[Title 26 CFR ]
[Code of Federal Regulations (annual edition) - April 1, 2003 Edition]
[From the U.S. Government Printing Office]



[[Page i]]



                    26


          Part 1 (Secs. 1.1401 to 1.1503-2A)

                         Revised as of April 1, 2003

Internal Revenue





          Containing a codification of documents of general 
          applicability and future effect
          As of April 1, 2003
          With Ancillaries
          Published by
          Office of the Federal Register
          National Archives and Records
          Administration

A Special Edition of the Federal Register



[[Page ii]]

                                      




                     U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003



  For sale by the Superintendent of Documents, U.S. Government Printing 
                                  Office
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      Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001



[[Page iii]]




                            Table of Contents



                                                                    Page
  Explanation.................................................       v

  Title 26:
          Chapter I--Internal Revenue Service, Department of 
          the Treasury (Continued)                                   3
  Finding Aids:
      Table of CFR Titles and Chapters........................     633
      Alphabetical List of Agencies Appearing in the CFR......     651
      Table of OMB Control Numbers............................     661
      List of CFR Sections Affected...........................     679



[[Page iv]]


      


                     ----------------------------

                     Cite this Code:  CFR
                     To cite the regulations in 
                       this volume use title, 
                       part and section number. 
                       Thus,  26 CFR 1.1401-1 
                       refers to title 26, part 
                       1, section 1401-1.

                     ----------------------------

[[Page v]]



                               EXPLANATION

    The Code of Federal Regulations is a codification of the general and 
permanent rules published in the Federal Register by the Executive 
departments and agencies of the Federal Government. The Code is divided 
into 50 titles which represent broad areas subject to Federal 
regulation. Each title is divided into chapters which usually bear the 
name of the issuing agency. Each chapter is further subdivided into 
parts covering specific regulatory areas.
    Each volume of the Code is revised at least once each calendar year 
and issued on a quarterly basis approximately as follows:

Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1

    The appropriate revision date is printed on the cover of each 
volume.

LEGAL STATUS

    The contents of the Federal Register are required to be judicially 
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie 
evidence of the text of the original documents (44 U.S.C. 1510).

HOW TO USE THE CODE OF FEDERAL REGULATIONS

    The Code of Federal Regulations is kept up to date by the individual 
issues of the Federal Register. These two publications must be used 
together to determine the latest version of any given rule.
    To determine whether a Code volume has been amended since its 
revision date (in this case, April 1, 2003), consult the ``List of CFR 
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative 
List of Parts Affected,'' which appears in the Reader Aids section of 
the daily Federal Register. These two lists will identify the Federal 
Register page number of the latest amendment of any given rule.

EFFECTIVE AND EXPIRATION DATES

    Each volume of the Code contains amendments published in the Federal 
Register since the last revision of that volume of the Code. Source 
citations for the regulations are referred to by volume number and page 
number of the Federal Register and date of publication. Publication 
dates and effective dates are usually not the same and care must be 
exercised by the user in determining the actual effective date. In 
instances where the effective date is beyond the cut-off date for the 
Code a note has been inserted to reflect the future effective date. In 
those instances where a regulation published in the Federal Register 
states a date certain for expiration, an appropriate note will be 
inserted following the text.

OMB CONTROL NUMBERS

    The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires 
Federal agencies to display an OMB control number with their information 
collection request.

[[Page vi]]

Many agencies have begun publishing numerous OMB control numbers as 
amendments to existing regulations in the CFR. These OMB numbers are 
placed as close as possible to the applicable recordkeeping or reporting 
requirements.

OBSOLETE PROVISIONS

    Provisions that become obsolete before the revision date stated on 
the cover of each volume are not carried. Code users may find the text 
of provisions in effect on a given date in the past by using the 
appropriate numerical list of sections affected. For the period before 
January 1, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in 11 separate 
volumes. For the period beginning January 1, 2001, a ``List of CFR 
Sections Affected'' is published at the end of each CFR volume.

CFR INDEXES AND TABULAR GUIDES

    A subject index to the Code of Federal Regulations is contained in a 
separate volume, revised annually as of January 1, entitled CFR Index 
and Finding Aids. This volume contains the Parallel Table of Statutory 
Authorities and Agency Rules (Table I). A list of CFR titles, chapters, 
and parts and an alphabetical list of agencies publishing in the CFR are 
also included in this volume.
    An index to the text of ``Title 3--The President'' is carried within 
that volume.
    The Federal Register Index is issued monthly in cumulative form. 
This index is based on a consolidation of the ``Contents'' entries in 
the daily Federal Register.
    A List of CFR Sections Affected (LSA) is published monthly, keyed to 
the revision dates of the 50 CFR titles.

REPUBLICATION OF MATERIAL

    There are no restrictions on the republication of material appearing 
in the Code of Federal Regulations.

INQUIRIES

    For a legal interpretation or explanation of any regulation in this 
volume, contact the issuing agency. The issuing agency's name appears at 
the top of odd-numbered pages.
    For inquiries concerning CFR reference assistance, call 202-741-6000 
or write to the Director, Office of the Federal Register, National 
Archives and Records Administration, Washington, DC 20408 or e-mail 
info@fedreg.nara.gov.

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    The Government Printing Office (GPO) processes all sales and 
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ELECTRONIC SERVICES

    The full text of the Code of Federal Regulations, the LSA (List of 
CFR Sections Affected), The United States Government Manual, the Federal 
Register, Public Laws, Public Papers, Weekly Compilation of Presidential 
Documents and the Privacy Act Compilation are available in electronic 
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Government Printing Office. Phone 202-512-1530, or 888-293-6498 (toll-
free). E-mail, gpoaccess@gpo.gov.

[[Page vii]]

    The Office of the Federal Register also offers a free service on the 
National Archives and Records Administration's (NARA) World Wide Web 
site for public law numbers, Federal Register finding aids, and related 
information. Connect to NARA's web site at www.archives.gov/federal--
register. The NARA site also contains links to GPO Access.

                              Raymond A. Mosley,
                                    Director,
                          Office of the Federal Register.

April 1, 2003.



[[Page ix]]



                               THIS TITLE

    Title 26--Internal Revenue is composed of twenty volumes. The 
contents of these volumes represent all current regulations issued by 
the Internal Revenue Service, Department of the Treasury, as of April 1, 
2003. The first thirteen volumes comprise part 1 (Subchapter A--Income 
Tax) and are arranged by sections as follows: Secs. 1.0-1-1.60; 
Secs. 1.61-1.169; Secs. 1.170-1.300; Secs. 1.301-1.400; Secs. 1.401-
1.440; Secs. 1.441-1.500; Secs. 1.501-1.640; Secs. 1.641-1.850; 
Secs. 1.851-1.907; Secs. 1.908-1.1000; Secs. 1.1001-1.1400; 
Secs. 1.1401-1.1503-2A; and Sec. 1.1551-1 to end. The fourteenth volume 
containing parts 2-29, includes the remainder of subchapter A and all of 
Subchapter B--Estate and Gift Taxes. The last six volumes contain parts 
30-39 (Subchapter C--Employment Taxes and Collection of Income Tax at 
Source); parts 40-49; parts 50-299 (Subchapter D--Miscellaneous Excise 
Taxes); parts 300-499 (Subchapter F--Procedure and Administration); 
parts 500-599 (Subchapter G--Regulations under Tax Conventions); and 
part 600 to end (Subchapter H--Internal Revenue Practice).

    The OMB control numbers for Title 26 appear in Sec. 602.101 of this 
chapter. For the convenience of the user, Sec. 602.101 appears in the 
Finding Aids section of the volumes containing parts 1 to 599.

[[Page x]]





[[Page 1]]



                       TITLE 26--INTERNAL REVENUE




           (This book contains part 1, Sec. 1.1401-1.1503-2A)

  --------------------------------------------------------------------
                                                                    Part

chapter i--Internal Revenue Service, Department of the 
  Treasury (Continued)......................................           1

[[Page 3]]



    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)




  --------------------------------------------------------------------


  Editorial Note: IRS published a document at 45 FR 6088, January 25, 
1980, deleting statutory sections from their regulations. In Chapter I 
cross references to the deleted material have been changed to the 
corresponding sections of the IRS Code of 1954 or to the appropriate 
regulations sections. When either such change produced a redundancy, the 
cross reference has been deleted. For further explanation, see 45 FR 
20795, March 31, 1980.

                  SUBCHAPTER A--INCOME TAX (CONTINUED)
Part                                                                Page
1               Income taxes................................           5

Supplementary Publications: Internal Revenue Service Looseleaf 
  Regulations System.

  Additional supplementary publications are issued covering Alcohol and 
Tobacco Tax Regulations, and Regulations Under Tax Conventions.

[[Page 5]]



                  SUBCHAPTER A--INCOME TAX (CONTINUED)





PART 1--INCOME TAXES--Table of Contents




                      TAX ON SELF-EMPLOYMENT INCOME

Sec.
1.1401-1  Tax on self-employment income.
1.1402(a)-1  Definition of net earnings from self-employment.
1.1402(a)-2  Computation of net earnings from self-employment.
1.1402(a)-3  Special rules for computing net earnings from self-
          employment.
1.1402(a)-4  Rentals from real estate.
1.1402(a)-5  Dividends and interest.
1.1402(a)-6  Gain or loss from disposition of property.
1.1402(a)-7  Net operating loss deduction.
1.1402(a)-8  Community income.
1.1402(a)-9  Puerto Rico.
1.1402(a)-10  Personal exemption deduction.
1.1402(a)-11  Ministers and members of religious orders.
1.1402(a)-12  Possession of the United States.
1.1402(a)-13  Income from agricultural activity.
1.1402(a)-14  Options available to farmers in computing net earnings 
          from self-employment for taxable years ending after 1954 and 
          before December 31, 1956.
1.1402(a)-15  Options available to farmers in computing net earnings 
          from self-employment for taxable years ending on or after 
          December 31, 1956.
1.1402(a)-16  Exercise of option.
1.1402(a)-17  Retirement payments to retired partners.
1.1402(b)-1  Self-employment income.
1.1402(c)-1  Trade or business.
1.1402(c)-2  Public office.
1.1402(c)-3  Employees.
1.1402(c)-4  Individuals under Railroad Retirement System.
1.1402(c)-5  Ministers and members of religious orders.
1.1402(c)-6  Members of certain professions.
1.1402(c)-7  Members of religious groups opposed to insurance.
1.1402(d)-1  Employee and wages.
1.1402(e)-1A  Application of regulations under section 1402(e).
1.1402(e)-2A  Ministers, members of religious orders and Christian 
          Science practitioners; application for exemption from self-
          employment tax.
1.1402(e)-3A  Time limitation for filing application for exemption.
1.1402(e)-4A  Period for which exemption is effective.
1.1402(e)-5A  Applications for exemption from self-employment taxes 
          filed after December 31, 1986, by ministers, certain members 
          of religious orders, and Christian Science practitioners.
1.1402(e)(1)-1  Election by ministers, members of religious orders, and 
          Christian Science practitioners for self-employment coverage.
1.1402(e)(2)-1  Time limitation for filing waiver certificate.
1.1402(e)(3)-1  Effective date of waiver certificate.
1.1402(e)(4)-1  Treatment of certain remuneration paid in 1955 and 1956 
          as wages.
1.1402(e)(5)-1  Optional provision for certain certificates filed before 
          April 15, 1962.
1.1402(e)(5)-2  Optional provisions for certain certificates filed on or 
          before April 17, 1967.
1.1402(e)(6)-1  Certificates filed by fiduciaries or survivors on or 
          before April 15, 1962.
1.1402(f)-1  Computation of partner's net earnings from self-employment 
          for taxable year which ends as result of his death.
1.1402(g)-1  Treatment of certain remuneration erroneously reported as 
          net earnings from self-employment.
1.1402(h)-1  Members of certain religious groups opposed to insurance.
1.1403-1  Cross references.

 Withholding of Tax on Nonresident Aliens and Foreign Corporations and 
                         Tax-Free Covenant Bonds

               NONRESIDENT ALIENS AND FOREIGN CORPORATIONS

1.1441-0  Outline of regulation provisions for section 1441.
1.1441-1  Requirement for the deduction and withholding of tax on 
          payments to foreign persons.
1.1441-2  Amounts subject to withholding.
1.1441-3  Determination of amounts to be withheld.
1.1441-4  Exemptions from withholding for certain effectively connected 
          income and other amounts.
1.1441-5  Withholding on payments to partnerships, trusts, and estates.
1.1441-6  Claim of reduced withholding under an income tax treaty.
1.1441-7  General provisions relating to withholding agents.
1.1441-8  Exemption from withholding for payments to foreign 
          governments, international organizations, foreign central 
          banks of issue, and the Bank for International Settlements.
1.1441-9  Exemption from withholding on exempt income of a foreign tax-
          exempt organization, including foreign private foundations.
1.1441-10  Withholding agents with respect to fact-pay arrangements.

[[Page 6]]

1.1442-1  Withholding of tax on foreign corporations.
1.1442-2  Exemption under a tax treaty.
1.1442-3  Tax exempt income of a foreign tax-exempt corporations.
1.1443-1  Foreign tax-exempt organizations.
1.1445-1  Withholding on dispositions of U.S. real property interests by 
          foreign persons: In general.
1.1445-2  Situations in which withholding is not required under section 
          1445(a).
1.1445-3  Adjustments to amount required to be withheld pursuant to 
          withholding certificate.
1.1445-4  Liability of agents.
1.1445-5  Special rules concerning distributions and other transactions 
          by corporations, partnerships, trusts, and estates.
1.1445-6  Adjustments pursuant to withhold certificate of amount 
          required to be withheld under section 1445(e).
1.1445-7  Treatment of foreign corporation that has made an election 
          under section 897(i) to be treated as a domestic corporation.
1.1445-8  Special rules regarding publicly traded partnerships, publicly 
          traded trusts and real estate investment trusts (REITs).
1.1445-9T  Special rule for section 1034 nonrecognition (temporary).
1.1445-10T  Special rule for Foreign governments (temporary).
1.1445-11T  Special rules requiring withholding under Sec.  1.1445-5 
          (temporary).

                         TAX-FREE COVENANT BONDS

1.1451-1  Tax-free covenant bonds issued before January 1, 1934.
1.1451-2  Exemptions from withholding under section 1451.

                  APPLICATION OF WITHHOLDING PROVISIONS

1.1461-1  Payment and returns of tax withheld.
1.1461-2  Adjustments for overwithholding or underwithholding of tax.
1.1462-1  Withheld tax as credit to recipient of income.
1.1463-1  Tax paid by recipient of income.
1.1464-1  Refunds or credits.

    Rules Applicable to Recovery of Excessive Profits on Government 
                                Contracts

          RECOVERY OF EXCESSIVE PROFITS ON GOVERNMENT CONTRACTS

1.1471-1  Recovery of excessive profits on government contracts.

      MITIGATION OF EFFECT OF RENEGOTIATION OF GOVERNMENT CONTRACTS

1.1481-1  [Reserved]

                  Tax on Transfers To Avoid Income Tax

1.1491-1  Imposition of tax.
1.1492-1  Nontaxable transfers.
1.1493-1  Definition of foreign trust.
1.1494-1  Returns; payment and collection of tax.
1.1494-2  Effective date.

                          Consolidated Returns

                       RETURNS AND PAYMENT OF TAX

                     Consolidated Return Regulations

1.1502-0  Effective dates.
1.1502-1  Definitions.

                       Consolidated Tax Liability

1.1502-2  Computation of tax liability.
1.1502-3  Consolidated tax credits.
1.1502-4  Consolidated foreign tax credit.
1.1502-5  Estimated tax.
1.1502-6  Liability for tax.
1.1502-9  Consolidated overall foreign losses and separate limitation 
          losses.

               Computation of Consolidated Taxable Income

1.1502-11  Consolidated taxable income.

                 Computation of Separate Taxable Income

1.1502-12  Separate taxable income.
1.1502-13  Intercompany transactions.
1.1502-15  SRLY limitation on built-in losses.
1.1502-16  Mine exploration expenditures.
1.1502-17  Methods of accounting.
1.1502-18  Inventory adjustment.
1.1502-19  Excess loss accounts.
1.1502-20  Disposition or deconsolidation of subsidiary stock.
1.1502-20T  Disposition or deconsolidation of subsidiary stock 
          (temporary).

                    Computation of Consolidated Items

1.1502-21  Net operating losses.
1.1502-21T  Net operating losses (temporary).
1.1502-22  Consolidated capital gain and loss.
1.1502-23  Consolidated net section 1231 gain or loss.
1.1502-24  Consolidated charitable contributions deduction.
1.1502-26  Consolidated dividends received deduction.
1.1502-27  Consolidated section 247 deduction.

         Basis, Stock Ownership, and Earnings and Profits Rules

1.1502-30  Stock basis after certain triangular reorganizations.
1.1502-31  Stock basis after a group structure change.
1.1502-32  Investment adjustments.
1.1502-32T  Investment adjustments (temporary).
1.1502-33  Earnings and profits.

[[Page 7]]

1.1502-34  Special aggregate stock ownership rules.
1.1502-35T  Transfers of subsidiary member stock and deconsolidations of 
          subsidiary members (temporary).

                       Special Taxes and Taxpayers

1.1502-42  Mutual savings banks, etc.
1.1502-43  Consolidated accumulated earnings tax.
1.1502-44  Percentage depletion for independent producers and royalty 
          owners.
1.1502-47  Consolidated returns by life-nonlife groups.
1.1502-55  Computation of alternative minimum tax of consolidated 
          groups.

                Administrative Provisions and Other Rules

1.1502-75  Filing of consolidated returns.
1.1502-76  Taxable year of members of group.
1.1502-77  Agent for the group.
1.1502-78  Tentative carryback adjustments.
1.1502-79  Separate return years.
1.1502-80  Applicability of other provisions of law.
1.1502-81T  Alaska Native Corporations.
1.1502-90  Table of contents.
1.1502-91  Application of section 382 with respect to a consolidated 
          group.
1.1502-92  Ownership change of a loss group or a loss subgroup.
1.1502-93  Consolidated section 382 limitation (or subgroup section 382 
          limitation).
1.1502-94  Coordination with section 382 and the regulations thereunder 
          when a corporation becomes a member of a consolidated group.
1.1502-95  Rules on ceasing to be a member of a consolidated group (or 
          loss subgroup).
1.1502-96  Miscellaneous rules.
1.1502-97  Special rules under section 382 for members under the 
          jurisdiction of a court in a title 11 similar case. [Reserved]
1.1502-98  Coordination with section 383.
1.1502-99  Effective dates.
1.1502-100  Corporations exempt from tax.
1.1503-1  Computation and payment of tax.
1.1503-2  Dual consolidated loss.
1.1504-0  Outline of provisions.
1.1504-1  Definitions.
1.1504-2--1.1504-3  [Reserved]
1.1504-4  Treatment of warrants, options, convertible obligations, and 
          other similar interests.

  Regulations Applicable for Tax Years for Which a Return Is Due on or 
                         Before August 11, 1999

1.1502-9A  Applications of overall foreign loss recapture rules to 
          corporations filing consolidated returns due on or before 
          August 11, 1999.

     Regulations Applicable to Taxable Years Before January 1, 1997

1.1502-15A  Limitations on the allowance of built-in deductions for 
          consolidated return years beginning before January 1, 1997.
1.1502-21A  Consolidated net operating loss deduction generally 
          applicable for consolidated return years beginning before 
          January 1, 1997.
1.1502-22A  Consolidated net capital gain or loss generally applicable 
          for consolidated return years beginning before January 1, 
          1997.
1.1502-23A  Consolidated net section 1231 gain or loss generally 
          applicable for consolidated return years beginning before 
          January 1, 1997.
1.1502-41A  Determination of consolidated net long-term capital gain and 
          consolidated net short-term capital loss generally applicable 
          for consolidated return years beginning before January 1, 
          1997.

 REGULATIONS APPLICABLE TO TAXABLE YEARS BEGINNING BEFORE JUNE 28, 2002

1.1502-77A  Common parent agent for subsidiaries applicable for 
          consolidated return years beginning before June 28, 2002.

     REGULATIONS APPLICABLE TO TAXABLE YEARS BEFORE JANUARY 1, 1997

1.1502-79A  Separate return years generally applicable for consolidated 
          return years beginning before January 1, 1997.

  REGULATIONS APPLYING SECTION 382 WITH RESPECT TO TESTING DATES (AND 
  CORPORATIONS JOINING OR LEAVING CONSOLIDATED GROUPS) BEFORE JUNE 25, 
                                  1999

1.1502-90A  Table of contents.
1.1502-91A  Application of section 382 with respect to a consolidated 
          group generally applicable for testing dates before June 25, 
          1999.
1.1502-92A  Ownership change of a loss group or a loss subgroup 
          generally applicable for testing dates before June 25, 1999.
1.1502-93A  Consolidated section 382 limitation (or subgroup section 382 
          limitation) generally applicable for testing dates before June 
          25, 1999.
1.1502-94A  Coordination with section 382 and the regulations thereunder 
          when a corporation becomes a member of a consolidated group 
          generally applicable for corporations becoming members of a 
          group before June 25, 1999.
1.1502-95A  Rules on ceasing to be a member of a consolidated group 
          generally applicable for corporations ceasing to be members 
          before June 25, 1999.

[[Page 8]]

1.1502-96A  Miscellaneous rules generally applicable for testing dates 
          before June 25, 1999.
1.1502-97A  Special rules under section 382 for members under the 
          jurisdiction of a court in a title 11 similar case. [Reserved]
1.1502-98A  Coordination with section 383 generally applicable for 
          testing dates (or members joining or leaving a group) before 
          June 25, 1999.
1.1502-99A  Effective dates.

  DUAL CONSOLIDATED LOSSES INCURRED IN TAXABLE YEARS BEGINNING BEFORE 
                             OCTOBER 1, 1992

1.1503-2A  Dual consolidated loss.

    Authority: 26 U.S.C. 7805, unless otherwise noted.
    Section 1.1402 (e)-5T also is issued under 26 U.S.C. 1402(e)(1) and 
(2).
    Section 1.1441-2 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1441-3 also issued under 26 U.S.C. 1441(c)(4), 26 U.S.C. 
3401(a)(6) and 26 U.S.C. 7701(l).
    Section 1.1441-4 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1441-5 also issued under 26 U.S.C. 1441(c)(4), 26 U.S.C. 
3401(a)(6) and 26 U.S.C. 7701(b)(11).
    Section 1.1441-6 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1441-7 also issued under 26 U.S.C. 1441(c)(4), 26 U.S.C. 
3401(a)(6) and 26 U.S.C. 7701(l).
    Section 1.1443-1 also issued under 26 U.S.C. 1443(a).
    Section 1.1445-5 also issued under 26 U.S.C. 1445(e)(6).
    Section 1.1445-8 also issued under 26 U.S.C. 1445(e)(6).
    Section 1.1461-1 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1461-2 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1462-1 also issued under 26 U.S.C. 1441(c)(4) and 26 
U.S.C. 3401(a)(6).
    Section 1.1502-0 also issued under 26 U.S.C. 1502.
    Section 1.1502-1 also issued under 26 U.S.C. 1502.
    Section 1.1502-2 also issued under 26 U.S.C. 1502.
    Section 1.1502-3 also issued under 26 U.S.C. 1502.
    Section 1.1502-4 also issued under 26 U.S.C. 1502.
    Section 1.1502-9 also issued under 26 U.S.C. 1502.
    Section 1.1502-11 also issued under 26 U.S.C. 1502.
    Section 1.1502-12 also issued under 26 U.S.C. 1502.
    Section 1.1502-13 also issued under 26 U.S.C. 1502.
    Section 1.1502-15 also issued under 26 U.S.C. 1502.
    Section 1.1502-17 also issued under 26 U.S.C. 446 and 1502.
    Section 1.1502-18 also issued under 26 U.S.C. 1502.
    Section 1.1502-19 also issued under 26 U.S.C. 301, 1502, and 1503.
    Section 1.1502-20 also issued under 26 U.S.C. 337(d) and 1502.
    Section 1.1502-20T also issued under 26 U.S.C. 337(d) and 1502.
    Section 1.1502-21 also issued under 26 U.S.C. 1502 and 6402(i).
    Section 1.1502-21T also issued under 26 U.S.C. 1502.
    Section 1.1502-21T(b)(1) and (b)(3)(v) also issued under 26 U.S.C. 
1502.
    Section 1.1502-22 also issued under 26 U.S.C. 1502.
    Section 1.1502-23 also issued under 26 U.S.C. 1502.
    Section 1.1502-26 also issued under 26 U.S.C. 1502.
    Section 1.1502-30 also issued under 26 U.S.C. 1502.
    Section 1.1502-31 also issued under 26 U.S.C. 1502.
    Section 1.1502-32 also issued under 26 U.S.C. 301, 1502, and 1503.
    Section 1.1502-32T(a)(2), (b)(3)(iii)(C), (b)(3)(iii)(D), and 
(b)(4)(vi) also issued under 26 U.S.C. 1502.
    Section 1.1502-32T(b)(4)(v) also issued under 26 U.S.C. 1502.
    Section 1.1502-33 also issued under 26 U.S.C. 1502.
    Section 1.1502-34 also issued under 26 U.S.C. 1502.
    Section 1.1502-35T also issued under 26 U.S.C. 1502.
    Section 1.1502-55 also issued under 26 U.S.C. 1502.
    Section 1.1502-75 also issued under 26 U.S.C. 1502.
    Section 1.1502-76 also issued under 26 U.S.C. 1502.
    Section 1.1502-77 also issued under 26 U.S.C. 1502 and 6402(j).
    Section 1.1502-78 also issued under 26 U.S.C. 1502, 6402(j), and 
6411(c).
    Section 1.1502-79 also issued under 26 U.S.C. 1502.
    Section 1.1502-80 also issued under 26 U.S.C. 1502.
    Section 1.1502-81T also issued under 26 U.S.C. 1502.
    Section 1.1502-91 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-92 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-93 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-94 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.

[[Page 9]]

    Section 1.1502-95 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-96 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-98 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-99 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1503-2T also issued under 26 U.S.C. 1503(d).
    Section 1.1504-4 also issued under 26 U.S.C. 1504(a)(5).
    Section 1.1502-9A also issued under 26 U.S.C. 1502.
    Section 1.1502-15A also issued under 26 U.S.C. 1502.
    Section 1.1502-21A also issued under 26 U.S.C. 1502.
    Section 1.1502-22A also issued under 26 U.S.C. 1502.
    Section 1.1502-23A also issued under 26 U.S.C. 1502.
    Section 1.1502-41A also issued under 26 U.S.C. 1502.
    Section 1.1502-77A also issued under 26 U.S.C. 1502 and 6402(j).
    Section 1.1502-79A also issued under 26 U.S.C. 1502.
    Section 1.1502-91A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-92A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-93A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-94A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-95A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-96A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-98A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.
    Section 1.1502-99A also issued under 26 U.S.C. 382(m) and 26 U.S.C. 
1502.

    Source: Sections 1.1401-1 to 1.1403-1 contained in T.D. 6691, 28 FR 
12796, Dec. 3, 1963, unless otherwise noted.

                      TAX ON SELF-EMPLOYMENT INCOME



Sec. 1.1401-1  Tax on self-employment income.

    (a) There is imposed, in addition to other taxes, a tax upon the 
self-employment income of every individual at the rates prescribed in 
section 1401(a) (old-age, survivors, and disability insurance) and (b) 
(hospital insurance). (See subparagraphs (1) and (2) of paragraph (b) of 
this section.) This tax shall be levied, assessed, and collected as part 
of the income tax imposed by subtitle A of the Code and, except as 
otherwise expressly provided, will be included with the tax imposed by 
section 1 or 3 in computing any deficiency or overpayment and in 
computing the interest and additions to any deficiency, overpayment, or 
tax. Since the tax on self-employment income is part of the income tax, 
it is subject to the jurisdiction of the Tax Court of the United States 
to the same extent and in the same manner as the other taxes under 
subtitle A of the Code. Furthermore, with respect to taxable years 
beginning after December 31, 1966, this tax must be taken into account 
in computing any estimate of the taxes required to be declared under 
section 6015.
    (b) The rates of tax on self-employment income are as follows:
    (1) For old-age, survivors, and disability insurance:

 
                         Taxable year                           Percent
 
Beginning before January 1, 1957.............................          3
Beginning after December 31, 1956 and before January 1, 1959.      3.375
Beginning after December 31, 1958 and before January 1, 1960.       3.75
Beginning after December 31, 1959 and before January 1, 1962.        4.5
Beginning after December 31, 1961 and before January 1, 1963.        4.7
Beginning after December 31, 1962 and before January 1, 1966.        5.4
Beginning after December 31, 1965 and before January 1, 1967.        5.8
Beginning after December 31, 1966 and before January 1, 1968.        5.9
Beginning after December 31, 1967 and before January 1, 1969.        5.8
Beginning after December 31, 1968 and before January 1, 1971.        6.3
Beginning after December 31, 1970 and before January 1, 1973.        6.9
Beginning after December 31, 1972............................        7.0
 

    (2) For hospital insurance:

 
                         Taxable year                           Percent
 
Beginning after December 31, 1965 and before January 1, 1967.       0.35
Beginning after December 31, 1966 and before January 1, 1968.        .50
Beginning after December 31, 1967 and before January 1, 1973.        .60
Beginning after December 31, 1972 and before January 1, 1974.        1.0
Beginning after December 31, 1973 and before January 1, 1978.        .90
Beginning after December 31, 1977 and before January 1, 1981.       1.10
Beginning after December 31, 1980 and before January 1, 1986.       1.35
Beginning after December 31, 1985............................       1.50
 

    (c) In general, self-employment income consists of the net earnings 
derived by an individual (other than a

[[Page 10]]

nonresident alien) from a trade or business carried on by him as sole 
proprietor or by a partnership of which he is a member, including the 
net earnings of certain employees as set forth in Sec. 1.1402(c)-3, and 
of crew leaders, as defined in section 3121(o) (see such section and the 
regulations thereunder in part 31 of this chapter (Employment Tax 
Regulations)). See, however, the exclusions, exceptions, and limitations 
set forth in Secs. 1.1402(a)-1 through 1.1402(h)-1.

[T.D. 6993, 34 FR 828, Jan. 18, 1969, as amended by T.D. 7333, 39 FR 
44445, Dec. 24, 1974]



Sec. 1.1402(a)-1  Definition of net earnings from self-employment.

    (a) Subject to the special rules set forth in Secs. 1.1402(a)-3 to 
1.1402(a)-17, inclusive, and to the exclusions set forth in 
Secs. 1.1402(c)-2 to 1.1402(c)-7, inclusive, the term ``net earnings 
from self-employment'' means:
    (1) The gross income derived by an individual from any trade or 
business carried on by such individual, less the deductions allowed by 
chapter 1 of the Code which are attributable to such trade or business, 
plus
    (2) His distributive share (whether or not distributed), as 
determined under section 704, of the income (or minus the loss), 
described in section 702(a)(9) and as computed under section 703, from 
any trade or business carried on by any partnership of which he is a 
member.
    (b) Gross income derived by an individual from a trade or business 
includes payments received by him from a partnership of which he is a 
member for services rendered to the partnership or for the use of 
capital by the partnership, to the extent the payments are determined 
without regard to the income of the partnership. However, such payments 
received from a partnership not engaged in a trade or business within 
the meaning of section 1402(c) and Sec. 1.1402(c)-1 do not constitute 
gross income derived by an individual from a trade or business. See 
section 707(c) and the regulations thereunder, relating to guaranteed 
payments to a member of a partnership for services or the use of 
capital. See also section 706(a) and the regulations thereunder, 
relating to the taxable year of the partner in which such guaranteed 
payments are to be included in computing taxable income.
    (c) Gross income derived by an individual from a trade or business 
includes gross income received (in the case of an individual reporting 
income on the cash receipts and disbursements method) or accrued (in the 
case of an individual reporting income on the accrual method) in the 
taxable year from a trade or business even though such income may be 
attributable in whole or in part to services rendered or other acts 
performed in a prior taxable year as to which the individual was not 
subject to the tax on self-employment income.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR 
44445, Dec. 24, 1974]



Sec. 1.1402(a)-2  Computation of net earnings from self-employment.

    (a) General rule. In general, the gross income and deductions of an 
individual attributable to a trade or business (including a trade or 
business conducted by an employee referred to in paragraphs (b), (c), 
(d), or (e) of Sec. 1.1402(c)-3), for the purpose of ascertaining his 
net earnings from self-employment, are to be determined by reference to 
the provisions of law and regulations applicable with respect to the 
taxes imposed by sections 1 and 3. Thus, if an individual uses the 
accrual method of accounting in computing taxable income from a trade or 
business for the purpose of the tax imposed by section 1 or 3, he must 
use the same method in determining net earnings from self-employment. 
Likewise, if a taxpayer engaged in a trade or business of selling 
property on the installment plan elects, under the provisions of section 
453, to use the installment method in computing income for purposes of 
the tax under section 1 or 3, he must use the same method in determining 
net earnings from self-employment. Income which is excludable from gross 
income under any provision of subtitle A of the Internal Revenue Code is 
not taken into account in determining net earnings from self-employment 
except as otherwise provided in Sec. 1.1402(a)-9, relating to certain 
residents of Puerto Rico, in Sec. 1.1402(a)-11, relating to ministers or 
members of religious orders, and in Sec. 1.1402(a)-12, relating to the

[[Page 11]]

term ``possession of the United States'' as used for purposes of the tax 
on self-employment income. Thus, in the case of a citizen of the United 
States conducting, in a foreign country, a trade or business in which 
both personal services and capital are material income-producing 
factors, any part of the income therefrom which is excluded from gross 
income as earned income under the provisions of section 911 and the 
regulations thereunder is not taken into account in determining net 
earnings from self-employment.
    (b) Trade or business carried on. The trade or business must be 
carried on by the individual, either personally or through agents or 
employees. Accordingly, income derived from a trade or business carried 
on by an estate or trust is not included in determining the net earnings 
from self-employment of the individual beneficiaries of such estate or 
trust.
    (c) Aggregate net earnings. Where an individual is engaged in more 
than one trade or business within the meaning of section 1402(c) and 
Sec. 1.1402(c)-1, his net earnings from self-employment consist of the 
aggregate of the net income and losses (computed subject to the special 
rules provided in Secs. 1.1402(a)-1 to 1.1402(a)-17 inclusive) of all 
such trades or businesses carried on by him. Thus, a loss sustained in 
one trade or business carried on by an individual will operate to offset 
the income derived by him from another trade or business.
    (d) Partnerships. The net earnings from self-employment of an 
individual include, in addition to the earnings from a trade or business 
carried on by him, his distributive share of the income or loss, 
described in section 702(a)(9), from any trade or business carried on by 
each partnership of which he is a member. An individual's distributive 
share of such income or loss of a partnership shall be determined as 
provided in section 704, subject to the special rules set forth in 
section 1402(a) and in Secs. 1.1402(a)-1 to 1.1402(a)-17, inclusive, and 
to the exclusions provided in section 1402(c) and Secs. 1.1402(c)-2 to 
1.1402(c)-7, inclusive. For provisions relating to the computation of 
the taxable income of a partnership, see section 703.
    (e) Different taxable years. If the taxable year of a partner 
differs from that of the partnership, the partner shall include, in 
computing net earnings from self-employment, his distributive share of 
the income or loss, described in section 702(a)(9), of the partnership 
for its taxable year ending with or within the taxable year of the 
partner. For the special rule in case of the termination of a partner's 
taxable year as result of death, see Secs. 1.1402(f) and 1.1402(f)-1.
    (f) Meaning of partnerships. For the purpose of determining net 
earnings from self-employment, a partnership is one which is recognized 
as such for income tax purposes. For income tax purposes, the term 
``partnership'' includes not only a partnership as known at common law, 
but, also a syndicate, group, pool, joint venture, or other 
unincorporated organization which carries on any trade or business, 
financial operation, or venture, and which is not, within the meaning of 
the Code, a trust, estate, or a corporation. An organization described 
in the preceding sentence shall be treated as a partnership for purposes 
of the tax on self-employment income even though such organization has 
elected, pursuant to section 1361 and the regulations thereunder, to be 
taxed as a domestic corporation.
    (g) Nature of partnership interest. The net earnings from self-
employment of a partner include his distributive share of the income or 
loss, described in section 702(a)(9), of the partnership of which he is 
a member, irrespective of the nature of his membership. Thus, in 
determining his net earnings from self-employment, a limited or inactive 
partner includes his distributive share of such partnership income or 
loss. In the case of a partner who is a member of a partnership with 
respect to which an election has been made pursuant to section 1361 and 
the regulations thereunder to be taxed as a domestic corporation, net 
earnings from self-employment include his distributive share of the 
income or loss, described in section 702(a)(9), from the trade or 
business carried on by the partnership computed without regard to the 
fact that the partnership has elected to be taxed as a domestic 
corporation.

[[Page 12]]

    (h) Proprietorship taxed as domestic corporation. A proprietor of an 
unincorporated business enterprise with respect to which an election has 
been made pursuant to section 1361 and the regulations thereunder to be 
taxed as a domestic corporation shall compute his net earnings from 
self-employment without regard to the fact that such election has been 
made.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR 
44445, Dec. 24, 1974]



Sec. 1.1402(a)-3  Special rules for computing net earnings from self-employment.

    For the purpose of computing net earnings from self-employment, the 
gross income derived by an individual from a trade or business carried 
on by him, the allowable deductions attributable to such trade or 
business, and the individual's distributive share of the income or loss, 
described in section 702(a)(9), from any trade or business carrier on by 
a partnership of which he is a member shall be computed in accordance 
with the special rules set forth in Secs. 1.1402(a)-4 to 1.1402(a)-17, 
inclusive.

[T.D. 7333, 39 FR 44445, Dec. 24, 1974]



Sec. 1.1402(a)-4  Rentals from real estate.

    (a) In general. Rentals from real estate and from personal property 
leased with the real estate (including such rentals paid in crop shares) 
and the deductions attributable thereto, unless such rentals are 
received by an individual in the course of a trade or business as a 
real-estate dealer, are excluded. Whether or not an individual is 
engaged in the trade or business of a real-estate dealer is determined 
by the application of the principles followed in respect of the taxes 
imposed by sections 1 and 3. In general, an individual who is engaged in 
the business of selling real estate to customers with a view to the 
gains and profits that may be derived from such sales is a real-estate 
dealer. On the other hand, an individual who merely holds real estate 
for investment or speculation and receives rentals therefrom is not 
considered a real-estate dealer. Where a real-estate dealer holds real 
estate for investment or speculation in addition to real estate held for 
sale to customers in the ordinary course of his trade or business as a 
real-estate dealer, only the rentals from the real estate held for sale 
to customers in the ordinary course of his trade or business as a real-
estate dealer, and the deductions attributable thereto, are included in 
determining net earnings from self-employment; the rentals from the real 
estate held for investment or speculation, and the deductions 
attributable thereto, are excluded. Rentals paid in crop shares include 
income derived by an owner or lessee of land under an agreement entered 
into with another person pursuant to which such other person undertakes 
to produce a crop or livestock on such land and pursuant to which (1) 
the crop or livestock, or the proceeds thereof, are to be divided 
between such owner or lessee and such other person, and (2) the share of 
the owner or lessee depends on the amount of the crop or livestock 
produced. See, however, paragraph (b) of this section.
    (b) Special rule for ``includible farm rental income''--(1) In 
general. Notwithstanding the rules set forth in paragraph (a) of this 
section, there shall be included in determining net earnings from self-
employment for taxable years ending after 1955 any income derived by an 
owner or tenant of land, if the following requirements are met with 
respect to such income:
    (i) The income is derived under an arrangement between the owner or 
tenant of land and another person which provides that such other person 
shall produce agricultural or horticultural commodities on such land, 
and that there shall be material participation by the owner or tenant in 
the production or the management of the production of such agricultural 
or horticultural commodities; and
    (ii) There is material participation by the owner or tenant with 
respect to any such agricultural or horticultural commodity.

Income so derived shall be referred to in this section as ``includible 
farm rental income''.
    (2) Requirement that income be derived under an arrangement. In 
order for rental income received by an owner or tenant of land to be 
treated as includible farm rental income, such income must

[[Page 13]]

be derived pursuant to a share-farming or other rental arrangement which 
contemplates material participation by the owner or tenant in the 
production or management of production of agricultural or horticultural 
commodities.
    (3) Nature of arrangement. (i) The arrangement between the owner or 
tenant and the person referred to in subparagraph (1) of this paragraph 
may be either oral or written. The arrangement must impose upon such 
other person the obligation to produce one or more agricultural or 
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on the land of the owner or tenant. In 
addition, it must be within the contemplation of the parties that the 
owner or tenant will participate in the production or the management of 
the production of the agricultural or horticultural commodities required 
to be produced by the other person under such arrangement to an extent 
which is material with respect either to the production or to the 
management of production of such commodities or is material with respect 
to the production and management of production when the total required 
participation in connection with both is considered.
    (ii) The term ``production'', wherever used in this paragraph, 
refers to the physical work performed and the expenses incurred in 
producing a commodity. It includes such activities as the actual work of 
planting, cultivating, and harvesting crops, and the furnishing of 
machinery, implements, seed, and livestock. An arrangement will be 
treated as contemplating that the owner or tenant will materially 
participate in the ``production'' of the commodities required to be 
produced by the other person under the arrangement if under the 
arrangement it is understood that the owner or tenant is to engage to a 
material degree in the physical work related to the production of such 
commodities. The mere undertaking to furnish machinery, implements, and 
livestock and to incur expenses is not, in and of itself, sufficient. 
Such factors may be significant, however, in cases where the degree of 
physical work intended of the owner or tenant is not material. For 
example, if under the arrangement it is understood that the owner or 
tenant is to engage periodically in physical work to a degree which is 
not material in and of itself and, in addition, to furnish a substantial 
portion of the machinery, implements, and livestock to be used in the 
production of the commodities or to furnish or advance funds or assume 
financial responsibility for a substantial part of the expense involved 
in the production of the commodities, the arrangement will be treated as 
contemplating material participation of the owner or tenant in the 
production of such commodities.
    (iii) The term ``management of the production'', wherever used in 
this paragraph, refers to services performed in making managerial 
decisions relating to the production, such as when to plant, cultivate, 
dust, spray, or harvest the crop, and includes advising and consulting, 
making inspections, and making decisions as to matters such as rotation 
of crops, the type of crops to be grown, the type of livestock to be 
raised, and the type of machinery and implements to be furnished. An 
arrangement will be treated as contemplating that the owner or tenant is 
to participate materially in the ``management of the production'' of the 
commodities required to be produced by the other person under the 
arrangement if the owner or tenant is to engage to a material degree in 
the management decisions related to the production of such commodities. 
The services which are considered of particular importance in making 
such management decisions are those services performed in making 
inspections of the production activities and in advising and consulting 
with such person as to the production of the commodities. Thus, if under 
the arrangement it is understood that the owner or tenant is to advise 
or consult periodically with the other person as to the production of 
the commodities required to be produced by such person under the 
arrangement and to inspect periodically the production activities on the 
land, a strong inference will be drawn that the arrangement contemplates 
participation by the owner or tenant in the management of the production 
of such commodities. The mere undertaking to

[[Page 14]]

select the crops or livestock to be produced or the type of machinery 
and implements to be furnished or to make decisions as to the rotation 
of crops generally is not, in and of itself, sufficient. Such factors 
may be significant, however, in making the overall determination of 
whether the arrangement contemplates that the owner or tenant is to 
participate materially in the management of the production of the 
commodities. Thus, if in addition to the understanding that the owner or 
tenant is to advise or consult periodically with the other person as to 
the production of the commodities and to inspect periodically the 
production activities on the land, it is also understood that the owner 
is to select the type of crops and livestock to be produced and the type 
of machinery and implements to be furnished and to make decisions as to 
the rotation of crops, the arrangement will be treated as contemplating 
material participation of the owner or tenant in the management of 
production of such commodities.
    (4) Actual participation. In order for the rental income received by 
the owner or tenant of land to be treated as includible farm rental 
income, not only must it be derived pursuant to the arrangement 
described in subparagraph (1) of this paragraph, but also the owner or 
tenant must actually participate to a material degree in the production 
or in the management of the production of any of the commodities 
required to be produced under the arrangement, or he must actually 
participate in both the production and the management of the production 
to an extent that his participation in the one when combined with his 
participation in the other will be considered participation to a 
material degree. If the owner or tenant shows that he periodically 
advises or consults with the other person, who under the arrangement 
produces the agricultural or horticultural commodities, as to the 
production of any of these commodities and also shows that he 
periodically inspects the production activities on the land, he will 
have presented strong evidence of the existence of the degree of 
participation contemplated by section 1402(a)(1). If, in addition to the 
foregoing, the owner or tenant shows that he furnishes a substantial 
portion of the machinery, implements, and livestock used in the 
production of the commodities or that he furnishes or advances funds, or 
assumes financial responsibility, for a substantial part of the expense 
involved in the production of the commodities, he will have established 
the existence of the degree of participation contemplated by section 
1402(a)(1) and this paragraph.
    (5) Employees or agents. An agreement entered into by an employee or 
agent of an owner or tenant and another person is considered to be an 
arrangement entered into by the owner or tenant for purposes of 
satisfying the requirement set forth in paragraph (b)(2) that the income 
must be derived under an arrangement between the owner or tenant and 
another person. For purposes of determining whether the arrangement 
satisfies the requirement set forth in paragraph (b)(3) that the parties 
contemplate that the owner or tenant will materially participate in the 
production or management of production of a commodity, services which 
will be performed by an employee or agent of the owner or tenant are not 
considered to be services which the arrangement contemplates will be 
performed by the owner or tenant. Services actually performed by such 
employee or agent are not considered services performed by the owner or 
tenant in determining the extent to which the owner or tenant has 
participated in the production or management of production of a 
commodity. For taxable years beginning before January 1, 1974, 
contemplated or actual services of an agent or an employee of the owner 
or tenant are deemed to be contemplated or actual services of the owner 
or tenant under paragraphs (b)(3) and (b)(4) of this section.
    (6) Examples. Application of the rules prescribed in this paragraph 
may be illustrated by the following examples:

    Example (1). After the death of her husband, Mrs. A rents her farm, 
together with its machinery and equipment, to B for one-half of the 
proceeds from the commodities produced on such farm by B. It is agreed 
that B will live in the tenant house on the farm and be responsible for 
the over-all operation of the farm, such as planting, cultivating, and 
harvesting the field crops, caring for the

[[Page 15]]

orchard and harvesting the fruit and caring for the livestock and 
poultry. It also is agreed that Mrs. A will continue to live in the farm 
residence and help B operate the farm. Under the agreement it is 
contemplated that Mrs. A will regularly operate and clean the cream 
separator and feed the poultry flock and collect the eggs. When possible 
she will assist B in such work as spraying the fruit trees, penning 
livestock, culling the poultry, and controlling weeds. She will also 
assist in preparing the meals when B engages seasonal workers. The 
agreement between Mrs. A and B clearly provides that she will materially 
participate in the over-all production operations to be conducted on her 
farm by B. In actual practice, Mrs. A performs such regular and 
intermittent services. The regularly performed services are material to 
the production of an agricultural commodity, and the intermittent 
services performed are material to the production operations to which 
they relate. The furnishing of a substantial portion of the farm 
machinery and equipment also adds support to a conclusion that Mrs. A 
has materially participated. Accordingly, the rental income Mrs. A 
receives from her farm should be included in net earnings from self-
employment.
    Example (2). D agrees to produce a crop on C's cotton farm under an 
arrangement providing that C and D will each receive one-half of the 
proceeds from such production. C agrees to furnish all the necessary 
equipment, and it is understood that he is to advise D when to plant the 
cotton and when it needs to be chopped, plowed, sprayed, and picked. It 
is also understood that during the growing season C is to inspect the 
crop every few days to determine whether D is properly taking care of 
the crop. Under the arrangement, D is required to furnish all labor 
needed to grow and harvest the crop. C, in fact, renders such advice, 
makes such inspections, and furnishes such equipment. C's contemplated 
participation in management decisions is considered material with 
respect to the management of the cotton production operation. C's actual 
participation pursuant to the arrangement is also considered to be 
material with respect to the management of the production of cotton. 
Accordingly, the income C receives from his cotton farm is to be 
included in computing his net earnings from self-employment.
    Example (3). E owns a grain farm and turns its operation over to his 
son, F. By the oral rental arrangement between E and F, the latter 
agrees to produce crops of grain on the farm, and E agrees that he will 
be available for consultation and advice and will inspect and help to 
harvest the crops. E furnishes most of the equipment, including a 
tractor, a combine, plows, wagons, drills, and harrows; he continues to 
live on the farm and does some of the work such as repairing barns and 
farm machinery, going to town for supplies, cutting weeds, etc.; he 
regularly inspects the crops during the growing season; and he helps F 
to harvest the crops. Although the final decisions are made by F, he 
frequently consults with his father regarding the production of the 
crops. An evaluation of all of E's actual activities indicates that they 
are sufficiently substantial and regular to support a conclusion that he 
is materially participating in the crop production operations and the 
management thereof. If it can be shown that the degree of E's actual 
participation was contemplated by the arrangement, E's income from the 
grain farm will be included in computing net earnings from self-
employment.
    Example (4). G owns a fully-equipped farm which he rents to H under 
an arrangement which contemplates that G shall materially participate in 
the management of the production of crops raised on the farm pursuant to 
the arrangement. G lives in town about 5 miles from the farm. About 
twice a month he visits the farm and looks over the buildings and 
equipment. G may occasionally, in an emergency, discuss with H some 
phase of a crop production activity. In effect, H has complete charge of 
the management of farming operations regardless of the understanding 
between him and G. Although G pays one-half of the cost of the seed and 
fertilizer and is charged for the cost of materials purchased by H to 
make all necessary repairs, G's activities do not constitute material 
participation in the crop production activities. Accordingly, G's income 
from the crops is not included in computing net earnings from self-
employment.
    Example (5). I owned a farm several miles from the town in which he 
lived. He rented the farm to J under an arrangement which contemplated 
I's material participation in the management of production of wheat. I 
furnished one-half of the seed and fertilizer and all the farm equipment 
and livestock. He employed K to perform all the services in advising, 
consulting, and inspecting contemplated by the arrangement. I is not 
materially participating in the management of production of wheat by J. 
The work done by I's employee, K, is not attributable to I in 
determining the extent of I's participation. I's rental income from the 
arrangement is, therefore, not to be included in computing his net 
earnings from self-employment. For taxable years beginning before 
January 1, 1974, however, I's rental income would be includible in those 
earnings.
    Example (6). L, a calendar-year taxpayer, appointed M as his agent 
to rent his fully equipped farm for 1974. M entered into a rental 
arrangement with N under which M was to direct the planting of crops, 
inspect them weekly during the growing season, and consult with N on any 
problems that might arise in connection with irrigation, etc.,

[[Page 16]]

while N furnished all the labor needed to grow and harvest the crops. M 
did in fact fulfill its responsibilities under the arrangement. Although 
the arrangement entered into by M and N is considered to have been made 
by L, M's services are not attributable to L, and L's furnishing of a 
fully equipped farm is insufficient by itself to constitute material 
participation in the production of the crops. Accordingly, L's rental 
income from the arrangement is not included in his net earnings from 
self-employment for that year. For taxable years beginning before 
January 1, 1974, however, L's rental income would be includible in those 
earnings.

    (c) Rentals from living quarters--(1) No services rendered for 
occupants. Payments for the use or occupancy of entire private 
residences or living quarters in duplex or multiple-housing units are 
generally rentals from real estate. Except in the case of real-estate 
dealers, such payments are excluded in determining net earnings from 
self-employment even though such payments are in part attributable to 
personal property furnished under the lease.
    (2) Services rendered for occupants. Payments for the use or 
occupancy of rooms or other space where services are also rendered to 
the occupant, such as for the use or occupancy of rooms or other 
quarters in hotels, boarding houses, or apartment houses furnishing 
hotel services, or in tourist camps or tourist homes, or payments for 
the use or occupancy of space in parking lots, warehouses, or storage 
garages, do not constitute rentals from real estate; consequently, such 
payments are included in determining net earnings from self-employment. 
Generally, services are considered rendered to the occupant if they are 
primarily for his convenience and are other than those usually or 
customarily rendered in connection with the rental of rooms or other 
space for occupancy only. The supplying of maid service, for example, 
constitutes such service; whereas the furnishing of heat and light, the 
cleaning of public entrances, exits, stairways and lobbies, the 
collection of trash, and so forth, are not considered as services 
rendered to the occupant.
    (3) Example. The application of this paragraph may be illustrated by 
the following example:

    Example. A, an individual, owns a building containing four 
apartments. During the taxable year, he receives $1,400 from apartments 
numbered 1 and 2, which are rented without services rendered to the 
occupants, and $3,600 from apartments numbered 3 and 4, which are rented 
with services rendered to the occupants. His fixed expenses for the four 
apartments aggregate $1,200 during the taxable year. In addition, he has 
$500 of expenses attributable to the services rendered to the occupants 
of apartments 3 and 4. In determining his net earnings from self-
employment, A includes the $3,600 received from apartments 3 and 4, and 
the expenses of $1,100 ($500 plus one-half of $1,200) attributable 
thereto. The rentals and expenses attributable to apartments 1 and 2 are 
excluded. Therefore, A has $2,500 of net earnings from self-employment 
for the taxable year from the building.

    (d) Treatment of business income which includes rentals from real 
estate. Except in the case of a real-estate dealer, where an individual 
or a partnership is engaged in a trade or business the income of which 
is classifiable in part as rentals from real estate, only that portion 
of such income which is not classifiable as rentals from real estate, 
and the expenses attributable to such portion, are included in 
determining net earnings from self-employment.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7710, 45 FR 
50739, July 31, 1980]



Sec. 1.1402(a)-5  Dividends and interest.

    (a) All dividends on shares of stock are excluded unless they are 
received by an individual in the course of his trade or business as a 
dealer in stocks or securities.
    (b) Interest on any bond, debenture, note, or certificate, or other 
evidence of indebtedness, issued with interest coupons or in registered 
form by any corporation (including one issued by a government or 
political subdivision thereof) is excluded unless such interest is 
received in the course of a trade or business as a dealer in stocks or 
securities. However, interest with respect to which a credit against tax 
is allowable as provided in section 35, that is, interest on certain 
obligations of the United States and its instrumentalities, is not 
included in net earnings from self-employment even though received in 
the course of a trade or business as a dealer in stocks or securities. 
Only interest on bonds, debentures, notes, or certificates, or other 
evidence

[[Page 17]]

of indebtedness, issued with interest coupons or in registered form by a 
corporation, is excluded in the case of all persons other than dealers 
in stocks or securities; other interest received in the course of any 
trade or business (such as interest received by a pawnbroker on his 
loans or interest received by a merchant on his accounts or notes 
receivable) is not excluded.
    (c) Dividends and interest of the character excludable under 
paragraphs (a) and (b) of this section received by an individual on 
stocks or securities held for speculation or investment are excluded 
whether or not the individual is a dealer in stocks or securities.
    (d) A dealer in stocks or securities is a merchant of stocks or 
securities with an established place of business, regularly engaged in 
the business of purchasing stocks or securities and reselling them to 
customers; that is, he is one who as a merchant buys stocks or 
securities and sells them to customers with a view to the gains and 
profits that may be derived therefrom. Persons who buy and sell or hold 
stocks or securities for investment or speculation, irrespective of 
whether such buying or selling constitutes the carrying on of a trade or 
business, are not dealers in stocks or securities.



Sec. 1.1402(a)-6  Gain or loss from disposition of property.

    (a) There is excluded any gain or loss: (1) Which is considered as 
gain or loss from the sale or exchange of a capital asset; (2) from the 
cutting of timber or the disposal of timber, coal, or iron ore, even 
though held primarily for sale to customers, if section 631 is 
applicable to such gain or loss; and (3) from the sale, exchange, 
involuntary conversion, or other disposition of property if such 
property is neither (i) stock in trade or other property of a kind which 
would properly be includible in inventory if on hand at the close of the 
taxable year, nor (ii) property held primarily for sale to customers in 
the ordinary course of a trade or business. For the purpose of the 
special rule in subparagraph (3) of this paragraph, it is immaterial 
whether a gain or loss is treated as a capital gain or loss or as an 
ordinary gain or loss for purposes other than determining net earnings 
from self-employment. For instance, where the character of a loss is 
governed by the provisions of section 1231, such loss is excluded in 
determining net earnings from self-employment even though such loss is 
treated under section 1231 as an ordinary loss. For the purposes of this 
special rule, the term ``involuntary conversion'' means a compulsory or 
involuntary conversion of property into other property or money as a 
result of its destruction in whole or in part, theft or seizure, or an 
exercise of the power of requisition or condemnation or the threat or 
imminence thereof; and the term ``other dispostion'' includes the 
destruction or loss, in whole or in part, of property by fire, storm, 
shipwreck, or other casualty, or by theft, even though there is no 
conversion of such property into other property or money.
    (b) The application of this section may be illustrated by the 
following example:

    Example. During the taxable year 1954, A, who owns a grocery store, 
realized a net profit of $1,500 from the sale of groceries and a gain of 
$350 from the sale of a refrigerator case. During the same year, he 
sustained a loss of $2,000 as a result of damage by fire to the store 
building. In computing taxable income, all of these items are taken into 
account. In determining net earnings from self-employment, however, only 
the $1,500 of profit derived from the sale of groceries is included. The 
$350 gain and the $2,000 loss are excluded.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6841, 30 FR 
9309, July 27, 1965]



Sec. 1.1402(a)-7  Net operating loss deduction.

    The deduction provided by section 172, relating to net operating 
losses sustained in years other than the taxable year, is excluded.



Sec. 1.1402(a)-8  Community income.

    (a) In case of an individual. If any of the income derived by an 
individual from a trade or business (other than a trade or business 
carried on by a partnership) is community income under community 
property laws applicable to such income, all of the gross income, and 
the deductions attributable to such income, shall be treated as the 
gross income and deductions of the husband unless the wife exercises 
substantially

[[Page 18]]

all of the management and control of such trade or business, in which 
case all of such gross income and deductions shall be treated as the 
gross income and deductions of the wife. For the purpose of this special 
rule, the term ``management and control'' means management and control 
in fact, not the management and control imputed to the husband under the 
community property laws. For example, a wife who operates a beauty 
parlor without any appreciable collaboration on the part of her husband 
will be considered as having substantially all of the management and 
control of such business despite the provision of any community property 
law vesting in the husband the right of management and control of 
community property; and the income and deductions attributable to the 
operation of such beauty parlor will be considered the income and 
deductions of the wife.
    (b) In case of a partnership. Even though a portion of a partner's 
distributive share of the income or loss, described in section 
702(a)(9), from a trade or business carried on by a partnership is 
community income or loss under the community property laws applicable to 
such share, all of such distributive share shall be included in 
computing the net earnings from self-employment of such partner; no part 
of such share shall be taken into account in computing the net earnings 
from self-employment of the spouse of such partner. In any case in which 
both spouses are members of the same partnership, the distributive share 
of the income or loss of each spouse is included in computing the net 
earnings from self-employment of that spouse.



Sec. 1.1402(a)-9  Puerto Rico.

    (a) Residents. A resident of Puerto Rico, whether or not a bona fide 
resident thereof during the entire taxable year, and whether or not an 
alien, a citizen of the United States, or a citizen of Puerto Rico, 
shall compute his net earnings from self-employment in the same manner 
as would a citizen of the United States residing in the United States. 
See paragraph (d) of Sec. 1.1402(b)-1 for regulations relating to 
nonresident aliens. For the purpose of the tax on self-employment 
income, the gross income of such a resident of Puerto Rico also includes 
income from Puerto Rican sources. Thus, under this special rule, income 
from Puerto Rican sources will be included in determining net earnings 
from self-employment of a resident of Puerto Rico engaged in the active 
conduct of a trade or business in Puerto Rico despite the fact that, 
under section 933, such income may not be taken into account for 
purposes of the tax under section 1 or 3.
    (b) Nonresidents. A citizen of Puerto Rico who is also a citizen of 
the United States and who is not a resident of Puerto Rico will compute 
his net earnings from self-employment in the same manner and subject to 
the same provisions of law and regulations as other citizens of the 
United States.



Sec. 1.1402(a)-10  Personal exemption deduction.

    The deduction provided by section 151, relating to personal 
exemptions, is excluded.



Sec. 1.1402(a)-11  Ministers and members of religious orders.

    (a) In general. For each taxable year ending after 1954 in which a 
minister or member of a religious order is engaged in a trade or 
business, within the meaning of section 1402(c) and Sec. 1.1402(c)-5, 
with respect to service performed in the exercise of his ministry or in 
the exercise of duties required by such order, net earnings from self-
employment from such trade or business include the gross income derived 
during the taxable year from any such service, less the deductions 
attributable to such gross income. For each taxable year ending on or 
after December 31, 1957, such minister or member of a religious order 
shall compute his net earnings from self-employment derived from the 
performance of such service without regard to the exclusions from gross 
income provided by section 107 (relating to rental value of parsonages) 
and section 119 (relating to meals and lodging furnished for the 
convenience of the employer). Thus, a minister who is subject to self-
employment tax with respect to his services as a minister will include 
in the computation of his net earnings from self-employment for

[[Page 19]]

a taxable year ending on or after December 31, 1957, the rental value of 
a home furnished to him as remuneration for services performed in the 
exercise of his ministry or the rental allowance paid to him as 
remuneration for such services irrespective of whether such rental value 
or rental allowance is excluded from gross income by section 107. 
Similarly, the value of any meals or lodging furnished to a minister or 
to a member of a religious order in connection with service performed in 
the exercise of his ministry or as a member of such order will be 
included in the computation of his net earnings from self-employment for 
a taxable year ending on or after December 31, 1957, notwithstanding the 
exclusion of such value from gross income by section 119.
    (b) In employ of American employer. If a minister or member of a 
religious order engaged in a trade or business described in section 
1402(c) and Sec. 1.1402(c)-5 is a citizen of the United States and 
performs service, in his capacity as a minister or member of a religious 
order, as an employee of an American employer, as defined in section 
3121(h) and the regulations thereunder in Part 31 of this chapter 
(Employment Tax Regulations), his net earnings from self-employment 
derived from such service shall be computed as provided in paragraph (a) 
of this section but without regard to the exclusions from gross income 
provided in section 911, relating to earned income from sources without 
the United States, and section 931, relating to income from sources 
within possessions of the United States. Thus, even though all the 
income of the minister or member for service of the character to which 
this paragraph is applicable was derived from sources without the United 
States, or from sources within possessions of the United States, and 
therefore may be excluded from gross income, such income is included in 
computing net earnings from self-employment.
    (c) Minister in a foreign country whose congregation is composed 
predominantly of citizens of the United States--(1) Taxable years ending 
after 1956. For any taxable year ending after 1956, a minister of a 
church, who is engaged in a trade or business within the meaning of 
section 1402(c) and Sec. 1.1402(c)-5, is a citizen of the United States, 
is performing service in the exercise of his ministry in a foreign 
country, and has a congregation composed predominantly of United States 
citizens, shall compute his net earnings from self-employment derived 
from his services as a minister for such taxable year without regard to 
the exclusion from gross income provided in section 911, relating to 
earned income from sources without the United States. For taxable years 
ending on or after December 31, 1957, such minister shall also disregard 
sections 107 and 119 in the computation of his net earnings from self-
employment. (See paragraph (a) of this section.) For purposes of section 
1402(a)(8) and this paragraph a ``congregation composed predominantly of 
citizens of the United States'' means a congregation the majority of 
which throughout the greater portion of its minister's taxable year were 
United States citizens.
    (2) Election for taxable years ending after 1954 and before 1957. 
(i) A minister described in subparagraph (1) of this paragraph who, for 
a taxable year ending after 1954 and before 1957, had income from 
service described in such subparagraph which would have been included in 
computing net earnings from self-employment if such income had been 
derived in a taxable year ending after 1956 by an individual who had 
filed a waiver certificate under section 1402(e), may elect to have 
section 1402(a)(8) and subparagraph (1) of this paragraph apply to his 
income from such service for his taxable years ending after 1954 and 
before 1957. If such minister filed a waiver certificate prior to August 
1, 1956, in accordance with Sec. 1.1402(e)(1)-1, or he files such a 
waiver certificate on or before the due date of his return (including 
any extensions thereof) for his last taxable year ending before 1957, he 
must make such election on or before the due date of his return 
(including any extensions thereof) for such taxable year or before April 
16, 1957, whichever is the later. If the waiver certificate is not so 
filed, the minister must make his election on or before the due date of 
the return (including any extensions thereof) for his first taxable year 
ending after 1956. Notwithstanding the expiration of the

[[Page 20]]

period prescribed by section 1402(e)(2) for filing such waiver, the 
minister may file a waiver certificate at the time he makes the 
election. In no event shall an election be valid unless the minister 
files prior to or at the time of the election a waiver certificate in 
accordance with Sec. 1.1402(e)(1)-1.
    (ii) The election shall be made by filing with the district director 
of internal revenue with whom the waiver certificate, Form 2031, is 
filed a written statement indicating that, by reason of the Social 
Security Amendments of 1956, the minister desires to have the Federal 
old-age, survivors, and disability insurance system established by title 
II of the Social Security Act extended to his services performed in a 
foreign country as a minister of a congregation composed predominantly 
of United States citizens beginning with the first taxable year ending 
after 1954 and prior to 1957 for which he had income from such services. 
The statement shall be dated and signed by the minister and shall 
clearly state that it is an election for retroactive self-employment tax 
coverage under the Self-Employment Contributions Act of 1954. In 
addition, the statement shall include the following information:
    (a) The name and address of the minister.
    (b) His social security account number, if he has one.
    (c) That he is a duly ordained, commissioned, or licensed minister 
of a church.
    (d) That he is a citizen of the United States.
    (e) That he is performing services in the exercise of his ministry 
in a foreign country.
    (f) That his congregation is composed predominantly of citizens of 
the United States.
    (g)(1) That he has filed a waiver certificate and, if so, where and 
under what circumstances the certificate was filed and the taxable year 
for which it is effective; or (2) that he is filing a waiver certificate 
with his election for retroactive coverage and, if so, the taxable year 
for which it is effective.
    (h) That he has or has not filed income tax returns for his taxable 
years ending after 1954 and before 1957. If he has filed such returns, 
he shall state the years for which they were filed and indicate the 
district director of internal revenue with whom they were filed.
    (iii) Notwithstanding section 1402(e)(3), a waiver certificate filed 
pursuant to Sec. 1.1402(e)(1)-1 by a minister making an election under 
this paragraph shall be effective (regardless of when such certificate 
is filed) for such minister's first taxable year ending after 1954 in 
which he had income from service described in subparagraph (1) of this 
paragraph or for the taxable year of the minister prescribed by section 
1402(e)(3), if such taxable year is earlier, and for all succeeding 
taxable years.
    (iv) No interest or penalty shall be assessed or collected for 
failure to file a return within the time prescribed by law if such 
failure arises solely by reason of an election made by a minister 
pursuant to this paragraph or for any underpayment of self-employment 
income tax arising solely by reason of such election, for the period 
ending with the date such minister makes an election pursuant to this 
paragraph.
    (d) Treatment of certain remuneration paid in 1955 and 1956 as 
wages. For treatment of remuneration paid to an individual for service 
described in section 3121(b)(8)(A) which was erroneously treated by the 
organization employing him as employment with-in the meaning of chapter 
21 of the Internal Revenue Code, see Sec. 1.1402(e)(4)-1.



Sec. 1.1402(a)-12  Possession of the United States.

    For purposes of the tax on self-employment income, the term 
``possession of the United States,'' as used in section 931 (relating to 
income from sources within possessions of the United States) and section 
932 (relating to citizens of possessions of the United States) shall be 
deemed not to include the Virgin Islands, Guam, or American Samoa. The 
provisions of section 1402(a)(9) and of this section insofar as they 
involve nonapplication of sections 931 and 932 to Guam or American 
Samoa, shall apply only in the case of taxable years beginning after 
1960. For definition of the term ``United States'' and for other 
geographical definitions

[[Page 21]]

relating to the Continental Shelf see section 638 and Sec. 1.638-1.

[T.D. 7277, 38 FR 12742, May 15, 1973]



Sec. 1.1402(a)-13  Income from agricultural activity.

    (a) Agricultural trade or business. (1) An agricultural trade or 
business is one in which, if the trade or business were carried on 
exclusively by employees, the major portion of the services would 
constitute agricultural labor as defined in section 3121(g) and the 
regulations thereunder in part 31 of this chapter (Employment Tax 
Regulations). In case the services are in part agricultural and in part 
nonagricultural, the time devoted to the performance of each type of 
service is the test to be used to determine whether the major portion of 
the services would constitute agricultural labor. If more than half of 
the time spent in performing all the services is spent in performing 
services which would constitute agricultural labor under section 
3121(g), the trade or business is agricultural. If only half, or less, 
of the time spent in performing all the services is spent in performing 
services which would constitute agricultural labor under section 
3121(g), the trade or business is not agricultural. In every case the 
time spent in performing the services will be computed by adding the 
time spent in the trade or business during the taxable year by every 
individual (including the individual carrying on such trade or business 
and the members of his family) in performing such services. The 
operation of this special rule is not affected by section 3121(c), 
relating to the included-excluded rule for determining employment.
    (2) The rules prescribed in subparagraph (1) of this paragraph have 
no application where the nonagricultural services are performed in 
connection with an enterprise which constitutes a trade or business 
separate and distinct from the trade or business conducted as an 
agricultural enterprise. Thus, the operation of a roadside automobile 
service station on farm premises constitutes a trade or business 
separate and distinct from the agricultural enterprise, and the gross 
income derived from such service station, less the deductions 
attributable thereto, is to be taken into account in determining net 
earnings from self-employment.
    (b) Farm operator's income for taxable years ending before 1955. 
Income derived in a taxable year ending before 1955 from any 
agricultural trade or business (see paragraph (a) of this section), and 
all deductions attributable to such income, are excluded in computing 
net earnings from self-employment.
    (c) Farm operator's income for taxable years ending after 1954. 
Income derived in a taxable year ending after 1954 from an agricultural 
trade or business (see paragraph (a) of this section) is includible in 
computing net earnings from self-employment. Income derived from an 
agricultural trade or business includes income derived by an individual 
under an agreement entered into by such individual with another person 
pursuant to which such individual undertakes to produce agricultural or 
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on land owned or leased by such other 
person and pursuant to which the agricultural or horticultural 
commodities produced by such individual, or the proceeds therefrom, are 
to be divided between such individual and such other person, and the 
amount of such individual's share depends on the amount of the 
agricultural or horticultural commodities produced. However, except as 
provided in paragraph (d) of this section, relating to arrangements 
involving material participation, the income derived under such an 
agreement by the owner or lessee of the land is not includible in 
computing net earnings from self-employment. See Sec. 1.1402(a)-4. For 
options relating to the computation of net earnings from self-
employment, see Secs. 1.1402(a)-14 and 1.1402(a)-15.
    (d) Includible farm rental income for taxable years ending after 
1955. For taxable years ending after 1955, income derived from an 
agricultural trade or business (see paragraph (a) of this section) 
includes also income derived by the owner or tenant of land under an 
arrangement between such owner or tenant and another person, if such 
arrangement provides that such other person shall produce agricultural 
or horticultural commodities (including

[[Page 22]]

livestock, bees, poultry, and fur-bearing animals and wildlife) on such 
land, and that there shall be material participation by the owner or 
tenant in the production or the management of the production of such 
agricultural or horticultural commodities, and if there is material 
participation by the owner or tenant with respect to any such 
agricultural or horticultural commodity. See paragraph (b) of 
Sec. 1.1402(a)-4. For options relating to the computation of net 
earnings from self-employment, see Secs. 1.1402(a)-14 and 1.1402(a)-15.
    (e) Income from service performed after 1956 as a crew leader. 
Income derived by a crew leader (see section 3121(o) and the regulations 
thereunder in Part 31 of this chapter (Employment Tax Regulations)) from 
service performed after 1956 in furnishing individuals to perform 
agricultural labor for another person and from service performed after 
1956 in agricultural labor as a member of the crew is considered to be 
income derived from a trade or business for purposes of Sec. 1.1402(c)-
1. Whether such trade or business is an agricultural trade or business 
shall be determined by applying the rules set forth in this section.



Sec. 1.1402(a)-14  Options available to farmers in computing net earnings from self-employment for taxable years ending after 1954 and before December 31, 1956.

    (a) Computation of net earnings. In the case of any trade or 
business which is carried on by an individual who reports his income on 
the cash receipts and disbursements method, and in which, if it were 
carried on exclusively by employees, the major portion of the services 
would constitute agricultural labor as defined in section 3121(g) (see 
paragraph (a) of Sec. 1.1402(a)-13), net earnings from self-employment 
may, for a taxable year ending after 1954, at the option of the 
taxpayer, be computed as follows:
    (1) Gross income $1,800 or less. If the gross income, computed as 
provided in paragraph (b) of this section, from such trade or business 
is $1,800 or less, the taxpayer may, at his option, treat as net 
earnings from self-employment from such trade or business an amount 
equal to 50 percent of such gross income. If the taxpayer so elects, the 
amount equal to 50 percent of such gross income shall be used in 
computing his self-employment income in lieu of his actual net earnings 
from such trade or business, if any.
    (2) Gross income in excess of $1,800. If the gross income, computed 
as provided in paragraph (b) of this section, from such trade or 
business is more than $1,800, and the actual net earnings from self-
employment from such trade or business are less than $900, the taxpayer 
may, at his option, treat $900 as net earnings from self-employment. If 
the taxpayer so elects, $900 shall be used in computing his self-
employment income in lieu of his actual net earnings from such trade or 
business, if any. However, if the taxpayer's actual net earnings from 
such trade or business, as computed in accordance with Secs. 1.1402(a)-1 
through 1.1402(a)-3 are $900 or more, such actual net earnings shall be 
used in computing his self-employment income.
    (b) Computation of gross income. For purposes of paragraph (a) of 
this section, gross income shall consist of the gross receipts from such 
trade or business reduced by the cost or other basis of property which 
was purchased and sold in carrying on such trade or business, adjusted 
(after such reduction) in accordance with the provisions of 
Sec. 1.1402(a)-3, relating to income and deductions not included in 
computing net earnings from self-employment.
    (c) Two or more agricultural activities. If an individual is engaged 
in more than one agricultural trade or business within the meaning of 
paragraph (a) of Sec. 1.1402(a)-13 (for example, the business of 
ordinary farming and the business of cotton ginning), the gross income 
derived from each agricultural trade or business shall be aggregated for 
purposes of the optional method provided in paragraph (a) of this 
section for computing net earnings from self-employment.
    (d) Examples. Application of the regulations prescribed in 
paragraphs (a) and (b) of this section may be illustrated by the 
following examples:

    Example (1). F, a farmer, uses the cash receipts and disbursements 
method of accounting in making his income tax returns. F's books and 
records show that during the calendar year 1955 he received $1,200 from 
the

[[Page 23]]

sale of produce raised on the farm, $200 from the sale of livestock 
raised on the farm and not held for breeding or dairy purposes, and $600 
from the sale of a tractor. The income from the sale of the tractor is 
of a type which is excluded from net earnings from self-employment by 
section 1402(a). F's actual net earnings from self-employment, computed 
in accordance with the provisions of Secs. 1.1402(a)-1 through 
1.1402(a)-3, are $450. F may report $450 as his net earnings from self-
employment or he may elect to report $700 (one-half of $1,400).
    Example (2). C, a cattleman, uses the cash receipts and 
disbursements method of accounting in making his income tax returns. C 
had actual net earnings from self-employment, computed in accordance 
with the provisions of Secs. 1.1402(a)-1 through 1.1402(a)-3, of $725. 
His gross receipts were $1,000 from the sale of produce raised on the 
farm and $1,200 from the sale of feeder cattle, which C bought for $500. 
The income from the sale of the feeder cattle is of a type which is 
included in computing net earnings from self-employment. Therefore, C 
may report $725 as his net earnings from self-employment or he may elect 
to report $850, one-half of $1,700 ($2,200 minus $500).
    Example (3). R, a rancher, has gross income of $3,000 from the 
operation of his ranch, computed as provided in paragraph (b) of this 
section. His actual net earnings from self-employment from farming 
activities are less than $900. R, nevertheless, may elect to report $900 
as net earnings from self-employment from such trade or business. If R 
had actual net earnings from self-employment from his farming activities 
in the amount of $900 or more, he would be required to report such 
amount in computing his self-employment income.

    (e) Members of farm partnerships. The optional method provided by 
paragraph (a) of this section for computing net earnings from self-
employment is not available to a member of a partnership with respect to 
his distributive share of the income or loss from any trade or business 
carried on by any partnership of which he is a member.



Sec. 1.1402(a)-15  Options available to farmers in computing net earnings from self-employment for taxable years ending on or after December 31, 1956.

    (a) Computation of net earnings. In the case of any trade or 
business which is carried on by an individual or by a partnership and in 
which, if such trade or business were carried on exclusively by 
employees, the major portion of the services would constitute 
agricultural labor as defined in section 3121(g) (see paragraph (a) of 
Sec. 1.1402(a)-13), net earnings from self-employment may, for a taxable 
year ending on or after December 31, 1956, at the option of the 
taxpayer, be computed as follows:
    (1) In case of an individual--(i) Gross income of less than 
specified amount. If the gross income, computed as provided in paragraph 
(b) of this section, from such trade or business is $2,400 or less 
($1,800 or less for a taxable year ending on or after December 31, 1956, 
and beginning before January 1, 1966), the taxpayer may, at his option, 
treat as net earnings from self-employment from such trade or business 
an amount equal to 66\2/3\ percent of such gross income. If the taxpayer 
so elects, the amount equal to 66\2/3\ percent of such gross income 
shall be used in computing his self-employment income in lieu of his 
actual net earnings from such trade or business, if any.
    (ii) Gross income in excess of specified amount. If the gross 
income, computed as provided in paragraph (b) of this section, from such 
trade or business is more than $2,400 ($1,800 for a taxable year ending 
on or after December 31, 1956, and beginning before January 1, 1966), 
and the net earnings from self-employment from such trade or business 
(computed without regard to this section) are less than $1,600 ($1,200 
for a taxable year ending on or after December 31, 1956, and beginning 
before January 1, 1966), the taxpayer may, at his option, treat $1,600 
($1,200 for a taxable year ending on or after December 31, 1956, and 
beginning before January 1, 1966) as net earnings from self-employment. 
If the taxpayer so elects, $1,600 ($1,200 for a taxable year ending on 
or after December 31, 1956, and beginning before January 1, 1966) shall 
be used in computing his self-employment income in lieu of his actual 
net earnings from such trade or business, if any. However, if the 
taxpayer's actual net earnings from such trade or business, as computed 
in accordance with the applicable provisions of Secs. 1.1402(a)-1 to 
1.1402(a)-13, inclusive, are $1,600 or more ($1,200 or more for a 
taxable year ending on or after December 31, 1956, and beginning before 
January 1, 1966) such actual net earnings shall be used

[[Page 24]]

in computing his self-employment income.
    (2) In case of a member of a partnership--(i) Distributive share of 
gross income of less than specified amount. If a taxpayer's distributive 
share of the gross income of a partnership (as such gross income is 
computed under the provisions of paragraph (b) of this section) derived 
from such trade or business (after such gross income has been reduced by 
the sum of all payments to which section 707(c) applies) is $2,400 or 
less ($1,800 or less for a taxable year ending on or after December 31, 
1956, and beginning before January 1, 1966), the taxpayer may, at his 
option, treat as his distributive share of income described in section 
702(a)(9) derived from such trade or business an amount equal to 66\2/3\ 
percent of his distributive share of such gross income (after such gross 
income has been reduced by the sum of all payments to which section 
707(c) applies). If the taxpayer so elects, the amount equal to 66\2/3\ 
percent of his distributive share of such gross income shall be used by 
him in the computation of his net earnings from self-employment in lieu 
of the actual amount of his distributive share of income described in 
section 702(a)(9) from such trade or business, if any.
    (ii) Distributive share of gross income in excess of specified 
amount. If a taxpayer's distributive share of the gross income of the 
partnership (as such gross income is computed under the provisions of 
paragraph (b) of this section) derived from such trade or business 
(after such gross income has been reduced by the sum of all payments to 
which section 707(c) applies) is more than $2,400 ($1,800 for a taxable 
year ending on or after December 31, 1956, and beginning before January 
1, 1966) and the actual amount of his distributive share (whether or not 
distributed) of income described in section 702(a)(9) derived from such 
trade or business (computed without regard to this section) is less than 
$1,600 ($1,200 for a taxable year ending on or after December 31, 1956, 
and beginning before January 1, 1966), the taxpayer may, at his option, 
treat $1,600 ($1,200 for a taxable year ending on or after December 31, 
1956, and beginning before January 1, 1966) as his distributive share of 
income described in section 702(a)(9) derived from such trade or 
business. If the taxpayer so elects, $1,600 ($1,200 for a taxable year 
ending on or after December 31, 1956, and beginning before January 1, 
1966) shall be used by him in the computation of his net earnings from 
self-employment in lieu of the actual amount of his distributive share 
of income described in section 702(a)(9) from such trade or business, if 
any. However, if the actual amount of the taxpayer's distributive share 
of income described in section 702(a)(9) from such trade or business, as 
computed in accordance with the applicable provisions of 
Secs. 1.1402(a)-1 to 1.1402(a)-13, inclusive, is $1,600 or more ($1,200 
or more for a taxable year ending on or after December 31, 1956, and 
beginning before January 1, 1966), such actual amount of the taxpayer's 
distributive share shall be used in computing his net earnings from 
self-employment.
    (iii) Cross reference. For a special rule in the case of certain 
deceased partners, see paragraph (c) of Sec. 1.1402(f)-1.
    (b) Computation of gross income. For purposes of this section gross 
income has the following meanings:
    (1) In the case of any such trade or business in which the income is 
computed under a cash receipts and disbursements method, the gross 
receipts from such trade or business reduced by the cost or other basis 
of property which was purchased and sold in carrying on such trade or 
business (see paragraphs (a) and (c), other than paragraph (a)(5), of 
Sec. 1.61-4), adjusted (after such reduction) in accordance with the 
applicable provisions of Secs. 1.1402(a)-3 to 1.1402(a)-13, inclusive.
    (2) In the case of any such trade or business in which the income is 
computed under an accrual method (see paragraphs (b) and (c), other than 
paragraph (b)(5), of Sec. 1.61-4), the gross income from such trade or 
business, adjusted in accordance with the applicable provisions of 
Secs. 1.1402(a)-3 to 1.1402(a)-13, inclusive.
    (c) Two or more agricultural activities. If an individual (including 
a member of a partnership) derives gross income (as defined in paragraph 
(b) of this section) from more than one agricultural trade or business, 
such gross income (including his distributive share of the gross

[[Page 25]]

income of any partnership derived from any such trade or business) shall 
be deemed to have been derived from one trade or business. Thus, such an 
individual shall aggregate his gross income derived from each 
agricultural trade or business carried on by him (which includes, under 
paragraph (b) of Sec. 1.1402(a)-1, any guaranteed payment, within the 
meaning of section 707(c), received by him from a farm partnership of 
which he is a member) and his distributive share of partnership gross 
income (after such gross income has been reduced by any guaranteed 
payment within the meaning of section 707(c)) derived from each farm 
partnership of which he is a member. Such gross income is the amount to 
be considered for purposes of the optional method provided in this 
section for computing net earnings from self-employment. If the 
aggregate gross income of an individual includes income derived from an 
agricultural trade or business carried on by him and a distributive 
share of partnership income derived from an agricultural trade or 
business carried on by a partnership of which he is a member, such 
aggregate gross income shall be treated as income derived from a single 
trade or business carried on by him, and such individual shall apply the 
optional method applicable to individuals set forth in paragraph (a)(1) 
of this section for purposes of computing his net earnings from self-
employment.
    (d) Examples. The application of this section may be illustrated by 
the following examples:

    Example (1). F is engaged in the business of farming and computes 
his income under the cash receipts and disbursements method. He files 
his income tax returns on the basis of the calendar year. During the 
year 1966, F's gross income from the business of farming (computed in 
accordance with paragraph (b) (1) of this section) is $2,325. His actual 
net earnings from self-employment derived from such business are $1,250. 
As his net earnings from self-employment, F may report $1,250 or, by the 
optional computation method, he may report $1,550 (66\2/3\ percent of 
$2,325).
    Example (2). G is engaged in the business of farming and computes 
his income under the accrual method. His income tax returns are filed on 
the calendar year basis. For the year 1966, G's gross income from the 
operation of his farm (computed in accordance with paragraph (b)(2) of 
this section) is $2,800. He has actual net earnings from self-employment 
derived from such farm in the amount of $1,250. As his net earnings from 
self-employment derived from his farm, G may report his actual net 
earnings of $1,250, or by the optional method he may report $1,600. If 
G's actual net earnings from self-employment from his farming activities 
for 1966 were in an amount of $1,600 or more, he would be required to 
report such amount in computing his self-employment income.
    Example (3). M, who files his income tax returns on a calendar year 
basis, is one of the three partners of the XYZ Company, a partnership, 
engaged in the business of farming. The taxable year of the partnership 
is the calendar year, and its income is computed under the cash receipts 
and disbursements method. For M's services in connection with the 
planting, cultivating, and harvesting of the crops during the year 1966 
the partnership agrees to pay him $500, the full amount of which is 
determined without regard to the income of the partnership and 
constitutes a guaranteed payment within the meaning of section 707(c). 
This guaranteed payment to M is the only such payment made during such 
year. The gross income derived from the business for the year 1966 
computed in accordance with paragraph (b)(1) of this section and after 
being reduced by the guaranteed payment of $500 made to M, is $3,000. 
One-third of the $3,000 ($1,000), is M's distributive share of such 
gross income. Under paragraph (c) of this section, the guaranteed 
payment ($500) received by M and his distributive share of the 
partnership gross income ($1,000) are deemed to have been derived from 
one trade or business, and such amounts must be aggregated for purposes 
of the optional method of computing net earnings from self-employment. 
Since M's combined gross income from his two agricultural businesses 
($1,000 and $500) is not more than $2,400 and since such income is 
deemed to be derived from one trade or business, M's net earnings from 
self-employment derived from such farming business may, at his option, 
be deemed to be $1,000 (66\2/3\ percent of $1,500).
    Example (4). A is one of the two partners of the AB partnership 
which is engaged in the business of farming. The taxable year of the 
partnership is the calendar year and its income is computed under the 
accrual method. A files his income tax returns on the calendar year 
basis. The partnership agreement provides for an equal sharing in the 
profits and losses of the partnership by the two partners. A is an 
experienced farmer and for his services as manager of the partnership's 
farm activities during the year 1966 he receives $6,000 which amount 
constitutes a guaranteed payment within the meaning of section 707(c). 
The gross income of the partnership derived from such business for the

[[Page 26]]

year 1966, computed in accordance with paragraph (b)(2) of this section 
and after being reduced by the guaranteed payment made to A, is $9,600. 
A's distributive share of such gross income is $4,800 and his 
distributive share of income described in section 702(a)(9) derived from 
the partnership's business is $1,900. Under paragraph (c) of this 
section, the guaranteed payment received by A and his distributive share 
of the partnership gross income are deemed to have been derived from one 
trade or business, and such amounts must be aggregated for purposes of 
the optional method of computing his net earnings from self-employment. 
Since the aggregate of A's guaranteed payment ($6,000) and his 
distributive share of partnership gross income ($4,800) is more than 
$2,400 and since the aggregate of A's guaranteed payment ($6,000) and 
his distributive share ($1,900) of partnership income described in 
section 702(a)(9) is not less than $1,600, the optional method of 
computing net earnings from self-employment is not available to A.
    Example (5). F is a member of the EFG partnership which is engaged 
in the business of farming. F files his income tax returns on the 
calendar year basis. The taxable year of the partnership is the calendar 
year, and its income is computed under a cash receipts and disbursements 
method. Under the partnership agreement the partners are to share 
equally the profits or losses of the business. The gross income derived 
from the partnership business for the year 1966, computed in accordance 
with paragraph (b)(1) of this section is $7,500. F's share of such gross 
income is $2,500. Due to drought and an epidemic among the livestock, 
the partnership sustains a net loss of $7,800 for the year 1966 of which 
loss F's share is $2,600. Since F's distributive share of gross income 
derived from such business is in excess of $2,400 and since F does not 
receive income described in section 702(a)(9) of $1,600 or more from 
such business, he may, at his option, be deemed to have received $1,600 
as his distributive share of income described in section 702(a)(9) from 
such business.


[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6993, 34 FR 
828, Jan. 18, 1969]



Sec. 1.1402(a)-16  Exercise of option.

    A taxpayer shall, for each taxable year with respect to which he is 
eligible to use the optional method described in Sec. 1.1402(a)-14 or 
Sec. 1.1402(a)-15, make a determination as to whether his net earnings 
from self-employment are to be computed in accordance with such method. 
If the taxpayer elects the optional method for a taxable year, he shall 
signify such election by computing net earnings from self-employment 
under the optional method as set forth in Schedule F (Form 1040) of the 
income tax return filed by the taxpayer for such taxable year. If the 
optional method is not elected at the time of the filing of the return 
for a taxable year with respect to which the taxpayer is eligible to 
elect such optional method, such method may be elected on an amended 
return (or on such other form as may be prescribed for such use) filed 
within the period prescribed by section 6501 and the regulations 
thereunder for the assessment of the tax for such taxable year. If the 
optional method is elected on a return for a taxable year, the taxpayer 
may revoke such election by filing an amended return (or such other form 
as may be prescribed for such use) for the taxable year within the 
period prescribed by section 6501 and the regulations thereunder for the 
assessment of the tax for such taxable year. If the taxpayer is deceased 
or unable to make an election, the person designated in section 6012(b) 
and the regulations thereunder may, within the period prescribed in this 
section elect the optional method for any taxable year with respect to 
which the taxpayer is eligible to use the optional method and revoke an 
election previously made by or for the taxpayer.



Sec. 1.1402(a)-17  Retirement payments to retired partners.

    (a) In general. There shall be excluded, in computing net earnings 
from self-employment for taxable years ending on or after December 31, 
1967, certain payments made on a periodic basis by a partnership, 
pursuant to a written plan of the partnership, to a retired partner on 
account of his retirement. The exclusion applies only if the payments 
are made pursuant to a plan which meets the requirements prescribed in 
paragraph (b) of this section, and, in addition, the conditions set 
forth in paragraph (c) of this section are met.
    (b) Retirement plan of partnership. (1) To meet the requirements of 
section 1402(a)(10), the written plan of the partnership must set forth 
the terms and conditions of the program or system established by the 
partnership for the purpose of making payments to retired

[[Page 27]]

partners on account of their retirement. To qualify as payments on 
account of retirement, the payments must constitute bona fide retirement 
income. Thus, payments of benefits not customarily included in a pension 
or retirement plan such as layoff benefits are not payments on account 
of retirement. Eligibility for retirement generally is established on 
the basis of age, physical condition, or a combination of age or 
physical condition and years of service. Generally, retirement benefits 
are measured by, and based on, such factors as years of service and 
compensation received. In determining whether the plan of the 
partnership provides for payments on account of retirement, factors, 
formulas, etc., reflected in public, and in broad based private, pension 
or retirement plans in prescribing eligibility requirements and in 
computing benefits may be taken into account.
    (2) The plan of the partnership must provide for payments on account 
of retirement:
    (i) To partners generally or to a class or classes of partners,
    (ii) On a periodic basis, and
    (iii) Which continue at least until the partner's death.

For purposes of subdivision (i) of this subparagraph, a class of 
partners may, in an appropriate case, contain only one member. Payments 
are made on a periodic basis if made at regularly recurring intervals 
(usually monthly) not exceeding one year.
    (c) Conditions relating to exclusion--(1) In general. A payment made 
pursuant to a written plan of a partnership which meets the requirements 
of paragraph (b) of this section shall be excluded, in computing net 
earnings from self-employment, only if:
    (i) The retired partner to whom the payment is made rendered no 
service with respect to any trade or business carried on by the 
partnership (or its successors) during the taxable year of the 
partnership (or its successors), which ends within or with the taxable 
year of the retired partner and in which the payment was received by 
him;
    (ii) No obligation (whether certain in amount or contingent on a 
subsequent event) exists (as of the close of the partnership's taxable 
year referred to in subdivision (i) of this subparagraph) from the other 
partners to the retired partner except with respect to retirement 
payments under the plan or rights such as benefits payable on account of 
sickness, accident, hospitalization, medical expenses, or death; and
    (iii) The retired partner's share (if any) of the capital of the 
partnership has been paid to him in full before the close of the 
partnership's taxable year referred to in subdivision (i) of this 
subparagraph.

By application of the conditions set forth in this subparagraph, either 
all payments on account of retirement received by a retired partner 
during the taxable year of the partnership ending within or with his 
taxable year are excluded or none of the payments are excluded. 
Subdivision (ii) of this subparagraph has application only to 
obligations from other partners in their capacity as partners as 
distinguished from an obligation which arose and exists from a 
transaction unrelated to the partnership or to a trade or business 
carried on by the partnership. The effect of the conditions set forth in 
subdivisions (ii) and (iii) of this subparagraph is that the exclusion 
may apply with respect to payments received by a retired partner during 
the taxable year of the partnership ending within or with his taxable 
year only if at the close of the partnership's taxable year the retired 
partner had no financial interest in the partnership except for the 
right to retirement payments.
    (2) Examples. The application of subparagraph (1) of this paragraph 
may be illustrated by the following examples. Each example assumes that 
the partnership plan pursuant to which the payments are made meets the 
requirements of paragraph (b) of this section.

    Example (1). A, who files his income tax returns on a calendar year 
basis, is a partner in the ABC partnership. The taxable year of the 
partnership is the period July 1 to June 30, inclusive. A retired from 
the partnership on January 1, 1973, and receives monthly payments on 
account of his retirement. As of June 30, 1973, no obligation existed 
from the other partners to A (except with respect to retirement payments 
under the plan) and A's share of the capital of the partnership had

[[Page 28]]

been paid to him in full. The monthly retirement payments received by A 
from the partnership in his taxable year ending on December 31, 1973, 
are not excluded from net earnings from self-employment since A rendered 
service to the partnership during a portion of the partnership's taxable 
year (July 1, 1972, through June 30, 1973) which ends within A's taxable 
year ending on December 31, 1973.
    Example (2). D, a partner in the DEF partnership, retired from the 
partnership as of the close of December 31, 1972. The taxable year of 
both D and the partnership is the calendar year. During the 
partnership's taxable year ending December 31, 1973, D rendered no 
service with respect to any trade or business carried on by the 
partnership. On or before December 31, 1973, all obligations (other than 
with respect to retirement payments under the plan) from the other 
partners to D have been liquidated, and D's share of the capital of the 
partnership has been paid to him. Retirement payments received by D 
pursuant to the partnership's plan in his taxable year ending December 
31, 1973, are excluded in determining his net earnings from self-
employment (if any) for that taxable year.
    Example (3). Assume the same facts as in example (2) except that as 
of the close of December 31, 1973, D has a right to a fixed percentage 
of any amounts collected by the partnership after that date which are 
attributable to services rendered by him prior to his retirement for 
clients of the partnership. The monthly payments received by D in his 
taxable year ending December 31, 1973, are not excluded from net 
earnings from self-employment since as of the close of the partnership's 
taxable year which ends with D's taxable year, an obligation (other than 
an obligation with respect to retirement payments) exists from the other 
partners to D.

[T.D. 7333, 39 FR 44446, Dec. 24, 1974]



Sec. 1.1402(b)-1  Self-employment income.

    (a) In general. Except for the exclusions in paragraphs (b) and (c) 
of this section and the exception in paragraph (d) of this section, the 
term ``self-employment income'' means the net earnings from self-
employment derived by an individual during a taxable year.
    (b) Maximum self-employment income--(1) General rule. Subject to the 
special rules described in subparagraph (2) of this paragraph, the 
maximum self-employment income of an individual for a taxable year 
(whether a period of 12 months or less) is:
    (i) For any taxable year beginning in a calendar year after 1974, an 
amount equal to the contribution and benefit base (as determined under 
section 230 of the Social Security Act) which is effective for such 
calendar year; and
    (ii) For any taxable year:
Ending before 1955................................................$3,600
Ending after 1954 and before 1959..................................4,200
Ending after 1958 and before 1966..................................4,800
Ending after 1965 and before 1968..................................6,600
Ending after 1967 and beginning before 1972........................7,800
Beginning after 1971 and before 1973...............................9,000
Beginning after 1972 and before 1974..............................10,800
Beginning after 1973 and before 1975..............................13,200
    (2) Special rules. (i) If an individual is paid wages as defined in 
subparagraph (3) of this paragraph in a taxable year, the maximum self-
employment income for such taxable year is computed as provided in 
subdivision (ii) or (iii) of this subparagraph.
    (ii) If an individual is paid wages as defined in subparagraph (3) 
(i) or (ii) of this paragraph in a taxable year, the maximum self-
employment income of such individual for such taxable year is the excess 
of the amounts indicated in subparagraph (1) of this paragraph over the 
amount of the wages, as defined in subparagraph (3) (i) and (ii) of this 
paragraph, paid to him during the taxable year. For example, if for his 
taxable year beginning in 1974, an individual has $15,000 of net 
earnings from self-employment and during such taxable year is paid 
$1,000 of wages as defined in section 3121(a) (see subparagraph (3)(i) 
of this paragraph), he has $12,200 ($13,200 -$1,000) of self-employment 
income for the taxable year.
    (iii) For taxable years ending on or after December 31, 1968, wages, 
as defined in subparagraph (3)(iii) of this paragraph, are taken into 
account in determining the maximum self-employment income of an 
individual for purposes of the tax imposed under section 1401(b) 
(hospital insurance), but not for purposes of the tax imposed under 
section 1401(a) (old-age survivors, and disability insurance). If an 
individual is paid wages as defined in subparagraph (3)(iii) of this 
paragraph in a taxable year, his maximum self-employment income for such 
taxable year for purposes of the tax imposed under section 1401(a) is 
computed under subparagraph (1) of this paragraph or subdivision (ii) of 
this subparagraph (whichever is applicable), and his maximum self-
employment income for such

[[Page 29]]

taxable year for purposes of the tax imposed under section 1401(b) is 
the excess of his section 1401(a) maximum self-employment income over 
the amount of wages, as defined in subparagraph (3)(iii) of this 
paragraph, paid to him during the taxable year. For purposes of this 
subdivision, wages as defined in subparagraph (3)(iii) of this paragraph 
are deemed paid to an individual in the period with respect to which the 
payment is made, that is, the period in which the compensation was 
earned or deemed earned within the meaning of section 3231(e). For an 
explanation of the term ``compensation'' and for provisions relating to 
when compensation is earned, see the regulations under section 3231(e) 
in part 31 of this chapter (Employment Tax Regulations). The application 
of the rules set forth in this subdivision may be illustrated by the 
following example:

    Example. M, a calendar-year taxpayer, has $15,000 of net earnings 
from self-employment for 1974 and during the taxable year is paid $1,000 
of wages as defined in section 3121(a) (see subparagraph (3)(i) of this 
paragraph) and $1,600 of compensation subject to tax under section 3201 
(see subparagraph (3)(iii) of this paragraph). Of the $1,600 of taxable 
compensation, $1,200 represents compensation for services rendered in 
1974 and the balance ($400) represents compensation which pursuant to 
the provisions of section 3231(e) is earned or deemed earned in 1973. 
M's maximum self-employment income for 1974 for purposes of the tax 
imposed under section 1401(a), computed as provided in subdivision (ii) 
of this subparagraph, is $12,200 ($13,200-$1,000), and for purposes of 
the tax imposed under section 1401(b) is $11,000 ($12,200-$1,200). 
However, M may recompute his maximum self-employment income for 1973 for 
purposes of the tax imposed under section 1401(b) by taking into account 
the $400 of compensation which is deemed paid in 1973.

    (3) Meaning of term ``wages''. For the purpose of the computation 
described in subparagraph (2) of this paragraph, the term ``wages'' 
includes:
    (i) Wages as defined in section 3121(a);
    (ii) Such remuneration paid to an employee for services covered by:
    (a) An agreement entered into pursuant to section 218 of the Social 
Security Act (42 U.S.C. 418), which section provides for extension of 
the Federal old-age, survivors and disability insurance system to State 
and local government employees under voluntary agreements between the 
States and the Secretary of Health, Education, and Welfare (Federal 
Security Administrator before April 11, 1953), or
    (b) An agreement entered into pursuant to the provisions of section 
3121(1), relating to coverage of citizens of the United States who are 
employees of foreign subsidiaries of domestic corporations,

as would be wages under section 3121(a) if such services constituted 
employment under section 3121(b). For an explanation of the term 
``wages'', see the regulations under section 3121(a) in part 31 of this 
chapter (Employment Tax Regulations); and
    (iii) Compensation, as defined in section 3231(e), which is subject 
to the employee tax imposed by section 3201 or the employee 
representative tax imposed by section 3211.
    (c) Minimum net earnings from self-employment. Self-employment 
income does not include the net earnings from self-employment of an 
individual when the amount of such earnings for the taxable year is less 
than $400. Thus, an individual having only $300 of net earnings from 
self-employment for the taxable year would not have any self-employment 
income. However, an individual having net earnings from self-employment 
of $400 or more for the taxable year may, by application of paragraph 
(b)(2) of this section, have less than $400 of self-employment income 
for purposes of the tax imposed under section 1401(a) and the tax 
imposed under section 1401(b) or may have self-employment income of $400 
or more for purposes of the tax imposed under section 1401(a) and of 
less than $400 for purposes of the tax imposed under section 1401(b). 
This could occur in a case in which the amount of the individual's net 
earnings from self-employment is $400 or more for a taxable year and the 
amount of such net earnings from self-employment plus the amount of 
wages, as defined in paragraph (b)(3) of this section, paid to him 
during the taxable year exceed the maximum self-employment income, as 
set forth in paragraph (b)(1) of this section, for the taxable year. 
However, the

[[Page 30]]

result occurs only if such maximum self-employment income exceeds the 
amount of such wages. The application of this paragraph may be 
illustrated by the following example:

    Example. For 1974 M, a calendar-year taxpayer, has net earnings from 
self-employment of $2,000 and wages (as defined in paragraph (b)(3) (i) 
and (ii) of this section) of $12,500. Since M's net earnings from self-
employment plus his wages exceed the maximum self-employment income for 
1974 ($13,200), his self-employment income for 1974 is $700 ($13,200-
$12,500). If M also had wages, as defined in paragraph (b)(3)(iii) of 
this section, of $200, his self-employment income would be $700 for 
purposes of the tax imposed under section 1401(a) and $500 ($13,200-
$12,700 ($12,500+$200)) for purposes of the tax imposed under section 
1401(b).

For provisions relating to when wages as defined in paragraph 
(b)(3)(iii) of this section are treated as paid, see paragraph 
(b)(2)(iii) of this section.
    (d) Nonresident aliens. A nonresident alien individual never has 
self-employment income. While a nonresident alien individual who derives 
income from a trade or business carried on within the United States, 
Puerto Rico, the Virgin Islands, Guam, or American Samoa (whether by 
agents or employees, or by a partnership of which he is a member) may be 
subject to the applicable income tax provisions on such income, such 
nonresident alien individual will not be subject to the tax on self-
employment income, since any net earnings which he may have from self-
employment do not constitute self-employment income. For the purpose of 
the tax on self-employment income, an individual who is not a citizen of 
the United States but who is a resident of the Commonwealth of Puerto 
Rico, the Virgin Islands, or, for taxable years beginning after 1960, of 
Guam or American Samoa is not considered to be a nonresident alien 
individual.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 7333, 39 FR 
44447, Dec. 24, 1974]



Sec. 1.1402(c)-1  Trade or business.

    In order for an individual to have net earnings from self-
employment, he must carry on a trade or business, either as an 
individual or as a member of a partnership. Except for the exclusions 
discussed in Secs. 1.1402(c)-2 to 1.1402(c)-7, inclusive, the term 
``trade or business'', for the purpose of the tax on self-employment 
income, shall have the same meaning as when used in section 162. An 
individual engaged in one of the excluded activities specified in such 
sections of the regulations may also be engaged in carrying on 
activities which constitute a trade or business for purposes of the tax 
on self-employment income. Whether or not he is also engaged in carrying 
on a trade or business will be dependent upon all of the facts and 
circumstances in the particular case. An individual who is a crew 
leader, as defined in section 3121(o) (see such section and the 
regulations thereunder in part 31 of this chapter (Employment Tax 
Regulations)), is considered to be engaged in carrying on a trade or 
business with respect to services performed by him after 1956 in 
furnishing individuals to perform agricultural labor for another person 
or services performed by him after 1956 as a member of the crew.

[T.D. 6978, 33 FR 15937, Oct. 30, 1968]



Sec. 1.1402(c)-2  Public office.

    (a) In general--(1) General rule. Except as otherwise provided in 
subparagraph (2) of this paragraph, the performance of the functions of 
a public office does not constitute a trade or business.
    (2) Fee basis public officials--(i) In general. If an individual 
receives fees after 1967 for the performance of the functions of a 
public office of a State or a political subdivision thereof for which he 
is compensated solely on a fee basis, and if the service performed in 
such office is eligible for (but is not made the subject of) an 
agreement between the State and the Secretary of Health, Education, and 
Welfare pursuant to section 218 of the Social Security Act to extend 
social security coverage thereto, the service for which such fees are 
received constitutes a trade or business within the meaning of section 
1402(c) and Sec. 1.1402(c)-1. If an individual performs service for a 
State or a political subdivision thereof in any period in more than one 
position, each position is treated separately for purposes of the 
preceding sentence. See also paragraph (f) of Sec. 1.1402(c)-3 relating 
to the performance of service by an individual as an employee of a State 
or a

[[Page 31]]

political subdivision thereof in a position compensated solely on a fee 
basis.
    (ii) Election with respect to fees received in 1968. (A) Any 
individual who in 1968 receives fees for service performed by him with 
respect to the functions of a public office of a State or a political 
subdivision thereof in any period in which the functions are performed 
in a position compensated solely on a fee basis may elect, if the 
performance of the service for which such fees are received constitutes 
a trade or business pursuant to the provisions of subdivision (i) of 
this subparagraph, to have such performance of service treated as 
excluded from the term ``trade or business'' for the purpose of the tax 
on self-employment income, pursuant to the provisions of section 
122(c)(2) of the Social Security Amendments of 1967 (as quoted in 
Sec. 1.1402(c)). Such election shall not be limited to service to which 
the fees received in 1968 are attributable but must also be applicable 
to service (if any) in subsequent years which, except for the election, 
would constitute a trade or business pursuant to the provisions of 
subdivision (i) of this subparagraph. An election made pursuant to the 
provisions of this subparagraph is irrevocable.
    (B) The election referred to in subdivision (ii)(A) of this 
subparagraph shall be made by filing a certificate of election of 
exemption (Form 4415) on or before the due date of the income tax return 
(see section 6072), including any extension thereof (see section 6081), 
for the taxable year of the individual making the election which begins 
in 1968. The certificate of election of exemption shall be filed with an 
internal revenue office in accordance with the instructions on the 
certificate.
    (b) Meaning of public office. The term ``public office'' includes 
any elective or appointive office of the United States or any possession 
thereof, of the District of Columbia, of a State or its political 
subdivisions, or a wholly-owned instrumentality of any one or more of 
the foregoing. For example, the President, the Vice President, a 
governor, a mayor, the Secretary of State, a member of Congress, a State 
representative, a county commissioner, a judge, a justice of the peace, 
a county or city attorney, a marshal, a sheriff, a constable, a 
registrar of deeds, or a notary public performs the functions of a 
public office. (However, the service of a notary public could not be 
made the subject of a section 218 agreement under the Social Security 
Act because notaries are not ``employees'' within the meaning of that 
section. Accordingly, such service does not constitute a trade or 
business.)

[T.D. 7333, 39 FR 44448, Dec. 24, 1974, as amended by T.D. 7372, 40 FR 
30945, July 24, 1975]



Sec. 1.1402(c)-3  Employees.

    (a) General rule. Generally, the performance of service by an 
individual as an employee, as defined in the Federal Insurance 
Contributions Act (Chapter 21 of the Internal Revenue Code) does not 
constitute a trade or business within the meaning of section 1402(c) and 
Sec. 1.1402(c)-1. However, in six cases set forth in paragraphs (b) to 
(g), inclusive, of this section, the performance of service by an 
individual is considered to constitute a trade or business within the 
meaning of section 1402(c) and Sec. 1.1402(c)-1. (As to when an 
individual is an employee, see section 3121 (d) and (o) and section 3506 
and the regulations under those sections in part 31 of this chapter 
(Employment Tax Regulations).)
    (b) Newspaper vendors. Service performed by an individual who has 
attained the age of 18 constitutes a trade or business for purposes of 
the tax on self-employment income within the meaning of section 1402(c) 
and Sec. 1.1402(c)-1 if performed in, and at the time of, the sale of 
newspapers or magazines to ultimate consumers, under an arrangement 
under which the newspapers or magazines are to be sold by him at a fixed 
price, his compensation being based on the retention of the excess of 
such price over the amount at which the newspapers or magazines are 
charged to him, whether or not he is guaranteed a minimum amount of 
compensation for such service, or is entitled to be credited with the 
unsold newspapers or magazines turned back.
    (c) Sharecroppers. Service performed by an individual under an 
arrangement with the owner or tenant of land pursuant to which:

[[Page 32]]

    (1) Such individual undertakes to produce agricultural or 
horticultural commodities (including livestock, bees, poultry, and fur-
bearing animals and wildlife) on such land,
    (2) The agricultural or horticultural commodities produced by such 
individual, or the proceeds therefrom, are to be divided between such 
individual and such owner or tenant, and
    (3) The amount of such individual's share depends on the amount of 
the agricultural or horticultural commodities produced, constitutes a 
trade or business within the meaning of section 1402(c) and 
Sec. 1.1402(c)-1.
    (d) Employees of foreign government, instrumentality wholly owned by 
foreign government, or international organization. Service performed in 
the United States, as defined in section 3121(e)(2) (see such section 
and the regulations thereunder in part 31 of this chapter (Employment 
Tax Regulations)), by an individual who is a citizen of the United 
States constitutes a trade or business within the meaning of section 
1402(c) and Sec. 1.1402(c)-1 if such service is excepted from 
employment, for purposes of the Federal Insurance Contributions Act 
(chapter 21 of the Code), by:
    (1) Section 3121(b)(11), relating to service in the employ of a 
foreign government (for regulations under section 3121(b)(11), see 
Sec. 31.3121(b)(11)-1 of this chapter);
    (2) Section 3121(b)(12), relating to service in the employ of an 
instrumentality wholly owned by a foreign government (for regulations 
under section 3121(b)(12), see Sec. 31.3121(b)(12)-1 of this chapter); 
or
    (3) Section 3121(b)(15), relating to service in the employ of an 
international organization (for regulations under section 3121(b)(15), 
see Sec. 31.3121(b)(15)-1 of this chapter).

This paragraph is applicable to service performed in any taxable year 
ending on or after December 31, 1960, except that it does not apply to 
service performed before 1961 in Guam or American Samoa.
    (e) Ministers and members of religious orders--(1) Taxable years 
ending before 1968. Service described in section 1402(c)(4) performed by 
an individual during taxable years ending before 1968 for which a 
certificate filed pursuant to section 1402(e) is in effect constitutes a 
trade or business within the meaning of section 1402(c) and 
Sec. 1.1402(c)-1. See also Sec. 1.1402(c)-5.
    (2) Taxable years ending after 1967. Service described in section 
1402(c)(4) performed by an individual during taxable years ending after 
1967 constitutes a trade or business within the meaning of section 
1402(c) and Sec. 1.1402(c)-1 unless an exemption under section 1402(e) 
(see Secs. 1.1402(e)-1A through 1.1402(e)-4A) is effective with respect 
to such individual for the taxable year during which the service is 
performed. See also Sec. 1.1402(c)-5.
    (f) State and local government employees compensated on fee basis--
(1) In general. (i) Section 1402(c)(2)(E) and this paragraph are 
applicable only with respect to fees received by an individual after 
1967 for service performed by him as an employee of a State or a 
political subdivision thereof in a position compensated solely on a fee 
basis. If an individual performs service for a State or a political 
subdivision thereof in more than one position, each position is treated 
separately for purposes of determining whether the service performed in 
such position is performed by an employee and whether compensation for 
service performed in the position is solely on a fee basis.
    (ii) If an individual receives fees after 1967 for service performed 
by him as an employee of a State or a political subdivision thereof in a 
position compensated solely on a fee basis, the service for which such 
fees are received constitutes a trade or business within the meaning of 
section 1402(c) and Sec. 1.1402(c)-1 except that if service performed in 
such position is covered under an agreement entered into by the State 
and the Secretary of Health, Education, and Welfare pursuant to section 
218 of the Social Security Act at the time a fee is received, the 
service to which such fee relates does not constitute a trade or 
business. See also paragraph (a) of Sec. 1.1402(c)-2, relating, in part, 
to the performance of the functions of a public office of a State or a 
political subdivision thereof by an individual.
    (2) Election with respect to fees received in 1968. (i) Any 
individual who in 1968

[[Page 33]]

receives fees for service as an employee of a State or a political 
subdivision thereof in a position compensated solely on a fee basis may 
elect, if the performance of the service for which such fees are 
received constitutes a trade or business pursuant to the provisions of 
subparagraph (1) of this paragraph, to have such performance of service 
treated as excluded from the term ``trade or business'' for the purpose 
of the tax on self-employment income, pursuant to the provisions of 
section 122(c)(2) of the Social Security Amendments of 1967 (as quoted 
in Sec. 1.1402(c)). Such election shall not be limited to service to 
which the fees received in 1968 are attributable but must also be 
applicable to service (if any) in subsequent years which, except for the 
election, would constitute a trade or business pursuant to the 
provisions of subparagraph (1) of this paragraph. An election made 
pursuant to the provisions of this subparagraph is irrevocable.
    (ii) The election referred to in subdivision (i) of this 
subparagraph shall be made by filing a certificate of election of 
exemption (Form 4415) on or before the due date of the income tax return 
(see section 6072), including any extension thereof (see section 6081), 
for the taxable year of the individual making the election which begins 
in 1968. The certificate of election of exemption shall be filed with an 
internal revenue office in accordance with the instructions on the 
certificate.
    (g) Individuals engaged in fishing. For taxable years ending after 
December 31, 1954, service performed by an individual on a boat engaged 
in catching fish or other forms of aquatic animal life (hereinafter 
``fish'') constitutes a trade or business within the meaning of section 
1402(c) and Sec. 1.1402(c)-1 if the service is excepted from the 
definition of employment by section 3121(b)(20) and Sec. 31.3121(b)(20)-
1(a). However, the preceding sentence does not apply to services 
performed after December 31, 1954, and before October 4, 1976, on a boat 
engaged in catching fish if the owner or operator of the boat treated 
the individual as an employee in the manner described in 
Sec. 31.3121(b)(20)-1(b).

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15937, Oct. 30, 1968; T.D. 7333, 39 FR 44448, Dec. 24, 1974; T.D. 7691, 
45 FR 24129, Apr. 9, 1980; T.D. 7716, 45 FR 57123, Aug. 27, 1980]



Sec. 1.1402(c)-4  Individuals under Railroad Retirement System.

    The performance of service by an individual as an employee or 
employee representative as defined in section 3231(b) and (c), 
respectively (see Secs. 31.3231(b)-1 and 31.3231(c)-1 of Part 31 of this 
chapter (Employment Tax Regulations)), that is, an individual covered 
under the railroad retirement system, does not constitute a trade or 
business.



Sec. 1.1402(c)-5  Ministers and members of religious orders.

    (a) In general--(1) Taxable years ending before 1968. For taxable 
years ending before 1955, a duly ordained, commissioned, or licensed 
minister of a church or a member of a religious order is not engaged in 
carrying on a trade or business with respect to service performed by him 
in the exercise of his ministry or in the exercise of duties required by 
such order. However, for taxable years ending after 1954 and before 
1968, any individual who is a duly ordained, commissioned, or licensed 
minister of a church or a member of a religious order (other than a 
member of a religious order who has taken a vow of poverty as a member 
of such order) may elect, as provided in Sec. 1.1402(e)(1)-1, to have 
the Federal old-age, survivors, and disability insurance system 
established by title II of the Social Security Act extended to service 
performed by him in his capacity as such a minister or member. If such a 
minister or a member of a religious order makes an election pursuant to 
Sec. 1.1402(e)(1)-1 he is, with respect to service performed by him in 
such capacity, engaged in carrying on a trade or business for each 
taxable year to which the election is effective. An election by a 
minister or member of a religious order has no application to service 
performed by such minister or member which is not in the

[[Page 34]]

exercise of his ministry or in the exercise of duties required by such 
order.
    (2) Taxable years ending after 1967. For any taxable year ending 
after 1967, a duly ordained, commissioned, or licensed minister of a 
church or a member of a religious order (other than a member of a 
religious order who has taken a vow of poverty as a member of such 
order) is engaged in carrying on a trade or business with respect to 
service performed by him in the exercise of his ministry or in the 
exercise of duties required by such order unless an exemption under 
section 1402(e) (see Secs. 1.1402(e)-1A through 1.1402(e)-4A) is 
effective with respect to such individual for the taxable year during 
which the service is performed. An exemption which is effective with 
respect to a minister or a member of a religious order has no 
application to service performed by such minister or member which is not 
in the exercise of his ministry or in the exercise of duties required by 
such order.
    (b) Service by a minister in the exercise of his ministry. (1)(i) A 
certificate of election filed by a duly ordained, commissioned, or 
licensed minister of a church under the provisions of Sec. 1.1402(e)(1)-
1 has application only to service performed by him in the exercise of 
his ministry.
    (ii) An exemption under section 1402(e) (see Secs. 1.1402(e)-1A 
through 1.1402(e)-4A) which is effective with respect to a duly 
ordained, commissioned, or licensed minister of a church has application 
only to service performed by him in the exercise of his ministry.
    (2) Except as provided in paragraph (c)(3) of this section, service 
performed by a minister in the exercise of his ministry includes the 
ministration of sacerdotal functions and the conduct of religious 
worship, and the control, conduct, and maintenance of religious 
organizations (including the religious boards, societies, and other 
integral agencies of such organizations), under the authority of a 
religious body constituting a church or church denomination. The 
following rules are applicable in determining whether services performed 
by a minister are performed in the exercise of his ministry:
    (i) Whether service performed by a minister constitutes the conduct 
of religious worship or the ministration of sacerdotal functions depends 
on the tenets and practices of the particular religious body 
constituting his church or church denomination.
    (ii) Service performed by a minister in the control, conduct, and 
maintenance of a religious organization relates to directing, managing, 
or promoting the activities of such organization. Any religious 
organization is deemed to be under the authority of a religious body 
constituting a church or church denomination if it is organized and 
dedicated to carrying out the tenets and principles of a faith in 
accordance with either the requirements or sanctions governing the 
creation of institutions of the faith. The term ``religious 
organization'' has the same meaning and application as is given to the 
term for income tax purposes.
    (iii) If a minister is performing service in the conduct of 
religious worship or the ministration of sacerdotal functions, such 
service is in the exercise of his ministry whether or not it is 
performed for a religious organization. The application of this rule may 
be illustrated by the following example:

    Example. M, a duly ordained minister, is engaged to perform service 
as chaplain at N University. M devotes his entire time to performing his 
duties as chaplain which include the conduct of religious worship, 
offering spiritual counsel to the university students, and teaching a 
class in religion. M is performing service in the exercise of his 
ministry.

    (iv) If a minister is performing service for an organization which 
is operated as an integral agency of a religious organization under the 
authority of a religious body constituting a church or church 
denomination, all service performed by the minister in the conduct of 
religious worship, in the ministration of sacerdotal functions, or in 
the control, conduct, and maintenance of such organization (see 
subparagraph (2)(ii) of this paragraph) is in the exercise of his 
ministry. The application of this rule may be illustrated by the 
following example:

    Example. M, a duly ordained minister, is engaged by the N Religious 
Board to serve as

[[Page 35]]

director of one of its departments. He performs no other service. The N 
Religious Board is an integral agency of O, a religious organization 
operating under the authority of a religious body constituting a church 
denomination. M is performing service in the exercise of his ministry.

    (v) If a minister, pursuant to an assignment or designation by a 
religious body constituting his church, performs service for an 
organization which is neither a religious organization nor operated as 
an integral agency of a religious organization, all service performed by 
him, even though such service may not involve the conduct of religious 
worship or the ministration of sacerdotal functions, is in the exercise 
of his ministry. The application of this rule may be illustrated by the 
following example:

    Example. M, a duly ordained minister, is assigned by X, the 
religious body constituting his church, to perform advisory service to Y 
Company in connection with the publication of a book dealing with the 
history of M's church denomination. Y is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M performs no other service for X or Y. M is performing 
service in the exercise of his ministry.

    (c) Service by a minister not in the exercise of his ministry. 
(1)(i) A certificate filed by a duly ordained, commissioned, or licensed 
minister of a church under the provisions of Sec. 1.1402(e)(1)-1 has no 
application to service performed by him which is not in the exercise of 
his ministry.
    (ii) An exemption under section 1402(e) (see Secs. 1.1402(e)-1A 
through 1.1402(e)-4A) which is effective with respect to a duly 
ordained, commissioned, or licensed minister of a church has no 
application to service performed by him which is not in the exercise of 
his ministry.
    (2) If a minister is performing service for an organization which is 
neither a religious organization nor operated as an integral agency of a 
religious organization and the service is not performed pursuant to an 
assignment or designation by his ecclesiastical superiors, then only the 
service performed by him in the conduct of religious worship or the 
ministration of sacerdotal functions is in the exercise of his ministry. 
See, however, subparagraph (3) of this paragraph. The application of the 
rule in this subparagraph may be illustrated by the following example:

    Example. M, a duly ordained minister, is engaged by N University to 
teach history and mathematics. He performs no other service for N 
although from time to time he performs marriages and conducts funerals 
for relatives and friends. N University is neither a religious 
organization nor operated as an integral agency of a religious 
organization. M is not performing the service for N pursuant to an 
assignment or designation by his ecclesiastical superiors. The service 
performed by M for N University is not in the exercise of his ministry. 
However, service performed by M in performing marriages and conducting 
funerals is in the exercise of his ministry.

    (3) Service performed by a duly ordained, commissioned, or licensed 
minister of a church as an employee of the United States, or a State, 
Territory, or possession of the United States, or the District of 
Columbia, or a foreign government, or a political subdivision of any of 
the foregoing, is not considered to be in the exercise of his ministry 
for purposes of the tax on self-employment income, even though such 
service may involve the ministration of sacerdotal functions or the 
conduct of religious worship. Thus, for example, service performed by an 
individual as a chaplain in the Armed Forces of the United States is 
considered to be performed by a commissioned officer in his capacity as 
such, and not by a minister in the exercise of his ministry. Similarly, 
service performed by an employee of a State as a chaplain in a State 
prison is considered to be performed by a civil servant of the State and 
not by a minister in the exercise of his ministry.
    (d) Service in the exercise of duties required by a religious 
order--(1) Certificate of election. A certificate of election filed by a 
member of a religious order (other than a member of a religious order 
who has taken a vow of poverty as a member of such order) under the 
provisions of Sec. 1.1402(e)(1)-1 has application to all duties required 
of him by such order.
    (2) Exemption. An exemption under section 1402(e) (see 
Secs. 1.1402(e)-1A through 1.1402(e)-4A) which is effective with respect 
to a member of a religious order (other than a member of a religious 
order who has taken a vow of

[[Page 36]]

poverty as a member of such order) has application only to the duties 
required of him by such order.
    (3) Service. For purposes of subparagraphs (1) and (2) of this 
paragraph, the nature or extent of the duties required of the member by 
the order is immaterial so long as it is a service which he is directed 
or required to perform by his ecclesiastical superiors.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15937, Oct. 30, 1968]



Sec. 1.1402(c)-6  Members of certain professions.

    (a) Periods of exclusion--(1) Taxable years ending before 1955. For 
taxable years ending before 1955, an individual is not engaged in 
carrying on a trade or business with respect to the performance of 
service in the exercise of his profession as a physician, lawyer, 
dentist, osteopath, veterinarian, chiropractor, naturopath, optometrist, 
Christian Science practitioner, architect, certified public accountant, 
accountant registered or licensed as an accountant under State or 
municipal law, full-time practicing public accountant, funeral director, 
or professional engineer.
    (2) Taxable years ending in 1955. Except as provided in paragraph 
(b) of this section, for a taxable year ending in 1955 an individual is 
not engaged in carrying on a trade or business with respect to the 
performance of service in the exercise of his profession as a physician, 
lawyer, dentist, osteopath, veterinarian, chiropractor, naturopath, 
optometrist, or Christian Science practitioner.
    (3) Taxable years ending after 1955--(i) Doctors of medicine. For 
taxable years ending after 1955 and before December 31, 1965, and 
individual is not engaged in carrying on a trade or business with 
respect to the performance of service in the exercise of his profession 
as a doctor of medicine. For taxable years ending after December 30, 
1965, an individual is engaged in carrying on a trade or business with 
respect to the performance of service in the exercise of his profession 
as a doctor of medicine.
    (ii) Christian Science practitioners. Except as provided in 
paragraph (b)(1) of this section, for taxable years ending after 1955 
and before 1968, an individual is not engaged in carrying on a trade or 
business with respect to the performance of service in the exercise of 
his profession as a Christian Science practitioner. For provisions 
relating to the performance of service in taxable years ending after 
1967 by an individual in the exercise of his profession as a Christian 
Science practitioner, see paragraph (b)(2) of this section.
    (b) Christian Science practitioner--(1) Certain taxable years ending 
before 1968; election. For taxable years ending after 1954 and before 
1968, a Christian Science practitioner may elect, as provided in 
Sec. 1.1402(e)(1)-1, to have the Federal old-age, survivors, and 
disability insurance system established by title II of the Social 
Security Act extended to service performed by him in the exercise of his 
profession as a Christian Science practitioner. If an election is made 
pursuant to Sec. 1.1402(e)(1)-1, the Christian Science practitioner is, 
with respect to the performance of service in the exercise of such 
profession, engaged in carrying on a trade or business for each taxable 
year for which the election is effective. An election by a Christian 
Science practitioner has no application to service performed by him 
which is not in the exercise of his profession as a Christian Science 
practitioner.
    (2) Taxable years ending after 1967; exemption. For a taxable year 
ending after 1967, a Christian Science practitioner is, with respect to 
the performance of service in the exercise of his profession as a 
Christian Science practitioner, engaged in carrying on a trade or 
business unless an exemption under section 1402(e) (see Secs. 1.1402(e)-
1A through 1.1402(e)-4A) is effective with respect to him for the 
taxable year during which the service is performed. An exemption which 
is effective with respect to a Christian Science practitioner has no 
application to service performed by him which is not in the exercise of 
his profession as a Christian Science practitioner.
    (c) Meaning of terms. The designations in this section are to be 
given their commonly accepted meanings. For taxable years ending after 
1955, an individual who is a doctor of osteopathy, and who is not a 
doctor of medicine

[[Page 37]]

within the commonly accepted meaning of that term, is deemed, for 
purposes of this section, not to be engaged in carrying on a trade or 
business in the exercise of the profession of doctor of medicine.
    (d) Legal requirements. The exclusions specified in paragraph (a) of 
this section apply only if the individuals meet the legal requirements, 
if any, for practicing their professions in the place where they perform 
the service.
    (e) Partnerships. In the case of a partnership engaged in the 
practice of any of the designated excluded professions, the partnership 
shall not be considered as carrying on a trade or business for the 
purpose of the tax on self-employment income, and none of the 
distributive shares of the income or loss, described in section 
702(a)(9), of such partnership shall be included in computing net 
earnings from self-employment of any member of the partnership. On the 
other hand, where a partnership is engaged in a trade or business not 
within any of the designated excluded professions, each partner must 
include his distributive share of the income or loss, described in 
section 702(a)(9), of such partnership in computing his net earnings 
from self-employment, irrespective of whether such partner is engaged in 
the practice of one or more of such professions and contributes his 
professional services to the partnership.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15938, Oct. 30, 1968]



Sec. 1.1402(c)-7  Members of religious groups opposed to insurance.

    The performance of service by an individual:
    (a) Who is a member of a recognized religious sect or division 
thereof, and
    (b) Who is an adherent of established tenets or teachings of such 
sect or division by reason of which he is conscientiously opposed to 
acceptance of the benefits of any private or public insurance which 
makes payments in the event of death, disability, old age, or retirement 
or makes payments toward the cost of, or provides services for, medical 
care (including the benefits of any insurance system established by the 
Social Security Act),

during any taxable year for which he is granted a tax exemption, 
pursuant to section 1402(h), does not constitute a trade or business 
within the meaning of section 1402(c) and Sec. 1.1402(c)-1. See also 
Secs. 1.1402(h) and 1.1402(h)-1.

[T.D. 6993, 34 FR 830, Jan. 18, 1969]



Sec. 1.1402(d)-1  Employee and wages.

    For the purpose of the tax on self-employment income, the term 
``employee'' and the term ``wages'' shall have the same meaning as when 
used in the Federal Insurance Contributions Act. For an explanation of 
these terms, see Subpart B of Part 31 of this chapter (Employment Tax 
Regulations).



Sec. 1.1402(e)-1A  Application of regulations under section 1402(e).

    The regulations in Secs. 1.1402(e)-2A through 1.1402(e)-4A relate to 
section 1402(e) as amended by section 115(b)(2) of the Social Security 
Amendments of 1967 (81 Stat. 839) and apply to taxable years ending 
after 1967. Section 1.1402(e)-5A reflects changes made by section 
1704(a) of the Tax Reform Act of 1986 (100 Stat. 2085, 2779) and applies 
to applications for exemption under section 1402(e) filed after December 
31, 1986. For regulations under section 1402(e) (as in effect prior to 
amendment by the Social Security Amendments of 1967) applicable to 
taxable years ending before 1968, see Secs. 1.1402(e)(1)-1 through 
1.1402(e)(6)-1.

[T.D. 8221, 53 FR 33461, Aug. 31, 1988]



Sec. 1.1402(e)-2A  Ministers, members of religious orders and Christian Science practitioners; application for exemption from self-employment tax.

    (a) In general. (1) Subject to the limitations set forth in 
subparagraphs (2) and (3) of this paragraph, any individual who is (i) a 
duly ordained, commissioned, or licensed minister of a church or a 
member of a religious order (other than a member of a religious order 
who has taken a vow of poverty as a member of such order) or (ii) a 
Christian Science practitioner may request an exemption from the tax on 
self-employment income (see section 1401 and Sec. 1.1401-1) with respect 
to services performed by him in his capacity

[[Page 38]]

as a minister or member, or as a Christian Science practitioner, as the 
case may be. Such a request shall be made by filing an application for 
exemption on Form 4361 in the manner provided in paragraph (b) of this 
section and within the time specified in Sec. 1.1402(e)-3A. For 
provisions relating to the taxable year or years for which an exemption 
from the tax on self-employment income with respect to service performed 
by a minister or member or a Christian Science practitioner in his 
capacity as such is effective, see Sec. 1.1402(e)-4A. For additional 
provisions applicable to services performed by individuals referred to 
in this subparagraph, see paragraph (e) of Sec. 1.1402(c)-3 and 
Sec. 1.1402(c)-5 relating to ministers and members of religious orders, 
and paragraphs (a)(3)(ii) and (b) of Sec. 1.1402(c)-6 relating to 
Christian Science practitioners.
    (2) The application for exemption shall contain, or there shall be 
filed with such application, a statement to the effect that the 
individual making application for exemption is conscientiously opposed 
to, or because of religious principles is opposed to, the acceptance 
(with respect to services performed by him in his capacity as a 
minister, member, or Christian Science practitioner) of any public 
insurance which makes payments in the event of death, disability, old 
age, or retirement or makes payments toward the cost of, or provides 
services for, medical care (including the benefits of any insurance 
system established by the Social Security Act). Thus, ministers, members 
of religious orders, and Christian Science practitioners requesting 
exemption from social security coverage must meet either of two 
alternative tests: (1) A religious principles test which refers to the 
institutional principles and discipline of the particular religious 
denomination to which he belongs, or (2) a conscientious opposition test 
which refers to the opposition because of religious considerations of 
individual ministers, members of religious orders, and Christian Science 
practitioners (rather than opposition based upon the general conscience 
of any such individual or individuals). The term ``public insurance'', 
as used in section 1402(e) and this paragraph, refers to governmental, 
as distinguished from private, insurance and does not include insurance 
carried with a commercial insurance carrier. To be eligible to file an 
application for exemption on Form 4361, a minister, member, or Christian 
Science practitioners need not be opposed to the acceptance of all 
public insurance making payments of this specified type; he must, 
however, be opposed on religious grounds to the acceptance of any such 
payment which, in whole or in part, is based on, or measured by earnings 
from, services performed by in his capacity as a minister or member (see 
Sec. 1.1402(c)-5) or in his capacity as a Christian Science practitioner 
(see paragraph (b)(2) of Sec. 1.1402(c)-6). For example, a minister 
performing service in the exercise of his ministry may be eligible to 
file an application for exemption on Form 4361 even though he is not 
opposed to the acceptance of benefits under the Social Security Act with 
respect to service performed by him which is not in the exercise of his 
ministry.
    (3) An exemption from the tax imposed on self-employment income with 
respect to service performed by a minister, member, or Christian Science 
practitioner in his capacity as such may not be granted to a minister, 
member, or practitioner who (in accordance with the provisions of 
section 1402(e) as in effect prior to amendment by section 115(b)(2) of 
the Social Security Amendments of 1967 (81 Stat. 839)) filed a valid 
waiver certificate on Form 2031 electing to have the Federal old-age, 
survivors, and disability insurance system establish by title II of the 
Social Security Act extended to service performed by him in the exercise 
of his ministry or in the exercise of duties required by the order of 
which he is a member, or in the exercise of his profession as a 
Christian Science practitioner. For provisions relating to waiver 
certificates on Form 2031, see Secs. 1.1402(e)(1)-1 through 
1.1402(e)(6)-1.
    (b) Application for exemption. An application for exemption on Form 
4361 shall be filed in triplicate with the internal revenue officer or 
the internal revenue office, as the case may be, designated in the 
instructions relating to

[[Page 39]]

the application for exemption. The application for exemption must be 
filed within the time prescribed in Sec. 1.1402(e)-3A. If the last 
original Federal income tax return of an individual to whom paragraph 
(a) of this section applies which was filed before the expiration of 
such time limitation for filing an application for exemption shows no 
liability for tax on self-employment income, such return will be treated 
as an application for exemption, provided that before February 28, 1975 
such individual also files a properly executed Form 4361.
    (c) Approval of application for exemption. The filing of an 
application for exemption on Form 4361 by a minister, a member of a 
religious order, or a Christian Science practitioner does not constitute 
an exemption from the tax on self-employment income with respect to 
services performed by him in his capacity as a minister, member, or 
practitioner. The exemption is granted only if the application is 
approved by an appropriate internal revenue officer. See Sec. 1.1402(e)-
4A relating to the period for which an exemption is effective.

[T.D. 7333, 39 FR 44448, Dec. 24, 1974; 39 FR 45216, Dec. 31, 1974]



Sec. 1.1402(e)-3A  Time limitation for filing application for exemption.

    (a) General rule. (1) Any individual referred to in paragraph (a) of 
Sec. 1.1402(e)-2A who desires an exemption from the tax on self-
employment income with respect to service performed by him in his 
capacity as a minister or member of a religious order or as a Christian 
Science practitioner must file the application for exemption (Form 4361) 
prescribed by Sec. 1.1402(e)-2A on or before whichever of the following 
dates is later:
    (i) The due date of the income tax return (see section 6072), 
including any extension thereof (see section 6081), for his second 
taxable year ending after 1967, or
    (ii) The due date of the income tax return, including any extension 
thereof, for his second taxable year beginning after 1953 for which he 
has net earnings from self-employment of $400 or more, any part of 
which:
    (a) In the case of a duly ordained, commissioned, or licensed 
minister of a church, consists of remuneration for service performed in 
the exercise of his ministry,
    (b) In the case of a member of a religious order who has not taken a 
vow of poverty as a member of such order, consists of remuneration for 
service performed in the exercise of duties required by such order, or
    (c) In the case of a Christian Science practitioner, consists of 
remuneration for service performed in the exercise of his profession as 
a Christian Science practitioner.

See paragraph (c) of this section for provisions relating to the 
computation of net earnings from self-employment.
    (2) If a minister, a member of a religious order, or a Christian 
Science practitioner derives gross income in a taxable year both from 
service performed in such capacity and from the conduct of another trade 
or business, and the deductions allowed by Chapter 1 of the Internal 
Revenue Code which are attributable to the gross income derived from 
service performed in such capacity equal or exceed the gross income 
derived from service performed in such capacity, no part of the net 
earnings from self-employment (computed as prescribed in paragraph (c) 
of this section) for the taxable year shall be considered as derived 
from service performed in such capacity.
    (3) The application of the rules set forth in subparagraphs (1) and 
(2) of this paragraph may be illustrated by the following examples:

    Example (1). M, who makes his income tax returns on a calendar year 
basis, was ordained as a minister in January 1960. During each of two or 
more taxable years ending before 1968 M has net earnings from self-
employment in excess of $400 some part of which is from service 
performed in the exercise of his ministry. M has not filed an effective 
waiver certificate on Form 2031 (see paragraph (a)(3) of Sec. 1.1402(e)-
2A). If M desires an exemption from the tax on self-employment income 
with respect to service performed in the exercise of his ministry, he 
must file an application for exemption on or before the due date of his 
income tax return for 1969 (his second taxable year ending after 1967), 
or any extension thereof.
    Example (2). M, who makes his income tax returns on a calendar year 
basis, was ordained as a minister in January 1966. M has net earnings of 
$350 for the taxable year 1966 and has net earnings in excess of $400 
for

[[Page 40]]

each of his taxable years 1967 and 1968 (some part or all of which is 
derived from service performed in the exercise of his ministry). M has 
not filed an effective waiver certificate on Form 2031 (see paragraph 
(a)(3) of Sec. 1.1402(e)-2A). If M desires an exemption from the tax on 
self-employment income with respect to service performed in the exercise 
of his ministry, he must file an application for exemption on or before 
the due date of his income tax return for 1969 (his second taxable year 
ending after 1967), or any extension thereof.
    Example (3). Assume the same facts as in example (2) except that M 
has net earnings in excess of $400 for each of his taxable years 1967 
and 1969 (but less than $400 in 1968). The application for exemption 
must be filed on or before the due date of his income tax return for 
1969, or any extension thereof.
    Example (4). M was ordained as a minister in May 1973. During each 
of the taxable years 1973 and 1975, M, who makes his income tax returns 
on a calendar year basis, derives net earnings in excess of $400 from 
his activities as a minister. M has net earnings of $350 for the taxable 
year 1974, $200 of which is derived from service performed by him in the 
exercise of his ministry. If M desires an exemption from the tax on 
self-employment income with respect to service performed in the exercise 
of his ministry, he must file an application for exemption on or before 
the due date of his income tax return for 1975, or any extension 
thereof.
    Example (5). M, who was ordained a minister in January 1973, is 
employed as a toolmaker by the XYZ Corporation for the taxable years 
1973 and 1974 and also engages in activities as a minister on weekends. 
M makes his income tax returns on the basis of a calendar year. During 
each of the taxable years 1973 and 1974 M receives wages of $14,000 from 
the XYZ Corporation and derives net earnings of $400 from his activities 
as a minister. If M desires an exemption from the tax on self-employment 
income with respect to service performed in the exercise of his 
ministry, he must file an application for exemption on or before the due 
date of his income tax return for 1974, or any extension thereof. It 
should be noted that although by reason of section 1402(b)(1) (G) and 
(H) no part of the $400 represents ``self-employment income'', 
nevertheless the entire $400 constitutes ``net earnings from self-
employment'' for purposes of fulfilling the requirements of section 
1402(e)(2).
    Example (6). M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in March 1973. During 1973 he receives 
$410 for service performed in the exercise of his ministry. In addition 
to his ministerial services, M is engaged during the year 1973 in a 
mercantile venture from which he derives net earnings from self-
employment in the amount of $4,000. The expenses incurred by him in 
connection with his ministerial services during 1973 and which are 
allowable deductions under Chapter 1 of the Internal Revenue Code amount 
to $410. During 1974 and 1975, M has net earnings from self-employment 
in amounts of $4,600 and $4,800, respectively, and some part of each of 
these amounts is from the exercise of his ministry. The deductions 
allowed in each of the years 1974 and 1975 by Chapter 1 which are 
attributable to the gross income derived by M from the exercise of his 
ministry in each of such years, respectively, do not equal or exceed 
such gross income in such year. If M desires an exemption from the tax 
on self-employment income with respect to service performed in the 
exercise of his ministry, he must file an application for exemption on 
or before the due date of his income tax return for 1975, or an 
extension thereof.

    (b) Effect of death. The right of an individual to file an 
application for exemption shall cease upon his death. Thus, the 
surviving spouse, administrator, or executor of a decedent shall not be 
permitted to file an application for exemption for such decedent.
    (c) Computation of net earnings--(1) Taxable years ending before 
1968. For purposes of this section net earnings from self-employment for 
taxable years ending before 1968 shall be determined without regard to 
the fact that, without an election under section 1402(e) (as in effect 
prior to amendment by section 115(b)(2) of the Social Security 
Amendments of 1967, see Sec. 1.1402(e)-1A), the performance of services 
by a duly ordained, commissioned, or licensed minister of a church in 
the exercise of his ministry, or by a member of a religious order in the 
exercise of duties required by such order, or the performance of service 
by an individual in the exercise of his profession as a Christian 
Science practitioner, does not constitute a trade or business for 
purposes of the tax on self-employment income.
    (2) Taxable years ending after 1967. For purposes of this section 
and Sec. 1.1402(e)-4A net earnings from self-employment for taxable 
years ending after 1967 shall be determined without regard to section 
1402(c) (4) and (5). See Sec. 1.1402(c)-3(e)(2) and Sec. 1.1402(c)-5 
relating to ministers and members of religious orders, and paragraphs 
(a)(3)(ii) and (b) of Sec. 1.1402(c)-6 relating to Christian Science 
practitioners.

[T.D. 7333, 39 FR 44449, Dec. 24, 1974]

[[Page 41]]



Sec. 1.1402(e)-4A  Period for which exemption is effective.

    (a) In general. If an application for exemption on Form 4361:
    (1) Is filed by a minister, a member of a religious order, or a 
Christian Science practitioner eligible to file such an application (see 
particularly paragraph (a) (2) and (3) of Sec. 1.1402(e)-2A), and
    (2) Is approved (see paragraph (c) of Sec. 1.1402(e)-2A),

the exemption from the tax on self-employment income shall be effective 
for the first taxable year ending after 1967 for which such minister, 
member, or practitioner has net earnings from self-employment of $400 or 
more any part of which was derived from the performance of service in 
his capacity as a minister, member, or practitioner, and for all 
succeeding taxable years. See, however, paragraphs (b)(1)(ii) and (d)(2) 
of Sec. 1.1402(c)-5 relating to ministers and members of religious 
orders and paragraph (b)(2) of Sec. 1.1402(c)-6 relating to Christian 
Science practitioners.
    (b) Exemption irrevocable. An exemption granted to a minister, a 
member of a religious order, or a Christian Science practitioner 
pursuant to the provisions of section 1402(e) is irrevocable.

[T.D. 7333, 39 FR 44450, Dec. 24, 1974]



Sec. 1.1402(e)-5A  Applications for exemption from self-employment taxes filed after December 31, 1986, by ministers, certain members of religious orders, and 
          Christian Science practitioners.

    (a) In general. (1) Except as provided in paragraph (a)(2) of this 
section, this section applies to any individual who is a duly ordained, 
commissioned, or licensed minister of a church, member of a religious 
order (other than a member of a religious order who has taken a vow of 
poverty as a member of such order), or a Christian Science practitioner 
who files an application after December 31, 1986, for exemption from the 
tax on self-employment income (see section 1401 and 1.1401-1) with 
respect to services performed by him or her in his or her capacity as a 
minister, member, or practitioner pursuant to Secs. 1.1402(e)-2A through 
1.1402(e)-4A. This section does not apply to applications for exemption 
under section 1402(e) that are filed before January 1, 1987.
    (2) Application of this section to Christian Science practitioners. 
Paragraph (b) of this section does not apply to Christian Science 
practitioners. Thus, Christian Science practitioners filing applications 
for exemption from self-employment taxes under section 1402(e) should 
follow the procedures set forth in Secs. 1.1402(e)-2A through 1.1402(e)-
4A, and are not required to include the statement described in paragraph 
(b)(1)(ii) of this section. However, see paragraph (c) of this section 
for verification procedures with respect to applications for exemption 
from self-employment taxes filed after December 31, 1986, by Christian 
Science practitioners.
    (b) Church or order must be informed--(1) In general. Any 
individual, other than a Christian Science practitioner, who files an 
application for exemption from the tax on self-employment income under 
section 1402(e) after December 31, 1986:
    (i) Shall file such application in accordance with the procedures 
set forth in Secs. 1.1402(e)-2A through 1.1402(e)-4A, and
    (ii) Shall include with such application a statement to the effect 
that the individual making application for exemption has informed the 
ordaining, commissioning, or licensing body of the church or order that 
he or she is opposed to the acceptance (for services performed as a 
minister or member of a religious order not under a vow of poverty) of 
any public insurance that makes payments in the event of death, 
disability, old age, or retirement, or that makes payments toward the 
cost of, or provides services for, medical care (including the benefits 
of any insurance system established by the Social Security Act).
    (2) Statement to be filed with form. If the form provided by the 
Service for applying for exemption under 1402(e) does not contain the 
statement set forth in paragraph (b)(1)(ii) of this section, any 
individual required to include this statement with his or her 
application under this paragraph (b) shall file such statement with the 
individual's application at the time and place prescribed for filing 
such application

[[Page 42]]

under Secs. 1.1402(e)-2A and 1.1402(e)-3A. The statement shall contain 
the information set forth in paragraph (b)(1)(ii) of this section and 
shall be signed by such individual under penalties of perjury.
    (c) Verification of application--(1) In general. The Service will 
approve an application for an exemption filed by an individual to whom 
this section applies only after verifying that the individual applying 
for the exemption is aware of the grounds on which the individual may 
receive an exemption under section 1402(e) (See Sec. 1.1402(e)-2A) and 
that the individual seeks exemption on such grounds in accordance with 
the procedures set forth in paragraph (c)(2) of this section.
    (2) Verification procedure. Upon receipt of an application for 
exemption from self-employment taxes under section 1402(e) and this 
section, the Service will mail to the applicant a statement that 
describes the grounds on which an individual may receive an exemption 
under section 1402(e). The individual filing the application shall 
certify that he or she has read the statement and that he or she seeks 
exemption from self-employment taxes on the grounds listed in the 
statement. The certification shall be made by signing a copy of the 
statement under penalties of perjury and mailing the signed copy to the 
Service Center from which the statement was issued not later than 90 
days after the date on which the statement was mailed to the individual. 
If the signed copy of the statement is not mailed to the Service Center 
within 90 days of the date on which the statement was mailed to the 
individual, that individual's exemption will not be effective until the 
date that the signed copy of the statement is received at the Service 
Center.

[T.D. 8136, 52 FR 12162, Apr. 15, 1987, redesignated and amended at T.D. 
8221, 53 FR 33461, Aug. 31, 1988]



Sec. 1.1402(e)(1)-1  Election by ministers, members of religious orders, and Christian Science practitioners for self-employment coverage.

    (a) In general. Any individual who is (1) a duly ordained, 
commissioned, or licensed minister of a church or a member of a 
religious order (other than a member of a religious order who has taken 
a vow of poverty as a member of such order) or (2) a Christian Science 
practitioner may elect to have the Federal old-age, survivors, and 
disability insurance system established by title II of the Social 
Security Act extended to service performed by him in the exercise of his 
ministry or in the exercise of duties required by such order, or in the 
exercise of his profession as a Christian Science practitioner, as the 
case may be. Such an election shall be made by filing a certificate on 
Form 2031 in the manner provided in paragraph (b) of this section and 
within the time specified in Sec. 1.1402(e)(2)-1. If a minister or 
member to whom this section has application, or a Christian Science 
practitioner, makes an election by filing Form 2031 such individual 
shall, for each taxable year for which the election is effective (see 
Sec. 1.1402(e)(3)-1), be considered as carrying on a trade or business 
with respect to the performance of service in his capacity as a minister 
or member, or as a Christian Science practitioner, as the case may be.
    (b) Waiver certificate. The certificate on Form 2031 shall be filed 
in triplicate with the district director of internal revenue for the 
internal revenue district in which is located the legal residence or 
principal place of business of the individual who executes the 
certificate. If such individual has no legal residence or principal 
place of business in any internal revenue district, the certificate 
shall be filed with the Director of International Operations, Internal 
Revenue Service, Washington, DC 20225, or at such other address as is 
designated in the instructions relating to the certificate. The 
certificate must be filed within the time prescribed in 
Sec. 1.1402(e)(2)-1. If an individual to whom paragraph (a) of this 
section has application submits to a district director of internal 
revenue a dated and signed statement indicating that he desires to have 
the Federal old-age, survivors, and disability insurance system 
established by title II of the Social Security Act extended to his 
services, such statement will be treated as a waiver certificate, if 
filed within the time specified in Sec. 1.1402(e)(2)-1, provided that 
without unnecessary delay such

[[Page 43]]

statement is supplemented by a properly executed Form 2031. An 
application for a social security account number filed on Form SS-5 or 
the filing of an income tax return showing an amount representing self-
employment income or self-employment tax shall not be construed to 
constitute an election referred to in Sec. 1.1402(e)(1)-1.



Sec. 1.1402(e)(2)-1  Time limitation for filing waiver certificate.

    (a) General rule. (1) Any individual referred to in 
Sec. 1.1402(e)(1)-1 who desires to have the Federal old-age, survivors, 
and disability insurance system established by title II of the Social 
Security Act extended to his services must file the waiver certificate 
(Form 2031) prescribed by Sec. 1.1402(e)(1)-1 on or before whichever of 
the following dates is later:
    (i) The due date of the income tax return (see section 6072), 
including any extension thereof (see section 6081), for his second 
taxable year ending after 1963; or
    (ii) The due date of the income tax return, including any extension 
thereof, for his second taxable year ending after 1954 for which he has 
net earnings from self-employment (computed as prescribed in paragraph 
(c) of this section) of $400 or more, any part of which:
    (a) In the case of a duly ordained, commissioned, or licensed 
minister of a church, consists of remuneration for service performed in 
the exercise of his ministry,
    (b) In the case of a member of a religious order who has not taken a 
vow of poverty as a member of such order, consists of remuneration for 
service performed in the exercise of duties required by such order, or
    (c) In the case of a Christian Science practitioner, consists of 
remuneration for service performed in the exercise of his profession as 
a Chrsitian Science practitioner.
    (2) If a minister, a member of a religious order, or a Christian 
Science practitioner derives gross income in a taxable year both from 
service performed in such capacity and from the conduct of another trade 
or business, and the deductions allowed by chapter 1 of the Internal 
Revenue Code which are attributable to the gross income derived from 
service performed in such capacity equal or exceed the gross income 
derived from service performed in such capacity, no part of the net 
earnings from self-employment (computed as prescribed in paragraph (c) 
of this section) for the taxable year shall be considered as derived 
from service performed in such capacity.
    (3) The application of the rules set forth in subparagraphs (1) and 
(2) of this paragraph may be illustrated by the following examples:

    Example (1). M was ordained as a minister in May 1963. During each 
of the taxable years 1963 and 1966, M, who makes his income tax returns 
on a calendar year basis, derives net earnings in excess of $400 from 
his activities as a minister. M has net earnings of $350 for each of the 
taxable years 1964 and 1965, $200 of which is derived from service 
performed by him as a minister. If M wishes to have the Federal old-age, 
survivors, and disability insurance system established by title II of 
the Social Security Act extended to his service as a minister, he must 
file the waiver certificate on or before the due date of his income tax 
return for 1966, or any extension thereof.
    Example (2). M, who was ordained a minister in January 1965, is 
employed as a toolmaker by the XYZ Corporation for the taxable years 
1965 and 1966 and also engages in activities as a minister on weekends. 
M makes his income tax return on the basis of a calendar year. During 
each of the taxable years 1965 and 1966, M receives wages of $4,800 from 
the XYZ Corporation and derives $400 (all of which constitutes net 
earnings from self-employment computed as prescribed in paragraph (c) of 
this section) from his activities as a minister. In such case if M 
wishes to have the Federal old-age, survivors, and disability insurance 
system established by title II of the Social Security Act extended to 
his services as a minister, he must file the waiver certificate on or 
before the due date of his income tax return for 1966, or any extension 
thereof. A waiver certificate filed after such date will be invalid. It 
should be noted that although by reason of section 1402(b)(1)(C) no part 
of the $400 for the taxable year 1965 represents ``self-employment 
income'', nevertheless the entire $400 constitutes ``net earnings from 
self-employment'' for purposes of fulfilling the requirements of section 
1402(e)(2).
    Example (3). M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in June 1964. During 1964 he receives 
$410 for services performed in the exercise of his ministry. In addition 
to his ministerial services, M is engaged during the year 1964 in a 
mercantile venture from which

[[Page 44]]

he derives net earnings from self-employment in the amount of $1,000. 
The expenses incurred by him in connection with his ministerial services 
during 1964 and which are allowable deductions under Chapter 1 of the 
Internal Revenue Code amount to $410. During 1965 and 1966, M has net 
earnings from self-employment in amounts of $1,200 and $1,500, 
respectively, and some part of each of these amounts is from the 
exercise of his ministry. The deductions allowed in each of the years 
1965 and 1966 by Chapter 1 which are attributable to the gross income 
derived by M from the exercise of his ministry in each of such years, 
respectively, do not equal or exceed such gross income in such year. If 
M wishes to have the Federal old-age, survivors, and disability 
insurance system established by Title II of the Social Security Act 
extended to his service as a minister, he must file a waiver certificate 
on or before the due date of his income tax return (including any 
extension thereof) for 1966.
    Example (4). M, a licensed minister who makes his income tax returns 
on the basis of a calendar year, derived net earnings of $400 or more 
from the exercise of his ministry for two or more of the taxable years 
1955 to 1965, inclusive. In such case, if M wishes to have the Federal 
old-age, survivors, and disability insurance system established by Title 
II of the Social Security Act extended to his services as a minister, he 
must file the waiver certificate on or before the due date (April 15, 
1966) prescribed for filing his income tax return for 1965, or any 
extension thereof. A waiver certificate filed after such date will be 
invalid.

    (b) Effect of death. Except as provided in Secs. 1.1402(e)(5)-1, 
1.1402(e) (5)-2, and 1.1402(e)(6)-1, the right of an individual to file 
a waiver certificate shall cease from his death. Thus, except as 
provided in such sections, the surviving spouse, administrator, or 
executor of a decedent shall not be permitted to file a waiver 
certificate for such decedent.
    (c) Computation of net earnings without regard to election. For the 
purpose of this section net earnings from self-employment shall be 
determined without regard to the fact that, without an election under 
section 1402(e), the performance of services by a duly ordained, 
commissioned, or licensed minister of a church in the exercise of his 
ministry, or by a member of a religious order in the exercise of duties 
required by such order, or the performance of service by an individual 
in the exercise of his profession as a Christian Science practitioner, 
does not constitute a trade or business for purposes of the tax on self-
employment income.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15938, Oct. 30, 1968]



Sec. 1.1402(e)(3)-1  Effective date of waiver certificate.

    (a) Filed before August 31, 1957--(1) In general. A certificate on 
Form 2031 filed by an individual before August 31, 1957, in accordance 
with the provisions of section 1402(e) in effect at the time the 
certificate is filed, shall be effective for the first taxable year with 
respect to which it is filed, and all subsequent taxable years. In order 
for a certificate filed by an individual before August 31, 1957, to be 
effective under section 1402(e), the certificate must be made effective 
for either the first or second taxable year ending after 1954 in which 
the individual has net earnings from self-employment of $400 or more 
(determined as provided in paragraph (c) of Sec. 1.1402(e)(2)-1) some 
part of which is derived from service of the character with respect to 
which an election may be made. However, a certificate on Form 2031, 
filed before August 31, 1957, even though filed within the time 
specified in paragraph (a)(1)(ii) of Sec. 1.1402(e)(2)-1, may not be 
effective, except as provided in subparagraph (2) of this paragraph, for 
any taxable year with respect to which the due date for filing the 
individual's income tax return (including any extension thereof) has 
expired at the time such certificate is filed. Further, a certificate on 
Form 2031 may not be effective for any taxable year ending before 1955. 
In order for a certificate filed before August 31, 1957, except for the 
filing of a supplemental certificate, to be effective for the first or 
second taxable year ending after 1954 in which the individual has net 
earnings from self-employment (determined as provided in paragraph (c) 
of Sec. 1.1402(e)(2)-1) some part of which is derived from service of 
the character with respect to which an election may be made, the 
certificate on Form 2031 must be filed on or before the due date for 
filing the income tax return of the individual for such first or second 
taxable year, respectively, or any extension thereof.
    (2) Supplemental certificates--(i) Filed before due date of 1958 
return. If under

[[Page 45]]

subparagraph (1) of this paragraph the certificate is effective only for 
the individual's third or fourth taxable year ending after 1954 and all 
succeeding taxable years, the individual may make such a certificate 
effective for his first taxable year ending after 1955 and all 
succeeding taxable years by filing a supplemental certificate on Form 
2031. To be valid the supplemental certificate must be filed after 
August 30, 1957, and on or before the due date of the return (including 
any extension thereof) for his second taxable year ending after 1956 and 
must be otherwise in accordance with Sec. 1.1402(e)(1)-1.

    Example. M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in 1956, and his net earnings from 
service performed in the exercise of his ministry during such year were 
$400 or more. M had no net earnings from the exercise of his ministry 
during 1957. On July 15, 1957, M filed a waiver certificate and 
indicated thereon that it was to become effective for the taxable year 
1958. At the time of filing, the certificate was effective for 1958 and 
all succeeding taxable years. Since the certificate was not filed on or 
before April 15, 1957 (the due date of M's income tax return for the 
taxable year 1956), and since there was no extension of time for filing 
his 1956 income tax return, the certificate was not, at the time of 
filing, effective for the taxable year 1956. M files a supplemental 
certificate on April 15, 1958. By the filing of the supplemental 
certificate, the certificate filed by M on July 15, 1957, was made 
effective for the year 1956 and all succeeding taxable years.

    (ii) Filed after September 13, 1960, and on or before April 16, 
1962. If under subparagraph (1) of this paragraph the certificate is 
effective only for the individual's first taxable year ending after 1956 
and all succeeding taxable years, the individual may make such 
certificate effective for his first taxable year ending after 1955 and 
all succeeding taxable years by:
    (a) Filing a supplemental certificate on Form 2031 after September 
13, 1960, and before April 17, 1962;
    (b) Paying on or before April 16, 1962, the tax under section 1401 
in respect of all the individual's self-employment income (except for 
underpayments of tax attributable to errors made in good faith) for his 
first taxable year ending after 1955; and
    (c) By repaying on or before April 16, 1962, the amount of any 
refund (including any interest paid under section 6611) that has been 
made of any such tax which (but for section 1402(e)(3)(B)) is an 
overpayment.

Any payment or repayment described in section 1402(e)(3)(B) and in this 
subparagraph shall not constitute an overpayment within the meaning of 
section 6401 which relates to amounts treated as overpayments. See 
section 6401 and the regulations thereunder in part 301 of this chapter 
(Regulations on Procedure and Administration).

    Example. M, who files his income tax returns on a calendar year 
basis, was ordained as a minister in 1956, and his net earnings from 
service performed in the exercise of his ministry during each of the 
years 1956 and 1957 were $400 or more. On July 15, 1957, M filed a 
waiver certificate which became effective, at the time of filing, for 
1957 and all succeeding taxable years. Since the certificate was not 
filed on or before April 15, 1957 (the due date of M's income tax return 
for the taxable year 1956), and since there was no extension of time for 
filing his 1956 income tax return, the certificate was not, at the time 
of filing, effective for the taxable year 1956. M files a supplemental 
certificate on April 17, 1961. If, in addition to the filing of the 
supplemental certificate, M pays on or before April 16, 1962, the self-
employment tax in respect of all his self-employment income (except for 
underpayments of tax attributable to errors made in good faith) for his 
taxable year 1956, and repays, on or before April 16, 1962, the amount 
of any refund (including any interest paid under section 6611) that has 
been made of any such tax which (but for section 1402(e)(3)(B)) is an 
overpayment, the certificate filed by M on July 15, 1957, becomes 
effective for the year 1956 and all succeeding taxable years.

    (b) Filed after August 30, 1957, and before the due date of the 1958 
return. A certificate on Form 2031 filed by an individual after August 
30, 1957, but on or before the due date of the return (including any 
extension thereof) for his second taxable year ending after 1956, in 
accordance with the provisions of section 1402(e) in effect at the time 
the certificate is filed, shall be effective for his first taxable year 
ending after 1955, and all subsequent taxable years.
    (c) Filed after due date of 1958 return--(1) In general. Except as 
otherwise provided in Sec. 1.1402(e)(5)-1 (applicable to certificates 
filed within the period September 14, 1960, to April 16, 1962, 
inclusive) and in subparagraphs (2) and (3) of

[[Page 46]]

this paragraph, a certificate on Form 2031 filed by an individual in 
accordance with the provisions of Secs. 1.1402(e)(1)-1 and 1.1402(e)(2)-
1, inclusive, after the due date of the return (including any extension 
thereof) for his second taxable year ending after 1956 shall be 
effective for the taxable year immediately preceding the earliest 
taxable year for which, at the time the certificate is filed, the period 
for filing a return (including any extension thereof) has not expired, 
and for all succeeding taxable years.

    Example. M, a duly ordained minister of a church, makes his income 
tax returns on the basis of a calendar year. M has not been granted an 
extension of time for filing any return. On April 15, 1963, the due date 
of his income tax return for 1962, M files a waiver certificate pursuant 
to Sec. 1.1402(e)(1)-1 and within the time limitation set forth in 
Sec. 1.1402(e)(2)-1. On April 15, 1963, the year 1962 is the earliest 
taxable year for which the period for filing a return has not expired. 
Consequently, M's certificate is effective for 1961 and all succeeding 
taxable years. M must report and pay any self-employment tax due for 
1961 and 1962. (The tax, if any, for 1962 is due on April 15, 1963.) 
Inasmuch as the due date of the tax for 1961 is April 16, 1962, M must 
pay interest on any tax due for 1961. For provisions relating to such 
interest, see Sec. 301.6601-1 of Part 301 of this chapter (Regulations 
on Procedure and Administration).

    (2) Filed after October 13, 1964, and on or before the due date of 
return for second taxable year ending after 1962. A certificate on Form 
2031 filed by an individual in accordance with the provisions of 
Secs. 1.1402(e)(1)-1 and 1.1402(e)(2)-1, inclusive, after October 13, 
1964, and on or before the due date of the return (including any 
extension thereof) for his second taxable year ending after 1962 (April 
15, 1965, in the case of a calendar year taxpayer who has not been 
granted an extension of time for filing his income tax return for 1964) 
shall be effective for his first taxable year ending after 1961 and all 
succeeding taxable years.

    Example. M, a duly ordained minister of a church, makes his income 
tax returns on the basis of a calendar year. M has not been granted an 
extension of time for filing any return. On April 15, 1965, the due date 
of his income tax return for 1964, M files a waiver certificate pursuant 
to Sec. 1.1402(e)(1)-1 and within the time limitation set forth in 
Sec. 1.1402(e)(2)-1. M's certificate is effective for 1962 and all 
succeeding taxable years, and he must report and pay any self-employment 
tax due for 1962, 1963, and 1964. (The tax, if any, for 1964 is due on 
April 15, 1965.) Inasmuch as the due dates of the tax for 1962 and 1963 
are April 15, 1963, and April 15, 1964, respectively, M must pay 
interest on any tax due for 1962 or 1963. For provisions relating to 
such interest, see Sec. 301.6601-1 of Part 301 of this chapter 
(Regulations on Procedure and Administration).

    (3) Filed after July 30, 1965, and on or before the due date of 
return for second taxable year ending after 1963. A certificate on Form 
2031 filed by an individual in accordance with the provisions of 
Secs. 1.1402(e)(1)-1 and 1.1402(e)(2)-1, inclusive, after July 30, 1965, 
and on or before the due date of the return (including any extension 
thereof) for his second taxable year ending after 1963 (Apr. 15, 1966, 
in the case of a calendar year taxpayer who has not been granted an 
extension of time for filing his income tax return for 1965) shall be 
effective for his first taxable year ending after 1962 and all 
succeeding taxable years.

    Example. M, a duly ordained minister of a church, makes his income 
tax returns on the basis of a calendar year. M has not been granted an 
extension of time for filing any return. On April 15, 1966, the due date 
of his income tax return for 1965, M files a waiver certificate pursuant 
to Sec. 1.1402(e)(1)-1 and within the time limitation set forth in 
Sec. 1.1402(e)(2)-1. M's certificate is effective for 1963 and all 
succeeding taxable years, and he must report and pay any self-employment 
tax due for 1963, 1964, and 1965. (The tax, if any, for 1965 is due on 
April 15, 1966.) Inasmuch as the due dates of the tax for 1963 and 1964 
are April 15, 1964, and April 15, 1965, respectively, M must pay 
interest on any tax due for 1963 or 1964. For provisions relating to 
such interest, see Sec. 301.6601-1 of Part 301 of this chapter 
(Regulations on Procedure and Administration).

    (d) Election irrevocable. An election which has become effective 
pursuant to this section is irrevocable. A certificate may not be 
withdrawn after June 30, 1961.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6978, 33 FR 
15939, Oct. 30, 1968]



Sec. 1.1402(e)(4)-1  Treatment of certain remuneration paid in 1955 and 1956 as wages.

    If in 1955 or 1956 an individual was paid remuneration for service 
described

[[Page 47]]

in section 3121(b)(8)(A) which was erroneously treated by the 
organization employing him (under a certificate filed by such 
organization pursuant to section 3121(k) or the corresponding section of 
prior law) as employment, within the meaning of the Federal Insurance 
Contributions Act (Chapter 21 of the Internal Revenue Code), and if on 
or before August 30, 1957, the taxes imposed by sections 3101 and 3111 
were paid (in good faith and upon the assumption that the insurance 
system established by title II of the Social Security Act had been 
extended to such service) with respect to any part of the remuneration 
paid to such individual for such service, then the remuneration with 
respect to which such taxes were paid, and with respect to which no 
credit or refund of such taxes (other than a credit or refund which 
would be allowable if such service had constituted employment) has been 
obtained either by the employer or the employee on or before August 30, 
1957, shall be deemed, for purposes of the Self-Employment Contributions 
Act of 1954 and the Federal Insurance Contributions Act, to constitute 
remuneration paid for employment and not net earnings from self-
employment. For regulations relating to section 3121(b)(8)(A) and (k), 
see Secs. 31.3121(b)(8)-1 and 31.3121(k)-1 of subpart B of part 31 of 
this chapter (Employment Tax Regulations).



Sec. 1.1402(e)(5)-1  Optional provision for certain certificates filed before April 15, 1962.

    (a) Certificates. (1) The optional provision contained in section 
1402(e)(5)(A) may be applied to a certificate on Form 2031 filed within 
the period September 14, 1960, to April 16, 1962, inclusive, in the case 
of a duly ordained, commissioned, or licensed minister of a church, a 
member of a religious order (other than a member of a religious order 
who has taken a vow of poverty as a member of such order), or a 
Christian Science practitioner, who has derived net earnings, in any 
taxable year ending after 1954 and before 1960, from the performance of 
service in the exercise of his ministry, in the exercise of duties 
required by his religious order, or in the exercise of his profession as 
a Christian Science practitioner, respectively, and who has reported 
such earnings as self-employment income on a return filed before 
September 14, 1960, and on or before the date prescribed for filing such 
return (including any extension thereof). The certificate may be filed 
by such minister, member of a religious order, or Christian Science 
practitioner or by a fiduciary acting for such individual or his estate, 
or by his survivor within the meaning of section 205(c)(1)(C) of the 
Social Security Act, and it must be filed after September 13, 1960, and 
on or before April 16, 1962. Subject to the conditions stated in 
subparagraph (2) of this paragraph, such certificate may be effective at 
the election of the person filing it, for the first taxable year ending 
after 1954 and before 1960 for which a return, as described in the first 
sentence of this subparagraph, was filed, and for all succeeding taxable 
years, rather than for the period prescribed in Sec. 1.1402(e)(3)-1. The 
election for retroactive application of the certificate may be made by 
indicating on the certificate the first taxable year for which it is to 
be effective and that such year is the first taxable year ending after 
1954 and before 1960 for which the minister, member of a religious 
order, or Christian Science practitioner filed an income tax return on 
which he reported net earnings for such year from the exercise of his 
ministry, the exercise of duties required by his religious order, or the 
exercise of his profession as a Christian Science practitioner, as the 
case may be, and by fulfilling the conditions prescribed in subparagraph 
(2) of this paragraph.
    (2) A certificate to which subparagraph (1) of this paragraph 
relates may be effective for a taxable year prior to the taxable year 
immediately preceding the earliest taxable year for which, at the time 
the certificate is filed, the period for filing a return (including any 
extension thereof) has not expired, only if the following conditions are 
met:
    (i) The tax under section 1401 is paid on or before April 16, 1962, 
in respect of all self-employment income (whether or not derived from 
the performance of service by the individual in the exercise of his 
ministry, in the exercise of

[[Page 48]]

duties required by his religious order, or in the exercise of his 
profession as a Christian Science practitioner, as the case may be) for 
the first taxable year ending after 1954 and before 1960 for which such 
individual has filed a return, as described in subparagraph (1) of this 
paragraph, and for each succeeding taxable year ending before 1960; and
    (ii) In any case where refund has been made of any such tax which 
(but for section 1402(e)(5)) is an overpayment, the amount refunded 
(including any interest paid under section 6611) is repaid on or before 
April 16, 1962. For regulations under section 6611 (relating to interest 
on overpayments), see Sec. 301.6611-1 of part 301 of this chapter 
(Regulations on Procedure and Administration).
    (b) Supplemental certificates. (1) Subject to the conditions stated 
in subparagraph (2) of this paragraph, a certificate on Form 2031 filed 
on or before September 13, 1960, by a minister, member of a religious 
order, or a Christian Science practitioner described in paragraph (a)(1) 
of this section and which (but for section 1402(e)(5)(B)) is ineffective 
for the first taxable year ending after 1954 and before 1959 for which 
such a return as described in paragraph (a)(1) of this section was filed 
by such individual, shall be effective for such first taxable year and 
for all succeeding taxable years, provided a supplemental certificate is 
filed by such individual or by a fiduciary acting for him or his estate, 
or by his survivor (within the meaning of section 205(c)(1)(C) of the 
Social Security Act), after September 13, 1960 and on or before April 
16, 1962.
    (2) The filing of a supplemental certificate pursuant to 
subparagraph (1) of this paragraph will give retroactive effect to a 
certificate to which such subparagraph applies only if the following 
conditions are met:
    (i) The tax under section 1401 is paid on or before April 16, 1962, 
in respect of all self-employment income (whether or not attributable to 
earnings as a minister, member of a religious order, or Christian 
Science practitioner) for the first taxable year for which the 
certificate is retroactively effective and for each subsequent year 
ending before 1959; and
    (ii) In any case where refund has been made of any such tax which 
(but for section 1402(d)(5)) is an overpayment, the amount refunded 
(including any interest paid under section 6611) is repaid on or before 
April 16, 1962.
    (c) Underpayment of tax. For purposes of this section, any 
underpayment of the tax which is attributable to an error made in good 
faith will not invalidate an election which is otherwise valid.
    (d) Nonapplicability of section 6401. Any payment or repayment 
described in paragraph (a)(2) or paragraph (b)(2) of this section shall 
not constitute an overpayment within the meaning of section 6401 which 
relates to amounts treated as overpayments. For the provisions of 
section 6401 and the regulations thereunder, see section 6401 and 
Sec. 301.6401-1 of part 301 of this chapter (Regulations on Procedure 
and Administration).



Sec. 1.1402(e)(5)-2  Optional provisions for certain certificates filed on or before April 17, 1967.

    (a) In general--(1) General rule. Section 1402(e)(5), as amended by 
the Social Security Amendments of 1965, applies only in the case of a 
duly ordained, commissioned, or licensed minister of a church, a member 
of a religious order (other than a member of a religious order who has 
taken a vow of poverty as a member of such order), or a Christian 
Science practitioner, who has derived net earnings in any taxable year 
ending after 1954 from the performance of service in the exercise of his 
ministry, in the exercise of duties required by his religious order, or 
in the exercise of his profession as a Christian Science practitioner, 
respectively, and who has reported such earnings as self-employment 
income on a return filed on or before the date prescribed for filing 
such return (including any extension thereof).
    (2) Supplemental certificate. Subject to the conditions stated in 
subparagraph (4) of this paragraph, a certificate on Form 2031 filed on 
or before April 15, 1966, by a minister, member of a religious order, or 
a Christian Science practitioner described in subparagraph

[[Page 49]]

(1) of this paragraph and which (but for section 1402(e)(5)(A)) is 
ineffective for the first taxable year ending after 1954 for which a 
return described in subparagraph (1) of this paragraph was filed by such 
individual, shall be effective for such first taxable year and for all 
succeeding taxable years, provided a supplemental certificate is filed 
by such individual or by a fiduciary acting for him or his estate, or by 
his survivor (within the meaning of section 205(c)(1)(C) of the Social 
Security Act), after July 30, 1965 (the date of enactment of the Social 
Security Amendments of 1965), and on or before April 17, 1967.
    (3) Certificate filed by survivor. A survivor (within the meaning of 
section 205(c)(1)(C) of the Social Security Act) of an individual who:
    (i) Died on or before April 15, 1966,
    (ii) Was a minister, member of a religious order, or a Christian 
Science practitioner described in subparagraph (1) of this paragraph,
    (iii) Has filed a return as described in subparagraph (1) of this 
paragraph for a taxable year ending after 1954, and
    (iv) Had not filed a valid waiver certificate on Form 2031,

may file a certificate on Form 2031 on behalf of such individual. The 
certificate must be filed after July 30, 1965 (the date of enactment of 
the Social Security Amendments of 1965), and on or before April 17, 
1967. Subject to the conditions stated in subparagraph (4) of this 
paragraph, such certificate shall be effective for the first taxable 
year ending after 1954 for which a return, as described in subparagraph 
(1) of this paragraph, was filed by such individual and for all 
succeeding taxable years.
    (4) Applicable conditions. A supplemental certificate referred to in 
subparagraph (2) of this paragraph and a certificate referred to in 
subparagraph (3) of this paragraph shall be effective only if the 
following conditions are met:
    (i) The tax under section 1401 is paid on or before April 17, 1967, 
in respect of all self-employment income (whether or not attributable to 
earnings as a minister, member of a religious order, or Christian 
Science practitioner) for the first taxable year ending after 1954 for 
which the individual (by or in respect of whom the supplemental 
certificate or certificate is filed) has filed a return, as described in 
paragraph (1) of this paragraph, and for each succeeding taxable year 
ending before January 1, 1966; and
    (ii) In any case where refund has been made of any such tax which 
(but for section 1402(e)(5)) is an overpayment, the amount refunded 
(including any interest paid under section 6611) is repaid on or before 
April 17, 1967. For regulations under section 6611 (relating to interest 
on overpayments), see Sec. 301.6611-1 of part 301 of this chapter 
(Regulations on Procedure and Administration).
    (b) Underpayment of tax. For purposes of this section, any 
underpayment of the tax which is attributable to an error made in good 
faith will not invalidate an election which is otherwise valid.
    (c) Nonapplicability of section 6401. Any payment or repayment 
described in paragraph (a)(4) of this section shall not constitute an 
overpayment within the meaning of section 6401 which relates to amounts 
treated as overpayments. For the provisions of section 6401 and the 
regulations thereunder, see section 6401 and Sec. 301.6401-1 of part 301 
of this chapter (Regulations on Procedure and Administration).
    (d) Applicability of Secs. 1.1402(e) (5)-1 and 1.1402(e)(6)-1. The 
provisions of section 1402(e) (5) and (6) (in effect prior to July 30, 
1965, the date of enactment of the Social Security Amendments of 1965) 
and Secs. 1.1402(e) (5)-1 and 1.1402(e)(6)-1 shall apply with respect to 
any certificate filed pursuant to such sections if a supplemental 
certificate is not filed with respect to such certificate as provided in 
this section.

[T.D. 6978, 33 FR 15939, Oct. 30, 1968]



Sec. 1.1402(e)(6)-1  Certificates filed by fiduciaries or survivors on or before April 15, 1962.

    In any case in which an individual whose death has occurred after 
September 12, 1960, and before April 16, 1962, derived earnings from the 
performance of services as a duly ordained, commissioned, or licensed 
minister of a church in the exercise of his ministry, as a member of a 
religious

[[Page 50]]

order (other than a member of a religious order who has taken a vow of 
poverty as a member of such order) in the exercise of duties required by 
such order, or in the exercise of his profession as a Christian Science 
practitioner, a waiver certificate on Form 2031 may be filed after June 
30, 1961 (the date of enactment of the Social Security Amendments of 
1961), and on or before April 16, 1962, by a fiduciary acting for such 
individual's estate or by such individual's survivor within the meaning 
of section 205(c)(1)(C) of the Social Security Act. Such certificates 
shall be effective for the period prescribed in section 1402(e)(3)(A) 
(see Sec. 1.1402(e)(3)-1(c)) as if filed by the individual on the date 
of his death.



Sec. 1.1402(f)-1  Computation of partner's net earnings from self-employment for taxable year which ends as result of his death.

    (a) Taxable years ending after August 28, 1958--(1) In general. The 
rules for the computation of a partner's net earnings from self-
employment are set forth in paragraphs (d) to (g), inclusive, of 
Sec. 1.1402(a)-2. In addition to the net earnings from self-employment 
computed under such rules for the last taxable year of a deceased 
partner, if a partner's taxable year ends after August 28, 1958, solely 
because of death, and on a day other than the last day of the 
partnership's taxable year, the deceased partner's net earnings from 
self-employment for such year shall also include so much of the deceased 
partner's distributive share of partnership ordinary income or loss (see 
subparagraph (3) of this paragraph) for the taxable year of the 
partnership in which his death occurs as is attributable to an interest 
in the partnership prior to the month following the month of his death.
    (2) Computation. (i) The deceased partner's distributive share of 
partnership ordinary income or loss for the partnership taxable year in 
which he died shall be determined by applying the rules contained in 
paragraphs (d) to (g), inclusive, of Sec. 1.1402(a)-2, except that 
paragraph (e) shall not apply.
    (ii) The portion of such distributive share to be included under 
this section in the deceased partner's net earnings from self-employment 
for his last taxable year shall be determined by treating the ordinary 
income or loss constituting such distributive share as having been 
realized or sustained ratably over the period of the partnership taxable 
year during which the deceased partner had an interest in the 
partnership and during which his estate, or any other person succeeding 
by reason of his death to rights with respect to his partnership 
interest, held such interest in the partnership or held a right with 
respect to such interest. The amount to be included under this section 
in the deceased partner's net earnings from self-employment for his last 
taxable year will, therefore, be determined by multiplying the deceased 
partner's distributive share of partnership ordinary income or loss for 
the partnership taxable year in which he died, as determined under 
subdivision (i) of this subparagraph, by a fraction, the denominator of 
which is the number of calendar months in the partnership taxable year 
over which the ordinary income or loss constituting the deceased 
partner's distributive share of partnership income or loss for such year 
is treated as having been realized or sustained under the preceding 
sentence and the numerator of which is the number of calendar months in 
such partnership taxable year that precede the month following the month 
of his death.
    (3) Definition of ``deceased partner's distributive share''. For the 
purpose of this section, the term ``deceased partner's distributive 
share'' includes the distributive share of his estate or of any other 
person succeeding, by reason of his death, to rights with respect to his 
partnership interest. It does not include any share attributable to a 
partnership interest which was not held by the deceased partner at the 
time of his death. Thus, if a deceased partner's estate should acquire 
an interest in a partnership additional to the interest to which it 
succeeded upon the death of the deceased partner, the amount of the 
distributive share attributable to such additional interest acquired by 
the estate would not be included in computing the ``deceased partner's 
distributive share'' of the partnership's

[[Page 51]]

ordinary income or loss for the partnership taxable year.
    (4) Examples. The application of this paragraph may be illustrated 
by the following examples:

    Example (1). B, an individual who files his income tax returns on 
the calendar year basis, is a member of the ABC partnership, the taxable 
year of which ends on June 30. B dies on October 17, 1958, and his 
estate succeeds to his partnership interest and continues as a partner 
in its own right under local law until June 30, 1959. B's distributive 
share of the partnership's ordinary income, as determined under 
paragraphs (d) to (g), inclusive, of Sec. 1.1402(a)-2, for the taxable 
year of the partnership ended June 30, 1958 is $2,400. His distributive 
share, including the share of his estate, of such partnership's ordinary 
income, as determined under paragraphs (d) to (g), inclusive, of 
Sec. 1.1402(a)-2 (with the exception of paragraph (e)), for the taxable 
year of the partnership ended June 30, 1959 is $4,500. The portion of 
such $4,500 attributable to an interest in the partnership prior to the 
month following the month in which he died is $4,500x4/12 (4 being the 
number of months in the partnership taxable year in which B died which 
precede the month following the month of his death and 12 being the 
number of months in such partnership taxable year in which B and his 
estate had an interest in the partnership) or $1,500. The amount to be 
included in the deceased partner's net earnings from self-employment for 
his last taxable year is $3,900 ($2,400 plus $1,500).
    Example (2). If in the preceding example B's estate is entitled to 
only $1,000, the amount of B's distributive share of partnership 
ordinary income for the period July 1, 1958 through October 17, 1958, 
such $1,000 is considered to have been realized ratably over the period 
preceding B's death and will be included in B's net earnings from self-
employment for his last taxable year.
    Example (3). X, who reports his income on a calendar year basis, is 
a member of a partnership which also reports its income on a calendar 
year basis. X dies on June 30, 1959, and his estate succeeds to his 
partnership interest and continues as a partner in its own right under 
local law. On September 15, 1959, X's estate sells the partnership 
interest to which it succeeded on the death of X. X's distributive share 
of partnership income for 1959 is $5,500. $600 of such amount is X's 
share of the gain from the sale of a capital asset which occurs on May 
1, 1959, and $400 of such amount is the estate's share of the gain from 
the sale of a capital asset which occurs on July 15, 1959. The remainder 
of such amount is income from services rendered. X's distributive share 
of partnership ordinary income for 1959, as determined under paragraphs 
(d) to (g), inclusive, of Sec. 1.1402(a)-2 (with the exception of 
paragraph (e)), is $4,500 ($5,500 minus $1,000). The portion of such 
share attributable to an interest in the partnership prior to the month 
following the month of his death is $4,500x6/8.5 (6 being the number of 
months in the partnership taxable year in which X died as precede the 
month following the month of his death and 8.5 being the number of 
months in such partnership taxable year in which X and his estate had an 
interest in the partnership) or $3,176.47.

    (b) Options available to farmers--(1) Special rule. In determining 
whether the optional method available to a member of a farm partnership 
in computing his net earnings from self-employment may be applied, and 
in applying such method, it is necessary to determine the partner's 
distributive share of partnership gross income and the partner's 
distributive share of income described in section 702(a)(9). See section 
1402(a) and Sec. 1.1402(a)-15. If section 1402(f) and this section 
apply, or may be made applicable under section 403(b)(2) of the Social 
Security Amendments of 1958 and paragraph (c) of this section, for the 
last taxable year of a deceased partner, such partner's distributive 
share of income described in section 702(a)(9) for his last taxable year 
shall be determined by including therein any amount which is included 
under section 1402(f) and this section in his net earnings from self-
employment for such taxable year. Such a partner's distributive share of 
partnership gross income for his last taxable year shall be determined 
by including therein so much of the deceased partner's distributive 
share (see paragraph (a)(3) of this section) of partnership gross 
income, as defined in section 1402(a) and paragraph (b) of 
Sec. 1.1402(a)-15, for the partnership taxable year in which he died as 
is attributable to an interest in the partnership prior to the month 
following the month of his death. Such allocation shall be made in the 
same manner as is prescribed in paragraph (a)(2) of this section for 
determining the portion of a deceased partner's distributive share of 
partnership ordinary income or loss to be included under section 1402(f) 
and this section in his net earnings from self-employment for his last 
taxable year.

[[Page 52]]

    (2) Examples. The principles set forth in this paragraph may be 
illustrated by the following examples:

    Example (1). X, an individual who files his income tax returns on a 
calendar year basis, is a member of the XYZ farm partnership, the 
taxable year of which ends on March 31. X dies on May 31, 1967, and his 
estate succeeds to his partnership interest and continues as a partner 
in its own right under local law until March 31, 1968. X's distributive 
share of the partnership's ordinary income, determined under paragraphs 
(d) to (g), inclusive, of Sec. 1.1402(a)-2, for the taxable year of the 
partnership ended March 31, 1967, is $1,600. His distributive share, 
including the share of his estate, of such partnership's ordinary loss 
as determined under paragraphs (d) to (g), inclusive, of Sec. 1.1402(a)-
2 (with the exception of paragraph (e)), for the taxable year of the 
partnership ended March 31, 1968, is $1,200. The portion of such $1,200 
attributable to an interest in the partnership prior to the month 
following the month in which he died is $1,200x2/12 (2 being the number 
of months in the partnership taxable year in which X died which precede 
the month following the month of his death and 12 being the number of 
months in such partnership taxable year in which X and his estate had an 
interest in the partnership) or $200. X is also a member of the ABX farm 
partnership, the taxable year of which ends on May 31. His distributive 
share of the partnership loss described in section 702(a)(9) for the 
partnership taxable year ending May 31, 1967, is $300. Section 1402(f) 
and this section do not apply with respect to such $300 since X's last 
taxable year ends, as a result of his death, with the taxable year of 
the ABX partnership. Under this paragraph the $200 loss must be included 
in determining X's distributive share of XYZ partnership income 
described in section 702(a)(9) for the purpose of applying the optional 
method available to farmers for computing net earnings from self-
employment. Further, the resulting $1,400 of income must be aggregated, 
pursuant to paragraph (c) of Sec. 1.1402(a)-15, with the $300 loss, X's 
distributive share of ABX partnership loss described in section 
702(a)(9), for purposes of applying such option. The representative of 
X's estate may exercise the option described in paragraph (a)(2)(ii) of 
Sec. 1.1402(a)-15, provided the portion of X's distributive share of XYZ 
partnership gross income for the taxable year ended March 31, 1968, 
attributable to an interest in the partnership prior to the month 
following the month in which he died (the allocation being made in the 
manner prescribed for allocating his $1,200 distributive share of XYZ 
partnership loss for such year), when aggregated with his distributive 
share of XYZ partnership gross income for the partnership taxable year 
ended March 31, 1967, and with his distributive share of ABX partnership 
gross income for the partnership taxable year ended May 31, 1967, 
results in X having more than $2,400 of gross income from the trade or 
business of farming. If such aggregate amount of gross income is not 
more than $2,400, the option described in paragraph (a)(2)(i) of 
Sec. 1.1402(a)-15, is available.
    Example (2). A, a sole proprietor engaged in the business of 
farming, files his income tax returns on a calendar year basis. A is 
also a member of a partnership engaged in an agricultural activity. The 
partnership files its returns on the basis of a fiscal year ending March 
31. A dies June 29, 1967. A's gross income from farming as a sole 
proprietor for the 6-month period comprising his taxable year which ends 
because of death is $1,600 and his actual net earnings from self-
employment based thereon are $400. As of March 31, 1967, A's 
distributive share of the gross income of the farm partnership is $2,200 
and his distributive share of income described in section 702(a)(9) 
based thereon is $1,000. The amount of A's distributive share of the 
partnership's ordinary income for its taxable year ended March 31, 1968, 
which may be included in his net earnings from self-employment under 
section 1402(f) and paragraph (a) of this section is $300. The amount of 
the deceased partner's distributive share of partnership gross income 
attributable to an interest in the partnership prior to the month 
following the month of his death as is determined, pursuant to 
subparagraph (1) of this paragraph, under paragraph (a) of this section 
is $2,000. An aggregation of the above figures produces a gross income 
from farming of $5,800 and actual net earnings from self-employment of 
$1,700. Under these circumstances none of the options provided by 
section 1402(a) may be used. If the actual net earnings from self-
employment had been less than $1,600, the option described in paragraph 
(a)(2)(ii) of Sec. 1.1402(a)-15 would have been available.

    (c) Taxable years ending after 1955 and on or before August 28, 
1958--(1) Requirement of election. If a partner's taxable year ended, as 
a result of his death, after 1955 and on or before August 28, 1958, the 
rules set forth in paragraph (a) of this section may be made applicable 
in computing the deceased partner's net earnings from self-employment 
for his last taxable year provided that:
    (i) Before January 1, 1960, there is filed, by the person designated 
in section 6012(b)(1) and paragraph (b)(1) of Sec. 1.6012-3, a return 
(or amended return) of the tax imposed by chapter 2 for the taxable year 
ending as a result of death, and

[[Page 53]]

    (ii) Such return, if filed solely for the purpose of reporting net 
earnings from self-employment resulting from the enactment of section 
1402(f), is accompanied by the amount of tax attributable to such net 
earnings.
    (2) Administrative rule of special application. Notwithstanding the 
provisions of sections 6601, 6651, and 6653 (see such sections and the 
regulations thereunder) no interest or penalty shall be assessed or 
collected on the amount of any self-employment tax due solely by reason 
of the operation of section 1402(f) in the case of an individual who 
died after 1955 and before August 29, 1958.

[T.D. 6691, 28 FR 12796, Dec. 3, 1963, as amended by T.D. 6993, 34 FR 
830, Jan. 18, 1969]



Sec. 1.1402(g)-1  Treatment of certain remuneration erroneously reported as net earnings from self-employment.

    (a) General rule. If an amount is erroneously paid as self-
employment tax, for any taxable year ending after 1954 and before 1962, 
with respect to remuneration for service (other than service described 
in section 3121(b)(8)(A)) performed in the employ of an organization 
described in section 501(c)(3) and exempt from income tax under section 
501(a), and if such remuneration is reported as self-employment income 
on a return filed on or before the due date prescribed for filing such 
return (including any extension thereof), the individual who paid such 
amount (or a fiduciary acting for such individual or his estate, or his 
survivor (within the meaning of section 205(c)(1)(C) of the Social 
Security Act)), may request that such remuneration be deemed to 
constitute net earnings from self-employment. If such request is filed 
during the period September 14, 1960, to April 16, 1962, inclusive, and 
on or after the date on which the organization which paid such 
remuneration to such individual for services performed in its employ has 
filed, pursuant to section 3121(k), a certificate waiving exemption from 
taxes under the Federal Insurance Contributions Act, and if no credit or 
refund of any portion of the amount erroneously paid for such taxable 
year as self-employment tax (other than a credit or refund which would 
be allowable if such tax were applicable with respect to such 
remuneration) has been obtained before the date on which such request is 
filed or, if obtained, the amount credited or refunded (including any 
interest under section 6611) is repaid on or before such date, then, for 
purposes of the Self-Employment Contributions Act of 1954 and the 
Federal Insurance Contributions Act, any amount of such remuneration 
which is paid to such individual before the calendar quarter in which 
such request is filed (or before the succeeding quarter if such 
certificate first becomes effective with respect to services performed 
by such individual in such succeeding quarter) and with respect to which 
no tax (other than an amount erroneously paid as tax) has been paid 
under the Federal Insurance Contributions Act, shall be deemed to 
constitute net earnings from self-employment and not remuneration for 
employment. If the certificate filed by such organization pursuant to 
section 3121(k) is not effective with respect to services performed by 
such individual on or before the first day of the calendar quarter in 
which the request is filed, then, for purposes of section 3121(b)(8)(B) 
(ii) and (iii), such individual shall be deemed to have become an 
employee of such organization (or to have become a member of a group, 
described in section 3121(k)(1)(E), of employees of such organization) 
on the first day of the succeeding quarter.
    (b) Request for validation. (1) No particular form is prescribed for 
making a request under paragraph (a) of this section. The request should 
be in writing, should be signed and dated by the person making the 
request, and should indicate clearly that it is a request that, pursuant 
to section 1402(g) of the Code, remuneration for service described in 
section 3121(b)(8) (other than service described in section 
3121(b)(8)(A)) erroneously reported as self-employment income for one or 
more specified years be deemed to constitute net earnings from self-
employment and not remuneration for employment. In addition, the 
following information shall be shown in connection with the request:

[[Page 54]]

    (i) The name, address, and social security account number of the 
individual with respect to whose remuneration the request is made.
    (ii) The taxable year or years (ending after 1954 and before 1962) 
to which the request relates.
    (iii) A statement that the remuneration was erroneously reported as 
self- employment income on the individual's return for each year 
specified and that the return was filed on or before its due date 
(including any extension thereof).
    (iv) Location of the office of the district director with whom each 
return was filed.
    (v) A statement that no portion of the amount erroneously paid by 
the individual as self-employment tax with respect to the remuneration 
has been credited or refunded (other than a credit or refund which would 
have been allowable if the tax had been applicable with respect to the 
remuneration); or, if a credit or refund of any portion of such amount 
has been obtained, a statement identifying the credit or refund and 
showing how and when the amount credited or refunded, together with any 
interest received in connection therewith, was repaid.
    (vi) The name and address of the organization which paid the 
remuneration to the individual.
    (vii) The date on which the organization filed a waiver certificate 
on Form SS-15, and the location of the office of the district director 
with whom it was filed.
    (viii) The date on which the certificate became effective with 
respect to services performed by the individual.
    (ix) If the request is made by a person other than the individual to 
whom the remuneration was paid, the name and address of that person and 
evidence which shows the authority of such person to make the request.
    (2) The request should be filed with the district director of 
internal revenue with whom the latest of the returns specified in the 
request pursuant to subparagraph (1)(iii) of this paragraph was filed.
    (c) Cross references. For regulations relating to section 3121 
(b)(8) and (k), see Secs. 31.3121(b)(8)-2 and 31.3121(k)-1 of subpart B 
of part 31 of this chapter (Employment Tax Regulations). For regulations 
relating to exemption from income tax of an organization described in 
section 501(c)(3), see Sec. 1.501(c)(3)-1.



Sec. 1.1402(h)-1  Members of certain religious groups opposed to insurance.

    (a) In general. An individual--(1) Who is a member of a recognized 
religious sect or division thereof and,
    (2) Who is an adherent of established tenets or teachings of such 
sect or division and by reason thereof is conscientiously opposed to 
acceptance of the benefits of any private or public insurance which 
makes payments in the event of death, disability, old age, or retirement 
or makes payments toward the cost of, or provides services for, medical 
care (including the benefits of any insurance system established by the 
Social Security Act),

may file an application for exemption from the tax under section 1401. 
The form of insurance to which section 1402(h) and this section refer 
does not include liability insurance of a kind that provides only for 
the protection of other persons, or property of other persons, who may 
be injured or damaged by or on property belonging to, or by an action 
of, an individual who otherwise meets the requirements of this section. 
An application for exemption under section 1402(h) and this section 
shall be made in the manner provided in paragraph (b) of this section 
and within the time specified in paragraph (c) of this section. For 
provisions relating to the filing of an application for exemption by a 
fiduciary or survivor, see paragraph (d) of this section.
    (b) Application for exemption. The application for exemption shall 
be filed on Form 4029 in duplicate with the internal revenue official or 
office designated on the form. The filing of a return by a member of a 
religious group opposed to insurance showing no self-employment income 
or self-employment tax shall not be construed as an application for 
exemption referred to in paragraph (a) of this section.
    (c) Time limitation for filing application for exemption--(1) 
Taxable years ending before December 31, 1967. A member of a religious 
group opposed to insurance within the meaning of paragraph (a) of this 
section:

[[Page 55]]

    (i) Who has self-employment income (determined without regard to 
subsections (c)(6) and (h) of section 1402 and this section) for one or 
more taxable years ending before December 31, 1967, and
    (ii) Who desires to be exempt from the payment of the self-
employment tax under section 1401,

must file the application for exemption on or before December 31, 1968.
    (2) Taxable year ending on or after December 31, 1967--(i) General 
rule. Except as provided in subdivision (ii) of this subparagraph, a 
member of a religious group opposed to insurance within the meaning of 
paragraph (a) of this section:
    (a) Who has no self-employment income (determined without regard to 
subsections (c)(6) and (h) of section 1402 and this section) for any 
taxable year ending before December 31, 1967, and
    (b) Who desires to be exempt from the payment of the self-employment 
tax under section 1401 for any taxable year ending on or after December 
31, 1967,

must file the application for exemption on or before the due date of the 
income tax return (see section 6072), including any extension thereof 
(see section 6081), for the first taxable year ending on or after 
December 31, 1967, for which he has self-employment income (determined 
without regard to subsections (c)(6) and (h) of section 1402 and this 
section.
    (ii) Exception to general rule. If an individual to whom subdivision 
(i) of this subparagraph applies:
    (a) Is notified in writing by a district director of internal 
revenue or the Director of International Operations that he has not 
filed the application for exemption on or before the date specified in 
such subdivision (i), and
    (b) Files the application for exemption on or before the last day of 
the third calendar month following the calendar month in which he is so 
notified,

such application shall be considered a timely filed application for 
exemption.
    (d) Application by fiduciary or survivor. If an individual who was a 
member of a religious group opposed to insurance dies before the 
expiration of the time prescribed in section 1402(h)(2) and paragraph 
(c) of this section during which an application could have been filed by 
him, an application for exemption with respect to such deceased 
individual may be filed by a fiduciary acting for such individual's 
estate or by such individual's survivor within the meaning of section 
205(c)(1)(C) of the Social Security Act. An application for exemption 
with respect to a deceased individual executed by a fiduciary or 
survivor may be approved only if it could have been approved if the 
individual were not deceased and had filed the application on the date 
the application was filed by the fiduciary or executor.
    (e) Approval of application for exemption--(1) In general. The 
filing of an application for exemption on Form 4029 by a member of a 
religious group opposed to insurance does not constitute an exemption 
from the payment of the tax on self-employment income. An individual who 
files such an application is exempt from the payment of the tax only if 
the application is approved by the official with whom the application is 
required to be filed (see paragraph (b) of this section).
    (2) Conditions relating to approval or disapproval of application. 
An application for exemption on Form 4029 will not be approved unless 
the Secretary of Health, Education, and Welfare finds with respect to 
the religious sect or division thereof of which the individual filing 
the application is a member:
    (i) That the sect or division thereof has the established tenets or 
teachings by reason of which the individual applicant is conscientiously 
opposed to the benefits of insurance of the type referred to in section 
1402(h) (see paragraph (a) of this section),
    (ii) That it is the practice, and has been for a period of time 
which the Secretary of Health, Education, and Welfare deems to be 
substantial, for members of such sect or division thereof to make 
provisions for their dependent members which, in the judgment of such 
Secretary, is reasonable in view of the general level of living of the 
members of the sect or division thereof; and
    (iii) That the sect or division thereof has been in existence 
continuously since December 31, 1950.

In addition, an application for exemption on Form 4029 will not be 
approved if any benefit or other payment under

[[Page 56]]

title II of title XVIII of the Social Security Act became payable (or, 
but for section 203, relating to reduction of insurance benefits, or 
222(b), relating to reduction of insurance benefits on account of 
refusal to accept rehabilitation services, of the Social Security Act 
would have been payable) at or before the time of the filing of the 
application for exemption. Any determination required to be made 
pursuant to the preceding sentence will be made by the Secretary of 
Health, Education, and Welfare.
    (f) Period for which exemption is effective--(1) General rule. An 
application for exemption shall be in effect (if approved as provided in 
paragraph (e) of this section) for all taxable years beginning after 
December 31, 1950, except as otherwise provided in subparagraph (2) of 
this paragraph.
    (2) Exceptions. An application for exemption referred to in 
subparagraph (1) of this paragraph shall not be effective for any 
taxable year which:
    (i) Begins (a) before the taxable year in which the individual 
filing the application first met the requirements of subparagraphs (1) 
and (2) of paragraph (a) of this section, or (b) before the time as of 
which the Secretary of Health, Education, and Welfare finds that the 
sect or division thereof of which the individual is a member met the 
requirements of subparagraphs (C) and (D) of section 1402(h)(1) (see 
subdivisions (i) and (ii) of paragraph (e)(2) of this section), or
    (ii) Ends (a) after the time at which the individual filing the 
application ceases to meet the requirements of subparagraphs (1) and (2) 
of paragraph (a) of this section, or (b) after the time as of which the 
Secretary of Health, Education, and Welfare finds that the sect or 
division thereof of which the individual is a member ceases to meet the 
requirements of subparagraphs (C) and (D) of section 1402(h)(1) (see 
subdivisions (i) and (ii) of paragraph (e)(2) of this section).
    (g) Refund or credit. An application for exemption on Form 4029 
filed on or before December 31, 1968 (if approved as provided in 
paragraph (e) of this section), shall constitute a claim for refund or 
credit of any tax on self-employment income under section 1401 (or under 
section 480 of the Internal Revenue Code of 1939) paid or incurred in 
respect of any taxable year beginning after December 31, 1950, and 
ending before December 31, 1967, for which an exemption is granted. 
Refund or credit of any tax referred to in the preceding sentence may be 
made, pursuant to the provisions of section 501(c) of the Social 
Security Amendments of 1967 (81 Stat. 933), notwithstanding that the 
refund or credit would otherwise be prevented by operation of any law or 
rule of law. No interest shall be allowed or paid in respect of any 
refund or credit made or allowed in connection with a claim for refund 
or credit made on Form 4029.

[T.D. 6993, 34 FR 831, Jan. 18, 1969]



Sec. 1.1403-1  Cross references.

    For provisions relating to the requirement for filing returns with 
respect to net earnings from self-employment, see Sec. 1.6017-1. For 
provisions relating to declarations of estimated tax on self-employment 
income, see Secs. 1.6015(a) to 1.6015(j)-1, inclusive. For other 
administrative provisions relating to the tax on self-employment income, 
see the applicable sections of the regulations in this part 
(Sec. 1.6001-1 et seq.) and the applicable sections of the regulations 
in part 301 of this chapter (Regulations on Procedure and 
Administration).

[T.D. 7427, 41 FR 34026, Aug. 12, 1976]

 Withholding of Tax on Nonresident Aliens and Foreign Corporations and 
                         Tax-Free Covenant Bonds

               NONRESIDENT ALIENS AND FOREIGN CORPORATIONS



Sec. 1.1441-0  Outline of regulation provisions for section 1441.

    This section lists captions contained in Secs. 1.1441-1 through 
1.1441-9.

 Sec. 1.1441-1  Requirement for the deduction and withholding of tax on 
                      payments to foreign persons.

(a) Purpose and scope.
(b) General rules of withholding.
(1) Requirement to withhold on payments to foreign persons.
(2) Determination of payee and payee's status.
(i) In general.

[[Page 57]]

(ii) Payments to a U.S. agent of a foreign person.
(iii) Payments to wholly-owned entities.
(A) Foreign-owned domestic entity.
(B) Foreign entity.
(iv) Payments to a U.S. branch of certain foreign banks or foreign 
          insurance companies.
(A) U.S. branch treated as a U.S. person in certain cases.
(B) Consequences to the withholding agent.
(C) Consequences to the U.S. branch.
(D) Definition of payment to a U.S. branch.
(E) Payments to other U.S. branches.
(v) Payments to a foreign intermediary.
(A) Payments treated as made to persons for whom the intermediary 
          collects the payment.
(B) Payments treated as made to foreign intermediary.
(vi) Other payees.
(vii) Rules for reliably associating a payment with a withholding 
          certificate or other appropriate documentation.
(A) Generally.
(B) Special rules applicable to a withholding certificate from a 
          nonqualified intermediary or flow-through entity.
(C) Special rules applicable to a withholding certificate provided by a 
          qualified intermediary that does not assume primary 
          withholding responsibility.
(D) Special rules applicable to a withholding certificate provided by a 
          qualified intermediary that assumes primary withholding 
          responsibility under chapter 3 of the Internal Revenue Code.
(E) Special rules applicable to a withholding certificate provided by a 
          qualified intermediary that assumes primary Form 1099 
          reporting and backup withholding responsibility but not 
          primary withholding under chapter 3.
(F) Special rules applicable to a withholding certificate provided by a 
          qualified intermediary that assumes primary withholding 
          responsibility under chapter 3 and primary Form 1099 reporting 
          and backup withholding responsibility and a withholding 
          certificate provided by a withholding foreign partnership.
(3) Presumptions regarding payee's status in the absence of 
          documentation.
(i) General rules.
(ii) Presumptions of classification as individual, corporation, 
          partnership, etc.
(A) In general.
(B) No documentation provided.
(C) Documentary evidence furnished for offshore account.
(iii) Presumption of U.S. or foreign status.
(A) Payments to exempt recipients.
(B) Scholarships and grants.
(C) Pensions, annuities, etc.
(D) Certain payments to offshore accounts.
(iv) Grace period.
(v) Special rules applicable to payments to foreign intermediaries.
(A) Reliance on claim of status as foreign intermediary.
(B) Beneficial owner documentation or allocation information is lacking 
          or unreliable.
(C) Information regarding allocation of payment is lacking or 
          unreliable.
(D) Certification that the foreign intermediary has furnished 
          documentation for all of the persons to whom the intermediary 
          certificate relates is lacking or unreliable.
(vi) U.S. branches.
(vii) Joint payees.
(A) In general.
(B) Special rule for offshore accounts.
(viii) Rebuttal of presumptions.
(ix) Effect of reliance on presumptions and of actual knowledge or 
          reason to know otherwise.
(A) General rule.
(B) Actual knowledge or reason to know that amount of withholding is 
          greater than is required under the presumptions or that 
          reporting of the payment is required.
(x) Examples.
(4) List of exemptions from, or reduced rates of, withholding under 
          chapter 3 of the Code.
(5) Establishing foreign status under applicable provisions of chapter 
          61 of the Code.
(6) Rules of withholding for payments by a foreign intermediary or 
          certain U.S. branches.
(i) In general.
(ii) Example.
(7) Liability for failure to obtain documentation timely or to act in 
          accordance with applicable presumptions.
(i) General rule.
(ii) Proof that tax liability has been satisfied.
(iii) Liability for interest and penalties.
(iv) Special effective date.
(v) Examples.
(8) Adjustments, refunds, or credits of overwithheld amounts.
(9) Payments to joint owners.
(c) Definitions.
(1) Withholding.
(2) Foreign and U.S. person.
(3) Individual.
(i) Alien individual.
(ii) Nonresident alien individual.
(4) Certain foreign corporations.
(5) Financial institution and foreign financial institution.
(6) Beneficial owner.
(i) General rule.
(ii) Special rules.
(A) General rule.
(B) Foreign partnerships.
(C) Foreign simple trusts and foreign grantor trusts.
(D) Other foreign trusts and foreign estates.

[[Page 58]]

(7) Withholding agent.
(8) Person.
(9) Source of income.
(10) Chapter 3 of the Code.
(11) Reduced rate.
(12) Payee.
(13) Intermediary.
(14) Nonqualified intermediary.
(15) Qualified intermediary.
(16) Withholding certificate.
(17) Documentary evidence; other appropriate 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) Beneficial owner's or payee's claim of U.S. status.
(1) In general.
(2) Payments for which a Form W-9 is otherwise required.
(3) Payments for which a Form W-9 is not otherwise required.
(4) When a payment to an intermediary or flow-through entity may be 
          treated as made to a U.S. payee.
(e) Beneficial owner's claim of foreign status.
(1) Withholding agent's reliance.
(i) In general.
(ii) Payments that a withholding agent may treat as made to a foreign 
          person that is a beneficial owner.
(A) General rule.
(B) Additional requirements.
(2) Beneficial owner withholding certificate.
(i) In general.
(ii) Requirements for validity of certificate.
(3) Intermediary, flow-through, or U.S. branch withholding certificate.
(i) In general.
(ii) Intermediary withholding certificate from a qualified intermediary.
(iii) Intermediary withholding certificate from a nonqualified 
          intermediary.
(iv) Withholding statement provided by nonqualified Intermediary.
(A) In general.
(B) General requirements.
(C) Content of withholding statement.
(D) Alternative procedures.
(E) Notice procedures.
(v) Withholding certificate from certain U.S. branches.
(vi) Reportable amounts.
(4) Applicable rules.
(i) Who may sign the certificate.
(ii) Period of validity.
(A) Three-year period.
(B) Indefinite validity period.
(C) Withholding certificate for effectively connected income.
(D) Change in circumstances.
(iii) Retention of withholding certificate.
(iv) Electronic transmission of information.
(A) In general.
(B) Requirements.
(C) Special requirements for transmission of Forms W-8 by an 
          intermediary. [Reserved]
(v) Electronic confirmation of taxpayer identifying number on 
          withholding certificate.
(vi) Acceptable substitute form.
(vii) Requirement of taxpayer identifying number.
(viii) Reliance rules.
(A) Classification.
(B) Status of payee as an intermediary or as a person acting for its own 
          account.
(ix) Certificates to be furnished for each account unless exception 
          applies.
(A) Coordinated account information system in effect.
(B) Family of mutual funds.
(C) Special rule for brokers.
(5) Qualified intermediaries.
(i) General rule.
(ii) Definition of qualified intermediary.
(iii) Withholding agreement.
(A) In general.
(B) Terms of the withholding agreement.
(iv) Assignment of primary withholding responsibility.
(v) Withholding statement.
(A) General rule.
(B) Content of withholding statement.
(C) Withholding rate pools.
(f) Effective date.
(1) In general.
(2) Transition rules.
(i) Special rules for existing documentation.
(ii) Lack of documentation for past years.

             Sec. 1.1441-2  Amounts subject to withholding.

(a) In general.
(b) Fixed or determinable annual or periodical income.
(1) In general.
(i) Definition.
(ii) Manner of payment.
(iii) Determinability of amount.
(2) Exceptions.
(3) Original issue discount.
(i) Amount subject to tax.
(ii) Amounts subject to withholding.
(4) Securities lending transactions and equivalent transactions.
(c) Other income subject to withholding.
(d) Exceptions to withholding where no money or property is paid or lack 
          of knowledge.
(1) General rule.
(2) Cancellation of debt.
(3) Satisfaction of liability following underwithholding by withholding 
          agent.

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(e) Payment.
(1) General rule.
(2) Income allocated under section 482.
(3) Blocked income.
(4) Special rules for dividends.
(5) Certain interest accrued by a foreign corporation.
(6) Payments other than in U.S. dollars.
(f) Effective date.

         Sec. 1.1441-3  Determination of amounts to be withheld.

(a) Withholding on gross amount.
(b) Withholding on payments on certain obligations.
(1) Withholding at time of payment of interest.
(2) No withholding between interest payment dates.
(i) In general.
(ii) Anti-abuse rule.
(c) Corporate distributions.
(1) General rule.
(2) Exception to withholding on distributions.
(i) In general.
(ii) Reasonable estimate of accumulated and current earnings and profits 
          on the date of payment.
(A) General rule.
(B) Procedures in case of underwithholding.
(C) Reliance by intermediary on reasonable estimate.
(D) Example.
(3) Special rules in the case of distributions from a regulated 
          investment company.
(i) General rule
(ii) Reliance by intermediary on reasonable estimate.
(4) Coordination with withholding under section 1445.
(i) In general.
(A) Withholding under section 1441.
(B) Withholding under both sections 1441 and 1445.
(C) Coordination with REIT withholding.
(ii) Intermediary reliance rule.
(d) Withholding on payments that include an undetermined amount of 
          income.
(1) In general.
(2) Withholding on certain gains.
(e) Payments other than in U.S. dollars.
(1) In general.
(2) Payments in foreign currency.
(f) Tax liability of beneficial owner satisfied by withholding agent.
(1) General rule.
(2) Example.
(g) Conduit financing arrangements
(h) Effective date.

   Sec. 1.1441-4  Exemptions from withholding for certain effectively 
                   connected income and other amounts.

(a) Certain income connected with a U.S. trade or business.
(1) In general.
(2) Withholding agent's reliance on a claim of effectively connected 
          income.
(i) In general.
(ii) Special rules for U.S. branches of foreign persons.
(A) U.S. branches of certain foreign banks or foreign insurance 
          companies.
(B) Other U.S. branches.
(3) Income on notional principal contracts.
(i) General rule.
(ii) Exception for certain payments.
(b) Compensation for personal services of an individual.
(1) Exemption from withholding.
(2) Manner of obtaining withholding exemption under tax treaty.
(i) In general.
(ii) Withholding certificate claiming withholding exemption.
(iii) Review by withholding agent.
(iv) Acceptance by withholding agent.
(v) Copies of Form 8233.
(3) Withholding agreements.
(4) Final payments exemption.
(i) General rule.
(ii) Final payment of compensation for personal services.
(iii) Manner of applying for final payment exemption.
(iv) Letter to withholding agent.
(5) Requirement of return.
(6) Personal exemption.
(i) In general.
(ii) Multiple exemptions.
(iii) Special rule where both certain scholarship and compensation 
          income are received.
(c) Special rules for scholarship and fellowship income.
(1) In general.
(2) Alternate withholding election.
(d) Annuities received under qualified plans.
(e) Per diem of certain alien trainees.
(f) Failure to receive withholding certificates timely or to act in 
          accordance with applicable presumptions.
(g) Effective date.
(1) General rule.
(2) Transition rules.

  Sec. 1.1441-5  Withholding on payments to partnerships, 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 partners.
    (ii) U.S. simple trusts.
    (iii) U.S. complex trusts and U.S. estates.
    (iv) U.S. grantor trusts.
    (v) Subsequent distribution.

[[Page 60]]

(c) Foreign partnerships.
(1) Determination of payee.
(i) Payments treated as made to partners.
(ii) Payments treated as made to the partnership.
(iii) Rules for reliably associating a payment with documentation.
(iv) Examples.
(2) Withholding foreign partnerships.
(i) Reliance on claim of withholding foreign partnership status.
(ii) Withholding agreement.
(iii) Withholding responsibility.
(iv) Withholding certificate from a withholding foreign partnership.
(3) Nonwithholding foreign partnerships.
(i) Reliance on claim of foreign partnership status.
(ii) Reliance on claim of reduced withholding by a partnership for its 
          partners.
(iii) Withholding certificate from a nonwithholding foreign partnership.
(iv) Withholding statement provided by nonwithholding foreign 
          partnership.
(v) Withholding and reporting by a foreign partnership.
(d) Presumption rules.
(1) In general.
(2) Determination of partnership's status as domestic or foreign in the 
          absence of documentation.
(3) Determination of partners' status in the absence of certain 
          documentation.
    (4) Determination by a withholding foreign partnership of the status 
of its partners.
    (e) Foreign trusts and estates.
    (1) In general.
    (2) Payments to foreign complex trusts and estates.
    (3) Payees of payments to foreign simple trusts and foreign grantor 
trusts.
    (i) Payments for which beneficiaries and owners are payees.
    (ii) Payments for which trust is payee.
    (4) Reliance on claim of foreign complex trust or foreign estate 
status.
    (5) Foreign simple trust and foreign grantor trust.
    (i) Reliance on claim of foreign simple trust or foreign grantor 
trust status.
    (ii) Reliance on claim of reduced withholding by a foreign simple 
trust or foreign grantor trust for its beneficiaries or owners.
    (iii) Withholding certificate from foreign simple trust or foreign 
grantor trust.
    (iv) Withholding statement provided by a foreign simple trust or 
foreign grantor trust.
    (v) Withholding foreign trusts.
    (6) Presumption rules.
    (i) In general.
    (ii) Determination of status as U.S. or foreign trust or estate in 
the absence of documentation.
    (iii) Determination of beneficiary or owner's status in the absence 
of certain documentation.
(f) Failure to receive withholding certificate timely or to act in 
          accordance with applicable presumptions.
(g) Effective date.
(1) General rule.
(2) Transition rules.

 Sec. 1.1441-6  Claim of reduced withholding under an income tax treaty.

(a) In general.
(b) Reliance on claim of reduced withholding under an income tax treaty.
(1) In general.
    (2) Payment to fiscally transparent entity.
    (i) In general.
    (ii) Certification by qualified intermediary.
    (iii) Dual treatment.
    (iv) Examples.
    (3) Certified TIN.
    (4) Claim of benefits under an income tax treaty by a U.S. person.
    (c) Exemption from requirement to furnish a taxpayer identifying 
number and special documentary evidence rules for certain income.
(1) In general.
    (2) Income to which special rules apply.
(3) Certificate of residence.
(4) Documentary evidence establishing residence in the treaty country.
(i) Individuals.
(ii) Persons other than individuals.
(5) Statements regarding entitlement to treaty benefits.
(i) Statement regarding conditions under a limitation on benefits 
          provision.
(ii) Statement regarding whether the taxpayer derives the income.
(d) Joint owners.
(e) Competent authority.
(f) Failure to receive withholding certificate timely.
(g) Special taxpayer identifying number rule for certain foreign 
          individuals claiming treaty benefits.
(1) General rule.
(2) Special rule.
(3) Requirement that an ITIN be requested during the first business day 
          following payment.
(4) Definition of unexpected payment.
(5) Examples.
(h) Effective dates.
(1) General rule.
(2) Transition rules.

    Sec. 1.1441-7  General provisions relating to withholding agents.

(a) Withholding agent defined.
(1) In general.
(2) Examples.
(b) Standards of knowledge.
(1) In general.
(2) Reason to know.
    (3) Financial institutions--limits on reason to know.

[[Page 61]]

    (4) Rules applicable to withholding certificates.
    (i) In general.
    (ii) Examples.
    (5) Withholding certificate--establishment of foreign status.
    (6) Withholding certificate--claim of reduced rate of withholding 
under treaty.
    (7) Documentary evidence.
    (8) Documentary evidence--establishment of foreign status.
    (9) Documentary evidence--claim of reduced rate of withholding under 
treaty.
    (10) Limits on reason to know--indirect account holders.
    (11) Additional guidance.
(c) Authorized agent.
(1) In general.
(2) Authorized foreign agent.
(3) Notification.
(4) Liability of U.S. withholding agent.
(5) Filing of returns.
(d) United States obligations.
(e) Assumed obligations.
(f) Conduit financing arrangements.
(g) Effective date.

   Sec. 1.1441-8  Exemption from withholding for payments to foreign 
   governments, international organizations, foreign central banks of 
           issue, and the Bank for International Settlements.

(a) Foreign governments.
(b) Reliance on claim of exemption by foreign government.
(c) Income of a foreign central bank of issue or the Bank for 
          International
Settlements.
(1) Certain interest income.
(2) Bankers' acceptances.
(d) Exemption for payments to international organizations.
(e) Failure to receive withholding certificate timely and other 
          applicable procedures.
(f) Effective date.
(1) In general.
(2) Transition rules.

Sec. 1.1441-9  Exemption from withholding on exempt income of a foreign 
     tax-exempt organization, including foreign private foundations.

(a) Exemption from withholding for exempt income.
(b) Reliance on foreign organization's claim of exemption from 
          withholding.
(1) General rule.
(2) Withholding certificate.
(3) Presumptions in the absence of documentation.
(4) Reason to know.
(c) Failure to receive withholding certificate timely and other 
          applicable procedures.
(d) Effective date.
(1) In general.
(2) Transition rules.

[T.D. 8734, 62 FR 53421, Oct. 14, 1997, as amended by T.D. 8881, 66 FR 
32168, May 22, 2000; T.D. 9023, 67 FR 70312, Nov. 22, 2002]



Sec. 1.1441-1  Requirement for the deduction and withholding of tax on payments to foreign persons.

    (a) Purpose and scope. This section, Secs. 1.1441-2 through 1.1441-
9, and 1.1443-1 provide rules for withholding under sections 1441, 1442, 
and 1443 when a payment is made to a foreign person. This section 
provides definitions of terms used in chapter 3 of the Internal Revenue 
Code (Code) and regulations thereunder. It prescribes procedures to 
determine whether an amount must be withheld under chapter 3 of the Code 
and documentation that a withholding agent may rely upon to determine 
the status of a payee or a beneficial owner as a U.S. person or as a 
foreign person and other relevant characteristics of the payee that may 
affect a withholding agent's obligation to withhold under chapter 3 of 
the Code and the regulations thereunder. Special procedures regarding 
payments to foreign persons that act as intermediaries are also 
provided. Section 1.1441-2 defines the income subject to withholding 
under section 1441, 1442, and 1443 and the regulations under these 
sections. Section 1.1441-3 provides rules regarding the amount subject 
to withholding. Section 1.1441-4 provides exemptions from withholding 
for, among other things, certain income effectively connected with the 
conduct of a trade or business in the United States, including certain 
compensation for the personal services of an individual. Section 1.1441-
5 provides rules for withholding on payments made to flow-through 
entities and other similar arrangements. Section 1.1441-6 provides rules 
for claiming a reduced rate of withholding under an income tax treaty. 
Section 1.1441-7 defines the term withholding agent and provides due 
diligence rules governing a withholding agent's obligation to withhold. 
Section 1.1441-8 provides rules for relying on claims of exemption from 
withholding for payments to a foreign government, an international 
organization, a foreign central bank of issue, or the Bank for 
International Settlements. Sections

[[Page 62]]

1.1441-9 and 1.1443-1 provide rules for relying on claims of exemption 
from withholding for payments to foreign tax exempt organizations and 
foreign private foundations.
    (b) General rules of withholding--(1) Requirement to withhold on 
payments to foreign persons. A withholding agent must withhold 30-
percent of any payment of an amount subject to withholding made to a 
payee that is a foreign person unless it can reliably associate the 
payment with documentation upon which it can rely to treat the payment 
as made to a payee that is a U.S. person or as made to a beneficial 
owner that is a foreign person entitled to a reduced rate of 
withholding. However, a withholding agent making a payment to a foreign 
person need not withhold where the foreign person assumes responsibility 
for withholding on the payment under chapter 3 of the Code and the 
regulations thereunder as a qualified intermediary (see paragraph (e)(5) 
of this section), as a U.S. branch of a foreign person (see paragraph 
(b)(2)(iv) of this section), as a withholding foreign partnership (see 
Sec. 1.1441-5(c)(2)(i)), or as an authorized foreign agent (see 
Sec. 1.1441-7(c)(1)). This section (dealing with general rules of 
withholding and claims of foreign or U.S. status by a payee or a 
beneficial owner), and Secs. 1.1441-4, 1.1441-5, 1.1441-6, 1.1441-8, 
1.1441-9, and 1.1443-1 provide rules for determining whether 
documentation is required as a condition for reducing the rate of 
withholding on a payment to a foreign beneficial owner or to a U.S. 
payee and if so, the nature of the documentation upon which a 
withholding agent may rely in order to reduce such rate. Paragraph 
(b)(2) of this section prescribes the rules for determining who the 
payee is, the extent to which a payment is treated as made to a foreign 
payee, and reliable association of a payment with documentation. 
Paragraph (b)(3) of this section describes the applicable presumptions 
for determining the payee's status as U.S. or foreign and the payee's 
other characteristics (i.e., as an owner or intermediary, as an 
individual, partnership, corporation, etc.). Paragraph (b)(4) of this 
section lists the types of payments for which the 30-percent withholding 
rate may be reduced. Because the treatment of a payee as a U.S. or a 
foreign person also has consequences for purposes of making an 
information return under the provisions of chapter 61 of the Code and 
for withholding under other provisions of the Code, such as sections 
3402, 3405 or 3406, paragraph (b)(5) of this section lists applicable 
provisions outside chapter 3 of the Code that require certain payees to 
establish their foreign status (e.g., in order to be exempt from 
information reporting). Paragraph (b)(6) of this section describes the 
withholding obligations of a foreign person making a payment that it has 
received in its capacity as an intermediary. Paragraph (b)(7) of this 
section describes the liability of a withholding agent that fails to 
withhold at the required 30-percent rate in the absence of 
documentation. Paragraph (b)(8) of this section deals with adjustments 
and refunds in the case of overwithholding. Paragraph (b)(9) of this 
section deals with determining the status of the payee when the payment 
is jointly owned. See paragraph (c)(6) of this section for a definition 
of beneficial owner. See Sec. 1.1441-7(a) for a definition of 
withholding agent. See Sec. 1.1441-2(a) for the determination of an 
amount subject to withholding. See Sec. 1.1441-2(e) for the definition 
of a payment and when it is considered made. Except as otherwise 
provided, the provisions of this section apply only for purposes of 
determining a withholding agent's obligation to withhold under chapter 3 
of the Code and the regulations thereunder.
    (2) Determination of payee and payee's status--(i) In general. 
Except as otherwise provided in this paragraph (b)(2) and Sec. 1.1441-
5(c)(1) and (e)(3), a payee is the person to whom a payment is made, 
regardless of whether such person is the beneficial owner of the amount 
(as defined in paragraph (c)(6) of this section). A foreign payee is a 
payee who is a foreign person. A U.S. payee is a payee who is a U.S. 
person. Generally, the determination by a withholding agent of the U.S. 
or foreign status of a payee and of its other relevant characteristics 
(e.g., as a beneficial owner or intermediary, or as an individual, 
corporation, or flow-through entity) is made on the basis of

[[Page 63]]

a withholding certificate that is a Form W-8 or a Form 8233 (indicating 
foreign status of the payee or beneficial owner) or a Form W-9 
(indicating U.S. status of the payee). The provisions of this paragraph 
(b)(2), paragraph (b)(3) of this section, and Sec. 1.1441-5 (c), (d), 
and (e) dealing with determinations of payee and applicable presumptions 
in the absence of documentation, apply only to payments of amounts 
subject to withholding under chapter 3 of the Code (within the meaning 
of Sec. 1.1441-2(a)). Similar payee and presumption provisions are set 
forth under Sec. 1.6049-5(d) for payments of amounts that are not 
subject to withholding under chapter 3 of the Code (or the regulations 
thereunder) but that may be reportable under provisions of chapter 61 of 
the Code (and the regulations thereunder). See paragraph (d) of this 
section for documentation upon which the withholding agent may rely in 
order to treat the payee or beneficial owner as a U.S. person. See 
paragraph (e) of this section for documentation upon which the 
withholding agent may rely in order to treat the payee or beneficial 
owner as a foreign person. For applicable presumptions of status in the 
absence of documentation, see paragraph (b)(3) of this section and 
Sec. 1.1441-5(d). For definitions of a foreign person and U.S. person, 
see paragraph (c)(2) of this section.
    (ii) Payments to a U.S. agent of a foreign person. A withholding 
agent making a payment to a U.S. person (other than to a U.S. branch 
that is treated as a U.S. person pursuant to paragraph (b)(2)(iv) of 
this section) and who has actual knowledge that the U.S. person receives 
the payment as an agent of a foreign person must treat the payment as 
made to the foreign person. However, the withholding agent may treat the 
payment as made to the U.S. person if the U.S. person is a financial 
institution and the withholding agent has no reason to believe that the 
financial institution will not comply with its obligation to withhold. 
See paragraph (c)(5) of this section for the definition of a financial 
institution.
    (iii) Payments to wholly-owned entities--(A) Foreign-owned domestic 
entity. A payment to a wholly-owned domestic entity that is disregarded 
for federal tax purposes under Sec. 301.7701-2(c)(2) of this chapter as 
an entity separate from its owner and whose single owner is a foreign 
person shall be treated as a payment to the owner of the entity, subject 
to the provisions of paragraph (b)(2)(iv) of this section. For purposes 
of this paragraph (b)(2)(iii)(A), a domestic entity means a person that 
would be treated as a U.S. person if it had an election in effect under 
Sec. 301.7701-3(c)(1)(i) of this chapter to be treated as a corporation. 
For example, a limited liability company, A, organized under the laws of 
the State of Delaware, opens an account at a U.S. bank. Upon opening of 
the account, the bank requests A to furnish a Form W-9 as required under 
section 6049(a) and the regulations under that section. A does not have 
an election in effect under Sec. 301.7701-3(c)(1)(i) of this chapter 
and, therefore, is not treated as an organization taxable as a 
corporation, including for purposes of the exempt recipient provisions 
in Sec. 1.6049-4(c)(1). If A has a single owner and the owner is a 
foreign person (as defined in paragraph (c)(2) of this section), then A 
may not furnish a Form W-9 because it may not represent that it is a 
U.S. person for purposes of the provisions of chapters 3 and 61 of the 
Code, and section 3406. Therefore, A must furnish a Form W-8 with the 
name, address, and taxpayer identifying number (TIN) (if required) of 
the foreign person who is the single owner in the same manner as if the 
account were opened directly by the foreign single owner. See 
Secs. 1.894-1T(d) and 1.1441-6(b)(2) for special rules where the 
entity's owner is claiming a reduced rate of withholding under an income 
tax treaty.
    (B) Foreign entity. A payment to a wholly-owned foreign entity that 
is disregarded under Sec. 301.7701-2(c)(2) of this chapter as an entity 
separate from its owner shall be treated as a payment to the single 
owner of the entity, subject to the provisions of paragraph (b)(2)(iv) 
of this section if the foreign entity has a U.S. branch in the United 
States. For purposes of this paragraph (b)(2)(iii)(B), a foreign entity 
means a person that would be treated as a foreign person if it had an 
election in effect under Sec. 301.7701-3(c)(1)(i) of this chapter to be 
treated as a corporation.

[[Page 64]]

See Secs. 1.894-1T(d) and 1.1441-6(b)(2) for special rules where the 
foreign entity or its owner is claiming a reduced rate of withholding 
under an income tax treaty. Thus, for example, if the foreign entity's 
single owner is a U.S. person, the payment shall be treated as a payment 
to a U.S. person. Therefore, based on the saving clause in U.S. income 
tax treaties, such an entity may not claim benefits under an income tax 
treaty even if the entity is organized in a country with which the 
United States has an income tax treaty in effect and treats the entity 
as a non-fiscally transparent entity. See Sec. 1.894-1T(d)(6), Example 
10. Unless it has actual knowledge or reason to know that the foreign 
entity to whom the payment is made is disregarded under Sec. 301.7701-
2(c)(2) of this chapter, a withholding agent may treat a foreign entity 
as an entity separate from its owner unless it can reliably associate 
the payment with a withholding certificate from the entity's owner.
    (iv) Payments to a U.S. branch of certain foreign banks or foreign 
insurance companies--(A) U.S. branch treated as a U.S. person in certain 
cases. A payment to a U.S. branch of a foreign person is a payment to a 
foreign person. However, a U.S. branch described in this paragraph 
(b)(2)(iv)(A) and a withholding agent (including another U.S. branch 
described in this paragraph (b)(2)(iv)(A)) may agree to treat the branch 
as a U.S. person for purposes of withholding on specified payments to 
the U.S. branch. Notwithstanding the preceding sentence, a withholding 
agent making a payment to a U.S. branch treated as a U.S. person under 
this paragraph (b)(2)(iv)(A) shall not treat the branch as a U.S. person 
for purposes of reporting the payment made to the branch. Therefore, a 
payment to such U.S. branch shall be reported on Form 1042-S under 
Sec. 1.1461-1(c). Further, a U.S. branch that is treated as a U.S. 
person under this paragraph (b)(2)(iv)(A) shall not be treated as a U.S. 
person for purposes of the withholding certificate it may provide to a 
withholding agent. Therefore, the U.S. branch must furnish a U.S. branch 
withholding certificate on Form W-8 as provided in paragraph (e)(3)(v) 
of this section and not a Form W-9. An agreement to treat a U.S. branch 
as a U.S. person must be evidenced by a U.S. branch withholding 
certificate described in paragraph (e)(3)(v) of this section furnished 
by the U.S. branch to the withholding agent. A U.S. branch described in 
this paragraph (b)(2)(iv)(A) is any U.S. branch of a foreign bank 
subject to regulatory supervision by the Federal Reserve Board or a U.S. 
branch of a foreign insurance company required to file an annual 
statement on a form approved by the National Association of Insurance 
Commissioners with the Insurance Department of a State, a Territory, or 
the District of Columbia. The Internal Revenue Service (IRS) may approve 
a list of U.S. branches that may qualify for treatment as a U.S. person 
under this paragraph (b)(2)(iv)(A) (see Sec. 601.601(d)(2) of this 
chapter). See Sec. 1.6049-5(c)(5)(vi) for the treatment of U.S. branches 
as U.S. payors if they make a payment that is subject to reporting under 
chapter 61 of the Internal Revenue Code. Also see Sec. 1.6049-
5(d)(1)(ii) for the treatment of U.S. branches as foreign payees under 
chapter 61 of the Internal Revenue Code.
    (B) Consequences to the withholding agent. Any person that is 
otherwise a withholding agent regarding a payment to a U.S. branch 
described in paragraph (b)(2)(iv)(A) of this section shall treat the 
payment in one of the following ways--
    (1) As a payment to a U.S. person, in which case the withholding 
agent is not responsible for withholding on such payment to the extent 
it can reliably associate the payment with a withholding certificate 
described in paragraph (e)(3)(v) of this section that has been furnished 
by the U.S. branch under its agreement with the withholding agent to be 
treated as a U.S. person;
    (2) As a payment directly to the persons whose names are on 
withholding certificates or other appropriate documentation forwarded by 
the U.S. branch to the withholding agent when no agreement is in effect 
to treat the U.S. branch as a U.S. person for such payment, to the 
extent the withholding

[[Page 65]]

agent can reliably associate the payment with such certificates or 
documentation; or
    (3) As a payment to a foreign person of income that is effectively 
connected with the conduct of a trade or business in the United States 
if the withholding agent cannot reliably associate the payment with a 
withholding certificate from the U.S. branch or any other certificate or 
other appropriate documentation from another person. See Sec. 1.1441-
4(a)(2)(ii).
    (C) Consequences to the U.S. branch. A U.S. branch that is treated 
as a U.S. person under paragraph (b)(2)(iv)(A) of this section shall be 
treated as a separate person solely for purposes of section 1441(a) and 
all other provisions of chapter 3 of the Internal Revenue Code and the 
regulations thereunder (other than for purposes of reporting the payment 
to the U.S. branch under Sec. 1.1461-1(c) or for purposes of the 
documentation such a branch must furnish under paragraph (e)(3)(v) of 
this section) for any payment that it receives as such. Thus, the U.S. 
branch shall be responsible for withholding on the payment in accordance 
with the provisions under chapter 3 of the Internal Revenue Code and the 
regulations thereunder and other applicable withholding provisions of 
the Internal Revenue Code. For this purpose, it shall obtain and retain 
documentation from payees or beneficial owners of the payments that it 
receives as a U.S. person in the same manner as if it were a separate 
entity. For example, if a U.S. branch receives a payment on behalf of 
its home office and the home office is a qualified intermediary, the 
U.S. branch must obtain a qualified intermediary withholding certificate 
described in paragraph (e)(3)(ii) of this section from its home office. 
In addition, a U.S. branch that has not provided documentation to the 
withholding agent for a payment that is, in fact, not effectively 
connected income is a withholding agent with respect to that payment. 
See paragraph (b)(6) of this section and Sec. 1.1441-4(a)(2)(ii).
    (D) Definition of payment to a U.S. branch. A payment is treated as 
a payment to a U.S. branch of a foreign bank or foreign insurance 
company if the payment is credited to an account maintained in the 
United States in the name of a U.S. branch of the foreign person, or the 
payment is made to an address in the United States where the U.S. branch 
is located and the name of the U.S. branch appears on documents (in 
written or electronic form) associated with the payment (e.g., the check 
mailed or a letter addressed to the branch).
    (E) Payments to other U.S. branches. Similar withholding procedures 
may apply to payments to U.S. branches that are not described in 
paragraph (b)(2)(iv)(A) of this section to the extent permitted by the 
district director or the Assistant Commissioner (International). Any 
such branch must establish that its situation is analogous to that of a 
U.S. branch described in paragraph (b)(2)(iv)(A) of this section 
regarding its registration with, and regulation by, a U.S. governmental 
institution, the type and amounts of assets it is required to, or 
actually maintains in the United States, and the personnel who carry out 
the activities of the branch in the United States. In the alternative, 
the branch must establish that the withholding and reporting 
requirements under chapter 3 of the Code and the regulations thereunder 
impose an undue administrative burden and that the collection of the tax 
imposed by section 871(a) or 881(a) on the foreign person (or its 
members in the case of a foreign partnership) will not be jeopardized by 
the exemption from withholding. Generally, an undue administrative 
burden will be found to exist in a case where the person entitled to the 
income, such as a foreign insurance company, receives from the 
withholding agent income on securities issued by a single corporation, 
some of which is, and some of which is not, effectively connected with 
conduct of a trade or business within the United States and the criteria 
for determining the effective connection are unduly difficult to apply 
because of the circumstances under which such securities are held. No 
exemption from withholding shall be granted under this paragraph 
(b)(2)(iv)(E) unless the person entitled to the income complies with 
such other requirements as may be imposed by the district director or

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the Assistant Commissioner (International) and unless the district 
director or the Assistant Commissioner (International) is satisfied that 
the collection of the tax on the income involved will not be jeopardized 
by the exemption from withholding. The IRS may prescribe such procedures 
as are necessary to make these determinations (see Sec. 601.601(d)(2) of 
this chapter).
    (v) Payments to a foreign intermediary--(A) Payments treated as made 
to persons for whom the intermediary collects the payment. Except as 
otherwise provided in paragraph (b)(2)(v)(B) of this section, the payee 
of a payment to a person that the withholding agent may treat as a 
foreign intermediary in accordance with the provisions of paragraph 
(b)(3)(ii)(C) or (b)(3)(v)(A) of this section is the person or persons 
for whom the intermediary collects the payment. Thus, for example, the 
payee of a payment that the withholding agent can reliably associate 
with a withholding certificate from a qualified intermediary (defined in 
paragraph (e)(5)(ii) of this section) that does not assume primary 
withholding responsibility or a payment to a nonqualified intermediary 
are the persons for whom the qualified intermediary or nonqualified 
intermediary acts and not to the intermediary itself. See paragraph 
(b)(3)(v) of this section for presumptions that apply if the payment 
cannot be reliably associated with valid documentation. For similar 
rules for payments to flow-through entities, see Sec. 1.1441-5(c)(1) and 
(e)(3).
    (B) Payments treated as made to foreign intermediary. The payee of a 
payment to a person that the withholding agent may treat as a qualified 
intermediary is the qualified intermediary to the extent that the 
qualified intermediary assumes primary withholding responsibility under 
paragraph (e)(5)(iv) of this section for the payment. For example if a 
qualified intermediary assumes primary withholding responsibility under 
chapter 3 of the Internal Revenue Code but does not assume primary 
reporting or withholding responsibility under chapter 61 or section 3406 
of the Internal Revenue Code and therefore provides Forms W-9 for U.S. 
non-exempt recipients, the qualified intermediary is the payee except to 
the extent the payment is reliably associated with a Form W-9 from a 
U.S. non-exempt recipient.
    (vi) Other payees. A payment to a person described in Sec. 1.6049-
4(c)(1)(ii) that the withholding agent would treat as a payment to a 
foreign person without obtaining documentation for purposes of 
information reporting under section 6049 (if the payment were interest) 
is treated as a payment to a foreign payee for purposes of chapter 3 of 
the Code and the regulations thereunder (or to a foreign beneficial 
owner to the extent provided in paragraph (e)(1)(ii)(A) (6) or (7) of 
this section). Further, payments that the withholding agent can reliably 
associate with documentary evidence described in Sec. 1.6049-5(c)(1) 
relating to the payee is treated as a payment to a foreign payee. A 
payment that the withholding agent may treat as a payment to an 
authorized foreign agent (as defined in Sec. 1.1441-7(c)(2)) is treated 
as a payment to the agent and not to the persons for whom the agent 
collects the payment. See Sec. 1.1441-5 (b)(1) and (c)(1) for payee 
determinations for payments to partnerships. See Sec. 1.1441-5(e) for 
payee determinations for payments to foreign trusts or foreign estates.
    (vii) Rules for reliably associating a payment with a withholding 
certificate or other appropriate documentation--(A) Generally. The 
presumption rules of paragraph (b)(3) of this section and Secs. 1.1441-
5(d) and (e)(6) and 1.6049-5(d) apply to any payment, or portion of a 
payment, that a withholding agent cannot reliably associate with valid 
documentation. Generally, a withholding agent can reliably associate a 
payment with valid documentation if, prior to the payment, it holds 
valid documentation (either directly or through an agent), it can 
reliably determine how much of the payment relates to the valid 
documentation, and it has no actual knowledge or reason to know that any 
of the information, certifications, or statements in, or associated 
with, the documentation are incorrect. Special rules apply for payments 
made to intermediaries, flow-through entities, and certain U.S. 
branches. See paragraph (b)(2)(vii)(B) through (F) of this section. The 
documentation referred to in this paragraph

[[Page 67]]

(b)(2)(vii) is documentation described in paragraphs (c)(16) and (17) of 
this section upon which a withholding agent may rely to treat the 
payment as a payment made to a payee or beneficial owner, and to 
ascertain the characteristics of the payee or beneficial owner that are 
relevant to withholding or reporting under chapter 3 of the Internal 
Revenue Code and the regulations thereunder. For purposes of this 
paragraph (b)(2)(vii), documentation also includes the agreement that 
the withholding agent has in effect with an authorized foreign agent in 
accordance with Sec. 1.1441-7(c)(2)(i). A withholding agent that is not 
required to obtain documentation with respect to a payment is considered 
to lack documentation for purposes of this paragraph (b)(2)(vii). For 
example, a withholding agent paying U.S. source interest to a person 
that is an exempt recipient, as defined in Sec. 1.6049-4(c)(1)(ii), is 
not required to obtain documentation from that person in order to 
determine whether an amount paid to that person is reportable under an 
applicable information reporting provision under chapter 61 of the 
Internal Revenue Code. The withholding agent must, however, treat the 
payment as made to an undocumented person for purposes of chapter 3 of 
the Internal Revenue Code. Therefore, the presumption rules of paragraph 
(b)(3)(iii) of this section apply to determine whether the person is 
presumed to be a U.S. person (in which case, no withholding is required 
under this section), or whether the person is presumed to be a foreign 
person (in which case 30-percent withholding is required under this 
section). See paragraph (b)(3)(v) of this section for special reliance 
rules in the case of a payment to a foreign intermediary and 
Sec. 1.1441-5(d) and (e)(6) for special reliance rules in the case of a 
payment to a flow-through entity.
    (B) Special rules applicable to a withholding certificate from a 
nonqualified intermediary or flow-through entity. (1) In the case of a 
payment made to a nonqualified intermediary, a flow-through entity (as 
defined in paragraph (c)(23) of this section), and a U.S. branch 
described in paragraph (b)(2)(iv) of this section (other than a branch 
that is treated as a U.S. person), a withholding agent can reliably 
associate the payment with valid documentation only to the extent that, 
prior to the payment, the withholding agent can allocate the payment to 
a valid nonqualified intermediary, flow-through, or U.S. branch 
withholding certificate; the withholding agent can reliably determine 
how much of the payment relates to valid documentation provided by a 
payee as determined under paragraph (c)(12) of this section (i.e., a 
person that is not itself an intermediary, flow-through entity, or U.S. 
branch); and the withholding agent has sufficient information to report 
the payment on Form 1042-S or Form 1099, if reporting is required. See 
paragraph (e)(3)(iii) of this section for the requirements of a 
nonqualified intermediary withholding certificate, paragraph (e)(3)(v) 
of this section for the requirements of a U.S. branch certificate, and 
Secs. 1.1441-5(c)(3)(iii) and (e)(5)(iii) for the requirements of a 
flow-through withholding certificate. Thus, a payment cannot be reliably 
associated with valid documentation provided by a payee to the extent 
such documentation is lacking or unreliable, or to the extent that 
information required to allocate and report all or a portion of the 
payment to each payee is lacking or unreliable. If a withholding 
certificate attached to an intermediary, U.S. branch, or flow-through 
withholding certificate is another intermediary, U.S. branch, or flow-
through withholding certificate, the rules of this paragraph 
(b)(2)(vii)(B) apply by treating the share of the payment allocable to 
the other intermediary, U.S. branch, or flow-through entity as if the 
payment were made directly to such other entity. See paragraph 
(e)(3)(iv)(D) of this section for rules permitting information 
allocating a payment to documentation to be received after the payment 
is made.
    (2) The rules of paragraph (b)(2)(vii)(B)(1) of this section are 
illustrated by the following examples:

    Example 1. WH, a withholding agent, makes a payment of U.S. source 
interest to NQI, an intermediary that is a nonqualified intermediary. 
NQI provides a valid intermediary withholding certificate under 
paragraph (e)(3)(iii) of this section. NQI does not, however, provide 
valid documentation from the

[[Page 68]]

persons on whose behalf it receives the interest payment, and, 
therefore, the interest payment cannot be reliably associated with valid 
documentation provided by a payee. WH must apply the presumption rules 
of paragraph (b)(3)(v) of this section to the payment.
    Example 2. The facts are the same as in Example 1, except that NQI 
does attach valid beneficial owner withholding certificates (as defined 
in paragraph (e)(2)(i) of this section) from A, B, C, and D establishing 
their status as foreign persons. NQI does not, however, provide WH with 
any information allocating the payment among A, B, C, and D and, 
therefore, WH cannot determine the portion of the payment that relates 
to each beneficial owner withholding certificate. The interest payment 
cannot be reliably associated with valid documentation from a payee and 
WH must apply the presumption rules of paragraph (b)(3)(v) of this 
section to the payment. See, however, paragraph (e)(3)(iv)(D) of this 
section providing special rules permitting allocation information to be 
received after a payment is made.
    Example 3. The facts are the same as in Example 2, except that NQI 
does provide allocation information associated with its intermediary 
withholding certificate indicating that 25 percent of the interest 
payment is allocable to A and 25 percent to B. NQI does not provide any 
allocation information regarding the remaining 50 percent of the 
payment. WH may treat 25 percent of the payment as made to A and 25 
percent as made to B. The remaining 50 percent of the payment cannot be 
reliably associated with valid documentation from a payee, however, 
since NQI did not provide information allocating the payment. Thus, the 
remaining 50 percent of the payment is subject to the presumption rules 
of paragraph (b)(3)(v) of this section.
    Example 4. WH makes a payment of U.S. source interest to NQI1, an 
intermediary that is not a qualified intermediary. NQI1 provides WH with 
a valid nonqualified intermediary withholding certificate as well a 
valid beneficial owner withholding certificates from A and B and a valid 
nonqualified intermediary withholding certificate from NQI2. NQI2 has 
provided valid beneficial owner documentation from C sufficient to 
establish C's status as a foreign person. Based on information provided 
by NQI1, WH can allocate 20 percent of the interest payment to A, and 20 
percent to B. Based on information that NQI2 provided NQI1 and that NQI1 
provides to WH, WH can allocate 60 percent of the payment to NQI 2, but 
can only allocate one half of that payment (30 percent) to C. Therefore, 
WH cannot reliably associate 30 percent of the payment made to NQI2 with 
valid documentation and must apply the presumption rules of paragraph 
(b)(3)(v) of this section to that portion of the payment.

    (C) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that does not assume primary withholding 
responsibility. (1) If a payment is made to a qualified intermediary 
that does not assume primary withholding responsibility under chapter 3 
of the Internal Revenue Code or primary Form 1099 reporting and backup 
withholding responsibility under chapter 61 and section 3406 of the 
Internal Revenue Code for the payment, a withholding agent can reliably 
associate the payment with valid documentation only to the extent that, 
prior to the payment, the withholding agent has received a valid 
qualified intermediary withholding certificate and the withholding agent 
can reliably determine the portion of the payment that relates to a 
withholding rate pool, as defined in paragraph (e)(5)(v)(C) of this 
section. In the case of a withholding rate pool attributable to a U.S. 
non-exempt recipient, a payment cannot be reliably associated with valid 
documentation unless, prior to the payment, the qualified intermediary 
has provided the U.S. person's Form W-9 (or, in the absence of the form, 
the name, address, and TIN, if available, of the U.S. person) and 
sufficient information for the withholding agent to report the payment 
on Form 1099. See paragraph (e)(5)(v)(C)(2) of this section for special 
rules regarding allocation of payments among U.S. non-exempt recipients.
    (2) The rules of this paragraph (b)(2)(vii)(C) are illustrated by 
the following examples:

    Example 1. WH, a withholding agent, makes a payment of U.S. source 
dividends to QI. QI provides WH with a valid qualified intermediary 
withholding certificate on which it indicates that it does not assume 
primary withholding responsibility under chapter 3 of the Internal 
Revenue Code or primary Form 1099 reporting and backup withholding 
responsibility under chapter 61 and section 3406 of the Internal Revenue 
Code. QI does not provide any information allocating the dividend to 
withholding rate pools. WH cannot reliably associate the payment with 
valid payee documentation and therefore must apply the presumption rules 
of paragraph (b)(3)(v) of this section.
    Example 2. WH makes a payment of U.S. source dividends to QI. QI has 
5 customers: A, B, C, D, and E. QI has obtained documentation from A and 
B establishing their

[[Page 69]]

entitlement to a 15 percent rate of tax on U.S. source dividends under 
an income tax treaty. C is a U.S. person that is an exempt recipient as 
defined in paragraph (c)(20) of this section. D and E are U.S. non-
exempt recipients who have provided Forms W-9 to QI. A, B, C, D, and E 
are each entitled to 20 percent of the dividend payment. QI provides WH 
with a valid qualified intermediary withholding certificate as described 
in paragraph (e)(2)(ii) of this section with which it associates the 
Forms W-9 from D and E. QI associates the following allocation 
information with its qualified intermediary withholding certificate: 40 
percent of the payment is allocable to the 15 percent withholding rate 
pool, and 20 percent is allocable to each of D and E. QI does not 
provide any allocation information regarding the remaining 20 percent of 
the payment. WH cannot reliably associate 20 percent of the payment with 
valid documentation and, therefore, must apply the presumption rules of 
paragraph (b)(3)(v) of this section to that portion of the payment. The 
20 percent of the payment allocable to the 15 percent withholding rate 
pool, and the portion of the payments allocable to D and E are payments 
that can be reliably associated with documentation.

    (D) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary withholding 
responsibility under chapter 3 of the Internal Revenue Code. (1) In the 
case of a payment made to a qualified intermediary that assumes primary 
withholding responsibility under chapter 3 of the Internal Revenue Code 
with respect to that payment (but does not assume primary Form 1099 
reporting and backup withholding responsibility under chapter 61 and 
section 3406 of the Internal Revenue Code), a withholding agent can 
reliably associate the payment with valid documentation only to the 
extent that, prior to the payment, the withholding agent has received a 
valid qualified intermediary withholding certificate and the withholding 
agent can reliably determine the portion of the payment that relates to 
the withholding rate pool for which the qualified intermediary assumes 
primary withholding responsibility under chapter 3 of the Internal 
Revenue Code and the portion of the payment attributable to withholding 
rate pools for each U.S. non-exempt recipient for whom the qualified 
intermediary has provided a Form W-9 (or, in absence of the form, the 
name, address, and TIN, if available, of the U.S. non-exempt recipient). 
See paragraph (e)(5)(v)(C)(2) of this section for alternative allocation 
procedures for payments made to U.S. persons that are not exempt 
recipients.
    (2) Examples. The following examples illustrate the rules of 
paragraph (b)(2)(vii)(D)(1) of this section:

    Example 1. WH makes a payment of U.S. source interest to QI, a 
qualified intermediary. QI provides WH with a withholding certificate 
that indicates that QI will assume primary withholding responsibility 
under chapter 3 of the Internal Revenue Code with respect to the 
payment. In addition, QI attaches a Form W-9 from A, a U.S. non-exempt 
recipient, as defined in paragraph (c)(21) of this section, and provides 
the name, address, and TIN of B, a U.S. person that is also a non-exempt 
recipient but who has not provided a Form W-9. QI associates a 
withholding statement with its qualified intermediary withholding 
certificate indicating that 10 percent of the payment is attributable to 
A, and 10 percent to B, and that QI will assume primary withholding 
responsibility with respect to the remaining 80 percent of the payment. 
WH can reliably associate the entire payment with valid documentation. 
Although under the presumption rule of paragraph (b)(3)(v) of this 
section, an undocumented person receiving U.S. source interest is 
generally presumed to be a foreign person, WH has actual knowledge that 
B is a U.S. non-exempt recipient and therefore must report the payment 
on Form 1099 and backup withhold on the interest payment under section 
3406.
    Example 2. The facts are the same as in Example 1, except that no 
Forms W-9 or other information have been provided for the 20 percent of 
the payment that is allocable to A and B. Thus, QI has accepted 
withholding responsibility for 80 percent of the payment, but has 
provided no information for the remaining 20 percent. In this case, 20 
percent of the payment cannot be reliably associated with valid 
documentation, and WH must apply the presumption rule of paragraph 
(b)(3)(v) of this section.

    (E) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary Form 1099 reporting and 
backup withholding responsibility but not primary withholding under 
chapter 3. (1) If a payment is made to a qualified intermediary that 
assumes primary Form 1099 reporting and backup withholding 
responsibility for the payment (but does not assume primary withholding 
responsibility under chapter 3 of the Internal Revenue Code), a 
withholding agent can reliably associate the payment with valid

[[Page 70]]

documentation only to the extent that, prior to the payment, the 
withholding agent has received a valid qualified intermediary 
withholding certificate and the withholding agent can reliably determine 
the portion of the payment that relates to a withholding rate pool or 
pools provided as part of the qualified intermediary's withholding 
statement and the portion of the payment for which the qualified 
intermediary assumes primary Form 1099 reporting and backup withholding 
responsibility.
    (2) The following example illustrates the rules of paragraph 
(b)(2)((vii)(D)(1) of this section:

    Example. WH makes a payment of U.S. source dividends to QI, a 
qualified intermediary. QI has provided WH with a valid qualified 
intermediary withholding certificate. QI states on its withholding 
statement accompanying the certificate that it assumes primary Form 1099 
reporting and backup withholding responsibility but does not assume 
primary withholding responsibility under chapter 3 of the Internal 
Revenue Code. QI represents that 15 percent of the dividend is subject 
to a 30 percent rate of withholding, 75 percent of the dividend is 
subject to a 15 percent rate of withholding, and that QI assumed primary 
Form 1099 reporting and backup withholding for the remaining 10 percent 
of the payment. The entire payment can be reliably associated with valid 
documentation.

    (F) Special rules applicable to a withholding certificate provided 
by a qualified intermediary that assumes primary withholding 
responsibility under chapter 3 and primary Form 1099 reporting and 
backup withholding responsibility and a withholding certificate provided 
by a withholding foreign partnership. If a payment is made to a 
qualified intermediary that assumes both primary withholding 
responsibility under chapter 3 of the Internal Revenue Code and primary 
Form 1099 reporting and backup withholding responsibility under chapter 
61 and section 3406 of the Internal Revenue Code for the payment, a 
withholding agent can reliably associate a payment with valid 
documentation provided that it receives a valid qualified intermediary 
withholding certificate as described in paragraph (e)(3)(ii) of this 
section. In the case of a payment made to a withholding foreign 
partnership, the withholding agent can reliably associate the payment 
with valid documentation to the extent it can associate the payment with 
a valid withholding certificate described in Sec. 1.1441-5(c)(2)(iv).
    (3) Presumptions regarding payee's status in the absence of 
documentation--(i) General rules. A withholding agent that cannot, prior 
to the payment, reliably associate (within the meaning of paragraph 
(b)(2)(vii) of this section) a payment of an amount subject to 
withholding (as described in Sec. 1.1441-2(a)) with valid documentation 
may rely on the presumptions of this paragraph (b)(3) to determine the 
status of the payee as a U.S. or a foreign person and the payee's other 
relevant characteristics (e.g., as an owner or intermediary, as an 
individual, trust, partnership, or corporation). The determination of 
withholding and reporting requirements applicable to payments to a 
person presumed to be a foreign person is governed only by the 
provisions of chapter 3 of the Code and the regulations thereunder. For 
the determination of withholding and reporting requirements applicable 
to payments to a person presumed to be a U.S. person, see chapter 61 of 
the Code, section 3402, 3405, or 3406, and the regulations under these 
provisions. A presumption that a payee is a foreign payee is not a 
presumption that the payee is a foreign beneficial owner. Therefore, the 
provisions of this paragraph (b)(3) have no effect for purposes of 
reducing the withholding rate if associating the payment with 
documentation of foreign beneficial ownership is required as a condition 
for such rate reduction. See paragraph (b)(3)(ix) of this section for 
consequences to a withholding agent that fails to withhold in accordance 
with the presumptions set forth in this paragraph (b)(3) or if the 
withholding agent has actual knowledge or reason to know of facts that 
are contrary to the presumptions set forth in this paragraph (b)(3). See 
paragraph (b)(2)(vii) of this section for rules regarding the extent 
which a withholding agent can reliably associate a payment with 
documentation.
    (ii) Presumptions of classification as individual, corporation, 
partnership, etc. (A) In general. A withholding agent

[[Page 71]]

that cannot reliably associate a payment with a valid withholding 
certificate or that has received valid documentary evidence under 
Secs. 1.1441-1(e)(1)(ii)(2) and 1.6049-5(c)(1) or (4) but cannot 
determine a payee's classification from the documentary evidence must 
apply the rules of this paragraph (b)(3)(ii) to determine the payee's 
classification as an individual, trust, estate, corporation, or 
partnership. The fact that a payee is presumed to have a certain status 
under the provisions of this paragraph (b)(3)(ii) does not mean that it 
is excused from furnishing documentation if documentation is otherwise 
required to obtain a reduced rate of withholding under this section. For 
example, if, for purposes of this paragraph (b)(3)(ii), a payee is 
presumed to be a tax-exempt organization based on Sec. 1.6049-
4(c)(1)(ii)(B), the withholding agent cannot rely on this presumption to 
reduce the rate of withholding on payments to such person (if such 
person is also presumed to be a foreign person under paragraph 
(b)(3)(iii)(A) of this section) because a reduction in the rate of 
withholding for payments to a foreign tax-exempt organization generally 
requires that a valid Form W-8 described in Sec. 1.1441-9(b)(2) be 
furnished to the withholding agent.
    (B) No documentation provided. If the withholding agent cannot 
reliably associate a payment with a valid withholding certificate or 
valid documentary evidence, it must presume that the payee is an 
individual, a trust, or an estate, if the payee appears to be such 
person (e.g., based on the payee's name or other indications). In the 
absence of reliable indications that the payee is an individual, trust, 
or an estate, the withholding agent must presume that the payee is a 
corporation or one of the persons enumerated under Sec. 1.6049-
4(c)(1)(ii)(B) through (Q) if it can be so treated under Sec. 1.6049-
4(c)(1)(ii)(A)(1) or any one of the paragraphs under Sec. 1.6049-
4(c)(1)(ii)(B) through (Q) without the need to furnish documentation. If 
the withholding agent cannot treat a payee as a person described in 
Sec. 1.6049-4(c)(1)(ii)(A)(1) through (Q), then the payee shall be 
presumed to be a partnership. If such a partnership is presumed to be 
foreign, it is not the beneficial owner of the income paid to it. See 
paragraph (c)(6) of this section. If such a partnership is presumed to 
be domestic, it is a U.S. non-exempt recipient for purposes of chapter 
61 of the Internal Revenue Code.
    (C) Documentary evidence furnished for offshore account. If the 
withholding agent receives valid documentary evidence, as described in 
Sec. 1.6049-5(c)(1) or (4), with respect to an offshore account from an 
entity but the documentary evidence does not establish the entity's 
classification as a corporation, trust, estate, or partnership, the 
withholding agent may presume (in the absence of actual knowledge 
otherwise) that the entity is the type of person enumerated under 
Sec. 1.6049-4 (c)(1)(ii)(B) through (Q) if it can be so treated under 
any one of those paragraphs without the need to furnish documentation. 
If the withholding agent cannot treat a payee as a person described in 
Sec. 1.6049-4(c)(1)(ii)(B) through (Q), then the payee shall be presumed 
to be a corporation unless the withholding agent knows, or has reason to 
know, that the entity is not classified as a corporation for U.S. tax 
purposes. If a payee is, or is presumed to be, a corporation under this 
paragraph (b)(3)(ii)(C) and a foreign person under paragraph (b)(3)(iii) 
of this section, a withholding agent shall not treat the payee as the 
beneficial owner of income if the withholding agent knows, or has reason 
to know, that the payee is not the beneficial owner of the income. For 
this purpose, a withholding agent shall have reason to know that the 
payee is not a beneficial owner if the documentary evidence indicates 
that the payee is a bank, broker, intermediary, custodian, or other 
agent, or is treated under Sec. 1.6049-4(c)(1)(ii)(B) through (Q) as 
such a person. A withholding agent may, however, treat such a person as 
a beneficial owner if the foreign person provides a statement, in 
writing and signed by a person with authority to sign the statement, 
that is attached to the documentary evidence stating it is the 
beneficial owner of the income.
    (iii) Presumption of U.S. or foreign status. A payment that the 
withholding agent cannot reliably associate with documentation is 
presumed to be made to a U.S. person, except as otherwise

[[Page 72]]

provided in this paragraph (b)(3)(iii), in paragraphs (b)(3) (iv) and 
(v) of this section, or in Sec. 1.1441-5 (d) or (e).
    (A) Payments to exempt recipients. If a withholding agent cannot 
reliably associate a payment with documentation from the payee and the 
payee is an exempt recipient (as determined under the provisions of 
Sec. 1.6049-4(c)(1)(ii) in the case of interest, or under similar 
provisions under chapter 61 of the Code applicable to the type of 
payment involved, but not including a payee that the withholding agent 
may treat as a foreign intermediary in accordance with paragraph 
(b)(3)(v) of this section), the payee is presumed to be a foreign person 
and not a U.S. person--
    (1) If the withholding agent has actual knowledge of the payee's 
employer identification number and that number begins with the two 
digits ``98'';
    (2) If the withholding agent's communications with the payee are 
mailed to an address in a foreign country;
    (3) If the name of the payee indicates that the entity is the type 
of entity that is on the per se list of foreign corporations contained 
in Sec. 301.7701-2(b)(8)(i) of this chapter; or
    (4) If the payment is made outside the United States (as defined in 
Sec. 1.6049-5(e)).
    (B) Scholarships and grants. A payment representing taxable 
scholarship or fellowship grant income that does not represent 
compensation for services (but is not excluded from tax under section 
117) and that a withholding agent cannot reliably associate with 
documentation is presumed to be made to a foreign person if the 
withholding agent has a record that the payee has a U.S. visa that is 
not an immigrant visa. See section 871(c) and Sec. 1.1441-4(c) for 
applicable tax rate and withholding rules.
    (C) Pensions, annuities, etc. A payment from a trust described in 
section 401(a), an annuity plan described in section 403(a), a payment 
with respect to any annuity, custodial account, or retirement income 
account described in section 403(b), or a payment from an individual 
retirement account or individual retirement annuity described in section 
408 that a withholding agent cannot reliably associate with 
documentation is presumed to be made to a U.S. person only if the 
withholding agent has a record of a Social Security number for the payee 
and relies on a mailing address described in the following sentence. A 
mailing address is an address used for purposes of information reporting 
or otherwise communicating with the payee that is an address in the 
United States or in a foreign country with which the United States has 
an income tax treaty in effect and the treaty provides that the payee, 
if an individual resident in that country, would be entitled to an 
exemption from U.S. tax on amounts described in this paragraph 
(b)(3)(iii)(C). Any payment described in this paragraph (b)(3)(iii)(C) 
that is not presumed to be made to a U.S. person is presumed to be made 
to a foreign person. A withholding agent making a payment to a person 
presumed to be a foreign person may not reduce the 30-percent amount of 
withholding required on such payment unless it receives a withholding 
certificate described in paragraph (e)(2)(i) of this section furnished 
by the beneficial owner. For reduction in the 30-percent rate, see 
Secs. 1.1441-4(e) or 1.1441-6(b).
    (D) Certain payments to offshore accounts. A payment is presumed 
made to a foreign payee if the payment is made outside the United States 
(as defined in Sec. 1.6049-5(e)) to an offshore account (as defined in 
Sec. 1.6049-5(c)(1)) and the withholding agent does not have actual 
knowledge that the payee is a U.S. person. See Sec. 1.6049-5(d)(2) and 
(3) for exceptions to this rule.
    (iv) Grace period. A withholding agent may choose to apply the 
provisions of Sec. 1.6049-5(d)(2)(ii) regarding a 90-day grace period 
for purposes of this paragraph (b)(3) (by applying the term withholding 
agent instead of the term payor) to amounts described in Sec. 1.1441-
6(c)(2) and to amounts covered by a Form 8233 described in Sec. 1.1441-
4(b)(2)(ii). Thus, for these amounts, a withholding agent may choose to 
treat an account holder as a foreign person and withhold under chapter 3 
of the Internal Revenue Code (and the regulations thereunder) while 
awaiting documentation. For purposes of determining the rate of 
withholding under this section, the withholding agent must withhold at 
the unreduced 30-percent rate at the time that the

[[Page 73]]

amounts are credited to an account. However, a withholding agent who can 
reliably associate the payment with a withholding certificate that is 
otherwise valid within the meaning of the applicable provisions except 
for the fact that it is transmitted by facsimile may rely on that 
facsimile form for purposes of withholding at the claimed reduced rate. 
For reporting of amounts credited both before and after the grace 
period, see Sec. 1.1461-1(c)(4)(i)(A). The following adjustments shall 
be made at the expiration of the grace period:
    (A) If, at the end of the grace period, the documentation is not 
furnished in the manner required under this section and the account 
holder is presumed to be a U.S. non-exempt recipient, then backup 
withholding applies to amounts credited to the account after the 
expiration of the grace period only. Amounts credited to the account 
during the grace period shall be treated as owned by a foreign payee and 
adjustments must be made to correct any underwithholding on such amounts 
in the manner described in Sec. 1.1461-2.
    (B) If, at the end of the grace period, the documentation is not 
furnished in the manner required under this section, or if documentation 
is furnished that does not support the claimed rate reduction, and the 
account holder is presumed to be a foreign person then adjustments must 
be made to correct any underwithholding on amounts credited to the 
account during the grace period, based on the adjustment procedures 
described in Sec. 1.1461-2.
    (v) Special rules applicable to payments to foreign intermediaries--
(A) Reliance on claim of status as foreign intermediary. The presumption 
rules of paragraph (b)(3)(v)(B) of this section apply to a payment made 
to an intermediary (whether the intermediary is a qualified or 
nonqualified intermediary) that has provided a valid withholding 
certificate under paragraph (e)(3)(ii) or (iii) of this section (or has 
provided documentary evidence described in paragraph (b)(3)(ii)(C) of 
this section that indicates it is a bank, broker, custodian, 
intermediary, or other agent) to the extent the withholding agent cannot 
treat the payment as being reliably associated with valid documentation 
under the rules of paragraph (b)(2)(vii) of this section. For this 
purpose, a U.S. person's foreign branch that is a qualified intermediary 
defined in paragraph (e)(5)(ii) of this section shall be treated as a 
foreign intermediary. A payee that the withholding agent may not 
reliably treat as a foreign intermediary under this paragraph 
(b)(3)(v)(A) is presumed to be a payee other than an intermediary whose 
classification as an individual, corporation, partnership, etc., must be 
determined in accordance with paragraph (b)(3)(ii) of this section to 
the extent relevant. In addition, such payee is presumed to be a U.S. or 
a foreign payee based upon the presumptions described in paragraph 
(b)(3)(iii) of this section. The provisions of paragraph (b)(3)(v)(B) of 
this section are not relevant to a withholding agent that can reliably 
associate a payment with a withholding certificate from a person 
representing to be a qualified intermediary to the extent the qualified 
intermediary has assumed primary withholding responsibility in 
accordance with paragraph (e)(5)(iv) of this section.
    (B) Beneficial owner documentation or allocation information is 
lacking or unreliable. Any portion of a payment that the withholding 
agent may treat as made to a foreign intermediary (whether a 
nonqualified or a qualified intermediary) but that the withholding agent 
cannot treat as reliably associated with valid documentation under the 
rules of paragraph (b)(2)(vii) of this section is presumed made to an 
unknown, undocumented foreign payee. As a result, a withholding agent 
must deduct and withhold 30 percent from any payment of an amount 
subject to withholding. If a withholding certificate attached to an 
intermediary certificate is another intermediary withholding certificate 
or a flow-through withholding certificate, the rules of this paragraph 
(b)(3)(v)(B) (or Sec. 1.1441-5(d)(3) or (e)(6)(iii)) apply by treating 
the share of the payment allocable to the other intermediary or flow-
through entity as if it were made directly to the other intermediary or 
flow-through entity. Any payment of an amount subject to withholding 
that is presumed made to an undocumented foreign person must be reported 
on Form 1042-S. See Sec. 1.1461-1(c). See Sec. 1.6049-5(d) for

[[Page 74]]

payments that are not subject to withholding.
    (vi) U.S. branches. The rules of paragraph (b)(3)(v)(B) of this 
section shall apply to payments to a U.S. branch described in paragraph 
(b)(2)(iv)(A) of this section that has provided a withholding 
certificate as described in paragraph (e)(3)(v) of this section on which 
it has not agreed to be treated as a U.S. person.
    (vii) Joint payees--(A) In general. Except as provided in paragraph 
(b)(3)(vii)(B) of this section, if a withholding agent makes a payment 
to joint payees and cannot reliably associate a payment with valid 
documentation from all payees, the payment is presumed made to an 
unidentified U.S. person. However, if one of the joint payees provides a 
Form W-9 furnished in accordance with the procedures described in 
Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter, the payment 
shall be treated as made to that payee. See Sec. 31.3406(h)-2 of this 
chapter for rules to determine the relevant payee if 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 
only if each payee meets the conditions described in paragraph 
(b)(3)(iv) of this section.
    (B) Special rule for offshore accounts. If a withholding agent makes 
a payment to joint payees and cannot reliably associate a payment with 
valid documentation from all payees, the payment is presumed made to an 
unknown foreign payee if the payment is made outside the United States 
(as defined in Sec. 1.6049-5(e)) to an offshore account (as defined in 
Sec. 1.6049-5(c)(1)).
    (viii) Rebuttal of presumptions. A payee or beneficial owner may 
rebut the presumptions described in this paragraph (b)(3) by providing 
reliable documentation to the withholding agent or, if applicable, to 
the IRS.
    (ix) Effect of reliance on presumptions and of actual knowledge or 
reason to know otherwise--(A) General rule. Except as otherwise provided 
in paragraph (b)(3)(ix)(B) of this section, a withholding agent that 
withholds on a payment under section 3402, 3405 or 3406 in accordance 
with the presumptions set forth in this paragraph (b)(3) shall not be 
liable for withholding under this section even it is later established 
that the beneficial owner of the payment is, in fact, a foreign person. 
Similarly, a withholding agent that withholds on a payment under this 
section in accordance with the presumptions set forth in this paragraph 
(b)(3) shall not be liable for withholding under section 3402 or 3405 or 
for backup withholding under section 3406 even if it is later 
established that the payee or beneficial owner is, in fact, a U.S. 
person. A withholding agent that, instead of relying on the presumptions 
described in this paragraph (b)(3), relies on its own actual knowledge 
to withhold a lesser amount, not withhold, or not report a payment, even 
though reporting of the payment or withholding a greater amount would be 
required if the withholding agent relied on the presumptions described 
in this paragraph (b)(3) shall be liable for tax, interest, and 
penalties to the extent provided under section 1461 and the regulations 
under that section. See paragraph (b)(7) of this section for provisions 
regarding such liability if the withholding agent fails to withhold in 
accordance with the presumptions described in this paragraph (b)(3).
    (B) Actual knowledge or reason to know that amount of withholding is 
greater than is required under the presumptions or that reporting of the 
payment is required. Notwithstanding the provisions of paragraph 
(b)(3)(ix)(A) of this section, a withholding agent may not rely on the 
presumptions described in this paragraph (b)(3) to the extent it has 
actual knowledge or reason to know that the status or characteristics of 
the payee or of the beneficial owner are other than what is presumed 
under this paragraph (b)(3) and, if based on such knowledge or reason to 
know, it should withhold (under this section or another withholding 
provision of the Code) an amount greater than would be the case if it 
relied on the presumptions described in this paragraph (b)(3) or it 
should report (under this section or under another provision of the 
Code) an amount that would not otherwise be reportable if it relied on 
the presumptions described in this paragraph (b)(3). In such a case, the 
withholding agent must rely on its actual knowledge or

[[Page 75]]

reason to know rather than on the presumptions set forth in this 
paragraph (b)(3). Failure to do so and, as a result, failure to withhold 
the higher amount or to report the payment, shall result in liability 
for tax, interest, and penalties to the extent provided under sections 
1461 and 1463 and the regulations under those sections.
    (x) Examples. The provisions of this paragraph (b)(3) are 
illustrated by the following examples:

    Example 1. A withholding agent, W, makes a payment of U.S. source 
dividends to person X, Inc. at an address outside the United States. W 
cannot reliably associate the payment to X with documentation. Under 
Secs. 1.6042-3(b)(1)(vii) and 1.6049-4(c)(1)(ii)(A)(1), W may treat X as 
a corporation. Thus, under the presumptions described in paragraph 
(b)(3)(iii) of this section, W must presume that X is a foreign person 
(because the payment is made outside the United States). However, W 
knows that X is a U.S. person who is an exempt recipient. W may not rely 
on its actual knowledge to not withhold under this section. If W's 
knowledge is, in fact, incorrect, W would be liable for tax, interest, 
and, if applicable, penalties, under section 1461. W would be permitted 
to reduce or eliminate its liability for the tax by establishing, in 
accordance with paragraph (b)(7) of this section, that the tax is not 
due or has been satisfied. If W's actual knowledge is, in fact, correct, 
W may nevertheless be liable for tax, interest, or penalties under 
section 1461 for the amount that W should have withheld based upon the 
presumptions. W would be permitted to reduce or eliminate its liability 
for the tax by establishing, in accordance with paragraph (b)(7) of this 
section, that its actual knowledge was, in fact, correct and that no tax 
or a lesser amount of tax was due.
    Example 2. A withholding agent, W, makes a payment of U.S. source 
dividends to Y who does not qualify as an exempt recipient under 
Secs. 1.6042-3(b)(1)(vii) and 1.6049-4(c)(1)(ii). W cannot reliably 
associate the payment to Y with documentation. Under the presumptions 
described in paragraph (b)(3)(iii) of this section, W must presume that 
Y is a U.S. person who is not an exempt recipient for purposes of 
section 6042. However, W knows that Y is a foreign person. W may not 
rely on its actual knowledge to withhold under this section rather than 
backup withhold under section 3406. If W's knowledge is, in fact, 
incorrect, W would be liable for tax, interest, and, if applicable, 
penalties, under section 3403. If W's actual knowledge is, in fact, 
correct, W may nevertheless be liable for tax, interest, or penalties 
under section 3403 for the amount that W should have withheld based upon 
the presumptions. Paragraph (b)(7) of this section does not apply to 
provide relief from liability under section 3403.
    Example 3. A withholding agent, W, makes a payment of U.S. source 
dividends to X, Inc. W cannot reliably associate the payment to X, Inc. 
with documentation. X, Inc. presents none of the indicia of foreign 
status described in paragraph (b)(3)(iii)(A) of this section, but W has 
actual knowledge that X, Inc. is a foreign corporation. W may treat X, 
Inc. as an exempt recipient under Sec. 1.6042-3(b)(1)(vii). Because 
there are no indicia of foreign status, W would, absent actual knowledge 
or reason to know otherwise, be permitted to treat X, Inc. as a domestic 
corporation in accordance with the presumptions of paragraph (b)(3)(iii) 
of this section. However, under paragraph (b)(3)(ix)(B) of this section, 
W may not rely on the presumption of U.S. status since reliance on its 
actual knowledge requires that it withhold an amount greater than would 
be the case under the presumptions.
    Example 4. A withholding agent, W, is a plan administrator who makes 
pension payments to person X with a mailing address in a foreign country 
with which the United States has an income tax treaty in effect. Under 
that treaty, the type of pension income paid to X is taxable solely in 
the country of residence. The plan administrator has a record of X's 
U.S. social security number. W has no actual knowledge or reason to know 
that X is a foreign person. W may rely on the presumption of paragraph 
(b)(3)(iii)(C) of this section in order to treat X as a U.S. person. 
Therefore, any withholding and reporting requirements for the payment 
are governed by the provisions of section 3405 and the regulations under 
that section.

    (4) List of exemptions from, or reduced rates of, withholding under 
chapter 3 of the Code. A withholding agent that has determined that the 
payee is a foreign person for purposes of paragraph (b)(1) of this 
section must determine whether the payee is entitled to a reduced rate 
of withholding under section 1441, 1442, or 1443. This paragraph (b)(4) 
identifies items for which a reduction in the rate of withholding may 
apply and whether the rate reduction is conditioned upon documentation 
being furnished to the withholding agent. Documentation required under 
this paragraph (b)(4) is documentation that a withholding agent must be 
able to associate with a payment upon which it can rely to treat the 
payment as made to a foreign person that is the beneficial owner of the 
payment in accordance with paragraph (e)(1)(ii) of this section. This

[[Page 76]]

paragraph (b)(4) also cross-references other sections of the Code and 
applicable regulations in which some of these exceptions, exemptions, or 
reductions are further explained. See, for example, paragraph 
(b)(4)(viii) of this section, dealing with effectively connected income, 
that cross-references Sec. 1.1441-4(a); see paragraph (b)(4)(xv) of this 
section, dealing with exemptions from, or reductions of, withholding 
under an income tax treaty, that cross-references Sec. 1.1441-6. This 
paragraph (b)(4) is not an exclusive list of items to which a reduction 
of the rate of withholding may apply and, thus, does not preclude an 
exemption from, or reduction in, the rate of withholding that may 
otherwise be allowed under the regulations under the provisions of 
chapter 3 of the Code for a particular item of income identified in this 
paragraph (b)(4).
    (i) Portfolio interest described in section 871(h) or 881(c) and 
substitute interest payments described in Sec. 1.871-7(b)(2) or 1.881-
2(b)(2) are exempt from withholding under section 1441(a). See 
Sec. 1.871-14 for regulations regarding portfolio interest and section 
1441(c)(9) for exemption from withholding. Documentation establishing 
foreign status is required for interest on an obligation in registered 
form to qualify as portfolio interest. See section 871(h)(2)(B)(ii) and 
Sec. 1.871-14(c)(1)(ii)(C). For special documentation rules regarding 
foreign-targeted registered obligations described in Sec. 1.871-
14(e)(2), see Sec. 1.871-14(e) (3) and (4) and, in particular, 
Sec. 1.871-14(e)(4)(i)(A) and (ii)(A) regarding the time when the 
withholding agent must receive the documentation. The documentation 
furnished for purposes of qualifying interest as portfolio interest 
serves as the basis for the withholding exemption for purposes of this 
section and for purposes of establishing foreign status for purposes of 
section 6049. See Sec. 1.6049-5(b)(8). Documentation establishing 
foreign status is not required for qualifying interest on an obligation 
in bearer form described in Sec. 1.871-14(b)(1) as portfolio interest. 
However, in certain cases, documentation for portfolio interest on a 
bearer obligation may have to be furnished in order to establish foreign 
status for purposes of the information reporting provisions of section 
6049 and backup withholding under section 3406. See Sec. 1.6049-5(b)(7).
    (ii) Bank deposit interest and similar types of deposit interest 
(including original issue discount) described in section 871(i)(2)(A) or 
881(d) that are from sources within the United States are exempt from 
withholding under section 1441(a). See section 1441(c)(10). 
Documentation establishing foreign status is not required for purposes 
of this withholding exemption but may have to be furnished for purposes 
of the information reporting provisions of section 6049 and backup 
withholding under section 3406. See Sec. 1.6049-5(d)(3)(iii) for 
exceptions to the foreign payee and exempt recipient rules regarding 
this type of income. See also Sec. 1.6049-5(b)(11) for applicable 
documentation exemptions for certain bank deposit interest paid on 
obligations in bearer form.
    (iii) Bank deposit interest (including original issue discount) 
described in section 861(a)(1)(B) is exempt from withholding under 
sections 1441(a) as income that is not from U.S. sources. Documentation 
establishing foreign status is not required for purposes of this 
withholding exemption but may have to be furnished for purposes of the 
information reporting provisions of section 6049 and backup withholding 
under section 3406. Reporting requirements for payments of such interest 
are governed by section 6049 and the regulations under that section. See 
Sec. 1.6049-5(b)(12) and alternative documentation rules under 
Sec. 1.6049-5(c)(1).
    (iv) Interest or original issue discount from sources within the 
United States on certain short-term obligations described in section 
871(g)(1)(B) or 881(a)(3) is exempt from withholding under sections 
1441(a). Documentation establishing foreign status is not required for 
purposes of this withholding exemption but may have to be furnished for 
purposes of the information reporting provisions of section 6049 and 
backup withholding under section 3406. See Sec. 1.6049-5(b)(12) for 
applicable documentation for establishing foreign status and 
Sec. 1.6049-5(d)(3)(iii) for exceptions to the foreign payee and exempt 
recipient rules regarding this type of

[[Page 77]]

income. See also Sec. 1.6049-5(b)(10) for applicable documentation 
exemptions for certain obligations in bearer form.
    (v) Income from sources without the United States is exempt from 
withholding under sections 1441(a). Documentation establishing foreign 
status is not required for purposes of this withholding exemption but 
may have to be furnished for purposes of the information reporting 
provisions of section 6049 or other applicable provisions of chapter 61 
of the Code and backup withholding under section 3406. See, for example, 
Sec. 1.6049-5(b) (6) and (12) and alternative documentation rules under 
Sec. 1.6049-5(c). See also paragraph (b)(5) of this section for cross 
references to other applicable provisions of the regulations under 
chapter 61 of the Code.
    (vi) Distributions from certain domestic corporations described in 
section 871(i)(2)(B) or 881(d) are exempt from withholding under section 
1441(a). See section 1441(c)(10). Documentation establishing foreign 
status is not required for purposes of this withholding exemption but 
may have to be furnished for purposes of the information reporting 
provisions of section 6042 and backup withholding under section 3406. 
See Sec. 1.6042-3(b)(1) (iii) through (vi).
    (vii) Dividends paid by certain foreign corporations that are 
treated as income from sources within the United States by reason of 
section 861(a)(2)(B) are exempt from withholding under section 884(e)(3) 
to the extent that the distributions are paid out of earnings and 
profits in any taxable year that the corporation was subject to branch 
profits tax for that year. Documentation establishing foreign status is 
not required for purposes of this withholding exemption but may have to 
be furnished for purposes of the information reporting provisions of 
section 6042 and backup withholding under section 3406. See Sec. 1.6042-
3(b)(1) (iii) through (vii).
    (viii) Certain income that is effectively connected with the conduct 
of a U.S. trade or business is exempt from withholding under section 
1441(a). See section 1441(c)(1). Documentation establishing foreign 
status and status of the income as effectively connected must be 
furnished for purposes of this withholding exemption to the extent 
required under the provisions of Sec. 1.1441-4(a). Documentation 
furnished for this purpose also serves as documentation establishing 
foreign status for purposes of applicable information reporting 
provisions under chapter 61 of the Code and for backup withholding under 
section 3406. See, for example, Sec. 1.6041-4(a)(1).
    (ix) Certain income with respect to compensation for personal 
services of an individual that are performed in the United States is 
exempt from withholding under section 1441(a). See section 1441(c)(4) 
and Sec. 1.1441-4(b). However, such income may be subject to withholding 
as wages under section 3402. Documentation establishing foreign status 
must be furnished for purposes of any withholding exemption or reduction 
to the extent required under Sec. 1.1441-4(b) or 31.3401(a)(6)-1 (e) and 
(f) of this chapter. Documentation furnished for this purpose also 
serves as documentation establishing foreign status for purposes of 
information reporting under section 6041. See Sec. 1.6041-4(a)(1).
    (x) Amounts described in section 871(f) that are received as 
annuities from certain qualified plans are exempt from withholding under 
section 1441(a). See section 1441(c)(7). Documentation establishing 
foreign status must be furnished for purposes of the withholding 
exemption as required under Sec. 1.1441-4(d). Documentation furnished 
for this purpose also serves as documentation establishing foreign 
status for purposes of information reporting under section 6041. See 
Sec. 1.6041-4(a)(1).
    (xi) Payments to a foreign government (including a foreign central 
bank of issue) that are excludable from gross income under section 
892(a) are exempt from withholding under section 1442. See Sec. 1.1441-
8(b). Documentation establishing status as a foreign government is 
required for purposes of this withholding exemption. Payments to a 
foreign government are exempt from information reporting under chapter 
61 of the Code (see Sec. 1.6049-4(c)(1)(ii)(F)).
    (xii) Payments of certain interest income to a foreign central bank 
of issue or the Bank for International Settlements that are exempt from 
tax under

[[Page 78]]

section 895 are exempt from withholding under section 1442. 
Documentation establishing eligibility for such exemption is required to 
the extent provided in Sec. 1.1441-8(c)(1). Payments to a foreign 
central bank of issue or to the Bank for International Settlements are 
exempt from information reporting under chapter 61 of the Code (see 
Sec. 1.6049-4(c)(1)(ii) (H) and (M)).
    (xiii) Amounts derived by a foreign central bank of issue from 
bankers' acceptances described in section 871(i)(2)(C) or 881(d) are 
exempt from tax and, therefore, from withholding. See section 
1441(c)(10). Documentation establishing foreign status is not required 
for purposes of this withholding exemption if the name of the payee and 
other facts surrounding the payment reasonably indicate that the 
beneficial owner of the payment is a foreign central bank of issue as 
defined in Sec. 1.861-2(b)(4). See Sec. 1.1441-8(c)(2) for withholding 
procedures. See also Secs. 1.6049-4(c)(1)(ii)(H) and 1.6041-3(q)(8) for 
a similar exemption from information reporting.
    (xiv) Payments to an international organization from investments in 
the United States of stocks, bonds, or other domestic securities or from 
interest on deposits in banks in the United States of funds belonging to 
such international organization are exempt from tax under section 892(b) 
and, thus, from withholding. Documentation establishing status as an 
international organization is not required if the name of the payee and 
other facts surrounding the payment reasonably indicate that the 
beneficial owner of the payment is an international organization within 
the meaning of section 7701(a)(18). See Sec. 1.1441-8(d). Payments to an 
international organization are exempt from information reporting under 
chapter 61 of the Code (see Sec. 1.6049-4(c)(1)(ii)(G)).
    (xv) Amounts may be exempt from, or subject to a reduced rate of, 
withholding under an income tax treaty. Documentation establishing 
eligibility for benefits under an income tax treaty is required for this 
purpose as provided under Secs. 1.1441-6. Documentation furnished for 
this purpose also serves as documentation establishing foreign status 
for purposes of applicable information reporting provisions under 
chapter 61 of the Code and for backup withholding under section 3406. 
See, for example, Sec. 1.6041-4(a)(1).
    (xvi) Amounts of scholarships and grants paid to certain exchange or 
training program participants that do not represent compensation for 
services but are not excluded from tax under section 117 are subject to 
a reduced rate of withholding of 14-percent under section 1441(b). 
Documentation establishing foreign status is required for purposes of 
this reduction in rate as provided under Sec. 1.1441-4(c). This income 
is not subject to information reporting under chapter 61 of the Code nor 
to backup withholding under section 3406. The compensatory portion of a 
scholarship or grant is reportable as wage income. See Sec. 1.6041-3(o).
    (xvii) Amounts paid to a foreign organization described in section 
501(c) are exempt from withholding under section 1441 to the extent that 
the amounts are not income includible under section 512 in computing the 
organization's unrelated business taxable income and are not subject to 
the tax imposed by section 4948(a). Documentation establishing status as 
a tax-exempt organization is required for purposes of this exemption to 
the extent provided in Sec. 1.1441-9. Amounts includible under section 
512 in computing the organization's unrelated business taxable income 
are subject to withholding to the extent provided in section 1443(a) and 
Sec. 1.1443-1(a). Gross investment income (as defined in section 
4940(c)(2)) of a private foundation is subject to withholding at a 4-
percent rate to the extent provided in section 1443(b) and Sec. 1.1443-
1(b). Payments to a tax-exempt organization are exempt from information 
reporting under chapter 61 of the Code and the regulations thereunder 
(see Sec. 1.6049-4(c)(1)(ii)(B)(1)).
    (xviii) Per diem amounts for subsistence paid by the U.S. government 
to a nonresident alien individual who is engaged in any program of 
training in the United States under the Mutual Security Act of 1954 are 
exempt from withholding under section 1441(a). See section 1441(c)(6). 
Documentation of foreign status is not required under Sec. 1.1441-4(e) 
for purposes of establishing

[[Page 79]]

eligibility for this exemption. See Sec. 1.6041-3(p).
    (xix) Interest with respect to tax-free covenant bonds issued prior 
to 1934 is subject to special withholding procedures set forth in 
Sec. 1.1461-1 in effect prior to January 1, 2001 (see Sec. 1.1461-1 as 
contained in 26 CFR part 1, revised April 1, 1999).
    (xx) Income from certain gambling winnings of a nonresident alien 
individual is exempt from tax under section 871(j) and from withholding 
under section 1441(a). See section 1441(c)(11). Documentation 
establishing foreign status is not required for purposes of this 
exemption but may have to be furnished for purposes of the information 
reporting provisions of section 6041 and backup withholding under 
section 3406. See Secs. 1.6041-1 and 1.6041-4(a)(1).
    (xxi) Any payments not otherwise mentioned in this paragraph (b)(4) 
shall be subject to withholding at the rate of 30-percent if it is an 
amount subject to withholding (as defined in Sec. 1.1441-2(a)) unless 
and to the extent the IRS may otherwise prescribe in published guidance 
(see Sec. 601.601(d)(2) of this chapter) or unless otherwise provided in 
regulations under chapter 3 of the Code.
    (5) Establishing foreign status under applicable provisions of 
chapter 61 of the Code. This paragraph (b)(5) identifies relevant 
provisions of the regulations under chapter 61 of the Code that exempt 
payments from information reporting, and therefore, from backup 
withholding under section 3406, based on the payee's status as a foreign 
person. Many of these exemptions require that the payee's foreign status 
be established in order for the exemption to apply. The regulations 
under applicable provisions of chapter 61 of the Code generally provide 
that the documentation described in this section may be relied upon for 
purposes of determining foreign status.
    (i) Payments to a foreign person that are governed by section 6041 
(dealing with certain trade or business income) are exempt from 
information reporting under Sec. 1.6041-4(a).
    (ii) Payments to a foreign person that are governed by section 6041A 
(dealing with remuneration for services and certain sales) are exempt 
from information reporting under Sec. 1.6041A-1(d)(3).
    (iii) Payments to a foreign person that are governed by section 6042 
(dealing with dividends) are exempt from information reporting under 
Sec. 1.6042-3(b)(1) (iii) through (vi).
    (iv) Payments to a foreign person that are governed by section 6044 
(dealing with patronage dividends) are exempt from information reporting 
under Sec. 1.6044-3(c)(1).
    (v) Payments to a foreign person that are governed by section 6045 
(dealing with broker proceeds) are exempt from information reporting 
under Sec. 1.6045-1(g).
    (vi) Payments to a foreign person that are governed by section 6049 
(dealing with interest) to a foreign person are exempt from information 
reporting under Sec. 1.6049-5(b) (6) through (15).
    (vii) Payments to a foreign person that are governed by section 
6050N (dealing with royalties) are exempt from information reporting 
under Sec. 1.6050N-1(c).
    (viii) Payments to a foreign person that are governed by section 
6050P (dealing with income from cancellation of debt) are exempt from 
information reporting under section 6050P or the regulations under that 
section except to the extent provided in Notice 96-61 (1996-2 C.B. 227); 
see also Sec. 601.601(b)(2) of this chapter.
    (6) Rules of withholding for payments by a foreign intermediary or 
certain U.S. branches--(i) In general. A foreign intermediary described 
in paragraph (e)(3)(i) of this section or a U.S. branch described in 
paragraph (b)(2)(iv) of this section that receives an amount subject to 
withholding (as defined in Sec. 1.1441-2(a)) shall be required to 
withhold (if another withholding agent has not withheld the full amount 
required) and report such payment under chapter 3 of the Internal 
Revenue Code and the regulations thereunder except as otherwise provided 
in this paragraph (b)(6). A nonqualified intermediary or U.S. branch 
described in paragraph (b)(2)(iv) of this section (other than a branch 
that is treated as a U.S. person) shall not be required to withhold or 
report if it has provided a valid nonqualified intermediary withholding 
certificate

[[Page 80]]

or a U.S. branch withholding certificate, it has provided all of the 
information required by paragraph (e)(3)(iv) of this section 
(withholding statement), and it does not know, and has no reason to 
know, that another withholding agent failed to withhold the correct 
amount or failed to report the payment correctly under Sec. 1.1461-1(c). 
A qualified intermediary's obligations to withhold and report shall be 
determined in accordance with its qualified intermediary withholding 
agreement.
    (ii) Examples. The following examples illustrate the rules of 
paragraph (b)(6)(i) of this section:

    Example 1. FB, a foreign bank, acts as intermediary for five 
different persons, A, B, C, D, and E, each of whom owns U.S. securities 
that generate U.S. source dividends. The dividends are paid by USWA, a 
U.S. withholding agent. FB furnished USWA with a nonqualified 
intermediary withholding certificate, described in paragraph (e)(3)(iii) 
of this section, to which it attached the withholding certificates of 
each of A, B, C, D, and E. The withholding certificates from A and B 
claim a 15 percent reduced rate of withholding under an income tax 
treaty. C, D, and E claim no reduced rate of withholding. FB provides a 
withholding statement that meets all of the requirements of paragraph 
(e)(3)(iv) of this section, including information allocating 20 percent 
of each dividend payment to each of A, B, C, D, and E. FB does not have 
actual knowledge or reason to know that USWA did not withhold the 
correct amounts or report the dividends on Forms 1042-S to each of A, B, 
C, D, and E. FB is not required to withhold or to report the dividends 
to A, B, C, D, and E.
    Example 2. The facts are the same as in Example 1, except that FB 
did not provide any information for USWA to determine how much of the 
dividend payments were made to A, B, C, D, and E. Because USWA could not 
reliably associate the dividend payments with documentation under 
paragraph (b)(2)(vii) of this section, USWA applied the presumption 
rules of paragraph (b)(3)(v) of this section and withheld 30 percent 
from all dividend payments. In addition, USWA filed a single Form 1042-S 
reporting the payment to an unknown foreign payee. FB is deemed to know 
that USWA did not report the payment to A, B, C, D, and E because it did 
not provide all of the information required on a withholding statement 
under paragraph (e)(3)(iv) of this section (i.e., allocation 
information). Although FB is not required to withhold on the payment 
because the full 30 percent withholding was imposed by USWA, it is 
required to report the payments on Forms 1042-S to A, B, C, D, and E. 
FB's intentional failure to do so will subject it to intentional 
disregard penalties under sections 6721 and 6722.

    (7) Liability for failure to obtain documentation timely or to act 
in accordance with applicable presumptions--(i) General rule. A 
withholding agent that cannot reliably associate a payment with 
documentation on the date of payment and that does not withhold under 
this section, or withholds at less than the 30-percent rate prescribed 
under section 1441(a) and paragraph (b)(1) of this section, is liable 
under section 1461 for the tax required to be withheld under chapter 3 
of the Code and the regulations thereunder, without the benefit of a 
reduced rate unless--
    (A) The withholding agent has appropriately relied on the 
presumptions described in paragraph (b)(3) of this section (including 
the grace period described in paragraph (b)(3)(iv) of this section) in 
order to treat the payee as a U.S. person or, if applicable, on the 
presumptions described in Sec. 1.1441-4(a) (2)(ii) or (3)(i) to treat 
the payment as effectively connected income; or
    (B) The withholding agent can demonstrate to the satisfaction of the 
district director or the Assistant Commissioner (International) that the 
proper amount of tax, if any, was in fact paid to the IRS; or
    (C) No documentation is required under section 1441 or this section 
in order for a reduced rate of withholding to apply.
    (D) The withholding agent has complied with the provisions of 
Sec. 1.1441-6(c) or (g).
    (ii) Proof that tax liability has been satisfied. Proof of payment 
of tax may be established for purposes of paragraph (b)(7)(i)(B) of this 
section on the basis of a Form 4669 (or such other form as the IRS may 
prescribe in published guidance (see Sec. 601.601(d)(2) of this 
chapter)), establishing the amount of tax, if any, actually paid by or 
for the beneficial owner on the income. Proof that a reduced rate of 
withholding was, in fact, appropriate under the provisions of chapter 3 
of the Code and the regulations thereunder may also be established after 
the date of payment by the withholding agent on the basis of a valid 
withholding certificate or other appropriate documentation furnished

[[Page 81]]

after that date. However, in the case of a withholding certificate or 
other appropriate documentation received after the date of payment (or 
after the grace period specified in paragraph (b)(3)(iv) of this 
section), the district director or the Assistant Commissioner 
(International) may require additional proof if it is determined that 
the delays in obtaining the withholding certificate affect its 
reliability.
    (iii) Liability for interest and penalties. A withholding agent that 
has failed to withhold other than based on appropriate reliance on the 
presumptions described in paragraph (b)(3) of this section or in 
Sec. 1.1441-4(a) (2)(ii) or (3)(i) is not relieved from liability for 
interest under section 6601. Such liability exists even if there is no 
underlying tax liability due. The interest on the amount that should 
have been withheld shall be imposed as prescribed under section 6601 
beginning on the last date for paying the tax due under section 1461 
(which, under section 6601, is the due date for filing the withholding 
agent's return of tax). The interest shall stop accruing on the earlier 
of the date that the required withholding certificate or other 
documentation is provided to the withholding agent and to the extent of 
the amount of tax that is determined not to be due based on 
documentation provided, or the date, and to the extent, that the unpaid 
tax liability under section 871, 881 or under section 1461 is satisfied. 
Further, in the event that a tax liability is assessed against the 
beneficial owner under section 871, 881, or 882 and interest under 
section 6601(a) is assessed against, and collected from, the beneficial 
owner, the interest charge imposed on the withholding agent shall be 
abated to that extent so as to avoid the imposition of a double interest 
charge. However, the withholding agent is not relieved of any applicable 
penalties. See section 1464.
    (iv) Special effective date. See paragraph (f)(2)(ii) of this 
section for the special effective date applicable to this paragraph 
(b)(7).
    (v) Examples. The provisions of paragraph (b)(7) of this section are 
illustrated by the following examples:

    Example 1. On June 15, 2001, a withholding agent pays U.S. source 
interest on an obligation in registered form (issued after July 18, 
1984) to a foreign corporation that it cannot reliably associate with a 
Form W-8 or other appropriate documentation upon which to rely to treat 
the beneficial owner as a foreign person. The withholding agent does not 
withhold from the payment. On September 30, 2003, the withholding agent 
receives from the foreign corporation a valid Form W-8 described in 
paragraph (e)(2)(ii) of this section. Thus, the interest qualifies as 
portfolio interest retroactively to June 15, 2001 (the date of payment). 
See Sec. 1.871-14(c)(3). The foreign corporation does not file a U.S. 
federal income tax return and does not pay the tax owed. The withholding 
agent is not liable under section 1461 for the 30-percent tax on the 
interest income because the receipt of the Form W-8 exempts the interest 
from tax for purposes of sections 881(a) and 1461. The withholding 
agent, however, is liable for interest on the amount of withholding that 
should have been deducted from the payment on June 15, 2001 and 
deposited. Under paragraph (b)(7)(iii) of this section, the period 
during which interest may be assessed against the withholding agent runs 
from March 15, 2002 (the due date for the Form 1042 relating to the 
payment) until September 30, 2003 (i.e., the date that appropriate 
documentation is furnished to the withholding agent).
    Example 2. On June 15, 2001, a withholding agent pays U.S. source 
dividends to a foreign corporation that it cannot reliably associate 
with a Form W-8 or other appropriate documentation upon which to rely to 
treat the beneficial owner as a foreign person. The withholding agent 
does not withhold from the payment. On September 30, 2003, the 
withholding agent receives from the foreign corporation a valid Form W-8 
described in paragraph (e)(2)(ii) of this section claiming a reduced 15-
percent rate of withholding under a U.S. income tax treaty. The dividend 
qualifies for the reduced treaty rate retroactively to June 15, 2001 
(the date of payment). The foreign corporation does not file a U.S. 
federal income tax return and does not pay the tax owed. Under section 
1461, the withholding agent is liable only for a 15-percent tax on the 
dividend income because the receipt of the Form W-8 allows the tax rate 
to be reduced for purposes of sections 881(a) and 1461 from 30 percent 
to 15 percent. The withholding agent, however, is liable for interest on 
the full 30-percent amount that should have been deducted and withheld 
from the payment on June 15, 2001, and deposited, over a period running 
from March 15, 2002 (the due date for the Form 1042 relating to the 
payment) until September 30, 2003 (the date that the appropriate 
documentation is furnished to the withholding agent supporting a 
reduction in rate under a tax treaty). Additional interest may be 
assessed relating to the outstanding 15-percent tax liability (i.e., the

[[Page 82]]

portion of the 30-percent total tax liability that is not reduced under 
the treaty). Such additional interest runs from March 15, 2002, until 
such date as that 15-percent tax liability is satisfied by the 
withholding agent or the taxpayer (subject to abatement in order to 
avoid a double interest charge).

    (8) Adjustments, refunds, or credits of overwithheld amounts. If the 
amount withheld under section 1441, 1442, or 1443 is greater than the 
tax due by the withholding agent or the taxpayer, adjustments may be 
made in accordance with the procedures described in Sec. 1.1461-2(a). 
Alternatively, refunds or credits may be claimed in accordance with the 
procedures described in Sec. 1.1464-1, relating to refunds or credits 
claimed by the beneficial owner, or Sec. 1.6414-1, relating to refunds 
or credits claimed by the withholding agent. If an amount was withheld 
under section 3406 or is subsequently determined to have been paid to a 
foreign person, see paragraph (b)(3)(vii) of this section and 
Sec. 31.6413(a)-3(a)(1) of this chapter.
    (9) Payments to joint owners. A payment to joint owners that 
requires documentation in order to reduce the rate of withholding under 
chapter 3 of the Code and the regulations thereunder does not qualify 
for such reduced rate unless the withholding agent can reliably 
associate the payment with documentation from each owner. 
Notwithstanding the preceding sentence, a payment to joint owners 
qualifies as a payment exempt from withholding under this section if any 
one of the owners provides a certificate of U.S. status on a Form W-9 in 
accordance with paragraph (d) (2) or (3) of this section or the 
withholding agent can associate the payment with an intermediary or 
flow-through withholding certificate upon which it can rely to treat the 
payment as made to a U.S. payee under paragraph (d)(4) of this section. 
See Sec. 31.3406(h)-2(a)(3)(i)(B) of this chapter.
    (c) Definitions--(1) Withholding. The term withholding means the 
deduction and withholding of tax at the applicable rate from the 
payment.
    (2) Foreign and U.S. person. The term foreign person means a 
nonresident alien individual, a foreign corporation, a foreign 
partnership, a foreign trust, a foreign estate, and any other person 
that is not a U.S. person described in the next sentence. Solely for 
purposes of the regulations under chapter 3 of the Internal Revenue 
Code, the term foreign person also means, with respect to a payment by a 
withholding agent, a foreign branch of a U.S. person that furnishes an 
intermediary withholding certificate described in paragraph (e)(3)(ii) 
of this section. Such a branch continues to be a U.S. payor for purposes 
of chapter 61 of the Internal Revenue Code. See Sec. 1.6049-5(c)(4). A 
U.S. person is a person described in section 7701(a)(30), the U.S. 
government (including an agency or instrumentality thereof), a State 
(including an agency or instrumentality thereof), or the District of 
Columbia (including an agency or instrumentality thereof).
    (3) Individual--(i) Alien individual. The term alien individual 
means an individual who is not a citizen or a national of the United 
States. See Sec. 1.1-1(c).
    (ii) Nonresident alien individual. The term nonresident alien 
individual means a person described in section 7701(b)(1)(B), an alien 
individual who is a resident of a foreign country under the residence 
article of an income tax treaty and Sec. 301.7701(b)-7(a)(1) of this 
chapter, or an alien individual who is a resident of Puerto Rico, Guam, 
the Commonwealth of Northern Mariana Islands, the U.S. Virgin Islands, 
or American Samoa as determined under Sec. 301.7701(b)-1(d) of this 
chapter. An alien individual who has made an election under section 6013 
(g) or (h) to be treated as a resident of the United States is 
nevertheless treated as a nonresident alien individual for purposes of 
withholding under chapter 3 of the Code and the regulations thereunder.
    (4) Certain foreign corporations. For purposes of this section, a 
corporation created or organized in Guam, the Commonwealth of Northern 
Mariana Islands, the U.S. Virgin Islands, and American Samoa, is not 
treated as a foreign corporation if the requirements of sections 
881(b)(1) (A), (B), and (C) are met for such corporation. Further, a 
payment made to a foreign government or an international organization 
shall be treated as a payment made to a foreign corporation for purposes 
of withholding under chapter 3 of the Code and the regulations 
thereunder.

[[Page 83]]

    (5) Financial institution and foreign financial institution. For 
purposes of the regulations under chapter 3 of the Code, the term 
financial institution means a person described in Sec. 1.165-
12(c)(1)(iv) (not including a person providing pension or other similar 
benefits or a regulated investment company or other mutual fund, unless 
otherwise indicated) and the term foreign financial institution means a 
financial institution that is a foreign person, as defined in paragraph 
(c)(2) of this section.
    (6) Beneficial owner--(i) General rule. This paragraph (c)(6) 
defines the term beneficial owner for payments of income other than a 
payment for which a reduced rate of withholding is claimed under an 
income tax treaty. The term beneficial owner means the person who is the 
owner of the income for tax purposes and who beneficially owns that 
income. A person shall be treated as the owner of the income to the 
extent that it is required under U.S. tax principles to include the 
amount paid in gross income under section 61 (determined without regard 
to an exclusion or exemption from gross income under the Internal 
Revenue Code). Beneficial ownership of income is determined under the 
provisions of section 7701(l) and the regulations under that section and 
any other applicable general U.S. tax principles, including principles 
governing the determination of whether a transaction is a conduit 
transaction. Thus, a person receiving income in a capacity as a nominee, 
agent, or custodian for another person is not the beneficial owner of 
the income. In the case of a scholarship, the student receiving the 
scholarship is the beneficial owner of that scholarship. In the case of 
a payment of an amount that is not income, the beneficial owner 
determination 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 to an entity described in this paragraph (c)(6)(ii) are 
those persons described in paragraphs (c)(6)(ii)(B) through (D) of this 
section.
    (B) Foreign partnerships. The beneficial owners of income paid to a 
foreign partnership (whether a nonwithholding or a withholding foreign 
partnership) are the partners in the partnership, unless they themselves 
are not the beneficial owners of the income under this paragraph (c)(6). 
For example, a partnership (first tier) that is a partner in another 
partnership (second tier) is not the beneficial owner of income paid to 
the second tier partnership since the first tier partnership is not the 
owner of the income under U.S. tax principles. Rather, the partners of 
the first tier partnership are the beneficial owners (to the extent they 
are not themselves persons that are not beneficial owners under this 
paragraph (c)(6)). See Sec. 1.1441-5(b) for applicable withholding 
procedures for payments to a domestic partnership. See also Sec. 1.1441-
5(c)(3)(ii) for applicable withholding procedures for payments to a 
foreign partnership where one of the partners (at any level in the chain 
of tiers) is a domestic partnership.
    (C) Foreign simple trusts and foreign grantor trusts. The beneficial 
owners of income paid to a foreign simple trust, as described in 
paragraph (c)(23) of this section, are the beneficiaries of the trust, 
unless they themselves are not the beneficial owners of the income under 
this paragraph (c)(6). The beneficial owners of income paid to a foreign 
grantor trust, as described in paragraph (c)(26) of this section, are 
the persons treated as the owners of the trust, unless they themselves 
are not the beneficial owners of the income under this paragraph (c)(6).
    (D) Other foreign trusts and foreign estates. The beneficial owner 
of income paid to a foreign complex trust as defined in paragraph 
(c)(25) of this section or to a foreign estate is the foreign complex 
trust or estate itself.
    (7) Withholding agent. For a definition of the term withholding 
agent and applicable rules, see Sec. 1.1441-7.
    (8) Person. For purposes of the regulations under chapter 3 of the 
Code, the term person shall mean a person described in section 
7701(a)(1) and the regulations under that section and a U.S. branch to 
the extent treated as a U.S. person under paragraph (b)(2)(iv) of this 
section. For purposes of the regulations under chapter 3 of the Code, 
the term person does not include a wholly-owned entity that is 
disregarded for federal tax purposes under Sec. 301.7701-

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2(c)(2) of this chapter as an entity separate from its owner. See 
paragraph (b)(2)(iii) of this section for procedures applicable to 
payments to such entities.
    (9) Source of income. The source of income is determined under the 
provisions of part I (section 861 and following) , subchapter N, chapter 
1 of the Code and the regulations under those provisions.
    (10) Chapter 3 of the Code. For purposes of the regulations under 
sections 1441, 1442, and 1443, any reference to chapter 3 of the Code 
shall not include references to sections 1445 and 1446, unless the 
context indicates otherwise.
    (11) Reduced rate. For purposes of regulations under chapter 3 of 
the Code, and other withholding provisions of the Code, the term reduced 
rate, when used in regulations under chapter 3 of the Code, shall 
include an exemption from tax.
    (12) Payee. For purposes of chapter 3 of the Internal Revenue Code, 
the term payee of a payment is determined under paragraph (b)(2) of this 
section, Sec. 1.1441-5(c)(1) (relating to partnerships), and 
Sec. 1.1441-5(e)(2) and (3) (relating to trusts and estates) and 
includes foreign persons, U.S. exempt recipients, and U.S. non-exempt 
recipients. A nonqualified intermediary and a qualified intermediary (to 
the extent it does not assume primary withholding responsibility) are 
not payees if they are acting as intermediaries and not the beneficial 
owner of income. In addition, a flow-through entity is not a payee 
unless the income is (or is deemed to be) effectively connected with the 
conduct of a trade or business in the United States. See Sec. 1.6049-
5(d)(1) for rules to determine the payee for purposes of chapter 61 of 
the Internal Revenue Code. See Secs. 1.1441-1(b)(3), 1.1441-5(d), and 
(e)(6) and 1.6049-5(d)(3) for presumption rules that apply if a payee's 
identity cannot be determined on the basis of valid documentation.
    (13) Intermediary. An intermediary means, with respect to a payment 
that it receives, a person that, for that payment, acts as a custodian, 
broker, nominee, or otherwise as an agent for another person, regardless 
of whether such other person is the beneficial owner of the amount paid, 
a flow-through entity, or another intermediary.
    (14) Nonqualified intermediary. A nonqualified intermediary means 
any intermediary that is not a U.S. person and not a qualified 
intermediary, as defined in paragraph (e)(5)(ii) of this section, or a 
qualified intermediary that is not acting in its capacity as a qualified 
intermediary with respect to a payment. For example, to the extent an 
entity that is a qualified intermediary provides another withholding 
agent with a foreign beneficial owner withholding certificate as defined 
in paragraph (e)(2)(i) of this section, the entity is not acting in its 
capacity as a qualified intermediary. Notwithstanding the preceding 
sentence, a qualified intermediary is acting as a qualified intermediary 
to the extent it provides another withholding agent with Forms W-9, or 
other information regarding U.S. non-exempt recipients pursuant to its 
qualified intermediary agreement with the IRS.
    (15) Qualified intermediary. The term qualified intermediary is 
defined in paragraph (e)(5)(ii) of this section.
    (16) Withholding certificate. The term withholding certificate means 
a Form W-8 described in paragraph (e)(2)(i) of this section (relating to 
foreign beneficial owners), paragraph (e)(3)(i) of this section 
(relating to foreign intermediaries), Sec. 1.1441-5(c)(2)(iv), 
(c)(3)(iii), and (e)(3)(iv) (relating to flow-through entities), a Form 
8233 described in Sec. 1.1441-4(b)(2), a Form W-9 as described in 
paragraph (d) of this section, a statement described in Sec. 1.871-
14(c)(2)(v) (relating to portfolio interest), or any other certificates 
that under the Internal Revenue Code or regulations certifies or 
establishes the status of a payee or beneficial owner as a U.S. or a 
foreign person.
    (17) Documentary evidence; other appropriate documentation. The 
terms documentary evidence or other appropriate documentation refer to 
documents other than a withholding certificate that may be provided for 
payments made outside the United States to offshore accounts or any 
other evidence that under the Internal Revenue Code or regulations 
certifies or establishes the status of a payee or beneficial owner as a 
U.S. or foreign person. See Secs. 1.1441-

[[Page 85]]

6(b)(2), (c)(3) and (4) (relating to treaty benefits), and 1.6049-
5(c)(1) and (4) (relating to chapter 61 reporting). Also see 
Sec. 1.1441-4(a)(3)(ii) regarding documentary evidence for notional 
principal contracts.
    (18) Documentation. The term documentation refers to both 
withholding certificates, as defined in paragraph (c)(16) of this 
section, and documentary evidence or other appropriate documentation, as 
defined in paragraph (c)(17) of this section.
    (19) Payor. The term payor is defined in Sec. 31.3406(a)-2 of this 
chapter and Sec. 1.6049-4(a)(2) and generally includes a withholding 
agent, as defined in Sec. 1.1441-7(a). The term also includes any person 
that makes a payment to an intermediary, flow-through entity, or U.S. 
branch that is not treated as a U.S. person to the extent the 
intermediary, flow-through, or U.S. branch provides a Form W-9 or other 
appropriate information relating to a payee so that the payment can be 
reported under chapter 61 of the Internal Revenue Code and, if required, 
subject to backup withholding under section 3406. This latter rule does 
not preclude the intermediary, flow-through entity, or U.S. branch from 
also being a payor.
    (20) Exempt recipient. The term exempt recipient means a person that 
is exempt from reporting under chapter 61 of the Internal Revenue Code 
and backup withholding under section 3406 and that is described in 
Secs. 1.6041-3(q), 1.6045-2(b)(2)(i), and 1.6049-4(c)(1)(ii), and 
Sec. 5f.6045-1(c)(3)(i)(B) of this chapter. Exempt recipients are not 
exempt from withholding under chapter 3 of the Internal Revenue Code 
unless they are U.S. persons or foreign persons entitled to an exemption 
from withholding under chapter 3.
    (21) Non-exempt recipient. A non-exempt recipient is any person that 
is not an exempt recipient under paragraph (c)(20) of this section.
    (22) Reportable amounts. Reportable amounts are defined in paragraph 
(e)(3)(vi) of this section.
    (23) Flow-through entity. A flow-through entity means any entity 
that is described in this paragraph (c)(23) and that may provide 
documentation on behalf of others to a withholding agent. The entities 
described in this paragraph are a foreign partnership (other than a 
withholding foreign partnership), a foreign simple trust (other than a 
withholding foreign trust) that is described in paragraph (c)(24) of 
this section, a foreign grantor trust (other than a withholding foreign 
trust) that is described in paragraph (c)(25) of this section, or, for 
any payments for which a reduced rate of withholding under an income tax 
treaty is claimed, any entity to the extent the entity is considered to 
be fiscally transparent under section 894 with respect to the payment by 
an interest holder's jurisdiction.
    (24) Foreign simple trust. A foreign simple trust is a foreign trust 
that is described in section 651(a).
    (25) Foreign complex trust. A foreign complex trust is a foreign 
trust other than a trust described in section 651(a) or sections 671 
through 679.
    (26) Foreign grantor trust. A foreign grantor trust is a foreign 
trust but only to the extent all or a portion of the income of the trust 
is treated as owned by the grantor or another person under sections 671 
through 679.
    (27) Partnership. The term partnership means any entity treated as a 
partnership under Sec. 301.7701-2 or -3 of this chapter.
    (28) Nonwithholding foreign partnership. A nonwithholding foreign 
partnership is a foreign partnership that is not a withholding foreign 
partnership, as defined in Sec. 1.1441-5(c)(2)(i).
    (29) Withholding foreign partnership. A withholding foreign 
partnership is defined in Sec. 1.1441-5(c)(2)(i).
    (d) Beneficial owner's or payee's claim of U.S. status--(1) In 
general. Under paragraph (b)(1) of this section, a withholding agent is 
not required to withhold under chapter 3 of the Code on payments to a 
U.S. payee, to a person presumed to be a U.S. payee in accordance with 
the provisions of paragraph (b)(3) of this section, or to a person that 
the withholding agent may treat as a U.S. beneficial owner of the 
payment. Absent actual knowledge or reason to know otherwise, a 
withholding agent may rely on the provisions of this paragraph (d) in 
order to determine whether to treat a payee or beneficial owner as a 
U.S. person.
    (2) Payments for which a Form W-9 is otherwise required. A 
withholding agent

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may treat as a U.S. payee any person who is required to furnish a Form 
W-9 and who furnishes it in accordance with the procedures described in 
Secs. 31.3406(d)-1 through 31.3406(d)-5 of this chapter (including the 
requirement that the payee furnish its taxpayer identifying number 
(TIN)) if the withholding agent meets all the requirements described in 
Sec. 31.3406(h)-3(e) of this chapter regarding reliance by a payor on a 
Form W-9. Providing a Form W-9 or valid substitute form shall serve as a 
statement that the person whose name is on the form is a U.S. person. 
Therefore, a foreign person, including a U.S. branch treated as a U.S. 
person under paragraph (b)(2)(iv) of this section, shall not provide a 
Form W-9. A U.S. branch of a foreign person may establish its status as 
a foreign person exempt from reporting under chapter 61 and backup 
withholding under section 3406 by providing a withholding certificate on 
Form W-8.
    (3) Payments for which a Form W-9 is not otherwise required. In the 
case of a payee who is not required to furnish a Form W-9 under section 
3406 (e.g., a person exempt from reporting under chapter 61 of the 
Internal Revenue Code), the withholding agent may treat the payee as a 
U.S. payee if the payee provides the withholding agent with a Form W-9 
or a substitute form described in Sec. 31.3406(h)-3(c)(2) of this 
chapter (relating to forms for exempt recipients) that contains the 
payee's name, address, and TIN. The form must be signed under penalties 
of perjury by the payee if so required by the form or by 
Sec. 31.3406(h)-3 of this chapter. Providing a Form W-9 or valid 
substitute form shall serve as a statement that the person whose name is 
on the certificate is a U.S. person. A Form W-9 or valid substitute form 
shall not be provided by a foreign person, including any U.S. branch of 
a foreign person whether or not the branch is treated as a U.S. person 
under paragraph (b)(2)(iv) of this section. See paragraph (e)(3)(v) of 
this section for withholding certificates provided by U.S. branches 
described in paragraph (b)(2)(iv) of this section. The procedures 
described in Sec. 31.3406(h)-2(a) of this chapter shall apply to 
payments to joint payees. A withholding agent that receives a Form W-9 
to satisfy this paragraph (d)(3) must retain the form in accordance with 
the provisions of Sec. 31.3406(h)-3(g) of this chapter, if applicable, 
or of paragraph (e)(4)(iii) of this section (relating to the retention 
of withholding certificates) if Sec. 31.3406(h)-3(g) of this chapter 
does not apply. The rules of this paragraph (d)(3) are only intended to 
provide a method by which a withholding agent may determine that a payee 
is a U.S. person and do not otherwise impose a requirement that 
documentation be furnished by a person who is otherwise treated as an 
exempt recipient for purposes of the applicable information reporting 
provisions under chapter 61 of the Internal Revenue Code (e.g., 
Sec. 1.6049-4(c)(1)(ii) for payments of interest).
    (4) When a payment to an intermediary or flow-through entity may be 
treated as made to a U.S. payee. A withholding agent that makes a 
payment to an intermediary (whether a qualified intermediary or 
nonqualified intermediary), a flow-through entity, or a U.S. branch 
described in paragraph (b)(2)(iv) of this section may treat the payment 
as made to a U.S. payee to the extent that, prior to the payment, the 
withholding agent can reliably associate the payment with a Form W-9 
described in paragraph (d)(2) or (3) of this section attached to a valid 
intermediary, flow-through, or U.S. branch withholding certificate 
described in paragraph (e)(3)(i) of this section or to the extent the 
withholding agent can reliably associate the payment with a Form W-8 
described in paragraph (e)(3)(v) of this section that evidences an 
agreement to treat a U.S. branch described in paragraph (b)(2)(iv) of 
this section as a U.S. person. In addition, a withholding agent may 
treat the payment as made to a U.S. payee only if it complies with the 
electronic confirmation procedures described in paragraph (e)(4)(v) of 
this section, if required, and it has not been notified by the IRS that 
any of the information on the withholding certificate or other 
documentation is incorrect or unreliable. In the case of a Form W-9 that 
is required to be furnished for a reportable payment that may be subject 
to backup withholding, the withholding agent

[[Page 87]]

may be notified in accordance with section 3406(a)(1)(B) and the 
regulations under that section. See applicable procedures under section 
3406(a)(1)(B) and the regulations under that section for payors who have 
been notified with regard to such a Form W-9. Withholding agents who 
have been notified in relation to other Forms W-9, including under 
section 6724(b) pursuant to section 6721, may rely on the withholding 
certificate or other documentation only to the extent provided under 
procedures as prescribed by the IRS (see Sec. 601.601(d)(2) of this 
chapter).
    (e) Beneficial owner's claim of foreign status--(1) Withholding 
agent's reliance--(i) In general. Absent actual knowledge or reason to 
know otherwise, a withholding agent may treat a payment as made to a 
foreign beneficial owner in accordance with the provisions of paragraph 
(e)(1)(ii) of this section. See paragraph (e)(4)(viii) of this section 
for applicable reliance rules. See paragraph (b)(4) of this section for 
a description of payments for which a claim of foreign status is 
relevant for purposes of claiming a reduced rate of withholding for 
purposes of section 1441, 1442, or 1443. See paragraph (b)(5) of this 
section for a list of payments for which a claim of foreign status is 
relevant for other purposes, such as claiming an exemption from 
information reporting under chapter 61 of the Code.
    (ii) Payments that a withholding agent may treat as made to a 
foreign person that is a beneficial owner--(A) General rule. The 
withholding agent may treat a payment as made to a foreign person that 
is a beneficial owner if it complies with the requirements described in 
paragraph (e)(1)(ii)(B) of this section and, then, only to the extent--
    (1) That the withholding agent can reliably associate the payment 
with a beneficial owner withholding certificate described in paragraph 
(e)(2) of this section furnished by the person whose name is on the 
certificate or attached to a valid foreign intermediary, flow-through, 
or U.S. branch withholding certificate;
    (2) That the payment is made outside the United States (within the 
meaning of Sec. 1.6049-5(e)) to an offshore account (within the meaning 
of Sec. 1.6049-5(c)(1)) and the withholding agent can reliably associate 
the payment with documentary evidence described in Secs. 1.1441-6(c)(3) 
or (4), or 1.6049-5(c)(1) relating to the beneficial owner;
    (3) That the withholding agent can reliably associate the payment 
with a valid qualified intermediary withholding certificate, as 
described in paragraph (e)(3)(ii) of this section, and the qualified 
intermediary has provided sufficient information for the withholding 
agent to allocate the payment to a withholding rate pool other than a 
withholding rate pool or pools established for U.S. non-exempt 
recipients;
    (4) That the withholding agent can reliably associate the payment 
with a withholding certificate described in Sec. 1.1441-5(c)(3)(iii) or 
(e)(5)(iii) from a flow-through entity claiming the income is 
effectively connected income;
    (5) That the withholding agent identifies the payee as a U.S. branch 
described in paragraph (b)(2)(iv) of this section, the payment to which 
it treats as effectively connected income in accordance with 
Sec. 1.1441-4(a) (2)(ii) or (3);
    (6) That the withholding agent identifies the payee as an 
international organization (or any wholly-owned agency or 
instrumentality thereof) as defined in section 7701(a)(18) that has been 
designated as such by executive order (pursuant to 22 U.S.C. 288 through 
288(f)); or
    (7) That the withholding agent pays interest from bankers' 
acceptances and identifies the payee as a foreign central bank of issue 
(as defined in Sec. 1.861-2(b)(4)).
    (B) Additional requirements. In order for a payment described in 
paragraph (e)(1)(ii)(A) of this section to be treated as made to a 
foreign beneficial owner, the withholding agent must hold the 
documentation (if required) prior to the payment, comply with the 
electronic confirmation procedures described in paragraph (e)(4)(v) of 
this section (if required), and must not have been notified by the IRS 
that any of the information on the withholding certificate or other 
documentation is incorrect or unreliable. If the withholding agent has 
been so notified, it may rely on the withholding certificate

[[Page 88]]

or other documentation only to the extent provided under procedures 
prescribed by the IRS (see Sec. 601.601(d)(2) of this chapter). See 
paragraph (b)(2)(vii) of this section for rules regarding reliable 
association of a payment with a withholding certificate or other 
appropriate documentation.
    (2) Beneficial owner withholding certificate--(i) In general. A 
beneficial owner withholding certificate is a statement by which the 
beneficial owner of the payment represents that it is a foreign person 
and, if applicable, claims a reduced rate of withholding under section 
1441. A separate withholding certificate must be submitted to each 
withholding agent. If the beneficial owner receives more than one type 
of payment from a single withholding agent, the beneficial owner may 
have to submit more than one withholding certificate to the single 
withholding agent for the different types of payments as may be required 
by the applicable forms and instructions, or as the withholding agent 
may require (such as to facilitate the withholding agent's compliance 
with its obligations to determine withholding under this section or the 
reporting of the amounts under Sec. 1.1461-1 (b) and (c)). For example, 
if a beneficial owner claims that some but not all of the income it 
receives is effectively connected with the conduct of a trade or 
business in the United States, it may be required to submit two separate 
withholding certificates, one for income that is not effectively 
connected and one for income that is so connected. See Sec. 1.1441-
6(b)(2) for special rules for determining who must furnish a beneficial 
owner withholding certificate when a benefit is claimed under an income 
tax treaty. See paragraph (e)(4)(ix) of this section for reliance rules 
in the case of certificates held by another person or at a different 
branch location of the same person.
    (ii) Requirements for validity of certificate. A beneficial owner 
withholding certificate is valid only if it is provided on a Form W-8, 
or a Form 8233 in the case of personal services income described in 
Sec. 1.1441-4(b) or certain scholarship or grant amounts described in 
Sec. 1.1441-4(c) (or a substitute form described in paragraph (e)(4)(vi) 
of this section, or such other form as the IRS may prescribe). A Form W-
8 is valid only if its validity period has not expired, it is signed 
under penalties of perjury by the beneficial owner, and it contains all 
of the information required on the form. The required information is the 
beneficial owner's name, permanent residence address, and TIN (if 
required), the country under the laws of which the beneficial owner is 
created, incorporated, or governed (if a person other than an 
individual), the classification of the entity, and such other 
information as may be required by the regulations under section 1441 or 
by the form or accompanying instructions in addition to, or in lieu of, 
the information described in this paragraph (e)(2)(ii). A person's 
permanent residence address is an address in the country where the 
person claims to be a resident for purposes of that country's income 
tax. In the case of a certificate furnished in order to claim a reduced 
rate of withholding under an income tax treaty, the residence must be 
determined in the manner prescribed under the applicable treaty. See 
Sec. 1.1441-6(b). The address of a financial institution with which the 
beneficial owner maintains an account, a post office box, or an address 
used solely for mailing purposes is not a residence address for this 
purpose. If the beneficial owner is an individual who does not have a 
tax residence in any country, the permanent residence address is the 
place at which the beneficial owner normally resides. If the beneficial 
owner is not an individual and does not have a tax residence in any 
country, then the permanent residence address is the place at which the 
person maintains its principal office. See paragraph (e)(4)(vii) of this 
section for circumstances in which a TIN is required on a beneficial 
owner withholding certificate. See paragraph (f)(2)(i) of this section 
for continued validity of certificates during a transition period.
    (3) Intermediary, flow-through, or U.S. branch withholding 
certificate--(i) In general. An intermediary withholding certificate is 
a Form W-8 by which a payee represents that it is a foreign person and 
that it is an intermediary (whether a qualified or nonqualified

[[Page 89]]

intermediary) with respect to a payment and not the beneficial owner. 
See paragraphs (e)(3)(ii) and (iii) of this section. A flow-through 
withholding certificate is a Form W-8 used by a flow-through entity as 
defined in paragraph (c)(23) of this section. See Sec. 1.1441-
5(c)(3)(iii) (a nonwithholding foreign partnership), Sec. 1.1441-
5(e)(5)(iii) (a foreign simple trust or foreign grantor trust) or 
Sec. 1.1441-6(b)(2) (foreign entity presenting claims on behalf of its 
interest holders for a reduced rate of withholding under an income tax 
treaty). A U.S. branch certificate is a Form W-8 furnished under 
paragraph (e)(3)(v) of this section by a U.S. branch described in 
paragraph (b)(2)(iv) of this section. See paragraph (e)(4)(viii) of this 
section for applicable reliance rules.
    (ii) Intermediary withholding certificate from a qualified 
intermediary. A qualified intermediary shall provide a qualified 
intermediary withholding certificate for reportable amounts received by 
the qualified intermediary. See paragraph (e)(3)(vi) of this section for 
the definition of reportable amount. A qualified intermediary 
withholding certificate is valid only if it is furnished on a Form W-8, 
an acceptable substitute form, or such other form as the IRS may 
prescribe, it is signed under penalties of perjury by a person with 
authority to sign for the qualified intermediary, its validity has not 
expired, and it contains the following information, statement, and 
certifications--
    (A) The name, permanent residence address (as described in paragraph 
(e)(2)(ii) of this section), qualified intermediary employer 
identification number (QI-EIN), and the country under the laws of which 
the intermediary is created, incorporated, or governed. A qualified 
intermediary that does not act in its capacity as a qualified 
intermediary must not use its QI-EIN. Rather the intermediary should 
provide a nonqualified intermediary withholding certificate, if it is 
acting as an intermediary, and should use the taxpayer identification 
number, if any, that it uses for all other purposes;
    (B) A certification that, with respect to accounts it identifies on 
its withholding statement (as described in paragraph (e)(5)(v) of this 
section), the qualified intermediary is not acting for its own account 
but is acting as a qualified intermediary;
    (C) A certification that the qualified intermediary has provided, or 
will provide, a withholding statement as required by paragraph (e)(5)(v) 
of this section; and
    (D) Any other information, certifications, or statements as may be 
required by the form or accompanying instructions in addition to, or in 
lieu of, the information and certifications described in this paragraph 
(e)(3)(ii) or paragraph (e)(3)(v) of this section. See paragraph 
(e)(5)(v) of this section for the requirements of a withholding 
statement associated with the qualified intermediary withholding 
certificate.
    (iii) Intermediary withholding certificate from a nonqualified 
intermediary. A nonqualified intermediary shall provide a nonqualified 
intermediary withholding certificate for reportable amounts received by 
the nonqualified intermediary. See paragraph (e)(3)(vi) of this section 
for the definition of reportable amount. A nonqualified intermediary 
withholding certificate is valid only to the extent it is furnished on a 
Form W-8, an acceptable substitute form, or such other form as the IRS 
may prescribe, it is signed under penalties of perjury by a person 
authorized to sign for the nonqualified intermediary, it contains the 
information, statements, and certifications described in this paragraph 
(e)(3)(iii) and paragraph (e)(3)(iv) of this section, its validity has 
not expired, and the withholding certificates and other appropriate 
documentation for all persons to whom the certificate relates are 
associated with the certificate. Withholding certificates and other 
appropriate documentation consist of beneficial owner withholding 
certificates described in paragraph (e)(2)(i) of this section, 
intermediary and flow-through withholding certificates described in 
paragraph (e)(3)(i) of this section, withholding foreign partnership 
certificates described in Sec. 1.1441-5(c)(2)(iv), documentary evidence 
described in Secs. 1.1441-6(c)(3) or (4) and 1.6049-5(c)(1), and any 
other documentation or certificates applicable under other provisions of 
the Internal Revenue Code or regulations

[[Page 90]]

that certify or establish the status of the payee or beneficial owner as 
a U.S. or a foreign person. If a nonqualified intermediary is acting on 
behalf of another nonqualified intermediary or a flow-through entity, 
then the nonqualified intermediary must associate with its own 
withholding certificate the other nonqualified intermediary withholding 
certificate or the flow-through withholding certificate and separately 
identify all of the withholding certificates and other appropriate 
documentation that are associated with the withholding certificate of 
the other nonqualified intermediary or flow-through entity. Nothing in 
this paragraph (e)(3)(iii) shall require an intermediary to furnish 
original documentation. Copies of certificates or documentary evidence 
may be transmitted to the U.S. withholding agent, in which case the 
nonqualified intermediary must retain the original documentation for the 
same time period that the copy is required to be retained by the 
withholding agent under paragraph (e)(4)(iii) of this section and must 
provide it to the withholding agent upon request. For purposes of this 
paragraph (e)(3)(iii), a valid intermediary withholding certificate also 
includes a statement described in Sec. 1.871-14(c)(2)(v) furnished for 
interest to qualify as portfolio interest for purposes of sections 
871(h) and 881(c). The information and certifications required on a Form 
W-8 described in this paragraph (e)(3)(iii) are as follows--
    (A) The name and permanent resident address (as described in 
paragraph (e)(2)(ii) of this section) of the nonqualified intermediary, 
and the country under the laws of which the nonqualified intermediary is 
created, incorporated, or governed;
    (B) A certification that the nonqualified intermediary is not acting 
for its own account;
    (C) If the nonqualified intermediary withholding certificate is used 
to transmit withholding certificates or other appropriate documentation 
for more than one person on whose behalf the nonqualified intermediary 
is acting, a withholding statement associated with the Form W-8 that 
provides all the information required by paragraph (e)(3)(iv) of this 
section; and
    (D) Any other information, certifications, or statements as may be 
required by the form or accompanying instructions in addition to, or in 
lieu of, the information, certifications, and statements described in 
this paragraph (e)(3)(iii) or paragraph (e)(5)(iv) of this section.
    (iv) Withholding statement provided by nonqualified intermediary--
(A) In general. A nonqualified intermediary shall provide a withholding 
statement required by this paragraph (e)(3)(iv) to the extent the 
nonqualified intermediary is required to furnish, or does furnish, 
documentation for payees on whose behalf it receives reportable amounts 
(as defined in paragraph (e)(3)(vi) of this section) or to the extent it 
otherwise provides the documentation of such payees to a withholding 
agent. A nonqualified intermediary is not required to disclose 
information regarding persons for whom it collects reportable amounts 
unless it has actual knowledge that any such person is a U.S. non-exempt 
recipient as defined in paragraph (c)(21) of this section. Information 
regarding U.S. non-exempt recipients required under this paragraph 
(e)(3)(iv) must be provided irrespective of any requirement under 
foreign law that prohibits the disclosure of the identity of an account 
holder of a nonqualified intermediary or financial information relating 
to such account holder. Although a nonqualified intermediary is not 
required to provide documentation and other information required by this 
paragraph (e)(3)(iv) for persons other than U.S. non-exempt recipients, 
a withholding agent that does not receive documentation and such 
information must apply the presumption rules of paragraph (b) of this 
section, Secs. 1.1441-5(d) and (e)(6) and 1.6049-5(d) or the withholding 
agent shall be liable for tax, interest, and penalties. A withholding 
agent must apply the presumption rules even if it is not required under 
chapter 61 of the Internal Revenue Code to obtain documentation to treat 
a payee as an exempt recipient and even though it has actual knowledge 
that the payee is a U.S. person. For example, if a nonqualified 
intermediary fails to provide a withholding agent with a Form W-9

[[Page 91]]

for an account holder that is a U.S. exempt recipient, the withholding 
agent must presume (even if it has actual knowledge that the account 
holder is a U.S. exempt recipient), that the account holder is an 
undocumented foreign person with respect to amounts subject to 
withholding. See paragraph (b)(3)(v) of this section for applicable 
presumptions. Therefore, the withholding agent must withhold 30 percent 
from the payment even though if a Form W-9 had been provided, no 
withholding or reporting on the payment attributable to a U.S. exempt 
recipient would apply. Further, a nonqualified intermediary that fails 
to provide the documentation and the information under this paragraph 
(e)(3)(iv) for another withholding agent to report the payments on Forms 
1042-S and Forms 1099 is not relieved of its responsibility to file 
information returns. See paragraph (b)(6) of this section. Therefore, 
unless the nonqualified intermediary itself files such returns and 
provides copies to the payees, it shall be liable for penalties under 
sections 6721 (failure to file information returns), and 6722 (failure 
to furnish payee statements), including the penalties under those 
sections for intentional failure to file information returns. In 
addition, failure to provide either the documentation or the information 
required by this paragraph (e)(3)(iv) results in a payment not being 
reliably associated with valid documentation. Therefore, the beneficial 
owners of the payment are not entitled to reduced rates of withholding 
and if the full amount required to be held under the presumption rules 
is not withheld by the withholding agent, the nonqualified intermediary 
must withhold the difference between the amount withheld by the 
withholding agent and the amount required to be withheld. Failure to 
withhold shall result in the nonqualified intermediary being liable for 
tax under section 1461, interest, and penalties, including penalties 
under section 6656 (failure to deposit) and section 6672 (failure to 
collect and pay over tax).
    (B) General requirements. A withholding statement must be provided 
prior to the payment of a reportable amount and must contain the 
information specified in paragraph (e)(3)(iv)(C) of this section. The 
statement must be updated as often as required to keep the information 
in the withholding statement correct prior to each subsequent payment. 
The withholding statement forms an integral part of the withholding 
certificate provided under paragraph (e)(3)(iii) of this section, and 
the penalties of perjury statement provided on the withholding 
certificate shall apply to the withholding statement. The withholding 
statement may be provided in any manner the nonqualified intermediary 
and the withholding agent mutually agree, including electronically. If 
the withholding statement is provided electronically, there must be 
sufficient safeguards to ensure that the information received by the 
withholding agent is the information sent by the nonqualified 
intermediary and all occasions of user access that result in the 
submission or modification of the withholding statement information must 
be recorded. In addition, an electronic system must be capable of 
providing a hard copy of all withholding statements provided by the 
nonqualified intermediary. A withholding agent will be liable for tax, 
interest, and penalties in accordance with paragraph (b)(7) of this 
section to the extent it does not follow the presumption rules of 
paragraph (b)(3) of this section or Secs. 1.1441-5(d) and (e)(6), and 
1.6049-5(d) for any payment of a reportable amount, or portion thereof, 
for which it does not have a valid withholding statement prior to making 
a payment.
    (C) Content of withholding statement. The withholding statement 
provided by a nonqualified intermediary must contain the information 
required by this paragraph (e)(3)(iv)(C).
    (1) The withholding statement must contain the name, address, TIN 
(if any) and the type of documentation (documentary evidence, Form W-9, 
or type of Form W-8) for every person from whom documentation has been 
received by the nonqualified intermediary and provided to the 
withholding agent and whether that person is a U.S. exempt recipient, a 
U.S. non-exempt recipient, or a foreign person. See paragraphs (c)(2), 
(20), and (21) of this section for the definitions of foreign person, 
U.S. exempt recipient, and

[[Page 92]]

U.S. non-exempt recipient. In the case of a foreign person, the 
statement must indicate whether the foreign person is a beneficial owner 
or an intermediary, flow-through entity, or U.S. branch described in 
paragraph (b)(2)(iv) of this section and include the type of recipient, 
based on recipient codes used for filing Forms 1042-S, if the foreign 
person is a recipient as defined in Sec. 1.1461-1(c)(1)(ii).
    (2) The withholding statement must allocate each payment, by income 
type, to every payee (including U.S. exempt recipients) for whom 
documentation has been provided. Any payment that cannot be reliably 
associated with valid documentation from a payee shall be treated as 
made to an unknown payee in accordance with the presumption rules of 
paragraph (b) of this section and Secs. 1.1441-5(d) and (e)(6) and 
1.6049-5(d). For this purpose, a type of income is determined by the 
types of income required to be reported on Forms 1042-S or 1099, as 
appropriate. Notwithstanding the preceding sentence, deposit interest 
(including original issue discount) described in section 871(i)(2)(A) or 
881(d) and interest or original issue discount on short-term obligations 
as described in section 871(g)(1)(B) or 881(e) is only required to be 
allocated to the extent it is required to be reported on Form 1099 or 
Form 1042-S. See Sec. 1.6049-8 (regarding reporting of bank deposit 
interest to certain foreign persons). If a payee receives income through 
another nonqualified intermediary, flow-through entity, or U.S. branch 
described in paragraph (e)(2)(iv) of this section (other than a U.S. 
branch treated as a U.S. person), the withholding statement must also 
state, with respect to the payee, the name, address, and TIN, if known, 
of the other nonqualified intermediary or U.S. branch from which the 
payee directly receives the payment or the flow-through entity in which 
the payee has a direct ownership interest. If another nonqualified 
intermediary, flow-through entity, or U.S. branch fails to allocate a 
payment, the name of the nonqualified intermediary, flow-through entity, 
or U.S. branch that failed to allocate the payment shall be provided 
with respect to such payment.
    (3) If a payee is identified as a foreign person, the nonqualified 
intermediary must specify the rate of withholding to which the payee is 
subject, the payee's country of residence and, if a reduced rate of 
withholding is claimed, the basis for that reduced rate (e.g., treaty 
benefit, portfolio interest, exempt under section 501(c)(3), 892, or 
895). The allocation statement must also include the taxpayer 
identification numbers of those foreign persons for whom such a number 
is required under paragraph (e)(4)(vii) of this section or Sec. 1.1441-
6(b)(1) (regarding claims for treaty benefits). In the case of a claim 
of treaty benefits, the nonqualified intermediary's withholding 
statement must also state whether the limitation on benefits and section 
894 statements required by Sec. 1.1441-6(c)(5) have been provided, if 
required, in the beneficial owner's Form W-8 or associated with such 
owner's documentary evidence.
    (4) The withholding statement must also contain any other 
information the withholding agent reasonably requests in order to 
fulfill its obligations under chapter 3, chapter 61 of the Internal 
Revenue Code, and section 3406.
    (D) Alternative procedures--(1) In general. Under the alternative 
procedures of this paragraph (e)(3)(iv)(D), a nonqualified intermediary 
may provide information allocating a payment of a reportable amount to 
each payee (including U.S. exempt recipients) otherwise required under 
paragraph (e)(3)(iv)(B)(2) of this section after a payment is made. To 
use the alternative procedure of this paragraph (e)(3)(iv)(D), the 
nonqualified intermediary must inform the withholding agent on a 
statement associated with its nonqualified intermediary withholding 
certificate that it is using the procedure under this paragraph 
(e)(3)(iv)(D) and the withholding agent must agree to the procedure. If 
the requirements of the alternative procedure are met, a withholding 
agent, including the nonqualified intermediary using the procedures, can 
treat the payment as reliably associated with documentation and, 
therefore, the presumption rules of paragraph (b)(3) of this section and 
Secs. 1.1441-5(d) and (e)(6) and 1.6049-5(d) do not apply even

[[Page 93]]

though information allocating the payment to each payee has not been 
received prior to the payment. See paragraph (e)(3)(iv)(D)(7) of this 
section, however, for a nonqualified intermediary's liability for tax 
and penalties if the requirements of this paragraph (e)(3)(iv)(D) are 
not met. These alternative procedures shall not be used for payments 
that are allocable to U.S. non-exempt recipients. Therefore, a 
nonqualified intermediary is required to provide a withholding agent 
with information allocating payments of reportable amounts to U.S. non-
exempt recipients prior to the payment being made by the withholding 
agent.
    (2) Withholding rate pools. In place of the information required in 
paragraph (e)(3)(iv)(C)(2) of this section allocating payments to each 
payee, the nonqualified intermediary must provide a withholding agent 
with withholding rate pool information prior to the payment of a 
reportable amount. The withholding statement must contain all other 
information required by paragraph (e)(3)(iv)(C) of this section. 
Further, each payee listed in the withholding statement must be assigned 
to an identified withholding rate pool. To the extent a nonqualified 
intermediary is required to, or does provide, documentation, the 
alternative procedures do not relieve the nonqualified intermediary from 
the requirement to provide documentation prior to the payment being 
made. Therefore, withholding certificates or other appropriate 
documentation and all information required by paragraph (e)(3)(iv)(C) of 
this section (other than allocation information) must be provided to a 
withholding agent before any new payee receives a reportable amount. In 
addition, the withholding statement must be updated by assigning a new 
payee to a withholding rate pool prior to the payment of a reportable 
amount. A withholding rate pool is a payment of a single type of income, 
determined in accordance with the categories of income used to file Form 
1042-S, that is subject to a single rate of withholding. A withholding 
rate pool may be established by any reasonable method to which the 
nonqualified intermediary and a withholding agent agree (e.g., by 
establishing a separate account for a single withholding rate pool, or 
by dividing a payment made to a single account into portions allocable 
to each withholding rate pool). The nonqualified intermediary shall 
determine withholding rate pools based on valid documentation or, to the 
extent a payment cannot be reliably associated with valid documentation, 
the presumption rules of paragraph (b)(3) of this section and 
Secs. 1.1441-5(d) and (e)(6) and 1.6049-5(d).
    (3) Allocation information. The nonqualified intermediary must 
provide the withholding agent with sufficient information to allocate 
the income in each withholding rate pool to each payee (including U.S. 
exempt recipients) within the pool no later than January 31 of the year 
following the year of payment. Any payments that are not allocated to 
payees for whom documentation has been provided shall be allocated to an 
undocumented payee in accordance with the presumption rules of paragraph 
(b)(3) of this section and Secs. 1.1441-5(d) and (e)(6) and 1.6049-5(d). 
Notwithstanding the preceding sentence, deposit interest (including 
original issue discount) described in section 871(i)(2)(A) or 881(d) and 
interest or original issue discount on short-term obligations as 
described in section 871(g)(1)(B) or 881(e) is not required to be 
allocated to a U.S. exempt recipient or a foreign payee, except as 
required under Sec. 1.6049-8 (regarding reporting of deposit interest 
paid to certain foreign persons).
    (4) Failure to provide allocation information. If a nonqualified 
intermediary fails to provide allocation information, if required, by 
January 31 for any withholding rate pool, a withholding agent shall not 
apply the alternative procedures of this paragraph (e)(3)(iv)(D) to any 
payments of reportable amounts paid after January 31 in the taxable year 
following the calendar year for which allocation information was not 
given and any subsequent taxable year. Further, the alternative 
procedures shall be unavailable for any other withholding rate pool even 
though allocation information was given for that other pool. Therefore, 
the withholding agent must withhold on a payment of a reportable amount 
in accordance with the presumption rules of paragraph

[[Page 94]]

(b)(3) of this section, and Secs. 1.1441-5(d) and (e)(6) and 1.6049-
5(d), unless the nonqualified intermediary provides all of the 
information, including information sufficient to allocate the payment to 
each specific payee, required by paragraph (e)(3)(iv)(A) through (C) of 
this section prior to the payment. A nonqualified intermediary must 
allocate at least 90 percent of the income required to be allocated for 
each withholding rate pool or the nonqualified intermediary will be 
treated as having failed to provide allocation information for purposes 
of this paragraph (e)(3)(iv)(D). See paragraph (e)(3)(iv)(D)(7) of this 
section for liability for tax and penalties if a nonqualified 
intermediary fails to provide allocation information in whole or in 
part.
    (5) Cure provision. A nonqualified intermediary may cure any failure 
to provide allocation information by providing the required allocation 
information to the withholding agent no later than February 14 following 
the calendar year of payment. If the withholding agent receives the 
allocation information by that date, it may apply the adjustment 
procedures of Sec. 1.1461-2 to any excess withholding for payments made 
on or after February 1 and on or before February 14. Any nonqualified 
intermediary that fails to cure by February 14, may request the ability 
to use the alternative procedures of this paragraph (e)(3)(iv)(D) by 
submitting a request, in writing, to the Assistant Commissioner 
(International). The request must state the reason that the nonqualified 
intermediary did not comply with the alternative procedures of this 
paragraph (e)(3)(iv)(D) and steps that the nonqualified intermediary has 
taken, or will take, to ensure that no failures occur in the future. If 
the Assistant Commissioner (International) determines that the 
alternative procedures of this paragraph (e)(3)(iv)(D) may apply, a 
determination to that effect will be issued by the IRS to the 
nonqualified intermediary.
    (6) Form 1042-S reporting in case of allocation failure. If a 
nonqualified intermediary fails to provide allocation information by 
February 14 following the year of payment for a withholding rate pool, 
the withholding agent must file Forms 1042-S for payments made to each 
payee in that pool (other than U.S. exempt recipients) in the prior 
calendar year by pro rating the payment to each payee (including U.S. 
exempt recipients) listed in the withholding statement for that 
withholding rate pool. If the nonqualified intermediary fails to 
allocate10 percent or less of an amount required to be allocated for a 
withholding rate pool, a withholding agent shall report the unallocated 
amount as paid to a single unknown payee in accordance with the 
presumption rules of paragraph (b) of this section and Secs. 1.1441-5(d) 
and (e)(6) and 1.6049-5(d). The portion of the payment that can be 
allocated to specific recipients, as defined in Sec. 1.1461-1(c)(1)(ii), 
shall be reported to each recipient in accordance with the rules of 
Sec. 1.1461-1(c).
    (7) Liability for tax, interest, and penalties. If a nonqualified 
intermediary fails to provide allocation information by February 14 
following the year of payment for all or a portion of the payments made 
to any withholding rate pool, the withholding agent from whom the 
nonqualified intermediary received payments of reportable amounts shall 
not be liable for any tax, interest, or penalties, due solely to the 
errors or omissions of the nonqualified intermediary. See Sec. 1.1441-
7(b)(2) through (10) for the due diligence requirements of a withholding 
agent. Because failure by the nonqualified intermediary to provide 
allocation information results in a payment not being reliably 
associated with valid documentation, the beneficial owners for whom the 
nonqualified intermediary acts are not entitled to a reduced rate of 
withholding. Therefore, the nonqualified intermediary, as a withholding 
agent, shall be liable for any tax not withheld by the withholding agent 
in accordance with the presumption rules, interest on the under withheld 
tax if the nonqualified intermediary fails to pay the tax timely, and 
any applicable penalties, including the penalties under sections 6656 
(failure to deposit), 6721 (failure to file information returns) and 
6722 (failure to file payee statements). Failure to provide allocation 
information for more than 10 percent of

[[Page 95]]

the payments made to a particular withholding rate pool will be presumed 
to be an intentional failure within the meaning of sections 6721(e) and 
6722(c). The nonqualified intermediary may rebut the presumption.
    (8) Applicability to flow-through entities and certain U.S. 
branches. See paragraph (e)(3)(v) of this section and Sec. 1.1441-
5(c)(3)(iv) and (e)(5)(iv) for the applicability 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) and flow-
through entities.
    (E) Notice procedures. The IRS may notify a withholding agent that 
the alternative procedures of paragraph (e)(3)(iv)(D) of this section 
are not applicable to a specified nonqualified intermediary, a U.S. 
branch described in paragraph (b)(2)(iv) of this section, or a flow-
through entity. If a withholding agent receives such a notice, it must 
commence withholding in accordance with the presumption rules of 
paragraph (b)(3) of this section and Secs. 1.1441-5(d) and (e)(6) and 
1.6049-5(d) unless the nonqualified intermediary, U.S. branch, or flow-
through entity complies with the procedures 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 must apply the 
presumption rules of paragraph (b)(3) of this section and Secs. 1.1441-
5(d) and (e)(6) and 1.6049-5(d) to payments made to a nonqualified 
intermediary, a U.S. branch, or a flow-through entity even if the 
nonqualified intermediary, U.S. branch or flow-through entity provides 
allocation information prior to the payment. A withholding agent that 
receives a notice under this paragraph (e)(3)(iv)(E) must commence 
withholding in accordance with the presumption rules within 30 days of 
the date of the notice. The IRS may withdraw its prohibition against 
using the alternative procedures of paragraph (e)(3)(iv)(D) of this 
section, or its requirement to follow the presumption rules, if the 
nonqualified intermediary, U.S. branch, or flow-through entity can 
demonstrate to the satisfaction of the Assistant Commissioner 
(International) or his delegate that it is capable of complying with the 
rules under chapter 3 of the Internal Revenue Code and any other 
conditions required by the Assistant Commissioner (International).
    (v) Withholding certificate from certain U.S. branches. A U.S. 
branch certificate is a withholding certificate provided by a U.S. 
branch described in paragraph (b)(2)(iv) of this section that is not the 
beneficial owner of the income. The withholding certificate is provided 
with respect to reportable amounts and must state that such amounts are 
not effectively connected with the conduct of a trade or business in the 
United States. The withholding certificate must either transmit the 
appropriate documentation for the persons for whom the branch receives 
the payment (i.e., as an intermediary) or be provided as evidence of its 
agreement with the withholding agent to be treated as a U.S. person with 
respect to any payment associated with the certificate. A U.S. branch 
withholding certificate is valid only if it is furnished on a Form W-8, 
an acceptable substitute form, or such other form as the IRS may 
prescribe, it is signed under penalties of perjury by a person 
authorized to sign for the branch, its validity has not expired, and it 
contains the information, statements, and certifications described in 
this paragraph (e)(3)(v). If the certificate is furnished to transmit 
withholding certificates and other documentation, it must contain the 
information, certifications, and statements described in paragraphs 
(e)(3)(v)(A) through (C) of this section and in paragraphs (e)(3)(iii) 
and (iv) (alternative procedures) of this section, applying the term 
U.S. branch instead of the term nonqualified intermediary. If the 
certificate is furnished pursuant to an agreement to treat the U.S. 
branch as a U.S. person, the information and certifications required on 
the withholding certificate are limited to the following--
    (A) The name of the person of which the branch is a part and the 
address of the branch in the United States;
    (B) A certification that the payments associated with the 
certificate are not effectively connected with the conduct of its trade 
or business in the United States; and

[[Page 96]]

    (C) Any other information, certifications, or statements as may be 
required by the form or accompanying instructions in addition to, or in 
lieu of, the information and certification described in this paragraph 
(e)(3)(v).
    (vi) Reportable amounts. For purposes of chapter 3 of the Internal 
Revenue Code, a nonqualified intermediary, qualified 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 certificate and associated 
documentation and other information with respect to reportable amounts. 
For purposes of the regulations under chapter 3 of the Internal Revenue 
Code, the term reportable amount means an amount subject to withholding 
within the meaning of Sec. 1.1441-2(a), bank deposit interest (including 
original issue discount) and similar types of deposit interest described 
in section 871(i)(2)(A) or 881(d) that are from sources within the 
United States, and any amount of interest or original issue discount 
from sources within the United States on the redemption of certain 
short-term obligations described in section 871(g)(1)(B) or 881(e). 
Reportable amounts shall not include amounts received on the sale or 
exchange (other than a redemption) of an obligation described in section 
871(g)(1)(B) or 881(e) that is effected at an office outside the United 
States. See Sec. 1.6045-1(g)(3) to determine whether a sale is effected 
at an office outside the United States. Reportable amounts also do not 
include payments with respect to deposits with banks and other financial 
institutions that remain on deposit for a period of two weeks or less, 
to amounts of original issue discount arising from a sale and repurchase 
transaction that is completed within a period of two weeks or less, or 
to amounts described in Sec. 1.6049-5(b)(7), (10) or (11) (relating to 
certain obligations issued in bearer form). While short-term OID and 
bank deposit interest are not subject to withholding under chapter 3 of 
the Internal Revenue Code, such amounts may be subject to information 
reporting under section 6049 if paid to a U.S. person who is not an 
exempt recipient described in Sec. 1.6049-4(c)(1)(ii) and to backup 
withholding under section 3406 in the absence of documentation. See 
Sec. 1.6049-5(d)(3)(iii) for applicable procedures when such amounts are 
paid to a foreign intermediary.
    (4) Applicable rules. The provisions in this paragraph (e)(4) 
describe procedures applicable to withholding certificates on Form W-8 
or Form 8233 (or a substitute form) or documentary evidence furnished to 
establish foreign status. These provisions do not apply to Forms W-9 (or 
their substitutes). For corresponding provisions regrading Form W-9 (or 
a substitute form), see section 3406 and the regulations under that 
section.
    (i) Who may sign the certificate. A withholding certificate (or 
other acceptable substitute) may be signed by any person authorized to 
sign a declaration under penalties of perjury on behalf of the person 
whose name is on the certificate as provided in section 6061 and the 
regulations under that section (relating to who may sign generally for 
an individual, estate, or trust, which includes certain agents who may 
sign returns and other documents), section 6062 and the regulations 
under that section (relating to who may sign corporate returns), and 
section 6063 and the regulations under that section (relating to who may 
sign partnership returns).
    (ii) Period of validity--(A) Three-year period. A withholding 
certificate described in paragraph (e)(2)(i) of this section, or a 
certificate described in Sec. 1.871-14(c)(2)(v) (furnished to qualify 
interest as portfolio interest for purposes of sections 871(h) and 
881(c)), shall remain valid until the earlier of the last day of the 
third calendar year following the year in which the withholding 
certificate is signed or the day that a change in circumstances occurs 
that makes any information on the certificate incorrect. For example, a 
withholding certificate signed on September 30, 2001, remains valid 
through December 31, 2004, unless circumstances change that make the 
information on the form no longer correct. Documentary evidence 
described in Secs. 1.1441-6(c)(3) or (4) or 1.6049-5(c)(1) shall remain 
valid until the earlier of the last day of the third calendar year

[[Page 97]]

following the year in which the documentary evidence is provided to the 
withholding agent or the day that a change in circumstances occurs that 
makes any information on the documentary evidence incorrect.
    (B) Indefinite validity period. Notwithstanding paragraph 
(e)(4)(ii)(A) of this section, the following certificates or parts of 
certificates shall remain valid until the status of the person whose 
name is on the certificate is changed in a way relevant to the 
certificate or circumstances change that make the information on the 
certificate no longer correct:
    (1) A withholding certificate described in paragraph (e)(2)(ii) of 
this section that is furnished with a TIN, provided that the withholding 
agent reports at least one payment annually to the beneficial owner 
under Sec. 1.1461-1(c) or the TIN furnished on the certificate is 
reported to the IRS under the procedures described in Sec. 1.1461-1(d). 
For example, assume a withholding agent receives a Form W-8 in 2001 from 
a beneficial owner with respect to an account that contains bonds, the 
interest on which must be reported on Form 1042-S under Sec. 1.1461-
1(c). The Form W-8 contains a valid TIN and the withholding agent 
reports on Forms 1042-S interest to the beneficial owner for 2001 
through 2005. In 2005, the beneficial owner sells some of the bonds. For 
purposes of the exemption from Form 1099 reporting under Sec. 1.6045-
1(g), the withholding agent may consider the Form W-8 as valid, even 
though the payment of the sales proceeds is not reportable on Form 1042-
S under Sec. 1.1461-1(c) and even though the Form W-8 was provided more 
than three years previously.
    (2) A certificate described in paragraph (e)(3)(ii) of this section 
(a qualified intermediary withholding certificate) but not including the 
withholding certificates, documentary evidence, statements or other 
information associated with the certificate.
    (3) A certificate described in paragraph (e)(3)(iii) of this section 
(a nonqualified intermediary certificate), but not including the 
withholding certificates, documentary evidence, statements or other 
information associated with the certificate.
    (4) A certificate described in paragraph (e)(3)(v) of this section 
(a U.S. branch withholding certificate), but not including the 
withholding certificates, documentary evidence, statements or other 
information associated with the certificate.
    (5) A certificate described in Sec. 1.1441-5(c)(2)(iv) (dealing with 
a certificate from a person representing to be a withholding foreign 
partnership).
    (6) A certificate described in Sec. 1.1441-5(c)(3)(iii) (a 
withholding certificate from a nonwithholding foreign partnership) but 
not including the withholding certificates, documentary evidence, 
statements or other information required to be associated with the 
certificate.
    (7) A certificate furnished by a person representing to be an 
integral part of a foreign government (within the meaning of Sec. 1.892-
2T(a)(2)) in accordance with Sec. 1.1441-8(b), or by a person 
representing to be a foreign central bank of issue (within the meaning 
of Sec. 1.861-2(b)(4)) or the Bank for International Settlements in 
accordance with Sec. 1.1441-8(c)(1).
    (8) A withholding certificate described in Sec. 1.1441-5(e)(5)(iii) 
provided by a foreign simple trust or a foreign grantor trust to 
transmit documentation of beneficiaries or owners, but not including the 
withholding certificates, documentary evidence, statements or other 
information associated with the certificate.
    (C) Withholding certificate for effectively connected income. 
Notwithstanding paragraph (e)(4)(ii)(B)(1) of this section, the period 
of validity of a withholding certificate furnished to a withholding 
agent to claim a reduced rate of withholding for income that is 
effectively connected with the conduct of a trade or business within the 
United States shall be limited to the three-year period described in 
paragraph (e)(4)(ii)(A) of this section.
    (D) Change in circumstances. If a change in circumstances makes any 
information on a certificate or other documentation incorrect, then the 
person whose name is on the certificate or other documentation must 
inform the withholding agent within 30 days of the change and furnish a 
new certificate or new documentation. A certificate or

[[Page 98]]

documentation becomes invalid from the date that the withholding agent 
holding the certificate or documentation knows or has reason to know 
that circumstances affecting the correctness of the certificate or 
documentation have changed. However, a withholding agent may choose to 
apply the provisions of paragraph (b)(3)(iv) of this section regarding 
the 90-day grace period as of that date while awaiting a new certificate 
or documentation or while seeking information regarding changes, or 
suspected changes, in the person's circumstances. If an intermediary 
(including a U.S. branch described in paragraph (b)(2)(iv)(A) of this 
section that passes through certificates to a withholding agent) or a 
flow-through entity becomes aware that a certificate or other 
appropriate documentation it has furnished to the person from whom it 
collects the payment is no longer valid because of a change in the 
circumstances of the person who issued the certificate or furnished the 
other appropriate documentation, then the intermediary or flow-through 
entity must notify the person from whom it collects the payment of the 
change of circumstances. It must also obtain a new withholding 
certificate or new appropriate documentation to replace the existing 
certificate or documentation whose validity has expired due to the 
change in circumstances. If a beneficial owner withholding certificate 
is used to claim foreign status only (and not, also, residence in a 
particular foreign country for purposes of an income tax treaty), a 
change of address is a change in circumstances for purposes of this 
paragraph (e)(4)(ii)(D) only if it changes to an address in the United 
States. Further, a change of address within the same foreign country is 
not a change in circumstances for purposes of this paragraph 
(e)(4)(ii)(D). A change in the circumstances affecting the withholding 
information provided to the withholding agent in accordance with the 
provisions in paragraph (e) (3)(iv) or (5)(v) of this section or in 
Sec. 1.1441-5(c)(3)(iv) shall terminate the validity of the withholding 
certificate with respect to the information that is no longer reliable 
unless the information is updated. A withholding agent may rely on a 
certificate without having to inquire into possible changes of 
circumstances that may affect the validity of the statement, unless it 
knows or has reason to know that circumstances have changed. A 
withholding agent may require a new certificate at any time prior to a 
payment, even though the withholding agent has no actual knowledge or 
reason to know that any information stated on the certificate has 
changed.
    (iii) Retention of withholding certificate. A withholding agent must 
retain each withholding certificate and other documentation for as long 
as it may be relevant to the determination of the withholding agent's 
tax liability under section 1461 and Sec. 1.1461-1.
    (iv) Electronic transmission of information--(A) In general. A 
withholding agent may establish a system for a beneficial owner or payee 
to electronically furnish a Form W-8, an acceptable substitute Form W-8, 
or such other form as the Internal Revenue Service may prescribe. The 
system must meet the requirements described in paragraph (e)(4)(iv)(B) 
of this section. A withholding agent may accept Forms W-8 that are 
furnished electronically 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. The electronic system must ensure 
that the information received is the information sent, and must document 
all occasions of user access that result in the submission renewal, or 
modification of a Form W-8. In addition, the design and operation of the 
electronic system, including access procedures, must make it reasonably 
certain that the person accessing the system and furnishing Form W-8 is 
the person named in the Form.
    (2) Same information as paper Form W-8. The electronic transmission 
must provide the withholding agent or payor with exactly the same 
information as the paper Form W-8.
    (3) Perjury statement and signature requirements. The electronic 
transmission must contain an electronic signature by the person whose 
name is on the Form W-8 and the signature must be

[[Page 99]]

under penalties of perjury in the manner described in this paragraph 
(e)(4)(iv)(B)(3).
    (i) Perjury statement. The perjury statement must contain the 
language that appears on the paper Form W-8. The electronic system must 
inform the person whose name is on the Form W-8 that the person must 
make the declaration contained in the perjury statement and that the 
declaration is made by signing the Form W-8. The instructions and the 
language of the perjury statement must immediately follow the person's 
certifying statements and immediately precede the person's electronic 
signature.
    (ii) Electronic signature. The act of the electronic signature must 
be effected by the person whose name is on the electronic Form W-8. The 
signature must also authenticate and verify the submission. For this 
purpose, the terms authenticate and verify have the same meanings as 
they do when applied to a written signature on a paper Form W-8. An 
electronic signature can be in any form that satisfies the foregoing 
requirements. The electronic signature must be the final entry in the 
person's Form W-8 submission.
    (4) Requests for electronic Form W-8 data. Upon request by the 
Internal Revenue Service during an examination, the withholding agent 
must supply a hard copy of the electronic Form W-8 and a statement that, 
to the best of the withholding agent's knowledge, the electronic Form W-
8 was filed by the person whose name is on the form. The hard copy of 
the electronic Form W-8 must provide exactly the same information as, 
but need not be identical to, the paper Form W-8.
    (C) Special requirements for transmission of Forms W-8 by an 
intermediary. [Reserved]
    (v) Electronic confirmation of taxpayer identifying number on 
withholding certificate. The Commissioner may prescribe procedures in a 
revenue procedure (see Sec. 601.601(d)(2) of this chapter) or other 
appropriate guidance to require a withholding agent to confirm 
electronically with the IRS information concerning any TIN stated on a 
withholding certificate.
    (vi) Acceptable substitute form. A withholding agent may substitute 
its own form instead of an official Form W-8 or 8233 (or such other 
official form as the IRS may prescribe). Such a substitute for an 
official form will be acceptable if it contains provisions that are 
substantially similar to those of the official form, it contains the 
same certifications relevant to the transactions as are contained on the 
official form and these certifications are clearly set forth, and the 
substitute form includes a signature-under-penalties-of-perjury 
statement identical to the one stated on the official form. The 
substitute form is acceptable even if it does not contain all of the 
provisions contained on the official form, so long as it contains those 
provisions that are relevant to the transaction for which it is 
furnished. For example, a withholding agent that pays no income for 
which treaty benefits are claimed may develop a substitute form that is 
identical to the official form, except that it does not include 
information regarding claim of benefits under an income tax treaty. A 
withholding agent who uses a substitute form must furnish instructions 
relevant to the substitute form only to the extent and in the manner 
specified in the instructions to the official form. A withholding agent 
may refuse to accept a certificate from a payee or beneficial owner 
(including the official Form W-8 or 8233) if the certificate is not 
provided on the acceptable substitute form provided by the withholding 
agent. However, a withholding agent may refuse to accept a certificate 
provided by a payee or beneficial owner only if the withholding agent 
furnishes the payee or beneficial owner with an acceptable substitute 
form immediately upon receipt of an unacceptable form or within 5 
business days of receipt of an unacceptable form from the payee or 
beneficial owner. In that case, the substitute form is acceptable only 
if it contains a notice that the withholding agent has refused to accept 
the form submitted by the payee or beneficial owner and that the payee 
or beneficial owner must submit the acceptable form provided by the 
withholding agent in order for the payee or beneficial owner to be 
treated as having furnished the required withholding certificate.

[[Page 100]]

    (vii) Requirement of taxpayer identifying number. A TIN must be 
stated on a withholding certificate when required by this paragraph 
(e)(4)(vii). A TIN is required to be stated on--
    (A) A withholding certificate on which a beneficial owner is 
claiming the benefit of a reduced rate under an income tax treaty (other 
than for amounts described in Sec. 1.1441-6(c)(2);
    (B) A withholding certificate on which a beneficial owner is 
claiming exemption from withholding because income is effectively 
connected with a U.S. trade or business;
    (C) A withholding certificate on which a beneficial owner is 
claiming exemption from withholding under section 871(f) for certain 
annuities received under qualified plans;
    (D) A withholding certificate on which a beneficial owner is 
claiming an exemption based solely on a foreign organization's claim of 
tax exempt status under section 501(c) or private foundation status 
(however, a TIN is not required from a foreign private foundation that 
is subject to the 4-percent tax under section 4948(a) on income if that 
income would be exempt from withholding but for section 4948(a) (e.g., 
portfolio interest));
    (E) A withholding certificate from a person representing to be a 
qualified intermediary described in paragraph (e)(5)(ii) of this 
section;
    (F) A withholding certificate from a person representing to be a 
withholding foreign partnership described in Sec. 1.1441-5(c)(2)(i));
    (G) A withholding certificate from a person representing to be a 
foreign grantor trust with 5 or fewer grantors;
    (H) A withholding certificate provided by a foreign organization 
that is described in section 501(c);
    (I) A withholding certificate from a person representing to be a 
U.S. branch described in paragraph (b)(2)(iv) of this section.
    (viii) Reliance rules. A withholding agent may rely on the 
information and certifications stated on withholding certificates or 
other documentation without having to inquire into the truthfulness of 
this information or certification, unless it has actual knowledge or 
reason to know that the same is untrue. In the case of amounts described 
in Sec. 1.1441-6(c)(2), a withholding agent described in Sec. 1.1441-
7(b)(2)(ii) has reason to know that the information or certifications on 
a certificate are untrue only to the extent provided in Sec. 1.1441-
7(b)(2)(ii). See Sec. 1.1441-6(b)(1) for reliance on representations 
regarding eligibility for a reduced rate under an income tax treaty. 
Paragraphs (e)(4)(viii) (A) and (B) of this section provide examples of 
such reliance.
    (A) Classification. A withholding agent may rely on the claim of 
entity classification indicated on the withholding certificate that it 
receives from or for the beneficial owner, unless it has actual 
knowledge or reason to know that the classification claimed is 
incorrect. A withholding agent may not rely on a person's claim of 
classification other than as a corporation if the name of the 
corporation indicates that the person is a per se corporation described 
in Sec. 301.7701-2(b)(8)(i) of this chapter unless the certificate 
contains a statement that the person is a grandfathered per se 
corporation described in Sec. 301.7701-2(b)(8) of this chapter and that 
its grandfathered status has not been terminated. In the absence of 
reliable representation or information regarding the classification of 
the payee or beneficial owner, see Sec. 1.1441-1(b)(3)(ii) for 
applicable presumptions.
    (B) Status of payee as an intermediary or as a person acting for its 
own account. A withholding agent may rely on the type of certificate 
furnished as indicative of the payee's status as an intermediary or as 
an owner, unless the withholding agent has actual knowledge or reason to 
know otherwise. For example, a withholding agent that receives a 
beneficial owner withholding certificate from a foreign financial 
institution may treat the institution as the beneficial owner, unless it 
has information in its records that would indicate otherwise or the 
certificate contains information that is not consistent with beneficial 
owner status (e.g., sub-account numbers or names). If the financial 
institution also acts as an intermediary, the withholding agent may 
request that the institution furnish two certificates, i.e., a 
beneficial owner certificate described in paragraph (e)(2)(i) of this 
section for the amounts that it receives as a beneficial

[[Page 101]]

owner, and an intermediary withholding certificate described in 
paragraph (e)(3)(i) of this section for the amounts that it receives as 
an intermediary. In the absence of reliable representation or 
information regarding the status of the payee as an owner or as an 
intermediary, see paragraph (b)(3)(v)(A) for applicable presumptions.
    (ix) Certificates to be furnished for each account unless exception 
applies. Unless otherwise provided in this paragraph (e)(4)(ix), a 
withholding agent that is a financial institution with which a customer 
may open an account shall obtain withholding certificates or other 
appropriate documentation on an account-by-account basis.
    (A) Coordinated account information system in effect. A withholding 
agent may rely on the withholding certificate or other appropriate 
documentation furnished by a customer for a pre-existing account under 
any one or more of the circumstances described in this paragraph 
(e)(4)(ix)(A).
    (1) A withholding agent may rely on documentation furnished by a 
customer for another account if all such accounts are held at the same 
branch location.
    (2) A withholding agent may rely on documentation furnished by a 
customer for an account held at another branch location of the same 
withholding agent or at a branch location of a person related to the 
withholding agent if the withholding agent and the related person are 
part of a universal account system that uses a customer identifier that 
can be used to retrieve systematically all other accounts of the 
customer. See Sec. 31.3406(c)(3)(ii) and (iii)(C) of this chapter for an 
identical procedure for purposes of backup withholding. For purposes of 
this paragraph (e)(4)(ix)(A), a withholding agent is related to another 
person if it is related within the meaning of section 267(b) or 707(b).
    (3) A withholding agent may rely on documentation furnished by a 
customer for an account held at another branch location of the same 
withholding agent or at a branch location of a person related to the 
withholding agent if the withholding agent and the related person are 
part of an information system other than a universal account system and 
the information system is described in this paragraph (e)(4)(ix)(A)(3). 
The system must allow the withholding agent to easily access data 
regarding the nature of the documentation, the information contained in 
the documentation, and its validity status, and must allow the 
withholding agent to easily transmit data into the system regarding any 
facts of which it becomes aware that may affect the reliability of the 
documentation. The withholding agent must be able to establish how and 
when it has accessed the data regarding the documentation and, if 
applicable, how and when it has transmitted data regarding any facts of 
which it became aware that may affect the reliability of the 
documentation. In addition, the withholding agent or the related party 
must be able to establish that any data it has transmitted to the 
information system has been processed and appropriate due diligence has 
been exercised regarding the validity of the documentation.
    (4) A withholding agent may rely on documentation furnished by a 
beneficial owner or payee to an agent of the withholding agent. The 
agent may retain the documentation as part of an information system 
maintained for a single or multiple withholding agents provided that the 
system permits any withholding agent that uses the system to easily 
access data regarding the nature of the documentation, the information 
contained in the documentation, and its validity, and must allow the 
withholding agent to easily transmit data into the system regarding any 
facts of which it becomes aware that may affect the reliability of the 
documentation. The withholding agent must be able to establish how and 
when it has accessed the data regarding the documentation and, if 
applicable, how and when it has transmitted data regarding any facts of 
which it became aware that may affect the reliability of the 
documentation. In addition, the withholding agent must be able to 
establish that any data it has transmitted to the information system has 
been processed and appropriate due diligence has been exercised 
regarding the validity of the documentation.

[[Page 102]]

    (B) Family of mutual funds. An interest in a mutual fund that has a 
common investment advisor or common principal underwriter with other 
mutual funds (within the same family of funds) may, in the discretion of 
the mutual fund, be represented by one single withholding certificate 
where shares are acquired or owned in any of the funds. See 
Sec. 31.3406(h)-3(a)(2) of this chapter for an identical procedures for 
purposes of backup withholding.
    (C) Special rule for brokers--(1) In general. A withholding agent 
may rely on the certification of a broker that the broker holds a valid 
beneficial owner withholding certificate described in paragraph 
(e)(2)(i) of this section or other appropriate documentation for that 
beneficial owner with respect to any readily tradable instrument, as 
defined in Sec. 31.3406(h)-1(d) of this chapter, if the broker is a 
United States person (including a U.S. branch treated as a U.S. person 
under paragraph (b)(2)(iv) of this section) that is acting as the agent 
of a beneficial owner and the U.S. broker has been provided a valid Form 
W-8 or other appropriate documentation. The certification must be in 
writing or in electronic form and contain all of the information 
required of a nonqualified intermediary under paragraphs (e)(3)(iv)(B) 
and (C) of this section. If a U.S. broker chooses to use this paragraph 
(e)(4)(ix)(C), that U.S. broker will be solely responsible for applying 
the rules of Sec. 1.1441-7(b) to the withholding certificates or other 
appropriate documentation. For purposes of this paragraph (c)(4)(ix)(C), 
the term broker means a person treated as a broker under Sec. 1.6045-
1(a).
    (2) The following example illustrates the rules of this paragraph 
(e)(4)(ix)(C):

    Example. SCO is a U.S. securities clearing organization that 
provides clearing services for correspondent broker, CB, a U.S. 
corporation. Pursuant to a fully disclosed clearing agreement, CB fully 
discloses 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 Sec. 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 determining the validity of the withholding 
certificates or other appropriate documentation under Sec. 1.1441-1(b).

    (5) Qualified intermediaries--(i) General rule. A qualified 
intermediary, as defined in paragraph (e)(5)(ii) of this section, may 
furnish a qualified intermediary withholding certificate to a 
withholding agent. The withholding certificate provides certifications 
on behalf of other persons for the purpose of claiming and verifying 
reduced rates of withholding under section 1441 or 1442 and for the 
purpose of reporting and withholding under other provisions of the 
Internal Revenue Code, such as the provisions under chapter 61 and 
section 3406 (and the regulations under those provisions). Furnishing 
such a certificate is in lieu of transmitting to a withholding agent 
withholding certificates or other appropriate documentation for the 
persons for whom the qualified intermediary receives the payment, 
including interest holders in a qualified intermediary that is fiscally 
transparent under the regulations under section 894. Although the 
qualified intermediary is required to obtain withholding certificates or 
other appropriate documentation from beneficial owners, payees, or 
interest holders pursuant to its agreement with the IRS, it is generally 
not required to attach such documentation to the intermediary 
withholding certificate. Notwithstanding the preceding sentence a 
qualified intermediary must provide a withholding agent with the Forms 
W-9, or disclose the names, addresses, and taxpayer identifying numbers, 
if known, of those U.S. non-exempt recipients for whom the qualified 
intermediary receives reportable amounts (within the meaning of 
paragraph (e)(3)(vi) of this section) to the extent required in the 
qualified intermediary's agreement with the IRS. A person may claim 
qualified intermediary status before an agreement is executed with the 
IRS if it has applied for such status and the IRS authorizes such status 
on an interim basis under such procedures as the IRS may prescribe.

[[Page 103]]

    (ii) Definition of qualified intermediary. With respect to a payment 
to a foreign person, the term qualified intermediary means a person that 
is a party to a withholding agreement with the IRS and such person is--
    (A) A foreign financial institution or a foreign clearing 
organization (as defined in Sec. 1.163-5(c)(2)(i)(D)(8), without regard 
to the requirement that the organization hold obligations for members), 
other than a U.S. branch or U.S. office of such institution or 
organization;
    (B) A foreign branch or office of a U.S. financial institution or a 
foreign branch or office of a U.S. clearing organization (as defined in 
Sec. 1.163-5(c)(2)(i)(D)(8), without regard to the requirement that the 
organization hold obligations for members);
    (C) A foreign corporation for purposes of presenting claims of 
benefits under an income tax treaty on behalf of its shareholders; or
    (D) Any other person acceptable to the IRS.
    (iii) Withholding agreement--(A) In general. The IRS may, upon 
request, enter into a withholding agreement with a foreign person 
described in paragraph (e)(5)(ii) of this section pursuant to such 
procedures as the IRS may prescribe in published guidance (see 
Sec. 601.601(d)(2) of this chapter). Under the withholding agreement, a 
qualified intermediary shall generally be subject to the applicable 
withholding and reporting provisions applicable to withholding agents 
and payors under chapters 3 and 61 of the Internal Revenue Code, section 
3406, the regulations under those provisions, and other withholding 
provisions of the Internal Revenue Code, except to the extent provided 
under the agreement.
    (B) Terms of the withholding agreement. Generally, the agreement 
shall specify the type of certifications and documentation upon which 
the qualified intermediary may rely to ascertain the classification 
(e.g., corporation or partnership) and status (i.e., U.S. or foreign) of 
beneficial owners and payees who receive payments collected by the 
qualified intermediary and, if necessary, entitlement to the benefits of 
a reduced rate under an income tax treaty. The agreement shall specify 
if, and to what extent, the qualified intermediary may assume primary 
withholding responsibility in accordance with paragraph (e)(5)(iv) of 
this section. It shall also specify the extent to which applicable 
return filing and information reporting requirements are modified so 
that, in appropriate cases, the qualified intermediary may report 
payments to the IRS on an aggregated basis, without having to disclose 
the identity of beneficial owners and payees. However, the qualified 
intermediary may be required to provide to the IRS the name and address 
of those foreign customers who benefit from a reduced rate under an 
income tax treaty pursuant to the qualified intermediary arrangement for 
purposes of verifying entitlement to such benefits, particularly under 
an applicable limitation on benefits provision. Under the agreement, a 
qualified intermediary may agree to act as an acceptance agent to 
perform the duties described in Sec. 301.6109-1(d)(3)(iv)(A) of this 
chapter. The agreement may specify the manner in which applicable 
procedures for adjustments for underwithholding and overwithholding, 
including refund procedures, apply in the context of a qualified 
intermediary arrangement and the extent to which applicable procedures 
may be modified. In particular, a withholding agreement may allow a 
qualified intermediary to claim refunds of overwithheld amounts. If 
relevant, the agreement shall specify the manner in which the qualified 
intermediary may deal with payments to other intermediaries and flow-
through entities. In addition, the agreement shall specify the manner in 
which the IRS will verify compliance with the agreement. In appropriate 
cases, the IRS may agree to rely on audits performed by an 
intermediary's approved auditor. In such a case, the IRS's audit may be 
limited to the audit of the auditor's records (including work papers of 
the auditor and reports prepared by the auditor indicating the 
methodology employed to verify the entity's compliance with the 
agreement). For this purpose, the agreement shall specify the auditor or 
class of auditors that are approved. Generally, an auditor will not be 
approved if the

[[Page 104]]

auditor is not subject to laws, regulations, or rules that impose 
sanctions for failure to exercise its independence and to perform the 
audit competently. The agreement may include provisions for the 
assessment and collection of tax in the event that failure to comply 
with the terms of the agreement results in the failure by the 
withholding agent or the qualified intermediary to withhold and deposit 
the required amount of tax. Further, the agreement may specify the 
procedures by which deposits of amounts withheld are to be deposited, if 
different from the deposit procedures under the Internal Revenue Code 
and applicable regulations. To determine whether to enter a qualified 
intermediary withholding agreement and the terms of any particular 
withholding agreement, the IRS will consider appropriate factors 
including whether or not the foreign person agrees to assume primary 
withholding responsibility, the type of local know-your-customer laws 
and practices to which it is subject, the extent and nature of 
supervisory and regulatory control exercised under the laws of the 
foreign country over the foreign person, the volume of investments in 
U.S. securities (determined in dollar amounts and number of account 
holders), the financial condition of the foreign person, and whether the 
qualified intermediary is a resident of a country with which the United 
States has an income tax treaty.
    (iv) Assignment of primary withholding responsibility. Any person 
who meets the definition of a withholding agent under Sec. 1.1441-7(a) 
(whether a U.S. person or a foreign person) is required to withhold and 
deposit any amount withheld under Sec. 1.1461-1(a) and to make the 
returns prescribed by Sec. 1.1461-1(b) and (c). If permitted by its 
qualified intermediary agreement, a qualified intermediary agreement 
may, however, inform a withholding agent from which it receives a 
payment that it will assume the primary obligation to withhold, deposit, 
and report amounts under chapter 3 of the Internal Revenue Code and/or 
under chapter 61 of the Internal Revenue Code and section 3406. If a 
withholding agent makes a payment of an amount subject to withholding, 
as defined in Sec. 1.1441-2(a), or a reportable payment, as defined in 
section 3406(b), to a qualified intermediary that represents to the 
withholding agent that it has assumed primary withholding responsibility 
for the payment, the withholding agent is not required to withhold on 
the payment. The withholding agent is not required to determine that the 
qualified intermediary agreement actually permits the qualified 
intermediary to assume primary withholding responsibility. A qualified 
intermediary that assumes primary withholding responsibility under 
chapter 3 of the Internal Revenue Code or primary reporting and backup 
withholding responsibility under chapter 61 and section 3406 is not 
required to assume primary withholding responsibility for all accounts 
it has with a withholding agent but must assume primary withholding 
responsibility for all payments made to any one account that it has with 
the withholding agent. A qualified intermediary may agree with the 
withholding agent to assume primary withholding responsibility under 
chapter 3 and section 3406, only if expressly permitted to do so under 
its agreement with the IRS.
    (v) Withholding statement--(A) In general. A qualified intermediary 
must provide each withholding agent from which it receives reportable 
amounts, as defined in paragraph (e)(3)(vi) of this section, as a 
qualified intermediary with a written statement (the withholding 
statement) containing the information specified in paragraph 
(e)(5)(v)(B) of this section. A withholding statement is not required, 
however, if all of the information a withholding agent needs to fulfill 
its withholding and reporting requirements is contained in the 
withholding certificate. The qualified intermediary agreement may 
require, in appropriate circumstances, the qualified intermediary to 
include information in its withholding statement relating to payments 
other than payments of reportable amounts. The withholding statement 
forms an integral part of the qualified intermediary's qualified 
intermediary withholding certificate and the penalties of perjury 
statement provided on the withholding certificate

[[Page 105]]

shall apply to the withholding statement as well. The withholding 
statement may be provided in any manner, and in any form, to which 
qualified intermediary and the withholding agent mutually agree, 
including electronically. If the withholding statement is provided 
electronically, there must be sufficient safeguards to ensure that the 
information received by the withholding agent is the information sent by 
qualified intermediary and must also document all occasions of user 
access that result in the submission or modification of withholding 
statement information. In addition, the electronic system must be 
capable of providing a hard copy of all withholding statements provided 
by the qualified intermediary. The withholding statement shall be 
updated as often as necessary for the withholding agent to meet its 
reporting and withholding obligations under chapters 3 and 61 of the 
Internal Revenue Code and section 3406. A withholding agent will be 
liable for tax, interest, and penalties in accordance with paragraph 
(b)(7) of this section to the extent it does not follow the presumption 
rules of paragraph (b)(3) of this section, Secs. 1.1441-5(d) and (e)(6), 
and 1.6049-5(d) for any payment, or portion thereof, for which it does 
not have a valid withholding statement prior to making a payment.
    (B) Content of withholding statement. The withholding statement must 
contain sufficient information for a withholding agent to apply the 
correct rate of withholding on payments from the accounts identified on 
the statement and to properly report such payments on Forms 1042-S and 
Forms 1099, as applicable. The withholding statement must--
    (1) Designate those accounts for which the qualified intermediary 
acts as a qualified intermediary;
    (2) Designate those accounts for which qualified intermediary 
assumes primary withholding responsibility under chapter 3 of the 
Internal Revenue Code and/or primary reporting and backup withholding 
responsibility under chapter 61 and section 3406; and
    (3) Provide information regarding withholding rate pools, as 
described in paragraph (e)(5)(v)(C) of this section.
    (C) Withholding rate pools--(1) In general. Except to the extent it 
has assumed both primary withholding responsibility under chapter 3 of 
the Internal Revenue Code and primary reporting and backup withholding 
responsibility under chapter 61 and section 3406 with respect to a 
payment, a qualified intermediary shall provide as part of its 
withholding statement the withholding rate pool information that is 
required for the withholding agent to meet its withholding and reporting 
obligations under chapters 3 and 61 of the Internal Revenue Code and 
section 3406. A withholding rate pool is a payment of a single type of 
income, determined in accordance with the categories of income reported 
on Form 1042-S or Form 1099, as applicable, that is subject to a single 
rate of withholding. A withholding rate pool may be established by any 
reasonable method on which the qualified intermediary and a withholding 
agent agree (e.g., by establishing a separate account for a single 
withholding rate pool, or by dividing a payment made to a single account 
into portions allocable to each withholding rate pool). To the extent a 
qualified intermediary does not assume primary reporting and backup 
withholding responsibility under chapter 61 and section 3406, a 
qualified intermediary's withholding statement must establish a separate 
withholding rate pool for each U.S. non-exempt recipient account holder 
that the qualified intermediary has disclosed to the withholding agent 
unless the qualified intermediary uses the alternative procedures in 
paragraph (e)(5)(v)(C)(2) of this section. A qualified intermediary 
shall determine withholding rate pools based on valid documentation that 
it obtains under its withholding agreement with the IRS, or if a payment 
cannot be reliably associated with valid documentation, under the 
applicable presumption rules. If a qualified intermediary has an account 
holder that is another intermediary (whether a qualified intermediary or 
a nonqualified intermediary) or a flow-through entity, the qualified 
intermediary may combine the account holder information provided by the 
intermediary or flow-through entity

[[Page 106]]

with the qualified intermediary's direct account holder information to 
determine the qualified intermediary's withholding rate pools.
    (2) Alternative procedure for U.S. non-exempt recipients. If 
permitted under its agreement with the IRS, a qualified intermediary 
may, by mutual agreement with a withholding agent, establish a single 
zero withholding rate pool that includes U.S. non-exempt recipient 
account holders for whom the qualified intermediary has provided Forms 
W-9 prior to the withholding agent paying any reportable payments, as 
defined in the qualified intermediary agreement, and a separate 
withholding rate pool (subject to 31-percent withholding) that includes 
only U.S. non-exempt recipient account holders for whom a qualified 
intermediary has not provided Forms W-9 prior to the withholding agent 
paying any reportable payments. If a qualified intermediary chooses the 
alternative procedure of this paragraph (e)(5)(v)(C)(2), the qualified 
intermediary must provide the information required by its qualified 
intermediary agreement to the withholding agent no later than January 15 
of the year following the year in which the payments are paid. Failure 
to provide such information will result in the application of penalties 
to the qualified intermediary under sections 6721 and 6722, as well as 
any other applicable penalties, and may result in the termination of the 
qualified intermediary's withholding agreement with the IRS. A 
withholding agent shall not be liable for tax, interest, or penalties 
for failure to backup withhold or report information under chapter 61 of 
the Internal Revenue Code due solely to the errors or omissions of the 
qualified intermediary. If a qualified intermediary fails to provide the 
allocation information required by this paragraph (e)(5)(v)(C)(2), with 
respect to U.S. non-exempt recipients, the withholding agent shall 
report the unallocated amount paid from the withholding rate pool to an 
unknown recipient, or otherwise in accordance with the appropriate Form 
1099 and the instructions accompanying the form.
    (f) Effective date--(1) In general. This section applies to payments 
made after December 31, 2000.
    (2) Transition rules--(i) Special rules for existing documentation. 
For purposes of paragraphs (d)(3) and (e)(2)(i) of this section, the 
validity of a withholding certificate (namely, Form W-8, 8233, 1001, 
4224, or 1078 , or a statement described in Sec. 1.1441-5 in effect 
prior to January 1, 2001 (see Sec. 1.1441-5 as contained in 26 CFR part 
1, revised April 1, 1999)) that was valid on January 1, 1998 under the 
regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and 
35a, revised April 1, 1999) and expired, or will expire, at any time 
during 1998, is extended until December 31, 1998. The validity of a 
withholding certificate that is valid on or after January 1, 1999, 
remains valid until its validity expires under the regulations in effect 
prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 
1999) but in no event will such withholding certificate remain valid 
after December 31, 2000. The rule in this paragraph (f)(2)(i), however, 
does not apply to extend the validity period of a withholding 
certificate that expires solely by reason of changes in the 
circumstances of the person whose name is on the certificate. 
Notwithstanding the first three sentences of this paragraph (f)(2)(i), a 
withholding agent may choose to not take advantage of the transition 
rule in this paragraph (f)(2)(i) with respect to one or more withholding 
certificates valid under the regulations in effect prior to January 1, 
2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and, therefore, 
to require withholding certificates conforming to the requirements 
described in this section (new withholding certificates). For purposes 
of this section, a new withholding certificate is deemed to satisfy the 
documentation requirement under the regulations in effect prior to 
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999). 
Further, a new withholding certificate remains valid for the period 
specified in paragraph (e)(4)(ii) of this section, regardless of when 
the certificate is obtained.
    (ii) Lack of documentation for past years. A taxpayer may elect to 
apply the provisions of paragraphs (b)(7)(i)(B), (ii), and (iii) of this 
section, dealing with liability for failure to obtain documentation 
timely, to all of its

[[Page 107]]

open tax years, including tax years that are currently under examination 
by the IRS. The election is made by simply taking action under those 
provisions in the same manner as the taxpayer would take action for 
payments made after December 31, 2000.

[T.D. 8734, 62 FR 53424, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72184, 72187, Dec. 31, 1998; T.D. 8856, 64 FR 73409, 73412, Dec. 30, 
1999; T.D. 8881, 65 FR 32170, 32211, May 22, 2000; 66 FR 18188, Apr. 6, 
2001; T.D. 9023, 67 FR 70312, Nov. 22, 2002]



Sec. 1.1441-2  Amounts subject to withholding.

    (a) In general. For purposes of the regulations under chapter 3 of 
the Internal Revenue Code, the term amounts subject to withholding means 
amounts from sources within the United States that constitute either 
fixed or determinable annual or periodical income described in paragraph 
(b) of this section or other amounts subject to withholding described in 
paragraph (c) of this section. For purposes of this paragraph (a), an 
amount shall be treated as being from sources within the United States 
if the source of the amount cannot be determined at the time of payment. 
See Sec. 1.1441-3(d)(1) for determining the amount to be withheld from a 
payment in the absence of information at the time of payment regarding 
the source of the amount. Amounts subject to withholding include amounts 
that are not fixed or determinable annual or periodical income and upon 
which withholding is specifically required under a provision of this 
section or another section of the regulations under chapter 3 of the 
Internal Revenue Code (such as corporate distributions upon which 
withholding is required under Sec. 1.1441-3(c)(1) that do not constitute 
dividend income). Amounts subject to withholding do not include--
    (1) Amounts described in Sec. 1.1441-1(b)(4)(i) to the extent they 
involve interest on obligations in bearer form or on foreign-targeted 
registered obligations (but, in the case of a foreign-targeted 
registered obligation, only to the extent of those amounts paid to a 
registered owner that is a financial institution within the meaning of 
section 871(h)(5)(B) or a member of a clearing organization which member 
is the beneficial owner of the obligation);
    (2) Amounts described in Sec. 1.1441-1(b)(4)(ii) (dealing with bank 
deposit interest and similar types of interest (including original issue 
discount) described in section 871(i)(2)(A) or 881(d));
    (3) Amounts described in Sec. 1.1441-1(b)(4)(iv) (dealing with 
interest or original issue discount on certain short-term obligations 
described in section 871(g)(1)(B) or 881(e));
    (4) Amounts described in Sec. 1.1441-1(b)(4)(xx) (dealing with 
income from certain gambling winnings exempt from tax under section 
871(j));
    (5) Amounts paid as part of the purchase price of an obligation sold 
or exchanged between interest payment dates, unless the sale or exchange 
is part of a plan the principal purpose of which is to avoid tax and the 
withholding agent has actual knowledge or reason to know of such plan;
    (6) Original issue discount paid as part of the purchase price of an 
obligation sold or exchanged in a transaction other than a redemption of 
such obligation, unless the purchase is part of a plan the principal 
purpose of which is to avoid tax and the withholding agent has actual 
knowledge or reason to know of such plan; and
    (7) Insurance premiums paid with respect to a contract that is 
subject to the section 4371 excise tax.
    (b) Fixed or determinable annual or periodical income--(1) In 
general--(i) Definition. For purposes of chapter 3 of the Internal 
Revenue Code and the regulations thereunder, fixed or determinable 
annual or periodical income includes all income included in gross income 
under section 61 (including original issue discount) except for the 
items specified in paragraph (b)(2) of this section. Items of income 
that are excluded from gross income under a provision of law without 
regard to the U.S. or foreign status of the owner of the income, such as 
interest excluded from gross income under section 103(a) or qualified 
scholarship income under section 117, shall not be treated as fixed or 
determinable annual or periodical income under chapter 3 of the Internal 
Revenue Code. Income excluded from gross income under section 892 
(income of

[[Page 108]]

foreign governments) or section 115 (income of a U.S. possession) is 
fixed or determinable annual or periodical income since the exclusion 
from gross income under those sections is dependent on the foreign 
status of the owner of the income. See Sec. 1.306-3(h) for treating 
income from the disposition of section 306 stock as fixed or 
determinable annual or periodical income.
    (ii) Manner of payment. The term fixed or determinable annual or 
periodical is merely descriptive of the character of a class of income. 
If an item of income falls within the class of income contemplated in 
the statute and described in paragraph (a) of this section, it is 
immaterial whether payment of that item is made in a series of payments 
or in a single lump sum. Further, the income need not be paid annually 
if it is paid periodically; that is to say, from time to time, whether 
or not at regular intervals. The fact that a payment is not made 
annually or periodically does not, however, prevent it from being fixed 
or determinable annual or periodical income (e.g., a lump sum payment). 
In addition, the fact that the length of time during which the payments 
are to be made may be increased or diminished in accordance with 
someone's will or with the happening of an event does not disqualify the 
payment as determinable or periodical. For this purpose, the share of 
the fixed or determinable annual or periodical income of an estate or 
trust from sources within the United States which is required to be 
distributed currently, or which has been paid or credited during the 
taxable year, to a nonresident alien beneficiary of such estate or trust 
constitutes fixed or determinable annual or periodical income.
    (iii) Determinability of amount. An item of income is fixed when it 
is to be paid in amounts definitely pre-determined. An item of income is 
determinable if the amount to be paid is not known but there is a basis 
of calculation by which the amount may be ascertained at a later time. 
For example, interest is determinable even if it is contingent in that 
its amount cannot be determined at the time of payment of an amount with 
respect to a loan because the calculation of the interest portion of the 
payment is contingent upon factors that are not fixed at the time of the 
payment. For purposes of this section, an amount of income does not have 
to be determined at the time that the payment is made in order to be 
determinable. An amount of income described in paragraph (a) of this 
section which the withholding agent knows is part of a payment it makes 
but which it cannot calculate exactly at the time of payment, is 
nevertheless determinable if the determination of the exact amount 
depends upon events expected to occur at a future date. In contrast, a 
payment which may be income in the future based upon events that are not 
anticipated at the time the payment is made is not determinable. For 
example, loan proceeds may become income to the borrower when and to the 
extent the loan is canceled without repayment. While the cancellation of 
the debt is income to the borrower when it occurs, it is not 
determinable at the time the loan proceeds are disbursed to the borrower 
if the lack of repayment leading to the cancellation of part or all of 
the debt was not anticipated at the time of disbursement. The fact that 
the source of an item of income cannot be determined at the time that 
the payment is made does not render a payment not determinable. See 
Sec. 1.1441-3(d)(1) for determining the amount to be withheld from a 
payment in the absence of information at the time of payment regarding 
the source of the amount.
    (2) Exceptions. For purposes of chapter 3 of the Code and the 
regulations thereunder, the items of income described in this paragraph 
(b)(2) are not fixed or determinable annual or periodical income--
    (i) Gains derived from the sale of property (including market 
discount and option premiums), except for gains described in paragraph 
(b)(3) or (c) of this section; and
    (ii) Any other income that the Internal Revenue Service (IRS) may 
determine, in published guidance (see Sec. 601.601(d)(2) of this 
chapter), is not fixed or determinable annual or periodical income.
    (3) Original issue discount--(i) Amount subject to tax. An amount 
representing original issue discount is fixed or determinable annual or 
periodical income

[[Page 109]]

that is subject to tax under sections 871(a)(1)(C) and 881(a)(3) to the 
extent provided in those sections and this paragraph (b)(3) if not 
otherwise excluded under paragraph (a) of this section. An amount of 
original issue discount is subject to tax with respect to a foreign 
beneficial owner of an obligation carrying original issue discount upon 
a sale or exchange of the obligation or when a payment is made on such 
obligation. The amount taxable is the amount of original issue discount 
that accrued while the foreign person held the obligation up to the time 
that the obligation is sold or exchanged or that a payment is made on 
the obligation, reduced by any amount of original issue discount that 
was taken into account prior to that time (due to a payment made on the 
obligation). In the case of a payment made on the obligation, the tax 
due on the amount of original issue discount may not exceed the amount 
of the payment reduced by the tax imposed on any portion of the payment 
that is qualified stated interest.
    (ii) Amounts subject to withholding. A withholding agent must 
withhold on the taxable amount of original issue discount paid on the 
redemption of an original issue discount obligation unless an exception 
to withholding applies (e.g., portfolio interest or treaty exception). 
In addition, withholding is required on the taxable amount of original 
issue discount upon the sale or exchange of an original issue discount 
obligation, other than in a redemption, to the extent the withholding 
agent has actual knowledge or reason to know that the sale or exchange 
is part of a plan the principal purpose of which is to avoid tax. If a 
withholding agent cannot determine the taxable amount of original issue 
discount on the redemption of an original issue discount obligation (or 
on the sale or exchange of such an obligation if the principal purpose 
of the sale is to avoid tax), then it must withhold on the entire amount 
of original issue discount accrued from the date of issue until the date 
of redemption (or the date the obligation is sold or exchanged) 
determined on the basis of the most recently published ``List of 
Original Issue Discount Instruments'' (IRS Publication 1212, available 
from the IRS Forms Distribution Center) or similar list published by the 
IRS as if the beneficial owner of the obligation had held the obligation 
since its original issue.
    (iii) Exceptions to withholding. To the extent that this paragraph 
(b)(3) applies to require withholding by a person other than an issuer 
of an original issue discount obligation, or the issuer's agent, it 
shall apply only to obligations issued after December 31, 2000.
    (4) Securities lending transactions and equivalent transactions. See 
Secs. 1.871-7(b)(2) and 1.881-2(b)(2) regarding the character of 
substitute payments as fixed and determinable annual or periodical 
income. Such amounts constitute income subject to withholding to the 
extent they are from sources within the United States, as determined 
under section Secs. 1.861-2(a)(7) and 1.861-3(a)(6). See Secs. 1.6042-
3(a)(2) and 1.6049-5(a)(5) for reporting requirements applicable to 
substitute dividend and interest payments, respectively.
    (c) Other income subject to withholding. Withholding is also 
required on the following items of income--
    (1) Gains described in sections 631 (b) or (c), relating to 
treatment of gain on disposal of timber, coal, or domestic iron ore with 
a retained economic interest; and
    (2) Gains subject to the 30-percent tax under section 871(a)(1)(D) 
or 881(a)(4), relating to contingent payments received from the sale or 
exchange of patents, copyrights, and similar intangible property.
    (d) Exceptions to withholding where no money or property is paid or 
lack of knowledge--(1) General rule. A withholding agent who is not 
related to the recipient or beneficial owner has an obligation to 
withhold under section 1441 only to the extent that, at any time between 
the date that the obligation to withhold would arise (but for the 
provisions of this paragraph (d)) and the due date for the filing of 
return on Form 1042 (including extensions) for the year in which the 
payment occurs, it has control over, or custody of money or property 
owned by the recipient or beneficial owner from which to withhold an 
amount and has knowledge of the facts that give rise to the payment.

[[Page 110]]

The exemption from the obligation to withhold under this paragraph (d) 
shall not apply, however, to distributions with respect to stock or if 
the lack of control or custody of money or property from which to 
withhold is part of a pre-arranged plan known to the withholding agent 
to avoid withholding under section 1441, 1442, or 1443. For purposes of 
this paragraph (d), a withholding agent is related to the recipient or 
beneficial owner if it is related within the meaning of section 482. Any 
exemption from withholding pursuant to this paragraph (d) applies 
without a requirement that documentation be furnished to the withholding 
agent. However, documentation may have to be furnished for purposes of 
the information reporting provisions under chapter 61 of the Code and 
backup withholding under section 3406. The exemption from withholding 
under this paragraph (d) is not a determination that the amounts are not 
fixed or determinable annual or periodical income, nor does it 
constitute an exemption from reporting the amount under Sec. 1.1461-1 
(b) and (c).
    (2) Cancellation of debt. A lender of funds who forgives any portion 
of the loan is deemed to have made a payment of income to the borrower 
under Sec. 1.61-12 at the time the event of forgiveness occurs. However, 
based on the rules of paragraph (d)(1) of this section, the lender shall 
have no obligation to withhold on such amount to the extent that it does 
not have custody or control over money or property of the borrower at 
any time between the time that the loan is forgiven and the due date 
(including extensions) of the Form 1042 for the year in which the 
payment is deemed to occur. A payment received by the lender from the 
borrower in partial settlement of the debt obligation does not, for this 
purpose, constitute an amount of money or property belonging to the 
borrower from which the withholding tax liability can be satisfied.
    (3) Satisfaction of liability following underwithholding by 
withholding agent. A withholding agent who, after failing to withhold 
the proper amount from a payment, satisfies the underwithheld amount out 
of its own funds may cause the beneficial owner to realize income to the 
extent of such satisfaction or may be considered to have advanced funds 
to the beneficial owner. Such determination depends upon the contractual 
arrangements governing the satisfaction of such tax liability (e.g., 
arrangements in which the withholding agent agrees to pay the amount due 
under section 1441 for the beneficial owner) or applicable laws 
governing the transaction. If the satisfaction of the tax liability is 
considered to constitute an advance of funds by the withholding agent to 
the beneficial owner and the withholding agent fails to collect the 
amount from the beneficial owner, a cancellation of indebtedness may 
result, giving rise to income to the beneficial owner under Sec. 1.61-
12. While such income is annual or periodical fixed or determinable, the 
withholding agent shall have no liability to withhold on such income to 
the extent the conditions set forth in paragraphs (d) (1) and (2) of 
this section are satisfied with respect to this income. Contrast the 
rules of this paragraph (d)(3) with the rules in Sec. 1.1441-3(f)(1) 
dealing with a situation in which the satisfaction of the beneficial 
owner's tax liability itself constitutes additional income to the 
beneficial owner. See, also, Sec. 1.1441-3(c)(2)(ii)(B) for a special 
rule regarding underwithholding on corporate distributions due to 
underestimating an amount of earnings and profits.
    (e) Payment--(1) General rule. A payment is considered made to a 
person if that person realizes income whether or not such income results 
from an actual transfer of cash or other property. For example, 
realization of income from cancellation of debt results in a deemed 
payment. A payment is considered made when the amount would be 
includible in the income of the beneficial owner under the U.S. tax 
principles governing the cash basis method of accounting. A payment is 
considered made whether it is made directly to the beneficial owner or 
to another person for the benefit of the beneficial owner (e.g., to the 
agent of the beneficial owner). Thus, a payment of income is considered 
made to a beneficial owner if it is paid in complete or partial 
satisfaction of the beneficial owner's debt to a creditor. In the event 
of

[[Page 111]]

a conflict between the rules of this paragraph (e)(1) governing whether 
a payment has occurred and its timing and the rules of Sec. 31.3406(a)-4 
of this chapter, the rules in Sec. 31.3406(a)-4 of this chapter shall 
apply to the extent that the application of section 3406 is relevant to 
the transaction at issue.
    (2) Income allocated under section 482. A payment is considered made 
to the extent income subject to withholding is allocated under section 
482. Further, income arising as a result of a secondary adjustment made 
in conjunction with a reallocation of income under section 482 from a 
foreign person to a related U.S. person is considered paid to a foreign 
person unless the taxpayer to whom the income is reallocated has entered 
into a repatriation agreement with the IRS and the agreement eliminates 
the liability for withholding under this section. For purposes of 
determining the liability for withholding, the payment of income is 
deemed to have occurred on the last day of the taxable year in which the 
transactions that give rise to the allocation of income and the 
secondary adjustments, if any, took place.
    (3) Blocked income. Income is not considered paid if it is blocked 
under executive authority, such as the President's exercise of emergency 
power under the Trading with the Enemy Act (50 U.S.C. App. 5), or the 
International Emergency Economic Powers Act (50 U.S.C. 1701 et seq). 
However, on the date that the blocking restrictions are removed, the 
income that was blocked is considered constructively received by the 
beneficial owner (and therefore paid for purposes of this section) and 
subject to withholding under Sec. 1.1441-1. Any exemption from 
withholding pursuant to this paragraph (e)(3) applies without a 
requirement that documentation be furnished to the withholding agent. 
However, documentation may have to be furnished for purposes of the 
information reporting provisions under chapter 61 of the Code and backup 
withholding under section 3406. The exemption from withholding granted 
by this paragraph (e)(3) is not a determination that the amounts are not 
fixed or determinable annual or periodical income.
    (4) Special rules for dividends. For purposes of sections 1441 and 
6042, in the case of stock for which the record date is earlier than the 
payment date, dividends are considered paid on the payment date. In the 
case of a corporate reorganization, if a beneficial owner is required to 
exchange stock held in a former corporation for stock in a new 
corporation before dividends that are to be paid with respect to the 
stock in the new corporation will be paid on such stock, the dividend is 
considered paid on the date that the payee or beneficial owner actually 
exchanges the stock and receives the dividend. See Sec. 31.3406(a)-
4(a)(2) of this chapter.
    (5) Certain interest accrued by a foreign corporation. For purposes 
of sections 1441 and 6049, a foreign corporation shall be treated as 
having made a payment of interest as of the last day of the taxable year 
if it has made an election under Sec. 1.884-4(c)(1) to treat accrued 
interest as if it were paid in that taxable year.
    (6) Payments other than in U.S. dollars. For purposes of section 
1441, a payment includes amounts paid in a medium other than U.S. 
dollars. See Sec. 1.1441-3(e) for rules regarding the amount subject to 
withholding in the case of such payments.
    (f) Effective date. This section applies to payments made after 
December 31, 2000.

[T.D. 8734, 62 FR 53444, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72187, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999; T.D. 8881, 
65 FR 32186, May 22, 2000]



Sec. 1.1441-3  Determination of amounts to be withheld.

    (a) Withholding on gross amount. Except as otherwise provided in 
regulations under section 1441, the amount subject to withholding under 
Sec. 1.1441-1 is the gross amount of income subject to withholding that 
is paid to a foreign person. The gross amount of income subject to 
withholding may not be reduced by any deductions, except to the extent 
that one or more personal exemptions are allowed as provided under 
Sec. 1.1441-4(b)(6).
    (b) Withholding on payments on certain obligations--(1) Withholding 
at time of payment of interest. When making a

[[Page 112]]

payment on an interest-bearing obligation, a withholding agent must 
withhold under Sec. 1.1441-1 upon the gross amount of stated interest 
payable on the interest payment date, regardless of whether the payment 
constitutes a return of capital or the payment of income within the 
meaning of section 61. To the extent an amount was withheld on an amount 
of capital rather than interest, see the rules for adjustments, refunds, 
or credits under Sec. 1.1441-1(b)(8).
    (2) No withholding between interest payment dates--(i) In general. A 
withholding agent is not required to withhold under Sec. 1.1441-1 upon 
interest accrued on the date of a sale or exchange of a debt obligation 
when that sale occurs between two interest payment dates (even though 
the amount is treated as interest under Sec. 1.61-7(c) or (d) and is 
subject to tax under section 871 or 881). See Sec. 1.6045-1(c) for 
reporting requirements by brokers with respect to sale proceeds. See 
Sec. 1.61-7(c) regarding the character of payments received by the 
acquirer of an obligation subsequent to such acquisition (that is, as a 
return of capital or interest accrued after the acquisition). Any 
exemption from withholding pursuant to this paragraph (b)(2)(i) applies 
without a requirement that documentation be furnished to the withholding 
agent. However, documentation may have to be furnished for purposes of 
the information reporting provisions under section 6045 or 6049 and 
backup withholding under section 3406. The exemption from withholding 
granted by this paragraph (b)(2) is not a determination that the accrued 
interest is not fixed or determinable annual or periodical income under 
section 871(a) or 881(a).
    (ii) Anti-abuse rule. The exemption in paragraph (b)(2)(i) of this 
section does not apply if the sale of securities is part of a plan the 
principal purpose of which is to avoid tax by selling and repurchasing 
securities and the withholding agent has actual knowledge or reason to 
know of such plan.
    (c) Corporate distributions--(1) General rule. A corporation making 
a distribution with respect to its stock or any intermediary (described 
in Sec. 1.1441-1(c)(13)) making a payment of such a distribution is 
required to withhold under section 1441, 1442, or 1443 on the entire 
amount of the distribution, unless it elects to reduce the amount of 
withholding under the provisions of this paragraph (c). Any exceptions 
from withholding provided by this paragraph (c) apply without any 
requirement to furnish documentation to the withholding agent. However, 
documentation may have to be furnished for purposes of the information 
reporting provisions under section 6042 or 6045 and backup withholding 
under section 3406. See Sec. 1.1461-1(c) to determine whether amounts 
excepted from withholding under this section are considered amounts that 
are subject to reporting.
    (2) Exception to withholding on distributions--(i) In general. An 
election described in paragraph (c)(1) of this section is made by 
actually reducing the amount of withholding at the time that the payment 
is made. An intermediary that makes a payment of a distribution is not 
required to reduce the withholding based on the distributing 
corporation's estimates under this paragraph (c)(2) even if the 
distributing corporation itself elects to reduce the withholding on 
payments of distributions that it itself makes to foreign persons. 
Conversely, an intermediary may elect to reduce the amount of 
withholding with respect to the payment of a distribution even if the 
distributing corporation does not so elect for the payments of 
distributions that it itself makes of distributions to foreign persons. 
The amounts with respect to which a distributing corporation or 
intermediary may elect to reduce the withholding are as follows:
    (A) A distributing corporation or intermediary may elect to not 
withhold on a distribution to the extent it represents a nontaxable 
distribution payable in stock or stock rights.
    (B) A distributing corporation or intermediary may elect to not 
withhold on a distribution to the extent it represents a distribution in 
part or full payment in exchange for stock.
    (C) A distributing corporation or intermediary may elect to not 
withhold on a distribution (actual or deemed) to the extent it is not 
paid out of accumulated earnings and profits or current earnings and 
profits, based on

[[Page 113]]

a reasonable estimate determined under paragraph (c)(2)(ii) of this 
section.
    (D) A regulated investment company or intermediary may elect to not 
withhold on a distribution representing a capital gain dividend (as 
defined in section 852(b)(3)(C)) or an exempt interest dividend (as 
defined in section 852(b)(5)(A)) based on the applicable procedures 
described under paragraph (c)(3) of this section.
    (E) A U.S. Real Property Holding Corporation (defined in section 
897(c)(2)) or a real estate investment trust (defined in section 856) or 
intermediary may elect to not withhold on a distribution to the extent 
it is subject to withholding under section 1445 and the regulations 
under that section. See paragraph (c)(4) of this section for applicable 
procedures.
    (ii) Reasonable estimate of accumulated and current earnings and 
profits on the date of payment--(A) General rule. A reasonable estimate 
for purposes of paragraph (c)(2)(i)(C) of this section is a 
determination made by the distributing corporation at a time reasonably 
close to the date of payment of the extent to which the distribution 
will constitute a dividend, as defined in section 316. The determination 
is based upon the anticipated amount of accumulated earnings and profits 
and current earnings and profits for the taxable year in which the 
distribution is made, the distributions made prior to the distribution 
for which the estimate is made and all other relevant facts and 
circumstances. A reasonable estimate may be made based on the procedures 
described in Sec. 31.3406(b)(2)-4(c)(2) of this chapter.
    (B) Procedures in case of underwithholding. A distributing 
corporation or intermediary that is a withholding agent with respect to 
a distribution and that determines at the end of the taxable year in 
which the distribution is made that it underwithheld under section 1441 
on the distribution shall be liable for the amount underwithheld as a 
withholding agent under section 1461. However, for purposes of this 
section and Sec. 1.1461-1, any amount underwithheld paid by a 
distributing corporation, its paying agent, or an intermediary shall not 
be treated as income subject to additional withholding even if that 
amount is treated as additional income to the shareholders unless the 
additional amount is income to the shareholder as a result of a 
contractual arrangement between the parties regarding the satisfaction 
of the shareholder's tax liabilities. In addition, no penalties shall be 
imposed for failure to withhold and deposit the tax if--
    (1) The distributing corporation made a reasonable estimate as 
provided in paragraph (c)(2)(ii)(A) of this section; and
    (2) Either--
    (i) The corporation or intermediary pays over the underwithheld 
amount on or before the due date for filing a Form 1042 for the calendar 
year in which the distribution is made, pursuant to Sec. 1.1461-2(b); or
    (ii) The corporation or intermediary is not a calendar year taxpayer 
and it files an amended return on Form 1042X (or such other form as the 
Commissioner may prescribe) for the calendar year in which the 
distribution is made and pays the underwithheld amount and interest 
within 60 days after the close of the taxable year in which the 
distribution is made.
    (C) Reliance by intermediary on reasonable estimate. For purposes of 
determining whether the payment of a corporate distribution is a 
dividend, a withholding agent that is not the distributing corporation 
may, absent actual knowledge or reason to know otherwise, rely on 
representations made by the distributing corporation regarding the 
reasonable estimate of the anticipated accumulated and current earnings 
and profits made in accordance with paragraph (c)(2)(ii)(A) of this 
section. Failure by the withholding agent to withhold the required 
amount due to a failure by the distributing corporation to reasonably 
estimate the portion of the distribution treated as a dividend or to 
properly communicate the information to the withholding agent shall be 
imputed to the distributing corporation. In such a case, the Internal 
Revenue Service (IRS) may collect from the distributing corporation any 
underwithheld amount and subject the distributing corporation to 
applicable interest and penalties as a withholding agent.

[[Page 114]]

    (D) Example. The rules of this paragraph (c)(2) are illustrated by 
the following example:

    Example. (i) Facts. Corporation X, a publicly traded corporation 
with both U.S. and foreign shareholders and a calendar year taxpayer, 
has an accumulated deficit in earnings and profits at the close of 2000. 
In 2001, Corporation X generates $1 million of current earnings and 
profits each month and makes an $18 million distribution, resulting in a 
$12 million dividend. Corporation X plans to make an additional $18 
million distribution on October 1, 2002. Approximately one month before 
that date, Corporation X's management receives an internal report from 
its legal and accounting department concerning Corporation X's estimated 
current earnings and profits. The report states that Corporation X 
should generate only $5.1 million of current earnings and profits by the 
close of the third quarter due to costs relating to substantial 
organizational and product changes, but these changes will enable 
Corporation X to generate $1.3 million of earnings and profits monthly 
for the last quarter of the 2002 fiscal year. Thus, the total amount of 
current and earnings and profits for 2002 is estimated to be $9 million.
    (ii) Analysis. Based on the facts in paragraph (i) of this Example, 
including the fact that earnings and profits estimate was made within a 
reasonable time before the distribution, Corporation X can rely on the 
estimate under paragraph (c)(2)(ii)(A) of this section. Therefore, 
Corporation X may treat $9 million of the $18 million of the October 1, 
2002, distribution to foreign shareholders as a non-dividend 
distribution.

    (3) Special rules in the case of distributions from a regulated 
investment company--(i) General rule. If the amount of any distributions 
designated as being subject to section 852(b)(3)(C) or (5)(A) exceeds 
the amount that may be designated under those sections for the taxable 
year, then no penalties will be asserted for any resulting 
underwithholding if the designations were based on a reasonable estimate 
(made pursuant to the same procedures as are described in paragraph 
(c)(2)(ii)(A) of this section) and the adjustments to the amount 
withheld are made within the time period described in paragraph 
(c)(2)(ii)(B) of this section. Any adjustment to the amount of tax due 
and paid to the IRS by the withholding agent as a result of 
underwithholding shall not be treated as a distribution for purposes of 
section 562(c) and the regulations thereunder. Any amount of U.S. tax 
that a foreign shareholder is treated as having paid on the 
undistributed capital gain of a regulated investment company under 
section 852(b)(3)(D) may be claimed by the foreign shareholder as a 
credit or refund under Sec. 1.1464-1.
    (ii) Reliance by intermediary on reasonable estimate. For purposes 
of determining whether a payment is a distribution designated as subject 
to section 852(b) (3)(C) or (5)(A), a withholding agent that is not the 
distributing regulated investment company may, absent actual knowledge 
or reason to know otherwise, rely on the designations that the 
distributing company represents have been made in accordance with 
paragraph (c)(3)(i) of this section. Failure by the withholding agent to 
withhold the required amount due to a failure by the regulated 
investment company to reasonably estimate the required amounts or to 
properly communicate the relevant information to the withholding agent 
shall be imputed to the distributing company. In such a case, the IRS 
may collect from the distributing company any underwithheld amount and 
subject the company to applicable interest and penalties as a 
withholding agent.
    (4) Coordination with withholding under section 1445--(i) In 
general. A distribution from a U.S. Real Property Holding Corporation 
(USRPHC) (or from a corporation that was a USRPHC at any time during the 
five-year period ending on the date of distribution) with respect to 
stock that is a U.S. real property interest under section 897(c) or from 
a Real Estate Investment Trust (REIT) with respect to its stock is 
subject to the withholding provisions under section 1441 (or section 
1442 or 1443) and section 1445. A USRPHC making a distribution shall be 
treated as satisfying its withholding obligations under both sections if 
it withholds in accordance with one of the procedures described in 
either paragraph (c)(4)(i) (A) or (B) of this section. A USRPHC must 
apply the same withholding procedure to all the distributions made 
during the taxable year. However, the USRPHC may change the applicable 
withholding procedure from year to year. For rules regarding 
distributions

[[Page 115]]

by REITs, see paragraph (c)(4)(i)(C) of this section.
    (A) Withholding under section 1441. The USRPHC may choose to 
withhold on a distribution only under section 1441 (or 1442 or 1443) and 
not under section 1445. In such a case, the USRPHC must withhold under 
section 1441 (or 1442 or 1443) on the full amount of the distribution, 
whether or not any portion of the distribution represents a return of 
basis or capital gain. If a reduced tax rate under an income tax treaty 
applies to the distribution by the USRPHC, then the applicable rate of 
withholding on the distribution shall be no less than 10-percent, unless 
the applicable treaty specifies an applicable lower rate for 
distributions from a USRPHC, in which case the lower rate may apply.
    (B) Withholding under both sections 1441 and 1445. As an alternative 
to the procedure described in paragraph (c)(4)(i)(A) of this section, a 
USRPHC may choose to withhold under both sections 1441 (or 1442 or 1443) 
and 1445 under the procedures set forth in this paragraph (c)(4)(i)(B). 
The USRPHC must make a reasonable estimate of the portion of the 
distribution that is a dividend under paragraph (c)(2)(ii)(A) of this 
section, and must--
    (1) Withhold under section 1441 (or 1442 or 1443) on the portion of 
the distribution that is estimated to be a dividend under paragraph 
(c)(2)(ii)(A) of this section; and
    (2) Withhold under section 1445(e)(3) and Sec. 1.1445-5(e) on the 
remainder of the distribution or on such smaller portion based on a 
withholding certificate obtained in accordance with Sec. 1.1445-
5(e)(2)(iv).
    (C) Coordination with REIT withholding. Withholding is required 
under section 1441 (or 1442 or 1443) on the portion of a distribution 
from a REIT that is not designated as a capital gain dividend, a return 
of basis, or a distribution in excess of a shareholder's adjusted basis 
in the stock of the REIT that is treated as a capital gain under section 
301(c)(3). A distribution in excess of a shareholder's adjusted basis in 
the stock of the REIT is, however, subject to withholding under section 
1445, unless the interest in the REIT is not a U.S. real property 
interest (e.g., an interest in a domestically controlled REIT under 
section 897(h)(2)). In addition, withholding is required under section 
1445 on the portion of the distribution designated by a REIT as a 
capital gain dividend. See Sec. 1.1445-8.
    (ii) Intermediary reliance rule. A withholding agent that is not the 
distributing USRPHC must withhold under paragraph (c)(4)(i) of this 
section, but may, absent actual knowledge or reason to know otherwise, 
rely on representations made by the USRPHC regarding the determinations 
required under paragraph (c)(4)(i) of this section. Failure by the 
withholding agent to withhold the required amount due to a failure by 
the distributing USRPHC to make these determinations in a reasonable 
manner or to properly communicate the determinations to the withholding 
agent shall be imputed to the distributing USRPHC. In such a case, the 
IRS may collect from the distributing USRPHC any underwithheld amount 
and subject the distributing USRPHC to applicable interest and penalties 
as a withholding agent.
    (d) Withholding on payments that include an undetermined amount of 
income--(1) In general. Where the withholding agent makes a payment and 
does not know at the time of payment the amount that is subject to 
withholding because the determination of the source of the income or the 
calculation of the amount of income subject to tax depends upon facts 
that are not known at the time of payment, then the withholding agent 
must withhold an amount under Sec. 1.1441-1 based on the entire amount 
paid that is necessary to assure that the tax withheld is not less than 
30 percent (or other applicable percentage) of the amount that will 
subsequently be determined to be from sources within the United States 
or to be income subject to tax. The amount so withheld shall not exceed 
30 percent of the amount paid. In the alternative, the withholding agent 
may make a reasonable estimate of the amount from U.S. sources or of the 
taxable amount and set aside a corresponding portion of the amount due 
under the transaction and hold such portion in escrow until the amount 
from U.S. sources or the taxable amount can be determined, at which

[[Page 116]]

point withholding becomes due under Sec. 1.1441-1. See Sec. 1.1441-
1(b)(8) regarding adjustments in the case of overwithholding. The 
provisions of this paragraph (d)(1) shall not apply to the extent that 
other provisions of the regulations under chapter 3 of the Internal 
Revenue Code (Code) specify the amount to be withheld, if any, when the 
withholding agent lacks knowledge at the time of payment (e.g., lack of 
reliable knowledge regarding the status of the payee or beneficial 
owner, addressed in Sec. 1.1441-1(b)(3), or lack of knowledge regarding 
the amount of original issue discount under Sec. 1.1441-2(b)(3)).
    (2) Withholding on certain gains. Absent actual knowledge or reason 
to know otherwise, a withholding agent may rely on a claim regarding the 
amount of gain described in Sec. 1.1441-2(c) if the beneficial owner 
withholding certificate, or other appropriate withholding certificate, 
states the beneficial owner's basis in the property giving rise to the 
gain. In the absence of a reliable representation on a withholding 
certificate, the withholding agent must withhold an amount under 
Sec. 1.1441-1 that is necessary to assure that the tax withheld is not 
less than 30 percent (or other applicable percentage) of the recognized 
gain. For this purpose, the recognized gain is determined without regard 
to any deduction allowed by the Code from the gains. The amount so 
withheld shall not exceed 30 percent of the amount payable by reason of 
the transaction giving rise to the recognized gain. See Sec. 1.1441-
1(b)(8) regarding adjustments in the case of overwithholding.
    (e) Payments other than in U.S. dollars--(1) In general. The amount 
of a payment made in a medium other than U.S. dollars is measured by the 
fair market value of the property or services provided in lieu of U.S. 
dollars. The withholding agent may liquidate the property prior to 
payment in order to withhold the required amount of tax under section 
1441 or obtain payment of the tax from an alternative source. However, 
the obligation to withhold under section 1441 is not deferred even if no 
alternative source can be located. Thus, for purposes of withholding 
under chapter 3 of the Code, the provisions of Sec. 31.3406(h)-
2(b)(2)(ii) of this chapter (relating to backup withholding from another 
source) shall not apply. If the withholding agent satisfies the tax 
liability related to such payments, the rules of paragraph (f) of this 
section apply.
    (2) Payments in foreign currency. If the amount subject to 
withholding tax is paid in a currency other than the U.S. dollar, the 
amount of withholding under section 1441 shall be determined by applying 
the applicable rate of withholding to the foreign currency amount and 
converting the amount withheld into U.S. dollars on the date of payment 
at the spot rate (as defined in Sec. 1.988-1(d)(1)) in effect on that 
date. A withholding agent making regular or frequent payments in foreign 
currency may use a month-end spot rate or a monthly average spot rate. A 
spot rate convention must be used consistently for all non-dollar 
amounts withheld and from year to year. Such convention cannot be 
changed without the consent of the Commissioner. The U.S. dollar amount 
so determined shall be treated by the beneficial owner as the amount of 
tax paid on the income for purposes of determining the final U.S. tax 
liability and, if applicable, claiming a refund or credit of tax.
    (f) Tax liability of beneficial owner satisfied by withholding 
agent--(1) General rule. In the event that the satisfaction of a tax 
liability of a beneficial owner by a withholding agent constitutes 
income to the beneficial owner and such income is of a type that is 
subject to withholding, the amount of the payment deemed made by the 
withholding agent for purposes of this paragraph (f) shall be determined 
under the gross-up formula provided in this paragraph (f)(1). Whether 
the payment of the tax by the withholding agent constitutes a 
satisfaction of the beneficial owner's tax liability and whether, as 
such, it constitutes additional income to the beneficial owner, must be 
determined under all the facts and circumstances surrounding the 
transaction, including any agreements between the parties and applicable 
law. The formula described in this paragraph (f)(1) is as follows:

[[Page 117]]

[GRAPHIC] [TIFF OMITTED] TR14OC97.000

    (2) Example. The following example illustrates the provisions of 
this paragraph (f):

    Example. College X awards a qualified scholarship within the meaning 
of section 117(b) to foreign student, FS, who is in the United States on 
an F visa. FS is a resident of a country that does not have an income 
tax treaty with the United States. The scholarship is $20,000 to be 
applied to tuition, mandatory fees and books, plus benefits in kind 
consisting of room and board and roundtrip air transportation. College X 
agrees to pay any U.S. income tax owed by FS with respect to the 
scholarship. The fair market value of the room and board measured by the 
amount College X charges non-scholarship students is $6,000. The cost of 
the roundtrip air transportation is $2,600. Therefore, the total fair 
market value of the scholarship received by FS is $28,600. However, the 
amount taxable is limited to the fair market value of the benefits in 
kind ($8,600) because the portion of the scholarship amount for tuition, 
fees, and books is not included in gross income under section 117. The 
applicable rate of withholding is 14 percent under section 1441(b). 
Therefore, under the gross-up formula, College X is deemed to make a 
payment of $10,000 ($8,600 divided by (1-.14). The U.S. tax that must be 
deducted and withheld from the payment under section 1441(b) is $1,400 
(.14x$10,000). College X reports scholarship income of $30,000 and 
$1,400 of U.S. tax withheld on Forms 1042 and 1042-S.
    (g) Conduit financing arrangements--(1) Duty to withhold. A financed 
entity or other person required to withhold tax under section 1441 with 
respect to a financing arrangement that is a conduit financing 
arrangement within the meaning of Sec. 1.881-3(a)(2)(iv) shall be 
required to withhold under section 1441 as if the district director had 
determined, pursuant to Sec. 1.881-3(a)(3), that all conduit entities 
that are parties to the conduit financing arrangement should be 
disregarded. The amount of tax required to be withheld shall be 
determined under Sec. 1.881-3(d). The withholding agent may withhold tax 
at a reduced rate if the financing entity establishes that it is 
entitled to the benefit of a treaty that provides a reduced rate of tax 
on a payment of the type deemed to have been paid to the financing 
entity. Section 1.881-3(a)(3)(ii)(E) shall not apply for purposes of 
determining whether any person is required to deduct and withhold tax 
pursuant to this paragraph (g), or whether any party to a financing 
arrangement is liable for failure to withhold or entitled to a refund of 
tax under sections 1441 or 1461 to 1464 (except to the extent the amount 
withheld exceeds the tax liability determined under Sec. 1.881-3(d)). 
See Sec. 1.1441-7(f) relating to withholding tax liability of the 
withholding agent in conduit financing arrangements subject to 
Sec. 1.881-3.
    (2) Effective date. This paragraph (g) is effective for payments 
made by financed entities on or after September 11, 1995. This paragraph 
shall not apply to interest payments covered by section 127(g)(3) of the 
Tax Reform Act of 1984, and to interest payments with respect to other 
debt obligations issued prior to October 15, 1984 (whether or not such 
debt was issued by a Netherlands Antilles corporation).
    (h) Effective date. Except as otherwise provided in paragraph (g) of 
this section, this section applies to payments made after December 31, 
2000.

[T.D. 6500, 25 FR 12074, Nov. 26, 1960, as amended by T.D. 6908, 31 FR 
16771, Dec. 31, 1966; T.D. 7378, 40 FR 45436, Oct. 2, 1975; T.D. 7977, 
49 FR 36831, Sept. 20, 1984; T.D. 8611, 60 FR 41014, Aug. 11, 1995; T.D. 
8734, 62 FR 53446, Oct. 14, 1997; T.D. 8804, 63 FR 72187, Dec. 31, 1998; 
T.D. 8856, 64 FR 73412, Dec. 30, 1999; T.D. 8881, 65 FR 32187, 32212, 
May 22, 2000]



Sec. 1.1441-4  Exemptions from withholding for certain effectively connected income and other amounts.

    (a) Certain income connected with a U.S. trade or business--(1) In 
general. No withholding is required under section 1441 on income 
otherwise subject to withholding if the income is (or is deemed to be) 
effectively connected with the conduct of a trade or business within the 
United States and is includible in the beneficial owner's gross income 
for the taxable year. For purposes of this paragraph (a), an amount is 
not deemed to be includible in gross income if the amount is (or is 
deemed to be) effectively connected with the conduct of a trade or 
business within the United States and the beneficial owner claims an 
exemption from tax under an income tax treaty because the income is not 
attributable to a permanent establishment in the United States. To claim 
a reduced rate of

[[Page 118]]

withholding because the income is not attributable to a permanent 
establishment, see Sec. 1.1441-6(b)(1). This paragraph (a) does not 
apply to income of a foreign corporation to which section 543(a)(7) 
applies for the taxable year or to compensation for personal services 
performed by an individual. See paragraph (b) of this section for 
compensation for personal services performed by an individual.
    (2) Withholding agent's reliance on a claim of effectively connected 
income--(i) In general. Absent actual knowledge or reason to know 
otherwise, a withholding agent may rely on a claim of exemption based 
upon paragraph (a)(1) of this section if, prior to the payment to the 
foreign person, the withholding agent can reliably associate the payment 
with a Form W-8 upon which it can rely to treat the payment as made to a 
foreign beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii). For 
purposes of this paragraph (a), a withholding certificate is valid only 
if, in addition to other applicable requirements, it includes the 
taxpayer identifying number of the person whose name is on the Form W-8 
and represents, under penalties of perjury, that the amounts for which 
the certificate is furnished are effectively connected with the conduct 
of a trade or business in the United States and is includable in the 
beneficial owner's gross income for the taxable year. In the absence of 
a reliable claim that the income is effectively connected with the 
conduct of a trade or business in the United States, the income is 
presumed not to be effectively connected, except as otherwise provided 
in paragraph (a) (2)(ii) or (3) of this section. See Sec. 1.1441-
1(e)(4)(ii)(C) for the period of validity applicable to a certificate 
provided under this section and Sec. 1.1441-1(e)(4)(ii)(D) for changes 
in circumstances arising during the taxable year indicating that the 
income to which the certificate relates is not, or is no longer expected 
to be, effectively connected with the conduct of a trade or business 
within the United States. A withholding certificate shall be effective 
only for the item or items of income specified therein. The provisions 
of Sec. 1.1441-1(b)(3)(iv) dealing with a 90-day grace period shall 
apply for purposes of this section.
    (ii) Special rules for U.S. branches of foreign persons--(A) U.S. 
branches of certain foreign banks or foreign insurance companies. A 
payment to a U.S. branch described in Sec. 1.1441-1(b)(2)(iv)(A) is 
presumed to be effectively connected with the conduct of a trade or 
business in the United States without the need to furnish a certificate, 
unless the U.S. branch provides a U.S. branch withholding certificate 
described in Sec. 1.1441-1(e)(3)(v) that represents otherwise. If no 
certificate is furnished but the income is not, in fact, effectively 
connected income, then the branch must withhold whether the payment is 
collected on behalf of other persons or on behalf of another branch of 
the same entity. See Sec. 1.1441-1(b) (2)(iv) and (6) for general rules 
applicable to payments to U.S. branches of foreign persons.
    (B) Other U.S. branches. See Sec. 1.1441-1(b)(2)(iv)(E) for similar 
procedures for other U.S. branches to the extent provided in a 
determination letter from the district director or the Assistant 
Commissioner (International).
    (3) Income on notional principal contracts--(i) General rule. A 
withholding agent that pays amounts attributable to a notional principal 
contract described in Sec. 1.863-7(a) or 1.988-2(e) shall have no 
obligation to withhold on the amounts paid under the terms of the 
notional principal contract regardless of whether a withholding 
certificate is provided. However, a withholding agent must file returns 
under Sec. 1.1461-1(b) and (c) reporting the income that it must treat 
as effectively connected with the conduct of a trade or business in the 
United States under the provisions of this paragraph (a)(3). Except as 
otherwise provided in paragraph (a)(3)(ii) of this section, a 
withholding agent must treat the income as effectively connected with 
the conduct of a U.S. trade or business if the income is paid to, or to 
the account of, a qualified business unit of a foreign person located in 
the United States or, if the payment is paid to, or to the account of, a 
qualified business unit of a foreign person located outside the United 
States, the

[[Page 119]]

withholding agent knows, or has reason to know, the payment is 
effectively connected with the conduct of a trade or business within the 
United States. Income on a notional principal contract does not include 
the amount characterized as interest under the provisions of Sec. 1.446-
3(g)(4).
    (ii) Exception for certain payments. A payment shall not be treated 
as effectively connected with the conduct of a trade or business within 
the United States for purposes of paragraph (a)(3)(i) of this section 
even if no withholding certificate is furnished if the payee provides a 
representation in a master agreement that governs the transactions in 
notional principal contracts between the parties (for example an 
International Swaps and Derivatives Association (ISDA) Agreement, 
including the Schedule thereto) or in the confirmation on the particular 
notional principal contract transaction that the payee is a U.S. person 
or a non-U.S. branch of a foreign person.
    (b) Compensation for personal services of an individual--(1) 
Exemption from withholding. Withholding is not required under 
Sec. 1.1441-1 from salaries, wages, remuneration, or any other 
compensation for personal services of a nonresident alien individual if 
such compensation is effectively connected with the conduct of a trade 
or business within the United States and--
    (i) Such compensation is subject to withholding under section 3402 
(relating to withholding on wages) and the regulations under that 
section;
    (ii) Such compensation would be subject to withholding under section 
3402 but for the provisions of section 3401(a) (not including section 
3401(a)(6)) and the regulations under that section. This paragraph 
(b)(1)(ii) does not apply to payments to a nonresident alien individual 
from any trust described in section 401(a), any annuity plan described 
in section 403(a), any annuity, custodial account, or retirement income 
account described in section 403(b), or an individual retirement account 
or individual retirement annuity described in section 408. Instead, 
these payments are subject to withholding under this section to the 
extent they are exempted from the definition of wages under section 
3401(a)(12) or to the extent they are from an annuity, custodial 
account, or retirement income account described in section 403(b), or an 
individual retirement account or individual retirement annuity described 
in section 408. Thus, for example, payments to a nonresident alien 
individual from a trust described in section 401(a) are subject to 
withholding under section 1441 and not under section 3405 or section 
3406.
    (iii) Such compensation is for services performed by a nonresident 
alien individual who is a resident of Canada or Mexico and who enters 
and leaves the United States at frequent intervals;
    (iv) Such compensation is, or will be, exempt from the income tax 
imposed by chapter 1 of the Code by reason of a provision of the 
Internal Revenue Code or a tax treaty to which the United States is a 
party;
    (v) Such compensation is paid after January 3, 1979 as a commission 
or rebate paid by a ship supplier to a nonresident alien individual, who 
is employed by a nonresident alien individual, foreign partnership, or 
foreign corporation in the operation of a ship or ships of foreign 
registry, for placing orders for supplies to be used in the operation of 
such ship or ships with the supplier. See section 162(c) and the 
regulations thereunder for denial of deductions for illegal bribes, 
kickbacks, and other payments; or
    (vi) Compensation that is exempt from withholding under section 3402 
by reason of section 3402(e), provided that the employee and his 
employer enter into an agreement under section 3402(p) to provide for 
the withholding of income tax upon payments of amounts described in 
Sec. 31.3401(a)-3(b)(1) of this chapter. An employee who desires to 
enter into such an agreement should furnish his employer with Form W-4 
(withholding exemption certificate) (or such other form as the Internal 
Revenue Service (IRS) may prescribe). See section 3402(f) and the 
regulations thereunder and Sec. 31.3402(p)-1 of this chapter.
    (2) Manner of obtaining withholding exemption under tax treaty--(i) 
In general. In order to obtain the exemption from withholding by reason 
of a tax treaty, provided by paragraph (b)(1)(iv) of this

[[Page 120]]

section, a nonresident alien individual must submit a withholding 
certificate (described in paragraph (b)(2)(ii) of this section) to each 
withholding agent from whom amounts are to be received. A separate 
withholding certificate must be filed for each taxable year of the alien 
individual. If the withholding agent is satisfied that an exemption from 
withholding is warranted (see paragraph (b)(2)(iii) of this section), 
the withholding certificate shall be accepted in the manner set forth in 
paragraph (b)(2)(iv) of this section. The exemption from withholding 
becomes effective for payments made at least ten days after a copy of 
the accepted withholding certificate is forwarded to the Assistant 
Commissioner (International). The withholding agent may rely on an 
accepted withholding certificate only if the IRS has not objected to the 
certificate. For purposes of this paragraph (b)(2)(i), the IRS will be 
considered to have not objected to the certificate if it has not 
notified the withholding agent within a 10-day period beginning from the 
date that the withholding certificate is forwarded to the IRS pursuant 
to paragraph (b)(2)(v) of this section. After expiration of the 10-day 
period, the withholding agent may rely on the withholding certificate 
retroactive to the date of the first payment covered by the certificate. 
The fact that the IRS does not object to the withholding certificate 
within the 10-day period provided in this paragraph (b)(2)(i) shall not 
preclude the IRS from examining the withholding agent at a later date in 
light of facts that the withholding agent knew or had reason to know 
regarding the payment and eligibility for a reduced rate and that were 
not disclosed to the IRS as part of the 10-day review process.
    (ii) Withholding certificate claiming withholding exemption. The 
statement claiming an exemption from withholding shall be made on Form 
8233 (or an acceptable substitute or such other form as the IRS may 
prescribe). Form 8233 shall be dated, signed by the beneficial owner 
under penalties of perjury, and contain the following information--
    (A) The individual's name, permanent residence address, taxpayer 
identifying number (or a copy of a completed Form W-7 or SS-5 showing 
that a number has been applied for), and the U.S. visa number, if any;
    (B) The individual's current immigration status and visa type;
    (C) The individual's original date of entry into the United States;
    (D) The country that issued the individual's passport and the number 
of such passport, or the individual's permanent address if a citizen of 
Canada or Mexico;
    (E) The taxable year for which the statement is to apply, the 
compensation to which it relates, and the amount (or estimated amount if 
exact amount not known) of such compensation;
    (F) A statement that the individual is not a citizen or resident of 
the United States;
    (G) The number of personal exemptions claimed by the individual;
    (H) A statement as to whether the compensation to be paid to him or 
her during the taxable year is or will be exempt from income tax and the 
reason why the compensation is exempt;
    (I) If the compensation is exempt from withholding by reason of an 
income tax treaty to which the United States is a party, the tax treaty 
and provision under which the exemption from withholding is claimed and 
the country of which the individual is a resident;
    (J) Sufficient facts to justify the claim in exemption from 
withholding; and
    (K) Any other information as may be required by the form or 
accompanying instructions in addition to, or in lieu of, the information 
described in this paragraph (b)(2)(ii).
    (iii) Review by withholding agent. The exemption from withholding 
provided by paragraph (b)(1)(iv) of this section shall not apply unless 
the withholding agent accepts (in the manner provided in paragraph 
(b)(2)(iv) of this section) the statement on Form 8233 supplied by the 
nonresident alien individual. Before accepting the statement the 
withholding agent must examine the statement. If the withholding agent 
knows or has reason to know that any of the facts or assertions on Form 
8233 may

[[Page 121]]

be false or that the eligibility of the individual's compensation for 
the exemption cannot be readily determined, the withholding agent may 
not accept the statement on Form 8233 and is required to withhold under 
this section. If the withholding agent accepts the statement and 
subsequently finds that any of the facts or assertions contained on Form 
8233 may be false or that the eligibility of the individual's 
compensation for the exemption can no longer be readily determined, then 
the withholding agent shall promptly so notify the Assistant 
Commissioner (International) by letter, and the withholding agent is not 
relieved of liability to withhold on any amounts still to be paid. If 
the withholding agent is notified by the Assistant Commissioner 
(International) that the eligibility of the individual's compensation 
for the exemption is in doubt or that such compensation is not eligible 
for the exemption, the withholding agent is required to withhold under 
this section. The rules of this paragraph are illustrated by the 
following examples.

    Example 1. C, a nonresident alien individual, submits Form 8233 to 
W, a withholding agent. The statement on Form 8233 does not include all 
the information required by paragraph (b)(2)(ii) of this section. 
Therefore, W has reason to know that he or she cannot readily determine 
whether C's compensation for personal services is eligible for an 
exemption from withholding and, therefore, W must withhold.
    Example 2. D, a nonresident alien, is performing services for W, a 
withholding agent. W has accepted a statement on Form 8233 submitted by 
D, according to the provisions of this section. W receives notice from 
the Internal Revenue Service that the eligibility of D's compensation 
for a withholding exemption is in doubt. Therefore, W has reason to know 
that the eligibility of the compensation for a withholding exemption 
cannot be readily determined, as of the date W receives the 
notification, and W must withhold tax under section 1441 on amounts paid 
after receipt of the notification.
    Example 3. E, a nonresident alien individual, submits Form 8233 to 
W, a withholding agent for whom E is to perform personal services. The 
statement contains all the information requested on Form 8233. E claims 
an exemption from withholding based on a personal exemption amount 
computed on the number of days E will perform personal services for W in 
the United States. If W does not know or have reason to know that any 
statement on the Form 8233 is false or that the eligibility of E's 
compensation for the withholding exemption cannot be readily determined, 
W can accept the statement on Form 8233 and exempt from withholding the 
appropriate amount of E's income.

    (iv) Acceptance by withholding agent. If after the review described 
in paragraph (b)(2)(iii) of this section the withholding agent is 
satisfied that an exemption from withholding is warranted, the 
withholding agent may accept the statement by making a certification, 
verified by a declaration

that it is made under the penalties of perjury, on Form 8233. The 
certification shall be--
    (A) That the withholding agent has examined the statement,
    (B) That the withholding agent is satisfied that an exemption from 
withholding is warranted, and
    (C) That the withholding agent does not know or have reason to know 
that the individual's compensation is not entitled to the exemption or 
that the eligibility of the individual's compensation for the exemption 
cannot be readily determined.
    (v) Copies of Form 8233. The withholding agent shall forward one 
copy of each Form 8233 that is accepted under paragraph (b)(2)(iv) of 
this section to the Assistant Commissioner (International), within five 
days of such acceptance. The withholding agent shall retain a copy of 
Form 8233.
    (3) Withholding agreements. Compensation for personal services of a 
nonresident alien individual who is engaged during the taxable year in 
the conduct of a trade or business within the United States may be 
wholly or partially exempted from the withholding required by 
Sec. 1.1441-1 if an agreement is reached between the Assistant 
Commissioner (International) and the alien individual with respect to 
the amount of withholding required. Such agreement shall be available in 
the circumstances and in the manner set forth by the Internal Revenue 
Service, and shall be effective for payments covered by the agreement 
that are made after the agreement is executed by all parties. The alien 
individual must agree to timely file an income tax return for the 
current taxable year.

[[Page 122]]

    (4) Final payment exemption--(i) General rule. Compensation for 
independent personal services of a nonresident alien individual who is 
engaged during the taxable year in the conduct of a trade or business 
within the United States may be wholly or partially exempted from the 
withholding required by Sec. 1.1441-1 from the final payment of 
compensation for independent personal services. This exemption does not 
apply to wages. This exemption from withholding is available only once 
during an alien individual's taxable year and is obtained by the alien 
individual presenting to the withholding agent a letter in duplicate 
from a district director stating the amount of compensation subject to 
the exemption and the amount that would otherwise be withheld from such 
final payment under section 1441 that shall be paid to the alien 
individual due to the exemption. The alien individual shall attach a 
copy of the letter to his or her income tax return for the taxable year 
for which the exemption is effective.
    (ii) Final payment of compensation for personal services. For 
purposes of this paragraph, final payment of compensation for personal 
services means the last payment of compensation, other than wages, for 
personal services rendered within the United States that the individual 
expects to receive from any withholding agent during the taxable year.
    (iii) Manner of applying for final payment exemption. In order to 
obtain the final payment exemption provided by paragraph (b)(4)(i) of 
this section, the nonresident alien individual (or his or her agent) 
must file the forms and provide the information required by the district 
director. Ordinary and necessary business expenses may be taken into 
account if substantiated to the satisfaction of the district director. 
The alien individual must submit a statement, signed by him or her and 
verified by a declaration that it is made under the penalties of 
perjury, that all the information provided is true and that to his or 
her knowledge no relevant information has been omitted. The information 
required to be submitted includes, but is not limited to--
    (A) A statement by each withholding agent from whom amounts of gross 
income effectively connected with the conduct of a trade or business 
within the United States have been received by the alien individual 
during the taxable year, of the amount of such income paid and the 
amount of tax withheld, signed and verified by a declaration that it is 
made under penalties of perjury;
    (B) A statement by the withholding agent from whom the final payment 
of compensation for personal services will be received, of the amount of 
such final payment and the amount which would be withheld under 
Sec. 1.1441-1 if a final payment exemption under paragraph (b)(4)(i) of 
this section is not granted, signed and verified by a declaration that 
it is made under penalties of perjury;
    (C) A statement by the individual that he or she does not intend to 
receive any other amounts of gross income effectively connected with the 
conduct of a trade or business within the United States during the 
current taxable year;
    (D) The amount of tax which has been withheld (or paid) under any 
other provision of the Code or regulations with respect to any income 
effectively connected with the conduct of a trade or business within the 
United States during the current taxable year;
    (E) The amount of any outstanding tax liabilities (and interest and 
penalties relating thereto) from the current taxable year or prior 
taxable periods; and
    (F) The provision of any income tax treaty under which a partial or 
complete exemption from withholding may be claimed, the country of the 
individual's residence, and a statement of sufficient facts to justify 
an exemption pursuant to such treaty.
    (iv) Letter to withholding agent. If the district director is 
satisfied that the information provided under paragraph (b)(4)(iii) of 
this section is sufficient, the district director will, after 
coordination with the Director of the Foreign Operations District, 
ascertain the amount of the alien individual's tentative income tax for 
the taxable year with respect to gross income that is effectively 
connected with the conduct of

[[Page 123]]

a trade or business within the United States. After the tentative tax 
has been ascertained, the district director will provide the alien 
individual with a letter to the withholding agent stating the amount of 
the final payment of compensation for personal services that is exempt 
from withholding, and the amount that would otherwise be withheld under 
section 1441 that shall be paid to the alien individual due to the 
exemption. The amount of compensation for personal services exempt from 
withholding under this paragraph (b)(4) shall not exceed $5,000.

    Example 1. On July 15, 1983, B, a non-resident alien individual, 
appears before a district director with the information required by 
paragraph (b)(4)(iii) of this section. B has received personal service 
income in 1983 from which $3,000 has been withheld under section 1441. 
On August 1, 1983, B will receive $5,000 in personal service income from 
W. B does not intend to receive any other income subject to U.S. tax 
during 1983. Taking into account B's substantiated deductible business 
expenses, the district director computes the tentative tax liability on 
B's income effectively connected with the conduct of a trade or business 
in the United States during 1983 (including the $5,000 payment to be 
made on August 1, 1983) to be $3,300. B does not owe U.S. tax for any 
other taxable periods. The amount of B's final payment exemption is 
determined as follows:
    (1) The amount of total withholding is $4,500 ($3,000 previously 
withheld plus $1,500, 30% of the $5,000 final payment);
    (2) The amount of tentative excess withholding is $1,200 (total 
withholding of $4,500 minus B's tentative tax liability of $3,300); and
    (3) To allow B to receive $1,200 of the amount which would otherwise 
have been withheld from the final payment, the district director allows 
a withholding exemption for $4,000 of B's final payment. W must withhold 
$300 from the final payment.
    Example 2. The facts are the same as in Example 1 except B will 
receive a final payment of compensation on August 1, 1983, in the amount 
of $10,000 and B's tentative tax liability is $3,900. The amount of B's 
final payment exemption is determined as follows:
    (1) The amount of total withholding is $6,000 ($3,000 previously 
withheld plus $3,000, 30% of the $10,000 final payment);
    (2) The amount of tentative excess withholding is $2,100 (total 
withholding of $6,000 minus B's tentative tax liability of $3,900); and
    (3) To allow B to receive $2,100 of the amount which would otherwise 
be withheld from the final payment, $7,000 of the final payment would 
have to be exempt from withholding; however, as no more than $5,000 of 
the final payment can be exempt from withholding under this paragraph 
(b)(4), the district director allows a withholding exemption for $5,000 
of B's final payment. B must file a claim for refund at the end of the 
taxable year to obtain a refund of $600. W must withhold $1,500 from the 
final payment.

    (5) Requirement of return. The tentative tax determined by the 
district director under paragraph (b)(4)(iv) of this section or by the 
Director of the Foreign Operations District under the withholding 
agreement procedure of paragraph (b)(3) of this section shall not 
constitute a final determination of the income tax liability of the 
nonresident alien individual, nor shall such determination constitute a 
tax return of the nonresident alien individual for any taxable period. 
An alien individual who applies for or obtains an exemption from 
withholding under the procedures of paragraphs (b) (2), (3), or (4) of 
this section is not relieved of the obligation to file a return of 
income under section 6012.
    (6) Personal exemption--(i) In general. To determine the tax to be 
withheld at source under Sec. 1.1441-1 from remuneration paid for 
personal services performed within the United States by a nonresident 
alien individual and from scholarship and fellowship income described in 
paragraph (c) of this section, a withholding agent may take into account 
one personal exemption pursuant to sections 873(b)(3) and 151 regardless 
of whether the income is effectively connected. For purposes of 
withholding under section 1441 on remuneration for personal services, 
the exemption must be prorated upon a daily basis for the period during 
which the personal services are performed within the United States by 
the nonresident alien individual by dividing by 365 the number of days 
in the period during which the individual is present in the United 
States for the purpose of performing the services and multiplying the 
result by the amount of the personal exemption in effect for the taxable 
year. See Sec. 31.3402(f)(6)-1 of this chapter.
    (ii) Multiple exemptions. More than one personal exemption may be 
claimed in the case of a resident of a contiguous country or a national 
of the United States under section 873(b)(3).

[[Page 124]]

In addition, residents of a country with which the United States has an 
income tax treaty in effect may be eligible to claim more than one 
personal exemption if the treaty so provides. Claims for more than one 
personal exemption shall be made on the withholding certificate 
furnished to the withholding agent. The exemption must be prorated on a 
daily basis in the same manner as described in paragraph (b)(6)(i) of 
this section.
    (iii) Special rule where both certain scholarship and compensation 
income are received. The fact that both non-compensatory scholarship 
income and compensation income (including compensatory scholarship 
income) are received during the taxable year does not entitle the 
taxpayer to claim more than one personal exemption amount (or more than 
the additional amounts permitted under paragraph (b)(6)(ii) of this 
section). Thus, if a nonresident alien student receives non-compensatory 
taxable scholarship income from one withholding agent and compensation 
income from another withholding agent, no more than the total personal 
exemption amount permitted under the Internal Revenue Code or under an 
income tax treaty may be taken into account by both withholding agents. 
For this purpose, the withholding agent may rely on a representation 
from the beneficial owner that the exemption amount claimed does not 
exceed the amount permissible under this section.
    (c) Special rules for scholarship and fellowship income--(1) In 
general. Under section 871(c), certain amounts paid as a scholarship or 
fellowship for study, training, or research in the United States to a 
nonresident alien individual temporarily present in the United States as 
a nonimmigrant under section 101(a)(15) (F), (J), (M), or (Q) of the 
Immigration and Nationality Act are treated as income effectively 
connected with the conduct of a trade or business within the United 
States. The amounts described in the preceding sentence are those 
amounts that do not represent compensation for services. Such amounts 
(as described in the second sentence of section 1441(b)) are subject to 
withholding under section 1441, but at the lower rate of 14 percent. 
That rate may be reduced under the provisions of an income tax treaty. 
Claims of a reduced rate under an income tax treaty shall be made under 
the procedures described in Sec. 1.1441-6(b)(1). Therefore, claims for 
reduction in withholding under an income tax treaty on amounts described 
in this paragraph (c)(1) may not be made on a Form 8233. However, if the 
payee is receiving both compensation for personal services (including 
compensatory scholarship income) and non-compensatory scholarship income 
described in this paragraph (c)(1) from the same withholding agent, 
claims for reduction of withholding on both types of income may be made 
on Form 8233.
    (2) Alternate withholding election. A withholding agent may elect to 
withhold on the amounts described in paragraph (c)(1) of this section at 
the rates applicable under section 3402, as if the income were wages. 
Such election shall be made by obtaining a Form W-4 (or an acceptable 
substitute or such other form as the IRS may prescribe) from the 
beneficial owner. The fact that the withholding agent asks the 
beneficial owner to furnish a Form W-4 for such fellowship or 
scholarship income or to take such income into account in preparing such 
Form W-4 shall serve as notice to the beneficial owner that the income 
is being treated as wages for purposes of withholding tax under section 
1441.
    (d) Annuities received under qualified plans. Withholding is not 
required under section Sec. 1.1441-1 in the case of any amount received 
as an annuity if the amount is exempt from tax under section 871(f) and 
the regulations under that section. The withholding agent may exempt the 
payment from withholding if, prior to payment, it can reliably associate 
the payment with documentation upon which it can rely to treat the 
payment as made to a beneficial owner in accordance with Sec. 1.1441-
1(e)(1)(ii). A beneficial owner withholding certificate furnished for 
purposes of claiming the benefits of the exemption under this paragraph 
(d) is valid only if, in addition to other applicable requirements, it 
contains a taxpayer identifying number.
    (e) Per diem of certain alien trainees. Withholding is not required 
under section 1441(a) and Sec. 1.1441-1 on per diem

[[Page 125]]

amounts paid for subsistence by the United States Government (directly 
or by contract) to any nonresident alien individual who is engaged in 
any program of training in the United States under the Mutual Security 
Act of 1954, as amended (22 U.S.C. chapter 24). This rule shall apply 
even though such amounts are subject to tax under section 871. Any 
exemption from withholding pursuant to this paragraph (e) applies 
without a requirement that documentation be furnished to the withholding 
agent. However, documentation may have to be furnished for purposes of 
the information reporting provisions under section 6041 and backup 
withholding under section 3406. The exemption from withholding granted 
by this paragraph (e) is not a determination that the amounts are not 
fixed or determinable annual or periodical income.
    (f) Failure to receive withholding certificates timely or to act in 
accordance with applicable presumptions. See applicable procedures 
described in Sec. 1.1441-1(b)(7) in the event the withholding agent does 
not hold an appropriate withholding certificate or other appropriate 
documentation at the time of payment or does not act in accordance with 
applicable presumptions described in paragraph (a) (2)(i), (2)(ii), or 
(3) of this section.
    (g) Effective date--(1) General rule. This section applies to 
payments made after December 31, 2000.
    (2) Transition rules. The validity of a Form 4224 or 8233 that was 
valid on January 1, 1998, under the regulations in effect prior to 
January 1, 2001 (see 26 CFR part 1, revised April 1, 1999) and expired, 
or will expire, at any time during 1998, is extended until December 31, 
1998. The validity of a Form 4224 or 8233 that is valid on or after 
January 1, 1999, remains valid until its validity expires under the 
regulations in effect prior to January 1, 2001 (see 26 CFR part 1, 
revised April 1, 1999) but in no event will such form remain valid after 
December 31, 2000. The rule in this paragraph (g)(2), however, does not 
apply to extend the validity period of a Form 4224 or 8223 that expires 
solely by reason of changes in the circumstances of the person whose 
name is on the certificate. Notwithstanding the first three sentences of 
this paragraph (g)(2), a withholding agent may choose to not take 
advantage of the transition rule in this paragraph (g)(2) with respect 
to one or more withholding certificates valid under the regulations in 
effect prior to January 1, 2001 (see 26 CFR part 1, revised April 1, 
1999) and, therefore, to require withholding certificates conforming to 
the requirements described in this section (new withholding 
certificates). For purposes of this section, a new withholding 
certificate is deemed to satisfy the documentation requirement under the 
regulations in effect prior to January 1, 2001 (see 26 CFR part 1, 
revised April 1, 1999). Further, a new withholding certificate remains 
valid for the period specified in Sec. 1.1441-1(e)(4)(ii), regardless of 
when the certificate is obtained.

[T.D. 6500, 25 FR 12075, Nov. 26, 1960]

    Editorial Note: For Federal Register citations affecting 
Sec. 1.1441-4, see the List of Sections Affected in the Finding Aids 
section of this volume.



Sec. 1.1441-5  Withholding on payments to partnerships, trusts, and estates.

    (a) In general. This section describes the rules that apply to 
payments made to partnerships, trusts, and estates. Paragraph (b) of 
this section prescribes the rules that apply to a withholding agent 
making a payment to a U.S. partnership, trust, or estate. It also 
prescribes the obligations of a U.S. partnership, trust, or estate that 
makes a payment to a foreign partner, beneficiary, or owner. Paragraph 
(c) of this section prescribes rules that apply to a withholding agent 
that makes a payment to a foreign partnership. Paragraph (d) of this 
section provides presumption rules that apply to payments made to 
foreign partnerships. Paragraph (e) of this section prescribes rules, 
including presumption rules, that apply to a withholding agent that 
makes a payment to a foreign trust or foreign estate.
    (b) Rules applicable to U.S. partnerships, trusts, and estates--(1) 
Payments to U.S. partnerships, trusts, and estates. No withholding is 
required under section 1.1441-1(b)(1) on a payment of an amount subject 
to withholding (as defined in Sec. 1.1441-2(a)) that a withholding agent 
may treat as made to a U.S.

[[Page 126]]

payee. Therefore, if a withholding agent can reliably associate (within 
the meaning of Sec. 1.1441-2(b)(vii)) a Form W-9 provided in accordance 
with Sec. 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 the payment as made to a 
U.S. payee and the payment is not subject to withholding under section 
1441 even though the partnership, trust, or estate may have foreign 
partners, beneficiaries, or owners. A withholding agent is also not 
required to withhold under section 1441 on a payment it makes to an 
entity presumed to be a 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. A U.S. partnership is required to withhold under Sec. 1.1441-1 
as a withholding agent on an amount subject to withholding (as defined 
in Sec. 1.1441-2(a)) that is includible in the gross income of a partner 
that is a foreign person. Subject to paragraph (b)(2)(v) of this 
section, a U.S. partnership shall withhold when any distributions that 
include amounts subject to withholding (including guaranteed payments 
made by a U.S. partnership) are made. To the extent a foreign partner's 
distributive share of income subject to withholding has not actually 
been distributed to the foreign partner, the U.S. partnership must 
withhold on the foreign partner's distributive share of the income on 
the earlier of the date that the statement required under section 
6031(b) is mailed or otherwise provided to the partner or the due date 
for furnishing the statement.
    (B) Effectively connected income of partners. Withholding on items 
of income that are effectively connected income in the hands of the 
partners who are foreign persons is governed by section 1446 and not by 
this section. In such a case, partners in a domestic partnership are not 
required to furnish a withholding certificate in order to claim an 
exemption from withholding under section 1441(c)(1) and Sec. 1.1441-4.
    (ii) U.S. simple trusts. A U.S. trust that is described in section 
651(a) (a U.S. simple trust) is required to withhold under chapter 3 of 
the Internal Revenue Code as a withholding agent on the distributable 
net income includible in the gross income of a foreign beneficiary to 
the extent the distributable net income is an amount subject to 
withholding (as defined in Sec. 1.1441-2(a)). A U.S. simple trust shall 
withhold when a distribution is made to a foreign beneficiary. The U.S. 
trust may make a reasonable estimate of the portion of the distribution 
that constitutes distributable net income consisting of an amount 
subject to withholding and apply the appropriate rate of withholding to 
the estimated amount. If, at the end of the taxable year in which the 
distribution is made, the U.S. simple trust determines that it 
underwithheld under section 1441 or 1442, the trust shall be liable as a 
withholding agent for the amount under withheld under section 1461. No 
penalties shall be imposed for failure to withhold and deposit the tax 
if the U.S. simple trust's estimate was reasonable and the trust pays 
the underwithheld amount on or before the due date of Form 1042 under 
section 1461. Any payment of underwithheld amounts by the U.S. simple 
trust shall not be treated as income subject to additional withholding 
even if that amount is treated as additional income to the foreign 
beneficiary, unless the additional amount is income to the foreign 
beneficiary as a result of a contractual arrangement between the parties 
regarding the satisfaction of the foreign beneficiary's tax liability. 
To the extent a U.S. simple trust is required to, but does not, 
distribute such income to a foreign beneficiary, the U.S. trust must 
withhold on the foreign beneficiary's allocable share at the time the 
income is required (without extension) to be reported on Form 1042-S 
under Sec. 1.1461-1(c).
    (iii) U.S. complex trusts and U.S. estates. A U.S. trust that is not 
a trust described in section 651(a) (a U.S. complex trust) is required 
to withhold under chapter 3 of the Internal Revenue Code as a 
withholding agent on the distributable net income includible in the 
gross income of a foreign beneficiary to the extent the distributable 
net income consists of an amount subject to withholding (as defined in 
Sec. 1.1441-2(a)) that is, or is required to be, distributed currently. 
The U.S.

[[Page 127]]

complex trust shall withhold when a distribution is made to a foreign 
beneficiary. The trust may use the same procedures regarding an estimate 
of the amount subject to withholding as a U.S. simple trust under 
paragraph (b)(2)(ii) of this section. To the extent an amount subject to 
withholding is required to be, but is not actually distributed, the U.S. 
complex trust must withhold on the foreign beneficiary's allocable share 
at the time the income is required to be reported on Form 1042-S under 
Sec. 1.1461-1(c), without extension. A U.S. estate is required to 
withhold under chapter 3 of the Internal Revenue Code on the 
distributable net income includible in the gross income of a foreign 
beneficiary to the extent the distributable net income consists of an 
amount subject to withholding (as defined in Sec. 1.1441-2(a)) that is 
actually distributed. A U.S. estate may also use the reasonable estimate 
procedures of paragraph (b)(2)(ii) of this section. However, those 
procedures apply to an estate that has a taxable year other than a 
calendar year only if the estate files an amended return on Form 1042 
for the calendar year in which the distribution was made and pays the 
underwithheld tax and interest within 60 days after the close of the 
taxable year in which the distribution was made.
    (iv) U.S. grantor trusts. A U.S. trust that is described in section 
671 through 679 (a U.S. grantor trust) must withhold on any income 
includible in the gross income of a foreign person that is treated as an 
owner of the grantor trust to the extent the amount includible consists 
of an amount that is subject to withholding (as described in 
Sec. 1.1441-2(a)). The withholding must occur at the time the income is 
received by, or credited to, the trust.
    (v) Subsequent distribution. If a U.S. partnership or U.S. trust 
withholds on a foreign partner, beneficiary, or owner's share of an 
amount subject to withholding before the amount is actually distributed 
to the partner, beneficiary, or owner, withholding is not required when 
the amount is subsequently distributed.
    (c) Foreign partnerships--(1) Determination of payee--(i) Payments 
treated as made to partners. Except as otherwise provided in paragraph 
(c)(1)(ii) of this section, the payees of a payment to a person that the 
withholding agent may treat as a nonwithholding foreign partnership 
under paragraph (c)(3)(i) or (d)(2) of this section are the partners 
(looking through partners that are foreign intermediaries or flow-
through entities) as follows--
    (A) If the withholding agent can reliably associate a partner's 
distributive share of the payment with a valid Form W-9 provided under 
Sec. 1.1441-1(d), the partner is a U.S. payee;
    (B) If the withholding agent can reliably associate a partner's 
distributive share of the payment with a valid Form W-8, or other 
appropriate documentation, provided under Sec. 1.1441-1(e)(1)(ii), the 
partner is a payee that is a foreign beneficial owner;
    (C) If the withholding agent can reliably associate a partner's 
distributive share of the payment with a qualified intermediary 
withholding certificate under Sec. 1.1441-1(e)(3)(ii), a nonqualified 
intermediary withholding certificate under Sec. 1.1441-1(e)(3)(iii), or 
a U.S. branch certificate under Sec. 1.1441-1(e)(3)(v), then the rules 
of Sec. 1.1441-1(b)(2)(v) shall apply to determine who the payee is in 
the same manner as if the partner's distributive share of the payment 
had been paid directly to such intermediary or U.S. branch;
    (D) If the withholding agent can reliably associate the partner's 
distributive share with a withholding foreign partnership certificate 
under paragraph (c)(2)(iv) of this section or a nonwithholding foreign 
partnership certificate under paragraph (c)(3)(iii) of this section, 
then the rules of this paragraph (c)(1)(i) or paragraph (c)(1)(ii) of 
this section shall apply to determine whether the payment is treated as 
made to the partners of the higher-tier partnership under this paragraph 
(c)(1)(i) or to the higher-tier partnership itself (under the rules of 
paragraph (c)(1)(ii) of this section) in the same manner as if the 
partner's distributive share of the payment had been paid directly to 
the higher-tier foreign partnership;
    (E) If the withholding agent can reliably associate the partner's 
distributive share with a withholding certificate described in paragraph 
(e) of this

[[Page 128]]

section regarding a foreign trust or estate, then the rules of paragraph 
(e) of this section shall apply to determine who the payees are; and
    (F) If the withholding agent cannot reliably associate the partner's 
distributive share with a withholding certificate or other appropriate 
documentation, the partners are considered to be the payees and the 
presumptions described in paragraph (d)(3) of this section shall apply 
to determine their classification and status.
    (ii) Payments treated as made to the partnership. A payment to a 
person that the withholding agent may treat as a foreign partnership is 
treated as a payment to the foreign partnership and not to its partners 
only if--
    (A) The withholding agent can reliably associate the payment with a 
withholding certificate described in paragraph (c)(2)(iv) of this 
section (withholding certificate of a withholding foreign partnership);
    (B) The withholding agent can reliably associate the payment with a 
withholding certificate described in paragraph (c)(3)(iii) of this 
section (nonwithholding foreign partnership) certifying that the payment 
is income that is effectively connected with the conduct of a trade or 
business in the United States; or
    (C) The withholding agent can treat the income as effectively 
connected income under the presumption rules of Sec. 1.1441-4(a)(2)(ii) 
or (3)(i).
    (iii) Rules for reliably associating a payment with documentation. 
For rules regarding the reliable association of a payment with 
documentation, see Sec. 1.1441-1(b)(2)(vii). In the absence of 
documentation, see Secs. 1.1441-1(b)(3) and 1.6049-5(d) and paragraphs 
(d) and (e)(6) of this section for applicable presumptions.
    (iv) Examples. The rules of paragraphs (c)(1)(i) and (ii) of this 
section are illustrated by the following examples:

    Example 1. FP is a nonwithholding foreign partnership organized in 
Country X. FP has two partners, 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. FP has provided USWH with a valid 
nonwithholding foreign partnership certificate, as described in 
paragraph (c)(3)(iii) of this section, with which it associates a 
beneficial owner withholding certificate from FC and a Form W-9 from USP 
together with the withholding statement required by paragraph (c)(3)(iv) 
of this section. USWH can reliably associate the payment of interest 
with the withholding certificates from FC and USP. Under paragraph 
(c)(1)(i) of this section, the payees of the interest payment are FC and 
USP.
    Example 2. The facts are the same as in Example 1, except that FP1, 
a nonwithholding foreign partnership, is a partner in FP rather than 
USP. FP1 has two partners, A and B, both foreign persons. FP provides 
USWH with a valid nonwithholding foreign partnership certificate, as 
described in paragraph (c)(3)(iii) of this section, with which it 
associates a beneficial owner withholding certificate from FC and a 
nonwithholding foreign partnership certificate from FP1. In addition, 
foreign beneficial owner withholding certificates from A and B are 
associated with the nonwithholding foreign partnership withholding 
certificate from FP1. FP also provides the withholding statement 
required by paragraph (c)(3)(iv) of this section. USWH can reliably 
associate the interest payment with the withholding certificates 
provided by FC, A, and B. Therefore, under paragraph (c)(1)(i) of this 
section, the payees of the interest payment are FC, A, and B.
    Example 3. USWH makes a payment of U.S. source dividends to WFP, a 
withholding foreign partnership. WFP has two partners, FC1 and FC2, both 
foreign corporations. USWH can reliably associate the payment with a 
valid withholding foreign partnership withholding certificate from WFP. 
Therefore, under paragraph (c)(1)(ii)(A) of this section, WFP is the 
payee of the dividends.
    Example 4. USWH makes a payment of U.S. source royalties to FP, a 
foreign partnership. USWH can reliably associate the royalties with a 
valid withholding certificate from FP on which FP certifies that the 
income is effectively connected with the conduct of a trade or business 
in the United States. Therefore, under paragraph (c)(1)(ii)(B) of this 
section, FP is the payee of the royalties.

    (2) Withholding foreign partnerships--(i) Reliance on claim of 
withholding foreign partnership status. A withholding foreign 
partnership is a foreign partnership that has entered into an agreement 
with the Internal Revenue Service (IRS), as described in paragraph 
(c)(2)(ii) of this section, with respect to distributions and guaranteed 
payments it makes to its partners. A withholding agent that can reliably 
associate a payment with a certificate described in paragraph (c)(2)(iv) 
of this section may treat the person to whom it makes the payment as a 
withholding foreign partnership for purposes of withholding

[[Page 129]]

under chapter 3 of the Internal Revenue Code, information reporting 
under chapter 61 of the Internal Revenue Code, backup withholding under 
section 3406, and withholding under other provisions of the Internal 
Revenue Code. Furnishing such a certificate is in lieu of transmitting 
to a withholding agent withholding certificates or other appropriate 
documentation for its partners. Although the withholding foreign 
partnership generally will be required to obtain withholding 
certificates or other appropriate documentation from its partners 
pursuant to its agreement with the IRS, it will generally not be 
required to attach such documentation to its withholding foreign 
partnership withholding certificate. A foreign partnership may act as a 
qualified intermediary under Sec. 1.1441-1(e)(5) with respect to 
payments it makes to persons other than its partners. In addition, the 
IRS may permit a foreign partnership to act as a qualified intermediary 
under Sec. 1.1441-1(e)(5)(ii)(D) with respect to its partners in 
appropriate circumstances.
    (ii) Withholding agreement. The IRS may, upon request, enter into a 
withholding agreement with a foreign partnership pursuant to such 
procedures as the IRS may prescribe in published guidance (see 
Sec. 601.601(d)(2) of this chapter). Under the withholding agreement, a 
foreign partnership shall generally be subject to the applicable 
withholding and reporting provisions applicable to withholding agents 
and payors under chapters 3 and 61 of the Internal Revenue Code, section 
3406, the regulations under those provisions, and other withholding 
provisions of the Internal Revenue Code, except to the extent provided 
under the agreement. Under the agreement, a foreign partnership may 
agree to act as an acceptance agent to perform the duties described in 
Sec. 301.6109-1(d)(3)(iv)(A) of this chapter. The agreement may specify 
the manner in which applicable procedures for adjustments for 
underwithholding and overwithholding, including refund procedures, apply 
to the withholding foreign partnership and its partners and the extent 
to which applicable procedures may be modified. In particular, a 
withholding agreement may allow a withholding foreign partnership to 
claim refunds of overwithheld amounts on behalf of its customers. In 
addition, the agreement must specify the manner in which the IRS will 
audit the foreign partnership's books and records in order to verify the 
partnership's compliance with its agreement. A withholding foreign 
partnership must file a return on Form 1042 and information returns on 
Form 1042-S. The withholding foreign partnership agreement may also 
require a withholding foreign partnership to file a partnership return 
under section 6031(a) and partner statements under 6031(b).
    (iii) Withholding responsibility. A withholding foreign partnership 
must assume primary withholding responsibility under chapter 3 of the 
Internal Revenue Code. It is not required to provide information to the 
withholding agent regarding each partner's distributive share of the 
payment. The withholding foreign partnership will be responsible for 
reporting the payments under Sec. 1.1461-1(c) and chapter 61 of the 
Internal Revenue Code. A withholding agent making a payment to a 
withholding foreign partnership is not required to withhold any amount 
under chapter 3 of the Internal Revenue Code on a payment to the 
withholding foreign partnership, unless it has actual knowledge or 
reason to know that the foreign partnership is not a withholding foreign 
partnership. The withholding foreign partnership shall withhold the 
payments under the same procedures and at the same time as prescribed 
for withholding by a U.S. partnership under paragraph (b)(2) of this 
section, except that, for purposes of determining the partner's status, 
the provisions of paragraph (d)(4) of this section shall apply.
    (iv) Withholding certificate from a withholding foreign partnership. 
The rules of Sec. 1.1441-1(e)(4) shall apply to withholding certificates 
described in this paragraph (c)(2)(iv). A withholding certificate 
furnished by a withholding foreign partnership is valid with regard to 
any partner on whose behalf the certificate is furnished only if it is 
furnished on a Form W-8, an acceptable substitute form, or such other 
form as the IRS may prescribe, it is signed under penalties of perjury 
by a partner

[[Page 130]]

with authority to sign for the partnership, its validity has not 
expired, and it contains the information, statement, and certifications 
described in this paragraph (c)(2)(iv) as follows--
    (A) The name, permanent residence address (as described in 
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the 
partnership, and the country under the laws of which the partnership is 
created or governed;
    (B) A certification that the partnership is a withholding foreign 
partnership within the meaning of paragraph (c)(2)(i) of this section; 
and
    (C) Any other information, certifications or statements as may be 
required by the withholding foreign partnership agreement with the IRS 
or the form or accompanying instructions in addition to, or in lieu of, 
the information, statements, and certifications described in this 
paragraph (c)(2)(iv).
    (3) Nonwithholding foreign partnerships--(i) Reliance on claim of 
foreign partnership status. A withholding agent may treat a person as a 
nonwithholding foreign partnership if it receives from that person a 
nonwithholding foreign partnership withholding certificate as described 
in paragraph (c)(3)(iii) of this section. A withholding agent that does 
not receive a nonwithholding foreign partnership withholding 
certificate, or does not receive a valid withholding certificate, from 
an entity it knows, or has reason to know, is a foreign partnership, 
must apply the presumption rules of Secs. 1.1441-1(b)(3) and 1.6049-5(d) 
and paragraphs (d) and (e)(6) of this section. In addition, to the 
extent a withholding agent cannot, prior to a payment, reliably 
associate the payment with valid documentation from a payee that is 
associated with the nonwithholding foreign partnership withholding 
certificate or has insufficient information to report the payment on 
Form 1042-S or Form 1099, to the extent reporting is required, must also 
apply the presumption rules. See Sec. 1.1441-1(b)(2)(vii)(A) and (B) for 
rules regarding reliable association. See paragraph (c)(3)(iv) of this 
section and Sec. 1.1441-1(e)(3)(iv) for alternative procedures 
permitting allocation information to be received after a payment is 
made.
    (ii) Reliance on claim of reduced withholding by a partnership for 
its partners. This paragraph (c)(3)(ii) describes the manner in which a 
withholding agent may rely on a claim of reduced withholding when making 
a payment to a nonwithholding foreign partnership. To the extent that a 
withholding agent treats a payment to a nonwithholding foreign 
partnership as a payment to the nonwithholding foreign partnership's 
partners (whether direct or indirect) in accordance with paragraph 
(c)(1)(i) of this section, it may rely on a claim for reduced 
withholding by the partner if, prior to the payment, the withholding 
agent can reliably associate the payment (within the meaning of 
Sec. 1.1441-1(b)(2)(vii)) with a valid withholding certificate or other 
appropriate documentation from the partner that establishes entitlement 
to a reduced rate of withholding. A withholding certificate or other 
appropriate documentation that establishes entitlement to a reduced rate 
of withholding is a beneficial owner withholding certificate described 
in Sec. 1.1441-1(e)(2)(i), documentary evidence described in 
Sec. 1.1441-6(c)(3) or (4) or 1.6049-5(c)(1) (for a partner claiming to 
be a foreign person and a beneficial owner, determined under the 
provisions of Sec. 1.1441-1(c)(6)), a Form W-9 described in Sec. 1.1441-
1(d) (for a partner claiming to be a U.S. payee), or a withholding 
foreign partnership withholding certificate described in paragraph 
(c)(2)(iv) of this section. Unless a nonwithholding foreign partnership 
withholding certificate is provided for income claimed to be effectively 
connected with the conduct of a trade or business in the United States, 
a claim must be presented for each portion of the payment that 
represents an item of income includible in the distributive share of a 
partner as required under paragraph (c)(3)(iii)(C) of this section. When 
making a claim for several partners, the partnership may present a 
single nonwithholding foreign partnership withholding certificate to 
which the partners' certificates or other appropriate documentation are 
associated. Where the nonwithholding foreign partnership withholding 
certificate is provided for income claimed to be effectively connected 
with the conduct of a trade or

[[Page 131]]

business in the United States under paragraph (c)(3)(iii)(D) of this 
section, the claim may be presented without having to identify any 
partner's distributive share of the payment.
    (iii) Withholding certificate from a nonwithholding foreign 
partnership. A nonwithholding foreign partnership shall provide a 
nonwithholding foreign partnership withholding certificate with respect 
to reportable amounts received by the nonwithholding foreign 
partnership. A nonwithholding foreign partnership withholding 
certificate is valid only to the extent it is furnished on a Form W-8 
(or an acceptable substitute form or such other form as the IRS may 
prescribe), it is signed under penalties of perjury by a partner with 
authority to sign for the partnership, its validity has not expired, and 
it contains the information, statements, and certifications described in 
this paragraph (c)(3)(iii) and paragraph (c)(3)(iv) of this section, and 
the withholding certificates and other appropriate documentation for all 
the persons to whom the certificate relates are associated with the 
certificate. The rules of Sec. 1.1441-1(e)(4) shall apply to withholding 
certificates described in this paragraph (c)(3)(iii). No withholding 
certificates or other appropriate documentation from persons who derive 
income through a partnership (whether or not U.S. exempt recipients) are 
required to be associated with the nonwithholding foreign partnership 
withholding certificate if the certificate is furnished solely for 
income claimed to be effectively connected with the conduct of a trade 
or business in the United States. Withholding certificates and other 
appropriate documentation that may be associated with the nonwithholding 
foreign partnership withholding certificate consist of beneficial owner 
withholding certificates under Sec. 1.1441-1(e)(2)(i), intermediary 
withholding certificates under Sec. 1.1441-1(e)(3)(i), withholding 
foreign partnership withholding certificates under paragraph (c)(2)(iv) 
of this section, nonwithholding foreign partnership withholding 
certificates under this paragraph (c)(3)(iii), withholding certificates 
from foreign trusts or estates under paragraph (e) of this section, 
documentary evidence described in Sec. 1.1441-6(c)(3) or (4) or 
documentary evidence described in Sec. 1.6049-5(c)(1), and any other 
documentation or certificates applicable under other provisions of the 
Internal Revenue Code or regulations that certify or establish the 
status of the payee or beneficial owner as a U.S. or a foreign person. 
Nothing in this paragraph (c)(3)(iii) shall require a nonwithholding 
foreign partnership to furnish original documentation. Copies of 
certificates or documentary evidence may be transmitted to the U.S. 
withholding agent, in which case the nonwithholding foreign partnership 
must retain the original documentation for the same time period that the 
copy is required to be retained by the withholding agent under 
Sec. 1.1441-1(e)(4)(iii) and must provide it to the withholding agent 
upon request. The information, statement, and certifications required on 
the withholding certificate are as follows--
    (A) The name, permanent residence address (as described in 
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number of the 
partnership, if any, and the country under the laws of which the 
partnership is created or governed;
    (B) A certification that the person whose name is on the certificate 
is a foreign partnership;
    (C) A withholding statement associated with the nonwithholding 
foreign partnership withholding certificate that provides all of the 
information required by paragraph (c)(3)(iv) of this section and 
Sec. 1.1441-1(e)(3)(iv). No withholding statement is required, however, 
for a nonwithholding foreign partnership withholding certificate 
furnished for income claimed to be effectively connected with the 
conduct of a trade or business in the United States;
    (D) A certification that the income is effectively connected with 
the conduct of a trade or business in the United States, if applicable; 
and
    (E) Any other information, certifications, or statements required by 
the form or accompanying instructions in addition to, or in lieu of, the 
information and certifications described in this paragraph (c)(3)(iii).
    (iv) Withholding statement provided by nonwithholding foreign 
partnership. The

[[Page 132]]

provisions of Sec. 1.1441-1(e)(3)(iv) (regarding a withholding 
statement) shall apply to a nonwithholding foreign partnership by 
substituting the term nonwithholding foreign partnership for the term 
nonqualified intermediary.
    (v) Withholding and reporting by a foreign partnership. A 
nonwithholding foreign partnership described in this paragraph (c)(3) 
that receives an amount subject to withholding (as defined in 
Sec. 1.1441-2(a)) shall be required to withhold and report such payment 
under chapter 3 of the Internal Revenue Code and the regulations 
thereunder except as otherwise provided in this paragraph (c)(3)(v). A 
nonwithholding foreign partnership shall not be required to withhold and 
report if it has provided a valid nonwithholding foreign partnership 
withholding certificate, it has provided all of the information required 
by paragraph (c)(3)(iv) of this section (withholding statement), and it 
does not know, and has no reason to know, that another withholding agent 
failed to withhold the correct amount or failed to report the payment 
correctly under Sec. 1.1461-1(c). A withholding foreign partnership's 
obligations to withhold and report shall be determined in accordance 
with its withholding foreign partnership agreement.
    (d) Presumption rules--(1) In general. This paragraph (d) contains 
the applicable presumptions for a withholding agent (including a 
partnership) to determine the classification and status of a partnership 
and its partners in the absence of documentation. The provisions of 
Sec. 1.1441-1(b)(3)(iv) (regarding the 90-day grace period) and 
Sec. 1.1441-1(b)(3)(vii) through (ix) shall apply for purposes of this 
paragraph (d).
    (2) Determination of partnership status as U.S. or foreign in the 
absence of documentation. In the absence of a valid representation of 
U.S. partnership status in accordance with paragraph (b)(1) of this 
section or of foreign partnership status in accordance with paragraph 
(c)(2)(i) or (3)(i) of this section, the withholding agent shall 
determine the classification of the payee under the presumptions set 
forth in Sec. 1.1441-1(b)(3)(ii). If the withholding agent treats the 
payee as a partnership under Sec. 1.1441-1(b)(3)(ii), the withholding 
agent shall presume the partnership to be a U.S. partnership unless 
there are indicia of foreign status. If there are indicia of foreign 
status, the withholding agent may presume the partnership to be foreign. 
Indicia of foreign status exist only if the withholding agent has actual 
knowledge of the payee's employer identification number and that number 
begins with the two digits ``98,'' the withholding agent's 
communications with the payee are mailed to an address in a foreign 
country, or the payment is made outside the United States (as defined in 
Sec. 1.6049-5(e)). For rules regarding reliable association with a 
withholding certificate from a domestic or a foreign partnership, see 
Sec. 1.1441-1(b)(2)(vii).
    (3) Determination of partners' status in the absence of certain 
documentation. If a nonwithholding foreign partnership has provided a 
nonwithholding foreign partnership withholding certificate under 
paragraph (c)(3)(iii) of this section that would be valid except that 
the withholding agent cannot reliably associate all or a portion of the 
payment with valid documentation from a partner of the partnership, then 
the withholding agent may apply the presumption rule of this paragraph 
(d)(3) with respect to all or a portion of the payment for which 
documentation has not been received. See Sec. 1.1441-1(b)(2)(vii)(A) and 
(B) for rules regarding reliable association. The presumption rule of 
this paragraph (d)(3) also applies to a person that is presumed to be a 
foreign partnership under the rule of paragraph (d)(2) of this section. 
Any portion of a payment that the withholding agent cannot treat as 
reliably associated with valid documentation from a partner may be 
presumed made to a foreign payee. As a result, any payment of an amount 
subject to withholding is subject to withholding at a rate of 30 
percent. Any payment that is presumed to be made to an undocumented 
foreign payee must be reported on Form 1042-S. See Sec. 1.1461-1(c).
    (4) Determination by a withholding foreign partnership of the status 
of its partners. A withholding foreign partnership shall determine 
whether the partners or some other persons are the payees of the 
partners' distributive shares of any payment made by a withholding 
foreign partnership by applying the rules

[[Page 133]]

of Sec. 1.1441-1(b)(2), paragraph (c)(1) of this section (in the case of 
a partner that is a foreign partnership), and paragraph (e)(3) of this 
section (in the case of a partner that is a foreign estate or a foreign 
trust). Further, the provisions of paragraph (d)(3) of this section 
shall apply to determine the status of partners and the applicable 
withholding rates to the extent that, at the time the foreign 
partnership is required to withhold on a payment, it cannot reliably 
associate the amount with documentation for any one or more of its 
partners.
    (e) Foreign trusts and estates--(1) In general. This paragraph (e) 
provides rules applicable to payments of amounts subject to withholding 
(as defined in Sec. 1.1441-2(a)) that a withholding agent may treat as 
made to any foreign trust or a foreign estate. For rules relating to 
payments to a U.S. trust or a U.S. estate, see paragraph (b) of this 
section. For the definitions of foreign simple trust, foreign complex 
trust, and foreign grantor trust, see Sec. 1.1441-1(c)(24), (25), and 
(26).
    (2) Payments to foreign complex trusts and foreign estates. Under 
Sec. 1.1441-1(c)(6)(ii)(D), a foreign complex trust or foreign estate is 
generally considered to be the beneficial owner of income paid to the 
foreign complex trust or foreign estate. See paragraph (e)(4) of this 
section for rules describing when a withholding agent may treat a 
payment as made to a foreign complex trust or a foreign estate.
    (3) Payees of payments to foreign simple trusts and foreign grantor 
trusts--(i) Payments for which beneficiaries and owners are payees. For 
purposes of the regulations under chapters 3 and 61 of the Internal 
Revenue Code and section 3406, a foreign simple trust is not a 
beneficial owner or a payee of a payment. Also, a foreign grantor trust 
(or a portion of a trust that is a foreign grantor trust) is not 
considered a beneficial owner or a payee of a payment. Except as 
otherwise provided in paragraph (e)(3)(ii) of this section, the payees 
of a payment made to a person that the withholding agent may treat as a 
foreign simple trust or a foreign grantor trust (or a portion of a trust 
that is a foreign grantor trust) are determined under the rules of this 
paragraph (e)(3)(i). The payees shall be treated as the beneficial 
owners if they may be so treated under Sec. 1.1441-1(c)(6)(ii)(C) and 
they provide documentation supporting their status as the beneficial 
owners. The payees of a payment to a foreign simple trust or foreign 
grantor trust are determined as follows--
    (A) If the withholding agent can reliably associate a payment with a 
valid Form W-9 provided under Sec. 1.1441-1(d) from a beneficiary or 
owner of the foreign trust, then the beneficiary or owner is a U.S. 
payee;
    (B) If the withholding agent can reliably associate a payment with a 
valid Form W-8, or other appropriate documentation, provided under 
Sec. 1.1441-1(e)(1)(ii) from a beneficiary or owner of the foreign 
trust, then the beneficiary or owner is a payee that is a foreign 
beneficial owner;
    (C) If the withholding agent can reliably associate a payment with a 
qualified intermediary withholding certificate under Sec. 1.1441-
1(e)(3)(ii), a nonqualified intermediary withholding certificate under 
Sec. 1.1441-1(e)(3)(ii), or a U.S. branch withholding certificate under 
Sec. 1.1441-1(e)(3)(v), then the rules of Sec. 1.1441-1(b)(2)(v) shall 
apply to determine the payee in the same manner as if the payment had 
been paid directly to such intermediary or U.S. branch;
    (D) If the withholding agent can reliably associate a payment with a 
withholding foreign partnership withholding certificate under paragraph 
(c)(2)(iv) of this section or a nonwithholding foreign partnership 
withholding certificate under paragraph (c)(3)(iii) of this section, 
then the rules of paragraph (c)(1)(i) or (ii) of this section shall 
apply to determine the payee;
    (E) If the withholding agent can reliably associate the payment with 
a foreign simple trust withholding certificate or a foreign grantor 
trust withholding certificate (both described in paragraph (e)(5)(iii) 
of this section) from a second or higher-tier foreign simple trust or 
foreign grantor trust, then the rules of this paragraph (e)(3)(i) or 
paragraph (e)(3)(ii) of this section shall apply to determine whether 
the payment is treated as made to a beneficiary or owner of the higher-
tier trust

[[Page 134]]

or to the trust itself in the same manner as if the payment had been 
made directly to the higher-tier trust; and
    (F) If the withholding agent cannot reliably associate a payment 
with a withholding certificate or other appropriate documentation, the 
payees shall be determined by applying the presumptions described in 
paragraph (e)(6) of this section.
    (ii) Payments for which trust is payee. A payment to a person that 
the withholding agent may treat as made to a foreign trust under 
paragraph (e)(5)(iii) of this section is treated as a payment to the 
trust, and not to a beneficiary of the trust, only if--
    (A) The withholding agent can reliably associate the payment with a 
foreign complex trust withholding certificate under paragraph (e)(4) of 
this section;
    (B) The withholding agent can reliably associate the payment with a 
foreign simple trust withholding certificate under paragraph (e)(5)(iii) 
of this section certifying that the payment is income that is treated as 
effectively connected with the conduct of a trade or business in the 
United States; or
    (C) The withholding agent can treat the income as effectively 
connected income under the presumption rules of Sec. 1.1441-4(a)(3)(i).
    (4) Reliance on claim of foreign complex trust or foreign estate 
status. A withholding agent may treat a payment as made to a foreign 
complex trust or a foreign estate if the withholding agent can reliably 
associate the payment with a beneficial owner withholding certificate 
described in Sec. 1.1441-1(e)(2)(i) or other documentary evidence under 
Sec. 1.1441-6(c)(3) or (4) (regarding a claim for treaty benefits) or 
Sec. 1.6049-5(c)(1) (regarding documentary evidence to establish foreign 
status for purposes of chapter 61 of the Internal Revenue Code) that 
establishes the foreign complex trust or foreign estate's status as a 
beneficial owner. See paragraph (e)(6) of this section for presumption 
rules if documentation is lacking.
    (5) Foreign simple trust and foreign grantor trust--(i) Reliance on 
claim of foreign simple trust or foreign grantor trust status. A 
withholding agent may treat a person as a foreign simple trust or 
foreign grantor trust if it receives from that person a foreign simple 
trust or foreign grantor trust withholding certificate as described in 
paragraph (e)(5)(iii) of this section. A withholding agent must apply 
the presumption rules of Secs. 1.1441-1(b)(3) and 1.6049-5(d) and 
paragraphs (d) and (e)(6) of this section to the extent it cannot, prior 
to the payment, reliably associate a payment (within the meaning of 
Sec. 1.1441-1(b)(2)(vii)) with a valid foreign simple trust or foreign 
grantor trust withholding certificate, it cannot reliably determine how 
much of the payment relates to valid documentation provided by a payee 
(e.g., a person that is not itself a nonqualified intermediary, flow-
through entity, or U.S. branch) associated with the foreign simple trust 
or foreign grantor trust withholding certificate, or it does not have 
sufficient information to report the payment on Form 1042-S or Form 
1099, if reporting is required. See Sec. 1.1441-1(b)(2)(vii)(A) and (B).
    (ii) Reliance on claim of reduced withholding by a foreign simple 
trust or foreign grantor trust for its beneficiaries or owners. This 
paragraph (e)(5)(ii) describes the manner in which a withholding agent 
may rely on a claim of reduced withholding when making a payment to a 
foreign simple trust or foreign grantor trust. To the extent that a 
withholding agent treats a payment to a foreign simple trust or foreign 
grantor trust as a payment to payees other than the trust in accordance 
with paragraph (e)(3)(i) of this section, it may rely on a claim for 
reduced withholding by a beneficiary or owner if, prior to the payment, 
the withholding agent can reliably associate the payment (within the 
meaning of Sec. 1.1441-1(b)(2)(vii)) with a valid withholding 
certificate or other appropriate documentation from a payee or 
beneficial owner that establishes entitlement to a reduced rate of 
withholding. A withholding certificate or other appropriate 
documentation that establishes entitlement to a reduced rate of 
withholding is a beneficial owner withholding certificate described in 
Sec. 1.1441-1(e)(2)(i) or documentary evidence described in Sec. 1.1441-
6(c)(3) or(4) or in Sec. 1.6049-5(c)(1) (for a beneficiary or owner 
claiming to be a foreign person and a beneficial owner, determined

[[Page 135]]

under the provisions of Sec. 1.1441-1(c)(6)), a Form W-9 described in 
Sec. 1.1441-1(d) (for a beneficiary or owner claiming to be a U.S. 
payee), or a withholding foreign partnership withholding certificate 
described in paragraph (c)(2)(iv) of this section. Unless a foreign 
simple trust or foreign grantor trust withholding certificate is 
provided for income treated as income effectively connected with the 
conduct of a trade or business in the United States, a claim must be 
presented for each payee's portion of the payment. When making a claim 
for several payees, the trust may present a single foreign simple trust 
or foreign grantor trust withholding certificate with which the payees' 
certificates or other appropriate documentation are associated. Where 
the foreign simple trust or foreign grantor trust withholding 
certificate is provided for income that is treated as effectively 
connected with the conduct of a trade or business in the United States 
under paragraph (e)(5)(iii)(D) of this section, the claim may be 
presented without having to identify any beneficiary's or grantor's 
distributive share of the payment.
    (iii) Withholding certificate from foreign simple trust or foreign 
grantor trust. A withholding certificate furnished by a foreign simple 
trust or a foreign grantor trust that is not a withholding foreign trust 
(within the meaning of paragraph (e)(5)(v) of this section) is valid 
only if it is furnished on a Form W-8, an acceptable substitute form, or 
such other form as the IRS may prescribe, it is signed under penalties 
of perjury by a trustee, its validity has not expired, it contains the 
information, statements, and certifications required by this paragraph 
(e)(5)(iii) and Sec. 1.1441-1(e)(3)(iv), and the withholding 
certificates or other appropriate documentation for all of the payees 
(as determined under paragraph (e)(3)(i) of this section) to whom the 
certificate relates are associated with the foreign simple trust or 
foreign grantor trust withholding certificate. The rules of Sec. 1.1441-
1(e)(4) shall apply to withholding certificates described in this 
paragraph (e)(5)(iii). No withholding certificates or other appropriate 
documentation from persons who derive income through a foreign simple 
trust or a foreign grantor trust (whether or not U.S. exempt recipients) 
are required to be associated with the foreign simple trust or foreign 
grantor trust withholding certificate if the certificate is furnished 
solely for income that is treated as effectively connected with the 
conduct of a trade or business in the United States. Withholding 
certificates and other appropriate documentation (as determined under 
paragraph (e)(3)(i) of this section) that may be associated with a 
foreign simple trust or foreign grantor trust withholding certificate 
consist of beneficial owner withholding certificates under Sec. 1.1441-
1(e)(2)(i), intermediary withholding certificates under Sec. 1.1441-
1(e)(3)(i), withholding foreign partnership withholding certificates 
under paragraph (c)(2)(iv) of this section, nonwithholding foreign 
partnership withholding certificates under paragraph (c)(3)(iii) of this 
section, withholding certificates from foreign trusts or estates under 
paragraph (e)(4) or (5)(iii) of this section, documentary evidence 
described in Secs. 1.1441-6(c)(3) or (4), or 1.6049-5(c)(1), and any 
other documentation or certificates applicable under other provisions of 
the Internal Revenue Code or regulations that certify or establish the 
status of the payee or beneficial owner as a U.S. or a foreign person. 
Nothing in this paragraph (e)(5)(iii) shall require a foreign simple 
trust or foreign grantor trust to provide original documentation. Copies 
of certificates or documentary evidence may be passed up to the U.S. 
withholding agent, in which case the foreign simple trust or foreign 
grantor trust must retain the original documentation for the same time 
period that the copy is required to be retained by the withholding agent 
under Sec. 1.1441-1(e)(4)(iii) and must provide it to the withholding 
agent upon request. The information, statement, and certifications 
required on a foreign simple trust or foreign grantor trust withholding 
certificate are as follows--
    (A) The name, permanent residence address (as described in 
Sec. 1.1441-1(e)(2)(ii)), and the employer identification number, if 
required, of the trust and the country under the laws of which the trust 
is created;

[[Page 136]]

    (B) A certification that the person whose name is on the certificate 
is a foreign simple trust or a foreign grantor trust;
    (C) A withholding statement associated with the foreign simple trust 
or foreign grantor trust withholding certificate that provides all of 
the information required by paragraph (e)(5)(iv) of this section. No 
withholding statement is required, however, for a foreign simple trust 
withholding certificate furnished for income that is treated as 
effectively connected with the conduct of a trade or business in the 
United States;
    (D) A certification on a foreign simple trust withholding 
certificate that the income is treated as effectively connected with the 
conduct of a trade or business in the United States, if applicable; and
    (E) Any other information, certifications, or statements required by 
the form or accompanying instructions in addition to, or in lieu of, the 
information, certifications, and statements described in this paragraph 
(e)(5)(iii);
    (iv) Withholding statement provided by a foreign simple trust or 
foreign grantor trust. The provisions of Sec. 1.1441-1(e)(3)(iv) 
(regarding a withholding statement) shall apply to a foreign simple 
trust or foreign grantor trust by substituting the term foreign simple 
trust or foreign grantor trust for the term nonqualified intermediary.
    (v) Withholding foreign trusts. The IRS may enter an agreement with 
a foreign trust to treat the trust or estate as a withholding foreign 
trust. Such an agreement shall generally follow the same principles as 
an agreement with a withholding foreign partnership under paragraph 
(c)(2)(ii) of this section. A withholding agent may treat a payment to a 
withholding foreign trust in the same manner the withholding agent would 
treat a payment to a withholding foreign partnership. The IRS may also 
enter an agreement to treat a trust as a qualified intermediary in 
appropriate circumstances. See Sec. 1.1441-1(e)(5)(ii)(D).
    (6) Presumption rules--(i) In general. This paragraph (e)(6) 
contains the applicable presumptions for a withholding agent (including 
a trust or estate) to determine the classification and status of a trust 
or estate and its beneficiaries or owners in the absence of valid 
documentation. The provisions of Sec. 1.1441-1(b)(3)(iv) (regarding the 
90-day grace period) and Sec. 1.1441-1(b)(3)(vii) through (ix) shall 
apply for purposes of this paragraph (e)(6).
    (ii) Determination of status as U.S. or foreign trust or estate in 
the absence of documentation. In the absence of valid documentation that 
establishes the U.S. status of a trust or estate under paragraph (b)(1) 
of this section and of documentation that establishes the foreign status 
of a trust or estate under paragraph (e)(4) or (5)(iii) of this section, 
the withholding agent shall determine the classification of the payee 
based upon the presumptions set forth in Sec. 1.1441-1(b)(3)(ii). If, 
based upon those presumptions, the withholding agent classifies the 
payee as a trust or estate, the trust or estate shall be presumed to be 
a U.S. trust or U.S. estate unless there are indicia of foreign status, 
in which case the trust or estate shall be presumed to be foreign. 
Indicia of foreign status exists if the withholding agent has actual 
knowledge of the payee's employer identification number and that number 
begins with the two digits ``98,'' the withholding agent's 
communications with the payee are mailed to an address in a foreign 
country, or the payment is made outside the United States (as defined in 
Sec. 1.6049-5(e)). If an undocumented payee is presumed to be a foreign 
trust it shall be presumed to be a foreign complex trust. If a 
withholding agent has documentary evidence that establishes that an 
entity is a foreign trust, but the withholding agent cannot determine 
whether the foreign trust is a complex trust, a simple trust, or foreign 
grantor trust, the withholding agent may presume that the trust is a 
foreign complex trust.
    (iii) Determination of beneficiary or owner's status in the absence 
of certain documentation. If a foreign simple trust or foreign grantor 
trust has provided a foreign simple trust or foreign grantor trust 
withholding certificate under paragraph (e)(5)(iii) of this section but 
the payment to such trust cannot be reliably associated with valid 
documentation from a specific beneficiary or owner of the trust, then 
any portion

[[Page 137]]

of a payment that a withholding agent cannot treat as reliably 
associated with valid documentation from a beneficiary or owner may be 
presumed made to a foreign payee. As a result, any payment of an amount 
subject to withholding is subject to withholding at a rate of 30 
percent. Any such payment that is presumed to be made to an undocumented 
foreign person must be reported on Form 1042-S. See Sec. 1.1461-1(c).
    (f) Failure to receive withholding certificate timely or to act in 
accordance with applicable presumptions. See applicable procedures 
described in Sec. 1.1441-1(b)(7) in the event the withholding agent does 
not hold an appropriate withholding certificate or other appropriate 
documentation at the time of payment or fails to rely on the 
presumptions set forth in Sec. 1.1441-1(b)(3) or in paragraph (d) or (e) 
of this section.
    (g) Effective date--(1) General rule. This section applies to 
payments made after December 31, 2000.
    (2) Transition rules. The validity of a withholding certificate that 
was valid on January 1, 1998, under the regulations in effect prior to 
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and 
expired, or will expire, at any time during 1998, is extended until 
December 31, 1998. The validity of a withholding certificate that is 
valid on or after January 1, 1999, remains valid until its validity 
expires under the regulations in effect prior to January 1, 2001 (see 26 
CFR parts 1 and 35a, revised April 1, 1999) but in no event will such a 
withholding certificate remain valid after December 31, 2000. The rule 
in this paragraph (g)(2), however, does not apply to extend the validity 
period of a withholding certificate that expires solely by reason of 
changes in the circumstances of the person whose name is on the 
certificate. Notwithstanding the first three sentences of this paragraph 
(g)(2), a withholding agent may choose to not take advantage of the 
transition rule in this paragraph (g)(2) with respect to one or more 
withholding certificates valid under the regulations in effect prior to 
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and, 
therefore, to require withholding certificates conforming to the 
requirements described in this section (new withholding certificates). 
For purposes of this section, a new withholding certificate is deemed to 
satisfy the documentation requirement under the regulations in effect 
prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 
1999). Further, a new withholding certificate remains valid for the 
period specified in Sec. 1.1441-1(e)(4)(ii), regardless of when the 
certificate is obtained.

[T.D. 8734, 62 FR 53452, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72185, 72188, Dec. 31, 1998; 64 FR 73410, Dec. 30, 1999; T.D. 8881, 65 
FR 32188, May 22, 2000; 66 FR 18188, Apr. 6, 2001]



Sec. 1.1441-6  Claim of reduced withholding under an income tax treaty.

    (a) In general. The rate of withholding on a payment of income 
subject to withholding may be reduced to the extent provided under an 
income tax treaty in effect between the United States and a foreign 
country. Most benefits under income tax treaties are to foreign persons 
who reside in the treaty country. In some cases, benefits are available 
under an income tax treaty to U.S. citizens or U.S. residents or to 
residents of a third country.
    See paragraph (b)(5) of this section for claims of benefits by U.S. 
persons. If the requirements of this section are met, the amount 
withheld from the payment may be reduced at source to account for the 
treaty benefit. See also Sec. 1.1441-4(b)(2) for rules regarding claims 
of reduced rate of withholding under an income tax treaty in the case of 
compensation from personal services.
    (b) Reliance on claim of reduced withholding under an income tax 
treaty--(1) In general. The withholding imposed under section 1441, 
1442, or 1443 on any payment to a foreign person is eligible for 
reduction under the terms of an income tax treaty only to the extent 
that such payment is treated as derived by a resident of an applicable 
treaty jurisdiction, such resident is a beneficial owner, and all other 
requirements for benefits under the treaty are

[[Page 138]]

satisfied. See section 894 and the regulations thereunder to determine 
whether a resident of a treaty country derives the income. Absent actual 
knowledge or reason to know otherwise, a withholding agent may rely on a 
claim that a beneficial owner is entitled to a reduced rate of 
withholding based upon an income tax treaty if, prior to the payment, 
the withholding agent can reliably associate the payment with a 
beneficial owner withholding certificate, described in Sec. 1.1441-
1(e)(2), that contains the information necessary to support the claim, 
or, in the case of a payment of income described in paragraph (c)(2) of 
this section made outside the United States with respect to an offshore 
account, documentary evidence described in paragraphs (c)(3), (4) and 
(5) of this section. See Secs. 1.6049-5(e) for the definition of 
payments made outside the United States and 1.6049-5(c)(1) for the 
definition of offshore account. For purposes of this paragraph (b)(1), a 
beneficial owner withholding certificate described in Sec. 1.1441-
1(e)(2)(i) contains information necessary to support the claim for a 
treaty benefit only if it includes the beneficial owner's taxpayer 
identifying number (except as otherwise provided in paragraph (c)(1) of 
this section and Sec. 1.1441-6(g)) and the representations that the 
beneficial owner derives the income under section 894 and the 
regulations thereunder, if required, and meets the limitation on 
benefits provisions of the treaty, if any. The withholding certificate 
must also contain any other representations required by this section and 
any other information, certifications, or statements as may be required 
by the form or accompanying instructions in addition to, or in place of, 
the information and certifications described in this section. Absent 
actual knowledge or reason to know that the claims are incorrect (and 
subject to the standards of knowledge in Sec. 1.1441-7(b)), a 
withholding agent may rely on the claims made on a withholding 
certificate or on documentary evidence. A withholding agent may also 
rely on the information contained in a withholding statement provided 
under Secs. 1.1441-1(e)(3)(iv) and 1.1441-5(c)(3)(iv) and (e)(5)(iv) to 
determine whether the appropriate statements regarding section 894 and 
limitation on benefits have been provided in connection with documentary 
evidence. If the beneficial owner is a person related to the withholding 
agent within the meaning of section 482, the withholding certificate 
must also contain a representation that the beneficial owner will file 
the statement required under Sec. 301.6114-1(d) of this chapter (if 
applicable). The requirement to file an information statement under 
section 6114 for income subject to withholding applies only to amounts 
received during the calendar year that, in the aggregate, exceed 
$500,000. See Sec. 301.6114-1(d) of this chapter. The Internal Revenue 
Service (IRS) may apply the provisions of Sec. 1.1441-1(e)(1)(ii)(B) to 
notify the withholding agent that the certificate cannot be relied upon 
to grant benefits under an income tax treaty. See Sec. 1.1441-
1(e)(4)(viii) regarding reliance on a withholding certificate by a 
withholding agent. The provisions of Sec. 1.1441-1(b)(3)(iv) dealing 
with a 90-day grace period shall apply for purposes of this section.
    (2) Payment to fiscally transparent entity--(i) In general. If the 
person claiming a reduced rate of withholding under an income tax treaty 
is the interest holder of an entity that is considered to be fiscally 
transparent (as defined in the regulations under section 894) by the 
interest holder's jurisdiction with respect to an item of income, then, 
with respect to such income derived by that person through the entity, 
the entity shall be treated as a flow-through entity and may provide a 
flow-through withholding certificate with which the withholding 
certificate or other documentary evidence of the interest holder that 
supports the claim for treaty benefits is associated. For purposes of 
the preceding sentence, interest holders do not include any direct or 
indirect interest holders that are themselves treated as fiscally 
transparent entities with respect to that income by the interest 
holder's jurisdiction. See Sec. 1.1441-1(c)(23) and (e)(3)(i) for the 
definition of flow-through entity and flow-through withholding 
certificate. The entity may provide a beneficial owner withholding 
certificate, or beneficial owner

[[Page 139]]

documentation, with respect to any remaining portion of the income to 
the extent the entity is receiving income and is not treated as fiscally 
transparent by its own jurisdiction. Further, the entity may claim a 
reduced rate of withholding with respect to the portion of a payment for 
which it is not treated as fiscally transparent if it meets all the 
requirements to make such a claim and, in the case of treaty benefits, 
it provides the documentation required by paragraph (b)(1) of this 
section. If dual claims, as described in paragraph (b)(2)(iii) of this 
section, are made, multiple withholding certificates may have to be 
furnished. Multiple withholding certificates may also have to be 
furnished if the entity receives income for which a reduction of 
withholding is claimed under a provision of the Internal Revenue Code 
(e.g., portfolio interest) and income for which a reduction of 
withholding is claimed under an income tax treaty.
    (ii) Certification by qualified intermediary. Notwithstanding 
paragraph (b)(2)(i) of this section, a foreign entity that is fiscally 
transparent, as defined in the regulations under section 894, that is 
also a qualified intermediary for purposes of claiming a reduced rate of 
withholding under an income tax treaty for its interest holders (who are 
deriving the income paid to the entity as residents of an applicable 
treaty jurisdiction) may furnish a single qualified intermediary 
withholding certificate, as described in Sec. 1.1441-1(e)(3)(ii), for 
amounts for which it claims a reduced rate of withholding under an 
income tax treaty on behalf of its interest holders.
    (iii) Dual treatment. Under paragraph (b)(2)(i) of this section, a 
withholding agent may make a payment to a foreign entity that is 
simultaneously claiming to be the beneficial owner of a portion of the 
income (whether or not it is also claiming a reduced rate of tax on its 
own behalf) and a reduced rate on behalf of persons in their capacity as 
interest holders in the entity with respect to the same, or a different, 
portion of the income. If the same portion of a payment may be reliably 
associated with both the entity's claim and an interest holder's claim, 
the withholding agent may choose to reject both claims and request new 
documentation and information allocating the payment among the 
beneficial owners of the payment or the withholding agent may choose 
which claim to apply. If the entity and the interest holder's claims are 
reliably associated with separate portions of the payment, the 
withholding agent may, at its option, accept such dual claims based on 
withholding certificates or other appropriate documentation furnished by 
the entity and its interest holders with respect to their respective 
shares of the payment even though this will result in the withholding 
agent treating the entity differently with respect to different portions 
of the same payment. Alternatively, the withholding agent may choose to 
apply only the claim made by the entity, provided the entity may be 
treated as a beneficial owner of the income. If the withholding agent 
does not accept claims for a reduced rate of withholding presented by 
any one or more of the interest holders, or by the entity, any interest 
holder or the entity may subsequently claim a refund or credit of any 
amount so withheld to the extent the interest holder's or entity's share 
of such withholding exceeds the amount of tax due.
    (iv) Examples. The following examples illustrate the rules of this 
paragraph (b)(2):

    Example 1. (i) Facts. Entity E is a business organization formed 
under the laws of country Y. Country Y has an income tax treaty with the 
United States. The treaty contains a limitation on benefits provision. E 
receives U.S. source royalties from withholding agent W and claims a 
reduced rate of withholding under the U.S.-Y tax treaty on its own 
behalf (rather than on behalf of its interest holders). E furnishes a 
beneficial owner withholding certificate described in paragraph (b)(1) 
of this section that represents that E is a resident of country Y 
(within the meaning of the U.S.-Y tax treaty), is the beneficial owner 
of the income, derives the income under section 894 and the regulations 
thereunder, and is not precluded from claiming benefits by the treaty's 
limitation on benefits provision.
    (ii) Analysis. Absent actual knowledge or reason to know otherwise, 
W may rely on the representations made by E to apply a reduced rate of 
withholding.
    Example 2. (i) Facts. The facts are the same as under Example 1, 
except that one of E's interest holders, H, is an entity organized in 
country Z. The U.S.-Z tax treaty reduces the

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rate on royalties to zero whereas the rate on royalties under the U.S.-Y 
tax treaty applicable to E is 5 percent. H is not fiscally transparent 
under country Z's tax law with respect to such income. H furnishes a 
beneficial owner withholding certificate to E that represents that H 
derives, within the meaning of section 894 and the regulations 
thereunder, its share of the royalty income paid to E as a resident of 
country Z, is the beneficial owner of the royalty income, and is not 
precluded from claiming treaty benefits by virtue of the limitation on 
benefits provision in the U.S.-Z treaty. E furnishes to W a flow-through 
withholding certificate described in Sec. 1.1441-1(e)(3)(i) to which it 
attaches H's beneficial owner withholding certificate and a withholding 
statement for the portion of the payment that H claims as its 
distributive share of the royalty income. E also furnishes to W a 
beneficial owner withholding certificate for itself for the portion of 
the payment that H does not claim as its distributive share.
    (ii) Analysis. Absent actual knowledge or reason to know otherwise, 
W may rely on the documentation furnished by E to treat the royalty 
payment to a single foreign entity (E) as derived by different residents 
of tax treaty countries as a result of the claims presented under 
different treaties. W may, at its option, grant dual treatment, that is, 
a reduced rate of zero percent under the U.S.-Z treaty on the portion of 
the royalty payment that H claims to derive as a resident of country Z 
and a reduced rate of 5 percent under the U.S.-Y treaty for the balance. 
However, under paragraph (b)(2)(iii) of this section, W may, at its 
option, treat E as the only relevant person deriving the royalty and 
grant benefits under the U.S.-Y treaty only.
    Example 3. (i) Facts. E is a business organization formed under the 
laws of country X. Country X has an income tax treaty with the United 
States. E has 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 and interest that is eligible for the portfolio 
interest exception under sections 871(h) and 881(c), provided W receives 
the appropriate beneficial owner statement required under section 
871(h)(5). E is classified as a corporation under U.S. tax law 
principles. Country X, E's country of organization, treats E as an 
entity that is not fiscally transparent with respect to items of income 
under the regulations under section 894. Under the U.S.-X income tax 
treaty, royalties are subject to 5 percent rate of withholding. Country 
Y, H1's country of organization, treats E as fiscally transparent with 
respect to items of income under section 894 and H1 as not fiscally 
transparent with respect to items of income. Under the country Y-U.S. 
income tax treaty, royalties are exempt from U.S. tax. Country Z, H2's 
country of organization, treats E as not fiscally transparent under 
section 894 with respect to items of income. E provides W with a flow-
through beneficial owner withholding certificate with which it 
associates a beneficial owner withholding certificate from H1. H1's 
withholding certificate states that H1 is a resident of country Y, 
derives the royalty income under section 894, meets the applicable 
limitations on benefits provisions of the U.S.-Y treaty, and is the 
beneficial owner of the income. The withholding statement attached to 
E's flow-through withholding certificate allocates one-half of the 
royalty payment to H1. E also provides W with a beneficial owner 
withholding certificate for the interest income and the remaining one-
half of the royalty income. The withholding certificate states that E is 
a resident of country X, derives the royalty income under section 894, 
meets the limitation on benefits provisions of the U.S.-X treaty, and is 
the beneficial owner of the income.
    (ii) Analysis. Absent actual knowledge or reason to know that the 
claims are incorrect, W may treat one-half of the royalty derived by E 
as subject to a 5 percent withholding rate and one-half of the royalty 
as derived by H1 and subject to no withholding. Further, it may treat 
all of the interest as being paid to E and as qualifying for the 
portfolio interest exception. W can, at its option, treat the entire 
royalty as paid to E and subject it to withholding at a 5 percent rate 
of withholding. In that case, H1 would be entitled to claim a refund 
with respect to its one-half of the royalty.

    (3) Certified TIN. The IRS may issue guidance requiring a foreign 
person claiming treaty benefits and for whom a TIN is required to 
establish with the IRS, at the time the TIN is requested or after the 
TIN is issued, that the person is a resident in a treaty country and 
meets other conditions (such as limitation on benefits provisions) of 
the treaty. See Sec. 601.601(d)(2) of this chapter.
    (4) Claim of benefits under an income tax treaty by a U.S. person. 
In certain cases, a U.S. person may claim the benefit of an income tax 
treaty. For example, under certain treaties, a U.S. citizen residing in 
the treaty country may claim a reduced rate of U.S. tax on certain 
amounts representing a pension or an annuity from U.S. sources. Claims 
of treaty benefits by a U.S. person may be made by furnishing a Form W-9 
to the withholding agent or such other form as the IRS may prescribe in 
published guidance (see Sec. 601.601(d)(2) of this chapter).

[[Page 141]]

    (c) Exemption from requirement to furnish a taxpayer identifying 
number and special documentary evidence rules for certain income--(1) 
General rule. In the case of income described in paragraph (c)(2) of 
this section, a withholding agent may rely on a beneficial owner 
withholding certificate described in paragraph (b)(1) of this section 
without regard to the requirement that the withholding certificate 
include the beneficial owner's taxpayer identifying number. In the case 
of payments of income described in paragraph (c)(2) of this section made 
outside the United States (as defined in Sec. 1.6049-5(e)) with respect 
to an offshore account (as defined in Sec. 1.6049-5(c)(1)), a 
withholding agent may, as an alternative to a withholding certificate 
described in paragraph (b)(1) of this section, rely on a certificate of 
residence described in paragraph (c)(3) of this section or documentary 
evidence described in paragraph (c)(4) of this section, relating to the 
beneficial owner, that the withholding agent has reviewed and maintains 
in its records in accordance with Sec. 1.1441-1(e)(4)(iii). In the case 
of a payment to a person other than an individual, the certificate of 
residence or documentary evidence must be accompanied by the statements 
described in paragraphs (c)(5)(i) and (ii) of this section regarding 
limitation on benefits and whether the amount paid is derived by such 
person or by one of its interest holders. The withholding agent 
maintains the reviewed documents by retaining either the documents 
viewed or a photocopy thereof and noting in its records the date on 
which, and by whom, the documents were received and reviewed. This 
paragraph (c)(1) shall not apply to amounts that are exempt from 
withholding based on a claim that the income is effectively connected 
with the conduct of a trade or business in the United States.
    (2) Income to which special rules apply. The income to which 
paragraph (c)(1) of this section applies is dividends and interest from 
stocks and debt obligations that are actively traded, dividends from any 
redeemable security issued by an investment company registered under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1), dividends, interest, 
or royalties from units of beneficial interest in a unit investment 
trust that are (or were upon issuance) publicly offered and are 
registered with the Securities and Exchange Commission under the 
Securities Act of 1933 (15 U.S.C. 77a) and amounts paid with respect to 
loans of securities described in this paragraph (c)(2). For purposes of 
this paragraph (c)(2), a stock or debt obligation is actively traded if 
it is actively traded within the meaning of section 1092(d) and 
Sec. 1.1092(d)-1 when documentation is provided.
    (3) Certificate of residence. A certificate of residence referred to 
in paragraph (c)(1) of this section is a certification issued by an 
appropriate tax official of the treaty country of which the taxpayer 
claims to be a resident that the taxpayer has filed its most recent 
income tax return as a resident of that country (within the meaning of 
the applicable tax treaty). The certificate of residence must have been 
issued by such official within three years prior to its being presented 
to the withholding agent, or such other period as the IRS may prescribe 
in published guidance (see Sec. 601.601(d)(2) of this chapter). See 
Sec. 1.1441-1(e)(4)(ii)(A) for the period during which a withholding 
agent may rely on a certificate of residence. The competent authorities 
may agree to a different procedure for certifying residence, in which 
case such procedure shall govern for payments made to a person claiming 
to be a resident of the country with which such an agreement is in 
effect.
    (4) Documentary evidence establishing residence in the treaty 
country--(i) Individuals. For an individual, the documentary evidence 
referred to in paragraph (c)(1) of this section is any documentation 
that includes the individuals name, address, and photograph, is an 
official document issued by an authorized governmental body (i.e., a 
government or agency thereof, or a municipality), and has been issued no 
more than three years prior to presentation to the withholding agent. A 
document older than three years may be relied upon as proof of residence 
only if it is accompanied by additional evidence of the person's 
residence in the treaty country (e.g., a bank statement, utility bills, 
or medical bills). Documentary evidence must be in the form

[[Page 142]]

of original documents or certified copies thereof.
    (ii) Persons other than individuals. For a person other than an 
individual, the documentary evidence referred to in paragraph (c)(1) of 
this section is any documentation that includes the name of the entity 
and the address of its principal office in the treaty country, and is an 
official document issued by an authorized governmental body (e.g., a 
government or agency thereof, or a municipality).
    (5) Statements regarding entitlement to treaty benefits--(i) 
Statement regarding conditions under a limitation on benefits provision. 
In addition to the documentary evidence described in (c)(4)(ii) of this 
section, a taxpayer that is not an individual must provide a statement 
that it meets one or more of the conditions set forth in the limitation 
on benefits article (if any, or in a similar provision) contained in the 
applicable tax treaty.
    (ii) Statement regarding whether the taxpayer derives the income. A 
taxpayer that is not an individual must also provide, in addition to the 
documentary evidence and the statement described in paragraph (c)(5)(i) 
of this section, a statement that any income for which it intends to 
claim benefits under an applicable income tax treaty is income that will 
properly be treated as derived by itself as a resident of the applicable 
treaty jurisdiction within the meaning of section 894 and the 
regulations thereunder. This requirement does not apply if the taxpayer 
furnishes a certificate of residence that certifies that fact.
    (d) Joint owners. In the case of a payment to joint owners, each 
owner must furnish a withholding certificate or, if applicable, 
documentary evidence or a certificate of residence. The applicable rate 
of withholding on a payment of income to joint owners shall be the 
highest applicable rate.
    (e) Competent authority. The procedures described in this section 
may be modified to the extent the U.S. competent authority may agree 
with the competent authority of a country with which the United States 
has an income tax treaty in effect.
    (f) Failure to receive withholding certificate timely. See 
applicable procedures described in Sec. 1.1441-1(b)(7) in the event the 
withholding agent does not hold an appropriate withholding certificate 
or other appropriate documentation at the time of payment.
    (g) Special taxpayer identifying number rule for certain foreign 
individuals claiming treaty benefits--(1) General rule. Except as 
provided in paragraph (c) or (g)(2) of this section, for purposes of 
paragraph (b)(1) of this section, a withholding agent may not rely on a 
beneficial owner withholding certificate, described in paragraph (b)(1) 
of this section, that does not include the beneficial owner's taxpayer 
identifying number (TIN).
    (2) Special rule. For purposes of satisfying the TIN requirement of 
paragraph (b)(1) of this section, a withholding agent may rely on a 
beneficial owner withholding certificate, described in such paragraph, 
without regard to the requirement that the withholding certificate 
include the beneficial owner's TIN, if--
    (i) A withholding agent, who is also an acceptance agent, as defined 
in Sec. 301.6109-1(d)(3)(iv) of this chapter (the payor), has entered 
into an acceptance agreement that permits the acceptance agent to 
request an individual taxpayer identification number (ITIN) on an 
expedited basis because of the circumstances of payment or unexpected 
nature of payments required to be made by the payor;
    (ii) The payor was required to make an unexpected payment to the 
beneficial owner who is a foreign individual;
    (iii) An ITIN for the beneficial owner cannot be received by the 
payor from the Internal Revenue Service (IRS) because the IRS is not 
issuing ITINs at the time of payment or any time prior to the time of 
payment when the payor has knowledge of the unexpected payment;
    (iv) The unexpected payment to the beneficial owner could not be 
reasonably delayed to permit the payor to obtain an ITIN for the 
beneficial owner on an expedited basis; and
    (v) The payor satisfies the provisions of paragraph (g)(3) of this 
section.
    (3) Requirement that an ITIN be requested during the first business 
day following payment. The payor must submit

[[Page 143]]

a beneficial owner payee application for an ITIN (Form W-7 ``Application 
for IRS Individual Taxpayer Identification Number'') that complies with 
the requirements of Sec. 301.6109-1(d)(3)(ii) of this chapter, and also 
the certification described in Sec. 301.6109-1(d)(3)(iv)(A)(4) of this 
chapter, to the IRS during the first business day after payment is made.
    (4) Definition of unexpected payment. For purposes of this section, 
an unexpected payment is a payment that, because of the nature of the 
payment or the circumstances in which it is made, could not reasonably 
have been anticipated by the payor or beneficial owner during a time 
when the payor or beneficial owner could obtain an ITIN from the IRS. 
For purposes of this paragraph (g)(4), a payor or beneficial owner will 
not lack the requisite knowledge of the forthcoming payment solely 
because the amount of the payment is not fixed.
    (5) Examples. The rules of this paragraph (g) are illustrated by the 
following examples:

    Example 1.  G, a citizen and resident of Country Y, a country with 
which the United States has an income tax treaty that exempts U.S. 
source gambling winnings from U.S. tax, is visiting the United States 
for the first time. During his visit, G visits Casino B, a casino that 
has entered into a special acceptance agent agreement with the IRS that 
permits Casino B to request an ITIN on an expedited basis. During that 
visit, on a Sunday, G wins $5000 in slot machine play at Casino B and 
requests immediate payment from Casino B. ITINs are not available from 
the IRS on Sunday and would not again be available until Monday. G, who 
does not have an individual taxpayer identification number, furnishes a 
beneficial owner withholding certificate, described in Sec. 1.1441-
1(e)(2), to the Casino upon winning at the slot machine. The beneficial 
owner withholding certificate represents that G is a resident of Country 
Y (within the meaning of the U.S.--Y tax treaty) and meets all 
applicable requirements for claiming benefits under the U.S.--Y tax 
treaty. The beneficial owner withholding certificate does not, however, 
contain an ITIN for G. On the following Monday, Casino B faxes a 
completed Form W-7, including the required certification, for G, to the 
IRS for an expedited ITIN. Pursuant to paragraph (b) and (g)(2) of this 
section, absent actual knowledge or reason to know otherwise, Casino B, 
may rely on the documentation furnished by G at the time of payment and 
pay the $5000 to G without withholding U.S. tax based on the treaty 
exemption.
    Example 2.  The facts are the same as Example 1, except G visits 
Casino B on Monday. G requests payment Monday afternoon. In order to pay 
the winnings to G without withholding the 30 percent tax, Casino B must 
apply for and obtain an ITIN for G because an expedited ITIN is 
available from the IRS at the time of the $5000 payment to G.
    Example 3.  The facts are the same as Example 1, except G requests 
payment fifteen minutes before the time when the IRS begins issuing 
ITINs. Under these facts, it would be reasonable for Casino B to delay 
payment to G. Therefore, Casino B must apply for and obtain an ITIN for 
G if G wishes to claim an exemption from U.S. withholding tax under the 
U.S.--Y tax treaty at the time of payment.
    Example 4.  P, a citizen and resident of Country Z, is a lawyer and 
a well-known expert on real estate transactions. P is scheduled to 
attend a three-day seminar on complex real estate transactions, as a 
participant, at University U, a U.S. university, beginning on a Saturday 
and ending on the following Monday, which is a holiday. University U has 
entered into a special acceptance agent agreement with the IRS that 
permits University U to request an ITIN on an expedited basis. Country Z 
is a country with which the United States has an income tax treaty that 
exempts certain income earned from the performance of independent 
personal services from U.S. tax. It is P's first visit to the United 
States. On Saturday, prior to the start of the seminar, Professor Q, one 
of the lecturers at the seminar, cancels his lecture. That same day the 
Dean of University U offers P $5000, to replace Professor Q at the 
seminar, payable at the conclusion of the seminar on Monday. P agrees. P 
gives her lecture Sunday afternoon. ITINs are not available from the IRS 
on that Saturday, Sunday, or Monday. After the seminar ends on Monday, 
P, who does not have an ITIN, requests payment for her teaching. P 
furnishes a beneficial owner withholding certificate, described in 
Sec. 1.1441-1(e)(2), to University U that represents that P is a 
resident of Country Z (within the meaning of the U.S.--Z tax treaty) and 
meets all applicable requirements for claiming benefits under the U.S.--
Z tax treaty. The beneficial owner withholding certificate does not, 
however, contain an ITIN for P. On Tuesday, University U faxes a 
completed Form W-7, including the required certification, for P, to the 
IRS for an expedited ITIN. Pursuant to paragraph (b) and (g)(2) of this 
section, absent actual knowledge or reason to know otherwise, University 
U may rely on the documentation furnished by P and pay $5000 to P 
without withholding U.S. tax based on the treaty exemption.


[[Page 144]]


    (h) Effective dates--(1) General rule. This section applies to 
payments made after December 31, 2000, except for paragraph (g) of this 
section which applies to payments made after December 31, 2001.
    (2) Transition rules. For purposes of this section, the validity of 
a Form 1001 or 8233 that was valid on January 1, 1998, under the 
regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and 
35a, revised April 1, 1999) and expired, or will expire, at any time 
during 1998, is extended until December 31, 1998. The validity of a Form 
1001 or 8233 that is valid on or after January 1, 1999, remains valid 
until its validity expires under the regulations in effect prior to 
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) but 
in no event will such a form remain valid after December 31, 2000. The 
rule in this paragraph (h)(2), however, does not apply to extend the 
validity period of a Form 1001 or 8233 that expires solely by reason of 
changes in the circumstances of the person whose name is on the 
certificate or in interpretation of the law under the regulations under 
Sec. 1.894-1T(d). Notwithstanding the first three sentences of this 
paragraph (h)(2), a withholding agent may choose to not take advantage 
of the transition rule in this paragraph (h)(2) with respect to one or 
more withholding certificates valid under the regulations in effect 
prior to January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 
1999) and, therefore, to require withholding certificates conforming to 
the requirements described in this section (new withholding 
certificates). For purposes of this section, a new withholding 
certificate is deemed to satisfy the documentation requirement under the 
regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and 
35a, revised April 1, 1999). Further, a new withholding certificate 
remains valid for the period specified in Sec. 1.1441-1(e)(4)(ii), 
regardless of when the certificate is obtained.

[T.D. 8734, 62 FR 53458, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72185, 72188, Dec. 31, 1998; T.D. 8856, 64 FR 73410, Dec. 30, 1999; 65 
FR 16320, Mar. 28, 2000; T.D. 8881, 65 FR 32194, May 22, 2000; T.D. 
8977, 67 FR 2328, Jan. 17, 2002; T.D. 9023, 67 FR 70312, Nov. 22, 2002]



Sec. 1.1441-7  General provisions relating to withholding agents.

    (a) Withholding agent defined--(1) In general. For purposes of 
chapter 3 of the Internal Revenue Code and the regulations under such 
chapter, the term withholding agent means any person, U.S. or foreign, 
that has the control, receipt, custody, disposal, or payment of an item 
of income of a foreign person subject to withholding, including (but not 
limited to) a foreign intermediary described in Sec. 1.1441-1(e)(3)(i), 
a foreign partnership, or a U.S. branch described in Sec. 1.1441-
1(b)(2)(iv)(A) or (E). See Secs. 1.1441-1(b)(2) and (3) and 1.1441-5(c), 
(d), and (e), for rules to determine whether a payment is considered 
made to a foreign person. Any person who meets the definition of a 
withholding agent is required to deposit any tax withheld under 
Sec. 1.1461-1(a) and to make the returns prescribed by Sec. 1.1461-1(b) 
and (c), except as otherwise may be required by a qualified intermediary 
withholding agreement, a withholding foreign partnership agreement, or a 
withholding foreign trust agreement. When several persons qualify as 
withholding agents with respect to a single payment, only one tax is 
required to be withheld and deposited. See Sec. 1.1461-1. A person who, 
as a nominee described in Sec. 1.6031(c)-1T, has furnished to a 
partnership all of the information required to be furnished under 
Sec. 1.6031(c)-1T(a) shall not be treated as a withholding agent if it 
has notified the partnership that it is treating the provision of 
information to the partnership as a discharge of its obligations as a 
withholding agent.

    (2) Examples. The following examples illustrate the rules of 
paragraph (a)(1) of this section:

    Example 1. USB is a broker organized in the United States. USB pays 
U.S. source dividends and interest, which are amounts subject to 
withholding under Sec. 1.1441-2(a), to FC, a foreign corporation that 
has an investment account with USB. USB is a withholding agent as 
defined in paragraph (a)(1) of this section.
    Example 2. USB is a bank organized in the United States. FB is a 
bank organized in country X. X has an omnibus account with USB through 
which FB invests in debt and equity instruments that pay amounts subject 
to withholding as defined in Sec. 1.1441-2(a). FB is a nonqualified 
intermediary, as defined

[[Page 145]]

in Sec. 1.1441-1(c)(14). Both USB and FB are withholding agents as 
defined in paragraph (a)(1) of this section.
    Example 3. The facts are the same as in Example 2, except that FB is 
a qualified intermediary. Both USB and FB are withholding agents as 
defined in paragraph (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 branch has customers that are foreign persons 
who receive amounts subject to withholding, as defined in Sec. 1.1441-
2(a). FB is a withholding agent under paragraph (a)(1) of this section 
and is required to withhold and report payments of amounts subject to 
withholding in accordance with chapter 3 of the Internal Revenue Code.
    Example 5. X is a foreign corporation. X pays dividends to 
shareholders who are foreign persons. Under section 861(a)(2)(B), a 
portion of the dividends are from sources within the United States and 
constitute amounts subject to withholding within the meaning of 
Sec. 1.1441-2(a). The dividends are not subject to tax under section 
884(a). See 884(e)(3). X is a withholding agent under paragraph (a)(1) 
of this section.

    (b) Standards of knowledge--(1) In general. A withholding agent must 
withhold at the full 30-percent rate under section 1441, 1442, or 
1443(a) or at the full 4-percent rate under section 1443(b) if it has 
actual knowledge or reason to know that a claim of U.S. status or of a 
reduced rate of withholding under section 1441, 1442, or 1443 is 
unreliable or incorrect. A withholding agent shall be liable for tax, 
interest, and penalties to the extent provided under sections 1461 and 
1463 and the regulations under those sections if it fails to withhold 
the correct amount despite its actual knowledge or reason to know the 
amount required to be withheld. For purposes of the regulations under 
sections 1441, 1442, and 1443, a withholding agent may rely on 
information or certifications contained in, or associated with, a 
withholding certificate or other documentation furnished by or for a 
beneficial owner or payee unless the withholding agent has actual 
knowledge or reason to know that the information or certifications are 
incorrect or unreliable and, if based on such knowledge or reason to 
know, it should withhold (under chapter 3 of the Code or another 
withholding provision of the Code) an amount greater than would be the 
case if it relied on the information or certifications, or it should 
report (under chapter 3 of the Code or under another provision of the 
Code) an amount that would not otherwise be reportable if it relied on 
the information or certifications. See Sec. 1.1441-1(e)(4)(viii) for 
applicable reliance rules. A withholding agent that has received 
notification by the Internal Revenue Service (IRS) that a claim of U.S. 
status or of a reduced rate is incorrect has actual knowledge beginning 
on the date that is 30 calendar days after the date the notice is 
received. A withholding agent that fails to act in accordance with the 
presumptions set forth in Secs. 1.1441-1(b)(3), 1.1441-4(a), 1.1441-5 
(d) and (e), or 1.1441-9(b)(3) may also be liable for tax, interest, and 
penalties. See Sec. 1.1441-1(b)(3)(ix) and (7).
    (2) Reason to know. A withholding agent shall be considered to have 
reason to know if its knowledge of relevant facts or of statements 
contained in the withholding certificates or other documentation is such 
that a reasonably prudent person in the position of the withholding 
agent would question the claims made.
    (3) Financial institutions--limits on reason to know. For purposes 
of this paragraph (b)(3) and paragraphs (b)(4) through (b)(10) of this 
section, the terms withholding certificate, documentary evidence, and 
documentation are defined in Sec. 1.1441-1(c)(16), (17) and (18). Except 
as otherwise provided in paragraphs (b)(4) through (b)(9) of this 
section, a withholding agent that is a financial institution (including 
a regulated investment company) that has a direct account relationship 
with a beneficial owner (a direct account holder) has a reason to know, 
with respect to amounts described in Sec. 1.1441-6(c)(2), that 
documentation provided by the direct account holder is unreliable or 
incorrect only if one or more of the circumstances described in 
paragraphs (b)(4) through (b)(9) of this section exist. If a direct 
account holder has provided documentation that is unreliable or 
incorrect under the rules of paragraph (b)(4) through (b)(9) of this 
section, the withholding agent may require new documentation. 
Alternatively, the withholding agent may rely on the documentation 
originally provided if the rules of paragraphs

[[Page 146]]

(b)(4) through (b)(9) of this section permit such reliance based on 
additional statements and documentation. Paragraph (b)(10) of this 
section provides limits on reason to know for financial institutions 
that receive beneficial owner documentation from persons (indirect 
account holders) that have an account relationship with, or an ownership 
interest in, a direct account holder. For rules regarding reliance on 
Form W-9, see Sec. 31.3406(g)-3(e)(2) of this chapter.
    (4) Rules applicable to withholding certificates--(i) In general. A 
withholding agent has reason to know that a beneficial owner withholding 
certificate provided by a direct account holder in connection with a 
payment of an amount described in Sec. 1.1441-6(c)(2) is unreliable or 
incorrect if the withholding certificate is incomplete with respect to 
any item on the certificate that is relevant to the claims made by the 
direct account holder, the withholding certificate contains any 
information that is inconsistent with the direct account holder's claim, 
the withholding agent has other account information that is inconsistent 
with the direct account holder's claim, or the withholding certificate 
lacks information necessary to establish entitlement to a reduced rate 
of withholding. For purposes of establishing a direct account holder's 
status as a foreign person or resident of a treaty country a withholding 
certificate shall be considered unreliable or inconsistent with an 
account holder's claims only if it is not reliable under the rules of 
paragraphs (b)(5) and (6) of this section. A withholding agent that 
relies on an agent to review and maintain a withholding certificate is 
considered to know or have reason to know the facts within the knowledge 
of the agent.
    (ii) Examples. The rules of paragraph (b)(4) of this section are 
illustrated by the following examples:

    Example 1. F, a foreign person that has a direct account 
relationship with USB, a bank that is a U.S. person, provides USB with a 
beneficial owner withholding certificate for the purpose of claiming a 
reduced rate of withholding on U.S. source dividends. F resides in a 
treaty country that has a limitation on benefits provision in its income 
tax treaty with the United States. The withholding certificate, however, 
does not contain a statement regarding limitations on benefits or 
deriving the income under section 894 as required by Sec. 1.1441-
6(b)(1). USB cannot rely on the withholding certificate to grant a 
reduced rate of withholding because it is incomplete with respect to the 
claim made by F.
    Example 2. F, a foreign person that has a direct account 
relationship with USB, a broker that is a U.S. person, provides USB with 
a withholding certificate for the purpose of claiming the portfolio 
interest exception under section 881(c), which applies to foreign 
corporations. F indicates on its withholding certificate, however, that 
it is a partnership. USB may not treat F as a beneficial owner of the 
interest for purposes of the portfolio interest exception because F has 
indicated on its withholding certificate that it is a foreign 
partnership, and therefore under Sec. 1.1441-1(c)(6)(ii) it is not the 
beneficial owner of the interest payment.

    (5) Withholding certificate--establishment of foreign status. A 
withholding agent has reason to know that a beneficial owner withholding 
certificate (as defined in Sec. 1.1441-1(e)(2)) provided by a direct 
account holder in connection with a payment of an amount described in 
Sec. 1.1441-6(c)(2) is unreliable or incorrect for purposes of 
establishing the account holder's status as a foreign person if the 
certificate is described in paragraph (b)(5)(i) or (ii) of this section.
    (i) A withholding certificate is unreliable or incorrect if the 
withholding certificate has a permanent residence address (as defined in 
Sec. 1.1441-1(e)(2)(ii)) in the United States, the withholding 
certificate has a mailing address in the United States, the withholding 
agent has a residence or mailing address as part of its account 
information that is an address in the United States, or the direct 
account holder notifies the withholding agent of a new residence or 
mailing address in the United States (whether or not provided on a 
withholding certificate). A withholding agent may, however, rely on the 
beneficial owner withholding certificate as establishing the account 
holder's foreign status if it may do so under the provisions of 
paragraph (b)(5)(i)(A) or (B) of this section.
    (A) A withholding agent may treat a direct account holder as a 
foreign person if the beneficial owner withholding certificate has been 
provided by an individual and--

[[Page 147]]

    (1) The withholding agent has in its possession or obtains 
documentary evidence (which does not contain a U.S. address) that has 
been provided within the past three years, was valid at the time it was 
provided, the documentary evidence supports the claim of foreign status, 
and the direct account holder provides the withholding agent with a 
reasonable explanation, in writing, supporting the account holder's 
foreign status; or
    (2) The account is maintained at an office of the withholding agent 
outside the United States and the withholding agent is required to 
report annually a payment to the direct account holder on a tax 
information statement that is filed with the tax authority of the 
country in which the office is located and that country has an income 
tax treaty in effect with the United States.
    (B) A withholding agent may treat an account holder as a foreign 
person if the beneficial owner withholding certificate has been provided 
by an entity that the withholding agent does not know, or does not have 
reason to know, is a flow-through entity and--
    (1) The withholding agent has in its possession, or obtains, 
documentation that substantiates that the entity is actually organized 
or created under the laws of a foreign country; or
    (2) The account is maintained at an office of the withholding agent 
outside the United States and the withholding agent is required to 
report annually a payment to the direct account holder on a tax 
information statement that is filed with the tax authority of the 
country in which the office is located and that country has an income 
tax treaty in effect with the United States.
    (ii) A beneficial owner withholding certificate is unreliable or 
incorrect if it is provided with respect to an offshore account (as 
defined in Sec. 1.6049-5(c)(1)) and the direct account holder has 
standing instructions directing the withholding agent to pay amounts 
from its account to an address or an account maintained in the United 
States. The withholding agent may treat the direct account holder as a 
foreign person, however, if the direct account holder provides a 
reasonable explanation in writing that supports its foreign status.
    (6) Withholding certificate--claim of reduced rate of withholding 
under treaty. A withholding agent has reason to know that a withholding 
certificate (other than Form W-9) provided by a direct account holder in 
connection with a payment of an amount described in Sec. 1.1441-6(c)(2) 
is unreliable or incorrect for purposes of establishing that the direct 
account holder is a resident of a country with which the United States 
has an income tax treaty if it is described in paragraphs (b)(6)(i) 
through (iii) of this section.
    (i) A beneficial owner withholding certificate is unreliable or 
incorrect if the permanent residence address on the beneficial owner 
withholding certificate is not in the country whose treaty is invoked, 
or the direct account holder notifies the withholding agent of a new 
permanent residence address that is not in the treaty country. A 
withholding agent may, however, treat a direct account holder as 
entitled to a reduced rate of withholding under an income tax treaty if 
the direct account holder provides a reasonable explanation for the 
permanent residence address outside the treaty country (e.g., the 
address is the address of a branch of the beneficial owner located 
outside the treaty country in which the entity is a resident) or the 
withholding agent has in its possession, or obtains, documentary 
evidence that establishes residency in a treaty country.
    (ii) A beneficial owner withholding certificate is unreliable or 
incorrect if the permanent residence address on the withholding 
certificate is in the applicable treaty country but the withholding 
certificate contains a mailing address outside the treaty country or the 
withholding agent has a mailing address as part of its account 
information that is outside the treaty country. A mailing address that 
is a P.O. Box, in-care-of address, or address at a financial institution 
(if the financial institution is not a beneficial owner) shall not 
preclude a withholding agent from treating the direct account holder as 
a resident of a treaty country if such address is in the treaty country. 
If a withholding agent has a mailing address (whether or not contained 
on the

[[Page 148]]

withholding certificate) outside the applicable treaty country, the 
withholding agent may nevertheless treat a direct account holder as a 
resident of an applicable treaty country if--
    (A) The withholding agent has in its possession, or obtains, 
additional documentation supporting the direct account holder's claim of 
residence in the applicable treaty country (and the additional 
documentation does not contain an address outside the treaty country);
    (B) The withholding agent has in its possession, or obtains, 
documentation that establishes that the direct account holder is an 
entity organized in a treaty country (or an entity managed and 
controlled in a treaty country, if the applicable treaty so requires);
    (C) The withholding agent knows that the address outside the 
applicable treaty country (other than a P.O. box, or in-care-of address) 
is a branch of a bank or insurance company that is a resident of the 
applicable treaty country; or
    (D) The withholding agent obtains a written statement from the 
direct account holder that reasonably establishes entitlement to treaty 
benefits.
    (iii) A beneficial owner withholding certificate is unreliable or 
incorrect to establish entitlement to a reduced rate of withholding 
under an income tax treaty if the direct account holder has standing 
instructions for the withholding agent to pay amounts from its account 
to an address or an account outside the treaty country unless the direct 
account holder provides a reasonable explanation, in writing, 
establishing the direct account holder's residence in the applicable 
treaty country.
    (7) Documentary evidence. A withholding agent shall not treat 
documentary evidence provided by a direct account holder as valid if the 
documentary evidence does not reasonably establish the identity of the 
person presenting the documentary evidence. For example, documentary 
evidence is not valid if it is provided in person by a direct account 
holder that is a natural person and the photograph or signature on the 
documentary evidence, if any, does not match the appearance or signature 
of the person presenting the document. A withholding agent shall not 
rely on documentary evidence to reduce the rate of withholding that 
would otherwise apply under the presumption rules of Secs. 1.1441-
1(b)(3), 1.1441-5(d) and (e)(6), and 1.6049-5(d) if the documentary 
evidence contains information that is inconsistent with the direct 
account holder's claim of a reduced rate of withholding, the withholding 
agent has other account information that is inconsistent with the direct 
account holder's claim, or the documentary evidence lacks information 
necessary to establish entitlement to a reduced rate of withholding. For 
example, if a direct account holder provides documentary evidence to 
claim treaty benefits and the documentary evidence establishes the 
direct account holder's status as a foreign person and a resident of a 
treaty country, but the account holder fails to provide the treaty 
statements required by Sec. 1.1441-6(c)(5), the documentary evidence 
does not establish the direct account holder's entitlement to a reduced 
rate of withholding. For purposes of establishing a direct account 
holder's status as a foreign person or resident of a country with which 
the United States has an income tax treaty with respect to income 
described in Sec. 1.1441-6(c)(2), documentary evidence shall be 
considered unreliable or incorrect only if it is not reliable under the 
rules of paragraph (b)(8) and (9) of this section.
    (8) Documentary evidence--establishment of foreign status. A 
withholding agent has reason to know that documentary evidence provided 
in connection with a payment of an amount described in Sec. 1.1441-
6(c)(2) is unreliable or incorrect for purposes of establishing the 
direct account holder's status as a foreign person if the documentary 
evidence is described in paragraphs (b)(8)(i), (ii), (iii) or (iv) of 
this section.
    (i) A withholding agent shall not treat documentary evidence 
provided by an account holder after December 31, 2000, as valid for 
purposes of establishing the direct account holder's foreign status if 
the only mailing or residence address that is available to the 
withholding agent is an address at a financial institution (unless the 
financial institution is a beneficial owner of the income), an in-care-
of address, or a P.O. box. In this case, the withholding

[[Page 149]]

agent must obtain additional documentation that is sufficient to 
establish the direct account holder's status as a foreign person. A 
withholding agent shall not treat documentary evidence provided by an 
account holder before January 1, 2001, as valid for purposes of 
establishing a direct account holder's status as a foreign person if it 
has actual knowledge that the direct account holder is a U.S. person or 
if it has a mailing or residence address for the direct account holder 
in the United States. If a withholding agent has an address for the 
direct account holder in the United States, the withholding agent may 
nevertheless treat the direct account holder as a foreign person if it 
can so treat the direct account holder under the rules of paragraph 
(b)(8)(ii) of this section.
    (ii) Documentary evidence is unreliable or incorrect to establish a 
direct account holder's status as a foreign person if the withholding 
agent has a mailing or residence address (whether or not on the 
documentation) for the direct account holder in the United States or if 
the direct account holder notifies the withholding agent of a new 
address in the United States. A withholding agent may, however, rely on 
documentary evidence as establishing the direct account holder's foreign 
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 direct account holder that is an 
individual as a foreign person even if it has a mailing or residence 
address for the direct account holder in the United States if the 
withholding agent--
    (1) Has in its possession or obtains additional documentary evidence 
(which does not contain a U.S. address) supporting the claim of foreign 
status and a reasonable explanation in writing supporting the account 
holder's foreign status;
    (2) Has in its possession or obtains a valid beneficial owner 
withholding certificate on Form W-8 and the Form W-8 contains a 
permanent residence address outside the United States and a mailing 
address outside the United States (or if a mailing address is inside the 
United States the direct account holder provides a reasonable 
explanation in writing supporting the direct account holder's foreign 
status); or
    (3) The account is maintained at an office of the withholding agent 
outside the United States and the withholding agent is required to 
report annually a payment to the direct account holder on a tax 
information statement that is filed with the tax authority of the 
country in which the office is located and that country has an income 
tax treaty in effect with the United States.
    (B) A withholding agent may treat a direct account holder that is an 
entity (other than a flow-through entity) as a foreign person even if it 
has a mailing or residence address for the direct account holder in the 
United States if the withholding agent--
    (1) Has in its possession, or obtains, documentation that 
substantiates that the entity is actually organized or created under the 
laws of a foreign country;
    (2) Obtains a valid beneficial owner withholding certificate on Form 
W-8 and the Form W-8 contains a permanent residence address outside the 
United States and a mailing address outside the United States (or if a 
mailing address is inside the United States the direct account holder 
provides additional documentary evidence sufficient to establish the 
direct account holder's foreign status); or
    (3) The account is maintained at an office of the withholding agent 
outside the United States and the withholding agent is required to 
report annually a payment to the direct account holder on a tax 
information statement that is filed with the tax authority of the 
country in which the office is located and that country has an income 
tax treaty in effect with the United States.
    (iii) Documentary evidence is unreliable or incorrect if the direct 
account holder has standing instructions directing the withholding agent 
to pay amounts from its account to an address or an account maintained 
in the United States. The withholding agent may treat the direct account 
holder as a foreign person, however, if the account holder provides a 
reasonable explanation in writing that supports its foreign status.
    (9) Documentary evidence--claim of reduced rate of withholding under 
treaty. A

[[Page 150]]

withholding agent has reason to know that documentary evidence provided 
in connection with a payment of an amount described in Sec. 1.1441-
6(c)(2) is unreliable or incorrect for purposes of establishing that a 
direct account holder is a resident of a country with which the United 
States has an income tax treaty if it is described in paragraph 
(b)(9)(i) or (ii) of this section.
    (i) Documentary evidence is unreliable or incorrect if the 
withholding agent has a mailing or residence address for the direct 
account holder (whether or not on the documentary evidence) that is 
outside the applicable treaty country, or the only address that the 
withholding agent has (whether in or outside of the applicable treaty 
country) is a P.O. box, an in-care-of address, or the address of a 
financial institution (if the financial institution is not the 
beneficial owner). If a withholding agent has a mailing or residence 
address for the direct account holder outside the applicable treaty 
country, the withholding agent may nevertheless treat a direct account 
holder as a resident of an applicable treaty country if the withholding 
agent--
    (A) Has in its possession, or obtains, additional documentary 
evidence supporting the direct account holder's claim of residence in 
the applicable treaty country (and the documentary evidence does not 
contain an address outside the applicable treaty country, a P.O. box, an 
in-care-of address, or the address of a financial institution);
    (B) Has in its possession, or obtains, documentary evidence that 
establishes the direct account holder is an entity organized in a treaty 
country (or an entity managed and controlled in a treaty country, if the 
applicable treaty so requires); or
    (C) Obtains a valid beneficial owner withholding certificate on Form 
W-8 that contains a permanent residence address and a mailing address in 
the applicable treaty country.
    (ii) Documentary evidence is unreliable or incorrect if the direct 
account holder has standing instructions directing the withholding agent 
to pay amounts from its account to an address or an account maintained 
outside the treaty country unless the direct account holder provides a 
reasonable explanation, in writing, establishing the direct account 
holder's residence in the applicable treaty country.
    (10) Limits on reason to know--indirect account holders. A financial 
institution that receives documentation from a payee through a 
nonqualified intermediary, a flow-through entity, or a U.S. branch 
described in Sec. 1.1441-1(b)(2)(iv) (other than a U.S. branch that is 
treated as a U.S. person) with respect to a payment of an amount 
described in Sec. 1.1441-6(c)(2) has reason to know that the 
documentation is unreliable or incorrect if a reasonably prudent person 
in the position of a withholding agent would question the claims made. 
This standard requires, but is not limited to, a withholding agent's 
compliance with the rules of paragraphs (b)(10)(i) through (iii).
    (i) The withholding agent must review the withholding statement 
described in Sec. 1.1441-1(e)(3)(iv) and may not rely on information in 
the statement to the extent the information does not support the claims 
made for any payee. For this purpose, a withholding agent may not treat 
a payee as a foreign person if an address in the United States is 
provided for such payee and may not treat a person as a resident of a 
country with which the United States has an income tax treaty if the 
address for that person is outside the applicable treaty country. 
Notwithstanding a U.S. address or an address outside a treaty country, 
the withholding agent may treat a payee as a foreign person or a foreign 
person as a resident of a treaty country if a reasonable explanation is 
provided, in writing, by the nonqualified intermediary, flow-through 
entity, or U.S. branch supporting the payee's foreign status or the 
foreign person's residency in a treaty country.
    (ii) The withholding agent must review each withholding certificate 
in accordance with the requirements of paragraphs (b)(5) and (6) of this 
section and verify that the information on the withholding certificate 
is consistent with the information on the withholding statement required 
under Sec. 1.1441-1(e)(3)(iv). If there is a discrepancy between the 
withholding certificate and the withholding statement,

[[Page 151]]

the withholding agent may choose to rely on the withholding certificate, 
if valid, and instruct the nonqualified intermediary, flow-through 
entity, or U.S. branch to correct the withholding statement or apply the 
presumption rules of Secs. 1.1441-1(b), 1.1441-5(d) and (e)(6), and 
1.6049-5(d) to the payment allocable to the payee who provided the 
withholding certificate. A withholding agent that receives a withholding 
certificate before December 31, 2001, is not required to review the 
information on withholding certificates or determine if it is consistent 
with the information on the withholding statement until December 31, 
2001. A withholding agent may withhold and report in accordance with a 
withholding statement until December 31, 2001, unless it has actually 
performed the verification procedures required by this paragraph 
(b)(10)(ii) and determined that the withholding statement is inaccurate 
with respect to a particular payee.
    (iii) The withholding agent must review the documentary evidence 
provided by the nonqualified intermediary, flow-through entity, or U.S. 
branch to determine that there is no obvious indication that the payee 
is a U.S. non-exempt recipient or that the documentary evidence does not 
establish the identity of the person who provided the documentation 
(e.g., the documentary evidence does not appear to be an identification 
document).
    (11) Additional guidance. The IRS may prescribe other circumstances 
for which a withholding certificate or documentary evidence is 
unreliable or incorrect in addition to the circumstances described in 
paragraph (b) of this section to establish an account holder's status as 
a foreign person or a beneficial owner entitled to a reduced rate of 
withholding in published guidance (see Sec. 601.601(d)(2) of this 
chapter).
    (c) Authorized agent--(1) In general. The acts of an agent of a 
withholding agent (including the receipt of withholding certificates, 
the payment of amounts of income subject to withholding, and the deposit 
of tax withheld) are imputed to the withholding agent on whose behalf it 
is acting. However, if the agent is a foreign person, a withholding 
agent that is a U.S. person may treat the acts of the foreign agent as 
its own for purposes of determining whether it has complied with the 
provisions of this section, but only if the agent is an authorized 
foreign agent, as defined in paragraph (c)(2) of this section. An 
authorized foreign agent cannot apply the provisions of this paragraph 
(c) to appoint another person its authorized foreign agent with respect 
to the payments it receives from the withholding agent.
    (2) Authorized foreign agent. An agent is an authorized foreign 
agent only if--
    (i) There is a written agreement between the withholding agent and 
the foreign person acting as agent;
    (ii) The notification procedures described in paragraph (c)(3) of 
this section have been complied with;
    (iii) Books and records and relevant personnel of the foreign agent 
are available (on a continuous basis, including after termination of the 
relationship) for examination by the IRS in order to evaluate the 
withholding agent's compliance with the provisions of chapters 3 and 61 
of the Code, section 3406, and the regulations under those provisions; 
and
    (iv) The U.S. withholding agent remains fully liable for the acts of 
its agent and does not assert any of the defenses that may otherwise be 
available, including under common law principles of agency in order to 
avoid tax liability under the Internal Revenue Code.
    (3) Notification. A withholding agent that appoints an authorized 
agent to act on its behalf for purposes of Sec. 1.871-14(c)(2), the 
withholding provisions of chapter 3 of the Code, section 3406 or other 
withholding provisions of the Internal Revenue Code, or the reporting 
provisions of chapter 61 of the Code, is required to file notice of such 
appointment with the Office of the Assistant Commissioner 
(International). Such notice shall be filed before the first payment for 
which the authorized agent acts as such. Such notice shall acknowledge 
the withholding agent liability as provided in paragraph (c)(2)(iv) of 
this section.
    (4) Liability of U.S. withholding agent. An authorized foreign agent 
is subject to the same withholding and reporting obligations that apply 
to any withholding agent under the provisions of

[[Page 152]]

chapter 3 of the Code and the regulations thereunder. In particular, an 
authorized foreign agent does not benefit from the special procedures or 
exceptions that may apply to a qualified intermediary. A withholding 
agent acting through an authorized foreign agent is liable for any 
failure of the agent, such as failure to withhold an amount or make 
payment of tax, in the same manner and to the same extent as if the 
agent's failure had been the failure of the U.S. withholding agent. For 
this purpose, the foreign agent's actual knowledge or reason to know 
shall be imputed to the U.S. withholding agent. The U.S. withholding 
agent's liability shall exist irrespective of the fact that the 
authorized foreign agent is also a withholding agent and is itself 
separately liable for failure to comply with the provisions of the 
regulations under section 1441, 1442, or 1443. However, the same tax, 
interest, or penalties shall not be collected more than once.
    (5) Filing of returns. See Sec. 1.1461-1(b)(2)(iii) and (c)(4)(iii) 
regarding returns required to be made where a U.S. withholding agent 
acts through an authorized foreign agent.
    (d) United States obligations. If the United States is a withholding 
agent for an item of interest, including original issue discount, on 
obligations of the United States or of any agency or instrumentality 
thereof, the withholding obligation of the United States is assumed and 
discharged by--
    (1) The Commissioner of the Public Debt, for interest paid by checks 
issued through the Bureau of the Public Debt;
    (2) The Treasurer of the United States, for interest paid by him or 
her, whether by check or otherwise;
    (3) Each Federal Reserve Bank, for interest paid by it, whether by 
check or otherwise; or
    (4) Such other person as may be designated by the IRS.
    (e) Assumed obligations. If, in connection with the sale of a 
corporation's property, payment on the bonds or other obligations of the 
corporation is assumed by a person, then that person shall be a 
withholding agent to the extent amounts subject to withholding are paid 
to a foreign person. Thus, the person shall withhold such amounts under 
Sec. 1.1441-1 as would be required to be withheld by the seller or 
corporation had no such sale or assumption been made.
    (f) Conduit financing arrangements--(1) Liability of withholding 
agent. Subject to paragraph (f)(2) of this section, any person that is 
required to deduct and withhold tax under Sec. 1.1441-3(g) is made 
liable for that tax by section 1461. A person that is required to deduct 
and withhold tax but fails to do so is liable for the payment of the tax 
and any applicable penalties and interest.
    (2) Exception for withholding agents that do not know of conduit 
financing arrangement--(i) In general. A withholding agent will not be 
liable under paragraph (f)(1) of this section for failing to deduct and 
withhold with respect to a conduit financing arrangement unless the 
person knows or has reason to know that the financing arrangement is a 
conduit financing arrangement. This standard shall be satisfied if the 
withholding agent knows or has reason to know of facts sufficient to 
establish that the financing arrangement is a conduit financing 
arrangement, including facts sufficient to establish that the 
participation of the intermediate entity in the financing arrangement is 
pursuant to a tax avoidance plan. A withholding agent that knows only of 
the financing transactions that comprise the financing arrangement will 
not be considered to know or have reason to know of facts sufficient to 
establish that the financing arrangement is a conduit financing 
arrangement.
    (ii) Examples. The following examples illustrate the operation of 
paragraph (d)(2) of this section.

    Example 1. (i) DS is a U.S. subsidiary of FP, a corporation 
organized in Country N, a country that does not have an income tax 
treaty with the United States. FS is a special purpose subsidiary of FP 
that is incorporated in Country T, a country that has an income tax 
treaty with the United States that prohibits the imposition of 
withholding tax on payments of interest. FS is capitalized with 
$10,000,000 in debt from BK, a Country N bank, and $1,000,000 in capital 
from FS.
    (ii) On May 1, 1995, C, a U.S. person, purchases an automobile from 
DS in return for an installment note. On July 1, 1995, DS sells a number 
of installment notes, including C's, to FS in exchange for $10,000,000. 
DS continues to service the installment notes for

[[Page 153]]

FS and C is not notified of the sale of its obligation and continues to 
make payments to DS. But for the withholding tax on payments of interest 
by DS to BK, DS would have borrowed directly from BK, pledging the 
installment notes as collateral.
    (iii) The C installment note is a financing transaction, whether 
held by DS or by FS, and the FS note held by BK also is a financing 
transaction. After FS purchases the installment note, and during the 
time the installment note is held by FS, the transactions constitute a 
financing arrangement, within the meaning of Sec. 1.881-3(a)(2)(i). BK 
is the financing entity, FS is the intermediate entity, and C is the 
financed entity. Because the participation of FS in the financing 
arrangement reduces the tax imposed by section 881 and because there was 
a tax avoidance plan, FS is a conduit entity.
    (iv) Because C does not know or have reason to know of the tax 
avoidance plan (and by extension that the financing arrangement is a 
conduit financing arrangement), C is not required to withhold tax under 
section 1441. However, DS, who knows that FS's participation in the 
financing arrangement is pursuant to a tax avoidance plan and is a 
withholding agent for purposes of section 1441, is not relieved of its 
withholding responsibilities.
    Example 2. Assume the same facts as in Example, 1 except that C 
receives a new payment booklet on which DS is described as ``agent''. 
Although C may deduce that its installment note has been sold, without 
more C has no reason to know of the existence of a financing 
arrangement. Accordingly, C is not liable for failure to withhold, 
although DS still is not relieved of its withholding responsibilities.
    Example 3. (i) DC is a U.S. corporation that is in the process of 
negotiating a loan of $10,000,000 from BK1, a bank located in Country N, 
a country that does not have an income tax treaty with the United 
States. Before the loan agreement is signed, DC's tax lawyers point out 
that interest on the loan would not be subject to withholding tax if the 
loan were made by BK2, a subsidiary of BK1 that is incorporated in 
Country T, a country that has an income tax treaty with the United 
States that prohibits the imposition of withholding tax on payments of 
interest. BK1 makes a loan to BK2 to enable BK2 to make the loan to DC. 
Without the loan from BK1 to BK2, BK2 would not have been able to make 
the loan to DC.
    (ii) The loan from BK1 to BK2 and the loan from BK2 to DC are both 
financing transactions and together constitute a financing arrangement 
within the meaning of Sec. 1.881-3(a)(2)(i). BK1 is the financing 
entity, BK2 is the intermediate entity, and DC is the financed entity. 
Because the participation of BK2 in the financing arrangement reduces 
the tax imposed by section 881 and because there is a tax avoidance 
plan, BK2 is a conduit entity.
    (iii) Because DC is a party to the tax avoidance plan (and 
accordingly knows of its existence), DC must withhold tax under section 
1441. If DC does not withhold tax on its payment of interest, BK2, a 
party to the plan and a withholding agent for purposes of section 1441, 
must withhold tax as required by section 1441.
    Example 4. (i) DC is a U.S. corporation that has a long-standing 
banking relationship with BK2, a U.S. subsidiary of BK1, a bank 
incorporated in Country N, a country that does not have an income tax 
treaty with the United States. DC has borrowed amounts of as much as 
$75,000,000 from BK2 in the past. On January 1, 1995, DC asks to borrow 
$50,000,000 from BK2. BK2 does not have the funds available to make a 
loan of that size. BK2 considers asking BK1 to enter into a loan with DC 
but rejects this possibility because of the additional withholding tax 
that would be incurred. Accordingly, BK2 borrows the necessary amount 
from BK1 with the intention of on-lending to DC. BK1 does not make the 
loan directly to DC because of the withholding tax that would apply to 
payments of interest from DC to BK1. DC does not negotiate with BK1 and 
has no reason to know that BK1 was the source of the loan.
    (ii) The loan from BK2 to DC and the loan from BK1 to BK2 are both 
financing transactions and together constitute a financing arrangement 
within the meaning of Sec. 1.881-3(a)(2)(i). BK1 is the financing 
entity, BK2 is the intermediate entity, and DC is the financed entity. 
The participation of BK2 in the financing arrangement reduces the tax 
imposed by section 881. Because the participation of BK2 in the 
financing arrangement reduces the tax imposed by section 881 and because 
there was a tax avoidance plan, BK2 is a conduit entity.
    (iii) Because DC does not know or have reason to know of the tax 
avoidance plan (and by extension that the financing arrangement is a 
conduit financing arrangement), DC is not required to withhold tax under 
section 1441. However, BK2, who is also a withholding agent under 
section 1441 and who knows that the financing arrangement is a conduit 
financing arrangement, is not relieved of its withholding 
responsibilities.

    (3) Effective date. This paragraph (f) is effective for payments 
made by financed entities on or after September 11, 1995. This paragraph 
shall not apply to interest payments covered by section 127(g)(3) of the 
Tax Reform Act of 1984, and to interest payments with respect to other 
debt obligations issued prior to October 15, 1984 (whether or not such 
debt was issued by a Netherlands Antilles corporation).

[[Page 154]]

    (g) Effective date. Except as otherwise provided in paragraph (f)(3) 
of this section, this section applies to payments made after December 
31, 2000.

[T.D. 7977, 49 FR 36834, Sept. 20, 1984, as amended by T.D. 8611, 60 FR 
41014, Aug. 11, 1995; 60 FR 55312, Oct. 31, 1995; T.D. 8734, 62 FR 
53462, Oct. 14, 1997; T.D. 8804, 63 FR 72188, Dec. 31, 1998; T.D. 8856, 
64 FR 73412, Dec. 30, 1999; T.D. 8881, 65 FR 32197, 32212, May 22, 2000; 
66 FR 18189, Apr. 6, 2001]



Sec. 1.1441-8  Exemption from withholding for payments to foreign governments, international organizations, foreign central banks of issue, and the Bank for 
          International Settlements.

    (a) Foreign governments. Under section 892, certain specific types 
of income received by foreign governments are excluded from gross income 
and are exempt from taxation, unless derived from the conduct of a 
commercial activity or received from or by a controlled commercial 
entity. Accordingly, withholding is not required under Sec. 1.1441.1 
with regard to any item of income which is exempt from taxation under 
section 892.
    (b) Reliance on claim of exemption by foreign government. Absent 
actual knowledge or reason to know otherwise, the withholding agent may 
rely upon a claim of exemption made by the foreign government if, prior 
to the payment, the withholding agent can reliably associate the payment 
with documentation upon which it can rely to treat the payment as made 
to a beneficial owner in accordance with Sec. 1.1441-1(e)(1)(ii). A Form 
W-8 furnished by a foreign government for purposes of claiming an 
exemption under this paragraph (b) is valid only if, in addition to 
other applicable requirements, it certifies that the income is, or will 
be, exempt from taxation under section 892 and the regulations under 
that section and whether the person whose name is on the certificate is 
an integral part of a foreign government (as defined in Sec. 1.892-
2T(a)(2)) or a controlled entity (as defined in Sec. 1.892-2T(a)(3)).
    (c) Income of a foreign central bank of issue or the Bank for 
International Settlements--(1) Certain interest income. Section 895 
provides for the exclusion from gross income of certain income derived 
by a foreign central bank of issue, or by the Bank for International 
Settlements, from obligations of the United States or of any agency or 
instrumentality thereof or from interest on deposits with persons 
carrying on the banking business if the bank is the owner of the 
obligations or deposits and does not hold the obligations or deposits 
for, or use them in connection with, the conduct of a commercial banking 
function or other commercial activity by such bank. See Sec. 1.895-1. 
Absent actual knowledge or reason to know that a foreign central bank of 
issue, or the Bank for International Settlements, is operating outside 
the scope of the exclusion granted by section 895 and the regulations 
under that section, the withholding agent may rely on a claim of 
exemption if, prior to the payment, the withholding agent can reliably 
associate the payment with documentation upon which it can rely to treat 
the foreign central bank of issue or the Bank for International 
Settlements as the beneficial owner of the payment in accordance with 
Sec. 1.1441-1(e)(1)(ii). A Form W-8 furnished by a foreign central bank 
of issue or the Bank for International Settlements for purposes of 
claiming an exemption under this paragraph (c)(1) is valid only if, in 
addition to other applicable requirements, it certifies that the person 
whose name is on the certificate is a foreign central bank of issue, or 
the Bank for International Settlements, and that the bank does not, and 
will not, hold the obligations or the bank deposits covered by the Form 
W-8 for, or use them in connection with, the conduct of a commercial 
banking function or other commercial activity.
    (2) Bankers acceptances. Interest derived by a foreign central bank 
of issue from bankers acceptances is exempt from tax under sections 
871(i)(2)(C) and 881(d) and Sec. 1.861-2(b)(4). With respect to bankers' 
acceptances, a withholding agent may treat a payee as a foreign central 
bank of issue without requiring a withholding certificate if the name of 
the payee and other facts surrounding the payment reasonably indicate 
that the payee or beneficial owner is a foreign central bank of issue, 
as defined in Sec. 1.861-2(b)(4).

[[Page 155]]

    (d) Exemption for payments to international organizations. A payment 
to an international organization (within the meaning of section 
7701(a)(18)) is exempt from withholding on any payment. A withholding 
agent may treat a payee as an international organization without 
requiring a withholding certificate if the name of the payee is one that 
is designated as an international organization by executive order 
(pursuant to 22 U.S.C. 288 through 288(f)) and other facts surrounding 
the transaction reasonably indicate that the international organization 
is the beneficial owner of the payment.
    (e) Failure to receive withholding certificate timely and other 
applicable procedures. See applicable procedures described in 
Sec. 1.1441-1(b)(7) in the event the withholding agent does not hold a 
valid withholding certificate described in paragraph (b) or (c)(1) of 
this section or other appropriate documentation at the time of payment. 
Further, the provisions of Sec. 1.1441-1(e)(4) shall apply to 
withholding certificates and other documents related thereto furnished 
under the provisions of this section.
    (f) Effective date--(1) In general. This section applies to payments 
made after December 31, 2000.
    (2) Transition rules. For purposes of this section, the validity of 
a Form 8709 that was valid on January 1, 1998, under the regulations in 
effect prior to January 1, 2001 (see 26 CFR part 1, revised April 1, 
1999) and expired, or will expire, at any time during 1998, is extended 
until December 31, 1998. The validity of a Form 8709 that is valid on or 
after January 1, 1999, remains valid until its validity expires under 
the regulations in effect prior to January 1, 2001 (see 26 CFR part 1, 
revised April 1, 1999) but in no event shall such a form remain valid 
after December 31, 2000. The rule in this paragraph (f)(2), however, 
does not apply to extend the validity period of a Form 8709 that expires 
solely by reason of changes in the circumstances of the person whose 
name is on the certificate. Notwithstanding the first three sentences of 
this paragraph (f)(2), a withholding agent may choose to not take 
advantage of the transition rule in this paragraph (f)(2) with respect 
to one or more withholding certificates valid under the regulations in 
effect prior to January 1, 2001 (see 26 CFR part 1, revised April 1, 
1999) and, therefore, to require withholding certificates conforming to 
the requirements described in this section (new withholding 
certificates). For purposes of this section, a new withholding 
certificate is deemed to satisfy the documentation requirement under the 
regulations in effect prior to January 1, 2001 (see 26 CFR part 1, 
revised April 1, 1999). Further, a new withholding certificate remains 
valid for the period specified in Sec. 1.1441-1(e)(4)(ii), regardless of 
when the certificate is obtained.

[T.D. 8211, 53 FR 24066, June 27, 1988, as amended at T.D. 8211, 53 FR 
27595, July 21, 1988; Redesignated and amended by T.D. 8734, 62 FR 
53464, Oct. 14, 1997; T.D. 8804, 63 FR 72185, Dec. 31, 1998; 64 FR 
73410, Dec. 30, 1999]



Sec. 1.1441-9  Exemption from withholding on exempt income of a foreign tax-exempt organization, including foreign private foundations.

    (a) Exemption from withholding for exempt income. No withholding is 
required under section 1441(a) or 1442, and the regulations under those 
sections, on amounts paid to a foreign organization that is described in 
section 501(c) to the extent that the amounts are not income includable 
under section 512 in computing the organization's unrelated business 
taxable income. See, however, Sec. 1.1443-1 for withholding on payments 
of unrelated business income to foreign tax-exempt organizations and on 
payments subject to tax under section 4948. For a foreign organization 
to claim an exemption from withholding under section 1441(a) or 1442 
based on its status as an organization described in section 501(c), it 
must furnish the withholding agent with a withholding certificate 
described in paragraph (b)(2) of this section. A foreign organization 
described in section 501(c) may choose to claim a reduced rate of 
withholding under the procedures described in other sections of the 
regulations under section 1441 and not under this section. In 
particular, if an organization chooses to claim benefits under an income 
tax treaty, the withholding procedures applicable to claims of such a 
reduced

[[Page 156]]

rate are governed solely by the provisions of Sec. 1.1441-6 and not of 
this section.
    (b) Reliance on foreign organization's claim of exemption from 
withholding--(1) General rule. A withholding agent may rely on a claim 
of exemption under this section only if, prior to the payment, the 
withholding agent can reliably associate the payment with a valid 
withholding certificate described in paragraph (b)(2) of this section.
    (2) Withholding certificate. A withholding certificate under this 
paragraph (b)(2) is valid only if it is a Form W-8 and if, in addition 
to other applicable requirements, the Form W-8 includes the taxpayer 
identifying number of the organization whose name is on the certificate, 
and it certifies that the Internal Revenue Service (IRS) has issued a 
favorable determination letter (and the date thereof) that is currently 
in effect, what portion, if any, of the amounts paid constitute income 
includible under section 512 in computing the organization's unrelated 
business taxable income, and, if the organization is described in 
section 501(c)(3), whether it is a private foundation described in 
section 509. Notwithstanding the preceding sentence, if the organization 
cannot certify that it has been issued a favorable determination letter 
that is still in effect, its withholding certificate is nevertheless 
valid under this paragraph (b)(2) if the organization attaches to the 
withholding certificate an opinion that is acceptable to the withholding 
agent from a U.S. counsel (or any other person as the IRS may prescribe 
in published guidance (see Sec. 601.601(d)(2) of this chapter)) 
concluding that the organization is described in section 501(c). If the 
determination letter or opinion of counsel to which the withholding 
certificate refers concludes that the organization is described in 
section 501(c)(3), and the certificate further certifies that the 
organization is not a private foundation described in section 509, an 
affidavit of the organization setting forth sufficient facts concerning 
the operations and support of the organization for the Internal Revenue 
Service (IRS) to determine that such organization would be likely to 
qualify as an organization described in section 509(a)(1), (2), (3), or 
(4) must be attached to the withholding certificate. An organization 
that provides an opinion of U.S. counsel or an affidavit may provide the 
same opinion or affidavit to more than one withholding agent provided 
that the opinion is acceptable to each withholding agent who receives it 
in conjunction with a withholding certificate. Any such opinion of 
counsel or affidavit must be renewed whenever there is a change in facts 
or circumstances that are relevant to determine the organization's 
status under section 501(c) or, if relevant, that the organization is or 
is not a private foundation described in section 509.
    (3) Presumptions in the absence of documentation. Notwithstanding 
paragraph (b)(1) of this section, if the organization's certification 
with respect to whether amounts paid constitute income includable under 
section 512 in computing the organization's unrelated business taxable 
income is not reliable or is lacking but all other certifications are 
reliable, the withholding agent may rely on the certificate but the 
amounts paid are presumed to be income includable under section 512 in 
computing the organization's unrelated business taxable income. If the 
certification regarding private foundation status is not reliable, the 
withholding agent may rely on the certificate but the amounts paid are 
presumed to be paid to a foreign beneficial owner that is a private 
foundation.
    (4) Reason to know. Reliance by a withholding agent on the 
information and certifications stated on a withholding certificate is 
subject to the agent's actual knowledge or reason to know that such 
information or certification is incorrect as provided in Sec. 1.1441-
7(b). For example, a withholding agent must cease to treat a foreign 
organization's claim for exemption from withholding based on the 
organization's tax-exempt status as valid beginning on the earlier of 
the date on which such agent knows that the IRS has given notice to such 
foreign organization that it is not an organization described in section 
501(c) or the date on which the IRS gives notice to the public that such 
foreign organization is not an organization described in section 501(c). 
Similarly, a withholding

[[Page 157]]

agent may no longer rely on a certification that an amount is not 
subject to tax under section 4948 beginning on the earlier of the date 
on which such agent knows that the IRS has given notice to such foreign 
organization that it is subject to tax under section 4948 or the date on 
which the IRS gives notice that such foreign organization is a private 
foundation within the meaning of section 509(a).
    (c) Failure to receive withholding certificate timely and other 
applicable procedures. See applicable procedures described in 
Sec. 1.1441-1(b)(7) in the event the withholding agent does not hold a 
valid withholding certificate or other appropriate documentation at the 
time of payment. Further, the provisions of Sec. 1.1441-1(e)(4) shall 
apply to withholding certificates and other documents related thereto 
furnished under the provisions of this section.
    (d) Effective date--(1) In general. This section applies to payments 
made after December 31, 2000.
    (2) Transition rules. For purposes of this section, the validity of 
a Form W-8, 1001, or 4224 or a statement that was valid on January 1, 
1998, under the regulations in effect prior to January 1, 2001 (see 26 
CFR parts 1 and 35a, revised April 1, 1999) and expired, or will expire, 
at any time during 1998, is extended until December 31, 1998. The 
validity of a Form W-8, 1001, or 4224 or a statement that is valid on or 
after January 1, 1999 remains valid until its validity expires under the 
regulations in effect prior to January 1, 2001 (see 26 CFR parts 1 and 
35a, revised April 1, 1999) but in no event shall such form or statement 
remain valid after December 31, 2000. The rule in this paragraph (d)(2), 
however, does not apply to extend the validity period of a Form W-8, 
1001, or 4224 or a statement that expires solely by reason of changes in 
the circumstances of the person whose name is on the certificate. 
Notwithstanding the first three sentences of this paragraph (d)(2), a 
withholding agent may choose to not take advantage of the transition 
rule in this paragraph (d)(2) with respect to one or more withholding 
certificates valid under the regulations in effect prior to January 1, 
2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999) and, therefore, 
to require withholding certificates conforming to the requirements 
described in this section (new withholding certificates). For purposes 
of this section, a new withholding certificate is deemed to satisfy the 
documentation requirement under the regulations in effect prior to 
January 1, 2001 (see 26 CFR parts 1 and 35a, revised April 1, 1999). 
Further, a new withholding certificate remains valid for the period 
specified in Sec. 1.1441-1(e)(4)(ii), regardless of when the certificate 
is obtained.

[T.D. 8734, 62 FR 53465, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72185, Dec. 31, 1998; T.D. 8856, 64 FR 73410, Dec. 10, 1999; T.D. 8881, 
65 FR 32201, May 22, 2000]



Sec. 1.1441-10  Withholding agents with respect to fast-pay arrangements.

    (a) In general. A corporation that issues fast-pay stock in a fast-
pay arrangement described in Sec. 1.7701(l)-3(b)(1) is a withholding 
agent with respect to payments made on the fast-pay stock and payments 
deemed made under the recharacterization rules of Sec. 1.7701(l)-3. 
Except as provided in this paragraph (a) or in paragraph (b) of this 
section, the withholding tax rules under section 1441 and section 1442 
apply with respect to a fast-pay arrangement described in 
Sec. 1.7701(l)-3(c)(1)(i) in accordance with the recharacterization 
rules provided in Sec. 1.7701(l)-3(c). In all cases, notwithstanding 
paragraph (b) of this section, if at any time the withholding agent 
knows or has reason to know that the Commissioner has exercised the 
discretion under either Sec. 1.7701(l)-3(c)(1)(ii) to apply the 
recharacterization rules of Sec. 1.7701(l)-3(c), or Sec. 1.7701(l)-3(d) 
to depart from the recharacterization rules of Sec. 1.7701(l)-3(c) for a 
taxpayer, the withholding agent must withhold on payments made (or 
deemed made) to that taxpayer in accordance with the characterization of 
the fast-pay arrangement imposed by the Commissioner under 
Sec. 1.7701(l)-3.
    (b) Exception. If at any time the withholding agent knows or has 
reason to know that any taxpayer entered into a fast-pay arrangement 
with a principal purpose of applying the recharacterization rules of 
Sec. 1.7701(l)-3(c) to avoid tax under section 871(a) or section 881, 
then for each payment made or deemed

[[Page 158]]

made to such taxpayer under the arrangement, the withholding agent must 
withhold, under section 1441 or section 1442, the higher of--
    (1) The amount of withholding that would apply to such payment 
determined under the form of the arrangement; or
    (2) The amount of withholding that would apply to deemed payments 
determined under the recharacterization rules of Sec. 1.7701(l)-3(c).
    (c) Liability. Any person required to deduct and withhold tax under 
this section is made liable for that tax by section 1461, and is also 
liable for applicable penalties and interest for failing to comply with 
section 1461.
    (d) Examples. The following examples illustrate the rules of this 
section:

    Example 1. REIT W issues shares of fast-pay stock to foreign 
individual A, a resident of Country C. United States source dividends 
paid to residents of C are subject to a 30 percent withholding tax. W 
issues all shares of benefited stock to foreign individuals who are 
residents of Country D. D's income tax convention with the United States 
reduces the United States withholding tax on dividends to 15 percent. 
Under Sec. 1.7701(l)-3(c), the dividends paid by W to A are deemed to be 
paid by W to the benefited shareholders. W has reason to know that A 
entered into the fast-pay arrangement with a principal purpose of using 
the recharacterization rules of Sec. 1.7701(l)-3(c) to reduce United 
States withholding tax. W must withhold at the 30 percent rate because 
the amount of withholding that applies to the payments determined under 
the form of the arrangement is higher than the amount of withholding 
that applies to the payments determined under Sec. 1.7701(l)-3(c).
    Example 2. The facts are the same as in Example 1 of this paragraph 
(d) except that W does not know, or have reason to know, that A entered 
into the arrangement with a principal purpose of using the 
recharacterization rules of Sec. 1.7701(l)-3(c) to reduce United States 
withholding tax. Further, the Commissioner has not exercised the 
discretion under Sec. 1.7701(l)-3(d) to depart from the 
recharacterization rules of Sec. 1.7701(l)-3(c). Accordingly, W must 
withhold tax at a 15 percent rate on the dividends deemed paid to the 
benefited shareholders.

    (e) Effective date. This section applies to payments made (or deemed 
made) on or after January 6, 1999.

[T.D. 8853, 65 FR 1312, Jan. 10, 2000]



Sec. 1.1442-1  Withholding of tax on foreign corporations.

    For regulations concerning the withholding of tax at source under 
section 1442 in the case of foreign corporations, foreign governments, 
international organizations, foreign tax-exempt corporations, or foreign 
private foundations, see Secs. 1.1441-1 through 1.1441-9.

[T.D. 8734, 62 FR 53466, Oct. 14, 1997]



Sec. 1.1442-2  Exemption under a tax treaty.

    For regulations providing for a claim of reduced withholding tax 
under section 1442 by certain foreign corporations pursuant to the 
provisions of an income tax treaty, see Sec. 1.1441-6.

[T.D. 8734, 62 FR 53466, Oct. 14, 1997]



Sec. 1.1442-3  Tax exempt income of a foreign tax-exempt corporations.

    For regulations providing for a claim of exemption for income exempt 
from tax under section 501(a) of a foreign tax-exempt corporation, see 
Sec. 1.1441-9. See Sec. 1.1443-1 for withholding rules applicable to 
foreign private foundations and to the unrelated business income of 
foreign tax-exempt organizations.

[T.D. 8734, 62 FR 53466, Oct. 14, 1997]



Sec. 1.1443-1  Foreign tax-exempt organizations.

    (a) Income includible under section 512 in computing unrelated 
business taxable income. In the case of a foreign organization that is 
described in section 501(c), amounts paid to the organization includible 
under section 512 in computing the organization's unrelated business 
taxable income are subject to withholding under Secs. 1.1441-1, 1.1441-
4, and 1.1441-6 in the same manner as payments of the same amounts to 
any foreign person that is not a tax-exempt organization. Therefore, a 
foreign organization receiving amounts includible under section 512 in 
computing the organization's unrelated business taxable income may claim 
an exemption from withholding or a reduced rate of withholding with 
respect to that income in the same manner as a foreign person that is 
not a tax-exempt organization. See Sec. 1.1441-9(b)(3) for presumption 
that amounts are includible under section

[[Page 159]]

512 in computing the organization's unrelated business taxable income in 
the absence of a reliable certification.
    (b) Income subject to tax under section 4948--(1) In general. The 
gross investment income (as defined in section 4940(c)(2)) of a foreign 
private foundation is subject to withholding under section 1443(b) at 
the rate of 4 percent to the extent that the income is from sources 
within the United States and is subject to the tax imposed by section 
4948(a) and the regulations under that section. Withholding under this 
paragraph (b) is required irrespective of the fact that the income may 
be effectively connected with the conduct of a trade or business in the 
United States by the foreign organization. See Sec. 1.1441-9(b)(3) for 
applicable presumptions that amounts are subject to tax under section 
4948. The withholding imposed under this paragraph (b)(1) does not 
obviate a private foundation's obligation to file any return required by 
law with respect to such organization, such as the form that the 
foundation is required to file under section 6033 for the taxable year.
    (2) Reliance on a foreign organization's claim of foreign private 
foundation status. For reliance by a withholding agent on a foreign 
organization's claim of foreign private foundation status, see 
Sec. 1.1441-9 (b) and (c).
    (3) Applicable procedures. A withholding agent withholding the 4-
percent amount pursuant to paragraph (b)(1) of this section shall treat 
such withholding as withholding under section 1441(a) or 1442(a) for all 
purposes, including reporting of the payment on a Form 1042 and a Form 
1042-S pursuant to Sec. 1.1461-1 (b) and (c). Similarly, the foreign 
private foundation shall treat the 4-percent withholding as withholding 
under section 1441(a) or 1442(a), including for purposes of claims for 
refunds and credits.
    (4) Claim of benefits under an income tax treaty. The withholding 
procedures applicable to claims of a reduced rate under an income tax 
treaty are governed solely by the provisions of Sec. 1.1441-6 and not by 
this section.
    (c) Effective date--(1) In general. This section applies to payments 
made after December 31, 2000.
    (2) Transition rules. For purposes of this section, the validity of 
an affidavit or opinion of counsel described in Sec. 1.1443-1(b)(4)(i) 
in effect prior to January 1, 2001 (see Sec. 1.1443-1(b)(4)(i) as 
contained in 26 CFR part 1, revised April 1, 1999) is extended until 
December 31, 2000. However, a withholding agent may choose to not take 
advantage of the transition rule in this paragraph (c)(2) with respect 
to one or more withholding certificates valid under the regulations in 
effect prior to January 1, 2001 (see 26 CFR part 1, revised April 1, 
1999) and, therefore, to require withholding certificates conforming to 
the requirements described in this section (new withholding 
certificates). For purposes of this section, a new withholding 
certificate is deemed to satisfy the documentation requirement under the 
regulations in effect prior to January 1, 2001 ( see 26 CFR part 1, 
revised April 1, 1999). Further, a new withholding certificate remains 
valid for the period specified in Sec. 1.1441-1(e)(4)(ii), regardless of 
when the certificate is obtained.

[T.D. 8734, 62 FR 53466, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72186, Dec. 31, 1998; T.D. 8856, 64 FR 73411, Dec. 30, 1999]



Sec. 1.1445-1  Withholding on dispositions of U.S. real property interests by foreign persons: In general.

    (a) Purpose and scope of regulations. These regulations set forth 
rules relating to the withholding requirements of section 1445. In 
general, section 1445(a) provides that any person who acquires a U.S. 
real property interest from a foreign person must withhold a tax of 10 
percent from the amount realized by the transferor foreign person (or a 
lesser amount established by agreement with the Internal Revenue 
Service). Section 1445(e) provides special rules requiring withholding 
on distributions and certain other transactions by corporations, 
partnerships, trusts, and estates. This Sec. 1.1445-1 provides general 
rules concerning the withholding requirement of sections 1445(a), as 
well as definitions applicable under both section 1445(a) and 1445(e). 
Section 1.1445-2 provides for various situations in which withholding is 
not required under section 1445(a). Section 1.1445-3 provides for 
adjustments to the

[[Page 160]]

amount required to be withheld by transferees under section 1445(a). 
Section 1.1445-4 prescribes the duties of agents in transactions subject 
to withholding under either section 1445(a) or 1445(e). Section 1.1445-5 
provides rules concerning the withholding required under section 
1445(e), while Sec. 1.1445-6 provides for adjustments to the amount 
required to be withheld under section 1445(e). Finally, Sec. 1.1445-7 
provides rules concerning the treatment of a foreign corporation that 
has made an election under section 897(i) to be treated as a domestic 
corporation.
    (b) Duty to withhold--(1) In general. Transferees of U.S. real 
property interests are required to deduct and withhold a tax equal to 10 
percent of the amount realized by the transferor, if the transferor is a 
foreign person and the disposition takes place on or after January 1, 
1985. Neither the transferee's duty to withhold nor the amount required 
to be withheld is affected by the amount of cash to be paid by the 
transferee. Amounts withheld must be reported and paid over in 
accordance with the requirements of paragraph (c) of this section. 
Failures to withhold and pay over are subject to the liabilities set 
forth in paragraph (e) of this section. If two or more persons are joint 
transferees of a U.S. real property interest, each such person is 
subject to the obligation to withhold. That obligation is fulfilled with 
respect to each such person if any one of them withholds and pays over 
the required amount in accordance with the rules of this section. If the 
amount realized (as defined in paragraph (g)(5) of this section) by the 
transferor is zero, then no withholding is required. For example, if a 
real property interest is transferred as a gift (i.e, the recipient does 
not assume any liabilities or furnish any other consideration to the 
transferor) then no withholding is required. Withholding is not required 
with respect to dispositions that takes place before January 1, 1985, 
even if the first payment of consideration is made after December 31, 
1984.
    (2) U.S. real property interest owned jointly by foreign and non-
foreign transferors. The amount subject to withholding under paragraph 
(b)(1) of this section with respect to the transfer of a U.S. real 
property interest owned by one or more foreign persons (as defined in 
Sec. 1.897-1(k)) and one or more non-foreign persons shall be determined 
by allocating the amount realized from the transfer between (or among) 
such transferors based upon the capital contribution of each transferor 
with respect to the property and by aggregating the amounts allocated to 
any foreign person (or persons). For this purpose, a husband and wife 
will each be deemed to have contributed 50 percent of the aggregate 
capital contributed by such husband and wife. See Sec. 1.1445-
1(f)(3)(iv) with respect to the crediting of the amount withheld between 
or among joint foreign transferors.
    (3) Options to acquire a U.S. real property interest--(i) No 
withholding on grant of option. No withholding is required under section 
1445 with respect to any amount realized by the grantor on the grant of 
an option to acquire a U.S. real property interest.
    (ii) No withholding upon lapse of option. No withholding is required 
under section 1445 with respect to any amount realized by the grantor 
upon the lapse of an option to acquire a U.S. real property interest.
    (iii) Withholding required upon the sale or exchange of option. A 
transferee of an option to acquire a U.S. real property interest must 
deduct and withhold a tax equal to 10 percent of the amount realized by 
the transferor upon the disposition. This Sec. 1.1445-1(b)(3)(iii) does 
not apply to require withholding upon the initial grant of an option.
    (iv) Withholding required on exercise of option. If the holder 
exercises an option to purchase a U.S. real property interest, the 
amount paid for the option shall be considered an amount realized by the 
grantor/transferor upon the transfer of the property with respect to 
which the option was granted, and shall thus be subject to withholding 
on the day that such underlying property is transferred. The preceding 
sentence applies regardless of whether or not the terms of the option 
specifically provide that the option price is applied to the purchase 
price.
    (4) Exceptions and modifications. The duty to withhold under section 
1445(a)

[[Page 161]]

is subject to the exceptions and modifications contained in 
Secs. 1.1445-2 and 1.1445-3. Generally, Sec. 1.1445-2 provides rules for 
determining that withholding is not required because either the 
transferor is not a foreign person or the interest transferred is not a 
U.S. real property interest. In addition, Sec. 1.1445-2 provides 
exceptions to the withholding requirement, including a rule that exempts 
from withholding any person who acquires a U.S. real property interest 
for use as a residence for a contract price of $300,000 or less. If 
withholding is required under section 1445(a), Sec. 1.1445-3 allows the 
amount withheld to be modified pursuant to a withholding certificate 
issued by the Internal Revenue Service. If a transferee cannot withhold 
the full amount required because the first payment of consideration for 
the transfer does not involve sufficient cash (or other liquid assets 
convertible into cash, such as foreign currency), then a withholding 
certificate must be obtained pursuant to Sec. 1.1445-3.
    (c) Reporting and paying over of withheld amounts--(1) In general. A 
transferee must report and pay over any tax withheld by the 20th day 
after the date of the transfer. Forms 8288 and 8288-A are used for this 
purpose, and must be filed with the Internal Revenue Service Center, 
Philadelphia, PA, 19255. Pursuant to section 7502 and regulations 
thereunder, the timely mailing of Forms 8288 and 8228-A will be treated 
as their timely filing. Form 8288-A will be stamped by the IRS to show 
receipt, and a stamped copy will be mailed by the IRS to the transferor 
(at the address reported on the form) for the transferor's use. See 
Secs. 1.1445-1(f) and 1.1445-3(f).
    (2) Pending application for withholding certificate--(i) In general. 
(A) Delayed reporting and payment with respect to application submitted 
by transferee. If an application for a withholding certificate with 
respect to a transfer of a U.S. real property interest is submitted to 
the Internal Revenue Service by the transferee on the day of or at any 
time prior to the transfer, the transferee must withhold 10 percent of 
the amount realized as required by paragraph (b) of this section. 
However, the amount withheld, or a lesser amount as determined by the 
Service, need not be reported and paid over to the Service until the 
20th day following the Service's final determination with respect to the 
application for a withholding certificate. For this purpose, the 
Service's final determination occurs on the day when the withholding 
certificate is mailed to the transferee by the Service or when a 
notification denying the request for a withholding certificate is mailed 
to the transferee by the Service. An application is submitted to the 
Service on the day it is actually received by the Service at the address 
provided in Sec. 1.1445-1(g)(10) or, under the rules of section 7502, on 
the day it is mailed to the Service at the address provided in 
Sec. 1.1445-1(g)(10).
    (B) Delayed reporting and payment with respect to application 
submitted by transferor. If an application for a withholding certificate 
with respect to a transfer of a U.S. real property interest is submitted 
to the Internal Revenue Service by the Transferor on the day of or any 
time prior to the transfer, such transferor must provide notice to the 
transferee prior to the transfer. No particular form is required but the 
notice must set forth the name, address, and taxpayer identification 
number, if any, of the transferor, a brief description of the property 
which is the subject of the application, and the date the application 
was submitted to the Service. The transferee must withhold 10 percent of 
the amount realized as required in paragraph (b) of this section but 
need not report or pay over to the Service such amount (or a lesser 
amount as determined by the Service) until the 20th day following the 
Service's final determination with respect to the application. The 
Service will send a copy of the withholding certificate or copy of the 
notification denying the request for a withholding certificate to the 
transferee. For this purpose, the Service's final determination will be 
deemed to occur on the day when the copy of the withholding certificate 
or the copy of the notification denying the request for a withholding 
certificate is mailed by the Service to the transferee (or transferees). 
An application is submitted to the Service on the day it is actually 
received by the Service at the address provided in Sec. 1.1445-

[[Page 162]]

1(g)(10) or, under the rules of Sec. 7502, on the day it is mailed to 
the Service at the address provided in Sec. 1.1445-1(g)(10).
    (ii) Anti-abuse rule--(A) In general. A transferee that in reliance 
upon the rules of this paragraph (c)(2) fails to report and pay over 
amounts withheld by the 20th day following the date of the transfer, 
shall be subject to the payment of interest and penalties if the 
relevant application for a withholding certificate (or an amendment to 
the application for a withholding certificate) was submitted for a 
principal purpose of delaying the transferee's payment to the IRS of the 
amount withheld. Interest and penalties shall be assessed on the amount 
that is ultimately paid over (or collected pursuant to the agreement) 
with respect to the period between the 20th day after the date of the 
transfer and the date on which payment is made (or collected).
    (B) Presumption. A principal purpose of delaying payment of the 
amount withheld shall be presumed if--
    (1) The transferee applies for a withholding certificate pursuant to 
Sec. 1.1445-3(c) based on a determination of the transferor's maximum 
tax liability, and
    (2) Such liability is ultimately determined to be equal to 90 
percent or more of the amount that was otherwise required to be withheld 
and paid over. However, the presumption created by the previous sentence 
may be rebutted by evidence establishing that delaying payment of the 
amount withheld was not a principal purpose of the transaction.
    (d) Contents of Forms 8288 and 8288-A--(1) Transactions subject to 
section 1445(a). Any person that is required to file Forms 8288 and 
8288-A pursuant to section 1445(a) and the rules of this section must 
set forth thereon the following information:
    (i) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of any entity) of 
the transferee(s) filing the return;
    (ii) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of any entity) of 
the transferor(s);
    (iii) A brief description of the U.S. real property interest 
transferred, including its location and the nature of any substantial 
improvements in the case of real property, and the class or type and 
amount of interests transferred in the case of interests in a 
corporation that constitute U.S. real property interests;
    (iv) The date of the transfer;
    (v) The amount realized by the transferor, as defined in paragraph 
(g)(5) of this section;
    (vi) The amount withheld by the transferee and whether withholding 
is at the statutory or reduced rate; and
    (vii) Such other information as the Commissioner may require.
    For purposes of paragraph (d)(1) (i) and (ii), mailing addresses may 
be provided in addition to, but not in lieu of, home addresses or office 
addresses.
    (2) Transactions subject to section 1445(e). Any person that is 
required to file Forms 8288 and 8288-A pursuant to the rules of 
Sec. 1.1445-5 must set forth thereon the following information:
    (i) The name, identifying number (if any), and office address of the 
entity or fiduciary filing the return;
    (ii) The amount withheld by the entity or fiduciary;
    (iii) The date of the transfer;
    (iv) In the case of a transaction subject to withholding pursuant to 
section 1445(e)(1) and Sec. 1.1445-5(c):
    (A) A brief description of the U.S. real property interest 
transferred, as described in paragraph (d)(1)(iii) of this section;
    (B) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of an entity) of 
each holder of an interest in the entity that is a foreign person; and
    (C) Each such interest-holder's pro rata share of the amount 
withheld;
    (v) In the case of a distribution subject to withholding pursuant to 
section 1445(e)(2) and Sec. 1.1445-5(d):
    (A) A brief description of the U.S. real property interest 
transferred, as described in paragraph (d)(1)(iii) of this section; and
    (B) The amount of gain recognized upon the distribution by the 
corporation.
    (vi) In the case of a distribution subject to withholding pursuant 
to section 1445(e)(3) and Sec. 1.1445-5(e):

[[Page 163]]

    (A) A brief description of the property distributed by the 
corporation;
    (B) The name, identifying number (if any), and home address (in case 
of an individual) or office address (in the case of an entity) of each 
holder of an interest in the entity that is a foreign person;
    (C) The amount realized upon the distribution by each such foreign 
interest holder; and
    (D) Each foreign interest-holder's pro rata share of the amount 
withheld; and
    (vii) Such other information as the Commissioner may require.
    (e) Liability of transferee upon failure to withhold--(1) In 
general. Every person required to deduct and withhold tax under section 
1445 is made liable for that tax by section 1461. Therefore, a person 
that is required to deduct and withhold tax but fails to do so may be 
held liable for the payment of the tax and any applicable penalties and 
interest.
    (2) Transferor's liability not otherwise satisfied--(i) Tax and 
penalties. Except as provided in paragraph (e)(3) of this section, if a 
transferee is required to deduct and withhold tax under section 1445 but 
fails to do so, then the tax shall be assessed against and collected 
from that transferee. Such person may also be subject to any of the 
civil and criminal penalties that apply. Corporate officers or other 
responsible persons may be subject to a civil penalty under section 6672 
equal to the amount that should have been withheld and paid over.
    (ii) Interest. If a transferee is required to deduct and withhold 
tax under section 1445 but fails to do so, then such transferee shall be 
liable for the payment of interest pursuant to section 6601 and the 
regulations thereunder. Interest shall be payable with respect to the 
period between--
    (A) The last date on which the tax imposed under section 1445 was 
required to be paid over by the transferee, and
    (B) The date on which such tax is actually paid. Interest shall be 
payable with respect to the entire amount that is required to be 
deducted and withheld. However, if the Service issues a withholding 
certificate providing for withholding of a reduced amount, then, for the 
period after the issuance of the certificate, interest shall be payable 
with respect to that reduced amount.
    (3) Transferor's liability otherwise satisfied--(i) Tax and 
penalties. If a transferee is required to deduct and withhold tax under 
section 1445 but fails to do so, and the transferor's tax liability with 
respect to the transfer was satisfied (or was established to be zero) 
by--
    (A) The transferor's filing of an income tax return (and payment of 
any tax due) with respect to the transfer, or
    (B) The issuance of a withholding certificate by the Internal 
Revenue Service establishing that the transferor's maximum tax liability 
is zero,

then the tax required to be withheld under section 1445 shall not be 
collected from the transferee. Such transferee's liability for tax, and 
the requirement that such person file Forms 8288 and 8288-A, shall be 
deemed to have been satisfied as of the date on which the transferor's 
income tax return was filed or the withholding certificate was issued. 
No penalty shall be imposed on or collected from such person for failure 
to return or pay the tax, unless such failure was fraudulent and for the 
purpose of evading payment. A transferee that seeks to avoid liability 
for tax and penalties pursuant to the rule of paragraph (e)(3)(i) must 
provide sufficient information for the Service to determine whether the 
transferor's tax liability was satisfied (or was established to be 
zero).
    (ii) Interest. If a transferee is required to deduct and withhold 
tax under section 1445 but fails to do so, then such person shall be 
liable for the payment of interest under section 6601 and regulations 
thereunder. Such transferee's liability for the payment of interest 
shall not be excused by reason of the deemed satisfaction, pursuant to 
subdivision (i) of this paragraph (e)(3), of the transferee's liability 
under section 1445, because the deemed satisfaction of that liability is 
the equivalent of the late payment of a liability, on which interest 
must be paid. Interest shall be payable with respect to the period 
between--

[[Page 164]]

    (A) The last date on which the tax imposed under section 1445 was 
required to be paid over, and
    (B) The date (established from information supplied to the Service 
by the transferee) on which any tax due is paid with respect to the 
transferor's relevant income tax return, or the date the withholding 
certificate is issued establishing that the transferor's maximum tax 
liability is zero.

Interest shall be payable with respect to the entire amount that is 
required to be deducted and withheld. However, if the Service issues a 
withholding certificate providing for withholding of a reduced amount, 
then for the period after the issuance of the certificate interest shall 
be payable with respect to that reduced amount.
    (4) Coordination with entity with holding rules. For purposes of 
section 1445(e) and Secs. 1.1445-5, 1.1445-6, 1.1445-7, and 1.1445-8T, 
the rules of this paragraph (e) shall be applied by--
    (i) Substituting the words ``person required to withhold'' for the 
word ``transferee'' each place it appears in this paragraph (e), and
    (ii) Substituting the words ``person subject to withholding'' for 
the word ``transferor'' each place it appears in this paragraph (e).
    (f) Effect of withholding on transferor--(1) In general. The 
withholding of tax under section 1445(a) does not excuse a foreign 
person that disposes of a U.S. real property interest from filing a U.S. 
tax return with respect to the income arising from the disposition. Form 
1040NR, 1041, or 1120F, as appropriate, must be filed, and any tax due 
must be paid, by the filing deadline generally applicable to such 
person. (The return may be filed by such later date as is provided in an 
extension granted by the Internal Revenue Service.) Any tax withheld 
under section 1445(a) shall be credited against the amount of income tax 
as computed in such return.
    (2) Manner of obtaining credit or refund. A stamped copy of Form 
8288-A will be provided to the transferor by the Service (under 
paragraph (c) of this section), and must be attached to the transferor's 
return to establish the amount withheld that is available as a credit. 
If the amount withheld under section 1445(a) constitutes less than the 
full amount of the transferor's U.S. tax liability for that taxable 
year, then a payment of estimated tax may be required to be made 
pursuant to section 6154 or 6654 prior to the filing of the income tax 
return for that year. Alternatively, if the amount withheld under 
section 1445(a) exceeds the transferor's maximum tax liability with 
respect to the disposition (as determined by the IRS), then the 
transferor may seek an early refund of the excess pursuant to 
Sec. 1.1445-3(g), or a normal refund upon the filing of a tax return.
    (3) Special rules--(i) Failure to receive Form 8288-A. If a stamped 
copy of Form 8288-A has not been provided to the transferor by the 
Service, the transferor may establish the amount of tax withheld by the 
transferee by attaching to its return substantial evidence (e.g., 
closing documents) of such amount. Such a transferor must attach to its 
return a statement which supplies all of the information required by 
Sec. 1.1445-1(d) (except such information that was not obtained after a 
diligent effort).
    (ii) U.S. persons subjected to withholding. If a transferee 
withholds tax under section 1445(a) with respect to a person who is not 
a foreign person, such person may credit the amount of any tax withheld 
against his income tax liability in accordance with the provisions of 
this Sec. 1.1145-1(f) or apply for an early refund under Sec. 1.1445-
3(g).
    (iii) Refund in case of installment sale. A transferor that takes 
gain into account in accordance with the provisions of section 453 shall 
not be entitled to a refund of the amount withheld, unless a withholding 
certificate providing for such a refund is obtained from the Internal 
Revenue Service pursuant to the provisions of Sec. 1.1445-3.
    (iv) Joint foreign transferors. If two or more foreign persons 
jointly transfer a U.S. real property interest, each transferor shall be 
credited with such portion of the amount withheld as such transferors 
mutually agree. Such transferors must request that the transferee 
reflect the agreed-upon crediting of the amount withheld on the Forms 
8288-A filed by the transferee. If the foreign transferors fail to 
request that the transferee reflect the agreed-

[[Page 165]]

upon crediting of the amount withheld by the 10th day after the date of 
transfer, the transferee must credit the amount withheld equally between 
(or among) the foreign transferors. In such case, the transferee is 
indemnified pursuant to section 1461 against any claim by a transferor 
objecting to the resulting division of credits. For rules regarding the 
amount realized allocated to joint foreign and non-foreign transferors, 
see Sec. 1.1445-1(b)(2).
    (g) Definitions--(1) In general. Unless otherwise specified, the 
definitions of terms provided in Sec. 1.897-1 shall apply for purposes 
of this section and Secs. 1.1445-2 through 1.1445-7. For purposes of 
section 1445 and the regulations thereunder, definitions of other 
relevant terms are provided in this paragraph (g). In addition, the term 
``residence'' is defined in 1.1445-2(d)(1), the terms ``transferor's 
agent'' and ``transferee's agent'' are defined in 1.1445-4(f), and the 
term ``relevant taxpayer'' is defined in 1.1445-6(a)(2).
    (2) Transfer. The term ``transfer'' means any transaction that would 
constitute a disposition for any purpose, of the Internal Revenue Code 
and regulations thereunder. For purposes of Secs. 1.1445-5 and 1.1445-6, 
the term includes distribution to shareholders of a corporation, 
partners of a partnership and beneficiaries of a trust or estate.
    (3) Transferor. The term ``transferor'' means any person, foreign or 
domestic, that disposes of a U.S. real property interest by sale, 
exchange, gift, or any other transfer. The term ``U.S. real property 
interest'' is defined in Sec. 1.897-1(c).
    (4) Transferee. The term ``transferee'' means any person, foreign or 
domestic, that acquires a U.S. real property interest by purchase, 
exchange, gift, or any other transfer.
    (5) Amount realized. The amount realized by the transferor for the 
transfer of a U.S. real property interest is the sum of.
    (i) The cash paid, or to be paid.
    (ii) The fair market value of other property transferred, or to be 
transferred, and
    (iii) The outstanding amount of any liability assumed by the 
transferee or to which the U.S. real property interest is subject 
immediately before and after the transfer.

The term ``cash paid or to be paid'' does not include stated or unstated 
interest or original issue discount (as determined under the rules of 
sections 1271 through 1275).
    (6) Contract price. The contract price of a U.S. real property 
interest is the sum that is agreed to by the transferee and transferor 
as the total amount of consideration to be paid for the property. That 
amount will generally be equal to the amount realized by the transferor, 
as defined in paragraph (b)(5) of this section.
    (7) Fair market value. The fair market value of property means the 
price at which the property would change hands between an unrelated 
willing buyer and willing seller, neither being under any compulsion to 
buy or to sell and both having reasonable knowledge of all relevant 
facts.
    (8) Date of transfer. The date of transfer of a U.S. real property 
interest is the first date on which consideration is paid (or a 
liability assumed) by the transferee. However, for purposes of section 
1445(e) (2), (3), and (4) and Secs. 1.1445-5(c)(1)(iii) and 1.1445-
5(c)(3) only, the date of transfer is the date of the distribution that 
gives rise to the obligation to withhold. For purposes of this paragraph 
(g)(8), the payment of consideration does not include the payment, prior 
to the passage of legal or equitable title (other than pursuant to an 
initial contract for purchase), of earnest money, a good-faith deposit, 
or any similar sum that is primarily intended to bind the transferee or 
transferor to the entering or performance of a contract. Such a payment 
will not constitute a payment of consideration solely because it may 
ultimately be applied against the amount owed to the transferor by the 
transferee. Such a payment is presumed to be earnest money, a good faith 
deposit, or a similar sum if it is subject to forfeiture in the event of 
a failure to enter into a contract or a breach of contract. However, a 
payment that is not forefeitable may nevertheless be found to constitute 
earnest money, a good faith deposit, or a similar sum.
    (9) Identifying number. Pursuant to Sec. 1.897-1(p), an individual's 
identifying

[[Page 166]]

number is the social security number (or the identification numbers 
assigned by the Internal Revenue Service). The identifying number of any 
other person is its United States employer identification number.
    (10) Address of the Assistant Commissioner International. Any 
written communication directed to the Assistant Commissioner 
(International) is to be addressed as follows: Director, Philadelphia 
Service Center; 11601 Roosevelt Blvd.; Philadelphia, PA 19255; ATTN: 
Drop Point 543X.

[T.D. 8113, 51 FR 46629, Dec. 24, 1986; 52 FR 3796, 3916, Feb. 6, 1987, 
as amended by T.D. 8647, 60 FR 66076, Dec. 21, 1995]



Sec. 1.1445-2  Situations in which withholding is not required under section 1445(a).

    (a) Purpose and scope of section. This section provides rules 
concerning various situations in which withhold is not required under 
section 1445(a). In general, a transferee has a duty to withhold under 
section 1445(a) only if both of the following are true:
    (1) The transferor is a foreign person; and
    (2) The transferee is acquiring a U.S. real property interest.

Thus, paragraphs (b) and (c) of this section provide rules under which a 
transferee of property can ascertain that he has no duty to withhold 
because one or the other of the two key elements is missing. Under 
paragraph (b), a transferee may determine that no withholding is 
required because the transferor is not a foreign person. Under paragraph 
(c), a transferee may determine that no withholding is required because 
the property acquired is not a U.S. real property interest. Finally, 
paragraph (d) of this section provides rules concerning exceptions to 
the withholding requirement.
    (b) Transferor not a foreign person--(1) In general. No withholding 
is required under section 1445 if the transferor of a U.S. real property 
interest is not a foreign person. Therefore, paragraph (b)(2) of this 
section provides rules pursuant to which the transferor can provide a 
certification of non-foreign status to inform the transferee that 
withholding is not required. A transferee that obtains such a 
certification must retain that document for five years, as provided in 
paragraph (b)(3) of this section. Except to the extent provided in 
paragraph (b)(4) of this section, the obtaining of this certification 
excuses the transferee from any liability otherwise imposed by section 
1445 and Sec. 1.1445-1(e). However, section 1445 and the rules of this 
section do not impose any obligation upon a transferee to obtain a 
certification from the transferor, thus, a transferee may instead rely 
upon other means to ascertain the non-foreign status of the transferor. 
If, however, the transferee relies upon other means and the transferor 
was, in fact, a foreign person, then the transferee is subject to the 
liability imposed by section 1445 and Sec. 1.1445-1(e).

A transferee is in no event required to rely upon other means to 
ascertain the non-foreign status of the transferor and may demand a 
certification of non-foreign status. If the certification is not 
provided, the transferee may withhold tax under section 1445 and will be 
considered, for purposes of sections 1461 through 1463, to have been 
required to withhold such tax.

    (2) Transferor's certification of non-foreign status--(i) In 
general. A transferee of a U.S. real property interest is not required 
to withhold under section 1445(a) if, prior to or at the time of the 
transfer, the transferor furnishes to the transferee a certification 
that--
    (A) States that the transferor is not a foreign person.
    (B) Sets forth the transferor's name, identifying number and home 
address (in the case of an individual) or office address (in the case of 
an entity), and
    (C) Is signed under penalties of perjury.

In general, a foreign person is a nonresident alien individual, foreign 
corporation, foreign partnership, foreign trust, or foreign estate, but 
not a resident alien individual. In this regard, see Sec. 1.897-1(k). 
However, a foreign corporation that has made a valid election under 
section 897(i) is generally not treated as a foreign person for purposes 
of section 1445. In this regard, see Sec. 1.1445-7. Pursuant to 
Sec. 1.897-1(p), an individual's identifying number is the individual's 
Social Security number and any other person's identifying number is its 
U.S. employer identification

[[Page 167]]

number. A certification pursuant to this paragraph (b) must be vertified 
as true and signed under penalties of perjury by a responsible officer 
in the case of a corporation, by a general partner in the case of a 
partnership, and by a trustee, executor, or equivalent fiduciary in the 
case of a trust or estate. No particular form is needed for a 
certification pursuant to this paragraph (b), nor is any particular 
language required, so long as the document meets the requirements of 
this paragraph (b)(2)(i). Samples of acceptable certifications are 
provided in paragraph(b)(2)(iii) of this section.
    (ii) Foreign corporation that ``has made election under section 
897(i). A foreign corporation that has made a valid election under 
section 897(i) to be treated as a domestic corporation for purposes of 
section 897 may provide a certification of non-foreign status pursuant 
to this paragraph (b)(2). However, an electing foreign corporation must 
attach to such certification a copy of the acknowledgment of the 
election provided to the corporation by the Internal Revenue Service 
pursuant to Sec. 1.897-3(d)(4).

An acknowledgment is valid for this purpose only if it states that the 
information required by Sec. 1.897-3 has been determined to be complete.
    (iii) Sample certifications--(A) Individual transferor.

    ``Section 1445 of the Internal Revenue Code provides that a 
transferee (buyer) of a U.S. real property interest must withhold tax if 
the transferor (seller) is a foreign person. To inform the transferee 
(buyer) that withholding of tax is not required upon my disposition of a 
U.S. real property interest, I, [name of transferor], hereby certify the 
following:
    1. I am not a nonresident alien for purposes of U.S. income 
taxation;
    2. My U.S. taxpayer identifying number [Social Security number] is 
--------; and
    3. My home address is:
________________________________________________________________________

________________________________________________________________________
    I understand that this certification may be disclosed to the 
Internal Revenue Service by the transferee and that any false statement 
I have made here could be punished by fine, imprisonment, or both.
    Under penalties of perjury I declare that I have examined this 
certification and to the best of my knowledge and belief it is true, 
correct, and complete. [Signature and Date]''

    (B) Entity transferor.

    ``Section 1445 of the Internal Revenue Code provides that a 
transferee of a U.S. real property interest must withhold tax if the 
transferor is a foreign person. To inform the transferee that 
withholding of tax is not required upon the disposition of a U.S. real 
property interest by [name of transferor], the undersigned hereby 
certifies the following on behalf of [name of transferor]:
    1. [Name of transferor] is not a foreign corporation, foreign 
partnership, foreign trust, or foreign estate (as those terms are 
defined in the Internal Revenue Code and Income Tax Regulations]:
    2. [Name of transferor]'s U.S. employer identification number is --
------, and
    3. [Name of transferor]'s office address is
________________________________________________________________________
    [Name of transferor] understands that this certification may be 
disclosed to the Internal Revenue Service by transferee and that any 
false statement contained herein could be punished by fine, imprisonment 
or both.
    Under penalties of perjury I declare that I have examined this 
certification and to the best of my knowledge and belief it is true, 
correct and complete, and I further declare that I have authority to 
sign this document on behalf of [name of transferor].

[Signature and date]

[Title --------]

    (3) Transferee must retain certification. If a transferee obtains a 
transferor's certification pursuant to the rules of this paragraph (b), 
then the transferee must retain that certification until the end of the 
fifth taxable year following the taxable year in which the transfer 
takes place. The transferee must retain the certification, and make it 
avaliable to the Internal Revenue Service when requested in accordance 
with the requirements of section 6001 and regulations thereunder.
    (4) Reliance upon certification not permitted--(i) In general. A 
transferee may not rely upon a transferor's certification pursuant to 
this paragraph (b) under the circumstances set forth in either 
subdivision (ii) or (iii) of this paragraph (b)(4). In either of those 
circumstances, a transferee's withholding obligation shall apply as if a 
certification had never been obtained, and the transferee is fully 
liable pursuant to section 1445 and Sec. 1.1445-1(e) for any failure to 
withhold.
    (ii) Failure to attach IRS acknowledgment of election. A transferee 
that knows that the transferor is a foreign

[[Page 168]]

corporation may not rely upon a certification of non-foreign status 
provided by the corporation on the basis of election under section 
897(i), unless there is attached to the certification a copy of the 
acknowledgment by the Internal Revenue Service of the corporation's 
election, as required by paragraph (b)(2)(ii) of this section.
    (iii) Knowledge of falsity. A transferee is not entitled to rely 
upon a transferor's certification if prior to or at the time of the 
transfer the transferee either--
    (A) Has actual knowledge that the transferor's certification is 
false; or
    (B) Receives a notice that the certification is false from a 
transferor's or transferee's agent, pursuant to Sec. 1.1445-4.
    (iv) Belated notice of false certification. If after the date of the 
transfer a transferee receives a notice that a certification is false, 
then that transferee is entitled to rely upon the certification only 
with respect to consideration that was paid prior to receipt for the 
notice. Such a transferee is required to withhold a full 10 percent of 
the amount realized from the consideration that remains to be paid to 
the transferor if possible. Thus, if 10 percent or more of the amount 
reailzed remains to be paid to the transferor then the transferee is 
required to withhold and pay over the full 10 percent. The transferee 
must do so by withholding and paying over the entire amount of each 
successive payment of consideration to the transferor until the full 10 
percent of the amount realized has been withheld and paid over. Amounts 
so withheld must be reported and paid over by the 20th day following the 
date on which each such payment of consideration is made. A transferee 
that is subject to the rules of this paragraph (b)(4)(iv) may not obtain 
a withholding certificate pursuant to Sec. 1.1445-3, but must instead 
withhold and pay over the amounts required by this paragraph.
    (c) Transferred property not a U.S. real property interest--(1) In 
general. No withholding is required under section 1445 if the transferee 
acquires only property that is not a U.S. real property interest. As 
defined in section 897(c) and Sec. 1.897-1(c), a U.S. real property 
interest includes certain interests in U.S. corporations, as well as 
direct interests in real property and certain associated personal 
property. This paragraph (c) provides rules pursuant to which a person 
acquiring an interest in a U.S. corporation may determine that 
withholding is not required because that interest is not a U.S. real 
property interest. To determine whether an interest in tangible property 
constitutes a U.S. real property interest the acquisition of which would 
be subject to withholding, see Sec. 1.897-1 (b) and (c).
    (2) Interests in publicly traded entities. No withholding is 
required under section 1445(a) upon the acquisition of an interest in a 
domestic corporation if any class of stock of the corporation is 
regularly traded on an established securities market.

This exemption shall apply if the disposition is incident to an initial 
public offering of stock pursuant to a registration statement filed with 
the Securities and Exchange Commission. Similarly, no withholding is 
required under section 1445(a) upon the acquisition of an interest in a 
publicly traded partnership or trust. However, the rule of this 
paragraph (c)(2) shall not apply to the acquisition, from a single 
transferor in a single (or related transferors (as defined in 
Sec. 1.897-1(i)) transaction (or related transactions), of an interest 
described in Sec. 1.897-1(c)(2)(iii)(B) (relating to substantial amounts 
of non-publicly traded interests in publicly traded corporations) or to 
similar interests in publicly traded partnerships or trusts. The person 
making an acquisition described in the preceding sentence must otherwise 
determine whether withholding is required, pursuant to section 1445 and 
the regulations thereunder. Transactions shall be deemed to be related 
if they are undertaken within 90 days of one another or if it can 
otherwise be shown that they were undertaken in pursuance of a 
prearranged plan.
    (3) Transferee receives statement that interest in corporation is 
not a U.S. real property interest--(i) In general. No withholding is 
required under section 1445(a) upon the acquisition of an interest in a 
domestic corporation, if the tranferor provides the transferee with a 
copy of a statement, issued by the

[[Page 169]]

corporation pursuant to Sec. 1.897-2(h), certifying that the interest is 
not a U.S. real property interest. In general, a corporation may issue 
such a statement only if the corporation was not a U.S. real property 
holding corporation at any time during the previous five years (or the 
period in which the interest was held by its present holder, if shorter) 
or if interests in the corporation ceased to be United States real 
property interests under section 897(c)(1)(B). (A corporation may not 
provide such a statement based on its determination that the interest in 
question is an interest solely as a creditor). See Sec. 1.897-2 (f) and 
(h). The corporation may provide such a statement directly to the 
transferee at the transferor's request. The transferor must request such 
a statement prior to the transfer, and shall, to the extent possible, 
specify the anticipated date of the transfer. A corporation's statement 
may be relied upon for purposes of this paragraph (c)(3) only if the 
statement is dated not more than 30 days prior to the date of the 
transfer. A transferee may also rely upon a corporation's statement that 
is voluntarily provided by the corporation in response to a request from 
the transferee, if that statement otherwise complies with the 
requirements of this paragraph (c)(3) and Sec. 1.897-2(h).
    (ii) Reliance on statement not permitted. A transferee is not 
entitled to rely upon a statement that a corporation is not a U.S. real 
property holding corporation if, prior to or at the time of the 
transfer, the transferee either--
    (A) Has actual knowledge that the statement is false, or
    (B) Receives a notice that the statement is false from a 
transferor's or transferee's agent, pursuant to Sec. 1.1445-4.

Such a transferee's withholding obligations shall apply as if a 
statement had never been given, and such a transferee may be held fully 
liable pursuant to Sec. 1.1445-1(e) for any failure to withhold.
    (iii) Belated notice of false statement. If after the date of the 
transfer, a transferee receives notice that a statement provided under 
Sec. 1.1445-2(c)(3)(i) (that an interest in a corporation is not a U.S. 
real property interest) is false, then such transferee may rely on the 
statement only with respect to consideration that was paid prior to the 
receipt of the notice.

Such a transferee is required to withhold a full 10 percent of the 
amount realized from the consideration that remains to be paid to the 
transferor, if possible. Thus, if 10 percent or more of the amount 
realized remains to be paid to the transferor, then the transferee is 
required to withhold and pay over the full 10 percent. The transferee 
must do so by withholding and paying over the entire amount of each 
successive payment of consideration to the transferor, until the full 10 
percent of the amount realized has been withheld and paid over. Amounts 
so withheld must be reported and paid over by the 20th day following the 
date on which each such payment of consideration is made. A transferee 
that is subject to the rules of this Sec. 1.1445-2(c)(3)(iii) may not 
obtain a withholding certificate pursuant to Sec. 1.1445-3, but must 
instead withhold and pay over the amounts required by this paragraph.
    (d) Exceptions to requirement of withholding--(1) Purchase of 
residence for $300,000 or less. No withholding is required under section 
1445(a) if one or more individual transferees acquire a U.S. real 
property interest for use as a residence and the amount realized on the 
transaction is $300,000 or less. For purposes of this section, a U.S. 
real property interest is acquired for use as a residence if on the date 
of the transfer the transferee (or transferees) has definite plans to 
reside at the property for at least 50 percent of the number of days 
that the property is used by any person during each of the first two 12-
month periods following the date of the transfer. The number of days 
that the property will be vacant is not taken into account in 
determining the number of days such property is used by any person. A 
transferee shall be considered to reside at a property on any day on 
which a member of the transferee's family, as defined in section 
267(c)(4), resides at the property. No form or other document need be 
filed with the Internal Revenue Service to establish a transferee's 
entitlement to rely upon the exception provided by this paragraph 
(d)(1). A transferee who fails to withhold in reliance upon this

[[Page 170]]

exception, but who does not in fact reside at the property for the 
minimum number of days set forth above, shall be liable for the failure 
to withhold (if the transferor was a foreign person and did not pay the 
full U.S. tax due on any gain recognized upon the transfer). However, if 
the transferee establishes that the failure to reside the minimum number 
of days was caused by a change in circumstances that could not 
reasonably have been anticipated at the time of the transfer, then the 
transferee shall not be liable for the failure to withhold.

The exception provided by paragraph (d)(1) does not apply in any case 
where the transferee is other than an individual even if the property is 
acquired for or on behalf of an individual who will use the property as 
a residence. However, this exception applies regardless of the 
organizational structure of the transferor (i.e., regardless of whether 
the transferor is an individual, partnership, trust, corporation, etc.).
    (2) Coordination with nonrecognition provisions--(i) In general. A 
transferee shall not be required to withhold under section 1445(a) with 
respect to the transfer of a U.S. real property interest if--
    (A) The transferor notifies the transferee, in the manner described 
in paragraph (d)(2)(iii) of this section, that by reason of the 
operation of a nonrecognition provision of the Internal Revenue Code or 
the provisions of any United States treaty the transferor is not 
required to recognize any gain or loss with respect to the transfer, and
    (B) By the 20th day after the date of the transfer the transferee 
provides a copy of the transferor's notice to the Assistant Commissioner 
(International), at the address provided in Sec. 1.1445-1(g)(10), 
together with a cover letter setting forth the name, identifying number 
(if any), and home address (in the case of an individual) or office 
address (in the case of an entity) of the transferee providing the 
notice to the Service. The rule of this paragraph (d)(2)(i) is subject 
to the exceptions set forth in paragraph (d)(2)(ii). For purposes of 
this paragraph (d)(2) a nonrecognition provision is any provision of the 
Internal Revenue Code for not recognizing gain or loss.
    (ii) Exceptions. A transferee may not rely upon the rule of 
paragraph (d)(2)(i) of this section, and must therefore withhold under 
section 1445(a) with respect to the transfer of a U.S. real property 
interest, if either:
    (A) The transferor qualifies for nonrecognition treatment with 
respect to part, but not all, of the gain realized by the transferor 
upon the transfer, or
    (B) The transferee knows or has reason to know that the transferor 
is not entitled to the nonrecognition treatment claimed by the 
transferor.

In either of the above circumstances the transferee or transferor may 
request a withholding certificate from the Internal Revenue Service 
pursuant to the rules of Sec. 1.1445-3.
    (3) Special procedural rules applicable to foreclosures--(i) Amount 
to be withheld--(A) foreclosures. A transferee that acquires a U.S. real 
property interest pursuant to a repossession or foreclosure on such 
property under a mortgage, security agreement, deed of trust or other 
instrument securing a debt must withhold tax under section 1445(a) equal 
to 10 percent of the amount realized on such sale. Such amount must be 
reported and paid over to the Service under the general rules of 
Sec. 1.1445-1. However, if the transferee complies with the notice 
requirements of Sec. 1.1445-2(d)(3) (ii) and (iii), such transferee may 
report and pay over to the Service on or before the 20th day following 
the final determination by a court or trustee with jurisdiction over the 
foreclosure action, the lesser of:
    (1) The amount otherwise required to be withheld under section 
1445(a), or
    (2) The ``alternative amount'' as defined in the succeeding 
sentence. The alternative amount is the entire amount, if any, 
determined by a court or trustee with jurisdiction over the matter, that 
accrues to the debtor/transferor out of the amount realized from the 
foreclosure sale. The amount of any mortgage, lien, or other security 
agreement secured by the property, that is terminated, assumed by 
another person, or otherwise extinguished (as to the debtor/transferor) 
shall not be treated as an amount that accrues to the debtor/transferor 
for purposes of this Sec. 1.1445-2(d)(3)(i)(A). If the alternative 
amount is zero, no withholding

[[Page 171]]

is required. Any difference between the amount withheld at the time of 
the foreclosure sale and the amount to be reported and paid over to the 
Service must be transferred to the court or trustee with jurisdiction 
over the foreclosure action. Amounts withheld, if any, are to be 
reported and paid to the Service by using Forms 8288 and 8288-A in 
conformity with Sec. 1.1445-1(d).
    (B) Deeds in lieu of foreclosures. A transferee of a U.S. real 
property interest pursuant to a deed in lieu of foreclosure must 
withhold tax equal to 10 percent of the amount realized by the debtor/
transferor on the transfer. However, no withholding is required if:
    (1) The transferee is the only person with a security interest in 
the property,
    (2) No cash or other property (other than incidental fees incurred 
with respect to the transfer) is paid, directly or indirectly, to any 
person with respect to the transfer, and
    (3) The notice requirement of Sec. 1.1445-2(d)(3) are satisfied.

The amount withheld, if any, must be reported and paid over to the 
Service not later than the 20th day following the date of transfer. In a 
case where withholding would otherwise be required, a withholding 
certificate may be requested in accordance with Sec. 1.1445-3.
    (ii) Notice to the court or trustee in a foreclosure action--(A) 
Notice on day of purchase. A transferee in a foreclosure sale that 
chooses to use the special rules applicable to foreclosures must provide 
notice to the court or trustee with jurisdiction over the foreclosure 
action on the day the property is transferred with respect to such 
transferee's withholding obligation. No particular form is necessary but 
the notice must set forth the transferee's name, home address in the 
case of an individual, office address in the case of an entity, a brief 
description of the property, the date of the transfer, the amount 
realized on the sale of the foreclosed property and the amount withheld 
under section 1445(a).
    (B) Notice whether amount withheld or alternative amount is reported 
and paid over to the Service. A purchaser/transferee in a foreclosure 
that chooses to use the special rules applicable to foreclosures must 
provide notice to the court or trustee with jurisdiction over the 
foreclosure action regarding whether the amount withheld or the 
alternative amount will be (or has been) reported and paid over to the 
Service. The notice should set forth all the information required by the 
preceding paragraph (d)(3)(ii)(A), the amount withheld or alternative 
amount that will be (or has been) reported and paid over to the Service, 
and the amount that will be (or has been) paid over to the court or 
trustee.
    (iii) Notice to the Service--(A) General rule. A transferee that in 
reliance upon the rules of this paragraph (d)(3) withholds an 
alternative amount (or does not withhold because the alternative amount 
is zero) must, on or before the 20th day following the final 
determination by a court or trustee in a foreclosure action or on or 
before the 20th day following the date of the transfer with respect to a 
transfer pursuant to a deed in lieu of foreclosure, provide notice 
thereof to the Assistant Commissioner (International) at the address 
provided in Sec. 1.1445-1(g)(10). (The filing of such a notice shall not 
relieve a creditor of any obligation it may have to file a notice 
pursuant to section 6050J and the regulations thereunder.) No particular 
form is required but the following information must be set forth in 
paragraphs labelled to correspond with the numbers set forth below.
    (1) A statement that the notice constitutes a notice of foreclosure 
action or transfer pursuant to a deed in lieu of foreclosure under 
Sec. 1.1445-2(d)(3).
    (2) The name, identifying number (if any) and home address (in the 
case of an individual) or office address (in the case of an entity) of 
the purchaser/transferee.
    (3) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of an entity) of 
the debor/transferor.
    (4) In a foreclosure action, the date of the final determination by 
a court or trustee regarding the distribution of the amount realized 
from the foreclosure sale. In a transfer pursuant to a deed in lieu of 
foreclosure, the date the

[[Page 172]]

property is transferred to the purchaser/transferee.
    (5) A brief description of the property.
    (6) The amount realized from the foreclosure sale or with respect to 
the transfer pursuant to a deed in lieu of foreclosure.
    (7) The alternative amount.
    (B) Special rule for lenders required to file Form 1099-A where the 
alternative amount is zero. A person required under section 6050J to 
file Form 1099-A does not have to comply with the notice requirement of 
Sec. 1.1445-2(d)(3)(iii)(A) if the alternative amount is zero. In such 
case, the filing of the Form 1099-A will be deemed to satisfy the notice 
requirments of Sec. 1.1445-2(d)(3)(iii)(A).
    (iv) Requirements not applicable. A transferee is not required to 
withhold tax or provide notice pursuant to the rules of this paragraph 
(d)(3) if no substantive withholding liability applies to the transfer 
of the property by the debtor/transferor. For example, if the debtor/
transferor provides the transferee with a certification of non-foreign 
status pursuant to paragraph (b) of this section, then no substantive 
withholding liability would exist with respect to the acquisition of the 
property from the debtor transferor. In such a case, no withholding of 
tax or notice to the Internal Revenue Service is required of the 
transferee with respect to the repossession or foreclosure.
    (v) Anti-abuse rule. If a U.S. real property interest is transferred 
in foreclosure or pursuant to a deed in lieu of foreclosure for a 
principal purpose of avoiding the requirements of section 1445(a), then 
the provisions of this paragraph (d)(3) shall not apply to the transfer 
and the transferee shall be fully liable for any failure to withhold 
with respect to the transfer. A principal purpose to avoid section 
1445(a) will be presumed (subject to rebuttal on the basis of all 
relevant facts and circumstances) if:
    (A) The transferee acquires property in which it, or a related 
party, has a security interest;
    (B) The security interest did not arise in connection with the 
debtor/transferor's or a related party's or predecessor in interest's 
acquisition, improvement, or maintenance of the property; and
    (C) The total amount of all debts secured by the property exceeds 90 
percent of the fair market value of the property.
    (4) Installment payments. A transferee of a U.S. real property 
interest is not required to withhold under section 1445 when making 
installment payments on an obligation arising out of a dispositions that 
took place before January 1, 1985. With respect to disposition that take 
place after December 31, 1984, the transferee shall be required to 
satisfy its entire withholding obligation within the time specified in 
Sec. 1.1445-1(c) regardless of the amount actually paid by the 
transferee. Thereafter, no withholding is required upon further 
installment payments on an obligation arising out of the transfer. A 
transferee that is unable to satisfy its entire withholding obligation 
within the time specified in Sec. 1.1445-1(c) may request a withholding 
certificate pursuant to Sec. 1.1445-3.
    (5) Acquisitions by governmental bodies. No withholding of tax is 
required under section 1445 with respect to any acquisition of property 
by the United States, a state or possession of the United States, a 
political subdivision thereof, or the District of Columbia.
    (6) [Reserved]
    (7) Withholding certificate obtained by transferee or transferor. No 
withholding is required under section 1445(a) if the transferee is 
provided with a withholding cerfiticate that so specifies. Either the 
transferor or the transferee may seek a withholding certificate from the 
Internal Revenue Service, pursuant to the provisions of Sec. 1.1445-3.
    (8) Amount realized by transferor is zero. If the amount realized by 
transferor on a transfer of a U.S. real property interest is zero, no 
withholding is required.

[T.D. 8113, 51 FR 46633, Dec. 24, 1986; 52 FR 3917, Feb. 6, 1987; as 
amended at T.D. 8198, 53 FR 16230, May 5, 1988]

[[Page 173]]



Sec. 1.1445-3  Adjustments to amount required to be withheld pursuant to withholding certificate.

    (a) In general. Withholding under section 1445(a) may be reduced or 
eliminated pursuant to a withholding certificate issued by the Internal 
Revenue Service in accordance with the rules of this section. A 
withholding certificate may be issued by the Service in cases where 
reduced withholding is appropriate (see paragraph (c) of this section), 
where the transferor is exempt from U.S. tax (see paragraph (d) of this 
section), or where an agreement for the payment of tax is entered into 
with the Service (see paragraph (e) of this section). A withholding 
certificate that is obtained prior to a transfer notifies the transferee 
that no withholding is required. A withholding certificate that is 
obtained after a transfer has been made may authorize a normal refund or 
an early refund pursuant to paragraph (g) of this section. Either a 
transferee or transferor may apply for a withholding certificate. The 
Internal Revenue Service will act upon an application for a withholding 
certificate not later than the 90th day after it is received. Solely for 
this purpose (i.e., determining the day upon which the 90-day period 
commences), an application is received by the Service on the date that 
all information necessary for the Service to make a determination is 
provided by the applicant. (For rules regarding whether an application 
for a withholding certificate has been timely submitted, see Sec. 1.445-
1(c)(2).) The Service may deny a request for a withholding certificate 
where, after due notice, an applicant fails to provide information 
necessary for the Service to make a determination. The Service will act 
upon an application for an early refund not later than the 90th day 
after it is received. An application for an early refund must either (1) 
include a copy of a withholding certificate issued by the Service with 
respect to the transaction or, (2) be combined with an application for a 
withholding certificate. Where an application for an early refund is 
combined with an application for a withholding certificate, the Service 
will act upon both applications not later than the 90th day after 
receipt. In the case of an application for a certificate based on non-
conforming secuirty under paragraph (e)(3)(v) of this section, and in 
unusually complicated cases, the Service may be unable to provide a 
final withholding certificate by the 90th day. In such a case the 
Service will notify the applicant, by the 45th day after receipt of the 
application, that additional processing time will be necessary. The 
Service's notice may request additional information or explanation 
concerning particular aspects of the application, and will provide a 
target date for final action (contingent upon the application's timely 
submission of any requested information). A withholding certificate 
issued pursuant to the provisions of this section serves to fulfill the 
requirements of section 1445(b)(4) concerning qualifying statements, 
section 1445(c)(1) concerning the transferor's maximum tax liability, or 
section 1445(c)(2) concerning the Secretary's authority to prescribe 
reduced withholding.
    (b) Applications for withholding certificates--(1) In general. An 
application for a withholding certificate must be submitted to the 
Assistant Commissioner (International), at the address provided in 
Sec. 1.1445-1(g)(10). An application for a withholding certificate must 
be signed by a responsible officer in the case of a corporation, by a 
general partner in the case of a partnership, by a trustee, executor, or 
equivalent fiduciary in the case of a trust or estate, and in the case 
of an individual by the individual himself. A duly authorized agent may 
sign the application but the application must contain a valid power of 
attorney authorizing the agent to sign the application on behalf of the 
applicant. The person signing the application must verify under 
penalties of perjury that all representations made in connection with 
the application are true, correct, and complete to his knowledge and 
belief. No particular form is required for an application, but the 
application must set forth the information described in paragraphs (b), 
(2), (3), and (4) of this section.
    (2) Parties to the transaction. The application must set forth the 
name, address, and identifying number (if any) of the person submitting 
the application (specifying whether that person is

[[Page 174]]

the transferee or transferor), and the name, address, and identifying 
number (if any) of other parties to the transaction (specifying whether 
each such party is a transferee or transferor). The applicant must 
determine if an identifying number exists for each party concerned and 
if none exists for a particular party the application must so state. The 
address provided in the case of an individual must be that individual's 
home address, and the address provided in the case of an entity must be 
that entity's office address. A mailing address may be provided in 
addition to, but not in lieu of, a home address or office address.
    (3) Real property interest to be transferred. The application must 
set forth information concerning the U.S. real property interest with 
respect to which the withholding certificate is sought, including the 
type of interest, the contract price, and, in the case of an interest in 
real property, its location and general description, or in the case of 
an interest in a U.S. real property holding corporation, the class or 
type and amount of the interest.
    (4) Basis for certificate--(i) Reduced withholding. If a withholding 
certificate is sought on the basis of a claim that reduced withholding 
in appropriate, the application must include:
    (A) A calculation of the maximum tax that may be imposed on the 
disposition in accordance with paragraph (c)(2) of this section. Such 
calculation must be accompanied by a copy of the relevant contract and 
depreciation schedules or other evidence that confirms the contract 
price and adjusted basis of the property. If no depreciation schedules 
are provided, the application must state the nature of the use of the 
property and why depreciation was not allowable. Evidence that supports 
any claimed adjustment to the maximum tax on the disposition must also 
be provided;
    (B) A calculation of the transferor's unsatisfied withholding 
liability, or evidence supporting the claim that no such liability 
exists, in accordance with paragraph (c)(3) of this section; and
    (C) In the case of a request for a special reduction of withholding 
pursuant to paragraph (c)(4) of this section, a statement of law and 
facts in support of the request.
    (ii) Exemption. If a withholding certificate is sought on the basis 
of the transferor's exemption from U.S. tax, the application must set 
forth a brief statement of the law and facts that support the claimed 
exemption. In this regard, see paragraph (d) of this section.
    (iii) Agreement. If a withholding certificate is sought on the basis 
of an agreement for the payment of tax, the application must include a 
signed copy of the agreement proposed by the applicant and a copy of the 
security instrument (if any) proposed by the applicant. In this regard, 
see paragraph (e) of this section.
    (c) Adjustment of amount required to be withheld--(1) In general. 
The Internal Revenue Service may issue a withholding certificate that 
excuses withholding or that permits the transferee to withhold an 
adjusted amount reflecting the transferor's maximum tax liability. The 
transferor's maximum tax liability is the sum of--
    (i) The maximum amount which could be imposed as tax under section 
871 or 882 upon the transferor's disposition of the subject real 
property interest, as determined under paragraph (c)(2) of this section, 
and
    (ii) The transferor's unsatisfied withholding liability with respect 
to the subject real property interest, as determined under paragraph 
(c)(3) of this section.

In addition, the Internal Revenue Service may issue a withholding 
certificate that permits the transferee to withhold a reduced amount if 
the Service determines pursuant to paragraph (c)(4) of this section that 
reduced withholding will not jeopardize the collection of tax.
    (2) Maximum tax imposed on disposition. The first element of the 
transferor's maximum tax liability is the maximum amount which the 
transferor could be required to pay as tax upon the disposition of the 
subject real property interest. In the case of an individual transferor 
that amount will generally be the contract price of the property minus 
its adjusted basis, multiplied by the maximum individual income tax rate 
applicable to long term

[[Page 175]]

capital gain. In the case of a corporate transferor, that amount will 
generally be the contract price of the property minus its adjusted 
basis, multiplied by the maximum corporate income tax rate applicable to 
long term capital gain. However, that amount must be adjusted to take 
into account the following:
    (i) Any reduction of tax to which the transferor is entitled under 
the provisions of a U.S. income tax treaty;
    (ii) The effect of any nonrecognition provision that is applicable 
to the transaction;
    (iii) Any losses realized and recognized upon the previous 
disposition of U.S. real property interests during the taxable year;
    (iv) Any amount that is required to be treated as ordinary income; 
and
    (v) Any other factor that may increase or reduce the tax upon the 
disposition.
    (3) Transferor's unsatisfied withholding liability--(i) In general. 
The second element of the transferor's maximum tax liability is the 
transferor's unsatisfied withholding liability. That liability is the 
amount of any tax that the transferor was required to but did not 
withhold and pay over under section 1445 upon the acquisition of the 
subject U.S. real property interest or a predecessor interest. The 
transferor's unsatisfied withholding liability is included in the 
calculation of maximum tax liability so that such prior withholding 
liability can be satisfied by the transferee's withholding upon the 
current transfer. Alternatively, the transferor's unsatisfied 
withholding liability may be disregarded for purposes of calculating the 
maximum tax liability, if either--
    (A) Such prior withholding liability is fully satisfied by a payment 
that is made with the application submitted pursuant to this section; or
    (B) An agreement is entered into for the payment of that liability 
pursuant to the rules of paragraph (e) of this section.


Because section 1445 only requires withholding after December 31, 1984, 
no transferor's unsatisfied withholding liability can exist unless the 
transferor acquired the subject or predecessor real property interest 
after that date. For purposes of this paragraph (c), a predecessor 
interest is one that was exchanged for the subject U.S. real property 
interest in a transaction in which the transferor was not required to 
recognize the full amount of the gain or loss realized upon the 
transfer.
    (ii) Evidence that no unsatisfied withholding liability exists. For 
purposes of paragraph (b)(4)(i)(B) of this section (concerning 
information that must be submitted with an application for a withholding 
certificate), evidence that the transferor has no unsatisfied 
withholding liability includes any one of the following documents:
    (A) Evidence that the transferor acquired the subject or predecessor 
real property interest prior to January 1, 1985;
    (B) A copy of the Form 8288 that was filed by the transferor, and 
proof of payment of the amount shown due thereon, with respect to the 
transferor's acquisition of the subject or predecessor real property 
interest;
    (C) A copy of a withholding certificate with respect to the 
transferor's acquisition of the subject or predecessor real property 
interest, plus a copy of Form 8288 and proof of payment with respect to 
any withholding required under that certificate;
    (D) A copy of the non-foreign certification furnished by the person 
from whom the subject or predecessor U.S. real property interest was 
acquired, executed at the time of that acquisition;
    (E) Evidence that the transferor purchased the subject or 
predecessor real property for $300,000 or less, and a statement signed 
by the transferor under penalties of perjury, that the transferor 
purchased the property for use as a residence within the meaning of 
Sec. 1.1445-2(d)(1);
    (F) Evidence that the person from whom the transferor acquired the 
subject or predecessor U.S. real property interest fully paid any tax 
imposed on that transaction pursuant to section 897.
    (G) A copy of a notice of nonrecognition treatment provided to the 
transferor pursuant to Sec. 1.1445-2(d)(2) by person from whom the 
transferor acquired the subject or predecessor U.S. real property 
interest; and

[[Page 176]]

    (H) A statement, signed by the transferor under penalties of 
perjury, setting forth the facts and circumstances that supported the 
transferor's conclusion that no withholding was required under section 
1445(a) with respect to the transferor's acquisition of the subject or 
predecessor real property interest.
    (4) Special reduction of amount required to be withheld. The 
Internal Revenue Service may, in its discretion, issue a withholding 
certificate that permits the transferee to withhold a reduced amount 
based upon a determination that reduced withholding will not jeopardize 
the collection of tax. A transferor that requests a withholding 
certificate pursuant to this paragraph (c)(4) is required pursuant to 
paragraph (b)(4)(i)(C) of this section to submit a statement of law and 
facts in support of the request. That statement must explain why the 
transferor is unable to enter into an agreement for the payment of tax 
pursuant to paragraph (e) of this section.
    (d) Transferor's exemption from U.S. tax--(1) In general. The 
Internal Revenue Service will issue a withholding certificate that 
excuses all withholding by a transferee if it is established that:
    (i) The transferor's gain from the disposition of the subject U.S. 
real property interest will be exempt from U.S. tax, and
    (ii) The transferor has no unsatisfied withholding liability.

For the available exemptions, see paragraph (d)(2) of this section. The 
transferor's unsatisfied withholding liability shall be determined in 
accordance with the provisions of paragraph (c)(3) of this section. A 
transferor that is entitled to a reduction of (rather than an exemption 
from) U.S. tax may obtain a withholding certificate to that effect 
pursuant to the provisions of paragraph (c) of this section.
    (2) Available exemptions. A transferor's gain from the disposition 
of a U.S. real property interest may be exempt from U.S. tax because 
either:
    (i) The transferor is an integral part or controlled entity of a 
foreign government and the disposition of the subject property is not a 
commercial activity, as determined pursuant to section 892 and the 
regulations thereunder; or
    (ii) The transferor is entitled to the benefits of an income tax 
treaty that provides for such an exemption (subject to the limitations 
imposed by section 1125(c) of Pub. L. 96-499, which, in general, 
overrides such benefits as of January 1, 1985).
    (e) Agreement for the payment of tax--(1) In general. The Internal 
Revenue Service will issue a withholding certificate that excuses 
withholding or that permits a transferee to withhold a reduced amount, 
if either the transferee or the transferor enters into an agreement for 
the payment of tax pursuant to the provisions of this paragraph (e). An 
agreement for the payment of tax is a contract between the Service and 
any other person that consists of two necessary elements. Those elements 
are--
    (i) A contract between the Service and the other person, setting 
forth in detail the rights and obligations of each; and
    (ii) A security instrument or other form of security acceptable to 
the Director, Foreign Operations District.
    (2) Contents of agreement--(i) In general. An agreement for the 
payment of tax must cover an amount described in subdivision (ii) or 
(iii) of this paragraph (e)(2). The agreement may either provide 
adequate security for the payment of the chosen amount in accordance 
with paragraph (e)(3) of this section, or provide for the payment of 
that amount through a combination of security and withholding of tax by 
the transferee.
    (ii) Tax that would otherwise be withheld. An agreement for the 
payment of tax may cover the amount of tax that would otherwise be 
required to be withheld pursuant to section 1445(a). In addition to the 
amount computed pursuant to section 1445(a), the applicant must agree to 
pay interest upon that amount, at the rate established under section 
6621, with respect to the period between the date on which the tax 
imposed by section 1445(a) would otherwise be due (i.e., the 20th day 
after the date of transfer) and the date on which the transferor's 
payment of tax with respect to the disposition will be due under the 
agreement. The amount of interest agreed upon must be paid by

[[Page 177]]

the applicant regardless of whether or not the Service is required to 
draw upon any security provided pursuant to the agreement. The interest 
may be paid either with the return or by the Service drawing upon the 
security.
    (iii) Maximum tax liability. An agreement for the payment of tax may 
cover the transferor's maximum tax liability, determined in accordance 
with paragraph (c) of this section. The agreement must also provide for 
the payment of an additional amount equal to 25 percent of the amount 
determined under paragraph (c) of this section. This additional amount 
secures the interest and penalties that would accrue between the date of 
a failure to file a return and pay tax with respect to the disposition, 
and the date on which the Service collects upon that liability pursuant 
to the agreement. Such additional amount will only be collected if the 
Service finds it necessary to draw upon any security provided due to the 
transferor's failure to file a return and pay tax with respect to the 
relevant disposition.
    (3) Major types of security--(i) In general. The following are the 
major types of security acceptable to the Service. Further details with 
respect to the terms and conditions of each type may be specified by 
Revenue Procedure.
    (ii) Bond with surety or guarantor. The Service may accept as 
security with respect to a transferor's tax liability a bond that is 
executed with a satisfactory surety or guarantor. Only the following 
persons may act as surety or guarantor for this purpose
    (A) A surety company holding a certificate of authority from the 
Secretary as an acceptable surety on Federal bonds, as listed in 
Treasury Department Circular No. 570, published annually in the Federal 
Register on the first working day of July;
    (B) A person that is engaged within or without the United States in 
the conduct of a banking, financing, or similar business under the 
principles of Sec. 1.864-4(c)(5), and that is subject to U.S. or foreign 
local or national regulation of such business, if that person is 
otherwise acceptable to the Service; and
    (C) A person that is engaged within or without the United States in 
the conduct of an insurance business that is subject to U.S. or foreign 
local or national regulation, if that person is otherwise acceptable to 
the Service.
    (iii) Bond with collateral. The Service may accept as security with 
respect to a transferor's tax liability a bond that is secured by 
acceptable collateral. All collateral must be deposited with a 
responsible financial institution acting as escrow agent, or, in the 
Service's discretion, with the Service. Only the following types of 
collateral are acceptable:
    (A) Bonds, notes, or other public debt obligations of the United 
States, in accordance with the rules of 31 CFR part 225; and
    (B) A certified cashier's, or treasurer's check, drawn on an entity 
acceptable to the Service that is engaged within or without the United 
States in the conduct of a banking, financing, or similar business under 
the principles of Sec. 1.864-4(c)(5) and that is subject to U.S. or 
foreign local or national regulation of such business.
    (iv) Letter of credit. The Service may accept as security with 
respect to a transferor's tax liability an irrevocable letter of credit. 
The Service may accept a letter of credit issued by an entity acceptable 
to the Service that is engaged within or without the United States in 
the conduct of a banking, financing, or similar business under the 
principles of Sec. 1.864-4(c)(5) and that is subject to U.S. or foreign 
local or national regulation of such business. However, the Director 
will accept a letter of credit from an entity that is not engaged in 
trade or business in the United States only if such letter may be drawn 
on an advising bank within the United States.
    (v) Guarantees and other non-conforming security--(A) Guarantee. The 
Service may in its discretion accept as security with respect to a 
transferor's tax liability the applicant's guarantee that it will pay 
such liability. The Service will in general accept such a guarantee only 
from a corporation, foreign or domestic, any class of stock of which is 
regularly traded on an established securities market on the date of the 
transfer.
    (B) Other forms of security. The Service may in unusual 
circumstances and

[[Page 178]]

at its discretion accept any form of security that if finds to be 
adequate. An application for a withholding certificate that proposes a 
form of security that does not conform with any of the preferred types 
set forth in paragraph (e)(3) (ii) through (iv) of this section or any 
relevant Revenue Procedure must include:
    (1) A detailed statement of the facts and circumstances supporting 
the use of the proposed form of security, and
    (2) A memorandum of law concerning the validity and enforceability 
of the proposed form of security.
    (4) Terms of security instrument. Any security instrument that is 
furnished pursuant to this section must provide that--
    (i) The amount of each deposit of estimated tax that will be 
required with respect to the gain realized on the subject disposition 
may be collected by levy upon the security as of the date following the 
date on which each such deposit is due (unless such deposit is timely 
made);
    (ii) The entire amount of the liability may be collected by levy 
upon the security at any time during the nine months following the date 
on which the payment of tax with respect to the subject disposition is 
due, subject to release of the security upon the full payment of the tax 
and any interest and penalties due. If the transferor requests an 
extension of time to file a return with respect to the disposition, then 
the Director may require that the term of the security instrument be 
extended until the date that is nine months after the filing deadline as 
extended.
    (f) Amendments to application for withholding certificate--(1) In 
general. An applicant for a withholding certificate may amend an 
otherwise complete application by submitting an amending statement to 
the Assistant Commissioner (International), at the address provided in 
Sec. 1.1445-1(g)(10). The amending statement shall provide the 
information required by Sec. 1.1445-3(f)(3) and must be signed and 
accompanied by a penalties of perjury statement in accordance with 
Sec. 1.1445-3(b)(1).
    (2) Extension of time for the Service to process reqests for 
withholding certificates--(i) In general. If an amending statement is 
submitted, the time in which the Internal Revenue Service must act upon 
the amended application shall be extended by 30 days.
    (ii) Substantial amendments. If an amending statement is submitted 
and the Service finds that the statement substantially amends the facts 
of the underlying application or substantially alters the terms of the 
withholding certificate as requested in the initial application, the 
time within which the Service must act upon the amended application 
shall be extended by 60 days. The applicant shall be so notified.
    (iii) Amending statement received after the requested withholding 
certificate has been signed by the Assistant Commissioner 
(International). If an amending statement is received after the 
withholding certificate, drafted in response to the underlying 
application, has been signed by the Assistant Commissioner 
(International) or his delegate and prior to the day such certificate is 
mailed to the applicant, the time in which the Service must act upon the 
amended application shall be extended by 90 days. The applicant will be 
so notified.
    (3) Information required to be submitted. No particular form is 
required for an amending statement but the statement must provide the 
following information:
    (i) Identification of applicant. The amending statement must set 
forth the name, address and identifying number (if any) of the person 
submitting the amending statement (specifying whether that person is the 
transferee or transferor).
    (ii) Date of underlying application. The amending statement must set 
forth the date of the underlying application for a withholding 
certificate.
    (iii) Real property interest to be (or that has been) transferred. 
The amending statement must set forth a brief description of the real 
property interest with respect to which the underlying application for a 
withholding certificate was submitted.
    (iv) Amending information. The amending statement must fully set 
forth the basis for the amendment including any modification of the 
facts supporting the application for a withholding certificate and any 
change

[[Page 179]]

sought in the terms of the withholding certificate.
    (g) Early refund of overwithheld amounts. If a transferor receives a 
withholding certificate pursuant to this section, and an amount greater 
than that specified in the certificate was withheld by the transferee, 
then pursuant to the rules of this paragraph (g) the transferor may 
apply for a refund (without interest) of the excess amount prior to the 
date on which the transferor's tax return is due (without extensions). 
(Any interest payable on refunds issued after the filing of a tax return 
shall be determined in accordance with the provisions of section 6611 
and regulations thereunder.) An application for an early refund must be 
addressed to the Assistant Commissioner (International), at the address 
provided in Sec. 1.1445-1(g)(10). No particular form is required for the 
application, but the following information must be set forth in separate 
paragraphs numbered to correspond with the number given below:
    (1) Name, address, and identifying number (if any) of the transferor 
seeking the refund;
    (2) Amount required to be withheld pursuant to the withholding 
certificate issued by Internal Revenue Service;
    (3) Amount withheld by the transferee (attach a copy of Form 8288-A 
stamped by IRS pursuant to Sec. 1.1445-1(c));
    (4) Amount to be refunded to the transferor. An application for an 
early refund cannot be processed unless the required copy of Form 8288-A 
(or substantial evidence of the amount withheld in the case of a failure 
to receive Form 8288-A as provided in Sec. 1.1445-1(f)(3)) is attached 
to the application. If an application for a withholding certificate 
based upon the transferor's maximum tax liability is submitted after the 
transfer takes place, then that application may be combined with an 
application for an early refund. The Service will act upon a claim for 
refund within the time limits set forth in paragraph (a) of this 
section.

[T.D. 8113, 51 FR 46637, Dec. 24, 1986; 52 FR 3796, Feb. 6, 1987]



Sec. 1.1445-4  Liability of agents.

    (a) Duty to provide notice of false certification or statement to 
transferee. A transferee's or transferor's agent must provide notice to 
the transferee if either--
    (1) The transferee is furnished with a non-U.S. real property 
interest statement pursuant to Sec. 1.1445-2(c)(3) and the agent knows 
that the statement is false; or
    (2) The transferee is furnished with a non-foreign certification 
pursuant to Sec. 1.1445-2(b)(2) and either (i) the agent knows that the 
certification is false, or (ii) the agent represents a transferor that 
is a foreign corporation. An agent that represents a transferor that is 
a foreign corporation is not required to provide notice to the 
transferee if the foreign corporation provided a non-foreign 
certification to the transferee prior to such agent's employment and the 
agent does not know that the corporation did so.
    (b) Duty to provide notice of false certification or statement to 
entity or fiduciary. A transferee's or transferor's agent must provide 
notice to an entity or fiduciary that plans to carry out a transaction 
described in section 1445(e) (1), (2), (3), or (4) if either--
    (1) The entity or fiduciary is furnished with a non-U.S. real 
property interest statement pursuant to Sec. 1.1445-5(b)(4)(iii) and the 
agent knows that such statement is false; or
    (2) The entity or fiduciary is furnished with a non-foreign 
certification pursuant to Sec. 1.1445-5(b)(3) (ii) and either (i) the 
agent knows that such certification is false, or (ii) the agent 
represents a foreign corporation that made such a certification.
    (c) Procedural requirements--(1) Notice to transferee, entity, or 
fiduciary. An agent who is required by this section to provide notice 
must do so in writing as soon as possible after learning of the false 
certification or statement, but not later than the date of the transfer 
(prior to the transferee's payment of consideration). If an agent first 
learns of a false certification or statement after the date of the 
transfer, notice must be given by the third day following that 
discovery. The notice must state that the certification or statement is 
false and may not be relied

[[Page 180]]

upon. The notice must also explain the possible consequences to the 
recipient of a failure to withhold. The notice need not disclose the 
information on which the agent's statement is based. The following is an 
example of an acceptable notice.``This is to notify you that you may be 
required to withhold tax in connection with (describe transaction). You 
have been provided with a certification of non-foreign status (or a non-
U.S. real property interest statement) in connection with that 
transaction. I have learned that that document is false. Therefore, you 
may not rely upon it as a basis for failing to withhold under section 
1445 of the Internal Revenue Code. Section 1445 provides that any person 
who acquires a U.S. real property interest from a foreign person must 
withhold a tax equal to 10 percent of the total purchase price. (The 
term `U.S. real property interest' includes real property, stock in U.S. 
corporations whose assets are primarily real property, and some personal 
property associated with realty.) Any person who is required to withhold 
but fails to do so can be held liable for the tax. Thus, if you do not 
withhold the 10 percent tax from the total that you pay on this 
transaction you could be required to pay the tax yourself, if what you 
are acquiring is a U.S. real property interest and the transferor is a 
foreign person. Tax that is withheld must be promptly paid over to the 
IRS using Form 8288. For further information see sections 897 and 1445 
of the Internal Revenue Code and the related regulations.''
    (2) Notice to be filed with IRS. An agent who is required by 
paragraph (a) or (b) of this section to provide notice to a transferee, 
entity, or fiduciary must furnish a copy of that notice to the Internal 
Revenue Service by the date on which the notice is required to be given 
to the transferee, entity, or fiduciary. The copy of the notice must be 
delivered to the Assistant Commissioner (International) at the address 
provided in Sec. 1.1445-1(g)(10) and must be accompanied by a cover 
letter stating that the copy is being filed pursuant to the requirements 
of this Sec. 1.1445-4(c)(2).
    (d) Effect on recipient. A transferee, entity, or fiduciary that 
receives a notice pursuant to this section prior to the date of the 
transfer from any agent of the transferor or transferee may not rely 
upon the subject certification or statement for purposes of excusing 
withholding pursuant to Sec. 1.1445-2 or Sec. 1.1445-5. Therefore, the 
recipient of a notice may be held liable for any failure to deduct and 
withhold tax under section 1445 as if such certification or statement 
had never been given. For special rules concerning the effect of the 
receipt of a notice after the date of the transfer, see Secs. 1.1445-
2(b)(4)(iv) and 1.1445-5 (c), (d) and (e).
    (e) Failure to provide notice. Any agent who is required to provide 
notice but who fails to do so in the manner required by paragraph (a) or 
(b) of this section shall be held liable for the tax that the recipient 
of the notice would have been required to withhold under section 1445 if 
such notice had been given. However, an agent's liability under this 
paragraph (e) is limited to the amount of compensation that that agent 
derives from the transaction. In addition, an agent who assists in the 
preparation of, or fails to disclose knowledge of, a false certification 
or statement may be liable for civil or criminal penalties.
    (f) Definition of transferor's or transferee's agent--(1) In 
general. For purposes of this section, the terms ``transferor's agent'' 
and ``transferee's agent'' means any person who represents the 
transferor or transferee (respectively)--
    (i) In any negotiation with another person (or another person's 
agent) relating to the transaction; or
    (ii) In settling the transaction.
    (2) Transactions subject to section 1445(e). In the case of 
transactions subject section 1445(e), the following definitions apply.
    (i) The term ``transferor's agent'' means any person that represents 
or advises an entity or fiduciary with respect to the planning, 
arrangement, or consummation by the entity of a transaction described in 
section 1445(e) (1), (2), (3), or (4).
    (ii) The term ``transferee's agent'' means any person that 
represents or advises the holder of an interest in an

[[Page 181]]

entity with respect to the planning, arrangement or consummation by the 
entity of a transaction described in section 1445(e) (1), (2), (3), or 
(4).
    (3) Exclusion of settlement officers and clerical personnel. For 
purposes of this section, a person shall not be treated as a 
transferor's agent or transferee's agent with respect to any transaction 
solely because such person performs one or more of the following 
activities.
    (i) The receipt and disbursement of any portion of the consideration 
for the transaction;
    (ii) The recording of any document in connection with the 
transaction;
    (iii) Typing, copying, and other clerical tasks;
    (iv) The obtaining of title insurance reports and reports concerning 
the condition of the real property that is the subject of the 
transaction; or
    (v) The transmission or delivery of documents between the parties.
    (4) Exclusion for governing body of a condominium association and 
the board of directors of a cooperative housing corporation. The members 
of a board, committee or other governing body of a condominium 
association and the board of directors and officers of a cooperative 
housing corporation will not be deemed agents of the transferor or 
transferee if such individuals function exclusively in their capacity as 
representatives of such association or corporation with respect to the 
transaction. In addition, the managing agent of a cooperative housing 
corporation or condominium association will not be deemed to be an agent 
of the transferee or transferor if such person functions exclusively in 
its capacity as a managing agent. If a person's activities include 
advising the transferee or transferor with respect to the transfer, this 
exclusion shall not apply.

[T.D. 8113, 51 FR 46641, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987]



Sec. 1.1445-5  Special rules concerning distributions and other transactions by corporations, partnerships, trusts, and estates.

    (a) Purpose and scope. This section provides special rules 
concerning the withholding that is required under section 1445(e) upon 
distributions and other transactions involving domestic or foreign 
corporations, partnerships, trusts, and estates. Paragraph (b) of this 
section provides rules that apply generally to the various withholding 
requirements set forth in this section. Under section 1445(e)(1) and 
paragraph (c) of this section, a domestic partnership or the fiduciary 
of a domestic trust or estate is required to withhold tax upon the 
entity's disposition of a U.S. real property interest if any foreign 
persons are partners or beneficiaries of the entity. Paragraph (d) 
provides rules concerning the requirement of section 1445(e)(2) that a 
foreign corporation withhold tax upon its distribution of a U.S. real 
property interest to its interest-holders. Finally, under section 
1445(e)(3) and paragraph (e) of this section a domestic U.S. real 
property holding corporation is required to withhold tax upon certain 
distributions to interest-holders that are foreign persons. Paragraphs 
(f) and (g) of this section are reserved to provide rules concerning 
transactions involving interests in partnerships, trusts, and estates 
that will be subject to withholding pursuant to sections 1445(e) (4) and 
(5).
    (b) Rules of general application--(1) Double withholding not 
required. If tax is required to be withheld with respect to a transfer 
of property in accordance with the rules of this section, then no 
additional tax is required to be withheld by the transferee of the 
property with respect to that transfer pursuant to the general rules of 
section 1445(a) and Sec. 1.1445-1. For rules coordinating the 
withholding under section 1441 (or section 1442 or 1443) and under 
section 1445 on distributions from a corporation, see Sec. 1.1441-
3(b)(4). If a transfer of a U.S. real property interest described in 
section 1445(e) is exempt from withholding under the rules of this 
section, then no withholding is required under the general rules of 
section 1445(a) and Sec. 1.1445-1.
    (2) Coordination with nonrecognition provisions--(i) In general. 
Withholding shall not be required under the rules of this section with 
respect to a transfer described in section 1445(e) of a U.S. real 
property interest if--
    (A) By reason of the operation of a nonrecognition provision of the 
Internal Revenue Code or the provisions of

[[Page 182]]

any treaty of the United States no gain or loss is required to be 
recognized by the foreign person with respect to which withholding would 
otherwise be required; and
    (B) The entity or fiduciary that is otherwise required to withhold 
complies with the notice requirements of paragraph (b)(2)(ii) of this 
section. The entity or fiduciary must determine whether gain or loss is 
required to be recognized pursuant to the rules of section 897 and the 
applicable nonrecognition provisions of the Internal Revenue Code. An 
entity or fiduciary may obtain a withholding certificate from the 
Internal Revenue Service that confirms the applicability of a 
nonrecognition provision, but is not required to do so. For purposes of 
this paragraph (b)(2), a nonrecognition provision is any provision of 
the Internal Revenue Code for not recognizing gain or loss. If 
nonrecognition treatment is available only with respect to part of the 
gain realized on a transfer, the exemption from withholding provided by 
this paragraph (b)(2) shall not apply. In such cases a withholding 
certificate may be sought pursuant to the provisions of Sec. 1.1445-6.
    (ii) Notice of nonrecognition transfer. An entity or fiduciary that 
fails to withhold tax with respect to a transfer in reliance upon the 
rules of this paragraph (b)(2) must by the 20th day after the date of 
the transfer deliver a notice thereof to the Assistant Commissioner, 
(International), at the address provided in Sec. 1.1445-1(g)(10). No 
particular form is required for a notice of transfer, but the following 
information must be set forth in paragraphs labelled to correspond with 
the letter set forth below:
    (A) A statement that the document submitted constitutes a notice of 
a nonrecognition transfer pursuant to the requirements of Sec. 1.1445-
5(b)(2)(ii);
    (B) The name, office address, and identifying number (if any) of the 
entity of fiduciary submitting the notice;
    (C) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of an entity) of 
each foreign person with respect to which withholding would otherwise be 
required;
    (D) A brief description of the transfer; and
    (E) A brief statement of the law and facts supporting the claim that 
recognition of gain or loss is not required with respect to the 
transfer.
    (3) Interest-holder not a foreign person--(i) In general. Pursuant 
to the provisions of paragraphs (c) and (e) of this section, an entity 
or fiduciary is required to withhold with respect to certain transfers 
of property if a holder of an interest in the entity is a foreign 
person. For purposes of determining whether a holder of an interest is a 
foreign person, and entity or fiduciary may rely upon a certification of 
nonforeign status provided by that person in accordance with paragraph 
(b)(3)(ii) of this section. Except to the extent provided in paragraph 
(b)(3)(iii) of this section, such a certification excuses the entity or 
fiduciary from any liability otherwise imposed pursuant to section 
1445(e) and regulations thereunder. However, no obligation is imposed 
upon an entity or fiduciary to obtain certifications from interest-
holders; an entity or fiduciary may instead rely upon other means to 
ascertain the nonforeign status of an interest-holder. If the entity or 
fiduciary does rely upon other means but the interest-holder proves, in 
fact, to be a foreign person, then the entity or fiduciary is subject to 
any liability imposed pursuant to section 1445 and regulations 
thereunder.

An entity or fiduciary is not required to rely upon other means to 
ascertain the non-foreign status of an interest-holder and may demand a 
certification of non-foreign status. If the certification is not 
provided, the entity or fiduciary may withhold tax under section 1445 
and will be considered, for purposes of sections 1461 through 1463, to 
have been required to withhold such tax.
    (ii) Interest-holder's certification of non-foreign status--(A) In 
general. For purposes of this section, an entity or fiduciary may treat 
any holder of an interest in the entity as a U.S. person if that 
interest-holder furnishes to the entity or fiduciary a certification 
stating that the interest-holder is not a foreign person, in accordance 
with the provisions of paragraph (b)(3)(ii)(B) of this section. In 
general, a foreign person is a nonresident alien individual,

[[Page 183]]

foreign corporation, foreign partnership, foreign trust, or foreign 
estate, but not a resident alien individual. In this regard, see 
Sec. 1.897-1(k).
    (B) Procedural rules. An interest-holder's certification of non-
foreign status must--
    (1) State that the interest-holder is not a foreign person;
    (2) Set forth the interest-holder's name, identifying number, home 
address (in the case of an individual), or office address (in the case 
of an entity), and place of incorporation (in the case of a 
corporation); and
    (3) Be signed under penalties of perjury.

Pursuant to Sec. 1.897-1(p), an individual's identifying number is the 
individual's Social Security number and any other person's identifying 
number is its U.S. employer identification number. The certification 
must be signed by a responsible officer in the case of a corporation, by 
a general partner in the case of a partnership, and by a trustee, 
executor, or equivalent fiduciary in the case of a trust or estate. No 
particular form is needed for a certification pursuant to this paragraph 
(b)(3)(ii)(B), nor is any particular language required, so long as the 
document meets the requirements of this paragraph. Samples of acceptable 
certifications are provided in paragraph (b)(3)(ii)(D) of this section. 
An entity may rely upon a certification pursuant to this paragraph 
(b)(3)(ii)(B) for a period of two calendar years following the close of 
the calendar year in which the certification was given.

If an interest holder becomes a foreign person within the period 
described in the preceding sentence, the interest-holder must notify the 
entity prior to any further dispositions or distributions and upon 
receipt of such notice (or any other notification of the foreign status 
of the interest-holder) the entity may no longer rely upon the prior 
certification. An entity that obtains and relies upon a certification 
must retain that certification with its books and records for a period 
of three calendar years following the close of the last calendar year in 
which the entity relied upon the certification.
    (C) Foreign corporation that has made an election under section 
897(i). A foreign corporation that has made a valid election under 
section 897(i) to be treated as a domestic corporation for purposes of 
section 897 may provide a certification of non-foreign status pursuant 
to this paragraph (b)(3)(ii). However, an electing foreign corporation 
must attach to such certification a copy of the acknowledgment of the 
election provided to the corporation by the Internal Revenue Service 
pursuant to Sec. 1.897-3(d)(4).

An acknowledgment is valid for this purpose only if it states that the 
information required by Sec. 1.897-3 has been determined to be complete.
    (D) Sample certifications--(1) Individual interest-holder.

    ``Under section 1445(e) of the Internal Revenue Code, a corporation, 
partnership, trust or estate must withhold tax with respect to certain 
transfers of property if a holder of an interest in the entity is a 
foreign person. To inform (name of entity) that no withholding is 
required with respect to my interest in it, I, (name of interest-
holder), hereby certify the following:

    1. I am not a nonresident alien for purposes of U.S. income 
taxation;
    2. My U.S. taxpayer identifying number (Social Security number) is 
--------; and
    3. My home address is
________________________________________________________________________
________________________________________________________________________
I agree to inform [name of entity] promptly if I become a nonresident 
alien at any time during the three years immediately following the date 
of this notice.
    I understand that this certification may be disclosed to the 
Internal Revenue Service by (name of entity) and that any false 
statement I have made here could be punished by fine, imprisonment, or 
both.
    Under penalties of perjury I declare that I have examined this 
certification and to the best of my knowledge and belief it is true, 
correct, and complete.

    [Signature and date]''

    (2) Entity interest-holder. ``Under section 1445(e) of the Internal 
Revenue Code, a corporation, partnership, trust, or estate must withhold 
tax with respect to certain transfers of property if a holder of an 
interest in the entity is a foreign person. To inform [name of entity] 
that no withholding is required with respect to [name of interest-
holder]'s interest in it, the undersigned hereby certifies the following 
on behalf of [name of interest-holder]:
    1. [Name of interest-holder] is not a foreign corporation, foreign 
partnership, foreign trust, or foreign estate (as those terms are

[[Page 184]]

defined in the Internal Revenue Code and Income Tax Regulations);
    2. [Name of interest-holder]'s U.S. employer identification number 
is --------; and
    3. [Name of interest-holder]'s office address is
________________________________________________________________________
and place of incorporation (if applicable) is
________________________________________________________________________
    [Name of interest holder] agrees to inform [name of entity] if it 
becomes a foreign person at any time during the three year period 
immediately following the date of this notice.
    [Name of interest-holder] understands that this certification may be 
disclosed to the Internal Revenue Service by [name of entity] and that 
any false statement contained herein could be punished by fine, 
imprisonment, or both.
    Under penalties of perjury I declare that I have examined this 
certification and to the best of my knowledge and belief it is true, 
correct, and complete, and I further declare that I have authority to 
sign this document on behalf of [name of interest-holder].

[Signature and date]

[Title     ]''

    (iii) Reliance upon certification not permitted. An entity or 
fiduciary may not rely upon an interest-holder's certification of non-
foreign status if, prior to or at the time of the transfer with respect 
to which withholding would be required, the entity or fiduciary either--
    (A) Has actual knowledge that the certification is false;
    (B) Has received a notice that the certification is false from a 
transferor's or transferee's agent, pursuant to Sec. 1.1445-4; or
    (C) Has received from a corporation that it knows to be a foreign 
corporation a certification that does not have attached to it a copy of 
the IRS acknowledgment of the corporation's election under section 
897(i), as required by paragraph (b)(3)(ii)(C) of this section. Such an 
entity's or fiduciary's withholding obligations shall apply as if a 
statement had never been given, and such an entity or fiduciary may be 
held fully liable pursuant to Sec. 1.1445-1(e) for any failure to 
withhold. For special rules concerning an entity's belated receipt of a 
notice concerning a false certification, see paragraphs (c)(2)(ii) and 
(e)(2)(iii) of this section.
    (4) Property transferred not a U.S. real property interest--(i) In 
general. Pursuant to the provisions of paragraphs (c) and (d) of this 
section, an entity or fiduciary is required to withhold with respect to 
certain transfers of property, if the property transferred is a U.S. 
real property interest. (In addition, taxable distributions of U.S. real 
property interests by domestic or foreign partnerships, trusts, and 
estates will be subject to withholding pursuant to section 1445(e)(4) 
and paragraph (f) of this section after publication of a Treasury 
decision under sections 897 (e)(2) and (g). As defined in section 897(c) 
and Sec. 1.897-1(c), a U.S. real property interest includes certain 
interests in U.S. corporations, as well as direct interests in real 
property and certain associated personal property. This paragraph (b)(4) 
provides rules pursuant to which an entity (or fiduciary thereof) that 
transfers an interest in a U.S. corporation may determine that 
withholding is not required because the interest transferred is not a 
U.S. real property interest. To determine whether an interest in 
tangible property constitutes a U.S. real property interest the transfer 
of which would be subject to withholding, see Sec. 1.897-1 (b) and (c).
    (ii) Interests in publicly traded entities. Withholding is not 
required under paragraph (c) or (d) of this section upon an entity's 
transfer of an interest in a domestic corporation if any class of stock 
of the corporation is regularly traded on an established securities 
market. This exemption shall apply to a disposition incident to an 
initial public offering of stock pursuant to a registration statement 
filed with the Securities and Exchange Commission.

Similarly, no withholding is required under paragraph (c) or (d) of this 
section upon an entity's transfer of an interest in a publicly traded 
partnership or trust. However, the rule of this paragraph (b)(4)(ii) 
shall not apply to the transfer, to a single transferee (or related 
transferees as defined in Sec. 1.897-1(i)) in a single transaction (or 
related transactions), of an interest described in Sec. 1.897-
1(c)(2)(iii)(B) (relating to substantial amounts of non-publicly traded 
interests in publicly traded corporations) or of similar interests in 
publicly traded partnerships or trusts. The entity making a transfer 
described in the preceding sentence must otherwise

[[Page 185]]

determine whether withholding is required, pursuant to section 1445(e) 
and the regulations thereunder. Transactions shall be deemed to be 
related if they are undertaken within 90 days of one another or if it 
can otherwise be shown that they were undertaken in pursuance of a 
prearranged plan.
    (iii) Corporation's statement that interest is not a U.S. real 
property interest. (A) In general. No withholding is required under 
paragraph (c) or (d) of this section upon an entity's transfer of an 
interest in a domestic corporation if, prior to the transfer, the entity 
or fiduciary obtains a statement, issued by the corporation pursuant to 
Sec. 1.897-2(h), certifying that the interest is not a U.S. real 
property interest. In general, a corporation may issue such a statement 
only if the corporation was not a U.S. real property holding corporation 
at any time during the previous five years (or the period in which the 
interest was held by its present holder, if shorter) or if interests in 
the corporation ceased to be United States real property interests under 
section 897(c)(1)(B). (A corporation may not provide such a statement 
based on its determination that the interest in question is an interest 
solely as a creditor.) See Sec. 1.897-2 (f) and (h). A corporation's 
statement may be relied upon for purposes of this paragraph (b)(4)(iii) 
only if the statement is dated not more than 30 days prior to the date 
of the transfer.
    (B) Reliance on statement not permitted. An entity or fiduciary is 
not entitled to rely upon a statement that an interest in a corporation 
is not a U.S. real property interest, if, prior to or at the time of the 
transfer, the entity or fiduciary either--
    (1) Has actual knowledge that the statement is false, or
    (2) Receives a notice that the statement is false from a 
transferor's or transferee's agent, pursuant to Sec. 1.1445-4.

Such an entity's or fiduciary's withholding obligations shall apply as 
if a statement had never been given, and such an entity or fiduciary may 
be held fully liable pursuant to Sec. 1.1445-1(e) for any failure to 
withhold. For special rules concerning an entity's belated receipt of a 
notice concerning a false statement, see paragraphs (c)(2)(iii) and 
(d)(2)(i) of this section.
    (5) Reporting and paying over of withheld amounts--(i) In General. 
An entity or fiduciary must report and pay over to the Internal Revenue 
Service any tax withheld pursuant to section 1445(e) and this section by 
the 20th day after the date of the transfer (as defined in Sec. 1.1445-
1(g)(8). Forms 8288 and 8288-A are used for this purpose and must be 
filed with the Internal Revenue Service Center, Philadephia, PA 19255. 
The contents of Forms 8288 and 8288-A are described in Sec. 1.1445-1(d). 
Pursuant to section 7502 and regulations thereunder, the timely mailing 
of Forms 8288 and 8288-A by U.S. mail will be treated as their timely 
filing. Form 8288-A will be stamped by the Internal Revenue Service to 
show receipt, and a stamped copy will be mailed by the Service to the 
interest-holder, at the address shown on the form, for the interest-
holder's use. See paragraph (b)(7) of this section. If an application 
for a withholding certificate with respect to a transfer of a U.S. real 
property interest was submitted to the Internal Revenue Service on the 
day of or at any time prior to the transfer, the entity or fiduciary 
must withold the amount required under section 1445(e) and the rules of 
this section. However, the amount withheld, or a lesser amount as 
determined by the Service, need not be reported and paid over to the 
Service until the 20th day following the Service's final determination. 
For this purpose, the Service's final determination occurs on the day 
when the withholding certificate is mailed to the applicant by the 
Service or when a notification denying the request for a withholding 
certificate is mailed to the applicant by the Service. An application is 
submitted to the Service on the day it is actually received by the 
Service at the address provided in Sec. 1.1445-1(g)(10) or, under the 
rules of section 7502, on the day it is mailed to the Service at the 
address provided in Sec. 1.1445-1(g)(10). For rules concerning the 
issuance of withholding certificates, see Sec. 1.1445-6.
    (ii) Anti-abuse rule. An entity or fiduciary that in reliance upon 
the rules of this paragraph (b)(5)(ii) fails to report and pay over 
amounts withheld by the 20th day following the date of the

[[Page 186]]

transfer, shall be subject to the payment of interest and penalties if 
the relevant application for a withholding certificate (or an amendment 
of the application for a withholding certificate) was submitted for a 
principle purpose of delaying the payment to the IRS of the amount 
withheld. Interest and penalties shall be assessed on the amount that is 
ultimately paid over, with respect to the period between the 20th day 
after the date of the transfer and the date on which payment is made.
    (6) Liability upon failure to withhold. For rules regarding 
liability upon failure to withhold under section 1445(e) and this 
Sec. 1.1445-5, see Sec. 1.1445-1(e).
    (7) Effect of withholding by entity or fiduciary upon interest 
holder. The withholding of tax under section 1445(e) does not excuse a 
foreign person that is subject to U.S. tax by reason of the operation of 
section 897 from filing a U.S. tax return. Thus, Form 1040NR. 1041. or 
1120F, as appropriate must be filed and any tax due must be paid, by the 
filing date otherwise applicable to such person (or any extension 
thereof). The tax withheld with respect to the foreign person under 
section 1445(e) (as shown on Form 8288-A) shall be credited against the 
amount of income tax as computed in such return, but only if the stamped 
copy of Form 8288-A provided to the entity or fiduciary (under paragraph 
(b)(5) of this section) is attached to the return or substantial 
evidence of the amount of tax withheld is attached to the return in 
accordance with the succeeding sentence. If a stamped copy of Form 8288-
A has not been provided to the interest-holder by the Service, the 
interest-holder may establish the amount of tax withheld by the entity 
or fiduciary by attaching to its return substantial evidence of such 
amount. Such an interestholder must attach to its return a statement 
which supplies all of the information required by Sec. 1.1445-1(d) (2) 
(expect such information that was not obtained by a diligent effort.) If 
the amount withheld under section 1445(e) constitutes less than the full 
amount of the foreign person's U.S. tax liability for that taxable year, 
then a payment of estimated tax may be required to be made pursuant to 
section 6154 or 6654 prior to the filing of the income tax return for 
the year. Alternatively, if the amount withheld under section 1445(e) 
exceeds the foreign person's maximum tax liability with respect to the 
transaction (as reflected in a withholding certificate issued by the 
Internal Revenue Service pursuant to Sec. 1.1445-6), then the foreign 
person may seek an early refund of the excess pursuant to Sec. 1.1445-
6(g). A foreign person that takes gain into account in accordance with 
the provisions of section 453 shall not be entitled to a refund to the 
amount withheld, unless a withholding certificate providing for such a 
refund is obtained pursuant to Sec. 1.1445-6. If an entity or fiduciary 
withholds tax under section 1445(e) with respect to a beneficial owner 
of an interest who is not a foreign person, such beneficial owner may 
credit the amount of any tax withheld against his income tax liability 
in accordance with the provisions of this Sec. 1.1445-5(b)(7) or apply 
for an early refund under Sec. 1.1445-6(g).
    (8) Effective dates--(i) Partnership, trust, and estate dispositions 
of U.S. real property interests. The provisions of section 1445(e)(1) 
and paragraph (c) of this section, requiring withholding upon certain 
dispositions of U.S. real property interests by domestic partnerships, 
trusts, and estates, shall apply to any disposition on or after January 
1, 1985.
    (ii) Certain distributions by foreign corporations. The provisions 
of section 1445(e)(2) and paragraph (d) of this section, requiring 
withholding upon distributions of U.S. real property interests by 
foreign corporations shall apply to distributions made on or after 
January 1, 1985.
    (iii) Distributions by certain domestic corporations to foreign 
shareholders. The provisions of section 1445(e)(3) and paragraph (e) of 
this section, requiring withholding upon distributions by U.S. real 
property holding corporations to foreign shareholders, shall apply to 
distributions made on or after January 1. 1985.
    (iv) Taxable distributions by domestic or foreign partnerships, 
trusts, and estates. The provisions of section 1445(e)(4), requiring 
withholding upon certain taxable distributions by domestic or foreign 
partnerships, trusts, and estates, shall apply to distributions made on 
or

[[Page 187]]

after the effective date of a Treasury decision under section 897 
(e)(2)(B)(ii) and (g).
    (v) [Reserved]
    (vi) Tiered Partnerships. No withholding is required upon the 
disposition of a U.S. real property interest by a partnership which is 
directly owned, in whole or in part, by another domestic partnership 
(but only to the extent that the amount realized is attributable to the 
partnership interest of that other partnership) until the effective date 
of a Treasury Decision published under section 1445(e) providing rules 
governing this matter.
    (c) Dispositions of U.S. real property interests by domestic 
partnerships, trusts, and estates--(1) Withholding required--(i) In 
general. If a domestic partnership, trust, or estate disposes of a U.S. 
real property interest and any partner, beneficiary, or owner of the 
entity is a foreign person, then the partnership or the trustee, 
executor, or equivalent fiduciary of the trust or estate must withhold 
tax with respect to each such foreign person in accordance with the 
provisions of subdivision (ii), (iii), or (iv), of this paragraph (c)(1) 
(as applicable). The withholding obligation imposed by this paragraph 
(c) applies to the fiduciary of a trust even if the grantor of the trust 
or another person is treated as the owner of the trust or any portion 
thereof for purposes of the Internal Revenue Code. Thus, the withholding 
obligation imposed by this paragraph (c) applies to the trustee of a 
land trust or similar arrangement, even if such a trustee is not 
ordinarily treated under the applicable provisions of local law as a 
true fiduciary.
    (ii) Disposition by partnership. A partnership must withhold a tax 
equal to 35 percent (or the highest rate specified in section 
1445(e)(1)) of each foreign partner's distributive share of the gain 
realized by the partnership upon the disposition of each U.S. real 
property interest. Such distributive share of the gain must be 
determined pursuant to the principles of section 704 and the regulations 
thereunder. For the rules applicable to partnerships, interests in which 
are regularly traded on an established securities market, see 
Sec. 1.1445-8.
    (iii) Disposition by trust or estate.--(A) In general. A trustee, 
fiduciary, executor or equivalent fiduciary (hereafter collectively 
referred to as the fiduciary) of a trust or estate having one or more 
foreign beneficiaries must withhold tax in accordance with the rules of 
this Sec. 1.1445-5(c)(1)(iii). Such a fiduciary must establish a U.S. 
real property interest account and must enter in such account all gains 
and losses realized during the taxable year of the trust or estate from 
dispositions of U.S. real property interests. The fiduciary must 
withhold 35 percent (or the highest rate specified in section 
1445(e)(1)) of any distribution to a foreign beneficiary that is 
attributable to the balance in the U.S. real property interest account 
on the day of the distribution. A distribution from a trust or estate to 
a beneficiary (domestic or foreign) shall, solely for purposes of 
section 1445(e)(1), be deemed to be attributable first to any balance in 
the U.S. real property interest account and then to other amounts. 
However, a distribution that occurs prior to the transfer of a U.S. real 
property interest in a taxable year or at any other time when the amount 
contained in the U.S. real property interest account is zero, is not 
subject to withholding under this Sec. 1.1445-5(c)(1)(iii). The U.S. 
real property interest account is reduced by the amount distributed to 
all beneficiaries (domestic and foreign) attributable to such account 
during the taxable year of the trust or estate. Any ending balance of 
the U.S. real property interest account not distributed by the close of 
the taxable year of the trust or estate is cancelled and is not carried 
over (or carried back) to any other year. Thus, the beginning balance of 
such account in any taxable year of the trust or estate is always zero. 
For rules applicable to grantor trusts see Sec. 1.1445-5(c)(1)(iv). For 
rules applicable to trusts, interests in which are regularly traded on 
an established securities market and real estate investment trusts, see 
Sec. 1.1445-8.
    (B) Example.The following example illustrates the rules of paragraph 
(c)(1)(iii)(A) of this section.

    On January 1, 1994, A establishes a domestic trust (which has as its 
taxable year, the calendar year) for the benefit of B, a nonresident 
alien, and C, a U.S. citizen. The trust is not a trust subject to 
sections 671

[[Page 188]]

through 679. Under the terms of the trust, the trustee, T, is given 
discretion to distribute income and corpus of the trust to provide for 
the reasonable needs of B and C. During the trust's 1994 tax year, T 
disposes of three parcels of vacant land located in the United States. 
The following chart illustrates the computation of the amount subject to 
withholding under section 1445 with respect to distributions made by T 
to B and C during 1994.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                             U.S. real
                                                                             Gains or      Distributions   Distributions   Section 1445      property
                   Date                              Parcel sold              (loss)           to C        to B (before     withholding      interest
                                                                             realized                      withholding)      35% rate         account
--------------------------------------------------------------------------------------------------------------------------------------------------------
 1/01/94..................................  ............................  ..............  ..............  ..............  ..............             -0-
 3/01/94..................................  Parcel 1....................        140,000   ..............  ..............  ..............         140,000
 3/05/94..................................  ............................  ..............           5,000          10,000           3,500         125,000
 3/15/94..................................  ............................  ..............          10,000           5,000           1,750         110,000
 5/01/94..................................  Parcel 2....................        300,000   ..............  ..............  ..............         410,000
 5/15/94..................................  Parcel 3....................        (50,000)  ..............  ..............  ..............         360,000
12/01/94..................................  ............................  ..............         170,000         170,000          59,500          20,000
 1/01/95..................................  ............................  ..............  ..............  ..............  ..............             -0-
--------------------------------------------------------------------------------------------------------------------------------------------------------


    (iv) Disposition by grantor trust. The trustee or equivalent 
fiduciary of a trust that is subject to the provisions of subpart E of 
part 1 of subchapter J (sections 671 through 679) must withhold a tax 
equal to 35 percent (or the highest rate specified in section 
1445(e)(1)) of the gain realized from each disposition of a U.S. real 
property interest to the extent such gain is allocable to a portion of 
the trust treated as owned by a foreign person under subpart E of part 1 
of subchapter J.
    (2) Withholding not required under paragraph (c)--(i) [Reserved]
    (ii) Interest-holder not a foreign person--(A) In general. A 
domestic partnership, trust, or estate that disposes of a U.S. real 
property interest shall not be required to withhold with respect to any 
partner or beneficiary that it determines, pursuant to the rules of 
paragraph (b)(3) of this section, not to be a foreign person.
    (B) Belated notice of false certification. If after the date of the 
transfer a partnership or fiduciary learns that a partner's or 
beneficiary's certification of non-foreign status is false, then that 
partnership or fiduciary shall be required to withhold, with respect to 
the foreign partner or beneficiary that gave the false certification, 
the lessor of--
    (1) The amount otherwise required to be withheld under the rules of 
this paragraph (c), or
    (2) An amount equal to that partner's or beneficiary's remaining 
interests in the income or assets of the partnership, trust, or estate. 
Amounts so withheld must be reported and paid over by the 60th day 
following the date on which the partnership or fiduciary learns that the 
certification is false. For rules concerning the notifications of false 
certifications that may be required to be given to partnerships and 
fiduciaries, see Sec. 1.1445-4(b).
    (iii) Property disposed of not a U.S. real property interest--(A) In 
general. No withholding is required under this paragraph (c) if a 
domestic partnership, trust, or estate that disposes of property 
determines pursuant to the rules of paragraph (b)(4) of this section 
that the property disposed of is not a U.S. real property interest.
    (B) Belated notice of false statement. If after the date of the 
transfer a partnership or fiduciary learns that a corporation's 
statement (that an interest in the corporation is not a U.S. real 
property interest) is false, then that partnership or fiduciary shall be 
required to withhold, with respect to each foreign partner or 
beneficiary, the lesser of--
    (1) The amount otherwise required to be withheld under the rules of 
this paragraph (c), or
    (2) An amount equal to that partner's or beneficiary's remaining 
interests in the income or assets of the parnership, trust, or estate.

Amounts so withheld must be reported and paid over by the 60th day 
following the date on which the partnership or fiduciary learns that the 
statement is false. For rules concerning the notifications of false 
statements that may be required to be given to partnerships or 
fiduciaries, see Sec. 1.1445-4(b).

[[Page 189]]

    (iv) Withholding certificate. No withholding is required under this 
paragraph (c) with respect to the transfer of a U.S. real property 
interest if the Internal Revenue Service issues a withholding 
certificate that so provides. For rules concerning the issuance of 
withholding certificates, see Sec. 1.1445-6.
    (v) Nonrecognition transactions. For special rules concerning 
transactions entitled to nonrecognition of gain or loss, see paragraph 
(b)(2) of this section.
    (3) Large partnerships or trusts--(i) In general. If a partnership 
or trust has more than 100 partners or beneficiaries, then the 
partnership or fiduciary of the trust may elect to withhold in 
accordance with the provisions of this Sec. 1.1445-5(c)(3) in lieu of 
withholding in the manner required by Sec. 1.1445-5(c)(1). However, the 
rules of this Sec. 1.1445-5(c)(3) shall not apply to any partnership or 
trust interests in which are regularly traded on an established 
securities market except as described in Sec. 1.1445-8(c)(1). The rules 
of this Sec. 1.1445-5(c)(3) shall not apply to any real estate 
investment trust. See Sec. 1445-8.
    (ii) Amount to be withheld. A partnership or trust electing to 
withhold under this Sec. 1.1445-5(c)(3) shall withhold from each 
distribution to a foreign person an amount equal to 35 percent (or the 
highest rate specified in section 1445(e)(1)) of the amount attributable 
to section 1445(e)(1) transfers.
    (iii) Amounts attributable to section 1445(e)(1) transfers. A 
distribution is attributable to section 1445(e)(1) transfers to the 
extent of the partner's or beneficiary's proportionate share of the 
current balance of the entity's section 1445(e)(1) account. A 
distribution from a partnership or trust that has made an election under 
this Sec. 1.1445-5(c)(3) shall be deemed first to be attributable to a 
section 1445(e)(1) transfer to the extent of the balance in the section 
1445(e)(1) account. An entity's section 1445(e)(1) account shall be 
equal to--
    (A) The total amount of net gain realized by the entity upon all 
transfers of U.S. real property interests carried out by the entity 
after the date of its election under this Sec. 1.1445-5(c)(3); minus
    (B) The total amount of all distributions by the entity to domestic 
and foreign distributees from such account.
    (iv) Special rules for entities that make recurring sales of growing 
crops and timber. An entity that makes an election under Sec. 1.1445-
5(c)(3) and that makes recurring sales of growing crops and timber may 
further elect to determine the amount subject to withholding under the 
rules of this Sec. 1.1445-5(c)(3)(iv). Such an entity must withhold from 
each distribution to a foreign partner or beneficiary an amount equal to 
10 percent of such partner's or beneficiary's proportionate share of the 
current balance of the entity's gross section 1445(e)(1) account. An 
entity's gross section 1445(e)(1) account equals--
    (A) The total amount realized by the entity upon all transfers of 
U.S. real property interests carried out by the entity after the date of 
its election under this Sec. 1.1445-5(c)(3)(iv); minus
    (B) The total amount of all distributions to domestic and foreign 
distributees from such account.

An entity that elects to compute the amount subject to withholding under 
this Sec. 1.1445-5(c)(3)(iv), shall make such election in accordance 
with Sec. 1.1445-5(c)(3)(vi) and shall be subject to the provisions 
otherwise applicable under Sec. 1.1445-5(c)(3).
    (v) Procedural rules. An election under paragraph (c)(3) may be made 
by filing a notice thereof with the Assistant Commissioner 
(International), at the address provided in Sec. 1.1445-1(g)(10). The 
notice must be submitted by a general partner (in the case of a 
partnership) or the trustee or equivalent fiduciary (in the case of a 
trust). The notice must set forth the name, office address, and 
identifying number of the partnership or fiduciary making the election, 
and, in the case of a partnership, must include the name, office 
address, and identifying number of the general partner submitting the 
election. An election under this paragraph (c)(3) may be revoked only 
with the consent of the Internal Revenue Service. Consent of the Service 
may be requested by filing an application to revoke the election with 
the Assistant Commissioner (International) at the address stated above. 
This application must include all information provided to the Service

[[Page 190]]

with the election notice and must provide an explanation of the reasons 
for revoking the election. The application to revoke an election must 
also specify the amount remaining to be distributed in the section 
1445(e)(1) account or the gross section 1445(e)(1) account.

An entity that ceases to qualify under section 1.1445-5(c)(3) because 
such entity does not have more than 100 partners or beneficiaries may 
revoke its election only with the consent of the Internal Revenue 
Service.
    (d) Distributions of U.S. real property interests by foreign 
corporations--(1) In general. A foreign corporation that distributes a 
U.S. real property interest must deduct and withhold a tax equal to 35 
percent (or the rate specified in section 1445(e)(2)) of the amount of 
gain recognized by the corporation on the distribution. The amount of 
gain required to be recognized by the corporation must be determined 
pursuant to the rules of section 897 and any other applicable section. 
For special rules concerning the applicability of a nonrecognition 
provision to a distribution, see paragraph (b)(2) of this section. The 
withholding liability imposed by this paragraph (d) applies to the same 
taxpayer that owes the related substantive income tax liability pursuant 
to the operation of section 897. Only one such liability will be 
assessed and collected from a foreign corporation, but separate 
penalties for failures to comply with the two requirements will be 
asserted.
    (2) Withholding not required--(i) Property distributed not a U.S. 
real property interest--(A) In general. No withholding is required under 
this paragraph (d) if a foreign corporation that distributes property 
determines pursuant to the rules of paragraph (b)(3) of this section 
that the property distributed is not a U.S. real property interest.
    (B) Belated notice of false statement. If after the date of a 
distribution described in paragraph (d)(1) of this section a foreign 
corporation learns that another corporation's statement (that an 
interest in that other corporation is not a U.S. real property interest) 
is false, then the foreign corporation may not rely upon that statement 
for any purpose. Such a foreign corporation's withholding obligations 
under this paragraph (d) shall apply if a statement had never been 
given, and such a corporation may be held fully liable pursuant to 
Sec. 1.1445-5(b)(5) for any failure to withhold. Amounts withheld 
pursuant to the rule of this paragraph (d)(2)(i)(B) must be reported and 
paid over by the 60th day following the date on which the foreign 
corporation learns that the statement is false. No penalties or interest 
will be assessed for failures to withhold prior to that date. For rules 
concerning the notifications of false statements that may be required to 
be given to foreign corporations, see Sec. 1.1445-4(b).
    (ii) Withholding certificate. No withholding is required under this 
paragraph (d) with respect to a foreign corporation's distribution of a 
U.S. real property interest if the distributing corporation obtains a 
withholding certificate from the Internal Revenue Service that so 
provides. For rules concerning the issuance of withholding certificates, 
see Sec. 1.1445-6.
    (e) Distributions to foreign persons by U.S. real property holding 
corporations--(1) In general. A domestic corporation that distributes 
any property to a foreign person that holds an interest in the 
corporation must deduct and withhold a tax equal to 10 percent of the 
fair market value of the property distributed to the foreign person, 
if--
    (i) The foreign person's interest in the corporation constitutes a 
U.S. real property interest under the provisions of section 897 and 
regulations thereunder; and
    (ii) The property is distributed either--
    (A) In redemption of stock under section 302; or
    (B) In liquidation of the corporation pursuant to the provisions of 
part II of subchapter C (sections 331 through 341). For the treatment of 
a domestic corporation's transfer of a U.S. real property interest to a 
foreign interest-holder in a distribution to which section 301 applies, 
see sections 897(f), 1441, and 1442.
    (2) Withholding not required--(i) Foreign person's interest not a 
U.S. real property interest. Withholding is required

[[Page 191]]

under this paragraph (e) only with respect to distributions to foreign 
persons holding interests in the corporation that constitute U.S. real 
property interests. In general, a foreign person's interest in a 
domestic corporation constitutes a U.S. real property interest if the 
corporation was a U.S real property holding corporation at any time 
during the shorter of (A) the period in which the foreign person held 
the interest or (B) the previous five years (but not earlier than June 
19, 1980). See section 897(c) and Secs. 1.897-1(c) and 1.897-2 (b) and 
(h). However, an interest in such a corporation ceases to be a U.S. real 
property interest after all of the U.S. real property interests held by 
the corporation itself are disposed of in transactions on which gain or 
loss is recognized. See section 897(c)(1)(B) and Sec. 1.897-2(f)(2). 
Thus, if a U.S. real property holding corporation in the process of 
liquidation does not elect section 337 nonrecognition treatment upon its 
sale of all U.S. real property interests held by the corporation, and 
recognizes gain or loss upon such sales, interests in that corporation 
cease to be U.S. real property interests. Therefore, no withholding 
would be required with respect to that corporation's subsequent 
liquidating distribution to a foreign shareholder of property other than 
a U.S. real property interest.
    (ii) Nonrecognition transactions. For special rules concerning the 
applicability of a nonrecognition provision to a distribution described 
in paragraph (e)(1) of this section, see paragraph (b)(2) of this 
section.
    (iii) Interest-holder not a foreign person--(A) In general. A 
domestic corporation shall not be required to withhold under this 
paragraph (e) with respect to a distribution of property to any 
distributee that it determines, pursuant to the rules of paragraph 
(b)(3) of this section, not to be a foreign person.
    (B) Belated notice of false certification. If after the date of a 
distribution described in paragraph (e)(1) of this section a domestic 
corporation learns that an interest-holder's certification of non-
foreign status is false, then the corporation may rely upon that 
certification only if the person providing the false certification holds 
(or held) less than 10 percent of the value of the outstanding stock of 
the corporation. With respect to less than 10 percent interest-holders, 
no withholding is required under this paragraph (e) upon receipt of a 
belated notice of false certification. With respect to 10 percent or 
greater interest-holders, the corporation's withholding obligations 
under this paragraph (e) shall apply as if a certification had never 
been given, and such a corporation may be held fully liable pursuant to 
Sec. 1.1445-5(b)(6) for any failure to withhold as of the date specified 
in this Sec. 1.1445-5(e)(2)(iii)(B). Amounts withheld pursuant to the 
rule of this paragraph (e)(2)(iii)(B) must be reported and paid over by 
the 60th day following the date on which the corporation learns that the 
certification is false. No penalties or interest for failures to 
withhold will be assessed prior to that date. For rules concerning the 
notifications of false certifications that may be required to be given 
to U.S. real property holding corporations, see Sec. 1.1445-4(b).
    (iv) Withholding certificate. No withholding, or reduced 
withholding, is required under this paragraph (e) with respect to a 
domestic corporation's distribution of property if the distributing 
corporation obtains a withholding certificate from the Internal Revenue 
Service that so provides. For rules concerning the issuance of 
withholding certificates, see Sec. 1.1445-6.
    (f) Taxable distributions by domestic or foreign partnerships, 
trusts, or estates. [Reserved]
    (g) Dispositions of interests in partnerships, trusts, and estates. 
[Reserved]

[T.D. 8113, 51 FR 46642, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987, 
as amended at T.D. 8198, 53 FR 16230, May 5, 1988; T.D. 8321, 55 FR 
50553, Dec. 7, 1990; T.D. 8647, 60 FR 66076, Dec. 21, 1995; 61 FR 7157, 
Feb. 26, 1996; T.D. 8734, 62 FR 53467, Oct. 14, 1997]



Sec. 1.1445-6  Adjustments pursuant to withhold certificate of amount required to be withheld under section 1445(e).

    (a) Withholding certificate for purposes of section 1445(e)--(1) In 
general. Pursuant to the provisions of Sec. 1.1445-5 (c)(2)(iv), 
(d)(2)(ii), and (e)(2)(iv), withholding under section 1445(e) may be 
reduced or eliminated pursuant to a withholding certificate issued by 
the

[[Page 192]]

Internal Revenue Service in accordance with the rules of this 
Sec. 1.1445-6. A withholding certificate may be issued in cases where 
adjusted withholding is appropriate (e.g., because of the applicability 
of a nonrecognition provision--see paragraph (c) of this section), where 
the relevant taxpayers are exempt from U.S. tax (see paragraph (d) of 
this section), or where an agreement for the payment of tax is entered 
into with the Service (see paragraph (e) of this section). A withholding 
certificate that is obtained prior to a transfer allows the entity or 
fiduciary to withhold a reduced amount or excuses withholding entirely. 
A withholding certificate that is obtained after a transfer has been 
made may authorize a normal refund or an early refund pursuant to 
paragraph (g) of this section. The Internal Revenue Service will act 
upon an application for a withholding certificate not later than the 
90th day after it is received. (The Service may deny a request for a 
withholding certificate where, after due notice, an applicant fails to 
provide the information necessary to make a determination.) Solely for 
this purpose (i.e., determining the day upon which the 90 day period 
commences), an application is received by the Service on the date when 
all information necessary for the Service to make a determination is 
provided by the applicant. (For rules regarding whether an application 
has been timely submitted, see Sec. 1.1445-5(b)(5)). The Internal 
Revenue Service will act upon an application for an early refund not 
later than the 90th day after it is received. An application for an 
early refund must either (i) include a copy of a withholding certificate 
issued by the Service with respect to the transaction, or (ii) be 
combined with an application for a withholding certificate. Where an 
application for an early refund is combined with an application for a 
withholding certificate, the Service will act upon both applications not 
later than the 90th day after receipt. Either an entity, a fiduciary, or 
a relevant taxpayer (as defined in paragraph (a)(2) of this section) may 
apply for a withholding certificate. An entity or fiduciary may apply 
for a withholding certificate with respect to all or less than all 
relevant taxpayers. For special rules concerning the issuance of a 
withholding certificate to a foreign corporation that has made an 
election under section 897(i), see Sec. 1.1445-7(d).
    (2) Relevant taxpayer. For purposes of this section, the term 
``relevant taxpayer'' means any foreign person that will bear 
substantive income tax liability by reason of the operation of section 
897 with respect to a transaction upon which withholding is required 
under section 1445(e).
    (b) Applications for withholding certificates--(1) In general. An 
application for a withholding certificate pursuant to this Sec. 1.1445-6 
must be submitted in the manner provided in Sec. 1.1445--3 (b). However, 
in lieu of the information required to be submitted pursuant to 
Sec. 1.1445-3(b)(4), the applicant must provide the information required 
by paragraph (b)(2) of this section. In addition, the information 
required by paragraph (b)(3) of this section must be submitted with the 
application.
    (2) Basis for certificate--(i) Adjusted withholding. If a 
withholding certificate is sought on the basis of a claim that adjusted 
withholding is appropriate, the application must include a calculation, 
in accordance with paragraph (c) of this section, of the maximum tax 
that may be imposed on each relevant taxpayer with respect to which 
adjusted withholding is sought. The application must also include all 
evidence necessary to substantiate the claimed calculation, such as 
records of adjustments to basis or appraisals of fair market value.
    (ii) Exemption. If a withholding certificate is sought on the basis 
of a relevant taxpayer's exemption from U.S. tax, the application must 
set forth a brief statement of the law and facts that support the 
claimed exemption. See paragraph (d) of this section.
    (iii) Agreement. If a withholding certificate is sought on the basis 
of an agreement for the payment of tax, the application must include a 
copy of the agreement proposed by the applicant and a copy of the 
security instrument (if any) proposed by the applicant. In this regard, 
see paragraph (e) of this section.

[[Page 193]]

    (3) Relevant taxpayers. An application for withholding certificate 
pursuant to this section must set forth the name, identifying number (if 
any) and home address (in the case of an individual) or office address 
(in the case of an entity) of each relevant taxpayer with respect to 
which adjusted withholding is sought.
    (c) Adjustment of amount required to be withheld. The Internal 
Revenue Service may issue a withhold certificate that excuses 
withholding or that permits an entity or fiduciary to withhold an 
adjusted amount reflecting the relevant taxpayers' maximum tax 
liability. A relevant taxpayer's maximum tax liability is the maximum 
amount which that taxpayer could be required to pay as tax by reason of 
the transaction upon which withholding is required. In the case of an 
individual taxpayer that amount will generally be the gain realized by 
the individual, multiplied by the maximum individual income tax rate 
applicable to long term capital gain. In the case of a corporate 
taxpayer, that amount will generally be the gain realized by the 
corporation, multiplied by the maximum corporate income tax rate 
applicable to long term capital gain. However, that amount must be 
adjusted to take into account the following:
    (1) Any reduction of tax to which the relevant taxpayer is entitled 
under the provisions of a U.S. income tax treaty;
    (2) The effect of any nonrecognition provision that is applicable to 
the transaction;
    (3) Any losses previously realized and recognized by the relevant 
taxpayer during the taxable year by reason of the operation of section 
897;
    (4) Any amount realized upon the subject transfer by the relevant 
taxpayer that is required to be treated as ordinary income under any 
provision of the Code; and
    (5) Any other factor that may increase or reduce the tax upon the 
transaction.
    (d) Relevant taxpayer's exemption from U.S. tax--(1) In general. The 
Internal Revenue Service will issue a withholding certificate that 
excuses withholding by an entity or fiduciary if it is established that 
a relevant taxpayer's income from the transaction will be exempt from 
U.S. tax. For the available exemptions, see paragraph (d)(2) of this 
section. If a relevant taxpayer is entitled to a reduction of (rather 
than an exemption from) U.S. tax, then the entity or fiduciary may 
obtain a withholding certificate to that effect pursuant to the 
provisions of paragraph (c) of this section.
    (2) Available exemptions. A relevant taxpayer's income from a 
transaction with respect to which withholding is required under section 
1445(e) may be exempt from U.S. tax because either:
    (i) The relevant taxpayer is an integral part or controlled entity 
of a foreign government and the subject income is exempt from U.S. tax 
pursuant to section 892 and the regulations thereunder; or
    (ii) The relevant taxpayer is entitled to the benefits of an income 
tax treaty that provides for such an exemption (subject to the 
limitations imposed by section 1125(c) of Pub. L. 96-499, which, in 
general overrides such benefits as of January 1, 1985).
    (e) Agreement for the payment of tax--(1) In general. The Internal 
Revenue Service will issue a withholding certificate that excuses 
withholding or that permits an entity or fiduciary to withhold a reduced 
amount, if the entity, fiduciary, or a relevant taxpayer enters into an 
agreement for the payment of tax pursuant to the provisions of this 
paragraph (e). An agreement for the payment of tax is a contract between 
the Service and the entity, fiduciary, or relevant taxpayer that 
consists of two necessary elements. Those elements are--
    (i) A contract between the Service and the other person, setting 
forth in detail the rights and obligations of each; and
    (ii) A security instrument or other form of security acceptable to 
the Assistant Commissioner (International).
    (2) Contents of agreement--(i) In general. An agreement for the 
payment of tax must cover an amount described in subdivision (ii) or 
(iii) of this paragraph (e)(2). The agreement may either provide 
adequate security for the payment of the chosen amount with respect to 
the relevant taxpayer in accordance with paragraph (e)(3) of this 
section or provide for the payment of

[[Page 194]]

that amount through a combination of security and withholding of tax by 
the entity or fiduciary.
    (ii) Tax that would otherwise be withheld. An agreement for the 
payment of tax may cover the amount of tax that would otherwise be 
required to be withheld with respect to the relevant taxpayer pursuant 
to section 1445(e). In addition to the amount computed pursuant to 
section 1445(e), the applicant must agree to pay interest upon that 
amount, at the rate established under section 6621, with respect to the 
period between the date on which withholding tax under section 1445(e) 
would otherwise be due and the date on which the relevant taxpayer's 
payment of tax with respect to the disposition will be due. The amount 
of interest agreed upon must be paid by the applicant regardless of 
whether or not the Service is required to draw upon any security 
provided pursuant to the agreement. The interest may be paid either with 
the return or by the Service drawing upon the security.
    (iii) Maximum tax liability. An agreement for the payment of tax may 
cover the relevant taxpayer's maximum tax liability, determined in 
accordance with paragraph (c) of this section. The agreement must also 
provide for the payment of an additional amount equal to 25 percent of 
the amount determined under paragraph (c) of this section. This 
additional amount secures the interest and penalties that would accrue 
between the date of the relevant taxpayer's failure to file a return and 
pay tax with respect to the disposition, and the date of which the 
Service collects upon that liability pursuant to the agreement.
    (iv) Allocation of payment. An agreement for the payment of tax 
pursuant to this section must set forth an allocation of the payment 
provided for by the agreement among the relevant taxpayers with respect 
to which the withholding certificate is sought. In the case of an 
agreement that covers an amount described in subdivision (ii) of this 
paragraph (e)(2), such allocation must be based upon the amount that 
would otherwise be required to be withheld with respect to each relevant 
taxpayer. In the case of an agreement that covers an amount described in 
subdivision (iii) of this paragraph (e)(2), such allocation must be 
based upon each relevant taxpayer's maximum tax liability.
    (3) Major types of security. The major types of security that are 
acceptable to the Internal Revenue Service for purposes of this section 
are described in Sec. 1.1445-3(e)(3).
    (4) Terms of security instrument. Any security instrument that is 
furnished pursuant to this section must contain the terms described in 
Sec. 1.1445-3(e)(4).
    (f) Amendments to application for withholding certificates--(1) In 
general. An applicant for a withholding certificate may amend an 
otherwise complete application by submitting an amending statement to 
the Assistant Commissioner (International) at the address provided in 
Sec. 1.1445-1(g)(10). The amending statement shall provide the 
information required by Sec. 1.1445-6(f)(3) and must be signed and 
accompanied by a penalties of perjury statement in accordance with 
Sec. 1.1445-6(b).
    (2) Extension of time for the Service to process requests for 
withholding certificates--(i) In general. If an amending statement is 
submitted, the time in which the Internal Revenue Service must act upon 
the amended application shall be extended by 30 days.
    (ii) Substantial amendments. If an amending statement is submitted 
and the Service finds that the statement substantially amends to the 
facts of the underlying application or substantially alters the terms of 
the withholding certificate as requested in the initial application, the 
time within which the Service must act upon the amended application 
shall be extended by 60 days. The applicant shall be so notified.
    (iii) Amending statement received after the requested withholding 
certificate has been signed by the Assistant Commissioner 
(International). If an amending statement is received after the 
withholding certificate, drafted in response to the underlying 
application, has been signed by the Assistant Commissioner 
(International) or his delegate and prior to the day such certificate is 
mailed to the applicant, the time in which the Service must act upon the 
amended application shall be extended by 90 days.

[[Page 195]]

    (3) Information required to be submitted. No particular form is 
required for an amending statement but the statement must provide the 
following information:
    (i) Identification of applicant. The amending statement must set 
forth the name, address, and identifying number (if any) of the person 
submitting the amending statement.
    (ii) Date of application. The amending statement must set forth the 
date of the underlying application for a withholding certificate.
    (iii) Real property interest to be (or that has been) transferred. 
The amending statement must set forth a brief description of the real 
property interest with respect to which the underlying application for a 
withholding certificate was submitted.
    (iv) Amending information. The amending statement must fully set 
forth the basis for the amendment including any modification of the 
facts supporting the application for a withholding certificate and any 
change sought in the terms of the withholding certificate.
    (g) Early refund of overwithheld amounts. If the Internal Revenue 
Service issues a withholding certificate pursuant to this section, and 
an amount greater than that specified in the certificate was withheld by 
the entity or fiduciary, then pursuant to the rules of this paragraph 
(g) a relevant taxpayer may apply for an early refund of a proportionate 
share of the excess amount (without interest) prior to the date on which 
the relevant taxpayer's return is due (without extensions). An 
application for an early refund must be addressed to the Assistant 
Commissioner (International), at the address provided in Sec. 1.1445-
1(g)(10). No particular form is required for the application, but the 
following information must be set forth in separate paragraphs numbered 
to correspond with the numbers given below:
    (1) Name, address, and identifying number (if any) of the relevant 
taxpayer seeking the refund;
    (2) Amount required to be withheld pursuant to withholding 
certificate;
    (3) Amount withheld by entity or fiduciary (attach a copy of Form 
8288-A stamped by IRS pursuant to Sec. 1.1445-5(b)(4) or provide 
substantial evidence of the amount withheld in the case of a failure to 
receive Form 8288-A, as provided in Sec. 1.1445-5(b)(7)); and
    (4) Amount to be refunded to the relevant taxpayer.

An application for an early refund cannot be processed unless the 
required copy of Form 8288-A or substantial evidence of the amount 
withheld in the case of a failure to receive Form 8288-A (as provided in 
Sec. 1.1445-5(b)(7)) is attached to the application. If an application 
for a withholding certificate is submitted after the transfer takes 
place, then that application may be combined with an application for an 
early refund. The Service will act upon a claim for refund within the 
time limits set forth in Sec. 1.1445-6(a)(1).

[T.D. 8113, 51 FR 46648, Dec. 24, 1986; 52 FR 3796, 3917, Feb. 6, 1987]



Sec. 1.1445-7  Treatment of foreign corporation that has made an election under section 897(i) to be treated as a domestic corporation.

    (a) In general. Pursuant to section 897(i) a foreign corporation may 
elect to be treated as a domestic corporation for purposes of sections 
897 and 6039C. A foreign corporation that has made such an election 
shall also be treated as a domestic corporation for purposes of the 
withholding required under section 1445, in accordance with the 
provisions of this section.
    (b) Withholding under section 1445(a)--(1) Dispositions by 
corporation. A foreign corporation that has made an election under 
section 897(i) may provide a transferee with a certification of non-
foreign status in connection with the corporation's disposition of a 
U.S. real property interest. However, in accordance with the provisions 
of Secs. 1.1445-2(b)(2)(ii) and 1.1445-5(b)(3)(ii)(C), such an electing 
foreign corporation must attach to such certification a copy of the 
acknowledgment of the election provided to the corporation by the 
Internal Revenue Service pursuant to Sec. 1.897-3(d)(4) which states 
that the information required by Sec. 1.897-3 has been determined to be 
complete.
    (2) Dispositions of interests in corporation. Dispositions of 
interests in electing foreign corporations shall be subject to the 
withholding requirements of

[[Page 196]]

section 1445(a) and the rules of Secs. 1.1445-1 through 1.1445-4. 
Therefore, if a foreign person disposes of an interest in such a 
corporation, and that interest is a U.S. real property interest under 
the provisions of section 897 and regulations thereunder, then the 
transferee is required to withhold under section 1445(a).
    (c) Withholding under section 1445(e). Because a foreign corporation 
that has made an election under section 897(i) is treated as a domestic 
corporation for purposes of determining withholding obligations under 
section 1445, such a corporation is not subject to the requirement of 
section 1445(e)(2) that a foreign corporation withhold at the corporate 
capital gain rate from the gain recognized upon the distribution of a 
U.S. real property interest. Such a corporation is subject to the 
provisions of section 1445(e)(3). Thus, if interests in an electing 
corporation constitute U.S. real property interests, then the 
corporation is required to withhold with respect to the non-dividend 
distribution of any property to an interest-holder that is a foreign 
person. See Sec. 1.1445-5(e). Dividend distributions (distributions that 
are described in section 301) shall be treated as provided in sections 
897(f), 1441 and 1442. In addition, if interests in an electing foreign 
corporation do not constitute U.S. real property interests, then 
distributions by such corporation shall be treated as provided in 
sections 897(f) (if applicable), 1441 and 1442.

(Approved by the Office of Management and Budget under control number 
545-0902)

[T.D. 8113, 51 FR 46650, Dec. 24, 1986; 52 FR 3796, Feb. 6, 1987]



Sec. 1.1445-8  Special rules regarding publicly traded partnerships, publicly traded trusts and real estate investment trusts (REITs).

    (a) Entities to which this section applies. The rules of this 
section apply to--
    (1) Any partnership or trust, interests in which are regularly 
traded on an established securities market (regardless of the number of 
its partners or beneficiaries), and
    (2) Any REIT (regardless of the form of its organization).

For purposes of paragraph (a)(1) of this section, the rules of section 
1445 (e)(1) and this section shall not apply to a publicly traded 
partnership (as defined in section 7704) which is treated as a 
corporation under section 7704(a), or to those entities that are 
classified as ``associations'' and taxed as corporations. See 
Sec. 301.7701-2.
    (b) Obligation to withhold--(1) In general. An entity described in 
paragraph (a) of this section is not required to withhold under the 
provisions of Sec. 1.1445-5(c), which states the withholding 
requirements of domestic partnerships, trusts and estates upon the 
disposition of U.S. real property interests. Except as otherwise 
provided in this paragraph (b), an entity described in paragraph (a) of 
this section shall be liable to withhold tax upon the distribution of 
any amount attributable to the disposition of a U.S. real property 
interest, with respect to each holder of an interest in the entity that 
is a foreign person. The amount to be withhold is described in paragraph 
(c) of this section.
    (2) Publicly traded partnerships. Publicly traded partnerships which 
comply with the withholding procedures under section 1446 will be deemed 
to have satisfied their withholding obligations under this paragraph 
(b).
    (3) Special rule for certain distributions to nominees. In the case 
of a person that--
    (i) Is a nominee (as defined in paragraph (d) of this section),
    (ii) Receives a distribution attributable to the disposition of a 
U.S. real property interest directly from an entity described in 
paragraph (a) of this section or indirectly from such entity through a 
nominee,
    (iii) Receives the distribution for payment to any foreign person, 
or the account of any foreign person, and
    (iv) Receives a qualified notice pursuant to paragraph (f) of this 
section,

then the obligation to withhold in accordance with the general rules of 
section 1445(e)(1) and this paragraph (b) shall be imposed solely on 
that person to the extent of the amount specified by the qualified 
notice. A person obligated to withhold by reason of this paragraph 
(b)(3) is referred to as a withholding agent.

[[Page 197]]

    (4) Person designated to act for withholding agent. The rules stated 
in Sec. 1.1441-7(b) (1) and (2) regarding a person designated to act for 
a withholding agent shall apply for purposes of this section.
    (5) Effect of withholding exemption granted under Sec. 1.1441-4(f). 
A letter issued by a district director under the provisions of 
Sec. 1.1441-4(f), which exempts a person from withholding under section 
1441 or section 1442, shall also exempt that person from withholding 
under this paragraph (b), if--
    (i) The letter identifies another person as the withholding agent 
for purposes of section 1441 or 1442, and
    (ii) Such other person enters into a written agreement, with the 
district director who issued the letter, to be the withholding agent for 
purposes of this paragraph (b).

The exemption granted, and the corresponding withholding obligation 
imposed, by this paragraph (b)(5) shall apply with respect to the first 
distribution made after execution of the agreement described in the 
preceding sentence and shall continue to apply to all distributions made 
during the period in which the exemption granted under Sec. 1.1441-4(f) 
is in effect.
    (6) Payment other than in money. The rule stated in Sec. 1.1441-7(c) 
regarding payment other than in money shall apply for purposes of this 
section.
    (c) Amount to be withheld--(1) Distribution from a publicly traded 
partnership or publicly traded trust. The amount to be withheld under 
this section with respect to a distribution by a publicly traded 
partnership or publicly traded trust shall be computed in the manner 
described in Sec. 1.1445-5(c)(3) (ii) and (iii), subject to the rules of 
this section.
    (2) REITs--(i) In general. The amount to be withheld with respect to 
a distribution by a REIT, under this section shall be equal to 35 
percent (or the highest rate specified in section 1445(e)(1)) of the 
amount described in paragraph (c)(2)(ii) of this section.
    (ii) Amount subject to withholding--(A) In general. Except as 
otherwise provided in paragraph (c)(2)(ii)(C) of this section, the 
amount subject to withholding is the amount of any distribution, 
determined with respect to each share or certificate of beneficial 
interest, designated by a REIT as a capital gain dividend, multiplied by 
the number of shares or certificates of beneficial interest owned by the 
foreign person. Solely for purposes of this paragraph, the largest 
amount of any distribution occurring after March 7, 1991 that could be 
designated as a capital gain dividend under section 857(b)(3)(C) shall 
be deemed to have been designated by a REIT as a capital gain dividend 
regardless of the amount actually designated.
    (B) Distribution attributable to net short-term capital gain from 
the disposition of a U.S. real property interest. [Reserved]
    (C) Designation of prior distribution as capital gain dividend. If a 
REIT makes an actual designation of a prior distribution, in whole or in 
part, as a capital gain dividend, such prior distribution shall not be 
subject to withholding under this section. Rather, a REIT must 
characterize and treat as a capital gain dividend distribution (solely 
for purposes of section 1445(e)(1)) each distribution, determined with 
respect to each share or certificate of beneficial interest, made on the 
day of, or any time subsequent to, such designation as a capital gain 
dividend until such characterized amounts equal the amount of the prior 
distribution designated as a capital gain dividend. The provisions of 
this paragraph shall not be applicable in any taxable year in which the 
REIT adopts a formal or informal resolution or plan of complete 
liquidation.
    (iii) Example. The following example illustrates the rules of 
paragraph (c)(2)(ii)(C) of this section.

    In the first quarter of 1988, XYZ REIT makes a dividend distribution 
of $2X. In the second quarter of 1988, XYZ sells real property, 
recognizing a long term capital gain of $15X, and makes a dividend 
distribution of $5X. In the third quarter of 1988, XYZ makes a 
distribution of $3X. In the fourth quarter of 1988, XYZ sells real 
property recognizing a long term capital loss of $2X. Within 30 days 
after the close of the taxable year, XYZ designates a capital gain 
dividend for the year of $13X. It subsequently makes a fourth quarter 
distribution of $7X. Since XYZ has made an actual designation of prior 
distributions during the taxable year as capital gain dividends, 
withholding on those prior distributions will not be required. However, 
the REIT must characterize, solely for purposes

[[Page 198]]

of section 1445(e)(1), a total amount of $13X of dividend distributions 
as capital gain dividends. Therefore, the fourth quarter dividend 
distribution of $7X must be characterized as a capital gain dividend 
subject to withholding under this section. In addition, XYZ will be 
required to characterize an additional $6X of subsequent dividend 
distributions as capital gain dividends.

    (d) Definition of nominee. For purposes of this section, the term 
``nominee'' means a domestic person that holds an interest in an entity 
described in paragraph (a) of this section on behalf of another domestic 
or foreign person.
    (e) Determination of non-foreign status by withholding agent. A 
withholding agent may rely on a certificate of non-foreign status 
pursuant to Sec. 1.1445-2(b) or on the statements and address provided 
to it on Form W-9 or a form that is substantailly similar to such form, 
to determine whether an interest holder is a domestic person. Reliance 
on these documents will excuse the withholding agent from liability 
imposed under section 1445(e)(1) in the absence of actual knowledge that 
the interest holder is a foreign person. A withholding agent may also 
employ other means to determine the status of an interest holder, but, 
if the agent relies on such other means and the interest holder proves, 
in fact, to be a foreign person, then the withholding agent is subject 
to any liability imposed pursuant to section 1445 and the regulations 
thereunder for failure to withhold.
    (f) Qualified notice. A qualified notice for purposes of paragraph 
(b)(3)(iv) of this section is a notice given by a partnership, trust or 
REIT regarding a distribution that is attributable to the disposition of 
a U.S. real property interest in accordance with the notice requirements 
with respect to dividends described in 17 CFR 240.10b-17(b) (1) or (3) 
issued pursuant to the Securities Exchange Act of 1934, 15 U.S.C. 78a et 
seq. In the case of a REIT, a qualified notice is only a notice of a 
distribution, all or any portion of which the REIT actually designates, 
or characterizes in accordance with paragraph (c)(2)(ii)(C) of this 
section, as a capital gain dividend in accordance with 17 CFR 240.10b-
17(b) (1) or (3), with respect to each share or certificate of 
beneficial interest. A deemed designation under paragraph (c)(2)(ii)(A) 
of this section may not be the subject of a qualified notice under this 
paragraph (f). A person described in paragraph (b)(3) of this section 
shall be treated as receiving a qualified notice at the time such notice 
is published in accordance wtih 17 CFR 240.10b-17(b) (1) or (3).
    (g) Reporting and paying over withheld amounts. With respect to an 
amount withheld under this section, a withholding agent is not required 
to conform to the requirements of Sec. 1.1445-5(b)(5) but is required to 
report and pay over to the Internal Revenue Service any amount required 
to be withheld pursuant to the rules and procedures of section 1461, the 
regulations thereunder and Sec. 1.6302-2. Forms 1042 and 1042S are to be 
used for this purpose.
    (h) Early refund procedure not available. The early refund procedure 
set forth in Sec. 1.1445-6(g) shall not apply to amounts withheld under 
the rules of this section. For adjustment of over-withheld amounts, see 
Sec. 1.1461.4.
    (i) Liability upon failure to withhold. For rules regarding 
liability upon failure to withhold under Sec. 1445(e) and this section, 
see Sec. 1.1445-1(e).

[T.D. 8321, 55 FR 50553, Dec. 7, 1990; 56 FR 4542, Feb. 5, 1991, as 
amended by T.D. 8647, 60 FR 66077, Dec. 21, 1995]



Sec. 1.1445-9T  Special rule for section 1034 nonrecognition (temporary).

    (a) Purpose and scope. This section provides a temporary regulation 
that, if and when adopted as a final regulation, will add a new 
paragraph (d)(2)(iii) to Sec. 1.1445-2. Paragraph (b) of this section 
would then appear as paragraph (d)(2)(iii) of Sec. 1.1445-2.
    (b) No particular form is required for a transferor's notice to a 
transferee that the transferor is not required to recognize gain or loss 
with respect to a transfer. The notice must be verified as true and 
signed under penalties of perjury by a responsible officer in the case 
of a corporation, by a general partner in the case of a partnership, and 
by a trustee or equivalent fiduciary in the case of a trust or estate. 
The following information must be set forth in paragraphs labeled to 
correspond with the designation set forth below:
    (1) A statement that the document submitted constitutes a notice of 
a

[[Page 199]]

nonrecognition transfer pursuant to the requirements of Sec. 1.1445-
2(d)(2);
    (2) The name, identifying number (if any), and home address (in the 
case of an individual) or office address (in the case of an entity) of 
the transferor submitting the notice;
    (3) A statement that the transferor is not required to recognize any 
gain or loss with respect to the transfer;
    (4) A brief description of the transfer;
    (5) A brief summary of the law and facts supporting the claim that 
recognition of gain or loss is not required with respect to the 
transfer; and
    (6) If the transferor claims nonrecognition on the sale or exchange 
of a principal residence under section 1034(a) and another principal 
residence in the United States has not been purchased as of the date of 
sale of the principal residence, either (i) a copy of an executed 
binding contract for purchase by the transferor of a further principal 
residence in the United States with a purchase price exceeding the 
adjusted sales price of the old principal residence or (ii) an affidavit 
by the transferor signed under penalties of perjury stating that the 
transferor intends to complete purchase of another principal residence 
within the United States with a purchase price exceeding the adjusted 
sales price of the old principal residence by April 15 of the year 
following the taxable year of the sale of the principal residence, and 
that the transferor is expected to continue to be employed or stationed 
in the United States for a period of two years from the sale of the 
principal residence. If the transferor's adjusted sales price of the old 
principal residence exceeds the transferor's cost of purchasing another 
principal residence in the United States, withholding shall be required 
at the rate of ten percent on the portion of the gross amount realized 
on the sale or exchange of the principal residence equal to such excess.
    (c) Effective Date. The rules of this section are effective with 
respect to sale of a principal residence after August 3, 1988.

[T.D. 8198, 53 FR 16230, May 5, 1988]



Sec. 1.1445-10T  Special rule for Foreign governments (temporary).

    (a) This section provides a temporary regulation that, if and when 
adopted as a final regulation will add a new paragraph (d)(6) to 
Sec. 1.1445-2. Paragraph (b) of this section would then appear as 
paragraph (d)(6) of Sec. 1.1445-2.
    (b) Foreign government--(1) As transferor. A foreign government is 
subject to U.S. taxation under section 897 on the disposition of a U.S. 
real property interest except to the extent specifically otherwise 
provided in the regulations issued under section 892. A foreign 
government that disposes of a U.S. real property interest that is not 
subject to taxation as specifically provided by the regulations under 
section 892 may present a notice of nonrecognition treatment pursuant to 
paragraph (d)(2) of this section that specifically cites the provision 
of such regulation, and thereby avoids withholding by the transferee of 
the property. A foreign government that disposes of a U.S. real property 
interest or the transferee of the property may obtain a withholding 
certificate from the Internal Revenue Service that confirms the 
applicability of section 892, but neither is required to do so. Rules 
concerning the issuance of withholding certificates are provided in 
Sec. 1.1445-3.
    (2) As transferee. A foreign government or international 
organization that acquires a U.S. real property interest is fully 
subject to section 1445 and the regulations thereunder. Therefore, such 
an entity is required to withhold tax upon the acquisition of a U.S. 
real property interest from a foreign person.
    (c) Effective date. The rules of this section shall be effective for 
transfers, exchanges, distributions and other dispositions occuring on 
or after June 6, 1988.

[T.D. 8198, 53 FR 16230, May 5, 1988]



Sec. 1.1445-11T  Special rules requiring withholding under Sec. 1.1445-5 (temporary).

    (a) Purpose and scope. This section provides temporary regulations 
that, if and when adopted as a final regulation will add certain new 
paragraphs within Sec. 1.1445-5 (b) and (c). The paragraphs of this 
section would then appear as set

[[Page 200]]

forth below. Paragraph (b) of this section would then appear as 
paragraph (b)(8)(v) of Sec. 1.1445-5. Paragraph (c) of this section 
would then appear as paragraph (c)(2)(i) of Sec. 1.1445-5. Paragraph (d) 
of this section would then appear as paragraph (g) of Sec. 1.1445-5.
    (b) Dispositions of interests in partnerships, trusts, and estates. 
The provisions of section 1445(e)(5), requiring withholding upon certain 
dispositions of interests in partnerships, trusts, and estates, that own 
directly or indirectly a U.S. real property interest shall apply to 
dispositions on or after the effective date of a later Treasury decision 
under section 897(g) of the Code except in the case of dispositions of 
interests in partnerships in which fifty percent of the value of the 
gross assets consist of U.S. real property interests and ninety percent 
or more of the value of the gross assets consist of U.S. real property 
interests plus any cash or cash equivalents. The provisions of section 
1445(e)(5), shall apply, however, to dispositions after June 6, 1988, of 
interests in partnerships in which fifty percent or more of the value of 
the gross assets consist of U.S. real property interests, and ninety 
percent or more of the value of the gross assets consist of U.S. real 
property interests plus any cash or cash equivalents. See paragraph (d) 
of this section.
    (c) Transactions covered elsewhere. No withholding is required under 
this paragraph (c) with respect to the distribution of a U.S. real 
property interest by a partnership, trust, or estate. Such distributions 
shall be subject to withholding under section 1445(e)(4) and paragraph 
(f) of this Sec. 1.1445-5 on the effective date of a later Treasury 
decision published under section 897(g) of the Code. No withholding is 
required at this time for distributions described in the preceding 
sentence. See paragraph (b)(8)(iv) of this Sec. 1.1445-5. No withholding 
is required under this paragraph with respect to the disposition of an 
interest in a trust, estate, or partnership except in the case of a 
partnership in which fifty percent or more of the value of the gross 
assets consist of U.S. real property interests, and ninety percent or 
more of the value of the gross assets consist of U.S. real property 
interests plus any cash or cash equivalents. See paragraph (b)(8)(v) of 
Sec. 1.1445-5. Withholding shall be required as provided in section 
1445(e)(5) and paragraph (g) of this section with respect to the 
disposition after June 6, 1988, of an interest in a partnership in which 
fifty percent or more of the value of the gross assets consist of U.S. 
real property interests, and ninety percent or more of the value of the 
gross assets consist of U.S. real property interests plus any cash or 
cash equivalents.
    (d) Dispositions of interests in partnerships, trusts or estates--
(1) Withholding required on disposition of certain partnership 
interests. Withholding is required under section 1445(e)(5) and this 
paragraph with respect to the disposition by a foreign partner of an 
interest in a domestic or foreign partnership in which fifty percent or 
more of the value of the gross assets consist of U.S. real property 
interests, and ninety percent or more of the value of the gross assets 
consist of U.S. real property interests plus any cash or cash 
equivalents. For purposes of this paragraph cash equivalents mean any 
asset readily convertible into cash (whether or not denominated in U.S. 
dollars), including, but not limited to, bank accounts, certificates of 
deposit, money market accounts, commercial paper, U.S. and foreign 
treasury obligations and bonds, corporate obligations and bonds, 
precious metals or commodities, and publicly traded instruments. The 
taxpayer on filing an income tax return for the year of the disposition 
may demonstrate the extent to which the gain on the disposition of the 
interest is not attributable to U.S. real property interests. A taxpayer 
is also permitted by Sec. 1.1445-3 to apply for a withholding 
certificate in instances where reduced withholding is approporiate.
    (2) Withholding not required--(i) Transferee receives statement that 
interest in partnership is not described in paragraph (d)(1). No 
withholding is required under paragraph (d)(1) of this section upon the 
disposition of a partnership interest otherwise described in that 
paragraph if the transferee is provided a statement, issued by the 
partnership and signed by a general partner under penalties of perjury 
no earlier than 30

[[Page 201]]

days before the transfer, certifying that fifty percent or more of the 
value of the gross assets does not consist of U.S. real property 
interests, or that ninety percent or more of the value of the gross 
assets of the partnership does not consist of U.S. real property 
interests plus cash or cash equivalents.
    (ii) Reliance on statement not permitted. A transferee is not 
entitled to rely upon a statement described in paragraph (d)(2)(i) of 
this section if, prior to or at the time of the transfer, the transferee 
either--
    (A) Has actual knowledge that the statement is false, or
    (B) Receives a notice, pursuant to Sec. 1.1445-4.

Such a transferee's withholding obligations shall apply as if the 
statement had never been given, and such a transferee may be held fully 
liable pursuant to Sec. 1.1445-1(e) for any failure to withhold.
    (iii) Belated notice of false statement. If, after the date of the 
transfer, a transferee receives notice that a statement provided under 
paragraph (d)(2)(i) of this section is false, then such transferee may 
rely on the statement only with respect to consideration that was paid 
prior to the receipt of the notice. Such a transferee is required to 
withhold a full 10 percent of the amount realized from the consideration 
that remains to be paid to the transferor. Thus, if 10 percent or more 
of the amount realized remains to be paid to the transferor, then the 
transferee is required to withhold and pay over the full 10 percent. The 
transferee must do so by withholding and paying over the entire amount 
of each successive payment of consideration to the transferor, until the 
full 10 percent of the amount realized has been withheld and paid over. 
Amounts so withheld must be reported and paid over by the 20th day 
following the date on which each such payment of consideration is made. 
A transferee that is subject to the rules of this Sec. 1.1445-
10T(d)(2)(iii) may not obtain a withholding certificate pursuant to 
Sec. 1.1445-3, but must instead withhold and pay over the amounts 
required by this paragraph.
    (e) Effective date. The rules of this section are effective for 
transactions after June 6, 1988.

[T.D. 8198, 53 FR 16231, May 5, 1988]

                         TAX-FREE COVENANT BONDS



Sec. 1.1451-1  Tax-free covenant bonds issued before January 1, 1934.

    (a) Rates of withholding--(1) Rate of 2 percent. Withholding of a 
tax equal to 2 percent is required in the case of interest upon bonds or 
other corporate obligations containing a tax-free covenant and issued 
before January 1, 1934, paid to an individual, a fiduciary, or a 
partnership, whether resident or nonresident, or to a nonresident 
foreign corporation, regardless of whether the liability assumed by the 
obligor is less than, equal to, or greater than 2 percent.
    (2) Rate of 30 percent. Notwithstanding subparagraph (1) of this 
paragraph, if the liability assumed by the obligor does not exceed 2 
percent of the interest, withholding is required at the rate of 30 
percent in the case of payments to a nonresident alien individual, a 
nonresident partnership composed in whole or in part of nonresident 
aliens, a nonresident foreign corporation, or an owner who is unknown to 
the withholding agent.
    (3) Obligations of resident payers. The rates of withholding 
specified in subparagraphs (1) and (2) of this paragraph are applicable 
to interest on such tax-free covenant bonds issued by a domestic 
corporation or by a resident foreign corporation.
    (4) Obligations of nonresident payers. A nonresident foreign 
corporation having a fiscal or paying agent in the United States is 
required to withhold a tax of 2 percent in the case of interest upon its 
tax-free covenant bonds issued before January 1, 1934, which is paid to 
an individual or fiduciary who is a citizen or resident of the United 
States, to a partnership any member of which is a citizen or resident, 
or to an unknown owner.
    (5) Interest from sources without the United States. Withholding is 
not required under section 1451 in the case of interest upon bonds or 
other corporate obligations issued before January 1,

[[Page 202]]

1934, and containing a tax-free covenant if the interest is not to be 
treated as income from sources within the United States and the payments 
are made to a nonresident alien, a partnership composed wholly of 
nonresident aliens, or a nonresident foreign corporation.
    (6) Tax treaties. The rates of tax to be withheld in accordance with 
this paragraph shall be reduced as may be provided by treaty with any 
country. See section 894 and Sec. 1.1441-6 relating to income subject to 
a reduced rate of, or an exemption from, income tax pursuant to an 
income tax convention.
    (b) Date of issue. The withholding provisions of section 1451 are 
applicable only to bonds, mortgages, or deeds of trust, or other similar 
obligations of a corporation which were issued before January 1, 1934, 
and which contain a tax-free covenant. For the purpose of section 1451, 
bonds, mortgages, or deeds of trust, or other similar obligations of a 
corporation, are issued when delivered. If a broker or other person acts 
as selling agent of the obligor, the obligation is issued when delivered 
by the agent to the purchaser. If a broker or other person purchases the 
obligation outright for the purpose of holding or reselling it, the 
obligation is issued when delivered to such broker or other person.
    (c) Extended maturity date. In cases where on or after January 1, 
1934, the maturity date of bonds or other obligations of a corporation 
is extended, the bonds or other obligations shall be considered to have 
been issued on or after January 1, 1934. The interest on such 
obligations is not subject to the withholding provisions of section 1451 
but falls within the class of interest described in section 1441. See 
paragraph (c)(5)(iii) of Sec. 1.1441-3.
    (d) Covenant in trust deed. Bonds issued under a trust deed 
containing a tax-free covenant are treated as if they contain such a 
covenant. If neither the bonds nor the trust deeds given by the obligor 
to secure them contained a tax-free covenant, but the original trust 
deeds were modified before January 1, 1934, by supplemental agreements 
containing a tax-free covenant executed by the obligor corporation and 
the trustee, the bonds issued before January 1, 1934, are subject to the 
provisions of section 1451, provided appropriate authority existed for 
the modification of the trust deeds in this manner. The authority must 
have been contained in the original trust deeds or actually secured from 
the bondholders.
    (e) Notation showing date of issue. In order that the date of issue 
of bonds, mortgages, deeds of trust, or other similar corporate 
obligations containing a tax-free covenant may be readily determined by 
the owner for the purpose of preparing the ownership certificates 
required by Sec. 1.1461-1, the issuing or debtor corporation shall 
indicate the date of issue by an appropriate notation, or use the phrase 
``issued on or after January 1, 1934,'' on each such obligation or in a 
statement accompanying the delivery of the obligation.
    (f) Effect of withholding on income taxes of bondholder and issuing 
corporation--(1) Federal tax. In the case of corporate bonds or other 
corporate obligations issued before January 1, 1934, and containing a 
tax-free covenant, the corporation paying a Federal tax, or any part of 
it, for someone else pursuant to its agreement is not entitled to deduct 
such payment from its gross income on any ground; nor shall the tax so 
paid be included in the gross income of the bondholder. The amount of 
the tax so paid may, nevertheless, be claimed by the bondholder in 
accordance with paragraph (a) of Sec. 1.1462-1 as a credit against the 
total amount of income tax due. See also section 32. The tax so paid by 
the corporation upon tax-free covenant bond interest payable to a 
domestic or resident fiduciary and allocable to any nonresident alien 
beneficiary under section 652 or 662 is allowable, pro rata, as a credit 
against:
    (i) The tax required to be withheld by the fiduciary in accordance 
with paragraph (f) of Sec. 1.1441-3 from the income of the beneficiary, 
and
    (ii) The total income tax computed in the return of the beneficiary, 
as indicated in paragraph (a) of Sec. 1.1462-1.
    (2) State taxes. In the case of corporate bonds or other obligations 
containing an appropriate tax-free covenant, the corporation paying for

[[Page 203]]

someone else, pursuant to its agreement, a State tax or any tax other 
than a Federal tax may deduct such payment as interest paid on 
indebtedness.
    (g) Alien resident of Puerto Rico. For purposes of this section the 
term ``nonresident alien individual'' includes an alien resident of 
Puerto Rico.
    (h) Other rules for withholding of tax under section 1451. The rules 
for withholding stated in paragraphs (c) (2) and (3), (f), and (g) of 
Sec. 1.1441-3 shall also apply for purposes of withholding the tax under 
this section.

[T.D. 6500, 25 FR 12076, Nov. 26, 1960, as amended by T.D. 7157, 36 FR 
25228, Dec. 30, 1971]



Sec. 1.1451-2  Exemptions from withholding under section 1451.

    (a) Claiming personal exemptions. Withholding under Sec. 1.1451-1 
from interest on bonds or other obligations of corporations issued 
before January 1, 1934, and containing a tax-free covenant shall not be 
required if there is filed with the withholding agent when presenting 
coupons for payment, or not later than February 1 of the following year, 
an ownership certificate on Form 1000 stating:
    (1) In the case of a citizen or resident of the United States, that 
his taxable income does not exceed his deductions for personal 
exemptions allowed under section 151; or
    (2) In the case of an estate or trust the fiduciary of which is a 
citizen or resident of the United States, that its taxable income does 
not exceed the deduction for the personal exemption allowed under 
section 642(b).
    (b) Claiming residence in United States. To claim residence in the 
United States for purposes of section 1451, see Sec. 1.1441-5.
    (c) Other exemptions. The exemptions allowed by paragraphs (d) and 
(h) of Sec. 1.1441-4 shall also apply for purposes of section 1451.

[T.D. 6500, 25 FR 12077, Nov. 26, 1960, as amended by T.D. 6908, 31 FR 
16774, Dec. 31, 1966]

                  APPLICATION OF WITHHOLDING PROVISIONS



Sec. 1.1461-1  Payment and returns of tax withheld.

    (a) Payment of withheld tax--(1) Deposits of tax. Every withholding 
agent who withholds tax pursuant to chapter 3 of the Internal Revenue 
Code (Code) and the regulations under such chapter shall deposit such 
amount of tax with an authorized financial institution as provided in 
Sec. 1.6302-2(a). If for any reason the total amount of tax required to 
be returned for any calendar year pursuant to paragraph (b) of this 
section has not been deposited pursuant to Sec. 1.6302-2, the 
withholding agent shall pay the balance of tax due for such year at such 
place as the Internal Revenue Service (IRS) shall specify. The tax shall 
be paid when filing the return required under paragraph (b)(1) of this 
section for such year, unless the IRS specifies otherwise.
    (2) Penalties for failure to pay tax. For penalties and additions to 
the tax for failure to timely pay the tax required to be withheld under 
chapter 3 of the Code, see sections 6656, 6672, and 7202 and the 
regulations under those sections.
    (b) Income tax return--(1) General rule. A withholding agent shall 
make an income tax return on Form 1042 (or such other form as the IRS 
may prescribe) for income paid during the preceding calendar year that 
the withholding agent is required to report on an information return on 
Form 1042-S (or such other form as the IRS may prescribe) under 
paragraph (c)(1) of this section. See section 6011 and Sec. 1.6011-1(c). 
The withholding agent must file the return on or before March 15 of the 
calendar year following the year in which the income was paid. The 
return must show the aggregate amount of income paid and tax withheld 
required to be reported on all the Forms 1042-S for the preceding 
calendar year by the withholding agent, in addition to such information 
as is required by the form and accompanying instructions. Withholding 
certificates or other statements or information provided to a 
withholding agent are not required to

[[Page 204]]

be attached to the return. A return must be filed under this paragraph 
(b)(1) even though no tax was required to be withheld during the 
preceding calendar year. The withholding agent must retain a copy of 
Form 1042 for the applicable statute of limitations on assessments and 
collection with respect to the amounts required to be reported on the 
Form 1042. See section 6501 and the regulations thereunder for the 
applicable statute of limitations. Adjustments to the total amount of 
tax withheld, as described in Sec. 1.1461-2, shall be stated on the 
return as prescribed by the form and accompanying instructions.
    (2) Amended returns. An amended return may be filed on a Form 1042 
or such other form as the IRS may prescribe. An amended return must 
include such information as the form or accompanying instructions shall 
require, including, with respect to any information that has changed 
from the time of the filing of the return, the information that was 
shown on the original return and the corrected information.
    (c) Information returns--(1) Filing requirement--(i) In general. A 
withholding agent (other than an individual who is not acting in the 
course of a trade or business with respect to a payment) must make an 
information return on Form 1042-S (or such other form as the IRS may 
prescribe) to report the amounts subject to reporting, as defined in 
paragraph (c)(2) of this section, that were paid during the preceding 
calendar year. Notwithstanding the preceding sentence, any person that 
withholds or is required to withhold an amount under sections 1441, 
1442, or 1443 must file a Form 1042-S for the payment withheld upon 
whether or not that person is engaged in a trade or business and whether 
or not the payment is an amount subject to reporting. A Form 1042-S 
shall be prepared for each recipient of an amount subject to reporting. 
The Form 1042-S shall be prepared in such manner as the form and 
accompanying instructions prescribe. One copy of the Form 1042-S shall 
be filed with the IRS on or before March 15 of the calendar year 
following the year in which the amount subject to reporting was paid. It 
shall be filed with a transmittal form as provided in the instructions 
to the Form 1042-S and to the transmittal form. Withholding 
certificates, documentary evidence, or other statements or documentation 
provided to a withholding agent are not required to be attached to the 
form. Another copy of the Form 1042-S must be furnished to the recipient 
for whom the form is prepared (or any other person, as required under 
this paragraph (c) or the instructions to the form) on or before March 
15 of the calendar year following the year in which the amount subject 
to reporting was paid. The withholding agent must retain a copy of each 
Form 1042-S for the statute of limitations on assessment and collection 
applicable to the Form 1042 to which the Form 1042-S relates.
    (ii) Recipient--(A) Defined. For purposes of this section, the term 
recipient means--
    (1) A beneficial owner as defined in Sec. 1.1441-1(c)(6), including 
a foreign estate or a foreign complex trust, as defined in Sec. 1.1441-
1(c)(25);
    (2) A qualified intermediary as defined in Sec. 1.1441-1(e)(5)(ii);
    (3) A withholding foreign partnership as defined in Sec. 1.1441-
5(c)(2) or a withholding foreign trust under Sec. 1.1441-5(e)(5)(v);
    (4) An authorized foreign agent as defined in Sec. 1.1441-7(c);
    (5) A U.S. branch that is treated as a U.S. person under 
Sec. 1.1441-1(b)(2)(iv)(A);
    (6) A nonwithholding foreign partnership or a foreign simple trust 
as defined in Sec. 1.1441-1(c)(24), but only to the extent the income is 
(or is treated as) effectively connected with the conduct of a trade or 
business in the United States by such entity;
    (7) A payee, as defined in Sec. 1.1441-1(b)(2) that is presumed to 
be a foreign person under the presumption rules of Sec. 1.1441-1(b)(3); 
1.1441-5(d) or (e)(6), or 1.6049-5(d); and
    (8) Any other person as required on Form 1042-S or the instructions 
to the form.
    (B) Persons that are not recipients. A recipient does not include--
    (1) A nonqualified intermediary;
    (2) A payment to a wholly-owned entity that is disregarded under 
Sec. 301.7701-

[[Page 205]]

2(c)(2) of this chapter as an entity separate from its owner;
    (3) A flow-through entity, as defined in Sec. 1.1441-1(c)(23) (to 
the extent it is receiving amounts subject to reporting other than 
income effectively connected with the conduct of a trade or business in 
the United States); and
    (4) A U.S. branch described in Sec. 1.1441-1(b)(2)(iv) that is not 
treated as a U.S. person under that section.
    (2) Amounts subject to reporting--(i) In general. Subject to the 
exceptions described in paragraph (c)(2)(ii) of this section, amounts 
subject to reporting on Form 1042-S are amounts paid to a foreign payee 
(including persons presumed to be foreign) that are amounts subject to 
withholding as defined in Sec. 1.1441-2(a). Amounts subject to reporting 
include amounts subject to withholding even if no amount is deducted and 
withheld from the payment because of a treaty or Internal Revenue Code 
exception to taxation or because an amount withheld was reimbursed to 
the payee under the adjustment procedures of Sec. 1.1461-2. In addition, 
amounts subject to reporting include any amounts paid to a foreign payee 
on which a withholding agent withheld an amount (either under chapter 3 
of the Internal Revenue Code or section 3406) whether or not the amount 
is subject to withholding. Amounts subject to reporting include, but are 
not limited to, the following items--
    (A) The entire amount of a corporate distribution (whether actual or 
deemed) irrespective of any estimate of the portion of the distribution 
that represents a taxable dividend;
    (B) Interest, including the portion of a notional principal contract 
payment that is characterized as interest. Interest shall also be 
reported on Form 1042-S if it is bank deposit interest paid to 
nonresident alien individuals as required under Sec. 1.6049-8;
    (C) Rents;
    (D) Royalties;
    (E) Compensation for dependent and independent personal services 
performed in the United States;
    (F) Annuities;
    (G) Pension distributions and other deferred income;
    (H) Gambling winnings that are not exempt from tax under section 
871(j);
    (I) Income from the cancellation of indebtedness unless the 
withholding agent is unrelated to the debtor and does not have knowledge 
of the facts that give rise to the payment (see Sec. 1.1441-2(d));
    (J) Amounts that are (or are presumed to be) effectively connected 
with the conduct of a trade or business in the United States (including 
deposit interest as defined in sections 871(i)(2)(A) and 881(d)) even if 
no withholding certificate is required to be furnished by the payee or 
beneficial owner. In the case of amounts paid on a notional principal 
contract described in Sec. 1.1441-4(a)(3) that are presumed to be 
effectively connected with the conduct of a trade or business in the 
United States, the amount required to be reported is limited to the 
amount of cash paid from the notional principal contract;
    (K) Scholarship, fellowship, or grant income and compensation for 
personal services that is not excludible from gross income under section 
117 (whether or not the taxable scholarship, fellowship, grant income, 
or compensation for personal services is exempt from tax under an income 
tax treaty) paid to foreign students, trainees, teachers, or 
researchers;
    (L) Amounts paid to foreign governments, international 
organizations, or the Bank for International Settlements, whether or not 
documentation must be provided; and
    (M) Original issue discount paid on the redemption of an OID 
obligation. The amount to be reported is the amount of OID includible in 
the gross income of the holder of the obligation, if known, or, if not 
known, the total amount of original issue discount determined as if the 
holder held the obligation from its original issuance. A withholding 
agent may determine the total amount of OID by using the most recently 
published ``List of Original Issue Discount Instruments,'' (Publication 
1212, available from the IRS Forms Distribution Centers).
    (ii) Exceptions to reporting. The amounts listed in this paragraph 
(c)(2)(ii) are not required to be reported on Form 1042-S--
    (A) Interest (including original issue discount) that is deposit 
interest under

[[Page 206]]

sections 871(i)(2)(A) and 881(d) and that is not effectively connected 
with the conduct of a trade or business in the United States, unless 
reporting is required under Sec. 1.6049-8 (regarding payments to certain 
foreign residents) or is interest that is effectively connected with the 
conduct of a trade or business in the United States;
    (B) Interest or original issue discount on certain short-term 
obligations, described in section 871(g)(1)(B) or 881(a)(3);
    (C) Interest paid on obligations sold between interest payment dates 
and the portion of the purchase price of an OID obligation that is sold 
or exchanged in a transaction other than a redemption, unless the sale 
or exchange is part of a plan, the principal purpose of which is to 
avoid tax and the withholding agent has actual knowledge or reason to 
know of such plan (see Sec. 1.1441-2(a)(5) and (6));
    (D) Any item required to be reported on a Form W-2, including an 
item required to be shown on Form W-2 solely by reason of Sec. 1.6041-2 
(relating to return of information for payments to employees) or 
Sec. 1.6052-1 (relating to information regarding payment of wages in the 
form of group-term life insurance);
    (E) Any item required to be reported on Form 1099, and such other 
forms as are prescribed pursuant to the information reporting provisions 
of sections 6041 through 6050P and the regulations under those sections;
    (F) Amounts paid on a notional principal contract described in 
Sec. 1.1441-4(a)(3)(i) that are not effectively connected with the 
conduct of a trade or business in the United States (or not treated as 
effectively connected pursuant to Sec. 1.1441-4(a)(3)(ii));
    (G) Amounts required to be reported on Form 8288 (U.S. Withholding 
Tax Return for Dispositions by Foreign Persons of U.S. Real Property 
Interests) or Form 8804 (Annual Return for Partnership Withholding Tax 
(section 1446)). A withholding agent that must report a distribution 
partly on a Form 8288 or 8804 and partly on a Form 1042-S may elect to 
report the entire amount on a Form 8288 or 8804;
    (H) Interest (including original issue discount) paid with respect 
to foreign-targeted registered obligations described in Sec. 1.871-
14(e)(2) to the extent the documentation requirements described in 
Sec. 1.871-14(e)(3) and (4) are required to be satisfied (taking into 
account the provisions of Sec. 1.871-14(e)(4)(ii), if applicable;
    (I) Interest on a foreign targeted bearer obligation (see 
Secs. 1.1441-1(b)(4)(i) and 1.1441-2(a));
    (J) Gain described in section 301(c)(3); and
    (K) Amounts described in Sec. 1.1441-1(b)(4)(xviii) (dealing with 
certain amounts paid by the U.S. government).
    (3) Required information. The information required to be furnished 
under this paragraph (c)(3) shall be based upon the information provided 
by or on behalf of the recipient of an amount subject to reporting (as 
corrected and supplemented based on the withholding agent's actual 
knowledge) or the presumption rules of Secs. 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 Form 1042-
S must include the following information, if applicable--
    (i) The name, address, and taxpayer identifying number of the 
withholding agent;
    (ii) A description of each category of income paid based on the 
income codes provided on the form (e.g., interest, dividends, royalties, 
etc.) and the aggregate amount in each category expressed in U.S. 
dollars;
    (iii) The rate of withholding applied or the basis for exempting the 
payment from withholding (based on exemption codes provided on the 
form);
    (iv) The name and address of the recipient;
    (v) The name and address of any nonqualified intermediary, flow-
through entity, or U.S. branch as described in Sec. 1.1441-1(b)(2)(iv) 
(other than a branch that is treated as a U.S. person) to which the 
payment was made;
    (vi) The taxpayer identifying number of the recipient if required 
under Sec. 1.1441-1(e)(4)(vii) or if actually known to the withholding 
agent making the return;
    (vii) The taxpayer identifying number of a nonqualified intermediary 
or flow-through entity (to the extent it is not a recipient) or other 
flow-through

[[Page 207]]

entity to the extent it is known to the withholding agent;
    (viii) The country (based on the country codes provided on the form) 
of the recipient and of any nonqualified intermediary or flow-through 
entity the name of which appears on the form; and
    (ix) Such information as the form or the instructions may require in 
addition to, or in lieu of, information required under this paragraph 
(c)(3).
    (4) Method of reporting--(i) Payments by U.S. withholding agents to 
recipients. A withholding agent that is a U.S. person (other than a 
foreign branch of a U.S. person that is a qualified intermediary as 
defined in Sec. 1.1441-1(e)(5)(ii)) and that makes payments of amounts 
subject to reporting on Form 1042-S must file a separate Form 1042-S for 
each recipient who receives such amount. For purposes of this paragraph 
(c)(4), a U.S. person includes a U.S. branch described in Sec. 1.1441-
1(e)(2)(iv)(A) or (E) that agrees to be treated as a U.S. person. Except 
as may otherwise be required on Form 1042-S or the instructions to the 
form, only payments for which the income code, exemption code, 
withholding rate and recipient code are the same may be reported on a 
single Form 1042-S. See paragraph (c)(4)(ii) of this section for 
reporting of payments made to a person that is not a recipient.
    (A) Payments to beneficial owners. If a U.S. withholding agent makes 
a payment directly to a beneficial owner it must complete Form 1042-S 
treating the beneficial owner as the recipient. Under the grace period 
rule of Sec. 1.1441-1(b)(3)(iv), a U.S. withholding agent may, under 
certain circumstances, treat a payee as a foreign person while the 
withholding agent awaits a valid withholding certificate. A U.S. 
withholding agent who relies on the grace period rule to treat a payee 
as a foreign person must file a Form 1042-S to report all payments on 
Form 1042-S during the period that person was presumed to be foreign 
even if that person is later determined to be a U.S. person based on 
appropriate documentation or is presumed to be a U.S. person after the 
grace period ends. In the case of joint owners, a withholding agent may 
provide a single Form 1042-S made out to the owner whose status the U.S. 
withholding agent relied upon to determine the applicable rate of 
withholding. If, however, any one of the owners requests its own Form 
1042-S, the withholding agent must furnish a Form 1042-S to the person 
who requests it. If more than one Form 1042-S is issued for a single 
payment, the aggregate amount paid and tax withheld that is reported on 
all Forms 1042-S cannot exceed the total amounts paid to joint owners 
and the tax withheld thereon.
    (B) Payments to a qualified intermediary, a withholding foreign 
partnership, or a withholding foreign trust. A U.S. withholding agent 
that makes payments to a qualified intermediary (whether or not the 
qualified intermediary assumes primary withholding responsibility), a 
withholding foreign partnership, or a withholding foreign trust shall 
complete Forms 1042-S treating the qualified intermediary or withholding 
foreign partnership as the recipient. The U.S. withholding agent must 
complete a separate Form 1042-S for each withholding rate pool. A 
withholding rate pool is a payment of a single type of income 
(determined by the income codes on Form 1042-S) that is subject to a 
single rate of withholding. A qualified intermediary that does not 
assume primary withholding responsibility on all payments it receives 
provides information regarding the proportions of income subject to a 
particular withholding rate to the withholding agent on a withholding 
statement associated with a qualified intermediary withholding 
certificate. A qualified intermediary may provide a U.S. withholding 
agent with information regarding withholding rate pools for U.S. non-
exempt recipients (as defined under Sec. 1.1441-1(c)(21)). Amounts paid 
with respect to such withholding rate pools must be reported on Form 
1099 completed for each U.S. non-exempt recipient to the extent they are 
subject to Form 1099 reporting. These amounts must not be reported on 
Form 1042-S. In addition, the qualified intermediary may provide the 
U.S. withholding agent information regarding withholding rate pools for 
U.S. persons that are exempt recipients as defined

[[Page 208]]

under Sec. 1.1441-1(c)(20). If such information is provided, a U.S. 
withholding agent should not report such withholding rate pools on Form 
1042-S.
    (C) Amounts paid to U.S. branches treated as U.S. persons. A U.S. 
withholding agent making a payment to a U.S. branch of a foreign person 
described in Sec. 1.1441-1(b)(2)(iv) shall complete Form 1042-S as 
follows--
    (1) If the branch has provided the U.S. withholding agent with a 
withholding certificate that evidences its agreement with the 
withholding agent to be treated as a U.S. person, the U.S. withholding 
agent files 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 certificate that transmits information regarding beneficial 
owners, qualified intermediaries, withholding foreign partnerships, or 
other recipients, the U.S. withholding agent must complete a separate 
Form 1042-S for each recipient whose documentation is associated with 
the U.S. branch's withholding certificate; or
    (3) If the U.S. withholding agent cannot reliably associate a 
payment with a valid withholding certificate from the U.S. branch, it 
shall treat the U.S. branch as the recipient and report the income as 
effectively connected with the conduct of a trade or business in the 
United States.
    (D) Amounts paid to an authorized foreign agent. If a U.S. 
withholding agent makes a payment to an authorized foreign agent, the 
withholding agent files Forms 1042-S treating the authorized foreign 
agent as the recipient, provided that the authorized foreign agent 
reports the payments on Forms 1042-S to each recipient to which it makes 
payments. If the authorized foreign agent fails to report the amounts 
paid on Forms 1042-S for each recipient to which the payment is made, 
the U.S. withholding agent remains responsible for such reporting.
    (E) Dual Claims. A U.S. withholding agent may make a payment to a 
foreign entity that is simultaneously claiming a reduced rate of tax on 
its own behalf for a portion of the payment and a reduced rate on behalf 
of persons in their capacity as interest holders in that entity on the 
remaining portion. See Sec. 1.1441-6(b)(2)(iii). If the claims are 
consistent and the withholding agent accepts the multiple claims, the 
withholding agent must file a separate Form 1042-S for those payments 
for which the entity is treated as the beneficial owner and Forms 1042-S 
for each of the interest holder in the entity for which the interest 
holder is treated as the recipient. For those payments for which the 
interest holder in an entity is treated as the recipient, the U.S. 
withholding agent shall prepare the Form 1042-S in the same manner as a 
payment made to a nonqualified intermediary or flow-through entity as 
set forth in paragraph (c)(4)(ii) of this section. If the claims are 
consistent but the withholding agent has not chosen to accept the 
multiple claims, or if the claims are inconsistent, the withholding 
agent must file a separate Form 1042-S for the person or persons it has 
chosen to treat as the recipients.
    (ii) Payments made by U.S. withholding agents to persons that are 
not recipients--(A) Amounts paid to a nonqualified intermediary, a flow-
through entity, and certain U.S. branches. If a U.S. withholding agent 
makes a payment to a nonqualified intermediary, a flow-through entity, 
or a U.S. branch described in Sec. 1.1441-1(b)(2)(iv) (other than a 
branch that agrees to be treated as a U.S. person), it must complete a 
separate Form 1042-S for each recipient to the extent the withholding 
agent can reliably associate a payment with valid documentation (within 
the meaning of Sec. 1.1441-1(b)(2)(vii)) from the recipient which is 
associated with the withholding certificate provided by the nonqualified 
intermediary, flow-through entity, or U.S. branch. If a payment is made 
through tiers of nonqualified intermediaries or flow-through entities, 
the withholding agent must nevertheless complete Form 1042-S for the 
recipients to the extent it can reliably associate the payment with 
documentation from the recipients. A withholding agent that is 
completing a Form 1042-S for a recipient that receives a payment through 
a nonqualified intermediary, a flow-through entity, or a U.S. branch 
must include on the Form 1042-S the name of

[[Page 209]]

the nonqualified intermediary or flow-through entity from which the 
recipient directly receives the payment. If a U.S. withholding agent 
cannot reliably associate the payment, or any portion of the payment, 
with valid documentation from a recipient either because no such 
documentation has been provided or because the nonqualified 
intermediary, flow-through entity, or U.S. branch has failed to provide 
sufficient allocation information so that the withholding agent can 
associate the payment, or any portion thereof, with valid documentation, 
then the withholding agent must report the payments as made to an 
unknown recipient in accordance with the appropriate presumption rules 
for that payment. Thus, if under the presumption rules the payment is 
presumed to be made to a foreign person, the withholding agent must 
generally withhold 30 percent of the payment and report the payment on 
Form 1042-S made out to an unknown recipient and shall also include the 
name of the nonqualified intermediary or flow-through entity that 
received the payment on behalf of the unknown recipient. If, however, 
the recipient is presumed to be a U.S. non-exempt recipient (as defined 
in Sec. 1.1441-1(c)(21)), the withholding agent must withhold on the 
payment as required under section 3406 and report the payment as made to 
an unknown recipient on the appropriate Form 1099 as required under 
chapter 61 of the Internal Revenue Code.
    (B) Disregarded entities. If a U.S. withholding agent makes a 
payment to a disregarded entity but receives a valid withholding 
certificate or other documentary evidence from a foreign person that is 
the single owner of a disregarded entity, the withholding agent must 
file a Form 1042-S treating the foreign single owner as the recipient. 
The taxpayer identifying number on the Form 1042-S, if required, must be 
the foreign single owner's TIN.
    (iii) Reporting by qualified intermediaries, withholding foreign 
partnerships, and withholding foreign trusts. A qualified intermediary, 
a withholding foreign partnership, and a withholding foreign trust shall 
report payments on Form 1042-S as provided in their agreements with the 
IRS and the instructions to the form.
    (iv) Reporting by a nonqualified intermediary, flow-through entity, 
and certain U.S. branches. A nonqualified intermediary, flow-through 
entity, or U.S. branch described in Sec. 1.1441-1(e)(2)(iv) (other than 
a U.S. branch that is treated as a U.S. person) is a withholding agent 
and must file Forms 1042-S for amounts paid to recipients in the same 
manner as a U.S. withholding agent. A Form 1042-S will not be required, 
however, if another withholding agent has reported the same amount to 
the same recipient for which the nonqualified intermediary, flow-through 
entity, or U.S. branch would be required to file a return and the entire 
amount that should be withheld from such payment has been withheld. A 
nonqualified intermediary, flow-through entity, or U.S. branch must 
report payments made to recipients to the extent it has failed to 
provide the appropriate documentation to another withholding agent 
together with the information required for that withholding agent to 
reliably associate the payment with the recipient documentation or to 
the extent it knows, or has reason to know, that less than the required 
amount has been withheld. A nonqualified intermediary or flow-through 
entity that is required to report a payment on Form 1042-S must follow 
the same rules as apply to a U.S. withholding agent under paragraph 
(c)(4)(i) and (ii) of this section.
    (v) Pro rata reporting for allocation failures. If a nonqualified 
intermediary, flow-through entity, or U.S. branch described in 
Sec. 1.1441-1(b)(2)(iv) (other than a branch treated as a U.S. person) 
that uses the alternative procedures of Sec. 1.1441-1(e)(3)(iv)(D) fails 
to provide information sufficient to allocate the amount subject to 
reporting paid to a withholding rate pool to the payees identified for 
that pool, then the withholding agent shall report the payment in 
accordance with the rule provided in Sec. 1.1441-1(e)(3)(iv)(D)(6).
    (vi) Other withholding agents. Any person that is a withholding 
agent not described in paragraph (c)(4)(i), (iii), or (iv) of this 
section (e.g., a foreign person that is not a qualified intermediary, 
flow-through entity, or U.S.

[[Page 210]]

branch) shall file Form 1042-S in the same manner as a U.S. withholding 
agent and in accordance with the instructions to the form.
    (5) Magnetic media reporting. A withholding agent that makes 250 or 
more Form 1042-S information returns for a taxable year must file Form 
1042-S returns on magnetic media. See Sec. 301.6011-2 of this chapter 
for requirements applicable to a withholding agent that files Forms 
1042-S with the IRS on magnetic media and publications of the IRS 
relating to magnetic media filing.
    (d) Report of taxpayer identifying numbers. When so required under 
procedures that the IRS may prescribe in published guidance (see 
Sec. 601.601(d)(2) of this chapter), a withholding agent must attach to 
the Form 1042 a list of all the taxpayer identifying numbers (and 
corresponding names) that have been furnished to the withholding agent 
and upon which the withholding agent has relied to grant a reduced rate 
of withholding and that are not otherwise required to be reported on a 
Form 1042-S under the provisions of this section.
    (e) Indemnification of withholding agent. A withholding agent is 
indemnified against the claims and demands of any person for the amount 
of any tax it deducts and withholds in accordance with the provisions of 
chapter 3 of the Code and the regulations under that chapter. A 
withholding agent that withholds based on a reasonable belief that such 
withholding is required under chapter 3 of the Code and the regulations 
under that chapter is treated for purposes of section 1461 and this 
paragraph (e) as having withheld tax in accordance with the provisions 
of chapter 3 of the Code and the regulations under that chapter. In 
addition, a withholding agent is indemnified against the claims and 
demands of any person for the amount of any payments made in accordance 
with the grace period provisions set forth in Sec. 1.1441-1(b)(3)(iv). 
This paragraph (e) does not apply to relieve a withholding agent from 
tax liability under chapter 3 of the Code or the regulations under that 
chapter.
    (f) Amounts paid not constituting gross income. Any amount withheld 
in accordance with Sec. 1.1441-3 shall be reported and paid in 
accordance with this section, even though the amount paid to the 
beneficial owner may not constitute gross income in whole or in part. 
For this purpose, a reference in this section and Sec. 1.1461-2 to an 
amount shall, where appropriate, be deemed to refer to the amount 
subject to withholding under Sec. 1.1441-3.
    (g) Extensions of time to file Forms 1042 and 1042-S. The IRS may 
grant an extension of time in which to file a Form 1042 or a Form 1042-
S. Form 2758, Application for Extension of Time to File Certain Excise, 
Income, Information, and Other Returns (or such other form as the IRS 
may prescribe), must be used to request an extension of time for a Form 
1042. Form 8809, Request for Extension of Time to File Information 
Returns (or such other form as the IRS may prescribe) must be used to 
request an extension of time for a Form 1042-S. The request must contain 
a statement of the reasons for requesting the extension and such other 
information as the forms or instructions may require. It must be mailed 
or delivered not later than March 15 of the year following the end of 
the calendar year for which the return will be filed.
    (h) Penalties. For penalties and additions to the tax for failure to 
file returns or furnish statements in accordance with this section, see 
sections 6651, 6662, 6663, 6721, 6722, 6723, 6724(c), 7201, 7203, and 
the regulations under those sections.
    (i) Effective date. This section shall apply to returns required for 
payments made after December 31, 2000.

[T.D. 8734, 62 FR 53467, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999; T.D. 8881, 
65 FR 32201, 32212, May 22, 2000; 66 FR 18189, Apr. 6, 2001; T.D. 8952, 
66 FR 33831, June 26, 2001]



Sec. 1.1461-2  Adjustments for overwithholding or underwithholding of tax.

    (a) Adjustments of overwithheld tax--(1) In general. A withholding 
agent that has overwithheld under chapter 3 of the Internal Revenue Code 
(Code) and made a deposit of the tax as provided in Sec. 1.6302-2(a) may 
adjust the overwithheld amount either pursuant to the reimbursement 
procedure described in

[[Page 211]]

paragraph (a)(2) of this section or pursuant to the set-off procedure 
described in paragraph (a)(3) of this section. Adjustments under this 
paragraph (a) may only be made within the time prescribed under 
paragraph (a) (2) or (3) of this section. After such time, a refund of 
the amount overwithheld can only be claimed by the beneficial owner with 
the Internal Revenue Service (IRS) pursuant to the procedures described 
in chapter 65 of the Code. For purposes of this section, the term 
overwithholding means any amount actually withheld (determined before 
application of the adjustment procedures under this section) from an 
item of income pursuant to chapter 3 of the Code or the regulations 
thereunder in excess of the actual tax liability due, regardless of 
whether such overwithholding was in error or appeared correct at the 
time it occurred.
    (2) Reimbursement of tax--(i) General rule. Under the reimbursement 
procedure, the withholding agent repays the beneficial owner or payee 
for the amount overwithheld. In such a case, the withholding agent may 
reimburse itself by reducing, by the amount of tax actually repaid to 
the beneficial owner or payee, the amount of any deposit of tax made by 
the withholding agent under Sec. 1.6302-2(a)(1)(iii) for any subsequent 
payment period occurring before the end of the calendar year following 
the calendar year of overwithholding. Any such reduction that occurs for 
a payment period in the calendar year following the calendar year of 
overwithholding shall be allowed only if--
    (A) The withholding agent states, on a timely filed (not including 
extensions) Form 1042-S for the calendar year of overwithholding, the 
amount of tax withheld and the amount of any actual repayment; and
    (B) The withholding agent states on a timely filed (not including 
extensions) Form 1042 for the calendar year of overwithholding, that the 
filing of the Form 1042 constitutes a claim for credit in accordance 
with Sec. 1.6414-1.
    (ii) Record maintenance. If the beneficial owner is repaid an amount 
of withholding tax under the provisions of this paragraph (a)(2), the 
withholding agent shall keep as part of its records a receipt showing 
the date and amount of repayment and the withholding agent must provide 
a copy of such receipt to the beneficial owner. For this purpose, a 
canceled check or an entry in a statement is sufficient provided that 
the check or statement contains a specific notation that it is a refund 
of tax overwithheld.
    (3) Set-offs. Under the set-off procedure, the withholding agent may 
repay the beneficial owner or payee by applying the amount overwithheld 
against any amount which otherwise would be required under chapter 3 of 
the Code or the regulations thereunder to be withheld from income paid 
by the withholding agent to such person before the earlier of the due 
date (without regard to extensions) for filing the Form 1042-S for the 
calendar year of overwithholding or the date that the Form 1042-S is 
actually filed with the IRS. For purposes of making a return on Form 
1042 or 1042-S (or an amended form) for the calendar year of 
overwithholding and for purposes of making a deposit of the amount 
withheld, the reduced amount shall be considered the amount required to 
be withheld from such income under chapter 3 of the Code and the 
regulations thereunder.
    (4) Examples. The principles of this paragraph (a) are illustrated 
by the following examples:

    Example 1. (i) N is a nonresident alien individual who is a resident 
of the United Kingdom. In December 2001, a domestic corporation C pays a 
dividend of $100 to N, at which time C withholds $30 and remits the 
balance of $70 to N. On February 10, 2002, prior to the time that C 
files its Form 1042, N furnishes a valid Form W-8 described in 
Sec. 1.1441-1(e)(2)(i) upon which C may rely to reduce the rate of 
withholding to 15 percent under the provisions of the U.S.-U.K. tax 
treaty. Consequently, N advises C that its tax liability is only $15 and 
not $30 and requests reimbursement of $15. Although C has already 
deposited the $30 that was withheld, as required by Sec. 1.6302-
2(a)(1)(iv), C repays N in the amount of $15.
    (ii) During 2001, C makes no other payments upon which tax is 
required to be withheld under chapter 3 of the Code; accordingly, its 
return on Form 1042 for such year, which is filed on March 15, 2002, 
shows total tax withheld of $30, an adjusted total tax withheld of $15, 
and $30 previously paid for such year. Pursuant to Sec. 1.6414-1(b), C 
claims a credit for the overpayment of $15 shown on

[[Page 212]]

the Form 1042 for 2001. Accordingly, it is permitted to reduce by $15 
any deposit required by Sec. 1.6302-2 to be made of tax withheld during 
the calendar year 2002. The Form 1042-S required to be filed by C with 
respect to the dividend of $100 paid to N in 2001 is required to show 
tax withheld of $30 and tax released of $15.
    Example 2. The facts are the same as in Example 1. In addition, 
during 2002, C makes payments to N upon which it is required to withhold 
$200 under chapter 3 of the Code, all of which is withheld in June 2002. 
Pursuant to Sec. 1.6302-2(a)(1)(iii), C deposits the amount of $185 on 
July 15, 2002 ($200 less the $15 for which credit is claimed on the Form 
1042 for 2001). On March 15, 2003, C Corporation files its return on 
Form 1042 for calendar year 2002, which shows total tax withheld of 
$200, $185 previously deposited by C, and $15 allowable credit.
    Example 3. The facts are the same as in Example 1. Under 
Sec. 1.6032-2(a)(1)(ii)), C is required to deposit on a quarter-monthly 
basis the tax withheld under chapter 3 of the Code. C withholds tax of 
$100 between February 8 and February 15, 2002, and deposits $75 
[($100x90 percent) less $15] of the withheld tax within 3 banking days 
after February 15, 2002, and by depositing $10 [($100-$15) less $75] 
within 3 banking days after March 15, 2002.

    (b) Withholding of additional tax when underwithholding occurs. A 
withholding agent may withhold from future payments made to a beneficial 
owner the tax that should have been withheld from previous payments to 
such beneficial owner. In the alternative, the withholding agent may 
satisfy the tax from property that it holds in custody for the 
beneficial owner or property over which it has control. Such additional 
withholding or satisfaction of the tax owed may only be made before the 
date that the Form 1042 is required to be filed (not including 
extensions) for the calendar year in which the underwithholding 
occurred. See Sec. 1.6302-2 for making deposits of tax or Sec. 1.1461-
1(a) for making payment of the balance due for a calendar year.
    (c) Definition. For purposes of this section, the term payment 
period means the period for which the withholding agent is required by 
Sec. 1.6302-2(a)(1) to make a deposit of tax withheld under chapter 3 of 
the Code.
    (d) Effective date. This section applies to payments made after 
December 31, 2000.

[T.D. 8734, 62 FR 53470, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999]



Sec. 1.1462-1  Withheld tax as credit to recipient of income.

    (a) Creditable tax. The entire amount of the income from which the 
tax is required to be withheld (including amounts calculated under the 
gross-up formula in Sec. 1.1441-3(f)(1)) shall be included in gross 
income in the return required to be made by the beneficial owner of the 
income, without deduction for the amount required to be or actually 
withheld, but the amount of tax actually withheld shall be allowed as a 
credit against the total income tax computed in the beneficial owner's 
return.
    (b) Amounts paid to persons who are not the beneficial owner. 
Amounts withheld at source under chapter 3 of the Internal Revenue Code 
(Code) on payments to a fiduciary, partnership, or intermediary is 
deemed to have been paid by the taxpayer ultimately liable for the tax 
upon such income. Thus, for example, if a beneficiary of a trust is 
subject to the taxes imposed by section 1, 2, 3, or 11 upon any portion 
of the income received from a foreign trust, the part of any amount 
withheld at source which is properly allocable to the income so taxed to 
such beneficiary shall be credited against the amount of the income tax 
computed upon the beneficiary's return, and any excess shall be 
refunded. Further, if a partnership withholds an amount under chapter 3 
of the Code with respect to the distributive share of a partner that is 
a partnership or with respect to the distributive share of partners in 
an upper tier partnership, such amount is deemed to have been withheld 
by the upper tier partnership.
    (c) Effective date. This section applies to payments made after 
December 31, 2000.

[T.D. 8734, 62 FR 53471, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998]

[[Page 213]]



Sec. 1.1463-1  Tax paid by recipient of income.

    (a) Tax paid. If the tax required to be withheld under chapter 3 of 
the Internal Revenue Code is paid by the beneficial owner of the income 
or by the withholding agent, it shall not be re-collected from the 
other, regardless of the original liability therefor. However, this 
section does not relieve the person that did not withhold tax from 
liability for interest or any penalties or additions to tax otherwise 
applicable. See Sec. 1.1441-7(b) for additional applicable rules.
    (b) Effective date. This section applies to failures to withhold 
occurring after December 31, 2000.

[T.D. 8734, 62 FR 53471, Oct. 14, 1997, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998; T.D. 8856, 64 FR 73412, Dec. 30, 1999]



Sec. 1.1464-1  Refunds or credits.

    (a) In general. The refund or credit under chapter 65 of the Code of 
an overpayment of tax which has actually been withheld at the source 
under chapter 3 of the Code shall be made to the taxpayer from whose 
income the amount of such tax was in fact withheld. To the extent that 
the overpayment under chapter 3 was not in fact withheld at the source, 
but was paid, by the withholding agent the refund or credit under 
chapter 65 of the overpayment shall be made to the withholding agent. 
Thus, where a debtor corporation assumes liability pursuant to its tax-
free covenant for the tax required to be withheld under chapter 3 upon 
interest and pays the tax in behalf of its bondholder, and it can be 
shown that the bondholder is not in fact liable for any tax, the 
overpayment of tax shall be credited or refunded to the withholding 
agent in accordance with chapter 65 since the tax was not actually 
deducted and withheld from the interest paid to the bondholder. In 
further illustration, where a withholding agent who is required by 
chapter 3 to withhold $300 tax from rents paid to a nonresident alien 
individual mistakenly withholds $320 and mistakenly pays $350 as 
internal revenue tax, the amount of $30 shall be credited or refunded to 
the withholding agent in accordance with chapter 65 and the amount of 
$20 shall be credited or refunded in accordance with such chapter to the 
person from whose income such amount has been withheld.
    (b) Tax repaid to payee. For purposes of this section and 
Sec. 1.6414-1, any amount of tax withheld under chapter 3 of the Code, 
which, pursuant to paragraph (a)(1) of Sec. 1.1461-2, is repaid by the 
withholding agent to the person from whose income such amount was 
erroneously withheld shall be considered as tax which, within the 
meaning of sections 1464 and 6414, was not actually withheld by the 
withholding agent.

[T.D. 6922, 32 FR 8713, June 17, 1967, as amended by T.D. 8804, 63 FR 
72188, Dec. 31, 1998]

    Rules Applicable to Recovery of Excessive Profits on Government 
                                Contracts

          RECOVERY OF EXCESSIVE PROFITS ON GOVERNMENT CONTRACTS



Sec. 1.1471-1  Recovery of excessive profits on government contracts.

    The inclusion of the statutory provisions of section 1471 in this 
part does not supersede the provisions of 26 CFR (1939) part 17 
(Treasury Decision 4906) and 26 CFR (1939) part 16 (Treasury Decision 
4909) as made applicable to section 1471 by Treasury Decision 6091 (19 
FR 5167, C.B. 1954-2, 47).

[T.D. 6500, 25 FR 12081, Nov. 26, 1960]

    Editorial Note: For the convenience of the user, the text of parts 
16 and 17 (not entirely superseded) of 26 CFR (1939) referred to above 
is set forth below:

         Part 16--Excess Profits on Army Contracts for Aircraft

  regulations under section 14 of the act of april 3, 1939, and other 
                               provisions

    Authority: Sections 16.1 to 16.18 issued under 52 Stat. 467; 26 
U.S.C. 3791. Interpret or apply sec. 3, 48 Stat. 505, as amended, sec. 
14, 53 Stat. 560; 34 U.S.C. 496, 10 U.S.C. 311, 312.2206

    Source: Sections 16.1 to 16.18 contained in T.D. 4909, 4 FR 2733, 
July 1, 1939, except as otherwise noted.
    Sec. 16.1 Definitions. As used in the regulations in this part the 
term:

[[Page 214]]

    (a) ``Act'' means the act of April 3, 1939 (53 Stat. 560; 10 U.S.C. 
311, 312, 34 U.S.C. 496), together with the applicable provisions of 
section 3 of the act of March 27, 1934, 48 Stat. 505; 34 U.S.C. 496, as 
amended by the act of June 25, 1936, 49 Stat. 1926; 34 U.S.C., Sup. IV, 
496, and as further amended by the act of April 3, 1939 (53 Stat. 560; 
34 U.S.C. 496).
    (b) ``Person'' includes an individual, a corporation, a partnership, 
a trust or estate, a joint-stock company, an association, or a 
syndicate, group, pool, joint venture or other unincorporated 
organization or group, through or by means of which any business, 
financial operation or venture is carried on.
    (c) ``Contract'' means an agreement made by authority of the 
Secretary of the Army for the construction or manufacture of any 
complete aircraft or any portion thereof for the Army.
    (d) ``Contractor'' means a person entering into a direct contract 
with the Secretary of the Army or his duly authorized representative.
    (e) ``Subcontract'' means an agreement entered into by one person 
with another person for the construction or manufacture of any complete 
aircraft or any portion thereof for the Army, the prime contract for 
such aircraft or portion thereof having been entered into between a 
contractor and the Secretary of the Army or his duly authorized 
representative.
    (f) ``Subcontractor'' means any person other than a contractor 
entering into a subcontract.
    (g) ``Contracting party'' means a contractor or subcontractor as the 
case may be.
    (h) ``Contract price'' or ``total contract price'' means the amount 
or total amount to be received under a contract or subcontract as the 
case may be.
    (i) ``Income-taxable year'' means the calendar year, the fiscal year 
ending during such calendar year, or the fractional part of such 
calendar or fiscal year, upon the basis of which the contracting party's 
net income is computed and for which its income tax returns are made for 
Federal income tax purposes.
    Sec. 16.2 Contracts and subcontracts under which excess profit 
liability may be incurred. Except as otherwise provided with respect to 
contracts or subcontracts for certain scientific equipment (see 
Sec. 16.3), every contract awarded for an amount exceeding $10,000 and 
entered into after the enactment of the act of April 3, 1939 for the 
construction or manufacture of any complete aircraft or any portion 
thereof for the Army, is subject to the provisions of the act relating 
to excess profit liability. Any subcontract made with respect to such a 
contract and involving an amount in excess of $10,000 is also within the 
scope of the act. If a contracting party places orders with another 
party, aggregating an amount in excess of $10,000, for articles or 
materials which constitute a part of the cost of performing the contract 
or subcontract, the placing of such orders shall constitute a 
subcontract within the scope of the act, unless it is clearly shown that 
each of the orders involving $10,000 or less is a bona fide separate and 
distinct subcontract and not a subdivision made for the purpose of 
evading the provisions of the act.
    Sec. 16.3 Contracts or subcontracts for scientific equipment. No 
excess profit liability is incurred upon a contract or subcontract 
entered into after the enactment of the act of April 3, 1939, if at the 
time or prior to the time such contract or subcontract is made it is 
designated by the Secretary of the Army as being exempt under the 
provisions of the act pertaining to scientific equipment used for 
communication, target detection, navigation, and fire control.
    Sec. 16.4 Completion of contract defined. The date of delivery of 
the aircraft or portion thereof covered by the contract or subcontract 
shall be considered the date of completion of the contract or 
subcontract unless otherwise determined jointly by the Secretary of the 
Army and the Secretary of the Treasury or their duly authorized 
representatives. Except as otherwise provided in the preceding sentence, 
the replacement of defective parts or delivered articles or the 
performance of other guarantee work in respect of such articles will not 
operate to extend the date of completion. As to the treatment of the 
cost of such work as a cost of performing a contract or subcontract, see 
Sec. 16.8(h). As to a refund in case of adjustment due to any 
subsequently incurred additional costs, see Sec. 16.18. If a contract or 
subcontract is at any time cancelled or terminated, it is completed at 
the time of the cancellation or termination.
    Sec. 16.5 Manner of determining liability. (a) The first step in the 
determination of the excess profit to be paid to the United States by a 
contracting party with respect to contracts and subcontracts completed 
within an income-taxable year is to ascertain the total contract prices 
of all contracts and subcontracts completed by the contracting party 
within the income-taxable year. As to total contract prices, see 
Sec. 16.7.
    (b) The second step is to ascertain the cost of performing such 
contracts and subcontracts and to deduct such cost from the total 
contract prices of such contracts and subcontracts as computed in the 
first step. See Sec. 16.8. The amount remaining after such subtraction 
is the amount of net profit or net loss upon the contracts and 
subcontracts completed within the income-taxable year.
    (c) The third step, in case there is a net profit upon such 
contracts and subcontracts, is to subtract from the amount of such net 
profit as computed in the second step the sum of:

[[Page 215]]

    (1) An amount equal to 12 percent of the total contract prices of 
the contracts and subcontracts completed within the income- taxable 
year;
    (2) The amount of any net loss allowable as a credit in determining 
the excess profit for the income-taxable year (see Sec. 16.9); and
    (3) The amount of any deficiency in profit allowable as a credit in 
determining the excess profit for the income-taxable year (see 
Sec. 16.9). The amount remaining after such subtraction is the amount of 
excess profit for the income-taxable year.
    (d) The fourth step is to ascertain the amount of credit allowed for 
Federal income taxes paid or remaining to be paid upon the amount of 
such excess profit (see Sec. 16.10) and then subtract from the amount of 
such excess profit the amount of credit for Federal income taxes. The 
amount remaining after this subtraction is the amount of excess profit 
to be paid to the United States by the contracting party for the income-
taxable year.

[T.D. 4909, 4 FR 2733, July 1, 1939, as amended by T.D. 6511, 25 FR 
12442, Dec. 6, 1960]

    Sec. 16.6 Computation of excess profit liability. The application of 
the provisions of Sec. 16.5 may be illustrated by the following example:
    Example. On September 1, 1939, the B Corporation, which keeps its 
books and makes its Federal income tax returns on a calendar year basis, 
entered into a contract for the construction of Army aircraft coming 
within the scope of the act, the total contract price of which was 
$200,000. On March 10, 1940, the corporation entered into another such 
contract, the total contract price of which was $40,000. Both contracts 
were completed within the calendar year 1940, the first at a cost of 
$155,000 and the second at a cost of $45,000. During the year 1940, the 
B Corporation also completed at a deficiency in profit of $2,000 a 
contract entered into after April 3, 1939, for the construction of naval 
aircraft coming within the scope of 10 U.S.C. 2382 (formerly section 3 
of the Act of March 27, 1934 (48 Stat. 505)). For the year 1939, the B 
Corporation sustained a net loss of $1,500 and a deficiency in profit of 
$1,000 on all contracts and subcontracts entered into after April 3, 
1939, for Army aircraft coming within the scope of the act and completed 
within the calendar year 1939. For the year 1939, the B Corporation also 
sustained a net loss of $1,000 on a contract, entered into after April 
3, 1939, and completed within the calendar year 1939, for naval aircraft 
coming within the scope of 10 U.S.C. 2382 (formerly section 3 of the Act 
of March 27, 1934 (48 Stat. 505)). For purposes of the Federal income 
tax, the net income of the B Corporation for the year 1940, on which the 
tax was paid, amounted to $96,000, which included the total net profit 
of $40,000 upon the two contracts entered into on September 1, 1939, and 
March 10, 1940. The excess profit liability is $4,332, computed as 
follows:

Total contract prices:
  Contract No. 1................................    $200,000
  Contract No. 2................................      40,000
                                                 -------------
                                                                $240,000
Less: Cost of performing contracts:
  Contract No. 1................................     155,000
  Contract No. 2................................      45,000
                                                 ============
                                                                $200,000
                                                             -----------
Net profit on contracts.....................................     $40,000
Less:
  12 percent of total contract prices (12            $28,800
   percent of $240,000).........................
  Deficiency in profit (in naval aircraft              2,000
   contracts) in 1940...........................
  Net loss (in Army aircraft contracts) from           1,500
   1939.........................................
 
  Net loss (in naval aircraft contracts) from          1,000
   1939.........................................
  Deficiency in profit (in Army aircraft               1,000  ..........
   contracts) from 1939.........................
                                                             -----------
 
Excess profit for year 1940.................................       5,700
Less: Credit for Federal income taxes (Federal income tax on       1,368
 $5,700 at rates for 1940)..................................
                                                                  34,300
                                                 -------------
Amount of excess profit payable to the United States........       4,332
 


[T.D. 4909, 4 FR 2733, July 1, 1939, as amended by T.D. 6511, 25 FR 
12442, Dec. 6, 1960]

    Sec. 16.7 Total contract price. The total contract price of a 
particular contract or subcontract (see Sec. 16.1) may be received in 
money or its equivalent. If something other than money is received, only 
the fair market value of the thing received, at the date of receipt, is 
to be included in determining the amount received. Bonuses earned for 
bettering performance and penalties incurred for failure to meet the 
contract guarantees are to be regarded as adjustments of the original 
contract price. Trade or other discounts granted by a contracting party 
in respect of a contract or subcontract performed by such party are also 
to be deducted in determining the true total contract price of such 
contract or subcontract.
    Sec. 16.8 Cost of performing a contract or subcontract.--(a) General 
rule. The cost of performing a particular contract or subcontract shall 
be the sum of (1) the direct costs, including therein expenditures for 
materials, direct labor and direct expenses, incurred by the contracting 
party in performing the contract or subcontract; and (2) the proper 
proportion of any indirect costs (including therein a reasonable 
proportion of management expenses) incident to and necessary for the 
performance of the contract or subcontract.
    (b) Elements of cost. No definitions of the elements of cost may be 
stated which are of

[[Page 216]]

invariable application to all contractors and subcontractors. In 
general, the elements of cost may be defined for purposes of the act as 
follows:
    (1) Manufacturing cost, which is the sum of factory cost (see 
paragraph (c) of this section) and other manufacturing cost (see 
paragraph (d) of this section);
    (2) Miscellaneous direct expenses (see paragraph (e) of this 
section);
    (3) General expenses, which are the sum of indirect engineering 
expenses, usually termed ``engineering overhead'' (see paragraph (f) of 
this section) and expenses of distribution, servicing and administration 
(see paragraph (g) of this section); and
    (4) Guarantee expenses (see paragraph (h) of this section).
    (c) Factory cost. Factory cost is the sum of the following:
    (1) Direct materials. Materials, such as those purchased for stock 
and subsequently issued for contract operations and those acquired under 
subcontracts, which become a component part of the finished product or 
which are used directly in fabricating, converting or processing such 
materials or parts.
    (2) Direct productive labor. Productive labor, usually termed ``shop 
labor,'' which is performed on and is properly chargeable directly to 
the article manufactured or constructed pursuant to the contract or 
subcontract, but which ordinarily does not include direct engineering 
labor (see subparagraph (3) of this paragraph).
    (3) Direct engineering labor. The compensation of professional 
engineers and other technicists (including reasonable advisory fees), 
and of draftsmen, properly chargeable directly to the cost of the 
contract or subcontract.
    (4) Miscellaneous direct factory charges. Items which are properly 
chargeable directly to the factory cost of performing the contract or 
subcontract but which do not come within the classifications in 
subparagraphs (1), (2), and (3) of this paragraph, as for example, 
royalties which the contracting party pays to another party and which 
are properly chargeable to the cost of performing the contract or 
subcontract (but see paragraph (d) of this section).
    (5) Indirect factory expenses. Items, usually termed ``factory 
overhead,'' which are not directly chargeable to the factory cost of 
performing the contract or subcontract but which are properly incident 
to and necessary for the performance of the contract or subcontract and 
consist of the following:
    (i) Labor. Amounts expended for factory labor, such as supervision 
and inspection, clerical labor, timekeeping, packing and shipping, 
stores supply, services of tool crib attendants, and services in the 
factory employment bureau, which are not chargeable directly to 
productive labor of the contract or subcontract.
    (ii) Materials and supplies. The cost of materials and supplies for 
general use in the factory in current operations, such as shop fuel, 
lubricants, heat-treating, plating, cleaning and anodizing supplies, 
nondurable tools and gauges, stationery (such as time tickets and other 
forms), and boxing and wrapping materials.
    (iii) Service expenses. Factory expenses of a general nature, such 
as those for power, heat and light (whether purchased or produced), 
ventilation and air-conditioning and operation and maintenance of 
general plant assets and facilities.
    (iv) Fixed charges and obsolescence. Recurring charges with respect 
to property used for manufacturing purposes of the contract or 
subcontract, such as premiums for fire and elevator insurance, property 
taxes, rentals and allowances for depreciation of such property, 
including maintenance and depreciation of reasonable stand-by equipment; 
and depreciation and obsolescence of special equipment and facilities 
necessarily acquired primarily for the performance of the contract or 
subcontract. In making allowances for depreciation, consideration shall 
be given to the number and length of shifts.
    (v) Miscellaneous indirect factory expenses. Miscellaneous factory 
expenses not directly chargeable to the factory cost of performing the 
contract or subcontract, such as purchasing expenses; ordinary and 
necessary expenses of rearranging facilities within a department or 
plant; employees' welfare expenses; premiums or dues on compensation 
insurance; employers' payments to unemployment, old age and social 
security Federal and State funds not including payments deducted from or 
chargeable to employees or officers; pensions and retirement payments to 
factory employees; factory accident compensation (as to self-insurance, 
see paragraph (g) of this section); but not including any amounts which 
are not incident to services, operations, plant, equipment or facilities 
involved in the performance of the contract or subcontract.
    (d) Other manufacturing cost. Other manufacturing cost as used in 
paragraph (b) of this section includes items of manufacturing costs 
which are not properly or satisfactorily chargeable to factory costs 
(see paragraph (c) of this section) but which upon a complete showing of 
all pertinent facts are properly to be included as a cost of performing 
the contract or subcontract, as for instance, payments of royalties and 
amortization of the cost of designs purchased and patent rights over 
their useful life; and ``deferred'' or ``unliquidated'' experimental and 
development charges. For example, in case experimental and development 
costs have been properly deferred or capitalized and are amortized in 
accordance with a reasonably consistent plan, a proper portion of the 
current charge, determined by a ratable allocation

[[Page 217]]

which is reasonable in consideration of the pertinent facts, may be 
treated as a cost of performing the contract or subcontract. In the case 
of general experimental and development expenses which may be charged 
off currently, a reasonable portion thereof may be allocated to the cost 
of performing the contract or subcontract. If a special experimental or 
development project is carried on in pursuance of a contract, or in 
anticipation of a contract which is later entered into, and the expense 
is not treated as a part of general experimental and development 
expenses or is not otherwise allowed as a cost of performing the 
contract, there clearly appearing no reasonable prospect of an 
additional contract for the type of article involved, the entire cost of 
such project may be allowed as a part of the cost of performing the 
contract.
    (e) Miscellaneous direct expenses. Miscellaneous direct expenses as 
used in paragraph (b) of this section include:
    (1) Cost of installation and construction. Cost of installation and 
construction includes the cost of materials, labor and expenses 
necessary for the erection and installation prior to the completion of 
the contract and after the delivery of the product or material 
manufactured or constructed pursuant to the contract or subcontract.
    (2) Sundry direct expenses. Items of expense which are properly 
chargeable directly to the cost of performing a contract or subcontract 
and which do not constitute guarantee expenses (see paragraph (h) of 
this section) or direct costs classified as factory cost or other 
manufacturing cost (see paragraphs (c) and (d) of this section), such as 
premiums on performance or other bonds required under the contract or 
subcontract; State sales taxes imposed on the contracting party; freight 
on outgoing shipments; fees paid for wind tunnel and model basin tests; 
demonstration and test expenses; crash insurance premiums; traveling 
expenses. In order for any such item to be allowed as a charge directly 
to the cost of performing a contract or subcontract, (i) a detailed 
record shall be kept by the contracting party of all items of a similar 
character, and (ii) no item of a similar character which is properly a 
direct charge to other work shall be allowed as a part of any indirect 
expenses in determining the proper proportion thereof chargeable to the 
cost of performing the contract or subcontract. As to allowable indirect 
expenses, see paragraphs (c)(5), (f), (g) and (j) of this section.
    (f) Indirect engineering expenses. Indirect engineering expenses, 
usually termed ``engineering overhead,'' which are treated in this 
section as a part of general expenses in determining the cost of 
performing a contract or subcontract (see paragraph (b) of this 
section), comprise the general engineering expenses which are incident 
to and necessary for the performance of the contract or subcontract, 
such as the following:
    (1) Labor. Reasonable fees of engineers employed in a general 
consulting capacity, and compensation of employees for personal services 
to the engineering department, such as supervision, which is properly 
chargeable to the contract or subcontract, but which is not chargeable 
as direct engineering labor (see paragraph (c)(3) of this section).
    (2) Material. Supplies for the engineering department, such as paper 
and ink for drafting and similar supplies.
    (3) Miscellaneous expenses. Expenses of the engineering department, 
such as (i) maintenance and repair of engineering equipment, and (ii) 
services purchased outside of the engineering department for blue 
printing, drawing, computing, and like purposes.
    (g) Expenses of distribution, servicing and administration. Expenses 
of distribution, servicing and administration, which are treated in this 
section as a part of general expenses in determining the cost of 
performing a contract or subcontract (see paragraph (b) of this 
section), comprehend the expenses incident to and necessary for the 
performance of the contract or subcontract, which are incurred in 
connection with the distribution and general servicing of the 
contracting party's products and the general administration of the 
business, such as:
    (1) Compensation for personal services of employees. The salaries of 
the corporate and general executive officers and the salaries and wages 
of administrative clerical employees and of the office services 
employees such as telephone operators, janitors, cleaners, watchmen and 
office equipment repairmen.
    (2) Bidding and general selling expenses. Bidding and general 
selling expenses which by reference to all the pertinent facts and 
circumstances reasonably constitute a part of the cost of performing a 
contract or subcontract. The treatment of bidding and general selling 
expenses as a part of general expenses in accordance with this paragraph 
is in lieu of any direct charges which otherwise might be made for such 
expenses. The term ``bidding expenses'' as used in this section includes 
all expenses in connection with preparing and submitting bids.
    (3) General servicing expenses. Expenses which by reference to all 
the pertinent facts and circumstances reasonably constitute a part of 
the cost of performing a contract or subcontract and which are incident 
to delivered or installed articles and are due to ordinary adjustments 
or minor defects; but including no items which are treated as a part of 
guarantee expenses (see paragraph (h) of this section) or as a part of 
direct costs, such as direct materials, direct labor, and other direct 
expense.
    (4) Other expenses. Miscellaneous office and administrative 
expenses, such as stationery

[[Page 218]]

and office supplies; postage; repair and depreciation of office 
equipment; contributions to local charitable or community organizations 
to the extent constituting ordinary and necessary business expenses; 
employees' welfare expenses; premiums and dues on compensation 
insurance; employers' payments to unemployment, old age and social 
security Federal and State funds not including payments deducted from or 
chargeable to employees or officers; pensions and retirement payments to 
administrative office employees and accident compensation to office 
employees (as to self-insurance, see subdivision (i) of this 
subparagraph.
    (i) Subject to the exception stated in this subdivision, in cases 
where a contracting party assumes its own insurable risks (usually 
termed ``self-insurance''), losses and payments will be allowed in the 
cost of performing a contract or subcontract only to the extent of the 
actual losses suffered or payments incurred during, and in the course 
of, the performance of the contract or subcontract and properly 
chargeable to such contract or subcontract. If however, a contracting 
party assumes its own insurable risks (a) for compensation paid to 
employees for injuries received in the performance of their duties, or 
(b) for unemployment risks in States where insurance is required, there 
may be allowed as a part of the cost of performing a contract or 
subcontract a reasonable portion of the charges set up for purposes of 
self-insurance under a system of accounting regularly employed by the 
contracting party, as determined by the Commissioner of Internal 
Revenue, at rates not exceeding the lawful or approved rates of 
insurance companies for such insurance, reduced by amounts representing 
the acquisition cost in such companies, provided the contracting party 
adopts and consistently follows this method with respect to self-
insurance in connection with all contracts and subcontracts subsequently 
performed by him.
    (ii) Allowances for interest on invested capital are not allowable 
as costs of performing a contract or subcontract.
    (iii) Among the items which shall not be included as a part of the 
cost of performing a contract or subcontract or considered in 
determining such cost, are the following: Entertainment expenses; dues 
and memberships other than of regular trade associations; donations 
except as otherwise provided above; losses on other contracts; profits 
or losses from sales or exchanges of capital assets; extraordinary 
expenses due to strikes or lockouts; fines and penalties; amortization 
of unrealized appreciation of values of assets; expenses, maintenance 
and depreciation of excess facilities (including idle land and building, 
idle parts of a building, and excess machinery and equipment) vacated or 
abandoned, or not adaptable for future use in performing contracts or 
subcontracts; increases in reserve accounts for contingencies, repairs, 
compensation insurance (except as above provided with respect to self-
insurance) and guarantee work; Federal and State income and excess-
profits taxes and surtaxes; cash discount earned up to one percent of 
the amount of the purchase, except that all discounts on subcontracts 
subject to the act will be considered; interest incurred or earned; bond 
discount or finance charges; premiums for life insurance on the lives of 
officers; legal and accounting fees in connection with reorganizations, 
security issues, capital stock issues and the prosecution of claims 
against the United State (including income tax matters); taxes and 
expenses on issues and transfers of capital stock; losses on 
investments; bad debts; and expenses of collection and exchange.
    (iv) In order that the cost of performing a contract or subcontract 
may be accounted for clearly, the amount of any excess profits repayable 
to the United States pursuant to the act should not be charged to or 
included in such cost.
    (h) Guarantee expenses. Guarantee expenses include the various items 
of factory cost, other manufacturing cost, cost of installation and 
construction, indirect engineering expenses and other general expenses 
(see paragraphs (c) to (g), of this section) which are incurred after 
delivery or installation of the article manufactured or constructed 
pursuant to the particular contract or subcontract and which are 
incident to the correction of defects or deficiencies which the 
contracting party is required to make under the guarantee provisions of 
the particular contract or subcontract. If the total amount of such 
guarantee expenses is not ascertainable at the time of filing the report 
required to be filed with the district director of internal revenue (see 
Sec. 16.15) and the contracting party includes any estimated amount of 
such expenses as part of the claimed total cost of performing the 
contract or subcontract, such estimated amount shall be separately shown 
on the report and the reasons for claiming such estimated amount shall 
accompany the report; but only the amount of guarantee expenses actually 
incurred will be allowed. If the amount of guarantee expenses actually 
incurred is greater than the amount (if any) claimed on the report and 
the contracting party has made an overpayment of excess profit, a refund 
of the overpayment shall be made in accordance with the provisions of 
Sec. 16.18. If the amount of guarantee expenses actually incurred is 
less than the amount claimed on the report and an additional amount of 
excess profit is determined to be due, the additional amount of excess 
profit shall be assessed and paid in accordance with the provisions of 
Sec. 16.18.
    (i) Unreasonable compensation. (1) The salaries and compensation for 
services which are

[[Page 219]]

treated as a part of the cost of performing a contract or subcontract 
include reasonable payments for salaries, bonuses, or other compensation 
for services. As a general rule, bonuses paid to employees (and not to 
officers) in pursuance of a regularly established incentive bonus system 
may be allowed as a part of the cost of performing a contract or 
subcontract.
    (2) The test of allowability is whether the aggregate compensation 
paid to each individual is for services actually rendered incident to, 
and necessary for, the performance of the contract or subcontract, and 
is reasonable. Excessive or unreasonable payments, whether in cash, 
stock or other property ostensibly as compensation for services shall 
not be included in the cost of performing a contract or subcontract.
    (j) Allocation of indirect costs. No general rule applicable to all 
cases may be stated for ascertaining the proper proportion of the 
indirect costs to be allocated to the cost of performing a particular 
contract or subcontract. Such proper proportion depends upon all the 
facts and circumstances relating to the performance of the particular 
contract or subcontract. Subject to a requirement that all items which 
have no relation to the performance of the contract or subcontract shall 
be eliminated from the amount to be allocated, the following methods of 
allocation are outlined as acceptable in a majority of cases:
    (1) Factory indirect expenses. The allowable indirect factory 
expenses (see paragraph (c)(5) of this section) shall ordinarily be 
allocated or ``distributed'' to the cost of the contract or subcontract 
on the basis of the proportion which the direct productive labor (see 
paragraph (c)(2) of this section) attributable to the contract or 
subcontract bears to the total direct productive labor of the production 
department or particular section thereof during the period within which 
the contract or subcontract is performed, except that if the indirect 
factory expenses are incurred in different amounts and in different 
proportions by the various producing departments consideration shall be 
given to such circumstances to the extent necessary to make a fair and 
reasonable determination of the true profit and excess profit.
    (2) Engineering indirect expenses. The allowable indirect 
engineering expenses (see paragraph (f) of this section) shall 
ordinarily be allocated or ``distributed'' to the cost of the contract 
or subcontract on the basis of the proportion which the direct 
engineering labor attributable to the contract or subcontract (see 
paragraph (c)(3) of this section) bears to the total direct engineering 
labor of the engineering department or particular section thereof during 
the period within which the contract or subcontract is performed. If the 
expenses of the engineering department are not sufficient in amount to 
require the maintenance of separate accounts, the engineering indirect 
costs may be included in the indirect factory expenses (see paragraph 
(c)(5) of this section) and allocated or distributed to the cost of 
performing the contract or subcontract as a part of such expenses, 
provided the proportion so allocated or distributed is proper under the 
facts and circumstances relating to the performance of the particular 
contract or subcontract.
    (3) Administrative expenses (or ``overhead''). The allowable 
expenses of administration (see paragraph (g) of this section) or other 
general expenses except indirect engineering expenses, bidding and 
general selling expenses, and general servicing expenses shall 
ordinarily be allocated or distributed to the cost of performing a 
contract or subcontract on the basis of the proportion which the sum of 
the manufacturing cost (see paragraph (b) of this section) and the cost 
of installation and construction (see paragraph (e) of this section) 
attributable to the particular contract or subcontract bears to the sum 
of the total manufacturing cost and the total cost of installation and 
construction during the period within which the contract or subcontract 
is performed.
    (4) Bidding, general selling, and general servicing expenses. The 
allowable bidding and general selling expenses and general servicing 
expenses (see paragraph (g) (2) and (3) of this section) shall 
ordinarily be allocated or distributed to the cost of performing a 
contract or subcontract on the basis of:
    (i) The proportion which the contract price of the particular 
contract or subcontract bears to the total sales made(including 
contracts or subcontracts completed) during the period within which the 
particular contract or subcontracts is performed, or
    (ii) The proportion which the sum of the manufacturing cost (see 
paragraph (b) of this section) and the cost of installation and 
construction (see paragraph (e) of this section) attributable to the 
particular contract or subcontract bears to the sum of the total 
manufacturing cost and the total cost of installation and construction 
during the period within which the contract or subcontract is performed,

except that special consideration shall be given to the relation which 
certain classes of such expenses bear to the various classes of articles 
produced by the contracting party in each case in which such 
consideration is necessary in order to make a fair and reasonable 
determination of the true profit and excess profit. See Sec. 16.13.
    Sec. 16.9 Credit for net loss or for deficiency in profit in 
computing excess profit. (a) The term ``net loss'' as used in the act 
and as applied to contracts and subcontracts for aircraft or portions 
thereof coming within the regulations prescribed under the act or under 
10 U.S.C. 2382 (formerly section 3 of the Act of

[[Page 220]]

March 27, 1934 (48 Stat. 505)) means the amount by which the total cost 
of performing all such contracts and subcontracts for aircraft entered 
into after April 3, 1939, and completed by a particular contracting 
party within the income-taxable year exceeds the total contract prices 
of such contracts and subcontracts. As to the meaning of income-taxable 
year, see Sec. 16.1.
    (b) The term ``deficiency in profit'', as used in the act and as 
applied to contracts and subcontracts for aircraft or portions thereof 
coming within the regulations prescribed under the act or under 10 
U.S.C. 2882 (formerly section 3 of the Act of March 27, 1934 (48 Stat. 
505)), means the amount by which 12 percent of the total contract prices 
of all such contracts and subcontracts for aircraft entered into after 
April 3, 1939, and completed by a particular contracting party within 
the income-taxable year exceeds the net profit upon all such contracts 
and subcontracts.
    (c) A net loss or a deficiency in profit sustained by a contracting 
party for an income-taxable year is allowable as a credit in computing 
the contracting party's excess profit on contracts and subcontracts for 
aircraft coming within the regulations prescribed under the act or under 
10 U.S.C. 2382 (formerly section 3 of the Act of March 27, 1934 (48 
Stat. 505)) and completed during the four next succeeding income-taxable 
years. Credit for such a net loss or deficiency in profit may be claimed 
in the contracting party's annual report of profit filed with the 
district director of internal revenue (see Sec. 16.15), but it shall be 
supported by separate schedules for each contract or subcontract 
involved showing total contract prices, costs of performance and 
pertinent facts relative thereto, together with a summarized computation 
of the net loss or deficiency in profit. The net loss or deficiency in 
profit claimed is subject to verification and adjustment. As to 
preservation of books and records, see Sec. 16.13.
    (d) Net loss or deficiency in profit sustained on contracts and 
subcontracts completed within one income-taxable year may not be 
considered in computing net loss or deficiency in profit sustained on 
contracts and subcontracts completed within another income-taxable year.
    (e) The provisions of this section may be illustrated by the 
following example:
    Example. For the calendar year 1939, the A Corporation, which keeps 
its books and makes its Federal income tax returns on a calendar year 
basis, sustained a net loss of $30,000 on the contracts and subcontracts 
for Army aircraft and portions thereof coming within the scope of the 
act and completed within that year. During the year 1939, the A 
Corporation also completed contracts for naval aircraft coming within 
the scope of 10 U.S.C. 2382 (formerly section 3 of the Act of March 27, 
1934 (48 Stat. 505)) at a deficiency in profit of $10,000. In 1940, the 
A Corporation completed similar contracts for Army aircraft totaling 
$175,000 at a cost of $155,000, whereby the A Corporation realized a net 
profit of $20,000 but sustained a deficiency in profit of $1,000 (i.e., 
12 percent of $175,000, or $21,000, less $20,000. During the year 1940, 
the A Corporation also completed contracts for naval aircraft coming 
within the scope of 10 U.S.C. 2382 (formerly section 3 of the Act of 
March 27, 1934 (48 Stat. 505)) at a net loss of $2,000. In 1941, the A 
Corporation completed contracts for Army aircraft coming within the 
scope of the act totaling $400,000 at a cost of $300,000, or at a net 
profit of $100,000. After deducting from the net profit of $100,000 for 
the year 1941 the amount of $48,000 (i.e., 12 percent of the total 
contract price of $400,000), there remains $52,000 in excess profit on 
the contracts completed in the year 1941. The A Corporation may deduct 
from such $52,000, in determining the amount of excess profit it must 
pay for the year 1941 with respect to the contracts completed in such 
year, the net loss of $30,000 and the deficiency in profit of $10,000 
sustained in 1939 on Army and naval aircraft contracts, respectively, 
and the net loss of $2,000 and the deficiency in profit of $1,000 
sustained in 1940 on naval and Army aircraft contracts, respectively.

[T.D. 4909, 4 FR 2733, July 1, 1939, as amended by T.D. 6511, 25 FR 
12442, Dec. 6, 1960]

    Sec. 16.10 Credit for Federal income taxes. For the purpose of 
computing the amount of excess profit to be paid to the United States, a 
credit is allowable against the excess profit for the amount of Federal 
income taxes paid or remaining to be paid on the amount of such excess 
profit. The ``Federal income taxes'' in respect of which this credit is 
allowable include the income taxes imposed by Titles I and IA of the 
Revenue Act of 1938, and Chapter 1 and Subchapter A of Chapter 2 of the 
Internal Revenue Code, and the excess-profits taxes imposed by section 
602 of the Revenue Act of 1938 and Subchapter B of Chapter 2 of the 
Internal Revenue Code. This credit is allowable for these taxes only to 
the extent that it is affirmatively shown that they have been finally 
determined and paid or remain to be paid and that they were imposed upon 
the excess profit against which the credit is to be made. In case such a 
credit has been allowed and the amount of Federal income taxes imposed 
upon the excess profit is redetermined, the credit previously allowed 
shall be adjusted accordingly.
    Sec. 16.11 Failure of contractor to require agreement by 
subcontractor. (a) Every contract or subcontract coming within the scope 
of the act and the regulations in this part is required by the act to 
contain, among other things, an agreement by the contracting party to 
make no subcontract unless the subcontractor agrees:

[[Page 221]]

    (1) To make a report, as described in the act, under oath to the 
Secretary of War upon the completion of the subcontract;
    (2) To pay into the Treasury excess profit, as determined by the 
Treasury Department, in the manner and amounts specified in the act;
    (3) To make no subdivision of the subcontract for the same article 
or articles for the purpose of evading the provisions of the act;
    (4) That the manufacturing spaces and books of its own plant, 
affiliates, and subdivisions shall at all times be subject to inspection 
and audit as provided in the act.
    (b) If a contracting party enters into a subcontract with a 
subcontractor who fails to make such agreement, such contracting party 
shall, in addition to its liability for excess profit determined on 
contracts or subcontracts performed by it, be liable for any excess 
profit determined to be due the United States on the subcontract entered 
into with such subcontractor. In such event, however, the excess profit 
to be paid to the United States in respect of the subcontract entered 
into with such subcontractor shall be determined separately from any 
contracts or subcontracts performed by the contracting party entering 
into the subcontract with such subcontractor.
    Sec. 16.12 Evasion of excess profit. Section 3 of the act of March 
27, 1934, as amended, provides that the contracting party shall agree to 
make no subdivisions of any contract or subcontract for the same article 
or articles for the purpose of evading the provisions of the act. If any 
such subdivision or subcontract is made it shall constitute a violation 
of the agreement provided for in the act, and the cost of completing a 
contract or subcontract by a contracting party which violates such 
agreement shall be determined in a manner necessary clearly to reflect 
the true excess profit of such contracting party.
    Sec. 16.13 Books of account and records. (a) It is recognized that 
no uniform method of accounting can be prescribed for all contracting 
parties subject to the provisions of the act. Each contracting party is 
required by law to make a report of its true profits and excess profit. 
Such party must, therefore, maintain such accounting records as will 
enable it to do so. See Sec. 16.8. Among the essentials are the 
following:
    (1) The profit or loss upon a particular contract or subcontract 
shall be accounted for and fully explained in the books of account 
separately on each contract or subcontract.
    (2) Any cost accounting methods, however standard they may be and 
regardless of long continued practice, shall be controlled by, and be in 
accord with, the objectives and purposes of the act and of any 
regulations prescribed thereunder.
    (3) The accounts shall clearly disclose the nature and amount of the 
different items of cost of performing a contract or subcontract.
    (b) In cases where it has been the custom priorly to use so-called 
``normal'' rates of overhead expense or administrative expenses, or 
``standard'' or ``normal'' prices of material or labor charges, no 
objection will be made to the use temporarily during the period of 
performing the contract or subcontract of such methods in charging the 
contract or subcontract, if the method of accounting employed is such as 
clearly to reflect, in the final determination upon the books of 
account, the actual profit derived from the performance of the contract 
or subcontract and if the necessary adjusting entries are entered upon 
the books and they explain in full detail the revisions necessary to 
accord with the facts. As to the elements of cost, see Sec. 16.8.
    (c) All books, records, and original evidences of costs (including, 
among other things, production orders, bills or schedules of materials, 
purchase requisitions, purchase orders, vouchers, requisitions for 
materials, standing expense orders, inventories, labor time cards, pay 
rolls, cost distribution sheets) pertinent to the determination of the 
true profit, excess profit, deficiency in profit or net loss from the 
performance of a contract or subcontract shall be kept at all times 
available for inspection by internal- revenue officers, and shall be 
carefully preserved and retained so long as the contents thereof may 
become material in the administration of the act. This provision is not 
confined to books, records, and original evidences pertaining to items 
which may be considered to be a part of the cost of performing a 
contract or subcontract. It is applicable to all books, records, and 
original evidences of costs of each plant, branch or department involved 
in the performance of a contract or subcontract or in the allocation or 
distribution of costs to the contract or subcontract.
    Sec. 16.14 Report to Secretary of the Army. (a) Upon the completion 
of a contract or subcontract coming within the scope of the act and the 
regulations in this part, the contracting party is required to make a 
report, under oath, to the Secretary of the Army. As to the date of 
completion of a contract or subcontract, see Sec. 16.4. Such report 
shall be in the form prescribed by the Secretary of the Army and shall 
state the total contract price, the cost of performing the contract, the 
net income from such contract, and the per centum such income bears to 
the contract price. The contracting party shall also include as a part 
of such report a statement showing:
    (1) The manner in which the indirect costs were determined and 
allocated to the cost of performing the contract or subcontract (see 
Sec. 16.8);

[[Page 222]]

    (2) The name and address of every subcontractor with whom a 
subcontract was made, the object of such subcontract, the date when 
completed and the amount thereof; and
    (3) The name and address of each affiliate or other organization, 
trade or business owned or controlled directly or indirectly by the same 
interests as those who so own or control the contracting party, together 
with a statement showing in detail all transactions which were made with 
such affiliate or other organization, trade or business and are 
pertinent to the determination of the excess profit.
    (b) A copy of the report required to be made to the Secretary of the 
Army is required to be transmitted by the contracting party to the 
Secretary of the Treasury. Such copy shall not be transmitted directly 
to the Secretary of the Treasury but shall be filed as a part of the 
annual report. See Sec. 16.15.
    Sec. 16.15 Annual reports for income-taxable years--(a) General 
requirements. Every contracting party completing a contract or 
subcontract within the contracting party's income-taxable year ending 
after April 3, 1939 shall file with the district director of internal 
revenue for the internal revenue district in which the contracting 
party's Federal income tax returns are required to be filed an annual 
report on the prescribed form of the profit and excess profit on all 
contracts and subcontracts coming within the scope of the act and the 
regulations in this part and completed within the particular income-
taxable year. There shall be included as a part of such a report a 
statement, preferably in columnar form, showing separately for each such 
contract or subcontract completed by the contracting party within the 
income-taxable year the total contract price, the cost of performing the 
contract or subcontract and the resulting profit or loss on each 
contract or subcontract together with a summary statement showing in 
detail the computation of the net profit or net loss upon all contracts 
and subcontracts completed within the income-taxable year and the amount 
of the excess profit, if any, for the income-taxable year covered by the 
report. A copy of the report made to the Secretary of the Army (see 
Sec. 16.14) with respect to each contract or subcontract covered in the 
annual report, shall be filed as a part of such annual report. In case 
the income-taxable year of the contracting party is a period of less 
than twelve months (see Sec. 16.1), the report required by this section 
shall be made for such period and not for a full year.
    (b) Time for filing annual reports. Annual reports of contracts and 
subcontracts coming within the scope of the act and the regulations in 
this part completed by a contracting party within an income-taxable year 
must be filed on or before the 15th day of the ninth month following the 
close of the contracting party's income-taxable year. It is important 
that the contracting party render on or before the due date an annual 
report as nearly complete and final as it is possible for the 
contracting party to prepare. An extension of time granted the 
contracting party for filing its Federal income tax return does not 
serve to extend the time for filing the annual report required by this 
section. Authority consistent with authorizations for granting 
extensions of time for filing Federal income tax returns is hereby 
delegated to the various collectors of internal revenue for granting 
extensions of time for filing the reports required by this section. 
Application for extensions of time for filing such reports should be 
addressed to the district director of internal revenue for the district 
in which the contracting party files its Federal income tax returns and 
must contain a full recital of the causes for the delay.
    Sec. 16.16 Payment of excess profit liability. The amount of the 
excess profit liability to be paid to the United States shall be paid on 
or before the due date for filing the report with the district director 
of internal revenue. See Sec. 16.15. At the option of the contracting 
party, the amount of the excess profit liability may be paid in four 
equal installments instead of in a single payment, in which case the 
first installment is to be paid on or before the date prescribed for the 
payment of the excess profit as a single payment, the second installment 
on or before the 15th day of the third month, the third installment on 
or before the 15th day of the sixth month, and the fourth installment on 
or before the 15th day of the ninth month, after such date.
    Sec. 16.17 Liability of surety. The surety under contracts entered 
into with the Secretary of the Army for the construction or manufacture 
of any complete aircraft or any portion thereof for the Army shall not 
be liable for payment of excess profit due the United States in respect 
of such contracts.
    Sec. 16.18 Determination of liability for excess profit, interest 
and penalties; assessment, collection, payment, refunds. (a) The duty of 
determining the correct amount of excess profit liability on contracts 
and subcontracts coming within the scope of the act and the regulations 
in this part is upon the Commissioner of Internal Revenue. Under section 
3(b) of the act of March 27, 1934, as last amended, all provisions of 
law (including the provisions of law relating to interest, penalties and 
refunds) applicable with respect to the taxes imposed by Title I of the 
Revenue Act of 1934 and not inconsistent with section 3 of the act of 
March 27, 1934, as last amended, are applicable with respect to the 
assessment, collection, or payment of excess profits on contracts and 
subcontracts coming within the scope of the act and the regulations in 
this part and to refunds of overpayments of profits into the Treasury 
under the act. Claims by a contracting party for the refund of an amount 
of excess profit, interest,

[[Page 223]]

penalties, and additions to such excess profit shall conform to the 
general requirements prescribed with respect to claims for refund of 
overpayments of taxes imposed by Title I of the Revenue Act of 1934 and, 
if filed on account of any additional costs incurred pursuant to 
guarantee provisions in a contract, shall be supplemented by a statement 
under oath showing the amount and nature of such costs and all facts 
pertinent thereto.
    (b) Administrative procedure for the determination, assessment and 
collection of excess profit liability under the act and the regulations 
in this part and the examination of reports and claims in connection 
therewith will be prescribed from time to time by the Commissioner of 
Internal Revenue.

                Part 17--Excess Profits on Navy Contracts

     regulations for income-taxable years ending after april 3, 1939

    Authority: Sections 17.1 to 17.19 issued under 52 Stat. 467; 26 
U.S.C. 3791. Interpret or apply sec. 3, 48 Stat. 505, as amended, 53 
Stat. 112; 34 U.S.C. 496, 26 U.S.C. 650, 651.

    Source: Sections 17.1 to 17.19 contained in T.D. 4906, 4 FR 2492, 
June 27, 1939, except as otherwise noted.
    Sec. 17.1 Definitions. As used in the regulations in this part the 
term:
    (a) Act means the act of March 27, 1934 (48 Stat. 505; 34 U.S.C. 
496), as originally enacted, as amended by the act of June 25, 1936 (49 
Stat. 1926; 34 U.S.C. 496), and as further amended by the act of April 
3, 1939 (53 Stat. 560; 34 U.S.C. 496).
    (b) Person includes an individual, a corporation, a partnership, a 
trust or estate, a joint-stock company, an association, or a syndicate, 
group, pool, joint venture or other unincorporated organization or 
group, through or by means of which any business, financial operation or 
venture is carried on.
    (c) Contract means an agreement made by authority of the Secretary 
of the Navy for the construction or manufacture of any complete naval 
vessel or aircraft or any portion thereof.
    (d) Contractor means a person entering into a direct contract with 
the Secretary of the Navy or his duly authorized representative.
    (e) Subcontract means an agreement entered into by one person with 
another person for the construction or manufacture of a complete naval 
vessel or aircraft or any portion thereof, the prime contract for such 
vessel or aircraft or portion thereof having been entered into between a 
contractor and the Secretary of the Navy or his duly authorized 
representative.
    (f) Subcontractor means any person other than a contractor entering 
into a subcontract.
    (g) Contracting party means a contractor or subcontractor as the 
case may be.
    (h) Contract price or contract price means the amount or total 
amount to be received under a contract or subcontract as the case may 
be.
    (i) Income-taxable year means the calendar year, the fiscal year 
ending during such calendar year or the fractional part of such calendar 
or fiscal year, upon the basis of which the contracting party's net 
income is computed and for which its income tax returns are made for 
Federal income tax purposes.
    Sec. 17.2 Scope of this part. The regulations in this part deal with 
liability for excess profit on contracts and subcontracts for the 
construction or manufacture of any complete naval vessel or aircraft or 
any portion thereof completed within income-taxable years ending after 
April 3, 1939. As to the date of the completion of a contract or 
subcontract, see Sec. 17.5.
    Sec. 17.3 Contracts and subcontracts under which excess profit 
liability may be incurred. Except as otherwise provided with respect to 
contracts or subcontracts for certain scientific equipment (see 
Sec. 17.4), every contract awarded for an amount exceeding $10,000 and 
entered into after the enactment of the act of March 27, 1934 for the 
construction or manufacture of any complete naval vessel or aircraft, or 
any portion thereof, is subject to the provisions of the act relating to 
excess profit liability. Any subcontract made with respect to such a 
contract and involving an amount in excess of $10,000 is also within the 
scope of the act. If a contracting party places orders with another 
party, aggregating an amount in excess of $10,000, for articles or 
materials which constitute a part of the cost of performing the contract 
or subcontract, the placing of such orders shall constitute a 
subcontract within the scope of the act, unless it is clearly shown that 
each of the orders involving $10,000 or less is a bona fide separate and 
distinct subcontract and not a subdivision made for the purpose of 
evading the provisions of the act.
    Sec. 17.4 Contracts or subcontracts for scientific equipment. No 
excess profit liability is incurred upon a contract or subcontract 
entered into after the amendment of section 3(b) of the act of June 25, 
1936, if at the time or prior to the time such contract or subcontract 
is made it is designated by the Secretary of the Navy as being exempt 
under the provisions of the act pertaining to scientific equipment used 
for communication, target detection, navigation, or fire control. The 
exemption of contracts or subcontracts for scientific equipment does not 
extend to any contract or subcontract entered into prior to the 
enactment of such amendment of section 3(b) of the act.

[[Page 224]]

    Sec. 17.5 Completion of contract defined. The date of delivery of 
the vessel, aircraft or portion thereof covered by the contract or 
subcontract shall be considered the date of completion of the contract 
or subcontract unless otherwise determined jointly by the Secretary of 
the Navy and the Secretary of the Treasury or their duly authorized 
representatives. Except as otherwise provided in the preceding sentence, 
the replacement of defective parts of delivered articles or the 
performance of other guarantee work in respect to such articles will not 
operate to extend the date of completion. As to the treatment of the 
cost of such work as a cost of performing a contract or subcontract, see 
Sec. 17.9(h). As to a refund in case of adjustment due to any 
subsequently incurred additional costs, see Sec. 17.19. If a contract or 
subcontract is at any time cancelled or terminated, it is completed at 
the time of the cancellation or termination.
    Sec. 17.6 Manner of determining liability with respect to contracts 
or subcontracts for complete naval vessles or portions thereof. If in an 
income-taxable year ending after April 3, 1939 a contracting party 
completes one or more contracts or subcontracts coming within the scope 
of the act and entered into for the construction or manufacture of any 
complete naval vessel or any portion thereof, the amount of excess 
profit to be paid to the United States with respect to all such 
contracts and subcontracts completed within the income-taxable year 
shall be computed as follows:
    (a) The first step is to ascertain the total contract prices of all 
such contracts and subcontracts completed by the contracting party 
within the income-taxable year. As to total contract prices, see 
Secs. 17.1 and 17.8.
    (b) The second step is to ascertain the cost of performing such 
contracts and subcontracts (see Sec. 17.9) and to deduct such cost from 
the total contract prices of such contracts and subcontracts as computed 
in the first step.

The amount remaining after such subtraction is the amount of net profit 
or net loss upon such contracts and subcontracts completed within the 
income-taxable year.
    (c) The third step, in case there is a new profit upon such 
contracts and subcontracts, is to subtract from the amount of such net 
profit as computed in the second step the sum of:
    (1) An amount equal to 10 percent of the total contract prices of 
such contracts and subcontracts completed within the income- taxable 
year; and
    (2) The amount of any net loss which was sustained in the preceding 
income-taxable year with respect to contracts or subcontracts entered 
into for the construction or manufacture of any complete naval vessel or 
any portion thereof, and which is allowable as a credit in determining 
the excess profit for the income-taxable year with respect to contracts 
and subcontracts entered into for the construction or manufacture of any 
complete naval vessel or any portion thereof (see Sec. 17.10(a)).

The amount remaining after such subtraction is the amount of excess 
profit for the income-taxable year with respect to contracts and 
subcontracts entered into for the construction or manufacture of any 
complete naval vessel or any portion thereof.
    (d) The fourth step is to ascertain the amount of credit allowed for 
Federal income taxes paid or remaining to be paid upon the amount of 
such excess profit as computed in the third step (see Sec. 17.11) and 
then subtract from the amount of such excess profit the amount of credit 
for Federal income taxes. The amount remaining after this subtraction is 
the amount of excess profit to be paid to the United States by the 
contracting party for the income-taxable year with respect to contracts 
and subcontracts entered into for the construction or manufacture of any 
complete naval vessel or any portion thereof and completed within the 
income- taxable year.
    (e) The application of the provisions of this section of the 
regulations may be illustrated by the following example:
    Example: On September 1, 1939 the A Corporation, which keeps its 
books and makes its Federal income tax returns on a calendar year basis, 
entered into a contract with the Secretary of the Navy for the 
construction of portions of a naval vessel coming within the scope of 
the act, the total contract price of which $200,000. On March 10, 1940 
the A Corporation entered into another such contract, the total contract 
price of which was $40,000. Both contracts were completed within the 
calendar year 1940, the first at a cost of $155,000 and the second at a 
cost of $45,000. During the year 1940 the A Corporation also completed 
at a loss of $10,000 two contracts entered into for the construction or 
manufacture of naval aircraft coming within the scope of the act. For 
the year 1939 the A Corporation sustained a net loss of $2,500 on all 
contracts and subcontracts for any complete naval vessel or any portion 
thereof coming within the scope of the act and completed within the 
calendar year 1939. For the year 1939 the A Corporation also sustained a 
net loss of $1,800 on all other contracts and subcontracts coming within 
the scope of the act which were completed within the calendar year 1939. 
For purposes of Federal income tax, the net income of the A Corporation 
for the year 1940 amounted to $96,000, which amount included the net 
profit of $40,000 upon the contracts entered into on September 1, 1939 
and March 10, 1940. For the year 1940 the A Corporation paid Federal 
income taxes amounting to $19,200. The excess profit liability of the A 
Corporation for 1940 is payable with respect to the contracts for

[[Page 225]]

portions of a naval vessel which were completed in 1940. The loss of 
$10,000 on other contracts completed in 1940 and the net loss of $1,800 
for 1939 on contracts and subcontracts for naval aircraft do not enter 
into the computation of such liability. Accordingly, the excess profit 
liability of the A Corporation for 1940 is $10,800 computed as follows:

Total contract prices:
  Contract No. 1................................    $200,000
  Contract No. 2................................      40,000
                                                 ------------
                                                                $240,000
  Less cost of performing contracts:
  Contract No. 1................................     155,000
  Contract No. 2................................      45,000
                                                 ------------
                                                                 200,000
                                                             -----------
    Net profit on contracts.................................      40,000
 
Less:
  10 percent of total contract prices (10             24,000
   percent of $240,000).........................
  Net loss from 1939............................       2,500
                                                 ------------
                                                                  26,500
                                                             -----------
      Excess profit for year 1940...........................      13,500
  Less credit for Federal income taxes (Federal income tax         2,700
   on $13,500 at rates for 1940)............................
                                                 -------------
    Amount of excess profit payable to the United States....      10,800
 

    Sec. 17.7 Manner of determining liability with respect to contracts 
or subcontracts for complete naval aircraft or portions thereof. If in 
an income-taxable year ending after April 3, 1939 a contracting party 
completes one or more contracts or subcontracts coming within the scope 
of the act and entered into for the construction or manufacture of any 
complete naval aircraft or any portion thereof, the amount of excess 
profit to be paid to the United States with respect to all such 
contracts and subcontracts completed within the income-taxable year 
shall be computed as follows:
    (a) The first step is to ascertain the total contract prices of all 
such contracts and subcontracts completed by the contracting party 
within the income-taxable year. As to total contract prices, see 
Sec. Sec. 17.1 and 17.8.
    (b) The second step is to ascertain the cost of performing such 
contracts and subcontracts (see Sec. 17.9) and to deduct such cost from 
the total contract prices of such contracts and subcontracts as computed 
in the first step.

The amount remaining after such subtraction is the amount of net profit 
or net loss upon such contracts and subcontracts completed within the 
income-taxable year.
    (c) The third step, in case there is a net profit upon such 
contracts and subcontracts, is to subtract from the amount of such net 
profit as computed in the second step the sum of:
    (1) An amount equal to 12 percent of the total contract prices of 
such contracts and subcontracts completed within the income- taxable 
year;
    (2) The amount of any net loss which was sustained in the same or a 
prior income- taxable year with respect to contracts or subcontracts for 
the construction or manufacture of any complete aircraft or any portion 
thereof, and which is allowable as a credit in determining the excess 
profit for the income-taxable year with respect to contracts and 
subcontracts entered into for the construction or manufacture of 
complete aircraft or any portion thereof (see Sec. 17.10(b)); and
    (3) The amount of any deficiency in profit which was sustained in 
the same or a prior income-taxable year with respect to contracts or 
subcontracts for the construction or manufacture of any complete 
aircraft or any portion thereof, and which is allowable as a credit in 
determining the excess profit for the income-taxable year with respect 
to contracts and subcontracts entered into for the construction or 
manufacture of complete aircraft or any portion thereof (see 
Sec. 17.10(c)).

The amount remaining after such subtraction is the amount of excess 
profit for the income-taxable year with respect to contracts and 
subcontracts entered into for the construction or manufacture of 
complete naval aircraft or any portion thereof.
    (d) The fourth step is to ascertain the amount of credit allowed for 
Federal income taxes paid or remaining to be paid upon the amount of 
such excess profit as computed in the third step (see Sec. 17.11) and 
then subtract from the amount of such excess profit the amount of credit 
for Federal income taxes. The amount remaining after this subtraction is 
the amount of excess profit to be paid to the United States by the 
contracting party for the income-taxable year with respect to contracts 
and subcontracts entered into for the construction or manufacture of 
complete naval aircraft or any portion thereof and completed within the 
income-taxable year.
    (e) The application of the provisions of this section of the 
regulations may be illustrated by the following example:
    Example. On September 1, 1939, the B Corporation, which keeps its 
books and makes its Federal income tax returns on a calendar year basis, 
entered into a contract with the Secretary of the Navy for the 
construction of naval aircraft coming within the scope of the act, the 
total contract price of which was $200,000. On March 10, 1940, the B 
Corporation entered into another such contract, the total contract price 
of which was $40,000. Both contracts were completed within the calendar 
year 1940, the first at a cost of $155,000 and the second at a cost of 
$45,000. During the year 1940, the B Corporation also completed at a 
deficiency in profit of $2,000 a

[[Page 226]]

contract entered into for the construction of Army aircraft coming 
within the scope of the act. During the year 1940, the B Corporation 
also completed at a loss of $10,000 two contracts entered into for the 
construction or manufacture of portions of a naval vessel coming within 
the scope of the act. For the year 1939, the B Corporation sustained a 
net loss of $2,500 and a deficiency in profit of $1,000 on all contracts 
and subcontracts for naval aircraft coming within the scope of the act 
and completed within the calendar year 1939. For the year 1939, the B 
Corporation also sustained a net loss of $1,800 on a contract for the 
construction of Army aircraft coming within the scope of the act which 
was completed within the calendar year 1939. For the purposes of the 
Federal income tax, the net income of the B Corporation for the year 
1940, on which the tax was paid, amounted to $96,000, which included the 
net profit of $40,000 upon the contracts entered into on September 1, 
1939, and March 10, 1940. The excess profit liability of the B 
Corporation for 1940 is payable with respect to the contracts for naval 
aircraft which were completed in 1940. The loss of $10,000 on the 
contracts for portions of a naval vessel completed in 1940 does not 
enter into the computation of such liability. Accordingly, the excess 
profit liability of the B Corporation for 1940 is $2,964 computed as 
follows:

Total contract prices:
  Contract No. 1................................    $200,000
  Contract No. 2................................      40,000
                                                 ------------
                                                                $240,000
Less: Cost of performing contracts:
  Contract No. 1................................     155,000
  Contract No. 2................................      45,000
                                                 ------------
                                                                 200,000
                                                             -----------
Net profit on contracts.....................................      40,000
 
Less:
  12 percent of total contract prices (12             28,800
   percent of $240,000).........................
  Deficiency in profit (in Army aircraft               2,000
   contracts) in 1940...........................
  Net loss (in naval aircraft contracts) from          2,500
   1939.........................................
  Net loss (in Army aircraft contracts) from           1,800
   1939.........................................
  Deficiency in profit (in naval aircraft              1,000
   contracts) from 1939.........................
                                                 ------------
                                                                  36,100
                                                             -----------
 
Excess profit for year 1940.................................       3,900
 
Less: Credit for Federal income taxes (Federal income tax on         936
 $3,900 at rates for 1940)..................................
                                                 -------------
Amount of excess profit payable to the United States........       2,964
 


[T.D. 4906, 4 FR 2492, June 27, 1939, as amended by T.D. 6512, 25 FR 
12443, Dec. 6, 1960]

    Sec. 17.8 Total contract price. The total contract price of a 
particular contract or subcontract (see Sec. 17.1) may be received in 
money or its equivalent. If something other than money is received, only 
the fair market value of the thing received, at the date of receipt, is 
to be included in determining the amount received. Bonuses earned for 
bettering performance and penalties incurred for failure to meet the 
contract guarantees are to be regarded as adjustments of the original 
contract price. Trade or other discounts granted by a contracting party 
in respect of a contract or subcontract performed by such party are also 
to be deducted in determining the true total contract price of such 
contract or subcontract.
    Sec. 17.9 Cost of performing a contract or subcontract--(a) General 
rule. The cost of performing a particular contract or subcontract shall 
be the sum of (1) the direct costs, including therein expenditures for 
materials, direct labor and direct expenses, incurred by the contracting 
party in performing the contract or subcontract; and (2) the proper 
proportion of any indirect costs (including therein a reasonable 
proportion of management expenses) incident to and necessary for the 
performance of the contract or subcontract.
    (b) Elements of cost. No definitions of the elements of cost may be 
stated which are of invariable application to all contractors and 
subcontractors. In general, the elements of cost may be defined for 
purposes of the act as follows:
    (1) Manufacturing cost, which is the sum of factory cost (see 
paragraph (c) of this section) and other manufacturing cost (see 
paragraph (d) of this section);
    (2) Miscellaneous direct expenses (see paragraph (e) of this 
section);
    (3) General expenses, which are the sum of indirect engineering 
expenses, usually termed ``engineering overhead'' (see paragraph (f) of 
this section) and expenses of distribution, servicing and administration 
(see paragraph (g) of this section); and
    (4) Guarantee expenses (see paragraph (h) of this section).
    (c) Factory cost. Factory cost is the sum of the following:
    (1) Direct materials. Materials, such as those purchased for stock 
and subsequently issued for contract operations and those acquired under 
subcontracts, which become a component part of the finished product or 
which are used directly in fabricating, converting or processing such 
materials or parts.
    (2) Direct productive labor. Productive labor, usually termed ``shop 
labor,'' which is performed on and is properly chargeable directly to 
the article manufactured or constructed pursuant to the contract or 
subcontract, but which ordinarily does not include direct engineering 
labor (see subparagraph (3) of this paragraph).

[[Page 227]]

    (3) Direct engineering labor. The compensation of professional 
engineers and other technicists (including reasonable advisory fees), 
and of draftsmen, properly chargeable directly to the cost of the 
contract or subcontract.
    (4) Miscellaneous direct factory charges. Items which are properly 
chargeable directly to the factory cost of performing the contract or 
subcontract but which do not come within the classifications in 
subparagraphs (1), (2), and (3) of this paragraph, as for example, 
royalties which the contracting party pays to another party and which 
are properly chargeable to the cost of performing the contract or 
subcontract (but see paragraph (d) of this section).
    (5) Indirect factory expenses. Items, usually termed ``factory 
overhead,'' which are not directly chargeable to the factory cost of 
performing the contract or subcontract but which are properly incident 
to and necessary for the performance of the contract or subcontract and 
consist of the following:
    (i) Labor. Amounts expended for factory labor, such as supervision 
and inspection, clerical labor, timekeeping, packing and shipping, 
stores supply, services of tool crib attendants, and services in the 
factory employment bureau, which are not chargeable directly to 
productive labor of the contract or subcontract.
    (ii) Materials and supplies. The cost of materials and supplies for 
general use in the factory in current operations, such as shop fuel, 
lubricants, heat-treating, plating, cleaning and anodizing supplies, 
nondurable tools and gauges, stationery (such as time tickets and other 
forms), and boxing and wrapping materials.
    (iii) Service expenses. Factory expenses of a general nature, such 
as those for power, heat and light (whether purchased or produced), 
ventilation and air conditioning and operation and maintenance of 
general plant assets and facilities.
    (iv) Fixed charges and obsolescence. Recurring charges with respect 
to property used for manufacturing purposes of the contract or 
subcontract, such as premiums for fire and elevator insurance, property 
taxes, rentals and allowances for depreciation of such property, 
including maintenance and depreciation of reasonable standby equipment; 
and depreciation and obsolescence of special equipment and facilities 
necessarily acquired primarily for the performance of the contract or 
subcontract. In making allowances for depreciation, consideration shall 
be given to the number and length of shifts.
    (v) Miscellaneous indirect factory expenses. Miscellaneous factory 
expenses not directly chargeable to the factory cost of performing the 
contract or subcontract, such as purchasing expenses; ordinary and 
necessary expenses of rearranging facilities within a department or 
plant; employees' welfare expenses; premiums or dues on compensation 
insurance; employers' payments to unemployment, old age and social 
security, Federal and State funds not including payments deducted from 
or chargeable to employees or officers; pensions and retirement payments 
to factory employees; factory accident compensation (as to self-
insurance, see paragraph (g) of this section); but not including any 
amounts which are not incident to services, operations, plant, equipment 
or facilities involved in the performance of the contract or 
subcontract.
    (d) Other manufacturing cost. Other manufacturing cost as used in 
paragraph (b) of this section includes items of manufacturing costs 
which are not properly or satisfactorily chargeable to factory costs 
(see paragraph (c) of this section) but which upon a complete showing of 
all pertinent facts are properly to be included as a cost of performing 
the contract or subcontract, as for instance, payments of royalties and 
amortization of the cost of designs purchased and patent rights over 
their useful life; and ``deferred'' or ``unliquidated'' experimental and 
development charges. For example, in case experimental and development 
costs have been properly deferred or capitalized and are amortized in 
accordance with a reasonably consistent plan, a proper portion of the 
current charge, determined by a ratable allocation which is reasonable 
in consideration of the pertinent facts, may be treated as a cost of 
performing the contract or subcontract. In the case of general 
experimental and development expenses which may be charged off 
currently, a reasonable portion thereof may be allocated to the cost of 
performing the contract or subcontract. If a special experimental or 
development project is carried on in pursuance of a contract, or in 
anticipation of a contract which is later entered into, and the expense 
is not treated as a part of general experimental and development 
expenses or is not otherwise allowed as a cost of performing the 
contract, there clearly appearing no reasonable prospect of an 
additional contract for the type of article involved, the entire cost of 
such project may be allowed as a part of the cost of performing the 
contract.
    (e) Miscellaneous direct expenses. Miscellaneous direct expenses as 
used in paragraph (b) of this section include:
    (1) Cost of installation and construction. Cost of installation and 
construction includes the cost of materials, labor and expenses 
necessary for the erection and installation prior to the completion of 
the contract and after the delivery of the product or material 
manufactured or constructed pursuant to the contract or subcontract.
    (2) Sundry direct expenses. Items of expense which are properly 
chargeable directly to the cost of performing a contract or subcontract 
and which do not constitute guarantee expenses (see paragraph (h) of 
this section) or

[[Page 228]]

direct costs classified as factory cost or other manufacturing cost (see 
paragraphs (c) and (d) of this section), such as premiums on performance 
or other bonds required under the contract or subcontract; State sales 
taxes imposed on the contracting party; freight on outgoing shipments; 
fees paid for wind tunnel and model basin tests; demonstration and test 
expenses; crash insurance premiums; traveling expenses. In order for any 
such item to be allowed as a charge directly to the cost of performing a 
contract or subcontract, (i) a detailed record shall be kept by the 
contracting party of all items of a similar character, and (ii) no item 
of a similar character which is properly a direct charge to other work 
shall be allowed as a part of any indirect expenses in determining the 
proper proportion thereof chargeable to the cost of performing the 
contract or subcontract. As to allowable indirect expenses, see 
paragraphs (c)(5), (f), (g), and (j) of this section.
    (f) Indirect engineering expenses. Indirect engineering expenses, 
usually termed ``engineering overhead,'' which are treated in this 
section as a part of general expenses in determining the cost of 
performing a contract or subcontract (see paragraph (b) of this 
section), comprise the general engineering expenses which are incident 
to and necessary for the performance of the contract or subcontract, 
such as the following:
    (1) Labor. Reasonable fees of engineers employed in a general 
consulting capacity, and compensation of employees for personal services 
to the engineering department, such as supervision, which is properly 
chargeable to the contract or subcontract, but which is not chargeable 
as direct engineering labor (see paragraph (c)(3) of this section).
    (2) Material. Supplies for the engineering department, such as paper 
and ink for drafting and similar supplies.
    (3) Miscellaneous expenses. Expenses of the engineering department, 
such as (i) maintenance and repair of engineering equipment, and (ii) 
services purchased outside of the engineering department for blue- 
printing, drawing, computing, and like purposes.
    (g) Expenses of distribution, servicing and administration. Expenses 
of distribution, servicing and administration, which are treated in this 
section as a part of general expenses in determining the cost of 
performing a contract or subcontract (see paragraph (b) of this 
section), comprehend the expenses incident to and necessary for the 
performance of the contract or subcontract, which are incurred in 
connection with the distribution and general servicing of the 
contracting party's products and the general administration of the 
business, such as:
    (1) Compensation for personal services of employees. The salaries of 
the corporate and general executive officers and the salaries and wages 
of administrative clerical employees and of the office services 
employees such as telephone operators, janitors, cleaners, watchmen and 
office equipment repairmen.
    (2) Bidding and general selling expenses. Bidding and general 
selling expenses which by reference to all the pertinent facts and 
circumstances reasonably constitute a part of the cost of performing a 
contract or subcontract. The treatment of bidding and general selling 
expenses as a part of general expenses in accordance with this paragraph 
is in lieu of any direct charges which otherwise might be made for such 
expenses. The term ``bidding expenses'' as used in this section includes 
all expenses in connection with preparing and submitting bids.
    (3) General servicing expenses. Expenses which by reference to all 
the pertinent facts and circumstances reasonably constitute a part of 
the cost of performing a contract or subcontract and which are incident 
to delivered or installed articles and are due to ordinary adjustments 
or minor defects; but including no items which are treated as a part of 
guarantee expenses (see paragraph (h) of this section) or as a part of 
direct costs, such as direct materials, direct labor, and other direct 
expense.
    (4) Other expenses. Miscellaneous office and administrative 
expenses, such as stationery and office supplies; postage; repair and 
depreciation of office equipment; contributions to local charitable or 
community organizations to the extent constituting ordinary and 
necessary business expenses; employees' welfare expenses; premiums and 
dues on compensation insurance; employers' payments to unemployment, old 
age and social security Federal and State funds not including payments 
deducted from or chargeable to employees or officers; pensions and 
retirement payments to administrative office employees and accident 
compensation to office employees (as to self-insurance, see subdivision 
(i) of this subparagraph).
    (i) Subject to the exception stated in this subdivision, in cases 
where a contracting party assumes its own insurable risks (usually 
termed ``self-insurance''), losses and payments will be allowed in the 
cost of performing a contract or subcontract only to the extent of the 
actual losses suffered or payments incurred during, and in the course 
of, the performance of the contract or subcontract and properly 
chargeable to such contract or subcontract. If, however, a contracting 
party assumes its own insurable risks (a) for compensation paid to 
employees for injuries received in the performance of their duties, or 
(b) for unemployment risks in States where insurance is required, there

[[Page 229]]

may be allowed as a part of the cost of performing a contract or 
subcontract a reasonable portion of the charges set up for purposes of 
self-insurance under a system of accounting regularly employed by the 
contracting party, as determined by the Commissioner of Internal 
Revenue, at rates not exceeding the lawful or approved rates of 
insurance companies for such insurance, reduced by amounts representing 
the acquisition cost in such companies, provided the contracting party 
adopts and consistently follows this method with respect to self-
insurance in connection with all contracts and subcontracts subsequently 
performed by him.
    (ii) Allowances for interest on invested capital are not allowable 
as costs of performing a contract or subcontract.
    (iii) Among the items which shall not be included as a part of the 
cost of performing a contract or subcontract or considered in 
determining such cost, are the following: Entertainment expenses; dues 
and memberships other than of regular trade associations; donations 
except as otherwise provided above; losses on other contracts; profits 
or losses from sales or exchanges of capital assets; extraordinary 
expenses due to strikes or lockouts; fines and penalties; amortization 
of unrealized appreciation of values of assets; expenses, maintenance 
and depreciation of excess facilities (including idle land and building, 
idle parts of a building, and excess machinery and equipment) vacated or 
abandoned, or not adaptable for future use in performing contracts or 
subcontracts; increases in reserve accounts for contingencies, repairs, 
compensation insurance (except as above provided with respect to self-
insurance) and guarantee work; Federal and State income and excess-
profits taxes and surtax