Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules 53503

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–114000–97]

RIN–1545–AV41

Withholding on Interest in the Case of

Sales of Obligations Between Interest

Payment Dates

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This notice of proposed

rulemaking provides guidance regarding

the obligation to withhold on interest

paid with respect to obligations in the

case of the sale of obligations between

interest payment dates. These

regulations would affect United States

and foreign withholding agents and

recipients. This document also provides

notice of a public hearing on these

proposed regulations.

DATES: Comments and outlines of oral

comments to be presented at the public

hearing scheduled for January 26, 1998,

at 10 a.m. must be received by January

5, 1998.

ADDRESSES: Send submission to:

CC:DOM:CORP:R (REG–114000–97),

room 5226, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington DC 20224. Submissions

may be hand delivered between the

hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG–114000–97),

Courier desk, Internal Revenue Service,

1111 Constitution Avenue, NW.,

Washington DC. Alternatively,

taxpayers may submit comments

electronically via the internet by

selecting the ‘‘Tax Regs’’ option on the

IRS Home Page, or by submitting

comments directly to the IRS internet

site at http://www.irs.ustreas.gov/prod/

taxlregs/comments.html. The hearing

scheduled for January 26, 1998, will be

held in the Commissioner’s Conference

Room, room 3313, Internal Revenue

Service, 1111 Constitution Avenue,

NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Lilo Hester

at (202) 622–3840 (not a toll-free

number); concerning submissions and

the hearing, Evangelista Lee, (202) 622–

7180 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

In this issue of the Federal Register,

the IRS and Treasury are publishing

final withholding and reporting

regulations under chapter 3 of the

Internal Revenue Code (Code) and other

sections of the Code. Section 1.1441–

3(b)(2) of the final regulations provides

that no withholding is required upon

interest accrued on the date of a sale of

debt obligations when the sale occurs

between two interest payment dates,

even though the amount is treated as

interest under § 1.61–7 (c) or (d) and is

subject to tax under section 871 or 881.

In contrast, § 1.1441–2(b)(3) of the final

regulations provides that withholding is

required on amounts of original issue

discount in the event of a sale of an

original issue discount obligation or a

payment on such an obligation, subject

to certain exceptions. The IRS and

Treasury believe that, in view of these

provisions, the exemption from

withholding on non-OID amounts is no

longer justified. A withholding agent

that pays amounts to a foreign person in

connection with the sale of an

obligation between interest payments

dates is in the same position as a

withholding agent that pays amounts to

a foreign person in connection with the

sale of an original issue discount

obligation. The withholding exemption

for sale of debt obligations between

interest payment dates provides an easy

avenue for the avoidance of the

documentation requirements imposed

under sections 871(h) and 881(c) for

purposes of qualifying interest on

registered debt obligations as portfolio

interest. For this reason, and in order to

create parity with the tax treatment of

original issue discount obligations

under chapter 3 of the Code, it is no

longer appropriate to continue this

exemption.

Under § 1.1441–2(b)(3), a withholding

agent must withhold on an amount of

original issue discount to the extent that

it has actual knowledge of the

proportion of the amount of the

payment that is taxable to the beneficial

owner under section 871(a)(1)(C) or

881(a)(3)(A). A withholding agent has

actual knowledge if it knows how long

the beneficial owner has held the

obligation, the terms of the obligation,

and the extent to which the beneficial

owner purchased the obligation at a

premium. A withholding agent is

treated as having knowledge if the

information is reasonably available.

Special rules are provided for

withholding agents with which the

beneficial owner does not maintain a

direct account relationship. Further, the

regulations under § 1.1441–2(b)(3)

dealing with original issue discount

provide that, in the case of an obligation

that would qualify as portfolio interest

if documentation were provided to the

withholding agent, withholding is

required on the entire amount of stated

interest, if any, and original issue

discounts, if no such documentation is

provided, irrespective of whether the

withholding agent has knowledge of the

portion of the payment representing

taxable original issue discount. For this

purpose, the withholding agent may rely

upon the IRS List of Original issue

Discount Instruments contained in IRS

Publication 1212 (available from the IRS

Distribution Centers).

In response to comments, the

provisions in § 1.1441–3(b)(1) are

proposed to be modified to reduce the

amount upon which withholding is

required. No obligation to withhold is

imposed under current law on the

payment of stated interest on an

obligation that was purchased between

interest payment dates. Under § 1.61–

7(c), interest received on the interest

payment date is treated as a return of

basis to the extent it represents accrued

unpaid interest as of the date of

purchase as reflected in the new

holder’s basis for the obligation.

Therefore, when the new holder

receives a payment of the stated interest,

the holder s tax liability is limited to the

amount of interest accrued after the date

of purchase (subject to additional

adjustments reflecting possible

acquisition premiums or market

discounts). Because of the difficulty for

a withholding agent to determine the

amount accrued to the holder and other

adjustments affecting the actual amount

taxable to the holder, withholding on

the entire amount of stated interest is

required under the current withholding

regulations under § 1.1441–3(b)(1).

Commentators have asked that the

withholding agent be permitted to

withhold on the amount that it knows

is taxable. The final withholding

regulations did not modify the proposed

regulations on this point because the

Treasury and IRS consider that

withholding on the entire amount is

justified if withholding on sales of

obligations between interest payment

dates is not required. However, because

these proposed regulations require

withholding, the regulations permit a

withholding agent to adjust the amount

of withholding at the time of payment

of stated interest to account for earlier

withholding.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in EO 12866. Therefore, a regulatory

assessment is not required. It also has

been determined that section 553(b) of

the Administrative Procedure Act (5
53504 Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 / Proposed Rules

U.S.C. chapter 5) does not apply to these

regulations, and because the regulation

does not impose a collection of

information on small entities, the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

comments that are submitted timely to

the IRS. All comments will be available

for public inspection and copying.

A public hearing has been scheduled

for January 26, 1998, at 10 a.m. in the

Commissioner’s Conference Room, room

3313, Internal Revenue Building, 1111

Constitution Ave, NW., Washington DC.

Because of access restrictions, visitors

will not be admitted beyond the Internal

Revenue Building lobby more than 15

minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons who wish to present oral

comments at the hearing must submit

comments and an outline of the topics

to be discussed and the time to be

devoted to each topic by January 5,

1998.

A period of 10 minutes will be

allotted to each person for making

comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Proposed Amendments to the

Regulations

Accordingly, CFR part 1 is proposed

to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority for part 1

continues to read in part as follows:

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

Par. 2. In § 1.1441–3, paragraph (b) is

revised to read as follows:

§ 1.1441–3 Determination of amount to be

withheld.

* * * * *

(b) Withholding on payments on

certain obligations—(1) Withholding at

time of payment of interest. When

making a payment on an interestbearing obligation, a withholding agent

must withhold under § 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, unless the withholding

agent has knowledge of the actual

amount of interest paid. For this

purpose, the withholding agent may rely

on information provided by the issuer

(or its paying agent), on a representation

from the beneficial owner, or on

information that the withholding agent

has in its records. To the extent an

amount was withheld on an amount of

capital rather than interest, see rules for

adjustments, refunds, or credits under

§ 1.1441–1(b)(8).

(2) No withholding between interest

payment dates—(i) General rule. A

withholding agent is not required to

withhold under § 1.1441–1 upon

interest accrued on the date of a sale of

debt obligations when that sale occurs

between two interest payment dates

(even though the amount is treated as

interest under § 1.61–7(c) or (d) and is

subject to tax under section 871(a) or

881(a)), unless the withholding agent

has knowledge of the amount paid as

interest. For purposes of this paragraph

(b)(2)(i), a withholding agent is treated

as having knowledge in the same

manner as a withholding agent has

knowledge for purposes of § 1.1441–

2(b)(3)(ii), dealing with withholding on

original issue discount. In addition,

notwithstanding lack of knowledge

(within the meaning of § 1.1441–

2(b)(3)(ii)), withholding is required on

the entire amount of stated interest paid

with respect to the obligation as

determined as of the date of original

issue if the withholding agent, pursuant

to the provisions in § 1.1441–1(b)(3),

treats the payment as made to a foreign

payee because it cannot associate the

payment with required documentation

and the amount would qualify as

portfolio interest. See § 1.1441–1(b)(8)

for adjustments to any amount that has

been overwithheld as a result of this

provision.

(ii) Applicable rules. Any exemption

from withholding pursuant to paragraph

(b)(2)(i) of this section 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 6049 and backup withholding

under section 3406. See § 1.6045–1(c)

for reporting requirements by brokers

with respect to sale proceeds. Any

exemption from withholding under

paragraph (b)(2)(i) of this section is not

a determination that the accrued interest

is not fixed or determinable annual or

periodical income. See § 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).

Michael P. Dolan,

Acting Commissioner of Internal Revenue.

[FR Doc. 97–26000 Filed 10–6–97; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG–107872–97]

RIN 1545–AV27

Electronic Transmission of Form W–8

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations relating to the

submission of Form W–8, a withholding

certificate, needed for purposes of

chapters 3 and 61 of the Internal

Revenue Code (Code) and other

withholding or reporting provisions of

the Code, such as section 3402, 3405, or

3406. The proposed regulations provide

guidance to withholding agents and

payors who wish to establish an

electronic system for use by beneficial

owners or payees in furnishing Form

W–8. The proposed regulations state the

general requirements that such an

electronic system must satisfy so that a

withholding agent or payor may rely on

a Form W–8 transmitted through such a

system. These regulations affect

withholding agents and payors that

establish electronic systems and

beneficial owners and payees who use

these systems.

DATES: Written comments and requests

for a public hearing must be received by

January 12, 1998.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (REG–107872–97),

room 5228, Internal Revenue Service,

POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions

may be hand delivered between the

hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (REG–107872–97),

Courier’s Desk, Internal Revenue

Service, 1111 Constitution Avenue,

NW., Washington, DC. Alternatively,

taxpayers may submit comments

electronically via the Internet by