Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66105

LIMITATIONS PERIOD WOULD

EXPIRE EARLIER WITHOUT SUCH

EXTENSION, FOR ANY ITEMS

AFFECTED IN ANY TAXABLE YEAR

BY THE FILING OF THIS ELECTION,’’

and a declaration that either

‘‘AMENDED RETURNS WILL BE FILED

FOR ALL TAXABLE YEARS AFFECTED

BY THE FILING OF THIS ELECTION

WITHIN 180 DAYS OF MAKING THIS

STATEMENT, UNLESS SUCH

REQUIREMENT IS WAIVED IN

WRITING BY THE DISTRICT

DIRECTOR OR HIS DELEGATE’’ or

‘‘ALL RETURNS PREVIOUSLY FILED

ARE CONSISTENT WITH THE

PROVISIONS OF §§ 1.597–1 THROUGH

1.597–6,’’ and be signed by an

individual who is authorized to make

the election under this paragraph (c) on

behalf of the taxpayer. An election with

respect to a consolidated group must be

made by the common parent of the

group, not Agency, and applies to all

members of the group.

(ii) Effect of elective disaffiliation. To

make the affirmative election described

in § 1.597–4(g)(5) for an Institution

placed in Agency receivership in a

taxable year ending before April 22,

1992, the consolidated group must send

the affected Institution the statement

described in § 1.597–4(g)(5) on or before

May 31, 1996. Notwithstanding the

requirements of paragraph (c)(4)(i) of

this section, a consolidated group

sending such a statement is deemed to

make the election described in, and to

agree to the conditions contained in,

this paragraph (c). The consolidated

group must nevertheless attach the

statement described in paragraph

(c)(4)(i) of this section to its first annual

income tax return filed on or after

March 15, 1996.

(d) Reliance on prior guidance—(1)

Notice 89–102. Taxpayers may rely on

Notice 89–102, 1989–2 C.B. 436, to the

extent they acted in reliance on that

Notice prior to April 22, 1992. Such

reliance must be reasonable and

transactions with respect to which

taxpayers rely must be consistent with

the overriding policies of section 597, as

expressed in the legislative history.

(2) Notice FI–46–89—(i) In general.

Notice FI–46–89 was published in the

Federal Register on April 23, 1992 (57

FR 14804). Taxpayers may rely on the

provisions of §§ 1.597–1 through 1.597–

6 of that notice to the extent they acted

in reliance on those provisions prior to

December 21, 1995. Such reliance must

be reasonable and transactions with

respect to which taxpayers rely must be

consistent with the overriding policies

of section 597, as expressed in the

legislative history, as well as the

overriding policies of notice FI–46–89.

(ii) Taxable Transfers. Any taxpayer

described in this paragraph (d) that,

under notice FI–46–89, would be a New

Entity or Acquiring with respect to a

Taxable Transfer on or after April 22,

1992, and before December 21, 1995,

may apply the rules of that notice with

respect to such transaction.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 3. The authority citation for part

301 is amended by adding entries in

numerical order to read as follows:

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

Section 301.7507–1 also issued under

26 U.S.C. 597.

Section 301.7507–9 also issued under

26 U.S.C. 597. * * *

Par. 4. Section 301.7507–1 is

amended by adding paragraph (b)(4) to

read as follows:

§ 301.7507–1 Banks and trust companies

covered.

* * * * *

(b) * * *

(4) The term ceased to do business

means the bank no longer accepts

deposits or makes loans and discounts,

and is winding up its affairs and is in

the process of liquidating its assets to

pay depositors. A bank will not be

considered to have ceased to do

business on account of a transaction in

which the bank—

(i) Transfers assets and liabilities to a

Bridge Bank in a transfer described in

§ 1.597–4 of this chapter;

(ii) Transfers assets and liabilities to

any person in a transaction to which

section 381(a) applies or in which the

transferee receives property with a

transferred basis;

(iii) Transfers assets or liabilities to

any person in a transaction in which

Federal Financial Assistance (as defined

in section 597) is provided to any party

to the transaction, unless all the Federal

Financial Assistance is deposit

insurance under § 301.7507–9(d); or

(iv) Transfers assets or liabilities to

any person in a transaction similar to

any transaction described in paragraphs

(b)(4) (i) through (iii) of this section.

This paragraph (b)(4) applies to taxable

years ending on or after April 22, 1992.

Par. 5. Section 301.7507–9 is

amended by adding a sentence to the

end of paragraph (d) to read as follows:

§ 301.7507–9 Termination of immunity.

* * * * *

(d) * * * For taxable years ending on

or after April 22, 1992, deposit

insurance does not include Federal

Financial Assistance (as defined in

section 597) and other payments

described in section 597(a) prior to its

amendment by the Financial

Institutions Reform, Recovery, and

Enforcement Act of 1989 and, therefore,

such payments must be taken into

account to determine whether a bank’s

assets are sufficient to meet claims of

depositors.

* * * * *

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 6. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 7. In § 602.101, paragraph (c) is

amended by adding entries in numerical

order to the table to read as follows:

§ 602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where

identified and described

Current

OMB control No.

* * * * *

1.597–2 ..................................... 1545–1300

1.597–4 ..................................... 1545–1300

1.597–6 ..................................... 1545–1300

1.597–7 ..................................... 1545–1300

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: December 4, 1995.

Cynthia G. Beerbower,

Assistant Secretary of the Treasury

[FR Doc. 95–30827 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Parts 1, 31, 35a, 301, and 602

[TD 8637]

RIN 1545–AT76

Backup Withholding, Statement

Mailing Requirements, and Due

Diligence

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final and temporary

regulations.

SUMMARY: This document provides final

rules on backup withholding under

sections 3406(a)(1) (A), (C), and (D) of

the Internal Revenue Code of 1986

(Code) when a payee fails to provide a

taxpayer identification number in the

required manner to a person required to

make an information return, when a

payee is subject to notified payee
66106 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

underreporting, or when a payee fails to

certify, under penalties of perjury, that

the payee is not subject to backup

withholding due to notified payee

underreporting.

This document also provides final

rules on the manner for providing a

statement to a payee under sections

6042(c), 6044(e), 6049(c), and 6050N(b)

of the Code.

This document also contains

temporary regulations on the effective

date of §§ 35a.9999–1 through

35a.9999–5, Temporary Employment

Tax Regulations under the Interest and

Dividend Tax Compliance Act of 1983.

The text of these temporary regulations

also serves as the text of the proposed

regulations set forth in the notice of

proposed rulemaking on this subject in

the Proposed Rules section of this issue

of the Federal Register.

DATES: These regulations are effective

December 21, 1995. These regulations

are applicable to transactions occurring

after December 31, 1996.

FOR FURTHER INFORMATION CONTACT:

Renay France of the Office of Assistant

Chief Counsel (Income Tax and

Accounting) with respect to domestic

transactions, 202–622–4910 (not a tollfree number); and Teresa Burridge

Hughes of the Office of Assistant Chief

Counsel (International) with respect to

international transactions, 202–622–

3880 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in this final regulation has

been reviewed and approved by the

Office of Management and Budget in

accordance with the requirements of the

Paperwork Reduction Act (44 U.S.C.

3507) under control number 1545–0112.

Responses to this collection of

information are mandatory.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

The estimated annual burden per

respondent/recordkeeper is

approximately 1 hour, depending on

individual circumstances.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be directed

to the Internal Revenue Service, Attn:

IRS Reports Clearance Officer, PC:FP,

Washington, DC 20224, and to the

Office of Management and Budget,

Attention: Desk Officer for the

Department of the Treasury, Office of

Information and Regulatory Affairs,

Washington, DC 20503.

Books or records relating to this

collection of information must be

retained as long as their contents may

become material in the administration

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

On October 4, 1983, the Federal

Register published Temporary

Employment Tax Regulations under the

Interest and Dividend Tax Compliance

Act of 1983 (26 CFR part 35a) under

sections 3406 and 6676(b) of the

Internal Revenue Code of 1954 (26 CFR

part 35a.9999–1; TD 7916 (48 FR

45362), as amended on November 25,

1983, by TD 7922 (48 FR 53111), on

November 23, 1987, by TD 8163 (52 FR

44861), and on April 11, 1989, by TD

8248 (54 FR 14341). Additional

temporary regulations were published

in the Federal Register on November 25,

1983 (26 CFR part 35a.9999–2; TD 7922

(48 FR 53106), as amended on December

20, 1983, by TD 7929 (48 FR 56342), on

March 13, 1984, by TD 7922 (49 FR

9417), on November 23, 1987, by TD

8163, and on April 11, 1989, by TD 8248

(54 FR 14341)), on December 20, 1983

(26 CFR part 35a.9999–3; TD 7929 (48

FR 56332), as amended on January 3,

1984, by TD 7933 (49 FR 63), on August

22, 1984, by TD 7966 (49 FR 33236), on

November 23, 1987, by TD 8163 (52 FR

44861), and on April 11, 1989, by TD

8248 (54 FR 14341)), on February 28,

1984 (26 CFR part 35a.9999–3A; TD

7946 (49 FR 7227)), on August 22, 1984

(26 CFR part 35a.9999–4T, TD 7966 (49

FR 33237), as amended on August 29,

1984, by TD 7972 (49 FR 34340); and 26

CFR part 35a.9999–5, TD 7967 (49 FR

33240), as amended on September 19,

1984, by TD 7973 (49 FR 36645), on

August 20, 1985, by TD 8046 (50 FR

33526), on April 3, 1986, by TD 8046

(51 FR 11447), on December 19, 1986,

by TD 8110 (51 FR 45453), and on May

19, 1988, by TD 8202 (53 FR 17927)), on

April 23, 1987 (26 CFR part 35a.3406–

2; TD 8137 (52 FR 13430)), and on

November 23, 1987 (26 CFR part

35a.3406–1; TD 8163 (52 FR 44861), as

amended on April 11, 1989, by TD 8248

(54 FR 14341)). Those regulations were

published primarily to provide guidance

under the Interest and Dividend Tax

Compliance Act of 1983.

Proposed regulations on backup

withholding, the statement mailing

requirements, and due diligence were

published in the Federal Register on

September 27, 1990, 55 FR 39427. Those

regulations were proposed under

regulations file number IA–224–82 and

RIN 1545–AE20, which numbers were

closed in error. These final regulations

are issued under regulations file number

IA–31–95 and RIN 1545–AT76.

A public hearing on the proposed

regulations was held on March 4, 1991.

The public submitted written comments

on the proposed regulations. After

consideration of those comments, the

proposed regulations are adopted as

revised by this Treasury decision.

Explanation of Provisions

I. Overview

The proposed regulations contain

rules on the requirement to backup

withhold, which section 3406 imposes

in four situations. First, backup

withholding under section 3406(a)(1)(A)

applies if a payee fails to provide a

taxpayer identification number (TIN) in

the required manner (the A trigger or

certification). Second, backup

withholding under section 3406(a)(1)(B)

applies if the Service or a broker notifies

a payor that a payee provided an

incorrect TIN (the B trigger). Third,

backup withholding under section

3406(a)(1)(C) applies if the Service or a

broker notifies a payor that a payee is

subject to notified payee

underreporting, i.e., the payee has failed

to report and pay tax on reportable

interest and dividends (the C trigger).

Fourth, backup withholding under

section 3406(a)(1)(D) applies if a payee

fails to certify, when required, that the

payee is not subject to backup

withholding under section 3406(a)(1)(C)

(the D trigger).

Because the IRS published final

regulations on the B trigger as a separate

project (TD 8409) in 1992, the final

regulations in this document address

only the other three triggers, sections

3406(a)(1) (A), (C), and (D). The final

regulations on these triggers

considerably shorten as well as simplify

the proposed regulations. In addition,

the final regulations contain several

modifications to the proposed

regulations relating to grantor trusts, S

corporations, reportable payments, and

certain foreign provisions.

II. Changes Regarding Grantor Trusts, S

Corporations, Reportable Payments, and

Certain Foreign Provisions

A. Grantor trusts—proposed

§ 31.3406(a)–2. The proposed

regulations provide that a grantor trust

with ten or fewer grantors is not a payor

under section 3406 and, as a result, has

no obligation to withhold under section

3406 on reportable payments flowing

through the trust and includible in the

gross income of its grantors. However, a

grantor trust with eleven or more

grantors is a payor and must withhold
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66107

under section 3406 on reportable

payments to its grantors who are subject

to such withholding.

Recently, the IRS issued proposed

regulations under section 671 on the

methods of reporting by grantor trusts.

These proposed regulations provide two

regimes for reporting, one for a grantor

trust that is owned (or treated as owned)

by one grantor and another for a grantor

trust that is owned by two or more

grantors. To avoid confusion and

thereby promote simplification, the final

backup withholding regulations are

conformed to these regimes.

Accordingly, under these final

regulations a grantor trust with two or

more grantors is considered a payor and

must withhold on payments to its

grantors who are subject to backup

withholding. For purposes of

determining the number of grantors, a

husband and wife filing a joint return

are considered one grantor. See

§ 31.3406(a)–2(b)(4).

B. S corporations—proposed

§ 31.3406(a)–2(c)(3). Under an exception

in the proposed regulations defining

payors, a partnership making a payment

of a distributive share to a partner is not

considered a payor. The exception does

not include S corporations. Because the

tax treatment of both entities is similar,

the final regulations provide that an S

corporation making a similar

distribution is not a payor under section

3406. See § 31.3406(a)–2(c)(3).

C. Transferred short-term

obligations—proposed § 31.3406(b)(2)–

2. The proposed regulations provide

that a subsequent holder of a short-term

obligation with original issue discount

may establish the purchase price at

which the subsequent holder purchased

the obligation. That purchase price is

then treated as the original issue price

for purposes of computing the amount

of original issue discount subject to

backup withholding. To reduce the

paperwork of issuers and payors of

these obligations, the final regulations

provide that a payor may disregard the

subsequent holder’s purchase price if

the payor’s computer or recordkeeping

system is not able to accept that price

without substantial manual

intervention. See § 31.3406(b)(2)–

2(c)(1)(ii).

D. Foreign provisions. The proposed

regulations contained several provisions

on international transactions that are

not included in the final regulations.

For those international provisions

relating to section 3406, the temporary

regulations under § 35a.9999 remain in

effect.

III. The C Trigger (Payee

Underreporting)

A. Identifying the account subject to

the C trigger—proposed § 31.3406(c)–

1(b)(3) (i) and (iv). The proposed

regulations provide that a payor must

withhold under section 3406(a)(1)(C) on

reportable interest or dividend

payments to all existing accounts of a

payee that the payor can identify

exercising reasonable care.

Commentators suggested several

modifications to or clarifications of the

reasonable care standard. For example,

some commentators suggested that the

procedures for locating and identifying

an account of a payee subject to the C

trigger should more closely resemble the

procedures for identifying an account

subject to the B trigger. In response to

this comment, the final regulations

modify the procedures for identifying

accounts subject to the C trigger, and

thus require a payor to identify those

accounts by identifying accounts with

the same TIN as the one provided in the

notice from the IRS to the payor that

advises the payor to commence

withholding on accounts of a payee.

Commentators also informed the IRS

that some computer systems use a

universal account number that retrieves

all accounts of a payee with that payor.

In light of this information, the final

regulations require payors with such

systems to identify all accounts that can

be so retrieved.

Some commentators also addressed

the requirement under the proposed

regulations that a payor search for

accounts of a payee on the computer or

other recordkeeping system for the

region, division, or branch that serves

the geographic area in which the payee’s

mailing address is located. These

commentators questioned whether

payors must search every such

computer or record system. The final

regulations clarify that a payor need not

search a computer or other

recordkeeping system if it is highly

unlikely that the system contains an

account of the payee that should be

identified as one subject to the C trigger.

See § 31.3406(c)–1(c)(3)(ii).

B. Newly opened accounts—proposed

§ 31.3406(c)–1(b)(3)(ii). Under the

proposed regulations, if a payee subject

to the C trigger has one account with a

payor and subsequently opens another

account, the payor may not rely on the

subsequent Form W–9 on which the

payee certifies that the payee is not

subject to the C trigger, but only if the

payor discovers while processing the

Form W–9 or administering the account

that the Form W–9 is false because the

IRS previously notified the payor to

withhold on the payee under the C

trigger. Commentators argued that this

discovery standard was unclear and

potentially burdensome. As a result, the

final regulations clarify when a payor

may not rely on a Form W–9 provided

by the payee.

Under the final regulations, a payor

has knowledge that a payee opening a

new account with the payor is subject

to withholding under section

3406(a)(1)(C), and thus must commence

backup withholding on reportable

interest and dividend payments to the

new account, only if (1) the employee or

individual agent of the payor receiving

the Form W–9 knows at the time the

payee opens the account that the

payee’s statement under section

3406(a)(1)(D) is not true; (2) at the time

the payor processes the Form W–9 or in

administering the account to which it

relates, the payor discovers that the

payee is currently subject to

withholding under section 3406(a)(1)(C)

on a pre-existing account with the

payor; (3) the payor uses a single Form

W–9 for multiple accounts of the payee;

or (4) the payor uses a universal

identifier to associate all of the payee’s

accounts with the payor and other

accounts under that universal identifier

have been identified as subject to

withholding under section

3406(a)(1)(C). See § 31.3406(c)–

1(c)(3)(iii).

C. Including certain dates in the

notice that the payor must send to a

payee—proposed § 31.3406(c)–1(c)(2)

(ii) and (iii). A commentator objected to

the proposed rule requiring a payor to

include the following dates in the notice

informing a payee that backup

withholding for the C trigger has begun

or will begin: (1) the last date before the

payor must commence backup

withholding, and (2) the date the payor

received the notice from the IRS. The

significant date for the payee is the date

backup withholding begins on the

payee’s account. Therefore, to ease

payors’ administrative costs, the final

regulations require the payor to include

only the date the payor started (or plans

to start) backup withholding in the

notice to the payee. See § 31.3406(c)–

1(d)(2)(iii).

D. Monitoring accounts subject to

withholding—proposed § 31.3406(c)–

1(e). Commentators asked the IRS to

address how long a payor must monitor

an account identified as one subject to

the C trigger, if that account later

becomes dormant. The final regulations

provide that a payor is not required to

backup withhold on dormant accounts.

In this connection, backup withholding

terminates no later than the close of the

third calendar year ending after the later
66108 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

of (1) the date that the payor pays the

last reportable payment to that account,

or (2) the date that the payor received

a notice from the IRS to impose the C

trigger on that account. See

§ 31.3406(c)–1(e)(3).

IV. Special Rules for Acquiring

Accounts (Including a Readily Tradable

Instrument) or Selling a Readily

Tradable Instrument

A. By electronic transmission—

proposed § 31.3406(d)–3. A payee can

acquire by electronic transmission an

account or an instrument that earns

reportable interest or dividends. Under

the proposed regulations the payor, at

its option, may permit a payee to

furnish the certifications relating to the

A and D triggers within 30 days after the

establishment or acquisition of the

account or the instrument (30-day

period) by electronic transmission,

provided that the payee furnishes the

payee’s TIN at the time of the

establishment or the acquisition.

However, if the payee makes any

withdrawal within the 30-day period

and before the payor receives the

payee’s certifications, the payor must

withhold to the extent of any reportable

interest or dividends paid to the payee

during the 30-day period and at the time

of withdrawal.

The proposed regulations provide

comparable rules for the sale of a readily

tradable instrument by electronic

transmission. In this context, the payee

is permitted to withdraw (or reinvest)

up to 69 percent of the gross proceeds

from the sale during the relevant 30-day

period.

Commentators requested that backup

withholding be applied in the same

manner whether the electronic

transmission involves the establishment

or acquisition of an account or a readily

tradable instrument or the sale of a

readily tradable instrument. In response

to this comment, the final regulations

provide that backup withholding

applies if the payee withdraws more

than 69 percent of the reportable

interest or dividends paid to the payee

during the relevant 30-day period and at

the time of withdrawal, but only if the

payor has not received the payee’s

certifications relating to the A and D

triggers at the time of the withdrawal.

See § 31.3406(d)–3(a).

B. By mail—proposed § 31.3406(d)–

3(a)(1). The proposed regulations

provide that a payee may provide the

certifications relating to the A and D

triggers within 30 days after a payee

establishes or acquires a readily tradable

instrument by mail before January 1,

1985, provided the payee furnishes the

payee’s TIN upon the establishment or

acquisition. The proposed regulations

do not provide a similar rule for the sale

of a readily tradable instrument by mail.

To simplify the procedures for

entering into investments which do not

occur in person, the final regulations

provide a 30-day rule for the

establishment or acquisition of an

account or readily tradable instrument

by mail and extend the 30-day rule to

the sale of a readily tradable instrument

by mail. Under the final regulations, if

the payee furnishes the payee’s TIN

before the transaction, backup

withholding applies during the 30-day

period only if the payee withdraws

more than 69 percent of the reportable

payment and if the payor has not

received the payee’s certifications

relating to the A or D triggers,

whichever applies, at the time of the

withdrawal. See § 31.3406(d)–3(a).

V. Section 3406 Confidentiality Issues—

Proposed § 31.3406(f)–1(a)

Section 3406(f) provides that a payor

may not use information obtained under

section 3406 except for meeting a

requirement of that section.

Commentators requested clarification on

what actions a payor or broker may take,

consistent with section 3406(f), in

response to a payee’s failure to provide

the payee’s TIN under section

3406(a)(1)(A). The final regulations

provide that a payor who closes an

account at or before the end of a

calendar year in which the payee opens

the account without providing the

payee’s TIN or documentation of foreign

status, as required, during that year will

not, in the absence of evidence to the

contrary, be deemed in violation of

section 3406(f).

Another commentator inquired

whether prohibiting a payee from

withdrawing funds from the payee’s

account is a violation of section 3406(f).

The final regulations clarify that

refusing to allow a payee to withdraw

funds from the payee’s account solely

because the payee has not furnished a

TIN violates section 3406(f). See

§ 31.3406(f)–1(b)(1).

VI. Exemptions From Backup

Withholding.

A. Interaction of information

reporting and backup withholding

exemptions—proposed § 31.3406(g)–

1(a). Several commentators questioned

the interaction between the rules

exempting payees from information

reporting and those exempting payees

from backup withholding. The class of

recipients exempt from information

reporting is larger than the class exempt

from backup withholding. The final

regulations clarify that the list of the

payees that are specifically exempt from

backup withholding is not exclusive

and that other payees that are exempt

from information reporting also are

exempt from backup withholding. See

§ 31.3406(g)–1(a)(2).

B. Interest on certain life-insurance

contracts—proposed § 31.3406(g)–

1(a)(4). Commentators requested that

the temporary exemption from backup

withholding for interest payments made

before January 1, 1992, on ‘‘advance

premiums’’, ‘‘prepaid premiums’’, or

‘‘premium deposit funds’’, on certain

insurance policies be made permanent.

The final regulations provide an

extension through December 31, 1996.

C. Payments reportable under section

6047—proposed § 31.3406(g)–2(c)(1)

and (2). Commentators noted that,

contrary to the position set forth in the

proposed regulations, backup

withholding does not apply to

designated distributions paid after

December 31, 1984. The final

regulations clarify that backup

withholding does not apply to those

payments. See § 31.3406(g)–2(d).

D. Awaiting-TIN certificate—proposed

§ 31.3406(g)–3. Commentators requested

simplification of the backup

withholding rules applicable to

accounts for which a payor has received

an awaiting-TIN certification. One

suggestion was that backup withholding

should not apply during the period (up

to 60 days) that the payee is waiting for

the payee’s TIN if no more than 69

percent of the reportable payment is

withdrawn during the 60-day period.

The final regulations adopt this

suggestion. Therefore, backup

withholding is deferred during the 60-

day period unless the payee makes a

withdrawal (of more than $500 in one

transaction) during that time or has

failed to provide the certification

relating to the D trigger. If the payee

makes a withdrawal of more than $500

in one transaction during the 60-day

period, backup withholding applies to

the extent of any reportable interest or

dividends made to the account during

the 60-day period and at the time of

withdrawal unless the payee reserves 31

percent of all reportable payments made

to the account during that period.

Payors may elect, however, to impose

withholding during the 60-day period.

See § 31.3406(g)–3(a)(2) and (3).

Commentators requested clarification

of the interaction of the awaiting-TIN

rules for post-1983 accounts or

instruments and the obligation of the

payee to provide the certification

relating to the D trigger that the payee

is not subject to backup withholding

due to the C trigger. The final

regulations clarify that in spite of the
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66109

awaiting-TIN certification, backup

withholding applies under section

3406(a)(1)(D) during the 60-day period if

the payee has not provided this

certification to the payor. See

§ 31.3406(g)–3(a)(1).

A commentator asked whether the 60-

day period refers to calendar or business

days. Accordingly, the final regulations

clarify that the term ‘‘day’’ means a

calendar day. See §§ 31.3406(g)–3 and

31.3406(h)–1(e).

VII. Other Changes

A. Identifying the person listed on a

joint account as the one subject to

withholding—proposed § 31.3406(h)–

2(a). Under the proposed regulations, a

payor of a reportable payment to a joint

account may treat the first person listed

on the account (or on the instrument) as

the payee subject to information

reporting and backup withholding. The

final regulations provide that the

relevant payee is the one whose name

and TIN combination the payor uses for

information reporting purposes,

whether or not that account or

instrument registration lists that payee

first. See § 31.3406(h)–2(a)(1).

B. Backup withholding on payments

made in property—proposed

§ 31.3406(h)–2(b). Under the proposed

regulations, a payor making a reportable

payment in property subject to backup

withholding must withhold on an

amount equal to the fair market value of

the property. The obligation to withhold

occurs at the time the property is paid

to the payee. Consequently, the payor

must find an alternative source, such as

another account of the payee, from

which the payor can satisfy its backup

withholding liability. Otherwise, the

payor must continue to look for

accounts of the payee to satisfy the

payor’s backup withholding liability. A

commentator suggested that the final

regulations add an ending date after

which a payor no longer has to search

for alternative sources from which to

satisfy a backup withholding obligation

arising from a payment in property.

According to this commentator, the

obligation should extinguish after a

reasonable period of time. In response to

this comment, the final regulations

provide that a payor’s obligation to

backup withhold on property terminates

on the earlier of the date sufficient cash

is deposited to the account to fully

satisfy the obligation or the close of the

fourth calendar year after the obligation

arose. See § 31.3406(h)–2(b)(2)(ii).

C. Gross-up of payments by

middlemen—proposed § 31.3406(h)–

2(d). Under the proposed regulations, a

middleman is required to remit the full

amount due a payee unless one of the

requirements for imposing backup

withholding exists at the time of

payment. Thus, the middleman is

required to remit the full amount even

though an upstream payor erroneously

withheld on that payment to the

middleman. In that event, the

middleman may recover the difference

between the amount received and the

amount paid to the payee, i.e., 31

percent, by seeking a refund from the

upstream payor or by taking an

equivalent credit against the next

required deposit of employment taxes.

One commentator noted that the

middleman payor incurs a loss in the

time value of money measured from the

time it pays the full amount due to the

payee to the time the payor receives a

refund or credit. Because of this, the

commentator suggested that the

regulations allow the middleman to

remit only the net amount due its payee.

This suggestion presents several

problems. First, it requires a new

reconciliation process to correlate the

backup withholding reflected on the

upstream payor’s Form 945 with the

backup withholding shown as withheld

tax on the payee’s income tax return.

Second, the suggestion produces an

anomalous result, namely, withholding

occurs even though none of the

statutory conditions requiring

withholding exist. For these reasons the

final regulations do not adopt this

suggestion.

D. Refund of amount erroneously

subject to backup withholding—

proposed § 31.6413(a)–3. Under the

proposed regulations, a payor must

refund an amount previously withheld

under the C trigger if the IRS instructs

the payor to do so. This provision is also

set forth in § 35a.9999–3 Q/A–38 of the

Temporary Employment Tax

Regulations issued under the Interest

and Dividend Tax Compliance Act of

1983, as amended by TD 8248 (54 FR

18713) on May 2, 1989. One

commentator suggested eliminating this

refund provision. This rule was needed

initially to allow refunds in certain

cases where payees had interest or

dividend income subject to backup

withholding under the C trigger but had

no income tax liability on this income.

The IRS has subsequently enhanced its

C withholding program to eliminate C

notices to payors in such cases. Thus,

the final regulations adopt the

suggestion and delete the proposed rule.

See § 31.6413(a)–3.

E. Effective date. The final regulations

are effective for reportable payments

made and transactions occurring after

December 31, 1996, and, optionally, for

reportable payments made and

transactions occurring on or after

December 21, 1995. See § 31.3406(i)–1.

F. Coordination with the temporary

regulations—§§ 35a.9999–1 through

35a.9999–5. The temporary regulations

issued under 26 CFR Part 35a are not

effective for noninternational

transactions occurring on and after the

effective date of the final regulations.

The temporary regulations, however,

remain effective for the due diligence

safe harbor and for international

transactions, including transactions

involving a foreign payee, a foreign

payor, or a payment from sources

without the United States.

G. Statement mailing requirement—

proposed §§ 1.6042–5, 1.6044–6,

1.6049–6, and 1.6050N–1. These final

regulations set forth rules on the manner

in which a payor who is required to file

an information return for dividends and

corporate earnings and profits,

patronage dividends, interest, and

royalties under sections 6042(c),

6044(e), 6049(c), and 6050N(b),

respectively, must provide a copy of

that information return to the payee, i.e.,

payee statement mailing.

The proposed regulations limit the

permissible nontax enclosures

includible in a statement mailing.

Several commentators requested that the

inclusion of additional nontax

enclosures be permitted. This

suggestion was not adopted because the

relevant legislative history indicates that

Congress wanted to substantially restrict

the nontax enclosures in a statement

mailing.

H. Correct identifying number for

estates—proposed § 301.6109–1. The

final regulations clarify that the

taxpayer identification number to be

used to identify estates of decedents is

the employer identification number

(rather than a social security number).

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in E.O.

12866. Therefore, a regulatory

assessment is not required. It has also

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Small Business

Administration for comment on its

impact on small business.
66110 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

Drafting Information

The principal author of these

regulations is Renay France of the Office

of Assistant Chief Counsel (Income Tax

and Accounting), IRS. However, other

personnel from the IRS and Treasury

Department participated in their

development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

26 CFR Part 31

Employment taxes, Income taxes,

Penalties, Pensions, Railroad retirement,

Reporting and recordkeeping

requirements, Social security,

Unemployment compensation.

26 CFR Part 35a

Employment taxes, Income taxes,

Reporting and recordkeeping

requirements.

26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

26 CFR Part 602

Reporting and recordkeeping

requirements.

Adoption of Amendments to the

Regulations

The amendments to 26 CFR parts 1,

31, 35a, 301, and 602 read 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 * * *

Section 1.6049–6 also issued under

6049(a), (b), and (d). * * *

Par. 2. Section 1.6042–4 is revised as

follows:

§ 1.6042–4 Statements to recipients of

dividend payments.

(a) Requirement. A person required to

make an information return under

section 6042(a)(1) and § 1.6042–2 must

furnish a statement to each recipient

whose identifying number is required to

be shown on the related information

return for dividend payments.

(b) Form of the statement. The

statement required by paragraph (a) of

this section must be either the official

Form 1099 prescribed by the Internal

Revenue Service for the respective

calendar year or an acceptable substitute

statement that contains provisions that

are substantially similar to those of the

official Form 1099 for the respective

calendar year. For further guidance on

how to prepare an acceptable substitute

statement, see Rev. Proc. 95–30 (1995–

27 I.R.B. 9) (or its successor),

republished as ‘‘Rules and

Specifications for Private Printing of

Substitute Forms 1096, 1098, 1099

Series, 5498, and W–2G.’’ See

§ 601.601(d)(2) of this chapter.

(c) Aggregation of payments. A payor

may aggregate on one Form 1099 all

payments made to a recipient with

respect to each separate account during

a calendar year.

(d) Manner of providing statements to

recipients—(1) In general. The Form

1099, or acceptable substitute statement,

must be provided to the recipient either

in person or by first-class mail to the

recipient’s last known address in a

statement mailing.

(2) Statement mailing requirement.

The mailing required under section

6042(c) of a Form 1099 to a payeerecipient must qualify as a statement

mailing. A statement mailing must

contain the required Form 1099 or

acceptable substitute statement (written

statement) and must comply with

enclosure and envelope restrictions.

(i) Enclosure restrictions. To qualify

as a statement mailing, the mailing

cannot contain any enclosures except

those listed in this paragraph (d)(2)(i).

Moreover, no promotional or advertising

material is permitted in the mailing of

the written statement. Even a de

minimis amount of promotional or

advertising material violates the

statement mailing requirement.

However, a logo on the envelope

containing the written statement and on

nontax enclosures described in

paragraph (d)(2)(i) (A) through (D) of

this section does not violate the written

statement requirement. The written

statement required under section

6042(c) and paragraph (a) of this section

may be perforated to a check or to a

statement of the recipient-payee’s

specific account with the payor

described in paragraph (d)(2)(i) (A) or

(C) of this section. The enclosure to

which the written statement is

perforated must contain, in a bold and

conspicuous type, the legend:

‘‘Important Tax Return Document

Attached.’’ The enclosures permitted in

a mailing are limited to—

(A) A check with respect to the

account reported on the written

statement;

(B) A letter explaining why a check

with respect to such account is not

enclosed with the written statement (for

example, because a dividend has not

been declared payable);

(C) A statement of the taxpayerrecipient’s specific account with the

payor if payments on such account are

reflected on the written statement;

(D) A letter limited to an explanation

of the tax consequences of the

information set forth on the enclosed

written statement;

(E) Payee statements related to other

Forms 1099, Form 1098, and Form 5498

(or the account balance on a Form

5498), Forms W–2 and W–2G; and

(F) Any document concerning the

solicitation of the Form W–9 or Form

W–8.

(ii) Envelope and delivery

restrictions—(A) Envelope restrictions.

The outside of the envelope in which

the written statement is mailed and each

nontax enclosure enclosed in the

envelope must contain, in a bold and

conspicuous type, the legend:

‘‘Important Tax Return Document

Enclosed.’’ For purposes of this

paragraph (d)(2)(ii), a nontax enclosure

is any item listed in paragraphs

(d)(2)(i)(A) through (C) of this section.

However, a payor is not required to

include the legend on the outside of an

envelope containing only the enclosures

in paragraph (d)(2)(i)(D) through (F) of

this section.

(B) Delivery restrictions. The

requirement to provide the written

statement in person or by first-class mail

may be satisfied by sending the written

statement and any enclosures described

in paragraph (d)(2)(i) of this section by

intra-office mail, provided that intraoffice mail is used by the payor in

sending account activity, balance

information, and other correspondence

to the payee. If a payor does not

personally deliver the written statement

(i.e., the Form 1099 or its acceptable

substitute) to the recipient or mail it to

the recipient in a statement mailing as

described in this paragraph (d), the

payor is considered to have failed to

mail the statement required under

section 6042(c) and will be subject to

the penalty under section 6722.

(e) Time for furnishing statements—

(1) In general. Each statement required

by section 6042(c) and this section to be

furnished to any person for a calendar

year must be furnished to such person

after November 30 of the year and on or

before January 31 (February 10 in the

case of a nominee filing under § 1.6042–

2(a)(1)(iii)) of the following year, but no

statement may be furnished before the

final dividend for the calendar year has

been paid. However, the statement may

be furnished at any time after April 30

if it is furnished with the final dividend

for the calendar year.

(2) Extensions of time. For good cause

upon written application of the person

required to furnish statements under
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66111

this section, the Director, Martinsburg

Computing Center, may grant an

extension of time not exceeding 30 days

in which to furnish such statements.

The application must be addressed to

the Director, Martinsburg Computing

Center, and must contain a full recital

of the reasons for requesting the

extension to aid the Director in

determining the period of the extension,

if any, that will be granted. Such a

request in the form of a letter to the

Director, Martinsburg Computing

Center, signed by the applicant will

suffice as an application. The

application must be filed on or before

the date prescribed in paragraph (e)(1)

of this section.

(3) Last day for furnishing statement.

For provisions relating to the time for

performance of an act when the last day

prescribed for performance falls on

Saturday, Sunday, or a legal holiday, see

section 7503 and § 301.7503–1 of this

chapter (Regulations on Procedure and

Administration). (f) Penalty. For

provisions relating to the penalty for the

failure to furnish a statement under this

section, see section 6722.

(g) Effective date. This section is

effective for payee statements due after

December 31, 1995, without regard to

extensions. For the substantially similar

statement mailing requirements that

apply with respect to forms required to

be filed after October 22, 1986, and

before January 1, 1996, see Rev. Proc.

84–70 (1984–2 C.B. 716) (or successor

revenue procedures). See § 601.601(d)(2)

of this chapter.

Par. 3. Section 1.6044–5 is revised as

follows:

§ 1.6044–5 Statements to recipients of

patronage dividends.

(a) Requirement. A person required to

make an information return under

section 6044(a)(1) and § 1.6044–2 must

furnish a statement to each recipient

whose identifying number is required to

be shown on the related information

return for patronage dividends paid.

(b) Form, manner, and time for

providing statements to recipients. The

statement required by paragraph (a) of

this section must be either the official

Form 1099 prescribed by the Internal

Revenue Service for the respective

calendar year or an acceptable substitute

statement. The rules under § 1.6042–4

(relating to statements with respect to

dividends) apply comparably in

determining the form of an acceptable

substitute statement permitted by this

section. Those rules also apply for

purposes of determining the manner of

and time for providing the Form 1099 or

its acceptable substitute to a recipient

under this section. However, each Form

1099 or acceptable substitute statement

required by this section must be

furnished on or before January 31 of the

following year, but no statement may be

furnished before the final payment has

been made for the calendar year.

(c) Penalty. For provisions relating to

the penalty for the failure to furnish a

statement under this section, see section

6722.

(d) Effective date. This section is

effective for payee statements due after

December 31, 1995, without regard to

extensions. For the substantially similar

statement mailing requirements that

apply with respect to forms required to

be filed after October 22, 1986, and

before January 1, 1996, see Rev. Proc.

84–70 (1984–2 C.B. 716) (or successor

revenue procedures). See § 601.601(d)(2)

of this chapter.

Par. 4. Section 1.6049–6 is amended

by:

1. Revising the section heading.

2. Removing the language ‘‘section

3451’’ and adding ‘‘section 3406’’ in

each of the following locations:

a. Paragraph (a), second sentence.

b. Paragraph (a), third sentence.

c. Paragraph (a), fourth sentence.

3. Removing the language ‘‘section

3451’’ and adding ‘‘section 3406’’ in

each of the following locations:

a. Paragraph (b)(1)(ii).

b. Paragraph (b)(2)(ii).

4. Adding paragraph (e).

5. Removing the authority citation at

the end of the section.

The revision and additions read as

follows:

§ 1.6049–6 Statements to recipients of

interest payments and holders of

obligations for attributed original issue

discount.

* * * * *

(e) Statements to recipients—(1)

Requirement. A person required to make

an information return under section

6049(a) and § 1.6049–4 must furnish a

statement to each recipient whose

identifying number is required to be

shown on the related information return

for interest or original issue discount

paid or accrued.

(2) Form, manner, and time for

providing statements to recipients. The

statement required by paragraph (e)(1)

of this section must be either the official

Form 1099 prescribed by the Internal

Revenue Service for the respective

calendar year or an acceptable substitute

statement. The rules under § 1.6042–4

(relating to statements with respect to

dividends) apply comparably in

determining the form of an acceptable

substitute statement permitted by this

paragraph (e). Those rules also apply for

purposes of determining the manner of

and time for providing the Form 1099 or

its acceptable substitute to a recipient

under paragraph (e)(1) of this section.

However, with respect to original issue

discount, the Form 1099 or acceptable

substitute statement required by

paragraph (e)(1) of this section must

show the aggregate amount of original

issue discount includible in the gross

income by the recipient for the calendar

year with respect to the obligation

(determined by applying the rules of

§ 1.6049–4(b)(2)), and the amount, serial

number, or other identifying number of

each obligation with respect to which a

return is being made. With respect to

interest or original issue discount, the

Form 1099 or acceptable substitute

statement required by paragraph (e)(1)

of this section must be furnished to the

recipient on or before January 31 of the

year following the calendar year for

which the return under section

6049(a)(1) was required to be made.

(3) Penalty. For provisions relating to

the penalty for the failure to furnish a

statement under this section, see section

6722.

(4) Effective date. This paragraph (e)

is effective for payee statements due

after December 31, 1995, without regard

to extensions. For the substantially

similar statement mailing requirements

that apply with respect to forms

required to be filed after October 22,

1986, and before January 1, 1996, see

Rev. Proc. 84–70 (1984–2 C.B. 716) (or

successor revenue procedures). See

§ 601.601(d)(2) of this chapter.

Par. 5. Section 1.6050N–1 is added to

read as follows:

§ 1.6050N–1 Statements to recipients of

royalties.

(a) Requirement. A person required to

make an information return under

section 6050N(a) must furnish a

statement to each recipient whose name

is required to be shown on the related

information return for royalties paid.

(b) Form, manner, and time for

providing statements to recipients. The

statement required by paragraph (a) of

this section must be either the official

Form 1099 prescribed by the Internal

Revenue Service for the respective

calendar year or an acceptable substitute

statement. The rules under § 1.6042–4

(relating to statements with respect to

dividends) apply comparably in

determining the form of the acceptable

substitute statement permitted by this

section. Those rules also apply for

purposes of determining the manner of

and time for providing the Form 1099 or

its acceptable substitute statement to a

recipient under this section.

(c) Penalty. For provisions relating to

the penalty for failure to furnish a
66112 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

statement under this section, see section

6722.

(d) Effective date. This section is

effective for payee statements due after

December 31, 1995, without regard to

extensions. For the substantially similar

statement mailing requirements that

apply with respect to forms required to

be filed after October 22, 1986, and

before January 1, 1996, see Rev. Proc.

84–70 (1984–2 C.B. 716) (or successor

revenue procedures). See § 601.601(d)(2)

of this chapter.

PART 31—EMPLOYMENT TAXES AND

COLLECTION OF INCOME TAX AT

SOURCE

Par. 6. The authority for Part 31 is

amended by removing the entry for

§ 31.3406(d)–5 and by adding an entry

in numerical order to read as follows:

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

Sections 31.3406(a)–1 through 31.3406(i)–

1 also issued under 26 U.S.C. 3406(i).

Par. 7. Section 31.3406–0 is revised to

read as follows:

§ 31.3406–0 Outline of the backup

withholding regulations.

This section lists paragraphs

contained in §§ 31.3406(a)–1 through

31.3406(i)–1.

§ 31.3406(a)–1 Backup withholding

requirement on reportable payments.

(a) Overview.

(b) Conditions that invoke the backup

withholding requirement.

(1) Conditions applicable to all reportable

payments.

(2) Conditions applicable only to

reportable interest or dividend payments.

(c) Exceptions.

(d) Cross references.

§ 31.3406(a)–2 Definition of payors

obligated to backup withhold.

(a) In general.

(b) Middlemen treated as payors.

(c) Persons not treated as payors.

§ 31.3406(a)–3 Scope and extent of

accounts subject to backup withholding.

§ 31.3406(a)–4 Time when payments are

considered to be paid and subject to backup

withholding.

(a) Timing.

(1) In general.

(2) Special rules for dividends.

(b) Amounts reportable under section 6045.

(1) In general.

(2) Special rule for interest accrued on

bonds.

(c) Middlemen.

(1) In general.

(2) Special rule for common trust funds.

(3) Special rule for certain grantor trusts.

§ 31.3406(b)(2)–1 Reportable interest

payment.

(a) Interest subject to backup withholding.

(1) In general.

(2) Special rule for tax-exempt interest.

(b) Amount subject to backup withholding.

(1) In general.

(2) Special rule to adjust for premature

withdrawal penalty.

§ 31.3406(b)(2)–2 Original issue discount.

(a) Original issue discount subject to

backup withholding.

(b) Amount subject to backup withholding

and time when backup withholding is

imposed with respect to short-term

obligations.

(c) Transferred short-term obligations.

(1) Subsequent holder may establish

purchase price.

(2) Subsequent holder unable (or not

permitted) to establish purchase price.

(3) Transferred obligation.

(d) Amount subject to backup withholding

and time when backup withholding is

imposed with respect to long-term

obligations.

(1) No cash payments prior to maturity.

(2) Registered long-term obligations with

cash payments prior to maturity.

(3) Transferred registered long-term

obligations with payments prior to maturity.

(e) Bearer long-term obligations.

(1) Payments prior to maturity.

(2) Payments at maturity.

§ 31.3406(b)(2)–3 Window transactions.

(a) Requirement to backup withhold.

(b) Window transaction defined.

(c) Manner of furnishing taxpayer

identification number in the case of a

window transaction.

§ 31.3406(b)(2)–4 Reportable dividend

payment.

(a) Dividends subject to backup

withholding.

(b) Dividends not subject to backup

withholding.

(c) Amount subject to backup withholding.

(1) In general.

(2) Reasonable estimate of amount of

dividend subject to backup withholding.

(3) Reinvested dividends.

§ 31.3406(b)(2)–5 Reportable patronage

dividend payment.

(a) Patronage dividends subject to backup

withholding.

(b) Amount subject to backup withholding.

(1) Failure to provide taxpayer

identification number or notification of

incorrect taxpayer identification number.

(2) Notified payee underreporting or payee

certification failure.

§ 31.3406(b)(3)–1 Reportable payments of

rents, commissions, nonemployee

compensation, etc.

(a) Section 6041 and 6041A(a) payments

subject to backup withholding.

(b) Amount subject to backup withholding.

(1) In general.

(2) Net commissions.

(3) Payments aggregating $600 or more for

the calendar year.

§ 31.3406(b)(3)–2 Reportable barter

exchanges and gross proceeds of sales of

securities or commodities by brokers.

(a) Transactions subject to backup

withholding.

(b) Amount subject to backup withholding.

(1) In general.

(2) Forward contracts, including foreign

currency contracts, and regulated futures

contracts.

(3) Security sales made through a margin

account.

(4) Security short sales.

(5) Fractional shares.

§ 31.3406(b)(3)–3 Reportable payments by

certain fishing boat operators.

(a) Payments subject to backup

withholding.

(b) Amount subject to backup withholding.

§ 31.3406(b)(3)–4 Reportable payments of

royalties.

(a) Royalty payments subject to backup

withholding.

(b) Amount subject to backup withholding.

§ 31.3406(b)(4)–1 Exemption for certain

minimal payments.

(a) In general.

(b) Manner of making the election.

(c) How to annualize.

(1) In general.

(2) Special aggregation rule for reportable

interest and dividends.

(d) Exception for window transactions and

original issue discount.

§ 31.3406(c)–1 Notified payee

underreporting of reportable interest or

dividend payments.

(a) Overview.

(b) Definitions.

(1) Notified payee underreporting.

(2) Payee underreporting.

(c) Notice to payors regarding backup

withholding due to notified payee

underreporting.

(1) In general.

(2) Additional requirements for payors that

are also brokers.

(3) Payor identification of accounts of the

payee subject to backup withholding due to

notified payee underreporting.

(d) Notice from payors of backup

withholding due to notified payee

underreporting.

(1) In general.

(2) Procedures.

(e) Period during which backup

withholding is required.

(1) In general.

(2) Stop withholding.

(3) Dormant accounts.

(f) Notice to payees from the Internal

Revenue Service.

(1) Notice period.

(2) Payee subject to backup withholding.

(3) Disclosure of names of payors and

brokers.

(4) Backup withholding certification.

(g) Determination by the Internal Revenue

Service that backup withholding should not

start or should be stopped.

(1) In general.

(2) Date notice to stop backup withholding

will be provided.
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66113

(3) Grounds for determination.

(4) No underreporting.

(5) Correcting any payee underreporting.

(6) Undue hardship.

(7) Bona fide dispute.

(h) Payees filing a joint return.

(1) In general.

(2) Exceptions.

(i) [Reserved.]

(j) Penalties.

§ 31.3406(d)–1 Manner required for

furnishing a taxpayer identification number.

(a) Requirement to backup withhold.

(b) Reportable interest or dividend account.

(1) Manner required for furnishing a

taxpayer identification number with respect

to a pre-1984 account or instrument.

(2) Determination of pre-1984 account or

instrument.

(3) Manner required for furnishing a

taxpayer identification number with respect

to an account or instrument that is not a pre1984 account.

(4) Special rule with respect to the

acquisition of a readily tradable instrument

in a transaction between certain parties

acting without the assistance of a broker.

(c) Brokerage account.

(1) Manner required for furnishing a

taxpayer identification number with respect

to a brokerage relationship that is not a post1983 brokerage account.

(2) Manner required for furnishing a

taxpayer identification number with respect

to a post-1983 brokerage account.

(d) Rents, commissions, nonemployee

compensation, and certain fishing boat

operators, etc.—Manner required for

furnishing a taxpayer identification number.

§ 31.3406(d)–2 Payee certification failure.

(a) Requirement to backup withhold.

(b) Exceptions.

§ 31.3406(d)–3 Special 30-day rules for

certain reportable payments.

(a) Accounts or readily tradable

instruments acquired directly from the payor

(including a broker who holds an instrument

in street name) by electronic transmission or

by mail.

(b) Sale of an instrument for a customer by

electronic transmission or by mail.

(c) Application to foreign payees.

§ 31.3406(d)–4 Special rules for readily

tradable instruments acquired through a

broker.

(a) Readily tradable instruments acquired

through post-1983 brokerage accounts with a

broker who is not a payor.

(1) In general.

(2) Additional requirements.

(3) Transactions entered into through a

brokerage account that is not a post-1983

brokerage account.

(4) Payor must notify payee.

(b) Notices.

(1) Form of notice by broker to payor.

(2) Form of notice by payor to payee.

(c) Payor’s reliance on information from

broker.

(1) In general.

(2) Amount subject to backup withholding.

§ 31.3406(d)–5 Backup withholding when

the Service or a broker notifies the payor to

withhold because the payee’s taxpayer

identification number is incorrect.

(a) Overview.

(b) Definitions and special rules.

(1) Definition of an incorrect name/TIN

combination.

(2) Definition of account.

(3) Definition of business day.

(4) Certain exceptions.

(c) Notice regarding an incorrect name/TIN

combination.

(1) In general.

(2) Additional requirements for payors that

are also brokers.

(3) Payor identification of the account or

accounts of the payee that have the incorrect

taxpayer identification number.

(4) Special rule for joint accounts.

(5) Date of receipt.

(d) Notice from payors of backup

withholding due to an incorrect name/TIN

combination.

(1) In general.

(2) Procedures.

(e) Period during which backup

withholding is required due to notification of

an incorrect name/TIN combination.

(1) In general.

(2) Grace periods.

(3) Dormant accounts.

(f) Manner required for payee to furnish

certified taxpayer identification number.

(g) Receipt of two notices within a 3-year

period.

(1) In general.

(2) Notice to payee who has provided two

incorrect name/TIN combinations within 3

calendar years.

(3) Period during which backup

withholding is required due to a second

notice of an incorrect name/TIN combination

within 3 calendar years.

(4) Receipt of two notices in one calendar

year.

(5) Notification from the Social Security

Administration (or the Internal Revenue

Service) validating a name/TIN combination.

(h) Payors must use newly provided

certified number.

(i) Effective date.

(j) Examples.

§ 31.3406(e)–1 Period during which backup

withholding is required.

(a) In general.

(b) Failure to furnish a taxpayer

identification number in the manner

required.

(1) Start withholding.

(2) Stop withholding.

(c) Notification of an incorrect taxpayer

identification number.

(d) Notified payee underreporting.

(e) Payee certification failure.

(1) Start withholding.

(2) Stop withholding.

(f) Rule for determining when the payor

receives a taxpayer identification number or

certificate from a payee.

§ 31.3406(f)–1 Confidentiality of

information.

(a) Confidentiality and liability for

violation.

(b) Permissible use of information.

(1) In general.

(2) Window transactions.

(c) Specific restrictions on the use of

information.

§ 31.3406(g)–1 Exception for payments to

certain payees and certain other payments.

(a) Exempt recipients.

(1) In general.

(2) Nonexclusive list.

(b) Determination of whether a person is

described in paragraph (a)(1) of this section.

(c) Prepaid or advance premium lifeinsurance contracts.

§ 31.3406(g)–2 Exception for reportable

payments for which backup withholding is

otherwise required.

(a) In general.

(b) Payment of wages.

(c) Distribution from a pension, annuity, or

other plan of deferred compensation.

(d) Gambling winnings.

(1) In general.

(2) Definition of a reportable gambling

winning and determination of amount

subject to backup withholding.

(3) Special rules.

(e) Certain real estate transactions.

(f) Certain payments after an acquisition of

accounts or instruments.

(g) Certain gross proceeds.

§ 31.3406(g)–3 Exemption while payee is

waiting for a taxpayer identification number.

(a) In general.

(1) Backup withholding not required for 60

days.

(2) Reserve method.

(3) Alternative rule; 7-day grace period.

(b) Special rule for readily tradable

instruments.

(c) Exceptions.

(1) In general.

(2) Special rule for amounts subject to

reporting under section 6045 other than

proceeds of redemptions of bearer

obligations.

(d) Awaiting-TIN certificate.

(e) Form for awaiting-TIN certificate.

§ 31.3406(h)–1 Definitions.

(a) In general.

(b) Taxpayer identification number.

(1) In general.

(2) Obviously incorrect number.

(c) Broker.

(d) Readily tradable instrument.

(e) Day.

(f) Business day.

§ 31.3406(h)–2 Special rules.

(a) Joint accounts.

(1) Relevant name and taxpayer

identification number combination.

(2) Optional rule for accounts subject to

backup withholding under section

3406(a)(1)(B) or (C) where the names are

switched.

(3) Joint foreign payees.

(b) Backup withholding from an alternative

source.

(1) In general.

(2) Exceptions for payments made in

property.

(c) Trusts.
66114 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

(d) Adjustment of prior withholding by

middleman.

(e) Conversion of amounts paid in foreign

currency into United States dollars.

(1) Convertible foreign currency.

(2) Nonconvertible foreign currency.

[Reserved]

(f) Coordination with other sections.

(g) Tax liabilities and penalties.

(h) To whom payor is liable for amount

withheld.

§ 31.3406(h)–3 Certificates.

(a) Prescribed form to furnish information

under penalties of perjury.

(1) In general.

(2) Use of a single or multiple Forms W–

9 for accounts of the same payee.

(b) Prescribed form to furnish a

noncertified taxpayer identification number.

(c) Forms prepared by payors or brokers.

(1) Substitute forms; in general.

(2) Form for exempt recipient.

(d) Special rule for brokers.

(e) Reasonable reliance on certificate.

(1) In general.

(2) Circumstances establishing reasonable

reliance.

(f) Who may sign certificate.

(1) In general.

(2) Notified payee underreporting.

(g) Retention of certificates.

(1) Accounts or instruments that are not

pre-1984 accounts and brokerage

relationships that are post-1983 brokerage

accounts.

(2) Accounts or instruments that are pre1984 accounts and brokerage relationships

that are not post-1983 brokerage accounts.

(h) Cross references.

§ 31.3406(i)–1 Effective date.

Par. 8. Sections 31.3406(a)–1 through

31.3406(a)–4, 31.3406(b)(2)–1 through

31.3406(b)(2)–5, 31.3406(b)(3)–1

through 31.3406(b)(3)–4, 31.3406(b)(4)–

1, 31.3406(c)–1, 31.3406(d)–1 through

31.3406(d)–4, 31.3406(e)–1, 31.3406(f)–

1, 31.3406(g)–1 through 31.3406(g)–3,

31.3406(h)–1 through 31.3406(h)–3, and

31.3406(i)–1 are added to read as

follows:

§ 31.3406(a)–1 Backup withholding

requirement on reportable payments.

(a) Overview. Under section 3406, a

payor must deduct and withhold 31

percent of a reportable payment if a

condition for withholding exists.

Reportable payments mean interest and

dividend payments (as defined in

section 3406(b)(2)) and other reportable

payments (as defined in section

3406(b)(3)). The conditions described in

paragraph (b)(1) of this section apply to

all reportable payments, including

reportable interest and dividend

payments. The conditions described in

paragraph (b)(2) of this section apply

only to reportable interest and dividend

payments.

(b) Conditions that invoke the backup

withholding requirement—(1)

Conditions applicable to all reportable

payments. A payor of a reportable

payment must deduct and withhold

under section 3406 if—

(i) The payee of the reportable

payment does not furnish the payee’s

taxpayer identification number to the

payor, as required in section

3406(a)(1)(A) and § 31.3406(d)–1; or

(ii) The Internal Revenue Service or a

broker notifies the payor that the

taxpayer identification number

furnished by its payee for a reportable

payment is incorrect, as described in

section 3406(a)(1)(B) and § 31.3406(d)–

5.

(2) Conditions applicable only to

reportable interest or dividend

payments. A payor of a reportable

interest or dividend payment must

deduct and withhold under section

3406 if—

(i) The Internal Revenue Service or a

broker notifies the payor that its payee

has underreported interest or dividend

income, as described in section

3406(a)(1)(C) and § 31.3406(c)–1; or

(ii) The payee fails to certify to the

payor or broker that the payee is not

subject to withholding due to notified

payee underreporting, as described in

section 3406(a)(1)(D) and § 31.3406(d)–

2.

(c) Exceptions. The requirement to

withhold does not apply to certain

minimal payments as described in

§ 31.3406(b)(4)–1 or to payments exempt

from withholding under §§ 31.3406(g)–1

through 31.3406(g)–3.

(d) Cross references. For the definition

of payor, see § 31.3406(a)–2. For the

definition of taxpayer identification

number, see § 31.3406(h)–1(b).

§ 31.3406(a)–2 Definition of payors

obligated to backup withhold.

(a) In general. Payor means any

person who is required to make an

information return with respect to any

reportable payment (as described in

section 3406(b)) under section 6041,

6041A(a), 6042, 6044, 6045, 6049,

6050A, or 6050N, including any

middleman as described in paragraph

(b) of this section.

(b) Middlemen treated as payors. A

person who receives or collects a

reportable payment on behalf of or for

the account of a payee is a middleman

and is treated as the payor of the

payment. These persons include, but are

not limited to—

(1) A custodian of a payee’s account,

such as a bank, financial institution, or

brokerage firm acting as custodian of an

account;

(2) A nominee, including the joint

owner of an account or instrument,

except if the joint owners are husband

and wife or if the payment is actually

owned by another person whose name

is also shown on the information return

filed with respect to the payment;

(3) A broker holding a security

(including stock) for a customer in street

name;

(4) A grantor trust established after

December 31, 1995, all of which is

owned by two or more grantors, and for

this purpose spouses filing a joint return

are considered to be one grantor;

(5) A common trust fund; and

(6) A partnership or an S corporation

that makes a reportable payment.

(c) Persons not treated as payors. The

following persons are not treated as

payors for purposes of section 3406 if

the person does not have a reporting

obligation under the section on

information reporting to which the

payment relates:

(1) An agent of the payor who is

acting on behalf of the payor in making

the payment and who has not entered

into an agreement with the payor (for

further guidance see Rev. Proc. 84–33

(1984–1 C.B. 502), and § 601.601(d)(2) of

this chapter), such as a bank that acts as

a paying agent in making a payment of

dividends on behalf of a corporation

(although payments made by the agent

are considered to be payments made by

the payor, and thus are subject to

withholding, reporting, and the

depositing requirements pertaining to

section 3406 as if they were made by the

payor itself, and failure by the agent so

to withhold, report, or deposit is

considered to be failure by the payor);

(2) A trust (other than a grantor trust

as described in paragraph (b)(4) of this

section) that files a Form 1041 and

furnishes each beneficiary a Form K–1

containing information required to be

shown on an information return,

including amounts withheld under

section 3406; or

(3) A partnership making a payment

of a distributive share or an S

corporation making a similar

distribution.

§ 31.3406(a)–3 Scope and extent of

accounts subject to backup withholding.

A payor who is required to withhold

under § 31.3406(a)–1 must withhold—

(a) On the accounts subject to

withholding under § 31.3406(a)–1

(b)(1)(i) or (b)(2)(ii); and

(b) On the accounts subject to

withholding under § 31.3406(a)–

1(b)(1)(ii) or (b)(2)(i), as described under

§ 31.3406(d)–5 (relating to notification

of incorrect TIN) or § 31.3406(c)–1

(relating to notified payee

underreporting), respectively.
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66115

§ 31.3406(a)–4

Time when payments are considered

to be paid and subject to backup

withholding.

(a) Timing—(1) In general. If backup

withholding is required under section

3406 on a reportable payment (as

defined in section 3406(b)), the payor

must withhold at the time it makes the

payment to the payee or to the payee’s

account that is subject to withholding.

Amounts are considered paid when they

are credited to the account of, or made

available to, the payee. Amounts are not

considered paid solely because they are

posted (e.g., an informational notation

on the payee’s passbook) if they are not

actually credited to the payee’s account

or made available to the payee. See

paragraph (c) of this section for the

timing of withholding by a middleman.

(2) Special rules for dividends. For

purposes of section 3406 and this

section—

(i) Record date earlier than payment

date. In the case of stock for which the

record date is earlier than the payment

date, the dividends are considered paid

on the payment date.

(ii) Dividends paid in corporate

reorganizations. In the case of a

corporate reorganization, if a payee is

required to exchange stock held in the

former corporation for stock in the new

corporation before the dividends that

have been paid with respect to the stock

in the new corporation will be provided

to the payee, the dividend is considered

paid on the date the payee actually

exchanges the stock and receives the

dividend.

(b) Amounts reportable under section

6045—(1) In general. Notwithstanding

paragraph (a) of this section, in the case

of a transaction reportable under section

6045 (except in the case of forward

contracts (including foreign currency

contracts), regulated futures contracts,

and security short sales), the obligation

to withhold under section 3406 arises

on the date the sale is entered on the

books of the broker or the date the

exchange occurs as provided in

§ 1.6045–1(f)(3) of this chapter. A broker

(in its capacity as payor) is not required,

however, to satisfy its withholding

liability until payment is made. See

§ 31.3406(b)(3)–2(b)(2) for special rules

applicable to forward contracts

(including foreign currency contracts),

regulated futures contracts, and security

short sales.

(2) Special rule for interest accrued on

bonds. For purposes of determining the

time that interest is considered paid and

subject to withholding under section

3406 when bonds are sold between

interest payment dates, the portion of

the sales price representing interest

accrued to the date of sale is considered

a portion of a reportable payment of

gross proceeds under section 6045

(provided that the accrued interest is

not tax-exempt as described in section

103(a), relating to certain governmental

obligations), and is not considered to be

a payment of interest for purposes of

section 6049.

(c) Middlemen—(1) In general. Any

middleman (as defined in § 31.3406(a)–

2(b)) must withhold under section 3406

at the time the reportable payment is

received by or credited to the

middleman. If the middleman makes or

credits the reportable payment to the

payee prior to the middleman’s receipt

of the corresponding payment, the

middleman may withhold at the time

the reportable payment is made or

credited to the payee.

(2) Special rule for common trust

funds. A common trust fund (as defined

in section 584) must withhold either—

(i) At the time the reportable payment

is received by or credited to the

common trust fund as provided in

paragraph (c)(1) of this section;

(ii) On the date on which the assets

of the common trust fund are valued; or

(iii) At the time the common trust

fund pays or credits the reportable

payment to a participant of the common

trust fund.

(3) Special rule for certain grantor

trusts. For grantor trusts described in

§ 31.3406(a)–2(b)(4), reportable

payments made to the trust are treated

as paid by the trust to each grantor, in

an amount equal to the distribution

made by the trust to each grantor, on the

date that the reportable payment is paid

to the trust (except for gross proceeds

reportable under section 6045).

Paragraph (b)(2) of this section applies

to a grantor trust making a payment of

gross proceeds under section 6045

subject to withholding under section

3406. For purposes of this paragraph

(c)(3) a husband and wife filing a joint

return are considered to be one grantor.

§ 31.3406(b)(2)–1 Reportable interest

payment.

(a) Interest subject to backup

withholding—(1) In general. A payment

of a kind, and to a payee, that is

required to be reported under section

6049 (relating to returns regarding

interest and original issue discount) is a

reportable payment for purposes of

section 3406, subject to the special rules

of § 31.3406(b)(2)–2 (relating to original

issue discount) and § 31.3406(b)(2)–3

(relating to window transactions). See

§ 31.6051–4 for the requirement to

furnish a statement to the payee if tax

is withheld under section 3406.

(2) Special rule for tax-exempt

interest. When an issuer is required to

make an information return under

§ 1.6049–4(d)(8) of this chapter because

a payee provided a signed written

statement on the envelope or shell

incorrectly claiming that the interest

was exempt from taxation under section

103(a) (as described in § 1.6049–

5(b)(1)(ii) of this chapter), the issuer is

not required to impose withholding

under section 3406.

(b) Amount subject to backup

withholding—(1) In general. The

amount of interest subject to

withholding under section 3406 is the

amount subject to reporting under

section 6049.

(2) Special rule to adjust for

premature withdrawal penalty. Solely

for purposes of computing the amount

subject to withholding under section

3406, the payor may elect not to

withhold from the portion of any

interest payment that is not received by

the payee because a penalty is in fact

imposed for premature withdrawal of

funds deposited in a time savings

account, certificate of deposit, or similar

class of deposit.

§ 31.3406(b)(2)–2 Original issue discount.

(a) Original issue discount subject to

backup withholding. The amount of

original issue discount, treated as

interest, subject to withholding under

section 3406 is the amount subject to

reporting under section 6049, but is

limited to the amount of cash paid. In

addition, if an original issue discount

obligation, subject to reporting under

section 6045, is sold prior to maturity

and with respect to the seller a

condition exists for imposing

withholding under section 3406 on the

gross proceeds, then withholding under

§ 31.3406(b)(3)–2 applies to the gross

proceeds of the sale reportable under

section 6045, and not to the amount of

any original issue discount includible in

the gross income of the seller for the

calendar year of the sale. See § 31.6051–

4 for the requirement to furnish a

statement to the payee if tax is withheld

under section 3406.

(b) Amount subject to backup

withholding and time when backup

withholding is imposed with respect to

short-term obligations. In the case of an

obligation with a fixed maturity date not

exceeding one year from the date of

issue (a short-term obligation),

withholding under section 3406 applies

to any payment of original issue

discount on the obligation includible in

the gross income of the holder to the

extent of the cash amount of the

payment. See § 1.1273–1 of this chapter

to determine the amount of original
66116 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

issue discount on a short-term

obligation. See § 1.446–2(e)(1) of this

chapter to determine the amount of a

payment treated as original issue

discount.

(c) Transferred short-term

obligations—(1) Subsequent holder may

establish purchase price—(i) In general.

At maturity of a short-term obligation, a

subsequent holder (i.e., any person who

purchased or otherwise obtained the

obligation after the obligation was

issued to the original holder) may

establish the price of the obligation. The

price established by the subsequent

holder must then be treated as the

original issue price for purposes of

computing the amount of the original

issue discount subject to withholding

under section 3406. The price of a shortterm obligation may be established by

confirmation receipt or other record of

a similar type or, if the obligation is

redeemed by or through the person from

whom the obligation was purchased or

otherwise obtained, by the records of

the person from whom or through

whom the obligation was purchased or

otherwise obtained. The subsequent

holder is not required to certify under

penalties of perjury that the price

determined under this paragraph

(c)(1)(i) is correct.

(ii) Exception. A payor may elect to

disregard the price at which the

subsequent holder purchased or

otherwise obtained the obligation if the

payor’s computer or recordkeeping

system on which the details of the

obligation are stored is not able to

accept that price without significant

manual intervention.

(2) Subsequent holder unable (or not

permitted) to establish purchase price. If

a subsequent holder fails (or is unable,

pursuant to paragraph (c)(1)(ii) of this

section) to establish the purchase price

of the obligation, then the person

redeeming the obligation must

determine the amount subject to

withholding under section 3406 as

though the obligation had been

purchased by the holder on the date of

issue. If the person redeeming the

obligation is the issuer of the obligation,

then the issuer must determine the

amount subject to withholding from its

records. If a person other than the issuer

of the obligation redeems the obligation

and the obligation is listed in Internal

Revenue Service Publication 1212, List

of Original Issue Discount Obligations,

that person must determine the amount

subject to withholding by using the

issue price indicated in Publication

1212.

(3) Transferred obligation. If a shortterm obligation is transferred, no part of

the purchase price is considered a

reportable interest payment under

section 6049. Withholding under

section 3406 applies, however, to the

gross proceeds of the sale of the

obligation if the transfer is subject to

reporting under section 6045 and a

condition exists for imposing

withholding. For the rules regarding

withholding for amounts subject to

reporting under section 6045, see

§ 31.3406(b)(3)-2.

(d) Amount subject to backup

withholding and time when backup

withholding is imposed with respect to

long-term obligation—(1) No cash

payments prior to maturity. In the case

of an obligation with a fixed maturity

date that is more than one year from the

date of issue (a long-term obligation)

and with no cash payments prior to

maturity, withholding under section

3406 applies at the maturity of the

obligation to the amount of original

issue discount includible in the gross

income of the holder for the calendar

year in which the obligation matures.

The amount required to be withheld

must not exceed the amount of the cash

payment.

(2) Registered long-term obligations

with cash payments prior to maturity. In

the case of a long-term obligation in

registered form that provides for cash

payments prior to maturity, withholding

under section 3406 applies at the time

cash payments are made to the sum of

the amounts of qualified stated interest

and original issue discount includible in

the gross income of the holder for the

calendar year in which the cash

payments are made. The amount

required to be withheld at the time of

any cash payment, however, must not

exceed the amount of the cash payment.

If more than one cash payment is made

during a calendar year, the tax that is

required to be withheld with respect to

original issue discount must be

allocated among all the expected cash

payments in the ratio that each cash

payment bears to the total of the

expected cash payments.

(3) Transferred registered long-term

obligations with payments prior to

maturity. In the case of a long-term

obligation that is transferred after its

issuance from the original holder, the

amount subject to withholding under

section 3406 with respect to a

subsequent holder is the amount of

original issue discount includible in the

gross income of all holders during the

calendar year (without regard to any

amount paid by a subsequent holder at

the time of transfer). If the person

redeeming the obligation at maturity is

the issuer of the obligation, the issuer

must determine the amount subject to

withholding through its records by

treating the holder as if he were the

original holder. If a person redeeming

the obligation at maturity is a person

other than the issuer of the obligation,

and the obligation is listed in Internal

Revenue Service Publication 1212, List

of Original Issue Discount Obligations,

the person must determine the amount

subject to withholding by using the

issue price indicated in Publication

1212.

(e) Bearer long-term obligations. In the

case of a bearer long-term obligation

with cash payments prior to maturity—

(1) Payments prior to maturity.

Withholding under section 3406 applies

prior to maturity only to the payment of

qualified stated interest (and not to any

amount of original issue discount)

includible in the gross income of the

holder for the calendar year.

(2) Payments at maturity. At maturity

of the obligation, withholding applies to

the sum of any qualified stated interest

payment made at maturity and the total

amount of original issue discount

includible in the gross income of the

holder during the calendar year of

maturity. The amount required to be

withheld at the time of the cash

payment, however, must not exceed the

amount of the cash payment.

§ 31.3406(b)(2)–3 Window transactions.

(a) Requirement to backup withhold.

Withholding under section 3406 applies

to a window transaction (as defined in

paragraph (b) of this section) only if the

payee does not furnish a taxpayer

identification number to the payor in

the manner required in paragraph (c) of

this section or furnishes an obviously

incorrect number as described in

§ 31.3406(h)–1(b)(2). Withholding does

not apply to a window transaction even

though the Internal Revenue Service

notifies the payor of the payee’s

incorrect taxpayer identification number

under section 3406(a)(1)(B) or of

notified payee underreporting under

section 3406(a)(1)(C). The payee in a

window transaction is not required to

certify under penalties of perjury that

the payee is not subject to withholding

due to notified payee underreporting (as

described in § 31.3406(d)–2(b)(2)).

(b) Window transaction defined—

Window transaction means a payment

of interest with respect to any of the

following obligations:

(1) An interest coupon in bearer form

that is subject to taxation (i.e., other

than exempt interest described in

§ 1.6049–5(b)(1)(ii) of this chapter);

(2) A United States savings bond; or

(3) A discount obligation having a

maturity at issue of one year or less,

including commercial paper and

bankers’ acceptances that are in
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66117

definitive form (i.e., evidenced by a

paper document other than a

confirmation receipt) but not including

short-term government obligations (as

defined in section 1271(a)(3)(B)).

(c) Manner of furnishing taxpayer

identification number in the case of a

window transaction. A payee must

furnish the payee’s taxpayer

identification number to the payor with

respect to a window transaction either

orally or in writing at the time that the

window transaction occurs. See

§ 31.3406(g)–3(c)(1)(i), which provides

that a payee may not claim the payee is

awaiting receipt of a taxpayer

identification number with respect to a

window transaction. The payee is not

required to certify, under penalties of

perjury, that the taxpayer identification

number provided is correct.

§ 31.3406(b)(2)–4 Reportable dividend

payment.

(a) Dividends subject to backup

withholding. A payment of a kind, and

to a payee, that is required to be

reported under section 6042 (relating to

returns regarding payments of dividends

and corporate earnings and profits) is a

reportable payment for purposes of

section 3406. See paragraph (b) of this

section for certain dividends not subject

to withholding under section 3406. See

§ 31.6051–4 for the requirement to

furnish a statement to the payee if tax

is withheld under section 3406.

(b) Dividends not subject to backup

withholding. Except as provided in

§ 31.3406(b)(3)–2 (relating to

transactions reportable under section

6045), withholding under section 3406

does not apply to—

(1) Any amount treated as a taxable

dividend by reason of section 302

(relating to redemptions of stock),

section 304 (relating to redemptions

through the use of related corporations),

section 306 (relating to disposition of

certain stock), section 356 (relating to

receipt of additional consideration in

connection with certain

reorganizations), or section 1081(e)(2)

(relating to certain distributions

pursuant to an order of the Securities

and Exchange Commission);

(2) Any exempt-interest dividend, as

defined in section 852(b)(5)(A), paid by

a regulated investment company; or

(3) Any amount paid or treated as

paid during a year by a regulated

investment company, provided that the

payor reasonably estimates, as provided

in paragraph (c)(2) of this section, that

95 percent or more of all dividends paid

or treated as paid during the year are

exempt-interest dividends.

(c) Amount subject to backup

withholding—(1) In general. The

amount of a dividend subject to

withholding under section 3406 is the

amount subject to reporting under

section 6042, including any dividend

that is reinvested pursuant to a plan

under which a shareholder may elect to

receive stock as a dividend instead of

property. Except as otherwise provided

in this paragraph (c), withholding

applies to the entire amount of the

distribution.

(2) Reasonable estimate of amount of

dividend subject to backup withholding.

Pursuant to section 6042(b)(3) and

§ 1.6042–3(c) of this chapter, if the

payor is unable to determine the portion

of a distribution that is a dividend, the

entire amount of the distribution must

be treated as a dividend for information

reporting under section 6042. Hence,

withholding applies to the entire

amount of the distribution. If a payor is

able reasonably to estimate under

section 6042 and § 1.6042–3(c) of this

chapter the portion of a distribution that

is not a dividend, however, the payor

must not withhold on that portion

(which is not considered a dividend). A

payor making a payment, all or a

portion of which may not be a dividend,

may use previous experience to estimate

the portion of a distribution that is not

a dividend. The payor’s estimate is

considered reasonable if—

(i) The estimate does not exceed the

proportion of the distributions made by

the payor during the most recent

calendar year for which a Form 1099

was required to be filed that was not

reported by the payor as a dividend; and

(ii) The payor has no reasonable basis

to expect that the proportion of the

distribution that is not a dividend will

be substantially different for the current

year.

(3) Reinvested dividends. In the case

of a dividend paid pursuant to a

dividend reinvestment plan,

withholding under section 3406 applies,

pursuant to § 31.3406(a)–4(a), at the

time and to the amount made available

to the shareholder or credited to the

shareholder’s account. At the discretion

of the payor, withholding under section

3406 need not be applied to any excess

of the fair market value of the shares of

stock received by the shareholder or

credited to the shareholder’s account

over the purchase price of the shares

(including shares acquired by the

shareholder at a discount in connection

with the dividend distribution) or to any

fee that is paid by the payor in the

nature of a broker’s fee for purchase of

the stock or service charge for

maintenance of the shareholder’s

account. The payor must, however, treat

any excess amounts and fees on a

consistent basis for each calendar year.

§ 31.3406(b)(2)–5 Reportable patronage

dividend payment.

(a) Patronage dividends subject to

backup withholding. A payment of a

kind, and to a payee, that is required to

be reported under section 6044 (relating

to returns regarding patronage

dividends) is a reportable payment for

purposes of section 3406. See

§ 31.6051–4 for the requirement to

furnish a statement to the payee if tax

is withheld under section 3406.

(b) Amount subject to backup

withholding—(1) Failure to provide

taxpayer identification number or

notification of incorrect taxpayer

identification number. For purposes of

sections 3406(a)(1) (A) and (B), the

amount of a payment described in

paragraph (a) of this section that is

subject to withholding under section

3406 is the amount subject to reporting

under section 6044, but only to the

extent the payment is made in money.

For purposes of this paragraph (b),

money includes cash or a qualified

check (as defined in section 1388(c)(4)).

(2) Notified payee underreporting or

payee certification failure. For purposes

of sections 3406(a)(1) (C) and (D), the

amount of a payment described in

paragraph (a) of this section that is

subject to withholding under section

3406 is the amount subject to

withholding under paragraph (b)(1) of

this section, but only if 50 percent or

more of that reportable amount is paid

in money. Thus, a payor is required to

withhold according to this paragraph

(b)(2) on a payment if—

(i) There has been a notified payee

underreporting described in section

3406(a)(1)(C) and § 31.3406(c)–1 or there

has been a payee certification failure

described in section 3406(a)(1)(D) and

§ 31.3406(d)–2;

(ii) The payor makes a reportable

payment subject to reporting under

section 6044 to the payee; and

(iii) Fifty percent or more of the

payment is in cash or by qualified

check.

§ 31.3406(b)(3)–1 Reportable payments of

rents, commissions, nonemployee

compensation, etc.

(a) Section 6041 and 6041A(a)

payments subject to backup

withholding. A payment of a kind, and

to a payee, that is required to be

reported under section 6041 (relating to

information reporting of rents,

commissions, nonemployee

compensation, etc.) or a payment that is

required to be reported under section

6041A(a) (relating to information

reporting of payments to nonemployees

for services) is a reportable payment for

purposes of section 3406. See paragraph
66118 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

(b) of this section for an exception

concerning payments aggregating less

than $600. See § 31.6051–4 for the

requirement to furnish a statement to

the payee if tax is withheld under

section 3406.

(b) Amount subject to backup

withholding—(1) In general. The

amount of a payment described in

paragraph (a) of this section subject to

withholding under section 3406 is the

amount subject to reporting under

section 6041 or section 6041A(a).

(2) Net commissions. Withholding

under section 3406 does not apply to

net commissions paid to unincorporated

special agents with respect to insurance

policies that are subject to reporting

under section 6041, provided that no

cash is actually paid by the payor to the

special agent.

(3) Payments aggregating $600 or

more for the calendar year—(i) In

general. A payment is a reportable

payment under paragraph (a) of this

section only if the aggregate amount of

the current payment and all previous

payments to the payee during the

calendar year aggregate $600 or more.

The amount subject to withholding is

the entire amount of the payment that

causes the total amount paid to the

payee to equal $600 or more and the

amount of any subsequent payments

made to the payee during the calendar

year. This paragraph (b)(3)(i) does not

apply to gambling winnings (as

provided in § 31.3406(g)–2(e)(1)).

(ii) Exceptions—(A) The $600

aggregation rule. The $600 aggregation

rule of paragraph (b)(3)(i) of this section

does not apply if the payor was required

to make an information return under

section 6041 or 6041A(a) for the

preceding calendar year with respect to

payments to the payee, or the payor was

required to withhold under section 3406

during the preceding calendar year with

respect to payments to the payee that

were reportable under section 6041 or

6041A(a).

(B) Determination of whether

payments aggregate $600 or more. In

determining whether payments to a

payee aggregate $600 or more during a

calendar year for purposes of

withholding under section 3406, the

payor must aggregate only payments of

the same kind made to the same payee.

For this purpose, payments are of the

same kind if they are of the same type,

regardless of whether they are

reportable under the same section.

However, a payor with different paying

departments making reportable

payments of the same kind is not

required to aggregate payments made by

all those departments unless it is the

payor’s customary method to aggregate

those payments. A payor may, in its

discretion, aggregate—

(1) Payments not of the same kind to

the same payee, reportable under either

section 6041 or 6041A(a); and

(2) Payments reportable under section

6041 with payments reportable under

section 6041A(a).

§ 31.3406(b)(3)–2 Reportable barter

exchanges and gross proceeds of sales of

securities or commodities by brokers.

(a) Transactions subject to backup

withholding. A payment of a kind, and

to a payee, that any broker (as defined

in section 6045(c) and § 1.6045–1(a)(1)

of this chapter) or any barter exchange

(as defined in section 6045(c) and

§ 1.6045–1(a)(4) of this chapter) is

required to report under section 6045 is

a reportable payment for purposes of

section 3406. See § 31.6051–4 for the

requirement to furnish a statement to

the payee if tax is withheld under

section 3406.

(b) Amount subject to backup

withholding—(1) In general. The

amount subject to withholding under

section 3406 is the amount subject to

reporting under section 6045. The

amount subject to withholding with

respect to broker reporting is the

amount of gross proceeds (as

determined under § 1.6045–1(d)(5) of

this chapter). The amount subject to

withholding with respect to barter

exchanges is the amount received by

any member or client (as determined

under § 1.6045–1(f)(4) of this chapter).

(2) Forward contracts, including

foreign currency contracts, and

regulated futures contracts—(i) In

general. If a customer is subject to

withholding under section 3406 with

respect to a forward contract (subject to

information reporting under § 1.6045–

1(c)(5) of this chapter), including a

foreign currency contract (as defined in

section 1256(g)(2)), or a regulated

futures contract (as defined in section

1256(g)(1)), or with respect to an

account through which those contracts

are disposed of or acquired, the broker

must withhold on both of the following

amounts:

(A) All cash or property withdrawn

from the account by the customer

during the relevant year; and

(B) The amount of cash in the account

available for withdrawal by the

customer at the relevant year-end

(including both gross proceeds and

variation margin).

(ii) Rules concerning withdrawals. A

withdrawal includes the use of money

(including both gross proceeds and

variation margin) or property in the

account to purchase any property other

than property acquired in connection

with the closing of a contract. For this

purpose, the acceptance of a warehouse

receipt or other taking of delivery to

close a contract is in connection with

the closing of a contract only if the

property acquired is disposed of by the

close of the seventh trading day

following the trading day that the

customer takes delivery under the

contract. In addition, making delivery to

close a contract is in connection with

the closing of a contract only if the

broker is able to determine that the

property used to close the contract was

acquired no earlier than the seventh

trading day prior to the trading day on

which delivery is made. Withdrawals do

not include repayments of debt incurred

in connection with making or taking

delivery that meets the requirements of

this paragraph (b)(2). Withdrawals also

do not include payments of

commissions, fees, transfers of cash

from the account to another futures

account that is subject to this paragraph

(b)(2) or cash withdrawals traceable to

dispositions of property other than

futures (not including profit on the

contract separately reportable under

§ 1.6045–1(c)(5)(i)(b) of this chapter).

(iii) Special rule for forward contracts,

including foreign currency contracts,

and regulated futures contracts. The

determination of whether the customer

is subject to withholding under section

3406 with respect to an account

containing forward contracts, including

foreign currency contracts, or regulated

futures contracts must be made at the

time of the cash or property

withdrawals or the relevant year-end,

whichever is applicable.

(3) Security sales made through a

margin account. The amount described

in paragraph (a) of this section that is

subject to withholding under section

3406 in the case of a security sale made

through a margin account (as defined in

12 CFR part 220 (Regulation T)) is the

gross proceeds (as defined in § 1.6045–

1(d)(5) of this chapter) of the sale. The

amount required to be withheld with

respect to the sale, however, is limited

to the amount of cash available for

withdrawal by the customer

immediately after the settlement of the

sale. For this purpose, the amount

available for withdrawal by the

customer does not include amounts

required to satisfy margin maintenance

under Regulation T, rules and

regulations of the National Association

of Securities Dealers and national

securities exchanges, and generally

applicable self-imposed rules of the

margin account carrier.

(4) Security short sales—(i) Amount

subject to backup withholding. The

amount subject to withholding under
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66119

section 3406 with respect to a short sale

of securities is the gross proceeds (as

defined in § 1.6045–1(d)(5) of this

chapter) of the short sale. At the option

of the broker, however, the amount

subject to withholding may be the gain

upon the closing of the short sale (if

any); consequently, the obligation to

withhold under section 3406 would be

deferred until the closing transaction. A

broker may use this alternative method

of determining the amount subject to

withholding under section 3406 with

respect to a short sale only if at the time

the short sale is initiated, the broker

expects that the amount of gain realized

upon the closing of the short sale will

be determinable from the broker’s

records. If, due to events unforeseen at

the time the short sale was initiated, the

broker is unable to determine the basis

of the property used to close the short

sale, the property must be assumed for

this purpose to have a basis of zero.

(ii) Time of backup withholding. The

determination of whether a short seller

is subject to withholding under section

3406 must be made on the date of the

initiation or closing, as the case may be,

or on the date that the initiation or

closing, as the case may be, is entered

on the broker’s books and records.

(5) Fractional shares. A broker is not

required to withhold under section 3406

with respect to a sale of a fractional

share of stock resulting in less than $20

of gross proceeds (as described in

§ 5f.6045–1(c)(3)(ix) of this chapter).

§ 31.3406(b)(3)–3 Reportable payments by

certain fishing boat operators.

(a) Payments subject to backup

withholding. A payment of a kind, and

to a payee, that is required to be

reported under section 6050A (relating

to information reporting by certain

fishing boat operators) is a reportable

payment for purposes of section 3406.

See § 31.6051–4 for the requirement to

furnish a statement to the payee if tax

is withheld under section 3406.

(b) Amount subject to backup

withholding. The amount described in

paragraph (a) of this section subject to

withholding under section 3406 is the

amount subject to reporting under

section 6050A, but only to the extent the

amount is paid in money and represents

a share of the proceeds of the catch.

§ 31.3406(b)(3)–4 Reportable payments of

royalties.

(a) Royalty payments subject to

backup withholding. A payment of a

kind, and to a payee, that is required to

be reported under section 6050N

(relating to information reporting of

payments of royalties) is a reportable

payment for purposes of section 3406.

See § 31.6051–4 for the requirement to

furnish a statement to the payee if tax

is withheld under section 3406.

(b) Amount subject to backup

withholding. In general, the amount

described in paragraph (a) of this

section that is subject to withholding

under section 3406 is the amount

subject to reporting under section

6050N. However, if the reportable

payment is for an oil or gas interest, the

amount subject to withholding is the net

amount the payee receives (i.e., the

gross proceeds less production-related

taxes such as state severance taxes).

§ 31.3406(b)(4)–1 Exemption for certain

minimal payments.

(a) In general. A payor of reportable

interest or dividends (as described in

section 3406(b)(2)) or of royalties (as

described in section 3406(b)(3)(E)) may

elect not to withhold from a payment

that does not exceed $10 and that on an

annualized basis does not exceed $10

(see paragraph (c) of this section). A

broker or barter exchange may elect not

to withhold on gross proceeds of $10 or

less without regard to the annualization

requirement. See § 31.6051–4 for the

requirement to furnish a statement to

the payee if tax is withheld under

section 3406.

(b) Manner of making the election.

The election not to withhold from

payments that do not exceed $10 can be

made only for payments described in

paragraph (a) of this section. The

election may be made on a payment-bypayment basis.

(c) How to annualize—(1) In general.

To annualize a reportable interest

payment, dividend payment, or royalty

payment, a payor must calculate what

the amount of the payment would be if

it were paid for a 1-year period (instead

of the period for which it actually is

paid). The annualized amount is

determined by dividing the amount of

the payment by the number of days in

the period for which it is being paid and

then multiplying that result by the

number of days in the year. If the

annualized amount is $10 or less, the

payor may elect not to withhold on that

payment regardless of whether more

than $10 may be or has been paid to the

payee in other reportable payments

during the calendar year. Conversely, if

the annualized amount is more than

$10, withholding applies even if $10 or

less is actually paid to the payee during

the calendar year. For purposes of

computing the annualized amount, the

payor may assume that February always

consists of 28 days and that the year

always consists of 360 days. For

amounts that are deposited with a payor

in a new account or certificate between

the dates on which the payor

customarily pays or credits interest, the

payor may assume that the period for

which the interest is paid is the payor’s

customary period for paying or crediting

interest.

(2) Special aggregation rule for

reportable interest and dividends. If a

payor maintains records that reflect

multiple holdings of one payee and the

payor makes an aggregate payment of

reportable interest or dividends (as

defined in section 3406(b)(2)) with

respect to those multiple holdings (such

as a dividend check that reflects

payment on all stock owned by the

payee), the payor must annualize the

aggregate payment.

(d) Exception for window transactions

and original issue discount. A payor is

not required to annualize payments

made in window transactions (as

defined in § 31.3406(b)(2)–3(b)) or

payments of original issue discount.

With respect to a window transaction,

however, the payor is required to

aggregate all payments made in the

same transaction (e.g., payments made

with respect to coupons or obligations

presented for payment at the same time

as described in § 1.6049–4(e)(4) of this

chapter).

§ 31.3406(c)–1 Notified payee

underreporting of reportable interest or

dividend payments.

(a) Overview. Withholding under

section 3406(a)(1)(C) applies to any

reportable interest or dividend payment

(as defined in section 3406(b)(2)) made

with respect to an account of a payee if

the Internal Revenue Service or a broker

notifies a payor under paragraph (c) (1)

or (2) of this section that the payee is

subject to withholding due to notified

payee underreporting (as defined in

paragraph (b)(1) of this section), and the

payor is required under paragraph (c)(3)

of this section to identify that account.

After receiving the notice and

identifying accounts, the payor must

notify the payee, in accordance with

paragraph (d) of this section, that

withholding due to notified payee

underreporting has started. Paragraph

(e) of this section describes the period

for which withholding due to notified

payee underreporting is required.

Paragraph (f) of this section provides

rules concerning notices that the

Internal Revenue Service will send to a

payee before notifying a payor that the

payee is subject to withholding due to

notified payee underreporting.

Paragraph (g) of this section provides

rules that a payee can use to prevent

withholding due to notified payee

underreporting from starting or to stop

it once it has started. Paragraph (h) of
66120 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

this section provides special rules for

joint accounts of payees who have filed

a joint return. See section 6682 for the

penalties that may apply to a payee

subject to withholding under section

3406(a)(1)(C).

(b) Definitions—(1) Notified payee

underreporting. Notified payee

underreporting means that the Internal

Revenue Service has—

(i) Determined that there was a payee

underreporting (as defined in paragraph

(b)(2) of this section);

(ii) Mailed at least four notices under

paragraph (f)(1) of this section to the

payee (over a period of at least 120 days)

with respect to the underreporting; and

(iii) Assessed any deficiency

attributable to the underreporting in the

case of any payee who has filed a return.

(2) Payee underreporting—(i) In

general. Payee underreporting means

that the Internal Revenue Service has

determined, for a taxable year, that—

(A) A payee failed to include in the

payee’s return of tax under chapter 1 of

the Internal Revenue Code for that year

any portion of a reportable interest or

dividend payment required to be shown

on that tax return; or

(B) A payee may be required to file a

return for that year and to include a

reportable interest or dividend payment

in the return, but failed to file the

return.

(ii) Payments included in making

payee underreporting determination.

The determination of whether there is

payee underreporting is made by

treating as reportable interest or

dividend payments, all payments of

dividends reported under section 6042,

all patronage dividends reported under

section 6044, and all interest and

original issue discount reported under

section 6049, regardless of whether

withholding due to notified payee

underreporting applies to those

payments.

(c) Notice to payors regarding backup

withholding due to notified payee

underreporting—(1) In general. If the

Internal Revenue Service or a broker

notifies a payor that a payee is subject

to withholding due to notified payee

underreporting, the payor must—

(i) Identify any accounts of the payee

under the rules of paragraph (c)(3) of

this section; and

(ii) Notify the payee and withhold

under section 3406 on reportable

interest or dividend payments made

with respect to any identified account

under the rules of paragraphs (d) and (e)

of this section.

(2) Additional requirements for

payors that are also brokers—(i) In

general. A broker must notify the payor

of a readily tradable instrument that the

payee of the instrument is subject to

withholding due to notified payee

underreporting if—

(A) The broker (in its capacity as a

payor) receives a notice from the

Internal Revenue Service under

paragraph (c)(1) of this section that a

payee is subject to withholding due to

notified payee underreporting and the

broker is required to identify an account

of the payee under paragraph (c)(3) of

this section;

(B) The payee subsequently acquires

the instrument from the broker through

the same account; and

(C) The acquisition of the instrument

occurs after the close of the 30th

business day after the date that the

broker receives the notice (or on any

earlier date that the broker may begin

applying this paragraph (c)(2) after

receipt of the notice described in

paragraph (c)(1) of this section).

(ii) Transfer out of street name. For

purposes of this paragraph (c)(2), an

acquisition includes a transfer of an

instrument out of street name into the

name of the registered owner (i.e., the

payee).

(iii) Method of providing notice. A

broker must provide the notice required

under this paragraph (c)(2) to the payor

of the instrument with the transfer

instructions for the acquisition. See

§ 31.3406(d)–4(a)(2).

(iv) Termination of obligation to

provide information. The obligation of a

broker to provide notice to payors under

this paragraph (c)(2) terminates

simultaneously with the termination of

the broker’s obligation to withhold (in

its capacity as payor) due to notified

payee underreporting on reportable

interest or dividends made with respect

to the account.

(3) Payor identification of accounts of

the payee subject to backup withholding

due to notified payee underreporting—

(i) In general—(A) Notice from the

Internal Revenue Service. If a payor

receives a notice from the Internal

Revenue Service under paragraph (c)(1)

of this section, the payor must identify,

exercising reasonable care, all accounts

using the same taxpayer identification

number for information reporting

purposes as the one provided in the

notice. The notice may provide,

however, that the payor need only

identify the account or accounts

corresponding to any account number or

designation and related taxpayer

identification number used for

information reporting purposes as that

listed on the notice.

(B) Notice from a broker. If a payor

receives a notice from a broker under

paragraphs (c) (1) and (2) of this section,

the payor is not required to identify any

account other than the account

identified in the notice.

(ii) Exercise of reasonable care. If an

account identified pursuant to

paragraph (c)(3)(i)(A) of this section

contains a customer identifier that can

be used to retrieve systemically any

other accounts that use the same

taxpayer identification number for

information reporting purposes, the

payor must identify all accounts that

can be so retrieved. Otherwise, a payor

is considered to exercise reasonable care

in identifying accounts subject to

withholding under section 3406(a)(1)(C)

if the payor searches any computer or

other recordkeeping system for the

region, division, or branch that serves

the geographic area in which the payee’s

mailing address is located and that was

established (or is maintained) to reflect

reportable interest or dividend

payments.

(iii) Newly opened accounts. (A) In

general, a new account is not subject to

withholding under section 3406(a)(1)(C)

if the payee provides to the payor a

Form W–9 (or other acceptable

substitute) on which the payor may

reasonably rely (within the meaning of

§ 31.3406(h)–3(e)(2) without regard to

§ 31.3406(h)–3(e)(2)(v)), unless the

payor has actual knowledge (within the

meaning of paragraph (c)(3)(iii)(B) of

this section) that the statements made

on the form are not true.

(B) For purposes of paragraph

(c)(3)(iii)(A) of this section, a payor is

considered to have actual knowledge

that a payee’s statement that the payee

is not subject to withholding under

section 3406(a)(1)(C) is not true if—

(1) The employee or individual agent

of the payor who receives the payee’s

certification knows that the statement is

not true;

(2) In conducting the investigation, if

any, required by paragraph (c)(3)(iii)(C)

of this section, the payor identifies any

other accounts of the payee that are

already subject to withholding under

section 3406(a)(1)(C); or

(3) In the course of processing the

certification or in administering an

account to which a certification relates,

the payor discovers that the payor was

previously notified by the Internal

Revenue Service that the payee is

subject to withholding under section

3406(a)(1)(C) and no notice was

received to stop withholding pursuant

to section 3406(c)(3) prior to the time of

the discovery.

(C) Except as provided in this

paragraph (c)(3)(iii)(C), a payor is not

required to investigate whether the

statements made on the Form W–9

described in paragraph (c)(3)(iii)(A) of

this section are true. If, however, in
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66121

opening a new account, the payor relies

on the same Form W–9 (or appropriate

substitute) that it relied on previously in

opening another account, the payor

must investigate whether any such

existing account is subject to

withholding under section

3406(a)(1)(C). Similarly, if the payor

utilizes a universal account system

described in the first sentence of

paragraph (c)(3)(ii) of this section, and

in opening a new account the payor

searches its records to determine

whether the new account should be

identified under an existing identifier

(because the payee has existing accounts

with the payor), the payor must

investigate whether any existing

accounts identified with the same

identifier are subject to withholding

under section 3406(a)(1)(C).

(d) Notice from payors of backup

withholding due to notified payee

underreporting—(1) In general. If a

payor receives notice from the Internal

Revenue Service or a broker under

paragraph (c)(1) of this section and is

required to identify an account under

paragraph (c)(3) of this section as an

account of the payee, the payor must

notify the payee in accordance with

paragraph (d)(2) of this section that

withholding due to notified payee

underreporting has started.

(2) Procedures. The payor must send

the notice required by paragraph (d)(1)

of this section to the payee no later than

15 days after the date that the payor

makes the first payment subject to

withholding due to notified payee

underreporting. The payor must send

the notice by first-class mail to the

payee at the payee’s last known address.

The notice to the payee required by

paragraph (d)(1) of this section must

state—

(i) That the Internal Revenue Service

has given notice that the payee has

underreported reportable interest or

dividends;

(ii) That, as a result of the

underreporting, the payor is required

under section 3406(a)(1)(C) of the

Internal Revenue Code to withhold 31

percent of reportable interest or

dividend payments made to the payee;

(iii) The date that the payor started (or

plans to start) withholding due to

notified payee underreporting under

section 3406(a)(1)(C);

(iv) The account number or numbers

that are subject to withholding due to

notified payee underreporting;

(v) That the payee must obtain a

determination from the Internal

Revenue Service in order to stop the

withholding due to notified payee

underreporting; and

(vi) That while the payee is subject to

withholding due to notified payee

underreporting, the payee may not

certify to a payor making reportable

interest or dividend payments (or to a

broker acquiring a readily tradable

instrument for the payee) that the payee

is not subject to withholding due to

notified underreporting.

(e) Period during which backup

withholding is required—(1) In general.

If a payor receives notice from the

Internal Revenue Service or a broker

under paragraph (c)(1) of this section,

the payor must impose withholding

under section 3406(a)(1)(C) on all

reportable interest or dividend

payments with respect to any account of

the payee required to be identified

under paragraph (c)(3) of this section

made after the close of the 30th business

day after the day on which the payor

receives that notice and before the stop

date (as described in paragraph (e)(2) of

this section). A payor may choose to

start withholding under this paragraph

(e)(1) at any time during the 30-

business-day period described in the

preceding sentence.

(2) Stop withholding—(i) When no

underreporting exists or undue hardship

exists—(A) Stop date. In the case of a

determination under paragraph (g)(3) (i)

or (iii) of this section that no

underreporting exists or that an undue

hardship exists, the stop date is the day

that is 30 days after the earlier of—

(1) The date on which the payor

receives written notification from the

Internal Revenue Service under

paragraph (g) of this section that

withholding is to stop; or

(2) The date on which the payor

receives a copy of the written

certification provided to the payee by

the Internal Revenue Service under

paragraph (g) of this section that

withholding is to stop.

(B) Acceleration of stop date. A payor

may choose to stop withholding at any

time during the 30-day period described

in paragraph (e)(2)(i)(A) of this section.

(ii) When underreporting is corrected

or bona fide dispute exists. In the case

of a determination under paragraph

(g)(3) (ii) or (iv) of this section that the

underreporting has been corrected or

that a bona fide dispute exists, the stop

date occurs on the first day of January

(immediately following a period of at

least twelve months ending on October

15 of any calendar year in which the

determination has been made) or if later,

the stop date determined under

paragraph (e)(2)(i) of this section.

(3) Dormant accounts. The

requirement that a payor withhold

under this paragraph (e) on reportable

interest or dividend payments made

with respect to an account terminates no

later than the close of the third calendar

year ending after the later of—

(i) The date that the most recent

reportable interest or dividend payment

was made with respect to that account;

or

(ii) The date that the payor received

notice under paragraph (c)(1) of this

section.

(f) Notice to payees from the Internal

Revenue Service—(1) Notice period.

After the Internal Revenue Service

determines under paragraph (b)(2) of

this section that payee underreporting

exists, the Internal Revenue Service will

mail to the payee at least four notices

over a period of at least 120 days (the

notice period) before payors will be

notified under paragraph (c)(1) of this

section that the payee is subject to

withholding due to notified payee

underreporting. The notices may be

accompanied by, or incorporated in,

other notices provided to the payee by

the Internal Revenue Service.

(2) Payee subject to backup

withholding. After the Internal Revenue

Service provides the notices described

in paragraph (f)(1) of this section, the

Internal Revenue Service will send

notices to payors under paragraph (c)(1)

of this section unless—

(i) A payee obtains a determination

under paragraph (g) of this section; or

(ii) In the case of a payee who has

filed a tax return, the Internal Revenue

Service has not assessed the deficiency

attributable to the underreporting.

(3) Disclosure of names of payors and

brokers. Pursuant to section 3406(c)(5)

the Internal Revenue Service may

require a payee subject to withholding

due to notified payee underreporting to

disclose the names of all the payee’s

payors of reportable interest or dividend

payments and the names of all of the

brokers with whom the payee has

accounts which may involve reportable

interest or dividend payments. To the

extent required in the request from the

Internal Revenue Service, the payee

must also provide the payee’s account

numbers and other information

necessary to identify the payee’s

accounts.

(4) Backup withholding certification.

After a payee receives a final notice

from the Internal Revenue Service under

paragraph (f)(1) of this section, the

payee is not permitted to certify to any

payor or broker, under penalties of

perjury, that the payee is not subject to

withholding under section

3406(a)(1)(C), until the payee receives

the certification from the Internal

Revenue Service under paragraph (g) of

this section advising the payee that the

payee is no longer subject to
66122 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

withholding under section

3406(a)(1)(C). A final notice will contain

the information described in this

paragraph (f)(4). See sections 6682 and

7205(b) for civil and criminal penalties

for making a false certification.

(g) Determination by the Internal

Revenue Service that backup

withholding should not start or should

be stopped—(1) In general. A payee may

prevent withholding due to notified

payee underreporting from starting, or

stop the withholding once it has started,

by requesting and receiving a

determination from the Internal

Revenue Service under one or more of

the provisions of paragraph (g)(3) of this

section. Following its review of a

request for a determination under

paragraph (g)(3) of this section, the

Internal Revenue Service will either

make the determination or provide the

payee with a written report informing

the payee that the request for

determination is being denied and the

reasons for the denial. If a determination

is made during the notice period (as

defined in paragraph (f)(1) of this

section), the payee is not subject to

withholding due to notified payee

underreporting with respect to any

taxable year for which a determination

was made. If a determination is made

after the notice period, the Internal

Revenue Service will, at the time

prescribed in paragraph (g)(2) of this

section, provide written certification to

a payee that withholding is to stop, and

will notify payors who were contacted

pursuant to paragraph (c)(1) of this

section to stop withholding. A broker

who (in its capacity as payor) under this

paragraph (g)(1) receives a notice from

the Internal Revenue Service or a copy

of the certification provided to a payee

by the Internal Revenue Service is not

required to provide a corresponding

notice to any payors whom the broker

has previously notified under paragraph

(c)(2) of this section.

(2) Date notice to stop backup

withholding will be provided—(i)

Underreporting corrected or bona fide

dispute. If the Internal Revenue Service

makes a determination under paragraph

(g)(3) (ii) or (iv) of this section during

the 12-month period ending on October

15 of any calendar year (as described in

paragraph (e)(2)(ii) of this section), the

Internal Revenue Service will provide

the certification and the notices

described in paragraph (g)(1) of this

section no later than December 1 of that

calendar year.

(ii) No underreporting or undue

hardship. If the Internal Revenue

Service makes a determination under

paragraph (g)(3)(i) or (iii) of this section,

the Internal Revenue Service will

provide the notices described in

paragraph (g)(1) of this section no later

than the 45th day after the day on which

the Internal Revenue Service makes its

determination.

(3) Grounds for determination. The

Internal Revenue Service will make a

determination that withholding due to

notified payee underreporting should

not start or should stop once it has

started if the payee—

(i) Shows that there was no payee

underreporting (as provided in

paragraph (g)(4) of this section) for each

taxable year with respect to which the

Internal Revenue Service determined

under paragraph (b)(2) of this section

that there was payee underreporting;

(ii) Corrects any payee underreporting

(as provided in paragraph (g)(5) of this

section) for each taxable year with

respect to which the Internal Revenue

Service determined under paragraph

(b)(2) of this section that there was

payee underreporting;

(iii) Shows that withholding will

cause or is causing an undue hardship

(as defined in paragraph (g)(6) of this

section) and that it is unlikely that the

payee will underreport interest or

dividend payments again; or

(iv) Shows that a bona fide dispute

exists regarding whether any

underreporting has occurred (as

provided in paragraph (g)(7) of this

section) for each taxable year with

respect to which the Internal Revenue

Service determined under paragraph

(b)(2) of this section that there was

payee underreporting.

(4) No underreporting. A payee may

show that no underreporting of

reportable interest or dividends

payments exists by presenting—

(i) Receipts or other satisfactory

documentation to the Internal Revenue

Service showing that all taxes relating to

the payments were reported; or

(ii) Evidence showing that the payee

did not have to file a return for the

taxable year in question (e.g., because

the payee did not make enough income)

or that the underreporting

determination was based upon a factual,

clerical, or other error.

(5) Correcting any payee

underreporting—(i) Before issuance of a

statutory notice of deficiency. Before a

statutory notice of deficiency is issued

to a payee pursuant to section 6212, the

payee may correct underreporting—

(A) By filing a return if one was not

previously filed and including the

unreported interest and dividends

thereon;

(B) By filing an amended return in the

event a return was filed and including

the unreported interest and dividends

thereon; or

(C) By consenting to the additional

assessment according to applicable

notices and forms sent to the payee by

the Internal Revenue Service with

respect to the underreporting, and

paying taxes, penalties, and interest due

with respect to any underreported

interest or dividend payments.

(ii) After issuance of a statutory notice

of deficiency. After a statutory notice of

deficiency is issued to a payee—

(A) The payee may correct

underreporting at any time, by filing a

return if one was not previously filed

and paying the entire deficiency and

any other taxes including penalties and

interest attributable to any payee

underreporting of interest or dividend

payments; or

(B) The payee may correct

underreporting after the mailing of the

statutory notice of deficiency but before

the expiration of the 90-day or 150-day

period described in section 6213(a) or,

if a petition is filed with the United

States Tax Court, before the decision of

the Tax Court is final, by making a

remittance to the Internal Revenue

Service of the amounts described in

paragraph (g)(5)(ii)(A) of this section.

The payee must specifically designate in

writing that the remittance is a deposit

in the nature of a cash bond.

(iii) Special rules. For purposes of

paragraph (g)(5)(ii) of this section, the

payee will not be deemed to have

corrected the payee underreporting

under paragraph (g)(5)(ii)(B) of this

section after the remittance is returned

to the payee in the manner described in

any applicable administrative

procedure. For further guidance on a

deposit in the nature of a cash bond, see

subparagraph 2 of section 4.01 of Rev.

Proc. 84–58 (1984–2 C.B. 501). (See

§ 601.601(d)(2) of this chapter.) Once

the remittance is returned to the payee,

the rules of this section will apply. If the

Internal Revenue Service previously

contacted payors of the payee to start

withholding with respect to the notified

payee underreporting, however, the

Internal Revenue Service will recontact

those payors to start withholding under

paragraph (c)(1) of this section with

respect to the payee underreporting

without regard to paragraph (f) of this

section.

(6) Undue hardship—(i) In general. A

determination of undue hardship will

be based on the overall impact to the

payee of having reportable interest or

dividend payments withheld at a 31

percent rate under section 3406. In

addition, a determination of undue

hardship will be made only if the

Internal Revenue Service concludes that

it is unlikely that any payee

underreporting will occur again.
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66123

(ii) Factors. Factors that will be

considered in determining whether

withholding causes undue hardship

include, but are not limited to, the

following—

(A) Whether estimated tax payments,

and other credits for current tax

liabilities, or amounts withheld on

employee wages or pensions, in

addition to withholding under section

3406, would cause significant

overwithholding;

(B) The payee’s health, including the

payee’s ability to pay foreseeable

medical expenses;

(C) The extent of the payee’s reliance

on interest and dividend payments to

meet necessary living expenses and the

existence, if any, of other sources of

income;

(D) Whether other income of the

payee is limited or fixed

(e.g., social security, pension, and

unearned income);

(E) The payee’s ability to sell or

liquidate stocks, bonds, bank accounts,

trust accounts, or other assets, and the

consequences of doing so;

(F) Whether the payee reported and

timely paid the most recent year’s tax

liability, including interest and

dividend income; and

(G) Whether the payee has filed a

bankruptcy petition with the United

States Bankruptcy Court.

(7) Bona fide dispute. The Internal

Revenue Service may make a

determination under this paragraph

(g)(7) if there is a dispute between the

payee and the Internal Revenue Service

on a question of fact or law that is

material to a determination under

paragraph (g)(3)(i) of this section and,

based upon all the facts and

circumstances, the Internal Revenue

Service finds that the dispute is asserted

in good faith by the payee and there is

a reasonable basis for the payee’s

position.

(h) Payees filing a joint return—(1) In

general. For purposes of this section, if

payee underreporting is found to exist

with respect to a joint return, then the

provisions of this section apply to both

payees (i.e., the husband and wife). As

a result, both payees are subject to

withholding on accounts in their

individual names as well as accounts in

their joint names. Either or both payees

may satisfy the criteria for a

determination that no payee

underreporting exists, that the

underreporting has been corrected, or

that a bona fide dispute exists (as

provided in paragraph (g)(3) (i), (ii), or

(iv) of this section). Both payees,

however, must satisfy the criteria for a

determination that withholding will

cause or is causing undue hardship (as

provided in paragraph (g)(3)(iii) of this

section).

(2) Exceptions—(i) Innocent spouse. A

spouse who files a joint return may

obtain a determination that withholding

should stop or not start with respect to

payments made to his or her individual

accounts, if the spouse shows that—

(A) He or she did not underreport

income because he or she is a spouse

described in section 6013(e), i.e,

innocent spouse; or

(B) There is a bona fide dispute

regarding whether he or she is an

innocent spouse and hence did not

underreport income.

(ii) Divorced or legally separated

payee. A payee who, at the time of the

request for a determination under

paragraph (g) of this section, is divorced

or separated under State law may obtain

a determination that undue hardship

exists (or would exist) under paragraph

(g)(3)(iii) of this section with respect to

reportable interest or dividend

payments made to his or her individual

accounts if the divorced or legally

separated payee satisfies the criteria for

a determination under paragraph (g)(6)

of this section.

(i) Reserved.

(j) Penalties. For the application of

penalties related to this section, see

sections 6682 and 7205(b).

§ 31.3406(d)–1 Manner required for

furnishing a taxpayer identification number.

(a) Requirement to backup withhold.

Withholding under section

3406(a)(1)(A) applies to a reportable

payment (as defined in section 3406(b))

if the payee does not furnish the payee’s

taxpayer identification number to the

payor in the manner required by this

section. The period for which

withholding is required is described in

§ 31.3406(e)–1(b). See § 31.3406(d)–3(a)

and (b) for special rules when an

account is established directly with, or

an instrument is acquired directly from,

the payor by electronic transmission or

by mail, or an instrument is sold

through a broker by electronic

transmission or by mail. See

§ 31.3406(d)–4 for special rules

applicable to readily tradable

instruments acquired through a broker.

See § 31.3406(h)–3(e) for the rules on

when a payor may rely on a Form W–

9. See also § 31.3406(g)–3 for rules

regarding a payee awaiting receipt of a

taxpayer identification number. See the

applicable information reporting

sections and section 6109 and the

regulations thereunder to determine

whose taxpayer identification number

should be provided.

(b) Reportable interest or dividend

account—(1) Manner required for

furnishing a taxpayer identification

number with respect to a pre-1984

account or instrument. A payee must

furnish the payee’s taxpayer

identification number to the payor with

respect to any obligation, deposit,

certificate, share, membership, contract,

investment, account, or other

relationship or instrument established

or acquired on or before December 31,

1983 (a pre-1984 account) and with

respect to which the payor makes a

reportable interest or dividend payment

(as defined in section 3406(b)(2)). The

manner of determining whether an

account or an instrument is a pre-1984

account is described in paragraph (b)(2)

of this section. The payee of a pre-1984

account may furnish the payee’s

taxpayer identification number to the

payor orally or in writing. The payee is

not required to certify under penalties of

perjury that the taxpayer identification

number is correct.

(2) Determination of pre-1984 account

or instrument—(i) In general. An

account that is in existence before

January 1, 1984, will be considered a

pre-1984 account, regardless of whether

additional deposits are made to the

account on or after January 1, 1984. An

account established as an expansion of

a credit union prime account in

existence prior to January 1, 1984,

constitutes a pre-1984 account. If funds

taken from one account in existence

prior to January 1, 1984, are used to

create a new account on or after that

date, however, the new account does

not constitute a pre-1984 account except

as provided in the preceding sentence.

An instrument acquired prior to January

1, 1984, is a pre-1984 account.

Regardless of when an instrument was

acquired, if it is negotiated in a window

transaction as defined in

§ 31.3406(b)(2)–3(b), it is treated as an

instrument acquired after December 31,

1983. An obligation in bearer form and

subject to reporting under section 6045,

whenever acquired, is not a pre-1984

account. Any instrument, whenever

acquired, that is held in a brokerage

account is considered a pre-1984

account if the brokerage account is not

a post-1983 brokerage account (as

described in paragraph (c)(1)(ii) of this

section). If shares of a corporation are

held before January 1, 1984 (or

considered held before that date by

operation of this paragraph (b)(2)), and

additional shares are acquired by the

holder, irrespective of whether the

shares are received by reason of a stock

dividend, investing new cash, or

otherwise, the new shares, in the

discretion of the payor, may be

considered a pre-1984 account. In the
66124 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

case of a qualified employee trust that

distributes instruments in kind, any

instrument distributed from the trust is

considered a pre-1984 account with

respect to employees who were

participants in the trust before 1984.

Similarly, when a payor offers

participants in a plan the opportunity to

purchase stock of the payor after a

specified time, using the money that the

payee invested during that period of

time, the stock so purchased after

December 31, 1983, is considered a pre1984 account with respect to

participants in the plan who either

owned shares or invested money in the

plan before January 1, 1984.

(ii) Account or instrument

automatically acquired on the maturity

or termination of an account. When an

account is opened, or an instrument is

acquired, automatically on the maturity

or termination of an account that was in

existence or an instrument that was held

before January 1, 1984 (or considered to

have been in existence or held before

that date by operation of this paragraph

(b)(2)(ii)), without the participation of

the payee, the new account or

instrument, in the discretion of the

payor, may be considered a pre-1984

account. For purposes of the preceding

sentence, a payee is not considered to

have participated in the acquisition of

the new account or instrument solely

because the payee failed to exercise a

right to withdraw funds at the maturity

or termination of the old account or

instrument.

(iii) Insurance policies. In the case of

insurance policies in effect on December

31, 1983, the election of a dividend

accumulation option pursuant to which

interest is paid (as defined in § 1.6049–

5(a)(4) of this chapter), or the creation

of an account in which proceeds of a

policy are held for the policy

beneficiary, may, in the payor’s

discretion, be treated as a pre-1984

account.

(iv) Acquisitions of accounts and

instruments—(A) Pre-1984 or post-1983

status known. If a payor acquires

accounts or instruments of another

payor (including through a tax-free

reorganization under section 368), the

acquiring payor must treat the persons

specified in this paragraph (b)(2)(iv)(A)

as having the same requirement to

furnish a taxpayer identification number

in the manner required under this

paragraph (b) to the acquiring payor for

information reporting, withholding, and

related tax provisions as existed with

respect to the payor whose accounts or

instruments were acquired. Persons

specified in this paragraph (b)(2)(iv)(A)

are persons who held accounts or

instruments in the other payor

immediately before the acquisition and

who receive an account or instrument in

the acquiring payor immediately after

the acquisition.

(B) Pre-1984 or post-1983 status

unknown. If the acquiring payor, as

described in paragraph (b)(2)(iv)(A) of

this section, is unable to identify from

the business records of the other payor

whether any or all of the accounts or

instruments of the persons specified in

paragraph (b)(2)(iv)(A) of this section

are pre-1984 (or post-1983) accounts or

instruments, then the acquiring payor

may treat these unidentified accounts or

instruments as pre-1984 accounts or

instruments.

(C) Cross reference. See § 31.3406(g)–

2(g) for the limited exception from

withholding under section 3406(a)(1)(A)

on accounts or instruments described in

paragraphs (b)(2)(iv) (A) and (B) of this

section for which the payor does not

have a taxpayer identification number.

(3) Manner required for furnishing a

taxpayer identification number with

respect to an account or instrument that

is not a pre-1984 account. A payee who

receives reportable interest or dividend

payments (as defined in section

3406(b)(2)) from a payor must certify

under penalties of perjury that the

taxpayer identification number the

payee furnishes to the payor is the

payee’s correct taxpayer identification

number. The payee must make the

certification only with respect to an

account or instrument that is not a pre1984 account (as described in paragraph

(b)(2) of this section). See § 31.3406(h)–

3 for a description of the certificate on

which the certification must be made.

See § 31.3406(d)–2 for the requirement

that the payee must certify under

penalties of perjury that the payee is not

subject to withholding due to notified

payee underreporting. See § 31.3406(d)–

3(a) with respect to an account

established directly with, or an

instrument acquired directly from, the

payor by electronic transmission or by

mail. See § 31.3406(d)–4 for the rules

applicable to readily tradable

instruments acquired through a broker.

(4) Special rule with respect to the

acquisition of a readily tradable

instrument in a transaction between

certain parties acting without the

assistance of a broker. If a payee, at any

time, acquires a readily tradable

instrument without the assistance of a

broker, and no party to the acquisition

is a broker or an agent of the payor, the

payee must furnish the payee’s taxpayer

identification number to the payor prior

to the time reportable payments are

made on the instrument. The payee is

not required to certify under penalties of

perjury that the number is correct. See

§ 31.3406(d)–2 for the rule that a payee

is not subject to withholding due to

notified payee underreporting with

respect to a readily tradable instrument

acquired in the manner described in this

paragraph (b)(4). A broker is considered

to provide assistance in the acquisition

of an instrument if the person effecting

the acquisition would be required to

make an information return under

section 6045 if such person were to sell

the instrument. See § 31.3406(d)–4 for

rules relating to an acquisition of a

readily tradable instrument when a

broker is involved.

(c) Brokerage account—(1) Manner

required for furnishing a taxpayer

identification number with respect to a

brokerage relationship that is not a post1983 brokerage account—(i) In general.

With respect to any instrument,

investment, or deposit made through a

brokerage account that is not a post1983 brokerage account, a payee must

furnish the payee’s taxpayer

identification number to the broker

either orally or in writing. The payee is

not required to certify under penalties of

perjury that the taxpayer identification

number is correct. See paragraph

(b)(2)(i) of this section for the rule that

any instrument, whenever acquired, that

is held in a brokerage account that is not

a post-1983 brokerage account, is

considered held in an account that is

not a post-1983 brokerage account. For

example, in 1983 a payee established

and acquired a readily tradable

instrument from a brokerage account; no

activity took place through that account

until the payee purchased a readily

tradable instrument in 1995. That

readily tradable instrument is not held

in a post-1983 brokerage account;

therefore, the payee need not certify

under penalties of perjury that the

payee’s taxpayer identification number

is correct.

(ii) Definition of a brokerage account

that is not a post-1983 brokerage

account. A brokerage account that was

established by a payee before January 1,

1984, through which during 1983 the

broker either bought or sold securities

for the payee or held securities on

behalf of the payee as a nominee (i.e.,

in street name), is an account that is not

a post-1983 brokerage account.

(2) Manner required for furnishing a

taxpayer identification number with

respect to a post-1983 brokerage

account—(i) In general. With respect to

a post-1983 brokerage account, the

payee must furnish the payee’s taxpayer

identification number to the broker and

certify under penalties of perjury that

the taxpayer identification number

furnished is correct, except as provided

in § 31.3406(d)–3(b).
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66125

(ii) Definition of a post-1983

brokerage account. A brokerage account

established after December 31, 1983 (or

before January 1, 1984, through which

during 1983 the broker neither bought

nor sold securities nor held securities

on behalf of the payee as a nominee (i.e.,

in street name)), is a post-1983

brokerage account.

(d) Rents, commissions, nonemployee

compensation, and certain fishing boat

operators, etc.—Manner required for

furnishing a taxpayer identification

number. For accounts, contracts, or

relationships subject to information

reporting under section 6041 (relating to

information reporting at source on rents,

royalties, salaries, etc.), section

6041A(a) (relating to information

reporting of payments for nonemployee

services), section 6050A (relating to

information reporting by certain fishing

boat operators), or section 6050N

(relating to information reporting of

payments of royalties), the payee must

furnish the payee’s taxpayer

identification number to the payor

either orally or in writing. Except as

provided in § 31.3406(d)–5, the payee is

not required to certify under penalties of

perjury that the taxpayer identification

number is correct regardless of when the

account, contract, or relationship is

established.

§ 31.3406(d)–2 Payee certification failure.

(a) Requirement to backup withhold.

Withholding under section 3406(a)(1)(D)

applies to a reportable interest or

dividend payment (as defined in section

3406(b)(2)) if, and only if, the payee fails

to certify to the payor, under penalties

of perjury, that the payee is not subject

to withholding due to notified payee

underreporting under section

3406(a)(1)(C). The period for which

withholding applies is described in

§ 31.3406(e)–1(e). See § 31.3406(d)–3(a)

for special rules when an account is

established directly with, or an

instrument is acquired directly from, the

payor by electronic transmission or by

mail. See § 31.3406(c)–1(c)(3)(iv) for

rules with respect to a payor’s reliance

on a payee certification for a new

account following notified payee

underreporting. See § 31.3406(d)–4 for

special rules relating to the acquisition

of a readily tradable instrument through

a broker. The certificate on which the

certification should be made is

described in § 31.3406(h)–3.

(b) Exceptions. Withholding under

section 3406(a)(1)(D) and paragraph (a)

of this section does not apply to

reportable interest or dividend

payments (as defined in section

3406(b)(2)) made—

(1) With respect to a pre-1984 account

(as defined in § 31.3406(d)–1(b)(1));

(2) In a window transaction (as

defined in § 31.3406(b)(2)–3(b));

(3) With respect to a readily tradable

instrument described in § 31.3406(d)–

1(b)(2)(iv) or § 31.3406(d)–4(a)(3); or

(4) During the period and with respect

to an account or readily tradable

instrument described in § 31.3406(d)–3.

§ 31.3406(d)–3 Special 30-day rules for

certain reportable payments.

(a) Accounts or readily tradable

instruments acquired directly from the

payor (including a broker who holds an

instrument in street name) by electronic

transmission or by mail. In the case of

an account established directly with, or

a readily tradable instrument acquired

directly from, the payor by means of

electronic transmission (i.e., telephone

or wire instruction) or by mail, the

payor may permit the payee to furnish

the certifications required in

§ 31.3406(d)–1(b)(3) (relating to

certification that the payee’s taxpayer

identification number is correct) and

§ 31.3406(d)–2 (relating to certification

of notified payee underreporting) within

30 days after the establishment or

acquisition without subjecting the

account to withholding during the 30

days. The preceding sentence applies

only if the payee furnishes a taxpayer

identification number to the payor at the

time of the establishment or acquisition,

and the payee does not withdraw more

than 69 percent of a reportable interest

or dividend payment before the

certifications are received within the 30

days. If the payee does not provide the

required certifications within 30 days of

the establishment or acquisition, the

payor must withhold 31 percent of any

reportable interest or dividend

payments made to the account after its

acquisition. For purposes of this section,

an account or instrument is considered

acquired directly from the payor if the

instrument was acquired by the payee

without the assistance of a broker or the

instrument was acquired directly from a

broker who holds the instrument as

nominee for the payee (i.e., in street

name) and who is considered a payor

under § 31.3406(a)–2.

(b) Sale of an instrument for a

customer by electronic transmission or

by mail. The special 30-day rules set

forth in paragraph (a) of this section

apply comparably with respect to

certification of the taxpayer

identification number for the sale of an

instrument under section 6045 (as

described in § 31.3406(b)(3)–2) through

a post-1983 brokerage account (as

described in § 31.3406(d)–1(c)(2)) for a

customer by electronic transmission or

by mail. However, these rules apply

only if the payee furnishes the payee’s

taxpayer identification number before

the sale occurs. For purposes of

applying those 30-day rules under this

paragraph (b), a payee’s reinvestment of

the gross proceeds of the sale into other

instruments constitutes a withdrawal.

(c) Application to foreign payees. The

rules of paragraphs (a) and (b) of this

section also apply to a payee from

whom the payor is required to obtain a

Form W–8 or a substitute of the form or

is to obtain other evidence of foreign

status (pursuant to the relevant

regulations issued under sections 6049

and 6045), provided the payee

represents orally or otherwise, before or

at the time of the acquisition or sale of

the instrument or the establishment of

the account, that the payee is not a

United States citizen or resident.

§ 31.3406(d)–4 Special rules for readily

tradable instruments acquired through a

broker.

(a) Readily tradable instruments

acquired through post-1983 brokerage

accounts with a broker who is not a

payor—(1) In general. If a readily

tradable instrument is acquired through

a post-1983 brokerage account (as

defined in § 31.3406(d)–1(c)(2)) and the

broker is not the payor of the instrument

(as defined in § 31.3406(a)–2(b)(3)), the

broker must—

(i) Obtain once with respect to each

account the certifications described in

§ 31.3406(d)–2(a) and § 31.3406(d)–

1(b)(3) and (c)(2) from the payee

(relating to certification regarding payee

underreporting and taxpayer

identification number, respectively);

(ii) Furnish the payee’s taxpayer

identification number to the payor; and

(iii) Notify the payor to impose

withholding if the payee fails to make

either of the required certifications to

the broker or if the broker has been

notified by the Internal Revenue Service

before the acquisition of the instrument

that the payee is subject to withholding

due to notified payee underreporting

under section 3406(a)(1)(C) or that the

payee is subject to withholding because

the payee’s taxpayer identification

number is incorrect under section

3406(a)(1)(B) (as described in

§ 31.3406(d)–5).

(2) Additional requirements. The

broker must give the information

required by paragraphs (a)(1) (ii) and

(iii) of this section to the payor with the

transfer instructions for the acquisition

(including account registration

instructions transmitted by a broker in

the case of acquisitions of shares in a

mutual fund). A notice including the

information described in paragraph
66126 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

(b)(1) of this section fulfills the broker’s

requirement to give notice to the payor.

Once the broker transmits the transfer

instructions containing the information

required by this section, the broker has

no further responsibility to obtain a

missing taxpayer identification number

or missing certification or to provide

additional notices to the payee or payor

with respect to the acquisition of the

instrument. Upon receiving the notice

from a broker, the payor must impose

withholding on the account pursuant to

§ 31.3406(a)–1.

(3) Transactions entered into through

a brokerage account that is not a post1983 brokerage account. If a broker

acquires readily tradable instruments for

a payee through an account (with the

broker) that is not a post-1983 brokerage

account (as defined in § 31.3406(d)–

1(c)(1)), and the broker is not the payor

of the instruments, the broker must

furnish the payee’s taxpayer

identification number to the payor. In

addition, if the broker has been notified

by the Internal Revenue Service that the

payee is subject to withholding under

section 3406 either because of an

incorrect taxpayer identification number

or due to notified payee underreporting

as described in sections 3406(a)(1) (B) or

(C), respectively, the broker must notify

the payor of the instrument to impose

withholding with respect to that payee

and transmit the information in the

manner described in this paragraph (a).

After a payor receives a notice from a

broker pursuant to section 3406(d)(2)(B)

and this paragraph (a), the payor must

impose withholding on any accounts of

the payee paying reportable interest or

dividends as defined in section

3406(b)(2) in accordance with

§ 31.3406(a)–1.

(4) Payor must notify payee—(i)

Failure to provide certifications. If a

payor is notified by a broker, as required

in paragraph (a)(1) of this section, that

a payee is subject to withholding

because the payee failed to provide the

certifications, as described in

§ 31.3406(d)–2(a) and § 31.3406(d)–

(b)(3) and (c)(2), and the payor has not

received the certifications from the

payee, then the payor must notify the

payee that withholding has started (or

will start) no later than 15 days after the

payor makes the first payment to the

payee that is subject to withholding

under section 3406. A notice that

contains the information described in

paragraph (b)(2) of this section satisfies

the payor’s requirement to give notice to

the payee. If the broker notifies the

payor that the payee failed to make a

required certification and the payor has

received the certification from the

payee, the payor may disregard the

notice from the broker.

(ii) Notified payee underreporting and

incorrect taxpayer identification

number. The payor must notify the

payee under this section if the Internal

Revenue Service or a broker notifies the

payor to withhold either because of an

incorrect taxpayer identification number

under section 3406(a)(1)(B) (as

described in § 31.3406(d)–5) or due to

notified payee underreporting under

section 3406(a)(1)(C) (as described in

§ 31.3406(c)–1). If a payor is notified by

the Internal Revenue Service or a broker

with respect to a readily tradable

instrument, the payor may not ignore

the notice even if the payee previously

provided the payee’s taxpayer

identification number under penalties of

perjury to the payor and even if the

payee certified to the payor that the

payee is not subject to backup

withholding due to a notified payee

underreporting. See § 31.3406(d)–5(c)

(1) and (2) and (f)(2) for notice

requirements under section

3406(a)(1)(B) due to an incorrect

taxpayer identification number. See

§ 31.3406(c)–1(c)(2) for notice

requirements under section

3406(a)(1)(C) due to notified payee

underreporting.

(b) Notices—(1) Form of notice by

broker to payor. A broker who is

required under paragraphs (a)(1)(iii) and

(2) of this section to notify the payor

with respect to a readily tradable

instrument may notify the payor in

connection with the transfer

instructions by means of magnetic

media, machine readable document, or

any other medium, provided that the

notice includes the following

information—

(i) The payee’s name, address, and

taxpayer identification number (if

provided to the broker); and

(ii) A statement that the payee is

subject to withholding under section

3406(a)(1) (A), (B), (C), or (D) of the

Internal Revenue Code, whichever

section applies; and

(iii) When applicable, a statement that

the broker was notified by the Internal

Revenue Service that the payee is

subject to withholding under sections

3406(a)(1)(B) or (C).

(2) Form of notice by payor to payee.

A payor who is required to notify a

payee that the payee is subject to

withholding must provide notice that is

substantially similar to the following—

(i) For a notification concerning a

failure to provide a taxpayer

identification number in the required

manner under section 3406(a)(1)(A) or a

failure to make the following

certification described in section

3406(a)(1)(D):

Recently, you purchased (identify security

acquired). Because of the existence of one or

more of the following conditions, payments

of interest, dividends, and other reportable

amounts that are made to you will be subject

to withholding of tax at a 31 percent rate:

(specify the condition or conditions,

described below, that are applicable)

(1) You failed to provide a taxpayer

identification number, or failed to provide

this number under penalties of perjury, in

connection with the purchase of the acquired

security. (An individual’s taxpayer

identification number is his or her social

security number.)

(2) You failed to certify, under penalties of

perjury, that you are not subject to

withholding due to notified payee

underreporting as required under section

3406(a)(1)(D) of the Internal Revenue Code.

If condition (1) applies, you may stop

withholding by providing your taxpayer

identification number on the enclosed Form

W–9, signing the form, and returning it to us.

If you do not have a taxpayer identification

number, but have applied (or will soon

apply) for one, you may so indicate on the

Form W–9. Withholding may apply during

the 60-day period you are waiting for your

taxpayer identification number. You must

provide us with your taxpayer identification

number promptly after you receive it in order

to avoid withholding after the end of the 60-

day period or to stop withholding if it has

already begun. Certain persons, described on

the enclosed Form W–9, are exempt from

withholding. Follow the instructions on that

form if applicable to you.

If condition (2) applies, you may stop

withholding by certifying on the enclosed

Form W–9 that you are not subject to

withholding due to notified payee

underreporting, signing the form, and

returning it to us.

If more than one condition applies, you

must remove all applicable conditions to stop

withholding.

Please address any questions concerning

this notice to: [Insert payor identifying

information].

(Do not address questions to the broker

who purchased the securities for you.)

(ii) For the form of the notice

concerning imposition of withholding

due to an incorrect taxpayer

identification number, see § 31.3406(d)–

5 (d)(2) and (g)(2).

(iii) For the form of the notice

concerning the imposition of

withholding due to notified payee

underreporting, see § 31.3406(c)–1(d)(2).

(c) Payor’s reliance on information

from broker—(1) In general. A payor of

an instrument acquired by a payee

through a broker may rely on the

information that the payor receives from

the broker pursuant to paragraphs (a)

and (b) of this section.

(2) Amount subject to backup

withholding. The payor is required to

withhold under section 3406 depending
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66127

on the payor’s customary method of

making payment on an instrument or

instruments owned by a payee. If it is

the practice of a payor to combine in

one account all readily tradable

instruments of the same issue owned by

a payee and if only certain of those

instruments are subject to withholding,

the payor must withhold on the

aggregate payment made with respect to

all the instruments in the account.

Otherwise, the payor must withhold on

the payment made on the instrument or

instruments with respect to which the

payee is subject to withholding.

§ 31.3406(e)–1 Period during which

backup withholding is required.

(a) In general. A payor must withhold

under section 3406 at a rate of 31

percent on any reportable payment (as

defined in section 3406(b)) made to a

payee during the period described in

this section (irrespective of the number

of conditions for imposing withholding

under section 3406 that exist with

respect to the payee). A payor must

continue to withhold under section

3406 until no condition for imposing

backup withholding exists with respect

to the payee.

(b) Failure to furnish a taxpayer

identification number in the manner

required—(1) Start withholding. A payor

is required to withhold under section

3406(a)(1)(A) at a rate of 31 percent on

any reportable payment (as defined in

section 3406(b)) at the time the payor

pays the reportable payment (as

described in § 31.3406(a)–4) to a payee

if—

(i) The payor has not received the

payee’s taxpayer identification number

in the manner required in § 31.3406(d)–

1; or

(ii) The payor has received notice

from a broker (as required in

§ 31.3406(d)–4(a)(1)(iii)) with respect to

a readily tradable instrument that the

payee did not furnish a taxpayer

identification number to the broker in

the manner required in § 31.3406(d)–1

and the payor has not received the

taxpayer identification number from the

payee in this manner.

(2) Stop withholding. The payor must

stop withholding under section

3406(a)(1)(A) within 30 days after the

payor receives—

(i) The payee’s taxpayer identification

number in the manner required under

§ 31.3406(d)–1; or

(ii) A statement, in such form and

containing such information as is

required under applicable regulations,

that the payee is not a United States

person.

(c) Notification of an incorrect

taxpayer identification number. See

§ 31.3406(d)–5(e) and (g)(3) for the

period for which withholding is

required in the case of notification of an

incorrect taxpayer identification

number.

(d) Notified payee underreporting. See

§ 31.3406(c)–1(e) for the period for

which withholding is required in the

case of notified payee underreporting.

(e) Payee certification failure—(1)

Start withholding. A payor is required to

withhold under section 3406(a)(1)(D) at

a rate of 31 percent on any reportable

interest or dividend payment (as

defined in section 3406(b)(2)) at the

time the payor pays such reportable

interest or dividend payment (as

described in § 31.3406(a)–4) to a payee

if—

(i) The payor has not received from

the payee the certification required in

§ 31.3406(d)–2; or

(ii) The payor has received notice

from a broker (as required in

§ 31.3406(d)–4(a)(1)(iii)) with respect to

a readily tradable instrument that the

payee did not make the required

certification and the payor has not

received the required certification from

the payee.

(2) Stop withholding. The payor must

stop withholding under section

3406(a)(1)(D) on any reportable interest

or dividend payment within 30 days

after the payor receives the certification

from the payee in the manner required

by § 31.3406(d)–2.

(f) Rule for determining when the

payor receives a taxpayer identification

number or certificate from a payee. In

determining whether a payee has failed

to provide a taxpayer identification

number or any certification to a payor

(including a Form W–8 or substitute

form), a payor is required to process the

taxpayer identification number or

certification within 30 days after the

payor receives the taxpayer

identification number or certification

from the payee or in certain cases, from

a broker. Thus, the payor may take up

to 30 days to treat the taxpayer

identification number or a certificate as

having been received.

§ 31.3406(f)–1 Confidentiality of

information.

(a) Confidentiality and liability for

violation. Pursuant to section 3406(f) no

person may use any information

obtained under section 3406 for any

purpose except for the purpose of

complying with the requirements of

section 3406 or for purposes permitted

under section 6103 (subject to the

safeguards of section 6103). See section

7431 for civil damages for violating the

confidential use of the information

(subject to an exception for good faith).

(b) Permissible use of information—

(1) In general. A payor or broker may

transmit information on a Form W–9,

Form W–8, or other acceptable form

relating to withholding to the

department, institution, or firm (or to

any employee therein) responsible for

withholding or processing of taxpayer

identification numbers, certifications

described in § 31.3406(h)–3, or other

substitute forms. In addition, a broker

may notify the payor with respect to a

readily tradable instrument of the

requirement to withhold and the

condition or conditions for imposing

withholding (as described in

§ 31.3406(d)–4) that exist with respect to

the payee. A payor or broker may,

without violating the Internal Revenue

Code, close an account of, refuse to

open an account for, issue an

instrument to, or redeem an instrument

for, a person solely because the person

fails to furnish the person’s taxpayer

identification number or documentation

of foreign status in the manner required

in § 31.3406(d)–1 and § 31.3406(g)–1,

respectively. A payor who closes an

account of a payee in the calendar year

in which the account was opened and

during which no taxpayer identification

number or evidence of foreign status

was provided for that account will be

presumed in the absence of evidence to

the contrary to have closed the account

without violating section 3406(f) even

though the payee is subject to backup

withholding under section

3406(a)(1)(A). A payor, except as

provided in §§ 31.3406(d)–3 and

31.3406(g)–3, may not prohibit a payee

who fails to furnish the payee’s taxpayer

identification number in the manner

required in § 31.3406(d)–1 from

withdrawing any funds in the account.

(2) Window transactions. In the case

of a window transaction (as defined in

§ 31.3406(b)(2)–3(b)), a payor may,

without violating the Internal Revenue

Code, refuse to redeem or may refuse to

make payment if the payee fails to

provide a taxpayer identification

number regardless of when the

obligation was issued or acquired.

(c) Specific restrictions on the use of

information. Except as provided in

paragraph (b) of this section, a payor or

broker is not permitted to—

(1) Close an account (or instrument) of

a payee solely because that payee (or the

account of a payee) is subject to

withholding under section 3406(a)(1)

(A), (B), (C), or (D);

(2) Refuse to open an account or to

issue an instrument if the person fails to

certify, under penalties of perjury, that

the person is not subject to withholding

under section 3406(a)(1)(C) (relating to

notified payee underreporting);
66128 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

(3) Use information obtained under

section 3406 (including a payee’s failure

or inability to certify that the payee is

not subject to withholding due to

notified payee underreporting or the fact

that the account is subject to

withholding), surcharge an account (i.e.,

charge an account more than the fee

charged a similar account that was not

subject to withholding under section

3406), or use that information to

determine whether to open or close an

account, whether to issue or redeem an

instrument, or whether to extend credit

to the payee.

§ 31.3406(g)–1 Exception for payments to

certain payees and certain other payments.

(a) Exempt recipients—(1) In general.

A payor of any reportable payment (as

defined in section 3406(b)) must not

withhold under section 3406 if the

payee is—

(i) An organization exempt from

taxation under section 501(a) or an

individual retirement account;

(ii) The United States or any wholly

owned agency or instrumentality

thereof;

(iii) A state, the District of Columbia,

a possession of the United States, any

political subdivision of any of the

foregoing, or any wholly owned agency

or instrumentality of any one or more of

the foregoing;

(iv) A foreign government, a political

subdivision of a foreign government, or

any wholly owned agency or

instrumentality of any one or more of

the foregoing (as defined in regulations

under section 892); or

(v) An international organization or

any wholly owned agency or

instrumentality thereof (as defined in

section 7701(a)(18)).

(2) Nonexclusive list. Paragraph (a)(1)

of this section does not prescribe an

exclusive list of payees that are exempt

from information reporting and also are

exempt from withholding under section

3406.

(b) Determination of whether a person

is described in paragraph (a)(1) of this

section. The determination of whether a

person is a payee described in

paragraph (a)(1) of this section must be

made as provided in the applicable

provisions of section 6049 and the

regulations issued thereunder. A payor,

even if permitted to treat a person as an

exempt recipient without requiring a

certificate under the provisions of

section 6049, may require a payee,

otherwise not required to file a

certificate regarding its exempt status, to

file a certificate and may treat a payee

who fails to file the certificate as a

person who is not an exempt recipient.

See § 31.3406(h)–3 for a description of

the Form W–9 or a substitute form

prescribed under section 3406 for

claiming exempt status.

(c) Prepaid or advance premium lifeinsurance contracts. A payor of a

reportable payment (as defined in

section 3406(b)(1)) may, but is not

required to, withhold under section

3406 on reportable payments made from

January 1, 1984, to December 31, 1996,

on prepaid or advance premium lifeinsurance contracts to a payee who is

the owner for tax purposes of the

prepaid or advance premium lifeinsurance contract. For purposes of this

exception from backup withholding, a

prepaid or advance premium lifeinsurance contract is one entered into

on or before June 30, 1984, by the payee

and under which the increment in value

of the prepaid or advance premium is

used for the payment of premiums

during the period in which the

exception from backup withholding

applies.

§ 31.3406(g)–2 Exception for reportable

payments for which withholding is

otherwise required.

(a) In general. A payor of a reportable

payment (as defined in section 3406(b))

must not withhold under section 3406

if the payment is subject to withholding

under any other provision of the

Internal Revenue Code.

(b) Payment of wages. A payor who is

required to make an information return

under section 6041 with respect to a

payment of wages (as defined in section

3401) because, e.g., the employee makes

a certification under section 3402(n)

(relating to employees incurring no

income tax liability), must not withhold

under section 3406 on those wages.

(c) Distribution from a pension,

annuity, or other plan of deferred

compensation. An amount reportable

under section 6047, such as a

designated distribution under section

3405, is not a reportable payment

subject to withholding under section

3406. See section 3406(b). Designated

distributions not subject to withholding

under section 3406 include—

(1) Distributions from a pension,

annuity, profit-sharing, stock bonus

plan, or other plan deferring the receipt

of compensation;

(2) Distributions from an individual

retirement account or annuity;

(3) Distributions from an owneremployee plan; and

(4) Certain surrenders of life

insurance contracts.

(d) Gambling winnings—(1) In

general. A payor of a reportable

gambling winning must not withhold

under section 3406 if tax is required to

be withheld from the gambling winning

under section 3402(q) (relating to the

extension of withholding to certain

gambling winnings). If the reportable

gambling winning is not required to be

withheld upon under section 3402(q),

withholding under section 3406 applies

to the gambling winning if, and only if,

the payee does not furnish a taxpayer

identification number to the payor.

Section 31.3406(b)(3)–1(b)(3) does not

apply to a reportable gambling winning.

The payor of a reportable gambling

winning is not required to aggregate all

such winnings made to a payee during

a calendar year, nor is the payor

required to determine whether an

information return was required to be

made with respect to the payee for the

preceding year.

(2) Definition of a reportable gambling

winning and determination of amount

subject to backup withholding. For

purposes of withholding under section

3406, a reportable gambling winning is

any gambling winning subject to

information reporting under section

6041. The amount of a reportable

gambling winning is—

(i) The amount paid with respect to

the amount of the wager reduced, at the

option of the payor; by

(ii) The amount of the wager.

(3) Special rules. Amounts paid with

respect to identical wagers are treated as

paid with respect to a single wager. The

determination of whether wagers are

identical is made under § 31.3402(q)–

1(c)(1)(ii). In addition, a gambling

winning (other than a winning from

bingo, keno, or slot machines) is a

reportable gambling winning only if the

amount paid with respect to the wager

is $600 or more and if the proceeds are

at least 300 times as large as the amount

wagered. See § 7.6041–1 of this chapter

to determine whether a winning from

bingo, keno, or slot machines is a

reportable gambling winning and thus

subject to withholding under section

3406.

(e) Certain real estate transactions. A

real estate reporting person (the socalled broker) as defined in section

6045(e)(2) must not withhold under

section 3406 on a payment made with

respect to a real estate transaction that

is subject to reporting under sections

6045 (a) and (e) and § 1.6045–4 of this

chapter.

(f) Certain payments after an

acquisition of accounts or instruments.

A payor who acquires pre-1984

accounts or instruments described in

§ 31.3406(d)–1(b)(2)(iv) for which the

payor does not have a taxpayer

identification number or has an

obviously incorrect taxpayer

identification number as defined in

§ 31.3406(h)–1(b)(2) must start
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66129

withholding under section 3406(a)(1)(A)

and § 31.3406(d)–1 on those accounts or

instruments no later than sixty days

following the date of the payor’s

acquisition of those accounts or

instruments.

(g) Certain gross proceeds. No

withholding under section 3406 is

required with respect to any portion of

the original issue discount on an

instrument or security that is subject to

withholding under section 3406 as

reportable gross proceeds of such

instrument or security under section

6045.

§ 31.3406(g)–3 Exemption while payee is

waiting for a taxpayer identification number.

(a) In general—(1) Backup

withholding not required for 60 days. If

a payor has received an awaiting-TIN

certificate from a payee with respect to

an account or instrument receiving

reportable interest or dividends as

described in section 3406(b)(2), the

payor must exempt the payee from

withholding under section 3406(a)(1)(A)

during the 60-day exemption period to

the extent and in the manner described

in either paragraph (a) (2) or (3) of this

section. The 60-day exemption period

means the 60-consecutive-day period

beginning with the day the payor

receives the awaiting-TIN certificate.

The payor must withhold under section

3406 beginning after the 60-day

exemption period if the payor has not

received a taxpayer identification

number from the payee in the manner

required in § 31.3406(d)–1. Regardless

of whether the payee provides an

awaiting-TIN certificate to a payor, the

payor is required to withhold under

section 3406(a)(1)(D) and § 31.3406(d)–2

on reportable interest or dividend

payments as described in § 31.3406(d)–

2 if the payee fails to certify, under

penalties of perjury, that the payee is

not subject to withholding due to

notified payee underreporting as

required in section 3406(a)(1)(D) and

§ 31.3406(d)–2.

(2) Reserve method. A payor must not

withhold under section 3406 during the

60-day exemption period unless the

payee (or a joint payee in the case of a

joint account) desires to make a

withdrawal of more than $500 of either

principal or interest from the account in

any single transaction during the period.

If a payee (or a joint payee) desires to

make a withdrawal of more than $500

during the 60-day exemption period, the

payor is required under section 3406 to

withhold 31 percent of all reportable

payments made during the period and at

the time of withdrawal unless the payee

reserves 31 percent of all reportable

payments made to the account during

the period.

(3) Alternative rule; 7-day grace

period—(i) In general. A payor who

receives an awaiting-TIN certificate may

elect, on a payee-by-payee basis or in

general, to exempt reportable interest or

dividend payments to a payee from

withholding under section 3406

applying the rules in paragraph (a)(3)

(ii) or (iii) of this section.

(ii) Withholding on withdrawals.

Under this paragraph (a)(3)(ii), a payor

must obtain a certified taxpayer

identification number from the payee

within 60 days after the date that the

payor receives the awaiting-TIN

certification. In addition, the payor must

withhold under section 3406 on any

withdrawals made after the close of 7

business days after the date the

awaiting-TIN certification is received

and before the earlier of the date that the

payor receives a certified taxpayer

identification number from the payee,

the date the account is closed (in which

case the payor must withhold on any

reportable payment made at the time the

account or relationship is closed), or the

date withholding under section 3406

starts on all reportable payments made

to the account, instrument, or

relationship. All cash withdrawals in an

amount up to the reportable payments

made from the day after the date of

receipt of the awaiting-TIN certification

to the date of withdrawal are treated as

reportable payments.

(iii) Withholding regardless of

withdrawals. Under this paragraph

(a)(3)(iii), a payor must start

withholding under section 3406 on the

account not later than 7 business days

after the date the payor receives the

awaiting-TIN certification on reportable

payments thereafter made to the account

(whether or not the payee makes a cash

withdrawal). The payor must withhold

under section 3406 until the earlier of

the date the payor receives a certified

taxpayer identification number from the

payee, the date the account is closed, or

the date withholding under section 3406

starts on all reportable payments made

to the account, instrument, or

relationship. The payor must obtain a

certified taxpayer identification number

from the payee within 60 days after the

date that the payor receives the

awaiting-TIN certificate or undertake a

mailing each year soliciting the certified

taxpayer identification number from the

payee until the earlier of the calendar

year that the certified taxpayer

identification number is received, or the

calendar year in which the account is

closed. However, if the account is

closed in December of a calendar year,

the mailing must be made after the

account is closed and before January 31

of the subsequent calendar year.

(b) Special rule for readily tradable

instruments. The 60-day awaiting-TIN

exemption described in paragraph (a)(1)

of this section applies to payments

made with respect to readily tradable

instruments only if the payee provides

an awaiting-TIN certificate directly to

the payor. If a broker acquires a readily

tradable instrument through a post-1983

brokerage account (as described in

§ 31.3406(d)–1(c)(2)) for a payee who

has no taxpayer identification number,

the broker must advise the payor as

required in § 31.3406(d)–4(a)(1) that the

payee failed to provide a taxpayer

identification number under penalties of

perjury, regardless of whether the payee

provides an awaiting-TIN certificate to

the broker. Once a payor is notified by

a broker that a payee failed to provide

a taxpayer identification number in the

required manner, or that the payee is

subject to withholding under section

3406(a)(1) (B) or (C), the payor must

impose withholding under section 3406

for the appropriate period described in

§ 31.3406(e)–1.

(c) Exceptions—(1) In general. The 60-

day awaiting-TIN exemption described

in paragraph (a) of this section does not

apply to—

(i) Window transactions (as defined in

§ 31.3406(b)(2)–3(b));

(ii) Redemptions of bearer obligations

that are subject to reporting under

section 6045; or

(iii) Other amounts that are subject to

reporting under section 6045 (except as

described in paragraph (c)(2) of this

section).

(2) Special rule for amounts subject to

reporting under section 6045 other than

proceeds of redemptions of bearer

obligations. If a broker’s customer does

not provide a taxpayer identification

number to the broker, and the broker

effects a sale that is subject to reporting

under section 6045 (other than a

redemption of a bearer obligation),

§ 31.3406(d)–3(b) applies, whether or

not the sale is pursuant to an instruction

by electronic transmission, provided the

customer furnishes an awaiting-TIN

certificate to the broker before the sale.

For purposes of this paragraph (c)(2),

the 30-day period provided in

§ 31.3406(d)–3(b) is a 60-day period.

(d) Awaiting-TIN certificate. A payee

qualifies for the 60-day awaiting-TIN

exemption provided in paragraph (a) of

this section if the payee furnishes a

written statement to the payor, signed

under penalties of perjury, that the

payee has not been issued a taxpayer

identification number, that the payee

has applied for a taxpayer identification

number or intends to apply for a
66130 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

number in the near future, and that the

payee understands that if the payee does

not provide a number to the payor

within 60 days, the payor is required

under section 3406 to withhold 31

percent of any reportable payment

thereafter made to the payee until the

payor receives a number, and 31 percent

of a withdrawal to the extent of

reportable payments made to the payee

during the 60-day period, as described

in paragraph (a) of this section.

Language that is substantially similar to

the awaiting-TIN certification on Form

W–9 will satisfy the requirements of this

paragraph (d).

(e) Form for awaiting-TIN certificate.

A payor may use Form W–9 for the

awaiting-TIN certificate, or a payor may

include language that is substantially

similar to the awaiting-TIN certification

on Form W–9 in any other document of

the payor. See § 31.3406(h)–3, which

provides that Form W–9 is the

prescribed form but permits use of

substitute forms, and specifies the

length of time the payor is required to

retain the form. If Form W–9 is used, the

payee should write ‘‘Applied For’’ in

the space reserved for the taxpayer

identification number.

§ 31.3406(h)–1 Definitions.

(a) In general. For purposes of section

3406 and the regulations thereunder, the

definitions of this section apply.

(b) Taxpayer identification number—

(1) In general. Taxpayer identification

number means the identifying number

assigned to a person under section 6109

(relating to identifying numbers,

generally a nine-digit social security

number for an individual and a ninedigit employer identification number for

a nonindividual, e.g., a corporation,

partnership, trust, or estate). An

obviously incorrect number is not

considered a taxpayer identification

number. See § 31.6011(b)–2 and

§ 301.6109–1 of this chapter for

provisions relating to obtaining a

taxpayer identification number.

(2) Obviously incorrect number.

Obviously incorrect number means a

number that does not contain nine digits

or a number that includes an alpha

character as one of the nine digits.

(c) Broker.—Broker is defined in

section 6045(c)(1) and § 1.6045–1(a)(1)

of this chapter. If there could be more

than one broker with respect to any

acquisition, only the broker having the

closest contact (as determined under

§ 5f.6045–1(c)(3) (ii) and (iii) of this

chapter) with the payee is treated as a

broker. In the case of any instrument,

the term broker does not include any

person who is the payor with respect to

the instrument as described in

§ 31.3406(a)–2.

(d) Readily tradable instrument.—

Readily tradable instrument means—

(l) Any instrument that is part of an

issue any portion of which is traded on

an established securities market (within

the meaning of section 453(f)(5)); or

(2) Any instrument that is regularly

quoted by brokers or dealers making a

market.

(e) Day.—Day means a calendar day

unless specified otherwise under any

section of the regulations under section

3406. For example, see §§ 31.3406(d)–

5(a) and 31.3406(g)–3(a)(2).

(f) Business day.—Business day

means any day other than a Saturday,

Sunday, or legal holiday (within the

meaning of section 7503).

§ 31.3406(h)–2 Special rules.

(a) Joint accounts—(1) Relevant name

and taxpayer identification number

combination. For purposes of

identifying the account subject to

withholding under sections 3406(a)(1)

(B) and (C), the relevant name and

taxpayer identification number

combination is that which is used for

information reporting purposes.

(2) Optional rule for accounts subject

to backup withholding under section

3406(a)(1) (B) or (C) where the names

are switched. See § 31.3406(d)–

5(c)(4)(iii) under which a payor may

withhold under section 3406(a)(1)(B) as

required even though the names or

taxpayer identification numbers on the

account have been switched. The rules

under § 31.3406(d)–5(c)(4)(iii) may be

applied comparably by a payor who is

required to withhold under section

3406(a)(1)(C).

(3) Joint foreign payees—(i) In general.

If the first payee listed on an account or

instrument provides the penalties of

perjury statement regarding its foreign

status, withholding under section 3406

applies unless—

(A) Every joint payee provides the

statement regarding foreign status

(pursuant to the relevant regulations

issued under sections 6045 and 6049);

or

(B) Any one of the joint payees who

has not established foreign status

provides a taxpayer identification

number to the payor in the manner

required in § 31.3406(d)–1.

(ii) Information reporting on an

account including foreign payees. If any

one of the joint payees who has not

established foreign status provides a

taxpayer identification number under

paragraph (a)(3)(i)(B) of this section, that

number is the taxpayer identification

number that is required to be furnished

for purposes of information reporting

and withholding under section 3406.

(b) Backup withholding from an

alternative source—(1) In general. A

payor may not withhold under section

3406 from a source maintained by the

payor other than the source with respect

to which there exists a liability to

withhold under section 3406 with

respect to the payee. See section 3403

and § 31.3403–1, which provide that the

payor is liable for the amount required

to be withheld regardless of whether the

payor withholds.

(2) Exceptions for payments made in

property—(i) Backup withholding from

alternative source. In the case of a

payment that is made in property (other

than money), the payor must withhold

under section 3406 31 percent of the fair

market value of the property determined

immediately before or on the date of

payment. The payor may withhold

under section 3406 from the principal

amount being deposited with the payor

or from another source maintained by

the payee with the payor. The source

from which the tax is withheld under

section 3406 must be payable to at least

one of the persons listed on the account

subject to withholding. If the account or

source is not payable exclusively to the

same person or persons listed on the

account subject to withholding under

section 3406, then the payor must

obtain a written statement from all other

persons to whom the account or source

is payable authorizing the payor to

withhold under section 3406 from the

alternative account or source. A payor

that elects to withhold under section

3406 from an alternative source may

determine the account or source from

which the tax is to be withheld, or may

allow the payee to designate the

alternative source. A payee may not,

however, require a payor to withhold

under section 3406 from a specific

alternative source. See § 31.3402(q)–

1(d), Example 5, for methods of

withholding on prizes, awards, and

gambling winnings paid in property

other than cash.

(ii) Deferral of withholding. If the

payor cannot locate, using reasonable

care (following procedures substantially

similar to those set forth in

§ 31.3406(d)–5(c)(3)(ii) (A) and (B)), an

alternative source of cash from which

the payor may satisfy its withholding

obligation pursuant to paragraph

(b)(2)(i) of this section, the payor may

defer its obligation to withhold under

section 3406, except for reportable

payments of property made in

connection with prizes, awards, or

gambling winnings, until the earlier of—

(A) The date the payor makes a cash

payment to the account subject to
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66131

withholding under section 3406 or cash

is otherwise deposited in the account in

a sufficient amount to satisfy the

obligation in full; or

(B) The close of the fourth calendar

year after the obligation arose.

(iii) Barter exchanges. In the case of

a barter exchange that issues scrip to, or

credits the account of, a member or

client of the exchange in payment for

property or services, the barter exchange

may withhold under section 3406

from—

(A) The scrip or credit, if converted to

cash in order to satisfy the deposit

requirements of section 6302 and

§ 31.6302–4; or

(B) Any other source maintained by

the exchange for the member or client

in the manner described in paragraph

(b)(2) of this section.

(c) Trusts. Withholding under section

3406 applies to reportable payments

made to a trust if any of the conditions

for imposing withholding under section

3406 apply to the trust. Generally, a

trust is not a payor and will not be

required to withhold under section 3406

on reportable payments that it makes to

its beneficiary who is subject to

withholding under section 3406. The

preceding sentence does not apply,

however, to a grantor trust with two or

more grantors described in § 31.3406(a)–

2(b)(4), which is treated as a middleman

payor. The trustee of a trust described

in this paragraph (c) may certify that the

trust’s taxpayer identification number is

correct and that the trust is not subject

to withholding due to notified payee

underreporting, without regard to the

status of the beneficiaries of the trust.

(d) Adjustment of prior withholding

by middlemen. A middleman payor (as

defined in § 31.3406(a)–2(b)) who

receives a payment from which tax has

been erroneously withheld under

section 3406 may seek a refund of the

tax withheld by the payor from whom

the middleman payor received the

payment (referred to as the ‘‘upstream

payor’’). Alternatively, the middleman

payor may obtain a refund of the tax by

claiming a credit for the amount of tax

withheld by the upstream payor against

the deposit of any tax imposed by this

chapter which the middleman payor is

required to withhold and deposit (as

described in section 6413 and

§ 31.6413(a)–2). In either case, the

middleman payor must pay or credit the

gross amount of the payment (including

the tax withheld) to its payee as though

it had received the gross amount of the

payment from the upstream payor and

must withhold under section 3406 only

if one of the conditions for imposing

backup withholding exists with respect

to its payee. If its payee is not subject

to withholding under section 3406, the

middleman payor must pay or credit the

full amount of the payment to the payee.

See § 31.6413(a)–3 regarding repayment

by a payor of tax erroneously collected

from a payee.

(e) Conversion of amounts paid in

foreign currency into United States

dollars—(1) Convertible foreign

currency. If a payment is made in a

currency other than the United States

dollar, the amount subject to

withholding under section 3406 is

determined by applying the statutory

rate of backup withholding to the

foreign currency payment and

converting the amount withheld into

United States dollars on the date of

payment at the spot rate (as defined in

§ 1.988–1(d)(1) of this chapter) or

pursuant to a reasonable spot rate

convention. For example, a withholding

agent may use a month-end spot rate or

a monthly average spot rate. A spot rate

convention must be used consistently

with respect to all non-dollar amounts

withheld and from year to year. Such

convention cannot be changed without

the consent of the Commissioner.

(2) Nonconvertible foreign currency.

[Reserved]

(f) Coordination with other sections.

For purposes of section 31, chapter 24

(other than section 3402(n)) of subtitle

C of the Internal Revenue Code (relating

to employment taxes and collection of

income tax at source) and so much of

subtitle F (other than section 7205) of

the Internal Revenue Code (relating to

procedure and administration) as relates

to this chapter, and the regulations

thereunder—

(1) An amount required to be

withheld under section 3406 must be

treated as a tax required to be withheld

under section 3402;

(2) An amount withheld under section

3406 must be treated as an amount

withheld under section 3402;

(3) An amount withheld under section

3406 must be deposited as required

under § 31.6302–4;

(4) Wages includes the gross amount

of any reportable payment (as defined in

section 3406(b)) except for purposes of

section 6014 (relating to an election by

the taxpayer not to compute the tax on

his annual return);

(5) Employee includes a payee of any

reportable payment; and

(6) Employer includes a payor who is

required to withhold the tax under

section 3406 (as defined in § 31.3406(a)–

2(a)) with respect to any reportable

payment (as defined in section 3406(b)).

(g) Tax liabilities and penalties. A

payor is subject to the same civil and

criminal penalties for failing to impose

withholding under section 3406 as an

employer who fails to withhold on a

payment of wages. In addition, a broker

may be subject to the penalty under

section 6705 (failure of a broker to

provide notice to a payor).

(h) To whom payor is liable for

amount withheld. A payor is not liable

to any person for any amount withheld

under section 3406. A payor is liable

only to the United States for an amount

that is required to be withheld as

provided in § 31.3403–1.

§ 31.3406(h)–3 Certificates.

(a) Prescribed form to furnish

information under penalties of perjury—

(1) In general. Except as provided in

paragraph (c) of this section, the Form

W–9 is the form prescribed under

section 3406 on which the payee

certifies, under penalties of perjury,

that—

(i) The taxpayer identification number

furnished to the payor is correct (as

required in § 31.3406(d)–1 and

§ 31.3406(d)–5);

(ii) The payee is not subject to

withholding due to notified payee

underreporting (as required in

§ 31.3406(d)–2);

(iii) The payee is an exempt recipient

(as described in § 31.3406(g)–1); or

(iv) The payee is awaiting receipt of

a taxpayer identification number (as

described in § 31.3406(g)–3).

(2) Use of a single or multiple Forms

W–9 for accounts of the same payee. A

valid Form W–9 must include the name

and taxpayer identification number of

the payee. Except as provided in

paragraph (b) of this section, the payee

must sign under penalties of perjury and

date the Form W–9 in order to satisfy

the requirements of this section. A

payor or broker may require a payee to

furnish a separate Form W–9 for each

obligation, deposit, certificate, share,

membership, contract, or other

instrument, or one Form W–9 for all the

payee’s obligations or relationships with

the payor or broker. In addition, a payee

of a mutual fund that has a common

investment advisor or common

principal underwriter with other mutual

funds (within the same family of funds)

may be permitted, in the discretion of

the mutual fund, to provide one Form

W–9 with respect to shares acquired or

owned in any of the funds.

(b) Prescribed form to furnish a

noncertified taxpayer identification

number. With respect to accounts or

other relationships where the payee is

not required to certify, under penalties

of perjury, that the taxpayer

identification number being furnished is

correct, the payor or broker may obtain

the taxpayer identification number

orally or may use Form W–9, a
66132 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

substitute form, or any other document,

but the payee is not required to sign the

form.

(c) Forms prepared by payors or

brokers—(1) Substitute forms; in

general. A payor or broker may prepare

and use a form that contains provisions

that are substantially similar to those of

the official Form W–9. A payor or

broker may use any document relating

to the transaction, such as the signature

card for an account, so long as the

certifications are clearly set forth. A

payor or broker who uses a substitute

form may furnish orally or in writing

the instructions for the Form W–9 that

relate to the account. A payor or broker

may refuse to accept certifications

(including the official Form W–9) that

are not made on the form or forms

provided by the payor or broker. A

payor or broker may refuse to accept a

certification provided by a payee only if

the payor or broker furnishes the payee

with an acceptable form immediately

upon receipt of an unacceptable form or

within 5 business days of receipt of an

unacceptable form. An acceptable form

for this purpose must contain a notice

that the payor or broker has refused to

accept the form submitted by the payee

and that the payee must submit the

acceptable form provided by the payor

in order for the payee not to be subject

to withholding under section 3406. If

the payor or broker requires the payee

to furnish a form for each account of the

payee, the payor or broker is not

required to furnish an acceptable form

until the payee furnishes the payor or

broker with the payee’s account

numbers. A payor or broker may use

separate substitute forms to have a

payee certify under penalties of perjury

that—

(i) The payee’s taxpayer identification

number is correct; and

(ii) The payee is not subject to

withholding under section 3406 due to

notified payee underreporting.

(2) Form for exempt recipient. A

payor or broker may use a substitute

form for the payee to certify, under

penalties of perjury, that the payee is an

exempt recipient (described in

§ 31.3406(g)–1 or described in the

respective reporting section), provided

the form contains provisions that are

substantially similar to those of the

official Form W–9 relating to exempt

recipients. A certificate must be

prepared in accordance with the

instructions applicable to exempt

recipients on Form W–9, and must set

forth fully and clearly the data called for

therein. If a payor will treat the payee

as an exempt recipient only if the payee

files a certificate as to its exempt status,

the certificate is valid only if it contains

the payee’s taxpayer identification

number. Thus, a payee must include the

payee’s taxpayer identification number

on a certificate that a payor requires to

be made in order to treat the payee as

an exempt recipient.

(d) Special rule for brokers. A broker

may act as the payee’s agent for

purposes of furnishing a taxpayer

identification number or certification to

a payor with respect to any readily

tradable instrument (as defined in

§ 31.3406(h)–1(d)) provided the payee

provides a taxpayer identification

number on Form W–9 or other

acceptable substitute form to the broker.

The payor may rely on a taxpayer

identification number provided by the

broker unless certification is required

(as described in § 31.3406(d)–4) and the

broker notifies the payor that the

number was not certified.

(e) Reasonable reliance on

certificate—(1) In general. A payor is

not liable for the tax imposed under

section 3406 if the payor’s failure to

deduct and withhold the tax is due to

reasonable reliance, as defined in

paragraph (e)(2) of this section, on a

Form W–9 (or other acceptable

substitute) required by this section.

(2) Circumstances establishing

reasonable reliance. For purposes of

paragraph (e)(1) of this section, a payor

can reasonably rely on a Form W–9 (or

other acceptable substitute) unless—

(i) The form does not contain the

name and taxpayer identification

number of the payee (or does not state,

in lieu of a taxpayer identification

number, that the payee is awaiting

receipt of a taxpayer identification

number (i.e., an awaiting-TIN

certificate));

(ii) The form is not signed and dated

by the payee;

(iii) The form does not contain the

statement, when required, that the

payee is not subject to withholding due

to notified payee underreporting;

(iv) The payee has deleted the jurat or

other similar provisions by which the

payee certifies or affirms the correctness

of the statements contained on the form;

or

(v) For purposes of section

3406(a)(1)(C), the payor is required to

subject the account to which the form

relates to withholding under section

3406(a)(1)(C) under the circumstances

described in § 31.3406(c)–1(c)(3)(iii).

(f) Who may sign certificate—(1) In

general. A Form W–9 or other

acceptable substitute form may be

signed by any person who is authorized

to sign a declaration under penalties of

perjury on behalf of the payee as

provided in section 6061 and the

regulations thereunder (relating to who

may sign generally for an individual,

which includes certain agents who may

sign returns and other documents),

section 6062 and the regulations

thereunder (relating to who may sign

corporate returns), and section 6063 and

the regulations thereunder (relating to

who may sign partnership returns).

(2) Notified payee underreporting. A

payee who has not been notified that he

is subject to withholding under section

3406(a)(1)(C) as a result of notified

payee underreporting may make the

certification related to notified payee

underreporting. In addition, a payee

who was subject to withholding under

section 3406(a)(1)(C) due to notified

payee underreporting may certify that

he is not subject to withholding under

section 3406(a)(1)(C) due to notified

payee underreporting if the Internal

Revenue Service has provided the payee

with written certification that

withholding under section 3406(a)(1)(C)

due to notified payee underreporting

has terminated.

(g) Retention of certificates—(1)

Accounts or instruments that are not

pre-1984 accounts and brokerage

relationships that are post-1983

brokerage accounts. With respect to an

account or instrument that is not a pre1984 account (as described in

§ 31.3406(d)–1(b)(3)), or with respect to

a brokerage relationship that is a post1983 brokerage account (as described in

§ 31.3406(d)–1(c)(2)), a payor or broker

who receives a Form W–9 or other

acceptable substitute form related to

withholding under section 3406 must

retain the form in its records for 3 years

from the date the account is opened or

the instrument is purchased. The form

may be retained on microfilm or

microfiche.

(2) Accounts or instruments that are

pre-1984 accounts and brokerage

relationships that are not post-1983

brokerage accounts. With respect to a

pre-1984 account (as described in

§ 31.3406(d)–1(b)(1)) or with respect to

a brokerage relationship that is not a

post-1983 brokerage account (as

described in § 31.3406(d)–1(c)(1)), a

payor or broker is not required to retain

any Form W–9 or other acceptable

substitute form. If, however, the payor

or broker requires the payee to file only

one Form W–9 or substitute form for all

accounts or instruments of the payee,

the payor or broker must retain the

single form in the manner and for the

period of time described in paragraph

(g)(1) of this section if that form relates

to any account or instrument that is not

a pre-1984 account or relates to a post1983 brokerage account. If a payee has

certified that the payee is an exempt

recipient described in § 31.3406(g)–1,
Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations 66133

the payor or broker must retain the form

unless the payor or broker can establish

the existence of procedures that are

reasonably calculated to ensure that a

payee who has so certified is accurately

identified in the payor’s or broker’s

records.

(h) Cross references. For the

requirement to file an information

return (and furnish the related

statement) with respect to a reportable

payment, particularly if that payment

has been subject to withholding under

section 3406, see subtitle F, chapter 61,

subparts B and C of the Internal

Revenue Code. See § 31.6302–4 for the

requirement to deposit amounts

withheld under section 3406 on either

a monthly or semi-weekly basis. See

§ 31.6011(a)–4(b) for the requirement to

file Form 945, Annual Return of

Withheld Federal Income Tax, to reflect

amounts withheld under section 3406.

See § 31.6071(a)–1 for the time for filing

the Form 945.

§ 31.3406(i)–1 Effective date.

Sections 31.3406–0 through

31.3406(i)–1 (except §§ 31.3406(d)–5

and 31.3406(g)–1(c) and except for

international transactions) are effective

after December 31, 1996, and,

optionally, for reportable payments

made and transactions occurring on or

after December 21, 1995. For the

effective date of § 31.3406(d)–5, see

§ 31.3406(d)–5(i). Section 31.3406(g)–

1(c) is effective before January 1, 1997.

See §§ 35a.9999–0T through 35a.9999–5

of this chapter for rules that apply to

international transactions after

December 31, 1996.

Par. 9. Section 31.6011(a)–5(a) is

amended by:

1. Removing the word ‘‘or’’

immediately after the language

‘‘941PR,’’ in the first and third sentences

of paragraph (a)(1).

2. Adding the language ‘‘, or Form

945’’ immediately after the language

‘‘Form 941VI’’ in the first and third

sentences of paragraph (a)(1).

3. Adding the language ‘‘(or other

person)’’ immediately after the word

‘‘employer’’ in the second, third, fourth,

and sixth sentences of paragraph (a)(1).

4. Removing the authority citation at

the end of the section.

Par. 10. Section 31.6011(a)–6 is

amended by revising the heading and

the first and third sentences of

paragraph (a)(1) to read as follows:

§ 31.6011(a)–6 Final returns.

(a) In general—(1) Federal Insurance

Contributions Act; income tax withheld

from wages and nonpayroll payments.

An employer (or other person) who is

required to make a return on a particular

form pursuant to § 31.6011(a)–1,

§ 31.6011(a)–4, or § 31.6011(a)–5, and

who in any return period ceases to pay

wages or nonpayroll payments in

respect of which he is required to make

a return on that form, must make the

return for the period as a final return.

* * * Every such person filing a final

return (other than a final return on Form

942 or Form 943) must furnish

information showing the date of the last

payment of wages (as defined in section

3121(a) or section 3401(a)), and, if

appropriate, the date of the last payment

of nonpayroll payments defined in

§ 31.6011(a)–4(b). * * *

* * * * *

Par. 11. Sections 31.6051–4 and

31.6413(a)–3 are added to read as

follows:

§ 31.6051–4 Statement required in case of

backup withholding.

(a) Statements required from payor.

Every payor of any reportable payment

(as defined in section 3406(b)(1)) who is

required to deduct and withhold tax

under section 3406 must furnish to the

payee a written statement containing the

information required by paragraph (c) of

this section.

(b) Prescribed form. The prescribed

form for the statement required by this

section is Form 1099. In the case of any

reportable interest or dividend payment

as defined in section 3406(b)(2), the

prescribed form is the Form 1099

required in § 1.6042–4 of this chapter

(relating to payments of dividends),

§ 1.6044–5 of this chapter (relating to

payments of patronage dividends), or

§ 1.6049–6(e) of this chapter (relating to

payments of interest or original issue

discount). Statements required to be

furnished by this section will be treated

as statements required by the respective

sections with respect to any reportable

payment, except that the statement

required under this section must

include the amount of tax withheld

under section 3406. In no event will a

statement be required under this section

if a statement with the same information

is required to be furnished to the

recipient under another section.

(c) Information required. Each

statement on Form 1099 must show the

following:

(1) The name, address, and taxpayer

identification number of the person

receiving any reportable payment;

(2) The amount subject to reporting

under section 6041, 6041A(a), 6042,

6044, 6045, 6049, 6050A, or 6050N

whether or not the amount of the

reportable payment is less than the

amount for which an information return

is required. If tax is withheld under

section 3406, the statement must show

the amount of the payment withheld

upon;

(3) The amount of tax deducted and

withheld under section 3406;

(4) The name and address of the

person filing the form;

(5) A legend stating that such amount

is being reported to the Internal

Revenue Service; and

(6) Such other information as is

required by the form.

(d) Time for furnishing statements.

The statement must be furnished to the

payee no later than January 31 of the

year following the calendar year in

which the payment was made.

(e) Aggregation. The payor or broker

may combine the information required

to be shown under this section with

information required to be shown under

another section even if they do not

relate to the same type of reportable

payment.

§ 31.6413(a)–3 Repayment by payor of tax

erroneously collected from payee.

(a) In general—(1) Erroneous

withholding under section 3406 of the

Internal Revenue Code. If a payor or

broker withholds under section 3406

from a payee in error or withholds more

than the proper amount of the tax under

section 3406, the payor or broker may

refund the amount erroneously

withheld as provided in section 6413

and this section. A payor or broker will

be considered to have withheld

erroneously under section 3406 only if

the amount is withheld because of an

error by the payor or broker (e.g., an

error in flagging or identifying an

account that is subject to withholding

under section 3406). The payor or

broker may, in its discretion, treat the

amount withheld as an amount

erroneously withheld and refund it to

the payee if—

(i) The payor or broker requires a

payee described in § 31.3406(g)–1(a) or

described in a provision of the Internal

Revenue Code requiring the reporting of

a payment subject to withholding under

section 3406 to certify that it is an

exempt recipient, the payee fails to

make the required certification, and the

payor or broker subsequently withholds

under section 3406 from a payment to

the payee;

(ii) The payor or broker does not

require the payee to certify concerning

its exempt status and the payor or

broker withholds under section 3406; or

(iii) The payor or broker withholds

under section 3406 from a payee after

the payee provides a taxpayer

identification number or required

certification (including the certification

relating to foreign status described in

§ 1.6049–5(b)(2)(iv) of this chapter or
66134 Federal Register / Vol. 60, No. 245 / Thursday, December 21, 1995 / Rules and Regulations

§ 1.6045–1(g)(1) of this chapter) to the

payor, but before the payor or broker

treats the number or required

certification as having been received

under § 31.3406(e)–1(b).

(2) Limitation. For purposes of

paragraph (a)(1) of this section, if a

payor or broker withholds because the

payor or broker has not received a

taxpayer identification number or

required certification and the payee

subsequently provides a taxpayer

identification number or a required

certification to the payor, the payor or

broker may not refund the amount to the

payee.

(b) Refunding amounts erroneously

withheld—(1) Time and manner. If a

payor or broker withholds under section

3406 from a payee in error (including

withholding more than the correct

amount, as described in paragraph (a) of

this section), the payor or broker may

refund the amount erroneously

withheld to the payee if the refund is

made prior to the end of the calendar

year and prior to the time the payor or

broker furnishes a Form 1099 to the

payee with respect to the payment for

which the erroneous withholding

occurred. If the amount of the erroneous

withholding is refunded to the payee,

the payor or broker must—

(i) Keep as part of its records a receipt

showing the date and amount of refund

and must provide a copy of the receipt

to the payee (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 erroneously withheld);

(ii) Not report on a Form 1099 as tax

withheld any amount which the payor

or broker has refunded to a payee; and

(iii) Not deposit the amount

erroneously withheld if the payor or

broker has not deposited the amount of

the tax prior to the time that the refund

is made to the payee.

(2) Adjustment after the deposit of the

tax. For purposes of paragraph (b)(1) of

this section, if the amount erroneously

withheld has been deposited prior to the

time that the refund is made to the

payee, the payor or broker may adjust

any subsequent deposit of the tax

collected under chapter 24 of the

Internal Revenue Code that the payor or

broker is required to make in the

amount of the tax that has been

refunded to the payee.

PART 35a—TEMPORARY

EMPLOYMENT TAX REGULATIONS

UNDER THE INTEREST AND DIVIDEND

TAX COMPLIANCE ACT OF 1983

Par. 12. The authority citation for part

35a is amended by removing the entry

for 35a.3406–2 to read, in part, as

follows:

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

§ 35a.3406–2 [Removed]

Par. 13. Section 35a.3406–2 is

removed.

Par. 14. Section 35a.9999–0T is added

to read as follows:

§ 35a.9999–0T Effective date (temporary).

In general, the provisions of

§§ 35a.9999–1, 35a.9999–2, 35a.9999–3,

35a.9999–3A, 35a.9999–4T, and

35a.9999–5 are effective before January

1, 1997. The provisions of those sections

remain effective after December 31,

1996, however, for purposes of

§ 301.6724–1(g) of this chapter, relating

to due diligence safe harbor, and for

international transactions, including

transactions involving a foreign payee, a

foreign payor, a foreign office of a U.S.

bank or broker, or a payment from

sources without the United States. See

§§ 31.3406–0 through 31.3406(i)–1 of

this chapter for rules that apply to other

transactions after December 31, 1996.

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 15. The authority for part 301

continues to read in part as follows:

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

Par. 16. Section 301.6109–1 is

amended by:

1. Revising the third sentence in

paragraph (a)(1).

2. Revising the first sentence in

paragraph (h).

The revised sentences read as follows:

§ 301.6109–1 Identifying numbers.

(a) In general—(1) Social security

numbers and employer identification

numbers. * * * Social security numbers

identify individual persons, while

employer identification numbers

identify corporations, partnerships,

nonprofit associations, trusts, estates of

decedents, and similar nonindividual

persons. * * *

* * * * *

(h) Effective date. The provisions of

this section are effective for information

that must be furnished after April 15,

1974, except that the requirement that

an estate obtain an Employer

Identification Number applies on and

after January 1, 1984. * * *

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par 17. The authority for part 602

continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 18. In § 602.101, paragraph (c) is

amended by adding an entry to the table

in numerical order to read as follows:

‘‘§ 31.3406(a)–1—§ 31.3406(i)–1...1545–

0112’’.

Dated: November 28, 1995.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved:

Cynthia G. Beerbower,

Deputy Assistant Secretary of the Treasury.

[FR Doc. 95–30733 Filed 12–20–95; 8:45 am]

BILLING CODE 4830–01–U

26 CFR Parts 1 and 602

[TD 8643]

RIN 1545–AQ42

Distributions of Stock and Stock

Rights

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations amending regulations under

section 305(c) of the Internal Revenue

Code relating to constructive

distributions on preferred stock. The

final regulations concern the treatment

of stock redeemable at a premium by the

issuer. The regulations generally treat a

call premium as giving rise to a

constructive distribution only if

redemption pursuant to the call

provision is more likely than not to

occur. The final regulations also reflect

1990 amendments to section 305(c).

DATES: These regulations are effective

December 20, 1995.

For dates of applicability of these

regulations, see Effective dates under

SUPPLEMENTARY INFORMATION.

FOR FURTHER INFORMATION CONTACT:

Kirsten L. Simpson, (202) 622–7790 (not

a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in these final regulations has

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act (44 U.S.C. 3507) under

control number 1545–1438. Responses

to this collection of information are

required to comply with the consistency

requirements of the regulation.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number. The