Internal Revenue Bulletin 2000-23 (PDF rendition): IRS Revenue Rulings

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

INCOME TAX
Rev. Rul. 2000–28, page 1157.
Federal rates; adjusted federal rates; adjusted federal
long-term rate, and the long-term exempt rate.For
purposes of sections 1274, 1288, 382, and other sections
of the Code, tables set forth the rates for June 2000.
T.D. 8881, page 1158.
Amendments to final regulations (T.D. 8734, 1997–2 C.B.
109) relate to the withholding of income tax under section
1441 of the Code on certain U.S. source income paid to for-
eign persons.
T.D. 8882, page 1150.
Final regulations under section 356 of the Code relate to
nonqualified preferred stock and rights to acquire nonquali-
fied preferred stock, as defined in section 351(g)(2).
T.D. 8883, page 1151.
Final regulations under section 1032 of the Code relate to
the treatment of a disposition by a corporation or partner-
ship of the stock of a corporation in a taxable transaction.
Rev. Rul. 80–76 obsoleted.
REG–106186–98, page 1226.
Proposed regulations under section 368 of the Code provide
that mergers involving Disregarded Entities do no qualify for
tax-free treatment because the mergers do not result in the
combination of the assets and liabilities of two corporations
pursuant to the state or federal merger law. A public hearing
is scheduled for August 8, 2000.
REG–107644–98, page 1229.
Proposed regulations under section 472 of the Code relate
to the dollar-value last-in, first-out (LIFO) and inventory price
index computation (IPIC) methods of accounting for invento-
ries. A public hearing is scheduled for September 15, 2000.
Notice 2000–29, page 1241.
Partnership options and convertible instruments.This
notice invites public comment on the federal income tax
treatment of the exercise of an option to acquire a partner-
ship interest, the exchange of convertible debt for a partner-
ship interest, and the exchange of a preferred interest in a
partnership for a common interest in that partnership.
ADMINISTRATIVE
Announcement 2000–48, page 1243.
This announcment provides additional information relating to
Rev. Proc. 2000–12 for financial institutions that are consid-
ering entering into a qualified intermediary agreement with
the Internal Revenue Service.
Internal Revenue
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Bulletin No. 2000–23
June 5, 2000
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
Department of the Treasury
Internal Revenue Service
Actions Relating to Court Decisions is on the page following the Introduction.
Finding Lists begin on page ii.
Announcements of Disbarments and Suspensions begin on page 1244.
Index for January through May begins on page vi.

June 5, 20002000–23 I.R.B.
The Internal Revenue Bulletin is the authoritative instrument
of the Commissioner of Internal Revenue for announcing offi-
cial rulings and procedures of the Internal Revenue Service
and for publishing Treasury Decisions, Executive Orders, Tax
Conventions, legislation, court decisions, and other items of
general interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscription
basis. Bulletin contents are consolidated semiannually into
Cumulative Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application
of the tax laws, including all rulings that supersede, revoke,
modify, or amend any of those previously published in the
Bulletin. All published rulings apply retroactively unless other-
wise indicated. Procedures relating solely to matters of in-
ternal management are not published; however, statements
of internal practices and procedures that affect the rights
and duties of taxpayers are published.
Revenue rulings represent the conclusions of the Service on
the application of the law to the pivotal facts stated in the
revenue ruling. In those based on positions taken in rulings
to taxpayers or technical advice to Service field offices,
identifying details and information of a confidential nature
are deleted to prevent unwarranted invasions of privacy and
to comply with statutory requirements.
Rulings and procedures reported in the Bulletin do not have
the force and effect of Treasury Department Regulations,
but they may be used as precedents. Unpublished rulings
will not be relied on, used, or cited as precedents by Service
personnel in the disposition of other cases. In applying pub-
lished rulings and procedures, the effect of subsequent leg-
islation, regulations, court decisions, rulings, and proce-
dures must be considered, and Service personnel and oth-
ers concerned are cautioned against reaching the same con-
clusions in other cases unless the facts and circumstances
are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions
of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions, and Subpart B, Legislation and Related
Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to
these subjects are contained in the other Parts and Sub-
parts. Also included in this part are Bank Secrecy Act Admin-
istrative Rulings. Bank Secrecy Act Administrative Rulings
are issued by the Department of the Treasury’s Office of the
Assistant Secretary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months.
These monthly indexes are cumulated on a semiannual basis,
and are published in the first Bulletin of the succeeding semi-
annual period, respectively.
The IRS Mission
Provide America’s taxpayers top quality service by help-
ing them understand and meet their tax responsibilities
and by applying the tax law with integrity and fairness to
all.
Introduction
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.

2000–23 I.R.B.June 5, 2000
It is the policy of the Internal Revenue
Service to announce at an early date
whether it will follow the holdings in cer-
tain cases. An Action on Decision is the
document making such an announcement.
An Action on Decision will be issued at
the discretion of the Service only on un-
appealed issues decided adverse to the
government. Generally, an Action on De-
cision is issued where its guidance would
be helpful to Service personnel working
with the same or similar issues. Unlike a
Treasury Regulation or a Revenue Ruling,
an Action on Decision is not an affirma-
tive statement of Service position. It is not
intended to serve as public guidance and
may not be cited as precedent.
Actions on Decisions shall be relied
upon within the Service only as conclu-
sions applying the law to the facts in the
particular case at the time the Action on
Decision was issued. Caution should be
exercised in extending the recommenda-
tion of the Action on Decision to similar
cases where the facts are different. More-
over, the recommendation in the Action
on Decision may be superseded by new
legislation, regulations, rulings, cases, or
Actions on Decisions.
Prior to 1991, the Service published ac-
quiescence or nonacquiescence only in
certain regular Tax Court opinions. The
Service has expanded its acquiescence
program to include other civil tax cases
where guidance is determined to be help-
ful. Accordingly, the Service now may ac-
quiesce or nonacquiesce in the holdings
of memorandum Tax Court opinions, as
well as those of the United States District
Courts, Claims Court, and Circuit Courts
of Appeal. Regardless of the court decid-
ing the case, the recommendation of any
Action on Decision will be published in
the Internal Revenue Bulletin.
The recommendation in every Action
on Decision will be summarized as ac-
quiescence, acquiescence in result only,
or nonacquiescence. Both “acquies-
cence” and “acquiescence in result only”
mean that the Service accepts the holding
of the court in a case and that the Service
will follow it in disposing of cases with
the same controlling facts. However, “ac-
quiescence” indicates neither approval
nor disapproval of the reasons assigned
by the court for its conclusions; whereas,
“acquiescence in result only” indicates
disagreement or concern with some or all
of those reasons. “Nonacquiescence” sig-
nifies that, although no further review
was sought, the Service does not agree
with the holding of the court and, gener-
ally, will not follow the decision in dis-
posing of cases involving other taxpay-
ers. In reference to an opinion of a circuit
court of appeals, a “nonacquiescence” in-
dicates that the Service will not follow
the holding on a nationwide basis. How-
ever, the Service will recognize the
precedential impact of the opinion on
cases arising within the venue of the de-
ciding circuit.
The Actions on Decisions published in
the weekly Internal Revenue Bulletin are
consolidated semiannually and appear in
the first Bulletin for July and the Cumu-
lative Bulletin for the first half of the
year. A semiannual consolidation also ap-
pears in the first Bulletin for the follow-
ing January and in the Cumulative Bul-
letin for the last half of the year.
The Commissioner ACQUIESCES in
the following decision:
Diane Fernandez v. Commissioner,
1
114 T.C. No. 21
The Commissioner ACQUIESCES in
result only in the following decision:
Osteophathic Medical Oncology and
Hematology, P.C. v. Commissioner,
2
113 T.C. No. 26
Actions Relating to Decisions of the Tax Court
1
Acquiescence relating to whether the Tax Court has jurisdiction to review the Service’s determination that a spouse is not entitled to relief under I.R.C. section
6015.
2
Acquiescence in result only relating to whether the administration of chemotherapy drugs arising from the provision of medical services constitutes the sale of mer-
chandise within the meaning of Treas. Reg. section 1.471–1.

Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term
rates are set forth for the month of June 2000. See
Rev. Rul. 2000–28, page 1157.
Section 356.—Receipt for
Additional Consideration
26 CFR 1.356–6: Rules for treatment of
nonqualified preferred stock as other property.
T.D. 8882
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Reorganizations; Nonqualified
Preferred Stock
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to nonqualified
preferred stock and rights to acquire
nonqualified preferred stock. The regu-
lations are necessary to reflect changes
to the law concerning these instruments
that were made by the Taxpayer Relief
Act of 1997. The regulations affect
shareholders who receive nonqualified
preferred stock, or rights to acquire such
stock, in certain corporate reorganiza-
tions and divisions.
EFFECTIVE DATE: These regulations
are effective May 16, 2000.
FOR FURTHER INFORMATION CON-
TACT: Michael J. Danbury, (202) 622-
7750 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
On January 6, 1998, temporary regula-
tion TD 8753 (1998–9 I.R.B. 6 [63 F.R.
411]) was published in the Federal Reg-
ister. A notice of proposed rulemaking
(REG–121755–97, 1998–9 I.R.B. 13)
cross–referencing the temporary regula-
tion was published in the Federal Regis-
ter(63 F.R. 453) on the same day.
The temporary regulation provided
that, notwithstanding contemporaneously
issued final regulations treating certain
rights to acquire stock as securities that
can be received tax-free in corporate reor-
ganizations and divisions, nonqualified
preferred stock (as defined in section
351(g)(2) of the Internal Revenue Code)
(NQPS), or a right to acquire NQPS, will
in some circumstances not be treated as
stock or securities for purposes of sec-
tions 354, 355, and 356. The temporary
regulation added §1.356–6T, and applied
to NQPS received in connection with a
transaction occurring on or after March 9,
1998 (other than certain recapitalizations
of family-owned corporations and trans-
actions described in section 1014(f)(2) of
the Taxpayer Relief Act of 1997, Public
Law 105–34, 111 Stat. 788, 921). No
written comments responding to the no-
tice of proposed rulemaking were re-
ceived, and no public hearing was re-
quested or held.
The regulation proposed by
REG–121755–97 is adopted by this Trea-
sury decision, and the corresponding tem-
porary regulation is removed. Cross-ref-
erences to the temporary regulation in
§§1.354–1(e), 1.355–1(c), and 1.356–3(b)
have been removed and replaced with
cross-references to the final regulation at
§1.356–6.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It has also been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. Because the regulations do not im-
pose a collection of information on small
entities, the Regulatory Flexibility Act (5
U.S.C. chapter 6) does not apply. Pur-
suant to section 7805(f) of the Internal
Revenue Code, the notice of proposed
rulemaking preceding these regulations
was submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Michael J. Danbury of the Office
of Assistant Chief Counsel (Corporate).
However, other personnel from the IRS
and Treasury participated in their devel-
opment.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph . The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.356–6 also issued under 26
U.S.C. 351(g)(4). * * *
§1.354–1 [Amended]
Par. 2. In §1.354–1, paragraph (e), first
sentence, the language “§1.356–6T” is re-
moved and “§1.356–6” is added in its
place.
§1.355–1 [Amended]
Par. 3. In §1.355–1, paragraph (c), first
sentence, the language “§1.356–6T” is re-
moved and “§1.356–6” is added in its
place.
§1.356–3 [Amended]
Par. 4. In §1.356–3, paragraph (b), first
sentence, the language “§1.356–6T” is re-
moved and “§1.356–6” is added in its
place.
Par. 5. Section 1.356–6T is redesig-
nated as §1.356–6 and the section heading
is revised to read as follows:
§1.356–6 Rules for treatment of nonqual-
ified preferred stock as other property.
* * * * *
June 5, 200011502000–23 I.R.B.
Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved May 5, 2000.
Jonathan Talisman,
Deputy Assistant Secretary
of the Treasury.
Section 382.—Limitation on Net
Operating Loss Carryforwards
and Certain Built-In Losses
Following Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of June 2000. See Rev. Rul.
2000–28, page 1157.
Section 412.—Minimum Funding
Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157.
Section 467.—Certain Payments
for the Use of Property or
Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157.
Section 468.—Special Rules for
Mining and Solid Waste
Reclamation and Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157.
Section 482.—Allocation of
Income and Deductions Among
Taxpayers
Federal short-term, mid-term, and long-term
rates are set forth for the month of June 2000. See
Rev. Rul. 2000–28, page 1157.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157.
Section 642.—Special Rules for
Credits and Deductions
Federal short-term, mid-term, and long-term
rates are set forth for the month of June 2000. See
Rev. Rul. 2000–28, page 1157.
Section 807.—Rules for Certain
Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157.
Section 1032.—Exchange of
Stock for Property
26 CFR 1.1032–2: Disposition by a corporation of
stock of a controlling corporation in certain
triangular reorganizations.
T.D. 8883
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
Guidance Under Section 1032
Relating to the Treatment of a
Disposition by an Acquiring
Entity of the Stock of a
Corporation in a Taxable
Transaction
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the treatment
of a disposition by a corporation or part-
nership (the acquiring entity) of the stock
of a corporation (the issuing corporation)
in a taxable transaction. The final regula-
tions interpret section 1032 of the Internal
Revenue Code. They affect persons en-
gaging in certain taxable transactions, as
described in the final regulations, occur-
ring after May 16, 2000.
EFFECTIVE DATE: These regulations
are effective May 16, 2000.
FOR FURTHER INFORMATION CON-
TACT: Filiz Serbes, (202) 622-7550 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On September 23, 1998, the Treasury
and the IRS issued a notice of proposed
rulemaking in the Federal Register (63 FR
50816), setting forth rules relating to the
treatment of a disposition by a corpora-
tion (the acquiring corporation) of the
stock of another corporation (the issuing
corporation) in a taxable transaction. A
public hearing regarding these proposed
regulations was held on January 7, 1999.
Written comments responding to the no-
tice were received. After consideration of
all of the comments, the proposed regula-
tions are adopted as revised by this Trea-
sury decision.
Explanation of Revisions and Summary
of Comments
The Immediacy Requirement
The proposed regulations adopted a
cash purchase model in which certain
transactions involving a contribution of is-
suing corporation stock by an issuing cor-
poration to an acquiring corporation are
recast as a contribution of cash by the issu-
ing corporation to the acquiring corpora-
tion, which is used by the acquiring corpo-
ration to purchase issuing corporation
stock from the issuing corporation. As a
condition for application of the cash pur-
chase model of the proposed regulations,
the proposed regulations adopted the re-
quirement of §1.1502–13(f)(6)(ii)(B) that
the issuing corporation stock received by
the acquiring corporation be immediately
transferred to acquire money or other
property.
A number of commentators requested
that the term “immediately” be explicitly
defined. Some suggested replacing the
temporal requirement with a transactional
approach, requiring only that the stock be
disposed of “pursuant to a plan of acquisi-
tion.” Others suggested that the immedi-
acy requirement be waived in certain cir-
cumstances, such as with respect to a
nonqualified deferred compensation
arrangement involving a grantor trust
(commonly referred to as a “Rabbi
Trust”) that is established to provide fu-
2000–23 I.R.B.1151June 5, 2000

ture benefits to the employees of an ac-
quiring corporation and that is funded
with issuing corporation stock.
After considering the purposes of section
1032 and issues of administrative burden
and technical complexity, the Treasury and
the IRS believe that the immediacy require-
ment should neither be waived nor con-
strued to permit the acquiring corporation
to hold issuing corporation stock for a pe-
riod of time during which the value of the
stock could fluctuate.
The Treasury and the IRS believe that,
in a case where the issuing corporation
contributes its stock to the acquiring cor-
poration and the acquiring corporation
does not immediately dispose of that
stock, it is not appropriate to increase the
basis of either the issuing corporation
stock transferred to the acquiring corpora-
tion or the stock of the acquiring corpora-
tion held by the issuing corporation. In
the cases addressed by the proposed regu-
lations, in which the acquiring corpora-
tion exchanges the stock immediately for
property owned by a third party, the trans-
action is indistinguishable from one in
which the issuing corporation directly ex-
changes its stock for the property of the
third party (an exchange to which section
1032 would apply) and contributes that
property to the acquiring corporation, a
transaction whose tax result would be the
same as the cash purchase model set forth
in the proposed regulations. However, in
cases where the acquiring corporation’s
ownership of the issuing corporation
stock is more than transitory, there ap-
pears to be no comparable transaction
which would generate the same tax conse-
quences as the cash purchase model.
Implementation of an approach that
waives the immediacy requirement would
raise administrative and policy concerns.
If the acquiring corporation were to be
permitted to hold the issuing corporation
stock for a period of time, the regulations
would have to adopt one of two alterna-
tive approaches. Under the first alterna-
tive, the regulations would provide that
the cash purchase model would be
deemed to apply at the time that the stock
is contributed to the acquiring corpora-
tion, giving the acquiring corporation a
fair market value basis in the stock. How-
ever, such an approach would raise at
least two concerns. First, in the case that
the issuing corporation stock is not pub-
licly traded, such an approach would im-
pose administrative burdens requiring a
valuation of the stock at a time when there
is no related transaction to assist in such
valuation. Thus, there is a potential for
the stock to be overvalued, with a result
of inflating the basis in both the con-
tributed issuing corporation stock and the
acquiring corporation stock held by the is-
suing corporation.
Second, even if the valuation were ac-
curate, providing for the cash purchase
model on the date of the contribution
would facilitate selective loss recognition.
If the acquiring corporation could receive
the stock at a fair market value basis and
hold on to it, then if the value of the stock
decreased, the subsidiary could sell the
stock and recognize a loss. The Treasury
and the IRS believe that it is inappropriate
to issue regulations facilitating selective
loss recognition.
Under the second alternative, the regu-
lations would suspend the operation of the
cash purchase model until such time as
the acquiring corporation actually dis-
poses of the issuing corporation stock.
However, such an approach also would
give rise to inappropriate tax results. In
addition to precluding gain recognition at-
tributable to the zero basis result, this al-
ternative would allow a subsidiary to
avoid recognition of gain attributable to
real appreciation in this asset.
Assume, for example, a case where the
issuing corporation contributes issuing
corporation stock worth $100 to the ac-
quiring corporation, the acquiring corpo-
ration retains that stock while it appreci-
ates to $300, and then sells the stock for
$300 in cash. Absent an immediacy re-
quirement, under the second alternative,
the acquiring corporation would be
deemed to have purchased the stock for
$300 in cash contributed by the issuing
corporation immediately before the sale
of the stock to the third party. As a result,
the acquiring corporation would not rec-
ognize any gain or loss, and the issuing
corporation would increase its basis in the
stock of the acquiring corporation by
$300. More than merely avoiding a zero
basis result (i.e., taxation on the $100
value in the stock when contributed to the
acquiring corporation), neither the acquir-
ing corporation nor the issuing corpora-
tion would ever be taxed on the further
$200 in appreciation of the issuing corpo-
ration stock which occurred while such
stock was held by the acquiring corpora-
tion. Such a result, which effectively
would provide full section 1032 protec-
tion for a subsidiary’s gain in certain par-
ent stock, would go well beyond address-
ing the zero basis result, the scope of
these regulations.
Because each of those alternatives
would be unsatisfactory for the reasons
discussed above, the final regulations re-
tain the immediacy requirement without
further exception.
Consistent with that determination, and
as in the case of any other transaction, the
cash purchase model of these regulations
applies to arrangements involving Rabbi
Trusts only if the immediacy requirement
is satisfied. Thus, these regulations do
not apply to Rabbi Trust arrangements in
which the stock of an issuing corporation
is treated for federal tax purposes as
owned for a period of time by its sub-
sidiary. However, the Treasury and the
IRS have reconsidered certain aspects of
Rabbi Trust arrangements and have deter-
mined that the fact that trust assets are
subject to the claims of creditors of the
subsidiary corporation does not necessar-
ily establish that the subsidiary should be
treated as a grantor of the trust at the time
the trust is funded. Guidance regarding
the effects of this reconsideration on ex-
isting Rabbi Trusts will be forthcoming.
In addition, the final regulations contain a
new example describing an arrangement
in which the issuing corporation (and not
the subsidiary) is treated as the grantor
and owner of the Rabbi Trust, with the re-
sult that the immediacy requirement is
satisfied upon the transfer of issuing cor-
poration stock by the trust to the sub-
sidiary’s employees.
Taxpayers could have reasonably antic-
ipated that Rabbi Trust arrangements
could not be structured without causing
subsidiaries to be treated as grantors and
owners of the trust. For that reason and
because of the potential ambiguities in in-
terpreting Rev. Rul. 80–76 (1980–1 C.B.
15), the IRS will not challenge a tax-
payer’s position that no gain is recognized
by an acquiring corporation upon the dis-
position by a Rabbi Trust, established on
or before June 15, 2000, of issuing corpo-
ration stock if that stock was contributed
by the issuing corporation to the Rabbi
Trust on or before May 16, 2001.
June 5, 200011522000–23 I.R.B.

Exchanges by the Acquiring Corporation
of Stock of the Issuing Corporation for
Other Issuing Corporation Stock
Commentators noted that, unlike
§1.1502–13(f)(6)(ii), the recast of the pro-
posed regulations applies even where the
acquiring corporation exchanges stock of
the issuing corporation for other issuing
corporation stock. Allowing a subsidiary
to receive parent stock it immediately
swaps for other parent stock, which it
could hold long term with a cost basis,
would facilitate selective loss recognition
with respect to parent stock by a sub-
sidiary. Accordingly, the final regulations
adopt, as a precondition for the recast, a
requirement that the issuing corporation
stock not be exchanged for other issuing
corporation stock.
Exchanges by the Acquiring Corporation
of Stock of the Issuing Corporation for
Acquiring Corporation Debt
Commentators contended that it is un-
clear whether the proposed regulations
are applicable when the acquiring corpo-
ration uses issuing corporation stock to
satisfy acquiring corporation debt. The
Treasury and the IRS believe that the reg-
ulations do apply to an exchange of issu-
ing corporation stock for acquiring corpo-
ration debt. Although section 1032 refers
to an exchange for money or other prop-
erty and does not expressly refer to ex-
changes of stock for debt, it is generally
acknowledged that section 1032 applies
to an exchange of a corporation’s stock
for its debt, subject to sections 61(a)(12)
and 108, which provide that a corporation
may have income from a cancellation of
indebtedness on an exchange of its stock
for its own debt (that is, cancellation of
indebtedness income can be realized and
recognized when debt is satisfied with
stock of the debtor corporation, even
though no gain is recognized on the is-
suance of the stock). Similarly, therefore,
the requirement set forth in these regula-
tions that the acquiring corporation trans-
fer issuing corporation stock to acquire
money or other property is satisfied where
the stock is used to satisfy acquiring cor-
poration debt (although the acquiring cor-
poration may be subject to sections
61(a)(12) and 108). No modifications to
the language of the final regulations are
needed to achieve this result.
Similarly, a commentator expressed
concern that the proposed regulations do
not expressly apply to an acquiring corpo-
ration’s exchange of issuing corporation
stock for the acquiring corporation’s own
outstanding acquiring corporation stock
held by a shareholder other than the issu-
ing corporation. The Treasury and the IRS
believe that the regulations do apply to
such an exchange.
Acquiring Corporation’s Use of Issuing
Corporation’s Debt
Commentators also requested that the
regulations be extended to issuing corpo-
ration debt instruments used by the ac-
quiring corporation to acquire money or
other property from unrelated third par-
ties. Because section 1032 only refers to
corporate stock, debt instruments are be-
yond the scope of these final regulations.
Reorganizations Coupled with Taxable
Transactions
The proposed regulations do not apply
if any party to the exchange receives a
substituted basis in the issuing corpora-
tion stock. Commentators suggested that
the final regulations provide that the
above rule does not preclude application
of the final regulations if a taxable ex-
change of issuing corporation stock for
property accompanies a reorganization.
The Treasury and the IRS believe that a
taxable transaction to which the regula-
tions apply can accompany a reorganiza-
tion, provided that the exchanges are sep-
arate and that the assets acquired in the
taxable transaction and the assets ac-
quired as part of the reorganization can be
identified. If these elements can be estab-
lished, the substituted basis prohibition
should not preclude application of the
final regulations to the taxable portion of
the exchange. Accordingly, clarifying
language has been added to
§1.1032–3(c)(3).
Options Without a Readily Ascertainable
Fair Market Value
Several commentators asked how the
proposed regulations apply to a compen-
satory stock option without a readily as-
certainable fair market value. Pursuant to
section 83(e)(3) and §1.83–7(a), the grant
of such options is effectively treated as an
open transaction. Section §1.83–7(a) pro-
vides that section 83(a) and (b) applies at
the time the option is exercised or is oth-
erwise disposed of. An example has been
added to confirm that the final regulations
do not apply to such options.
When the option is exercised, section
83(a) and (b) applies to the transfer of
stock pursuant to the exercise. If all of
the requirements of §1.1032–3 are met,
those regulations apply to determine the
treatment accorded the issuing corpora-
tion and the acquiring corporation upon
transfer of the issuing corporation stock to
the employee.
Reversionary Interest in Issuing
Corporation Stock
Examples 4and 5of the proposed regu-
lations set forth situations in which either
the issuing corporation (X) or the acquir-
ing corporation (Y) retains a reversionary
interest in the issuing corporation stock.
One commentator pointed out that the
preamble of the proposed regulations
does not articulate reasons for concern
with reversionary interests.
These facts were included in the exam-
ples in the proposed regulations to indi-
cate ownership of the stock for tax pur-
poses. Example 6of the final regulations
has been modified to state that Xretains
the only reversionary interest in the X
stock in the event that Aforfeits the right
to the stock.
Actual Payment for Issuing Corporation
Stock
Under the cash purchase model of the
proposed regulations, the acquiring cor-
poration is deemed to have purchased the
issuing corporation stock from the issuing
corporation for fair market value with
cash contributed to the acquiring corpora-
tion by the issuing corporation. Commen-
tators requested clarification of the tax
consequences in cases where the acquir-
ing corporation or another party makes an
actual payment to the issuing corporation
for issuing corporation stock. Specifi-
cally, concern was expressed as to
whether any or all of the amounts actually
paid to the issuing corporation are treated
as a distribution by the acquiring corpora-
tion to the issuing corporation. Assume,
for example, that the issuing corporation,
which owns all the stock of the acquiring
corporation, transfers an option for issu-
ing corporation stock to an employee of
2000–23 I.R.B.1153June 5, 2000

the acquiring corporation. At a time when
one share of issuing corporation stock has
a fair market value of $100, that em-
ployee exercises the option to acquire one
share of issuing corporation stock and
pays a strike price of $80 to the issuing
corporation. The acquiring corporation
pays some or all of the “spread” of $20 to
the issuing corporation.
The Treasury and the IRS do not believe
that an actual payment to the issuing corpo-
ration for issuing corporation stock should
be taxed as a distribution with respect to ac-
quiring corporation stock. Accordingly, the
final regulations have been modified to
provide that the amount of cash deemed
contributed by the issuing corporation to
the acquiring corporation in the cash pur-
chase model is equal to the difference be-
tween the fair market value of the issuing
corporation stock and the fair market value
of the money or other property received by
the issuing corporation as payment from
the employee or the acquiring corporation.
An example to such effect has been added
to the final regulations.
Although in other contexts partial pay-
ments received by a shareholder of an ac-
quiring corporation should be characterized
as boot under section 351(b), these final
regulations integrate such payments into
the cash purchase model described above.
Because the property transferred by the is-
suing corporation to the acquiring corpora-
tion in this context is the issuing corpora-
tion’s stock (or is deemed to be cash under
the recast of these regulations), characteri-
zation of the payment as boot in this con-
text would have no effect. No inference
should be drawn from the recast in the final
regulations to transactions in which a share-
holder receives money or other property in
exchange for property other than its own
stock.
Section 1.83–6 is currently under study.
A cross-reference in §1.83–6(d) to these
final regulations has been added to indicate
that the mechanics of §1.1032–3, rather
than the mechanics of §1.83–6(d), apply to
a corporate shareholder’s transfer of its
own stock to any person in consideration of
services performed for another entity where
the conditions of the final regulations are
satisfied.
Applicability of the Final Regulations in
the Partnership Context
Consistent with a suggestion by com-
mentators that the regulations be ex-
panded to apply to transactions involving
partnerships, the final regulations treat an
acquiring partnership’s disposition of the
stock of the issuing corporation in the
same manner as an acquiring corpora-
tion’s disposition of such stock. The reg-
ulations also have been expanded to apply
to transactions in which the stock of the
issuing corporation is obtained indirectly
by the acquiring entity in any combina-
tion of exchanges under sections 721 and
351.
In certain situations where the recast of
the final regulations does not apply to the
disposition by a partnership of a corporate
partner’s stock (for example, because the
immediacy requirement is not satisfied),
realized gain or loss that is allocated to
that corporate partner may nonetheless
not be recognized pursuant to section
1032. See Rev. Rul. 99–57 (1999–51
I.R.B. 678).
Status of §1.1502–13(f)(6)(ii)
The Treasury and the IRS believe that
the finalization of these §1.1032–3 regu-
lations renders §1.1502–13(f)(6)(ii) su-
perfluous because there should be no
cases which would be subject to recast
under §1.1502–13(f)(6)(ii), but in which a
member would “otherwise recognize
gain” as required for §1.1502–13(f)(6)(ii)
to apply. Accordingly, the effective date
paragraph in the §1.1502–13(f)(6) regula-
tions has been modified to limit the ap-
plicability of §1.1502–13(f)(6)(ii) and the
last sentence of §1.1502–13(f)(6)(iv)(A)
to periods before the effective date of
these regulations.
Status of Rev. Rul. 80–76
The preamble to the proposed regula-
tions states that Rev. Rul. 80–76 (1980–1
C.B. 15) addresses the same issues as the
proposed regulations and that, when final-
ized, the regulations will render Rev. Rul.
80–76 obsolete. In Rev. Rul. 80–76, a
majority shareholder of parent transfers
parent stock to an employee of its sub-
sidiary corporation as compensation. The
holding of the revenue ruling that the sub-
sidiary does not recognize gain or loss on
the transfer of the parent stock is now
governed by these regulations. An exam-
ple has been added to the final regulations
to clarify how general tax principles (see
Commissioner v. Fink, 483 U.S. 89
(1987)) and these final regulations inter-
act when a shareholder of the parent/issu-
ing corporation compensates an employee
of the subsidiary/acquiring corporation.
With the finalization of these regulations,
Rev. Rul. 80–76 is obsolete.
Additional Issues and Future Guidance
Since issuance of the proposed regula-
tions, commentators have raised questions
regarding the tax treatment of restricted
stock and options granted to employees be-
fore or in connection with a transaction in
which an issuing corporation distributes the
stock of the acquiring corporation under
section 355 (commonly referred to as a
“spin off”). For example, assume that em-
ployees of both Xcorporation and its sub-
sidiary Ycorporation have outstanding op-
tions to acquire stock in Xcorporation. In
connection with a spin off of the Ystock by
X, the employees of both corporations have
their outstanding options converted into op-
tions to acquire stock of both Xand Y, with
option terms preserving the overall values
of the original options. Commentators
have requested guidance on the tax conse-
quences to Xwhen, after the spin off, em-
ployees of Xexercise options to acquire Y
stock and, likewise, the tax consequences
to Ywhen, after the spin off, employees of
Yexercise options to acquire Xstock.
Guidance addressing these issues will be
forthcoming.
Effective Date
Commentators suggested that taxpayers
who engaged in transactions described in
these final regulations prior to the effective
date should be eligible for the tax treatment
prescribed by the regulations. While the
final regulations are applicable only
prospectively, the IRS will not challenge a
taxpayer’s position taken in a prior period
that is consistent with the requirements set
forth in the final regulations.
For a discussion of transitional relief
concerning certain Rabbi Trust arrange-
ments, see the discussion of the immedi-
acy requirement above.
Effect on Other Documents
Rev. Rul. 80–76 (1980–1 C.B. 15) is
obsolete.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
June 5, 200011542000–23 I.R.B.

tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions, and, because these regulations do
not impose a collection of information on
small entities, the Regulatory Flexibility
Act (5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Internal
Revenue Code, the notices of proposed
rulemaking preceding these regulations
were submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on their impact on
small business.
Drafting Information
The principal author of these final reg-
ulations is Filiz A. Serbes of the Office of
the Assistant Chief Counsel (Corporate),
IRS. However, other personnel from the
IRS and the Treasury Department partici-
pated in its development.
* * * * *
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.83–6 is amended by
adding two sentences to the end of para-
graph (d)(1) to read as follows:
§1.83–6 Deduction by employer.
* * * * *
(d) * * * (1) * * * For special rules that
may apply to a corporation’s transfer of
its own stock to any person in considera-
tion of services performed for another
corporation or partnership, see
§1.1032–3. The preceding sentence ap-
plies to transfers of stock and amounts
paid for such stock occurring on or after
May 16, 2000.
* * * * *
Par. 3. Section 1.1032–2 is amended
by:
1. Revising paragraph (e).
2. Adding paragraph (f).
The addition and revision read as follows:
§1.1032–2 Disposition by a corporation
of stock of a controlling corporation in
certain triangular reorganizations.
* * * * *
(e) Stock options. The rules of this sec-
tion shall apply to an option to buy or sell
P stock issued by P in the same manner as
the rules of this section apply to P stock.
(f) Effective dates.This section applies
to triangular reorganizations occurring on
or after December 23, 1994, except for
paragraph (e) of this section, which ap-
plies to transfers of stock options occur-
ring on or after May 16, 2000.
Par. 4. Section 1.1032–3 is added to
read as follows:
§1.1032–3 Disposition of stock or stock
options in certain transactions not quali-
fying under any other nonrecognition pro-
vision.
(a) Scope. This section provides rules
for certain transactions in which a corpo-
ration or a partnership (the acquiring en-
tity) acquires money or other property (as
defined in §1.1032–1) in exchange, in
whole or in part, for stock of a corpora-
tion (the issuing corporation).
(b) Nonrecognition of gain or loss—(1)
General rule. In a transaction to which this
section applies, no gain or loss is recog-
nized on the disposition of the issuing cor-
poration’s stock by the acquiring entity.
The transaction is treated as if, immediately
before the acquiring entity disposes of the
stock of the issuing corporation, the acquir-
ing entity purchased the issuing corpora-
tion’s stock from the issuing corporation for
fair market value with cash contributed to
the acquiring entity by the issuing corpora-
tion (or, if necessary, through intermediate
corporations or partnerships). For rules
that may apply in determining the issuing
corporation’s adjustment to basis in the ac-
quiring entity (or, if necessary, in determin-
ing the adjustment to basis in intermediate
entities), see sections 358, 722, and the reg-
ulations thereunder.
(2) Special rule for actual payment for
stock of the issuing corporation.If the is-
suing corporation receives money or other
property in payment for its stock, the
amount of cash deemed contributed under
paragraph (b)(1) of this section is the dif-
ference between the fair market value of
the issuing corporation stock and the
amount of money or the fair market value
of other property that the issuing corpora-
tion receives as payment.
(c) Applicability. The rules of this sec-
tion apply only if, pursuant to a plan to
acquire money or other property—
(1) The acquiring entity acquires stock
of the issuing corporation directly or indi-
rectly from the issuing corporation in a
transaction in which, but for this section,
the basis of the stock of the issuing corpo-
ration in the hands of the acquiring entity
would be determined, in whole or in part,
with respect to the issuing corporation’s
basis in the issuing corporation’s stock
under section 362(a) or 723;
(2) The acquiring entity immediately
transfers the stock of the issuing corpora-
tion to acquire money or other property
(from a person other than an entity from
which the stock was directly or indirectly
acquired);
(3) The party receiving stock of the is-
suing corporation in the exchange speci-
fied in paragraph (c)(2) of this section
from the acquiring entity does not receive
a substituted basis in the stock of the issu-
ing corporation within the meaning of
section 7701(a)(42); and
(4) The issuing corporation stock is not
exchanged for stock of the issuing corpo-
ration.
(d) Stock options. The rules of this sec-
tion shall apply to an option issued by a
corporation to buy or sell its own stock in
the same manner as the rules of this sec-
tion apply to the stock of an issuing cor-
poration.
(e) Examples. The following examples
illustrate the application of this section:
Example 1.(i) X, a corporation, owns all of the
stock of Ycorporation. Yreaches an agreement with
C, an individual, to acquire a truck from Cin ex-
change for 10 shares of Xstock with a fair market
value of $100. To effectuate Y’s agreement with C,
Xtransfers to Ythe Xstock in a transaction in which,
but for this section, the basis of the Xstock in the
hands of Ywould be determined with respect to X’s
basis in the Xstock under section 362(a). Yimmedi-
ately transfers the Xstock to C to acquire the truck.
(ii) In this Example 1, no gain or loss is recog-
nized on the disposition of the Xstock by Y. Imme-
diately before Y’s disposition of the Xstock, Yis
treated as purchasing the Xstock from Xfor $100 of
cash contributed to Yby X. Under section 358, X’s
basis in its Ystock is increased by $100.
Example 2.(i) Assume the same facts as Example
1, except that, rather than Xstock, Xtransfers an option
with a fair market value of $100 to purchase Xstock.
(ii) In this Example 2, no gain or loss is recog-
nized on the disposition of the Xstock option by Y.
Immediately before Y’s disposition of the Xstock
option, Yis treated as purchasing the Xstock option
from Xfor $100 of cash contributed to Yby X.
Under section 358, X’s basis in its Ystock is in-
creased by $100.
2000–23 I.R.B.1155June 5, 2000

Example 3.(i) X, a corporation, owns all of the
outstanding stock of Ycorporation. Yis a partner
in partnership Z. Zreaches an agreement with C,
an individual, to acquire a truck from C in ex-
change for 10 shares of Xstock with a fair market
value of $100. To effectuate Z’s agreement with
C, Xtransfers to Ythe Xstock in a transaction in
which, but for this section, the basis of the Xstock
in the hands of Ywould be determined with re-
spect to X’s basis in the Xstock under section
362(a). Yimmediately transfers the Xstock to Zin
a transaction in which, but for this section, the
basis of the Xstock in the hands of Zwould be de-
termined under section 723. Zimmediately trans-
fers the Xstock to Cto acquire the truck.
(ii) In this Example 3, no gain or loss is recog-
nized on the disposition of the Xstock by Z. Im-
mediately before Z’s disposition of the Xstock, Z
is treated as purchasing the Xstock from Xfor
$100 of cash indirectly contributed to Zby X
through an intermediate corporation, Y. Under
section 722, Y’s basis in its Zpartnership interest
is increased by $100, and, under section 358, X’s
basis in its Ystock is increased by $100.
Example 4.(i) X, a corporation, owns all of the
outstanding stock of Ycorporation. B, an individ-
ual, is an employee of Y. Pursuant to an agreement
between Xand Yto compensate Bfor services pro-
vided to Y, Xtransfers to B10 shares of Xstock
with a fair market value of $100. Under §1.83–
6(d), but for this section, the transfer of Xstock by
Xto Bwould be treated as a contribution of the x
stock by Xto the capital of Y, and immediately
thereafter, a transfer of the Xstock by Yto B. But
for this section, the basis of the Xstock in the
hands of Ywould be determined with respect to
X’s basis in the Xstock under section 362(a).
(ii) In this Example 4, no gain or loss is recog-
nized on the deemed disposition of the Xstock by
Y. Immediately before Y’s deemed disposition of
the Xstock, Yis treated as purchasing the Xstock
from Xfor $100 of cash contributed to Yby X.
Under section 358, X’s basis in its Ystock is in-
creased by $100.
Example 5. (i) X, a corporation, owns all of the
outstanding stock of Ycorporation. B,an individ-
ual, is an employee of Y. To compensate Bfor ser-
vices provided to Y, Bis offered the opportunity to
purchase 10 shares of Xstock with a fair market
value of $100 at a reduced price of $80. Btrans-
fers $80 and Ytransfers $10 to Xas partial pay-
ment for the Xstock.
(ii) In this Example 5, no gain or loss is recog-
nized on the deemed disposition of the Xstock by
Y. Immediately before Y’s deemed disposition of
the Xstock, Yis treated as purchasing the X stock
from X for $100, $80 of which Yis deemed to
have received from B, $10 of which originated
with Y, and $10 of which is deemed to have been
contributed to Yby X. Under section 358, X’s basis
in its Ystock is increased by $10.
Example 6.(i) X, a corporation, owns stock of
Y. To compensate Y’s employee, B, for services
provided to Y, Xissues 10 shares of Xstock to B,
subject to a substantial risk of forfeiture. Bdoes
not have an election under section 83(b) in effect
with respect to the Xstock. Xretains the only re-
versionary interest in the Xstock in the event that
Bforfeits the right to the stock. Several years after
X’s transfer of the Xshares, the stock vests. At the
time the stock vests, the 10 shares of Xstock have
a fair market value of $100. Under §1.83– 6(d),
but for this section, the transfer of the Xstock by X
to Bwould be treated, at the time the stock vests,
as a contribution of the Xstock by Xto the capital
of Y, and immediately thereafter, a disposition of
the Xstock by Yto B. The basis of the Xstock in
the hands of Y, but for this section, would be deter-
mined with respect to X’s basis in the Xstock
under section 362(a).
(ii) In this Example 6,no gain or loss is recog-
nized on the deemed disposition of Xstock by Y
when the stock vests. Immediately before Y’s
deemed disposition of the Xstock, Yis treated as
purchasing X’s stock from Xfor $100 of cash con-
tributed to Yby X. Under section 358, X’s basis in
its Ystock is increased by $100.
Example 7. (i) Assume the same facts as in Ex-
ample 6, except that Y(rather than X) retains a re-
versionary interest in the Xstock in the event that
Bforfeits the right to the stock. Several years after
X’s transfer of the Xshares, the stock vests.
(ii) In this Example 7, this section does not
apply to Y’s deemed disposition of the Xshares be-
cause Yis not deemed to have transferred the X
stock to Bimmediately after receiving the stock
from X. For the tax consequences to Yon the
deemed disposition of the Xstock, see §1.83–6(b).
Example 8. (i) X, a corporation, owns all of the
outstanding stock of Ycorporation. In Year 1, X
issues to Y’s employee, B, a nonstatutory stock op-
tion to purchase 10 shares of Xstock as compensa-
tion for services provided to Y. The option is exer-
cisable against Xand does not have a readily
ascertainable fair market value (determined under
§1.83–7(b)) at the time the option is granted. In
Year 2, Bexercises the option by paying Xthe
strike price of $80 for the Xstock, which then has
a fair market value of $100.
(ii) In this Example 8, because, under section
83(e)(3), section 83(a) does not apply to the grant
of the option, paragraph (d) of this section also
does not apply to the grant of the option. Section
83 and §1.1032–3 apply in Year 2 when the option
is exercised; thus, no gain or loss is recognized on
the deemed disposition of Xstock by Yin Year 2.
Immediately before Y’s deemed disposition of the
Xstock in Year 2, Yis treated as purchasing the X
stock from Xfor $100, $80 of which Yis deemed
to have received from Band the remaining $20 of
which is deemed to have been contributed to Yby
X. Under section 358, X’s basis in its Ystock is in-
creased by $20.
Example 9. (i) A, an individual, owns a major-
ity of the stock of X. Xowns stock of Yconstitut-
ing control of Ywithin the meaning of section
368(c). Atransfers 10 shares of its Xstock to B, a
key employee of Y. The fair market value of the
10 shares on the date of transfer was $100.
(ii) In this Example 9, A is treated as making a
nondeductible contribution of the 10 shares of Xto
the capital of X, and no gain or loss is recognized
by A as a result of this transfer. See Commissioner
v. Fink, 483 U.S. 89 (1987). A must allocate his
basis in the transferred shares to his remaining
shares of Xstock. No gain or loss is recognized on
the deemed disposition of the Xstock by Y. Imme-
diately before Y’s disposition of the Xstock, Y is
treated as purchasing the Xstock from Xfor $100
of cash contributed to Yby X. Under section 358,
X’s basis in its Ystock is increased by $100.
Example 10.(i) In Year 1, X, a corporation,
forms a trust which will be used to satisfy deferred
compensation obligations owed by Y, X’s wholly
owned subsidiary, to Y’s employees. Xfunds the
trust with Xstock, which would revert to Xupon
termination of the trust, subject to the employees’
rights to be paid the deferred compensation due to
them. The creditors of Xcan reach all the trust as-
sets upon the insolvency of X. Similarly, Y’s cred-
itors can reach all the trust assets upon the insol-
vency of Y. In Year 5, the trust transfers Xstock to
the employees of Y in satisfaction of the deferred
compensation obligation.
(ii) In this Example 10, Xis considered to be
the grantor of the trust, and, under section 677, X
is also the owner of the trust. Any income earned
by the trust would be reflected on X’s income tax
return. Yis not considered a grantor or owner of
the trust corpus at the time Xtransfers Xstock to
the trust. In Year 5, when employees of Yreceive X
stock in satisfaction of the deferred compensation
obligation, no gain or loss is recognized on the
deemed disposition of the Xstock by Y. Immedi-
ately before Y’s deemed disposition of the Xstock,
Yis treated as purchasing the Xstock from Xfor
fair market value using cash contributed to Yby X.
Under section 358, X’s basis in its Ystock in-
creases by the amount of cash deemed contributed.
(f) Effective date. This section applies
to transfers of stock or stock options of
the issuing corporation occurring on or
after May 16, 2000.
Par. 5. In §1.1502–13, paragraph
(f)(6)(v) is amended by adding a sentence
after the first sentence to read as follows:
§1.1502–13 Intercompany transactions.
* * * * *
(f) ***
(6) ***
(v) Effective date. *** However, para-
graph (f)(6)(ii) of this section and the last
sentence of paragraph (f)(6)(iv)(A) of this
section do not apply to dispositions of P
stock or options occurring on or after May
16, 2000. ***
* * * * *
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved May 5, 2000.
Jonathan Talisman,
Deputy Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on May
11, 2000, 2:30 p.m., and published in the issue of the
Federal Register for May 16, 2000, 65 F.R. 31073)
June 5, 200011562000–23 I.R.B.

Section 1274.—Determination
of Issue Price in the Case of
Certain Debt Instruments Issued
for Property
(Also sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate, and
the long-term exempt rate.For purposes
of sections 1274, 1288, 382, and other
sections of the Code, tables set forth the
rates for June 2000.
Rev. Rul. 2000–28
This revenue ruling provides various
prescribed rates for federal income tax
purposes for June 2000 (the current
month.) Table 1 contains the short-term,
mid-term, and long-term applicable fed-
eral rates (AFR) for the current month for
purposes of section 1274(d) of the Inter-
nal Revenue Code. Table 2 contains the
short-term, mid-term, and long-term ad-
justed applicable federal rates (adjusted
AFR) for the current month for purposes
of section 1288(b). Table 3 sets forth the
adjusted federal long-term rate and the
long-term tax-exempt rate described in
section 382(f). Table 4 contains the ap-
propriate percentages for determining the
low-income housing credit described in
section 42(b)(2) for buildings placed in
service during the current month. Finally,
Table 5 contains the federal rate for deter-
mining the present value of an annuity, an
interest for life or for a term of years, or a
remainder or a reversionary interest for
purposes of section 7520.
2000–23 I.R.B.1157June 5, 2000
REV. RUL. 2000–28 TABLE 1
Applicable Federal Rates (AFR) for June 2000
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-Term
AFR6.53%6.43%6.38%6.35%
110% AFR7.19%7.07%7.01%6.97%
120% AFR7.87%7.72%7.65%7.60%
130% AFR8.53%8.36%8.27%8.22%
Mid-Term
AFR6.62%6.51%6.46%6.42%
110% AFR7.29%7.16%7.10%7.06%
120% AFR7.96%7.81%7.74%7.69%
130% AFR8.64%8.46%8.37%8.31%
150% AFR10.01%9.77%9.65%9.58%
175% AFR11.71%11.39%11.23%11.13%
Long-Term
AFR6.39%6.29%6.24%6.21%
110% AFR7.04%6.92%6.86%6.82%
120% AFR7.69%7.55%7.48%7.43%
130% AFR8.35%8.18%8.10%8.04%
REV. RUL. 2000–28 TABLE 2
Adjusted AFR for June 2000
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
adjusted AFR4.62%4.57%4.54%4.53%
Mid-term
adjusted AFR5.01%4.95%4.92%4.90%
Long-term
adjusted AFR5.65%5.57%5.53%5.51%

REV. RUL. 2000–28 TABLE 3
Rates Under Section 382 for June 2000
Adjusted federal long-term rate for the current month5.65%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)5.75%
June 5, 200011582000–23 I.R.B.
REV. RUL. 2000–28 TABLE 4
Appropriate Percentages Under Section 42(b)(2)
for June 2000
Appropriate percentage for the 70% present value low-income housing credit8.53%
Appropriate percentage for the 30% present value low-income housing credit3.65%
REV. RUL. 2000–28 TABLE 5
Rate Under Section 7520 for June 2000
Applicable federal rate for determining the present value of an annuity, an interest for life or
a term of years, or a remainder or reversionary interest8.0%
Section 1288.—Treatment of
Original Issue Discounts on Tax-
Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157.
Section 1441.—Withholding of
Tax On Nonresident Aliens
26 CFR 1.1441–1: Requirements for the deduction
and withholding of tax on payments to foreign
persons.
T.D. 8881
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 31
Revisions to Regulations
Relating to Withholding of Tax
on Certain U.S. Source Income
Paid to Foreign Persons and
Revisions of Information
Reporting Regulations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
amendments to final regulations relating
to the withholding of income tax under
sections 1441, 1442, and 1443 on certain
U.S. source income paid to foreign per-
sons and related requirements governing
collection, deposit, refunds, and credits of
withheld amounts under sections 1461
through 1463. Additionally, this docu-
ment contains amendments under sections
6041, 6041A, 6042, 6045, 6049, and
3406. This regulation affects persons
making payments of U.S. source income
to foreign persons.
DATES: These regulations are effective
January 1, 2001.
FOR FURTHER INFORMATION CON-
TACT: Carl Cooper, Laurie Hatten-Boyd,
or Kate Hwa (202) 622-3840 (not a toll
free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information in these
final regulations have been reviewed and
approved by the Office of Management
and Budget in accordance with the Paper-
work Reduction Act of 1995 (44 U.S.C.
3507) under control number 1545 -1484.
Responses to these collections of infor-
mation are required to obtain a benefit (to
claim an exemption to, or a reduction in,
withholding), and to facilitate tax compli-
ance (to verify entitlement to an exemp-
tion or a reduced rate). The likely respon-
dents are individuals, businesses, and
other for-profit organizations.
Comments on the collections of infor-
mation should be sent to the Office of
Management and Budget, Attn: Desk
Officer for the Department of the Trea-
sury, Office of Information and Regula-
tory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
OP:FS:FP, Washington, DC 20224.
The estimated average annual burden
per respondent and/or recordkeeper are
reflected in the burdens of Forms W-8,
1042, 1042-S, 1099, and the income tax
return of a foreign person filed for pur-
poses of claiming a refund.
An agency may not conduct or sponsor,
and a person is not required to respond to,
a collection of information unless the col-
lection of information displays a valid
control number assigned by the Office of
Management and Budget.
Books or records relating to a collec-
tion of information must be retained as

long as their contents may become mater-
ial in the administration of any internal
revenue law. Generally, tax returns and
tax return information are confidential, as
required by 26 U.S.C. 6103.
Background
In Treasury Decision 8734 (1997–2
C.B. 109 [62 F.R. 53387]), the Treasury
Department and the IRS issued compre-
hensive regulations (final regulations)
under chapter 3 (sections 1441- 1464) and
subpart G of Subchapter A of chapter 61
(sections 6041-6050S) of the Internal
Revenue Code. Those final regulations
were amended by TD 8804 (1999–12
I.R.B. 5 [63 F.R. 72183]) which delayed
the effective date of the final regulations
to payments made after December 31,
1999. The effective date of the regulations
was again extended by TD 8856 (2000–3
I.R.B. 298 [64 F.R. 73408]) to payments
made after December 31, 2000.
Need for Changes
Since the publication of TD 8734, the
IRS and Treasury of have received nu-
merous comments relating to technical er-
rors in the regulations and ways to ease
compliance while keeping the objectives
of the regulations in place. In Notice 99–8
(1999–5 I.R.B. 26), the IRS and Treasury
announced amendments that would be
made to the regulations. This TD imple-
ments Notice 99–8 and contains addi-
tional changes made in response to com-
ments as well as the IRS and Treasury’s
further analysis of the regulations.
Explanation of Revisions
A. Changes to §1.1441–1
1. Payments to a U.S. Branch of Certain
Foreign Banks or Foreign Insurance
Companies.
Generally, a payment to a U.S. branch
of a foreign person is a payment to a for-
eign person. Under §1.1441–1(b)(2)(iv),
however, a U.S. branch of certain foreign
banks or insurance companies and a with-
holding agent may agree to treat the U.S.
branch as a U.S. person for purposes of
chapter 3 of the Internal Revenue Code.
The regulation as initially drafted re-
quired a withholding agent to treat such a
U.S. branch as a U.S. person for all pur-
poses under chapter 3 of the Internal Rev-
enue Code. The regulation itself, how-
ever, does not treat a U.S. branch as a
U.S. person for all purposes under chapter
3 of the Internal Revenue Code. For ex-
ample, a U.S. branch of a foreign bank or
insurance company provides a withhold-
ing certificate on a Form W-8, which is
used only by foreign persons. Further,
under §1.1461–1(c), payments to such a
branch are reportable as payments to a
foreign person on Form 1042-S. There-
fore, §1.1441–1(b)(2)(iv) has been
amended to state that, notwithstanding the
agreement between the withholding agent
and a U.S. branch to the treat the U.S.
branch as a U.S. person, the branch is not
treated as a U.S. person for purposes of
providing documentation or for reporting
payments to the branch.
2. Rules for Reliably Associating a Pay-
ment With a Withholding Certificate or
Other Appropriate Documentation
Section 1.1441–1(b)(2)(vii) contains
rules to determine whether a payment can
be reliably associated with valid docu-
mentation. A payment that cannot be reli-
ably associated with valid documentation
is subject to the presumption rules in
§§1.1441–1(b)(3), 1.1441–4(a)(2)(ii) and
(3)(i), 1.1441–5(d) and (e)(6),
1.1441–9(b)(3), and 1.6049–5(d). Para-
graph (b)(2)(vii) did not adequately ad-
dress when a payment made to a nonqual-
ified intermediary, a flow-through entity,
or a U.S. branch of certain foreign banks
and insurance companies (other than a
branch that acts as a U.S. person) would
be treated as reliably associated with doc-
umentation. These entities provide a
withholding certificate for themselves and
withholding certificates, documentary ev-
idence, or other information for the per-
sons on whose behalf they act. Therefore,
the payment must be reliably associated
not only with a withholding certificate
from the intermediary, flow-through en-
tity, or U.S. branch, but also with docu-
mentation from, or information relating
to, the payee on whose behalf the entity
acts.
Paragraph (b)(2)(vii) has been
amended to provide more detailed reliable
association rules. For a payment made to
a nonqualified intermediary, a flow-
through entity, or a U.S. branch, new
paragraph (b)(2)(vii)(B) provides that a
withholding agent can reliably associate
the payment with valid documentation if,
prior to the payment, it has received a
valid nonqualified intermediary withhold-
ing certificate on Form W-8IMY; it can
determine the portion of the payment that
relates to valid documentation associated
with the Form W-8IMY from a payee
(i.e., a person other than a nonqualified
intermediary, flow-through entity, or U.S.
branch); and the nonqualified intermedi-
ary, flow-through entity, or U.S. branch
has provided sufficient information for
the withholding agent to report the pay-
ment on Form 1042-S or Form 1099, if
reporting is required.
Paragraph (b)(2)(vii)(C) provides rules
for a withholding agent that makes a pay-
ment to a qualified intermediary that does
not assume primary withholding responsi-
bility under chapter 3 of the Internal Rev-
enue Code or primary Form 1099 report-
ing and backup withholding responsibility
under chapter 61 and section 3406 of the
Internal Revenue Code. The payment can
be reliably associated with valid docu-
mentation if, prior to the payment, the
withholding agent receives a valid quali-
fied intermediary withholding certificate
on Form W-8IMY and a withholding
statement that allocates the payment
among withholding rate pools, including
withholding rate pools for each U.S. non-
exempt recipient for which the qualified
intermediary has provided a valid Form
W-9 (or other information if a Form W-9
has not been provided).
For a payment made to a qualified in-
termediary that assumes primary with-
holding responsibility under chapter 3 of
the Internal Revenue Code with respect to
the payment, but does not assume primary
Form 1099 reporting and backup with-
holding responsibility under chapter 61
and section 3406 of the Internal Revenue
Code, paragraph (b)(2)(vii)(D) provides
that a withholding agent can reliably asso-
ciate the payment with valid documenta-
tion if, prior to the payment, it receives a
valid Form W-8IMY and the withholding
statement associated with the Form W-
8IMY allocates the payment between a
single withholding rate pool for which the
qualified intermediary assumes primary
withholding responsibility and separate
withholding rate pools for each U.S. non-
exempt recipient.
Paragraph (b)(2)(vii)(E) provides rules
for a withholding agent that makes a pay-
2000–23 I.R.B.1159June 5, 2000

ment to a qualified intermediary that as-
sumes primary Form 1099 reporting and
backup withholding responsibility under
chapter 61 and section 3406 of the Internal
Revenue Code, but does not assume pri-
mary withholding responsibility under
chapter 3 of the Internal Revenue Code.
The payment can be reliably associated
with valid documentation if, prior to the
payment, the withholding agent can asso-
ciate the payment with a valid Form W-
8IMY and the withholding statement asso-
ciated with the Form W-8IMY allocates
the payment among the withholding rate
pool or pools for which withholding re-
sponsibility is not assumed and the portion
of payment for which the qualified inter-
mediary assumes Form 1099 reporting
and backup withholding responsibility.
Finally, for a payment made to a quali-
fied intermediary that assumes both pri-
mary withholding responsibility under
chapter 3 of the Internal Revenue Code
and primary Form 1099 reporting and
backup withholding responsibility under
chapter 61 and section 3406 of the Inter-
nal Revenue Code, paragraph
(b)(2)(vii)(F) provides that a withholding
agent can reliably associate the payment
with valid documentation if, prior to the
payment, it can associate the payment
with a valid Form W-8IMY. In this case,
no withholding rate pool allocation infor-
mation is required. This same rule ap-
plies for payments made to a withholding
foreign partnership.
3. Presumptions of Classification as Indi-
vidual, Corporation, Partnership, etc.
As initially drafted, §1.1441–1(b)(3)(ii)
provided a withholding agent with pre-
sumption rules to determine a payee’s
classification (e.g., individual, corpora-
tion, partnership) if it could not reliably
associate a payment with valid documen-
tation. Paragraph (b)(3)(ii) did not, how-
ever, provide a presumption rule if a with-
holding agent could reliably associate a
payment with documentary evidence (i.e.,
documentation other than a withholding
certificate) from which it could not deter-
mine the payee’s classification. For ex-
ample, documentary evidence may indi-
cate that a payee (other than an entity that
is treated as a per se corporation under
§301.7701–2(b)(8)(i)) is a type of entity
that can be organized so that all of its
members have limited liability, in which
case it would be treated as an association,
or so that one or more of its members
have unlimited liability, in which case it
would be treated as a partnership. The
determination of classification can be crit-
ical because if the entity is a flow-through
entity, it is not the beneficial owner of the
payment and its documentary evidence
cannot be relied upon to grant a reduced
rate of withholding.
Section 1.1441–1(b)(3)(ii)(C) has been
added to permit a withholding agent to
treat an entity that has provided documen-
tary evidence as a corporation if the clas-
sification of the entity cannot be deter-
mined from documentary evidence or by
reference to the exempt recipient rules
under §1.6049–4(c)(1)(ii). This presump-
tion rule will reduce burdens on withhold-
ing agents that are permitted to use docu-
mentary evidence, such as foreign
intermediaries and flow-through entities,
which would otherwise have to request
from payees additional information re-
garding U.S. tax classification. The pre-
sumption rule is not, however, intended to
allow foreign entities to avoid making the
correct determination of their classifica-
tion and to provide the correct documen-
tation. Thus, a foreign entity must make a
determination about its classification and
if it determines that it is an intermediary,
partnership, foreign simple trust, or for-
eign grantor trust under U.S. tax law prin-
ciples, it must provide an intermediary or
flow-through withholding certificate on
Form W-8IMY together with the appro-
priate information relating to its cus-
tomers, partners, beneficiaries, owners, or
other payees. Further, a withholding
agent cannot treat an entity as a corpora-
tion if it knows, or should know, that the
entity is a flow-through entity or interme-
diary. For example, if a particular type of
collective investment vehicle provides
documentary evidence that does not es-
tablish that it is a corporation, partnership,
or trust, but the withholding agent knows,
or has reason to know, that the investment
vehicle is classified as a partnership for
U.S. tax purposes, it must request a part-
nership withholding certificate from the
entity.
An entity that is presumed to be a for-
eign corporation under new paragraph
(b)(2)(ii)(C) cannot be treated as the ben-
eficial owner entitled to a reduced rate of
withholding to the extent the documen-
tary evidence indicates that it is a bank,
broker, custodian, intermediary, or other
agent unless the entity provides a state-
ment that it is the beneficial owner of the
income. For example, documentary evi-
dence that indicates that the payee is a
bank does not permit a withholding agent
to apply the portfolio interest exception to
payments of interest made to the bank. In
addition, even though a foreign entity is
treated as a beneficial owner for purposes
of the exceptions to withholding under the
Internal Revenue Code and regulations, it
is not necessarily entitled to claim treaty
benefits. Whether treaty benefits may be
claimed by an entity depend on whether it
meets the requirements under the income
tax treaty and section 894.
4. Changes to presumption rules
Several simplifying and clarifying
changes have been made to the presump-
tion rules in §1.1441–1(b)(3). First, the
presumption rule applicable to pensions
and annuities contained in
§1.1441–1(b)(3)(iii)(C) has been expanded
to apply to individual retirement accounts
and individual retirement annuities. Sec-
ond, §1.1441–1(b)(3)(iii)(D), which con-
tains presumption rules applicable to off-
shore accounts, was revised to state the
applicable rule more clearly. In addition,
the restriction on applying the presumption
rule of paragraph (b)(3)(iii)(D) to amounts
that are not subject to withholding has
been moved from that paragraph to
§1.6049–5(d)(2). This change eliminates a
conflict with §1.6049–5(d)(2), as previ-
ously drafted, which applied the paragraph
(b)(3)(iii)(D) rule to amounts not subject to
withholding.
Section 1.1441–1(b)(3)(iv) contains a
grace period presumption rule that per-
mits a withholding agent to treat a payee
as a foreign person in certain situations
where the withholding agent would pre-
sume the payee to be a U.S. person. Al-
though the grace period rule generally
does not permit a withholding agent to
apply any exceptions to withholding, it
does permit a withholding agent to apply
a reduced rate of withholding for 90 days
to a payee that provides a withholding
certificate that would have been valid ex-
cept that it was transmitted by facsimile.
One commentator noted that because the
facsimile rule applied only to payees that
a withholding agent could, “in its discre-
June 5, 200011602000–23 I.R.B.

tion” treat as a foreign person, the rule
was limited to those situations where the
presumption rules would have treated the
payee as a U.S. person and the withhold-
ing agent was exercising its discretion to
treat the payee as foreign. Therefore, the
commentator argued, the rule arguably
could not be applied to payees that were
required to be treated as foreign persons
under the presumption rules, e.g., an ex-
empt recipient with indicia of foreign sta-
tus. The regulation has been modified by
removing the phrase “in its discretion”
thereby permitting the facsimile rule to
apply to payees that are treated as foreign
payees under the presumption rules.
Paragraph (b)(3)(v), as promulgated in
TD 8734, provided several presumption
rules that applied if a withholding agent
did not receive from a nonqualified inter-
mediary the withholding certificates or
documentary evidence of the persons on
whose behalf the nonqualified intermedi-
ary acted or did not receive information
allocating the payment to each person.
Under paragraph (b)(3)(v)(C), if the with-
holding agent could associate a payment
with a group of beneficial owners or pay-
ees, it could treat the payment as being
made in its entirety to the person in the
group that was subject to the highest with-
holding rate or, if the rates were equal, to
the payee in the group with the highest
U.S. tax liability. If a nonqualified inter-
mediary grouped persons subject to simi-
lar withholding and tax rates together and
allocated the payment to the group, the
nonqualified intermediary could achieve a
reduced rate of withholding for its cus-
tomers without reliably associating the
payment to each of the customers that
would be entitled to the payment. Trea-
sury and the IRS stated in Notice 99-8
that affording a reduced rate of withhold-
ing under these circumstances was inap-
propriate. Further, it was inappropriate to
report the entire payment as if it were
made to a single documented payee who
was not entitled to receive the entire
amount of income.
Paragraph (b)(3)(v) has been revised so
that whenever a payment to a nonquali-
fied intermediary cannot be reliably asso-
ciated with valid documentation from a
specific payee, the payment is treated as
made to an undocumented foreign payee
and is subject to 30 percent withholding.
Under §1.1461–1(c), such payments are
reported to an unknown owner on Form
1042-S. Thus, a payment can no longer
be subject to a reduced rate of withhold-
ing because it can be allocated to a group
of documented payees all of whom are
subject to the same reduced rate of with-
holding. Similar changes have been made
to the presumption rules that applied to
foreign partnerships under former
§1.1441–5(d)(3)(ii).
Paragraph (b)(3)(vi), as originally
drafted, was in error. It stated that the
presumption rules that applied to foreign
intermediaries also applied to U.S.
branches of foreign banks and insurance
companies that assumed withholding re-
sponsibility. The rule should have pro-
vided that the intermediary presumption
rules also apply to U.S. branches of for-
eign banks and insurance companies that
do not agree to be treated as U.S. persons.
Those branches are generally treated in
the same manner as nonqualified interme-
diaries under chapter 3 of the Internal
Revenue Code. Therefore, paragraph
(b)(3)(vi) has been revised to apply only
to those branches that are not treated as
U.S. persons. Finally, paragraph
(b)(3)(vii), which applies to payments to
joint payees, has been amended to clarify
the treatment of payments made to joint
accounts.
5. Rules for Withholding and Reporting
of Payments by a Foreign Intermediary
and Certain U.S. Branches
Section 1.1441–1(b)(6) sets forth the
withholding obligations of a foreign inter-
mediary and certain U.S. branches. The
regulation, as originally drafted, stated
that a qualified intermediary, a nonquali-
fied intermediary, or a U.S. branch of a
foreign bank or insurance company was
deemed to have satisfied any obligation it
had to withhold and report an amount it
paid if it did not know that the correct
amount had not been withheld. The rule
did not, however, require a foreign inter-
mediary or U.S. branch to report a pay-
ment if it knew that the withholding agent
from whom it received the payment had
not reported the payment to the persons on
whose behalf the foreign intermediary or
U.S. branch acted as long as the correct
amount was withheld. For example, if a
U.S. withholding agent withheld 30 per-
cent from a payment of an amount subject
to withholding made to a nonqualified in-
termediary because the nonqualified inter-
mediary failed to provide documentation
or allocation information relating to the
persons for whom it acted, the rule re-
lieved the nonqualified intermediary from
any obligation to report the payment to
those persons. Foreign intermediaries and
U.S. branches, however, are withholding
agents under §1.1441–7(a) and, as stated
in Notice 99–8, it is inappropriate to re-
lieve them of any reporting responsibility
unless they have provided another with-
holding agent with all of the information
that the withholding agent needs to report
amounts paid to the appropriate recipients
of the income. In addition, paragraph
(b)(6) should not have included qualified
intermediaries, because a qualified inter-
mediary has reporting responsibilities
whether or not another withholding agent
properly reported the payment made to the
qualified intermediary.
The regulation has been revised to pro-
vide that a nonqualified intermediary or
U.S. branch (other than a U.S. branch
treated as a U.S. person) is not required to
withhold and report if the nonqualified in-
termediary or U.S. branch (i) has pro-
vided a valid nonqualified intermediary or
U.S. branch withholding certificate, (ii)
has provided all of the information re-
quired to be included in a withholding
statement associated with its withholding
certificate so that another withholding
agent can do the required reporting on
Form 1042-S or Form 1099, and (iii) does
not know, and has no reason to know, that
the other withholding agent did not with-
hold the correct amount or did not report
the payment correctly. A qualified inter-
mediary’s obligations to withhold and re-
port are determined in accordance with its
qualified intermediary agreement.
6. Definitions
Section 1.1441–1(c) contains the defin-
itions of terms used in the regulations
under chapter 3 of the Internal Revenue
Code. The section has been significantly
expanded and certain definitions have
been consolidated in this section. New
definitions, or cross-references to defini-
tions, have been provided for the terms
beneficial owner, payee, intermediary,
nonqualified intermediary, qualified inter-
mediary, withholding certificate, docu-
mentary evidence, documentation, payor,
exempt recipient, non-exempt recipient,
2000–23 I.R.B.1161June 5, 2000

reportable amounts, flow-through entity,
foreign simple trust, foreign complex
trust, foreign grantor trust, partnership,
nonwithholding foreign partnership, and
withholding foreign partnership.
Paragraph (c)(6)(i) has been changed to
state specifically that the definition of
beneficial owner does not apply in cases
where a reduced rate of withholding is
being claimed under an income tax treaty.
This change has been made to clarify that
a person who is a beneficial owner of an
item of income for purposes of these reg-
ulations would not necessarily benefi-
cially own the item of income for pur-
poses of an income tax treaty.
Paragraph (c)(6), as originally drafted,
did not include rules to determine the ben-
eficial owner of a payment made to a for-
eign trust or estate. In general, the regula-
tions retained the rules for foreign trusts
and estates that existed prior to the publi-
cation of TD 8734. The paragraph has
been revised to provide specific rules for
payments to foreign trusts and estates.
Generally, the beneficial owners of a pay-
ment to a foreign simple trust are the ben-
eficiaries of the trust. The beneficial
owners of a payment made to a foreign
grantor trust are the owners of the trust.
Foreign complex trusts and foreign es-
tates are considered to be the beneficial
owners of income paid to such entities.
Paragraph (c)(12) has been added to
clarify the term payee. It provides cross-
references to those sections under which
the payee of income is determined, and
emphasizes that foreign intermediaries
and flow-through entities are generally
not considered the payees of income. A
qualified intermediary is, however, a
payee to the extent it assumes primary
withholding responsibility with respect to
a payment, and a flow-through entity is a
payee if it is receiving income that is, or is
treated as, effectively connected with the
conduct of a U.S. trade or business.
The definition of a flow-through entity
has been moved from §1.1441–1(e)(3)(i)
to paragraph (c)(23). The definition has
also been expanded and clarified. The
term flow- through entityrefers to any en-
tity which has an obligation to transmit
documentation to another withholding
agent. Therefore, an entity may be a
flow-through entity whether or not the in-
come paid to the entity is includible in the
gross income of the entity’s owners. A
flow-through entity includes a nonwith-
holding foreign partnership, a foreign
simple trust, a foreign grantor trust, or an
entity that is fiscally transparent under
section 894 to the extent it provides docu-
mentation on behalf of its interest holders.
A withholding foreign partnership and a
withholding foreign trust are not flow-
through entities. The term flow-through
entity has replaced the term partnership in
numerous places throughout the regula-
tion.
7. Withholding Certificates
a. Forms W-9
Section 1.1441–1(d) contains rules for
a payee to establish its status as a U.S.
payee. Under paragraph (d), a payee that
provides a Form W-9 may be treated as a
U.S. payee that is not subject to withhold-
ing under section 1441. Commentators
have noted that under current law, there is
no prohibition against a foreign person
providing a Form W-9 to establish status
as an exempt recipient. They therefore
suggest that the regulations should be
clarified to specifically state that provid-
ing a Form W-9 serves as a representation
of U.S. status and should only be fur-
nished by a U.S. person. In response to
these comments, paragraph (d)(2) has
been amended to state that furnishing a
Form W-9 serves as a statement that the
person providing the form is a U.S. per-
son. Therefore, a foreign person, includ-
ing a U.S. branch of a foreign person,
should not provide a Form W-9 to a with-
holding agent. The instructions to Form
W-9 will also be modified to make clear
that providing a Form W-9 is a declara-
tion of U.S. status.
Paragraph (d)(3) is revised to eliminate
the requirement for a permanent residence
address. Permanent residence address is a
term defined in §1.1441–1(e)(2)(ii) and is
generally the address of a foreign person
in the country in which the person is a res-
ident for tax purposes. The term is inap-
plicable, and potentially misleading, as
applied to the address a U.S. person
should provide on Form W-9.
Paragraph (d)(4), as originally drafted,
provided rules to determine whether a
payment was made to a U.S. beneficial
owner. Generally, the regulation provided
that if a customer of a foreign intermedi-
ary provided a Form W-9, the withhold-
ing agent could treat such person as a U.S.
beneficial owner. A customer of a foreign
intermediary could also be treated as a
U.S. beneficial owner if it provided a U.S.
branch withholding certificate that evi-
denced its agreement to be treated as a
U.S. person. A Form W-9 and a U.S.
branch withholding certificate, however,
do not establish beneficial ownership.
Further, it is not necessary under the regu-
lations to determine whether a U.S. payee
is a beneficial owner because a payment
to a U.S. payee is not subject to withhold-
ing under chapter 3 of the Internal Rev-
enue Code whether or not the payee is the
beneficial owner of the income. Thus, the
paragraph has been modified to provide
that the withholding agent may treat the
payee of a payment made to a foreign in-
termediary or a flow-through entity as a
U.S. payee if the payee provides a Form
W-9 or a U.S. branch withholding certifi-
cate that evidences the branch’s agree-
ment to be treated as a U.S. person.
b. Intermediary and flow-through with-
holding certificates
Section 1.1441–1(e)(3)(i) provides def-
initions for the terms intermediary with-
holding certificate, flow-through with-
holding certificate, and U.S. branch
withholding certificate. That section orig-
inally defined a flow-through withholding
certificate as a Form W-8 furnished by a
partnership (other than a withholding for-
eign partnership) or a trust or estate. The
paragraph has been revised to conform to
the definition of flow-through entity con-
tained in §1.1441–1(c)(23) and the new
rules contained in §1.1441–5(e) regarding
foreign trusts and foreign estates, dis-
cussed in section E of this Explanation of
Provisions. Under paragraph (e)(3)(i), as
revised, a flow-through withholding cer-
tificate is defined as a withholding certifi-
cate on Form W-8 furnished by a non-
withholding foreign partnership, a foreign
simple trust, a foreign grantor trust, or a
foreign entity presenting claims on behalf
of its interest holders for a reduced rate of
withholding under an income tax treaty.
Foreign complex trusts and foreign es-
tates generally provide beneficial owner
withholding certificates.
Section 1.1441–1(e)(3)(ii) provides the
requirements for a valid withholding cer-
tificate provided by a qualified intermedi-
ary. The paragraph has been modified to
June 5, 200011622000–23 I.R.B.

reflect the procedures applicable to quali-
fied intermediaries as set forth in Rev.
Proc. 2000–12 (2004–4 I.R.B. 1).
Section §1.1441–1(e)(3)(iii) provides
rules relating to a nonqualified intermedi-
ary withholding certificate. Paragraph
(e)(3)(iii) generally provided that payee
documentation provided with a nonquali-
fied intermediary withholding certificate
needed to be attached to the certificate.
Similar requirements existed for flow-
through withholding certificates and U.S.
branch withholding certificates. The reg-
ulations have been revised to require that
payee documentation be associated with,
rather than attached to, a nonqualified in-
termediary, flow-through, or U.S. branch
certificate to obviate the need for a new
withholding certificate each time payee
documentation is provided to a withhold-
ing agent. The regulations do not set forth
specific requirements for associating doc-
umentation. Any reasonable method may
be used to associate documentation with
its intermediary withholding certificate.
Paragraph (e)(3)(iii), as originally
drafted, required a certification that the
withholding certificates or other appropri-
ate documentation attached to a nonquali-
fied intermediary withholding certificate
represented all of the persons to whom the
intermediary withholding certificate re-
lated or that the amounts of income allo-
cable to persons for whom no documenta-
tion was provided was separately stated.
A similar requirement applied to nonwith-
holding foreign partnership withholding
certificates in §1.1441–5(c)(3)(iii)(D).
The requirement for this certification has
been eliminated. The persons on whose
behalf a nonqualified intermediary acts
will frequently change as persons open
and close accounts with the intermediary.
Thus, any such certification may be true
at the time made, but false at a later point,
necessitating a new withholding certifi-
cate. The elimination of the certification
is not an elimination, however, of the re-
quirement to provide payee withholding
certificates to a withholding agent prior to
a payment. The certification requirement
has also been eliminated for nonwithhold-
ing foreign partnerships.
Section 1.1441–1(e)(3)(iii) permits a
nonqualified intermediary to provide
payee documentation either in the form of
withholding certificates or in the form of
documentary evidence. The withholding
agent is required to derive information
from the withholding certificates or other
documentary evidence and report pay-
ments to each specific payee on whose
behalf the nonqualified intermediary acts.
However, the regulations were silent on
how a withholding agent was to deter-
mine the status (U.S. or foreign) or classi-
fication (e.g., corporate, partnership, trust,
or estate) and other information required
to report payments on Form 1042-S from
documentary evidence, particularly when
that documentary evidence was in a for-
eign language. Further, although the reg-
ulations require a nonqualified intermedi-
ary to allocate payments to each payee on
whose behalf it acts so that a withholding
agent can report payments to each payee
on Form 1042-S or Form 1099, the regu-
lations provided no detail on how the allo-
cation information was to be provided.
The regulations have been revised to
take these considerations into account.
Under §1.1441–1(e)(3)(iv) as revised, a
nonqualified intermediary must associate
with its nonqualified intermediary with-
holding certificate a withholding state-
ment which sets forth the information a
withholding agent needs to allocate a pay-
ment to each payee on whose behalf the
nonqualified intermediary acts and to re-
port the payment. Specifically, the with-
holding statement must contain for each
payee the payee’s name, address, country
of residence, TIN (if any), the payee’s re-
cipient type for Form 1042-S reporting,
the applicable rate of withholding, the
type of withholding exception applied (if
any), and the name of any other interme-
diary or flow-through entity from whom
the payee directly receives the income.
Additional information is required if a re-
duced rate of withholding under an in-
come tax treaty is claimed. The withhold-
ing statement may be provided in any
manner that the withholding agent and
nonqualified intermediary agree, includ-
ing electronically. It must be updated as
frequently as necessary to remain accu-
rate prior to each payment. The regula-
tion does not require a nonqualified inter-
mediary to provide information for a
payee unless the payee is a U.S. non-ex-
empt recipient. Information regarding
U.S. non-exempt recipients must be pro-
vided irrespective of any local laws that
prohibit disclosure of an account holder
or account information. Therefore, a non-
qualified intermediary should obtain
waivers from non-disclosure provisions
from U.S. non-exempt recipients. To the
extent payee information is not provided,
whether for a U.S. non-exempt recipient
or any other payee, the regulation has
been clarified to state explicitly that a
withholding agent must withhold under
the presumption rules. Further, the non-
qualified intermediary remains liable for
any tax not withheld by a withholding
agent and, unless the nonqualified inter-
mediary itself files information returns,
will also be held liable for penalties im-
posed for failure to file information re-
turns under sections 6721 and 6722.
Many commentators have argued that it
is not practical to provide information al-
locating a payment to each payee prior to
each payment because the customers of
nonqualified intermediaries are constantly
acquiring and disposing of investments.
Several commentators made suggestions
on how the regulations might ease com-
pliance burdens. One commentator sug-
gested that no allocation information
should be required except in the case of
income subject to reduced rates of with-
holding under an income tax treaty and
payments made to U.S. non-exempt recip-
ients. This suggestion was rejected. The
IRS has provided a mechanism for aggre-
gate reporting of payments in the model
qualified intermediary agreement in Rev.
Proc. 2000–12 (2000–4 I.R.B. 387). It is
inappropriate to extend such treatment to
nonqualified intermediaries without the
safeguards contained in a qualified inter-
mediary agreement. Other commentators
suggested that a withholding agent should
withhold the difference between 30 per-
cent of a payment and the claimed re-
duced rate of withholding in escrow and
release the amounts when allocation in-
formation is provided. This suggestion
was also not accepted. Such a system
would leave the escrow funds out of the
control of both the IRS and the beneficial
owners of the payments. Further, because
the nonqualified intermediary would have
to provide frequent allocations as soon as
possible after the time of payment to have
the escrow funds released, it appeared to
provide little relief from the pressures in-
herent in providing allocation information
prior to a payment. Other commentators
argued that a reduced rate of withholding
should be provided at the time of payment
2000–23 I.R.B.1163June 5, 2000

with allocation information to follow after
the close of the year with various disin-
centives provided for failure to furnish the
allocation information. The regulations
generally adopt this approach.
Paragraph (e)(3)(iv)(D) provides alter-
native procedures that permit a nonquali-
fied intermediary to provide information
allocating reportable amounts to payees
(including U.S. exempt recipients) by
January 31 of the year following the cal-
endar year of payment. The alternative
procedures do not apply to payments
made to U.S. non-exempt recipients.
Therefore, allocation information for
those persons must be provided prior to a
payment. Under the alternative proce-
dures, only allocation information may be
provided after a payment is made: all
other information that is required to be in-
cluded in a withholding statement and ap-
propriate payee documentation must be
provided prior to a payment. The non-
qualified intermediary may have reduced
rates of withholding apply by identifying
pools of income subject to a particular
withholding rate (withholding rate pools)
and identifying the payees with the appro-
priate withholding rate pools.
Various penalties apply if a nonquali-
fied intermediary fails to provide infor-
mation to allocate payments in a with-
holding rate pool to a withholding agent
by January 31. First, the withholding
agent must commence withholding on all
payments in accordance with the pre-
sumption rules. Therefore, 30 percent
withholding applies to amounts subject to
withholding and 31 percent backup with-
holding applies to payments of deposit in-
terest and original issue discount on origi-
nal issue discount obligations of 183 days
or less. Under a cure provision, the with-
held amounts may be returned, and the al-
ternative procedures may continue to be
used, if the nonqualified intermediary
provides allocation information by Febru-
ary 14. If the nonqualified intermediary
fails to provide allocation information by
that date, withholding continues for the
taxable year, and all subsequent taxable
years, unless the withholding agent pro-
vides allocation information prior to a
payment. Further, because no allocation
information has been provided, the pay-
ments are considered never to have been
reliably associated with valid documenta-
tion and the foreign beneficial owners and
other payees on whose behalf the non-
qualified intermediary is acting are not
entitled to a reduced rate of withholding.
Therefore, the nonqualified intermediary
shall remain liable under section 1461 for
the difference between the amount, if any,
withheld by the withholding agent and the
amount that should have been withheld
under the presumption rules. Any tax due
because of an allocation failure will be as-
sessed against the nonqualified intermedi-
ary and, if necessary, collected from the
assets that the nonqualified intermediary
has with the withholding agent. Interest
and penalties may also be assessed
against the nonqualified intermediary. In
particular, paragraph (e)(3)(iv)(7) states
that a failure to provide allocation infor-
mation will be presumed to be an inten-
tional failure to file information returns
and payee statements under sections 6721
and 6722. The IRS will not, however,
hold the withholding agent liable for any
tax, interest, or penalties, that are due
solely to the failure of the nonqualified in-
termediary to provide allocation informa-
tion.
The withholding statement rules and al-
ternative allocation procedures have also
been made applicable to U.S. branches of
certain foreign banks and insurance com-
panies and flow-through entities. This
change, together with certain other
changes discussed in this Explanation of
Provisions, generally results in nonquali-
fied intermediaries, U.S. branches, and
flow-through entities being treated simi-
larly.
Paragraph (e)(3)(iv)(E) has been added
to permit the IRS to provide a withhold-
ing agent with a notice prohibiting the
withholding agent from applying the al-
ternative procedures of paragraph
(e)(3)(iv)(D) to an identified nonqualified
intermediary (or to a flow-through entity
or a U.S. branch of a foreign bank or for-
eign insurance company) thereby requir-
ing allocation information prior to a pay-
ment to have a reduced rate of
withholding apply. In addition, the IRS
may, in appropriate circumstances issue a
notice to a withholding agent prohibiting
the withholding agent from applying a re-
duced rate of withholding under any cir-
cumstances, even if allocation informa-
tion is provided prior to a payment. The
IRS contemplates issuing these notices in
situations where a nonqualified interme-
diary, flow-through entity, or U.S. branch
fails to pay a tax due or is not applying
the rules of the regulations in good faith.
c. Reportable amounts
Foreign intermediaries, flow-through
entities, and U.S. branches of foreign banks
and insurance companies (other than U.S.
branches treated as U.S. persons) are re-
quired to provide information with respect
to reportable amounts, as defined in
§1.1441–1(e)(3)(vi). Prior to its revision,
paragraph (e)(3)(vi) included in the defini-
tion of reportable amounts original issue
discount or interest (OID) paid on short-
term instruments. This definition appeared
to include interest and OID regardless of
whether those amounts were paid on the re-
demption of an obligation or from the sale
or exchange of an obligation in a transac-
tion other than a redemption. Under the
presumption rules, if a withholding agent
makes a payment to a foreign intermediary
of interest and OID on a short-term obliga-
tion and it lacks documentation for such
amounts, it must presume that the payee is
a U.S. non-exempt recipient and report the
income on Form 1099 and backup with-
hold on the payment. See
§1.6049–5(d)(3)(iii). These rules proved to
be impractical for sales of short-term oblig-
ations outside the United States. Foreign
intermediaries have contended that they do
not have the appropriate systems to report
gains from sales transactions on Forms
1099 or to provide the proper allocation in-
formation to U.S. payors. Moreover, treat-
ing the sale or exchange of short-term OID
instruments as reportable interest on Form
1099 was inconsistent with rules that treat
amounts paid on the sale or exchange,
other than redemptions, of such obligations
as gross proceeds. See §§1.6045–1(d)(3)
and 31.3406(b)(2)–2. Because it is more
appropriate to treat sales, other than re-
demptions, of short-term OID instruments
as gross proceeds rather than payments of
interest or original issue discount, the regu-
lation has been amended to provide that re-
portable amounts do not include amounts
representing interest or OID on the sale or
exchange, other than a redemption, of a
short-term OID instrument. Therefore, a
foreign intermediary, flow-through entity,
or U.S. branch is not required to provide in-
formation regarding these transactions to a
withholding agent as part of its withhold-
ing statement.
June 5, 200011642000–23 I.R.B.

d. Period of validity
Section 1.1441–1(e)(4)(ii)(A) states
that documentary evidence (i.e., docu-
mentation other than a withholding cer-
tificate) remains valid until “the earlier of
the last day of the third calendar year fol-
lowing the year in which the documentary
evidence is created . . . .“ Commentators
have stated that it is not clear if a docu-
ment is “created” when it comes into
being or when it is provided to a with-
holding agent. They also stated that bas-
ing the validity period on the date a docu-
ment came into being would be more
difficult to administer because they would
have to calculate the expiration date in
every case rather than assuming that it
was valid for three years after it had been
received by the withholding agent. In re-
sponse to these comments, the rule has
been amended to permit the validity pe-
riod to be measured from the date docu-
mentation is provided to the withholding
agent.
Section 1.1441–1(e)(4)(ii)(B) sets
forth the circumstances in which a Form
W-8 has an indefinite validity period.
Paragraph (e)(4)(ii)(B)(1), as originally
drafted, provided that a Form W-8 that
contained a TIN was valid indefinitely
“if the income for which such certificate
is furnished is required to be reported”
on Form 1042-S. Commentators noted
that a strict reading of this language
could preclude the indefinite validity of
a Form W-8 with respect to income that
was not subject to reporting, even though
other income paid to the same beneficial
owner by the withholding agent was sub-
ject to reporting. The regulation has
been amended to provide that if there is
annual reporting of at least one item of
income paid by a withholding agent to a
beneficial owner, the Form W-8 remains
valid even for payments that are not sub-
ject to reporting. However, if a with-
holding agent has a Form W-8 with a
TIN but does not make any payments of
an amount subject to withholding, for
example the withholding agent pays only
deposit interest, the form remains valid
only for 3 calendar years after the year of
receipt. In addition, paragraph
(e)(4)(ii)(B)(8) has been added to pro-
vide an indefinite validity period for a
withholding certificate provided by a
foreign simple trust or foreign grantor
trust for the purposes of transmitting
withholding certificates or documentary
evidence.
e. Electronic transmission of information
These regulations finalize the regula-
tions proposed in REG–107872–97
(1997–2 C.B. 658 [62 F.R. 53504]) relat-
ing to the electronic submission of Forms
W-8 and make them applicable beginning
January 1, 2000. Like the proposed regu-
lations, the final regulations apply only to
situations where there is a direct relation-
ship between the withholding agent or
payor and the beneficial owner or payee.
The final regulations reserve on applica-
ble standards for transmitting forms
through tiers of intermediaries. Com-
ments were solicited on this matter in the
preamble to the proposed regulations but
none were received. The IRS and Trea-
sury recognize the benefits of allowing
the electronic transmission of Forms W-8
through one or more intermediaries and
continue to solicit comments regarding
requirements to ensure the integrity, accu-
racy, and reliability of electronically
transmitted forms through tiers of inter-
mediaries.
f. Requirement of taxpayer identifying
number
Section 1.1441–1(e)(4)(vii) provides
guidance for when a TIN is required on a
Form W-8. Paragraph (e)(4)(vii), as orig-
inally drafted, required TINs on withhold-
ing certificates from all trusts or estates or
the fiduciaries thereof. A number of com-
mentators stated that the TIN requirement
was burdensome and unreasonable when
applied to pension trusts and large invest-
ment trusts. In addition, commentators
noted that nonwithholding foreign part-
nerships, which are treated similarly to
foreign simple trusts and foreign grantor
trusts, are not required to have a TIN. In
response to these comments, the regula-
tions have been amended by eliminating
the TIN requirement for foreign trusts
other than foreign grantor trusts with 5 or
fewer owners.
Paragraph (e)(4)(vii) has also been modi-
fied to state that a TIN is required on a with-
holding certificate from a beneficial owner
that is claiming an exemption based on its
claim of tax exempt status under section
501(c) or private foundation status. This
does not represent a change in the require-
ments for a withholding certificate from
such a beneficial owner. The regulation, as
originally drafted, however, contained the
requirement only in §1.1441–9. The re-
quirement of a TIN has been repeated in this
paragraph for convenience. Finally, com-
mentators noted that there was a conflict be-
tween paragraph (e)(4)(vii), which did not
require a TIN on a withholding certificate
from a nonwithholding foreign partnership,
and §1.1441–5(c)(3)(iii)(A), which stated
that a TIN was required. It was never in-
tended that a nonwithholding foreign part-
nership withholding certificate used to
transmit documentation and information re-
lating to its partners have a TIN. Section
1.1441–5(c)(3)(iii)(A) has been modified
accordingly. TINs are required, however, if
the withholding foreign partnership is pro-
viding a withholding certificate on which it
claims an exemption from withholding be-
cause the income is effectively connected
with the conduct of a trade or business or
when it is entitled to claim treaty benefits
under section 894 on income for which a
TIN is required under §1.1441–6(b)(1).
g. Requirement to furnish certificates for
each account
Generally, each withholding agent that
makes a payment to a beneficial owner
must obtain a separate withholding cer-
tificate. In addition, a withholding agent
that is a financial institution must obtain
withholding certificates or other appropri-
ate documentation on an account-by-ac-
count basis from its customers. Under
paragraph (e)(4)(ix)(A)(3) of the regula-
tions, a withholding agent may rely on a
withholding certificate held at another
branch of the same withholding agent or
of a person related to the withholding
agent if there is a system in place that per-
mits a withholding agent to access data
regarding the withholding certificate and
to transmit data that affects the validity of
the documentation into the system. A
commentator noted that the regulations do
not contain provisions, however, to let un-
related withholding agents utilize such a
system that they maintain in common or
that is maintained by another person.
New paragraph (e)(4)(ix)(A)(4) has been
added to permit unrelated withholding
agents to rely on such a system.
h. Special rules for brokers
Section 1.1441–1(e)(4)(ix)(C) pro-
vided that a withholding agent may rely
2000–23 I.R.B.1165June 5, 2000

on the certification of a broker acting as
the agent of a beneficial owner if the bro-
ker held a valid beneficial owner with-
holding certificate or other documentation
for that beneficial owner. As originally
drafted, the intention of this provision
was unclear. It also appeared to be overly
broad because it would have permitted a
foreign broker to retain beneficial owner
documentation and not transmit the docu-
mentation to a U.S. withholding agent.
Paragraph (e)(4)(ix)(C) has been re-
drafted to clarify, and appropriately limit,
its application. As redrafted, it applies
only to a U.S. broker. It permits such a
broker that is acting as an introducing or
corresponding broker to provide a clear-
ing broker with a certification that it holds
a valid withholding certificate or other ap-
propriate documentation. Without this
rule, an introducing or corresponding bro-
ker would have to obtain multiple Forms
W-8 and provide them to each clearing
broker with whom the introducing or cor-
responding broker executes transactions.
In addition, paragraph (e)(4)(ix)(C) has
been amended to apply only to readily
tradeable instruments, as provided in
§31.3406(h)–3(d), on which it is mod-
eled. An example has been added to illus-
trate the paragraph.
8. Qualified Intermediary Withholding
Certificates
Section 1.1441–1(e)(5) provides rules
regarding qualified intermediaries. The
rules have been redrafted to more closely
conform with the model qualified inter-
mediary agreement published as part of
Rev. Proc. 2000–12. The regulation, as
originally drafted, contained a require-
ment that a qualified intermediary dis-
close U.S. non-exempt recipients “irre-
spective of local secrecy laws.” The
model qualified intermediary agreement
has specific provisions contained in sec-
tion 6.04 of the agreement, as well as
other sections, that govern the treatment
of U.S. persons whenever foreign law,
whether or not a “secrecy” provision, may
preclude disclosure of a U.S. non-exempt
recipient. Very generally, those provi-
sions require a qualified intermediary to
disinvest a U.S. non-exempt recipient
who does not waive its local law non-dis-
closure privileges and to collect backup
withholding on income and sales pro-
ceeds paid to such person. Therefore, the
language stating that disclosure is re-
quired “irrespective of local secrecy
laws” has been deleted to avoid creating
an inconsistency between the model qual-
ified intermediary agreement and the reg-
ulation.
The provisions in paragraph (e)(5) re-
garding the terms of the withholding
agreement a qualified intermediary must
enter with the IRS have also been
changed to more generally conform with
the qualified intermediary agreement as
set forth in Rev. Proc. 2000–12. The reg-
ulation clarifies the consequences of a
qualified intermediary’s assumption of
primary withholding responsibility. Sec-
tion 1.1441–1(e)(5)(iv), as originally
drafted, stated that a withholding agent
making a payment to a qualified interme-
diary was required to presume full with-
holding responsibility for that payment
unless the qualified intermediary assumed
primary withholding responsibility. The
regulation was potentially misleading be-
cause it could have been interpreted to
mean that if a qualified intermediary did
not assume primary withholding responsi-
bility, only the U.S. withholding agent
was responsible for withholding. Rev.
Proc. 2000–12 makes clear, however, that
qualified intermediaries are required to
withhold in certain circumstances even
though they have not assumed primary
withholding responsibility. The rule that
was initially in paragraph (e)(5)(iv) was
intended to relieve a withholding agent
making a payment to a qualified interme-
diary that assumed primary withholding
responsibility from the obligation to with-
hold, not to relieve the qualified interme-
diary of any withholding requirement.
The paragraph has been amended to re-
flect this intent.
Paragraph (e)(5)(iv) also stated that a
qualified intermediary generally would
not be permitted to assume withholding
and reporting responsibility under section
3406 and chapter 61 of the Internal Rev-
enue Code on a payment made to a U.S.
person unless the qualified intermediary
was a foreign branch of a U.S. person or a
foreign person that had a branch in the
United States capable of performing such
reporting and withholding. In developing
the model qualified intermediary agree-
ment, it became apparent that it was desir-
able to permit certain qualified intermedi-
aries that did not meet those criteria to
assume reporting and withholding respon-
sibility under chapter 61 of the Internal
Revenue Code and section 3406. For ex-
ample, where payments are made through
clearing organizations, it may be imprac-
tical to require a qualified intermediary to
provide information regarding U.S. non-
exempt recipients to a U.S. withholding
agent. The language that generally lim-
ited the ability to assume reporting and
withholding responsibility under chapter
61 of the Internal Revenue Code and sec-
tion 3406 has been eliminated. Whether a
qualified intermediary may assume such
responsibility is left to the terms of the
qualified intermediary agreement. See
section 3 of the model qualified interme-
diary agreement in Rev. Proc. 2000–12.
Section 1.1441–1(e)(5)(v), as origi-
nally drafted, required a qualified inter-
mediary to associate a payment with one
of three categories of assets: (i) assets as-
sociated with documented foreign per-
sons, (ii) assets associated with docu-
mented U.S. payees, and (iii) assets
associated with undocumented payees.
These three asset categories were subdi-
vided into classes of assets based on with-
holding rates and reporting requirements.
The asset categories did not provide the
needed flexibility sought by qualified in-
termediaries. For example, information
regarding U.S. exempt recipient payees,
who are not subject to withholding under
section 1441, could not be combined with
information regarding foreign beneficial
owner payees subject to a zero rate of
withholding. The model qualified inter-
mediary agreement, as published in Rev.
Proc. 2000–12, substituted the withhold-
ing rate pool concept for asset classes and
this concept has been reflected in the re-
vised regulation. A withholding rate pool
is a payment of a single type of income,
determined in accordance with the cate-
gories of income reported on Form 1042-
S or Form 1099, as applicable, that is sub-
ject to a single rate of withholding.
Finally, the regulations permit, in ac-
cordance with Rev. Proc. 2000–12, a
qualified intermediary and a U.S. with-
holding agent to use a single withholding
rate pool for U.S. non-exempt recipients
for whom no backup withholding is re-
quired and a single withholding rate pool
for U.S. non-exempt recipients that are
subject to backup withholding provided
that the qualified intermediary agreement
June 5, 200011662000–23 I.R.B.

permits such an arrangement and suffi-
cient information is provided to the with-
holding agent no later than January 15
following the year of payment that allo-
cates the reportable payments to each
U.S. non-exempt recipient account
holder. Failure to provide the allocation
information timely may result in penalties
imposed on the qualified intermediary
and the termination of its qualified inter-
mediary agreement. Unlike qualified in-
termediaries, nonqualified intermediaries
and flow-through entities are not permit-
ted to pool payments to U.S. non-exempt
recipients. Therefore, information suffi-
cient to allocate the payment to each U.S.
non-exempt recipient must be provided
before a payment is made or the withhold-
ing agent must treat the payment as made
to a U.S. payee that has failed to provide a
TIN and impose backup withholding.
B. Changes to §1.1441–2
1. Amounts Subject to Withholding
Section 1.1441–2(a) has been amended
to exclude from the definition of amount
subject to withholding interest paid as
part of the purchase price of an obligation
sold between interest payment dates (ac-
crued interest) and an amount represent-
ing original issue discount (OID) paid as
part of the purchase price of an obligation
sold in a transaction other than the re-
demption of such obligation. The exclu-
sions do not apply, however, if the sale of
an obligation is part of a plan the principal
purpose of which is to avoid tax and the
withholding agent has actual knowledge
or reason to know of such plan.
The exclusion of accrued interest and
amounts representing OID paid as part of
the purchase price of an obligation sold in
a transaction other than a redemption were
made in response to comments received on
§1.1441–2(b)(3) of the final regulations
and proposed regulation §1.1441–3(b)
(REG–114000, [1997–2 C.B. 661, 62 F.R.
53503]). Section 1.1441–2(b)(3), as origi-
nally drafted, required withholding on
OID to the extent the withholding agent
had actual knowledge of the amount of the
payment that was taxable to the beneficial
owner. A withholding agent was treated as
having actual knowledge if it had a direct
account relationship with the holder of the
obligation. Proposed regulation
§1.1441–3(b) would have eliminated the
rule that no withholding was required on
accrued interest and replaced it with a rule
that conformed with the rule applicable to
OID on the theory that, from a withholding
perspective, the two payments were equiv-
alent. The withholding rules applicable to
OID and accrued interest would have re-
quired withholding whenever a payment
of interest or OID was not subject to an ex-
ception, such as the portfolio interest ex-
ception, or a payment of OID or accrued
interest was presumed made to a foreign
person and the withholding agent could
not reliably associate the payment with
beneficial owner documentation. Such
payments were subject to reporting on
Form 1042-S whether or not withholding
was imposed.
In Notice 99–8, Treasury and the IRS an-
nounced that they would make modifica-
tions to the OID and accrued interest rules.
The modifications were intended to address
criticisms by commentators that the OID
and accrued interest rules were unworkable.
Commentators argued that debt obligations
are often sold in delivery-versus-payment
transactions which settle quickly and often
involve multiple intermediaries. The re-
quirement to withhold in absence of a bene-
ficial owner withholding certificate would
necessarily inhibit the speed with which
sales transactions are normally conducted.
In addition, they argued that a withholding
agent does not necessarily know the amount
of OID or accrued interest merely because it
has a direct account relationship with the ac-
count holder. In addition, custodians stated
that sales were often accounted for in sys-
tems different from those used to report in-
terest and OID and therefore the reporting
requirement of the regulations would re-
quire significant systems modifications.
They argued that these modifications were
not justified because nearly all accrued in-
terest and OID would be from instruments
that could qualify for the portfolio interest
exception.
Notice 99–8 proposed rules that were
intended to require only the withholding
agent that had a direct account relation-
ship with a beneficial owner to obtain a
Form W-8. Thus, the notice proposed a
rule that would require a withholding
agent to obtain a withholding certificate
only if it received the proceeds from a
sale against delivery of the debt obliga-
tion or, in the case of a retirement, the
withholding agent was the person respon-
sible for paying the owner or crediting its
account. The notice would have pre-
vented intermediaries other than the inter-
mediary with the direct account relation-
ship with the beneficial owner from
having to obtain a Form W-8 by stating
that any withholding agent that effected a
transaction for a broker was generally not
required to obtain a Form W-8. A broker
was defined by reference to §1.6045–1(a)
and generally included a person that
makes sales of securities for customers in
the ordinary course of that person’s trade
or business. In addition, the notice pro-
posed to eliminate the rule that presumed
knowledge of the amount of OID or inter-
est accrued between interest payment
dates merely because there was a direct
account relationship with the beneficial
owner of an obligation.
Commentators criticized the Notice
99–8 proposal. They argued that the mul-
tiple broker exception did not always ac-
complish its intended purpose because
certain participants in a transaction for
whom a Form W-8 should not be required
could not meet the definition of a broker,
particularly since that definition does not
include non-U.S. payors that effect sales
of obligations at an office outside the
United States and certain other persons,
such as investment advisors, who might
participate in the transaction but did not
stand ready to effect sales of securities for
others. In addition, the Notice did not
solve the problem faced by custodians.
In light of these criticisms, Treasury
and the IRS have decided to eliminate the
requirement for withholding, and report-
ing, on accrued interest and an amount
representing OID paid on the sale of an
OID obligation, other than in a redemp-
tion. This change has been effected by
eliminating those items from the defini-
tion of amounts subject to withholding.
Withholding is required, however, if the
withholding agent knows or has reason to
know that a sale is part of a plan to avoid
tax. For example, if a holder of a debt
obligation that pays interest that does not
qualify for the portfolio interest exception
sells the instrument immediately prior to
an interest payment date and reacquires
the same type of security after the interest
payment date and the withholding agent
knows, or has reason to know, of this pat-
tern of sales, withholding and reporting of
accrued interest is required.
2000–23 I.R.B.1167June 5, 2000

Paragraph (a) has also been amended to
state that insurance premiums paid on a
contract subject to the section 4371 excise
tax are not amounts subject to withholding.
As previously drafted, these amounts were
excluded from the definition of fixed or
determinable annual or periodical (FDAP)
income under §1.1441–1(b)(2)(ii) and
therefore were not included in amounts
subject to withholding. Excluding insur-
ance premiums from FDAP is inappropri-
ate, however. Insurance premiums fall
within the definition of FDAP provided in
paragraph (b)(1). Therefore, the better
means for exempting premiums subject to
the section 4371 excise tax from withhold-
ing is to exclude them from the definition
of amounts subject to withholding.
2. Fixed or Determinable Annual or Peri-
odical Income
Section 1.1441–2(b)(1)(i) provides the
definition of fixed or determinable an-
nual or periodical (FDAP) income. Such
income, if from sources within the United
States, is generally an amount subject to
withholding and therefore also subject to
reporting on Form 1042-S if paid to a for-
eign payee. Paragraph (b)(1)(i) states
that amounts that are excluded from
gross income under any provision of law
“without regard to the identity of the
holder” are not FDAP income. This pro-
vision was, in part, intended to exclude
from FDAP qualified scholarship income
under section 117. The language, how-
ever, failed to accomplish its intended
purpose because the section 117 exclu-
sion is dependent on the identity of the
person receiving the income—the recipi-
ent must be a candidate for a degree at a
certain type of educational organization.
The paragraph has been revised to state
that amounts that are excluded from
gross income without regard to the U.S.
or foreign status of the owner of the in-
come is not FDAP. In addition, the para-
graph has been changed to clarify that
amounts excluded from gross income
under sections 892 (income of foreign
governments) and 115 (income of a U.S.
possession) are not excluded from the de-
finition of FDAP since the foreign status
of the owner of the income is determina-
tive of whether the exclusions provided
by those sections apply. Amounts subject
to the section 892 and section 115 exclu-
sions are, therefore, included in the scope
of amounts subject to withholding and
therefore are reportable on Form 1042-S
under section 1461 even though not tax-
able under section 871 or 881.
3. Original Issue Discount
Section 1.1441–2(b)(3) provides rules
governing the treatment of original issue
discount. Paragraph (b)(3)(i) describes
the amount of OID subject to taxation in
the hands of the owner of an OID obliga-
tion. Minor changes have been made to
this paragraph to clarify the amount of
OID that is taxable to the beneficial
owner of the obligation.
Paragraph (b)(3)(ii) describes the
amount of OID subject to withholding.
To conform paragraph (b)(3)(ii) to the
changes discussed in section B. 1 of this
Explanation of Provisions, the paragraph
has been revised to require a withholding
agent to withhold on OID only upon the
redemption of the original issue discount
obligation or in any case where the with-
holding agent knows that a sale, other
than a redemption, is being made with the
principal purpose of avoiding tax on the
obligation. A withholding agent is re-
quired to withhold on the actual amount
of OID includible in the gross income of
the owner of an obligation if it has actual
knowledge of such amount, or, if actual
knowledge is lacking, on the entire
amount of OID determined under Publi-
cation 1212, “List of Original Issue Dis-
count Instruments” as if the obligation
had been held since issuance.
Paragraph (b)(3)(iii) contained a rule
that required a withholding agent to with-
hold on interest and OID paid on an OID
obligation even though it did not know the
amount of OID subject to taxation if the
withholding agent could not reliably asso-
ciate the payment with valid documenta-
tion. The rule was designed to eliminate
an exception to withholding that applied if
a withholding agent did not have actual
knowledge of the amount of OID that ac-
crued to the holder of the obligation up to
the date of sale. If the exception were not
eliminated, it was feared that the docu-
mentation requirement for portfolio inter-
est could be avoided by selling OID oblig-
ations through intermediaries that had no
knowledge of the accrued amount of OID.
The rule is no longer necessary. Under
new §1.1441–2(a)(6), withholding is re-
quired if a withholding agent knows, or
has reason to know, that an OID obliga-
tion is sold with the principal purpose of
avoiding tax. Therefore, the rule as origi-
nally contained in paragraph (b)(3)(iii) has
been removed. New paragraph (b)(3)(iii)
contains the transition rule formerly found
in paragraph (b)(3)(iv). The rule has been
modified, however. As previously drafted,
the rule appeared to eliminate any with-
holding responsibility by the issuer of an
OID obligation or its agent, as formerly
contained in Rev. Rul. 68–333 (1968–1
C.B. 390). As revised, issuers and their
agents are subject to any applicable with-
holding requirements on obligations is-
sued before or after December 31, 2000.
The rule now states, however, that with-
holding on OID obligations is only re-
quired by persons other than issuers or
their agents with respect to obligations is-
sued after December 31, 2000.
C. Changes to §1.1441–3
1. Accrued Interest
Section 1.1441–3 provides rules to de-
termine the amount subject to withhold-
ing. In accordance with the change made
in §1.1441–2(a)(5), which eliminates in-
terest accrued between sales dates from
amounts subject to withholding,
§1.1441–3(b)(2) has been modified to
eliminate the requirement that a withhold-
ing agent that pays accrued interest must
report that interest on Form 1042-S.
2. Coordination With REIT Withholding
As originally drafted, §1.1441–3(c)-
(4)(i)(C) required withholding under sec-
tion 1441 on the portion of a Real Estate
Investment Trust (REIT) distribution that
is not designated as a capital gain divi-
dend or return of basis. Therefore,
§1.1441–3(c)(4)(i)(C) inadvertently re-
quired withholding under section 1441 on
a distribution in excess of basis, which
under section 301(c)(3) is capital gain
from the sale or exchange of stock and,
therefore, not subject to withholding
under section 1441. To correct this error,
paragraph (c)(4)(i)(C) has been amended
to provide that withholding under section
1441 is not required on a distribution in
excess of basis. A distribution in excess
of basis is, however, subject to withhold-
ing under section 1445 unless the interest
in the REIT is not a U.S. real property in-
terest (e.g., an interest in a domestically
controlled REIT under section 897(h)(2)).
June 5, 200011682000–23 I.R.B.

D. Changes to §1441–4
1. Notional Principal Contracts
Section 1.1441–4(a)(3)(i) treats a pay-
ment of income on a notional principal
contract made to a foreign person as in-
come effectively connected with a trade
or business within the United States un-
less the withholding agent can reliably as-
sociate a payment with a withholding cer-
tificate that certifies that the payment is
not effectively connected. This rule is
overly broad because it presumes that any
notional principal contract payment made
to a foreign person is effectively con-
nected even if the foreign person has no
nexus to the United States. As a result,
§1.1441–4(a)(3)(i) has been amended to
limit the presumption that notional princi-
pal contract income is effectively con-
nected to a U.S. trade or business to those
situations in which the income is either
paid to a U.S. qualified business unit of a
foreign person or the withholding agent
otherwise knows, or has reason to know,
that the income is effectively connected
with the conduct of a U.S. trade or busi-
ness. It is not expected that a withholding
agent would be considered to have reason
to know that a notional principal contract
payment is effectively connected with the
conduct of a trade or business within the
United States solely because the foreign
person receiving the payment has a quali-
fied business unit in the United States to
which a portion of the payment may be al-
located pursuant to proposed regulation
§1.863–3(h) (the global dealing regula-
tions).
Section 1.1441–4(a)(3)(ii), as origi-
nally drafted, stated that a payment to a fi-
nancial institution was not treated as ef-
fectively connected with the conduct of a
trade or business within the United States
if the financial institution provided a rep-
resentation in a master agreement that
governs transactions in notional principal
contracts between the parties (for exam-
ple, an International Swaps and Deriva-
tives Association (ISDA) Agreement) or
in the confirmation on the particular no-
tional principal contract transaction that
the counter party was a U.S. person or a
non-U.S. branch of a foreign person.
Commentators requested that the mas-
ter agreement and confirmation excep-
tions be expanded to apply to persons
other than financial institutions. Section
1.1441–4(a)(3)(ii) has been amended (in
the table or corrections at the end of the
regulation) to allow any payee, not just a
financial institution, to provide in a mas-
ter agreement or confirmation statement a
representation that the payee is a U.S. per-
son or a non-U.S. branch of a foreign per-
son.
2. Withholding on Payments From Indi-
vidual Retirement Accounts
Section 1.1441–4(b)(1)(ii), as origi-
nally drafted, provided that section 1441
applied to distributions from any trust de-
scribed in section 401(a) made to a non-
resident alien individual and to certain
other retirement distributions. The result
of this rule is that section 1441, rather
than section 3405, applies to retirement
distributions. This rule considerably
eases the burdens that would otherwise
apply to retirement distributions.
Commentators noted that the regula-
tions did not provide the same rule for
distributions from individual retirement
accounts and annuities described in sec-
tion 408. The regulation has been
amended so that those distributions will
be subject to section 1441 as well.
E. Changes to §1441–5
Section 1.1441–5 of the regulations
concerns payments made to partnerships,
trusts, and estates. As originally drafted,
the regulations contained extensive rules
for payments made to U.S. and foreign
partnerships, but applied the rules of the
regulations prior to the publication of TD
8734 to trusts and estates. The trust and
estate rules, however, were inconsistent
with the rules contained in TD 8734 and
were also incomplete. For example,
§1.1441–1(c)(6)(ii)(B) required a with-
holding agent to determine the beneficial
owner of income paid to a trust or estate
under §1.1441–3(f) and (g) of the regula-
tions in effect prior to January 1, 2001.
That section, however, did not determine
the beneficial owner of income paid to a
trust. In addition, §1.1441–1(e)(3)(i)
stated that a trust or estate was to use a
flow–through withholding certificate fur-
nished under §1.1441–5(e), but that sec-
tion was reserved in the regulation. The
regulation has been revised to provide
complete trust and estate rules. Except as
noted below, the partnership rules remain
generally unchanged; however, several
changes were made to clarify those rules.
1. Rules Applicable to U.S. Partnerships,
Trusts, and Estates
Section 1.1441–5(b), as originally
drafted, provided rules regarding pay-
ments to U.S. partnerships. The rules of
paragraph (b) have been expanded to
cover payments to U.S. trusts and U.S. es-
tates as well. Under revised paragraph
(b)(1), a payment to a U.S. partnership,
U.S. trust, or U.S. estate is treated as a
payment to a U.S. person and, therefore,
not subject to withholding under chapter 3
of the Internal Revenue Code. United
States partnerships, U.S. trusts, and U.S.
estates are required, however, to withhold
on payments they make to foreign part-
ners, foreign beneficiaries, or, in the case
of grantor trusts, foreign owners. Fidu-
ciaries of U.S. trusts and U.S. estates
should take particular note that it is the
trust or the estate that is the withholding
agent, and Forms 1042 and Forms 1042-S
must be filed using the name and TIN of
the U.S. trust or U.S. estate, not the name
and TIN of the fiduciary.
Under paragraph (b)(2), a U.S. partner-
ship is a withholding agent for a foreign
partner’s distributable share of partner-
ship income that consists of amounts sub-
ject to withholding. A U.S. simple trust is
a withholding agent for the distributable
net income (DNI) includible in the gross
income of a foreign beneficiary to the ex-
tent the DNI consists of an amount sub-
ject to withholding. Similarly, a U.S.
complex trust is a withholding agent on
DNI includible in the gross income of a
foreign beneficiary to the extent the DNI
consists of an amount subject to withhold-
ing that is, or is required to be, distributed
currently. U.S. simple trusts and complex
trusts are permitted to make reasonable
estimates of the portion of a distribution
that constitute DNI consisting of amounts
subject to withholding. A U.S. grantor
trust must withhold on any income in-
cludible in the taxable income of a foreign
person that is treated as an owner to the
extent the amount includible consists of
an amount subject to withholding.
In the case of a partnership, if amounts
subject to withholding are not actually
distributed, the U.S. partnership must
withhold at the earlier of the time the
statement required under section 6031(b)
(Form K-1) is mailed or otherwise pro-
vided to the partner or the due date for
furnishing the statement. In addition, if
2000–23 I.R.B.1169June 5, 2000

an amount of income is required to be, but
is not actually distributed to the foreign
beneficiary of a U.S. simple or complex
trust, the U.S. trust must withhold at the
time the income is required to be reported
on Form 1042-S. A U.S. grantor trust is
required to withhold at the time the trust
receives the payment or the payment is
credited to the trust’s account.
2. Payments Made to Foreign Partner-
ships
Section 1.1441–5(c) provides rules for
payments made to foreign partnerships.
Generally, the payees of a payment made
to a nonwithholding foreign partnership
are the partners of the partnership. Para-
graph (c)(1)(ii), however, contains rules
on when the partnership itself will be re-
garded as the payee of a payment. That
paragraph, as originally drafted, permitted
a partnership to be treated as the payee of
income if the partnership provided a with-
holding certificate stating that the pay-
ment was effectively connected with the
conduct of the partnership’s U.S. trade or
business. A commentator noted that the
paragraph did not treat the partnership as
the payee, however, to the extent the in-
come was treated as being effectively
connected under the presumption rules in
the absence of a withholding certificate.
The paragraph has been revised to treat
the partnership as the payee if the income
is presumed to be effectively connected in
the absence of documentation. For exam-
ple, if a nonwithholding foreign partner-
ship is receiving income on a notional
principal contract and the income is
treated as effectively connected income
under the presumption rule of
§1.1441–4(b)(3)(i), the nonwithholding
foreign partnership, and not the partners,
is treated as the payee. In addition, the
example in paragraph (c)(1)(iv) has been
replaced with several less complex exam-
ples that better illustrate the operation of
the rules of paragraph (c)(1).
Section 1.1441–5(c)(2) contains rules
relating to withholding foreign partner-
ships. Section 1.1441–5(c)(2)(ii)(A), to-
gether with §1.1461–1(c)(2)(ii)(A), re-
quired a withholding foreign partnership
to file a Form 1065 and Forms K-1 and
exempted the partnership from having to
file Form 1042 and Forms 1042-S. The
rule was incorrect. A withholding foreign
partnership is generally required to with-
hold on payments and therefore must file a
Form 1042, which is an income tax return,
and not merely report the amounts on
Form 1065. Also, because the IRS
matches amounts reported on Forms
1042-S with amounts reported on Form
1042, it was incorrect to substitute Forms
K-1 for Forms 1042-S. Therefore, the reg-
ulation has been amended to require a
withholding foreign partnership to file a
tax return on Form 1042 and file informa-
tion returns on Form 1042-S for amounts
subject to withholding paid to, or included
in the distributive share of, its foreign
partners. A withholding foreign partner-
ship may also be required to file a return
on Form 1065 and make the statements on
Form K-1 under section 6031 for its part-
ners. However, the IRS may agree in the
withholding agreement to modify infor-
mation reporting requirements to avoid
double reporting. A rule that was formerly
contained in §1.1441–7(a), which permit-
ted a withholding foreign partnership to
arrange with a withholding agent to have
the withholding agent impose withholding
on a payment has been removed because a
withholding foreign partnership is re-
quired to assume withholding responsibil-
ity.
Section 1.1441–5(c)(3) provides rules
relating to nonwithholding foreign part-
nerships. Paragraph (c)(3)(iv) has been
revised to require a nonwithholding for-
eign partnership to provide a withholding
statement in the same manner as a non-
qualified intermediary. In addition, para-
graph (c)(3)(v) has been revised to con-
form with revised §1.1441–1(b)(6),
discussed in section A. 5 of this Explana-
tion of Provisions. Thus, the regulation
has been changed to make clear that a
nonwithholding foreign partnership has
an obligation to report payments even
though another withholding agent has
withheld the appropriate amount if the
nonwithholding partnership has failed to
provide adequate information for a with-
holding agent to report the payments ap-
propriately on Form 1042-S and Form
1099 or the nonwithholding foreign part-
nership knows, or has reason to know,
that the payments were not correctly re-
ported.
Paragraph (d) of §1.1441–5 provides
presumption rules that apply to determine
the status of a partnership and its partners
if a payment cannot be reliably associated
with valid documentation. The rule in
paragraph (d)(3)(ii), which permitted a re-
duced rate of withholding to be applied to
a payment to a nonwithholding foreign
partnership if the payment could be asso-
ciated with a group of documented payees
all of whom were subject to the same
withholding rate has been removed for the
reasons stated in connection with the
changes made to §1.1441–1(b)(3)(v)(C).
See section A. 4, of this Explanation of
Provisions. Under the revised rule, any
payment of an amount subject to with-
holding paid to a foreign partnership that
has not been allocated to a specific payee
is presumed made to an undocumented
foreign payee and subject to 30 percent
withholding.
3. Payments to Foreign Trusts and Es-
tates
Treasury Decision 8734 did not include
new provisions regarding withholding on
payments by and to foreign trusts and for-
eign estates. The IRS provided interim
guidance in the instructions to Forms W-
8BEN and W-8IMY so that withholding
agents could replace documentation that
was expiring under the withholding regu-
lations with documentation that would
meet the requirements of TD 8734. In ad-
dition, Notice 99-8 announced that Trea-
sury and the IRS intended to issue regula-
tions that would clarify the withholding
obligations of income paid to trusts and
estates. Under the instructions and the
notice, a payment to a foreign fiduciary
was treated as a payment to a foreign in-
termediary and, therefore, the foreign
fiduciary was required to furnish an inter-
mediary withholding certificate on Form
W-8IMY. If the trust was a trust de-
scribed in section 651(a) or a trust, all or a
portion of which was treated as owned by
the grantor or other persons under sec-
tions 671 through 679, the fiduciary was
required to attach Forms W-8BEN, Forms
W-8EXP, or Forms W-9, from the benefi-
ciaries or owners of the trust. In all other
cases, the foreign trustee or executor was
required to attach a Form W-8BEN, Form
W-8EXP, or if required, Form W-9, com-
pleted on behalf of the trust or estate.
Several commentators objected to the
requirement that a foreign fiduciary of a
complex trust or a foreign estate provide
an intermediary withholding certificate.
They requested that a withholding certifi-
June 5, 200011702000–23 I.R.B.

cate be required only from the trust or es-
tate itself. Requiring documentation from
a fiduciary also was not consistent with
the rules under chapter 61, which gener-
ally require a Form W-9 from a trust or
estate and ignore the status of the fidu-
ciary. Finally, Notice 99–8 did not pro-
vide any presumption rules for payments
to foreign trusts and foreign estates.
The regulations now contain a compre-
hensive set of rules for payments made to
foreign trusts and foreign estates in
§1.1441–5(e). A foreign complex trust
(as defined in paragraph (c)(25)) and a
foreign estate are generally considered
beneficial owners of income under
§1.1441–1(c)(6). Therefore, under
§1.1441–5(e)(2), a foreign complex trust
or a foreign estate may provide a benefi-
cial owner withholding certificate or other
beneficial owner documentation for pay-
ments for which a reduced rate of with-
holding is not claimed under a treaty.
Whether such a trust or estate can provide
a beneficial owner withholding certificate
to claim a reduced rate of withholding
under an income tax treaty will depend on
whether the trust or estate can claim to be
a resident of a treaty country, whether it
derives the income under section 894, and
the regulations thereunder, and whether
treaty benefits are denied under a limita-
tion on benefits provision.
Foreign simple trusts and foreign
grantor trusts are not payees or beneficial
owners under §1.1441–5(e)(3), unless the
payment is an amount that is treated as ef-
fectively connected with the conduct of a
U.S. trade or business. The payees of
payments to a foreign simple trust or a
foreign grantor trust are generally the
beneficiaries or owners of the trust. This
is similar to the treatment accorded to
payments to foreign partnerships, where
the partners, rather than the partnership,
are generally considered the payees of in-
come paid to the partnership. Therefore,
the documentation rules applicable to for-
eign simple trusts and foreign grantor
trusts generally accord with those applica-
ble to foreign partnerships. The trust it-
self provides a flow-through withholding
certificate with which it associates the
withholding certificates or, if permitted,
documentary evidence of its beneficiaries
or owners. The foreign simple trust or
foreign grantor trust must also associate
with its flow-through withholding certifi-
cate a withholding statement identical to
that provided by foreign partnerships and
nonqualified intermediaries. The IRS
may permit a foreign trust to function as a
withholding foreign trust. A withholding
foreign trust would generally be subject to
the same provisions as a withholding for-
eign partnership.
Section 1.1441–1(e)(6) provides pre-
sumption rules for payments of amounts
subject to withholding to foreign trusts
and estates. Whether a payee is a trust or
estate is determined under the general
presumption rules of §1.1441–1(b)(3)(ii).
A trust or estate is presumed to be U.S.
unless there are indicia of foreign status.
If a payee is presumed to be a foreign
trust, but its status as a complex, simple,
or grantor trust is unknown, it will be
treated as a complex trust. If the trust is
known to be a foreign simple or grantor
trust, its beneficiaries or owners will gen-
erally be presumed to be foreign with re-
spect to payments of amounts subject to
withholding.
F. Changes to §1441–6
Section 1.1441–6 contains the provi-
sions for claiming a reduced rate of with-
holding under an income tax treaty. Sec-
tion 1.1441–6(b) has been revised to
clarify the requirements for claiming
treaty benefits. Specifically, the provi-
sions of paragraph (b)(2), as originally
drafted, which related to use of documen-
tary evidence, have been moved to newly
revised paragraphs (c)(1) and (2) so that
all the documentary evidence rules appear
in the same paragraph. Paragraph (b)(2)
now contains the provisions relating to
treaty claims made by interest holders of
fiscally transparent entities. Clarifying
changes to those rules, which appeared in
former paragraph (b)(4), have also been
made.
Section 1.1441–6(c)(1) and (2), as orig-
inally drafted, required a foreign person
to establish residency by obtaining a certi-
fied taxpayer identification number (certi-
fied TIN) from the IRS. Those provisions
required a person claiming a reduced rate
of withholding to submit either a certifi-
cate of residency or certain other pre-
scribed documentation, plus affidavits re-
garding compliance with the limitation on
benefits provisions of a treaty and with
the regulations under section 894. In No-
tice 99–8, the IRS announced that it
would not implement the procedures for
obtaining certified TINs until January 1,
2002.
The certified TIN procedures have
been removed. New paragraph (b)(3),
however, provides authority for the IRS to
issue guidance on requirements that a
treaty claimant must follow to establish
residency and compliance with other re-
quirements imposed by treaties and the
Internal Revenue Code, such as limitation
on benefits provisions and the require-
ment that the claimant derive the income
under section 894. Treasury and the IRS
fully intend to implement such proce-
dures. However, Treasury and the IRS
determined that it was appropriate to
delay implementation of the requirement
while withholding agents and beneficial
owners implement other requirements
under the regulation. In addition, the IRS
will examine ways to more effectively
implement the certified TIN requirement.
Paragraphs (c)(3) and (4) prescribe the
types of documentation that can be used
to claim treaty benefits for income from
marketable instruments paid outside the
United States to offshore accounts. For-
mer paragraph (b)(2) stated that docu-
mentary evidence could be used, in cer-
tain cases, to claim treaty benefits if the
documentary evidence was accompanied
by the certifications required in paragraph
(c)(5). Paragraph (c)(5) contained a re-
quirement that a beneficial owner apply-
ing for a certified TIN provide the IRS
with certifications, made in an affidavit
signed under penalties of perjury, that the
beneficial owner was in compliance with
any applicable limitation on benefits pro-
visions contained in a treaty and that the
beneficial owner derives the income for
which treaty benefits will be claimed. It
was unclear from the regulations, as
drafted, whether the certifications that
were provided to withholding agents were
required to be made in affidavits signed
under penalties of perjury or whether the
affidavit requirement only applied to ob-
taining certified TINs. Although Treasury
and the IRS believe it is important that
statements regarding compliance with
limitation on benefits provisions and sec-
tion 894 be given in conjunction with
documentary evidence provided to a with-
holding agent, a penalties of perjury re-
quirement would impose a burden that
undermines the use of documentary evi-
2000–23 I.R.B.1171June 5, 2000

dence. One reason for permitting use of
documentary evidence is to eliminate, as
much as possible, the need for a penalties
of perjury statement. Thus, the affidavit
and penalties of perjury requirements
have been eliminated with respect to doc-
umentary evidence provided to a with-
holding agent. The IRS may, however,
require an affidavit in connection with the
certified TIN procedures that it will estab-
lish. The affidavit requirement in para-
graph (c)(4), stating that the information
on documentary evidence is true and
complete, has also been eliminated.
G. Changes to §1.1441–7
Section 1.1441–7 defines the term
withholding agentand provides various
rules relating to the obligations of with-
holding agents, including certain due dili-
gence requirements regarding the docu-
mentation they receive from payees.
1. Withholding Agent Defined
§1.1441–7(a) provides the definition of
a withholding agent as well as a withhold-
ing agent’s obligation to withhold the ap-
propriate amount of taxes and file returns.
The section has been revised by removing
language stating that a withholding for-
eign partnership does not have to file
Forms 1042–S for payments made to for-
eign partners because it is required to pro-
vide Forms K-1. The reason for this
change is discussed in section E. 2 of this
Explanation of Provisions.
Some U.S. withholding agents com-
mented that foreign persons, including
U.S. branches of foreign persons, were
taking the position that they were not
withholding agents for purposes of chap-
ter 3 of the Internal Revenue Code. Any
person, whether U.S. or foreign, that
pays, or has control, receipt, custody, or
disposal of an amount subject to with-
holding is a withholding agent. In addi-
tion, with respect to a single item of in-
come, each person that handles the
payment is a withholding agent. Thus,
there may be more than one withholding
agent with respect to a payment of an
amount subject to withholding. Examples
have been added in new paragraph (a)(2)
to illustrate these principles. In particular,
examples were added to emphasize that
foreign persons that pay, or have control,
receipt, or custody, of amounts subject to
withholding are withholding agents, in-
cluding U.S. branches of foreign persons.
2. Reason to Know
Section 1.1441–7(b)(2)(ii), as origi-
nally drafted, provided the exclusive rules
for determining when a withholding agent
that is a financial institution making a
payment of income from marketable se-
curities has reason to know that documen-
tation provided to the withholding agent
is unreliable. Commentators noted that
the language of paragraph (b)(2)(ii) was
inconsistent about whether the rules ap-
plied only to withholding certificates (i.e.,
Forms W-8) or also to documentary evi-
dence. In addition, many commentators
noted that the rules could not be reason-
ably applied to documentary evidence re-
ceived through tiers of intermediaries, be-
cause that documentation would often be
in a foreign language. They further ar-
gued that the rules relating to P.O. box ad-
dresses were unreasonable because in
some countries P.O. box addresses are
standard. Finally, commentators noted
that the means for curing otherwise unre-
liable documentation were, in some in-
stances, too restrictive.
Section 1.1441–7 (b)(3) through (10)
have been added to address the com-
ments. Some of the changes made to
paragraph (b) reflect rules in the model
qualified intermediary agreement con-
tained in Rev. Proc. 2000–12. Paragraphs
(b)(4) through (b)(9) relate to the obliga-
tions of a withholding agent for account
holders that have a direct account rela-
tionship with the withholding agent. The
rules are limited to direct account rela-
tionships because they often rely on ac-
count information that will exist only if
such a relationship exists. However,
under the rules of paragraph (b)(10),
which relate to documentation from per-
sons that are not direct account holders,
the rules in paragraph (b)(4) through (9)
apply to the extent that they rely on infor-
mation contained on the face of a with-
holding certificate, documentary evi-
dence, or a withholding statement.
Paragraph (b)(4) contains general rules
regarding the reliability of a withholding
certificate provided on Form W-8. Para-
graph (b)(5) contains rules for when a
Form W-8 will be regarded as unreliable
to establish a beneficial owner’s foreign
status and applicable cure provisions.
Paragraph (b)(6) contains rules for when a
Form W-8 will be regarded as unreliable
to establish a beneficial owner’s claim of
treaty benefits and applicable cure provi-
sions. Paragraph (b)(7) provides general
rules relating to documentary evidence.
Paragraphs (b)(8) and (b)(9) contain rules
regarding documentary evidence that is
unreliable to establish a beneficial
owner’s status as a foreign person or a
resident of a treaty country, respectively.
Paragraph (b)(10) provides rules re-
garding due diligence standards for docu-
mentation from payees received through
nonqualified intermediaries, flow-through
entities, and certain U.S. branches of for-
eign banks and insurance companies.
Under paragraph (b)(10), a withholding
agent is required to review the informa-
tion contained in a withholding statement
provided by those entities and may not
rely on the information contained in the
withholding statement to the extent it
does not support the claims made for the
payee. A withholding agent must also re-
view each withholding certificate to ver-
ify that they support the claims made and
are consistent with the information on the
withholding statement. Under a transition
rule, this review process does not apply to
withholding certificates received before
December 31, 2001, if the payment is
made prior to that date. If a withholding
certificate received before December 31,
2001, is relevant to a payment made after
that date, it must be reviewed for accu-
racy and matched to the information con-
tained in the withholding statement. Fi-
nally, a withholding agent must review
documentary evidence to determine that
there is no obvious indication that the
payee is a U.S. non-exempt recipient or
no obvious indication that the documen-
tary evidence does not establish the iden-
tity of the person who provided the docu-
mentation.
H. Changes to §1.1441–9
Section 1.1441–9 provides the rules for
payments made to foreign tax-exempt en-
tities and foreign governments. Para-
graph (b)(2) of that section provided that
if a tax-exempt organization did not have
a determination from the IRS, it could es-
tablish its exempt status by attaching to its
withholding certificate an opinion of
counsel concluding that the organization
is described in section 501(c) of the Inter-
nal Revenue Code. In addition, if the
June 5, 200011722000–23 I.R.B.

opinion concluded that the organization
was described in section 501(c)(3) and
was not a private foundation, an affidavit
regarding the operations and support of
the organization was required to be at-
tached to the organization’s withholding
certificate as well. The opinion of coun-
sel and affidavit was required to be re-
newed whenever the certificate to which
it was attached was required to be re-
newed.
Commentators stated that the require-
ment that the opinion of tax-exempt status
be provided by an attorney was too nar-
row and that an opinion from any feder-
ally authorized tax practitioner, as defined
in section 7525(a)(3), should be permit-
ted. In addition, the requirement that the
opinion of counsel and the affidavit be re-
newed whenever the certificate was re-
quired to be renewed was confusing be-
cause a withholding certificate from a
tax-exempt entity requires a TIN and, pro-
vided the income paid is subject to report-
ing, is valid indefinitely absent a change
in circumstances.
Treasury and IRS are currently consid-
ering whether an opinion issued by a per-
son other than an attorney authorized to
practice before the IRS should suffice.
Although the Treasury and IRS have not
yet concluded that a person other than an
attorney should be permitted to provide
the opinion, the regulation has been
amended to permit that possibility in fu-
ture guidance. In addition, the require-
ment to renew the opinion and affidavit
has been clarified by stating that it must
be renewed if there is a change in facts or
circumstances relevant to the organiza-
tion’s status under section 501(c)(3).
I. Changes to §1.1461-1
Section 1.1461–1 contains require-
ments regarding the payment and deposit
of tax withheld under chapter 3 of the In-
ternal Revenue Code and the filing of a
tax return (Form 1042) and information
returns (Forms 1042-S) by withholding
agents. Generally, the paragraph has been
amended to make a withholding agent’s
obligations clearer.
Paragraphs (b)(2) and (c)(4), as origi-
nally drafted, stated that a withholding
agent was not required to file a tax return
or information return if another withhold-
ing agent had done so. Numerous excep-
tions to the rule were provided. These
paragraphs were misleading because they
implied that the general rule was that a tax
return and information returns were not
required if there was another withholding
agent in the chain of payment required to
file a tax return and information returns.
The exceptions to the rule, however, re-
quired every withholding agent that made
payments of an amount subject to with-
holding to a foreign person to file a tax re-
turn and information returns in every situ-
ation, except that a nonqualified
intermediary or flow-through entity was
not required to file a tax return and infor-
mation returns for payments that it made
provided that it furnished to a withholding
agent sufficient information for the with-
holding agent to correctly withhold and
report the payment. Section 1.1461–1(b)
and (c) have been clarified to state that a
withholding agent that makes a payment
of an amount subject to reporting to a re-
cipient must file a Form 1042–S and pro-
vide a copy to the recipient. The terms
recipient and amount subject to reporting
are defined in paragraphs (c)(1)(ii) and
(c)(2), respectively. A recipient includes a
beneficial owner (including a foreign
complex trust and estate), a qualified in-
termediary, a withholding foreign partner-
ship, a withholding foreign trust, an au-
thorized foreign agent, a U.S. branch
treated as a U.S. person, a nonwithhold-
ing foreign partnership or foreign simple
trust receiving income effectively con-
nected with a U.S. trade or business, any
payee presumed to be a foreign person,
and any other person for whom a Form
1042-S is required by the instructions to
the form. A nonqualified intermediary, a
disregarded entity, a flow-through entity,
and a U.S. branch that is not treated as a
U.S. person are not recipients. Amounts
paid to such entities are reported as paid
to the persons on whose behalf the entity
acts or to the interest holders in the entity.
The term amount subject to reporting gen-
erally means amount subject to withhold-
ing as defined under §1.1441–2(a).
The regulation has also been clarified by
providing a more extensive, but not ex-
haustive, list of those amounts subject to
reporting and those amounts for which
there is an exception to reporting. See
new §1.1461–1(c)(2). Paragraph
(c)(2)(i)(C), as originally drafted, stated
that the amount of effectively connected
income that was required to be reported
with respect to a notional principal con-
tract was the net income described in
§1.446–3(d). Commentators objected to
this requirement because their systems are
programmed to report cash payments, not
accrued amounts. New paragraph
(c)(2)(i)(J) now provides that the amount
required to be reported is limited to the
amount of cash paid from the notional
principal contract.
Finally, the section has been clarified
by separately stating the reporting re-
quirements of U.S. withholding agents,
qualified intermediaries, nonqualified in-
termediaries, and flow-through entities.
Withholding agents should note, in partic-
ular, that information regarding nonquali-
fied intermediaries, flow-through entities,
and U.S. branches (other than U.S.
branches treated as U.S. persons) in
which a recipient is an account holder or
an interest holder must be included on
Form 1042-S. Such information is impor-
tant to the IRS’s efforts to monitor com-
pliance by such entities and branches with
the requirements of the regulations.
J. Changes to the regulations under
section 6041
Section 1.6041–1(d) has been revised
to require that the amount of a notional
principal contract payment reported on
Form 1099 is the amount of cash paid on
the contract for the calendar year. This
change conforms the Form 1099 reporting
rule to that under §1.1461–1(c)(2)(i)(J).
Section 1.6041–4(a)(3) states that a
nonqualified intermediary, a qualified in-
termediary, or certain U.S. branches of
foreign banks and insurance companies
that receive payments reportable under
section 6041 (e.g., rents, notional princi-
pal contract income, and other fixed or
determinable income) are not required to
report the payments on Form 1099 when
they, in turn, make the payment to their
account holders unless they know the
payments are required to be reported and
were not so reported. Similar exceptions
apply to dividends, gross proceeds from
sales of securities, and interest under
§§1.6042–3(b)(1)(vi), 1.6045–1(g)(v),
and 1.6049–5(b)(14), respectively. These
provisions have been modified to state
that the exception does not apply to a U.S.
branch of a foreign bank or insurance
company that agrees with a withholding
agent to be treated as a U.S. person. The
2000–23 I.R.B.1173June 5, 2000

exception is inappropriate in this case be-
cause such branches do not provide payee
documentation on Form W-9 (or the
name, address, TIN, and information allo-
cating the payment to the payee) to a
withholding agent. The exception is also
inappropriate if a qualified intermediary
assumes Form 1099 reporting responsibil-
ity. Therefore, the exception has been
changed to exclude qualified intermedi-
aries that assume Form 1099 reporting.
Finally, the exceptions have been
amended to state that a nonqualified inter-
mediary, qualified intermediary, or U.S.
branch is deemed to know the required re-
porting was not done in any case where
the intermediary or branch has failed to
provide documentation or other informa-
tion so that another payor can do the re-
porting.
K. Changes to §1.6041A–1
Section 1.6041A–1(d)(3)(i)(C) has
been added to provide an exception from
reporting remuneration for services as a
direct seller paid outside the United
States. Prior to this change, remuneration
for services was subject to reporting in
absence of documentation establishing
the direct seller’s status as a foreign per-
son because the presumption rules of
§§1.6049–5(d)(2) and 1.1441–1(b)(3)(iii)
treated a direct seller as a U.S. non-ex-
empt recipient. Commentators stated that
the presumption was inaccurate because
most direct sellers abroad are foreign per-
sons. They also argued that obtaining
documentation from direct sellers to rebut
the presumption was overly burdensome.
L. Changes to §1.6045–1
Section 1.6045–1(g) provides an ex-
ception from Form 1099 reporting for a
broker if a customer is considered an ex-
empt foreign person under that section.
Under §1.6045–1(g)(1)(i), a broker may
treat a customer as an exempt foreign per-
son if the broker receives a withholding
certificate or documentary evidence that
establishes the person’s status as a foreign
person. As originally drafted, the last sen-
tence of §1.6045–1(g)(1)(i) stated that if a
withholding certificate was provided, a
withholding agent could rely on the cer-
tificate to exempt the customer from re-
porting only if the certificate included a
statement that the beneficial owner had
not been, and at the time the certificate
was furnished reasonably expected not to
be, present in the United States for a pe-
riod aggregating 183 days or more during
each calendar year. The regulation did
not state whether the a statement was re-
quired if documentary evidence was pro-
vided.
Two clarifying changes have been
made to §1.6045–1(g)(1)(i). First, the
regulation has been modified to require
the statement relating to presence in the
United States only from individuals. Sec-
ond, the regulation states that the state-
ment is not required if documentary evi-
dence is provided. The statement is
required on a withholding certificate and
not on documentary evidence because a
withholding certificate is the documenta-
tion required for an account maintained in
the United States. Documentary evidence
can only be used for amounts paid outside
the United States to an offshore account
and, therefore, the likelihood that the per-
son may be present in the United States
for the relevant period is greatly reduced.
Clarifying changes have also been
made to §1.6045–1(g)(3)(iv). The first
sentence of that section stated that a bro-
ker could treat an intermediary, as defined
in §1.1441– 1(c)(13), as an exempt recipi-
ent except when the broker had actual
knowledge or reason to know the interme-
diary was acting on behalf of a U.S. per-
son. The exception should only apply if
the intermediary is acting on behalf of a
U.S. person who is subject to reporting on
Form 1099, that is, a U.S. non-exempt re-
cipient. The regulation has been amended
to make this clear. An erroneous cite to
nonwithholding foreign partnerships has
also been eliminated.
In paragraph (g)(4) of §1.6045–1, Ex-
ample 7has been amended to reflect the
change to the regulations that now gener-
ally treats accrued interest as an amount
that is not subject to withholding. Under
that example, a foreign bank that is a U.S.
payor effects a sale of an interest bearing
obligation at an office outside the United
States on behalf of an undocumented ac-
count holder. Under the regulation, as
originally drafted, the gross proceeds
from the sale, net of accrued interest,
were reported on Form 1099 as paid to a
payee that was presumed to be a U.S. per-
son. However, because the accrued inter-
est was considered an amount subject to
withholding, it was reportable on Form
1042-S. Under the regulation, as revised,
accrued interest is treated as an amount
that is not subject to withholding. There-
fore, both the gross proceeds, net of ac-
crued interest, and the accrued interest are
now presumed paid to a U.S. payee and
reported on Form 1099 under the pre-
sumption rule §1.6049–5(d)(2). Two ad-
ditional examples have been added to
paragraph (g)(4) to illustrate the operation
of the presumption rules on a sale of a
short-term original issue discount instru-
ment. These examples were added to
make clear that a sale of an OID obliga-
tion outside the United States is a gross
proceeds transaction and, therefore, under
the presumption rule of §1.6049–5(d)(2),
presumed made to a U.S. person.
Whether the gross proceeds are reportable
depends on whether the exception of
§1.6045–1(a) for sales outside the United
States by a non-U.S. payor applies.
M. Changes to §1.6049–5
Under §1.6049–5(c)(1), a withholding
agent or payor may generally rely on doc-
umentary evidence from a foreign payee
instead of a beneficial owner withholding
certificate on Form W-8 if an amount is
paid outside the United States to an off-
shore account. An offshore account is an
account maintained at an office or branch
of a U.S. or foreign bank or other finan-
cial institution at any location outside the
United States and outside of a U.S. pos-
session. Under §1.6049–5(e), an amount
is considered paid outside the United
States if the payor completes the acts nec-
essary to effect payment outside the
United States.
The regulations do not specifically ad-
dress whether partners of a nonwithhold-
ing foreign partnership, foreign beneficia-
ries of a foreign simple trust, or foreign
owners of a foreign grantor trust can use
documentary evidence to establish their
status as foreign payees. Paragraph (c)(1)
has been amended to permit the use of
documentary evidence by foreign part-
ners, beneficiaries, and owners in these
situations. Documentary evidence can
also be used for purposes of chapter 3 of
the Internal Revenue Code by virtue of
the incorporation of §1.6049–5(c)(1) in
§1.1441–1(e)(1)(ii)(A)(2). The use of
documentary evidence is appropriate be-
cause the regulations generally treat pay-
ments to foreign nonwithholding foreign
June 5, 200011742000–23 I.R.B.

partnerships, foreign simple trusts, and
foreign grantor trusts similar to payments
made to nonqualified intermediaries, and
the latter are permitted to provide docu-
mentary evidence on behalf of their ac-
count holders.
Section 1.6049–5(c)(4) provides rules
that apply to U.S. payors that make pay-
ments outside the United States of
amounts not subject to withholding (e.g.,
foreign source income and gross proceeds
from the sale of securities) other than de-
posit interest and interest or OID on short-
term OID instruments. Non-U.S. payors
are generally exempt from reporting these
payments. There were several issues
under paragraph (c)(4) as originally
drafted. First, the paragraph was inter-
nally inconsistent. Paragraph (c)(4)(i)
stated that a bank or other financial insti-
tution could establish a payee’s status as a
foreign person by relying on a written de-
claration made on an account opening
statement that the payee was not a U.S.
person in two circumstances: (i) if it was
not customary in a country to obtain doc-
umentary evidence to establish a person’s
identity, or (ii) if it was customary to ob-
tain documentary evidence but it was not
customary to renew it. Paragraph
(c)(4)(iv), however, stated that a bank or
financial institution could not rely on a
declaration if it was customary to obtain
documentary evidence but not customary
to renew it. Second, paragraph (c)(4)(i)
did not permit a bank or financial institu-
tion to rely on documentary evidence to
establish a person’s foreign status if there
was indicia of U.S. status, including em-
ployment by a U.S.-based multinational
organization. A commentator noted that
prohibiting use of documentary evidence
merely because an account holder worked
for a U.S.-based multinational organiza-
tion was overly broad because such orga-
nizations commonly employ local em-
ployees and a withholding agent may not
know whether a particular multinational
is U.S. based. Finally, paragraph
(c)(4)(iii) required a bank or financial in-
stitution that relied upon a declaration of
foreign status or non-renewable docu-
mentary evidence to send a negative con-
firmation statement each year to the ac-
count holder stating that the account
holder was being treated as a foreign
payee and that the account holder was ob-
ligated to notify the bank or financial in-
stitution if it became a U.S. citizen or U.S.
resident. A commentator argued that the
expense of such a requirement was not
justified. The commentator argued that if
an account holder legitimately establishes
foreign status, it is unlikely that the ac-
count holder will become a U.S. citizen or
resident and that if it does, there are fac-
tors, such as a change of address, that will
indicate a change in the person’s status.
Paragraph (c)(4) has been amended to
remove the inconsistency and to take the
commentators’ comments into account.
Under paragraph (c)(4)(ii), as revised, a
declaration of foreign status may be used
only if it is not customary to obtain docu-
mentary evidence. The declaration may
be relied upon only if there is no address
or other indicia of U.S. status. If it is cus-
tomary in the country where a bank or fi-
nancial institution maintains a branch or
office to obtain, but not renew, documen-
tary evidence, then the bank or financial
institution may rely on the documentary
evidence without the need to renew it pro-
vided that it may rely on the documenta-
tion to establish foreign status under the
due diligence rules of §1.1441–7(b)(7)
and (8). The restriction on using such
documentation in the case of a U.S. based
multinational employee has been re-
moved. If, however, the bank or financial
institution may rely on the documentary
evidence as establishing foreign status
even though there are indicia of U.S. sta-
tus, it can rely on the documentary evi-
dence only for a period of three full calen-
dar years after the calendar year in which
it is received. Finally, neither the docu-
mentation rule of paragraph (c)(4)(i) nor
the declaration rule of paragraph (c)(4)(ii)
requires a payor to send a negative confir-
mation.
Section 1.6049–5(d) contains presump-
tion rules that generally apply for chapter
61 reporting if a payor lacks required doc-
umentation from a payee. Paragraph
(d)(2) governs payments other than pay-
ments to intermediaries or flow-through
entities. Paragraph (d)(2)(i) has been
clarified to state that the presumption
rules of §1.1441–1(b)(3)(iii)(D) (pay-
ments to offshore accounts) do not apply
to amounts that are not subject to with-
holding. As originally drafted, paragraph
(d)(2)(i) stated that the rules of
§1.1441–1(b)(3)(iii) applied to all pay-
ments, irrespective of whether they were
subject to withholding. Section
1.1441–1(b)(3)(iii)(D), however, stated
that it did not apply to amounts that were
not subject to withholding. Revised para-
graph (d)(2)(i) eliminates the inconsis-
tency. Therefore, payments of deposit in-
terest, and interest or OID arising from
the redemption of an obligation described
in section 871(g)(1)(B)(i) paid to an off-
shore account are presumed paid to a U.S.
payee. In addition, gross proceeds, which
are not amounts subject to withholding,
are also treated as paid to U.S. persons
under §1.6045–1(g)(1)(i). Under the ex-
ceptions of §§1.6045–1(a)(1) and
1.6045–1(g)(3), however, gross proceeds
from the sale of a security by a non-U.S.
payor effected outside the United States
are not subject to reporting.
The grace period rule in
§1.6049–5(d)(2)(ii), as originally drafted,
did not cover the same payments as were
covered under the grace period rule of
§1.1441–1(b)(3)(iv) even though the lat-
ter regulation cross-references
§1.6049–5(d)(2)(ii). For example, the
rule under the 1441 regulations, but not
the rule under section 6049, covered divi-
dends from any redeemable security is-
sued by an investment company and
amounts paid with respect to loans of se-
curities. Paragraph 5(d)(2)(ii) has been
amended to cover the same payments as
are covered by the grace period rule of
§1.1441–1(b)(3)(iv). In addition, para-
graph (d)(2)(ii) prior to amendment stated
that the grace period expired on the earlier
of the of the 90th day after the grace pe-
riod began, the date on which documenta-
tion is provided, or the last day of the cal-
endar year. Commentators stated that
terminating the grace period at the end of
a calendar year complicated systems pro-
gramming because there was a shrinking
grace period for payments made within 90
days of the end of the year. The require-
ment to terminate the grace period as of
the close of a calendar year has been elim-
inated because it is not necessary.
Paragraph (d)(3) provides presumption
rules for payments made to foreign inter-
mediaries. With exceptions for deposit
interest and interest and OID on short-
term obligations, payments to foreign in-
termediaries are presumed made to for-
eign payees. Paragraph (d)(4) provided
different presumptions for payments to
partnerships. Under that paragraph, pay-
2000–23 I.R.B.1175June 5, 2000

ments made to foreign partnerships were
generally presumed made to U.S. payees,
even if the partnership established its sta-
tus as a foreign partnership. Commenta-
tors argued that the disparate treatment
between intermediaries and partnerships
was not justified because they are treated
similarly for other purposes under the reg-
ulations. The differences also compli-
cated payors’ information systems. In re-
sponse to these comments, the
presumption rules of paragraph (d)(3)
have been revised to apply to payments
made to all flow-through entities (non-
withholding foreign partnerships, foreign
simple trusts, and foreign grantor trusts).
Paragraph (d)(3)(ii) provides rules for
payments of amounts that are not subject
to withholding (e.g., foreign source in-
come and gross proceeds from the sales of
securities) other than deposit interest and
interest and OID on short-term obliga-
tions paid to foreign intermediaries and
flow-through entities. The paragraph re-
quired a payor to presume that a payment
was made to an exempt recipient unless
the payor had actual knowledge that any
person for whom the intermediary was
collecting the payment was a U.S. non-
exempt recipient. In that case, the pay-
ment was treated as made to the U.S. non-
exempt recipient. The last sentence of the
paragraph, however, also appeared to re-
quire a payor to presume that a payment
was made to a U.S. non-exempt recipient
if it appeared that the payment might be
collected on behalf of a U.S. non-exempt
payee, because, for example, an interme-
diary provided Forms W-9 for some pay-
ees but did not allocate a payment to any
particular payee. The application of the
last sentence of the paragraph, however,
was uncertain.
Paragraph (d)(3)(ii) has been revised to
generally reflect the principle that a pay-
ment of an amount that is not subject to
withholding (other than short-term OID
and deposit interest) made to an interme-
diary should not be subject to Form 1099
reporting by a payor if the payment would
not be subject to Form 1099 reporting if
made to a U.S. non-exempt recipient by
an intermediary that is not a U.S. payor.
Thus, the general rule is that a payment
covered by the paragraph (i.e., foreign
source income or gross proceeds) is pre-
sumed paid to an exempt recipient unless
the payor has actual knowledge that the
amount is attributable to a U.S. non-ex-
empt recipient.
As originally drafted,
§1.6049–5(d)(3)(iii) provided special pre-
sumption rules for payments of deposit
interest and interest or OID from short-
term original issue discount obligations to
foreign intermediaries. It was not clear
whether the presumption rule of the para-
graph applied to the portion of the sale
proceeds representing OID from the sale
or exchange of short-term OID instrument
in a transaction other than a redemption.
Under paragraph (d)(3)(iii) as revised,
a payment of deposit interest or interest or
OID on the redemption of a short-term
original issue discount obligation paid to
an intermediary or flow-through entity is
presumed paid to a U.S. payee. The para-
graph does not apply to sales or ex-
changes (other than redemption) of short-
term OID instruments. Such sales or
exchanges are treated as gross proceeds
transactions, in conformance with the
rules in §§1.6045–1(c) and (d)(3) and
31.3406(b)(2)–2, and are subject to the
general presumption rule for payments
made to foreign intermediaries under
§1.6049–5(d)(3)(ii). Therefore, gross
proceeds from the sale or exchange (other
than a redemption) of a short-term OID
instrument will generally be presumed
paid as made to an exempt recipient. In-
termediaries that are U.S. payors, how-
ever, may themselves be required to re-
port such gross proceeds under
§1.6045–1(c) and (1)(g)(i) and the pre-
sumption rule of §1.6049–5(d)(2), which
applies to payments made to persons
other than an intermediary because under
that section gross proceeds are generally
considered paid to U.S. payees under that
section.
Paragraph (d)(3)(iii)(B) contained a
presumption rule for payments made to
exempt recipients that had not provided
documentation that they were acting as
intermediaries. The scope and application
of this rule were unclear. Paragraph
(d)(3)(iii)(B) has been completely revised
and now states that a payment made to an
exempt recipient that the payor knows, or
has reason to know, is acting as an inter-
mediary is subject to the presumptions
that apply to intermediaries.
N. Withholding Certificate Transitional
Issues
The changes made by this regulation
will require revisions to instructions to the
withholding certificates issued on Form
W-8 and certain minor changes to the
forms themselves. Until Forms W-8, and
the instructions, are revised withholding
agents may rely on Forms W-8BEN,
W-8ECI, W-8EXP, and W-8IMY as cur-
rently in effect but should take into ac-
count, particularly with respect to Form
W-8IMY used by intermediaries and
flow-through entities, that the instructions
to the form do not reflect the withholding
statement requirements contained in this
regulation. In particular, withholding
agents and providers of Form W-8IMY
should furnish a withholding statement in
connection with the form that conforms to
§1.1441–1(e)(3)(iv).
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assess-
ment is not required. It has also been de-
termined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C.
chapter 5) does not apply to these regula-
tions. Finally, it has been determined that
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply to these regula-
tions because the regulations do not im-
pose a collection of information on small
entities. Pursuant to 7805(f) of the Inter-
nal Revenue Code, the notice of proposed
rulemaking preceding these regulations
(61 F.R. 17614) was submitted to the
Small Business Administration for com-
ment on its impact on small business.
Drafting Information
The principal authors of these regula-
tions are Carl Cooper, Laurie Hatten-
Boyd, and Kate Hwa of the Office of As-
sociate Chief Counsel (International).
* * * * *
Adoption of Amendments to
Regulations
Accordingly, 26 CFR parts 1 and 31 are
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
June 5, 200011762000–23 I.R.B.

Par. 2. Effective January 1, 2001,
§1.1441–0 is amended by:
1. Revising the entry for
§1.1441–1(b)(2)(vii).
2. Adding entries for
§1.1441–1(b)(2)(vii)(A) through (F).
2a. Revising the entry for
§1.1441–1(b)(3)(ii).
3. Adding entries for
§1.1441–1(b)(3)(ii)(A) through (C).
4. Revising the entry for
§1.1441–1(b)(3)(iv).
5. Revising entry for
§1.1441–1(b)(3)(v)(B).
6. Revising the entry for
§1.1441–1(b)(3)(vi).
7. Adding entries for
§1.1441–1(b)(3)(vii)(A) and (B).
8. Adding entries for
§1.1441–1(b)(6)(i) and (ii).
9. Revising the entries for
§1.1441–1(c)(6)(ii), (c)(6)(ii)(B),
(c)(6)(ii)(C), and adding a new entry for
§1.1441–1(c)(6)(ii)(D).
10. Adding entries for
§1.1441–1(c)(12) through (29).
11. Revising the entry for
§1.1441–1(d)(4).
12. Revising the entry for
§1.1441–1(e)(3)(iii), (e)(3)(iv), and
(e)(3)(iv)(A) through (C).
13. Adding entries for
§1.1441–1(e)(3)(iv)(D) and (E).
14. Adding entries for
§1.1441–1(e)(4)(iv)(A), (B), and (C).
15. Revising the entries for
§1.1441–1(e)(5)(v) and (e)(5)(v)(B) and
(C).
16. Revising the entries for
§1.1441–2(b)(3)(i) and (ii).
17. Removing the entries for
§1.1441–2(b)(3)(iii) and (iv).
18. Revising the entry for
§1.1441–5(a).
19. Revising the entries for
§1.1441–5(b), (b)(1), (b)(2), and (b)(2)(i),
adding entries for §1.1441–5(b)(2)(i)(A)
and (b)(2)(i)(B), and revising entries for
§1.1441–5(b)(2)(ii), (b)(2)(iii), (b)(2)(iv),
and (b)(2)(v).
20. Revising the entry for
§1.1441–5(c)(1)(iv).
21. Removing the entries for
§1.1441–5(c)(2)(ii)(A) and (B).
21. Revising the entry for
§1.1441–5(c)(3).
22. Revising the entries for
§1.1441–5(c)(3)(iii).
23. Revising the entries for
§1.1441–5(c)(3)(iv) and (v).
24. Revising the entry for
§1.1441–5(d).
25. Removing the entries for
§1.1441–5(d)(3)(i) through (d)(3)(iv).
26. Revising the entry for
§1.1441–5(d)(4).
27. Revising the entry for
§1.1441–5(e).
28. Adding entries for
§1.1441–5(e)(1), (e)(2), (e)(3), (e)(3)(i),
(e)(3)(ii), (e)(4), (e)(5), (e)(5)(i), (e)(5)(ii),
(e)(5)(iii), (e)(5)(iv), (e)(5)(v), (e)(6),
(e)(6)(i), (e)(6)(ii) and (e)(6)(iii).
29. Revising the entries for
§1.1441–6(b)(2), (b)(2)(i) and (b)(2)(ii).
30. Adding entries for
§1.1441–6(b)(2)(iii) and (b)(2)(iv).
31. Revising the entry for
§1.1441–6(b)(3).
32. Revising the entry for
§1.1441–6(b)(4).
33. Removing the entries for
§1.1441–6(b)(4)(i), (b)(4)(ii), (b)(4)(ii)(A),
(b)(4)(ii)(B), (b)(4)(iii), and (b)(4)(iv).
34. Removing the entry for
§1.1441–6(b)(5).
35. Revising the entry for
§1.1441–6(c).
36. Revising the entry for
§1.1441–6(c)(2).
37. Removing the entries for
§1.1441–6(c)(2)(i), (c)(2)(ii), and
(c)(2)(iii).
38. Revising the entries for
§1.1441–6(c)(5), (c)(5)(i) and (c)(5)(ii).
39. Revising the entry for
§1.1441–6(e).
40. Adding entries for §1.1441–7(a)(1)
and (2).
41. Removing the entries for
§1.1441–7(b)(2)(i) and (b)(2)(ii).
42. Revising the entry for
§1.1441–7(b)(3).
43. Adding entries for
§1.1441–7(b)(4), (b)(4)(i), (b)(4)(ii), and
(b)(5) through (b)(11).
The additions and revisions read as fol-
lows.
§1.1441–0 Outline of regulation provi-
sions for section 1441.
* * * * *
§1.1441–1 Requirement for the deduction
and withholding of tax on payments to
foreign persons.
* * * * *
(b) * * *
(2) * * *
(vii) Rules for reliably associating a pay-
ment with a withholding certificate or
other appropriate documentation.
(A) Generally.
(B) Special rules applicable to a withhold-
ing certificate from a nonqualified inter-
mediary or flow-through entity.
(C) Special rules applicable to a withhold-
ing certificate provided by a qualified in-
termediary that does not assume primary
withholding responsibility.
(D) Special rules applicable to a with-
holding certificate provided by a qualified
intermediary that assumes primary with-
holding responsibility under chapter 3 of
the Internal Revenue Code.
(E) Special rules applicable to a withhold-
ing certificate provided by a qualified in-
termediary that assumes primary Form
1099 reporting and backup withholding
responsibility but not primary withhold-
ing under chapter 3.
(F) Special rules applicable to a with-
holding certificate provided by a qualified
intermediary that assumes primary with-
holding responsibility under chapter 3 and
primary Form 1099 reporting and backup
withholding responsibility and a with-
holding certificate provided by a with-
holding foreign partnership.
(3) * * *
(ii) Presumptions of classification as indi-
vidual, corporation, partnership, etc.
(A) In general.
(B) No documentation provided.
(C) Documentary evidence furnished for
offshore account.
* * * * *
(iv) Grace period.
(v) * * *
(B) Beneficial owner documentation or
allocation information is lacking or unre-
liable.
* * * * *
(vi) U.S. branches.
(vii) * * *
(A) In general.
(B) Special rule for offshore accounts.
* * * * *
(6) * * *
(i) In general.
(ii) Example.
* * * * *
(c) * * *
(6) * * *
(ii) Special rules.
* * * * *
2000–23 I.R.B.1177June 5, 2000

(B) Foreign partnerships.
(C) Foreign simple trusts and foreign
grantor trusts.
(D) Other foreign trusts and foreign es-
tates.
* * * * *
(12) Payee.
(13) Intermediary.
(14) Nonqualified intermediary.
(15) Qualified intermediary.
(16) Withholding certificate.
(17) Documentary evidence; other appro-
priate documentation.
(18) Documentation.
(19) Payor.
(20) Exempt recipient.
(21) Non-exempt recipient.
(22) Reportable amounts.
(23) Flow-through entity.
(24) Foreign simple trust.
(25) Foreign complex trust.
(26) Foreign grantor trust.
(27) Partnership.
(28) Nonwithholding foreign partnership.
(29) Withholding foreign partnership.
(d) * * *
(4) When a payment to an intermediary or
flow-through entity may be treated as
made to a U.S. payee.
(e) * * *
(3) * * *
(iii) Intermediary withholding certificate
from a nonqualified intermediary.
(iv) Withholding statement provided by
nonqualified Intermediary.
(A) In general.
(B) General requirements.
(C) Content of withholding statement.
(D) Alternative procedures.
(E) Notice procedures.
* * * * *
(4) * * *
(iv) * * *
(A) In general.
(B) Requirements.
(C) Special requirements for transmission
of Forms W-8 by an intermediary. [Re-
served]
* * * * *
(5) * * *
(v) Withholding statement.
* * * * *
(B) Content of withholding statement.
(C) Withholding rate pools.
* * * * *
§1.1441–2 Amounts subject to withhold-
ing.
* * * * *
(b) * * *
(3) * * *
(i) Amount subject to tax.
(ii) Amounts subject to withholding.
* * * * *
§1.1441–5 Withholding on payments to
partnerships trusts, and estates.
(a) In general.
(b) Rules applicable to U.S. partnerships,
trusts, and estates.
(1) Payments to U.S. partnerships, trusts,
and estates.
(2) Withholding by U.S. payees.
(i) U.S. partnerships.
(A) In general.
(B) Effectively connected income of part-
ners.
(ii) U.S. simple trusts.
(iii) U.S. complex trusts and U.S. estates.
(iv) U.S. grantor trusts
(v) Subsequent distribution
(c) * * *
(1) * * *
(iv) Examples.
* * * * *
(3) Nonwithholding foreign partnerships.
* * * * *
(iii) Withholding certificate from a non-
withholding foreign partnership.
(iv) Withholding statement provided by
nonwithholding foreign partnership.
(v) Withholding and reporting by a for-
eign partnership.
(d) Presumption rules.
* * * * *
(4) Determination by a withholding for-
eign partnership of the status of its part-
ners.
(e) Foreign trusts and estates.
(1) In general.
(2) Payments to foreign complex trusts
and estates.
(3) Payees of payments to foreign simple
trusts and foreign grantor trusts.
(i) Payments for which beneficiaries and
owners are payees.
(ii) Payments for which trust is payee.
(4) Reliance on claim of foreign complex
trust or foreign estate status.
(5) Foreign simple trust and foreign
grantor trust.
(i) Reliance on claim of foreign simple
trust or foreign grantor trust status.
(ii) Reliance on claim of reduced with-
holding by a foreign simple trust or for-
eign grantor trust for its beneficiaries or
owners.
(iii) Withholding certificate from foreign
simple trust or foreign grantor trust.
(iv) Withholding statement provided by a
foreign simple trust or foreign grantor
trust.
(v) Withholding foreign trusts.
(6) Presumption rules
(i) In general
(ii) Determination of status as U.S. or for-
eign trust or estate in the absence of docu-
mentation.
(iii) Determination of beneficiary or
owner’s status in the absence of certain
documentation.
* * * * *
§1.1441–6 Claim of reduced withholding
under an income tax treaty.
* * * * *
(b) * * *
(2) Payment to fiscally transparent entity.
(i) In general.
(ii) Certification by qualified intermedi-
ary.
(iii) Dual treatment.
(iv) Examples.
(3) Certified TIN.
(4) Claim of benefits under an income tax
treaty by a U.S. person.
(c) Exemption from requirement to fur-
nish a taxpayer identifying number and
special documentary evidence rules for
certain income.
* * * * *
(2) Income to which special rules apply.
* * * * *
(5) Statements regarding entitlement to
treaty benefits.
(i) Statement regarding conditions under a
limitation on benefits provision.
(ii) Statement regarding whether the tax-
payer derives the income.
* * * * *
(e) Competent authority.
* * * * *
§1.1441–7 General provisions relating to
withholding agents.
(a) * * *
(1) In general.
(2) Examples.
(b) * * *
(3) Financial institutions—limits on rea-
son to know.
(4) Rules applicable to withholding cer-
tificates.
(i) In general.
(ii) Examples.
(5) Withholding certificate—establish-
ment of foreign status.
(6) Withholding certificate—claim of re-
June 5, 200011782000–23 I.R.B.

duced rate of withholding under treaty.
(7) Documentary evidence.
(8) Documentary evidence—establish-
ment of foreign status.
(9) Documentary evidence—claim of re-
duced rate of withholding under treaty.
(10) Limits on reason to know—indirect
account holders.
(11) Additional guidance.
* * * * *
Par. 3. Effective January 1, 2001, sec-
tion 1.1441–1 is amended by:
1.Revising the first sentence of
paragraph (b)(2)(i).
2.Revising paragraphs (b)(2)(iv)(A),
(b)(2)(iv)(B)(3), and (b)(2)(iv)(C).
3. Revising paragraphs (b)(2)(v)(A)
and (b)(2)(v)(B).
4.Revising paragraph (b)(2)(vii).
5.Revising the first sentence of
paragraph (b)(3)(i).
6. Revising paragraph (b)(3)(ii).
7.Revising paragraphs (b)(3)(iii)(C)
and (b)(3)(iii)(D).
8.Revising paragraph (b)(3)(iv).
9.Revising paragraph (b)(3)(v).
10.Revising paragraphs (b)(3)(vi)
and (b)(3)(vii).
11. Revising paragraph (b)(6).
12. Revising paragraph (c)(2).
13. Revising paragraph (c)(6).
14.Adding paragraphs (c)(12)
through (c)(29).
15.Revising paragraphs (d)(2) through
(d) (4).
16.Revising paragraphs (e)(1)(ii)
(A)(1), (e)(1)(ii)(A)(3), and (e)(1)(ii)(A)(4).
17.Revising paragraph (e)(3).
18. Revising paragraph (e)(4)(ii)(A).
19. Revising paragraphs (e)(4)(ii)(B)(1)
through (e)(4)(ii)(B)(4) and (e)(4)(ii)(B) (6),
and adding paragraph (e)(4)(ii)(B)(8).
20. Revising paragraph (e)(4)(iv).
21. Revising paragraph (e)(4)(vii).
22. Adding paragraph (e)(4)(ix)(A)(4)
and revising paragraph (e)(4)(ix)(C).
23. Revising paragraph (e)(5)(i) and
(e)(5)(iii) through (e)(5)(v).
The additions and revisions read as fol-
lows:
§1.1441–1 Requirement for the deduction
and withholding of tax on payments to
foreign persons.
* * * * *
(b) * * *
(2) Determination of payee and payee’s
status—(i) In general.Except as other-
wise provided in this paragraph (b)(2) and
§1.1441–5(c)(1) and (e)(3), a payee is the
person to whom a payment is made, re-
gardless of whether such person is the
beneficial owner of the amount (as de-
fined in paragraph (c)(6) of this section).
* * *
* * * * *
(iv) Payments to a U.S. branch of cer-
tain foreign banks or foreign insurance
companies—(A) U.S. branch treated as a
U.S. person in certain cases.A payment
to a U.S. branch of a foreign person is a
payment to a foreign person. However, a
U.S. branch described in this paragraph
(b)(2)(iv)(A) and a withholding agent (in-
cluding another U.S. branch described in
this paragraph (b)(2)(iv)(A)) may agree to
treat the branch as a U.S. person for pur-
poses of withholding on specified pay-
ments to the U.S. branch. Notwithstand-
ing the preceding sentence, a withholding
agent making a payment to a U.S. branch
treated as a U.S. person under this para-
graph (b)(2)(iv)(A) shall not treat the
branch as a U.S. person for purposes of
reporting the payment made to the
branch. Therefore, a payment to such
U.S. branch shall be reported on Form
1042-S under §1.1461–1(c). Further, a
U.S. branch that is treated as a U.S. per-
son under this paragraph (b)(2)(iv)(A)
shall not be treated as a U.S. person for
purposes of the withholding certificate it
may provide to a withholding agent.
Therefore, the U.S. branch must furnish a
U.S. branch withholding certificate on
Form W-8 as provided in paragraph
(e)(3)(v) of this section and not a Form
W-9. An agreement to treat a U.S. branch
as a U. S. person must be evidenced by a
U.S. branch withholding certificate de-
scribed in paragraph (e)(3)(v) of this sec-
tion furnished by the U.S. branch to the
withholding agent. A U.S. branch de-
scribed in this paragraph (b)(2)(iv)(A) is
any U.S. branch of a foreign bank subject
to regulatory supervision by the Federal
Reserve Board or a U.S. branch of a for-
eign insurance company required to file
an annual statement on a form approved
by the National Association of Insurance
Commissioners with the Insurance De-
partment of a State, a Territory, or the
District of Columbia. The Internal Rev-
enue Service (IRS) may approve a list of
U.S. branches that may qualify for treat-
ment as a U.S. person under this para-
graph (b)(2)(iv)(A) (see §601.601(d)(2)
of this chapter). See §1.6049–5(c)(5)(vi)
for the treatment of U.S. branches as U.S.
payors if they make a payment that is sub-
ject to reporting under chapter 61 of the
Internal Revenue Code. Also see
§1.6049–5(d)(1)(ii) for the treatment of
U.S. branches as foreign payees under
chapter 61 of the Internal Revenue Code.
(B) * * *
(3) As a payment to a foreign person of
income that is effectively connected with
the conduct of a trade or business in the
United States if the withholding agent
cannot reliably associate the payment
with a withholding certificate from the
U.S. branch or any other certificate or
other appropriate documentation from an-
other person. See §1.1441–4(a)(2)(ii).
(C) Consequences to the U.S. branch
A U.S. branch that is treated as a U.S. per-
son under paragraph (b)(2)(iv)(A) of this
section shall be treated as a separate per-
son solely for purposes of section 1441(a)
and all other provisions of chapter 3 of the
Internal Revenue Code and the regula-
tions thereunder (other than for purposes
of reporting the payment to the U.S.
branch under §1.1461–1(c) or for pur-
poses of the documentation such a branch
must furnish under paragraph (e)(3)(v) of
this section) for any payment that it re-
ceives as such. Thus, the U.S. branch
shall be responsible for withholding on
the payment in accordance with the provi-
sions under chapter 3 of the Internal Rev-
enue Code and the regulations thereunder
and other applicable withholding provi-
sions of the Internal Revenue Code. For
this purpose, it shall obtain and retain
documentation from payees or beneficial
owners of the payments that it receives as
a U.S. person in the same manner as if it
were a separate entity. For example, if a
U.S. branch receives a payment on behalf
of its home office and the home office is a
qualified intermediary, the U.S. branch
must obtain a qualified intermediary with-
holding certificate described in paragraph
(e)(3)(ii) of this section from its home of-
fice. In addition, a U.S. branch that has
not provided documentation to the with-
holding agent for a payment that is, in
fact, not effectively connected income is a
withholding agent with respect to that
payment. See paragraph (b)(6) of this
section and §1.1441–4(a)(2)(ii).
* * * * *
(v) Payments to a foreign
2000–23 I.R.B.1179June 5, 2000

intermediary—(A) Payments treated as
made to persons for whom the intermedi-
ary collects the payment.Except as oth-
erwise provided in paragraph (b)(2)(v)(B)
of this section, the payee of a payment to
a person that the withholding agent may
treat as a foreign intermediary in accor-
dance with the provisions of paragraph
(b)(3)(ii)(C) or (b)(3)(v)(A) of this sec-
tion is the person or persons for whom the
intermediary collects the payment. Thus,
for example, the payee of a payment that
the withholding agent can reliably associ-
ate with a withholding certificate from a
qualified intermediary (defined in para-
graph (e)(5)(ii) of this section) that does
not assume primary withholding responsi-
bility or a payment to a nonqualified in-
termediary are the persons for whom the
qualified intermediary or nonqualified in-
termediary acts and not to the intermedi-
ary itself. See paragraph (b)(3)(v) of this
section for presumptions that apply if the
payment cannot be reliably associated
with valid documentation. For similar
rules for payments to flow-through enti-
ties, see §1.1441–5(c)(1) and (e)(3).
(B) Payments treated as made to for-
eign intermediary. The payee of a pay-
ment to a person that the withholding
agent may treat as a qualified intermediary
is the qualified intermediary to the extent
that the qualified intermediary assumes
primary withholding responsibility under
paragraph (e)(5)(iv) of this section for the
payment. For example if a qualified inter-
mediary assumes primary withholding re-
sponsibility under chapter 3 of the Internal
Revenue Code but does not assume pri-
mary reporting or withholding responsi-
bility under chapter 61 or section 3406 of
the Internal Revenue Code and therefore
provides Forms W-9 for U.S. non-exempt
recipients, the qualified intermediary is
the payee except to the extent the payment
is reliably associated with a Form W-9
from a U.S. non-exempt recipient.
* * * * *
(vii) Rules for reliably associating a
payment with a withholding certificate or
other appropriate documentation—(A)
Generally.The presumption rules of para-
graph (b)(3) of this section and
§§1.1441–5(d) and (e)(6) and 1.6049–5(d)
apply to any payment, or portion of a pay-
ment, that a withholding agent cannot reli-
ably associate with valid documentation.
Generally, a withholding agent can reli-
ably associate a payment with valid docu-
mentation if, prior to the payment, it holds
valid documentation (either directly or
through an agent), it can reliably deter-
mine how much of the payment relates to
the valid documentation, and it has no ac-
tual knowledge or reason to know that any
of the information, certifications, or state-
ments in, or associated with, the documen-
tation are incorrect. Special rules apply
for payments made to intermediaries,
flow-through entities, and certain U.S.
branches. See paragraph (b)(2)(vii)(B)
through (F) of this section. The documen-
tation referred to in this paragraph
(b)(2)(vii) is documentation described in
paragraphs (c)(16) and (17) of this section
upon which a withholding agent may rely
to treat the payment as a payment made to
a payee or beneficial owner, and to ascer-
tain the characteristics of the payee or ben-
eficial owner that are relevant to withhold-
ing or reporting under chapter 3 of the
Internal Revenue Code and the regulations
thereunder. For purposes of this para-
graph (b)(2)(vii), documentation also in-
cludes the agreement that the withholding
agent has in effect with an authorized for-
eign agent in accordance with
§1.1441–7(c)(2)(i). A withholding agent
that is not required to obtain documenta-
tion with respect to a payment is consid-
ered to lack documentation for purposes
of this paragraph (b)(2)(vii). For example,
a withholding agent paying U.S. source
interest to a person that is an exempt recip-
ient, as defined in §1.6049–4(c)(1)(ii), is
not required to obtain documentation from
that person in order to determine whether
an amount paid to that person is reportable
under an applicable information reporting
provision under chapter 61 of the Internal
Revenue Code. The withholding agent
must, however, treat the payment as made
to an undocumented person for purposes
of chapter 3 of the Internal Revenue Code.
Therefore, the presumption rules of para-
graph (b)(3)(iii) of this section apply to
determine whether the person is presumed
to be a U.S. person (in which case, no
withholding is required under this sec-
tion), or whether the person is presumed to
be a foreign person (in which case 30-per-
cent withholding is required under this
section). See paragraph (b)(3)(v) of this
section for special reliance rules in the
case of a payment to a foreign intermedi-
ary and §1.1441–5(d) and (e)(6) for spe-
cial reliance rules in the case of a payment
to a flow-through entity.
(B) Special rules applicable to a with-
holding certificate from a nonqualified in-
termediary or flow-through entity.(1) In
the case of a payment made to a nonquali-
fied intermediary, a flow-through entity
(as defined in paragraph (c)(23) of this
section), and a U.S. branch described in
paragraph (b)(2)(iv) of this section (other
than a branch that is treated as a U.S. per-
son), a withholding agent can reliably as-
sociate the payment with valid documen-
tation only to the extent that, prior to the
payment, the withholding agent can allo-
cate the payment to a valid nonqualified
intermediary, flow-through, or U.S.
branch withholding certificate; the with-
holding agent can reliably determine how
much of the payment relates to valid doc-
umentation provided by a payee as deter-
mined under paragraph (c)(12) of this sec-
tion (i.e., a person that is not itself an
intermediary, flow-through entity, or U.S.
branch); and the withholding agent has
sufficient information to report the pay-
ment on Form 1042-S or Form 1099, if
reporting is required. See paragraph
(e)(3)(iii) of this section for the require-
ments of a nonqualified intermediary
withholding certificate, paragraph
(e)(3)(v) of this section for the require-
ments of a U.S. branch certificate, and
§§1.1441–5(c)(3)(iii) and (e)(5)(iii) for
the requirements of a flow-through with-
holding certificate. Thus, a payment can-
not be reliably associated with valid docu-
mentation provided by a payee to the
extent such documentation is lacking or
unreliable, or to the extent that informa-
tion required to allocate and report all or a
portion of the payment to each payee is
lacking or unreliable. If a withholding
certificate attached to an intermediary,
U.S. branch, or flow-through withholding
certificate is another intermediary, U.S.
branch, or flow-through withholding cer-
tificate, the rules of this paragraph
(b)(2)(vii)(B) apply by treating the share
of the payment allocable to the other in-
termediary, U.S. branch, or flow-through
entity as if the payment were made di-
rectly to such other entity. See paragraph
(e)(3)(iv)(D) of this section for rules per-
mitting information allocating a payment
to documentation to be received after the
payment is made.
(2) The rules of paragraph (b)(2)(vii)(B)(1)
June 5, 200011802000–23 I.R.B.

of this section are illustrated by the following
examples:
Example 1. WH, a withholding agent, makes a
payment of U.S. source interest to NQI, an interme-
diary that is a nonqualified intermediary. NQI pro-
vides a valid intermediary withholding certificate
under paragraph (e)(3)(iii) of this section. NQI does
not, however, provide valid documentation from the
persons on whose behalf it receives the interest pay-
ment, and, therefore, the interest payment cannot be
reliably associated with valid documentation pro-
vided by a payee. WH must apply the presumption
rules of paragraph (b)(3)(v) of this section to the
payment.
Example 2. The facts are the same as in Example
1, except that NQI does attach valid beneficial
owner withholding certificates (as defined in para-
graph (e)(2)(i) of this section) from A, B, C, and D
establishing their status as foreign persons. NQI
does not, however, provide WH with any informa-
tion allocating the payment among A, B, C, and D
and, therefore, WH cannot determine the portion of
the payment that relates to each beneficial owner
withholding certificate. The interest payment can-
not be reliably associated with valid documentation
from a payee and WH must apply the presumption
rules of paragraph (b)(3)(v) of this section to the
payment. See, however, paragraph (e)(3)(iv)(D) of
this section providing special rules permitting allo-
cation information to be received after a payment is
made.
Example 3. The facts are the same as in Example
2, except that NQI does provide allocation informa-
tion associated with its intermediary withholding
certificate indicating that 25 percent of the interest
payment is allocable to A and 25 percent to B. NQI
does not provide any allocation information regard-
ing the remaining 50 percent of the payment. WH
may treat 25 percent of the payment as made to A
and 25 percent as made to B. The remaining 50 per-
cent of the payment cannot be reliably associated
with valid documentation from a payee, however,
since NQI did not provide information allocating the
payment. Thus, the remaining 50 percent of the pay-
ment is subject to the presumption rules of para-
graph (b)(3)(v) of this section.
Example 4. WH makes a payment of U.S. source
interest to NQI1, an intermediary that is not a quali-
fied intermediary. NQI1 provides WH with a valid
nonqualified intermediary withholding certificate as
well a valid beneficial owner withholding certifi-
cates from A and B and a valid nonqualified inter-
mediary withholding certificate from NQI2. NQI2
has provided valid beneficial owner documentation
from C sufficient to establish C’s status as a foreign
person. Based on information provided by NQI1,
WH can allocate 20 percent of the interest payment
to A, and 20 percent to B. Based on information that
NQI2 provided NQI1 and that NQI1 provides to
WH, WH can allocate 60 percent of the payment to
NQI 2, but can only allocate one half of that pay-
ment (30 percent) to C. Therefore, WH cannot reli-
ably associate 30 percent of the payment made to
NQI2 with valid documentation and must apply the
presumption rules of paragraph (b)(3)(v) of this sec-
tion to that portion of the payment.
(C) Special rules applicable to a with-
holding certificate provided by a qualified
intermediary that does not assume pri-
mary withholding responsibility.(1) If a
payment is made to a qualified intermedi-
ary that does not assume primary with-
holding responsibility under chapter 3 of
the Internal Revenue Code or primary
Form 1099 reporting and backup with-
holding responsibility under chapter 61
and section 3406 of the Internal Revenue
Code for the payment, a withholding
agent can reliably associate the payment
with valid documentation only to the ex-
tent that, prior to the payment, the with-
holding agent has received a valid quali-
fied intermediary withholding certificate
and the withholding agent can reliably de-
termine the portion of the payment that
relates to a withholding rate pool, as de-
fined in paragraph (e)(5)(v)(C) of this
section. In the case of a withholding rate
pool attributable to a U.S. non-exempt re-
cipient, a payment cannot be reliably as-
sociated with valid documentation unless,
prior to the payment, the qualified inter-
mediary has provided the U.S. person’s
Form W-9 (or, in the absence of the form,
the name, address, and TIN, if available,
of the U.S. person) and sufficient infor-
mation for the withholding agent to report
the payment on Form 1099. See para-
graph (e)(5)(v)(C)(2) of this section for
special rules regarding allocation of pay-
ments among U.S. non-exempt recipients.
(2) The rules of this paragraph
(b)(2)(vii)(C) are illustrated by the fol-
lowing examples:
Example 1. WH, a withholding agent, makes a
payment of U.S. source dividends to QI. QI pro-
vides WH with a valid qualified intermediary with-
holding certificate on which it indicates that it does
not assume primary withholding responsibility
under chapter 3 of the Internal Revenue Code or pri-
mary Form 1099 reporting and backup withholding
responsibility under chapter 61 and section 3406 of
the Internal Revenue Code. QI does not provide any
information allocating the dividend to withholding
rate pools. WH cannot reliably associate the pay-
ment with valid payee documentation and therefore
must apply the presumption rules of paragraph
(b)(3)(v) of this section.
Example 2. WH makes a payment of U.S. source
dividends to QI. QI has 5 customers: A, B, C, D,
and E. QI has obtained documentation from A and B
establishing their entitlement to a 15 percent rate of
tax on U.S. source dividends under an income tax
treaty. C is a U.S. person that is an exempt recipient
as defined in paragraph (c)(20) of this section. D
and E are U.S. non-exempt recipients who have pro-
vided Forms W-9 to QI. A, B, C, D, and E are each
entitled to 20 percent of the dividend payment. QI
provides WH with a valid qualified intermediary
withholding certificate as described in paragraph
(e)(2)(ii) of this section with which it associates the
Forms W-9 from D and E. QI associates the follow-
ing allocation information with its qualified interme-
diary withholding certificate: 40 percent of the pay-
ment is allocable to the 15 percent withholding rate
pool, and 20 percent is allocable to each of D and E.
QI does not provide any allocation information re-
garding the remaining 20 percent of the payment.
WH cannot reliably associate 20 percent of the pay-
ment with valid documentation and, therefore, must
apply the presumption rules of paragraph (b)(3)(v)
of this section to that portion of the payment. The
20 percent of the payment allocable to the 15 per-
cent withholding rate pool, and the portion of the
payments allocable to D and E are payments that can
be reliably associated with documentation.
(D) Special rules applicable to a with-
holding certificates provided by a quali-
fied intermediary that assumes primary
withholding responsibility under chapter
3 of the Internal Revenue Code.(1) In the
case of a payment made to a qualified in-
termediary that assumes primary with-
holding responsibility under chapter 3 of
the Internal Revenue Code with respect to
that payment (but does not assume pri-
mary Form 1099 reporting and backup
withholding responsibility under chapter
61 and section 3406 of the Internal Rev-
enue Code), a withholding agent can reli-
ably associate the payment with valid
documentation only to the extent that,
prior to the payment, the withholding
agent has received a valid qualified inter-
mediary withholding certificate and the
withholding agent can reliably determine
the portion of the payment that relates to
the withholding rate pool for which the
qualified intermediary assumes primary
withholding responsibility under chapter
3 of the Internal Revenue Code and the
portion of the payment attributable to
withholding rate pools for each U.S. non-
exempt recipient for whom the qualified
intermediary has provided a Form W-9
(or, in absence of the form, the name, ad-
dress, and TIN, if available, of the U.S.
non-exempt recipient). See paragraph
(e)(5)(v)(C)(2) of this section for alterna-
tive allocation procedures for payments
made to U.S. persons that are not exempt
recipients.
(2) Examples. The following examples
illustrate the rules of paragraph
(b)(2)(vii)(D)(1) of this section:
Example 1. WH makes a payment of U.S. source
interest to QI, a qualified intermediary. QI provides
WH with a withholding certificate that indicates that
QI will assume primary withholding responsibility
under chapter 3 of the Internal Revenue Code with
respect to the payment. In addition, QI attaches a
Form W-9 from A, a U.S. non-exempt recipient, as
defined in paragraph (c)(21) of this section, and pro-
vides the name, address, and TIN of B, a U.S. person
2000–23 I.R.B.1181June 5, 2000

that is also a non-exempt recipient but who has not
provided a Form W-9. QI associates a withholding
statement with its qualified intermediary withhold-
ing certificate indicating that 10 percent of the pay-
ment is attributable to A, and 10 percent to B, and
that QI will assume primary withholding responsi-
bility with respect to the remaining 80 percent of the
payment. WH can reliably associate the entire pay-
ment with valid documentation. Although under the
presumption rule of paragraph (b)(3)(v) of this sec-
tion, an undocumented person receiving U.S. source
interest is generally presumed to be a foreign person,
WH has actual knowledge that B is a U.S. non-ex-
empt recipient and therefore must report the pay-
ment on Form 1099 and backup withhold on the in-
terest payment under section 3406.
Example 2. The facts are the same as in Example
1, except that no Forms W-9 or other information
have been provided for the 20 percent of the pay-
ment that is allocable to A and B. Thus, QI has ac-
cepted withholding responsibility for 80 percent of
the payment, but has provided no information for the
remaining 20 percent. In this case, 20 percent of the
payment cannot be reliably associated with valid
documentation, and WH must apply the presump-
tion rule of paragraph (b)(3)(v) of this section.
(E) Special rules applicable to a with-
holding certificate provided by a qualified
intermediary that assumes primary Form
1099 reporting and backup withholding
responsibility but not primary withhold-
ing under chapter 3.(1). If a payment is
made to a qualified intermediary that as-
sumes primary Form 1099 reporting and
backup withholding responsibility for the
payment (but does not assume primary
withholding responsibility under chapter
3 of the Internal Revenue Code), a with-
holding agent can reliably associate the
payment with valid documentation only
to the extent that, prior to the payment,
the withholding agent has received a valid
qualified intermediary withholding cer-
tificate and the withholding agent can re-
liably determine the portion of the pay-
ment that relates to a withholding rate
pool or pools provided as part of the qual-
ified intermediary’s withholding state-
ment and the portion of the payment for
which the qualified intermediary assumes
primary Form 1099 reporting and backup
withholding responsibility.
(2) The following example illustrates
the rules of paragraph (b)(2)((vii)(D)(1)
of this section:
Example.WH makes a payment of U.S. source
dividends to QI, a qualified intermediary. QI has
provided WH with a valid qualified intermediary
withholding certificate. QI states on its withholding
statement accompanying the certificate that it as-
sumes primary Form 1099 reporting and backup
withholding responsibility but does not assume pri-
mary withholding responsibility under chapter 3 of
the Internal Revenue Code. QI represents that 15
percent of the dividend is subject to a 30 percent rate
of withholding, 75 percent of the dividend is subject
to a 15 percent rate of withholding, and that QI as-
sumed primary Form 1099 reporting and backup
withholding for the remaining 10 percent of the pay-
ment. The entire payment can be reliably associated
with valid documentation.
(F) Special rules applicable to a with-
holding certificate provided by a qualified
intermediary that assumes primary with-
holding responsibility under chapter 3
and primary Form 1099 reporting and
backup withholding responsibility and a
withholding certificate provided by a
withholding foreign partnership.If a pay-
ment is made to a qualified intermediary
that assumes both primary withholding
responsibility under chapter 3 of the Inter-
nal Revenue Code and primary Form
1099 reporting and backup withholding
responsibility under chapter 61 and sec-
tion 3406 of the Internal Revenue Code
for the payment, a withholding agent can
reliably associate a payment with valid
documentation provided that it receives a
valid qualified intermediary withholding
certificate as described in paragraph
(e)(3)(ii) of this section. In the case of a
payment made to a withholding foreign
partnership, the withholding agent can re-
liably associate the payment with valid
documentation to the extent it can associ-
ate the payment with a valid withholding
certificate described in §1.1441-
5(c)(2)(iv).
(3) Presumptions regarding payee’s
status in the absence of documentation—
(i) General rules. A withholding agent
that cannot, prior to the payment, reliably
associate (within the meaning of para-
graph (b)(2)(vii) of this section) a pay-
ment of an amount subject to withholding
(as described in §1.1441–2(a)) with valid
documentation may rely on the presump-
tions of this paragraph (b)(3) to determine
the status of the payee as a U.S. or a for-
eign person and the payee’s other relevant
characteristics (e.g., as an owner or inter-
mediary, as an individual, trust, partner-
ship, or corporation). * * *
(ii) Presumptions of classification as
individual, corporation, partnership, etc.
(A) In general.A withholding agent that
cannot reliably associate a payment with a
valid withholding certificate or that has
received valid documentary evidence
under §§1.1441–1(e)(1)(ii)(2) and
1.6049–5(c)(1) or (4) but cannot deter-
mine a payee’s classification from the
documentary evidence must apply the
rules of this paragraph (b)(3)(ii) to deter-
mine the payee’s classification as an indi-
vidual, trust, estate, corporation, or part-
nership. The fact that a payee is
presumed to have a certain status under
the provisions of this paragraph (b)(3)(ii)
does not mean that it is excused from fur-
nishing documentation if documentation
is otherwise required to obtain a reduced
rate of withholding under this section.
For example, if, for purposes of this para-
graph (b)(3)(ii), a payee is presumed to be
a tax-exempt organization based on
§1.6049–4(c)(1)(ii)(B), the withholding
agent cannot rely on this presumption to
reduce the rate of withholding on pay-
ments to such person (if such person is
also presumed to be a foreign person
under paragraph (b)(3)(iii)(A) of this sec-
tion) because a reduction in the rate of
withholding for payments to a foreign
tax-exempt organization generally re-
quires that a valid Form W–8 described in
§1.1441–9(b)(2) be furnished to the with-
holding agent.
(B) No documentation provided. If the
withholding agent cannot reliably associ-
ate a payment with a valid withholding
certificate or valid documentary evidence,
it must presume that the payee is an indi-
vidual, a trust, or an estate, if the payee ap-
pears to be such person (e.g., based on the
payee’s name or other indications). In the
absence of reliable indications that the
payee is an individual, trust, or an estate,
the withholding agent must presume that
the payee is a corporation or one of the per-
sons enumerated under §1.6049–4(c)-
(1)(ii)(B) through (Q) if it can be so treated
under §1.6049–4(c)(1)(ii)(A)(1) or any one
of the paragraphs under §1.6049–4(c)-
(1)(ii)(B) through (Q) without the need to
furnish documentation. If the withholding
agent cannot treat a payee as a person de-
scribed in §1.6049–4(c)(1)(ii)(A)(1)
through (Q), then the payee shall be pre-
sumed to be a partnership. If such a part-
nership is presumed to be foreign, it is not
the beneficial owner of the income paid to
it. See paragraph (c)(6) of this section. If
such a partnership is presumed to be do-
mestic, it is a U.S. non-exempt recipient
for purposes of chapter 61 of the Internal
Revenue Code.
(C) Documentary evidence furnished
for offshore account.If the withholding
agent receives valid documentary evi-
June 5, 200011822000–23 I.R.B.

dence, as described in §1.6049–5(c)(1) or
(4), with respect to an offshore account
from an entity but the documentary evi-
dence does not establish the entity’s clas-
sification as a corporation, trust, estate, or
partnership, the withholding agent may
presume (in the absence of actual knowl-
edge otherwise) that the entity is the type
of person enumerated under
§1.6049–4(c)(1)(ii)(B) through (Q) if it
can be so treated under any one of those
paragraphs without the need to furnish
documentation. If the withholding agent
cannot treat a payee as a person described
in §1.6049–4(c)(1)(ii)(B) through (Q),
then the payee shall be presumed to be a
corporation unless the withholding agent
knows, or has reason to know, that the en-
tity is not classified as a corporation for
U.S. tax purposes, the withholding agent
is required to presume the payee is a U.S.
person under paragraph (b)(3)(iii) of this
section, or there are indicia of U.S. status.
If the withholding agent must presume the
payee is a U.S. person, or there are indicia
of U.S. status, the withholding agent shall
treat the entity as a partnership, and there-
fore as a U.S. non-exempt recipient for
purposes of chapter 61 of the Internal
Revenue Code; however backup with-
holding under section 3406 shall not
apply if backup withholding is not re-
quired under §31.3406(g)–1(e) of this
chapter. Indicia of U.S. status exists if
payments are regularly made to a payee in
the United States, the payee has an ac-
count with the same withholding agent in
the United States, or the payee has a U.S.
address. If a payee is, or is presumed to
be, a corporation under this paragraph
(b)(3)(ii)(C) and a foreign person under
paragraph (b)(3)(iii) of this section, a
withholding agent shall not treat the
payee as the beneficial owner of income if
the withholding agent knows, or has rea-
son to know, that the payee is not the ben-
eficial owner of the income. For this pur-
pose, a withholding agent shall have
reason to know that the payee is not a
beneficial owner if the documentary evi-
dence indicates that the payee is a bank,
broker, intermediary, custodian, or other
agent, or is treated under
§1.6049–4(c)(1)(ii)(B) through (Q) as
such a person. A withholding agent may,
however, treat such a person as a benefi-
cial owner if the foreign person provides a
statement, in writing and signed by a per-
son with authority to sign the statement,
that is attached to the documentary evi-
dence stating it is the beneficial owner of
the income.
(iii) * * *
(C) Pensions, annuities, etc. A pay-
ment from a trust described in section
401(a), an annuity plan described in sec-
tion 403(a), a payment with respect to any
annuity, custodial account, or retirement
income account described in section
403(b), or a payment from an individual
retirement account or individual retire-
ment annuity described in section 408 that
a withholding agent cannot reliably asso-
ciate with documentation is presumed to
be made to a U.S. person only if the with-
holding agent has a record of a Social Se-
curity number for the payee and relies on
a mailing address described in the follow-
ing sentence. A mailing address is an ad-
dress used for purposes of information re-
porting or otherwise communicating with
the payee that is an address in the United
States or in a foreign country with which
the United States has an income tax treaty
in effect and the treaty provides that the
payee, if an individual resident in that
country, would be entitled to an exemp-
tion from U.S. tax on amounts described
in this paragraph (b)(3)(iii)(C). Any pay-
ment described in this paragraph
(b)(3)(iii)(C) that is not presumed to be
made to a U.S. person is presumed to be
made to a foreign person. A withholding
agent making a payment to a person pre-
sumed to be a foreign person may not re-
duce the 30-percent amount of withhold-
ing required on such payment unless it
receives a withholding certificate de-
scribed in paragraph (e)(2)(i) of this sec-
tion furnished by the beneficial owner.
For reduction in the 30-percent rate, see
§§1.1441–4(e) or 1.1441–6(b).
(D) Certain payments to offshore ac-
counts. A payment is presumed made to a
foreign payee if the payment is made out-
side the United States (as defined in
§1.6049–5(e)) to an offshore account (as
defined in §1.6049–5(c)(1)) and the with-
holding agent does not have actual knowl-
edge that the payee is a U.S. person. See
§1.6049–5(d)(2) and (3) for exceptions to
this rule.
(iv) Grace period.A withholding
agent may choose to apply the provisions
of §1.6049–5(d)(2)(ii) regarding a 90-
day grace period for purposes of this para-
graph (b)(3) (by applying the term with-
holding agent instead of the term payor)
to amounts described in §1.1441–6(c)(2)
and to amounts covered by a Form 8233
described in §1.1441–4(b)(2)(ii). Thus,
for these amounts, a withholding agent
may choose to treat an account holder as a
foreign person and withhold under chap-
ter 3 of the Internal Revenue Code (and
the regulations thereunder) while await-
ing documentation. For purposes of de-
termining the rate of withholding under
this section, the withholding agent must
withhold at the unreduced 30-percent rate
at the time that the amounts are credited
to an account. However, a withholding
agent who can reliably associate the pay-
ment with a withholding certificate that is
otherwise valid within the meaning of the
applicable provisions except for the fact
that it is transmitted by facsimile may rely
on that facsimile form for purposes of
withholding at the claimed reduced rate.
For reporting of amounts credited both
before and after the grace period, see
§1.1461–1(c)(4)(i)(A). The following ad-
justments shall be made at the expiration
of the grace period:
(A) If, at the end of the grace period,
the documentation is not furnished in the
manner required under this section and
the account holder is presumed to be a
U.S. non-exempt recipient, then backup
withholding applies to amounts credited
to the account after the expiration of the
grace period only. Amounts credited to
the account during the grace period shall
be treated as owned by a foreign payee
and adjustments must be made to correct
any underwithholding on such amounts in
the manner described in §1.1461–2.
(B) If, at the end of the grace period,
the documentation is not furnished in the
manner required under this section, or if
documentation is furnished that does not
support the claimed rate reduction, and
the account holder is presumed to be a
foreign person then adjustments must be
made to correct any underwithholding on
amounts credited to the account during
the grace period, based on the adjustment
procedures described in §1.1461–2.
(v) Special rules applicable to pay-
ments to foreign intermediaries—(A) Re-
liance on claim of status as foreign inter-
mediary.The presumption rules of
paragraph (b)(3)(v)(B) of this section
apply to a payment made to an intermedi-
2000–23 I.R.B.1183June 5, 2000

ary (whether the intermediary is a quali-
fied or nonqualified intermediary) that
has provided a valid withholding certifi-
cate under paragraph (e)(3)(ii) or (iii) of
this section (or has provided documentary
evidence described in paragraph
(b)(3)(ii)(C) of this section that indicates
it is a bank, broker, custodian, intermedi-
ary, or other agent) to the extent the with-
holding agent cannot treat the payment as
being reliably associated with valid docu-
mentation under the rules of paragraph
(b)(2)(vii) of this section. For this pur-
pose, a U.S. person’s foreign branch that
is a qualified intermediary defined in
paragraph (e)(5)(ii) of this section shall be
treated as a foreign intermediary. A payee
that the withholding agent may not reli-
ably treat as a foreign intermediary under
this paragraph (b)(3)(v)(A) is presumed to
be a payee other than an intermediary
whose classification as an individual, cor-
poration, partnership, etc., must be deter-
mined in accordance with paragraph
(b)(3)(ii) of this section to the extent rele-
vant. In addition, such payee is presumed
to be a U.S. or a foreign payee based upon
the presumptions described in paragraph
(b)(3)(iii) of this section. The provisions
of paragraph (b)(3)(v)(B) of this section
are not relevant to a withholding agent
that can reliably associate a payment with
a withholding certificate from a person
representing to be a qualified intermedi-
ary to the extent the qualified intermedi-
ary has assumed primary withholding re-
sponsibility in accordance with paragraph
(e)(5)(iv) of this section.
(B) Beneficial owner documentation or
allocation information is lacking or unre-
liable. Any portion of a payment that the
withholding agent may treat as made to a
foreign intermediary (whether a nonquali-
fied or a qualified intermediary) but that
the withholding agent cannot treat as reli-
ably associated with valid documentation
under the rules of paragraph (b)(2)(vii) of
this section is presumed made to an un-
known, undocumented foreign payee. As
a result, a withholding agent must deduct
and withhold 30 percent from any pay-
ment of an amount subject to withhold-
ing. If a withholding certificate attached
to an intermediary certificate is another
intermediary withholding certificate or a
flow-through withholding certificate, the
rules of this paragraph (b)(3)(v)(B) (or
§1.1441–5(d)(3) or (e)(6)(iii)) apply by
treating the share of the payment alloca-
ble to the other intermediary or flow-
through entity as if it were made directly
to the other intermediary or flow-through
entity. Any payment of an amount subject
to withholding that is presumed made to
an undocumented foreign person must be
reported on Form 1042-S. See
§1.1461–1(c). See §1.6049–5(d) for pay-
ments that are not subject to withholding.
(vi) U.S. branches. The rules of para-
graph (b)(3)(v)(B) of this section shall
apply to payments to a U.S. branch de-
scribed in paragraph (b)(2)(iv)(A) of this
section that has not agreed to be treated as
a U.S. person.
(vii) Joint payees—(A) In general.Ex-
cept as provided in paragraph
(b)(3)(vii)(B) of this section, if a with-
holding agent makes a payment to joint
payees and cannot reliably associate a
payment with valid documentation from
all payees, the payment is presumed made
to an unidentified U.S. person. However,
if one of the joint payees provides a Form
W-9 furnished in accordance with the pro-
cedures described in §§31.3406(d)–1
through 31.3406(d)–5 of this chapter, the
payment shall be treated as made to that
payee. See §31.3406(h)–2 of this chapter
for rules to determine the relevant payee
if more than one Form W–9 is provided.
For purposes of applying this paragraph
(b)(3), the grace period rules in paragraph
(b)(3)(iv) of this section shall apply only
if each payee meets the conditions de-
scribed in paragraph (b)(3)(iv) of this sec-
tion.
(B) Special rule for offshore accounts.
If a withholding agent makes a payment
to joint payees and cannot reliably associ-
ate a payment with valid documentation
from all payees, the payment is presumed
made to an unknown foreign payee if the
payment is made outside the United
States (as defined in §1.6059–5(e)) to an
offshore account (as defined in
§1.6049–5(c)(1)).
* * * * *
(6) Rules of withholding for payments
by a foreign intermediary or certain U.S.
branches—(i) In general. A foreign inter-
mediary described in paragraph (e)(3)(i)
of this section or a U.S. branch described
in paragraph (b)(2)(iv) of this section that
receives an amount subject to withholding
(as defined in §1.1441–2(a)) shall be re-
quired to withhold (if another withholding
agent has not withheld the full amount re-
quired) and report such payment under
chapter 3 of the Internal Revenue Code
and the regulations thereunder except as
otherwise provided in this paragraph
(b)(6). A nonqualified intermediary or
U.S. branch described in paragraph
(b)(2)(iv) of this section (other than a
branch that is treated as a U.S. person)
shall not be required to withhold or report
if it has provided a valid nonqualified in-
termediary withholding certificate or a
U.S. branch withholding certificate, it has
provided all of the information required
by paragraph (e)(3)(iv) of this section
(withholding statement), and it does not
know, and has no reason to know, that an-
other withholding agent failed to withhold
the correct amount or failed to report the
payment correctly under §1.1461–1(c). A
qualified intermediary’s obligations to
withhold and report shall be determined
in accordance with its qualified interme-
diary withholding agreement.
(ii) Examples. The following examples
illustrate the rules of paragraph (b)(6)(i)
of this section:
Example 1. FB, a foreign bank, acts an interme-
diary for five different persons, A, B, C, D, and E,
each of whom owns U.S. securities that generate
U.S. source dividends. The dividends are paid by
USWA, a U.S. withholding agent. FB furnished
USWA with a nonqualified intermediary withhold-
ing certificate, described in paragraph (e)(3)(iii) of
this section, to which it attached the withholding
certificates of each of A, B, C, D, and E. The with-
holding certificates from A and B claim a 15 percent
reduced rate of withholding under an income tax
treaty. C, D, and E claim no reduced rate of with-
holding. FB provides a withholding statement that
meets all of the requirements of paragraph (e)(3)(iv)
of this section, including information allocating 20
percent of each dividend payment to each of A, B, C,
D, and E. FB does not have actual knowledge or rea-
son to know that USWA did not withhold the correct
amounts or report the dividends on Forms 1042-S to
each of A, B, C, D, and E. FB is not required to
withhold or to report the dividends to A, B, C, D,
and E.
Example 2. The facts are the same as in Example
1, except that FB did not provide any information
for USWA to determine how much of the dividend
payments were made to A, B, C, D, and E. Because
USWA could not reliably associate the dividend
payments with documentation under paragraph
(b)(2)(vii) of this section, USWA applied the pre-
sumption rules of paragraph (b)(3)(v) of this section
and withheld 30 percent from all dividend payments.
In addition, USWA filed a single Form 1042-S re-
porting the payment to an unknown foreign payee.
FB is deemed to know that USWA did not report the
payment to A, B, C, D, and E because it did not pro-
vide all of the information required on a withholding
statement under paragraph (e)(3)(iv) of this section
(i.e., allocation information). Although FB is not re-
June 5, 200011842000–23 I.R.B.

quired to withhold on the payment because the full
30 percent withholding was imposed by USWA, it is
required to report the payments on Forms 1042-S to
A, B, C, D, and E. FB’s intentional failure to do so
will subject it to intentional disregard penalties
under sections 6721 and 6722.
* * * * *
(c) * * *
(2) Foreign and U.S. person.The term
foreign personmeans a nonresident alien
individual, a foreign corporation, a for-
eign partnership, a foreign trust, a foreign
estate, and any other person that is not a
U.S. person described in the next sen-
tence. Solely for purposes of the regula-
tions under chapter 3 of the Internal Rev-
enue Code, the term foreign personalso
means, with respect to a payment by a
withholding agent, a foreign branch of a
U.S. person that furnishes an intermediary
withholding certificate described in para-
graph (e)(3)(ii) of this section. Such a
branch continues to be a U.S. payor for
purposes of chapter 61 of the Internal
Revenue Code. See §1.6049–5(c)(4). A
U.S. person is a person described in sec-
tion 7701(a)(30), the U.S. government
(including an agency or instrumentality
thereof), a State (including an agency or
instrumentality thereof), or the District of
Columbia (including an agency or instru-
mentality thereof).
* * * * *
(6) Beneficial owner—(i) General rule.
This paragraph (c)(6) defines the term
beneficial owner for payments of income
other than a payment for which a reduced
rate of withholding is claimed under an
income tax treaty. The term beneficial
ownermeans the person who is the owner
of the income for tax purposes and who
beneficially owns that income. A person
shall be treated as the owner of the in-
come to the extent that it is required under
U.S. tax principles to include the amount
paid in gross income under section 61
(determined without regard to an exclu-
sion or exemption from gross income
under the Internal Revenue Code). Bene-
ficial ownership of income is determined
under the provisions of section 7701(l)
and the regulations under that section and
any other applicable general U.S. tax
principles, including principles governing
the determination of whether a transaction
is a conduit transaction. Thus, a person
receiving income in a capacity as a nomi-
nee, agent, or custodian for another per-
son is not the beneficial owner of the in-
come. In the case of a scholarship, the
student receiving the scholarship is the
beneficial owner of that scholarship. In
the case of a payment of an amount that is
not income, the beneficial owner determi-
nation shall be made under this paragraph
(c)(6) as if the amount were income.
(ii) Special rules—(A) General rule.
The beneficial owners of income paid to
an entity described in this paragraph
(c)(6)(ii) are those persons described in
paragraphs (c)(6)(ii)(B) through (D) of
this section.
(B) Foreign partnerships.The benefi-
cial owners of income paid to a foreign
partnership (whether a nonwithholding or
a withholding foreign partnership) are the
partners in the partnership, unless they
themselves are not the beneficial owners
of the income under this paragraph (c)(6).
For example, a partnership (first tier) that
is a partner in another partnership (second
tier) is not the beneficial owner of income
paid to the second tier partnership since
the first tier partnership is not the owner
of the income under U.S. tax principles.
Rather, the partners of the first tier part-
nership are the beneficial owners (to the
extent they are not themselves persons
that are not beneficial owners under this
paragraph (c)(6)). See §1.1441–5(b) for
applicable withholding procedures for
payments to a domestic partnership. See
also §1.1441–5(c)(3)(ii) for applicable
withholding procedures for payments to a
foreign partnership where one of the part-
ners (at any level in the chain of tiers) is a
domestic partnership.
(C) Foreign simple trusts and foreign
grantor trusts. The beneficial owners of
income paid to a foreign simple trust, as
described in paragraph (c)(23) of this sec-
tion, are the beneficiaries of the trust, un-
less they themselves are not the beneficial
owners of the income under this para-
graph (c)(6). The beneficial owners of in-
come paid to a foreign grantor trust, as
described in paragraph (c)(26) of this sec-
tion, are the persons treated as the owners
of the trust, unless they themselves are
not the beneficial owners of the income
under this paragraph (c)(6).
(D) Other foreign trusts and foreign es-
tates. The beneficial owner of income
paid to a foreign complex trust as defined
in paragraph (c)(25) of this section or to a
foreign estate is the foreign complex trust
or estate itself.
* * * * *
(12) Payee. For purposes of chapter 3
of the Internal Revenue Code, the term
payeeof a payment is determined under
paragraph (b)(2) of this section,
§1.1441–5(c)(1) (relating to partner-
ships), and §1.1441–5(e)(2) and (3) (relat-
ing to trusts and estates) and includes for-
eign persons, U.S. exempt recipients, and
U.S. non-exempt recipients. A nonquali-
fied intermediary and a qualified interme-
diary (to the extent it does not assume pri-
mary withholding responsibility) are not
payees if they are acting as intermediaries
and not the beneficial owner of income.
In addition, a flow-through entity is not a
payee unless the income is (or is deemed
to be) effectively connected with the con-
duct of a trade or business in the United
States. See §1.6049–5(d)(1) for rules to
determine the payee for purposes of chap-
ter 61 of the Internal Revenue Code. See
§§1.1441–1(b)(3), 1.1441–5(d), and
(e)(6) and 1.6049–5(d)(3) for presump-
tion rules that apply if a payee’s identity
cannot be determined on the basis of valid
documentation.
(13) Intermediary. An intermediary
means, with respect to a payment that it re-
ceives, a person that, for that payment, acts
as a custodian, broker, nominee, or other-
wise as an agent for another person, regard-
less of whether such other person is the ben-
eficial owner of the amount paid, a
flow-through entity, or another intermediary.
(14) Nonqualified intermediary.A
nonqualified intermediarymeans any in-
termediary that is not a qualified interme-
diary, as defined in paragraph (e)(5)(ii) of
this section, or a qualified intermediary
that is not acting in its capacity as a quali-
fied intermediary with respect to a pay-
ment. For example, to the extent an entity
that is a qualified intermediary provides
another withholding agent with a foreign
beneficial owner withholding certificate
as defined in paragraph (e)(2)(i) of this
section, the entity is not acting in its ca-
pacity as a qualified intermediary.
Notwithstanding the preceding sentence,
a qualified intermediary is acting as a
qualified intermediary to the extent it pro-
vides another withholding agent with
Forms W-9, or other information regard-
ing U.S. non-exempt recipients pursuant
to its qualified intermediary agreement
with the IRS.
(15) Qualified intermediary.The term
2000–23 I.R.B.1185June 5, 2000

qualified intermediaryis defined in para-
graph (e)(5)(ii) of this section.
(16) Withholding certificate. The term
withholding certificate means a Form
W-8 described in paragraph (e)(2)(i) of
this section (relating to foreign beneficial
owners), paragraph (e)(3)(i) of this sec-
tion (relating to foreign intermediaries),
§1.1441–5(c)(2)(iv), (c)(3)(iii), and
(e)(3)(iv) (relating to flow-through enti-
ties), a Form 8233 described in §1.1441–
4(b)(2), a Form W-9 as described in para-
graph (d) of this section, a statement de-
scribed in §1.871–14(c)(2)(v) (relating to
portfolio interest), or any other certifi-
cates that under the Internal Revenue
Code or regulations certifies or estab-
lishes the status of a payee or beneficial
owner as a U.S. or a foreign person.
(17) Documentary evidence; other ap-
propriate documentation.The terms docu-
mentary evidenceor other appropriate doc-
umentationrefer to documents other than a
withholding certificate that may be pro-
vided for payments made outside the
United States to offshore accounts or any
other evidence that under the Internal Rev-
enue Code or regulations certifies or estab-
lishes the status of a payee or beneficial
owner as a U.S. or foreign person. See
§§1.1441–6(b)(2), (c)(3) and (4) (relating
to treaty benefits), and 1.6049–5(c)(1) and
(4) (relating to chapter 61 reporting). Also
see §1.1441–4(a)(3)(ii) regarding docu-
mentary evidence for notional principal
contracts.
(18) Documentation. The term docu-
mentationrefers to both withholding cer-
tificates, as defined in paragraph (c)(16)
of this section, and documentary evidence
or other appropriate documentation, as
defined in paragraph (c)(17) of this sec-
tion.
(19) Payor. The term payoris defined
in §31.3406(a)–2 of this chapter and
§1.6049– 4(a)(2) and generally includes a
withholding agent, as defined in
§1.1441–7(a). The term also includes any
person that makes a payment to an inter-
mediary, flow-through entity, or U.S.
branch that is not treated as a U.S. person
to the extent the intermediary, flow-
through, or U.S. branch provides a Form
W-9 or other appropriate information re-
lating to a payee so that the payment can
be reported under chapter 61 of the Inter-
nal Revenue Code and, if required, sub-
ject to backup withholding under section
3406. This latter rule does not preclude
the intermediary, flow-through entity, or
U.S. branch from also being a payor.
(20) Exempt recipient. The term ex-
empt recipient means a person that is ex-
empt from reporting under chapter 61 of
the Internal Revenue Code and backup
withholding under section 3406 and that
is described in §§1.6041–3(q),
1.6045–2(b)(2)(i), and 1.6049–4(c)(1)(ii),
and §5f.6045–1(c)(3)(i)(B) of this chap-
ter. Exempt recipients are not exempt
from withholding under chapter 3 of the
Internal Revenue Code unless they are
U.S. persons or foreign persons entitled to
an exemption from withholding under
chapter 3.
(21) Non-exempt recipient. Anon-ex-
empt recipientis any person that is not an
exempt recipient under paragraph (c)(20)
of this section.
(22) Reportable amounts. Reportable
amountsare defined in paragraph
(e)(3)(vi) of this section.
(23) Flow-through entity. Aflow-
through entitymeans any entity that is de-
scribed in this paragraph (c)(23) and that
may provide documentation on behalf of
others to a withholding agent. The enti-
ties described in this paragraph are a for-
eign partnership (other than a withholding
foreign partnership), a foreign simple
trust (other than a withholding foreign
trust) that is described in paragraph
(c)(24) of this section, a foreign grantor
trust (other than a withholding foreign
trust) that is described in paragraph
(c)(25) of this section, or, for any pay-
ments for which a reduced rate of with-
holding under an income tax treaty is
claimed, any entity to the extent the entity
is considered to be fiscally transparent
under section 894 with respect to the pay-
ment by an interest holder’s jurisdiction.
(24) Foreign simple trust. Aforeign
simple trustis a foreign trust that is de-
scribed in section 651(a).
(25) Foreign complex trust.Aforeign
complex trustis a foreign trust other than
a trust described in section 651(a) or sec-
tions 671 through 679.
(26) Foreign grantor trust. Aforeign
grantor trustis a foreign trust but only to
the extent all or a portion of the income of
the trust is treated as owned by the grantor
or another person under sections 671
through 679.
(27) Partnership. The term partner-
ship means any entity treated as a partner-
ship under §301.7701–2 or –3 of this
chapter.
(28) Nonwithholding foreign partner-
ship. Anonwithholding foreign partner-
shipis a foreign partnership that is not a
withholding foreign partnership, as de-
fined in §1.1441–5(c)(2)(i).
(29) Withholding foreign partnership.
A withholding foreign partnership is de-
fined in §1.1441–5(c)(2)(i).
(d) * * *
(2) Payments for which a Form W-9 is
otherwise required. A withholding agent
may treat as a U.S. payee any person who
is required to furnish a Form W-9 and
who furnishes it in accordance with the
procedures described in §§31.3406(d)–1
through 31.3406(d)–5 of this chapter (in-
cluding the requirement that the payee
furnish its taxpayer identifying number
(TIN)) if the withholding agent meets all
the requirements described in
§31.3406(h)–3(e) of this chapter regard-
ing reliance by a payor on a Form W–9.
Providing a Form W–9 or valid substitute
form shall serve as a statement that the
person whose name is on the form is a
U.S. person. Therefore, a foreign person,
including a U.S. branch treated as a U.S.
person under paragraph (b)(2)(iv) of this
section, shall not provide a Form W-9. A
U.S. branch of a foreign person may es-
tablish its status as a foreign person ex-
empt from reporting under chapter 61 and
backup withholding under section 3406
by providing a withholding certificate on
Form W-8.
(3) Payments for which a Form W-9 is
not otherwise required. In the case of a
payee who is not required to furnish a
Form W-9 under section 3406 (e.g., a per-
son exempt from reporting under chapter
61 of the Internal Revenue Code), the
withholding agent may treat the payee as a
U.S. payee if the payee provides the with-
holding agent with a Form W-9 or a sub-
stitute form described in
§31.3406(h)–3(c)(2) of this chapter (relat-
ing to forms for exempt recipients) that
contains the payee’s name, address, and
TIN. The form must be signed under
penalties of perjury by the payee if so re-
quired by the form or by §31.3406(h)–3 of
this chapter. Providing a Form W-9 or
valid substitute form shall serve as a state-
ment that the person whose name is on the
certificate is a U.S. person. A Form W-9
June 5, 200011862000–23 I.R.B.

or valid substitute form shall not be pro-
vided by a foreign person, including any
U.S. branch of a foreign person whether or
not the branch is treated as a U.S. person
under paragraph (b)(2)(iv) of this section.
See paragraph (e)(3)(v) of this section for
withholding certificates provided by U.S.
branches described in paragraph (b)(2)(iv)
of this section. The procedures described
in §31.3406(h)–2(a) of this chapter shall
apply to payments to joint payees. A with-
holding agent that receives a Form W-9 to
satisfy this paragraph (d)(3) must retain
the form in accordance with the provisions
of §31.3406(h)–3(g) of this chapter, if ap-
plicable, or of paragraph (e)(4)(iii) of this
section (relating to the retention of with-
holding certificates) if §31.3406(h)–3(g)
of this chapter does not apply. The rules
of this paragraph (d)(3) are only intended
to provide a method by which a withhold-
ing agent may determine that a payee is a
U.S. person and do not otherwise impose a
requirement that documentation be fur-
nished by a person who is otherwise
treated as an exempt recipient for purposes
of the applicable information reporting
provisions under chapter 61 of the Internal
Revenue Code (e.g., §1.6049–4(c)(1)(ii)
for payments of interest).
(4)When a payment to an intermediary
or flow-through entity may be treated as
made to a U.S. payee. A withholding
agent that makes a payment to an interme-
diary (whether a qualified intermediary or
nonqualified intermediary), a flow-
through entity, or a U.S. branch described
in paragraph (b)(2)(iv) of this section may
treat the payment as made to a U.S. payee
to the extent that, prior to the payment,
the withholding agent can reliably associ-
ate the payment with a Form W-9 de-
scribed in paragraph (d)(2) or (3) of this
section attached to a valid intermediary,
flow-through, or U.S. branch withholding
certificate described in paragraph (e)(3)(i)
of this section or to the extent the with-
holding agent can reliably associate the
payment with a Form W-8 described in
paragraph (e)(3)(v) of this section that ev-
idences an agreement to treat a U.S.
branch described in paragraph (b)(2)(iv)
of this section as a U.S. person. In addi-
tion, a withholding agent may treat the
payment as made to a U.S. payee only if it
complies with the electronic confirmation
procedures described in paragraph
(e)(4)(v) of this section, if required, and it
has not been notified by the IRS that any
of the information on the withholding cer-
tificate or other documentation is incor-
rect or unreliable. In the case of a Form
W-9 that is required to be furnished for a
reportable payment that may be subject to
backup withholding, the withholding
agent may be notified in accordance with
section 3406(a)(1)(B) and the regulations
under that section. See applicable proce-
dures under section 3406(a)(1)(B) and the
regulations under that section for payors
who have been notified with regard to
such a Form W-9. Withholding agents
who have been notified in relation to
other Forms W-9, including under section
6724(b) pursuant to section 6721, may
rely on the withholding certificate or
other documentation only to the extent
provided under procedures as prescribed
by the IRS (see §601.601(d)(2) of this
chapter).
(e) * * * (1) * * *
(ii) * * * (A) * * *
(1) That the withholding agent can reli-
ably associate the payment with a benefi-
cial owner withholding certificate de-
scribed in paragraph (e)(2) of this section
furnished by the person whose name is on
the certificate or attached to a valid for-
eign intermediary, flow-through, or U.S.
branch withholding certificate;
* * * * *
(3) That the withholding agent can reli-
ably associate the payment with a valid
qualified intermediary withholding cer-
tificate, as described in paragraph
(e)(3)(ii) of this section, and the qualified
intermediary has provided sufficient in-
formation for the withholding agent to al-
locate the payment to a withholding rate
pool other than a withholding rate pool or
pools established for U.S. non-exempt re-
cipients;
(4) That the withholding agent can reli-
ably associate the payment with a with-
holding certificate described in
§1.1441–5(c)(3)(iii) or (e)(5)(iii) from a
flow-through entity claiming the income
is effectively connected income;
* * * * *
(3) Intermediary, flow-through, or U.S.
branch withholding certificate—(i) In
general.An intermediary withholding
certificate is a Form W-8 by which a
payee represents that it is a foreign person
and that it is an intermediary (whether a
qualified or nonqualified intermediary)
with respect to a payment and not the ben-
eficial owner. See paragraphs (e)(3)(ii)
and (iii) of this section. A flow-through
withholding certificate is a Form W-8
used by a flow-through entity as defined
in paragraph (c)(23) of this section. See
§1.1441–5(c)(3)(iii) (a nonwithholding
foreign partnership), §1.1441–5(e)(5)(iii)
(a foreign simple trust or foreign grantor
trust) or §1.1441–6(b)(2) (foreign entity
presenting claims on behalf of its interest
holders for a reduced rate of withholding
under an income tax treaty). A U.S.
branch certificate is a Form W-8 fur-
nished under paragraph (e)(3)(v) of this
section by a U.S. branch described in
paragraph (b)(2)(iv) of this section. See
paragraph (e)(4)(viii) of this section for
applicable reliance rules.
(ii) Intermediary withholding certifi-
cate from a qualified intermediary. A
qualified intermediary shall provide a
qualified intermediary withholding cer-
tificate for reportable amounts received
by the qualified intermediary. See para-
graph (e)(3)(vi) of this section for the def-
inition of reportable amount. A qualified
intermediary withholding certificate is
valid only if it is furnished on a Form
W-8, an acceptable substitute form, or
such other form as the IRS may prescribe,
it is signed under penalties of perjury by a
person with authority to sign for the qual-
ified intermediary, its validity has not ex-
pired, and it contains the following infor-
mation, statement, and certifications—
(A) The name, permanent residence ad-
dress (as described in paragraph (e)(2)(ii)
of this section), qualified intermediary
employer identification number (QI-
EIN), and the country under the laws of
which the intermediary is created, incor-
porated, or governed. A qualified inter-
mediary that does not act in its capacity as
a qualified intermediary must not use its
QI-EIN. Rather the intermediary should
provide a nonqualified intermediary with-
holding certificate, if it is acting as an in-
termediary, and should use the taxpayer
identification number, if any, that it uses
for all other purposes;
(B) A certification that, with respect to
accounts it identifies on its withholding
statement (as described in paragraph
(e)(5)(v) of this section), the qualified in-
termediary is not acting for its own ac-
count but is acting as a qualified interme-
diary;
2000–23 I.R.B.1187June 5, 2000

(C) A certification that the qualified in-
termediary has provided, or will provide,
a withholding statement as required by
paragraph (e)(5)(v) of this section; and
(D) Any other information, certifica-
tions, or statements as may be required by
the form or accompanying instructions in
addition to, or in lieu of, the information
and certifications described in this para-
graph (e)(3)(ii) or paragraph (e)(3)(v) of
this section. See paragraph (e)(5)(v) of
this section for the requirements of a
withholding statement associated with the
qualified intermediary withholding cer-
tificate.
(iii) Intermediary withholding certifi-
cate from a nonqualified intermediary.A
nonqualified intermediary shall provide a
nonqualified intermediary withholding
certificate for reportable amounts received
by the nonqualified intermediary. See
paragraph (e)(3)(vi) of this section for the
definition of reportable amount. A non-
qualified intermediary withholding certifi-
cate is valid only to the extent it is fur-
nished on a Form W-8, an acceptable
substitute form, or such other form as the
IRS may prescribe, it is signed under
penalties of perjury by a person authorized
to sign for the nonqualified intermediary,
it contains the information, statements,
and certifications described in this para-
graph (e)(3)(iii) and paragraph (e)(3)(iv)
of this section, its validity has not expired,
and the withholding certificates and other
appropriate documentation for all persons
to whom the certificate relates are associ-
ated with the certificate. Withholding cer-
tificates and other appropriate documenta-
tion consist of beneficial owner
withholding certificates described in para-
graph (e)(2)(i) of this section, intermedi-
ary and flow-through withholding certifi-
cates described in paragraph (e)(3)(i) of
this section, withholding foreign partner-
ship certificates described in
§1.1441–5(c)(2)(iv), documentary evi-
dence described in §§1.1441–6(c)(3) or
(4) and 1.6049–5(c)(1), and any other
documentation or certificates applicable
under other provisions of the Internal Rev-
enue Code or regulations that certify or es-
tablish the status of the payee or beneficial
owner as a U.S. or a foreign person. If a
nonqualified intermediary is acting on be-
half of another nonqualified intermediary
or a flow-through entity, then the nonqual-
ified intermediary must associate with its
own withholding certificate the other non-
qualified intermediary withholding certifi-
cate or the flow-through withholding cer-
tificate and separately identify all of the
withholding certificates and other appro-
priate documentation that are associated
with the withholding certificate of the
other nonqualified intermediary or flow-
through entity. Nothing in this paragraph
(e)(3)(iii) shall require an intermediary to
furnish original documentation. Copies of
certificates or documentary evidence may
be transmitted to the U.S. withholding
agent, in which case the nonqualified in-
termediary must retain the original docu-
mentation for the same time period that
the copy is required to be retained by the
withholding agent under paragraph
(e)(4)(iii) of this section and must provide
it to the withholding agent upon request.
For purposes of this paragraph (e)(3)(iii),
a valid intermediary withholding certifi-
cate also includes a statement described in
§1.871–14(c)(2)(v) furnished for interest
to qualify as portfolio interest for purposes
of sections 871(h) and 881(c). The infor-
mation and certifications required on a
Form W-8 described in this paragraph
(e)(3)(iii) are as follows—
(A) The name and permanent resident
address (as described in paragraph
(e)(2)(ii) of this section) of the nonquali-
fied intermediary, and the country under
the laws of which the nonqualified inter-
mediary is created, incorporated, or gov-
erned;
(B) A certification that the nonqualified
intermediary is not acting for its own ac-
count;
(C) If the nonqualified intermediary
withholding certificate is used to transmit
withholding certificates or other appropri-
ate documentation for more than one per-
son on whose behalf the nonqualified in-
termediary is acting, a withholding
statement associated with the Form W-8
that provides all the information required
by paragraph (e)(3)(iv) of this section;
and
(D) Any other information, certifica-
tions, or statements as may be required by
the form or accompanying instructions in
addition to, or in lieu of, the information,
certifications, and statements described in
this paragraph (e)(3)(iii) or paragraph
(e)(3)(iv) of this section.
(iv) Withholding statement provided by
nonqualified intermediary—(A) In gen-
eral.A nonqualified intermediary shall
provide a withholding statement required
by this paragraph (e)(3)(iv) to the extent
the nonqualified intermediary is required
to furnish, or does furnish, documentation
for payees on whose behalf it receives re-
portable amounts (as defined in para-
graph (e)(3)(vi) of this section) or to the
extent it otherwise provides the documen-
tation of such payees to a withholding
agent. A nonqualified intermediary is not
required to disclose information regarding
persons for whom it collects reportable
amounts unless it has actual knowledge
that any such person is a U.S. non-exempt
recipient as defined in paragraph (c)(21)
of this section. Information regarding
U.S. non-exempt recipients required
under this paragraph (e)(3)(iv) must be
provided irrespective of any requirement
under foreign law that prohibits the dis-
closure of the identity of an account
holder of a nonqualified intermediary or
financial information relating to such ac-
count holder. Although a nonqualified in-
termediary is not required to provide doc-
umentation and other information
required by this paragraph (e)(3)(iv) for
persons other than U.S. non-exempt re-
cipients, a withholding agent that does not
receive documentation and such informa-
tion must apply the presumption rules of
paragraph (b) of this section,
§§1.1441–5(d) and (e)(6) and
1.6049–5(d) or the withholding agent
shall be liable for tax, interest, and penal-
ties. A withholding agent must apply the
presumption rules even if it is not re-
quired under chapter 61 of the Internal
Revenue Code to obtain documentation to
treat a payee as an exempt recipient and
even though it has actual knowledge that
the payee is a U.S. person. For example,
if a nonqualified intermediary fails to pro-
vide a withholding agent with a Form W-
9 for an account holder that is a U.S. ex-
empt recipient, the withholding agent
must presume (even if it has actual
knowledge that the account holder is a
U.S. exempt recipient), that the account
holder is an undocumented foreign person
with respect to amounts subject to with-
holding. See paragraph (b)(3)(v) of this
section for applicable presumptions.
Therefore, the withholding agent must
withhold 30 percent from the payment
even though if a Form W-9 had been pro-
vided, no withholding or reporting on the
June 5, 200011882000–23 I.R.B.

payment attributable to a U.S. exempt re-
cipient would apply. Further, a nonquali-
fied intermediary that fails to provide the
documentation and the information under
this paragraph (e)(3)(iv) for another with-
holding agent to report the payments on
Forms 1042-S and Forms 1099 is not re-
lieved of its responsibility to file informa-
tion returns. See paragraph (b)(6) of this
section. Therefore, unless the nonquali-
fied intermediary itself files such returns
and provides copies to the payees, it shall
be liable for penalties under sections 6721
(failure to file information returns), and
6722 (failure to furnish payee state-
ments), including the penalties under
those sections for intentional failure to
file information returns. In addition, fail-
ure to provide either the documentation or
the information required by this para-
graph (e)(3)(iv) results in a payment not
being reliably associated with valid docu-
mentation. Therefore, the beneficial own-
ers of the payment are not entitled to re-
duced rates of withholding and if the full
amount required to be held under the pre-
sumption rules is not withheld by the
withholding agent, the nonqualified inter-
mediary must withhold the difference be-
tween the amount withheld by the with-
holding agent and the amount required to
be withheld. Failure to withhold shall re-
sult in the nonqualified intermediary
being liable for tax under section 1461,
interest, and penalties, including penalties
under section 6656 (failure to deposit)
and section 6672 (failure to collect and
pay over tax).
(B) General requirements. A withhold-
ing statement must be provided prior to
the payment of a reportable amount and
must contain the information specified in
paragraph (e)(3)(iv)(C) of this section.
The statement must be updated as often as
required to keep the information in the
withholding statement correct prior to
each subsequent payment. The withhold-
ing statement forms an integral part of the
withholding certificate provided under
paragraph (e)(3)(iii) of this section, and
the penalties of perjury statement pro-
vided on the withholding certificate shall
apply to the withholding statement. The
withholding statement may be provided in
any manner the nonqualified intermediary
and the withholding agent mutually agree,
including electronically. If the withhold-
ing statement is provided electronically,
there must be sufficient safeguards to en-
sure that the information received by the
withholding agent is the information sent
by the nonqualified intermediary and all
occasions of user access that result in the
submission or modification of the with-
holding statement information must be
recorded. In addition, an electronic sys-
tem must be capable of providing a hard
copy of all withholding statements pro-
vided by the nonqualified intermediary.
A withholding agent will be liable for tax,
interest, and penalties in accordance with
paragraph (b)(7) of this section to the ex-
tent it does not follow the presumption
rules of paragraph (b)(3) of this section or
§§1.1441–5(d) and (e)(6), and
1.6049–5(d) for any payment of a re-
portable amount, or portion thereof, for
which it does not have a valid withhold-
ing statement prior to making a payment.
(C) Content of withholding statement.
The withholding statement provided by a
nonqualified intermediary must contain
the information required by this para-
graph (e)(3)(iv)(C).
(1) The withholding statement must
contain the name, address, TIN (if any)
and the type of documentation (documen-
tary evidence, Form W-9, or type of Form
W-8) for every person from whom docu-
mentation has been received by the non-
qualified intermediary to the withholding
agent and whether that person is a U.S.
exempt recipient, a U.S. non-exempt re-
cipient, or a foreign person. See para-
graphs (c)(2), (20), and (21) of this sec-
tion for the definitions of foreign person,
U.S. exempt recipient, and U.S. non-ex-
empt recipient. In the case of a foreign
person, the statement must indicate
whether the foreign person is a beneficial
owner or an intermediary, flow-through
entity, or U.S. branch described in para-
graph (b)(2)(iv) of this section and in-
clude the type of recipient, based on re-
cipient codes used for filing Forms
1042-S, if the foreign person is a recipient
as defined in §1.1461–1(c)(1)(ii).
(2) The withholding statement must al-
locate each payment, by income type, to
every payee (including U.S. exempt re-
cipients) for whom documentation has
been provided. Any payment that cannot
be reliably associated with valid docu-
mentation from a payee shall be treated as
made to an unknown payee in accordance
with the presumption rules of paragraph
(b) of this section and §§1.1441–5(d) and
(e)(6) and 1.6049–5(d). For this purpose,
a type of income is determined by the
types of income required to be reported
on Forms 1042–S or 1099, as appropriate.
Notwithstanding the preceding sentence,
deposit interest (including original issue
discount) described in section
871(i)(2)(A) or 881(d) and interest or
original issue discount on short-term
obligations as described in section
871(g)(1)(B) or 881(e) is only required to
be allocated to the extent it is required to
be reported on Form 1099 or Form 1042-
S. See §1.6049–8 (regarding reporting of
bank deposit interest to certain foreign
persons). If a payee receives income
through another nonqualified intermedi-
ary, flow-through entity, or U.S. branch
described in paragraph (e)(2)(iv) of this
section (other than a U.S. branch treated
as a U.S. person), the withholding certifi-
cate must also state, with respect to the
payee, the name, address, and TIN, if
known, of the other nonqualified interme-
diary or U.S. branch from which the
payee directly receives the payment or the
flow-through entity in which the payee
has a direct ownership interest. If another
nonqualified intermediary, flow-through
entity, or U.S. branch fails to allocate a
payment, the name of the nonqualified in-
termediary, flow-through entity, or U.S.
branch that failed to allocate the payment
shall be provided with respect to such
payment.
(3) If a payee is identified as a foreign
person, the nonqualified intermediary
must specify the rate of withholding to
which the payee is subject, the payee’s
country of residence and, if a reduced rate
of withholding is claimed, the basis for
that reduced rate (e.g., treaty benefit, port-
folio interest, exempt under section
501(c)(3), 892, or 895). The allocation
statement must also include the taxpayer
identification numbers of those foreign
persons for whom such a number is re-
quired under paragraph (e)(4)(vii) of this
section or §1.1441–6(b)(1) (regarding
claims for treaty benefits). In the case of
a claim of treaty benefits, the nonquali-
fied intermediary’s withholding statement
must also state whether the limitation on
benefits and section 894 statements re-
quired by §1.1441–6(c)(5) have been pro-
vided, if required, in the beneficial
owner’s Form W-8 or associated with
2000–23 I.R.B.1189June 5, 2000

such owner’s documentary evidence.
(4) The withholding statement must
also contain any other information the
withholding agent reasonably requests in
order to fulfill its obligations under chap-
ter 3, chapter 61 of the Internal Revenue
Code, and section 3406.
(D) Alternative procedures—(1) In
general.Under the alternative procedures
of this paragraph (e)(3)(iv)(D), a nonqual-
ified intermediary may provide informa-
tion allocating a payment of a reportable
amount to each payee (including U.S. ex-
empt recipients) otherwise required under
paragraph (e)(3)(iv)(B)(2) of this section
after a payment is made. To use the alter-
native procedure of this paragraph
(e)(3)(iv)(D), the nonqualified intermedi-
ary must inform the withholding agent on
a statement associated with its nonquali-
fied intermediary withholding certificate
that it is using the procedure under this
paragraph (e)(3)(iv)(D) and the withhold-
ing agent must agree to the procedure. If
the requirements of the alternative proce-
dure are met, a withholding agent, includ-
ing the nonqualified intermediary using
the procedures, can treat the payment as
reliably associated with documentation
and, therefore, the presumption rules of
paragraph (b)(3) of this section and
§§1.1441-5(d) and (e)(6) and 1.6049–5(d)
do not apply even though information al-
locating the payment to each payee has
not been received prior to the payment.
See paragraph (e)(3)(iv)(D)(7) of this sec-
tion, however, for a nonqualified interme-
diary’s liability for tax and penalties if the
requirements of this paragraph
(e)(3)(iv)(D) are not met. These alterna-
tive procedures shall not be used for pay-
ments that are allocable to U.S. non-ex-
empt recipients. Therefore, a
nonqualified intermediary is required to
provide a withholding agent with infor-
mation allocating payments of reportable
amounts to U.S. non-exempt recipients
prior to the payment being made by the
withholding agent.
(2) Withholding rate pools. In place of
the information required in paragraph
(e)(3)(iv)(B)(2) of this section allocating
payments to each payee, the nonqualified
intermediary must provide a withholding
agent with withholding rate pool informa-
tion prior to the payment of a reportable
amount. The withholding statement must
contain all other information required by
paragraph (e)(3)(iv)(B) of this section.
Further, each payee listed in the withhold-
ing statement must be assigned to an iden-
tified withholding rate pool. To the extent
a nonqualified intermediary is required to,
or does provide, documentation, the alter-
native procedures do not relieve the non-
qualified intermediary from the require-
ment to provide documentation prior to
the payment being made. Therefore,
withholding certificates or other appropri-
ate documentation and all information re-
quired by paragraph (e)(3)(iv)(B) of this
section (other than allocation informa-
tion) must be provided to a withholding
agent before any new payee receives a re-
portable amount. In addition, the with-
holding statement must be updated by as-
signing a new payee to a withholding rate
pool prior to the payment of a reportable
amount. A withholding rate pool is a pay-
ment of a single type of income, deter-
mined in accordance with the categories
of income used to file Form 1042-S, that
is subject to a single rate of withholding.
A withholding rate pool may be estab-
lished by any reasonable method to which
the nonqualified intermediary and a with-
holding agent agree (e.g., by establishing
a separate account for a single withhold-
ing rate pool, or by dividing a payment
made to a single account into portions al-
locable to each withholding rate pool).
The nonqualified intermediary shall de-
termine withholding rate pools based on
valid documentation or, to the extent a
payment cannot be reliably associated
with valid documentation, the presump-
tion rules of paragraph (b)(3) of this sec-
tion and §§1.1441–5(d) and (e)(6) and
1.6049–5(d).
(3) Allocation information.The non-
qualified intermediary must provide the
withholding agent with sufficient infor-
mation to allocate the income in each
withholding rate pool to each payee (in-
cluding U.S. non-exempt recipients)
within the pool no later than January 31 of
the year following the year of payment.
Any payments that are not allocated to
payees for whom documentation has been
provided shall be allocated to an undocu-
mented payee in accordance with the pre-
sumption rules of paragraph (b)(3) of this
section and §§1.1441–5(d) and (e)(6) and
1.6049–5(d). Notwithstanding the pre-
ceding sentence, deposit interest (includ-
ing original issue discount) described in
section 871(i)(2)(A) or 881(d) and inter-
est or original issue discount on short-
term obligations as described in section
871(g)(1)(B) or 881(e) is not required to
be allocated to a U.S. exempt recipient or
a foreign payee, except as required under
§1.6049–8 (regarding reporting of deposit
interest paid to certain foreign persons).
(4) Failure to provide allocation infor-
mation. If a nonqualified intermediary
fails to provide allocation information, if
required, by January 31 for any withhold-
ing rate pool, a withholding agent shall
not apply the alternative procedures of
this paragraph (e)(3)(iv)(D) to any pay-
ments of reportable amounts paid after
January 31 in the taxable year following
the calendar year for which allocation in-
formation was not given and any subse-
quent taxable year. Further, the alterna-
tive procedures shall be unavailable for
any other withholding rate pool even
though allocation information was given
for that other pool. Therefore, the with-
holding agent must withhold on a pay-
ment of a reportable amount in accor-
dance with the presumption rules of
paragraph (b)(3) of this section, and
§§1.1441–5(d) and (e)(6) and
1.6049–5(d), unless the nonqualified in-
termediary provides all of the informa-
tion, including information sufficient to
allocate the payment to each specific
payee, required by paragraph
(e)(3)(iv)(A) through (C) of this section
prior to the payment. A nonqualified in-
termediary must allocate at least 90 per-
cent of the income required to be allo-
cated for each withholding rate pool or
the nonqualified intermediary will be
treated as having failed to provide alloca-
tion information for purposes of this para-
graph (e)(3)(iv)(D). See paragraph
(e)(3)(iv)(D)(7) of this section for liability
for tax and penalties if a nonqualified in-
termediary fails to provide allocation in-
formation in whole or in part.
(5) Cure provision. A nonqualified in-
termediary may cure any failure to pro-
vide allocation information by providing
the required allocation information to the
withholding agent no later than February
14 following the calendar year of pay-
ment. If the withholding agent receives
the allocation information by that date, it
may apply the adjustment procedures of
§1.1461–2 to any excess withholding for
payments made on or after February 1 and
June 5, 200011902000–23 I.R.B.

on or before February 14. Any nonquali-
fied intermediary that fails to cure by Feb-
ruary 14, may request the ability to use
the alternative procedures of this para-
graph (e)(3)(iv)(D) by submitting a re-
quest, in writing, to the Assistant Com-
missioner (International). The request
must state the reason that the nonqualified
intermediary did not comply with the al-
ternative procedures of this paragraph
(e)(3)(iv)(D) and steps that the nonquali-
fied intermediary has taken, or will take,
to ensure that no failures occur in the fu-
ture. If the Assistant Commissioner (In-
ternational) determines that the alterna-
tive procedures of this paragraph
(e)(3)(iv)(D) may apply, a determination
to that effect will be issued by the IRS to
the nonqualified intermediary.
(6) Form 1042-S reporting in case of
allocation failure. If a nonqualified inter-
mediary fails to provide allocation infor-
mation by February 14 following the year
of payment for a withholding rate pool,
the withholding agent must file Forms
1042-S for payments made to each payee
in that pool (other than U.S. exempt recip-
ients) in the prior calendar year by pro rat-
ing the payment to each payee (including
U.S. exempt recipients) listed in the with-
holding statement for that withholding
rate pool. If the nonqualified intermedi-
ary fails to allocate10 percent or less of an
amount required to be allocated for a
withholding rate pool, a withholding
agent shall report the unallocated amount
as paid to a single unknown payee in ac-
cordance with the presumption rules of
paragraph (b) of this section and
§§1.1441–5(d) and (e)(6) and
1.6049–5(d). The portion of the payment
that can be allocated to specific recipi-
ents, as defined in §1.1461–1(c)(1)(ii),
shall be reported to each recipient in ac-
cordance with the rules of §1.1461–1(c).
(7) Liability for tax, interest, and
penalties. If a nonqualified intermediary
fails to provide allocation information by
February 14 following the year of pay-
ment for all or a portion of the payments
made to any withholding rate pool, the
withholding agent from whom the non-
qualified intermediary received payments
of reportable amounts shall not be liable
for any tax, interest, or penalties, due
solely to the errors or omissions of the
nonqualified intermediary. See
§1.1441–7(b)(2) through (10) for the due
diligence requirements of a withholding
agent. Because failure by the nonquali-
fied intermediary to provide allocation in-
formation results in a payment not being
reliably associated with valid documenta-
tion, the beneficial owners for whom the
nonqualified intermediary acts are not en-
titled to a reduced rate of withholding.
Therefore, the nonqualified intermediary,
as a withholding agent, shall be liable for
any tax not withheld by the withholding
agent in accordance with the presumption
rules, interest on the under withheld tax if
the nonqualified intermediary fails to pay
the tax timely, and any applicable penal-
ties, including the penalties under sec-
tions 6656 (failure to deposit), 6721 (fail-
ure to file information returns) and 6722
(failure to file payee statements). Failure
to provide allocation information for
more than 10 percent of the payments
made to a particular withholding rate pool
will be presumed to be an intentional fail-
ure within the meaning of sections
6721(e) and 6722(c). The nonqualified
intermediary may rebut the presumption.
(8) Applicability to flow-through enti-
ties and certain U.S. branches.See para-
graph (e)(3)(v) of this section and
§1.1441–5(c)(3)(iv) and (e)(5)(iv) for the
applicability of this paragraph (e)(3)(iv)
to U.S. branches described in paragraph
(b)(2)(iv) of this section (other than U.S.
branches treated as U.S. persons) and
flow-through entities.
(E) Notice procedures. The IRS may
notify a withholding agent that the alter-
native procedures of paragraph
(e)(3)(iv)(D) of this section are not ap-
plicable to a specified nonqualified inter-
mediary, a U.S. branch described in para-
graph (b)(2)(iv) of this section, or a
flow-through entity. If a withholding
agent receives such a notice, it must com-
mence withholding in accordance with
the presumption rules of paragraph (b)(3)
of this section and §§1.1441–5(d) and
(e)(6) and 1.6049–5(d) unless the non-
qualified intermediary, U.S. branch, or
flow-through entity complies with the
procedures in paragraphs (e)(3)(iv)(A)
through (C) of this section. In addition,
the IRS may notify a withholding agent,
in appropriate circumstances, that it must
apply the presumption rules of paragraph
(b)(3) of this section and §§1.1441–5(d)
and (e)(6) and 1.6049–5(d) to payments
made to a nonqualified intermediary, a
U.S. branch, or a flow-through entity
even if the nonqualified intermediary,
U.S. branch or flow-through entity pro-
vides allocation information prior to the
payment. A withholding agent that re-
ceives a notice under this paragraph
(e)(3)(iv)(E) must commence withholding
in accordance with the presumption rules
within 30 days of the date of the notice.
The IRS may withdraw its prohibition
against using the alternative procedures of
paragraph (e)(3)(iv)(D) of this section, or
its requirement to follow the presumption
rules, if the nonqualified intermediary,
U.S. branch, or flow-through entity can
demonstrate to the satisfaction of the As-
sistant Commissioner (International) or
his delegate that it is capable of comply-
ing with the rules under chapter 3 of the
Internal Revenue Code and any other con-
ditions required by the Assistant Commis-
sioner (International).
(v) Withholding certificate from cer-
tain U.S. branches. A U.S. branch certifi-
cate is a withholding certificate provided
by a U.S. branch described in paragraph
(b)(2)(iv) of this section that is not the
beneficial owner of the income. The
withholding certificate is provided with
respect to reportable amounts and must
state that such amounts are not effectively
connected with the conduct of a trade or
business in the United States. The with-
holding certificate must either transmit
the appropriate documentation for the
persons for whom the branch receives the
payment (i.e., as an intermediary) or be
provided as evidence of its agreement
with the withholding agent to be treated
as a U.S. person with respect to any pay-
ment associated with the certificate. A
U.S. branch withholding certificate is
valid only if it is furnished on a Form W-
8, an acceptable substitute form, or such
other form as the IRS may prescribe, it is
signed under penalties of perjury by a per-
son authorized to sign for the branch, its
validity has not expired, and it contains
the information, statements, and certifica-
tions described in this paragraph
(e)(3)(v). If the certificate is furnished to
transmit withholding certificates and
other documentation, it must contain the
information, certifications, and statements
described in paragraphs (e)(3)(v)(A)
through (C) of this section and in para-
graphs (e)(3)(iii) and (iv) (alternative pro-
cedures) of this section, applying the term
2000–23 I.R.B.1191June 5, 2000

U.S. branchfor the term nonqualified in-
termediary. If the certificate is furnished
pursuant to an agreement to treat the U.S.
branch as a U.S. person, the information
and certifications required on the with-
holding certificate are limited to the fol-
lowing—
(A) The name of the person of which
the branch is a part and the address of the
branch in the United States;
(B) A certification that the payments
associated with the certificate are not ef-
fectively connected with the conduct of
its trade or business in the United States;
and
(C) Any other information, certifica-
tions, or statements as may be required by
the form or accompanying instructions in
addition to, or in lieu of, the information
and certification described in this para-
graph (e)(3)(v).
(vi) Reportable amounts. For purposes
of chapter 3 of the Internal Revenue
Code, a nonqualified intermediary, quali-
fied intermediary, flow-through entity,
and U.S. branch described in paragraph
(b)(2)(iv) of this section (other than a U.S.
branch that agrees to be treated as a U.S.
person) must provide a withholding cer-
tificate and associated documentation and
other information with respect to re-
portable amounts. For purposes of the
regulations under chapter 3 of the Internal
Revenue Code, the term reportable
amount means an amount subject to with-
holding within the meaning of
§1.1441–2(a), bank deposit interest (in-
cluding original issue discount) and simi-
lar types of deposit interest described in
section 871(i)(2)(A) or 881(d) that are
from sources within the United States,
and any amount of interest or original
issue discount from sources within the
United States on the redemption of certain
short-term obligations described in sec-
tion 871(g)(1)(B) or 881(e). Reportable
amounts shall not include amounts re-
ceived on the sale or exchange (other than
a redemption) of an obligation described
in section 871(g)(1)(B) or 881(e) that is
effected at an office outside the United
States. See §1.6045–1(g)(3) to determine
whether a sale is effected at an office out-
side the United States. Reportable
amounts also do not include payments
with respect to deposits with banks and
other financial institutions that remain on
deposit for a period of two weeks or less,
to amounts of original issue discount aris-
ing from a sale and repurchase transaction
that is completed within a period of two
weeks or less, or to amounts described in
§1.6049–5(b)(7), (10) or (11) (relating to
certain obligations issued in bearer form).
While short–term OID and bank deposit
interest are not subject to withholding
under chapter 3 of the Internal Revenue
Code, such amounts may be subject to in-
formation reporting under section 6049 if
paid to a U.S. person who is not an ex-
empt recipient described in §1.6049-
4(c)(1)(ii) and to backup withholding
under section 3406 in the absence of doc-
umentation. See §1.6049–5(d)(3)(iii) for
applicable procedures when such amounts
are paid to a foreign intermediary.
(4) * * *
(ii) Period of validity—(A) Three-year
period. A withholding certificate de-
scribed in paragraph (e)(2)(i) of this sec-
tion, or a certificate described in §1.871-
14(c)(2)(v) (furnished to qualify interest
as portfolio interest for purposes of sec-
tions 871(h) and 881(c)), shall remain
valid until the earlier of the last day of the
third calendar year following the year in
which the withholding certificate is
signed or the day that a change in circum-
stances occurs that makes any informa-
tion on the certificate incorrect. For ex-
ample, a withholding certificate signed on
September 30, 2001, remains valid
through December 31, 2004, unless cir-
cumstances change that make the infor-
mation on the form no longer correct.
Documentary evidence described in
§§1.1441-6(c)(3) or (4) or 1.6049–5(c)(1)
shall remain valid until the earlier of the
last day of the third calendar year follow-
ing the year in which the documentary ev-
idence is provided to the withholding
agent or the day that a change in circum-
stances occurs that makes any informa-
tion on the documentary evidence incor-
rect.
(B) * * *
(1) A withholding certificate described
in paragraph (e)(2)(ii) of this section that
is furnished with a TIN, provided that the
withholding agent reports at least one
payment annually to the beneficial owner
under §1.1461–1(c) or the TIN furnished
on the certificate is reported to the IRS
under the procedures described in
§1.1461–1(d). For example, assume a
withholding agent receives a Form W-8 in
2001 from a beneficial owner with respect
to an account that contains bonds, the in-
terest on which must be reported on Form
1042-S under §1.1461–1(c). The Form
W-8 contains a valid TIN and the with-
holding agent reports on Forms 1042-S
interest to the beneficial owner for 2001
through 2005. In 2005, the beneficial
owner sells some of the bonds. For pur-
poses of the exemption from Form 1099
reporting under §1.6045–1(g), the with-
holding agent may consider the Form W-8
as valid, even though the payment of the
sales proceeds is not reportable on Form
1042-S under §1.1461–1(c) and even
though the Form W-8 was provided more
than three years previously.
(2) A certificate described in paragraph
(e)(3)(ii) of this section (a qualified inter-
mediary withholding certificate) but not
including the withholding certificates,
documentary evidence, statements or
other information associated with the cer-
tificate.
(3) A certificate described in paragraph
(e)(3)(iii) of this section (a nonqualified
intermediary certificate), but not includ-
ing the withholding certificates, docu-
mentary evidence, statements or other in-
formation associated with the certificate.
(4) A certificate described in paragraph
(e)(3)(v) of this section (a U.S. branch
withholding certificate), but not including
the withholding certificates, documentary
evidence, statements or other information
associated with the certificate.
* * * * *
(6) A certificate described in §1.1441-
5(c)(3)(iii) (a withholding certificate from
a nonwithholding foreign partnership) but
not including the withholding certificates,
documentary evidence, statements or
other information required to be associ-
ated with the certificate.
* * * * *
(8) A withholding certificate described
in §1.1441–5(e)(5)(iii) provided by a for-
eign simple trust or a foreign grantor trust
to transmit documentation of beneficia-
ries or owners, but not including the with-
holding certificates, documentary evi-
dence, statements or other information
associated with the certificate.
* * * * *
(iv) Electronic transmission of infor-
mation—(A) In general.A withholding
agent may establish a system for a benefi-
cial owner or payee to electronically fur-
June 5, 200011922000–23 I.R.B.

nish a Form W-8, an acceptable substitute
Form W-8, or such other form as the In-
ternal Revenue Service may prescribe.
The system must meet the requirements
described in paragraph (e)(4)(iv)(B) of
this section. A withholding agent may ac-
cept Forms W-8 that are furnished elec-
tronically on or after January 1, 2000,
provided the requirements of paragraph
(e)(4)(iv)(B) of this section are met.
(B) Requirements—(1) In general.The
electronic system must ensure that the in-
formation received is the information
sent, and must document all occasions of
user access that result in the submission
renewal, or modification of a Form W-8.
In addition, the design and operation of
the electronic system, including access
procedures, must make it reasonably cer-
tain that the person accessing the system
and furnishing Form W-8 is the person
named in the Form.
(2) Same information as paper Form
W-8.The electronic transmission must
provide the withholding agent or payor
with exactly the same information as the
paper Form W-8.
(3) Perjury statement and signature re-
quirements.The electronic transmission
must contain an electronic signature by
the person whose name is on the Form W-
8 and the signature must be under penal-
ties of perjury in the manner described in
this paragraph (e)(4)(iv)(B)(3).
(i) Perjury statement. The perjury
statement must contain the language that
appears on the paper Form W-8. The
electronic system must inform the person
whose name is on the Form W-8 that the
person must make the declaration con-
tained in the perjury statement and that
the declaration is made by signing the
Form W-8. The instructions and the lan-
guage of the perjury statement must im-
mediately follow the person’s certifying
statements and immediately precede the
person’s electronic signature.
(ii) Electronic signature. The act of the
electronic signature must be effected by
the person whose name is on the elec-
tronic Form W-8. The signature must also
authenticate and verify the submission.
For this purpose, the terms authenticate
and verify have the same meanings as
they do when applied to a written signa-
ture on a paper Form W-8. An electronic
signature can be in any form that satisfies
the foregoing requirements. The elec-
tronic signature must be the final entry in
the person’s Form W-8 submission.
(4) Requests for electronic Form W-8
data.Upon request by the Internal Rev-
enue Service during an examination, the
withholding agent must supply a hard
copy of the electronic Form W-8 and a
statement that, to the best of the withhold-
ing agent’s knowledge, the electronic
Form W-8 was filed by the person whose
name is on the form. The hard copy of
the electronic Form W-8 must provide ex-
actly the same information as, but need
not be identical to, the paper Form W-8.
(C) Special requirements for transmis-
sion of Forms W-8 by an intermediary.
[Reserved]
* * * * *
(vii) Requirement of taxpayer identify-
ing number. A TIN must be stated on a
withholding certificate when required by
this paragraph (e)(4)(vii). A TIN is re-
quired to be stated on—
(A) A withholding certificate on which
a beneficial owner is claiming the benefit
of a reduced rate under an income tax
treaty (other than for amounts described
in §1.1441–6(c)(2);
(B) A withholding certificate on which
a beneficial owner is claiming exemption
from withholding because income is ef-
fectively connected with a U.S. trade or
business;
(C) A withholding certificate on which
a beneficial owner is claiming exemption
from withholding under section 871(f) for
certain annuities received under qualified
plans;
(D) A withholding certificate on which
a beneficial owner is claiming an exemp-
tion based solely on a foreign organiza-
tion’s claim of tax exempt status under
section 501(c) or private foundation status
(however, a TIN is not required from a
foreign private foundation that is subject
to the 4-percent tax under section 4948(a)
on income if that income would be ex-
empt from withholding but for section
4948(a) (e.g., portfolio interest));
(E) A withholding certificate from a
person representing to be a qualified in-
termediary described in paragraph
(e)(5)(ii) of this section;
(F) A withholding certificate from a
person representing to be a withholding
foreign partnership described in
§1.1441–5(c)(2)(i));
(G) A withholding certificate from a
person representing to be a foreign
grantor trust with 5 or fewer grantors;
(H) A withholding certificate provided
by a foreign organization that is described
in section 501(c);
(I) A withholding certificate from a per-
son representing to be a U.S. branch de-
scribed in paragraph (b)(2)(iv) of this sec-
tion.
* * * * *
(ix) * * *
(A) * * *
(4) A withholding agent may rely on
documentation furnished by a beneficial
owner or payee to an agent of the with-
holding agent. The agent may retain the
documentation as part of an information
system maintained for a single or multiple
withholding agents provided that the sys-
tem permits any withholding agent that
uses the system to easily access data re-
garding the nature of the documentation,
the information contained in the docu-
mentation, and its validity, and must
allow the withholding agent to easily
transmit data into the system regarding
any facts of which it becomes aware that
may affect the reliability of the documen-
tation. The withholding agent must be
able to establish how and when it has ac-
cessed the data regarding the documenta-
tion and, if applicable, how and when it
has transmitted data regarding any facts
of which it became aware that may affect
the reliability of the documentation. In
addition, the withholding agent must be
able to establish that any data it has trans-
mitted to the information system has been
processed and appropriate due diligence
has been exercised regarding the validity
of the documentation.
* * * * *
(C) Special rule for brokers—(1) In
general.A withholding agent may rely on
the certification of a broker that the bro-
ker holds a valid beneficial owner with-
holding certificate described in paragraph
(e)(2)(i) of this section or other appropri-
ate documentation for that beneficial
owner with respect to any readily tradable
instrument, as defined in
§31.3406(h)–1(d) of this chapter, if the
broker is a United States person (includ-
ing a U.S. branch treated as a U.S. person
under paragraph (b)(2)(iv) of this section)
that is acting as the agent of a beneficial
owner and the U.S. broker has been pro-
vided a valid Form W-8 or other appropri-
2000–23 I.R.B.1193June 5, 2000

ate documentation. The certification must
be in writing or in electronic form and
contain all of the information required of
a nonqualified intermediary under para-
graphs (e)(3)(iv)(B) and (C) of this sec-
tion. If a U.S. broker chooses to use this
paragraph (e)(4)(ix)(C), that U.S. broker
will be solely responsible for applying the
rules of §1.1441–7(b) to the withholding
certificates or other appropriate documen-
tation. For purposes of this paragraph
(c)(4)(ix)(C), the term broker means a
person treated as a broker under
§1.6045–1(a).
(2) The following example illustrates
the rules of this paragraph (e)(4)(ix)(C):
Example.SCO is a U.S. securities clearing orga-
nization that provides clearing services for corre-
spondent broker, CB, a U.S. corporation. Pursuant
to a fully disclosed clearing agreement, CB fully dis-
closes the identity of each of its customers to SCO.
Part of SCO’s clearing duties include the crediting
of income and gross proceeds of readily tradeable
instruments (as defined in §31.3406(h)–1(d)) to each
customer’s account. For each disclosed customer
that is a foreign beneficial owner, CB provides SCO
with information required under paragraphs
(e)(3)(iv)(B) and (C) of this section that is necessary
to apply the correct rate of withholding and to file
Forms 1042-S. SCO may use the representations
and beneficial owner information provided by CB to
determine the proper amount of withholding and to
file Forms 1042-S. CB is responsible for determin-
ing the validity of the withholding certificates or
other appropriate documentation under §1.1441-
1(b).
* * * * *
(5) Qualified intermediaries—(i) Gen-
eral rule. A qualified intermediary, as de-
fined in paragraph (e)(5)(ii) of this sec-
tion, may furnish a qualified intermediary
withholding certificate to a withholding
agent. The withholding certificate pro-
vides certifications on behalf of other per-
sons for the purpose of claiming and veri-
fying reduced rates of withholding under
section 1441 or 1442 and for the purpose
of reporting and withholding under other
provisions of the Internal Revenue Code,
such as the provisions under chapter 61
and section 3406 (and the regulations
under those provisions). Furnishing such
a certificate is in lieu of transmitting to a
withholding agent withholding certifi-
cates or other appropriate documentation
for the persons for whom the qualified in-
termediary receives the payment, includ-
ing interest holders in a qualified interme-
diary that is fiscally transparent under the
regulations under section 894. Although
the qualified intermediary is required to
obtain withholding certificates or other
appropriate documentation from benefi-
cial owners, payees, or interest holders
pursuant to its agreement with the IRS, it
is generally not required to attach such
documentation to the intermediary with-
holding certificate. Notwithstanding the
preceding sentence a qualified intermedi-
ary must provide a withholding agent
with the Forms W-9, or disclose the
names, addresses, and taxpayer identify-
ing numbers, if known, of those U.S. non-
exempt recipients for whom the qualified
intermediary receives reportable amounts
(within the meaning of paragraph
(e)(3)(vi) of this section) to the extent re-
quired in the qualified intermediary’s
agreement with the IRS. A person may
claim qualified intermediary status before
an agreement is executed with the IRS if
it has applied for such status and the IRS
authorizes such status on an interim basis
under such procedures as the IRS may
prescribe.
* * * * *
(iii) Withholding agreement—(A) In
general. The IRS may, upon request,
enter into a withholding agreement with a
foreign person described in paragraph
(e)(5)(ii) of this section pursuant to such
procedures as the IRS may prescribe in
published guidance (see §601.601(d)(2)
of this chapter). Under the withholding
agreement, a qualified intermediary shall
generally be subject to the applicable
withholding and reporting provisions ap-
plicable to withholding agents and payors
under chapters 3 and 61 of the Internal
Revenue Code, section 3406, the regula-
tions under those provisions, and other
withholding provisions of the Internal
Revenue Code, except to the extent pro-
vided under the agreement.
(B) Terms of the withholding agree-
ment. Generally, the agreement shall
specify the type of certifications and doc-
umentation upon which the qualified in-
termediary may rely to ascertain the clas-
sification (e.g., corporation or
partnership) and status (i.e., U.S. or for-
eign) of beneficial owners and payees
who receive payments collected by the
qualified intermediary and, if necessary,
entitlement to the benefits of a reduced
rate under an income tax treaty. The
agreement shall specify if, and to what
extent, the qualified intermediary may as-
sume primary withholding responsibility
in accordance with paragraph (e)(5)(iv) of
this section. It shall also specify the ex-
tent to which applicable return filing and
information reporting requirements are
modified so that, in appropriate cases, the
qualified intermediary may report pay-
ments to the IRS on an aggregated basis,
without having to disclose the identity of
beneficial owners and payees. However,
the qualified intermediary may be re-
quired to provide to the IRS the name and
address of those foreign customers who
benefit from a reduced rate under an in-
come tax treaty pursuant to the qualified
intermediary arrangement for purposes of
verifying entitlement to such benefits,
particularly under an applicable limitation
on benefits provision. Under the agree-
ment, a qualified intermediary may agree
to act as an acceptance agent to perform
the duties described in
§301.6109–1(d)(3)(iv)(A) of this chapter.
The agreement may specify the manner in
which applicable procedures for adjust-
ments for underwithholding and over-
withholding, including refund procedures,
apply in the context of a qualified inter-
mediary arrangement and the extent to
which applicable procedures may be
modified. In particular, a withholding
agreement may allow a qualified interme-
diary to claim refunds of overwithheld
amounts. If relevant, the agreement shall
specify the manner in which the qualified
intermediary may deal with payments to
other intermediaries and flow-through en-
tities. In addition, the agreement shall
specify the manner in which the IRS will
verify compliance with the agreement. In
appropriate cases, the IRS may agree to
rely on audits performed by an intermedi-
ary’s approved auditor. In such a case, the
IRS’s audit may be limited to the audit of
the auditor’s records (including work pa-
pers of the auditor and reports prepared
by the auditor indicating the methodology
employed to verify the entity’s compli-
ance with the agreement). For this pur-
pose, the agreement shall specify the au-
ditor or class of auditors that are
approved. Generally, an auditor will not
be approved if the auditor is not subject to
laws, regulations, or rules that impose
sanctions for failure to exercise its inde-
pendence and to perform the audit compe-
June 5, 200011942000–23 I.R.B.

tently. The agreement may include provi-
sions for the assessment and collection of
tax in the event that failure to comply
with the terms of the agreement results in
the failure by the withholding agent or the
qualified intermediary to withhold and
deposit the required amount of tax. Fur-
ther, the agreement may specify the pro-
cedures by which deposits of amounts
withheld are to be deposited, if different
from the deposit procedures under the In-
ternal Revenue Code and applicable regu-
lations. To determine whether to enter a
qualified intermediary withholding agree-
ment and the terms of any particular with-
holding agreement, the IRS will consider
appropriate factors including whether or
not the foreign person agrees to assume
primary withholding responsibility, the
type of local know-your-customer laws
and practices to which it is subject, the
extent and nature of supervisory and regu-
latory control exercised under the laws of
the foreign country over the foreign per-
son, the volume of investments in U.S. se-
curities (determined in dollar amounts
and number of account holders), the fi-
nancial condition of the foreign person,
and whether the qualified intermediary is
a resident of a country with which the
United States has an income tax treaty.
(iv) Assignment of primary withholding
responsibility. Any person who meets the
definition of a withholding agent under
§1.1441–7(a) (whether a U.S. person or a
foreign person) is required to withhold
and deposit any amount withheld under
§1.1461–1(a) and to make the returns pre-
scribed by §1.1461–1(b) and (c). If per-
mitted by its qualified intermediary agree-
ment, a qualified intermediary agreement
may, however, inform a withholding
agent from which it receives a payment
that it will assume the primary obligation
to withhold, deposit, and report amounts
under chapter 3 of the Internal Revenue
Code and/or under chapter 61 of the Inter-
nal Revenue Code and section 3406. If a
withholding agent makes a payment of an
amount subject to withholding, as defined
in §1.1441–2(a), or a reportable payment,
as defined in section 3406(b), to a quali-
fied intermediary that represents to the
withholding agent that it has assumed pri-
mary withholding responsibility for the
payment, the withholding agent is not re-
quired to withhold on the payment. The
withholding agent is not required to deter-
mine that the qualified intermediary
agreement actually permits the qualified
intermediary to assume primary withhold-
ing responsibility. A qualified intermedi-
ary that assumes primary withholding re-
sponsibility under chapter 3 of the
Internal Revenue Code or primary report-
ing and backup withholding responsibility
under chapter 61 and section 3406 is not
required to assume primary withholding
responsibility for all accounts it has with a
withholding agent but must assume pri-
mary withholding responsibility for all
payments made to any one account that it
has with the withholding agent. A quali-
fied intermediary may agree with the
withholding agent to assume primary
withholding responsibility under chapter
3 and section 3406, only if expressly per-
mitted to do so under its agreement with
the IRS.
(v) Withholding statement—(A) In gen-
eral. A qualified intermediary must pro-
vide each withholding agent from which it
receives reportable amounts, as defined in
paragraph (e)(3)(vi) of this section, as a
qualified intermediary with a written state-
ment (the withholding statement) contain-
ing the information specified in paragraph
(e)(5)(v)(B) of this section. A withholding
statement is not required, however, if all
of the information a withholding agent
needs to fulfill its withholding and report-
ing requirements is contained in the with-
holding certificate. The qualified interme-
diary agreement may require, in
appropriate circumstances, the qualified
intermediary to include information in its
withholding statement relating to pay-
ments other than payments of reportable
amounts. The withholding statement
forms an integral part of the qualified in-
termediary’s qualified intermediary with-
holding certificate and the penalties of
perjury statement provided on the with-
holding certificate shall apply to the with-
holding statement as well. The withhold-
ing statement may be provided in any
manner, and in any form, to which quali-
fied intermediary and the withholding
agent mutually agree, including electroni-
cally. If the withholding statement is pro-
vided electronically, there must be suffi-
cient safeguards to ensure that the
information received by the withholding
agent is the information sent by qualified
intermediary and must also document all
occasions of user access that result in the
submission or modification of withhold-
ing statement information. In addition, the
electronic system must be capable of pro-
viding a hard copy of all withholding
statements provided by the qualified inter-
mediary. The withholding statement shall
be updated as often as necessary for the
withholding agent to meet its reporting
and withholding obligations under chap-
ters 3 and 61 of the Internal Revenue Code
and section 3406. A withholding agent
will be liable for tax, interest, and penal-
ties in accordance with paragraph (b)(7) of
this section to the extent it does not follow
the presumption rules of paragraph (b)(3)
of this section, §§1.1441–5(d) and (e)(6),
and 1.6049–5(d) for any payment, or por-
tion thereof, for which it does not have a
valid withholding statement prior to mak-
ing a payment.
(B) Content of withholding statement.
The withholding statement must contain
sufficient information for a withholding
agent to apply the correct rate of with-
holding on payments from the accounts
identified on the statement and to prop-
erly report such payments on Forms
1042-S and Forms 1099, as applicable.
The withholding statement must—
(1) Designate those accounts for which
the qualified intermediary acts as a quali-
fied intermediary;
(2) Designate those accounts for which
qualified intermediary assumes primary
withholding responsibility under chapter
3 of the Internal Revenue Code and/or
primary reporting and backup withhold-
ing responsibility under chapter 61 and
section 3406; and
(3) Provide information regarding
withholding rate pools, as described in
paragraph (e)(5)(v)(C) of this section.
(C) Withholding rate pools—(1) In
general.Except to the extent it has as-
sumed both primary withholding respon-
sibility under chapter 3 of the Internal
Revenue Code and primary reporting and
backup withholding responsibility under
chapter 61 and section 3406 with respect
to a payment, a qualified intermediary
shall provide as part of its withholding
statement the withholding rate pool infor-
mation that is required for the withhold-
ing agent to meet its withholding and re-
porting obligations under chapters 3 and
61 of the Internal Revenue Code and sec-
tion 3406. A withholding rate pool is a
payment of a single type of income, deter-
2000–23 I.R.B.1195June 5, 2000

mined in accordance with the categories
of income reported on Form 1042-S or
Form 1099, as applicable, that is subject
to a single rate of withholding. A with-
holding rate pool may be established by
any reasonable method on which the qual-
ified intermediary and a withholding
agent agree (e.g., by establishing a sepa-
rate account for a single withholding rate
pool, or by dividing a payment made to a
single account into portions allocable to
each withholding rate pool). To the extent
a qualified intermediary does not assume
primary reporting and backup withhold-
ing responsibility under chapter 61 and
section 3406, a qualified intermediary’s
withholding statement must establish a
separate withholding rate pool for each
U.S. non-exempt recipient account holder
that the qualified intermediary has dis-
closed to the withholding agent unless the
qualified intermediary uses the alternative
procedures in paragraph (e)(5)(v)(C)(2)
of this section. A qualified intermediary
shall determine withholding rate pools
based on valid documentation that it ob-
tains under its withholding agreement
with the IRS, or if a payment cannot be
reliably associated with valid documenta-
tion, under the applicable presumption
rules. If a qualified intermediary has an
account holder that is another intermedi-
ary (whether a qualified intermediary or a
nonqualified intermediary) or a flow-
through entity, the qualified intermediary
may combine the account holder informa-
tion provided by the intermediary or flow-
through entity with the qualified interme-
diary’s direct account holder information
to determine the qualified intermediary’s
withholding rate pools.
(2) Alternative procedure for U.S. non-
exempt recipients. If permitted under its
agreement with the IRS, a qualified inter-
mediary may, by mutual agreement with a
withholding agent, establish a single
withholding rate pool (not subject to
backup withholding) for all U.S. non-ex-
empt recipient account holders for whom
the qualified intermediary has provided
Forms W-9 prior to the withholding agent
paying any reportable payments, as de-
fined in section 3406(b), and a separate
withholding rate pool (subject to 31-per-
cent withholding) for all U.S. non-exempt
recipient account holders for whom a
qualified intermediary has not provided
Forms W-9 prior to the withholding agent
paying any reportable payments. If a
qualified intermediary chooses the alter-
native procedure of this paragraph
(e)(5)(v)(C)(2), the qualified intermediary
must provide sufficient information to the
withholding agent no later than January
15 of the year following the year in which
the reportable payments are paid that allo-
cates the reportable payments to each
U.S. non-exempt recipient account
holder. Failure to provide such informa-
tion will result in the application of penal-
ties to the qualified intermediary under
sections 6721 and 6722, as well as any
other applicable penalties, and may result
in the termination of the qualified inter-
mediary’s withholding agreement with
the IRS. A withholding agent shall not be
liable for tax, interest, or penalties for
failure to backup withhold or report infor-
mation under chapter 61 of the Internal
Revenue Code due solely to the errors or
omissions of the qualified intermediary.
If a qualified intermediary fails to provide
the allocation information required by this
paragraph (e)(5)(v)(C)(2), the withhold-
ing agent shall report the entire amount
paid from the withholding rate pool to an
unknown recipient, or otherwise in accor-
dance with the appropriate Form 1099
and the instructions accompanying the
form.
* * * * *
Par 4. Effective January 1, 2001,
§1.1441–2 is amended by:
1. Revising paragraph (a).
2. Revising paragraph (b)(1)(i).
3. Removing paragraph (b)(2)(ii),
redesignating paragraph (b)(2)(iii) as
paragraph (b)(2)(ii), and adding the word
“and” after the semicolon in paragraph
(b)(2)(i).
4. Revising paragraph (b)(3).
The revisions read as follows:
§1.1441–2 Amounts subject to withhold-
ing.
(a) In general.For purposes of the reg-
ulations under chapter 3 of the Internal
Revenue Code, the term amounts subject
to withholdingmeans amounts from
sources within the United States that con-
stitute either fixed or determinable annual
or periodical income described in para-
graph (b) of this section or other amounts
subject to withholding described in para-
graph (c) of this section. For purposes of
this paragraph (a), an amount shall be
treated as being from sources within the
United States if the source of the amount
cannot be determined at the time of pay-
ment. See §1.1441–3(d)(1) for determin-
ing the amount to be withheld from a pay-
ment in the absence of information at the
time of payment regarding the source of
the amount. Amounts subject to with-
holding include amounts that are not fixed
or determinable annual or periodical in-
come and upon which withholding is
specifically required under a provision of
this section or another section of the regu-
lations under chapter 3 of the Internal
Revenue Code (such as corporate distrib-
utions upon which withholding is re-
quired under §1.1441–3(c)(1) that do not
constitute dividend income). Amounts
subject to withholding do not include—
(1) Amounts described in
§1.1441–1(b)(4)(i) to the extent they in-
volve interest on obligations in bearer
form or on foreign-targeted registered
obligations (but, in the case of a foreign-
targeted registered obligation, only to the
extent of those amounts paid to a regis-
tered owner that is a financial institution
within the meaning of section
871(h)(5)(B) or a member of a clearing
organization which member is the benefi-
cial owner of the obligation);
(2) Amounts described in
§1.1441–1(b)(4)(ii) (dealing with bank
deposit interest and similar types of inter-
est (including original issue discount) de-
scribed in section 871(i)(2)(A) or 881(d));
(3) Amounts described in
§1.1441–1(b)(4)(iv) (dealing with interest
or original issue discount on certain short-
term obligations described in section
871(g)(1)(B) or 881(e));
(4) Amounts described in
§1.1441–1(b)(4)(xx) (dealing with in-
come from certain gambling winnings ex-
empt from tax under section 871(j));
(5) Amounts paid as part of the pur-
chase price of an obligation sold or ex-
changed between interest payment dates,
unless the sale or exchange is part of a
plan the principal purpose of which is to
avoid tax and the withholding agent has
actual knowledge or reason to know of
such plan;
(6) Original issue discount paid as part
of the purchase price of an obligation sold
or exchanged in a transaction other than a
redemption of such obligation, unless the
purchase is part of a plan the principal
purpose of which is to avoid tax and the
June 5, 200011962000–23 I.R.B.

withholding agent has actual knowledge
or reason to know of such plan; and
(7) Insurance premiums paid with re-
spect to a contract that is subject to the
section 4371 excise tax.
(b) Fixed or determinable annual or
periodical income—(1) In general—(i)
Definition. For purposes of chapter 3 of
the Internal Revenue Code and the regula-
tions thereunder, fixed or determinable
annual or periodical income includes all
income included in gross income under
section 61 (including original issue dis-
count) except for the items specified in
paragraph (b)(2) of this section. Items of
income that are excluded from gross in-
come under a provision of law without re-
gard to the U.S. or foreign status of the
owner of the income, such as interest ex-
cluded from gross income under section
103(a) or qualified scholarship income
under section 117, shall not be treated as
fixed or determinable annual or periodical
income under chapter 3 of the Internal
Revenue Code. Income excluded from
gross income under section 892 (income
of foreign governments) or section 115
(income of a U.S. possession) is fixed or
determinable annual or periodical income
since the exclusion from gross income
under those sections is dependent on the
foreign status of the owner of the income.
See §1.306-3(h) for treating income from
the disposition of section 306 stock as
fixed or determinable annual or periodical
income.
* * * * *
(3) Original issue discount—(i)
Amount subject to tax. An amount repre-
senting original issue discount is fixed or
determinable annual or periodical income
that is subject to tax under sections
871(a)(1)(C) and 881(a)(3) to the extent
provided in those sections and this para-
graph (b)(3) if not otherwise excluded
under paragraph (a) of this section. An
amount of original issue discount is sub-
ject to tax with respect to a foreign benefi-
cial owner of an obligation carrying origi-
nal issue discount upon a sale or exchange
of the obligation or when a payment is
made on such obligation. The amount
taxable is the amount of original issue dis-
count that accrued while the foreign per-
son held the obligation up to the time that
the obligation is sold or exchanged or that
a payment is made on the obligation, re-
duced by any amount of original issue
discount that was taken into account prior
to that time (due to a payment made on
the obligation). In the case of a payment
made on the obligation, the tax due on the
amount of original issue discount may not
exceed the amount of the payment re-
duced by the tax imposed on any portion
of the payment that is qualified stated in-
terest.
(ii) Amounts subject to withholding. A
withholding agent must withhold on the
taxable amount of original issue discount
paid on the redemption of an original
issue discount obligation unless an excep-
tion to withholding applies (e.g., portfolio
interest or treaty exception). In addition,
withholding is required on the taxable
amount of original issue discount upon
the sale or exchange of an original issue
discount obligation, other than in a re-
demption, to the extent the withholding
agent has actual knowledge or reason to
know that the sale or exchange is part of a
plan the principal purpose of which is to
avoid tax. If a withholding agent cannot
determine the taxable amount of original
issue discount on the redemption of an
original issue discount obligation (or on
the sale or exchange of such an obligation
if the principal purpose of the sale is to
avoid tax), then it must withhold on the
entire amount of original issue discount
accrued from the date of issue until the
date of redemption (or the date the obliga-
tion is sold or exchanged) determined on
the basis of the most recently published
“List of Original Issue Discount Instru-
ments” (IRS Publication 1212, available
from the IRS Forms Distribution Center)
or similar list published by the IRS as if
the beneficial owner of the obligation had
held the obligation since its original issue.
(iii) Exceptions to withholding. To the
extent that this paragraph (b)(3) applies to
require withholding by a person other
than an issuer of an original issue dis-
count obligation, or the issuer’s agent, it
shall apply only to obligations issued after
December 31, 2000.
* * * * *
Par. 5. Effective January 1, 2001,
§1.1441–3 is amended by:
1. Revising paragraph (b)(2)(i).
2. Revising paragraph (c)(1).
3. Revising paragraph (c)(4)(i)(C).
The revisions read as follows:
§1.1441–3 Determination of amounts to
be withheld.
* * * * *
(b) * * *
(2) No withholding between interest
payment dates—(i) In general. A with-
holding agent is not required to withhold
under §1.1441–1 upon interest accrued on
the date of a sale or exchange of a debt
obligation when that sale occurs between
two interest payment dates (even though
the amount is treated as interest under
§1.61–7(c) or (d) and is subject to tax
under section 871 or 881). See
§1.6045–1(c) for reporting requirements
by brokers with respect to sale proceeds.
See §1.61–7(c) regarding the character of
payments received by the acquirer of an
obligation subsequent to such acquisition
(that is, as a return of capital or interest
accrued after the acquisition). Any ex-
emption from withholding pursuant to
this paragraph (b)(2)(i) applies without a
requirement that documentation be fur-
nished to the withholding agent. How-
ever, documentation may have to be fur-
nished for purposes of the information
reporting provisions under section 6045
or 6049 and backup withholding under
section 3406. The exemption from with-
holding granted by this paragraph (b)(2)
is not a determination that the accrued in-
terest is not fixed or determinable annual
or periodical income under section 871(a)
or 881(a).
* * * * *
(c) Corporate distributions—(1) Gen-
eral rule. A corporation making a distrib-
ution with respect to its stock or any inter-
mediary (described in §1.1441–1(c)(13))
making a payment of such a distribution
is required to withhold under section
1441, 1442, or 1443 on the entire amount
of the distribution, unless it elects to re-
duce the amount of withholding under the
provisions of this paragraph (c). Any ex-
ceptions from withholding provided by
this paragraph (c) apply without any re-
quirement to furnish documentation to the
withholding agent. However, documenta-
tion may have to be furnished for pur-
poses of the information reporting provi-
sions under section 6042 or 6045 and
backup withholding under section 3406.
See §1.1461–1(c) to determine whether
amounts excepted from withholding
under this section are considered amounts
that are subject to reporting.
* * * * *
(4) * * * (i) * * *
2000–23 I.R.B.1197June 5, 2000

(C) Coordination with REIT withhold-
ing. Withholding is required under sec-
tion 1441 (or 1442 or 1443) on the portion
of a distribution from a REIT that is not
designated as a capital gain dividend, a
return of basis, or a distribution in excess
of a shareholder’s adjusted basis in the
stock of the REIT that is treated as a capi-
tal gain under section 301(c)(3). A distri-
bution in excess of a shareholder’s ad-
justed basis in the stock of the REIT is,
however, subject to withholding under
section 1445, unless the interest in the
REIT is not a U.S. real property interest
(e.g., an interest in a domestically con-
trolled REIT under section 897(h)(2)). In
addition, withholding is required under
section 1445 on the portion of the distrib-
ution designated by a REIT as a capital
gain dividend. See §1.1445–8.
* * * * *
Par. 6. Effective January 1, 2001,
§1.1441–4 is amended by:
1. Revising paragraph (a)(3)(i).
2. Revising paragraph (b)(1)(ii).
The revisions read as follows:
§1.1441–4 Exemptions from withholding
for certain effectively connected income
and other amounts.
(a) * * *
(3) Income on notional principal con-
tracts—(i) General rule. A withholding
agent that pays amounts attributable to a
notional principal contract described in
§1.863–7(a) or 1.988–2(e) shall have no
obligation to withhold on the amounts
paid under the terms of the notional prin-
cipal contract regardless of whether a
withholding certificate is provided. How-
ever, a withholding agent must file returns
under §1.1461–1(b) and (c) reporting the
income that it must treat as effectively
connected with the conduct of a trade or
business in the United States under the
provisions of this paragraph (a)(3). Ex-
cept as otherwise provided in paragraph
(a)(3)(ii) of this section, a withholding
agent must treat the income as effectively
connected with the conduct of a U.S.
trade or business if the income is paid to,
or to the account of, a qualified business
unit of a foreign person located in the
United States or, if the payment is paid to,
or to the account of, a qualified business
unit of a foreign person located outside
the United States, the withholding agent
knows, or has reason to know, the pay-
ment is effectively connected with the
conduct of a trade or business within the
United States. Income on a notional prin-
cipal contract does not include the amount
characterized as interest under the provi-
sions of §1.446–3(g)(4).
* * * * *
(b) * * * (1) * * *
(ii) Such compensation would be sub-
ject to withholding under section 3402 but
for the provisions of section 3401(a) (not
including section 3401(a)(6)) and the reg-
ulations under that section. This para-
graph (b)(1)(ii) does not apply to pay-
ments to a nonresident alien individual
from any trust described in section
401(a), any annuity plan described in sec-
tion 403(a), any annuity, custodial ac-
count, or retirement income account de-
scribed in section 403(b), or an individual
retirement account or individual retire-
ment annuity described in section 408.
Instead, these payments are subject to
withholding under this section to the ex-
tent they are exempted from the definition
of wages under section 3401(a)(12) or to
the extent they are from an annuity, custo-
dial account, or retirement income ac-
count described in section 403(b), or an
individual retirement account or individ-
ual retirement annuity described in sec-
tion 408. Thus, for example, payments to
a nonresident alien individual from a trust
described in section 401(a) are subject to
withholding under section 1441 and not
under section 3405 or section 3406.
* * * * *
Par. 7. Effective January 1, 2001, in
§1.1441–5 paragraphs (a) through (e) are
revised to read as follows:
§1.1441–5 Withholding on payments to
partnerships, trusts, and estates.
(a) In general. This section describes
the rules that apply to payments made to
partnerships, trusts, and estates. Para-
graph (b) of this section prescribes the
rules that apply to a withholding agent
making a payment to a U.S. partnership,
trust, or estate. It also prescribes the
obligations of a U.S. partnership, trust, or
estate that makes a payment to a foreign
partner, beneficiary, or owner. Paragraph
(c) of this section prescribes rules that
apply to a withholding agent that makes a
payment to a foreign partnership. Para-
graph (d) of this section provides pre-
sumption rules that apply to payments
made to foreign partnerships. Paragraph
(e) of this section prescribes rules, includ-
ing presumption rules, that apply to a
withholding agent that makes a payment
to a foreign trust or foreign estate.
(b) Rules applicable to U.S. partner-
ships, trusts, and estates—(1) Payments
to U.S. partnerships, trusts, and estates.
No withholding is required under section
1.1441–1(b)(1) on a payment of an
amount subject to withholding (as defined
in §1.1441–2(a)) that a withholding agent
may treat as made to a U.S. payee. There-
fore, if a withholding agent can reliably
associate (within the meaning of
§1.1441–2(b)(vii)) a Form W-9 provided
in accordance with §1.1441–1(d)(2) or (4)
by a U.S. partnership, U.S. trust, or a U.S.
estate the withholding agent may treat the
payment as made to a U.S. payee and the
payment is not subject to withholding
under section 1441 even though the part-
nership, trust, or estate may have foreign
partners, beneficiaries, or owners. A
withholding agent is also not required to
withhold under section 1441 on a pay-
ment it makes to an entity presumed to be
a U.S. payee under paragraphs (d)(2) and
(e)(6)(ii) of this section.
(2) Withholding by U.S. payees—(i)
U.S. partnerships—(A) In general.A
U.S. partnership is required to withhold
under §1.1441–1 as a withholding agent
on an amount subject to withholding (as
defined in §1.1441–2(a)) that is includible
in the gross income of a partner that is a
foreign person. Subject to paragraph
(b)(2)(v) of this section, a U.S. partner-
ship shall withhold when any distribu-
tions that include amounts subject to
withholding (including guaranteed pay-
ments made by a U.S. partnership) are
made. To the extent a foreign partner’s
distributive share of income subject to
withholding has not actually been distrib-
uted to the foreign partner, the U.S. part-
nership must withhold on the foreign part-
ner’s distributive share of the income on
the earlier of the date that the statement
required under section 6031(b) is mailed
or otherwise provided to the partner or the
due date for furnishing the statement.
(B) Effectively connected income of
partners.Withholding on items of in-
come that are effectively connected in-
come in the hands of the partners who are
foreign persons is governed by section
1446 and not by this section. In such a
case, partners in a domestic partnership
are not required to furnish a withholding
June 5, 200011982000–23 I.R.B.

certificate in order to claim an exemption
from withholding under section
1441(c)(1) and §1.1441–4.
(ii) U.S. simple trusts. A U.S. trust that
is described in section 651(a) (a U.S. sim-
ple trust) is required to withhold under
chapter 3 of the Internal Revenue Code as
a withholding agent on the distributable
net income includible in the gross income
of a foreign beneficiary to the extent the
distributable net income is an amount
subject to withholding (as defined in
§1.1441–2(a)). A U.S. simple trust shall
withhold when a distribution is made to a
foreign beneficiary. The U.S. trust may
make a reasonable estimate of the portion
of the distribution that constitutes distrib-
utable net income consisting of an amount
subject to withholding and apply the ap-
propriate rate of withholding to the esti-
mated amount. If, at the end of the tax-
able year in which the distribution is
made, the U.S. simple trust determines
that it underwithheld under section 1441
or 1442, the trust shall be liable as a with-
holding agent for the amount under with-
held under section 1461. No penalties
shall be imposed for failure to withhold
and deposit the tax if the U.S. simple
trust’s estimate was reasonable and the
trust pays the underwithheld amount on or
before the due date of Form 1042 under
section 1461. Any payment of underwith-
held amounts by the U.S. simple trust
shall not be treated as income subject to
additional withholding even if that
amount is treated as additional income to
the foreign beneficiary, unless the addi-
tional amount is income to the foreign
beneficiary as a result of a contractual
arrangement between the parties regard-
ing the satisfaction of the foreign benefi-
ciary’s tax liability. To the extent a U.S.
simple trust is required to, but does not,
distribute such income to a foreign bene-
ficiary, the U.S. trust must withhold on
the foreign beneficiary’s allocable share
at the time the income is required (with-
out extension) to be reported on Form
1042–S under §1.1461–1(c).
(iii) U.S. complex trusts and U.S. es-
tates.A U.S. trust that is not a trust de-
scribed in section 651(a) (a U.S. complex
trust) is required to withhold under chap-
ter 3 of the Internal Revenue Code as a
withholding agent on the distributable net
income includible in the gross income of
a foreign beneficiary to the extent the dis-
tributable net income consists of an
amount subject to withholding (as defined
in §1.1441–2(a)) that is, or is required to
be, distributed currently. The U.S. com-
plex trust shall withhold when a distribu-
tion is made to a foreign beneficiary. The
trust may use the same procedures regard-
ing an estimate of the amount subject to
withholding as a U.S. simple trust under
paragraph (b)(2)(ii) of this section. To
the extent an amount subject to withhold-
ing is required to be, but is not actually
distributed, the U.S. complex trust must
withhold on the foreign beneficiary’s allo-
cable share at the time the income is re-
quired to be reported on Form 1042-S
under §1.1461–1(c), without extension.
A U.S. estate is required to withhold
under chapter 3 of the Internal Revenue
Code on the distributable net income in-
cludible in the gross income of a foreign
beneficiary to the extent the distributable
net income consists of an amount subject
to withholding (as defined in
§1.1441–2(a)) that is actually distributed.
A U.S. estate may also use the reasonable
estimate procedures of paragraph
(b)(2)(ii) of this section. However, those
procedures apply to an estate that has a
taxable year other than a calendar year
only if the estate files an amended return
on Form 1042 for the calendar year in
which the distribution was made and pays
the underwithheld tax and interest within
60 days after the close of the taxable year
in which the distribution was made.
(iv) U.S. grantor trusts. A U.S. trust
that is described in section 671 through
679 (a U.S. grantor trust) must withhold
on any income includible in the gross in-
come of a foreign person that is treated as
an owner of the grantor trust to the extent
the amount includible consists of an
amount that is subject to withholding (as
described in §1.1441–2(a)). The with-
holding must occur at the time the income
is received by, or credited to, the trust.
(v) Subsequent distribution. If a U.S.
partnership or U.S. trust withholds on a
foreign partner, beneficiary, or owner’s
share of an amount subject to withholding
before the amount is actually distributed
to the partner, beneficiary, or owner, with-
holding is not required when the amount
is subsequently distributed.
(c) Foreign partnerships—(1) Determi-
nation of payee—(i) Payments treated as
made to partners. Except as otherwise
provided in paragraph (c)(1)(ii) of this
section, the payees of a payment to a per-
son that the withholding agent may treat
as a nonwithholding foreign partnership
under paragraph (c)(3)(i) or (d)(2) of this
section are the partners (looking through
partners that are foreign intermediaries or
flow-through entities) as follows—
(A) If the withholding agent can reli-
ably associate a partner’s distributive
share of the payment with a valid Form
W-9 provided under §1.1441–1(d), the
partner is a U.S. payee;
(B) If the withholding agent can reli-
ably associate a partner’s distributive
share of the payment with a valid Form
W-8, or other appropriate documentation,
provided under §1.1441-1(e)(1)(ii), the
partner is a payee that is a foreign benefi-
cial owner;
(C) If the withholding agent can reli-
ably associate a partner’s distributive
share of the payment with a qualified in-
termediary withholding certificate under
§1.1441–1(e)(3)(ii), a nonqualified inter-
mediary withholding certificate under
§1.1441–1(e)(3)(iii), or a U.S. branch cer-
tificate under §1.1441–1(e)(3)(v), then
the rules of §1.1441–1(b)(2)(v) shall
apply to determine who the payee is in the
same manner as if the partner’s distribu-
tive share of the payment had been paid
directly to such intermediary or U.S.
branch;
(D) If the withholding agent can reli-
ably associate the partner’s distributive
share with a withholding foreign partner-
ship certificate under paragraph (c)(2)(iv)
of this section or a nonwithholding for-
eign partnership certificate under para-
graph (c)(3)(iii) of this section, then the
rules of this paragraph (c)(1)(i) or para-
graph (c)(1)(ii) of this section shall apply
to determine whether the payment is
treated as made to the partners of the
higher-tier partnership under this para-
graph (c)(1)(i) or to the higher-tier part-
nership itself (under the rules of para-
graph (c)(1)(ii) of this section) in the
same manner as if the partner’s distribu-
tive share of the payment had been paid
directly to the higher-tier foreign partner-
ship;
(E) If the withholding agent can reli-
ably associate the partner’s distributive
share with a withholding certificate de-
scribed in paragraph (e) of this section re-
garding a foreign trust or estate, then the
2000–23 I.R.B.1199June 5, 2000

rules of paragraph (e) of this section shall
apply to determine who the payees are;
and
(F) If the withholding agent cannot reli-
ably associate the partner’s distributive
share with a withholding certificate or
other appropriate documentation, the
partners are considered to be the payees
and the presumptions described in para-
graph (d)(3) of this section shall apply to
determine their classification and status.
(ii) Payments treated as made to the
partnership. A payment to a person that
the withholding agent may treat as a for-
eign partnership is treated as a payment to
the foreign partnership and not to its part-
ners only if—
(A) The withholding agent can reliably
associate the payment with a withholding
certificate described in paragraph
(c)(2)(iv) of this section (withholding cer-
tificate of a withholding foreign partner-
ship);
(B) The withholding agent can reliably
associate the payment with a withholding
certificate described in paragraph
(c)(3)(iii) of this section (nonwithholding
foreign partnership) certifying that the
payment is income that is effectively con-
nected with the conduct of a trade or busi-
ness in the United States; or
(C) The withholding agent can treat the
income as effectively connected income
under the presumption rules of
§1.1441–4(a)(2)(ii) or (3)(i).
(iii) Rules for reliably associating a
payment with documentation. For rules
regarding the reliable association of a
payment with documentation, see
§1.1441–1(b)(2)(vii). In the absence of
documentation, see §§1.1441–1(b)(3) and
1.6049–5(d) and paragraphs (d) and (e)(6)
of this section for applicable presump-
tions.
(iv) Examples. The rules of paragraphs
(c)(1)(i) and (ii) of this section are illus-
trated by the following examples:
Example 1. FP is a nonwithholding foreign part-
nership organized in Country X. FP has two part-
ners, FC, a foreign corporation, and USP, a U.S.
partnership. USWH, a U.S. withholding agent,
makes a payment of U.S. source interest to FP. FP
has provided USWH with a valid nonwithholding
foreign partnership certificate, as described in para-
graph (c)(3)(iii) of this section, with which it associ-
ates a beneficial owner withholding certificate from
FC and a Form W-9 from USP together with the
withholding statement required by paragraph
(c)(3)(iv) of this section. USWH can reliably asso-
ciate the payment of interest with the withholding
certificates from FC and USP. Under paragraph
(c)(1)(i) of this section, the payees of the interest
payment are FC and USP.
Example 2. The facts are the same as in Example
1, except that FP1, a nonwithholding foreign part-
nership, is a partner in FP rather than USP. FP1 has
two partners, A and B, both foreign persons. FP pro-
vides USWH with a valid nonwithholding foreign
partnership certificate, as described in paragraph
(c)(3)(iii) of this section, with which it associates a
beneficial owner withholding certificate from FC
and a nonwithholding foreign partnership certificate
from FP1. In addition, foreign beneficial owner
withholding certificates from A and B are associated
with the nonwithholding foreign partnership with-
holding certificate from FP1. FP also provides the
withholding statement required by paragraph
(c)(3)(iv) of this section. USWH can reliably asso-
ciate the interest payment with the withholding cer-
tificates provided by FC, A, and B. Therefore, under
paragraph (c)(1)(i) of this section, the payees of the
interest payment are FC, A, and B.
Example 3. USWH makes a payment of U.S.
source dividends to WFP, a withholding foreign
partnership. WFP has two partners, FC1 and FC2,
both foreign corporations. USWH can reliably asso-
ciate the payment with a valid withholding foreign
partnership withholding certificate from WFP.
Therefore, under paragraph (c)(1)(ii)(A) of this sec-
tion, WFP is the payee of the dividends.
Example 4. USWH makes a payment of U.S.
source royalties to FP, a foreign partnership. USWH
can reliably associate the royalties with a valid with-
holding certificate from FP on which FP certifies
that the income is effectively connected with the
conduct of a trade or business in the United States.
Therefore, under paragraph (c)(1)(ii)(B) of this sec-
tion, FP is the payee of the royalties.
(2) Withholding foreign partnerships—
(i) Reliance on claim of withholding for-
eign partnership status.A withholding
foreign partnership is a foreign partner-
ship that has entered into an agreement
with the Internal Revenue Service (IRS),
as described in paragraph (c)(2)(ii) of this
section, with respect to distributions and
guaranteed payments it makes to its part-
ners. A withholding agent that can reli-
ably associate a payment with a certificate
described in paragraph (c)(2)(iv) of this
section may treat the person to whom it
makes the payment as a withholding for-
eign partnership for purposes of withhold-
ing under chapter 3 of the Internal Rev-
enue Code, information reporting under
chapter 61 of the Internal Revenue Code,
backup withholding under section 3406,
and withholding under other provisions of
the Internal Revenue Code. Furnishing
such a certificate is in lieu of transmitting
to a withholding agent withholding cer-
tificates or other appropriate documenta-
tion for its partners. Although the with-
holding foreign partnership generally will
be required to obtain withholding certifi-
cates or other appropriate documentation
from its partners pursuant to its agreement
with the IRS, it will generally not be re-
quired to attach such documentation to its
withholding foreign partnership withhold-
ing certificate. A foreign partnership may
act as a qualified intermediary under
§1.1441–1(e)(5) with respect to payments
it makes to persons other than its partners.
In addition, the IRS may permit a foreign
partnership to act as a qualified intermedi-
ary under §1.1441–1(e)(5)(ii)(D) with re-
spect to its partners in appropriate circum-
stances.
(ii) Withholding agreement.The IRS
may, upon request, enter into a withhold-
ing agreement with a foreign partnership
pursuant to such procedures as the IRS
may prescribe in published guidance (see
§601.601(d)(2) of this chapter). Under
the withholding agreement, a foreign
partnership shall generally be subject to
the applicable withholding and reporting
provisions applicable to withholding
agents and payors under chapters 3 and 61
of the Internal Revenue Code, section
3406, the regulations under those provi-
sions, and other withholding provisions of
the Internal Revenue Code, except to the
extent provided under the agreement.
Under the agreement, a foreign partner-
ship may agree to act as an acceptance
agent to perform the duties described in
§301.6109–1(d)(3)(iv)(A) of this chapter.
The agreement may specify the manner in
which applicable procedures for adjust-
ments for underwithholding and over-
withholding, including refund procedures,
apply to the withholding foreign partner-
ship and its partners and the extent to
which applicable procedures may be
modified. In particular, a withholding
agreement may allow a withholding for-
eign partnership to claim refunds of over-
withheld amounts on behalf of its cus-
tomers. In addition, the agreement must
specify the manner in which the IRS will
audit the foreign partnership’s books and
records in order to verify the partnership’s
compliance with its agreement. A with-
holding foreign partnership must file a re-
turn on Form 1042 and information re-
turns on Form 1042-S. The withholding
foreign partnership agreement may also
require a withholding foreign partnership
to file a partnership return under section
6031(a) and partner statements under
6031(b).
June 5, 200012002000–23 I.R.B.

(iii) Withholding responsibility. A
withholding foreign partnership must as-
sume primary withholding responsibility
under chapter 3 of the Internal Revenue
Code. It is not required to provide infor-
mation to the withholding agent regarding
each partner’s distributive share of the
payment. The withholding foreign part-
nership will be responsible for reporting
the payments under §1.1461–1(c) and
chapter 61 of the Internal Revenue Code.
A withholding agent making a payment to
a withholding foreign partnership is not
required to withhold any amount under
chapter 3 of the Internal Revenue Code on
a payment to the withholding foreign
partnership, unless it has actual knowl-
edge or reason to know that the foreign
partnership is not a withholding foreign
partnership. The withholding foreign
partnership shall withhold the payments
under the same procedures and at the
same time as prescribed for withholding
by a U.S. partnership under paragraph
(b)(2) of this section, except that, for pur-
poses of determining the partner’s status,
the provisions of paragraph (d)(4) of this
section shall apply.
(iv) Withholding certificate from a
withholding foreign partnership.The
rules of §1.1441–1(e)(4) shall apply to
withholding certificates described in this
paragraph (c)(2)(iv). A withholding cer-
tificate furnished by a withholding for-
eign partnership is valid with regard to
any partner on whose behalf the certifi-
cate is furnished only if it is furnished on
a Form W-8, an acceptable substitute
form, or such other form as the IRS may
prescribe, it is signed under penalties of
perjury by a partner with authority to sign
for the partnership, its validity has not ex-
pired, and it contains the information,
statement, and certifications described in
this paragraph (c)(2)(iv) as follows—
(A) The name, permanent residence ad-
dress (as described in
§1.1441–1(e)(2)(ii)), and the employer
identification number of the partnership,
and the country under the laws of which
the partnership is created or governed;
(B) A certification that the partnership
is a withholding foreign partnership
within the meaning of paragraph (c)(2)(i)
of this section; and
(C) Any other information, certifica-
tions or statements as may be required by
the withholding foreign partnership
agreement with the IRS or the form or ac-
companying instructions in addition to, or
in lieu of, the information, statements,
and certifications described in this para-
graph (c)(2)(iv).
(3) Nonwithholding foreign partner-
ships—(i) Reliance on claim of foreign
partnership status. A withholding agent
may treat a person as a nonwithholding
foreign partnership if it receives from that
person a nonwithholding foreign partner-
ship withholding certificate as described
in paragraph (c)(3)(iii) of this section. A
withholding agent that does not receive a
nonwithholding foreign partnership with-
holding certificate, or does not receive a
valid withholding certificate, from an en-
tity it knows, or has reason to know, is a
foreign partnership, must apply the pre-
sumption rules of §§1.1441–1(b)(3) and
1.6049–5(d) and paragraphs (d) and (e)(6)
of this section. In addition, to the extent a
withholding agent cannot, prior to a pay-
ment, reliably associate the payment with
valid documentation from a payee that is
associated with the nonwithholding for-
eign partnership withholding certificate or
has insufficient information to report the
payment on Form 1042-S or Form 1099,
to the extent reporting is required, must
also apply the presumption rules. See
§1.1441–1(b)(2)(vii)(A) and (B) for rules
regarding reliable association. See para-
graph (c)(3)(iv) of this section and
§1.1441–1(e)(3)(iv) for alternative proce-
dures permitting allocation information to
be received after a payment is made.
(ii) Reliance on claim of reduced with-
holding by a partnership for its partners.
This paragraph (c)(3)(ii) describes the
manner in which a withholding agent may
rely on a claim of reduced withholding
when making a payment to a nonwith-
holding foreign partnership. To the extent
that a withholding agent treats a payment
to a nonwithholding foreign partnership
as a payment to the nonwithholding for-
eign partnership’s partners (whether di-
rect or indirect) in accordance with para-
graph (c)(1)(i) of this section, it may rely
on a claim for reduced withholding by the
partner if, prior to the payment, the with-
holding agent can reliably associate the
payment (within the meaning of
§1.1441–1(b)(2)(vii)) with a valid with-
holding certificate or other appropriate
documentation from the partner that es-
tablishes entitlement to a reduced rate of
withholding. A withholding certificate or
other appropriate documentation that es-
tablishes entitlement to a reduced rate of
withholding is a beneficial owner with-
holding certificate described in
§1.1441–1(e)(2)(i), documentary evi-
dence described in §1.1441–6(c)(3) or (4)
or 1.6049–5(c)(1) (for a partner claiming
to be a foreign person and a beneficial
owner, determined under the provisions
of §1.1441–1(c)(6)), a Form W–9 de-
scribed in §1.1441–1(d) (for a partner
claiming to be a U.S. payee), or a with-
holding foreign partnership withholding
certificate described in paragraph
(c)(2)(iv) of this section. Unless a non-
withholding foreign partnership withhold-
ing certificate is provided for income
claimed to be effectively connected with
the conduct of a trade or business in the
United States, a claim must be presented
for each portion of the payment that rep-
resents an item of income includible in
the distributive share of a partner as re-
quired under paragraph (c)(3)(iii)(C) of
this section. When making a claim for
several partners, the partnership may pre-
sent a single nonwithholding foreign part-
nership withholding certificate to which
the partners’ certificates or other appro-
priate documentation are associated.
Where the nonwithholding foreign part-
nership withholding certificate is pro-
vided for income claimed to be effec-
tively connected with the conduct of a
trade or business in the United States
under paragraph (c)(3)(iii)(D) of this sec-
tion, the claim may be presented without
having to identify any partner’s distribu-
tive share of the payment.
(iii) Withholding certificate from a non-
withholding foreign partnership. A non-
withholding foreign partnership shall pro-
vide a nonwithholding foreign partnership
withholding certificate with respect to re-
portable amounts received by the non-
withholding foreign partnership. A non-
withholding foreign partnership
withholding certificate is valid only to the
extent it is furnished on a Form W-8 (or
an acceptable substitute form or such
other form as the IRS may prescribe), it is
signed under penalties of perjury by a
partner with authority to sign for the part-
nership, its validity has not expired, and it
contains the information, statements, and
certifications described in this paragraph
(c)(3)(iii) and paragraph (c)(3)(iv) of this
2000–23 I.R.B.1201June 5, 2000

section, and the withholding certificates
and other appropriate documentation for
all the persons to whom the certificate re-
lates are associated with the certificate.
The rules of §1.1441–1(e)(4) shall apply
to withholding certificates described in
this paragraph (c)(3)(iii). No withholding
certificates or other appropriate documen-
tation from persons who derive income
through a partnership (whether or not
U.S. exempt recipients) are required to be
associated with the nonwithholding for-
eign partnership withholding certificate if
the certificate is furnished solely for in-
come claimed to be effectively connected
with the conduct of a trade or business in
the United States. Withholding certifi-
cates and other appropriate documenta-
tion that may be associated with the non-
withholding foreign partnership
withholding certificate consist of benefi-
cial owner withholding certificates under
§1.1441–1(e)(2)(i), intermediary with-
holding certificates under
§1.1441–1(e)(3)(i), withholding foreign
partnership withholding certificates under
paragraph (c)(2)(iv) of this section, non-
withholding foreign partnership withhold-
ing certificates under this paragraph
(c)(3)(iii), withholding certificates from
foreign trusts or estates under paragraph
(e) of this section, documentary evidence
described in §1.1441–6(c)(3) or (4) or
documentary evidence described in
§1.6049–5(c)(1), and any other documen-
tation or certificates applicable under
other provisions of the Internal Revenue
Code or regulations that certify or estab-
lish the status of the payee or beneficial
owner as a U.S. or a foreign person.
Nothing in this paragraph (c)(3)(iii) shall
require a nonwithholding foreign partner-
ship to furnish original documentation.
Copies of certificates or documentary evi-
dence may be transmitted to the U.S.
withholding agent, in which case the non-
withholding foreign partnership must re-
tain the original documentation for the
same time period that the copy is required
to be retained by the withholding agent
under §1.1441–1(e)(4)(iii) and must pro-
vide it to the withholding agent upon re-
quest. The information, statement, and
certifications required on the withholding
certificate are as follows—
(A) The name, permanent residence ad-
dress (as described in
§1.1441–1(e)(2)(ii)), and the employer
identification number of the partnership,
if any, and the country under the laws of
which the partnership is created or gov-
erned;
(B) A certification that the person
whose name is on the certificate is a for-
eign partnership;
(C) A withholding statement associated
with the nonwithholding foreign partner-
ship withholding certificate that provides
all of the information required by para-
graph (c)(3)(iv) of this section and
§1.1441–1(e)(3)(iv). No withholding
statement is required, however, for a non-
withholding foreign partnership withhold-
ing certificate furnished for income
claimed to be effectively connected with
the conduct of a trade or business in the
United States;
(D) A certification that the income is
effectively connected with the conduct of
a trade or business in the United States, if
applicable; and
(E) Any other information, certifica-
tions, or statements required by the form
or accompanying instructions in addition
to, or in lieu of, the information and certi-
fications described in this paragraph
(c)(3)(iii).
(iv) Withholding statement provided by
nonwithholding foreign partnership. The
provisions of §1.1441–1(e)(3)(iv) (re-
garding a withholding statement) shall
apply to a nonwithholding foreign part-
nership by substituting the term nonwith-
holding foreign partnership for the term
nonqualified intermediary.
(v) Withholding and reporting by a for-
eign partnership. A nonwithholding for-
eign partnership described in this para-
graph (c)(3) that receives an amount
subject to withholding (as defined in
§1.1441–2(a)) shall be required to with-
hold and report such payment under chap-
ter 3 of the Internal Revenue Code and the
regulations thereunder except as other-
wise provided in this paragraph (c)(3)(v).
A nonwithholding foreign partnership
shall not be required to withhold and re-
port if it has provided a valid nonwith-
holding foreign partnership withholding
certificate, it has provided all of the infor-
mation required by paragraph (c)(3)(iv) of
this section (withholding statement), and
it does not know, and has no reason to
know, that another withholding agent
failed to withhold the correct amount or
failed to report the payment correctly
under §1.1461–1(c). A withholding for-
eign partnership’s obligations to withhold
and report shall be determined in accor-
dance with its withholding foreign part-
nership agreement.
(d) Presumption rules—(1) In general.
This paragraph (d) contains the applicable
presumptions for a withholding agent (in-
cluding a partnership) to determine the
classification and status of a partnership
and its partners in the absence of docu-
mentation. The provisions of
§1.1441–1(b)(3)(iv) (regarding the 90-
day grace period) and
§1.1441–1(b)(3)(vii) through (ix) shall
apply for purposes of this paragraph (d).
(2) Determination of partnership status
as U.S. or foreign in the absence of docu-
mentation. In the absence of a valid rep-
resentation of U.S. partnership status in
accordance with paragraph (b)(1) of this
section or of foreign partnership status in
accordance with paragraph (c)(2)(i) or
(3)(i) of this section, the withholding
agent shall determine the classification of
the payee under the presumptions set
forth in §1.1441–1(b)(3)(ii). If the with-
holding agent treats the payee as a part-
nership under §1.1441–1(b)(3)(ii), the
withholding agent shall presume the part-
nership to be a U.S. partnership unless
there are indicia of foreign status. If there
are indicia of foreign status, the withhold-
ing agent may presume the partnership to
be foreign. Indicia of foreign status exist
only if the withholding agent has actual
knowledge of the payee’s employer iden-
tification number and that number begins
with the two digits “98,” the withholding
agent’s communications with the payee
are mailed to an address in a foreign
country, or the payment is made outside
the United States (as defined in
§1.6049–5(e)). For rules regarding reli-
able association with a withholding cer-
tificate from a domestic or a foreign part-
nership, see §1.1441–1(b)(2)(vii).
(3) Determination of partners’ status in
the absence of certain documentation. If
a nonwithholding foreign partnership has
provided a nonwithholding foreign part-
nership withholding certificate under
paragraph (c)(3)(iii) of this section that
would be valid except that the withhold-
ing agent cannot reliably associate all or a
portion of the payment with valid docu-
mentation from a partner of the partner-
ship, then the withholding agent may
June 5, 200012022000–23 I.R.B.

apply the presumption rule of this para-
graph (d)(3) with respect to all or a por-
tion of the payment for which documenta-
tion has not been received. See
§1.1441–1(b)(2)(vii)(A) and (B) for rules
regarding reliable association. The pre-
sumption rule of this paragraph (d)(3)
also applies to a person that is presumed
to be a foreign partnership under the rule
of paragraph (d)(2) of this section. Any
portion of a payment that the withholding
agent cannot treat as reliably associated
with valid documentation from a partner
may be presumed made to a foreign
payee. As a result, any payment of an
amount subject to withholding is subject
to withholding at a rate of 30 percent.
Any payment that is presumed to be made
to an undocumented foreign payee must
be reported on Form 1042-S. See
§1.1461–1(c).
(4) Determination by a withholding
foreign partnership of the status of its
partners. A withholding foreign partner-
ship shall determine whether the partners
or some other persons are the payees of
the partners’ distributive shares of any
payment made by a withholding foreign
partnership by applying the rules of
§1.1441–1(b)(2), paragraph (c)(1) of this
section (in the case of a partner that is a
foreign partnership), and paragraph (e)(3)
of this section (in the case of a partner that
is a foreign estate or a foreign trust). Fur-
ther, the provisions of paragraph (d)(3) of
this section shall apply to determine the
status of partners and the applicable with-
holding rates to the extent that, at the time
the foreign partnership is required to
withhold on a payment, it cannot reliably
associate the amount with documentation
for any one or more of its partners.
(e) Foreign trusts and estates—(1) In
general. This paragraph (e) provides
rules applicable to payments of amounts
subject to withholding (as defined in
§1.1441–2(a)) that a withholding agent
may treat as made to any foreign trust or a
foreign estate. For rules relating to pay-
ments to a U.S. trust or a U.S. estate, see
paragraph (b) of this section. For the def-
initions of foreign simple trust, foreign
complex trust, and foreign grantor trust,
see §1.1441–1(c)(24), (25), and (26).
(2) Payments to foreign complex trusts
and foreign estates.Under §1.1441–
1(c)(6)(ii)(D), a foreign complex trust or
foreign estate is generally considered to
be the beneficial owner of income paid to
the foreign complex trust or foreign es-
tate. See paragraph (e)(4) of this section
for rules describing when a withholding
agent may treat a payment as made to a
foreign complex trust or a foreign estate.
(3) Payees of payments to foreign sim-
ple trusts and foreign grantor trusts—(i)
Payments for which beneficiaries and
owners are payees. For purposes of the
regulations under chapters 3 and 61 of the
Internal Revenue Code and section 3406,
a foreign simple trust is not a beneficial
owner or a payee of a payment. Also, a
foreign grantor trust (or a portion of a
trust that is a foreign grantor trust) is not
considered a beneficial owner or a payee
of a payment. Except as otherwise pro-
vided in paragraph (e)(3)(ii) of this sec-
tion, the payees of a payment made to a
person that the withholding agent may
treat as a foreign simple trust or a foreign
grantor trust (or a portion of a trust that is
a foreign grantor trust) are determined
under the rules of this paragraph (e)(3)(i).
The payees shall be treated as the benefi-
cial owners if they may be so treated
under §1.1441–1(c)(6)(ii)(C) and they
provide documentation supporting their
status as the beneficial owners. The pay-
ees of a payment to a foreign simple trust
or foreign grantor trust are determined as
follows—
(A) If the withholding agent can reli-
ably associate a payment with a valid
Form W-9 provided under §1.1441–1(d)
from a beneficiary or owner of the foreign
trust, then the beneficiary or owner is a
U.S. payee;
(B) If the withholding agent can reli-
ably associate a payment with a valid
Form W-8, or other appropriate documen-
tation, provided under §1.1441–1(e)(1)(ii)
from a beneficiary or owner of the foreign
trust, then the beneficiary or owner is a
payee that is a foreign beneficial owner;
(C) If the withholding agent can reli-
ably associate a payment with a qualified
intermediary withholding certificate
under §1.1441–1(e)(3)(ii), a nonqualified
intermediary withholding certificate
under §1.1441–1(e)(3)(ii), or a U.S.
branch withholding certificate under
§1.1441–1(e)(3)(v), then the rules of
§1.1441–1(b)(2)(v) shall apply to deter-
mine the payee in the same manner as if
the payment had been paid directly to
such intermediary or U.S. branch;
(D) If the withholding agent can reli-
ably associate a payment with a withhold-
ing foreign partnership withholding cer-
tificate under paragraph (c)(2)(iv) of this
section or a nonwithholding foreign part-
nership withholding certificate under
paragraph (c)(3)(iii) of this section, then
the rules of paragraph (c)(1)(i) or (ii) of
this section shall apply to determine the
payee;
(E) If the withholding agent can reli-
ably associate the payment with a foreign
simple trust withholding certificate or a
foreign grantor trust withholding certifi-
cate (both described in paragraph
(e)(5)(iii) of this section) from a second or
higher-tier foreign simple trust or foreign
grantor trust, then the rules of this para-
graph (e)(3)(i) or paragraph (e)(3)(ii) of
this section shall apply to determine
whether the payment is treated as made to
a beneficiary or owner of the higher-tier
trust or to the trust itself in the same man-
ner as if the payment had been made di-
rectly to the higher-tier trust; and
(F) If the withholding agent cannot reli-
ably associate a payment with a withhold-
ing certificate or other appropriate docu-
mentation, the payees shall be determined
by applying the presumptions described
in paragraph (e)(6) of this section.
(ii) Payments for which trust is payee.
A payment to a person that the withhold-
ing agent may treat as made to a foreign
trust under paragraph (e)(5)(iii) of this
section is treated as a payment to the trust,
and not to a beneficiary of the trust, only
if—
(A) The withholding agent can reliably
associate the payment with a foreign com-
plex trust withholding certificate under
paragraph (e)(4) of this section;
(B) The withholding agent can reliably
associate the payment with a foreign sim-
ple trust withholding certificate under
paragraph (e)(5)(iii) of this section certi-
fying that the payment is income that is
treated as effectively connected with the
conduct of a trade or business in the
United States; or
(C) The withholding agent can treat the
income as effectively connected income
under the presumption rules of
§1.1441–4(a)(3)(i).
(4) Reliance on claim of foreign com-
plex trust or foreign estate status.A with-
holding agent may treat a payment as
made to a foreign complex trust or a for-
2000–23 I.R.B.1203June 5, 2000

eign estate if the withholding agent can
reliably associate the payment with a ben-
eficial owner withholding certificate de-
scribed in §1.1441–1(e)(2)(i) or other
documentary evidence under
§1.1441–6(c)(3) or (4) (regarding a claim
for treaty benefits) or §1.6049–5(c)(1)
(regarding documentary evidence to es-
tablish foreign status for purposes of
chapter 61 of the Internal Revenue Code)
that establishes the foreign complex trust
or foreign estate’s status as a beneficial
owner. See paragraph (e)(6) of this sec-
tion for presumption rules if documenta-
tion is lacking.
(5) Foreign simple trust and foreign
grantor trust—(i) Reliance on claim of for-
eign simple trust or foreign grantor trust
status.A withholding agent may treat a
person as a foreign simple trust or foreign
grantor trust if it receives from that person a
foreign simple trust or foreign grantor trust
withholding certificate as described in para-
graph (e)(5)(iii) of this section. A withhold-
ing agent must apply the presumption rules
of §§1.1441–1(b)(3) and 1.6049–5(d) and
paragraphs (d) and (e)(6) of this section to
the extent it cannot, prior to the payment,
reliably associate a payment (within the
meaning of §1.1441–1(b)(2)(vii)) with a
valid foreign simple trust or foreign grantor
trust withholding certificate, it cannot reli-
ably determine how much of the payment
relates to valid documentation provided by
a payee (e.g., a person that is not itself a
nonqualified intermediary, flow-through
entity, or U.S. branch) associated with the
foreign simple trust or foreign grantor trust
withholding certificate, or it does not have
sufficient information to report the payment
on Form 1042-S or Form 1099, if reporting
is required. See §1.1441–1(b)(2)(vii)(A)
and (B).
(ii) Reliance on claim of reduced with-
holding by a foreign simple trust or for-
eign grantor trust for its beneficiaries or
owners.This paragraph (e)(5)(ii) de-
scribes the manner in which a withhold-
ing agent may rely on a claim of reduced
withholding when making a payment to a
foreign simple trust or foreign grantor
trust. To the extent that a withholding
agent treats a payment to a foreign simple
trust or foreign grantor trust as a payment
to payees other than the trust in accor-
dance with paragraph (e)(3)(i) of this sec-
tion, it may rely on a claim for reduced
withholding by a beneficiary or owner if,
prior to the payment, the withholding
agent can reliably associate the payment
(within the meaning of
§1.1441–1(b)(2)(vii)) with a valid with-
holding certificate or other appropriate
documentation from a payee or beneficial
owner that establishes entitlement to a re-
duced rate of withholding. A withholding
certificate or other appropriate documen-
tation that establishes entitlement to a re-
duced rate of withholding is a beneficial
owner withholding certificate described
in §1.1441–1(e)(2)(i) or documentary evi-
dence described in §1.1441–6(c)(3) or(4)
or in §1.6049–5(c)(1) (for a beneficiary or
owner claiming to be a foreign person and
a beneficial owner, determined under the
provisions of §1.1441–1(c)(6)), a Form
W–9 described in §1.1441–1(d) (for a
beneficiary or owner claiming to be a
U.S. payee), or a withholding foreign
partnership withholding certificate de-
scribed in paragraph (c)(2)(iv) of this sec-
tion. Unless a foreign simple trust or for-
eign grantor trust withholding certificate
is provided for income treated as income
effectively connected with the conduct of
a trade or business in the United States, a
claim must be presented for each payee’s
portion of the payment. When making a
claim for several payees, the trust may
present a single foreign simple trust or
foreign grantor trust withholding certifi-
cate with which the payees’ certificates or
other appropriate documentation are asso-
ciated. Where the foreign simple trust or
foreign grantor trust withholding certifi-
cate is provided for income that is treated
as effectively connected with the conduct
of a trade or business in the United States
under paragraph (e)(5)(iii)(D) of this sec-
tion, the claim may be presented without
having to identify any partner’s distribu-
tive share of the payment.
(iii) Withholding certificate from for-
eign simple trust or foreign grantor trust.
A withholding certificate furnished by a
foreign simple trust or a foreign grantor
trust that is not a withholding foreign trust
(within the meaning of paragraph
(e)(5)(v) of this section) is valid only if it
is furnished on a Form W-8, an acceptable
substitute form, or such other form as the
IRS may prescribe, it is signed under
penalties of perjury by a trustee, its valid-
ity has not expired, it contains the infor-
mation, statements, and certifications re-
quired by this paragraph (e)(5)(iii) and
§1.1441–1(e)(3)(iv), and the withholding
certificates or other appropriate documen-
tation for all of the payees (as determined
under paragraph (e)(3)(i) of this section)
to whom the certificate relates are associ-
ated with the foreign simple trust or for-
eign grantor trust withholding certificate.
The rules of §1.1441–1(e)(4) shall apply
to withholding certificates described in
this paragraph (e)(5)(iii). No withholding
certificates or other appropriate documen-
tation from persons who derive income
through a foreign simple trust or a foreign
grantor trust (whether or not U.S. exempt
recipients) are required to be associated
with the foreign simple trust or foreign
grantor trust withholding certificate if the
certificate is furnished solely for income
that is treated as effectively connected
with the conduct of a trade or business in
the United States. Withholding certifi-
cates and other appropriate documenta-
tion (as determined under paragraph
(e)(3)(i) of this section) that may be asso-
ciated with a foreign simple trust or for-
eign grantor trust withholding certificate
consist of beneficial owner withholding
certificates under §1.1441–1(e)(2)(i), in-
termediary withholding certificates under
§1.1441–1(e)(3)(i), withholding foreign
partnership withholding certificates under
paragraph (c)(2)(iv) of this section, non-
withholding foreign partnership withhold-
ing certificates under paragraph (c)(3)(iii)
of this section, withholding certificates
from foreign trusts or estates under para-
graph (e)(4) or (5)(iii) of this section, doc-
umentary evidence described in
§§1.1441–6(c)(3) or (4), or
1.6049–5(c)(1), and any other documen-
tation or certificates applicable under
other provisions of the Internal Revenue
Code or regulations that certify or estab-
lish the status of the payee or beneficial
owner as a U.S. or a foreign person.
Nothing in this paragraph (e)(5)(iii) shall
require a foreign simple trust or foreign
grantor trust to provide original documen-
tation. Copies of certificates or documen-
tary evidence may be passed up to the
U.S. withholding agent, in which case the
foreign simple trust or foreign grantor
trust must retain the original documenta-
tion for the same time period that the copy
is required to be retained by the withhold-
ing agent under §1.1441–1(e)(4)(iii) and
must provide it to the withholding agent
upon request. The information, state-
June 5, 200012042000–23 I.R.B.

ment, and certifications required on a for-
eign simple trust or foreign grantor trust
withholding certificate are as follows—
(A) The name, permanent residence ad-
dress (as described in
§1.1441–1(e)(2)(ii)), and the employer
identification number, if required, of the
trust and the country under the laws of
which the trust is created;
(B) A certification that the person
whose name is on the certificate is a for-
eign simple trust or a foreign grantor
trust;
(C) A withholding statement associated
with the foreign simple trust or foreign
grantor trust withholding certificate that
provides all of the information required
by paragraph (e)(5)(iv) of this section.
No withholding statement is required,
however, for a foreign simple trust with-
holding certificate furnished for income
that is treated as effectively connected
with the conduct of a trade or business in
the United States;
(D) A certification on a foreign simple
trust withholding certificate that the in-
come is treated as effectively connected
with the conduct of a trade or business in
the United States, if applicable; and
(E) Any other information, certifica-
tions, or statements required by the form
or accompanying instructions in addition
to, or in lieu of, the information, certifica-
tions, and statements described in this
paragraph (e)(5)(iii);
(iv) Withholding statement provided by
a foreign simple trust or foreign grantor
trust. The provisions of
§1.1441–1(e)(3)(iv) (regarding a with-
holding statement) shall apply to a foreign
simple trust or foreign grantor trust by
substituting the term foreign simple trust
or foreign grantor trust for the term non-
qualified intermediary.
(v) Withholding foreign trusts.The
IRS may enter an agreement with a for-
eign trust to treat the trust or estate as a
withholding foreign trust. Such an agree-
ment shall generally follow the same prin-
ciples as an agreement with a withholding
foreign partnership under paragraph
(c)(2)(ii) of this section. A withholding
agent may treat a payment to a withhold-
ing foreign trust in the same manner the
withholding agent would treat a payment
to a withholding foreign partnership. The
IRS may also enter an agreement to treat a
trust as a qualified intermediary in appro-
priate circumstances. See
§1.1441–1(e)(5)(ii)(D).
(6) Presumption rules—(i) In general.
This paragraph (e)(6) contains the applic-
able presumptions for a withholding agent
(including a trust or estate) to determine
the classification and status of a trust or
estate and its beneficiaries or owners in
the absence of valid documentation. The
provisions of §1.1441–1(b)(3)(iv) (re-
garding the 90-day grace period) and
§1.1441–1(b)(3)(vii) through (ix) shall
apply for purposes of this paragraph
(e)(6).
(ii) Determination of status as U.S. or
foreign trust or estate in the absence of
documentation.In the absence of valid
documentation that establishes the U.S.
status of a trust or estate under paragraph
(b)(1) of this section and of documenta-
tion that establishes the foreign status of a
trust or estate under paragraph (e)(4) or
(5)(iii) of this section, the withholding
agent shall determine the classification of
the payee based upon the presumptions
set forth in §1.1441–1(b)(3)(ii). If, based
upon those presumptions, the withholding
agent classifies the payee as a trust or es-
tate, the trust or estate shall be presumed
to be a U.S. trust or U.S. estate unless
there are indicia of foreign status, in
which case the trust or estate shall be pre-
sumed to be foreign. Indicia of foreign
status exists if the withholding agent has
actual knowledge of the payee’s employer
identification number and that number be-
gins with the two digits “98,” the with-
holding agent’s communications with the
payee are mailed to an address in a for-
eign country, or the payment is made out-
side the United States (as defined in
§1.6049–5(e)). If an undocumented
payee is presumed to be a foreign trust it
shall be presumed to be a foreign complex
trust. If a withholding agent has docu-
mentary evidence that establishes that an
entity is a foreign trust, but the withhold-
ing agent cannot determine whether the
foreign trust is a complex trust, a simple
trust, or foreign grantor trust, the with-
holding agent may presume that the trust
is a foreign complex trust.
(iii) Determination of beneficiary or
owner’s status in the absence of certain
documentation.If a foreign simple trust
or foreign grantor trust has provided a for-
eign simple trust or foreign grantor trust
withholding certificate under paragraph
(e)(5)(iii) of this section but the payment
to such trust cannot be reliably associated
with valid documentation from a specific
beneficiary or owner of the trust, then any
portion of a payment that a withholding
agent cannot treat as reliably associated
with valid documentation from a benefi-
ciary or owner may be presumed made to
a foreign payee. As a result, any payment
of an amount subject to withholding is
subject to withholding at a rate of 30 per-
cent. Any such payment that is presumed
to be made to an undocumented foreign
person must be reported on Form 1042–S.
See §1.1461–1(c).
* * * * *
Par. 8. Effective January 1, 2001,
§1.1441–6 is amended by:
1. Revising paragraphs (b)(1),
(b)(2), and (b)(3).
2. Removing paragraph (b)(4) and
redesignating paragraph (b)(5) as new
paragraph (b)(4).
3. Revising paragraphs (c) and (e).
The revisions read as follows:
§1.1441–6 Claim of reduced withholding
under an income tax treaty.
* * * * *
(b) Reliance on claim of reduced with-
holding under an income tax treaty—(1)
In general.The withholding imposed
under section 1441, 1442, or 1443 on any
payment to a foreign person is eligible for
reduction under the terms of an income
tax treaty only to the extent that such pay-
ment is treated as derived by a resident of
an applicable treaty jurisdiction, such res-
ident is a beneficial owner, and all other
requirements for benefits under the treaty
are satisfied. See section 894 and the reg-
ulations thereunder to determine whether
a resident of a treaty country derives the
income. Absent actual knowledge or rea-
son to know otherwise, a withholding
agent may rely on a claim that a beneficial
owner is entitled to a reduced rate of with-
holding based upon an income tax treaty
if, prior to the payment, the withholding
agent can reliably associate the payment
with a beneficial owner withholding cer-
tificate, described in §1.1441–1(e)(2),
that contains the information necessary to
support the claim, or, in the case of a pay-
ment of income described in paragraph
(c)(2) of this section made outside the
United States with respect to an offshore
account, documentary evidence described
in paragraphs (c)(3), (4) and (5) of this
2000–23 I.R.B.1205June 5, 2000

section. See §§1.6049–5(e) for the defini-
tion of payments made outside the United
States and 1.6049–5(c)(1) for the defini-
tion of offshore account. For purposes of
this paragraph (b)(1), a beneficial owner
withholding certificate described in
§1.1441–1(e)(2)(i) contains information
necessary to support the claim for a treaty
benefit only if it includes the beneficial
owner’s taxpayer identifying number (ex-
cept as otherwise provided in paragraph
(c)(1) of this section) and the representa-
tions that the beneficial owner derives the
income under section 894 and the regula-
tions thereunder, if required, and meets
the limitation on benefits provisions of
the treaty, if any. The withholding certifi-
cate must also contain any other represen-
tations required by this section and any
other information, certifications, or state-
ments as may be required by the form or
accompanying instructions in addition to,
or in place of, the information and certifi-
cations described in this section. Absent
actual knowledge or reason to know that
the claims are incorrect (and subject to the
standards of knowledge in §1.1441–7(b)),
a withholding agent may rely on the
claims made on a withholding certificate
or on documentary evidence. A withhold-
ing agent may also rely on the informa-
tion contained in a withholding statement
provided under §§1.1441–1(e)(3)(iv) and
1.1441–5(c)(3)(iv) and (e)(5)(iv) to deter-
mine whether the appropriate statements
regarding section 894 and limitation on
benefits have been provided in connection
with documentary evidence. If the bene-
ficial owner is a person related to the
withholding agent within the meaning of
section 482, the withholding certificate
must also contain a representation that the
beneficial owner will file the statement
required under §301.6114–1(d) of this
chapter (if applicable). The requirement
to file an information statement under
section 6114 for income subject to with-
holding applies only to amounts received
during the calendar year that, in the ag-
gregate, exceed $500,000. See
§301.6114–1(d) of this chapter. The In-
ternal Revenue Service (IRS) may apply
the provisions of §1.1441–1(e)(1)(ii)(B)
to notify the withholding agent that the
certificate cannot be relied upon to grant
benefits under an income tax treaty. See
§1.1441–1(e)(4)(viii) regarding reliance
on a withholding certificate by a with-
holding agent. The provisions of
§1.1441–1(b)(3)(iv) dealing with a 90-
day grace period shall apply for purposes
of this section.
(2) Payment to fiscally transparent en-
tity—(i) In general. If the person claiming
a reduced rate of withholding under an in-
come tax treaty is the interest holder of an
entity that is considered to be fiscally trans-
parent (as defined in the regulations under
section 894) by the interest holder’s juris-
diction with respect to an item of income,
then, with respect to such income derived
by that person through the entity, the entity
shall be treated as a flow-through entity and
may provide a flow-through withholding
certificate with which the withholding cer-
tificate or other documentary evidence of
the interest holder that supports the claim
for treaty benefits is associated. For pur-
poses of the preceding sentence, interest
holders do not include any direct or indirect
interest holders that are themselves treated
as fiscally transparent entities with respect
to that income by the interest holder’s juris-
diction. See §1.1441–1(c)(23) and (e)(3)(i)
for the definition of flow-through entity and
flow-through withholding certificate. The
entity may provide a beneficial owner with-
holding certificate, or beneficial owner
documentation, with respect to any remain-
ing portion of the income to the extent the
entity is receiving income and is not treated
as fiscally transparent by its own jurisdic-
tion. Further, the entity may claim a re-
duced rate of withholding with respect to
the portion of a payment for which it is not
treated as fiscally transparent if it meets all
the requirements to make such a claim and,
in the case of treaty benefits, it provides the
documentation required by paragraph
(b)(1) of this section. If dual claims, as de-
scribed in paragraph (b)(2)(iii) of this sec-
tion, are made, multiple withholding certifi-
cates may have to be furnished. Multiple
withholding certificates may also have to
be furnished if the entity receives income
for which a reduction of withholding is
claimed under a provision of the Internal
Revenue Code (e.g., portfolio interest) and
income for which a reduction of withhold-
ing is claimed under an income tax treaty.
(ii) Certification by qualified interme-
diary. Notwithstanding paragraph
(b)(2)(i) of this section, a foreign entity
that is fiscally transparent, as defined in
the regulations under section 894, that is
also a qualified intermediary for purposes
of claiming a reduced rate of withholding
under an income tax treaty for its interest
holders (who are deriving the income paid
to the entity as residents of an applicable
treaty jurisdiction) may furnish a single
qualified intermediary withholding cer-
tificate, as described in
§1.1441–1(e)(3)(ii), for amounts for
which it claims a reduced rate of with-
holding under an income tax treaty on be-
half of its interest holders.
(iii) Dual treatment. Under paragraph
(b)(2)(i) of this section, a withholding
agent may make a payment to a foreign
entity that is simultaneously claiming to
be the beneficial owner of a portion of the
income (whether or not it is also claiming
a reduced rate of tax on its own behalf)
and a reduced rate on behalf of persons in
their capacity as interest holders in the en-
tity with respect to the same, or a differ-
ent, portion of the income. If the same
portion of a payment may be reliably as-
sociated with both the entity’s claim and
an interest holder’s claim, the withholding
agent may choose to reject both claims
and request new documentation and infor-
mation allocating the payment among the
beneficial owners of the payment or the
withholding agent may choose which
claim to apply. If the entity and the inter-
est holder’s claims are reliably associated
with separate portions of the payment, the
withholding agent may, at its option, ac-
cept such dual claims based on withhold-
ing certificates or other appropriate docu-
mentation furnished by the entity and its
interest holders with respect to their re-
spective shares of the payment even
though this will result in the withholding
agent treating the entity differently with
respect to different portions of the same
payment. Alternatively, the withholding
agent may choose to apply only the claim
made by the entity, provided the entity
may be treated as a beneficial owner of
the income. If the withholding agent does
not accept claims for a reduced rate of
withholding presented by any one or more
of the interest holders, or by the entity,
any interest holder or the entity may sub-
sequently claim a refund or credit of any
amount so withheld to the extent the inter-
est holder’s or entity’s share of such with-
holding exceeds the amount of tax due.
(iv) Examples. The following exam-
ples illustrate the rules of this paragraph
(b)(2):
June 5, 200012062000–23 I.R.B.

Example 1. (i) Facts. Entity E is a business or-
ganization formed under the laws of country Y.
Country Y has an income tax treaty with the United
States. The treaty contains a limitation on benefits
provision. E receives U.S. source royalties from
withholding agent W and claims a reduced rate of
withholding under the U.S.-Y tax treaty on its own
behalf (rather than on behalf of its interest holders).
E furnishes a beneficial owner withholding certifi-
cate described in paragraph (b)(1) of this section that
represents that E is a resident of country Y (within
the meaning of the U.S.-Y tax treaty), is the benefi-
cial owner of the income, derives the income under
section 894 and the regulations thereunder, and is
not precluded from claiming benefits by the treaty’s
limitation on benefits provision.
(ii) Analysis. Absent actual knowledge or reason
to know otherwise, W may rely on the representa-
tions made by E to apply a reduced rate of withhold-
ing.
Example 2. (i) Facts. The facts are the same as
under Example 1, except that one of E’s interest
holders, H, is an entity organized in country Z. The
U.S.-Z tax treaty reduces the rate on royalties to zero
whereas the rate on royalties under the U.S.-Y tax
treaty applicable to E is 5 percent. H is not fiscally
transparent under country Z’s tax law with respect to
such income. H furnishes a beneficial owner with-
holding certificate to E that represents that H de-
rives, within the meaning of section 894 and the reg-
ulations thereunder, its share of the royalty income
paid to E as a resident of country Z, is the beneficial
owner of the royalty income, and is not precluded
from claiming treaty benefits by virtue of the limita-
tion on benefits provision in the U.S.-Z treaty. E
furnishes to W a flow-through withholding certifi-
cate described in §1.1441-1(e)(3)(i) to which it at-
taches H’s beneficial owner withholding certificate
and a withholding statement for the portion of the
payment that H claims as its distributive share of the
royalty income. E also furnishes to W a beneficial
owner withholding certificate for itself for the por-
tion of the payment that H does not claim as its dis-
tributive share.
(ii) Analysis. Absent actual knowledge or reason
to know otherwise, W may rely on the documenta-
tion furnished by E to treat the royalty payment to a
single foreign entity (E) as derived by different resi-
dents of tax treaty countries as a result of the claims
presented under different treaties. W may, at its op-
tion, grant dual treatment, that is, a reduced rate of
zero percent under the U.S.-Z treaty on the portion
of the royalty payment that H claims to derive as a
resident of country Z and a reduced rate of 5 percent
under the U.S.-Y treaty for the balance. However,
under paragraph (b)(2)(iii) of this section, W may, at
its option, treat E as the only relevant person deriv-
ing the royalty and grant benefits under the U.S.-Y
treaty only.
Example 3. (i)Facts. E is a business organiza-
tion formed under the laws of country X. Country X
has an income tax treaty with the United States. E
has two interest holders, H1, organized in country Y,
and H2, organized in country Z. E receives from W,
a U.S. withholding agent, U.S. source royalties and
interest that is eligible for the portfolio interest ex-
ception under sections 871(h) and 881(c), provided
W receives the appropriate beneficial owner state-
ment required under section 871(h)(5). E is classi-
fied as a corporation under U.S. tax law principles.
Country X, E’s country of organization, treats E as
an entity that is not fiscally transparent with respect
to items of income under the regulations under sec-
tion 894. Under the U.S.-X income tax treaty, royal-
ties are subject to 5 percent rate of withholding.
Country Y, H1’s country of organization, treats E as
fiscally transparent with respect to items of income
under section 894 and H1 as not fiscally transparent
with respect to items of income. Under the country
Y-U.S. income tax treaty, royalties are exempt from
U.S. tax. Country Z, H2’s country of organization,
treats E as not fiscally transparent under section 894
with respect to items of income. E provides W with
a flow-through beneficial owner withholding certifi-
cate with which it associates a beneficial owner
withholding certificate from H1. H1’s withholding
certificate states that H1 is a resident of country Y,
derives the royalty income under section 894, meets
the applicable limitations on benefits provisions of
the U.S.-Y treaty, and is the beneficial owner of the
income. The withholding statement attached to E’s
flow-through withholding certificate allocates one-
half of the royalty payment to H1. E also provides
W with a beneficial owner withholding certificate
for the interest income and the remaining one-half of
the royalty income. The withholding certificate
states that E is a resident of country X, derives the
royalty income under section 894, meets the limita-
tion on benefits provisions of the U.S.-X treaty, and
is the beneficial owner of the income.
(ii) Analysis. Absent actual knowledge or reason
to know that the claims are incorrect, W may treat
one-half of the royalty derived by E as subject to a 5
percent withholding rate and one-half of the royalty
as derived by H1 and subject to no withholding.
Further, it may treat all of the interest as being paid
to E and as qualifying for the portfolio interest ex-
ception. W can, at its option, treat the entire royalty
as paid to E and subject it to withholding at a 5 per-
cent rate of withholding. In that case, H1 would be
entitled to claim a refund with respect to its one-half
of the royalty.
(3) Certified TIN. The IRS may issue
guidance requiring a foreign person claim-
ing treaty benefits and for whom a TIN is
required to establish with the IRS, at the
time the TIN is requested or after the TIN is
issued, that the person is a resident in a
treaty country and meets other conditions
(such as limitation on benefits provisions)
of the treaty. See §601.601(d)(2) of this
chapter.
* * * * *
(c) Exemption from requirement to fur-
nish a taxpayer identifying number and
special documentary evidence rules for
certain income—(1) General rule. In the
case of income described in paragraph
(c)(2) of this section, a withholding agent
may rely on a beneficial owner withhold-
ing certificate described in paragraph
(b)(1) of this section without regard to the
requirement that the withholding certifi-
cate include the beneficial owner’s tax-
payer identifying number. In the case of
payments of income described in para-
graph (c)(2) of this section made outside
the United States (as defined in
§1.6049–5(e)) with respect to an offshore
account (as defined in §1.6049–5(c)(1)), a
withholding agent may, as an alternative
to a withholding certificate described in
paragraph (b)(1) of this section, rely on a
certificate of residence described in para-
graph (c)(3) of this section or documen-
tary evidence described in paragraph
(c)(4) of this section, relating to the bene-
ficial owner, that the withholding agent
has reviewed and maintains in its records
in accordance with §1.1441–1(e)(4)(iii).
In the case of a payment to a person other
than an individual, the certificate of resi-
dence or documentary evidence must be
accompanied by the statements described
in paragraphs (c)(5)(i) and (ii) of this sec-
tion regarding limitation on benefits and
whether the amount paid is derived by
such person or by one of its interest hold-
ers. The withholding agent maintains the
reviewed documents by retaining either
the documents viewed or a photocopy
thereof and noting in its records the date
on which, and by whom, the documents
were received and reviewed. This para-
graph (c)(1) shall not apply to amounts
that are exempt from withholding based
on a claim that the income is effectively
connected with the conduct of a trade or
business in the United States.
(2) Income to which special rules
apply. The income to which paragraph
(c)(1) of this section applies is dividends
and interest from stocks and debt obliga-
tions that are actively traded, dividends
from any redeemable security issued by
an investment company registered under
the Investment Company Act of 1940 (15
U.S.C. 80a–1), dividends, interest, or roy-
alties from units of beneficial interest in a
unit investment trust that are (or were
upon issuance) publicly offered and are
registered with the Securities and Ex-
change Commission under the Securities
Act of 1933 (15 U.S.C. 77a) and amounts
paid with respect to loans of securities de-
scribed in this paragraph (c)(2). For pur-
poses of this paragraph (c)(2), a stock or
debt obligation is actively traded if it is
actively traded within the meaning of sec-
tion 1092(d) and §1.1092(d)–1 when doc-
umentation is provided.
(3) Certificate of residence. A certifi-
cate of residence referred to in paragraph
2000–23 I.R.B.1207June 5, 2000

(c)(1) of this section is a certification is-
sued by an appropriate tax official of the
treaty country of which the taxpayer
claims to be a resident that the taxpayer
has filed its most recent income tax return
as a resident of that country (within the
meaning of the applicable tax treaty). The
certificate of residence must have been is-
sued by such official within three years
prior to its being presented to the with-
holding agent, or such other period as the
IRS may prescribe in published guidance
(see §601.601(d)(2) of this chapter). See
§1.1441–1(e)(4)(ii)(A) for the period dur-
ing which a withholding agent may rely
on a certificate of residence. The compe-
tent authorities may agree to a different
procedure for certifying residence, in
which case such procedure shall govern
for payments made to a person claiming
to be a resident of the country with which
such an agreement is in effect.
(4) Documentary evidence establishing
residence in the treaty country—(i) Indi-
viduals. For an individual, the documen-
tary evidence referred to in paragraph
(c)(1) of this section is any documentation
that includes the individuals name, ad-
dress, and photograph, is an official docu-
ment issued by an authorized governmen-
tal body (i.e., a government or agency
thereof, or a municipality), and has been
issued no more than three years prior to
presentation to the withholding agent. A
document older than three years may be
relied upon as proof of residence only if it
is accompanied by additional evidence of
the person’s residence in the treaty coun-
try (e.g., a bank statement, utility bills, or
medical bills). Documentary evidence
must be in the form of original documents
or certified copies thereof.
(ii) Persons other than individuals. For
a person other than an individual, the doc-
umentary evidence referred to in para-
graph (c)(1) of this section is any docu-
mentation that includes the name of the
entity and the address of its principal of-
fice in the treaty country, and is an official
document issued by an authorized gov-
ernmental body (e.g., a government or
agency thereof, or a municipality).
(5) Statements regarding entitlement to
treaty benefits—(i) Statement regarding
conditions under a limitation on benefits
provision. In addition to the documentary
evidence described in (c)(4)(ii) of this
section, a taxpayer that is not an individ-
ual must provide a statement that it meets
one or more of the conditions set forth in
the limitation on benefits article (if any, or
in a similar provision) contained in the
applicable tax treaty.
(ii) Statement regarding whether the
taxpayer derives the income. A taxpayer
that is not an individual must also pro-
vide, in addition to the documentary evi-
dence and the statement described in
paragraph (c)(5)(i) of this section, a state-
ment that any income for which it intends
to claim benefits under an applicable in-
come tax treaty is income that will prop-
erly be treated as derived by itself as a
resident of the applicable treaty jurisdic-
tion within the meaning of section 894
and the regulations thereunder. This re-
quirement does not apply if the taxpayer
furnishes a certificate of residence that
certifies that fact.
* * * * *
(e) Competent authority. The proce-
dures described in this section may be
modified to the extent the U.S. competent
authority may agree with the competent
authority of a country with which the
United States has an income tax treaty in
effect.
* * * * *
Par. 9. Effective January 1, 2001,
§1.1441–7 is amended by:
1. Revising paragraphs (a), (b)(2)
and (b)(3).
2. Adding paragraphs (b)(4)
through (b)(11).
The revisions and additions read as fol-
lows:
§1.1441–7 General provisions relating to
withholding agents.
(a) Withholding agent defined—(1) In
general.For purposes of chapter 3 of the
Internal Revenue Code and the regulations
under such chapter, the term withholding
agentmeans any person, U.S. or foreign,
that has the control, receipt, custody, dis-
posal, or payment of an item of income of
a foreign person subject to withholding, in-
cluding (but not limited to) a foreign inter-
mediary described in §1.1441–1(e)(3)(i), a
foreign partnership, or a U.S. branch de-
scribed in §1.1441–1(b)(2)(iv)(A) or (E).
See §§1.1441–1(b)(2) and (3) and
1.1441–5(c), (d), and (e), for rules to deter-
mine whether a payment is considered
made to a foreign person. Any person who
meets the definition of a withholding agent
is required to deposit any tax withheld
under §1.1461–1(a) and to make the re-
turns prescribed by §1.1461–1(b) and (c),
except as otherwise may be required by a
qualified intermediary withholding agree-
ment, a withholding foreign partnership
agreement, or a withholding foreign trust
agreement. When several persons qualify
as withholding agents with respect to a sin-
gle payment, only one tax is required to be
withheld and deposited. See §1.1461–1.
A person who, as a nominee described in
§1.6031(c)–1T, has furnished to a partner-
ship all of the information required to be
furnished under §1.6031(c)–1T(a) shall not
be treated as a withholding agent if it has
notified the partnership that it is treating
the provision of information to the partner-
ship as a discharge of its obligations as a
withholding agent.
(2) Examples. The following examples
illustrate the rules of paragraph (a)(1) of
this section:
Example 1. USB is a broker organized in the
United States. USB pays U.S. source dividends and
interest, which are amounts subject to withholding
under §1.1441-2(a), to FC, a foreign corporation that
has an investment account with USB. USB is a
withholding agent as defined in paragraph (a)(1) of
this section.
Example 2. USB is a bank organized in the
United States. FB is a bank organized in country X.
X has an omnibus account with USB through which
FB invests in debt and equity instruments that pay
amounts subject to withholding as defined in
§1.1441–2(a). FB is a nonqualified intermediary, as
defined in §1.1441–1(c)(14). Both USB and FB are
withholding agents as defined in paragraph (a)(1) of
this section.
Example 3. The facts are the same as in Example
2, except that FB is a qualified intermediary. Both
USB and FB are withholding agents as defined in
paragraph (a)(1) of this section.
Example 4. FB is a bank organized in country X.
FB has a branch in the United States. FB’s branch
has customers that are foreign persons who receive
amounts subject to withholding, as defined in
§1.1441–2(a). FB is a withholding agent under
paragraph (a)(1) of this section and is required to
withhold and report payments of amounts subject to
withholding in accordance with chapter 3 of the In-
ternal Revenue Code.
Example 5. X is a foreign corporation. X pays
dividends to shareholders who are foreign persons.
Under section 861(a)(2)(B), a portion of the divi-
dends are from sources within the United States and
constitute amounts subject to withholding within the
meaning of §1.1441–2(a). The dividends are not
subject to tax under section 884(a). See 884(e)(3).
X is a withholding agent under paragraph (a)(1) of
this section.
(b) * * *
(2) Reason to know. A withholding
agent shall be considered to have reason
to know if its knowledge of relevant facts
or of statements contained in the with-
June 5, 200012082000–23 I.R.B.

holding certificates or other documenta-
tion is such that a reasonably prudent per-
son in the position of the withholding
agent would question the claims made.
(3) Financial institutions—limits on
reason to know.For purposes of this
paragraph (b)(3) and paragraphs (b)(4)
through (b)(10) of this section, the terms
withholding certificate, documentary evi-
dence, and documentationare defined in
§1.1441–1(c)(16), (17) and (18). Except
as otherwise provided in paragraphs
(b)(4) through (b)(9) of this section, a
withholding agent that is a financial insti-
tution (including a regulated investment
company) that has a direct account rela-
tionship with a beneficial owner (a direct
account holder) has a reason to know,
with respect to amounts described in
§1.1441–6(c)(2), that documentation pro-
vided by the direct account holder is unre-
liable or incorrect only if one or more of
the circumstances described in paragraphs
(b)(4) through (b)(9) of this section exist.
If a direct account holder has provided
documentation that is unreliable or incor-
rect under the rules of paragraph (b)(4)
through (b)(9) of this section, the with-
holding agent may require new documen-
tation. Alternatively, the withholding
agent may rely on the documentation
originally provided if the rules of para-
graphs (b)(4) through (b)(9) of this sec-
tion permit such reliance based on addi-
tional statements and documentation.
Paragraph (b)(10) of this section provides
limits on reason to know for financial in-
stitutions that receive beneficial owner
documentation from persons (indirect ac-
count holders) that have an account rela-
tionship with, or an ownership interest in,
a direct account holder. For rules regard-
ing reliance on Form W-9, see
§31.3406(g)–3(e)(2) of this chapter.
(4) Rules applicable to withholding
certificates—(i) In general. A withhold-
ing agent has reason to know that a bene-
ficial owner withholding certificate pro-
vided by a direct account holder in
connection with a payment of an amount
described in §1.1441–6(c)(2) is unreliable
or incorrect if the withholding certificate
is incomplete with respect to any item on
the certificate that is relevant to the claims
made by the direct account holder, the
withholding certificate contains any infor-
mation that is inconsistent with the direct
account holder’s claim, the withholding
agent has other account information that
is inconsistent with the direct account
holder’s claim, or the withholding certifi-
cate lacks information necessary to estab-
lish entitlement to a reduced rate of with-
holding. A withholding agent shall also
treat a withholding certificate as unreli-
able or incorrect if the name of the person
on the withholding certificate indicates
that the person is a corporation, partner-
ship, trust, estate, or an individual, and the
person’s claim of classification (e.g. indi-
vidual, partnership, corporation) is not
consistent with such indication and a dif-
ference in classification would result in a
different rate of withholding or a differ-
ence in the person or persons to whom the
payment is reported under §1.1461–1(c)
or chapter 61 of the Internal Revenue
Code. For purposes of establishing a di-
rect account holder’s status as a foreign
person or resident of a treaty country a
withholding certificate shall be consid-
ered unreliable or inconsistent with an ac-
count holder’s claims only if it is not reli-
able under the rules of paragraph (b)(5)
and (6) of this section. A withholding
agent that relies on an agent to review and
maintain a withholding certificate is con-
sidered to know or have reason to know
the facts within the knowledge of the
agent.
(ii) Examples. The rules of paragraph
(b)(4) of this section are illustrated by the
following examples:
Example 1. F, a foreign person that has a direct
account relationship with USB, a bank that is a U.S.
person, provides USB with a beneficial owner with-
holding certificate for the purpose of claiming a re-
duced rate of withholding on U.S. source dividends.
F resides in a treaty country that has a limitation on
benefits provision in its income tax treaty with the
United States. The withholding certificate, however,
does not contain a statement regarding limitations
on benefits or deriving the income under section 894
as required by §1.1441–6(b)(1). USB cannot rely on
the withholding certificate to grant a reduced rate of
withholding because it is incomplete with respect to
the claim made by F.
Example 2. F, a foreign person that has a direct
account relationship with USB, a broker that is a
U.S. person, provides USB with a withholding cer-
tificate for the purpose of claiming the portfolio in-
terest exception under section 881(c), which applies
to foreign corporations. F indicates on its withhold-
ing certificate, however, that it is a partnership.
USB may not treat F as a beneficial owner of the in-
terest for purposes of the portfolio interest exception
because F has indicated on its withholding certifi-
cate that it is a foreign partnership, and therefore
under §1.1441–1(c)(6)(ii) it is not the beneficial
owner of the interest payment.
(5) Withholding certificate—establish-
ment of foreign status. A withholding
agent has reason to know that a beneficial
owner withholding certificate (as defined
in §1.1441–1(e)(2)) provided by a direct
account holder in connection with a pay-
ment of an amount described in
§1.1441–6(c)(2) is unreliable or incorrect
for purposes of establishing the account
holder’s status as a foreign person if the
certificate is described in paragraph
(b)(5)(i) or (ii) of this section.
(i) A withholding certificate is unreli-
able or incorrect if the withholding certifi-
cate has a permanent residence address
(as defined in §1.1441–1(e)(2)(ii)) in the
United States, the withholding certificate
has a mailing address in the United States,
the withholding agent has a residence or
mailing address as part of its account in-
formation that is an address in the United
States, or the direct account holder noti-
fies the withholding agent of a new resi-
dence or mailing address in the United
States (whether or not provided on a with-
holding certificate). A withholding agent
may, however, rely on the beneficial
owner withholding certificate as estab-
lishing the account holder’s foreign status
if it may do so under the provisions of
paragraph (b)(5)(i)(A) or (B) of this sec-
tion.
(A) A withholding agent may treat a di-
rect account holder as a foreign person if
the beneficial owner withholding certifi-
cate has been provided by an individual
and—
(1) The withholding agent has in its
possession or obtains documentary evi-
dence (which does not contain a U.S. ad-
dress) that is no more than three years old,
the documentary evidence supports the
claim of foreign status, and the direct ac-
count holder provides the withholding
agent with a reasonable explanation, in
writing, supporting the account holder’s
foreign status; or
(2) The account is maintained at an of-
fice of the withholding agent outside the
United States and the withholding agent is
required to report annually a payment to
the direct account holder on a tax infor-
mation statement that is filed with the tax
authority of the country in which the of-
fice is located and that country has an in-
come tax treaty in effect with the United
States.
(B) A withholding agent may treat an
account holder as a foreign person if the
2000–23 I.R.B.1209June 5, 2000

beneficial owner withholding certificate
has been provided by an entity that the
withholding agent does not know, or does
not have reason to know, is a flow-
through entity and—
(1) The withholding agent has in its
possession, or obtains, documentation
that substantiates that the entity is actually
organized or created under the laws of a
foreign country; or
(2) The account is maintained at an of-
fice of the withholding agent outside the
United States and the withholding agent is
required to report annually a payment to
the direct account holder on a tax infor-
mation statement that is filed with the tax
authority of the country in which the of-
fice is located and that country has an in-
come tax treaty in effect with the United
States.
(ii) A beneficial owner withholding cer-
tificate is unreliable or incorrect if it is
provided with respect to an offshore ac-
count (as defined in §1.6049–5(c)(1)) and
the direct account holder has standing in-
structions directing the withholding agent
to pay amounts from its account to an ad-
dress or an account maintained in the
United States. The withholding agent
may treat the direct account holder as a
foreign person, however, if the direct ac-
count holder provides a reasonable expla-
nation in writing that supports its foreign
status.
(6) Withholding certificate—claim of
reduced rate of withholding under treaty.
A withholding agent has reason to know
that a withholding certificate (other than
Form W-9) provided by a direct account
holder in connection with a payment of an
amount described in §1.1441–6(c)(2) is
unreliable or incorrect for purposes of es-
tablishing that the direct account holder is
a resident of a country with which the
United States has an income tax treaty if it
is described in paragraphs (b)(6)(i)
through (iii) of this section.
(i) A beneficial owner withholding cer-
tificate is unreliable or incorrect if the
permanent residence address on the bene-
ficial owner withholding certificate is not
in the country whose treaty is invoked, or
the direct account holder notifies the
withholding agent of a new permanent
residence address that is not in the treaty
country. A withholding agent may, how-
ever, treat a direct account holder as enti-
tled to a reduced rate of withholding
under an income tax treaty if the direct ac-
count holder provides a reasonable expla-
nation for the permanent residence ad-
dress outside the treaty country (e.g., the
address is the address of a branch of the
beneficial owner located outside the
treaty country in which the entity is a resi-
dent) or the withholding agent has in its
possession, or obtains, documentary evi-
dence that establishes residency in a
treaty country.
(ii) A beneficial owner withholding cer-
tificate is unreliable or incorrect if the
permanent residence address on the with-
holding certificate is in the applicable
treaty country but the withholding certifi-
cate contains a mailing address outside
the treaty country or the withholding
agent has a mailing address as part of its
account information that is outside the
treaty country. A mailing address that is a
P.O. Box, in-care-of address, or address at
a financial institution (if the financial in-
stitution is not a beneficial owner) shall
not preclude a withholding agent from
treating the direct account holder as a res-
ident of a treaty country if such address is
in the treaty country. If a withholding
agent has a mailing address (whether or
not contained on the withholding certifi-
cate) outside the applicable treaty coun-
try, the withholding agent may neverthe-
less treat a direct account holder as a
resident of an applicable treaty country
if—
(A) The withholding agent has in its
possession, or obtains, additional docu-
mentation supporting the direct account
holder’s claim of residence in the applica-
ble treaty country (and the additional doc-
umentation does not contain an address
outside the treaty country);
(B) The withholding agent has in its
possession, or obtains, documentation
that establishes that the direct account
holder is an entity organized in a treaty
country (or an entity managed and con-
trolled in a treaty country, if the applica-
ble treaty so requires);
(C) The withholding agent knows that
the address outside the applicable treaty
country (other than a P.O. box, or in-care-
of address) is a branch of a bank or insur-
ance company that is a resident of the ap-
plicable treaty country; or
(D) The withholding agent obtains a
written statement from the direct account
holder that reasonably establishes entitle-
ment to treaty benefits.
(iii) A beneficial owner withholding
certificate is unreliable or incorrect to es-
tablish entitlement to a reduced rate of
withholding under an income tax treaty if
the direct account holder has standing in-
structions for the withholding agent to
pay amounts from its account to an ad-
dress or an account outside the treaty
country unless the direct account holder
provides a reasonable explanation, in
writing, establishing the direct account
holder’s residence in the applicable treaty
country.
(7) Documentary evidence. A with-
holding agent shall not treat documentary
evidence provided by a direct account
holder as valid if the documentary evi-
dence does not reasonably establish the
identity of the person presenting the docu-
mentary evidence. For example, docu-
mentary evidence is not valid if it is pro-
vided in person by a direct account holder
that is a natural person and the photo-
graph or signature on the documentary
evidence, if any, does not match the ap-
pearance or signature of the person pre-
senting the document. A withholding
agent shall not rely on documentary evi-
dence to reduce the rate of withholding
that would otherwise apply under the pre-
sumption rules of §§1.1441–1(b)(3),
1.1441–5(d) and (e)(6), and 1.6049–5(d)
if the documentary evidence contains in-
formation that is inconsistent with the di-
rect account holder’s claim of a reduced
rate of withholding, the withholding agent
has other account information that is in-
consistent with the direct account holder’s
claim, or the documentary evidence lacks
information necessary to establish entitle-
ment to a reduced rate of withholding.
For example, if a direct account holder
provides documentary evidence to claim
treaty benefits and the documentary evi-
dence establishes the direct account
holder’s status as a foreign person and a
resident of a treaty country, but the ac-
count holder fails to provide the treaty
statements required by §1.1441–6(c)(5),
the documentary evidence does not estab-
lish the direct account holder’s entitle-
ment to a reduced rate of withholding.
For purposes of establishing a direct ac-
count holder’s status as a foreign person
or resident of a country with which the
United States has an income tax treaty
with respect to income described in
June 5, 200012102000–23 I.R.B.

§1.1441–6(c)(2), documentary evidence
shall be considered unreliable or incorrect
only if it is not reliable under the rules of
paragraph (b)(8) and (9) of this section.
(8) Documentary evidence—establish-
ment of foreign status. A withholding
agent has reason to know that documen-
tary evidence provided in connection with
a payment of an amount described in
§1.1441–6(c)(2) is unreliable or incorrect
for purposes of establishing the direct ac-
count holder’s status as a foreign person if
the documentary evidence is described in
paragraphs (b)(8)(i), (ii), (iii) or (iv) of
this section.
(i) A withholding agent shall not treat
documentary evidence provided by an ac-
count holder after December 31, 2000, as
valid for purposes of establishing the di-
rect account holder’s foreign status if the
only mailing or residence address that is
available to the withholding agent is an
address at a financial institution (unless
the financial institution is a beneficial
owner of the income), an in-care-of ad-
dress, or a P.O. box. In this case, the
withholding agent must obtain additional
documentation that is sufficient to estab-
lish the direct account holder’s status as a
foreign person. A withholding agent shall
not treat documentary evidence provided
by an account holder before January 1,
2001, as valid for purposes of establishing
a direct account holder’s status as a for-
eign person if it has actual knowledge that
the direct account holder is a U.S. person
or if it has a mailing or residence address
for the direct account holder in the United
States. If a withholding agent has an ad-
dress for the direct account holder in the
United States, the withholding agent may
nevertheless treat the direct account
holder as a foreign person if it can so treat
the direct account holder under the rules
of paragraph (b)(8)(ii) of this section.
(ii) Documentary evidence is unreliable
or incorrect to establish a direct account
holder’s status as a foreign person if the
withholding agent has a mailing or resi-
dence address (whether or not on the doc-
umentation) for the direct account holder
in the United States or if the direct ac-
count holder notifies the withholding
agent of a new address in the United
States. A withholding agent may, how-
ever, rely on documentary evidence as es-
tablishing the direct account holder’s for-
eign status if it may do so under the
provisions of paragraph (b)(8)(ii)(A) or
(B) of this section.
(A) A withholding agent may treat a di-
rect account holder that is an individual as
a foreign person even if it has a mailing or
residence address for the direct account
holder in the United States if the with-
holding agent—
(1) Has in its possession or obtains ad-
ditional documentary evidence (which
does not contain a U.S. address) support-
ing the claim of foreign status and a rea-
sonable explanation in writing supporting
the account holder’s foreign status;
(2) Has in its possession or obtains a
valid beneficial owner withholding cer-
tificate on Form W-8 and the Form W-8
contains a permanent residence address
outside the United States and a mailing
address outside the United States (or if a
mailing address is inside the United States
the direct account holder provides a rea-
sonable explanation in writing supporting
the direct account holder’s foreign status);
or
(3) The account is maintained at an of-
fice of the withholding agent outside the
United States and the withholding agent is
required to report annually a payment to
the direct account holder on a tax infor-
mation statement that is filed with the tax
authority of the country in which the of-
fice is located and that country has an in-
come tax treaty in effect with the United
States.
(B) A withholding agent may treat a di-
rect account holder that is an entity (other
than a flow-through entity) as a foreign
person even if it has a mailing or resi-
dence address for the direct account
holder in the United States if the with-
holding agent—
(1) Has in its possession, or obtains,
documentation that substantiates that the
entity is actually organized or created
under the laws of a foreign country;
(2) Obtains a valid beneficial owner
withholding certificate on Form W-8 and
the Form W-8 contains a permanent resi-
dence address outside the United States
and a mailing address outside the United
States (or if a mailing address is inside the
United States the direct account holder
provides additional documentary evi-
dence sufficient to establish the direct ac-
count holder’s foreign status); or
(3) The account is maintained at an of-
fice of the withholding agent outside the
United States and the withholding agent is
required to report annually a payment to
the direct account holder on a tax infor-
mation statement that is filed with the tax
authority of the country in which the of-
fice is located and that country has an in-
come tax treaty in effect with the United
States.
(iii) Documentary evidence is unreli-
able or incorrect if the direct account
holder has standing instructions directing
the withholding agent to pay amounts
from its account to an address or an ac-
count maintained in the United States.
The withholding agent may treat the di-
rect account holder as a foreign person,
however, if the account holder provides a
reasonable explanation in writing that
supports its foreign status.
(9) Documentary evidence—claim of
reduced rate of withholding under treaty.
A withholding agent has reason to know
that documentary evidence provided in
connection with a payment of an amount
described in §1.1441–6(c)(2) is unreliable
or incorrect for purposes of establishing
that a direct account holder is a resident of
a country with which the United States
has an income tax treaty if it is described
in paragraph (b)(9)(i) or (ii) of this sec-
tion.
(i) Documentary evidence is unreliable
or incorrect if the withholding agent has a
mailing or residence address for the direct
account holder (whether or not on the
documentary evidence) that is outside the
applicable treaty country, or the only ad-
dress that the withholding agent has
(whether in or outside of the applicable
treaty country) is a P.O. box, an in-care-of
address, or the address of a financial insti-
tution (if the financial institution is not the
beneficial owner). If a withholding agent
has a mailing or residence address for the
direct account holder outside the applica-
ble treaty country, the withholding agent
may nevertheless treat a direct account
holder as a resident of an applicable treaty
country if the withholding agent—
(A) Has in its possession, or obtains,
additional documentary evidence support-
ing the direct account holder’s claim of
residence in the applicable treaty country
(and the documentary evidence does not
contain an address outside the applicable
treaty country, a P.O. box, an in-care-of
address, or the address of a financial insti-
tution);
2000–23 I.R.B.1211June 5, 2000

(B) Has in its possession, or obtains,
documentary evidence that establishes the
direct account holder is an entity orga-
nized in a treaty country (or an entity
managed and controlled in a treaty coun-
try, if the applicable treaty so requires); or
(C) Obtains a valid beneficial owner
withholding certificate on Form W-8 that
contains a permanent residence address
and a mailing address in the applicable
treaty country.
(ii) Documentary evidence is unreliable
or incorrect if the direct account holder
has standing instructions directing the
withholding agent to pay amounts from
its account to an address or an account
maintained outside the treaty country un-
less the direct account holder provides a
reasonable explanation, in writing, estab-
lishing the direct account holder’s resi-
dence in the applicable treaty country.
(10) Limits on reason to know—indi-
rect account holders. A financial institu-
tion that receives documentation from a
payee through a nonqualified intermedi-
ary, a flow-through entity, or a U.S.
branch described in §1.1441–1(b)(2)(iv)
(other than a U.S. branch that is treated as
a U.S. person) with respect to a payment
of an amount described in
§1.1441–6(c)(2) has reason to know that
the documentation is unreliable or incor-
rect if a reasonably prudent person in the
position of a withholding agent would
question the claims made. This standard
requires, but is not limited to, a withhold-
ing agent’s compliance with the rules of
paragraphs (b)(10)(i) through (iii).
(i) The withholding agent must review
the withholding statement described in
§1.1441–1(e)(3)(iv) and may not rely on
information in the statement to the extent
the information does not support the
claims made for any payee. For this pur-
pose, a withholding agent may not treat a
payee as a foreign person if an address in
the United States is provided for such
payee and may not treat a person as a res-
ident of a country with which the United
States has an income tax treaty if the ad-
dress for that person is outside the applic-
able treaty country. Notwithstanding a
U.S. address or an address outside a treaty
country, the withholding agent may treat a
payee as a foreign person or a foreign per-
son as a resident of a treaty country if a
reasonable explanation is provided, in
writing, by the nonqualified intermediary,
flow-through entity, or U.S. branch sup-
porting the payee’s foreign status or the
foreign person’s residency in a treaty
country.
(ii) The withholding agent must review
each withholding certificate in accor-
dance with the requirements of para-
graphs (b)(5) and (6) of this section and
verify that the information on the with-
holding certificate is consistent with the
information on the withholding statement
required under §1.1441–1(e)(3)(iv). If
there is a discrepancy between the with-
holding certificate and the withholding
statement, the withholding agent may
choose to rely on the withholding certifi-
cate, if valid, and instruct the nonqualified
intermediary, flow-through entity, or U.S.
branch to correct the withholding state-
ment or apply the presumption rules of
§§1.1441–1(b), 1.1441–5(d) and (e)(6),
and 1.6049–5(d) to the payment allocable
to the payee who provided the withhold-
ing certificate relates. A withholding
agent that receives a withholding certifi-
cate before December 31, 2001, is not re-
quired to review the information on with-
holding certificates or determine if it is
consistent with the information on the
withholding statement until December 31,
2001. A withholding agent may withhold
and report in accordance with a withhold-
ing statement until December 31, 2001,
unless it has actually performed the verifi-
cation procedures required by this para-
graph (b)(10)(ii) and determined that the
withholding statement is inaccurate with
respect to a particular payee.
(iii) The withholding agent must re-
view the documentary evidence provided
by the nonqualified intermediary, flow-
through entity, or U.S. branch to deter-
mine that there is no obvious indication
that the payee is a U.S. non-exempt recip-
ient or that the documentary evidence
does not establish the identity of the per-
son who provided the documentation
(e.g., the documentary evidence does not
appear to be an identification document).
(11) Additional guidance. The IRS
may prescribe other circumstances for
which a withholding certificate or docu-
mentary evidence is unreliable or incor-
rect in addition to the circumstances de-
scribed in paragraph (b) of this section to
establish an account holder’s status as a
foreign person or a beneficial owner enti-
tled to a reduced rate of withholding in
published guidance (see §601.601(d)(2)
of this chapter).
* * * * *
Par. 10. Effective January 1, 2001,
§1.1441–9 is amended by revising para-
graph (b)(2) to read as follows:
§1.1441–9 Exemption from withholding
on exempt income of a foreign tax-exempt
organization, including foreign private
foundations.
* * * * *
(b) * * *
(2) Withholding certificate. A with-
holding certificate under this paragraph
(b)(2) is valid only if it is a Form W-8 and
if, in addition to other applicable require-
ments, the Form W-8 includes the tax-
payer identifying number of the organiza-
tion whose name is on the certificate, and
it certifies that the Internal Revenue Ser-
vice (IRS) has issued a favorable determi-
nation letter (and the date thereof) that is
currently in effect, what portion, if any, of
the amounts paid constitute income in-
cludible under section 512 in computing
the organization’s unrelated business tax-
able income, and, if the organization is
described in section 501(c)(3), whether it
is a private foundation described in sec-
tion 509. Notwithstanding the preceding
sentence, if the organization cannot cer-
tify that it has been issued a favorable de-
termination letter that is still in effect, its
withholding certificate is nevertheless
valid under this paragraph (b)(2) if the or-
ganization attaches to the withholding
certificate an opinion that is acceptable to
the withholding agent from a U.S. counsel
(or any other person as the IRS may pre-
scribe in published guidance (see
§601.601(d)(2) of this chapter)) conclud-
ing that the organization is described in
section 501(c). If the determination letter
or opinion of counsel to which the with-
holding certificate refers concludes that
the organization is described in section
501(c)(3), and the certificate further certi-
fies that the organization is not a private
foundation described in section 509, an
affidavit of the organization setting forth
sufficient facts concerning the operations
and support of the organization for the In-
ternal Revenue Service (IRS) to deter-
mine that such organization would be
likely to qualify as an organization de-
scribed in section 509(a)(1), (2), (3), or
(4) must be attached to the withholding
certificate. An organization that provides
June 5, 200012122000–23 I.R.B.

an opinion of U.S. counsel or an affidavit
may provide the same opinion or affidavit
to more than one withholding agent pro-
vided that the opinion is acceptable to
each withholding agent who receives it in
conjunction with a withholding certifi-
cate. Any such opinion of counsel or affi-
davit must be renewed whenever there is
a change in facts or circumstances that are
relevant to determine the organization’s
status under section 501(c) or, if relevant,
that the organization is or is not a private
foundation described in section 509.
* * * * *
Par. 12. Effective January 1, 2001,
§1.1461–1 is amended by:
1. Removing the last sentence of
paragraph (a)(1).
2. Removing paragraphs (b)(2) and
(b)(3) and redesignating paragraph (b)(4)
as new paragraph (b)(2).
3.Revising paragraphs (c)(1),
(c)(2), (c)(3), and (c)(4).
4. Removing paragraphs (c)(5),
(c)(6), and (c)(7), and redesignating para-
graph (c)(8) as new paragraph (c)(5).
The revisions read as follows:
§1.1461–1 Payment and returns of tax
withhold.
* * * * *
(c) Information returns—(1) Filing re-
quirement—(i) In general. A withholding
agent (other than an individual who is not
acting in the course of a trade or business
with respect to a payment) must make an
information return on Form 1042-S (or
such other form as the IRS may prescribe)
to report the amounts subject to reporting,
as defined in paragraph (c)(2) of this sec-
tion, that were paid during the preceding
calendar year. Notwithstanding the pre-
ceding sentence, any person that with-
holds or is required to withhold an
amount under sections 1441, 1442, or
1443 must file a Form 1042-S for the pay-
ment withheld upon whether or not that
person is engaged in a trade or business
and whether or not the payment is an
amount subject to reporting. A Form
1042-S shall be prepared for each recipi-
ent of an amount subject to reporting.
The Form 1042-S shall be prepared in
such manner as the form and accompany-
ing instructions prescribe. One copy of
the Form 1042-S shall be filed with the
IRS on or before March 15 of the calendar
year following the year in which the
amount subject to reporting was paid. It
shall be filed with a transmittal form as
provided in the instructions to the Form
1042-S and to the transmittal form. With-
holding certificates, documentary evi-
dence, or other statements or documenta-
tion provided to a withholding agent are
not required to be attached to the form.
Another copy of the Form 1042-S must be
furnished to the recipient for whom the
form is prepared (or any other person, as
required under this paragraph (c) or the
instructions to the form) on or before
March 15 of the calendar year following
the year in which the amount subject to
reporting was paid. The withholding
agent must retain a copy of each Form
1042-S for the statute of limitations on as-
sessment and collection applicable to the
Form 1042 to which the Form 1042-S re-
lates.
(ii) Recipient—(A) Defined. For pur-
poses of this section, the term recipient
means—
(1) A beneficial owner as defined in
paragraph (c)(6) of this section, including
a foreign estate or a foreign complex
trust, as defined in §1.1441–1(c)(25);
(2) A qualified intermediary as defined
in §1.1441–1(e)(5)(ii);
(3) A withholding foreign partnership
as defined in §1.1441–5(c)(2) or a with-
holding foreign trust under
§1.1441–5(e)(5)(v);
(4) An authorized foreign agent as de-
fined in §1.1441–7(c);
(5) A U.S. branch that is treated as a
U.S. person under §1.1441–1(b)-
(2)(iv)(A);
(6) A nonwithholding foreign partner-
ship or a foreign simple trust as defined in
§1.1441–1(c)(24), but only to the extent
the income is (or is treated as) effectively
connected with the conduct of a trade or
business in the United States by such en-
tity;
(7) Apayee, as defined in
§1.1441–1(b)(2) that is presumed to be a
foreign person under the presumption
rules of §1.1441–1(b)(3); 1.1441–5(d) or
(e)(6), or 1.6049–5(d); and
(8) Any other person as required on
Form 1042-S or the instructions to the
form.
(B) Persons that are not recipients. A
recipient does not include—
(1) A nonqualified intermediary;
(2) A payment to a wholly-owned en-
tity that is disregarded under
§301.7701–2(c)(2) of this chapter as an
entity separate from its owner;
(3) A flow-through entity, as defined in
§1.1441–1(c)(23) (to the extent it is re-
ceiving amounts subject to reporting other
than income effectively connected with
the conduct of a trade or business in the
United States); and
(4) A U.S. branch described in
§1.1441–1(b)(2)(iv) that is not treated as
a U.S. person under that section.
(2) Amounts subject to reporting—(i)
In general. Subject to the exceptions de-
scribed in paragraph (c)(2)(ii) of this sec-
tion, amounts subject to reporting on
Form 1042–S are amounts paid to a for-
eign payee (including persons presumed
to be foreign) that are amounts subject to
withholding as defined in §1.1441–2(a).
Amounts subject to reporting include
amounts subject to withholding even if no
amount is deducted and withheld from the
payment because of a treaty or Internal
Revenue Code exception to taxation or
because an amount withheld was reim-
bursed to the payee under the adjustment
procedures of §1.1461–2. In addition,
amounts subject to reporting include any
amounts paid to a foreign payee on which
a withholding agent withheld an amount
(either under chapter 3 of the Internal
Revenue Code or section 3406) whether
or not the amount is subject to withhold-
ing. Amounts subject to reporting in-
clude, but are not limited to, the following
items—
(A) The entire amount of a corporate
distribution (whether actual or deemed)
irrespective of any estimate of the portion
of the distribution that represents a tax-
able dividend;
(B) Interest, including the portion of a
notional principal contract payment that is
characterized as interest. Interest shall
also be reported on Form 1042-S if it is
bank deposit interest paid to nonresident
alien individuals as required under
§1.6049–8;
(C) Rents;
(D) Royalties;
(E) Compensation for dependent and
independent personal services performed
in the United States;
(F) Annuities;
(G) Pension distributions and other de-
ferred income;
(H) Gambling winnings that are not ex-
empt from tax under section 871(j);
2000–23 I.R.B.1213June 5, 2000

(I) Income from the cancellation of in-
debtedness unless the withholding agent
is unrelated to the debtor and does not
have knowledge of the facts that give rise
to the payment (see §1.1441–2(d));
(J) Amounts that are (or are presumed
to be) effectively connected with the con-
duct of a trade or business in the United
States (including deposit interest as de-
fined in sections 871(i)(2)(A) and 881(d))
even if no withholding certificate is re-
quired to be furnished by the payee or
beneficial owner. In the case of amounts
paid on a notional principal contract de-
scribed in §1.1441–4(a)(3) that are pre-
sumed to be effectively connected with
the conduct of a trade or business in the
United States, the amount required to be
reported is limited to the amount of cash
paid from the notional principal contract;
(K) Scholarship, fellowship, or grant
income and compensation for personal
services that is not excludible from gross
income under section 117 (whether or not
the taxable scholarship, fellowship, grant
income, or compensation for personal ser-
vices is exempt from tax under an income
tax treaty) paid to foreign students,
trainees, teachers, or researchers;
(L) Amounts paid to foreign govern-
ments, international organizations, or the
Bank for International Settlements,
whether or not documentation must be
provided;
(M) Interest (including original issue dis-
count) paid with respect to foreign-targeted
registered obligations described in
§1.871–14(e)(2) to the extent the documen-
tation requirements described in
§1.871–14(e)(3) and (4) are required to be
satisfied (taking into account the provisions
of §1.871–14(e)(4)(ii), if applicable); and
(N) Original issue discount paid on the
redemption of an OID obligation. The
amount to be reported is the amount of
OID includible in the gross income of the
holder of the obligation, if known, or, if
not known, the total amount of original
issue discount determined as if the holder
held the obligation from its original is-
suance. A withholding agent may deter-
mine the total amount of OID by using the
most recently published ”List of Original
Issue Discount Instruments,” (Publication
1212, available from the IRS Forms Dis-
tribution Centers).
(ii) Exceptions to reporting. The
amounts listed in this paragraph (c)(2)(ii)
are not required to be reported on Form
1042-S—
(A) Interest (including original issue
discount) that is deposit interest under
sections 871(i)(2)(A) and 881(d) and that
is not effectively connected with the con-
duct of a trade or business in the United
States, unless reporting is required under
§1.6049–8 (regarding payments to certain
foreign residents) or is interest that is ef-
fectively connected with the conduct of a
trade or business in the United States;
(B) Interest or original issue discount
on certain short-term obligations, de-
scribed in section 871(g)(1)(B) or
881(a)(3);
(C) Interest paid on obligations sold be-
tween interest payment dates and the por-
tion of the purchase price of an OID
obligation that is sold or exchanged in a
transaction other than a redemption, un-
less the sale or exchange is part of a plan,
the principal purpose of which is to avoid
tax and the withholding agent has actual
knowledge or reason to know of such plan
(see §1.1441–2(a)(5) and (6));
(D) Any item required to be reported on
a Form W-2, including an item required to
be shown on Form W-2 solely by reason
of §1.6041–2 (relating to return of infor-
mation for payments to employees) or
§1.6052–1 (relating to information re-
garding payment of wages in the form of
group-term life insurance);
(E) Any item required to be reported on
Form 1099, and such other forms as are
prescribed pursuant to the information re-
porting provisions of sections 6041
through 6050P and the regulations under
those sections;
(F) Amounts paid on a notional princi-
pal contract described in
§1.1441–4(a)(3)(i) that are not effectively
connected with the conduct of a trade or
business in the United States (or not
treated as effectively connected pursuant
to §1.1441–4(a)(3)(ii));
(G) Amounts required to be reported on
Form 8288 (U.S. Withholding Tax Return
for Dispositions by Foreign Persons of
U.S. Real Property Interests) or Form
8804 (Annual Return for Partnership
Withholding Tax (section 1446)). A with-
holding agent that must report a distribu-
tion partly on a Form 8288 or 8804 and
partly on a Form 1042-S may elect to re-
port the entire amount on a Form 8288 or
8804;
(H) Interest on a registered obligation
that is targeted to foreign markets and
qualifies as portfolio interest to the extent
it is paid to a registered owner that is a fi-
nancial institution or member of a clear-
ing organization that has provided the
proper withholding certificates (see
§§1.1441–1(b)(4)(i) and 1.1441–2(a));
(I) Interest on a foreign targeted bearer
obligation (see §§1.1441–1(b)(4)(i) and
1.1441–2(a));
(J) Gain described in section 301(c)(3);
and
(K) Amounts described in
§1.1441–1(b)(4)(xviii) (dealing with certain
amounts paid by the U.S. government).
(3) Required information. The informa-
tion required to be furnished under this para-
graph (c)(3) shall be based upon the infor-
mation provided by or on behalf of the
recipient of an amount subject to reporting
(as corrected and supplemented based on the
withholding agent’s actual knowledge) or
the presumption rules of §§1.1441–1(b)(3),
1.1441– 4(a); 1.1441–5(d) and (e);
1.1441–9(b)(3) or 1.6049–5(d). The Form
1042–S must include the following informa-
tion, if applicable—
(i) The name, address, and taxpayer
identifying number of the withholding
agent;
(ii) A description of each category of
income paid based on the income codes
provided on the form (e.g., interest, divi-
dends, royalties, etc.) and the aggregate
amount in each category expressed in
U.S. dollars;
(iii) The rate of withholding applied or
the basis for exempting the payment from
withholding (based on exemption codes
provided on the form);
(iv) The name and address of the recip-
ient;
(v) The name and address of any non-
qualified intermediary, flow–through en-
tity, or U.S. branch as described in
§1.1441–1(b)(2)(iv) (other than a branch
that is treated as a U.S. person) to which
the payment was made;
(vi) The taxpayer identifying number
of the recipient if required under
§1.1441–1(e)(4)(vii) or if actually known
to the withholding agent making the re-
turn;
(vii) The taxpayer identifying number
of a nonqualified intermediary or flow-
through entity (to the extent it is not a re-
cipient) or other flow-through entity to
June 5, 200012142000–23 I.R.B.

the extent it is known to the withholding
agent;
(viii) The country (based on the coun-
try codes provided on the form) of the re-
cipient and of any nonqualified intermedi-
ary or flow-through entity the name of
which appears on the form; and
(ix) Such information as the form or
the instructions may require in addition
to, or in lieu of, information required
under this paragraph (c)(3).
(4) Method of reporting—(i) Payments
by U.S. withholding agents to recipients.
A withholding agent that is a U.S. person
(other than a foreign branch of a U.S. per-
son that is a qualified intermediary as de-
fined in §1.1441–1(e)(5)(ii)) and that
makes payments of amounts subject to re-
porting on Form 1042-S must file a sepa-
rate Form 1042-S for each recipient who
receives such amount. For purposes of
this paragraph (c)(4), a U.S. person in-
cludes a U.S. branch described in
§1.1441–1(e)(2)(iv)(A) or (E) that agrees
to be treated as a U.S. person. Except as
may otherwise be required on Form 1042-
S or the instructions to the form, only
payments for which the income code, ex-
emption code, withholding rate and recip-
ient code are the same may be reported on
a single Form 1042-S. See paragraph
(c)(4)(ii) of this section for reporting of
payments made to a person that is not a
recipient.
(A) Payments to beneficial owners.If
a U.S. withholding agent makes a pay-
ment directly to a beneficial owner it must
complete Form 1042-S treating the bene-
ficial owner as the recipient. Under the
grace period rule of §1.1441–1(b)(3)(iv),
a U.S. withholding agent may, under cer-
tain circumstances, treat a payee as a for-
eign person while the withholding agent
awaits a valid withholding certificate. A
U.S. withholding agent who relies on the
grace period rule to treat a payee as a for-
eign person must file a Form 1042-S to
report all payments on Form 1042-S dur-
ing the period that person was presumed
to be foreign even if that person is later
determined to be a U.S. person based on
appropriate documentation or is presumed
to be a U.S. person after the grace period
ends. In the case of joint owners, a with-
holding agent may provide a single Form
1042-S made out to the owner whose sta-
tus the U.S. withholding agent relied upon
to determine the applicable rate of with-
holding. If, however, any one of the own-
ers requests its own Form 1042-S, the
withholding agent must furnish a Form
1042-S to the person who requests it. If
more than one Form 1042-S is issued for
a single payment, the aggregate amount
paid and tax withheld that is reported on
all Forms 1042-S cannot exceed the total
amounts paid to joint owners and the tax
withheld thereon.
(B)Payments to a qualified intermedi-
ary, a withholding foreign partnership, or
a withholding foreign trust. A U.S. with-
holding agent that makes payments to a
qualified intermediary (whether or not the
qualified intermediary assumes primary
withholding responsibility), a withhold-
ing foreign partnership, or a withholding
foreign trust shall complete Forms 1042-S
treating the qualified intermediary or
withholding foreign partnership as the re-
cipient. The U.S. withholding agent must
complete a separate Form 1042-S for each
withholding rate pool. A withholding rate
pool is a payment of a single type of in-
come (determined by the income codes on
Form 1042-S) that is subject to a single
rate of withholding. A qualified interme-
diary that does not assume primary with-
holding responsibility on all payments it
receives provides information regarding
the proportions of income subject to a
particular withholding rate to the with-
holding agent on a withholding statement
associated with a qualified intermediary
withholding certificate. A qualified inter-
mediary may provide a U.S. withholding
agent with information regarding with-
holding rate pools for U.S. non-exempt
recipients (as defined under
§1.1441–1(c)(21)). Amounts paid with
respect to such withholding rate pools
must be reported on Form 1099 com-
pleted for each U.S. non-exempt recipient
to the extent they are subject to Form
1099 reporting. These amounts must not
be reported on Form 1042-S. In addition,
the qualified intermediary may provide
the U.S. withholding agent information
regarding withholding rate pools for U.S.
persons that are exempt recipients as de-
fined under §1.1441–1(c)(20). If such in-
formation is provided, a U.S. withholding
agent should not report such withholding
rate pools on Form 1042-S.
(C) Amounts paid to U.S. branches
treated as U.S. persons. A U.S. withhold-
ing agent making a payment to a U.S.
branch of a foreign person described in
§1.1441–1(b)(2)(iv) shall complete Form
1042-S as follows—
(1) If the branch has provided the U.S.
withholding agent with a withholding cer-
tificate that evidences its agreement with
the withholding agent to be treated as a
U.S. person, the U.S. withholding agent
files Forms 1042-S treating the U.S.
branch as the recipient;
(2) If the branch has provided the U.S.
withholding agent with a withholding cer-
tificate that transmits information regard-
ing beneficial owners, qualified interme-
diaries, withholding foreign partnerships,
or other recipients, the U.S. withholding
agent must complete a separate Form
1042-S for each recipient whose docu-
mentation is associated with the U.S.
branch’s withholding certificate; or
(3) If the U.S. withholding agent can-
not reliably associate a payment with a
valid withholding certificate from the
U.S. branch, it shall treat the U.S. branch
as the recipient and report the income as
effectively connected with the conduct of
a trade or business in the United States.
(D) Amounts paid to an authorized for-
eign agent. If a U.S. withholding agent
makes a payment to an authorized foreign
agent, the withholding agent files Forms
1042-S treating the authorized foreign
agent as the recipient, provided that the
authorized foreign agent reports the pay-
ments on Forms 1042-S to each recipient
to which it makes payments. If the autho-
rized foreign agent fails to report the
amounts paid on Forms 1042-S for each
recipient to which the payment is made,
the U.S. withholding agent remains re-
sponsible for such reporting.
(E) Dual Claims. A U.S. withholding
agent may make a payment to a foreign
entity that is simultaneously claiming a
reduced rate of tax on its own behalf for a
portion of the payment and a reduced rate
on behalf of persons in their capacity as
interest holders in that entity on the re-
maining portion. See §1.1441–6(b)-
(2)(iii). If the claims are consistent and
the withholding agent accepts the multi-
ple claims, the withholding agent must
file a separate Form 1042-S for those pay-
ments for which the entity is treated as the
beneficial owner and Forms 1042-S for
each of the interest holder in the entity for
which the interest holder is treated as the
recipient. For those payments for which
2000–23 I.R.B.1215June 5, 2000

the interest holder in an entity is treated as
the recipient, the U.S. withholding agent
shall prepare the Form 1042-S in the same
manner as a payment made to a nonquali-
fied intermediary or flow-through entity
as set forth in paragraph (c)(4)(ii) of this
section. If the claims are consistent but
the withholding agent has not chosen to
accept the multiple claims, or if the
claims are inconsistent, the withholding
agent must file a separate Form 1042-S
for the person or persons it has chosen to
treat as the recipients.
(ii) Payments made by U.S. withhold-
ing agents to persons that are not recipi-
ents—(A) Amounts paid to a nonqualified
intermediary, a flow-through entity, and
certain U.S. branches. If a U.S. with-
holding agent makes a payment to a non-
qualified intermediary, a flow-through en-
tity, or a U.S. branch described in
§1.1441–1(b)(2)(iv) (other than a branch
that agrees to be treated as a U.S. person),
it must complete a separate Form 1042-S
for each recipient to the extent the with-
holding agent can reliably associate a
payment with valid documentation
(within the meaning of
§1.1441–1(b)(2)(vii)) from the recipient
which is associated with the withholding
certificate provided by the nonqualified
intermediary, flow-through entity, or U.S.
branch. If a payment is made through
tiers of nonqualified intermediaries or
flow-through entities, the withholding
agent must nevertheless complete Form
1042-S for the recipients to the extent it
can reliably associate the payment with
documentation from the recipients. A
withholding agent that is completing a
Form 1042-S for a recipient that receives
a payment through a nonqualified inter-
mediary, a flow-through entity, or a U.S.
branch must include on the Form 1042-S
the name of the nonqualified intermediary
or flow-through entity from which the re-
cipient directly receives the payment. If a
U.S. withholding agent cannot reliably as-
sociate the payment, or any portion of the
payment, with valid documentation from
a recipient either because no such docu-
mentation has been provided or because
the nonqualified intermediary, flow-
through entity, or U.S. branch has failed
to provide sufficient allocation informa-
tion so that the withholding agent can as-
sociate the payment, or any portion
thereof, with valid documentation, then
the withholding agent must report the
payments as made to an unknown recipi-
ent in accordance with the appropriate
presumption rules for that payment.
Thus, if under the presumption rules the
payment is presumed to be made to a for-
eign person, the withholding agent must
generally withhold 30 percent of the pay-
ment and report the payment on Form
1042-S made out to an unknown recipient
and shall also include the name of the
nonqualified intermediary or flow-
through entity that received the payment
on behalf of the unknown recipient. If,
however, the recipient is presumed to be a
U.S. non-exempt recipient (as defined in
§1.1441–1(c)(21)), the withholding agent
must withhold on the payment as required
under section 3406 and report the pay-
ment as made to an unknown recipient on
the appropriate Form 1099 as required
under chapter 61 of the Internal Revenue
Code.
(B) Disregarded entities. If a U.S. with-
holding agent makes a payment to a disre-
garded entity but receives a valid with-
holding certificate or other documentary
evidence from a foreign person that is the
single owner of a disregarded entity, the
withholding agent must file a Form 1042-
S treating the foreign single owner as the
recipient. The taxpayer identifying num-
ber on the Form 1042-S, if required, must
be the foreign single owner’s TIN.
(iii) Reporting by qualified intermedi-
aries, withholding foreign partnerships,
and withholding foreign trusts. A quali-
fied intermediary, a withholding foreign
partnership, and a withholding foreign
trust shall report payments on Form 1042-
S as provided in their agreements with the
IRS and the instructions to the form.
(iv) Reporting by a nonqualified inter-
mediary, flow-through entity, and certain
U.S. branches. A nonqualified intermedi-
ary, flow-through entity, or U.S. branch
described in §1.1441–1(e)(2)(iv) (other
than a U.S. branch that is treated as a
U.S. person) is a withholding agent and
must file Forms 1042-S for amounts paid
to recipients in the same manner as a U.S.
withholding agent. A Form 1042-S will
not be required, however, if another with-
holding agent has reported the same
amount to the same recipient for which
the nonqualified intermediary, flow-
through entity, or U.S. branch would be
required to file a return and the entire
amount that should be withheld from
such payment has been withheld. A non-
qualified intermediary, flow-through en-
tity, or U.S. branch must report payments
made to recipients to the extent it has
failed to provide the appropriate docu-
mentation to another withholding agent
together with the information required
for that withholding agent to reliably as-
sociate the payment with the recipient
documentation or to the extent it knows,
or has reason to know, that less than the
required amount has been withheld. A
nonqualified intermediary or flow-
through entity that is required to report a
payment on Form 1042-S must follow
the same rules as apply to a U.S. with-
holding agent under paragraph (c)(4)(i)
and (ii) of this section.
(v) Pro rata reporting for allocation
failures. If a nonqualified intermediary,
flow- through entity, or U.S. branch de-
scribed in §1.1441–1(b)(2)(iv) (other than
a branch treated as a U.S. person) that
uses the alternative procedures of
§1.1441–1(e)(3)(iv)(D) fails to provide
information sufficient to allocate the
amount subject to reporting paid to a
withholding rate pool to the payees identi-
fied for that pool, then the withholding
agent shall report the payment in accor-
dance with the rule provided in
§1.1441–1(e)(3)(iv)(D)(6).
(vi) Other withholding agents. Any
person that is a withholding agent not de-
scribed in paragraph (c)(4)(i), (iii), or (iv)
of this section (e.g., a foreign person that
is not a qualified intermediary, flow-
through entity, or U.S. branch) shall file
Form 1042-S in the same manner as a
U.S. withholding agent and in accordance
with the instructions to the form.
* * * * *
Par. 11. Effective January 1, 2001,
§1.6041–1 is amended by revising para-
graph (d)(5) to read as follows:
§ 1.6041–1 Return of information as to
payments of $600 or more.
* * * * *
(d) * * *
(5) Notional principal contracts. Ex-
cept as provided in paragraphs (b)(5)(i)
and (ii) of this section, amounts paid after
December 31, 2000, with respect to no-
tional principal contracts referred to in
§1.863–7 or 1.988–2(e) to persons who
are not described in §1.6049–4(c)(1)(ii)
are required to be reported in returns of
June 5, 200012162000–23 I.R.B.

information under this section. The
amount required to be reported under this
paragraph (d)(5) is limited to the amount
of cash paid from the notional principal
contract as described in §1.446–3(d). A
non-periodic payment is reportable for the
year in which an actual payment is made.
Any amount of interest determined under
the provisions of §1.446–3(g)(4) (dealing
with interest in the case of a significant
non-periodic payment) is reportable under
this paragraph (d)(5) and not under sec-
tion 6049 (see §1.6049–5(b)(15)). See
§1.6041–4(a)(4) for reporting exceptions
regarding payments to foreign persons.
See, however, §1.1461–1(c)(1) for report-
ing amounts described under this para-
graph (d)(5) that are paid to foreign per-
sons. The provisions of §1.6049–5(d)
shall apply for determining whether a
payment with respect to a notional princi-
pal contract is made to a foreign person.
See §1.6049–4(a) for a definition of
payor. For purposes of this paragraph
(d)(5), a payor includes a middleman de-
fined in §1.6049–4(f)(4).
(i) An amount paid with respect to a no-
tional principal contract is not required to
be reported if the payment is made out-
side the United States (as defined in
§1.6049–5(e)) by a non-U.S. payor or a
non-U.S. middleman.
(ii) An amount paid with respect to a
notional principal contract is not required
to be reported if the payment is made out-
side the United States (as defined in
§1.6049–5(e)) by a payor that has no ac-
tual knowledge that the payee is a U.S.
person, and the payor is—
(A) A U.S. payor or U.S. middleman
that is not a U.S. person (such as a con-
trolled foreign corporation defined in sec-
tion 957(a) or certain foreign corporations
or foreign partnerships engaged in a U.S.
trade or business); or
(B) A foreign branch of a U.S. bank.
See §1.6049–5(c)(5) for a definition of a
U.S. payor, a U.S. middleman, a non-U.S.
payor, and a non-U.S. middleman.
* * * * *
Par. 12. Effective January 1, 2001,
§1.6041–4 is amended by
1. Revising paragraph (a)(3).
2. Adding paragraph (a)(6).
The revision and addition read as fol-
lows:
§1.6041–4 Foreign-related items and
other exceptions.
(a) * * *
(3) Returns of information are not re-
quired for amounts paid by a foreign in-
termediary described in §1.1441–1(c)(13)
that it has received in its capacity as an in-
termediary and that are associated with a
valid withholding certificate described in
§1.1441–1(e)(3)(ii) or (iii) and payments
made by a U.S. branch of a foreign bank
or of a foreign insurance company de-
scribed in §1.1441–1(b)(2)(iv) (other than
a U.S. branch that is treated as a U.S. per-
son) that are associated with a valid with-
holding certificate described in
§1.1441–1(e)(3)(v), which certificate the
intermediary or branch has furnished to
the payor or middleman from whom it has
received the payment, unless, and to the
extent, the intermediary or branch knows
that the payments are required to be re-
ported under §1.6041–1 and were not so
reported. For example, if a foreign inter-
mediary or U.S. branch described in
§1.1441–1(b)(2)(iv) fails to provide infor-
mation regarding U.S. persons that are not
exempt from reporting under
§1.6041–3(q) to the person from whom
the intermediary or U.S. branch receives
the payment, the foreign intermediary or
U.S. branch must report the payment on
an information return. The exception of
this paragraph (a)(3) shall not apply to a
qualified intermediary that assumes re-
porting responsibility under chapter 61 of
the Internal Revenue Code.
* * * * * *
(6) For rules concerning direct sellers,
see §1.6041A–1(d)(3)(i)(C).
* * * * *
Par. 13. Effective January 1, 2001,
§1.6041A–1 is amended by:
1. Revising paragraph (d)(3)(i)(B).
2. Adding paragraph (d)(3)(i)(C).
The revision and addition read as fol-
lows:
§1.6041A–1 Returns regarding payments
of remuneration for services and certain
direct sales.
* * * * *
(d) * * *
(3) * * * (i) * * *
(B) Returns of information are not re-
quired for payments of remuneration for
services from sources outside the United
States (determined under the provisions
of part I, subchapter N, chapter 1 of the
Internal Revenue Code and the regula-
tions under those provisions) if payments
are made outside the United States by a
non-U.S. payor or non U.S. middleman.
For a definition of non U.S. payor or non-
U.S. middleman, see §1.6049–5(c)(5).
For circumstances in which a payment is
considered to be made outside the United
States, see §1.6049–5(e).
(C) Returns of information are not re-
quired under sections 6041 or 6041A for
amounts paid outside of the United States
(within the meaning of §1.6049–5(e)) as
remuneration for services as a direct seller
(within the meaning of section 3508) per-
formed outside of the United States or for
sales described in section 6041A(b) made
outside of the United States of consumer
products for resale outside of the United
States.
* * * * *
Par. 14. Effective January 1, 2001,
§1.6042–3 is amended by revising para-
graph (b)(1)(vi) to read as follows:
§1.6042–3 Dividends subject to report-
ing.
* * * * *
(b) * * * (1) * * *
(vi) Payments made by a foreign interme-
diary described in §1.1441–1(c)(13) of
amounts that it has received in its capacity as
an intermediary and that are associated with
a valid withholding certificate described in
§1.1441–1(e)(3)(ii) or (iii) and payments
made by a U.S. branch of a foreign bank or
of a foreign insurance company described in
§1.1441–1(b)(2)(iv) (other than a U.S.
branch that is treated as a U.S. person) that
are associated with a valid withholding cer-
tificate described in §1.1441–1(e)(3)(v),
which certificate the intermediary or branch
has furnished to the payor or middleman
from whom it has received the payment, un-
less, and to the extent, the intermediary or
branch knows that the payments are required
to be reported under §1.6042–2 and were not
so reported. For example, if a foreign inter-
mediary or U.S. branch described in
§1.1441–1(b)(2)(iv) fails to provide infor-
mation regarding U.S. persons that are not
exempt from reporting under
§1.6049–4(c)(1)(ii) to the person from
whom the intermediary or U.S. branch re-
ceives the payment, the amount paid by the
foreign intermediary or U.S. branch to such
person is a dividend. The exception of this
paragraph (b)(1)(vi) shall not apply to a
qualified intermediary that assumes report-
ing responsibility under chapter 61 of the In-
ternal Revenue Code.
2000–23 I.R.B.1217June 5, 2000

* * * * *
Par. 15. Effective January 1, 2001,
§1.6045–1 is amended by:
1.Removing the last sentence of
paragraph (g)(1)(i) and adding two new
sentences in its place.
2. Revising paragraph (g)(3)(iv).
3. Revising paragraph (g)(4), Ex-
ample7.
4. Adding Examples 8and 9to
paragraph (g)(4).
The additions and revisions read as fol-
lows:
§1.6045–1 Returns of information of bro-
kers and barter exchanges.
* * * * *
(g) * * * (1) * * *
(i) * * * For purposes of this paragraph
(g)(1)(i), a broker that is required to ob-
tain, or chooses to obtain, a beneficial
owner withholding certificate described
in §1.1441–1(e)(2)(i) from an individual
may rely on the withholding certificate
only to the extent the certificate includes
a certification that the beneficial owner
has not been, and at the time the certifi-
cate is furnished, reasonably expects not
to be present in the United States for a pe-
riod aggregating 183 days or more during
each calendar year to which the certificate
pertains. The certification is not required
if a broker receives documentary evi-
dence under §1.6049–5(c)(1) or (4).
* * * * *
(3) * * *
(iv) Special rules where the customer is
a foreign intermediary or certain U.S.
branches. A foreign intermediary, as de-
fined in §1.1441–1(c)(13), is an exempt
foreign person, except when the broker
has actual knowledge or reason to know
(within the meaning of §1.6049–5(c)(3))
that the person for whom the intermediary
acts is a U.S. person that is not exempt
from reporting under §5f.6045–1(c)(3) of
this chapter or the broker is required to
presume under §1.6049–5(d)(3) that the
payee is a U.S. person that is not an ex-
empt recipient. If an intermediary, as de-
fined in §1.1441–1(c)(13), or a U.S.
branch described in §1.1441–1(b)(2)(iv)
(other than a U.S. branch that is treated as
a U.S. person) receives a payment from a
payor or middleman, which payment the
payor or middleman can associate with a
valid withholding certificate described in
§1.1441–1(e)(3)(ii), (iii), or (v) furnished
by such intermediary or U.S. branch, then
the intermediary or U.S. branch is not re-
quired to report such payment when it, in
turn, pays the amount to the person whose
name is on the certificate furnished by the
intermediary or U.S. branch to the payor
or middleman, unless, and to the extent,
the intermediary or U.S. branch knows
that the payment is required to be reported
under this section and was not so re-
ported. For example, if a foreign interme-
diary or U.S. branch fails to provide infor-
mation regarding U.S. persons that are not
exempt from reporting under
§5f.6045–1(c)(3) of this chapter to the
person from whom the intermediary or
U.S. branch receives the payment, the for-
eign intermediary or U.S. branch must re-
port the payment on an information re-
turn. The exception of this paragraph
(g)(3)(iv) shall not apply to a qualified in-
termediary that assumes reporting respon-
sibility under chapter 61 of the Internal
Revenue Code.
(4) * * *
Example 7. Customer A, an individual, owns
U.S. corporate bonds issued in registered form after
July 18, 1984 and carrying a stated rate of interest.
The bonds are held through an account with foreign
bank, X, and are held in street name. X is a wholly-
owned subsidiary of a U.S. company and is not a
qualified intermediary within the meaning of
§1.1441–1(e)(5)(ii). X has no documentation re-
garding A. A instructs X to sell the bonds. In order
to effect the sale, X acts through its agent in the
United States, Y. Y sells the bonds and remits the
sales proceeds to X. X credits A’s account in the for-
eign country. X does not provide documentation to
Y.
(i) Y’s obligations to withhold and report. Y
treats X as the customer, and not A, because Y can-
not treat X as an intermediary because it has re-
ceived no documentation from X. Y is not required
to report the sales proceeds under the multiple bro-
ker exception under §5f.6045–1(c)(3)(ii) of this
chapter, because X is an exempt recipient. Further,
Y is not required to report the amount of accrued in-
terest paid to X on Form 1042–S under
§1.1461–1(c)(2)(ii) because accrued interest is not
an amount subject to reporting unless the withhold-
ing agent knows that the obligation is being sold
with a primary purpose of avoiding tax.
(ii) X’s obligations to withhold and report. Al-
though X has effected, within the meaning of para-
graph (a)(1) of this section, the sale of a security at
an office outside the United States under paragraph
(g)(3)(iii) of this section, X is treated as a broker,
under paragraph (a)(1) of this section, because as a
wholly-owned subsidiary of a U.S. corporation, X is
a U.S. payor . See §1.6049–5(c)(5). Under the pre-
sumptions described in §1.6049–5(d)(2), X must
presume that, with respect to the sales proceeds, A is
a U.S. person who is not an exempt recipient.
Therefore the payment of sales proceeds to A by X is
reportable on a Form 1099 under paragraph (c)(2) of
this section. X has no obligation to backup withhold
on the payment based on the exemption under
§31.3406(g)–1(e) of this chapter, unless X has actual
knowledge that A is a U.S. person that is not an ex-
empt recipient. X is also required to separately re-
port the accrued interest (see paragraph (d)(3) of this
section) on Form 1099 under section 6049 because
A is also presumed to be a U.S. person who is not an
exempt recipient under the presumption rule in
§1.6049–5(d)(2) and §1.1441–1(b)(3)(iii) since ac-
crued interest is not an amount subject to reporting
and therefore the presumption of foreign status for
offshore accounts under §1.1441–1(b)(3)(iii)(D)
does not apply.
Example 8. The facts are the same as in Example
7, except that instead of U.S. corporate bonds that
carry stated interest, A owns original issue discount
instruments described in section 871(g)(1)(B)(i)
(i.e., obligations payable 183 days or less from the
date of original issue). In addition, the sale is in a
transaction other than a redemption.
(i) Y’s obligations to withhold and report
. Y is not
required to report the sales proceeds under the multi-
ple broker exception under §5f.6045–1(c)(3)(ii) of this
chapter, because X is an exempt recipient.
(ii) X’s obligations to withhold and report. Al-
though X has effected, within the meaning of para-
graph (a)(1) of this section, the sale of a security at
an office outside the United States under paragraph
(g)(3)(iii) of this section, X is treated as a broker,
under paragraph (a)(1) of this section, because as a
wholly-owned subsidiary of a U.S. corporation, X is
a U.S. payor. See §1.6049–5(c)(5). Under the pre-
sumptions described in §1.6049–5(d)(2), X must
presume that, with respect to the sales proceeds, A is
a U.S. person who is not an exempt recipient.
Therefore the payment of sales proceeds to A by X is
reportable on a Form 1099 under paragraph (c)(2) of
this section. X has no obligation to backup withhold
on the payment based on the exemption under
§31.3406(g)–1(e) of this chapter, unless X has actual
knowledge that A is a U.S. person that is not an ex-
empt recipient. X is not required to separately report
the amount of accrued original issue discount. See
paragraph (d)(3) of this section.
Example 9. The facts are the same as in Example
8, except that X is a foreign corporation that is not a
U.S. payor under §1.6049–5(c).
(i) Y’s obligations to withhold and report. Y is not
required to report the sales proceeds under the multi-
ple broker exception under §5f.6045–1(c)(3)(ii) of this
chapter, because X is the person responsible for pay-
ing the proceeds from the sale to A.
(ii) X’s obligations to withhold and report. Al-
though A is presumed to be a U.S. payee under the
presumptions of §1.6049–5(d)(2), X is not consid-
ered to be a broker under paragraph (a)(1) of this
section because it is a not a U.S. payor under
§1.6049–5(c)(5). Therefore X is not required to re-
port the sale under paragraph (c)(2) of this section.
* * * * *
Par. 16. Effective January 1, 2001,
§1.6049–4 is amended by revising the in-
troductory text of paragraph (c)(1)(ii) to
read as follows:
§1.6049–4 Return of information as to in-
terest paid and original issue discount in-
cludible in gross income after December
31, 1982.
June 5, 200012182000–23 I.R.B.

* * * * *
(c) * * * (1) * * *
(ii) Exempt recipient defined.The term
exempt recipient means any person de-
scribed in paragraphs (c)(1)(ii)(A) through
(Q) of this section. An exempt recipient is
generally exempt from information report-
ing without filing a certificate claiming ex-
empt status unless the provisions of this
paragraph (c)(1)(ii) require a payee to file a
certificate. A payor may, in any case, re-
quire a payee that is a U.S. person not oth-
erwise required to file a certificate under
this paragraph (c)(1)(ii) to file a certificate
in order to qualify as an exempt recipient.
See §31.3406(h)–3(a)(1)(iii) and (c)(2) of
this chapter for the certificate that a payee
that is a U.S. person must provide when a
payor requires the certificate to treat the
payee as an exempt recipient under this
paragraph (c)(1)(ii). A payor may treat a
payee as an exempt recipient based upon a
properly completed form as described in
§31.3406(h)–3(e)(2) of this chapter, its ac-
tual knowledge that the payee is a person
described in this paragraph (c)(1)(ii), or the
indicators described in this paragraph
(c)(1)(ii).
* * * * *
Par. 17. Effective January 1, 2001,
§1.6049–5 is amended by:
1. Adding a sentence at the end of
paragraph (b)(10)(ii).
2. Adding a sentence at the end of
the introductory text language of para-
graph (b)(11).
3. Revising paragraph (b)(14).
4. Adding a sentence at the end of
paragraph (c)(1).
5. Revising paragraph (c)(4).
6. In paragraph (c)(6), removing
Example 3and redesignating Examples 4
and 5as Examples 3and 4, respectively;
in newly designated Example 3, revise
the language “The facts are the same as in
Example 3” to read “The facts are the
same as in Example 2”; in addition, in
newly designated Example 4, revise the
language “The facts are the same as in Ex-
ample 4” to read “The facts are the same
as in Example 3”.
7. Revising the first sentence of
paragraph (d)(1) introductory text.
8. Revising paragraphs (d)(2)(i)
and (d)(2)(ii), (d)(3), and (d)(4).
9. Removing paragraph (d)(5).
The additions and revisions read as fol-
lows:
§1.6049–5 Interest and original issue
discount subject to reporting after De-
cember 31, 1982.
* * * * *
(b) * * *
(10) * * *
(ii) * * * The exemption from reporting
described in this paragraph (b)(10) shall
not apply if the payor has actual knowl-
edge that the payee is a U.S. person who
is not an exempt recipient.
(11) * * * The exemption from report-
ing described in this paragraph (b)(11)
shall not apply if the payor has actual
knowledge that the payee is a U.S. person
who is not an exempt recipient.
* * * * *
(14) Payments made by a foreign inter-
mediary described in §1.1441–1(e)(3)(i)
of amounts that it has received in its ca-
pacity as an intermediary and that are as-
sociated with a valid withholding certifi-
cate described in §1.1441–1(e)(3)(ii) or
(iii) and payments made by a U.S. branch
of a foreign bank or of a foreign insurance
company described in §1.1441–1(b)-
(2)(iv) (other than a U.S. branch that is
treated as a U.S. person) that are associ-
ated with a valid withholding certificate
described in §1.1441–1(e)(3)(v), which
certificate the intermediary or branch has
furnished to the payor or middleman from
whom it has received the payment, unless,
and to the extent, the intermediary or
branch knows that the payments are re-
quired to be reported under §1.6049–4
and were not so reported. For example, if
a foreign intermediary or U.S. branch de-
scribed in §1.1441–1(b)(2)(iv) fails to
provide information regarding U.S. per-
sons that are not exempt from reporting
under §1.6049–4(c)(1)(ii) to the person
from whom the intermediary or U.S.
branch receives the payment, the amount
paid by the foreign intermediary or U.S.
branch to such person is interest or origi-
nal issue discount. The exception of this
paragraph (b)(14) shall not apply to a
qualified intermediary that assumes re-
porting responsibility under chapter 61 of
the Internal Revenue Code.
* * * * *
(c) * * * (1) * * * A payor may also
rely on documentary evidence associated
with a flow-through withholding certifi-
cate for payments treated as made to for-
eign partners of a nonwithholding foreign
partnership, as defined in §1.1441–1-
(c)(28), the foreign beneficiaries of a for-
eign simple trust, as defined in
§1.1441–1(c)(24), or foreign owners of a
foreign grantor trust, as defined in
§1.1441–1(c)(26), even though the part-
nership or trust account is maintained in
the United States.
* * * * *
(4) Special documentation rules for
certain payments. This paragraph (c)(4)
modifies the provisions of this paragraph
(c) for payments to offshore accounts
maintained at a bank or other financial in-
stitution of amounts that are not subject to
withholding under chapter 3 of the Inter-
nal Revenue Code, other than amounts
described in paragraph (d)(3)(iii) of this
section (dealing with U.S. short-term OID
and U.S. bank deposit interest). Amounts
are not subject to withholding under chap-
ter 3 of the Internal Revenue Code if they
are not included in the definition of
amounts subject to withholding under
§1.1441–2(a) (e.g., deposit interest with
foreign branches of U.S. banks, foreign
source income, or broker proceeds).
(i) Special rule when non-renewable
documentary evidence is customary. If it
is customary in the country in which a
branch or office of a bank or other finan-
cial institution is located to obtain docu-
mentary evidence described in paragraph
(c)(1) of this section, but it is not custom-
ary for such documentary evidence to be
renewed, then a payor may, in lieu of ob-
taining a withholding certificate, request
such documentary evidence for an ac-
count maintained at such branch or office.
The bank or other financial institution
may rely on such documentary evidence
to treat a person as a foreign person with-
out renewing such documentary evidence
in accordance with paragraph (c)(2) of
this section and §1.1441–1(e)(4)(ii) if it
may rely on the documentary evidence as
sufficient to establish the person’s foreign
status under §1.1441–7(b)(7) and (8). If,
however, the bank or other financial insti-
tution may, under §1.1441–7(b)(8) treat a
payee as a foreign person even though it
has a residence or mailing address for the
payee in the United States, or has stand-
ing instructions to pay amounts from its
account to an address in the United States
or an account maintained in the United
States, then the payor shall rely on the
documentary evidence only for a period
of three full calendar years after the calen-
2000–23 I.R.B.1219June 5, 2000

dar year in which the documentary evi-
dence is provided to the payor or, if ear-
lier, until the payor is aware of a change
of circumstances that affects the validity
of the documentation as establishing the
payee’s status as a foreign person.
(ii) Statement in lieu of documentary
evidence. If under the local laws, regula-
tions, or practices applicable to a type of
account or transaction it is not customary
to obtain documentary evidence described
in paragraph (c)(1) of this section, the
bank or other financial institution may, in-
stead of obtaining a beneficial owner
withholding certificate described in
§1.1441–1(e)(2)(i) or documentary evi-
dence described in paragraph (c)(1) of
this section, establish a payee’s foreign
status based on the statement described in
this paragraph (4)(ii) (or such substitute
statement as the Internal Revenue Service
may prescribe) made on an account open-
ing form. The statement shall be valid
only if the mailing and residence ad-
dresses of the payee are outside the
United States and there are not other indi-
cia of U.S. status. If reliance is not per-
mitted because there are indicia of U.S.
status then the payor must obtain either
documentary evidence described in para-
graph (c)(1) of this section or a Form W-8
described in §1.1441–1(e)(2)(i) to treat
the customer as a foreign payee. In such a
case, the form or documentary evidence
must be renewed every three years in ac-
cordance with the renewal procedures set
forth in §1.1441–1(e)(4)(ii)(A) for as long
as indicia of U.S. status continue to be
present. The statement referred to in this
paragraph (c)(4)(i) of this section must
appear near the signature line and must
read as follows:
By opening this account and signing
below, the account owner represents
and warrants that he/she/it is not a U.S.
person for purposes of U.S. Federal
income tax and that he/she/it is not act-
ing for, or on behalf of, a U.S. person.
A false statement or misrepresentation
of tax status by a U.S. person could
lead to penalties under U.S. law. If
your tax status changes and you
become a U.S. citizen or a resident, you
must notify us within 30 days.
(iii) Continuous validity of declaration
of foreign status subject to due diligence
by financial institution. A declaration of
foreign status described in paragraph
(c)(4)(ii) of this section does not expire
unless the bank or financial institution be-
comes aware of circumstances indicating
that the customer may be a U.S. person.
(iv) Exception for existing accounts.
The rules of paragraphs (c)(4)(i) and (iii)
of this section shall apply to accounts
opened on or after January 1, 2001. For
accounts opened before 2001, a bank or
other financial institution may rely on the
rules contained in §§35a.9999–3(ii) Q&A
34 and 35a.9999–4T Q&A 1 and 5 of this
chapter in effect prior to January 1, 2001
(see 26 CFR Parts 30–39 revised as of
April 1, 2000).
* * * * *
(d) * * * (1) Identifying the payee. The
provisions of §§1.1441–1(b)(2), 1.1441–
5(c)(1), (e)(2) and (3) shall apply (by ap-
plying the term payorinstead of the term
withholding agent) to identify the payee
for purposes of this section (and other
sections of the regulations under this
chapter to which this paragraph (d)(1) ap-
plies), except to the extent provided in
this paragraph (d)(1) in the case of a pay-
ment of amounts that are not subject to
withholding under chapter 3 of the Inter-
nal Revenue Code. * * *
* * * * *
(2) Presumptions of classification and
U.S. or foreign status in the absence of
documentation—(i) In general. Except as
otherwise provided in this paragraph
(d)(2)(i), for purposes of this section (and
other sections of regulations under this
chapter to which this paragraph (d)(2) ap-
plies), the provisions of
§1.1441–1(b)(3)(i), (ii), (iii), (vii), (viii),
and (ix) and 1.1441–5(d) and (e)(6) shall
apply (by applying the term payorinstead
of the term withholding agent) to deter-
mine the classification (e.g., individual,
corporation, partnership, trust), status
(i.e., a U.S. or a foreign person), and other
relevant characteristics (e.g., beneficial
owner or intermediary) of a payee if a
payment cannot be reliably associated
with valid documentation under
§1.1441–1(b)(2)(vii) irrespective of
whether the payments are subject to with-
holding under chapter 3 of the Internal
Revenue Code. The provisions of
§1.1441–1(b)(3)(iii)(D) and (vii)(B) shall
not apply, however, to payments of
amounts that are not subject to withhold-
ing. In addition, §1.1441–5(d)(2) shall
not apply to treat a partnership as a for-
eign partnership with respect to amounts
that are not subject to withholding unless
the payor has actual knowledge of the
payee’s employer identification number
and that number begins with the two dig-
its “98.” The rules of
§1.1441–1(b)(2)(vii) shall apply for pur-
poses of determining when a payment can
reliably be associated with documenta-
tion, by applying the term payorinstead
of the term withholding agent. For this
purpose, the documentary evidence or
statement described in paragraph (c)(4) of
this section can be treated as documenta-
tion with which a payment can be associ-
ated.
(ii) Grace period in the case of indicia
of a foreign payee. When the conditions
of this paragraph (d)(2)(ii) are satisfied,
the 30–day grace period provisions under
section 3406(e) shall not apply and the
provisions of this paragraph (d)(2)(ii)
shall apply instead. A payor that, at any
time during the grace period described in
this paragraph (d)(2)(ii), credits an ac-
count with payments described in
§1.1441–6(c)(2) that are reportable under
sections 6042, 6045, 6049, or 6050N
may, instead of treating the account as
owned by a U.S. person and applying
backup withholding under section 3406,
if applicable, choose to treat the account
as owned by a foreign person if, at the be-
ginning of the grace period, the address
that the payor has in its records for the ac-
count holder is in a foreign country, the
payor has been furnished the information
contained in a withholding certificate de-
scribed in §1.1441–1(e)(2)(i) or (3)(i) (by
way of a facsimile copy of the certificate
or other non-qualified electronic trans-
mission of the information required to be
stated on the certificate), or the payor
holds a withholding certificate that is no
longer reliable other than because the va-
lidity period as described in §1.1441-
1(e)(4)(ii)(A) has expired. In the case of
a newly opened account, the grace period
begins on the date that the payor first
credits the account. In the case of an ex-
isting account for which the payor holds a
Form W-8 or documentary evidence of
foreign status, the grace period begins on
the date that the payor first credits the ac-
count after the existing documentation
held with regard to the account can no
longer be relied upon (other than because
June 5, 200012202000–23 I.R.B.

the validity period described in
§1.1441–1(e)(4)(ii)(A) has expired). A
new account shall be treated as an exist-
ing account if the account holder already
holds an account at the branch location at
which the new account is opened. It shall
also be treated as an existing account if an
account is held at another branch location
if the institution maintains a coordinated
account information system described in
§1.1441–1(e)(4)(ix). The grace period
terminates on the earlier of the close of
the 90th day from the date on which the
grace period begins or the date that the
documentation is provided. The grace pe-
riod also terminates when the remaining
balance in the account (due to with-
drawals or otherwise) is equal to or less
than 31 percent of the total amounts cred-
ited since the beginning of the grace pe-
riod that would be subject to backup with-
holding if the provisions of this paragraph
(d)(2)(ii) did not apply. At the end of the
grace period, the payor shall treat the
amounts credited to the account during
the grace period as paid to a U.S. or for-
eign payee depending upon whether doc-
umentation has been furnished and the na-
ture of any such documentation furnished
upon which the payor may rely to treat the
account as owned by a U.S. or foreign
payee. If the documentation has not been
received on or before the date of expira-
tion of the grace period, the payor may
also apply the presumptions described in
this paragraph (d) to amounts credited to
the account after the date on which the
grace period expires (until such time as
the payor can reliably associate the docu-
mentation with amounts credited). See
§31.6413(a)–3(a)(1)(iv) of this chapter
for treating backup withheld amounts
under section 3406 as erroneously with-
held when the documentation establishing
foreign status is furnished prior to the end
of the calendar year in which backup
withholding occurs. If the provisions of
this paragraph (d)(2)(ii) apply, the provi-
sions of §31.3406(d)–3 of this chapter
shall not apply. For purposes of this para-
graph (d)(2)(ii), an account holder’s rein-
vestment of gross proceeds of a sale into
other instruments constitutes a with-
drawal and a non-qualified electronic
transmission of information on a with-
holding certificate is a transmission that is
not in accordance with the provisions of
§1.1441–1(e)(4)(iv). See §1.1092(d)–1
for a definition of the term actively traded
for purposes of this paragraph (d)(2)(ii).
* * * * *
(3) Payments to foreign intermediaries
or flow-through entities—(i) Payments of
amounts subject to withholding under
chapter 3 of the Internal Revenue Code.
In the case of payments of amounts that
the payor may treat as made to a foreign
intermediary or flow-through entity in ac-
cordance with §§1.1441–1(b)(3)(ii)(C)
and (b)(3)(v)(A), 1.1441–5(c) or (e) and
that are subject to withholding under
§1.1441–2(a), the provisions of
§§1.1441–1(b)(2)(v) and 1.1441–5(c)(1),
(e)(2), and (3) shall apply (by applying
the term payorinstead of the term with-
holding agent) to identify the payee. If a
payment of an amount subject to with-
holding cannot be reliably associated with
valid documentation from a payee in ac-
cordance with §1.1441–1(b)(2)(vii) the
presumption rules of §1.1441–1(b)(3)(v)
and §1.1441–5(d) and (e)(6) shall apply
to determine the payees status for pur-
poses of this section (and other sections of
regulations under this chapter to which
this paragraph (d)(3) applies).
(ii) Payments of amounts not subject to
withholding under chapter 3 of the Inter-
nal Revenue Code. Except as provided in
paragraph (d)(3)(iii) of this section,
amounts that are not subject to withhold-
ing under chapter 3 of the Internal Rev-
enue Code that the payor may treat as
paid to a foreign intermediary or flow-
through entity shall be treated as made to
an exempt recipient described in
§1.6049–4(c) except to the extent that the
payor has actual knowledge that any per-
son for whom the intermediary or flow-
through entity is collecting the payment is
a U.S. person who is not an exempt recip-
ient. In the case of such actual knowl-
edge, the payor shall treat the payment
that it knows is allocable to such U.S. per-
son as a payment to a U.S. payee who is
not an exempt recipient.
(iii) Special rule for payments of cer-
tain short-term original issue discount
and bank deposit interest—(A) General
rule. A payment of U.S. source deposit
interest described in section 871(i)(2)(A)
or 881(d)(3) or interest or original issue
discount on the redemption of an obliga-
tion with a maturity from the date of issue
of 183 days or less (short-term OID) de-
scribed in section 871(g)(1)(B) or 881(e)
that the payor may treat as paid to a for-
eign intermediary or flow-through entity
in accordance with the provisions of
§1.1441–1(b)(3)(ii)(C) or (v)(A) shall be
treated as paid to an undocumented U.S.
payee that is not an exempt recipient
under paragraph §1.6049–4(c) unless the
payor has documentation from the payees
of the payment and the payment is allo-
cated to foreign payees, as a group, and to
each U.S. non-exempt recipient payee.
See §1.1441–1(e)(3)(iv)(C)(2).
(B) Payee may be an intermediary. If a
payment is made to a person described in
§1.6049–4(c)(1)(ii) that has not provided
an intermediary withholding certificate
under §1.1441–1(e)(3)(i) but the payor
knows or has reason to know that the
payee may be an intermediary, the payor
must apply the rules of paragraph
(d)(3)(iii)(A) of this section. A payor has
reason to know that such a person may be
an intermediary if that person has pro-
vided documentation under
§1.1441–3(b)(ii)(C) or (v)(A) for another
account with the same payor.
(iv) Short-term deposits and repur-
chase transactions. The provisions of
paragraph (d)(3)(ii) of this section and not
paragraph (d)(3)(iii) of this section shall
apply to deposits with banks and other fi-
nancial institutions that remain on deposit
for a period of two weeks or less, to
amounts of original issue discount arising
from a sale and repurchase transaction
that is completed within a period of two
weeks or less, or to amounts described in
paragraphs (b)(7), (10) and (11) of this
section (relating to certain obligations is-
sued in bearer form).
(4) Examples. The rules of paragraphs
(d)(1) through (3) of this section are illus-
trated by the following examples:
Example 1. (i) Facts. USP is a U.S. payor as de-
fined in paragraph (c)(5) of this section. USP pays in-
terest from sources within the United States to an ac-
count maintained in the United States by X. The
interest is not deposit interest described in sections
871(i)(2)(A) or 881(d). USP does not have a with-
holding certificate from X as defined in
§1.1441–1(c)(16). Moreover, USP cannot treat X as
an exempt recipient, as defined in §1.6049–4(c)(1)(ii),
without documentation and there is no indication that
X is an individual, trust, or estate.
(ii) Analysis. The U.S. source interest is an
amount subject to withholding as defined in
§1.1441–2(a). Under paragraph (d)(1) of this sec-
tion, USP must apply the provisions of
§§1.1441–1(b)(2) and 1.1441–5(c) and (e) to deter-
mine the payee of the interest. Under
§1.1441–1(b)(2)(i), X, the person to whom the pay-
2000–23 I.R.B.1221June 5, 2000

ment is made, is considered to be the payee, unless
X is determined to be a flow-through entity, in
which case the rules of §1.1441–5 apply to deter-
mine the payee. Under paragraph (d)(2)(i) of this
section, the rules of §1.1441–1(b)(3)(ii) apply to de-
termine the classification of a payee as an individ-
ual, trust, estate, corporation, or partnership. Under
§1.1441–1(b)(3)(ii)(B), X is presumed to be a part-
nership, since X does not appear to be an individual,
trust or estate, and X cannot be presumed to be an
exempt recipient in the absence of documentation.
Paragraph (d)(2)(i) of this section requires USP to
apply the provisions of §§1.1441–1(b)(3)(iii) and
1.1441–5(d) to determine whether X is presumed to
be a U.S. or foreign partnership. Under
§§1.1441–1(b)(3)(iii) and 1.1441–5(d)(2), X is pre-
sumed to be a U.S. partnership in absence of any in-
dicia of foreign partnership status. The U.S. source
interest paid to X is reportable under section 6049
on Form 1099 and the interest is subject to backup
withholding under section 3406 because X has not
provided its TIN on a valid Form W-9.
Example 2. (i) Facts. The facts are the same as
in Example 1, except that the interest paid by USP is
from sources outside the United States.
(ii) Analysis. Interest from sources outside the
United States is not an amount subject to withhold-
ing, as defined in §1.1441–2(a). Under paragraph
(d)(1) of this section, USP must apply the provisions
of §§1.1441–1(b)(2) and 1.1441–5(c) and (e) to de-
termine the payee. Under §1.1441–1(b)(2)(i), X, the
person to whom the payment is made, is considered
to be the payee, unless X is determined to be a flow-
through entity, in which case the rules of §1.1441-
5(c) or (e) apply to determine the payee. Under
paragraph (d)(2)(i) of this section, the rules of
§1.1441–1(b)(3)(ii) apply to determine the classifi-
cation of a payee as an individual, trust, estate, cor-
poration, or partnership. These rules apply irrespec-
tive of whether the payment is an amount subject to
withholding. Under §1.1441–1(b)(3)(ii)(B), X is
presumed to be a partnership, since X does not ap-
pear to be an individual, trust or estate, and X cannot
be presumed to be an exempt recipient in the ab-
sence of documentation. Paragraph (d)(2)(i) of this
section requires USP to apply the provisions of
§§1.1441–1(b)(3)(iii) and 1.1441–5(d) to determine
whether, X is presumed to be a U.S. or foreign part-
nership. Under §§1.1441–1(b)(3)(iii) and
1.1441–5(d)(2), X is presumed to be a U.S. partner-
ship in absence of any indicia of foreign partnership
status. The foreign source interest is a payment sub-
ject to reporting on Form 1099 under §1.6049–5(a).
Further, because X is a non-exempt recipient that
has failed to provide its TIN on a valid Form W-9,
the foreign source interest is subject to backup with-
holding under section 3406.
Example 3. (i) Facts. USP is a U.S. payor as de-
fined in paragraph (c)(5) of this section. USP makes
a payment of U.S. source interest outside the United
States to an offshore account of X. See paragraphs
(c)(1) for a definition of offshore account and (e) for
a payment outside the United States. USP does not
have a withholding certificate from X as defined in
§1.1441–1(c)(16) nor does it have documentary evi-
dence as described in §1.1441–1(e)(1)(ii)(A)(2) and
1.6049–5(c)(1).
(ii) Analysis. The interest is an amount subject to
withholding as defined in §1.1441– 2(a). Under
paragraph (d)(1) of this section, USP must apply the
provisions of §1.1441–1(b)(2) and §1.1441–5(c) and
(e) to determine the payee. Under
§1.1441–1(b)(2)(i), X, the person to whom the pay-
ment is made, is considered to be the payee, unless
X is determined to be a flow-through entity, in
which case the rules of §1.1441–5(c) or (e) apply to
determine the payee. Under paragraph (d)(2)(i) of
this section, the rules of §1.1441–1(b)(3)(ii) apply to
determine the classification of a payee as an individ-
ual, trust, estate, corporation, or partnership. Under
§1.1441–1(b)(3)(ii)(B), X is presumed to be a part-
nership, since X does not appear to be an individual,
trust or estate, and X cannot be presumed to be an
exempt recipient in the absence of documentation.
Paragraph (d)(2)(i) of this section requires USP to
apply the provisions of §§1.1441–1(b)(3)(iii) and
1.1441–5(d) to determine whether, X is presumed to
be a U.S. or foreign partnership. Under
§§1.1441–1(b)(3)(iii)(D) and 1.1441–5(d)(2), X is
presumed to be a foreign partnership. Therefore,
under paragraph (d)(1) of this section and
§1.1441–5(c)(1)(i)(E), the payees of the interest are
presumed to be the partners of X. Under
§1.1441–5(d)(3), the partners are presumed to be
undocumented foreign persons. Therefore, USP
must withhold 30 percent of the interest payment
under §1.1441–1(b)(1) and report the payment on
Form 1042–S in accordance with §1.1461–1(c).
Example 4. (i) Facts. The facts are the same as in
Example 3, except that the interest is paid by F, a
non-U.S. payor.
(ii) Analysis. The analysis and result are the
same as in Example 3. F is a withholding agent
under §1.1441–7 and its status as a non-U.S. payor
under paragraph (c)(5) of this section is irrelevant.
Example 5. (i) Facts. USP is a U.S. payor as de-
fined in paragraph (c)(5) of this section. USP makes a
payment outside the United States of interest from
sources outside the United States to an offshore ac-
count of X. USP does not have a withholding certifi-
cate from X as defined in §1.1441–1(c)(16) nor does it
have documentary evidence as described in
§§1.1441–1(e)(1)(ii)(A)(2) and 1.6049–5(c)(1). USP
does not have actual knowledge of an employer identi-
fication number for X. X does not appear to be an in-
dividual, trust, or estate and cannot be treated as an ex-
empt recipient, as defined in §1.6049–4(c)(1)(ii) in the
absence of documentation.
(ii) Analysis. The interest is not an amount sub-
ject to withholding as defined in §1.1441–2(a).
Under paragraph (d)(1) of this section, USP must
apply the rules of §§1.1441–1(b)(2) and 1.1441–5(c)
and (e) to determine the payee of the interest. Under
§1.1441–1(b)(2)(i), X, the person to whom the pay-
ment is made, is considered to be the payee, unless X
is determined to be a flow–through entity, in which
case the rules of §1.1441–5(c) or (e) apply to deter-
mine the payee. Under paragraph (d)(2)(i) of this
section, §1.1441–1(b)(3)(ii) applies to determine X’s
classification as an individual, trust, estate, corpora-
tion or partnership. Under §1.1441–1(b)(3)(ii)(B), X
is treated as a partnership, since it does not appear to
be an individual, trust, or estate and cannot be treated
as an exempt recipient without documentation. Para-
graph (d)(2)(i) of this section requires USP to apply
the provisions of §§1.1441-1(b)(3)(iii) and 1.1441-
5(d) to determine whether, X is presumed to be a
U.S. or foreign partnership. Paragraph (d)(2)(i) also
states that the presumptions of foreign status for pay-
ments made to offshore accounts contained in
§§1.1441-1(b)(3)(iii)(D) and 1.1441-5(d)(2) do not
apply to amounts that are not subject to withholding.
Therefore, under §§1.1441-1(b)(3)(iii) and 1.1441-
5(d)(2), X is presumed to be a U.S. partnership be-
cause it does not have actual knowledge that X’s em-
ployer identification number begins with the digits
“98.” Therefore, USP must treat X as a U.S. person
that is not an exempt recipient and report the pay-
ment on Form 1099 under section 6049. Under
§31.3406(g)–1(e) of this chapter, however, USP is
not required to backup withhold on the payment un-
less it has actual knowledge that X is a U.S. person
that is not an exempt recipient.
Example 6. (i) Facts. The facts are the same as
in Example 5, except that the interest is paid by F, a
non-U.S. payor, as defined under paragraph (c)(5) of
this section.
(ii)Analysis. The analysis is the same as under
Example 5. However, because F is a non-U.S. payor
paying foreign source interest outside the United
States, paragraph (b)(6) of this section exempts the
payment from reporting under section 6049.
Example 7. (i) Facts. USP, a U.S. payor as de-
fined in paragraph (c)(5) of this section, makes a
payment of U.S. source interest to NQI, a foreign
corporation and a nonqualified intermediary as de-
fined in §1.1441–1(c)(14). The interest is not de-
posit interest as defined in sections 871(i)(2)(A) and
881(d). The interest is paid inside the United States
to an account maintained in the United States. NQI
has provided USP with a nonqualified intermediary
withholding certificate, as described in
§1.1441–1(e)(3)(iii), but has not attached any docu-
mentation from the persons on whose behalf it acts
or a withholding statement as described in
§1.1441–1(e)(3)(iv).
(ii) Analysis. U.S. source interest is an amount sub-
ject to withholding under §1.1441– 2(a). USP may treat
the payment as made to a foreign intermediary under
§1.1441–1(b)(3)(v)(A) because USP has received a
nonqualified intermediary withholding certificate from
NQI. Under paragraph (d)(3)(i) of this section, USP
must apply §1.1441–1(b)(2)(v) to determine the payees
of the payment. Under §1.1441–1(b)(2)(v)(A), USP
must treat the persons on whose behalf NQI is acting as
the payees. Paragraph (d)(3)(i) of this section also re-
quires USP to apply the presumption rules of
§1.1441–1(b)(3)(v) if it cannot reliably associate the
payment with valid documentation from a payee. See
§1.1441–1(b)(2)(vii). Under §1.1441–1(b)(3)(v)(B),
the interest is treated as paid to an unknown foreign
payee because it cannot be reliably associated with doc-
umentation under §1.1441–1(b)(2)(vii). Therefore, the
payment is not subject to reporting on Form 1099 under
paragraph (b)(12) of this section because the payment is
presumed made to a foreign person. The payment is
subject to withholding, however, under §1.1441–1(b) at
a rate of 30 percent and is subject to reporting on Form
1042–S under §1.1461–1(c).
Example 8. (i) Facts. The facts are the same as
in Example 7, except that the interest is paid outside
the United States, as defined in paragraph (e) of this
section to an offshore account, as defined in para-
graph (c)(1) of this section.
(ii) Analysis. The analysis and results are the
same as in Example 7. The rules of
§1.1441–1(b)(3)(v) apply irrespective of where the
account is maintained or the payment made.
Example 9. (i) Facts. The facts are the same as
in Example 8, except that the interest is paid by F, a
June 5, 200012222000–23 I.R.B.

non–U.S. payor, as defined in paragraph (c)(5) of
this section.
(ii) Analysis. The analysis and results are the same
as in Example 7.
Example 10. (i) USP, a U.S. payor as defined in
paragraph (c)(5) of this section, makes a payment of
foreign source interest to NQI, a foreign corporation
and a nonqualified intermediary as defined in
§1.1441–1(c)(14). NQI has provided USP with a non-
qualified intermediary withholding certificate, as de-
scribed in §1.1441–1(e)(3)(iii), but has not attached
any documentation from the persons on whose behalf
it acts or a withholding statement as described in
§1.1441–1(e)(3)(iv).
(ii) Analysis. Foreign source interest is not an
amount subject to withholding under chapter 3 of the
Internal Revenue Code. See §1.1441–2(a). Under
paragraph (d)(3)(ii)(A) of this section, amounts that
are not subject to withholding under chapter 3 of the
Internal Revenue Code that a payor may treat as paid
to a foreign intermediary are treated as made to an ex-
empt recipient described in §1.6049–4(c). Therefore,
the foreign source interest is not subject to reporting
on Form 1099.
Example 11. (i) Facts. USP is a U.S. payor as de-
fined in paragraph (c)(5) of this section. USP pays
U.S. source original issue discount from the redemp-
tion of an obligation described in section 871(g)(1)(B)
to NQI, a foreign corporation that is a nonqualified in-
termediary as defined in §1.1441–1(c)(14). The re-
demption proceeds are paid to an account NQI has
with USP in the United States. NQI provides a non-
qualified intermediary withholding certificate as de-
scribed in §1.1441–1(e)(3)(iii) but does not attach any
payee documentation or a withholding statement de-
scribed in §1.1441–1(e)(3)(iv).
(ii) Analysis. Under paragraph (d)(3)(ii)(A) of this
section, USP must treat the payment as made to an un-
documented U.S. payee that is not an exempt recipient
and report the payment on Form 1099. Further, be-
cause the payment is made inside the United States,
the exception to backup withholding for offshore ac-
counts contained in §31.3406(g)–1(e) of this chapter
does not apply and the payment is subject to backup
withholding.
Example 12. (i) Facts. P, a payor, makes a pay-
ment to NQI of U.S. source interest on debt obliga-
tions issued prior to July 18, 1984. Therefore, the in-
terest does not qualify as portfolio interest under
section 871(h) or 881(d). NQI is a nonqualified for-
eign intermediary, as defined in §1.1441–1(c)(14), and
has furnished P a valid nonqualified intermediary
withholding certificate described in
§1.1441–1(e)(3)(iii) to which it has attached a valid
Form W-9 for A, and two valid beneficial owner
Forms W-8, one for B and one for C. A is not an ex-
empt recipient under §1.6049–4(c). NQI furnishes a
withholding statement, described in
§1.1441–1(e)(3)(iv), in which it allocates 20 percent
of the U.S. source interest to A, but does not allocate
the remaining 80 percent of the interest between B and
C. B’s withholding certificate indicates that B is a for-
eign pension fund, exempt from U.S. tax under the
U.S. income tax treaty with Country T. C’s withhold-
ing certificate indicates that C is a foreign corporation
not entitled to a reduced rate of withholding.
(ii) Analysis. Under paragraph (d)(3)(i) of this sec-
tion, P applies the rules of §1.1441– 1(b)(2)(v) to de-
termine the payees of the interest. Under that section,
the payees are the persons on whose behalf NQI
acts—A, B and C. Because P can reliably associate 20
percent of the payment with valid documentation pro-
vided by A, P must treat 20 percent of the interest as
paid to A, a U.S. person not exempt from reporting,
and report the payment on Form 1099. P cannot reli-
ably associate the remaining 80 percent of the pay-
ment with valid documentation under
§1.1441–1(b)(2)(vii) and, therefore, under paragraph
(d)(3)(i) of this section must apply the presumption
rules of §1.1441–1(b)(3)(v). Under that section, the
interest is presumed paid to an unknown foreign
payee. Under paragraph (b)(12) of this section, P is
not required to report the interest presumed paid to a
foreign person on Form 1099. Under §1.1441–1(b),
80 percent of the interest is subject to 30 percent with-
holding, however, and the interest is reportable on
Form 1042–S under §1.1461–1(c).
Example 13. (i) Facts. The facts are the same as in
Example 12, except that P can reliably associate 30
percent of the payment of interest to B, but cannot reli-
ably associate the remaining 70 percent with A or C.
(ii) Analysis. Under paragraph (d)(3)(i) of this sec-
tion, P applies the rules of §1.1441– 1(b)(2)(v) to de-
termine the payees of the interest. Under that section,
the payees are the persons on whose behalf NQI
acts—A, B and C. Because P can reliably associate 30
percent of the payment with B, a foreign pensions
fund exempt from withholding under an income tax
treaty, P may treat that payment as paid to B and not
subject to reporting on Form 1099 under paragraph
(b)(12) of this section. P cannot reliably associate the
remaining 70 percent of the payment with valid docu-
mentation under §1.1441–1(b)(2)(vii) and, therefore,
under paragraph (d)(3)(i) of this section must apply
the presumption rules of §1.1441–1(b)(3)(v). Under
that section, the interest is presumed paid to an un-
known foreign payee. Under paragraph (b)(12) of this
section, P is not required to report the interest pre-
sumed paid to a foreign person on Form 1099. Under
§1.1441–1(b), 80 percent of the interest is subject to
30 percent withholding, however, and the interest is
reportable on Form 1042–S under §1.1461–1(c).
Example 14. (i) Facts. The facts are the same as in
Example 12, except that P also makes a payment of
foreign source interest to NQI.
(ii) Analysis. Under paragraph (d)(3)(ii)(A), P may
treat the foreign source interest as paid to an exempt
recipient as defined in §1.6049–4(c) and not subject to
reporting on Form 1099 even though some or all of the
foreign source interest may in fact be owned by A, the
U.S. person that is not exempt from reporting.
* * * * *
Parts 1 and 31 [Amended]
Par. 18. Effective January 1, 2001, in
the list below, for each section indicated
in the left column remove the language in
the middle column and add the language
in the right column:
2000–23 I.R.B.1223June 5, 2000
SectionRemoveAdd
1.1441–1(b)(1), firstto a beneficial ownerto a payee that is a
sentencethat is a U.S. personU.S. person
1.1441–1(b)(2)(iii)(A),1.1441–6(b)(4)1.1441–6(b)(2)
last sentence
1.1441–1(b)(2)(iii)(B),1.1441–6(b)(4)1.1441–6(b)(2)
third sentence
1.1441–1(b)(2)(vi), second1.6049–5(c)(4)1.6049–5(c)(1)
sentence
1.1441–1(b)(4)(iii), last§1.6049–5(c)(4)§1.6049–5(c)(1)
sentence
1.1441–1(b)(4)(v), third§1.6049–5(c)(4)§1.6049–5(c)
sentence
1.1441–1(b)(4)(xviii), thirdis requiredis not required
sentence

1.1441–1(b)(7)(i)(A)§1.1441–4(a)(2)(i)§1.1441–4(a)(2)(ii)
or (3)or (3)(i)
1.1441–1(b)(7)(iii), first§1.1441–4(a)(2)(i)§1.1441–4(a)(2)(ii)
sentenceor (3)or (3)(i)
1.14441–1(b)(9), seconda withholding certificatean intermediary or
sentenceflow–through withholding
certificate
1.1441–1(b)(9), seconda U.S. beneficial ownera U.S. payee
sentence
1.1441–1(e)(1)(ii)(A)(2)with respect to anto an offshore account
offshore account
1.1441–1(e)(2)(i), fifthSee §1.1441–6(b)(4)(ii)See §1.1441–6(b)(2)
sentence
1.1441–1(e)(2)(ii), sixth See §1.1441–6(b)(4)(i)See §1.1441–6(b)
sentence
1.1441–1(e)(4)(viii), introductory§1.1441–6(b)(2)(ii)§1.1441–6(c)(2)
text, second sentence
1.1441–1(e)(4)(viii), third§1.1441–6(b)(4)(ii)§1.1441–6(b)(1)
sentence
1.1441–3(c)(2)(i), introductoryestimate of earningsestimates under this
text, second sentenceand profits,paragraph (c)(2),
1.1441–4(a)(3)(ii)payment to a foreignpayment shall
financial institution
(within the meaning of
§1.165–12(c)(1)(iv))
shall
1.1441–4(a)(3)(ii)counterpartypayee
1.1441–7(b)(1), firstis incorrect.is unreliable or incorrect.
sentence
1.1441–7(b)(1), thirdcontained in, or attachedcontained in, or associated
sentenceto, a withholding with, a withholding
certificatecertificate
1.1441–7(b)(1), thirdare not correct andare incorrect or unreliable
sentenceand
1.1461–1(b)(2), firstForm 1042XForm 1042
sentence
1.6045–1(j), firstthe end of the secondFebruary 28 of the
sentencecalendar monthfollowing calendar
following the close ofyear
the calendar year of
such reporting period
1.6049–4(c)(1)(ii)(A), meets themeets one of the
second sentence
31.3406(h)–3(a), the payee certifiesa payee that is a U.S.
introductory text,person certifies
first sentence
June 5, 200012242000–23 I.R.B.

Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
Approved May 5, 2000.
Jonathan Talisman,
Deputy Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on May
15, 2000, 8:45 a.m., and published in the issue of the
Federal Register for May 22, 2000, 65 F.R. 32151)
Section 7520.—Valuation Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157 .
Section 7872.—Treatment of
Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2000. See Rev. Rul. 2000–28, page 1157.
2000–23 I.R.B.1225June 5, 2000

Notice of Proposed Rulemaking
and Notice of Public Hearing
Certain Corporate
Reorganizations Involving
Disregarded Entities
REG–106186–98
AGENCY:Internal Revenue Service
(IRS), Treasury.
ACTION:Notice of proposed rulemaking
and notice of public hearing.
SUMMARY:This document contains
proposed regulations that provide guid-
ance to corporations and their sharehold-
ers about whether certain transactions
qualify as corporate reorganizations. The
proposed regulations apply to certain
mergers under state or Federal law be-
tween two entities, one of which is a cor-
poration and the other of which, for Fed-
eral tax purposes, is disregarded as an
entity separate from its owner (for exam-
ple, a qualified REIT subsidiary, a quali-
fied subchapter S subsidiary, or a limited
liability company with a single corporate
owner that does not elect to be treated as a
separate corporation). This document
also provides a notice of public hearing
on these proposed regulations.
DATES:Written or electronic comments
must be received by August 14, 2000.
Requests to speak (with outlines of oral
comments to be discussed) at the public
hearing scheduled for August 8, 2000,
must be received by July 18, 2000.
ADDRESSES:Send submissions to
CC:DOM:CORP:R (REG–106186–98),
room 5226, Internal Revenue Service,
P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand delivered Monday through
Friday between the hours of 8 am and 5
pm to: CC:DOM:CORP:R
(REG–106186–98), Courier’s desk, Inter-
nal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC 20044.
Alternatively, taxpayers may submit com-
ments electronically via the Internet by
selecting the “Tax Regs” option on the
IRS Home Page, or by submitting com-
ments directly to the IRS Internet site at
http://www.irs.gov/tax_regs/reglist.html.
The public hearing will be held in room
4718, Internal Revenue Building, 1111
Constitution Avenue, NW., Washington,
DC.
FOR FURTHER INFORMATION CON-
TACT:Concerning the proposed regula-
tions, Reginald Mombrun, (202) 622-
7750, concerning submissions of
comments, the hearing, and/or to be
placed on the building access list to attend
the hearing, Guy Traynor, (202) 622-7180
(not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR Part 1) that provide guid-
ance as to whether certain mergers under
state or Federal law between two entities,
one of which is a corporation and the
other of which, for Federal tax purposes,
is disregarded as an entity separate from
its owner can be statutory mergers quali-
fying as reorganizations under section
368(a)(1)(A) of the Internal Revenue
Code of 1986 (Code). The Code provides
general nonrecognition treatment for reor-
ganizations specifically described in sec-
tion 368(a). Section 368(a)(1)(A) pro-
vides that the term reorganizationmeans
“a statutory merger or consolidation.”
Section 1.368–2(b)(1) provides that a
statutory merger must be accomplished
under the “corporation laws of the United
States or a State or territory or the District
of Columbia.” In addition to meeting the
requirements of section 368(a), a merger
transaction must meet other reorganiza-
tion requirements such as the requirement
that the persons engaged in the transac-
tion each qualify as “a party to a reorgani-
zation” under section 368(b), the continu-
ity of interest requirement of §1.368–1(e),
and the continuity of business enterprise
requirement of §1.368–1(d).
Certain entities that are respected under
state law are disregarded for Federal tax
purposes. These entities include a qualified
REIT subsidiary, a qualified subchapter S
subsidiary (QSub), and an entity that is dis-
regarded under §301.7701–3 as an entity
separate from its owner. Section 856(i)(2)
provides that a corporation that is wholly
owned by a real estate investment trust
(REIT) is a qualified REIT subsidiary. Sec-
tion 1361(b)(3)(B) provides that a QSub is
an eligible domestic corporation, wholly
owned by an S corporation, for which the S
corporation makes a QSub election. Under
§301.7701–3, a business entity that is not
classified as a corporation per se (see
§301.7701–2(b)((1), (3), (4), (5), (6), (7) or
(8); for example, a limited liability com-
pany) can elect to be treated as a corpora-
tion or, if it has a single owner, can choose
to be disregarded. (These entities here-
inafter are collectively referred to as Disre-
garded Entities, and the corporation that
owns the Disregarded Entity is referred to
as the Owner.) For Federal tax purposes,
all of the assets, liabilities, and items of in-
come, deduction, and credit of a Disre-
garded Entity are treated as those of its
Owner.
Because qualified REIT subsidiaries
and QSubs are corporations under state
law, state merger laws generally permit
them to merge with other corporations. In
addition, many state merger laws permit
mergers between limited liability compa-
nies and corporations.
Commentators have raised questions as
to whether the merger under state or Fed-
eral law of a Disregarded Entity into an
acquiring corporation or of a target corpo-
ration into a Disregarded Entity can qual-
ify as a reorganization under section
368(a)(1)(A). These regulations address
this issue.
Explanation of Provisions
The proposed regulations provide guid-
ance on the tax treatment of the following
two transactions: (1) the merger of a Dis-
regarded Entity into an acquiring corpora-
tion, and (2) the merger of a target corpo-
ration into a Disregarded Entity. Under
the Federal tax laws, the merger under
state or Federal law of a Disregarded En-
tity into an acquiring corporation in which
the Owner exchanges its interest in the
Disregarded Entity for stock in the acquir-
ing corporation and the Disregarded En-
tity ceases to exist as a result of the trans-
action by operation of the state or Federal
merger law (hereinafter, the merger of a
Disregarded Entity into an acquiring cor-
poration) is treated as if the Owner trans-
June 5, 200012262000–23 I.R.B.
Part III. Administrative, Procedural, and Miscellaneous

ferred the assets of the Disregarded Entity
to the acquiring corporation. Conversely,
the merger under state or Federal law of a
target corporation into a Disregarded En-
tity in which the shareholders of the target
corporation exchange their target corpora-
tion stock for stock in the Owner and the
Disregarded Entity does not lose its status
as a Disregarded Entity as a result of the
transaction (hereinafter, the merger of a
target corporation into a Disregarded En-
tity) is treated as if the Owner acquired all
of the assets of the target corporation.
The proposed regulations reflect Trea-
sury’s and the IRS’ view that neither
merger is a statutory merger qualifying as
a reorganization under section
368(a)(1)(A). Compliance with a corpo-
rate law merger statute does not by itself
qualify a transaction as a “statutory
merger” for purposes of section
368(a)(1)(A). See Roebling v. Commis-
sioner, 143 F.2d 810, 812 (3d Cir. 1944),
cert. denied, 323 U.S. 773 (1944). The
proposed regulations contain the require-
ments that must be satisfied for a state or
Federal law merger or consolidation to
qualify as a reorganization under section
368(a)(1)(A). In addition, the proposed
regulations remove the word “corpora-
tion” from the requirement that, in order
to qualify as a reorganization under sec-
tion 368(a)(1)(A), a merger or consolida-
tion must be effected pursuant to the cor-
poration law of the relevant jurisdiction.
This change is necessary to conform the
regulations to the IRS’ long-standing po-
sition that a merger or consolidation may
qualify as a reorganization under section
368(a)(1)(A) even if it is undertaken pur-
suant to laws other than the corporation
law of the relevant jurisdiction. See Rev.
Rul. 84-104 (1984–2 C.B. 94) (a “consol-
idation” pursuant to the National Banking
Act, 12 U.S.C. 215, is treated as a merger
for Federal tax purposes).
The Merger of a Disregarded Entity into
an Acquiring Corporation
Consistent with the views of all the
commentators, Treasury and the IRS be-
lieve that the merger of a Disregarded En-
tity into an acquiring corporation is not a
statutory merger qualifying as a reorgani-
zation under section 368(a)(1)(A) because
the Owner’s assets (other than those held
in the Disregarded Entity) are not trans-
ferred to the acquiring corporation and the
Owner does not cease to exist as a result
of the state or Federal law merger transac-
tion. “A merger ordinarily is an absorp-
tion by one corporation of the properties
and franchises of another whose stock it
has acquired. The merged corporation
ceases to exist, and the merging corpora-
tion alone survives.” Cortland Specialty
Co. v. Commissioner of Internal Revenue,
60 F. 2d 937, 939 (2d Cir. 1932), cert. de-
nied, 288 U.S. 599 (1933). The merger of
a Disregarded Entity into an acquiring
corporation, in which the Owner’s assets
and liabilities are divided between the
Owner and the acquiring corporation after
the transaction, is a divisive transaction,
not a transaction in which the assets of the
Owner and the acquiring corporation are
combined. Congress intended that sec-
tion 355 be the sole means under which
divisive transactions will be afforded tax-
free status and, thus, specifically required
the liquidation of the acquired corporation
in reorganizations under both sections
368(a)(1)(C) and 368(a)(1)(D) in order to
prevent these reorganizations from being
used in divisive transactions that did not
satisfy section 355. See S. Rep. No.
1622, 83
rd
Cong., 2
d
Sess. 274 (1954); S.
Rpt. No. 169, 98
th
Cong., 2
d
Sess. 204
(1984) and Rev. Rul. 2000–5 (2000–5
I.R.B. 436).
Accordingly, consistent with existing
law, the proposed regulations provide that
for a merger to qualify as a reorganization
under section 368(a)(1)(A), it must, by
operation of the merger statute of the rele-
vant jurisdiction, result in one corporation
acquiring the assets of the merging corpo-
ration and the merging corporation ceas-
ing to exist. Thus, the merger of a Disre-
garded Entity into an acquiring
corporation cannot qualify as a reorgani-
zation under section 368(a)(1)(A). How-
ever, the transaction may be treated as a
reorganization under section
368(a)(1)(C), (D), or (F) if all applicable
requirements are met (including the liqui-
dation of the Owner). The transaction
also may be described in section 351.
The Merger of a Target Corporation into
a Disregarded Entity
There has been a split in views as to
whether the merger of a target corporation
into a Disregarded Entity is a statutory
merger qualifying as a reorganization
under section 368(a)(1)(A). Some com-
mentators argue that, because the Disre-
garded Entity is disregarded for Federal
tax purposes, the transaction should be
treated for Federal tax purposes as a
merger into the Owner. Thus, they argue,
as long as the Owner is a corporation, all
other relevant reorganization require-
ments are satisfied, and the target corpo-
ration could have merged into the Owner
in a transaction that qualifies as a reorga-
nization under section 368(a)(1)(A), the
merger should qualify as a reorganization
under section 368(a)(1)(A). According to
these commentators, treating such a
merger as a statutory merger into the
Owner qualifying as a reorganization
under section 368(a)(1)(A) does not inap-
propriately facilitate avoidance of any re-
organization requirement under section
368. Accordingly, the commentators
argue there is no sound policy for not per-
mitting the merger of a target corporation
into a Disregarded Entity to be treated as
a statutory merger into the Owner qualify-
ing as a reorganization under section
368(a)(1)(A).
Other commentators argue that, as a
technical matter, the better interpretation
of the applicable provisions of the Code
and regulations is that the merger of a tar-
get corporation into a Disregarded Entity
is not a statutory merger of the target cor-
poration into the Owner qualifying as a
reorganization under section
368(a)(1)(A). Congress added the word
“statutory” in 1934 so that the definition
“will conform more closely to the general
requirements of [state or Federal] corpo-
ration law.” See H.R. Rep. No. 704, 73
rd
Cong., 2
nd
Sess. 14 (1934). Treasury and
the IRS believe that it is inappropriate to
treat the state or Federal law merger of a
target corporation into a Disregarded En-
tity instead as a statutory merger of the
target corporation into the Owner, be-
cause the Owner, the only potential party
to a reorganization under section 368(b),
is not a party to the state or Federal law
merger transaction. A reorganization
under section 368(a)(1)(A) is a combina-
tion of the assets and liabilities of two
corporations through a merger under state
or Federal law. A merger of a target cor-
poration into a Disregarded Entity differs
from a merger of a target corporation into
the Owner because the target corporation
and the Owner have combined their assets
and liabilities only under the Federal tax
2000–23 I.R.B.1227June 5, 2000

rules concerning Disregarded Entities,
and not under state or Federal merger law,
the law on which Congress relied in en-
acting section 368(a)(1)(A).
Accordingly, the proposed regulations
provide that the merger of a target corpo-
ration into a Disregarded Entity is not a
statutory merger of the target corporation
into the Owner qualifying as a reorganiza-
tion under section 368(a)(1)(A). Such a
transaction may qualify as a reorganiza-
tion under section 368(a)(1)(C), section
368(a)(1)(D), or section 368(a)(1)(F) if
all relevant requirements are met. Such a
transaction also may qualify for non-
recognition of gain under section 351.
Proposed Effective Date
These regulations as proposed apply to
any transaction occurring on or after the
date these regulations are published as
final regulations in the Federal Register.
Comments Requested
Several states permit the merger of a
domestic corporation into a foreign cor-
poration under state law. Treasury and
the IRS are studying whether this transac-
tion qualifies as a reorganization under
section 368(a)(1)(A) and request com-
ments on this issue.
Special Analysis
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It has
also been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C chapter 5) does not apply to these
regulations, and, because the regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Code, this notice of proposed rulemaking
will be submitted to the Chief Counsel for
Advocacy of the Small Business Admin-
istration for comment on its impact on
small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight copies)
that are submitted timely to the IRS. Al-
ternatively, taxpayers may submit com-
ments electronically via the Internet by
selecting the “Tax Regs” option on the
IRS Home Page, or by submitting com-
ments directly to the IRS Internet site at
http://www.irs.gov/tax_regs/reglist.html.
The IRS and Treasury Department request
comments on the clarity of the proposed
rules and how they can be made easier to
understand. All comments will be avail-
able for public inspection and copying.
A public hearing has been scheduled
for August 8, 2000, beginning at 10:00
AM in Room 4718, Internal Revenue
Building, 1111 Constitution Avenue, NW.,
Washington, DC. Due to building secu-
rity procedures, visitors must enter at the
10
th
Street entrance, located between
Constitution and Pennsylvania Avenues,
NW. In addition, all visitors must present
photo identification to enter the building.
Because of access restrictions, visitors
will not be admitted beyond the immedi-
ate entrance area more than 15 minutes
before the hearing starts. For information
about having your name placed on the
building access list to attend the hearing,
see the “For Further Information Contact”
portion of this preamble.
The rules of 26 CFR 601.601(a)(3) apply
to the hearing. Persons who wish to present
oral comments must submit written com-
ments and an outline of the topics to be dis-
cussed and the time to be devoted to each
topic (a signed original and eight (8)
copies) by July 18, 2000. A period of 10
minutes will be allotted to each person for
making comments. An agenda showing the
scheduling of the speakers will be prepared
after the deadline for reviewing outlines has
passed. Copies of the agenda will be avail-
able free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Reginald Mombrun of the office
of the Assistant Chief Counsel (Corpo-
rate), IRS. However, other personnel
from the IRS and the Treasury Depart-
ment participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR Part 1 is pro-
posed to be amended as follows:
PART 1— INCOME TAXES
Paragraph 1.The authority citation for
part 1 continues to read in part as follows:
Authority:26 U.S.C. 7805 * * *
Par. 2. Section 1.368–2 is amended by
revising paragraph (b)(1) to read as fol-
lows:
§1.368–2 Definition of terms.
* * * * *
(b) (1) In order to qualify as a reorgani-
zation under section 368(a)(1)(A), the
transaction must be a merger or consolida-
tion involving two corporations effected
pursuant to the laws of the United States or
a State or territory, or the District of Colum-
bia. In addition, by operation of such a
merger law, the transaction must result in
one corporation acquiring the assets of the
merging corporation and the merging cor-
poration ceasing to exist. Similarly, by op-
eration of such a consolidation law, the
transaction must result in one newly
formed corporation acquiring the assets of
both consolidating corporations, and both
consolidating corporations ceasing to exist.
Thus, the merger under state or Federal law
of an entity that is disregarded as an entity
separate from its owner for Federal tax pur-
poses into an acquiring corporation in
which the owner exchanges its interest in
the disregarded entity for stock in the ac-
quiring corporation and the disregarded en-
tity ceases to exist as a result of the transac-
tion by operation of the state or Federal
merger law is not a statutory merger quali-
fying as a reorganization under section
368(a)(1)(A). Moreover, the merger of a
target corporation into an entity that is dis-
regarded as an entity separate from its
owner for Federal tax purposes that does
not lose its status as a disregarded entity as
a result of the transaction is not a statutory
merger qualifying as a reorganization under
section 368(a)(1)(A). Examples of entities
that are disregarded as entities separate
from their owners include a qualified REIT
subsidiary (within the meaning of section
856(i)(2)), a qualified subchapter S sub-
sidiary (within the meaning of section
1361(b)(3)(B)), and a business entity that is
not classified as a corporation and that has a
single owner (as provided in
§301.7701–2(c)(2) of this chapter). The
preceding five sentences apply to any trans-
action occurring on or after [Date These
Regulations Are Published As Final Regu-
lations In The Federal Register].
June 5, 200012282000–23 I.R.B.

* * * * *
Robert E. Wenzel,
Deputy Commissioner
Internal Revenue.
(Filed by the Office of the Federal Register on May
11, 2000, 2:30 p.m., and published in the issue of the
Federal Register for May 16, 2000, 65 F.R. 31115)
Notice of Proposed Rulemaking
and Notice of Public Hearing
Dollar-Value LIFO Regulations;
Inventory Price Index
Computation Method
REG–107644–98
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
SUMMARY: This document contains
proposed regulations under section 472 of
the Internal Revenue Code that relate to
accounting for inventories under the last-
in, first-out (LIFO) method. The pro-
posed regulations provide guidance re-
garding methods of valuing dollar-value
LIFO pools and affect persons who elect
to use the dollar-value LIFO and inven-
tory price index computation (IPIC)
methods. This document also provides
notice of a public hearing on these pro-
posed regulations.
DATES: Written and electronic com-
ments must be received by August 17,
2000. Requests to speak (with outlines of
oral comments) at a public hearing sched-
uled for September 15, 2000 at 10 a.m.,
must be received by August 25, 2000.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–107644–98),
room 5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand de-
livered Monday through Friday between
the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–107644–98),
Courier’s Desk, Internal Revenue Service,
1111 Constitution Avenue, NW., Washing-
ton, DC. Alternatively, taxpayers may sub-
mit comments electronically via the Inter-
net by selecting the “Tax Regs” option on
the IRS Home Page, or by submitting com-
ments directly to the IRS Internet site at
http://www.irs.ustreas.gov/tax_regs/regslist
.html. The public hearing will be held in
room 4718, Internal Revenue Building,
1111 Constitution Avenue, NW., Washing-
ton, DC.
FOR FURTHER INFORMATION CON-
TACT: Concerning the proposed regula-
tions, Jeffery G. Mitchell, (202)622-4970;
concerning submissions of comments, the
hearing, and/or to be placed on the build-
ing access list to attend the hearing, Guy
Traynor of the Regulations Unit at (202)
622-7180 (not toll-free calls).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed
amendments to the Income Tax Regula-
tions (26 CFR part 1) that relate to the
last-in, first-out (LIFO) inventory ac-
counting method under section 472 of the
Internal Revenue Code (Code). The
LIFO method of accounting for goods
treats inventories on hand at the end of
the year as consisting first of inventory
on hand at the beginning of the year and
then of inventories acquired during the
year.
Under §1.472–8, a taxpayer is permit-
ted to use the dollar-value LIFO method
of accounting for inventories, which ac-
counts for inventories in terms of dollars
of cost rather than specific goods. The
dollar-value LIFO method measures in-
creases or decreases in inventory quanti-
ties by comparing the total cost of the
quantity of goods on hand at the begin-
ning and end of the taxable year in terms
of equivalent-value dollars, i.e., base-
year cost. The current-year dollar cost of
beginning and ending inventory may be
converted into a base-year dollar cost
using price indexes. Then, the quantity of
base-year cost in beginning and ending
inventory can be compared and the in-
crease (increment) or decrease (liquida-
tion) can be measured.
Section 472(f) directs the Secretary to
prescribe regulations that permit the use
of suitable published governmental price
indexes for purposes of the LIFO method.
The IRS and Treasury Department pre-
scribed the inventory price index compu-
tation (IPIC) method in §1.472–8(e)(3)
(TD 7814, 47 FR 11271, 1982–1 C.B.
84), pursuant to authority contained in
sections 472 and 7805. Under the IPIC
method, inventory price indexes are com-
puted with reference to consumer or pro-
ducer price indexes published by the
United States Bureau of Labor Statistics
(BLS). The IPIC method was intended to
simplify the use of the dollar-value LIFO
method so that the LIFO method could be
used by more taxpayers and would be eas-
ier to use by taxpayers already using the
dollar-value LIFO method.
Explanation of Provisions
This document contains proposed
amendments to the IPIC method provided
in §1.472–8(e)(3) of computing the LIFO
value of a dollar-value inventory pool that
are intended to simplify and clarify cer-
tain aspects of the IPIC method as well as
to modify the computational methodology
so that the IPIC method produces a more
accurate and suitable inventory price
index. In addition, the proposed regula-
tions provide rules for computing the
LIFO value of a dollar-value pool when a
taxpayer receives LIFO inventories in
certain nonrecognition transactions.
1. Elimination of Requirement to Use 10
Percent Categories and BLS Weights
Section 1.472–8(e)(3)(iii) of the regu-
lations provides detailed rules for assign-
ing inventory items to index categories
published by the BLS in the “CPI De-
tailed Report” or the “PPI Detailed Re-
port” for purposes of computing an inven-
tory price index. Items are first assigned
to the most detailed index category listed
in the appropriate table of the “CPI De-
tailed Report” or the “PPI Detailed Re-
port” that contains those items. If the
total current-year cost of the items in a
single detailed index category equals or
exceeds 10 percent of the total inventory
value, the taxpayer must use the pub-
lished index for that selected index cate-
gory for all items that are included in that
detailed index category. If the total cur-
rent-year cost of items in a single detailed
index category is less than 10 percent of
the total inventory value, the taxpayer
must investigate successively less de-
tailed index categories until it reaches an
index category that meets the 10 percent
threshold. The taxpayer, however, may
only use the published index for a less de-
tailed selected index category if it has at
least one item that would have been in-
cluded in each of the most detailed index
2000–23 I.R.B.1229June 5, 2000

categories subsumed by the selected cate-
gory. For example, a taxpayer may only
use the published index for the “Fresh
fruits” category from the “CPI Detailed
Report” if its inventory includes at least
one apple, banana, orange, citrus fruit
other than orange, and other fresh fruit. If
the taxpayer’s inventory does not contain
at least one item in each of the most de-
tailed index categories within the selected
index category, the taxpayer must com-
pute an appropriate index for the selected
index category. An appropriate index for
the selected index category is a weighted
average of the published indexes for the
most detailed index categories that in-
clude at least one of the taxpayer’s inven-
tory items. The weights to be used in
computing the appropriate index are the
BLS weights listed for the detailed index
categories. In computing an index for a
pool, however, a taxpayer must weight
the appropriate indexes for the selected
index categories comprising the pool ac-
cording to the taxpayer’s actual inventory
weights for those selected index cate-
gories.
The proposed regulations eliminate the
requirement to use 10 percent categories
and BLS weights to determine an appro-
priate index for two reasons. First, the
weight assigned to an index category by
the BLS may vary dramatically from the
taxpayer’s actual inventory weight for
that category. Consequently, the index
computed for those items using BLS
weights will not accurately reflect the tax-
payer’s inflation experience. Second, the
requirement to use 10 percent categories
and BLS weights was intended to sim-
plify the index computation procedure for
those taxpayers that did not keep detailed
inventory records. In practice, however,
this requirement adds complexity to the
index computation for most taxpayers.
Moreover, even the most detailed BLS
index categories are fairly broad and, with
current inventory recordkeeping proce-
dures and practices, most taxpayers have
sufficiently detailed books and records to
classify their inventory items according to
the most detailed BLS index categories.
The proposed regulations require a tax-
payer to classify its inventory items into
the most detailed index category listed in
the “CPI Detailed Report” or the “PPI De-
tailed Report.” For purposes of comput-
ing a weighted average pool index, the
weight assigned to each selected index
category will be the relative current-year
cost of the items in that category. The
IRS and Treasury Department request
written comments regarding rules for ex-
cluding index categories that contain
items with a de minimis amount of rela-
tive current-year cost from the pool index
computation.
2. Weighted Harmonic Mean for Comput-
ing Pool Index
A pool index computed using the dol-
lar-value LIFO method should reflect a
weighted average of the inflation rates of
the items contained in the ending inven-
tory. Under LIFO methods that compute
an internal index, the index computation
procedure automatically produces an ap-
propriately weighted pool index. How-
ever, when a taxpayer computes a LIFO
inventory pool index using externally
generated inflation rates, the taxpayer
must weight the inflation rates to compute
an appropriate composite index for the
pool.
Section 1.472–8(e)(3)(iii)(B) states that
the appropriate indexes are weighted ac-
cording to the relative current-year costs of
the items in each selected index category.
However, the regulations do not set forth
how to compute a weighted average of the
appropriate indexes using the amount of
relative current-year costs in each selected
index category. The IRS provided an ex-
ample of IPIC weighting methodology in
Rev. Proc. 84–57 (1984–2 C.B. 496). The
example computes a weighted average pool
index based on a weighted arithmetic mean
of the appropriate indexes. (Weighted
Arithmetic Mean = [Sum of (Weight x Ap-
propriate Index)] / Sum of Weights). The
example provided in Rev. Proc. 98–49
(1998–37 I.R.B. 9), also used a weighted
arithmetic mean to compute a weighted av-
erage percent change for a selected index
category.
The IRS and Treasury Department have
determined that a weighted arithmetic
mean is mathematically inappropriate for
averaging inflation indexes based on cur-
rent-year costs. The mathematically cor-
rect method of averaging inflation in-
dexes using relative current-year costs is a
weighted harmonic mean. (Weighted
Harmonic Mean = Sum of Weights / Sum
of [Weight / Appropriate Index]). There-
fore, the proposed regulations make the
weighted harmonic mean the only accept-
able method of computing a weighted av-
erage pool index using relative current-
year costs of items in ending inventory.
3. Double-extension or Link-Chain
Method of Index Computation
The current regulations do not indicate
whether the inventory price index should
be computed using a link-chain or double-
extension methodology. Section
1.472–8(e)(3)(ii) merely states that “[a]n
inventory price index computed [under
the IPIC method] shall be a stated per-
centage of the percent change in the se-
lected consumer or producer price index
or indexes for a specific category or cate-
gories of goods.”
In practice, some taxpayers have used a
link-chain methodology, and others a
double-extension methodology. The pro-
posed regulations specifically permit ei-
ther method. The proposed regulations
also explain how to compute an index
under each method and provide examples.
4. Selecting Indexes as of an Appropriate
Month
Section 1.472–8(e)(3)(iii)(C) states that
a taxpayer not using the retail inventory
method must select indexes “as of the
month or months” most appropriate to its
method of determining current-year cost,
or make a one-time binding election of an
appropriate representative month. The
IRS has ruled that a month is an appropri-
ate representative month if there is a
nexus between the selected month, the
taxpayer’s method of determining cur-
rent-year cost, and the taxpayers’ histori-
cal experience of inventory purchases.
Rev. Rul. 89–29 (1989–1 C.B. 168). In
practice, there has been confusion about
the meaning of the phrase “month or
months most appropriate to the taxpayer’s
method of determining current-year cost.”
The proposed regulations clarify that,
for each dollar-value pool, a taxpayer
should either annually determine the
month most appropriate to its method of
determining the current-year cost of the
pool (appropriate month) or make a one-
time election of a representative appropri-
ate month (representative month) for the
pool. The principles of Rev. Rul. 89–29
continue to apply for purposes of deter-
mining whether a particular month is ap-
propriate or representative. An appropri-
June 5, 200012302000–23 I.R.B.

ate index is computed by comparing the
published cumulative index for the appro-
priate or representative month to the pub-
lished cumulative index for the appropri-
ate or representative month used for the
immediately preceding year (in the case
of a taxpayer using the link-chain IPIC
method) or the published cumulative
index for the month preceding the first
day of the base year (in the case of a tax-
payer using the double-extension IPIC
method). The proposed regulations also
clarify that a taxpayer electing to use a
representative month must use an appro-
priate month, rather than the representa-
tive month, to compute an appropriate
index in certain circumstances, such as a
short taxable year.
5. Taxpayers Eligible to Use “Department
Store Inventory Price Indexes”
The current regulations prohibit the use
of the IPIC method by a taxpayer that is
eligible to use inventory price indexes
prepared by the BLS for the purpose of
valuing the LIFO inventories of a specific
industry. Specifically, §1.472–8(e)(3)(i)
provides that a taxpayer eligible to use the
retail price indexes prepared by the BLS
and published in “Department Store In-
ventory Price Indexes” may not use the
IPIC method.
Some retailers may carry goods tradi-
tionally carried by department stores and
other goods that are not traditionally car-
ried by department stores. Such taxpay-
ers may qualify as department stores, but
“Department Store Inventory Price In-
dexes” may not provide indexes that are
applicable for some of the taxpayers’ de-
partments. Whenever one or more depart-
ments of a department store do not fit into
any one of the 23 major groups estab-
lished by the BLS or into the special com-
binations listed in Rev. Proc. 86–46
(1986–2 C.B. 739), the taxpayer may use
either an index that represents an average
for the whole of the remainder of the
LIFO inventory or the store total index
published by the BLS. However, the ex-
press terms of the current regulations pro-
hibit taxpayers eligible to value their
LIFO inventories using “Department
Store Inventory Price Indexes” from
using the IPIC method to compute an
index for any dollar-value pool.
The proposed regulations eliminate the
eligibility restrictions applicable to the
IPIC method. Generally, any taxpayer
may adopt the IPIC method as long as it
uses that method for all goods accounted
for under the dollar-value LIFO method.
However, a taxpayer eligible to use “De-
partment Store Inventory Price Indexes”
may elect to use those indexes for LIFO
inventory items that fall within any of the
23 major groups listed in “Department
Store Inventory Price Indexes” and the
IPIC method for the remainder of its
LIFO inventory items, or may elect to use
the IPIC method for all of its LIFO inven-
tories. The proposed regulations do not,
however, affect the ability of an eligible
taxpayer to use “Department Store Inven-
tory Price Indexes” to value its LIFO in-
ventories in accordance with §1.472–1(k)
and Rev. Proc. 86–46.
6. Selection from “CPI Detailed Report”
or “PPI Detailed Report”
Section 1.472–8(e)(3)(iii)(C) states that
a retailer may select indexes from the
“CPI Detailed Report” or the “PPI De-
tailed Report,” but if equally appropriate
indexes may be selected from either, a re-
tailer using the retail inventory method
must select from the “CPI Detailed Re-
port” and a retailer not using the retail in-
ventory method must select from the “PPI
Detailed Report.”
The proposed regulations eliminate the
need for a retailer to determine whether
the “CPI Detailed Report” and “PPI De-
tailed Report” contain equally appropriate
indexes. The proposed regulations re-
quire retailers using the retail inventory
method to select indexes from the “CPI
Detailed Report.” All other taxpayers
must select indexes from the “PPI De-
tailed Report.”
7. Elimination of Requirement to Convert
Published Indexes into Retail Price In-
dexes or Cost Price Indexes
Section 1.472–8(e)(3)(iii)(C) provides
that if a retailer using the retail inventory
method selects an index from the “PPI
Detailed Report,” the selected index must
be converted into a retail price index, and
that if a retailer not using the retail inven-
tory method selects an index from the
“CPI Detailed Report,” the selected index
must be converted into a cost price index.
The regulations further provide that man-
ufacturers, processors, wholesalers, job-
bers, and distributors must convert se-
lected indexes into cost price indexes.
This conversion requirement in the cur-
rent regulations was intended to more ac-
curately represent the taxpayer’s inflation
experience relative to the selected price
index. However, due to the inability of
many taxpayers to determine gross profit
percentages at the detailed index category
level and the fact that gross profit percent-
ages for many taxpayers are relatively
constant, this conversion requirement
may not actually increase the accuracy of
the indexes used in the inventory price
index computation. The IRS and Trea-
sury Department have concluded that the
administrative burden of converting pub-
lished indexes into retail price or cost
price indexes outweighs any benefits of
increased accuracy from the procedure.
Thus, the proposed regulations eliminate
the requirement to convert published
price indexes into either retail price in-
dexes or cost price indexes.
8. Relocation and Clarification of Special
Pooling Rules
Section 1.472–8(e)(3)(iv) provides spe-
cial, elective pooling rules for retailers,
wholesalers, jobbers, and distributors that
use the IPIC method. Such taxpayers are
permitted to establish an inventory pool
for any group of goods included in one of
the eleven general categories of consumer
goods described in the “CPI Detailed Re-
port.” Although wholesalers, jobbers and
distributors are allowed to pool goods ac-
cording to categories found in the “CPI
Detailed Report,” they must select in-
dexes from the “PPI Detailed Report”
pursuant to §1.472–8(e)(3)(iii)(C). The
current regulations provide no special,
elective pooling rules for manufacturers
that use the IPIC method. However, Rev.
Proc. 84–57 provides that an inventory
pool or pools may be established for any
group of goods included within one of the
15 general categories of producer goods
described in Table 6 of the “PPI Detailed
Report.”
The proposed regulations provide spe-
cial, elective pooling rules for LIFO in-
ventories accounted for under the IPIC
method. Specifically, retailers using the
retail inventory method may establish an
inventory pool for any group of goods ac-
counted for under the IPIC method in-
cluded within one of the general expendi-
ture categories (i.e., major groups) in
2000–23 I.R.B.1231June 5, 2000

Table 3 of the “CPI Detailed Report.”
Retailers not using the retail method,
wholesalers, jobbers, distributors, proces-
sors, and manufacturers may establish an
inventory pool for any group of goods ac-
counted for under the IPIC method in-
cluded within one of the 2-digit commod-
ity codes (i.e., major commodity groups)
in Table 6 of the “PPI Detailed Report.”
The special, elective pooling rules pro-
vided in the proposed regulations corre-
spond with the pooling rules found in sec-
tion 474(b) so that a taxpayer may change
from the simplified dollar-value LIFO
method of section 474 to the IPIC method
without changing its pooling structure. In
addition, the special, elective pooling
rules for taxpayers using the IPIC method
are relocated with the general pooling
rules applicable to all taxpayers in
§1.472–8(b) and (c).
9. Clarification of the Definition of “Eli-
gible Small Business”
Section 1.472–8(e)(3)(ii) permits an el-
igible small business, as defined under
section 474(b) of the Internal Revenue
Code of 1954, to compute an inventory
price index for its pool(s) using 100 per-
cent of the percent change in the selected
indexes. All other taxpayers must com-
pute an inventory price index for their
pools using 80 percent of the percent
change in the selected indexes. At the
time the regulations were published, sec-
tion 474(b) defined an eligible small busi-
ness as a taxpayer with average annual
gross receipts that did not exceed
$2,000,000 for the 3-taxable-year period
ending with the taxable year.
Section 474 was amended by the Tax
Reform Act of 1986. Public Law 99-514,
100 Stat. 2348. An eligible small busi-
ness is now defined by section 474(c) as a
taxpayer with average annual gross re-
ceipts that do not exceed $5,000,000 for
the 3 preceding taxable years. The pro-
posed regulations clarify that the IPIC
method definition of “eligible small busi-
ness” mirrors the definition in current sec-
tion 474.
10. New Base Year for IPIC Method
Changes
Section 1.472–8(e)(vi) requires a tax-
payer that changes to the IPIC method
from another dollar-value LIFO method
to treat the year of change as the base year
in determining the LIFO value of the in-
ventory pool(s) for the year of change and
later taxable years. The taxpayer is also
required to restate indexes of existing lay-
ers of increment in terms of new base-
year cost. This procedure is generally
known as updating the base year.
The proposed regulations clarify that
the base year updating procedure applies
in the case of a voluntary change to the
IPIC method, but is discretionary in the
case of an involuntary change to the IPIC
method. If an examining agent deter-
mines that a taxpayer’s dollar-value LIFO
method does not clearly reflect income,
the agent may require the taxpayer to
change to the double-extension IPIC
method on a cut-off basis with or without
an updated base year. If the examining
agent chooses not to update the base year,
the examining agent will ascertain the
amount of any increment in terms of base-
year cost for the year of change by com-
paring the total base-year cost of the be-
ginning inventory determined under the
taxpayer’s dollar-value LIFO method and
the total base-year cost of the ending in-
ventory determined under the double-ex-
tension IPIC method. Any increment so
determined will be valued using the index
computed under the double-extension
IPIC method.
11. Inventories Received in a Nonrecogni-
tion Transaction
Under current law, the treatment of
LIFO inventories received in a nonrecog-
nition transaction depends upon whether
the transaction qualifies as a corporate re-
organization to which section 381 applies.
Section 381(c)(5) provides that inventory
accounting methods generally carry over,
uninterrupted, to a transferee in a transac-
tion described in section 381(a).
However, inventory accounting meth-
ods generally do not carry over to a trans-
feree in other nonrecognition transactions
such as transfers to a controlled corpora-
tion under section 351, divisive “D” reor-
ganizations under section 368(a)(1)(D),
or contributions to a partnership under
section 721 (non-section 381 transfers).
Textile Apron Company, Inc. v. Commis-
sioner, 21 T.C. 146 (1953), acq., 1954–1
C.B. 7. But see §1.263A–7(c)(4);
1.1502–17. If a transferee that has never
owned inventories or that has accounted
for inventories using a method other than
LIFO wants to use the LIFO method to
account for inventories received in a non-
section 381 transfer, it must elect the
LIFO method for the year of transfer. The
inventories received in the transfer are
treated as opening inventory and their
cost is determined using the average cost
method as provided in section 472(b)(3).
Rev. Rul. 70–564 (1970–2 C.B. 109). A
transferee that previously elected to use
the LIFO method may account for the
LIFO inventories received in a non-sec-
tion 381 transfer using its preexisting
LIFO method. The LIFO layers of the
transferor retain the transferor’s original
acquisition dates and costs and are inte-
grated into the transferee’s existing LIFO
layers. Commissioner v. Joseph E. Sea-
gram & Sons, Inc., 394 F.2d 738 (1968),
rev’g, 46 T.C. 698 (1966); Rev. Rul.
70–565 (1970–2 C.B. 110).
An election to use the dollar-value
LIFO method for LIFO inventories re-
ceived in a non-section 381 transfer, how-
ever, may not continue the LIFO reserve
of the transferor. If the mix of goods in
the inventory changes significantly after
the transfer, the mechanics of the dollar-
value LIFO method may produce an in-
crement in the first taxable year that ef-
fectively eliminates the LIFO reserve
established by the transferor. This occurs
because the transferee’s base year is the
year in which it elects LIFO.
A taxpayer using the dollar-value LIFO
method determines whether there is an in-
crease or decrease in the quantity of in-
ventory by comparing the base-year cost
of the ending inventory to the base-year
cost of the beginning inventory. When in-
ventory is received in a non-section 381
transfer, the transferee’s basis is deter-
mined by reference to the transferor’s
basis in the inventory. The transferee’s
base-year cost, however, is not deter-
mined by reference to the transferor’s
base-year cost. The transferee’s base-year
cost of inventory received in a non-sec-
tion 381 transfer is equal to the trans-
feree’s cost of the inventory, which is
generally the carryover basis of the inven-
tory. Since the transferor’s basis was es-
tablished by reference to the actual cost of
the goods in years prior to the transfer, the
carryover basis of the inventory may be
considerably lower than what it would
cost to purchase or produce the goods in
the current year. If a new item enters the
June 5, 200012322000–23 I.R.B.

transferee’s inventory, §1.472–8(e)(2)(iii)
only permits the transferee to reconstruct
the base-year unit cost of that item back to
the year in which it elected LIFO. If the
transferee elected LIFO in the year in
which the non-section 381 transfer oc-
curred, the base-year unit cost of the new
item will not be comparable to the base-
year unit cost of the items that were re-
ceived in the transfer and comprised the
opening inventory. The disparity in the
base-year unit costs may produce an in-
crement in terms of base-year cost that
would not have occurred but for the low
base-year unit cost of the inventory re-
ceived in the transfer.
While the current regulations contain a
provision requiring a taxpayer that
changes to the IPIC method from another
LIFO method to treat the year of change
as the base year in determining the LIFO
value of the inventory pool(s) for the year
of change and later taxable years, the pro-
vision does not apply to an initial adop-
tion of LIFO by a transferee. When a
transferee elects the LIFO and IPIC meth-
ods for LIFO inventories received in a
non-section 381 transfer, the transferee
will have an increment in the year in
which the inventories are received even
without a significant change in the mix of
goods in the transferee’s ending inven-
tory. The IPIC method invariably pro-
duces an increment because the index
used to convert the current-year cost of
the ending inventory to base-year cost
will reflect only one year of inflation
while the difference between the current-
year cost and the carryover basis of the
opening inventory reflects more than one
year of inflation.
The IRS and Treasury Department have
determined that recapture of the LIFO re-
serve established by the transferor’s use of
the dollar-value LIFO method solely by
virtue of the mechanical application of the
dollar-value LIFO method after a non-sec-
tion 381 transfer is inappropriate, given the
business continuity principles governing
the tax treatment of the underlying transac-
tion. Accordingly, the proposed regula-
tions provide that if a transferee uses the
dollar-value LIFO method for inventories
that were received in a nonrecognition
transaction to which section 381 does not
apply and that were accounted for using
the dollar-value LIFO method by the trans-
feror, the transferee must use the year of
transfer as the base year and the trans-
feror’s current-year cost of the inventory
received as the new base-year cost of such
inventory for purposes of determining fu-
ture increments and liquidations. The pro-
posed regulations do not affect a newly
formed transferee’s ability to elect new ac-
counting methods or the holdings of Rev.
Rul. 70–564 and Rev. Rul. 70–565. How-
ever, the new base year rule does not apply
to a non-section 381 transaction if the
transaction was made with the principal
purpose of availing the transferee of a
method of accounting that would be un-
available to the transferor (or would be un-
available without securing consent from
the Commissioner). In determining the
principal purpose of a transfer, considera-
tion will be given to all of the facts and cir-
cumstances. However, if a transferor ac-
quired inventory in a bargain purchase
within the five taxable years preceding the
year of the transfer and accounted for that
inventory using a dollar-value LIFO
method that did not treat the bargain pur-
chase inventory and physically identical
inventory acquired at market prices as sep-
arate items, the transfer will be deemed
made with the principal purpose of avail-
ing the transferee of a method of account-
ing that would be unavailable to the trans-
feror (or would be unavailable without
securing consent from the Commissioner).
Proposed Effective Date
These regulations are proposed to be
effective for taxable years beginning on
or after the date they are published in the
Federal Registeras final regulations.
Effect on Other Documents
Rev. Proc. 84–57 will become obsolete
as of the date these regulations are pub-
lished in the Federal Registeras final
regulations. In addition, Rev. Proc. 98–49
is modified with respect to the require-
ments to use 10 percent categories and
BLS weights, to compute a weighted av-
erage using a weighted arithmetic mean,
and to convert selected indexes to cost, as
of the date these regulations are published
in the Federal Registeras final regula-
tions.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a signifi-
cant regulatory action as defined in Exec-
utive Order 12866. Therefore, a regula-
tory assessment is not required. It also
has been determined that section 553(b)
of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these
regulations, and because the regulations
do not impose a collection of information
on small entities, the Regulatory Flexibil-
ity Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the
Internal Revenue Code, this notice of pro-
posed rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
its impact on small business.
Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written com-
ments (a signed original and eight (8)
copies) and electronic comments that are
submitted timely to the IRS. The IRS and
Treasury Department request comments
on the clarity of the proposed rules and
how they can be made easier to under-
stand. All comments will be available for
public inspection and copying.
A public hearing has been scheduled
for September 15, 2000, at 10 a.m., in
room 4718, Internal Revenue Building,
1111 Constitution Avenue, NW., Wash-
ington, DC. Due to building security pro-
cedures, visitors must enter at the 10th
Street entrance, located between Consti-
tution and Pennsylvania Avenues, NW. In
addition, all visitors must present photo
identification to enter the building. Be-
cause of access restrictions, visitors will
not be admitted beyond the immediate en-
trance area more than 15 minutes before
the hearing starts. For information about
having your name placed on the building
access list to attend the hearing, see the
“FOR FURTHER INFORMATION
CONTACT” section of this preamble.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons who wish to present oral com-
ments at the hearing must submit written
or electronic comments by August 17,
2000, and submit an outline of the topics
to be discussed and the time to be devoted
to each topic (a signed original and eight
(8) copies) by August 25, 2000.
A period of 10 minutes will be allo-
cated to each person for making com-
2000–23 I.R.B.1233June 5, 2000

ments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal author of these regula-
tions is Jeffery G. Mitchell of the Office
of Assistant Chief Counsel (Income Tax
and Accounting). However, other person-
nel from the IRS and Treasury Depart-
ment participated in their development.
* * * * *
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is pro-
posed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by adding an entry in
numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
§1.472–8 also issued under 26 U.S.C.
472. * * *
Par. 2. Section 1.472–8 is amended as
follows:
1. Paragraph (b)(4) is added.
2. The text of paragraph (c) following
the paragraph heading is redesignated as
paragraph (c)(1) and a paragraph heading
for newly designated (c)(1) is added.
3. Paragraph (c)(2) is added.
4. Paragraphs (e)(3) and (h) are revised.
The revisions and additions read as fol-
lows:
§1.472–8 Dollar-value method of pricing
LIFO inventories.
* * * * *
(b) * * *
(4) Inventory price index pools. A manu-
facturer or processor that elects to use the
inventory price index computation method
described in paragraph (e)(3) of this section
to value its dollar-value pools may establish
an inventory pool for any group of goods
included within one of the 2-digit commod-
ity codes (i.e., major commodity groups) in
Table 6 (Producer price indexes for com-
modity groups, subgroups, product classes,
and individual items) of the “PPI Detailed
Report” published by the United States Bu-
reau of Labor Statistics (available from
New Orders, Superintendent of Docu-
ments, P.O. Box 371954, Pittsburgh, PA
15250–7954). Inventory pools that com-
prise less than 5 percent of the total inven-
tory value may be combined to form a sin-
gle miscellaneous inventory pool. If the
resulting miscellaneous inventory pool it-
self comprises less than 5 percent of the
total inventory value, that pool may be
combined only with the largest inventory
pool.
(c) * * *(1) In general. * * *
(2) Inventory price index pools. A re-
tailer using the retail inventory method
that elects to use the inventory price index
computation method described in para-
graph (e)(3) of this section (the IPIC
method) may establish an inventory pool
for any group of goods accounted for
under the IPIC method included within
one of the general expenditure categories
(i.e., major groups) in Table 3 (Consumer
Price Index for all Urban Consumers
(CPI-U): U.S. city average, detailed ex-
penditure categories) of the “CPI Detailed
Report” published by the United States
Bureau of Labor Statistics (available from
New Orders, Superintendent of Docu-
ments, P.O. Box 371954, Pittsburgh, PA
15250-7954). A retailer not using the re-
tail inventory method, wholesaler, jobber,
or distributor electing to use the IPIC
method may establish an inventory pool
for any group of goods accounted for
under the IPIC method included within
one of the 2-digit commodity codes (i.e.,
major commodity groups) in Table 6
(Producer price indexes for commodity
groups, subgroups, product classes, and
individual items) of the “PPI Detailed Re-
port” published by the United States Bu-
reau of Labor Statistics. Inventory pools
that comprise less than 5 percent of the
total inventory value may be combined to
form a single miscellaneous inventory
pool. If the resulting miscellaneous in-
ventory pool itself comprises less than 5
percent of the total inventory value, that
pool may be combined only with the
largest inventory pool.
* * * * *
(e) * * *
(3) Inventory price index computation
method—(i) In general. The inventory
price index computation method provided
by this paragraph (e)(3) (the IPIC
method) is a method of determining the
LIFO value of a dollar-value inventory
pool with reference to indexes published
by the United States Bureau of Labor Sta-
tistics (BLS). An inventory price index
computed using the IPIC method will be
accepted by the Commissioner as an ap-
propriate method of computing an index,
and the use of that inventory price index
to compute the LIFO value of a dollar-
value inventory pool will be accepted as
accurate, reliable, and suitable. The ap-
propriateness of a taxpayer’s computation
of an inventory price index, including the
selection of the consumer or producer
price indexes and the propriety of all
computations incidental to the use of
those consumer or producer price in-
dexes, will be determined in connection
with the examination of the taxpayer’s in-
come tax return. A taxpayer using the
IPIC method may elect to establish inven-
tory pools in accordance with the special
rules in paragraphs (b)(4) and (c)(2) of
this section or the general rules for estab-
lishing inventory pools in paragraphs (b)
and (c) of this section. Taxpayers eligible
to use the IPIC method are described in
paragraph (e)(3)(ii) of this section. The
manner in which an inventory price index
is computed using the IPIC method is de-
scribed in paragraph (e)(3)(iii) of this sec-
tion. Rules relating to the adoption of, or
change to, the IPIC method are in para-
graph (e)(3)(iv) of this section.
(ii) Eligibility. Any taxpayer electing
to use the dollar- value LIFO method may
elect to compute an inventory price index
in accordance with the IPIC method. Ex-
cept as provided in this paragraph
(e)(3)(ii), a taxpayer using the IPIC
method must use that method in determin-
ing the value of all goods for which the
taxpayer has elected to use the dollar-
value LIFO method. A taxpayer that uses
the retail price indexes prepared by the
BLS and published in “Department Store
Inventory Price Indexes” (available from
the BLS by calling (202)606-6325 and
entering document code 2415) may elect
to use the IPIC method for inventory
items that do not fall within any of the
major groups listed in “Department Store
Inventory Price Indexes.”
(iii) Computation of an inventory price
index—(A) In general. An inventory
price index computed using the IPIC
method is used to convert the current-year
cost of the inventory in a dollar-value in-
ventory pool to base-year cost for pur-
poses of determining whether an incre-
June 5, 200012342000–23 I.R.B.

ment or liquidation in terms of base-year
cost exists and to value the increment, if
any, at current-year cost. A taxpayer must
compute a separate inventory price index
for each dollar-value inventory pool. The
computation of an index for each pool in-
volves the following four steps which are
described in more detail in this paragraph
(e)(3)(iii): first, selection of a BLS table
and an appropriate month, second, selec-
tion of an index category, third computa-
tion of an appropriate index for each se-
lected index category, and fourth,
computation of a pool index. A taxpayer
may compute an inventory price index for
each dollar-value inventory pool under
the IPIC method using a double-extension
method (the double-extension IPIC
method) or a link-chain method (the link-
chain IPIC method) without regard to
whether the use of a double-extension
method is impractical or unsuitable. See
paragraphs (e)(3)(iii)(D) and (E) of this
section. The use of the double-extension
IPIC method or the link-chain IPIC
method is a method of accounting, and
whichever method is adopted must be ap-
plied consistently to all of the taxpayer’s
dollar-value inventory pools accounted
for using the IPIC method.
(B) Selection of a BLS table and appro-
priate month—(1) In general. An inven-
tory price index computed using the IPIC
method is computed with reference to the
consumer or producer price indexes for
specific categories of inventory items
listed in the “CPI Detailed Report” or
“PPI Detailed Report” published by the
BLS for the appropriate month. A tax-
payer may elect to use either the prelimi-
nary or final indexes published by the
BLS for the appropriate month provided
that the chosen indexes are used consis-
tently from year to year. A taxpayer that
elects to use final indexes must use pre-
liminary indexes for the appropriate
month for any taxable year in which it
files its original federal income tax return
before the BLS publishes final indexes.
(2) BLS table selection. Manufactur-
ers, processors, wholesalers, jobbers, dis-
tributors, and retailers not using the retail
inventory method must select indexes
from Table 6 (Producer price indexes for
commodity groups, subgroups, product
classes, and individual items) of the “PPI
Detailed Report,” unless the taxpayer can
demonstrate that the selection of an index
from another table of the “PPI Detailed
Report” would be more appropriate. Re-
tailers using the retail inventory method
must select indexes from Table 3 (Con-
sumer Price Index for all Urban Con-
sumers (CPI-U): U.S. city average, de-
tailed expenditure categories) of the “CPI
Detailed Report.”
(3) Appropriate month. In the case of a
retailer using the retail inventory method,
the appropriate month is the last month of
the retailer’s taxable year. In the case of
all other taxpayers, the appropriate month
is a month most appropriate to the tax-
payer’s method of determining the cur-
rent-year cost of each dollar-value inven-
tory pool under paragraph (e)(2)(ii) of this
section. A taxpayer not using the retail in-
ventory method may annually select an
appropriate month for each dollar-value
inventory pool or make an election of a
representative appropriate month (repre-
sentative month). An election of a repre-
sentative month is a method of accounting
and must be used for the taxable year of
the election and all subsequent taxable
years, unless the taxpayer obtains the con-
sent of the Commissioner as provided in
§1.446-1(e) to change or revoke its elec-
tion. The election of a representative
month must be clearly set forth on Form
970. See paragraph (e)(3)(iv)(A) of this
section.
(C) Selection of an index category—(1)
In general. The inventory items in each
dollar-value pool should be classified ac-
cording to the most detailed listings in the
appropriate tables of the “CPI Detailed
Report” or the “PPI Detailed Report.”
The selection of a consumer or producer
price index category for a specific item to
compute an inventory price index under
the IPIC method is a method of account-
ing. However, the selection of a new con-
sumer or producer price index category
for a specific item as a result of revisions
to the “CPI Detailed Report” or the “PPI
Detailed Report” is a change in underly-
ing facts and not a change in method of
accounting. Change in method of ac-
counting rules relating to changes in se-
lected indexes are in paragraph (e)(3)(iv)
of this section.
(2) Index selection from the PPI De-
tailed Report. Manufacturers, processors,
wholesalers, jobbers, distributors, and re-
tailers not using the retail inventory
method must classify their inventory
items according to the detailed listings in
the appropriate table(s) of the “PPI De-
tailed Report.” Each specific inventory
item in the taxpayer’s inventory must be
assigned to the most detailed index cate-
gory listed in the appropriate tables (as
determined under paragraph
(e)(3)(iii)(B)(2) of this section) of the
“PPI Detailed Report” that includes that
specific inventory item. Manufacturers
and processors must assign each raw ma-
terial inventory item to the most detailed
index category that includes that raw ma-
terial and each finished good inventory
item to the most detailed index category
that includes that finished good. Manu-
facturers and processors must assign
work-in-process inventory items to the
most detailed index category that includes
the finished good into which the item will
be manufactured or processed. For this
purpose, the term finished good means a
good that is in a saleable state. For exam-
ple, a gasoline engine manufacturer that
also produces pistons for the engines must
assign finished pistons that have not yet
been affixed to an engine block and the
piston work-in-process items to the most
detailed index category that includes pis-
tons. Finished pistons that have been af-
fixed to an engine block must be assigned
to the most detailed index category that
includes the engine.
(3) Index selection from the CPI De-
tailed Report. Retailers using the retail
inventory method must classify their in-
ventory items according to the detailed
listings in the appropriate tables of the
“CPI Detailed Report.” Each specific in-
ventory item in the taxpayer’s inventory
must be placed in the most detailed index
category listed in the appropriate table (as
determined under paragraph
(e)(3)(iii)(B)(2) of this section) of the
“CPI Detailed Report” that includes that
specific inventory item.
(D) Computation of an appropriate
index—(1) Double- extension IPIC
method. In the case of a taxpayer using
the double-extension IPIC method, an ap-
propriate index for a selected index cate-
gory is the percent change in the pub-
lished cumulative indexes for that
category for the index period between the
appropriate or representative month of the
current taxable year (determined under
paragraph (e)(3)(iii)(B)(3) of this section)
and the month preceding the first day of
2000–23 I.R.B.1235June 5, 2000

the base year (the base month). The per-
cent change in the published indexes is
equal to the quotient of the published cu-
mulative index for the appropriate or rep-
resentative month of the current year di-
vided by the published cumulative index
for the base month.
(2) Link-chain IPIC method. In the
case of a taxpayer using the link-chain
IPIC method, an appropriate index for a
selected index category is the percent
change in the published cumulative in-
dexes for that category during the index
period between the appropriate or repre-
sentative month of the current taxable
year (determined under paragraph
(e)(3)(iii)(B)(3) of this section) and the
appropriate or representative month used
for the immediately preceding taxable
year. The percent change in the published
indexes is equal to the quotient of the
published cumulative index for the appro-
priate or representative month of the cur-
rent year divided by the published cumu-
lative index for the appropriate or
representative month used for the imme-
diately preceding year (or, for the month
immediately preceding the first day of the
taxable year, if such year is the first tax-
able year in which the taxpayer uses dol-
lar-value LIFO).
(3) Limitation on index period. A tax-
payer electing to use a representative
month under paragraph (e)(3)(iii)(B)(3) of
this section must use an appropriate month,
rather than the representative month, to de-
termine the index period in the circum-
stances described in this paragraph
(e)(3)(iii)(D)(3) and other similar circum-
stances. For example, if the first taxable
year in which the taxpayer uses the IPIC
method is also the first taxable year in
which the taxpayer uses the dollar-value
LIFO method, the index period is the pe-
riod between the month immediately pre-
ceding the first day of the taxable year and
an appropriate month for that taxable year.
Likewise, in the case of a short taxable
year, the index period ordinarily is the pe-
riod between the base month (double-ex-
tension IPIC method) or the appropriate or
representative month used for the preced-
ing taxable year (link-chain IPIC method)
and the appropriate month for the short
taxable year. Similarly, if a taxpayer using
the link-chain IPIC method is granted con-
sent to change its method of determining
the current-year cost of a dollar-value pool
and its representative month, the index pe-
riod is the period between the old represen-
tative month used for the preceding taxable
year and the new representative month for
the year of change.
(E) Computation of a pool index—(1)
Weighted average pool index. To com-
pute an inventory price index for a dollar-
value pool, a taxpayer must compute a
weighted average pool index. A weighted
average pool index is a weighted har-
monic mean of the appropriate indexes
(determined under paragraph
(e)(3)(iii)(D) of this section) for each se-
lected index category represented in the
taxpayer’s ending inventory. The formula
for computing a weighted harmonic mean
is: Sum of weights / Sum of (Weight / Ap-
propriate Index). The costs to be used in
computing a weighted harmonic mean are
the relative amount of current-year costs
(or, in the case of a retailer using the retail
inventory method, the relative retail sell-
ing prices) in each index category repre-
sented in the ending inventory of the pool.
(2) Double-extension IPIC method.
Under the double- extension IPIC
method, an inventory price index com-
puted for each pool is 1.0 plus a stated
percentage of the increase since the base
date in the weighted average pool index
determined under paragraph
(e)(3)(iii)(E)(1) of this section. In the
case of an eligible small business as de-
fined in section 474, the stated percentage
is 100%. In the case of all other taxpay-
ers, the stated percentage is 80%. Thus,
the inventory price index for an eligible
small business is equal to the weighted
average pool index determined under
paragraph (e)(3)(iii)(E)(1) of this section.
The inventory price index for all other
taxpayers is computed using the follow-
ing formula: 1 + [ 0.8 * (weighted average
pool index - 1)].
(3) Link-chain IPIC method. Under the
link-chain IPIC method, an inventory
price index for each pool is 1.0 plus a
stated percentage of the increase since the
base date in a cumulative index. In the
case of an eligible small business as de-
fined in section 474, the stated percentage
is 100%. In the case of all other taxpay-
ers, the stated percentage is 80%. The cu-
mulative index for each taxable year is the
product of the weighted average pool
index determined under paragraph
(e)(3)(iii)(E)(1) of this section multiplied
by the cumulative index for the immedi-
ately preceding taxable year. The cumu-
lative index for the taxable year is com-
puted using the following formula:
(weighted average pool index * preceding
year’s Cumulative Index). The inventory
price index for a taxable year of an eligi-
ble small business is equal to the cumula-
tive index for the taxable year. The in-
ventory price index for a taxable year of
all other taxpayers is computed using the
following formula: 1 + [0.8 * (Cumula-
tive Index for the taxable year - 1)].
(F) Examples. The following examples
illustrate the rules of this paragraph
(e)(3)(iii):
Example 1. Double-extension Method. (i) Intro-
duction. R is a retail furniture merchant with more
than $5,000,000 in average annual gross receipts for
all relevant years. For the taxable year ending De-
cember 31, 1996, R used the first-in, first-out
method of identifying inventory and valued its in-
ventory at cost. R’s inventory on December 31,
1996, had a cost of $850,000.00. R elected to use
the dollar-value LIFO and double-extension IPIC
methods for its taxable year ending December 31,
1997. R determines the current-year cost of inven-
tory items by reference to the actual cost of the
goods most recently purchased. R elected to pool its
inventory in accordance with the special IPIC pool-
ing rules of paragraph (b)(4) of this section. R does
not use the retail inventory method. All of R’s in-
ventory items fall within the 2-digit commodity
code in Table 6 (Producer price indexes for com-
modity groups, subgroups, product classes, and indi-
vidual items) of the “PPI Detailed Report” for “fur-
niture and household durables.” Therefore, R will
maintain a single inventory pool.
(ii) Select a BLS table and appropriate month for
the 1997 taxable year. R determines that the appro-
priate month for the taxable year ending December
31, 1997, is October. Because R is a retailer not
using the retail inventory method, R must select in-
dexes from the “PPI Detailed Report.” The indexes
in Table 6 of the “PPI Detailed Report” are appropri-
ate for R’s inventory.
(iii) Select index categories for the 1997 taxable
year. R’s inventory items can be classified into five
detailed categories listed in Table 6 of the “PPI De-
tailed Report” published for October, 1997. The cat-
egories and current-year cost of items in those cate-
gories can be summarized as follows:
June 5, 200012362000–23 I.R.B.

Commodity CodeCategoryCurrent-Year Cost
12120101Living Room Table$111,924.00
12120211Dining Room Table$159,578.00
12120216Dining Room Chairs$ 98,639.00
12130101Upholstered Sofas$332,488.00
12130111Upholstered Chairs$218,751.00
$921,380.00
2000–23 I.R.B.1237June 5, 2000
(iv) Compute appropriate indexes for the 1997
taxable year. Because R elected to use the double-
extension IPIC method, R will compute appropriate
indexes in accordance with paragraph
(e)(3)(iii)(D)(1) of this section (published cumula-
tive index for October, 1997 divided by published
cumulative index for December, 1996). R computes
the appropriate indexes as follows:
Oct. ‘97Dec. ‘96Appropriate
CategoryIndex Index Index
Living Room Table172.4169.21.018913
Dining Room Table171.9168.11.022606
Dining Room Chairs172.8169.71.018268
Upholstered Sofas142.2140.91.009226
Upholstered Chairs134.1132.51.012075
(v) Compute a weighted average pool index for the
1997 taxable year. R must first compute a weighted
average pool index using the formula set forth in para-
graph (e)(3)(iii)(E)(1) of this section (Sum of weights /
Sum of [Weight / Appropriate Index]). The weighted
average pool index is computed as follows:
Appropriate
CategoryWeightIndex Quotient
Living Room Table$111,924.001.018913$109,846.47
Dining Room Table159,578.001.022606156,050.33
Dining Room Chairs98,639.001.01826896,869.39
Upholstered Sofas332,488.001.009226329,448.51
Upholstered Chairs 218,751.00
1.012075 216,141.10
Total$921,380.00$908,355.80
Sum ofSum ofWeighted Average
Weights(Weight/Appropriate Index)Pool Index
$921,380.00$908,355.801.0143382
(vi) Compute an inventory price index for the
1997 taxable year. R computes an inventory price
index for the pool using the formula set forth in
paragraph (e)(3)(iii)(E)(2
) of this section. The in-
ventory price index is 1.0114710 (1 + [0.8 *
(1.0143382 - 1)]).
(vii) Determine the LIFO value of the pool for the
1997 taxable year. R determines the total base-year
cost of its ending inventory by dividing the total cur-
rent-year cost of the inventory items in the pool by
the inventory price index. The total base-year cost
of R’s ending inventory is $910,930.71 ($921,380 /
1.011471). R compares the ending inventory at
base-year cost to the beginning inventory at base-
year cost and determines that the amount of the layer
of increment for the taxable year in terms of base-
year cost is $60,930.71 ($910,930.71 -
$850,000.00). R multiplies the base-year cost of the
increment by the inventory price index computed for
the taxable year and determines that the LIFO value
of the increment is $61,629.65 ($60,930.71 *
1.011471). Thus, the LIFO value of R’s inventory at
the end of the 1997 taxable year is $911,629.65
($850,000 opening inventory + $61,629.65 incre-
ment).
(viii) Select a BLS table and appropriate month
for the 1998 taxable year. For the 1998 taxable
year, R must compute a new inventory price index
under the double-extension IPIC method to deter-
mine the LIFO value of its dollar-value pool. R de-
termines that the appropriate month for the taxable
year ending December 31, 1998, is November.
(ix) Select index categories for the 1998 taxable
year. The inventory items contained in R’s ending
inventory can be classified into five detailed cate-
gories listed in Table 6 of the “PPI Detailed Report”
published for November, 1998. The categories and
current-year cost of items in those categories can be
summarized as follows:
Commodity CodeCategoryCurrent-Year Cost
12120103Living Room Desks$125,008.00
12120211Dining Room Table$136,216.00
12120216Dining Room Chairs$113,569.00
12130101Upholstered Sofas$343,900.00
12130111Upholstered Chairs$233,050.00
$951,743.00
(x) Compute appropriate indexes for the 1998
taxable year. Because R uses the double-extension
IPIC method, R will compute an appropriate index
in accordance with paragraph (e)(3)(iii)(D)(1) of
this section (published cumulative index for Novem-
ber, 1998 divided by published cumulative index for
December, 1996). R computes the appropriate in-
dexes as follows:

Nov. ‘98Dec. ‘96Appropriate
CategoryIndex Index Index
Living Room Desks172.6160.31.076731
Dining Room Table174.8168.11.039857
Dining Room Chairs177.0169.71.043017
Upholstered Sofas144.9140.91.028389
Upholstered Chairs136.6132.51.030943
June 5, 200012382000–23 I.R.B.
(xi) Compute a pool index for the 1998 taxable
year. R must first compute a weighted average pool
index using the formula set forth in paragraph
(e)(3)(iii)(E)(1) of this section (Sum of weights / (Sum
of [Weight / Appropriate Index])). The weighted aver-
age pool index is computed as follows:
Appropriate
CategoryWeightIndex Quotient
Living Room Desks$125,008.001.076731$116,099.56
Dining Room Table136,216.001.039857130,994.93
Dining Room Chairs113,569.001.043017108,885.09
Upholstered Sofas343,900.001.028389334,406.53
Upholstered Chairs 233,050.00
1.030943 226,055.17
Total$951,743.00
$916,441.28
Sum ofSum ofWeighted Average
Weights(Weight/Appropriate Index)Pool Index
$951,743.00$916,441.281.0385204
(xii) Compute an inventory price index for the
1997 taxable year. R computes the inventory price
index for the pool using the formula set forth in
paragraph (e)(3)(iii)(E)(2) of this section. The in-
ventory price index is 1.0308163 (1 + [0.8 *
(1.0385204 - 1)]).
(xiii) Determine the LIFO value of the pool for
the 1998 taxable year. R determines the total base-
year cost of its ending inventory by dividing the
total current-year cost of the inventory items in the
pool by the pool index. The total base-year cost of
the ending inventory is $923,290.60 ($951,743.00 /
1.0308163). R compares the ending inventory at
base-year cost to the beginning inventory at base-
year cost and determines that the amount of the layer
of increment for the taxable year in terms of base-
year cost is $12,359.89 ($923,290.60 -
$910,930.71). R multiplies the base-year cost of the
increment by the pool index computed for the tax-
able year and determines that the LIFO value of the
increment is $12,740.78 ($12,359.89 * 1.0308163).
Thus, the LIFO value of R’s inventory at the end of
the 1997 taxable year is $924,370.43 ($850,000.00
base year layer + $61,629.65 1997 layer +
$12,740.78 1998 layer).
Example 2. Link-chain Method. (i) Introduction.
The facts are the same as Example 1, except that R
uses the link-chain IPIC method. The double-exten-
sion IPIC method and the link-chain IPIC method
yield the same results for the first taxable year in
which the IPIC method is used. Therefore, this ex-
ample only illustrates how R would compute an in-
ventory price index and determine the LIFO value of
its dollar-value pool for the 1998 taxable year.
(ii) Select a BLS table and appropriate month for
the 1998 taxable year. R determines that the appro-
priate index month for the taxable year ending De-
cember 31, 1998, is November.
(iii) Select index categories for the 1998 taxable
year. R’s inventory items can be classified into five
detailed categories listed in Table 6 of the “PPI De-
tailed Report” published for November, 1998. The
categories and current-year cost of items in those
categories can be summarized as follows:
Commodity CodeCategoryCurrent-Year Cost
12120103Living Room Desks$125,008.00
12120211Dining Room Table$136,216.00
12120216Dining Room Chairs$113,569.00
12130101Upholstered Sofas$343,900.00
12130111Upholstered Chairs$233,050.00
$951,743.00
(iv) Compute appropriate indexes for the 1998
taxable year.Because R uses the link-chain IPIC
method, R will compute an appropriate index in ac-
cordance with paragraph (e)(3)(iii)(D)(2) of this sec-
tion (published cumulative index for the November,
1998 divided by published cumulative index for the
October, 1997). R computes the appropriate indexes
as follows:
Nov. ‘98Oct. ‘97Appropriate
CategoryIndex Index Index
Living Room Desks172.6162.01.065432
Dining Room Table174.8171.91.016870
Dining Room Chairs177.0172.81.024306
Upholstered Sofas144.9142.21.018987
Upholstered Chairs136.6134.11.018643
(v) Compute a pool index for the 1998 taxable
year. R must first compute a weighted average pool
index using the formula set forth in paragraph
(e)(3)(iii)(E)(1
) of this section (Sum of weights / Sum
of [Weight / Appropriate Index]). The weighted aver-
age pool index is computed as follows:

Appropriate
CategoryWeightIndex Quotient
Living Room Desks$125,008.001.065432$117,330.81
Dining Room Table136,216.001.016870133,956.16
Dining Room Chairs113,569.001.024306110,874.09
Upholstered Sofas343,900.001.018987337,492.04
Upholstered Chairs 233,050.00
1.018643 228,784.77
Total$951,743.00
$928,437.87
Sum ofSum ofWeighted Average
Weights(Weight/Appropriate Index)Pool Index
$951,743.00$928,437.871.0251014
2000–23 I.R.B.1239June 5, 2000
(vi) Compute an inventory price index for the
1997 taxable year. R computes the inventory price
index in accordance with paragraph (e)(3)(iii)(E)(3
)
of this section. R multiplies the weighted average
pool index by the prior year’s cumulative index to
get the cumulative index for the taxable year. Be-
cause 1997 was the first year in which R used the
link-chain IPIC method, the prior year’s cumulative
index is equal to the 1997 weighted average pool
index. The cumulative index for 1998 is 1.0397995
(1.0143382 * 1.0251014). R computes the inven-
tory price index using the formula set forth in para-
graph (e)(3)(iii)(E)(3) of this section. The inventory
price index is 1.0318396 (1 + [0.80 * (1.0397995 -
1)]).
(vii) Determine the LIFO value of the pool for the
1998 taxable year. R determines the total base-year
cost of its ending inventory by dividing the total cur-
rent-year cost of the inventory items in the pool by
the inventory price index. The total base-year cost
of the ending inventory is $922,374.95 ($951,743.00
/ 1.0318396). R compares the ending inventory at
base-year cost to the beginning inventory at base-
year cost and determines that the amount of the layer
of increment for the taxable year in terms of base-
year cost is $11,444.24 ($922,374.95 -
$910,930.71). R multiplies the base-year cost of the
increment by the pool index computed for the tax-
able year and determines that the LIFO value of the
increment is $11,808.62 ($11,444.24 * 1.0318396).
Thus, the LIFO value of R’s inventory at the end of
the 1998 taxable year is $923,438.27 ($850,000 base
year layer + $61,629.65 1997 layer + $11,808.62
1998 layer).
(iv) Adoption or change of method—
(A) Adoption or change to IPIC method.
The use of an inventory price index com-
puted using the IPIC method is a method
of accounting. A taxpayer permitted to
adopt the dollar-value LIFO method with-
out first securing the consent of the Com-
missioner may also adopt the IPIC
method incident to that adoption without
first securing the consent of the Commis-
sioner. The IPIC method may be adopted
and used only if the taxpayer indicates on
a Form 970, “Application to Use LIFO
Inventory Method,” or in such other man-
ner as may be acceptable to the Commis-
sioner, a listing of each dollar-value in-
ventory pool, the type of goods included
in each pool, the consumer or producer
price index or indexes selected for each
pool, whether the taxpayer will use the
double-extension IPIC method or the
link-chain IPIC method of computing an
inventory price index, and if the taxpayer
makes a one-time binding election of an
appropriate representative month, the rep-
resentative month. In the case of a tax-
payer permitted to adopt the IPIC method
without requesting the Commissioner’s
consent, the Form 970 shall be attached to
the taxpayer’s income tax return for the
taxable year of that adoption. In all other
cases, a taxpayer may change to the IPIC
method prescribed by this paragraph only
after first securing the consent of the
Commissioner as provided in §1.446-
1(e). In such cases, the Form 970 con-
taining the information described above
must be attached to a Form 3115, “Appli-
cation for Change in Accounting
Method,” filed in accordance with
§1.446–1(e). Taxpayers must maintain
adequate books and records in order to
satisfy the requirements of §1.472–2(h),
including adequate books and records of
the use and computations of the IPIC
method. Notwithstanding the rules in
paragraph (e)(1) of this section, a tax-
payer that adopts or changes to the use of
an inventory price index computed using
the IPIC method is not required to demon-
strate that the use of any other method of
computing the LIFO value of a dollar-
value inventory pool is impractical.
(B) Change in selected index. The se-
lection of a consumer or producer price
index category for a specific item to com-
pute an appropriate index under para-
graph (e)(3)(iii)(B) of this section is a
method of accounting. A taxpayer desir-
ing to change the selection of such a con-
sumer or producer price index must se-
cure the consent of the Commissioner as
provided in §1.446–1(e).
(C) New base year—(1) Voluntary
change—(i) In general. In the case of a
taxpayer using a method other than the
IPIC method to determine the LIFO value
of a dollar-value inventory pool, any lay-
ers of inventory increments previously
determined by that method and the LIFO
value of those layers are retained if the
taxpayer voluntarily changes to the use of
the IPIC method. In the case of a tax-
payer changing the selection of an index
category for an inventory item, any layers
of inventory increments previously deter-
mined and the LIFO value of those layers
are retained. Instead of using the earliest
taxable year for which the taxpayer
adopted the LIFO method for any items in
the pool, the year of change is used as the
new base year in determining the LIFO
value of the inventory pool for the year of
change and later taxable years. The cu-
mulative index as of the first day of the
year of change (the base date) is 1.00.
The base-year costs of layers of increment
in the pool at the beginning of the year of
change must be restated in terms of new
base-year cost, using the year of change
as the new base year, and the indexes for
previously determined inventory incre-
ments must be recomputed accordingly.
The new base-year cost of a pool is equal
to the total current-year cost of all the
items in the pool as determined pursuant
to the taxpayer’s established method of
determining the total current-year cost of
items making up the pool under paragraph
(e)(2)(ii) of this section. See paragraph
(f)(2) of this section for rules relating to a
change to the dollar-value method from
another method of pricing LIFO invento-
ries.
(ii) Example. The following example
illustrates the rules of this paragraph
(e)(3)(iv)(C)(1):
Example. (i) X began using a dollar-value LIFO
method other than the IPIC method in 1990 and main-

tains a single dollar-value pool. X is granted permis-
sion to change to the IPIC method, beginning with the
taxable year ending December 31, 2000. X will con-
tinue to use a single dollar-value pool under the IPIC
method. X’s beginning inventory as of January 1,
2000, computed using its former method, is as follows:
June 5, 200012402000–23 I.R.B.
Base-Year
Costs IndexLIFO Value
Base layer$135,0001.00$135,000
1991 layer20,0001.4328,600
1994 layer60,0001.5593,000
1995 layer13,0001.5920,670
1997 layer 2,000
1.61 3,220
Totals$230,000
$280,490
(ii) Under X’s method of determining the current-
year cost of items, the current-year cost of the begin-
ning inventory is $391,000. Thus, X’s new base-
year cost as of January 1, 2000 is $391,000. X
allocates this new base-year cost to each LIFO layer
based on the ratio of old base-year cost of the layer
to the total old base-year cost of the pool. To recom-
pute the indexes for each of its LIFO layers, X di-
vides the LIFO value of each layer by the new base-
year cost attributable to the layer. The new base-
year costs, recomputed indexes, and LIFO value of
X’s inventory are as follows:
Base-Year
Costs IndexLIFO Value
Base layer$229,5000.588235$135,000
1991 layer34,0000.84117628,600
1994 layer102,0000.91176593,000
1995 layer22,1000.93529420,670
1997 layer 3,400
0.947059 3,220
Totals$391,000$280,490
(2) Involuntary change—(i) In general.
If a taxpayer uses a method of accounting
other than the IPIC method to determine
the LIFO value of a dollar-value inventory
pool and the Commissioner determines
that the method does not clearly reflect in-
come, the Commissioner may require the
taxpayer to change to the IPIC method. If
a taxpayer is unable to provide a sufficient
basis, including information from its books
and records, to compute an adjustment
under section 481, and the Commissioner
requires the taxpayer to change to the IPIC
method, the Commissioner will require the
taxpayer to change to the double-extension
IPIC method and implement the change on
a cut-off basis without a new base year.
Under the cut-off basis without a new base
year, the Commissioner will determine the
amount of any increment in terms of base-
year cost for the year of change by com-
paring the total base-year cost of the begin-
ning inventory under the taxpayer’s
method and the total base-year cost of the
ending inventory under the double-exten-
sion IPIC method described in this para-
graph (e)(3) and value any increment so
determined using the inventory price index
computed under the double-extension IPIC
method.
(ii) Example. The following example
illustrates the rules of this paragraph
(e)(3)(iv)(C)(2):
Example. (i) Y began using a dollar-value LIFO
method other than the IPIC method in 1994 and
maintains a single dollar-value pool. Under Y’s
method of determining the current-year cost of
items, the current-year cost of Y’s ending inventory
for the 2000 taxable year is $348,160. Y’s begin-
ning inventory as of January 1, 2000, computed
using its method, is as follows:
Base-Year
Costs IndexLIFO Value
Base layer$105,0001.00$105,000
1995 layer3,0001.705,100
1996 layer5,5002.0011,000
1997 layer2,9002.507,250
1998 layer 1,400
2.85 3,990
Totals$1
17,800$132,340
(ii) Upon examination, it is determined that Y’s
dollar- value LIFO method does not clearly reflect
income. If Y is unable to provide the examining
agent with a sufficient basis to compute a section
481 adjustment arising from a change to a dollar-
value LIFO method that does clearly reflect in-
come, and the examining agent chooses to change
Y to the IPIC method, the change will be imple-
mented as follows. First, the examining agent will
compute an inventory price index under the dou-
ble-extension IPIC method in accordance with this
paragraph (e)(3). For purposes of this example, as-
sume that the inventory price index computed
under the double-extension IPIC method is
1.438793. Second, the examining agent will divide
the current-year cost of Y’s ending inventory by the
inventory price index to determine the base-year
cost of Y’s inventory under the double-extension
IPIC method. The base-year cost is $241,980.60
($348,160 / 1.438793). Third, the examining agent
will compare the base-year cost of the ending in-
ventory determined under the double-extension
IPIC method to the base-year cost of the beginning
inventory determined under Y’s method of ac-
counting to determine the amount of any incre-
ment. The increment at base- year cost for the
2000 taxable year is $124,180.60 ($241,980.60 -
$117,800.00). Fourth, the examining agent will
value the increment by multiplying the base-year
cost of the increment by the inventory price index.
The LIFO value of the increment is $178,670.18
($241,980.60 * 1.438793). Finally, the examining
agent will reduce Y’s cost of goods sold and in-
creases Y’s gross income for the 2000 taxable year
by the increase in the LIFO value of the 2000 end-
ing inventory, or $178,670.18.

(v) Effective date—(A) In general. The
rules of this paragraph (e)(3) and para-
graphs (b)(4) and (c)(2) of this section are
applicable for taxable years beginning on
or after the date these regulations are pub-
lished in the Federal Registeras final
regulations.
(B) Change in method of accounting.
Any change in a taxpayer’s method of ac-
counting necessary to comply with this
paragraph (e)(3) or paragraphs (b)(4) or
(c)(2) of this section is a change in method
of accounting to which the provisions of
section 446 and the regulations thereunder
apply. For the first taxable year beginning
on or after the date these regulations are
published in the Federal Registeras final
regulations, a taxpayer is granted the con-
sent of the Commissioner to change its
method of accounting to a method re-
quired or permitted by this paragraph
(e)(3) and paragraphs (b)(4) and (c)(2) of
this section. A taxpayer that wants to
change its method of accounting under
this paragraph (e)(3)(v) must follow the
automatic consent procedures in Rev.
Proc. 99–49 (1999–52 I.R.B. 725)(see
§601.601(d)(2) of this chapter). However,
the scope limitations in section 4.02 of
Rev. Proc. 99–49 do not apply. In addi-
tion, if the taxpayer’s method of account-
ing for its LIFO inventories is an issue
under consideration at the time the appli-
cation is filed with the national office, the
audit protection of section 7 of Rev. Proc.
99–49 does not apply. If a taxpayer
changing its method of accounting under
this paragraph (e)(3)(v)(B) is under exam-
ination, before an appeals office, or before
a federal court with respect to any income
tax issue, the taxpayer must provide a
copy of the application to the examining
agent(s), appeals officer or counsel for the
government, as appropriate, at the same
time it files the application with the na-
tional office. A change under this para-
graph (e)(3)(v)(B) must be made using a
cut-off basis and new base year in accor-
dance with paragraph (e)(3)(iv)(C)(1) of
this section. Because a change under this
paragraph (e)(3)(v)(B) is made on a cut-
off basis, a section 481(a) adjustment is
not required. However, a taxpayer chang-
ing its method of accounting under this
paragraph (e)(3)(v)(B) must comply with
the requirements of section 10.04(3) of the
APPENDIX of Rev. Proc. 99–49 (con-
cerning bargain purchases).
* * * * *
(h) Inventories received in certain non-
recognition transactions—(1) In general.
Except as provided in paragraph (h)(3) of
this section, if inventories are received in
a transaction described in paragraph
(h)(2) of this section, then for purposes of
determining future increments and liqui-
dations the transferee must use the year of
the transfer as the base year and the cur-
rent-year cost (determined under the
transferor’s method of accounting) of the
inventories received as the new base-year
cost of such inventories. Likewise, the
transferee must use the current-year cost
(determined under the transferee’s
method of accounting) of its beginning in-
ventory, if any, as the new base-year cost
of the beginning inventory for purposes of
determining future increments and liqui-
dations. The total new base-year cost of
the transferee’s beginning inventory is
equal to the new base-year cost of the in-
ventories received and the new base-year
cost of the beginning inventory. The cu-
mulative index as of the first day of the
year in which the inventory is received
(the base date) is 1.00. The base-year
costs of any layers of increment in the
pool, as determined after the transfer,
must be restated in terms of new base-
year costs and the indexes for all such lay-
ers must be restated in terms of the new
base year index. See paragraph
(e)(3)(iv)(C)(1) of this section for an ex-
ample of this computation.
(2) Transactions to which this para-
graph (h) applies. A transaction is de-
scribed in this paragraph (h) if—
(i) The transferee determines its basis
in the inventories, in whole or in part, by
reference to the basis of the inventories in
the hands of the transferor;
(ii) The transferor used the dollar-value
LIFO method to account for the trans-
ferred inventories;
(iii) The transferee uses the dollar-
value LIFO method to account for the in-
ventories in the year of the transfer; and
(iv) The transaction is not described in
section 381(a).
(3) Anti-avoidance rule. The rule in
paragraph (h)(1) of this section will not
apply to a transaction entered into with
the principal purpose to avail the trans-
feree of a method of accounting that
would be unavailable to the transferor (or
would be unavailable to the transferor
without securing consent from the Com-
missioner). In determining the principal
purpose of a transfer, consideration will
be given to all of the facts and circum-
stances. However, a transfer is deemed
made with the principal purpose to avail
the transferee of a method of accounting
that would be unavailable to the transferor
without securing consent from the Com-
missioner if the transferor acquired inven-
tory in a bargain purchase within the five
taxable years preceding the year of the
transfer and used a dollar-value LIFO
method to account for that inventory that
did not treat the bargain purchase inven-
tory and physically identical inventory ac-
quired at market prices as separate items.
Inventory is deemed acquired in a bargain
purchase if the actual cost of the inven-
tory (or, if appropriate, the allocated cost
of the inventory) was less than or equal to
50 percent of the replacement cost of
physically identical inventory. Inventory
is not considered acquired in a bargain
purchase if the actual cost of the inven-
tory (or, if appropriate, the allocated cost
of the inventory) was greater than or
equal to 75 percent of the replacement
cost of physically identical inventory.
(4) Effective date. The rules of this
paragraph (h) are applicable for transfers
on or after the date these regulations are
published in the Federal Registeras final
regulations.
Robert E. Wenzel,
Deputy Commissioner
of Internal Revenue.
(Filed by the Office of the Federal Register on May
18, 2000, 8:45 a.m., and published in the issue of the
Federal Register for May 19, 2000, 65 F.R. 31841)
Partnership Options and
Convertible Instruments
Notice 2000–29
PURPOSE
This notice invites public comment on
the federal income tax treatment of the
exercise of an option to acquire a partner-
ship interest, the exchange of convertible
debt for a partnership interest, and the ex-
change of a preferred interest in a partner-
ship for a common interest in that partner-
ship.
2000–23 I.R.B.1241June 5, 2000

BACKGROUND
In a variety of situations, partnerships
issue options or convertible debt that allow
the holder to acquire by purchase or conver-
sion an equity interest in an entity classified
as a partnership for federal tax purposes.
Partnerships also issue convertible preferred
partnership interests that allow a partner to
acquire a materially different interest in the
partnership upon conversion. Often, these
instruments are exercised or converted
when the partnership interest to be received
is more valuable than the sum of considera-
tion previously transferred to the partner-
ship plus any consideration transferred upon
exercise or conversion. In addition, con-
vertible preferred partnership interests often
are converted at a time when the partnership
interest to be received is more valuable than
the interest being converted (disregarding
the value of the conversion right). Taxpay-
ers have noted significant uncertainties as to
the federal income tax consequences of
using such instruments and have expressed
a need for guidance.
REQUEST FOR PUBLIC COMMENT
The Internal Revenue Service and the
Treasury Department request comments
on the tax consequences to the recipient
of the partnership interest as well as to the
partnership upon the exercise of a partner-
ship option or conversion of a debt or pre-
ferred equity interest in that partnership.
Taxpayers may submit comments in
writing to:
Internal Revenue Service
Attn: CC:DOM:CORP:R (Notice
2000–29, Room 5226)
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
Alternatively, taxpayers may submit
comments electronically at:
sharon.y
.horn@M1.IRSCounsel.treas.gov
All comments should be received by
September 15, 2000. The comments sub-
mitted will be available for public inspec-
tion and copying.
DRAFTING INFORMATION
The principal author of this notice is
Audrey W. Ellis of the Office of Assistant
Chief Counsel (Passthroughs and Special
Industries). For further information re-
garding this notice contact Ms. Ellis at
(202) 622-3060 (not a toll-free call).
June 5, 200012422000–23 I.R.B.

Supplemental Information on
Revenue Procedure 2000–12
for Prospective Qualified
Intermediaries
Announcement 2000–48
AGENCY: Internal Revenue Service
(IRS), Treasury
Revenue Procedure 2000–12, 2000–4
I.R.B. 387 sets forth a qualified interme-
diary (QI) withholding agreement that
governs the withholding and information
reporting obligations of certain financial
institutions. This announcement provides
guidance for financial institutions that are
considering the qualified intermediary
regime.
The QI system is a significant step for-
ward for both taxpayers and the IRS. It
does, however, represent a paradigm shift
to greater self-regulation. Treasury and
the IRS believe that it is appropriate to
allow the greatest self-regulation under
circumstances in which Treasury and the
IRS have the greatest confidence that
such self-regulation will be effective. In
pursuit of that objective, Treasury and the
IRS considered allowing QI status only
for businesses operating in jurisdictions
with which the United States has a bilat-
eral tax treaty or tax information ex-
change agreement. In response to tax-
payer comments, however, that approach
was not adopted. Taxpayers requested
that the QI system have the broadest
scope possible, so that financial institu-
tions can potentially act as qualified inter-
mediaries in all jurisdictions in which
they do business. In an attempt to balance
these competing concerns, Treasury and
the IRS intend to permit financial institu-
tions to act as qualified intermediaries in
accordance with the provisions of this an-
nouncement.
QI Agreements in Countries Without KYC
Rules.
As noted above, Treasury and the IRS
believe it is appropriate to permit the self-
regulation envisioned by the QI system
only under circumstances in which Trea-
sury and the IRS have confidence that
such self-regulation may be effective.
Because Treasury and the IRS regard
know-your-customer (KYC) rules as a
vital component of adequate self-regula-
tion, the IRS generally will not extend the
QI system to any country that does not
have KYC rules or has unacceptable KYC
rules. The IRS will, however, permit a
branch of a financial institution (but not a
separate juridical entity affiliated with the
financial institution) located in such a
country to act as a qualified intermediary
if the branch is part of an entity organized
in a country that has acceptable KYC
rules and the entity agrees to apply its
home country KYC rules to the branch.
As is the case with any violations of the
QI agreement by the branch, failure to ob-
tain adequate documentation will cause
the entity to be in default of its agreement
and may cause the agreement to be termi-
nated.
Heightened Enforcement of QI Agreement
in Specified Tax Haven and Secrecy
Jurisdictions.
Treasury and the IRS believe that self-
regulation is most likely to be effective in
jurisdictions that are characterized by ad-
equate transparency and a willingness to
provide tax information to the IRS. Ac-
cordingly, the IRS will apply more rigor-
ous oversight to financial institutions or
their branches in jurisdictions that are tax
havens or bank secrecy jurisdictions and
show an unwillingness to cooperate with
the United States to reform their practices
relating to transparency and the provision
of tax information (“specified tax havens
and secrecy jurisdictions”). It will do so,
for example, by imposing increased or
more rigorous audit requirements and/or
stricter enforcement standards (including
a more rigorous approach to defaults) on
businesses operating in such jurisdictions.
The IRS will begin immediately making
determinations of which jurisdictions
meet these criteria, but may not have
made all such determinations prior to en-
tering into QI agreements. As such, QIs
should not assume that, because they have
an agreement covering a business in a
particular jurisdiction, such jurisdiction
will not later be identified as a specified
tax haven or secrecy jurisdiction. Any en-
hanced audit requirements or stricter en-
forcement standards will, however, be im-
posed only on agreements entered into or
renewed after identification of the juris-
diction as a specified tax haven or secrecy
jurisdiction.
Certification Prior to Renewal.
As stated above, Treasury and the IRS
believe that self-regulation is most likely
to be effective in jurisdictions that are
characterized by adequate transparency
and a willingness to provide tax informa-
tion to the IRS. A QI agreement generally
has a duration of six calendar years. After
the six year period, the agreement may be
renewed upon the signatures of both the
QI and the IRS. It is expected that the
IRS will agree to renew a QI agreement
or, in the case of new agreements that be-
come effective on or after January 1,
2004, enter a new agreement for QIs in a
particular country only if the IRS receives
a certification from the Treasury Depart-
ment that the country has effective rules
and/or procedures for providing tax infor-
mation to the United States for both civil
tax administration and criminal tax en-
forcement purposes (including, for exam-
ple, under an income tax treaty or a tax in-
formation exchange agreement), or has
taken significant steps towards achieving
such effective provision of information.
2000–23 I.R.B.1243June 5, 2000
Part IV. Items of General Interest

June 5, 200012442000–23 I.R.B.
Announcement of the Disbarment and Suspension of Attorneys,
Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries
From Practice Before the Internal Revenue Service
Under Section 330, Title 31 of the
United States Code, the Secretary of the
Treasury, after due notice and opportunity
for hearing, is authorized to suspend or
disbar from practice before the Internal
Revenue Service any person who has vio-
lated the rules and regulations governing
the recognition of attorneys, certified
public accountants, enrolled agents or en-
rolled actuaries to practice before the In-
ternal Revenue Service.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
prohibited in any Internal Revenue Service
matter from directly or indirectly employing,
accepting assistance from, being employed
by or sharing fees with, any practitioner dis-
barred or under suspension from practice be-
fore the Internal Revenue Service.
To enable attorneys, certified public ac-
countants, enrolled agents and enrolled
actuaries to identify such disbarred or sus-
pended practitioners, the Director of Prac-
tice will announce in the Internal Revenue
Bulletin the names and addresses of prac-
titioners who have been suspended from
such practice, their designation as attor-
ney, certified public accountant, enrolled
agent or enrolled actuary, and the date of
disbarment or period of suspension. This
announcement will appear in the weekly
Bulletin for five successive weeks or as
long as it is practicable for each attorney,
certified public accountant, enrolled agent
or enrolled actuary so suspended or dis-
barred and will be consolidated and pub-
lished in the Cumulative Bulletin.
After due notice and opportunity for
hearing before an administrative law
judge, the following individuals has been
disbarred from ffifther practice before the
Internal Revenue Service:
NameAddressDesignationEffective Date
Kolesar, GaryN. Patchogue, NYCPAOctober 27, 1999
Announcement of the Consent Voluntary Suspension of Attorneys,
Certified Public Accountants, Enrolled Agents, and Enrolled Actuaries
From Practice Before the Internal Revenue Service
Under 31 Code of Federal Regulations,
Part 10, an attorney, certified public ac-
countant, enrolled agent or enrolled actu-
ary, in order to avoid the institution or
conclusion of a proceeding for his disbar-
ment or suspension from practice before
the Internal Revenue Service, may offer
his consent to suspension from such prac-
tice. The Director of Practice, in his dis-
cretion, may suspend an attorney, certi-
fied public accountant, enrolled agent or
enrolled actuary in accordance with the
consent offered.
Attorneys, certified public accountants,
enrolled agents and enrolled actuaries are
prohibited in any Internal Revenue Ser-
vice matter from directly or indirectly em-
ploying, accepting assistance from, being
employed by or sharing fees with, any
practitioner disbarred or suspended from
practice before the Internal Revenue Ser-
vice.
To enable attorneys, certified public ac-
countants, enrolled agents and enrolled ac-
tuaries to identify practitioners under con-
sent suspension from practice before the
Internal Revenue Service, the Director of
Practice will announce in the Internal Rev-
enue Bulletin the names and addresses of
practitioners who have been suspended
from such practice, their designation as at-
torney, certified public accountant, en-
rolled agent or enrolled actuary, and date
or period of suspension. This announce-
ment will appear in the weekly Bulletin at
the earliest practicable date after such ac-
tion and will continue to appear in the
weekly Bulletins for five successive
weeks or for as many weeks as is practica-
ble for each attorney, certified public ac-
countant, enrolled agent or enrolled actu-
ary so suspended and will be consolidated
and published in the Cumulative Bulletin.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
Date of
NameAddressDesignationSuspension
Quann, WarrenElk Grove, CAAttorneyIndefinite
from
March 1, 1999
Helms, W. RichardWestern Springs, ILAttorneyMarch 1, 1999
to
August 31, 2002

2000–23 I.R.B.1245June 5, 2000
Dillahunty, Larry L.St. Petersburg, FLAttorneyMarch 1, 1999
to
February 28, 2003
Friesen, AlanLincoln, NECPAMarch 8, 1999
to
July 7, 2002
Cummins, Richard L.Torrance, CACPAMarch 20, 1999
to
March 19, 2002
Potter, Thomas C.Oneonta, NYCPAApril 16, 1999
to
October 15, 2000
Jenkins, GordonIdaho Falls, IDAttorneyMay 1, 1999
to
October 31, 2002
Blair Jr., John D.Charleston, WVCPAJune 1, 1999
to
May 31, 2002
Caudle, LarryAnchorage, AKAttorneyJune 21, 1999
to
December 31, 2001
Schorr, HarveyVoorheese, NJCPAJuly 1, 1999
to
December 31, 2001
Fernandez, Michael J. Camillus, NYCPAJuly 7, 1999
to
July 6, 2000
Polking, William G.Carol, IAAttorneySeptember 27, 1999
to
September 26, 2000
Luxen, Robert J.Oak Lawn, ILCPAOctober 1, 1999
to
June 30, 2001
Underwood, KennethChattanooga, TNCPAOctober 14, 1999
to
April 13, 2001
Vancho, JohnGreenwich, CTCPANovember 1, 1999
to
October 31, 2001
Enkulenko, ThomasMoscow, PACPANovember 15, 1999
to
November 14, 2000
Moody, James E.Pittsburgh, PACPADecember 1, 1999
to
November 30, 2000
Patterson, Robert A. Marietta, GACPADecember 13, 1999
to
December 12, 2002
Hanson, Raymond L. Boise, IDCPAJanuary 1, 2000
to
December 31, 2001
Wallach, StevenNorth Brook, ILCPAFebruary 25, 2000
to
February 24, 2002

June 5, 200012462000–23 I.R.B.
Watkins Sr., RichardWashington, MOCPAMarch 15, 2000
to
September 14, 2002
Peltin, RonaldEscanaba, MIEnrolledMarch 15, 2000
Agentto
March 14, 2003
Arwood, B. JoeChuckey, TNCPAMarch 20, 2000
to
June 19, 2001
Gazzola, Frank L.N. Mankato, MNCPAMay 1, 2000
to
October 31, 2002
O’Hearn, JamesBakersfield, CAEnrolledJune 1, 2000
Agentto
May 31, 2002
Dooner Jr., WilliamToms River, NJEnrolledJune 1, 2000
Agentto
August 31, 2000
Announcement of the Expedited Suspension of Attorneys, Certified
Public Accountants, Enrolled Agents, and Enrolled Actuaries From
Practice Before the Internal Revenue Service
Under title 31 of the Code of Federal
Regulations, section 10.76, the Director
of Practice is authorized to immediately
suspend from practice before the Internal
Revenue Service any practitioner who,
within five years, from the date the expe-
dited proceeding is instituted, (1) has had
a license to practice as an attorney, certi-
fied public accountant, or actuary sus-
pended or revoked for cause; or (2) has
been convicted of any crime under title 26
of the United States Code or, of a felony
under title 18 of the United States Code
involving dishonesty or breach of trust.
Attorneys, certified public accountants,
enrolled agents, and enrolled actuaries are
prohibited in any Internal Revenue Service
matter from directly or indirectly employ-
ing, accepting assistance from, being em-
ployed by, or sharing fees with, any practi-
tioner disbarred or suspended from practice
before the Internal Revenue Service.
To enable attorneys, certified pubic ac-
countants, enrolled agents, and enrolled ac-
tuaries to identify practitioners under expe-
dited suspension from practice before the
Internal Revenue Service, the Director of
Practice will announce in the Internal Rev-
enue Bulletin the names and addresses of
practitioners who have been suspended
from such practice, their designation as at-
torney, certified public accountant, enrolled
agent, or enrolled actuary, and date or pe-
riod of suspension. This announcement will
appear in the weekly Bulletin at the earliest
practicable date after such action and will
continue to appear in the weekly Bulletins
for five successive weeks or for as many
weeks as is practicable for each attorney,
certified public accountant, enrolled agent,
or enrolled actuary so suspended and will
be consolidated and published in the Cu-
mulative Bulletin.
The following individuals have been
placed under suspension from practice be-
fore the Internal Revenue Service by
virtue of the expedited proceeding provi-
sions of the applicable regulations:
Date of
NameAddressDesignationSuspension
Moeller, David G.Golden Valley, MNAttorneyIndefinite
from
March 8, 1999
Dais, Robert E.Plano, TXCPAIndefinite
from
March 15, 1999
Taylor, Donald J.Sequim, WACPAIndefinite
from
March 15, 1999
Thurson, Terrance N.Jacksonville, FLCPAIndefinite
from
March 15, 1999

Hartman, RichardMerrick, NYAttorneyIndefinite
from
March 15, 1999
Mandel, Stewart I.Univ. Heigths, OHAttorneyIndefinite
from
March 15, 1999
Gowin, Dennis L.Falls Church, VACPAIndefinite
from
March 15, 1999
Kelly, RichardLloyd Harbor, NYAttorneyIndefinite
from
March 16, 1999
Nagel, Maxine M.Renton, WACPAIndefinite
from
March 16, 1999
Cox, James L.Bedford, TXCPAIndefinite
from
March 23, 1999
Shields, Morris R.Omaha, NECPAIndefinite
from
March 23, 1999
Stradone, Mark A.San Antonio, TXCPAIndefinite
from
March 24, 1999
Anderson, David J.Minnetonka, MNCPAIndefinite
from
March 28, 1999
Budenz, Lawrence J.Miamisburg, OHCPAIndefinite
from
March 28, 1999
Hogan, Kelly M.Ogallala, NEAttorneyIndefinite
from
March 28, 1999
Fernez, Daniel J.Monroe, CTCPAIndefinite
from
March 28, 1999
Fitsos, JohnSacramento, CAAttorneyIndefinite
from
March 28, 1999
Schweitzer, Clifford A.Aberdeen, SDCPAIndefinite
from
April 2, 1999
Magdalena, Lynn JosephMcAlester, OKCPAIndefinite
from
April 2, 1999
Parrott, GeorgeNashville, TNCPAIndefinite
from
April 2, 1999
Elder Jr., Wilton K.Burlington, NCAttorneyIndefinite
from
May 6, 1999
Passero, RobertSeal Beach, CACPAIndefinite
from
July 8, 1999
2000–23 I.R.B.1247June 5, 2000

Stringham, RichardColumbia, MOCPAIndefinite
from
July 8, 1999
Koseluk, Alexander F.Omaha, NEAttorneyIndefinite
from
July 19, 1999
Dotson, Marshall F.Jacksonville, NCAttorneyIndefinite
from
July 27, 1999
Schaffer, Clark D.Atlantic Beach, FLCPAIndefinite
from
July 27, 1999
Zimmerman, RobertAlpharetta, GACPAIndefinite
from
January 17, 2000
June 5, 200012482000–23 I.R.B.

2000–23 I.R.B.iJune 5, 2000
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the
effect:
Amplified describes a situation where
no change is being made in a prior pub-
lished position, but the prior position is
being extended to apply to a variation of
the fact situation set forth therein. Thus,
if an earlier ruling held that a principle
applied to A, and the new ruling holds
that the same principle also applies to B,
the earlier ruling is amplified. (Compare
with modified, below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in a
prior ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously
published ruling and points out an essen-
tial difference between them.
Modified is used where the substance
of a previously published position is
being changed. Thus, if a prior ruling
held that a principle applied to A but not
to B, and the new ruling holds that it ap-
plies to both A and B, the prior ruling is
modified because it corrects a published
position. (Compare with amplified and
clarified, above).
Obsoleted describes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used
in a ruling that lists previously published
rulings that are obsoleted because of
changes in law or regulations. A ruling
may also be obsoleted because the sub-
stance has been included in regulations
subsequently adopted.
Revoked describes situations where the
position in the previously published rul-
ing is not correct and the correct position
is being stated in the new ruling.
Superseded describes a situation where
the new ruling does nothing more than
restate the substance and situation of a
previously published ruling (or rulings).
Thus, the term is used to republish under
the 1986 Code and regulations the same
position published under the 1939 Code
and regulations. The term is also used
when it is desired to republish in a single
ruling a series of situations, names, etc.,
that were previously published over a pe-
riod of time in separate rulings. If the
new ruling does more than restate the
substance of a prior ruling, a combination
of terms is used. For example, modified
and superseded describes a situation
where the substance of a previously pub-
lished ruling is being changed in part and
is continued without change in part and it
is desired to restate the valid portion of
the previously published ruling in a new
ruling that is self contained. In this case
the previously published ruling is first
modified and then, as modified, is super-
seded.
Supplemented is used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and
that list is expanded by adding further
names in subsequent rulings. After the
original ruling has been supplemented
several times, a new ruling may be pub-
lished that includes the list in the original
ruling and the additions, and supersedes
all prior rulings in the series.
Suspended is used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use and for-
merly used will appear in material published in the
Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedral Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Definition of Terms

June 5, 2000ii2000–23 I.R.B.
Numerical Finding List
1
Bulletins 2000–1 through 2000–22
Announcements:
2000–1, 2000–2 I.R.B. 294
2000–2, 2000–2 I.R.B. 295
2000–3, 2000–2 I.R.B. 296
2000–4, 2000–3 I.R.B. 317
2000–5, 2000–4 I.R.B. 427
2000–6, 2000–4 I.R.B. 428
2000–7, 2000–6 I.R.B. 586
2000–8, 2000–6 I.R.B. 586
2000–9, 2000–9 I.R.B. 733
2000–10, 2000–9 I.R.B. 733
2000–11, 2000–10 I.R.B. 739
2000–12, 2000–12 I.R.B. 835
2000–13, 2000–11 I.R.B. 771
2000–14, 2000–11 I.R.B. 772
2000–15, 2000–12 I.R.B. 837
2000–16, 2000–12 I.R.B. 837
2000–17, 2000–13 I.R.B. 846
2000–18, 2000–13 I.R.B. 846
2000–19, 2000–19 I.R.B. 973
2000–20, 2000–19 I.R.B. 977
2000–21, 2000–19 I.R.B. 983
2000–22, 2000–19 I.R.B. 987
2000–23, 2000–19 I.R.B. 992
2000–24, 2000–14 I.R.B. 855
2000–25, 2000–14 I.R.B. 855
2000–26, 2000–15 I.R.B. 876
2000–27, 2000–15 I.R.B. 876
2000–28, 2000–15 I.R.B. 876
2000–29, 2000–15 I.R.B. 877
2000–30, 2000–15 I.R.B. 877
2000–31, 2000–15 I.R.B. 877
2000–32, 2000–15 I.R.B. 879
2000–33, 2000–15 I.R.B. 878
2000–34, 2000–15 I.R.B. 879
2000–35, 2000–16 I.R.B. 922
2000–36, 2000–16 I.R.B. 947
2000–37, 2000–16 I.R.B. 947
2000–38, 2000–16 I.R.B. 948
2000–39, 2000–16 I.R.B. 948
2000–40, 2000–16 I.R.B. 948
2000–41, 2000–16 I.R.B. 949
2000–42, 2000–16 I.R.B. 949
2000–43, 2000–17 I.R.B. 957
2000–44, 2000–17 I.R.B. 958
2000–45, 2000–18 I.R.B. 962
2000–46, 2000–19 I.R.B. 997
2000–47, 2000–21 I.R.B. 1118
2000–49, 2000–19 I.R.B. 998
2000–50, 2000–19 I.R.B. 998
2000–51, 2000–22 I.R.B. 1141
2000–52, 2000–22 I.R.B. 1142
2000–53, 2000–22 I.R.B. 1144
Court Decisions:
2066, 2000–15 I.R.B. 867
2067, 2000–15 I.R.B. 863
Notices:
2000–1, 2000–2 I.R.B. 288
2000–2, 2000–9 I.R.B. 727
2000–3, 2000–4 I.R.B. 413
2000–4, 2000–3 I.R.B. 313
2000–5, 2000–3 I.R.B. 314
2000–6, 2000–3 I.R.B. 315
Notices—continued:
2000–7, 2000–4 I.R.B. 419
2000–8, 2000–4 I.R.B. 420
2000–9, 2000–5 I.R.B. 449
2000–10, 2000–5 I.R.B. 451
2000–11, 2000–6 I.R.B. 572
2000–12, 2000–9 I.R.B. 727
2000–13, 2000–9 I.R.B. 732
2000–14, 2000–10 I.R.B. 737
2000–15, 2000–12 I.R.B. 826
2000–16, 2000–12 I.R.B. 826
2000–17, 2000–12 I.R.B. 827
2000–18, 2000–13 I.R.B. 845
2000–19, 2000–13 I.R.B. 845
2000–20, 2000–14 I.R.B. 851
2000–21, 2000–19 I.R.B. 967
2000–22, 2000–16 I.R.B. 902
2000–23, 2000–17 I.R.B. 952
2000–24, 2000–17 I.R.B. 952
2000–25, 2000–17 I.R.B. 954
2000–26, 2000–17 I.R.B. 954
2000–27, 2000–21 I.R.B. 1116
2000–28, 2000–21 I.R.B. 1116
Proposed Regulations:
REG–208280–86, 2000–8 I.R.B. 654
REG–209135–88, 2000–8 I.R.B. 681
REG–208254–90, 2000–6 I.R.B. 577
REG–209601–92, 2000–12 I.R.B. 829
REG–100276–97, 2000–8 I.R.B. 682
REG–101492–98, 2000–3 I.R.B. 326
REG–106012–98, 2000–2 I.R.B. 290
REG–109101–98, 2000–16 I.R.B. 903
REG–110311–98, 2000–11 I.R.B. 767
REG–103831–99, 2000–5 I.R.B. 452
REG–103882–99, 2000–8 I.R.B. 706
REG–105089–99, 2000–6 I.R.B. 580
REG–105279–99, 2000–8 I.R.B. 707
REG–105606–99, 2000–4 I.R.B. 421
REG–107872–99, 2000–16 I.R.B. 911
REG–111119–99, 2000–5 I.R.B. 455
REG–113572–99, 2000–7 I.R.B. 624
REG–116048–99, 2000–6 I.R.B. 584
REG–116567–99, 2000–5 I.R.B. 463
REG–116704–99, 2000–3 I.R.B. 325
REG–117162–99, 2000–15 I.R.B. 871
REG–100163–00, 2000–7 I.R.B. 633
REG–100291–00, 2000–16 I.R.B. 917
REG–103735–00, 2000–11 I.R.B. 770
REG–103736–00, 2000–11 I.R.B. 768
Railroad Retirement Quarterly Rate:
2000–9 I.R.B. 721
Revenue Procedures:
2000–1, 2000–1 I.R.B. 4
2000–2, 2000–1 I.R.B. 73
2000–3, 2000–1 I.R.B. 103
2000–4, 2000–1 I.R.B. 115
2000–5, 2000–1 I.R.B. 158
2000–6, 2000–1 I.R.B. 187
2000–7, 2000–1 I.R.B. 227
2000–8, 2000–1 I.R.B. 230
2000–9, 2000–2 I.R.B. 280
2000–10, 2000–2 I.R.B. 287
2000–11, 2000–3 I.R.B. 309
2000–12, 2000–4 I.R.B. 387
2000–13, 2000–6 I.R.B. 515
2000–14, 2000–18 I.R.B. 960
Revenue Procedures—continued:
2000–15, 2000–5 I.R.B. 447
2000–16, 2000–6 I.R.B. 518
2000–17, 2000–11 I.R.B. 766
2000–18, 2000–9 I.R.B. 722
2000–19, 2000–12 I.R.B. 785
2000–20, 2000–6 I.R.B. 553
2000–21, 2000–19 I.R.B. 971
2000–22, 2000–20 I.R.B. 1008
2000–23, 2000–21 I.R.B. 1018
2000–24, 2000–22 I.R.B. 1133
2000–25, 2000–21 I.R.B. 1033
Revenue Rulings:
2000–1, 2000–2 I.R.B. 250
2000–2, 2000–3 I.R.B. 305
2000–3, 2000–3 I.R.B. 297
2000–4, 2000–4 I.R.B. 331
2000–5, 2000–5 I.R.B. 436
2000–6, 2000–6 I.R.B. 512
2000–7, 2000–9 I.R.B. 712
2000–8, 2000–7 I.R.B. 617
2000–9, 2000–6 I.R.B. 497
2000–10, 2000–8 I.R.B. 643
2000–11, 2000–10 I.R.B. 734
2000–12, 2000–11 I.R.B. 744
2000–13, 2000–12 I.R.B. 774
2000–14, 2000–12 I.R.B. 779
2000–15, 2000–12 I.R.B. 774
2000–16, 2000–12 I.R.B. 780
2000–17, 2000–13 I.R.B. 842
2000–18, 2000–14 I.R.B. 847
2000–19, 2000–14 I.R.B. 849
2000–20, 2000–16 I.R.B. 880
2000–21, 2000–16 I.R.B. 881
2000–22, 2000–16 I.R.B. 880
2000–23, 2000–19 I.R.B. 964
2000–24, 2000–19 I.R.B. 963
2000–25, 2000–20 I.R.B. 1006
2000–26, 2000–22 I.R.B. 1124
2000–27, 2000–21 I.R.B. 1016
Tax Conventions:
2000–22 I.R.B. 1126
Treasury Decisions:
8849, 2000–2 I.R.B. 245
8850, 2000–2 I.R.B. 265
8851, 2000–2 I.R.B. 275
8852, 2000–2 I.R.B.253
8853, 2000–4 I.R.B.377
8854, 2000–3 I.R.B.306
8855, 2000–4 I.R.B.374
8856, 2000–3 I.R.B.298
8857, 2000–4 I.R.B.365
8858, 2000–4 I.R.B.332
8859, 2000–5 I.R.B.429
8860, 2000–5 I.R.B.437
8861, 2000–5 I.R.B.441
8862, 2000–6 I.R.B.466
8863, 2000–6 I.R.B.488
8864, 2000–7 I.R.B.614
8865, 2000–7 I.R.B.589
8866, 2000–6 I.R.B.495
8867, 2000–7 I.R.B.620
8868, 2000–6 I.R.B.491
8869, 2000–6 I.R.B.498
8870, 2000–8 I.R.B.647
8871, 2000–8 I.R.B.641
1
A cumulative list of all revenue rulings, revenue
procedures, Treasury decisions, etc., published in
Internal Revenue Bulletins 1999–27 through
1999–52 is in Internal Revenue Bulletin 2000–1,
dated January 3, 2000.

Treasury Decisions—continued:
8872, 2000–8 I.R.B.639
8873, 2000–9 I.R.B.713
8874, 2000–8 I.R.B.644
8875, 2000–11 I.R.B.761
8876, 2000–11 I.R.B.753
8877, 2000–11 I.R.B.747
8878, 2000–15 I.R.B.857
8879, 2000–16 I.R.B.882
8880, 2000–20 I.R.B.1003
2000–23 I.R.B.iiiJune 5, 2000

June 5, 2000iv2000–23 I.R.B.
Finding List of Current Actions on
Previously Published Items
1
Bulletins 2000–1 through 2000–22
Announcements:
99–40
Obsoleted by
T.D. 8879, 2000–16 I.R.B. 882
99–50
Modified by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
99–59
Superseded by
Announcement 2000–47, 2000–21 I.R.B. 1118
2000–18
Corrected by
Announcement 2000–32, 2000–15 I.R.B. 878
Notices:
88–125
Obsoleted by
T.D. 8870, 2000–8 I.R.B. 647
92–48
Obsoleted by
Notice 2000–11, 2000–6 I.R.B. 572
97–19
Modified by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
98–22
Obsoleted by
T.D. 8870, 2000–8 I.R.B. 647
98–52
Modified by
Notice 2000–3, 2000–4 I.R.B. 413
98–61
Modified and superseded by
Rev. Proc. 2000–15, 2000–5 I.R.B. 447
99–8
Obsoleted by
Rev. Proc. 2000–12, 2000–4 I.R.B. 387
2000–4
Corrected by
Announcement 2000–9, 2000–9 I.R.B. 733
Proposed Regulations:
REG–209601–92
Corrected by
Announcement 2000–40, 2000–16 I.R.B. 948
REG–100276–97
Corrected by
Announcement 2000–38, 2000–16 I.R.B. 948
REG–101492–98
Corrected by
Announcement 2000–16, 2000–12 I.R.B. 837
REG–113572–99
Corrected by
Announcement 2000–41, 2000–16 I.R.B. 949
REG–103736–00
Corrected by
Announcement 2000–44, 2000–17 I.R.B. 958
Revenue Procedures:
80–18
Modified by
Rev. Proc. 2000–13, 2000–6 I.R.B. 515
89–9
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
89–13
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
90–21
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
91–66
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
92–13
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
92–13A
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
92–41
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
93–9
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
93–10
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
94–12
Modified, amplified, and superseded by
Rev. Proc. 2000–11, 2000–3 I.R.B. 309
95–42
Superseded by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
96–13
Modified by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
98–22
Modified and superseded by
Rev. Proc. 2000–16, 2000–6 I.R.B. 518
98–27
Superseded by
Rev. Proc. 2000–12, 2000–4 I.R.B. 387
98–64
Superseded by
Rev. Proc. 2000–9, 2000–2 I.R.B. 280
98–65
Superseded by
Rev. Proc. 2000–19, 2000–12 I.R.B. 785
99–1
Superseded by
Rev. Proc. 2000–1, 2000–1 I.R.B. 4
99–2
Superseded by
Rev. Proc. 2000–2, 2000–1 I.R.B. 73
99–3
Superseded by
Rev. Proc. 2000–3, 2000–1 I.R.B. 103
Revenue Procedures—Continued:
99–4
Superseded by
Rev. Proc. 2000–4, 2000–1 I.R.B. 115
99–5
Superseded by
Rev. Proc. 2000–5, 2000–1 I.R.B. 158
99–6
Superseded by
Rev. Proc. 2000–6, 2000–1 I.R.B. 187
99–7
Superseded by
Rev. Proc. 2000–7, 2000–1 I.R.B. 227
99–8
Superseded by
Rev. Proc. 2000–8, 2000–1 I.R.B. 230
99–13
Modified and superseded by
Rev. Proc. 2000–16, 2000–6 I.R.B. 518
99–20
Supplemented by
Rev. Proc. 2000–14, 2000–18 I.R.B. 960
99–22
Obsoleted by
(except as provided in section 5.02 of)
Rev. Proc. 2000–21, 2000–19 I.R.B. 971
99–24
Superseded by
Rev. Proc. 2000–23, 2000–21 I.R.B. 1018
99–25
Superseded by
Rev. Proc. 2000–24, 2000–22 I.R.B. 1133
99–29
Superseded by
Rev. Proc. 2000–25, 2000–21 I.R.B. 1033
99–31
Modified and superseded by
Rev. Proc. 2000–16, 2000–6 I.R.B. 518
99–49
Modified and amplified by
Rev. Rul. 2000–4, 2000–4 I.R.B. 331
Rev. Rul. 2000–7, 2000–9 I.R.B. 712
Notice 2000–4, 2000–3 I.R.B. 313
99–51
Superseded by
Rev. Proc. 2000–3, 2000–1 I.R.B. 103
2000–6
Modified by
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
2000–8
Modified by
Rev. Proc. 2000–16, 2000–6 I.R.B. 518
Rev. Proc. 2000–20, 2000–6 I.R.B. 553
2000–12
Corrected by
Announcement 2000–50, 2000–19 I.R.B. 998
2000–16
Corrected by
Announcement 2000–17, 2000–13 I.R.B. 846
1
A cumulative list of current actions on previously
published items in Internal Revenue Bulletins
1999–27 through 1999–52 is in Internal Revenue
Bulletin 2000–1, dated January 3, 2000.

2000–23 I.R.B.vJune 5, 2000
Revenue Rulings:
57–259
Obsoleted by
T.D. 8879, 2000–16 I.R.B. 882
57–499
Obsoleted by
T.D. 8879, 2000–16 I.R.B. 882
73–292
Obsoleted by
T.D. 8879, 2000–16 I.R.B. 882
76–79
Distinguised by
Rev. Rul. 2000–24, 2000–19 I.R.B. 963
78–218
Obsoleted by
T.D. 8879, 2000–16 I.R.B. 882
86–62
Obsoleted by
T.D. 8879, 2000–16 I.R.B. 882
88–36
Modified by
Rev. Rul. 2000–6, 2000–6 I.R.B. 512
89–89
Obsoleted by
Rev. Rul. 2000–2, 2000–3 I.R.B. 305
92–19
Supplemented by
Rev. Rul. 2000–17, 2000–13 I.R.B. 842
98–30
Amplified and superseded by
Rev. Rul. 2000–8, 2000–7 I.R.B. 617
Treasury Decisions:
8734
Modified by
T.D. 8856, 2000–3 I.R.B. 298
8804
Modified by
T.D. 8856, 2000–3 I.R.B. 298
8845
Corrected by
Announcement 2000–6, 2000–4 I.R.B. 428
8846
Corrected by
Announcement 2000–3, 2000–2 I.R.B. 296
8847
Corrected by
Announcement 2000–13, 2000–11 I.R.B. 771
8849
Corrected by
Announcement 2000–28, 2000–15 I.R.B. 876
8852
Corrected by
Announcement 2000–18, 2000–13 I.R.B. 846
8853
Corrected by
Announcement 2000–33, 2000–15 I.R.B. 878
8856
Corrected by
Announcement 2000–31, 2000–15 I.R.B. 877
8859
Corrected by
Announcement 2000–27, 2000–15 I.R.B. 876
8864
Corrected by
Announcement 2000–26, 2000–15 I.R.B. 876
Treasury Decisions—continued:
8865
Corrected by
Announcement 2000–37, 2000–16 I.R.B. 947
8867
Corrected by
Announcement 2000–30, 2000–15 I.R.B. 877
8869
Corrected by
Announcement 2000–36, 2000–16 I.R.B. 947
8870
Corrected by
Announcement 2000–34, 2000–15 I.R.B. 879
8874
Corrected by
Announcement 2000–29, 2000–15 I.R.B. 877
8879
Corrected by
Announcement 2000–53, 2000–22 I.R.B. 1144

Index
Internal Revenue Bulletins
2000–1 Through 2000–23
The abbreviation and number in paren-
thesis following the index entry refer to
the specific item; numbers in roman and
italic type following the parenthesis refer
to the Internal Revenue Bulletin in which
the item may be found and the page
number on which it appears.
Key to Abbreviations:
AnnAnnouncement
CDCourt Decision
DODelegation Order
EOExecutive Order
PLPublic Law
PTEProhibited Transaction
Exemption
RPRevenue Procedure
RRRevenue Ruling
SPRStatement of Procedural
Rules
TCTax Convention
TDTreasury Decision
TDOTreasury Department Order
EMPLOYEE PLANS
Areas in which advance letter rulings and
determination letters will not be issued
from Associate Chief Counsel,
Domestic (RP 3) 1, 103
Areas in which advance letter rulings and
determination letters will not be issued
from Associate Chief Counsel,
International (RP 7) 1, 227
Cafeteria plans, treatment of (TD 8878)
15, 857; (REG–117162–99) 15, 871
Cash or deferred arrangements:
Elective deferrals (RR 8) 7, 617
Nondiscrimination (Notice 3) 4, 413
Separation from service, transferred
employees (RR 27) 21,1016
Determination letters, issuing procedures
(RP 6) 1, 187
Eligible rollover distributions, safe har-
bor explanations (Notice 11) 6, 572
EPCRS, closing agreements (RP 16) 6,518;
correction (Ann 17) 13,846
Full funding limitations, weighted aver-
age interest rate for:
January (Notice 8) 4, 420
February (Notice 2) 9,727
March (Notice 18) 13, 845
April (Notice 25) 17, 954
May (Notice 27) 21,1116
Letter rulings, determination letters and
information letters issued by Associate
Chief Counsel (RP 1) 1, 4
Letter rulings, information letters, etc.
(RP 4) 1, 115
Master and prototype plans, unified pro-
cedures (RP 20) 6, 553
Minimum funding standards:
Amortization bases (RR 20) 16, 880
Waiver of the 100 percent tax (RP 17)
11, 766
Mortality tables (Ann 7) 6, 586
New comparability plans, nondiscrimina-
tion (Notice 14) 10, 737
New technologies in retirement plans,
distribution notices and consents (TD
8873) 9, 713
Proposed Regulations:
26 CFR 1.125–1, amended; 1.125–2,
amended; 1.125–4, amended; tax
treatment of cafeteria plans
(REG–117162–99) 15, 871
26 CFR 1.411(d)–4, amended; special
rules regarding optional forms of
benefit under qualified retirement
plans (REG–109101–98) 16, 903
Qualified retirement plans:
Eligible rollover distributions, relief
from disqualification of (TD 8880)
20, 1003
Optional forms of benefit
(REG–109101–98) 16, 903
Remedial amendment period (TD
8871) 8, 641
Regulations:
26 CFR 1.125–4, added; 1.125–4T,
amended; tax treatment of cafeteria
plans (TD 8878) 15, 857
26 CFR 1.401(a)(31)–1, amended;
1.402(c)–2, amended; 1.403(b)–2,
amended; relief from disqualifica-
tion for plans accepting rollovers
(TD 8880) 20, 1003
26 CFR 1.401(b)–1T, removed; reme-
dial amendment period (TD 8871)
8, 641
26 CFR 1.402(f)–1, amended;
1.411(a)–11, amended; new tech-
nologies in retirement plans (TD
8873) 9,713
Reporting requirements, section 457
plans (Ann 1) 2, 294
Technical advice to district directors and
chiefs, appeals offices, from Associate
Chief Counsel (RP 2) 1, 73
Technical advice to IRS employees (RP
5) 1, 158
User fees, request for letter rulings (RP
8) 1, 230
EMPLOYMENT TAX
Electronic filing; magnetic media:
Form 1040NR (RP 24) 22, 1133
Information reporting seminars for
2000 (Ann 47) 21, 1118
Publication 1220, Specifications for
Filing Forms 1098, 1099, 5498, and
W-2G, Magnetically or
Electronically (RP 25) 21, 1033
Electronically filed information returns,
due dates (REG–105279–99) 8, 707
EmTrac program requirements, food and
beverage industry (Notice 21) 19, 967
EPCRS, closing agreements (RP 16) 6,
518; correction (Ann 17) 13, 846
Forms:
Electronic filing; magnetic media:
1040 NR (RP 24) 22, 1133
1098, 1099, 5498, and W-2G, speci-
fications for filing forms electroni-
cally or magnetically (RP 25) 21,
1033
W-2 and W-3, specifications for private
printing of paper substitutes (RP 23)
21, 1018
Information reporting:
Election workers (RR 6) 6,512
New technologies in retirement plans,
distribution notices and consents (TD
8873) 9, 713
Proposed Regulations:
26 CFR 31.3402(q)–1, revised;
31.6053–3, revised; 31.6071(a)–1,
revised; extension of due date for
electronically filed information
returns (REG–105279–99) 8, 707
Publication 1220, Specifications for
Filing Forms 1098, 1099, 5498, and
W-2G, Magnetically or
Electronically (RP 25) 21, 1033
Qualified retirements plans:
Eligible rollover distributions, relief
from disqualification of (TD 8880)
20, 1003
Railroad retirement, quarterly rate
beginning January 1, 2000, 9, 721
Regulations:
26 CFR 31.3405(c)–1, amended; relief
June 5, 2000vi2000–23 I.R.B.
EMPLOYEE PLANS—
cont.
EMPLOYEE PLANS—
cont.

from disqualification for plans
accepting rollovers (TD 8880) 20,
1003
26 CFR 35.3405–1, redesignated as
35.3405–1T, revised; 35.3405–1,
added; new technologies in retire-
ment plans (TD 8873) 9, 713
Substitute for Forms W-2 and W-3, for
private printing and general rules and
specifications (RP 23) 21, 1018
Tips:
Tip rate determination agreement
(TRDA):
Food and beverage industry (Ann
23) 19,992
Generic agreement (Ann 20) 19, 977
Tip reporting alternative commitment
(TRAC) agreement:
Cosmetology and barber industry
(Ann 21) 19,983
Food and beverage industry (Ann
22) 19,987
Generic agreement (Ann 19) 19,
973
ESTATE TAX
Guaranteed annuity interests and unitrust
interests (REG–100291–00) 16, 917
Interest rates; special use value of farm
real property (RR 26) 22, 1124
Marital / charitable deduction, valuation
of property; administration expenses
(Ann 3) 2, 296
Proposed Regulations:
26 CFR 1.170A–6, amended;
20.2055–2, amended; 25.2522(c)–3,
amended; guaranteed annuity inter-
ests and unitrust interests
(REG–100291–00) 16, 917
QTIP elections, individual retirement
accounts and testamentary trusts (RR
2) 3, 305
Valuation tables (Ann 25) 14, 855
EXCISE TAX
Coal exports, nontaxable sale (Notice 28)
21, 1116
Gasoline and diesel fuel dye injection
systems, partial withdrawal of
REG–209735–95 (Ann 42) 16, 949
Imported substances, tax on (Ann 43) 17,
957
Kerosene tax; aviation fuel tax; taxable
fuel measurement and reporting; tax
on heavy trucks and trailers; highway
use tax (TD 8879) 16,882; correction
(Ann 53) 22,1144
Minimum funding standards, waiver of
(RP 17) 11, 766
Prepaid telephone cards (TD 8855) 4, 374
Regulations:
26 CFR 40.6011(a)–1, amended;
41.0–1, revised; 41.02–2, –3,
removed; 41.4481–1T, 1.4481–1,
–2, amended; 41.4481–1T, removed;
41.4482(a)–1, amended;
41.4482(b)–1, amended;
41.4482(b)–1T, removed;
41.4482(c)–1, amended; 41.4483–1,
revised; 41.4483–2, –3, amended;
41.4483–5, removed; 41.4484–1,
removed; 41.6001–1, –2, amended;
41–6011(a)–1, revised;
41.6071(a)–1, amended;
41.6081(a)–1, removed; 41.6091–1,
revised; 41–6101–1, revised;
41.6109–1, revised; 41.6151(a)–1,
revised; 41.6161(a)(1)–1, removed;
41.6302(b)–1, removed; 41.7805–1,
removed; Part 47, removed; 48.0–2,
amended; 48.4041–21, amended;
48.4052–1, added; 48.4081–1,
amended; 48.4081–1T, removed;
48.4081–2, –3, –6, –7, –8, amended;
48.4081–9, removed; 48.4082–1,
amended; 48.4082–2, –3, revised;
48.4082–4, –5, amended;
48.4082–6, –7, added; 48.4082–6T,
–7T, –8T, –9T, –10T, removed;
48.4083–1, amended; 48.4091–3T,
redesignated as 48.4091–3, amend-
ed; 48.4101–3T, removed;
48.4101–1, –2, amended;
48.4102–2T, removed; 48.4221–1,
amended; 48.4222(b)–1, amended;
48.6416(b)(2)–1, –2, amended;
48.6420–7, removed; 48.6420(c)–2,
removed; 48.6421–2, amended;
48.6427–8, –9, amended;
48.6427–10T, –11T, removed;
48.6427–10, –11, added; 48.6715–1,
amended; 145.4051–1, amended;
145.4052–1, amended; kerosene tax;
aviation fuel tax; taxable fuel mea-
surement and reporting; tax on
heavy trucks and trailers; highway
use tax (TD 8879) 16, 882; correc-
tion (Ann 53) 22,1144
26 CFR 49.4251–4, added; 602.101,
amended; prepaid telephone cards
(TD 8855) 4, 374
Return filing and deposits (Ann 5) 4,
427
EXEMPT
ORGANIZATIONS
Areas in which advance letter rulings and
determination letters will not be issued
from Associate Chief Counsel,
Domestic (RP 3) 1, 103
Charitable split dollar insurance, report-
ing requirements (Notice 24) 17, 952
Information letters available for public
inspection (Ann 2) 2, 295
Letter rulings, information letters, etc.
(RP 4) 1, 115
List of organizations classified as private
foundations (Ann 8) 6, 586; (Ann 52)
22,1142
Private foundation disclosure rules (TD
8861) 5, 441
Proposed Regulations:
26 CFR 1.170A–9(e)(6)(i), amended;
1.509(a)–3(f)(1), amended;
1.512(a)–1(e), amended; 1.513–4,
withdrawn; 1.513–4, added; taxation
of tax-exempt organizations’ income
from corporate sponsorship
(REG–209601–92) 12, 829; correc-
tion (Ann 40) 16, 948
Regulations:
26 CFR 1.513–7, added; travel and
tour activities of tax-exempt organi-
zations (TD 8874) 8, 644; correction
(Ann 29) 15, 877
26 CFR 301.6104(d)–1, removed;
301.6104(d)–2, redesignated as
301.6104(d)–0, revised;
301.6104(d)–3, redesignated as
301.6104(d)–1, amended;
301.6104(d)–4, redesignated as
301.6104(d)–2, amended;
301.6104(d)–5, redesignated as
301.6104(d)–3, amended; private
foundation disclosure rules (TD
8861) 5, 441
Revocations:
(Ann 15) 12, 837
(Ann 39) 16, 948
Sponsorship payments, taxation of
(REG–209601–92) 12, 829; correction
2000–23 I.R.B.viiJune 5, 2000
EMPLOYMENT TAX—
cont.
EXCISE TAX—
cont.
EXCISE TAX—
cont.

(Ann 40) 16, 948
Technical advice to district directors and
chiefs, appeals offices, from Associate
Chief Counsel (RP 2) 1, 73
Technical advice to IRS employees (RP
5) 1, 158
Travel tours, taxation of (TD 8874) 8,
644; correction (Ann 29) 15, 877
User fees, request for letter rulings (RP
8) 1, 230
GIFT TAX
Guaranteed annuity interests and unitrust
interests (REG–100291–00) 16, 917
Proposed Regulations:
26 CFR 1.170A–6, amended;
20.2055–2, amended; 25.2522(c)–3,
amended; guaranteed annuity inter-
ests and unitrust interests
(REG–100291–00) 16, 917
INCOME TAX
Accounting period change, automatic
consent (RP 11) 3, 309
Acquisitions, recognition of gain on dis-
tributions (Ann 10) 9, 733
Adequate disclosure of gifts (Ann 6) 4,
428
Advance pricing agreements (Ann 35)
16, 922
Allocation of partnership debt, nonre-
course liabilities (REG–103831–99) 5,
452
Amortization of intangible property (TD
8865) 7, 589; correction (Ann 37) 16,947
Appeals, test of arbitration procedure
(Ann 4) 3, 317
Areas in which advance letter rulings and
determination letters will not be issued
from Associate Chief Counsel,
International (RP 7) 1, 227
Asset acquisitions, allocation of purchase
price (TD 8858) 4, 332
Automobile owners and lessees (RP 18)
9, 722
Barter exchanges, information reporting
(Notice 6) 3, 315
Business expenses:
ISO 9000 costs (RR 4) 4, 331
Substantiation (TD 8864) 7,614; cor-
rection (Ann 26) 15,876
Traveling expenses, per diem
allowances (RP 9) 2, 280
Canadian banking legislation, repeal,
deferral of termination (Notice 7) 4,
419
Closely-held real estate investment trust,
estimated tax payments, penalty relief
(Notice 5) 3, 314
Contribution in aid of construction, defi-
nition (REG–106012–98) 2, 290
Credits:
Low-income housing credit:
Compliance monitoring (TD 8859)
5, 429; correction (Ann 27) 15,
876
Resident population estimates
(Notice 13) 9, 732
Satisfactory bond; “bond factor”
amounts for the period January
through March 2000 (RR 22) 16,
880
Puerto Rico and possession tax credit,
termination of (TD 8868) 6, 491
Research credit, controlled group
(REG–105606–99) 4, 421
Debt instrument (RR 12) 11, 744
Depletion, treatment of delay rental
(REG–103882–99) 8, 706
Depreciation:
MACRS property, involuntary conver-
sion or like-kind exchange (Notice
4) 3, 313; correction (Ann 9) 9, 733
Determination of underwriting income,
non-life insurance companies (TD
8857) 4, 365
Disclosure of return information, Census
of Agriculture (TD 8854) 3,306;
(REG–116704–99) 3, 325
Electronic filing; magnetic media:
Form 1040NR (RP 24) 22, 1133
Information reporting seminars for
2000 (Ann 47) 21, 1118
Publication 1220, Specifications for
Filing Forms 1098, 1099, 5498, and
W-2G, Magnetically or
Electronically (RP 25) 21, 1033
Electronically filed information returns,
due dates of (REG–105279–99) 8, 707
Equity options with flexible terms, special
rules and definitions (TD 8866) 6, 495
Estimated taxes:
Closely-held real estate investment
trust, penalty relief (Notice 5) 3,
314
Date deemed paid (CD 2066) 15, 867
Filing requirements:
Northeastern taxpayers, due dates
(Notice 17) 12, 827
Financial asset securitization investment
trusts, general (REG–100276–97;
REG–122450–98) 8, 682; correction
(Ann 38) 16, 948
Foreign corporations:
Exclusion of shipping income
(REG–208280–86) 8, 654; correc-
tion (Ann 45) 18,962
Information reporting (TD 8850) 3,
265
Stock transfer rules:
General provisions (TD 8862) 6, 466
Nonrecognition (TD 8863) 6, 488;
(REG–116048–99) 6, 584
Foreign currency:
Gains and losses, qualified business
units (Notice 20) 14, 851
Hyperinflation; definition
(REG–116567–99) 5, 463; (TD
8860) 5, 437
Foreign partnerships:
Information reporting (TD 8850) 3,
265
U.S. persons with reportable event,
reporting requirement (TD 8851) 2,
275
Foreign persons, distributions to (Ann
24) 14, 855
Forms:
1040NR, electronic filing, magnetic
media (RP 24) 22, 1133
1098, 1099, 5498, and W-2G, specifi-
cations for filing forms magnetically
or electronically (RP 25) 21, 1033
SS-4, interim waiver of signature
(Notice 19) 13,845
Fringe benefits:
Aircraft valuation (RR 13) 12, 774
Qualified transportation
(REG–113572–99) 7,624; correc-
tion (Ann 41) 61,949
Guaranteed annuity interests and unitrust
interests, definition of (REG–100291–
00) 16, 917
Guidance priority list (Notice 10) 5, 451
Information letters available for public
inspection (Ann 2) 2, 295
Information reporting:
Barter exchange (Notice 6) 3, 315
Discharges of indebtedness, penalties
for (Notice 22) 16, 902
Foreign partnerships and foreign cor-
June 5, 2000viii2000–23 I.R.B.
EXEMPT
ORGANIZATIONS—
cont.
INCOME TAX—
cont.
INCOME TAX—
cont.

porations (TD 8850) 3, 265
Innocent spouse, equitable relief (RP 15)
5, 447
Installment agreements, limitation of fail-
ure to pay penalty (REG–105279–99)
8, 707
Installment sales (Notice 26) 17, 954
Insurance companies:
Differential earnings rate, tentative
(Notice 16) 12, 826
Prevailing state assumed interest
rates (RR 17) 13, 842
Interest:
Investment:
Federal short-term, mid-term, and
long-term rates for:
January 2000 (RR 1) 2, 250
February 2000 (RR 9) 6,497
March 2000 (RR 11) 10, 734
April 2000 (RR 19) 14, 849
May 2000 (RR 23) 19, 964
Rates:
Underpayment and overpayment,
quarter beginning April 1, 2000
(RR 16) 12, 780
International operation of ships and/or
aircraft, Kingdom of Saudi
Arabia, 22, 1126
Inventory:
LIFO:
Price indexes, department stores:
November 1999 (RR 3) 3, 297
December 1999 (RR 10) 8,643
January 2000 (RR 14) 12,779
February 2000 (RR 21) 16, 881
March 2000 (RR 25) 20,1006
Last known address, definition of (Ann
49) 19, 998
Letter rulings, determination letters and
information letters issued by Associate
Chief Counsel (RP 1) 1, 4
Major disaster and emergency areas,
losses (RR 15 ) 12, 774
Medical conference expenses, deductibil-
ity of (RR 24) 19, 963
Methods of accounting; inventories,
small taxpayers (RP 22) 20, 1008
Mortgage credit certificates, median
income figures (RP 21) 19, 971
Nonconventional source fuel credit,
inflation adjustment factor and refer-
ence price (Notice 23) 17, 952
Nonqualified preferred stock, exchanges
and distributions (REG–105089–99) 6,
580
Partnerships:
Adjustments following sales (Ann 13)
11, 771
Allocation of basis adjustments among
partnership assets
(REG–107872–99) 16, 911
Allocation of nonrecourse liabilities
(REG–103831–99) 5,452
Amortization of intangible property
(REG–100163–00) 7, 633
Basis adjustments, residual method,
valuation of partnership assets
including goodwill
(REG–107872–99) 16, 911
Mergers and divisions
(REG–111119–99) 5, 455
Qualified replacement property, trans-
fer to (RR 18) 14, 847
Passive foreign investment companies:
Marketable stock (TD 8867) 7, 620;
correction (Ann 30) 15,877
Qualified electing fund (TD 8870) 8,
647; correction (Ann 34) 15, 879
Practice before the Internal Revenue
Service, governing regulations (Ann
51) 22, 1141
Pre-filing agreement pilot program
(Notice 12) 9, 727
Presidentially declared disaster and com-
bat zone, relief (REG–101492–98) 3,
326; correction (Ann 16) 12, 837
Private foundations:
Disclosure rules (TD 8861) 5, 442
Organizations now classified as (Ann
8) 6, 586;(Ann 52) 22, 1142
Proposed Regulations:
26 CFR 1.41–0, amended; 1.41–8,
revised; credit for increasing
research activities
(REG–105606–99) 4, 421
26 CFR 1.118–2, added; contribution
in aid of construction, definition
(REG–106012–98) 2, 290
26 CFR 1.132–0, amended; 1.132–9,
added; qualified transportation
fringe benefits (REG–113572–99) 7,
624; correction (Ann 41) 16, 949
26 CFR 1.170A–6, amended;
20.2055–2, amended; 25.2522(c)–3,
amended; lifetime charitable lead
trusts (REG–100291–00) 16, 917
26 CFR 1.197–2, amended; amortiza-
tion of intangible property
(REG–100163–00) 7, 633
26 CFR 1.337(d)–5T, added,
1.852–12, added; 1.857–11, added;
certain asset transfers to regulated
investment companies and real
estate investment trusts
(REG–209135–88) 8, 681
26 CFR 1.354–1, amended; 1.355–1,
amended; 1.356–7, added;
1.1036–1, amended; treatment of
nonqualified perferred stock and
other preferred stock in certain
exchanges and distributions
(REG–105089–99) 6, 580
26 CFR 1.367(b)–3, amended; stock
transfer rules (REG–116048–99) 6, 584
26 CFR 1.612–3, amended; depletion,
treatment of delay rental
(REG–103882–99) 8, 706
26 CFR 1.708–1, amended; 1.743–1,
amended; treatment of partnership
mergers and divisions
(REG–111119–99) 5, 455
26 CFR 1.752–3, amended; 1.752–5,
revised; allocation of nonrecourse
liabilities by a partnership
(REG–103831–99) 5, 452
26 CFR 1.755–2, added; 1.755–2T,
removed; allocation of basis adjust-
ments among partnership assets
(REG–107872–99) 16, 911
26 CFR 1.860E–1, amended;
1.860H–0, –1, –2, –3, –4, –5, –6,
added; 1.860I–1, –2, added;
1.860J–1, added; 1.860L–1, –2, –3,
–4, added; 1.861–9T, amended;
1.861–10T, amended; financial asset
securitization investment trusts; real
estate mortgage investment conduits
(REG–100276–97;
REG–122450–98) 8, 682; correction
(Ann 38) 16,948
26 CFR 1.861–4, amended; source of
compensation for labor or personal
services (REG–208254–90) 6, 577
26 CFR 1.883–0, added; 1.883–1,
revised; 1.883–2, –3, –4, –5, added;
exclusions from gross income of
foreign corporations
(REG–208280–86) 8, 654
26 CFR 1.988–1, revised; hyperinfla-
tionary currencies, definition
(REG–116567–99) 5, 463
26 CFR 1.6011–4, added; tax shelter
disclosure statements
(REG–103735–00) 11, 770
26 CFR 1.6041–2, revised; 1.6041–6,
2000–23 I.R.B.ixJune 5, 2000
INCOME TAX—
cont.
INCOME TAX—
cont.
INCOME TAX—
cont.

revised; 1.6042–2, revised;
1.6043–2, revised; 1.6044–2,
revised; 1.6045–1, added; 1.6045–2,
revised; 1.6045–4, revised;
1.6047–1, revised; 1.6049–4,
revised; 1.6049–7, revised;
1.6050A–1, revised; 1.6050D–1,
revised; 1.6050E–1, revised;
1.6050H–2, revised; 1.6050J–1T,
revised; 1.6050P–1, revised;
1.6052–1, revised; 301.6651–1,
amended; extension of due date for
electronically filed information
returns; limitation of failure to pay
penalty for individuals during peri-
od of installment agreement
(REG–105279–99) 8, 707
26 CFR 301.6103(j)(5)–1, added; dis-
closure of return information;
Census of Agriculture
(REG–116704–99) 3, 325
26 CFR 301.6111–2, added; corporate
tax shelter registration
(REG–110311–98) 11, 767
26 CFR 301.6112–1, amended;
requirements to maintain list of
investors in potentially abusive tax
shelters (REG–103736–00) 11, 768;
correction (Ann 44) 17, 958
26 CFR 301.7508–1, added;
301.7508A–1, added; relief for ser-
vice in combat zone and for
Presidentially declared disaster
(REG–101492–98) 3, 326; correc-
tion (Ann 16) 12, 837
Publications:
515, changes to Tables 1 and 2 (Ann
11) 10, 739
1167, substitute forms, general
requirements (RP 19) 12, 785
1212, supplemental information (Ann
14) 11, 772
1220, Specifications for Filing Forms
1098, 1099, 5498, and W-2G,
Magnetically or Electronically (RP
25) 21, 1033
Circular 230 (Ann 51) 22,1141
Qualified intermediary withholding
agreements (RP 12) 4, 387; correction
(Ann 50) 19, 998
Qualified mortgage bond, median income
figures (RP 21) 19, 971
Qualified Zone Academy Bonds (RP 10)
2, 287
Real estate investment trusts, asset trans-
fers to (TD 8872) 8, 639;
(REG–209135–88) 8, 681
Real estate mortgage investment con-
duits, safe harbor (REG–100276–97;
REG–122450–98) 8, 682; correction
(Ann 38) 16,948
Recharacterizing financing arrangements,
fast-pay stock (TD 8853) 4, 377; cor-
rection (Ann 33) 15, 878
Regulated investment companies, asset
transfers to (TD 8872) 8, 639;
(REG–209135–88) 8, 681
Regulations:
26 CFR 1.42–5, –6, amended; 1.42
–11, –12, –13, amended; 1.42–17,
added; compliance monitoring and
miscellaneous issues relating to the
low-income housing credit (TD
8859) 5, 429
26 CFR 1.62–2, amended; 1.62–2T,
removed; 1.274–5, added;
1.274–5T, amended; substantiation
of business expenses (TD 8864) 7,
614; correction (Ann 26) 15, 876
26 CFR 1.162–11, amended;
1.167(a)–3, amended; 1.167(a)–6,
amended; 1.167(a)–14, added;
1.197–0, added; 1.197–2, added;
amortization of goodwill and certain
other intangibles (TD 8865) 7, 589;
correction (Ann 37) 16, 947
26 CFR 1.337(d)–5, added, certain
asset transfers to regulated invest-
ment companies and real estate
investment trusts (TD 8872) 8, 639
26 CFR 1.338–0, –1, –2, –3, removed;
1.338–4, redesignated as 1.338–8;
1.338–5, redesignated as 1.338–9;
1.338–4T, –5T, –6T, –7T, –10T,
added; 1.338(b)–1, added;
1.338(b)–2T, –3T, removed;
1.338(h)(10)–1, removed;
1.338(i)–1, removed; 1.338(i)–1T,
added; 1.1060–1T, revised; purchase
price allocations in deemed and
actual asset acquisitions (TD 8858)
4, 332
26 CFR 1.367(a)–3, amended;
1.367(b)–0, added; 1.367(b)–1, –2,
revised; 1.367(b)–3, added;
1.367(b)–4, revised; 1.367(b)–5, –6,
added; 1.367(b)–7, –8, –9, removed;
1.381(b)–1, amended; 7.367(b)–1,
–2, –3, –4, –5, –6, –7, –8, –9, –10,
–11, removed; 7.367(b)–12, amend-
ed; 7.367(b)–13, removed; stock
transfers rules (TD 8862) 6, 466
26 CFR 1.367(b)–3T, added; stock
transfer rules, (TD 8863) 6, 488
26 CFR 1.367(e)–1, –2, corrected;
treatment of distributions to foreign
persons (Ann 24) 14, 855
26 CFR 1.401(b)–1, amended;
1.401(b)–1T, removed; remedial
amendment period (TD 8871) 8, 641
26 CFR 1.513–7, added; travel and
tour activities of tax-exempt organi-
zations (TD 8874) 8, 644
26 CFR 1.663(a)–1, amended;
1.663(c)–1, amended; 1.663(c)–2,
revised; 1.663(c)–3, amended;
1.663(c)–4, redesignated as
1.663(c)–5, amended; 1.663(c)–4,
added; 1.663(c)–6, added; separate
shares rule applicable to estates (TD
8849) 2, 245; correction (Ann 28)
15,876
26 CFR 1.664–2, corrected; use of
actuarial tables in valuing annuities,
interests for life or term of years,
and remainder or reversionary inter-
ests (Ann 25) 14, 855
26 CFR 1.743–1, 1.754–1, 1.755–1,
corrected; adjustments following
sales of partnership interests (Ann
13) 11, 771
26 CFR 1.871–14, revised; 1.1441–1,
–4, –5, –6, –8, –9, revised;
1.1443–1, revised; 1.6042–3,
revised; 1.6045–1, revised;
1.6049–5, revised; withholding of
tax on certain U.S. source income
paid to foreign persons; delay of
effective date (TD 8856) 3, 298;
correction (Ann 31) 15, 877
26 CFR 1.883–0, added; 1.883–1,
revised; 1.883–2, –3, –4, –5, added;
exclusions from gross income of
foreign corporations
(REG–208280–86) 8, 654; change
of date for public hearing (Ann 45)
18, 962
26 CFR 1.936–11T, removed;
1.936–11, added; termination of
Puerto Rico and possession tax
credit (TD 8868) 6, 491
26 CFR 1.988–0, amended; 1.988–2,
amended; treatment of income and
expenses from certain hyperinfla-
tionary currencies; nonperiodic pay-
June 5, 2000x2000–23 I.R.B.
INCOME TAX—
cont.
INCOME TAX—
cont.
INCOME TAX—
cont.

ments (TD 8860) 5, 437
26 CFR 1.1092(c)–1, added; equity
options with flexible terms (TD
8866) 6, 495
26 CFR 1.1291–1T, redesignated as
1.1291–1, revised; 1.1293–1T,
redesignated as 1.1293–1, revised;
1.1295–0, amended; 1.1295–1T,
redesignated as 1.1295–1, amended;
1.1295–3T, redesignated as
1.1295–3, amended; general rules
for making and maintaining quali-
fied electing fund elections (TD
8870) 8, 647; correction (Ann 34)
15,879
26 CFR 1.1296(e)–1, added; passive
foreign investment companies, mar-
ketable stock (TD 8867) 7, 620; cor-
rection (Ann 30) 15,877
26 CFR 1.1361–0, –1; amended;
1.1361–2, –3, –4, –5, –6, added;
1.1362–0, amended; 1.1362–2,
amended; 1.1362–8, added;
1.1368–0, amended; 1.1368–2,
amended; 1.1374–8, amended;
301.6109–1, amended; subchapter S
subsidiaries (TD 8869) 6, 498; cor-
rection (Ann 36) 16,947
26 CFR 1.1366–0, –1, added;
1.1366–2, revised; 1.1366–3, –4, –5,
added; 1.1367–0, –1, amended;
1.1367–3, revised; 1.1368–0, –1, –2,
–3, amended; 1.1368–4, revised;
passthrough of items of an S corpo-
ration to its shareholders (TD 8852)
2, 253; correction (Ann 18) 13,846;
correction (Ann 32) 15,878
26 CFR 1.1441–10, added; 1.7701(1)–0,
added; 1.7701(1)–3, added;
602.101(b), amended; recharacteriz-
ing financing arrangements involving
fast–pay stock (TD 8853) 4, 377; cor-
rection (Ann 33) 15,878
26 CFR 1.6011–4T, added; tax shelter
disclosure statements (TD 8877) 11,
747
26 CFR 1.6038–3, added; 1.6038–2,
amended; 1.6038B–1, amended;
1.6038B–2, amended; information
reporting with respect to certain for-
eign partnerships and certain foreign
corporations (TD 8850) 2, 265
26 CFR 1.6046A–1, added; return
requirement for U.S. persons acquir-
ing or disposing of an interest in a
foreign partnership (TD 8851) 2,
275
26 CFR 301.6103(j)(5)–1T, added;
disclosure of return information;
Census of Agriculture (TD 8854) 3,
306
26 CFR 301.6104(d)–1, removed;
301.6104(d)–2, redesignated as
301.6104(d)–0, revised;
301.6104(d)–3, redesignated as
301.6104(d)–1, amended;
301.6104(d)–4, redesignated as
301.6104(d)–2, amended;
301.6104(d)–5, redesignated as
301.6104(d)–3, amended;
602.101(b), amended; private foun-
dation disclosure rules (TD 8861) 5,
442
26 CFR 301.6111–2T, added; corpo-
rate tax shelter registration (TD
8876) 11, 753
26 CFR 301.6112–1T, amended;
requirements to maintain list of
investors in potentially abusive tax
shelters (TD 8875) 11, 761
Removal costs, capital expenditures (RR
7) 9, 712
Reorganizations:
Divisive mergers, definition (RR 5) 5,
436
Solely for voting stock requirement
(Notice 1) 2, 288
S corporations:
Passthrough items (TD 8852) 2, 253;
correction (Ann 18) 13,846; correc-
tion (Ann 32) 15,878
Subsidiaries (TD 8869) 6, 498; correc-
tion (Ann 36) 16,947
Section 911(d)(4) waiver; 1999 update
(RP 14) 18, 960
Separate shares rules (TD 8849) 2, 245;
correction (Ann 28) 15,876
Short-term Treasury bills (Ann 14) 11,
772
Sources of income, compensation for
labor or services (REG–208254–90) 6,
577
Tax conventions:
New treaties with Estonia, Latvia,
Lithuania, Venezuela;
Publication 515 changes (Ann 11)
10, 739
Shipping and aircraft agreement,
Kingdom of Saudi Arabia, 22,
1126
Treaties with Austria, Ireland, South
Africa; Publication 515 changes (Ann
11) 10,739
United Kingdom; repeal of advance
corporation tax (RP 13) 6, 515
Tax liens, determination of property or
rights to property (CD 2067) 15, 863
Tax shelters:
Circular 230 (Ann 51) 22, 1141
Confidential corporate, registration
(TD 8876) 11, 753;
(REG–110311–98) 11,753
Disclosure statements (TD 8877) 11,
747; (REG–103735–00) 11, 770
Listed transactions (Notice 15) 12, 826
Office of Tax Shelter Analysis (Ann
12) 12,835
Potentially abusive, list of investors
(TD 8875) 11, 761;
(REG–103736–00) 11, 768; correc-
tion (Ann 44) 17,958
Technical advice to district directors and
chiefs, appeals office, from Associate
Chief Counsel (RP 2) 1, 73
Treasury bonds, call for redemption of
(Ann 46) 19, 997
Valuation tables (Ann 25) 14, 855
Variable annuity contracts, closing agree-
ments (Notice 9) 5, 449
Withholdings:
Date deemed paid (CD 2066) 15, 867
Qualified intermediary withholding
agreements (RP 12) 4, 387
U.S. source income payments to for-
eign persons, delay of effective date
(TD 8856) 3, 298; correction (Ann
31) 15, 877
2000–23 I.R.B.xiJune 5, 2000
INCOME TAX—
cont.
INCOME TAX—
cont.
INCOME TAX—
cont.

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