[4830-01-u] DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1, 31, 35a, 301, 502, 503, 509, 513, 514, 516, 517, 520, and 521 [INTL-O62-90; INTL-0032-93; INTL-52-86; INTL-52-94] RINS 1545-AO27; 1545-AR90; 1545-AL99; 1545-AT00 General Revision of Regulations Relating to Withholding of Tax on Certain U.S. Source Income Paid to Foreign Persons and Related Collection, Refunds, and Credits; Revision of Information Reporting and Backup Withholding Regulations; and Removal of Regulations Under Part 35a and of Certain Regulations Under Income Tax Treaties AGENCY: Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking and withdrawal of notice of proposed rulemaking. SUMMARY: This document contains proposed regulations relating to the withholding of income tax under sections 1441 and 1442 on certain U.S. source income paid to foreign persons, the related tax deposit and reporting requirements under section 1461, and the related collection, refunds, and credits of withheld tax under sections 1461 through 1463 and section 6402. Additionally, this document contains proposed regulations relating to the statutory exemption under sections 871(h) and 881(c) for portfolio interest. This document proposes to remove certain temporary employment tax regulations under the Interest and Dividend Compliance Act of 1983 and to amend existing regulations under sections 6041A and 6050N. This document also proposes changes to proposed regulations contained in project number INTL- 52-86, published on February 29, 1988 (53 FR 5991) under sections 6041, 6042, 6045, and 6049. This document proposes related changes to the regulations under sections 163(f), 165(j), 3401, 3406, 6114, and 6413 and proposes further changes to the proposed regulations under section 6109 contained in project number IL- 0024-94 published on June 8, 1995 (60 FR 30211). This document proposes to remove certain regulations under income tax treaties. The IRS and Treasury have reviewed current withholding and reporting procedures applicable to cross-border flows of income and have concluded that changes are necessary in view of the substantial growth in such flows over the past 15 years. This document also removes proposed regulations published on July 12, 1976 (41 FR 28517) and September 10, 1984 (49 FR 355110), respectively. DATES: Written comments and requests for a public hearing must be received by July 22, 1996. ADDRESSES: Send submissions to: CC:DOM:CORP:R ([INTL-0032-93]), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. In the alternative, submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R ([INTL-0032-93]), Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC. FOR FURTHER INFORMATION CONTACT: Philip Garlett, telephone (202) 622-3880 (not a toll-free number), for questions on proposed regulations under sections 1441, 1442, 1461, 1462, 1463, 3401, 6402, and 6413; Gwendolyn A. Stanley, telephone (202) 622-3860 (not a toll-free number) for questions on payments to partnerships; Carl Cooper, telephone (202) 622-3840 (not a toll- free number) for questions on proposed regulations under sections 163(f), 165(j), 871(h) and 881(c) and on withholding agreements; Teresa Burridge Hughes, telephone (202) 622-3880 (not a toll-free number), for questions on proposed regulations under sections 6041 through 6049, 6050N; Teresa Burridge Hughes, telephone (202) 622-3880 and Renay France, telephone (202) 622-4910, for questions on proposed regulations under section 3406; Elissa Shendalman (202) 622-3870 on proposed regulations under section 6045 and 6049 relating to the reporting of payments made in a currency other than the U.S. dollar or transactions subject to section 988; Lilo Hester, telephone (202) 874-1490 (not a toll- free number), for questions on proposed regulations under section 6109; David F. Bergkuist, telephone (202) 622-3860 (not a toll- free number), for questions on proposed regulations under section 6114. SUPPLEMENTARY INFORMATION: Paperwork Reduction Act The collections of information contained in this notice of proposed rulemaking have been submitted to the Office of Management and Budget for review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3507). Comments on the collection of information should be sent to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224. Comments on the collections of information should be received by June 21, 1996. An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number. The collections of information relating to foreign persons that receive payments subject to withholding under sections 1441 or 1442 of the Internal Revenue Code are in 1.1441-1(e), 1.1441-4(a)(2), 1.1441-4(b) (1) and (2), 1.1441-4(c), (d) and (e), 1.1441-5(a)(2)(ii), 1.1441-5(b), 1.1441-6(b) and (c), 1.1441-8(b), 1.1441-9(b), 1.1461-1(b) and (c), 301.6114-1, and 301.6402-3(e), 31.3401(a)(6)-1(e). This information is required by the IRS to identify and verify the status of persons to whom payments of U.S. source income is made. This information will be used to claim foreign person status and, in appropriate cases, to claim residence in a country with which the United States has an income tax treaty in effect, so that withholding at a reduced rate of tax may be obtained at source. The likely respondents and recordkeepers are individuals, state or local governments, farms, business or other for-profit institutions, federal agencies, nonprofit institutions, and small business or organizations. Responses to this collection of information are mandatory. Books or records relating to a collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103. The burden for the reporting requirement contained in 1.1441-1(e)(2), 1.1441-4(a)(2), 1.1441-4(b)(2), 1.1441-4(c)(2), 1.1441-4(d), 1.1441-4(e)(1), (2) and (3), 1.1441-6(b), 1.1441- 8(b), 1.1441-9(a)(2), 301.6114-1(b)(4), and 301.6402-3(e) will be reflected in the burden of Form W-8, Form 8833, Form 8233, and the income tax return of a foreign person filed for purposes of claiming a refund of tax. The collection of information requirement for corporations contained in 1.6049-4(c) will be reflected in the burden of Form W-8. The requirement for the recordkeeping requirement in 1.6049-5(c)(1)(ii) and (iii) is in an existing regulation, appearing in TD 7966 that was approved under OMB number 1545- 0112. Background This document contains proposed amendments to the Income Tax Regulations (CFR parts 1, 31, 35a and 301) under sections 163(f), 165(j), 871, 881, 1441, 1442, 1461, 1462, 1463, 3401, 3406, 6041, 6041A, 6042, 6045, 6049, 6050N, 6109, 6114, 6402, and 6413 of the Internal Revenue Code (Code). This document also proposes to remove certain regulations under income tax treaties. Explanation of Provisions A. Current rules These proposed regulations deal with the withholding of tax under section 1441, 1442, or 1443 on amounts paid to foreign persons, procedures for claiming foreign status to avoid backup withholding under section 3406 on certain payments, and the reporting to the IRS of payments to foreign persons. Reporting to the IRS may be required under sections 6011 and 1461 or under the reporting provisions of chapter 61 of the Code, such as sections 6041, 6041A, 6042, 6044, 6045, 6049, 6050H, and 6050N, (the 1099 reporting provisions). 1. U.S. income tax on U.S. source income of foreign persons. Under sections 871(a) and 881(a) of the Code, non-resident alien individuals and foreign corporations are subject to a 30 percent tax on most items of income they receive from sources within the United States that are not effectively connected with the conduct of a trade or business in the United States. Income taxable under these provisions includes interest, dividends, royalties, compensation, and other fixed or determinable annual or periodical income. The tax liability imposed under section 871(a) and 881(a) is generally collected by way of withholding at source under section 1441(a) (for payments to non-resident alien individuals and foreign partnerships) or under section 1442(a) (for payments to foreign corporations). Special withholding provisions apply under section 1443 to payments of certain income to foreign tax-exempt entities. The 30 percent rate is often reduced under the Code or an income tax treaty. Under current regulations, a withholding agent may generally rely on a statement furnished by, or on behalf of, the beneficial owner certifying entitlement to a reduced rate. For example, the portfolio interest exception under section 871(h) and 881(c) is conditioned upon the beneficial owner of the interest providing a statement of foreign status to the U.S. withholding agent, which can be provided on a Form W-8. See 35a.9999-5(b), A-9. If a reduction is claimed under an income tax treaty, the withholding agent may generally rely on a Form 1001 provided by, or on behalf of, the beneficial owner claiming residence in a treaty country. For dividends, however, no certification is required and the withholding agent may generally rely on the address of the payee in the treaty country. The procedural requirements for claiming a reduced rate of withholding may vary depending upon the type of income, the taxpayer, or whether a treaty is involved. A withholding agent is generally required to file an annual income tax return on Form 1042 to report amounts upon which a tax was actually withheld under chapter 3 of the Code or would have been required to be withheld but for an exemption under the Code, the regulations, or an income tax treaty. An information return on a Form 1042-S must be attached to the Form 1042 and report each recipient's name and address, amounts paid, and taxes withheld, if any. Section 1.1461-2(b) and (c). 2. Backup withholding Under chapter 61 of the Code and section 3406, a reportable payment, as defined in section 3406(b), is subject to backup withholding at the rate of 31 percent unless the payor receives a taxpayer identifying number (TIN), generally on a Form W-9, and, for reportable interest and dividends, a certification that the payee is not subject to notified payee underreporting. The payor of a reportable payment is also generally required to file Form 1099 with the IRS showing the name, address, and TIN of the payee; the amount of the payment; and the amount that was withheld, if any. The payor must also provide a copy of Form 1099 to the payee, who must report the payment on an income tax return to the extent the payment constitutes gross income. A payor that fails to obtain a TIN or other required information or to backup withhold when required under section 3406 may also be liable under section 3403 for the amount that should have been withheld. Information reporting by payors is critical to a matching system that allows the IRS to match information provided by payors with income reported on a payee's return. The information reporting provisions of chapter 61 provide guidance to help payors determine when payments are made to a foreign person and, therefore, exempt from 1099 reporting and backup withholding. Generally, depending upon the type of payment involved, a payor may rely on a certification of foreign status made on Form W-8, Form 1001, Form 4224, or on documentary evidence. Therefore, even though an amount is exempt from withholding under chapter 3 of the Code if earned by a foreign person (e.g., gain from the sale of securities), a payor must nevertheless comply with specified certification procedures in order to avoid being subject to backup withholding. Only amounts subject to reporting under the 1099 reporting provisions can be subject to backup withholding under section 3406. Therefore, payments to foreign persons that are exempt from reporting are also exempt from backup withholding. B. Need for reform The IRS and Treasury have reviewed the current withholding and reporting procedures applicable to cross-border flows of income and have concluded that changes are necessary in view of the substantial growth in such flows over the past 15 years. The IRS and Treasury have concluded that allowing the benefit of the reduced rate at source continues to be desirable. A system that reduces withholding at source permits an investor to receive its full income without the administrative costs and delays that can occur when applying for a refund of withheld taxes. This advantage, however, is necessarily accompanied by the need to rely, in part, on withholding agents. Withholding agents perform an important compliance function as recipients of the necessary documentation substantiating claims of foreign status and of reduced rates of withholding and as providers of information to the IRS. One of the important objectives of the proposed revisions is to eliminate unnecessary burdens that the lack of standardization and coordination of current procedures imposes on withholding agents. For example, under current rules, different forms must be used for different purposes; different standards of proof apply for establishing foreign status for purposes of the 1099 reporting provisions (and the related backup withholding provisions) and of the Chapter 3 withholding provisions. Also, the revisions seek to facilitate compliance by clarifying many of the uncertainties under current procedures (e.g., the scope of due diligence standards imposed on withholding agents). This proposal also addresses the important issue of payments to intermediaries (nominees, agents, etc.) and whether, in the case of interest, dividends, and gross proceeds from publicly traded or widely held obligations or stocks, intermediaries should certify status on behalf of beneficial owners and, if so, how. Under current rules, nominee procedures work differently for different types of income. For example, a U.S. broker redeeming a short-term obligation held by a foreign financial institution as an agent may exempt the payment from 1099 reporting and backup withholding and grant the exemption from the 30 percent tax under section 871(a) without having to obtain certificates or documentation. If the foreign financial institution makes a payment to another person offshore then no certification or documentation is required. On the other hand if, for example, the foreign financial institution, remitted the amount to a person in the United States through a U.S. office, it might have to obtain a Form W-8 or a Form W-9. In contrast, interest on registered obligations may not qualify as portfolio interest under sections 871(h) and 881(c) unless the U.S. withholding agent receives a statement that the beneficial owner of the obligation is not a U.S. person (see section 871(h)(2)(B)(ii)). Current regulations implement this condition by requiring that a beneficial owner certification be passed up through a chain of intermediaries to the U.S. withholding agent. These procedures have proved difficult to implement in a number of cases and these proposed regulations offer alternative procedures. The proposed revisions, therefore, respond to the concerns expressed by various representatives of the financial community regarding the cost of complying with current procedures and potential harm to the competitiveness of U.S. financial institutions in handling investment transactions in the United States and abroad. These proposed regulations are also responsive to the Congressional mandate in section 342 of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) that Treasury consider a range of options for replacing the address/self-certification method of administering income tax treaty benefits. Since 1982, the IRS and Treasury have studied several options for improving the withholding tax procedures, including a system of certification of residence in a treaty country and refund systems. At hearings held in February of 1985 on proposed regulations issued in 1984 under section 1441, comments from the public and several U.S. treaty partners made it apparent that certification requirements, as proposed, would create too many administrative problems for payments made through nominees. The proposed revisions take these comments into account and propose to rely on procedures essentially identical to the procedures proposed for portfolio interest on registered obligations. The streamlining of current procedures and the implementation of workable nominee certification procedures represent a substantial simplification and reduction of burden. The IRS and Treasury expect that this, in turn, should result in greater compliance and improve the ability by withholding agents and the IRS to detect abusive claims under U.S. income tax treaties or under the Code. C. Summary of proposal 1. Changes affecting portfolio-type investments The proposed regulations under section 1441 and related Code provisions would substantially revise some aspects of the current system for withholding on, and reporting of, amounts paid to foreign persons. Current certification procedures (i.e., Forms W-8, 1001, 4224, etc.,) would be unified and reliance standards would be clarified in an effort to streamline the processing of cross-border payments, particularly by banks and other financial institutions. Most forms (W-8, 1001, 4224, 8709) are proposed to be combined into a single form (Form W-8). In addition, taxpayer identifying numbers are not required to be stated on withholding certificates, with certain limited exceptions that do not affect market-based transactions. These changes are important steps toward reducing the burden on withholding agents and assisting taxpayer compliance. The address rule for claiming tax treaty benefits for dividends is proposed to be eliminated. Instead, dividends would be made subject to the same beneficial owner and intermediary certification procedures as are proposed for portfolio interest on registered obligations. It is also proposed to apply the same procedures to bank deposit interest (as described in section 871(i)(2)(A)). On the other hand, the documentary evidence procedures currently in effect for bank deposit interest on accounts held with foreign branches would be continued and would be applied as well to offshore payments of dividends on publicly traded stocks and portfolio interest on registered obligations. Therefore, documentary evidence would become the general rule for dividends and interest earned on accounts held with foreign branches. These proposed changes illustrate the effort by the IRS and Treasury to eliminate unnecessary procedural differences in order to reduce the burden on withholding agents. The proposal does not generally affect other important classes of investment transactions. Thus, current portfolio interest rules for bearer obligations (including commercial paper), convertible obligations, pass-through certificates, as well as rules for broker proceeds and short term obligations would be retained. In order to further simplify compliance, the regulations under section 165(j) (1.165-12) are proposed to be revised to eliminate the requirements that, in connection with delivery of bearer obligations, holders receive statements and send confirmations. Provisions regarding foreign-targeted registered obligations are to be retained. However, because these special procedures have been rarely used, comments are solicited on their usefulness and whether they should be retained. Foreign intermediary procedures as currently applicable to portfolio interest (which are proposed to become applicable to dividends and bank deposit interest as well) are substantially revised by providing several options, allowing different taxpayers to comply in different ways. These options recognize that it is appropriate to adapt withholding requirements to accommodate different types of transactions and should provide substantial relief from current requirements. In order to allow sufficient time for transition, the regulations are proposed to be generally effective for payments made after 1997. In addition, withholding agents would be allowed to continue to rely on existing certificates after that date until their validity expires as determined under current rules. Comments are solicited on whether these proposed effective dates leave adequate time to implement necessary system changes. The regulations proposed in 1988 regarding the reporting by U.S. banks of bank deposit interest paid to Canadian residents are finalized, effective for payments made on or after January 1, 1997 with respect to Forms W-8 furnished on or after that date. See the Rules and Regulations section of this issue of the Federal Register. 2. Intermediary procedures options for portfolio interest, dividends on publicly traded stock, and bank deposit interest. The proposed regulations offer intermediary certification options designed to simplify compliance by withholding agents. These procedures would be mostly relevant to portfolio interest on registered obligations, dividends on publicly traded stocks (eliminating the address rule), and interest paid on bank deposits (as described in section 871(i)(2)(A)). First, for portfolio interest on registered obligations, the current certification procedures would be retained, as an option and are not reproposed. See 35a.9999-5(b), A-9. These rules will be included in final regulations in proposed 1.871-14(c)(2)(iii) and, accordingly, that section of the proposed regulations is reserved. Preserving the existing regulations is designed to accommodate those taxpayers and withholding agents for whom the current rules work appropriately. The regulations propose to add two new procedures. First, a withholding agent would be allowed to rely on an intermediary Form W-8 furnished on behalf of one or more beneficial owners (or other intermediaries) without having to obtain beneficial owner documentation if the intermediary has entered into a withholding agreement with the IRS and, thus, is a "qualified intermediary." In a chain of intermediaries, an intermediary would be allowed to rely on the intermediary Form W-8 of another qualified intermediary. If the other intermediary is not qualified, the qualified intermediary would generally be required to obtain beneficial owner documentation from the other non-qualified intermediary. The qualified intermediary would then pass such documentation up the chain or rely on such documentation when issuing its intermediary Form W-8. Under the withholding agreement procedure, a qualified intermediary would agree with the IRS to obtain such documentation or certifications as the agreement would specify. It is contemplated that institutions that are subject to bona fide "know-your-customer" procedures under their domestic laws will generally be permitted to rely on such procedures. The withholding agreement will generally include provisions for beneficial owner information to be reported or made available to the IRS and for the IRS to audit such information. In appropriate cases, the reporting and audit may be limited to the beneficial ownership information pertaining to U.S. source income (other than gross proceeds) of U.S. customers or to an audit of the reports prepared by, and the methodology employed by, the approved external auditors of the qualified intermediary. The regulations propose a second intermediary procedure permitting a foreign agent of a U.S. withholding agent to act on behalf of the withholding agent. While the U.S. withholding agent would remain liable for the acts (or failures to act) of its agent, the proposed procedure streamlines the withholding process as the foreign agent would collect the appropriate documentation on behalf of the U.S. withholding agent and report beneficial owner information to the IRS without having to furnish the documentation to the U.S. withholding agent. The documentation requirements under this procedure would be the same as those normally applicable to withholding agents. Lastly, the proposed regulations provide that the U.S. competent authority may agree to special withholding procedures with a foreign competent authority under an income tax treaty. The United States intends to consult with its tax treaty partners before implementing changes that would affect its relationship with its treaty partners. 3. Use of taxpayer identifying number. A taxpayer identifying number (TIN) is not required to be shown on withholding documents provided for income on portfolio- type investments. A TIN continues to be required for claims of effectively connected income. A TIN would also be required to support claims of benefits under an income tax treaty (other than dividends on publicly traded stocks). Therefore, for example, payments of dividends on non-publicly traded stocks, royalties, or related party interest would require a TIN to be shown on the withholding certificate in order for a withholding agent to rely on a claim of a reduced rate under a tax treaty. In the case of an individual, a TIN would generally be an IRS individual taxpayer identifying number (ITIN) issued by the IRS to a nonresident alien individual who is not otherwise eligible for a Social Security Number. In the case of a non- individual, a TIN would be an Employer Identification Number (EIN). Over time, the IRS will issue EIN's to foreign persons that begin with the two digits "98" to permit instant recognition of foreign status. See regulations proposed under section 6109 contained in project number INTL-0024-94, published on June 8, 1995 (60 FR 302111), describing the types of taxpayer identifying numbers issued to nonresident alien individuals and the manner in which a number can be obtained. Further revisions to the regulations under section 6109 are proposed in order to require the statement of a TIN in appropriate cases. 4. Other proposed changes The regulations propose to clarify the extent of due diligence expected from certain withholding agents, such as banks and other financial institutions. Thus, for payments of portfolio-type income, the withholding agent's due diligence would be limited to an examination of the address stated on the withholding certificate. If the address on the certificate were a U.S. address or did not match the address information in its records, the withholding agent would have to seek further proof of a claim of foreign status. This change would not affect the current requirement that a withholding agent cannot ignore what it actually knows when determining the extent to which it may rely on a withholding certificate. However, in the case of financial institutions, knowledge would be limited to information that can be associated with the account under the same procedures as apply for purposes of the backup withholding provisions. As a further burden reduction, the regulations propose to eliminate the requirement to attach withholding certificates to Forms 1042 and 1042-S. The current reporting requirements are otherwise unchanged except for clarification of how these requirements apply in the case of payments to intermediaries. Therefore, even though certification procedures are proposed to be modified for bank deposit interest, such interest continues to be exempt from reporting (except for certain interest on bank deposits paid to Canadian residents). The period of validity of a certificate of foreign status (Form W-8) is limited to three years as under current law. However, a Form W-8 stating a beneficial owner's TIN is proposed to be valid indefinitely if it relates to income required to be reported to the IRS (or if the TIN is actually reported even though not otherwise required). The validity period for certificates used to claim a reduced rate for effectively connected income is proposed to be extended from one year to three years. The regulations propose new procedures dealing with payments to foreign partnerships. These procedures generally would allow looking through to the partners and reliance on a certification provided for each partner. Alternatively, in order to facilitate certification for partnerships with many partners or for tiered partnerships, the regulations would also allow a foreign partnership to be a qualified intermediary under an agreement with the IRS. In that case, the partnership would be allowed to furnish an intermediary certificate for the partnership. The partnership would be required to withhold under section 1441 in the same manner as a domestic partnership. In addition, the regulations would clarify the manner in which a foreign entity and its interest holders can determine entitlement to benefits under an income tax treaty with a particular country based upon the principles in effect under the laws of that country. The proposed regulations also address the practical difficulties that exist under current rules due to the lack of clear guidelines on determining the status of a payee as a U.S. or a foreign person in the absence of documentation. While some guidelines exist in limited cases (e.g., 35a.9999-5(b) A-10), guidance is incomplete. The proposed regulations offer a comprehensive and uniform set of presumptions to assist withholding agents with these determinations. 5. Changes to reporting rules under chapter 61 of the Internal Revenue Code On February 29, 1988, the IRS and Treasury published in project number INTL-52-86 (53 FR 5991) proposed amendments to the 1099 information reporting regulations (the 1988 proposed regulations) modifying the reporting requirements and the procedures for presenting a claim of foreign status. The provisions in the 1988 proposed regulations concerning information reporting of bank deposit interest paid to persons resident in Canada are finalized. See 1.6049-5(e)(2) of the 1988 proposed regulations and the Rules and Regulations section of this issue of the Federal Register. The 1988 proposed regulations are not otherwise amended. In order to standardize procedures, changes are proposed to the procedures for certifying foreign status that were proposed in 1988 so as to conform them to those proposed under section 1441. The IRS and Treasury are considering finalizing the 1988 proposed regulations at the same time that the proposed regulations under section 1441 are finalized. Proposed effective dates Unless otherwise provided in the regulations, the regulations are proposed to be effective for payments made after December 31, 1997. The regulations contain a number of transition rules designed to phase out currently outstanding withholding certificates (e.g., Forms W-8 and 1001). Section-by-section analysis 1.163-5 Denial of interest deduction on certain obligations issued after December 31, 1982, unless issued in registered form Section 1.163-5(c) contains foreign targeting procedures applicable to certain obligations issued in bearer form. Section 1.163-5(c)(2)(i)(B)(5) would be revised to modify the cross- reference to the documentary evidence rules since the Q&A regulations under part 35a are proposed to be eliminated. 1.165-12 Denial of deduction for losses on registration- required obligations not in registered form Section 165(j)(1) and 1.165-12(a) deny a loss deduction to a holder of a registration-required obligation that is not in registered form unless the holder meets certain exceptions. Under 1.165-12(c)(1)(iii) and (iv), the loss disallowance rule does not apply to a holder that delivers a registration-required obligation that is in bearer form and that is offered or sold in the United States if the holder delivers the obligation to a financial institution, and the financial institution provides a statement that it is a financial institution within the meaning of 1.165-12(c)(1)(v), it is purchasing the obligation for its own account, the account of another financial institution, or an exempt organization, that will comply with section 165(j)(3)(A), (B), or (C). The loss disallowance rule also does not apply if a holder delivers a registration-required obligation in bearer form that is offered or sold outside the United States if it is delivered to a financial institution and the holder gives the financial institution a confirmation stating that any U.S. taxpayer that holds the obligation in bearer form and that is not exempt under section 165(j)(3)(A), (B), or (C) will be denied a deduction for any loss or capital gain treatment with respect to the obligation. A holder may deliver a registration-required obligation in bearer form that is offered and sold outside the United States to a person other than a financial institution only if the holder has documentary evidence, as described in 35a.9999-4T, A-5 that the person is not a U.S. person. These proposed regulations would revise 1.165-12(c)(1)(iv) to eliminate the requirement that the holder receive a statement from a financial institution for bearer obligations offered or sold in the United States. The proposed regulations would also eliminate the requirement that the holder deliver a confirmation to a financial institution for obligations offered or sold outside the United States. These changes are proposed to reduce the documentation burden associated with secondary market transactions. The documentary evidence requirement for delivery outside the United States to a foreign person other than a financial institution is retained. The proposed regulations would clarify that the holder may receive such evidence electronically. 1.871-14 Rules for portfolio interest. Under section 871(h) and 881(c), interest that qualifies as portfolio interest is generally exempt from tax and is exempt from withholding at source under section 1441(b)(9). Section 1.871-14 proposes procedures governing whether interest (including original issue discount) qualifies as portfolio interest described in section 871(h)(2). Section 1.1441-2(d) provides the exemption from withholding. For interest on bearer obligations, the existing provisions in 35a.9999-5(a), A-1 (dealing with portfolio interest on bearer obligations) and in 35a.9999-5(c) (dealing with convertible obligations) will be incorporated in 1.871-14(b) without substantive changes and are not reproposed. These rules will be restated in proposed 1.871-14(b)(1) and (b)(2) that are currently shown as reserved. For interest on registered obligations, section 871(h)(2)(B)(ii) provides that such interest qualifies as portfolio interest only if the U.S. withholding agent receives a statement that the beneficial owner is not a United States person. Paragraph (c)(2)(i) provides that the statement requirement would be satisfied if the beneficial owner furnishes the type of documents described in proposed 1.1441-1(e)(1)(i) for a withholding agent to rely on a claim of foreign status. Thus, in the case of a payment to a beneficial owner, the beneficial owner must provide a beneficial owner withholding certificate described in proposed 1.1441-1(e)(2) or, if the payment is made on an account held at a foreign branch, documentary evidence may be substituted (see paragraph (c)(2)(ii)). The ability to use documentary evidence on foreign branch accounts is a significant change from current law and one that intends to reduce the burden on transactions outside the United States. Further, as under current regulations, the withholding certificate would not have to state a taxpayer identifying number (although one may be provided, if desired). See 35a.9999-5(b), A-9. In the case of a payment to a foreign person that acts as an intermediary (e.g., an agent, representative, nominee, etc.), the proposed procedures under section 1441 would require either that the intermediary furnish an intermediary withholding certificate or, if the intermediary acts as the agent of the withholding agent, that the intermediary be an authorized foreign agent. Under proposed 1.1441-1(e)(3)(iv) or proposed 1.871- 14(c)(2)(iii), the certificate could be, as under current rules, a certificate to which the beneficial owner documentation is attached (see 35a.9999-5(b), A-9). Alternatively, under proposed 1.1441-1(e)(3)(ii), it could be a certificate by which the intermediary certifies for the beneficial owner (or other intermediaries) without being required to attach beneficial owner documentation. The latter certificate could be issued only by a qualified intermediary, i.e., a person that has an agreement with the IRS. The qualified intermediary certificate would be issued based upon certifications or documentation obtained by the qualified intermediary. The same standards would apply to these documents as are proposed to be applied to documents that a U.S. withholding agent is required to obtain when paying directly to a beneficial owner. Therefore, a taxpayer identifying number is not required to be shown on a beneficial owner withholding certificate provided to the qualified intermediary. Alternatively, the qualified intermediary could rely on documentary evidence for accounts held at foreign branches. In addition, different procedures may apply under the terms of a qualified intermediary's agreement with the IRS. Where a withholding agent acts through an authorized foreign agent, certificates received by the agent would be deemed to be received by the withholding agent. In that case, no certificate would be required from the authorized agent. See proposed 1.1441-7(c)(2) for the description of an authorized foreign agent and proposed 1.1461-1(b)(2)(iii) and (c)(4)(iii) for the filing of returns by the withholding agent and its authorized foreign agent. Paragraph (c)(2)(iv) specifies that other procedures may apply under a competent authority agreement with a country with which the United States has an income tax treaty. The regulations clarify the consequences of a late-received Form W-8 or other documentation. Paragraph (c)(3) provides that the withholding certificate may be received by the withholding agent at any time before expiration of the beneficial owner's period of limitation for claiming a refund of tax with respect to the interest. The applicable period is described in section 6511(a). Under this rule, a foreign person would be allowed, for example, to provide the required certificate to a U.S. withholding agent (or its authorized foreign agent) at any time prior to filing an income tax return and still be able to qualify the interest as portfolio interest. However, a withholding agent that does not hold a valid certificate (or other valid documentation) when paying the interest would be required to withhold. Failure to do so would make the withholding agent liable for the tax if the required certification or documentation procedures are not complied with prior to the expiration of the beneficial owner's period of limitation. If a withholding agent fails to withhold although it does not hold a valid certificate, but the documentation procedures are ultimately complied with, a withholding agent would be liable for interest pursuant to section 1463 even though there is no underlying tax liability. In addition, the withholding agent may be subject to penalties for failure to withhold tax. See proposed 1.1441-1(f)(5). Paragraphs (d) and (e) are reserved. Paragraph (d) will reflect the rules in 35a.9999-5(e), regarding pass-through certificates. Paragraph (e) will reflect the rules in 35a.9999- 5(b) A-12 through A-15 regarding foreign-targeted registered obligations. These rules are not reproposed. Under 1.871- 14(g), the rules contained in proposed regulation 1.871-14 are proposed to be effective for payments of interest after December 31, 1997. However, withholding agents may continue to rely on valid Forms W-8 that they hold on the date that is 60 days after the regulations become final until the forms expire under the rules as in effect on April 22, 1996. 1.1441-1 Requirement for the withholding of tax on payments to foreign persons. This section states the general rules concerning withholding on payments to foreign persons. Paragraph (a) provides the general purpose and scope of the section. Paragraph (b) states the general rule that a withholding agent must withhold 30 percent of the gross amount of income subject to withholding if paid to a foreign person unless the beneficial owner of the income is a U.S. person or is a foreign person entitled to a reduced rate of tax. A withholding agent may grant a reduced rate at source in the case of a payment to a foreign person only if, before payment, it can associate the appropriate documentation with the payment. Therefore, actual knowledge that the beneficial owner is a foreign person would not excuse the obligation to obtain appropriate documentation. A withholding agent failing to act in accordance with these rules may ultimately be relieved from the liability for the tax under section 1461, but would, in any event, be liable for interest, and possibly, penalties. See paragraph (f)(5). For this purpose, payment to a foreign person includes a payment to a U.S. person if the withholding agent has actual knowledge or reason to know that the U.S. person is acting as the agent of a foreign person. These rules restate current law. See 1.1441-1 and 1.1441-7(a)(1) of the existing regulations. Paragraph (c) defines terms, including payee and beneficial owner. Paragraph (c)(3) defines a payee as the person to whom the payment is made. This definition has significance for purposes of coordinating the section 1441 withholding provisions with the 1099 reporting and backup withholding rules under chapter 61 of the Code and section 3406, respectively (the 1099 reporting and backup withholding provisions determine consequences of payments based on payees; in contrast, the section 1441 withholding provisions determine consequences of payments based on beneficial owner). In the case of a payment to a foreign partnership, paragraph (c)(3)(ii) provides that the partners, and not the partnership, are considered to be the payees. However, a foreign partnership could be considered a payee if it certified to the withholding agent that it is a qualified intermediary (see paragraph (e)(5) regarding qualified intermediaries) or if it certified that the income is effectively connected with a U.S. trade or business (in which case, the partnership must itself withhold the tax required under section 1446). The provisions specify how these rules would apply on a look-through basis to tiered partnership structures. Under paragraph (c)(6), a beneficial owner is defined as the person who, under U.S. tax principles, would be required to include the amount paid in gross income. Therefore, under these principles, partners, and not partnerships, are the beneficial owners (unless the partner is itself a partnership, in which case, one looks through to the partners of the highest tier foreign partnership). Therefore, the identification of a beneficial owner is influenced by the classification of the entity to which the payment is made. This proposed rule revises 1.1441-3(f) of the existing regulations that, in effect, treats a partnership as a beneficial owner for purposes of the withholding provisions. This provision has created difficulties for partners of a foreign partnership who wish to claim the benefit of a reduced rate at source based on their status, but may not do so because the entity does not qualify for the reduced rate. The proposed regulations would alleviate these difficulties by permitting beneficial owner information to be passed to the withholding agent or by permitting the partnership to be a qualified intermediary. The IRS and Treasury are aware that some large investment partnerships hold significant amounts of U.S. portfolio type investments. The IRS and Treasury understand that generally these entities are treated as corporations under the provisions of section 7704(c)(3) and the regulations under that section. Therefore, the proposed revisions requiring beneficial owner documentation for partners would not adversely affect these entities. The IRS and Treasury solicit comments on this point. Generally, the determination of the classification of an entity, including an entity organized in a foreign country, is made under U.S. tax rules. Because U.S. and foreign laws may differ on classification principles, the U.S. tax classification of an entity as a partnership or a corporation may differ from the tax treatment of that entity under the laws of a foreign country. Therefore, in the case of income paid to a foreign entity, the entity might be considered the beneficial owner under U.S. tax principles (because it is classified as an association taxable as a corporation under U.S. tax principles), but, if foreign tax principles are applied, its interest holders, rather than the entity, might be considered the beneficial owners. This dual characterization may give rise to difficulties in the application of income tax treaties. In order to alleviate these difficulties, paragraph (c)(6)(ii)(B) proposes that foreign tax principles, rather than U.S. tax principles, apply to identify the beneficial owner of income for which a claim of a reduced rate of withholding is made based upon a tax treaty. Under this proposed rule, when a benefit is claimed under a tax treaty with a particular country, the tax principles that govern the determination of who the beneficial owner is for purposes of obtaining benefits under that treaty would be the principles in effect under the laws of that country. This clarification is intended to address the significant uncertainties resulting from the current lack of guidance on these issues. The IRS and Treasury intend to consult with treaty partners in order to promote uniformity in this area. Paragraph (c)(6)(iii) provides that the beneficial owner rules in the proposed regulations would not apply to trusts. Until further guidance is provided, the rules in the current regulations would continue to apply trusts. See 1.1441-3(f) and (g) of the existing regulations. While different procedures would apply depending upon whether a payment is made to a corporation or a partnership, a withholding agent would not be required to determine the classification of an entity when making a payment to a foreign person. Rather, a withholding agent would be allowed to rely on the classification claimed by the entity, unless it had actual knowledge or reason to know otherwise. Paragraph (d) deals with procedures that would enable a withholding agent to determine the circumstances in which it could consider that the payment is made to a U.S. person and is, therefore, exempt from section 1441 withholding. This paragraph replaces 1.1441-5 of the existing regulations and proposes to replace Form 1078 with Form W-9, consistent with the manner in which a U.S. payee must generally provide a taxpayer identifying number under section 3406. In the case of a payment to an exempt recipient or a payment of scholarship, grant, pension, or annuities, for which no Form W-9 is required under section 3406, a person also would be permitted to use a Form W-9 to establish its U.S. status. The regulations specify the information that must be stated on such a certificate, which parallels that required under 31.3406(h)-3(e)(2) in order for a payor to reasonably rely on a Form W-9. If no, or insufficient, documentation is provided, the presumptions in 1.1441-1(f) would apply to determine whether the beneficial owner should be treated as a foreign or U.S. person. In the case of a payment to a foreign person acting as an intermediary (e.g., agent, representative, or nominee) for a U.S. person, paragraph (d)(3) provides that the intermediary may transmit a Form W-9 for the U.S. person to claim U.S. status and avoid section 1441 withholding. If the U.S. person is not an exempt recipient, the withholding agent would then have to comply with the 1099 reporting requirements under chapter 61 of the Code, because, under these rules, the U.S. person would be treated as a payee. Similarly, as a result of the payee rules set forth in paragraph (c)(3)(ii) dealing with payments to foreign partnerships, a withholding agent may treat a payment to a foreign partnership as a payment made to a U.S. person to the extent of the U.S. partner's distributive share of that payment. Similarly, the withholding agent would have to comply with the 1099 reporting requirements. Paragraph (e) describes the conditions for a withholding agent to rely upon a beneficial owner's claim of foreign status. Paragraph (e)(1) provides that a withholding agent may rely upon a claim of foreign status if, prior to making the payment, the withholding agent (1) holds a beneficial owner withholding certificate or an intermediary withholding certificate, (2) complies with on-line confirmation procedures when prescribed by the IRS, and (3) has not received a notification from the IRS that the withholding certificate is incorrect or unreliable. The withholding agent's reliance on the withholding certificate is subject to the withholding agent's actual knowledge or reason to know otherwise. See standards of knowledge in proposed 1.1441- 7(b). Paragraph (e)(2) sets forth the requirements for a beneficial owner withholding certificate. Generally, a withholding certificate would be a Form W-8 or, in the case of certain compensation for personal services, a Form 8233 (or an acceptable substitute) that is signed under penalties of perjury by the beneficial owner and contains certain required information. The certificate serves as a representation that the beneficial owner is not a U.S. person and that the conditions for claiming a reduced rate of withholding tax are satisfied. These conditions may vary depending upon the nature of the income or the type of exemption claimed. Required information on a beneficial owner Form W-8 would include the beneficial owner's name, permanent residence address, the type of income to be received, and the basis for any reduced rate claimed. Generally, the Form W-8 would not be required to state the beneficial owner's taxpayer identifying number ("TIN"), except in limited cases (see paragraph (e)(4)(vii), below). Paragraph (e)(3) sets forth the requirements for an intermediary withholding certificate. Intermediary withholding certificates may be provided by one of three types of persons: (1) a qualified intermediary, (2) a foreign partnership, or (3) an agent, nominee, or other representative that is not a qualified intermediary. Information required from a qualified intermediary on a Form W-8 would include similar information as that required for the beneficial owner Form W-8 except that the information would relate to the intermediary. In addition, the Form W-8 would have to state a TIN and certify that the issuer is a qualified intermediary and has obtained the appropriate certificates or documentation with respect to the account holders covered by the Form W-8. A foreign partnership that is not a withholding agent (because it is not a qualified intermediary or acting for the account of others) would have to provide the same information about itself, and attach the partners' withholding certificates. In addition, the partnership would be required to state an EIN on the withholding certificate. See proposed 1.1441-5(b) for the certificates required to be attached in the case of tiered partnerships. See also, proposed 1.1461-1(c)(4)(v) for Form 1042-S filing requirements for the withholding agent. An agent, nominee, or representative furnishing an intermediary certificate would have to provide information about itself, state an EIN for the intermediary (or an SSN or ITIN in the case of an individual) and certify that it is not acting for its own account and is using the Form W-8 to transmit beneficial owner certification for the payment to which the Form W-8 relates. These procedures are essentially similar to those in effect for portfolio interest on registered obligations under 1.9999-5(b), A9 and that are proposed to be retained in proposed 1.871-14(c)(2)(iii). Paragraph (e)(4)(i) requires that, in the case of joint owners, each owner provide a withholding certificate. This rule would parallel the requirements for backup withholding purposes. See 31.3406(h)-2(a). Paragraph (e)(4)(ii)(A) provides the general rule that a withholding certificate would be valid for a period of three years or until the circumstances of the beneficial owner changed, making an item of information on the certificate incorrect. However, under paragraph (e)(4)(ii)(B), a withholding certificate that includes a TIN would be valid indefinitely if the income (or, under special procedures, the TIN) with which the certificate is associated were reported to the IRS. For example, a bank may rely on a claim of foreign status by an account holder if it holds a Form W-8 for the account holder even without a TIN. In that case, the certificate would be valid for a period of three years only. If, however, the account holder were to state a TIN on the form and the bank adopted procedures by which it reports the TIN to the IRS as provided in proposed 1.1461-1(d), the certificate would be valid indefinitely until a change in circumstances of the account holder made the information on the form incorrect. Second, certificates furnished to claim a reduced rate of withholding on income that is effectively connected with the conduct of a trade of business within the United States would also be limited to three years in all circumstances. This is a change from existing regulations under 1.1441-4(a)(2) that require that a new certificate be filed each year. This change would relieve the burden associated with annual renewal of these certificates and simplify compliance by providing uniform validity period rules. The 3-year period of validity for this certificate would extend from the date it is signed to the last day of the third succeeding calendar year. This change would insure a full 3-year validity period in all cases (and up to four years where the certificate is furnished at the beginning of the calendar year). Under paragraph (e)(4)(iii), withholding certificates must be retained for as long as they are relevant for the determination of the withholding agent's liability under proposed 1.1461-1. This rule would replace the 4-year retention period under current law and conform the rules under section 1441 to the retention period required for Forms W-9 under section 3406. This change is necessary because the Form W-8, like Form W-9, is proposed to be made valid indefinitely in certain circumstances. Paragraph (e)(4)(iv) anticipates the possibility that, in the future, a withholding agent may rely on electronically transmitted information otherwise required to be stated on a withholding certificate. Paragraph (e)(4)(v) provides for on-line confirmation procedures for TIN's required to be stated on withholding certificates in order to verify their correctness and the claim that it belongs to a foreign person. Such procedures are being developed by the IRS and, when the system becomes operational, the IRS may require certain categories of withholding agents handling large volumes of payments to foreign persons (such as certain teaching institutions) to perform on-line confirmation of such TIN's. These procedures would be similar to those currently in use under section 3406 in order to notify payors of an incorrect TIN. Paragraph (e)(4)(vi) defines an acceptable substitute form. As under section 3406, these regulations would permit the use of substitute forms provided the information furnished is the same as is required under the regulations and is certified to be correct under penalties of perjury. See 31.3406(h)-3(c)(1). Paragraph (e)(4)(vii) provides all of the circumstances in which a taxpayer is required to furnish a TIN on a withholding certificate for purposes of the regulations under sections 1441, 1442, and 1443. Taxpayers would be required to furnish a TIN when claiming the benefit of a reduced rate under an income tax treaty (other than with respect to dividends on publicly traded stocks) or because income is effectively connected with a U.S. trade or business. In addition, intermediaries, partnerships, foreign organizations claiming to be tax-exempt under section 501(c), and private foundations would be required to furnish a TIN. A TIN would be an IRS Individual Taxpayer Identification Number (ITIN), a Social Security Number (SSN), or an Employer Identification Number (EIN). A nonresident alien individual not eligible for a social security number would be able to obtain an ITIN from the IRS. See proposed regulations under section 6109 describing procedures for obtaining an ITIN. Paragraph (e)(5)(i) provides that a qualified intermediary may furnish a single intermediary withholding certificate to a withholding agent on behalf of beneficial owners, other intermediaries, and U.S. payees. The qualified intermediary would have to obtain certification or documentation from these persons on whose behalf the intermediary withholding certificate is provided. Generally, the certification and documentation would be the same as that which a withholding agent is required to obtain, subject to such modifications as the intermediary's agreement with the IRS would provide. It is anticipated that the terms of the agreement would be flexible enough to accommodate the individual circumstances of a particular qualified intermediary, including any locally applicable know-your-customer rules or practices. Therefore, the agreement might acknowledge certain documentary evidence procedures already in place and not require additional documentation. Paragraph (e)(5)(ii) provides that a qualified intermediary is a foreign person that is a party to a withholding agreement with the IRS and is a clearing organization as defined in 1.163-5(c)(2)(i)(D)(8), a financial institution as defined in 1.165-12(c)(1)(iv), a partnership, or any other person acceptable within the discretion of the IRS. A qualified intermediary would be able to either assume primary responsibility for withholding and reporting to the IRS (if so permitted under its agreement with the IRS) or leave that responsibility to the withholding agent. A qualified intermediary that assumes primary withholding responsibility would present an intermediary withholding certificate to the withholding agent or another qualified intermediary representing that it will withhold all appropriate amounts and comply with all applicable reporting requirements. The withholding agent or other qualified intermediary would be allowed to rely on such a certificate and not withhold. However, the withholding agent would have to file Forms 1042 and 1042-S under section 1461 to report the payment to the qualified intermediary and the qualified intermediary's EIN. See proposed 1.1461-1(b)(2)(ii) and (c)(4)(ii). A qualified intermediary that does not assume primary withholding responsibility would present an intermediary withholding certificate to a U.S. withholding agent or another qualified intermediary representing that beneficial owners of U.S. income payments (other than gross proceeds) are not U.S. persons and, if applicable, qualify for a reduced rate of withholding. It is anticipated that a qualified intermediary would establish separate accounts for income subject to different withholding rates. A single intermediary withholding certificate should serve as documentation for all these separate accounts. In addition, the qualified intermediary would provide a Form W-9 for each beneficial owner that is a U.S. person to whom payments of income otherwise subject to withholding are made and for whom reporting is required under chapter 61 of the Code. A qualified intermediary would generally have to agree to be subject to the same reporting requirements as apply to withholding agents under proposed 1.1461-1(b) and (c), to allow periodic inspection of its records, and to pay any amount of tax liability determined to be due. The IRS intends to agree to arrangements with the qualified intermediary so that, for example, inspection of records may be minimized where the IRS otherwise gets sufficient access to beneficial ownership information, through annual reporting of TIN's, review of know- your-customer rules, and selection of appropriate account information, or through an exchange of information program under a tax treaty. In appropriate cases, the IRS may rely on audits performed by an institution's approved external auditors where, for example, under an income tax treaty or local laws, the IRS would be given access to appropriate auditor's records to verify compliance. Records may include workpapers of, reports prepared by, and methodology employed by, the approved external auditors. A proposed revenue procedure providing guidance with respect to withholding agreements has been published as Announcement 96-23 simultaneously with the publication of this document in the Federal Register. Paragraph (e)(5)(v) specifies that a foreign partnership that is a qualified intermediary acting for its partners is a withholding agent with respect to its partners' distributive shares of income paid to the partnership. In that case, the partnership is subject to the same withholding and reporting procedures as would apply to a domestic partnership. Thus, any arrangement whereby the partnership would seek to shift primary withholding responsibility to the withholding agent under the provisions of paragraph (e)(5)(iv)(B) would not be recognized. Paragraph (f) contains a set of presumptions upon which a withholding agent (for purposes of section 1441) and a payor (for purposes of the 1099 reporting provisions) would rely to determine whether to treat a person as U.S. or foreign if, at the time of payment, the withholding agent or payor does not have actual knowledge of the status of the person to whom the payment is made and lacks the required documentation or knows or has reason to know that the documentation it holds is incorrect or unreliable. A presumption under this paragraph (f) could be rebutted by providing or correcting the required documentation to the withholding agent or payor. Thus, these presumptions would assist the payor in determining whether the income paid is subject to the 1099 reporting and backup withholding regime (if paid to a U.S. person that is not an exempt recipient) or to the section 1441 withholding regime (if paid to a foreign person). Presumptions of foreign status resulting from the application of these provisions would, when applied for purposes of section 1441, only affect whether the withholding agent should withhold 30 percent from the payment on the ground that the payment may, under the provisions, be treated as made to a foreign beneficial owner. However, the presumptions could not operate to deem the payee as having established proof of foreign status for purposes of claiming a reduced rate of tax under the Code or an income tax treaty. Paragraph (f)(2)(i) addresses reportable payments to a non- exempt recipient (a non-exempt recipient is a person for whom the payor must file a Form 1099; see proposed 1.6049-4(c)(1)(ii) for a list of exempt recipients). Where a withholding agent lacks the required documentation, it would presume that the payee is a U.S. individual. Accordingly, the withholding agent would withhold 31 percent under section 3406. Paragraph (f)(2)(ii) incorporates the concept of the 30-day grace period under 31.3406(d)-3(a) for a payee to furnish a Form W-9 to the payor. Because it may take longer to obtain the required documentation from a foreign person than from a U.S. person, the proposed regulations allow a withholding agent to treat a payee as a beneficial owner that is a foreign person for up to 90 days from the date the agent credits the payee's account (or until the end of the calendar year if earlier) if the withholding agent has the name and a foreign address for the account holder or a facsimile copy or an electronic transmission of the information on a withholding certificate. This special rule would defer the obligation to backup withhold under section 3406 because there are sufficient indicia of foreign status, but does not defer the obligation to withhold under section 1441, if applicable. If the required documentation were provided or corrected within the 90- day grace period, the amount withheld may be refunded to the payee under the adjustment procedures described in proposed 1.1461-2. The 90-day grace period would be terminated if any part of the proceeds in the account that are subject to the grace period were withdrawn (other than for purposes of withholding an amount of tax). If the required documentation were not provided or corrected by the expiration of the grace period, the payee would be presumed to be a U.S. payee for purposes of section 3406 and chapter 61 of the Code from the date the account was first credited. A special rule for joint owners or payees is provided in paragraph (f)(2)(iii) that would permit a withholding agent to presume that a payment made to joint owners or payees for whom it does not hold the required documentation is made to U.S. payees. The grace period would apply to joint payees if each payee qualified for its application. If any one of them withdrew any portion of the funds in the account, then additional withholding under paragraph (f)(2)(ii)(A) would be required. Paragraph (f)(2)(iv) addresses reportable payments to an exempt recipient. In that case, the withholding agent could presume that the payee is a foreign person if it knew the payee's TIN and the TIN began with the two digits "98." The withholding agent also could presume that the payee is a foreign person if the payee had a foreign mailing address or the payment were made outside of the United States (as defined in proposed 1.6049- 5(e)). In other cases, the withholding agent could presume that the exempt recipient is a U.S. person. Thus, for example, a U.S. withholding agent making a payment of interest on a registered obligation to a corporation with an EIN beginning with the digits "98" would not have to backup withhold under section 3406 (because the corporation is an exempt recipient). However, it should withhold a 30 percent tax under section 1442 because the condition under 1.871-14(c)(1)(iii) that a certificate of foreign status be received by the U.S. withholding agent for the interest to qualify as portfolio interest would not be satisfied. Thus, the withholding agent should treat the interest as not qualified for the portfolio interest exemption for purposes of section 1441(b)(9). Adjustments to the tax may be made at a later time in accordance with proposed 1.1461-2 if the required documentation described in proposed 1.871-14(c)(2) is later furnished. See proposed 1.871-14(c)(3) and 1.1441-1(f)(5) for rules addressing late received documentation. Paragraph (f)(3) contains special presumption provisions for certain payments that are not subject to backup withholding: scholarship and pension income. In the case of scholarship and grant income, the withholding agent or payor may generally treat the payee as a U.S. person unless it has U.S. visa information in its records concerning the payee. For pension and annuities, the payment would be presumed to be made to a U.S. person if the payor had the payee's Social Security number and the payment were made either to a U.S. mailing address or to a mailing address in a foreign country with which the United States has an income tax treaty in effect that exempts residents of the country from U.S. tax on that income. In all other cases, the payor could presume that the payee is a foreign person. A withholding agent may use these presumptions as a safe harbor or may, at its option, choose to withhold at a higher rate if it were unsure of the application of the presumption in a particular case. Paragraph (f)(4) provides special rules for pass-through entities. Paragraph (f)(4)(i) provides rules for determining whether to treat a partnership as foreign or domestic. The withholding agent or payor could presume that the partnership is a foreign partnership if the withholding agent or payor actually knows that the partnership's EIN begins with the digits "98," if the mailing address of the partnership is in a foreign country, if the payment is made outside of the United States (as defined in proposed 1.6049-5(e)), or if the withholding agent or payor knows or had reason to know that the partnership is foreign. Under paragraph (f)(4)(ii), a withholding agent or payor that makes a reportable payment to a person determined to be a foreign partnership could presume that any partner for which it does not hold the required documentation is a U.S. individual. In that case, the payee would be treated as a U.S. payee that is not an exempt recipient and the payment would be subject to reporting under chapter 61 of the Code and to backup withholding under section 3406. Paragraph (f)(4)(iii) provides rules for partners' distributive shares. A domestic partnership could treat a partner as a U.S. payee if, at the time it is required to withhold on a reportable payment, it did not hold all of the required documentation for that partner. A foreign partnership that is a qualified intermediary under proposed 1.1441- 1(e)(5)(ii) could treat a partner as a foreign payee if, at the time it were required to withhold on a reportable payment, it could not associate the payment with the required documentation. Paragraph (f)(5) clarifies that a withholding agent that does not act in accordance with the presumptions and fails to withhold the required amount may be liable under section 1461 or 3403 for the tax that should have been withheld based upon the presumptions in paragraph (f), unless the withholding agent can demonstrate either that the correct amount of tax was, in fact, withheld or that the beneficial owner paid the tax due. Proof of payment of tax could be established on the basis of a Form 4669 furnished by the beneficial owner certifying the amount of tax paid to the IRS. Proof that the correct amount of tax was, in fact, withheld, could be based upon obtaining the required documentation. Late-received documentation could be accepted as proof of status and entitlement to a reduced rate of tax. However, if the delays involved in obtaining this documentation affected its reliability, the IRS could require further proof of status or entitlement to a reduced rate. Further, pursuant to section 1463 or section 3403, the withholding agent would be liable for interest under section 6601, even though, ultimately, there is no underlying tax liability. Penalties may also apply. Under paragraph (f)(6), a reportable payment is an amount reportable under section 3406(b) (without regard to any exception to reporting under section 6041, 6041A, 6042, 6045, 6049, 6050A, or 6050N). Paragraph (f)(7) provides that if overwithholding occurs under section 1441 as a result of application of the presumptions in paragraph (f), adjustments may be made in accordance with proposed 1.1461-2(a). Appropriate refunds and credits may be claimed under section 1464 or 6414. Amounts overwithheld under section 3406 are subject to adjustments pursuant to 31.6413(a)- 3(a)(1). Paragraph (g) provides that these rules are effective for payments made after December 31, 1997. However, transition rules are provided so that valid certificates (as determined under current rules) that are outstanding on the date that is 60 days after these regulations are published as final regulations may continue to be relied upon for their period of validity. In addition, dividends on publicly traded stocks are given special transition relief. See proposed 1.1441-6(b)(2). 1.1441-2 Income subject to withholding Paragraph (a) restates the rules in 1.1441-1 and -3(a) of the existing regulations limiting withholding to items of income from sources within the United States. Paragraph (b) simplifies 1.1441-2(a) of the existing regulations by providing that, for purposes of chapter 3 of the Code, fixed or determinable, annual or periodical (FDAP) income is any income includable in income under section 61, subject to enumerated exceptions in paragraph (b)(2) (including certain exceptions for original issue discount and capital gains, including option premiums). Under these proposed rules, income paid under a notional principal contract would be FDAP, but see proposed 1.1441-4(a)(3) for an exemption from withholding. Paragraph (b)(3) reflects the position adopted by the IRS in TIR-877 (December 27, 1966) and in Rev. Rul. 68-333, 1968-1 C.B. 390 that FDAP includes original issue discount paid by an original issuer of bonds or other obligations with original issue discount. However, under the authority of section 1441(c)(8), only certain items of original issue discount are currently subject to withholding of tax under Chapter 3. The lack of rules in this area in the past reflects the difficulties in determining the amount of OID upon which withholding should be applied. These proposed regulations, however, identify transactions in which information about the amount of original issue discount would generally be known or available to the withholding agent. Therefore, the proposed regulations require withholding on amounts paid upon sale by an obligor that is related to the original issuer. In addition, amounts that fail to qualify for the portfolio interest exemption under section 871(h) or 881(c) (because, for example, the statement described in section 871(h)(5) has not been furnished to the U.S. withholding agent) would also be subject to withholding, regardless of whether it is possible for the withholding agent to determine precisely the amount of OID. See proposed 1.871-14(c)(2). If the required documentation were not furnished, the amounts could be treated as paid to a U.S. or foreign payee based upon the presumptions in proposed 1.1441-1(f). If the amounts are presumed paid to a U.S. payee, backup withholding under section 3406 might apply. See 31.3406(b)(2)-(2). If the amounts are presumed paid to a foreign payee, withholding under section 1441 would apply (unless the OID instrument had a maturity not exceeding 183 days from the date of issue). Under these rules, the entire amount of OID (as determined on the date of issue) would have to be reported as taxable if the exact amount of OID were not known. Any amount of overwithholding may be adjusted or refunded in accordance with the procedures in proposed 1.1461-2(a) or 1.1464-1. The proposed changes to the OID rules would be effective for OID on obligations issued after a date that is 60 days after these regulations are published as final regulations. Paragraph (c) restates 1.1441-2(b) of the existing regulations to eliminate the reference to pre-1967 payments. It also eliminates the reference to items of income under section 402(a)(2) and 403(a)(2), relating to payments from certain employees trusts or under employee annuities, in order to conform to the amendment made to sections 1441(b) and (c)(5) by Public Law 102-318 that deleted these sections from the requirement of withholding under section 1441. Paragraph (d) lists exemptions from withholding for certain items that otherwise constitute FDAP income. Paragraph (d)(1) lists the exceptions that are not conditioned upon furnishing documentation (e.g., interest on bearer or foreign targeted registered obligations, short-term obligations). However, documentation may be required under the 1099 reporting provisions in order to avoid reporting under sections 6041 or 6049 and backup withholding under section 3406. Paragraph (d)(2) lists two other exceptions, but those exceptions are conditioned upon furnishing documentation described in proposed 1.871-14(c)(2). The exceptions are portfolio interest on registered obligations described in section 871(h)(2)(B) or 881(c)(2)(B) (other than foreign targeted obligations) and bank deposit interest described in section 871(i)(2)(A). Because bank deposit interest is not subject to beneficial owner documentation requirements under current rules, the regulations propose a transition rule that would allow interest paid on accounts in existence on or before a date that is 60 days after these regulations are published as final regulations to continue to be subject to current rules until December 31, 1999. Paragraph (e) clarifies the meaning of payment for purposes of withholding. An amount would be considered paid when it is includable in income under the cash basis method of accounting. Under paragraph (e)(2), income reallocated under section 482 from a U.S. person to a related foreign person would be considered a payment for withholding tax purposes. A payment would also be considered to be made if income arose as a result of a secondary adjustment made after income is allocated under section 482, unless the taxpayer entered into a repatriation agreement that eliminated the liability for withholding. Paragraph (e)(3) provides that income is not considered paid if it is blocked under certain executive authority, but is considered paid on the date the blocking restriction is removed and, therefore, subject to withholding as of that date. Paragraph (e)(4) provides special payment rules for dividends. These rules are similar to those in effect for purposes of backup withholding. See 31.3406(b)(2)-4. Paragraph (e)(5) coordinates the payment election for branch interest tax under 1.884-4(c)(1) with section 6049 and the withholding provisions under section 1441. 1.1441-3 Amounts subject to withholding Paragraph (a) restates the rule in 1.1441-2(a)(1) of the existing regulations that withholding is generally imposed on the gross amount of income. Paragraph (b) provides for special withholding rules for interest. Paragraph (b)(1) restates the rule in 1.1441-3(c)(3) of the existing regulations that requires withholding on the entire amount of stated interest owed on an interest-bearing obligation, regardless of the character of the amounts paid. The heading is modified to eliminate any inference that this rule is limited to payments on defaulted interest coupons. Paragraph (b)(2) restates the exemption from withholding in 1.1441-4(h) of the existing regulations regarding sales of obligations between interest payment dates. An anti- abuse rule is added that would require withholding where the withholding agent knew or had reason to know that the sale transaction was part of a plan the principal purpose of which was to avoid withholding through a pattern of sales and repurchases. Paragraph (c) provides rules relating to corporate distributions and substantially relieves the withholding burden imposed under 1.1441-3(b) of the existing regulations on these distributions. Under the proposed regulations, a corporation could determine the amount of a distribution subject to withholding based on a reasonable estimate of available earnings and profits for the taxable year. A corporation that made a reasonable estimate, but nonetheless underwithheld, would remain liable for the amount of tax underwithheld (and interest), but not penalties. These proposed regulations adopt the same "reasonable estimate" standard as is provided under 31.3406(b)(2)-4(c)(2). Under paragraph (c)(2)(ii), an intermediary could rely on a reasonable estimate represented by the distributing corporation. The distributing corporation would be made liable for any amount of underwithholding where the withholding agent had relied on the representation and the estimate had not been reasonably determined. Paragraph (c)(3) proposes special procedures for withholding on certain distributions made by a Regulated Investment Company (RIC). In order to determine whether a withholding obligation arises in that case, a RIC would benefit from the same exceptions that would apply to other corporations for distributions payable in stock or stock rights or distributions treated in part or in full as in exchange for stock. In addition, the proposed regulations provide that no withholding is required for a distribution that is a capital gain dividend defined in section 852(b)(3)(C) or an exempt interest dividend defined in section 852(b)(5)(A). Special procedures are proposed for implementing these exemptions, however, because a RIC must specifically designate the extent to which a distribution falls under one of these provisions. Under applicable rules, the designation may be made as late as 60 days after the close of the RIC's taxable year, and after making the designation, the RIC may find that the amount so designated exceeds what the Code and the regulations allow. This presents special difficulties under section 1441, which assumes that the amounts subject to withholding are fixed at the time they are paid. To address these special difficulties, paragraph (c)(3) would allow a RIC to designate interim distributions as being subject to section 852(b)(3)(C) or 852(b)(5)(A). If it later determined that the designation was in excess of what was permitted and, as a result, had underwithheld, the RIC would have to satisfy the tax liability and could adjust the withholding pursuant to proposed 1.1461-2(b). A RIC would not be subject to penalties for failure to withhold timely, provided the designation was based upon a reasonable estimate when made. However, interest would apply under section 6601. In addition, the RIC might be liable for penalties if the IRS determined that the estimates were not reasonably determined. Paragraph (d) restates, without significant changes, the rule in 1.1441-3(d) of the existing regulations regarding withholding on the full amount realized from the sale of property where the withholding agent does not know the amount of gain subject to withholding. A withholding agent may, however, determine gain based on the beneficial owner's withholding certificate if it indicates the beneficial owner's basis in the property sold. This rule is of limited application as most capital gains are exempt from withholding under section 1441. Paragraph (e) restates the rule in 1.1441-7(c) of the existing regulations pertaining to payments in kind. The property conversion requirement under current rules would be made optional. Instead, the withholding agent could choose to obtain payment from another source. The regulations further propose to clarify that the amount of a payment in kind is measured by the fair market value of the property transferred or of the services provided. Payments made in foreign currency require a conversion of the amount of tax using the spot rate (as defined in 1.988- 1(d)(1)) or a reasonable spot rate convention. Paragraph (e)(3) provides guidance where the withholding agent's satisfaction of the beneficial owner's tax liability constitutes additional income to the beneficial owner that is subject to withholding. In that case, the final withholding tax liability would be calculated under a gross-up formula. The provisions currently stated under 1.1441-3(j), relating to conduit financing arrangements, are proposed to be incorporated without change into a new paragraph (f). These provisions are not reproposed. The address rule in 1.1441-3(b)(3) of the existing regulations would be eliminated and replaced by requirements to furnish appropriate documentation or to establish foreign status and, if applicable, residence in a treaty country. See proposed 1.1441-1(e) and 1.1441-6. Section 1.1441-3(c)(1) requiring withholding in the case of interest paid on obligations issued by the U.S. government would be deleted as unnecessary given the provisions in 1.1441-2(a) describing income subject to withholding. Section 1.1441-3(c)(4) addressing unknown owners would also be deleted because the presumption provisions in 1.1441-1(f) provide guidance. The special rules for tax-free covenant bonds issued prior to 1934 are proposed to be deleted. Comments are solicited as to whether these rules are still necessary. 1.1441-4 Certain exemptions from withholding Paragraph (a)(1) restates, without significant change, the provisions in 1.1441-4(a) of the existing regulations regarding the exemption from withholding for certain income effectively connected with the conduct of a trade or business within the United States. The regulations clarify that the exemption under this section does not apply to claim an exemption under an income tax treaty (i.e., income not attributable to a permanent establishment). Claims of treaty benefit must be made under the procedures described in proposed 1.1441-6. Under paragraph (a)(2)(i), a withholding agent could rely on a claim that income is effectively connected with the conduct of a trade or business within the United States if it held a withholding certificate so stating. The regulations do not permit a withholding agent to rely on a qualified intermediary withholding certificate to grant a reduced rate of withholding for income claimed to be effectively connected, except in the case of a qualified intermediary that is a partnership acting for its own account. A partnership that does not claim to be a qualified intermediary could also furnish an intermediary withholding certificate described in proposed 1.1441- 1(e)(3)(iii) (i.e., the transmittal certificate normally required from a partnership transmitting its partners' documentation under the procedures described in proposed 1.1441-5(b)). For purposes of claiming an effectively connected income exemption, it would not be necessary to attach the partners' documentation to the certificate since the exemption is available regardless of the status of the partners and, under section 1446, the partnership is required to withhold. The validity period of a withholding certificate used to claim an effectively connected exemption is proposed to be extended from one year to three years (subject to amendment if a change in circumstances affected the character of the income that the beneficial owner anticipated would be effectively connected). This rule should significantly ease the burden on continuing transactions that generate effectively connected income every year. The regulations propose to eliminate the requirement that the certificate be attached to the Form 1042-S; the withholding agent would be required to state the beneficial owner's TIN on the Form 1042-S. See proposed 1.1461-1(c)(1)(i). If the withholding certificate were silent as to whether the income is effectively connected or if the required documentation were lacking, incorrect, or unreliable, the withholding agent should presume that the income is not effectively connected. The rules provided in 1.1441-4(f) of the existing regulations are proposed to be restated in a new paragraph (a)(2)(ii) and are not reproposed. Paragraph (a)(2)(iii) provides for special rules for payments made to joint owners that would require each joint owner to provide a withholding certificate certifying that the income is effectively connected with a trade or business in the United States. These rules are consistent with the joint owners rules provided under the section 3406 regulation. See 31.3406(h)-2(a). Paragraph (a)(3) provides that no withholding is required on income from notional principal contracts regardless of whether a withholding certificate is provided. However, such income would have to be reported on a Form 1042 and 1042-S. This rule would significantly simplify the paper flows currently associated with these transactions. Paragraph (a)(4) parallels the rule in proposed 1.1441- 1(f)(5) regarding the consequences of acting in a manner contrary to prescribed presumptions. Late received documentation could relieve the withholding agent from the tax liability. However, an interest charge would apply under section 6601 on the amount that should have been withheld even if, ultimately, there is no underlying tax liability. In addition, penalties might apply. Paragraph (b) of the existing regulations concerning compensation for personal services of an individual is substantially unchanged. A new paragraph (b)(1)(ii) is added to require that withholding on distributions from certain qualified pension plans and annuities occur under section 1441 rather than under section 3405 as was required under 1.1441-4T(b)(ii) (which expired on February, 1993). A new paragraph (b)(1)(vi) is also added that would allow employers to wage withhold on compensation that is otherwise exempt from wage withholding by reason of section 3402(e). This rule provides relief for employers of nonresident alien individuals who derive income from sources partly within and partly without the United States on a regular basis (e.g., crew members working on cruise ships). Without this rule, employers would have to withhold at the 30 percent rate instead of the lower wage withholding rate. The provisions under paragraph (b)(2) of the existing regulations (dealing with a claim of reduced rate of withholding on personal service income under an income tax treaty) are unchanged with one exception. The 10-day review rule in paragraphs (b)(2)(i) and (iv) would be extended to 20 days. This extension is necessary because of the increase in the number of Forms 8233 that the IRS receives. Paragraph (b)(6) is added to eliminate the requirement in 1.1441-3(e) of the existing regulations to pro-rate the personal exemption based on the period during which a nonresident alien individual is present in the United States during the taxable year. Therefore, the entire personal exemption amount could be taken into account to determine the base amount on which to withhold. Paragraph (c) incorporates the provisions in 1.1441-2(c) of the existing regulations dealing with participants in certain exchange or training programs and provides additional guidance with respect to payments of scholarship or fellowship grants to nonresident alien individuals. It reflects 1988 and 1994 statutory amendments to section 1441 concerning certain visa holders. Such income is subject to a lower withholding rate of 14 percent under section 871(c). The regulations propose an alternate withholding election so that taxpayers may choose to be subject to the withholding rates applicable to wages, which in many cases are likely to result in a lower rate. Also, individuals who receive both scholarship or grants and compensation income from the same withholding agent could choose to combine all income on Form 8233 to claim a reduced rate under a tax treaty for both types of income. Paragraphs (d) (dealing with annuities) and (e) (dealing with central banks of issue and the Bank of International Settlement) merely reflect conforming changes regarding the proposed documentation requirements. 1.1441-5 Withholding on payments to pass-through entities The existing regulations in 1.1441-5 address claims of U.S. status. These provisions are restated, with modifications, in proposed 1.1441-1(d). This section, as revised, would provide special withholding procedures for payments to partnerships. Paragraph (a) deals with domestic partnerships. As under current regulations, payments to domestic partnerships would not require withholding, even if the partners were foreign persons. A domestic partnership is the withholding agent for items of income included in the distributive share of a partner that is a foreign person. Paragraph (b) proposes to modify the current rules for payments to foreign partnerships to permit a look-through approach, so that claims of reduced rate could be presented by the partnership on behalf of the partners (including partners that are U.S. persons). The look-through approach would apply through tiers of foreign partnerships. In the alternative, a foreign partnership could, under an agreement with the IRS, become a qualified intermediary so that the partners' documentation would not have to be furnished to the withholding agent. See proposed 1.1441- 1(e)(5) for rules applicable to qualified intermediaries. Paragraph (b)(2) clarifies how the look-through approach would operate in the case of a tiered partnership. Generally, the partnership would have to look through tiers until it reached the beneficial owner (as determined under proposed 1.1441-1(c)(6)). However, it could stop at any level in the chain that constitutes a payee (as defined in proposed 1.1441-1(c)(3)). 1.1441-6 Claim of a reduced rate under an income tax treaty The proposed regulations eliminate the "address" rule in 1.1441-6(c)(1) of the existing regulations and in regulations under several income tax treaties, which permits a withholding agent to grant a reduced rate of tax under a treaty based upon the address of the payee (including a nominee). Paragraph (b)(1) provides general procedures for reliance by a withholding agent on a claim for a reduced rate of withholding under a treaty based upon the documentation requirements described in proposed 1.1441-1(e)(1)(i). A withholding agent could rely upon a beneficial owner withholding certificate described in proposed 1.1441-1(e)(2) as establishing both foreign status and residence in the treaty country provided a TIN is stated on the certificate. In addition, in the case of dividends with respect to which an advance ruling is required in order to secure the reduced rate of tax under the tax treaty, the withholding certificate would have to state that the beneficial owner has obtained such a ruling. Such rulings are currently required under a very limited number of tax treaties: Austria, Denmark, Ireland, and Switzerland. See paragraph (e) regarding the procedures for obtaining such a ruling. Further, for amounts exceeding $500,000 in the aggregate for the taxable year paid to a beneficial owner related to the withholding agent, the beneficial owner would have to indicate on the certificate that it will file a Form 8833 under section 6114. The regulations under section 6114 are proposed to be modified accordingly. Claims of treaty benefit could also be made on the basis of an intermediary withholding certificate described in proposed 1.1441-1(e)(3). Further, a U.S. withholding agent could act through an authorized foreign agent described in proposed 1.1441-7(c)(2). Paragraph (b)(2) provides special rules for certain dividends paid on stock that is traded on a U.S. established market. For these dividends, the withholding agent could grant treaty benefits based upon the same documentation procedures as are proposed to apply to portfolio interest on registered obligations (e.g., no TIN is required on a beneficial owner withholding certificate). See proposed 1.871-14(c)(2). Paragraph (b)(3) provides that the competent authorities may agree to different certification procedures under an applicable tax treaty. Paragraph (b)(4) clarifies the manner in which beneficial owners could claim benefits under a tax treaty where foreign law principles apply to identify the beneficial owner of a payment made to a foreign entity. Under proposed 1.1441-1(c)(6)(ii)(B), the beneficial owner would be determined based upon the laws of the country whose tax treaty with the United States is invoked to claim a reduced rate of tax. These procedures are intended to apply in a reciprocal manner. Therefore, paragraph (b)(4)(iv) provides that, if the IRS determined that a treaty partner is not identifying beneficial owners in a similar manner and, as a result, denies benefits under an otherwise applicable treaty to an entity organized in the United States or to interest holders residing in the United States, the benefits of these procedures could be suspended for entities organized, or interest holders residing, in that country until the competent authorities reached a reciprocal agreement on the application of treaty benefits in such cases. Suspension of benefits under this provision would be effective on a prospective basis only. Paragraph (c) states the rules regarding certification of a TIN by the IRS. These procedures would apply to payments for which a Form W-8 is furnished with a TIN. They are directed to beneficial owners (or their agents) and are designed to ensure that the IRS can verify the beneficial owner's status as a resident of a treaty country based upon the information return later filed by the withholding agent on Form 1042-S. If the IRS determined that the TIN does not support the beneficial owner's claim of residence in the treaty country, it would so notify the withholding agent. The IRS could waive the requirement that a taxpayer certify its TIN with the IRS when it implements procedures to verify a taxpayer's status directly with a foreign competent authority. The IRS could also certify a TIN based upon representations made by a qualified intermediary. The IRS would certify a TIN based upon a certificate of residence or documentary evidence. Paragraph (c)(3) describes a certificate of residence as a certificate issued by the tax authorities of the treaty country certifying that the taxpayer files income tax returns as a resident of that country and is current on his filing obligations. Paragraph (c)(4) describes documentary evidence as a document that is no more than three- years old and sufficiently identifies the person and the residence of that person in the treaty country. Paragraph (e) incorporates the provisions in existing regulations that condition the benefit of the reduced five- percent rate on related party dividends to an advance ruling from the IRS determining that the parent-subsidiary relationship is not established or maintained with the principal purpose to secure the reduced rate. The ruling would be required only if so required under an applicable treaty. It must be requested prior to the payment of the dividend. While a request made after payment would not disqualify the dividend from the benefit of the reduced rate if a favorable ruling is later obtained, the withholding agent would nevertheless withhold. Failure to do so would subject the withholding agent to an interest charge under section 6601. Also, the withholding agent would be liable for the tax and related penalties if a favorable ruling were not issued. See proposed 1.1441-1(f)(5) regarding the consequences to the withholding agent when it does not withhold the full amount even though it does not hold the required documentation prior to payment. The regulations are proposed to be effective for payments made after December 31, 1997. However, certificates issued on or before the date that is 60 days after these regulations are published as final regulations will continue to be valid until they expire, based upon existing regulations. In addition, because no documentation is currently required for dividends, the regulations propose a transition rule that would allow dividends paid on publicly-traded stock to accounts in existence on or before a date that is 60 days after these regulations are published as final regulations to continue to be subject to the current address rule until December 31, 1999. 1.1441-7 General provisions relating to withholding agents. This section modifies 1.1441-7 of the existing regulations dealing with withholding agents. Paragraph (a) clarifies that a withholding agent is any person that has the control, receipt, custody, disposal, or payment of an item of income and not merely a person that pays or causes an amount to be paid. If there are several withholding agents with respect to one payment, only one tax should be withheld and only one return should be filed. Paragraph (b) restates the "actual knowledge or reason to know" standards applicable to a withholding agent as in effect under current law. The IRS and Treasury are aware that the application of a "reason to know" standard without limitation may be impractical in the case of financial institutions handling large volumes of transactions for many customers. Therefore, the regulations propose to limit the due diligence expected from withholding agents paying portfolio interest, deposit interest, or dividends on publicly traded stock. Under paragraph (b)(2)(ii), a withholding agent's due diligence regarding a beneficial owner certificate would be limited to examining the address stated on the certificate. If this information indicated that the beneficial owner might be a U.S. taxpayer or conflicted with information that the withholding agent otherwise had in its records for that account, the withholding agent would have to obtain specified documentation to verify the beneficial owner's claim of foreign status or residence. Paragraph (b)(3) proposes to incorporate rules consistent with those under section 3406 dealing with universal accounts. Therefore, if the withholding agent used a system of universal accounts, it would be required to use that system to determine the scope of its due diligence under the regulations. Paragraph (c) restates and expands the provisions in 1.1441-7(b) of the existing regulations pertaining to authorized agents and adds provisions regarding an authorized foreign agent. This new concept is intended to facilitate compliance by U.S. withholding agents that make payments through their agent abroad. By imputing the acts of a foreign agent to a U.S. withholding agent, the required documentation could remain with the foreign agent and would not have to be provided to the U.S. withholding agent. However, the regulations require that the agent be "authorized" in order to insure that the IRS can verify the foreign agent's compliance with the withholding procedures, which, in turn, would determine whether the U.S. withholding agent has itself complied. See proposed 1.1461-1(b)(2)(iii) and (c)(4)(iii) regarding corresponding filing requirements. Section 1.1441-7(b)(3) of the existing regulations is proposed to be deleted, pending comments on the continuing necessity of providing guidance on tax-free covenant bonds. Paragraph (d) restates without changes the provisions in 1.1441-7(a)(2) of the existing regulations dealing with the United States as a withholding agent. Paragraph (e) restates without changes the provisions in 1.1441-3(c)(2) of the existing regulations dealing with assumed obligations. Section 1.1441- 7(c) of existing regulations dealing with payments other than money would be deleted and restated in proposed 1.1441-3(f) dealing with withholding procedures for payments in kind. 1.1441-8T Foreign government and international organization exemption from withholding This section exempts from withholding certain types of income excluded from gross income under section 892 that are paid to foreign governments and international organizations. Revisions are proposed to paragraph (b) of the existing regulations to conform the certification procedures to the proposed withholding certificate procedures described in proposed 1.1441-1(e)(1)(i). Therefore, Form 8709 would be replaced by the standard withholding certificate (Form W-8), meaning that foreign governments and international organizations would be relieved from the requirement to furnish annual certification. A foreign government or an international organization would not be required to furnish a tax identifying number. However, if it did, the certificate would be valid indefinitely for income required to be reported on Form 1042 or for which the withholding agent reports the TIN to the IRS. See proposed 1.1441- 1(e)(4)(ii). 1.1441-9 Exemption from withholding on exempt income of foreign tax-exempt corporations and foreign private foundations This new section provides that income paid to a foreign organization described in section 501(c) would not be subject to withholding under section 1442 if the income were not subject to tax as unrelated business income under section 511 and the entity were exempt from tax under section 501(a). For purposes of granting a reduced rate, a withholding agent could rely on a withholding certificate satisfying the requirements of proposed 1.1441-1(e)(1). A beneficial owner certificate must include a taxpayer identifying number and must certify that it will not be subject to tax under section 511, and that the IRS has issued a determination letter. In the absence of such a letter, the beneficial owner should provide an opinion of counsel stating that the organization meets the conditions for a tax exemption under section 501(c). Since the affidavit requirement for foreign foundations is proposed to be eliminated, foreign tax- exempt organizations would be subject to the same documentation requirements as would apply to foreign foundations under proposed 1.1443-1(b). 1.1461-1 Deposit and return of tax withheld The provisions in 1.1461-1 of the existing regulations pertaining to ownership certificates for bond interest are proposed to be deleted. Interest on bonds described in this section would be subject to the regular procedures provided in the regulations under sections 1441 and 1443. The special rules would no longer be necessary in view of the substitute procedures provided in the proposed regulations. Comments are solicited as to the continuing need for provisions governing tax-free covenant bonds. Section 1.1461-1 contains proposed procedures for withholding agents to pay the withheld tax and file the annual income tax return and information returns with respect to payments of income subject to section 1441 withholding. Paragraph (a) restates 1.1461-3 of the existing regulations regarding the payment of amounts withheld. The provisions regarding pre-1973 years are proposed to be deleted as obsolete. Paragraph (b) revises 1.1461-2(b) of the existing regulations on the filing of returns of amounts withheld. Paragraph (b)(1) clarifies that the Form 1042 must include the total amount of income paid during the preceding calendar year. Also, the filing date is changed from March 15 to February 28 in order to conform with the filing dates for Form 1099. The proposed regulations would eliminate the requirement to attach the Forms 1042-S to the return. Instead, the Forms 1042-S would have to be filed separately with a transmittal form. See paragraph (c)(1)(i). Paragraph (b)(2) describes applicable return requirements for multiple withholding agents. Generally, as under current rules, only one Form 1042 would have to be filed for an item of income. Exceptions to this general rule are provided for payments to qualified intermediaries where the U.S. withholding agent would have to file a return, regardless of whether the qualified intermediary assumed primary withholding responsibility for the payment and regardless of whether the qualified intermediary were also required to file a return under its agreement with the IRS. Another exception would be provided for payments to an authorized foreign agent. In that case, the U.S. withholding agent and the authorized foreign agent would each be required to make a return. The return of the withholding agent would report amounts paid to the authorized foreign agent. The return of the authorized foreign agent would report amounts paid to the beneficial owner or its intermediaries. Paragraph (b)(3) requires that changes to the originally filed Form 1042 be filed on an amended return on a new Form 1042X. This change is designed to facilitate the processing of returns by the IRS and would be consistent with the procedures for filing other amended returns. Paragraph (c) revises the provisions in 1.1461-2(c) of the existing regulations regarding the filing of information returns on Form 1042-S. As under existing regulations, any income subject to withholding must be reported on an information return on Form 1042-S and a return would be due irrespective of the fact that no tax was withheld (e.g., the beneficial owner claimed an exemption or the withholding agent failed to withhold). The provisions of 1.1461-2(c)(3) of the existing regulations requiring that the name of the beneficial owner be reported on Form 1042-S would be retained. However, more detailed guidance is provided regarding reporting of income paid to intermediaries. See paragraph (c)(4) below dealing with multiple agents. The proposed regulations eliminate as unnecessary the requirements under existing regulations to attach any certificate, form, or statement to the return. Paragraph (c)(1)(ii) proposes new rules pertaining to joint owners. A single Form 1042-S may be provided to one of the joint owners. In that case, the withholding agent should provide the Form 1042-S to the joint owner whose status determines the tax withheld. Further, any one owner may request a separate Form 1042-S, but the total amounts of income and tax reported paid and withheld on all the forms 1042-S may not exceed the total amount of income actually paid and tax actually withheld. Paragraph (c)(2) replaces 1.1461-2(c)(1) of the existing regulations and states that the items of income that are subject to reporting on Form 1042-S are those items of income subject to withholding, income from a notional principal contract, and amounts described in sections 6041 through 6050P that are paid to a foreign person and are not exempt from reporting under those sections or the corresponding regulations. This provision is intended to standardize reports of payments to foreign persons to the IRS and should simplify compliance by withholding agents. Paragraph (c)(2)(ii) lists the exceptions to reporting on a Form 1042-S. As under current regulations, items of income exempt from reporting include portfolio interest on a bearer obligation and original issue discount on short-term obligations. An explicit exception for reporting on deposits described in section 871(i)(2)(A) would be added. However, bank deposit interest that is subject to withholding under section 1441 (because, for example, documentation was not furnished but payments were made to a foreign address; see special grace period provisions under proposed 1.1441-1(f)(2)(i)(B)) would have to be reported. Also, interest on bank deposit interest paid to Canadian residents would have to be reported based upon provisions under final regulations under section 6049 published in the Rules and Regulations section of this issue of the Federal Register. In addition to the items excepted from reporting under existing 1.1461-1(c)(1), other items are added that prevent duplicative reporting. Finally, the proposed regulations would clarify that to the extent group-term life insurance and other items of income required to be reported pursuant to the provisions in 1.6041-2 and 1.6052-1 can be associated with wages required to be reported on a Form W-2, then such items may also be reported on a Form W-2 instead of a Form 1042-S. Paragraph (c)(3) restates the provisions of 1.1461-2(c)(2) of the existing regulations regarding the types of information to be included on Form 1042-S. It clarifies that the information could be based on the information furnished by or on behalf of the beneficial owner, as corrected based on the withholding agent's actual knowledge if necessary. In addition, the Form 1042-S would have to include the TIN of the beneficial owner if required to be shown on the withholding certificate. Also, a beneficial owner's TIN that the beneficial owner is not required to furnish but which is actually known to the withholding agent would have to be reported on Form 1042-S. Paragraph (c)(4) is added to provide rules for filing Form 1042-S where there are multiple withholding agents. Generally, as with the Form 1042, only one Form 1042-S must be filed with respect to an item of income. Current rules requiring the withholding agent to identify the beneficial owners of payments made to agents, nominees, or representatives, if known, would be eliminated for payments to an intermediary that either claims to be a qualified intermediary or is an authorized foreign agent. In all other cases, the information on a Form 1042-S must be reported for each beneficial owner. This would modify 1.1461- 2(c)(3)(i) of the existing regulations providing that beneficial owner information be reported only if known. For payments made to a person claiming to be a qualified intermediary or is an authorized foreign agent, each withholding agent in the chain would be permitted to report on one Form 1042-S reflecting the payment made to the next qualified intermediary or authorized foreign agent in the chain. In the case of a payment to an authorized foreign agent, however, the withholding agent would be excused from the requirement to report the beneficial owner information only to the extent that the authorized foreign agent actually complies with the filing requirements under paragraph (c)(4)(iv). Paragraph (c)(5) is added to cross-reference the magnetic media filing requirements applicable to Forms 1042-S under 1.6011-1(c). Generally, a filer of 250 or more Forms 1042-S must file on magnetic media, unless a waiver is granted. Paragraph (d) would allow a withholding agent to provide a list of taxpayer identifying numbers furnished by or on behalf of beneficial owners to the extent the agent has relied upon such number to grant a reduced rate of withholding tax. This is a special filing procedure under which the reporting of the associated amount of income would not be have to be reported. Finally, paragraph (e) clarifies the provisions regarding indemnification of withholding agents. Section 1461 indemnifies a withholding agent from the claim of any person for the amount of any payments made in accordance with the provisions of chapter 3 of the Code. Some commentators and withholding agents have expressed concerns that section 1461 could be interpreted to limit indemnification to amounts that were required to be withheld. The proposed regulations clarify that a withholding agent that withheld based upon a reasonable belief that such amount was withheld in accordance with chapter 3 of the Code would be treated for purposes of section 1461 as having withheld in accordance with chapter 3 (even though it is later determined that the withholding agent's application of the rules was incorrect). Additionally, a withholding agent would be indemnified against any claim of any person for the amount of any withholding made in accordance with the grace period provisions under proposed 1.1441-1(f)(2)(ii). Paragraph (f) restates without changes 1.1461-2(f) of the existing regulations dealing with amounts that may not constitute gross income, in whole or in part. This rule would apply to amounts subject to withholding under proposed 1.1441-3(b)(1) or 1.1441-3(d). Paragraph (g) is added to provide guidance on requests of extensions of time to file Form 1042, Forms 1042-S, and to furnish Forms 1042-S to recipients. The rules with respect to such requests would parallel those under section 6081. A change would be made, however, to the form to be used for making a request for an extension of time to file Forms 1042-S. Currently, these requests are made on Form 2758; the proposed regulations require such a request to be made on Form 8809. 1.1461-2 Adjustments for overwithholding and underwithholding of tax This section has also been renumbered and, although the rules are the same as those of the current regulations in 1.1461-4, it has been redrafted to simplify the language and to update the examples. Specifically, the rule for reimbursements remains the same, but the rule in proposed 1.1461-4(b) with respect to the adjustment of tax payments or deposits is now titled "set-offs," which more accurately describes the adjustment process. 1.1462-1 Withheld tax as credit to recipient of income Section 1.1462-1(a) is clarified by stating that the amount of income from which the tax is required to be withheld includes the amount calculated under the gross-up formula in proposed 1.1441-3(e)(3). 1.1463-1 Tax paid by recipient of income This section provides that if the income tax for which the beneficial owner and the withholding agent have joint liability under section 1461 has been paid by either one of them, the IRS may not collect from the other, regardless of the original liability for the tax. This section has been changed to reflect the 1989 statutory amendment (Public Law 101, 239, Sec. 7743(a)) that provides for the imposition of interest and penalties on the party that fails to withhold. Prior proposed regulations under section 871 and chapter 3 of the Code In 1976, proposed regulations were published relating primarily to withholding and original issue discount. In 1984, proposed regulations were published relating primarily to claims of benefits under income tax treaties. These proposed regulations were contained in project number LR-2043, published on July 12, 1976 (41 FR 28517) and project number LR-271-83, published on September 10, 1984 (49 FR 35511). Both proposed regulations are being withdrawn on April 22, 1996. Regulations under sections 6041, 6041A, 6042, 6045, 6049, and 6050N These proposed regulations provide exceptions from information reporting and backup withholding under sections 3406, 6041, 6041A, 6042, 6045, 6049, and 6050N for payments to foreign beneficial owners and for income paid by certain foreign payors or middlemen. Generally the regulations clarify and simplify the regulations under sections 3406, 6041, 6042, 6045, and 6049 that were proposed on February 29, 1988, at 53 FR 5991 (1988) (the 1988 proposed regulations). In addition, the regulations under these sections are proposed to be revised. The regulations also would add new exceptions from reporting (including the addition of middleman rules) to sections 6041, 6041A, and 6050N. These proposed revisions and new exceptions from reporting parallel the exceptions under these proposed regulations under sections 6042 and 6049. Further, parallel provisions are found in each section for: definitions of terms (such as non-U.S. payor or non-U.S. middleman); presumptions as to whether a payee is U.S. or foreign where the required documentation is lacking, incorrect, or unreliable; rules for payments to joint owners; and rules for converting into U.S. dollars amounts paid in foreign currency. In addition, the proposed regulations specify that the standard of knowledge applicable to payors and middlemen would be actual knowledge. Thus, the "reason to know" standard would not apply for purposes of the reporting provisions. The subparagraphs under proposed 1.6042-3(a) (dealing with the definition of dividends for purposes of information reporting under that section) are proposed to be restated with changes in drafting only. The substantive rules in that paragraph would be unchanged and are, therefore, not reproposed. Also, 1.6042- 3(b)(3) and (4) of the 1988 proposed regulations (relating to capital gain dividends from regulated investment companies and payments to exempt recipients) would be redesignated as subparagraphs (vii) and (viii), respectively, of proposed 1.6042-3(b)(1). These rules are not reproposed. This document also proposes to revise the definition of an exempt recipient in the case of a corporation. Section 1.6049- 4(c)(1)(ii)(A) of the 1988 proposed regulations provides that a person would be treated as a corporation, and therefore as an exempt recipient not subject to information reporting, if the name of the payee or a corporate resolution provided to the payor clearly indicates corporate status (the eyeball test). These proposed regulations retain the eyeball test of the 1988 proposed regulations for payments (i) other than interest, dividends and broker proceeds paid to accounts established after a date that is 60 days after the date that these regulations are published as final regulations in the Federal Register and (2) other than interest, dividends and broker proceeds that are not paid to a person to whom the payor has an account relationship. For interest and dividends paid to a new account, the entity would be required to provide either a corporate resolution or similar document that clearly indicates corporate status, a Form W-9 with an EIN, or a Form W-8. For interest and dividends paid where an account relationship does not exist, the payor may continue to rely on the eyeball test if the payor also has a mailing address of the payee in the United States. The IRS and Treasury understand that financial institutions routinely request a corporate resolution when opening accounts for entities. Therefore, requiring such a document would not significantly increase burden and would improve compliance. This proposed rule is reflected in paragraph (c)(1)(ii)(A). In addition, the list of international organizations under paragraph (c)(1)(ii)(G) is proposed to be eliminated as a simplification measure. In addition, the 1988 proposed regulations under 1.6049-5 are proposed to be substantially redrafted, although without significant substantive changes. Paragraph (b)(6) provides an exception from reporting for amounts from sources outside the United States paid outside the United States by a non-U.S. payor or non-U.S. middleman. This provision duplicates that found in the 1988 proposed regulations at proposed 1.6049-5(b)(8) and 1.6049-5(d)(3)(i), (ii), and the foreign source portion of proposed 1.6049-5(d)(3)(iii). Paragraph (b)(7) (which corresponds to 1.6049-5(c)(6) of the 1988 proposed regulations) would except portfolio interest paid on bearer obligations if paid outside the United States. In these proposed regulations, this exception would not apply where a U.S. middleman acts as a custodian, nominee, or other agent of the payee and collects the amount for, or on behalf of, the payee, whether or not the middleman is also acting as agent of the payor. Paragraph (b)(8) (which corresponds to 1.6049- 5(c)(6) of the 1988 proposed regulations) provides an exception for portfolio interest paid on registered obligations. The provisions of 1.6049-5(b)(9) of the 1988 proposed regulations, which excepted from reporting amounts paid by an international organization (or its agent) on an obligation issued by the international organization are proposed to be incorporated in paragraph (b)(9) of these new proposed regulations. These rules are not reproposed. Paragraph (b)(10) (which corresponds to 1.6049-5(c)(5)(ii) of the 1988 proposed regulations) provides an exception for certain short-term foreign targeted obligations. Paragraph (b)(11) (which corresponds to 1.6049-5(e)(1) (the parenthetical language) and 1.6049-5(e)(2)(i) and (ii) of the proposed 1988 proposed regulations) provides an exception for certain foreign- targeted obligations issued by persons engaged in the banking business. Although the 1988 proposed regulations limited the exceptions at 1.6049-5(e)(2)(i) and (ii) to Canadians, these proposed regulations expand the scope of the exceptions to apply to all beneficial owners. However, as under the 1988 proposed regulations, the exception would not apply where a U.S. middleman acts as an agent of the payee. Paragraph (b)(12) (which corresponds to 1.6049-5(b)(7) and (c)(1), (2), and (3) of the 1988 proposed regulations) would except any amount of U.S. source interest subject to withholding under section 1441. Such interest would be required to be reported on a Form 1042-S under proposed 1.1461-1(c). This exception would replace 1.6049-5(b)(1)(vi), (b)(1)(vi)(B)(1) and (b)(2)(iv) of the existing regulations, which provide an exception for reporting for bank deposit interest paid to a foreign person, but only if a Form W-8 (or documentary evidence in appropriate cases) is provided to the payor. The withholding certificate requirement for bank deposit interest is now found at proposed 1.1441-2(d)(2). Paragraph (b)(13) provides a new exception for assets blocked pursuant to an executive order. Paragraph (b)(14) provides the general rule for exempting any other amount of otherwise reportable interest based on specified documentation furnished to the payor or middleman. The standards of documentation are described in paragraph (c) and would generally parallel the documentation standards proposed for purposes of claiming a reduced rate of withholding under section 1441. Therefore, the payor could rely on a beneficial owner or intermediary withholding certificate described in proposed 1.1441-1(e)(1)(i) provided it complied with the procedures described in proposed 1.1441-1(e)(4)(iv) and (v) (dealing with on-line confirmation and notification procedures). No taxpayer identifying number is required to be stated on a beneficial owner withholding certificate. These proposed regulations retain the permission under current regulations to furnish documentary evidence instead of a certificate for payments made to an off- shore account. The on-shore and off-shore distinction is similar to that found in the 1988 proposed regulations. The provisions of the 1988 proposed regulations contained in paragraphs (d), (e), (f), (g), (h), (i), and (l) are withdrawn. Proposed paragraphs (j) (relating to payments outside the United States) and (k) (dealing with original issue discount) of the 1988 proposed regulations would be renumbered as paragraphs (e) and (f), respectively. The provisions in these paragraphs are not restated. 31.3401(a)(6)-1(e) Income exempt from income tax This section is amended to reflect the new certification procedures under proposed 1.1441-1(e). Backup withholding regulations under section 3406 Several changes to the backup withholding regulations under section 3406 are proposed to conform those regulations to the proposed information reporting and chapter 3 withholding regulations. Section 31.3406(d)-3 (c) would be amended to extend to 90 days the current 30-day grace period applicable to readily tradeable instruments acquired directly from a payor if the payment were made to a person for whom indicia of foreign status existed, as described in proposed 1.1441-1(f)(2)(i)(B). Section 31.3406(g)-1(e) would revise the proposed regulations contained in project number IA-224-82 published in the Federal Register on September 27, 1990 (55 FR 39427) to restate the principles that no backup withholding applies under section 3406 to reportable payments made outside the United States even though documentary evidence of non-U.S. status may be required in order to exempt the payment from 1099 reporting, unless the payor has actual knowledge that the payee is a United States person. The regulations propose to add an exception for notional principal contract payments that are made outside the United States. Amendments to 31.6413(a)-3 The regulations under 31.6413(a)-3 are proposed to be amended in order to allow payers to refund backup withholding in certain circumstances. Those regulations currently prohibit a refund of backup withholding except when erroneous withholding has occurred. It is proposed to expand the definition of erroneous withholding to a situation where the withholding agent backup withholds because the payee fails to provide sufficient documentation as required under section 3406 and 1441 and the regulations under these sections. Where an appropriate withholding certificate is later provided, the withholding agent could treat the earlier withholding as erroneous withholding. However, the withholding certificate should to be received prior to the end of the calendar year in which the payment is made and prior to the time the payor furnishes a Form 1099 to the payee with respect to the payment for which the withholding erroneously occurred. The amount refunded would be the amount actually withheld less the amount required to be withheld, if any, under chapter 3 of the Code. Removal of Q&A regulations The existing regulations under part 35a are proposed to be removed in order to reflect the proposed revisions in this document. Amendments to 301.6109-1 Amendments to the regulations under this section are currently pending to authorize the IRS to issue taxpayer identifying numbers to certain foreign persons and to require a taxpayer to state a TIN on any tax return filed (other than an information return). These regulations are proposed to be further amended to require that a TIN be stated on withholding certificates as may be required under the regulations proposed under sections 1441, 1442, and 1443. Amendments to 301.6114-1 The regulations under section