[Federal Register Volume 60, Number 245 (Thursday, December 21, 1995)]
[Rules and Regulations]
[Pages 66105-66134]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-30733]



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DEPARTMENT OF THE TREASURY
26 CFR Parts 1, 31, 35a, 301, and 602

[TD 8637]
RIN 1545-AT76


Backup Withholding, Statement Mailing Requirements, and Due 
Diligence

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document provides final rules on backup withholding under 
sections 3406(a)(1) (A), (C), and (D) of the Internal Revenue Code of 
1986 (Code) when a payee fails to provide a taxpayer identification 
number in the required manner to a person required to make an 
information return, when a payee is subject to notified payee 

[[Page 66106]]
underreporting, or when a payee fails to certify, under penalties of 
perjury, that the payee is not subject to backup withholding due to 
notified payee underreporting.
    This document also provides final rules on the manner for providing 
a statement to a payee under sections 6042(c), 6044(e), 6049(c), and 
6050N(b) of the Code.
    This document also contains temporary regulations on the effective 
date of Secs. 35a.9999-1 through 35a.9999-5, Temporary Employment Tax 
Regulations under the Interest and Dividend Tax Compliance Act of 1983. 
The text of these temporary regulations also serves as the text of the 
proposed regulations set forth in the notice of proposed rulemaking on 
this subject in the Proposed Rules section of this issue of the Federal 
Register.

DATES: These regulations are effective December 21, 1995. These 
regulations are applicable to transactions occurring after December 31, 
1996.

FOR FURTHER INFORMATION CONTACT: Renay France of the Office of 
Assistant Chief Counsel (Income Tax and Accounting) with respect to 
domestic transactions, 202-622-4910 (not a toll-free number); and 
Teresa Burridge Hughes of the Office of Assistant Chief Counsel 
(International) with respect to international transactions, 202-622-
3880 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this final regulation 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the requirements of the Paperwork Reduction Act (44 
U.S.C. 3507) under control number 1545-0112. Responses to this 
collection of information are mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number.
    The estimated annual burden per respondent/recordkeeper is 
approximately 1 hour, depending on individual circumstances.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be directed to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, 
Washington, DC 20224, and to the Office of Management and Budget, 
Attention: Desk Officer for the Department of the Treasury, Office of 
Information and Regulatory Affairs, Washington, DC 20503.
    Books or records relating to this collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On October 4, 1983, the Federal Register published Temporary 
Employment Tax Regulations under the Interest and Dividend Tax 
Compliance Act of 1983 (26 CFR part 35a) under sections 3406 and 
6676(b) of the Internal Revenue Code of 1954 (26 CFR part 35a.9999-1; 
TD 7916 (48 FR 45362), as amended on November 25, 1983, by TD 7922 (48 
FR 53111), on November 23, 1987, by TD 8163 (52 FR 44861), and on April 
11, 1989, by TD 8248 (54 FR 14341). Additional temporary regulations 
were published in the Federal Register on November 25, 1983 (26 CFR 
part 35a.9999-2; TD 7922 (48 FR 53106), as amended on December 20, 
1983, by TD 7929 (48 FR 56342), on March 13, 1984, by TD 7922 (49 FR 
9417), on November 23, 1987, by TD 8163, and on April 11, 1989, by TD 
8248 (54 FR 14341)), on December 20, 1983 (26 CFR part 35a.9999-3; TD 
7929 (48 FR 56332), as amended on January 3, 1984, by TD 7933 (49 FR 
63), on August 22, 1984, by TD 7966 (49 FR 33236), on November 23, 
1987, by TD 8163 (52 FR 44861), and on April 11, 1989, by TD 8248 (54 
FR 14341)), on February 28, 1984 (26 CFR part 35a.9999-3A; TD 7946 (49 
FR 7227)), on August 22, 1984 (26 CFR part 35a.9999-4T, TD 7966 (49 FR 
33237), as amended on August 29, 1984, by TD 7972 (49 FR 34340); and 26 
CFR part 35a.9999-5, TD 7967 (49 FR 33240), as amended on September 19, 
1984, by TD 7973 (49 FR 36645), on August 20, 1985, by TD 8046 (50 FR 
33526), on April 3, 1986, by TD 8046 (51 FR 11447), on December 19, 
1986, by TD 8110 (51 FR 45453), and on May 19, 1988, by TD 8202 (53 FR 
17927)), on April 23, 1987 (26 CFR part 35a.3406-2; TD 8137 (52 FR 
13430)), and on November 23, 1987 (26 CFR part 35a.3406-1; TD 8163 (52 
FR 44861), as amended on April 11, 1989, by TD 8248 (54 FR 14341)). 
Those regulations were published primarily to provide guidance under 
the Interest and Dividend Tax Compliance Act of 1983.
    Proposed regulations on backup withholding, the statement mailing 
requirements, and due diligence were published in the Federal Register 
on September 27, 1990, 55 FR 39427. Those regulations were proposed 
under regulations file number IA-224-82 and RIN 1545-AE20, which 
numbers were closed in error. These final regulations are issued under 
regulations file number IA-31-95 and RIN 1545-AT76.
    A public hearing on the proposed regulations was held on March 4, 
1991. The public submitted written comments on the proposed 
regulations. After consideration of those comments, the proposed 
regulations are adopted as revised by this Treasury decision.

Explanation of Provisions

I. Overview

    The proposed regulations contain rules on the requirement to backup 
withhold, which section 3406 imposes in four situations. First, backup 
withholding under section 3406(a)(1)(A) applies if a payee fails to 
provide a taxpayer identification number (TIN) in the required manner 
(the A trigger or certification). Second, backup withholding under 
section 3406(a)(1)(B) applies if the Service or a broker notifies a 
payor that a payee provided an incorrect TIN (the B trigger). Third, 
backup withholding under section 3406(a)(1)(C) applies if the Service 
or a broker notifies a payor that a payee is subject to notified payee 
underreporting, i.e., the payee has failed to report and pay tax on 
reportable interest and dividends (the C trigger). Fourth, backup 
withholding under section 3406(a)(1)(D) applies if a payee fails to 
certify, when required, that the payee is not subject to backup 
withholding under section 3406(a)(1)(C) (the D trigger).
    Because the IRS published final regulations on the B trigger as a 
separate project (TD 8409) in 1992, the final regulations in this 
document address only the other three triggers, sections 3406(a)(1) 
(A), (C), and (D). The final regulations on these triggers considerably 
shorten as well as simplify the proposed regulations. In addition, the 
final regulations contain several modifications to the proposed 
regulations relating to grantor trusts, S corporations, reportable 
payments, and certain foreign provisions.

II. Changes Regarding Grantor Trusts, S Corporations, Reportable 
Payments, and Certain Foreign Provisions

    A. Grantor trusts--proposed Sec. 31.3406(a)-2. The proposed 
regulations provide that a grantor trust with ten or fewer grantors is 
not a payor under section 3406 and, as a result, has no obligation to 
withhold under section 3406 on reportable payments flowing through the 
trust and includible in the gross income of its grantors. However, a 
grantor trust with eleven or more grantors is a payor and must withhold 


[[Page 66107]]
under section 3406 on reportable payments to its grantors who are 
subject to such withholding.
    Recently, the IRS issued proposed regulations under section 671 on 
the methods of reporting by grantor trusts. These proposed regulations 
provide two regimes for reporting, one for a grantor trust that is 
owned (or treated as owned) by one grantor and another for a grantor 
trust that is owned by two or more grantors. To avoid confusion and 
thereby promote simplification, the final backup withholding 
regulations are conformed to these regimes. Accordingly, under these 
final regulations a grantor trust with two or more grantors is 
considered a payor and must withhold on payments to its grantors who 
are subject to backup withholding. For purposes of determining the 
number of grantors, a husband and wife filing a joint return are 
considered one grantor. See Sec. 31.3406(a)-2(b)(4).
    B. S corporations--proposed Sec. 31.3406(a)-2(c)(3). Under an 
exception in the proposed regulations defining payors, a partnership 
making a payment of a distributive share to a partner is not considered 
a payor. The exception does not include S corporations. Because the tax 
treatment of both entities is similar, the final regulations provide 
that an S corporation making a similar distribution is not a payor 
under section 3406. See Sec. 31.3406(a)-2(c)(3).
    C. Transferred short-term obligations--proposed Sec. 31.3406(b)(2)-
2. The proposed regulations provide that a subsequent holder of a 
short-term obligation with original issue discount may establish the 
purchase price at which the subsequent holder purchased the obligation. 
That purchase price is then treated as the original issue price for 
purposes of computing the amount of original issue discount subject to 
backup withholding. To reduce the paperwork of issuers and payors of 
these obligations, the final regulations provide that a payor may 
disregard the subsequent holder's purchase price if the payor's 
computer or recordkeeping system is not able to accept that price 
without substantial manual intervention. See Sec. 31.3406(b)(2)-
2(c)(1)(ii).
    D. Foreign provisions. The proposed regulations contained several 
provisions on international transactions that are not included in the 
final regulations. For those international provisions relating to 
section 3406, the temporary regulations under Sec. 35a.9999 remain in 
effect.

III. The C Trigger (Payee Underreporting)

    A. Identifying the account subject to the C trigger--proposed 
Sec. 31.3406(c)-1(b)(3) (i) and (iv). The proposed regulations provide 
that a payor must withhold under section 3406(a)(1)(C) on reportable 
interest or dividend payments to all existing accounts of a payee that 
the payor can identify exercising reasonable care. Commentators 
suggested several modifications to or clarifications of the reasonable 
care standard. For example, some commentators suggested that the 
procedures for locating and identifying an account of a payee subject 
to the C trigger should more closely resemble the procedures for 
identifying an account subject to the B trigger. In response to this 
comment, the final regulations modify the procedures for identifying 
accounts subject to the C trigger, and thus require a payor to identify 
those accounts by identifying accounts with the same TIN as the one 
provided in the notice from the IRS to the payor that advises the payor 
to commence withholding on accounts of a payee.
    Commentators also informed the IRS that some computer systems use a 
universal account number that retrieves all accounts of a payee with 
that payor. In light of this information, the final regulations require 
payors with such systems to identify all accounts that can be so 
retrieved.
    Some commentators also addressed the requirement under the proposed 
regulations that a payor search for accounts of a payee on the computer 
or other recordkeeping system for the region, division, or branch that 
serves the geographic area in which the payee's mailing address is 
located. These commentators questioned whether payors must search every 
such computer or record system. The final regulations clarify that a 
payor need not search a computer or other recordkeeping system if it is 
highly unlikely that the system contains an account of the payee that 
should be identified as one subject to the C trigger. See 
Sec. 31.3406(c)-1(c)(3)(ii).
    B. Newly opened accounts--proposed Sec. 31.3406(c)-1(b)(3)(ii). 
Under the proposed regulations, if a payee subject to the C trigger has 
one account with a payor and subsequently opens another account, the 
payor may not rely on the subsequent Form W-9 on which the payee 
certifies that the payee is not subject to the C trigger, but only if 
the payor discovers while processing the Form W-9 or administering the 
account that the Form W-9 is false because the IRS previously notified 
the payor to withhold on the payee under the C trigger. Commentators 
argued that this discovery standard was unclear and potentially 
burdensome. As a result, the final regulations clarify when a payor may 
not rely on a Form W-9 provided by the payee.
    Under the final regulations, a payor has knowledge that a payee 
opening a new account with the payor is subject to withholding under 
section 3406(a)(1)(C), and thus must commence backup withholding on 
reportable interest and dividend payments to the new account, only if 
(1) the employee or individual agent of the payor receiving the Form W-
9 knows at the time the payee opens the account that the payee's 
statement under section 3406(a)(1)(D) is not true; (2) at the time the 
payor processes the Form W-9 or in administering the account to which 
it relates, the payor discovers that the payee is currently subject to 
withholding under section 3406(a)(1)(C) on a pre-existing account with 
the payor; (3) the payor uses a single Form W-9 for multiple accounts 
of the payee; or (4) the payor uses a universal identifier to associate 
all of the payee's accounts with the payor and other accounts under 
that universal identifier have been identified as subject to 
withholding under section 3406(a)(1)(C). See Sec. 31.3406(c)-
1(c)(3)(iii).
    C. Including certain dates in the notice that the payor must send 
to a payee--proposed Sec. 31.3406(c)-1(c)(2) (ii) and (iii). A 
commentator objected to the proposed rule requiring a payor to include 
the following dates in the notice informing a payee that backup 
withholding for the C trigger has begun or will begin: (1) the last 
date before the payor must commence backup withholding, and (2) the 
date the payor received the notice from the IRS. The significant date 
for the payee is the date backup withholding begins on the payee's 
account. Therefore, to ease payors' administrative costs, the final 
regulations require the payor to include only the date the payor 
started (or plans to start) backup withholding in the notice to the 
payee. See Sec. 31.3406(c)-1(d)(2)(iii).
    D. Monitoring accounts subject to withholding--proposed 
Sec. 31.3406(c)-1(e). Commentators asked the IRS to address how long a 
payor must monitor an account identified as one subject to the C 
trigger, if that account later becomes dormant. The final regulations 
provide that a payor is not required to backup withhold on dormant 
accounts. In this connection, backup withholding terminates no later 
than the close of the third calendar year ending after the later 

[[Page 66108]]
of (1) the date that the payor pays the last reportable payment to that 
account, or (2) the date that the payor received a notice from the IRS 
to impose the C trigger on that account. See Sec. 31.3406(c)-1(e)(3).

IV. Special Rules for Acquiring Accounts (Including a Readily Tradable 
Instrument) or Selling a Readily Tradable Instrument

    A. By electronic transmission--proposed Sec. 31.3406(d)-3. A payee 
can acquire by electronic transmission an account or an instrument that 
earns reportable interest or dividends. Under the proposed regulations 
the payor, at its option, may permit a payee to furnish the 
certifications relating to the A and D triggers within 30 days after 
the establishment or acquisition of the account or the instrument (30-
day period) by electronic transmission, provided that the payee 
furnishes the payee's TIN at the time of the establishment or the 
acquisition. However, if the payee makes any withdrawal within the 30-
day period and before the payor receives the payee's certifications, 
the payor must withhold to the extent of any reportable interest or 
dividends paid to the payee during the 30-day period and at the time of 
withdrawal.
    The proposed regulations provide comparable rules for the sale of a 
readily tradable instrument by electronic transmission. In this 
context, the payee is permitted to withdraw (or reinvest) up to 69 
percent of the gross proceeds from the sale during the relevant 30-day 
period.
    Commentators requested that backup withholding be applied in the 
same manner whether the electronic transmission involves the 
establishment or acquisition of an account or a readily tradable 
instrument or the sale of a readily tradable instrument. In response to 
this comment, the final regulations provide that backup withholding 
applies if the payee withdraws more than 69 percent of the reportable 
interest or dividends paid to the payee during the relevant 30-day 
period and at the time of withdrawal, but only if the payor has not 
received the payee's certifications relating to the A and D triggers at 
the time of the withdrawal. See Sec. 31.3406(d)-3(a).
    B. By mail--proposed Sec. 31.3406(d)-3(a)(1). The proposed 
regulations provide that a payee may provide the certifications 
relating to the A and D triggers within 30 days after a payee 
establishes or acquires a readily tradable instrument by mail before 
January 1, 1985, provided the payee furnishes the payee's TIN upon the 
establishment or acquisition. The proposed regulations do not provide a 
similar rule for the sale of a readily tradable instrument by mail.
    To simplify the procedures for entering into investments which do 
not occur in person, the final regulations provide a 30-day rule for 
the establishment or acquisition of an account or readily tradable 
instrument by mail and extend the 30-day rule to the sale of a readily 
tradable instrument by mail. Under the final regulations, if the payee 
furnishes the payee's TIN before the transaction, backup withholding 
applies during the 30-day period only if the payee withdraws more than 
69 percent of the reportable payment and if the payor has not received 
the payee's certifications relating to the A or D triggers, whichever 
applies, at the time of the withdrawal. See Sec. 31.3406(d)-3(a).

V. Section 3406 Confidentiality Issues--Proposed Sec. 31.3406(f)-1(a)

    Section 3406(f) provides that a payor may not use information 
obtained under section 3406 except for meeting a requirement of that 
section. Commentators requested clarification on what actions a payor 
or broker may take, consistent with section 3406(f), in response to a 
payee's failure to provide the payee's TIN under section 3406(a)(1)(A). 
The final regulations provide that a payor who closes an account at or 
before the end of a calendar year in which the payee opens the account 
without providing the payee's TIN or documentation of foreign status, 
as required, during that year will not, in the absence of evidence to 
the contrary, be deemed in violation of section 3406(f).
    Another commentator inquired whether prohibiting a payee from 
withdrawing funds from the payee's account is a violation of section 
3406(f). The final regulations clarify that refusing to allow a payee 
to withdraw funds from the payee's account solely because the payee has 
not furnished a TIN violates section 3406(f). See Sec. 31.3406(f)-
1(b)(1).

VI. Exemptions From Backup Withholding.

    A. Interaction of information reporting and backup withholding 
exemptions--proposed Sec. 31.3406(g)-1(a). Several commentators 
questioned the interaction between the rules exempting payees from 
information reporting and those exempting payees from backup 
withholding. The class of recipients exempt from information reporting 
is larger than the class exempt from backup withholding. The final 
regulations clarify that the list of the payees that are specifically 
exempt from backup withholding is not exclusive and that other payees 
that are exempt from information reporting also are exempt from backup 
withholding. See Sec. 31.3406(g)-1(a)(2).
    B. Interest on certain life-insurance contracts--proposed 
Sec. 31.3406(g)-1(a)(4). Commentators requested that the temporary 
exemption from backup withholding for interest payments made before 
January 1, 1992, on ``advance premiums'', ``prepaid premiums'', or 
``premium deposit funds'', on certain insurance policies be made 
permanent. The final regulations provide an extension through December 
31, 1996.
    C. Payments reportable under section 6047--proposed 
Sec. 31.3406(g)-2(c)(1) and (2). Commentators noted that, contrary to 
the position set forth in the proposed regulations, backup withholding 
does not apply to designated distributions paid after December 31, 
1984. The final regulations clarify that backup withholding does not 
apply to those payments. See Sec. 31.3406(g)-2(d).
    D. Awaiting-TIN certificate--proposed Sec. 31.3406(g)-3. 
Commentators requested simplification of the backup withholding rules 
applicable to accounts for which a payor has received an awaiting-TIN 
certification. One suggestion was that backup withholding should not 
apply during the period (up to 60 days) that the payee is waiting for 
the payee's TIN if no more than 69 percent of the reportable payment is 
withdrawn during the 60-day period. The final regulations adopt this 
suggestion. Therefore, backup withholding is deferred during the 60-day 
period unless the payee makes a withdrawal (of more than $500 in one 
transaction) during that time or has failed to provide the 
certification relating to the D trigger. If the payee makes a 
withdrawal of more than $500 in one transaction during the 60-day 
period, backup withholding applies to the extent of any reportable 
interest or dividends made to the account during the 60-day period and 
at the time of withdrawal unless the payee reserves 31 percent of all 
reportable payments made to the account during that period. Payors may 
elect, however, to impose withholding during the 60-day period. See 
Sec. 31.3406(g)-3(a)(2) and (3).
    Commentators requested clarification of the interaction of the 
awaiting-TIN rules for post-1983 accounts or instruments and the 
obligation of the payee to provide the certification relating to the D 
trigger that the payee is not subject to backup withholding due to the 
C trigger. The final regulations clarify that in spite of the 

[[Page 66109]]
awaiting-TIN certification, backup withholding applies under section 
3406(a)(1)(D) during the 60-day period if the payee has not provided 
this certification to the payor. See Sec. 31.3406(g)-3(a)(1).
    A commentator asked whether the 60-day period refers to calendar or 
business days. Accordingly, the final regulations clarify that the term 
``day'' means a calendar day. See Secs. 31.3406(g)-3 and 31.3406(h)-
1(e).

VII. Other Changes

    A. Identifying the person listed on a joint account as the one 
subject to withholding--proposed Sec. 31.3406(h)-2(a). Under the 
proposed regulations, a payor of a reportable payment to a joint 
account may treat the first person listed on the account (or on the 
instrument) as the payee subject to information reporting and backup 
withholding. The final regulations provide that the relevant payee is 
the one whose name and TIN combination the payor uses for information 
reporting purposes, whether or not that account or instrument 
registration lists that payee first. See Sec. 31.3406(h)-2(a)(1).
    B. Backup withholding on payments made in property--proposed 
Sec. 31.3406(h)-2(b). Under the proposed regulations, a payor making a 
reportable payment in property subject to backup withholding must 
withhold on an amount equal to the fair market value of the property. 
The obligation to withhold occurs at the time the property is paid to 
the payee. Consequently, the payor must find an alternative source, 
such as another account of the payee, from which the payor can satisfy 
its backup withholding liability. Otherwise, the payor must continue to 
look for accounts of the payee to satisfy the payor's backup 
withholding liability. A commentator suggested that the final 
regulations add an ending date after which a payor no longer has to 
search for alternative sources from which to satisfy a backup 
withholding obligation arising from a payment in property. According to 
this commentator, the obligation should extinguish after a reasonable 
period of time. In response to this comment, the final regulations 
provide that a payor's obligation to backup withhold on property 
terminates on the earlier of the date sufficient cash is deposited to 
the account to fully satisfy the obligation or the close of the fourth 
calendar year after the obligation arose. See Sec. 31.3406(h)-
2(b)(2)(ii).
    C. Gross-up of payments by middlemen--proposed Sec. 31.3406(h)-
2(d). Under the proposed regulations, a middleman is required to remit 
the full amount due a payee unless one of the requirements for imposing 
backup withholding exists at the time of payment. Thus, the middleman 
is required to remit the full amount even though an upstream payor 
erroneously withheld on that payment to the middleman. In that event, 
the middleman may recover the difference between the amount received 
and the amount paid to the payee, i.e., 31 percent, by seeking a refund 
from the upstream payor or by taking an equivalent credit against the 
next required deposit of employment taxes. One commentator noted that 
the middleman payor incurs a loss in the time value of money measured 
from the time it pays the full amount due to the payee to the time the 
payor receives a refund or credit. Because of this, the commentator 
suggested that the regulations allow the middleman to remit only the 
net amount due its payee. This suggestion presents several problems. 
First, it requires a new reconciliation process to correlate the backup 
withholding reflected on the upstream payor's Form 945 with the backup 
withholding shown as withheld tax on the payee's income tax return. 
Second, the suggestion produces an anomalous result, namely, 
withholding occurs even though none of the statutory conditions 
requiring withholding exist. For these reasons the final regulations do 
not adopt this suggestion.
    D. Refund of amount erroneously subject to backup withholding--
proposed Sec. 31.6413(a)-3. Under the proposed regulations, a payor 
must refund an amount previously withheld under the C trigger if the 
IRS instructs the payor to do so. This provision is also set forth in 
Sec. 35a.9999-3 Q/A-38 of the Temporary Employment Tax Regulations 
issued under the Interest and Dividend Tax Compliance Act of 1983, as 
amended by TD 8248 (54 FR 18713) on May 2, 1989. One commentator 
suggested eliminating this refund provision. This rule was needed 
initially to allow refunds in certain cases where payees had interest 
or dividend income subject to backup withholding under the C trigger 
but had no income tax liability on this income. The IRS has 
subsequently enhanced its C withholding program to eliminate C notices 
to payors in such cases. Thus, the final regulations adopt the 
suggestion and delete the proposed rule. See Sec. 31.6413(a)-3.
    E. Effective date. The final regulations are effective for 
reportable payments made and transactions occurring after December 31, 
1996, and, optionally, for reportable payments made and transactions 
occurring on or after December 21, 1995. See Sec. 31.3406(i)-1.
    F. Coordination with the temporary regulations--Secs. 35a.9999-1 
through 35a.9999-5. The temporary regulations issued under 26 CFR Part 
35a are not effective for noninternational transactions occurring on 
and after the effective date of the final regulations. The temporary 
regulations, however, remain effective for the due diligence safe 
harbor and for international transactions, including transactions 
involving a foreign payee, a foreign payor, or a payment from sources 
without the United States.
    G. Statement mailing requirement--proposed Secs. 1.6042-5, 1.6044-
6, 1.6049-6, and 1.6050N-1. These final regulations set forth rules on 
the manner in which a payor who is required to file an information 
return for dividends and corporate earnings and profits, patronage 
dividends, interest, and royalties under sections 6042(c), 6044(e), 
6049(c), and 6050N(b), respectively, must provide a copy of that 
information return to the payee, i.e., payee statement mailing.
    The proposed regulations limit the permissible nontax enclosures 
includible in a statement mailing. Several commentators requested that 
the inclusion of additional nontax enclosures be permitted. This 
suggestion was not adopted because the relevant legislative history 
indicates that Congress wanted to substantially restrict the nontax 
enclosures in a statement mailing.
    H. Correct identifying number for estates--proposed Sec. 301.6109-
1. The final regulations clarify that the taxpayer identification 
number to be used to identify estates of decedents is the employer 
identification number (rather than a social security number).

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in E.O. 12866. Therefore, a 
regulatory assessment is not required. It has also been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to 
these regulations, and therefore, a Regulatory Flexibility Analysis is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
the notice of proposed rulemaking preceding these regulations was 
submitted to the Small Business Administration for comment on its 
impact on small business. 

[[Page 66110]]


Drafting Information

    The principal author of these regulations is Renay France of the 
Office of Assistant Chief Counsel (Income Tax and Accounting), IRS. 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social security, 
Unemployment compensation.

26 CFR Part 35a

    Employment taxes, Income taxes, Reporting and recordkeeping 
requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    The amendments to 26 CFR parts 1, 31, 35a, 301, and 602 read as 
follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority for part 1 continues to read in part as 
follows:

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

    Section 1.6049-6 also issued under 6049(a), (b), and (d). * * *

    Par. 2. Section 1.6042-4 is revised as follows:


Sec. 1.6042-4  Statements to recipients of dividend payments.

    (a) Requirement. A person required to make an information return 
under section 6042(a)(1) and Sec. 1.6042-2 must furnish a statement to 
each recipient whose identifying number is required to be shown on the 
related information return for dividend payments.
    (b) Form of the statement. The statement required by paragraph (a) 
of this section must be either the official Form 1099 prescribed by the 
Internal Revenue Service for the respective calendar year or an 
acceptable substitute statement that contains provisions that are 
substantially similar to those of the official Form 1099 for the 
respective calendar year. For further guidance on how to prepare an 
acceptable substitute statement, see Rev. Proc. 95-30 (1995-27 I.R.B. 
9) (or its successor), republished as ``Rules and Specifications for 
Private Printing of Substitute Forms 1096, 1098, 1099 Series, 5498, and 
W-2G.'' See Sec. 601.601(d)(2) of this chapter.
    (c) Aggregation of payments. A payor may aggregate on one Form 1099 
all payments made to a recipient with respect to each separate account 
during a calendar year.
    (d) Manner of providing statements to recipients--(1) In general. 
The Form 1099, or acceptable substitute statement, must be provided to 
the recipient either in person or by first-class mail to the 
recipient's last known address in a statement mailing.
    (2) Statement mailing requirement. The mailing required under 
section 6042(c) of a Form 1099 to a payee-recipient must qualify as a 
statement mailing. A statement mailing must contain the required Form 
1099 or acceptable substitute statement (written statement) and must 
comply with enclosure and envelope restrictions.
    (i) Enclosure restrictions. To qualify as a statement mailing, the 
mailing cannot contain any enclosures except those listed in this 
paragraph (d)(2)(i). Moreover, no promotional or advertising material 
is permitted in the mailing of the written statement. Even a de minimis 
amount of promotional or advertising material violates the statement 
mailing requirement. However, a logo on the envelope containing the 
written statement and on nontax enclosures described in paragraph 
(d)(2)(i) (A) through (D) of this section does not violate the written 
statement requirement. The written statement required under section 
6042(c) and paragraph (a) of this section may be perforated to a check 
or to a statement of the recipient-payee's specific account with the 
payor described in paragraph (d)(2)(i) (A) or (C) of this section. The 
enclosure to which the written statement is perforated must contain, in 
a bold and conspicuous type, the legend: ``Important Tax Return 
Document Attached.'' The enclosures permitted in a mailing are limited 
to--
    (A) A check with respect to the account reported on the written 
statement;
    (B) A letter explaining why a check with respect to such account is 
not enclosed with the written statement (for example, because a 
dividend has not been declared payable);
    (C) A statement of the taxpayer-recipient's specific account with 
the payor if payments on such account are reflected on the written 
statement;
    (D) A letter limited to an explanation of the tax consequences of 
the information set forth on the enclosed written statement;
    (E) Payee statements related to other Forms 1099, Form 1098, and 
Form 5498 (or the account balance on a Form 5498), Forms W-2 and W-2G; 
and
    (F) Any document concerning the solicitation of the Form W-9 or 
Form W-8.
    (ii) Envelope and delivery restrictions--(A) Envelope restrictions. 
The outside of the envelope in which the written statement is mailed 
and each nontax enclosure enclosed in the envelope must contain, in a 
bold and conspicuous type, the legend: ``Important Tax Return Document 
Enclosed.'' For purposes of this paragraph (d)(2)(ii), a nontax 
enclosure is any item listed in paragraphs (d)(2)(i)(A) through (C) of 
this section. However, a payor is not required to include the legend on 
the outside of an envelope containing only the enclosures in paragraph 
(d)(2)(i)(D) through (F) of this section.
    (B) Delivery restrictions. The requirement to provide the written 
statement in person or by first-class mail may be satisfied by sending 
the written statement and any enclosures described in paragraph 
(d)(2)(i) of this section by intra-office mail, provided that intra-
office mail is used by the payor in sending account activity, balance 
information, and other correspondence to the payee. If a payor does not 
personally deliver the written statement (i.e., the Form 1099 or its 
acceptable substitute) to the recipient or mail it to the recipient in 
a statement mailing as described in this paragraph (d), the payor is 
considered to have failed to mail the statement required under section 
6042(c) and will be subject to the penalty under section 6722.
    (e) Time for furnishing statements--(1) In general. Each statement 
required by section 6042(c) and this section to be furnished to any 
person for a calendar year must be furnished to such person after 
November 30 of the year and on or before January 31 (February 10 in the 
case of a nominee filing under Sec. 1.6042-2(a)(1)(iii)) of the 
following year, but no statement may be furnished before the final 
dividend for the calendar year has been paid. However, the statement 
may be furnished at any time after April 30 if it is furnished with the 
final dividend for the calendar year.

    (2) Extensions of time. For good cause upon written application of 
the person required to furnish statements under 

[[Page 66111]]
this section, the Director, Martinsburg Computing Center, may grant an 
extension of time not exceeding 30 days in which to furnish such 
statements. The application must be addressed to the Director, 
Martinsburg Computing Center, and must contain a full recital of the 
reasons for requesting the extension to aid the Director in determining 
the period of the extension, if any, that will be granted. Such a 
request in the form of a letter to the Director, Martinsburg Computing 
Center, signed by the applicant will suffice as an application. The 
application must be filed on or before the date prescribed in paragraph 
(e)(1) of this section.
    (3) Last day for furnishing statement. For provisions relating to 
the time for performance of an act when the last day prescribed for 
performance falls on Saturday, Sunday, or a legal holiday, see section 
7503 and Sec. 301.7503-1 of this chapter (Regulations on Procedure and 
Administration). (f) Penalty. For provisions relating to the penalty 
for the failure to furnish a statement under this section, see section 
6722.
    (g) Effective date. This section is effective for payee statements 
due after December 31, 1995, without regard to extensions. For the 
substantially similar statement mailing requirements that apply with 
respect to forms required to be filed after October 22, 1986, and 
before January 1, 1996, see Rev. Proc. 84-70 (1984-2 C.B. 716) (or 
successor revenue procedures). See Sec. 601.601(d)(2) of this chapter.
    Par. 3. Section 1.6044-5 is revised as follows:


Sec. 1.6044-5  Statements to recipients of patronage dividends.

    (a) Requirement. A person required to make an information return 
under section 6044(a)(1) and Sec. 1.6044-2 must furnish a statement to 
each recipient whose identifying number is required to be shown on the 
related information return for patronage dividends paid.
    (b) Form, manner, and time for providing statements to recipients. 
The statement required by paragraph (a) of this section must be either 
the official Form 1099 prescribed by the Internal Revenue Service for 
the respective calendar year or an acceptable substitute statement. The 
rules under Sec. 1.6042-4 (relating to statements with respect to 
dividends) apply comparably in determining the form of an acceptable 
substitute statement permitted by this section. Those rules also apply 
for purposes of determining the manner of and time for providing the 
Form 1099 or its acceptable substitute to a recipient under this 
section. However, each Form 1099 or acceptable substitute statement 
required by this section must be furnished on or before January 31 of 
the following year, but no statement may be furnished before the final 
payment has been made for the calendar year.
    (c) Penalty. For provisions relating to the penalty for the failure 
to furnish a statement under this section, see section 6722.
    (d) Effective date. This section is effective for payee statements 
due after December 31, 1995, without regard to extensions. For the 
substantially similar statement mailing requirements that apply with 
respect to forms required to be filed after October 22, 1986, and 
before January 1, 1996, see Rev. Proc. 84-70 (1984-2 C.B. 716) (or 
successor revenue procedures). See Sec. 601.601(d)(2) of this chapter.
    Par. 4. Section 1.6049-6 is amended by:
    1. Revising the section heading.
    2. Removing the language ``section 3451'' and adding ``section 
3406'' in each of the following locations:
    a. Paragraph (a), second sentence.
    b. Paragraph (a), third sentence.
    c. Paragraph (a), fourth sentence.
    3. Removing the language ``section 3451'' and adding ``section 
3406'' in each of the following locations:
    a. Paragraph (b)(1)(ii).
    b. Paragraph (b)(2)(ii).
    4. Adding paragraph (e).
    5. Removing the authority citation at the end of the section.
    The revision and additions read as follows:


Sec. 1.6049-6  Statements to recipients of interest payments and 
holders of obligations for attributed original issue discount.

* * * * *
    (e) Statements to recipients--(1) Requirement. A person required to 
make an information return under section 6049(a) and Sec. 1.6049-4 must 
furnish a statement to each recipient whose identifying number is 
required to be shown on the related information return for interest or 
original issue discount paid or accrued.
    (2) Form, manner, and time for providing statements to recipients. 
The statement required by paragraph (e)(1) of this section must be 
either the official Form 1099 prescribed by the Internal Revenue 
Service for the respective calendar year or an acceptable substitute 
statement. The rules under Sec. 1.6042-4 (relating to statements with 
respect to dividends) apply comparably in determining the form of an 
acceptable substitute statement permitted by this paragraph (e). Those 
rules also apply for purposes of determining the manner of and time for 
providing the Form 1099 or its acceptable substitute to a recipient 
under paragraph (e)(1) of this section. However, with respect to 
original issue discount, the Form 1099 or acceptable substitute 
statement required by paragraph (e)(1) of this section must show the 
aggregate amount of original issue discount includible in the gross 
income by the recipient for the calendar year with respect to the 
obligation (determined by applying the rules of Sec. 1.6049-4(b)(2)), 
and the amount, serial number, or other identifying number of each 
obligation with respect to which a return is being made. With respect 
to interest or original issue discount, the Form 1099 or acceptable 
substitute statement required by paragraph (e)(1) of this section must 
be furnished to the recipient on or before January 31 of the year 
following the calendar year for which the return under section 
6049(a)(1) was required to be made.
    (3) Penalty. For provisions relating to the penalty for the failure 
to furnish a statement under this section, see section 6722.
    (4) Effective date. This paragraph (e) is effective for payee 
statements due after December 31, 1995, without regard to extensions. 
For the substantially similar statement mailing requirements that apply 
with respect to forms required to be filed after October 22, 1986, and 
before January 1, 1996, see Rev. Proc. 84-70 (1984-2 C.B. 716) (or 
successor revenue procedures). See Sec. 601.601(d)(2) of this chapter.
    Par. 5. Section 1.6050N-1 is added to read as follows:


Sec. 1.6050N-1  Statements to recipients of royalties.

    (a) Requirement. A person required to make an information return 
under section 6050N(a) must furnish a statement to each recipient whose 
name is required to be shown on the related information return for 
royalties paid.
    (b) Form, manner, and time for providing statements to recipients. 
The statement required by paragraph (a) of this section must be either 
the official Form 1099 prescribed by the Internal Revenue Service for 
the respective calendar year or an acceptable substitute statement. The 
rules under Sec. 1.6042-4 (relating to statements with respect to 
dividends) apply comparably in determining the form of the acceptable 
substitute statement permitted by this section. Those rules also apply 
for purposes of determining the manner of and time for providing the 
Form 1099 or its acceptable substitute statement to a recipient under 
this section.
    (c) Penalty. For provisions relating to the penalty for failure to 
furnish a 

[[Page 66112]]
statement under this section, see section 6722.
    (d) Effective date. This section is effective for payee statements 
due after December 31, 1995, without regard to extensions. For the 
substantially similar statement mailing requirements that apply with 
respect to forms required to be filed after October 22, 1986, and 
before January 1, 1996, see Rev. Proc. 84-70 (1984-2 C.B. 716) (or 
successor revenue procedures). See Sec. 601.601(d)(2) of this chapter.

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

    Par. 6. The authority for Part 31 is amended by removing the entry 
for Sec. 31.3406(d)-5 and by adding an entry in numerical order to read 
as follows:

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

    Sections 31.3406(a)-1 through 31.3406(i)-1 also issued under 26 
U.S.C. 3406(i).

    Par. 7. Section 31.3406-0 is revised to read as follows:


Sec. 31.3406-0  Outline of the backup withholding regulations.

    This section lists paragraphs contained in Secs. 31.3406(a)-1 
through 31.3406(i)-1.

Sec. 31.3406(a)-1  Backup withholding requirement on reportable 
payments.

    (a) Overview.
    (b) Conditions that invoke the backup withholding requirement.
    (1) Conditions applicable to all reportable payments.
    (2) Conditions applicable only to reportable interest or 
dividend payments.
    (c) Exceptions.
    (d) Cross references.

Sec. 31.3406(a)-2  Definition of payors obligated to backup 
withhold.

    (a) In general.
    (b) Middlemen treated as payors.
    (c) Persons not treated as payors.

Sec. 31.3406(a)-3  Scope and extent of accounts subject to backup 
withholding.

Sec. 31.3406(a)-4  Time when payments are considered to be paid and 
subject to backup withholding.

    (a) Timing.
    (1) In general.
    (2) Special rules for dividends.
    (b) Amounts reportable under section 6045.
    (1) In general.
    (2) Special rule for interest accrued on bonds.
    (c) Middlemen.
    (1) In general.
    (2) Special rule for common trust funds.
    (3) Special rule for certain grantor trusts.

Sec. 31.3406(b)(2)-1  Reportable interest payment.

    (a) Interest subject to backup withholding.
    (1) In general.
    (2) Special rule for tax-exempt interest.
    (b) Amount subject to backup withholding.
    (1) In general.
    (2) Special rule to adjust for premature withdrawal penalty.

Sec. 31.3406(b)(2)-2  Original issue discount.

    (a) Original issue discount subject to backup withholding.
    (b) Amount subject to backup withholding and time when backup 
withholding is imposed with respect to short-term obligations.
    (c) Transferred short-term obligations.
    (1) Subsequent holder may establish purchase price.
    (2) Subsequent holder unable (or not permitted) to establish 
purchase price.
    (3) Transferred obligation.
    (d) Amount subject to backup withholding and time when backup 
withholding is imposed with respect to long-term obligations.
    (1) No cash payments prior to maturity.
    (2) Registered long-term obligations with cash payments prior to 
maturity.
    (3) Transferred registered long-term obligations with payments 
prior to maturity.
    (e) Bearer long-term obligations.
    (1) Payments prior to maturity.
    (2) Payments at maturity.

Sec. 31.3406(b)(2)-3  Window transactions.

    (a) Requirement to backup withhold.
    (b) Window transaction defined.
    (c) Manner of furnishing taxpayer identification number in the 
case of a window transaction.

Sec. 31.3406(b)(2)-4  Reportable dividend payment.

    (a) Dividends subject to backup withholding.
    (b) Dividends not subject to backup withholding.
    (c) Amount subject to backup withholding.
    (1) In general.
    (2) Reasonable estimate of amount of dividend subject to backup 
withholding.
    (3) Reinvested dividends.

Sec. 31.3406(b)(2)-5  Reportable patronage dividend payment.

    (a) Patronage dividends subject to backup withholding.
    (b) Amount subject to backup withholding.
    (1) Failure to provide taxpayer identification number or 
notification of incorrect taxpayer identification number.
    (2) Notified payee underreporting or payee certification 
failure.

Sec. 31.3406(b)(3)-1  Reportable payments of rents, commissions, 
nonemployee compensation, etc.

    (a) Section 6041 and 6041A(a) payments subject to backup 
withholding.
    (b) Amount subject to backup withholding.
    (1) In general.
    (2) Net commissions.
    (3) Payments aggregating $600 or more for the calendar year.

Sec. 31.3406(b)(3)-2  Reportable barter exchanges and gross 
proceeds of sales of securities or commodities by brokers.

    (a) Transactions subject to backup withholding.
    (b) Amount subject to backup withholding.
    (1) In general.
    (2) Forward contracts, including foreign currency contracts, and 
regulated futures contracts.
    (3) Security sales made through a margin account.
    (4) Security short sales.
    (5) Fractional shares.

Sec. 31.3406(b)(3)-3  Reportable payments by certain fishing boat 
operators.

    (a) Payments subject to backup withholding.
    (b) Amount subject to backup withholding.

Sec. 31.3406(b)(3)-4  Reportable payments of royalties.

    (a) Royalty payments subject to backup withholding.
    (b) Amount subject to backup withholding.

Sec. 31.3406(b)(4)-1  Exemption for certain minimal payments.

    (a) In general.
    (b) Manner of making the election.
    (c) How to annualize.
    (1) In general.
    (2) Special aggregation rule for reportable interest and 
dividends.
    (d) Exception for window transactions and original issue 
discount.

Sec. 31.3406(c)-1  Notified payee underreporting of reportable 
interest or dividend payments.

    (a) Overview.
    (b) Definitions.
    (1) Notified payee underreporting.
    (2) Payee underreporting.
    (c) Notice to payors regarding backup withholding due to 
notified payee underreporting.
    (1) In general.
    (2) Additional requirements for payors that are also brokers.
    (3) Payor identification of accounts of the payee subject to 
backup withholding due to notified payee underreporting.
    (d) Notice from payors of backup withholding due to notified 
payee underreporting.
    (1) In general.
    (2) Procedures.
    (e) Period during which backup withholding is required.
    (1) In general.
    (2) Stop withholding.
    (3) Dormant accounts.
    (f) Notice to payees from the Internal Revenue Service.
    (1) Notice period.
    (2) Payee subject to backup withholding.
    (3) Disclosure of names of payors and brokers.
    (4) Backup withholding certification.
    (g) Determination by the Internal Revenue Service that backup 
withholding should not start or should be stopped.
    (1) In general.
    (2) Date notice to stop backup withholding will be provided. 
    
[[Page 66113]]

    (3) Grounds for determination.
    (4) No underreporting.
    (5) Correcting any payee underreporting.
    (6) Undue hardship.
    (7) Bona fide dispute.
    (h) Payees filing a joint return.
    (1) In general.
    (2) Exceptions.
    (i) [Reserved.]
    (j) Penalties.

Sec. 31.3406(d)-1  Manner required for furnishing a taxpayer 
identification number.

    (a) Requirement to backup withhold.
    (b) Reportable interest or dividend account.
    (1) Manner required for furnishing a taxpayer identification 
number with respect to a pre-1984 account or instrument.
    (2) Determination of pre-1984 account or instrument.
    (3) Manner required for furnishing a taxpayer identification 
number with respect to an account or instrument that is not a pre-
1984 account.
    (4) Special rule with respect to the acquisition of a readily 
tradable instrument in a transaction between certain parties acting 
without the assistance of a broker.
    (c) Brokerage account.
    (1) Manner required for furnishing a taxpayer identification 
number with respect to a brokerage relationship that is not a post-
1983 brokerage account.
    (2) Manner required for furnishing a taxpayer identification 
number with respect to a post-1983 brokerage account.
    (d) Rents, commissions, nonemployee compensation, and certain 
fishing boat operators, etc.--Manner required for furnishing a 
taxpayer identification number.

Sec. 31.3406(d)-2  Payee certification failure.

    (a) Requirement to backup withhold.
    (b) Exceptions.

Sec. 31.3406(d)-3  Special 30-day rules for certain reportable 
payments.

    (a) Accounts or readily tradable instruments acquired directly 
from the payor (including a broker who holds an instrument in street 
name) by electronic transmission or by mail.
    (b) Sale of an instrument for a customer by electronic 
transmission or by mail.
    (c) Application to foreign payees.

Sec. 31.3406(d)-4  Special rules for readily tradable instruments 
acquired through a broker.

    (a) Readily tradable instruments acquired through post-1983 
brokerage accounts with a broker who is not a payor.
    (1) In general.
    (2) Additional requirements.
    (3) Transactions entered into through a brokerage account that 
is not a post-1983 brokerage account.
    (4) Payor must notify payee.
    (b) Notices.
    (1) Form of notice by broker to payor.
    (2) Form of notice by payor to payee.
    (c) Payor's reliance on information from broker.
    (1) In general.
    (2) Amount subject to backup withholding.

Sec. 31.3406(d)-5  Backup withholding when the Service or a broker 
notifies the payor to withhold because the payee's taxpayer 
identification number is incorrect.

    (a) Overview.
    (b) Definitions and special rules.
    (1) Definition of an incorrect name/TIN combination.
    (2) Definition of account.
    (3) Definition of business day.
    (4) Certain exceptions.
    (c) Notice regarding an incorrect name/TIN combination.
    (1) In general.
    (2) Additional requirements for payors that are also brokers.
    (3) Payor identification of the account or accounts of the payee 
that have the incorrect taxpayer identification number.
    (4) Special rule for joint accounts.
    (5) Date of receipt.
    (d) Notice from payors of backup withholding due to an incorrect 
name/TIN combination.
    (1) In general.
    (2) Procedures.
    (e) Period during which backup withholding is required due to 
notification of an incorrect name/TIN combination.
    (1) In general.
    (2) Grace periods.
    (3) Dormant accounts.
    (f) Manner required for payee to furnish certified taxpayer 
identification number.
    (g) Receipt of two notices within a 3-year period.
    (1) In general.
    (2) Notice to payee who has provided two incorrect name/TIN 
combinations within 3 calendar years.
    (3) Period during which backup withholding is required due to a 
second notice of an incorrect name/TIN combination within 3 calendar 
years.
    (4) Receipt of two notices in one calendar year.
    (5) Notification from the Social Security Administration (or the 
Internal Revenue Service) validating a name/TIN combination.
    (h) Payors must use newly provided certified number.
    (i) Effective date.
    (j) Examples.

Sec. 31.3406(e)-1  Period during which backup withholding is 
required.

    (a) In general.
    (b) Failure to furnish a taxpayer identification number in the 
manner required.
    (1) Start withholding.
    (2) Stop withholding.
    (c) Notification of an incorrect taxpayer identification number.
    (d) Notified payee underreporting.
    (e) Payee certification failure.
    (1) Start withholding.
    (2) Stop withholding.
    (f) Rule for determining when the payor receives a taxpayer 
identification number or certificate from a payee.

Sec. 31.3406(f)-1  Confidentiality of information.

    (a) Confidentiality and liability for violation.
    (b) Permissible use of information.
    (1) In general.
    (2) Window transactions.
    (c) Specific restrictions on the use of information.

Sec. 31.3406(g)-1  Exception for payments to certain payees and 
certain other payments.

    (a) Exempt recipients.
    (1) In general.
    (2) Nonexclusive list.
    (b) Determination of whether a person is described in paragraph 
(a)(1) of this section.
    (c) Prepaid or advance premium life-insurance contracts.

Sec. 31.3406(g)-2  Exception for reportable payments for which 
backup withholding is otherwise required.

    (a) In general.
    (b) Payment of wages.
    (c) Distribution from a pension, annuity, or other plan of 
deferred compensation.
    (d) Gambling winnings.
    (1) In general.
    (2) Definition of a reportable gambling winning and 
determination of amount subject to backup withholding.
    (3) Special rules.
    (e) Certain real estate transactions.
    (f) Certain payments after an acquisition of accounts or 
instruments.
    (g) Certain gross proceeds.

Sec. 31.3406(g)-3  Exemption while payee is waiting for a taxpayer 
identification number.

    (a) In general.
    (1) Backup withholding not required for 60 days.
    (2) Reserve method.
    (3) Alternative rule; 7-day grace period.
    (b) Special rule for readily tradable instruments.
    (c) Exceptions.
    (1) In general.
    (2) Special rule for amounts subject to reporting under section 
6045 other than proceeds of redemptions of bearer obligations.
    (d) Awaiting-TIN certificate.
    (e) Form for awaiting-TIN certificate.

Sec. 31.3406(h)-1  Definitions.

    (a) In general.
    (b) Taxpayer identification number.
    (1) In general.
    (2) Obviously incorrect number.
    (c) Broker.
    (d) Readily tradable instrument.
    (e) Day.
    (f) Business day.

Sec. 31.3406(h)-2  Special rules.

    (a) Joint accounts.
    (1) Relevant name and taxpayer identification number 
combination.
    (2) Optional rule for accounts subject to backup withholding 
under section 3406(a)(1)(B) or (C) where the names are switched.
    (3) Joint foreign payees.
    (b) Backup withholding from an alternative source.
    (1) In general.
    (2) Exceptions for payments made in property.
    (c) Trusts. 
    
[[Page 66114]]

    (d) Adjustment of prior withholding by middleman.
    (e) Conversion of amounts paid in foreign currency into United 
States dollars.
    (1) Convertible foreign currency.
    (2) Nonconvertible foreign currency. [Reserved]
    (f) Coordination with other sections.
    (g) Tax liabilities and penalties.
    (h) To whom payor is liable for amount withheld.

Sec. 31.3406(h)-3  Certificates.

    (a) Prescribed form to furnish information under penalties of 
perjury.
    (1) In general.
    (2) Use of a single or multiple Forms W-9 for accounts of the 
same payee.
    (b) Prescribed form to furnish a noncertified taxpayer 
identification number.
    (c) Forms prepared by payors or brokers.
    (1) Substitute forms; in general.
    (2) Form for exempt recipient.
    (d) Special rule for brokers.
    (e) Reasonable reliance on certificate.
    (1) In general.
    (2) Circumstances establishing reasonable reliance.
    (f) Who may sign certificate.
    (1) In general.
    (2) Notified payee underreporting.
    (g) Retention of certificates.
    (1) Accounts or instruments that are not pre-1984 accounts and 
brokerage relationships that are post-1983 brokerage accounts.
    (2) Accounts or instruments that are pre-1984 accounts and 
brokerage relationships that are not post-1983 brokerage accounts.
    (h) Cross references.

Sec. 31.3406(i)-1  Effective date.

    Par. 8. Sections 31.3406(a)-1 through 31.3406(a)-4, 31.3406(b)(2)-1 
through 31.3406(b)(2)-5, 31.3406(b)(3)-1 through 31.3406(b)(3)-4, 
31.3406(b)(4)-1, 31.3406(c)-1, 31.3406(d)-1 through 31.3406(d)-4, 
31.3406(e)-1, 31.3406(f)-1, 31.3406(g)-1 through 31.3406(g)-3, 
31.3406(h)-1 through 31.3406(h)-3, and 31.3406(i)-1 are added to read 
as follows:


Sec. 31.3406(a)-1  Backup withholding requirement on reportable 
payments.

    (a) Overview. Under section 3406, a payor must deduct and withhold 
31 percent of a reportable payment if a condition for withholding 
exists. Reportable payments mean interest and dividend payments (as 
defined in section 3406(b)(2)) and other reportable payments (as 
defined in section 3406(b)(3)). The conditions described in paragraph 
(b)(1) of this section apply to all reportable payments, including 
reportable interest and dividend payments. The conditions described in 
paragraph (b)(2) of this section apply only to reportable interest and 
dividend payments.
    (b) Conditions that invoke the backup withholding requirement--(1) 
Conditions applicable to all reportable payments. A payor of a 
reportable payment must deduct and withhold under section 3406 if--
    (i) The payee of the reportable payment does not furnish the 
payee's taxpayer identification number to the payor, as required in 
section 3406(a)(1)(A) and Sec. 31.3406(d)-1; or
    (ii) The Internal Revenue Service or a broker notifies the payor 
that the taxpayer identification number furnished by its payee for a 
reportable payment is incorrect, as described in section 3406(a)(1)(B) 
and Sec. 31.3406(d)-5.
    (2) Conditions applicable only to reportable interest or dividend 
payments. A payor of a reportable interest or dividend payment must 
deduct and withhold under section 3406 if--
    (i) The Internal Revenue Service or a broker notifies the payor 
that its payee has underreported interest or dividend income, as 
described in section 3406(a)(1)(C) and Sec. 31.3406(c)-1; or
    (ii) The payee fails to certify to the payor or broker that the 
payee is not subject to withholding due to notified payee 
underreporting, as described in section 3406(a)(1)(D) and 
Sec. 31.3406(d)-2.
    (c) Exceptions. The requirement to withhold does not apply to 
certain minimal payments as described in Sec. 31.3406(b)(4)-1 or to 
payments exempt from withholding under Secs. 31.3406(g)-1 through 
31.3406(g)-3.
    (d) Cross references. For the definition of payor, see 
Sec. 31.3406(a)-2. For the definition of taxpayer identification 
number, see Sec. 31.3406(h)-1(b).


Sec. 31.3406(a)-2  Definition of payors obligated to backup withhold.

    (a) In general. Payor means any person who is required to make an 
information return with respect to any reportable payment (as described 
in section 3406(b)) under section 6041, 6041A(a), 6042, 6044, 6045, 
6049, 6050A, or 6050N, including any middleman as described in 
paragraph (b) of this section.
    (b) Middlemen treated as payors. A person who receives or collects 
a reportable payment on behalf of or for the account of a payee is a 
middleman and is treated as the payor of the payment. These persons 
include, but are not limited to--
    (1) A custodian of a payee's account, such as a bank, financial 
institution, or brokerage firm acting as custodian of an account;
    (2) A nominee, including the joint owner of an account or 
instrument, except if the joint owners are husband and wife or if the 
payment is actually owned by another person whose name is also shown on 
the information return filed with respect to the payment;
    (3) A broker holding a security (including stock) for a customer in 
street name;
    (4) A grantor trust established after December 31, 1995, all of 
which is owned by two or more grantors, and for this purpose spouses 
filing a joint return are considered to be one grantor;
    (5) A common trust fund; and
    (6) A partnership or an S corporation that makes a reportable 
payment.
    (c) Persons not treated as payors. The following persons are not 
treated as payors for purposes of section 3406 if the person does not 
have a reporting obligation under the section on information reporting 
to which the payment relates:
    (1) An agent of the payor who is acting on behalf of the payor in 
making the payment and who has not entered into an agreement with the 
payor (for further guidance see Rev. Proc. 84-33 (1984-1 C.B. 502), and 
Sec. 601.601(d)(2) of this chapter), such as a bank that acts as a 
paying agent in making a payment of dividends on behalf of a 
corporation (although payments made by the agent are considered to be 
payments made by the payor, and thus are subject to withholding, 
reporting, and the depositing requirements pertaining to section 3406 
as if they were made by the payor itself, and failure by the agent so 
to withhold, report, or deposit is considered to be failure by the 
payor);
    (2) A trust (other than a grantor trust as described in paragraph 
(b)(4) of this section) that files a Form 1041 and furnishes each 
beneficiary a Form K-1 containing information required to be shown on 
an information return, including amounts withheld under section 3406; 
or
    (3) A partnership making a payment of a distributive share or an S 
corporation making a similar distribution.


Sec. 31.3406(a)-3  Scope and extent of accounts subject to backup 
withholding.

     A payor who is required to withhold under Sec. 31.3406(a)-1 must 
withhold--
    (a) On the accounts subject to withholding under Sec. 31.3406(a)-1 
(b)(1)(i) or (b)(2)(ii); and
    (b) On the accounts subject to withholding under Sec. 31.3406(a)-
1(b)(1)(ii) or (b)(2)(i), as described under Sec. 31.3406(d)-5 
(relating to notification of incorrect TIN) or Sec. 31.3406(c)-1 
(relating to notified payee underreporting), respectively. 

[[Page 66115]]



Sec. 31.3406(a)-4

    Time when payments are considered to be paid and subject to backup 
withholding.
    (a) Timing--(1) In general. If backup withholding is required under 
section 3406 on a reportable payment (as defined in section 3406(b)), 
the payor must withhold at the time it makes the payment to the payee 
or to the payee's account that is subject to withholding. Amounts are 
considered paid when they are credited to the account of, or made 
available to, the payee. Amounts are not considered paid solely because 
they are posted (e.g., an informational notation on the payee's 
passbook) if they are not actually credited to the payee's account or 
made available to the payee. See paragraph (c) of this section for the 
timing of withholding by a middleman.
    (2) Special rules for dividends. For purposes of section 3406 and 
this section--
    (i) Record date earlier than payment date. In the case of stock for 
which the record date is earlier than the payment date, the dividends 
are considered paid on the payment date.
    (ii) Dividends paid in corporate reorganizations. In the case of a 
corporate reorganization, if a payee is required to exchange stock held 
in the former corporation for stock in the new corporation before the 
dividends that have been paid with respect to the stock in the new 
corporation will be provided to the payee, the dividend is considered 
paid on the date the payee actually exchanges the stock and receives 
the dividend.
    (b) Amounts reportable under section 6045--(1) In general. 
Notwithstanding paragraph (a) of this section, in the case of a 
transaction reportable under section 6045 (except in the case of 
forward contracts (including foreign currency contracts), regulated 
futures contracts, and security short sales), the obligation to 
withhold under section 3406 arises on the date the sale is entered on 
the books of the broker or the date the exchange occurs as provided in 
Sec. 1.6045-1(f)(3) of this chapter. A broker (in its capacity as 
payor) is not required, however, to satisfy its withholding liability 
until payment is made. See Sec. 31.3406(b)(3)-2(b)(2) for special rules 
applicable to forward contracts (including foreign currency contracts), 
regulated futures contracts, and security short sales.
    (2) Special rule for interest accrued on bonds. For purposes of 
determining the time that interest is considered paid and subject to 
withholding under section 3406 when bonds are sold between interest 
payment dates, the portion of the sales price representing interest 
accrued to the date of sale is considered a portion of a reportable 
payment of gross proceeds under section 6045 (provided that the accrued 
interest is not tax-exempt as described in section 103(a), relating to 
certain governmental obligations), and is not considered to be a 
payment of interest for purposes of section 6049.
    (c) Middlemen--(1) In general. Any middleman (as defined in 
Sec. 31.3406(a)-2(b)) must withhold under section 3406 at the time the 
reportable payment is received by or credited to the middleman. If the 
middleman makes or credits the reportable payment to the payee prior to 
the middleman's receipt of the corresponding payment, the middleman may 
withhold at the time the reportable payment is made or credited to the 
payee.
    (2) Special rule for common trust funds. A common trust fund (as 
defined in section 584) must withhold either--
    (i) At the time the reportable payment is received by or credited 
to the common trust fund as provided in paragraph (c)(1) of this 
section;
    (ii) On the date on which the assets of the common trust fund are 
valued; or
    (iii) At the time the common trust fund pays or credits the 
reportable payment to a participant of the common trust fund.
    (3) Special rule for certain grantor trusts. For grantor trusts 
described in Sec. 31.3406(a)-2(b)(4), reportable payments made to the 
trust are treated as paid by the trust to each grantor, in an amount 
equal to the distribution made by the trust to each grantor, on the 
date that the reportable payment is paid to the trust (except for gross 
proceeds reportable under section 6045). Paragraph (b)(2) of this 
section applies to a grantor trust making a payment of gross proceeds 
under section 6045 subject to withholding under section 3406. For 
purposes of this paragraph (c)(3) a husband and wife filing a joint 
return are considered to be one grantor.


Sec. 31.3406(b)(2)-1  Reportable interest payment.

    (a) Interest subject to backup withholding--(1) In general. A 
payment of a kind, and to a payee, that is required to be reported 
under section 6049 (relating to returns regarding interest and original 
issue discount) is a reportable payment for purposes of section 3406, 
subject to the special rules of Sec. 31.3406(b)(2)-2 (relating to 
original issue discount) and Sec. 31.3406(b)(2)-3 (relating to window 
transactions). See Sec. 31.6051-4 for the requirement to furnish a 
statement to the payee if tax is withheld under section 3406.
    (2) Special rule for tax-exempt interest. When an issuer is 
required to make an information return under Sec. 1.6049-4(d)(8) of 
this chapter because a payee provided a signed written statement on the 
envelope or shell incorrectly claiming that the interest was exempt 
from taxation under section 103(a) (as described in Sec. 1.6049-
5(b)(1)(ii) of this chapter), the issuer is not required to impose 
withholding under section 3406.
    (b) Amount subject to backup withholding--(1) In general. The 
amount of interest subject to withholding under section 3406 is the 
amount subject to reporting under section 6049.
    (2) Special rule to adjust for premature withdrawal penalty. Solely 
for purposes of computing the amount subject to withholding under 
section 3406, the payor may elect not to withhold from the portion of 
any interest payment that is not received by the payee because a 
penalty is in fact imposed for premature withdrawal of funds deposited 
in a time savings account, certificate of deposit, or similar class of 
deposit.


Sec. 31.3406(b)(2)-2  Original issue discount.

    (a) Original issue discount subject to backup withholding. The 
amount of original issue discount, treated as interest, subject to 
withholding under section 3406 is the amount subject to reporting under 
section 6049, but is limited to the amount of cash paid. In addition, 
if an original issue discount obligation, subject to reporting under 
section 6045, is sold prior to maturity and with respect to the seller 
a condition exists for imposing withholding under section 3406 on the 
gross proceeds, then withholding under Sec. 31.3406(b)(3)-2 applies to 
the gross proceeds of the sale reportable under section 6045, and not 
to the amount of any original issue discount includible in the gross 
income of the seller for the calendar year of the sale. See 
Sec. 31.6051-4 for the requirement to furnish a statement to the payee 
if tax is withheld under section 3406.
    (b) Amount subject to backup withholding and time when backup 
withholding is imposed with respect to short-term obligations. In the 
case of an obligation with a fixed maturity date not exceeding one year 
from the date of issue (a short-term obligation), withholding under 
section 3406 applies to any payment of original issue discount on the 
obligation includible in the gross income of the holder to the extent 
of the cash amount of the payment. See Sec. 1.1273-1 of this chapter to 
determine the amount of original 

[[Page 66116]]
issue discount on a short-term obligation. See Sec. 1.446-2(e)(1) of 
this chapter to determine the amount of a payment treated as original 
issue discount.
    (c) Transferred short-term obligations--(1) Subsequent holder may 
establish purchase price--(i) In general. At maturity of a short-term 
obligation, a subsequent holder (i.e., any person who purchased or 
otherwise obtained the obligation after the obligation was issued to 
the original holder) may establish the price of the obligation. The 
price established by the subsequent holder must then be treated as the 
original issue price for purposes of computing the amount of the 
original issue discount subject to withholding under section 3406. The 
price of a short-term obligation may be established by confirmation 
receipt or other record of a similar type or, if the obligation is 
redeemed by or through the person from whom the obligation was 
purchased or otherwise obtained, by the records of the person from whom 
or through whom the obligation was purchased or otherwise obtained. The 
subsequent holder is not required to certify under penalties of perjury 
that the price determined under this paragraph (c)(1)(i) is correct.
    (ii) Exception. A payor may elect to disregard the price at which 
the subsequent holder purchased or otherwise obtained the obligation if 
the payor's computer or recordkeeping system on which the details of 
the obligation are stored is not able to accept that price without 
significant manual intervention.
    (2) Subsequent holder unable (or not permitted) to establish 
purchase price. If a subsequent holder fails (or is unable, pursuant to 
paragraph (c)(1)(ii) of this section) to establish the purchase price 
of the obligation, then the person redeeming the obligation must 
determine the amount subject to withholding under section 3406 as 
though the obligation had been purchased by the holder on the date of 
issue. If the person redeeming the obligation is the issuer of the 
obligation, then the issuer must determine the amount subject to 
withholding from its records. If a person other than the issuer of the 
obligation redeems the obligation and the obligation is listed in 
Internal Revenue Service Publication 1212, List of Original Issue 
Discount Obligations, that person must determine the amount subject to 
withholding by using the issue price indicated in Publication 1212.
    (3) Transferred obligation. If a short-term obligation is 
transferred, no part of the purchase price is considered a reportable 
interest payment under section 6049. Withholding under section 3406 
applies, however, to the gross proceeds of the sale of the obligation 
if the transfer is subject to reporting under section 6045 and a 
condition exists for imposing withholding. For the rules regarding 
withholding for amounts subject to reporting under section 6045, see 
Sec. 31.3406(b)(3)-2.
    (d) Amount subject to backup withholding and time when backup 
withholding is imposed with respect to long-term obligation--(1) No 
cash payments prior to maturity. In the case of an obligation with a 
fixed maturity date that is more than one year from the date of issue 
(a long-term obligation) and with no cash payments prior to maturity, 
withholding under section 3406 applies at the maturity of the 
obligation to the amount of original issue discount includible in the 
gross income of the holder for the calendar year in which the 
obligation matures. The amount required to be withheld must not exceed 
the amount of the cash payment.
    (2) Registered long-term obligations with cash payments prior to 
maturity. In the case of a long-term obligation in registered form that 
provides for cash payments prior to maturity, withholding under section 
3406 applies at the time cash payments are made to the sum of the 
amounts of qualified stated interest and original issue discount 
includible in the gross income of the holder for the calendar year in 
which the cash payments are made. The amount required to be withheld at 
the time of any cash payment, however, must not exceed the amount of 
the cash payment. If more than one cash payment is made during a 
calendar year, the tax that is required to be withheld with respect to 
original issue discount must be allocated among all the expected cash 
payments in the ratio that each cash payment bears to the total of the 
expected cash payments.
    (3) Transferred registered long-term obligations with payments 
prior to maturity. In the case of a long-term obligation that is 
transferred after its issuance from the original holder, the amount 
subject to withholding under section 3406 with respect to a subsequent 
holder is the amount of original issue discount includible in the gross 
income of all holders during the calendar year (without regard to any 
amount paid by a subsequent holder at the time of transfer). If the 
person redeeming the obligation at maturity is the issuer of the 
obligation, the issuer must determine the amount subject to withholding 
through its records by treating the holder as if he were the original 
holder. If a person redeeming the obligation at maturity is a person 
other than the issuer of the obligation, and the obligation is listed 
in Internal Revenue Service Publication 1212, List of Original Issue 
Discount Obligations, the person must determine the amount subject to 
withholding by using the issue price indicated in Publication 1212.
    (e) Bearer long-term obligations. In the case of a bearer long-term 
obligation with cash payments prior to maturity--
    (1) Payments prior to maturity. Withholding under section 3406 
applies prior to maturity only to the payment of qualified stated 
interest (and not to any amount of original issue discount) includible 
in the gross income of the holder for the calendar year.
    (2) Payments at maturity. At maturity of the obligation, 
withholding applies to the sum of any qualified stated interest payment 
made at maturity and the total amount of original issue discount 
includible in the gross income of the holder during the calendar year 
of maturity. The amount required to be withheld at the time of the cash 
payment, however, must not exceed the amount of the cash payment.


Sec. 31.3406(b)(2)-3  Window transactions.

    (a) Requirement to backup withhold. Withholding under section 3406 
applies to a window transaction (as defined in paragraph (b) of this 
section) only if the payee does not furnish a taxpayer identification 
number to the payor in the manner required in paragraph (c) of this 
section or furnishes an obviously incorrect number as described in 
Sec. 31.3406(h)-1(b)(2). Withholding does not apply to a window 
transaction even though the Internal Revenue Service notifies the payor 
of the payee's incorrect taxpayer identification number under section 
3406(a)(1)(B) or of notified payee underreporting under section 
3406(a)(1)(C). The payee in a window transaction is not required to 
certify under penalties of perjury that the payee is not subject to 
withholding due to notified payee underreporting (as described in 
Sec. 31.3406(d)-2(b)(2)).
    (b) Window transaction defined--Window transaction means a payment 
of interest with respect to any of the following obligations:
    (1) An interest coupon in bearer form that is subject to taxation 
(i.e., other than exempt interest described in Sec. 1.6049-5(b)(1)(ii) 
of this chapter);
    (2) A United States savings bond; or
    (3) A discount obligation having a maturity at issue of one year or 
less, including commercial paper and bankers' acceptances that are in 

[[Page 66117]]
definitive form (i.e., evidenced by a paper document other than a 
confirmation receipt) but not including short-term government 
obligations (as defined in section 1271(a)(3)(B)).
    (c) Manner of furnishing taxpayer identification number in the case 
of a window transaction. A payee must furnish the payee's taxpayer 
identification number to the payor with respect to a window transaction 
either orally or in writing at the time that the window transaction 
occurs. See Sec. 31.3406(g)-3(c)(1)(i), which provides that a payee may 
not claim the payee is awaiting receipt of a taxpayer identification 
number with respect to a window transaction. The payee is not required 
to certify, under penalties of perjury, that the taxpayer 
identification number provided is correct.


Sec. 31.3406(b)(2)-4  Reportable dividend payment.

    (a) Dividends subject to backup withholding. A payment of a kind, 
and to a payee, that is required to be reported under section 6042 
(relating to returns regarding payments of dividends and corporate 
earnings and profits) is a reportable payment for purposes of section 
3406. See paragraph (b) of this section for certain dividends not 
subject to withholding under section 3406. See Sec. 31.6051-4 for the 
requirement to furnish a statement to the payee if tax is withheld 
under section 3406.
    (b) Dividends not subject to backup withholding. Except as provided 
in Sec. 31.3406(b)(3)-2 (relating to transactions reportable under 
section 6045), withholding under section 3406 does not apply to--
    (1) Any amount treated as a taxable dividend by reason of section 
302 (relating to redemptions of stock), section 304 (relating to 
redemptions through the use of related corporations), section 306 
(relating to disposition of certain stock), section 356 (relating to 
receipt of additional consideration in connection with certain 
reorganizations), or section 1081(e)(2) (relating to certain 
distributions pursuant to an order of the Securities and Exchange 
Commission);
    (2) Any exempt-interest dividend, as defined in section 
852(b)(5)(A), paid by a regulated investment company; or
    (3) Any amount paid or treated as paid during a year by a regulated 
investment company, provided that the payor reasonably estimates, as 
provided in paragraph (c)(2) of this section, that 95 percent or more 
of all dividends paid or treated as paid during the year are exempt-
interest dividends.
    (c) Amount subject to backup withholding--(1) In general. The 
amount of a dividend subject to withholding under section 3406 is the 
amount subject to reporting under section 6042, including any dividend 
that is reinvested pursuant to a plan under which a shareholder may 
elect to receive stock as a dividend instead of property. Except as 
otherwise provided in this paragraph (c), withholding applies to the 
entire amount of the distribution.
    (2) Reasonable estimate of amount of dividend subject to backup 
withholding. Pursuant to section 6042(b)(3) and Sec. 1.6042-3(c) of 
this chapter, if the payor is unable to determine the portion of a 
distribution that is a dividend, the entire amount of the distribution 
must be treated as a dividend for information reporting under section 
6042. Hence, withholding applies to the entire amount of the 
distribution. If a payor is able reasonably to estimate under section 
6042 and Sec. 1.6042-3(c) of this chapter the portion of a distribution 
that is not a dividend, however, the payor must not withhold on that 
portion (which is not considered a dividend). A payor making a payment, 
all or a portion of which may not be a dividend, may use previous 
experience to estimate the portion of a distribution that is not a 
dividend. The payor's estimate is considered reasonable if--
    (i) The estimate does not exceed the proportion of the 
distributions made by the payor during the most recent calendar year 
for which a Form 1099 was required to be filed that was not reported by 
the payor as a dividend; and
    (ii) The payor has no reasonable basis to expect that the 
proportion of the distribution that is not a dividend will be 
substantially different for the current year.
    (3) Reinvested dividends. In the case of a dividend paid pursuant 
to a dividend reinvestment plan, withholding under section 3406 
applies, pursuant to Sec. 31.3406(a)-4(a), at the time and to the 
amount made available to the shareholder or credited to the 
shareholder's account. At the discretion of the payor, withholding 
under section 3406 need not be applied to any excess of the fair market 
value of the shares of stock received by the shareholder or credited to 
the shareholder's account over the purchase price of the shares 
(including shares acquired by the shareholder at a discount in 
connection with the dividend distribution) or to any fee that is paid 
by the payor in the nature of a broker's fee for purchase of the stock 
or service charge for maintenance of the shareholder's account. The 
payor must, however, treat any excess amounts and fees on a consistent 
basis for each calendar year.


Sec. 31.3406(b)(2)-5  Reportable patronage dividend payment.

    (a) Patronage dividends subject to backup withholding. A payment of 
a kind, and to a payee, that is required to be reported under section 
6044 (relating to returns regarding patronage dividends) is a 
reportable payment for purposes of section 3406. See Sec. 31.6051-4 for 
the requirement to furnish a statement to the payee if tax is withheld 
under section 3406.
    (b) Amount subject to backup withholding--(1) Failure to provide 
taxpayer identification number or notification of incorrect taxpayer 
identification number. For purposes of sections 3406(a)(1) (A) and (B), 
the amount of a payment described in paragraph (a) of this section that 
is subject to withholding under section 3406 is the amount subject to 
reporting under section 6044, but only to the extent the payment is 
made in money. For purposes of this paragraph (b), money includes cash 
or a qualified check (as defined in section 1388(c)(4)).
    (2) Notified payee underreporting or payee certification failure. 
For purposes of sections 3406(a)(1) (C) and (D), the amount of a 
payment described in paragraph (a) of this section that is subject to 
withholding under section 3406 is the amount subject to withholding 
under paragraph (b)(1) of this section, but only if 50 percent or more 
of that reportable amount is paid in money. Thus, a payor is required 
to withhold according to this paragraph (b)(2) on a payment if--
    (i) There has been a notified payee underreporting described in 
section 3406(a)(1)(C) and Sec. 31.3406(c)-1 or there has been a payee 
certification failure described in section 3406(a)(1)(D) and 
Sec. 31.3406(d)-2;
    (ii) The payor makes a reportable payment subject to reporting 
under section 6044 to the payee; and
    (iii) Fifty percent or more of the payment is in cash or by 
qualified check.


Sec. 31.3406(b)(3)-1  Reportable payments of rents, commissions, 
nonemployee compensation, etc.

    (a) Section 6041 and 6041A(a) payments subject to backup 
withholding. A payment of a kind, and to a payee, that is required to 
be reported under section 6041 (relating to information reporting of 
rents, commissions, nonemployee compensation, etc.) or a payment that 
is required to be reported under section 6041A(a) (relating to 
information reporting of payments to nonemployees for services) is a 
reportable payment for purposes of section 3406. See paragraph 

[[Page 66118]]
(b) of this section for an exception concerning payments aggregating 
less than $600. See Sec. 31.6051-4 for the requirement to furnish a 
statement to the payee if tax is withheld under section 3406.
    (b) Amount subject to backup withholding--(1) In general. The 
amount of a payment described in paragraph (a) of this section subject 
to withholding under section 3406 is the amount subject to reporting 
under section 6041 or section 6041A(a).
    (2) Net commissions. Withholding under section 3406 does not apply 
to net commissions paid to unincorporated special agents with respect 
to insurance policies that are subject to reporting under section 6041, 
provided that no cash is actually paid by the payor to the special 
agent.
    (3) Payments aggregating $600 or more for the calendar year--(i) In 
general. A payment is a reportable payment under paragraph (a) of this 
section only if the aggregate amount of the current payment and all 
previous payments to the payee during the calendar year aggregate $600 
or more. The amount subject to withholding is the entire amount of the 
payment that causes the total amount paid to the payee to equal $600 or 
more and the amount of any subsequent payments made to the payee during 
the calendar year. This paragraph (b)(3)(i) does not apply to gambling 
winnings (as provided in Sec. 31.3406(g)-2(e)(1)).
    (ii) Exceptions--(A) The $600 aggregation rule. The $600 
aggregation rule of paragraph (b)(3)(i) of this section does not apply 
if the payor was required to make an information return under section 
6041 or 6041A(a) for the preceding calendar year with respect to 
payments to the payee, or the payor was required to withhold under 
section 3406 during the preceding calendar year with respect to 
payments to the payee that were reportable under section 6041 or 
6041A(a).
    (B) Determination of whether payments aggregate $600 or more. In 
determining whether payments to a payee aggregate $600 or more during a 
calendar year for purposes of withholding under section 3406, the payor 
must aggregate only payments of the same kind made to the same payee. 
For this purpose, payments are of the same kind if they are of the same 
type, regardless of whether they are reportable under the same section. 
However, a payor with different paying departments making reportable 
payments of the same kind is not required to aggregate payments made by 
all those departments unless it is the payor's customary method to 
aggregate those payments. A payor may, in its discretion, aggregate--
    (1) Payments not of the same kind to the same payee, reportable 
under either section 6041 or 6041A(a); and
    (2) Payments reportable under section 6041 with payments reportable 
under section 6041A(a).


Sec. 31.3406(b)(3)-2  Reportable barter exchanges and gross proceeds of 
sales of securities or commodities by brokers.

    (a) Transactions subject to backup withholding. A payment of a 
kind, and to a payee, that any broker (as defined in section 6045(c) 
and Sec. 1.6045-1(a)(1) of this chapter) or any barter exchange (as 
defined in section 6045(c) and Sec. 1.6045-1(a)(4) of this chapter) is 
required to report under section 6045 is a reportable payment for 
purposes of section 3406. See Sec. 31.6051-4 for the requirement to 
furnish a statement to the payee if tax is withheld under section 3406.
    (b) Amount subject to backup withholding--(1) In general. The 
amount subject to withholding under section 3406 is the amount subject 
to reporting under section 6045. The amount subject to withholding with 
respect to broker reporting is the amount of gross proceeds (as 
determined under Sec. 1.6045-1(d)(5) of this chapter). The amount 
subject to withholding with respect to barter exchanges is the amount 
received by any member or client (as determined under Sec. 1.6045-
1(f)(4) of this chapter).
    (2) Forward contracts, including foreign currency contracts, and 
regulated futures contracts--(i) In general. If a customer is subject 
to withholding under section 3406 with respect to a forward contract 
(subject to information reporting under Sec. 1.6045-1(c)(5) of this 
chapter), including a foreign currency contract (as defined in section 
1256(g)(2)), or a regulated futures contract (as defined in section 
1256(g)(1)), or with respect to an account through which those 
contracts are disposed of or acquired, the broker must withhold on both 
of the following amounts:
    (A) All cash or property withdrawn from the account by the customer 
during the relevant year; and
    (B) The amount of cash in the account available for withdrawal by 
the customer at the relevant year-end (including both gross proceeds 
and variation margin).
    (ii) Rules concerning withdrawals. A withdrawal includes the use of 
money (including both gross proceeds and variation margin) or property 
in the account to purchase any property other than property acquired in 
connection with the closing of a contract. For this purpose, the 
acceptance of a warehouse receipt or other taking of delivery to close 
a contract is in connection with the closing of a contract only if the 
property acquired is disposed of by the close of the seventh trading 
day following the trading day that the customer takes delivery under 
the contract. In addition, making delivery to close a contract is in 
connection with the closing of a contract only if the broker is able to 
determine that the property used to close the contract was acquired no 
earlier than the seventh trading day prior to the trading day on which 
delivery is made. Withdrawals do not include repayments of debt 
incurred in connection with making or taking delivery that meets the 
requirements of this paragraph (b)(2). Withdrawals also do not include 
payments of commissions, fees, transfers of cash from the account to 
another futures account that is subject to this paragraph (b)(2) or 
cash withdrawals traceable to dispositions of property other than 
futures (not including profit on the contract separately reportable 
under Sec. 1.6045-1(c)(5)(i)(b) of this chapter).
    (iii) Special rule for forward contracts, including foreign 
currency contracts, and regulated futures contracts. The determination 
of whether the customer is subject to withholding under section 3406 
with respect to an account containing forward contracts, including 
foreign currency contracts, or regulated futures contracts must be made 
at the time of the cash or property withdrawals or the relevant year-
end, whichever is applicable.
    (3) Security sales made through a margin account. The amount 
described in paragraph (a) of this section that is subject to 
withholding under section 3406 in the case of a security sale made 
through a margin account (as defined in 12 CFR part 220 (Regulation T)) 
is the gross proceeds (as defined in Sec. 1.6045-1(d)(5) of this 
chapter) of the sale. The amount required to be withheld with respect 
to the sale, however, is limited to the amount of cash available for 
withdrawal by the customer immediately after the settlement of the 
sale. For this purpose, the amount available for withdrawal by the 
customer does not include amounts required to satisfy margin 
maintenance under Regulation T, rules and regulations of the National 
Association of Securities Dealers and national securities exchanges, 
and generally applicable self-imposed rules of the margin account 
carrier.
    (4) Security short sales--(i) Amount subject to backup withholding. 
The amount subject to withholding under 

[[Page 66119]]
section 3406 with respect to a short sale of securities is the gross 
proceeds (as defined in Sec. 1.6045-1(d)(5) of this chapter) of the 
short sale. At the option of the broker, however, the amount subject to 
withholding may be the gain upon the closing of the short sale (if 
any); consequently, the obligation to withhold under section 3406 would 
be deferred until the closing transaction. A broker may use this 
alternative method of determining the amount subject to withholding 
under section 3406 with respect to a short sale only if at the time the 
short sale is initiated, the broker expects that the amount of gain 
realized upon the closing of the short sale will be determinable from 
the broker's records. If, due to events unforeseen at the time the 
short sale was initiated, the broker is unable to determine the basis 
of the property used to close the short sale, the property must be 
assumed for this purpose to have a basis of zero.
    (ii) Time of backup withholding. The determination of whether a 
short seller is subject to withholding under section 3406 must be made 
on the date of the initiation or closing, as the case may be, or on the 
date that the initiation or closing, as the case may be, is entered on 
the broker's books and records.
    (5) Fractional shares. A broker is not required to withhold under 
section 3406 with respect to a sale of a fractional share of stock 
resulting in less than $20 of gross proceeds (as described in 
Sec. 5f.6045-1(c)(3)(ix) of this chapter).


Sec. 31.3406(b)(3)-3  Reportable payments by certain fishing boat 
operators.

    (a) Payments subject to backup withholding. A payment of a kind, 
and to a payee, that is required to be reported under section 6050A 
(relating to information reporting by certain fishing boat operators) 
is a reportable payment for purposes of section 3406. See Sec. 31.6051-
4 for the requirement to furnish a statement to the payee if tax is 
withheld under section 3406.
    (b) Amount subject to backup withholding. The amount described in 
paragraph (a) of this section subject to withholding under section 3406 
is the amount subject to reporting under section 6050A, but only to the 
extent the amount is paid in money and represents a share of the 
proceeds of the catch.


Sec. 31.3406(b)(3)-4  Reportable payments of royalties.

    (a) Royalty payments subject to backup withholding. A payment of a 
kind, and to a payee, that is required to be reported under section 
6050N (relating to information reporting of payments of royalties) is a 
reportable payment for purposes of section 3406. See Sec. 31.6051-4 for 
the requirement to furnish a statement to the payee if tax is withheld 
under section 3406.
    (b) Amount subject to backup withholding. In general, the amount 
described in paragraph (a) of this section that is subject to 
withholding under section 3406 is the amount subject to reporting under 
section 6050N. However, if the reportable payment is for an oil or gas 
interest, the amount subject to withholding is the net amount the payee 
receives (i.e., the gross proceeds less production-related taxes such 
as state severance taxes).


Sec. 31.3406(b)(4)-1  Exemption for certain minimal payments.

    (a) In general. A payor of reportable interest or dividends (as 
described in section 3406(b)(2)) or of royalties (as described in 
section 3406(b)(3)(E)) may elect not to withhold from a payment that 
does not exceed $10 and that on an annualized basis does not exceed $10 
(see paragraph (c) of this section). A broker or barter exchange may 
elect not to withhold on gross proceeds of $10 or less without regard 
to the annualization requirement. See Sec. 31.6051-4 for the 
requirement to furnish a statement to the payee if tax is withheld 
under section 3406.
    (b) Manner of making the election. The election not to withhold 
from payments that do not exceed $10 can be made only for payments 
described in paragraph (a) of this section. The election may be made on 
a payment-by-payment basis.
    (c) How to annualize--(1) In general. To annualize a reportable 
interest payment, dividend payment, or royalty payment, a payor must 
calculate what the amount of the payment would be if it were paid for a 
1-year period (instead of the period for which it actually is paid). 
The annualized amount is determined by dividing the amount of the 
payment by the number of days in the period for which it is being paid 
and then multiplying that result by the number of days in the year. If 
the annualized amount is $10 or less, the payor may elect not to 
withhold on that payment regardless of whether more than $10 may be or 
has been paid to the payee in other reportable payments during the 
calendar year. Conversely, if the annualized amount is more than $10, 
withholding applies even if $10 or less is actually paid to the payee 
during the calendar year. For purposes of computing the annualized 
amount, the payor may assume that February always consists of 28 days 
and that the year always consists of 360 days. For amounts that are 
deposited with a payor in a new account or certificate between the 
dates on which the payor customarily pays or credits interest, the 
payor may assume that the period for which the interest is paid is the 
payor's customary period for paying or crediting interest.
    (2) Special aggregation rule for reportable interest and dividends. 
If a payor maintains records that reflect multiple holdings of one 
payee and the payor makes an aggregate payment of reportable interest 
or dividends (as defined in section 3406(b)(2)) with respect to those 
multiple holdings (such as a dividend check that reflects payment on 
all stock owned by the payee), the payor must annualize the aggregate 
payment.
    (d) Exception for window transactions and original issue discount. 
A payor is not required to annualize payments made in window 
transactions (as defined in Sec. 31.3406(b)(2)-3(b)) or payments of 
original issue discount. With respect to a window transaction, however, 
the payor is required to aggregate all payments made in the same 
transaction (e.g., payments made with respect to coupons or obligations 
presented for payment at the same time as described in Sec. 1.6049-
4(e)(4) of this chapter).


Sec. 31.3406(c)-1  Notified payee underreporting of reportable interest 
or dividend payments.

    (a) Overview. Withholding under section 3406(a)(1)(C) applies to 
any reportable interest or dividend payment (as defined in section 
3406(b)(2)) made with respect to an account of a payee if the Internal 
Revenue Service or a broker notifies a payor under paragraph (c) (1) or 
(2) of this section that the payee is subject to withholding due to 
notified payee underreporting (as defined in paragraph (b)(1) of this 
section), and the payor is required under paragraph (c)(3) of this 
section to identify that account. After receiving the notice and 
identifying accounts, the payor must notify the payee, in accordance 
with paragraph (d) of this section, that withholding due to notified 
payee underreporting has started. Paragraph (e) of this section 
describes the period for which withholding due to notified payee 
underreporting is required. Paragraph (f) of this section provides 
rules concerning notices that the Internal Revenue Service will send to 
a payee before notifying a payor that the payee is subject to 
withholding due to notified payee underreporting. Paragraph (g) of this 
section provides rules that a payee can use to prevent withholding due 
to notified payee underreporting from starting or to stop it once it 
has started. Paragraph (h) of 

[[Page 66120]]
this section provides special rules for joint accounts of payees who 
have filed a joint return. See section 6682 for the penalties that may 
apply to a payee subject to withholding under section 3406(a)(1)(C).
    (b) Definitions--(1) Notified payee underreporting. Notified payee 
underreporting means that the Internal Revenue Service has--
    (i) Determined that there was a payee underreporting (as defined in 
paragraph (b)(2) of this section);
    (ii) Mailed at least four notices under paragraph (f)(1) of this 
section to the payee (over a period of at least 120 days) with respect 
to the underreporting; and
    (iii) Assessed any deficiency attributable to the underreporting in 
the case of any payee who has filed a return.
    (2) Payee underreporting--(i) In general. Payee underreporting 
means that the Internal Revenue Service has determined, for a taxable 
year, that--
    (A) A payee failed to include in the payee's return of tax under 
chapter 1 of the Internal Revenue Code for that year any portion of a 
reportable interest or dividend payment required to be shown on that 
tax return; or
    (B) A payee may be required to file a return for that year and to 
include a reportable interest or dividend payment in the return, but 
failed to file the return.
    (ii) Payments included in making payee underreporting 
determination. The determination of whether there is payee 
underreporting is made by treating as reportable interest or dividend 
payments, all payments of dividends reported under section 6042, all 
patronage dividends reported under section 6044, and all interest and 
original issue discount reported under section 6049, regardless of 
whether withholding due to notified payee underreporting applies to 
those payments.
    (c) Notice to payors regarding backup withholding due to notified 
payee underreporting--(1) In general. If the Internal Revenue Service 
or a broker notifies a payor that a payee is subject to withholding due 
to notified payee underreporting, the payor must--
    (i) Identify any accounts of the payee under the rules of paragraph 
(c)(3) of this section; and
    (ii) Notify the payee and withhold under section 3406 on reportable 
interest or dividend payments made with respect to any identified 
account under the rules of paragraphs (d) and (e) of this section.
    (2) Additional requirements for payors that are also brokers--(i) 
In general. A broker must notify the payor of a readily tradable 
instrument that the payee of the instrument is subject to withholding 
due to notified payee underreporting if--
    (A) The broker (in its capacity as a payor) receives a notice from 
the Internal Revenue Service under paragraph (c)(1) of this section 
that a payee is subject to withholding due to notified payee 
underreporting and the broker is required to identify an account of the 
payee under paragraph (c)(3) of this section;
    (B) The payee subsequently acquires the instrument from the broker 
through the same account; and
    (C) The acquisition of the instrument occurs after the close of the 
30th business day after the date that the broker receives the notice 
(or on any earlier date that the broker may begin applying this 
paragraph (c)(2) after receipt of the notice described in paragraph 
(c)(1) of this section).
    (ii) Transfer out of street name. For purposes of this paragraph 
(c)(2), an acquisition includes a transfer of an instrument out of 
street name into the name of the registered owner (i.e., the payee).
    (iii) Method of providing notice. A broker must provide the notice 
required under this paragraph (c)(2) to the payor of the instrument 
with the transfer instructions for the acquisition. See 
Sec. 31.3406(d)-4(a)(2).
    (iv) Termination of obligation to provide information. The 
obligation of a broker to provide notice to payors under this paragraph 
(c)(2) terminates simultaneously with the termination of the broker's 
obligation to withhold (in its capacity as payor) due to notified payee 
underreporting on reportable interest or dividends made with respect to 
the account.
    (3) Payor identification of accounts of the payee subject to backup 
withholding due to notified payee underreporting--(i) In general--(A) 
Notice from the Internal Revenue Service. If a payor receives a notice 
from the Internal Revenue Service under paragraph (c)(1) of this 
section, the payor must identify, exercising reasonable care, all 
accounts using the same taxpayer identification number for information 
reporting purposes as the one provided in the notice. The notice may 
provide, however, that the payor need only identify the account or 
accounts corresponding to any account number or designation and related 
taxpayer identification number used for information reporting purposes 
as that listed on the notice.
    (B) Notice from a broker. If a payor receives a notice from a 
broker under paragraphs (c) (1) and (2) of this section, the payor is 
not required to identify any account other than the account identified 
in the notice.
    (ii) Exercise of reasonable care. If an account identified pursuant 
to paragraph (c)(3)(i)(A) of this section contains a customer 
identifier that can be used to retrieve systemically any other accounts 
that use the same taxpayer identification number for information 
reporting purposes, the payor must identify all accounts that can be so 
retrieved. Otherwise, a payor is considered to exercise reasonable care 
in identifying accounts subject to withholding under section 
3406(a)(1)(C) if the payor searches any computer or other recordkeeping 
system for the region, division, or branch that serves the geographic 
area in which the payee's mailing address is located and that was 
established (or is maintained) to reflect reportable interest or 
dividend payments.
    (iii) Newly opened accounts. (A) In general, a new account is not 
subject to withholding under section 3406(a)(1)(C) if the payee 
provides to the payor a Form W-9 (or other acceptable substitute) on 
which the payor may reasonably rely (within the meaning of 
Sec. 31.3406(h)-3(e)(2) without regard to Sec. 31.3406(h)-3(e)(2)(v)), 
unless the payor has actual knowledge (within the meaning of paragraph 
(c)(3)(iii)(B) of this section) that the statements made on the form 
are not true.
    (B) For purposes of paragraph (c)(3)(iii)(A) of this section, a 
payor is considered to have actual knowledge that a payee's statement 
that the payee is not subject to withholding under section 
3406(a)(1)(C) is not true if--
    (1) The employee or individual agent of the payor who receives the 
payee's certification knows that the statement is not true;
    (2) In conducting the investigation, if any, required by paragraph 
(c)(3)(iii)(C) of this section, the payor identifies any other accounts 
of the payee that are already subject to withholding under section 
3406(a)(1)(C); or
    (3) In the course of processing the certification or in 
administering an account to which a certification relates, the payor 
discovers that the payor was previously notified by the Internal 
Revenue Service that the payee is subject to withholding under section 
3406(a)(1)(C) and no notice was received to stop withholding pursuant 
to section 3406(c)(3) prior to the time of the discovery.
    (C) Except as provided in this paragraph (c)(3)(iii)(C), a payor is 
not required to investigate whether the statements made on the Form W-9 
described in paragraph (c)(3)(iii)(A) of this section are true. If, 
however, in 

[[Page 66121]]
opening a new account, the payor relies on the same Form W-9 (or 
appropriate substitute) that it relied on previously in opening another 
account, the payor must investigate whether any such existing account 
is subject to withholding under section 3406(a)(1)(C). Similarly, if 
the payor utilizes a universal account system described in the first 
sentence of paragraph (c)(3)(ii) of this section, and in opening a new 
account the payor searches its records to determine whether the new 
account should be identified under an existing identifier (because the 
payee has existing accounts with the payor), the payor must investigate 
whether any existing accounts identified with the same identifier are 
subject to withholding under section 3406(a)(1)(C).
    (d) Notice from payors of backup withholding due to notified payee 
underreporting--(1) In general. If a payor receives notice from the 
Internal Revenue Service or a broker under paragraph (c)(1) of this 
section and is required to identify an account under paragraph (c)(3) 
of this section as an account of the payee, the payor must notify the 
payee in accordance with paragraph (d)(2) of this section that 
withholding due to notified payee underreporting has started.
    (2) Procedures. The payor must send the notice required by 
paragraph (d)(1) of this section to the payee no later than 15 days 
after the date that the payor makes the first payment subject to 
withholding due to notified payee underreporting. The payor must send 
the notice by first-class mail to the payee at the payee's last known 
address. The notice to the payee required by paragraph (d)(1) of this 
section must state--
    (i) That the Internal Revenue Service has given notice that the 
payee has underreported reportable interest or dividends;
    (ii) That, as a result of the underreporting, the payor is required 
under section 3406(a)(1)(C) of the Internal Revenue Code to withhold 31 
percent of reportable interest or dividend payments made to the payee;
    (iii) The date that the payor started (or plans to start) 
withholding due to notified payee underreporting under section 
3406(a)(1)(C);
    (iv) The account number or numbers that are subject to withholding 
due to notified payee underreporting;
    (v) That the payee must obtain a determination from the Internal 
Revenue Service in order to stop the withholding due to notified payee 
underreporting; and
    (vi) That while the payee is subject to withholding due to notified 
payee underreporting, the payee may not certify to a payor making 
reportable interest or dividend payments (or to a broker acquiring a 
readily tradable instrument for the payee) that the payee is not 
subject to withholding due to notified underreporting.
    (e) Period during which backup withholding is required--(1) In 
general. If a payor receives notice from the Internal Revenue Service 
or a broker under paragraph (c)(1) of this section, the payor must 
impose withholding under section 3406(a)(1)(C) on all reportable 
interest or dividend payments with respect to any account of the payee 
required to be identified under paragraph (c)(3) of this section made 
after the close of the 30th business day after the day on which the 
payor receives that notice and before the stop date (as described in 
paragraph (e)(2) of this section). A payor may choose to start 
withholding under this paragraph (e)(1) at any time during the 30-
business-day period described in the preceding sentence.
    (2) Stop withholding--(i) When no underreporting exists or undue 
hardship exists--(A) Stop date. In the case of a determination under 
paragraph (g)(3) (i) or (iii) of this section that no underreporting 
exists or that an undue hardship exists, the stop date is the day that 
is 30 days after the earlier of--
    (1) The date on which the payor receives written notification from 
the Internal Revenue Service under paragraph (g) of this section that 
withholding is to stop; or
    (2) The date on which the payor receives a copy of the written 
certification provided to the payee by the Internal Revenue Service 
under paragraph (g) of this section that withholding is to stop.
    (B) Acceleration of stop date. A payor may choose to stop 
withholding at any time during the 30-day period described in paragraph 
(e)(2)(i)(A) of this section.
    (ii) When underreporting is corrected or bona fide dispute exists. 
In the case of a determination under paragraph (g)(3) (ii) or (iv) of 
this section that the underreporting has been corrected or that a bona 
fide dispute exists, the stop date occurs on the first day of January 
(immediately following a period of at least twelve months ending on 
October 15 of any calendar year in which the determination has been 
made) or if later, the stop date determined under paragraph (e)(2)(i) 
of this section.
    (3) Dormant accounts. The requirement that a payor withhold under 
this paragraph (e) on reportable interest or dividend payments made 
with respect to an account terminates no later than the close of the 
third calendar year ending after the later of--
    (i) The date that the most recent reportable interest or dividend 
payment was made with respect to that account; or
    (ii) The date that the payor received notice under paragraph (c)(1) 
of this section.
    (f) Notice to payees from the Internal Revenue Service--(1) Notice 
period. After the Internal Revenue Service determines under paragraph 
(b)(2) of this section that payee underreporting exists, the Internal 
Revenue Service will mail to the payee at least four notices over a 
period of at least 120 days (the notice period) before payors will be 
notified under paragraph (c)(1) of this section that the payee is 
subject to withholding due to notified payee underreporting. The 
notices may be accompanied by, or incorporated in, other notices 
provided to the payee by the Internal Revenue Service.
    (2) Payee subject to backup withholding. After the Internal Revenue 
Service provides the notices described in paragraph (f)(1) of this 
section, the Internal Revenue Service will send notices to payors under 
paragraph (c)(1) of this section unless--
    (i) A payee obtains a determination under paragraph (g) of this 
section; or
    (ii) In the case of a payee who has filed a tax return, the 
Internal Revenue Service has not assessed the deficiency attributable 
to the underreporting.
    (3) Disclosure of names of payors and brokers. Pursuant to section 
3406(c)(5) the Internal Revenue Service may require a payee subject to 
withholding due to notified payee underreporting to disclose the names 
of all the payee's payors of reportable interest or dividend payments 
and the names of all of the brokers with whom the payee has accounts 
which may involve reportable interest or dividend payments. To the 
extent required in the request from the Internal Revenue Service, the 
payee must also provide the payee's account numbers and other 
information necessary to identify the payee's accounts.
    (4) Backup withholding certification. After a payee receives a 
final notice from the Internal Revenue Service under paragraph (f)(1) 
of this section, the payee is not permitted to certify to any payor or 
broker, under penalties of perjury, that the payee is not subject to 
withholding under section 3406(a)(1)(C), until the payee receives the 
certification from the Internal Revenue Service under paragraph (g) of 
this section advising the payee that the payee is no longer subject to 

[[Page 66122]]
withholding under section 3406(a)(1)(C). A final notice will contain 
the information described in this paragraph (f)(4). See sections 6682 
and 7205(b) for civil and criminal penalties for making a false 
certification.
    (g) Determination by the Internal Revenue Service that backup 
withholding should not start or should be stopped--(1) In general. A 
payee may prevent withholding due to notified payee underreporting from 
starting, or stop the withholding once it has started, by requesting 
and receiving a determination from the Internal Revenue Service under 
one or more of the provisions of paragraph (g)(3) of this section. 
Following its review of a request for a determination under paragraph 
(g)(3) of this section, the Internal Revenue Service will either make 
the determination or provide the payee with a written report informing 
the payee that the request for determination is being denied and the 
reasons for the denial. If a determination is made during the notice 
period (as defined in paragraph (f)(1) of this section), the payee is 
not subject to withholding due to notified payee underreporting with 
respect to any taxable year for which a determination was made. If a 
determination is made after the notice period, the Internal Revenue 
Service will, at the time prescribed in paragraph (g)(2) of this 
section, provide written certification to a payee that withholding is 
to stop, and will notify payors who were contacted pursuant to 
paragraph (c)(1) of this section to stop withholding. A broker who (in 
its capacity as payor) under this paragraph (g)(1) receives a notice 
from the Internal Revenue Service or a copy of the certification 
provided to a payee by the Internal Revenue Service is not required to 
provide a corresponding notice to any payors whom the broker has 
previously notified under paragraph (c)(2) of this section.
    (2) Date notice to stop backup withholding will be provided--(i) 
Underreporting corrected or bona fide dispute. If the Internal Revenue 
Service makes a determination under paragraph (g)(3) (ii) or (iv) of 
this section during the 12-month period ending on October 15 of any 
calendar year (as described in paragraph (e)(2)(ii) of this section), 
the Internal Revenue Service will provide the certification and the 
notices described in paragraph (g)(1) of this section no later than 
December 1 of that calendar year.
    (ii) No underreporting or undue hardship. If the Internal Revenue 
Service makes a determination under paragraph (g)(3)(i) or (iii) of 
this section, the Internal Revenue Service will provide the notices 
described in paragraph (g)(1) of this section no later than the 45th 
day after the day on which the Internal Revenue Service makes its 
determination.
    (3) Grounds for determination. The Internal Revenue Service will 
make a determination that withholding due to notified payee 
underreporting should not start or should stop once it has started if 
the payee--
    (i) Shows that there was no payee underreporting (as provided in 
paragraph (g)(4) of this section) for each taxable year with respect to 
which the Internal Revenue Service determined under paragraph (b)(2) of 
this section that there was payee underreporting;
    (ii) Corrects any payee underreporting (as provided in paragraph 
(g)(5) of this section) for each taxable year with respect to which the 
Internal Revenue Service determined under paragraph (b)(2) of this 
section that there was payee underreporting;
    (iii) Shows that withholding will cause or is causing an undue 
hardship (as defined in paragraph (g)(6) of this section) and that it 
is unlikely that the payee will underreport interest or dividend 
payments again; or
    (iv) Shows that a bona fide dispute exists regarding whether any 
underreporting has occurred (as provided in paragraph (g)(7) of this 
section) for each taxable year with respect to which the Internal 
Revenue Service determined under paragraph (b)(2) of this section that 
there was payee underreporting.
    (4) No underreporting. A payee may show that no underreporting of 
reportable interest or dividends payments exists by presenting--
    (i) Receipts or other satisfactory documentation to the Internal 
Revenue Service showing that all taxes relating to the payments were 
reported; or
    (ii) Evidence showing that the payee did not have to file a return 
for the taxable year in question (e.g., because the payee did not make 
enough income) or that the underreporting determination was based upon 
a factual, clerical, or other error.
    (5) Correcting any payee underreporting--(i) Before issuance of a 
statutory notice of deficiency. Before a statutory notice of deficiency 
is issued to a payee pursuant to section 6212, the payee may correct 
underreporting--
    (A) By filing a return if one was not previously filed and 
including the unreported interest and dividends thereon;
    (B) By filing an amended return in the event a return was filed and 
including the unreported interest and dividends thereon; or
    (C) By consenting to the additional assessment according to 
applicable notices and forms sent to the payee by the Internal Revenue 
Service with respect to the underreporting, and paying taxes, 
penalties, and interest due with respect to any underreported interest 
or dividend payments.
    (ii) After issuance of a statutory notice of deficiency. After a 
statutory notice of deficiency is issued to a payee--
    (A) The payee may correct underreporting at any time, by filing a 
return if one was not previously filed and paying the entire deficiency 
and any other taxes including penalties and interest attributable to 
any payee underreporting of interest or dividend payments; or
    (B) The payee may correct underreporting after the mailing of the 
statutory notice of deficiency but before the expiration of the 90-day 
or 150-day period described in section 6213(a) or, if a petition is 
filed with the United States Tax Court, before the decision of the Tax 
Court is final, by making a remittance to the Internal Revenue Service 
of the amounts described in paragraph (g)(5)(ii)(A) of this section. 
The payee must specifically designate in writing that the remittance is 
a deposit in the nature of a cash bond.
    (iii) Special rules. For purposes of paragraph (g)(5)(ii) of this 
section, the payee will not be deemed to have corrected the payee 
underreporting under paragraph (g)(5)(ii)(B) of this section after the 
remittance is returned to the payee in the manner described in any 
applicable administrative procedure. For further guidance on a deposit 
in the nature of a cash bond, see subparagraph 2 of section 4.01 of 
Rev. Proc. 84-58 (1984-2 C.B. 501). (See Sec. 601.601(d)(2) of this 
chapter.) Once the remittance is returned to the payee, the rules of 
this section will apply. If the Internal Revenue Service previously 
contacted payors of the payee to start withholding with respect to the 
notified payee underreporting, however, the Internal Revenue Service 
will recontact those payors to start withholding under paragraph (c)(1) 
of this section with respect to the payee underreporting without regard 
to paragraph (f) of this section.
    (6) Undue hardship--(i) In general. A determination of undue 
hardship will be based on the overall impact to the payee of having 
reportable interest or dividend payments withheld at a 31 percent rate 
under section 3406. In addition, a determination of undue hardship will 
be made only if the Internal Revenue Service concludes that it is 
unlikely that any payee underreporting will occur again. 

[[Page 66123]]

    (ii) Factors. Factors that will be considered in determining 
whether withholding causes undue hardship include, but are not limited 
to, the following--
    (A) Whether estimated tax payments, and other credits for current 
tax liabilities, or amounts withheld on employee wages or pensions, in 
addition to withholding under section 3406, would cause significant 
overwithholding;
    (B) The payee's health, including the payee's ability to pay 
foreseeable medical expenses;
    (C) The extent of the payee's reliance on interest and dividend 
payments to meet necessary living expenses and the existence, if any, 
of other sources of income;
    (D) Whether other income of the payee is limited or fixed
    (e.g., social security, pension, and unearned income);
    (E) The payee's ability to sell or liquidate stocks, bonds, bank 
accounts, trust accounts, or other assets, and the consequences of 
doing so;
    (F) Whether the payee reported and timely paid the most recent 
year's tax liability, including interest and dividend income; and
    (G) Whether the payee has filed a bankruptcy petition with the 
United States Bankruptcy Court.
    (7) Bona fide dispute. The Internal Revenue Service may make a 
determination under this paragraph (g)(7) if there is a dispute between 
the payee and the Internal Revenue Service on a question of fact or law 
that is material to a determination under paragraph (g)(3)(i) of this 
section and, based upon all the facts and circumstances, the Internal 
Revenue Service finds that the dispute is asserted in good faith by the 
payee and there is a reasonable basis for the payee's position.
    (h) Payees filing a joint return--(1) In general. For purposes of 
this section, if payee underreporting is found to exist with respect to 
a joint return, then the provisions of this section apply to both 
payees (i.e., the husband and wife). As a result, both payees are 
subject to withholding on accounts in their individual names as well as 
accounts in their joint names. Either or both payees may satisfy the 
criteria for a determination that no payee underreporting exists, that 
the underreporting has been corrected, or that a bona fide dispute 
exists (as provided in paragraph (g)(3) (i), (ii), or (iv) of this 
section). Both payees, however, must satisfy the criteria for a 
determination that withholding will cause or is causing undue hardship 
(as provided in paragraph (g)(3)(iii) of this section).
    (2) Exceptions--(i) Innocent spouse. A spouse who files a joint 
return may obtain a determination that withholding should stop or not 
start with respect to payments made to his or her individual accounts, 
if the spouse shows that--
    (A) He or she did not underreport income because he or she is a 
spouse described in section 6013(e), i.e, innocent spouse; or
    (B) There is a bona fide dispute regarding whether he or she is an 
innocent spouse and hence did not underreport income.
    (ii) Divorced or legally separated payee. A payee who, at the time 
of the request for a determination under paragraph (g) of this section, 
is divorced or separated under State law may obtain a determination 
that undue hardship exists (or would exist) under paragraph (g)(3)(iii) 
of this section with respect to reportable interest or dividend 
payments made to his or her individual accounts if the divorced or 
legally separated payee satisfies the criteria for a determination 
under paragraph (g)(6) of this section.
    (i) Reserved.
    (j) Penalties. For the application of penalties related to this 
section, see sections 6682 and 7205(b).


Sec. 31.3406(d)-1  Manner required for furnishing a taxpayer 
identification number.

    (a) Requirement to backup withhold. Withholding under section 
3406(a)(1)(A) applies to a reportable payment (as defined in section 
3406(b)) if the payee does not furnish the payee's taxpayer 
identification number to the payor in the manner required by this 
section. The period for which withholding is required is described in 
Sec. 31.3406(e)-1(b). See Sec. 31.3406(d)-3(a) and (b) for special 
rules when an account is established directly with, or an instrument is 
acquired directly from, the payor by electronic transmission or by 
mail, or an instrument is sold through a broker by electronic 
transmission or by mail. See Sec. 31.3406(d)-4 for special rules 
applicable to readily tradable instruments acquired through a broker. 
See Sec. 31.3406(h)-3(e) for the rules on when a payor may rely on a 
Form W-9. See also Sec. 31.3406(g)-3 for rules regarding a payee 
awaiting receipt of a taxpayer identification number. See the 
applicable information reporting sections and section 6109 and the 
regulations thereunder to determine whose taxpayer identification 
number should be provided.
    (b) Reportable interest or dividend account--(1) Manner required 
for furnishing a taxpayer identification number with respect to a pre-
1984 account or instrument. A payee must furnish the payee's taxpayer 
identification number to the payor with respect to any obligation, 
deposit, certificate, share, membership, contract, investment, account, 
or other relationship or instrument established or acquired on or 
before December 31, 1983 (a pre-1984 account) and with respect to which 
the payor makes a reportable interest or dividend payment (as defined 
in section 3406(b)(2)). The manner of determining whether an account or 
an instrument is a pre-1984 account is described in paragraph (b)(2) of 
this section. The payee of a pre-1984 account may furnish the payee's 
taxpayer identification number to the payor orally or in writing. The 
payee is not required to certify under penalties of perjury that the 
taxpayer identification number is correct.
    (2) Determination of pre-1984 account or instrument--(i) In 
general. An account that is in existence before January 1, 1984, will 
be considered a pre-1984 account, regardless of whether additional 
deposits are made to the account on or after January 1, 1984. An 
account established as an expansion of a credit union prime account in 
existence prior to January 1, 1984, constitutes a pre-1984 account. If 
funds taken from one account in existence prior to January 1, 1984, are 
used to create a new account on or after that date, however, the new 
account does not constitute a pre-1984 account except as provided in 
the preceding sentence. An instrument acquired prior to January 1, 
1984, is a pre-1984 account. Regardless of when an instrument was 
acquired, if it is negotiated in a window transaction as defined in 
Sec. 31.3406(b)(2)-3(b), it is treated as an instrument acquired after 
December 31, 1983. An obligation in bearer form and subject to 
reporting under section 6045, whenever acquired, is not a pre-1984 
account. Any instrument, whenever acquired, that is held in a brokerage 
account is considered a pre-1984 account if the brokerage account is 
not a post-1983 brokerage account (as described in paragraph (c)(1)(ii) 
of this section). If shares of a corporation are held before January 1, 
1984 (or considered held before that date by operation of this 
paragraph (b)(2)), and additional shares are acquired by the holder, 
irrespective of whether the shares are received by reason of a stock 
dividend, investing new cash, or otherwise, the new shares, in the 
discretion of the payor, may be considered a pre-1984 account. In the 

[[Page 66124]]
case of a qualified employee trust that distributes instruments in 
kind, any instrument distributed from the trust is considered a pre-
1984 account with respect to employees who were participants in the 
trust before 1984. Similarly, when a payor offers participants in a 
plan the opportunity to purchase stock of the payor after a specified 
time, using the money that the payee invested during that period of 
time, the stock so purchased after December 31, 1983, is considered a 
pre-1984 account with respect to participants in the plan who either 
owned shares or invested money in the plan before January 1, 1984.
    (ii) Account or instrument automatically acquired on the maturity 
or termination of an account. When an account is opened, or an 
instrument is acquired, automatically on the maturity or termination of 
an account that was in existence or an instrument that was held before 
January 1, 1984 (or considered to have been in existence or held before 
that date by operation of this paragraph (b)(2)(ii)), without the 
participation of the payee, the new account or instrument, in the 
discretion of the payor, may be considered a pre-1984 account. For 
purposes of the preceding sentence, a payee is not considered to have 
participated in the acquisition of the new account or instrument solely 
because the payee failed to exercise a right to withdraw funds at the 
maturity or termination of the old account or instrument.
    (iii) Insurance policies. In the case of insurance policies in 
effect on December 31, 1983, the election of a dividend accumulation 
option pursuant to which interest is paid (as defined in Sec. 1.6049-
5(a)(4) of this chapter), or the creation of an account in which 
proceeds of a policy are held for the policy beneficiary, may, in the 
payor's discretion, be treated as a pre-1984 account.
    (iv) Acquisitions of accounts and instruments--(A) Pre-1984 or 
post-1983 status known. If a payor acquires accounts or instruments of 
another payor (including through a tax-free reorganization under 
section 368), the acquiring payor must treat the persons specified in 
this paragraph (b)(2)(iv)(A) as having the same requirement to furnish 
a taxpayer identification number in the manner required under this 
paragraph (b) to the acquiring payor for information reporting, 
withholding, and related tax provisions as existed with respect to the 
payor whose accounts or instruments were acquired. Persons specified in 
this paragraph (b)(2)(iv)(A) are persons who held accounts or 
instruments in the other payor immediately before the acquisition and 
who receive an account or instrument in the acquiring payor immediately 
after the acquisition.
    (B) Pre-1984 or post-1983 status unknown. If the acquiring payor, 
as described in paragraph (b)(2)(iv)(A) of this section, is unable to 
identify from the business records of the other payor whether any or 
all of the accounts or instruments of the persons specified in 
paragraph (b)(2)(iv)(A) of this section are pre-1984 (or post-1983) 
accounts or instruments, then the acquiring payor may treat these 
unidentified accounts or instruments as pre-1984 accounts or 
instruments.
    (C) Cross reference. See Sec. 31.3406(g)-2(g) for the limited 
exception from withholding under section 3406(a)(1)(A) on accounts or 
instruments described in paragraphs (b)(2)(iv) (A) and (B) of this 
section for which the payor does not have a taxpayer identification 
number.
    (3) Manner required for furnishing a taxpayer identification number 
with respect to an account or instrument that is not a pre-1984 
account. A payee who receives reportable interest or dividend payments 
(as defined in section 3406(b)(2)) from a payor must certify under 
penalties of perjury that the taxpayer identification number the payee 
furnishes to the payor is the payee's correct taxpayer identification 
number. The payee must make the certification only with respect to an 
account or instrument that is not a pre-1984 account (as described in 
paragraph (b)(2) of this section). See Sec. 31.3406(h)-3 for a 
description of the certificate on which the certification must be made. 
See Sec. 31.3406(d)-2 for the requirement that the payee must certify 
under penalties of perjury that the payee is not subject to withholding 
due to notified payee underreporting. See Sec. 31.3406(d)-3(a) with 
respect to an account established directly with, or an instrument 
acquired directly from, the payor by electronic transmission or by 
mail. See Sec. 31.3406(d)-4 for the rules applicable to readily 
tradable instruments acquired through a broker.
    (4) Special rule with respect to the acquisition of a readily 
tradable instrument in a transaction between certain parties acting 
without the assistance of a broker. If a payee, at any time, acquires a 
readily tradable instrument without the assistance of a broker, and no 
party to the acquisition is a broker or an agent of the payor, the 
payee must furnish the payee's taxpayer identification number to the 
payor prior to the time reportable payments are made on the instrument. 
The payee is not required to certify under penalties of perjury that 
the number is correct. See Sec. 31.3406(d)-2 for the rule that a payee 
is not subject to withholding due to notified payee underreporting with 
respect to a readily tradable instrument acquired in the manner 
described in this paragraph (b)(4). A broker is considered to provide 
assistance in the acquisition of an instrument if the person effecting 
the acquisition would be required to make an information return under 
section 6045 if such person were to sell the instrument. See 
Sec. 31.3406(d)-4 for rules relating to an acquisition of a readily 
tradable instrument when a broker is involved.
    (c) Brokerage account--(1) Manner required for furnishing a 
taxpayer identification number with respect to a brokerage relationship 
that is not a post-1983 brokerage account--(i) In general. With respect 
to any instrument, investment, or deposit made through a brokerage 
account that is not a post-1983 brokerage account, a payee must furnish 
the payee's taxpayer identification number to the broker either orally 
or in writing. The payee is not required to certify under penalties of 
perjury that the taxpayer identification number is correct. See 
paragraph (b)(2)(i) of this section for the rule that any instrument, 
whenever acquired, that is held in a brokerage account that is not a 
post-1983 brokerage account, is considered held in an account that is 
not a post-1983 brokerage account. For example, in 1983 a payee 
established and acquired a readily tradable instrument from a brokerage 
account; no activity took place through that account until the payee 
purchased a readily tradable instrument in 1995. That readily tradable 
instrument is not held in a post-1983 brokerage account; therefore, the 
payee need not certify under penalties of perjury that the payee's 
taxpayer identification number is correct.
    (ii) Definition of a brokerage account that is not a post-1983 
brokerage account. A brokerage account that was established by a payee 
before January 1, 1984, through which during 1983 the broker either 
bought or sold securities for the payee or held securities on behalf of 
the payee as a nominee (i.e., in street name), is an account that is 
not a post-1983 brokerage account.
    (2) Manner required for furnishing a taxpayer identification number 
with respect to a post-1983 brokerage account--(i) In general. With 
respect to a post-1983 brokerage account, the payee must furnish the 
payee's taxpayer identification number to the broker and certify under 
penalties of perjury that the taxpayer identification number furnished 
is correct, except as provided in Sec. 31.3406(d)-3(b). 

[[Page 66125]]

    (ii) Definition of a post-1983 brokerage account. A brokerage 
account established after December 31, 1983 (or before January 1, 1984, 
through which during 1983 the broker neither bought nor sold securities 
nor held securities on behalf of the payee as a nominee (i.e., in 
street name)), is a post-1983 brokerage account.
    (d) Rents, commissions, nonemployee compensation, and certain 
fishing boat operators, etc.--Manner required for furnishing a taxpayer 
identification number. For accounts, contracts, or relationships 
subject to information reporting under section 6041 (relating to 
information reporting at source on rents, royalties, salaries, etc.), 
section 6041A(a) (relating to information reporting of payments for 
nonemployee services), section 6050A (relating to information reporting 
by certain fishing boat operators), or section 6050N (relating to 
information reporting of payments of royalties), the payee must furnish 
the payee's taxpayer identification number to the payor either orally 
or in writing. Except as provided in Sec. 31.3406(d)-5, the payee is 
not required to certify under penalties of perjury that the taxpayer 
identification number is correct regardless of when the account, 
contract, or relationship is established.


Sec. 31.3406(d)-2  Payee certification failure.

    (a) Requirement to backup withhold. Withholding under section 
3406(a)(1)(D) applies to a reportable interest or dividend payment (as 
defined in section 3406(b)(2)) if, and only if, the payee fails to 
certify to the payor, under penalties of perjury, that the payee is not 
subject to withholding due to notified payee underreporting under 
section 3406(a)(1)(C). The period for which withholding applies is 
described in Sec. 31.3406(e)-1(e). See Sec. 31.3406(d)-3(a) for special 
rules when an account is established directly with, or an instrument is 
acquired directly from, the payor by electronic transmission or by 
mail. See Sec. 31.3406(c)-1(c)(3)(iv) for rules with respect to a 
payor's reliance on a payee certification for a new account following 
notified payee underreporting. See Sec. 31.3406(d)-4 for special rules 
relating to the acquisition of a readily tradable instrument through a 
broker. The certificate on which the certification should be made is 
described in Sec. 31.3406(h)-3.
    (b) Exceptions. Withholding under section 3406(a)(1)(D) and 
paragraph (a) of this section does not apply to reportable interest or 
dividend payments (as defined in section 3406(b)(2)) made--
    (1) With respect to a pre-1984 account (as defined in 
Sec. 31.3406(d)-1(b)(1));
    (2) In a window transaction (as defined in Sec. 31.3406(b)(2)-
3(b));
    (3) With respect to a readily tradable instrument described in 
Sec. 31.3406(d)-1(b)(2)(iv) or Sec. 31.3406(d)-4(a)(3); or
    (4) During the period and with respect to an account or readily 
tradable instrument described in Sec. 31.3406(d)-3.


Sec. 31.3406(d)-3  Special 30-day rules for certain reportable 
payments.

    (a) Accounts or readily tradable instruments acquired directly from 
the payor (including a broker who holds an instrument in street name) 
by electronic transmission or by mail. In the case of an account 
established directly with, or a readily tradable instrument acquired 
directly from, the payor by means of electronic transmission (i.e., 
telephone or wire instruction) or by mail, the payor may permit the 
payee to furnish the certifications required in Sec. 31.3406(d)-1(b)(3) 
(relating to certification that the payee's taxpayer identification 
number is correct) and Sec. 31.3406(d)-2 (relating to certification of 
notified payee underreporting) within 30 days after the establishment 
or acquisition without subjecting the account to withholding during the 
30 days. The preceding sentence applies only if the payee furnishes a 
taxpayer identification number to the payor at the time of the 
establishment or acquisition, and the payee does not withdraw more than 
69 percent of a reportable interest or dividend payment before the 
certifications are received within the 30 days. If the payee does not 
provide the required certifications within 30 days of the establishment 
or acquisition, the payor must withhold 31 percent of any reportable 
interest or dividend payments made to the account after its 
acquisition. For purposes of this section, an account or instrument is 
considered acquired directly from the payor if the instrument was 
acquired by the payee without the assistance of a broker or the 
instrument was acquired directly from a broker who holds the instrument 
as nominee for the payee (i.e., in street name) and who is considered a 
payor under Sec. 31.3406(a)-2.
    (b) Sale of an instrument for a customer by electronic transmission 
or by mail. The special 30-day rules set forth in paragraph (a) of this 
section apply comparably with respect to certification of the taxpayer 
identification number for the sale of an instrument under section 6045 
(as described in Sec. 31.3406(b)(3)-2) through a post-1983 brokerage 
account (as described in Sec. 31.3406(d)-1(c)(2)) for a customer by 
electronic transmission or by mail. However, these rules apply only if 
the payee furnishes the payee's taxpayer identification number before 
the sale occurs. For purposes of applying those 30-day rules under this 
paragraph (b), a payee's reinvestment of the gross proceeds of the sale 
into other instruments constitutes a withdrawal.
    (c) Application to foreign payees. The rules of paragraphs (a) and 
(b) of this section also apply to a payee from whom the payor is 
required to obtain a Form W-8 or a substitute of the form or is to 
obtain other evidence of foreign status (pursuant to the relevant 
regulations issued under sections 6049 and 6045), provided the payee 
represents orally or otherwise, before or at the time of the 
acquisition or sale of the instrument or the establishment of the 
account, that the payee is not a United States citizen or resident.


Sec. 31.3406(d)-4  Special rules for readily tradable instruments 
acquired through a broker.

    (a) Readily tradable instruments acquired through post-1983 
brokerage accounts with a broker who is not a payor--(1) In general. If 
a readily tradable instrument is acquired through a post-1983 brokerage 
account (as defined in Sec. 31.3406(d)-1(c)(2)) and the broker is not 
the payor of the instrument (as defined in Sec. 31.3406(a)-2(b)(3)), 
the broker must--
    (i) Obtain once with respect to each account the certifications 
described in Sec. 31.3406(d)-2(a) and Sec. 31.3406(d)-1(b)(3) and 
(c)(2) from the payee (relating to certification regarding payee 
underreporting and taxpayer identification number, respectively);
    (ii) Furnish the payee's taxpayer identification number to the 
payor; and
    (iii) Notify the payor to impose withholding if the payee fails to 
make either of the required certifications to the broker or if the 
broker has been notified by the Internal Revenue Service before the 
acquisition of the instrument that the payee is subject to withholding 
due to notified payee underreporting under section 3406(a)(1)(C) or 
that the payee is subject to withholding because the payee's taxpayer 
identification number is incorrect under section 3406(a)(1)(B) (as 
described in Sec. 31.3406(d)-5).
    (2) Additional requirements. The broker must give the information 
required by paragraphs (a)(1) (ii) and (iii) of this section to the 
payor with the transfer instructions for the acquisition (including 
account registration instructions transmitted by a broker in the case 
of acquisitions of shares in a mutual fund). A notice including the 
information described in paragraph 

[[Page 66126]]
(b)(1) of this section fulfills the broker's requirement to give notice 
to the payor. Once the broker transmits the transfer instructions 
containing the information required by this section, the broker has no 
further responsibility to obtain a missing taxpayer identification 
number or missing certification or to provide additional notices to the 
payee or payor with respect to the acquisition of the instrument. Upon 
receiving the notice from a broker, the payor must impose withholding 
on the account pursuant to Sec. 31.3406(a)-1.
    (3) Transactions entered into through a brokerage account that is 
not a post-1983 brokerage account. If a broker acquires readily 
tradable instruments for a payee through an account (with the broker) 
that is not a post-1983 brokerage account (as defined in 
Sec. 31.3406(d)-1(c)(1)), and the broker is not the payor of the 
instruments, the broker must furnish the payee's taxpayer 
identification number to the payor. In addition, if the broker has been 
notified by the Internal Revenue Service that the payee is subject to 
withholding under section 3406 either because of an incorrect taxpayer 
identification number or due to notified payee underreporting as 
described in sections 3406(a)(1) (B) or (C), respectively, the broker 
must notify the payor of the instrument to impose withholding with 
respect to that payee and transmit the information in the manner 
described in this paragraph (a). After a payor receives a notice from a 
broker pursuant to section 3406(d)(2)(B) and this paragraph (a), the 
payor must impose withholding on any accounts of the payee paying 
reportable interest or dividends as defined in section 3406(b)(2) in 
accordance with Sec. 31.3406(a)-1.
    (4) Payor must notify payee--(i) Failure to provide certifications. 
If a payor is notified by a broker, as required in paragraph (a)(1) of 
this section, that a payee is subject to withholding because the payee 
failed to provide the certifications, as described in Sec. 31.3406(d)-
2(a) and Sec. 31.3406(d)-(b)(3) and (c)(2), and the payor has not 
received the certifications from the payee, then the payor must notify 
the payee that withholding has started (or will start) no later than 15 
days after the payor makes the first payment to the payee that is 
subject to withholding under section 3406. A notice that contains the 
information described in paragraph (b)(2) of this section satisfies the 
payor's requirement to give notice to the payee. If the broker notifies 
the payor that the payee failed to make a required certification and 
the payor has received the certification from the payee, the payor may 
disregard the notice from the broker.
    (ii) Notified payee underreporting and incorrect taxpayer 
identification number. The payor must notify the payee under this 
section if the Internal Revenue Service or a broker notifies the payor 
to withhold either because of an incorrect taxpayer identification 
number under section 3406(a)(1)(B) (as described in Sec. 31.3406(d)-5) 
or due to notified payee underreporting under section 3406(a)(1)(C) (as 
described in Sec. 31.3406(c)-1). If a payor is notified by the Internal 
Revenue Service or a broker with respect to a readily tradable 
instrument, the payor may not ignore the notice even if the payee 
previously provided the payee's taxpayer identification number under 
penalties of perjury to the payor and even if the payee certified to 
the payor that the payee is not subject to backup withholding due to a 
notified payee underreporting. See Sec. 31.3406(d)-5(c) (1) and (2) and 
(f)(2) for notice requirements under section 3406(a)(1)(B) due to an 
incorrect taxpayer identification number. See Sec. 31.3406(c)-1(c)(2) 
for notice requirements under section 3406(a)(1)(C) due to notified 
payee underreporting.
    (b) Notices--(1) Form of notice by broker to payor. A broker who is 
required under paragraphs (a)(1)(iii) and (2) of this section to notify 
the payor with respect to a readily tradable instrument may notify the 
payor in connection with the transfer instructions by means of magnetic 
media, machine readable document, or any other medium, provided that 
the notice includes the following information--
    (i) The payee's name, address, and taxpayer identification number 
(if provided to the broker); and
    (ii) A statement that the payee is subject to withholding under 
section 3406(a)(1) (A), (B), (C), or (D) of the Internal Revenue Code, 
whichever section applies; and
    (iii) When applicable, a statement that the broker was notified by 
the Internal Revenue Service that the payee is subject to withholding 
under sections 3406(a)(1)(B) or (C).
    (2) Form of notice by payor to payee. A payor who is required to 
notify a payee that the payee is subject to withholding must provide 
notice that is substantially similar to the following--
    (i) For a notification concerning a failure to provide a taxpayer 
identification number in the required manner under section 
3406(a)(1)(A) or a failure to make the following certification 
described in section 3406(a)(1)(D):

    Recently, you purchased (identify security acquired). Because of 
the existence of one or more of the following conditions, payments 
of interest, dividends, and other reportable amounts that are made 
to you will be subject to withholding of tax at a 31 percent rate: 
(specify the condition or conditions, described below, that are 
applicable)
    (1) You failed to provide a taxpayer identification number, or 
failed to provide this number under penalties of perjury, in 
connection with the purchase of the acquired security. (An 
individual's taxpayer identification number is his or her social 
security number.)
    (2) You failed to certify, under penalties of perjury, that you 
are not subject to withholding due to notified payee underreporting 
as required under section 3406(a)(1)(D) of the Internal Revenue 
Code.
    If condition (1) applies, you may stop withholding by providing 
your taxpayer identification number on the enclosed Form W-9, 
signing the form, and returning it to us. If you do not have a 
taxpayer identification number, but have applied (or will soon 
apply) for one, you may so indicate on the Form W-9. Withholding may 
apply during the 60-day period you are waiting for your taxpayer 
identification number. You must provide us with your taxpayer 
identification number promptly after you receive it in order to 
avoid withholding after the end of the 60-day period or to stop 
withholding if it has already begun. Certain persons, described on 
the enclosed Form W-9, are exempt from withholding. Follow the 
instructions on that form if applicable to you.
    If condition (2) applies, you may stop withholding by certifying 
on the enclosed Form W-9 that you are not subject to withholding due 
to notified payee underreporting, signing the form, and returning it 
to us.
    If more than one condition applies, you must remove all 
applicable conditions to stop withholding.
    Please address any questions concerning this notice to: [Insert 
payor identifying information].
    (Do not address questions to the broker who purchased the 
securities for you.)

    (ii) For the form of the notice concerning imposition of 
withholding due to an incorrect taxpayer identification number, see 
Sec. 31.3406(d)-5 (d)(2) and (g)(2).
    (iii) For the form of the notice concerning the imposition of 
withholding due to notified payee underreporting, see Sec. 31.3406(c)-
1(d)(2).
    (c) Payor's reliance on information from broker--(1) In general. A 
payor of an instrument acquired by a payee through a broker may rely on 
the information that the payor receives from the broker pursuant to 
paragraphs (a) and (b) of this section.
    (2) Amount subject to backup withholding. The payor is required to 
withhold under section 3406 depending 

[[Page 66127]]
on the payor's customary method of making payment on an instrument or 
instruments owned by a payee. If it is the practice of a payor to 
combine in one account all readily tradable instruments of the same 
issue owned by a payee and if only certain of those instruments are 
subject to withholding, the payor must withhold on the aggregate 
payment made with respect to all the instruments in the account. 
Otherwise, the payor must withhold on the payment made on the 
instrument or instruments with respect to which the payee is subject to 
withholding.


Sec. 31.3406(e)-1  Period during which backup withholding is required.

    (a) In general. A payor must withhold under section 3406 at a rate 
of 31 percent on any reportable payment (as defined in section 3406(b)) 
made to a payee during the period described in this section 
(irrespective of the number of conditions for imposing withholding 
under section 3406 that exist with respect to the payee). A payor must 
continue to withhold under section 3406 until no condition for imposing 
backup withholding exists with respect to the payee.
    (b) Failure to furnish a taxpayer identification number in the 
manner required--(1) Start withholding. A payor is required to withhold 
under section 3406(a)(1)(A) at a rate of 31 percent on any reportable 
payment (as defined in section 3406(b)) at the time the payor pays the 
reportable payment (as described in Sec. 31.3406(a)-4) to a payee if--
    (i) The payor has not received the payee's taxpayer identification 
number in the manner required in Sec. 31.3406(d)-1; or
    (ii) The payor has received notice from a broker (as required in 
Sec. 31.3406(d)-4(a)(1)(iii)) with respect to a readily tradable 
instrument that the payee did not furnish a taxpayer identification 
number to the broker in the manner required in Sec. 31.3406(d)-1 and 
the payor has not received the taxpayer identification number from the 
payee in this manner.
    (2) Stop withholding. The payor must stop withholding under section 
3406(a)(1)(A) within 30 days after the payor receives--
    (i) The payee's taxpayer identification number in the manner 
required under Sec. 31.3406(d)-1; or
    (ii) A statement, in such form and containing such information as 
is required under applicable regulations, that the payee is not a 
United States person.
    (c) Notification of an incorrect taxpayer identification number. 
See Sec. 31.3406(d)-5(e) and (g)(3) for the period for which 
withholding is required in the case of notification of an incorrect 
taxpayer identification number.
    (d) Notified payee underreporting. See Sec. 31.3406(c)-1(e) for the 
period for which withholding is required in the case of notified payee 
underreporting.
    (e) Payee certification failure--(1) Start withholding. A payor is 
required to withhold under section 3406(a)(1)(D) at a rate of 31 
percent on any reportable interest or dividend payment (as defined in 
section 3406(b)(2)) at the time the payor pays such reportable interest 
or dividend payment (as described in Sec. 31.3406(a)-4) to a payee if--
    (i) The payor has not received from the payee the certification 
required in Sec. 31.3406(d)-2; or
    (ii) The payor has received notice from a broker (as required in 
Sec. 31.3406(d)-4(a)(1)(iii)) with respect to a readily tradable 
instrument that the payee did not make the required certification and 
the payor has not received the required certification from the payee.
    (2) Stop withholding. The payor must stop withholding under section 
3406(a)(1)(D) on any reportable interest or dividend payment within 30 
days after the payor receives the certification from the payee in the 
manner required by Sec. 31.3406(d)-2.
    (f) Rule for determining when the payor receives a taxpayer 
identification number or certificate from a payee. In determining 
whether a payee has failed to provide a taxpayer identification number 
or any certification to a payor (including a Form W-8 or substitute 
form), a payor is required to process the taxpayer identification 
number or certification within 30 days after the payor receives the 
taxpayer identification number or certification from the payee or in 
certain cases, from a broker. Thus, the payor may take up to 30 days to 
treat the taxpayer identification number or a certificate as having 
been received.


Sec. 31.3406(f)-1  Confidentiality of information.

    (a) Confidentiality and liability for violation. Pursuant to 
section 3406(f) no person may use any information obtained under 
section 3406 for any purpose except for the purpose of complying with 
the requirements of section 3406 or for purposes permitted under 
section 6103 (subject to the safeguards of section 6103). See section 
7431 for civil damages for violating the confidential use of the 
information (subject to an exception for good faith).
    (b) Permissible use of information--(1) In general. A payor or 
broker may transmit information on a Form W-9, Form W-8, or other 
acceptable form relating to withholding to the department, institution, 
or firm (or to any employee therein) responsible for withholding or 
processing of taxpayer identification numbers, certifications described 
in Sec. 31.3406(h)-3, or other substitute forms. In addition, a broker 
may notify the payor with respect to a readily tradable instrument of 
the requirement to withhold and the condition or conditions for 
imposing withholding (as described in Sec. 31.3406(d)-4) that exist 
with respect to the payee. A payor or broker may, without violating the 
Internal Revenue Code, close an account of, refuse to open an account 
for, issue an instrument to, or redeem an instrument for, a person 
solely because the person fails to furnish the person's taxpayer 
identification number or documentation of foreign status in the manner 
required in Sec. 31.3406(d)-1 and Sec. 31.3406(g)-1, respectively. A 
payor who closes an account of a payee in the calendar year in which 
the account was opened and during which no taxpayer identification 
number or evidence of foreign status was provided for that account will 
be presumed in the absence of evidence to the contrary to have closed 
the account without violating section 3406(f) even though the payee is 
subject to backup withholding under section 3406(a)(1)(A). A payor, 
except as provided in Secs. 31.3406(d)-3 and 31.3406(g)-3, may not 
prohibit a payee who fails to furnish the payee's taxpayer 
identification number in the manner required in Sec. 31.3406(d)-1 from 
withdrawing any funds in the account.
    (2) Window transactions. In the case of a window transaction (as 
defined in Sec. 31.3406(b)(2)-3(b)), a payor may, without violating the 
Internal Revenue Code, refuse to redeem or may refuse to make payment 
if the payee fails to provide a taxpayer identification number 
regardless of when the obligation was issued or acquired.
    (c) Specific restrictions on the use of information. Except as 
provided in paragraph (b) of this section, a payor or broker is not 
permitted to--
    (1) Close an account (or instrument) of a payee solely because that 
payee (or the account of a payee) is subject to withholding under 
section 3406(a)(1) (A), (B), (C), or (D);
    (2) Refuse to open an account or to issue an instrument if the 
person fails to certify, under penalties of perjury, that the person is 
not subject to withholding under section 3406(a)(1)(C) (relating to 
notified payee underreporting); 

[[Page 66128]]

    (3) Use information obtained under section 3406 (including a 
payee's failure or inability to certify that the payee is not subject 
to withholding due to notified payee underreporting or the fact that 
the account is subject to withholding), surcharge an account (i.e., 
charge an account more than the fee charged a similar account that was 
not subject to withholding under section 3406), or use that information 
to determine whether to open or close an account, whether to issue or 
redeem an instrument, or whether to extend credit to the payee.


Sec. 31.3406(g)-1  Exception for payments to certain payees and certain 
other payments.

    (a) Exempt recipients--(1) In general. A payor of any reportable 
payment (as defined in section 3406(b)) must not withhold under section 
3406 if the payee is--
    (i) An organization exempt from taxation under section 501(a) or an 
individual retirement account;
    (ii) The United States or any wholly owned agency or 
instrumentality thereof;
    (iii) A state, the District of Columbia, a possession of the United 
States, any political subdivision of any of the foregoing, or any 
wholly owned agency or instrumentality of any one or more of the 
foregoing;
    (iv) A foreign government, a political subdivision of a foreign 
government, or any wholly owned agency or instrumentality of any one or 
more of the foregoing (as defined in regulations under section 892); or
    (v) An international organization or any wholly owned agency or 
instrumentality thereof (as defined in section 7701(a)(18)).
    (2) Nonexclusive list. Paragraph (a)(1) of this section does not 
prescribe an exclusive list of payees that are exempt from information 
reporting and also are exempt from withholding under section 3406.
    (b) Determination of whether a person is described in paragraph 
(a)(1) of this section. The determination of whether a person is a 
payee described in paragraph (a)(1) of this section must be made as 
provided in the applicable provisions of section 6049 and the 
regulations issued thereunder. A payor, even if permitted to treat a 
person as an exempt recipient without requiring a certificate under the 
provisions of section 6049, may require a payee, otherwise not required 
to file a certificate regarding its exempt status, to file a 
certificate and may treat a payee who fails to file the certificate as 
a person who is not an exempt recipient. See Sec. 31.3406(h)-3 for a 
description of the Form W-9 or a substitute form prescribed under 
section 3406 for claiming exempt status.
    (c) Prepaid or advance premium life-insurance contracts. A payor of 
a reportable payment (as defined in section 3406(b)(1)) may, but is not 
required to, withhold under section 3406 on reportable payments made 
from January 1, 1984, to December 31, 1996, on prepaid or advance 
premium life-insurance contracts to a payee who is the owner for tax 
purposes of the prepaid or advance premium life-insurance contract. For 
purposes of this exception from backup withholding, a prepaid or 
advance premium life-insurance contract is one entered into on or 
before June 30, 1984, by the payee and under which the increment in 
value of the prepaid or advance premium is used for the payment of 
premiums during the period in which the exception from backup 
withholding applies.


Sec. 31.3406(g)-2  Exception for reportable payments for which 
withholding is otherwise required.

    (a) In general. A payor of a reportable payment (as defined in 
section 3406(b)) must not withhold under section 3406 if the payment is 
subject to withholding under any other provision of the Internal 
Revenue Code.
    (b) Payment of wages. A payor who is required to make an 
information return under section 6041 with respect to a payment of 
wages (as defined in section 3401) because, e.g., the employee makes a 
certification under section 3402(n) (relating to employees incurring no 
income tax liability), must not withhold under section 3406 on those 
wages.
    (c) Distribution from a pension, annuity, or other plan of deferred 
compensation. An amount reportable under section 6047, such as a 
designated distribution under section 3405, is not a reportable payment 
subject to withholding under section 3406. See section 3406(b). 
Designated distributions not subject to withholding under section 3406 
include--
    (1) Distributions from a pension, annuity, profit-sharing, stock 
bonus plan, or other plan deferring the receipt of compensation;
    (2) Distributions from an individual retirement account or annuity;
    (3) Distributions from an owner-employee plan; and
    (4) Certain surrenders of life insurance contracts.
    (d) Gambling winnings--(1) In general. A payor of a reportable 
gambling winning must not withhold under section 3406 if tax is 
required to be withheld from the gambling winning under section 3402(q) 
(relating to the extension of withholding to certain gambling 
winnings). If the reportable gambling winning is not required to be 
withheld upon under section 3402(q), withholding under section 3406 
applies to the gambling winning if, and only if, the payee does not 
furnish a taxpayer identification number to the payor. Section 
31.3406(b)(3)-1(b)(3) does not apply to a reportable gambling winning. 
The payor of a reportable gambling winning is not required to aggregate 
all such winnings made to a payee during a calendar year, nor is the 
payor required to determine whether an information return was required 
to be made with respect to the payee for the preceding year.
    (2) Definition of a reportable gambling winning and determination 
of amount subject to backup withholding. For purposes of withholding 
under section 3406, a reportable gambling winning is any gambling 
winning subject to information reporting under section 6041. The amount 
of a reportable gambling winning is--
    (i) The amount paid with respect to the amount of the wager 
reduced, at the option of the payor; by
    (ii) The amount of the wager.
    (3) Special rules. Amounts paid with respect to identical wagers 
are treated as paid with respect to a single wager. The determination 
of whether wagers are identical is made under Sec. 31.3402(q)-
1(c)(1)(ii). In addition, a gambling winning (other than a winning from 
bingo, keno, or slot machines) is a reportable gambling winning only if 
the amount paid with respect to the wager is $600 or more and if the 
proceeds are at least 300 times as large as the amount wagered. See 
Sec. 7.6041-1 of this chapter to determine whether a winning from 
bingo, keno, or slot machines is a reportable gambling winning and thus 
subject to withholding under section 3406.
    (e) Certain real estate transactions. A real estate reporting 
person (the so-called broker) as defined in section 6045(e)(2) must not 
withhold under section 3406 on a payment made with respect to a real 
estate transaction that is subject to reporting under sections 6045 (a) 
and (e) and Sec. 1.6045-4 of this chapter.
    (f) Certain payments after an acquisition of accounts or 
instruments. A payor who acquires pre-1984 accounts or instruments 
described in Sec. 31.3406(d)-1(b)(2)(iv) for which the payor does not 
have a taxpayer identification number or has an obviously incorrect 
taxpayer identification number as defined in Sec. 31.3406(h)-1(b)(2) 
must start 

[[Page 66129]]
withholding under section 3406(a)(1)(A) and Sec. 31.3406(d)-1 on those 
accounts or instruments no later than sixty days following the date of 
the payor's acquisition of those accounts or instruments.
    (g) Certain gross proceeds. No withholding under section 3406 is 
required with respect to any portion of the original issue discount on 
an instrument or security that is subject to withholding under section 
3406 as reportable gross proceeds of such instrument or security under 
section 6045.


Sec. 31.3406(g)-3  Exemption while payee is waiting for a taxpayer 
identification number.

    (a) In general--(1) Backup withholding not required for 60 days. If 
a payor has received an awaiting-TIN certificate from a payee with 
respect to an account or instrument receiving reportable interest or 
dividends as described in section 3406(b)(2), the payor must exempt the 
payee from withholding under section 3406(a)(1)(A) during the 60-day 
exemption period to the extent and in the manner described in either 
paragraph (a) (2) or (3) of this section. The 60-day exemption period 
means the 60-consecutive-day period beginning with the day the payor 
receives the awaiting-TIN certificate. The payor must withhold under 
section 3406 beginning after the 60-day exemption period if the payor 
has not received a taxpayer identification number from the payee in the 
manner required in Sec. 31.3406(d)-1. Regardless of whether the payee 
provides an awaiting-TIN certificate to a payor, the payor is required 
to withhold under section 3406(a)(1)(D) and Sec. 31.3406(d)-2 on 
reportable interest or dividend payments as described in 
Sec. 31.3406(d)-2 if the payee fails to certify, under penalties of 
perjury, that the payee is not subject to withholding due to notified 
payee underreporting as required in section 3406(a)(1)(D) and 
Sec. 31.3406(d)-2.
    (2) Reserve method. A payor must not withhold under section 3406 
during the 60-day exemption period unless the payee (or a joint payee 
in the case of a joint account) desires to make a withdrawal of more 
than $500 of either principal or interest from the account in any 
single transaction during the period. If a payee (or a joint payee) 
desires to make a withdrawal of more than $500 during the 60-day 
exemption period, the payor is required under section 3406 to withhold 
31 percent of all reportable payments made during the period and at the 
time of withdrawal unless the payee reserves 31 percent of all 
reportable payments made to the account during the period.
    (3) Alternative rule; 7-day grace period--(i) In general. A payor 
who receives an awaiting-TIN certificate may elect, on a payee-by-payee 
basis or in general, to exempt reportable interest or dividend payments 
to a payee from withholding under section 3406 applying the rules in 
paragraph (a)(3) (ii) or (iii) of this section.
    (ii) Withholding on withdrawals. Under this paragraph (a)(3)(ii), a 
payor must obtain a certified taxpayer identification number from the 
payee within 60 days after the date that the payor receives the 
awaiting-TIN certification. In addition, the payor must withhold under 
section 3406 on any withdrawals made after the close of 7 business days 
after the date the awaiting-TIN certification is received and before 
the earlier of the date that the payor receives a certified taxpayer 
identification number from the payee, the date the account is closed 
(in which case the payor must withhold on any reportable payment made 
at the time the account or relationship is closed), or the date 
withholding under section 3406 starts on all reportable payments made 
to the account, instrument, or relationship. All cash withdrawals in an 
amount up to the reportable payments made from the day after the date 
of receipt of the awaiting-TIN certification to the date of withdrawal 
are treated as reportable payments.
    (iii) Withholding regardless of withdrawals. Under this paragraph 
(a)(3)(iii), a payor must start withholding under section 3406 on the 
account not later than 7 business days after the date the payor 
receives the awaiting-TIN certification on reportable payments 
thereafter made to the account (whether or not the payee makes a cash 
withdrawal). The payor must withhold under section 3406 until the 
earlier of the date the payor receives a certified taxpayer 
identification number from the payee, the date the account is closed, 
or the date withholding under section 3406 starts on all reportable 
payments made to the account, instrument, or relationship. The payor 
must obtain a certified taxpayer identification number from the payee 
within 60 days after the date that the payor receives the awaiting-TIN 
certificate or undertake a mailing each year soliciting the certified 
taxpayer identification number from the payee until the earlier of the 
calendar year that the certified taxpayer identification number is 
received, or the calendar year in which the account is closed. However, 
if the account is closed in December of a calendar year, the mailing 
must be made after the account is closed and before January 31 of the 
subsequent calendar year.
    (b) Special rule for readily tradable instruments. The 60-day 
awaiting-TIN exemption described in paragraph (a)(1) of this section 
applies to payments made with respect to readily tradable instruments 
only if the payee provides an awaiting-TIN certificate directly to the 
payor. If a broker acquires a readily tradable instrument through a 
post-1983 brokerage account (as described in Sec. 31.3406(d)-1(c)(2)) 
for a payee who has no taxpayer identification number, the broker must 
advise the payor as required in Sec. 31.3406(d)-4(a)(1) that the payee 
failed to provide a taxpayer identification number under penalties of 
perjury, regardless of whether the payee provides an awaiting-TIN 
certificate to the broker. Once a payor is notified by a broker that a 
payee failed to provide a taxpayer identification number in the 
required manner, or that the payee is subject to withholding under 
section 3406(a)(1) (B) or (C), the payor must impose withholding under 
section 3406 for the appropriate period described in Sec. 31.3406(e)-1.
    (c) Exceptions--(1) In general. The 60-day awaiting-TIN exemption 
described in paragraph (a) of this section does not apply to--
    (i) Window transactions (as defined in Sec. 31.3406(b)(2)-3(b));
    (ii) Redemptions of bearer obligations that are subject to 
reporting under section 6045; or
    (iii) Other amounts that are subject to reporting under section 
6045 (except as described in paragraph (c)(2) of this section).
    (2) Special rule for amounts subject to reporting under section 
6045 other than proceeds of redemptions of bearer obligations. If a 
broker's customer does not provide a taxpayer identification number to 
the broker, and the broker effects a sale that is subject to reporting 
under section 6045 (other than a redemption of a bearer obligation), 
Sec. 31.3406(d)-3(b) applies, whether or not the sale is pursuant to an 
instruction by electronic transmission, provided the customer furnishes 
an awaiting-TIN certificate to the broker before the sale. For purposes 
of this paragraph (c)(2), the 30-day period provided in 
Sec. 31.3406(d)-3(b) is a 60-day period.
    (d) Awaiting-TIN certificate. A payee qualifies for the 60-day 
awaiting-TIN exemption provided in paragraph (a) of this section if the 
payee furnishes a written statement to the payor, signed under 
penalties of perjury, that the payee has not been issued a taxpayer 
identification number, that the payee has applied for a taxpayer 
identification number or intends to apply for a 

[[Page 66130]]
number in the near future, and that the payee understands that if the 
payee does not provide a number to the payor within 60 days, the payor 
is required under section 3406 to withhold 31 percent of any reportable 
payment thereafter made to the payee until the payor receives a number, 
and 31 percent of a withdrawal to the extent of reportable payments 
made to the payee during the 60-day period, as described in paragraph 
(a) of this section. Language that is substantially similar to the 
awaiting-TIN certification on Form W-9 will satisfy the requirements of 
this paragraph (d).
    (e) Form for awaiting-TIN certificate. A payor may use Form W-9 for 
the awaiting-TIN certificate, or a payor may include language that is 
substantially similar to the awaiting-TIN certification on Form W-9 in 
any other document of the payor. See Sec. 31.3406(h)-3, which provides 
that Form W-9 is the prescribed form but permits use of substitute 
forms, and specifies the length of time the payor is required to retain 
the form. If Form W-9 is used, the payee should write ``Applied For'' 
in the space reserved for the taxpayer identification number.


Sec. 31.3406(h)-1  Definitions.

    (a) In general. For purposes of section 3406 and the regulations 
thereunder, the definitions of this section apply.
    (b) Taxpayer identification number--(1) In general. Taxpayer 
identification number means the identifying number assigned to a person 
under section 6109 (relating to identifying numbers, generally a nine-
digit social security number for an individual and a nine-digit 
employer identification number for a nonindividual, e.g., a 
corporation, partnership, trust, or estate). An obviously incorrect 
number is not considered a taxpayer identification number. See 
Sec. 31.6011(b)-2 and Sec. 301.6109-1 of this chapter for provisions 
relating to obtaining a taxpayer identification number.
    (2) Obviously incorrect number. Obviously incorrect number means a 
number that does not contain nine digits or a number that includes an 
alpha character as one of the nine digits.
    (c) Broker.--Broker is defined in section 6045(c)(1) and 
Sec. 1.6045-1(a)(1) of this chapter. If there could be more than one 
broker with respect to any acquisition, only the broker having the 
closest contact (as determined under Sec. 5f.6045-1(c)(3) (ii) and 
(iii) of this chapter) with the payee is treated as a broker. In the 
case of any instrument, the term broker does not include any person who 
is the payor with respect to the instrument as described in 
Sec. 31.3406(a)-2.
    (d) Readily tradable instrument.--Readily tradable instrument 
means--
    (l) Any instrument that is part of an issue any portion of which is 
traded on an established securities market (within the meaning of 
section 453(f)(5)); or
    (2) Any instrument that is regularly quoted by brokers or dealers 
making a market.
    (e) Day.--Day means a calendar day unless specified otherwise under 
any section of the regulations under section 3406. For example, see 
Secs. 31.3406(d)-5(a) and 31.3406(g)-3(a)(2).
    (f) Business day.--Business day means any day other than a 
Saturday, Sunday, or legal holiday (within the meaning of section 
7503).


Sec. 31.3406(h)-2  Special rules.

    (a) Joint accounts--(1) Relevant name and taxpayer identification 
number combination. For purposes of identifying the account subject to 
withholding under sections 3406(a)(1) (B) and (C), the relevant name 
and taxpayer identification number combination is that which is used 
for information reporting purposes.
    (2) Optional rule for accounts subject to backup withholding under 
section 3406(a)(1) (B) or (C) where the names are switched. See 
Sec. 31.3406(d)-5(c)(4)(iii) under which a payor may withhold under 
section 3406(a)(1)(B) as required even though the names or taxpayer 
identification numbers on the account have been switched. The rules 
under Sec. 31.3406(d)-5(c)(4)(iii) may be applied comparably by a payor 
who is required to withhold under section 3406(a)(1)(C).
    (3) Joint foreign payees--(i) In general. If the first payee listed 
on an account or instrument provides the penalties of perjury statement 
regarding its foreign status, withholding under section 3406 applies 
unless--
    (A) Every joint payee provides the statement regarding foreign 
status (pursuant to the relevant regulations issued under sections 6045 
and 6049); or
    (B) Any one of the joint payees who has not established foreign 
status provides a taxpayer identification number to the payor in the 
manner required in Sec. 31.3406(d)-1.
    (ii) Information reporting on an account including foreign payees. 
If any one of the joint payees who has not established foreign status 
provides a taxpayer identification number under paragraph (a)(3)(i)(B) 
of this section, that number is the taxpayer identification number that 
is required to be furnished for purposes of information reporting and 
withholding under section 3406.
    (b) Backup withholding from an alternative source--(1) In general. 
A payor may not withhold under section 3406 from a source maintained by 
the payor other than the source with respect to which there exists a 
liability to withhold under section 3406 with respect to the payee. See 
section 3403 and Sec. 31.3403-1, which provide that the payor is liable 
for the amount required to be withheld regardless of whether the payor 
withholds.
    (2) Exceptions for payments made in property--(i) Backup 
withholding from alternative source. In the case of a payment that is 
made in property (other than money), the payor must withhold under 
section 3406 31 percent of the fair market value of the property 
determined immediately before or on the date of payment. The payor may 
withhold under section 3406 from the principal amount being deposited 
with the payor or from another source maintained by the payee with the 
payor. The source from which the tax is withheld under section 3406 
must be payable to at least one of the persons listed on the account 
subject to withholding. If the account or source is not payable 
exclusively to the same person or persons listed on the account subject 
to withholding under section 3406, then the payor must obtain a written 
statement from all other persons to whom the account or source is 
payable authorizing the payor to withhold under section 3406 from the 
alternative account or source. A payor that elects to withhold under 
section 3406 from an alternative source may determine the account or 
source from which the tax is to be withheld, or may allow the payee to 
designate the alternative source. A payee may not, however, require a 
payor to withhold under section 3406 from a specific alternative 
source. See Sec. 31.3402(q)-1(d), Example 5, for methods of withholding 
on prizes, awards, and gambling winnings paid in property other than 
cash.
    (ii) Deferral of withholding. If the payor cannot locate, using 
reasonable care (following procedures substantially similar to those 
set forth in Sec. 31.3406(d)-5(c)(3)(ii) (A) and (B)), an alternative 
source of cash from which the payor may satisfy its withholding 
obligation pursuant to paragraph (b)(2)(i) of this section, the payor 
may defer its obligation to withhold under section 3406, except for 
reportable payments of property made in connection with prizes, awards, 
or gambling winnings, until the earlier of--
    (A) The date the payor makes a cash payment to the account subject 
to 

[[Page 66131]]
withholding under section 3406 or cash is otherwise deposited in the 
account in a sufficient amount to satisfy the obligation in full; or
    (B) The close of the fourth calendar year after the obligation 
arose.
    (iii) Barter exchanges. In the case of a barter exchange that 
issues scrip to, or credits the account of, a member or client of the 
exchange in payment for property or services, the barter exchange may 
withhold under section 3406 from--
    (A) The scrip or credit, if converted to cash in order to satisfy 
the deposit requirements of section 6302 and Sec. 31.6302-4; or
    (B) Any other source maintained by the exchange for the member or 
client in the manner described in paragraph (b)(2) of this section.
    (c) Trusts. Withholding under section 3406 applies to reportable 
payments made to a trust if any of the conditions for imposing 
withholding under section 3406 apply to the trust. Generally, a trust 
is not a payor and will not be required to withhold under section 3406 
on reportable payments that it makes to its beneficiary who is subject 
to withholding under section 3406. The preceding sentence does not 
apply, however, to a grantor trust with two or more grantors described 
in Sec. 31.3406(a)-2(b)(4), which is treated as a middleman payor. The 
trustee of a trust described in this paragraph (c) may certify that the 
trust's taxpayer identification number is correct and that the trust is 
not subject to withholding due to notified payee underreporting, 
without regard to the status of the beneficiaries of the trust.
    (d) Adjustment of prior withholding by middlemen. A middleman payor 
(as defined in Sec. 31.3406(a)-2(b)) who receives a payment from which 
tax has been erroneously withheld under section 3406 may seek a refund 
of the tax withheld by the payor from whom the middleman payor received 
the payment (referred to as the ``upstream payor''). Alternatively, the 
middleman payor may obtain a refund of the tax by claiming a credit for 
the amount of tax withheld by the upstream payor against the deposit of 
any tax imposed by this chapter which the middleman payor is required 
to withhold and deposit (as described in section 6413 and 
Sec. 31.6413(a)-2). In either case, the middleman payor must pay or 
credit the gross amount of the payment (including the tax withheld) to 
its payee as though it had received the gross amount of the payment 
from the upstream payor and must withhold under section 3406 only if 
one of the conditions for imposing backup withholding exists with 
respect to its payee. If its payee is not subject to withholding under 
section 3406, the middleman payor must pay or credit the full amount of 
the payment to the payee. See Sec. 31.6413(a)-3 regarding repayment by 
a payor of tax erroneously collected from a payee.
    (e) Conversion of amounts paid in foreign currency into United 
States dollars--(1) Convertible foreign currency. If a payment is made 
in a currency other than the United States dollar, the amount subject 
to withholding under section 3406 is determined by applying the 
statutory rate of backup withholding to the foreign currency payment 
and converting the amount withheld into United States dollars on the 
date of payment at the spot rate (as defined in Sec. 1.988-1(d)(1) of 
this chapter) or pursuant to a reasonable spot rate convention. For 
example, a withholding agent may use a month-end spot rate or a monthly 
average spot rate. A spot rate convention must be used consistently 
with respect to all non-dollar amounts withheld and from year to year. 
Such convention cannot be changed without the consent of the 
Commissioner.
    (2) Nonconvertible foreign currency. [Reserved]
    (f) Coordination with other sections. For purposes of section 31, 
chapter 24 (other than section 3402(n)) of subtitle C of the Internal 
Revenue Code (relating to employment taxes and collection of income tax 
at source) and so much of subtitle F (other than section 7205) of the 
Internal Revenue Code (relating to procedure and administration) as 
relates to this chapter, and the regulations thereunder--
    (1) An amount required to be withheld under section 3406 must be 
treated as a tax required to be withheld under section 3402;
    (2) An amount withheld under section 3406 must be treated as an 
amount withheld under section 3402;
    (3) An amount withheld under section 3406 must be deposited as 
required under Sec. 31.6302-4;
    (4) Wages includes the gross amount of any reportable payment (as 
defined in section 3406(b)) except for purposes of section 6014 
(relating to an election by the taxpayer not to compute the tax on his 
annual return);
    (5) Employee includes a payee of any reportable payment; and
    (6) Employer includes a payor who is required to withhold the tax 
under section 3406 (as defined in Sec. 31.3406(a)-2(a)) with respect to 
any reportable payment (as defined in section 3406(b)).
    (g) Tax liabilities and penalties. A payor is subject to the same 
civil and criminal penalties for failing to impose withholding under 
section 3406 as an employer who fails to withhold on a payment of 
wages. In addition, a broker may be subject to the penalty under 
section 6705 (failure of a broker to provide notice to a payor).
    (h) To whom payor is liable for amount withheld. A payor is not 
liable to any person for any amount withheld under section 3406. A 
payor is liable only to the United States for an amount that is 
required to be withheld as provided in Sec. 31.3403-1.


Sec. 31.3406(h)-3  Certificates.

    (a) Prescribed form to furnish information under penalties of 
perjury--(1) In general. Except as provided in paragraph (c) of this 
section, the Form W-9 is the form prescribed under section 3406 on 
which the payee certifies, under penalties of perjury, that--
    (i) The taxpayer identification number furnished to the payor is 
correct (as required in Sec. 31.3406(d)-1 and Sec. 31.3406(d)-5);
    (ii) The payee is not subject to withholding due to notified payee 
underreporting (as required in Sec. 31.3406(d)-2);
    (iii) The payee is an exempt recipient (as described in 
Sec. 31.3406(g)-1); or
    (iv) The payee is awaiting receipt of a taxpayer identification 
number (as described in Sec. 31.3406(g)-3).
    (2) Use of a single or multiple Forms W-9 for accounts of the same 
payee. A valid Form W-9 must include the name and taxpayer 
identification number of the payee. Except as provided in paragraph (b) 
of this section, the payee must sign under penalties of perjury and 
date the Form W-9 in order to satisfy the requirements of this section. 
A payor or broker may require a payee to furnish a separate Form W-9 
for each obligation, deposit, certificate, share, membership, contract, 
or other instrument, or one Form W-9 for all the payee's obligations or 
relationships with the payor or broker. In addition, a payee of a 
mutual fund that has a common investment advisor or common principal 
underwriter with other mutual funds (within the same family of funds) 
may be permitted, in the discretion of the mutual fund, to provide one 
Form W-9 with respect to shares acquired or owned in any of the funds.
    (b) Prescribed form to furnish a noncertified taxpayer 
identification number. With respect to accounts or other relationships 
where the payee is not required to certify, under penalties of perjury, 
that the taxpayer identification number being furnished is correct, the 
payor or broker may obtain the taxpayer identification number orally or 
may use Form W-9, a 

[[Page 66132]]
substitute form, or any other document, but the payee is not required 
to sign the form.
    (c) Forms prepared by payors or brokers--(1) Substitute forms; in 
general. A payor or broker may prepare and use a form that contains 
provisions that are substantially similar to those of the official Form 
W-9. A payor or broker may use any document relating to the 
transaction, such as the signature card for an account, so long as the 
certifications are clearly set forth. A payor or broker who uses a 
substitute form may furnish orally or in writing the instructions for 
the Form W-9 that relate to the account. A payor or broker may refuse 
to accept certifications (including the official Form W-9) that are not 
made on the form or forms provided by the payor or broker. A payor or 
broker may refuse to accept a certification provided by a payee only if 
the payor or broker furnishes the payee with an acceptable form 
immediately upon receipt of an unacceptable form or within 5 business 
days of receipt of an unacceptable form. An acceptable form for this 
purpose must contain a notice that the payor or broker has refused to 
accept the form submitted by the payee and that the payee must submit 
the acceptable form provided by the payor in order for the payee not to 
be subject to withholding under section 3406. If the payor or broker 
requires the payee to furnish a form for each account of the payee, the 
payor or broker is not required to furnish an acceptable form until the 
payee furnishes the payor or broker with the payee's account numbers. A 
payor or broker may use separate substitute forms to have a payee 
certify under penalties of perjury that--
    (i) The payee's taxpayer identification number is correct; and
    (ii) The payee is not subject to withholding under section 3406 due 
to notified payee underreporting.
    (2) Form for exempt recipient. A payor or broker may use a 
substitute form for the payee to certify, under penalties of perjury, 
that the payee is an exempt recipient (described in Sec. 31.3406(g)-1 
or described in the respective reporting section), provided the form 
contains provisions that are substantially similar to those of the 
official Form W-9 relating to exempt recipients. A certificate must be 
prepared in accordance with the instructions applicable to exempt 
recipients on Form W-9, and must set forth fully and clearly the data 
called for therein. If a payor will treat the payee as an exempt 
recipient only if the payee files a certificate as to its exempt 
status, the certificate is valid only if it contains the payee's 
taxpayer identification number. Thus, a payee must include the payee's 
taxpayer identification number on a certificate that a payor requires 
to be made in order to treat the payee as an exempt recipient.
    (d) Special rule for brokers. A broker may act as the payee's agent 
for purposes of furnishing a taxpayer identification number or 
certification to a payor with respect to any readily tradable 
instrument (as defined in Sec. 31.3406(h)-1(d)) provided the payee 
provides a taxpayer identification number on Form W-9 or other 
acceptable substitute form to the broker. The payor may rely on a 
taxpayer identification number provided by the broker unless 
certification is required (as described in Sec. 31.3406(d)-4) and the 
broker notifies the payor that the number was not certified.
    (e) Reasonable reliance on certificate--(1) In general. A payor is 
not liable for the tax imposed under section 3406 if the payor's 
failure to deduct and withhold the tax is due to reasonable reliance, 
as defined in paragraph (e)(2) of this section, on a Form W-9 (or other 
acceptable substitute) required by this section.
    (2) Circumstances establishing reasonable reliance. For purposes of 
paragraph (e)(1) of this section, a payor can reasonably rely on a Form 
W-9 (or other acceptable substitute) unless--
    (i) The form does not contain the name and taxpayer identification 
number of the payee (or does not state, in lieu of a taxpayer 
identification number, that the payee is awaiting receipt of a taxpayer 
identification number (i.e., an awaiting-TIN certificate));
    (ii) The form is not signed and dated by the payee;
    (iii) The form does not contain the statement, when required, that 
the payee is not subject to withholding due to notified payee 
underreporting;
    (iv) The payee has deleted the jurat or other similar provisions by 
which the payee certifies or affirms the correctness of the statements 
contained on the form; or
    (v) For purposes of section 3406(a)(1)(C), the payor is required to 
subject the account to which the form relates to withholding under 
section 3406(a)(1)(C) under the circumstances described in 
Sec. 31.3406(c)-1(c)(3)(iii).
    (f) Who may sign certificate--(1) In general. A Form W-9 or other 
acceptable substitute form may be signed by any person who is 
authorized to sign a declaration under penalties of perjury on behalf 
of the payee as provided in section 6061 and the regulations thereunder 
(relating to who may sign generally for an individual, which includes 
certain agents who may sign returns and other documents), section 6062 
and the regulations thereunder (relating to who may sign corporate 
returns), and section 6063 and the regulations thereunder (relating to 
who may sign partnership returns).
    (2) Notified payee underreporting. A payee who has not been 
notified that he is subject to withholding under section 3406(a)(1)(C) 
as a result of notified payee underreporting may make the certification 
related to notified payee underreporting. In addition, a payee who was 
subject to withholding under section 3406(a)(1)(C) due to notified 
payee underreporting may certify that he is not subject to withholding 
under section 3406(a)(1)(C) due to notified payee underreporting if the 
Internal Revenue Service has provided the payee with written 
certification that withholding under section 3406(a)(1)(C) due to 
notified payee underreporting has terminated.
    (g) Retention of certificates--(1) Accounts or instruments that are 
not pre-1984 accounts and brokerage relationships that are post-1983 
brokerage accounts. With respect to an account or instrument that is 
not a pre-1984 account (as described in Sec. 31.3406(d)-1(b)(3)), or 
with respect to a brokerage relationship that is a post-1983 brokerage 
account (as described in Sec. 31.3406(d)-1(c)(2)), a payor or broker 
who receives a Form W-9 or other acceptable substitute form related to 
withholding under section 3406 must retain the form in its records for 
3 years from the date the account is opened or the instrument is 
purchased. The form may be retained on microfilm or microfiche.
    (2) Accounts or instruments that are pre-1984 accounts and 
brokerage relationships that are not post-1983 brokerage accounts. With 
respect to a pre-1984 account (as described in Sec. 31.3406(d)-1(b)(1)) 
or with respect to a brokerage relationship that is not a post-1983 
brokerage account (as described in Sec. 31.3406(d)-1(c)(1)), a payor or 
broker is not required to retain any Form W-9 or other acceptable 
substitute form. If, however, the payor or broker requires the payee to 
file only one Form W-9 or substitute form for all accounts or 
instruments of the payee, the payor or broker must retain the single 
form in the manner and for the period of time described in paragraph 
(g)(1) of this section if that form relates to any account or 
instrument that is not a pre-1984 account or relates to a post-1983 
brokerage account. If a payee has certified that the payee is an exempt 
recipient described in Sec. 31.3406(g)-1, 

[[Page 66133]]
the payor or broker must retain the form unless the payor or broker can 
establish the existence of procedures that are reasonably calculated to 
ensure that a payee who has so certified is accurately identified in 
the payor's or broker's records.
    (h) Cross references. For the requirement to file an information 
return (and furnish the related statement) with respect to a reportable 
payment, particularly if that payment has been subject to withholding 
under section 3406, see subtitle F, chapter 61, subparts B and C of the 
Internal Revenue Code. See Sec. 31.6302-4 for the requirement to 
deposit amounts withheld under section 3406 on either a monthly or 
semi-weekly basis. See Sec. 31.6011(a)-4(b) for the requirement to file 
Form 945, Annual Return of Withheld Federal Income Tax, to reflect 
amounts withheld under section 3406. See Sec. 31.6071(a)-1 for the time 
for filing the Form 945.


Sec. 31.3406(i)-1  Effective date.

    Sections 31.3406-0 through 31.3406(i)-1 (except Secs. 31.3406(d)-5 
and 31.3406(g)-1(c) and except for international transactions) are 
effective after December 31, 1996, and, optionally, for reportable 
payments made and transactions occurring on or after December 21, 1995. 
For the effective date of Sec. 31.3406(d)-5, see Sec. 31.3406(d)-5(i). 
Section 31.3406(g)-1(c) is effective before January 1, 1997. See 
Secs. 35a.9999-0T through 35a.9999-5 of this chapter for rules that 
apply to international transactions after December 31, 1996.
    Par. 9. Section 31.6011(a)-5(a) is amended by:
    1. Removing the word ``or'' immediately after the language 
``941PR,'' in the first and third sentences of paragraph (a)(1).
    2. Adding the language ``, or Form 945'' immediately after the 
language ``Form 941VI'' in the first and third sentences of paragraph 
(a)(1).
    3. Adding the language ``(or other person)'' immediately after the 
word ``employer'' in the second, third, fourth, and sixth sentences of 
paragraph (a)(1).
    4. Removing the authority citation at the end of the section.
    Par. 10. Section 31.6011(a)-6 is amended by revising the heading 
and the first and third sentences of paragraph (a)(1) to read as 
follows:


Sec. 31.6011(a)-6  Final returns.

    (a) In general--(1) Federal Insurance Contributions Act; income tax 
withheld from wages and nonpayroll payments. An employer (or other 
person) who is required to make a return on a particular form pursuant 
to Sec. 31.6011(a)-1, Sec. 31.6011(a)-4, or Sec. 31.6011(a)-5, and who 
in any return period ceases to pay wages or nonpayroll payments in 
respect of which he is required to make a return on that form, must 
make the return for the period as a final return. * * * Every such 
person filing a final return (other than a final return on Form 942 or 
Form 943) must furnish information showing the date of the last payment 
of wages (as defined in section 3121(a) or section 3401(a)), and, if 
appropriate, the date of the last payment of nonpayroll payments 
defined in Sec. 31.6011(a)-4(b). * * *
* * * * *
    Par. 11. Sections 31.6051-4 and 31.6413(a)-3 are added to read as 
follows:


Sec. 31.6051-4  Statement required in case of backup withholding.

    (a) Statements required from payor. Every payor of any reportable 
payment (as defined in section 3406(b)(1)) who is required to deduct 
and withhold tax under section 3406 must furnish to the payee a written 
statement containing the information required by paragraph (c) of this 
section.
    (b) Prescribed form. The prescribed form for the statement required 
by this section is Form 1099. In the case of any reportable interest or 
dividend payment as defined in section 3406(b)(2), the prescribed form 
is the Form 1099 required in Sec. 1.6042-4 of this chapter (relating to 
payments of dividends), Sec. 1.6044-5 of this chapter (relating to 
payments of patronage dividends), or Sec. 1.6049-6(e) of this chapter 
(relating to payments of interest or original issue discount). 
Statements required to be furnished by this section will be treated as 
statements required by the respective sections with respect to any 
reportable payment, except that the statement required under this 
section must include the amount of tax withheld under section 3406. In 
no event will a statement be required under this section if a statement 
with the same information is required to be furnished to the recipient 
under another section.
    (c) Information required. Each statement on Form 1099 must show the 
following:
    (1) The name, address, and taxpayer identification number of the 
person receiving any reportable payment;
    (2) The amount subject to reporting under section 6041, 6041A(a), 
6042, 6044, 6045, 6049, 6050A, or 6050N whether or not the amount of 
the reportable payment is less than the amount for which an information 
return is required. If tax is withheld under section 3406, the 
statement must show the amount of the payment withheld upon;
    (3) The amount of tax deducted and withheld under section 3406;
    (4) The name and address of the person filing the form;
    (5) A legend stating that such amount is being reported to the 
Internal Revenue Service; and
    (6) Such other information as is required by the form.
    (d) Time for furnishing statements. The statement must be furnished 
to the payee no later than January 31 of the year following the 
calendar year in which the payment was made.
    (e) Aggregation. The payor or broker may combine the information 
required to be shown under this section with information required to be 
shown under another section even if they do not relate to the same type 
of reportable payment.


Sec. 31.6413(a)-3  Repayment by payor of tax erroneously collected from 
payee.

    (a) In general--(1) Erroneous withholding under section 3406 of the 
Internal Revenue Code. If a payor or broker withholds under section 
3406 from a payee in error or withholds more than the proper amount of 
the tax under section 3406, the payor or broker may refund the amount 
erroneously withheld as provided in section 6413 and this section. A 
payor or broker will be considered to have withheld erroneously under 
section 3406 only if the amount is withheld because of an error by the 
payor or broker (e.g., an error in flagging or identifying an account 
that is subject to withholding under section 3406). The payor or broker 
may, in its discretion, treat the amount withheld as an amount 
erroneously withheld and refund it to the payee if--
    (i) The payor or broker requires a payee described in 
Sec. 31.3406(g)-1(a) or described in a provision of the Internal 
Revenue Code requiring the reporting of a payment subject to 
withholding under section 3406 to certify that it is an exempt 
recipient, the payee fails to make the required certification, and the 
payor or broker subsequently withholds under section 3406 from a 
payment to the payee;
    (ii) The payor or broker does not require the payee to certify 
concerning its exempt status and the payor or broker withholds under 
section 3406; or
    (iii) The payor or broker withholds under section 3406 from a payee 
after the payee provides a taxpayer identification number or required 
certification (including the certification relating to foreign status 
described in Sec. 1.6049-5(b)(2)(iv) of this chapter or 

[[Page 66134]]
Sec. 1.6045-1(g)(1) of this chapter) to the payor, but before the payor 
or broker treats the number or required certification as having been 
received under Sec. 31.3406(e)-1(b).
    (2) Limitation. For purposes of paragraph (a)(1) of this section, 
if a payor or broker withholds because the payor or broker has not 
received a taxpayer identification number or required certification and 
the payee subsequently provides a taxpayer identification number or a 
required certification to the payor, the payor or broker may not refund 
the amount to the payee.
    (b) Refunding amounts erroneously withheld--(1) Time and manner. If 
a payor or broker withholds under section 3406 from a payee in error 
(including withholding more than the correct amount, as described in 
paragraph (a) of this section), the payor or broker may refund the 
amount erroneously withheld to the payee if the refund is made prior to 
the end of the calendar year and prior to the time the payor or broker 
furnishes a Form 1099 to the payee with respect to the payment for 
which the erroneous withholding occurred. If the amount of the 
erroneous withholding is refunded to the payee, the payor or broker 
must--
    (i) Keep as part of its records a receipt showing the date and 
amount of refund and must provide a copy of the receipt to the payee (a 
canceled check or an entry in a statement is sufficient, provided that 
the check or statement contains a specific notation that it is a refund 
of tax erroneously withheld);
    (ii) Not report on a Form 1099 as tax withheld any amount which the 
payor or broker has refunded to a payee; and
    (iii) Not deposit the amount erroneously withheld if the payor or 
broker has not deposited the amount of the tax prior to the time that 
the refund is made to the payee.
    (2) Adjustment after the deposit of the tax. For purposes of 
paragraph (b)(1) of this section, if the amount erroneously withheld 
has been deposited prior to the time that the refund is made to the 
payee, the payor or broker may adjust any subsequent deposit of the tax 
collected under chapter 24 of the Internal Revenue Code that the payor 
or broker is required to make in the amount of the tax that has been 
refunded to the payee.

PART 35a--TEMPORARY EMPLOYMENT TAX REGULATIONS UNDER THE INTEREST 
AND DIVIDEND TAX COMPLIANCE ACT OF 1983

    Par. 12. The authority citation for part 35a is amended by removing 
the entry for 35a.3406-2 to read, in part, as follows:

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


Sec. 35a.3406-2  [Removed]

    Par. 13. Section 35a.3406-2 is removed.
    Par. 14. Section 35a.9999-0T is added to read as follows:


Sec. 35a.9999-0T  Effective date (temporary).

    In general, the provisions of Secs. 35a.9999-1, 35a.9999-2, 
35a.9999-3, 35a.9999-3A, 35a.9999-4T, and 35a.9999-5 are effective 
before January 1, 1997. The provisions of those sections remain 
effective after December 31, 1996, however, for purposes of 
Sec. 301.6724-1(g) of this chapter, relating to due diligence safe 
harbor, and for international transactions, including transactions 
involving a foreign payee, a foreign payor, a foreign office of a U.S. 
bank or broker, or a payment from sources without the United States. 
See Secs. 31.3406-0 through 31.3406(i)-1 of this chapter for rules that 
apply to other transactions after December 31, 1996.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 15. The authority for part 301 continues to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *
    Par. 16. Section 301.6109-1 is amended by:
    1. Revising the third sentence in paragraph (a)(1).
    2. Revising the first sentence in paragraph (h).
    The revised sentences read as follows:


Sec. 301.6109-1  Identifying numbers.

    (a) In general--(1) Social security numbers and employer 
identification numbers. * * * Social security numbers identify 
individual persons, while employer identification numbers identify 
corporations, partnerships, nonprofit associations, trusts, estates of 
decedents, and similar nonindividual persons. * * *
* * * * *
    (h) Effective date. The provisions of this section are effective 
for information that must be furnished after April 15, 1974, except 
that the requirement that an estate obtain an Employer Identification 
Number applies on and after January 1, 1984. * * *

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par 17. The authority for part 602 continues to read as follows:

    Authority: 26 U.S.C. 7805.

    Par. 18. In Sec. 602.101, paragraph (c) is amended by adding an 
entry to the table in numerical order to read as follows: 
``Sec. 31.3406(a)-1--Sec. 31.3406(i)-1...1545-0112''.

    Dated: November 28, 1995.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved:
Cynthia G. Beerbower,
Deputy Assistant Secretary of the Treasury.
[FR Doc. 95-30733 Filed 12-20-95; 8:45 am]
BILLING CODE 4830-01-U