[Federal Register Volume 62, Number 198 (Tuesday, October 14, 1997)]
[Proposed Rules]
[Pages 53503-53504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-26000]
Federal Register / Vol. 62, No. 198 / Tuesday, October 14, 1997 /
Proposed Rules
[[Page 53503]]
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-114000-97]
RIN-1545-AV41
Withholding on Interest in the Case of Sales of Obligations
Between Interest Payment Dates
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This notice of proposed rulemaking provides guidance regarding
the obligation to withhold on interest paid with respect to obligations
in the case of the sale of obligations between interest payment dates.
These regulations would affect United States and foreign withholding
agents and recipients. This document also provides notice of a public
hearing on these proposed regulations.
DATES: Comments and outlines of oral comments to be presented at the
public hearing scheduled for January 26, 1998, at 10 a.m. must be
received by January 5, 1998.
ADDRESSES: Send submission to: CC:DOM:CORP:R (REG-114000-97), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington DC 20224. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-114000-97), Courier
desk, Internal Revenue Service, 1111 Constitution Avenue, NW.,
Washington DC. Alternatively, taxpayers may submit comments
electronically via the internet by selecting the ``Tax Regs'' option on
the IRS Home Page, or by submitting comments directly to the IRS
internet site at http://www.irs.ustreas.gov/prod/tax__regs/
comments.html. The hearing scheduled for January 26, 1998, will be held
in the Commissioner's Conference Room, room 3313, Internal Revenue
Service, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Lilo
Hester at (202) 622-3840 (not a toll-free number); concerning
submissions and the hearing, Evangelista Lee, (202) 622-7180 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
In this issue of the Federal Register, the IRS and Treasury are
publishing final withholding and reporting regulations under chapter 3
of the Internal Revenue Code (Code) and other sections of the Code.
Section 1.1441-3(b)(2) of the final regulations provides that no
withholding is required upon interest accrued on the date of a sale of
debt obligations when the sale occurs between two interest payment
dates, even though the amount is treated as interest under Sec. 1.61-7
(c) or (d) and is subject to tax under section 871 or 881. In contrast,
Sec. 1.1441-2(b)(3) of the final regulations provides that withholding
is required on amounts of original issue discount in the event of a
sale of an original issue discount obligation or a payment on such an
obligation, subject to certain exceptions. The IRS and Treasury believe
that, in view of these provisions, the exemption from withholding on
non-OID amounts is no longer justified. A withholding agent that pays
amounts to a foreign person in connection with the sale of an
obligation between interest payments dates is in the same position as a
withholding agent that pays amounts to a foreign person in connection
with the sale of an original issue discount obligation. The withholding
exemption for sale of debt obligations between interest payment dates
provides an easy avenue for the avoidance of the documentation
requirements imposed under sections 871(h) and 881(c) for purposes of
qualifying interest on registered debt obligations as portfolio
interest. For this reason, and in order to create parity with the tax
treatment of original issue discount obligations under chapter 3 of the
Code, it is no longer appropriate to continue this exemption.
Under Sec. 1.1441-2(b)(3), a withholding agent must withhold on an
amount of original issue discount to the extent that it has actual
knowledge of the proportion of the amount of the payment that is
taxable to the beneficial owner under section 871(a)(1)(C) or
881(a)(3)(A). A withholding agent has actual knowledge if it knows how
long the beneficial owner has held the obligation, the terms of the
obligation, and the extent to which the beneficial owner purchased the
obligation at a premium. A withholding agent is treated as having
knowledge if the information is reasonably available. Special rules are
provided for withholding agents with which the beneficial owner does
not maintain a direct account relationship. Further, the regulations
under Sec. 1.1441-2(b)(3) dealing with original issue discount provide
that, in the case of an obligation that would qualify as portfolio
interest if documentation were provided to the withholding agent,
withholding is required on the entire amount of stated interest, if
any, and original issue discounts, if no such documentation is
provided, irrespective of whether the withholding agent has knowledge
of the portion of the payment representing taxable original issue
discount. For this purpose, the withholding agent may rely upon the IRS
List of Original issue Discount Instruments contained in IRS
Publication 1212 (available from the IRS Distribution Centers).
In response to comments, the provisions in Sec. 1.1441-3(b)(1) are
proposed to be modified to reduce the amount upon which withholding is
required. No obligation to withhold is imposed under current law on the
payment of stated interest on an obligation that was purchased between
interest payment dates. Under Sec. 1.61-7(c), interest received on the
interest payment date is treated as a return of basis to the extent it
represents accrued unpaid interest as of the date of purchase as
reflected in the new holder's basis for the obligation. Therefore, when
the new holder receives a payment of the stated interest, the holder s
tax liability is limited to the amount of interest accrued after the
date of purchase (subject to additional adjustments reflecting possible
acquisition premiums or market discounts). Because of the difficulty
for a withholding agent to determine the amount accrued to the holder
and other adjustments affecting the actual amount taxable to the
holder, withholding on the entire amount of stated interest is required
under the current withholding regulations under Sec. 1.1441-3(b)(1).
Commentators have asked that the withholding agent be permitted to
withhold on the amount that it knows is taxable. The final withholding
regulations did not modify the proposed regulations on this point
because the Treasury and IRS consider that withholding on the entire
amount is justified if withholding on sales of obligations between
interest payment dates is not required. However, because these proposed
regulations require withholding, the regulations permit a withholding
agent to adjust the amount of withholding at the time of payment of
stated interest to account for earlier withholding.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866. Therefore,
a regulatory assessment is not required. It also has been determined
that section 553(b) of the Administrative Procedure Act (5
[[Page 53504]]
U.S.C. chapter 5) does not apply to these regulations, and because the
regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS. All comments will be available for public inspection and
copying.
A public hearing has been scheduled for January 26, 1998, at 10
a.m. in the Commissioner's Conference Room, room 3313, Internal Revenue
Building, 1111 Constitution Ave, NW., Washington DC. Because of access
restrictions, visitors will not be admitted beyond the Internal Revenue
Building lobby more than 15 minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
Persons who wish to present oral comments at the hearing must
submit comments and an outline of the topics to be discussed and the
time to be devoted to each topic by January 5, 1998.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In Sec. 1.1441-3, paragraph (b) is revised to read as
follows:
Sec. 1.1441-3 Determination of amount to be withheld.
* * * * *
(b) Withholding on payments on certain obligations--(1) Withholding
at time of payment of interest. When making a payment on an interest-
bearing obligation, a withholding agent must withhold under
Sec. 1.1441-1 upon the gross amount of stated interest payable on the
interest payment date, regardless of whether the payment constitutes a
return of capital or the payment of income within the meaning of
section 61, unless the withholding agent has knowledge of the actual
amount of interest paid. For this purpose, the withholding agent may
rely on information provided by the issuer (or its paying agent), on a
representation from the beneficial owner, or on information that the
withholding agent has in its records. To the extent an amount was
withheld on an amount of capital rather than interest, see rules for
adjustments, refunds, or credits under Sec. 1.1441-1(b)(8).
(2) No withholding between interest payment dates--(i) General
rule. A withholding agent is not required to withhold under
Sec. 1.1441-1 upon interest accrued on the date of a sale of debt
obligations when that sale occurs between two interest payment dates
(even though the amount is treated as interest under Sec. 1.61-7(c) or
(d) and is subject to tax under section 871(a) or 881(a)), unless the
withholding agent has knowledge of the amount paid as interest. For
purposes of this paragraph (b)(2)(i), a withholding agent is treated as
having knowledge in the same manner as a withholding agent has
knowledge for purposes of Sec. 1.1441-2(b)(3)(ii), dealing with
withholding on original issue discount. In addition, notwithstanding
lack of knowledge (within the meaning of Sec. 1.1441-2(b)(3)(ii)),
withholding is required on the entire amount of stated interest paid
with respect to the obligation as determined as of the date of original
issue if the withholding agent, pursuant to the provisions in
Sec. 1.1441-1(b)(3), treats the payment as made to a foreign payee
because it cannot associate the payment with required documentation and
the amount would qualify as portfolio interest. See Sec. 1.1441-1(b)(8)
for adjustments to any amount that has been overwithheld as a result of
this provision.
(ii) Applicable rules. Any exemption from withholding pursuant to
paragraph (b)(2)(i) of this section applies without a requirement that
documentation be furnished to the withholding agent. However,
documentation may have to be furnished for purposes of the information
reporting provisions under section 6049 and backup withholding under
section 3406. See Sec. 1.6045-1(c) for reporting requirements by
brokers with respect to sale proceeds. Any exemption from withholding
under paragraph (b)(2)(i) of this section is not a determination that
the accrued interest is not fixed or determinable annual or periodical
income. See Sec. 1.61-7(c) regarding the character of payments received
by the acquirer of an obligation subsequent to such acquisition (that
is, as a return of capital or interest accrued after the acquisition).
Michael P. Dolan,
Acting Commissioner of Internal Revenue.
[FR Doc. 97-26000 Filed 10-6-97; 8:45 am]
BILLING CODE 4830-01-P