Withholding Procedures Under Section 1441 for Certain Distributions to Which Section 302 Applies, 58781-58787 [E7-20504]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 72, Number 200 (Wednesday, October 17, 2007)]
[Proposed Rules]
[Pages 58781-58787]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-20504]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-140206-06]
RIN 1545-BF93


Withholding Procedures Under Section 1441 for Certain 
Distributions to Which Section 302 Applies

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations regarding a 
withholding agent's obligation to withhold and report tax under Chapter 
3 of the Internal Revenue Code when there is a distribution in 
redemption of stock of a corporation that is actively traded on an 
established financial market. Specifically, the proposed regulations 
provide an escrow procedure that a withholding agent must apply while 
making the determination under section 302 as to whether the 
distribution in redemption of the stock held by a foreign shareholder 
is treated as a dividend subject to withholding, or a distribution in 
part or full payment in exchange for stock. These regulations would 
affect corporations that are actively traded on an established 
financial market and their shareholders. This document also provides a 
notice of public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by January 16, 
2008. Outlines of topics to be discussed at the public hearing 
scheduled for February 6, 2008 at 10 a.m. must be received by January 
16, 2008.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-140206-06), room 5203, 
Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
140206-06), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC or sent electronically, via the Federal 
eRulemaking Portal at www.regulations.gov (IRS REG-140206-06). The 
public hearing will be held in room 2140, Internal Revenue Building, 
1111 Constitution Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Kathryn Holman, (202) 622-3440 (not a toll-free number); concerning 
submissions of comments, the hearing, and/or to be placed on the 
building access list to attend the hearing, e-mail 
Richard.A.Hurst@irscounsel.treas.gov.

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in this notice of proposed 
rulemaking have been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collections of information should be 
sent to the Office of Management and Budget, Attn: Desk Office for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by January 16, 2008. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;

[[Page 58782]]

    The accuracy of the estimated burden associated with the proposed 
collection of information;
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collections of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance and purchase of service to provide information.
    The collection of information in these proposed regulations is in 
Sec.  1.1441-3(c)(5)(iii). This information is required to allow a U.S. 
financial institution that is applying the escrow procedure to properly 
comply with its withholding and reporting obligations under sections 
1441, 1442 and 1443 in the case of a distribution made by a corporation 
with respect to its stock that is actively traded on an established 
financial market and that requires a determination under section 302 as 
to whether the distribution is treated as a dividend or a distribution 
in part or full payment in exchange for stock. The collection of 
information is mandatory and the respondents are nonresident aliens and 
foreign corporations.
    Estimated total annual reporting burden: 1400 hours.
    The estimated annual burden per respondent: 2 hours.
    Estimated number of respondents: 700.
    Estimated annual frequency of responses: 5 times.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential as required by 26 U.S.C. 6103.

Background

    These proposed regulations, REG-140206-06, provide guidance 
regarding the withholding and reporting obligations of a withholding 
agent under Chapter 3 of the Internal Revenue Code (Code) in the case 
of a distribution in redemption of the stock of a corporation that is 
actively traded on an established financial market within the meaning 
of Sec.  1.1092(d)-1 (publicly traded). In general the proposed 
regulations contemplate a transaction where a publicly traded 
corporation offers to purchase stock from its shareholders (a self 
tender), where the amount of stock purchased and the shareholders 
involved in the transaction (the participating shareholders) depend on 
a number of factors, including each shareholder's willingness to sell 
some or all of its stock, and the terms set forth in the offer. The 
regulations would also apply to transactions described in section 
304(a)(2).
    In the case of a self-tender, a corporation may purchase stock from 
some or all of its shareholders and, as a result, each participating 
shareholder's percentage ownership interest in the corporation may 
increase, decrease, or remain the same. Although the corporation's self 
tender offer is denominated as an offer to purchase shares, the tax 
consequences to the corporation and any participating shareholder of 
the payment to such a shareholder, as described in this preamble, 
depend on several factors. Further, where the participating shareholder 
is a foreign person, withholding under Chapter 3 of the Code may or may 
not be required.
    Sections 1441 and 1442 and Sec.  1.1441-1(b)(1) generally require a 
person that makes a payment of an ``amount subject to withholding'' to 
a beneficial owner that is a foreign person to deduct and withhold 30 
percent of the payment unless the payor can reliably associate the 
payment with documentation upon which the payor can rely to treat the 
payment as made to a beneficial owner that is a U.S. person or as made 
to a beneficial owner that is a foreign person entitled to a reduced 
rate of withholding under the Code, regulations or an income tax 
treaty.
    Section 1.1441-2(a) provides that the term amounts subject to 
withholding means amounts from sources within the United States that 
constitute fixed or determinable annual or periodical income (FDAP) 
described in Sec.  1.1441-2(b) or other amounts subject to withholding 
described in Sec.  1.1441-2(c).
    Section 1.1441-2(b)(1) provides that FDAP includes all income 
described in section 61 of the Code, unless the item of income is 
described in Sec.  1.1441-2(b)(2). Section 1.1441-2(b)(2)(i) generally 
excludes from FDAP gains derived from the sale of property. Thus, a 
distribution to a shareholder that is treated as gain from the sale of 
stock is excluded from FDAP. Further, to the extent a distribution is a 
return of capital, it is not gross income under section 61, and thus 
also is not FDAP.
    Section 302 provides rules for determining when a distribution in 
redemption of stock is treated as a distribution in part or full 
payment in exchange for stock. That section generally requires a 
comparison of a shareholder's overall interest in the corporation 
before the distribution and its overall interest in such corporation 
after the distribution. See section 302(b). In conducting the 
comparison, the constructive ownership rules of section 318 generally 
apply. If the shareholder's interest in the corporation has been 
sufficiently reduced, then the distribution is treated as a payment in 
exchange for the shareholder's stock under section 302(a). If the 
shareholder's interest in the corporation has not been sufficiently 
reduced, the tax consequences of the distribution are determined under 
section 301, and such distribution is a dividend to the shareholder to 
the extent the distribution is out of the distributing corporation's 
earnings and profits, then applied against and reduce the adjusted 
basis of the stock, and finally treated as gain from the sale or 
exchange of property. See section 301(c).
    When a publicly held corporation makes a distribution in redemption 
of its stock, a determination must be made under section 302 with 
respect to each shareholder as to whether the redemption is treated as 
a distribution of property to which section 301 applies (potentially 
constituting a dividend in whole or in part) or as a distribution in 
part or full payment in exchange for stock. However, the information 
necessary for each shareholder to make such a determination generally 
is not available until after the transaction is completed because the 
redemption of stock held by other shareholders must be taken into 
account. Further, because of the application of the constructive 
ownership rules of section 318, when a distribution is made to a 
foreign shareholder, a withholding agent will often not be in the best 
position to make a determination as to whether the distribution to the 
foreign shareholder should be treated as a payment in exchange for the 
shareholder's stock or a dividend.
    There are two revenue rulings that consider the issue of whether 
the interest of a shareholder in a publicly held corporation has been 
sufficiently reduced as a result of a distribution to effect exchange 
treatment under section 302(a).
    In Rev. Rul. 76-385, 1976-2 CB 92, See Sec.  601.601(d)(2)(ii)(b), 
the IRS ruled that a shareholder who actually and constructively owned 
0.0001118% of a publicly traded corporation's stock

[[Page 58783]]

before a redemption, but only constructively owned 0.0001081% after the 
redemption, had experienced a ``meaningful reduction in proportionate 
interest'' in the corporation under the principles of United States v. 
Davis, 397 U.S. 301 (1970), rehearing denied, 397 U.S. 107 (1970). The 
shareholder's interest in the corporation after the redemption 
therefore was approximately 96.7% of the shareholder's interest before 
the redemption, taking constructive ownership into account. 
Nevertheless, the reduction was considered meaningful, and so the 
distribution to the shareholder was treated as not essentially 
equivalent to a dividend under section 302(b)(1) and as a payment in 
exchange for the shareholder's stock under section 302(a).
    Consistent with Rev. Rul. 76-385, in Rev. Rul. 81-289, 1981-2 CB 
82, See Sec.  601.601(d)(2)(ii)(b), the IRS ruled that a shareholder 
who owned 0.2% of the common stock of a publicly traded company before 
a redemption, and 0.2% of the common stock in the company after the 
redemption, did not satisfy the ``meaningful reduction'' standard of 
United States v. Davis, and that the redemption did not qualify for 
exchange treatment under section 302(a).
    Under the analysis adopted in these revenue rulings, each minority 
shareholder who participates in a self tender must compute its 
percentage ownership of the total outstanding stock of the corporation 
before and after the transaction. If after the transaction the 
shareholder's percentage ownership is less than it was before the 
transaction, the shareholder generally has experienced a ``meaningful 
reduction'' in the shareholder's proportionate interest in the 
corporation, and the transaction, at least with respect to that 
shareholder, is considered a distribution in exchange for the stock 
under section 302(a) and not a distribution of property to which 
section 301 applies. This result occurs even if another participating 
shareholder in the same self tender experiences no change or an 
increase in its percentage ownership of the corporation, and, 
therefore, is considered to receive a distribution of property to which 
section 301 applies. See also section 302(b)(2), (3), and (4).
    Section 1.1441-3(c) requires a corporation making a distribution 
with respect to its stock to a foreign shareholder, as well as any 
intermediary (such as a broker) making a payment of such a 
distribution, to withhold on the entire amount of the distribution, 
unless it elects to reduce the amount of withholding under Sec.  
1.1441-3(c). Section 1.1441-3(c)(2)(i)(B) provides that a distributing 
corporation or intermediary may elect to not withhold on a distribution 
to the extent it represents a distribution in part or full payment in 
exchange for stock. Section 1.1441-3(c)(2)(i) provides that a 
corporation or intermediary makes the election by reducing the amount 
of withholding at the time that the payment is made. However, a 
withholding agent cannot avail itself of this election unless it knows 
the extent to which a distribution represents a payment in exchange for 
stock under section 302(a). As previously noted, in the context of a 
distribution in redemption of stock held in a publicly traded 
corporation, the withholding agent generally will not have this 
information unless, at the time of the redemption, it has obtained 
information from each participating shareholder regarding actual and 
constructive ownership of stock for purposes of the foregoing analysis.
    The Treasury Department and the IRS are aware that, in the context 
of transactions involving distributions in redemption of stock held by 
foreign persons where such stock is actively traded on an established 
financial market, the means of compliance with sections 1441, 1442, and 
1443 is varied. The Treasury Department and the IRS believe that the 
discretion permitted by the current regulations, and the resulting 
different treatment of similar transactions is not appropriate. 
Accordingly, these proposed regulations provide the procedure (``escrow 
procedure'') to be followed by U.S. withholding agents to satisfy the 
withholding, reporting and deposit requirements of the regulations 
under sections 1441, 1442, and 1443 with respect to any payment of a 
corporate distribution in redemption of stock made to a foreign account 
holder with respect to certain self tenders.

Explanation of Provisions

    The proposed regulations set forth an escrow procedure for 
withholding agents to follow in the case of a payment made after 
December 31, 2008 of a corporate distribution in redemption of stock 
that is actively traded on an established financial market within the 
meaning of Sec.  1.1092(d)-1 (section 302 payment).
    In general, the proposed regulations require a U.S. financial 
institution (withholding agent) to set aside in an escrow account 30 
percent (or the applicable dividend rate provided under a treaty) of 
the amount of the section 302 payment. The withholding agent is then 
required to provide information to the foreign beneficial owner 
regarding the distribution, including the total number of the 
distributing corporation's shares outstanding before and after the 
distribution. The withholding agent must also provide a written 
statement explaining the conditions under which the section 302 payment 
will be treated as a dividend or a payment in exchange for stock 
(including an explanation of the constructive ownership rules under 
section 318). In the written explanation provided to the foreign 
beneficial owner, the withholding agent must request that the 
beneficial owner provide a written certification to the withholding 
agent within 60 days as to whether the distribution is either a 
dividend or a payment in exchange for stock.
    The certification to be provided by the foreign beneficial owner 
must contain, among other requirements, the beneficial owner's name and 
account number, a certification that the distribution is a payment in 
exchange for stock or is a dividend, and the number of shares actually 
and constructively owned by the beneficial owner before and after the 
distribution. The beneficial owner's certification must be signed under 
penalties of perjury.
    A withholding agent may generally rely on a certification received 
from a foreign beneficial owner in determining its section 1441 
obligations with respect to payments for such beneficial owner's stock. 
However, if the withholding agent knows or has reason to know that the 
certification is unreliable or incorrect, or the withholding agent does 
not receive a certification from a foreign beneficial owner, the 
withholding agent is required to treat the amount set aside in escrow 
as tax withheld on the 61st day, and deposit that amount pursuant to 
the applicable regulations.
    Although a qualified intermediary (QI) may, and a withholding 
foreign partnership and a withholding foreign trust (WP/WT) must, 
assume primary withholding responsibility under section 1441 and 
receive payments without any withholding by the U.S. financial 
institution, under the proposed regulations, in the case of a section 
302 payment, the QI or WP/WT cannot assume primary withholding 
responsibility and receive the payment in gross. The QI or WP/WT must 
apply the procedure described in this preamble and provide the U.S. 
financial institution with a withholding statement that details the 
appropriate rate of withholding and information reporting for amounts 
paid to the QI or WP/WT. In addition, if there is a chain of QIs or 
WPs/WTs this procedure must be

[[Page 58784]]

followed at each level in the chain. The U.S. financial institution 
shall treat beneficial owners that are U.S. non-exempt recipients, and 
that hold stock in the distributing corporation through QIs, WPs/WTs, 
NQIs and flow-throughs, in accordance with the section 302 payment 
certifications obtained from those U.S. non-exempt recipients and shall 
instruct foreign intermediaries and foreign flow-through entities to do 
the same.
    These proposed regulations would apply for redemptions of stock 
that are made after December 31, 2008. However, a withholding agent 
may, at its option, rely on these proposed regulations for a redemption 
of stock that occurs before January 1, 2009.
    The Treasury Department and the IRS are aware that withholding 
agents serve various customer bases: some may maintain accounts for a 
small number of account holders, others may maintain accounts for a 
much greater number of account holders. Comments are requested on 
alternatives to the escrow procedure described in this proposed 
regulation for withholding agents that maintain accounts for large 
numbers of customers.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required.
    It has been determined that section 553(b) of the Administrative 
Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations.
    These regulations impose a collection of information on small 
entities, and the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
applies. This rule regulates securities brokerages that have foreign 
customers that respond to a tender offer by a U.S. publicly traded 
corporation to purchase some of its stock from its shareholders. The 
Small Business Administration (SBA) has established size standards for 
types of economic activities which are classified based on the North 
American Industry Classification Codes (NAICS). The regulations 
specifying size standards are set forth in Title 13, Code of Federal 
Regulations, part 121 (13 CFR part 121), Small Business Size 
Regulations. The NAICS Code for a small securities brokerage is 
specified at 13 CFR 121.201. Pursuant to subsector 523120 of the NAICS, 
a small securities brokerage is one with receipts of less than 6.5 
million dollars. According to NAICS 523120, U.S. Census Bureau, 
Statistics of U.S. Business (2002), there are a total of 7,886 
securities brokerages of which 7,113 generate revenue less than $5 
million and 224 generate revenue between $5 million and $10 million. It 
is estimated that 7,213 of the securities brokerages are considered 
small businesses. The IRS requests information regarding the number of 
transactions these small securities brokerages engage in each year 
involving self tenders by public corporations. In the case of a tender 
offer by a publicly held corporation, it is estimated that a brokerage 
clerk would spend two hours preparing the paperwork and verifying the 
computations required to accurately withhold with respect to foreign 
customers. According to the Bureau of Labor Statistics, the mean hourly 
wage of a brokerage clerk is $18.34, so it is estimated that it will 
cost a small securities brokerage $36.68 per transaction. This cost is 
not significant when compared to the annual revenue of the small 
securities brokerage. Pursuant to section 605(b) of the Regulatory 
Flexibility Act, 5 U.S.C. 605, the Chief Counsel certifies that this 
rule will not have a significant economic impact on a substantial 
number of small entities. The IRS invites specific comments on the 
economic impact of compliance from members of the public who believe 
there will be a significant economic impact on small businesses that 
are regulated by this rule. Pursuant to section 7805(f) of the Internal 
Revenue Code, this regulation has been submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small businesses.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department request comments on the 
clarity of the proposed rules and how they can be made easier to 
understand. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for February 6, 2008, beginning 
at 10 a.m. in room 2140 of the Internal Revenue Building, 1111 
Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the 12th street entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 30 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit electronic or 
written comments, and an outline of the topics to be discussed, and the 
time to be devoted to each topic (signed original and eight (8) copies) 
by January 16, 2008. 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.

Drafting Information

    The principal author of these proposed regulations is Kathryn 
Holman, Office of Associate Chief Counsel (International). However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

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

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

    Par. 2. Section 1.1441-3 is amended as follows:
    1. A sentence is added at the end of paragraph (c)(2)(i)(B).
    2. Paragraph (c)(5) is added.
    3. A sentence is added at the end of paragraph (d)(1).
    The additions read as follows.


Sec.  1.1441-3  Determination of amounts to be withheld.

* * * * *
    (c) * * *
    (2) * * *
    (i) * * *
    (B) * * * The preceding sentence shall not apply to a public 
section 302 distribution to which paragraph (c)(5) applies.
* * * * *
    (5) Special rules for certain distributions to which section 302 
applies--(i) Withholding

[[Page 58785]]

responsibility--(A) General rule. A corporation that makes a public 
section 302 distribution, or any intermediary (described in Sec.  
1.1441-1(c)(13)) making a payment of such a distribution, is required 
to withhold under section 1441, 1442 or 1443 on the entire amount of 
the distribution unless the provisions of paragraph (c)(5)(iii) of this 
section have been applied. The provisions of paragraph (c)(2)(i)(B) or 
(d)(1) of this section do not apply to a public section 302 
distribution.
    (B) Effective/applicability date. The rules of this paragraph 
(c)(5) apply to public section 302 distributions made after December 
31, 2008.
    (ii) Definitions. Solely for purposes of this paragraph (c)(5), the 
following definitions shall apply:
    (A) Public section 302 distribution means a distribution by a 
corporation in redemption of its stock for which there is an 
established financial market within the meaning of Sec.  1.1092(d)-1.
    (B) Section 302 payment means payment of a public section 302 
distribution.
    (C) Distributing corporation means a corporation making or treated 
as making a public section 302 distribution.
    (iii) Escrow procedure--(A) Application--(1) In general. The escrow 
procedure in this paragraph (c)(5)(iii) may be applied only by an 
intermediary (described in Sec.  1.1441-1(c)(13)) that is a U.S. 
financial institution. A U.S. financial institution making a section 
302 payment to a foreign account holder, and applying this escrow 
procedure, is not required to withhold on the entire amount of a 
section 302 payment under the general rule of paragraph (c)(5)(i).
    (B) Escrow account--(1) In general. A U.S. financial institution 
shall set aside in an escrow account on the date it receives a section 
302 payment from a distributing corporation with respect to stock of a 
foreign account holder 30 percent (or the applicable dividend rate 
provided by a tax treaty for a qualifying foreign account holder) of 
the amount and shall credit the foreign account holder's account with 
the balance of the section 302 payment.
    (2) Qualified intermediaries. The amount set aside, under paragraph 
(c)(5)(iii)(B)(1) of this section shall include 30 percent (or the 
applicable dividend rate provided by a treaty) of the amount paid to 
any qualified intermediary (QI) (whether or not the QI has assumed 
primary withholding responsibility) and to any withholding foreign 
partnership or withholding foreign trust (WP/WT).
    (C) Request for section 302 payment certification. On or before the 
date it receives the section 302 payment, the U.S. financial 
institution shall provide the following information and instructions, 
in writing, to the foreign beneficial owner--
    (1) The total number of distributing corporation's shares 
outstanding before and after the public section 302 distribution;
    (2) An explanation of the conditions under which the section 302 
payment will be treated as a dividend or a payment in exchange for 
stock for Federal income tax purposes (including an explanation of any 
applicable constructive ownership rules); and
    (3) A request that the beneficial owner of the account provide a 
certification (section 302 payment certification), within 60 days of 
the section 302 payment, stating whether the section 302 payment is 
either a dividend or a payment in exchange for stock under the Internal 
Revenue Code.
    (D) Content of section 302 payment certification. The section 302 
payment certification must include the following information:
    (1) The beneficial owner's name and account number.
    (2) The distributing corporation's name.
    (3) The total shares of the distributing corporation outstanding 
immediately before and immediately after the public section 302 
distribution.
    (4) A certification from the beneficial owner that either--
    (i) The section 302 payment is a payment in exchange for stock 
because the beneficial owner's proportionate interest has been reduced 
but not completely terminated;
    (ii) The section 302 payment is a payment in exchange for stock 
because the beneficial owner's interest in the distributing corporation 
is completely terminated; or
    (iii) The section 302 payment is a dividend.
    (5) With respect to the certifications in paragraph 
(c)(5)(iii)(D)(4)(i) and (ii) of this section, the number of shares 
actually and constructively owned by the beneficial owner before and 
after the distribution and the beneficial owner's percentage ownership 
before and after the distribution.
    (6) A penalties of perjury statement.
    (7) The signature of the beneficial owner and date of signature.
    (E) Receipt of section 302 payment certification--(1) Payment in 
exchange for stock. If, within the 60-day period described in paragraph 
(c)(5)(iii)(C)(3), the U.S. financial institution receives from the 
foreign beneficial owner a section 302 payment certification stating 
that the section 302 payment is a payment in exchange for stock, and if 
the U.S. financial institution does not know or have reason to know 
that the information in the section 302 payment certification is 
unreliable or incorrect, the U.S. financial institution shall credit 
the account with the amount set aside with respect to the beneficial 
owner who provides the certification. The entire amount paid (including 
the amount initially set aside) shall be reported as capital gains on 
Form 1042-S Foreign Person's U.S. Source Income Subject to Withholding.
    (2) Unreliable or incorrect exchange certification. If the U.S. 
financial institution knows or has reason to know that the information 
in the section 302 payment certification is unreliable or incorrect, 
the U.S. financial institution shall treat the payment as a payment for 
which no section 302 payment certification has been received and shall 
follow the withholding and reporting procedures in paragraph 
(c)(5)(iii)(E)(4) of this section.
    (3) Dividend. If, within the 60-day period, the U.S. financial 
institution receives a section 302 payment certification from the 
foreign beneficial owner stating that the section 302 payment is a 
dividend, the U.S. financial institution shall treat the amount set 
aside as tax withheld as of the time it receives the section 302 
payment certification, and shall deposit that amount pursuant to the 
applicable regulations. The entire amount paid shall be reported on 
Form 1042-S as dividends.
    (4) No timely certification received. If, within the 60-day period, 
the U.S. financial institution does not receive a section 302 payment 
certification, or is treated under paragraph (c)(5)(iii)(E)(2) of this 
section as not receiving a section 302 payment certification, the U.S. 
financial institution shall treat the amount set aside as tax withheld 
as of the 61st day, and shall deposit that amount pursuant to the 
applicable regulations. The entire amount paid shall be reported on 
Form 1042-S as dividends.
    (5) Late certification. If, after the 60-day period has expired, 
the U.S. financial institution receives a section 302 payment 
certification from a foreign beneficial owner that the section 302 
payment is a payment in exchange for stock and the conditions stated in 
Sec.  1.1461-2(a) are satisfied, the U.S. financial institution may 
apply the refund or offset procedures of that paragraph.
    (6) Determination of incorrect treatment. If, after the 60-day 
period has expired, the U.S. financial institution determines that the 
section 302 payment

[[Page 58786]]

was incorrectly treated as a distribution in exchange for stock, the 
procedures set forth regarding underwithholding in Sec.  1.1461-2(b) 
are applicable.
    (7) Undocumented beneficial owners. The U.S. financial institution 
shall withhold at 30 percent on the entire amount paid to a beneficial 
owner that is not properly documented under Sec. Sec.  1.1441-1, 
1.1441-5, etc. and that is presumed to be a foreign person, whether or 
not the U.S. financial institution has received a section 302 payment 
certification from such beneficial owner. The U.S. financial 
institution shall report the entire amount paid on Form 1042-S as 
dividends.
    (F) Amounts in excess of section 302 payment. If the amount the 
U.S. financial institution credits to the account of the foreign 
beneficial owner from the escrow account includes an amount in excess 
of the section 302 payment, such as interest accrued on the escrowed 
funds, the U.S. financial institution shall report and withhold on such 
excess amount in accordance with the rules under Chapter 3 of the 
Internal Revenue Code.
    (G) U.S. non-exempt recipients. The U.S. financial institution 
shall treat beneficial owners that are U.S. non-exempt recipients, and 
that hold stock in the distributing corporation through QIs, WPs/WTs, 
NQIs and flow-throughs, in accordance with the section 302 payment 
certifications obtained from those U.S. non-exempt recipients and shall 
instruct foreign intermediaries and foreign flow-through entities to do 
the same.
    (H) Notice to distributing corporation. The U.S. financial 
institution shall notify the distributing corporation, in writing, by 
the filing date of Form 1042-S, of the aggregate amount of the section 
302 payment that the U.S. financial institution has reported on Forms 
1042-S as capital gains, and the aggregate amount of the section 302 
payment that it has reported on Forms 1042-S as dividends.
    (I) Application of Escrow Procedure to Qualified Intermediaries. As 
provided in paragraph (c)(5)(iii)(A) of this section, only the U.S. 
financial institution may establish an escrow account and the amounts 
set aside in the escrow account shall include 30 percent (or the 
applicable treaty rate applicable to dividends) on payments made to a 
direct account holder that is a QI (including a QI that has assumed 
primary withholding responsibility). Under the procedure described in 
paragraph (c)(5)(iii)(I)(3), a QI shall provide the U.S. financial 
institution with a withholding statement as required in the QI 
Agreement. If there is a chain of QIs, each QI in the chain shall apply 
the procedure. The procedures described in this paragraph (I) shall be 
applied to withholding foreign partnerships and withholding foreign 
trusts within the meaning of Sec. Sec.  1.1441-5(c)(2) and (e)(5)(v), 
respectively, in the same manner as the procedures apply to a QI.
    (1) Request for section 302 payment certification. The U.S. 
financial institution shall provide the information and instructions 
described in paragraph (c)(5)(iii)(C) of this section to the QI, and 
the QI shall provide the same information and instructions to its 
account holders including account holders that are U.S. non-exempt 
recipients.
    (2) Content of section 302 payment certification. The content of 
the section 302 payment certification shall include the information 
described in paragraph (c)(5)(iii)(D) of this section.
    (3) Receipt of section 302 payment certification--(i) Payment in 
exchange for stock. If, within the 60-day period described in paragraph 
(c)(5)(iii)(C), the QI receives from the beneficial owner a section 302 
payment certification stating that the section 302 payment is a payment 
in exchange for stock and if the QI does not know or have reason to 
know that the information in the section 302 payment certification is 
unreliable or incorrect, the QI shall reflect such treatment in its 
withholding statement provided to the U.S. financial institution, and, 
based upon the withholding statement, the U.S. financial institution 
shall release payment from its escrow and the QI shall credit the 
beneficial owner's account with the amount set aside by the U.S. 
financial institution with respect to the beneficial owner who provided 
the certification. The entire amount paid (including the amount 
initially set aside) shall be reported on the QI's pooled basis Form 
1042-S as capital gains.
    (ii) Unreliable or incorrect exchange certification. If the QI 
knows or has reason to know that the information in the section 302 
payment certification is unreliable or incorrect, the QI shall treat 
the payment as a payment for which no section 302 payment certification 
has been received and shall follow the withholding and reporting 
procedures in paragraph (c)(5)(iii)(I)(3)(iv) of this section.
    (iii) Dividend. If, within the 60-day period, QI receives a section 
302 payment certification stating that the section 302 payment is a 
dividend, the QI shall reflect such treatment in its withholding 
statement and shall treat the payment as a dividend for purposes of its 
reporting and withholding responsibilities under the QI agreement. The 
entire amount paid shall be reported on its pooled basis Form 1042-S as 
dividends.
    (iv) No timely certification received. If, within the 60-day 
period, the QI does not receive a section 302 payment certification, or 
is treated under paragraph (c)(5)(iii)(I)(3)(ii) of this section as not 
receiving a section 302 payment certification, the QI shall reflect 
such treatment in its withholding statement provided to the U.S. 
financial institution and shall treat the payment as a dividend for 
purposes of its reporting and withholding responsibilities under the QI 
agreement. The entire amount paid shall be reported on its pooled basis 
Form 1042-S as dividends.
    (v) Late certification. If, after the 60-day period has expired, 
the QI receives a section 302 payment certification from a beneficial 
owner that the section 302 payment is a payment in exchange for stock 
and the conditions stated in the QI agreement regarding the refund and 
offset procedures are satisfied, the QI may apply such refund or offset 
procedures.
    (vi) Determination of incorrect treatment. If, after the 60-day 
period has expired, the QI determines that the section 302 payment was 
incorrectly treated as a distribution in exchange for stock, the 
procedures set forth regarding adjustments for underwithholding in the 
QI agreement are applicable.
    (vii) Undocumented beneficial owners. The QI shall withhold at 30 
percent on the entire amount paid to a beneficial owner that is not 
properly documented and that is presumed to be a foreign person, 
whether or not the QI has received a section 302 payment certification 
from such beneficial owner. The QI shall report the entire amount paid 
on its pooled basis Form 1042-S as dividends.
    (4) U.S. non-exempt recipients. The QI shall treat direct account 
holders that are U.S. non-exempt recipients, and that hold stock in the 
distributing corporation, in accordance with the section 302 payment 
certifications obtained from those U.S. non-exempt recipients and shall 
instruct foreign intermediaries and foreign flow-through entities to do 
the same.
    (J) Intermediaries that are not qualified intermediaries. If the 
U.S. financial institution has an account holder that is an 
intermediary that is not a QI (``NQI''), the U.S. financial institution 
shall apply the rules of paragraph (c)(5)(iii)(J)(1) through (4) of 
this section. Where the provisions of

[[Page 58787]]

this paragraph (J) refer only to the U.S. financial institution, they 
shall apply in the same manner to a QI or WP/WT and where they refer to 
an NQI, they shall apply in the same manner to a flow-through that is 
not a WP or WT.
    (1) The U.S. financial institution shall provide the information 
and instructions described in paragraph (c)(5)(iii)(C) of this section 
to the NQI and the NQI shall provide the same information and 
instructions to its account holders.
    (2) The content of the section 302 payment certification shall 
include the information described in paragraph (c)(5)(iii)(D) of this 
section.
    (3) The NQI shall provide the section 302 payment certification to 
the U.S. financial institution together with the otherwise required 
documentation and a withholding statement made in accordance with the 
section 302 payment certification.
    (4) The U.S. financial institution shall treat the section 302 
payment as a dividend or a payment in exchange for stock based on the 
information and documentation provided to it under paragraph 
(c)(5)(iii)(J)(3) of this section. The U.S. financial institution shall 
withhold and report on a specific payee basis in accordance with this 
information.
    (d) * * * (1) * * * This paragraph does not apply to a public 
section 302 distribution to which paragraph (c)(5) applies.
* * * * *

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-20504 Filed 10-16-07; 8:45 am]
BILLING CODE 4830-01-P