§3406 — Backup withholding
11 citing cases
Statute Text — 26 U.S.C. §3406
In the case of any reportable payment, if—
the payee fails to furnish his TIN to the payor in the manner required,
the Secretary notifies the payor that the TIN furnished by the payee is incorrect,
there has been a notified payee underreporting described in subsection (c), or
there has been a payee certification failure described in subsection (d),
then the payor shall deduct and withhold from such payment a tax equal to the product of the fourth lowest rate of tax applicable under section 1(c)
1
1 See References in Text note below.
and such payment.
Subparagraphs (C) and (D) of paragraph (1) shall apply only to reportable interest or dividend payments.
For purposes of this section—
The term “reportable payment” means—
any reportable interest or dividend payment, and
any other reportable payment.
The term “reportable interest or dividend payment” means any payment of a kind, and to a payee, required to be shown on a return required under—
section 6049(a) (relating to payments of interest),
section 6042(a) (relating to payments of dividends), or
section 6044 (relating to payments of patronage dividends) but only to the extent such payment is in money.
For purposes of subparagraphs (C) and (D) of subsection (a)(1), the term “reportable interest or dividend payment” shall not include any payment to which section 6044 (relating to patronage dividends) applies unless 50 percent or more of such payment is in money.
The term “other reportable payment” means any payment of a kind, and to a payee, required to be shown on a return required under—
section 6041 (relating to certain information at source),
section 6041A(a) (relating to payments of remuneration for services),
section 6045 (relating to returns of brokers),
section 6050A (relating to reporting requirements of certain fishing boat operators), but only to the extent such payment is in money and represents a share of the proceeds of the catch,
section 6050N (relating to payments of royalties), or
section 6050W (relating to returns relating to payments made in settlement of payment card transactions).
The determination of whether any payment is of a kind required to be shown on a return described in paragraph (2) or (3) shall be made without regard to any minimum amount which must be paid before a return is required.
To the extent provided in regulations, the term “reportable payment” shall not include any payment which—
does not exceed $10, and
if determined for a 1-year period, would not exceed $10.
Any payment of a kind required to be shown on a return required under section 6041(a) or 6041A(a) which is made during any calendar year shall be treated as a reportable payment only if—
the aggregate amount of such payment and all previous payments described in such sections by the payor to the payee during such calendar year equals or exceeds the dollar amount in effect for such calendar year under section 6041(a),
the payor was required under section 6041(a) or 6041A(a) to file a return for the preceding calendar year with respect to payments to the payee, or
during the preceding calendar year, the payor made reportable payments to the payee with respect to which amounts were required to be deducted and withheld under subsection (a).
For purposes of subparagraphs (C) and (D) of subsection (a)(1), the term “reportable interest or dividend payment” shall not include any payment—
in redemption of a coupon on a bearer instrument or in redemption of a United States savings bond, or
to the extent provided in regulations, of interest on instruments similar to those described in subparagraph (A).
The preceding sentence shall not apply for purposes of determining whether there is payee underreporting described in subsection (c).
Any payment in settlement of a third party network transaction required to be shown on a return required under section 6050W which is made during any calendar year shall be treated as a reportable payment only if—
the aggregate number of transactions with respect to the participating payee during such calendar year exceeds the number of transactions specified in section 6050W(e)(2), and
the aggregate amount of transactions with respect to the participating payee during such calendar year exceeds the dollar amount specified in section 6050W(e)(1) at the time of such payment.
Subparagraph (A) shall not apply with respect to payments to any participating payee during any calendar year if one or more payments in settlement of third party network transactions made by the payor to the participating payee during the preceding calendar year were reportable payments.
If—
the Secretary determines with respect to any payee that there has been payee underreporting,
at least 4 notices have been mailed by the Secretary to the payee (over a period of at least 120 days) with respect to the underreporting, and
in the case of any payee who has filed a return for the taxable year, any deficiency of tax attributable to such failure has been assessed,
the Secretary may notify payors of reportable interest or dividend payments with respect to such payee of the requirement to deduct and withhold under subsection (a)(1)(C) (but not the reasons for the withholding under subsection (a)(1)(C)).
For purposes of this section, there has been payee underreporting if for any taxable year the Secretary determines that—
the payee failed to include in his return of tax under chapter 1 for such year any portion of a reportable interest or dividend payment required to be shown on such return, or
the payee may be required to file a return for such year and to include a reportable interest or dividend payment in such return, but failed to file such return.
If the Secretary determines that—
there was no payee underreporting,
any payee underreporting has been corrected (and any tax, penalty, or interest with respect to the payee underreporting has been paid),
withholding under subsection (a)(1)(C) has caused (or would cause) undue hardship to the payee and it is unlikely that any payee underreporting by such payee will occur again, or
there is a bona fide dispute as to whether there has been any payee underreporting,
then the Secretary shall take the action described in subparagraph (B).
For purposes of subparagraph (A), if at the time of the Secretary’s determination under subparagraph (A)—
no notice has been given under paragraph (1) to any payor with respect to the underreporting, the Secretary shall not give any such notice, or
if such notice has been given, the Secretary shall—
provide the payee with a written certification that withholding under subsection (a)(1)(C) is to stop, and
notify the applicable payors (and brokers) that such withholding is to stop.
In any case where notice has been given under paragraph (1) to any payor with respect to any underreporting, if the Secretary makes a determination under subparagraph (A) during the 12-month period ending on October 15 of any calendar year—
except as provided in clause (ii), the Secretary shall take the action described in subparagraph (B)(ii) to bring about the stopping of withholding no later than December 1 of such calendar year, or
in the case of—
a no payee underreporting determination under clause (i) of subparagraph (A), or
a hardship determination under clause (iii) of subparagraph (A),
such action shall be taken no later than the 45th day after the day on which the Secretary made the determination.
The Secretary shall prescribe procedures under which—
a payee may request a determination under subparagraph (A), and
the payee may provide information with respect to such request.
Any payor required to withhold any tax under subsection (a)(1)(C) shall, at the time such withholding begins, notify the payee of such withholding.
For purposes of this section, the Secretary may require any payee of reportable interest or dividend payments who is subject to withholding under subsection (a)(1)(C) to notify the Secretary of—
all payors from whom the payee receives reportable interest or dividend payments, and
all brokers with whom the payee has accounts which may involve reportable interest or dividend payments.
The Secretary may notify any such broker that such payee is subject to withholding under subsection (a)(1)(C).
There is a payee certification failure unless the payee has certified to the payor, under penalty of perjury, that such payee is not subject to withholding under subsection (a)(1)(C).
Subsection (a)(1)(D) shall apply to any reportable interest or dividend payment to any payee on any readily tradable instrument if (and only if) the payor was notified by a broker under subparagraph (B) or no certification was provided to the payor by the payee under paragraph (1) and—
such instrument was acquired directly by the payee from the payor, or
such instrument is held by the payor as nominee for the payee.
If—
a payee acquires any readily tradable instrument through a broker, and
with respect to such acquisition—
the payee fails to furnish his TIN to the broker in the manner required under subsection (a)(1)(A),
the Secretary notifies such broker before such acquisition that the TIN furnished by the payee is incorrect,
the Secretary notifies such broker before such acquisition that such payee is subject to withholding under subsection (a)(1)(C), or
the payee does not provide a certification to such broker under subparagraph (C),
such broker shall, within such period as the Secretary may prescribe by regulations (but not later than 15 days after such acquisition), notify the payor that such payee is subject to withholding under subparagraph (A), (B), (C), or (D) of subsection (a)(1), respectively.
In the case of any readily tradable instrument acquired by a payee through a broker, the certification described in paragraph (1) may be provided by the payee to such broker—
at any time after the payee’s account with the broker was established and before the acquisition of such instrument, or
in connection with the acquisition of such instrument.
This subsection and subsection (a)(1)(D) shall not apply to any reportable interest or dividend payment which is paid or credited—
in the case of interest or any other amount of a kind reportable under section 6049, with respect to any account (whatever called) established before
January 1, 1984
, or with respect to any instrument acquired before
January 1, 1984
,
in the case of dividends or any other amount reportable under section 6042, on any stock or other instrument acquired before
January 1, 1984
, or
in the case of patronage dividends or other amounts of a kind reportable under section 6044, with respect to any membership acquired, or contract entered into, before
January 1, 1984
.
Subparagraph (B) of paragraph (2) shall not apply with respect to a readily tradable instrument which was acquired through an account with a broker if—
such account was established before
January 1, 1984
, and
during 1983, such broker bought or sold instruments for the payee (or acted as a nominee for the payee) through such account.
The preceding sentence shall not apply with respect to any readily tradable instrument acquired through such account after the broker was notified by the Secretary that the payee is subject to withholding under subsection (a)(1)(C).
In the case of any failure by a payee to furnish his TIN to a payor in the manner required, subsection (a) shall apply to any reportable payment made by such payor during the period during which the TIN has not been furnished in the manner required. The Secretary may require that a TIN required to be furnished under subsection (a)(1)(A) be provided under penalties of perjury only with respect to interest, dividends, patronage dividends, and amounts subject to broker reporting.
In any case in which the Secretary notifies the payor that the TIN furnished by the payee is incorrect, subsection (a) shall apply to any reportable payment made by such payor—
after the close of the 30th day after the day on which the payor received such notification, and
before the payee furnishes another TIN in the manner required.
In the case of any notified payee underreporting described in subsection (c), subsection (a) shall apply to any reportable interest or dividend payment made—
after the close of the 30th day after the day on which the payor received notification from the Secretary of such underreporting, and
before the stop date.
For purposes of this subsection, the term “stop date” means the determination effective date or, if later, the earlier of—
the day on which the payor received notification from the Secretary under subsection (c)(3)(B) to stop withholding, or
the day on which the payor receives from the payee a certification provided by the Secretary under subsection (c)(3)(B).
For purposes of this subsection—
Except as provided in clause (ii), the determination effective date of any determination under subsection (c)(3)(A) which is made during the 12-month period ending on October 15 of any calendar year shall be the first January 1 following such October 15.
In the case of any determination under clause (i) or (iii) of subsection (c)(3)(A), the determination effective date shall be the date on which the Secretary’s determination is made.
In the case of any payee certification failure described in subsection (d)(1), subsection (a) shall apply to any reportable interest or dividend payment made during the period during which the certification described in subsection (d)(1) has not been furnished to the payor.
In the case of any readily tradable instrument acquired by the payee through a broker, the period described in subparagraph (A) shall start with payments to the payee made after the close of the 30th day after the payor receives notification from a broker under subsection (d)(2)(B).
If the payor elects the application of this subparagraph with respect to the payee, subsection (a) shall also apply to any reportable payment made during the 30-day period described in paragraph (2)(A), (3)(A), or (4)(B).
Unless the payor elects not to have this subparagraph apply with respect to the payee, subsection (a) shall also apply to any reportable payment made after the close of the period described in paragraph (1), (2), or (4) (as the case may be) and before the 30th day after the close of such period. A similar rule shall also apply with respect to the period described in paragraph (3)(A) where the stop date is determined under clause (i) or (ii) of paragraph (3)(B).
The payor may elect a period shorter than the grace period set forth in subparagraph (A) or (B), as the case may be.
No person may use any information obtained under this section (including any failure to certify under subsection (d)) except for purposes of meeting any requirement under this section or (subject to the safeguards set forth in section 6103) for purposes permitted under section 6103.
For provision providing for civil damages for violation of paragraph (1), see section 7431.
Subsection (a) shall not apply to any payment made to—
any organization or governmental unit described in subparagraph (B), (C), (D), (E), or (F) of section 6049(b)(4), or
any other person specified in regulations.
Subsection (a) shall not apply to any amount for which withholding is otherwise required by this title.
The Secretary shall prescribe regulations for exemptions from the tax imposed by subsection (a) during the period during which a person is waiting for receipt of a TIN.
For purposes of this section—
A person shall be treated as failing to furnish his TIN if the TIN furnished does not contain the proper number of digits.
If the payee furnishes the payor 2 incorrect TINs in any 3-year period, the payor shall, after receiving notice of the second incorrect TIN, treat the payee as not having furnished another TIN under subsection (e)(2)(B) until the day on which the payor receives notification from the Secretary that a correct TIN has been furnished.
Except to the extent otherwise provided in regulations, any payment to joint payees shall be treated as if all the payment were made to the first person listed in the payment.
The term “payor” means, with respect to any reportable payment, a person required to file a return described in paragraph (2) or (3) of subsection (b) with respect to such payment.
The term “broker” has the meaning given to such term by section 6045(c)(1).
If, but for this subparagraph, there would be more than 1 broker with respect to any acquisition, only the broker having the closest contact with the payee shall be treated as the broker.
In the case of any instrument, such term shall not include any person who is the payor with respect to such instrument.
Except as provided by regulations, such term shall not include any real estate broker (as defined in section 6045(e)(2)).
The term “readily tradable instrument” means—
any instrument which is part of an issue any portion of which is traded on an established securities market (within the meaning of section 453(f)(5)), and
except as otherwise provided in regulations prescribed by the Secretary, any instrument which is regularly quoted by brokers or dealers making a market.
To the extent provided in regulations, rules similar to the rules of paragraph (6) of section 6049(d) shall apply.
Whenever the Secretary notifies a payor under paragraph (1)(B) of subsection (a) that the TIN furnished by any payee is incorrect, the Secretary shall at the same time furnish a copy of such notice to the payor, and the payor shall promptly furnish such copy to the payee.
If the Secretary notifies a payor under paragraph (1)(B) of subsection (a) that the TIN furnished by any payee is incorrect and such payee subsequently furnishes another TIN to the payor, the payor shall promptly notify the Secretary of the other TIN so furnished.
For purposes of section 31, this chapter (other than section 3402(n)), and so much of subtitle F (other than section 7205) as relates to this chapter, payments which are subject to withholding under this section shall be treated as if they were wages paid by an employer to an employee (and amounts deducted and withheld under this section shall be treated as if deducted and withheld under section 3402).
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
Treasury Regulations
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Treas. Reg. §31.3406(b)(2)-1Reportable 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 § 31.3406(b)(2)-2 (relating to original issue discount) and § 31.3406(b)(2)-3 (relating to window transactions). See § 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 § 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 § 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.
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Treas. Reg. §31.3406(b)(2)-1(a)Interest subject to backup withholding—(1) In general.
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 § 31.3406(b)(2)-2 (relating to original issue discount) and § 31.3406(b)(2)-3 (relating to window transactions). See § 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 § 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 § 1.6049-5(b)(1)(ii) of this chapter), the issuer is not required to impose withholding under section 3406.
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Treas. Reg. §31.3406(b)(2)-1(b)Amount subject to backup withholding—(1) In general.
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.
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Treas. Reg. §31.3406(b)(2)-2Original 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 § 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 § 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 § 1.1273-1 of this chapter to determine the amount of original issue discount on a short-term obligation. See § 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 § 31.3406(b)(3)-2.
(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. 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.
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Treas. Reg. §31.3406(b)(2)-2(a)Original issue discount subject to backup withholding.
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 § 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 § 31.6051-4 for the requirement to furnish a statement to the payee if tax is withheld under section 3406.
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Treas. Reg. §31.3406(b)(2)-2(b)Amount subject to backup withholding and time when backup withholding is imposed with respect to short-term obligations.
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 § 1.1273-1 of this chapter to determine the amount of original issue discount on a short-term obligation. See § 1.446-2(e)(1) of this chapter to determine the amount of a payment treated as original issue discount.
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Treas. Reg. §31.3406(b)(2)-2(c)Transferred short-term obligations—(1) Subsequent holder may establish purchase price—(i) In general.
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 § 31.3406(b)(3)-2.
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Treas. Reg. §31.3406(b)(2)-2(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.
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. 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.
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Treas. Reg. §31.3406(b)(2)-2(e)Bearer long-term obligations.
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.
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Treas. Reg. §31.3406(b)(2)-3Window 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 § 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 § 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 § 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 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 § 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.
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Treas. Reg. §31.3406(b)(2)-3(a)Requirement to backup withhold.
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 § 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 § 31.3406(d)-2(b)(2)).
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Treas. Reg. §31.3406(b)(2)-3(b)Window transaction defined.
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 § 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 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)).
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Treas. Reg. §31.3406(b)(2)-3(c)Manner of furnishing taxpayer identification number in the case of a window transaction.
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 § 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.
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Treas. Reg. §31.3406(b)(2)-4Reportable 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 § 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 § 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 § 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 § 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 § 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.
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Treas. Reg. §31.3406(b)(2)-4(a)Dividends subject to backup withholding.
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 § 31.6051-4 for the requirement to furnish a statement to the payee if tax is withheld under section 3406.
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Treas. Reg. §31.3406(b)(2)-4(b)Dividends not subject to backup withholding.
Dividends not subject to backup withholding. Except as provided in § 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.
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Treas. Reg. §31.3406(b)(2)-4(c)Amount subject to backup withholding—(1) In general.
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 § 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 § 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—
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Treas. Reg. §31.3406(b)(2)-4(i)§31.3406(b)(2)-4(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 § 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.
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Treas. Reg. §31.3406(b)(2)-5Reportable 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 § 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 § 31.3406(c)-1 or there has been a payee certification failure described in section 3406(a)(1)(D) and § 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.
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Treas. Reg. §31.3406(b)(2)-5(a)Patronage dividends subject to backup withholding.
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 § 31.6051-4 for the requirement to furnish a statement to the payee if tax is withheld under section 3406.
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Treas. Reg. §31.3406(b)(2)-5(b)Amount subject to backup withholding—(1) Failure to provide taxpayer identification number or notification of incorrect taxpayer identification number.
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—
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Treas. Reg. §31.3406(b)(2)-5(i)There has been a notified payee underreporting described in section 3406(a)(1)(C) and § 31.
There has been a notified payee underreporting described in section 3406(a)(1)(C) and § 31.3406(c)-1 or there has been a payee certification failure described in section 3406(a)(1)(D) and § 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.
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Treas. Reg. §31.3406(b)(3)-1Reportable 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 (b) of this section for an exception concerning payments aggregating less than $600. See § 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 § 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).
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Treas. Reg. §31.3406(b)(3)-1(a)Section 6041 and 6041A(a) payments subject to backup withholding.
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 (b) of this section for an exception concerning payments aggregating less than $600. See § 31.6051-4 for the requirement to furnish a statement to the payee if tax is withheld under section 3406.
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Treas. Reg. §31.3406(b)(3)-1(b)Amount subject to backup withholding—(1) In general.
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 § 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).
11 Citing Cases
3406 requires a payor to deduct and withhold tax from certain payments not otherwise subject to withholding if the payee taxpayer fails to cooperate with the information reporting scheme (e.g., failure to furnish his taxpayer identification number to the payor).
ced. & Admin. Regs., and to clarify the existing rule that the owner ofa disregarded entity for Federal tax purposes under sec. 301.7701-2(c), Proced. & Admin. Regs., is subject to backup withholding (i.e., the withholding requirements imposed under sec. 3406), the Department ofthe Treasury amended, among other regulations, sec. 301.7701-2, Proced. & Admin. Regs. See T.D. 9554, 2011-50 I.R.B. 843. It revised (and made "[r]eserved") sec. 301.7701-2(c)(2)(iv)(A), Proced. & Admin. Regs., and added
Therefore, Forrest, which involved a section 31 credit, is inapposite and not controlling.
Therefore, Forrest, which involved a section 31 credit, is inapposite and not controlling.
Therefore, Forrest, which involved a section 31 credit, is inapposite and not controlling.
In reaching that conclusion, we note that the withholding from the proceeds of petitioners’ 2006 real property sales, even though prompted, in part, by petitioners’ failure to supply the title company payor with a TIN, did not constitute backup withholding under section 3406 because neither of those sales involved a “reportable payment” under section 3406(b)(1)(A) and (B) and (3).
Under section 3406, a financial institution required to perform "backup withholding" on payments ofinterest and dividends bears derivative liability for the investor's income tax. In none ofthese contexts does the Code explicitly provide that the employee, distributee, or investor will receive, toward her principal liability, a credit forpayments the pay
(cid:127)Pursuant to two Forms 2504-AD, Excise or Employment Tax- Offer of Agreement to Assessment and Collection of Additional Ta x -'and-Of-fer of Acceptance of Overassessment, respondent assessed backup withholding taxes under section 3406 and additions to tax for failure to file information returns required by section 6041A(a) as follows : Additions to Tax Year Backup Withholding Sec .
Lee to hold that withholding pursuant to section 3406 was the least restrictive means of furthering the compelling governmental interest of ensuring that all citizens participate in the tax system).