Determining payee and U.S. foreign status under sec. 1441.

• Author: Whisenant, Lori
• Position: IRC s. 1441

The IRS issued final regulations in October 1997 that changed existing rules on withholding on payments to foreign persons under Sec. 1441. These regulations (effective Jan. 1,2000) apply to any person who is a withholding agent. One of the most significant changes was the issuance of new procedures that a withholding agent must follow to avoid liability for failure to withhold the correct amount under Sec. 1441. The regulations specify the documentation types that a withholding agent must rely on for these purposes. The regulations also provide a set of presumptions that apply when there is no or unreliable documentation.

The presumptions' purpose is to give withholding agents guidance on avoiding liability. The complexity of the new rules and the exceptions may somewhat undercut this objective. Although this item in no way attempts to address every issue imbedded within the hundreds of pages of the final regulations, it seeks to give an overview of the documentation required and the presumptions applied in the absence of documentation. More importantly, by providing an overview of the presumptions, this item may assist practitioners who feel trapped in the maze of rules for withholding on payments to foreign persons.

Documentation Under Regs. Sec. 1.1441-1

To determine a payee's status, a withholding agent must rely (absent actual knowledge or reason to know otherwise) on Form W-9, Request for Taxpayer Identification Number and Certification, Form W-8, Certificate of Foreign Status, or Form 8233, Exception From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, that the payee provides. However, if the payee provides no or unreliable documentation, the following rules apply.

No or Unreliable Documentation

When a payee does not provide the appropriate documentation, the withholding agent must rely on the presumptions specified in Regs. Sec. 1.1441-1 (b) (3) to determine beneficial owner status and the payee's status as either a U.S. or foreign person.

Determination of payee status. A withholding agent must apply the presumptions in the following order. First, the agent presumes the payee is an individual, trust or estate, if the payee's name or other indications reasonably suggest such status. Second, if the payee's name or other indications do not reasonably suggest such status, the withholding agent must determine whether the payee is a corporation or other exempt...