11/ The IRS also filed with the Federal Register yesterday 352
pages of regulations in proposed form only dealing generally with
backup withholding and due diligence issues. These additional
regulations, which are not presently effective, will be the
subject of a separate Institute memorandum.
22/ These regulations are known as the "B Notice" regulations
because they implement the withholding requirements of Code
section 3406(a)(1)(B).
33/ The first version of the B Notice regulations was issued in
1987. (See Institute Memorandum to Tax Members No. 46-87, Unit
Investment Trust Committee No. 31-87, Closed-End Fund Members No.
5-87, Operations Members No. 29-87, and Transfer Agent
Shareholder Accounting Advisory Committee No. 24-87, dated
December 8, 1987.) These regulations were then amended in 1989.
(See Institute Memorandum to Tax Members No. 14-89, Unit
Investment Trust Members No. 22-89, Closed-End Fund Members No.
18-89, Operations Members No. 15-89 and Transfer Agent
Shareholder Advisory Committee No. 9-89, dated April 18, 1989.)
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September 21, 1990
TO: TAX MEMBERS NO. 37-90
OPERATIONS MEMBERS NO. 27-90
CLOSED-END FUND MEMBERS NO. 36-90
UNIT INVESTMENT TRUST MEMBERS NO. 61-90
TRANSFER AGENT ADVISORY COMMITTEE NO. 34-90
RE: IRS AMENDS "B NOTICE" REGULATIONS
__________________________________________________________
The Internal Revenue Service filed with the Federal
Register yesterday1/1 the attached temporary and proposed
regulations relating to the imposition of backup withholding due
to notification of an incorrect taxpayer identification number
(the so-called "B Notice" regulations). 2/2 These regulations are
effective on and after January 1, 1989. 3/3
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The revised B Notice regulations adopt several changes
requested by the Institute in our comment letters to and meetings
with Treasury and the IRS. (See Institute Memorandum to Tax
Committee No. 7-88, Operations Committee No. 13-88, Closed-End
Fund Committee No. 14-88 and Transfer Agent Shareholder Advisory
44/ The "prior regulations" remain in effect except to the
extent they are modified by these amended regulations.
55/ The payor is also required to provide the payee with a Form
W-9 and a self-addressed reply envelope and to inform the payee
that withholding would commence if a certified TIN is not
provided within a specified time period.
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Committee No. 8-88, dated April 21, 1988; to Tax Committee No.
10-88, Unit Investment Trust Committee No. 14-88, Operations
Committee No. 14-88 and Transfer Agent Shareholder Advisory
Committee No. 11-88, dated May 13, 1988; to Tax Committee No. 10-
89, Unit Investment Trust Committee No. 27-89, Closed-End Fund
Committee No. 20-89, Operations Committee No. 11-89 and Transfer
Agent Shareholder Advisory Committee No. 13-89, dated June 22,
1989; to Tax Committee No. 11-89, Unit Investment Trust Committee
No. 38-89, Closed-End Fund Committee No. 29-89, Operations
Committee No. 12-89 and Transfer Agent Advisory Committee No. 19-
89, dated July 26, 1989; to Tax Committee No. 18-90, Operations
Committee No. 14-90 and Transfer Agent Advisory Committee No. 24-
90, dated July 25, 1990; and to Operations Committee No. 20-90,
Tax Committee No. 25-90 and Transfer Agent Advisory Committee No.
33-90, dated August 31, 1990).
1. Time Period for Notifying Payees
Under the B Notice regulations as they existed prior to the
recent amendments (the "prior regulations") 4/4, a payor was
required to notify a payee that the taxpayer identification
number ("TIN") provided by the payee was incorrect (i.e., did not
"match" with the payee' name)5/5 within 5 business days from the
date on which the IRS or broker notified the payor of the
"mismatch". This procedure was later modified so that B Notices
would be mailed to payors two or three weeks before the date on
the Notice and that the 5 business day time period would run from
the later of receipt of the Notice or the date on the Notice (the
date of "deemed" receipt). Under the amended regulations, the 5
business day time period for notifying payees is extended to 15
business days.
2. Time Requirement for Withholding on Withdrawals
Under the prior regulations, payors were required to
commence backup withholding after 7 business days following
receipt of the B Notice on withdrawals (e.g., redemptions) and
after 30 business days following receipt of the B Notice on
reportable payments (e.g., dividends), unless the payee had in
66/ Of course, payors are not precluded from imposing
withholding before the relevant time periods have expired.
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the interim provided a certified TIN. 6/6 As a practical matter,
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funds could not distinguish for withholding purposes between
withdrawals and reportable payments and would have been required
to withhold on all reportable payments and withdrawals after 7
business days from the date of receipt of the B Notice. The
amended regulations eliminate the 7-day/30-day distinction and
require that withholding commence on all reportable payments and
withdrawals after 30 days from the date of receipt of the
notification unless the payee has in the interim provided a
certified TIN.
3. Fiduciary Accounts
The revised regulations eliminate, until final regulations
are issued, the requirement that backup withholding be imposed on
any account with respect to which at least one person named in
the registration is identified as acting in a capacity as nominee
or as administrator, conservator, custodian, receiver, tutor,
curator, committee, executor, guardian, trustee, or other
fiduciary capacity recognized under governing law. In addition,
payors are not required to send B Notices to the payees of such
fiduciary and nominee accounts. However, the IRS requests that
payors send B Notices to these payees and has provided that the
sending of a B Notice in these circumstances will be considered
strong evidence of (but not a requirement for) qualification for
the reasonable cause exception to the penalty that would
otherwise be imposed on failures to file correct TINs on
information returns that are filed subsequent to receipt of the B
Notice.
4. Reasonable Care Searches
Under the prior regulations, backup withholding was
required to be imposed on reportable payments made to all
accounts of a payee with the incorrect name/TIN combination that
the payor could locate using reasonable care. Under the revised
regulations, where the B Notice contains an account number or
designation, backup withholding will apply only to the account or
accounts corresponding to that number or designation and
containing the incorrect name/TIN combination. If the B Notice
does not contain an account number or designation, the rule in
the prior regulations requiring a reasonable care search will
continue to apply.
5. Two Notifications Within Three Year Period
Under the prior regulations, if a payor received two B
Notices with respect to a payee within any three-year period,
backup withholding could be terminated on any account of the
payee only by obtaining a notice from the IRS that a correct
name/TIN combination had been provided (the "2/3 rule"). Under
the amended regulations, the 2/3 rule will apply on an account-
by-account, rather than on a payee, basis. Thus, the 2/3 rule
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will apply only where a payor receives a B Notice twice within 3
calendar years with respect to the same account.
* * * * *
We will keep you informed of developments.
Keith D. Lawson
Associate General Counsel
Attachment