Internal Revenue Bulletin 2003-32 (PDF rendition): IRS Announcements

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing. Whole bulletin rendition: numbered items are identified below; other legal material and publisher context remain included. This is not a new standalone advance release.

Bulletin No. 2003-32
August 11, 2003
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
SPECIAL ANNOUNCEMENT
Announcement 2003–49, page 339.
Annual accounting periods; approval.This announce-
ment discusses some of the changes that the Service and Trea-
sury Department have made in finalizing procedures for certain
individuals to obtain the automatic approval of the Commis-
sioner to change their annual accounting period to a calendar
year.
INCOME TAX
Rev. Rul. 2003–84, page 289.
Regulated investment company (RIC).This ruling provides
that, for purposes of qualifying as a regulated investment com-
pany (RIC) under the tax law, a RIC shall treat its investment in
refunded bonds as an investment in government securities, to
the extent that the acquisition of the refunded bonds would be
treated under Rule 5b–3 under the Investment Company Act
of 1940 as an acquisition of the Government securities placed
in escrow to fund payment of principal and interest on the re-
funded bonds.
Rev. Rul. 2003–86, page 290.
Noncustomary services provided to REIT tenants by a
joint venture between a taxable REIT subsidiary and an
independent contractor.This ruling provides that a joint
venture between a taxable REIT subsidiary and an independent
contractor to provide noncustomary services to REIT tenants
will not cause rents paid by tenants to fail to qualify as „rents
from real property‰ under section 856 of the Code.
T.D. 9067, page 287.
REG–116914–03, page 338.
Temporary and proposed regulations under section 83 of the
Code clarify and amend existing regulations to address the
transfers of compensatory stock options to related persons.
The regulations provide that the transfer of a compensatory
stock option to a related person will not be treated as an armÊs
length transaction for purposes of section 1.83–7 of the regu-
lations.
Notice 2003–50, page 295.
This notice announces that regulations issued under section
269B of the Code will provide that a foreign corporation that
is stapled to a domestic corporation will be treated as a do-
mestic corporation for purposes of the definition of an includi-
ble corporation under section 1504(b) when applying sections
1.904(i)–1 and 1.861–11T(d)(6). Notice 89–94 modified.
Notice 2003–52, page 296.
This notice clarifies the application of section 911 of the Code
to U.S. citizens and residents earning income in Iraq attribut-
able to services performed by such individuals. As long as in-
dividuals whose activities in Iraq are permitted by a specific or
general license issued by TreasuryÊs Office of Foreign Assets
Control, those individuals are not subject to the limitations of
section 911(d)(8)(A).
(Continued on the next page)
Announcement of Declaratory Judgment Proceedings Under Section 7428 begins on page 345.
Announcements of Disbarments and Suspensions begin on page 339.
Finding Lists begin on page ii.

Rev. Proc. 2003–64, page 306.
This procedure contains the final withholding foreign partner-
ship (WP) and withholding foreign trust (WT) agreements. The
WP and WT agreements are designed to simplify withholding
and reporting obligations for payments of income made to for-
eign partnerships and foreign simple or grantor trusts. This
procedure also contains rules regarding withholding and report-
ing on certain small or related foreign partnerships and foreign
simpleorgrantortruststhatdonotenterintoWPorWTagree-
ments. Section III.C. of Notice 2001–4 superseded for 2004
and subsequent calendar years. Rev. Proc. 2000–12 modi-
fied.
EMPLOYEE PLANS
Rev. Rul. 2003–85, page 291.
Excise tax; terminating defined benefit plan; reversion.
This ruling describes the treatment of a transfer from a termi-
nating defined benefit plan to a defined contribution plan of an
amount that is in excess of 25 percent of the potential amount
otherwise available for reversion.
Rev. Rul. 2003–88, page 292.
Section 4971; running of statute of limitations; and fil-
ing of form.This ruling states that the filing of a Form 5330,
and not the filing of a Form 5500, starts the running of the
statute of limitations with respect to the excise taxes described
in section 4971 of the Code.
Notice 2003–49, page 294.
EGTRRA; employee plans’ user fees.This notice de-
scribes when a planÊs EGTRRA remedial amendment period
under section 401(b) of the Code is considered to begin for
purposes of determining if a determination letter application is
exempt from user fees. Notice 2002–1 amplified.
EXEMPT ORGANIZATIONS
Announcement 2003–52, page 345.
Hispanic Association of Lucent Technologies Employees, Inc.,
of Naperville, IL, no longer qualifies as an organization to which
contributions are deductible under section 170 of the Code.
ADMINISTRATIVE
Rev. Proc. 2003–61, page 296.
This procedure provides guidance for taxpayers seeking equi-
table relief from income tax liability under section 66(c) or sec-
tion 6015(f) of the Code. Rev. Proc. 2000–15 superseded.
Rev. Proc. 2003–62, page 299.
Changes in accounting periods; automatic approval for
individuals.Procedures are provided by which certain indi-
viduals may obtain automatic approval of the Commissioner to
change their annual accounting period under section 442 of
the Code to the calendar year. Rev. Proc. 66–50 modified,
amplified, and superseded, and Rev. Proc. 81–40 modified
and superseded.
Rev. Proc. 2003–63, page 304.
Depreciation of cable television distribution systems.
This procedure provides a safe harbor method under which the
Service will treat a node and fiber optic cable used in a cable
television distribution system providing one-way and two-way
communication services as the unit of property for computing
depreciation under sections 167 and 168 of the Code. Rev.
Proc. 2002–9 modified and amplified.
Rev. Proc. 2003–65, page 336.
REIT loans; real estate asset; interest.This procedure
sets forth a safe harbor under which a loan made by a real
estate investment trust (REIT) that is secured either by a part-
nership interest in a partnership or by the sole membership
interest in a disregarded entity will be treated as a real estate
asset for purposes of sections 856(c)(4)(A) and 856(c)(5)(B) of
the Code and the interest on the loan will be treated as interest
on an obligation secured by a mortgage on real property or on
an interest in real property for purposes of section 856(c)(3).
Au
gust 11, 20032003-32 I.R.B.

The IRS Mission
Provide AmericaÊs taxpayers top quality service by helping
them understand and meet their tax responsibilities and by
applying the tax law with integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bul-
letin contents are consolidated semiannually into Cumulative
Bulletins, which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—1986 Code.
This part includes rulings and decisions based on provisions of
the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the TreasuryÊs Office of the Assistant Sec-
retary (Enforcement).
Part IV.—Items of General Interest.
This part includes notices of proposed rulemakings, disbar-
ment and suspension lists, and announcements.
The first Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and
are published in the first Bulletin of the succeeding semiannual
period, respectively.
The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402.
20
03-32 I.R.B.August 11, 2003

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 66.—Treatment of
Community Income
26 CFR 1.66–4(b): Equitable relief from the federal
income tax liability resulting from the operation of
community property law.
This revenue procedure provides guidance for tax-
payers seeking equitable relief from income tax lia-
bility under section 66(c) or section 6015(f). See Rev.
Proc. 2003-61, page 296.
Section 83.—Property
Transferred in Connection
With Performance of Services
T.D. 9067
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Part 1
Transfers of Compensatory
Options
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final and temporary regula-
tions.
SUMMARY: This document contains
regulations that provide rules governing
transfers of certain compensatory stock
options (nonstatutory stock options). The
regulations affect persons who have been
granted nonstatutory stock options, as well
as service recipients who may be entitled
to deductions related to the options. The
text of the temporary regulations also
serves as the text of the proposed regula-
tions (REG–116914–03) on this subject in
this issue of the Bulletin.
DATES:Effective Date:These regulations
are effective July 2, 2003.
Applicability Dates:For dates of appli-
cability, see §§1.83–7(d) and 1.83–7T(d).
FOR FURTHER INFORMATION
CONTACT: Stephen Tackney (202)
622–6030 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These regulations amend 26 CFR part
1. Section 83 of the Internal Revenue Code
(Code) provides that if, in connection with
the performance of services, property is
transferred to any person other than the
person for whom such services are per-
formed, the excess of (1) the fair market
value of the property (determined without
regard to lapse restrictions) at the first time
the rights of the person having the bene-
ficial interest in such property are trans-
ferable or are not subject to a substantial
risk of forfeiture, whichever occurs earlier
,
over (2) the amount (if any) paid for such
property, is included in the gross income
of the service provider in the first taxable
year in which the rights of the person hav-
ing the beneficial interest in such prope
rty
are transferable or are not subject to a su
b-
stantial risk of forfeiture.
Section 83(e)(4) provides that section
83 does not apply to the transfer o
f prop-
erty pursuant to the exercise of a
n option
with a readily ascertainable fa
ir market
value at the date of grant.
Section 83(e)(3) provides that
section
83 does not apply to the transfe
rofan
option without a readily ascer
tainable fair
market value. Under §1.83–7(
a), section
83 generally applies to the t
ransfer of the
property subject to the opti
on at the time
of exercise.
Section 1.83–7(a) further p
rovides that
section 83 applies to the tr
ansfer of money
or other property rece
ived upon the sale or
disposition in an arm'
s length transaction
of an option without a
readily ascertainable
fair market value at
the time of grant.
Recent transactions
promoted by cer-
tain parties have ra
ised issues concerning
whenatransferofan
option to a related
person, typically
a family member or an
entity a substanti
al interest in which is
owned by the optio
n holder or family
members, is an arm
's length transaction.
SeeNotice2003–
47, 2003–30 I.R.B. 132.
The determinat
ion of whether a transfer to
a related per
sonisanarm'slengthtrans-
action requi
res scrutiny of the facts and
circumstan
ces surrounding the transfer.
Furthermor
e, if conducted under the terms
promoted,
Treasury and the IRS believe
these transfers will rarely constitute an
arm's length transaction.
Explanation of Provisions
The regulations provide that a sale or
other disposition of a nonstatutory stock
option to a related person will not be
treated as a transaction that closes the
application of section 83 with respect to
the option. For these purposes, a person
is related to the service provider if (I) the
person and the service provider bear a
relationship to each other that is specified
in section 267(b) or 707(b)(1), subject to
the modifications (i) that “20 percent” is
used in place of “50 percent” each place
it appears in section 267(b) and section
707(b)(1) and (ii) that section 267(c)(4) is
applied as if the family of an individual
includes the spouse of any member of
the family, or (II) the service provider
andsuchpersonareengagedintradesor
businesses under common control (withi
n
the meaning of section 52(a) and (b));
provided that a person is not rel
ated to the
service provider if the person
is the service
recipient with respect to the o
ption or the
grantor of the option. The reg
ulations
do not alter the treatment of
the sale or
disposition of an option in a
n arm's length
transaction with an unrela
ted person. In
those circumstances, sec
tion 83 applies to
the transfer of money or ot
her property
received in the exchange
.
Special Analyses
It has been determine
d that these regu-
lations are not a sign
ificant regulatory ac-
tion as defined in Ex
ecutive Order 12866.
Therefore, a regula
tory assessment is not
required. It also h
as been determined that
section 553(b) of
the Administrative Pro-
cedure Act (5 U.S.
C. chapter 5) does not
applytothesere
gulations, and because
these regulatio
ns do not impose a collec-
tion of informa
tion on small entities, the
Regulatory Fle
xibility Act (5 U.S.C. chap-
ter 6) does not
apply. Pursuant to section
7805(f) of th
e Code, these regulations are
being submi
tted to the Chief Counsel for
Advocacy o
f the Small Business Adminis-
tration fo
r comment on its impact on small
business
.
20
03-32 I.R.B.
28
7
Au
gust 11, 2003

Drafting Information
The principal author of these temporary
regulations is Stephen Tackney of the Of-
fice of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government En-
tities). However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority:26U.S.C.7805***.
Par. 2. Section 1.83–7 is amended by
adding paragraph (d) to read as follows:
§1.83–7 Taxation of nonqualified stock
options.
*****
(d)Effective dates. This section applies
for periods before July 2, 2003. For peri-
ods on or after July 2, 2003, see §1.83–7T.
Par. 3. Section 1.83–7T is added to read
as follows:
§1.83–7T Taxation of nonqualified stock
options (Temporary).
(a)In general. If there is granted to an
employee or independent contractor (or
beneficiary thereof) in connection with
the performance of services, an option to
which section 421 (relating generally to
certain qualified and other options) does
not apply, section 83(a) shall apply to
such grant if the option has a readily as-
certainable fair market value (determined
in accordance with paragraph (b) of this
section) at the time the option is granted.
The person who performed such services
realizes compensation upon such grant at
the time and in the amount determined
under section 83(a). If section 83(a) does
not apply to the grant of such an option
because the option does not have a readily
ascertainable fair market value at the time
of grant, sections 83(a) and 83(b) shall
apply at the time the option is exercised
or otherwise disposed of, even though the
fair market value of such option may have
become readily ascertainable before such
time. If the option is exercised, sections
83(a) and 83(b) apply to the transfer of
property pursuant to such exercise, and
the employee or independent contractor
realizes compensation upon such transfer
at the time and in the amount determined
under section 83(a) or 83(b). If the option
is sold or otherwise disposed of in an
arm's length transaction, sections 83(a)
and 83(b) apply to the transfer of money
or other property received in the same
manner as sections 83(a) and 83(b) would
have applied to the transfer of property
pursuant to an exercise of the option. The
preceding sentence does not apply to a
sale or other disposition of the option to a
person related to the service provider that
occurs on or after July 2, 2003. For this
purpose, a person is related to the service
provider if—
(1) The person and the service provider
bear a relationship to each other that is
specified in section 267(b) or 707(b)(1),
subject to the modifications that the lan-
guage “20 percent” is used instead of
“50 percent” each place it appears in sec-
tions 267(b) and 707(b)(1), and section
267(c)(4) is applied as if the family of
an individual includes the spouse of any
member of the family; or
(2) The person and the service provider
are engaged in trades or businesses under
common control (within the meaning of
section 52(a) and (b)); provided that a per-
son is not related to the service provider if
the person is the service recipient with re-
spect to the option or the grantor of the op-
tion.
(b) and (c) For further guidance, see
§1.83–7(b) and (c).
(d)Effective dates. This section applies
on or after July 2, 2003. For dates before
July 2, 2003, see §1.83–7.
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
Approved June 26, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
(Filed by the Office of the Federal Register on July 1, 2003,
8:45 a.m., and published in the issue of the Federal Register
for July 2, 2003, 68 F.R. 39453)
Section 167.—Depreciation
26 CFR 1.167(a)–11: Depreciation based on class
lives and asset depreciation ranges for property
placed in service after December 31, 1970.
A safe harbor method is provided under which
the Service will treat a node and fiber optic cable
used in a cable television distribution system provid-
ing one-way and two-way communication services as
the unit of property for computing depreciation under
sections 167 and 168 of the Internal Revenue Code.
See Rev. Proc. 2003-63, page 304.
Section 168.—Accelerated
Cost Recovery System
A safe harbor method is provided under which
the Service will treat a node and fiber optic cable
used in a cable television distribution system provid-
ing one-way and two-way communication services as
the unit of property for computing depreciation under
sections 167 and 168 of the Internal Revenue Code.
See Rev. Proc. 2003-63, page 304.
Section 442.—Change of
Annual Accounting Period
26 CFR 1.442–1: Change of annual accounting pe-
riod.
What significant changes were made in finaliz-
ing Notice 2002-75, which provided proposed proce-
dures for certain individuals to obtain automatic ap-
proval of the Commissioner to change their annual
accounting period under section 442 to the calendar
year. See Announcement 2003-49, page 339.
Section 446.—General Rule
for Methods of Accounting
26 CFR 1.1446–1: General rule for methods of ac-
counting.
A safe harbor method is provided under which
the Service will treat a node and fiber optic cable
used in a cable television distribution system provid-
ing one-way and two-way communication services as
the unit of property for computing depreciation under
sections 167 and 168 of the Internal Revenue Code.
See Rev. Proc. 2003-63, page 304.
Section 481.—Adjustments
Required by Changes in
Method of Accounting
A safe harbor method is provided under which
the Service will treat a node and fiber optic cable
used in a cable television distribution system provid-
ing one-way and two-way communication services as
the unit of property for computing depreciation under
Au
gust 11, 2003
28
8
20
03-32 I.R.B.

sections 167 and 168 of the Internal Revenue Code.
See Rev. Proc. 2003-63, page 304.
Section 851.—Definition
of Regulated Investment
Company
26 CFR 1.851–2: Limitations.
(Also § 851(b)(3).)
Regulated investment company
(RIC).This ruling provides that, for pur-
poses of qualifying as a regulated invest-
ment company (RIC) under the tax law, a
RIC shall treat its investment in refunded
bonds as an investment in Government
securities, to the extent that the acquisition
of the refunded bonds would be treated
under Rule 5b–3 under the Investment
Company Act of 1940 as an acquisition
of the Government securities placed in
escrow to fund payment of principal and
interest on the refunded bonds.
Rev. Rul. 2003–84
ISSUE
If one or more government securities
have been placed in escrow to fund pay-
ment of principal and interest on a bond
and if Rule 5b–3, 17 CFR 270.5b–3, under
the Investment Company Act of 1940, 15
U.S.C. 80a–1et seq. (“the 1940 Act”),
would treat acquisition of the bond as
an acquisition of a Government Security
within the meaning of the 1940 Act, is the
bond a government security for purposes
of § 851(b)(3)?
FACTS
R, a domestic corporation, is registered
under the 1940 Act as a diversified man-
agement company and elects to be treated
as a RIC under subchapter M, part 1, of the
Code.Rinvests primarily in bonds issued
by states and municipalities.
Rinvests in certain bonds that, to-
gether with other bonds (collectively, the
“refunded bonds”), have been refunded
through a transaction in which Govern-
ment Securities, as defined in § 2(a)(16) of
the 1940 Act, were placed in escrow for the
purpose of providing the funds needed to
make all future payments of principal and
interest on the refunded bonds. Pursuant
to an agreement between the issuer of
the refunded bonds and the escrow agent,
the deposit in escrow is irrevocable, and
the Government Securities are pledged
only to payment of the debt service of
the refunded bonds. The escrow agree-
ment prohibits any substitution for the
deposited Government Securities unless
the substituted securities are also Gov-
ernment Securities. Either the refunded
bonds have received the highest rating
from a nationally recognized statistical
rating organization, or an independent
certified public accountant has certified to
the escrow agent that the escrowed securi-
ties will satisfy all scheduled payments of
principal, interest, and applicable premi-
ums on the refunded bonds.
Section 5(b)(1) of the 1940 Act imposes
certain asset diversification requirements
on diversified investment companies for
purposes of the securities laws. To be clas-
sified as a diversified investment company
under § 5(b)(1), a fund is required to invest
at least 75 percent of its assets in cash and
cash items, Government Securities, secu-
rities of other investment companies, and
other securities generally limited in respect
of any one issuer to an amount not greater
than 5 percent of the value of its total as-
sets and to not more than 10 percent of the
outstanding voting securities of the issuer.
The remaining 25 percent of the fund's as-
setsmaybeinvestedinanymanner.
Section 2(a)(16) of the 1940 Act de-
fines the term Government Security for
purposes of the 1940 Act as meaning—
[A]ny security issued or guaranteed as
to principal or interest by the United
States, or by a person controlled or su-
pervised by and acting as an instrumen-
tality of the Government of the United
States pursuant to authority granted by
the Congress of the United States; or
any certificate of deposit for any of the
foregoing.
15 U.S.C. 80a–2. The statute does not
make any specific reference to refunded
securities. Effective August 15, 2001,
however, the term Refunded Security is
defined, and the treatment of Refunded
Securities is governed, by Rule 5b–3.
SeeSecurities and Exchange Commission
(SEC) Release No. IC–25058, 66 FR
36156 (July 11, 2001). This rule applies if
a fund acquires a Refunded Security, that
is, a security the payment of which has
been fully funded within the meaning of
Rule 5b–3(c)(4) by escrowed Government
Securities. “For purposes of section 5 of
the [1940] Act . . . , the acquisition of
a Refunded Security is deemed to be an
acquisition of the escrowed Government
Securities.” Rule 5b–3(b). The effect of
this Rule is that investments in Refunded
Securities are treated as investments in
Government Securities for purposes of
the definition of a diversified investment
companyinsection5ofthe1940Act.
LAW AND ANALYSIS
Section 851(b) provides that certain re-
quirements must be satisfied in order for
a domestic corporation to be taxed as a
RIC under subchapter M, part I. Section
851(b)(3) imposes certain asset diversifi-
cation requirements with respect to a cor-
poration's total assets that must be satisfied
as of the close of each quarter of the cor-
poration's taxable year.
Section 851(b)(3)(A) requires that at
least 50 percent of the value of a corpo-
ration's total assets must be represented
by cash and cash items (including receiv-
ables), Government securities, securities
of other RICs, and other securities gener-
ally limited in respect of any one issuer to
an amount not greater in value than 5 per-
cent of the value of the total assets of the
corporation and to not more than 10 per-
cent of the outstanding voting securities of
such issuer.
Section 851(b)(3)(B) provides that not
more than 25 percent of the corporation's
total assets may be invested in the securi-
ties (other than Government securities and
the securities of other RICs) of any one is-
suer, or of two or more issuers that the cor-
poration controls and that are determined,
under regulations, to be engaged in the
same or similar trades or businesses or re-
lated trades or businesses.
Section 851(c)(5) provides that, for
purposes of § 851(b)(3), all terms not
specifically defined in § 851(c) shall have
thesamemeaningaswhenusedinthe
1940 Act, as amended. The term “govern-
ment security” is not specifically defined
in § 851.
The RIC diversification rules of sub-
chapter M are substantially similar in
structure and purpose to those of the 1940
Act. Both sets of rules impose numer-
ical limitations on the percentages and
types of assets that may be held by an
investment company. Both are intended
to protect the investor from the risks of
20
03-32 I.R.B.
28
9
Au
gust 11, 2003

loss and of illiquidity inherent in the con-
centration of assets in the securities of a
single or a small number of issuers.See
H.R. Rep. No. 2020, 86th Cong., 2d
Sess. 820–26. In view of the commonality
of structure and purpose of both sets of
rules and in view of the need for RICs
simultaneouslytocomplywithboth,the
diversification provisions of the Code and
those of the1940 Act should be interpreted
consistently.
As a result of Rule 5b–3(b),R's invest-
ment in certain of the refunded bonds is
treated as an investment in Government
Securities for purposes of the diversifica-
tion requirements under the 1940 Act. Ac-
cordingly, for each calendar quarter the
end of which occurs after the refunding
transaction that created the escrow deposit,
the refunded bonds are government securi-
ties for purposes of § 851(b)(3), regardless
of whether the RIC acquired the refunded
bonds before or after that refunding trans-
action.
HOLDING
For purposes of applying the diversifi-
cation requirements under § 851(g)(3), a
RIC's investment in refunded bonds is an
investment in government securities to the
extent that an acquisition of the refunded
bonds would be treated by Rule 5b–3 as
an acquisition of the Government Securi-
ties that were deposited in the escrow for
the bonds.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Susan Thompson Baker of the Office
of the Associate Chief Counsel (Financial
Institutions & Products). For further infor-
mation regarding this revenue ruling, con-
tact her at (202) 622–3940 (not a toll-free
call).
Section 856.—Definition of
Real Estate Investment Trust
If a taxable REIT subsidiary of a REIT and an in-
dependent contractor from whom the REIT does not
derive income from a joint venture to provide non-
customary services to tenants of the REIT, will rents
paid to the REIT by tenants fail to qualify as "rents
from real property" under section 856 of the Code.
See Rev. Rul. 2003-86, page 290.
26 CFR 1.856–3: Definitions relating to real estate
investment trusts.
26 CFR 1.856–5: Treatment of interest by real estate
investment trusts.
26 CFR 301.7701–3: Classification of certain busi-
ness entities.
If a REIT under certain circumstances makes a
loan that is secured either by a partnership interest in
a partnership or by the sole membership interest in a
disregarded entity, how will the loan and interest be
treated under section 856? See Rev. Proc. 2003-65,
page 336.
26 CFR 1.856–4: Rents from Real Property.
Noncustomary services provided to
REIT tenants by a joint venture between
a taxable REIT subsidiary and an inde-
pendent contractor.This ruling provides
that a joint venture between a taxable REIT
subsidiary and an independent contractor
to provide noncustomary services to REIT
tenants will not cause rents paid by tenants
to fail to qualify as “rents from real prop-
erty” under section 856 of the Code.
Rev. Rul. 2003–86
ISSUE
If a joint venture partnership between a
taxable REIT subsidiary (TRS) of a real es-
tate investment trust (REIT) and a corpo-
ration that qualifies as an independent con-
tractor of the REIT under § 856(d)(3)(B) of
the Internal Revenue Code provides non-
customary services to tenants of the REIT
in the situation described below, will rents
paid by the tenants to the REIT fail to
qualify as rents from real property under
§ 856(d)?
FACTS
Ris a corporation that has elected and
qualifies to be treated as a REIT under sub-
chapter M of Chapter 1 of the Code.R
owns and operates rental apartment prop-
erties in several major metropolitan areas.
In 2002,Rformed a wholly owned corpo-
ration,T, to provide services to tenants of
its properties.RandTfiled Form 8875 to
jointly elect forTto be treated as a TRS of
Reffective as of the date ofT's formation.
The services provided to tenants byTare
services that are not customarily provided
to tenants of rental apartment properties in
the metropolitan areas in whichR's prop-
erties are located.
Xis a corporation unrelated, either di-
rectly or indirectly, to eitherRorT.X
qualifies as an independent contractor un-
der § 856(d)(3)(B).Xprovides various ser-
vices toR's tenants and tenants of other
rental apartments in the areas whereR's
properties are located. The services pro-
vided byXare noncustomary in the areas
whereR's properties are located and are
primarily for the convenience of tenants.
XandTformedP, which is treated as
a partnership for federal income tax pur-
poses, to provide the noncustomary ser-
vices that formerly were separately pro-
vided toR's tenants by eitherXorT.Xand
Tmade equal capital contributions toP.X
andTshare in all items ofP's income, gain,
loss,anddeductioninproportiontotheir
capital contributions.R's tenants contract
directly withPfor services.Rdoes not re-
ceive any payments related to the services
fromP,Xor tenants.Rreceives quarterly
dividends from T.
LAW AND ANALYSIS
ToqualifyasaREIT,anentitymust
derive at least 95 percent of its gross in-
come from sources listed in § 856(c)(2)
and at least 75 percent of its gross in-
come from sources listed in § 856(c)(3).
“Rents from real property” are among the
sources listed in both of those sections.
Section 856(d)(1) defines rents from real
property to include rents from interests in
real property, charges for services custom-
arily rendered in connection with the rental
of real property, and rent attributable to
certain leased personal property. How-
ever, § 856(d)(2)(C) excludes “impermis-
sible tenant service income” from the def-
inition of rents from real property.
Section 856(d)(7)(A) defines “im-
permissible tenant service income” to
include, with respect to any real or per-
sonal property, any amount received or
accrued directly or indirectly by a REIT
for services furnished or rendered by the
REIT to tenants of the property. Section
856(d)(7)(B) provides that if impermissi-
ble tenant service income from a property
for any tax year exceeds 1 percent of all
amounts received or accrued directly or
indirectly by the REIT during the tax
year from the property, the impermissible
tenant service income from the property
shall include all amounts received or ac-
crued from the property for the tax year.
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29
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03-32 I.R.B.

Section 856(d)(7)(C)(i) provides that ser-
vices furnished or rendered through a
TRS or an independent contractor from
whom the REIT does not derive or receive
any income are not treated as furnished,
rendered, or provided by the REIT for
purposes of § 856(d)(7)(A). Thus, ser-
vices rendered by a TRS do not give rise
to impermissible tenant service income,
and services rendered by an independent
contractor do not give rise to impermis-
sible tenant service income if the REIT
does not receive or derive income from the
independent contractor.
R's tenants contract directly withPto
perform noncustomary services. Thus,R
does not receive directly any payments re-
lated to the services fromP.Also,Rdoes
not directly or indirectly receive income
fromX, an independent contractor.Tis
entitled to its share of income from the
performance of services in proportion to
its interest inP,andRmay indirectly re-
ceive this income in the form of dividends
fromT. Under § 856(d)(7)(A), amounts re-
ceived directly or indirectly by a REIT for
services furnished or rendered to tenants
constitute impermissible tenant service in-
come. However, § 856(d)(7)(C)(i) pro-
vides an exception for services furnished
or rendered through a TRS.R's only inter-
est inPis throughT,whichisaTRS.Ac-
cordingly, the services provided byPare
treated as provided byTto the extent of
T's interest inP. Therefore,Rwill not be
treated as providing impermissible tenant
services to its tenants.
HOLDING
Under the circumstances described
above, a joint venture partnership between
a TRS of a REIT and a corporation that
qualifies as an independent contractor of
the REIT under § 856(d)(3)(B) may pro-
vide noncustomary services to tenants of
the REIT without causing the rents paid
by the tenants to the REIT to fail to qualify
as rents from real property under § 856(d).
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is Jonathan D. Silver of the Office of
Associate Chief Counsel (Financial Insti-
tutions & Products). For further infor-
mation regarding this revenue ruling, con-
tact Mr. Silver at (202) 622–3920 (not a
toll-free call).
Section 4971.—Taxes on
Failure to Meet Minimum
Funding Standards
Whether the filing of a Form 5330 or the filing of
a Form 5500 starts the running of the statute of limi-
tations within the meaning of section 6501 of the In-
ternal Revenue Code with respect to the excise taxes
described in section 4971. See Rev. Rul. 2003-88,
page 292.
Section 4980.—Tax on
Reversion of Qualified Plan
Assets to Employer
Excise tax; terminating defined ben-
efit plan; reversion.This ruling describes
the treatment of a transfer from a terminat-
ing defined benefit plan to a defined contri-
bution plan of an amount that is in excess
of 25 percent of the potential amount oth-
erwise available for reversion.
Rev. Rul. 2003–85
ISSUE
If a defined benefit plan is terminated,
and an amount in excess of 25 percent of
the maximum amount otherwise available
for reversion is transferred from the ter-
minating defined benefit plan to a defined
contribution plan, what is the tax treatment
of the amount transferred to the defined
contribution plan and of any reversion to
the employer from the terminating defined
benefit plan?
FACTS
Company M maintains Plan A, a de-
fined benefit plan qualified under § 401(a)
of the Internal Revenue Code. On March 1,
2002, the Board of Directors of Company
M adopted resolutions to terminate Plan A,
effective July 1, 2002, and to adopt Plan B,
a defined contribution plan. Company M
did not amend Plan A in connection with
the termination of the plan to provide for
any increases in the accrued benefits of the
participants.
All employees of Company M are eli-
gible to participate in Plan B upon attain-
ment of age 21 and completion of 1 year of
service. Of the 1,000 participants with ac-
crued benefits under Plan A that remained
as employees of Company M as of July 1,
2002 (the termination date of Plan A), 95
percent were participants in Plan B on that
date.
After satisfaction of all liabilities of
Plan A, Company M could have received a
reversion of $60X of surplus assets (deter-
mined without regard to § 4980(d)). After
satisfaction of all the plan liabilities and
before taking a reversion of the surplus
assets under Plan A, Company M trans-
ferred$20XtoPlanB.PlanBprovides
for the receipt and immediate allocation
of excess assets in the form of a direct
transfer from the terminating Plan A. The
allocation of the excess assets will satisfy
the requirements of §§ 401(a)(4) and 415.
LAW
Section 61 defines gross income as
all income from whatever source derived
(subject to certain exceptions). Section
111(a) provides that gross income does
not include income attributable to the
recovery during the taxable year of any
amount deducted in any prior taxable year
to the extent such amount did not reduce
the amount of the tax imposed by sections
1 through 1400L.
Section 4980(a) provides for a 20 per-
cent excise tax on the amount of any re-
version from a qualified plan. Section
4980(d)(1) provides, in pertinent part, that
the excise tax under § 4980(a) is increased
to 50 percent with respect to any employer
reversion from a qualified plan unless the
employer establishes or maintains a qual-
ified replacement plan or the plan pro-
videspro ratabenefit increases described
in § 4980(d)(3).
Section 4980(c)(2) generally defines
“employer reversion” as the amount of
cash and the fair market value of other
property received (directly or indirectly)
by an employer from the qualified plan.
Under § 4980(d)(2), a plan is a “quali-
fied replacement plan” if it is established or
maintained by the employer in connection
with a qualified plan termination (replace-
ment plan) and certain additional require-
ments are met. Under § 4980(d)(2)(A), in
20
03-32 I.R.B.
29
1
Au
gust 11, 2003

order for the replacement plan to be a qual-
ified replacement plan, at least 95 percent
of the active participants in the terminated
plan who remain as employees of the em-
ployer after the termination are active par-
ticipants in the replacement plan. Section
4980(d)(2)(C) provides rules for the allo-
cation of the amount transferred.
Under § 4980(d)(2)(B), in order for the
replacement plan to be a qualified replace-
ment plan, a direct transfer must be made
from the terminated plan to the replace-
ment plan before any employer reversion,
and the transfer must be in an amount equal
to the excess (if any) of (I) 25 percent of
the maximum amount the employer could
receive as an employer reversion (deter-
mined without regard to § 4980(d)) over
(II)thepresentvalueoftheaggregatein-
creases in the accrued benefits under the
terminated plan of any participants or ben-
eficiaries under a plan amendment which
is adopted within 60 days before the plan
termination and which takes effect imme-
diately upon plan termination.
Section 4980(d)(2)(B)(iii) provides
that, in the case of any amount transferred
under § 4980(d)(2)(B)(i) from a termi-
nated plan to a qualified replacement plan,
such amount (I) shall not be includible in
the gross income of the employer, (II) no
deduction shall be allowable with respect
to such transfer, and (III) such transfer
shall not be treated as an employer rever-
sion for purposes of § 4980.
HOLDINGS
1. Plan B is a qualified replacement
plan for purposes of § 4980(d).
2. In accordance with § 4980(d)(2)(B)
(iii), the direct transfer from Plan A to Plan
Bof$20X,anamountthatisatleast25
percent of the maximum amount which the
employer could receive as an employer re-
version, is treated as follows:
(a) the amount transferred is not in-
cludible in the gross income of the em-
ployer,
(b) no deduction is allowable with re-
spect to the amount transferred, and
(c) the amount transferred is not treated
as an employer reversion for purposes of
§ 4980.
3. The $40X that the employer receives
is subject to the 20 percent excise tax un-
der § 4980(a) and is includible in income
under § 61.
DRAFTING INFORMATION
The principal drafters of this revenue
ruling are Steven Linder of the Employee
Plans, Tax Exempt and Government En-
tities Division and Vernon Carter of the
Office of the Division Counsel/Asso-
ciate Chief Counsel (TEGE). For further
information regarding this revenue rul-
ing, please contact the Employee Plans'
taxpayer assistance telephone service at
1–877–829–5500 (a toll-free number)
between the hours of 8:00 a.m. and 6:30
p.m. Eastern Time, Monday through Fri-
day. Mr. Linder may be reached at (202)
283–9888; Mr. Carter may be reached at
(202) 622–6060. The telephone numbers
in the preceding sentence are not toll-free.
Section 6015.—Relief From
Joint and Several Liability
on a Joint Return
26 CFR 1.6015–4: Equitable relief from joint and
several liability.
This revenue procedure provides guidance for tax-
payers seeking equitable relief from income tax lia-
bility under section 66(c) or section 6015(f). See Rev.
Proc. 2003-61, page 296.
Section 6501.—Limitations
on Assessment and Collection
(Also, § 4971.)
Section 4971; running of statute of
limitations; and filing of form.This rul-
ing states that the filing of a Form 5330,
and not the filing of a Form 5500, starts the
running of the statute of limitations with
respect to the excise taxes described in sec-
tion4971oftheCode.
Rev. Rul. 2003–88
ISSUE
What starts the running of the statute of
limitations for purposes of the excise taxes
imposed by § 4971 of the Internal Revenue
Code on failure to satisfy the minimum
funding standards of § 412?
FACTS
EmployerXmaintains a defined bene-
fit pension plan (“the Plan”) qualified un-
der § 401(a) that is subject to the require-
ments of § 412. The Plan has an accumu-
lated funding deficiency under § 412 as of
the end of the 2002 plan year. As a result,
Xis liable for the initial excise tax under
§ 4971(a) for failure to meet the minimum
funding standards. Form 5500 is timely
filed for the Plan for the 2002 plan year and
the form discloses the amount of the ac-
cumulated funding deficiency. However,
Xfails to file Form 5330 to report the ex-
cise tax liability on the accumulated fund-
ing deficiency.
LAW AND ANALYSIS
Section 4971 imposes excise taxes on
the failure to satisfy the minimum funding
standards of § 412. The amount of the
taxes, for which the employer is liable,
is related to the amount of an accumu-
lated funding deficiency, as defined in
§ 412(a), and, in the case of a plan to
which § 412(m)(5) applies, to the amount
of an unpaid liquidity shortfall under
§ 4971(f). Although the determination of
whether there is an accumulated funding
deficiency is made at the end of the plan
year, the tax on the accumulated funding
deficiency is imposed for the taxable year
(of the employer who maintains the plan)
in which the plan year ends.
Section 6501(a) provides that, except
as otherwise provided in that section, the
amount of any tax imposed by Title 26 of
the United States Code (which includes
§ 4971) shall be assessed within three
years after the return was filed (whether or
not the return was filed on or after the date
prescribed), and no proceeding in court
without assessment for the collection of
the tax shall be begun after the expiration
of that period. Section 6501(a) further
provides that, for this purpose, the term
“return” means the return required to be
filed by the taxpayer.
However, there are exceptions to the
three year rule in § 6501(a). Section
6501(e)(3) provides that, except as other-
wise provided in § 6501(c), in the case of
a return of a tax imposed under a provision
of subtitle D (which includes § 4971), if
the return omits an item of the tax properly
includible thereon that exceeds 25 percent
Au
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29
2
20
03-32 I.R.B.

of the amount of the tax reported thereon,
the tax may be assessed, or a proceeding
in court for the collection of the tax may
be begun without assessment, at any time
within six years after the return is filed.
However, § 6501(e)(3) also provides that
in determining the amount of tax omitted
from the return, there shall not be taken
into account any amount of tax imposed
by chapter 43 (which includes § 4971) that
is omitted from the return if the transaction
giving rise to the tax is disclosed in the
return, or in a statement attached to the
return, in a manner adequate to apprise the
Secretary of the Treasury or his delegate
of the existence and nature of the item.
Section 6501(c) provides several rules
that take precedence over the provisions of
§ 6501(e)(3). Section 6501(c)(3) provides
that in the case of a failure to file a return,
the tax may be assessed, or a proceeding
in court for the collection of the tax may
be begun without assessment, at any time.
Also, § 6501(c)(4) provides that if both the
taxpayer and the Secretary of the Treasury
or his delegate have consented in writing
before the expiration of the time prescribed
in that section, the tax may be assessed at
any time before the expiration of the period
of extension.
Section 6058(a) requires employers that
maintain certain funded plans of deferred
compensation, including plans qualified
under § 401(a), to file an annual informa-
tion return. Section 301.6058–1(a)(1)of
the Procedure and Administration Reg-
ulations provides that the annual return
of the plan is the appropriateAnnual
Return/Report of Employee Benefit Plan
(Form 5500 series). Section 54.6011–1(a)
of the Excise Tax Regulations, however,
requires any employer liable for tax under
§4971tofileForm5330,Return of Excise
Taxes Related to Employee Benefit Plans.
Generally, filing a Form 5500 does not
start the § 6501 statute of limitations for
assessment for taxes. Absent a specific
statutory or regulatory exception, Form
5500 is not designated for the reporting of
tax. Section 6501(l)(1) provides an excep-
tion for taxes imposed by § 4975. Section
6501(l)(1) states, in pertinent part, that for
purposes of § 4975, the return to be used
for purposes of starting the running of
the statute of limitations on assessments
shall be the return filed by the plan for
the year in which the act giving rise to
the liability occurred. No such exception
exists for § 4971. Therefore, the general
rule of § 6501(a) applies. The return used
for purposes of the statute of limitations
for § 4971 is Form 5330, as designated
by § 54.6011–1(a). Disclosure of infor-
mation on Form 5500 does not commence
the running of the statute of limitations
under § 6501 because only disclosure on
the return required to report and pay the
tax (Form 5330) is relevant.
If an accumulated funding deficiency or
unpaid liquidity shortfall is disclosed on
the Form 5330 or in an attached statement,
the statute of limitations for collecting the
tax imposed by § 4971 expires three years
after the filing of the Form 5330 in which
the deficiency or unpaid liquidity short-
fall is disclosed. If an accumulated fund-
ing deficiency or unpaid liquidity short-
fall is not disclosed on the Form 5330 or
in a statement attached to the Form 5330,
the statute of limitations on assessment is
six years. However, either of these peri-
ods may be extended by a written agree-
ment for an agreed-upon period of time. If
Form 5330 has not been filed for a year in
which an accumulated funding deficiency
or unpaid liquidity shortfall occurs, the tax
may be assessed, or a proceeding in court
for the collection of the tax may be be-
gun without assessment, at any time af-
ter the date prescribed for filing the return.
In each case, the statute of limitations is
determined without regard to whether the
accumulated funding deficiency or unpaid
liquidity shortfall has been disclosed on
Form 5500.
HOLDING
The filing of Form 5330 starts the
running of the statute of limitations for
purposes of the excise taxes imposed by
§4971onfailuretosatisfythemini-
mum funding standards of § 412. If an
accumulated funding deficiency or un-
paid liquidity shortfall is disclosed on
Form 5330 or in an attached statement,
the three-year statute of limitations of
§ 6501(a) applies. However, if the defi-
ciency or unpaid liquidity shortfall is not
disclosed on Form 5330 or in an attached
statement, the six-year statute of limita-
tions of § 6501(e)(3) applies. If Form
5330 is not filed for that year, § 6501(c)(3)
permits the tax to be assessed at any time
after the date prescribed for filing the
return. BecauseXhas failed to file Form
5330 to disclose the accumulated funding
deficiency, the tax under § 4971 may be
assessed, or a proceeding in court for the
collection of the tax may be begun without
assessment, at any time.
DRAFTING INFORMATION
The principal author of this revenue rul-
ing is James Flannery of the Employee
Plans, Tax Exempt and Government Enti-
ties Division. For further information re-
garding this revenue ruling, please contact
the Employee Plans' taxpayer assistance
telephone service at 1–877–829–5500 (a
toll-free number), between the hours of
8:00 a.m. and 6:30 p.m. Eastern time,
Monday through Friday. Mr. Flannery
may be reached at 1–202–283–9888 (not
a toll-free number).
20
03-32 I.R.B.
29
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Part III. Administrative, Procedural, and Miscellaneous
Elimination of User Fees for
Certain Determination Letter
Requests Pursuant to Section
620 of the Economic Growth
and Tax Relief Reconciliation
Act of 2001
Notice 2003–49
I. Purpose
This notice provides guidance on the
application of section 620 of the Economic
Growth and Tax Relief Reconciliation Act
of 2001, Pub. L. 107–16 (EGTRRA), re-
garding elimination of user fees for certain
determination letter requests. The guid-
ance in this notice amplifies the guidance
in Notice 2002–1, 2002–1 C.B. 283, by
describing when the EGTRRA remedial
amendment period begins for purposes of
determining if a determination letter appli-
cation is eligible for elimination of the user
fee. The guidance in Notice 2002–1 and
this notice will help a plan sponsor deter-
mine if it is required to pay a user fee for a
determination letter application.
II. Background
Beginning January 1, 2002, section 620
of EGTRRA eliminated the requirement
for payment of user fees for certain re-
quests to the Internal Revenue Service for
determination letters with respect to the
qualified status of a pension, profit-shar-
ing, stock bonus, annuity, or employee
stock ownership plan maintained solely by
one or more eligible employers
1
or the ex-
empt status of any trust which is part of the
plan. However, section 620 of EGTRRA
did not eliminate user fees for any deter-
mination letter request made after the later
of (a) the fifth plan year the plan is in exis-
tence or (b) the end of any remedial amend-
ment period with respect to the plan begin-
ning within the first 5 plan years.
Notice 2002–1 provides guidance on
section 620 of EGTRRA, including guid-
ance on who is an eligible employer, when
a plan is in existence, and the types of de-
termination letter requests that are eligi-
ble for elimination of the user fee. Notice
2002–1, Q&A–12, provides guidance on
when the GUST
2
remedial amendment pe-
riod begins for purposes of determining if
a user fee is eliminated.
Notice 2001–42, 2001–2 C.B. 70, pro-
vides a remedial amendment period for
EGTRRA ending no earlier than the end of
the 2005 plan year. The EGTRRA reme-
dial amendment period is available to plans
that timely adopt good faith plan amend-
ments for EGTRRA.
Rev. Proc. 2003–8, 2003–1 I.R.B. 236,
provides guidance for complying with the
Service's user fee program as it pertains to
requests for determination letters on mat-
ters under the jurisdiction of the Commis-
sioner, Tax Exempt and Government En-
tities (TE/GE). Form 8717,User Fee for
Employee Plan Determination Letter Re-
quest, is used as an attachment to a de-
termination letter application to transmit
the payment of the required user fee or to
certify exemption from the fee pursuant to
section 620 of EGTRRA.
III. Beginning of EGTRRA Remedial
Amendment Period for User Fee Purposes
For a defined contribution plan, the ear-
liest date on which the plan's EGTRRA re-
medial amendment period could have be-
gun is January 1, 2002. The first day of the
5-year period ending on January 1, 2002, is
January 2, 1997. Thus, if a determination
letter application for a defined contribution
plan is filed within the plan's EGTRRA re-
medial amendment period, the application
may be eligible for elimination of the user
fee provided the plan was first in existence
afterJanuary 1, 1997.
For a defined benefit plan, the earliest
date on which the plan's EGTRRA reme-
dial amendment period could have begun
is January 2, 2001. (Although EGTRRA
is generally effective for years beginning
after December 31, 2001, section 611(a)
of EGTRRA, which increased the defined
benefit dollar limit under § 415 of the
Code, is effective for limitation years end-
ing after December 31, 2001. January 2,
2001, is the earliest date section 611(a) of
EGTRRAcouldbeeffectiveforaplanand,
thus, the earliest date on which a defined
benefit plan's EGTRRA remedial amend-
ment period could have begun.) The first
day of the 5-year period ending on Jan-
uary 2, 2001, is January 3, 1996. Thus, if
a determination letter application for a de-
fined benefit plan is filed within the plan's
EGTRRA remedial amendment period, the
application may be eligible for elimination
of the user fee provided the plan was first
in existenceafterJanuary 2, 1996.
The guidance in this notice amplifies
but does not supersede the guidance in No-
tice 2002–1. Thus, pursuant to Q&A–12
of Notice 2002–1, if a determination let-
ter application for a plan is filed within the
plan's GUST remedial amendment period,
the application may be eligible for elimina-
tion of the user fee provided the plan was
first in existenceon or afterDecember 9,
1989.
IV. Effect on Other Documents
Notice 2002–1 is amplified.
DRAFTING INFORMATION
The principal drafter of this notice is
James Flannery of the Employee Plans,
Tax Exempt and Government Entities Di-
vision. For further information regarding
this notice, please contact the Employee
Plans' taxpayer assistance telephone ser-
vice at 1–877–829–5500 between the
hours of 8:00 a.m. and 6:30 p.m. Eastern
1
In general, an employer is an eligible employer if the employer had (i) at least one employee who was not a highly compensated employee (within the meaning of § 414(q) of the Internal
Revenue Code) and who participated in the plan for the plan year preceding the determination letter request, and (ii) no more than 100 employees who received at least $5,000 of compensation
from the employer for the calendar year preceding the request. See Q&A–5 through Q&A–10 of Notice 2002–1.
2
The term “GUST” refers to the following:
•the Uruguay Round Agreements Act, Pub. L. 103–465;
•the Uniformed Services Employment and Reemployment Rights Act of 1994, Pub. L. 103–353;
•the Small Business Job Protection Act of 1996, Pub. L. 104–188;
•the Taxpayer Relief Act of 1997, Pub. L. 105–34;
•the Internal Revenue Service Restructuring and Reform Act of 1998, Pub. L. 105–206; and
•the Community Renewal Tax Relief Act of 2000, Pub. L. 106–554.
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29
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Time, Monday through Friday (a toll-free
number). Mr. Flannery may be reached at
1–202–283–9888 (not a toll-free number).
Treatment of Foreign Stapled
Entity Under Section 269B
as Domestic for Purposes of
Sections 904(i) and 864(e)
Notice 2003–50
This notice modifies Notice 89–94,
1989–2 C.B. 416.
Section 269B provides that, except
as provided in regulations, if a domestic
corporation and a foreign corporation are
stapled entities, the foreign corporation
will be treated as a domestic corporation
for U.S. income tax purposes. Section
269B(a)(1). Two entities are stapled en-
tities if more than 50 percent in value
of the beneficial ownership in each of
such entities consists of stapled interests.
Section 269B(c)(2). Interests are stapled
interests if, by reason of form of own-
ership, restrictions on transfer, or other
terms and conditions, in connection with
the transfer of one of the interests the other
interest is also transferred or required to
be transferred. Section 269B(c)(3).
Notice 89–94 announced that regu-
lations issued under section 269B will
provide that a stapled foreign corporation,
treated as a domestic corporation under
section 269B(a)(1), will nevertheless be
treated as a foreign corporation for pur-
poses of the definition of an includible
corporation under section 1504(b). Thus,
losses of a stapled foreign corporation will
notbeallowedtooffsetincomeofany
member of an affiliated group, unless a
valid section 1504(d) election is in effect
with respect to the stapled foreign corpo-
ration.
Section 904(i) provides that if two or
more domestic corporations would be
members of the same affiliated group if
(i) section 1504(b) were applied without
regard to the exceptions contained therein,
and (ii) the constructive ownership rules
of section 1563(e) applied for purposes
of section 1504(a), the Secretary is au-
thorized to issue regulations that provide
for resourcing the income of any of such
domestic corporations or for modifications
to the consolidated return regulations to
the extent that such resourcing or mod-
ifications are necessary to prevent the
avoidance of the provisions of this subpart
(sections 901 to 908). Section 904(i) was
enacted to prevent a consolidated group
of corporations from manipulating its
foreign tax credit limitation by utilizing
techniques to disaffiliate a subsidiary.See
H.R. Rep. No. 101–247, at 1292–93
(1989).
The regulations under section 904(i)
provide that two includible corpora-
tions that are “affiliates” (as defined in
§ 1.904(i)–1(b)(1)) must consistently elect
either to credit or to deduct foreign income
taxes paid or accrued (or deemed paid) for
the taxable year and require the affiliates
to determine their foreign tax credit limita-
tions on a combined basis. § 1.904(i)–1(a),
(d). In order to be an “affiliate” under
§ 1.904(i)–1(b), a corporation must be
an includible corporation under section
1504(b). See § 1.904(i)–1(b)(1)(i) and
–1(b)(2).
Section 864(e)(1) requires the members
of an affiliated group to allocate and appor-
tion interest expense as if all members of
the group were a single corporation. Sec-
tion 864(e)(5) provides that, except for cer-
tain financial institutions, the term “affil-
iated group” has the same meaning as in
section 1504 (determined without regard
to section 1504(b)(4)). Section 864(e)(1)
was enacted because Congress was con-
cerned that the separate company approach
for allocating and apportioning expenses
did not reflect economic reality. Instead,
consideration of the expenses of an en-
tire group of corporations that file a con-
solidated income tax return is a more ap-
propriate approach. In addition, Congress
wanted to prevent an affiliated group from
manipulating its foreign tax credit limita-
tion by adjusting the location of borrowing
within the affiliated group. H.R. Rep. No.
99–426, at 374–75 (1985); S. Rep. No.
99–313, at 346–47 (1986).
Sections 1.861–11 and 1.861–11T con-
tain rules for allocating and apportioning
interest expense of an affiliated group. For
purposes of these rules, the definition of
an “affiliated corporation” is expanded to
include any “includible corporation” (as
defined in section 1504(b) without regard
to section 1504(b)(4)) if 80 percent of the
vote or value of all the stock is owned
directly or indirectly by an includible cor-
poration or by members of an affiliated
group. § 1.861–11T(d)(6). This expanded
definition was intended to prevent taxpay-
ers from avoiding application of section
864(e)(1) through disaffiliation of one
member or the creation of two affiliated
groups.
Treasury and the IRS are aware that cer-
tain taxpayers have imposed transfer re-
strictions on the stock of an 80 percent
or greater owned foreign corporation and
taken the position that such stock is sta-
pled to the stock of an 80 percent or greater
owned domestic corporation. If the inter-
ests of the corporations are treated as sta-
pled for purposes of section 269B, then al-
though the foreign corporation generally
is treated as a domestic corporation, No-
tice 89–94 announced that regulations will
be issued that would treat it as a foreign
corporation for purposes of the definition
of an includible corporation under section
1504(b) and therefore not an includible
corporation.
This notice announces that regulations
issued under section 269B will provide
that a foreign corporation that is stapled
to a domestic corporation will be treated
as a domestic corporation for purposes
of the definition of an includible corpora-
tion under section 1504(b) when applying
§§ 1.904(i)–1 and 1.861–11T(d)(6). The
provisions of the regulations described in
the preceding sentence will be effective
for taxable years beginning after July 22,
2003. In the case of structures completed
on or after July 22, 2003, such provisions
will be effective for taxable years includ-
ing July 22, 2003.
The IRS will continue to apply princi-
ples of existing law to determine whether
interests are stapled for purposes of section
269B. For example, under a substance-
over-form analysis, restrictions on trans-
ferability of ownership interests may be
disregarded for tax purposes if the inter-
ests are held by the same person or related
persons. Finally, Treasury and the IRS are
considering issuing further guidance under
section 269B, including guidance on situ-
ations where the interests of two or more
entities are held by the same person or re-
lated persons.
EFFECT ON OTHER NOTICES
Notice 89–94, 1989–2 C.B. 416, is
modified.
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5
Au
gust 11, 2003

DRAFTING INFORMATION
The principal authors of this notice are
Kenneth Allison and Bethany Ingwalson
of the Associate Chief Counsel (Interna-
tional). However, other personnel from
the IRS and Treasury participated in its
development. For further information re-
garding this notice, contact Mr. Allison at
(202) 622–3860 or Ms. Ingwalson at (202)
622–3850 (not toll-free calls).
Guidance on the Application of
Section 911 to U.S. Individuals
Working in Iraq
Notice 2003–52
This notice clarifies the application of
section 911 of the Internal Revenue Code
(the “Code”) to U.S. citizens and residents
earning income in Iraq attributable to ser-
vices performed by such individuals.
Section 911(a) of the Code allows a
“qualified individual” to elect to exclude
from gross income his or her “foreign
earned income” (as defined in section
911(b)) and “housing cost amount” (as de-
fined in section 911(c)). Section 911(d)(1)
generally defines a “qualified individual”
as a citizen or resident of the United States
whose tax home is in a foreign country
and who meets certain requirements of
residence or presence in a foreign country.
Section 911(d)(8)(A) of the Code pro-
vides generally that if travel with respect to
any foreign country (or any transaction in
connection with such travel) is proscribed
by certain regulations during any period,
then: (1) foreign earned income does not
include income from sources within that
country attributable to services performed
during that period; (2) housing expenses
do not include any expenses allocable to
such period for housing in that country, or
for housing of the taxpayer's spouse or de-
pendents in another country while the tax-
payer is present in that country; and (3) an
individual is not treated as abona fideres-
ident of, or as present in, a foreign coun-
try for any day during which the individual
was present in that country.
Section 911(d)(8)(B) of the Code pro-
vides that the regulations described in
section 911(d)(8) are those promulgated
pursuant to the Trading With the Enemy
Act, 50 U.S.C. App. 1et seq., or the In-
ternational Emergency Economic Powers
Act (“IEEPA”), 50 U.S.C. 1701et seq.,
that include provisions generally pro-
hibiting U.S. citizens and residents from
engaging in transactions related to travel
to, from, or within a foreign country. Sec-
tion 911(d)(8)(C), however, provides that
the limitations of section 911(d)(8)(A) do
not apply to any individual during any
period in which such individual's activi-
ties are not in violation of the regulations
described in section 911(d)(8)(B).
In 1991, Treasury's Office of Foreign
Assets Control (“OFAC”) issued the Iraqi
Sanctions Regulations, 31 C.F.R. part
575. The Iraqi Sanctions Regulations
were issued pursuant to IEEPA, among
other authorities. Specifically, 31 C.F.R.
sec. 575.207 provides that “[e]xcept as
otherwise authorized, no U.S. person may
engage in any transaction relating to travel
by any U.S. citizen or permanent resident
alien to Iraq, or to activities by any U.S.
citizen or permanent resident alien within
Iraq,” with narrow exceptions. Follow-
ing promulgation of the Iraqi Sanctions
Regulations, the Service issued Rev. Rul.
92–63, 1992–2 C.B. 195, which lists Iraq
as one of the countries subject to the
limitations under section 911(d)(8) of the
Code.
In recent months, OFAC has issued sev-
eral specific and general licenses that au-
thorize individuals to engage in transac-
tions related to travel to Iraq or to activ-
ities within Iraq. Pursuant to the terms
of the Iraqi Sanctions Regulations, indi-
viduals whose activities in Iraq are per-
mitted by a specific or general license is-
sued by OFAC are not in violation of the
Iraqi Sanctions Regulations with respect to
the activities permitted by the license. 31
C.F.R. sec. 575.501(c). Accordingly, un-
der section 911(d)(8)(C) of the Code, the
limitations of section 911(d)(8)(A) do not
apply to such individuals with respect to
such licensed activities. Such individuals
are eligible for the exclusion under section
911 of the Code provided that they meet
the other requirements of that section.
For further information on this notice,
contact Kate Hwa at (202) 622–3840 (not
a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit, or abatement; determination of
correct tax liability.
(Also Part I, sections 66, 6015.)
Rev. Proc. 2003–61
SECTION 1. PURPOSE AND SCOPE
.01Purpose. This revenue procedure
provides guidance for a taxpayer seeking
equitable relief from income tax liability
under section 66(c) or section 6015(f) of
the Internal Revenue Code (a “requesting
spouse”). Section 4.01 of this revenue
procedure provides the threshold require-
ments for any request for equitable relief.
Section 4.02 of this revenue procedure sets
forth the conditions under which the Inter-
nal Revenue Service ordinarily will grant
equitable relief under section 6015(f) from
an underpayment of income tax reported
on a joint return. Section 4.03 of this rev-
enue procedure provides a nonexclusive
list of factors for consideration in deter-
mining whether relief should be granted
under section 6015(f) because it would be
inequitable to hold a requesting spouse
jointly and severally liable for an under-
payment of income tax on a joint return
where the conditions of section 4.02 are
not met, or for a deficiency. The factors in
section 4.03 also will apply in determining
whether to relieve a spouse from income
tax liability resulting from the operation of
community property law under the equi-
table relief provision of section 66(c).
.02Scope. This revenue procedure ap-
plies to spouses who request either equi-
table relief from joint and several liability
under section 6015(f), or equitable relief
under section 66(c) from income tax lia-
bility resulting from the operation of com-
munity property law.
SECTION 2. BACKGROUND
.01 Section 6013(d)(3) provides that
married taxpayers who file a joint return
under section 6013 will be jointly and
severally liable for the income tax arising
from that joint return. For purposes of
section 6013(d)(3) and this revenue pro-
cedure, the term “tax” includes penalties,
additions to tax, and interest. See sections
6601(e)(1) and 6665(a)(2).
.02 Section 3201(a) of the Internal Rev-
enue Service Restructuring and Reform
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Act of 1998, Pub. L. No. 105–206, 112
Stat. 685, 734 (RRA), enacted section
6015, which provides relief in certain
circumstances from the joint and several
liability imposed by section 6013(d)(3).
Section 6015(b) and (c) specifies two sets
of circumstances under which relief from
joint and several liability is available.
If relief is not available under section
6015(b) or (c), section 6015(f) authorizes
the Secretary to grant equitable relief if,
taking into account all the facts and cir-
cumstances, the Secretary determines that
it is inequitable to hold a requesting spouse
liable for any unpaid tax or any deficiency
(or any portion of either). Section 66(c)
provides relief from income tax liability
resulting from the operation of community
property law to taxpayers domiciled in a
community property state who do not file
a joint return. Section 3201(b) of RRA
amended section 66(c) to add an equitable
relief provision similar to section 6015(f).
.03Section6015providesreliefonly
from joint and several liability arising from
a joint return. If an individual signs a
joint return under duress, the election to
file jointly is not valid and there is no valid
joint return. The individual is not jointly
and severally liable for any income tax lia-
bilities arising from that return. Therefore,
section 6015 does not apply.
.04 Under section 6015(b) and (c), re-
lief is available only from a proposed or
assessed deficiency. Section 6015(b) and
(c) does not authorize relief from an under-
payment of income tax reported on a joint
return. Section 66(c) and section 6015(f)
permit equitable relief for an underpay-
ment of income tax. The legislative history
of section 6015 provides that Congress in-
tended for the Secretary to exercise dis-
cretion in granting equitable relief if a re-
questing spouse “does not know, and had
no reason to know, that funds intended for
the payment of tax were instead taken by
the other spouse for such other spouse's
benefit.” H.R. Conf. Rep. No. 105–599, at
254 (1998). Congress also intended for the
Secretary to exercise the equitable relief
authority under section 6015(f) in other sit-
uations if, “taking into account all the facts
and circumstances, it is inequitable to hold
an individual liable for all or part of any un-
paid tax or deficiency arising from a joint
return.”Id.
SECTION 3. CHANGES
This revenue procedure supersedes
Revenue Procedure 2000–15, changing
the following:
.01 Section 4.01 of this revenue proce-
dure adds a new threshold requirement un-
der section 4.01(7).
.02 Section 4.03(2)(a)(iii) of this rev-
enue procedure revises the weight given to
the knowledge or reason to know factor.
.03 Section 4.04 of this revenue proce-
dure broadens the availability of refunds
if equitable relief is granted under section
66(c) or section 6015(f).
SECTION 4. GENERAL CONDITIONS
FOR RELIEF
.01Eligibility for equitable relief.A
requesting spouse must satisfy all of the
following threshold conditions to be eli-
gible to submit a request for equitable re-
lief under section 6015(f). With the excep-
tion of conditions (1) and (2), a request-
ing spouse must satisfy all of the follow-
ing threshold conditions to be eligible to
submit a request for equitable relief under
section 66(c). The Service may relieve a
requesting spouse who satisfies all the ap-
plicable threshold conditions set forth be-
low of all or part of the income tax liabil-
ity under section 66(c) or section 6015(f),
if, taking into account all the facts and cir-
cumstances, the Service determines that it
would be inequitable to hold the requesting
spouse liable for the income tax liability.
The threshold conditions are as follows:
(1) The requesting spouse filed a joint
return for the taxable year for which he or
she seeks relief.
(2) Relief is not available to the request-
ing spouse under section 6015(b) or (c).
(3) The requesting spouse applies for
relief no later than two years after the
date of the Service's first collection ac-
tivity after July 22, 1998, with respect to
the requesting spouse.SeeTreas. Reg.
§ 1.6015–5(b)(2)(i) for the definition of
collection activity.
(4) No assets were transferred between
the spouses as part of a fraudulent scheme
by the spouses.
(5) The nonrequesting spouse did not
transfer disqualified assets to the request-
ing spouse. If the nonrequesting spouse
transferred disqualified assets to the re-
questing spouse, relief will be available
only to the extent that the income tax lia-
bility exceeds the value of the disqualified
assets. For this purpose, the term “disqual-
ified asset” has the meaning given the term
by section 6015(c)(4)(B).
(6) The requesting spouse did not file or
fail to file the return with fraudulent intent.
(7) The income tax liability from which
the requesting spouse seeks relief is attrib-
utable to an item of the individual with
whom the requesting spouse filed the joint
return (the “nonrequesting spouse”), un-
less one of the following exceptions ap-
plies:
(a)Attribution solely due to the oper-
ation of community property law.Ifan
item is attributable or partially attributable
to the requesting spouse solely due to the
operation of community property law, then
for purposes of this revenue procedure,
that item (or portion thereof) will be con-
sidered to be attributable to the nonrequest-
ing spouse.
(b)Nominal ownership. If the item is
titled in the name of the requesting spouse,
the item is presumptively attributable to
the requesting spouse. This presumption
is rebuttable. For example, H opens an in-
dividual retirement account (IRA) in W's
name and forges W's signature on the IRA
in 1998. Thereafter, H makes contribu-
tions to the IRA and in 2002 takes a tax-
able distribution from the IRA. H and W
file a joint return for the 2002 taxable year,
but do not report the taxable distribution
on their joint return. The Service later
proposes a deficiency relating to the tax-
able IRA distribution and assesses the de-
ficiency against H and W. W requests relief
from joint and several liability under sec-
tion 6015. W establishes that W did not
contribute to the IRA, sign paperwork re-
lating to the IRA, or otherwise act as if W
were the owner of the IRA. W thereby re-
butted the presumption that the IRA is at-
tributable to W.
(c)Misappropriation of funds.Ifthe
requesting spouse did not know, and had
no reason to know, that funds intended for
the payment of tax were misappropriated
by the nonrequesting spouse for the nonre-
questing spouse's benefit, the Service will
consider granting equitable relief although
the underpayment may be attributable in
part or in full to an item of the requesting
spouse. The Service will consider relief in
this case only to the extent that the funds
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intended for the payment of tax were taken
by the nonrequesting spouse.
(d)Abuse not amounting to duress.If
the requesting spouse establishes that he
or she was the victim of abuse prior to
the time the return was signed, and that,
as a result of the prior abuse, the request-
ing spouse did not challenge the treatment
of any items on the return for fear of the
nonrequesting spouse's retaliation, the Ser-
vice will consider granting equitable relief
although the deficiency or underpayment
maybeattributableinpartorinfulltoan
item of the requesting spouse.
.02Circumstances under which the Ser-
vice ordinarily will grant equitable relief
under section 6015(f) with respect to un-
derpayments on joint returns.
(1) If an income tax liability reported on
a joint return is unpaid, the Service ordi-
narily will grant equitable relief under sec-
tion 6015(f) (subject to the limitations of
paragraph (2) below) in cases in which all
of the following elements are satisfied:
(a) On the date of the request for relief,
the requesting spouse is no longer married
to, or is legally separated from, the nonre-
questing spouse, or has not been a member
of the same household as the nonrequest-
ing spouse at any time during the 12-month
period ending on the date of the request for
relief.
(b) On the date the requesting spouse
signed the joint return, the requesting
spouse had no knowledge or reason to
know that the nonrequesting spouse would
not pay the income tax liability. The re-
questing spouse must establish that it was
reasonable for the requesting spouse to be-
lieve that the nonrequesting spouse would
pay the reported income tax liability. If a
requesting spouse would otherwise qual-
ify for relief under this section, except for
the fact that the requesting spouse's lack
of knowledge or reason to know relates
only to a portion of the unpaid income tax
liability, then the requesting spouse may
receive relief to the extent that the income
tax liability is attributable to that portion.
(c) The requesting spouse will suffer
economic hardship if the Service does
not grant relief. For purposes of this rev-
enue procedure, the Service will base its
determination of whether the requesting
spouse will suffer economic hardship on
rules similar to those provided in Treas.
Reg. § 301.6343–1(b)(4). After the re-
questing spouse is deceased, there can
be no economic hardship.See Jonson v.
Commissioner, 118 T.C. 106, 126 (2002),
appeal docketed, No. 02–9009 (10
th
Cir.
May 24, 2002) (taxpayer appeal filed on
other grounds).
(2) Relief under this section 4.02 is sub-
ject to the following limitation: If the Ser-
vice adjusts the joint return to reflect an un-
derstatement of income tax, relief will be
available only to the extent of the income
tax liability shown on the joint return prior
to the Service's adjustment.
.03Factors for determining whether to
grant equitable relief.
(1)Applicability.Thissection4.03ap-
plies to requesting spouses who did not
file a joint return in a community prop-
erty state, who request relief under section
66(c), and satisfy the applicable thresh-
old conditions of section 4.01. This sec-
tion 4.03 also applies to requesting spouses
who filed a joint return, request relief un-
der section 6015, and satisfy the threshold
conditions of section 4.01, but do not qual-
ify for relief under section 4.02.
(2)Factors. The following is a nonex-
clusive list of factors that the Service
will consider in determining whether,
taking into account all the facts and cir-
cumstances, it is inequitable to hold the
requesting spouse liable for all or part of
the unpaid income tax liability or defi-
ciency, and full or partial equitable relief
under section 66(c) or section 6015(f)
should be granted. No single factor will
be determinative of whether to grant equi-
table relief in any particular case. Rather,
the Service will consider and weigh all
relevant factors, regardless of whether the
factor is listed in this section 4.03.
(a) Factors that may be relevant to
whether the Service will grant equitable
relief include, but are not limited to, the
following:
(i)Marital status. Whether the request-
ing spouse is separated (whether legally
separated or living apart) or divorced from
the nonrequesting spouse. A temporary
absence, such as an absence due to incar-
ceration, illness, business, vacation, mil-
itary service, or education, shall not be
considered separation for purposes of this
revenue procedure if it can be reasonably
expected that the absent spouse will re-
turn to a household maintained in antici-
pation of his or her return.SeeTreas. Reg.
§ 1.6015–3(b)(3)(i) for the definition of a
temporary absence.
(ii)Economic hardship. Whether the
requesting spouse would suffer economic
hardship (within the meaning of section
4.02(1)(c) of this revenue procedure) if the
Service does not grant relief from the in-
come tax liability.
(iii)Knowledge or reason to know.
(A)Underpayment cases. In the case
of an income tax liability that was properly
reported but not paid, whether the request-
ing spouse did not know and had no rea-
son to know that the nonrequesting spouse
would not pay the income tax liability.
(B)Deficiency cases. In the case of an
income tax liability that arose from a defi-
ciency, whether the requesting spouse did
not know and had no reason to know of the
item giving rise to the deficiency. Reason
to know of the item giving rise to the defi-
ciency will not be weighed more heavily
than other factors. Actual knowledge of
the item giving rise to the deficiency, how-
ever, is a strong factor weighing against
relief. This strong factor may be over-
come if the factors in favor of equitable re-
lief are particularly compelling. In those
limited situations, it may be appropriate to
grant relief under section 66(c) or section
6015(f) even though the requesting spouse
had actual knowledge of the item giving
rise to the deficiency.
(C)Reason to know. For purposes of
(A) and (B) above, in determining whether
the requesting spouse had reason to know,
the Service will consider the requesting
spouse's level of education, any deceit or
evasiveness of the nonrequesting spouse,
the requesting spouse's degree of involve-
ment in the activity generating the income
tax liability, the requesting spouse's in-
volvement in business and household
financial matters, the requesting spouse's
business or financial expertise, and any
lavish or unusual expenditures compared
with past spending levels.
(iv)Nonrequesting spouse's legal obli-
gation. Whether the nonrequesting spouse
has a legal obligation to pay the outstand-
ing income tax liability pursuant to a di-
vorce decree or agreement. This factor will
not weigh in favor of relief if the requesting
spouse knew or had reason to know, when
entering into the divorce decree or agree-
ment, that the nonrequesting spouse would
not pay the income tax liability.
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(v)Significant benefit. Whether the re-
questing spouse received significant bene-
fit (beyond normal support) from the un-
paid income tax liability or item giving
rise to the deficiency.SeeTreas. Reg.
§ 1.6015–2(d).
(vi)Compliance with income tax laws.
Whether the requesting spouse has made
a good faith effort to comply with income
tax laws in the taxable years following the
taxable year or years to which the request
for relief relates.
(b) Factors that, if present in a case,
will weigh in favor of equitable relief, but
will not weigh against equitable relief if
not present in a case, include, but are not
limited to, the following:
(i)Abuse. Whether the nonrequesting
spouse abused the requesting spouse. The
presence of abuse is a factor favoring re-
lief. A history of abuse by the nonre-
questing spouse may mitigate a requesting
spouse's knowledge or reason to know.
(ii)Mental or physical health.Whether
the requesting spouse was in poor mental
or physical health on the date the request-
ing spouse signed the return or at the time
the requesting spouse requested relief. The
Service will consider the nature, extent,
and duration of illness when weighing this
factor.
.04Refunds.
(1)Deficiency cases. In a case involv-
ing a deficiency, a requesting spouse is
eligible for a refund of certain payments
made pursuant to an installment agreement
that the requesting spouse entered into
with the Service, if the requesting spouse
has not defaulted on the installment agree-
ment. Only installment payments made
after the date the requesting spouse filed
the request for relief are eligible for re-
fund. Additionally, the requesting spouse
must establish that he or she provided the
funds for which he or she seeks a refund.
For purposes of this revenue procedure, a
requesting spouse is not in default if the
Service did not issue a notice of default to
the requesting spouse or take any action to
terminate the installment agreement.
(2)Underpayment cases. In a case in-
volving an underpayment of income tax,
a requesting spouse is eligible for a re-
fund of separate payments that he or she
made after July 22, 1998, if the request-
ing spouse establishes that he or she pro-
vided the funds used to make the payment
for which he or she seeks a refund. A re-
questing spouse is not eligible for refunds
of payments made with the joint return,
joint payments, or payments that the non-
requesting spouse made.
(3)Other limitations. The availability
of refunds is subject to the refund limita-
tions of section 6511.
SECTION 5. PROCEDURE
A requesting spouse seeking equi-
table relief under section 66(c) or section
6015(f) must file Form 8857,Request for
Innocent Spouse Relief (and Separation of
Liability, and Equitable Relief), or other
similar statement signed under penalties of
perjury, within two years of the first collec-
tion activity against the requesting spouse.
SeeTreas. Reg. § 1.6015–5(b)(2)(i) for
the definition of collection activity.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Revenue Procedure 2000–15, 2000–1
C.B. 447, is superseded.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective for
requests for relief filed on or after Novem-
ber 1, 2003. In addition, this revenue
procedure is effective for requests for re-
lief pending on November 1, 2003, for
which no preliminary determination letter
has been issued as of November 1, 2003.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Robin M. Tuczak of the
Office of Associate Chief Counsel, Proce-
dure and Administration (Administrative
Provisions and Judicial Practice Division).
For further information regarding this
revenue procedure, contact Ms. Tuczak at
(202) 622–4940 (not a toll-free call).
26 CFR 601.204: Changes in accounting periods and methods of accounting.
(Also Part I, § 442; 1.442–1.)
Rev. Proc. 2003–62
TABLE OF CONTENTS
SECTION 1. PURPOSE
............................................................................................ 300
SECTION 2. BACKGROUND....................................................................................... 300
.01TaxableYearDefined......................................................................................... 300
(1)Ingeneral................................................................................................ 300
(2) Annual accounting period.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
.02ChangeinTaxableYear....................................................................................... 301
(1)Ingeneral. .............................................................................................. 301
(2)Annualizationofshortperiodincome. ...................................................................... 301
(3) No retroactive change in annual accounting period.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301
.03ApprovalofaChange. ....................................................................................... 301
.04SpecialRuleforNewlyMarriedCouples........................................................................ 301
SECTION 3. SIGNIFICANT CHANGES.............................................................................. 301
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SECTION 4. SCOPE............................................................................................... 301
.01Applicability. ............................................................................................... 301
.02 Inapplicability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301
(1)Newlymarriedcouplessubjectto§1.442–1(d). ............................................................. 301
(2) Interest in a pass-through entity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 301
.03NonautomaticChanges....................................................................................... 302
.04Example.................................................................................................... 302
SECTION 5. DEFINITIONS......................................................................................... 302
.01Individual................................................................................................... 302
.02Pass-throughEntity........................................................................................... 302
.03FirstEffectiveYear........................................................................................... 302
.04ShortPeriod................................................................................................. 302
SECTION 6. TERMS AND CONDITIONS OF CHANGE................................................................ 302
.01InGeneral................................................................................................... 302
.02ShortPeriodTaxReturn. ..................................................................................... 303
.03RecordKeeping. ............................................................................................ 303
.04SubsequentYearTaxReturns.................................................................................. 303
.05CreationofNetOperatingLoss................................................................................ 303
.06CreationofGeneralBusinessCredits........................................................................... 303
.07 Concurrent Change for Related Entities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 303
SECTION 7. GENERAL APPLICATION PROCEDURES............................................................... 303
.01Approval.................................................................................................... 303
.02FilingRequirements.......................................................................................... 303
(1)Wheretofile............................................................................................. 303
(2)Whentofile.............................................................................................. 303
(3)Label.................................................................................................... 303
(4)Signaturerequirements.................................................................................... 303
(5)Nouserfee. ............................................................................................. 303
SECTION 8. REVIEW OF APPLICATION............................................................................ 303
.01ServiceCenterReview........................................................................................ 303
.02ReviewofDirector........................................................................................... 303
SECTION 9. EFFECTIVE DATE AND TRANSITION RULE............................................................. 303
.01EffectiveDate............................................................................................... 303
.02 Transition Rule. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304
SECTION 10. EFFECT ON OTHER DOCUMENTS.................................................................... 304
DRAFTING INFORMATION........................................................................................ 304
SECTION 1. PURPOSE
.01 This revenue procedure provides the
exclusive procedure under § 442 of the In-
ternal Revenue Code and § 1.442–1(b) of
the Income Tax Regulations for individu-
als within its scope filing federal income
tax returns on a fiscal year basis to ob-
tain automatic approval to change their an-
nual accounting period to a calendar year.
This revenue procedure modifies, ampli-
fies, and supersedes Rev. Proc. 66–50,
1966–2 C.B. 1260, and modifies and su-
persedes Rev. Proc. 81–40, 1981–2 C.B.
604. An individual that complies with all
of the applicable provisions of this revenue
procedure will be deemed to have estab-
lished a business purpose and to have ob-
tained the approval of the Commissioner
of Internal Revenue to change the individ-
ual's annual accounting period to a calen-
dar year under § 442 and the regulations
thereunder.
SECTION 2. BACKGROUND
.01Taxable Year Defined.
(1)In general. Section 441(b) and
§ 1.441–1(b)(1) provide that the term
“taxable year” generally means the tax-
payer's annual accounting period, if it is
a calendar or fiscal year, or, if applicable,
the taxpayer's required taxable year.
(2)Annual accounting period. Sec-
tion 441(c) and § 1.441–1(b)(3) provide
that the term “annual accounting period”
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means the annual period (calendar year
or fiscal year) on the basis of which the
taxpayer regularly computes its income in
keeping its books.
.02Change in Taxable Year.
(1)In general. Section 1.442–1(a)(1)
generally provides that a taxpayer that
wants to change its annual accounting
period and use a new taxable year must
obtain the approval of the Commissioner.
(2)Annualization of short pe-
riod income.Section 443(b) and
§ 1.443–1(b)(1)(i) generally provide that
if a return is made for a short period result-
ing from a change of an annual accounting
period, the taxable income for the short
period must be placed on an annual basis
by multiplying the income by 12 and di-
viding the result by the number of months
in the short period. Unless § 443(b)(2) and
§ 1.443–1(b)(2) apply, the tax for the short
period generally is the same part of the tax
computed on an annual basis as the num-
berofmonthsintheshortperiodisof12
months. Section 443(c) generally requires
a similar adjustment to the deduction for
personal exemptions.
(3)No retroactive change in annual ac-
counting period. Unless specifically au-
thorized by the Commissioner, a taxpayer
may not request, or otherwise make, a
retroactive change in annual accounting
period.
.03Approval of a Change. Section
1.442–1(b) provides, in part, that in or-
der to secure the approval of the Com-
missioner to change an annual accounting
period, a taxpayer must file an applica-
tion, generally on Form 1128,Application
to Adopt, Change, or Retain a Tax Year,
with the Commissioner within such time
andinsuchmannerasisprovidedinad-
ministrative procedures published by the
Commissioner. In general, a change in an-
nual accounting period will be approved
if the taxpayer establishes a business pur-
pose for the requested annual accounting
period and agrees to the Commissioner's
prescribed terms, conditions, and adjust-
ments for effecting the change.
.04Special Rule for Newly Married
Couples. Section 1.442–1(d) provides a
special rule under which a newly married
husband or wife may obtain automatic
approval to change his or her annual ac-
counting period in order to use the annual
accounting period of the other spouse so
that a joint return may be filed for the
first or second taxable year of that spouse
ending after the date of the marriage.
Generally, this change is made by filing
a federal income tax return for the short
period, and not by filing a Form 1128.
SECTION 3. SIGNIFICANT CHANGES
Significant changes to Rev. Proc.
66–50, as modified by Rev. Proc. 81–40,
include:
.01 Section 4.01 of this revenue proce-
dure provides that this revenue procedure
is the exclusive procedure for individuals
within its scope to automatically change
their annual accounting period to the cal-
endar year;
.02 Section 4.02 of this revenue proce-
dure does not limit the scope of this rev-
enue procedure to individuals who receive
only certain listed types of income;
.03 Section 4.02(2) of this revenue
procedure retains the general rule of Rev.
Proc. 66–50 that precluded the use of
the automatic change procedures by in-
dividuals deriving income from interests
in pass-through entities, but provides that
interests in pass-through entities will be
disregarded in certain circumstances;
.04 Section 6 of this revenue proce-
dure conforms the terms and conditions
applicable to annual accounting period
changes by individuals under this rev-
enue procedure to those of: Rev. Proc.
2002–37, 2002–1 C.B 1030, as clarified
and modified by Notice 2002–72, 2002–46
I.R.B. 843, and as modified by Rev. Proc.
2003–34, 2003–18 I.R.B. 856; Rev. Proc.
2002–38, 2002–1 C.B. 1037, as clari-
fied and modified by Notice 2002–72;
and Rev. Proc. 2002–39, 2002–1 C.B.
1046, as clarified and modified by Notice
2002–72 and as modified by Rev. Proc.
2003–34. These terms and conditions
include:
(1) a limitation on the carry
back of net
operating losses over $5
0,000 or general
business credits that a
re generated in the
short period; and
(2) a requirement that certain related
entities concurrently change their annual
accounting period to the new calendar tax-
able year of the individual owner; and
.05 Section 7.02 of this revenue proce-
dure extends the due date for filing a Form
1128 under this automatic revenue proce-
dure to the due date of the individual's fed-
eral income tax return (including exten-
sions) for the first effective year, as defined
in section 5.03.
SECTION 4. SCOPE
.01Applicability. Except as provided
in section 4.02, this revenue procedure,
which is the exclusive procedure for indi-
viduals within its scope, applies to an in-
dividual requesting automatic approval to
change the individual's annual accounting
period to a calendar year.
.02Inapplicability. This revenue pro-
cedure does not apply to:
(1)Newly married couples subject to
§ 1.442–1(d). An individual that is per-
mitted to change to the annual account-
ing period of the individual's spouse under
§ 1.442–1(d). See section 2.04 of this rev-
enue procedure.
(2)Interest in a pass-through entity.An
individual that has an interest in a pass-
through entity as of the end of the short
period. However, an interest in a pass-
through entity will be disregarded for this
purpose if any of the following conditions
are met:
(a) the pass-through entity would be re-
quired under the Code or regulations to
change its taxable year to the new calen-
dar taxable year of the individual (or, if ap-
plicable in the case of a controlled foreign
corporation (CFC) to a taxable year that
begins one month earlier than the new cal-
endar taxable year of the individual). See
section 6.07 of this revenue procedure for
a special term and condition related to this
exception;
(b) the pass-through entity is a fiscal-
year partnership that is owned equally (50-
percent) by two partners, one or both of
whom are individuals, and the individual
and the partnership both want to change
to the calendar taxable year of the other
50-percent partner. See section 6.07 of this
revenue procedure for a special term and
condition related to this exception;
(c) the new calendar taxable year
of the individual would result in no
change in, or less deferral (as described
in § 1.706–1(b)(3)) of income from
the pass-through entity than the present
taxable year of the individual. If the
pass-through entity is a partnership, CFC,
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or foreign personal holding company
(FPHC), the individual should compare
the existing deferral period (between the
pass-through entity's and the individual's
current taxable years) with the new de-
ferral period (between the new required
year of the pass-through entity and the
individual's new calendar taxable year).
See section 4.04 of this revenue procedure
for an example of this rule; or
(d) for pass-through entities not qualify-
ing for the exceptions in section 4.02(2)(a),
(b), or (c) of this revenue procedure, the
pass-through entity in which the individual
has an interest has been in existence for at
least three taxable years and the interest is
de minimis. For this purpose, an interest in
a pass-through entity isde minimisonly if,
for each of the prior three taxable years of
the individual:
(i) the amount of income (including
ordinary income or loss, capital gain or
losses, rents, royalties, interest, dividends,
and deduction equivalent of credits) from
such pass-through entity is less than or
equal to the lesser of (A) 5 percent of the
individual's gross income (without adjust-
ments) from all sources for those taxable
years, or (B) $500,000; and
(ii) the amount of the individual's gross
income (without adjustments) from all
such pass-through entities is, in the ag-
gregate, less than or equal to the amounts
described in (A) and (B) above. See sec-
tion 4.04 of this revenue procedure for an
example of this rule.
.03Nonautomatic Changes. Individu-
als that are not eligible to obtain automatic
approval for a change in accounting period
under this revenue procedure, applica-
ble regulations, or any other published
administrative procedures, must secure
prior approval from the Commissioner
for a change in annual accounting period
pursuant to § 442 and the regulations
thereunder.SeeRev. Proc. 2002–39.
.04Example(i) F, an individual hav-
ing a taxable year ending June 30, wants
to change F's taxable year to the calendar
year. F has interests in the capital and prof-
its of five partnerships, IJK, LMN, OPQ,
RST, and UVW. All of the partnerships
have been in existence for at least three tax-
able years. F's interest in IJK is greater
than 50 percent. IJK uses a majority in-
terest taxable year of June 30. F's interest
in LMN is 50 percent; the other 50 percent
interest is owned by G, an individual filing
federal income tax returns on a calendar
year basis. LMN also wants to change its
taxable year to a calendar year. LMN uses
a June 30 taxable year under the least ag-
gregate deferral rules of § 1.706–1(b)(3).
F's interests in OPQ, RST, and UVW are
15 percent, 10 percent, and 5 percent, re-
spectively. OPQ uses its majority interest
taxable year under § 706(b)(4), which ends
May 31; RST and UVW each use their
respective majority interest taxable years
under § 706(b)(4), which end December
31. F's distributive share of income/(loss)
from OPQ for each of the prior three tax-
able years is $5,000, $(1,000), and $2,000,
respectively. F's gross income for each of
those same taxable years from all sources
was $150,000.
(ii) F's interests in F's pass-through en-
tities will be disregarded only if each pass-
through entity satisfies one of the excep-
tions enumerated under section 4.02(2) of
this revenue procedure. F's interest in IJK
may be disregarded under the exception in
section 4.02(2)(a), because F is the major-
ity interest partner in IJK. F's interest in
LMN may be disregarded under the excep-
tion in section 4.02(2)(b), because both F
and LMN are changing to the calendar tax-
able year, which is the taxable year of indi-
vidual G, the other 50 percent partner. F's
interests in RST and UVW may each be
disregarded under the exception in section
4.02(2)(c), because F's new taxable year
would result in less deferral than F's old
taxable year (a new deferral period of 0
months as compared to the prior deferral
period of 6 months from December 31 and
June 30). Because F is not the majority
interest partner in OPQ, and because F's
new taxable year would not result in less
deferral from this partnership, F's interest
in OPQ may be disregarded only if thede
minimisexception in section 4.02(2)(d) is
satisfied. In this case, the income from
OPQ for each of the prior three taxable
years was less than the lesser of: (A) 5
percent of F's total gross income from all
sources ($150,000 x 5% = $7,500); or (B)
$500,000. Consequently, F's interest in
OPQ may be disregarded under thede min-
imisexception in section 4.02(2)(d). Be-
cause all of F's pass-through interests are
disregarded under section 4.02(2), F is el-
igible to change under this revenue proce-
dure.
SECTION 5. DEFINITIONS
The following definitions apply solely
for the purpose of this revenue procedure:
.01Individual. In the case of married
individuals, for any year in which a hus-
band and wife file separate federal income
tax returns, the term “individual” includes
only the husband or wife who is applying
to change his or her annual accounting pe-
riod under this revenue procedure. For any
year in which a husband and wife file a
joint federal income tax return, the term
“individual” includes both spouses, even if
only one spouse is applying to change an
annual accounting period under this rev-
enue procedure.
.02Pass-through Entity.Forpur-
poses of this revenue procedure the term
“pass-through entity” means a partnership;
a trust; an estate; a common trust fund (as
definedin§584);aCFC(asdefinedin
§ 957), but only if the individual is a U.S.
shareholder (as defined in § 951(b)); an
FPHC(asdefinedin§552),butonlyif
the individual is a U.S. shareholder (as
definedin§551(a));apassiveforeign
investment company (PFIC), but only if
the individual has elected to treat such
PFIC as a qualified electing fund (as
defined in § 1295); and a closely-held
real estate investment trust (as defined in
§ 6655(e)(5)(B)), but only to the extent the
individual is described in § 6655(e)(5)(A).
.03First Effective Year. The first effec-
tive year is the first taxable year for which
a change in annual accounting period is ef-
fective. Thus, in the case of a change, the
first effective year is the short period re-
quired to effect the change. The first ef-
fective year is also the first taxable year
for complying with all the terms and con-
ditions set forth in this revenue procedure
necessary to effect the change in annual ac-
counting period.
.04Short Period. An individual's short
period is the period beginning with the day
following the last day of the old taxable
year and ending with the day preceding the
first day of the new taxable year.
SECTION 6. TERMS AND
CONDITIONS OF CHANGE
.01In General. A change in annual ac-
counting period filed under this revenue
procedure must be made pursuant to the
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terms and conditions provided in this rev-
enue procedure.
.02Short Period Tax Return.Theindi-
vidual must file a federal income tax re-
turn for the short period required to ef-
fect a change in annual accounting pe-
riod by the due date of that return, includ-
ing extensions, pursuant to § 1.443–1(a).
The individual's taxable income for the
short period must be annualized and the
tax must be computed in accordance with
the provisions of §§ 443(b) and (c), and
§§ 1.443–1(b) and (c).
.03Record Keeping. The books of the
individual (records reflecting income ade-
quately and clearly on the basis of an an-
nual accounting period) must be closed as
of the last day of the first effective year.
.04Subsequent Year Tax Returns.Re-
turns for subsequent taxable years gener-
ally must be made on the basis of a full 12
months ending on the last day of the new
calendar taxable year, unless the individual
secures the approval of the Commissioner
to change that taxable year.
.05Creation of Net Operating Loss.If
the individual generates a net operating
loss (NOL) in the short period required to
effect a change in annual accounting pe-
riod, the individual may not carry the NOL
back, but must carry it over in accordance
with the provisions of § 172, beginning
with the first taxable year after the short
period. However, except as otherwise pro-
vided in the Code or regulations, the short
period NOL must be carried back or car-
ried over in accordance with § 172 if it is
either: (a) $50,000 or less, or (b) less than
the NOL generated for the full 12-month
period beginning with the first day of the
short period. The individual must wait
until this 12-month period has expired to
determine whether the individual qualifies
for the exception in (b) above.
.06Creation of General Business Cred-
its. If there is an unused general business
credit or any other unused credit gener-
ated in the short period, the individual must
carry that unused credit forward. An un-
used credit from the short period may not
be carried back.
.07Concurrent Change for Related En-
tities. If an individual's interest in a pass-
through entity is disregarded pursuant to
section 4.02(2) because the related entity
will be required to change its taxable year
to the individual's new calendar taxable
year (or, if applicable, in the case of a CFC,
to a taxable year beginning one month
earlier than the individual's new taxable
year), the related entity must change its
taxable year concurrently either under Rev.
Proc. 2002–37 or Rev. Proc. 2002–38,
whichever is applicable. The related party
is required to change notwithstanding the
testing date provisions in § 706(b)(4) or
898(c)(1)(C)(ii).
SECTION 7. GENERAL APPLICATION
PROCEDURES
.01Approval. Approval is hereby
granted to any individual within the scope
of this revenue procedure to change the
individual's annual accounting period,
provided the individual complies with all
the applicable provisions of this revenue
procedure. Approval is granted beginning
with the first effective year. Individuals
granted approval under this revenue pro-
cedure to change their annual accounting
period are deemed to have established a
business purpose for the change to the
satisfaction of the Commissioner.
.02Filing Requirements.
(1)Where to file. An individual who
wants to change the individual's annual ac-
counting period pursuant to the provisions
of this revenue procedure must complete
and file a Form 1128 with the Director, In-
ternal Revenue Service Center, Attention:
ENTITY CONTROL, where the individ-
ual files the individual's federal income tax
return. No copies of Form 1128 are re-
quired to be sent to the national office. The
individual also must attach a copy of the
Form 1128 to the individual's federal in-
come tax return filed for the short period
required to effect the change.
(2)When to file. A Form 1128 filed
pursuant to this revenue procedure will
be considered timely filed for purposes of
§ 1.442–1(b)(1) only if it is filed on or be-
fore the due date (including extensions) for
filing the federal income tax return for the
short period required to effect such change.
(3)Label. In order to assist in the pro-
cessing of the change in annual account-
ing period, reference to this revenue pro-
cedure must be made a part of the Form
1128 by either typing or legibly printing
the following statement at the top of page 1
of the Form 1128: “FILED UNDER REV.
PROC. 2003–62.”
(4)Signature requirements.TheForm
1128 must be signed by the individual. If
an individual is treated as including the
husband and wife under section 5.01 of this
revenue procedure, the Form 1128 must be
signed by both the husband and the wife.
(5)No user fee.Auserfeeisnotre-
quired for an application filed under this
revenue procedure and, except as provided
in section 8.01 of this revenue procedure,
the receipt of an application filed under this
revenue procedure generally will not be ac-
knowledged.
SECTION 8. REVIEW OF
APPLICATION
.01Service Center Review.AService
Center may deny a change of annual ac-
counting period under this revenue proce-
dure only if: (a) the Form 1128 is not filed
timely, or (b) the individual fails to meet
the scope or any term and condition of this
revenue procedure. If the change is denied,
the Service Center will return the Form
1128 with an explanation of the reason for
the denial.
.02Review of Director. The appropri-
ate director may ascertain if the change
in annual accounting period was made in
compliance with all the applicable provi-
sions of this revenue procedure. Individ-
uals changing their annual accounting pe-
riod pursuant to this revenue procedure
without complying with all the provisions
(including the terms and conditions) of
this revenue procedure ordinarily will be
deemed to have initiated the change in
annual accounting period without the ap-
proval of the Commissioner. Upon exam-
ination, an individual that has initiated an
unauthorized change of annual accounting
period may be denied the change. For ex-
ample, an individual may be required to
recompute the individual's taxable income
or loss in accordance with the individual's
former taxable year.
SECTION 9. EFFECTIVE DATE AND
TRANSITION RULE
.01Effective Date. This revenue proce-
dure generally is effective for all changes
in annual accounting periods for which the
first effective year ends on or after July 7,
2003. However, if the time period for filing
Form 1128 with respect to a taxable year
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set forth in section 7.02(2) of this revenue
procedure has not yet expired, an individ-
ual within the scope of this revenue pro-
cedure may elect early application of the
revenue procedure by providing the noti-
fication set forth in section 7.02(3) on the
topofpage1ofForm1128andbysatis-
fying the other procedural requirements of
section 7.
.02Transition Rule. If an individual
within the scope of this revenue procedure
filed an application with the national office
and the application is pending with the na-
tional office on July 7, 2003, the individ-
ual may obtain approval under this revenue
procedure. However, the national office
will process the application in accordance
with the authority under which it was filed,
unless by the later of August 21, 2003, or
the issuance of the letter ruling granting or
denying approval for the change, the indi-
vidual notifies the national office that the
individual wants to use this revenue proce-
dure. If the individual timely notifies the
national office that the individual wants to
use this revenue procedure, the national of-
fice may require the individual to make ap-
propriate modifications to the application
to comply with the applicable provisions
of this revenue procedure. In addition, any
user fee that was submitted with the appli-
cation will be refunded to the individual.
SECTION 10. EFFECT ON OTHER
DOCUMENTS
This revenue procedure modifies, am-
plifies, and supersedes Rev. Proc. 66–50,
1966–2 C.B. 1260, and modifies and su-
persedes Rev. Proc. 81–40, 1981–2 C.B.
604.
DRAFTING INFORMATION
The principal authors of this revenue
procedure are Roy A. Hirschhorn and
Jeffrey S. Marshall of the Office of As-
sociate Chief Counsel (Income Tax and
Accounting). For further information
regarding this revenue procedure, contact
Mr. Hirschhorn or Mr. Marshall at (202)
622–4960 (not a toll-free call).
26 CFR 601.105: Examination of returns and claims
for refund, credit or abatement; determination of cor-
rect tax liability.
(Also Part I, §§ 167, 168, 446, 481; 1.167(a)–11,
1.446–1.)
Rev. Proc. 2003–63
SECTION 1. PURPOSE
This revenue procedure provides a safe
harbor method under which the Internal
Revenue Service will treat a fiber optic
node and trunk line consisting of fiber op-
tic cable used in a cable television dis-
tribution system providing one-way and
two-way communication services as the
unit of property for computing deprecia-
tion under §§ 167 and 168 of the Internal
Revenue Code.
SECTION 2. BACKGROUND
.01 Cable television companies provide
broadcast and video programming to sub-
scribers. In recent years, many compa-
nies have upgraded their systems to pro-
vide new cable services such as digital
television, internet access through a ca-
ble modem, and telephony. Upgraded sys-
tems use fiber optic cable because optic
fibers have immense capacity and are re-
liable, and transmissions over them are not
susceptible to interference by outside sig-
nals. The fiber optic strands of glass (optic
fibers) within fiber optic cables carry ana-
log or digital signals in the form of light
waves. In comparison, coaxial cable car-
ries radio frequency signals. Bandwidth
is the range of radio frequencies or light
spectrum available for use by cable televi-
sion distribution systems for transmission.
.02 The design of cable television
distribution systems varies considerably
throughout the country. Programming
normally originates from an antenna,
satellite, microwave, film, or videotape
and is fed into the headend. The head-
end is electronic equipment that receives
programming signals and combines, am-
plifies, and converts the programming
signals for transmission throughout the
system. The distribution plant conveys the
programming signals from the headend to
subscribers. The distribution plant gen-
erally consists of optic transmission and
receiver devices, fiber optic cable (used
as trunk lines), fiber optic transfer nodes
(“nodes” containing optical receivers and
reverse optical transmitters), coaxial cable
(used as feeder or distribution cables),
amplifiers, taps, and coaxial drop cables
to the subscribers' properties.
.03 A fiber optic cable usually contains
several bundles of optic fibers. Many ca-
ble television distribution systems dedicate
one bundle from the headend to each node.
The nodes are the point of interface be-
tween the fiber optic cable and the feeder
or distribution cables, which carry the sig-
nals to, and past, subscribers' properties.
Fiber optic cable and node function to-
gether as an integrated unit. Nodes, how-
ever, are not usually interconnected or de-
pendent on one another; each node oper-
ates independently of other nodes.
.04 Subscribers generally cannot re-
ceive two-way communication services
until the node serving them is connected to
the equipment necessary for the services.
In order to provide two-way communi-
cation services, usually two optic fibers
are connected between the headend and
the node, even though the bundle of fibers
dedicated to the node may contain more
than two fibers. Typically, one optic fiber
is used for transmitting data downstream
from the headend to subscribers and an-
other optic fiber is used for transmitting
data upstream from subscribers.
.05 Section 167(a) provides that there
shall be allowed as a depreciation deduc-
tion a reasonable allowance for the exhaus-
tion, and wear and tear of property used in
a trade or business or held for the produc-
tion of income.
.06 The depreciation deduction pro-
vided by § 167(a) for tangible property
placed in service after 1986 generally is
determined under § 168. Section 168
prescribes two methods of accounting
for computing depreciation: the general
depreciationsystemin§168(a);andthe
alternative depreciation system (ADS) in
§ 168(g). Under either depreciation sys-
tem, the depreciation deduction is com-
puted by using a prescribed depreciation
method, recovery period, and convention.
.07 Rev. Proc. 87–56, 1987–2 C.B.
674, as clarified and modified by Rev.
Proc. 88–22, 1988–1 C.B. 785, sets forth
the class lives of property that are nec-
essary to compute depreciation under
§ 168. Rev. Proc. 87–56 prescribes
asset class 48.41, “CATV [Cable Tele-
vision]-Headend,” which includes assets
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such as towers, antennas, preamplifiers,
converters, modulation equipment, and
program non-duplication systems. This
asset class has a class life of 11 years,
which means that the property in this asset
class is classified as 7-year property under
§ 168(e)(1) with an applicable recovery
period of 7 years under § 168(c) and a re-
covery period of 11 years under § 168(g).
.08 Rev. Proc. 87–56 prescribes Asset
Class 48.42, “CATV-Subscriber Connec-
tion and Distribution Systems,” which
includes assets such as trunk and feeder
cable, connecting hardware, amplifiers,
power equipment, passive devices, direc-
tional taps, pedestals, pressure taps, drop
cables, matching transformers, multiple
set connector equipment, and converters.
This asset class has a class life of 10 years,
which means that the property in this asset
class is classified as 7-year property under
§ 168(e)(1) with an applicable recovery
period of 7 years under § 168(c) and a re-
covery period of 10 years under § 168(g).
Rev. Proc. 87–56 excludes from CATV
asset classes 48.41 and 48.42 assets used
to provide subscribers with two-way com-
munication services.
.09 Rev. Proc. 87–56 assigns a class
life of 24 years to property described in
asset classes 48.31 to 48.45 that is compa-
rable to property described in asset class
48.14, “Telephone Distribution Plant,”
and used for two-way exchange of voice
and data communication which is the
equivalent of telephone communication.
Comparable equipment does not include
cable television equipment used primarily
for one-way communication. See also
§ 168(e)(3)(E)(ii) and § 168(g)(3)(B),
under which any telephone distribution
plant and comparable equipment used
for two-way exchange of voice and data
communications is 15-year property with
an applicable recovery period of 15 years
under § 168(c) and a recovery period of
24 years under § 168(g).
.10 Under § 1.167(a)–11(b)(4)(iii)(b)of
the Income Tax Regulations, property is
included in the asset guideline class for the
activity in which the property is primar-
ily used. Property is classified according
to primary use even though the activity in
which such property is primarily used is in-
substantial in relation to all the taxpayer's
activities.
.11 Property is first placed in service in
the taxable year in which the property is
placed in a condition or state of readiness
and availability for a specifically assigned
function, whether in a trade or business,
in the production of income, in a tax-ex-
empt activity, or in a personal activity.See
§ 1.46–3(d)(1)(ii).
SECTION 3. SCOPE
.01Applicability. This revenue proce-
dure applies to taxpayers operating cable
television distribution systems designed to
provide one-way and two-way communi-
cation services to subscribers.
.02One-way and two-way communica-
tion services. For purposes of this revenue
procedure, one-way communication ser-
vices involve services in which broadcast
and video programming signals are sent
only downstream, that is, from the head-
endtosubscribers;andtwo-waycommu-
nication services involve services in which
property is used for the two-way exchange
between the headend and subscribers of
voice and data communications which is
the equivalent of telephone communica-
tion. Internet access through a cable mo-
dem and telephony (including IP (internet
protocol) telephony also known as voice-
over IP) are examples of two-way commu-
nication services.
SECTION 4. SAFE HARBOR METHOD
.01Unit of Property. The unit of prop-
erty for calculating depreciation under
§§ 167 and 168 is a node and the fiber
optic cable to that node, exclusive of any
fiber optic cable previously considered
placed in service under section 4.03 of this
revenue procedure and any optic fibers
sold by a taxpayer. Thus, for example, if a
taxpayer has a fiber optic cable containing
20 bundles of 6 optic fibers (120 total
optic fibers) and connects 2 optic fibers
to a node, the fiber optic cable (including
all 120 optic fibers) is a component of the
unit of property.
.02Determining primary use.Inde-
termining whether the unit of property
described in section 4.01 of this revenue
procedure is primarily used, within the
meaning of § 1.167(a)–11(b)(4)(iii)(b),
for providing one-way or two-way com-
munication services, a cable television
company must determine primary use
by using any reasonable manner that is
consistently applied to the taxpayer's units
of property described in section 4.01 of
this revenue procedure. If the unit of
property is primarily used for providing
one-way communication services, the
unit of property is assigned to asset class
48.42, “CATV-Subscriber Connection and
Distribution Systems,” and classified as
7-year property under § 168(e)(1) with
an applicable recovery period of 7 years
under § 168(c) and a recovery period
of 10 years under § 168(g). However,
if the unit of property is primarily used
for providing two-way communications
services, § 168(e)(3)(E)(ii) classifies the
unit of property as 15-year property with
an applicable recovery period of 15 years
under § 168(c) and a recovery period of
24 years under § 168(g). For purposes
of this revenue procedure, a cable televi-
sion company may determine primary use
based on either: the node within the unit of
property described in section 4.01 of this
revenue procedure; or the applicable cable
television distribution system for each
headend, provided the cable television
company maintains its books and records
based on each headend.
(1)Reasonable manner. A reasonable
manner includes, but is not limited to, de-
termining primary use by gross receipts or
by subscriber count for each service within
the applicable cable television distribution
system. However, for purposes of this safe
harbor method, determining primary use
by bandwidth is not considered reasonable.
(2)Change in primary use.Ifthepri-
mary use of the unit of property described
in section 4.01 of this revenue procedure
changes from providing either one-way
communication services to two-way
communication services, or two-way
communication services to one-way com-
munication services, § 168(i)(5) applies
beginning in the year of the change in use.
.03Placed in service. The unit of
property described in section 4.01 of this
revenue procedure is considered placed
in service for depreciation purposes when
placed in a condition or state of readiness
and availability for its specifically as-
signed function. The specifically assigned
function of a cable television company's
distribution system is to provide services
to subscribers. Thus, when a node is
connected to the equipment necessary for
providing one-way or two-way communi-
cation services to subscribers or potential
subscribers, the property is considered
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placed in service for purposes of §§ 167
and 168. Although a fiber optic cable
may contain more optic fibers than are
necessary to serve a single node, all optic
fibers in the unit of property are consid-
ered placed in service when the node is
ready and available as described above
and connected to at least one optic fiber in
the fiber optic cable.
.04Consistent treatment. Taxpayers us-
ing the unit of property described in sec-
tion 4.01 of this revenue procedure must
use it for all of a headend's nodes and fiber
optic cable. Except as provided in section
4.02 of this revenue procedure, taxpayers
are required to treat the unit of property
consistently for all purposes under §§ 167
and 168 and the regulations thereunder.
SECTION 5. CHANGE IN METHOD
OF ACCOUNTING AND AUDIT
PROTECTION
.01Change in method of accounting.A
change in a taxpayer's depreciation treat-
ment of cable television distribution sys-
tems (as described in section 4 of this rev-
enue procedure) is a change in method of
accounting to which §§ 446(e) and 481 ap-
ply. If a taxpayer within the scope of this
revenue procedure wants to change to the
safe harbor method provided in this rev-
enue procedure for cable television distri-
bution systems (as described in section 4 of
this revenue procedure) that are owned by
the taxpayer at the beginning of the year of
change, the taxpayer must follow the au-
tomatic change in method of accounting
provisions in Rev. Proc. 2002–9, 2002–1
C.B. 327 (as modified and amplified by
Rev. Proc. 2002–19, 2002–1 C.B. 696,
amplified, clarified, and modified by Rev.
Proc. 2002–54, 2002–35 I.R.B. 432, and
modified and clarified by Announcement
2002–17, 2002–1 C.B. 561) or any succes-
sor, with the following modifications:
(1) The scope limitations in section 4.02
of Rev. Proc. 2002–9 do not apply to a tax-
payer that wants to change to the safe har-
bor method for either its first or second tax-
able year ending after December 31, 2001;
and
(2) To assist the Service in processing
changes in method of accounting under
this section of the revenue procedure,
and to ensure proper handling, section
6.02(4)(a) of Rev. Proc. 2002–9 is mod-
ified to require that a Form 3115 filed
under this revenue procedure include the
statement: “Automatic Change Filed Un-
der Rev. Proc. 2003–63.” This statement
shouldbelegiblyprintedortypedonthe
appropriate line on the Form 3115.
.02Audit protection. If a taxpayer cur-
rently uses a method consistent with the
safe harbor method (as described in section
4 of this revenue procedure), the method
of accounting for depreciation of the tax-
payer's property described in section 4.01
will not be raised as an issue by the Ser-
vice in a taxable year that ends before Au-
gust 11, 2003. Also, if a taxpayer cur-
rently uses a method consistent with the
safe harbor method (as described in sec-
tion 4 of this revenue procedure) and its use
of that method is an issue under consider-
ation (within the meaning of section 3.09
of Rev. Proc. 2002–9) for taxable years in
examination, before an appeals office, or
before the U.S. Tax Court in a taxable year
that ends before August 11, 2003, that is-
sue will not be further pursued by the Ser-
vice.
SECTION 6. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 2002–9 is modified and am-
plified to include this change in method of
accounting in section 2 of the APPENDIX.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective on
August 11, 2003.
SECTION 8. DRAFTING
INFORMATION
The principal author of this revenue
procedure is Paul Handleman of the Office
of Associate Chief Counsel (Passthroughs
and Special Industries). For further infor-
mation regarding this revenue procedure,
contact Mr. Handleman at (202) 622–3040
(not a toll-free call).
Application Procedures and
Final Agreement for Withholding
Foreign Partnerships and
Withholding Foreign Trusts;
Additional Guidance for Qualified
Intermediaries Regarding
Withholding on Small or Related
Foreign Partnerships and Trusts.
Rev. Proc. 2003–64
SECTION 1. PURPOSE AND SCOPE
.01Guidance to Simplify Partnership
and Trust Withholding and Reporting
Obligations. The provisions of this rev-
enue procedure are designed to simplify
withholding and reporting obligations
for payments of income made to foreign
partnerships and foreign simple or grantor
trusts. This revenue procedure contains
the final withholding foreign partnership
(WP) and withholding foreign trust (WT)
agreements, described in Treasury Regu-
lation § 1.1441–5(c)(2)(ii) and (e)(5)(v),
and the application procedures for enter-
ing into such agreements. This revenue
procedure also amends the Qualified In-
termediary (“QI”) withholding agreement
(“QI agreement”), contained in Rev. Proc.
2000–12, 2000–1 C.B. 387, to add new
section 4A. New Section 4A of the QI
agreement provides additional rules for
QIs regarding withholding and reporting
on certain small or related foreign partner-
ships and foreign simple or grantor trusts
that do not enter into WP or WT agree-
ments. Similar rules are also incorporated
into the final WP and WT agreements. A
WP or WT agreement entered into during
a calendar year may be made effective as
of the first day of that calendar year. A QI
may apply the provisions of section 4A as
of the beginning of the 2003 calendar year.
.02Extension of Transitional Relief in
Notice 2001–4. Pending development of
the WP agreement, the IRS and Treasury
provided transitional relief for foreign
partnerships for calendar year 2001.See
Section IV of Notice 2001–4, 2001–1
C.B. 267. The IRS and Treasury extended
the transitional relief through calendar
year 2002.SeeNotice 2002–66, 2002–42
I.R.B. 715. The guidance provided in this
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revenue procedure makes further exten-
sions of this transitional relief for foreign
partnerships unnecessary. Section III.C of
Notice 2001–4 provides documentation
and reporting relief for foreign simple and
grantor trusts. The rules of Section III.C.
of Notice 2001–4 will no longer apply
after 2003 because the more comprehen-
sive guidance for trusts in this revenue
procedure make those rules unnecessary.
For the year 2003 a QI may apply the rules
of Section III.C. of Notice 2001–4 or the
rules of this revenue procedure.
SECTION 2. COMMENTS
ON PROPOSED WP AND WT
AGREEMENTS
.01Proposed WP and WT Agreements.
TheIRSandTreasuryissuedproposedWP
and WT agreements in Notice 2002–41,
2002–1 C.B. 1153. The proposed WP
and WT agreements provided streamlined
procedures designed to simplify documen-
tation and reporting. Under the provi-
sions of the proposed WP and WT agree-
ments,aWPorWTwouldbepermit-
ted to provide the withholding agent with
a Form W–8IMY as a WP or WT with-
out attached documentation from partners,
beneficiaries or owners. The WP or WT
would receive payments from the with-
holding agent in gross and would with-
hold and deposit tax, if any, based on the
Forms W–8 or W–9 that it receives from its
partners, beneficiaries or owners. The WP
or WT would report payments to, and tax
withheld from, its direct foreign partners,
beneficiaries or owners on Form 1042–S
on an individual basis or, by election, on
a pooled basis. Thus, a WP or WT would
be relieved of the requirement to disclose
to a withholding agent any documenta-
tion and payment information for partners,
beneficiaries or owners. A withholding
agent would be relieved of the responsi-
bility for collecting documentation, with-
holding and reporting payment informa-
tion for partners, beneficiaries or owners
of a WP or WT.
The financial community generally
responded favorably to the simplified pro-
cedures for documentation, reporting and
audit provided under the proposed WP and
WT agreements. The financial community
provided some comments about specific
provisions of the proposed agreements.
The financial community also raised con-
cerns that the WP and WT agreements may
not be as appropriate for certain foreign
partnerships and trusts and provided sug-
gestions for modification. In response, the
IRS and Treasury have amended several
provisions of the WP and WT agreements.
The IRS and Treasury have also developed
a new set of provisions for certain smaller
foreign partnerships and trusts and for
certain foreign partnerships and trusts that
are related to a QI, WP, or WT. Notwith-
standing the new rules below for certain
small or related partnerships and trusts,
the IRS and Treasury intend that the WP
and WT agreements may be entered into
in all circumstances in which a foreign
entity acting on behalf of its partners,
beneficiaries or owners provides Form
W–8IMY as proper documentation. It is
anticipated that the majority of foreign
partnerships and trusts with substantial
reportable income will seek to enter into
WP or WT agreements.
.02Specific Provisions of the WP and
WT Agreements. One category of com-
ments from the financial community ad-
dressed specific provisions of the WP and
WT agreements. The financial commu-
nity recommended the following: (1) the
term of the WP agreement should coincide
with the term of the partnership if a part-
nership with a limited term elects pooled
reporting; (2) the WP agreement should
not terminate following a termination of
the partnership under section 708(b)(1)(B)
(termination of partnership upon sale or
exchange of 50 percent or more of the to-
tal interest in partnership capital and prof-
its); (3) ordering rules should be added to
the WP and WT agreements to clarify the
partnership's or trust's withholding obliga-
tions on distributions; and (4) the validity
period of Form W–8BEN should be ex-
tended beyond three years. In addition,
commentators suggested that, in certain
circumstances, one or more of the follow-
ing provisions of the WP and WT agree-
ments should be modified to more closely
parallel the QI agreement: (1) documenta-
tion limited to Forms W–8 and W–9, (2)
application only to direct partners, benefi-
ciaries or owners, (3) frequency of audits
when pooled reporting is elected, and (4)
automatic termination.
The IRS and Treasury continue to
believe that, in general, the simplified
procedures contained in the WP and WT
agreements are appropriate given the
particular circumstances of partnerships
and trusts, and that these simplified pro-
cedures will reduce administrative and
audit costs as well as the risk of errors in
performing under the agreements. There-
fore, the final WP and WT agreements
are substantially the same as originally
proposed. For example, the WP and WT
agreements continue to require partners,
beneficiaries or owners to be documented
solely with Forms W–8 and W–9 and
do not permit reliance on the presump-
tion rules. The IRS and Treasury do not
believe it is appropriate to modify the doc-
umentation requirements to match those
applicable to QIs given the significant
differences between foreign partnerships
and trusts and QIs. Unlike QIs, foreign
partnerships and trusts generally are not
subject to know-your-customer (KYC)
rules. Therefore, the IRS is unable to
rely on regulators to ensure that a WP or
WT is properly documenting its partners,
beneficiaries or owners.
Where appropriate, however, certain
provisions of the WP and WT agreements
have been modified to be more similar to
provisions in the QI agreement. The WP
and WT agreements have been modified
as follows in response to comments by the
financial community.
Term of the Agreement. The WP or WT
agreement continues in force indefinitely
unless the WP or WT has elected to report
on Form 1042–S on a pooled basis. As
originally proposed, the term of the agree-
ment of a WP or WT that elected pooled
reporting was six years and was renew-
able. The six year renewable term contin-
ues to be available. In addition, the WP or
WT may elect to use a longer non-renew-
able term of up to fifteen years. This op-
tional longer term was added in response to
comments that investment partnerships or
trusts are often formed with limited terms,
usually ranging from ten to fifteen years
and that having the term of the WP or WT
agreement coincide with the term of the
trust or partnership would facilitate com-
pliance. See Sections 9.01 and 9.02 of
the WP and WT agreements, Appendices
1and2.
Automatic Termination.IftheWPor
WT fails to document any partner, bene-
ficiary or owner with Form W–8 or W–9
by the time withholding is required under
the agreement, then, unless the WP or
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WT cures its failure, the agreement will
automatically terminate effective Decem-
ber 31st of the year in which the failure
is discovered. In response to comments,
the final WP or WT agreements, first,
extend the date for curing documentation
failures from January 31 to March 15
and, second, add an alternative method
for curing. Thus, the final WP and WT
agreements allow reinstatement as of the
date the agreement is terminated not only
if the WP or WT is able to obtain doc-
umentation for undocumented partners,
beneficiaries or owners before March 15
of the year following the year in which
the agreement automatically terminated,
but, alternatively, if all undocumented
partners have ceased to be partners in WP
before March 15 of the year following
the year in which the agreement automat-
ically terminated. No change was made
in response to the comment that the WP
agreement should not terminate following
a termination of the partnership under
section 708(b)(1)(B). Consistent with the
application of section 708(b)(1)(B) in
numerous other areas, the WP agreement
must terminate in this case because section
708(b)(1)(B) terminates the partnership
for tax purposes.
Withholding on Distributions.TheWP
or WT receives payments from the with-
holding agent in gross and withholds and
deposits tax, if any, based on the Forms
W–8 or W–9 that it receives from its part-
ners, beneficiaries or owners. The WP or
WT must withhold on the date it makes a
distribution to a direct foreign partner, ben-
eficiary or owner that includes an amount
subject to withholding. Comments sug-
gested that ordering rules should be added
to the WP and WT agreements to clar-
ify the partnership's or trust's withholding
obligations on distributions. Rather than
developing a complex set of ordering rules,
a provision has been added to the final WP
and WT agreements that allows the WP or
WT to determine the amount of withhold-
ing on a distribution based on a reason-
able estimate of the partner, beneficiary or
owner's distributive share of income sub-
ject to withholding for the year. See Sec-
tion 3.03 of the WP and WT agreements,
Appendices 1 and 2.
Application to Direct Partners, Benefi-
ciaries or Owners. As originally proposed,
the WP and WT agreements provided that
a partnership or trust could act as a WP or
WT only for its direct partners, beneficia-
ries or owners that were not intermediaries
or flow-through entities. The WP or WT
could elect to report on Forms 1042–S on
a pooled basis for its direct partners, bene-
ficiaries or owners. For all its indirect part-
ners, beneficiaries or owners, however, the
WP or WT was required to pass documen-
tation up to the withholding agent. Thus
individual Form 1042–S reporting was re-
quired for each indirect partner, benefi-
ciary, or owner. The IRS and Treasury be-
lieve it is appropriate to modify these rules
only in specific situations. Thus, the final
WP and WT agreements contain two new
provisions. As discussed in Section 3.03
of this revenue procedure, the first provi-
sion may be applied to indirect partners,
beneficiaries or owners that are small part-
nerships and trusts. This provision con-
tains streamlined rules similar to the U.S.
rules for joint account holders. As dis-
cussed in Section 3.04 of this revenue pro-
cedure, the second provision may be ap-
plied to indirect partners, beneficiaries or
owners that are partnerships or trusts that
are related to the WP or WT. This pro-
vision contains rules similar to those for
private arrangement intermediaries (PAIs)
under the QI agreement. Under both provi-
sions, the indirect account holders must be
documented with Forms W–8 (and not any
other documentation). See Section 10 of
the WP and WT agreements, Appendices
1 and 2.
Frequency of Audit. Unless the WP or
WT has elected to report on Form 1042–S
on a pooled basis, it will be subject to audit
only if selected for audit by the IRS. Un-
der the proposed agreement if pooled re-
porting was elected, the external audit oc-
curred every two years and examined the
two previous years. In response to com-
ments that a WP's or WT's audit cover-
age should match that of a QI, the WP
and WT agreements have been amended
to conform the audit cycle for the six year
agreement to the audit cycle under the QI
agreement. Therefore, if the WP or WT
elects pooled reporting and a six year term,
it must agree to have the external auditor
conduct an audit of the second and fifth full
calendar year that the agreement is in ef-
fect. The two year audit cycle has been
retained, however, for a WP or WT that
elects pooled reporting and a non-renew-
able term of up to fifteen years. See Sec-
tions 8.03 and 8.04 of the WP and WT
agreements, Appendices 1 and 2.
Validity Period of Form W–8.This
revenue procedure does not include any
modifications to address comments from
the financial community regarding the
extension of the validity period of Form
W–8BEN. The IRS and Treasury will
continue to study these comments.
.03Certain Smaller Partnerships and
Trusts. The financial community has
suggested that the proposed WP and WT
agreements are less suitable for smaller
partnerships and family trusts. Commen-
tators provided information indicating
that a significant portion of foreign part-
nerships or trusts with accounts with QIs
are small partnerships or trusts that re-
ceive minimal U.S. source income and
may not have the resources to undertake
documentation, withholding and report-
ing responsibilities at their own level.
Commentators noted that the partners,
beneficiaries or owners of these part-
nerships and trusts generally are foreign
persons that are all from the same country
orotherwisesubjecttothesamerateof
withholding on U.S. source income.
Commentators recommended that the
IRS establish a threshold, below which
a QI would be able to handle the doc-
umentation, reporting (including pooled
reporting) and withholding obligations un-
der simplified rules, subject to verification
through additional documentation require-
ments. Commentators suggested that, to
the extent all partners, beneficiaries or
owners are not entitled to the same rate of
withholding, the QI, WP, or WT could be
required to withhold at the highest appli-
cable rate without a withholding statement
(or to obtain a withholding statement and
apply the different rates), and to perform
pooled reporting on Form 1042–S. Com-
mentators noted that the QI could then be
responsible for monitoring the account to
ensure that documentation is received and,
in the event the account holder received
reportable amounts above a certain thresh-
old, waivers of confidentiality could be
obtained to allow the QI to report on Form
1042–S on an individual basis. Similar
comments were also submitted for situa-
tions in which these smaller partnerships
and trusts were partners, beneficiaries or
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owners of larger foreign partnerships or
trusts that become WPs or WTs.
In response to these comments, the IRS
and Treasury have developed a new pro-
vision that may be applied to a small for-
eign partnership or simple or grantor trust
that is an account holder of a QI. This pro-
vision appears in new section 4A of the
QI agreement. See Appendix 3. Similar
rules, applicable to a foreign partnership
or simple or grantor trust that is a partner,
beneficiary or owner of a WP or WT, are
incorporated into the WP and WT agree-
ments. See Section 10 of the WP and WT
agreements, Appendices 1 and 2. This pro-
vision is not available to partnerships or
trusts if any partner, beneficiary or owner
is a U.S. person or a passthrough partner,
beneficiary or owner. Below is a summary
of the relevant rules.
Income Threshold. The QI, WP, or WT
may apply this provision only to a foreign
partnership or trust that receives from it
less than $200,000 of reportable amounts
for a calendar year.
Written Agreement. The partnership or
trust must agree in writing that it will make
available to the QI's, WP's, or WT's audi-
tor, if requested, records that establish that
documentation was provided for all of its
partners, beneficiaries or owners.
Documentation. A QI must obtain ei-
ther Form W–8 or other documentation
provided in its QI agreement from each
partner, beneficiary or owner. A WP or
WT must obtain a Form W–8 from each
partner, beneficiary or owner. Addition-
ally, the small partnership or trust must
provide a Form W–8IMY with the required
withholding statement. The withholding
statement, however, need not provide any
allocation information.
Withholding. Similar to the U.S. rules
for joint account holders, a QI, WP, or
WT must allocate payments to the part-
ner, beneficiary or owner that is subject
to the highest rate of withholding. The
QI, WP, or WT may report the reportable
amounts received during the calendar year
by these small partnerships or trusts in its
Form 1042–S reporting pools for direct ac-
count holders. Under the regulations that
would otherwise apply, the partnership or
trust must provide the QI, WP, or WT a
withholding statement that, among other
things, allocates the payment to each of
the partners in the partnership. The with-
holding agent must withhold and report for
each partner, beneficiary, or owner, sepa-
rately to the IRS. The new provision sim-
plifies these procedures by relieving the
partnership or trust of the responsibility for
providing allocation information and by al-
lowing the QI, WP, or WT to allocate pay-
ments to the partner, beneficiary or owner
that is subject to the highest rate of with-
holding.
Refunds.AQI,WP,orWTmaynot
include any payments made to such small
foreign partnership or trust in any collec-
tive refund claim pursuant to the general
provisions of QI, WP, or WT agreements.
Instead, if a partner, beneficiary, or owner
is subject to a lower withholding rate than
the other partners, beneficiaries or owners,
that partner, beneficiary or owner may
file a refund claim directly with the IRS
if the time period has elapsed for the QI,
WP, or WT to apply the reimbursement
or set-off procedures. To apply for such a
refund, the partner, beneficiary or owner
must have an individual Form 1042–S.
Upon request, a QI, WP, or WT may file
a separate Form 1042–S for any partner,
beneficiary or owner. A QI, WP, or WT
may do so only if the partnership or trust
has provided a withholding statement that
includes allocation information for the
requesting partner, beneficiary or owner
and the partnership or trust has agreed to
provide additional information requested
by the QI's, WP's, or WT's auditor to
substantiate the information.
Timing. A QI, WP, or WT may gener-
ally apply these special rules to a foreign
partnership or trust on a year-by-year ba-
sis.
Failure to Provide Records.AQI,WP,
or WT may not apply these rules to a part-
nership or trust if the partnership or trust
has failed to make available to the QI's,
WT's or WP's auditor requested records
within 90 days after the request. Upon
such failure, the QI, WP, or WT must
treat such partnership or trust under the
general rules, must correct its withholding
and must file corrected Forms 1042 and
1042–S for the individual partners, bene-
ficiaries or owners.
.04Certain Related Partnerships and
Trusts.
Additionally, commentators suggested
that the rules for indirect account hold-
ers should be modified for certain partner-
ships and trusts that are related to a QI,
WP, or WT. Commentators suggested that
these partnerships or trusts (such as spon-
sored funds) were able to determine allo-
cations and withholding amounts in accor-
dance with U.S. tax rules but that the QI,
WP, or WT should retain the withholding
and reporting responsibility.
In response to these comments, the IRS
and Treasury have developed new rules
that allow a foreign partnership or trust that
is related to a QI, WP, or WT to provide
the QI, WP, or WT the information neces-
sary for the QI, WP, or WT to withhold and
report on reportable amounts. The part-
nership or trust, however, retains the doc-
umentation identifying its partners, bene-
ficiaries or owners. Under these rules, the
partnership or trust acts as the QI's, WP's,
or WT's agent in applying the QI, WP or
WT agreement to its partners, beneficia-
ries or owners. The QI, WP or WT, how-
ever, must remain liable for the actions per-
formed by the partnership or trust. These
provisions appear in new section 4A.02 of
the QI agreement (see Appendix 3) and in
Section 10.02 of the WP and WT agree-
ments (see Appendices 1 and 2). Below is
a summary of these rules.
Related Partnership or Trust.Toad-
dress compliance concerns, a QI, WP, or
WT may apply these procedures to a for-
eign partnership or trust only if the QI, or
an affiliate of the QI, or WP or WT is a gen-
eral partner of the partnership or a trustee
of the trust.
Written Agreement.TheQI,WPorWT
and the partnership or trust must agree, in
writing, that the partnership ortrust will act
as agent of the QI, WP, or WT under the
QI, WP or WT agreement and will make
available, upon request, to the QI's, WP's,
or WT's auditor records that establish com-
pliance with the relevant provisions of the
QI, WP, or WT agreement.
Documentation. The related foreign
partnership or trust must provide the QI,
WP, or WT with a Form W8–IMY together
with a withholding statement providing in-
formation necessary for the QI, WP, or
WT to fulfill its withholding, reporting
and filing obligations. The withholding
statement may include pooled information
for direct partners, beneficiaries or owners
that are not intermediaries or flow-through
entities. The partnership or trust need not
provide to the QI, WP or WT the underly-
ing documentation for such partners, ben-
eficiaries or owners. However the partner-
ship or trust must provide to the QI, WP
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or WT the underlying documentation for
indirect partners, beneficiaries or owners
of such partnerships or trusts, or for di-
rect partners, beneficiaries or owners that
are intermediaries, flow-through entities or
U.S. nonexempt recipients.
Liability. By entering into the agree-
ment with the related foreign partnership
or trust, the QI, WP, or WT agrees that it
is not assigning liability for performance
of any of its obligations under its QI, WP,
or WT agreement. Similar to the rules that
apply to a PAI under a QI agreement, the
QI, WP, or WT and the related foreign part-
nership or trust are jointly and severally li-
able for any tax, penalties, and interest for
the partnership's or trust's failure to meet
any obligations that arise out of its agree-
ment with the QI, WP, or WT.
Withholding and Reporting.There-
lated foreign partnership or trust must
not assume withholding or reporting re-
sponsibility. Withholding and reporting
responsibility remains with the QI, WP,
orWT.TheQI,WP,orWTmustfile
separate Forms 1042–S for each related
foreign partnership or trust to which it
is applying these rules reflecting pooled
basis information. The QI, WP, or WT
must apply the specific payee reporting
provisions of the regulations to indirect
partners, beneficiaries or owners, and to
direct partners, beneficiaries or owners
that are U.S. non-exempt recipients. See
Treas. Reg. § 1.1441–1 and 1.1441–5.
Timing. A QI, WP, or WT may gener-
ally apply these special rules to a related
foreign partnership or trust on a year-by-
year basis.
Failure to Provide Records.AQI,WP,
or WT may not apply these rules to a part-
nership or trust if the partnership or trust
has failed to make available to the QI's,
WT's or WP's auditor requested records
within 90 days after the request. Upon
such failure, the QI, WP, or WT must
treat such partnership or trust under the
general rules, must correct its withholding
and must file corrected Forms 1042 and
1042–S for the individual partners, bene-
ficiaries or owners.
.04Modifications.TheIRSwillcon-
sider modifications of the QI agreement
and the WP or WT agreements only in rare
and unusual circumstances. The IRS will
not accept, however, any changes that it
determines would provide a QI, partner-
ship or trust with a competitive advantage
over other similarly situated QI's, partner-
ships or trusts. In its sole discretion, the
IRS may agree, or refuse, to adopt the sug-
gested modifications for a particular case.
SECTION 3. APPLICATION
PROCEDURES FOR FINAL WP
OR WT AGREEMENTS
.01Contents of the Application Pack-
age. A prospective WP or WT must sub-
mitanapplicationtobecomeaWPorWT.
The application package must include the
information specified in this Section 3.01
and any additional information and docu-
mentation requested by the IRS:
(1) A statement identifying what type
of entity the applicant is (i.e., a foreign
partnership or a foreign simple or grantor
trust) and that it requests to enter into a WP
or WT agreement with the IRS.
(2) The applicant's name, address, and
employer identification number(s) (EIN),
if any.
(3) The country in which the applicant
was created or organized and a description
of the applicant's business.
(4) A list of the titles of those persons
who will be the responsible parties for per-
formance under the WP or WT agreement
and the names, addresses, and telephone
numbers of those persons as of the date the
application is submitted.
(5) A list describing, as of the date the
application is submitted, the type of part-
ners, beneficiaries or owners (e.g., U.S.,
foreign, treaty benefit claimant, or inter-
mediary or flow-through entity), the num-
ber of partners, beneficiaries or owners
within each type, and the estimated value
of U.S. investments that the WP or WT
agreement will cover.
(6)AcompletedFormSS–4(Applica-
tion for Employer Identification Number)
to apply for a withholding foreign part-
nership or trust Employer Identification
Number (WP-EIN, WT-EIN) to be used
solely for WP or WT reporting and fil-
ing purposes. An applicant must apply for
a WP-EIN or WT-EIN even if it already
has another EIN. The WP-EIN or WT-EIN
will be in addition to any EIN the WP or
WT already has, which should be retained.
(7) Two copies of the completed WP or
WT agreements, as set forth in Appendix
1 or 2 of this revenue procedure, executed
as provided in Section 3.03.
.02Requesting Modifications.Apart-
nership or trust that seeks modifications to
the WP or WT agreement must complete
and execute an application in accordance
with the instructions in Sections 3.01 and
3.03. In addition to the information re-
quired under Section 3.01, the applica-
tion must include (1) information describ-
ing the partnership's or trust's unique facts
and circumstances, (2) suggested modifi-
cations to the agreement based on those
unique facts and circumstances, and (3) an
analysis of the feasibility of any such sug-
gested modifications. In its sole discretion,
the IRS may agree, or refuse, to modify the
WP or WT agreement.
.03Executing the WP or WP Agree-
ment. ToapplyforWPorWTstatus,a
foreign partnership or trust must submit
a completed application package, as pro-
videdinSection3.01(andSection3.02if
applicable), including the Form SS–4 and
the two signed copies of the WP or WT
agreement, to:
Internal Revenue Service
LMSB:FS:QI
290 Broadway
New York, NY 10007–1867
USA
Upon acceptance, the IRS will return one
executed copy of the WP or WT agreement
to the partnership or trust. The IRS may
develop procedures to expedite processing
of these applications.
SECTION4. AMENDMENTTOQI
AGREEMENT
This revenue procedure amends the
QI agreement, contained in Rev. Proc.
2000–12, to add new section 4A, con-
tained in Appendix 3 of this revenue
procedure. Pursuant to Section 12.02 of
the QI agreement, this amendment applies
not only to QI agreements entered into on
or after the effective date of this revenue
procedure but also to all existing QI agree-
ments. A QI may apply the provisions of
section 4A as of the beginning of the 2003
calendar year.
SECTION 5. EFFECT ON OTHER
DOCUMENTS
Section III.C. of Notice 2001–4 is su-
perseded for calendar year 2004 and subse-
quent calendar years. Rev. Proc. 2000–12
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is modified to add to the QI Agreement a
new section 4A, as set forth in Appendix 3
of this revenue procedure.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective July
10, 2003.
SECTION 7. FURTHER
INFORMATION
For further information regarding this
Notice, contact Carl Cooper and Valerie
Mark Lippe of the Office of the Asso-
ciate Chief Counsel (International), Inter-
nal Revenue Service, 1111 Constitution
Avenue, NW, Washington, D.C. 20224.
Mr. Cooper or Ms. Mark Lippe may be
contacted by telephone at 202–622–3840
(not a toll-free call).
Appendices
Appendix 1.Withholding Foreign Partnership Agreement
Appendix 2.Withholding Foreign Trust Agreement
Appendix 3.Amendment to Qualified Intermediary Withholding Agreement
APPENDIX 1
Withholding Foreign Partnership
Agreement
SECTION 1. PURPOSE AND SCOPE
Sec. 1.01. General Obligations
Sec. 1.02. Parties to the Agreement
SECTION 2. DEFINITIONS
Sec. 2.01. Agreement
Sec. 2.02. Amounts Subject to NRA
Withholding
Sec. 2.03. Chapter 3 of the Code
Sec. 2.04. Chapter 61 of the Code
Sec. 2.05. External Auditor
Sec. 2.06. Flow-Through Entity
Sec. 2.07. Foreign Person
Sec. 2.08. Form W–8
Sec. 2.09. Form W–9
Sec. 2.10. Form 1042
Sec. 2.11. Form 1042–S
Sec. 2.12. Form 1065
Sec. 2.13. Intermediary
Sec. 2.14. Nonwithholding Foreign
Partnership
Sec. 2.15. NRA Withholding
Sec. 2.16. Overwithholding
Sec. 2.17. Partnership and Partner;
Direct Partner; Indirect Partner; Pass-
through Partner
Sec. 2.18. Payment
Sec. 2.19. Pooled Reporting (PR)
Election
Sec. 2.20. Reduced Rate of Withhold-
ing
Sec. 2.21. Reportable Amount
Sec. 2.22. Reporting Pool
Sec. 2.23. Schedule K–1
Sec. 2.24. TIN
Sec. 2.25. Underwithholding
Sec. 2.26. U.S. Person
Sec. 2.27. Withholding Agent
Sec. 2.28. Withholding Foreign Part-
nership (or WP)
Sec. 2.29. Withholding Foreign Part-
nership (or WP) EIN
Sec. 2.30. Withholding Statement
Sec. 2.31. Other Terms
SECTION 3. WITHHOLDING
RESPONSIBILITY
Sec. 3.01. NRA Withholding Respon-
sibility
Sec. 3.02. Timing of Withholding
Sec. 3.03. Withholding on Distribu-
tions
Sec. 3.04. Deposit Requirements
SECTION 4. DOCUMENTATION
REQUIREMENTS
Sec. 4.01. Documentation Require-
ments
Sec. 4.02. Documentation For Foreign
Partners
Sec. 4.03. Treaty Claims
Sec. 4.04. Documentation for Interna-
tional Organizations
Sec. 4.05. Documentation for For-
eign Governments and Foreign Central
Banks of Issue
Sec. 4.06. Documentation for Foreign
Tax-Exempt Organizations
Sec. 4.07. Documentation from Pass-
through Partners
Sec. 4.08. Documentation for U.S.
Exempt Recipients
Sec. 4.09. Documentation for U.S.
Non-Exempt Recipients
Sec. 4.10. Documentation Validity
Sec. 4.11. Documentation Validity
Period
Sec. 4.12. Maintenance and Retention
of Documentation
SECTION 5. WITHHOLDING
FOREIGN PARTNERSHIP
WITHHOLDING CERTIFICATE
Sec. 5.01. WP Withholding Certificate
Sec. 5.02. Withholding Statement
Sec. 5.03. Withholding Rate Pools
SECTION 6. TAX RETURN
OBLIGATIONS
Sec. 6.01. Form 1042 Filing Require-
ment
Sec. 6.02. Form 1042–S Reporting:
General Rule
Sec. 6.03. Form 1042–S Reporting:
Special Rule for PR Election
Sec. 6.04. Form 1065 Filing Require-
ment
Sec. 6.05. Retention of Returns
SECTION 7. ADJUSTMENTS
FOR OVER- AND UNDER-
WITHHOLDING; REFUNDS
Sec. 7.01. Adjustments for NRA
Overwithholding by WP
Sec. 7.02. Collective Credit or Refund
Procedures for NRA Overwithholding
Sec. 7.03. Adjustments for NRA Un-
derwithholding
Sec. 7.04. NRA Underwithholding
after Form 1042 Filed
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Sec. 7.05. Special Rule Regarding
Failure to Deposit Penalties
SECTION 8. EXTERNAL AUDIT
PROCEDURES
Sec. 8.01. In General
Sec. 8.02. Designation of External
Auditor
Sec. 8.03. Timing of External Audits:
General Rule
Sec. 8.04. Timing of External Audits:
Special Rule for PR Election
Sec. 8.05. Scope of External Audit
Sec. 8.06. External Auditor's Report
Sec. 8.07. Expanding Scope and Tim-
ing of External Audit
SECTION 9. EXPIRATION,
TERMINATION AND DEFAULT
Sec. 9.01. Term of Agreement: Gen-
eral Rule
Sec. 9.02. Term of Agreement: Spe-
cial Rule for PR Election
Sec. 9.03. Termination of Agreement
Sec. 9.04. Automatic Termination of
Agreement
Sec. 9.05. Significant Change in Cir-
cumstances
Sec. 9.06. Events of Default
Sec. 9.07. Notice and Cure
Sec. 9.08. Renewal
SECTION 10. CERTAIN
PARTNERSHIPS AND TRUSTS
Sec. 10.01. Certain Smaller Partner-
ships and Trusts
Sec. 10.02. Certain Related Partner-
ships and Trusts
SECTION 11. MISCELLANEOUS
PROVISIONS
THIS AGREEMENT is made in du-
plicate under and in pursuance of section
1441 of the Internal Revenue Code of
1986, as amended, (the “Code”) and Trea-
sury Regulation § 1.1441–5(c)(2) by and
between
,(re-
ferred to as “WP”), and the INTERNAL
REVENUE SERVICE (the “IRS”):
WHEREAS, WP has submitted an
application in accordance with Revenue
Procedure 2003–64 to be a withholding
foreign partnership for purposes of Treas.
Reg. § 1.1441–5(c)(2);
WHEREAS, WP and the IRS desire to
enter into an agreement to establish WP's
rights and obligations regarding documen-
tation, withholding, information reporting,
tax return filing, deposits, and adjustment
procedures under sections 1441, 1442,
1443, 1461, 6031, 6302, 6402, and 6414
of the Code with respect to certain types
of payments;
NOW, THEREFORE, in consideration
of the following terms, representations,
and conditions, the parties agree as fol-
lows:
SECTION 1. PURPOSE AND SCOPE
Sec. 1.01. General Obligations.
Except as otherwise provided in this
Agreement, WP's obligations with respect
to income distributed to, or included in
the distributive shares of, its partners are
governed by the Code and the regulations
thereunder. Except as provided in Sec-
tion 10 of this Agreement, WP may act
in its capacity as a withholding foreign
partnership pursuant to this Agreement
only for payments of amounts subject to
NRA withholding that are distributed to,
or included in the distributive shares of,
its direct partners. WP is required to act
as a withholding foreign partnership for
all such amounts paid to WP, or included
in WP's distributive share, by any with-
holding agent to which WP has provided a
Form W–8IMY that represents that WP is
acting as a withholding foreign partnership
with respect to such amounts. WP must
act as a withholding foreign partnership
for any such amounts paid with respect to
such a Form W–8IMY that are distributed
to, or included in the distributive shares of,
its direct foreign partners. WP may also
act as a withholding foreign partnership
for such amounts that are distributed to, or
included in the distributive shares of, its
direct partners that are U.S. persons. WP
may not act as a withholding foreign part-
nership, but must act as a nonwithholding
foreign partnership, for amounts subject to
NRA withholding that are distributed to,
or included in the distributive shares of,
passthrough partners or indirect partners,
except as provided under Section 10 of
this Agreement.
Sec. 1.02. Parties to the Agreement.
This Agreement applies to WP and the
IRS.
SECTION 2. DEFINITIONS
For purposes of this Agreement, the
terms listed below are defined as follows:
Sec. 2.01. Agreement.“Agreement”
means this Agreement between WP and
the IRS. All appendices to this Agreement
and WP's application to become a with-
holding foreign partnership are incorpo-
rated into this Agreement by reference.
Sec. 2.02. Amounts Subject to NRA
Withholding.An “amount subject to
NRA withholding” is an amount described
in Treas. Reg. § 1.1441–2(a). An amount
subject to NRA withholding shall not in-
clude interest paid as part of the purchase
price of an obligation sold between interest
payment dates or original issue discount
paid as part of the purchase price of an
obligation sold in a transaction other than
the redemption of such obligation, unless
the sale is part of a plan the principal
purpose of which is to avoid tax and WP
has actual knowledge or reason to know
of such plan.
Sec. 2.03. Chapter 3 of the Code.
Any reference to “chapter 3 of the Code”
means sections 1441, 1442, 1443, 1461,
1463, and 1464 of the Code.
Sec. 2.04. Chapter 61 of the Code.
Any reference to “chapter 61 of the Code”
means sections 6031, 6041, 6042, 6045,
6049, and 6050N of the Code.
Sec. 2.05. External Auditor.An
“external auditor” is any approved audi-
tor listed in Appendix A of this Agreement
that WP engages to perform the audits re-
quired by Section 8 of this Agreement.
Sec. 2.06. Flow-Through Entity.A
flow-through entity is a foreign partnership
described in Treas. Reg. § 301.7701–2 or
3 (other than a withholding foreign part-
nership), a foreign trust that is described
in section 651(a) of the Code (other than
a withholding foreign trust), or a foreign
trust all or a portion of which is treated as
owned by the grantor or other person un-
der sections 671 through 679 of the Code
(other than a withholding foreign trust).
For an item of income for which a treaty
benefit is claimed, an entity is also a flow-
through entity to the extent it is treated as
fiscally transparent under section 894 and
the regulations thereunder.
Sec. 2.07. Foreign Person.A“foreign
person” is any person that is not a “United
States person” and includes a “nonresident
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alien individual,” a “foreign corporation,”
a “foreign partnership,” a “foreign trust,”
and a “foreign estate,” as those terms are
defined in section 7701 of the Code.
Sec. 2.08. Form W–8.“Form W–8”
means a valid IRS Form W–8BEN,Cer-
tificate of Foreign Status of Beneficial
Owner for United States Tax Withholding;
IRS Form W–8ECI,Certificate of Foreign
Person's Claim for Exemption From With-
holding on Income Effectively Connected
With the Conduct of a Trade or Business
in the United States;IRSFormW–8EXP,
Certificate of Foreign Governments and
Other Foreign Organizations for United
States Tax Withholding; and IRS Form
W–8IMY,Certificate of Foreign Interme-
diary, Foreign Partnership, and Certain
U.S. Branches for United States Tax With-
holding, as appropriate. It also includes
any acceptable substitute form.
Sec. 2.09. Form W–9.“Form W–9”
means a valid IRS Form W–9,Request for
Taxpayer Identification Number and Cer-
tification, or any acceptable substitute.
Sec. 2.10. Form 1042.“Form 1042”
means an IRS Form 1042,Annual With-
holding Tax Return for U.S. Source Income
of Foreign Persons.
Sec. 2.11. Form 1042–S.“Form
1042–S” means an IRS Form 1042–S,
Foreign Person's U.S. Source Income Sub-
ject to Withholding.
Sec. 2.12. Form 1065.“Form 1065”
means an IRS Form 1065,U.S. Return
of Partnership Income, and the Schedules
K–1 associated with that form.
Sec. 2.13. Intermediary.An “inter-
mediary” means any person that acts on be-
half of another person, such as a custodian,
broker, nominee, or other agent.
Sec. 2.14. Nonwithholding Foreign
Partnership.A “nonwithholding foreign
partnership” is any foreign partnership that
is not acting as a withholding foreign part-
nership.
Sec. 2.15. NRA Withholding.For
purposes of this Agreement, “nonresident
alien (NRA) withholding” is any with-
holding required under chapter 3 of the
Code (other than sections 1445 or 1446),
whether the payment subject to withhold-
ing is made to an individual or to an entity.
Sec. 2.16. Overwithholding.The term
“overwithholding” means the excess of the
amount actually withheld over the amount
required to be withheld under chapter 3 of
the Code.
Sec. 2.17. Partnership and Part-
ner; Direct Partner; Indirect Partner;
Passthrough Partner.The terms “part-
nership” and “partner” are defined in sec-
tion 7701(a)(2) of the Code and the reg-
ulations thereunder. A direct partner is
a partner, other than an intermediary or
flow-through entity that is not itself a with-
holding foreign partnership or withhold-
ing foreign trust, for which WP acts as a
withholding foreign partnership. An indi-
rect partner is a person that owns a partner-
ship interest in WP through one or more
passthrough partners. A passthrough part-
ner is a direct or indirect partner in WP
that is an intermediary or flow-through en-
tity. As provided in Section 2.06 of this
Agreement, a withholding foreign partner-
ship or withholding foreign trust is not
a flow-through entity and thus is not a
passthrough partner.
Sec. 2.18. Payment.A“payment”is
considered made to a person if that per-
son realizes income whether or not such
income results from an actual transfer of
cash or other property. See Treas. Reg.
§ 1.1441–2(e).
Sec. 2.19. Pooled Reporting (PR)
Election.A “pooled reporting (PR) elec-
tion”isdefinedinSection6.03.
Sec. 2.20. Reduced Rate of With-
holding.A “reduced rate of withholding”
means a rate of withholding that is less
than 30 percent, either as a result of a re-
duction in withholding under the Code or
as a result of a reduction in withholding un-
der an income tax treaty.
Sec. 2.21. Reportable Amount.A
“reportable amount” means an amount
subject to NRA withholding (as defined
in Section 2.02 of this Agreement); U.S.
source deposit interest; and U.S. source
interest or original issue discount paid on
the redemption of short-term obligations.
The term does not include payments on
deposits with banks and other financial
institutions that remain on deposit for two
weeks or less. It also does not include
amounts of original issue discount arising
from a sale and repurchase transaction
completed within a period of two weeks or
less, or amounts described in Treas. Reg.
§ 1.6049–5(b)(7), (10), or (11) (relating
to certain foreign targeted registered obli-
gations and certain obligations issued in
bearer form).
Sec. 2.22. Reporting Pool.Areport-
ing pool is defined in Section 6.03 of this
Agreement.
Sec. 2.23. Schedule K–1.“Schedule
K–1” or “K–1” is the schedule associated
with the Form 1065 that itemizes an indi-
vidual Partner's Share of Income, Credits,
Deductions, etc.
Sec. 2.24. TIN.A“TIN”isaU.S.
taxpayer identification number.
Sec. 2.25. Underwithholding.“Un-
derwithholding” means the excess of the
amount required to be withheld under
chapter 3 of the Code over the amount
actually withheld.
Sec. 2.26. U.S. Person.A “United
States (or U.S.) person” is a person de-
scribed in section 7701(a)(30) of the Code,
the U.S. government (including an agency
or instrumentality thereof), a State of the
United States (including an agency or in-
strumentality thereof), or the District of
Columbia (including an agency or instru-
mentality thereof).
Sec. 2.27. Withholding Agent.A
“withholding agent” has the same meaning
as set forth in Treas. Reg. § 1.1441–7(a)
andincludesapayor. Asusedinthis
Agreement, the term generally refers to the
person making a payment to a withholding
foreign partnership.
Sec. 2.28. Withholding Foreign
Partnership (or WP).A “withholding
foreign partnership” is a person, described
in Treas. Reg. § 1.1441–5(c)(2), that has
entered into a withholding agreement with
the IRS to be treated as a withholding
foreign partnership and is acting in its
capacity as a withholding foreign partner-
ship.
Sec. 2.29. Withholding Foreign Part-
nership (or WP) EIN.A “withholding
foreign partnership EIN” or “WP-EIN”
means the employer identification number
assigned by the IRS to a withholding for-
eign partnership. WP's WP-EIN is only to
be used when WP is acting as a withhold-
ing foreign partnership. For example, WP
must give a withholding agent its non-WP
EIN, if any, rather than its WP-EIN, if
it is not acting as a withholding foreign
partnership and a taxpayer identification
number is required.
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Sec. 2.30. Withholding Statement.
The term “withholding statement” is de-
finedinSection5.02ofthisAgreement.
Sec. 2.31. Other Terms.Any term
not defined in this section has the same
meaning that it has under the Code, the
income tax regulations under the Code, or
any applicable income tax treaty.
SECTION 3. WITHHOLDING
RESPONSIBILITY
Sec. 3.01. NRA Withholding Re-
sponsibility.WP is subject to the with-
holding and reporting provisions applica-
ble to withholding agents under chapter
3 of the Code. Under chapter 3, a with-
holding agent must withhold 30 percent
of any payment of an amount subject to
NRA withholding made to a partner that
is a foreign person unless the withhold-
ing agent can reliably associate the pay-
ment with documentation upon which it
can rely to treat the payment as made to
a payee 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.
When it is acting as a withholding foreign
partnership, WP must assume NRA with-
holding responsibility for amounts subject
to NRA withholding that are distributed
to, or included in the distributive share of,
any direct partner, and WP must withhold
the amount required to be withheld under
chapter 3 of the Code. WP must provide a
Form W–8IMY that certifies to a withhold-
ing agent that makes a payment of such
amounts that WP is acting as a withhold-
ing foreign partnership, and WP must iden-
tify such amounts on the withholding state-
ment associated with that Form W–8IMY.
WP is not required to withhold when it
pays such amounts to another withhold-
ing foreign partnership or withholding for-
eign trust that has certified to WP on Form
W–8IMY that it is acting as a withhold-
ing foreign partnership or withholding for-
eign trust with respect to such identified
amounts. WP is not required to act as
a withholding foreign partnership for all
amounts that it receives from a withhold-
ing agent. Except as provided in Sec-
tion10ofthisAgreement,WPmaynot
act as a withholding foreign partnership
for amounts distributed to, or included in
the distributive share of, passthrough part-
ners or indirect partners. WP must act as
a nonwithholding foreign partnership for
such amounts. When WP is not acting
as a withholding foreign partnership, WP
must: 1) provide to the withholding agent
a Form W–8IMY with Part VI completed;
2) identify such amounts on the withhold-
ing statement associated with that Form
W–8IMY; and 3) provide the documen-
tation and information required by Treas.
Reg. § 1.1441–5(c)(3)(iii) and (iv).
Sec. 3.02. Timing of Withholding.
WP must withhold on the date it makes a
distribution to a direct foreign partner that
includes an amount subject to NRA with-
holding. To the extent a direct foreign part-
ner's distributive share of income subject
to withholding has not actually been dis-
tributed to the direct foreign partner, WP
must withhold on the direct foreign part-
ner's distributive share on the earlier of the
date that the statement required under sec-
tion 6031(b) of the Code (schedule K–1) is
mailed or otherwise provided to the partner
or the due date for furnishing the statement
(whether or not WP is required to prepare
and furnish the statement).
Sec. 3.03. Withholding on Distribu-
tions.WP may determine the amount of
withholding on a distribution based on a
reasonable estimate of the partner’s dis-
tributive share of income subject to with-
holding for the year. WP must correct the
estimated withholding to reflect the part-
ner’s actual distributive share on the earlier
of the date that the statement required un-
der section 6031(b) of the Code (schedule
K–1) is mailed or otherwise provided to the
partner or the due date for furnishing the
statement (whether or not WP is required
to furnish the statement). If that date is af-
ter the due date for the WP’s Forms 1042
and 1042–S (including extensions) for the
calendar year, WP may withhold and re-
port any adjustments required by the cor-
rected information in the following calen-
dar year.
Sec. 3.04. Deposit Requirements.
WP must deposit amounts withheld under
chapter 3 of the Code with a Federal Re-
serve bank or authorized financial institu-
tion at the time and in the manner provided
under section 6302 of the Code (see Treas.
Reg. § 1.6302–2(a) or § 31.6302–1(h)).
SECTION 4. DOCUMENTATION
REQUIREMENTS
Sec. 4.01. Documentation Require-
ments.WP agrees to obtain, review, and
maintain Forms W–8 and W–9 in accor-
dance with this Section 4. WP must ob-
tain a Form W–8 or W–9 from every direct
partner prior to the time that withholding
is required. WP agrees to make documen-
tation (together with any associated with-
holding statements and other documents
or information) available upon request for
inspection by WP's external auditor. WP
represents that none of the laws to which it
is subject prohibits disclosure of the iden-
tity of any partner or corresponding partner
information to WP's external auditor. WP
mayrelyontheFormsW–8andW–9itob-
tainsunderthisSection4asthebasisfor
determining its withholding and reporting
obligations.
Sec. 4.02. Documentation for For-
eign Partners.WP may treat a direct part-
ner as a foreign beneficial owner if the di-
rect partner provides a Form W–8 that sup-
ports such status. WP may treat a direct
partner that has provided a Form W–8 as
entitled to a reduced rate of NRA with-
holding if all the requirements for a re-
duced rate are met and the Form W–8 pro-
vided by the direct partner supports enti-
tlement to a reduced rate. Sections 4.03
through 4.06 of this Agreement describe
the specific documentation requirements
necessary for obtaining a reduced rate of
withholding in certain circumstances.
Sec. 4.03. Treaty Claims.WP may not
reduce the rate of withholding based on a
direct partner's claim of treaty benefits un-
less WP obtains from the partner a Form
W–8BEN with Part II of the form properly
completed, including the appropriate lim-
itation on benefits and section 894 certifi-
cations.
Sec. 4.04. Documentation for Inter-
national Organizations.WP may not
treat a direct partner as an international
organization entitled to an exemption
from withholding under section 892 of the
Code unless WP obtains a Form W–8EXP
from the international organization and
the name provided on the Form W–8EXP
is the name of an entity designated as an
international organization by executive
orderpursuantto22UnitedStatesCode
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288 through 288(f). If an international or-
ganization is not claiming benefits under
section 892 of the Code but under another
Code exception, the provisions of Section
4.02 of this Agreement apply rather than
the provisions of this Section 4.04.
Sec. 4.05. Documentation for
Foreign Governments and Foreign
Central Banks of Issue.
(A) Documentation For a Foreign
Government or Foreign Central Bank
of Issue Claiming an Exemption From
Withholding Under Section 892 or Sec-
tion 895.WP may not treat a direct partner
as a foreign government or foreign central
bank of issue exempt from withholding
under section 892 or 895 of the Code
unless—
(1)WP receives from the direct partner a
Form W–8EXP establishing that the direct
partner is a foreign government or foreign
central bank of issue;
(2)The income distributed to, or included
in the distributive share of, the direct part-
ner is the type of income that qualifies for
an exemption from withholding under sec-
tion 892 or 895; and
(3)WP does not know, or have reason to
know, that the direct partner is a controlled
commercial entity, that the income owned
by the foreign government or foreign cen-
tral bank of issue is being received from
a controlled commercial entity, or that the
income is from the disposition of an inter-
est in a controlled commercial entity.
(B) Treaty Exemption.WP may not
treat a direct partner as a foreign govern-
ment or foreign central bank of issue en-
titled to a reduced rate of withholding un-
der an income tax treaty unless it obtains
a Form W–8BEN that, under Section 4.03
of this Agreement, is sufficient to obtain a
reduced rate of withholding under a treaty.
(C) Other Code Exception.If a for-
eign government or foreign central bank of
issue is not claiming benefits under section
892 or section 895 of the Code but under
another Code exception (e.g., the portfolio
interest exception under sections 871(h) or
881(c) of the Code), the provisions of Sec-
tion 4.02 of this Agreement apply rather
than the provisions of this Section 4.05.
Sec. 4.06. Documentation for
Foreign Tax-Exempt Organizations.
(A) Reduced Rate of Withholding
Under Section 501.WP may not treat a
direct partner as a foreign organization de-
scribed under section 501(c) of the Code,
and therefore exempt from withholding
(or, if the direct partner is a foreign pri-
vate foundation, subject to withholding
at a 4-percent rate under section 1443(b)
of the Code) unless WP obtains a valid
Form W–8EXP with Part III of the form
properly completed.
(B) Treaty Exemption.WP may not
treat a direct partner as a foreign organi-
zation that is tax exempt or entitled to a
reduced rate of withholding under an in-
come tax treaty unless WP obtains a Form
W–8BEN that, under Section 4.03 of this
Agreement, is sufficient to obtain a re-
duced rate of withholding under a treaty.
(C) Other Exceptions.If a tax-ex-
empt entity is not claiming a reduced rate
of withholding because it is an organiza-
tion described under section 501(c) of the
Code or under an income tax treaty, but is
claiming a reduced rate of withholding un-
der another Code exception, the provisions
of Section 4.02 of this Agreement apply
rather than the provisions of this Section
4.06.
Sec. 4.07. Documentation for
Passthrough Partners.Except as pro-
videdinSection10ofthisAgreement,
WP shall not act as a withholding foreign
partnership with respect to an amount
subject to withholding distributed to, or
included in the distributive share of, a
passthrough partner, as defined in Section
2.17 of this Agreement. WP must forward
that passthrough partner's documentation
(and associated withholding statement and
documentation of indirect partners) to the
withholding agent from whom WP re-
ceives the amount subject to withholding.
WP may act as a withholding foreign part-
nership with respect to amounts subject to
withholding distributed to, or included in
the distributive share of, partners that are
themselves withholding foreign partner-
ships or withholding foreign trusts.
Sec. 4.08. Documentation for U.S.
Exempt Recipients.WP shall not treat a
partner as a U.S. exempt recipient unless
WP obtains a Form W–9 from the partner
on which the partner writes “Exempt” in
Part II of the form.
Sec. 4.09. Documentation for U.S.
Non-Exempt Recipients.WP shall not
treat a partner as a U.S. non-exempt recip-
ient unless WP obtains a Form W–9 from
the partner.
Sec. 4.10. Documentation Validity.
WP may not rely on Forms W–8 or W–9
if WP has actual knowledge or reason to
know that the information or statements
contained in the forms are unreliable or in-
correct. Once WP knows, or has reason to
know, that a Form W–8 or W–9 provided
by a direct partner is unreliable or incor-
rect, WP must obtain a new Form W–8 or
W–9 prior to the time withholding is re-
quired.
Sec. 4.11. Documentation Validity
Period.
(A) Form W–8.WPmayrelyon
a properly completed Form W–8 until
its validity expires under Treas. Reg.
§ 1.1441–1(e)(4)(ii).
(B) Form W–9.WPmayrelyona
properly completed Form W–9 as long as
it has not been informed by the IRS or
another withholding agent that the form is
unreliable.
Sec. 4.12. Maintenance and
Retention of Documentation.
(A) Maintaining Documentation.WP
shall maintain Forms W–8 and W–9 by re-
taining the original documentation, a certi-
fied copy, a photocopy or a microfiche, or
by electronic storage or similar means of
record retention.
(B) Retention Period.WP shall retain
a direct partner's Form W–8 or W–9 ob-
tained under this Section 4 for as long as
it may be relevant to the determination of
WP's tax liability under this Agreement.
SECTION 5. WITHHOLDING
FOREIGN PARTNERSHIP
WITHHOLDING CERTIFICATE
Sec. 5.01. WP Withholding Certifi-
cate.WP agrees to furnish a withhold-
ing foreign partnership withholding certifi-
cate to each withholding agent from which
it receives amounts subject to NRA with-
holding as a withholding foreign partner-
ship. The withholding foreign partnership
withholding certificate is a Form W–8IMY
(or acceptable substitute form) that certi-
fies that WP is acting as a withholding for-
eign partnership, contains WP's WP-EIN,
and provides all other information required
by the form. WP is not required to dis-
close, as part of that Form W–8IMY or its
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withholding statement, any information re-
garding the identity of a direct partner.
Sec. 5.02. Withholding Statement.
WP agrees to provide to each withholding
agent from which WP receives amounts
subject to NRA withholding as a withhold-
ing foreign partnership a written statement
(the “withholding statement”) identifying
the amounts for which WP acts as a with-
holding foreign partnership. The state-
ment forms an integral part of the Form
W–8IMY. The withholding statement may
be provided in any manner, and in any
form, to which WP and the withholding
agent mutually agree.
Sec. 5.03. Withholding Rate Pools.
When it is acting as a withholding foreign
partnership, WP must assume withholding
responsibility for amounts subject to with-
holding that are distributed to, or included
in the distributive shares of, its direct part-
ners. Accordingly, withholding rate pool
information is not required as part of WP's
withholding statement.
SECTION 6. TAX RETURN
OBLIGATIONS
Sec. 6.01. Form 1042 Filing
Requirement.
(A) In General.WP shall file a return
on Form 1042, whether or not WP with-
held any amounts under chapter 3 of the
Code, on or before March 15 of the year
following any calendar year in which WP
acts as a withholding foreign partnership.
In addition to the information specifically
requested on Form 1042 and the accompa-
nying instructions, WP shall attach a state-
ment setting forth the amounts of any over-
withholding or underwithholding adjust-
ments made under Treas. Reg. § 1.1461–2
and Sections 7.01 and 7.03 of this Agree-
ment, and an explanation of the circum-
stances that resulted in the over- or un-
der-withholding.
(B) Extensions for Filing Returns.
WP may request an extension of the time
for filing Form 1042, or any of the infor-
mation required to be attached to the form,
by submitting Form 2758,Application for
Extension of Time to File Certain Excise,
Income, Information, and Other Returns,
on or before the due date of the return. The
application shall be in writing, properly
signed by a duly authorized agent of WP,
and shall clearly set forth the following:
(1)The calendar year for which the ex-
tension is requested; and
(2)A full explanation of the reason(s)
for requesting the extension, to assist the
IRS in determining the period of extension,
if any, that will be granted.
Sec. 6.02. Form 1042–S Reporting:
General Rule.Unless WP has made a
pooled reporting (PR) election pursuant
to Section 6.03 of this Agreement, WP
is required to file separate Forms 1042–S
for each direct partner to whom WP dis-
tributes, or in whose distributive share is
included, an amount subject to NRA with-
holding. WP must file separate Forms
1042–S by income code, exemption code,
recipient code, and withholding rate. WP
must file its Forms 1042–S in the manner
required by the regulations under chapter
3 of the Code and the instructions to the
form, including any requirement to file the
forms magnetically or electronically. Any
Form 1042–S required by this section 6
shall be filed on or before March 15 fol-
lowing the calendar year in which with-
holding, if any, was required under Sec-
tion 3.02 of this Agreement. WP may re-
quest an extension of time to file Forms
1042–S by submitting Form 8809,Request
for Extension of Time to File Information
Returns, by the due date of Forms 1042–S
in the manner required by Form 8809.
Sec. 6.03. Form 1042–S Reporting:
Special Rule for PR Election.If WP
has made the PR election pursuant to this
Section 6.03, WP is not required to file
Forms 1042–S for amounts distributed
to, or included in the distributive share
of, each separate direct partner for whom
such reporting would otherwise be re-
quired. Instead, WP shall file a separate
Form 1042–S for each reporting pool. A
reporting pool consists of income that
falls within a particular withholding rate
and within a particular income code,
exemption code, and recipient code as
determined on Form 1042–S. WP may use
a single recipient code for all reporting
pools except for amounts paid to foreign
tax-exempt recipients, for which a sepa-
rate recipient code must be used. For this
purpose, a foreign tax-exempt recipient in-
cludes any organization that is not subject
to NRA withholding and is not liable to tax
in its country of residence because it is a
charitable organization, a pension fund, or
a foreign government. WP must make the
PR election at the time this Agreement is
executed by signing the election statement
on the signature page of this Agreement.
Once made, the PR election remains in
effect for the entire term of this Agreement
beginning on the date the Agreement be-
comes effective and ending on the date of
its expiration or termination under Section
9 of the Agreement. WP must make a
new election for each renewal term of this
Agreement. If WP makes the PR election,
WP cannot revoke it prior to the end of the
term for which WP has made the PR elec-
tion. If WP did not make the PR election
at the time this Agreement was executed,
then WP may make a PR election only by
terminating this Agreement pursuant to
Section9.03andrequestingtoenterinto
a new withholding foreign partnership
agreement.
Sec. 6.04. Form 1065 Filing Require-
ment.If WP is required to file Form 1065
and Schedules K–1 under Treas. Reg.
§ 1.6031(a)–1, then WP shall file Form
1065 and Schedules K–1 in accordance
with the regulations and the instructions
for the form.
Sec. 6.05. Retention of Returns.WP
shall retain Forms 1065 and 1042 for the
period of the applicable statute of limita-
tions on assessments and collection under
the Code.
SECTION 7. ADJUSTMENTS
FOR OVER- AND UNDER-
WITHHOLDING; REFUNDS
Sec. 7.01. Adjustments for NRA
Overwithholding by WP.WP may make
an adjustment for amounts paid to its di-
rect partners that it has overwithheld under
chapter 3 of the Code by applying either
the reimbursement or set-off procedures
described in this section within the time
period prescribed for those procedures.
(A) Reimbursement Procedure.WP
may repay its partners for an amount over-
withheld and reimburse itself by reduc-
ing, by the amount of tax actually repaid
to the partners, the amount of any subse-
quent deposit of tax required to be made by
WP under Section 3.04 of this Agreement.
For purposes of this Section 7.01(A), an
amount that is overwithheld shall be ap-
plied in order of time to each of WP's sub-
sequent deposit periods in the same calen-
dar year to the extent that the withholding
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taxes required to be deposited for a sub-
sequent deposit period exceed the amount
actually deposited. An amount overwith-
held in a calendar year may be applied to
deposit periods in the calendar year follow-
ing the calendar year of overwithholding
only if—
(1)WP states on a Form 1042–S filed
by March 15 of the calendar year following
the calendar year of overwithholding, the
amount of tax withheld and the amount of
any actual repayments; and
(2)WP states on a Form 1042, filed by
March 15 of the calendar year following
the calendar year of overwithholding, that
the filing of the Form 1042 constitutes a
claim for credit in accordance with Treas.
Reg. § 1.6414–1.
(B) Set-Off Procedure.WP may repay
its partners by applying the amount over-
withheld against any amount which other-
wise would be required under chapter 3 of
the Code to be withheld by WP before the
earlier of March 15 of the calendar year
following the calendar year of overwith-
holding or the date that the Form 1042–S is
actually filed with the IRS. For purposes of
making a return on Form 1042 or 1042–S
for the calendar year of overwithholding,
and for purposes of making a deposit of
the amount withheld, the reduced amount
shall be considered the amount required to
be withheld from such income under chap-
ter 3 of the Code.
Sec. 7.02. Collective Credit or
Refund Procedures for NRA Overwith-
holding.If WP has made a PR election
and it has overwithheld under chapter 3
of the Code on amounts subject to NRA
withholding paid to WP's direct partners
during a calendar year and the amount has
not been recovered under the reimburse-
ment or set-off procedures under Sections
7.01 of this Agreement, WP may request
a credit or refund of the total amount
overwithheld by following the procedures
of this Section 7.02. WP shall follow the
procedures set forth under sections 6402
and 6414 of the Code, and the regulations
thereunder, to claim the credit or refund.
No credit or refund will be allowed after
the expiration of the statutory period of
limitation for refunds under section 6511
of the Code. WP may use the collective
refund procedures under this Section 7.02
only if the following conditions are met:
(A)WP must not have issued Forms
1042–S to the direct partners who were
subject to overwithholding;
(B)WP must submit, together with its
amended return on which it claims a credit
or refund, a statement of the reason for the
overwithholding;
(C)WP must submit, together with its
amended return on which it claims a credit
or refund, a statement that it has repaid
the amount of overwithholding to the ap-
propriate direct partners prior to filing the
claim for credit or refund; and
(D)WP must retain a record showing
that it repaid the direct partners the amount
of the overwithholding.
Sec. 7.03. Adjustments for NRA Un-
derwithholding.If WP knows that an
amount should have been withheld under
chapter 3 of the Code from a previous pay-
ment to a direct partner but was not with-
held, WP may either withhold from future
payments made to the same direct partner
or satisfy the tax from the direct partner's
proportionate share of assets over which
it has control. The additional withholding
or satisfaction of the tax owed may only
be made before the due date of the Form
1042 (not including extensions) for the cal-
endar year in which the underwithholding
occurred.
Sec. 7.04. NRA Underwithholding
after Form 1042 Filed.If, after a Form
1042 has been filed for a calendar year,
WP, WP's external auditor, or the IRS de-
termines that, due to WP's failure to carry
out its obligations under this Agreement,
WP has underwithheld tax for such year,
WP shall file an amended Form 1042 to re-
port and pay the underwithheld tax. WP
shall pay the underwithheld tax, the in-
terest due on the underwithheld tax, and
any applicable penalties, at the time of fil-
ing the amended Form 1042. If WP fails
to file an amended return, the IRS shall
make such return under section 6020 of the
Code.
Sec. 7.05. Special Rule Regarding
Failure to Deposit Penalties.Solely for
purposes of applying section 6656 of the
Code (failure to make deposit of taxes),
WPwillnotbeconsideredtohavemadean
underpayment of a deposit of NRA with-
holding taxes if the conditions of this para-
graph are met. The conditions of this para-
graph are that—
(A)WP makes its deposits within the
time (deposit period) required by section
6302 of the Code;
(B)The deposit is not less than 90 per-
cent of the aggregate amount of the tax re-
quired to be withheld under chapter 3 of
the Code during the deposit period appli-
cable to WP; and
(C)WP determines the difference be-
tween the total amount required to be de-
posited and the amount actually deposited
as of the end of the 3rd, 6th, 9th, and 12th
months of the calendar year and the dif-
ference is deposited no later than the 15th
day of the second following month (i.e.,
May 15, August 15, November 15, and
February 15, respectively). In determining
whether there has been an underpayment,
reimbursements and set-offs shall be taken
into account.
SECTION 8. EXTERNAL AUDIT
PROCEDURES
Sec. 8.01. In General.Unless WP
requests an IRS audit in lieu of an exter-
nal audit, the IRS agrees not to conduct an
on-site audit of WP with respect to with-
holding and reporting obligations covered
by this Agreement provided that an exter-
nal auditor designated in Appendix A of
this Agreement conducts an audit of WP
in accordance with this Section 8. WP
shall permit the external auditor to have
access to all relevant records of WP for
purposes of performing the external au-
dit, including information regarding spe-
cific partners. WP shall permit the IRS
to communicate directly with the external
auditor and to review the audit procedures
followed by the external auditor. WP rep-
resents that there are no legal prohibitions
that prevent the external auditor from ex-
amining any information relevant to the ex-
ternal audit to be performed under this Sec-
tion 8 and that there are no legal prohibi-
tions that prevent the IRS from communi-
cating directly with the auditor. WP shall
permit the IRS to examine the external au-
ditor's work papers and reports.
Sec. 8.02. Designation of External
Auditor.WP's external auditor must be
one of the auditors listed in Appendix A
of this Agreement, unless WP and the IRS
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agree, prior to the audit, to substitute an-
other auditor. WP shall not propose an ex-
ternal auditor unless it has a reasonable be-
lief that the auditor is subject to laws, reg-
ulations, or rules that impose sanctions for
failure to exercise its independence and to
perform the audit competently. The IRS
has the right to reject a proposed external
auditor, or to revoke its acceptance of an
external auditor, if the IRS, in its sole dis-
cretion, reasonably believes that the audi-
tor is not independent or cannot perform an
effective audit under this Agreement.
Sec. 8.03. Timing of External Audits:
General Rule.Unless WP has made a
PR election, WP shall have the external
auditor conduct an external audit only at
such time and only for such calendar years
as the IRS directs.
Sec. 8.04. Timing of External Audits:
Special Rule for PR Election.
(A)If WP has made a PR election and
the term of this Agreement is determined
under Section 9.02(A), WP shall have the
external auditor conduct an audit of the
second full calendar year and the fifth full
calendar year that this Agreement is in ef-
fect.
(B)If WP has made a PR election and
the term of this Agreement is determined
under Section 9.02(B), WP shall have the
external auditor conduct an audit after the
close of every other calendar year that this
Agreement is in effect. The auditor shall
examine the two previous calendar years.
For example, the first audit will occur in
the third calendar year that the Agreement
is in effect and the external auditor will
examine calendar years one and two.
Sec. 8.05. Scope of External Au-
dit.The external auditor shall verify
whether WP is in compliance with this
Agreement by conducting an audit that
meets the requirements of this Section
8.05. The report, described in Section
8.06 of this Agreement, must disclose that
the external auditor has, at a minimum,
performed the following checks listed
in this Section 8.05, and set forth how
each of those checks was performed and
the results of the checks. WP's external
auditor is encouraged to contact the IRS
at the address set forth in Section 11.06 of
this Agreement and submit an audit plan
(which includes, if relevant, the extent to
which the external auditor proposes to rely
on WP's internal audit procedures) prior
to performing the audit so that the audit
may be conducted in the most efficient
and least costly manner possible.
(A) Documentation.The external au-
ditor must review information contained in
partner files to determine whether the doc-
umentation requirements of Section 4 of
this Agreement are being met.
(B) Withholding Responsibilities.
The external auditor must—
(1)Perform test checks of direct part-
ners, to verify that WP is withholding the
proper amounts.
(2)Verify that amounts withheld were
timely deposited in accordance with Sec-
tion 3.04 of this Agreement.
(C) Return Filing and Information
Reporting.The external auditor must—
(1)Obtain copies of original and
amended Forms 1042, and any schedules,
statements, or attachments required to
be filed with those forms, and determine
whether the amounts of income, taxes, and
other information reported on those forms
are accurate by—
(i)Reviewing work papers;
(ii)Reviewing Forms W–8IMY, to-
gether with the associated withholding
statements, that WP has provided to with-
holding agents;
(iii)Reviewing copies of Forms 1042–S
received from withholding agents;
(iv)Reviewing account statements from
withholding agents;
(v)Reviewing correspondence between
WP and withholding agents; and
(vi)Interviewing personnel responsible
for preparing the Form 1042 and the work
papers used to prepare those forms.
(2)Obtain copies of original and
amended Forms 1042–S and Schedules
K–1 together with the work papers used
to prepare those forms and determine
whether the amounts reported on those
forms are accurate by—
(i)Reviewing the Forms 1042–S re-
ceived from withholding agents;
(ii)Reviewing the Form 1065, if re-
quired;
(iii)Reviewing a valid sample of earn-
ings statements issued by WP to direct
partners, if any.
(3)Thoroughly review the statements
attached to amended Forms 1042 filed to
claim a refund, ascertain their veracity, and
determine the causes of any overwithhold-
ing reported and ensure WP did not is-
sue Forms 1042–S to persons whom it in-
cluded as part of its collective credit or re-
fund.
(4)Determine, in the case of collective
credits or refunds, that WP repaid the ap-
propriate partners prior to requesting a col-
lective credit or refund.
(E) Change in Circumstances.The
external auditor must verify that in the
course of the audit it has not discovered
any significant change in circumstances, as
describedinSection9.05(A)or(D)ofthis
Agreement.
Sec. 8.06. External Auditor's Report.
Upon completion of the audit of WP, the
external auditor shall issue a report, or re-
ports, of audit findings directly to the IRS
by sending the original report to the IRS
at the address set forth in Section 11.06 of
this Agreement. This report is due by De-
cember 31 following the calendar year be-
ing audited, or if that date falls on a Satur-
day or Sunday, the next U.S. business day.
The IRS may, however, upon request by
the external auditor, extend the due date
of the audit report upon good cause. The
report must be in writing, in English, and
currencyamountsmustbestatedinU.S.
dollars. The report must fully describe the
scope of the audit, the methodologies (in-
cluding sampling techniques) used to de-
termine whether WP is in compliance with
the provisions of this Agreement, and the
result of each such determination. The re-
port must also specifically address each of
the items in Section 8.05 of this Agree-
ment.
Sec. 8.07. Expanding Scope and
Timing of External Audit.Upon review
of the external auditor's report, the IRS
may request, and WP must permit, the ex-
ternal auditor to perform additional audit
procedures.
SECTION 9. EXPIRATION,
TERMINATION AND DEFAULT
Sec. 9.01. Term of Agreement: Gen-
eral Rule.If WP has not made a PR elec-
tion, this Agreement shall be in effect on
and shall continue in force until
the earlier of the date WP terminates un-
der its partnership agreement or the date
WPisterminatedunder9.03or9.04ofthis
Agreement.
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Sec. 9.02. Term of Agreement:
Special Rule for PR Election.
(A)If WP has made a PR election, un-
less WP elects the special term pursuant to
Section 9.02(B), this Agreement shall be
in effect on
and shall expire upon
the earlier of the date WP terminates under
its partnership agreement or December 31
of the fifth full calendar year after the year
in which this Agreement first takes effect.
This Agreement may be renewed for addi-
tionaltermsasprovidedinSection9.08of
this Agreement.
(B)If WP has made a PR election, and
WP elects the special term pursuant to this
Section 9.02(B), this Agreement shall be in
effect on
and shall expire upon
the earlier of the date WP terminates un-
der its partnership agreement or December
31 of the fourteenth full calendar year af-
ter the year in which this Agreement first
takes effect. If WP elects the special term,
this Agreement is not renewable. WP must
make the special term election under this
Section 9.02(B) at the time this Agreement
is executed by signing the election state-
ment on the signature page of this Agree-
ment.
Sec. 9.03. Termination of Agree-
ment.This Agreement may be termi-
nated by either the IRS or WP prior to
the end of its term by delivery of a notice
of termination to the other party in accor-
dance with Section 11.06 of this Agree-
ment. The IRS, however, shall not termi-
nate the Agreement unless there has been a
significant change in circumstances, as de-
fined in Section 9.05 of this Agreement, or
an event of default has occurred, as defined
in Section 9.06 of this Agreement, and the
IRS determines, in its sole discretion, that
the significant change in circumstances or
the event of default warrants termination of
this Agreement. In addition, the IRS shall
not terminate this Agreement in the event
of default if WP can establish to the sat-
isfaction of the IRS that all events of de-
fault for which it has received notice have
been cured within the time period agreed
upon. The IRS shall notify WP, in ac-
cordance with Section 9.07 of this Agree-
ment, that an event of default has occurred
and that the IRS intends to terminate the
Agreement unless WP cures the default. A
notice of termination sent by either party
shall take effect on the date specified in the
notice.
Sec 9.04. Automatic Termination of
Agreement.
(A) Automatic Termination.Notwith-
standing Section 9.03 of this Agreement,
this Agreement will terminate automati-
cally in the event that the external auditor
or the IRS on audit discovers that WP was
not in possession of Forms W–8 or W–9,
as applicable, for any direct partner at any
time that withholding or reporting was re-
quired under Section 3.02 of this Agree-
ment. The automatic termination will be
effective as of December 31 of the year
in which the external auditor or the IRS
makes that discovery. The automatic ter-
mination rules of this Section 9.04(A) shall
not apply in the case of indirect partners
that are treated as direct partners of WP un-
der Section 10 of this Agreement.
(B) Cure and Reinstatement.This
Agreement will be reinstated, effective the
same date it automatically terminated un-
der Section 9.04(A) of this Agreement,
if—
(1)WP obtains appropriate Forms W–8
or W–9 (that relate to the time withholding
or reporting was required) for each such
undocumented partner before March 15 of
the year following the year in which the
Agreement automatically terminated, or
(2)All such undocumented partners
have ceased to be partners in WP before
March 15 of the year following the year
in which the Agreement automatically
terminated.
(C) Payment of Underwithholding
and Reporting upon Termination.In
the event of automatic termination of
this Agreement under this Section 9.04,
WP must pay any underwithholding of
tax, interest, and penalties that the IRS
determines is attributable to each undocu-
mented direct partner for the period during
which the partner was undocumented, and,
if WP has made a PR election, WP must
file Forms 1099, or partner specific Forms
1042–S reporting the names and addresses
and other required information, as ap-
propriate, for every undocumented direct
partner from the earliest time the Form
W–8 or W–9 was required for that undoc-
umented direct partner through the date of
termination. WP may, however, continue
to report on a pooled basis for documented
foreign direct partners through this period.
(D) Reinstatement after Termination.
After the date of automatic termination of
this Agreement, WP may not act as a with-
holding foreign partnership, and must so
notify any persons to which WP has fur-
nished a withholding foreign partnership
certificate. After the date of automatic ter-
mination of this Agreement, the IRS may
reinstate this Agreement (or the IRS may
require WP to enter into a new withhold-
ing foreign partnership agreement) on such
terms and conditions and with such modi-
fications as the IRS may determine.
Sec. 9.05. Significant Change in
Circumstances.Forpurposesofthis
Agreement, a significant change in cir-
cumstances includes, but is not limited
to—
(A)any merger, consolidation or divi-
sion of WP or any change in circumstances
that would result in a termination of WP
under section 708 of the Code;
(B)A change in U.S. federal law or pol-
icy, or applicable foreign law or policy, that
affects the validity of any provision of this
Agreement, materially affects the proce-
dures contained in this Agreement, or af-
fects WP's ability to perform its obliga-
tions under this Agreement;
(C)A ruling of any court that affects
the validity of any provision of this Agree-
ment; or
(D)A significant change in WP's busi-
ness practices that affects WP's ability to
meet its obligations under this Agreement.
Sec. 9.06. Events of Default.For
purposes of this Agreement, an event of
default occurs if WP fails to perform any
material duty or obligation required under
this Agreement, and includes, but is not
limited to, the occurrence of any of the
following:
(A)WP fails to implement adequate
procedures, accounting systems, and inter-
nal controls to ensure compliance with this
Agreement;
(B)WP underwithholds an amount that
WP is required to withhold under chapter
3 of the Code and fails to correct the un-
derwithholding or to file an amended Form
1042 reporting, and paying, the appropri-
ate tax;
(C)WP makes excessive refund claims;
(D)WP fails to file Forms 1042,
1042–S, 1065 (if required), or Schedules
K–1 (if required) by the due date speci-
fied on such forms or files forms that are
materially incorrect or fraudulent;
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(E)WP fails to have an external audit
performed when required, WP's external
auditor fails to provide its report directly
to the IRS on a timely basis, WP fails to
cooperate with the external auditor, or WP
or its external auditor fails to cooperate
with the IRS;
(F)WP fails to inform the IRS within 90
days of any significant change in its busi-
ness practices to the extent that change af-
fects WP's obligations under this Agree-
ment;
(G)WP fails to cure a default identified
by the IRS or by an external auditor;
(H)WP makes any fraudulent state-
ment or a misrepresentation of material
fact with regard to this Agreement to the
IRS, a withholding agent, or WP's external
auditor;
(I)The IRS determines that WP's exter-
nal auditor is not sufficiently independent
to adequately perform its audit function or
the external auditor fails to provide an au-
dit report that complies with Section 8 of
this Agreement;
(J)WP is prohibited by any law from
disclosing the identity of a partner or part-
ner information to WP's external auditor;
(K)WP fails to make deposits in the
time and manner required by Section 3.04
of this Agreement or fails to make ade-
quate deposits, taking into account the pro-
cedures of 7.05 of this Agreement; or
(L)WP fails to permit the external audi-
tor to perform additional audit procedures
under the provisions of Section 8.07 of this
Agreement.
Sec. 9.07. Notice and Cure.Upon
the occurrence of an event of default, the
IRSmaydelivertoWPanoticeofde-
fault specifying the event of default that
has occurred. WP shall respond to the no-
tice of default within 60 days (60-day re-
sponse) from the date of the notice of de-
fault. The 60-day response shall contain
an offer to cure the event of default and the
time period in which the cure will be ac-
complished or shall state the reasons why
WP does not agree that an event of de-
fault has occurred. If WP does not provide
a 60-day response, the IRS may deliver a
notice of termination as provided in Sec-
tion 9.03 of this Agreement. If WP pro-
vides a 60-day response, the IRS shall ei-
ther accept or reject WP's statement that
no default has occurred or accept or reject
WP's proposal to cure an event of default.
If the IRS rejects WP's contention that no
default has occurred or rejects WP's pro-
posal to cure a default, the IRS will offer
a counter-proposal to cure the event of de-
fault. Within 30 days of receiving the IRS's
counter-proposal, WP shall notify the IRS
(30-day response) whether it continues to
maintain that no default has occurred or
whether it rejects the IRS's counter-pro-
posal to cure an event of default. If WP's
30-day response states that no default has
occurred or it rejects the IRS's counter-pro-
posal to cure, the parties shall seek to re-
solve their disagreement within 30 days of
the IRS's receipt of WP's 30-day response.
If a satisfactory resolution has not been
achieved at the end of this latter 30-day pe-
riod, or if WP fails to provide a 30-day re-
sponse, the IRS may terminate this Agree-
ment by providing a notice of termination
in accordance with Section 9.03 of this
Agreement. If WP receives a notice of ter-
mination from the IRS, it may appeal the
determination within 30 days of the date of
the notice of termination by sending a writ-
ten notice to the address specified in Sec-
tion 11.06 of this Agreement. If WP ap-
peals the notice of termination, this Agree-
ment shall not terminate until the appeal
has been decided. If an event of default
is discovered in the course of an external
audit, the WP may cure the default, with-
out following the procedures of this Sec-
tion 9.07, if the external auditor's report de-
scribes the default and the actions that WP
took to cure the default and the IRS deter-
mines that the cure procedures followed by
WP were sufficient. If the IRS determines
that WP's actions to cure the default were
not sufficient, the IRS shall issue a notice
of default and the procedures described in
this Section 9.07 shall be followed.
Sec. 9.08. Renewal.If WP has made
the PR election under Section 6.03 of
this Agreement and intends to renew this
Agreement for an additional term, it shall
submit an application for renewal to the
IRS no earlier than one year and no later
than six months prior to the expiration
of this Agreement. Any such application
for renewal must contain an update of the
informationprovidedbyWPtotheIRSin
connection with the application to enter
into this Agreement, and any other infor-
mation the IRS may request in connection
with the renewal process. This Agreement
shall be renewed only upon the signatures
of both WP and the IRS. Either the IRS or
WP may seek to negotiate a new withhold-
ing foreign partnership agreement rather
than renew this Agreement.
SECTION 10. CERTAIN
PARTNERSHIPS AND TRUSTS
Sec. 10.01. Certain Smaller Part-
nerships and Trusts.WP cannot apply
the rules of this Section 10.01 unless it
has made a PR election under Section 6.03
of this Agreement. WP may apply the
rules of this Section 10.01 only to a part-
nership or trust that meets the following
conditions: (i) the partnership or trust is
a foreign partnership or foreign simple or
grantor trust, (ii) the partnership or trust
is a direct partner of WP, (iii) none of
the partners, beneficiaries or owners of the
partnership or trust is a U.S. person or a
passthrough partner, beneficiary or owner,
and (iv) the total reportable amounts dis-
tributed to, and included in the distribu-
tive share of, the partnership or trust for
the calendar year do not exceed $200,000.
In applying this Section 10.01, WP must
treat the partners of such a partnership or
the beneficiaries or owners of such a trust
as direct partners of WP under this Agree-
ment. To apply this Section 10.01, WP and
the partnership or trust must comply with
all of the rules listed below.
(1)WP and the partnership or trust must
agree in writing that the partnership or trust
will make available to WP’s auditor for
purposes of WP’s audit under Section 8 of
this Agreement records that establish that
the partnership or trust has provided WP
with documentation for all of its partners,
beneficiaries or owners.
(2)The partnership or trust must pro-
vide to WP a Form W–8IMY, together with
Forms W–8 from each partner, beneficiary
or owner, and a withholding statement,
under Treas. Reg. § 1.1441–5(c)(3)(iv)
or (e)(5)(iv), that provides information for
all partners, beneficiaries or owners. The
withholding statement, however, need not
provide any allocation information.
(3)WP must treat amounts distributed
to, or included in the distributive share of,
the partnership or trust as allocated solely
to any partner, beneficiary or owner that is
subject to the highest rate of withholding
and must withhold at that rate.
(4)WP may include amounts dis-
tributed to, or included in the distributive
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share of, a partnership or trust under Sec-
tion 10.01(3) in its Form 1042–S reporting
pools for direct account holders under
Section 6.03 of this Agreement.
(5)After WP has withheld in accor-
dance with Section 10.01(3) above, it may
file a separate Form 1042–S for any part-
ner, beneficiary or owner who requests
that it do so. WP may do so only if the
partnership or trust provides a withhold-
ing statement that includes allocation in-
formation for the requesting partner, bene-
ficiary or owner and only if the partnership
or trust has agreed in writing under Section
10.01(1) to make available to WP’s exter-
nal auditor records that substantiate the al-
location information included in its with-
holding statement.
(6)WP may not include any amounts
distributed to, or included in the distribu-
tive share of, a partnership or trust to which
WP is applying the rules of this Section
10.01 in any collective refund claim made
under Section 7.02 of this Agreement.
(7)WP and a partnership or trust that
apply this Section 10.01 to any calendar
year are not required to apply this Section
10.01 to subsequent calendar years. WP
and a partnership or trust that apply this
Section 10.01 to any calendar year must
apply these rules to the calendar year in its
entirety.
(8)WP and the partnership or trust may
not apply this Section 10.01 to any cal-
endar year for which the partnership or
trust has failed to make available to WP’s
auditor the records described in Section
10.01(1) within 90 days after these records
are requested. If the partnership or trust
has failed to make these records available
within the 90-day period, or if WP and the
partnership or trust fail to comply with any
other requirement of this Section 10.01,
WP must apply Treas. Reg. § 1.1441–1
and 1.1441–5 to the partnership or trust,
correct its withholding, and must file cor-
rected Forms 1042 and 1042–S.
Sec. 10.02. Certain Related Part-
nerships and Trusts.WP may not ap-
ply the rules of this Section 10.02 unless
it has made a PR election under Section
6.03 of this Agreement. WP may apply the
rules of this Section 10.02 only to a part-
nership or trust that meets the following
conditions: (1) the partnership or trust is
a foreign partnership or foreign simple or
grantor trust; (2) the partnership or trust is
either (i) a direct partner of WP or (ii) the
partnership or trust is an indirect partner of
WP that is a partner, beneficiary or owner
of a partnership or trust to which WP has
also applied this Section 10.02; and (3) the
WP is a general partner of the partnership
or a trustee of the trust. WP may not apply
this Section 10.02 to indirect partners, ben-
eficiaries or owners of such partnerships or
trusts, or to direct partners, beneficiaries or
owners of such partnerships or trusts that
are intermediaries, flow-through entities or
U.S. nonexempt recipients. See 10.02(5)
of this Agreement. To apply this Sec-
tion 10.02, WP and the partnership or trust
must comply with all of the rules listed be-
low.
(1)WP and the partnership or trust must
enter into a written agreement under which
the partnership or trust agrees:
(a)To act as an agent of WP with re-
spect to its partners, beneficiaries or own-
ers, and, as WP’s agent, to apply the provi-
sions of the WP Agreement to its partners,
beneficiaries or owners,
(b)To treat its direct partners, benefi-
ciaries or owners as direct partners of WP
under the WP Agreement and to treat its
indirect partners, beneficiaries or owners
as indirect partners of WP under the WP
Agreement, and
(c)To make available, upon request, to
WP’s auditor for purposes of WP’s au-
dit under Section 8 of the WP Agreement,
records that establish its compliance with
all of the rules listed under this Section
10.02.
(2)By entering into an agreement with
a partnership or trust under paragraph (1)
of this section, WP is not assigning its lia-
bility for the performance of any of its obli-
gations under this Agreement. WP and the
partnership or trust to which WP applies
the rules of this Section 10.02, are jointly
and severally liable for any tax, penalties
and interest that may result from the failure
of the partnership or trust to meet any of the
obligations imposed by its agreement with
WP.
(3)The partnership or trust must
provide to WP a Form W–8IMY together
with a withholding statement, under Treas.
Reg. § 1.1441–5(c)(3)(iv) or (e)(5)(iv),
that includes all information necessary for
WP to fulfill its withholding, reporting and
filing obligations under this Agreement.
The withholding statement may include
pooled basis information regarding direct
partners, beneficiaries or owners that are
not intermediaries, flow-through entities
or U.S. non-exempt recipients. The part-
nership or trust need not provide to WP
documentation for partners, beneficiaries
or owners, except as provided under sec-
tion 10.02(1)(c).
(4)WP must withhold on the date an
amount is distributed to or included in the
distributive share of a foreign partnership
or trust based on the withholding state-
ment provided by the partnership or trust.
The amount allocated to each partner,
beneficiary or owner in the withholding
statement may be based on a reasonable
estimate of the partner’s, beneficiary’s
or owner’s distributive share of income
subject to withholding for the year. The
partnership or trust must correct the esti-
mated allocations to reflect the partner’s,
beneficiary’s or owner’s actual distribu-
tive share and must provide this corrected
information to WP, on the earlier of the
date that the statement required under sec-
tion 6031(b) of the Code (schedule K–1)
is mailed or otherwise provided to the
partner or the due date for furnishing the
statement (whether or not the partnership
or trust is required to prepare and furnish
the statement). If that date is after the due
date for WP’s Forms 1042 and 1042–S
(without regard to extensions) for the cal-
endar year, WP may withhold and report
any adjustments required by the corrected
information in the following calendar year.
(5)WP must file separate Forms
1042–S reflecting pooled basis informa-
tion for each partnership or trust that has
provided pooled basis information in its
withholding statement. WP shall apply
the provisions of Treas. Reg. § 1.1441–1
and 1.1441–5 to partners, beneficiaries or
owners of such partnerships or trusts that
are indirect partners, beneficiaries or own-
ers, and to direct partners, beneficiaries or
owners of such partnerships or trusts that
are intermediaries, flow-through entities
or U.S. nonexempt recipients.
(6)A partnership or trust to which WP
applies this Section 10.02 may not assume
primary NRA withholding responsibil-
ity, or primary Form 1099 reporting and
backup withholding responsibility.
(7)WP and a partnership or trust that
apply this Section 10.02 to any calendar
year must apply these rules to the calendar
year in its entirety. Generally, WP and a
partnership or trust that apply this Section
10.02 to any calendar year are not required
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to apply this Section 10.02 to subsequent
calendar years. If, however, WP with-
holds and reports any adjustments required
by corrected information in a subsequent
calendar year under Section 10.02(4), WP
must apply this Section 10.02 to that cal-
endar year in its entirety.
(8)WP and a partnership or trust may
not apply this Section 10.02 to any cal-
endar year for which the partnership or
trust has failed to make available to WP’s
auditor the records described in Section
10.02(1)(c) within 90 days after these
records are requested. If, for any calendar
year, the partnership or trust has failed
to make these records available within
the 90-day period, or if WP and the part-
nership or trust fail to comply with any
other requirement of this Section 10.02,
WP must apply Treas. Reg. § 1.1441–1
and 1.1441–5 to the partnership or trust,
must correct its withholding, and must file
corrected Forms 1042 and 1042–S for the
calendar year.
SECTION 11. MISCELLANEOUS
PROVISIONS
Sec. 11.01.WP's application to be-
come a withholding foreign partnership
and the Appendix to this Agreement
are hereby incorporated into and made
an integral part of this Agreement.This
Agreement, WP's application, and the
Appendix to this Agreement constitute the
complete agreement between the parties.
Sec. 11.02.This Agreement may be
amended by the IRS if the IRS determines
that such amendment is needed for the
sound administration of the internal rev-
enue laws or internal revenue regulations.
The Agreement may also be modified by
either WP or the IRS upon mutual agree-
ment. Such amendments or modifications
shall be in writing.
Sec. 11.03.Any waiver of a provision
of this Agreement by the IRS is a waiver
solely of that provision. The waiver does
not obligate the IRS to waive other provi-
sions of this Agreement or the same provi-
sion at a later date.
Sec. 11.04.This Agreement shall be
governed by the laws of the United States.
Any legal action brought under this Agree-
ment shall be brought only in a U.S. court
with jurisdiction to hear and resolve mat-
ters under the internal revenue laws of the
United States. For this purpose, WP agrees
to submit to the jurisdiction of such U.S.
court.
Sec. 11.05.WP's rights and responsi-
bilities under this Agreement cannot be as-
signed to another person.
Sec. 11.06.Notices provided under this
Agreement shall be mailed registered, first
class airmail. Notice shall be directed as
follows:
To the IRS
Internal Revenue Service
LMSB:FS:QI
290 Broadway
New York, NY 10007–1867
USA
All notices sent to the IRS must include
the WP’s WP–EIN
To WP:
Sec. 11.07.WP, acting in its capacity
as a withholding foreign partnership or in
any other capacity, does not act as an agent
of the IRS, nor does it have the authority to
hold itself out as an agent of the IRS.
IN WITNESS WHEREOF, the
above parties have subscribed their
names to these presents, in duplicate.
Signed this day of ,
(name and title of person
signing for WP)
(name and title of person signing for
IRS)
PR Election Statement – Six Year
Term
By signing hereunder, WP makes
the PR election with a term of
six years or until WP terminates,
whichever is earlier, under Sections
6.03 and 9.02 (A) of this Agreement.
(name and title of person
signing for WP)
PR Election Statement – Fifteen Year
Term
By signing hereunder, WP makes
the PR election with a term of 15 years
or until WP terminates, whichever is
earlier, under Sections 6.03 and 9.02
(B) of this Agreement.
(name and title of person
signing for WP)
Appendix A
WP and the IRS agree that any of the
following auditors may be used by WP
to perform the external audits required by
Section 8 of this Agreement.
[Names, addresses, telephone and fax
numbers of external auditors.]
APPENDIX 2
Withholding Foreign Trust Agreement
SECTION 1. PURPOSE AND SCOPE
Sec. 1.01. General Obligations
Sec. 1.02. Parties to the Agreement
SECTION 2. DEFINITIONS
Sec. 2.01. Agreement
Sec. 2.02. Amounts Subject to N
RA
Withholding
Sec. 2.03. Chapter 3 of the Code
Sec. 2.04. Chapter 61 of the
Code
Sec. 2.05. Distributive Sh
are
Sec. 2.06. External Auditor
Sec. 2.07. Flow -Through Ent
ity
Sec. 2.08. Foreign Person
Sec. 2.09. Form W–8
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Sec. 2.10. Form W–9
Sec. 2.11. Form 1042
Sec. 2.12. Form 1042–S
Sec. 2.13. Form 3520
Sec. 2.14. Form 3520–A
Sec. 2.15. Intermediary
Sec. 2.16. Nonwithholding Foreign
Trust
Sec. 2.17. NRA Withholding
Sec. 2.18. Overwithholding
Sec. 2.19. Payment
Sec. 2.20. Pooled Reporting (PR)
Election
Sec. 2.21. Reduced Rate of Withhold-
ing
Sec. 2.22. Reportable Amount
Sec. 2.23. Reporting Pool
Sec. 2.24. TIN
Sec. 2.25. Trust and Beneficiary or
Owner; Direct, Indirect or Passthrough
Beneficiary or Owner
Sec. 2.26. Underwithholding
Sec. 2.27. U.S. Person
Sec. 2.28. Withholding Agent
Sec. 2.29. Withholding Foreign Trust
(or WT)
Sec. 2.30. Withholding Foreign Trust
(or WT) EIN
Sec. 2.31. Withholding Statement
Sec. 2.32. Other Terms
SECTION 3. WITHHOLDING
RESPONSIBILITY
Sec. 3.01. NRA Withholding Respon-
sibility
Sec. 3.02. Timing of Withholding
Sec. 3.03. Withholding on Distribu-
tions
Sec. 3.04. Deposit Requirements
SECTION 4. DOCUMENTATION
REQUIREMENTS
Sec. 4.01. Documentation Require-
ments
Sec. 4.02. Documentation for Foreign
Beneficiaries or Owners
Sec. 4.03. Treaty Claims
Sec. 4.04. Documentation for Interna-
tional Organizations
Sec. 4.05. Documentation for For-
eign Governments and Foreign Central
Banks of Issue
Sec. 4.06. Documentation for Foreign
Tax-Exempt Organizations
Sec. 4.07. Documentation From
Passthrough Beneficiaries or Owners
Sec. 4.08. Documentation for U.S.
Exempt Recipients
Sec. 4.09. Documentation for U.S.
Non-Exempt Recipients
Sec. 4.10. Documentation Validity
Sec. 4.11. Documentation Validity
Period
Sec. 4.12. Maintenance and Retention
of Documentation
SECTION 5. WITHHOLDING
FOREIGN TRUST WITHHOLDING
CERTIFICATE
Sec. 5.01. WT Withholding Certifi-
cate
Sec. 5.02. Withholding Statement
Sec. 5.03. Withholding Rate Pools
SECTION 6. TAX RETURN
OBLIGATIONS
Sec. 6.01. Form 1042 Filing Require-
ment
Sec. 6.02. Form 1042–S Reporting:
General Rule
Sec. 6.03. Form 1042–S Reporting:
Special Rule for PR Election
Sec. 6.04. Form 3520–A Filing Re-
quirement
Sec. 6.05. Retention of Returns
SECTION 7. ADJUSTMENTS
FOR OVER- AND UNDER-
WITHHOLDING; REFUNDS
Sec. 7.01. Adjustments for NRA
Overwithholding by WT
Sec. 7.02. Collective Credit or Refund
Procedures for NRAOverwithholding
Sec. 7.03. Adjustments for NRA Un-
derwithholding
Sec. 7.04. NRA Underwithholding
after Form 1042 Filed
Sec. 7.05. Special Rule Regarding
Failure to Deposit Penalties
SECTION 8. EXTERNAL AUDIT
PROCEDURES
Sec. 8.01. In General
Sec. 8.02. Designation of External
Auditor
Sec. 8.03. Timing of External Audits:
General Rule
Sec. 8.04. Timing of External Audits:
Special Rule for PR Election
Sec. 8.05. Scope of External Audit
Sec. 8.06. External Auditor’s Report
Sec. 8.07. Expanding Scope and Tim-
ing of External Audit
SECTION 9. EXPIRATION,
TERMINATION AND DEFAULT
Sec. 9.01. Term of Agreement: Gen-
eral Rule
Sec. 9.02. Term of Agreement: Spec-
ial Rule for PR Election
Sec. 9.03. Termination of Agreement
Sec. 9.04. Automatic Termination of
Agreement
Sec. 9.05. Significant Change in Cir-
cumstances
Sec. 9.06. Events of Default
Sec. 9.07. Notice and Cure
Sec. 9.08. Renewal
SECTION 10. CERTAIN
PARTNERSHIPS AND TRUSTS
Sec. 10.01. Certain Smaller Partner-
ships and Trusts
Sec. 10.02. Certain Related Partner-
ships and Trusts
SECTION 11. MISCELLANEOUS
PROVISIONS
THIS AGREEMENT is made in du-
plicate under and in pursuance of section
1441 of the Internal Revenue Code of
1986, as amended, (the “Code”) and Trea-
sury Regulation § 1.1441–5(e)(5)(v) by
and between
,(re-
ferredtoas“WT”),andtheINTERNAL
REVENUE SERVICE (the “IRS”):
WHEREAS, WT has submitted an ap-
plication in accordance with Revenue Pro-
cedure 2003–64 to be a withholding for-
eign trust for purposes of Treas. Reg.
§ 1.1441–5(e)(5)(v);
WHEREAS, WT and the IRS desire to
enter into an agreement to establish WT's
rights and obligations regarding documen-
tation, withholding, information reporting,
tax return filing, deposits, and adjustment
procedures under sections 1441, 1442,
1443, 1461, 6048, 6302, 6402, and 6414
of the Code with respect to certain types
of payments;
NOW, THEREFORE,inconsidera-
tion of the following terms, representa-
tions, and conditions, the parties agree as
follows:
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SECTION 1. PURPOSE AND SCOPE
Sec. 1.01. General Obligations.Ex-
cept as otherwise provided in this Agree-
ment, WT's obligations with respect to in-
come distributed to, or included in the dis-
tributive shares of, its beneficiaries or own-
ers are governed by the Code and the reg-
ulations thereunder. Except as provided
in Section 10 of this Agreement, WT may
act in its capacity as a withholding for-
eign trust pursuant to this Agreement only
for payments of amounts subject to NRA
withholding that are distributed to, or in-
cluded in the distributive shares of, its di-
rect beneficiaries or owners. WT is re-
quired to act as a withholding foreign trust
for all such amounts paid to WT, or in-
cluded in WT's distributive share, by any
withholding agent to which WT has pro-
vided a Form W–8IMY that represents that
WT is acting as a withholding foreign trust
with respect to such amounts. WT must
act as a withholding foreign trust for any
such amounts paid with respect to such a
Form W–8IMY that are distributed to, or
included in the distributive shares of, its di-
rect foreign beneficiaries or owners. WT
may act as a withholding foreign trust for
such amounts that are distributed to, or in-
cluded in the distributive shares of, its di-
rect beneficiaries or owners that are U.S.
persons. WT may also act as a withhold-
ing foreign trust and may treat itself as
a direct foreign beneficiary if (i) WT is
a trust the terms of which are described
in section 651(a)(1) and (2) of the Code
and (ii) in any taxable year, WT distributes
amounts other than amounts of income de-
scribed in section 651(a)(1). WT may not
act as a withholding foreign trust, but must
act as a nonwithholding foreign trust, for
amounts subject to NRA withholding that
are distributed to, or included in the dis-
tributive shares of, passthrough beneficia-
ries or owners or indirect beneficiaries or
owners, except as provided under Section
10 of this Agreement.
Sec. 1.02. Parties to the Agreement.
This Agreement applies to WT and the
IRS.
SECTION 2. DEFINITIONS
For purposes of this Agreement, the
terms listed below are defined as follows:
Sec. 2.01. Agreement.“Agreement”
means this Agreement between WT and
the IRS. All appendices to this Agreement
and WT's application to become a with-
holding foreign trust are incorporated into
this Agreement by reference.
Sec. 2.02. Amounts Subject to NRA
Withholding.An “amount subject to
NRA withholding” is an amount described
in Treas. Reg. § 1.1441–2(a). An amount
subject to NRA withholding shall not
include interest paid as part of the pur-
chase price of an obligation sold between
interest payment dates or original issue
discount paid as part of the purchase price
of an obligation sold in a transaction other
than the redemption of such obligation,
unless the sale is part of a plan the princi-
pal purpose of which is to avoid tax and
WT has actual knowledge or reason to
know of such plan.
Sec. 2.03. Chapter 3 of the Code.
Any reference to “chapter 3 of the Code”
means sections 1441, 1442, 1443, 1461,
1463, and 1464 of the Code.
Sec. 2.04. Chapter 61 of the Code.
Any reference to “chapter 61 of the Code”
means sections 6041, 6042, 6045, 6048,
6049, and 6050N of the Code.
Sec. 2.05. Distributive share.“Dis-
tributive share” means an amount subject
to withholding that is required to be dis-
tributed to the beneficiaries of a simple
trust and an amount subject to withhold-
ing that is includible in the income of the
owners of a grantor trust.
Sec. 2.06. External Auditor.An
“external auditor” is any approved audi-
tor listed in Appendix A of this Agreement
that WT engages to perform the audits re-
quired by Section 8 of this Agreement.
Sec. 2.07. Flow-Through Entity.A
flow-through entity is a foreign partnership
described in Treas. Reg. § 301.7701–2 or
3 (other than a withholding foreign part-
nership), a foreign trust that is described
in section 651(a) of the Code (other than
a withholding foreign trust), or a foreign
trust all or a portion of which is treated as
owned by the grantor or other person un-
der sections 671 through 679 of the Code
(other than a withholding foreign trust).
For an item of income for which a treaty
benefit is claimed, an entity is also a flow-
through entity to the extent it is treated as
fiscally transparent under section 894 and
the regulations thereunder.
Sec. 2.08. Foreign Person.A “foreign
person” is any person that is not a “United
States person” and includes a “nonresident
alien individual,” a “foreign corporation,”
a “foreign partnership,” a “foreign trust,”
and a “foreign estate,” as those terms are
defined in section 7701 of the Code.
Sec. 2.09. Form W–8.“Form W–8”
means a valid IRS Form W–8BEN,Cer-
tificate of Foreign Status of Beneficial
Owner for United States Tax Withholding;
IRS Form W–8ECI,Certificate of Foreign
Person's Claim for Exemption From With-
holding on Income Effectively Connected
With the Conduct of a Trade or Business
in the United States;IRSFormW–8EXP,
Certificate of Foreign Governments and
Other Foreign Organizations for United
States Tax Withholding;andIRSForm
W–8IMY,Certificate of Foreign Interme-
diary, Foreign Partnership, and Certain
U.S. Branches for United States Tax With-
holding, as appropriate. It also includes
any acceptable substitute form.
Sec. 2.10. Form W–9.“Form W–9”
means a valid IRS Form W–9,Request for
Taxpayer Identification Number and Cer-
tification, or any acceptable substitute.
Sec. 2.11. Form 1042.“Form 1042”
means an IRS Form 1042,Annual With-
holding Tax Return for U.S. Source Income
of Foreign Persons.
Sec. 2.12. Form 1042–S.“Form
1042–S” means an IRS Form 1042–S,
Foreign Person's U.S. Source Income Sub-
ject to Withholding.
Sec. 2.13. Form 3520.“Form 3520”
means an IRS Form 3520,Annual Return
to Report Transaction with Foreign Trust
and Receipt of Certain Foreign Gifts.
Sec. 2.14. Form 3520–A.“Form
3520–A” means an IRS Form 3520–A,
Annual Information Return of Foreign
Trust with a U.S. Owner.
Sec. 2.15. Intermediary.An “inter-
mediary” means any person that acts on be-
half of another person, such as a custodian,
broker, nominee, or other agent.
Sec. 2.16. Nonwithholding Foreign
Trust.A “nonwithholding foreign trust”
is any foreign trust that is not acting as a
withholding foreign trust.
Sec. 2.17. NRA Withholding.For
purposes of this Agreement, “nonresident
alien (NRA) withholding” is any with-
holding required under chapter 3 of the
Code (other than sections 1445 or 1446),
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whether the payment subject to withhold-
ing is made to an individual or to an entity.
Sec. 2.18. Overwithholding.The term
“overwithholding” means the excess of the
amount actually withheld over the amount
required to be withheld under chapter 3 of
the Code.
Sec. 2.19. Payment.A “payment” is
considered made to a person if that per-
son realizes income whether or not such
income results from an actual transfer of
cash or other property. See Treas. Reg.
§ 1.1441–2(e).
Sec. 2.20. Pooled Reporting (PR)
Election.A “pooled reporting (PR) elec-
tion” is defined in Section 6.03. of this
Agreement.
Sec. 2.21. Reduced Rate of With-
holding.A “reduced rate of withholding”
means a rate of withholding that is less
than 30 percent, either as a result of a re-
duction in withholding under the Code or
as a result of a reduction in withholding un-
der an income tax treaty.
Sec. 2.22. Reportable Amount.A
“reportable amount” means an amount
subject to NRA withholding (as defined
in Section 2.02 of this Agreement); U.S.
source deposit interest; and U.S. source
interest or original issue discount paid on
the redemption of short-term obligations.
The term does not include payments on
deposits with banks and other financial
institutions that remain on deposit for two
weeks or less. It also does not include
amounts of original issue discount arising
from a sale and repurchase transaction
completed within a period of two weeks or
less, or amounts described in Treas. Reg.
§ 1.6049–5(b)(7), (10), or (11) (relating
to certain foreign targeted registered obli-
gations and certain obligations issued in
bearer form).
Sec. 2.23. Reporting Pool.Areport-
ing pool is defined in Section 6.03 of this
Agreement.
Sec. 2.24. TIN.A“TIN”isaU.S.
taxpayer identification number.
Sec. 2.25. Trust, Beneficiary and
Owner; Direct, Indirect or Passthrough
Beneficiary or Owner.The term “trust”
is defined in Treas. Reg. § 301.7701–4.
The term “beneficiary” is defined in sec-
tion 643(c) of the Code and the regulations
thereunder. An “owner” is a person treated
as a grantor or owner under Subpart C of
Subchapter J of the Code. A direct bene-
ficiary or owner is a beneficiary or owner,
other than an intermediary or flow-through
entity that is not itself a withholding for-
eign trust or withholding foreign partner-
ship, for which WT acts as a withholding
foreign trust. An indirect beneficiary or
owner is a person that owns a trust interest
in WT through one or more passthrough
beneficiaries or owners. A passthrough
beneficiary or owner is a direct or indirect
beneficiary or owner in WT that is an in-
termediary or flow-through entity. As pro-
vided in Section 2.07 of this Agreement,
a withholding foreign partnership or with-
holding foreign trust is not a flow-through
entity and thus is not a passthrough bene-
ficiary or owner.
Sec. 2.26. Underwithholding.“Un-
derwithholding” means the excess of the
amount required to be withheld under
chapter 3 of the Code over the amount
actually withheld.
Sec. 2.27. U.S. Person.A “United
States (or U.S.) person” is a person de-
scribed in section 7701(a)(30) of the Code,
the U.S. government (including an agency
or instrumentality thereof), a State of the
United States (including an agency or in-
strumentality thereof), or the District of
Columbia (including an agency or instru-
mentality thereof).
Sec. 2.28. Withholding Agent.A
“withholding agent” has the same meaning
as set forth in Treas. Reg. § 1.1441–7(a)
and includes a payor. As used in this
Agreement, the term generally refers to the
person making a payment to a withholding
foreign trust.
Sec. 2.29. Withholding Foreign
Trust (or WT).A “withholding foreign
trust” is a person, described in Treas. Reg.
§ 1.1441–5(e)(v), that has entered into a
withholding agreement with the IRS to be
treated as a withholding foreign trust and
is acting in its capacity as a withholding
foreign trust.
Sec. 2.30. Withholding Foreign
Trust(orWT)EIN.A “withholding for-
eign trust EIN” or “WT-EIN” means the
employer identification number assigned
by the IRS to a withholding foreign trust.
WT’s WT-EIN is only to be used when
WT is acting as a withholding foreign
trust. For example, WT must give a with-
holding agent its non-WT EIN, if any,
rather than its WT-EIN, if it is not acting
as a withholding foreign trust and a tax-
payer identification number is required.
Sec. 2.31. Withholding Statement.
The term “withholding statement” is de-
fined in Section 5.02 of this Agreement.
Sec. 2.32. Other Terms.Any term
not defined in this section has the same
meaning that it has under the Code, the
income tax regulations under the Code, or
any applicable income tax treaty.
SECTION 3. WITHHOLDING
RESPONSIBILITY
Sec. 3.01. NRA Withholding Re-
sponsibility.WT is subject to the with-
holding and reporting provisions applica-
ble to withholding agents under chapter
3 of the Code. Under chapter 3, a with-
holding agent must withhold 30 percent
of any payment of an amount subject to
NRA withholding made to a beneficiary
or owner that is a foreign person unless the
withholding agent can reliably associate
the payment with documentation upon
which it can rely to treat the payment as
made to a payee that is a U.S. person or as
made to a beneficial owner that is a foreign
person entitled to a reduced rate of with-
holding. When it is acting as a withholding
foreign trust, WT must assume NRA with-
holding responsibility for amounts subject
to NRA withholding that are distributed
to, or included in the distributive share
of, any direct beneficiary or owner, and
WT must withhold the amount required to
be withheld under chapter 3 of the Code.
WT must provide a Form W–8IMY that
certifies to a withholding agent that makes
a payment of such amounts that WT is
acting as a withholding foreign trust, and
WT must identify such amounts on the
withholding statement associated with
that Form W–8IMY. WT is not required
to withhold when it pays such amounts
to another withholding foreign trust or
withholding foreign partnership that has
certified to WT on Form W–8IMY that
it is acting as a withholding foreign trust
or withholding foreign partnership with
respect to such identified amounts. WT is
not required to act as a withholding foreign
trust for all amounts that it receives from
a withholding agent. Except as provided
in Section 10 of this Agreement, WT may
not act as a withholding foreign trust for
amounts distributed to, or included in the
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distributive share of, passthrough benefi-
ciaries or owners or indirect beneficiaries
or owners. WT must act as a nonwithhold-
ing foreign trust for such amounts. When
WT is not acting as a withholding foreign
trust, WT must: 1) provide to the with-
holding agent a Form W–8IMY with Part
VI completed; 2) identify such amounts on
the withholding statement associated with
that Form W–8IMY; and 3) provide the
documentation and information required
by Treas. Reg. § 1.1441–5(e)(5)(iii) and
(iv).
Sec. 3.02. Timing of Withholding.
WT must withhold on the date it makes a
distribution to a direct foreign beneficiary
or owner that includes an amount subject
to NRA withholding. To the extent a direct
foreign beneficiary’s or owner's distribu-
tive share of income subject to withhold-
ing has not actually been distributed to the
direct foreign beneficiary or owner, WT
must withhold on the direct beneficiary’s
or owner’s distributive share on the earlier
of the date the statement required under
section 6048 is mailed or otherwise pro-
vided to the beneficiary or owner or the due
date for furnishing the statement (whether
or not WT is required to prepare and fur-
nish the statement).
Sec. 3.03. Withholding on Distribu-
tions.WT may determine the amount of
withholding on a distribution based on a
reasonable estimate of the beneficiary’s or
owner’s distributive share of income sub-
ject to withholding for the year. WT must
correct the estimated withholding to re-
flect the beneficiary’s or owner’s actual
distributive share on the earlier of the date
that the statement required under section
6048 is mailed or otherwise provided to the
beneficiary or owner or the due date for
furnishing the statement (whether or not
WT is required to prepare and furnish the
statement). If that date is after the due date
for the WT’s Forms 1042 and 1042–S (in-
cluding extensions) for the calendar year,
WT may withhold and report any adjust-
ments required by the corrected informa-
tion in the following calendar year.
Sec. 3.04. Deposit Requirements.
WT must deposit amounts withheld under
chapter 3 of the Code with a Federal Re-
serve bank or authorized financial institu-
tion at the time and in the manner provided
under section 6302 of the Code (see Treas.
Reg. § 1.6302–2(a) or § 31.6302–1(h)).
SECTION 4. DOCUMENTATION
REQUIREMENTS
Sec. 4.01. Documentation Require-
ments.WT agrees to obtain, review, and
maintain Forms W–8 and W–9 in accor-
dance with this Section 4. WT must obtain
a Form W–8 or W–9 from every direct
beneficiary or owner prior to the time that
withholding is required. WT agrees to
make documentation (together with any
associated withholding statements and
other documents or information) available
upon request for inspection by WT’s ex-
ternal auditor. WT represents that none of
the laws to which it is subject prohibits dis-
closure of the identity of any beneficiary
or owner or corresponding beneficiary
or owner information to WT’s external
auditor. WT may rely on the Forms W–8
and W–9 it obtains under this Section 4 as
the basis for determining its withholding
and reporting obligations.
Sec. 4.02. Documentation for For-
eign Beneficiaries or Owners.WT may
treat a direct beneficiary or owner as a for-
eign beneficial owner if the direct benefi-
ciary or owner provides a Form W–8 that
supports such status. WT may treat a di-
rect beneficiary or owner that has provided
a Form W–8 as entitled to a reduced rate of
NRA withholding if all the requirements
for a reduced rate are met and the Form
W–8 provided by the direct beneficiary or
owner supports entitlement to a reduced
rate. Sections 4.03 through 4.06 of this
Agreement describe the specific documen-
tation requirements necessary for obtain-
ing a reduced rate of withholding in certain
circumstances.
Sec. 4.03. Treaty Claims.WT may
not reduce the rate of withholding based
on a direct beneficiary’s or owner’s claim
of treaty benefits unless WT obtains from
the beneficiary or owner a Form W–8BEN
with Part II of the form properly com-
pleted, including the appropriate limitation
on benefits and section 894 certifications.
Sec. 4.04. Documentation for Inter-
national Organizations.WT may not
treat a direct beneficiary or owner as an
international organization entitled to an
exemption from withholding under sec-
tion 892 of the Code unless WT obtains
a Form W–8EXP from the international
organization and the name provided on the
Form W–8EXP is the name of an entity
designated as an international organization
by executive order pursuant to 22 United
States Code 288 through 288(f). If an
international organization is not claiming
benefits under section 892 of the Code but
under another Code exception, the provi-
sions of Section 4.02 of this Agreement
apply rather than the provisions of this
Section 4.04.
Sec. 4.05. Documentation for
Foreign Governments and Foreign
Central Banks of Issue.
(A) Documentation For a Foreign
Government or Foreign Central Bank
of Issue Claiming an Exemption From
Withholding Under Section 892 or
Section 895.WT may not treat a direct
beneficiary or owner as a foreign gov-
ernment or foreign central bank of issue
exempt from withholding under section
892 or 895 of the Code unless—
(1)WT receives from the direct benefi-
ciary or owner a Form W-8EXP establish-
ing that the direct beneficiary or owner is a
foreign government or foreign central bank
of issue;
(2)The income distributed to, or in-
cluded in the distributive share of, the di-
rect beneficiary or owner is the type of in-
come that qualifies for an exemption from
withholding under section 892 or 895; and
(3)WT does not know, or have reason to
know, that the direct beneficiary or owner
is a controlled commercial entity, that the
income owned by the foreign government
or foreign central bank of issue is being re-
ceived from a controlled commercial en-
tity, or that the income is from the disposi-
tion of an interest in a controlled commer-
cial entity.
(B) Treaty Exemption.WT may not
treat a direct beneficiary or owner as a for-
eign government or foreign central bank of
issue entitled to a reduced rate of withhold-
ing under an income tax treaty unless it ob-
tains a Form W–8BEN that, under Section
4.03 of this Agreement, is sufficient to ob-
tain a reduced rate of withholding under a
treaty.
(C) Other Code Exception.If a for-
eign government or foreign central bank
of issue is not claiming benefits under sec-
tion 892 or 895 of the Code but under an-
other Code exception (e.g., the portfolio
interest exception under sections 871(h) or
Au
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881(c) of the Code), the provisions of Sec-
tion 4.02 of this Agreement apply rather
than the provisions of this Section 4.05.
Sec. 4.06. Documentation for
Foreign Tax-Exempt Organizations.
(A) Reduced Rate of Withholding
Under Section 501.WT may not treat a
direct beneficiary or owner as a foreign or-
ganization described under section 501(c)
of the Code, and therefore exempt from
withholding (or, if the direct beneficiary
or owner is a foreign private foundation,
subject to withholding at a 4-percent rate
under section 1443(b) of the Code) unless
WT obtains a valid Form W–8EXP with
Part III of the form properly completed.
(B) Treaty Exemption.WT may not
treat a direct beneficiary or owner as a for-
eign organization that is tax exempt, or en-
titled to a reduced rate of withholding un-
der an income tax treaty unless WT ob-
tains a Form W-8BEN from the benefi-
ciary or owner that, under Section 4.03 of
this Agreement, is sufficient to obtain a re-
duced rate of withholding under a treaty.
(C) Other Exceptions.If a tax-ex-
empt entity is not claiming a reduced rate
of withholding because it is an organiza-
tion described under section 501(c) of the
Code or under an income tax treaty, but is
claiming a reduced rate of withholding un-
der another Code exception, the provisions
of Section 4.02 of this Agreement apply
rather than the provisions of this Section
4.06.
Sec. 4.07. Documentation for
Passthrough Beneficiaries or Owners.
Except as provided in Section 10 of this
Agreement, WT shall not act as a with-
holding foreign trust with respect to an
amount subject to withholding distributed
to, or included in the distributive share
of, a passthrough beneficiary or owner,
as defined in Section 2.25 of this Agree-
ment. WT must forward that passthrough
beneficiary’s or owner’s documentation
(and associated withholding statement and
documentation of indirect beneficiaries
or owners) to the withholding agent from
whom WT receives the amount subject to
withholding. WT may act as a withhold-
ing foreign trust with respect to amounts
subject to withholding distributed to, or
included in the distributive share of, ben-
eficiaries or owners that are themselves
withholding foreign trusts or withholding
foreign partnerships.
Sec. 4.08. Documentation for U.S.
Exempt Recipients.WT shall not treat a
beneficiary or owner as a U.S. exempt re-
cipient unless WT obtains from the ben-
eficiary or owner a Form W–9 on which
the beneficiary or owner writes “Exempt”
in Part II of the form.
Sec. 4.09. Documentation for U.S.
Non-Exempt Recipients.WT shall not
treat a beneficiary or owner as a U.S.
non-exempt recipient unless WT obtains a
Form W–9 from the beneficiary or owner.
Sec. 4.10. Documentation Validity.
WT may not rely on Forms W–8 or W–9
if WT has actual knowledge or reason to
know that the information or statements
contained in the forms are unreliable or in-
correct. Once WT knows, or has reason to
know, that a Form W–8 or W–9 provided
by a direct beneficiary or owner is unreli-
able or incorrect, WT must obtain a new
Form W–8 or W–9 prior to the time with-
holding is required
(A) Form W–8.WTmayrelyon
a properly completed Form W–8 until
its validity expires under Treas. Reg.
§ 1.1441–1(e)(4)(ii).
(B) Form W–9.WTmayrelyona
properly completed Form W–9 as long as
it has not been informed by the IRS or
another withholding agent that the form is
unreliable.
Sec. 4.12. Maintenance and
Retention of Documentation.
(A) Maintaining Documentation.WT
shallmaintainFormsW–8andW–9byre-
taining the original documentation, a certi-
fied copy, a photocopy or a microfiche, or
by electronic storage or similar means of
record retention.
(B) Retention Period.WT shall retain
a direct beneficiary's or owner's Form W–8
or W–9 obtained under this Section 4 for as
long as it may be relevant to the determina-
tion of WT's tax liability under this Agree-
ment.
SECTION 5. WITHHOLDING
FOREIGN TRUST WITHHOLDING
CERTIFICATE
Sec. 5.01. WT Withholding Certifi-
cate.WT agrees to furnish a withhold-
ing foreign trust withholding certificate to
each withholding agent from which it re-
ceives amounts subject to NRA withhold-
ing as a withholding foreign trust. The
withholding foreign trust withholding cer-
tificate is a Form W–8IMY (or acceptable
substitute form) that certifies that WT is
acting as a withholding foreign trust, con-
tains WT's WT-EIN, and provides all other
information required by the form. WT is
not required to disclose, as part of that
Form W–8IMY or its withholding state-
ment, any information regarding the iden-
tity of a direct beneficiary or owner.
Sec. 5.02. Withholding Statement.
WT agrees to provide to each withholding
agent from which WT receives amounts
subject to NRA withholding as a withhold-
ing foreign trust a written statement (the
“withholding statement”) identifying the
amounts for which WT acts as a withhold-
ing foreign trust. The statement forms an
integral part of the Form W–8IMY. The
withholding statement may be provided in
any manner, and in any form, to which WT
and the withholding agent mutually agree.
Sec. 5.03. Withholding Rate Pools.
When it is acting as a withholding for-
eign trust, WT must assume withholding
responsibility for amounts subject to with-
holding that are distributed to, or included
in the distributive shares of, its direct ben-
eficiaries or owners. Accordingly, with-
holding rate pool information is not re-
quired as part of WT's withholding state-
ment.
SECTION 6. TAX RETURN
OBLIGATIONS
Sec. 6.01. Form 1042 Filing
Requirement.
(A) In General.WT shall file a return
on Form 1042, whether or not WT with-
held any amounts under chapter 3 of the
Code, on or before March 15 of the year
following any calendar year in which WT
acts as a withholding foreign trust. In ad-
dition to the information specifically re-
quested on Form 1042 and the accompa-
nying instructions, WT shall attach a state-
ment setting forth the amounts of any over-
withholding or underwithholding adjust-
ments made under Treas. Reg. § 1.1461–2
and Sections 7.01 and 7.03 of this Agree-
ment, and an explanation of the circum-
stances that resulted in the over- or under-
withholding.
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(B) Extensions for Filing Returns.
WT may request an extension of the time
for filing Form 1042, or any of the infor-
mation required to be attached to the form,
by submitting Form 2758,Application for
Extension of Time to File Certain Excise,
Income, Information, and Other Returns,
on or before the due date of the return. The
application shall be in writing, properly
signed by a duly authorized agent of WT,
and shall clearly set forth the following:
(1)The calendar year for which the ex-
tension is requested; and
(2)A full explanation of the reason(s)
for requesting the extension, to assist the
IRS in determining the period of extension,
if any, that will be granted.
Sec. 6.02. Form 1042–S Reporting:
General Rule.Unless WT has made a
pooled reporting (PR) election pursuant to
Section 6.03 of this Agreement, WT is re-
quired to file separate Forms 1042–S for
each direct beneficiary or owner to whom
WT distributes, or in whose distributive
share is included, an amount subject to
NRA withholding. WT must file separate
Forms 1042–S by income code, exemption
code, recipient code, and withholding rate.
WT must file its Forms 1042–S in the man-
ner required by the regulations under chap-
ter 3 of the Code and the instructions to the
form, including any requirement to file the
forms magnetically or electronically. Any
Form 1042–S required by this Section 6
shall be filed on or before March 15 fol-
lowing the calendar year in which with-
holding, if any, was required under Sec-
tion 3.02 of this Agreement. WT may re-
quest an extension of time to file Forms
1042–S by submitting Form 8809,Request
for Extension of Time to File Information
Returns, by the due date of Forms 1042–S
in the manner required by Form 8809.
Sec. 6.03. Form 1042–S Reporting:
Special Rule for PR Election.If WT has
made the PR election pursuant to this Sec-
tion 6.03, WT is not required to file Forms
1042–S for amounts distributed to, or in-
cluded in the distributive share of, each
separate direct beneficiary or owner for
whom such reporting would otherwise be
required. Instead, WT shall file a sepa-
rate Form 1042–S for each reporting pool.
A reporting pool consists of income that
falls within a particular withholding rate
and within a particular income code, ex-
emption code, and recipient code as deter-
mined on Form 1042–S. WT may use a sin-
gle recipient code for all reporting pools
except for amounts paid to foreign tax-ex-
empt recipients, for which a separate recip-
ient code must be used. For this purpose, a
foreign tax-exempt recipient includes any
organization that is not subject to NRA
withholding and is not liable to tax in its
country of residence because it is a char-
itable organization, a pension fund, or a
foreign government. WT must make the
PR election at the time this Agreement is
executed by signing the election statement
on the signature page of this Agreement.
Once made, the PR election remains in ef-
fect for the entire term of this Agreement
beginning on the date the Agreement be-
comes effective and ending on the date of
its expiration or termination under Section
9 of this Agreement. WT must make a
new election for each renewal term of this
Agreement. If WT makes the PR election,
WT cannot revoke it prior to the end of the
term for which WT has made the PR elec-
tion. If WT did not make the PR election
at the time this Agreement was executed,
then WT may make a PR election only
by terminating this Agreement pursuant to
Section 9.03 and requesting to enter into a
new withholding foreign trust agreement.
Sec. 6.04. Form 3520–A Filing Re-
quirements.If WT is required to file Form
3520–A under section 6048 of the Code,
then WT shall file Form 3520–A and fur-
nish any required statements to U.S. bene-
ficiaries or owners in accordance with the
instructions for the form.
Sec. 6.05. Retention of Returns.WT
shall retain 1042 and Form 3520–A, if re-
quired, for the period of the applicable
statute of limitations on assessments and
collection under the Code.
SECTION 7. ADJUSTMENTS
FOR OVER- AND
UNDER-WITHHOLDING; REFUNDS
Sec. 7.01. Adjustments for NRA
Overwithholding by WT.WT may make
an adjustment for amounts paid to its
direct beneficiaries or owners that it has
overwithheld under chapter 3 of the Code
by applying either the reimbursement or
set-off procedures described in this section
within the time period prescribed for those
procedures.
(A) Reimbursement Procedure.WT
may repay its beneficiaries or owners for
an amount overwithheld and reimburse it-
self by reducing, by the amount of tax actu-
ally repaid to the beneficiaries or owners,
the amount of any subsequent deposit of
tax required to be made by WT under Sec-
tion 3.04 of this Agreement. For purposes
of this Section 7.01(A), an amount that is
overwithheld shall be applied in order of
time to each of WT's subsequent deposit
periods in the same calendar year to the ex-
tent that the withholding taxes required to
be deposited for a subsequent deposit pe-
riod exceed the amount actually deposited.
An amount overwithheld in a calendar year
may be applied to deposit periods in the
calendar year following the calendar year
of overwithholding only if—
(1)WT states on a Form 1042–S, filed
by March 15 of the calendar year following
the calendar year of overwithholding, the
amount of tax withheld and the amount of
any actual repayments; and
(2)WT states on a Form 1042, filed by
March 15 of the calendar year following
the calendar year of overwithholding, that
the filing of the Form 1042 constitutes a
claim for credit in accordance with Treas.
Reg. § 1.6414–1.
(B) Set-Off Procedure.WT may repay
its beneficiaries or owners by applying the
amount overwithheld against any amount
which otherwise would be required un-
der chapter 3 of the Code to be withheld
by WT before the earlier of March 15 of
the calendar year following the calendar
year of overwithholding or the date that
the Form 1042–S is actually filed with the
IRS. For purposes of making a return on
Form 1042 or 1042–S for the calendar year
of overwithholding, and for purposes of
making a deposit of the amount withheld,
the reduced amount shall be considered the
amount required to be withheld from such
income under chapter 3 of the Code.
Sec. 7.02. Collective Credit or
Refund Procedures for NRA Overwith-
holding.If WT has made a PR election
and it has overwithheld under chapter 3
of the Code on amounts subject to NRA
withholding paid to WT's direct beneficia-
ries or owners during a calendar year and
the amount has not been recovered under
the reimbursement or set-off procedures
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under Section 7.01 of this Agreement,
WT may request a credit or refund of the
total amount overwithheld by following
the procedures of this Section 7.02. WT
shall follow the procedures set forth un-
der sections 6402 and 6414 of the Code,
and the regulations thereunder, to claim
the credit or refund. No credit or refund
will be allowed after the expiration of the
statutory period of limitation for refunds
under section 6511 of the Code. WT may
use the collective refund procedures under
this Section 7.02 only if the following
conditions are met:
(A)WT must not have issued Forms
1042–S to the direct beneficiaries or own-
ers who were subject to overwithholding;
(B)WT must submit, together with its
amended return on which it claims a credit
or refund, a statement of the reason for the
overwithholding;
(C)WT must submit, together with its
amended return on which it claims a credit
or refund, a statement that it has repaid the
amount of overwithholding to the appro-
priate direct beneficiaries or owners prior
to filing the claim for credit or refund; and
(D)WT must retain a record showing
that it repaid the direct beneficiaries or
owners the amount of the overwithholding.
Sec. 7.03. Adjustments for NRA Un-
derwithholding.If WT knows that an
amount should have been withheld under
chapter 3 of the Code from a previous pay-
ment to a direct beneficiary or owner but
was not withheld, WT may either withhold
from future payments made to the same
direct beneficiary or owner or satisfy the
tax from the direct beneficiary's or owner's
proportionate share of assets over which
it has control. The additional withholding
or satisfaction of the tax owed may only
be made before the due date of the Form
1042 (not including extensions) for the cal-
endar year in which the underwithholding
occurred.
Sec. 7.04. NRA Underwithholding
after Form 1042 Filed.If, after a Form
1042 has been filed for a calendar year,
WT, WT's external auditor, or the IRS de-
termines that, due to WT's failure to carry
out its obligations under this Agreement,
WT has underwithheld tax for such year,
WT shall file an amended Form 1042 to re-
port and pay the underwithheld tax. WT
shall pay the underwithheld tax, the in-
terest due on the underwithheld tax, and
any applicable penalties, at the time of fil-
ing the amended Form 1042. If WT fails
to file an amended return, the IRS shall
make such return under section 6020 of the
Code.
Sec. 7.05. Special Rule Regarding
Failure to Deposit Penalties.Solely for
purposes of applying section 6656 of the
Code (failure to make deposit of taxes),
WTwillnotbeconsideredtohavemadean
underpayment of a deposit of NRA with-
holding taxes if the conditions of this para-
graph are met. The conditions of this para-
graph are that—
(A)WT makes its deposits within the
time (deposit period) required by section
6302 of the Code;
(B)The deposit is not less than 90 per-
cent of the aggregate amount of the tax re-
quired to be withheld under chapter 3 of
the Code during the deposit period appli-
cable to WT; and
(C)WT determines the difference be-
tween the total amount required to be de-
posited and the amount actually deposited
as of the end of the 3rd, 6th, 9th, and
12th months of the calendar year and the
difference is deposited no later than the
15th day of the second following month
(i.e., May 15, August 15, November 15 and
February 15, respectively). In determining
whether there has been an underpayment,
reimbursements and set-offs shall be taken
into account.
SECTION 8. EXTERNAL AUDIT
PROCEDURES
Sec. 8.01. In General.Unless WT
requests an IRS audit in lieu of an exter-
nal audit, the IRS agrees not to conduct an
on-site audit of WT with respect to with-
holding and reporting obligations covered
by this Agreement provided that an exter-
nal auditor designated in Appendix A of
this Agreement conducts an audit of WT in
accordance with this Section 8. WT shall
permit the external auditor to have access
to all relevant records of WT for purposes
of performing the external audit, includ-
ing information regarding specific benefi-
ciaries or owners. WT shall permit the IRS
to communicate directly with the external
auditor and to review the audit procedures
followed by the external auditor. WT rep-
resents that there are no legal prohibitions
that prevent the external auditor from ex-
amining any information relevant to the ex-
ternal audit to be performed under this Sec-
tion 8 and that there are no legal prohibi-
tions that prevent the IRS from communi-
cating directly with the auditor. WT shall
permit the IRS to examine the external au-
ditor’s work papers and reports.
Sec. 8.02. Designation of External
Auditor.WT's external auditor must be
one of the auditors listed in Appendix A
of this Agreement, unless WT and the IRS
agree, prior to the audit, to substitute an-
other auditor. WT shall not propose an ex-
ternal auditor unless it has a reasonable be-
lief that the auditor is subject to laws, reg-
ulations, or rules that impose sanctions for
failure to exercise its independence and to
perform the audit competently. The IRS
has the right to reject a proposed external
auditor, or to revoke its acceptance of an
external auditor, if the IRS, in its sole dis-
cretion, reasonably believes that the audi-
tor is not independent or cannot perform an
effective audit under this Agreement.
Sec. 8.03. Timing of External Audits:
General Rule.Unless WT has made a
PR election, WT shall have the external
auditor conduct an external audit only at
such time and only for such calendar years
as the IRS directs.
Sec. 8.04. Timing of External Audits:
Special Rule for PR Election.
(A)If WT has made a PR election and
the term of this Agreement is determined
under Section 9.02(A), WT shall have the
external auditor conduct an audit of the
second full calendar year and the fifth full
calendar year that this Agreement is in ef-
fect.
(B)If WT has made a PR election and
the term of this Agreement is determined
under Section 9.02(B), WT shall have the
external auditor conduct an audit after the
close of every other calendar year that this
Agreement is in effect. The auditor shall
examine the two previous calendar years.
For example, the first audit will occur in
the third calendar year that the Agreement
is in effect and the external auditor will
examine calendar years one and two.
Sec. 8.05. Scope of External Au-
dit.The external auditor shall verify
whether WT is in compliance with this
Agreement by conducting an audit that
meets the requirements of this Section
8.05. The report, described in Section
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8.06 of this Agreement, must disclose that
the external auditor has, at a minimum,
performed the following checks listed
in this Section 8.05, and set forth how
each of those checks was performed and
the results of the checks. WT's external
auditor is encouraged to contact the IRS
at the address set forth in Section 11.06 of
this Agreement and submit an audit plan
(which includes, if relevant, the extent to
which the external auditor proposes to rely
on WT's internal audit procedures) prior
to performing the audit so that the audit
may be conducted in the most efficient
and least costly manner possible.
(A) Documentation.The external au-
ditor must review information contained
in beneficiary or owner files to determine
whether the documentation requirements
of Section 4 of this Agreement are being
met.
(B) Withholding Responsibilities.
The external auditor must—
(1)Perform test checks of direct ben-
eficiaries or owners, to verify that WT is
withholding the proper amounts.
(2)Verify that amounts withheld were
timely deposited in accordance with Sec-
tion 3.04 of this Agreement.
(C) Return Filing and Information
Reporting.The external auditor must—
(1)Obtain copies of original and
amended Forms 1042, and any schedules,
statements, or attachments required to
be filed with those forms, and determine
whether the amounts of income, taxes, and
other information reported on those forms
are accurate by—
(i)Reviewing work papers;
(ii)Reviewing Forms W–8IMY, to-
gether with the associated withholding
statements, that WT has provided to with-
holding agents;
(iii)Reviewing copies of Forms 1042–S
received from withholding agents;
(iv)Reviewing account statements from
withholding agents;
(v)Reviewing correspondence between
WT and withholding agents; and
(vi)Interviewing personnel responsible
for preparing the Form 1042 and the work
papers used to prepare those forms.
(2)Obtain copies of original and
amended Forms 1042–S and Forms
3520–A together with the work papers
used to prepare those forms and determine
whether the amounts reported on those
forms are accurate by—
(i)Reviewing the Forms 1042–S re-
ceived from withholding agents;
(ii)Reviewing a valid sample of earn-
ings statements issued by WT to direct
beneficiaries or owners, if any.
(3)Thoroughly review the statements
attached to amended Forms 1042 filed to
claim a refund, ascertain their veracity, and
determine the causes of any overwithhold-
ing reported and ensure WT did not is-
sue Forms 1042–S to persons whom it in-
cluded as part of its collective credit or re-
fund.
(4)Determine, in the case of collective
credits or refunds, that WT repaid the ap-
propriate beneficiaries or owners prior to
requesting a collective credit or refund.
(E) Change in Circumstances.The
external auditor must verify that in the
course of the audit it has not discovered
any significant change in circumstances, as
describedinSection9.05(A)or(D)ofthis
Agreement.
Sec. 8.06. External Auditor's Report.
Upon completion of the audit of WT, the
external auditor shall issue a report, or re-
ports, of audit findings directly to the IRS
by sending the original report to the IRS
at the address set forth in Section 11.06 of
this Agreement. This report is due by De-
cember 31 following the calendar year be-
ing audited, or if that date falls on a Satur-
day or Sunday, the next U.S. business day.
The IRS may, however, upon request by
the external auditor, extend the due date
of the audit report upon good cause. The
report must be in writing, in English, and
currency amounts must be stated in U.S.
dollars. The report must fully describe the
scope of the audit, the methodologies (in-
cluding sampling techniques) used to de-
termine whether WT is in compliance with
the provisions of this Agreement, and the
result of each such determination. The re-
port must also specifically address each of
the items in Section 8.05 of this Agree-
ment.
Sec. 8.07. Expanding Scope and
Timing of External Audit.Upon review
of the external auditor's report, the IRS
may request, and WT must permit, the ex-
ternal auditor to perform additional audit
procedures.
SECTION 9. EXPIRATION,
TERMINATION AND DEFAULT
Sec. 9.01. Term of Agreement: Gen-
eral Rule.If WT has not made a PR elec-
tion, this Agreement shall be in effect on
and shall continue in force until
the earlier of the date WT terminates under
the trust instrument or the date WT is ter-
minated under 9.03 or 9.04 of this Agree-
ment.
Sec. 9.02. Term of Agreement:
Special Rule for PR Election.
(A)If WT has made a PR election, un-
less WT elects the special term pursuant to
Section 9.02(B), this Agreement shall be
in effect on
and shall expire on
the earlier of the date WT terminates un-
der the trust instrument or December 31 of
the fifth full calendar year after the year
in which this Agreement first takes effect.
This Agreement may be renewed for addi-
tional terms as provided in Section 9.08 of
this Agreement.
(B)If WT has made a PR election, and
WT elects the special term pursuant to this
Section 9.02(B), this Agreement shall be
in effect on
and shall expire on
the earlier of the date WT terminates under
the trust instrument or December 31 of the
fourteenth full calendar year after the year
in which this Agreement first takes effect.
If WT elects the special term, this Agree-
ment is not renewable. WT must make
the special term election under this Section
9.02(B) at the time this Agreement is exe-
cuted by signing the election statement on
the signature page of this Agreement.
Sec. 9.03. Termination of Agree-
ment.This Agreement may be termi-
nated by either the IRS or WT prior to
the end of its term by delivery of a notice
of termination to the other party in accor-
dance with Section 11.06 of this Agree-
ment. The IRS, however, shall not termi-
nate the Agreement unless there has been a
significant change in circumstances, as de-
fined in Section 9.05 of this Agreement, or
an event of default has occurred, as defined
in Section 9.06 of this Agreement, and the
IRS determines, in its sole discretion, that
the significant change in circumstances or
the event of default warrants termination of
this Agreement. In addition, the IRS shall
not terminate this Agreement in the event
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of default if WT can establish to the sat-
isfaction of the IRS that all events of de-
fault for which it has received notice have
been cured within the time period agreed
upon. The IRS shall notify WT, in ac-
cordance with Section 9.07 of this Agree-
ment, that an event of default has occurred
and that the IRS intends to terminate the
Agreement unless WT cures the default. A
notice of termination sent by either party
shall take effect on the date specified in the
notice.
(A) Automatic Termination.Notwith-
standing Section 9.03 of this Agreement,
this Agreement will terminate automati-
cally in the event that the external auditor
or the IRS on audit discovers that WT was
not in possession of Forms W–8 or W–9,
as applicable, for any direct beneficiary or
owner at any time that withholding or re-
porting was required under Section 3.02 of
this Agreement. The automatic termina-
tion will be effective as of December 31 of
the year in which the external auditor or the
IRS makes that discovery. The automatic
termination rules of this Section 9.04(A)
shall not apply in the case of indirect bene-
ficiaries or owners that are treated as direct
beneficiaries or owners of WT under Sec-
tion 10 of this Agreement.
(B) Cure and Reinstatement.This
Agreement will be reinstated, effective the
same date it automatically terminated un-
der Section 9.04(A) of this Agreement,
if—
(1)WT obtains appropriate Forms W–8
or W–9 (that relate to the time withhold-
ing or reporting was required) for each
such undocumented beneficiary or owner
before March 15 of the year following the
year in which the Agreement automati-
cally terminated, or
(2)All such undocumented beneficia-
ries or owners have ceased to be benefi-
ciaries or owners in WT before March 15
of the year following the year in which the
Agreement automatically terminated.
(C) Payment of Underwithholding
and Reporting upon Termination.In
the event of automatic termination of
this Agreement underthis Section 9.04,
WT must pay any underwithholding of
tax, interest, and penalties that the IRS
determines is attributable to each undoc-
umented direct beneficiary or owner for
the period during which the beneficiary or
owner was undocumented, and, if WT has
made a PR election, WT must file Forms
1099, or beneficiary or owner specific
Forms 1042–S reporting the names and
addresses and other required information,
as appropriate, for every undocumented
direct beneficiary or owner from the ear-
liest time the Form W–8 or W–9 was
required for that undocumented direct
beneficiary or owner through the date of
termination. WT may, however, continue
to report on a pooled basis for documented
foreign direct beneficiaries or owners
through this period.
(D) Reinstatement after Termination.
After the date of automatic termination of
this Agreement, WT may not act as a with-
holding foreign trust, and must so notify
any persons to which WT has furnished a
withholding foreign trust certificate. Af-
ter the date of automatic termination of
this Agreement, the IRS may reinstate this
Agreement (or the IRS may require WT to
enter into a new withholding foreign trust
agreement) on such terms and conditions
and with such modifications as the IRS
may determine.
Sec. 9.05. Significant Change in
Circumstances.Forpurposesofthis
Agreement, a significant change in cir-
cumstances includes, but is not limited
to—
(A)A change in U.S. federal law or pol-
icy, or applicable foreign law or policy, that
affects the validity of any provision of this
Agreement, materially affects the proce-
dures contained in this Agreement, or af-
fects WT's ability to perform its obliga-
tions under this Agreement;
(B)A ruling of any court that affects
the validity of any provision of this Agree-
ment; or
(C)A significant change in WT's busi-
ness practices that affects WT's ability to
meet its obligations under this Agreement.
Sec. 9.06. Events of Default.For
purposes of this Agreement, an event of
default occurs if WT fails to perform any
material duty or obligation required under
this Agreement, and includes, but is not
limited to, the occurrence of any of the
following:
(A)WT fails to implement adequate
procedures, accounting systems, and inter-
nal controls to ensure compliance with this
Agreement;
(B)WT underwithholds an amount that
WT is required to withhold under chapter
3 of the Code and fails to correct the un-
derwithholding or to file an amended Form
1042 reporting, and paying, the appropri-
ate tax;
(C)WT makes excessive refund claims;
(D)WT fails to file Forms 1042,
1042–S, 3530–A (if required), 1041 (if
required), and Schedules K–1 (if required)
by the due date specified on such forms or
files forms that are materially incorrect or
fraudulent;
(E)WT fails to have an external audit
performed when required, WT's external
auditor fails to provide its report directly
to the IRS on a timely basis, WT fails to
cooperate with the external auditor, or WT
or its external auditor fails to cooperate
with the IRS;
(F)WT fails to inform the IRS within
90 days of any significant change in its
business practices to the extent that change
affects WT's obligations under this Agree-
ment;
(G)WT fails to cure a default identified
by the IRS or by an external auditor;
(H)WT makes any fraudulent state-
ment or a misrepresentation of material
fact with regard to this Agreement to the
IRS, a withholding agent, or WT's exter-
nal auditor;
(I)The IRS determines that WT's exter-
nal auditor is not sufficiently independent
to adequately perform its audit function or
the external auditor fails to provide an au-
dit report that complies with Section 8 of
this Agreement;
(J)WT is prohibited by any law from
disclosing the identity of a beneficiary or
owner or beneficiary or owner information
to WT's external auditor;
(K)WT fails to make deposits in the
time and manner required by Section 3.04
of this Agreement or fails to make ade-
quate deposits, taking into account the pro-
cedures of 7.05 of this Agreement; or
(L)WT fails to permit the external audi-
tor to perform additional audit procedures
under the provisions of Section 8.07 of this
Agreement.
Sec. 9.07. Notice and Cure.Upon
the occurrence of an event of default, the
IRS may deliver to WT a notice of de-
fault specifying the event of default that
has occurred. WT shall respond to the no-
tice of default within 60 days (60-day re-
sponse) from the date of the notice of de-
fault. The 60-day response shall contain
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an offer to cure the event of default and the
time period in which the cure will be ac-
complished or shall state the reasons why
WT does not agree that an event of de-
fault has occurred. If WT does not provide
a 60-day response, the IRS may deliver a
notice of termination as provided in Sec-
tion 9.03 of this Agreement. If WT pro-
vides a 60-day response, the IRS shall ei-
ther accept or reject WT's statement that
no default has occurred or accept or reject
WT's proposal to cure an event of default.
If the IRS rejects WT's contention that no
default has occurred or rejects WT's pro-
posal to cure a default, the IRS will offer
a counter-proposal to cure the event of de-
fault. Within 30 days of receiving the IRS's
counter-proposal, WT shall notify the IRS
(30-day response) whether it continues to
maintain that no default has occurred or
whether it rejects the IRS's counter-pro-
posal to cure an event of default. If WT's
30-day response states that no default has
occurred or it rejects the IRS's counter-pro-
posal to cure, the parties shall seek to re-
solve their disagreement within 30 days of
the IRS's receipt of WT's 30-day response.
If a satisfactory resolution has not been
achieved at the end of this latter 30-day pe-
riod, or if WT fails to provide a 30-day re-
sponse, the IRS may terminate this Agree-
ment by providing a notice of termination
in accordance with Section 9.03 of this
Agreement. If WT receives a notice of ter-
mination from the IRS, it may appeal the
determination within 30 days of the date of
the notice of termination by sending a writ-
ten notice to the address specified in Sec-
tion 11.06 of this Agreement. If WT ap-
peals the notice of termination, this Agree-
ment shall not terminate until the appeal
has been decided. If an event of default
is discovered in the course of an external
audit, the WT may cure the default, with-
out following the procedures of this Sec-
tion 9.07, if the external auditor's report de-
scribes the default and the actions that WT
took to cure the default and the IRS deter-
mines that the cure procedures followed by
WT were sufficient. If the IRS determines
that WT's actions to cure the default were
not sufficient, the IRS shall issue a notice
of default and the procedures described in
this Section 9.07 shall be followed.
Sec. 9.08. Renewal.If WT has made
the PR election under Section 6.03 of
this Agreement and intends to renew this
Agreement for an additional term, it shall
submit an application for renewal to the
IRS no earlier than one year and no later
than six months prior to the expiration
of this Agreement. Any such application
for renewal must contain an update of
the information provided by WT to the
IRS in connection with the application to
enter into this Agreement, and any other
information the IRS may request in con-
nection with the renewal process. This
Agreement shall be renewed only upon the
signatures of both WT and the IRS. Either
the IRS or WT may seek to negotiate a
new withholding foreign trust agreement
rather than renew this Agreement.
SECTION 10. CERTAIN
PARTNERSHIPS AND TRUSTS
Sec. 10.01. Certain Smaller Part-
nerships and Trusts.WT may not ap-
ply the rules of this Section 10.01 unless
it has made a PR election under Section
6.03 of this Agreement. WT may apply
the rules of this Section 10.01 only to a
partnership or trust that meets the follow-
ing conditions: (i) the partnership or trust
is a foreign partnership or foreign simple
or grantor trust, (ii) the partnership or trust
is a direct partner, beneficiary or owner of
WT, (iii) none of the partners, beneficia-
ries or owners of the partnership or trust
is a U.S. person or a passthrough partner,
beneficiary or owner, and (iv) the total re-
portable amounts distributed to, and in-
cluded in the distributive share of, the part-
nership or trust for the calendar year do not
exceed $200,000. In applying this Section
10.01, WT must treat the partners of such
a partnership or the beneficiaries or own-
ers of such a trust as direct beneficiaries or
owners of WT under this Agreement. To
apply this Section 10.01, WT and the part-
nership or trust must comply with all of the
rules listed below.
(1)WT and the partnership or trust must
agree in writing that the partnership or trust
will make available to WT’s auditor for
purposes of WT’s audit under Section 8 of
this Agreement records that establish that
the partnership or trust has provided WT
with documentation for all of its partners,
beneficiaries or owners.
(2)The partnership or trust must
provide to WT a Form W–8IMY, to-
gether with Forms W–8 from each part-
ner, beneficiary or owner, and a with-
holding statement, under Treas. Reg.
§ 1.1441–5(c)(3)(iv) or (e)(5)(iv), that
provides information for all partners, ben-
eficiaries or owners. The withholding
statement, however, need not provide any
allocation information.
(3)WT must treat amounts distributed
to, or included in the distributive share of,
the partnership or trust as allocated solely
to any partner, beneficiary or owner that is
subject to the highest rate of withholding
and must withhold at that rate.
(4)WT may include amounts dis-
tributed to, or included in the distributive
share of, a partnership or trust under Sec-
tion 10.01(3) in its Form 1042–S reporting
pools for direct account holders under
Section 6.03 of this Agreement.
(5)After WT has withheld in accor-
dance with Section 10.01(3) above, it may
file a separate Form 1042–S for any part-
ner, beneficiary or owner who requests
that it do so. WT may do so only if the
partnership or trust provides a withhold-
ing statement that includes allocation in-
formation for the requesting partner, bene-
ficiary or owner and only if the partnership
or trust has agreed in writing under Section
10.01(1) to make available to WT’s exter-
nal auditor records that substantiate the al-
location information included in its with-
holding statement.
(6)WT may not include any amounts
distributed to, or included in the distribu-
tive share of, a partnership or trust to which
the WT is applying the rules of this Section
10.01 in any collective refund claim made
under Section 7.02 of this Agreement.
(7)WT and a partnership or trust that
apply this Section 10.01 to any calendar
year are not required to apply this Section
10.01 to subsequent calendar years. WT
and a partnership or trust that apply this
Section 10.01 to any calendar year must
apply these rules to the calendar year in its
entirety.
(8)WT and the partnership or trust may
not apply this Section 10.01 to any cal-
endar year for which the partnership or
trust has failed to make available to WT’s
auditor the records described in Section
10.01(1) within 90 days after these records
are requested. If the partnership or trust
has failed to make these records available
Au
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33
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within the 90-day period, or if WT and the
partnership or trust fail to comply with any
other requirement of this Section 10.01,
WT must apply Treas. Reg. § 1.1441–1
and 1.1441–5 to the partnership or trust,
must correct its withholding, and must file
corrected Forms 1042 and 1042–S.
Sec. 10.02. Certain Related Part-
nerships and Trusts.WT may not ap-
ply the rules of this Section 10.02 unless
it has made a PR election under Section
6.03 of this Agreement. WT may apply
the rules of this Section 10.02 only to a
partnership or trust that meets the follow-
ing conditions: (1) the partnership or trust
is a foreign partnership or foreign simple
or grantor trust; (2) the partnership or trust
is either (i) a direct beneficiary or owner
of WT or (ii) an indirect beneficiary or
owner of WT that is a partner, beneficiary
or owner of a partnership or trust to which
WT has also applied this Section 10.02;
and (3) the WT is a general partner of
the partnership or a trustee of the trust.
WT may not apply this Section 10.02 to
indirect partners, beneficiaries or owners
of such partnerships or trusts, or to direct
partners, beneficiaries or owners of such
partnerships or trusts that are intermedi-
aries, flow-through entities or U.S. nonex-
empt recipients. See Section 10.02(5) of
this Agreement. To apply this Section
10.02, WT and the partnership or trust
must comply with all of the rules listed be-
low.
(1)WT and the partnership or trust must
enter into a written agreement under which
the partnership or trust agrees:
(a)To act as an agent of WT with re-
spect to its partners, beneficiaries or own-
ers, and, as WT’s agent, to apply the provi-
sions of the WT Agreement to its partners,
beneficiaries or owners,
(b)To treat its direct partners, benefi-
ciaries or owners as direct beneficiaries or
owners of WT under the WT Agreement
and to treat its indirect partners, beneficia-
ries or owners as indirect partners of WT
under the WT Agreement, and
(c)To make available, upon request, to
WT’s auditor, for purposes of WT’s au-
dit under Section 8 of the WT Agreement,
records that establish its compliance with
all of the rules listed under this Section
10.02.
(2)By entering into an agreement with
a partnership or trust under paragraph (1)
of this Section 10.02, WT is not assign-
ing its liability for the performance of any
of its obligations under this Agreement.
WT and the partnership or trust to which
WT applies the rules of this Section 10.02,
are jointly and severally liable for any tax,
penalties and interest that may result from
the failure of the partnership or trust to
meet any of the obligations imposed by its
agreement with WT.
(3)The partnership or trust must pro-
vide to WT a Form W–8IMY together
with a withholding statement, under Treas.
Reg. § 1.1441–5(c)(3)(iv) or (e)(5)(iv),
that includes all information necessary for
WT to fulfill its withholding, reporting and
filing obligations under this Agreement.
The withholding statement may include
pooled basis information regarding direct
partners, beneficiaries or owners that are
not intermediaries, flow-through entities
or U.S. non-exempt recipients. The part-
nership or trust need not provide to WT
documentation for partners, beneficiaries
or owners, except as provided under Sec-
tion 10.02(1)(c).
(4)WT must withhold on the date an
amount is distributed to or included in the
distributive share of a foreign partnership
or trust based on the withholding state-
ment provided by the partnership or trust.
The amount allocated to each partner,
beneficiary or owner in the withholding
statement may be based on a reasonable
estimate of the partner’s, beneficiary’s
or owner’s distributive share of income
subject to withholding for the year. The
partnership or trust must correct the esti-
mated allocations to reflect the partner’s,
beneficiary’s or owner’s actual distribu-
tive share and must provide this corrected
information to WT on the earlier of the
date that the statement required under sec-
tion 6031(b) of the Code (schedule K–1)
is mailed or otherwise provided to the
partner or the due date for furnishing the
statement (whether or not the partnership
or trust is required to prepare and furnish
the statement). If that date is after the due
date for WT’s Forms 1042 and 1042–S
(without regard to extensions) for the cal-
endar year, WT may withhold and report
any adjustments required by the corrected
information in the following calendar year.
(5)WT must file separate Forms
1042–S reflecting pooled basis informa-
tion for each partnership or trust that has
provided pooled basis information in its
withholding statement. WT must apply
the provisions of Treas. Reg. § 1.1441–1
and 1.1441–5 to partners, beneficiaries or
owners of such partnerships or trusts that
are indirect partners, beneficiaries or own-
ers, and to direct partners, beneficiaries or
owners of such partnerships or trusts that
are intermediaries, flow-through entities
or U.S. nonexempt recipients.
(6)A partnership or trust to which WT
applies this Section 10.02 may not assume
primary NRA withholding responsibil-
ity, or primary Form 1099 reporting and
backup withholding responsibility.
(7)WT and a partnership or trust that
apply this Section 10.02 to any calendar
year must apply these rules to the calendar
year in its entirety. Generally, WT and a
partnership or trust that apply this Section
10.02 to any calendar year are not required
to apply this Section 10.02 to subsequent
calendar years. If, however, WT with-
holds and reports any adjustments required
by corrected information in a subsequent
calendar year under Section 10.02(4), WT
must apply this Section 10.02 to that cal-
endar year in its entirety.
(8)WT and a partnership or trust may
not apply this Section 10.02 to any cal-
endar year for which the partnership or
trust has failed to make available to WT’s
auditor the records described in Section
10.02(1)(c) within 90 days after these
records are requested. If, for any calendar
year, the partnership or trust has failed
to make these records available within
the 90-day period, or if WT and the part-
nership or trust fail to comply with any
other requirement of this Section 10.02,
WT must apply Treas. Reg. § 1.1441–1
and 1.1441–5 to the partnership or trust,
must correct its withholding, and must file
corrected Forms 1042 and 1042–S for the
calendar year.
SECTION 11. MISCELLANEOUS
PROVISIONS
Sec. 11.01.WT's application to be-
come a withholding foreign trust and the
Appendix to this Agreement are hereby
incorporated into and made an integral
part of this Agreement. This Agreement,
WT's application, and the Appendix to
this Agreement constitute the complete
agreement between the parties.
Sec. 11.02.This Agreement may be
amended by the IRS if the IRS determines
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that such amendment is needed for the
sound administration of the internal rev-
enue laws or internal revenue regulations.
The Agreement may also be modified by
either WT or the IRS upon mutual agree-
ment. Such amendments or modifications
shall be in writing.
Sec. 11.03.Any waiver of a provision
of this Agreement is a waiver solely of that
provision. The waiver does not obligate
the IRS to waive other provisions of this
Agreement or the same provision at a later
date.
Sec. 11.04.This Agreement shall be
governed by the laws of the United States.
Any legal action brought under this Agree-
ment shall be brought only in a U.S. court
with jurisdiction to hear and resolve mat-
ters under the internal revenue laws of the
United States. For this purpose, WT agrees
to submit to the jurisdiction of such U.S.
court.
Sec. 11.05.WT's rights and responsi-
bilities under this Agreement cannot be as-
signed to another person.
Sec. 11.06.Notices provided under this
Agreement shall be mailed registered, first
class airmail. Notice shall be directed as
follows:
To the IRS
Internal Revenue Service
LMSB:FS:QI
290 Broadway
New York, NY 10007–1867
USA
All notices sent to the IRS must include
the WT’s WT-EIN.
To WT:
Sec. 11.07.WT, acting in its capacity
as a withholding foreign trust or in any
other capacity, does not act as an agent of
the IRS, nor does it have the authority to
hold itself out as an agent of the IRS.
IN WITNESS WHEREOF, the
above parties have subscribed their
names to these presents, in duplicate.
Signed this day of ,
(name and title of person
signing for WT)
(name and title of person
signing for IRS)
PR Election Statement – Six Year
Term
By signing hereunder, WT makes
the PR election with a term of
six years or until WT terminates,
whichever is earlier, under Sections
6.03 and 9.02 (A) of this Agreement.
(name and title of person
signing for WT)
PR Election Statement – Fifteen Year
Term
By signing hereunder, WT makes
the PR election with a term of 15 years
or until WT terminates, whichever is
earlier, under Sections 6.03 and 9.02
(B) of this Agreement.
(name and title of person
signing for WT)
Appendix A
WT and the IRS agree th
at any of the
following auditors m
ay be used by WT
to perform the exter
nal audits required by
Section 8 of this Agr
eement.
[Names, addresses,
telephone and fax
numbers of external
auditors.]
APPENDIX 3
Amendment to Qualified Intermediary
Withholding Agreement
SECTION 4A. CERTAIN
PARTNERSHIPS AND TRUSTS
Sec. 4A.01.Certain Smaller Partner-
ships and Trusts.QI may apply the rules
of this Section 4A.01 to a partnership or
trust only if (i) it is a foreign partnership
or foreign simple or grantor trust, (ii) it
is a direct account holder of QI, (iii) none
of its partners, beneficiaries or owners is a
U.S. person or a passthrough partner, bene-
ficiary or owner, as defined in Section 2.17
of the WP agreement and Section 2.25 of
the WT agreement, provided in Revenue
Procedure 2003–64, and (iv) the total re-
portable amounts that QI has paid to ac-
counts of the partnership or trust that are
covered by the QI Agreement do not ex-
ceed $200,000 for the calendar year. To
apply this Section 4A.01, QI and the part-
nership or trust must comply with all of the
rules listed below.
(1)QI and the partnership or trust must
agree in writing that the partnership or
trust, upon request, will make available to
QI’s auditor for purposes of QI’s second
and fifth year audits under Section 10 of
the QI Agreement records that establish
that the partnership or trust has provide
d
QI with documentation all of its partners
,
beneficiaries or owners.
(2)The partnership or trust must pro-
vide to QI a Form W–8IMY, together with
Forms W–8 or documentary evidence
listed in the know-your-custome
r(KYC)
attachment to the QI Agreement f
rom
each partner, beneficiary or ow
ner, and
a withholding statement, unde
r Treas.
Reg. § 1.1441–5(c)(3)(iv) or (
e)(5)(iv),
that provides information fo
r all partners,
beneficiaries or owners. The
withholding
statement, however, need no
t provide any
allocation information.
(3)QI must treat payments to
the part-
nership or trust as allocat
ed solely to any
partner, beneficiary or ow
ner that is sub-
ject to the highest rate of
withholding and
must withhold at that r
ate.
(4)QI may include payme
nts made to a
partnership or trust u
nder section 4A.01(3)
in its Form 1042–S repo
rting pools for di-
rect account holders
under Section 8.03 of
the QI Agreement.
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(5)After QI has withheld in accordance
with Section 4A.01(3) above, it may file
a separate Form 1042–S for any partner,
beneficiary or owner who requests that it
do so. QI may do so only if the partnership
or trust provides a withholding statement
that includes allocation information for the
requesting partner beneficiary or owner
and only if the partnership or trust has
agreed in writing under Section 4A.01(1)
to make available to QI’s external auditor
records that substantiate that the allocation
information included in its withholding
statement.
(6)QI may not include any payments
made to a partnership or trust to which QI
is applying the rules of this Section 4A.01
in any collective refund claim made under
section 9.04 of the QI Agreement.
(7)QI and a partnership or trust that
apply this Section 4A.01 to any calendar
year are not required to apply this Section
4A.01 to subsequent calendar years. QI
and a partnership or trust that apply this
Section 4A.01 to any calendar year must
apply these rules to the calendar year in its
entirety.
(8)QI and the partnership or trust may
not apply this Section 4A.01 to any cal-
endar year for which the partnership or
trust has failed to make available to QI’s
auditor the records described in Section
4A.01(1) within 90 days after these records
are requested. If the partnership or trust
has failed to make these records available
within the 90-day period, or if QI and the
partnership or trust fail to comply with any
other requirements of this Section 4A.01,
QI must apply the provisions of Treas.
Reg. § 1.1441–1 and 1.1441–5 to the part-
nership or trust, must correct its withhold-
ing, and must file corrected Forms 1042
and 1042–S.
Sec. 4A.02. Certain Related Partner-
ships and Trusts.QI may apply the rules
of this Section 4A.02 only to a partnership
or trust that is (1) a foreign partnership or
foreign simple or grantor trust; (2) either
(i) a direct account holder of QI or (ii) an
indirect account holder of QI that is a di-
rect partner, beneficiary or owner of a part-
nership or trust to which QI has also ap-
plied this Section 4A.02; and (3) the QI,
or an affiliate of the QI, is a general part-
ner of the partnership or a trustee of the
trust. QI may not apply the rules of this
Section 4A.02 to indirect partners, bene-
ficiaries or owners of such a partnership
or trust, or to direct partners, beneficia-
ries or owners of such partnerships or trusts
that are intermediaries, flow-through en-
tities or U.S. nonexempt recipients. See
Section 4A.02(5) of this Agreement. To
apply this Section 4A.02, QI and the part-
nership or trust must comply with all of the
rules listed below.
(1)QI and the partnership or trust must
enter into a written agreement under which
the partnership or trust agrees:
(a)To act as an agent of QI with re-
spect to its partners, beneficiaries or own-
ers, and, as QI’s agent, to apply the provi-
sions of the QI Agreement to the partners,
beneficiaries or owners,
(b)To treat its direct partners, benefi-
ciaries or owners as direct account holders
of QI under the QI Agreement and to treat
its indirect partners, beneficiaries or own-
ers as indirect account holders of QI under
the QI Agreement,
(c)To make available, upon request,
to QI’s auditor, for purposes of QI’s au-
dit under Section 10 of the QI Agreement,
records that establish its compliance with
all of the rules listed under this Section
4A.02.
(2)By entering into an agreement with a
partnership or trust under paragraph (1) of
this section, QI is not assigning its liability
for the performance of any of its obliga-
tions under the QI Agreement. QI and the
partnership or trust to which QI applies the
rules of this Section 4A.02, are jointly and
severally liable for any tax, penalties and
interest that may result from the failure of
the partnership or trust to meet any of the
obligations imposed by its agreement with
QI.
(3)The partnership or trust must pro-
vide to QI a Form W-8IMY together with a
withholding statement, under Treas. Reg.
§ 1.1441–5(c)(3)(iv) or (e)(5)(iv), that in-
cludes all information necessary for QI to
fulfill its withholding, reporting and fil-
ing obligations under the QI Agreement.
The withholding statement may include
pooled basis information regarding direct
partners, beneficiaries or owners that are
not intermediaries, flow-through entities
or U.S. non-exempt recipients. The part-
nership or trust need not provide to QI
documentation for partners, beneficiaries
or owners, except as provided under para-
graph (1)(c) of this section.
(4)QI must withhold on the date it
makes a payment to a foreign partnership
or trust based on the withholding statement
provided by the partnership or trust. The
amount allocated to each partner, benefi-
ciary or owner in the withholding state-
ment may be based on a reasonable es-
timate of the partner’s, beneficiary’s or
owner’s distributive share of income sub-
ject to withholding for the year. The part-
nership or trust must correct the estimated
allocations to reflect the partners’, ben-
eficiaries’ or owners’ actual distributive
share, and must provide this corrected in-
formation to QI, on the earlier of the date
that the statement required under section
6031(b) (schedule K–1) is mailed or oth-
erwise provided to the partner or the due
date for furnishing the statement (whether
or not the partnership or trust is required to
prepare and furnish the statement). If that
date is after the due date for QI’s Forms
1042 and 1042–S (without regard to exten-
sions) for the calendar year, QI may with-
hold and report any adjustments required
by the corrected information in the follow-
ing calendar year.
(5)QI must file separate Forms 1042–S
reflecting pooled basis information for
each partnership or trust that has provided
pooled basis information in its withhold-
ing statement. QI must file Forms 1042–S
and 1099, as provided in the QI Agree-
ment, for partners, beneficiaries or owners
of such partnerships or trusts that are in-
direct partners, beneficiaries or owners,
and for direct partners, beneficiaries or
owners of such partnerships or trusts that
are intermediaries, flow-through entities
or U.S. nonexempt recipients.
(6)The partnership or trust may not as-
sume primary NRA withholding responsi-
bility, or primary Form 1099 reporting and
backup withholding responsibility.
(7)QI and a partnership or trust that ap-
ply this Section 4A.02 to any calendar year
must apply these rules to the calendar year
in its entirety. Generally, QI and a partner-
ship or trust that apply this Section 4A.02
to any calendar year are not required to ap-
ply this Section 4A.02 to subsequent cal-
endar years. If, however, QI withholds and
reports any adjustments required by cor-
rected information in a subsequent calen-
dar year under Section 4A.02(4), QI must
apply this Section 4A.02 to that calendar
year in its entirety.
(8)QI and a partnership or trust may
not apply this Section 4A.02 to any calen-
dar year for which the partnership or trust
20
03-32 I.R.B.
33
5
Au
gust 11, 2003

has failed to make available to QI’s au-
ditor the records described in paragraph
(1)(c) of this section within 90 days af-
ter these records are requested. If, for
any calendar year, the partnership or trust
has failed to make these records available
within the 90-day period, or if QI and the
partnership or trust fail to comply with any
other requirement of this Section 4A.02,
QI must apply Treas. Reg. § 1.1441–1 and
1.1441–5 to the partnership or trust, must
correct its withholding, and must file cor-
rected Forms 1042 and 1042–S for the cal-
endar year.
26 CFR 601.201: Rulings and determination letters.
(Also Part I, §§ 856; 1.856–3, 1.856–5, and
301.7701–3.)
Rev. Proc. 2003–65
SECTION 1. PURPOSE
This revenue procedure sets forth a safe
harbor under which a loan from a real es-
tate investment trust (REIT) secured by
an interest in a partnership or by the sole
membership interest in a disregarded entity
will be treated as a real estate asset for pur-
poses of §§ 856(c)(4)(A) and 856(c)(5)(B)
of the Internal Revenue Code and the in-
terest on the loan will be treated as interest
on an obligation secured by a mortgage on
real property or on an interest in real prop-
erty for purposes of § 856(c)(3)(B).
SECTION 2. BACKGROUND
.01 Many REITs invest in real estate
by making loans that are secured by real
property. In certain cases because of fi-
nancing arrangements and restrictive loan
covenants, REITs make loans to the own-
ers of entities that hold real property in-
stead of making loans that are secured di-
rectly by real property. These loans are se-
cured by a pledge of the borrowers' owner-
ship interests in the property-owning enti-
ties.
.02 Section 856(a) provides that an en-
tity shall not be considered a REIT for any
taxable year unless certain requirements
are satisfied. One requirement is a test con-
tained in § 856(c)(4)(A) that provides that
at the close of each quarter of its taxable
year, at least 75 percent of the value of a
REIT's total assets must be represented by
real estate assets, cash and cash items (in-
cluding receivables), and government se-
curities.
.03 Section 856(c)(5)(B) provides
that the term “real estate assets” means
real property (including interests in real
property and interests in mortgages on
real property) and shares (or transfer-
able certificates of beneficial interest) in
other REITs that meet the requirements of
§§ 856 through 859. Section 1.856–3(d)
of the Income Tax Regulations provides
that the term “real property” means land
or improvements thereon, such as build-
ings and that the term “real property”
includes interests in real property. Section
1.856–3(d) further provides that local law
definitions will not be controlling for pur-
poses of determining the meaning of the
term “real property” as used in § 856 and
the regulations thereunder.
.04 Section 856(c)(3)(B) provides that
at least 75 percent of a REIT's gross in-
come must be derived from certain items,
including interest on obligations secured
by mortgages on real property or on inter-
ests in real property.
.05 Section 1.856–5(c)(1) provides that
if a mortgage covers both real property
and other property, an apportionment of
the interest income must be made for
purposes of the 75-percent requirement
of § 856(c)(3). Section 1.856–5(c)(1)(i)
provides that if the loan value of the real
property is equal to or exceeds the amount
of the loan, the entire interest income shall
be apportioned to the real property. Sec-
tion 1.856–5(c)(2) provides that the loan
value of the real property is the fair market
value of the property, determined on the
date the commitment by the trust to make
the loan becomes binding on the trust.
.06 Under § 301.7701–3(b)(1)(ii) of
the Procedure and Administration Regu-
lations, certain entities (including limited
liability companies) with a single member
that do not elect to be treated as cor-
porations will be disregarded as entities
separate from their owners for federal tax
purposes.
.07 Section 1.856–3(g) provides that in
the case of a REIT that is a partner in a part-
nership, the REIT will be deemed to own
its proportionate share of each of the as-
sets of the partnership and will be deemed
to be entitled to the income of the partner-
ship attributable to such share. For pur-
poses of § 856, the interest of a partner in
the partnership's assets will be determined
in accordance with the partner's capital in-
terest in the partnership. The character
of the various assets in the hands of the
partnership and items of gross income of
the partnership retain the same character
in the hands of the partners for all pur-
poses of § 856. Thus, for example, if the
REIT owns a 30-percent capital interest in
a partnership that owns a shopping mall,
the REIT will be treated as owning 30 per-
cent of such property and as earning 30
percent of the rent derived from the prop-
erty by the partnership.
.08 In Rev. Rul. 77–459, 1977–2 C.B.
239, a REIT makes a construction loan to a
partnership, and as security for the loan the
partnership assigns its interest in an Illinois
land trust to the REIT. The partnership is
the sole beneficiary of the land trust, and
the sole asset of the land trust is real prop-
erty. Although the beneficial interest in an
Illinois land trust is personal property un-
der Illinois law, so long as the real prop-
erty remains the sole asset of the land trust,
the beneficial interest has no value apart
from the underlying real property. Accord-
ingly, Rev. Rul. 77–459 concludes that the
loan is a real estate asset for purposes of
§ 856(c) and that interest on the loan is in-
terest on an obligation secured by a mort-
gage on real property or on an interest in
real property for purposes of § 856(c)(3).
SECTION 3. SCOPE
This revenue procedure applies to a
loan made by an entity that makes an elec-
tion to be taxed as a REIT under § 856(c)
if the loan meets the requirements of this
section.
.01 The borrower is either a partner in a
partnership or the sole member of an eligi-
ble entity that has not elected to be treated
as a corporation for federal tax purposes
and is therefore disregarded as an entity
separate from its owner under §§ 7701 and
301.7701–3(b)(1).
.02 The loan is nonrecourse, secured
only by the partner's interest in the partner-
ship, or the member's interest in the disre-
garded entity; thus, in the event of default,
the sole recourse is against the pledged
ownership interest.
.03 The lender is granted a first priority
security interest in the pledged ownership
interest. This security interest will place
the lender's claim as lender ahead of the
Au
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33
6
20
03-32 I.R.B.

claims of other creditors of the partner or
LLC member. The pledged ownership in-
terest cannot be further encumbered unless
the security interest created is subordinate
to the lender's security interest.
.04 Upon default and foreclosure on the
secured loan, the lender will replace the
borrower as a partner in the partnership
or as the sole member of the disregarded
entity. In the case of a loan secured by
a partnership interest, the other partners
in the partnership must have agreed that
upon default and foreclosure they will not
unreasonably oppose the admission of the
lender as a partner.
.05 On the date the commitment by the
lender to make the loan becomes bind-
ing on the lender, the partnership or dis-
regarded entity holds real property within
the meaning of § 1.856–3(d). If all or part
of this real property is subsequently sold
or otherwise transferred, the loan will be-
come due and payable upon the sale or
transfer of the real property.
.06 On each testing date, the value of
the real property (within the meaning of
§ 1.856–3(d)) held by the partnership or
disregarded entity is at least 85 percent of
the value of all of the assets of the partner-
ship or disregarded entity. For this purpose
a testing date means the close of the first
quarter of the lender's taxable year follow-
ing the date on which the commitment by
the lender to make the loan becomes bind-
ing on the lender, and the close of each
subsequent quarter in which the partner-
ship or disregarded entity acquires any as-
sets other than real estate assets, cash and
cash items (including receivables), or gov-
ernment securities (within the meaning of
§ 856(c)(4)(A)), or reasonable quantities
of equipment and materials customarily
used for the maintenance and repair of real
property. For this purpose, asset acquisi-
tions by a partnership or disregarded entity
include additional partnership or member
contributions.
.07 The loan value of the real property
owned by the partnership or disregarded
entity equals or exceeds the amount of the
loan as determined under § 1.856–5(c)(2).
For this purpose, the loan value is reduced
by any liens encumbering the real prop-
erty, as well as by any other liabilities of
the partnership or disregarded entity on the
date the commitment by the lender to make
the loan becomes binding on the lender. If
the real property is owned by a partner-
ship, only the proportionate share of the
loan value (determined using the principles
of § 1.856–3(g)) attributable to the interest
that secures the lender's loan is taken into
account.
.08 Interest on the loan meets the re-
quirements of §§ 1.856–5(a) and (b); thus,
the interest includes only an amount that
constitutes compensation for the use or
forbearance of money, and, subject to the
exception contained in § 1.856–5(d), the
determination of the amount does not de-
pend in whole or in part on the income or
profits of any person.
SECTION 4. PROCEDURE
AloanmadebyaREITthatsatisfiesthe
requirements of Section 3 of this revenue
procedure will be treated as a real estate
asset for purposes of §§ 856(c)(4)(A) and
856(c)(5)(B), and the interest on the loan
will be treated as interest on an obligation
secured by a mortgage on real property or
on an interest in real property for purposes
of § 856(c)(3)(B).
SECTION 5. EFFECTIVE DATE
This revenue procedure is effective
August 11, 2003.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Eric E. Boody of the Office
of Associate Chief Counsel (Financial
Institutions and Products). For further
information regarding this revenue pro-
cedure, contact Mr. Boody at (202)
622–3960 (not a toll-free call).
20
03-32 I.R.B.
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Au
gust 11, 2003

Part IV. Items of General Interest
Notice of Proposed Rulemaking
by Cross-Reference to
Temporary Regulations
Transfers of Compensatory
Options
REG–116914–03
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemaking
by cross-reference to temporary regula-
tions.
SUMMARY: In this issue of the Bulletin,
the IRS is issuing temporary regulations
(T.D. 9067) relating to the sale or other
disposition of compensatory nonstatutory
stock options to related persons. The text
of those regulations also serves as the text
of these proposed regulations.
DATES: Written or electronic comments
and requests for a public hearing must be
received by September 30, 2003.
ADDRESSES: Send submissions to:
CC:PA:RU (REG–116914–03), room
5226, Internal Revenue Service, POB
7604, Ben Franklin Station, Washington,
DC, 20044. Submissions may be hand
delivered Monday through Friday be-
tween the hours of 8 a.m. and 4 p.m. to:
CC:PA:RU (REG–116914–03), Courier's
Desk, Internal Revenue Service, 1111
Constitution Ave., NW, Washington,
DC. Alternatively, taxpayers may submit
electronic comments directly to the IRS
Internet site atwww.irs.gov/regs.
FOR FURTHER INFORMATION
CONTACT: Concerning the proposed
regulations, Stephen Tackney (202)
622–6030; concerning submissions of
comments and/or requests for a hear-
ing, Guy Traynor, (202) 622–7180 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background and Explanation of
Provisions
Temporary regulations in this issue of
the Bulletin amend 26 CFR part 1. The
regulations provide that a sale or other dis-
position of a nonstatutory stock option to a
related person will not be treated as a trans-
action that closes the application of sec-
tion 83 with respect to the option. The text
of the temporary regulations also serves as
the text of these proposed regulations. The
preamble to the temporary regulations ex-
plains the temporary regulations and these
proposed regulations.
Special Analyses
It has been determined that these pro-
posed regulations are not a significant reg-
ulatory action as defined in Executive or-
der 12866. Therefore, a regulatory assess-
ment is not required. It also has been de-
termined that section 533(b) of the Admin-
istrative Procedures Act (5 U.S.C. chapter
5) does not apply to these regulations, and
because these regulations do not impose a
collection of information on small entities,
the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to sec-
tion 7805(f) of the Internal Revenue Code,
these regulations are being submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment on
their impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations are
adopted as final regulations, consideration
will be given to any written comments
(a signed original and eight (8) copies)
or electronic comments that are submitted
timely to the IRS. The IRS and Treasury
Department request comments on the clar-
ity of the proposed rules and how they can
be made easier to understand. The IRS and
Treasury Department specifically request
comments on the clarity and efficacy of the
proposed definition of a related person. All
comments will be available for public in-
spection and copying. A public hearing
may be scheduled if requested by any per-
son that timely submits written comments.
If a public hearing is scheduled, notice of
the date, time, and place for the public
hearing will be published in theFederal
Register.
DRAFTING INFORMATION
The principal author of these proposed
regulations is Stephen Tackney of the Of-
fice of Division Counsel/Associate Chief
Counsel (Tax Exempt and Government En-
tities). However, other personnel from the
IRS and Treasury Department participated
in their development.
*****
Adoption of 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 as follows:
Authority:26U.S.C.7805***
Par. 2. Section 1.83–7 is amended as
follows:
1. Paragraph (a) is amended by adding a
sentence at the end.
2. Paragraphs (a)(1) and (a)(2) are added.
3. Paragraph (d) is added.
The additions read as follows:
(a) [The text of proposed § 1.83–7(a)
is the same as the text of § 1.83–7T(a)
published elsewhere in this issue of the
Bulletin].
*****
(d)Effective dates. Thissectionisap-
plicable to sales or other dispositions of
options on or after the publication of fi-
nal regulations in theFederal Register.
For dates on or after July 2, 2003, see
§ 1.83–7T(d).
Robert E. Wenzel,
Deputy Commissioner of
Internal Revenue.
(Filed by the Office of the Federal
Register on July 1, 2003,
8:45 a.m., and published in the issue of the Federal Register
for July 2, 2003, 68 F.R. 39498)
Au
gust 11, 2003
33
8
20
03-32 I.R.B.

Changes in Annual Accounting
Period
Announcement 2003–49
PURPOSE
This announcement discusses some of
the changes that the Internal Revenue Ser-
vice and Treasury Department have made
in finalizing Notice 2002–75, 2002–47
I.R.B. 884, which proposes procedures
for individuals to obtain the automatic
approval of the Commissioner to change
their annual accounting period from a
fiscal year to a calendar year. The final
procedures are contained in Rev. Proc.
2003–62, page 299 of this Bulletin.
BACKGROUND
The Service published Notice 2002–75
on November 25, 2002, and requested pub-
lic comments on the proposed procedures
contained therein. No public comments
were received. However, the Service and
Treasury Department have made certain
changes to Notice 2002–75 to further con-
form the rules for automatic accounting
period changes by individuals to those pro-
vided in Rev. Proc. 2002–37, 2002–1
C.B. 1030 (providing procedures for au-
tomatic approval of annual accounting pe-
riod changes by corporations) and Rev.
Proc. 2002–39, 2002–1 C.B. 1046 (pro-
viding procedures for the prior approval of
annual accounting period changes by tax-
payers generally, including individuals).
Also, the Service and Treasury Depart-
ment have made conforming changes to
Notice 2002–75 as a result of Rev. Proc.
2003–34, 2003–18 I.R.B. 856, which mod-
ifies the term and condition of Rev. Proc.
2002–37 and Rev. Proc. 2002–39 regard-
ing the carryback of losses incurred in the
short period.
CHANGES
A.Interest in a Pass-through Entity
The Service and Treasury Department
have determined that the $10,000de min-
imisexception for an individual's interest
in a pass-through entity provided in section
4.02(2)(d) of Notice 2002–75 should be
raised to $500,000. This change is consis-
tent with the $500,000de minimisexcep-
tion to the “substantial distortion” rule pro-
vided in section 5.05(1)(ii) of Rev. Proc.
2002–39. The corresponding example in
Notice 2002–75 is modified to reflect this
change.
Section 4.02(2)(a) of Notice 2002–75
is modified to remove the reference
to foreign personal holding companies
(FPHCs), because FPHCs cannot make
a one-month deferral election under
§ 898(c)(1)(B) of the Internal Revenue
Code. Section 4.02(2)(a) of Rev. Proc.
2002–37 also contains this reference. The
Service and Treasury Department intend
to remove the reference to FPHCs in sec-
tion 4.02(2)(a) of Rev. Proc. 2002–37.
No inference should be drawn from that
reference that FPHCs are eligible to
make a one month deferral election under
§ 898(c)(1)(B).
B.Net Operating Loss Term and
Condition.
Section 6.05 of Notice 2002–75 pro-
vides that a net operating loss (NOL) gen-
erated in the short period is carried back or
carried over if the loss is $10,000 or less.
The Service and Treasury Department
have determined that the $10,000 ceiling
should be raised to $50,000, consistent
with the $50,000 ceiling provided in sec-
tion 5.04 of Rev. Proc. 2002–39. Also,
the Service and Treasury Department have
made other changes to this section consis-
tent with Rev. Proc. 2003–34.
C.Other Changes
Additional conforming changes have
been made to Notice 2002–75 to make the
automatic approval procedures applicable
to individuals consistent with those of Rev.
Proc. 2002–37 and Rev. Proc. 2002–39.
See, for example, section 6.07 of Rev.
Proc. 2003–62.
FURTHER INFORMATION
For further information regarding this
announcement, contact Roy A. Hirschhorn
or Jeffrey S. Marshall of the Office of the
Associate Chief Counsel (Income Tax and
Accounting) at (202) 622–4960 (not a toll-
free call).
Announcement of Disciplinary Actions Involving Attorneys,
Certified Public Accountants, Enrolled Agents, and Enrolled
Actuaries — Suspensions, Censures, Disbarments, and
Resignations
Announcement 2003-50
Under Title 31, Code of Federal Regu-
lations, Part 10, attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries may not accept assistance from,
or assist, any person who is under disbar-
ment or suspension from practice before
the Internal Revenue Service if the assis-
tance relates to a matter constituting prac-
tice before the Internal Revenue Service
and may not knowingly aid or abet another
person to practice before the Internal Rev-
enue Service during a period of suspen-
sion, disbarment, or ineligibility of such
other person.
To enable attorneys, certified public
accountants, enrolled agents, and enrolled
actuaries to identify persons to whom
these restrictions apply, the Director, Of-
fice of Professional Responsibility will
announce in the Internal Revenue Bulletin
their names, their city and state, their pro-
fessional designation, the effective date
of disciplinary action, and the period of
suspension. This announcement will ap-
pear in the weekly Bulletin at the earliest
practicable date after such action and will
20
03-32 I.R.B.
33
9
Au
gust 11, 2003

continue to appear in the weekly Bulletins
for five successive weeks.
Suspensions From Practice Before the Internal
Revenue Service After Notice and an Opportunity for a
Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an adminis-
trative law judge, the following individuals
have been placed under suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationEffective Date
Arnold, JohnClovis, CAEnrolled AgentFebruary 13, 2003
to
August 12, 2003
Disbarments From Practice Before the Internal
Revenue Service After Notice and an Opportunity for a
Proceeding
Under Title 31, Code of Federal Regu-
lations, Part 10, after notice and an oppor-
tunity for a proceeding before an adminis-
trative law judge, the following individuals
have been disbarred from practice before
the Internal Revenue Service:
NameAddressDesignationEffective Date
Kalajian, ThomasLaguna Hills, CACPAOctober 2, 2002
Messman, CarlaOuting, MNEnrolled AgentJanuary 9, 2003
Consent Suspensions From Practice Before the Internal
Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, an attorney, certified pub-
lic accountant, enrolled agent, or enrolled
actuary, in order to avoid the institution
or conclusion of a proceeding for his or
her disbarment or suspension from prac-
tice before the Internal Revenue Service,
may offer his or her consent to suspension
from such practice. The Director, Office
of Professional Responsibility, in his dis-
cretion, may suspend an attorney, certified
public accountant, enrolled agent or en-
rolled actuary in accordance with the con-
sent offered.
The following individuals have been
placed under consent suspension from
practice before the Internal Revenue Ser-
vice:
NameAddressDesignationDate of Suspension
Kemp, BartSonoma, CAAttorneyMarch 15, 2003
to
November 15, 2003
Au
gust 11, 2003
34
0
20
03-32 I.R.B.

NameAddressDesignationDate of Suspension
Marks, GaryHewlett, NYCPAMarch 24, 2003
to
March 23, 2004
Fehl, KennethPalo Alto, CAAttorneyApril 1, 2003
to
March 31, 2004
Cohen, PeterEdison, NJCPAApril 3, 2003
to
May 2, 2005
Kohn, MichaelSt. Louis, MOAttorneyIndefinite
from
April 30, 2003
Sogamoso, CarlosBellflower, CAEnrolled AgentIndefinite
from
May 1, 2003
Huston, JamesKingman, AZCPAMay 1, 2003
to
April 30, 2006
Halleran, EdwardCarle Place, NYEnrolled AgentIndefinite
from
May 1, 2003
Marshall, E. PeterGlens Falls, NYCPAMay 1, 2003
to
April 30, 2006
Bell, RosannaIrvington, NYCPAIndefinite
from
May 8, 2003
Kingsley, StevenWeston, CTCPAIndefinite
from
May 15, 2003
Schawe, RudolphBrenham, TXEnrolled AgentMay 22, 2003
to
October 21, 2004
Scheve, MichaelBaltimore, MDCPAIndefinite
from
May 27, 2003
McKenzie, DawnaFort Smith, AREnrolled AgentIndefinite
from
June 2, 2003
Suen, MingSan Francisco, CAEnrolled AgentIndefinite
from
June 3, 2003
Reyes, RupertoPlacentia, CAEnrolled AgentJune 10, 2003
to
December 9, 2005
20
03-32 I.R.B.
34
1
Au
gust 11, 2003

NameAddressDesignationDate of Suspension
Garmo, GeorgisW. Bloomfield, MICPAIndefinite
from
June 10, 2003
Holmes, James L.Burlington, NCEnrolled AgentIndefinite
from
June 18, 2003
Brooks, SandraSan Diego, CAEnrolled AgentIndefinite
from
June 20, 2003
Malley, WayneCupertino, CAEnrolled AgentIndefinite
from
June 27, 2003
Leininger, BarbaraLutz, FLEnrolled AgentIndefinite
from
June 27, 2003
Expedited Suspensions From Practice Before the
Internal Revenue Service
Under Title 31, Code of Federal Regu-
lations, Part 10, the Director, Office of Pro-
fessional Responsibility, is authorized to
immediately suspend from practice before
the Internal Revenue Service any practi-
tioner who, within five years from the date
the expedited proceeding is instituted (1)
has had a license to practice as an attorney,
certified public accountant, or actuary sus-
pended or revoked for cause or (2) has been
convicted of certain crimes.
The following individuals have been
placed under suspension from practice
before the Internal Revenue Service by
virtue of the expedited proceeding provi-
sions:
NameAddressDesignationDate of Suspension
Radwick, PeterWoodinville, WACPAIndefinite
from
March 10, 2003
Jellinger, RichardAnoka, MNAttorneyIndefinite
from
March 10, 2003
Deen, BillyMansfield, TXCPAIndefinite
from
March 10, 2003
Dougherty Jr, WilliamNewport News, VAAttorneyIndefinite
from
March 10, 2003
Abood, NormanOregon, OHAttorneyIndefinite
from
March 10, 2003
Matis, VendelRedlands, CAAttorneyIndefinite
from
March 31, 2003
Au
gust 11, 2003
34
2
20
03-32 I.R.B.

NameAddressDesignationDate of Suspension
Workman, AndrewPanama City, FLCPAIndefinite
from
March 31, 2003
Bagwell, Jr., NoelCunningham, TNAttorneyIndefinite
from
March 31, 2003
O’Brien, BrienSioux City, IAAttorneyIndefinite
from
March 31, 2003
Boykoff, FranklinPleasantville, NYAttorneyIndefinite
from
March 31, 2003
McKinnon, MarvaStatesville, NCAttorneyIndefinite
from
March 31, 2003
Bailey, Scott K.Eden Prairie, MNAttorneyIndefinite
from
March 31, 2003
Kim, KunAtlanta, GACPAIndefinite
from
March 31, 2003
Massari III, DomenicTampa, FLAttorneyIndefinite
from
May 12, 2003
Haugabrook II, TyroneValdosta, GAAttorneyIndefinite
from
May 19, 2003
Wester, JosephMontgomery, ALCPAIndefinite
from
May 19, 2003
Smercina, DavidSolon, OHCPAIndefinite
from
May 19, 2003
Pullings, RetnaWashington, DCAttorneyIndefinite
from
May 19, 2003
Boyd, JamesMendota Heights, MNAttorneyIndefinite
from
May 20, 2003
Spindler, JudithOmaha, NEAttorneyIndefinite
from
May 20, 2003
Wintroub, EdwardOmaha, NEAttorneyIndefinite
from
May 20, 2003
20
03-32 I.R.B.
34
3
Au
gust 11, 2003

NameAddressDesignationDate of Suspension
Brinker, PeterOmaha, NEAttorneyIndefinite
from
May 21, 2003
Valdes, AlfredoOld Greenwich, CTCPAIndefinite
from
May 21, 2003
Cruise, MichaelLincoln, NEAttorneyIndefinite
from
May 22, 2003
Schoppert, ThomasMinot, NDAttorneyIndefinite
from
June 2, 2003
White, PaulSmithfield, NCEnrolled AgentIndefinite
from
June 2, 2003
Brier, MichaelProvidence, RICPAIndefinite
from
June 16, 2003
Resignations of Enrolled Agents
Under Title 31, Code of Federal Regu-
lations, Part 10, an enrolled agent, in or-
der to avoid the institution or conclusion
of a proceeding for his or her disbarment
or suspension from practice before the In-
ternal Revenue Service, may offer his or
her resignation as an enrolled agent. The
Director, Office of Professional Responsi-
bility, in his discretion, may accept the of-
fered resignation.
The Director, Office of Professional
Responsibility, has accepted offers of
resignation as an enrolled agent from the
following individuals:
NameAddressDate of Designation
Evans, CarolineTiverton, RIMay 7, 2003
Censure Issued by Consent
Under Title 31, Code of Federal Reg-
ulations, Part 10, in lieu of a proceeding
being instituted or continued, an attorney,
certified public accountant, enrolled agent,
or enrolled actuary, may offer his or her
consent to the issuance of a censure. Cen-
sure is a public reprimand.
The following individuals have con-
sented to the issuance of a Censure:
NameAddressDesignationDate of Censure
Pargas, Carlos B.Miami, FLCPAMarch 19, 2003
Malkasian, GarySacramento, CACPAMarch 27, 2003
Wilcox, Ronald E.Mt. Carmel, ILCPAApril 29, 2003
Wood, David T.Shawneetown, ILCPAMay 27, 2003
Au
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34
4
20
03-32 I.R.B.

Deletions From Cumulative List
of Organizations Contributions
to Which are Deductible Under
Section 170 of the Code
Announcement 2003–52
The name of an organization that no
longer qualifies as an organization de-
scribed in section 170(c)(2) of the Internal
Revenue Code of 1986 is listed below.
Generally, the Service will not disallow
deductions for contributions made to a
listed organization on or before the date
of announcement in the Internal Revenue
Bulletin that an organization no longer
qualifies. However, the Service is not
precluded from disallowing a deduction
for any contributions made after an or-
ganization ceases to qualify under section
170(c)(2) if the organization has not timely
filed a suit for declaratory judgment under
section 7428 and if the contributor (1) had
knowledge of the revocation of the ruling
or determination letter, (2) was aware that
such revocation was imminent, or (3) was
in part responsible for or was aware of the
activities or omissions of the organization
that brought about this revocation.
If on the other hand a suit for declara-
tory judgment has been timely filed, con-
tributions from individuals and organiza-
tions described in section 170(c)(2) that
are otherwise allowable will continue to
be deductible. Protection under section
7428(c) would begin on March 18, 2002,
and would end on the date the court first
determines that the organization is not de-
scribed in section 170(c)(2) as more partic-
ularly set forth in section 7428(c)(1). For
individual contributors, the maximum de-
duction protected is $1,000, with a hus-
band and wife treated as one contributor.
This benefit is not extended to any indi-
vidual, in whole or in part, for the acts or
omissions of the organization that were the
basis for revocation.
Hispanic Association of Lucent
Technologies Employees, Inc.
Napersville, IL
Section 7428(c) Validation of
Certain Contributions Made
During Pendency of Declaratory
Judgment Proceedings
Announcement 2003–53
This announcement serves notice to
potential donors that the organizations
listed below have recently filed timely
declaratory judgment suits under section
7428 of the Code, challenging revocation
of their status as eligible donees under
section 170(c)(2).
Protection under section 7428(c) of the
Code begins on the date that the notice
of revocation is published in the Internal
Revenue Bulletin and ends on the date
on which a court first determines that an
organization is not described in section
170(c)(2), as more particularly set forth in
section 7428(c)(1). In the case of individ-
ual contributors, the maximum amount of
contributions protected during this period
is limited to $1,000.00, with a husband and
wife being treated as one contributor. This
protection is not extended to any individual
who was responsible, in whole or in part,
for the acts or omissions of the organiza-
tion that were the basis for the revocation.
This protection also applies (but without
limitation as to amount) to organizations
described in section 170(c)(2) which are
exempt from tax under section 501(a). If
the organization ultimately prevails in its
declaratory judgment suit, deductibility of
contributions would be subject to the nor-
mal limitations set forth under section 170.
South Community Association
Middletown, OH
South Park Remedial Association
Dayton, OH
20
03-32 I.R.B.
34
5
Au
gust 11, 2003

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ing extended to apply to a variation of the
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
being stated in a new ruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations
to show that the previous published rul-
ings will not be applied pending some
future action such as the issuance of new
or amended regulations, the outcome of
cases in litigation, or the outcome of a
Service study.
Abbreviations
The following abbreviations in current use
and formerly used will appear in material
published in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
DC—Dummy Corporation.
DE—Donee.
Del. Order—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor.
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.
Au
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03-32 I.R.B.

Numerical Finding List
1
Bulletin 2003–27 through 2003–31
Announcements:
2003-45, 2003-28 I.R.B.73
2003-46, 2003-30 I.R.B.222
2003-47, 2003-29 I.R.B.124
2003-48, 2003-28 I.R.B.73
2003-50, 2003-30 I.R.B.339
Notices:
2003-38, 2003-27 I.R.B.9
2003-39, 2003-27 I.R.B.10
2003-40, 2003-27 I.R.B.10
2003-41, 2003-28 I.R.B.49
2003-42, 2003-28 I.R.B.49
2003-43, 2003-28 I.R.B.50
2003-44, 2003-28 I.R.B.52
2003-45, 2003-29 I.R.B.86
2003-46, 2003-28 I.R.B.53
2003-47, 2003-30 I.R.B.132
2003-48, 2003-30 I.R.B.133
Proposed Regulations:
REG-106736-00, 2003-28 I.R.B.60
REG-107618-02, 2003-27 I.R.B.13
REG-122917-02, 2003-27 I.R.B.15
Revenue Procedures:
2003-45, 2003-27 I.R.B.11
2003-46, 2003-28 I.R.B.54
2003-47, 2003-28 I.R.B.55
2003-48, 2003-29 I.R.B.86
2003-49, 2003-29 I.R.B.89
2003-50, 2003-29 I.R.B.119
2003-51, 2003-29 I.R.B.121
2003-52, 2003-30 I.R.B.134
2003-53, 2003-31 I.R.B.230
2003-54, 2003-31 I.R.B.236
2003-55, 2003-31 I.R.B.242
2003-56, 2003-31 I.R.B.249
2003-57, 2003-31 I.R.B.257
2003-58, 2003-31 I.R.B.262
2003-59, 2003-31 I.R.B.268
2003-60, 2003-31 I.R.B.274
Revenue Rulings:
2003-70, 2003-27 I.R.B.3
2003-71, 2003-27 I.R.B.1
2003-73, 2003-28 I.R.B.44
2003-74, 2003-29 I.R.B.77
2003-75, 2003-29 I.R.B.79
2003-77, 2003-29 I.R.B.75
2003-78, 2003-29 I.R.B.76
2003-79, 2003-29 I.R.B.80
Revenue Rulings— Continued:
2003-80, 2003-29 I.R.B.83
2003-81, 2003-30 I.R.B.126
2003-82, 2003-30 I.R.B.125
2003-83, 2003-30 I.R.B.128
2003-87, 2003-29 I.R.B.82
Treasury Decisions:
9061, 2003-27 I.R.B.5
9062, 2003-28 I.R.B.46
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2003-1 through 2003-26 is in Internal Revenue Bulletin 2003-27,
dated July 7, 2003.
20
03-32 I.R.B.
iiAu
gust 11, 2003

Findings List of Current Actions on
Previously Published Items
1
Bulletin 2003–27 through 2003–31
Notices:
89-79
Modified and superseded by
Rev. Proc. 2003-47, 2003-28 I.R.B.55
2001–70
Amplified by
Notice 2003-45, 2003-29 I.R.B.86
2001–74
Amplified by
Notice 2003-45, 2003-29 I.R.B.86
Proposed Regulations:
EE-86-88 (LR-279-81)
Withdrawn by
REG-122917-02, 2003-27 I.R.B.15
Revenue Procedures:
77-12
Amplified, modified, and superseded by
Rev. Proc. 2003-51, 2003-29 I.R.B.121
89-21
Superseded by
Rev. Proc. 2003-53, 2003-31 I.R.B.230
90-32
Section4supersededby
Rev. Proc. 2003-55, 2003-31 I.R.B.242
Section5supersededby
Rev. Proc. 2003-59, 2003-31 I.R.B.249
Section6supersededby
Rev. Proc. 2003-57, 2003-31 I.R.B.257
Section7supersededby
Rev. Proc. 2003-59, 2003-31 I.R.B.268
Section8supersededby
Rev. Proc. 2003-60, 2003-31 I.R.B.274
90-32
Section5supersededby
Rev. Proc. 2003-56, 2003-31 I.R.B.249
96-30
Modified and amplified by
Rev. Proc. 2003-48, 2003-29 I.R.B.86
2002-9
Modified by
Rev. Proc. 2003-45, 2003-27 I.R.B.11
Amplified and modified by
Rev. Proc. 2003-50, 2003-29 I.R.B.119
Modified and amplified by
Rev. Rul. 2003-81, 2003-30 I.R.B.126
2002-33
Amplified and modified by
Rev. Proc. 2003-50, 2003-29 I.R.B.119
Revenue Procedures— Continued:
2002-34
Superseded by
Rev. Proc. 2003-52, 2003-30 I.R.B.134
2003-3
Modified by
Rev. Proc. 2003-48, 2003-29 I.R.B.86
2003-15
Modified and superseded by
Rev. Proc. 2003-49, 2003-29 I.R.B.89
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2003-1 through 2003-26 is in Internal Revenue Bulletin 2003-27, dated July 7, 2003.
Au
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ii
i
20
03-32 I.R.B.
*U.S.GovernmentPrintingOffice2 003—4 96–9 19/60095