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Taxact 2008 Free Efile

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Taxact 2008 Free Efile

Taxact 2008 free efile 5. Taxact 2008 free efile   Excise Taxes Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Prohibited Tax Shelter TransactionsEntity Level Tax Excess Benefit TransactionsTax on Disqualified Persons Tax on Organization Managers Excess Benefit Transaction Excess Business Holdings Taxable Distributions of Sponsoring Organizations Exception. Taxact 2008 free efile A donor advised fund does not include: Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Excise Taxes on Private Foundations Excise Taxes on Black Lung Benefit Trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements Introduction An excise tax may be imposed on certain tax-exempt organizations. Taxact 2008 free efile Topics - This chapter discusses: Prohibited tax shelter transactions Excess benefit transactions Excess business holdings Taxable distributions of sponsoring organizations Taxes on prohibited benefits distributed from donor advised funds Excise taxes on private foundations Excise taxes on 501(c)(21) black lung benefit trusts Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements of Hospitals Useful Items - You may want to see: Forms (and Instructions) 4720 Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code See chapter 6 for more information about getting Form 4720. Taxact 2008 free efile Prohibited Tax Shelter Transactions Section 4965 imposes an excise tax on: Certain tax-exempt entities that are party to prohibited tax shelter transactions, and Any entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows or has reason to know that the transaction is a prohibited tax shelter transaction. Taxact 2008 free efile  Additionally, section 6033 provides new disclosure requirements on a tax-exempt entity that is a party to a prohibited tax shelter transaction. Taxact 2008 free efile Tax-exempt entities. Taxact 2008 free efile   Tax-exempt entities that are subject to section 4965 include: Entities described in section 501(c), including but not limited to the following common types of entities: Instrumentalities of the United States described in section 501(c)(1); Churches, hospitals, museums, schools, scientific research organizations, and other charities described in section 501(c)(3); Civic leagues, social welfare organizations, and local associations of employees described in section 501(c)(4); Labor, agricultural, or horticultural organizations described in section 501(c)(5); Business leagues, chambers of commerce, trade associations, and other organizations described in section 501(c)(6); Voluntary employees' beneficiary associations (VEBAs) described in section 501(c)(9); Credit unions described in section 501(c)(14); Insurance companies described in section 501(c)(15); and Veterans' organizations described in section 501(c)(19). Taxact 2008 free efile Religious or apostolic associations or corporations described in section 501(d). Taxact 2008 free efile Entities described in section 170(c), including states, possessions of the United States, the District of Columbia, political subdivisions of states and political subdivisions of possessions of the United States (but not including the United States). Taxact 2008 free efile Indian tribal governments within the meaning of section 7701(a)(40). Taxact 2008 free efile Entity manager. Taxact 2008 free efile    An entity manager is any person with authority or responsibility similar to that exercised by an officer, director, or trustee, and, for any act, the person that has authority or responsibility with respect to the prohibited transaction. Taxact 2008 free efile Prohibited tax shelter transaction. Taxact 2008 free efile   A prohibited tax shelter transaction is any listed transaction, within the meaning of section 6707A(c)(2), and any prohibited reportable transactions. Taxact 2008 free efile A prohibited reportable transaction is a confidential transaction within the meaning of Regulations section 1. Taxact 2008 free efile 6011-4(b)(3), and a transaction with contractual protection within the meaning of Regulations section 1. Taxact 2008 free efile 6011-4(b)(4). Taxact 2008 free efile See the Instructions for Form 8886 for more information on listed transactions and prohibited reportable transactions. Taxact 2008 free efile Subsequently listed transaction. Taxact 2008 free efile   Any transaction to which the tax-exempt entity is a party and is later determined to be a listed transaction after the entity has become a party to it, is a subsequently listed transaction. Taxact 2008 free efile Entity Level Tax Section 4965(a)(1) imposes an entity level excise tax on any tax-exempt entity described in 1, 2, 3, or 4 above that becomes a party to a prohibited tax shelter transaction or is a party to a subsequently listed transaction (defined earlier). Taxact 2008 free efile The excise tax imposed on a tax-exempt entity applies to tax years in which the entity becomes a party to the prohibited tax shelter transaction and any subsequent tax years. Taxact 2008 free efile The amount of the excise tax depends on whether the tax-exempt entity knew or had reason to know that the transaction was a prohibited tax shelter transaction at the time it became a party to the transaction. Taxact 2008 free efile To figure and report the excise tax imposed on a tax-exempt entity for being a party to a prohibited tax shelter transaction, file Form 4720. Taxact 2008 free efile For more information about this excise tax, including information about how it is figured, see the Instructions for Form 4720. Taxact 2008 free efile Manager Level Tax Section 4965(a)(2) imposes an excise tax on any tax-exempt entity manager who approves or otherwise causes the entity to be a party to a prohibited tax shelter transaction and knows (or has reason to know) that the transaction is a prohibited tax shelter transaction. Taxact 2008 free efile The excise tax, in the amount of $20,000, is assessed for each approval or other act causing the organization to be a party to the prohibited tax shelter transaction. Taxact 2008 free efile To report this tax, file Form 4720. Taxact 2008 free efile Excess Benefit Transactions Excise tax on excess benefit transactions. Taxact 2008 free efile   A disqualified person who benefits from an excess benefit transaction, such as compensation, fringe benefits, or contract payments from certain section 501(c)(3), 501(c)(4), or 501(c)(29) organizations, must correct the transaction and may have to pay an excise tax under section 4958. Taxact 2008 free efile A manager of the organization may also have to pay an excise tax under section 4958. Taxact 2008 free efile These taxes are reported on Form 4720. Taxact 2008 free efile   The excise taxes are imposed if an applicable tax-exempt organization provides an excess benefit to a disqualified person and that benefit exceeds the value of the benefit received in exchange. Taxact 2008 free efile   There are three taxes under section 4958. Taxact 2008 free efile Disqualified persons are liable for the first two taxes and certain organization managers are liable for the third tax. Taxact 2008 free efile    Taxes imposed on excess benefit transactions do not apply to a transaction under a written contract that was binding on September 13, 1995, and at all times thereafter before the transaction occurred. Taxact 2008 free efile Tax on Disqualified Persons An excise tax equal to 25% of the excess benefit is imposed on each excess benefit transaction between an applicable tax-exempt organization and a disqualified person. Taxact 2008 free efile The disqualified person who benefited from the transaction is liable for the tax. Taxact 2008 free efile See definition of Disqualified person, later at Disqualified person. Taxact 2008 free efile Additional tax on the disqualified person. Taxact 2008 free efile   If the 25% tax is imposed and the excess benefit transaction is not corrected within the taxable period, an additional excise tax equal to 200% of the excess benefit is imposed on any disqualified person involved. Taxact 2008 free efile   If a disqualified person makes a payment of less than the full correction amount, the 200% tax is imposed only on the unpaid portion of the correction amount. Taxact 2008 free efile If more than one disqualified person received an excess benefit from an excess benefit transaction, all such disqualified persons are jointly and severally liable for the taxes. Taxact 2008 free efile   To avoid the 200% tax, a disqualified person must correct the excess benefit transaction during the taxable period. Taxact 2008 free efile The 200% tax is abated (refunded if collected) if the excess benefit transaction is corrected within a 90-day correction period beginning on the date a statutory notice of deficiency is issued. Taxact 2008 free efile Taxable period. Taxact 2008 free efile   The taxable period means the period beginning with the date on which the excess benefit transaction occurs and ending on the earlier of: The date a notice of deficiency was mailed to the disqualified person for the initial tax on the excess benefit transaction, or The date on which the initial tax on the excess benefit transaction for the disqualified person is assessed. Taxact 2008 free efile Tax on Organization Managers If tax is imposed on a disqualified person for any excess benefit transaction, an excise tax equal to 10% of the excess benefit is imposed on an organization manager who knowingly participated in an excess benefit transaction, unless such participation was not willful and was due to reasonable cause. Taxact 2008 free efile This tax cannot exceed $20,000 ($10,000 for transactions entered in a tax year beginning before August 18, 2006), for each transaction. Taxact 2008 free efile There is also joint and several liability for this tax. Taxact 2008 free efile A person can be liable for both the tax paid by the disqualified person and the organization manager tax for a particular excess benefit transaction. Taxact 2008 free efile Organization Manager. Taxact 2008 free efile   An organization manager is any officer, director, or trustee of an applicable tax-exempt organization, or any individual having powers or responsibilities similar to officers, directors, or trustees of the organization, regardless of title. Taxact 2008 free efile An organization manager is not considered to have participated in an excess benefit transaction where the manager has opposed the transaction in a manner consistent with the fulfillment of the manager's responsibilities to the organization. Taxact 2008 free efile For example, a director who votes against giving an excess benefit would ordinarily not be subject to the 10% tax. Taxact 2008 free efile A person participates in a transaction knowingly if the person: Has actual knowledge of sufficient facts so that, based solely upon those facts, such transaction would be an excess benefit transaction; Is aware that such a transaction under these circumstances may violate the provisions of federal tax law governing excess benefit transactions; and Negligently fails to make reasonable attempts to ascertain whether the transaction is an excess benefit transaction, or the manager is in fact aware that it is such a transaction. Taxact 2008 free efile Knowing does not mean having reason to know. Taxact 2008 free efile The organization manager ordinarily will not be considered knowing if, after full disclosure of the factual situation to an appropriate professional, the organization manager relied on the professional's reasoned written opinion on matters within the professional's expertise or if the manager relied on the fact that the requirements for the rebuttable presumption of reasonableness have been satisfied. Taxact 2008 free efile Participation by an organization manager is willful if it is voluntary, conscious, and intentional. Taxact 2008 free efile An organization manager's participation is due to reasonable cause if the manager has exercised responsibility on behalf of the organization with ordinary business care and prudence. Taxact 2008 free efile Excess Benefit Transaction An excess benefit transaction is a transaction in which an economic benefit is provided by an applicable tax-exempt organization, directly or indirectly, to or for the use of any disqualified person, and the value of the economic benefit provided by the organization exceeds the value of the consideration (including the performance of services) received for providing such benefit. Taxact 2008 free efile The excess benefit transaction rules apply to all transactions with disqualified persons, regardless of whether the amount of the benefit provided is determined in whole or in part by the revenues of one or more activities of the organization. Taxact 2008 free efile To determine whether an excess benefit transaction has occurred, all consideration and benefits exchanged between a disqualified person and the applicable tax-exempt organization, and all entities it controls, are taken into account. Taxact 2008 free efile For purposes of determining the value of economic benefits, the value of property, including the right to use property, is the fair market value. Taxact 2008 free efile Fair market value is the price at which property, or the right to use property, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell, or transfer property or the right to use property, and both having reasonable knowledge of relevant facts. Taxact 2008 free efile Donor advised fund transactions occurring after August 17, 2006. Taxact 2008 free efile   For a donor advised fund, an excess benefit transaction includes a grant, loan, compensation, or other similar payment from the fund to a: Donor or donor advisor, Family member of a donor, or donor advisor, 35% controlled entity of a donor, or donor advisor, or 35% controlled entity of a family member of a donor, or donor advisor. Taxact 2008 free efile   The excess benefit in this transaction is the amount of the grant, loan, compensation, or other similar payment. Taxact 2008 free efile For additional information, see the Instructions for Form 4720. Taxact 2008 free efile Supporting organization transactions occurring after July 25, 2006. Taxact 2008 free efile   For any supporting organization, defined in section 509(a)(3), an excess benefit transaction includes grants, loans, compensation, or other similar payment provided by the supporting organization to a: Substantial contributor, Family member of a substantial contributor, 35% controlled entity of a substantial contributor, or 35% controlled entity of a family member of a substantial contributor. Taxact 2008 free efile   Additionally, an excess benefit transaction includes any loans provided by the supporting organization to a disqualified person (other than an organization described in section 509(a)(1), (2), or (4)). Taxact 2008 free efile   The excess benefit for substantial contributors and parties related to those contributors includes the amount of the grant, loan, compensation, or other similar payment. Taxact 2008 free efile For additional information, see the Instructions for Form 4720. Taxact 2008 free efile   Excess benefit transaction rules generally do not apply to transactions between a supporting organization and its supported organization described in section 501(c)(4), (5), or (6) in furtherance of charitable purposes. Taxact 2008 free efile Date of Occurrence An excess benefit transaction occurs on the date the disqualified person receives the economic benefit from the organization for federal income tax purposes. Taxact 2008 free efile However, when a single contractual arrangement provides for a series of compensation or other payments to or for the use of a disqualified person during the disqualified person's tax year, any excess benefit transaction with respect to these payments occurs on the last day of the taxpayer's tax year. Taxact 2008 free efile In the case of benefits provided to a qualified pension, profit-sharing, or stock bonus plan, the transaction occurs on the date the benefit is vested. Taxact 2008 free efile In the case of the transfer of property subject to a substantial risk of forfeiture, or in the case of rights to future compensation or property, the transaction occurs on the date the property, or the rights to future compensation or property, is not subject to a substantial risk of forfeiture. Taxact 2008 free efile Where the disqualified person elects to include an amount in gross income in the tax year of transfer under section 83(b), the excess benefit transaction occurs on the date the disqualified person receives the economic benefit for federal income tax purposes. Taxact 2008 free efile Correcting the excess benefit. Taxact 2008 free efile   An excess benefit transaction is corrected by undoing the excess benefit to the extent possible, and by taking any additional measures necessary to place the organization in a financial position not worse than what it would have been if the disqualified person were dealing under the highest fiduciary standards. Taxact 2008 free efile   A disqualified person corrects an excess benefit by making a payment in cash or cash equivalents, excluding payment by a promissory note, equal to the correction amount to the applicable tax-exempt organization. Taxact 2008 free efile The correction amount equals the excess benefit plus the interest on the excess benefit. Taxact 2008 free efile The interest rate can be no lower than the applicable federal rate, compounded annually, for the month the transaction occurred. Taxact 2008 free efile   A disqualified person can, with the agreement of the applicable tax-exempt organization, make a payment by returning the specific property previously transferred in the excess transaction. Taxact 2008 free efile In this case, the disqualified person is treated as making a payment equal to the lesser of: The fair market value of the property on the date the property is returned to the organization, or The fair market value of the property on the date the excess benefit transaction occurred. Taxact 2008 free efile   If the payment resulting from the return of property is less than the correction amount, the disqualified person must make an additional cash payment to the organization equal to the difference. Taxact 2008 free efile   If the payment resulting from the return of the property exceeds the correction amount described above, the organization can make a cash payment to the disqualified person equal to the difference. Taxact 2008 free efile Exception. Taxact 2008 free efile   For a correction of an excess benefit transaction (discussed earlier), no amount repaid in a manner prescribed by the Secretary can be held in a donor advised fund. Taxact 2008 free efile Applicable Tax-Exempt Organization An applicable tax-exempt organization is a section 501(c)(3), 501(c)(4), or 501(c)(29) organization that is tax-exempt under section 501(a), or was such an organization at any time during a 5-year period ending on the day of the excess benefit transaction. Taxact 2008 free efile An applicable tax-exempt organization does not include: A private foundation as defined in section 509(a), A governmental entity that is: Exempt from (or not subject to) taxation without regard to section 501(a), or Not required to file an annual return, or A foreign organization, recognized by the IRS or by treaty, that receives substantially all of its support (other than gross investment income) from sources outside the United States. Taxact 2008 free efile An organization is not treated as a section 501(c)(3), 501(c)(4), or 501(c)(29) organization for any period covered by a final determination that the organization was not tax-exempt under section 501(a), but only if the determination was not based on private inurement or one or more excess benefit transactions. Taxact 2008 free efile Disqualified Person A disqualified person is: Any person (at any time during the 5-year period ending on the date of the transaction) in a position to exercise substantial influence over the affairs of the organization, A family member of an individual described in 1, and A 35% controlled entity. Taxact 2008 free efile For donor advised funds, sponsoring organizations, and certain supporting organizations occurring after August 17, 2006. Taxact 2008 free efile   The following persons will be considered disqualified persons along with certain family members and 35% controlled entities associated with them. Taxact 2008 free efile Donors of donor advised funds, Investment advisors of sponsoring organizations, and Disqualified persons of a section 509(a)(3) supporting organization that supports the applicable tax-exempt organization. Taxact 2008 free efile For certain supporting organization transactions occurring after July 25, 2006. Taxact 2008 free efile   Substantial contributors to supporting organizations will also be considered disqualified persons with respect to the supporting organizations, along with their family members and 35% controlled entities. Taxact 2008 free efile Investment advisor. Taxact 2008 free efile   Investment advisor means for any sponsoring organization, any person compensated by such organization (but not an employee of such organization) for managing the investment of, or providing investment advice for, assets maintained in donor advised funds owned by such sponsoring organization. Taxact 2008 free efile Substantial contributor. Taxact 2008 free efile   In general, a substantial contributor means any person who contributed or bequeathed an aggregate of more than $5,000 to the organization, if that amount is more than 2% of the total contributions and bequests received by the end of the organization's tax year in which the contribution or bequest is received. Taxact 2008 free efile A substantial contributor includes the grantor of a trust. Taxact 2008 free efile Family members. Taxact 2008 free efile   Family members of a disqualified person include a disqualified person's spouse, brothers or sisters (whether by whole or half-blood), spouses of brothers or sisters (whether by whole or half-blood), ancestors, children (including a legally adopted child), grandchildren, great grandchildren, and spouses of children, grandchildren, and great grandchildren (whether by whole or half-blood). Taxact 2008 free efile 35% controlled entity. Taxact 2008 free efile   A 35% controlled entity is: A corporation in which disqualified persons own more than 35% of the total combined voting power, A partnership in which such persons own more than 35% of the profits interest, or A trust or estate in which such persons own more than 35% of the beneficial interest. Taxact 2008 free efile   In determining the holdings of a business enterprise, any stock or other interest owned directly or indirectly shall apply. Taxact 2008 free efile Persons having substantial influence. Taxact 2008 free efile   Among those who are in a position to exercise substantial influence over the affairs of the organization are, for example, voting members of the governing body, and persons holding the power of: Presidents, chief executives, or chief operating officers. Taxact 2008 free efile Treasurers and chief financial officers. Taxact 2008 free efile Persons with a material financial interest in a provider-sponsored organization. Taxact 2008 free efile Persons not considered to have substantial influence. Taxact 2008 free efile   Persons who are not considered to be in a position to exercise substantial influence over the affairs of an organization include: An employee who receives benefits that total less than the highly compensated amount in section 414(q)(1)(B)(i) and who does not hold the executive or voting powers mentioned earlier in the discussion on Disqualified Person, is not a family member of a disqualified person, and is not a substantial contributor, Tax-exempt organizations described in section 501(c)(3), and Section 501(c)(4) organizations with respect to transactions engaged in with other section 501(c)(4) organizations. Taxact 2008 free efile Facts and circumstances. Taxact 2008 free efile   The determination of whether a person has substantial influence over the affairs of an organization is based on all the facts and circumstances. Taxact 2008 free efile Facts and circumstances that tend to show a person has substantial influence over the affairs of an organization include, but are not limited to, the following. Taxact 2008 free efile The person founded the organization. Taxact 2008 free efile The person is a substantial contributor to the organization under the section 507(d)(2)(A) definition, only taking into account contributions to the organization for the past 5 years. Taxact 2008 free efile The person's compensation is primarily based on revenues derived from activities of the organization that the person controls. Taxact 2008 free efile The person has or shares authority to control or determine a substantial portion of the organization's capital expenditures, operating budget, or compensation for employees. Taxact 2008 free efile The person manages a discrete segment or activity of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. Taxact 2008 free efile The person owns a controlling interest (measured by either vote or value) in a corporation, partnership, or trust that is a disqualified person. Taxact 2008 free efile The person is a nonstock organization controlled directly or indirectly by one or more disqualified persons. Taxact 2008 free efile   Facts and circumstances tending to show that a person does not have substantial influence over the affairs of an organization include, but are not limited to, the following. Taxact 2008 free efile The person has taken a bona fide vow of poverty as an employee or agent of a religious organization or on its behalf. Taxact 2008 free efile The person is an independent contractor whose sole relationship to the organization is providing professional advice (without having decision-making authority) with respect to transactions from which the independent contractor will not economically benefit either directly or indirectly aside from customary fees received for the professional advice rendered. Taxact 2008 free efile Any preferential treatment the person receives based on the size of the person's donation is also offered to others making comparable widely solicited donations. Taxact 2008 free efile The direct supervisor of the person is not a disqualified person. Taxact 2008 free efile The person does not participate in any management decisions affecting the organization as a whole or a discrete segment of the organization that represents a substantial portion of the activities, assets, income, or expenses of the organization, as compared to the organization as a whole. Taxact 2008 free efile   In the case of multiple organizations affiliated by common control or governing documents, the determination of whether a person does or does not have substantial influence is made separately for each applicable tax-exempt organization. Taxact 2008 free efile A person may be a disqualified person with respect to transactions with more than one organization. Taxact 2008 free efile Reasonable Compensation. Taxact 2008 free efile    Reasonable compensation is the value that would ordinarily be paid for like services by like enterprises under like circumstances. Taxact 2008 free efile The section 162 standard will apply in determining the reasonableness of compensation. Taxact 2008 free efile The fact that a bonus or revenue-sharing arrangement is subject to a cap is a relevant factor in determining reasonableness of compensation. Taxact 2008 free efile   To determine the reasonableness of compensation, all items of compensation provided by an applicable tax-exempt organization in exchange for performance of services are taken into account in determining the value of compensation (except for economic benefits that are disregarded under the discussion Disregarded benefits , later). Taxact 2008 free efile Items of compensation include: All forms of cash and noncash compensation, including salary, fees, bonuses, severance payments, and deferred noncash compensation, The payment of liability insurance premiums for, or the payment or reimbursement by the organization of penalties, taxes, or certain expenses under section 4958, unless excludable from income as a de minimis fringe benefit under section 132(a)(4), All other compensatory benefits, whether or not included in gross income for income tax purposes, Taxable and nontaxable fringe benefits, except fringe benefits described in section 132, and Foregone interest on loans. Taxact 2008 free efile    Intent to treat benefits as compensation. Taxact 2008 free efile An economic benefit is not treated as consideration for the performance of services unless the organization providing the benefit clearly indicates its intent to treat the benefit as compensation when the benefit is paid. Taxact 2008 free efile   An applicable tax-exempt organization (or entity that it controls) is treated as clearly indicating its intent to provide an economic benefit as compensation for services only if the organization provides written substantiation that is contemporaneous with the transfer of the economic benefits under consideration. Taxact 2008 free efile Ways to provide contemporaneous written substantiation of its intent to provide an economic benefit as compensation include: The organization produces a signed written employment contract, The organization reports the benefit as compensation on an original Form W-2, Form 1099, or Form 990, or on an amended form filed before starting an IRS examination, or The disqualified person reports the benefit as income on the person's original Form 1040, or on an amended form filed before starting an IRS examination. Taxact 2008 free efile Exception. Taxact 2008 free efile   If the economic benefit is excluded from the disqualified person's gross income for income tax purposes, the applicable tax-exempt organization is not required to indicate its intent to provide an economic benefit as compensation for services. Taxact 2008 free efile Rebuttable presumption that a transaction is not an excess benefit transaction. Taxact 2008 free efile   Payments under a compensation arrangement are presumed to be reasonable and the transfer of property (or right to use property) is presumed to be at fair market value, if the following three conditions are met. Taxact 2008 free efile The transaction is approved in advance by an authorized body of the organization (or an entity it controls) which is composed of individuals who do not have a conflict of interest concerning the transaction. Taxact 2008 free efile Before making its determination, the authorized body obtained and relied upon appropriate data as to comparability. Taxact 2008 free efile (There is a special safe harbor for small organizations. Taxact 2008 free efile If the organization has gross receipts of less than $1 million, appropriate comparability data includes data on compensation paid by three comparable organizations in the same or similar communities for similar services. Taxact 2008 free efile ) The authorized body adequately documents the basis for its determination concurrently with making that determination. Taxact 2008 free efile The documentation should include: The terms of the approved transaction and the date approved, The members of the authorized body who were present during debate on the transaction that was approved and those who voted on it, The comparability data obtained and relied upon by the authorized body and how the data was obtained, Any actions by a member of the authorized body having conflict of interest, and Documentation of the basis of the determination before the later of the next meeting of the authorized body or 60 days after the final actions of the authorized body are taken, and approval of records as reasonable, accurate, and complete within a reasonable time thereafter. Taxact 2008 free efile Disregarded benefits. Taxact 2008 free efile   The following economic benefits are disregarded for section 4958 purposes. Taxact 2008 free efile Nontaxable fringe benefits that are excluded from income under section 132. Taxact 2008 free efile Benefits provided to a volunteer for the organization if the benefit is provided to the general public in exchange for a membership fee or contribution of $75 or less. Taxact 2008 free efile Benefits provided to a member of an organization due to the payment of a membership fee or to a donor as a result of a deductible contribution, if a significant number of disqualified persons make similar payments or contributions and are offered a similar economic benefit. Taxact 2008 free efile Benefits provided to a person solely as a member of a charitable class that the applicable tax-exempt organization intends to benefit as part of the accomplishment of its exempt purpose. Taxact 2008 free efile A transfer of an economic benefit to or for the use of a governmental unit, as defined in section 170(c)(1), if exclusively for public purposes. Taxact 2008 free efile Special Exception for Initial Contracts      Section 4958 does not apply to any fixed payment made to a person under an initial contract. Taxact 2008 free efile   A fixed payment is an amount of cash or other property specified in the contract, or determined by a fixed formula that is specified in the contract, which is to be paid or transferred in exchange for the provision of specified services or property. Taxact 2008 free efile   A fixed formula can, generally, incorporate an amount that depends upon future specified events or contingencies, as long as no one has discretion when calculating the amount of a payment or deciding whether to make a payment (such as a bonus). Taxact 2008 free efile   An initial contract is a binding written contract between an applicable tax-exempt organization and a person who was not a disqualified person immediately before entering into the contract. Taxact 2008 free efile   A binding written contract, providing it can be terminated or canceled by the applicable tax-exempt organization without the other party's consent (except as a result of substantial nonperformance) and without substantial penalty, is treated as a new contract, as of the earliest date any termination or cancellation would be effective. Taxact 2008 free efile Also, if the parties make a material change to a contract, which includes an extension or renewal of the contract (except for an extension or renewal resulting from the exercise of an option by the disqualified person), or a more than incidental change to the amount payable under the contract, it is treated as a new contract as of the effective date of the material change. Taxact 2008 free efile More information. Taxact 2008 free efile   For more information, see the Instructions to Forms 990 and 4720. Taxact 2008 free efile Excess Business Holdings Private foundations are generally not permitted to hold more than a 20% interest in an unrelated business enterprise. Taxact 2008 free efile They may be subject to an excise tax on the amount of any excess business holdings. Taxact 2008 free efile For purposes of section 4943, for tax years beginning after August 17, 2006, donor advised funds and certain supporting organizations are considered private foundations. Taxact 2008 free efile Donor advised fund. Taxact 2008 free efile   In general, a donor advised fund is a fund or account separately identified by reference to contributions of a donor or donors that is owned and controlled by a sponsoring organization and for which the donor has or expects to have advisory privileges concerning the distribution or investment of the funds. Taxact 2008 free efile Supporting organizations. Taxact 2008 free efile   Only certain supporting organizations are subject to the excess business holdings tax under section 4943. Taxact 2008 free efile These include (1) Type III supporting organizations that are not functionally integrated and (2) Type II supporting organizations that accept any gift or contribution from a person who by himself or in connection with a related party controls the supported organization that the Type II supporting organization supports. Taxact 2008 free efile Taxes. Taxact 2008 free efile   A private foundation that has excess holdings in a business enterprise may become liable for an excise tax based on the amount of holdings. Taxact 2008 free efile The initial tax is 10% (5% for tax years beginning before August 18, 2006) of the value of the excess holdings and is imposed on the last day of each tax year that ends during the taxable period. Taxact 2008 free efile The excess holdings are determined on the day during the tax year when they were the largest. Taxact 2008 free efile   A foundation that fails to correct the excess business holdings becomes liable for an additional tax of 200% of the remaining excess business holdings as of the earlier of tax assessment or mailing of a notice of deficiency. Taxact 2008 free efile   For more information on the tax on excess business holdings, see the Instructions for Form 4720. Taxact 2008 free efile Taxable Distributions of Sponsoring Organizations An excise tax is imposed on a sponsoring organization for each taxable distribution it makes from a donor advised fund. Taxact 2008 free efile An excise tax is also imposed on any fund manager of the sponsoring organization who agreed to the making of a distribution, knowing that it is a taxable distribution. Taxact 2008 free efile Taxable distribution. Taxact 2008 free efile   A taxable distribution is any distribution from a donor advised fund to any natural person or to any other person if: The distribution is for any purpose other than one specified in section 170(c)(2)(B), or The sponsoring organization maintaining the donor advised fund does not exercise expenditure responsibility with respect to the distribution in accordance with section 4945(h). Taxact 2008 free efile    However, a taxable distribution does not include a distribution from a donor advised fund to: Any organization described in section 170(b)(1)(A) (other than a disqualified supporting organization), The sponsoring organization of the donor advised fund, or Any other donor advised fund. Taxact 2008 free efile The tax on taxable distributions applies to distributions occurring in tax years beginning after August 17, 2006. Taxact 2008 free efile Sponsoring organization. Taxact 2008 free efile   A sponsoring organization is a section 170(c) organization that is neither a government organization (as referred to in section 170(c)(1) and (2)(A)) nor a private foundation. Taxact 2008 free efile Donor advised fund. Taxact 2008 free efile    A donor advised fund is a fund or account: Which is separately identified by reference to contributions of a donor or donors, Which is owned and controlled by a sponsoring organization, and For which the donor (or any person appointed or designated by the donor) has or expects to have advisory privileges concerning the distribution or investment of the funds held in the donor advised funds or accounts because of the donor's status as a donor. Taxact 2008 free efile Exception. Taxact 2008 free efile A donor advised fund does not include:    A fund or account that makes distributions only to a single identified organization or governmental entity, or Any fund or account for a person described in 3 above that gives advice about which individuals receive grants for travel, study, or similar purposes, if the following three requirements are met: The person's advisory privileges are performed exclusively by such person in their capacity as a committee member of which all the committee members are appointed by the sponsoring organization, No combination of persons with advisory privileges, described in 3 above, or persons related to those in 3 above directly or indirectly control the committee, and All grants from the fund or account are awarded on an objective and nondiscriminatory basis according to a procedure approved in advance by the board of directors of the sponsoring organization. Taxact 2008 free efile The procedure must be designed to ensure that all grants meet the requirements of section 4945(g)(1), (2), or (3). Taxact 2008 free efile Disqualified supporting organization. Taxact 2008 free efile   A disqualified supporting organization includes (1) a Type III supporting organization that is not functionally integrated and (2) any supporting organization where the donor or donor advisor (and any related parties) directly or indirectly controls a supported organization of the supporting organization. Taxact 2008 free efile Tax on sponsoring organization. Taxact 2008 free efile   A tax of 20% of the amount of each taxable distribution is imposed on the sponsoring organization. Taxact 2008 free efile Tax on fund manager. Taxact 2008 free efile   If a tax is imposed on a taxable distribution of the sponsoring organization, a tax of 5% of the distribution will be imposed on any fund manager who agreed to the distribution knowing that it was a taxable distribution. Taxact 2008 free efile Any fund manager who took part in the distribution and is liable for the tax must pay the tax. Taxact 2008 free efile The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. Taxact 2008 free efile If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. Taxact 2008 free efile   For more information on the tax on taxable distributions of sponsoring organizations, see the Instructions for Form 4720. Taxact 2008 free efile Taxes on Prohibited Benefits Resulting From Donor Advised Fund Distributions Prohibited benefit. Taxact 2008 free efile   If any donor, donor advisor, or related party advises the sponsoring organization about making a distribution which results in a donor, donor advisor, or related party receiving (either directly or indirectly) a more than incidental benefit, then such benefit is a prohibited benefit. Taxact 2008 free efile The tax on prohibited benefits applies to distributions occurring in tax years beginning after August 17, 2006. Taxact 2008 free efile Donor advisor. Taxact 2008 free efile   A donor advisor is any person appointed or designated by a donor to advise a sponsoring organization on the distribution or investment of amounts held in the donor's fund or account. Taxact 2008 free efile Related party. Taxact 2008 free efile   A related party includes any family member or 35% controlled entity. Taxact 2008 free efile See the definition of those terms under Disqualified Person , earlier. Taxact 2008 free efile Tax on donor, donor advisor, or related person. Taxact 2008 free efile    A tax of 125% of the benefit resulting from the distribution is imposed on both the party who advised as to the distribution (which might be a donor, donor advisor, or related party) and the party who received such benefit (which might be a donor, donor advisor, or related party). Taxact 2008 free efile The advisor and the party who received the benefit are jointly and severally liable for the tax. Taxact 2008 free efile Tax on fund managers. Taxact 2008 free efile   If a tax is imposed on a prohibited benefit received by a donor, donor advisor, or related person, a tax of 10% of the amount of the prohibited benefit is imposed on any fund manager who agreed to the distribution knowing that it would confer a prohibited benefit. Taxact 2008 free efile Any fund manager who took part in the distribution and is liable for the tax must pay the tax. Taxact 2008 free efile The maximum amount of tax on all fund managers for any one taxable distribution is $10,000. Taxact 2008 free efile If more than one fund manager is liable for tax on a taxable distribution, all such managers are jointly and severally liable for the tax. Taxact 2008 free efile Exception. Taxact 2008 free efile   If a person engaged in an excess benefit transaction and received a prohibited benefit for the same transaction, the person is taxed under section 4958, and no tax is imposed under section 4967 for a prohibited benefit. Taxact 2008 free efile   For more information on taxes on prohibited benefits distributed from donor advised funds, see the Instructions for Form 4720. Taxact 2008 free efile Excise Taxes on Private Foundations There is an excise tax on the net investment income of most domestic private foundations. Taxact 2008 free efile Capital gains from appreciation are included in the tax base on private foundation net investment income. Taxact 2008 free efile This tax must be reported on Form 990-PF and must be paid annually at the time for filing that return or in quarterly estimated tax payments if the total tax for the year (section 4940 tax minus credits) is $500 or more. Taxact 2008 free efile Form 990-W is used to calculate the estimated tax. Taxact 2008 free efile In addition, there are several other rules that apply to excise taxes on private foundations. Taxact 2008 free efile These include: Restrictions on self-dealing between private foundations and their substantial contributors and other disqualified persons, Requirements that the foundation annually distribute income for charitable purposes, Limits on their holdings in any business enterprise (see Excess Business Holdings, earlier), Provisions that investments must not jeopardize the carrying out of exempt purposes, and Provisions to assure that expenditures further the organization's exempt purposes. Taxact 2008 free efile Violations of these provisions give rise to taxes and penalties against the private foundation and, in some cases, its managers, its substantial contributors, and certain related persons. Taxact 2008 free efile For more information on the excise taxes imposed on private foundations, see the Instructions for Form 4720 and the Instructions for Form 990-PF. Taxact 2008 free efile Excise Taxes on Black Lung Benefit Trusts A black lung benefit trust that makes any expenditures, payments, or investments other than those described in chapter 4 under 501(c)(21) - Black Lung Benefit Trusts must pay a tax equal to 10% of the amount of such expenditures. Taxact 2008 free efile If there are any acts of self-dealing between the trust and a disqualified person, a tax equal to 10% of the amount involved is imposed on the disqualified person. Taxact 2008 free efile Both of these excise taxes are reported on Schedule A (Form 990-BL). Taxact 2008 free efile See the Form 990-BL instructions for more information on these taxes and what has to be filed, even if the trust is excepted from filing. Taxact 2008 free efile Excise Tax on Failure to Meet the Community Health Needs Assessment Requirements For tax years beginning after March 23, 2012, new section 4959 imposes an excise tax on hospital organizations which fail to meet certain section 501(r) requirements for each of their hospital facilities. Taxact 2008 free efile These entities must meet section 501(r)(3) requirements at all times during their tax year. Taxact 2008 free efile Section 501(r)(3) requirements pertain to a hospital organization preparing a community health needs assessment (CHNA). Taxact 2008 free efile See Schedule H, Hospitals (Form 990), for details. Taxact 2008 free efile Prev  Up  Next   Home   More Online Publications
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Taxact 2008 free efile Publication 515 - Main Content Table of Contents Withholding of TaxWithholding Agent Withholding and Reporting Obligations Persons Subject to NRA WithholdingIdentifying the Payee Foreign Persons DocumentationBeneficial Owners Foreign Intermediaries and Foreign Flow-Through Entities Standards of Knowledge Presumption Rules Income Subject to NRA WithholdingSource of Income Fixed or Determinable Annual or Periodical Income (FDAP) Withholding on Specific IncomeEffectively Connected Income Income Not Effectively Connected Pay for Personal Services Performed Artists and Athletes (Income Codes 42 and 43) Other Income Foreign Governments and Certain Other Foreign Organizations U. Taxact 2008 free efile S. Taxact 2008 free efile Taxpayer Identification NumbersUnexpected payment. Taxact 2008 free efile Depositing Withheld TaxesWhen Deposits Are Required Adjustment for Overwithholding Returns RequiredJoint owners. Taxact 2008 free efile Electronic reporting. Taxact 2008 free efile Partnership Withholding on Effectively Connected IncomeWho Must Withhold Foreign Partner Publicly Traded Partnerships U. Taxact 2008 free efile S. Taxact 2008 free efile Real Property InterestForeign corporations. Taxact 2008 free efile Domestic corporations. Taxact 2008 free efile U. Taxact 2008 free efile S. Taxact 2008 free efile real property holding corporations. Taxact 2008 free efile Partnerships. Taxact 2008 free efile Trusts and estates. Taxact 2008 free efile Domestically controlled QIE. Taxact 2008 free efile Late filing of certifications or notices. Taxact 2008 free efile Certifications. Taxact 2008 free efile Liability of agent or qualified substitute. Taxact 2008 free efile Reporting and Paying the Tax Withholding Certificates Tax Treaty TablesTable 1 Table 2 Table 3 How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Taxact 2008 free efile Withholding of Tax In most cases, a foreign person is subject to U. Taxact 2008 free efile S. Taxact 2008 free efile tax on its U. Taxact 2008 free efile S. Taxact 2008 free efile source income. Taxact 2008 free efile Most types of U. Taxact 2008 free efile S. Taxact 2008 free efile source income received by a foreign person are subject to U. Taxact 2008 free efile S. Taxact 2008 free efile tax of 30%. Taxact 2008 free efile A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. Taxact 2008 free efile The tax is generally withheld (NRA withholding) from the payment made to the foreign person. Taxact 2008 free efile The term “NRA withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Taxact 2008 free efile In most cases, NRA withholding describes the withholding regime that requires withholding on a payment of U. Taxact 2008 free efile S. Taxact 2008 free efile source income. Taxact 2008 free efile Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to NRA withholding. Taxact 2008 free efile NRA withholding does not include withholding under section 1445 of the Code (see U. Taxact 2008 free efile S. Taxact 2008 free efile Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income , later). Taxact 2008 free efile A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. Taxact 2008 free efile However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U. Taxact 2008 free efile S. Taxact 2008 free efile person is not required to withhold. Taxact 2008 free efile In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Taxact 2008 free efile Withholding Agent You are a withholding agent if you are a U. Taxact 2008 free efile S. Taxact 2008 free efile or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. Taxact 2008 free efile A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U. Taxact 2008 free efile S. Taxact 2008 free efile branch of certain foreign banks and insurance companies. Taxact 2008 free efile You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment. Taxact 2008 free efile Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Taxact 2008 free efile In most cases, the U. Taxact 2008 free efile S. Taxact 2008 free efile person who pays an amount subject to NRA withholding is the person responsible for withholding. Taxact 2008 free efile However, other persons may be required to withhold. Taxact 2008 free efile For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. Taxact 2008 free efile In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later. Taxact 2008 free efile Liability for tax. Taxact 2008 free efile   As a withholding agent, you are personally liable for any tax required to be withheld. Taxact 2008 free efile This liability is independent of the tax liability of the foreign person to whom the payment is made. Taxact 2008 free efile If you fail to withhold and the foreign payee fails to satisfy its U. Taxact 2008 free efile S. Taxact 2008 free efile tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties. Taxact 2008 free efile   The applicable tax will be collected only once. Taxact 2008 free efile If the foreign person satisfies its U. Taxact 2008 free efile S. Taxact 2008 free efile tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold. Taxact 2008 free efile Determination of amount to withhold. Taxact 2008 free efile   You must withhold on the gross amount subject to NRA withholding. Taxact 2008 free efile You cannot reduce the gross amount by any deductions. Taxact 2008 free efile However, see Scholarships and Fellowship Grants and Pay for Personal Services Performed , later, for when a deduction for a personal exemption may be allowed. Taxact 2008 free efile   If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. Taxact 2008 free efile In no case, however, should you withhold more than 30% of the total amount paid. Taxact 2008 free efile Or, you may make a reasonable estimate of the amount from U. Taxact 2008 free efile S. Taxact 2008 free efile sources and put a corresponding part of the amount due in escrow until the amount from U. Taxact 2008 free efile S. Taxact 2008 free efile sources can be determined, at which time withholding becomes due. Taxact 2008 free efile When to withhold. Taxact 2008 free efile   Withholding is required at the time you make a payment of an amount subject to withholding. Taxact 2008 free efile A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. Taxact 2008 free efile A payment is considered made to a person if it is paid for that person's benefit. Taxact 2008 free efile For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. Taxact 2008 free efile A payment also is considered made to a person if it is made to that person's agent. Taxact 2008 free efile   A U. Taxact 2008 free efile S. Taxact 2008 free efile partnership should withhold when any distributions that include amounts subject to withholding are made. Taxact 2008 free efile However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U. Taxact 2008 free efile S. Taxact 2008 free efile partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. Taxact 2008 free efile If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income , later. Taxact 2008 free efile A U. Taxact 2008 free efile S. Taxact 2008 free efile trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. Taxact 2008 free efile To the extent a U. Taxact 2008 free efile S. Taxact 2008 free efile trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S. Taxact 2008 free efile Withholding and Reporting Obligations You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. Taxact 2008 free efile (See Returns Required , later. Taxact 2008 free efile ) An exception from reporting may apply to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business. Taxact 2008 free efile Form 1099 reporting and backup withholding. Taxact 2008 free efile    You also may be responsible as a payer for reporting on Form 1099 payments made to a U. Taxact 2008 free efile S. Taxact 2008 free efile person. Taxact 2008 free efile You must withhold 28% (backup withholding rate) from a reportable payment made to a U. Taxact 2008 free efile S. Taxact 2008 free efile person that is subject to Form 1099 reporting if any of the following apply. Taxact 2008 free efile The U. Taxact 2008 free efile S. Taxact 2008 free efile person has not provided its taxpayer identification number (TIN) in the manner required. Taxact 2008 free efile The IRS notifies you that the TIN furnished by the payee is incorrect. Taxact 2008 free efile There has been a notified payee underreporting. Taxact 2008 free efile There has been a payee certification failure. Taxact 2008 free efile In most cases, a TIN must be provided by a U. Taxact 2008 free efile S. Taxact 2008 free efile non-exempt recipient on Form W-9, Request for Taxpayer Identification Number and Certification. Taxact 2008 free efile A payer files a tax return on Form 945, Annual Return of Withheld Federal Income Tax, for backup withholding. Taxact 2008 free efile You may be required to file Form 1099 and, if appropriate, backup withhold, even if you do not make the payments directly to that U. Taxact 2008 free efile S. Taxact 2008 free efile person. Taxact 2008 free efile For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U. Taxact 2008 free efile S. Taxact 2008 free efile person subject to Form 1099 reporting. Taxact 2008 free efile See Identifying the Payee , later, for more information. Taxact 2008 free efile Also see Section S. Taxact 2008 free efile Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Certain Information Returns. Taxact 2008 free efile Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting. Taxact 2008 free efile Wages paid to employees. Taxact 2008 free efile   If you are the employer of a nonresident alien, you generally must withhold taxes at graduated rates. Taxact 2008 free efile See Pay for Personal Services Performed , later. Taxact 2008 free efile Effectively connected income by partnerships. Taxact 2008 free efile   A withholding agent that is a partnership (whether U. Taxact 2008 free efile S. Taxact 2008 free efile or foreign) is also responsible for withholding on its income effectively connected with a U. Taxact 2008 free efile S. Taxact 2008 free efile trade or business that is allocable to foreign partners. Taxact 2008 free efile See Partnership Withholding on Effectively Connected Income , later, for more information. Taxact 2008 free efile U. Taxact 2008 free efile S. Taxact 2008 free efile real property interest. Taxact 2008 free efile   A withholding agent also may be responsible for withholding if a foreign person transfers a U. Taxact 2008 free efile S. Taxact 2008 free efile real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U. Taxact 2008 free efile S. Taxact 2008 free efile real property interest to a shareholder, partner, or beneficiary that is a foreign person. Taxact 2008 free efile See U. Taxact 2008 free efile S. Taxact 2008 free efile Real Property Interest , later. Taxact 2008 free efile Persons Subject to NRA Withholding NRA withholding applies only to payments made to a payee that is a foreign person. Taxact 2008 free efile It does not apply to payments made to U. Taxact 2008 free efile S. Taxact 2008 free efile persons. Taxact 2008 free efile Usually, you determine the payee's status as a U. Taxact 2008 free efile S. Taxact 2008 free efile or foreign person based on the documentation that person provides. Taxact 2008 free efile See Documentation , later. Taxact 2008 free efile However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation, then you must apply certain presumption rules, discussed later. Taxact 2008 free efile Identifying the Payee In most cases, the payee is the person to whom you make the payment, regardless of whether that person is the beneficial owner of the income. Taxact 2008 free efile However, there are situations in which the payee is a person other than the one to whom you actually make a payment. Taxact 2008 free efile U. Taxact 2008 free efile S. Taxact 2008 free efile agent of foreign person. Taxact 2008 free efile   If you make a payment to a U. Taxact 2008 free efile S. Taxact 2008 free efile person and you have actual knowledge that the U. Taxact 2008 free efile S. Taxact 2008 free efile person is receiving the payment as an agent of a foreign person, you must treat the payment as made to the foreign person. Taxact 2008 free efile However, if the U. Taxact 2008 free efile S. Taxact 2008 free efile person is a financial institution, you may treat the institution as the payee provided you have no reason to believe that the institution will not comply with its own obligation to withhold. Taxact 2008 free efile   If the payment is not subject to NRA withholding (for example, gross proceeds from the sales of securities), you must treat the payment as made to a U. Taxact 2008 free efile S. Taxact 2008 free efile person and not as a payment to a foreign person. Taxact 2008 free efile You may be required to report the payment on Form 1099 and, if applicable, backup withhold. Taxact 2008 free efile Disregarded entities. Taxact 2008 free efile   A business entity that is not a corporation and that has a single owner may be disregarded as an entity separate from its owner (a disregarded entity) for federal tax purposes. Taxact 2008 free efile The payee of a payment made to a disregarded entity is the owner of the entity. Taxact 2008 free efile   If the owner of the entity is a foreign person, you must apply NRA withholding unless you can treat the foreign owner as a beneficial owner entitled to a reduced rate of withholding. Taxact 2008 free efile   If the owner is a U. Taxact 2008 free efile S. Taxact 2008 free efile person, you do not apply NRA withholding. Taxact 2008 free efile However, you may be required to report the payment on Form 1099 and, if applicable, backup withhold. Taxact 2008 free efile You may assume that a foreign entity is not a disregarded entity unless you can reliably associate the payment with documentation provided by the owner or you have actual knowledge or reason to know that the foreign entity is a disregarded entity. Taxact 2008 free efile Flow-Through Entities The payees of payments (other than income effectively connected with a U. Taxact 2008 free efile S. Taxact 2008 free efile trade or business) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. Taxact 2008 free efile This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Taxact 2008 free efile Income that is, or is deemed to be, effectively connected with the conduct of a U. Taxact 2008 free efile S. Taxact 2008 free efile trade or business of a flow-through entity is treated as paid to the entity. Taxact 2008 free efile All of the following are flow-through entities. Taxact 2008 free efile A foreign partnership (other than a withholding foreign partnership). Taxact 2008 free efile A foreign simple or foreign grantor trust (other than a withholding foreign trust). Taxact 2008 free efile A fiscally transparent entity receiving income for which treaty benefits are claimed. Taxact 2008 free efile See Fiscally transparent entity , later. Taxact 2008 free efile In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation , later) on which it claims such status. Taxact 2008 free efile You also may be required to treat the entity as a flow-through entity under the presumption rules, discussed later. Taxact 2008 free efile You must determine whether the owners or beneficiaries of a flow-through entity are U. Taxact 2008 free efile S. Taxact 2008 free efile or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of NRA withholding applies. Taxact 2008 free efile You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. Taxact 2008 free efile If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. Taxact 2008 free efile See Documentation and Presumption Rules , later. Taxact 2008 free efile Withholding foreign partnerships and withholding foreign trusts are not flow-through entities. Taxact 2008 free efile Foreign partnerships. Taxact 2008 free efile    A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. Taxact 2008 free efile If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves a flow-through entity or a foreign intermediary. Taxact 2008 free efile However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Taxact 2008 free efile If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees. Taxact 2008 free efile Example 1. Taxact 2008 free efile A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation; and a U. Taxact 2008 free efile S. Taxact 2008 free efile citizen. Taxact 2008 free efile You make a payment of U. Taxact 2008 free efile S. Taxact 2008 free efile source interest to the partnership. Taxact 2008 free efile It gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien; Form W-8BEN from the foreign corporation; and Form W-9 from the U. Taxact 2008 free efile S. Taxact 2008 free efile citizen. Taxact 2008 free efile The partnership also gives you a complete withholding statement that enables you to associate a part of the interest payment to each partner. Taxact 2008 free efile You must treat all three partners as the payees of the interest payment as if the payment were made directly to them. Taxact 2008 free efile Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S. Taxact 2008 free efile Report the payment to the U. Taxact 2008 free efile S. Taxact 2008 free efile citizen on Form 1099-INT. Taxact 2008 free efile Example 2. Taxact 2008 free efile A nonwithholding foreign partnership has two partners: a foreign corporation and a nonwithholding foreign partnership. Taxact 2008 free efile The second partnership has two partners, both nonresident alien individuals. Taxact 2008 free efile You make a payment of U. Taxact 2008 free efile S. Taxact 2008 free efile source interest to the first partnership. Taxact 2008 free efile It gives you a valid Form W-8IMY with which it associates a Form W-8BEN from the foreign corporation and a Form W-8IMY from the second partnership. Taxact 2008 free efile In addition, Forms W-8BEN from the partners are associated with the Form W-8IMY from the second partnership. Taxact 2008 free efile The Forms W-8IMY from the partnerships have complete withholding statements associated with them. Taxact 2008 free efile Because you can reliably associate a part of the interest payment with the Form W-8BEN provided by the foreign corporation and the Forms W-8BEN provided by the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest. Taxact 2008 free efile Example 3. Taxact 2008 free efile You make a payment of U. Taxact 2008 free efile S. Taxact 2008 free efile source dividends to a withholding foreign partnership. Taxact 2008 free efile The partnership has two partners, both foreign corporations. Taxact 2008 free efile You can reliably associate the payment with a valid Form W-8IMY from the partnership on which it represents that it is a withholding foreign partnership. Taxact 2008 free efile You must treat the partnership as the payee of the dividends. Taxact 2008 free efile Foreign simple and grantor trust. Taxact 2008 free efile   A trust is foreign unless it meets both of the following tests. Taxact 2008 free efile A court within the United States is able to exercise primary supervision over the administration of the trust. Taxact 2008 free efile One or more U. Taxact 2008 free efile S. Taxact 2008 free efile persons have the authority to control all substantial decisions of the trust. Taxact 2008 free efile   In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. Taxact 2008 free efile A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679 of the Code. Taxact 2008 free efile   The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. Taxact 2008 free efile The payees of a payment made to a foreign grantor trust are the owners of the trust. Taxact 2008 free efile However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Taxact 2008 free efile If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees. Taxact 2008 free efile Example. Taxact 2008 free efile A foreign simple trust has three beneficiaries: two nonresident alien individuals and a U. Taxact 2008 free efile S. Taxact 2008 free efile citizen. Taxact 2008 free efile You make a payment of interest to the foreign trust. Taxact 2008 free efile It gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident aliens and a Form W-9 from the U. Taxact 2008 free efile S. Taxact 2008 free efile citizen. Taxact 2008 free efile The trust also gives you a complete withholding statement that enables you to associate a part of the interest payment with the forms provided by each beneficiary. Taxact 2008 free efile You must treat all three beneficiaries as the payees of the interest payment as if the payment were made directly to them. Taxact 2008 free efile Report the payment to the nonresident aliens on Forms 1042-S. Taxact 2008 free efile Report the payment to the U. Taxact 2008 free efile S. Taxact 2008 free efile citizen on Form 1099-INT. Taxact 2008 free efile Fiscally transparent entity. Taxact 2008 free efile   If a reduced rate of withholding under an income tax treaty is claimed, a flow-through entity includes any entity in which the interest holder must treat the entity as fiscally transparent. Taxact 2008 free efile The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc. Taxact 2008 free efile ). Taxact 2008 free efile The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. Taxact 2008 free efile An entity is considered to be fiscally transparent for the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Taxact 2008 free efile Subject to the standards of knowledge rules discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity. Taxact 2008 free efile   The payees of a payment made to a fiscally transparent entity are the interest holders of the entity. Taxact 2008 free efile Example. Taxact 2008 free efile Entity A is a business organization organized under the laws of country X that has an income tax treaty in force with the United States. Taxact 2008 free efile A has two interest holders, B and C. Taxact 2008 free efile B is a corporation organized under the laws of country Y. Taxact 2008 free efile C is a corporation organized under the laws of country Z. Taxact 2008 free efile Both countries Y and Z have an income tax treaty in force with the United States. Taxact 2008 free efile A receives royalty income from U. Taxact 2008 free efile S. Taxact 2008 free efile sources that is not effectively connected with the conduct of a trade or business in the United States. Taxact 2008 free efile For U. Taxact 2008 free efile S. Taxact 2008 free efile income tax purposes, A is treated as a partnership. Taxact 2008 free efile Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. Taxact 2008 free efile The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income was realized directly from the source that paid it to A. Taxact 2008 free efile Accordingly, A is fiscally transparent in its jurisdiction, country X. Taxact 2008 free efile B and C are not fiscally transparent under the laws of their respective countries of incorporation. Taxact 2008 free efile Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income was realized directly from the source that paid it to A. Taxact 2008 free efile Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U. Taxact 2008 free efile S. Taxact 2008 free efile source royalty income for purposes of the U. Taxact 2008 free efile S. Taxact 2008 free efile -Y income tax treaty. Taxact 2008 free efile Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. Taxact 2008 free efile Therefore, A is not treated as fiscally transparent under the laws of country Z. Taxact 2008 free efile Accordingly, C is not treated as deriving its share of the U. Taxact 2008 free efile S. Taxact 2008 free efile source royalty income for purposes of the U. Taxact 2008 free efile S. Taxact 2008 free efile -Z income tax treaty. Taxact 2008 free efile Foreign Intermediaries In most cases, if you make payments to a foreign intermediary, the payees are the persons for whom the foreign intermediary collects the payment, such as account holders or customers, not the intermediary itself. Taxact 2008 free efile This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Taxact 2008 free efile You may, however, treat a qualified intermediary that has assumed primary withholding responsibility for a payment as the payee, and you are not required to withhold. Taxact 2008 free efile An intermediary is a custodian, broker, nominee, or any other person that acts as an agent for another person. Taxact 2008 free efile A foreign intermediary is either a qualified intermediary or a nonqualified intermediary. Taxact 2008 free efile In most cases, you determine whether an entity is a qualified intermediary or a nonqualified intermediary based on the representations the intermediary makes on Form W-8IMY. Taxact 2008 free efile You must determine whether the customers or account holders of a foreign intermediary are U. Taxact 2008 free efile S. Taxact 2008 free efile or foreign persons and, if the account holder or customer is foreign, whether a reduced rate of NRA withholding applies. Taxact 2008 free efile You make these determinations based on the foreign intermediary's Form W-8IMY and associated information and documentation. Taxact 2008 free efile If you do not have all of the information or documentation that is required to reliably associate a payment with a payee, you must apply the presumption rules. Taxact 2008 free efile See Documentation and Presumption Rules , later. Taxact 2008 free efile Nonqualified intermediary. Taxact 2008 free efile   A nonqualified intermediary (NQI) is any intermediary that is a foreign person and that is not a qualified intermediary. Taxact 2008 free efile The payees of a payment made to an NQI are the customers or account holders on whose behalf the NQI is acting. Taxact 2008 free efile Example. Taxact 2008 free efile You make a payment of interest to a foreign bank that is a nonqualified intermediary. Taxact 2008 free efile The bank gives you a Form W-8IMY and the Forms W-8BEN of two foreign persons, and a Form W-9 from a U. Taxact 2008 free efile S. Taxact 2008 free efile person for whom the bank is collecting the payments. Taxact 2008 free efile The bank also associates with its Form W-8IMY a withholding statement on which it allocates the interest payment to each account holder and provides all other information required to be on the withholding statement. Taxact 2008 free efile The account holders are the payees of the interest payment. Taxact 2008 free efile You should report the part of the interest paid to the two foreign persons on Forms 1042-S and the part paid to the U. Taxact 2008 free efile S. Taxact 2008 free efile person on Form 1099-INT. Taxact 2008 free efile Qualified intermediary. Taxact 2008 free efile   A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U. Taxact 2008 free efile S. Taxact 2008 free efile intermediary) that has entered into a qualified intermediary withholding agreement (discussed later) with the IRS. Taxact 2008 free efile You may treat a QI as a payee to the extent the QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. Taxact 2008 free efile In this situation, the QI is required to withhold the tax. Taxact 2008 free efile You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI. Taxact 2008 free efile   A payment to a QI to the extent it does not assume primary NRA withholding responsibility is considered made to the person on whose behalf the QI acts. Taxact 2008 free efile If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U. Taxact 2008 free efile S. Taxact 2008 free efile person. Taxact 2008 free efile Branches of financial institutions. Taxact 2008 free efile   Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved “know-your-customer” (KYC) rules. Taxact 2008 free efile The countries with approved KYC rules are listed on IRS. Taxact 2008 free efile gov. Taxact 2008 free efile QI withholding agreement. Taxact 2008 free efile   Foreign financial institutions and foreign branches of U. Taxact 2008 free efile S. Taxact 2008 free efile financial institutions can enter into an agreement with the IRS to be a qualified intermediary. Taxact 2008 free efile   A QI is entitled to certain simplified withholding and reporting rules. Taxact 2008 free efile In general, there are three major areas whereby intermediaries with QI status are afforded such simplified treatment. Taxact 2008 free efile   To apply for QI status, complete Form 14345, Qualified Intermediary Application, and Form SS-4, Application for Employer Identification Number. Taxact 2008 free efile These forms, and the procedures required to obtain a QI withholding agreement are available at www. Taxact 2008 free efile irs. Taxact 2008 free efile gov/Businesses/Corporations/Qualified-Intermediaries-(QI). Taxact 2008 free efile Documentation. Taxact 2008 free efile   A QI is not required to forward documentation obtained from foreign account holders to the U. Taxact 2008 free efile S. Taxact 2008 free efile withholding agent from whom the QI receives a payment of U. Taxact 2008 free efile S. Taxact 2008 free efile source income. Taxact 2008 free efile The QI maintains such documentation at its location and provides the U. Taxact 2008 free efile S. Taxact 2008 free efile withholding agent with withholding rate pools. Taxact 2008 free efile A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding. Taxact 2008 free efile   A QI is required to provide the U. Taxact 2008 free efile S. Taxact 2008 free efile withholding agent with information regarding U. Taxact 2008 free efile S. Taxact 2008 free efile persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding. Taxact 2008 free efile   If a QI obtains documentary evidence under the “know-your-customer” rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. Taxact 2008 free efile This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence that is not of the type specified in the attachment to the agreement. Taxact 2008 free efile Form 1042-S reporting. Taxact 2008 free efile   A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. Taxact 2008 free efile Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified intermediary or a flow-through entity (discussed earlier). Taxact 2008 free efile Collective refund procedures. Taxact 2008 free efile   A QI may seek a refund on behalf of its direct account holders. Taxact 2008 free efile The direct account holders, therefore, are not required to file returns with the IRS to obtain refunds, but rather may obtain them from the QI. Taxact 2008 free efile U. Taxact 2008 free efile S. Taxact 2008 free efile branches of foreign banks and foreign insurance companies. Taxact 2008 free efile   Special rules apply to a U. Taxact 2008 free efile S. Taxact 2008 free efile branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. Taxact 2008 free efile If you agree to treat the branch as a U. Taxact 2008 free efile S. Taxact 2008 free efile person, you may treat the branch as a U. Taxact 2008 free efile S. Taxact 2008 free efile payee for a payment subject to NRA withholding provided you receive a Form W-8IMY from the U. Taxact 2008 free efile S. Taxact 2008 free efile branch on which the agreement is evidenced. Taxact 2008 free efile If you treat the branch as a U. Taxact 2008 free efile S. Taxact 2008 free efile payee, you are not required to withhold. Taxact 2008 free efile Even though you agree to treat the branch as a U. Taxact 2008 free efile S. Taxact 2008 free efile person, you must report the payment on Form 1042-S. Taxact 2008 free efile   A financial institution organized in a U. Taxact 2008 free efile S. Taxact 2008 free efile possession is treated as a U. Taxact 2008 free efile S. Taxact 2008 free efile branch. Taxact 2008 free efile The special rules discussed in this section apply to a possessions financial institution. Taxact 2008 free efile   If you are paying a U. Taxact 2008 free efile S. Taxact 2008 free efile branch an amount that is not subject to NRA withholding, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U. Taxact 2008 free efile S. Taxact 2008 free efile person for amounts subject to NRA withholding. Taxact 2008 free efile Consequently, amounts not subject to NRA withholding that are paid to a U. Taxact 2008 free efile S. Taxact 2008 free efile branch are not subject to Form 1099 reporting or backup withholding. Taxact 2008 free efile   Alternatively, a U. Taxact 2008 free efile S. Taxact 2008 free efile branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. Taxact 2008 free efile In this situation, the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. Taxact 2008 free efile See Nonqualified Intermediaries under  Documentation, later. Taxact 2008 free efile   If the U. Taxact 2008 free efile S. Taxact 2008 free efile branch does not provide you with a Form W-8IMY, then you should treat a payment subject to NRA withholding as made to the foreign person of which the branch is a part and the income as effectively connected with the conduct of a trade or business in the United States. Taxact 2008 free efile Withholding foreign partnership and foreign trust. Taxact 2008 free efile   A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP withholding agreement with the IRS and is acting in that capacity. Taxact 2008 free efile A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT withholding agreement with the IRS and is acting in that capacity. Taxact 2008 free efile   A WP or WT may act in that capacity only for payments of amounts subject to NRA withholding that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. Taxact 2008 free efile A WP or WT acting in that capacity must assume NRA withholding responsibility for these amounts. Taxact 2008 free efile You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts. Taxact 2008 free efile WP and WT withholding agreements. Taxact 2008 free efile   The WP and WT withholding agreements and the application procedures for the agreements are in Revenue Procedure 2003-64. Taxact 2008 free efile Also see the following items. Taxact 2008 free efile Revenue Procedure 2004-21. Taxact 2008 free efile Revenue Procedure 2005-77. Taxact 2008 free efile Employer identification number (EIN). Taxact 2008 free efile   A completed Form SS-4 must be submitted with the application for being a WP or WT. Taxact 2008 free efile The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity. Taxact 2008 free efile Documentation. Taxact 2008 free efile   A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and a written statement identifying the amounts for which it is so acting. Taxact 2008 free efile The statement is not required to contain withholding rate pool information or any information relating to the identity of a direct partner, beneficiary, or owner. Taxact 2008 free efile The Form W-8IMY must contain the WP-EIN or WT-EIN. Taxact 2008 free efile Foreign Persons A payee is subject to NRA withholding only if it is a foreign person. Taxact 2008 free efile A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U. Taxact 2008 free efile S. Taxact 2008 free efile person. Taxact 2008 free efile It also includes a foreign branch of a U. Taxact 2008 free efile S. Taxact 2008 free efile financial institution if the foreign branch is a qualified intermediary. Taxact 2008 free efile In most cases, the U. Taxact 2008 free efile S. Taxact 2008 free efile branch of a foreign corporation or partnership is treated as a foreign person. Taxact 2008 free efile Nonresident alien. Taxact 2008 free efile   A nonresident alien is an individual who is not a U. Taxact 2008 free efile S. Taxact 2008 free efile citizen or a resident alien. Taxact 2008 free efile A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding. Taxact 2008 free efile Married to U. Taxact 2008 free efile S. Taxact 2008 free efile citizen or resident alien. Taxact 2008 free efile   Nonresident alien individuals married to U. Taxact 2008 free efile S. Taxact 2008 free efile citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. Taxact 2008 free efile However, these individuals are still subject to the NRA withholding rules that apply to nonresident aliens for all income except wages. Taxact 2008 free efile Wages paid to these individuals are subject to graduated withholding. Taxact 2008 free efile See Wages Paid to Employees—Graduated Withholding . Taxact 2008 free efile Resident alien. Taxact 2008 free efile   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. Taxact 2008 free efile Green card test. Taxact 2008 free efile An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. Taxact 2008 free efile This is known as the green card test because these aliens hold immigrant visas (also known as green cards). Taxact 2008 free efile Substantial presence test. Taxact 2008 free efile An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. Taxact 2008 free efile Under this test, the individual must be physically present in the United States on at least: 31 days during the current calendar year, and 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year. Taxact 2008 free efile   In most cases, the days the alien is in the United States as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa are not counted. Taxact 2008 free efile This exception is for a limited period of time. Taxact 2008 free efile   For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519. Taxact 2008 free efile Note. Taxact 2008 free efile   If your employee is late in notifying you that his or her status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. Taxact 2008 free efile For more information on making adjustments, see chapter 13 of Publication 15 (Circular E). Taxact 2008 free efile Resident of a U. Taxact 2008 free efile S. Taxact 2008 free efile possession. Taxact 2008 free efile   A bona fide resident of Puerto Rico, the U. Taxact 2008 free efile S. Taxact 2008 free efile Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U. Taxact 2008 free efile S. Taxact 2008 free efile citizen or a U. Taxact 2008 free efile S. Taxact 2008 free efile national is treated as a nonresident alien for the withholding rules explained here. Taxact 2008 free efile A bona fide resident of a possession is someone who: Meets the presence test, Does not have a tax home outside the possession, and Does not have a closer connection to the United States or to a foreign country than to the possession. Taxact 2008 free efile   For more information, see Publication 570, Tax Guide for Individuals With Income From U. Taxact 2008 free efile S. Taxact 2008 free efile Possessions. Taxact 2008 free efile Foreign corporations. Taxact 2008 free efile   A foreign corporation is one that does not fit the definition of a domestic corporation. Taxact 2008 free efile A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia. Taxact 2008 free efile Guam or Northern Mariana Islands corporations. Taxact 2008 free efile   A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons; and At least 20% of the corporation's gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less). Taxact 2008 free efile Note. Taxact 2008 free efile   The provisions discussed below under U. Taxact 2008 free efile S. Taxact 2008 free efile Virgin Islands and American Samoa corporations will apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that possession. Taxact 2008 free efile U. Taxact 2008 free efile S. Taxact 2008 free efile Virgin Islands and American Samoa corporations. Taxact 2008 free efile   A corporation created or organized in, or under the laws of, the U. Taxact 2008 free efile S. Taxact 2008 free efile Virgin Islands or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons, At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U. Taxact 2008 free efile S. Taxact 2008 free efile Virgin Islands, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less), and No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the U. Taxact 2008 free efile S. Taxact 2008 free efile Virgin Islands, American Samoa, Guam, the CNMI, or the United States. Taxact 2008 free efile Foreign private foundations. Taxact 2008 free efile   A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. Taxact 2008 free efile Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to NRA withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate. Taxact 2008 free efile Other foreign organizations, associations, and charitable institutions. Taxact 2008 free efile   An organization may be exempt from income tax under section 501(a) of the Internal Revenue Code even if it was formed under foreign law. Taxact 2008 free efile In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations. Taxact 2008 free efile   Payments to these organizations, however, must be reported on Form 1042-S, even though no tax is withheld. Taxact 2008 free efile   You must withhold tax on the unrelated business income (as described in Publication 598, Tax on Unrelated Business Income of Exempt Organizations) of foreign tax-exempt organizations in the same way that you would withhold tax on similar income of nonexempt organizations. Taxact 2008 free efile U. Taxact 2008 free efile S. Taxact 2008 free efile branches of foreign persons. Taxact 2008 free efile   In most cases, a payment to a U. Taxact 2008 free efile S. Taxact 2008 free efile branch of a foreign person is a payment made to the foreign person. Taxact 2008 free efile However, you may treat payments to U. Taxact 2008 free efile S. Taxact 2008 free efile branches of foreign banks and foreign insurance companies (discussed earlier) that are subject to U. Taxact 2008 free efile S. Taxact 2008 free efile regulatory supervision as payments made to a U. Taxact 2008 free efile S. Taxact 2008 free efile person, if you and the U. Taxact 2008 free efile S. Taxact 2008 free efile branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. Taxact 2008 free efile For this purpose, a financial institution organized under the laws of a U. Taxact 2008 free efile S. Taxact 2008 free efile possession is treated as a U. Taxact 2008 free efile S. Taxact 2008 free efile branch. Taxact 2008 free efile Documentation In most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following. Taxact 2008 free efile The payee is a U. Taxact 2008 free efile S. Taxact 2008 free efile person. Taxact 2008 free efile The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. Taxact 2008 free efile In most cases, you must get the documentation before you make the payment. Taxact 2008 free efile The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. Taxact 2008 free efile See Standards of Knowledge , later. Taxact 2008 free efile If you cannot reliably associate a payment with valid documentation, you must use the presumption rules discussed later. Taxact 2008 free efile For example, if you do not have documentation or you cannot determine the part of a payment that is allocable to specific documentation, you must use the presumption rules. Taxact 2008 free efile The specific types of documentation are discussed in this section. Taxact 2008 free efile However, see Withholding on Specific Income , later, as well as the instructions to the particular forms. Taxact 2008 free efile As the withholding agent, you also may want to see the Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY. Taxact 2008 free efile Section 1446 withholding. Taxact 2008 free efile   Under section 1446 of the Code, a partnership must withhold tax on its effectively connected income allocable to a foreign partner. Taxact 2008 free efile In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. Taxact 2008 free efile This is the same documentation that is filed for NRA withholding, but may require additional information as discussed under each of the forms in this section. Taxact 2008 free efile Joint owners. Taxact 2008 free efile    If you make a payment to joint owners, you need to get documentation from each owner. Taxact 2008 free efile Form W-9. Taxact 2008 free efile   In most cases, you can treat the payee as a U. Taxact 2008 free efile S. Taxact 2008 free efile person if the payee gives you a Form W-9. Taxact 2008 free efile The Form W-9 can be used only by a U. Taxact 2008 free efile S. Taxact 2008 free efile person and must contain the payee's taxpayer identification number (TIN). Taxact 2008 free efile If there is more than one owner, you may treat the total amount as paid to a U. Taxact 2008 free efile S. Taxact 2008 free efile person if any one of the owners gives you a Form W-9. Taxact 2008 free efile See U. Taxact 2008 free efile S. Taxact 2008 free efile Taxpayer Identification Numbers , later. Taxact 2008 free efile U. Taxact 2008 free efile S. Taxact 2008 free efile persons are not subject to NRA withholding, but may be subject to Form 1099 reporting and backup withholding. Taxact 2008 free efile Form W-8. Taxact 2008 free efile   In most cases, a foreign payee of the income should give you a form in the Form W-8 series. Taxact 2008 free efile Until further notice, you can rely upon Forms W-8 that contain a P. Taxact 2008 free efile O. Taxact 2008 free efile box as a permanent residence address provided you do not know, or have reason to know, that the person providing the form is a U. Taxact 2008 free efile S. Taxact 2008 free efile person and that a street address is available. Taxact 2008 free efile You may rely on Forms W-8 for which there is a U. Taxact 2008 free efile S. Taxact 2008 free efile mailing address provided you received the form prior to December 31, 2001. Taxact 2008 free efile   If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. Taxact 2008 free efile You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U. Taxact 2008 free efile S. Taxact 2008 free efile possession. Taxact 2008 free efile Other documentation. Taxact 2008 free efile   Other documentation may be required to claim an exemption from, or a reduced rate of, withholding on pay for personal services. Taxact 2008 free efile The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Taxact 2008 free efile These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income. Taxact 2008 free efile Beneficial Owners If all the appropriate requirements have been established on a Form W-8BEN, W-8ECI, W-8EXP or, if applicable, on documentary evidence, you may treat the payee as a foreign beneficial owner. Taxact 2008 free efile Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Taxact 2008 free efile   This form is used by a foreign person to: Establish foreign status; Claim that such person is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding; and If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty. Taxact 2008 free efile   Form W-8BEN also may be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding. Taxact 2008 free efile For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding. Taxact 2008 free efile Claiming treaty benefits. Taxact 2008 free efile   You may apply a reduced rate of withholding to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the person provides a U. Taxact 2008 free efile S. Taxact 2008 free efile TIN and certifies that: It is a resident of a treaty country; It is the beneficial owner of the income; If it is an entity, it derives the income within the meaning of section 894 of the Internal Revenue Code (it is not fiscally transparent); and It meets any limitation on benefits provision contained in the treaty, if applicable. Taxact 2008 free efile   If the foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner also must certify on Form W-8BEN that it will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to NRA withholding received during a calendar year exceeds, in the aggregate, $500,000. Taxact 2008 free efile   An entity derives income for which it is claiming treaty benefits only if the entity is not treated as fiscally transparent for that income. Taxact 2008 free efile See Fiscally transparent entity discussed earlier under Flow-Through Entities. Taxact 2008 free efile   Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. Taxact 2008 free efile For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States or the treaty country. Taxact 2008 free efile   The exemptions from, or reduced rates of, U. Taxact 2008 free efile S. Taxact 2008 free efile tax vary under each treaty. Taxact 2008 free efile You must check the provisions of the tax treaty that apply. Taxact 2008 free efile Tables at the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding that apply in cases where all conditions of the particular treaty articles are satisfied. Taxact 2008 free efile   If you know, or have reason to know, that an owner of income is not eligible for treaty benefits claimed, you must not apply the treaty rate. Taxact 2008 free efile You are not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which you did not have actual knowledge, or reason to know, that the statements were incorrect. Taxact 2008 free efile Exceptions to TIN requirement. Taxact 2008 free efile   A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements for the following exceptions are met. Taxact 2008 free efile Income from marketable securities (discussed next). Taxact 2008 free efile Unexpected payments to an individual (discussed under U. Taxact 2008 free efile S. Taxact 2008 free efile Taxpayer Identification Numbers ). Taxact 2008 free efile Marketable securities. Taxact 2008 free efile   A Form W-8BEN provided to claim treaty benefits does not need a U. Taxact 2008 free efile S. Taxact 2008 free efile TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. Taxact 2008 free efile For this purpose, income from a marketable security consists of the following items. Taxact 2008 free efile Dividends and interest from stocks and debt obligations that are actively traded. Taxact 2008 free efile Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund). Taxact 2008 free efile Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933. Taxact 2008 free efile Income related to loans of any of the above securities. Taxact 2008 free efile Offshore accounts. Taxact 2008 free efile   If a payment is made outside the United States to an offshore account, a payee may give you documentary evidence, rather than Form W-8BEN. Taxact 2008 free efile   In most cases, a payment is made outside the United States if you complete the acts necessary to effect the payment outside the United States. Taxact 2008 free efile However, an amount paid by a bank or other financial institution on a deposit or account usually will be treated as paid at the branch or office where the amount is credited. Taxact 2008 free efile An offshore account is an account maintained at an office or branch of a U. Taxact 2008 free efile S. Taxact 2008 free efile or foreign bank or other financial institution at any location outside the United States. Taxact 2008 free efile   You may rely on documentary evidence given to you by a nonqualified intermediary or a flow-through entity with its Form W-8IMY. Taxact 2008 free efile This rule applies even though you make the payment to a nonqualified intermediary or flow-through entity in the United States. Taxact 2008 free efile In most cases, the nonqualified intermediary or flow-through entity that gives you documentary evidence also will have to give you a withholding statement, discussed later. Taxact 2008 free efile Documentary evidence. Taxact 2008 free efile   You may apply a reduced rate of withholding to income from marketable securities (discussed earlier) paid outside the United States to an offshore account if the beneficial owner gives you documentary evidence in place of a Form W-8BEN. Taxact 2008 free efile To claim treaty benefits, the documentary evidence must be one of the following: A certificate of residence that: Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident, States that the person has filed its most recent income tax return as a resident of that country, and Is issued within 3 years prior to being presented to you. Taxact 2008 free efile Documentation for an individual that: Includes the individual's name, address, and photograph, Is an official document issued by an authorized governmental body, and Is issued no more than 3 years prior to being presented to you. Taxact 2008 free efile Documentation for an entity that: Includes the name of the entity, Includes the address of its principal office in the treaty country, and Is an official document issued by an authorized governmental body. Taxact 2008 free efile In addition to the documentary evidence, a foreign beneficial owner that is an entity must provide a statement that it derives the income for which it claims treaty benefits and that it meets one or more of the conditions set forth in a limitation on benefits article, if any, (or similar provision) contained in the applicable treaty. Taxact 2008 free efile Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. Taxact 2008 free efile   This form is used by a foreign person to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim that the income is effectively connected with the conduct of a trade or business in the United States. Taxact 2008 free efile (See Effectively Connected Income , later. Taxact 2008 free efile )   Effectively connected income for which a valid Form W-8ECI has been provided is generally not subject to NRA withholding. Taxact 2008 free efile   If a partner submits this form to a partnership, the income claimed to be effectively connected with the conduct of a U. Taxact 2008 free efile S. Taxact 2008 free efile trade or business is subject to withholding under section 1446. Taxact 2008 free efile If the partner has made, or will make, an election under section 871(d) or 882(d), the partner must submit Form W-8ECI, and attach a copy of the election, or a statement of intent to elect, to the form. Taxact 2008 free efile    If the partner's only effectively connected income is the income allocated from the partnership and the partner is not making the election under section 871(d) or 882(d), the partner should provide Form W-8BEN to the partnership. Taxact 2008 free efile Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. Taxact 2008 free efile   This form is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U. Taxact 2008 free efile S. Taxact 2008 free efile possession to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim a reduced rate of, or an exemption from, withholding as such an entity. Taxact 2008 free efile   If the government or organization is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the partner is subject to withholding under section 1446. Taxact 2008 free efile   See Foreign Governments and Certain Other Foreign Organizations , later. Taxact 2008 free efile Foreign Intermediaries and Foreign Flow-Through Entities Payments made to a foreign intermediary or foreign flow-through entity are treated as made to the payees on whose behalf the intermediary or entity acts. Taxact 2008 free efile The Form W-8IMY provided by a foreign intermediary or flow-through entity must be accompanied by additional information for you to be able to reliably associate the payment with a payee. Taxact 2008 free efile The additional information required depends on the type of intermediary or flow-through entity and the extent of the withholding responsibilities it assumes. Taxact 2008 free efile Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U. Taxact 2008 free efile S. Taxact 2008 free efile Branches for United States Tax Withholding. Taxact 2008 free efile   This form is used by foreign intermediaries and foreign flow-through entities, as well as certain U. Taxact 2008 free efile S. Taxact 2008 free efile branches, to: Represent that a foreign person is a qualified intermediary or nonqualified intermediary, Represent, if applicable, that the qualified intermediary is assuming primary NRA withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility, Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust, Represent that a foreign flow-through entity is a nonwithholding foreign partnership, or a nonwithholding foreign trust and that the income is not effectively connected with the conduct of a trade or business in the United States, Represent that the provider is a U. Taxact 2008 free efile S. Taxact 2008 free efile branch of a foreign bank or insurance company and either is agreeing to be treated as a U. Taxact 2008 free efile S. Taxact 2008 free efile person or is transmitting documentation of the persons on whose behalf it is acting, or Represent that, for purposes of section 1446, it is an upper-tier foreign partnership or a foreign grantor trust and that the form is being used to transmit the required documentation. Taxact 2008 free efile For information on qualifying as an upper-tier foreign partnership, see Regulations section 1. Taxact 2008 free efile 1446-5. Taxact 2008 free efile Qualified Intermediaries In most cases, a QI is any foreign intermediary that has entered into a QI withholding agreement (discussed earlier) with the IRS. Taxact 2008 free efile A foreign intermediary that has received a QI employer identification number (QI-EIN) may represent on Form W-8IMY that it is a QI before it receives a fully executed agreement. Taxact 2008 free efile The intermediary can claim that it is a QI until the IRS revokes its QI-EIN. Taxact 2008 free efile The IRS will revoke a QI-EIN if the QI agreement is not executed and returned to the IRS within a reasonable period of time after the agreement was sent to the intermediary for signature. Taxact 2008 free efile Responsibilities. Taxact 2008 free efile   Payments made to a QI that does not assume NRA withholding responsibility are treated as paid to its account holders and customers. Taxact 2008 free efile However, a QI is not required to provide you with documentation it obtains from its foreign account holders and customers. Taxact 2008 free efile Instead, it provides you with a withholding statement that contains withholding rate pool information. Taxact 2008 free efile A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding. Taxact 2008 free efile A qualified intermediary is required to provide you with information regarding U. Taxact 2008 free efile S. Taxact 2008 free efile persons subject to Form 1099 reporting and to provide you withholding rate pool information separately for each such U. Taxact 2008 free efile S. Taxact 2008 free efile person unless it has assumed Form 1099 reporting and backup withholding responsibility. Taxact 2008 free efile For the alternative procedure for providing rate pool information for U. Taxact 2008 free efile S. Taxact 2008 free efile non-exempt persons, see the Form W-8IMY instructions. Taxact 2008 free efile   The withholding statement must: Designate those accounts for which it acts as a qualified intermediary, Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding responsibility, and Provide sufficient information for you to allocate the payment to a withholding rate pool. Taxact 2008 free efile   The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI. Taxact 2008 free efile Primary responsibility not assumed. Taxact 2008 free efile   If a QI does not assume primary NRA withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for the payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to each withholding rate pool for foreign payees. Taxact 2008 free efile Unless the alternative procedure applies, the qualified intermediary must provide you with a separate withholding rate pool for each U. Taxact 2008 free efile S. Taxact 2008 free efile person subject to Form 1099 reporting and/or backup withholding. Taxact 2008 free efile The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Taxact 2008 free efile Primary NRA withholding responsibility assumed. Taxact 2008 free efile   If you make a payment to a QI that assumes primary NRA withholding responsibility (but not primary Form 1099 reporting and backup withholding responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the part of the payment attributable to withholding rate pools for each U. Taxact 2008 free efile S. Taxact 2008 free efile person, unless the alternative procedure applies, subject to Form 1099 reporting and/or backup withholding. Taxact 2008 free efile The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Taxact 2008 free efile Primary NRA and Form 1099 responsibility assumed. Taxact 2008 free efile   If you make a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting and backup withholding responsibility, you can reliably associate a payment with valid documentation provided that you receive a valid Form W-8IMY. Taxact 2008 free efile It is not necessary to associate the payment with withholding rate pools. Taxact 2008 free efile Example. Taxact 2008 free efile You make a payment of dividends to a QI. Taxact 2008 free efile It has five customers: two are foreign persons who have provided documentation entitling them to a 15% rate of withholding on dividends; two are foreign persons subject to a 30% rate of withholding on dividends; and one is a U. Taxact 2008 free efile S. Taxact 2008 free efile individual who provides it with a Form W-9. Taxact 2008 free efile Each customer is entitled to 20% of the dividend payment. Taxact 2008 free efile The QI does not assume any primary withholding responsibility. Taxact 2008 free efile The QI gives you a Form W-8IMY with which it associates the Form W-9 and a withholding statement that allocates 40% of the dividend to a 15% withholding rate pool, 40% to a 30% withholding rate pool, and 20% to the U. Taxact 2008 free efile S. Taxact 2008 free efile individual. Taxact 2008 free efile You should report on Forms 1042-S 40% of the payment as made to a 15% rate dividend pool and 40% of the payment as made to a 30% rate dividend pool. Taxact 2008 free efile The part of the payment allocable to the U. Taxact 2008 free efile S. Taxact 2008 free efile individual (20%) is reportable on Form 1099-DIV. Taxact 2008 free efile Smaller partnerships and trusts. Taxact 2008 free efile   A QI may apply special rules to a smaller partnership or trust (Joint Account Provision) only if the partnership or trust meets the following conditions. Taxact 2008 free efile It is a foreign partnership or foreign simple or grantor trust. Taxact 2008 free efile It is a direct account holder of the QI. Taxact 2008 free efile It does not have any partner, beneficiary, or owner that is a U. Taxact 2008 free efile S. Taxact 2008 free efile person or a pass- through partner, beneficiary, or owner. Taxact 2008 free efile   For information on these rules, see section 4A. Taxact 2008 free efile 01 of the QI agreement. Taxact 2008 free efile This is found in Appendix 3 of Revenue Procedure 2003-64. Taxact 2008 free efile Also see Revenue Procedure 2004-21. Taxact 2008 free efile Related partnerships and trusts. Taxact 2008 free efile    A QI may apply special rules to a related partnership or trust only if the partnership or trust meets the following conditions. Taxact 2008 free efile It is a foreign partnership or foreign simple or grantor trust. Taxact 2008 free efile It is either: A direct account holder of the QI, or An indirect account holder of the QI that is a direct partner, beneficiary, or owner of a partnership or trust to which the QI has applied this rule. Taxact 2008 free efile For information on these rules, see section 4A. Taxact 2008 free efile 02 of the QI agreement. Taxact 2008 free efile This is found in Appendix 3 of Revenue Procedure 2003-64. Taxact 2008 free efile Also see Revenue Procedure 2005-77. Taxact 2008 free efile Nonqualified Intermediaries If you are making a payment to an NQI, foreign flow-through entity, or U. Taxact 2008 free efile S. Taxact 2008 free efile branch that is using Form W-8IMY to transmit information about the branch's account holders or customers, you can treat the payment (or a part of the payment) as reliably associated with valid documentation from a specific payee only if, prior to making the payment: You can allocate the payment to a valid Form W-8IMY, You can reliably determine how much of the payment relates to valid documentation provided by a payee (a person that is not itself a foreign intermediary, flow- through entity, or U. Taxact 2008 free efile S. Taxact 2008 free efile branch), and You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required. Taxact 2008 free efile The NQI, flow-through entity, or U. Taxact 2008 free efile S. Taxact 2008 free efile branch must give you certain information on a withholding statement that is associated with the Form W-8IMY. Taxact 2008 free efile A withholding statement must be updated to keep the information accurate prior to each payment. Taxact 2008 free efile Withholding statement. Taxact 2008 free efile   In most cases, a withholding statement must contain the following information. Taxact 2008 free efile The name, address, and TIN (if any, or if required) of each person for whom documentation is provided. Taxact 2008 free efile The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided. Taxact 2008 free efile The status of the person for whom the documentation has been provided, such as whether the person is a U. Taxact 2008 free efile S. Taxact 2008 free efile exempt recipient (U. Taxact 2008 free efile S. Taxact 2008 free efile person exempt from Form 1099 reporting), U. Taxact 2008 free efile S. Taxact 2008 free efile non-exempt recipient (U. Taxact 2008 free efile S. Taxact 2008 free efile person subject to Form 1099 reporting), or a foreign person. Taxact 2008 free efile For a foreign person, the statement must indicate whether the person is a beneficial owner or a foreign intermediary, flow-through entity, or a U. Taxact 2008 free efile S. Taxact 2008 free efile branch. Taxact 2008 free efile The type of recipient the person is, based on the recipient codes used on Form 1042-S. Taxact 2008 free efile Information allocating each payment, by income type, to each payee (including U. Taxact 2008 free efile S. Taxact 2008 free efile exempt and U. Taxact 2008 free efile S. Taxact 2008 free efile non-exempt recipients) for whom documentation has been provided. Taxact 2008 free efile The rate of withholding that applies to each foreign person to whom a payment is allocated. Taxact 2008 free efile A foreign payee's country of residence. Taxact 2008 free efile If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc. Taxact 2008 free efile ). Taxact 2008 free efile In the case of treaty benefits claimed by entities, whether the applicable limitation on benefits statement and the statement that the foreign person derives the income for which treaty benefits are claimed, have been made. Taxact 2008 free efile The name, address, and TIN (if any) of any other NQI, flow-through entity, or U. Taxact 2008 free efile S. Taxact 2008 free efile branch from which the payee will directly receive a payment. Taxact 2008 free efile Any other information a withholding agent requests to fulfill its reporting and withholding obligations. Taxact 2008 free efile Alternative procedure. Taxact 2008 free efile   Under this alternative procedure the NQI can give you the information that allocates each payment to each foreign and U. Taxact 2008 free efile S. Taxact 2008 free efile exempt recipient by January 31 following the calendar year of payment, rather than prior to the payment being made as otherwise required. Taxact 2008 free efile To take advantage of this procedure, the NQI must: (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. Taxact 2008 free efile You must receive the withholding statement with all the required information (other than item 5) prior to making the payment. Taxact 2008 free efile    This alternative procedure cannot be used for payments to U. Taxact 2008 free efile S. Taxact 2008 free efile non-exempt recipients. Taxact 2008 free efile Therefore, an NQI must always provide you with allocation information for all U. Taxact 2008 free efile S. Taxact 2008 free efile non-exempt recipients prior to a payment being made. Taxact 2008 free efile Pooled withholding information. Taxact 2008 free efile   If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, prior to the payment of a reportable amount. Taxact 2008 free efile A withholding rate pool is a payment of a single type of income (as determined by the income categories on Form 1042-S) that is subject to a single rate of withholding. Taxact 2008 free efile For example, an NQI that has foreign account holders receiving royalties and dividends, both subject to the 15% rate, will provide you with information for two withholding rate pools (one for royalties and one for dividends). Taxact 2008 free efile The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment. Taxact 2008 free efile Failure to provide allocation information. Taxact 2008 free efile   If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. Taxact 2008 free efile You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules . Taxact 2008 free efile An NQI is deemed to have f