Daily Tax Update - April 8, 2011: Treasury and IRS Issue Further FATCA Guidance

TREASURY AND IRS ISSUE FURTHER FATCA GUIDANCE:  Today, Treasury and the IRS issued Notice 2011-34 (the "Notice") to provide additional guidance on the new information reporting and withholding requirements that are commonly referred to as the "Foreign Account Tax Compliance Act" or "FATCA" provisions of the Hiring Incentives to Restore Employment Act.  Notice 2011-34 supplements and modifies the initial FATCA guidance provided in August 2010 in Notice 2010-60, and requests comments on the issues described in the Notice or other priority issues.

The Notice revisits the procedures, described in Notice 2010-60, by which foreign financial institutions ("FFIs") must determine whether preexisting accounts are US accounts, including adding specific steps for private banking accounts and removing a non-US P.O. box as an indicia of US status.  The Notice also defines key terms such as "documentary evidence," "documentation," and "electronically searchable information."  In addition, the Notice provides guidance on the key FATCA concept of a "passthru" payment.

In sum, Notice 2011-34 makes the following modifications and clarifications with respect to preexisting account procedures: 

  • The Notice provides definitions for several important terms that had been utilized in Notice 2010-60 and continue to be used in Notice 2011-34. 
    • Importantly, the Notice defines "documentary evidence" as including (i) documentary evidence sufficient to establish the identity of an individual and the status of that person as a non US person (consistent with documentary evidence that may be relied upon pursuant to Treas. Reg. § 1.6049-5(c)(1)) which may include, but is not limited to, photo identification described in Treas. Reg. § 1.1441-6(c)(4); (ii) any valid document issued by an authorized governmental body that includes the individual’s name and address and is typically used for identification purposes; and (iii) with respect to an account maintained in a jurisdiction with AML/KYC rules that have been approved by the IRS in connection with a QI Agreement, any of the documents (other than Form W-8) referenced in the jurisdiction’s QI attachment for identifying natural persons.
    • The Notice states that "documentary evidence establishing non-US status" means "documentary evidence that includes the account holder’s name and indicates citizenship or residence outside the United States."
    • "Documentation" is defined as "all information recorded in written or electronic form that is collected in connection with a financial account."
  • The Notice modifies the series of steps that must be used to determine whether preexisting accounts are US accounts.
    • First, all account holders already documented as US for other US tax purposes will be treated as specified US persons, and those account holders’ financial accounts will be treated as US accounts.
    • Second, the FFI may treat an account as a non-US account if the balance or value of the account as of the end of the calendar year preceding the effective date of the FFI’s FFI Agreement does not exceed $50,000.
    • Third, the FFI must perform special steps for private banking accounts (a step not included in Notice 2010-60).  The FFI must ensure that all the FFI’s private banking relationship managers undertake certain steps, including identifying any client for which the manager has actual knowledge that the client is a US person and perform a "diligent review" of the paper and electronic account files and other records for each client and identify each client with US citizenship/green card status, a US birthplace, a US residence or correspondence address (including a US P.O. box), standing instructions to transfer funds to an account maintained in the United States, an "in care of" or "hold mail address" that is the account holder’s sole address, and a power of attorney or signatory authority granted to a person with a US address.  If the relationship manager identifies the indications of US status described in the prior step, the relationship manager must obtain further documentation (described in the Notice) to establish whether the client’s account is a US account.
      • The Notice states that Treasury and the IRS are considering adopting the private banking steps for new accounts.
    • Fourth, from the accounts not specifically identified in the prior steps, the FFI shall determine whether the electronically searchable information maintained by the FFI and associated with those accounts includes any of the following US indicia: (i) identification of an account holder as a US resident or US citizen; (ii) a US place of birth for an account holder; (iii) a US residence or correspondence address (including a US P.O. box); (iv) standing instructions to transfer funds to an account maintained in the United States; (v) an "in care of" address or "hold mail" address that is the sole address in the FFI’s electronically searchable information; or (vi) a power of attorney or signatory authority granted to a person with a US address.
      • "Electronically searchable information" is defined as "information that an FFI maintains in its tax reporting files, or customer master file or similar files, that is stored in the form of an electronic database against which standard queries in programming languages, such as Structured Query Language, may be used."
      • For accounts identified as containing the US indicia described above, the FFI will be required within one year of the effective date of the FFI’s FFI Agreement to request certain documentation to establish whether the account is a US account as follows:
        • Account holder identified as US resident or citizen: Form W-9
        • Account information includes US birthplace or address: Form W-9 establishing US status or Form W-8BEN (or a substitute certification as may be provided in future guidance) and a non-US passport or other government-issued evidence of citizenship in a country other than the United States to establish non-US status.  In addition, account holders with a US birthplace will be required to provide a written explanation regarding the account holder’s citizenship.
        • Account information shows standing instructions to transfer funds to the United States: Form W-9 establishing US status or Form W-8BEN (or a substitute certification as may be provided in future guidance) and documentary evidence establishing non-US status
        • "In care of" or "hold mail address" or power of attorney with US address: Form W-9 establishing US status or Form W-8BEN (or a substitute certification as may be provided in future guidance) or documentary evidence establishing non-US status
      • Account holders that have not provided appropriate documentation within two years of the effective date of the FFI’s FFI Agreement will be classified as recalcitrant account holders until the date on which appropriate documentation is received
    • Fifth, for certain accounts of $500,000 or more ("high value accounts"), the FFI must perform a diligence review of the account files associated with the account to look for the US indicia described above.  If those indicia are found, the FFI must obtain documentation within two years as described above.
    • Sixth, beginning in the third year following the effective date of the FFI Agreement, the FFI will be required to apply the fifth step (above) annually to all preexisting individual accounts that were not previously treated as high value accounts but that would be high value accounts if the account balance or value were tested on the last day of the preceding year.
  • Notice 2011-34 provides that the chief compliance officer or equivalent-level officer must certify to the IRS when the FFI has completed the above procedures (other than annual retesting) for its preexisting individual accounts.  The officer will also be required to certify that FFI management personnel did not engage in any activity, or have any policies in place, directing, encouraging, or assisting account holders with respect to strategies for avoiding identification of their accounts as US accounts.

The Notice provides further guidance on the key FATCA concept of a "passthru" payment.  Under section 1471(b)(1)(D), a participating FFI must withhold 30% of any "passthru" payment made to a recalcitrant account holder or non-participating FFI.  Section 1471(d)(7) defines a "passthru" payment as "any withholdable payment or other payment to the extent attributable to a withholdable payment."

  • The Notice observes that direct tracing approaches suggested by commentators would not "be consistent with the purposes underlying the passthru payment concept," which the Notice describes as "to encourage FFIs to enter into FFI Agreements if they hold investments that produce payments that are attributable to withholdable payments, even if they do not directly hold assets that produce withholdable payments."
  • The Notice provides that a payment made by an FFI (the “payor FFI”) will be a "passthru" payment to the extent of: (i) the amount of the payment that is a withholdable payment, plus (ii) the amount of the payment that is not a withholdable payment multiplied by (A) in the case of a custodial payment, the "passthru payment percentage" of the entity that issued the interest or instrument or (B) in the case of any other payment, the passthru payment percentage of the payor FFI.
  • The passthru payment percentage will be determined by dividing the sum of the FFI’s US assets by the sum of the FFI’s total assets.  The percentage will be determined as of quarterly testing dates.
    • For purposes of calculating the passthru payment percentage, an asset will include any asset includable on a balance sheet of an FFI prepared under the FFI’s method of accounting for reporting to its interest holders, and will include off-balance sheet transactions or positions to the extent provided in future guidance.  Assets held in a custodial account of an FFI will not be considered assets of the FFI for this calculation.
    • A "US asset" will include any asset to the extent that it is a type that could give rise to a passthru payment, including interests in other non-custodial accounts or interests in a domestic corporation.  An interest in, or other custodial account held with, another FFI (a "lower tier FFI") constitutes a US asset in an amount equal to the value of the interest in, or account with, the lower tier FFI multiplied by the lower tier FFI”s passthru payment percentage.
  • Each participating FFI will be required within three months after its quarterly testing date to make available its passthru payment percentage on a website or database searchable by the public. 

The Notice also provides certain categories of FFIs that will be deemed compliant pursuant to section 1471(b)(2).  These categories include certain FFIs in an expanded affiliated group if specified requirements are met and certain investment vehicles.

  • A fund will be deemed complaint if the following requirements are met: (1) all holders of record of direct interests in the fund are participating FFIs or deemed-compliant FFIs holding on behalf of other investors, or entities described in section 1471(f); (2) the fund prohibits the subscription for or acquisition of any interest in the fund by any person that is not a participating FFI, a deemed-complaint FFI, or any entity described in section 1471(f), and (3) the fund certifies that any passthru payment percentages that it calculates and publishes will be done in accordance with the rules described above.

Notice 2011-34 also provides additional guidance on the information that an FFI will be required to report to the IRS under the FFI Agreement.  The Notice states that the IRS will generally limit FFIs’ account balance reporting obligations to year-end balances or values, as determined for purposes of reporting to the account holder.  The Notice also provides that FFIs will be required to report the following to satisfy the reporting of "gross receipts and withdrawals": (i) the gross amount of dividends paid or credited to the account; (ii) the gross amount of interest paid or credited to the account; (iii) other income paid or credited to the account; and (iv) gross proceeds from the sale or redemption of property paid or credited to the account with respect to which the FFI acted as a custodian, broker, nominee, or an agent for the account holder.  In addition, the Notice provides further explanation of how the IRS will apply the expanded affiliated group requirements of section 1471(e).

FINAL REGULATIONS ISSUED CLARIFYING CONTROLLED GROUP QUALIFICATION RULES:  Today, the IRS and Treasury issued final regulations clarifying that a corporation that satisfies the controlled group rules for stock ownership and qualification is a member of the group, regardless of its status as a component member.  The final regulations adopt with one clarifying change proposed regulations published on September 29, 2009, and are applicable for taxable years beginning on or after April 11, 2011.

  • The proposed regulations provided that, in determining whether a corporation is included in a controlled group of corporations, section 1563(b), which defines a component member, is not taken into account.  The final regulations make one clarifying change to the proposed regulations by also providing that the underlying regulation, Treas. Reg. § 1.1563-1(b), which similarly defines a component member, is not taken into account in determining the members of a controlled group.
  • The regulations can be accessed here.
  • For additional information, contact Mark J. Silverman at msilverman@steptoe.com or Lisa M. Zarlenga at lzarlenga@steptoe.com.

MIDNIGHT DEADLINE LOOMS FOR GOVERNMENT SHUTDOWN – TREASURY COULD FURLOUGH 92,000 EMPLOYEES:   As of this time, no deal has been reached between Congress and the Administration to prevent a government shutdown.  The current resolution funding the government expires at midnight tonight. 

  • Senate Majority Leader Harry Reid said this morning that he would introduce a one-week stopgap measure in a last-ditch attempt to avert a government shutdown.  The House passed a one-week continuing resolution yesterday but it contained deeper spending cuts and policy riders that are opposed by Senate Democrats.  Reid said that Democrats have agreed to $38 billion in budget cuts, and funding for Planned Parenthood remains the only policy sticking point in talks aimed at avoiding a government shutdown tonight.  Reid added, "We have worked out every other rider" on policy issues aside from Republicans’ insistence on halting money for Planned Parenthood.  Reid said, "If they back off from this ideological issue that is holding up this country, we have a number agreed upon."
  • Earlier today, House Democratic Whip Steny Hoyer said that lawmakers trying to avert a government shutdown have come "70 percent of the way on the numbers."  Hoyer added, "There's no deal yet, unfortunately.  We're pretty close."
  • Today, the Treasury Department posted information on its website about the impact a government shutdown would have on the agency.  The website stated, "In total, the Treasury Department has approximately 127,000 employees.  In the event of a lapse in appropriations, approximately 92,000 would be furloughed and 35,000 would remain on duty.  Because the possible lapse comes at the height of the annual tax filing season, the majority of these employees would be excepted from furlough to handle essential tax filing and service functions of the IRS, with the remainder primarily working in Treasury programs that are funded from sources other than annual appropriations.  Treasury will continue to revise its plans as circumstances warrant." 
  • Treasury added, "Individuals should keep filing their tax returns with the IRS and are required to do so by April 18.  The IRS would be accepting all tax returns.  Once they’ve been accepted, the IRS would generally process and issue refunds for electronically filed individual returns.  Individuals are urged to file electronically, because most of these returns are processed automatically and would not be delayed.  Because of limited IRS staffing, paper returns would be accepted, but would not be processed in the event of a lapse in appropriations and taxpayers who file paper returns would experience a delay in receiving their refunds.  Limited telephone customer service functions would remain available, but IRS walk-in taxpayer assistance centers would be closed.  If the government is closed, people with appointments related to examinations (audits), collection, Appeals or Taxpayer Advocate cases should assume their meetings are cancelled.  IRS personnel would reschedule those meetings at a later date."  Treasury added, "Treasury DO would continue to provide key functions in a limited capacity such as economic analysis, implementation of tax policies and programs, management of the Government's cash position, and the continuation of borrowing/debt programs, including work related to adjusting the debt limit."
  • The IRS’s website posted its contingency plans for a shutdown.  The IRS said that out of a total of 111,133 employees, 23,175 would be "excepted" from the furloughs.  The IRS site stated, "If the IRS were confronted by a shutdown, particularly during tax filing season, numerous other issues would need to be analyzed.  The tax filing season consists of an enormously concentrated set of operational tasks coordinated between the IRS and the tax return preparer community which could threaten the integrity of the federal tax collection process.  Among other considerations, during a shutdown, the IRS would need to analyze the capacity of software vendors to store pending tax return filings, the length of time required for the IRS to catch up on a substantial backlog of paper and electronic filings, and the overall volume of telephone inquiries from taxpayers trying to ascertain where their filing stands in the process.  Additionally, not processing electronic tax returns for a significant period of time could have substantial negative effects on voluntary tax compliance.  In a shutdown during the filing season, the IRS would assess the situation and likely bring back additional personnel as needed to protect government property, which includes the revenues of the United States collected by the IRS."  The IRS site continued, "The IRS Shutdown Contingency Plan for fiscal year 2011 reflects a total of 23,176 employees (20.85% of the total employee population as of 3/26/2011) are designated as 'excepted' and would be retained in the case of a shutdown in order to protect life and property."
  • Treasury information can be accessed here.
  • The IRS contingency plan can be accessed here.  

Revenue Procedure 2011-29 provides a safe harbor election for allocating success-based fees paid in business acquisitions or reorganizations described in § 1.263(a)-5(e)(3) of the Income Tax Regulations.  In lieu of maintaining the documentation required by § 1.263(a)-5(f), the safe harbor permits electing taxpayers to treat 70 percent of the success-based fee as an amount that does not facilitate the transaction. The remaining portion of the fee must be capitalized as an amount that facilitates the transaction.

Notice 2011-21 provides a more uniform method for the federal income taxation of Treasury Inflation-Protected Securities ("TIPS"), the notice provides that the IRS and the Department of the Treasury plan to issue regulations that will provide that the coupon bond method described in §1.1275-7(d) of the Income Tax Regulations applies to TIPS issued with more than a de minimis amount of premium. The regulations will be effective for TIPS issued on or after April 8, 2011.

Notice 2011-16 provides an extension of time to pay tax until October 17, 2011 to eligible civilian spouses of military servicemembers who work in American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the US Virgin Islands (each a "US territory") and claim residence or domicile for tax purposes in a State or the District of Columbia pursuant to the Military Spouses Residency Relief Act ("MSRRA"). In addition, this notice provides that civilian spouses of military servicemembers working in a State or the District of Columbia but claiming residence or domicile for tax purposes in a US territory under MSRRA should follow the procedures in Notice 2010-30 with respect to their 2010 individual income tax returns.

1.  [112nd] H.R.1416: To amend the Internal Revenue Code of 1986 to allow an offset against income tax refunds to pay for restitution and other State judicial debts that are past-due.
Sponsor: Rep Paulsen, Erik [MN-3] (introduced 4/7/2011)    Cosponsors (4)
Committees: House Ways and Means
Latest Major Action: 4/7/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

2. [112nd] H.R.1428: To amend the Internal Revenue Code of 1986 to extend the Renewal Community program through end of 2012.
Sponsor: Rep Higgins, Brian [NY-27] (introduced 4/7/2011)    Cosponsors (6)
Committees: House Ways and Means
Latest Major Action: 4/7/2011 Referred to House committee. Status: Referred to the House Committee on Ways and Means.

3. [112nd] S.755: A bill to amend the Internal Revenue Code of 1986 to allow an offset against income tax refunds to pay for restitution and other State judicial debts that are past-due.
Sponsor: Sen Wyden, Ron [OR] (introduced 4/7/2011)    Cosponsors (5)
Committees: Senate Finance
Latest Major Action: 4/7/2011 Referred to Senate committee. Status: Read twice and referred to the Committee on Finance.

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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