Recent information reporting developments.

Postponement until Jan. 1, 2001 of the implementation date for the final withholding-at-source regulations has raised questions as to the use and validity of the underlying documentation required to be collected when payments are made to foreign persons. Are the traditional forms still valid and, if so, for how long? Can withholding agents choose to collect certifications on the new forms that are now available?

The regulations extending the withholding-at-source effective date clarify the following three basic elements:

* The traditional forms will continue to remain effective until the earlier of their normal expiration date or Dec. 31, 2000. Notice 99-25, which extended the implementation date of the regulations, did not change this cutoff date.

* The final regulations require mandatory use of the new withholding certificates and statement after 2000.

* A withholding agent may choose to use the new forms immediately. These new withholding certificates satisfy the documentation requirements under the regulations in effect before 2001. Further, they remain valid for the period specified in the final withholding-at-source provisions, regardless of when the certificate is obtained.

Traditional Forms W-8 and 1001. Form W-8, Certificate of Foreign Status, is effective for the year in which received and the next two calendar years. A traditional Form W-8 received anytime in 1999 normally would have been effective from the time of receipt through Dec. 31, 2001. Because of the recent changes, however, a Form W-8 received in 1999 is valid only through 2000. Form 1001, Ownership, Exemption, or Reduced Rate Certificate, is effective for three calendar years. As with Form W-8, however, a Form 1001 received in 1999, which otherwise would have been valid through 2001, is now effective only through 2000.

Form W-8BEN. Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, incorporates both Forms W-8 and 1001 into one form. The instructions state that, when furnished without a taxpayer identification number (TIN), the form will remain in effect for a period starting on the date the. form is signed and ending on the last day of the third succeeding calendar year. Thus, a Form W-8BEN signed on Sept. 30, 1999 remains valid until Dec. 31, 2002. For most payments (except deposit interest), a Form W8BEN furnished with a taxpayer TIN remains in effect indefinitely, as long as the status of the person whose name is on the form does not change. Note: Although Form 1001 can be collected retroactively to claim treaty benefits, Form W-8BEN generally must be collected before the payment for which the treaty benefit applies.

Form 4224 and Form W-8ECI. Form 4224, Exemption from Withholding of Tax on Income Effectively Connected With the Conduct of a Trade or Business in the United States, is effective for only one (calendar or fiscal) year. Its new counterpart, Form W8ECI, Certificate of Foreign Person's Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States, is effective for the same three-year period as a Form W-8BEN. Both Forms 4224 and W8ECI require a payee TIN.

Treatment of Disregarded Entities

The check-the-box regulations issued under Sec. 7701 in 1996 generally allow certain unincorporated entities (most frequently, limited liability companies) to choose whether to be treated for Federal tax purposes as partnerships or corporation or, in the case of a single-member entity, to be disregarded as an entity separate from its owner. Similarly, Sec. 1361(b) (3) (A) provides that a qualified subchapter S subsidiary (QSub) shall not be treated as a separate corporation; all of a QSub's assets, liabilities and items of income, deduction and credit are treated as such items of the S corporation. Single-member entities and QSubs are collectively known as "disregarded entities."

Notice 99-6. Notice 99-6 provided interim guidance for employment tax reporting by disregarded entities. Previously, the IRS position on the identity of an employer of a disregarded entity's employees for employment tax purposes was not clear.

Notice 99-6 provides two alternative reporting methods that will be acceptable to the Service until formal reporting procedures are provided. The IRS will accept reporting as to the employees of a disregarded entity if the related employment taxes are:

* Calculated, paid and reported by an owner under the owner's name; or

* Calculated, paid and reported by a disregarded entity under its own name and TIN.

If the second method is used (i.e., the disregarded entity does the reporting), the owner retains ultimate responsibility for employment tax obligations incurred by the disregarded entity. In addition, an owner of multiple disregarded entities may choose one method of reporting for some disregarded entities and the other method for other disregarded entities. Finally, while Notice 99-6 allows an owner to switch from the second method of reporting to the first between tax years, if an owner uses the first method (i.e., reports the disregarded entity's employment taxes as its own), it must continue to use that method unless and until permitted to change by the Service.

Mechanics. Practitioners should note that many mechanical requirements, such as due dates for tax deposits, mandatory use of electronic means to make those deposits, and methods of filing (paper vs. magnetic media), may be affected by a disregarded entity and its owner's choice of reporting method.

Information reporting. While Notice 99-6 provides guidance for reporting employment tax obligations incurred by disregarded entities, it does not address other relevant information reporting requirements. For example, it is not presently clear whether payments made by a disregarded entity (or backup withholding applicable to those payments) should be reported by the disregarded entity or its owner. Also, it is not clear whether payments made to a disregarded entity not subject to the Sec. 1441 nonresident alien withholding rules should be reported by a payor to the disregarded entity or to its owner.

FROM GEORGE FOX, CPA, J.D., LL.M., AND DEBBIE PFLIEGER, J.D., LL.M., WASHINGTON, DC