# Prop. Treas. Reg. § 1.1441-2: Amounts subject to withholding. Proposed regulation, not in force. REG-133673-15, 81 FR 21795, published 2016-04-13 . Interprets 26 U.S.C. § 1441. Par. 7. Section 1.1441-2 is amended by: 1. Revising paragraphs (d)(1) and (4). 2. Amending paragraph (f) by removing the language “(d)(4)” in the second sentence and adding in its place “(d)(1)(ii)(C),” and adding a fourth and fifth sentence. The revisions and addition read as follows: * * * * * (d) * * * (1) General rule —(i) Control or custody and knowledge. Except as provided in paragraph (d)(1)(ii) of this section, a withholding agent has an obligation to withhold under section 1441 only to the extent that, at any time between the date that the obligation to withhold would arise (but for the provisions of this paragraph (d)) and the due date (including extensions) for filing Form 1042 with respect to the calendar year in which the payment occurs, it has— (A) Control over, or custody of, money or property owned by the recipient or beneficial owner from which to withhold an amount; and (B) Knowledge of the facts that give rise to the payment. (ii) Exception not available. The exception from the obligation to withhold under paragraph (d)(1)(i) of this section does not apply if— (A) The withholding agent is related (within the meaning of section 482) to the recipient or the beneficial owner of the payment; (B) The payment is a distribution with respect to stock (including a deemed distribution (as defined in § 1.305-1(d)(7)) of stock or a right to acquire stock); see, however, paragraph (d)(4) of this section, which provides a limited exception from the obligation to withhold on a deemed distribution; (C) The amounts are described in § 1.860G-3(b)(1) (regarding certain partnership allocations of REMIC net income with respect to a REMIC residual interest); (D) The lack of control over or custody of money or property from which to withhold is part of a pre-arranged plan known to the withholding agent to avoid withholding under section 1441, 1442, or 1443; or (E) The payment is a deemed payment (as defined in § 1.861-3(a)(6)); see, however, paragraph (d)(4) of this section, which provides a limited exception from the obligation to withhold on a deemed payment. (iii) Documentation. Any exception from withholding pursuant to paragraph (d)(1)(i) of this section applies without a requirement that documentation be furnished to the withholding agent. However, documentation may have to be furnished for purposes of the information reporting provisions under chapter 61 of the Code and backup withholding under section 3406. (iv) Scope of exception. The exception from withholding under this paragraph (d) is not a determination that the amounts are not fixed or determinable annual or periodical income, nor is it an exception from reporting the amount under § 1.1461-1(b) and (c). (v) Lack of money or property or lack of knowledge. A withholding agent does not lack control over money or property for purposes of this paragraph (d)(1) if the withholding agent directs another party to make the payment. Thus, for example, a principal does not cease to have control over a payment when it contracts with a paying agent to make the payments to its account holders in lieu of paying the account holders directly. Further, a withholding agent does not lack knowledge of the facts that give rise to a payment merely because the withholding agent does not know the character or source of the payment for U.S. tax purposes. See § 1.1441-3(d)(1) for rules addressing a withholding agent's obligations when the withholding agent has knowledge of the facts that give rise to the payment, but the character or source of the payment is not known. (vi) Example. A, an individual, owns stock in DC, a domestic corporation, through a custodian, Bank 1. A also has a money market account at Bank 2. DC pays a dividend of $1,000 that is deposited in A's custodial account at Bank 1. A then directs Bank 1 to transfer $1,000 to A's money market account at Bank 2. With respect to the payment of the dividend into A's custodial account with Bank 1, both DC and Bank 1 are withholding agents making a payment of an amount subject to withholding for which they have custody, control, and knowledge. See §§ 1.1441-2(b)(1) and 1.1441-7(a)(1). Therefore, both DC and Bank 1 have an obligation to withhold on the payment unless they can reliably associate the payment with documentation sufficient to treat the respective payees as not subject to withholding under chapter 3. With respect to the wire transfer of $1,000 from A's account at Bank 1 to A's account at Bank 2, neither Bank 1 nor Bank 2 is required to withhold on the transfer because neither bank has knowledge of the facts that gave rise to the payment. Even though Bank 1 is a custodian for A's stock in DC and has knowledge regarding the $1,000 dividend paid to A, once Bank 1 credits the $1,000 dividend to A's account, the $1,000 becomes A's property. When A transfers the $1,000 to its account at Bank 2, this is a separate transfer about which Bank 1 has no knowledge regarding the type of payment made. Further, Bank 2 only has knowledge that it receives $1,000 to be credited to A's account but has no knowledge regarding the type of payment made. Accordingly, Bank 1 and Bank 2 have no withholding obligation with respect to the transfer from A's custodial account at Bank 1 to A's money market account at Bank 2. * * * * * (4) Deemed distributions under section 305(c) and deemed payments —(i) General rule. Subject to the rules in this paragraph (d)(4)(i) and paragraph (d)(4)(iii) of this section, and any other exception to withholding (for example, under § 1.1441-4), a withholding agent has an obligation to withhold on a deemed distribution (as defined in § 1.305-1(d)(7)) or a deemed payment (as defined in § 1.861-3(a)(6)) on a security. However, a withholding agent other than the issuer of a specified security (as defined in § 1.6045-1(a)(14)) has an obligation to withhold on a deemed distribution (as defined in § 1.305-1(d)(7)) on a specified security or a deemed payment (as defined in § 1.861-3(a)(6)) that is determined with respect to a deemed distribution on a specified security only if: (A) The issuer of the specified security reports the information required under § 1.6045B-1 regarding the deemed distribution before the due date (not including extensions) for the withholding agent to file Form 1042 for the calendar year in which the deemed distribution or the deemed payment occurred; or (B) The withholding agent has actual knowledge of the deemed distribution before the due date (not including extensions) for it to file Form 1042 for the calendar year in which the deemed distribution or the deemed payment occurred, but in such case the requirements of this paragraph (d)(4)(i) will not be considered to be met until January 15 of the year following the calendar year in which the deemed distribution or the deemed payment occurred. (ii) Time to withhold on a deemed distribution or deemed payment. After the requirements of paragraph (d)(4)(i) of this section have been met, except as provided in § 1.1441-5 regarding the time to withhold for partnerships and trusts, a withholding agent must withhold on a deemed distribution (as defined in § 1.305-1(d)(7)) or a deemed payment (as defined in § 1.861-3(a)(6)) on the earliest of: (A) The date on which a payment of cash is made with respect to the security or the securities lending or sales-repurchase transaction; (B) The date on which the security is sold, exchanged, or otherwise disposed of (including a transfer of the security to a separate account not maintained by the withholding agent or a termination of the account relationship); or (C) The due date (not including extensions) for the withholding agent to file Form 1042 for the calendar year in which the deemed distribution or the deemed payment occurred. (iii) Treatment of foreign entities assuming withholding responsibilities. Notwithstanding § 1.1441-1(b)(1), a withholding agent may not treat a foreign entity as having assumed primary withholding responsibility under § 1.1441-1(e)(5), § 1.1441-1(b)(2)(iv), § 1.1441-5(c)(2)(i), or § 1.1441-5(e)(5)(v) for a deemed distribution (as defined in § 1.305-1(d)(7)) on a specified security (as defined in § 1.6045-1(a)(14)) or a deemed payment (as defined in § 1.861-3(a)(6)) that is determined with respect to a deemed distribution on a specified security unless the withholding agent has provided the foreign entity a copy of the issuer statement described in § 1.6045B-1(b)(1) within 10 days of the issuer furnishing the statement to the holder of record (or its nominee), or the issuer has met the public reporting requirements described in § 1.6045B-1(a)(3). A foreign entity described in the preceding sentence has an obligation to withhold on the deemed distribution or the deemed payment (unless an exception to withholding under section 1441 applies) if it receives a copy of the statement described in § 1.6045B-1(b)(1) or the issuer has met the public reporting requirements described in § 1.6045B-1(a)(3) by the due date (not including extensions) for filing Form 1042 with respect to the calendar year in which the deemed distribution or the deemed payment occurred. See § 1.1441-3(c)(5)(i) for when the foreign entity may rely on the copy of the issuer statement that it receives to determine the amount to withhold. (iv) Examples. The following examples illustrate when a withholding agent must satisfy its obligation to withhold under paragraph (d)(4) of this section on a deemed distribution. Example 1 (i) Facts. WA is a U.S. custodian that holds a convertible debt instrument (CDI) of Corporation X that is a specified security (as defined in § 1.6045- 1(a)(14)) on behalf of A, a foreign person. On March 1 of Year 1, there is a change in the conversion ratio of the CDI that is treated as a deemed distribution under § 1.305-7(b) and (c). On March 15 of Year 1, Corporation X makes an interest payment on the CDI to WA as custodian for A. On April 1 of Year 1, Corporation X reports the information required under § 1.6045B-1 regarding the deemed distribution on its public Web site. On April 15 of Year 1, Corporation X makes another interest payment on the CDI to WA as custodian for A. (ii) Analysis. Under paragraph (d)(4)(i) of this section, WA does not have an obligation to withhold on the deemed distribution on the CDI that it holds on behalf of A until April 1 of Year 1, the date on which Corporation X satisfied its reporting requirements under § 1.6045B-1 regarding the deemed distribution. WA must withhold on the April 15 cash payment, which is the earliest of the dates specified in paragraph (d)(4)(ii) of this section for withholding on the deemed distribution. Example 2 (i) Facts. The facts are the same as in Example 1, except that an interest payment is not made on the Corporation X CDI on April 15 of Year 1, and the CDI is transferred to a separate account of A that is not maintained by WA on April 15 of Year 1. (ii) Analysis. Because WA is a withholding agent under § 1.1441-7(a)(4) with respect to the deemed distribution on March 1 of Year 1 and Corporation X reports the information required under § 1.6045B-1, WA is required to satisfy the withholding obligation even though the CDI was transferred before a cash payment is made with respect to the CDI. WA does not have an obligation to withhold on the deemed distribution until April 1 of Year 1, the date on which Corporation X reported the conversion ratio adjustment as required by § 1.6045B-1 regarding the deemed distribution. WA must withhold upon the transfer of the CDI to an account not maintained by WA on April 15 of Year 1, which is the earliest of the dates specified in paragraph (d)(4)(ii) of this section for withholding. Example 3 (i) Facts. The facts are the same as in Example 2, except that the CDI is transferred to a separate account of A that is not maintained by WA on March 30 of Year 1. (ii) Analysis. Because WA is a withholding agent under § 1.1441-7(a)(4) with respect to the deemed distribution on March 1 of Year 1 and Corporation X has satisfied its reporting requirements with respect to the deemed distribution, WA is required to satisfy the withholding obligation even though the CDI was transferred before WA received the issuer reporting from Corporation X under § 1.6045B-1 regarding the deemed distribution. WA does not have an obligation to withhold on the deemed distribution until April 1 of Year 1, the date on which Corporation X satisfied its reporting requirements under § 1.6045B-1 regarding the deemed distribution. Because neither of the events specified in paragraphs (d)(4)(ii)(A) and (B) of this section occurred after April 1 of Year 1, WA must satisfy its withholding obligation by the due date (not including extensions) for filing Form 1042 (that is, by March 15 of Year 2), as provided in paragraph (d)(4)(ii)(C) of this section. WA may apply § 1.1461-2(b) in order to collect the underwithheld amount. * * * * * (f) Effective/applicability date. * * * Paragraphs (d)(1) and (d)(4) of this section apply to payments made on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register . A withholding agent may, however, rely on the rules in paragraphs (d)(1) and (d)(4) of this section for all deemed distributions (as defined in § 1.305-1(d)(7)) or deemed payments (as defined in § 1.861-3(a)(6)) occurring on or after January 1, 2016, until the date of publication of a Treasury decision adopting these rules as final regulations in the Federal Register .