ship grant which is not excludable, or because the amount received is not specifically designated to cover such expenses under paragraph (b) (2) (i) of § 1.117-1. (3) Exchange visitors.-A nonresident alien individual who is temporarily present in the United States as a nonimmigrant under subparagraph (J) of section 101 (a) (15) of the Immigration and Nationality Act, as amended, includes a nonresident alien individual admitted to the United States as an "exchange visitor" under section 201 of the United States Information and Educational Exchange Act of 1948, as amended (22 U.S.C. 1446), which section was repealed by section 111 of the Mutual Educational and Cultural Exchange Act of 1961 (Pub. Law 87-256, 75 Stat. 538) [C.B. 1961–2, 322].

PAR. 5. Section 1.1441-3 is amended by revising subparagraphs (1) and (2) of paragraph (b), by striking out subparagraphs (3) and (4) of paragraph (b), and inserting a new subparagraph (3) in lieu thereof, by revising paragraph (c) (1), by revising paragraph (d), by revising paragraph (e) (2), and by revising paragraph (f). These amended and added provisions read as follows:

$1.1441-3 EXCEPTIONS AND RULES OF SPECIAL APPLICATION.

(b) Corporate distributions.—(1) Nontaxable portion.-The tax shall be withheld at the source under § 1.1441-1 on the gross amount of any distribution made by a corporation other than

(i) A nontaxable distribution payable in stock or stock rights, and

(ii) A distribution which is treated as a distribution in part or full payment in exchange for stock. This rule shall apply without regard to any claim that all or a portion of the distribution is not taxable under section 871 or 881. The tax shall be withheld on the gross amount of the distribution even though the payee may be entitled to the benefits of section 116, relating to partial exclusion of dividends received by individuals. Appropriate adjustment, if any, will be made upon the payee's filing of a claim for refund, together with appropriate supporting evidence, in accordance with paragraph (h) of this section.

(2) Dividends paid by a foreign corporation.-(i) Payments in taxable years of recipients beginning before January 1, 1967.-In the case of dividends paid in taxable years of recipients beginning before January 1, 1967, no withholding ander § 1.1441-1 is required in the case of dividends paid by a foreign corporation unless (a) the corporation is engaged in trade or business within the United States and (b) more than 85 percent of the gross income of the corporation for the 3-year period ending with the close of its taxable year preceding the declaration of the dividends (or for such part of such period as the corporation has been in existence) was derived from sources within the United States as determained under the provisions of part I (section 861 and following), subchapter N. chapter 1 of the Code, and the regulations thereunder.

(ii) Payments in taxable years of recipients beginning after December 31, 1966-In the case of dividends paid in taxable years of recipients beginning after December 31, 1966, all dividends paid by a foreign corporation which are treated as income from sources within the United States are subject to withholding under § 1.1441-1.

(3) Dividends paid to shareholder whose status is not definite.-When a payer Corporation or any other person, including a nominee, having the control, receipt, custody, disposal, or payment of dividends has no definite knowledge of the status of a shareholder, the tax shall be withheld under § 1.1441-1 if the sharebolder's address is outside the United States. If the shareholder's address is Within the United States, it may be assumed for the purpose of withholding on dividends that, in the case of an individual, the shareholder is a citizen or resident of the United States; and, in the case of a partnership or corporation, the hareholder is a domestic partnership or a domestic corporation, as the case may be. Unless the facts and circumstances indicate clearly that the shareholder is a nonresident alien individual, foreign partnership, or foreign corporation, an address in care of another person in the United States does not of itself warrant treating the shareholder as a person who is subject to withholding upon dividends under 8 1.1441-1. If a shareholder changes his address from a place outside the United States to a place within the United States, the tax shall be withheld on dividends unless (i) proof is furnished showing that, in the case of an

individual, he is a citizen or resident of the United States or, in the case of a partnership or corporation, it is a domestic partnership or corporation, or (ii) the withholding agent is otherwise satisfied that the shareholder is not a person who is subject to withholding under §1.1441-1. For general provisions for claiming to be a person not subject to withholding under § 1.1441-1, see § 1.1441-5. (c) Interest.-(1) Government obligations.-Withholding is required under § 1.1441-1 in case of interest paid on obligations issued on or after March 1, 1941, by the United States or any agency or instrumentality thereof. See section 103 and the regulations thereunder, relating to the taxation of such interest, and § 1.1461-1, relating to ownership certificates. See also section 895 and the regu lations thereunder, relating to the exemption from tax with respect to interest received by a foreign central bank of issue or the Bank for International Settlements on obligations of the United States.

(d) Special rules applicable to certain income.—(1) Determination of amount to be withheld.—If in the case of amounts described in paragraph (b) of ́§ 1.14412, other than amounts described in subparagraph (2) (ii) of such paragraph, the withholding agent does not know the amount of recognized gain, he is required to deduct and withhold such amount under § 1.1441-1 as may be necessary to as sure that the tax withheld will not be less than 30 percent of the recognized gain For this purpose, the recognized gain shall be determined without regard to the deduction allowed by section 1202 with respect to capital gains. The amount so withheld shall not exceed 30 percent of the amount payable by reason of the transaction giving rise to the recognized gain, except that the amount payable may be determined by excluding the net unrealized appreciation described in sec tion 402(a) (2). Appropriate adjustment, if any, will be made by the payee's filing of a claim for refund, together with appropriate supporting evidence, in accordance with paragraph (h) of this section.

(2) Statement showing recognized gain.—The withholding agent may, unless he has reason to believe to the contrary, rely on the statement of the person entitled to the gain described in subparagraph (1) of this paragraph as to the amount of gain which is recognized on the transaction involved and subject to withholding under § 1.1441-1. This statement shall be filed with the withholding agent in duplicate. It shall show the computation of the amount of gain subject to withholding, shall be dated, shall be signed by the person entitled to the income, shall contain the taxpayer's identifying number, if any, and shall contain. or be verified by, a written declaration that it is made under the penalties of perjury. No particular form is prescribed for this statement. The duplicate copy of each statement filed during any calendar year pursuant to this subparagrapn shall be forwarded by the withholding agent with, and attached to, the Form 10428 required by paragraph (c) of § 1.1461-2 with respect to such gain for such calendar year.

(e) Personal exemption. ***

(2) In the determination of the tax to be withheld at the source under § 1.1441-1 from remuneration paid for labor or personal services performed within the United States by a nonresident alien individual, the benefit of the deduction for personal exemptions provided in section 151, to the extent allowable under section 873(b)(3) and the regulations thereunder, shall be allowed, prorated upon a daily basis for the period during which labor or personal service are performed within the United States by the alien individual. The benefit of the deduction for such personal exemptions shall also be allowed in the de termination of the tax of 14 percent to be withheld at the source under § 1.1441-1 and paragraph (c) of § 1.1441-2 from amounts paid after March 4, 1964, to nonresident alien individuals who are temporarily present in the United States as nonimmigrants under subparagraph (F) or (J) of the Immigration and Nation ality Act, as amended, and such personal exemptions shall be prorated upon & daily basis for the period during which the described nonresident alien student on scholar receives the payments. The proration is on a basis of $1.70 per day for each exemption to which the nonresident alien individual is entitled. Thus, if A, a married nonresident alien individual without dependents is paid remuneration subject to withholding under § 1.1441-1 for performing personal services during a stay of 100 days in the United States, the amount of $170 will be allocated as the portion of the deduction to be allowed against the remuneration for personal services performed within the United States during that period; and withholding at 30 percent shall be applied against the balance, if any, of the remuneration. If, for example, the total remuneration paid to A for that period is $2,000, a total tax in the amount of $549 [($2,000–$170) X.30] is required to

be withheld under § 1.1441-1. However, if A is a resident of Canada or Mexico, and his spouse has no gross income from sources within the United States, which is subject to income tax under chapter 1 of the Code, and is not the dependent of another taxpayer subject to such tax, an amount of $340 will be allocated as the portion of the deduction to be allowed against the remuneration for personal services performed within the United States. Thus, in such case, a total tax in the amount of $498 [($2,000–$340) ×.30] is required to be withheld under 1.1441-1. As to what constitutes remuneration for labor or personal services performed within the United States see section 861 (a) (3) and the regulations thereunder.

(f) Partnerships and fiduciaries.-Domestic partnerships are required to withhold the tax at source under § 1.1441-1 on items of income described in paragraphs (a) and (b) of § 1.1441-2 which are included in the distributive share of a member of such partnership who is a nonresident alien individual or foreign corporation. Resident or domestic fiduciaries are required to withhold the tax at source under § 1.1441-1 on all items of income described in paragraphs (a) and (b) of § 1.1441-2 of beneficiaries who are nonresident alien individuals, foreign partnerships, or foreign corporations, to the extent that such items constitute gross income from sources within the United States. Income described in paragraphs (a) and (b) of § 1.1441-2 which is paid to a foreign partnership or nonresident alien fiduciary is subject to withholding under § 1.1441-1 even though the members of the partnership, or the beneficiaries of the estate or trust, are individuals who are citizens or residents of the United States or are domestic corporations.

*

PAR. 6. Section 1.1441-4 is amended by striking out paragraph (a) and inserting a new paragraph (a) in lieu thereof, by revising paragraph (b), and by adding new paragraphs (f), (g), and (h). These amended and added provisions read as follows:

1.1441-4 EXEMPTIONS FROM WITHHOLDING.

(a) Income connected with a United States business.—(1) In general.—No withholding is required under § 1.1441-1 in the case of any item of income if such income is effectively connected with the conduct of a trade or business within the United States by the person entitled to such income and is includible in his gross income under section 871 (b) (2), section 842, or section 882 (a) (2) for the taxable year and if he has filed the statement prescribed by subparagraph (2) of this paragraph. This subparagraph shall apply to income for services performed by a foreign partnership or a foreign corporation (other than a foreign corporation which has income to which section 543 (a) (7) applies for the taxable year) but shall not apply to compensation for personal services performed by an individual. In determining whether an item of income from sources within the United States is, or is deemed to be, effectively connected with the conduct of a trade or business within the United States by the person entitled to the income, see section 864 (c) (2), section 871 (d), and sections 882 (d) and (e), and the regulations thereunder. (2) Statement claiming exemption.-In order for the exemption provided by subparagraph (1) of this paragraph to apply for any taxable year, the person entitled to the income must file with the withholding agent a statement in duplicate that the income described in the statement is, or is expected to be, effectively connected with the conduct of a trade or business within the United States and that such income is includible in his gross income for the taxable year. This statement shall show (i) the name and address of the withholding agent and of the person entitled to the income, (ii) the taxFayer's identifying number, (iii) the nature of the item or items of income with respect to which the statement is filed, (iv) the trade or business with which such income is, or is expected to be, effectively connected, and (v) the taxable year in spect of which the statement is made. This statement shall be filed with the withholding agent for each taxable year of the person entitled to the income, and before payment of the income in respect of which it applies. Any statement O filed shall be effective only with respect to the item or items of income specified herein and shall constitute authorization to the withholding agent to pay such come during the taxable year without deduction of the tax at source under i11441-1. The statement shall be amended by the person entitled to the income if subsequent circumstances arising during the taxable year indicate that the itcome is not, or is not expected to be, effectively connected with the conduct of a trade or business within the United States. Any statement required by this

subparagraph may be made on a properly executed Form 4224, which shall be filed in duplicate with the withholding agent. The duplicate copy of each statement or form filed during any calendar year pursuant to this subparagraph shall be forwarded by the withholding agent with, and attached to, any Form 10428 required by paragraph (c) of 8 1.1461-2 with respect to such income for such calendar year.

(b) Compensation for personal services of an individual.—(1) Exemption from withholding.-Withholding is not required under § 1.1441-1 from salaries, wages, remuneration, or any other compensation for personal services of a nonresident alien individual if—

(i) Such compensation is subject to withholding under section 3402, relating to withholding of tax at source on wages, and the regulations thereunder,

(ii) Such compensation would be subject to withholding under section 3402 but for the provisions of section 3401 (a) (other than paragraph (6) thereof) and the regulations thereunder,

(iii) Such compensation is for services performed by a nonresident alien individual who is a resident of Canada or Mexico and who enters and leaves the United States at frequent intervals, or

(iv) Such compensation is, or will be, exempt from the income tax imposed by chapter 1 of the Code by reason of a provision of the Internal Revenue Code or a tax convention to which the United States is a party.

(2) Statement claiming exemption.-In order for the exemption provided by subparagraph (1)(iv) of this paragraph to apply for any taxable year. the person entitled to such compensation must file for the taxable year with the withholding agent a statement in duplicate setting forth his name, address, and taxpayer identifying number, and certifying (i) that he is not a citizen or resident of the United States, (ii) that the compensation to be paid to him during the taxable year is, or will be, exempt from the tax imposed by chapter 1 of the Code, and (iii) the reason why such compensation is so exempt from tax. If the compensation is claimed to be exempt from tax by reason of a provision of an income tax convention to which the United States is a party, the statement shall also indicate the provision and tax convention under which the exemption is claimed, the country of which he is a resident, and sufficient facts to justify the claim to exemption. The statement shall be dated, shall identify the taxable year for which it is to apply and the compensation to which it relates, shall be signed by the person entitled to such compensation. and shall contain, or be verified by, a written declaration that it is made under the penalties of perjury. No particular form is prescribed for this statement. The duplicate copy of each statement filed during a calendar year pursuant to this subparagraph shall be forwarded by the withholding agent with, and attached to, the Form 1042S required by paragraph (c) of § 1.1461-2 with respect to such compensation for such calendar year.

(f) Exemption of certain foreign partnerships and foreign corporations.— (1) In general. No withholding is required under § 1.1441-1 upon any item of income paid to a foreign partnership, or foreign corporation, engaged in trade or business in the United States at any time during the taxable year, if it is established to the satisfaction of the Director of International Operations that the requirements of section 1441(a), or 1442(a), and § 1.1441-1 impose an undue administrative burden for such taxable year and that the collection of the tax imposed by section 871(a) or section 881 on the members of such partnership, or by section 881 on such corporation, as the case may be, will not be jeopardized by the exemption from withholding. As a general rule, the requirements of section 1441(a), or 1442(a), and § 1.1441-1 will be con sidered to impose an undue administrative burden only in a case where (i) the person entitled to the income, such as foreign insurance company, receives from the withholding agent income on securities issued by a single corporation. some of which is, and some of which is not, effectively connected with the con duct of a trade or business within the United States and (ii) the criteria for determining the effective connection are unduly difficult to apply because of the circumstances under which such securities are held. Thus, for example, is a foreign corporation carrying on a life insurance business in the United States finds that, because of the requirements of State law which cause its U.S. re serves to fluctuate frequently, it is unduly difficult with respect to any clasi of income to identify the income which is, and the income which is not, effec

tively connected with its conduct of business in the United States during the taxable year, the corporation will be considered to have satisfied the requirements of subdivision (ii) of this subparagraph. No exemption from withholding shall be granted under this paragraph unless the person entitled to the income complies with such other requirements as may be imposed by the Director of International Operations and unless the Director of International Operations is satisfied that the collection of the tax on the income involved will not be jeopardized by the exemption from withholding.

(2) Claiming exemption.—(i) Statement required.-In order for the exemption provided by subparagraph (1) of this paragraph to apply for any taxable year the foreign partnership or the foreign corporation must file with the Director of International Operations, Internal Revenue Service, Washington, D.C. 20225, a statement indicating the reasons why specific classes of income should be exempted from the withholding requirements of § 1.1441-1 for such year. This statement shall show the name and address of the withholding agent and of the person entitled to the income, the taxpayer's identifying number, the class or classes of income to be exempted from withholding, the trade or business with which such income is in part effectively connected, the taxable year during which such exemption is to apply, and, in such form and to such extent as shall satisfy the Director of International Operations, the identity of the securities or other underlying property involved.

(ii) Notification of determination.-The Director of International Operations shall notify the partnership or corporation by letter in duplicate of his determination in respect of the application for exemption. If the exemption from withholding is granted, the duplicate copy of the notice from the Director of International Operations shall be filed with the withholding agent and shall constitute authorization to pay the specified class or classes of income during the specified taxable year without deduction of the tax at source under § 1.1441–1. (iii) Bond requirement.-The Director of International Operations may, as a condition precedent to the allowance of the exemption from withholding for the taxable year, require a bond in such sum as the Commissioner may prescribe, conditioned upon the payment of the tax on the income involved and such further conditions as the Director of International Operations may require. This bond shall be executed by the foreign partnership or foreign corporation and shall conform to the requirements of § 301.7101-1 as to form of bond and surety required. No bond shall be required pursuant to this subparagraph from a foreign corporation which is required to file a declaration of estimated income tax under section 6016 for the taxable year in respect of which the exemption from withholding applies.

(g) Annuities received under qualified plans.—Withholding is not required ander § 1.1441-1 in the case of any amount received as an annuity if such amount is exempt under section 871 (f) and the regulations thereunder from the tax imposed by section 871(a). In order for the exemption provided by this paragraph to apply for any taxable year in those cases where the withholding agent is not the employer by whom the annuity plan or qualified trust under or from which such annuity is paid was established, the person entitled to the annuity must file with the withholding agent a statement in duplicate setting forth his name, address, and taxpayer identifying number, if any, and certifying that he is not a citizen or resident of the United States and that the annuity in respect of which the statement is filed is excluded from gross income by reason of section 71(f). This statement shall be dated, shall identify the taxable year to which it relates, shall be signed by the person entitled to the annuity and shall contain, of be verified by, a written declaration that it is made under the penalties of perjury. No particular form is prescribed for the statement. The duplicate copy of each statement filed during any calendar year pursuant to this paragraph shall be forwarded by the withholding agent with, and attached to, the Form 19428 required by paragraph (c) of § 1.1461-2 with respect to such annuity for ch calendar year.

(b) Interest on bonds sold between interest dates.-Except as provided by paragraph (b) (2) (ii) of § 1.1441-2, the tax is not required to be withheld under 11.1441-1 on accrued interest paid by the buyer in connection with the sale of bonds between interest dates, even though the interest is subject to tax under tion 871 or section 881. The exemption from withholding granted by this aragraph is not a determination that the accrued interest is not fixed or deterPinable annual or periodical income.