M E M O R A N D U M

February 9, 2011

TO: Distribution

FROM: Burt, Staples, Maner, LLP

RE:   New Form W-9         

The IRS released a new Form W-9 at the end of January. Financial institutions, accounts payable operations, and other payers of amounts that may be reported on Forms 1099 should start using this form as soon as possible, and (although the IRS has not come out with a hard and fast rule) should complete the transition to the new form within 3-6 months. Substitute Forms W-9 that are embedded in account opening forms and the like should be revised to conform to the new form.

Although there is a new version of Form W-9, there is generally no need to replace valid Forms W-9 already received from customers and vendors. However, because the new cost basis rules can make a corporation subject to reporting on broker proceeds unless it can be shown that the corporation is not an S corporation, brokers should ask for new Forms W-9 from corporate customers.

While the new cost basis regulations seem to be the main reason the form was updated now, the IRS took the opportunity to make a number of other changes to the form. Here are the highlights:

• New Box to Distinguish S Corporations from C Corporations. S corporations will not be exempt from backup withholding or Form 1099-B reporting for broker proceeds with respect to “covered securities” acquired on or after January 1, 2012. The new form provides explicitly labeled boxes for “C Corporation” and “S Corporation,” which should help brokers determine whether a corporation is exempt or not.
• Exempt Recipient Table Implies (Incorrectly) That S Corporations Cannot Be Exempt for Broker Proceeds. The table of exempt recipients has been revised to note that “C corporations” are exempt for broker transactions, but the table does not say anything about S corporations, implying that they are never exempt for broker proceeds purposes. That is not the case, however. For 2011, S corporations remain as exempt as they always have been. S corporations will continue to be exempt with respect to noncovered securities whenever they are acquired, and with respect to any covered securities acquired during 2011. This can play out in unexpected ways. For example, a security acquired by a C corporation during 2012 is noncovered. If the corporation later elects to become an S corporation, the security remains noncovered. The corporation would be exempt from Form 1099-B reporting of the sale of that security. Brokers may, however, find it easier to simply issue Forms 1099-B to S corporations in this circumstance.
• Clearer Treatment of Disregarded Entities (“DEs”). The old form, which was published in October 2007, created confusion about how to handle entities that are DEs under the check-the-box rules. That form allowed an LLC to choose “Disregarded entity” as an entity type. But DEs do not file tax returns; a DE’s income should show up on the return of its single owner and the single owner should receive any Forms 1099. The new form clarifies that the name and taxpayer identification number (“TIN”) on the Form W-9 should be those that are “shown on the income tax return on which the income will be reported,” typically those of the single owner. The DE’s name should go on the relabeled “Business name/disregarded entity name” line.
• Clarification of the Treatment of Grantor Trusts. Under the regulations in Treas. Reg. § 1.671-4, a grantor trust can elect one of two ways to handle tax reporting. Under Optional Method 1, as it is called in the new Form W-9 instructions, the trustee must provide the name and TIN of the grantor (or grantors), along with the address of the trust, to payers of reportable amounts, and must provide the grantor a statement of income received by the trust each year, but need not file any return with the IRS; the payer would issue any Forms 1099 in the name of the grantor. Under Optional Method 2, the trustee must provide payers with the trust’s name, address, and TIN, file Forms 1099 with the IRS naming the grantor as the payee under modified reporting rules, and provide an income statement to the grantor in lieu of Form 1099 payee statements; the payer would issue any Forms 1099 in the name of the trust. The Form W-9 instructions now clearly state that the information on the Form W-9 must be consistent with the trust’s reporting method, i.e., provide the grantor’s information if the trust uses Optional Method 1 and provide the trust’s information if the trust uses Optional Method 2.
• New “Trust/estate” Entity Box. The form now provides a check box for “Trust/estate,” which it has not in the past. The form now includes all the basic types of entities that are recognized under federal income tax law: individuals, corporations, partnerships, trusts and estates. The form continues to include an “Other” box, however, possibly for use by government entities and other entities that are entitled to special treatment under tax law.
• Requirement to Update Information on Loss of Exempt Status. The instructions to the new form explicitly require a payee that loses its exempt recipient status to “provide updated information.” Examples in the instructions include a C corporation that later elects to become an S corporation, and a charity that loses its status as a tax-exempt organization. The instructions imply that no new Form W-9 is necessary; the payee simply must update its information. If a grantor of a grantor trust dies, however, a new Form W-9 is required. A new Form W-9 also is required whenever the name or TIN changes for the account.
• Removal of Obsolete Reference to Investment Advisers as Exempt. The exempt recipient chart on the old form stated that “a person registered under the Investment Advisers Act of 1940 who regularly acts as a broker” is exempt for broker proceeds. Such persons have not been exempt recipients for quite some time. The new instructions delete this language.
• No Specific FATCA guidance. The new form contains no explicit references to FATCA, suggesting that the form or instructions may be revised again before FATCA’s January 1, 2013, effective date.
• Change to Layout of TINs. The new form has a separate box for each digit of a TIN, clearly indicating that a TIN has exactly nine digits. The old form had separators to indicate the two or three different pieces of a TIN, but nothing to indicate how many digits there should be.
• No Specific Backup Withholding Rate. The new Form W-9 simply refers to withholding “a percentage” of a payment when the backup withholding rules require it, but does not say what the percentage is. The old form stated that the payer may withhold 28%. The revision should avoid confusion if the backup withholding rate changes due to, for example, a change in the tax brackets.
• Added References to Form 2553. The new form adds references to Form 2553, the form a corporation files to elect S corporation status. The form also may be used by an LLC to simultaneously elect to be treated as a corporation and to elect S corporation status. The instructions essentially treat Form 2553 as equivalent to Form 8832 for determining corporate status.
• Identity Theft Changes. The instructions that provide information about identity theft have been revised with updated phone numbers and procedures.
• Broader Privacy Act Notice. The new form’s Privacy Act notice indicates that the information on Form W-9 may be used in a wider variety of circumstances. For example, the old form referred to disclosures under a “tax treaty,” while the new form simply says “treaty.” The old form referred to use of the form in enforcement of “federal nontax criminal laws,” while the new form refers to “civil and criminal laws,” apparently including state laws and possibly foreign laws.

The new form can be downloaded from the IRS website.

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