Certain Problem Accounts

Partnerships

Partnerships, unlike corporations, are not exempt payees. This would seem to mean that the partnership must supply a certified TIN (which will be an employer identification number rather than a social security number—see the instructions accompanying official Form W-9) and must certify that the partnership is not subject to backup withholding. The safest approach is to require partnerships to certify their TINs and certify that the partnership is not subject to backup withholding.

Sole Proprietorships

For most purposes under the law, a sole proprietorship is not an entity separate from the individual who owns it. However, most people think of a sole proprietor’s “business” as something apart from the sole proprietor, and some sole proprietorships will have an employer identification number. This leads to some confusion as to the type of TIN the payee should supply when an account is opened in the name of a sole proprietorship—should it be the social security number of the individual or the employer identification number of the sole proprietorship? The IRS has determined that either number is acceptable. However, the payee must supply both his or her individual name as well as the business name. [Instructions accompanying official Form W-9]

Associations, Clubs, Organizations, etc.

Organizations such as bowling leagues, bridge clubs, youth groups, etc., will qualify as tax-exempt organizations under Section 501 of the Internal Revenue Code if they get a determination to that effect from the IRS. These tax-exempt organizations are listed as exempt payees for backup withholding purposes (see list above in the section dealing with exempt payees). Since they are exempt payees, you should have them sign a certification of exempt status. Remember, however, that the payee must still supply a TIN (which will be an employer identification number), even though the TIN need not be certified. Of course, if the organization has a TIN but does not want to go to the trouble of getting a determination of exempt status, the organization can supply the TIN and certify its correctness and certify that the organization is not currently subject to backup withholding due to underreporting of interest.

Many of these types of organizations will not have a TIN, and in that case, you should obtain an “awaiting-TIN” certification. Another alternative is to have the organization open a noninterest-bearing account since backup withholding does not apply to noninterest-bearing accounts. Be aware, however, that the Bank Secrecy Act requires the solicitation of a TIN on all accounts. We refer you to that chapter in this manual for details.

Mortgage Escrow Accounts

The regulations state that because interest payments to mortgage escrow accounts are reportable payments, mortgage escrow accounts are subject to backup withholding. [26 CFR 35a.9999-3, Q&A 5] However, the regulations give no clue as to whose TIN should be obtained; whether it needs to be certified; or whether any payee needs to give the “not subject to backup withholding” certification. These issues are probably decided by the manner in which these escrow accounts are structured or, in other words, who is shown as the owner of the escrow account. If the borrower is shown as owner, then the borrower’s TIN should be used and the borrower should make the certifications. However, even if the borrower is not shown as owner of the account, interest payments to the escrow account are, in a sense, payments to the borrower, in that the interest will ultimately be used, in one way or another, to benefit the borrower. Most escrow agreements provide that the balance in the escrow account (including interest) will be used to pay insurance or taxes owed by the borrower, and, if there is an excess, will either be applied to the principal and interest of the borrower’s debt or will be refunded to the borrower. In any event, the borrower receives the benefit of interest paid to an escrow account, and therefore could be thought of as the payee of the interest even if not shown as the owner of the account. So perhaps the safest approach is to obtain a certified TIN and a “not subject to backup withholding” certification from the borrower on any mortgage loan with an interest-bearing escrow account.

Revocable Trust or “Pay-on-Death” (POD) Accounts

These are accounts where the person establishing the account retains full control over the funds during his or her life, including the ability to change beneficiaries or change the character of the account from a trust or pay-on-death to some other type. Upon the death of the person establishing the account, ownership of the funds is transferred immediately to any named, surviving beneficiaries.

For backup withholding purposes, these accounts are treated no differently than an individual account created by the person establishing the trust or POD account. The person establishing the account is considered the owner and should supply his or her TIN, certify the correctness of it, and certify that he or she is not subject to backup withholding. [Instructions accompanying official Form W-9]

Legal or Actual Trust Accounts

These are trust accounts in which control of the funds is actually relinquished by the person establishing the account to a trustee, who assumes certain legal and fiduciary obligations with respect to the funds for the benefit of named beneficiaries. Here, the trust itself is a legal entity with its own TIN, and that is the TIN you should obtain. The trustee should certify the correctness of the TIN and that the trust is not subject to backup withholding. [Instructions accompanying official Form W-9]

Uniform Transfers (or Gifts) to Minors Act Accounts

These are accounts established under a particular state’s version of the Uniform Gifts to Minors Act or the Uniform Transfers to Minors Act. These laws create a way for parents to transfer money to a son or daughter and have the earnings be part of the child’s taxable income rather than their own. These accounts, in general, are subject to backup withholding, and the payee for backup withholding purposes is the child. Therefore, you should obtain the child’s TIN and have the child certify the correctness of it and certify that he or she is not subject to backup withholding. [Instructions accompanying official Form W-9] If the child does not have a TIN, you will have to obtain an “awaiting-TIN” certification. And sometimes the child will be too young to actually make the necessary certifications. In these instances, the parent can make the certification for the child by signing as follows: “(Name of child) by (signature), parent for minor child.”