SECTION 2. BACKGROUND

In T.D. 8734, 1999–1 C.B. 455, as modified by T.D. 8881, 2000–1 C.B. 1158, the IRS issued comprehensive regulations (withholding regulations) under sections 1441– 1446 and 6041–6050S of the Internal Revenue Code (the Code). These regulations became effective January 1, 2001. Under the withholding regulations, as well as the qualified intermediary withholding agreement (QI Agreement), a foreign partnership generally is treated as a flowthrough entity. Therefore, prior to receiving a payment, it must provide a withholding agent, including a QI, with a Form W–8IMY together with documentation from each partner and a withholding statement that allocates the payment to each of the partners in the partnership.

The IRS recognizes that, under these rules, the withholding agent may receive a high volume of documentation and may therefore experience significant processing problems. The withholding regulations address this problem by allowing a foreign partnership to become a withholding foreign partnership under an agreement with the IRS similar to the QI Agreement. A withholding foreign partnership generally would not be required to provide documentation for its partners to the withholding agent.

As transition relief, pending the publication of a model agreement for entering into a withholding foreign partnership arrangement, the IRS issued Notice 2001–4, applicable to calendar year 2001. Notice 2001–4 allowed foreign partnerships to pro

vide the withholding agent with a withholding statement based on withholding rate pools, along with certain other documentation. In addition, under Notice 2001–4, the required documentation for partners that were foreign persons or U.S. exempt recipients could be provided to the withholding agent at any time during the calendar year 2001.

In Notice 2002–41, 2002–24 I.R.B. 1153, the IRS published proposed guidance for entering into a withholding foreign partnership (WP) or withholding foreign trust (WT) agreement. These proposed WP and WT agreements addressed the unique features of partnerships and trusts by adopting tailored procedures for documentation, reporting, and audit that were intended to facilitate compliance and reduce administrative and audit costs.

To allow time for comments on the proposed WP and WT agreements, the IRS has determined that it is appropriate to extend the transition relief for foreign partnerships under Section IV of Notice 2001–4 to calendar year 2002. The IRS anticipates that it will finalize the WP and WT agreements in the near future and will enter into WP and WT agreements with foreign partnerships and trusts in 2003. Such partnerships and trusts will be able to function as WPs or WTs as of the beginning of 2003. The transition relief for foreign partnerships under Section IV of Notice 2001–4 will be rendered obsolete when the guidance for entering into a WP agreement is finalized. Accordingly, this notice will extend the relief provided in Section IV of Notice 2001–4, through the end of calendar year 2002.