SECTION 2. BACKGROUND

Treasury regulation §1.1441–1(e)(5) permits a QI, as defined therein, to furnish a withholding certificate to a withholding agent on behalf of other persons for purposes of claiming and verifying reduced rates of withholding under section

1441 or 1442. To qualify as a QI, the intermediary must enter into a withholding agreement with the IRS, pursuant to §1.1441–1(e)(5)(iii), the terms of which are contained in Rev. Proc. 2000–12, 2000–1 C.B. 387 (QI Agreement). Rev. Proc. 2000–12 states that the IRS will not enter into a QI agreement that provides for the use of documentary evidence obtained under a country’s KYC rules unless it has received certain information that allows it to determine whether those KYC rules are acceptable. Once the IRS determines that a country’s KYC rules are acceptable, it lists such country as an approved jurisdiction on the IRS website. KYC rules relate to the capacity of a financial institution to determine whether their customers are U.S. persons and, if their customers are non-U.S. persons claiming the benefits of an income tax treaty, whether those customers are residents of the applicable treaty country. See Notice 2001–4, 2001–1 C.B. 267. Announcement 2000–48 limits eligibility for QI status to financial entities organized in jurisdictions with approved KYC rules. However, Announcement 2000–48 (as modified by Notice 2001–43) permits a branch of a financial institution (but not a separate juridical entity affiliated with the financial institution) to act as a QI in a jurisdiction that does not have KYC rules, has unacceptable KYC rules, or has KYC rules awaiting IRS approval, if the branch is part of an entity organized in a country that does have acceptable KYC rules and the entity agrees to apply its home country KYC rules to the branch.

When the QI system was implemented, only a small number of jurisdictions had KYC rules that had been reviewed and approved by the IRS. In an effort to implement the QI system as quickly and broadly as possible, branches of financial entities were allowed to participate in the QI system under the standards of Announcement 2000–48 and Notice 2001–43. Now that Treasury and the IRS have reviewed the KYC rules for all of the countries that submitted their KYC rules for review, and have approved the KYC rules of 57 countries, Treasury and the IRS believe that it is no longer prudent to permit branches of financial entities to operate as QIs in countries that do not have approved KYC rules. KYC rules are most effective when applied to the countries for which

April 3, 2006 708 2006–14 I.R.B.

(issued under section 103A of the Internal Revenue Code of 1954, the predecessor of section 143) provides that the term “State” includes a possession of the United States and the District of Columbia.

.07 Section 6a.103A–2(f)(5)(i) provides that an issuer may rely upon the average area purchase price safe harbors published by the Department of the Treasury for the statistical area in which a residence is located. Section 6a.103A–2(f)(5)(i) further provides that an issuer may use an average area purchase price limitation different from the published safe harbor if the issuer has more accurate and comprehensive data for the statistical area.

Qualified Mortgage Credit Certificate Program

.08 Section 25(c) permits a state or political subdivision to establish a qualified mortgage credit certificate program. In general, a qualified mortgage credit certificate program is a program under which the issuing authority elects not to issue an amount of private activity bonds that it may otherwise issue during the calendar year under section 146, and in their place, issues mortgage credit certificates to taxpayers in connection with the acquisition of their principal residences. Section 25(a)(1) provides, in general, that the holder of a mortgage credit certificate may claim a federal income tax credit equal to the product of the credit rate specified in the certificate and the interest paid or accrued during the tax year on the remaining principal of the indebtedness incurred to acquire the residence. Section 25(c)(2)(A)(iii)(III) generally provides that residences acquired in connection with the issuance of mortgage credit certificates must meet the purchase price requirements of section 143(e).

Income Limitations for Qualified Mortgage Bonds and Mortgage Credit Certificates

.09 Section 143(f) imposes limitations on the income of mortgagors for whom financing may be provided by qualified mortgage bonds. In addition, section 25(c)(2)(A)(iii)(IV) provides that holders of mortgage credit certificates must meet the income requirement of section 143(f). Generally, under sections 143(f)(1) and

Jason Kleinman or Ethan Atticks at (202) 622–3840 (not a toll-free call).

26 CFR 601.201: Rulings and determination letters. (Also: Part I, §§ 25, 103, 143.)

Rev. Proc 2006–17