[Federal Register Volume 59, Number 232 (Monday, December 5, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29701]
[[Page Unknown]]
[Federal Register: December 5, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[EE-81-88]
RIN 1545-AN55
Deductions for Transfers of Property
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of hearing.
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SUMMARY: This document contains proposed amendments to the regulations
to eliminate the special rule that requires an employer to deduct and
withhold income tax as a prerequisite for claiming a deduction for
property transferred to an employee in connection with the performance
of services. Under the existing regulation, employers have been denied
a deduction for failure to withhold even where the employee has
reported the income and paid the tax. The proposed amendments will
provide guidance on substantiating deductions for property transferred
in connection with the performance of services. The proposed amendments
will affect employers and other service recipients who transfer
property for services.
DATES: Written comments and requests for a public hearing must be
received by February 3, 1995.
ADDRESSES: Send comments and requests for a public hearing to: Internal
Revenue Service, POB 7604, Ben Franklin Station, Attn: CC:DOM:CORP:T:R
(EE-81-88), room 5228, Washington, DC 20044. In the alternative,
submissions may be hand delivered between the hours of 8 a.m. and 5
p.m. to: CC:DOM:CORP:T:R (EE-81-88), Courier's Desk, Internal Revenue
Service, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Charles T. Deliee, telephone 202-622-
6060 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act (44 U.S.C.
3504(h)). Comments on the collection of information should be sent to
the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC
20224.
The collection of information is in Secs. 1.6041-1 and 1.6041-2 of
the Regulations. This information is required by the IRS to ensure the
proper matching of income recognized by service providers with
deductions claimed by service recipients. The likely respondents are
individuals, farms, business or other for-profit institutions,
nonprofit institutions, and small businesses or organizations.
The burden for the reporting requirement contained in Secs. 1.6041-
1 and 1.6041-2 is reflected in the burden for Forms W-2 and 1099.
Overview
This document contains proposed amendments to the Income Tax
Regulations (26 CFR Part 1) under section 83(h) of the Internal Revenue
Code of 1986 (Code). The proposed regulations eliminate the requirement
to deduct and withhold income tax as a prerequisite for claiming a
deduction.
Under section 83(h) of the Code, in the case of a transfer of
property to which section 83(a) applies, the person for whom services
were provided may deduct an amount equal to the amount included in the
service provider's gross income. In light of the difficulty that a
service recipient may have in demonstrating that an amount has actually
been included in the service provider's gross income, the general rule
in existing Sec. 1.83-6(a)(1) permits the deduction for the amount
``includible'' in the service provider's gross income. Thus, the
deduction may be allowed to the service recipient even if the service
provider does not properly report the includible amount. Where the
service provider is an employee of the service recipient, however, the
special rule in Sec. 1.83-6(a)(2) provides that a deduction may be
claimed only if the service recipient (employer) deducts and withholds
income tax in accordance with section 3402. The special rule was
designed to ensure that the service recipient's deduction is in fact
offset by a corresponding inclusion in the service provider's gross
income. The special rule is limited to employer-employee situations
because in other situations there is no underlying withholding
requirement upon which the deduction could be conditioned.
Taxpayers have expressed concern that it is often difficult to
satisfy the prerequisite that employers must deduct and withhold income
tax from payments in kind as a condition for claiming a deduction. The
proposed amendments to the section 83 regulations would address this
concern by eliminating this prerequisite, while still ensuring
consistent treatment between service recipients and service providers
as required by the statute. In addition, because the deduction no
longer would be conditioned on withholding, there no longer would be a
need to have different rules for those who receive services from
employees and those who receive services from others.
Under the proposed amendments, the existing general rule and
special rule would be replaced by a revised general rule that more
closely follows the statutory language of section 83(h). The service
recipient would be allowed a deduction for the amount ``included'' in
the service provider's gross income. For this purpose, the amount
included means the amount reported on an original or amended return or
included in gross income as a result of an IRS audit of the service
provider.
Because of the potential difficulty of demonstrating actual
inclusion by the service provider, a special rule would provide that,
if the service recipient timely complies with applicable Form W-2 or
1099 reporting requirements under section 6041 (or 6041A), as
appropriate, with respect to the amount includible in income by the
service provider, the service provider will be deemed to have included
the amount in gross income for this purpose. Thus, the proposed
amendments would allow the deduction without requiring the service
recipient to demonstrate actual inclusion by the service provider. If a
transfer met the requirements for exemption from reporting for payments
aggregating less than $600 in any taxable year, or was eligible for any
other reporting exemption, no reporting would be required in order for
the service recipient to rely on the deemed inclusion rule.
In order to allow service recipients to take advantage of the
deemed inclusion rule with respect to property transfers to all service
providers, the proposed amendments would permit service recipients to
use the special rule also in the case of transfers to corporate service
providers. To that end, service recipients would be permitted, solely
for purposes of this rule, to treat the Form 1099 reporting
requirements as applicable to transfers to corporate service providers
in the same manner as those requirements would apply to transfers to
noncorporate service providers. Thus, if a service recipient who
transferred property to a corporate service provider timely reported
that income on Form 1099 (to both the service provider and the federal
government), the service recipient would be entitled to rely on the
deemed inclusion rule in claiming a deduction for the amount of that
income. If the transfer met the requirements for exemption from
reporting for payments aggregating less than $600 in any taxable year,
or was eligible for any other reporting exemption applicable to a
service provider that is not a corporation, no reporting would be
required in order for the service recipient to rely on the deemed
inclusion rule.
The deemed inclusion rule could be used only by a service recipient
whose compliance with applicable Form W-2 or 1099 reporting
requirements was timely. Thus, for example, under the current reporting
requirements, if amounts attributable to one or more section 83
transfers of property are includible in an employee's income in year 1
(and are not eligible for any reporting exemption), the employer
generally would be required to furnish the employee a Form W-2
reflecting that amount by January 31 of year 2 and generally would be
required to file a copy of the Form W-2 with the federal government by
the last day of February of year 2. If the employer did report to the
employee and the government in a timely manner, the employer would be
able to rely on the deemed inclusion rule to claim a deduction for the
amount in year 1. If the employee's Form W-2 were not furnished until
after January 31 of year 2 or the government's copy of Form W-2 were
not filed until after the last day of February of year 2, the employer
generally would be required to demonstrate that the employee actually
included the amount in income in order to support its deduction of such
amount.
Under the proposed amendments, a special rule would apply with
respect to an amount includible in an employee's or former employee's
income by reason of a disqualifying disposition of stock that had been
acquired pursuant to a statutory stock option. In the case of such a
disposition, a Form W-2 or W-2c (as appropriate) would have to be
furnished to the employee or former employee, and filed with the
federal government, only by the date on which the employer files its
tax return (including an amended return) claiming a deduction for that
amount.
With respect to disqualifying dispositions, the proposed amendments
would modify the conditions for an employer's deduction under section
83(h) in a manner that is not inconsistent with the guidance provided
by Notice 87-49 (Changes to Incentive Stock Option Requirements by
Section 321 of the Tax Reform Act of 1986), 1987-2 C.B. 355. The
proposed amendments are not intended to have any effect on the
application of Notice 87-49 or the analysis contained therein, and
therefore should not be viewed as constituting a reconsideration of
Revenue Ruling 71-52, 1971-1 C.B. 278, within the meaning of Notice 87-
49.
Although the withholding requirement would be eliminated as a
prerequisite for claiming a deduction, the proposed amendments would
not relieve the service recipient from any applicable withholding
requirements of subtitle C or from the statutorily prescribed penalties
or additions to tax for noncompliance with those requirements. Thus,
for example, if an employer transferred to an employee property to
which section 83 applies and failed to withhold income tax on the
payment, the employer would be liable for the tax under section 3403.
However, under section 3402(d), any tax liability assessed against the
employer would be offset by any tax paid by the employee. In addition,
nothing in this proposed regulation would relieve the service recipient
from penalties or additions to tax for noncompliance with the
requirements of section 6041 or 6041A (relating to information
reporting) to the extent they otherwise apply.
The proposed regulation that was published in the Federal Register
on November 16, 1983 (48 FR 52079), proposing to amend the special rule
in Sec. 1.83-6(a)(2), is hereby withdrawn.
These amendments are proposed to be effective for deductions
allowable for taxable years beginning on or after January 1, 1995.
However, taxpayers may apply these proposed amendments when claiming a
deduction for any year not closed by the statute of limitations. For
example, if substantially vested (within the meaning of Sec. 1.83-3(b))
stock was transferred to an employee in 1992 upon the exercise of a
nonstatutory stock option, and if the calendar year employer furnished
a Form W-2 to the employee by January 31, 1993, reflecting the income
generated by such transfer, and filed the appropriate Form W-2 with the
federal government by February 28, 1993, then the employer could apply
these proposed amendments to claim a deduction for 1992 for the amount
of the income, even if the employer failed to withhold in accordance
with section 3402 and could not demonstrate actual inclusion in income
by the employee. If that employer did not claim a deduction for the
amount of the income on its 1992 tax return, it could file an amended
return for 1992 claiming such a deduction pursuant to the proposed
amendments, provided that 1992 is still an open year.
Reliance on These Proposed Regulations
Taxpayers may rely on these proposed amendments for guidance
pending their issuance as final regulations. If future amendments are
more restrictive than these proposed amendments, the future amendments
will be applied without retroactive effect.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C.
chapter 6) do not apply to these regulations and, therefore, a
Regulatory Flexibility Analysis is not required. Pursuant to section
7805(f) of the Code, this notice of proposed rulemaking will be
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written comments (a signed original
and eight (8) copies) that are submitted timely to the IRS. All
comments will be available for public inspection and copying. A public
hearing may be scheduled if requested in writing by a person that
timely submits written comments. If a public hearing is scheduled,
notice of the date, time, and place for the hearing will be published
in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Charles T.
Deliee, Office of the Associate Chief Counsel (Employee Benefits and
Exempt Organizations), IRS. However, personnel from other offices of
the IRS and Treasury Department participated in their development.
List of Subjects in 26 CFR 1.61-1 through 1.281-4
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
Paragraph 1. The authority for part 1 continues to read in part as
follows:
Authority: 26 U.S.C. 7805* * *
Par. 2. In Sec. 1.83-6, is amended as follows:
1. Paragraphs (a)(1) and (2) are revised.
2. Paragraph (a)(5) is added.
3. The revisions and addition read as follows:
Sec. 1.83-6 Deduction by employer.
(a) Allowance of deduction--(1) General Rule. In the case of a
transfer of property in connection with the performance of services, or
a compensatory cancellation of a nonlapse restriction described in
section 83(d) and Sec. 1.83-5, a deduction is allowable under section
162 or 212 to the person for whom the services were performed. The
amount of the deduction is equal to the amount included as compensation
in the gross income of the service provider under section 83(a), (b),
or (d)(2), but only to the extent the amount meets the requirements of
section 162 or 212 and the regulations thereunder. The deduction is
allowed only for the taxable year of that person in which or with which
ends the taxable year of the service provider in which the amount is
included as compensation. For purposes of this paragraph, any amount
excluded from gross income under section 79 or section 101(b) or
subchapter N is considered to have been included in gross income.
(2) Special Rule. For purposes of paragraph (a)(1) of this section,
the service provider is deemed to have included the amount as
compensation in gross income if the person for whom the services were
performed satisfies in a timely manner all requirements of section 6041
or section 6041A, and the regulations thereunder, with respect to that
amount of compensation. For purposes of the preceding sentence, whether
a person for whom services were performed satisfies all requirements of
section 6041 or section 6041A, and the regulations thereunder, is
determined without regard to Sec. 1.6041-3(c) (exception for payments
to corporations). In the case of a disqualifying disposition of stock
described in section 421(b), an employer that otherwise satisfies all
requirements of section 6041 and the regulations thereunder will be
considered to have done so timely if Form W-2 or Form W-2c, as
appropriate, is furnished to the employee or former employee, and is
filed with the Federal Government, on or before the date on which the
employer files the tax return claiming the deduction relating to the
disqualifying disposition.
* * * * *
(5) Effective Date. Paragraphs (a)(1) and (a)(2) of this section
apply to deductions for taxable years beginning on or after January 1,
1995. However, taxpayers may also apply paragraphs (a)(1) and (a)(2) of
this section when claiming deductions for taxable years beginning
before that date if the claims are not barred by the statute of
limitations. Paragraphs (a)(3) and (a)(4) of this section are effective
as set forth in Sec. 1.83-8(b).
* * * * *
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-29701 Filed 12-2-94; 8:45 am]
BILLING CODE 4830-01-P
