[Federal Register Volume 60, Number 147 (Tuesday, August 1, 1995)]
[Rules and Regulations]
[Pages 39109-39111]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18625]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[TD 8604]
RIN 1545-AS22
Liability of Third Parties Paying or Providing for Wages: Suit
Period and Its Extension and Maximum Amount Recoverable
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations regarding the
liability of lenders, sureties, or other third persons for withholding
taxes when those persons have supplied funds, either directly to
employees or to or for the account of an employer, for the specific
purpose of paying wages of the employees of that employer. The final
regulations affect third parties paying or providing for wages.
EFFECTIVE DATE: August 1, 1995.
FOR FURTHER INFORMATION CONTACT: Robert A. Walker, (202) 622-3640 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
These final regulations contain changes to Sec. 31.3505-1. Section
3505 of the Internal Revenue Code (Code) was added by section 105(a) of
the Federal Tax Lien Act of 1966, Public Law 89-719 (1966). Treasury
regulations were issued with an effective date of August
[[Page 39110]]
19, 1976 (TD 7430). Neither the Code section nor the regulations has
been amended since enactment or issuance, respectively. The IRS
published a notice of proposed rulemaking in the Federal Register on
November 22, 1994, (59 FR 60099) providing proposed rules under section
3505 of the Code. No public comments were received and accordingly, the
final regulations are identical to the proposed regulations.
Explanation of Provisions
Under section 3505(b), if a lender, surety, or other person (the
lender) supplies funds to or for the account of an employer for the
specific purpose of paying wages of the employees of that employer, and
the lender has actual notice or knowledge (within the meaning of
section 6323(i)(1)) that the employer does not intend or will not be
able to make timely payment or deposit of the required withholding
taxes, the lender shall be liable to the United States in a sum equal
to the taxes (together with interest) that are not paid over to the
United States by the employer with respect to those wages. The lender's
liability for withholding taxes, in lieu of the employer, is limited to
an amount equal to 25 percent of the amount of wages so supplied to or
for the account of the employer. See section 3505(b) (final sentence).
Existing regulations provide that the 25-percent limitation applies
only to the tax, and not the interest on that tax, with the result that
the lender could be held liable for more than 25 percent of the amount
of funds it supplied. The courts that have addressed this issue,
however, have held that the 25-percent limitation on the amount of
wages supplied by a third party is an absolute cap with respect to the
recovery of withholding taxes and prejudgment interest. United States
v. Metro Constr. Co., Inc., 602 F.2d 879 (9th Cir. 1979); United States
v. Intercontinental Ind., Inc., 635 F.2d 1215 (6th Cir. 1980); United
States v. Hannan Co., 639 F.2d 284 (5th Cir. 1981); Taubman v. United
States, 449 F. Supp. 520 (E.D. Mich. 1978). See also O'Hare v. United
States, 878 F.2d 953 (6th Cir. 1989); United States v. Security Pacific
Business Credit, Inc., 956 F.2d 703 (7th Cir. 1992); United States v.
Vaccarella, 735 F. Supp. 1421 (S.D. Ind. 1990).
These final regulations conform to judicial interpretation and
clarify that interest will continue to be computed in addition to any
withholding tax liability, but only to an overall maximum of 25 percent
of the amount of the funds supplied by the lender.
The final regulations also change the period of limitations for
collection of the withholding taxes and interest from six years to ten
years. This revision will conform the period of limitations for the
purposes of section 3505 with the general rule on limitations on
collection. See section 6502, amended by the Omnibus Budget
Reconciliation Act of 1990, Public Law 101-508, section 11317(a)(1)
(1990).
Finally, Sec. 31.3505-1(d)(3) has been added to provide for
extensions of the period of limitation for collection because, on
occasion, the IRS or the lender requires additional time for compliance
with the regulation.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 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 Internal Revenue Code,
the notice of proposed rulemaking was submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Drafting Information
The principal author of these final regulations is Robert Walker,
Office of Assistant Chief Counsel (General Litigation). However, other
personnel from the IRS and Treasury Department participated in their
development.
List of Subjects in 26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping requirements, Social Security,
Unemployment compensation.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 31 is amended as follows:
PART 31--EMPLOYMENT TAXES
Paragraph 1. The authority citation for part 31 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 31.3505-1 [Amended]
Par. 2. Section 31.3505-1 is amended by:
1. Removing the phrase ``for such taxes'' from the second sentence
of paragraph (b)(1).
2. Removing the phrase ``, plus interest thereon'' from the final
sentence of paragraph (b)(2), Example (1).
3. Removing the phrase ``for withholding taxes'' from the fifth
sentence of paragraph (b)(2), Example (2).
4. Removing the phrase ``plus interest thereon'' from the final
sentence of paragraph (b)(2), Example (2).
5. Revising the final sentence of paragraph (d)(1).
6. Revising the final sentence of paragraph (d)(2)(iii).
7. Adding paragraphs (d)(3) and (g).
The additions and revisions read as follows:
Sec. 31.3505-1 Liability of third parties paying or providing for
wages.
* * * * *
(d) * * *
(1) * * * In the event that the lender, surety, or other person
does not satisfy the liability imposed by section 3505, the United
States may collect the liability by appropriate civil proceedings
commenced within 10 years after assessment of the tax against the
employer.
* * * * *
(2) * * *
(iii) * * * Thus, after the second payment by the employer, the
lender's liability under section 3505(b) is $75 ($250 less $175), plus
interest due on the underpayment for the period of underpayment, to a
maximum of $250, 25 percent of the funds supplied.
(3) Extensions of the period for collection. Prior to the
expiration of the 10-year period for collection after assessment
against the employer, the lender, surety, or other third party may
agree in writing with the district director, service center director,
or compliance center director to extend the 10-year period for
collection. The period so agreed upon may be extended by subsequent
agreements in writing made before the expiration of the period
previously agreed upon. If any timely proceeding in court for the
collection of the tax and any applicable interest is commenced, the
period during which such tax and interest may be collected shall be
extended and shall not expire until the liability for the tax (or a
judgment against the lender, surety, or other third party arising from
such liability) is satisfied or becomes unenforceable.
* * * * *
[[Page 39111]]
(g) Effective date. These regulations are effective on August 1,
1995.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: June 21, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-18625 Filed 7-31-95; 8:45 am]
BILLING CODE 4830-01-U
