[Federal Register Volume 59, Number 224 (Tuesday, November 22, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-27792]


[[Page Unknown]]

[Federal Register: November 22, 1994]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[GL-32-REG-94]
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: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed amendments 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 amendments revise the regulations under section 3505(b) with 
regard to the maximum liability of third parties who supply funds for 
wages. The amendments also revise the regulations under section 3505 to 
increase the period of limitations for collection after assessment of 
third-party liability, consistent with the statutory extension of 
general limitation on collections the Internal Revenue Code, and to 
permit the third party to consent to extend that period of limitations. 
The proposed amendments affect third parties paying or providing for 
wages.

DATES: Written comments and requests for a public hearing must be 
received by January 23, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (GL-32-REG-94), room 
5228, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. In the alternative, submissions may be hand 
delivered to: CC:DOM:CORP:T:R (GL-32-REG-94), Courier's Desk, Internal 
Revenue Service, 1111 Constitution Avenue NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Robert A. Walker, (202) 622-3640 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This notice of proposed rulemaking contains proposed 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, Pub. L. 
89-719 (1966). Treasury regulations were issued with an effective date 
of August 19, 1976 (TD 7430). Neither the Code section nor the 
regulations has been amended since enactment or issuance, respectively. 
Since the issuance of the regulations, courts have consistently 
determined the maximum liability of third parties who supply funds for 
wages in a manner that is contrary to the existing regulations. 
Administrative difficulties have also arisen because the self-imposed 
period of limitations on collection of these liabilities differs from 
the Code's general limitation on collections, and there is no provision 
in the regulations to extend this period by agreement.
    The proposed amendments revise the regulations with regard to the 
maximum liability of third parties who supply funds for wages to 
conform to judicial interpretation of the statute. To aid 
administration of this provision, the proposed amendments also (i) 
increase the self-imposed period of limitations for collection of 
section 3505 liabilities, consistent with the 1990 extension of the 
Code's general limitation on collections (See section 6502), from 6 
years to 10 years and (ii) add a provision allowing this period to be 
extended with the consent of the third party.

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. Code 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).
    The proposed amendments conform the existing regulations 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 proposed revisions to the 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 Internal Revenue Code section 6502, 
amended by the Omnibus Budget Reconciliation Act of 1990, Pub. L. 101-
508, Sec. 11317(a)(1) (1990).
    Finally, Sec. 31.3505-1(d)(3) has been added to the regulations 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 notice of proposed rulemaking 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, this notice of proposed rulemaking will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (preferably 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 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.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 31 is proposed to be amended as follows:

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE

    Paragraph 1. The authority citation for part 31 continues to read 
in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 31.3505-1 is amended as follows:
    1. Paragraph (b) is amended by:
    a. Removing ``for such taxes'' from the second sentence of 
paragraph (b)(1)(ii).
    b. Removing ``, plus interest thereon'' from the last sentence of 
paragraph (b)(2), Example (1).
    c. Removing a ``for withholding taxes'' from the fifth sentence of 
paragraph (b)(2), Example (2).
    d. Removing ``plus interest thereon'' from the last sentence of 
paragraph (b)(2), Example (2).
    2. Paragraph (d) is amended by:
    a. Revising the last sentence in paragraph (d)(1).
    b. Revising the last sentence of paragraph (d)(2)(iii).
    3. Paragraph (d)(3) and (g) are added.
    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.
* * * * *
    (g) Effective date. This section is effective on the date of 
publication of the final regulations in the Federal Register. For 
regulations in effect prior to the date final regulations are published 
in the Federal Register, see Sec. 31.3505-1 (as contained in 26 CFR 
part 31, revised April 1, 1994).
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 94-27792 Filed 11-21-94; 8:45 am]
BILLING CODE 4830-01-P