[Federal Register Volume 60, Number 138 (Wednesday, July 19, 1995)]
[Rules and Regulations]
[Pages 36995-36998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-17494]



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DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 602

[TD 8599]
RIN 1545-AN55


Deductions for Transfers of Property

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations concerning deductions 
for transfers of property. The regulations amend the special rule that 
required 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 
former regulation, employers that failed to deduct and withhold income 
tax were denied a deduction even where the employee reported the income 
and paid the tax. The new rules permit service recipients to claim a 
deduction for the amount included in the service provider's gross 
income. The service provider will be deemed to have included an amount 
in gross income if the service recipient provides a timely Form W-2 or 
1099, as appropriate. These regulations apply to all service recipients 
who transfer property in connection with the performance of services.

DATES: These regulations are effective July 19, 1995.
    For dates of applicability, see Sec. 1.83-6(a)(5).

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 these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)) 
under control number 1545-1448. The estimated annual burden of 
reporting will be reflected in the reporting requirements for Form 
1099-MISC.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, 
Washington, DC 20224, and 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.

Background

    On December 5, 1994, the IRS published in the Federal Register (59 
FR 62370) proposed amendments to the income tax regulations (26 CFR 
part 1) under section 83(h) of the Internal Revenue Code (Code), which 
permits a deduction for property transferred in connection with the 
performance of services.
    Three written comments were received from the public on the 
proposed regulations. No public hearing was held. After consideration 
of the written comments received, the proposed regulations are adopted 
by this Treasury decision with one technical clarification.

Explanation of Provisions

    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 

[[Page 36996]]
actually been included in the service provider's gross income, the 
general rule in former Sec. 1.83-6(a)(1) permitted the deduction for 
the amount ``includible'' in the service provider's gross income. Thus, 
the deduction was allowed to the service recipient even if the service 
provider did not properly report the includible amount. Where the 
service provider was an employee of the service recipient, however, the 
special rule in Sec. 1.83-6(a)(2) provided that a deduction could be 
claimed only if the service recipient (employer) deducted and withheld 
income tax in accordance with section 3402. The special rule was 
designed to ensure that the service recipient's deduction was in fact 
offset by a corresponding inclusion in the service provider's gross 
income. The special rule was limited to employer-employee situations 
because in other situations there was no underlying withholding 
requirement upon which the deduction could be conditioned.
    Taxpayers expressed concern that it was 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. These 
regulations 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 is conditioned on withholding, there no longer 
is a need to have different rules for those who receive services from 
employees and those who receive services from others.
    Under these regulations, the former general rule and special rule 
are replaced by a revised general rule that more closely follows the 
statutory language of section 83(h). The service recipient is 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 provides 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 is deemed to have included the amount in 
gross income for this purpose. Thus, the regulations allow the 
deduction without requiring the service recipient to demonstrate actual 
inclusion by the service provider. If a transfer meets the requirements 
for exemption from reporting for payments aggregating less than $600 in 
any taxable year, or is eligible for any other reporting exemption, no 
reporting is 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, these regulations also permit service recipients to use the 
special rule in the case of transfers to corporate service providers. 
To that end, service recipients are 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 apply to transfers to noncorporate service providers. 
Thus, if a service recipient who transferred property to a corporate 
service provider timely reports that income on Form 1099 (to both the 
service provider and the federal government), the service recipient is 
entitled to rely on the deemed inclusion rule in claiming a deduction 
for the amount of that income. If the transfer meets the requirements 
for exemption from reporting for payments aggregating less than $600 in 
any taxable year, or is eligible for any other reporting exemption 
applicable to a service provider that is not a corporation, no 
reporting is required in order for the service recipient to rely on the 
deemed inclusion rule.
    The deemed inclusion rule may be used only by a service recipient 
whose compliance with applicable Form W-2 or 1099 reporting 
requirements is 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 is required to furnish the employee a Form W-2 reflecting 
that amount by January 31 of year 2 and generally is 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 reports to the employee and the 
government in a timely manner, the employer can rely on the deemed 
inclusion rule to claim a deduction for the amount in year 1. If the 
employee's Form W-2 is not furnished until after January 31 of year 2 
or the government's copy of Form W-2 is not filed until after the last 
day of February of year 2, the employer generally is required to 
demonstrate that the employee actually included the amount in income in 
order to support its deduction of the amount.
    Under these regulations, a special rule applies 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, and solely for the purpose of determining whether an 
employer may use the deemed inclusion rule under these regulations, a 
Form W-2 or W-2c (as appropriate) will be considered timely if it is 
furnished to the employee or former employee, and filed with the 
federal government, 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, these regulations 
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. These regulations 
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.
    Three written comments were received from the public on the 
proposed regulations. One dealt specifically with the withholding 
requirements as they apply to disqualifying dispositions of stock 
received under an employee stock purchase plan and, therefore, is 
beyond the scope of this regulation. The remaining two comments 
generally applauded the proposed amendments, but they both expressed a 
concern that, even after elimination of the withholding requirement as 
a prerequisite for claiming a deduction under section 83(h), there 
remains a statutory requirement, under subtitle C, to withhold income 
tax from compensatory transfers of property. Both commentators 
suggested that regulations be published to exclude transfers of 
property in payment for services from the withholding requirements.
    Treasury and the IRS have carefully considered the comments. 
However, section 3402 of the Code requires every employer making 
payment of wages to deduct and withhold income tax from the wages. 
Section 3401(a) (relating to the definition of wages for income tax 

[[Page 36997]]
withholding purposes), section 3121(a) (relating to the definition of 
wages for FICA tax purposes), and section 3306(b) (relating to the 
definition of wages for FUTA tax purposes) of subtitle C all provide 
that ``wages'' means all remuneration ``including the cash value of all 
remuneration (including benefits) paid in any medium other than cash,'' 
except as specified otherwise in those sections. A transfer of property 
in connection with the performance of services is not one of the 
specified exceptions.
    Therefore, although the withholding requirement is eliminated as a 
prerequisite for claiming a deduction, these regulations do 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 these 
regulations relieves 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.
    These regulations are effective for deductions allowable for 
taxable years beginning on or after January 1, 1995. However, taxpayers 
may apply these regulations 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 the transfer 
and filed the appropriate Form W-2 with the federal government by 
February 28, 1993, then the employer could apply these regulations 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 these regulations, provided that 1992 is still 
an open year.
    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), was withdrawn by the Notice of Proposed 
Rulemaking published on December 5, 1994 (59 FR 62371).

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 Code, the notice of 
proposed rulemaking preceding these regulations 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 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

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are 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. Section 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 for purposes of this paragraph (a)(2) 
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 (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 (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 (4) of this section are effective as set forth 
in Sec. 1.83-8(b).
* * * * * 

[[Page 36998]]


PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 3. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.


Sec. 602.101  [Amended]

    Par. 4. In Sec. 602.101, paragraph (c) is amended by adding the 
entry ``1.83-6 * * * 1545-1448'' in numerical order to the table.

    Approved: June 19, 1995.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95-17494 Filed 7-18-95; 8:45 am]
BILLING CODE 4830-01-U