[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