[Federal Register Volume 65, Number 201 (Tuesday, October 17, 2000)]
[Proposed Rules]
[Pages 61292-61299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26204]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 5f, and 31

[REG-246249-96]
RIN 1545-AW48


Information Reporting Requirements for Certain Payments Made on 
Behalf of Another Person, Payments to Joint Payees, and Payments of 
Gross Proceeds From Sales Involving Investment Advisers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Withdrawal of previous notice of proposed rulemaking; notice of 
proposed rulemaking; and notice of public hearing.

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SUMMARY: This document withdraws a previous notice of proposed 
rulemaking (LR-62-84) published May 29, 1984 (49 FR 22343). This 
document contains proposed regulations under section 6041 that clarify 
who is the payee for information reporting purposes if a check or other 
instrument is made payable to joint payees, provide information 
reporting requirements for escrow agents and other persons making 
payments on behalf of another person, and clarify that the amount to be 
reported paid is the gross amount of the payment. This document also 
contains proposed regulations under section 6045 that remove investment 
advisers from the list of exempt recipients. In addition, this document 
provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by January 17, 
2001. Requests to speak (with outlines of oral comments) at a public 
hearing scheduled for February 7, 2001, at 10 a.m. must be submitted by 
January 24, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-246249-96), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered Monday 
through Friday between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU 
(REG-246249-96), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC, or sent electronically via 
the IRS Internet site at http://www.irs.gov/tax__regs/regslist.html. 
The public hearing will be held in the IRS Auditorium, Seventh Floor, 
Internal Revenue Service Building, 1111 Constitution Avenue, NW., 
Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Nancy L. 
Rose, (202) 622-4910; concerning submission of comments, the hearing, 
and/or to be placed on the building access list to attend the hearing, 
Guy R. Traynor, (202) 622-7190 (not toll-free numbers).

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 of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of Treasury, Office of Information and Regulatory Affairs, 
Washington, DC 20503, with copies to the Internal Revenue Service, 
Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S:O, Washington, DC 
20224. Comments on the collection of information should be received by 
December 19, 2000. Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper operation of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in these proposed regulations is in 
Secs. 1.6041-1(e) and 1.6045-1(c)(3). This information is required to 
determine if taxpayers have properly reported amounts received as 
income. The collection of information is mandatory. The likely 
respondents are businesses and other for-profit institutions.
    The estimate of the reporting burden in proposed Sec. 1.6041-1 is 
reflected in the burden of Form 1099-MISC, Miscellaneous Income, which 
is currently 14 minutes per form. The estimate of the reporting burden 
in proposed Sec. 1.6045-1 is reflected in the burden of Form 1099-B, 
Proceeds of Broker and Barter Exchange Transactions, which is currently 
15 minutes per form.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to the collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background and Explanation of Provisions

1. Proposed Regulations Under Section 6041

    Section 6041 provides that all persons engaged in a trade or 
business that make certain payments in the course of that trade or 
business to another person of $600 or more in a taxable year must 
report the amount of the payments and the name and address of the 
recipient.
    Section 3406(a) provides that a payor must withhold tax from 
reportable

[[Page 61293]]

payments under certain circumstances, for example, if the payee has 
failed to furnish a valid taxpayer identification number to the payor 
in the manner required. ``Reportable payments'' include payments that 
are required to be reported under sections 6041 and 6045. Section 
3406(b)(3)(A) and (C). The party that is responsible for reporting the 
payments under sections 6041 and 6045 is also responsible for any 
backup withholding required under section 3406.
    These proposed regulations address certain issues identified by the 
Commissioner's Information Reporting Program Advisory Committee (IRPAC) 
and take into account comments and information provided by IRPAC 
members representing the banking, real estate, insurance, and 
securities industries.
a. Payments to Joint Payees
    The proposed regulations clarify the definition of fixed and 
determinable income in Sec. 1.6041-1(c) when a payment is made payable 
to joint payees. This issue was discussed in papers presented at IRPAC 
meetings in May 1994 and May 1995. The regulations provide that a 
payment made jointly to two or more payees may be fixed and 
determinable income to one payee even though the payment is not fixed 
and determinable income to another payee. For example, when a payment 
in consideration for services is made payable to joint payees, one of 
whom is the service provider, an information return must be made 
showing the service provider as the payee if the payment is fixed and 
determinable income to the service provider, even if the payment is not 
fixed and determinable income to the other payee. See, e.g., Situation 
2 of Rev. Rul. 70-608 (1970-2 C.B. 286).
b. Identification of Payor
    A payment reportable under section 6041 may be made by a person on 
behalf of another person that is the actual source of the funds. Under 
certain circumstances this so-called middleman, and not the person that 
provided the funds, is the payor obligated to report the payment under 
section 6041. See, e.g., Rev. Rul. 93-70 (1993-2 C.B. 294).
    Consistent with Rev. Rul. 93-70, the proposed regulations add a new 
paragraph (e)(1) to Sec. 1.6041-1 that provides that a person that 
makes a payment on behalf of another person and performs a management 
or oversight function in connection with, or has a significant economic 
interest in, the payment must report under section 6041. A management 
or oversight function is an activity that is more than merely 
administrative or ministerial. For example, a person that merely writes 
checks at the direction of others in connection with a transaction, 
sometimes referred to as a paying agent, is performing only an 
administrative or ministerial function and is not a payor. In contrast, 
a person that exercises discretion or supervision in connection with a 
payment is performing a management or oversight function and is a 
payor. A significant economic interest in a payment is an economic 
interest that would be compromised if the payment were not made. For 
example a bank has a significant economic interest in a payment to a 
contractor when damage occurs to property securing a mortgage held by 
the bank. With this standard, which was also discussed in the IRPAC 
papers of May 1994 and May 1995, the proposed regulations attempt to 
replace disparate revenue rulings with a consistent and easily 
administrable rule that can be applied to a variety of factual 
situations involving middlemen.
    Section 1.6041-1(e)(2) of the proposed regulations provides an 
exception to the general rule of Sec. 1.6041-1(e)(1) by referencing the 
procedures in Rev. Proc. 84-33 (1984-1 C.B. 502) for an optional method 
for payors to designate a paying agent to file information returns and 
backup withhold.
    The proposed regulations include examples, derived primarily from 
revenue rulings and private letter rulings, which are intended to be 
all-inclusive. Rulings that are factually encompassed by the proposed 
regulations will be obsoleted. Comments are requested identifying other 
factually relevant rulings or suggesting appropriate additional 
examples.
    The proposed regulations make two changes to Sec. 1.6041-3 (to be 
effective January 1, 2001). They revise Sec. 1.6041-3(d) to conform the 
cross-reference to Sec. 1.6041-1 to the language effective January 1, 
2001, and to clarify the current rule that real estate agents who 
manage rental property and make payments of rent to landlords are 
payors and continue to be subject to the general requirements of 
Sec. 1.6041-1. The proposed regulations also remove Sec. 1.6041-3(n), 
which provides an exception to the information reporting requirements 
of section 6041 for amounts that a bank or similar institution collects 
on behalf of, and pays over or credits to the account of, the actual 
owner of the funds, but only if it does not collect the items on a 
regular and continuing basis. Rev. Rul. 77-53 (1977-1 C.B. 368) further 
restricted this limitation to banks that collect items on a regular and 
continuing basis and also assume a management function or perform more 
than the mere collection and payment or crediting of funds to a 
customer's account. This holding is consistent with the ``management 
and oversight'' standard of the proposed regulations. Accordingly, 
Example 11 of the proposed regulations preserves the holding of Rev. 
Rul. 77-53. Section 1.6041-3(n) is removed to avoid confusion and 
redundancy. However, its removal will change current requirements by 
imposing a reporting requirement on a bank that collects and pays or 
credits funds on behalf of a customer on an infrequent or isolated 
basis if it performs a management or oversight function in connection 
with the payment, a transaction that is currently within the 
Sec. 1.6041-3(n) exception.
    The proposed regulations also remove paragraphs (b) and (c) of 
Sec. 31.3406(a)-2. These paragraphs provide a standard for information 
reporting by a so-called middleman that is inconsistent with the 
standard in the proposed regulations. As amended, Sec. 31.3406(a)-2 
reiterates the general rule of section 3406(h) (also stated in 
Sec. 35a.9999-3, Q & A 1) that the definition of payor for information 
reporting purposes determines who is the payor for backup withholding 
purposes as well.
c. Amount To Be Reported When Fees, Expenses or Commissions are 
Deducted From a Payment
    The proposed regulations add a new paragraph (f) to Sec. 1.6041-1 
that clarifies that the amount to be reported as paid to a payee is the 
gross amount of the payment or payments before fees, commissions, 
expenses, or other amounts owed by the payee to another person have 
been deducted. See, e.g., Rev. Rul. 67-197 (1967-1 C.B. 319); Rev. Rul. 
54-571 (1954-2 C.B. 235). The rule, which applies whether the payment 
is made jointly or separately to the payee and another person, is also 
cross-referenced in Example 6 and Example 8 of Sec. 1.6041-1(e)(3).
    The rule of Sec. 1.6041-1(f) is illustrated by two examples 
involving payment of taxable damages by a defendant to a plaintiff. 
These examples, read with Example 8 of Sec. 1.6041-1(e)(3), are, in 
part, inconsistent with Example 2 of the proposed regulations at 
Sec. 1.6045-5(f), published on May 21, 1999 (64 FR 27730). Example 2 
states that a defendant that pays a settlement to a plaintiff and knows 
the amount of the plaintiff's attorney fees included in the

[[Page 61294]]

payment is required to report the payment of the attorney fees under 
section 6041 and not the gross proceeds under section 6045(f). However, 
under Sec. 1.6041-1(e) of these regulations, the defendant is not 
exercising management or oversight in connection with, and therefore is 
not required to make an information return under section 6041 for, the 
payment to the attorney. The plaintiff, not the defendant, is required 
to report the payment of attorney fees to plaintiff's attorney under 
section 6041 (assuming that the payment is made in the course of the 
plaintiff's trade or business and that the other requirements of 
section 6041 apply). Accordingly, Example 2 in the final regulations 
under section 6045(f) will be revised to provide that the defendant is 
not required to make an information return under section 6041 but is 
required to make an information return under section 6045(f), even if 
the defendant knows the amount of plaintiff's attorney fees.
d. Revenue Rulings To Become Obsolete
    As discussed above, the proposed regulations apply to the factual 
situations addressed in the following revenue rulings, which will 
become obsolete:

Rev. Rul. 93-70 (1993-2 C.B. 294)
Rev. Rul. 85-50 (1985-1 C.B. 345)
Rev. Rul. 77-53 (1977-1 C.B. 368)
Rev. Rul. 73-232 (1973-1 C.B. 541)
Rev. Rul. 70-608, Situations 1, 2, and 5 (1970-2 C.B. 286)
Rev. Rul. 69-595 (1969-2 C.B. 242)
Rev. Rul. 67-197 (1967-1 C.B. 319)
Rev. Rul. 65-129 (1965-1 C.B. 519)
Rev. Rul. 64-36 (1964-1 C.B. 446)
Rev. Rul. 59-328 (1959-2 C.B. 379)
Rev. Rul. 55-606 (1955-2 C.B. 489)
Rev. Rul. 54-571 (1954-2 C.B. 235)

2. Proposed Regulations Under Section 6045

    Section 6045 provides that a broker must file an information return 
showing the name and address of the broker's customer and other 
details, such as the amount of the gross proceeds of the transaction, 
as the Secretary may require. Section 6045(c) defines a broker as a 
dealer, a barter exchange, or any other person who, for a 
consideration, regularly acts as a middleman with respect to property 
or services.
    Section 1.6045-1(a)(2) provides that a customer is the person who 
makes a sale effected by a broker, if the broker acts as (i) an agent 
for the customer in the sale, (ii) a principal in the sale, or (iii) 
the party in the sale responsible for paying or crediting the proceeds 
to the customer. Under Sec. 1.6045-1(h), a broker must treat the person 
whose name appears on the broker's books and records as the principal.
    Section 5f.6045-1(c)(3), also published as proposed regulations (49 
FR 22343), provides that no return of information is required with 
respect to a sale effected for a customer that is an exempt recipient. 
Among the categories of exempt recipients is a person registered under 
the Investment Advisers Act of 1940 who regularly acts as a broker (an 
investment adviser).
    Section 5f.6045-1(c)(3)(iii) provides that, in a cash on delivery 
or similar transaction, only the broker that receives the gross 
proceeds against delivery of the securities sold is required to report 
a sale, unless the broker's customer is another broker (a second-party 
broker) that is an exempt recipient. In that case, only the second-
party broker is required to report.
    One effect of these provisions is to shift the reporting 
requirement in a cash on delivery transaction from the broker that 
receives the gross proceeds against delivery of the securities to an 
investment adviser. For example, in Sec. 5f.6045-1(c)(4) Example (4), 
an investment adviser instructs a broker/dealer to sell securities 
owned by the investment adviser's customer and to pay the proceeds of 
the sale to a custodian bank. The custodian bank is instructed to 
deliver the securities to the broker/dealer against delivery of the 
proceeds of the sale. The investment adviser, and not the broker/dealer 
or the custodian bank, is required to report the payment of the 
proceeds of the sale to the investment adviser's customer, because (1) 
the broker/dealer paid the gross proceeds of the sale to the custodian 
bank against delivery of the securities sold, and (2) the custodian 
bank's customer was the investment adviser, an exempt recipient.
    Commentators on the proposed regulations objected to the imposition 
of the reporting obligation under section 6045(a) on investment 
advisers because (1) investment advisers generally do not have first-
hand knowledge that a sale has been completed, and (2) investment 
advisers generally do not handle the proceeds of a sale and, 
consequently, cannot comply with the backup withholding requirements of 
section 3406. Investment adviser reporting issues were also the subject 
of IRPAC papers presented at meetings in November 1995 and October 
1997.
    These proposed regulations withdraw the 1984 proposed regulations. 
In general, they propose to incorporate the provisions of Sec. 5f.6045-
1 into Sec. 1.6045-1(c)(3) and (4). The proposed regulations also 
remove investment advisers from the list of exempt recipients and 
revise current Sec. 5f.6045-1(c)(4) Examples 4 and 5 to clarify that, 
under the revised rules, an investment adviser that initiates a sale on 
behalf of a customer is required to make a return of information only 
if the sale relates to an investment account in the investment 
adviser's name (i.e., the identity of the customer is not disclosed to 
the account custodian).

Proposed Effective Date

    The provisions of these regulations under sections 6041 and 3406 
are proposed to be applicable for payments made on or after the 
beginning of the first calendar year that begins after these 
regulations are published in the Federal Register as final regulations. 
The provisions of these regulations under section 6045 are proposed to 
be applicable for sales effected on or after the beginning of the first 
calendar year that begins after the date these regulations are 
published in the Federal Register as final regulations.

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) does not apply to these regulations. An initial 
regulatory flexibility analysis has been prepared for the collection of 
information in this notice of proposed rulemaking under 5 U.S.C. 
section 603. The analysis is set forth in this preamble under the 
heading ``Initial Regulatory Flexibility Analysis.'' 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.

Initial Regulatory Flexibility Analysis

    The collection of information proposed in Sec. 1.6041-1(e) is 
needed to clarify the requirements for filing an information return 
under section 6041 when a person makes a payment on behalf of another 
person or to joint payees. The objectives of the proposed regulations 
are to provide uniform, practicable, and administrable rules under 
section 6041 for persons making payments on behalf of another person or 
to joint payees. The types of small entities to which the proposed 
regulations may apply are small businesses. An estimate of the number 
of small entities affected is not feasible because of the large variety 
of entities

[[Page 61295]]

and transactions to which the proposed regulations may apply. However, 
in 1997 a total of 73,273,621 Forms 1099-MISC were filed with the IRS. 
The number of 1997 Forms 1099-MISC that related to transactions that 
involved payments made on behalf of another person or to joint payees 
cannot be determined. The current estimated reporting burden relating 
to Form 1099-MISC is 14 minutes per form. No special professional 
skills are necessary for preparation of the reports or records. There 
are no known Federal rules that duplicate, overlap, or conflict with 
these proposed regulations. The regulations proposed are considered to 
have the least economic impact on small entities of all alternatives 
considered.
    The collection of information in proposed Sec. 1.6045-1(c)(3) will 
not have a significant economic impact on a substantial number of small 
entities. The proposed regulations will relieve investment advisers of 
the requirement to make information returns under section 6045(a), and 
few, if any, financial custodians that may be affected by the 
regulations are small entities.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any electronic or written comments (a 
signed original and eight (8) copies) that are submitted timely (in the 
manner described in the ADDRESSES caption) to the IRS. The IRS and 
Treasury Department request comments on the clarity of the proposed 
rules and how they may be made easier to understand. All comments will 
be available for public inspection and copying.
    A public hearing has been scheduled for February 7, 2001, beginning 
at 10 a.m. in the IRS Auditorium, Seventh Floor, Internal Revenue 
Building, 1111 Constitution Avenue, NW., Washington, DC. Due to 
building security procedures, visitors must enter at the 10th Street 
entrance, located between Constitution and Pennsylvania Avenues, NW. In 
addition, all visitors must present photo identification to enter the 
building.
    Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 15 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of the preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written 
comments and an outline of the topics to be discussed and the time to 
be devoted to each topic (signed original and eight (8) copies) by 
January 24, 2001. A period of 10 minutes will be allotted to each 
person for making comments. An agenda showing the scheduling of the 
speakers will be prepared after the deadline for receiving outlines has 
passed. Copies of the agenda will be available free of charge at the 
hearing.

Drafting Information

    The principal author of these regulations is Donna M. Crisalli, 
Office of the Associate Chief Counsel (Income Tax & Accounting). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects

26 CFR Parts 1 and 5f

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Railroad retirement, 
Reporting and recordkeeping requirements, Social security, Unemployment 
compensation.

Proposed Amendments to the Regulations

    Accordingly, under the authority of 26 U.S.C. 7805, the notice of 
proposed rulemaking (LR-62-84) amending 26 CFR part 1 that was 
published in the Federal Register on May 29, 1984 (49 FR 22343) is 
withdrawn. In addition, 26 CFR parts 1, 5f, and 31 are proposed to be 
amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read in part as follows:


    Authority: 26 U.S.C. 7805 * * *.
    Section 1.6041-1 also issued under 26 U.S.C. 6041(a). * * *

    Par. 2. Section 1.6041-1 is amended by:
    1. Removing the language ``paragraph (g)'' in the second sentence 
of paragraph (b)(1) and adding the language ``paragraph (i)'' in its 
place.
    2. Adding two sentences after the fourth sentence of paragraph (c).
    3. Redesignating paragraphs (e) through (g) as paragraphs (g) 
through (i).
    4. Adding new paragraphs (e) and (f), and (j).
    The additions and revisions read as follows:


Sec. 1.6041-1  Return of information as to payments of $600 or more.

* * * * *
    (c) * * * A payment made jointly to two or more payees may be fixed 
and determinable income to one payee even though the payment is not 
fixed and determinable income to another payee. For example, property 
insurance proceeds paid jointly to the owner of damaged property and to 
a contractor that repairs the property may be fixed and determinable 
income to the contractor but not fixed and determinable income to the 
owner. * * *
* * * * *
    (e) Payment made on behalf of another person--(1) In general. A 
person that makes a payment in the course of its trade or business on 
behalf of another person is the payor that must make a return of 
information under this section with respect to that payment if the 
payment is described in paragraph (a) of this section and, under all 
the facts and circumstances, that person--
    (i) Performs management or oversight functions (i.e., performs more 
than mere administrative or ministerial functions) in connection with 
the payment; or
    (ii) Has a significant economic interest in the payment.
    (2) Optional method to report. A person that makes a payment on 
behalf of another person but is not required to make an information 
return under paragraph (e)(1) of this section may elect to do so 
pursuant to the procedures established in Rev. Proc. 84-33 (1984-1 C.B. 
502) (optional method for a paying agent to report and deposit amounts 
withheld for payors under the statutory provisions of backup 
withholding) (see Sec. 601-601(d)(2) of this chapter).
    (3) Examples. The provisions of this paragraph (e) are illustrated 
by the following examples:

    Example 1.  Bank B provides financing to C, a real estate 
developer, for a construction project. B puts the funds in an escrow 
account and makes disbursements from the account for labor, 
materials, services, and other expenses related to the construction 
project. In connection with the payments, B performs the following 
functions on behalf of C: approves payments to the general 
contractor or subcontractors; ensures that loan proceeds are 
properly applied and that all approved bills are properly paid to 
avoid mechanics or materialmen's liens; conducts site inspections to 
determine whether work has been completed (but does not check the 
quality of the work); evaluates and assesses the cost of the 
project, including costs of changes; and communicates resulting 
concerns to C or to the general contractor so that modifications can 
be made or additional funding obtained. B is performing

[[Page 61296]]

management or oversight functions in connection with the payment and 
is subject to the information reporting requirements of section 6041 
with respect to payments from the escrow fund.
    Example 2.  Mortgage company D holds a mortgage on business 
property owned by E. When the property is damaged by a storm E's 
insurance company issues a check payable to both D and E in 
settlement of E's claim. Pursuant to the contract between D and E, D 
holds the insurance proceeds in an escrow account and makes 
disbursements according to E's instructions to contractors and 
subcontractors performing repairs on the property. D is not 
performing management or oversight functions, but D has a 
significant economic interest in the payments because the purpose of 
the arrangement is to ensure that property on which D holds a 
mortgage is repaired or replaced. D is subject to the information 
reporting requirements of section 6041 with respect to the payments 
to contractors.
    Example 3.  Settlement agent F provides real estate closing 
services to real estate brokers and agents. F deposits money 
received from the buyer or lender in an escrow account and makes 
payments from the account to real estate agents or brokers, 
appraisers, land surveyors, building inspectors, or similar service 
providers according to the provisions of the real estate contract 
and written instructions from the lender. F may also make 
disbursements pursuant to verbal instructions of the seller or 
purchaser at closing. F is not performing management or oversight 
functions and does not have a significant economic interest in the 
payments, and is not subject to the information reporting 
requirements of section 6041. For the rules relating to F's 
obligation to report the gross proceeds of the sale, see section 
6045(e) and Sec. 1.6045-4.
    Example 4.  Assume the same facts as in Example 3, except that 
the seller instructs F to hire a contractor to perform repairs on 
the property. F selects the contractor, negotiates the cost, 
monitors the progress of the project, and inspects the work to 
ensure it complies with the contract. With respect to the payments 
to the contractor, F is performing management or oversight functions 
and is subject to the information reporting requirements of section 
6041.
    Example 5.  Real estate agent G manages certain rental property 
on behalf of property owner H. In addition to collecting the rent G 
arranges for various services that are needed to maintain the 
property (e.g., painting, repairs, lawn mowing, etc.), determines 
that the services have been satisfactorily performed, and pays the 
service providers. G is performing management or oversight functions 
and is subject to the information reporting requirements of section 
6041 with respect to the payments to the service providers. With 
respect to the payments of rent to H, see Sec. 1.6041-3(d).
    Example 6.  Literary agent J receives a payment from publisher L 
of fees earned by J's client, author K. J deposits the payment into 
a bank account in J's name and pays K the net amount after 
subtracting J's commission. From time to time and as directed by K, 
J also makes payments to attorneys, managers, and other third 
parties from these funds for services rendered to K. J does not 
order or direct the provision of services by the third parties to K, 
and J exercises no discretion in making the payments to them. J is 
not performing management or oversight functions and does not have a 
significant economic interest in the payments, and is not subject to 
the information reporting requirements of section 6041 in connection 
with the payments to K or to the third parties. For the rules 
relating to L's obligation to report the payment of the fees to K, 
see paragraphs (a)(1)(i) and (f) of this section. For the rules 
relating to K's obligation to report the payment of the commission 
to J and the payments to the third parties for services, see 
paragraphs (a)(1)(i) and (d)(2) of this section.
    Example 7.  Attorney P deposits into a client trust fund a 
settlement payment from R, the defendant in a breach of contract 
action for lost profits in which P represented plaintiff Q. P makes 
payments from the client trust fund to service providers such as 
expert witnesses and private investigators for expenses incurred in 
the litigation. P decides whom to hire, negotiates the amount of 
payment, and determines that the services have been satisfactorily 
performed. In the event of a dispute with a service provider, P 
withholds payment until the dispute is settled. With respect to 
payments to the service providers P is performing management or 
oversight functions and is subject to the information reporting 
requirements of section 6041.
    Example 8. Assume the same facts as in Example 7, except that 
after paying the service providers and deducting his legal fee, P 
pays Q the remaining funds that P had received from the settlement 
with R. With respect to the payment to Q, P is not performing 
management or oversight functions and does not have a significant 
economic interest in the payment, and is not subject to the 
information reporting requirements of section 6041. For the rules 
relating to R's obligation to report the payment of the settlement 
proceeds to P, see section 6045(f) and Sec. 1.6045-5. For the rules 
relating to R's obligation to report the payment of the settlement 
proceeds to Q, see paragraphs (a)(1)(i) and (f) of this section. For 
the rules relating to Q's obligation to report the payment of 
attorney fees to P, see paragraphs (a)(1)(i) and (d)(2) of this 
section.
    Example 9. Medical insurer S operates as the administrator of a 
health care program under a contract with a state. S makes payments 
of government funds to health care providers who provide care to 
eligible patients. S receives and reviews claims submitted by 
patients or health care providers, determines if the claims meet all 
the requirements of the program (e.g., that the care is authorized 
and that the patients are eligible beneficiaries), and determines 
the amount of payment. S is performing management or oversight 
functions and is subject to the information reporting requirements 
of section 6041 with respect to the payments.
    Example 10. Race track employee T holds deposits made by horse 
owner U in a special escrow account in U's name. U enters into a 
contract with jockey V to ride U's horse in a race at the track. As 
directed by U, T pays V the fee for riding U's horse from U's escrow 
account. T is not performing management or oversight functions and 
does not have a significant economic interest in the payment, and is 
not subject to the information reporting requirements of section 
6041. For the rules relating to U's obligation to report the payment 
of the fee to V, see paragraph (a)(1)(i) of this section.
    Example 11. Bank W collects payments from mortgagors and remits 
the amounts to the mortgagees or credits their accounts. W performs 
no other task with respect to the mortgage payments and has no other 
interest in the accounts. Although W collects payments on a regular 
and continuing basis, W is not performing management or oversight 
functions and does not have a significant economic interest in the 
payments, and is not subject to the information reporting 
requirements of section 6041 with respect to the payments.

    (f) Amount to be reported when fees, expenses or commissions are 
deducted--(1) In general. The amount to be reported as paid to a payee 
is the gross amount of the payment or payments before fees, 
commissions, expenses, or other amounts owed by the payee to another 
person have been deducted, whether the payment is made jointly or 
separately to the payee and the other person.
    (2) Examples. The provisions of this paragraph (f) are illustrated 
by the following examples:

    Example 1. Attorney P represents client Q in a breach of 
contract action for lost profits against defendant R. R settles the 
case for $100,000 damages and $40,000 for attorney fees. R issues a 
check payable to P and Q in the amount of $140,000. R is required to 
make an information return reporting a payment to Q in the amount of 
$140,000.
    Example 2. Assume the same facts as in Example 1, except that R 
issues a check to Q for $100,000 and a separate check to P for 
$40,000. R is required to make an information return reporting a 
payment to Q in the amount of $140,000.

* * * * *
    (j) Effective date. The provisions of paragraphs (b), (c), (e), and 
(f) of this section apply to payments made on or after the beginning of 
the first calendar year that begins after these regulations are 
published in the Federal Register as final regulations.


Sec. 1.6041-3  [Amended]

    Par. 3. Section 1.6041-3, as in effect on January 1, 2001, is 
amended as follows:
    1. In paragraph (d), removing the language ``(but the agent is 
subject to the requirements of paragraph (a)(1)(ii) and (2)(ii) of 
Sec. 1.6041-1)'' and adding the language ``(but the agent is required 
to report payments of rent to the landlord

[[Page 61297]]

in accordance with Sec. 1.6041-1)(a)(1)(i)(B) and (2)'' in its place.
    2. Removing paragraph (n) and redesignating paragraphs (o) through 
(q) as paragraphs (n) through (p).
    Par. 4. Section 1.6045-1, as in effect on January 1, 2001, is 
amended as follows:
    1. Revising paragraph (a) introductory text.
    2. Revising paragraphs (c)(3) and (c)(4).
    3. Removing the language ``5f.6045-1(c)(3)(ii) of this chapter'' 
and adding the language ``paragraph (c)(3)(iii) of this section'' in 
its place in each place it appears in paragraph (g)(4) Examples 1, 4, 
5, 6, and 7(i).
    The revisions read as follows:


Sec. 1.6045-1  Returns of information of brokers and barter exchanges.

    (a) Definitions. The following definitions apply for purposes of 
this section and Sec. 1.6045-2:
* * * * *
    (c) * * *
    (3) Exceptions--(i) Sales effected for exempt recipients--
    (A) In general. No return of information is required with respect 
to a sale effected for a customer that is an exempt recipient under 
paragraph (c)(3)(i)(B) of this section.
    (B) Exempt recipient defined. The term exempt recipient means--
    (1) A corporation as defined in section 7701(a)(3), whether 
domestic or foreign;
    (2) An organization exempt from taxation under section 501(a) or an 
individual retirement plan;
    (3) The United States or a State, the District of Columbia, a 
possession of the United States, a political subdivision of any of the 
foregoing, a wholly-owned agency or instrumentality of any one or more 
of the foregoing, or a pool or partnership composed exclusively of any 
of the foregoing;
    (4) A foreign government, a political subdivision thereof, an 
international organization, or any wholly-owned agency or 
instrumentality of the foregoing;
    (5) A foreign central bank of issue as defined in Sec. 1.895-
1(b)(1) (i.e., a bank that is by law or government sanction the 
principal authority, other than the government itself, issuing 
instruments intended to circulate as currency);
    (6) A dealer in securities or commodities registered as such under 
the laws of the United States or a State;
    (7) A futures commission merchant registered as such with the 
Commodity Futures Trading Commission;
    (8) A real estate investment trust (as defined in section 856);
    (9) An entity registered at all times during the taxable year under 
the Investment Company Act of 1940 (15 U.S.C. 80a-1, et seq.);
    (10) A common trust fund (as defined in section 584(a)); or
    (11) A financial institution such as a bank, mutual savings bank, 
savings and loan association, building and loan association, 
cooperative bank, homestead association, credit union, industrial loan 
association or bank, or other similar organization.
    (C) Exemption certificate. A broker may treat a person described in 
paragraph (c)(3)(i)(B) of this section as an exempt recipient based on 
a properly completed exemption certificate (as provided in 
Sec. 31.3406(h)-3) of this chapter or on the broker's actual knowledge 
that the payee is a person described in paragraph (c)(3)(i)(B) of this 
section. A broker may require an exempt recipient to file a properly 
completed exemption certificate and may treat an exempt recipient that 
fails to do so as a recipient that is not exempt.
    (ii) Excepted sales. No return of information is required with 
respect to a sale effected by a broker for a customer if the sale is an 
excepted sale. For this purpose, a sale is an excepted sale if it is so 
designated by the Internal Revenue Service in a revenue ruling or 
revenue procedure (see Sec. 601.601(d)(2) of this chapter).
    (iii) Multiple brokers. If a broker is instructed to initiate a 
sale by a person that is an exempt recipient described in paragraph 
(c)(3)(i)(B)(6), (7), or (11) of this section, no return of information 
is required with respect to the sale by that broker. In a redemption of 
stock or retirement of securities, only the broker responsible for 
paying the holder redeemed or retired, or crediting the gross proceeds 
on the sale to that holder's account, is required to report the sale.
    (iv) Cash on delivery transactions. In the case of a sale of 
securities through a cash on delivery account, a delivery versus 
payment account, or other similar account or transaction, only the 
broker that receives the gross proceeds from the sale against delivery 
of the securities sold is required to report the sale. If, however, the 
broker's customer is another broker (second-party broker) that is an 
exempt recipient, then only the second-party broker is required to 
report the sale.
    (v) Fiduciaries and partnerships. No return of information is 
required with respect to a sale effected by a custodian or trustee in 
its capacity as such or a redemption of a partnership interest by a 
partnership provided the sale is otherwise reported by the custodian or 
trustee on a properly filed Form 1041, or the redemption is otherwise 
reported by the partnership on a properly filed Form 1065, and all 
Schedule K-1 reporting requirements are satisfied.
    (vi) Sales at issue price. No return of information is required 
with respect to a sale of an interest in a regulated investment company 
(within the meaning of section 851) that computes its current price per 
share for purposes of distributions, redemptions, and purchases so as 
to stabilize the price per share at a constant amount that approximates 
its issue price or the price at which it was originally sold to the 
public.
    (vii) Obligor payments on certain obligations. No return of 
information is required with respect to payments representing obligor 
payments on--
    (A) Nontransferable obligations (including savings bonds, savings 
accounts, checking accounts, and NOW accounts);
    (B) Obligations as to which the entire gross proceeds are reported 
by the broker on Form 1099 under provisions of the Internal Revenue 
Code other than section 6045 (including stripped coupons issued prior 
to July 1, 1982); or
    (C) Retirement of short-term obligations (i.e., obligations with a 
fixed maturity date not exceeding 1 year from the date of issue) that 
have original issue discount, as defined in section 1273(a)(1).
    (viii) Callable obligations. No return of information is required 
with respect to payments representing obligor payments on demand 
obligations that also are callable by the obligor and that have no 
premium or discount.
    (ix) Foreign currency. No return of information is required with 
respect to a sale of foreign currency other than a sale pursuant to a 
forward contract or regulated futures contract that requires delivery 
of foreign currency.
    (x) Fractional share. No return of information is required with 
respect to a sale of a fractional share of stock if the gross proceeds 
on the sale of the fractional share are less than $20.
    (xi) Certain retirements. No return of information is required from 
an issuer or its agent with respect to the retirement of book entry or 
registered form obligations as to which the relevant books and records 
indicate that no interim transfers have occurred.
    (xii) Cross reference. For an exception for certain sales of 
agricultural commodities and certificates issued by the Commodity 
Credit Corporation after January 1, 1993, see paragraph (c)(7) of this 
section.
    (xiii) Effective date. The provisions of this paragraph (c)(3) 
apply for sales effected on or after the beginning of the

[[Page 61298]]

first calendar year that begins after the date these regulations are 
published in the Federal Register as final regulations.
    (4) Examples. The following examples illustrate the application of 
the rules in paragraph (c)(3) of this section:

    Example 1. P, an individual who is not an exempt recipient, 
places an order with B, a person generally known in the investment 
community to be a federally registered broker/dealer, to sell P's 
stock in a publicly traded corporation. B, in turn, places an order 
to sell the stock with C, a second broker, which will execute the 
sale. B discloses to C the identity of the customer placing the 
order. C is not required to make a return of information with 
respect to the sale because C was instructed by B, an exempt 
recipient as defined in paragraph (c)(3)(i)(B)(6) of this section, 
to initiate the sale. B is required to make a return of information 
with respect to the sale because P is B's customer and is not an 
exempt recipient.
    Example 2. Assume the same facts as in Example 1 except that B 
has an omnibus account with C so that B does not disclose to C 
whether the transaction is for a customer of B or for B's own 
account. C is not required to make a return of information with 
respect to the sale because C was instructed by B, an exempt 
recipient as defined in paragraph (c)(3)(i)(B)(6) of this section, 
to initiate the sale. B is required to make a return of information 
with respect to the sale because P is B's customer and is not an 
exempt recipient.
    Example 3. D, an individual who is not an exempt recipient, 
enters into a cash on delivery stock transaction by instructing K, a 
federally registered broker/dealer, to sell stock owned by D, and to 
deliver the proceeds to L, a custodian bank. Concurrently with the 
above instructions, D instructs L to deliver D's stock to K (or K's 
designee) against delivery of the proceeds from K. The records of 
both K and L with respect to this transaction show an account in the 
name of D. Pursuant to paragraph (h)(1) of this section, D is 
considered the customer of K and L. Under paragraph (c)(3)(iv) of 
this section, K is not required to make a return of information with 
respect to the sale because K will pay the gross proceeds to L 
against delivery of the securities sold. L is required to make a 
return of information with respect to the sale because D is L's 
customer and is not an exempt recipient.
    Example 4. Assume the same facts as in Example 3 except that E, 
a federally registered investment adviser, instructs K to sell stock 
owned by D and to deliver the proceeds to L. Concurrently with the 
above instructions, E instructs L to deliver D's stock to K (or K's 
designee) against delivery of the proceeds from K. The records of 
both K and L with respect to the transaction show an account in the 
name of D. Pursuant to paragraph (h)(1) of this section, D is 
considered the customer of K and L. Under paragraph (c)(3)(iv) of 
this section, K is not required to make a return of information with 
respect to the sale because K will pay the gross proceeds to L 
against delivery of the securities sold. L is required to make a 
return of information with respect to the sale because D is L's 
customer and is not an exempt recipient.
    Example 5. Assume the same facts as in Example 4 except that the 
records of both K and L with respect to the transaction show an 
account in the name of E. Pursuant to paragraph (h)(1) of this 
section, E is considered the customer of K and L. Under paragraph 
(c)(3)(iv) of this section, K is not required to make a return of 
information with respect to the sale because K will pay the gross 
proceeds to L against delivery of the securities sold. L is required 
to make a return of information with respect to the sale because E 
is L's customer and is not an exempt recipient. E is required to 
make a return of information with respect to the sale because D is 
E's customer and is not an exempt recipient.
    Example 6. F, an individual who is not an exempt recipient, owns 
bonds that are held by G, a federally registered broker/dealer, in 
an account for F with G designated as nominee for F. Upon the 
retirement of the bonds, the gross proceeds are automatically 
credited to the account of F. G is required to make a return of 
information with respect to the retirement because G is the broker 
responsible for making payments of the gross proceeds to F.

* * * * *


Sec. 1.6045-2  [Amended]

    Par. 5. In Sec. 1.6045-2, paragraph (b)(2)(ii), is amended by 
removing the language ``Sec. 5f.6045-1(c)(3)(i)(B) of the Temporary 
Income Tax Regulations under the Tax Equity and Fiscal Responsibility 
Act of 1982'' and adding the language ``Sec. 1.6045-1(c)(3)(i)(B)'' in 
its place.
    Par. 6. In Sec. 1.6049-4, as in effect on January 1, 2001, 
paragraph (a)(2) is revised to read as follows:


Sec. 1.6049-4  Return of information as to interest paid and original 
issue discount includible in gross income after December 31, 1982.

    (a) * * *
    (2) Payor. For payments made on or after the beginning of the first 
calendar year that begins after the date these regulations are 
published in the Federal Register as final regulations, a payor is a 
person described in paragraph (a)(2)(i) or (ii) of this section.
    (i) Every person who makes a payment of the type and of the amount 
subject to reporting under this section (or under an applicable section 
under this chapter) to any other person during a calendar year.
    (ii) Every person who collects on behalf of another person payments 
of the type and of the amount subject to reporting under this section 
(or under an applicable section under this chapter), or who otherwise 
acts as a middleman (as defined in paragraph (f)(4) of this section) 
with respect to such payment.
* * * * *

PART 5f--TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX EQUITY AND 
FISCAL RESPONSIBILITY ACT OF 1982

    Par. 7. The authority citation for part 5f is amended by removing 
the authority citation for Sec. 5f.6045-1 to read in part as follows:

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


Sec. 5f.6045-1  [Removed]

    Par. 8. Section 5f.6045-1 is removed.

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

    Par. 9. The authority citation for part 31 continues to read in 
part as follows:

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

    Par. 10. Section 31.3406-0 is amended by:
    1. Revising the entry for Sec. 31.3406(a)-2, paragraph (b).
    2. Adding an entry for Sec. 31.3406(a)-2, paragraph (d).
    The revision and addition read as follows:


Sec. 31.3406-0  Outline of the backup withholding regulations.

* * * * *


Sec. 31.3406(a)-2  Definition of payors obligated to backup withhold.

* * * * *
    (b) Persons treated as payors.
* * * * *
    (d) Effective date.
* * * * *
    Par. 11. Section 31.3406(a)-2 is revised to read as follows:


Sec. 31.3406(a)-2  Definition of payors obligated to backup withhold.

    (a) In general. Payor means the person that is required to make an 
information return under section 6041, 6041A(a), 6042, 6044, 6045, 
6049, 6050A, or 6050N, with respect to any reportable payment (as 
described in section 3406(b)), or that is described in paragraph (b) of 
this section.
    (b) Persons treated as payors. The following persons are treated as 
payors for purposes of section 3406--
    (1) A grantor trust established after December 31, 1995, all of 
which is owned by two or more grantors, and for this purpose spouses 
filing a joint return are considered to be one grantor;
    (2) A grantor trust with ten or more grantors established on or 
after January 1, 1984 but before January 1, 1996;

[[Page 61299]]

    (3) A common trust fund; and
    (4) A partnership or an S corporation that makes a reportable 
payment.
    (c) Persons not treated as payors. The following persons are not 
treated as payors for purposes of section 3406 if the person does not 
have a reporting obligation under the section on information reporting 
to which the payment relates--
    (1) A trust (other than a grantor trust as described in paragraph 
(b)(1) or (2) of this section) that files a Form 1041 containing 
information required to be shown on an information return, including 
amounts withheld under section 3406; or
    (2) A partnership making a payment of a distributive share or an S 
corporation making a similar distribution.
    (d) Effective date. The provisions of this section apply to 
payments made on or after the beginning of the first calendar year that 
begins after these regulations are published in the Federal Register as 
final regulations.


Sec. 31.3406(a)-4  [Amended]

    Par. 12. Section 31.3406(a)-4 is amended as follows:
    1. In paragraph (c)(1), first sentence, removing the language ``Any 
middleman (as defined in Sec. 31.3406(a)-2(b))'' and adding the 
language ``A middleman payor (as defined in Sec. 31.3406(a)-2(b) or in 
the section on information reporting to which the payment relates)'' in 
its place.
    2. In paragraph (c)(3), first sentence, removing the language 
``Sec. 31.3406(a)-2(b)(4)'' and adding the language ``Sec. 31.3406(a)-
2(b)(1) or (2)'' in its place.


Sec. 31.3406(b)(3)-2  [Amended]

    Par. 13. In Sec. 31.3406(b)(3)-2, paragraph (b)(5) is amended by 
removing the language ``Sec. 5f.6045-1(c)(3)(ix)'' and adding the 
language ``Sec. 1.6045-1(c)(3)(x)'' in its place.


Sec. 31.3406(d)-4  [Amended]

    Par. 14. In Sec. 31.3406(d)-4, paragraph (a)(1) introductory text 
is amended by removing the language ``the payor of the instrument (as 
defined in Sec. 31.3406(a)-2(b)(3)),'' and adding the language ``a 
broker holding a security (including stock) for a customer in street 
name,'' in its place.


Sec. 31.3406(h)-1  [Amended]

    Par. 15. In Sec. 31.3406(h)-1, paragraph (c), second sentence, is 
amended by removing the language ``Sec. 5f.6045-1(c)(3)(ii) and (iii)'' 
and adding the language ``Sec. 1.6045-1(c)(3)(iii) and (iv)'' in its 
place.


Sec. 31.3406(h)-2  [Amended]

    Par. 16. Section 31.3406(h)-2 is amended as follows:
    1. In paragraph (c), third sentence, removing the language ``with 
two or more grantors described in Sec. 31.3406(a)-2(b)(4), which is 
treated as a middleman payor'' and adding the language ``described in 
Sec. 31.3406(a)-2(b)(1) or (2), which is treated as a payor'' in its 
place.
    2. In paragraph (d), first sentence, removing the language ``A 
middleman payor (as defined in Sec. 31.3406(a)-2(b)'' and adding the 
language ``A middleman payor (as defined in Sec. 31.3406(a)-2(b) or in 
the section on information reporting to which the payment relates)'' in 
its place.
    3. In paragraph (f)(6), removing the language ``Sec. 31.3406(a)-
2(a)'' and adding the language ``Sec. 31.3406(a)-2'' in its place.

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 00-26204 Filed 10-16-00; 8:45 am]
BILLING CODE 4830-01-U