[Federal Register Volume 67, Number 144 (Friday, July 26, 2002)]
[Rules and Regulations]
[Pages 48754-48760]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18793]



[[Page 48754]]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 5f, 31, and 602

[TD 9010]
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 Advisors

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations

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SUMMARY: This document contains regulations under section 6041 that 
provide information reporting requirements for escrow agents and other 
persons making payments on behalf of another person, clarify who is the 
payee for information reporting purposes if a check or other instrument 
is made payable to joint payees, and clarify the amount to be reported. 
This document also contains regulations under section 6045 that 
incorporate the provisions of temporary regulations, which are removed, 
and that remove investment advisors from the list of exempt recipients.

DATES: Effective date: These regulations are effective January 1, 2003.
    Applicability dates: For dates of applicability, see Secs. 1.6041-
1(j), 1.6045-1(c)(3)(C)(xii), 1.6049-4(a)(2), and 31.3406(a)-2(d).

FOR FURTHER INFORMATION CONTACT: Nancy L. Rose (202) 622-4910 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information requirement contained in these final 
regulations has been reviewed and approved by the Office of Management 
and Budget in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)) under control number 1545-1705. Responses to this 
collection of information are mandatory.
    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.
    The estimate of the reporting burden in Sec. 1.6041-1 is reflected 
in the burden of Form 1099-MISC. The estimate of the reporting burden 
in Sec. 1.6045-1 is reflected in the burden of Form 1099-B.
    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, W:CAR:MP:FP:S, 
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.
    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

    This document contains amendments to the Income Tax Regulations (26 
CFR parts 1 and 5f) and Employment Tax Regulations (26 CFR part 31). 
These regulations finalize proposed regulations relating to payments to 
joint payees, payments made on behalf of another person, and payments 
of gross proceeds from sales involving investment advisors. A notice of 
proposed rulemaking (REG-246249-96) was published in the Federal 
Register (65 FR 61292) on October 17, 2000. A public hearing was held 
on February 7, 2001, at which two commentators presented oral comments. 
The IRS also received other written comments responding to the notice 
of proposed rulemaking. After consideration of all the comments, the 
proposed regulations are adopted as amended by this Treasury decision. 
The revisions are discussed below.

Explanation of Provisions and Summary of Comments

1. Payments Made on Behalf of Another Person

    Comments were received requesting further clarification as to the 
meaning of the terms management or oversight functions and significant 
economic interest in Sec. 1.6041-1(e)(1) of the proposed regulations. 
In response to these comments, the final regulations add language that 
was included in the preamble to the proposed regulations, explaining 
that a person who merely writes checks at another's direction is not 
exercising management or oversight with respect to the payment and that 
a person has a significant economic interest in a payment when such 
interest would be compromised if the payment were not made.
    One commentator stated that an agent cannot perform management or 
oversight functions in connection with payments it receives and remits 
to its principal, and, therefore, an agent for a payee could never be 
required to report a payment to the payee under this standard. The 
commentator recommended that Sec. 1.6041-1(e)(1) of the proposed 
regulation be revised to apply only to payments made by agents to third 
parties.
    The determination of whether a person performs management or 
oversight functions with respect to a payment made on behalf of 
another, or has a significant economic interest in connection with such 
payment, is a factual one. Whether an agent has a reporting obligation 
under these standards must, therefore, be determined in each instance 
based on the particular facts and circumstances. The standards set 
forth in the proposed regulations are intended to apply to all persons 
making payments on behalf of another, whether they are making such 
payments on behalf of the payor or payee in a transaction. In keeping 
with the need for uniformity and consistency in this regard, the 
regulations also amend Sec. 31.3406(a)-2 to eliminate the current 
distinction between payor agents and payee agents with respect to the 
obligation to backup withhold on payments. Therefore, while in some 
cases an agent for a payee may not be required to report a payment to 
its principal, the final regulation does not adopt the commentator's 
suggestion to eliminate the potential applicability of the regulation 
to all such payments.
    With respect to one type of payee agent, however, the final 
regulation does contain an exception to the rules set forth in 
paragraph (e)(1). The final regulation adds paragraph (e)(3) exempting 
from information reporting payments made by an employee to his 
employer, in recognition of the principle that the employee received 
such payment from a third party and remitted it to his employer in the 
course of his employment. Example 11 is added to illustrate this 
exception.
    Comments were also received with respect to special reporting 
exceptions. One commentator asked that the current rule with respect to 
financial institutions be retained. The proposed regulations removed 
Sec. 1.6041-3(n), which provided that banks making payments on an 
infrequent and isolated basis would not be subject to the reporting 
requirements. Banks will therefore now be subject to the same standards 
as other persons in determining whether they have an obligation to 
report payments. If a bank

[[Page 48755]]

exercises management or oversight functions over a payment, or has a 
significant economic interest in the payment, it will have a reporting 
obligation regardless of how frequently it makes such payments. 
Although this is a change that imposes a new reporting burden on 
financial institutions, the burden is no different than the one that 
applies to other persons, and the final regulations therefore do not 
adopt this suggestion.
    Another commentator asked that we eliminate the reporting 
requirements for real estate agents, found in Sec. 1.6041-3(d), as they 
conflict with the proposed regulations under Sec. 1.6041-1. The 
proposed regulations made conforming amendments to Sec. 1.6041-3(d), 
but retained the existing provision that rent paid by real estate 
agents is reportable, by cross-reference to the provisions of 
Sec. 1.6041-1(a). We believe it is appropriate to require such agents 
to report under these regulations; therefore, we decline to adopt this 
comment. The final regulations do, however, change the term real estate 
agents to rental agents to more accurately describe the type of person 
who would be collecting rent from a tenant and remitting it to a 
landlord.
    One commentator asked that the regulations clarify that insurance 
companies do not have a ``significant economic interest'' in payments 
they make to third parties pursuant to contracts with policyholders. 
Because this is a factual determination which should be made on a case 
by case basis, this suggestion was not adopted in the final 
regulations.
    Several commentators expressed concern that more than one person 
might report the same payment pursuant to these rules. One commentator 
stated that a service-recipient might be obligated to report the 
payment made on his behalf, while the person making the payment might 
also report it. Another commentator described a situation where funds 
were transferred through several parties involved in a construction 
project before reaching the ultimate payee and each of the parties 
might meet the management or oversight/significant economic interest 
standard for reporting the payments.
    Several of the examples illustrate the correct reporting of a 
payment by the parties to a transaction. In the event that several 
parties might be viewed as meeting the tests for reporting under 
Sec. 1.6041-1(e) of the regulations, the final regulations set forth 
the rule that the party closest in the chain to the payee must report 
the payment, unless the parties agree, in writing, that one of the 
other parties meeting the test for reporting will report the payment. 
Example 12 has been added to Sec. 1.6041-1(e) of the regulations to 
illustrate this rule. This provision is not intended to preclude the 
optional method to report under Sec. 1.6041-1(e)(4) of the regulations.
    A commentator suggested that in Example 3, dealing with an agent 
who performs real estate closings, we clarify that the term settlement 
agent can include a number of different persons who perform real estate 
closings, such as title companies or title insurance underwriters. 
Since these examples are meant to be illustrative only, and since any 
person making a payment on behalf of another person is subject to these 
regulations, it is not necessary to list all possible individuals who 
may be performing the functions described in this example. Therefore, 
the final regulations do not adopt this suggestion.

2. Amount To Be Reported

    One commentator objected to the rule in Sec. 1.6041-1(f) of the 
proposed regulations that the amount to be reported is the gross 
amount, before fees and other expenses are deducted. The commentator 
pointed out the conflicting case law with respect to the issue of 
whether attorneys fees are income to the client. The final regulations 
provide that in cases in which the gross amount is income, the gross 
amount should be reported regardless of any expenses, commissions or 
other obligations, including backup withholding, that were deducted 
from the amount before the check was issued. To assist taxpayers in 
determining whether the gross amount or some lesser amount is 
includible in a particular payee's income, the Commissioner may provide 
guidance in the Internal Revenue Bulletin with examples. Example 1 in 
Sec. 1.6041-1(f) has been modified to illustrate this rule.
    In response to a comment, we have added a cross-reference to 
section 6045(f) of the Internal Revenue Code and the regulations 
thereunder in the examples in Sec. 1.6041-1(f).

3. Obsolescence of Revenue Rulings

    One commentator asked that we include a statement in the 
regulations or commentary that the regulations render obsolete any 
revenue rulings that are factually encompassed by the proposed rules 
and that all other revenue rulings pertaining to third party payments 
would remain in effect unless specifically deemed obsolete.
    The preamble to the proposed regulations stated that ``Rulings that 
are factually encompassed by the proposed regulations will be 
obsoleted.'' A list of revenue rulings to become obsolete was included. 
The notice of proposed rulemaking also requested comments that 
identified other factually relevant rulings. No such comments were 
received. As the proposed regulations made clear that revenue rulings 
factually encompassed by the proposed regulations would be obsoleted 
and enumerated those rulings, there is no need to include this 
commentator's suggestion.
    Another commentator recommended that Rev. Rul. 69-595 (1969-2 C.B. 
242) and Rev. Rul. 70-608 (1970-2 C.B. 286), both of which were listed 
in the notice of proposed rulemaking as obsoleted by the proposed 
regulations, be obsoleted only to the extent they are inconsistent with 
the proposed regulations. The two revenue rulings cited contain 
guidance relating to the definition of medical service payments, which 
the commentator felt should be retained.
    Rev. Rul. 70-608 is listed in the notice of proposed rulemaking as 
obsoleted only with respect to Situations 1, 2, and 5. Therefore, 
Situation 4 of the revenue ruling, which includes a description of 
medical service payments, was not obsoleted. Rev. Rul. 69-595 will 
likewise not be obsoleted with respect to the definition of medical 
service payments.

Effect on Other Documents

    The following revenue rulings are obsolete as of January 1, 2003:

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 (1970-2 C.B. 286), Situations 1, 2, and 5
Rev. Rul. 69-595 (1969-2 C.B. 242), except with respect to the 
definition of medical service payments
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)

Special Analyses

    It has been determined that this Treasury decision 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. A final 
regulatory flexibility analysis under 5 U.S.C. section 604 has been 
prepared for the collection of information in this Treasury decision. 
This analysis is set forth in this preamble under the heading

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``Final Regulatory Flexibility Analysis.'' Pursuant to section 7805(f), 
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.

Final Regulatory Flexibility Analysis

    The collection of information contained 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 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 and transactions to which the regulations may apply.
    There are no known Federal rules that duplicate, overlap or 
conflict with these regulations. The regulations are considered to have 
the least economic impact on small entities of all alternatives 
considered.
    The collection of information contained in Sec. 1.6045-1(c)(3) will 
not have a significant economic impact on a substantial number of small 
entities. The regulations will relieve investment advisors 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.

Drafting Information

    The principal author of these regulations is Nancy L. Rose, Office 
of the Associate Chief Counsel (Procedure and Administration).

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.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 5f, 31, and 602 are 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 as follows:
    1. In paragraph (b)(1), the second sentence is amended by removing 
the language ``paragraph (g)'' and adding the language ``paragraph 
(i)'' in its place.
    2. Paragraph (c) is amended by adding two sentences after the 
penultimate sentence.
    3. Paragraphs (e), (f), and (g) are redesignated as paragraphs (g), 
(h), and (i), respectively.
    4. Adding new paragraphs (e), (f), and (j).
    The additions 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, and should be reported to the contractor. * * *
* * * * *
    (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 in connection with 
the payment (this would exclude, for example, a person who performs 
mere administrative or ministerial functions such as writing checks at 
another's direction); or
    (ii) Has a significant economic interest in the payment (i.e., an 
economic interest that would be compromised if the payment were not 
made, such as by creation of a mechanic's lien on property to which the 
payment relates, or a loss of collateral).
    (2) Determination of payor obligated to report. If two or more 
persons meet the requirements for making a return of information with 
respect to a payment, as set forth in paragraph (e)(1) of this section, 
the person obligated to report the payment is the person closest in the 
chain to the payee, unless the parties agree in writing that one of the 
other parties meeting the requirements set forth in paragraph (e)(1) of 
this section will report the payment.
    (3) Special rule for payment by employee to employer. 
Notwithstanding the provisions of paragraph (e)(1) of this section, an 
employee acting in the course of his employment who makes a payment to 
his employer on behalf of another person is not required to make a 
return of information with respect to that payment.
    (4) 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 by the Commissioner. See, e.g., 
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).
    (5) 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 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: 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). B is performing management or 
oversight functions in connection with the payments and is subject 
to the information reporting requirements of section 6041 with 
respect to payments.
    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

[[Page 48757]]

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 oral 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. In addition, 
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. G is a rental agent who manages certain rental 
property on behalf of property owner H. G finds tenants, arranges 
leases, collects rent, responds to tenant inquiries regarding 
maintenance, and hires and makes payments to repairmen. G subtracts 
her commission and any maintenance payments from rental payments and 
remits the remainder to H. With respect to payments to repairmen, G 
is performing management or oversight functions and is subject to 
the information reporting requirements of section 6041. With respect 
to the payment of rent to H, G is subject to the information 
reporting requirements of section 6041 regardless of whether she 
performs management or oversight functions or has a significant 
economic interest in the payment. See Sec. 1.6041-3(d) for rules 
relating to rental agents. See Sec. 1.6041-1(f) to determine the 
amount that G should report to H as rent.
    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. From time to time and as directed by K, 
J makes payments from these funds to attorneys, managers, and other 
third parties for services rendered to K. After subtracting J's 
commission, J pays K the net amount. 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 the third parties or to K. 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. In addition, 
assume 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, 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 the regulations 
thereunder. 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, 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. X is a certified public accountant employed by Firm 
Y, and is not a partner. Client Z pays X directly for accounting 
services. X remits the amount received to Y, as required by the 
terms of his employment. X does not have any reporting obligation 
with respect to the payment to Y. For the rules relating to Z's 
obligation to report the payment to Y for services, see paragraphs 
(a)(1)(i) and (d)(2) of this section.
    Example 12. Bank contracts with Title Company with respect to 
the disbursement of funds on a construction loan. Pursuant to their 
arrangement, the contractor sends draw requests to Title Company, 
which inspects the work, verifies the amount requested, and then 
sends the draw request to Bank with supporting documents. Bank pays 
Title Company the amount of the draw request, and Title Company 
insures Bank against any loss if it cannot obtain the necessary lien 
waivers. Bank has a significant economic interest in the payment as 
a mortgagee, and Title Company exercises management or oversight 
over the payment. Since Title Company is closest in the chain to the 
contractor, Title Company should report the payment, unless the 
parties agree in writing that Bank will report the payment.

    (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 amount includible in the gross income of the payee (which in 
many cases will be 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 another person. The Commissioner may, by 
guidance published in the Internal Revenue Bulletin, illustrate the 
circumstances under which the gross amount or less than the gross 
amount may be reported.
    (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. Under 
applicable law, the full $140,000 is includible in Q's gross taxable 
income. 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. For the rules with respect 
to R's obligation to report the payment to P, see section 6045(f) 
and the regulations thereunder.
    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. For the rules with respect 
to R's obligation to report the

[[Page 48758]]

payment to P, see section 6045(f) and the regulations thereunder.
* * * * *
    (j) Effective date. The provisions of paragraphs (b), (c), (e), and 
(f) apply to payments made after December 31, 2002.

    Par. 3. Section 1.6041-3 is amended as follows:
    1. Revising paragraph (d).
    2. Removing paragraph (n) and redesignating paragraphs (o), (p) and 
(q) as paragraphs (n), (o) and (p), respectively.
    The revisions read as follows:


Sec. 1.6041-3  Payments for which no return of information is required 
under section 6041.

* * * * *
    (d) Payments of rent made to rental agents (but the agent is 
required to report payments of rent to the landlord in accordance with 
Sec. 1.6041-1(a)(1)(i)(B) and (2)).
* * * * *

    Par. 4. Section 1.6045-1 is amended as follows:
    1. Revising paragraph (a) introductory text.
    2. Revising paragraphs (c)(3) and (c)(4).
    3. In paragraph (g)(3)(iv), first and third sentences, removing the 
language ``Sec. 5f.6045-1(c)(3) of this chapter'' and adding 
``paragraph (c)(3) of this section'' in its place.
    4. In paragraph (g)(4) Examples 1, 4, 5, 6, 7(i), 8(i), and 9(i), 
removing the language ``Sec. 5f.6045-1(c)(3)(ii) of this chapter'' and 
adding ``paragraph (c)(3)(iii) of this section'' in its place in each 
place it appears.
    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, on the broker's actual knowledge 
that the payee is a person described in paragraph (c)(3)(i)(B), or on 
the applicable indicators described in Sec. 1.6049-4(c)(1)(ii)(A) 
through (M). 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 
that can hold itself out as a money market fund under Rule 2a-7 under 
the Investment Company Act of 1940 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), with or 
without application of the de minimis rule.
    (D) Demand obligations that also are callable by the obligor and 
that have no premium or discount.

[[Page 48759]]

    (viii) 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.
    (ix) 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.
    (x) 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.
    (xi) 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.
    (xii) Effective date. The provisions of this paragraph (c)(3) apply 
for sales effected after December 31, 2002.
    (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 effect a 
sale of P's stock in a publicly traded corporation. B, in turn, 
places an order to sell the stock with C, a second broker, who 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 advisor, 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, 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 after December 31, 2002, 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 in the table for Sec. 31.3406(a)-2, paragraph 
(b).
    2. Adding an entry to the table 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:

[[Page 48760]]

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 (treating for this purpose 
spouses filing a joint return as one grantor);
    (2) A grantor trust with ten or more grantors established on or 
after January 1, 1984 but before January 1, 1996;
    (3) A common trust fund; and
    (4) A partnership or an S corporation that makes a reportable 
payment.
    (c) Persons not treated as payors. A person on the following list 
is not treated as a payor 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 after December 31, 2002.


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 ``A person 
that is a middleman and is a person 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 ``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 
``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 ``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 ``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 ``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 ``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 ``Sec. 31.3406(a)-2'' in its place.

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

    Par. 17. The authority citation for part 602 continues to read in 
part as follows:

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

    Par. 18. In section 602.101, paragraph (b) is amended by adding the 
following OMB control numbers in numerical order to the table to read 
as follows:


Sec. 602.101  OMB Control numbers

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
              *        *        *        *        *
1.6041-1................................................       1545-1705
 
              *        *        *        *        *
1.6045-1................................................       1545-1705
 
              *        *        *        *        *
------------------------------------------------------------------------


Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
    Approved: July 17, 2002.
Pamela F. Olson,
Acting Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 02-18793 Filed 7-25-02; 8:45 am]
BILLING CODE 4830-01-P