[Federal Register Volume 70, Number 8 (Wednesday, January 12, 2005)]
[Rules and Regulations]
[Pages 2012-2016]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-649]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[TD 9175]
RIN 1545-BE19


Returns Required on Magnetic Media

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary regulations relating to the 
requirements for filing corporate income tax returns and returns of 
organizations required to file returns under section 6033 on magnetic 
media pursuant to section 6011(e) of the Internal Revenue Code. The 
term magnetic media includes any magnetic media permitted under 
applicable regulations, revenue procedures, or publications, including 
electronic filing. The text of the temporary regulations also serves as 
the text of the proposed regulations set forth in the notice of 
proposed rulemaking on this subject in the Proposed Rules section in 
this issue of the Federal Register.

DATES: These regulations are effective January 12, 2005.

FOR FURTHER INFORMATION CONTACT: Michael E. Hara, (202) 622-4910 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    Electronic filing of tax returns benefits taxpayers and the IRS by 
eliminating the manual processing of returns and reducing errors that 
are more likely to occur during the manual preparation and processing 
of paper returns. Electronic filing results in faster settling of 
accounts and better customer service because the time required to 
process paper returns is eliminated. The error rate for corporate 
income tax returns filed on Form 1120, ``U.S. Corporation Income Tax 
Return'' and Form 1120S, U.S. Income Tax Return for an S Corporation,'' 
on paper is approximately 20 percent. Information returns required to 
be filed under section 6033, which include Form 990, ``Return of 
Organization Exempt From Income Tax,'' and Form 990-PF, ``Return of 
Private Foundation or Section 4947(a)(1) Trust Treated as a Private 
Foundation,'' that are filed on paper have an error rate of 
approximately 35 percent. The error rate for paper returns is due in 
roughly equal parts to IRS processing errors and taxpayer return 
preparation mistakes. By contrast, electronically filed returns have an 
error rate of less than one percent because these returns are subject 
to screening by the IRS prior to being accepted and are not required to 
be input manually by the IRS. Furthermore, returns required to be filed 
pursuant to section 6033 must be made available to the public by both 
the organization and the IRS pursuant to section 6104. Many state 
charity regulatory agencies rely on these returns. Requiring these 
returns to be filed electronically improves the accuracy of the 
information for both public and regulatory oversight of these 
organizations.
    Electronic filing of returns improves taxpayer satisfaction and 
confidence in the filing process, and may be more cost effective for 
taxpayers who file electronically. Electronic filing will enable the 
IRS to review taxpayer submissions expeditiously to reduce audit cycle 
time and will help the IRS identify emerging trends.
    In February 2004, the IRS introduced Modernized e-File, a new 
electronic filing system for corporations required to file Form 1120 or 
Form 1120S and organizations required to file Form 990. During the 
development of Modernized e-File, the IRS worked closely with taxpayers 
and tax professionals to ensure that the new electronic filing system 
would satisfy their needs. Modernized e-File alleviates the burden of 
filing massive paper returns, which may be up to 50,000 pages in 
length. Electronically filed returns are processed upon receipt and, 
shortly thereafter, an IRS acknowledgment message is generated to 
inform taxpayers or tax professionals that the return has been accepted 
or rejected. Error messages for rejected returns identify the reasons 
the return was rejected and make it easier for the taxpayer or tax 
professional to correct the errors. Modernized e-File streamlines 
electronic filing by eliminating the need for paper documents to be 
mailed to the IRS and enables taxpayers to attach forms and schedules, 
along with other documents, to the return in Portable Document Format 
(PDF).
    Section 6011(e) authorizes the Secretary to prescribe regulations 
providing the standards for determining which returns must be filed on 
magnetic media or in other machine-readable form. Section 6011(e)(2) 
provides that the Secretary may not require any person to file returns 
on magnetic media unless the person is required to file at least 250 
returns during the calendar year. Section 6011(e)(2)(B) requires that 
the Secretary, prior to issuing regulations requiring these entities to 
file returns on magnetic media, take into account (among other relevant 
factors) the ability of the taxpayer to comply at reasonable cost with 
the requirements of the regulations. The term magnetic media includes 
any magnetic media permitted under applicable regulations, revenue 
procedures, or publications, including electronic filing. Recognizing 
the benefits of electronic filing, Congress enacted section 2001(a) of 
the IRS Restructuring and Reform Act of 1998, Public Law 105-206, 112 
Stat. 727, which states that the policy of Congress is to promote 
paperless filing, with a long-range goal of providing for the filing of 
at least 80 percent of all Federal and information returns in 
electronic form by 2007.
    The IRS has partnered with taxpayers and tax practitioners in the 
design of Modernized e-File to minimize burdens

[[Page 2013]]

on taxpayers and tax practitioners and to address their concerns. Most 
corporate returns are prepared with the assistance of tax return 
preparation software. Some of these returns cannot yet be filed 
electronically using Modernized e-File because additional software is 
needed to format the return data and additional hardware may be needed 
to transmit the return data to the IRS. As a result, some taxpayers may 
incur incremental costs to make the transition from paper filing to 
electronic filing using Modernized e-File. After carefully evaluating 
the benefits of electronic filing and the burdens that might be imposed 
on filers, the IRS has determined that taxpayers will be able to 
convert to electronic filing at a reasonable cost and that the benefits 
to both the IRS and taxpayers substantially outweigh the costs.
    These regulations amend the Regulations on Procedure and 
Administration (26 CFR part 301) relating to the filing on magnetic 
media pursuant to section 6011(e) of corporate income tax returns, S 
corporation returns, and returns required under section 6033. These 
regulations provide that certain large corporations, including S 
corporations, are required to file their corporate income tax returns 
electronically. These regulations also provide that certain large 
exempt organizations, nonexempt charitable trusts, and exempt and 
nonexempt private foundations are required to file electronically 
returns required to be filed under section 6033.
    The IRS currently does not have the capability to accept electronic 
filing of certain types of Form 1120, Form 1120S, Form 990, and Form 
990-PF, such as a Form 1120 for a taxpayer that has changed its 
accounting period or a Form 1120 that is the taxpayer's final return. 
These types of returns are excluded from the electronic filing 
requirement under these regulations. The IRS will announce those 
returns that are excluded from electronic filing under these 
regulations in its publications, forms and instructions. The Treasury 
Department and the IRS intend to require electronic filing of 
additional corporate income tax returns, excise tax returns and returns 
required to be filed under section 6033 as the IRS increases its 
capability to receive these forms electronically, provided that the 
Treasury Department and the IRS determine that taxpayers are able to 
comply with the electronic filing requirements at a reasonable cost.

Explanation of Provisions

    To expand electronic filing, these regulations provide that the 
following taxpayers that are required by the Code or regulations to 
file at least 250 returns during the calendar year ending with or 
within the taxpayer's taxable year are required to file the following 
tax returns electronically for the taxable years indicated:

------------------------------------------------------------------------
                                                         Applicability
            Entities                    Form(s)              dates
------------------------------------------------------------------------
Corporations, including electing  Form 1120, ``U.S.   Taxable years
 small business corporations,      Corporation         ending on or
 with assets of $50 million or     Income Tax          after December
 more.                             Return'' or Form    31, 2005.
                                   1120S, ``U.S.
                                   Income Tax Return
                                   for an S
                                   Corporation''.
Corporations, including electing  Form 1120, ``U.S.   Taxable years
 small business corporations,      Corporation         ending on or
 with assets of $10 million or     Income Tax          after December
 more.                             Return'' or Form    31, 2006.
                                   1120S, ``U.S.
                                   Income Tax Return
                                   for an S
                                   Corporation''.
Exempt organizations with assets  Form 990, ``Return  Taxable years
 of $100 million or more that      of Organization     ending on or
 are required to file returns      Exempt From         after December
 under section 6033.               Income Tax''.       31, 2005.
Exempt organizations with assets  Form 990, ``Return  Taxable years
 of $10 million or more that are   of Organization     ending on or
 required to file returns under    Exempt From         after December
 section 6033.                     Income Tax''.       31, 2006.
Private foundations or section    Form 990-PF,        Taxable years
 4947(a)(1) trusts that are        ``Return of         ending on or
 required to file returns under    Private             after December
 section 6033.                     Foundation or       31, 2006.
                                   Section
                                   4947(a)(1) Trust
                                   Treated as a
                                   Private
                                   Foundation''.
------------------------------------------------------------------------

Under these regulations, an entity's assets are determined based on 
total assets at the end of the taxable year as reported on the entity's 
Form 1120, 1120S, or 990.
    Some of these large entities already file their returns 
electronically. In addition, many of these large entities prepare their 
income tax returns electronically, but file the returns on paper. The 
Treasury Department and the IRS have determined that these taxpayers 
are able to comply at a reasonable cost with the requirement to file 
returns electronically. To eliminate the potential burden of electronic 
filing on small businesses that may not be able to comply at a 
reasonable cost, these regulations exclude small corporations and 
certain exempt organizations with total assets of less than $10 
million.
    The determination of whether an entity is required to file at least 
250 returns is made by aggregating all returns, regardless of type, 
that the entity is required to file over the calendar year, including, 
for example, income tax returns, returns required under section 6033, 
information returns, excise tax returns, and employment tax returns. 
Under these regulations, corrected or amended returns are not counted 
in determining whether the 250-return threshold is met. All members of 
a controlled group of corporations are required to file their Forms 
1120 electronically if the total number of returns required to be filed 
by the controlled group of corporations is at least 250.
    The aggregation of returns required under these regulations is 
limited to determining whether an entity is required to file Form 1120, 
Form 1120S, Form 990, or Form 990-PF electronically. These regulations 
do not affect Sec.  301.6011-2(c)(1)(iii), which provides that returns 
are not to be aggregated for purposes of determining whether 
information returns must be filed on magnetic media. These regulations 
also do not affect Sec.  301.6721-1(a)(2)(ii), which provides that the 
250-return threshold requirements apply separately to original and 
corrected returns.
    Corporations required to file Form 1120 or Form 1120S 
electronically under these regulations may file amended returns on 
paper in the form allowed by Rev. Proc. 94-69 (1994-2 C.B. 804), or in 
the manner prescribed by any subsequent revenue procedure. However, an 
entity that files an incomplete electronic return and subsequently 
files an amended paper return before the return's due date has not 
complied with the provisions of these regulations because a second 
return filed before the due date is treated as an original return.

[[Page 2014]]

Hardship Waiver

    These regulations provide that the Commissioner may waive the 
requirements to file electronically in cases of undue hardship. Because 
the Treasury Department and the IRS believe that electronic filing will 
not impose significant burdens on the taxpayers covered by these 
regulations, the Commissioner will grant waivers of the electronic 
filing requirement only in exceptional cases. The Treasury Department 
and the IRS invite comments from the public regarding the waiver 
provision in these regulations. Additionally, the IRS will meet with 
various groups, including software developers and tax practitioners, to 
assist taxpayers in preparing to file their returns electronically. 
After considering comments, the Treasury Department and the IRS will 
issue guidance that will set forth the procedures by which a taxpayer 
may request a hardship waiver.

Exclusions

    These regulations provide exclusions from the requirement to file 
electronically for certain corporations and organizations that have not 
had a longstanding filing obligation. Corporations and organizations 
are not required to file their returns electronically if they were not 
required to file a Form 1120, Form 1120S, Form 990, or Form 990-PF for 
the preceding taxable year or have not been in existence for at least 
one calendar year prior to the due date (not including extensions) of 
their Form 1120, Form 1120S, Form 990, or Form 990-PF.

Date of Filing

    A return filed electronically is deemed to be filed on the date of 
the electronic postmark. See Sec.  301.7502-1(d). If a corporation or 
organization that is required to file electronically fails to do so, 
the corporation or organization is deemed to have failed to file its 
return.

Effective Dates

    To permit taxpayers sufficient time to implement the requirements 
of these regulations, these regulations apply to corporations required 
to file corporate income tax returns with total assets of $50 million 
or more as shown on their Schedule L of the Form 1120 or 1120S for 
taxable years ending on or after December 31, 2005, and to corporations 
required to file corporate income tax returns with total assets of $10 
million or more as shown on their Schedule L of their Form 1120 or 
1120S for taxable years ending on or after December 31, 2006. These 
regulations apply to any organization that is required to file Form 990 
and that, for a taxable year ending on or after December 31, 2005, has 
total assets as of the end of the taxable year of $100 million or more 
or that, for a taxable year ending on or after December 31, 2006, has 
total assets as of the end of the taxable year of $10 million or more. 
These regulations will apply to any organization required to file Form 
990-PF for taxable years ending on or after December 31, 2006. All 
other corporations and organizations are encouraged to adopt electronic 
filing as soon as feasible.

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 also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. For 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
refer to the Special Analyses of the preamble to the cross-reference of 
proposed rulemaking published in the Proposed Rules section in this 
issue of the Federal Register. Pursuant to section 7805(f) of the Code, 
these regulations will be submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on their impact on 
small business.

Drafting Information

    The principal author of these temporary regulations is Michael E. 
Hara, Office of the Associate Chief Counsel (Procedure and 
Administration), although other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 301 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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


0
Par. 2. Section 1.6011-5T is added to read as follows:


Sec.  1.6011-5T  Required use of magnetic media for corporate income 
tax returns (temporary).

    The return of a corporation that is required to be filed on 
magnetic media under Sec.  301.6011-5T of this chapter must be filed in 
accordance with Internal Revenue Service revenue procedures, 
publications, forms, or instructions. (See Sec.  601.601(d)(2) of this 
chapter).

0
Par. 3. Section 1.6033-4T is added to read as follows:


Sec.  1.6033-4T  Required use of magnetic media for returns by 
organizations required to file returns under section 6033 (temporary).

    The return of an organization that is required to be filed on 
magnetic media under Sec.  301.6033-4T of this chapter must be filed in 
accordance with Internal Revenue Service revenue procedures, 
publications, forms, or instructions. (See Sec.  601.601(d)(2) of this 
chapter).

0
Par. 4. Section 1.6037-2T is added to read as follows:


Sec.  1.6037-2T  Required use of magnetic media for income tax returns 
of electing small business corporations (temporary).

    The return of an electing small business corporation that is 
required to be filed on magnetic media under Sec.  301.6037-2T of this 
chapter must be filed in accordance with Internal Revenue Service 
revenue procedures, publications, forms, or instructions. (See Sec.  
601.601(d)(2) of this chapter).

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 5. The authority citation for part 301 is amended by adding 
entries, in numerical order, to read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 301.6011-5T also issued under 26 U.S.C. 6011. * * *
    Section 301.6033-4T also issued under 26 U.S.C. 6033. * * *
    Section 301.6037-2T also issued under 26 U.S.C. 6037. * * *


0
Par. 6. Section 301.6011-5T is added to read as follows:


Sec.  301.6011-5T  Required use of magnetic media for corporate income 
tax returns (temporary).

    (a) Corporate income tax returns required on magnetic media--(1) A 
corporation required to file a corporate income tax return on Form 
1120, ``U.S. Corporation Income Tax Return,'' under Sec.  1.6012-2 of 
this chapter must file its corporate income tax return on magnetic

[[Page 2015]]

media if the corporation is required by the Internal Revenue Code or 
regulations to file at least 250 returns during the calendar year 
ending with or within its taxable year, was required to file a 
corporate income tax return on Form 1120 under Sec.  1.6012-2 of this 
chapter for the preceding taxable year, and has been in existence for 
at least one year prior to the due date (excluding extensions) of its 
corporate income tax return. Returns filed on magnetic media must be 
made in accordance with applicable revenue procedures, publications, 
forms, or instructions. In prescribing revenue procedures, 
publications, forms, or instructions, the Commissioner may direct the 
type of magnetic media filing. (See Sec.  601.601(d)(2) of this 
chapter).
    (2) All members of a controlled group of corporations must file 
their corporate income tax returns on magnetic media if the aggregate 
number of returns required to be filed by the controlled group of 
corporations is at least 250.
    (b) Waiver. The Commissioner may grant waivers of the requirements 
of this section in cases of undue hardship. A request for waiver must 
be made in accordance with applicable revenue procedures or 
publications. The waiver also will be subject to the terms and 
conditions regarding the method of filing as may be prescribed by the 
Commissioner.
    (c) Failure to file. If a corporation fails to file a corporate 
income tax return on magnetic media when required to do so by this 
section, the corporation is deemed to have failed to file the return. 
(See section 6651 for the addition to tax for failure to file a 
return). In determining whether there is reasonable cause for failure 
to file the return, Sec.  301.6651-1(c) and rules similar to the rules 
in Sec.  301.6724-1(c)(3) (undue economic hardship related to filing 
information returns on magnetic media) will apply.
    (d) Meaning of terms. The following definitions apply for purposes 
of this section:
    (1) Magnetic media. The term magnetic media means any magnetic 
media permitted under applicable regulations, revenue procedures, or 
publications. These generally include magnetic tape, tape cartridge, 
and diskette, as well as other media, such as electronic filing, 
specifically permitted under the applicable regulations, procedures, 
publications, forms, or instructions. (See Sec.  601.601(d)(2) of this 
chapter).
    (2) Corporation. The term corporation means a corporation as 
defined in section 7701(a)(3).
    (3) Controlled group of corporations. The term controlled group of 
corporations means a group of corporations as defined in section 
1563(a).
    (4) Corporate income tax return. The term corporate income tax 
return means a Form 1120, ``U.S. Corporation Income Tax Return,'' along 
with all other related forms and schedules that are required to be 
attached to the Form 1120.
    (5) Determination of 250 returns. For purposes of this section, a 
corporation or controlled group of corporations is required to file at 
least 250 returns if, during the calendar year ending with or within 
the taxable year of the corporation or the controlled group, the 
corporation or the controlled group is required to file at least 250 
returns of any type, including information returns. If the corporation 
is a member of a controlled group, the determination of the number of 
returns includes all returns required to be filed by all members of the 
controlled group during that calendar year.
    (e) Example. The following example illustrates the provisions of 
paragraph (d)(5) of this section:

    Example. The taxable year of Corporation X, a fiscal year 
taxpayer with assets in excess of $10 million, ends on September 30. 
During the calendar year ending December 31, 2007, X was required to 
file one Form 1120, ``U.S. Corporation Income Tax Return,'' 100 
Forms W-2, ``Wage and Tax Statement,'' 146 Forms 1099-DIV, 
``Dividends and Distributions,'' one Form 940, ``Employer's Annual 
Federal Unemployment (FUTA) Tax Return,'' and four Forms 941, 
``Employer's Quarterly Federal Tax Return.'' Because X is required 
to file 252 returns during the calendar year that ended within its 
taxable year ending September 30, 2008, X is required to file its 
Form 1120 electronically for its taxable year ending September 30, 
2008.

    (f) Effective dates. This section applies to corporate income tax 
returns for corporations that report total assets at the end of the 
corporation's taxable year that equal or exceed $50 million on Schedule 
L of their Form 1120, for taxable years ending on or after December 31, 
2005. This section applies to corporate income tax returns for 
corporations that report total assets at the end of the corporation's 
taxable year that equal or exceed $10 million on Schedule L of their 
Form 1120, for taxable years ending on or after December 31, 2006.
0
Par. 7. Section 301.6033-4T is added to read as follows:


Sec.  301.6033-4T  Required use of magnetic media for returns by 
organizations required to file returns under section 6033 (temporary).

    (a) Returns by organizations required to file returns under section 
6033 on magnetic media. An organization required to file a return under 
section 6033 on Form 990, ``Return of Organization Exempt from Income 
Tax,'' or Form 990-PF, ``Return of Private Foundation or Section 
4947(a)(1) Trust Treated as a Private Foundation,'' must file its Form 
990 or 990-PF on magnetic media if the organization is required by the 
Internal Revenue Code or regulations to file at least 250 returns 
during the calendar year ending with or within its taxable year, was 
required to file its Form 990 or Form 990-PF under section 6033 for the 
preceding taxable year, and has been in existence for at least one 
calendar year prior to the due date (excluding extensions) of its Form 
990 or Form 990-PF. Returns filed on magnetic media must be made in 
accordance with applicable revenue procedures, publications, forms, or 
instructions. In prescribing revenue procedures, publications, forms, 
or instructions, the Commissioner may direct the type of magnetic media 
filing. (See Sec.  601.601(d)(2) of this chapter).
    (b) Waiver. The Commissioner may grant waivers of the requirements 
of this section in cases of undue hardship. A request for waiver must 
be made in accordance with applicable revenue procedures or 
publications. The waiver also will be subject to the terms and 
conditions regarding the method of filing as may be prescribed by the 
Commissioner.
    (c) Failure to file. If an organization required to file a return 
under section 6033 fails to file an information return on magnetic 
media when required to do so by this section, the organization is 
deemed to have failed to file the return. (See section 6652 for the 
addition to tax for failure to file a return.) In determining whether 
there is reasonable cause for failure to file the return, Sec.  
301.6652-2(f) and rules similar to the rules in Sec.  301.6724-1(c)(3) 
(undue economic hardship related to filing information returns on 
magnetic media) will apply.
    (d) Meaning of terms. The following definitions apply for purposes 
of this section:
    (1) Magnetic media. The term magnetic media means any magnetic 
media permitted under applicable regulations, revenue procedures, or 
publications. These generally include magnetic tape, tape cartridge, 
and diskette, as well as other media, such as electronic filing, 
specifically permitted

[[Page 2016]]

under the applicable regulations, procedures, publications, forms or 
instructions. (See Sec.  601.601(d)(2) of this chapter).
    (2) Return required under section 6033. The term return required 
under section 6033 means a Form 990, ``Return of Organization Exempt 
from Income Tax,'' and Form 990-PF, ``Return of Private Foundation or 
Section 4947(a)(1) Trust Treated as a Private Foundation,'' along with 
all other related forms and schedules that are required to be attached 
to the Form 990 or Form 990-PF.
    (3) Determination of 250 returns. For purposes of this section, an 
organization is required to file at least 250 returns if, during the 
calendar year ending with or within the taxable year of the 
organization, the organization is required to file at least 250 returns 
of any type, including information returns.
    (e) Example. The following example illustrates the provisions of 
paragraph (d)(3) of this section. In the example, the organization is a 
calendar year taxpayer:

    Example. In 2006, Organization T, with total assets in excess of 
$10 million, is required to file one Form 990, ``Return of 
Organization Exempt from Income Tax,'' 200 Forms W-2, ``Wage and Tax 
Statement,'' and 60 Forms 1099-MISC, ``Miscellaneous Income.'' 
Because T is required to file 261 returns during the calendar year, 
T must file its 2006 Form 990 electronically.

    (f) Effective dates. This section applies to any organization 
required to file Form 990 for a taxable year ending on or after 
December 31, 2005, that has total assets as of the end of the taxable 
year of $100 million or more. This section applies to any organization 
required to file Form 990 for a taxable year ending on or after 
December 31, 2006 that has total assets as of the end of the taxable 
year of $10 million or more. This section applies to any organization 
required to file Form 990-PF for taxable years ending on or after 
December 31, 2006.

0
Par. 8. Section 301.6037-2T is added to read as follows:


Sec.  301.6037-2T  Required use of magnetic media for returns of 
electing small business corporation (temporary).

    (a) Returns of electing small business corporation required on 
magnetic media--An electing small business corporation required to file 
an electing small business return on Form 1120S, ``U.S. Income Tax 
Return for an S Corporation,'' under Sec.  1.6037-1 of this chapter 
must file its Form 1120S on magnetic media if the small business 
corporation is required by the Internal Revenue Code and regulations to 
file at least 250 returns during the calendar year ending with or 
within its taxable year, was required to file its Form 1120S under 
Sec.  6037-1 of this chapter for the preceding taxable year, and has 
been in existence for at least one calendar year prior to the due date 
(excluding extensions) of its Form 1120S. Returns filed on magnetic 
media must be made in accordance with applicable revenue procedures, 
publications, forms, or instructions. In prescribing revenue 
procedures, publications, forms, or instructions, the Commissioner may 
direct the type of magnetic media filing. (See Sec.  601.601(d)(2) of 
this chapter).
    (b) Waiver. The Commissioner may grant waivers of the requirements 
of this section in cases of undue hardship. A request for waiver must 
be made in accordance with applicable revenue procedures or 
publications. The waiver also will be subject to the terms and 
conditions regarding the method of filing as may be prescribed by the 
Commissioner.
    (c) Failure to file. If an electing small business corporation 
fails to file a return on magnetic media when required to do so by this 
section, the corporation is deemed to have failed to file the return. 
(See section 6651 for the addition to tax for failure to file a 
return.) In determining whether there is reasonable cause for failure 
to file the return, Sec.  301.6651-1(c) and rules similar to the rules 
in Sec.  301.6724-1(c)(3) (undue economic hardship related to filing 
information returns on magnetic media) will apply.
    (d) Meaning of terms. The following definitions apply for purposes 
of this section:
    (1) Magnetic media. The term magnetic media means any magnetic 
media permitted under applicable regulations, revenue procedures, or 
publications. These generally include magnetic tape, tape cartridge, 
and diskette, as well as other media, such as electronic filing, 
specifically permitted under the applicable regulations, procedures, 
publications, forms, or instructions. (See Sec.  601.601(d)(2) of this 
chapter).
    (2) Corporation. The term corporation means a corporation as 
defined in section 7701(a)(3).
    (3) Electing small business corporation return. The term electing 
small business corporation return means a Form 1120S, ``U.S. Income Tax 
Return for an S Corporation,'' along with all other related forms and 
schedules that are required to be attached to the Form 1120S.
    (4) Electing small business corporation. The term electing small 
business corporation means an S corporation as defined in section 
1361(a)(1).
    (5) Determination of 250 returns. For purposes of this section, a 
corporation is required to file at least 250 returns if, during the 
calendar year ending with or within the taxable year of the 
corporation, the corporation is required to file at least 250 returns 
of any type, including information returns.
    (e) Example. The following example illustrates the provisions of 
paragraph (d)(5) of this section. In the example, the corporation is a 
calendar year taxpayer:

    Example. In 2007, Corporation S, an electing small business 
corporation with assets in excess of $10 million, is required to 
file one Form 1120S, ``U.S. Corporation Income Tax Return,'' 100 
Forms W-2, ``Wage and Tax Statement,'' 146 Forms 1099-DIV, 
``Dividends and Distributions,'' one Form 940, ``Employer's Annual 
Federal Unemployment (FUTA) Tax Return,'' four Forms 941, 
``Employer's Quarterly Federal Tax Return.'' Because S is required 
to file 252 returns during the calendar year, S is required to file 
its 2007 Form 1120S electronically.

    (f) Effective dates. This section applies to returns of electing 
small business corporations that report total assets at the end of the 
corporation's taxable year that equal or exceed $50 million on Schedule 
L of Form 1120S for taxable years ending on or after December 31, 2005. 
This section applies to returns of electing small business corporations 
that report total assets at the end of the corporation's taxable year 
that equal or exceed $10 million on Schedule L of Form 1120S for 
taxable years ending on or after December 31, 2006.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: January 6, 2005.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.
[FR Doc. 05-649 Filed 1-11-05; 8:45 am]
BILLING CODE 4830-01-P