[Federal Register Volume 79, Number 123 (Thursday, June 26, 2014)]
[Rules and Regulations]
[Pages 36204-36207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-14967]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31, and 301

[TD 9670]
RINs 1545-BJ06; 1545-BK38


Disregarded Entities; Religious and Family Member FICA and FUTA 
Exceptions; Indoor Tanning Services Excise Tax

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to 
disregarded entities (including qualified subchapter S subsidiaries) 
and the indoor tanning services excise tax. These final regulations 
affect disregarded entities responsible for collecting the indoor 
tanning services excise tax and owners of those disregarded entities. 
The final regulations also relate to disregarded entities and certain 
exceptions from taxes under the Federal Insurance Contributions Act and 
the Federal Unemployment Tax Act, as well as backup withholding rules 
and related information reporting requirements. These final regulations 
affect individual owners of disregarded entities. These regulations 
also affect the owners of disregarded entities subject to backup 
withholding rules.

DATES: Effective Date: These regulations are effective on June 26, 
2014.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.1361-4(a)(8)(ii), 31.3121(b)(3)-1(e), 31.3127-1(c), 31.3306(c)(5)-
1(e), 301.7701-2(e)(5), and 301.7701-2(e)(6)(iv).

FOR FURTHER INFORMATION CONTACT: Regarding excise tax-related 
provisions, Michael H. Beker (202) 317-6855; regarding employment tax-
related provisions, Andrew Holubeck (202) 317-4770 (not toll free 
calls).

SUPPLEMENTARY INFORMATION:

Background

    This document contains final regulations amending the Income Tax 
Regulations (26 CFR part 1) under section 1361 of the Internal Revenue 
Code (Code), the Employment Tax Regulations (26 CFR part 31) under 
sections 3121, 3127, and 3306 of the Code, and the Procedure and 
Administration Regulations (26 CFR part 301) under section 7701 of the 
Code.

Indoor Tanning Services Excise Tax-Related Regulations

    On June 25, 2012, final and temporary regulations (TD 9596) were 
published in the Federal Register (77 FR 37806). The regulations treat 
disregarded entities (including qualified subchapter S subsidiaries) as 
separate entities for purposes of the indoor tanning services excise 
tax imposed by section 5000B.
    Also on June 25, 2012, a notice of proposed rulemaking (REG-125570-
11) was published by cross-reference to the temporary regulations in 
the Federal Register (77 FR 37838). The preamble to TD 9596 includes 
background information and an explanation of provisions regarding the 
regulations.

Employment Tax-Related Regulations

    On November 1, 2011, final and temporary regulations (TD 9554) were 
published in the Federal Register (76 FR 67363). The regulations extend 
the exceptions or exemptions from taxes under the Federal Insurance 
Contributions Act and the Federal Unemployment Tax Act under sections 
3121(b)(3) (concerning individuals who work for certain family 
members), 3127 (concerning members of religious faiths), and 3306(c)(5) 
(concerning persons employed by children and spouses and children under 
21 employed by their parents) to services performed in the employ of 
certain

[[Page 36205]]

entities that are generally disregarded as separate from their owners 
for federal tax purposes under Sec.  301.7701-2(c). The regulations 
also clarify the existing rule that, in the case of an entity that is 
disregarded as an entity separate from its owner for any purpose under 
Sec.  301.7701-2(c), the owner is subject to the withholding 
requirements imposed under section 3406 (backup withholding).
    Also on November 1, 2011, a notice of proposed rulemaking (REG-
136565-09) was published by cross-reference to the temporary 
regulations in the Federal Register (76 FR 67384). The preamble to TD 
9554 includes background information and an explanation of provisions 
regarding the regulations.

Combining the Employment Tax and Excise Tax Provisions Into This Final 
Regulation

    The IRS did not receive any written or electronic comments 
responding to either notice of proposed rulemaking and a public hearing 
was neither requested nor held. Accordingly, both sets of proposed 
regulations are adopted as amended by this Treasury decision without 
substantive change and both sets of corresponding temporary regulations 
are removed. The nonsubstantive revisions are discussed in the next 
section.

Explanation of Revisions

    These final regulations reorganize and revise Sec.  31.3121(b)(3)-
1, Sec.  31.3127-1, Sec.  31.3306(c)(5)-1, and Sec.  301.7701-
2(c)(2)(iv) for clarity, and no substantive changes are intended to 
these provisions. In Sec.  31.3121(b)(3)-1, concerning family 
employment, the general rule that applies to corporations was moved 
from Sec.  31.3121(b)(3)-1(c) to Sec.  31.3121(b)(3)-1(d), so that the 
rules for disregarded entities (which are treated as corporations for 
purposes of Subtitle C under Sec.  301.7701-2(c)(2)(iv)(B)) would 
follow after the general corporate rule. Similarly, in Sec.  
31.3306(c)(5)-1, with respect to the provisions concerning family 
employment, the general rule that applies to corporations was moved 
from Sec.  31.3306(c)(5)-1(c) to Sec.  31.3306(c)(5)-1(d), so that the 
rules for disregarded entities would follow after the general corporate 
rule. For clarity, Sec.  31.3127-1(a) was reorganized into a list 
format and headings were added. In addition, Sec. Sec.  31.3121(b)(3)-
1(d), 31.3127-1(b), and 31.3306(c)(5)-1(d) were revised to provide that 
an entity that is treated as a corporation for purposes of Subtitle C 
under Sec.  301.7701-2(c)(2)(iv)(B) is not treated as the employer for 
purposes of applying sections 3121(b)(3), 3127, and 3306(c)(5) and the 
regulations thereunder.
    Section 301.7701-2(c)(2)(iv)(A) continues to provide that Sec.  
301.7701-2(c)(2)(i) (relating to certain wholly owned entities) does 
not apply to taxes imposed under Subtitle C. Section 301.7701-
2(c)(2)(iv)(B) also continues to provide that an entity that is 
disregarded as an entity separate from its owner for any purpose under 
Sec.  301.7701-2 is treated as a corporation for purposes of taxes 
imposed under Subtitle C. The cross references that were formerly in 
Sec.  301.7701-2(c)(2)(iv)(C) and were described as exceptions to Sec.  
301.7701-2(c)(2)(iv)(B) are now described as special rules and are 
added to Sec.  301.7701-2(c)(2)(iv)(B). In addition, the language 
formerly of Sec.  301.7701-2(c)(2)(iv)(A) regarding backup withholding 
has been moved to new Sec.  301.7701-2(c)(2)(iv)(C)(1) to clarify that 
it is an exception to the general provisions of Sec.  301.7701-
2(c)(2)(iv)(A) and (B). Finally, the last two sentences that were 
formerly in Sec.  301.7701-2(c)(2)(iv)(A) regarding taxes imposed under 
Subtitle A, including Chapter 2, Tax on Self Employment Income, have 
been moved to new Sec.  301.7701-2(c)(2)(iv)(C)(2) to put all the 
special clarifying rules and exceptions in one paragraph.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. 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, and because the regulations do not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 
section 7805(f) of the Code, the proposed regulations that preceded 
these regulations were submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
business and no comments were received.

Drafting Information

    The principal authors of these regulations are Michael H. Beker, 
Office of the Associate Chief Counsel (Passthroughs and Special 
Industries), and Andrew Holubeck, Office of the Associate Chief Counsel 
(Tax Exempt & Government Entities). However, other personnel from the 
IRS and the Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

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

26 CFR Part 301

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

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 31, and 301 are amended as follows:

PART 1--INCOME TAX

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 1.1361-4 is amended as follows:
0
1. In paragraph (a)(8)(i)(A) the language ``and 38'' is removed and 
``38, and 49'' is added in its place.
0
2. In paragraph (a)(8)(i)(B) the language ``Chapter 33'' is removed and 
``Chapters 33 and 49'' is added in its place.
0
3. Paragraph (a)(8)(ii) is revised.
0
4. Paragraph (a)(8)(iii) is removed.
    The revision reads as follows:


Sec.  1.1361-4  Effect of QSub election.

    (a) * * *
    (8) * * *
    (ii) Effective/applicability date. (A) Except as provided in this 
paragraph (a)(8)(ii), paragraph (a)(8) of this section applies to 
liabilities imposed and actions first required or permitted in periods 
beginning on or after January 1, 2008.
    (B) References to Chapter 49 in paragraph (a)(8) of this section 
apply to taxes imposed on amounts paid on or after July 1, 2012.
    (C) Paragraph (a)(8)(i)(E) of this section applies for periods 
after December 31, 2014.
* * * * *


Sec.  1.1361-4T  [Removed]

0
Par. 3. Section 1.1361-4T is removed.

[[Page 36206]]

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

0
Par. 4. The authority citation for part 31 continues to read in part as 
follows:

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


0
Par. 5. Section 31.3121(b)(3)-1 is amended by revising paragraphs (c), 
(d), and (e) to read as follows:


Sec.  31.3121(b)(3)-1  Family employment.

* * * * *
    (c) Services performed in the employ of a partnership are within 
the exception described in paragraph (a) of this section only if the 
requisite family relationship exists between the employee and each of 
the partners comprising the partnership.
    (d) Services performed in the employ of a corporation are not 
within the exception described in paragraph (a) of this section, except 
that services performed in the employ of an entity that is treated as a 
corporation under Sec.  301.7701-2(c)(2)(iv)(B) of this chapter may 
qualify for the exception if the requirements of the exception are 
otherwise met. An entity that is treated as a corporation under Sec.  
301.7701-2(c)(2)(iv)(B) of this chapter is not treated as the employer 
for purposes of applying section 3121(b)(3) and this section. For 
purposes of applying section 3121(b)(3) and this section, the owner of 
an entity that is treated as a corporation under Sec.  301.7701-
2(c)(2)(iv)(B) of this chapter is treated as the employer.
    (e) Paragraphs (c) and (d) of this section apply to wages paid on 
or after November 1, 2011. However, taxpayers may apply paragraphs (c) 
and (d) of this section to wages paid on or after January 1, 2009.


Sec.  31.3121(b)(3)-1T  [Removed]

0
Par. 6. Section 31.3121(b)(3)-1T is removed.
0
Par. 7. Section 31.3127-1 is added to read as follows:


Sec.  31.3127-1  Exemption for employers and their employees if both 
are members of religious faiths opposed to participation in Social 
Security Act programs.

    (a) Exemption--(1) Employer. Except as provided in paragraph (b) of 
this section, an employer is exempt from the taxes imposed by section 
3111 on wages paid to an employee if--
    (i) The employer (or if the employer is a partnership, each partner 
therein) and its employee are members of a recognized religious sect or 
division described in section 1402(g)(1);
    (ii) Both the employer (or if the employer is a partnership, each 
partner therein) and the employee adhere to the tenets and teachings of 
that sect; and
    (iii) Both the employer and the employee have filed and had 
approved applications under section 3127(b) for exemption from the 
taxes imposed by sections 3111 and 3101.
    (2) Employee. If an employer is exempt from the taxes imposed by 
section 3111 under paragraph (a)(1) of this section, then each employee 
described in paragraph (a)(1) of this section is exempt from the taxes 
imposed by section 3101 on the wages received with respect to 
employment with that employer.
    (b) Corporation. Services performed in the employ of a corporation 
are not within the exemption described in paragraph (a) of this 
section, except that services performed in the employ of an entity that 
is treated as a corporation under Sec.  301.7701-2(c)(2)(iv)(B) of this 
chapter may qualify for the exemption if the requirements of the 
exemption are otherwise met. An entity that is treated as a corporation 
under Sec.  301.7701-2(c)(2)(iv)(B) of this chapter is not treated as 
the employer for purposes of applying section 3127 and this section. 
For purposes of applying section 3127 and paragraph (a) of this 
section, the owner of an entity that is treated as a corporation under 
Sec.  301.7701-2(c)(2)(iv)(B) of this chapter is treated as the 
employer.
    (c) Effective/applicability date. This section applies to wages 
paid on or after November 1, 2011. However, taxpayers may apply this 
section to wages paid on or after January 1, 2009.

Sec.  31.3127-1T  [Removed]

0
Par. 8. Section 31.3127-1T is removed.
0
Par. 9. Section 31.3306(c)(5)-1 is amended by revising paragraphs (c), 
(d), and (e) to read as follows:


Sec.  31.3306(c)(5)-1  Family employment.

* * * * *
    (c) Services performed in the employ of a partnership are within 
the exception described in paragraph (a) of this section only if the 
requisite family relationship exists between the employee and each of 
the partners comprising the partnership.
    (d) Services performed in the employ of a corporation are not 
within the exception described in paragraph (a) of this section, except 
that services performed in the employ of an entity that is treated as a 
corporation under Sec.  301.7701-2(c)(2)(iv)(B) of this chapter may 
qualify for the exception if the requirements of the exception are 
otherwise met. An entity that is treated as a corporation under Sec.  
301.7701-2(c)(2)(iv)(B) of this chapter is not treated as the employer 
for purposes of applying section 3306(c)(5) and this section. For 
purposes of applying section 3306(c)(5) and this section, the owner of 
an entity that is treated as a corporation under Sec.  301.7701-
2(c)(2)(iv)(B) of this chapter is treated as the employer.
    (e) Paragraphs (c) and (d) of this section apply to wages paid on 
or after November 1, 2011. However, taxpayers may apply paragraphs (c) 
and (d) of this section to wages paid on or after January 1, 2009.


Sec.  31.3306(c)(5)-1T  [Removed]

0
Par. 10. Section 3306(c)(5)-1T is removed.

PART 301--PROCEDURE AND ADMINISTRATION

0
Par. 11. The authority citation for part 301 continues to read in part 
as follows:

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


0
Par. 12. Section 301.7701-2 is amended as follows:
0
1. Paragraphs (c)(2)(iv)(A), (B), and (C) are revised.
0
2. Paragraph (c)(2)(v)(A)(1) is amended by removing the language ``and 
38'' and adding ``38, and 49'' in its place.
0
3. Paragraph (c)(2)(v)(A)(2) is amended by removing the language 
``Chapter 33'' and adding ``Chapters 33 and 49'' in its place.
0
4. Paragraph (c)(2)(vi) is removed.
0
5. Paragraph (e)(5) is revised.
0
6. Paragraph (e)(6)(iv) is added.
0
7. Paragraphs (e)(8) and (e)(9) are removed.
    The revisions and addition read as follows:


Sec.  301.7701-2  Business entities; definitions.

* * * * *
    (c) * * *
    (2) * * *
    (iv) * * *
    (A) In general. Except as provided in paragraph (c)(2)(iv)(C) of 
this section, paragraph (c)(2)(i) of this section (relating to certain 
wholly owned entities) does not apply to taxes imposed under Subtitle 
C--Employment Taxes and Collection of Income Tax (Chapters 21, 22, 23, 
23A, 24, and 25 of the Internal Revenue Code).

[[Page 36207]]

    (B) Treatment of entity. Except as provided in paragraph 
(c)(2)(iv)(C) of this section, an entity that is disregarded as an 
entity separate from its owner for any purpose under this section is 
treated as a corporation with respect to taxes imposed under Subtitle 
C--Employment Taxes and Collection of Income Tax (Chapters 21, 22, 23, 
23A, 24, and 25 of the Internal Revenue Code). For special rules 
regarding the application of certain employment tax exceptions, see 
Sec. Sec.  31.3121(b)(3)-1(d), 31.3127-1(b), and 31.3306(c)(5)-1(d) of 
this chapter.
    (C) Special rules. (1) Paragraphs (c)(2)(iv)(A) and (B) of this 
section do not apply to withholding requirements imposed by section 
3406 (backup withholding). Thus, in the case of an entity that is 
disregarded as an entity separate from its owner for any purpose under 
this section, the owner is subject to the withholding requirements 
imposed by section 3406 (backup withholding).
    (2) Paragraph (c)(2)(i) of this section applies to taxes imposed 
under Subtitle A, including Chapter 2--Tax on Self Employment Income. 
Thus, the owner of an entity that is treated in the same manner as a 
sole proprietorship under paragraph (a) of this section is subject to 
tax on self-employment income.
* * * * *
    (e) * * *
    (5)(i) Except as provided in this paragraph (e)(5), paragraph 
(c)(2)(iv) of this section applies with respect to wages paid on or 
after January 1, 2009.
    (ii) Paragraph (c)(2)(iv)(B) applies with respect to wages paid on 
or after September 14, 2009. For rules that apply before September 14, 
2009, see 26 CFR part 301 revised as of April 1, 2009.
    (iii) Paragraph (c)(2)(iv)(C)(1) of this section applies with 
respect to wages paid on or after November 1, 2011. For rules that 
apply before November 1, 2011, see 26 CFR part 301, revised as of April 
1, 2011. However, taxpayers may apply paragraph (c)(2)(iv)(C)(1) of 
this section with respect to wages paid on or after January 1, 2009.
    (6) * * *
    (iv) References to Chapter 49 in paragraph (c)(2)(v) of this 
section apply to taxes imposed on amounts paid on or after July 1, 
2012.
* * * * *


Sec.  301.7701-2T  [Removed]

0
Par. 13. Section 301.7701-2T is removed.

 John Dalrymple,
Deputy Commissioner for Services and Enforcement.

    Approved: February 7, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).

    Editorial Note: This document was received for publication by 
the Office of the Federal Register on June 23, 2014.

[FR Doc. 2014-14967 Filed 6-25-14; 8:45 am]
BILLING CODE 4830-01-P