[Federal Register Volume 84, Number 105 (Friday, May 31, 2019)]
[Proposed Rules]
[Pages 25209-25212]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11292]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 31
[REG-132240-15]
RIN 1545-BN52
Withholding on Certain Distributions Under Section 3405(a) and
(b)
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains a proposed regulation regarding
withholding on certain periodic and nonperiodic distributions under
section 3405, other than eligible rollover distributions. This
regulation would affect payors and payees of these distributions.
DATES: Written or electronic comments and must be received by August
29, 2019.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-132240-15), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
132240-15), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW, Washington, DC 20224, or sent electronically via the Federal
eRulemaking Portal at http://www.regulations.gov (indicate IRS REG-
132240-15).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulation,
Jeremy D. Lamb at (202) 317-6799; concerning submissions of comments,
Regina Johnson at (202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 3405(a)(1) requires the payor of any periodic payment to
withhold income tax from the payment. Under section 3405(a)(2), an
individual generally may elect not to have section 3405(a)(1) apply
with respect to periodic payments made to the individual. Section
3405(b)(1) requires the payor of any nonperiodic distribution to
withhold income tax from the distribution. Under section 3405(b)(2), an
individual generally may elect not to have section 3405(b)(1) apply
with respect to any nonperiodic distribution.
Section 3405(e)(2) defines a periodic payment as a designated
distribution that is an annuity or similar periodic payment. Section
3405(e)(3) defines a nonperiodic distribution as any designated
distribution that is not a periodic payment. A designated distribution
generally is defined in section 3405(e)(1) as any distribution or
payment from or under an employer deferred compensation plan, an
individual retirement plan (as defined in section 7701(a)(37)), or a
commercial annuity. For this purpose, an employer deferred compensation
plan is defined in section 3405(e)(5) as any pension, annuity, profit
sharing, or stock bonus plan or other plan deferring the receipt of
compensation, and a commercial annuity is defined in section 3405(e)(6)
as an annuity, endowment, or life insurance contract issued by an
insurance company licensed to do business under the laws of any State.
Section 3405(e)(1)(B) identifies certain amounts or payments that
are not a ``designated distribution'' for purposes of section 3405
withholding. Under section 3405(e)(1)(B)(iii), any amount that is
subject to withholding under subchapter A of chapter 3 (relating to
withholding of tax on nonresident aliens and foreign corporations) by
the person paying such amount or which would be so subject but for a
tax treaty is not a designated distribution.
Section 3405(e)(13)(A) provides generally that, in the case of any
periodic payment or nonperiodic distribution that is ``to be delivered
outside of the United States and any possession of the United States,''
no election may be made under section 3405(a)(2) or (b)(2) with respect
to such payment, with the result that withholding may not be waived.
Section 3405(e)(13)(B) provides that section 3405(e)(13)(A) does not
apply if the recipient certifies to the payor, in such manner as the
Secretary of the Treasury may prescribe, that the recipient is not (i)
a United States citizen or a resident alien of the United States, or
(ii) an individual to whom section 877 applies. Section 877(h) provides
that section 877 applies to certain nonresident alien individuals whose
expatriation date, as defined in section 877A(g)(3), is before June 17,
2008.
Notice 87-7 (1987-1 C.B. 420), see Sec. 601.601(d)(2)(ii)(b),
provides guidance under section 3405(e)(13)(A) to payors of designated
distributions with respect to their duty to withhold income tax from
such distributions. The notice addresses designated distributions to
the following categories of payees: (1) Payees who have provided the
payors with a residence address outside of the United States; \1\ (2)
payees who have provided the payors with a residence address within the
United States; and (3) payees who have not provided the payors with a
residence address.
---------------------------------------------------------------------------
\1\ For purposes of this preamble, references to the ``United
States'' include any possession of the United States.
---------------------------------------------------------------------------
Notice 87-7 specifies that, if a payee has provided the payor with
a residence address outside of the United States, the payor is required
to withhold income tax from designated distributions to the payee. If a
payee has provided the payor with a residence address within the United
States, the payor is required to withhold income tax from these
distributions to the payee unless the payee has elected no withholding
in accordance with the applicable provisions of section 3405. If a
payee has not provided the payor with a residence address, the payor is
required to withhold income tax from designated distributions; included
within this category is a payee who has provided the payor with an
address for the
[[Page 25210]]
payee's nominee, trustee, or agent without also providing the payee's
residence address.
Explanation of Provisions
The Department of the Treasury and the IRS have concluded that
Notice 87-7 generally provides an administrable standard with respect
to withholding under section 3405 that is consistent with the purposes
of the statute. Thus, the proposed regulation is based on the guidance
provided in Notice 87-7. However, stakeholders have requested
clarification regarding the application of Notice 87-7 and section
3405(e)(13)(A) in the following situations:
The payee provides the payor with an Army Post Office
(APO), Fleet Post Office (FPO), or Diplomatic Post Office (DPO)
address.\2\
---------------------------------------------------------------------------
\2\ Army Post Office (APO) is associated with Army or Air Force
installations. Fleet Post Office (FPO) is associated with Navy
installations and ships. APO/FPO addresses are utilized by
Department of Defense personnel, their family members, and other
authorized users. Diplomatic Post Office (DPO) provides global mail
service to authorized personnel assigned to designated posts abroad.
---------------------------------------------------------------------------
The payee provides the payor with a residence address
located within the United States but provides payment instructions that
request delivery of the designated distribution to a financial
institution or other person located outside of the United States.
The proposed regulation includes rules that would address these
situations, and the regulation when finalized would supersede the
guidance in Notice 87-7 for payors of designated distributions with
respect to their duty to withhold under sections 3405(a)(1) or (b)(1).
A. Payees With a Military or Diplomatic Post Office Address
For purposes of section 3405(e)(13)(A), the proposed regulation
treats an APO, FPO, or DPO address as an address located within the
United States. In 1986, section 3405(e) was amended to add section
3405(e)(13) as one of several provisions intended to increase
compliance with the internal revenue laws by United States persons
resident abroad and green card holders. The legislative history
indicates that Congress was concerned, based on data gathered by the
General Accounting Office (GAO),\3\ that the percentage of taxpayers
who fail to file returns is substantially higher among Americans living
abroad than it is among those resident in the United States and that it
is often difficult for the IRS to enforce compliance by these
taxpayers. S. Rep. No. 99-313, pt. 4, at 390 (1986).
---------------------------------------------------------------------------
\3\ Effective July 7, 2004, the GAO's legal name was changed
from the General Accounting Office to the Government Accountability
Office.
---------------------------------------------------------------------------
The GAO data referred to in the legislative history does not
include United States military personnel and their families as
taxpayers who are living abroad. Johnny C. Finch, United States
Citizens Living in Foreign Countries and Not Filing Federal Income Tax
Returns, United States General Accounting Office, May 8, 1985. In
addition, enforcement of compliance by individuals receiving mail at an
APO, FPO, or DPO address generally does not involve the same challenges
as enforcing compliance by other taxpayers living abroad. Because APO,
FPO, and DPO delivery destinations are generally United States military
or diplomatic facilities, taxpayers with an APO, FPO, or DPO address
commonly maintain a current or former employment or contractor
relationship with the United States federal government. Moreover, these
addresses are generally treated as ``domestic'' by the United States
Postal Service. United States Domestic Mail Manual, 608.2.2.
Accordingly, the Department of the Treasury and the IRS have concluded
that designated distributions to United States military and diplomatic
personnel or their families should not be treated as delivered outside
of the United States solely because those payments or distributions are
to be delivered to a United States military or diplomatic post office
address. For these reasons, the Department of the Treasury and the IRS
have determined that treating an APO, FPO, or DPO address as located
within the United States for purposes of section 3405(e)(13)(A) is
consistent with the tax avoidance concerns underlying the enactment of
section 3405(e)(13).
B. Payees With a Residence Address Located Within the United States
The proposed regulation would impose new withholding requirements
on payors regarding certain payees who have provided the payor with a
residence address located within the United States. Under Notice 87-7,
payors are not required to withhold if a payee provides a residence
address located within the United States and the payee elects no
withholding. Notice 87-7 does not specifically address whether payors
are required to withhold when a payee provides a residence address
located within the United States but also provides payment instructions
indicating that the funds are to be delivered outside of the United
States. As explained above, section 3405(e)(13)(A) was enacted because
Congress was concerned about noncompliance. Section 3405(e)(13)(A)
refers to ``any periodic payment or nonperiodic distribution which is
to be delivered outside of the United States.'' Consistent with the
text of section 3405(e)(13)(A) and its purpose, the proposed regulation
requires payors to withhold in certain circumstances when a payee
provides a residence address located within the United States but also
provides payment instructions indicating that the funds are to be
delivered outside of the United States.
C. Payees With a Residence Address Located Outside of the United States
and Payees Who Have Not Provided a Residence Address
Unless section 3405(e)(13)(B) applies, if the payee's residence
address that is provided to the payor is located outside of the United
States, the payor is required to withhold income tax under section 3405
from any designated distribution, without regard to the delivery
instructions and without regard to any attempt to elect no withholding.
Thus, for example, withholding under section 3405 would be required
even if a payee with a foreign residence address has requested that the
distribution be deposited with a financial institution located within
the United States. Given the ease with which the funds deposited with a
financial institution in the United States can be withdrawn by a person
located outside the United States, the Department of the Treasury and
the IRS have concluded that the payee's residence address is more
likely to be indicative of the place the distribution is ultimately to
be delivered than the location of the financial institution. As
proposed, the same requirement to withhold income tax under section
3405 would apply if a payor has not provided a residence address to the
payee. Furthermore, a payee who has provided the payor with an address
for the payee's nominee, trustee, or agent without also providing the
payee's residence address has not provided a residence address for
purposes of this regulation.
These rules are consistent with the approach in Notice 87-7, which
uses the residence address of the payee in order to determine whether a
taxpayer is permitted to make an election not to have withholding apply
under section 3405(a)(2) or (b)(2). The Department of the Treasury and
the IRS have determined that this interpretation articulated in Notice
87-7 should be retained because it provides an administrable standard
that has been relied upon for many years, is consistent with the
legislative history, and appropriately addresses tax avoidance
[[Page 25211]]
concerns underlying section 3405(e)(13)(A).\4\
---------------------------------------------------------------------------
\4\ The committee report states that ``it will be appropriate to
require withholding with respect to pension payments to persons with
foreign addresses absent a showing that withholding is not
required.'' S. Rep. No. 99-313, pt. 4, at 391 (1986).
---------------------------------------------------------------------------
D. Payments Subject to Withholding Under Subchapter A of Chapter 3
In accordance with section 3405(e)(1)(B)(iii), the proposed
regulation clarifies that a designated distribution does not include a
distribution that is subject to withholding under subchapter A of
chapter 3 or that would be so subject but for a tax treaty and,
therefore, the withholding rules under section 3405(a) and (b) do not
apply to such distributions. For example, section 3405(a) or (b)
withholding would not apply to a United States-source distribution to a
nonresident alien individual from a trust described in section 401(a).
In such a case, the withholding rules of section 1441 (within
subchapter A of chapter 3) would apply to such distributions. See Sec.
1.1441-1(b)(1).
Proposed Applicability Date
This regulation is proposed to apply with respect to distributions
on or after the applicability date of the final regulation. Taxpayers
may continue to rely upon Notice 87-7 until this regulation is
finalized. Upon publication of a final regulation, Notice 87-7 will be
superseded. Notwithstanding the previous sentence, taxpayers may rely
upon Sec. 31.3405(e)-1(b)(1) and (2) of the proposed regulation until
the applicability date of the final regulation.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Department of the Treasury and the Office of
Management and Budget regarding review of tax regulations. Because this
regulation does 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 Internal Revenue Code, this
regulation has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Requests for Public Hearing
Before this proposed regulation is adopted as a final regulation,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the ADDRESSES heading.
The Department of the Treasury and the IRS request comments on all
aspects of the proposed rules, including any administrative concerns
and how they should be addressed. All comments will be available at
www.regulations.gov or upon request. A public hearing will be scheduled
if requested in writing by any person who timely submits written
comments. If a public hearing is scheduled, notice of the date, time,
and place of the public hearing will be published in the Federal
Register.
Statement of Availability of IRS Documents
IRS revenue procedures, revenue rulings, notices and other guidance
cited in this preamble are published in the Internal Revenue Bulletin
(or Cumulative Bulletin) and are available from the Superintendent of
Documents, U.S. Government Publishing Office, Washington, DC 20402, or
by visiting the IRS website at http://www.irs.gov.
Drafting Information
The principal author of this proposed regulation is Jeremy D. Lamb,
IRS Office of Associate Chief Counsel (Employee Benefits, Exempt
Organizations, and Employment Taxes). However, other personnel from the
Department of the Treasury and the IRS participated in the development
of the proposed regulation.
List of Subjects in 26 CFR Part 31
Employment taxes, Income taxes, Penalties, Pensions, Railroad
retirement, Reporting and recordkeeping requirements, Social security,
Unemployment compensation.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 31 is proposed to be amended as follows:
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME AT THE SOURCE
0
Paragraph 1. The authority citation for part 31 continues to read in
part as follows:
Authority: 26 U.S.C. 7805.
* * * * *
0
Par. 2. Section 31.3405(e)-1 is added to read as follows:
Sec. 31.3405(e)-1 Questions and answers relating to withholding on
pensions, annuities, and certain other deferred income.
(a) The following questions and answers apply for purposes of
determining whether a payor of a distribution described in section
3405(a) or (b) must withhold income tax under this section. For
purposes of this section, references to the United States include
possessions of the United States.
(b)(1) Q-1: Is an Army Post Office (APO), Fleet Post Office (FPO),
or Diplomatic Post Office (DPO) address an address located within the
United States for purposes of section 3405(e)(13)(A)?
(2) A-1: For purposes of section 3405(e)(13)(A), an APO, FPO, or
DPO address is an address located within the United States.
(c)(1) Q-2: Is the payor required to withhold income tax from any
distribution described in section 3405(a) or (b) if the payee's
residence address that is provided to the payor is located within the
United States?
(2) A-2: If the payee's residence address that is provided to the
payor is located within the United States, the payor is required to
withhold income tax from any distribution described in section 3405(a)
or (b) unless the payee has made a valid election of no withholding in
accordance with section 3405(a)(2) or (b)(2). Any election of no
withholding with respect to a distribution under section 3405(a)(2) or
(b)(2) is not valid if the payee instructs the payor to do one or more
of the following in connection with the distribution:
(i) Send the distribution to a financial institution or other
person located outside of the United States;
(ii) Send the distribution to a financial institution or other
person located within the United States with further instructions (such
as ``for further credit to'' instructions) directing that the funds be
forwarded to a financial institution or other person located outside of
the United States; or
(iii) Send the distribution to a financial institution or other
person pursuant to payment instructions (including addenda information)
that reference an International Automated Clearing House Transaction
(IAT), International Bank Account Number (IBAN), or Society for
Worldwide Interbank Financial Telecommunication (SWIFT) Business
Identifier Code (BIC) linked to a financial institution or other person
located outside of the United States.
(d)(1) Q-3: Is the payor required to withhold income tax from a
distribution
[[Page 25212]]
described in section 3405(a) or (b) if the payee's residence address
that is provided to the payor is located outside of the United States?
(2) A-3: Unless section 3405(e)(13)(B) (which provides an exception
for certain nonresident aliens) applies, if the payee's residence
address that is provided to the payor is located outside of the United
States, the payor is required to withhold income tax from a
distribution described in section 3405(a) or (b), without regard to the
delivery instructions and without regard to any request by the payee to
elect no withholding. Withholding would be required, in this case, even
if the payee has requested that the distribution be delivered to a
financial institution or other person located within the United States.
(e)(1) Q-4: Is the payor required to withhold income tax from a
distribution described in section 3405(a) or (b) if the payee has not
provided the payor with the payee's residence address?
(2) A-4: If a payee has not provided the payor with the payee's
residence address, the payor is required to withhold income tax from a
distribution described in section 3405(a) or (b). A payee may not elect
no withholding under section 3405(a)(2) or (b)(2) and any purported
election of no withholding by such payee is not valid. For purposes of
this section, a payee who has provided the payor with an address for
the payee's nominee, trustee, or agent without also providing the
payee's residence address has not provided a residence address.
(f)(1) Q-5: Do the withholding rules under section 3405(a) and (b)
apply to a payee who is to receive a distribution that is subject to
withholding under subchapter A of chapter 3 (or that would be so
subject but for a tax treaty)?
(2) A-5: In accordance with section 3405(e)(1)(B)(iii), a
designated distribution does not include a distribution of a United
States-source payment that is subject to withholding under the rules of
section 1441 and Sec. 1.1441-1(b)(1) of this chapter (or that would be
so subject but for a tax treaty), such as a pension or other deferred
compensation plan distribution to be made to a payee who is a
nonresident alien (or other individual payee who is presumed to be a
foreign person under the presumption rules of Sec. 1.1441-1(b)(3) of
this chapter). Withholding under the rules of section 1441 and Sec.
1.1441-1(b)(1) of this chapter, rather than under the rules of section
3405(a) or (b), would apply to such a distribution.
(g)(1) Q-6: What is the effective date and applicability date of
this section?
(2) A-6: This section is effective on the date of publication of
the Treasury decision adopting these rules as a final regulation in the
Federal Register. The regulation in this section applies with respect
to distributions on or after the applicability date of the final
regulation.
Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-11292 Filed 5-30-19; 8:45 am]
BILLING CODE 4830-01-P