[Federal Register Volume 65, Number 201 (Tuesday, October 17, 2000)]
[Proposed Rules]
[Pages 61292-61299]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26204]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 5f, and 31
[REG-246249-96]
RIN 1545-AW48
Information Reporting Requirements for Certain Payments Made on
Behalf of Another Person, Payments to Joint Payees, and Payments of
Gross Proceeds From Sales Involving Investment Advisers
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Withdrawal of previous notice of proposed rulemaking; notice of
proposed rulemaking; and notice of public hearing.
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SUMMARY: This document withdraws a previous notice of proposed
rulemaking (LR-62-84) published May 29, 1984 (49 FR 22343). This
document contains proposed regulations under section 6041 that clarify
who is the payee for information reporting purposes if a check or other
instrument is made payable to joint payees, provide information
reporting requirements for escrow agents and other persons making
payments on behalf of another person, and clarify that the amount to be
reported paid is the gross amount of the payment. This document also
contains proposed regulations under section 6045 that remove investment
advisers from the list of exempt recipients. In addition, this document
provides notice of a public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by January 17,
2001. Requests to speak (with outlines of oral comments) at a public
hearing scheduled for February 7, 2001, at 10 a.m. must be submitted by
January 24, 2001.
ADDRESSES: Send submissions to: CC:M&SP:RU (REG-246249-96), room 5226,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submissions may be hand delivered Monday
through Friday between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU
(REG-246249-96), Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue, NW., Washington, DC, or sent electronically via
the IRS Internet site at http://www.irs.gov/tax__regs/regslist.html.
The public hearing will be held in the IRS Auditorium, Seventh Floor,
Internal Revenue Service Building, 1111 Constitution Avenue, NW.,
Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Nancy L.
Rose, (202) 622-4910; concerning submission of comments, the hearing,
and/or to be placed on the building access list to attend the hearing,
Guy R. Traynor, (202) 622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of Treasury, Office of Information and Regulatory Affairs,
Washington, DC 20503, with copies to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S:O, Washington, DC
20224. Comments on the collection of information should be received by
December 19, 2000. Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper operation of the functions of the Internal Revenue Service,
including whether the information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of service to provide information.
The collection of information in these proposed regulations is in
Secs. 1.6041-1(e) and 1.6045-1(c)(3). This information is required to
determine if taxpayers have properly reported amounts received as
income. The collection of information is mandatory. The likely
respondents are businesses and other for-profit institutions.
The estimate of the reporting burden in proposed Sec. 1.6041-1 is
reflected in the burden of Form 1099-MISC, Miscellaneous Income, which
is currently 14 minutes per form. The estimate of the reporting burden
in proposed Sec. 1.6045-1 is reflected in the burden of Form 1099-B,
Proceeds of Broker and Barter Exchange Transactions, which is currently
15 minutes per form.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to the collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background and Explanation of Provisions
1. Proposed Regulations Under Section 6041
Section 6041 provides that all persons engaged in a trade or
business that make certain payments in the course of that trade or
business to another person of $600 or more in a taxable year must
report the amount of the payments and the name and address of the
recipient.
Section 3406(a) provides that a payor must withhold tax from
reportable
[[Page 61293]]
payments under certain circumstances, for example, if the payee has
failed to furnish a valid taxpayer identification number to the payor
in the manner required. ``Reportable payments'' include payments that
are required to be reported under sections 6041 and 6045. Section
3406(b)(3)(A) and (C). The party that is responsible for reporting the
payments under sections 6041 and 6045 is also responsible for any
backup withholding required under section 3406.
These proposed regulations address certain issues identified by the
Commissioner's Information Reporting Program Advisory Committee (IRPAC)
and take into account comments and information provided by IRPAC
members representing the banking, real estate, insurance, and
securities industries.
a. Payments to Joint Payees
The proposed regulations clarify the definition of fixed and
determinable income in Sec. 1.6041-1(c) when a payment is made payable
to joint payees. This issue was discussed in papers presented at IRPAC
meetings in May 1994 and May 1995. The regulations provide that a
payment made jointly to two or more payees may be fixed and
determinable income to one payee even though the payment is not fixed
and determinable income to another payee. For example, when a payment
in consideration for services is made payable to joint payees, one of
whom is the service provider, an information return must be made
showing the service provider as the payee if the payment is fixed and
determinable income to the service provider, even if the payment is not
fixed and determinable income to the other payee. See, e.g., Situation
2 of Rev. Rul. 70-608 (1970-2 C.B. 286).
b. Identification of Payor
A payment reportable under section 6041 may be made by a person on
behalf of another person that is the actual source of the funds. Under
certain circumstances this so-called middleman, and not the person that
provided the funds, is the payor obligated to report the payment under
section 6041. See, e.g., Rev. Rul. 93-70 (1993-2 C.B. 294).
Consistent with Rev. Rul. 93-70, the proposed regulations add a new
paragraph (e)(1) to Sec. 1.6041-1 that provides that a person that
makes a payment on behalf of another person and performs a management
or oversight function in connection with, or has a significant economic
interest in, the payment must report under section 6041. A management
or oversight function is an activity that is more than merely
administrative or ministerial. For example, a person that merely writes
checks at the direction of others in connection with a transaction,
sometimes referred to as a paying agent, is performing only an
administrative or ministerial function and is not a payor. In contrast,
a person that exercises discretion or supervision in connection with a
payment is performing a management or oversight function and is a
payor. A significant economic interest in a payment is an economic
interest that would be compromised if the payment were not made. For
example a bank has a significant economic interest in a payment to a
contractor when damage occurs to property securing a mortgage held by
the bank. With this standard, which was also discussed in the IRPAC
papers of May 1994 and May 1995, the proposed regulations attempt to
replace disparate revenue rulings with a consistent and easily
administrable rule that can be applied to a variety of factual
situations involving middlemen.
Section 1.6041-1(e)(2) of the proposed regulations provides an
exception to the general rule of Sec. 1.6041-1(e)(1) by referencing the
procedures in Rev. Proc. 84-33 (1984-1 C.B. 502) for an optional method
for payors to designate a paying agent to file information returns and
backup withhold.
The proposed regulations include examples, derived primarily from
revenue rulings and private letter rulings, which are intended to be
all-inclusive. Rulings that are factually encompassed by the proposed
regulations will be obsoleted. Comments are requested identifying other
factually relevant rulings or suggesting appropriate additional
examples.
The proposed regulations make two changes to Sec. 1.6041-3 (to be
effective January 1, 2001). They revise Sec. 1.6041-3(d) to conform the
cross-reference to Sec. 1.6041-1 to the language effective January 1,
2001, and to clarify the current rule that real estate agents who
manage rental property and make payments of rent to landlords are
payors and continue to be subject to the general requirements of
Sec. 1.6041-1. The proposed regulations also remove Sec. 1.6041-3(n),
which provides an exception to the information reporting requirements
of section 6041 for amounts that a bank or similar institution collects
on behalf of, and pays over or credits to the account of, the actual
owner of the funds, but only if it does not collect the items on a
regular and continuing basis. Rev. Rul. 77-53 (1977-1 C.B. 368) further
restricted this limitation to banks that collect items on a regular and
continuing basis and also assume a management function or perform more
than the mere collection and payment or crediting of funds to a
customer's account. This holding is consistent with the ``management
and oversight'' standard of the proposed regulations. Accordingly,
Example 11 of the proposed regulations preserves the holding of Rev.
Rul. 77-53. Section 1.6041-3(n) is removed to avoid confusion and
redundancy. However, its removal will change current requirements by
imposing a reporting requirement on a bank that collects and pays or
credits funds on behalf of a customer on an infrequent or isolated
basis if it performs a management or oversight function in connection
with the payment, a transaction that is currently within the
Sec. 1.6041-3(n) exception.
The proposed regulations also remove paragraphs (b) and (c) of
Sec. 31.3406(a)-2. These paragraphs provide a standard for information
reporting by a so-called middleman that is inconsistent with the
standard in the proposed regulations. As amended, Sec. 31.3406(a)-2
reiterates the general rule of section 3406(h) (also stated in
Sec. 35a.9999-3, Q & A 1) that the definition of payor for information
reporting purposes determines who is the payor for backup withholding
purposes as well.
c. Amount To Be Reported When Fees, Expenses or Commissions are
Deducted From a Payment
The proposed regulations add a new paragraph (f) to Sec. 1.6041-1
that clarifies that the amount to be reported as paid to a payee is the
gross amount of the payment or payments before fees, commissions,
expenses, or other amounts owed by the payee to another person have
been deducted. See, e.g., Rev. Rul. 67-197 (1967-1 C.B. 319); Rev. Rul.
54-571 (1954-2 C.B. 235). The rule, which applies whether the payment
is made jointly or separately to the payee and another person, is also
cross-referenced in Example 6 and Example 8 of Sec. 1.6041-1(e)(3).
The rule of Sec. 1.6041-1(f) is illustrated by two examples
involving payment of taxable damages by a defendant to a plaintiff.
These examples, read with Example 8 of Sec. 1.6041-1(e)(3), are, in
part, inconsistent with Example 2 of the proposed regulations at
Sec. 1.6045-5(f), published on May 21, 1999 (64 FR 27730). Example 2
states that a defendant that pays a settlement to a plaintiff and knows
the amount of the plaintiff's attorney fees included in the
[[Page 61294]]
payment is required to report the payment of the attorney fees under
section 6041 and not the gross proceeds under section 6045(f). However,
under Sec. 1.6041-1(e) of these regulations, the defendant is not
exercising management or oversight in connection with, and therefore is
not required to make an information return under section 6041 for, the
payment to the attorney. The plaintiff, not the defendant, is required
to report the payment of attorney fees to plaintiff's attorney under
section 6041 (assuming that the payment is made in the course of the
plaintiff's trade or business and that the other requirements of
section 6041 apply). Accordingly, Example 2 in the final regulations
under section 6045(f) will be revised to provide that the defendant is
not required to make an information return under section 6041 but is
required to make an information return under section 6045(f), even if
the defendant knows the amount of plaintiff's attorney fees.
d. Revenue Rulings To Become Obsolete
As discussed above, the proposed regulations apply to the factual
situations addressed in the following revenue rulings, which will
become obsolete:
Rev. Rul. 93-70 (1993-2 C.B. 294)
Rev. Rul. 85-50 (1985-1 C.B. 345)
Rev. Rul. 77-53 (1977-1 C.B. 368)
Rev. Rul. 73-232 (1973-1 C.B. 541)
Rev. Rul. 70-608, Situations 1, 2, and 5 (1970-2 C.B. 286)
Rev. Rul. 69-595 (1969-2 C.B. 242)
Rev. Rul. 67-197 (1967-1 C.B. 319)
Rev. Rul. 65-129 (1965-1 C.B. 519)
Rev. Rul. 64-36 (1964-1 C.B. 446)
Rev. Rul. 59-328 (1959-2 C.B. 379)
Rev. Rul. 55-606 (1955-2 C.B. 489)
Rev. Rul. 54-571 (1954-2 C.B. 235)
2. Proposed Regulations Under Section 6045
Section 6045 provides that a broker must file an information return
showing the name and address of the broker's customer and other
details, such as the amount of the gross proceeds of the transaction,
as the Secretary may require. Section 6045(c) defines a broker as a
dealer, a barter exchange, or any other person who, for a
consideration, regularly acts as a middleman with respect to property
or services.
Section 1.6045-1(a)(2) provides that a customer is the person who
makes a sale effected by a broker, if the broker acts as (i) an agent
for the customer in the sale, (ii) a principal in the sale, or (iii)
the party in the sale responsible for paying or crediting the proceeds
to the customer. Under Sec. 1.6045-1(h), a broker must treat the person
whose name appears on the broker's books and records as the principal.
Section 5f.6045-1(c)(3), also published as proposed regulations (49
FR 22343), provides that no return of information is required with
respect to a sale effected for a customer that is an exempt recipient.
Among the categories of exempt recipients is a person registered under
the Investment Advisers Act of 1940 who regularly acts as a broker (an
investment adviser).
Section 5f.6045-1(c)(3)(iii) provides that, in a cash on delivery
or similar transaction, only the broker that receives the gross
proceeds against delivery of the securities sold is required to report
a sale, unless the broker's customer is another broker (a second-party
broker) that is an exempt recipient. In that case, only the second-
party broker is required to report.
One effect of these provisions is to shift the reporting
requirement in a cash on delivery transaction from the broker that
receives the gross proceeds against delivery of the securities to an
investment adviser. For example, in Sec. 5f.6045-1(c)(4) Example (4),
an investment adviser instructs a broker/dealer to sell securities
owned by the investment adviser's customer and to pay the proceeds of
the sale to a custodian bank. The custodian bank is instructed to
deliver the securities to the broker/dealer against delivery of the
proceeds of the sale. The investment adviser, and not the broker/dealer
or the custodian bank, is required to report the payment of the
proceeds of the sale to the investment adviser's customer, because (1)
the broker/dealer paid the gross proceeds of the sale to the custodian
bank against delivery of the securities sold, and (2) the custodian
bank's customer was the investment adviser, an exempt recipient.
Commentators on the proposed regulations objected to the imposition
of the reporting obligation under section 6045(a) on investment
advisers because (1) investment advisers generally do not have first-
hand knowledge that a sale has been completed, and (2) investment
advisers generally do not handle the proceeds of a sale and,
consequently, cannot comply with the backup withholding requirements of
section 3406. Investment adviser reporting issues were also the subject
of IRPAC papers presented at meetings in November 1995 and October
1997.
These proposed regulations withdraw the 1984 proposed regulations.
In general, they propose to incorporate the provisions of Sec. 5f.6045-
1 into Sec. 1.6045-1(c)(3) and (4). The proposed regulations also
remove investment advisers from the list of exempt recipients and
revise current Sec. 5f.6045-1(c)(4) Examples 4 and 5 to clarify that,
under the revised rules, an investment adviser that initiates a sale on
behalf of a customer is required to make a return of information only
if the sale relates to an investment account in the investment
adviser's name (i.e., the identity of the customer is not disclosed to
the account custodian).
Proposed Effective Date
The provisions of these regulations under sections 6041 and 3406
are proposed to be applicable for payments made on or after the
beginning of the first calendar year that begins after these
regulations are published in the Federal Register as final regulations.
The provisions of these regulations under section 6045 are proposed to
be applicable for sales effected on or after the beginning of the first
calendar year that begins after the date these regulations are
published in the Federal Register as final regulations.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. An initial
regulatory flexibility analysis has been prepared for the collection of
information in this notice of proposed rulemaking under 5 U.S.C.
section 603. The analysis is set forth in this preamble under the
heading ``Initial Regulatory Flexibility Analysis.'' Pursuant to
section 7805(f) of the Internal Revenue Code, this notice of proposed
rulemaking will be submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Initial Regulatory Flexibility Analysis
The collection of information proposed in Sec. 1.6041-1(e) is
needed to clarify the requirements for filing an information return
under section 6041 when a person makes a payment on behalf of another
person or to joint payees. The objectives of the proposed regulations
are to provide uniform, practicable, and administrable rules under
section 6041 for persons making payments on behalf of another person or
to joint payees. The types of small entities to which the proposed
regulations may apply are small businesses. An estimate of the number
of small entities affected is not feasible because of the large variety
of entities
[[Page 61295]]
and transactions to which the proposed regulations may apply. However,
in 1997 a total of 73,273,621 Forms 1099-MISC were filed with the IRS.
The number of 1997 Forms 1099-MISC that related to transactions that
involved payments made on behalf of another person or to joint payees
cannot be determined. The current estimated reporting burden relating
to Form 1099-MISC is 14 minutes per form. No special professional
skills are necessary for preparation of the reports or records. There
are no known Federal rules that duplicate, overlap, or conflict with
these proposed regulations. The regulations proposed are considered to
have the least economic impact on small entities of all alternatives
considered.
The collection of information in proposed Sec. 1.6045-1(c)(3) will
not have a significant economic impact on a substantial number of small
entities. The proposed regulations will relieve investment advisers of
the requirement to make information returns under section 6045(a), and
few, if any, financial custodians that may be affected by the
regulations are small entities.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic or written comments (a
signed original and eight (8) copies) that are submitted timely (in the
manner described in the ADDRESSES caption) to the IRS. The IRS and
Treasury Department request comments on the clarity of the proposed
rules and how they may be made easier to understand. All comments will
be available for public inspection and copying.
A public hearing has been scheduled for February 7, 2001, beginning
at 10 a.m. in the IRS Auditorium, Seventh Floor, Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC. Due to
building security procedures, visitors must enter at the 10th Street
entrance, located between Constitution and Pennsylvania Avenues, NW. In
addition, all visitors must present photo identification to enter the
building.
Because of access restrictions, visitors will not be admitted
beyond the immediate entrance area more than 15 minutes before the
hearing starts. For information about having your name placed on the
building access list to attend the hearing, see the FOR FURTHER
INFORMATION CONTACT section of the preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit written
comments and an outline of the topics to be discussed and the time to
be devoted to each topic (signed original and eight (8) copies) by
January 24, 2001. A period of 10 minutes will be allotted to each
person for making comments. An agenda showing the scheduling of the
speakers will be prepared after the deadline for receiving outlines has
passed. Copies of the agenda will be available free of charge at the
hearing.
Drafting Information
The principal author of these regulations is Donna M. Crisalli,
Office of the Associate Chief Counsel (Income Tax & Accounting).
However, other personnel from the IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Parts 1 and 5f
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 31
Employment taxes, Income taxes, Penalties, Railroad retirement,
Reporting and recordkeeping requirements, Social security, Unemployment
compensation.
Proposed Amendments to the Regulations
Accordingly, under the authority of 26 U.S.C. 7805, the notice of
proposed rulemaking (LR-62-84) amending 26 CFR part 1 that was
published in the Federal Register on May 29, 1984 (49 FR 22343) is
withdrawn. In addition, 26 CFR parts 1, 5f, and 31 are proposed to be
amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *.
Section 1.6041-1 also issued under 26 U.S.C. 6041(a). * * *
Par. 2. Section 1.6041-1 is amended by:
1. Removing the language ``paragraph (g)'' in the second sentence
of paragraph (b)(1) and adding the language ``paragraph (i)'' in its
place.
2. Adding two sentences after the fourth sentence of paragraph (c).
3. Redesignating paragraphs (e) through (g) as paragraphs (g)
through (i).
4. Adding new paragraphs (e) and (f), and (j).
The additions and revisions read as follows:
Sec. 1.6041-1 Return of information as to payments of $600 or more.
* * * * *
(c) * * * A payment made jointly to two or more payees may be fixed
and determinable income to one payee even though the payment is not
fixed and determinable income to another payee. For example, property
insurance proceeds paid jointly to the owner of damaged property and to
a contractor that repairs the property may be fixed and determinable
income to the contractor but not fixed and determinable income to the
owner. * * *
* * * * *
(e) Payment made on behalf of another person--(1) In general. A
person that makes a payment in the course of its trade or business on
behalf of another person is the payor that must make a return of
information under this section with respect to that payment if the
payment is described in paragraph (a) of this section and, under all
the facts and circumstances, that person--
(i) Performs management or oversight functions (i.e., performs more
than mere administrative or ministerial functions) in connection with
the payment; or
(ii) Has a significant economic interest in the payment.
(2) Optional method to report. A person that makes a payment on
behalf of another person but is not required to make an information
return under paragraph (e)(1) of this section may elect to do so
pursuant to the procedures established in Rev. Proc. 84-33 (1984-1 C.B.
502) (optional method for a paying agent to report and deposit amounts
withheld for payors under the statutory provisions of backup
withholding) (see Sec. 601-601(d)(2) of this chapter).
(3) Examples. The provisions of this paragraph (e) are illustrated
by the following examples:
Example 1. Bank B provides financing to C, a real estate
developer, for a construction project. B puts the funds in an escrow
account and makes disbursements from the account for labor,
materials, services, and other expenses related to the construction
project. In connection with the payments, B performs the following
functions on behalf of C: approves payments to the general
contractor or subcontractors; ensures that loan proceeds are
properly applied and that all approved bills are properly paid to
avoid mechanics or materialmen's liens; conducts site inspections to
determine whether work has been completed (but does not check the
quality of the work); evaluates and assesses the cost of the
project, including costs of changes; and communicates resulting
concerns to C or to the general contractor so that modifications can
be made or additional funding obtained. B is performing
[[Page 61296]]
management or oversight functions in connection with the payment and
is subject to the information reporting requirements of section 6041
with respect to payments from the escrow fund.
Example 2. Mortgage company D holds a mortgage on business
property owned by E. When the property is damaged by a storm E's
insurance company issues a check payable to both D and E in
settlement of E's claim. Pursuant to the contract between D and E, D
holds the insurance proceeds in an escrow account and makes
disbursements according to E's instructions to contractors and
subcontractors performing repairs on the property. D is not
performing management or oversight functions, but D has a
significant economic interest in the payments because the purpose of
the arrangement is to ensure that property on which D holds a
mortgage is repaired or replaced. D is subject to the information
reporting requirements of section 6041 with respect to the payments
to contractors.
Example 3. Settlement agent F provides real estate closing
services to real estate brokers and agents. F deposits money
received from the buyer or lender in an escrow account and makes
payments from the account to real estate agents or brokers,
appraisers, land surveyors, building inspectors, or similar service
providers according to the provisions of the real estate contract
and written instructions from the lender. F may also make
disbursements pursuant to verbal instructions of the seller or
purchaser at closing. F is not performing management or oversight
functions and does not have a significant economic interest in the
payments, and is not subject to the information reporting
requirements of section 6041. For the rules relating to F's
obligation to report the gross proceeds of the sale, see section
6045(e) and Sec. 1.6045-4.
Example 4. Assume the same facts as in Example 3, except that
the seller instructs F to hire a contractor to perform repairs on
the property. F selects the contractor, negotiates the cost,
monitors the progress of the project, and inspects the work to
ensure it complies with the contract. With respect to the payments
to the contractor, F is performing management or oversight functions
and is subject to the information reporting requirements of section
6041.
Example 5. Real estate agent G manages certain rental property
on behalf of property owner H. In addition to collecting the rent G
arranges for various services that are needed to maintain the
property (e.g., painting, repairs, lawn mowing, etc.), determines
that the services have been satisfactorily performed, and pays the
service providers. G is performing management or oversight functions
and is subject to the information reporting requirements of section
6041 with respect to the payments to the service providers. With
respect to the payments of rent to H, see Sec. 1.6041-3(d).
Example 6. Literary agent J receives a payment from publisher L
of fees earned by J's client, author K. J deposits the payment into
a bank account in J's name and pays K the net amount after
subtracting J's commission. From time to time and as directed by K,
J also makes payments to attorneys, managers, and other third
parties from these funds for services rendered to K. J does not
order or direct the provision of services by the third parties to K,
and J exercises no discretion in making the payments to them. J is
not performing management or oversight functions and does not have a
significant economic interest in the payments, and is not subject to
the information reporting requirements of section 6041 in connection
with the payments to K or to the third parties. For the rules
relating to L's obligation to report the payment of the fees to K,
see paragraphs (a)(1)(i) and (f) of this section. For the rules
relating to K's obligation to report the payment of the commission
to J and the payments to the third parties for services, see
paragraphs (a)(1)(i) and (d)(2) of this section.
Example 7. Attorney P deposits into a client trust fund a
settlement payment from R, the defendant in a breach of contract
action for lost profits in which P represented plaintiff Q. P makes
payments from the client trust fund to service providers such as
expert witnesses and private investigators for expenses incurred in
the litigation. P decides whom to hire, negotiates the amount of
payment, and determines that the services have been satisfactorily
performed. In the event of a dispute with a service provider, P
withholds payment until the dispute is settled. With respect to
payments to the service providers P is performing management or
oversight functions and is subject to the information reporting
requirements of section 6041.
Example 8. Assume the same facts as in Example 7, except that
after paying the service providers and deducting his legal fee, P
pays Q the remaining funds that P had received from the settlement
with R. With respect to the payment to Q, P is not performing
management or oversight functions and does not have a significant
economic interest in the payment, and is not subject to the
information reporting requirements of section 6041. For the rules
relating to R's obligation to report the payment of the settlement
proceeds to P, see section 6045(f) and Sec. 1.6045-5. For the rules
relating to R's obligation to report the payment of the settlement
proceeds to Q, see paragraphs (a)(1)(i) and (f) of this section. For
the rules relating to Q's obligation to report the payment of
attorney fees to P, see paragraphs (a)(1)(i) and (d)(2) of this
section.
Example 9. Medical insurer S operates as the administrator of a
health care program under a contract with a state. S makes payments
of government funds to health care providers who provide care to
eligible patients. S receives and reviews claims submitted by
patients or health care providers, determines if the claims meet all
the requirements of the program (e.g., that the care is authorized
and that the patients are eligible beneficiaries), and determines
the amount of payment. S is performing management or oversight
functions and is subject to the information reporting requirements
of section 6041 with respect to the payments.
Example 10. Race track employee T holds deposits made by horse
owner U in a special escrow account in U's name. U enters into a
contract with jockey V to ride U's horse in a race at the track. As
directed by U, T pays V the fee for riding U's horse from U's escrow
account. T is not performing management or oversight functions and
does not have a significant economic interest in the payment, and is
not subject to the information reporting requirements of section
6041. For the rules relating to U's obligation to report the payment
of the fee to V, see paragraph (a)(1)(i) of this section.
Example 11. Bank W collects payments from mortgagors and remits
the amounts to the mortgagees or credits their accounts. W performs
no other task with respect to the mortgage payments and has no other
interest in the accounts. Although W collects payments on a regular
and continuing basis, W is not performing management or oversight
functions and does not have a significant economic interest in the
payments, and is not subject to the information reporting
requirements of section 6041 with respect to the payments.
(f) Amount to be reported when fees, expenses or commissions are
deducted--(1) In general. The amount to be reported as paid to a payee
is the gross amount of the payment or payments before fees,
commissions, expenses, or other amounts owed by the payee to another
person have been deducted, whether the payment is made jointly or
separately to the payee and the other person.
(2) Examples. The provisions of this paragraph (f) are illustrated
by the following examples:
Example 1. Attorney P represents client Q in a breach of
contract action for lost profits against defendant R. R settles the
case for $100,000 damages and $40,000 for attorney fees. R issues a
check payable to P and Q in the amount of $140,000. R is required to
make an information return reporting a payment to Q in the amount of
$140,000.
Example 2. Assume the same facts as in Example 1, except that R
issues a check to Q for $100,000 and a separate check to P for
$40,000. R is required to make an information return reporting a
payment to Q in the amount of $140,000.
* * * * *
(j) Effective date. The provisions of paragraphs (b), (c), (e), and
(f) of this section apply to payments made on or after the beginning of
the first calendar year that begins after these regulations are
published in the Federal Register as final regulations.
Sec. 1.6041-3 [Amended]
Par. 3. Section 1.6041-3, as in effect on January 1, 2001, is
amended as follows:
1. In paragraph (d), removing the language ``(but the agent is
subject to the requirements of paragraph (a)(1)(ii) and (2)(ii) of
Sec. 1.6041-1)'' and adding the language ``(but the agent is required
to report payments of rent to the landlord
[[Page 61297]]
in accordance with Sec. 1.6041-1)(a)(1)(i)(B) and (2)'' in its place.
2. Removing paragraph (n) and redesignating paragraphs (o) through
(q) as paragraphs (n) through (p).
Par. 4. Section 1.6045-1, as in effect on January 1, 2001, is
amended as follows:
1. Revising paragraph (a) introductory text.
2. Revising paragraphs (c)(3) and (c)(4).
3. Removing the language ``5f.6045-1(c)(3)(ii) of this chapter''
and adding the language ``paragraph (c)(3)(iii) of this section'' in
its place in each place it appears in paragraph (g)(4) Examples 1, 4,
5, 6, and 7(i).
The revisions read as follows:
Sec. 1.6045-1 Returns of information of brokers and barter exchanges.
(a) Definitions. The following definitions apply for purposes of
this section and Sec. 1.6045-2:
* * * * *
(c) * * *
(3) Exceptions--(i) Sales effected for exempt recipients--
(A) In general. No return of information is required with respect
to a sale effected for a customer that is an exempt recipient under
paragraph (c)(3)(i)(B) of this section.
(B) Exempt recipient defined. The term exempt recipient means--
(1) A corporation as defined in section 7701(a)(3), whether
domestic or foreign;
(2) An organization exempt from taxation under section 501(a) or an
individual retirement plan;
(3) The United States or a State, the District of Columbia, a
possession of the United States, a political subdivision of any of the
foregoing, a wholly-owned agency or instrumentality of any one or more
of the foregoing, or a pool or partnership composed exclusively of any
of the foregoing;
(4) A foreign government, a political subdivision thereof, an
international organization, or any wholly-owned agency or
instrumentality of the foregoing;
(5) A foreign central bank of issue as defined in Sec. 1.895-
1(b)(1) (i.e., a bank that is by law or government sanction the
principal authority, other than the government itself, issuing
instruments intended to circulate as currency);
(6) A dealer in securities or commodities registered as such under
the laws of the United States or a State;
(7) A futures commission merchant registered as such with the
Commodity Futures Trading Commission;
(8) A real estate investment trust (as defined in section 856);
(9) An entity registered at all times during the taxable year under
the Investment Company Act of 1940 (15 U.S.C. 80a-1, et seq.);
(10) A common trust fund (as defined in section 584(a)); or
(11) A financial institution such as a bank, mutual savings bank,
savings and loan association, building and loan association,
cooperative bank, homestead association, credit union, industrial loan
association or bank, or other similar organization.
(C) Exemption certificate. A broker may treat a person described in
paragraph (c)(3)(i)(B) of this section as an exempt recipient based on
a properly completed exemption certificate (as provided in
Sec. 31.3406(h)-3) of this chapter or on the broker's actual knowledge
that the payee is a person described in paragraph (c)(3)(i)(B) of this
section. A broker may require an exempt recipient to file a properly
completed exemption certificate and may treat an exempt recipient that
fails to do so as a recipient that is not exempt.
(ii) Excepted sales. No return of information is required with
respect to a sale effected by a broker for a customer if the sale is an
excepted sale. For this purpose, a sale is an excepted sale if it is so
designated by the Internal Revenue Service in a revenue ruling or
revenue procedure (see Sec. 601.601(d)(2) of this chapter).
(iii) Multiple brokers. If a broker is instructed to initiate a
sale by a person that is an exempt recipient described in paragraph
(c)(3)(i)(B)(6), (7), or (11) of this section, no return of information
is required with respect to the sale by that broker. In a redemption of
stock or retirement of securities, only the broker responsible for
paying the holder redeemed or retired, or crediting the gross proceeds
on the sale to that holder's account, is required to report the sale.
(iv) Cash on delivery transactions. In the case of a sale of
securities through a cash on delivery account, a delivery versus
payment account, or other similar account or transaction, only the
broker that receives the gross proceeds from the sale against delivery
of the securities sold is required to report the sale. If, however, the
broker's customer is another broker (second-party broker) that is an
exempt recipient, then only the second-party broker is required to
report the sale.
(v) Fiduciaries and partnerships. No return of information is
required with respect to a sale effected by a custodian or trustee in
its capacity as such or a redemption of a partnership interest by a
partnership provided the sale is otherwise reported by the custodian or
trustee on a properly filed Form 1041, or the redemption is otherwise
reported by the partnership on a properly filed Form 1065, and all
Schedule K-1 reporting requirements are satisfied.
(vi) Sales at issue price. No return of information is required
with respect to a sale of an interest in a regulated investment company
(within the meaning of section 851) that computes its current price per
share for purposes of distributions, redemptions, and purchases so as
to stabilize the price per share at a constant amount that approximates
its issue price or the price at which it was originally sold to the
public.
(vii) Obligor payments on certain obligations. No return of
information is required with respect to payments representing obligor
payments on--
(A) Nontransferable obligations (including savings bonds, savings
accounts, checking accounts, and NOW accounts);
(B) Obligations as to which the entire gross proceeds are reported
by the broker on Form 1099 under provisions of the Internal Revenue
Code other than section 6045 (including stripped coupons issued prior
to July 1, 1982); or
(C) Retirement of short-term obligations (i.e., obligations with a
fixed maturity date not exceeding 1 year from the date of issue) that
have original issue discount, as defined in section 1273(a)(1).
(viii) Callable obligations. No return of information is required
with respect to payments representing obligor payments on demand
obligations that also are callable by the obligor and that have no
premium or discount.
(ix) Foreign currency. No return of information is required with
respect to a sale of foreign currency other than a sale pursuant to a
forward contract or regulated futures contract that requires delivery
of foreign currency.
(x) Fractional share. No return of information is required with
respect to a sale of a fractional share of stock if the gross proceeds
on the sale of the fractional share are less than $20.
(xi) Certain retirements. No return of information is required from
an issuer or its agent with respect to the retirement of book entry or
registered form obligations as to which the relevant books and records
indicate that no interim transfers have occurred.
(xii) Cross reference. For an exception for certain sales of
agricultural commodities and certificates issued by the Commodity
Credit Corporation after January 1, 1993, see paragraph (c)(7) of this
section.
(xiii) Effective date. The provisions of this paragraph (c)(3)
apply for sales effected on or after the beginning of the
[[Page 61298]]
first calendar year that begins after the date these regulations are
published in the Federal Register as final regulations.
(4) Examples. The following examples illustrate the application of
the rules in paragraph (c)(3) of this section:
Example 1. P, an individual who is not an exempt recipient,
places an order with B, a person generally known in the investment
community to be a federally registered broker/dealer, to sell P's
stock in a publicly traded corporation. B, in turn, places an order
to sell the stock with C, a second broker, which will execute the
sale. B discloses to C the identity of the customer placing the
order. C is not required to make a return of information with
respect to the sale because C was instructed by B, an exempt
recipient as defined in paragraph (c)(3)(i)(B)(6) of this section,
to initiate the sale. B is required to make a return of information
with respect to the sale because P is B's customer and is not an
exempt recipient.
Example 2. Assume the same facts as in Example 1 except that B
has an omnibus account with C so that B does not disclose to C
whether the transaction is for a customer of B or for B's own
account. C is not required to make a return of information with
respect to the sale because C was instructed by B, an exempt
recipient as defined in paragraph (c)(3)(i)(B)(6) of this section,
to initiate the sale. B is required to make a return of information
with respect to the sale because P is B's customer and is not an
exempt recipient.
Example 3. D, an individual who is not an exempt recipient,
enters into a cash on delivery stock transaction by instructing K, a
federally registered broker/dealer, to sell stock owned by D, and to
deliver the proceeds to L, a custodian bank. Concurrently with the
above instructions, D instructs L to deliver D's stock to K (or K's
designee) against delivery of the proceeds from K. The records of
both K and L with respect to this transaction show an account in the
name of D. Pursuant to paragraph (h)(1) of this section, D is
considered the customer of K and L. Under paragraph (c)(3)(iv) of
this section, K is not required to make a return of information with
respect to the sale because K will pay the gross proceeds to L
against delivery of the securities sold. L is required to make a
return of information with respect to the sale because D is L's
customer and is not an exempt recipient.
Example 4. Assume the same facts as in Example 3 except that E,
a federally registered investment adviser, instructs K to sell stock
owned by D and to deliver the proceeds to L. Concurrently with the
above instructions, E instructs L to deliver D's stock to K (or K's
designee) against delivery of the proceeds from K. The records of
both K and L with respect to the transaction show an account in the
name of D. Pursuant to paragraph (h)(1) of this section, D is
considered the customer of K and L. Under paragraph (c)(3)(iv) of
this section, K is not required to make a return of information with
respect to the sale because K will pay the gross proceeds to L
against delivery of the securities sold. L is required to make a
return of information with respect to the sale because D is L's
customer and is not an exempt recipient.
Example 5. Assume the same facts as in Example 4 except that the
records of both K and L with respect to the transaction show an
account in the name of E. Pursuant to paragraph (h)(1) of this
section, E is considered the customer of K and L. Under paragraph
(c)(3)(iv) of this section, K is not required to make a return of
information with respect to the sale because K will pay the gross
proceeds to L against delivery of the securities sold. L is required
to make a return of information with respect to the sale because E
is L's customer and is not an exempt recipient. E is required to
make a return of information with respect to the sale because D is
E's customer and is not an exempt recipient.
Example 6. F, an individual who is not an exempt recipient, owns
bonds that are held by G, a federally registered broker/dealer, in
an account for F with G designated as nominee for F. Upon the
retirement of the bonds, the gross proceeds are automatically
credited to the account of F. G is required to make a return of
information with respect to the retirement because G is the broker
responsible for making payments of the gross proceeds to F.
* * * * *
Sec. 1.6045-2 [Amended]
Par. 5. In Sec. 1.6045-2, paragraph (b)(2)(ii), is amended by
removing the language ``Sec. 5f.6045-1(c)(3)(i)(B) of the Temporary
Income Tax Regulations under the Tax Equity and Fiscal Responsibility
Act of 1982'' and adding the language ``Sec. 1.6045-1(c)(3)(i)(B)'' in
its place.
Par. 6. In Sec. 1.6049-4, as in effect on January 1, 2001,
paragraph (a)(2) is revised to read as follows:
Sec. 1.6049-4 Return of information as to interest paid and original
issue discount includible in gross income after December 31, 1982.
(a) * * *
(2) Payor. For payments made on or after the beginning of the first
calendar year that begins after the date these regulations are
published in the Federal Register as final regulations, a payor is a
person described in paragraph (a)(2)(i) or (ii) of this section.
(i) Every person who makes a payment of the type and of the amount
subject to reporting under this section (or under an applicable section
under this chapter) to any other person during a calendar year.
(ii) Every person who collects on behalf of another person payments
of the type and of the amount subject to reporting under this section
(or under an applicable section under this chapter), or who otherwise
acts as a middleman (as defined in paragraph (f)(4) of this section)
with respect to such payment.
* * * * *
PART 5f--TEMPORARY INCOME TAX REGULATIONS UNDER THE TAX EQUITY AND
FISCAL RESPONSIBILITY ACT OF 1982
Par. 7. The authority citation for part 5f is amended by removing
the authority citation for Sec. 5f.6045-1 to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Sec. 5f.6045-1 [Removed]
Par. 8. Section 5f.6045-1 is removed.
PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME TAX AT SOURCE
Par. 9. The authority citation for part 31 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 10. Section 31.3406-0 is amended by:
1. Revising the entry for Sec. 31.3406(a)-2, paragraph (b).
2. Adding an entry for Sec. 31.3406(a)-2, paragraph (d).
The revision and addition read as follows:
Sec. 31.3406-0 Outline of the backup withholding regulations.
* * * * *
Sec. 31.3406(a)-2 Definition of payors obligated to backup withhold.
* * * * *
(b) Persons treated as payors.
* * * * *
(d) Effective date.
* * * * *
Par. 11. Section 31.3406(a)-2 is revised to read as follows:
Sec. 31.3406(a)-2 Definition of payors obligated to backup withhold.
(a) In general. Payor means the person that is required to make an
information return under section 6041, 6041A(a), 6042, 6044, 6045,
6049, 6050A, or 6050N, with respect to any reportable payment (as
described in section 3406(b)), or that is described in paragraph (b) of
this section.
(b) Persons treated as payors. The following persons are treated as
payors for purposes of section 3406--
(1) A grantor trust established after December 31, 1995, all of
which is owned by two or more grantors, and for this purpose spouses
filing a joint return are considered to be one grantor;
(2) A grantor trust with ten or more grantors established on or
after January 1, 1984 but before January 1, 1996;
[[Page 61299]]
(3) A common trust fund; and
(4) A partnership or an S corporation that makes a reportable
payment.
(c) Persons not treated as payors. The following persons are not
treated as payors for purposes of section 3406 if the person does not
have a reporting obligation under the section on information reporting
to which the payment relates--
(1) A trust (other than a grantor trust as described in paragraph
(b)(1) or (2) of this section) that files a Form 1041 containing
information required to be shown on an information return, including
amounts withheld under section 3406; or
(2) A partnership making a payment of a distributive share or an S
corporation making a similar distribution.
(d) Effective date. The provisions of this section apply to
payments made on or after the beginning of the first calendar year that
begins after these regulations are published in the Federal Register as
final regulations.
Sec. 31.3406(a)-4 [Amended]
Par. 12. Section 31.3406(a)-4 is amended as follows:
1. In paragraph (c)(1), first sentence, removing the language ``Any
middleman (as defined in Sec. 31.3406(a)-2(b))'' and adding the
language ``A middleman payor (as defined in Sec. 31.3406(a)-2(b) or in
the section on information reporting to which the payment relates)'' in
its place.
2. In paragraph (c)(3), first sentence, removing the language
``Sec. 31.3406(a)-2(b)(4)'' and adding the language ``Sec. 31.3406(a)-
2(b)(1) or (2)'' in its place.
Sec. 31.3406(b)(3)-2 [Amended]
Par. 13. In Sec. 31.3406(b)(3)-2, paragraph (b)(5) is amended by
removing the language ``Sec. 5f.6045-1(c)(3)(ix)'' and adding the
language ``Sec. 1.6045-1(c)(3)(x)'' in its place.
Sec. 31.3406(d)-4 [Amended]
Par. 14. In Sec. 31.3406(d)-4, paragraph (a)(1) introductory text
is amended by removing the language ``the payor of the instrument (as
defined in Sec. 31.3406(a)-2(b)(3)),'' and adding the language ``a
broker holding a security (including stock) for a customer in street
name,'' in its place.
Sec. 31.3406(h)-1 [Amended]
Par. 15. In Sec. 31.3406(h)-1, paragraph (c), second sentence, is
amended by removing the language ``Sec. 5f.6045-1(c)(3)(ii) and (iii)''
and adding the language ``Sec. 1.6045-1(c)(3)(iii) and (iv)'' in its
place.
Sec. 31.3406(h)-2 [Amended]
Par. 16. Section 31.3406(h)-2 is amended as follows:
1. In paragraph (c), third sentence, removing the language ``with
two or more grantors described in Sec. 31.3406(a)-2(b)(4), which is
treated as a middleman payor'' and adding the language ``described in
Sec. 31.3406(a)-2(b)(1) or (2), which is treated as a payor'' in its
place.
2. In paragraph (d), first sentence, removing the language ``A
middleman payor (as defined in Sec. 31.3406(a)-2(b)'' and adding the
language ``A middleman payor (as defined in Sec. 31.3406(a)-2(b) or in
the section on information reporting to which the payment relates)'' in
its place.
3. In paragraph (f)(6), removing the language ``Sec. 31.3406(a)-
2(a)'' and adding the language ``Sec. 31.3406(a)-2'' in its place.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 00-26204 Filed 10-16-00; 8:45 am]
BILLING CODE 4830-01-U