Internal Revenue Bulletin 2011-23 (PDF rendition): IRS Revenue Rulings

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Bulletin No. 201
1-23
June 6, 2011
HIGHLIGHTS
OF THIS ISSUE
These synopses are intended only as aids to the reader in
identifying the subject matter covered. They may not be
relied upon as authoritative interpretations.
INCOME TAX
Rev. Rul. 2011–13, page 841.
Federal rates; adjusted federal rates; adjusted federal
long-term rate and the long-term exempt rate.For pur-
poses of sections 382, 642, 1274, 1288, and other sections
of the Code, tables set forth the rates for June 2011.
T.D. 9525, page 837.
Final regulations under section 367 of the Code address the
treatment of certain income and assets related to the leasing
of aircraft or vessels in foreign commerce. The regulations re-
flect statutory changes made by the American Jobs Creation
Act of 2004. In general, the regulations will affect United States
shareholders of controlled foreign corporations that derive in-
come from the leasing of aircraft or vessels in foreign com-
merce and U.S. persons that transfer property subject to these
leases to a foreign corporation.
ADMINISTRATIVE
T.D. 9524, page 843.
Final regulations under section 3402(t) of the Code provide
guidance on withholding and reporting requirements that apply
to certain payments made by government entities to persons
providing property or services.
REG–151687–10, page 867.
Proposed regulations under section 3402(t) of the Code pro-
vide guidance on whether section 3402(t) withholding would
apply to certain payments by government entities made on or
after January 1, 2014, under existing contracts that are not
materially modified.
Notice 2011–42, page 866.
This notice provides interim guidance to third party settlement
organizations (TPSOs) on backup withholding obligations under
section 3406 of the Code and its accompanying regulations.
Finding Lists begin on page ii.

The IRS Mission
Provide Americ
a’s taxpayers top-quality service by helping
them understa
nd and meet their tax responsibilities and en-
force the law wi
th integrity and fairness to all.
Introduction
The Internal Revenue Bulletin is the authoritative instrument of
the Commissioner of Internal Revenue for announcing official
rulings and procedures of the Internal Revenue Service and for
publishing Treasury Decisions, Executive Orders, Tax Conven-
tions, legislation, court decisions, and other items of general
interest. It is published weekly and may be obtained from the
Superintendent of Documents on a subscription basis. Bulletin
contents are compiled semiannually into Cumulative Bulletins,
which are sold on a single-copy basis.
It is the policy of the Service to publish in the Bulletin all sub-
stantive rulings necessary to promote a uniform application of
the tax laws, including all rulings that supersede, revoke, mod-
ify, or amend any of those previously published in the Bulletin.
All published rulings apply retroactively unless otherwise indi-
cated. Procedures relating solely to matters of internal man-
agement are not published; however, statements of internal
practices and procedures that affect the rights and duties of
taxpayers are published.
Revenue rulings represent the conclusions of the Service on the
application of the law to the pivotal facts stated in the revenue
ruling. In those based on positions taken in rulings to taxpayers
or technical advice to Service field offices, identifying details
and information of a confidential nature are deleted to prevent
unwarranted invasions of privacy and to comply with statutory
requirements.
Rulings and procedures reported in the Bulletin do not have the
force and effect of Treasury Department Regulations, but they
may be used as precedents. Unpublished rulings will not be
relied on, used, or cited as precedents by Service personnel in
the disposition of other cases. In applying published rulings and
procedures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be considered,
and Service personnel and others concerned are cautioned
against reaching the same conclusions in other cases unless
the facts and circumstances are substantially the same.
The Bulletin is divided into four parts as follows:
Part I.—19
86 Code.
This part i
ncludes rulings and decisions based on provisions of
the Intern
al Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows: Subpart A,
Tax Conventions and Other Related Items, and Subpart B, Leg-
islation and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellaneous.
To the extent practicable, pertinent cross references to these
subjects are contained in the other Parts and Subparts. Also
included in this part are Bank Secrecy Act Administrative Rul-
ings. Bank Secrecy Act Administrative Rulings are issued by
the Department of the Treasury’s Office of the Assistant Secre-
tary (Enforcement).
Part IV
.—Items of General Interest.
This par
t includes notices of proposed rulemakings, disbar-
ment an
d suspension lists, and announcements.
The last Bulletin for each month includes a cumulative index
for the matters published during the preceding months. These
monthly indexes are cumulated on a semiannual basis, and are
published in the last Bulletin of each semiannual period.
The c
ontents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.
For sale by the Superintendent of Documents, U.S.Government Printing Office, Washington, DC 20402.
June 6, 20112011–23 I.R.B.

Part I. Rulings
and Decisions Under the Internal Revenue Code
of 1986
Section 42.—L
ow-Income
Housing Credi
t
The adjusted a
pplicable federal short-term, mid-
term, and long
-term rates are set forth for the month
of June 2011. S
ee Rev. Rul. 2011-13, page 841.
Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of June 2011. See Rev.
Rul. 2011-13, page 841.
Section 367.
—Foreign
Corporations
26 CFR 1.367(a)–2: Exception for transfers of prop-
erty for use in the active conduct of a trade or busi-
ness.
T.D. 9525
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 1
Modifications to Treatment of
Aircraft and Vessel Leasing
Income
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains fi-
nal regulations addressing the treatment of
certain income and assets related to the
leasing of aircraft or vessels in foreign
commerce. The regulations reflect statu-
tory changes made by the American Jobs
Creation Act of 2004. In general, the regu-
lations will affect United States sharehold-
ers of controlled foreign corporations that
derive income from the leasing of aircraft
or vessels in foreign commerce and U.S.
persons that transfer property subject to
these leases to a foreign corporation.
DATE
S:Effective Date:These regulations
are e
ffective on May 6, 2011.
Applicabilit
yDates:For dates of
applicabilit
y, see §§1.367(a)–2(e)(2),
1.367(a)–4(i
),1.367(a)–5(f)(3)(ii),
1.954–2(i) a
nd 1.956–2(e).
FOR FURTHER INFORMATION
CONTACT: Concerning the fi-
nal regulations under section 367,
Ronald M. Gootzeit at (202) 622–3860;
concerning the final regulations under
section 954 or 956, Kristine A. Crabtree at
(202) 622–3840; (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
In General
This document contains amendments
to 26 CFR Part 1 under sections 367, 954
and 956 of the Internal Revenue Code
(Code). Final and temporary regula-
tions (T.D. 9406, 2008–32 I.R.B. 287 [73
FR 38113]) (the temporary regulations)
and a cross-reference notice of proposed
rulemaking (REG–138355–07, 2008–32
I.R.B. 311 [73 FR 38162]) were published
in theFederal Registeron July 3, 2008
(the proposed regulations). On July 29,
2008, corrections to the final regulations
(73 FR 43863) were published in theFed-
eral Register. No public hearing was
requested or held with respect to the pro-
posed regulations. After consideration of
the comments received, the proposed reg-
ulations are adopted, as amended by this
Treasury decision.
Explanation of Provisions
Secti
on 415(a) of the American Jobs
Creat
ion Act of 2004, Public Law 108–357
(118
Stat. 1418) (Jobs Act), repealed sec-
tion
954(a)(4) and (f), the foreign base
comp
any shipping income provisions of
subp
art F. As a result of the repeal of these
prov
isions, rents derived from leasing an
air
craft or vessel in foreign commerce are
inc
luded in subpart F income only if the
ren
ts are described in another category of
sub
part F income, such as foreign per-
son
al holding company income (FPHCI)
as d
efined in section 954(c). Rents are
ge
nerally included in FPHCI under sec-
tion 954(c)(1
)(A), subject to certain excep-
tions. One suc
h exception is for rents re-
ceived from un
related persons and derived
in the active
conduct of a trade or business.
See section 9
54(c)(2)(A).
For this purp
ose, rents derived by a con-
trolled fore
ign corporation (CFC) are con-
sidered deri
ved in the active conduct of a
trade or busi
ness in certain circumstances,
including c
ircumstances whereby the rents
are derived
as a result of the performance
of marketin
g functions by the lessor CFC
with respec
t to the leased property (the
marketing
exception). §1.954–2(c)(1)(iv).
Specifica
lly, a lessor satisfies the market-
ing except
ion if the lessor, through its own
officers o
r staff of employees located in
a foreign c
ountry, maintains and operates
an organi
zation in the foreign country that
is regula
rly engaged in the business of
marketin
g, or of marketing and servicing,
the lease
d property and that is substan-
tial in re
lation to the amount of rents de-
rived fr
om leasing the property. For this
purpose
, whether an organization in a for-
eign cou
ntry is substantial in relation to
the amou
nt of rents is determined based on
all fac
ts and circumstances; however, such
an orga
nization will be considered sub-
stanti
al if active leasing expenses equal or
exceed
25 percent of the adjusted leasing
profit
(as defined in §1.954–2(c)(2)(iv)).
§1.95
4–2T(c)(2)(ii).
The Job
s Act amended section
954(c
)(2)(A) to expand the marketing
excep
tion with respect to rents derived
from l
easing an aircraft or vessel in for-
eign c
ommerce. In particular, section
954(c
)(2)(A) now provides that “rents
deri
ved from leasing an aircraft or vessel
in fo
reign commerce shall not fail to be
trea
ted as derived in the active conduct of
atra
de or business if, as determined under
regu
lations prescribed by the Secretary,
the a
ctive leasing expenses are not less
tha
n 10 percent of the profit on the lease.”
In a
ddition, the legislative history to this
pro
vision states that the Secretary of the
Tre
asury will make “conforming changes
to e
xisting regulations, including guid-
an
ce that aircraft or vessel leasing activity
th
at satisfies the requirements of section
95
4(c)(2)(A) shall also satisfy the re-
qu
irements for avoiding income inclusion
2011–23 I.R.B.837June 6, 2011

under section 956 and section 367(a).”
H.R. Conf. Rep. No. 755, 108th Cong.,
2d Sess. 402 (2004).
On July 3, 2008, the Treasury Depart-
ment and the IRS published the proposed
regulations providing guidance with re-
spect to the treatment of certain income
and assets related to the leasing of aircraft
or vessels in foreign commerce under sec-
tions 367, 954, and 956 of the Code in
light of the Jobs Act changes. These final
regulations adopt the proposed regulations
with the modifications described herein.
Section 954 Regulations
Under current regulations, to satisfy
the marketing exception, the lessor must,
among other things, maintain an organ-
ization that is regularly engaged in the
business of marketing, or of marketing
and servicing, the leased property and
that is “substantial in relation to the rents
derived.” §1.954–2(c)(1)(iv). The pro-
posed regulations added a new marketing
safe harbor for purposes of determining
whether an organization is substantial
inrelationtorentsderivedfromleasing
aircraft or vessels (including component
parts, such as engines, that are leased sepa-
rately from an aircraft or vessel) in foreign
commerce. This safe harbor provides that
an organization will be considered sub-
stantial for purposes of §1.954–2(c)(1)(iv)
if active leasing expenses equal or exceed
10 percent of the adjusted leasing profit.
For this purpose, the rules in the current
regulations for computing active leasing
expense and adjustedleasing profit con-
tinue to apply. The proposed regulations
also included a definition of when an
aircraft or vessel is leased in foreign com-
merce, including defining when property
is used predominantly outside the United
States, that is consistent with the legisla-
tive history to the Jobs Act. See H.R.
REP. NO. 108–548, pt. 1, at 210 (2004);
H.R. CONF. REP. NO. 108–755, at 402
(2004). Finally, the proposed regulations
also clarified that rents derived from cer-
tain finance leases and acquired leases are
eligible for the active rents exclusion.
One commentator expressed concern
that §1.954–2T(c)(2)(vii), which ad-
dresses finance leases, could be interpreted
to limit the application of the marketing
exception solely to finance leases. In
response to this comment, the final regula-
tions clarify that the marketing exception
can apply to both operating leases and
finance leases.
The same commentator also sug-
gested that, for purposes of applying
§1.954–2T(c)(2)(vi), the regulations
should clarify that “remarketing func-
tions” include remarketing for purposes
of selling the leased property. The final
regulations adopt this change.
In addition to these changes, the final
regulations clarify that an aircraft or ves-
sel is considered to be leased in foreign
commerce if it is used in foreign com-
merce, and is used predominantly outside
the United States. Finally, the language of
§1.954–2T(c)(3)Example 6has been mod-
ifiedtomakeitconsistentwiththeother
examples in §1.954–2(c)(3).
Section 956 Regulations
Section 956(c)(1)(A)provides that the
termUnited States property(“U.S. prop-
erty”) generally includes tangible property
located in the United States. Section
956(c)(2) provides exceptions to the gen-
eral definition of U.S. property, including
any aircraft, railroad rolling stock, vessel,
motor vehicle, or container used in the
transportation of persons or property in
foreign commerce and used predominantly
outside the United States. See section
956(c)(2)(D). Prior to issuance of the
temporary regulations, §1.956–2(b)(1)(vi)
provided that, as a general rule, such trans-
portation property will be considered to
be used predominantly outside the United
States if 70 percent or more of the miles
traversed (during the taxable year at the
close of which a determination is made
under section 956(a)(2)) in the use of such
property are traversed outside the United
States or if such property is located outside
the United States 70 percent of the time
during such taxable year.
In Notice 2006–48, 2006–1 C.B. 922,
the IRS and Treasury Department an-
nounced that regulations would be issued
providing that an aircraft or vessel used in
the transportation of persons or property in
foreign commerce is excluded from U.S.
property under §1.956–2(b)(1)(vi) if rents
derived from leasing such aircraft or vessel
are excluded from FPHCI under section
954(c)(2)(A) and such property is consid-
ered to be used predominantly outside the
United States under §1.954–2(b)(1)(vi),
determined by substituting “more than 50
percent” for the phrases “70 percent or
more” and “70 percent.” The proposed
regulations amended §1.956–2(b)(1)(vi)
toprovidethatanaircraftorvesselis
excluded from U.S. property if rents de-
rived from leasing such aircraft or vessel
are excluded from FPHCI under section
954(c)(2)(A) but inadvertently omitted the
language from Notice 2006–48 concern-
ing its use in the transportation of persons
or property in foreign commerce and its
predominant use outside the United States.
Consistent with section 956(c)(2)(D), the
legislative history of section 954(c)(2)(A),
and Notice 2006–48, the final regulations
modify the proposed regulations to clar-
ify that an aircraft or vessel is excepted
from the definition of U.S. property under
section 956(c)(2)(D) only if the aircraft or
vessel is leased in foreign commerce as
that term is defined in §1.954–2(c)(2)(v),
and the rents from the aircraft or vessel
qualify for the exception to FPHCI under
section 954(c)(2)(A). See §601.601(d)(2).
No comments were received and no
changes other than the change described
herein have been made to the section 956
provisions of the proposed regulations.
Section 367 Regulations
No written comments were received
and no changes have been made to the
section 367 provisions of the proposed
regulations.
Request for Comments
The Treasury Department and IRS con-
tinue to study and request comments on
how to determine whether an aircraft or
vessel is used predominantly outside the
United States during a particular month
for purposes of calculating depreciation re-
capture under section 367. Until further
guidance is issued, taxpayers may continue
to use any reasonable method to make this
determination.
Special Analyses
It has been determined that this Trea-
sury decision is not asignificant regula-
tory 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
June 6, 20118382011–23 I.R.B.

not apply to these regulations, and because
the regulations do not impose a collection
of information on small entities, the Reg-
ulatory Flexibility Act (5 U.S.C. Ch. 6)
does not apply. Pursuant to section 7805(f)
of the Code, this regulation has been sub-
mitted to the Chief Counsel for Advocacy
of the Small BusinessAdministration for
comment on its impact on small business.
Drafting Information
The principal authors of these reg-
ulations are Ronald M. Gootzeit and
Kristine A. Crabtree, Office of Associate
Chief Counsel (International). However,
other personnel from the IRS and
Treasury Department participated in their
development.
*****
Adoption of amendments to the
Regulations
Accordingly, 26 CFR part 1 is amended
as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.367(a)–2 is added to
read as follows:
§1.367(a)–2 Exception for transfers of
property for use in the active conduct of
a trade or business.
(a)through(d)[Reserved].Forfurther
guidance, see §1.367(a)–2T(a) through
(d).
(e)Special rules for certain transfers
occurring on or after May 2, 2006—(1)
General rule. Whether a trade or busi-
ness that produces rents or royalties is ac-
tively conducted shall be determined un-
der the principles of section 954(c)(2)(A)
and the regulations thereunder (but with-
out regard to whether the rents or royalties
are received from an unrelated party). See
§1.954–2(c) and (d).
(2)Effective/applicability date.The
rulesofthisparagraph(e)applyto
transfers occurring on or after May 2,
2006. However, if the transferor makes
the election to apply the provisions of
§1.367(a)–4(c)(3) for transfers occurring
on or after October 22, 2004, then para-
graph (e)(1) of this section will also apply
to the transfers occurring on or after Octo-
ber 22, 2004.
Par. 3. Section 1.367(a)–2T is amended
by removing and reserving paragraph (e)
to read as follows:
§1.367(a)–2T E
xception for transfers of
property for th
e use in the active conduct
of a trade or bus
iness (temporary).
*****
(e) [Reserved]. For further guidance,
see §1.367(a)–2(e).
Par. 4. Section 1.367(a)–4 is added to
read as follows:
§1.367(a)–4 Special rules applicable to
specified transfers of property.
(a) through (c)(2) [Reserved]. For
further guidance, see §1.367(a)–4T(a)
through (c)(2).
(3)Aircraft and vessels leased in for-
eign commerce. For purposes of satisfy-
ing §1.367–4T(c)(1), aircraft or vessels,
including component parts such as engines
leased separately from aircraft or vessels,
transferredtoaforeigncorporationand
leased to other persons by the foreign cor-
poration shall be considered to be trans-
ferred for use in the active conduct of a
trade or business if—
(i) The employees of the foreign corpo-
ration perform substantial managerial and
operational activities of leasing aircraft or
vessels outside the United States; and
(ii) The leased tangible personal
property is predominantly used outside
the United States, as determined under
§1.954–2(c)(2)(v).
(d) through (h) [Reserved]. For further
guidance, see §1.367–4T(d) through (h).
(i)Effective/applicability date.The
rules of paragraph (c)(3) of this section
apply for transfers of property occur-
ring on or after May 2, 2006. Trans-
ferors may elect to apply these provi-
sions to transfers occurring on or after
October 22, 2004, by citing the provisions
of paragraph (c)(3) of this section in the
documentation for such transfers required
by §1.6038B–1T(c)(4)(i) and (iv).
Par. 5. Section 1.367(a)–4T is amended
by removing and reserving paragraphs
(c)(3) and (i) to read as follows:
§1.367(a)–4T Special rules applicable
to specified transfers of property
(temporary).
*****
(c)***
(3) [Reserved]. For further guidance,
see §1.367(a)–4(c)(3).
*****
(i) [Reserved]. For further guidance,
see §1.367(a)–4(i).
Par. 6. Section §1.367(a)–5 is added to
read as follows:
§1.367(a)–5 Property subject to section
367(a)(1) regardless of use in a trade or
business.
(a) through (f)(2) [Reserved]. For
further guidance, see §1.367(a)–5T(a)
through (f)(2).
(3)(i) With respect to vessels and air-
craft, including their component parts, that
will be leased by the transferee to third per-
sons, the transferee satisfies the conditions
set forth in §1.367(a)–4(c)(3).
(ii)Effective/applicability date.The
rules of this paragraph (f)(3) apply to
transfers of property occurring on or af-
ter May 2, 2006. If the transferor makes
the election to apply the provisions of
§1.367(a)–4(c)(3) totransfers occurring
on or after October 22, 2004, then para-
graph (f)(3)(i) of this section will also
apply to transfers affected by that election.
Par. 7. Section §1.367(a)–5T is
amended by removing and reserving para-
graph (f)(3) to read as follows:
§1.367(a)–5T Property subject to section
367(a)(1) regardless of use in trade or
business (temporary).
*****
(f) * * *
(3) [Reserved]. For further guidance,
see §1.367(a)–5(f)(3).
Par. 8. Section 1.954–2 is amended
by revising paragraphs (c)(2)(ii), (c)(2)(v),
(c)(2)(vi), (c)(2)(vii), and (c)(3)Example 6
and paragraph (i) to read as follows:
§1.954–2 Foreign personal holding
company income.
*****
(c) * * *
(2) * * *
2011–23 I.R.B.839June 6, 2011

(ii)Substantiality of foreign organiza-
tion. For purposes of paragraph (c)(1)(iv)
of this section, whether an organization in
a foreign country is substantial in relation
to the amount of rents is determined based
on all facts and circumstances. However,
such an organization will be considered
substantial in relation to the amount of
rents if active leasing expenses, as defined
in paragraph (c)(2)(iii) of this section,
equal or exceed 25 percent of the adjusted
leasing profit, as defined in paragraph
(c)(2)(iv) of this section. In addition, for
purposes of aircraft or vessels leased in
foreign commerce, an organization will
be considered substantial if active leas-
ing expenses, as defined in paragraph
(c)(2)(iii) of this section, equal or ex-
ceed 10 percent of the adjusted leasing
profit, as defined in paragraph (c)(2)(iv)
of this section. For purposes of paragraphs
(c)(1)(iv) and (c)(2) of this section and
§1.956–2(b)(1)(vi), the termaircraft or
vesselsincludes component parts, such as
engines that are leased separately from an
aircraft or vessel.
*****
(v)Leased in foreign commerce.For
purposes of paragraphs (c)(1)(iv) and
(c)(2)(ii) of this section, an aircraft or
vessel is considered to be leased in for-
eign commerce if the aircraft or vessel
is used in foreign commerce and is used
predominantly outside the United States.
An aircraft or vessel is considered to be
used in foreign commerce if it is used
for the transportation of property or pas-
sengers between a port (or airport) in the
United States and a port (or airport) in a
foreign country or between foreign ports
(or airports). An aircraft or vessel will
be considered to be used predominantly
outside the United States if more than 50
percent of the miles traversed during the
taxable year in the use of the aircraft or
vessel are traversed outside the United
States or if the aircraft or vessel is located
outside the United States more than 50
percent of the time during the taxable year.
(vi)Leases acquired by the CFC lessor.
Except as provided in this paragraph
(c)(2)(vi), the exception in paragraph
(c)(1)(iv) of this section will also apply
to rents from leases acquired from any
person, if following the acquisition the
lessor performs active and substantial
management, operational, and remarket-
ing (including remarketing for purposes
of re-leasing or selling the property) func-
tions with respect tothe leased property.
However,ifanypersonisclaiminga
benefit with respect to an acquired lease
pursuant to section 921 or 114 of the In-
ternal Revenue Code or section 101(d)
of the American Jobs Creation Act of
2004, (Public Law 108–357 (118 Stat.
1418) (2004)), the rents from such lease,
notwithstanding paragraphs (b)(6) and (c)
of this section, are ineligible for the ex-
ception in section 954(c)(2)(A).
(vii)Marketing of leases. Paragraph
(c)(1)(iv) of this section can apply whether
alessorisengagedinthemarketingof
leases as a form of financing or is engaged
in marketing the property as such, and re-
gardless of whether the lease is classified
as a finance lease or an operating lease for
financial accounting purposes, so long as
such lease is treated as a lease for Federal
income tax purposes.
(3) * * *
Example 6. The facts are the same as inExam-
ple 2, except that controlled foreign corporation D
purchases aircraft which it leases to others. If Cor-
poration D incurs active leasing expenses, as defined
in paragraph (c)(2)(iii) of this section, equal to or in
excess of 10 percent of its adjusted leasing profit, as
defined in paragraph (c)(2)(iv) of this section, the or-
ganization maintained and operated by Corporation D
in country X is substantial in relation to the amount of
rents Corporation D receives from leasing the aircraft.
Therefore, under paragraph(c)(1)(iv) of this section,
such rents are derived in the active conduct of a trade
or business for purposes of section 954(c)(2)(A). If a
particular aircraft subject to lease was not leased by
the lessee corporation in foreign commerce, for ex-
ample, because 50 percent or less of the miles dur-
ing the taxable year were traversed outside the United
States and the aircraft was located in the United States
for 50 percent or more of the taxable year, Corpora-
tion D is not prevented from otherwise showing that it
actively carries on a trade or business with regard to
the rents derived from that aircraft under paragraph
(c)(2)(ii) of this section, based on its facts and cir-
cumstances or a showing that active leasing expenses
equal or exceed 25 percent of the adjusted leasing
profit.
*****
(i)Effective/applicability date.The
last two sentences of paragraph (c)(2)(ii),
and paragraphs (c)(2)(v) through (vii)
and (c)(3)Example 6of this section ap-
ply to taxable years of controlled for-
eign corporations beginning on or after
May 2, 2006, and for taxable years of
United States shareholders with or within
which such taxable years of the con-
trolled foreign corporations end. Tax-
payers may elect to apply the last two
sentences of paragraph (c)(2)(ii) and para-
graphs (c)(2)(v) through (vii) to taxable
years of controlled foreign corporations
beginning after December 31, 2004,
and for taxable years of United States
shareholders with or within which such
taxable years of the controlled foreign
corporations end. If an election is made
to apply §1.956–2(b)(1)(vi) to taxable
years beginning after December 31, 2004,
then the election must also be made for
paragraphs (c)(2)(ii) and (c)(2)(v) through
(vii)ofthissection.
§1.954–2T [Removed].
Par. 9. Section 1.954–2T is removed.
Par. 10. Section 1.956–2 is amended
by revising paragraphs (b)(1)(vi) and (e) to
read as follows:
§1.956–2 Definition of United States
property.
*****
(b)***
(1)***
(vi) Any aircraft, railroad rolling stock,
vessel, motor vehicle, or container used in
the transportation of persons or property
in foreign commerce and used predomi-
nantly outside the United States. Whether
transportation property described in this
paragraph (b)(1)(vi) is used in foreign
commerce and predominantly outside the
UnitedStatesistobedeterminedfrom
all the facts and circumstances of each
case. As a general rule, such transporta-
tion property will be considered to be
used predominantly outside the United
States if 70 percent or more of the miles
traversed (during the taxable year at the
close of which a determination is made
under section 956(a)(2)) in the use of such
property are traversed outside the United
States or if such property is located outside
the United States 70 percent of the time
during such taxable year. Notwithstanding
the above, an aircraft or vessel, including
component parts, is excluded from United
States property if the aircraft or vessel is
leased in foreign commerce (as the term
is defined in §1.954–2(c)(2)(v)) and rents
derived from leasing such aircraft or ves-
sel are excluded from foreign personal
holding company income under section
954(c)(2)(A).
*****
June 6, 20118402011–23 I.R.B.

(e)Effective/applicability date.The
last sentence of paragraph (b)(1)(vi) of
this section applies to taxable years of
controlled foreign corporations beginning
on or after May 2, 2006, and for taxable
years of United States shareholders with
or within which such taxable years of the
controlled foreign corporations end. Tax-
payers may elect to apply the rule of the
last sentence of paragraph (b)(1)(vi) of
this section to taxable years of controlled
foreign corporations beginning after De-
cember 31, 2004, and for taxable years of
United States shareholders with or within
which such taxable years of the controlled
foreign corporations end. If an election is
made to apply the last two sentences of
§1.954–2(c)(2)(ii) and §1.954–2(c)(2)(v)
through (vii) to taxable years of a con-
trolled foreign corporation beginning after
December 31, 2004, then the election must
also be made for the last sentence of para-
graph (b)(1)(vi) of this section.
Par. 11. Section 1.956–2T is amended
by removing and reserving paragraphs
(b)(1)(vi) and (e) to read as follows:
§1.956–2T Definition of United States
property (temporary).
*****
(b) * * *
(1) * * *
(vi) [Reserved]. For further guidance,
see §1.956–2(b)(1)(vi).
*****
(e) [Reserved]. For further guidance,
see §1.956–2(e).
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved March 30, 2011.
Michael Mundaca,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on May 5, 2011,
8:45 a.m., and published in the issue of the Federal Register
for May 6, 2011, 76 F.R. 26178)
Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of June 2011. See Rev. Rul.
2011-13, page 841.
Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2011. See Rev. Rul. 2011-13, page 841.
Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2011. See Rev. Rul. 2011-13, page 841.
Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2011. See Rev. Rul. 2011-13, page 841.
Sectio
n 482.—Allocation
of Inco
me and Deductions
Among T
axpayers
Federa
l short-term, mid-term, and long-term rates
are set
forth for the month of June 2011. See Rev.
Rul. 20
11-13, page 841.
Section 483.—Interest on
Certain Deferred Payments
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2011. See Rev. Rul. 2011-13, page 841.
Section 642.—Special
Rules
for Credits and
Deduc
tions
Feder
al short-term, mid-term, and long-term rates
are se
t forth for the month of June 2011. See Rev.
Rul.
2011-13, page 841.
Section 807.—Rules for
Certain Reserves
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2011. See Rev. Rul. 2011-13, page 841.
Section 846.—Discounted
Unpaid Losses Defined
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2011. See Rev. Rul. 2011-13, page 841.
Section 1274.—Determi-
nation of Issue Price in the
Case of Certain Debt Instru-
ments Issued for Property
(Also Sections 42, 280G, 382, 412, 467, 468, 482,
483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates;
adjusted federal long-term rate and the
long-term exempt rate.For purposes of
sections 382, 642, 1274, 1288, and other
sections of the Code, tables set forth the
rates for June 2011.
Rev. Rul. 2011–13
This revenue ruling provides various
prescribed rates for federal income tax pur-
poses for June 2011 (the current month).
Table 1 contains the short-term, mid-term,
and long-term applicable federal rates
(AFR) for the current month for purposes
of section 1274(d) of the Internal Revenue
Code. Table 2 contains the short-term,
mid-term, and long-term adjusted appli-
cable federal rates (adjusted AFR) for
the current month for purposes of section
1288(b). Table 3 sets forth the adjusted
federal long-term rate and the long-term
tax-exempt rate described in section
382(f). Table 4 contains the appropriate
percentages for determining the low-in-
come housing credit described in section
42(b)(1) for buildings placed in service
during the current month. However, under
section 42(b)(2), the applicable percentage
for non-federally subsidized new build-
ings placed in service after July 30, 2008,
and before December 31, 2013, shall not
be less than 9%. Finally, Table 5 contains
the federal rate for determining the present
value of an annuity, an interest for life
2011–23 I.R.B.841June 6, 2011

or for a term of years, or a remainder or
a reversionary interest for purposes of
section 7520.
REV. RUL. 2011–13 TABLE 1
Applicable Federal Rates (AFR) for June 2011
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-term
AFR.46%.46%.46%.46%
110% AFR
.51%.51%.51%.51%
120% AFR
.55%.55%.55%.55%
130% AFR.60%.60%.60%.60%
Mid-term
AFR2.27%2.26%
2.25%2.25%
110% AFR
2.51%
2.49%2.48%2.48%
120% AFR2.73%2.71%2.70%2.69%
130% AFR2.96%2.94%2.93%2.92%
150% AFR
3.42%3.39%3.38%3.37%
175% AFR
4.00%3.96%3.94%3.93%
Long-term
AFR
4.05%
4.01%3.99%3.98%
110% AFR4.46%4.41%4.39%4.37%
120% AFR4.87%4.81%4.78%4.76%
130% AFR
5.28%5.21%5.18%5.15%
REV. RUL. 2011–13 TABLE 2
Adjusted AFR for June 2011
Period for Compounding
AnnualSemiannualQuarterlyMonthly
Short-te
rm adjusted
AFR
.70%.70%.70%.70%
Mid-term adjusted AFR1.83%1.82%1.82%1.81%
Long-term adjusted
AFR
4.17%4.13%4.11%4.09%
REV. RUL
. 2011–13 TABLE 3
Rates Under Section 382 for June 2011
Adjusted federal long-term rate for the current month4.17%
Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted
federal long-term rates for the current month and the prior two months.)4.30%
June 6, 20118422011–23 I.R.B.

REV. RUL. 2011–13 TABLE 4
Appropriate Percentages Under Section 42(b)(1) for June 2011
Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service after
July 30, 2008, and before December 31, 2013, shall not be less than 9%.
Appropriate percentage for the 70% present value low-income housing credit7.73%
Appropriate percentage for the 30% present value low-income housing credit3.31%
REV. RUL. 2011–13 TABLE 5
Rate Under Section 7520 for June 2011
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,
or a remainder or reversionary interest2.8%
Section 1288.—Treatment
of Original Issue Discount
on Tax-Exempt Obligations
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2011. See Rev. Rul. 2011-13, page 841.
Section 3402.—Income Tax
Collected at Source
26 CFR 31.3402(t)–0: Outline of the government
withholding regulations.
T.D. 9524
DEPARTMENT OF THE
TREASURY
Internal Revenue Service
26 CFR Part 31
Extension of Withholding to
Certain Payments Made by
Government Entities
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations relating to withholding by gov-
ernment entities. These regulations reflect
changesinthelawmadebytheTaxIn-
crease Prevention and Reconciliation Act
of 2005 that require Federal, State, and
local government entities to withhold in-
cometaxwhenmakingpaymentstoper-
sons providing property or services. These
regulations affect Federal, State, and local
government entities that will be required to
withhold and report tax from payments to
persons providing property or services and
also affect the persons receiving payments
for property or services from the govern-
ment entities.
DATES:Effective Date:These regulations
are effective on May 9, 2011.
Applicability Date:For dates of
applicability, see §§31.3402(t)–1(d),
31.3402(t)–2(i),31.3402(t)–3(g),
31.3402(t)–4(u),31.3402(t)–5(e),
31.3402(t)–6(d),31.3402(t)–7(b),
31.3406(g)–2(i),31.6011(a)–4(d),
31.6051–5(g),31.6071(a)–1(g),
31.6302–1(n), and 31.6302–4(e).
FOR FURTHER INFORMATION
CONTACT: A. G. Kelley, (202) 622–6040
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments
to 26 CFR Part 31 under section 3402(t) of
the Internal Revenue Code (Code). This
document also contains amendments to
26 CFR Part 31 under sections 3406, 6011,
6051, 6071, and 6302 of the Code.
Section 3402(t) of the Code was
added by section 511 of the Tax Increase
Prevention and Reconciliation Act of
2005, Public Law 109–222 (TIPRA),
120 Stat. 345, which was enacted
into law on May 17, 2006. Section
3402(t)(1) providesthat the Government
of the United States, every State, every
political subdivision thereof, and every
instrumentality of the foregoing (including
multi-State agencies) making any payment
to any person providing any property or
services (including any payment made in
connection with a government voucher
or certificate programwhich functions as
a payment for property or services) shall
deduct and withhold from such payment a
tax in an amount equal to 3 percent of such
payment. Section 3402(t)(2) provides
exceptions to withholding under section
3402(t).
Proposed regulations under sections
3402(t), 3406, 6011, 6051, 6071, and
6302 of the Code were published in the
Federal Registeron December 5, 2008
(REG–158747–06, 2009–4 I.R.B. 362 [73
FR 74082]).
After the issuance of the proposed reg-
ulations, section 1511 of the American
Recovery and Reinvestment Act of 2009,
Public Law 111–5 (ARRA), 123 Stat. 115,
355, extended the effective date of section
3402(t) withholding to payments made
after December 31, 2011.
Notice 2010–91, 2010–52 I.R.B. 915,
provided interim guidance on the appli-
cation of section 3402(t) to payments
by debit cards, credit cards, stored value
cards, and other payment cards.
Written comments were received in
response to the proposed regulations,
and a public hearing was held on April
16, 2009. All comments are available
atwww.regulations.govor upon request.
After consideration of all the comments,
the proposed regulations are adopted as
amended by this Treasury decision.
2011–23 I.R.B.843June 6, 2011

Summary of Comments and
Explanation of Provisions
The Treasury Department and the IRS
received numerous comments in response
to the proposed regulations, all of which
were considered in formulating the final
regulations. Commenters generally ex-
pressed concerns about the administrative
burdens of compliance and the revenue
effect on persons subject to section 3402(t)
withholding. The final regulations are
intended to balance the legislative intent
to construct a withholding and reporting
regime for payments by government enti-
ties for property and services (other than
those specifically excepted under section
3402(t)(2)) with the goal of alleviating ad-
ministrative burdens on both government
entities required to withhold and persons
receiving payments subject to withholding
where appropriate.
AsdiscussedinsectionVIIIofthepre-
amble, these final regulations provide an
additional one-year extension from the re-
vised statutory effective date of payments
made after December 31, 2011. Thus,
under the final regulations, section 3402(t)
withholding and reporting requirements
apply to payments made after December
31, 2012, subject to an exception for pay-
ments made under contracts existing on
December 31, 2012, that are not materi-
ally modified (but see section VIII of this
preamble for discussion of accompanying
proposed regulations that would apply
section 3402(t) withholding and reporting
requirements to payments made under
all contracts after December 31, 2013,
regardless of whether the contract was
existing on December 31, 2012, and had
not been materially modified).
I.Government Entities Subject to Section
3402(t)
A.Exception for political subdivisions
and instrumentalities making total
payments under $100,000,000 (section
3402(t)(2)(G))
Section 3402(t)(2)(G) provides that
section 3402(t) withholding does not ap-
ply to payments by a political subdivision
of a State (or any instrumentality of that
political subdivision) that makes less than
$100,000,000 of payments for property or
services annually (other than for payroll or
of another type exempt from withholding
under the regulations). Consistent with the
proposed regulations, the final regulations
provide as a general rule that eligibility
for the exception for each calendar year
is determined based on payments made
during the accounting year ending with or
within the second preceding calendar year.
All payments for property and services
during that accounting year, including
payments that are less than the $10,000
payment threshold, must be considered
except payments qualifying for any of
the exceptions under §31.3402(t)–4(a)
through (q) of the final regulations (for ex-
ample, payments to the employees of the
government entity that are subject to in-
come tax withholding and thus excludable
under §31.3402(t)–4(a) (such as salary
payments) and payments to employees
of the government entity with respect to
their services as an employee that are ex-
cludable under §31.3402(t)–4(i) (such as
payments of nontaxable fringe benefits)).
Commenters stated that if the po-
litical subdivision’s or instrumental-
ity’s yearly payments generally are near
$100,000,000, but do not always equal
or exceed $100,000,000, the entity could
incur considerable expense and difficulty
administering withholding in some years
but not in others. In addition, providing
for withholding in contracts would be
problematic and uncertain. Other com-
menters noted that due to substantial
unusual capital spending, a political subdi-
vision or instrumentality could exceed the
$100,000,000 threshold in one year, even
though the entity usually makes annual
total payments well below the threshold.
The burden of applying section 3402(t)
withholding for a single year because of
one year of unusual spending could be
considerable.
In response to these comments, the fi-
nal regulations provide an optional rule un-
der which a political subdivision or instru-
mentality may average the payments made
during any four of the five consecutive ac-
counting years ending with the account-
ing year that ends with or within the sec-
ond preceding calendar year. An entity
applying this optional rule must keep ad-
equate records for each of the five years
for the period of limitations for assess-
ment applicable to the calendar year for
which it claimed the exception. This rule
is intended to provide a reasonable alterna-
tive method of determining expenditures
for a political subdivision or instrumental-
ity with an unusually high year of expen-
ditures.
This optional rule will give greater pre-
dictability for future years and will allow
political subdivisions and their instrumen-
talities to moderate the effect of unusual
years of expenditures. The entity may ap-
ply the optional rule at its discretion for
any given taxable year and is not required
to file a form or otherwise indicate to the
IRS that it is using the optional rule. Addi-
tionally, under the final regulations, if a po-
litical subdivision or instrumentality with-
holds under section 3402(t), pays (or de-
posits) the withheld tax, and reports this
withholding on payments in any calendar
year for which it does not qualify for the
section 3402(t)(2)(G) exception under the
general rule, but could have qualified un-
der the optional rule, it will be deemed to
have waived any right to use the optional
rule for that year. Thus, an affected entity
should decide before the beginning of the
calendar year whether it will rely on the
optional rule for that year.
One commenter requested a similar
exception for Federal Government enti-
ties and State entities with total annual
payments of less than $100,000,000. By
its terms, section 3402(t)(2)(G) does not
apply to the United States Government,
States, or instrumentalities of the United
States Government or States. Therefore,
this comment was not adopted.
B.Determining whether an organization
is an instrumentality
The proposed regulations requested
comments on how to determine whether
an organization is an instrumentality of a
government entity. Commenters did not
request a definition. The final regulations
do not define the terminstrumentality,
but reserve the issue for future guidance.
See §31.3402(t)–2(e). Although the Code
contains multiple references to govern-
ment instrumentalities, neither the Code
nor the regulations define the terminstru-
mentality. Several revenue rulings provide
guidance on determining whether an or-
ganization will be treated as an instrumen-
tality of a government entity for purposes
of other Code provisions. See Rev. Rul.
57–128, 1957–1 C.B. 311 (adopting a
six-factor test for use in determining what
is an instrumentality of a State or a politi-
June 6, 20118442011–23 I.R.B.

cal subdivision thereof for purposes of an
exception from the requirement to pay tax
under the Federal Insurance Contributions
Act (FICA)); Rev. Rul. 65–26, 1965–1
C.B. 444; Rev. Rul. 65–196, 1965–2 C.B.
388; and Rev. Rul. 69–453, 1969–2 C.B.
182. These rulings may be applied by
analogy to determinewhetheranentityis
an instrumentality for purposes of section
3402(t) withholding until final guidance
is issued defining the terminstrumental-
ityfor purposes of section 3402(t). See
§601.601(d)(2)(ii)(b).
II.Payments Subject toSection 3402(t)
Withholding
A.Payments by credit card or other
payment card
The final regulations reserve for fu-
ture guidance the issue of the potential
application of section 3402(t) withholding
to payment card transactions (including
payments by credit, debit, stored value,
and other payment cards). See Notice
2010–91 and §31.3402(t)–3(e). The Trea-
sury Department and the IRS continue
to study whether payments by payment
card should be subject to section 3402(t)
withholding and, if so, in what manner the
withholding should apply. As provided
in Notice 2010–91, the section 3402(t)
withholding requirements and the related
reporting requirements will not apply to
any payment made by payment card for
any calendar year beginning earlier than at
least 18 months from the date further guid-
ance is finalized applying section 3402(t)
withholding to payments by payment card.
This relief does not apply to convenience
checks issued in connection with payment
card accounts.
B.The $10,000 payment threshold
Consistent with the proposed regula-
tions, the final regulations provide that
a payment subject to withholding arises
when the government entity or its payment
administrator pays a person for providing
property or services. The final regulations
adopt the rule in the proposed regulations
that withholding will not apply to any
payment that is less than $10,000 (subject
to the anti-abuse rule described in section
II.B.3 of this preamble).
1. Amount of Payment Threshold
Commenters generally approved of the
concept of a threshold, and many com-
menters approved of the proposed $10,000
threshold level. However, numerous com-
menters requested that the threshold be
raised, and some commenters requested
that the threshold be adjusted each year
based on changes in the cost of living.
The final regulations adopt the payment
threshold of $10,000, which corresponds
to a minimum withholding of $300. This
$10,000 threshold level strikes a reason-
able balance between alleviating admin-
istrative burdens and preserving the leg-
islative intent that the withholding require-
ment apply broadly. The final regulations
do not adopt an annual cost-of-living ad-
justment to the threshold. Computer pro-
cessing and transaction systems are be-
coming increasingly cost-effective so that
increasing the threshold annually is not
warranted.
2. Application of the Payment Threshold
to Individual Payments
Some commenters requested that the
payment threshold apply cumulatively
rather than to individual payments. Under
this suggestion, section 3402(t) withhold-
ing would begin to apply when the payee
receives payments totaling $10,000 in
the aggregate from the government entity
during the calendar year, and then apply
to all subsequent payments to the payee
during the remainder of the year. The final
regulations do not adopt this suggestion.
As other commenters noted, one section
or division of a government entity may
not be able to coordinate its billing with
another section’s or division’s billing on
a real-time basis. Thus, a requirement
to withhold immediately upon reaching
an annual minimum payment threshold
would require the establishment of new
systems to track and coordinate payments.
3. Application of the Payment Threshold
to Multiple Payments to the Same
Recipient
The $10,000 threshold applies on a
payment-by-payment basis; therefore, if a
government entity makes a single payment
of $10,000 or more for multiple items of
property or services, the entity must with-
hold on the payment. For example, if a
person bills a government entity $5,000
each day for seven days of daily services,
but the entity pays the bills by making one
$35,000 payment, the payment threshold
is applied to the $35,000 payment.
Consistent with the proposed regula-
tions, the final regulations provide that
multiple payments by a government entity
to a payee generally will not be aggregated
in applying the $10,000 threshold. The
final regulations also adopt the anti-abuse
rule in the proposed regulations providing
that if a payment is divided into multiple
payments primarily to avoid the payment
threshold, the payments will be treated as
asinglepaymentmadeonthedateofthe
first payment for purposes of applying the
threshold. For example, if a government
entity is scheduled to make a contrac-
tual payment for landscaping services of
$15,000 on July 2, 2013, but divides the
payment into payments of $7,000 and
$8,000 on July 1, 2013, and July 2, 2013,
respectively, to avoid withholding, the
government entity will be treated as hav-
ing made a single payment of $15,000 on
July 1, 2013. This anti-abuse rule will not
apply if the primary reason for making
multiple payments is unrelated to section
3402(t).
Some commenters expressed concerns
about the anti-abuse rule. Some argued
that it was too subjective and would lead to
conflicts between government entities and
payees. Commenters noted that in many
cases, the payee controls the billing and
the government entity cannot determine
whether the payee manipulated the billing
to avoid the threshold or engaged in a nor-
mal business practice. Commenters also
requested guidance on which entity (the
payor or the payee) determines whether the
anti-abuse rule applies. Commenters as-
serted that theoretically every payment be-
low $10,000 will need to be examined to
determine whether the anti-abuse rule ap-
plies.
An anti-abuse rule is necessary because
the parties could potentially avoid the
thresholdbymanipulatingtheamountof
each payment. Because the government
entity is responsible for withholding and
may not have sufficient information re-
garding the payee’s billing process, the fi-
nal regulations provide that the anti-abuse
rule applies only if the government en-
tity knew or should have known that the
payment had been divided (whether by
2011–23 I.R.B.845June 6, 2011

the government entity or as a result of
divided billing) with the primary purpose
of avoiding the withholding requirements.
The final regulations further provide that
in determining whether the anti-abuse rule
applies, a significant factor is whether the
government entity has exhibited a pattern
or practice of intentionally dividing pay-
ments (or intentionally permitting divided
billing) to avoid withholding. Thus, the
anti-abuse rule is intended to apply only
in a limited number of cases.
Additionally, the final regulations per-
mit a government entity and a person pro-
viding services or property to that govern-
ment entity to contractually agree that the
government entity will or may withhold in
accordance with the rules governing with-
holding under section 3402(t), on specified
payments not subject to section 3402(t)
withholding, including payments below
$10,000. Therefore, the parties could
contractually agree to permit the govern-
ment entity to apply, in its discretion as it
deemed appropriate, the anti-abuse rule.
This type of contractual provision would
enable the parties to avoid disputes about
whether the anti-abuse rule applies. This
provision in the final regulations permit-
ting additional withholding does not apply
to payments already subject to section
3402(t) withholding notwithstanding the
contractual provision, including amounts
subject to section 3402(t) withholding
solely due to the anti-abuse rule.
4. Application of the Payment Threshold
to a Single Payment Covering Multiple
Billing Items
Commenters objected to applying the
threshold to the payment amount where
the government entity chooses for its con-
venience to make one payment for differ-
ent “unrelated transactions” (which they
termed “bundling” the payment), causing
the payment to meet the $10,000 thresh-
old. Commenters suggested that if a sin-
gle payment covers more than one “unre-
lated” transaction, the threshold should ap-
ply separately to each transaction, invoice,
or billing item, rather than to the full pay-
ment amount. According to these com-
menters, applying the threshold to bundled
payments makes the threshold difficult to
program into accounts payable systems be-
cause the threshold amount cannot be ap-
plied at the time of the transaction but only
at the time the payment is processed.
The final regulations adopt the pro-
posed rule applying the threshold on a
payment-by-payment basis rather than a
billing item basis. A billing item approach
would require formulating a method for
identifying a billing item or a similar term,
which may not be easily identifiable in
every case. As a result, disputes would
likely arise about the number and amount
of valid billing items, raising both com-
pliance issues for government entities and
enforcement issues for the IRS. A billing
item approach also would require the gov-
ernment entity to maintain records of the
items covered by a particular payment,
and the supporting documentation justi-
fying the separate billing item treatment,
increasing the administrative burden. This
approach could also facilitate abuse by
parties seeking to avoid the threshold by
dividing billing items.
C.Payments to contractors,
subcontractors, and payment
administrators
Consistent with the proposed regula-
tions, the final regulations provide that, if
a government entity or its payment admin-
istrator makes a payment to a person that
is subject to section 3402(t) withholding,
no subsequent transfer of cash or property
by that person to another person is treated
as a payment for section 3402(t) purposes.
Therefore, if the government entity con-
tracts with a prime contractor for prop-
erty and services, and that prime contrac-
tor separately contracts with subcontrac-
tors for delivery ofcertain property and
services, section 3402(t) withholding ap-
plies only to payments by the government
entity or its payment administrator to the
prime contractor, and does not apply to
successive payments by the prime contrac-
tor to its subcontractors.
Also consistent with the proposed regu-
lations, the final regulations apply to pay-
ments made by the government entity or
its payment administrator. A payment ad-
ministrator is any person that acts with re-
spect to a payment solely as an agent for
a government entity by making the pay-
ment on behalf of the government entity
to a person providing property or services
to, or on behalf of, the government entity.
The government entity is liable for the re-
quired withholding and responsible for all
related reporting regardless of whether the
government entity or its payment admin-
istrator makes the payment. Transfers of
funds from a government entity to a pay-
ment administrator to be used by the pay-
ment administrator, on the government en-
tity’s behalf, to pay persons for providing
property or services are not payments sub-
ject to section 3402(t) withholding. How-
ever, if the government entity pays the pay-
ment administrator a fee for its services,
the fee is a payment subject to withhold-
ing.
Many commenters requested additional
guidance on the application of section
3402(t) to prime contractors, subcon-
tractors, and payment administrators to
specific factual situations. The final regu-
lations adopt the rules in proposed regula-
tions without change. These rules provide
general guidance that can be applied to
various specific situations and it is not
practicable to describe all those situations
explicitly in the regulations. However,
the Treasury Department and the IRS may
issue other forms of guidance in the future
if it is determined that such guidance is
necessary to assist with particularly prob-
lematic situations.
D.Advance and interim payments
Commenters requested guidance on
whether section 3402(t) withholding ap-
plies to any of the following payments
that are made before the final delivery
and acceptance of service by the govern-
ment entity: contract financing payments,
performance-based payments, commer-
cial advance payments, interim payments,
progress payments based on cost, progress
payments based on a percentage or stage
of completion, or interim payments under
a cost-reimbursement contract. Com-
menters requested exceptions for these
types of payments because withhold-
ing would detrimentally affect the cash
flows of contractors and could result in
price increases for government contracts.
Commenters also argued that in some
cases withholding is unnecessary because
amounts are already withheld from con-
tract payments until the completion of a
contract. Finally, commenters suggested
that government entities are protected
from loss through other provisions such as
the Miller Act (40 USC 3131–3134, dis-
June 6, 20118462011–23 I.R.B.

cussed in greater detail in section III.E.1
of this preamble).
Commenters specifically requested that
section 3402(t) withholding apply to con-
tract financing payments on the date the
government entity accepts the services
or property provided under the contract.
Under Federal Acquisition Regulations
(FAR), a contractor is not entitled to liq-
uidate contract financing payments until
the government entity has accepted the
property or services. On this basis, a com-
menter asserted that contract financing
payments are not payments for property or
services until the contract is settled and the
property or servicesare “accepted” by the
government entity. The commenter main-
tained that the payment date for section
3402(t) purposes should be the acceptance
date because interest under the Prompt
Payment Act (31 USC 3903) for late pay-
ments under a contract does not begin to
run until the acceptance date.
The final regulations do not adopt these
suggestions. Treating the acceptance date
as the payment date would add adminis-
trative complexity to section 3402(t) with-
holding, as would any attempt to distin-
guish between payments in advance of per-
formance by the contractor, interim pay-
ments for partial performance, and other
designated payments for property or ser-
vices. Treating the date the funds are dis-
bursed as the payment date ensures that
there will be funds upon which to with-
hold. For these reasons, the final regu-
lations provide that payment is made and
withholding applies when the funds are
disbursed and not when the contract is set-
tled and the services or property accepted.
E.Utility payments
The proposed regulations provided
that, unless otherwise excepted, utility
payments are subject to section 3402(t)
withholding on the same basis as pay-
ments for other property and services.
Commenters requested that utility pay-
ments be exempted from the withholding
requirement on the ground that utilities
are already subject to regulation and that
government entities might lose utility ser-
vices if forced to withhold on payment of
the utility bill.
There is no statutory exception for
utility payments. In addition, all per-
sons receiving payments subject to sec-
tion 3402(t) withholding, including util-
ity companies, are paid the full amount
charged, albeit in the form of a combina-
tion of a cash payment and a deposit of tax
made to the IRS. Thus, unless otherwise
excepted, utility payments are subject to
section 3402(t) withholding.
F.Other payments
Commenters requested exemptions
from withholding or lower rates of with-
holding based on a particular industry’s
profit margin or a particular payee’s ex-
pectation that it will not have any income
tax liability (because, for example, the
payee had net operating losses). Com-
menters also requested exemptions for
payees that are current in their Federal tax
payments. The final regulations do not
adopt these suggestions because differing
rates for differing industries or taxpayers
are not contemplatedby the statute and
would raise administrative complexities.
In addition, many commenters re-
quested guidance on whether certain types
of payments or designated portions of
payments are payments for property or
services subject to section 3402(t) with-
holding. The final regulations do not
adopt most of these suggestions because
the general rules provide sufficient guid-
ance. For example, commenters requested
guidance on certain amounts that typically
are part of a payment for a specific service
or property, but generally are stated sepa-
rately in invoices to government entities,
such as fuel surcharges. The final regula-
tions do not except separately stated costs
(other than the optional rule permitting
sales, excise, and value-added taxes to
be excepted from the amount subject to
section 3402(t) withholding). In general,
separately stated items such as fuel sur-
charges are treated as part of the payment
for property or services by the government
entity, and therefore are subject to section
3402(t) withholding unless an exception
applies. For example, the amount subject
to withholding includes late payment fees
(that are not interest) and shipping and
handling costs in connection with the pur-
chase of property that is subject to section
3402(t) withholding.
Commenters also requested guidance
on determining the amount subject to with-
holding when a portion of one payment is
subject to withholding, but the remainder
of the payment is excepted from withhold-
ing. Commenters asserted that it would be
difficult to identify which portion of the
payment was excepted and to apply with-
holding only to the remainder. In response
to these administrative concerns, the fi-
nal regulations permit government entities
to withhold on the full amount of a pay-
ment that combines an amount subject to
withholding and an amount excepted from
withholding, provided the payee has con-
sented to this additional withholding.
Commenters requested guidance on de-
termining the amount of withholding when
a payment for property or services to a per-
son is subject to offsets for the person’s
outstanding debt or other amounts owed
to the government entity. Because there
is no exclusion or other provision under
section 3402(t) for offsets, the payment to
which the section 3402(t) withholding ap-
plies is not reduced by offsets. Rather, the
amount of the payment subject to section
3402(t) withholding includes any portion
of the payment that is offset to pay debt
owed to the government entity or other off-
sets.
III.Payments Excepted from the Section
3402(t) Withholding Requirements
A.Payments to certain exempt payees
(section 3402(t)(2)(E))
Consistent with the proposed regula-
tions, the final regulations except from
section 3402(t) withholding payments
to other government entities required to
withhold, to foreign governments, and to
tax-exempt organizations as provided in
section 3402(t)(2)(E). A commenter asked
whether the exception for payments to
tax-exempt organizations extends to pay-
ments that are included in determining the
organization’s unrelated business income
that is subject to income tax. A payment
to a tax-exempt organization is excepted
from section 3402(t) withholding regard-
less of whether it is treated as unrelated
business income.
B.Payments to Indian tribal governments
Consistent with the proposed reg-
ulations, the final regulations exempt
payments to Indian tribal governments.
Because Indian tribal governments are
not subject to United States income tax,
2011–23 I.R.B.847June 6, 2011

subjecting payments made by govern-
ment entities to Indian tribal governments
to section 3402(t) withholding would be
unduly burdensome. In response to com-
ments, the final regulations also exempt
payments to passthrough entities that are
owned80percentormorebyoneormore
persons each of which is an Indian tribal
government or a person described in sec-
tion 3402(t)(2)(E).
C.Identifying exempt payees
Commenters requested guidance on
how to identify exempt payees. Exempt
payees include: (1) government entities
required to withhold under section 3402(t),
foreign governments, tax-exempt organi-
zations, and Indian tribal governments; (2)
passthrough entities that are 80 percent or
more owned by those types of entities; and
(3) nonresident alien individuals and for-
eign corporations thatreceive certain types
of payments (and partnerships that receive
certain types of payments and that are 80
percent or more owned by nonresident
alien individuals and foreign corpora-
tions). The Treasury Department and the
IRS expect to issue additional guidance on
how a payee can claim an exemption. The
guidance is expected to provide that if the
government entity receives a payee state-
ment indicating under penalties of perjury
that the payee qualifies for an exemp-
tion from section 3402(t) withholding and
identifying the particular exemption, the
entitywillbeabletorelyonthatstatement
unless it knew or had reason to know that
the payee did not actually qualify for the
exception. The guidance is also expected
to provide that a government entity need
not obtain a payee statement if the name
of the payee reasonably indicates or the
payor knows the payee to be a government
entity (including an Indian tribal govern-
ment) or foreign government. However,
it is not anticipated that this “eyeball” test
would apply to tax-exempt organizations,
foreign corporations, nonresident alien
individuals, or passthrough entities.
D.Payments of interest (section
3402(t)(2)(C))
Section 3402(t)(2)(C) excepts pay-
ments of interest from section 3402(t)
withholding. Two commenters requested
that a definition of interest be provided,
and other commenters inquired whether
certain specific types of payments are
payments of interest for purposes of this
exception.
The Code and the regulations do not
provide a general definition of inter-
est. Rather, a definition of interest has
arisen through case law. Generally, under
long-standing case law, interest is com-
pensation paid for the use or forbearance
of money. See, for example,Old Colony
R.R. Co. v. Commissioner,284U.S.
552 (1932), 1932–1 C.B. 274;Deputy v.
DuPont, 308 U.S. 488 (1940), 1940–1
C.B. 118; see alsoThompson v. Commis-
sioner, 73 T.C. 878, 887 (1980) (interest
is the charge per unit of time for the use of
borrowed money);Dickman v. Commis-
sioner, 465 U.S. 330, 337 (1984), 1984–1
C.B. 197 (interest is the equivalent of rent
for the use of funds). The general stan-
dard, as developed through the case law,
may be applied to particular facts and cir-
cumstances. Thus, the final regulations do
not provide a definition of interest. How-
ever, the Treasury Department and the IRS
continue to study whether any particular
guidance with respect to the application of
section 3402(t) to interest payments may
assist taxpayers in complying with the
section 3402(t) withholding and reporting
requirements, and accordingly continue to
reserve that section. See §31.3402(t)–4(c).
E.Payments for real property (section
3402(t)(2)(D))
1. Construction Payments
Section 3402(t)(2)(D) excepts pay-
ments for real property from section
3402(t) withholding. Consistent with the
proposed regulations, the final regulations
provide that the termpayments for real
propertyincludes payments for the pur-
chase and the leasing of real property,
but does not include payments for the
construction of buildings or other public
works projects, such as bridges or roads.
Commenters requested that payments
for construction be treated as payments for
real property. One commenter interpreted
40 USC 3131–3134 (the “Miller Act”) as
already protecting the Federal Govern-
ment for taxes owed by the contractor.
The commenter stated that the Miller Act
mandates that the contractor provide a per-
formance bond to protect the Government,
and a separate payment and performance
bond to protect all persons supplying la-
bor and material in carrying out the work
provided for in the contract. According to
the commenter, the protection afforded by
these bonds includes taxes due under the
Code. See 40 USC 3131(c)(1).
The tax protection afforded by these
bonds relates to employment taxes de-
ducted from wages, not to income taxes
which the contractor may owe. Therefore,
these performance bonds do not protect
against a contractor’s failure to pay its
correct income tax liability, and the Miller
Act does not provide the Federal Govern-
ment protection for the contracting entity’s
income tax liability.
Another commenter suggested that
treating payments for construction as
payments for real property would be con-
sistent with other tax provisions, including
section 460(e)(4) and §1.460–3(a) (defin-
ing the termconstruction contractfor pur-
poses of determining whether an exception
from the required use of the percentage of
completion method in determining taxable
income applies), and §1.263A–8 (defining
the termreal propertyto include land,
buildings, and inherently permanent struc-
tures, and the structural components of
both buildings and inherently permanent
structures for purposes of the require-
ment to capitalize interest under section
263A). Another commenter cited other
Code sections and regulations, including:
(1) section 469 (relating to passive activity
losses and credits and providing that a
“real property trade or business” includes
“any real property development, rede-
velopment, construction, reconstruction,
acquisition, conversion, rental, operation,
management, leasing, or brokerage trade
or business”); (2) section 856 (defining
“interests in real property” to include “fee
ownership and co-ownership of land or im-
provements thereon, leaseholds of land or
improvements thereon, options to acquire
land or improvementsthereon, and options
to acquire leaseholds of land or improve-
ments thereon”); and (3) §1.1031(a)–1(b)
(relating to like-kind exchanges and pro-
viding that the fact that any real estate
involved is improved or unimproved is not
material, for that fact relates only to the
grade or quality of the property and not to
its kind or class).
The final regulations do not adopt these
suggestions. None of these authorities
provides as a general rule that payments
June 6, 20118482011–23 I.R.B.

for construction are payments for real
property. Moreover, the Code and reg-
ulations sections cited serve different
purposes. The relevant distinction here is
between payment for a completed building
(a payment for real property), and pay-
ment for the services and materials used
to construct a building (not a payment for
real property). There is no evidence that
Congress intended to exempt payments
for construction. Additionally, an exemp-
tion for construction would substantially
reduce the scope of payments subject to
section 3402(t) withholding.
2. Lease Payments
The proposed regulations provided
that the exemption for payments for real
property extends to payments for the leas-
ing of real property. A commenter asked
whether payments for construction in
leased buildings are treated as payments
for real property if the government entity
pays the person providing the property or
services directly for facility improvements
rather than the lessor. Commenters also
asked whether payments to the lessor for
services or property (such as for utilities or
insurance) or for services under the lease
agreement (such as for utilities provided
at the lessor’s expense) are considered
payments for the lease. In addition, com-
menters asked whether payments to third
parties required by the lease agreement
(such as payments for utilities and insur-
ance) are considered payments for the
lease.
The final regulations distinguish be-
tween payments to the lessor as part of the
lease and payments to a third party. Pay-
ments to the lessor that are required under
the lease agreement, such as payments
for utilities or insurance, are payments
for leasing, and are not subject to sec-
tion 3402(t) withholding. In contrast,
payments to third parties for services or
property are subjectto section 3402(t)
withholding, even if required by the lease.
Thus, under the final regulations, the lease
terms generally govern whether payments
for leasehold improvements and for ser-
vices or property in connection with a lease
are subject to section 3402(t) withhold-
ing. However, because of the potential
to avoid the application of withholding to
payments for construction by temporar-
ily leasing before purchasing, rather than
simply purchasing, the property on which
the construction will occur, payments for
construction are subject to section 3402(t)
withholding even if required by a lease
andpaidtothelessor.
F.Payments subject to other withholding
(section 3402(t)(2)(A) and (B))
Section 3402(t)(2)(A) excepts from
section 3402(t) withholding amounts that
are subject to withholding under another
provision of chapter 3 or chapter 24 (other
than section 3406). Commenters asked
whether unpaid compensation paid to
beneficiaries or the estates of deceased
employees is subject to section 3402(t)
withholding. Although such amounts gen-
erally are not subject to wage withholding
under section 3402(a) (see Rev. Rul.
86–109, 1986–2 C.B. 196), the final reg-
ulations provide that these payments are
excepted from section 3402(t) withholding
under section 3402(t)(2)(I) as payments to
an employee.
G.Payments made pursuant to a
classified or confidential contract (section
3402(t)(2)(F)).
Section 3402(t)(2)(F) excepts pay-
ments made pursuant to a classified or
confidential contract described in section
6050M(e)(3). Commenters asked whether
this exception applies to other govern-
ment operations not specifically covered
by section 6050M(e)(3), recommending
that the exception apply to any contract
whose subject matter contains any scope
of work subject to the National Indus-
trial Security Program Operating Manual
(NISPOM). Because of the express statu-
tory language describing the confidential
contracts to which the exception applies,
the final regulations do not extend the
exception beyond contracts described in
section 6050M(e)(3).
H.Payments in connection with a public
welfare or public assistance plan (section
3402(t)(2)(H))
Section 3402(t)(2)(H) excepts from
section 3402(t) withholding any payment
in connection with a public assistance or
public welfare program for which eligi-
bility is determined by a needs or income
test. Consistent with the proposed regula-
tions, the final regulations adopt a broad
definition ofin connection withto include
payments made to third parties under a
public assistance or public welfare pro-
gram for the benefit of the recipient of
benefits under the program. Consistent
with the legislative history, a program for
which eligibility is determined under a
needs or income test does not include a
program under which eligibility is based
on age only (for example, Medicare). For
purposes of this exception, a program pro-
viding disaster relief to victims of a natural
or other disaster is considered to be a pro-
gram for which eligibility is determined
under a needs test.
Many commenters asked that the regu-
lations address specific benefits under var-
ious plans. Questions about specific plans
can be resolved by applying the statute and
these final regulations, and special rules
are not needed. However, the Treasury
Department and the IRS may issue other
guidance in the future, as necessary to ad-
dress arrangements to which it is particu-
larly difficult to determine the application
of the statute and these final regulations.
Commenters asked how section 3402(t)
applies when a government office or por-
tion of a government office is used to ad-
minister a public welfare program. Com-
menters asked whether payments for ex-
penses of that office (utilities, property in-
surance, maintenance) that are attributable
to administering the public welfare pro-
gram qualify as payments made in con-
nection with a public welfare program un-
der section 3402(t)(2)(H). The final reg-
ulations provide that government entities
may determine the portion of any payment
that is attributable to expenses to adminis-
ter the public welfare program using any
reasonable allocation method (including,
for example, using prospective budget al-
locations). To ease administration, the fi-
nal regulations also provide that, if a gov-
ernment entity makes a reasonable, good
faith determination that only an insignif-
icant portion of the government office’s
payments are attributable to administering
a public welfare program (or to functions
other than administering a public welfare
program), that insignificant portion may be
disregarded.
2011–23 I.R.B.849June 6, 2011

I.Payments to a government employee
for services as an employee (section
3402(t)(2)(l))
Section 3402(t)(2)(I) excepts payments
to a government employee for the em-
ployee’s services as an employee. Con-
sistent with the proposed regulations, the
final regulations interpret this exception
broadly to exclude any form of compen-
sation that is paid to the employee or
on the employee’s behalf. For example,
the final regulations exclude employer
and employee contributions to employee
benefit and deferred compensation plans,
employer-provided fringe benefits, and
employer payments for insurance under
the Federal Employees Health Benefits
Program.
The final regulations further provide
that, consistent with the proposed regula-
tions, the section 3402(t)(2)(l) exception
applies to payments to employees under
an accountable plan for the employee’s
business travel expenses, and to payments
made by the employee to providers of
the employee’s travel, meals, and lodg-
ing when the employee is traveling on
government business and is reimbursed
under the accountable plan. Payments to
an employee made under a reimbursement
or other expense allowance arrangement
that do not exceed the substantiated ex-
penses are treated as paid under an ac-
countable plan and are not wages if the
arrangement meets the requirements of
section 62(c) and the expenses are sub-
stantiated within a reasonable period of
time.See§31.3401(a)–4(a). In contrast,
payments to an employee under a nonac-
countable plan are includible in wages
subject to income tax withholding under
section 3402(a), and thus are excepted
from section 3402(t) withholding by sec-
tion 3402(t)(2)(A).
Commenters requested that payments
by a government entity to third party
providers (and not to an employee) for
employee travel and lodging also be ex-
cepted from section 3402(t) withholding,
arguing that these payments are another
waytopayforemployeebusinesstravel
expenses and should be excepted in the
same manner as payments made under
accountable plans. Commenters argued
that applying withholding in this instance
will complicate the travel arrangement
process, reduce the use of more efficient
central billing accounts, and create un-
justified discrepancies in travel expense
reimbursements based on the employer
method of payment.
The section 3402(t)(2)(I) exception by
itstermsappliesonlytopaymentstoem-
ployees (or their successors in interest). If
the government entity pays a provider di-
rectly for employee travel expenses, there
is no payment from the government entity
to the employee to invoke this exception.
Payments to the provider by the govern-
ment entity are payments for property and
services, and therefore subject to section
3402(t) withholding unless another excep-
tion applies. The exception for employee
fringe benefits does not apply where a pay-
ment is made directly to the provider be-
cause, while related to the provision of a
fringe benefit to the employee, the pay-
ment itself is not a fringe benefit and is
made to a third party rather than to the
employee. However, payments made by
payment card are excepted pending future
guidance. See Notice 2010–91.
J.Grants
The proposed regulations did not pro-
vide an explicit exception for grant pay-
ments. Commenters requested that all
grant payments be excluded from sec-
tion 3402(t) withholding because they are
“non-exchange” transactions in which the
government entity is not making a pay-
ment for property or services for the direct
benefit or use of the government entity.
According to commenters, grant pay-
ments are distinguishable from payments
in a transaction with a vendor in which a
government entity is directly purchasing
property or services for its own benefit or
use.
Commenters also recommended that
section 3402(t) withholding not apply to
the use of grant funds by grant recipients
that are complying with the grant eligibil-
ity and award process. One commenter
cited the example of a city or county fire
department that receives a grant from a
government entity specifically for the pur-
chase of an emergency response vehicle.
If the purchase of an emergency response
vehicle by the local fire department were
subject to section 3402(t) withholding, the
commenter maintained the withholding
would divert federal grant money from the
authorized acquisition use into the three
percent withholding process.
In cases where the grant recipient is an-
other government entity or a tax-exempt
organization, the grant payment will be ex-
cepted from section 3402(t) withholding
under section 3402(t)(2)(E). In addition,
grant payments may qualify as payments
made in connection with a public assis-
tance or public welfare program for which
eligibility is determined by a needs or in-
come test, and thus be excepted from with-
holding under section 3402(t)(2)(H). Thus,
it seems likely that many grant payments
will qualify for these statutory exceptions.
In light of the administrative difficulty
and potential frustration to the intended
use of the grant proceeds that may arise,
the final regulations explicitly except all
grants from section 3402(t) withholding.
For this purpose, the final regulations de-
fine a grant as a transfer of funds by a gov-
ernment entity to a recipient (which may
be a state government, local government,
or other recipient) pursuant to an agree-
ment reflecting a relationship between the
government entity and the recipient when
(1) the principal purpose of the relation-
ship is to transfer a thing of value to the
recipient to carry out a public purpose of
support or stimulation authorized by law
instead of acquiring (by purchase, lease, or
barter) property or services for the direct
benefit or use of the government entity;
and (2) substantial involvement is not ex-
pected between the government entity and
the recipient when carrying out the activity
contemplated in the agreement.
The exception from section 3402(t)
withholding for grants does not apply to
the distribution of grant proceeds by a
government entity. Commenters’ sugges-
tions that grant proceeds be permanently
excepted from withholding if the grant
recipient is using the proceeds for the
purposes specified in the grant is not
supported by the statute and would be
difficult to administer. Tracing would be
required to determine which government
entity purchases had been made with grant
proceeds. Tracing would be particularly
difficult if the grant agreement does not
identify specific uses for the proceeds (for
example, to purchase items necessary to
improve emergency response time, which
may include an additional emergency re-
sponse vehicle) or if only a portion of a
payment consists of grant proceeds. Ac-
June 6, 20118502011–23 I.R.B.

cordingly, the final regulations do not
adopt this suggestion.
K.Sales tax, excise tax, and value-added
tax
Commenters requested guidance on
whether the payment subject to withhold-
ing includes the amount of any sales tax,
excise tax, or value-added tax. Sales taxes
are generally paid by the purchaser, col-
lected by the vendor, and remitted to the
state. The sales tax amount generally is
not included in the vendor’s gross income.
By comparison, information reporting
under section 6041 and related backup
withholding under section 3406 apply
only to payments that are includible in the
payee’s income. Therefore, if the payee is
liable for sales tax and the payor includes
the amount of sales tax in the total pay-
ment to the payee, the payor includes the
amount of sales tax on Form 1099–MISC,
“Miscellaneous Income,” as part of the
reportable payment. In contrast, if (as is
generally the case) the payor is liable for
any sales tax and the payee merely collects
sales tax from the payor, the payor does
not include sales tax in the total amount
reported on Form 1099–MISC.
A different reporting rule applies to re-
portable payment card transactions under
section 6050W. Section 1.6050W–1(a)(6)
provides that the gross amount reportable
on Form 1099–K, “Merchant Card and
Third Party Network Payments,” is the to-
tal dollar amount of aggregate reportable
payment transactions for each partici-
pating payee without regard to any ad-
justments for credit, cash equivalents,
discount amounts, fees, refunded amount
or any other amounts. Thus, the gross
amount reported on Form 1099–K in-
cludes the amount of sales tax, excise tax,
or value-added tax paid as part of a pay-
ment transaction.
Similar to reporting under section
6050W, but in contrast to reporting under
section 6041, section 3402(t) withholding
does not depend on whether an amount
is includible in gross income. The en-
tire amount paid for property or services
is subject to withholding regardless of
whether the vendor realizes a profit on
transactions covered by the payments.
Accordingly, the final regulations provide
that the amount subject to withholding
and reporting includes any sales, excise
or value-added tax. However, the final
regulations also permit government enti-
ties to exclude the amount of any sales,
value-added, or excise tax, for purposes
of section 3402(t) withholding, provided
the exclusion is applied consistently to all
payments to a given payee during the cal-
endar year. This rule is similar to the rules
permitting payors to exclude the amount
of the wager from gambling winnings
for reporting and withholding purposes
under §31.3406(g)–2(d)(2) or to exclude
commissions and option premiums in
determining gross proceeds from secu-
rities sales for reporting purposes under
§1.6045–1(d)(5).
L.Loan guarantees
Commenters requested guidance on
whether loan guarantees provided by gov-
ernment entities and payments on loan
guarantees are subject to section 3402(t)
withholding. The final regulations provide
that the loan guarantee itself (meaning a
guarantee provided by a government en-
tity on a loan by a lender) is not a payment
subject to section 3402(t). The underlying
amounts are still loans and guaranteeing a
loan or making a loan that is expected to
be repaid through the payment of principal
and interest is not a payment for property
or services.
Payments of principal and interest by
the government entity as guarantor of the
loan so that the borrower can continue per-
forming services under the contract are
also not subject to withholding under sec-
tion 3402(t). The government entity is
making these payments as guarantor of the
loan, and the payments are being made to
the lender, not to a third party contractor
that is performing services or transferring
property. Thus, the final regulations pro-
vide that government entity payments of
principal and interest on a loan pursuant to
a loan guarantee are not subject to section
3402(t) withholding.
Under some circumstances, borrowers
use the funds from guaranteed loans to
fund a specific project. As part of a loan
guarantee, the government has the right
to assume the operation of the underlying
project if the borrower ceases making pay-
ments on the loan. If the government entity
(through a right of subrogation) assumes
the operation of the underlying project,
the government entity as the operator of
the project makes payments to the con-
tractors providing services and property
for the project. In that case, payments
by the government entity to third party
contractors are payments for property or
services. Although the government exer-
cised its right of subrogation pursuant to
the loan guarantee or the underlying loan,
and not as a party to the underlying con-
tract between the borrower and the third
party contractors, the government is step-
ping into the borrower’s shoes and making
payments for property or services directly
to the third party contractors. Accordingly,
the final regulations provide that section
3402(t) withholding applies in that case.
M.Debt repayments and stock and bond
purchases
Commenters requested clarification
that a government entity’s repayments
of principal on a loan are not subject to
section 3402(t) withholding. Generally,
repayments of principal on a loan will not
be subject to section 3402(t) withholding
because they are not payments for prop-
erty or services. However, if a government
entity issues a debt obligation to a person
providing services as part of the purchase
price, the debt’s fair market value is sub-
ject to section 3402(t) withholding when
the obligation becomes effective, unless
an exception applies. If a government
entity issues a debt obligation to a person
providing property as part of the purchase
price, the debt’s issue price as determined
under section 1273 or 1274, as applicable,
is subject to section 3402(t) withholding
unless an exception applies (for exam-
ple, the exception for payments for real
property will apply to a debt obligation
issued as part of a government entity’s
purchase of real property). For adminis-
trative convenience, the regulations allow
the government entity and the person pro-
viding property to agree to use the stated
principal amount of the debt obligation
in lieu of the issue price as the amount
of the payment attributable to the debt
obligation that is subject to section 3402(t)
withholding. Thus, for example under
these rules, if a government entity pays
a person in 2013 for the performance of
services with $50,000 cash and a 5-year
note valued at $50,000, then the note’s fair
market value would besubject to section
3402(t) withholding in 2013 along with
2011–23 I.R.B.851June 6, 2011

the cash payment, but the repayment of the
principal after the note matured in 2018
would not be subject to section 3402(t)
withholding. If a government entity uses a
third party debt obligation (a debt obliga-
tion issued by another government entity
or by an entity other than a government
entity) to pay for property or services, the
fair market value of the debt obligation
is subject to section 3402(t) withholding,
unless an exception applies.
The final regulations also except pay-
ments to purchase stock, bonds, and
other negotiable instruments primarily
for investment purposes. Although these
payments are for intangible property, with-
holding on purchases in stock and bond
markets is not practicable given the func-
tioning of the investment markets in which
buyers and sellers are paired on a virtually
anonymous basis. However, a government
entity’s payment of investment advisory
fees to investment advisors (including a
payment from the government entity’s
account) is a payment for services subject
to section 3402(t) withholding. In con-
trast, investment advisory fees paid, for
example, by a mutual fund in which a gov-
ernment entity owns shares are not subject
to section 3402(t) withholding, since these
payments are not made by the government
entity.
IV.Application of Section 3402(t) to
Passthrough Entities
The final regulations generally adopt
the same basic rules as the proposed regu-
lations on applying section 3402(t) where
either the payor or the payee is a part-
nership or S corporation (a passthrough
entity). Payments from a passthrough
entity generally are not subject to sec-
tion 3402(t) withholding unless 80 per-
cent or more of the passthrough entity is
owned in the aggregate by government
entities required to withhold under sec-
tion 3402(t)(1). Similarly, payments to
a passthrough entity generally are sub-
ject to section 3402(t) withholding unless
80 percent or more of the passthrough
entity is owned in the aggregate by per-
sons described in section 3402(t)(2)(E)
(government entities required to withhold
under section 3402(t)(1), tax-exempt enti-
ties, and foreign governments) and Indian
tribal governments. Expanding on the
exceptions in the proposed regulations,
the final regulations additionally provide
that certain payments to a partnership that
is 80 percent or more owned by foreign
corporations or nonresident alien indi-
viduals are not subject to section 3402(t)
withholding. This exception does not ap-
ply to S corporations because nonresident
alien individuals and foreign corporations
are not permissible shareholders of an
S corporation under section 1361(b)(1).
The regulations also provide that, as a
general rule, whether a passthrough entity
is subject to section 3402(t) is determined
on the first day of the passthrough entity’s
taxable year. However, any manipulation
of the ownership percentage with intent to
avoid application of section 3402(t) will
be recharacterized as appropriate to reflect
the actual ownership percentage. Because
the government entity is responsible for
withholding and may not have sufficient
information regarding the payee’s
ownership structure, the final regulations
provide that this rule applies only if
the government entity knew or should
have known that the payee’s ownership
percentage had been manipulated with
intent to avoid application of section
3402(t).
Commenters requested that payments
to all passthrough entities be excepted
from section 3402(t) withholding. The
final regulations do not adopt this sug-
gestion. A passthrough entity exemption
would create opportunities for payees
to circumvent section 3402(t) by using
passthrough entities to receive govern-
ment payments.
V.Deposits and Reporting of Amounts
Withheld Under Section 3402(t)
The final regulations adopt the same
reporting and payment rules for section
3402(t) withholding purposes as the pro-
posed regulations. Final regulations under
section 6011 provide that the payor re-
quired to withhold under section 3402(t)
must file Form 945, “Annual Return of
Withheld Federal Income Tax,” report-
ing the amounts withheld. Final regula-
tions under section 6302 provide that the
amounts withheld under section 3402(t)
must be deposited and reported in the
same manner as other nonpayroll withheld
amounts, such as withholding on gambling
winnings and pensions. Pursuant to exist-
ing regulations, these amounts are treated
as if they were employment taxes for pur-
poses of the deposit rules, but are subject
to special rules for determining the payor’s
deposit schedule. See §31.6302–4. Ad-
ditionally, final regulations under section
6051 provide that payors required to with-
hold amounts under section 3402(t) must
file information returns and furnish payee
statements on Form 1099–MISC, “Miscel-
laneous Income” (or any successor form),
reporting such payments and tax withheld.
Because this reporting is pursuant to regu-
lations under section 6051, the exceptions
provided in the regulations under section
6041 relating to Form 1099 do not apply.
VI.Crediting of Amounts Withheld
A.Credit against income tax
Commenters requested that the regula-
tions permit fiscal year taxpayers to credit
amounts withheld against their income tax
liability for the fiscal year in which the
tax is withheld. The final regulations do
not adopt this suggestion because it is in-
consistent with the statute. Section 31
governs the taxable year against which a
taxpayer may credit income tax. Section
31(a)(1) provides that “[t]he amount with-
held as tax under chapter 24 shall be al-
lowed to the recipient of the income as a
credit against the tax imposed by this sub-
title.” Chapter 24 includes section 3402(t),
and section 31(a)(1) is in subtitle A, in-
come taxes. Thus, by its terms, section
31(a)(1) applies to persons who have had
income tax withheld from a payment pur-
suant to section 3402(t). Section 31(a)(2)
provides the general rule on the timing of
the allowance of the credit allowed under
section 31(a)(1): “The amount so withheld
during any calendar year shall be allowed
as a credit for the taxable year beginning in
such calendar year. If more than one tax-
able year begins in a calendar year, such
amount shall be allowed as a credit for the
last taxable year so beginning.” Thus, ab-
sent a special rule, section 31(a)(2) gener-
ally applies for purposes of withholdings
required under chapter 24, which includes
section 3402(t).
Section 31(c) provides a special rule
solely for backup withholding. Under sec-
tion 31(c), any credit allowed by section
31(a) for backup withholding under sec-
tion 3406 must be allowed for the taxable
year of the recipient of the income in which
June 6, 20118522011–23 I.R.B.

the income is received. Section 31(c) is
limited by its terms to section 3406 with-
holding only, and thus does not apply to
section 3402(t) withholding.
Practical considerations also support
the section 31(a)(2) crediting rule. Tax-
payers generally will have received Forms
1099–MISC reporting the withholding
prior to filing income tax returns crediting
the income tax withheld, promoting accu-
racy in return filing.
B.Credit against estimated income tax
liability
Commenters requested that taxpay-
ers be permitted to credit the income tax
withheld against the estimated tax liabil-
ity for the specific tax quarter in which
the income tax is withheld. However, the
Code specifically provides that crediting
for estimated tax purposes occurs in the
taxable year in which the tax withheld
may be taken as a credit against income
tax liability. See sections 6654(g)(1) and
6655(g)(1)(B). Thus, the final regulations
do not adopt this comment.
C.Credit against employment taxes or
other taxes
Many commenters requested that tax-
payers be permitted to credit their section
3402(t) withholding against employment
taxes on wages or other taxes. The final
regulations do not adopt this suggestion.
Section 3402(t)(3) directs that crediting
occur under the rules in section 31(a),
which provides for crediting against in-
come tax. As noted in the preamble to
the proposed regulations, if a statute per-
mits income tax payments to be treated as
employment tax payments, or vice versa,
it makes specific provision for that treat-
ment. See, for example, section 3510(b)
(providing that domestic employment
taxes are treated as taxes due for estimated
tax purposes under section 6654); and
section 31(b) (providing for the crediting
against income tax of the special refund of
social security tax under section 6413(c)
applicable when an employee receives
wages from two or more employers in
excess of the social security contribution
and benefit base). The Code does not
provide for section 3402(t) withholding to
be treated as payments of the taxpayer’s
employment tax liability. In addition,
payments of income tax and employment
taxes occur under different processes, us-
ing different forms, and are subject to
different procedures for corrections of un-
derpayments and overpayments, as well
as different audit procedures and potential
penalties. Therefore, the crediting of an
amount withheld for income tax against an
employment tax obligation is not adminis-
tratively feasible.
D.Credits for amounts withheld on
payments to passthrough entities
Amounts withheld on payments to
passthrough entities are subject to the same
crediting rules as payments made to other
entities. Thus, a passthrough entity with a
fiscal year may only claim the credit for its
fiscal year beginning in the calendar year
during which the amount was withheld
pursuant to section 31(a)(2). The timing
of when the owners of the passthrough
entity take into account the credit would
then be determined under the rules appli-
cable to that type of passthrough entity (for
example, section 706 for a partnership).
Commenters specifically asked how the
credit would be allocated by a partnership.
This allocation is governed by the rules set
forth in §1.704–1(b)(4)(ii), with appropri-
ate adjustments under section 705.
VII.Correction of Errors and Liability of
Government Entity
Commenters requested clarification
that a government entity is liable for tax
that the entity was required to withhold
under section 3402(t) but did not withhold,
unless the entity can demonstrate that the
payee has paid its income tax liability.
Commenters also requested clarification
of the rules applicable to corrections of
overwithholding and underwithholding,
and guidance on the effect of repayments,
underpayments, or overpayments for ser-
vices or property on the determination of
section 3402(t) liability.
A.Corrections of overwithholding and
underwithholding
Section 3402(t)(3)provides that, for
purposes of sections 3403 and 3404 and
for purposes of so much of subtitle F (ex-
cept section 7205) as relates to Chapter
24, Collection of Income Tax at Source,
payments to any person for property or
services that are subject to withholding
are treated as if the payments were wages
paid by an employer to an employee. If
a government entity fails to withhold the
tax imposed by section 3402(t), section
3403 applies to determine the government
entity’s liability.
Section 3403 provides that the em-
ployer is liable for the payment of tax
required to be deducted and withheld un-
der Chapter 24, and is not liable to any
person for the amount of that payment.
Section 31.3403–1 of the Employment Tax
Regulations provides that every employer
required to deduct and withhold the tax
under section 3402 from an employee’s
wages is liable for the payment of the tax
whether or not the employer collects the
tax from the employee. If the employer
fails to withhold all or part of the amount
required to be withheld, and thereafter the
employee pays the tax, section 3402(d)
provides that the tax will not be collected
from the employer. Thus, for purposes
of section 3402(t), the government entity
generally will be liable if it fails to with-
hold unless under section 3402(d) it can
demonstrate that the contractor reported
the amount subject to section 3402(t)
withholding on its return and paid the in-
come tax due (which may include payment
through an amended return or settlement
of an audit).
Pursuant to section 3402(t)(3), the
rules for adjustments of overpayments
or underpayments of income tax with-
holding on wages also apply to sec-
tion 3402(t) withholding.Seesec-
tion 6413, §31.6413(a)–2(c)(1), and
§31.6413(a)–1(b)(1)(i) (repayments and
reimbursements to employees of overwith-
holding, and correction of overpayments
of income tax withholding); section 6205
and §31.6205–1 (corrections of under-
payments of income tax withholding). If
an error is discovered before a return is
filed, the payor must report on the return
and pay to the IRS the correct amount of
income tax withholding. Corrections of
overwithholding or underwithholding of
income tax before the return is filed are not
adjustments, and a payor that discovers an
error before a return is filed but does not
report and pay the correct amount of tax
to the IRS may not later correct the error
through an adjustment.
For purposes of correcting overpay-
ments of income tax withholding, a payor
must repay or reimburse the overwithheld
2011–23 I.R.B.853June 6, 2011

income tax to the payee in the same calen-
dar year as the original payment in order to
make an adjustment. The payor can then
make that adjustment on its return at any
time before the period of limitations on
credit or refund under section 6511 expires
for that calendar year. If the amount of the
overwithheld income tax is not repaid or
reimbursed to the payee in the same calen-
dar year as the original payment, there is
no overpayment to be adjusted; rather the
amount withheld will be credited to the
payee and subject to a potential tax refund.
However, an adjustment may be made to
correct an administrative error (that is, an
inaccurate reporting of the amount actu-
ally withheld).
For purposes of correcting underpay-
ments of income tax withholding, an ad-
justment can generally only be made in
the same calendar year as the original pay-
ment. An exception to this general rule ap-
plies to corrections for administrative er-
rors (that is, an inaccurate reporting of the
amount actually withheld).
Pursuant to section 3402(t)(3), the rules
for claims for refund of income tax with-
holding on wages also apply to section
3402(t) withholding.Seesection 6414 and
§31.6414–1. Section 6414 permits refunds
of income tax withholding only to the ex-
tent the amount of the overpayment was
not actually deducted and withheld from
the payee.
Amounts withheld under section
3402(t) are reported on an annual Form
945. Accordingly, any corrections of over-
withholding or underwithholding during
the calendar year are not adjustments; the
government entity must report and pay to
the IRS the correct amount of tax on Form
945. For example, if a government entity
pays an amount subject to section 3402(t)
withholding in error to a contractor and
the contractor repays the net amount to the
government entity within the same calen-
dar year, the government entity should not
report the amount and the related with-
holding on the annual Form 945 (that is,
the government entity should report and
pay the correct amount of tax on Form
945). Because the correction is made
before the return is filed, the correction
does not constitute an adjustment. The
government entity may reduce its deposit
of other withholding reportable on Form
945 for that calendar year to account for
the deposit of section 3402(t) withholding
on the amount repaid by the contractor.
If the contractor repays the government
entity an amount in a later calendar year,
no adjustment can be made because an
adjustment is permitted only in the case
of an administrative error (an inaccurate
reporting of the amount actually withheld)
discovered after the filing of the Form 945.
The contractor already received a credit
for the amount withheld under the general
rules for crediting income tax withholding.
Similarly, the government entity can
collect underwithholding only during the
same calendar year as the payment (except
corrections made in the case of admin-
istrative errors). If the underpayment is
discovered in a later calendar year, the
government entity is liable under section
3403 for any amount that should have been
withheld, unless under section 3402(d)
it can demonstrate that the contractor
reported the amount subject to section
3402(t) withholding on its return and paid
the income tax due (which may include
payment through an amended return or
settlement of an audit). The contractor
is liable for any income tax due on any
payment subject to withholding regardless
of whether the government entity actually
withholds any amount from the payment.
B.Application of the $10,000 threshold to
corrections of erroneous payments
The final regulations provide that the
$10,000 payment threshold applies to the
actual payment made by the government
entity, even if the amount of the actual
payment is incorrect. For example, if an
excessive payment is subject to section
3402(t) withholding, the subsequent re-
payment of all or a portion of the ini-
tial payment does not affect whether the
$10,000 threshold was met with respect to
the initial payment. Any correction of in-
come tax withholding applies only to the
withholding on the amount repaid and not
to the remaining portion of the original
payment, even if that remaining portion is
less than $10,000. Similarly, if the pay-
ment was less than $10,000 due to an insuf-
ficient payment to the payee, the $10,000
threshold applies separately to the initial
payment and the subsequent payment (to
make up for the insufficient payment) un-
less the anti-abuse rule applies (that is,
unless the payment was divided into two
or more payments primarily to avoid the
$10,000 payment threshold).
VIII.Extension of Applicability Date and
Transition Relief for Existing Contracts
Numerous commenters indicated that
an extended period of time following the
issuance of final regulations would be nec-
essary for government entities to adopt the
systems and processes necessary to com-
ply with the §3402(t) withholding and re-
lated reporting requirements. Noting the
necessity to formulate government acqui-
sition rules that are consistent with the fi-
nal regulations, as well as the infrastruc-
ture needed to apply those rules, some
commenters stated that government enti-
ties would need at least 18 months from the
issuance of final regulations under section
3402(t) to be able to comply.
In response to these practical consid-
erations, the final regulations provide that
the withholding and reporting require-
ments under these regulations apply to
payments made after December 31, 2012,
subject to an existing contract exception.
Thus, under the regulations, payments
made under written binding contracts in
effect on December 31, 2012, are not
subject to section 3402(t) withholding,
while payments made after December 31,
2012, under contracts entered into after
December 31, 2012, are subject to section
3402(t) withholding unless otherwise ex-
cepted. In addition, if an existing contract
is materially modified after December 31,
2012, the contract ceases to be an existing
contract and payments under the contract
become subject to section 3402(t) with-
holding. With respect to payments before
January 1, 2013, government entities are
not required to apply section 3402(t) with-
holding and the related reporting, and
accordingly will not be subject to any lia-
bility, penalties or interest for failure to do
so.
Commenters requested that the mate-
rial modification rule be removed because
of the difficulty in determining whether it
applies. Commenters anticipated disputes
between parties about what constitutes a
material modification and questioned how
such disputes would be resolved. Cer-
tain commenters also requested that a mere
contract renewal not be considered a mate-
rial modification. Some commenters sug-
gested that, in lieu of a material modifica-
June 6, 20118542011–23 I.R.B.

tion rule, withholding should apply to all
contracts after a certain effective date, in-
cluding those that have not been materially
modified.
In response to these comments, at the
same time that these final regulations are
being issued, the IRS and the Treasury
Department are proposing regulations
to provide that the exception for pay-
ments made under existing contracts will
not apply to payments made on or after
January 1, 2014. See REG–151687–10.
Thus, under these proposed regulations,
payments on or after January 1, 2014,
under all contracts (existing and new)
would be subject to withholding under
section 3402(t) unless an exception
applies.
The final regulations retain the mate-
rial modification rule but provide that a
mere contract renewal will generally not
be considered a material modification. For
this purpose, a modification is not a ma-
terial modification unless it materially af-
fects either the payment terms of the con-
tract or the services or property to be pro-
vided under the contract. Thus, for ex-
ample, a change order (meaning a change
in the specifications of a contract that the
government entity is authorized to make
under the contract without the contractor’s
consent) generally would not be a mate-
rial modification unless the change mate-
rially affected the price or other payment
terms, or the services or property to be pro-
vided. The final regulations also provide
that modifying a contract to conform to
changes in the applicable law is not a ma-
terial modification.
Several commenters requested guid-
ance on the application of section 3402(t)
withholding to payments under Medicare
provider agreements. Under the final reg-
ulations, Medicare provider agreements
in effect as of December 31, 2012, are
existing contracts for purposes of the ex-
isting contract exception unless materially
modified after December 31, 2012. Ad-
ditionally, renewals of Medicare provider
agreements will not be treated as material
modifications to the extent the agreement
is modified to conform to federal law.
As with other existing contracts, the pro-
posed regulations issued with these final
regulations would provide that payments
made by government entities on or after
January 1, 2014, under both existing and
new Medicare provider agreements will
be subject to section 3402(t) withholding.
IX.Transition Rule for Interest and
Penalties on Underpayments
Consistent with the proposed regula-
tions, the final regulations provide a transi-
tion rule for payments for property and ser-
vices made before January 1, 2014. Under
this rule, a government entity will not be li-
able for interest and penalties for failure to
withhold on payments for property or ser-
vices made before January 1, 2014, if the
entity made a good faith effort to comply
with section 3402(t). However, this rule
does not relieve the entity from liability for
theamountoftaxrequiredtobewithheld
under section 3402(t).
Effective/Applicability Date
These regulations apply to payments
made after December 31, 2012. In addi-
tion, the regulations will not apply to pay-
ments under a contract existing on Decem-
ber 31, 2012, unless the contract is materi-
ally modified after December 31, 2012.
Special Analyses
It has been determined that this Trea-
sury decision is not a significant regula-
tory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to this regulation, and because
the regulation does not impose a collection
of information on small entities, the Regu-
latory Flexibility Act (5 U.S.C. chapter 6)
does not apply. Pursuant to section 7805(f)
of the Internal Revenue Code, the notice of
proposed rulemaking preceding this regu-
lation was submitted to the Chief Counsel
for Advocacy of the Small Business Ad-
ministration for comment on its impact on
small business.
Drafting Information
The principal author of these final reg-
ulations is A. G. Kelley, Office of the Di-
vision Counsel/Associate Chief Counsel
(Tax Exempt and Government Entities).
However, other personnel from the IRS
and the Treasury Department participated
in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 31 is
amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph 1. The authority citation for
part 31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Sections 31.3402(t)–0,
31.3402(t)–1, 31.3402(t)–2, 31.3402(t)–3,
31.3402(t)–4, 31.3402(t)–5, 31.3402(t)–6,
and 31.3402(t)–7 are added to read as fol-
lows:
§31.3402(t)–0 Outline of the Government
withholding regulations.
This section lists paragraphs contained
in §§31.3402(t)–1 through 31.3402(t)–7.
§31.3402(t)–1 Withholding requirement
on certain payments made by government
entities.
(a) In general.
(b) Special rules.
(c) Deposit and reporting requirements.
(d) Effective/applicability date.
§31.3402(t)–2 Government entities
required to withhold under section
3402(t).
(a) In general.
(b) Government of the United States.
(c) State.
(d) Political Subdivision.
(e) [Reserved].
(f) Possessions of the United States.
(g) Passthrough entities.
(h) Small entity exception.
(i) Effective/applicability date.
§31.3402(t)–3 Payments subject to
withholding.
(a) In general.
(b) Payment threshold of $10,000.
(c) No withholding on successive pay-
ments.
(d) Payments made through a payment
administrator or to a contractor.
(e) [Reserved].
2011–23 I.R.B.855June 6, 2011

(f) Examples.
(g) Effective/applicability date.
§31.3402(t)–4 Certain payments excepted
from withholding.
(a) Payments subject to withholding un-
der chapter 3 or chapter 24 (other than sec-
tion 3406).
(b) Payments subject to withholding un-
der section 3406 with backup withholding
deducted.
(c) [Reserved].
(d) Payments for real property.
(e) Payments to government entities,
tax-exempt organizations, and foreign
governments.
(f) Payments made pursuant to a classi-
fied or confidential contract.
(g) Exception for political subdivisions
or instrumentalities thereof making less
than $100,000,000 of payments for prop-
erty or services annually.
(h) Payments made in connection with
a public assistance or public welfare pro-
gram.
(i) Payments made to any government
employee with respect to his or her ser-
vices.
(j) Payments received by nonresident
alien individuals and foreign corporations.
(k) Payments to Indian tribal govern-
ments.
(l) Payments in emergency or disaster
situations.
(m) Grants.
(n) Sales tax, excise tax, value-added
tax, and other taxes.
(o) Loan guarantees.
(p) Debt.
(q) Investment securities.
(r) Partially exempt payments.
(s) Determination of eligibility for ex-
emption.
(t) Withholding relief for 2012.
(u) Effective/applicability date.
§31.3402(t)–5 Application to passthrough
entities.
(a) In general.
(b) Definitions.
(c) Payments from a passthrough entity.
(d) Payments to a passthrough entity.
(e) Effective/applicability date.
§31.3402(t)–6 Crediting of tax withheld
under section 3402(t).
(a) Crediting against income tax liabil-
ity only.
(b) Taxable year of credit.
(c) Estimated tax.
(d) Effective/applicability date.
§31.3402(t)–7 Transition relief from
interest and penalties.
(a) Good faith exception for interest and
penalties on payments before January 1,
2014.
(b) Effective/applicability date.
§31.3402(t)–1 Withholding requirement
on certain payments made by government
entities.
(a)In general. Except as provided in
§§31.3402(t)–3(b) and 31.3402(t)–4, the
Government of the United States, every
State, every politicalsubdivision thereof,
and every instrumentality of the forego-
ing (including multi-State agencies) mak-
ing any payment to any person providing
any property or services must deduct and
withhold from the payment a tax in an
amount equal to 3 percent of such pay-
ment.
(b)Special rules. See §31.3402(t)–2 for
government entities required to withhold
under this section, §31.3402(t)–3 for what
constitutes a payment to a person for prop-
erty or services and when such payment is
deemed to occur for purposes of this sec-
tion, and §31.3402(t)–4 for payments that
are excepted from withholding under this
section.
(c)Deposit and reporting requirements.
See §31.6302–4 for deposit requirements
with respect to withholding under sec-
tion 3402(t). See §§31.6011(a)–4(b) and
31.6051–5 for the reporting requirements
with respect to withholding under section
3402(t).
(d)Effective/applicability date.(1)Ex-
cept as provided in paragraph (d)(2) of
this section, this section applies to pay-
ments by the Government of the United
States, every State, every political subdivi-
sion thereof, and everyinstrumentality of
the foregoing (including multi-State agen-
cies) to any person providing property or
services made after December 31, 2012.
(2) Payments made under a written
binding contract that was in effect on
December 31, 2012, are not subject to
the withholding requirements of this sec-
tion. The preceding sentence does not
apply to payments made under any con-
tract that is materially modified after
December 31, 2012. For this purpose,
a material modification includes only
a modification that materially affects
the property or services to be provided
under the contract, the terms of payment
for the property or services under the
contract, or the amount payable for the
property or services under the contract.
Notwithstanding the foregoing, a material
modification does not include a mere
renewal of a contract that does not
otherwise materially affect the property or
services to be provided under the contract,
the terms of payment for the property or
services under the contract, or the amount
payable for the property or services under
the contract. A material modification
also does not include a modification to
the contract to the extent required by
applicable Federal, State or local law.
§31.3402(t)–2 Government entities
required to withhold under section
3402(t).
(a)In general. The requirement
to withhold under section 3402(t) and
§31.3402(t)–1(a) applies to the Govern-
ment of the United States (see paragraph
(b) of this section) and every State (see
paragraph (c) of this section), as well as
instrumentalities of the foregoing. The
requirement also applies to political sub-
divisions of every State (see paragraph (d)
of this section) and their instrumentali-
ties, unless the small entity exception of
§31.3402(t)–4(g) applies.
(b)Government of the United States.
The Government of the United States in-
cludes the legislative branch, the judicial
branch, and the executive branch, and all
components of the United States Govern-
ment. Thus, departments and agencies are
included within the definition of United
States Government.
(c)State.ThetermStateincludes the
District of Columbia. However, an In-
dian tribal government is not considered a
State for purposes of section 3402(t) and
§31.3402(t)–1(a). See section 7871(a).
(d)Political subdivision.Thetermpo-
litical subdivisionfor purposes of section
3402(t) and §31.3402(t)–1(a) is defined as
June 6, 20118562011–23 I.R.B.

a political subdivision within the meaning
of §1.103–1(b) of this chapter, except that
a subdivision of an Indian tribal govern-
ment is not considered a political subdivi-
sion. See section 7871(a) and (d).
(e) [Reserved].
(f)Possessions of the United States.
For purposes of section 3402(t) and
§31.3402(t)–1(a), the government of a
possession or territory of the United States
is not treated as a government entity sub-
ject to the withholding requirements of
section 3402(t)(1).
(g)Passthrough entities.See
§31.3402(t)–5(c) for the treatment of pay-
ments from certain passthrough entities as
subject to the withholding requirements of
§31.3402(t)–1.
(h)Small entity exception.See
§31.3402(t)–4(g) for the exception
from the withholding requirements of
§31.3402(t)–1 for political subdivisions
and instrumentalities thereof making less
than $100,000,000 of payments for prop-
erty or services annually.
(i)Effective/applicability date.This
section applies to amounts paid on or after
January 1, 2013.
§31.3402(t)–3 Payments subject to
withholding.
(a)In general. A payment is sub-
ject to withholding for purposes of
§§31.3402(t)–1 through 31.3402(t)–7
when paid by a government entity to any
person, as defined in §301.7701–6(a)
of this chapter, for property or services.
If, however, the government entity uses
a payment administrator to pay a per-
son for property or services, payment
occurs when the payment administrator
pays such person. The government entity
subject to the withholding requirements
of §31.3402(t)–1 is liable for the with-
holding required and responsible for all
related reporting regardless of whether the
government entity or its payment admin-
istrator makes the payment for property or
services. For this purpose, if a government
entity makes an advance payment, interim
payment, financing payment, or similar
payment, the amount is treated as paid
by the government entity at the time the
funds are disbursed, regardless of whether
the government entity has received or
accepted the property or services at that
time.
(b)Payment threshold of $10,000—(1)
In general.Thetermpayment thresh-
oldmeans an amount equal to $10,000.
The withholding requirements of
§31.3402(t)–1 will not apply to any pay-
ment that is less than the payment thresh-
old. Whether a payment is equal to or in
excess of the payment threshold is deter-
mined when the payment is made. Thus,
the payment threshold applies to the actual
payment even if the amount of the actual
payment is incorrect (except to the extent
the anti-abuse rule in paragraph (b)(3) of
this section applies). A later determination
that the amount of the payment was in
error does not affect the application of the
payment threshold (except to the extent
the anti-abuse rule in paragraph (b)(3) of
this section applies), so that the payment
threshold applies to the erroneous pay-
ment when made, and separately to any
additional payment intended to correct an
erroneous underpayment.
(2)Payment threshold applied per pay-
ment. If a government entity makes a sin-
gle payment to a person for property or ser-
vices combining charges for more than one
transaction with the person, the determina-
tion of whether the payment threshold pro-
vided by paragraph (b)(1) of this section is
met is based on the amount of the single
payment, rather than the amount attribut-
able to each separate transaction. Thus, if
a government entity makes a single pay-
ment of $10,000 or more to a person, the
government entity is required to withhold
on the payment, even if the payment is for
more than one property or service. The
same rule applies if a government entity
enters into multiple transactions with a sin-
gle person, each of which would result in a
payment of less than $10,000 if paid sepa-
rately, but elects to make a single payment
covering all the transactions such that the
aggregated payment is $10,000 or more.
Under these circumstances, the govern-
ment entity is required to withhold on the
aggregated payment.
(3)Anti-abuse rule. If a government
entity or payment administrator divides a
payment or payments to any person for
property or services into two or more pay-
ments (or permits a person providing prop-
erty or services to divide a request for
payment into two or more requests for
payments) primarily to avoid the $10,000
payment threshold provided in paragraph
(b)(1) of this section on one or more of
these payments, the divided payments will
be treated as a single payment made on
the date that the first of these payments is
made. This rule will not apply to a govern-
ment entity or payment administrator that
makes a payment in accordance with the
contractual terms, including any requests
for payments submitted by the person pro-
viding property or services in compliance
with the contractual terms, unless it knows,
or has reason to know, that the contractual
terms regarding payments were adopted,
or the person providing property or ser-
vices implemented such contractual terms,
with the primary purpose of avoiding the
$10,000 payment threshold. In determin-
ing whether this paragraph (b)(3) applies,
a significant factor is whether the govern-
ment entity or payment administrator has
exhibited a pattern or practice of dividing
payments to avoid the $10,000 payment
threshold.
(4)Withholding on excepted payments.
A government entity and a person pro-
viding property or services to that gov-
ernment entity may agree in writing that
the government entity will or may apply
section 3402(t) withholding to payments
not subject to section 3402(t) withhold-
ing, or an identified portion of payments
not subject to section 3402(t) withholding
(for example, only such payments made
from a specified agency of the govern-
ment entity), including payments below
the payment threshold provided in para-
graph (b)(1) of this section. This para-
graph (b)(4) does not apply to government
entity payments that are subject to sec-
tion 3402(t) withholding notwithstanding
a contractual provision between the par-
ties.
(c)No withholding on successive pay-
ments. If a government entity or its pay-
ment administrator makes a payment that
is subject to the withholding requirements
of §31.3402(t)–1 to a person, no subse-
quent transfer of cash or property from that
payment by such person to another person
is treated as a payment subject to with-
holding for purposes of §§31.3402(t)–1
through 31.3402(t)–7.
(d)Payments made through a payment
administrator or to a contractor—(1)Def-
inition. The following rules apply for pur-
poses of this section:
(i) Apayment administratoris any per-
son that acts with respect to a payment
solely as an agent for a government en-
2011–23 I.R.B.857June 6, 2011

tity by making the payment on behalf of
the government entity to a person provid-
ing property or services to, or on behalf of,
the government entity.
(ii) A payment administrator is treated
as a person providing property or services
for purposes of the withholding require-
ments of section 3402(t) to the extent it re-
ceives a fee from the government entity for
its services as a payment administrator for
the government entity.
(2)Payments to a contractor.Ifaper-
son provides property or services to a gov-
ernment entity under a contract and is not
a payment administrator, the person, who
is in privity with the government entity,
is treated as the person providing prop-
erty or services subject to withholding un-
der section 3402(t) for all payments re-
ceived from the government entity, regard-
less of whether some payments the person
receives relate to invoices for property or
services provided by subcontractors.
(3)Application of payment threshold.
Where a government entity uses a payment
administrator to make a payment, the de-
termination of whether the payment meets
the payment threshold is made at the time
the payment administrator makes the pay-
ment to the person providing property or
services. If a government entity makes one
transfer of funds to a payment administra-
tor that is composed of a fee to compen-
sate the payment administrator for its ser-
vices and other funds that are to be paid
to persons providing property or services,
the determination of whether the payment
threshold is met on the portion that is the
feeismadeatthetimeofthetransferofthe
funds to the payment administrator.
(e) [Reserved].
(f)Examples. This section is illustrated
by the following examples:
Example 1. (i) Prime contractorXhas a con-
tract with a government entity to provide services
and property to the government entity.Xcontracts
with numerous subcontractors to provide services and
property in connection with the contract. While the
engagement of any particular subcontractor is subject
to approval by the government entity, the subcontrac-
tors are not parties to the contract betweenXand the
government entity, and the government entity is not
a party to the contracts betweenXand subcontrac-
tors. Under its contract with the government entity,
Xsubmits an invoice for $48,000 for providing ser-
vices and property to the government entity, includ-
ing charges for services and property provided by two
subcontractors,MandN. The invoice reflects charges
of $16,000 forMand $2,000 forN. The government
entity paysXthe entire amount of the invoice in one
payment of $48,000.XpaysMforM’s billed portion
of the invoice in a single payment of $16,000, andX
paysNforN’s billed portion of the invoice in a single
payment of $2,000.
(ii) Under the facts of thisExample 1,Xis the per-
son providing property or services to, or for the bene-
fit of, the government entity with respect to the entire
amount of the $48,000 payment under the invoice,
including the charges for services or property pro-
vided by its subcontractorsMandN.Xis not a pay-
ment administrator (as defined in paragraph (d)(1)(i)
of this section) becauseXis not making payments
solely as an agent of the government entity to per-
sons providing property or services. Instead,Xmakes
payments to subcontractorsMandNpursuant toX’s
separate contracts with these subcontractors to which
the government entity is not a party. Therefore, un-
der paragraphs (a) and (d)(2) of this section, the en-
tire amount of the $48,000 payment toXunder the
invoice, including the charges for services and prop-
erty provided by its subcontractorsMandN,isthe
payment subject to withholding for purposes of sec-
tion 3402(t).
(iii) Under paragraph (b)(1) of this section, the
determination whether the payment meets the pay-
ment threshold is based on the entire amount of the
payment from the government entity toX. Withhold-
ing under section 3402(t) applies to the government
entity’s $48,000 payment toXbecause the payment
meets the payment threshold and is not otherwise ex-
cepted from section 3402(t) withholding. Thus, the
payment is subject to withholding of 3 percent, or
$1440.
(iv) Payments made byXto the subcontractors,
MandN, are not payments by the government entity
or its payment administrator. Thus,X’s $16,000 pay-
ment toMandX’s $2,000 payment toNfor services
or property under the contract are not subject to with-
holding under section 3402(t). See paragraphs (c) and
(d)(2) of this section.
(v) The government entity is liable for the $1440
withholding required under section 3402(t) on its
payment toXand is responsible for the related report-
ing required under §31.6051–5. See paragraph (a) of
this section.Xis the person receiving the payment
for purposes of reporting under §31.6051–5. Thus,
the government entity is responsible for furnishingX
with a Form 1099–MISC, “Miscellaneous Income”
(or successor form), including the entire amount of
the payment ($48,000) and the entire amount of the
withholding ($1440) and filing a Form 1099–MISC
with the Internal Revenue Service.
Example 2.(i)Zhas a contract with a govern-
ment entity to make payments as an agent of the gov-
ernment entity to persons providing services or prop-
erty to, or on behalf of, the government entity. The
only servicesZprovides under the contract are its ser-
vices in acting as an agent for the government entity
in making payments to persons providing property or
services to, or on behalf of, the government. The gov-
ernment entity transfers funds of $71,000 toZ,which
includes a fee of $1,000 toZfor its services as an
agent under the contract.Zthen makes payments of
the $70,000 remainder of the funds to persons provid-
ing property or services to, or on behalf of, the gov-
ernment entity, including a single payment of $18,000
toPand a single payment of $7,000 toR.
(ii) Under the facts of thisExample 2,Zis a pay-
ment administrator (as defined in paragraph (d)(1)(i)
of this section) becauseZmakes payments solely as
an agent for the government entity to persons provid-
ing property or services to, or on behalf of, the gov-
ernment entity. Under paragraphs (a) and (d) of this
section,Zis not treated as a person providing prop-
erty or services with respect to $70,000 of the transfer
of funds (the amount of the funds to be paid to per-
sons providing property or services to, or on behalf
of, the government entity). BecauseZis not treated
as a person providing property or services with re-
spect to this $70,000 portion of the funds, this portion
of the transfer of funds by the government entity to
Zis not subject to withholding under section 3402(t)
when transferred toZ.
(iii) Under paragraph (d)(1)(ii) of this section, the
payment administrator is treated as a person provid-
ing property or services with respect to the portion
of the $71,000 fund transfer that is a fee for its ser-
vices as a payment administrator, or $1,000. Under
paragraph (d)(3) of this section, the determination of
whether the payment threshold is met with respect to
the fee portion of the payment from the government
entity toZ
at the time of the payment from the gov-
ernment entity toZis made. Because the $1,000 fee
portion of the payment falls beneath the $10,000 pay-
ment threshold, withholding under section 3402(t) is
not required with respect to that portion of the pay-
ment.
(iv)PandRare persons providing services or
property to, or on behalf of, the government entity
with respect to the payments they receive fromZ.
(v) Withholding is required under section 3402(t)
on the payment byZ, a payment administrator, to a
person providing property or services to, or on be-
half of, a government entity provided the payment
meets the payment threshold and is not otherwise ex-
cepted. Under paragraph (d)(3) of this section, the de-
termination of whether the payment threshold is met
on the paymentZmakes to a person providing prop-
erty or services is made at the timeZpays the per-
son providing property or services. Under the facts
of thisExample 2,Z’s payment toPof $18,000 meets
the payment threshold, and therefore withholding of
$540 under section 3402(t) applies.Z’s payment toR
of $7,000 does not meet the payment threshold, and
therefore, no withholding under section 3402(t) is re-
quired.
(vi) The government entity, notZ, is liable for
any withholding required under section 3402(t) on the
payments fromZto persons providing property or ser-
vices. Also, the government entity, notZ, is respon-
sible for any reporting required under §31.6051–5 on
the payment fromZto persons providing property or
services. See paragraph (a) of this section. Each per-
son providing property or services for which with-
holding is required, notZ, is the person receiving the
payment for purposes of the reporting required under
§31.6051–5 if withholding under section 3402(t) ap-
plies. Thus, the government entity is responsible for
furnishingPForm 1099–MISC reflecting the amount
of the payment fromZtoPof $18,000 and the amount
of withholding of $540 and filing a Form 1099–MISC
with the Internal Revenue Service.
Example 3. (i) On March 1, 2013, a government
entity makes a payment of $12,000 toYfor provid-
ing property or services. The payment for property
or services is not excepted from withholding under
§31.3402(t)–4. On March 20, 2013, it is determined
that the payment should have been $9,000, and there-
June 6, 20118582011–23 I.R.B.

fore,Yowes the government entity $3,000 to repay
the excess payment.
(ii) The facts are the same as in paragraph (i) of
thisExample 3, except that, in addition, on April 30,
2013, the government entity makes a net payment of
$6,000 toYfor providing property or services, which
is based on the payment of a bill for property or ser-
vices equal to $11,000, which is offset by the repay-
ment of the $3,000 debt thatYowes with respect to
the erroneous March 1, 2013, payment, and the re-
payment of a $2,000 unrelated debt to the Federal
Government. No exception from withholding under
§31.3402(t)–4 applies to the $11,000 amount.
(iii) The facts are the same as in paragraph (ii) of
thisExample 3, except that, in addition, on May 31,
2013, the government entity makes a single payment
of $14,000 toYthat consists of a $9,000 portion that
is subject to section 3402(t) withholding (without re-
gard to the payment threshold) and a $5,000 portion
that is excepted from section 3402(t) withholding un-
der §31.3402(t)–4.
(iv) Under the facts of paragraph (i) of thisEx-
ample 3, the payment on March 1, 2013, is subject to
withholding under section 3402(t) because it meets
the payment threshold under paragraph (d) of this
section. The government entity is liable for withhold-
ingsection3402(t)taxonthepaymentequalto3%of
$12,000, or $360. The subsequent determination on
March 20, 2013, that an incorrect amount was paid
toYdoes not affect the application of the $10,000
payment threshold to the payment on March 1, 2013.
If there were no additional payments or repayments
between the government entity andYduring 2013,
and if the government entity correctly withheld $360
under section 3402(t), the government entity would
issueYa 2013 Form 1099–MISC (or successor form)
reporting $12,000 of payments subject to section
3402(t) withholding and $360 of withholding.
(v) Under the facts of paragraph (ii) of thisExam-
ple 3, the payment on April 30, 2013, is also subject
to withholding under section 3402(t). As an initial
matter, the government entity calculates its liability
for withholding section 3402(t) on the payment equal
to 3% of $11,000, or $330, because the amount of the
payment for purposes of section 3402(t) and the pay-
ment threshold is not reduced by the amount of offsets
for debts owed the government. Thus, the payment
exceeds the payment threshold under paragraph (d) of
this section. However, the repayment within the same
calendar year of the $3,000 excess amount which was
paid on March 1, 2013, means that the government is
entitled to correct its income tax withholding liabil-
ity with respect toYby the amount of section 3402(t)
withholding paid with respect to the $3,000, or $90.
Thus the net withholding amount deducted from the
$6,000 net payment is $240. The offset of $2,000 for
other unrelated debt owed the Federal Government
has no effect on section 3402(t) liability. Neither the
offset for the $3,000 repayment nor the offset for the
$2,000 other debt affects the application of the pay-
ment threshold to the March 1, 2013, payment or the
April 30, 2013, payment. If there were no additional
payments or repayments between the government en-
tity andYduring 2013, and if the government entity
withheld properly, the government entity would be re-
quired to furnishYa Form 1099–MISC (or successor
form) reporting $20,000 of payments subject to sec-
tion 3402(t) withholding ($12,000 plus $11,000 less
$3,000 repayment) and $600 withholding ($360 plus
$330 less $90) and to file a Form 1099–MISC with
the Internal Revenue Service.
(vi) Under the facts of this paragraph (iii) of this
Example 3, the government entity is not required
to withhold on the payment because only $9,000 of
the payment is potentially subject to section 3402(t)
withholding and this amount does not meet the pay-
ment threshold. However, under the optional rule
of §31.3402(t)–4(r), because only a portion of the
payment is exempt from section 3402(t) withholding,
the government entity may treat the entire amount of
the payment as subject to section 3402(t) withholding
provided the payee has agreed to this withholding.
If the government entity applies the optional rule
of §31.3402(t)–4(r), the payment threshold would
be met and the government entity would withhold
under section 3402(t) the amount of $420, or 3%
of the $14,000 payment. If the government entity
treats the entire amount of the payment as subject to
section 3402(t) withholding and withholds, the entire
amount of the payment ($14,000) plus the $420
withholding would be reported on Form 1099–MISC
(orsuccessorform).
(g)Effective/applicability date.This
section applies to payments by the Govern-
ment of the United States, every State, ev-
ery political subdivision thereof, and every
instrumentality of the foregoing (including
multi-State agencies) to any person pro-
viding property or services made after De-
cember 31, 2012.
§31.3402(t)–4 Certain payments excepted
from withholding.
(a)Payments subject to withholding
under chapter 3 or chapter 24 (other
thansection 3406)—(1)In general.Pay-
ments are excepted from withholding
under section §31.3402(t)–1(a) if they are
subject to withholding under chapter 3
of the Internal Revenue Code (Code) or
under sections 3401 through 3405 (other
than section 3402(t)).
(2)Payments subject to withholding un-
der chapter 3. Payments subject to with-
holding under chapter 3 of the Code in-
clude those payments that are subject to,
but exempt from, withholding under chap-
ter 3 of the Code on the ground that the
payments are exempt from United States
income tax pursuant to an income tax con-
vention to which the United States is a
party.
(3)Payments subject to withholding at
election of payee. For purposes of this
exception from section 3402(t), payments
for which the payee may elect withhold-
ing are exempt from withholding under
§31.3402(t)–1(a) regardless of whether
the payee in fact makes such an election.
These payments include—
(i) Unemployment compensation as
defined in section 85(b) (see section
3402(p)(2));
(ii) Social security benefits as de-
fined in section 86(d) (see section
3402(p)(1)(C)(i));
(iii) Any payment referred to in the
second sentence of section 451(d) that is
treated as insurance proceeds, relating to
certain disaster payments received under
the Agricultural Act of 1949, as amended,
or Title II of the Disaster Assistance Act
of 1988 (see section 3402(p)(1)(C)(ii));
(iv) Any amount that is includible in
gross income under section 77(a), relating
to amounts received as loans from the
Commodity Credit Corporation that the
taxpayer has elected to treat as income
(see section 3402(p)(1)(C)(iii)); and
(v) Any payment of an annuity to an
individual.
(b)Payments subject to withholding un-
der section 3406 with backup withhold-
ing deducted. A payment is not subject
to withholding under section 3402(t) if the
payment is subject to withholding under
section 3406, relating to backup withhold-
ing, and if backup withholding is actually
being withheld from such payment.
(c) [Reserved].
(d)Payments for real property.Pay-
ments for real property are not sub-
ject to the withholding requirements of
§31.3402(t)–1. For purposes of this excep-
tion, the termpayments for real property
includes the purchase and the leasing of
real property (including payments made
by a lessee to a lessor related to the use
or occupancy of the leased property and
made in accordance with the terms of the
applicable lease, but not including either
a payment for construction, or payment
to a person other than the lessor, even
if related to the use or occupancy of the
leased property and required by the terms
of the lease). However, payments for the
construction of buildings or other public
works projects, such as bridges or roads,
are not payments for real property.
(e)Payments to government entities,
tax-exempt organizations, and foreign
governments—(1)Government entities.
Payments are not subject to withholding
under section 3402(t) if the payments
are made to government entities that
are subject to the withholding require-
ments of section 3402(t)(1) pursuant to
§31.3402(t)–2. For purposes of this ex-
2011–23 I.R.B.859June 6, 2011

ception, payments to government entities
that qualify for the exception for polit-
ical subdivisions and instrumentalities
making less than $100,000,000 of pay-
ments for property and services annually,
as provided by section 3402(t)(2)(G) and
paragraph (g) of this section, are treated as
payments to government entities that are
subject to the withholding requirements of
section 3402(t)(1).
(2)Tax-exempt organizations.Pay-
ments to an organization that is exempt
from taxation under section 501(a) as an
organization described in section 501(c),
501(d), or 401(a) are not subject to with-
holding under section 3402(t).
(3)Foreign governments.Payments
to foreign governments are not subject to
withholding under section 3402(t). For
purposes of this paragraph (e), a govern-
ment of a possession or territory of the
United States is treated as a foreign gov-
ernment.
(f)Payments made pursuant to a clas-
sified or confidential contract.Payments
made pursuant to a classified or con-
fidential contract described in section
6050M(e)(3) are not subject to withhold-
ing under section 3402(t).
(g)Exception for political subdivisions
or instrumentalities thereof making less
than $100,000,000 of payments for prop-
erty or services annually—(1)In general.
Section 3402(t) withholding is not re-
quired on payments made by a political
subdivision of a State (or any instrumen-
tality of a political subdivision of a State)
that makes less than $100,000,000 of pay-
ments for property or services annually.
(2)Determination of whether an en-
tity is a political subdivision of a State.
Whether an entity is a political subdivi-
sion of a State for purposes of paragraph
(g)(1) of this section is determined under
§31.3402(t)–2(d).
(3)Determination of whether a political
subdivision or instrumentality makes less
than $100,000,000 of payments for prop-
erty or services annually—(i)General
determination rule. In general, whether
a political subdivision or instrumentality
makes less than $100,000,000 of pay-
ments for property or services annually
for purposes of paragraph (g)(1) of this
section is determined for each calendar
year based on the total payments made
by the entity for property or services in
the entity’s accounting year ending with
or within the second preceding calendar
year. For this purpose, payments that qual-
ify for the exceptions from withholding
under §31.3402(t)–4(a) through (q) (or
would have qualified had these regula-
tions been in effect) are not included in
determining total payments made. How-
ever, payments that are not subject to
withholding because the payments are
less than the $10,000 payment threshold
described in §31.3402(t)–3(b), or based
on the applicability date rules or transi-
tion rules contained in §31.3402(t)–1(d),
§31.3402(t)–2(i),§31.3402(t)–3(g),
§31.3402(t)–4(u), or §31.3402(t)–5(e), or
based on the withholding relief for 2012
provided in §31.3402(t)–4(t), but are not
otherwise excepted, are included in deter-
mining total payments. For this purpose,
the accounting year refers to the fiscal year
(consisting of 12 months) or calendar year
used by the government entity in setting its
budgets and keeping its accounting books.
If a political subdivision or instrumen-
tality was not in existence in the second
preceding calendar year or if no 12-month
accounting year exists ending in the sec-
ond preceding calendar year, eligibility for
this exception is determined based on the
total projected payments for the account-
ing year consisting of 12 months ending
in that calendar year.
(ii)Optional determination rule.Apo-
litical subdivision of a state or an instru-
mentality of that political subdivision may
treat itself as eligiblefor the exception pro-
vided in paragraph (g)(1) of this section for
a calendar year if the average of the to-
tal payments calculated under the rules of
paragraph (g)(3)(i) of this section for four
of the five successive accounting years, the
fifth year of which is the entity’s deter-
mination year, is less than $100,000,000.
For this purpose, for a calendar year the
political subdivision’s or instrumentality’s
determination year is the accounting year
ending with or within the second preceding
calendar year. If a political subdivision or
instrumentality withholds and pays (or de-
posits) tax under section 3402(t) for a cal-
endar year and files a return reporting the
withheld tax under section 3402(t) for that
calendar year based on the general deter-
mination rule of paragraph (g)(3)(i) of this
section, it is deemed to have waived any
right to use the optional determination rule
of this paragraph (g)(3)(ii) of this section
for that calendar year.
(4)Examples. The following examples
illustrate the provisions of paragraph (g) of
this section:
Example 1. (i) Government entityX, which qual-
ifies as a political subdivision or instrumentality of
a political subdivision for calendar years 2013 and
2014, uses a fiscal year ending June 30 to determine
its budgets and to keep its accounting books. During
its fiscal year ending June 30, 2011,Xmade payments
to persons for property and services of $200,000,000,
including $102,000,000 of payments that would have
been excepted under §31.3402(t)–4(a) through (q) if
section3402(t)hadbeenineffect.
(ii) During its fiscal year ending June 30, 2012,
Xmade payments for property and services of
$210,000,000, including $106,000,000 that would
have been excepted under §31.3402(t)–4(a) through
(q) if section 3402(t) had been in effect. The pay-
mentsXmade for property or services during the fis-
cal year ending June 30, 2012, included $15,000,000
of payments below the $10,000 payment threshold
described in §31.3402(t)–3(b).
(iii) For the calendar year 2013, the general de-
termination rule of paragraph (g)(3)(i) of this section
applies to determine whetherXis eligible for the ex-
ception provided in paragraph (g)(1) of this section
basedonthetotalpaymentsXmade for its account-
ing year ending June 30, 2011. Because total pay-
ments for this purpose exclude payments that would
be excepted under §31.3402(t)–4(a) through (q), to-
tal payments were $200,000,000 less $102,000,000,
or $98,000,000. Therefore, for calendar year 2013,X
would be eligible for the exception provided in para-
graph (g)(1) of this section, and would not be required
to withhold under section 3402(t).
(iv) For the calendar year 2014, the general deter-
mination rule of paragraph (g)(3)(i) of this section ap-
plies to determine whetherXis eligible for the excep-
tion provided in paragraph (g)(1) of this section based
on the total payments it made for its accounting year
ending June 30, 2012. Because total payments for
this purpose exclude payments that would have been
excepted under §31.3402(t)–4(a) through (q), but in-
clude payments below the $10,000 payment threshold
described in §31.3402(t)–3(b), total payments were
$210,000,000 less $106,000,000, or $104,000,000.
Therefore, for calendar year 2014,Xwould not qual-
ify for the exception provided in paragraph (g)(1) of
this section and would be required to withhold un-
der section 3402(t), provided it is not eligible for or
does not use the exception under the optional deter-
mination rule provided in paragraph (g)(3)(ii) of this
section.
Example 2. (i) Government entityY, which qual-
ifies as a political subdivision or instrumentality of
a political subdivision for calendar years 2013 and
2014, uses a fiscal year ending June 30 to determine
its budgets and to keep its accounting books. During
its fiscal year ending June 30, 2007,Ymade payments
to persons for property and services of $195,000,000,
including $110,000,000 of payments that would have
been excepted under §31.3402(t)–4(a) through (q) if
section3402(t)hadbeenineffect.
(ii) During its fiscal year ending June 30, 2008,
Ymade payments to persons for property and ser-
vices of $204,000,000, including $115,000,000 of
payments that would have been excepted under
§31.3402(t)–4(a) through (q) if section 3402(t) had
been in effect.
June 6, 20118602011–23 I.R.B.

(iii) During its fiscal year ending June 30, 2009,
Ymade payments to persons for property and ser-
vices of $215,000,000, including $124,000,000 of
payments that would have been excepted under
§31.3402(t)–4(a) through (q) if section 3402(t) had
been in effect.
(iv) During its fiscal year ending June 30, 2010,
Ymade payments to persons for property and ser-
vices of $225,000,000, including $130,000,000 of
payments that would have been excepted under
§31.3402(t)–4(a) through (q) if section 3402(t) had
been in effect.
(v) During its fiscal year ending June 30, 2011,
Ymade payments to persons for property and ser-
vices of $275,000,000, including $135,000,000 of
payments that would have been excepted under
§31.3402(t)–4(a) through (q) if section 3402(t) had
been in effect.
(vi) During its fiscal year ending June 30, 2012,
Ymade payments for property and services of
$235,000,000, including $140,000,000 that would
have been excepted under §31.3402(t)–4(a) through
(q) if section 3402(t) had been in effect.
(vii) For the calendar year 2013, the general de-
termination rule of paragraph (g)(3)(i) of this section
applies to determine whetherYis eligible for the ex-
ception provided in paragraph (g)(1) of this section
based on the total paymentsYmade for its account-
ing year ending June 30, 2011. Because total pay-
ments for this purpose exclude payments that would
be excepted under §31.3402(t)–4(a) through (q), total
payments were $275,000,000 less $135,000,000, or
$140,000,000. Therefore, for calendar year 2013,Y
would not qualify for the exception provided in para-
graph (g)(1) of this section and would be required to
withhold under section 3402(t), unless it was eligi-
ble for, and used, the optional determination rule pro-
vided in paragraph (g)(3)(ii) of this section.
(viii) For the calendar year 2013, under the
optional determination rule of paragraph (g)(3)(ii)
of this section,Ywould have total payments for
this purpose in the accounting year ending June 30,
2007, of $85,000,000; in the accounting year ending
June 30, 2008, of $89,000,000; in the accounting
year ending June 30, 2009, of $91,000,000; in
the accounting year ending June 30, 2010, of
$95,000,000; and in the accounting year ending
June 30, 2011, of $140,000,000. The average of
four of those years (excluding the highest year of
$140,000,000) would be $90,000,000 (85,000,000
plus 89,000,000 plus 91,000,000 plus 95,000,000
equals 360,000,000; 360,000,000 divided by 4 equals
90,000,000). Thus, for the calendar year 2013, under
the optional determination rule of paragraph (g)(3)(ii)
of this section,Yis eligible for the exception provided
in paragraph (g)(1) of this section and is not required
to withhold under section 3402(t). Alternatively,Y
could apply the general determination rule, ignore
the optional determination rule, and withhold under
section 3402(t).
(ix) For the calendar year 2014, under the gen-
eral determination rule of paragraph (g)(3)(i) of this
section,Yhas total payments of $95,000,000. Thus,
Yis eligible for the exception provided in paragraph
(g)(1) of this section and is not required to withhold
under section 3402(t).
(h)Payments made in connection with
a public assistance or public welfare pro-
gram—(1)In general. Section 3402(t)
withholding does not apply to payments
made in connection with a public assis-
tance or public welfare program for which
eligibility is determined by a needs or in-
come test.
(2)Needs or income test. Eligibility for
apublicassistanceorpublicwelfarepro-
gram is not considered to be determined
by a needs or income test if eligibility for
the program is based solely on the age of
the beneficiary. A public assistance pro-
gram providing disaster relief to victims
of a natural or other disaster is consid-
ered to be a program for which eligibil-
ity is determined under a needs test. Pay-
ments under government programs to pro-
vide health care or other services that are
not based on the needs or income of the re-
cipient are subject to section 3402(t) with-
holding, including programs where eligi-
bility is based on the age of the beneficiary.
(3)Payments to third parties.Theex-
ception provided by this paragraph (h) also
applies to payments made to third parties
to provide benefits to beneficiaries under
apublicassistanceorpublicwelfarepro-
gram for which eligibility is determined by
a needs or income test.
(4)Allocation of payments.Ifonlya
portion of a payment is made in connec-
tion with a public assistance or public wel-
fare program for which eligibility is de-
termined by a needs or income test, the
portion that is made in connection with
the program and therefore is not subject
to section 3402(t) withholding may be de-
termined using any reasonable allocation
method. If the government entity makes a
reasonable, good faith determination that
either the excudable or the nonexcludable
portion is insignificant in comparison to
the entire payment, the insignificant por-
tion may be disregarded for purposes of
this paragraph (h) (so that the entire pay-
ment is either eligible or ineligible for the
exception provided by this paragraph (h)).
(i)Payments made to any government
employee with respect to his or her ser-
vices. Section 3402(t) withholding does
not apply to payments made to any gov-
ernment employee with respect to his or
her services as an employee of the gov-
ernment. This exception applies to con-
tributions to deferred compensation plans
on behalf of an employee, contributions
to employee benefit plans on behalf of an
employee, fringe benefits provided to em-
ployees, and payments to employees under
accountable plans for expenses incurred
by the employee for the employee’s travel
while on government business. This ex-
ception also applies to payments made by
the government employee under account-
able plans (as defined in §1.62–2(c)(2)
of this chapter) to providers of the em-
ployee’s travel, meals, and lodging when
the government employee is traveling on
government business.
(j)Payments received by nonresident
alien individuals and foreign corporations.
Section 3402(t) withholding does not ap-
ply to any payment received by a nonres-
ident alien individual or foreign corpora-
tion for providing services or property if
the payment is derived from sources out-
side the United States, as determined under
sections 861, 862, 863, and 865, and is not
effectively connectedwith the conduct of a
trade or business within the United States
by the nonresident alien individual or for-
eign corporation.
(k)Payments to Indian tribal govern-
ments. Section 3402(t) withholding does
not apply to any payment made to an In-
dian tribal government or its political sub-
divisions.
(l)Payments in emergency, disaster,
or hardship situations. The Internal Rev-
enue Service may provide by publication
in the Internal Revenue Bulletin (see
§601.601(d)(2)(ii)(b)ofthischapter)for
additional exceptions from section 3402(t)
withholding for certain payments made
in an emergency, disaster, or hardship
situation if the Internal Revenue Service
determines that withholding from the
payments would impede a government en-
tity’s efforts to respond to the emergency,
disaster, or hardship.
(m)Grants—(1)In general. Section
3402(t) withholding does not apply to any
grant as defined in paragraph (m)(2) of this
section. This exclusion does not apply to
the use by a government entity of the pro-
ceeds of a grant received by that govern-
ment entity (unless the government entity
uses the proceeds to make a grant).
(2)Definition of grant. For purposes of
this paragraph (m), a grant is a transfer of
funds by a government entity to a recipient
(which may be a state government, local
government, or other recipient) pursuant to
an agreement reflecting a relationship be-
tween the government entity and the re-
cipient when the principal purpose of the
2011–23 I.R.B.861June 6, 2011

relationship is to transfer a thing of value
to the recipient to carry out a public pur-
pose of support or stimulation authorized
by law instead of acquiring (by purchase,
lease, or barter) property or services for the
direct benefit or use of the government en-
tity, and substantial involvement is not ex-
pected between the government entity and
the recipient when carrying out the activity
contemplated in the agreement.
(n)Sales tax, excise tax, value-added
tax, and other taxes. For purposes of this
section, section 3402(t) withholding ap-
plies to any payment of sales tax, excise
tax, value-added tax, or other tax made as
part of a payment to any person providing
property or services. Notwithstanding the
foregoing, the payment of sales tax, excise
tax, value added tax, or other tax may be
excluded from section 3402(t) withhold-
ing, provided this exclusion is applied con-
sistently to all payments to a given payee
during the calendar year.
(o)Loan guarantees. Section 3402(t)
withholding does not apply to a loan guar-
antee or the payment of principal and inter-
est on a loan pursuant to a loan guarantee.
However, if a government entity (through
a right of subrogation or similar right) as-
sumes the operation of a project or activity
funded by the loan, section 3402(t) with-
holding applies to payments by the govern-
ment entity for property or services relat-
ing to the project or activity unless other-
wise excepted under this section.
(p)Debt. Section 3402(t) withholding
does not apply to payment of principal on
a loan. However, if a government entity
issues a debt obligation to a person pro-
viding services as all or part of the pur-
chase price, the debt obligation’s fair mar-
ket value is subject to section 3402(t) with-
holding, unless an exception applies. If
a government entity issues a debt obliga-
tion to a person providing property as all
or part of the purchase price, the debt obli-
gation’s issue price as determined under
section 1273 or section 1274, whichever
is applicable to the debt obligation, is sub-
ject to section 3402(t) withholding, unless
an exception applies. In lieu of the is-
sue price, the government entity and the
person providing property may agree to
treat the stated principal amount of the debt
obligation as the payment amount attribut-
able to the debt obligation that is subject
to section 3402(t) withholding. If a gov-
ernment entity uses a third party debt obli-
gation (a debt obligation issued by any en-
tity other than that government entity) to
pay for property or services, the fair mar-
ket value of the debt obligation is subject
to section 3402(t) withholding, unless an
exception applies.
(q)Investment securities. Section
3402(t) withholding does not apply to any
payments to purchase stock, bonds, or
other securities primarily for investment
purposes.
(r)Partially exempt payments.Ifa
payment includes both an amount sub-
ject to section 3402(t) withholding and
an amount that is not subject to section
3402(t) withholding, section 3402(t) with-
holding applies only to the relevant portion
of the payment. Notwithstanding the fore-
going, a government entity may apply
section 3402(t) withholding to the entire
payment provided the payee has agreed to
this withholding.
(s)Authorization for additional rules
and procedures on payees and payments
exempt from section 3402(t) withholding.
The Commissioner is authorized to pro-
vide rules and procedures concerning pay-
ments that are exempt from withholding,
including the classification of additional
types of payees or payments as exempt
from section 3402(t) withholding, and pro-
cedures under which a government entity
may determine the eligibility of a payee for
an exemption from section 3402(t) with-
holding (and may rely on this determina-
tion notwithstanding the payee’s eligibil-
ity for this exemption), in revenue pro-
cedures, notices, or other guidance pub-
lished in the Internal Revenue Bulletin (see
§601.601(d)(2) of this chapter).
(t)Withholding relief for 2012. With-
holding under section 3402(t) is not re-
quired with respect to payments made
before January 1, 2013. Any person
that deducts and withholds tax under
section 3402(t) from payments made in
2012 shall deposit and report such tax
withheld pursuant to §31.6302–4 and
§31.6011(a)–4(b), and include the pay-
ment and the amount withheld on Form
1099–MISC, “Miscellaneous Income,” or
successor form, unless the amount of tax
withheld under section 3402(t) is repaid to
the payee before January 1, 2013.
(u)Effective/applicability date.This
section applies to payments by the Govern-
ment of the United States, every State, ev-
ery political subdivision thereof, and every
instrumentality of the foregoing (including
multi-State agencies) to any person pro-
viding property or services made after De-
cember 31, 2012, except that paragraph (t)
of this section applies to payments made
after December 31, 2011, and before Jan-
uary 1, 2013.
§31.3402(t)–5 Application to passthrough
entities.
(a)In general. Section 3402(t)(1)
does not apply to payments made by
passthrough entities except as described in
paragraph (c) of this section. In addition,
section 3402(t)(1) applies to payments
made to passthrough entities except as
described in paragraph (d) of this section.
(b)Definitions. The following defini-
tions apply for purposes of this section:
(1)Passthrough entity.Theterm
passthrough entitymeans a partnership
(for Federal income tax purposes) or an
S corporation.
(2)Owner.Thetermownermeans a
partner (for Federal income tax purposes)
or an S corporation shareholder.
(3)Ownership percentage.Theterm
ownership percentagemeans an owner’s
interest, as a percentage, in partnership
profits or capital (whichever is greater) in
the case of a partnership, or an owner’s
interest, as a percentage, in S corporation
stock in the case of an S corporation.
(4)Testing day.Thetermtesting day
refers to the first day of a passthrough en-
tity’s taxable year.
(c)Payments from a passthrough en-
tity—(1)General rule. Section 3402(t)(1)
does not apply to payments made by
passthrough entitiesduring the taxable
year, except as provided in paragraph
(c)(2) of this section.
(2)Exception. Section 3402(t)(1) ap-
plies to any payment during the taxable
year from a passthrough entity if the aggre-
gate ownership percentage held, directly or
indirectly, in the entity on the testing day
by one or more of the government entities
described in section 3402(t)(1) is at least
80 percent. For purposes of this paragraph
(c)(2), any manipulation of the ownership
percentage with an intent to avoid appli-
cation of section 3402(t) will be recharac-
terized as appropriate to reflect the actual
ownership percentage.
(d)Payments to a passthrough en-
tity—(1)General rule. Section 3402(t)(1)
June 6, 20118622011–23 I.R.B.

applies to payments made to passthrough
entities during the taxable year, except as
provided in paragraph (d)(2) of this sec-
tion.
(2)Exception—(i)In general. Section
3402(t)(1) does not apply to any payment
during the taxable year to a passthrough
entity if the aggregate ownership percent-
age held, directly or indirectly, in the en-
tity on the testing day by one or more per-
sons each of which is described in section
3402(t)(2)(E) or is an Indian tribal govern-
ment is at least 80 percent. For purposes
of this paragraph (d)(2)(i), any manipu-
lation of the ownership percentage with
an intent to avoid application of section
3402(t) will be recharacterized as appro-
priate to reflect the actual ownership per-
centage, if the government entity making
the payment knew or should have known
that the payee’s ownership percentage had
been manipulated with intent to avoid ap-
plication of section 3402(t).
(ii)Payments derived from sources out-
side the United States. Section 3402(t)(1)
does not apply to any payment during the
taxable year to a partnership if the aggre-
gate ownership percentage held, directly or
indirectly, in the partnership on the test-
ing day by one or more persons each of
which is a nonresident alien individual or
foreign corporation is at least 80 percent,
and the payment to the partnership is not
effectively connected with the conduct of a
trade or business within the United States
by the partnership, and is derived from
sources outside the United States, as de-
termined under sections 861, 862, 863,
and 865. For purposes of this paragraph
(d)(2)(ii), any manipulation of the owner-
ship percentage with an intent to avoid ap-
plication of section 3402(t) will be rechar-
acterized as appropriate to reflect the ac-
tual ownership percentage, if the govern-
ment entity making the payment knew or
should have known that the payee’s own-
ership percentage had been manipulated
with intent to avoid application of section
3402(t).
(e)Effective/applicability date.This
section applies to payments by the Govern-
ment of the United States, every State, ev-
ery political subdivision thereof, and every
instrumentality of the foregoing (including
multi-State agencies) to any person pro-
viding property or services made after De-
cember 31, 2012.
§31.3402(t)–6 Crediting of tax withheld
under section 3402(t).
(a)Credit against income tax liability
only. Tax withheld under section 3402(t)
is allowable as a credit against the tax im-
posed by Subtitle A of the Internal Rev-
enue Code (Code) upon the recipient of
the income in accordance with the rules
set forth in section 31(a) and §1.31–1 of
this chapter. Tax withheld under section
3402(t) is not allowable as a credit against
taxes imposed on wages or compensation
of employees under Chapters 21, 22, 23, or
24 of the Code.
(b)Taxable year of credit. Tax with-
held under section 3402(t) during any cal-
endar year is allowed as a credit against
the tax imposed by Subtitle A in accor-
dance with section 31(a)(2) of the Code
and §1.31–1(b) of this chapter.
(c)Estimated tax. The tax withheld
under section 3402(t) and allowable as a
credit under section 31(a) may be taken
into account in determining estimated tax
liability under sections 6654 and 6655 for
the taxable year against which the taxes
may be credited under paragraph (b) of this
section.
(d)Effective/applicability date.This
section applies with respect to amounts
withheld under section 3402(t) after De-
cember 31, 2012.
§31.3402(t)–7 Transition relief from
interest and penalties.
(a)Good faith exception for interest
and penalties on payments made before
January 1, 2014. Government entities
that make a good faith effort to com-
ply with the withholding requirements in
§31.3402(t)–1 will not be liable for inter-
est and penalties with respect to income
tax withholding under section 3402(t) that
the government entity failed to withhold
from payments made before January 1,
2014. However, this provision does not
relieve the government entity of liability
for income tax that it failed to withhold.
See, however, §31.3402(d)–1.
(b)Effective/Applicability Date.This
section applies with respect to payments
made after December 31, 2012.
Par. 3. Section 31.3406(g)–2 is
amended by adding paragraphs (h) and (i)
to read as follows:
§31.3406(g)–2 Exception for reportable
payment for which withholding is
otherwise required.
*****
(h)Certain payments made by govern-
ment entities. A government entity that
is required to withhold both on reportable
payments pursuant to section 3406(a) and
on certain payments pursuant to section
3402(t) must comply with the withholding
requirements of section 3406, and not sec-
tion 3402(t), for each payment to which
both types of withholding would apply.
Pursuant to section3402(t)(2)(B), with-
holding under section 3402(t) does not ap-
ply to a given payment if amounts are be-
ing withheld under section 3406 for that
payment. If a government entity fails to
withhold as required under section 3406,
the payment will not be deemed to be sub-
ject to withholding under another provi-
sion of the Internal Revenue Code for pur-
poses of this paragraph (h). Thus, even if
the government entity withholds on such
payment pursuant to section 3402(t), it will
remain liable for the amount required to be
withheld under section 3406.
(i)Effective/applicability date. Para-
graph (h) of this section relating to certain
payments made by government entities ap-
plies to payments made by government en-
tities under section 3402(t) made after De-
cember 31, 2012.
Par. 4. Section 31.6011(a)–4 is
amended by revising paragraphs (b)(4)
and (5) and adding paragraph (b)(6) and
revising paragraph (d) to read as follows:
§31.6011(a)–4 Returns of income tax
withheld.
*****
(b) * * *
(4) Pensions, annuities, IRAs, and cer-
tain other deferred income subject to with-
holding under section 3405;
(5) Reportable payments subject to
backup withholding under section 3406;
and
(6) Certain payments made by govern-
ment entities subject to withholding under
section 3402(t).
*****
(d)Effective/applicability date. Para-
graph (b)(6) of this section (relating to
certain payments made by government
2011–23 I.R.B.863June 6, 2011

entities subject to withholding under sec-
tion 3402(t)) applies to payments made by
government entities under section 3402(t)
made after December 31, 2012.
Par. 5. Section 31.6051–5 is added to
read as follows:
§31.6051–5 Statement and information
return required in case of withholding by
government entities.
(a)Statements required from govern-
ment entities. Every government entity re-
quired to deduct and withhold tax under
section 3402(t) must furnish to the payee a
written statement containing the informa-
tion required by paragraph (d) of this sec-
tion.
(b)Information returns required from
government entities. Every government
entity required to furnish a payee statement
under paragraph (a) of this section must
file a duplicate of such statement with the
Internal Revenue Service. Such duplicate
constitutes an information return.
(c)Prescribed form. The prescribed
form for the statement required by this sec-
tion is Form 1099–MISC, “Miscellaneous
Income,” or any successor form.
(d)Information required. Each state-
ment on Form 1099–MISC (or any succes-
sor form) must show the following—
(1) The name, address, and taxpayer
identification number of the person receiv-
ing the payment subject to withholding un-
der section 3402(t);
(2) The amount of the payment with-
held upon;
(3) The amount of tax deducted and
withheld under section 3402(t);
(4) The name, address, and taxpayer
identification number of the government
entity filing the form;
(5) A legend stating that such amount
is being reported to the Internal Revenue
Service; and
(6) Such other information as is re-
quired by the form and the instructions.
(e)Time for furnishing statements.
The statement required by paragraph (a)
of this section must be furnished to the
payee no later than January 31 of the year
following the calendar year in which the
payment subject to withholding was made.
However, the February 15 due date under
section 6045 applies to the statement if the
statement is furnished in a consolidated
reporting statement under section 6045.
See§§1.6045–1(k(3), 1.6045–2(d)(2),
1.6045–3(e)(2), 1.6045–4(m)(3), and
1.6045–5(a)(3)(ii) of this chapter.
(f)Cross references. For provisions re-
lating to the time for filing the informa-
tion returns required by this section with
the Internal Revenue Service and to ex-
tensions of the time for filing the returns,
see §§31.6071(a)–1(a)(3), 1.6081–1 of this
chapter, and 1.6081–8of this chapter. For
penalties applicable to failure to file in-
formation returns and furnish payee state-
ments, see sections 6721 through 6724.
(g)Effective/applicability date.This
section applies for calendar years begin-
ning on or after January 1, 2013.
Par. 6. Section 31.6071(a)–1 is
amended by revising paragraphs (a)(3)(i)
and (g) to read as follows:
§31.6071(a)–1 Time for filing returns and
other documents.
(a) * * *
(3)Information returns—(i)General
rule. Each information return in respect
of wages as defined in the Federal Insur-
ance Contributions Act or of income tax
withheld from wages as required under
§31.6051–2 or of income tax withheld
from payments by government entities
as required under §31.6051–5 must be
filed on or before the last day of February
(March 31 if filed electronically) of the
year following the calendar year for which
it is made, except that, if a tax return under
§31.6011(a)–5(a) is filed as a final return
for a period ending prior to December 31,
the information return must be filed on or
before the last day of the second calendar
month following the period for which the
taxreturnisfiled.
*****
(g) The requirement under paragraph
(a)(3)(i) of this section pertaining to the
information return in respect of income
tax withheld by government entities as re-
quired by §31.6051–5 of this part applies
for calendar years beginning on or after
January 1, 2013.
Par. 7. Section 31.6302–1 is amended
by:
1. Revising paragraph (e)(1)(iii)(C).
2. Adding paragraph (e)(1)(iii)(E).
3. Revising paragraph (n).
The revisions and additions read as fol-
lows:
§31.6302–1 Deposit rules for taxes under
the Federal Insurance Contributions Act
(FICA) and withheld income taxes.
*****
(e) * * *
(1) * * *
(iii) * * *
(C) Certain annuities described in sec-
tion 3402(o)(1)(B);
*****
(E) Certain payments made by govern-
ment entities under section 3402(t); and
*****
(n)Effective/applicability date.Ex-
cept for the deposit of employment taxes
attributable to payments made by gov-
ernment entities under section 3402(t),
§§31.6302–1 through 31.6302–3 apply
with respect to the deposit of employ-
ment taxes attributable to payments made
after December 31, 1992. Paragraph
(e)(1)(iii)(E) of this section applies with
respect to the deposit of employment taxes
attributable to payments made by govern-
ment entities under section 3402(t) made
after December 31, 2012.
*****
Par. 8. Section 31.6302–4 is amended
by:
1. Revising paragraph (b)(4).
2. Revising paragraph (b)(5).
3. Adding paragraph (b)(6).
4. Revising paragraph (e).
The revisions and additions read as fol-
lows:
§31.6302–4 Deposit rules for withheld
income taxes attributable to nonpayroll
payments.
*****
(b) * * *
(4) Amounts withheld under section
3405, relating to withholding on pensions,
annuities, IRAs, and certain other deferred
income;
(5) Amounts withheld under section
3406, relating to backup withholding with
respect to reportable payments; and
(6) Amounts withheld under section
3402(t), relating to certain payments made
by government entities.
*****
(e)Effective/applicability date. Sec-
tion 31.6302–4(d) applies to deposits and
payments made after December 31, 2010.
June 6, 20118642011–23 I.R.B.

Paragraph (b)(6) of this section relating to
certain payments made by government en-
tities applies to payments made by govern-
ment entities under section 3402(t) made
after December 31, 2012.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
Approved April 26, 2011.
Michael Mundaca,
Assistant Secretary of
theTreasury(TaxPolicy).
(Filed by the Office of the Federal Register on May 6, 2011,
8:45 a.m., and published in the issue of the Federal Register
for May 9, 2011, 76 F.R. 26583)
Section 7520.—Valuation
Tables
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2011. See Rev. Rul. 2011-13, page 841.
Section 7872.—Treatment
of Loans With Below-Market
Interest Rates
The adjusted applicable federal short-term, mid-
term, and long-term rates are set forth for the month
of June 2011. See Rev. Rul. 2011-13, page 841.
2011–23 I.R.B.865June 6, 2011

Part III. Administrative, Procedural, and Miscellaneous
Payments Subject to Backup
Withholding in Payment Card
and Third Party Network
Transactions
Notice 2011–42
PURPOSE
This notice provides interim guidance
to third party settlement organizations
(TPSO) (as defined under section 6050W
of the Internal Revenue Code (Code) and
its accompanying regulations) on backup
withholding obligations under section
3406 of the Code and its accompanying
regulations. Specifically, this notice es-
tablishes that a payment made by a TPSO
is a reportable payment potentially subject
to section 3406 backup withholding only
if the payee has received payment from
that TPSO in more than 200 transactions
within a calendar year. Payments made
in settlement of payment card transac-
tions that are potentially subject to section
3406 backup withholding have no limiting
threshold.
The Treasury Department and the Inter-
nal Revenue Service intend to amend the
existing regulations under section 3406 to
reflect the guidance provided in this no-
tice. TPSOs may rely on the interim guid-
ance in this notice until the regulations are
amended.
BACKGROUND
Section 3406(a)(1) requires certain pay-
ors to perform backup withholding by de-
ducting and withholding income tax from
a reportable payment, regardless of any
threshold amount otherwise applicable to
such payment, if the payee fails to furnish
the payee’s taxpayer identification number
(TIN) or furnishes an incorrect TIN to the
payor. Section 6050W, added by section
3091 of the Housing Assistance Tax Act
of 2008, Div. C of Pub. L. No. 110–289,
122 Stat. 2653 (the Act), requires infor-
mation returns to be made by certain pay-
ors with respect to payments made in set-
tlement of payment card transactions and
third party payment network transactions.
All payments made in settlement of pay-
ment card transactions are required to be
reported under section 6050W. Payments
made in settlement of third party network
transactions, however, are required to be
reported only if the amount to be reported
exceeds $20,000 and the aggregate number
of transactions exceeds 200 with respect to
any payee within a calendar year.
The Act also amended section
3406(b)(3) by including as reportable
payments potentially subject to backup
withholding those payments required to
be reported pursuant to section 6050W but
without regard to the reporting minimum
thresholds of that section.SeeTreas. Reg.
§ 31.3406(b)(3)–5(b). The withholding
requirements under section 3406 will ap-
ply to section 6050W payments beginning
January 1, 2012.
The regulations under section 3406
were amended to provide that whether
payments made in settlement of third
party network transactions were subject
to withholding under section 3406 is
determined without regard to the statu-
tory monetary or transactional thresholds
foundinsection6050W.SeeTreas. Reg.
§ 31.3406(b)(3)–5. Those monetary and
transactional thresholds are considered
solely for determining whether a TPSO
had an information reporting obligation
under section 6050W for payments made
to a payee. Accordingly, under the regula-
tions, TPSOs are required to obtain a TIN
from every payee in a third party payment
network, even the occasional small vol-
ume seller, to avoid backup withholding.
DISCUSSION
The Treasury Department and the In-
ternal Revenue Service have determined
that the section 6050W statutory transac-
tional threshold for determining informa-
tion reporting obligations should be met
before any section 3406 withholding obli-
gation arises with respect to TPSOs. The
Treasury Department and the Internal Rev-
enue Service intend to amend the regula-
tions under section 3406 to provide that
no backup withholding is required where
the aggregate number of transactions be-
tween a TPSO and a payee do not exceed
200 within a calendar year. The mone-
tary threshold of $20,000 found in sec-
tion 6050W is not considered for purposes
of determining backup withholding obli-
gations.
Until the amended final regulations are
published, TPSOs may rely on this notice
to limit any backup withholding obliga-
tions to payees who have exceeded the 200
transaction threshold. The relief provided
by this notice does not apply to payment
card transactions.
DRAFTING INFORMATION
The principal author of this notice is
Girish Prasad of the Office of Associate
Chief Counsel (Procedure & Administra-
tion). For further information regarding
this notice, please contact Girish Prasad at
(202) 622–4910 (not a toll-free call).
June 6, 20118662011–23 I.R.B.

Part IV. Items o
fGeneralInterest
Notice of Prop
osed
Rulemaking
Withholding o
nPayments
by Government
Entities to
Persons Prov
iding Property or
Services
REG–151687–10
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Noti
ce of proposed rulemaking.
SUMMARY: This document contains pro-
posed regulations relating to withholding
by government entities on payments to
persons providing property or services.
The proposed regulations reflect changes
in the law made by the Tax Increase Pre-
vention and Reconciliation Act of 2005
that require Federal, State, and local gov-
ernment entities to withhold income tax
when making payments to persons provid-
ing property or services. These proposed
regulations would change the provisions
related to the effective date of the final
regulations concerning these withholding
requirements that are being issued con-
currently with these proposed regulations.
The guidance affects government entities
that are required to withhold from pay-
ments to persons providing property or
services and personsreceiving the pay-
ments.
DATES: Written or electronic comments
and requests for a public hearing must be
received by August 8, 2011.
ADDRES
SES: Send submissions to:
CC:PA:
LPD:PR (REG–151687–10), room
5205, I
nternal Revenue Service, PO Box
7604, B
en Franklin Station, Washing-
ton, DC
20044. Submissions may be
hand-
delivered Monday through Friday
betwe
en the hours of 8 a.m. and 4 p.m.
to CC:
PA:LPD:PR (REG–151687–10),
Couri
er’s Desk, Internal Revenue
Servi
ce, 1111 Constitution Avenue, NW,
Washi
ngton, DC, or sent electronically
via t
he Federal eRulemaking Portal
atht
tp://www.regulations.gov/(IRS
REG–
151687–10).
FOR FURTHER IN
FORMATION
CONTACT: Conc
erning these pro-
posed regulat
ions, A. G. Kelley, (202)
622–6040; con
cerning submissions
of comments or
to request a public
hearing, Olu
wafunmilayo Taylor at (202)
622–7180 (no
t toll-free numbers).
SUPPLEMENTA
RY INFORMATION:
Background
This documen
t contains proposed
amendments t
o26CFRPart31under
section 340
2(t) of the Internal Revenue
Code (Code)
. Section 3402(t) of the Code
was added by
section 511 of the Tax In-
crease Prev
ention and Reconciliation Act
of 2005, Pub
lic Law 109–222 (TIPRA),
120 Stat. 3
45, which was enacted into law
on May 17, 2
006. Section 3402(t)(1) pro-
vides that
the Government of the United
States, ev
ery State, every political subdi-
vision the
reof, and every instrumentality
of the for
egoing (including multi-State
agencies
) making any payment to any
person pr
oviding any property or services
(includi
ng any payment made in con-
nection
with a government voucher or
certifi
cate program which functions as a
payment
forpropertyorservices)shall
deduct a
nd withhold from such payment a
tax in an
amount equal to 3 percent of such
paymen
t. Section 3402(t)(2) provides
except
ions to withholding under section
3402(t
).
Sectio
n 1511 of the American Recov-
ery and
Reinvestment Act of 2009 (Public
Law 111
–5), 123 Stat. 115, 355, amended
the eff
ective date of section 3402(t) with-
holdi
ng. As amended, the statute provides
that s
ection 3402(t) applies to payments
made a
fter December 31, 2011.
Notic
e 2010–91, 2010–52 I.R.B. 915,
provi
ded interim guidance on the appli-
catio
n of section 3402(t) to payments
by deb
it cards, credit cards, stored value
card
s, and other payment cards.
Propo
sed regulations under sections
3402
(t), 3406, 6011, 6051, 6071, and
6302
of the Code were published in
theF
ederal Registeron December 5,
2008
(REG–158747–06, 2009–4 I.R.B.
362 [
73 FR 74082]) (the “2008 pro-
pose
d regulations”). The 2008 proposed
reg
ulations proposed applying the with-
holding oblig
ations to payments begin-
ning on Januar
y 1, 2011, but proposed
excluding pay
ments made under contracts
existing on Ja
nuary 1, 2011, unless those
contracts wer
e materially modified. The
final regula
tions provide an additional
one-year ext
ension beyond the amended
effective da
te of the statute. Thus, under
the final reg
ulations, the withholding
obligation
applies to payments made
after Decem
ber 31, 2012, and the
exclusion a
pplies to contracts existing on
December 31
, 2012, that are not materially
modified o
n or after December 31, 2012.
These fina
l regulations under sections
3402(t), 3
406, 6011, 6051, 6071, and 6302
of the Code
(REG–158747–06, Treasury
Decision 9
524) are being published in the
Federal R
egisterconcurrently with these
proposed
regulations.
Several c
ommenters on the 2008 pro-
posed reg
ulations expressed concern that
the requi
rement to differentiate between
payments
subject to withholding and pay-
ments no
t subject to withholding based on
whether
the payment was made under a
contrac
t existing on December 31, 2011,
and whet
her that contract had been ma-
teriall
y modified, would be burdensome
to appl
y. In response to these concerns,
these p
roposed regulations would provide
that th
e exclusion for payments under
existi
ng contracts that had not been ma-
terial
ly modified would terminate with
payme
nts after December 31, 2013. Thus,
these
proposed regulations would subject
payme
nts under all contracts to section
3402(
t) withholding after December 31,
2013,
unless another exception applied.
This
rule would avoid the administrative
burd
en of distinguishing between pay-
ment
s made under existing contracts and
all o
ther payments while allowing time to
addr
ess concerns about applying the with-
hold
ingrequirementstoexistingcontracts.
Proposed Effective Date
Thes
e regulations are proposed to ap-
ply
to payments made after December 31,
201
1.
Special Analyses
It h
as been determined that this notice
of p
roposed rulemaking is not a significant
2011–23 I.R.B.867June 6, 2011

regulatory action as defined in Executive
Order 12866. Therefore, a regulatory as-
sessment is not required. It also has been
determined that section 553(b) of the Ad-
ministrative Procedure Act (5 U.S.C. chap-
ter 5) does not apply to this regulation, and
because the 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 sec-
tion 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 these proposed regulations are
adopted as final regulations, considera-
tion will be given to any written (a signed
original and eight (8) copies) or electronic
comments that are timely submitted to the
IRS. All comments will be available at
www.regulations.govor for public inspec-
tion and copying upon request. A public
hearing will be scheduled if requested in
writing by any person that timely submits
written or electronic comments. If a public
hearing is scheduled, notice of the date,
time, and place for the hearing will be
published in theFederal Register.
Drafting Information
The principal author of these proposed
regulations is A. G. Kelley, Office of the
Division Counsel/Associate Chief Coun-
sel(TaxExemptandGovernmentEnti-
ties). However, other personnel from the
IRS and the Treasury Department partici-
pated in their development.
*****
Proposed Ame
ndments to the
Regulations
Accordingly, 26 CFR part 31 is pro-
posed to be amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME TAX
AT SOURCE
Paragraph 1. The authority citation for
part 31 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 31.3402(t)–1 is
amended by revising paragraph (d)(2) to
read as follows:
§31.3402(t)–1 Withholding requirement
on certain payments made by government
entities.
*****
(d) * * *
(2) Payments made under a writ-
ten binding contract that was in effect
on December 31, 2012, are not sub-
ject to the withholding requirements of
this section for payments made prior to
January 1, 2014. The preceding sentence
does not apply to payments made under
any contract that is materially modified
after December 31, 2012. For this purpose,
a material modification includes only
a modification that materially affects
the property or services to be provided
under the contract, the terms of payment
for the property or services under the
contract, or the amount payable for the
property or services under the contract.
Notwithstanding the forgoing, a material
modification does not include a mere
renewal of a contract that does not
otherwise materially affect the property or
services to be provided under the contract,
the terms of payment for the property or
services under the contract, or the amount
payable for the property or services under
the contract. A material modification also
does not include a modification to the
contract required by applicable Federal,
State or local law. The amendment to
§31.3402(t)–1(d)(2) applies with respect
to payments made after December 31,
2012.
Steven T. Miller,
Deputy Commissioner for
Services and Enforcement.
(Filed by the Office of the Federal Register on May 6, 2011,
8:45 a.m., and published in the issue of the Federal Register
for May 9, 2011, 76 F.R. 26678)
June 6, 20118682011–23 I.R.B.

Definition of Terms
Revenue rulings and revenue procedures
(hereinafter referred to as “rulings”) that
have an effect on previous rulings use the
following defined terms to describe the ef-
fect:
Amplifieddescribes a situation where
no change is being made in a prior pub-
lished position, but the prior position is be-
ingextendedtoapplytoavariationofthe
fact situation set forth therein. Thus, if
an earlier ruling held that a principle ap-
plied to A, and the new ruling holds that the
same principle also applies to B, the earlier
ruling is amplified. (Compare withmodi-
fied,below).
Clarifiedis used in those instances
where the language in a prior ruling is be-
ing made clear because the language has
caused, or may cause, some confusion.
It is not used where a position in a prior
ruling is being changed.
Distinguisheddescribes a situation
where a ruling mentions a previously pub-
lished ruling and points out an essential
difference between them.
Modifiedis used where the substance
of a previously published position is being
changed. Thus, if a prior ruling held that a
principle applied to A but not to B, and the
new ruling holds that it applies to both A
and B, the prior ruling is modified because
it corrects a published position. (Compare
withamplifiedandclarified, above).
Obsoleteddescribes a previously pub-
lished ruling that is not considered deter-
minative with respect to future transac-
tions. This term is most commonly used in
a ruling that lists previously published rul-
ings that are obsoleted because of changes
in laws or regulations. A ruling may also
be obsoleted because the substance has
been included in regulations subsequently
adopted.
Revokeddescribes situations where the
position in the previously published ruling
is not correct and the correct position is
beingstatedinanewruling.
Supersededdescribes a situation where
the new ruling does nothing more than re-
state the substance and situation of a previ-
ously published ruling (or rulings). Thus,
the term is used to republish under the
1986 Code and regulations the same po-
sition published under the 1939 Code and
regulations. The term is also used when
it is desired to republish in a single rul-
ing a series of situations, names, etc., that
were previously published over a period of
time in separate rulings. If the new rul-
ing does more than restate the substance
of a prior ruling, a combination of terms
is used. For example,modifiedandsu-
persededdescribes a situation where the
substance of a previously published ruling
is being changed in part and is continued
without change in part and it is desired to
restate the valid portion of the previously
published ruling in a new ruling that is self
contained. In this case, the previously pub-
lished ruling is first modified and then, as
modified, is superseded.
Supplementedis used in situations in
which a list, such as a list of the names of
countries, is published in a ruling and that
list is expanded by adding further names in
subsequent rulings. After the original rul-
ing has been supplemented several times, a
new ruling may be published that includes
the list in the original ruling and the ad-
ditions, and supersedes all prior rulings in
the series.
Suspendedis used in rare situations to
show that the previous published rulings
will not be applied pending some future
action such as the issuance of new or
amended regulations, the outcome of cases
in litigation, or the outcome of a Service
study.
Abbreviations
The fol
lowing abbreviations in current use
and for
merly used will appear in material
publis
hedintheBulletin.
A—Individual.
Acq.—A
cquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank
.
B.T.A.—Board of Tax Appeals.
C—Individual.
C.B.—Cu
mulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Coo
perative.
Ct.D.—Court Decision.
CY—County.
D—Decede
nt.
DC—Dummy Corporation.
DE—Donee.
Del. Order
—Delegation Order.
DISC—Domestic International Sales Corporation.
DR—Donor.
E—Estate.
EE—Employee.
E.O.—Executive Order.
ER—Emp
loyer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduc
iary.
FC—Foreign Country.
FICA—Federal Insurance Contributions Act.
FISC—Fo
reign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Fed
eral Unemployment Tax Act.
FX—Foreign corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grante
e.
GP—General Partner.
GR—Grantor.
IC—Insura
nce Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited
Partner.
LR—Lessor.
M—Minor.
Nonacq.—No
nacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Persona
l Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Pa
rtnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Re
al Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsi
diary.
S.P.R.—Statement of Procedural Rules.
Stat.—Statutes at Large.
T—Target
Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Trans
feree.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpay
er.
TR—Trust.
TT—Trustee.
U.S.C.—Uni
ted States Code.
X—Corporation.
Y—Corporation.
Z—Corporat
ion.
2011–23 I.R.B.iJune 6, 2011

Numerical Finding List
1
Bulletin 2011–1 through 2011–23
Announcements:
2011-1, 2011-2 I.R.B.304
2011-2, 2011-3 I.R.B.324
2011-3, 2011-3 I.R.B.324
2011-4, 2011-4 I.R.B.424
2011-5, 2011-4 I.R.B.430
2011-6, 2011-4 I.R.B.433
2011-7, 2011-5 I.R.B.446
2011-8, 2011-5 I.R.B.446
2011-9, 2011-7 I.R.B.499
2011-10, 2011-7 I.R.B.499
2011-11, 2011-7 I.R.B.500
2011-12, 2011-9 I.R.B.532
2011-13, 2011-8 I.R.B.525
2011-14, 2011-9 I.R.B.532
2011-15, 2011-8 I.R.B.526
2011-16, 2011-7 I.R.B.500
2011-17, 2011-9 I.R.B.532
2011-18, 2011-12 I.R.B.567
2011-19, 2011-11 I.R.B.553
2011-20, 2011-10 I.R.B.542
2011-21, 2011-12 I.R.B.567
2011-22, 2011-16 I.R.B.672
2011-23, 2011-12 I.R.B.568
2011-24, 2011-12 I.R.B.569
2011-25, 2011-14 I.R.B.608
2011-26, 2011-14 I.R.B.608
2011-27, 2011-15 I.R.B.651
2011-28, 2011-18 I.R.B.748
2011-29, 2011-18 I.R.B.748
2011-30, 2011-20 I.R.B.791
2011-31, 2011-22 I.R.B.836
2011-32, 2011-22 I.R.B.836
Notices:
2011-1, 2011-2 I.R.B.259
2011-2, 2011-2 I.R.B.260
2011-3, 2011-2 I.R.B.263
2011-4, 2011-2 I.R.B.282
2011-5, 2011-3 I.R.B.314
2011-6, 2011-3 I.R.B.315
2011-7, 2011-5 I.R.B.437
2011-8, 2011-8 I.R.B.503
2011-9, 2011-6 I.R.B.459
2011-10, 2011-6 I.R.B.463
2011-11, 2011-7 I.R.B.497
2011-12, 2011-8 I.R.B.514
2011-13, 2011-9 I.R.B.529
2011-14, 2011-11 I.R.B.544
2011-15, 2011-10 I.R.B.539
2011-16, 2011-17 I.R.B.720
2011-17, 2011-10 I.R.B.540
Notices— Continued:
2011-18, 2011-11 I.R.B.549
2011-19, 2011-11 I.R.B.550
2011-20, 2011-16 I.R.B.652
2011-21, 2011-19 I.R.B.761
2011-22, 2011-12 I.R.B.557
2011-23, 2011-13 I.R.B.588
2011-24, 2011-14 I.R.B.603
2011-25, 2011-14 I.R.B.604
2011-26, 2011-17 I.R.B.720
2011-27, 2011-17 I.R.B.723
2011-28, 2011-16 I.R.B.656
2011-29, 2011-16 I.R.B.663
2011-30, 2011-17 I.R.B.724
2011-31, 2011-17 I.R.B.724
2011-32, 2011-18 I.R.B.737
2011-33, 2011-19 I.R.B.761
2011-34, 2011-19 I.R.B.765
2011-36, 2011-21 I.R.B.792
2011-37, 2011-20 I.R.B.785
2011-38, 2011-20 I.R.B.785
2011-39, 2011-20 I.R.B.786
2011-40, 2011-22 I.R.B.806
2011-41, 2011-21 I.R.B.798
2011-42, 2011-23 I.R.B.866
Proposed Regulations:
REG-140108-08, 2011-13 I.R.B.591
REG-149335-08, 2011-6 I.R.B.468
REG-118761-09, 2011-21 I.R.B.803
REG-146097-09, 2011-8 I.R.B.516
REG-153338-09, 2011-14 I.R.B.606
REG-154159-09, 2011-19 I.R.B.777
REG-124018-10, 2011-2 I.R.B.301
REG-131151-10, 2011-8 I.R.B.519
REG-131947-10, 2011-8 I.R.B.521
REG-132724-10, 2011-7 I.R.B.498
REG-151687-10, 2011-23 I.R.B.867
Revenue Procedures:
2011-1, 2011-1 I.R.B.1
2011-2, 2011-1 I.R.B.90
2011-3, 2011-1 I.R.B.111
2011-4, 2011-1 I.R.B.123
2011-5, 2011-1 I.R.B.167
2011-6, 2011-1 I.R.B.195
2011-7, 2011-1 I.R.B.233
2011-8, 2011-1 I.R.B.237
2011-9, 2011-2 I.R.B.283
2011-10, 2011-2 I.R.B.294
2011-11, 2011-4 I.R.B.329
2011-12, 2011-2 I.R.B.297
2011-13, 2011-3 I.R.B.318
2011-14, 2011-4 I.R.B.330
2011-15, 2011-3 I.R.B.322
2011-16, 2011-5 I.R.B.440
Revenue Procedures— Continued:
2011-17, 2011-5 I.R.B.441
2011-18, 2011-5 I.R.B.443
2011-19, 2011-6 I.R.B.465
2011-20, 2011-11 I.R.B.551
2011-21, 2011-12 I.R.B.560
2011-22, 2011-18 I.R.B.737
2011-23, 2011-15 I.R.B.626
2011-24, 2011-20 I.R.B.787
2011-25, 2011-17 I.R.B.725
2011-26, 2011-16 I.R.B.664
2011-27, 2011-18 I.R.B.740
2011-28, 2011-18 I.R.B.743
2011-29, 2011-18 I.R.B.746
2011-30, 2011-21 I.R.B.802
2011-31, 2011-22 I.R.B.808
2011-32, 2010-22 I.R.B.835
Revenue Rulings:
2011-1, 2011-2 I.R.B.251
2011-2, 2011-2 I.R.B.256
2011-3, 2011-4 I.R.B.326
2011-4, 2011-6 I.R.B.448
2011-5, 2011-13 I.R.B.577
2011-6, 2011-10 I.R.B.537
2011-7, 2011-10 I.R.B.534
2011-8, 2011-12 I.R.B.554
2011-9, 2011-12 I.R.B.554
2011-10, 2011-14 I.R.B.597
2011-11, 2011-19 I.R.B.758
2011-13, 2011-23 I.R.B.841
Treasury Decisions:
9507, 2011-3 I.R.B.305
9508, 2011-7 I.R.B.495
9509, 2011-6 I.R.B.450
9510, 2011-6 I.R.B.453
9511, 2011-6 I.R.B.455
9512, 2011-7 I.R.B.473
9513, 2011-8 I.R.B.501
9514, 2011-9 I.R.B.527
9515, 2011-14 I.R.B.599
9516, 2011-13 I.R.B.575
9517, 2011-15 I.R.B.610
9518, 2011-17 I.R.B.710
9519, 2011-18 I.R.B.734
9520, 2011-18 I.R.B.730
9521, 2011-19 I.R.B.750
9522, 2011-20 I.R.B.780
9523, 2011-20 I.R.B.781
9524, 2011-23 I.R.B.843
9525, 2011-23 I.R.B.837
1
A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2010–27 through 2010–52 is in Internal Revenue Bulletin
2010–52, dated December 27, 2010.
June 6, 2011ii2011–23 I.R.B.

Finding List of Current Actions on
Previously Published Items
1
Bulletin 2011–1 through 2011–23
Announcements:
85-88
Obsoleted by
Rev. Proc. 2011-10, 2011-2 I.R.B.294
2008-11
Modified by
Ann. 2011-6, 2011-4 I.R.B.433
2009-62
Obsoleted by
Rev. Proc. 2011-10, 2011-2 I.R.B.294
Notices:
2006-87
Superseded by
Notice 2011-8, 2011-8 I.R.B.503
2007-25
Superseded by
Notice 2011-8, 2011-8 I.R.B.503
2007-77
Superseded by
Notice 2011-8, 2011-8 I.R.B.503
2008-107
Superseded by
Notice 2011-8, 2011-8 I.R.B.503
2009-23
Modified by
Notice 2011-24, 2011-14 I.R.B.603
2009-24
Modified by
Notice 2011-24, 2011-14 I.R.B.603
2009-83
Modified by
Notice 2011-25, 2011-14 I.R.B.604
2009-93
Modified by
Notice 2011-38, 2011-20 I.R.B.785
2010-27
Superseded by
Notice 2011-8, 2011-8 I.R.B.503
2010-32
Modified and superseded by
Notice 2011-37, 2011-20 I.R.B.785
2010-59
Modified by
Notice 2011-5, 2011-3 I.R.B.314
Notices— Continued:
2010-60
Supplemented and superseded by
Notice 2011-34, 2011-19 I.R.B.765
2010-71
Modified and superseded by
Notice 2011-9, 2011-6 I.R.B.459
2010-79
Clarified and modified by
Notice 2011-4, 2011-2 I.R.B.282
Proposed Regulations:
REG-132554-08
Corrected by
Ann. 2011-11, 2011-7 I.R.B.500
REG-149335-08
Hearing scheduled by
Ann. 2011-26, 2011-14 I.R.B.608
REG-146097-09
Hearing rescheduled by
Ann. 2011-30, 2011-20 I.R.B.791
Revenue Procedures:
72-50
Modified and superseded by
Rev. Proc. 2011-10, 2011-2 I.R.B.294
76-34
Modified and supersed by
Rev. Proc. 2011-10, 2011-2 I.R.B.294
83-23
Modified and superseded by
Rev. Proc. 2011-15, 2011-3 I.R.B.322
94-17
Modified and superseded by
Rev. Proc. 2011-15, 2011-3 I.R.B.322
97-27
Clarified and modified by
Rev. Proc. 2011-14, 2011-4 I.R.B.330
2001-10
Modified by
Rev. Proc. 2011-14, 2011-4 I.R.B.330
2002-28
Modified by
Rev. Proc. 2011-14, 2011-4 I.R.B.330
2003-21
Modified and superseded by
Rev. Proc. 2011-15, 2011-3 I.R.B.322
2004-34
Modified by
Rev. Proc. 2011-14, 2011-4 I.R.B.330
Modified and clarified by
Rev. Proc. 2011-18, 2011-5 I.R.B.443
Revenue Procedures— Continued:
2006-44
Modified by
Ann. 2011-6, 2011-4 I.R.B.433
2006-56
Modified by
Rev. Proc. 2011-14, 2011-4 I.R.B.330
2008-52
Modified by
Notice 2011-4, 2011-2 I.R.B.282
Rev. Proc. 2011-17, 2011-5 I.R.B.441
Superseded in part by
Rev. Proc. 2011-14, 2011-4 I.R.B.330
2009-39
Superseded in part by
Rev. Proc. 2011-14, 2011-4 I.R.B.330
2009-44
Modified by
Ann. 2011-6, 2011-4 I.R.B.433
2010-1
Superseded by
Rev. Proc. 2011-1, 2011-1 I.R.B.1
2010-2
Superseded by
Rev. Proc. 2011-2, 2011-1 I.R.B.90
2010-3
Superseded by
Rev. Proc. 2011-3, 2011-1 I.R.B.111
2010-4
Superseded by
Rev. Proc. 2011-4, 2011-1 I.R.B.123
2010-5
Superseded by
Rev. Proc. 2011-5, 2011-1 I.R.B.167
2010-6
Superseded by
Rev. Proc. 2011-6, 2011-1 I.R.B.195
2010-7
Superseded by
Rev. Proc. 2011-7, 2011-1 I.R.B.233
2010-8
Superseded by
Rev. Proc. 2011-8, 2011-1 I.R.B.237
2010-9
Superseded by
Rev. Proc. 2011-9, 2011-2 I.R.B.283
2010-15
Updated by
Rev. Proc. 2011-13, 2011-3 I.R.B.318
1
A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2010–27 through 2010–52 is in Internal Revenue Bulletin 2010–52, dated December 27,
2010.
2011–23 I.R.B.iiiJune 6, 2011

Revenue Procedures— Continued:
2010-18
Amplified and modified by
Rev. Proc. 2011-21, 2011-12 I.R.B.560
2010-25
Obsoleted in part by
Rev. Proc. 2011-23, 2011-15 I.R.B.626
2011-1
Corrected by
Ann. 2011-7, 2011-5 I.R.B.446
2011-8
Corrected by
Ann. 2011-8, 2011-5 I.R.B.446
2011-11
Corrected by
Ann. 2011-9, 2011-7 I.R.B.499
2011-14
Modified by
Rev. Proc. 2011-27, 2011-18 I.R.B.740
Rev. Proc. 2011-28, 2011-18 I.R.B.743
Modified and amplified by
Rev. Proc. 2011-22, 2011-18 I.R.B.737
2011-21
Amplified by
Rev. Proc. 2011-26, 2011-16 I.R.B.664
Revenue Rulings:
81-100
Modified by
Rev. Rul. 2011-1, 2011-2 I.R.B.251
2004-67
Modified by
Rev. Rul. 2011-1, 2011-2 I.R.B.251
2008-40
Modified by
Rev. Rul. 2011-1, 2011-2 I.R.B.251
2011-3
Corrected by
Ann. 2011-16, 2011-7 I.R.B.500
Treasury Decisions:
9391
Corrected by
Ann. 2011-12, 2011-9 I.R.B.532
9505
Corrected by
Ann. 2011-10, 2011-7 I.R.B.499
June 6, 2011iv2011–23 I.R.B.

INTERNAL REVENUE BULLETIN
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