Internal Revenue Bulletin 1996-4 (PDF rendition): IRS Notices

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Bulletin No. 1996–4
January 22, 1996
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. 96–9, page 5.
LIFO; price indexes; department stores. The November
1995 Bureau of Labor Statistics price indexes are
accepted for use by department stores employing the
retail inventory and last-in, first-out inventory methods
for valuing inventories for tax years ended on, or with
reference to, November 30, 1995.
Rev. Rul. 96–10, page 27.
Basis of partner’s interest; sale between partnerships.
Partners’ bases in their partnership interests are
decreased to reflect losses on the sale of partnership
property to a related partnership that are disallowed
under section 707(b)(1) of the Internal Revenue Code.
Partners’ bases in their partnership interests are
increased to reflect gain from the sale of partnership
property that is not recognized under sections 267(d)
and 707(b)(1) of the Code.
Rev. Rul. 96–11, page 28.
Charitable contribution by partnership. A charitable
contribution of property by a partnership reduces each
partner’s basis in the partnership by the amount of the
partner’s share of the partnership’s basis in the
property contributed.
T.D. 8632, page 6.
Final regulations relating to qualified cost sharing
arrangements under section 482 of the Code.
EMPLOYMENT TAX
T.D. 8636, page 64.
Final regulations under sections 6011, 6051, 6071,
and 6081 of the Code concerning the time for
furnishing wage statements to employees and for filing
wage statements with the Social Security Administra-
tion upon the termination of an employer’s operations.
T.D. 8637, page 29.
IA–33–95, page 99.
Final, temporary, and proposed regulations relating to
backup withholding, statement mailing requirements,
and due diligence.
EXCISE TAX
Rev. Rul. 96–8, page 62.
Two COBRA premium issues. Guidance is given on two
premium issues that arise under the continuation
coverage requirements for group health plans in section
4980B of the Code.
ADMINISTRATIVE
Notice 96–4, page 69.
Partial withdrawal of proposed regulations INTL–52–86,
1988–1 C.B. 892, prescribing rules for official state-
ments to recipients of dividends and patronage divi-
dends paid after December 31, 1983.
Rev. Proc. 96–17, page 69.
Reportin agents; Form 8655. This procedure provides
instructions for preparing and submitting Form 8655,
Reporting Agent Authorization for Magnetic Tape and
Electronic Filers. Rev. Proc. 89–19 superseded; Rev.
Procs. 94–59, 94–18, 93–46, and 89–48 superseded
in part.
Rev. Proc. 96–18, page 73.
Magnetic tape reporting; Forms 940, 941, and 945. This
procedure provides requirements under which a re-
(Continued on page 4)
Finding Lists begin on page 104.

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Mission of the Service
The purpose of the Internal Revenue Service is to
collect the proper amount of tax revenue at the least
cost; serve the public by continually improving the
quality of our products and services; and perform in a
manner warranting the highest degree of public
confidence in our integrity, efficiency and fairness.
Statement of Principles
of Internal Revenue
Tax Administration
The function of the Internal Revenue Service is to
administer the Internal Revenue Code. Tax policy
for raising revenue is determined by Congress.
With this in mind, it is the duty of the Service to
carry out that policy by correctly applying the laws
enacted by Congress; to determine the reasonable
meaning of various Code provisions in light of the
Congressional purpose in enacting them; and to
perform this work in a fair and impartial manner,
with neither a government nor a taxpayer point of
view.
At the heart of administration is interpretation of the
Code. It is the responsibility of each person in the
Service, charged with the duty of interpreting the
law, to try to find the true meaning of the statutory
provision and not to adopt a strained construction in
the belief that he or she is ‘‘protecting the revenue.’’
The revenue is properly protected only when we as-
certain and apply the true meaning of the statute.
The Service also has the responsibility of applying
and administering the law in a reasonable,
practical manner. Issues should only be raised by
examining officers when they have merit, never
arbitrarily or for trading purposes. At the same
time, the examining officer should never hesitate
to raise a meritorious issue. It is also important
that care be exercised not to raise an issue or to
ask a court to adopt a position inconsistent with
an established Service position.
Administration should be both reasonable and
vigorous. It should be conducted with as little
delay as possible and with great courtesy and
considerateness. It should never try to overreach,
and should be reasonable within the bounds of law
and sound administration. It should, however, be
vigorous in requiring compliance with law and it
should be relentless in its attack on unreal tax
devices and fraud.

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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 Conventions, legisla-
tion, court decisions, and other items of general
interest. It is published weekly and may be obtained
from the Superintendent of Documents on a subscrip-
tion basis. Bulletin contents of a permanent nature are
consolidated 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 substantive rulings necessary to promote a uniform
application of the tax laws, including all rulings that
supersede, revoke, modify, or amend any of those
previously published in the Bulletin. All published
rulings apply retroactively unless otherwise indicated.
Procedures relating solely to matters of internal
management 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 proce-
dures, the effect of subsequent legislation, regulations,
court decisions, rulings, and procedures must be
considered, and Service personnel and others con-
cerned 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.—1986 Code.
This part includes rulings and decisions based on
provisions of the Internal Revenue Code of 1986.
Part II.—Treaties and Tax Legislation.
This part is divided into two subparts as follows:
Subpart A, Tax Conventions, and Subpart B, Legislation
and Related Committee Reports.
Part III.—Administrative, Procedural, and Miscellanous.
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 Rulings. Bank Secrecy Act Admin-
istrative Rulings are issued by the Department of the
Treasury’s Office of the Assistant Secretary
(Enforcement).
Part IV.—Items of General Interest.
With the exception of the Notice of Proposed Rulemak-
ing and the disbarment and suspension list included in
this part, none of these announcements are consoli-
dated in the Cumulative Bulletins.
The first Bulletin for each month includes an index for
the matters published during the preceding month.
These monthly indexes are cumulated on a quarterly
and semiannual basis, and are published in the first
Bulletin of the succeeding quarterly and semi-annual
period, respectively.
The Bulletin Index-Digest System, a research and
reference service supplementing the Bulletin, may be
obtained from the Superintendent of Documents on a
subscription basis. It consists of four Services: Service
No. 1, Income Tax; Service No. 2, Estate and Gift
Taxes; Service No. 3, Employment Taxes; Service No.
4, Excise Taxes. Each Service consists of a basic
volume and a cumulative supplement that provides (1)
finding lists of items published in the Bulletin, (2)
digests of revenue rulings, revenue procedures, and
other published items, and (3) indexes of Public Laws,
Treasury Decisions, and Tax Conventions.
The contents 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, D.C. 20402.

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HIGHLIGHTS
OF THIS ISSUE—Continued
ADMINISTRATIVE—Continued
porting agent can furnish information required by the
following forms by magnetic tape: Form 940,
Employer’s Annual Federal Unemployment (FUTA) Tax
Return; Form 941, Employer’s Quarterly Federal Tax
Return; and Form 945, Annual Return of Withheld
Federal Income Tax. Rev. Procs. 93–46, 94–18, and
94–59 superseded.
Rev. Proc. 96–19, page 80.
Electronic filing; Form 941. This procedure provides
requirements under which a taxpayer, or a reporting
agent preparing Form 941, Employer’s Quarterly Fed-
eral Tax Return, for groups of taxpayers, can furnish the
required information electronically through the
Electronic Filing Program for Form 941.
Rev. Proc. 96–20, page 88.
On-Line Service Electronic Filing Program; Form 1040.
Participants in the 1996 On-Line Filing Program for the
Form 1040 series are informed of their obligations
to the Service and other participants. Rev. Proc. 95–13
superseded.
Rev. Proc. 96–21, page 96.
Making the single-entity election. This procedure de-
scribes the manner and time for consolidated groups to
make the retroactive single-entity election under sec-
tion 1.1221–2(g)(5)(i) of the Income Tax Regulations
for purposes of the definition of a hedging transaction.
See T.D. 8653.
T.D. 8633, page 20.
Final regulations under sections 671, 2702, 6012, and
6109 of the Code relating to grantor trust reporting
requirements.
Announcement 96–5, page 99.
This announcement identifies the Taxpayer Bill of
Rights 2 proposals that Treasury and the IRS have
already adopted administratively or will soon do so and
describes similar regulatory and guidance projects.

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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Section 170.—Charitable
Contributions and Gifts
26 CFR 1.170A–1: Charitable Contributions
and Gifts
If a partnership makes a charitable contribu-
tion of property, are the partners’ bases in their
partnership interests decreased to reflect the
contribution. See Rev. Rul. 96–11, page 28.
Section 267.—Losses, Expenses, and
Interest with respect to Transactions
between Related Taxpayers.
26 CFR 1.267(d)–1: Amount of gain where
loss previously disallowed.
If gain from the sale of partnership property is
not recognized due to §§707(b)(1) and 267(d) of
the Internal Revenue Code, are the partners’
bases in their partnership interests incrased under
§ 705(a)(1) to reflect that gain? See Rev. Rul.
96–10, page 27.
§ 472.—Last-in, First-out Inventories
26 CFR 1.472–1: Last-in, first-out inventories.
LIFO; price indexes; department
stores. The November 1995 Bureau of
Labor Statistics price indexes are ac-
cepted for use by department stores
employing the retail inventory and last-
in, first-out inventory methods for valu-
ing inventories for tax years ended on, or
with reference to, November 30, 1995.
Rev. Rul. 96–9
The following Department Store In-
ventory Price Indexes for November
1995 were issued by the Bureau of
Labor Statistics on December 14, 1995.
The indexes are accepted by the
Internal Revenue Service, under
§ 1.472–1(k) of the Income Tax Reg-
ulations and Rev. Proc. 86–46, 1986–2
C.B. 739, for appropriate application to
inventories of department stores
employing the retail inventory and last-
in, first-out inventory methods for tax
years ended on, or with reference to,
November 30, 1995.
The Department Store Inventory
Price Indexes are prepared on a na-
tional basis and include (a) 23 major
groups of departments, (b) three special
combinations of the major groups—soft
goods, durable goods, and mis-
cellaneous goods, and (c) a store total,
which covers all departments, including
some not listed separately, except for
the following: candy, foods, liquor,
tobacco, and contract departments.
BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)
GroupsNov. 1994Nov. 1995
Percent Change from
Nov. 1994 to Nov. 1995
1
1. Piece Goods...........................486.9509.34.6
2. Domestics and Draperies................641.4632.0–1.5
3. Women’s and Children’s Shoes..........640.6637.8–0.4
4. Men’s Shoes..........................914.2921.80.8
5. Infants’ Wear..........................623.0636.82.2
6. Women’s Underwear...................529.5527.8–0.3
7. Women’s Hosiery......................281.1288.22.5
8. Women’s and Girls’ Accessories.........578.0559.8–3.1
9. Women’s Outerwear and Girls’ Wear.....432.0419.3–2.9
10. Men’s Clothing........................614.9623.71.4
11. Men’s Furnishings......................577.5572.7–0.8
12. Boys’ Clothing and Furnishings..........486.9485.5–0.3
13. Jewelry...............................1007.91001.1–0.7
14. Notions...............................748.5776.63.8
15. Toilet Articles and Drugs...............852.9875.32.6
16. Furniture and Bedding..................637.5661.23.7
17. Floor Coverings........................553.8555.40.3
18. Housewares...........................781.1248.70.1
19. Major Appliances......................248.4248.70.1
20. Radio and Television...................84.379.9–5.2
21. Recreation and Education
2
..............115.3113.4–1.6
22. Home Improvements
2
...................120.8121.90.9
23. Auto Accessories
2
......................106.3107.00.7

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BUREAU OF LABOR STATISTICS, DEPARTMENT STORE
INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS
(January 1941 = 100, unless otherwise noted)—Continued
GroupsNov. 1994Nov. 1995
Percent Change from
Nov. 1994 to Nov. 1995
1
Groups 1—15: Soft Goods..................598.6595.2–0.6
Groups 16—20: Durable Goods.............464.1465.00.2
Groups 21—23: Misc. Goods
2
...............114.4113.5–0.8
Store Total
3
.........................552.1550.7–0.3
1
Absence of a minus sign before percentage change in this column signifies price increase.
2
Indexes on a January 1986=100 base.
3
The store total index covers all departments, including some not listed separately, except for the following: candy, foods,
liquor, tobacco, and contract departments.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Stan Michaels of the Office of
Assistant Chief Counsel (Income Tax
and Accounting). For further informa-
tion regarding this revenue ruling,
contact Mr. Michaels on (202)
622-4970 (not a toll-free call).
Section 702.—Income and Credits of
Partner
26 CFR 1.702–1: Income and Credits of
Partner
If a partnership makes a charitable contribu-
tion of property, are the partners’ bases in their
partnership interests decreased to reflect the
contribution. See Rev. Rul. 96–11, page 28.
Section 482.—Allocation of Income
and Deductions Among Taxpayers
26 CFR 1.482–0: Outline of regulations under
section 482.
T.D. 8632
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301 and 602
Section 482 Cost Sharing
Regulations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to qualified
cost sharing arrangements under section
482 of the Internal Revenue Code.
These regulations reflect changes to
section 482 made by the Tax Reform
Act of 1986, and provide guidance to
revenue agents and taxpayers imple-
menting the changes.
DATES: These regulations are effective
January 1, 1996.
These regulations are applicable for
taxable years beginning on or after
January 1, 1996.
FOR FURTHER INFORMATION
CONTACT: Lisa Sams of the Office of
Associate Chief Counsel (Interna-
tional), IRS (202) 622–3840 (not a toll-
free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information con-
tained in these final regulations have
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under
control number 1545–1364. Responses
to these collections of information are
required to determine whether an intan-
gible development arrangement is a
qualified cost sharing arrangement and
who are the participants in such
arrangement.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
The estimated average annual burden
per recordkeeper is 8 hours. The
estimated average annual burden per
respondent is 0.5 hour.
Comments concerning the accuracy
of this burden estimate and suggestions
for reducing this burden should be sent
to the Internal Revenue Service, Attn:
IRS Reports Clearance Officer, T:FP,
Washington, DC 20224, and to the
Office of Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington,
DC 20503.
Books and records relating to these
collections of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
Section 482 was amended by the Tax
Reform Act of 1986, Public Law 99–
514, 100 Stat. 2085, 2561, et. seq.
(1986–3 C.B. (Vol. 1) 1, 478). On
January 30, 1992, a notice of proposed
rulemaking concerning the section 482
amendment in the context of cost
sharing was published in the Federal
Register (INTL–0372–88, 57 FR 3571
[1992–1 C.B. 1164]).
Written comments were received
with respect to the notice of proposed
rulemaking, and a public hearing was
held on August 31, 1992. After consid-
eration of all the comments, the pro-
posed regulations under section 482 are
adopted as revised by this Treasury

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decision, and the corresponding tempo-
rary regulations (which contain the cost
sharing regulations as in effect since
1968) are removed.
Explanation of Provisions
Introduction
The Tax Reform Act of 1986 (the
Act) amended section 482 to require
that consideration for intangible prop-
erty transferred in a controlled transac-
tion be commensurate with the income
attributable to the intangible. The Con-
ference Committee report to the Act
indicated that in revising section 482,
Congress did not intend to preclude the
use of bona fide research and develop-
ment cost sharing arrangements as an
appropriate method of allocating in-
come attributable to intangibles among
related parties. The Conference Com-
mittee report stated, however, that in
order for cost sharing arrangements to
produce results consistent with the
commensurate-with-income standard,
(a) a cost sharer should be expected to
bear its portion of all research and
development costs, on unsuccessful as
well as successful products, within an
appropriate product area, and the costs
of research and development at all
relevant development stages should be
shared, (b) the allocation of costs
generally should be proportionate to
profit as determined before deduction
for research and development, and (c)
to the extent that one party contributes
funds toward research and development
at a significantly earlier point in time
than another (or is otherwise putting its
funds at risk to a greater extent than
the other) that party should receive an
appropriate return on its investment.
See H.R. Rep. 99–281, 99th Cong., 2d
Sess. (1986) at II–638.
The Conference Committee report to
the Act recommended that the IRS
conduct a comprehensive study and
consider whether the regulations under
section 482 (issued in 1968) should be
modified in any respect.
The White Paper
In response to the Conference Com-
mittee’s directive, the IRS and the
Treasury Department issued a study of
intercompany pricing [Notice 88–123
(1988–2 C.B. 458)] on October 18,
1988 (the White Paper). The White
Paper suggested that most bona fide
cost sharing arrangements should have
certain provisions. For example, the
White Paper stated that most product
areas covered by cost sharing arrange-
ments should be within three-digit
Standard Industrial Classification
codes, that most participants should be
assigned exclusive geographic rights in
developed intangibles (and should pre-
dict benefits and divide costs accord-
ingly) and that marketing intangibles
should be excluded from bona fide cost
sharing arrangements.
Comments on the White Paper indi-
cated that, in practice, there was a great
deal of variety in the terms of bona
fide cost sharing arrangements, and that
if the White Paper’s suggestions were
incorporated in regulations, the regula-
tions would unduly restrict the avail-
ability of cost sharing.
The 1992 proposed regulations
The IRS issued proposed cost shar-
ing regulations on January 30, 1992
(INTL–0372–88, 57 FR 3571). In gen-
eral, the proposed regulations allowed
more flexibility than anticipated by the
White Paper, relying on anti-abuse tests
rather than requiring standard cost
sharing provisions.
The proposed regulations stated that
in order to be qualified, a cost sharing
arrangement had to meet the following
five requirements: (1) the arrangement
had to have two or more eligible
participants, (2) the arrangement had to
be recorded in writing contempo-
raneously with the formation of the
cost sharing arrangement, (3) the
eligible participants had to share the
costs and risks of intangible develop-
ment in return for a specified interest
in any intangible produced, (4) the
arrangement had to reflect a reasonable
effort by each eligible participant to
share costs and risks in proportion to
anticipated benefits from using devel-
oped intangibles, and (5) the arrange-
ment had to meet certain administrative
requirements. The key requirements
were that participants had to be eligible
and that costs and risks had to be
proportionate to benefits.
Under the proposed regulations, only
a controlled taxpayer that would use
developed intangibles in the active
conduct of its trade or business was
eligible to participate in a cost sharing
arrangement. This requirement was
considered necessary to ensure that
controlled foreign entities were not
established simply to participate in cost
sharing arrangements without perform-
ing any other meaningful function, and
to ensure that each participant’s share
of anticipated benefits was measurable.
The proposed regulations allowed
costs to be divided based on any
measurement that would reasonably
predict cost sharing benefits (e.g.,
anticipated units of production or antic-
ipated sales). However, the basis for
measuring anticipated benefits and di-
viding costs was checked by a cost-to-
operating-income ratio. The method for
dividing costs was presumed to be
unreasonable if a U.S. participant’s
ratio of shared costs to operating
income attributable to developed intan-
gibles was grossly disproportionate to
the cost-to-operating-income ratio of
the other participants.
If a U.S. participant’s cost-to-
operating-income ratio was not grossly
disproportionate, a section 482 alloca-
tion could still be made under three
circumstances: (a) if the cost-to-
operating-income ratio was dispropor-
tionate (allocation of costs), (b) if the
pool of costs shared was too broad or
too narrow, so that the U.S. participant
was paying for research that it would
not use (allocation of costs), or (c) if
the cost-to-operating-income ratio was
substantially disproportionate, such that
a transfer of an intangible could be
deemed to have occurred (allocation of
income).
Under the proposed regulations, the
IRS could also make an allocation of
income to reflect a buy-in or buy-out
event, that is, a transfer of an intang-
ible that could occur, for example,
when a participant joined or left a cost
sharing arrangement.
Comments on the 1992 proposed
regulations
The 1992 proposed cost sharing
regulations were generally well re-
ceived. However, there were five areas
of particular concern to commenters.
The first was the mechanical use of
cost-to-operating-income ratios as a
standard for measuring the reasonable-
ness of an effort to share costs in
proportion to anticipated benefits.
Commenters noted that operating in-
come attributable to developed intang-
ibles was difficult to measure, and that
other bases for measuring benefits
might produce more reliable results.
Commenters also believed that the

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ratios might be overused, leading to
adjustments to costs in every year, and
to many deemed transfers of intang-
ibles. In addition, commenters stated
that the ratios did not provide any
certainty that a cost sharing arrange-
ment would not be disregarded, since a
‘‘grossly disproportionate’’ ratio was
not numerically defined.
The second area of concern was the
eligible participant requirement. Com-
menters argued that separate research
entities (with no separate active trade
or business) should be allowed to
participate in cost sharing arrange-
ments, as should marketing affiliates.
Commenters also argued that transfers
of intangibles to unrelated entities
should not disqualify a participant, and
that foreign-to-foreign transfers should
not necessarily be monitored. Some
comments also stated that controlled
entities should be able to participate
even if their cost sharing payments
would be characterized differently for
purposes of foreign law.
The third area of concern was the
regulations’ requirement that every par-
ticipant be able to benefit from every
intangible developed under a cost shar-
ing arrangement. Commenters stated
that the regulations should allow both
single-product cost sharing arrange-
ments and umbrella cost sharing ar-
rangements (i.e., cost sharing arrange-
ments under which a broad category of
a controlled group’s research and de-
velopment would be covered).
The fourth area of concern was the
buy-in and buy-out rules. There were
some suggestions for clarifying and
simplifying the rules. For example,
comments urged that the regulations
provide that one participant’s abandon-
ment of its rights would not necessarily
confer benefits on the other partici-
pants, and that a new participant need
not always make a buy-in payment
when joining a cost sharing arrange-
ment. Suggestions for simplifying the
rules generally consisted of proposed
safe harbors for valuing intangibles.
The final general area of concern
was the administrative requirements.
Several commenters suggested that an-
nual adjustments to the method used to
share costs should not be required.
Commenters also suggested that tax-
payers not be required to attach their
cost sharing arrangements to their
returns, and that the time period for
producing records be increased.
In addition to these general areas of
concern, commenters noted that there
should be more guidance about when
the IRS would deem a cost sharing
arrangement to exist. Commenters also
argued that existing cost sharing ar-
rangements should be grandfathered, or
that there should be a longer transition
period. Commenters suggested that fi-
nancial accounting rules be used to
calculate costs to be shared, and that
the IRS address the impact of currency
fluctuations on the cost-to-operating-
income ratios. Finally, commenters
asked that the regulations clarify that a
cost sharing arrangement would not be
deemed to create a partnership or a
U.S. trade or business.
The final regulations
Without fundamentally altering the
policies of the 1992 proposed regula-
tions, the final regulations reflect nu-
merous modifications in response to the
comments described above. They also
reflect the approach of the final section
482 regulations relating to transfers of
tangible and intangible property.
Section 1.482–7(a)(1) defines a cost
sharing arrangement as an agreement
for sharing costs in proportion to
reasonably anticipated benefits from the
individual exploitation of interests in
the intangibles that are developed. In
order to claim the benefits of the safe
harbor, a taxpayer must also satisfy
certain formal requirements (enume-
rated in §1.482–7(b)). The district
director may apply the cost sharing
rules to any arrangement that in sub-
stance constitutes a cost sharing ar-
rangement, notwithstanding any failure
to satisfy particular requirements of the
safe harbor. It is further provided that a
qualified cost sharing arrangement, or
an arrangement treated in substance as
such, will not be treated as a part-
nership. (A corresponding provision is
added to §301.7701–3 pertaining to the
definition of a partnership.) Neither
will a foreign participant be treated as
engaged in a trade or business within
the United States solely by virtue of its
participation in such an arrangement.
Section 1.482–7(a)(2) restates the
general rule of cost sharing in a
manner intended to emphasize its lim-
itation on allocations: no section 482
allocation will be made with respect to
a qualified cost sharing arrangement,
except to make each controlled partici-
pant’s share of the intangible develop-
ment costs equal to its share of
reasonably anticipated benefits.
Section 1.482–7(b) contains the re-
quirements for a qualified cost sharing
arrangement. This provision substan-
tially tracks the proposed regulations. A
modification was made in the second re-
quirement which now directs that the ar-
rangement provide a method to calculate
each controlled participant’s share of
intangible development costs, based on
factors that can reasonably be expected
to reflect anticipated benefits. The new
standard is intended to ensure that cost
sharing arrangements will not be dis-
regarded by the IRS as long as the
factors upon which an estimate of bene-
fits was based were reasonable, even if
the estimate proved to be inaccurate.
Section 1.482–7(b)(4) requires that a
cost sharing arrangement be set forth in
writing and contain a number of
specified provisions, including the in-
terest that each controlled participant
will receive in any intangibles devel-
oped pursuant to the arrangement. The
intangibles developed under a cost
sharing arrangement are referred to as
the ‘‘covered intangibles.’’ It is possi-
ble that the research activity undertaken
may result in development of intangible
property that was not foreseen at the
inception of the cost sharing arrange-
ment; any such property is also in-
cluded within the definition of the term
covered intangibles. The prescriptive
rules in relation to the scope of the
intangible development area under the
proposed regulations are eliminated in
favor of a flexible definition that
encompasses any research and develop-
ment actually undertaken under the cost
sharing arrangement.
Section 1.482–7(c) provides rules for
being a participant in a qualified cost
sharing arrangement. Unlike the pro-
posed regulations, the final regulations
permit participation by unrelated per-
sons, which are referred to as ‘‘uncon-
trolled participants.’’ Controlled tax-
payers may be participants, referred to
as ‘‘controlled participants,’’ if they
satisfy the conditions set forth in these
rules. These qualification rules replace
the proposed regulations’ concept of
‘‘eligible participant.’’ The tax treat-
ment of controlled taxpayers that do
not qualify as controlled participants
provided in §1.482–7(c)(4) essentially
tracks the treatment provided for inelig-
ible participants under the proposed
regulations.
The requirements for being a con-
trolled participant are basically the
same as in the proposed regulations. In

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particular, a controlled participant must
use or reasonably expect to use covered
intangibles in the active conduct of a
trade or business. Thus, an entity that
chiefly provides services (e.g., as a
contract researcher) may not be a
controlled participant. These provisions
are necessary for the reason that they
are necessary to the proposed regula-
tions: to prevent foreign controlled
entities from being established simply
to participate in cost sharing arrange-
ments. In accordance with §1.482–
7(c)(4) mentioned above, service en-
tities (such as contract researchers) may
furnish research and development serv-
ices to the members of a qualified cost
sharing arrangement, with the appropri-
ate consideration for such assistance in
the research and development under-
taken in the intangible development
area being governed by the rules in
§1.482–4(f)(3)(iii) (Allocations with re-
spect to assistance provided to the
owner). In the case of a controlled
research entity, the appropriate arm’s
length compensation would generally
be determined under the principles of
§1.482–2(b) (Performance of services
for another). Each controlled partici-
pant would be deemed to incur as part
of its intangible development costs a
share of such compensation equal to its
s h a r e o f r e a s o n a b l y a n t i c i p a t e d
benefits.
As under the proposed regulations,
the activity of another person may be
attributed to a controlled taxpayer for
purposes of meeting the active conduct
requirement. However, modified lan-
guage is adopted to be more precise
concerning the intended requirements
for attribution. These requirements
were phrased in the proposed regula-
tions as bearing the risk and receiving
the benefits of the attributed activity.
Under the final regulations, the attribu-
tion will be made only in cases in
which the controlled taxpayer exercises
substantial managerial and operational
control over the attributed activities.
As under the proposed regulations, a
principal purpose to use cost sharing to
accomplish a transfer or license of
covered intangibles to uncontrolled or
controlled taxpayers will defeat satis-
faction of the active conduct require-
ment. However, a principal purpose
will not be implied where there are
legitimate business reasons for subse-
quently licensing covered intangibles.
The subgroup rules of the proposed
regulations are eliminated. Their major
purpose is accomplished by a simpler
provision (see the discussion of
§1.482–7(h)). In addition, the final
regulations treat all members of a
consolidated group as a single
participant.
Section 1.482–7(d) defines intangible
development costs as operating ex-
penses other than depreciation and
amortization expense, plus an arm’s
length charge for tangible property
made available to the cost sharing
arrangement. Costs to be shared include
all costs relating to the intangible
development area, which, as noted,
comprises any research actually under-
taken under the cost sharing arrange-
ment. As under the proposed regula-
tions, the district director may adjust
the pool of costs shared in order to
properly reflect costs that relate to the
intangible development area.
Section 1.482–7(e) defines antici-
pated benefits as additional income
generated or costs saved by the use of
covered intangibles. The pool of bene-
fits may also be adjusted in order to
properly reflect benefits that relate to
the intangible development area.
Section 1.482–7(f) governs cost al-
locations by the district director in
order to make a controlled participant’s
share of costs equal to its share of
reasonably anticipated benefits. Antici-
pated benefits of uncontrolled partici-
pants will be excluded from anticipated
benefits in calculating the benefits
shares of controlled participants. A
share of reasonably anticipated benefits
will be determined using the most
reliable estimate of benefits. This rule
echoes the best method rule for deter-
mining the most reliable measure of an
arm’s length result under §1.482–1(c).
The reliability of an estimate of
benefits principally depends on two
factors: the reliability of the basis for
measuring benefits used and the re-
liability of the projections used. The
cost-to-operating-income ratio used in
the proposed regulations to check the
reasonableness of an effort to share
costs in proportion to anticipated bene-
fits has not been included in the final
regulations. Rather, the final regula-
tions provide that an allocation of costs
or income may be made if the taxpayer
did not use the most reliable estimate
of benefits, which depends on the facts
and circumstances of each case.
Section 1.482–7(f)(3)(ii) provides
that in estimating a controlled partici-
pant’s share of benefits, the most
reliable basis for measuring anticipated
benefits must be used, taking into ac-
count the factors set forth in §1.482–
1(c)(2)(ii). The measurement basis used
must be consistent for all controlled
participants. The regulations provide
that benefits may be measured directly
or indirectly. In addition, regardless of
whether a direct or indirect basis of
measurement is employed, it may be
necessary to make adjustments to ac-
count for material differences in the
activities that controlled participants
perform in connection with exploitation
of covered intangibles, such as between
wholesale and retail distribution.
Section 1.482–7(f)(3)(iii) describes
the scope of various indirect bases for
measuring benefits, such as units, sales,
and operating profit. Indirect bases
other than those enumerated may be
employed as long as they bear a
relationship to benefits.
Section 1.482–7(f)(3)(iv) discusses
projections used to estimate benefits.
Projections required for this purpose
generally include a determination of the
time period between the inception of
the research and development and the
receipt of benefits, a projection of the
time over which benefits will be
received, and a projection of the
benefits anticipated for each year in
which it is anticipated that the intang-
ible will generate benefits. However,
the regulations note that in certain
circumstances, current annual benefit
shares may be used in lieu of
projections.
Section 1.482–7(f)(3)(iv)(B) states
that a significant divergence between
projected and actual benefit shares may
indicate that the projections were not
reliable. A significant divergence is
defined as divergence in excess of 20%
between projected and actual benefit
shares. If there is a significant diver-
gence, which is not due to an un-
foreseeable event, then the district
director may use actual benefits as the
most reliable basis for measuring bene-
fits. Conversely, no allocation will be
made based on a divergence that is not
considered significant as long as the
estimate is made using the most reli-
able basis for measuring benefits.
For purposes of the 20% test, all
non-U.S. controlled participants are
treated as a single controlled participant
in order that a divergence by a foreign
controlled participant with a very small
share of the total costs will not neces-
sarily trigger an allocation (section
1.482–7(f)(3)(iv)(D), Example 8, il-

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lustrates this rule). Section 1.482–7(f)-
(3)(iv)(B) and (C) notes that adjust-
ments among foreign controlled
participants will only be made if the
adjustment will have a substantial U.S.
tax impact, for example, under subpart
F.
Section 1.482–7(f)(4) states that cost
allocations must be reflected for tax
purposes in the year in which costs
were incurred. This reflects a change
from the rule in the 1992 proposed
regulations, which stated that cost
allocations would be included in in-
come in the taxable year under review,
even if the costs to be allocated were
incurred in a prior taxable year. The
purpose of the change was to match up
cost adjustments with the year to which
they relate in accordance with the clear
reflection of income principle of sec-
tion 482.
Section 1.482–7(g) provides buy-in
and buy-out rules that are similar to the
rules in the proposed regulations. How-
ever, some of the clarifications sug-
gested by commenters have been
incorporated in these rules. A ‘‘sub-
stantially disproportionate’’ cost-to-
operating-income ratio will no longer
trigger an adjustment to income under
these rules. However, if, after any cost
allocations authorized by §1.482–
7(a)(2), the economic substance of the
arrangement is inconsistent with the
terms of the arrangement over a period
of years (for example, through a con-
sistent pattern of one controlled partici-
pant bearing an inappropriately high or
low share of the cost of intangible
development), then the district director
may impute an agreement consistent
with the course of conduct. In that
case, one or more of the participants
would be deemed to own a greater
interest in covered intangibles than
provided under the arrangement, and
must receive buy-in payments from the
other participants.
The rules do not provide safe harbor
methods for valuing intangibles, but
rely on the intangible valuation rules of
§§1.482–1 and 1.482–4 through 1.482–
6. To the extent some participants
furnish a disproportionately greater
amount of existing intangibles to the
arrangement, they must be compensated
by royalties by the participants who
furnish a disproportionately lesser
amount of existing intangibles to the
arrangement. Buy-in payments owed
are netted against payments owing, and
only the net payment is treated as a
royalty. No implication is intended that
netting of cross royalties is permissible
outside of the qualified cost sharing
safe harbor rules.
Section 1.482–7(h) provides rules
regarding the character of payments
made pursuant to a qualified cost
sharing arrangement. Cost sharing pay-
ments received are generally treated as
reductions of research and development
expense. A net approach is applied to
foster simplicity and generally preserve
the character of items actually incurred
by a participant to the extent not
reimbursed. In addition, for purposes of
the research credit determined under
section 41, cost sharing payments
among controlled participants will be
treated as provided for intra-group
transactions in §1.41–8(e). Finally, any
payment that in substance constitutes a
cost sharing payment will be treated as
such, regardless of its characterization
under foreign law. This rule is intended
to enable foreign entities to participate
in cost sharing arrangements with U.S.
controlled participants even if foreign
law does not recognize cost sharing.
This rule obviated the main reason for
the subgroup rules which, as noted,
have accordingly been eliminated.
Section 1.482–7(i) requires that con-
trolled participants must use a consis-
tent accounting method for measuring
costs and benefits, and must translate
foreign currencies on a consistent basis.
To the extent that the accounting
method materially differs from U.S.
generally accepted accounting princi-
ples, any such material differences
must be documented, as provided in
§1.482–7(j)(2)(iv).
Section 1.482–7(j) provides sim-
plified recordkeeping and reporting
requirements. It is anticipated that
many of the background documents
necessary for purposes of this section
will be kept pursuant to section 6662(e)
and the regulations thereunder.
Section 1.482–7(k) provides that this
regulation is effective for taxable years
beginning on or after January 1, 1996.
Section 1.482–7(l) allows a one-year
transition period for taxpayers to con-
form their cost sharing arrangements
with the requirements of the final
regulations. A longer period was not
considered necessary, given the in-
creased flexibility and the reduced
number of administrative requirements
of the final regulations.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Small Business Administra-
tion for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Lisa Sams, Office of Associate
Chief Counsel (International), IRS.
However, other personnel from the IRS
and Treasury Department participated
in their development.
******
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 301
and 602 are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority for part 1
is amended by adding an entry for
section 1.482–7 to read as follows:
Authority: 26 U.S.C. 7805. * * *
Section 1.482–7 is also issued under 26
U.S.C. 482. * * *
Par. 2. Section 1.482–0 is amended
by:
1. Removing the entry for §1.482–
7T.
2. Adding the entry for §1.482–7 to
read as follows:
§1.482–0 Outline of regulations under
482.
******
§1.482–7 Sharing of costs.
(a)In general.
(1)Scope and application of the
rules in this section.
(2)Limitation on allocations.
(3)Cross references.
(b)Qualified cost sharing arrange-
ment.

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(c)Participant.
(1)In general.
(2)Active conduct of a trade or
business.
(i)Trade or business.
(ii)Active conduct.
(iii)Examples.
(3)Use of covered intangibles
in the active conduct of a
trade or business.
(i)In general.
(ii)Example.
(4)Treatment of a controlled
taxpayer that is not a con-
trolled participant.
(i)In general.
(ii)Example.
(5)Treatment of consolidated
group.
(d)Costs.
(1)Intangible development costs.
(2)Examples.
(e)Anticipated benefits.
(1)Benefits.
(2)Reasonably anticipated bene-
fits.
(f)Cost allocations.
(1)In general.
(2)Share of intangible develop-
ment costs.
(i)In general.
(ii)Example.
(3)Share of reasonably antici-
pated benefits.
(i)In general.
(ii)Measure of benefits.
(iii)Indirect bases for meas-
uring anticipated bene-
fits.
(A) Units used, pro-
duced or sold.
(B)Sales.
(C)Operating profit.
(D) O t h e r b a s e s f o r
measuring antici-
pated benefits.
(E)Examples.
(iv)Projections used to esti-
mate anticipated bene-
fits.
(A)In general.
(B) Unreliable projec-
tions.
(C) Foreign-to-foreign
adjustments.
(D)Examples.
(4)Timing of allocations.
(g)Allocations of income, deductions
or other tax items to reflect
transfers of intangibles (buy-in).
(1)In general.
(2)Pre-existing intangibles.
(3)New controlled participant.
(4)Controlled participant re-
linquishes interests.
(5)Conduct inconsistent with
the terms of a cost sharing
arrangement.
(6)Failure to assign interests
under a qualified cost shar-
ing arrangement.
(7)Form of consideration.
(i)Lump sum payments.
(ii)Installment payments.
(iii)Royalties.
(8)Examples.
(h)Character of payments made pur-
suant to a qualified cost sharing
arrangement.
(1)In general.
(2)Examples.
(i)Accounting requirements.
(j)Administrative requirements.
(1)In general.
(2)Documentation.
(3)Reporting requirements.
(k)Effective
date.
(l)Transition rule.
******
Par. 3. Section 1.482–7 is added to
read as follows:
§1.482–7 Sharing of costs.
(a)In general—(1) Scope and ap-
plication of the rules in this section. A
cost sharing arrangement is an agree-
ment under which the parties agree to
share the costs of development of one
or more intangibles in proportion to
their shares of reasonably anticipated
benefits from their individual exploita-
tion of the interests in the intangibles
assigned to them under the arrange-
ment. A taxpayer may claim that a cost
sharing arrangement is a qualified cost
sharing arrangement only if the agree-
ment meets the requirements of para-
graph (b) of this section. Consistent
with the rules of §1.482–1(d)(3)(ii)(B)
(Identifying contractual terms), the dis-
trict director may apply the rules of
this section to any arrangement that in
substance constitutes a cost sharing
arrangement, notwithstanding a failure
to comply with any requirement of this
section. A qualified cost sharing ar-
rangement, or an arrangement to which
the district director applies the rules of
this section, will not be treated as a
partnership to which the rules of sub-
chapter K apply. See §301.7701–3(e)
of this chapter. Furthermore, a partici-
pant that is a foreign corporation or
nonresident alien individual will not be
treated as engaged in trade or business
within the United States solely by
reason of its participation in such an
arrangement. See generally §1.864–
2(a).
(2)Limitation on allocations. The
district director shall not make alloca-
tions with respect to a qualified cost
sharing arrangement except to the
extent necessary to make each con-
trolled participant’s share of the costs
(as determined under paragraph (d) of
this section) of intangible development
under the qualified cost sharing ar-
rangement equal to its share of reason-
ably anticipated benefits attributable to
such development, under the rules of
this section. If a controlled taxpayer
acquires an interest in intangible prop-
erty from another controlled taxpayer
(other than in consideration for bearing
a share of the costs of the intangible’s
development), then the district director
may make appropriate allocations to
reflect an arm’s length consideration
for the acquisition of the interest in
such intangible under the rules of
§§1.482–1 and 1.482–4 through 1.482–
6. See paragraph (g) of this section. An
interest in an intangible includes any
commercially transferable interest, the
benefits of which are susceptible of
valuation. See §1.482–4(b) for the
definition of an intangible.
(3)Cross references. Paragraph (c)
of this section defines participant.
Paragraph (d) of this section defines
the costs of intangible development.
Paragraph (e) of this section defines the
anticipated benefits of intangible de-
velopment. Paragraph (f) of this section
provides rules governing cost alloca-
tions. Paragraph (g) of this section
provides rules governing transfers of
intangibles other than in consideration
for bearing a share of the costs of the
intangible’s development. Rules gov-
erning the character of payments made
pursuant to a qualified cost sharing
arrangement are provided in paragraph
(h) of this section. Paragraph (i) of this
section provides accounting require-
ments. Paragraph (j) of this section
provides administrative requirements.
Paragraph (k) of this section provides
an effective date. Paragraph (l) pro-
vides a transition rule.
(b)Qualified cost sharing arrange-
ment. A qualified cost sharing arrange-
ment must—
(1)Include two or more participants;
(2)Provide a method to calculate
each controlled participant’s share of
intangible development costs, based on

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factors that can reasonably be expected
to reflect that participant’s share of
anticipated benefits;
(3)Provide for adjustment to the
controlled participants’ shares of intan-
gible development costs to account for
changes in economic conditions, the
business operations and practices of the
participants, and the ongoing develop-
ment of intangibles under the arrange-
ment; and
(4)Be recorded in a document that
is contemporaneous with the formation
(and any revision) of the cost sharing
arrangement and that includes—
(i)A list of the arrangement’s par-
ticipants, and any other member of the
controlled group that will benefit from
the use of intangibles developed under
the cost sharing arrangement;
(ii)The information described in
paragraphs (b)(2) and (b)(3) of this
section;
(iii)A description of the scope of
the research and development to be
undertaken, including the intangible or
class of intangibles intended to be
developed;
(iv)A description of each partici-
pant’s interest in any covered intang-
ibles. A covered intangible is any
intangible property that is developed as
a result of the research and develop-
ment undertaken under the cost sharing
arrangement (intangible development
area);
(v)The duration of the arrangement;
and
(vi)The conditions under which the
arrangement may be modified or termi-
nated and the consequences of such
modification or termination, such as the
interest that each participant will re-
ceive in any covered intangibles.
(c)Participant—(1) In general. For
purposes of this section, a participant is
a controlled taxpayer that meets the
requirements of this paragraph (c)(1)
(controlled participant) or an uncon-
trolled taxpayer that is a party to the
cost sharing arrangement (uncontrolled
participant). See §1.482–1(i)(5) for the
definitions of controlled and uncon-
trolled taxpayers. A controlled taxpayer
may be a controlled participant only if
it—
(i)Uses or reasonably expects to use
covered intangibles in the active con-
duct of a trade or business, under the
rules of paragraphs (c)(2) and (c)(3) of
this section;
(ii)Substantially complies with the
accounting requirements described in
paragraph (i) of this section; and
(iii)Substantially complies with the
administrative requirements described
in paragraph (j) of this section.
(2)Active conduct of a trade or
business—(i) Trade or business. The
rules of §1.367(a)–2T(b)(2) apply in
determining whether the activities of a
controlled taxpayer constitute a trade or
business. For this purpose, the term
controlled taxpayer must be substituted
for the term foreign corporation.
(ii)Active conduct. In general, a
controlled taxpayer actively conducts a
trade or business only if it carries out
substantial managerial and operational
activities. For purposes only of this
paragraph (c)(2), activities carried out
on behalf of a controlled taxpayer by
another person may be attributed to the
controlled taxpayer, but only if the
controlled taxpayer exercises substan-
tial managerial and operational control
over those activities.
(iii)Examples. The following exam-
ples illustrate this paragraph (c)(2):
Example 1. Foreign Parent (FP) enters into a
cost sharing arrangement with its U.S. Subsidiary
(USS) to develop a cheaper process for manufac-
turing widgets. USS is to receive the right to
exploit the intangible to make widgets in North
America, and FP is to receive the right to exploit
the intangible to make widgets in the rest of the
world. However, USS does not manufacture
widgets; rather, USS acts as a distributor for
FP’s widgets in North America. Because USS is
simply a distributor of FP’s widgets, USS does
not use or reasonably expect to use the manu-
facturing intangible in the active conduct of its
trade or business, and thus USS is not a con-
trolled participant.
Example 2. The facts are the same as in
Example 1, except that USS contracts to have
widgets it sells in North America made by a
related manufacturer (that is not a controlled
participant) using USS’ cheaper manufacturing
process. USS purchases all the manufacturing
inputs, retains ownership of the work in process
as well as the finished product, and bears the risk
of loss at all times in connection with the
operation. USS compensates the manufacturer for
the manufacturing functions it performs and
receives substantially all of the intangible value
attributable to the cheaper manufacturing proc-
ess. USS exercises substantial managerial and
operational control over the manufacturer to
ensure USS’s requirements are satisfied concern-
ing the timing, quantity, and quality of the
widgets produced. USS uses the manufacturing
intangible in the active conduct of its trade or
business, and thus USS is a controlled
participant.
(3)Use of covered intangibles in the
active conduct of a trade or business—
(i) In general. A covered intangible
will not be considered to be used, nor
will the controlled taxpayer be consid-
ered to reasonably expect to use it, in
the active conduct of the controlled
taxpayer’s trade or business if a princi-
pal purpose for participating in the
arrangement is to obtain the intangible
for transfer or license to a controlled or
uncontrolled taxpayer.
(ii)Example. The following example
illustrates the absence of such a princi-
pal purpose:
Example. Controlled corporations A, B, and C
enter into a qualified cost sharing arrangement
for the purpose of developing a new technology.
Costs are shared equally among the three con-
trolled taxpayers. A, B, and C have the exclusive
rights to manufacture and sell products based on
the new technology in North America, South
America, and Europe, respectively. When the
new technology is developed, C expects to use it
to manufacture and sell products in most of
Europe. However, for sound business reasons, C
expects to license to an unrelated manufacturer
the right to use the new technology to manufac-
ture and sell products within a particular
European country owing to its relative remote-
ness and small size. In these circumstances, C
has not entered into the arrangement with a
principal purpose of obtaining covered intang-
ibles for transfer or license to controlled or
uncontrolled taxpayers, because the purpose of
licensing the technology to the unrelated man-
ufacturer is relatively insignificant in comparison
to the overall purpose of exploiting the European
market.
(4)Treatment of a controlled tax-
payer that is not a controlled
participant—(i) In general. If a con-
trolled taxpayer that is not a controlled
participant (within the meaning of this
paragraph (c)) provides assistance in
relation to the research and develop-
ment undertaken in the intangible de-
velopment area, it must receive consid-
eration from the controlled participants
under the rules of §1.482–4(f)(3)(iii)
(Allocations with respect to assistance
provided to the owner). For purposes of
paragraph (d) of this section, such
consideration is treated as an operating
expense and each controlled participant
must be treated as incurring a share of
such consideration equal to its share of
reasonably anticipated benefits (as de-
fined in paragraph (f)(3) of this
section).
(ii)Example. The following example
illustrates this paragraph (c)(4):
Example. (i) U.S. Parent (USP), one foreign
subsidiary (FS), and a second foreign subsidiary
constituting the group’s research arm (R+D)
enter into a cost sharing agreement to develop
manufacturing intangibles for a new product line
A. USP and FS are assigned the exclusive rights
to exploit the intangibles respectively in the
United States and Europe, where each presently
manufactures and sells various existing product
lines. R+D, whose activity consists solely in
carrying out research for the group, is assigned
the rights to exploit the new technology in Asia,

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where no group member presently operates, but
which is reliably projected to be a major market
for product A. R+D will license the Asian rights
to an unrelated third party. It is reliably projected
that the shares of reasonably anticipated benefits
of USP and FS (i.e., not taking R+D into
account) will be 66 2/3% and 33 1/3%, re-
spectively. The parties’ agreement provides that
USP and FS will reimburse 40% and 20%, re-
spectively, of the intangible development costs
incurred by R+D with respect to the new
intangible.
(ii) R+D does not qualify as a controlled
participant within the meaning of paragraph (c)
of this section. Therefore, R+D is treated as a
service provider for purposes of this section and
must receive arm’s length consideration for the
assistance it is deemed to provide to USP and
FS, under the rules of §1.482–4(f)(3)(iii). Such
consideration must be treated as intangible
development costs incurred by USP and FS in
proportion to their shares of reasonably antici-
pated benefits (i.e., 66 2/3% and 33 1/3%,
respectively). R+D will not be considered to bear
any share of the intangible development costs
under the arrangement.
(iii)The Asian rights nominally assigned to
R+D under the agreement must be treated as
being held by USP and FS in accordance with
their shares of the intangible development costs
(i.e., 66 2/3% and 33 1/3%, respectively). See
paragraph (g)(6) of this section. Thus, since
under the cost sharing agreement the Asian rights
are owned by R+D, the district director may
make allocations to reflect an arm’s length
consideration owed by R+D to USP and FS for
these rights under the rules of §§1.482–1 and
1.482–4 through 1.482–6.
(5)Treatment of consolidated group.
For purposes of this section, all mem-
bers of the same affiliated group
(within the meaning of section 1504(a))
that join in the filing of a consolidated
return for the taxable year under
section 1501 shall be treated as one
taxpayer.
(d)Costs—(1) Intangible develop-
ment costs. For purposes of this sec-
tion, a controlled participant’s costs of
developing intangibles for a taxable
year mean all of the costs incurred by
that participant related to the intangible
development area, plus all of the cost
sharing payments it makes to other
controlled and uncontrolled partici-
pants, minus all of the cost sharing
payments it receives from other con-
trolled and uncontrolled participants.
Costs incurred related to the intangible
development area consist of the follow-
ing items: operating expenses as de-
fined in §1.482–5(d)(3), other than
depreciation or amortization expense,
plus (to the extent not included in such
operating expenses, as defined in
§1.482–5(d)(3)) the charge for the use
of any tangible property made available
to the qualified cost sharing arrange-
ment. If tangible property is made
available to the qualified cost sharing
arrangement by a controlled participant,
the determination of the appropriate
charge will be governed by the rules of
§1.482–2(c) (Use of tangible property).
Intangible development costs do not
include the consideration for the use of
any intangible property made available
to the qualified cost sharing arrange-
ment. See paragraph (g)(2) of this
section. If a particular cost contributes
to the intangible development area and
other areas or other business activities,
the cost must be allocated between the
intangible development area and the
other areas or business activities on a
reasonable basis. In such a case, it is
necessary to estimate the total benefits
attributable to the cost incurred. The
share of such cost allocated to the
intangible development area must cor-
respond to covered intangibles’ share
of the total benefits. Costs that do not
contribute to the intangible develop-
ment area are not taken into account.
(2)Examples.The following exam-
ples illustrate this paragraph (d):
Example 1. Foreign Parent (FP) and U.S.
Subsidiary (USS) enter into a qualified cost
sharing arrangement to develop a better
mousetrap. USS and FP share the costs of FP’s
research and development facility that will be
exclusively dedicated to this research, the sal-
aries of the researchers, and reasonable overhead
costs attributable to the project. They also share
the cost of a conference facility that is at the
disposal of the senior executive management of
each company but does not contribute to the
research and development activities in any
measurable way. In this case, the cost of the
conference facility must be excluded from the
amount of intangible development costs.
Example 2. U.S. Parent (USP) and Foreign
Subsidiary (FS) enter into a qualified cost
sharing arrangement to develop a new device.
USP and FS share the costs of a research and
development facility, the salaries of researchers,
and reasonable overhead costs attributable to the
project. USP also incurs costs related to field
testing of the device, but does not include them
in the amount of intangible development costs of
the cost sharing arrangement. The district direc-
tor may determine that the field testing costs are
intangible development costs that must be
shared.
(e)Anticipated benefits—(1) Bene-
fits. Benefits are additional income
generated or costs saved by the use of
covered intangibles.
(2)Reasonably anticipated benefits.
For purposes of this section, a con-
trolled participant’s reasonably antici-
pated benefits are the aggregate bene-
fits that it reasonably anticipates that it
will derive from covered intangibles.
(f)Cost allocations—(1) In general.
For purposes of determining whether a
cost allocation authorized by paragraph
(a)(2) of this section is appropriate for
a taxable year, a controlled partici-
pant’s share of intangible development
costs for the taxable year under a
qualified cost sharing arrangement must
be compared to its share of reasonably
anticipated benefits under the arrange-
ment. A controlled participant’s share
of intangible development costs is
determined under paragraph (f)(2) of
this section. A controlled participant’s
share of reasonably anticipated benefits
under the arrangement is determined
under paragraph (f)(3) of this section.
In determining whether benefits were
reasonably anticipated, it may be ap-
propriate to compare actual benefits to
anticipated benefits, as described in
paragraph (f)(3)(iv) of this section.
(2)Share of intangible development
costs—(i) In general. A controlled
participant’s share of intangible de-
velopment costs for a taxable year is
equal to its intangible development
costs for the taxable year (as defined in
paragraph (d) of this section), divided
by the sum of the intangible develop-
ment costs for the taxable year (as
defined in paragraph (d) of this section)
of all the controlled participants.
(ii)Example. The following example
illustrates this paragraph (f)(2):
Example. (i) U.S. Parent (USP), Foreign
Subsidiary (FS), and Unrelated Third Party
(UTP) enter into a cost sharing arrangement to
develop new audio technology. In the first year
of the arrangement, the controlled participants
incur $2,250,000 in the intangible development
area, all of which is incurred directly by USP. In
the first year, UTP makes a $250,000 cost
sharing payment to USP, and FS makes a
$800,000 cost sharing payment to USP, under the
terms of the arrangement. For that year, the
intangible development costs borne by USP are
$1,200,000 (its $2,250,000 intangible develop-
ment costs directly incurred, minus the cost
sharing payments it receives of $250,000 from
UTP and $800,000 from FS); the intangible
development costs borne by FS are $800,000 (its
cost sharing payment); and the intangible de-
velopment costs borne by all of the controlled
participants are $2,000,000 (the sum of the
intangible development costs borne by USP and
FS of $1,200,000 and $800,000, respectively).
Thus, for the first year, USP’s share of intangible
development costs is 60% ($1,200,000 divided
by $2,000,000), and FS’s share of intangible
development costs is 40% ($800,000 divided by
$2,000,000).
(ii)For purposes of determining whether a
cost allocation authorized by paragraph §1.482–
7(a)(2) is appropriate for the first year, the
district director must compare USP’s and FS’s
shares of intangible development costs for that
year to their shares of reasonably anticipated
benefits. See paragraph (f)(3) of this section.
(3)Share of reasonably anticipated
benefits—(i) In general. A controlled

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participant’s share of reasonably antici-
pated benefits under a qualified cost
sharing arrangement is equal to its
reasonably anticipated benefits (as de-
fined in paragraph (e)(2) of this sec-
tion), divided by the sum of the
reasonably anticipated benefits (as de-
fined in paragraph (e)(2) of this sec-
tion) of all the controlled participants.
The anticipated benefits of an uncon-
trolled participant will not be included
for purposes of determining each con-
trolled participant’s share of anticipated
benefits. A controlled participant’s
share of reasonably anticipated benefits
will be determined using the most
reliable estimate of reasonably antici-
pated benefits. In determining which of
two or more available estimates is most
reliable, the quality of the data and
assumptions used in the analysis must
be taken into account, consistent with
§1.482–1(c)(2)(ii) (Data and assump-
tions). Thus, the reliability of an
estimate will depend largely on the
completeness and accuracy of the data,
the soundness of the assumptions, and
the relative effects of particular defi-
ciencies in data or assumptions on dif-
ferent estimates. If two estimates are
equally reliable, no adjustment should
be made based on differences in the
results. The following factors will be
particularly relevant in determining the
reliability of an estimate of anticipated
benefits—
(A)The reliability of the basis used
for measuring benefits, as described in
paragraph (f)(3)(ii) of this section; and
(B)The reliability of the projections
used to estimate benefits, as described
in paragraph (f)(3)(iv) of this section.
(ii)Measure of benefits. In order to
estimate a controlled participant’s share
of anticipated benefits from covered
intangibles, the amount of benefits that
each of the controlled participants is
reasonably anticipated to derive from
covered intangibles must be measured
on a basis that is consistent for all such
participants. See paragraph (f)(3)(iii)-
(E), Example 8, of this section. Antici-
pated benefits are measured either on a
direct basis, by reference to estimated
additional income to be generated or
costs to be saved by the use of covered
intangibles, or on an indirect basis, by
reference to certain measurements that
reasonably can be assumed to be
related to income generated or costs
saved. Such indirect bases of measure-
ment of anticipated benefits are de-
scribed in paragraph (f)(3)(iii) of this
section. A controlled participant’s an-
ticipated benefits must be measured on
the most reliable basis, whether direct
or indirect. In determining which of
two bases of measurement of reason-
ably anticipated benefits is most reli-
able, the factors set forth in §1.482–
1(c)(2)(ii) (Data and assumptions) must
be taken into account. It normally will
be expected that the basis that provided
the most reliable estimate for a particu-
lar year will continue to provide the
most reliable estimate in subsequent
years, absent a material change in the
factors that affect the reliability of the
estimate. Regardless of whether a di-
rect or indirect basis of measurement is
used, adjustments may be required to
account for material differences in the
activities that controlled participants
undertake to exploit their interests in
covered intangibles. See Example 6 of
paragraph (f)(3)(iii)(E) of this section.
(iii)Indirect bases for measuring
anticipated benefits. Indirect bases for
measuring anticipated benefits from
participation in a qualified cost sharing
arrangement include the following:
(A)Units used, produced or sold.
Units of items used, produced or sold
by each controlled participant in the
business activities in which covered
intangibles are exploited may be used
as an indirect basis for measuring its
anticipated benefits. This basis of
measurement will be more reliable to
the extent that each controlled partici-
pant is expected to have a similar
increase in net profit or decrease in net
loss attributable to the covered intang-
ibles per unit of the item or items used,
produced or sold. This circumstance is
most likely to arise when the covered
intangibles are exploited by the con-
trolled participants in the use, produc-
tion or sale of substantially uniform
i t e m s u n d e r s i m i l a r e c o n o m i c
conditions.
(B)Sales. Sales by each controlled
participant in the business activities in
which covered intangibles are exploited
may be used as an indirect basis for
measuring its anticipated benefits. This
basis of measurement will be more
reliable to the extent that each con-
trolled participant is expected to have a
similar increase in net profit or de-
crease in net loss attributable to cov-
ered intangibles per dollar of sales.
This circumstance is most likely to
arise if the costs of exploiting covered
intangibles are not substantial relative
to the revenues generated, or if the
principal effect of using covered intan-
gibles is to increase the controlled
participants’ revenues (e.g., through a
price premium on the products they
sell) without affecting their costs sub-
stantially. Sales by each controlled
participant are unlikely to provide a
reliable basis for measuring benefits
unless each controlled participant oper-
ates at the same market level (e.g.,
manufacturing, distribution, etc.).
(C)Operating profit. Operating
profit of each controlled participant
from the activities in which covered
intangibles are exploited may be used
as an indirect basis for measuring its
anticipated benefits. This basis of
measurement will be more reliable to
the extent that such profit is largely
attributable to the use of covered
intangibles, or if the share of profits
attributable to the use of covered
intangibles is expected to be similar for
each controlled participant. This cir-
cumstance is most likely to arise when
covered intangibles are integral to the
activity that generates the profit and the
activity could not be carried on or
would generate little profit without use
of those intangibles.
(D)Other bases for measuring an-
ticipated benefits. Other bases for
measuring anticipated benefits may, in
some circumstances, be appropriate, but
only to the extent that there is expected
to be a reasonably identifiable relation-
ship between the basis of measurement
used and additional income generated
or costs saved by the use of covered
intangibles. For example, a division of
costs based on employee compensation
would be considered unreliable unless
there were a relationship between the
amount of compensation and the ex-
pected income of the controlled partici-
pants from the use of covered
intangibles.
(E)Examples.The following ex-
amples illustrate this paragraph
(f)(3)(iii):
Example 1. Foreign Parent (FP) and U.S.
Subsidiary (USS) both produce a feedstock for
the manufacture of various high-performance
plastic products. Producing the feedstock requires
large amounts of electricity, which accounts for a
significant portion of its production cost. FP and
USS enter into a cost sharing arrangement to
develop a new process that will reduce the
amount of electricity required to produce a unit
of the feedstock. FP and USS currently both
incur an electricity cost of X% of its other
production costs and rates for each are expected
to remain similar in the future. How much the
new process, if it is successful, will reduce the
amount of electricity required to produce a unit
of the feedstock is uncertain, but it will be about
the same amount for both companies. Therefore,
the cost savings each company is expected to

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achieve after implementing the new process are
similar relative to the total amount of the
feedstock produced. Under the cost sharing
arrangement FP and USS divide the costs of
developing the new process based on the units of
the feedstock each is anticipated to produce in
the future. In this case, units produced is the
most reliable basis for measuring benefits and
dividing the intangible development costs be-
cause each participant is expected to have a
similar decrease in costs per unit of the feedstock
produced.
Example 2. The facts are the same as in
Example 1, except that USS pays X% of its other
production costs for electricity while FP pays
2X% of its other production costs. In this case,
units produced is not the most reliable basis for
measuring benefits and dividing the intangible
development costs because the participants do
not expect to have a similar decrease in costs per
unit of the feedstock produced. The district
director determines that the most reliable meas-
ure of benefit shares may be based on units of
the feedstock produced if FP’s units are weighted
relative to USS’ units by a factor of 2. This
reflects the fact that FP pays twice as much as
USS as a percentage of its other production costs
for electricity and, therefore, FP’s savings per
unit of the feedstock would be twice USS’s
savings from any new process eventually
developed.
Example 3. The facts are the same as in
Example 2, except that to supply the particular
needs of the U.S. market USS manufactures the
feedstock with somewhat different properties
than FP’s feedstock. This requires USS to
employ a somewhat different production process
than does FP. Because of this difference, it will
be more costly for USS to adopt any new
process that may be developed under the cost
sharing agreement. In this case, units produced is
not the most reliable basis for measuring benefit
shares. In order to reliably determine benefit
shares, the district director offsets the reasonably
anticipated costs of adopting the new process
against the reasonably anticipated total savings in
electricity costs.
Example 4. U.S. Parent (USP) and Foreign
Subsidiary (FS) enter into a cost sharing
arrangement to develop new anesthetic drugs.
USP obtains the right to use any resulting patent
in the U.S. market, and FS obtains the right to
use the patent in the European market. USP and
FS divide costs on the basis of anticipated
operating profit from each patent under develop-
ment. USP anticipates that it will receive a much
higher profit than FS per unit sold because drug
prices are uncontrolled in the U.S., whereas drug
prices are regulated in many European countries.
In this case, the controlled taxpayers’ basis for
measuring benefits is the most reliable.
Example 5. (i) Foreign Parent (FP) and U.S.
Subsidiary (USS) both manufacture and sell
fertilizers. They enter into a cost sharing
arrangement to develop a new pellet form of a
common agricultural fertilizer that is currently
available only in powder form. Under the cost
sharing arrangement, USS obtains the rights to
produce and sell the new form of fertilizer for
the U.S. market while FP obtains the rights to
produce and sell the fertilizer for the rest of the
world. The costs of developing the new form of
fertilizer are divided on the basis of the
anticipated sales of fertilizer in the participants’
respective markets.
(ii)If the research and development is suc-
cessful the pellet form will deliver the fertilizer
more efficiently to crops and less fertilizer will
be required to achieve the same effect on crop
growth. The pellet form of fertilizer can be
expected to sell at a price premium over the
powder form of fertilizer based on the savings in
the amount of fertilizer that needs to be used. If
the research and development is successful, the
costs of producing pellet fertilizer are expected
to be approximately the same as the costs of
producing powder fertilizer and the same for
both FP and USS. Both FP and USS operate at
approximately the same market levels, selling
t h e i r f e r t i l i z e r s l a r g e l y t o i n d e p e n d e n t
distributors.
(iii)In this case, the controlled taxpayers’
basis for measuring benefits is the most reliable.
Example 6. The facts are the same as in
Example 5, except that FP distributes its
fertilizers directly while USS sells to independ-
ent distributors. In this case, sales of USS and
FP are not the most reliable basis for measuring
benefits unless adjustments are made to account
for the difference in market levels at which the
sales occur.
Example 7. Foreign Parent (FP) and U.S.
Subsidiary (USS) enter into a cost sharing
arrangement to develop materials that will be
used to train all new entry-level employees. FP
and USS determine that the new materials will
save approximately ten hours of training time per
employee. Because their entry-level employees
are paid on differing wage scales, FP and USS
decide that they should not divide costs based on
the number of entry-level employees hired by
each. Rather, they divide costs based on compen-
sation paid to the entry-level employees hired by
each. In this case, the basis used for measuring
benefits is the most reliable because there is a
direct relationship between compensation paid to
new entry-level employees and costs saved by FP
and USS from the use of the new training
materials.
Example 8. U.S. Parent (USP), Foreign Sub-
sidiary 1 (FS1) and Foreign Subsidiary 2 (FS2)
enter into a cost sharing arrangement to develop
computer software that each will market and
install on customers’ computer systems. The
participants divide costs on the basis of projected
sales by USP, FS1, and FS2 of the software in
their respective geographic areas. However, FS1
plans for sound business reasons not only to sell
but also to license the software, and FS1’s
licensing income (which is a percentage of the
licensees’ sales) is not counted in the projected
benefits. In this case, the basis used for
measuring the benefits of each participant is not
the most reliable because all of the benefits
received by participants are not taken into
account. In order to reliably determine benefit
shares, FS1’s projected benefits from licensing
must be included in the measurement on a basis
that is the same as that used to measure its own
and the other participants’ projected benefits
from sales (e.g., all participants might measure
their benefits on the basis of operating profit).
(iv)Projections used to estimate
anticipated benefits—(A) In general.
The reliability of an estimate of antici-
pated benefits also depends upon the
reliability of projections used in mak-
ing the estimate. Projections required
for this purpose generally include a
determination of the time period be-
tween the inception of the research and
development and the receipt of bene-
fits, a projection of the time over which
benefits will be received, and a projec-
tion of the benefits anticipated for each
year in which it is anticipated that the
intangible will generate benefits. A
projection of the relevant basis for
measuring anticipated benefits may re-
quire a projection of the factors that
underlie it. For example, a projection
of operating profits may require a
projection of sales, cost of sales,
operating expenses, and other factors
that affect operating profits. If it is
anticipated that there will be significant
variation among controlled participants
in the timing of their receipt of
benefits, and consequently benefit
shares are expected to vary signifi-
cantly over the years in which benefits
will be received, it may be necessary to
use the present discounted value of the
projected benefits to reliably determine
each controlled participant’s share of
those benefits. If it is not anticipated
that benefit shares will significantly
change over time, current annual bene-
fit shares may provide a reliable
projection of anticipated benefit shares.
This circumstance is most likely to
occur when the cost sharing arrange-
ment is a long-term arrangement, the
arrangement covers a wide variety of
intangibles, the composition of the
covered intangibles is unlikely to
change, the covered intangibles are
unlikely to generate unusual profits,
and each controlled participant’s share
of the market is stable.
(B)Unreliable projections. A sig-
nificant divergence between projected
benefit shares and actual benefit shares
may indicate that the projections were
not reliable. In such a case, the district
director may use actual benefits as the
most reliable measure of anticipated
benefits. If benefits are projected over
a period of years, and the projections
for initial years of the period prove to
be unreliable, this may indicate that the
projections for the remaining years of
the period are also unreliable and thus
should be adjusted. Projections will not
be considered unreliable based on a
divergence between a controlled par-
ticipant’s projected benefit share and
actual benefit share if the amount of
such divergence for every controlled
participant is less than or equal to 20%
of the participant’s projected benefit
share. Further, the district director will
not make an allocation based on such
divergence if the difference is due to
an extraordinary event, beyond the

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control of the participants, that could
not reasonably have been anticipated at
the time that costs were shared. For
purposes of this paragraph, all con-
trolled participants that are not U.S.
persons will be treated as a single
controlled participant. Therefore, an
adjustment based on an unreliable
projection will be made to the cost
shares of foreign controlled participants
only if there is a matching adjustment
to the cost shares of controlled partici-
pants that are U.S. persons. Nothing in
this paragraph (f)(3)(iv)(B) will prevent
the district director from making an
allocation if the taxpayer did not use
the most reliable basis for measuring
anticipated benefits. For example, if the
taxpayer measures anticipated benefits
based on units sold, and the district
director determines that another basis is
more reliable for measuring anticipated
benefits, then the fact that actual units
sold were within 20% of the projected
unit sales will not preclude an alloca-
tion under this section.
(C)Foreign-to-foreign adjustments.
Notwithstanding the limitations on ad-
justments provided in paragraph (f)(3)-
(iv)(B) of this section, adjustments to
cost shares based on an unreliable
projection also may be made solely
among foreign controlled participants if
the variation between actual and pro-
jected benefits has the effect of sub-
stantially reducing U.S. tax.
(D)Examples.The following ex-
amples illustrate this paragraph
(f)(3)(iv):
Example 1. (i) Foreign Parent (FP) and U.S.
Subsidiary (USS) enter into a cost sharing
arrangement to develop a new car model. The
participants plan to spend four years developing
the new model and four years producing and
selling the new model. USS and FP project total
sales of $4 billion and $2 billion, respectively,
over the planned four years of exploitation of the
new model. Cost shares are divided for each year
based on projected total sales. Therefore, USS
bears 66 2/3% of each year’s intangible develop-
ment costs and FP bears 33 1/3% of such costs.
(ii)USS typically begins producing and sell-
ing new car models a year after FP begins
producing and selling new car models. The
district director determines that in order to reflect
USS’ one-year lag in introducing new car
models, a more reliable projection of each
participant’s share of benefits would be based on
a projection of all four years of sales for each
participant, discounted to present value.
Example 2. U.S. Parent (USP) and Foreign
Subsidiary (FS) enter into a cost sharing
arrangement to develop new and improved
household cleaning products. Both participants
have sold household cleaning products for many
years and have stable market shares. The
products under development are unlikely to
produce unusual profits for either participant.
The participants divide costs on the basis of each
participant’s current sales of household cleaning
products. In this case, the participants’ future
benefit shares are reliably projected by current
sales of cleaning products.
Example 3. The facts are the same as in
Example 2, except that FS’s market share is
rapidly expanding because of the business failure
of a competitor in its geographic area. The
district director determines that the participants’
future benefit shares are not reliably projected by
current sales of cleaning products and that FS’s
benefit projections should take into account its
growth in sales.
Example 4. Foreign Parent (FP) and U.S.
Subsidiary (USS) enter into a cost sharing
arrangement to develop synthetic fertilizers and
insecticides. FP and USS share costs on the basis
of each participant’s current sales of fertilizers
and insecticides. The market shares of the
participants have been stable for fertilizers, but
FP’s market share for insecticides has been
expanding. The district director determines that
the participants’ projections of benefit shares are
reliable with regard to fertilizers, but not reliable
with regard to insecticides; a more reliable
projection of benefit shares would take into
account the expanding market share for
insecticides.
Example 5. U.S. Parent (USP) and Foreign
Subsidiary (FS) enter into a cost sharing
arrangement to develop new food products,
dividing costs on the basis of projected sales two
years in the future. In year 1, USP and FS
project that their sales in year 3 will be equal,
and they divide costs accordingly. In year 3, the
district director examines the participants’
method for dividing costs. USP and FS actually
accounted for 42% and 58% of total sales,
respectively. The district director agrees that
sales two years in the future provide a reliable
basis for estimating benefit shares. Because the
differences between USP’s and FS’s actual and
projected benefit shares are less than 20% of
their projected benefit shares, the projection of
future benefits for year 3 is reliable.
Example 6. The facts are the same as in
Example 5, except that the in year 3 USP and FS
actually accounted for 35% and 65% of total
sales, respectively. The divergence between
USP’s projected and actual benefit shares is
greater than 20% of USP’s projected benefit
share and is not due to an extraordinary event
beyond the control of the participants. The
district director concludes that the projection of
anticipated benefit shares was unreliable, and
uses actual benefits as the basis for an adjust-
ment to the cost shares borne by USP and FS.
Example 7. U.S. Parent (USP), a U.S. corpora-
tion, and its foreign subsidiary (FS) enter a cost
sharing arrangement in year 1. They project that
they will begin to receive benefits from covered
intangibles in years 4 through 6, and that USP
will receive 60% of total benefits and FS 40% of
total benefits. In years 4 through 6, USP and FS
actually receive 50% each of the total benefits.
In evaluating the reliability of the participants’
projections, the district director compares these
actual benefit shares to the projected benefit
shares. Although USP’s actual benefit share
(50%) is within 20% of its projected benefit
share (60%), FS’s actual benefit share (50%) is
not within 20% of its projected benefit share
(40%). Based on this discrepancy, the district
director may conclude that the participants’
projections were not reliable and may use actual
benefit shares as the basis for an adjustment to
the cost shares borne by USP and FS.
Example 8. Three controlled taxpayers, USP,
FS1 and FS2 enter into a cost sharing arrange-
ment. FS1 and FS2 are foreign. USP is a United
States corporation that controls all the stock of
FS1 and FS2. The participants project that they
will share the total benefits of the covered
intangibles in the following percentages: USP
50%; FS1 30%; and FS2 20%. Actual benefit
shares are as follows: USP 45%; FS1 25%; and
FS2 30%. In evaluating the reliability of the
participants’ projections, the district director
compares these actual benefit shares to the
projected benefit shares. For this purpose, FS1
and FS2 are treated as a single participant. The
actual benefit share received by USP (45%) is
within 20% of its projected benefit share (50%).
In addition, the non-US participants’ actual
benefit share (55%) is also within 20% of their
projected benefit share (50%). Therefore, the
district director concludes that the participants’
projections of future benefits were reliable,
despite the fact that FS2’s actual benefit share
(30%) is not within 20% of its projected benefit
share (20%).
Example 9. The facts are the same as in
Example 8. In addition, the district director
determines that FS2 has significant operating
losses and has no earnings and profits, and that
FS1 is profitable and has earnings and profits.
Based on all the evidence, the district director
concludes that the participants arranged that FS1
would bear a larger cost share than appropriate
in order to reduce FS1’s earnings and profits and
thereby reduce inclusions USP otherwise would
be deemed to have on account of FS1 under
subpart F. Pursuant to §1.482–7 (f)(3)(iv)(C), the
district director may make an adjustment solely
to the cost shares borne by FS1 and FS2 because
FS2’s projection of future benefits was unreliable
and the variation between actual and projected
benefits had the effect of substantially reducing
USP’s U.S. income tax liability (on account of
FS1 subpart F income).
Example 10. (i) (A) Foreign Parent (FP) and
U.S. Subsidiary (USS) enter into a cost sharing
arrangement in 1996 to develop a new treatment
for baldness. USS’s interest in any treatment
developed is the right to produce and sell the
treatment in the U.S. market while FP retains
rights to produce and sell the treatment in the
rest of the world. USS and FP measure their
anticipated benefits from the cost sharing ar-
rangement based on their respective projected
future sales of the baldness treatment. The
following sales projections are used:
Sales ($millions)
YearUSSFP
1997510
19982020
19993030
20004040
20014040
20024040
20034040
20042020
20051010
200655
(B)in 1997, the first year of sales, USS is
projected to have lower sales than FP due to lags
in U.S. regulatory approval for the baldness
treatment. In each subsequent year USS and FP
are projected to have equal sales. Sales are

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projected to build over the first three years of the
period, level off for several years, and then
decline over the final years of the period as new
and improved baldness treatments reach the
market.
(ii)To account for USS’s lag in sales in the
first year, the present discounted value of sales
over the period is used as the basis for
measuring benefits. Based on the risk associated
with this venture, a discount rate of 10 percent is
selected. The present discounted value of pro-
jected sales is determined to be approximately
$154.4 million for USS and $158.9 million for
FP. On this basis USS and FP are projected to
obtain approximately 49.3% and 50.7% of the
benefit, respectively, and the costs of developing
the baldness treatment are shared accordingly.
(iii)(A) In the year 2002 the district director
examines the cost sharing arrangement. USS and
FP have obtained the following sales results
through the year 2001:
Sales ($millions)
YearUSSFP
1997017
19981735
19992541
20003841
20013941
(B)USS’s sales initially grew more slowly
than projected while FP’s sales grew more
quickly. In each of the first three years of the
period the share of total sales of at least one of
the parties diverged by over 20% from its
projected share of sales. However, by the year
2001 both parties’ sales had leveled off at
approximately their projected values. Taking into
account this leveling off of sales and all the facts
and circumstances, the district director deter-
mines that it is appropriate to use the original
projections for the remaining years of sales.
Combining the actual results through the year
2001 with the projections for subsequent years,
and using a discount rate of 10%, the present
discounted value of sales is approximately
$141.6 million for USS and $187.3 million for
FP. This result implies that USS and FP obtain
approximately 43.1% and 56.9%, respectively, of
the anticipated benefits from the baldness treat-
ment. Because these benefit shares are within
20% of the benefit shares calculated based on the
original sales projections, the district director
determines that, based on the difference between
actual and projected benefit shares, the original
projections were not unreliable. No adjustment is
made based on the difference between actual and
projected benefit shares.
Example 11. (i) The facts are the same as in
Example 10, except that the actual sales results
through the year 2001 are as follows:
Sales ($ millions)
YearUSSFP
1997017
19981735
19992544
20003454
20013655
(ii)Based on the discrepancy between the
projections and the actual results and on
consideration of all the facts, the district director
determines that for the remaining years the
following sales projections are more reliable than
the original projections:
Sales ($ millions)
YearUSSFP
20023655
20033655
20041828
2005914
20064.57
(iii)Combining the actual results through the
year 2001 with the projections for subsequent
years, and using a discount rate of 10%, the
present discounted value of sales is approx-
imately $131.2 million for USS and $229.4
million for FP. This result implies that USS and
FP obtain approximately 35.4% and 63.6%, re-
spectively, of the anticipated benefits from the
baldness treatment. These benefit shares diverge
by greater than 20% from the benefit shares cal-
culated based on the original sales projections,
and the district director determines that, based on
the difference between actual and projected
benefit shares, the original projections were
unreliable. The district director adjusts costs
shares for each of the taxable years under
examination to conform them to the recalculated
shares of anticipated benefits.
(4)Timing of allocations. If the
district director reallocates costs under
the provisions of this paragraph (f), the
allocation must be reflected for tax
purposes in the year in which the costs
were incurred. When a cost sharing
payment is owed by one member of a
qualified cost sharing arrangement to
another member, the district director
may make appropriate allocations to
reflect an arm’s length rate of interest
for the time value of money, consistent
with the provisions of §1.482–2(a)
(Loans or advances).
(g)Allocations of income, deduc-
tions or other tax items to reflect
transfers of intangibles (buy-in)—(1) In
general. A controlled participant that
makes intangible property available to
a qualified cost sharing arrangement
will be treated as having transferred
interests in such property to the other
controlled participants, and such other
controlled participants must make buy-
in payments to it, as provided in
paragraph (g)(2) of this section. If the
other controlled participants fail to
make such payments, the district direc-
tor may make appropriate allocations,
under the provisions of §§1.482–1 and
1.482–4 through 1.482–6, to reflect an
arm’s length consideration for the
transferred intangible property. Further,
if a group of controlled taxpayers
participates in a qualified cost sharing
arrangement, any change in the con-
trolled participants’ interests in covered
intangibles, whether by reason of entry
of a new participant or otherwise by
reason of transfers (including deemed
transfers) of interests among existing
participants, is a transfer of intangible
property, and the district director may
make appropriate allocations, under the
provisions of §§1.482–1 and 1.482–4
through 1.482–6, to reflect an arm’s
length consideration for the transfer.
See paragraphs (g)(3), (4), and (5) of
this section. Paragraph (g)(6) of this
section provides rules for assigning
unassigned interests under a qualified
cost sharing arrangement.
(2)Pre-existing intangibles. If a
controlled participant makes pre-
existing intangible property in which it
owns an interest available to other
controlled participants for purposes of
research in the intangible development
area under a qualified cost sharing
arrangement, then each such other
controlled participant must make a buy-
in payment to the owner. The buy-in
payment by each such other controlled
participant is the arm’s length charge
for the use of the intangible under the
rules of §§1.482–1 and 1.482–4
through 1.482–6, multiplied by the
controlled participant’s share of reason-
ably anticipated benefits (as defined in
paragraph (f)(3) of this section). A
controlled participant’s payment re-
quired under this paragraph (g)(2) is
deemed to be reduced to the extent of
any payments owed to it under this
paragraph (g)(2) from other controlled
participants. Each payment received by
a payee will be treated as coming pro
rata out of payments made by all
payors. See paragraph (g)(8), Example
4, of this section. Such payments will
be treated as consideration for a
transfer of an interest in the intangible
property made available to the qualified
cost sharing arrangement by the payee.
Any payment to or from an uncon-
trolled participant in consideration for
intangible property made available to
the qualified cost sharing arrangement
will be shared by the controlled partici-
pants in accordance with their shares of
reasonably anticipated benefits (as de-
fined in paragraph (f)(3) of this sec-
tion). A controlled participant’s
payment required under this paragraph
(g)(2) is deemed to be reduced by such
a share of payments owed from an un-
controlled participant to the same ex-
tent as by any payments owed from
other controlled participants under this
paragraph (g)(2). See paragraph (g)(8),
Example 5, of this section.
(3)New controlled participant. If a
new controlled participant enters a
qualified cost sharing arrangement and
acquires any interest in the covered

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intangibles, then the new participant
must pay an arm’s length consideration,
under the provisions of §§1.482–1 and
1.482–4 through 1.482–6, for such
interest to each controlled participant
from whom such interest was acquired.
(4)Controlled participant relin-
quishes interests. A controlled partici-
pant in a qualified cost sharing
arrangement may be deemed to have
acquired an interest in one or more
covered intangibles if another con-
trolled participant transfers, abandons,
or otherwise relinquishes an interest
under the arrangement, to the benefit of
the first participant. If such a relin-
quishment occurs, the participant relin-
quishing the interest must receive an
arm’s length consideration, under the
provisions of §§1.482–1 and 1.482–4
through 1.482–6, for its interest. If the
controlled participant that has relin-
quished its interest subsequently uses
that interest, then that participant must
pay an arm’s length consideration,
under the provisions of §§1.482–1 and
1.482–4 through 1.482–6, to the con-
trolled participant that acquired the
interest.
(5)Conduct inconsistent with the
terms of a cost sharing arrangement.
If, after any cost allocations authorized
by paragraph (a)(2) of this section, a
controlled participant bears costs of
intangible development that over a
period of years are consistently and
materially greater or lesser than its
share of reasonably anticipated bene-
fits, then the district director may
conclude that the economic substance
of the arrangement between the con-
trolled participants is inconsistent with
the terms of the cost sharing arrange-
ment. In such a case, the district
director may disregard such terms and
impute an agreement consistent with
the controlled participants’ course of
conduct, under which a controlled
participant that bore a disproportion-
ately greater share of costs received
additional interests in covered intang-
ibles. See §1.482–1(d)(3)(ii)(B) (Identi-
fying contractual terms) and §1.482–
4(f)(3)(ii) (Identification of owner).
Accordingly, that participant must re-
ceive an arm’s length payment from
any controlled participant whose share
of the intangible development costs is
less than its share of reasonably antici-
pated benefits over time, under the
provisions of §§1.482–1 and 1.482–4
through 1.482–6.
(6)Failure to assign interests under
a qualified cost sharing arrangement.
If a qualified cost sharing arrangement
fails to assign an interest in a covered
intangible, then each controlled partici-
pant will be deemed to hold a share in
such interest equal to its share of the
costs of developing such intangible.
For this purpose, if cost shares have
varied materially over the period during
which such intangible was developed,
then the costs of developing the intang-
ible must be measured by their present
discounted value as of the date when
the first such costs were incurred.
(7)Form of consideration. The con-
sideration for an acquisition described
in this paragraph (g) may take any of
the following forms:
(i)Lump sum payments. For the
treatment of lump sum payments, see
§1.482–4(f)(5) (Lump sum payments);
(ii)Installment payments. Install-
ment payments spread over the period
of use of the intangible by the trans-
feree, with interest calculated in ac-
cordance with §1.482–2(a) (Loans or
advances); and
(iii)Royalties. Royalties or other
payments contingent on the use of the
intangible by the transferee.
(8)Examples. The following exam-
ples illustrate allocations described in
this paragraph (g):
Example 1. In year one, four members of a
controlled group enter into a cost sharing
arrangement to develop a commercially feasible
process for capturing energy from nuclear fusion.
Based on a reliable projection of their future
benefits, each cost sharing participant bears an
equal share of the costs. The cost of developing
intangibles for each participant with respect to
the project is approximately $1 million per year.
In year ten, a fifth member of the controlled
group joins the cost sharing group and agrees to
bear one-fifth of the future costs in exchange for
part of the fourth member’s territory reasonably
anticipated to yield benefits amounting to one-
fifth of the total benefits. The fair market value
of intangible property within the arrangement at
the time the fifth company joins the arrangement
is $45 million. The new member must pay one-
fifth of that amount (that is, $9 million total) to
the fourth member from whom it acquired its
interest in covered intangibles.
Example 2. U.S. Subsidiary (USS), Foreign
Subsidiary (FS) and Foreign Parent (FP) enter
into a cost sharing arrangement to develop new
products within the Group X product line. USS
manufactures and sells Group X products in
North America, FS manufactures and sells Group
X products in South America, and FP manufac-
tures and sells Group X products in the rest of
the world. USS, FS and FP project that each will
manufacture and sell a third of the Group X
products under development, and they share costs
on the basis of projected sales of manufactured
products. When the new Group X products are
developed, however, USS ceases to manufacture
Group X products, and FP sells its Group X
products to USS for resale in the North
American market. USS earns a return on its
resale activity that is appropriate given its
function as a distributor, but does not earn a
return attributable to exploiting covered intang-
ibles. The district director determines that USS’
share of the costs (one-third) was greater than its
share of reasonably anticipated benefits (zero)
and that it has transferred an interest in the
intangibles for which it should receive a payment
from FP, whose share of the intangible develop-
ment costs (one-third) was less than its share of
reasonably anticipated benefits over time (two-
thirds). An allocation is made under §§1.482–1
and 1.482–4 through 1.482–6 from FP to USS to
recognize USS’ one-third interest in the intang-
ibles. No allocation is made from FS to USS
because FS did not exploit USS’ interest in
covered intangibles.
Example 3. U.S. Parent (USP), Foreign Sub-
sidiary 1 (FS1), and Foreign Subsidiary 2 (FS2)
enter into a cost sharing arrangement to develop
a cure for the common cold. Costs are shared
USP–50%, FS1–40% and FS2–10% on the basis
of projected units of cold medicine to be
produced by each. After ten years of research
and development, FS1 withdraws from the
arrangement, transferring its interests in the
intangibles under development to USP in ex-
change for a lump sum payment of $10 million.
The district director may review this lump sum
payment, under the provisions of §1.482–4(f)(5),
to ensure that the amount is commensurate with
the income attributable to the intangibles.
Example 4. (i) Four members A, B, C, and D
of a controlled group form a cost sharing
arrangement to develop the next generation
technology for their business. Based on a reliable
projection of their future benefits, the partici-
pants agree to bear shares of the costs incurred
during the term of the agreement in the fol-
lowing percentages: A 40%; B 15%; C 25%; and
D 20%. The arm’s length charges, under the
rules of §§1.482–1 and 1.482–4 through 1.482–6,
for the use of the existing intangible property
they respectively make available to the cost
sharing arrangement are in the following
amounts for the taxable year: A 80X; B 40X; C
30X; and D 30X. The provisional (before offsets)
and final buy-in payments/receipts among A, B,
C, and D are shown in the table as follows:
(All amounts stated in X’s)
ABCD
PAYMENTS,40. ,21. ,37.5. ,30.
RECEIPTS483422.524
FINAL813,15.,6.
(ii)The first row/first column shows A’s
provisional buy-in payment equal to the product
of 100X (sum of 40X, 30X, and 30X) and A’s
share of anticipated benefits of 40%. The second
row/first column shows A’s provisional buy-in
receipts equal to the sum of the products of 80X
and B’s, C’s, and D’s anticipated benefits shares
(15%, 25%, and 20%, respectively). The other
entries in the first two rows of the table are
similarly computed. The last row shows the final
buy-in receipts/payments after offsets. Thus, for
the taxable year, A and B are treated as receiving
the 8X and 13X, respectively, pro rata out of
payments by C and D of 15X and 6X,
respectively.
Example 5. A and B, two members of a
controlled group form a cost sharing arrangement

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with an unrelated third party C to develop a new
technology useable in their respective businesses.
Based on a reliable projection of their future
benefits, A and B agree to bear shares of 60%
and 40%, respectively, of the costs incurred
during the term of the agreement. A also makes
available its existing technology for purposes of
the research to be undertaken. The arm’s length
charge, under the rules of §§1.482–1 and 1.482–
4 through 1.482–6, for the use of the existing
technology is 100X for the taxable year. Under
its agreement with A and B, C must make a
specified cost sharing payment as well as a
payment of 50X for the taxable year on account
of the pre-existing intangible property made
available to the cost sharing arrangement. B’s
provisional buy-in payment (before offsets) to A
for the taxable year is 40X (the product of 100X
and B’s anticipated benefits share of 40%). C’s
payment of 50X is shared provisionally between
A and B in accordance with their shares of
reasonably anticipated benefits, 30X (50X times
60%) to A and 20X (50X times 40%) to B. B’s
final buy-in payment (after offsets) is 20X (40X
less 20X). A is treated as receiving the 70X total
provisional payments (40X plus 30X) pro rata
out of the final payments by B and C of 20X and
50X, respectively.
(h)Character of payments made
pursuant to a qualified cost sharing
arrangement—(1) In general. Payments
made pursuant to a qualified cost
sharing arrangement (other than pay-
ments described in paragraph (g) of
this section) generally will be consid-
ered costs of developing intangibles of
the payor and reimbursements of the
same kind of costs of developing
intangibles of the payee. For purposes
of this paragraph (h), a controlled
participant’s payment required under a
qualified cost sharing arrangement is
deemed to be reduced to the extent of
any payments owed to it under the
arrangement from other controlled or
uncontrolled participants. Each pay-
ment received by a payee will be
treated as coming pro rata out of
payments made by all payors. Such
payments will be applied pro rata
against deductions for the taxable year
that the payee is allowed in connection
with the qualified cost sharing arrange-
ment. Payments received in excess of
such deductions will be treated as in
consideration for use of the tangible
property made available to the qualified
cost sharing arrangement by the payee.
For purposes of the research credit
determined under section 41, cost shar-
ing payments among controlled partici-
pants will be treated as provided for
intra-group transactions in §1.41-8(e).
Any payment made or received by a
taxpayer pursuant to an arrangement
that the district director determines not
to be a qualified cost sharing arrange-
ment, or a payment made or received
pursuant to paragraph (g) of this
section, will be subject to the provi-
sions of §§1.482–1 and 1.482–4
through 1.482–6. Any payment that in
substance constitutes a cost sharing
payment will be treated as such for
purposes of this section, regardless of
its characterization under foreign law.
(2)Examples. The following exam-
ples illustrate this paragraph (h):
Example 1. U.S. Parent (USP) and its wholly
owned Foreign Subsidiary (FS) form a cost
sharing arrangement to develop a miniature
widget, the Small R. Based on a reliable
projection of their future benefits, USP agrees to
bear 40% and FS to bear 60% of the costs
incurred during the term of the agreement. The
principal costs in the intangible development area
are operating expenses incurred by FS in
Country Z of 100X annually, and operating
expenses incurred by USP in the United States
also of 100X annually. Of the total costs of
200X, USP’s share is 80X and FS’s share is
120X, so that FS must make a payment to USP
of 20X. This payment will be treated as a
reimbursement of 20X of USP’s operating
expenses in the United States. Accordingly,
USP’s Form 1120 will reflect an 80X deduction
on account of activities performed in the United
States for purposes of allocation and apportion-
ment of the deduction to source. The Form 5471
for FS will reflect a 100X deduction on account
of activities performed in Country Z, and a 20X
deduction on account of activities performed in
the United States.
Example 2. The facts are the same as in
Example 1, except that the 100X of costs borne
by USP consist of 5X of operating expenses
incurred by USP in the United States and 95X of
fair market value rental cost for a facility in the
United States. The depreciation deduction at-
tributable to the U.S. facility is 7X. The 20X net
payment by FS to USP will first be applied in
reduction pro rata of the 5X deduction for
operating expenses and the 7X depreciation
deduction attributable to the U.S. facility. The
8X remainder will be treated as rent for the U.S.
facility.
(i)Accounting requirements. The ac-
counting requirements of this paragraph
are that the controlled participants in a
qualified cost sharing arrangement must
use a consistent method of accounting
to measure costs and benefits, and must
translate foreign currencies on a consis-
tent basis.
(j)Administrative requirements—(1)
In general. The administrative require-
ments of this paragraph consist of the
documentation requirements of para-
graph (j)(2) of this section and the
reporting requirements of paragraph
(j)(3) of this section.
(2)Documentation. A controlled
participant must maintain sufficient
documentation to establish that the
requirements of paragraphs (b)(4) and
(c)(1) of this section have been met, as
well as the additional documentation
specified in this paragraph (j)(2), and
must provide any such documentation
to the Internal Revenue Service within
30 days of a request (unless an
extension is granted by the district
director). Documents necessary to
establish the following must also be
maintained—
(i)The total amount of costs in-
curred pursuant to the arrangement;
(ii)The costs borne by each con-
trolled participant;
(iii)A description of the method
used to determine each controlled
participant’s share of the intangible
development costs, including the pro-
jections used to estimate benefits, and
an explanation of why that method was
selected;
(iv)The accounting method used to
determine the costs and benefits of the
intangible development (including the
method used to translate foreign cur-
rencies), and, to the extent that the
method materially differs from U.S.
generally accepted accounting princi-
ples, an explanation of such material
differences; and
(v)Prior research, if any, undertaken
in the intangible development area, any
tangible or intangible property made
available for use in the arrangement, by
each controlled participant, and any
information used to establish the value
of pre-existing and covered intangibles.
(3)Reporting requirements. A con-
trolled participant must attach to its
U.S. income tax return a statement
indicating that it is a participant in a
qualified cost sharing arrangement, and
listing the other controlled participants
in the arrangement. A controlled par-
ticipant that is not required to file a
U.S. income tax return must ensure that
such a statement is attached to Sched-
ule M of any Form 5471 or to any
Form 5472 filed with respect to that
participant.
(k)Effective date. This section is
effective for taxable years beginning on
or after January 1, 1996.
(l)Transition rule. A cost sharing
arrangement will be considered a
qualified cost sharing arrangement,
within the meaning of this section, if,
prior to January 1, 1996, the arrange-
ment was a bona fide cost sharing
arrangement under the provisions of
§1.482–7T (as contained in the 26 CFR
part 1 edition revised as of April 1,
1995), but only if the arrangement is
amended, if necessary, to conform with

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the provisions of this section by
December 31, 1996.
§1.482–7T [Removed]
Par. 4. Section 1.482–7T is removed.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 5. The authority for part 301
continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 6. Section 301.7701–3 is
amended by adding paragraph (e) to
read as follows:
§301.7701–3 Partnerships.
******
(e)Qualified cost sharing arrange-
ments. A qualified cost sharing ar-
rangement that is described in §1.482–7
of this chapter and any arrangement
that is treated by the Service as a
qualified cost sharing arrangement un-
der §1.482–7 of this chapter is not
classified as a partnership for purposes
of the Internal Revenue Code. See
§1.482–7 of this chapter for the proper
treatment of qualified cost sharing
arrangements.
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 7. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 8. In §602.101, paragraph (c) is
amended by adding an entry to the
table in numerical order to read as
follows:
‘‘1.482–7............. 1545–1364’’.
Margaret Milner Richardson,
Commissioner of
Internal Revenue.
Approved November 30, 1995.
Leslie Samuels,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
December 19, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 20, 1995, 60 F.R. 65553)
Section 671.—Trust Income,
Deductions, and Credit Attributable to
Grantors and Others as Substantial
Owners
26 CFR 1.671–4: Method of reporting.
T.D. 8633
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 25, 301, and 602
Grantor Trust Reporting Requirements
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations relating to the method
of reporting for trusts that are treated
as owned by grantors or other persons
under the provisions of subpart E
(section 671 and following), part I,
subchapter J, chapter 1 of the Internal
Revenue Code. These regulations are
intended to reduce the current filing
burden on trustees, to provide neces-
sary information to grantors or other
persons treated as the owners of trusts,
to reduce any cases of duplicate filing,
and to provide more meaningful infor-
mation to the IRS. These regulations
affect grantors and trustees of trusts
that are treated as owned by grantors or
other persons, as well as persons who
are required to file information returns
with respect to payments to these
trusts.
DATES: These regulations are effective
January 1, 1996.
For dates of applicability of these
regulations, see §1.671–4(h).
FOR FURTHER INFORMATION
CONTACT: Steven Schneider, (202)
622-3060 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in these final regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork Reduc-
tion Act (44 U.S.C. 3507) under
control number 1545–1442. This infor-
mation is required by the IRS to insure
the proper reporting of income and
proceeds paid to a trust any portion of
which is treated as owned by the
grantor or another person.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
The estimated annual burden per
respondent is 30 minutes.
Comments concerning the accuracy
of this burden estimate and suggestions
for reducing this burden should be sent
to the Internal Revenue Service, Attn:
IRS Reports Clearance Officer, T:FP,
Washington, DC 20224, and to the
Office of Management and Budget,
Attn: Desk Officer for the Department
of the Treasury, Office of Information
and Regulatory Affairs, Washington,
DC 20503.
Books or records relating to this
collection of information must be re-
tained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
On July 22, 1994, the IRS published
in the Federal Register a notice of
proposed rulemaking and notice of
public hearing (59 FR 37450 [PS–79–
93, 1994–2 C.B. 916]) proposing
amendments to the Income Tax Regula-
tions (26 CFR part 1) under section
671 of the Internal Revenue Code
(Code) and to the Procedure and
Administration Regulations (26 CFR
part 301) under sections 6012 and 6109
of the Code.
Written comments responding to the
notice were received. A public hearing
was held on September 21, 1994,
pursuant to the notice published in the
Federal Register on July 22, 1994.
After consideration of all written and
oral comments regarding the proposed
amendments, those amendments are
adopted as revised by this Treasury
decision.
Explanation of provisions and
significant changes in the final
regulations
Subject to certain new limitations
under §1.671–4(b)(6) and (7), discussed

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below, §1.671–4(b) of the final regula-
tions retains the optional alternative
methods of reporting contained in the
proposed regulations published on July
22, 1994.
Several comments were submitted re-
questing confirmation that the alterna-
tive methods of reporting described in
the proposed regulations are optional
and not mandatory. Section 1.671–4(b)
of the final regulations clarifies that the
trustee of a trust all of which is treated
as owned by one or more grantors or
other persons may, but is not required
to, report pursuant to one of the
alternative methods.
Certain commentators were unsure of
which persons are considered payors
for purposes of the alternative filing
methods. The final regulations define
the term payor as including any person
who is required by any provision of the
Code and the regulations thereunder to
make any type of information return
with respect to the trust for the taxable
year.
With respect to the alternative
methods of reporting, several commen-
tators were unsure of the items and the
amounts of income that must be re-
ported on any Forms 1099 required to
be filed by the trustee. Section 1.671–
4(b)(5) of the final regulations clarifies
that the amounts that must be included
on any Forms 1099 required to be filed
by the trustee do not include any
amounts that are reportable by the
payor on an information return other
than Form 1099.
For example, in the case of a trustee
who furnishes the name, TIN, and
address of the trust to all payors
pursuant to §1.671–4(b)(2)(i)(B) of the
final regulations, the trustee does not
include items of income attributable to
an interest in a partnership on any
Forms 1099 filed by the trustee be-
cause those items are reportable by the
partnership on Schedule K–1 of Form
1065 (reporting distributive shares to
members of a partnership). While the
statement furnished to the grantor or
other person treated as the owner of the
trust by the trustee will show all items
of income, deduction, and credit at-
tributable to the partnership interest,
those items will not be reported to the
IRS by the trustee on any type of form.
Several commentators were unsure of
the dates by which a trustee must file
any required Forms 1099 and must
furnish any required statements to
grantors or other persons treated as
owners of the trust. Section 1.671–4(c)
of the final regulations provides that
the due date for any Forms 1099 re-
quired to be filed with the IRS by a
trustee is the due date otherwise in
effect for filing Forms 1099. Currently,
the due date is February 28 of the
following year.
Section 1.671–4(d) of the final reg-
ulations provides that the due date for
the statement required to be furnished
by a trustee to the grantor or other
person treated as an owner of the trust
is the date specified by section
6034A(a). Currently, the due date is
April 15 of the following year.
Comments were received requesting
clarification of the trustee’s obligation,
under the first of the alternative report-
ing methods, to furnish the name and
TIN of the grantor to all payors. The
final regulations provide that: (1) a
trustee may not report under the first
alternative reporting method unless the
grantor or other person treated as the
owner of the trust provides to the
trustee a complete Form W–9 or other
acceptable substitute form; (2) a trustee
reporting under the first alternative
reporting method acts as the agent of
the grantor or other person treated as
the owner of the trust for purposes of
furnishing backup withholding informa-
tion to a payor; and (3) the payor may
rely on the name and TIN provided to
the payor by the trustee. If the Form
W–9 indicates that the grantor or other
person is subject to backup withhold-
ing, then the trustee must notify all
payors of reportable interest and divi-
dend payments of the requirement to
backup withhold.
Comments were received requesting
clarification of the annuity and unitrust
payment dates under §25.2702–3 of the
Gift Tax Regulations for trusts electing
one of the alternative methods of re-
porting. The final regulations contain
conforming amendments to §25.2702–
3(b)(1)(i) and §25.2702–3(c)(1)(i).
One commentator noted the need for
more guidance concerning the reporting
requirements for widely held fixed
investment trusts. Because that guid-
ance is outside the scope of this
regulation, the final regulations do not
provide special rules for these trusts.
However IRS and Treasury anticipate
providing guidance for these trusts in a
separate project and would welcome
comments from interested taxpayers
and practitioners regarding such
guidance.
Several of the comments received
with respect to the proposed regulations
emphasized the necessity of making the
trustee’s choice to report under one of
the alternative methods revocable. The
final regulations provide that a trustee
who has reported pursuant to one of the
alternative methods may report pur-
suant to the general rule requiring the
trustee to file a Form 1041 for any
subsequent taxable years of the trust,
provided that certain conditions are
met.
The final regulations provide that the
trustee of a trust all of which is treated
as owned by one grantor or one other
person that is an exempt recipient for
information reporting purposes may not
report under an alternative method.
However, if the trust is treated as
owned by two or more grantors or
other persons, the trustee may report
pursuant to the alternative method for
multiple grantors if (1) at least one
grantor or one other person who is
treated as an owner of the trust is a
person who is not an exempt recipient
for information reporting purposes and
(2) the trustee reports without regard to
whether any of the grantors or other
persons treated as owners of the trust
are exempt recipients for information
reporting purposes.
The final regulations also provide
that the trustee of a trust all of which is
treated as owned by one grantor or
other person whose taxable year is a
fiscal year may not report under an
alternative method. However, the
trustee of a trust that is treated as
owned by two or more grantors or
other persons may report pursuant to
the alternative method for multiple
grantors even though one or more of
the grantors or other persons treated as
an owner of the trust has a taxable year
that is the fiscal year.
In addition, the final regulations
provide that a trustee of a trust that is a
qualified subchapter S trust as defined
in section 1361(d)(3) may not report
under an alternative method.
The final regulations also provide
that the trustee of a trust may not
report under an alternative method if
any person who is treated as an owner
of the trust is not a United States
person.
Effective date and transition rule
The final regulations are effective for
taxable years beginning on or after

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January 1, 1996, subject to a require-
ment that certain trustees file a final
Form 1041 before adopting one of the
alternative methods of reporting. The
final regulations retain the transition
rule contained in the proposed regula-
tions providing that, for taxable years
beginning prior to January 1, 1996, the
IRS will not challenge the manner of
reporting by trustees of certain trusts.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It has also been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Code, the notice of
proposed rulemaking preceding these
regulations was submitted to the Small
Business Administration for comment
on its impact on small business.
Drafting Information
The principal author of these regula-
tions is Robert Rio, formerly of the
Office of Assistant Chief Counsel
(Passthroughs and Special Industries),
IRS. However, other personnel from
the IRS and Treasury Department
participated in their development.
******
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 25,
301, and 602 are 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 1.671–4 is revised to
read as follows:
§1.671-4 Method of reporting.
(a)Portion of trust treated as owned
by the grantor or another person.
Except as otherwise provided in para-
graph (b) of this section, items of
income, deduction, and credit attributa-
ble to any portion of a trust which,
under the provisions of subpart E
(section 671 and following), part I,
subchapter J, chapter 1 of the Internal
Revenue Code, is treated as owned by
the grantor or another person are not
reported by the trust on Form 1041, but
are shown on a separate statement to be
attached to that form.
(b)A trust all of which is treated as
owned by one or more grantors or
other persons—(1) In general. In the
case of a trust all of which is treated as
owned by one or more grantors or
other persons, and which is not de-
scribed in paragraph (b)(6) or (7) of
this section, the trustee may, but is not
required to, report by one of the
methods described in this paragraph (b)
rather than by the method described in
paragraph (a) of this section. A trustee
may not report, however, pursuant to
paragraph (b)(2)(i)(A) of this section
unless the grantor or other person
treated as the owner of the trust
provides to the trustee a complete Form
W–9 or acceptable substitute Form W–
9 signed under penalties of perjury. See
section 3406 and the regulations there-
under for the information to include on,
and the manner of executing, the Form
W–9, depending upon the type of re-
portable payments made.
(2)A trust all of which is treated as
owned by one grantor or by one other
person—(i) In general. In the case of a
trust all of which is treated as owned
by one grantor or one other person, the
trustee reporting under this paragraph
(b) must either—
(A)Furnish the name and taxpayer
identification number (TIN) of the
grantor or other person treated as the
owner of the trust, and the address of
the trust, to all payors during the
taxable year, and comply with the
additional requirements described in
paragraph (b)(2)(ii) of this section; or
(B)Furnish the name, TIN, and ad-
dress of the trust to all payors during
the taxable year, and comply with the
additional requirements described in
paragraph (b)(2)(iii) of this section.
(ii)Additional obligations of the
trustee when name and TIN of the
grantor or other person treated as the
owner of the trust and the address of
the trust are furnished to payors. (A)
Unless the grantor or other person
treated as the owner of the trust is the
trustee or a co-trustee of the trust, the
trustee must furnish the grantor or
other person treated as the owner of the
trust with a statement that—
(1) Shows all items of income,
deduction, and credit of the trust for
the taxable year;
(2) Identifies the payor of each item
of income;
(3) Provides the grantor or other
person treated as the owner of the trust
with the information necessary to take
the items into account in computing the
grantor’s or other person’s taxable
income; and
(4) Informs the grantor or other
person treated as the owner of the trust
that the items of income, deduction and
credit and other information shown on
the statement must be included in
computing the taxable income and
credits of the grantor or other person
on the income tax return of the grantor
or other person.
(B)The trustee is not required to file
any type of return with the Internal
Revenue Service.
(iii)Additional obligations of the
trustee when name, TIN, and address of
the trust are furnished to payors—(A)
Obligation to file Forms 1099. The
trustee must file with the Internal
Revenue Service the appropriate Forms
1099, reporting the income or gross
proceeds paid to the trust during the
taxable year, and showing the trust as
the payor and the grantor or other
person treated as the owner of the trust
as the payee. The trustee has the same
obligations for filing the appropriate
Forms 1099 as would a payor making
reportable payments, except that the
trustee must report each type of income
in the aggregate, and each item of
gross proceeds separately. See para-
graph (b)(5) of this section regarding
the amounts required to be included on
any Forms 1099 filed by the trustee.
(B)Obligation to furnish statement.
(1) Unless the grantor or other person
treated as the owner of the trust is the
trustee or a co-trustee of the trust, the
trustee must also furnish to the grantor
or other person treated as the owner of
the trust a statement that—
(i) Shows all items of income, de-
duction, and credit of the trust for the
taxable year;
(ii) Provides the grantor or other
person treated as the owner of the trust
with the information necessary to take
the items into account in computing the
grantor’s or other person’s taxable
income; and

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(iii) Informs the grantor or other
person treated as the owner of the trust
that the items of income, deduction and
credit and other information shown on
the statement must be included in com-
puting the taxable income and credits
of the grantor or other person on the
income tax return of the grantor or
other person.
(2) By furnishing the statement, the
trustee satisfies the obligation to fur-
nish statements to recipients with re-
spect to the Forms 1099 filed by the
trustee.
(iv)Examples. The following exam-
ples illustrate the provisions of this
paragraph (b)(2):
Example 1. G, a United States citizen, creates
an irrevocable trust which provides that the
ordinary income is to be payable to him for life
and that on his death the corpus shall be
distributed to B, an unrelated person. Except for
the right to receive income, G retains no right or
power which would cause him to be treated as an
owner under sections 671 through 679. Under the
applicable local law, capital gains must be added
to corpus. Since G has a right to receive income,
he is treated as an owner of a portion of the trust
under section 677. The tax consequences of any
items of capital gain of the trust are governed by
the provisions of subparts A, B, C, and D
(section 641 and following), part I, subchapter J,
chapter 1 of the Internal Revenue Code. Because
not all of the trust is treated as owned by the
grantor or another person, the trustee may not
report by the methods described in paragraph
(b)(2) of this section.
Example 2. (i)(A) On January 2, 1996, G, a
United States citizen, creates a trust all of which
is treated as owned by G. The trustee of the trust
is T. During the 1996 taxable year the trust has
the following items of income and gross
proceeds:
Interest.......................... $2,500
Dividends.......................... 3,205
Proceeds from sale of B stock....... 2,000
(B)The trust has no items of deduction or
credit.
(ii)(A) The payors of the interest paid to the
trust are X ($2,000), Y ($300), and Z ($200).
The payors of the dividends paid to the trust are
A ($3,200), and D ($5). The payor of the gross
proceeds paid to the trust is D, a brokerage firm,
which held the B stock as the nominee for the
trust. The B stock was purchased by T for
$1,500 on January 3, 1996, and sold by T on
November 29, 1996. T chooses to report pursuant
to paragraph (b)(2)(i)(B) of this section, and
therefore furnishes the name, TIN, and address
of the trust to X, Y, Z, A, and D. X, Y, and Z
each furnish T with a Form 1099–INT showing
the trust as the payee. A furnishes T with a Form
1099–DIV showing the trust as the payee. D
does not furnish T with a Form 1099–DIV
because D paid a dividend of less than $10 to T.
D furnishes T with a Form 1099–B showing the
trust as the payee.
(B)On or before February 28, 1997, T files a
Form 1099–INT with the Internal Revenue
Service on which T reports interest attributable
to G, as the owner of the trust, of $2,500; a
Form 1099–DIV on which T reports dividends
attributable to G, as the owner of the trust, of
$3,205; and a Form 1099-B on which T reports
gross proceeds from the sale of B stock
attributable to G, as the owner of the trust, of
$2,000. On or before April 15, 1997, T furnishes
a statement to G which lists the following items
of income and information necessary for G to
take the items into account in computing G’s
taxable income:
Interest........................... $2,500
Dividends.......................... 3,205
Gain from sale of B stock............ 500
Information regarding sale of B stock:
Proceeds........................ $2,000
Basis............................ 1,500
Date acquired.................. 1/03/96
Date sold..................... 11/29/96
(C)T informs G that any items of income,
deduction and credit and other information
shown on the statement must be included in
computing the taxable income and credits of the
grantor or other person on the income tax return
of the grantor or other person.
(D)T has complied with T’s obligations under
this section.
(iii)(A) Same facts as paragraphs (i) and (ii) of
this Example 2, except that G contributed the B
stock to the trust on January 2, 1996. On or
before April 15, 1997, T furnishes a statement to
G which lists the following items of income and
information necessary for G to take the items
into account in computing G’s taxable income:
Interest........................... $2,500
Dividends.......................... 3,205
Information regarding sale of B stock:
Proceeds........................ $2,000
Date sold..................... 11/29/96
(B)T informs G that any items of income,
deduction and credit and other information
shown on the statement must be included in
computing the taxable income and credits of the
grantor or other person on the income tax return
of the grantor or other person.
(C)T has complied with T’s obligations under
this section.
Example 3. On January 2, 1996, G, a United
States citizen, creates a trust all of which is
treated as owned by G. The trustee of the trust is
T. The only asset of the trust is an interest in C,
a common trust fund under section 584(a). T
chooses to report pursuant to paragraph
(b)(2)(i)(B) of this section and therefore fur-
nishes the name, TIN, and address of the trust to
C. C files a Form 1065 and a Schedule K–1
(Partner’s Share of Income, Credits, Deductions,
etc.) showing the name, TIN, and address of the
trust with the Internal Revenue Service and
furnishes a copy to T. Because the trust did not
receive any amounts described in paragraph
(b)(5) of this section, T does not file any type of
return with the Internal Revenue Service. On or
before April 15, 1997, T furnishes G with a
statement that shows all items of income,
deduction, and credit of the trust for the 1996
taxable year. In addition, T informs G that any
items of income, deduction and credit and other
information shown on the statement must be
included in computing the taxable income and
credits of the grantor or other person on the
income tax return of the grantor or other person.
T has complied with T’s obligations under this
section.
(3)A trust all of which is treated as
owned by two or more grantors or
other persons—(i) In general. In the
case of a trust all of which is treated as
owned by two or more grantors or
other persons, the trustee must furnish
the name, TIN, and address of the trust
to all payors for the taxable year, and
comply with the additional require-
ments described in paragraph (b)(3)(ii)
of this section.
( i i )A d d i t i o n a l o b l i g a t i o n s o f
trustee—(A) Obligation to file Forms
1099. The trustee must file with the
Internal Revenue Service the appropri-
ate Forms 1099, reporting the items of
income paid to the trust by all payors
during the taxable year attributable to
the portion of the trust treated as
owned by each grantor or other person,
and showing the trust as the payor and
each grantor or other person treated as
an owner of the trust as the payee. The
trustee has the same obligations for
filing the appropriate Forms 1099 as
would a payor making reportable pay-
ments, except that the trustee must
report each type of income in the
aggregate, and each item of gross
proceeds separately. See paragraph
(b)(5) of this section regarding the
amounts required to be included on any
Forms 1099 filed by the trustee.
(B)Obligation to furnish statement.
(1) The trustee must also furnish to
each grantor or other person treated as
an owner of the trust a statement that—
(i) Shows all items of income, de-
duction, and credit of the trust for the
taxable year attributable to the portion
of the trust treated as owned by the
grantor or other person;
(ii) Provides the grantor or other
person treated as an owner of the trust
with the information necessary to take
the items into account in computing the
grantor’s or other person’s taxable
income; and
(iii) Informs the grantor or other
person treated as the owner of the trust
that the items of income, deduction and
credit and other information shown on
the statement must be included in
computing the taxable income and
credits of the grantor or other person
on the income tax return of the grantor
or other person.
(2) Except for the requirements pur-
suant to section 3406 and the regula-

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tions thereunder, by furnishing the
statement, the trustee satisfies the obli-
gation to furnish statements to recip-
ients with respect to the Forms 1099
filed by the trustee.
(4)Persons treated as payors—(i) In
general. For purposes of this section,
the term payor means any person who
is required by any provision of the
Internal Revenue Code and the regula-
tions thereunder to make any type of
information return (including Form
1099 or Schedule K–1) with respect to
the trust for the taxable year, including
persons who make payments to the
trust or who collect (or otherwise act as
middlemen with respect to) payments
on behalf of the trust.
(ii)Application to brokers and cus-
tomers. For purposes of this section, a
broker, within the meaning of section
6045, is considered a payor. A cus-
tomer, within the meaning of section
6045, is considered a payee.
(5)Amounts required to be included
on Forms 1099 filed by the trustee—(i)
In general. The amounts that must be
included on any Forms 1099 required
to be filed by the trustee pursuant to
this section do not include any amounts
that are reportable by the payor on an
information return other than Form
1099. For example, in the case of a
trust which owns an interest in a
partnership, the trust’s distributive
share of the income and gain of the
partnership is not includible on any
Forms 1099 filed by the trustee pur-
suant to this section because the
distributive share is reportable by the
partnership on Schedule K-1.
(ii)Example. The following example
illustrates the provisions of this para-
graph (b)(5):
Example. (i)(A) On January 2, 1996, G, a
United States citizen, creates a trust all of which
is treated as owned by G. The trustee of the trust
is T. The assets of the trust during the 1996
taxable year are shares of stock in X, an S
corporation, a limited partnership interest in P,
shares of stock in M, and shares of stock in N. T
chooses to report pursuant to paragraph
(b)(2)(i)(B) of this section and therefore fur-
nishes the name, TIN, and address of the trust to
X, P, M, and N. M furnishes T with a Form
1099–DIV showing the trust as the payee. N
does not furnish T with a Form 1099–DIV
because N paid a dividend of less than $10 to T.
X and P furnish T with Schedule K–1 (Share-
holder’s Share of Income, Credits, Deductions,
etc.) and Schedule K–1 (Partner’s Share of
Income, Credits, Deductions, etc.), respectively,
showing the trust’s name, TIN, and address.
(B)For the 1996 taxable year the trust has the
following items of income and deduction:
Dividends paid by M................. $12
Dividends paid by N................... 6
Administrative expense................ $20
Items reported by X on Schedule K–1
attributable to trust’s shares of stock in X:
Interest........................... $20
Dividends.......................... 35
Items reported by P on Schedule K-1 attributa-
ble to trust’s limited partnership interest in P:
Ordinary income.................. $300
(ii)(A) On or before February 28, 1997, T files
with the Internal Revenue Service a Form 1099-
DIV on which T reports dividends attributable to
G as the owner of the trust in the amount of $18.
T does not file any other returns.
(B)T has complied with T’s obligation under
paragraph (b)(2)(iii)(A) of this section to file the
appropriate Forms 1099.
(6)Trusts that cannot report under
this paragraph (b). The following
trusts cannot use the methods of
reporting described in this paragraph
(b)—
(i)A common trust fund as defined
in section 584(a);
(ii)A trust that has its situs or any
of its assets located outside the United
States;
(iii)A trust that is a qualified
subchapter S trust as defined in section
1361(d)(3);
(iv)A trust all of which is treated as
owned by one grantor or one other
person whose taxable year is a fiscal
year;
(v)A trust all of which is treated as
owned by one grantor or one other
person who is not a United States
person; or
(vi)A trust all of which is treated as
owned by two or more grantors or
other persons, one of whom is not a
United States person.
(7)Grantors or other persons who
are treated as owners of the trust and
are exempt recipients for information
reporting purposes—(i) Trust treated
as owned by one grantor or one other
person. The trustee of a trust all of
which is treated as owned by one
grantor or one other person may not
report pursuant to this paragraph (b) if
the grantor or other person is an
exempt recipient for information report-
ing purposes.
(ii)Trust treated as owned by two or
more grantors or other persons. The
trustee of a trust, all of which is treated
as owned by two or more grantors or
other persons, may not report pursuant
to this paragraph (b) if one or more
grantors or other persons treated as
owners are exempt recipients for infor-
mation reporting purposes unless—
(A)At least one grantor or one other
person who is treated as an owner of
the trust is a person who is not an
exempt recipient for information report-
ing purposes; and
(B)The trustee reports without re-
gard to whether any of the grantors or
other persons treated as owners of the
trust are exempt recipients for informa-
tion reporting purposes.
(8)Husband and wife who make a
single return jointly. A trust all of
which is treated as owned by a husband
and wife who make a single return
jointly of income taxes for the taxable
year under section 6013 is considered
to be owned by one grantor for
purposes of this paragraph (b).
(c)Due date for Forms 1099 re-
quired to be filed by trustee. The due
date for any Forms 1099 required to be
filed with the Internal Revenue Service
by a trustee pursuant to this section is
the due date otherwise in effect for
filing Forms 1099.
(d)Due date and other requirements
with respect to statement required to be
furnished by trustee. The due date for
the statement required to be furnished
by a trustee to the grantor or other
person treated as an owner of the trust
pursuant to this section is the date
specified by section 6034A(a). The
trustee must maintain in its records a
copy of the statement furnished to the
grantor or other person treated as an
owner of the trust for a period of three
years from the due date for furnishing
such statement specified in this para-
graph (d).
(e)Backup withholding require-
ments—(1) Trustee reporting under
paragraph (b)(2)(i)(A) of this section.
In order for the trustee to be able to
r e p o r t p u r s u a n t t o p a r a g r a p h
(b)(2)(i)(A) of this section and to
furnish to all payors the name and TIN
of the grantor or other person treated as
the owner of the trust, the grantor or
other person must provide a complete
Form W–9 to the trustee in the manner
provided in paragraph (b)(1) of this
section, and the trustee must give the
name and TIN shown on that Form W–
9 to all payors. In addition, if the Form
W–9 indicates that the grantor or other
person is subject to backup withhold-
ing, the trustee must notify all payors
of reportable interest and dividend
payments of the requirement to backup

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withhold. If the Form W–9 indicates
that the grantor or other person is not
subject to backup withholding, the
trustee does not have to notify the
payors that backup withholding is not
required. The trustee should not give
the Form W–9, or a copy thereof, to a
payor because the Form W–9 contains
the address of the grantor or other
person and paragraph (b)(2)(i)(A) of
this section requires the trustee to
furnish the address of the trust to all
payors and not the address of the
grantor or other person. The trustee
acts as the agent of the grantor or other
person for purposes of furnishing to the
payors the information required by this
paragraph (e)(1). Thus, a payor may
rely on the name and TIN provided to
the payor by the trustee, and, if given,
on the trustee’s statement that the
g r a n t o r i s s u b j e c t t o b a c k u p
withholding.
(2)Other backup withholding re-
quirements. Whether a trustee is treated
as a payor for purposes of backup
withholding is determined pursuant to
section 3406 and the regulations
thereunder.
(f)Penalties for failure to file a
correct Form 1099 or furnish a correct
statement. A trustee who fails to file a
correct Form 1099 or to furnish a
correct statement to a grantor or other
person treated as an owner of the trust
as required by paragraph (b) of this
section is subject to the penalties
provided by sections 6721 and 6722
and the regulations thereunder.
(g)Changing reporting methods—
(1) Changing from reporting by filing
Form 1041 to a method described in
paragraph (b) of this section. If the
trustee has filed a Form 1041 for any
taxable year ending before January 1,
1996 (and has not filed a final Form
1041 pursuant to §1.671–4(b)(3) (as
contained in the 26 CFR part 1 edition
revised as of April 1, 1995)), or files a
Form 1041 for any taxable year there-
after, the trustee must file a final Form
1041 for the taxable year which ends
after January 1, 1995, and which
immediately precedes the first taxable
year for which the trustee reports
pursuant to paragraph (b) of this
section, on the front of which form the
trustee must write: ‘‘Pursuant to
§1.671–4(g), this is the final Form
1041 for this grantor trust.’’.
(2)Changing from reporting by a
method described in paragraph (b) of
this section to the filing of a Form
1041. The trustee of a trust who
reported pursuant to paragraph (b) of
this section for a taxable year may
report pursuant to paragraph (a) of this
section for subsequent taxable years. If
the trustee reported pursuant to para-
graph (b)(2)(i)(A) of this section, and
therefore furnished the name and TIN
of the grantor to all payors, the trustee
must furnish the name, TIN, and ad-
dress of the trust to all payors for such
subsequent taxable years. If the trustee
r e p o r t e d p u r s u a n t t o p a r a g r a p h
(b)(2)(i)(B) or (b)(3)(i) of this section,
and therefore furnished the name and
TIN of the trust to all payors, the
trustee must indicate on each Form
1096 (Annual Summary and Transmit-
tal of U.S. Information Returns) that it
files (or appropriately on magnetic
media) for the final taxable year for
which the trustee so reports that it is
the final return of the trust.
(3)Changing between methods de-
scribed in paragraph (b) of this
section—(i) Changing from furnishing
the TIN of the grantor to furnishing the
TIN of the trust. The trustee of a trust
who reported pursuant to paragraph
(b)(2)(i)(A) of this section for a taxable
year, and therefore furnished the name
and TIN of the grantor to all payors,
may report pursuant to paragraph
(b)(2)(i)(B) of this section, and furnish
the name and TIN of the trust to all
payors, for subsequent taxable years.
(ii)Changing from furnishing the
TIN of the trust to furnishing the TIN
of the grantor. The trustee of a trust
who reported pursuant to paragraph
(b)(2)(i)(B) of this section for a taxable
year, and therefore furnished the name
and TIN of the trust to all payors, may
report pursuant to paragraph (b)(2)-
(i)(A) of this section, and furnish the
name and TIN of the grantor to all
payors, for subsequent taxable years.
The trustee, however, must indicate on
each Form 1096 (Annual Summary and
Transmittal of U.S. Information Re-
turns) that it files (or appropriately on
magnetic media) for the final taxable
year for which the trustee reports
pursuant to paragraph (b)(2)(i)(B) of
this section that it is the final return of
the trust.
(4)Example. The following example
illustrates the provisions of paragraph
(g) of this section:
Example. (i) On January 3, 1994, G, a United
States citizen, creates a trust all of which is
treated as owned by G. The trustee of the trust is
T. On or before April 17, 1995, T files with the
Internal Revenue Service a Form 1041 with an
attached statement for the 1994 taxable year
showing the items of income, deduction, and
credit of the trust. On or before April 15, 1996,
T files with the Internal Revenue Service a Form
1041 with an attached statement for the 1995
taxable year showing the items of income,
deduction, and credit of the trust. On the Form
1041, T states that ‘‘pursuant to §1.671-4(g), this
is the final Form 1041 for this grantor trust.’’ T
may report pursuant to paragraph (b) of this
section for the 1996 taxable year.
( i i ) T r e p o r t s p u r s u a n t t o p a r a g r a p h
(b)(2)(i)(B) of this section, and therefore fur-
nishes the name, TIN, and address of the trust to
all payors, for the 1996 and 1997 taxable years.
T chooses to report pursuant to paragraph (a) of
this section for the 1998 taxable year. On each
Form 1096 (Annual Summary and Transmittal of
U.S. Information Returns) which T files for the
1997 taxable year (or appropriately on magnetic
media), T indicates that it is the trust’s final
return. On or before April 15, 1999, T files with
the Internal Revenue Service a Form 1041 with
an attached statement showing the items of
income, deduction, and credit of the trust. On the
Form 1041, T uses the same TIN which T used
on the Forms 1041 and Forms 1099 it filed for
previous taxable years. T has complied with T’s
obligations under paragraph (g)(2) of this
section.
(h)Effective date and transition
rule—(1) Effective date. The trustee of
a trust any portion of which is treated
as owned by one or more grantors or
other persons must report pursuant to
this section for taxable years beginning
on or after January 1, 1996.
(2)Transition rule. For taxable years
beginning prior to January 1, 1996, the
Internal Revenue Service will not chal-
lenge the manner of reporting of—
(i)A trustee of a trust all of which
is treated as owned by one or more
grantors or other persons who did not
report in accordance with §1.671–4(a)
(as contained in the 26 CFR part 1
edition revised as of April 1, 1995) as
in effect for taxable years beginning
prior to January 1, 1996, but did report
in a manner substantially similar to one
of the reporting methods described in
paragraph (b) of this section; or
(ii)A trustee of two or more trusts
all of which are treated as owned by
one or more grantors or other persons
who filed a single Form 1041 for all of
the trusts, rather than a separate Form
1041 for each trust, provided that the
items of income, deduction, and credit
of each trust were shown on a state-
ment attached to the single Form 1041.
(i)Cross-reference. For rules relat-
ing to employer identification numbers,
and to the obligation of a payor of
income or proceeds to the trust to
furnish to the payee a statement to
recipient, see §301.6109–1(a)(2) of this
chapter.

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Par. 3. Section 1.6012–3 is amended
by revising paragraph (a)(9) to read as
follows:
§1.6012–3 Returns by fiduciaries.
(a)* * *
(9)A trust any portion of which is
treated as owned by the grantor or
another person pursuant to sections
671 through 678. In the case of a trust
any portion of which is treated as
owned by the grantor or another person
under the provisions of subpart E
(section 671 and following) part I,
subchapter J, chapter 1 of the Internal
Revenue Code see §1.671–4.
******
PART 25—GIFT TAX; GIFTS
MADE AFTER DECEMBER 31,
1954
Par. 4. The authority citation for part
25 continues to read in part as follows:
Authority: 26 U.S.C. 7805. * * *
Par. 5. Section 25.2702–3 is
amended by adding a sentence to the
end of paragraphs (b)(1)(i) and
(c)(1)(i), respectively, to read as
follows:
§25.2702–3 Qualified interests.
******
(b)* * *
(1)* * * (i) * * * If the trustee
reports for the taxable year pursuant to
§1.671–4(b) of this chapter, the annuity
payment must be made no later than
the date by which the trustee would
have been required to file the Federal
income tax return of the trust for the
taxable year (without regard to exten-
sions) had the trustee reported pursuant
to §1.671–4(a) of this chapter.
******
(c)* * *
(1)* * * (i) * * * If the trustee
reports for the taxable year pursuant to
§1.671–4(b) of this chapter, the unitrust
payment must be made no later than
the date by which the trustee would
have been required to file the Federal
income tax return of the trust for the
taxable year (without regard to exten-
sions) had the trustee reported pursuant
to §1.671–4(a) of this chapter.
******
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 6. The authority citation for part
301 continues to read in part as
follows:
Authority: 26 U.S.C. 7805. * * *
Par. 7. Section 301.6109–1 is
amended by revising paragraph (a)(2)
to read as follows:
§301.6109–1 Identifying numbers.
(a)* * *
(2)A trust all of which is treated as
owned by the grantor or another per-
son pursuant to sections 671 through
678—(i) Obtaining a taxpayer identi-
fication number. If a trust does not
have a taxpayer identification number
and the trustee furnishes the name and
taxpayer identification number of the
grantor or other person treated as the
owner of the trust and the address of
the trust to all payors pursuant to
§1.671–4(b)(2)(i)(A) of this chapter,
the trustee need not obtain a taxpayer
identification number for the trust until
either the first taxable year of the trust
in which all of the trust is no longer
owned by the grantor or another per-
son, or until the first taxable year of
the trust for which the trustee no longer
reports pursuant to §1.671–4(b)(2)(i)-
(A) of this chapter. If the trustee has
not already obtained a taxpayer identi-
fication number for the trust, the
trustee must obtain a taxpayer identi-
fication number for the trust as
provided in paragraph (d)(2) of this
section in order to report pursuant to
§1.671–4(a), (b)(2)(i)(B), or (b)(3)(i) of
this chapter.
(ii) Obligations of persons who make
payments to certain trusts. Any payor
that is required to file an information
return with respect to payments of in-
come or proceeds to a trust must show
the name and taxpayer identification
number that the trustee has furnished to
the payor on the return. Regardless of
whether the trustee furnishes to the
payor the name and taxpayer identifica-
tion number of the grantor or other
person treated as an owner of the trust,
or the name and taxpayer identification
number of the trust, the payor must
furnish a statement to recipients to the
trustee of the trust, rather than to the
grantor or other person treated as the
owner of the trust. Under these circum-
stances, the payor satisfies the obliga-
tion to show the name and taxpayer
identification number of the payee on
the information return and to furnish a
statement to recipients to the person
whose taxpayer identification number is
required to be shown on the form.
(iii)Persons treated as payors. For
purposes of this paragraph (a)(2), the
term payor means a person described in
§1.671–4(b)(4) of this chapter.
******
PART 602—OMB CONTROL
NUMBERS UNDER THE
PAPERWORK REDUCTION ACT
Par. 8. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 9. In §602.101, paragraph (c) is
amended in the table by revising the
entry for 1.671–4 to read ‘‘1.671–4
. . . .1545–1442’’.
Margaret Milner Richardson,
Commissioner of
Internal Revenue.
Approved December 5, 1995.
Leslie Samuels,
Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on
December 20, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 21, 1995, 60 F.R. 66085)
Section 703.— Partnership
Computations
26 CFR 1.703–1: Partnership Computations
If a partnership makes a charitable contribu-
tion of property, are the partners’ bases in their
partnership interests decreased to reflect the
contribution. See Rev. Rul. 96–11, page 28.
Section 705.—Determination of Basis
in Partner’s Interest
26 CFR 1.705–1: Determination of basis of
partner’s interest.
(Also §§267, 707; 1.267(d)–1, 1.707–1.)
Basis of partner’s interest; sale
between partnerships. Partners’ bases
in their partnership interests are de-
creased to reflect losses on the sale of
partnership property to a related part-
nership that are disallowed under sec-
tion 707(b)(1) of the Internal Revenue
Code. Partners’ bases in their part-

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nership interests are increased to reflect
gain from the sale of partnership
property that is not recognized under
sections 267(d) and 707(b)(1) of the
Code.
Rev. Rul. 96–10
ISSUE
(1)If a loss on the sale of part-
nership property is disallowed under
§ 707(b)(1) of the Internal Revenue
Code, are the partners’ bases in their
partnership interests decreased under
§ 705(a)(2) to reflect the disallowed
loss?
(2)If gain from the sale of part-
nership property is not recognized due
to §§707(b)(1) and 267(d), are the
partners’ bases in their partnership
interests increased under §705(a)(1) to
reflect that gain?
FACTS
A and B contribute cash to form
PRS, a general partnership. Under the
partnership agreement, each item of
income, gain, loss, and deduction of the
partnership is allocated 75 percent to A
and 25 percent to B. A is also a partner
in PRS2, a general partnership. Under
the partnership agreement, each item of
income, gain, loss, and deduction of the
partnership is allocated 60 percent to A
and 40 percent to C. A, B, and C are
unrelated to each other.
In year 1, PRS sells Property to
PRS2 at its fair market value of $80x.
The adjusted basis of Property at the
time of the sale is $100x.
In year 5, PRS2 sells Property to an
unrelated party for its fair market value
of $90x. The adjusted basis of Property
at the time of the sale is $80x.
LAW AND ANALYSIS
Section 1001(a) provides that the
gain from the sale or other disposition
of property shall be the excess of the
amount realized therefrom over the
adjusted basis and the loss shall be the
excess of the adjusted basis over the
amount realized. Section 1001(c) re-
quires that the entire amount of this
gain or loss be recognized, except as
otherwise provided in subtitle A of the
Code.
Section 707(b)(1) provides that no
deduction shall be allowed for losses
from sales or exchanges of property
(other than an interest in the part-
nership) between a partnership and a
person owning, directly or indirectly,
more than 50 percent of the capital
interest or the profits interest in the
partnership or between two partnerships
in which the same persons own,
directly or indirectly, more than 50
percent of the capital interests or
profits interests.
Section 707(b)(1) also provides that,
in the case of a subsequent sale or
exchange by a transferee described in
§ 707(b)(1), §267(d) applies as if the
loss were disallowed under §267(a)(1).
Section 267(d) provides that, if a
taxpayer acquires property by sale or
exchange from a transferor who, on the
transaction, sustained a loss not allow-
able as a deduction by reason of
§ 267(a)(1), then any gain realized by
the taxpayer on a sale or other
disposition of the property shall be
recognized only to the extent that the
gain exceeds so much of the loss as is
properly allocable to the property sold
or otherwise disposed of by the
taxpayer.
Section 705(a)(1) provides that the
adjusted basis of a partner’s interest in
a partnership shall be increased by the
sum of the partner’s distributive share
for the taxable year and prior taxable
years of: (1) taxable income of the
partnership as determined under
§ 703(a), (2) income of the partnership
exempt from income tax, and (3) the
excess of the deductions for depletion
over the basis of the property subject to
depletion.
Section 705(a)(2) provides that the
adjusted basis of a partner’s interest in
a partnership shall be decreased (but
not below zero) by distributions by the
partnership and by the sum of the
partner’s distributive share for the
taxable year and prior taxable years of:
(1) losses of the partnership, and (2)
expenditures of the partnership not
deductible in computing its taxable
income and not properly chargeable to
capital account.
The adjustments to the basis of a
partner’s interest in a partnership under
§ 705 are necessary to prevent inap-
propriate or unintended benefits or
detriments to the partners. Generally,
the basis of a partner’s interest in a
partnership is adjusted to reflect the tax
allocations of the partnership to that
partner. This ensures that the income
and loss of the partnership are taken
into account by its partners only once.
In addition, as provided in §705(a)-
(1)(B) and (a)(2)(B), adjustments must
also be made to reflect certain nontax-
able events in the partnership. For
example, a partner’s share of nontax-
able income (such as exempt income)
is added to the basis of the partner’s
interest because, without a basis adjust-
ment, the partner could recognize gain
with respect to the tax-exempt income,
for example, on the sale or redemption
of the partner’s interest, and the benefit
of the tax-exempt income would be lost
to the partner. Similarly, a partner’s
share of nondeductible expenditures
must be deducted from the partner’s
basis in order to prevent that amount
from giving rise to a loss to the partner
on a sale or a redemption of the
partner’s interest in the partnership. See
H.R. Rep. No. 1337, 83d Cong., 2d
Sess. A225 (1954); S. Rep. No. 1622,
83d Cong., 2d Sess. 384 (1954).
In determining whether a transaction
results in exempt income within the
meaning of §705(a)(1)(B) or a non-
deductible, noncapital expenditure
within the meaning of §705(a)(2)(B),
the proper inquiry is whether the
transaction has a permanent effect on
the partnership’s basis in its assets,
without a corresponding current or
future effect on its taxable income. PRS
realizes a $20x loss on the sale of
Property to PRS2 ($100x adjusted basis
less $80x amount realized). Pursuant to
§ 707(b)(1), this loss is not deductible
in computing taxable income because A
owns more than 50 percent of the pro-
fits interest in both PRS and PRS2.
Consequently, the sale results in a
permanent decrease in the aggregate
basis for the assets of PRS that is not
taken into account by PRS in determin-
ing its taxable income and will not be
taken into account for federal income
tax purposes in any other manner.
Therefore, for purposes of §705(a)-
(2)(B), the loss on the sale of Property,
and the resulting permanent decrease in
partnership basis, is an expenditure of
the partnership not deductible in com-
puting its taxable income and not
properly chargeable to capital account.
Cf. § 1.704–1(b)(2)(iv)(i)(3) (losses
disallowed under §707(b) treated as
§ 705(a)(2)(B) expenditures for pur-
poses of maintaining partners’ capital
accounts); §1.701–2(f), Example 2 (re-
q u i r i n g a d j u s t m e n t s u n d e r
§ 705(a)(2)(B) for reductions in the
basis of stock held by a partnership
following an extraordinary dividend
under §1059).

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Reducing the partners’ bases in their
partnership interests by their respective
shares of the partnership’s $20x loss
preserves the intended detriment of not
allowing losses from sales or ex-
changes between partnerships and re-
lated persons to be deducted. If the
partners’ bases in their partnership
interests were not reduced by the
amount of the partnership’s disallowed
loss, the partners could subsequently
recognize this loss (or a reduced gain),
for example, upon a disposition of their
partnership interests.
Under the PRS agreement, A’s dis-
tributive share of the partnership loss is
$15x and B’s distributive share is $5x.
Accordingly, the basis of A’s interest in
PRS is decreased by $15x and the basis
of B’s interest in PRS is decreased by
$5x.
PRS2 realizes a gain of $10x on the
subsequent sale of Property ($90x
amount realized less $80x adjusted
basis). Pursuant to §§707(b)(1) and
267(d), PRS2 must recognize the gain
only to the extent that it exceeds the
amount of PRS’s disallowed loss.
PRS2’s gain on the sale ($10x) does
not exceed PRS’s disallowed loss
($20x) and, therefore, PRS2 does not
recognize any gain on the sale of
Property. Consequently, the sale of
Property results in a permanent in-
crease in the aggregate basis of the
assets of PRS2 that is not taken into
account by PRS2 in determining its
taxable income and will not be taken
into account for federal income tax
purposes in any other manner. There-
fore, for purposes of §705(a)(1)(B),
the gain realized but not recognized by
PRS2 on the sale of Property, and the
resulting permanent increase in basis, is
income of the partnership exempt from
tax.
Increasing the partner’s bases in their
partnership interests by their respective
shares of the unrecognized gain on the
sale of Property preserves the intended
benefit of §§707(b)(1) and 267(d). If
the partners’ bases in their partnership
interests were not increased by the
amount of the partnership’s unrecog-
nized gain, the partners could subse-
quently recognize this gain (or a
reduced loss), for example, upon a
d i s p o s i t i o n o f t h e i r p a r t n e r s h i p
interests.
Under the PRS2 agreement, A’s
distributive share of the partnership
gain is $6x and C’s distributive share is
$4x. Accordingly, the basis of A’s
interest in PRS2 is increased by $6x
and the basis of C’s interest in PRS2 is
increased by $4x.
HOLDINGS
(1)If a loss on the sale of part-
nership property is disallowed under
§ 707(b)(1), the basis of each partner’s
interest in the partnership is decreased
(but not below zero) under §705(a)(2)
by the partner’s share of that loss.
(2)If gain from the sale of part-
nership property is not recognized
under §§707(b)(1) and 267(d), the
basis of each partner’s interest in the
p a r t n e r s h i p i s i n c r e a s e d u n d e r
§ 705(a)(1) by the partner’s share of
that gain.
DRAFTING INFORMATION
For further information regarding
this revenue ruling contact Deborah
Harrington at (202) 622-3050 (not a
toll-free call).
26 CFR 1.7-5–1: Adjustments to basis of
partner’s interest in partnership.
(Also §§170, 702, 703; 1.170A–1, 1.702–1,
1.703–1.)
Charitable contribution by part-
nership. A charitable contribution of
property by a partnership reduces each
partner’s basis in the partnership by the
amount of the partner’s share of the
partnership’s basis in the property
contributed.
Rev. Rul. 96–11
ISSUE
If a partnership makes a charitable
contribution of property, are the part-
ners’ bases in their partnership interests
decreased to reflect the contribution?
FACTS
A and B each contribute an equal
amount of cash to form PRS, a general
partnership. Under the PRS agreement,
each item of income, gain, loss, and
deduction of the partnership is allo-
cated 50 percent to A and 50 percent to
B. PRS has unencumbered property, X,
with a basis of $60x and a fair market
value of $100x. PRS contributes X in a
transaction that qualifies as a charitable
contribution under § 170(c) of the In-
ternal Revenue Code. The charitable
contribution is not subject to the
limitations of §170(e)(1).
LAW AND ANALYSIS
Section 170(a) allows as a deduction
any charitable contribution (as defined
in §170(c)) payment of which is made
within the taxable year. The deduction
provided by §170(a) is subject to the
limitations of §170(b).
Section 1.170A–1(c)(1) of the In-
come Tax Regulations provides that, if
a charitable contribution is made in
property other than money, the amount
of the contribution is the fair market
value of the property at the time of the
contribution reduced as provided by
§ 170(e)(1) and paragraph (a) of
§ 1.170A–4, or §170(e)(3) and para-
graph (c) of §1.170A–4A.
Section 703(a)(2)(C) provides that
the taxable income of a partnership is
computed in the same manner as in the
case of an individual except that the
deduction for charitable contributions
provided in §170 is not allowed to the
partnership. However, under §702(a)-
(4) each partner takes into account
separately the partner’s distributive
share of the partnership’s charitable
contributions (as defined in §170(c)).
Section 1.170A–1(h)(7) provides that
a partner’s distributive share of chari-
table contributions actually paid by a
partnership during its taxable year may
be allowed as a deduction in the
partner’s separate return for the part-
ner’s taxable year with or within which
the taxable year of the partnership
ends, to the extent that the aggregate of
the partner’s share of the partnership
contributions and the partner’s own
contributions does not exceed the lim-
itations in §170(b).
Section 705(a)(1) provides that the
adjusted basis of a partner’s interest in
a partnership shall be increased by the
sum of the partner’s distributive share
for the taxable year and prior taxable
years of: (1) taxable income of the
partnership as determined under
§ 703(a); (2) income of the partnership
exempt from income tax; and (3) the
excess of the deductions for depletion
over the basis of the property subject to
depletion.
Section 705(a)(2) provides that the
adjusted basis of a partner’s interest in
a partnership shall be decreased (but
not below zero) by distributions by the
partnership and by the sum of the

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partner’s distributive share for the
taxable year and prior taxable years of:
(1) losses of the partnership; and (2)
expenditures of the partnership not
deductible in computing its taxable
income and not properly chargeable to
capital account.
The adjustments to the basis of a
partner’s interest in a partnership under
§ 705 are necessary to prevent inap-
propriate or unintended benefits or
detriments to the partners. Generally,
the basis of a partner’s interest in a
partnership is adjusted to reflect the tax
allocations of the partnership to that
partner. This ensures that the income
and loss of the partnership are taken
into account by its partners only once.
In addition, as provided in §705(a)-
(1)(B) and (a)(2)(B), adjustments must
also be made to reflect certain nontax-
able events in the partnership. For
example, a partner’s share of nontax-
able income (such as exempt income)
is added to the basis of the partner’s
interest because, without a basis adjust-
ment, the partner could recognize gain
with respect to the tax-exempt income,
for example, on a sale or redemption of
the partner’s interest, and the benefit of
the tax-exempt income would be lost to
the partner. Similarly, a partner’s share
of nondeductible expenditures must be
deducted from the partner’s basis in
order to prevent that amount from
giving rise to a loss to the partner on a
sale or a redemption of the partner’s
interest in the partnership. See H.R.
Rep. No. 1337, 83d Cong., 2d Sess.
A225 (1954); S. Rep. No. 1622, 83d
Cong., 2d Sess. 384 (1954).
In determining whether a transaction
results in exempt income within the
meaning of §705(a)(1)(B), or a non-
deductible, noncapital expenditure
within the meaning of §705(a)(2)(B),
the proper inquiry is whether the
transaction has a permanent effect on
the partnership’s basis in its assets,
without a corresponding current or
future effect on its taxable income.
Pursuant to §703(a)(2)(C), the contri-
bution of X by PRS is not taken into
account by PRS in computing its
taxable income. Consequently, the con-
tribution results in a permanent de-
crease in the aggregate basis of the
assets of PRS that is not taken into
account by PRS in determining its
taxable income and will not be taken
into account for federal income tax
purposes in any other manner. There-
fore, for purposes of §705(a)(2)(B),
the contribution of X, and the resulting
permanent decrease in partnership
basis, is an expenditure of the part-
nership not deductible in computing its
taxable income and not properly
chargeable to capital account. Cf.
§ 1.701–2(f), Example 2 (requiring ad-
justments under §705(a)(2)(B) for re-
ductions in the basis of stock held by a
partnership following an extraordinary
dividend under §1059).
Reducing the partners’ bases in their
partnership interests by their respective
shares of the permanent decrease in the
partnership’s basis in its assets pre-
serves the intended benefit of providing
a deduction (in circumstances not under
§ 170(e)) for the fair market value of
appreciated property without recogni-
tion of the appreciation. By contrast,
reducing the partners’ bases in their
partnership interests by the fair market
value of the contributed property would
subsequently cause the partners to
recognize gain (or a reduced loss), for
example, upon a disposition of their
partnership interests, attributable to the
unrecognized appreciation in X at the
time of this contribution.
Under the PRS agreement, part-
nership items are allocated equally
between A and B. Accordingly, the
basis of A’s and B’s interests in PRS is
each decreased by $30x.
HOLDING
If a partnership makes a charitable
contribution of property, the basis of
each partner’s interest in the part-
nership is decreased (but not below
zero) by the partner’s share of the
partnership’s basis in the property
contributed.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Terri A. Belanger of the
Office of Assistant Chief Counsel
(Passthroughs and Special Industries).
For further information regarding this
revenue ruling contact Ms. Belanger at
(202) 622-3080 (not a toll-free call).
Section 707.—Transactions between
Partner and Partnership.
26 CFR 1.707–1: Transactions between
partner and partnership.
If loss on the sale of partnership property is
disallowed under §707(b)(1) of the Internal
Revenue Code, are the partners’ bases in their
partnership interests decreased to reflect the
disallowed loss? See Rev. Rul 96–10, page 00.
Section 3406.—Backup Withholding
26 CFR 31.3406–0: Outline of the backup
withholding regulations.
T.D. 8637
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 31, 35a, 301, and
602
Backup Withholding, Statement
Mailing Requirements, and Due
Diligence
AGENCY: Internal Revenue Service
(IRS), Treasury.
A C T I O N : F i n a l a n d t e m p o r a r y
regulations.
SUMMARY: This document provides
final rules on backup withholding
under sections 3406(a)(1)(A), (C), and
(D) of the Internal Revenue Code of
1986 (Code) when a payee fails to
provide a taxpayer identification num-
ber in the required manner to a person
required to make an information return,
when a payee is subject to notified
payee underreporting, or when a payee
fails to certify, under penalties of
perjury, that the payee is not subject to
backup withholding due to notified
payee underreporting.
This document also provides final
rules on the manner for providing a
statement to a payee under sections
6 0 4 2 ( c ) , 6 0 4 4 ( e ) , 6 0 4 9 ( c ) , a n d
6050N(b) of the Code.
This document also contains tempo-
rary regulations on the effective date of
§§35a.9999–1 through 35a.9999–5,
Temporary Employment Tax Regula-
tions under the Interest and Dividend
Tax Compliance Act of 1983. The text
of these temporary regulations also
serves as the text of the proposed
regulations set forth in the notice of
proposed rulemaking on this subject in
*** [IA–33–95, page 00, this Bulletin].
DATES: These regulations are effective
December 21, 1995. These regulations
are applicable to transactions occurring
after December 31, 1996.
FOR FURTHER INFORMATION
CONTACT: Renay France of the Of-

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fice of Assistant Chief Counsel (In-
come Tax and Accounting) with respect
to domestic transactions, 202-622-4910
(not a toll-free number); and Teresa
Burridge Hughes of the Office of As-
sistant Chief Counsel (International)
with respect to international transac-
tions, 202-622-3880 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information con-
tained in this final regulation has been
reviewed and approved by the Office of
Management and Budget in accordance
with the requirements of the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–0112. Responses
to this collection of information are
mandatory.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
The estimated annual burden per
respondent/recordkeeper is approx-
imately 1 hour, depending on individ-
ual circumstances.
Comments concerning the accuracy
of this burden estimate and suggestions
for reducing this burden should be
directed to the Internal Revenue Serv-
ice, Attn: IRS Reports Clearance Of-
ficer, PC:FP, Washington, D.C. 20224,
and to the Office of Management and
Budget, Attention: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, D.C. 20503.
Books or records relating to this
collection of information must be re-
tained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
On October 4, 1983, the Federal
Register published Temporary Employ-
ment Tax Regulations under the Inter-
est and Dividend Tax Compliance Act
of 1983 (26 CFR part 35a) under
sections 3406 and 6676(b) of the
Internal Revenue Code of 1954 (26
CFR part 35a.9999–1; TD 7916 (48 FR
45362), as amended on November 25,
1983, by TD 7922 (48 FR 53111), on
November 23, 1987, by TD 8163 (52
FR 44861), and on April 11, 1989, by
TD 8248 (54 FR 14341). Additional
temporary regulations were published
in the Federal Register on November
25, 1983 (26 CFR part 35a.9999–2; TD
7922 (48 FR 53106), as amended on
December 20, 1983, by TD 7929 (48
FR 56342), on March 13, 1984, by TD
7922 (49 FR 9417), on November 23,
1987, by TD 8163, and on April 11,
1989, by TD 8248 (54 FR 14341)), on
December 20, 1983 (26 CFR part
35a.9999–3; TD 7929 (48 FR 56332),
as amended on January 3, 1984, by TD
7933 (49 FR 63), on August 22, 1984,
by TD 7966 (49 FR 33236), on
November 23, 1987, by TD 8163 (52
FR 44861), and on April 11, 1989, by
TD 8248 (54 FR 14341)), on February
28, 1984 (26 CFR part 35a.9999–3A;
TD 7946 (49 FR 7227)), on August 22,
1984 (26 CFR part 35a.9999–4T, TD
7966 (49 FR 33237), as amended on
August 29, 1984, by TD 7972 (49 FR
34340); and 26 CFR part 35a.9999–5,
TD 7967 (49 FR 33240), as amended
on September 19, 1984, by TD 7973
(49 FR 36645), on August 20, 1985, by
TD 8046 (50 FR 33526), on April 3,
1986, by TD 8046 (51 FR 11447), on
December 19, 1986, by TD 8110 (51
FR 45453), and on May 19, 1988, by
TD 8202 (53 FR 17927)), on April 23,
1987 (26 CFR part 35a.3406–2; TD
8137 (52 FR 13430)), and on Novem-
ber 23, 1987 (26 CFR part 35a.3406–1;
TD 8163 (52 FR 44861), as amended
on April 11, 1989, by TD 8248 (54 FR
14341). Those regulations were pub-
lished primarily to provide guidance
under the Interest and Dividend Tax
Compliance Act of 1983.
Proposed regulations on backup
withholding, the statement mailing re-
quirements, and due diligence were
published in the Federal Register on
September 27, 1990, 55 FR 39427.
Those regulations were proposed under
regulations file number IA–224–82 and
RIN 1545–AE20, which numbers were
closed in error. These final regulations
are issued under regulations file num-
ber IA–31–95 and RIN 1545–AT76.
A public hearing on the proposed
regulations was held on March 4, 1991.
The public submitted written comments
on the proposed regulations. After
consideration of those comments, the
proposed regulations are adopted as
revised by this Treasury decision.
Explanation of Provisions
I.Overview.
The proposed regulations contain
rules on the requirement to backup
withhold, which section 3406 imposes
in four situations. First, backup with-
holding under section 3406(a)(1)(A)
applies if a payee fails to provide a
taxpayer identification number (TIN) in
the required manner (the A trigger or
certification). Second, backup withhold-
ing under section 3406(a)(1)(B) applies
if the Service or a broker notifies a
payor that a payee provided an incor-
rect TIN (the B trigger). Third, backup
withholding under section 3406(a)(1)-
(C) applies if the Service or a broker
notifies a payor that a payee is subject
to notified payee underreporting, i.e.,
the payee has failed to report and pay
tax on reportable interest and dividends
(the C trigger). Fourth, backup with-
holding under section 3406(a)(1)(D)
applies if a payee fails to certify, when
required, that the payee is not subject
to backup withholding under section
3406(a)(1)(C) (the D trigger).
Because the IRS published final
regulations on the B trigger as a
separate project (TD 8409) in 1992, the
final regulations in this document ad-
dress only the other three triggers,
sections 3406(a)(1)(A), (C), and (D).
The final regulations on these triggers
considerably shorten as well as sim-
plify the proposed regulations. In addi-
tion, the final regulations contain
several modifications to the proposed
regulations relating to grantor trusts, S
corporations, reportable payments, and
certain foreign provisions.
II.Changes regarding grantor trusts,
S corporations, reportable
payments, and certain foreign
provisions.
A .G r a n t o r t r u s t s — p r o p o s e d
§31.3406(a)–2. The proposed regula-
tions provide that a grantor trust with
ten or fewer grantors is not a payor
under section 3406 and, as a result, has
no obligation to withhold under section
3406 on reportable payments flowing
through the trust and includible in the
gross income of its grantors. However,
a grantor trust with eleven or more
grantors is a payor and must withhold
under section 3406 on reportable pay-
ments to its grantors who are subject to
such withholding.

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Recently, the IRS issued proposed
regulations under section 671 on the
methods of reporting by grantor trusts.
These proposed regulations provide two
regimes for reporting, one for a grantor
trust that is owned (or treated as
owned) by one grantor and another for
a grantor trust that is owned by two or
more grantors. To avoid confusion and
thereby promote simplification, the fi-
nal backup withholding regulations are
conformed to these regimes. Accord-
ingly, under these final regulations a
grantor trust with two or more grantors
is considered a payor and must with-
hold on payments to its grantors who
are subject to backup withholding. For
purposes of determining the number of
grantors, a husband and wife filing a
joint return are considered one grantor.
See §31.3406(a)–2(b)(4).
B .S c o r p o r a t i o n s — p r o p o s e d
§31.3406(a)–2(c)(3). Under an excep-
tion in the proposed regulations defin-
ing payors, a partnership making a
payment of a distributive share to a
partner is not considered a payor. The
exception does not include S corpora-
tions. Because the tax treatment of both
entities is similar, the final regulations
provide that an S corporation making a
similar distribution is not a payor under
section 3406. See §31.3406(a)–2(c)(3).
C.Transferred short-term obliga-
tions—proposed §31.3406(b)(2)–2. The
proposed regulations provide that a
subsequent holder of a short-term obli-
gation with original issue discount may
establish the purchase price at which
the subsequent holder purchased the
obligation. That purchase price is then
treated as the original issue price for
purposes of computing the amount of
original issue discount subject to
backup withholding. To reduce the
paperwork of issuers and payors of
these obligations, the final regulations
provide that a payor may disregard the
subsequent holder’s purchase price if
the payor’s computer or recordkeeping
system is not able to accept that price
without substantial manual intervention.
See §31.3406(b)(2)–2(c)(1)(ii).
D.Foreign provisions. The proposed
regulations contained several provisions
on international transactions that are
not included in the final regulations.
For those international provisions relat-
ing to section 3406, the temporary
regulations under §35a.9999 remain in
effect.
III.The C trigger (payee
underreporting).
A.Identifying the account subject to
the C trigger—proposed §31.3406(c)–
1(b)(3)(i) and (iv). The proposed reg-
ulations provide that a payor must
withhold under section 3406(a)(1)(C)
on reportable interest or dividend pay-
ments to all existing accounts of a
payee that the payor can identify
exercising reasonable care. Commenta-
tors suggested several modifications to
or clarifications of the reasonable care
standard. For example, some commen-
tators suggested that the procedures for
locating and identifying an account of a
payee subject to the C trigger should
more closely resemble the procedures
for identifying an account subject to
the B trigger. In response to this
comment, the final regulations modify
the procedures for identifying accounts
subject to the C trigger, and thus
require a payor to identify those
accounts by identifying accounts with
the same TIN as the one provided in
the notice from the IRS to the payor
that advises the payor to commence
withholding on accounts of a payee.
Commentators also informed the IRS
that some computer systems use a
universal account number that retrieves
all accounts of a payee with that payor.
In light of this information, the final
regulations require payors with such
systems to identify all accounts that
can be so retrieved.
Some commentators also addressed
the requirement under the proposed
regulations that a payor search for
accounts of a payee on the computer or
other recordkeeping system for the
region, division, or branch that serves
the geographic area in which the
payee’s mailing address is located.
T h e s e c o m m e n t a t o r s q u e s t i o n e d
whether payors must search every such
computer or record system. The final
regulations clarify that a payor need
not search a computer or other rec-
ordkeeping system if it is highly
unlikely that the system contains an
account of the payee that should be
identified as one subject to the C
trigger. See §31.3406(c)–1(c)(3)(ii).
B.Newly opened accounts—pro-
posed §31.3406(c)–1(b)(3)(ii). Under
the proposed regulations, if a payee
subject to the C trigger has one account
with a payor and subsequently opens
another account, the payor may not rely
on the subsequent Form W–9 on which
the payee certifies that the payee is not
subject to the C trigger, but only if the
payor discovers while processing the
Form W–9 or administering the account
that the Form W–9 is false because the
IRS previously notified the payor to
withhold on the payee under the C
trigger. Commentators argued that this
discovery standard was unclear and
potentially burdensome. As a result, the
final regulations clarify when a payor
may not rely on a Form W–9 provided
by the payee.
Under the final regulations, a payor
has knowledge that a payee opening a
new account with the payor is subject
to withholding under section 3406(a)-
(1)(C), and thus must commence back-
up withholding on reportable interest
and dividend payments to the new
account, only if (1) the employee or
individual agent of the payor receiving
the Form W–9 knows at the time the
payee opens the account that the
payee’s statement under section
3406(a)(1)(D) is not true; (2) at the
time the payor processes the Form W–9
or in administering the account to
which it relates, the payor discovers
that the payee is currently subject to
withholding under section 3406(a)-
(1)(C) on a pre-existing account with
the payor; (3) the payor uses a single
Form W–9 for multiple accounts of the
payee; or (4) the payor uses a universal
identifier to associate all of the payee’s
accounts with the payor and other ac-
counts under that universal identifier
have been identified as subject to with-
holding under section 3406(a)(1)(C).
See §31.3406(c)–1(c)(3)(iii).
C.Including certain dates in the
notice that the payor must send to a
payee—proposed §31.3406(c)–1(c)(2)-
(ii) and (iii). A commentator objected
to the proposed rule requiring a payor
to include the following dates in the
notice informing a payee that backup
withholding for the C trigger has begun
or will begin: (1) the last date before
the payor must commence backup with-
holding, and (2) the date the payor
received the notice from the IRS. The
significant date for the payee is the
date backup withholding begins on the
payee’s account. Therefore, to ease
payors’ administrative costs, the final
regulations require the payor to include
only the date the payor started (or
plans to start) backup withholding in
t h e n o t i c e t o t h e p a y e e . S e e
§31.3406(c)–1(d)(2)(iii).
D.Monitoring accounts subject to
withholding—proposed §31.3406(c)–1-

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(e). Commentators asked the IRS to
address how long a payor must monitor
an account identified as one subject to
the C trigger, if that account later
becomes dormant. The final regulations
provide that a payor is not required to
backup withhold on dormant accounts.
In this connection, backup withholding
terminates no later than the close of the
third calendar year ending after the
later of (1) the date that the payor pays
the last reportable payment to that
account, or (2) the date that the payor
received a notice from the IRS to
impose the C trigger on that account.
See §31.3406(c)–1(e)(3).
IV.Special rules for acquiring
accounts (including a readily
tradable instrument) or selling a
readily tradable instrument.
A.By electronic transmission—pro-
posed §31.3406(d)–3. A payee can
acquire by electronic transmission an
account or an instrument that earns
reportable interest or dividends. Under
the proposed regulations the payor, at
its option, may permit a payee to
furnish the certifications relating to the
A and D triggers within 30 days after
the establishment or acquisition of the
account or the instrument (30-day
period) by electronic transmission,
provided that the payee furnishes the
payee’s TIN at the time of the
establishment or the acquisition. How-
ever, if the payee makes any with-
drawal within the 30-day period and
before the payor receives the payee’s
certifications, the payor must withhold
to the extent of any reportable interest
or dividends paid to the payee during
the 30-day period and at the time of
withdrawal.
The proposed regulations provide
comparable rules for the sale of a
readily tradable instrument by elec-
tronic transmission. In this context, the
payee is permitted to withdraw (or
reinvest) up to 69 percent of the gross
proceeds from the sale during the
relevant 30-day period.
Commentators requested that backup
withholding be applied in the same
manner whether the electronic trans-
mission involves the establishment or
acquisition of an account or a readily
tradable instrument or the sale of a
readily tradable instrument. In response
to this comment, the final regulations
provide that backup withholding ap-
plies if the payee withdraws more than
69 percent of the reportable interest or
dividends paid to the payee during the
relevant 30-day period and at the time
of withdrawal, but only if the payor has
not received the payee’s certifications
relating to the A and D triggers at the
time of the withdrawal. See §31.3406-
(d)–3(a).
B.By mail—proposed §31.3406(d)–
3(a)(1). The proposed regulations
provide that a payee may provide the
certifications relating to the A and D
triggers within 30 days after a payee
establishes or acquires a readily trad-
able instrument by mail before January
1, 1985, provided the payee furnishes
the payee’s TIN upon the establishment
or acquisition. The proposed regula-
tions do not provide a similar rule for
the sale of a readily tradable instrument
by mail.
To simplify the procedures for enter-
ing into investments which do not
occur in person, the final regulations
provide a 30-day rule for the establish-
ment or acquisition of an account or
readily tradable instrument by mail and
extend the 30-day rule to the sale of a
readily tradable instrument by mail.
Under the final regulations, if the
payee furnishes the payee’s TIN before
the transaction, backup withholding
applies during the 30-day period only if
the payee withdraws more than 69 per-
cent of the reportable payment and if
the payor has not received the payee’s
certifications relating to the A or D
triggers, whichever applies, at the time
of the withdrawal. See §31.3406(d)–
3(a).
V.Section 3406 confidentiality
issues—proposed §31.3406(f)–1(a).
Section 3406(f) provides that a payor
may not use information obtained
under section 3406 except for meeting
a requirement of that section. Commen-
tators requested clarification on what
actions a payor or broker may take,
consistent with section 3406(f), in
response to a payee’s failure to provide
the payee’s TIN under section 3406(a)-
(1)(A). The final regulations provide
that a payor who closes an account at
or before the end of a calendar year in
which the payee opens the account
without providing the payee’s TIN or
documentation of foreign status, as
required, during that year will not, in
the absence of evidence to the contrary,
be deemed in violation of section
3406(f).
A n o t h e r c o m m e n t a t o r i n q u i r e d
whether prohibiting a payee from with-
drawing funds from the payee’s ac-
count is a violation of section 3406(f).
The final regulations clarify that refus-
ing to allow a payee to withdraw funds
from the payee’s account solely be-
cause the payee has not furnished a
TIN violates section 3406(f). See
§31.3406(f)–1(b)(1).
VI.Exemptions from backup
withholding.
A. Interaction of information report-
ing and backup withholding exemp-
tions—proposed §31.3406(g)–1(a). Sev-
eral commentators questioned the
interaction between the rules exempting
payees from information reporting and
those exempting payees from backup
withholding. The class of recipients
exempt from information reporting is
larger than the class exempt from
backup withholding. The final regula-
tions clarify that the list of the payees
that are specifically exempt from
backup withholding is not exclusive
and that other payees that are exempt
from information reporting also are
exempt from backup withholding. See
§31.3406(g)–1(a)(2).
B.Interest on certain life-insurance
contracts—proposed §31.3406(g)–1(a)-
(4). Commentators requested that the
temporary exemption from backup
withholding for interest payments made
before January 1, 1992, on ‘‘advance
premiums’’, ‘‘prepaid premiums’’, or
‘‘premium deposit funds’’, on certain
insurance policies be made permanent.
The final regulations provide an exten-
sion through December 31, 1996.
C.Payments reportable under sec-
tion 6047—proposed §31.3406(g)–2(c)-
(1) and (2). Commentators noted that,
contrary to the position set forth in the
proposed regulations, backup withhold-
ing does not apply to designated dis-
tributions paid after December 31,
1984. The final regulations clarify that
backup withholding does not apply to
those payments. See §31.3406(g)–2(d).
D.Awaiting-TIN certificate—pro-
posed §31.3406(g)–3. Commentators
requested simplification of the backup
withholding rules applicable to ac-
counts for which a payor has received
an awaiting-TIN certification. One sug-
gestion was that backup withholding
should not apply during the period (up
to 60 days) that the payee is waiting
for the payee’s TIN if no more than 69
percent of the reportable payment is
withdrawn during the 60-day period.

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The final regulations adopt this sugges-
tion. Therefore, backup withholding is
deferred during the 60-day period
unless the payee makes a withdrawal
(of more than $500 in one transaction)
during that time or has failed to
provide the certification relating to the
D trigger. If the payee makes a with-
drawal of more than $500 in one trans-
action during the 60-day period, backup
withholding applies to the extent of any
reportable interest or dividends made to
the account during the 60-day period
and at the time of withdrawal unless
the payee reserves 31 percent of all
reportable payments made to the ac-
count during that period. Payors may
elect, however, to impose withholding
d u r i n g t h e 6 0 - d a y p e r i o d . S e e
§31.3406(g)–3(a)(2) and (3).
Commentators requested clarification
of the interaction of the awaiting-TIN
rules for post-1983 accounts or instru-
ments and the obligation of the payee
to provide the certification relating to
the D trigger that the payee is not
subject to backup withholding due to
the C trigger. The final regulations
clarify that in spite of the awaiting-TIN
certification, backup withholding ap-
plies under section 3406(a)(1)(D) dur-
ing the 60-day period if the payee has
not provided this certification to the
payor. See §31.3406(g)–3(a)(1).
A commentator asked whether the
60-day period refers to calendar or
business days. Accordingly, the final
regulations clarify that the term ‘‘day’’
means a calendar day. See §§31.3406-
(g)–3 and 31.3406(h)–1(e).
VII.Other changes.
A.Identifying the person listed on a
joint account as the one subject to
withholding—proposed §31.3406(h)–
2(a). Under the proposed regulations, a
payor of a reportable payment to a
joint account may treat the first person
listed on the account (or on the in-
strument) as the payee subject to
information reporting and backup with-
holding. The final regulations provide
that the relevant payee is the one
whose name and TIN combination the
payor uses for information reporting
purposes, whether or not that account
or instrument registration lists that
payee first. See §31.3406(h)–2(a)(1).
B.Backup withholding on payments
made in property—proposed §31.3406-
(h)–2(b). Under the proposed regula-
tions, a payor making a reportable
payment in property subject to backup
withholding must withhold on an
amount equal to the fair market value
of the property. The obligation to
withhold occurs at the time the prop-
erty is paid to the payee. Consequently,
the payor must find an alternative
source, such as another account of the
payee, from which the payor can
satisfy its backup withholding liability.
Otherwise, the payor must continue to
look for accounts of the payee to
satisfy the payor’s backup withholding
liability. A commentator suggested that
the final regulations add an ending date
after which a payor no longer has to
search for alternative sources from
which to satisfy a backup withholding
obligation arising from a payment in
property. According to this commenta-
tor, the obligation should extinguish
after a reasonable period of time. In
response to this comment, the final
regulations provide that a payor’s obli-
gation to backup withhold on property
terminates on the earlier of the date
sufficient cash is deposited to the
account to fully satisfy the obligation
or the close of the fourth calendar year
after the obligation arose. See
§31.3406(h)–2(b)(2)(ii).
C.Gross-up of payments by middle-
men—proposed §31.3406(h)–2(d). Un-
der the proposed regulations, a middle-
man is required to remit the full
amount due a payee unless one of the
requirements for imposing backup
withholding exists at the time of
payment. Thus, the middleman is re-
quired to remit the full amount even
though an upstream payor erroneously
withheld on that payment to the mid-
dleman. In that event, the middleman
may recover the difference between the
amount received and the amount paid
to the payee, i.e., 31 percent, by
seeking a refund from the upstream
payor or by taking an equivalent credit
against the next required deposit of
employment taxes. One commentator
noted that the middleman payor incurs
a loss in the time value of money
measured from the time it pays the full
amount due to the payee to the time the
payor receives a refund or credit.
Because of this, the commentator sug-
gested that the regulations allow the
middleman to remit only the net
amount due its payee. This suggestion
presents several problems. First, it
requires a new reconciliation process to
correlate the backup withholding re-
flected on the upstream payor’s Form
945 with the backup withholding
shown as withheld tax on the payee’s
income tax return. Second, the sugges-
tion produces an anomalous result,
namely, withholding occurs even
though none of the statutory conditions
requiring withholding exist. For these
reasons the final regulations do not
adopt this suggestion.
D.Refund of amount erroneously
subject to backup withholding—pro-
posed §31.6413(a)–3. Under the pro-
posed regulations, a payor must refund
an amount previously withheld under
the C trigger if the IRS instructs the
payor to do so. This provision is also
set forth in §35a.9999–3 Q/A–38 of the
Temporary Employment Tax Regula-
tions issued under the Interest and
Dividend Tax Compliance Act of 1983,
as amended by TD 8248 (54 FR
18713) on May 2, 1989. One commen-
tator suggested eliminating this refund
provision. This rule was needed ini-
tially to allow refunds in certain cases
where payees had interest or dividend
income subject to backup withholding
under the C trigger but had no income
tax liability on this income. The IRS
has subsequently enhanced its C with-
holding program to eliminate C notices
to payors in such cases. Thus, the final
regulations adopt the suggestion and
delete the proposed rule. See §31.6413-
(a)–3.
E.Effective date. The final regula-
tions are effective for reportable pay-
ments made and transactions occurring
after December 31, 1996, and, op-
tionally, for reportable payments made
and transactions occurring on or after
December 21, 1995. See §31.3406(i)–1.
F.Coordination with the temporary
regulations—§§35a.9999–1 through
35a.9999–5. The temporary regulations
issued under 26 CFR Part 35a are not
effective for noninternational transac-
tions occurring on and after the effec-
tive date of the final regulations. The
temporary regulations, however, remain
effective for the due diligence safe
harbor and for international transac-
tions, including transactions involving a
foreign payee, a foreign payor, or a
payment from sources without the
United States.
G.Statement mailing requirement—
p r o p o s e d § § 1 . 6 0 4 2 – 5 , 1 . 6 0 4 4 – 6 ,
1.6049–6, and 1.6050N–1. These final
regulations set forth rules on the
manner in which a payor who is re-
quired to file an information return for
dividends and corporate earnings and
profits, patronage dividends, interest,

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and royalties under sections 6042(c),
6044(e), 6049(c), and 6050N(b), re-
spectively, must provide a copy of that
information return to the payee, i.e.,
payee statement mailing.
The proposed regulations limit the
permissible nontax enclosures includ-
ible in a statement mailing. Several
commentators requested that the inclu-
sion of additional nontax enclosures be
permitted. This suggestion was not
adopted because the relevant legislative
history indicates that Congress wanted
to substantially restrict the nontax
enclosures in a statement mailing.
H.Correct identifying number for
estates—proposed §301.6109–1. The fi-
nal regulations clarify that the taxpayer
identification number to be used to
identify estates of decedents is the
employer identification number (rather
than a social security number).
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in E.O.
12866. Therefore, a regulatory assess-
ment is not required. It has also been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking
preceding these regulations was submit-
ted to the Small Business Administra-
tion for comment on its impact on
small business.
Drafting Information
The principal author of these regula-
tions is Renay France of the Office of
Assistant Chief Counsel (Income Tax
and Accounting), IRS. However, other
personnel from the IRS and Treasury
Department participated in their
development.
******
Adoption of Amendments to the
Regulations
The amendments to 26 CFR parts 1,
31, 35a, 301, and 602 read as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority for part 1
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.6049–6 also issued under
6049(a), (b), and (d). * * *
Par. 2. Section 1.6042–4 is revised
as follows:
§1.6042–4 Statements to recipients of
dividend payments.
(a)Requirement. A person required
to make an information return under
section 6042(a)(1) and §1.6042–2 must
furnish a statement to each recipient
whose identifying number is required
to be shown on the related information
return for dividend payments.
(b)Form of the statement. The state-
ment required by paragraph (a) of this
section must be either the official Form
1099 prescribed by the Internal Reve-
nue Service for the respective calendar
year or an acceptable substitute state-
ment that contains provisions that are
substantially similar to those of the
official Form 1099 for the respective
calendar year. For further guidance on
how to prepare an acceptable substitute
statement, see Rev. Proc. 95–30 (1995–
27 I.R.B. 9) (or its successor), re-
published as ‘‘Rules and Specifications
for Private Printing of Substitute Forms
1096, 1098, 1099 Series, 5498, and W–
2G.’’ See §601.601(d)(2) of this
chapter.
(c)Aggregation of payments. A
payor may aggregate on one Form
1099 all payments made to a recipient
with respect to each separate account
during a calendar year.
(d)Manner of providing statements
to recipients—(1) In general. The Form
1099, or acceptable substitute state-
ment, must be provided to the recipient
either in person or by first-class mail to
the recipient’s last known address in a
statement mailing.
(2)Statement mailing requirement.
The mailing required under section
6042(c) of a Form 1099 to a payee-
recipient must qualify as a statement
mailing. A statement mailing must
contain the required Form 1099 or
acceptable substitute statement (written
statement) and must comply with en-
closure and envelope restrictions.
(i)Enclosure restrictions. To qualify
as a statement mailing, the mailing can-
not contain any enclosures except those
listed in this paragraph (d)(2)(i). More-
over, no promotional or advertising
material is permitted in the mailing of
the written statement. Even a de
minimis amount of promotional or
advertising material violates the state-
ment mailing requirement. However, a
logo on the envelope containing the
written statement and on nontax
enclosures described in paragraph
(d)(2)(i)(A) through (D) of this section
does not violate the written statement
requirement. The written statement re-
quired under section 6042(c) and para-
graph (a) of this section may be per-
forated to a check or to a statement of
the recipient-payee’s specific account
with the payor described in paragraph
(d)(2)(i)(A) or (C) of this section. The
enclosure to which the written state-
ment is perforated must contain, in a
bold and conspicuous type, the legend:
‘‘Important Tax Return Document At-
tached.’’ The enclosures permitted in a
mailing are limited to—
(A)A check with respect to the
account reported on the written
statement;
(B)A letter explaining why a check
with respect to such account is not
enclosed with the written statement (for
example, because a dividend has not
been declared payable);
(C)A statement of the taxpayer-
recipient’s specific account with the
payor if payments on such account are
reflected on the written statement;
(D)A letter limited to an explana-
tion of the tax consequences of the
information set forth on the enclosed
written statement;
(E)Payee statements related to other
Forms 1099, Form 1098, and Form
5498 (or the account balance on a
Form 5498), Forms W–2 and W–2G;
and
(F)Any document concerning the
solicitation of the Form W–9 or Form
W–8.
(ii)Envelope and delivery restric-
tions—(A) Envelope restrictions. The
outside of the envelope in which the
written statement is mailed and each
nontax enclosure enclosed in the en-
velope must contain, in a bold and
conspicuous type, the legend: ‘‘Impor-
tant Tax Return Document Enclosed.’’
For purposes of this paragraph (d)(2)-
(ii), a nontax enclosure is any item
listed in paragraphs (d)(2)(i)(A)
through (C) of this section. However, a
payor is not required to include the
legend on the outside of an envelope

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containing only the enclosures in para-
graph (d)(2)(i)(D) through (F) of this
section.
(B)Delivery restrictions. The re-
quirement to provide the written state-
ment in person or by first-class mail
may be satisfied by sending the written
statement and any enclosures described
in paragraph (d)(2)(i) of this section by
intra-office mail, provided that intra-
office mail is used by the payor in
sending account activity, balance infor-
mation, and other correspondence to
the payee. If a payor does not person-
ally deliver the written statement (i.e.,
the Form 1099 or its acceptable sub-
stitute) to the recipient or mail it to the
recipient in a statement mailing as de-
scribed in this paragraph (d), the payor
is considered to have failed to mail the
statement required under section
6042(c) and will be subject to the
penalty under section 6722.
(e)Time for furnishing statements—
(1) In general. Each statement required
by section 6042(c) and this section to
be furnished to any person for a
calendar year must be furnished to such
person after November 30 of the year
and on or before January 31 (February
10 in the case of a nominee filing
under §1.6042–2(a)(1)(iii)) of the fol-
lowing year, but no statement may be
furnished before the final dividend for
the calendar year has been paid. How-
ever, the statement may be furnished at
any time after April 30 if it is
furnished with the final dividend for
the calendar year.
(2)Extensions of time. For good
cause upon written application of the
person required to furnish statements
under this section, the Director, Mar-
tinsburg Computing Center, may grant
an extension of time not exceeding 30
days in which to furnish such state-
ments. The application must be ad-
dressed to the Director, Martinsburg
Computing Center, and must contain a
full recital of the reasons for requesting
the extension to aid the Director in
determining the period of the exten-
sion, if any, that will be granted. Such
a request in the form of a letter to the
Director, Martinsburg Computing Cen-
ter, signed by the applicant will suffice
as an application. The application must
be filed on or before the date pre-
scribed in paragraph (e)(1) of this
section.
(3)Last day for furnishing state-
ment. For provisions relating to the
time for performance of an act when
the last day prescribed for performance
falls on Saturday, Sunday, or a legal
h o l i d a y , s e e s e c t i o n 7 5 0 3 a n d
§301.7503–1 of this chapter (Regula-
tions on Procedure and Admini-
stration).
(f)Penalty. For provisions relating
to the penalty for the failure to furnish
a statement under this section, see
section 6722.
(g)Effective date. This section is
effective for payee statements due after
December 31, 1995, without regard to
extensions. For the substantially similar
statement mailing requirements that
apply with respect to forms required to
be filed after October 22, 1986, and
before January 1, 1996, see Rev. Proc.
84–70 (1984–2 C.B. 716) (or successor
revenue procedures). See §601.601(d)-
(2) of this chapter.
Par. 3. Section 1.6044–5 is revised
as follows:
§1.6044–5 Statements to recipients of
patronage dividends.
(a)Requirement. A person required
to make an information return under
section 6044(a)(1) and §1.6044–2 must
furnish a statement to each recipient
whose identifying number is required
to be shown on the related information
return for patronage dividends paid.
(b)Form, manner, and time for pro-
viding statements to recipients. The
statement required by paragraph (a) of
this section must be either the official
Form 1099 prescribed by the Internal
Revenue Service for the respective
calendar year or an acceptable sub-
stitute statement. The rules under
§1.6042–4 (relating to statements with
respect to dividends) apply comparably
in determining the form of an accept-
able substitute statement permitted by
this section. Those rules also apply for
purposes of determining the manner of
and time for providing the Form 1099
or its acceptable substitute to a recip-
ient under this section. However, each
Form 1099 or acceptable substitute
statement required by this section must
be furnished on or before January 31 of
the following year, but no statement
may be furnished before the final
payment has been made for the calen-
dar year.
(c)Penalty. For provisions relating
to the penalty for the failure to furnish
a statement under this section, see sec-
tion 6722.
(d)Effective date. This section is
effective for payee statements due after
December 31, 1995, without regard to
extensions. For the substantially similar
statement mailing requirements that
apply with respect to forms required to
be filed after October 22, 1986, and
before January 1, 1996, see Rev. Proc.
84–70 (1984–2 C.B. 716) (or successor
revenue procedures). See §601.601-
(d)(2) of this chapter.
Par. 4. Section 1.6049–6 is amended
by:
1.Revising the section heading.
2.Removing the language ‘‘section
3451’’ and adding ‘‘section 3406’’ in
each of the following locations:
a.Paragraph (a), second sentence.
b.Paragraph (a), third sentence.
c.Paragraph (a), fourth sentence.
3.Removing the language ‘‘section
3451’’ and adding ‘‘section 3406’’ in
each of the following locations:
a.Paragraph (b)(1)(ii).
b.Paragraph (b)(2)(ii).
4.Adding paragraph (e).
5.Removing the authority citation at
the end of the section.
The revision and additions read as
follows:
§1.6049–6 Statements to recipients of
interest payments and holders of
obligations for attributed original
issue discount.
******
(e)Statements to recipients—(1) Re-
quirement. A person required to make
an information return under section
6049(a) and §1.6049–4 must furnish a
statement to each recipient whose
identifying number is required to be
shown on the related information return
for interest or original issue discount
paid or accrued.
(2)Form, manner, and time for pro-
viding statements to recipients. The
statement required by paragraph (e)(1)
of this section must be either the
official Form 1099 prescribed by the
Internal Revenue Service for the re-
spective calendar year or an acceptable
substitute statement. The rules under
§1.6042–4 (relating to statements with
respect to dividends) apply comparably
in determining the form of an accept-
able substitute statement permitted by
this paragraph (e). Those rules also
apply for purposes of determining the
manner of and time for providing the
Form 1099 or its acceptable substitute
to a recipient under paragraph (e)(1) of

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this section. However, with respect to
original issue discount, the Form 1099
or acceptable substitute statement re-
quired by paragraph (e)(1) of this sec-
tion must show the aggregate amount
of original issue discount includible in
the gross income by the recipient for
the calendar year with respect to the
obligation (determined by applying the
rules of §1.6049–4(b)(2)), and the
amount, serial number, or other identi-
fying number of each obligation with
respect to which a return is being
made. With respect to interest or
original issue discount, the Form 1099
or acceptable substitute statement re-
quired by paragraph (e)(1) of this
section must be furnished to the
recipient on or before January 31 of the
year following the calendar year for
which the return under section 6049(a)-
(1) was required to be made.
(3)Penalty. For provisions relating
to the penalty for the failure to furnish
a statement under this section, see
section 6722.
(4)Effective date. This paragraph (e)
is effective for payee statements due
after December 31, 1995, without re-
gard to extensions. For the substantially
similar statement mailing requirements
that apply with respect to forms re-
quired to be filed after October 22,
1986, and before January 1, 1996, see
Rev. Proc. 84–70 (1984–2 C.B. 716)
(or successor revenue procedures). See
§601.601(d)(2) of this chapter.
Par. 5. Section 1.6050N–1 is added
to read as follows:
§1.6050N–1 Statements to recipients
of royalties.
(a)Requirement. A person required
to make an information return under
section 6050N(a) must furnish a state-
ment to each recipient whose name is
required to be shown on the related
information return for royalties paid.
(b)Form, manner, and time for pro-
viding statements to recipients. The
statement required by paragraph (a) of
this section must be either the official
Form 1099 prescribed by the Internal
Revenue Service for the respective
calendar year or an acceptable sub-
stitute statement. The rules under
§1.6042–4 (relating to statements with
respect to dividends) apply comparably
in determining the form of the accept-
able substitute statement permitted by
this section. Those rules also apply for
purposes of determining the manner of
and time for providing the Form 1099
or its acceptable substitute statement to
a recipient under this section.
(c)Penalty. For provisions relating
to the penalty for failure to furnish a
statement under this section, see sec-
tion 6722.
(d)Effective date. This section is
effective for payee statements due after
December 31, 1995, without regard to
extensions. For the substantially similar
statement mailing requirements that
apply with respect to forms required to
be filed after October 22, 1986, and
before January 1, 1996, see Rev. Proc.
84–70 (1984–2 C.B. 716) (or successor
revenue procedures). See §601.601(d)-
(2) of this chapter.
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME
TAX AT SOURCE
Par. 6. The authority for Part 31 is
amended by removing the entry for
§31.3406(d)–5 and by adding an entry
in numerical order to read as follows:
Authority: 26 U.S.C. 7805. * * *
S e c t i o n s 3 1 . 3 4 0 6 ( a ) – 1 t h r o u g h
31.3406(i)–1 also issued under 26
U.S.C. 3406(i).
Par. 7. Section 31.3406-0 is revised
to read as follows:
§31.3406–0 Outline of the backup
withholding regulations.
This section lists paragraphs con-
tained in §§31.3406(a)–1 through
31.3406(i)–1.
§31.3406(a)–1 Backup withholding
requirement on reportable payments.
(a)Overview.
(b)Conditions that invoke the
backup withholding require-
ment.
(1)Conditions applicable to all
reportable payments.
(2)Conditions applicable only
to reportable interest or div-
idend payments.
(c)Exceptions.
(d)Cross references.
§31.3406(a)–2 Definition of payors
obligated to backup withhold.
(a)In general.
(b)Middlemen treated as payors.
(c)Persons not treated as payors.
§31.3406(a)–3 Scope and extent of
accounts subject to backup
withholding.
§31.3406(a)–4 Time when payments
are considered to be paid and
subject to backup withholding.
(a)Timing.
(1)In general.
(2)Special rules for dividends.
(b)Amounts reportable under sec-
tion 6045.
(1)In general.
(2)Special rule for interest ac-
crued on bonds.
(c)Middlemen.
(1)In general.
(2)Special rule for common
trust funds.
(3) Special rule for certain
grantor trusts.
§31.3406(b)(2)–1 Reportable interest
payment.
(a)Interest subject to backup with-
holding.
(1)In general.
(2)Special rule for tax-exempt
interest.
(b)Amount subject to backup
withholding.
(1)In general.
(2)Special rule to adjust for
p r e m a t u r e w i t h d r a w a l
penalty.
§31.3406(b)(2)–2 Original issue
discount.
(a)Original issue discount subject
to backup withholding.
(b)Amount subject to backup
withholding and time when
backup withholding is imposed
with respect to short-term
obligations.
(c)Transferred short-term obliga-
tions.
(1) Subsequent holder may
establish purchase price.
(2)Subsequent holder unable
( o r n o t p e r m i t t e d ) t o
establish purchase price.
(3)Transferred obligation.
(d)Amount subject to backup
withholding and time when
backup withholding is imposed
with respect to long-term obli-
gations.
(1)No cash payments prior to
maturity.
(2)Registered long-term obliga-
tions with cash payments
prior to maturity.

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(3)Transferred registered long-
term obligations with pay-
ments prior to maturity.
(e)Bearer long-term obligations.
(1)Payments prior to maturity.
(2)Payments at maturity.
§31.3406(b)(2)–3 Window
transactions.
(a)Requirement to backup with-
hold.
(b)Window transaction defined.
(c)Manner of furnishing taxpayer
identification number in the
case of a window transaction.
§31.3406(b)(2)–4 Reportable dividend
payment.
(a)Dividends subject to backup
withholding.
(b)Dividends not subject to back-
up withholding.
(c)Amount subject to backup
withholding.
(1)In general.
(2) Reasonable estimate of
amount of dividend subject
to backup withholding.
(3)Reinvested dividends.
§31.3406(b)(2)–5 Reportable
patronage dividend payment.
(a)Patronage dividends subject to
backup withholding.
(b)Amount subject to backup
withholding.
(1)Failure to provide taxpayer
identification number or no-
tification of incorrect tax-
payer identification number.
(2)Notified payee underreport-
ing or payee certification
failure.
§31.3406(b)(3)–1 Reportable payments
of rents, commissions, nonemployee
compensation, etc.
(a)Section 6041 and 6041A(a)
payments subject to backup
withholding.
(b)Amount subject to backup
withholding.
(1)In general.
(2)Net commissions.
(3)Payments aggregating $600
or more for the calendar
year.
§31.3406(b)(3)–2 Reportable barter
exchanges and gross proceeds of
sales of securities or commodities by
brokers.
(a)Transactions subject to backup
withholding.
(b)Amount subject to backup
withholding.
(1)In general.
(2)Forward contracts, including
foreign currency contracts,
a n d r e g u l a t e d f u t u r e s
contracts.
(3)Security sales made through
a margin account.
(4)Security short sales.
(5)Fractional shares.
§31.3406(b)(3)–3 Reportable payments
by certain fishing boat operators.
(a)Payments subject to backup
withholding.
(b)Amount subject to backup
withholding.
§31.3406(b)(3)–4 Reportable payments
of royalties.
(a)Royalty payments subject to
backup withholding.
(b)Amount subject to backup
withholding.
§31.3406(b)(4)–1 Exemption for
certain minimal payments.
(a)In general.
(b)Manner of making the election.
(c)How to annualize.
(1)In general.
(2)Special aggregation rule for
r e p o r t a b l e i n t e r e s t a n d
dividends.
(d)Exception for window transac-
tions and original issue dis-
count.
§31.3406(c)–1 Notified payee
underreporting of reportable interest
or dividend payments.
(a)Overview.
(b)Definitions.
(1)Notified payee underreport-
ing.
(2)Payee underreporting.
(c)Notice to payors regarding
backup withholding due to no-
tified payee underreporting.
(1)In general.
(2)Additional requirements for
payors that are also brokers.
(3)Payor identification of ac-
counts of the payee subject
to backup withholding due
to notified payee under-
reporting.
(d)Notice from payors of backup
withholding due to notified
payee underreporting.
(1)In general.
(2)Procedures.
(e)Period during which backup
withholding is required.
(1)In general.
(2)Stop withholding.
(3)Dormant accounts.
(f)Notice to payees from the In-
ternal Revenue Service.
(1)Notice period.
(2)Payee subject to backup
withholding.
(3) Disclosure of names of
payors and brokers.
(4)Backup withholding certifi-
cation.
(g)Determination by the Internal
Revenue Service that backup
withholding should not start or
should be stopped.
(1)In general.
(2)Date notice to stop backup
w i t h h o l d i n g w i l l b e
provided.
(3)Grounds for determination.
(4)No underreporting.
(5)Correcting any payee under-
reporting.
(6)Undue hardship.
(7)Bona fide dispute.
(h)Payees filing a joint return.
(1)In general.
(2)Exceptions.
(i)[Reserved.]
(j)Penalties.
§31.3406(d)–1 Manner required for
furnishing a taxpayer identification
number.
(a)Requirement to backup with-
hold.
(b)Reportable interest or dividend
account.
(1)Manner required for fur-
nishing a taxpayer identi-
fication number with respect
to a pre-1984 account or
instrument.
(2)Determination of pre-1984
account or instrument.
(3)Manner required for fur-
nishing a taxpayer identi-
fication number with respect
to an account or instrument
that is not a pre-1984 ac-
count.

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(4)Special rule with respect to
the acquisition of a readily
tradable instrument in a
transaction between certain
parties acting without the
assistance of a broker.
(c)Brokerage account.
(1)Manner required for fur-
nishing a taxpayer identi-
fication number with respect
to a brokerage relationship
that is not a post-1983
brokerage account.
(2)Manner required for fur-
nishing a taxpayer identi-
fication number with respect
to a post-1983 brokerage
account.
(d)Rents, commissions, non-
employee compensation, and
certain fishing boat operators,
etc.—Manner required for fur-
nishing a taxpayer identifica-
tion number.
§31.3406(d)–2 Payee certification
failure.
(a)Requirement to backup with-
hold.
(b)Exceptions.
§31.3406(d)–3 Special 30-day rules
for certain reportable payments.
(a)Accounts or readily tradable
instruments acquired directly
from the payor (including a
broker who holds an instru-
ment in street name) by
electronic transmission or by
mail.
(b)Sale of an instrument for a
customer by electronic trans-
mission or by mail.
(c)Application to foreign payees.
§31.3406(d)–4 Special rules for
readily tradable instruments acquired
through a broker.
(a)Readily tradable instruments
acquired through post-1983
brokerage accounts with a bro-
ker who is not a payor.
(1)In general.
(2)Additional requirements.
(3) Transactions entered into
through a brokerage account
that is not a post-1983
brokerage account.
(4)Payor must notify payee.
(b)Notices.
(1)Form of notice by broker to
payor.
(2)Form of notice by payor to
payee.
(c)Payor’s reliance on information
from broker.
(1)In general.
(2)Amount subject to backup
withholding.
§31.3406(d)–5 Backup withholding
when the Service or a broker notifies
the payor to withhold because the
payee’s taxpayer identification
number is incorrect.
(a)Overview.
(b)Definitions and special rules.
(1)Definition of an incorrect
name/TIN combination.
(2)Definition of account.
(3)Definition of business day.
(4)Certain exceptions.
(c)Notice regarding an incorrect
name/TIN combination.
(1)In general.
(2)Additional requirements for
payors that are also brokers.
(3)Payor identification of the
account or accounts of the
payee that have the incor-
rect taxpayer identification
number.
(4) S p e c i a l r u l e f o r j o i n t
accounts.
(5)Date of receipt.
(d)Notice from payors of backup
withholding due to an incorrect
name/TIN combination.
(1)In general.
(2)Procedures.
(e)Period during which backup
withholding is required due to
notification of an incorrect
name/TIN combination.
(1)In general.
(2)Grace periods.
(3)Dormant accounts.
(f)Manner required for payee to
furnish certified taxpayer iden-
tification number.
(g)Receipt of two notices within
a 3-year period.
(1)In general.
(2)Notice to payee who has
p r o v i d e d t w o i n c o r r e c t
n a m e / T I N c o m b i n a t i o n s
within 3 calendar years.
(3)Period during which backup
withholding is required due
to a second notice of an
incorrect name/TIN com-
bination within 3 calendar
years.
(4)Receipt of two notices in
one calendar year.
(5)Notification from the Social
Security Administration (or
the Internal Revenue Serv-
ice) validating a name/TIN
combination.
(h)Payors must use newly
provided certified number.
(i)Effective date.
(j)Examples.
§31.3406(e)–1 Period during which
backup withholding is required.
(a)In general.
(b)Failure to furnish a taxpayer
identification number in the
manner required.
(1)Start withholding.
(2)Stop withholding.
(c)Notification of an incorrect
taxpayer identification number.
(d)Notified payee underreporting.
(e)Payee certification failure.
(1)Start withholding.
(2)Stop withholding.
(f)Rule for determining when the
payor receives a taxpayer iden-
tification number or certificate
from a payee.
§31.3406(f)–1 Confidentiality of
information.
(a)Confidentiality and liability for
violation.
(b)Permissible use of information.
(1)In general.
(2)Window transactions.
(c)Specific restrictions on the use
of information.
§31.3406(g)–1 Exception for payments
to certain payees and certain other
payments.
(a)Exempt recipients.
(1)In general.
(2)Nonexclusive list.
(b)Determination of whether a
person is described in para-
graph (a)(1) of this section.
(c)Prepaid or advance premium
life-insurance contracts.
§31.3406(g)–2 Exception for
reportable payments for which backup
withholding is otherwise required.
(a)In general.
(b)Payment of wages.
(c)Distribution from a pension,
annuity, or other plan of de-
ferred compensation.
(d)Gambling winnings.

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(1)In general.
(2)Definition of a reportable
gambling winning and de-
termination of amount sub-
ject to backup withholding.
(3)Special rules.
(e)Certain real estate transactions.
(f)Certain payments after an ac-
quisition of accounts or instru-
ments.
(g)Certain gross proceeds.
§31.3406(g)–3 Exemption while payee
is waiting for a taxpayer
identification number.
(a)In general.
(1)Backup withholding not re-
quired for 60 days.
(2)Reserve method.
(3) Alternative rule; 7-day
grace period.
(b)Special rule for readily trad-
able instruments.
(c)Exceptions.
(1)In general.
(2)Special rule for amounts
subject to reporting under
section 6045 other than pro-
ceeds of redemptions of
bearer obligations.
(d)Awaiting-TIN certificate.
(e)Form for awaiting-TIN certifi-
cate.
§31.3406(h)–1 Definitions.
(a)In general.
(b)Taxpayer identification number.
(1)In general.
(2)Obviously incorrect number.
(c)Broker.
(d)Readily tradable instrument.
(e)Day.
(f)Business day.
§31.3406(h)–2 Special rules.
(a)Joint accounts.
(1)Relevant name and taxpayer
identification number com-
bination.
(2)Optional rule for accounts
subject to backup withhold-
i n g u n d e r s e c t i o n
3406(a)(1)(B) or (C) where
the names are switched.
(3)Joint foreign payees.
(b)Backup withholding from an
alternative source.
(1)In general.
(2) Exceptions for payments
made in property.
(c)Trusts.
(d)Adjustment of prior withhold-
ing by middleman.
(e)Conversion of amounts paid in
foreign currency into United
States dollars.
(1) C o n v e r t i b l e f o r e i g n
currency.
(2)Nonconvertible foreign cur-
rency. [Reserved]
(f)Coordination with other
sections.
(g)Tax liabilities and penalties.
(h)To whom payor is liable for
amount withheld.
§31.3406(h)–3 Certificates.
(a)Prescribed form to furnish in-
formation under penalties of
perjury.
(1)In general.
(2)Use of a single or multiple
Forms W–9 for accounts of
the same payee.
(b)Prescribed form to furnish a
noncertified taxpayer identifica-
tion number.
(c)Forms prepared by payors or
brokers.
(1)Substitute forms; in general.
(2)Form for exempt recipient.
(d)Special rule for brokers.
(e)Reasonable reliance on
certificate.
(1)In general.
(2) Circumstances establishing
reasonable reliance.
(f)Who may sign certificate.
(1)In general.
(2) N o t i f i e d p a y e e
underreporting.
(g)Retention of certificates.
(1) Accounts or instruments
that are not pre-1984 ac-
counts and brokerage rela-
tionships that are post-1983
brokerage accounts.
(2) Accounts or instruments
that are pre-1984 accounts
and brokerage relationships
that are not post-1983 bro-
kerage accounts.
(h)Cross references.
§31.3406(i)–1 Effective date.
Par. 8. Sections 31.3406(a)–1
through 31.3406(a)–4, 31.3406(b)(2)–1
t h r o u g h 3 1 . 3 4 0 6 ( b ) ( 2 ) – 5 ,
3 1 . 3 4 0 6 ( b ) ( 3 ) – 1 t h r o u g h
3 1 . 3 4 0 6 ( b ) ( 3 ) – 4 , 3 1 . 3 4 0 6 ( b ) ( 4 ) – 1 ,
31.3406(c)–1, 31.3406(d)–1 through
3 1 . 3 4 0 6 ( d ) – 4 , 3 1 . 3 4 0 6 ( e ) – 1 ,
31.3406(f)–1, 31.3406(g)–1 through
31.3406(g)–3, 31.3406(h)–1 through
31.3406(h)–3, and 31.3406(i)–1 are
added to read as follows:
§31.3406(a)–1 Backup withholding
requirement on reportable payments.
(a) Overview. Under section 3406, a
payor must deduct and withhold 31
percent of a reportable payment if a
condition for withholding exists. Re-
portable payments mean interest and
dividend payments (as defined in sec-
tion 3406(b)(2)) and other reportable
payments (as defined in section
3406(b)(3)). The conditions described
in paragraph (b)(1) of this section
apply to all reportable payments, in-
cluding reportable interest and dividend
payments. The conditions described in
paragraph (b)(2) of this section apply
only to reportable interest and dividend
payments.
(b)Conditions that invoke the back-
u p w i t h h o l d i n g r e q u i r e m e n t— ( 1 )
Conditions applicable to all reportable
payments. A payor of a reportable
payment must deduct and withhold
under section 3406 if—
(i)The payee of the reportable pay-
ment does not furnish the payee’s
taxpayer identification number to the
payor, as required in section 3406(a)-
(1)(A) and §31.3406(d)–1; or
(ii)The Internal Revenue Service or
a broker notifies the payor that the
taxpayer identification number furnished
by its payee for a reportable payment is
incorrect, as described in section
3406(a)(1)(B) and §31.3406(d)–5.
(2)Conditions applicable only to
reportable interest or dividend pay-
ments. A payor of a reportable interest
or dividend payment must deduct and
withhold under section 3406 if—
(i)The Internal Revenue Service or
a broker notifies the payor that its
payee has underreported interest or
dividend income, as described in sec-
tion 3406(a)(1)(C) and §31.3406(c)–1;
or
(ii)The payee fails to certify to the
payor or broker that the payee is not
subject to withholding due to notified
payee underreporting, as described in
section 3406(a)(1)(D) and §31.3406(d)–
2.
(c)Exceptions. The requirement to
withhold does not apply to certain
minimal payments as described in
§31.3406(b)(4)–1 or to payments ex-
e m p t f r o m w i t h h o l d i n g u n d e r
§§31.3406(g)–1 through 31.3406(g)–3.

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(d)Cross references. For the defini-
tion of payor, see §31.3406(a)-2. For
the definition of taxpayer identification
number, see §31.3406(h)–1(b).
§31.3406(a)–2 Definition of payors
obligated to backup withhold.
(a)In general. Payor means any
person who is required to make an
information return with respect to any
reportable payment (as described in
section 3406(b)) under section 6041,
6041A(a), 6042, 6044, 6045, 6049,
6050A, or 6050N, including any mid-
dleman as described in paragraph (b) of
this section.
(b)Middlemen treated as payors. A
person who receives or collects a
reportable payment on behalf of or for
the account of a payee is a middleman
and is treated as the payor of the
payment. These persons include, but
are not limited to—
(1)A custodian of a payee’s ac-
count, such as a bank, financial institu-
tion, or brokerage firm acting as
custodian of an account;
(2)A nominee, including the joint
owner of an account or instrument,
except if the joint owners are husband
and wife or if the payment is actually
owned by another person whose name
is also shown on the information return
filed with respect to the payment;
(3)A broker holding a security
(including stock) for a customer in
street name;
(4)A grantor trust established after
December 31, 1995, all of which is
owned by two or more grantors, and
for this purpose spouses filing a joint
return are considered to be one grantor;
(5)A common trust fund; and
(6)A partnership or an S corpora-
tion that makes a reportable payment.
(c)Persons not treated as payors.
The following persons are not treated
as payors for purposes of section 3406
if the person does not have a reporting
obligation under the section on infor-
mation reporting to which the payment
relates:
(1)An agent of the payor who is
acting on behalf of the payor in making
the payment and who has not entered
into an agreement with the payor (for
further guidance see Rev. Proc. 84–33
(1984–1 C.B. 502), and §601.601(d)(2)
of this chapter), such as a bank that
acts as a paying agent in making a
payment of dividends on behalf of a
corporation (although payments made
by the agent are considered to be
payments made by the payor, and thus
are subject to withholding, reporting,
and the depositing requirements per-
taining to section 3406 as if they were
made by the payor itself, and failure by
the agent so to withhold, report, or
deposit is considered to be failure by
the payor);
(2)A trust (other than a grantor trust
as described in paragraph (b)(4) of this
section) that files a Form 1041 and
furnishes each beneficiary a Form K–1
containing information required to be
shown on an information return, includ-
ing amounts withheld under section
3406; or
(3)A partnership making a payment
of a distributive share or an S corpora-
tion making a similar distribution.
§31.3406(a)–3 Scope and extent of
accounts subject to backup withhold-
ing. A payor who is required to
withhold under §31.3406(a)–1 must
withhold—
(a)On the accounts subject to with-
holding under §31.3406(a)–1(b)(1)(i) or
(b)(2)(ii); and
(b)On the accounts subject to with-
holding under §31.3406(a)–1(b)(1)(ii)
or (b)(2)(i), as described under
§31.3406(d)–5 (relating to notification
of incorrect TIN) or §31.3406(c)–1
(relating to notified payee underreport-
ing), respectively.
§31.3406(a)–4 Time when payments
are considered to be paid and
subject to backup withholding.
(a)Timing—(1) In general. If
backup withholding is required under
section 3406 on a reportable payment
(as defined in section 3406(b)), the
payor must withhold at the time it
makes the payment to the payee or to
the payee’s account that is subject to
withholding. Amounts are considered
paid when they are credited to the
account of, or made available to, the
payee. Amounts are not considered
paid solely because they are posted
(e.g., an informational notation on the
payee’s passbook) if they are not
actually credited to the payee’s account
or made available to the payee. See
paragraph (c) of this section for the
timing of withholding by a middleman.
(2)Special rules for dividends. For
purposes of section 3406 and this
section—
(i)Record date earlier than payment
date. In the case of stock for which the
record date is earlier than the payment
date, the dividends are considered paid
on the payment date.
(ii)Dividends paid in corporate re-
organizations. In the case of a corpo-
rate reorganization, if a payee is
required to exchange stock held in the
former corporation for stock in the new
corporation before the dividends that
have been paid with respect to the
stock in the new corporation will be
provided to the payee, the dividend is
considered paid on the date the payee
actually exchanges the stock and re-
ceives the dividend.
(b)Amounts reportable under sec-
tion 6045—(1) In general. Notwith-
standing paragraph (a) of this section,
in the case of a transaction reportable
under section 6045 (except in the case
of forward contracts (including foreign
currency contracts), regulated futures
contracts, and security short sales), the
obligation to withhold under section
3406 arises on the date the sale is
entered on the books of the broker or
the date the exchange occurs as
provided in §1.6045–1(f)(3) of this
chapter. A broker (in its capacity as
payor) is not required, however, to
satisfy its withholding liability until
payment is made. See §31.3406(b)(3)–
2(b)(2) for special rules applicable to
forward contracts (including foreign
currency contracts), regulated futures
contracts, and security short sales.
(2)Special rule for interest accrued
on bonds. For purposes of determining
the time that interest is considered paid
and subject to withholding under sec-
tion 3406 when bonds are sold between
interest payment dates, the portion of
the sales price representing interest
accrued to the date of sale is consid-
ered a portion of a reportable payment
of gross proceeds under section 6045
(provided that the accrued interest is
not tax-exempt as described in section
103(a), relating to certain governmental
obligations), and is not considered to
be a payment of interest for purposes
of section 6049.
(c)Middlemen—(1) In general. Any
middleman (as defined in §31.3406(a)–
2(b)) must withhold under section 3406
at the time the reportable payment is
received by or credited to the middle-
man. If the middleman makes or credits
the reportable payment to the payee
prior to the middleman’s receipt of the
corresponding payment, the middleman
may withhold at the time the reportable

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payment is made or credited to the
payee.
(2)Special rule for common trust
funds. A common trust fund (as defined
in section 584) must withhold either—
(i)At the time the reportable pay-
ment is received by or credited to the
common trust fund as provided in
paragraph (c)(1) of this section;
(ii)On the date on which the assets
of the common trust fund are valued;
or
(iii)At the time the common trust
fund pays or credits the reportable
payment to a participant of the com-
mon trust fund.
(3)Special rule for certain grantor
trusts. For grantor trusts described in
§31.3406(a)–2(b)(4), reportable pay-
ments made to the trust are treated as
paid by the trust to each grantor, in an
amount equal to the distribution made
by the trust to each grantor, on the date
that the reportable payment is paid to
the trust (except for gross proceeds
reportable under section 6045). Para-
graph (b)(2) of this section applies to a
grantor trust making a payment of
gross proceeds under section 6045
subject to withholding under section
3406. For purposes of this paragraph
(c)(3) a husband and wife filing a joint
return are considered to be one grantor.
§31.3406(b)(2)–1 Reportable interest
payment.
(a)Interest subject to backup
withholding—(1) In general. A pay-
ment of a kind, and to a payee, that is
required to be reported under section
6049 (relating to returns regarding
interest and original issue discount) is a
reportable payment for purposes of
section 3406, subject to the special
rules of §31.3406(b)(2)–2 (relating to
o r i g i n a l i s s u e d i s c o u n t ) a n d
§31.3406(b)(2)–3 (relating to window
transactions). See §31.6051–4 for the
requirement to furnish a statement to
the payee if tax is withheld under
section 3406.
(2)Special rule for tax-exempt inter-
est. When an issuer is required to make
an information return under §1.6049–
4(d)(8) of this chapter because a payee
provided a signed written statement on
the envelope or shell incorrectly claim-
ing that the interest was exempt from
taxation under section 103(a) (as de-
scribed in §1.6049–5(b)(1)(ii) of this
chapter), the issuer is not required to
impose withholding under section 3406.
(b)Amount subject to backup with-
holding—(1) In general. The amount of
interest subject to withholding under
section 3406 is the amount subject to
reporting under section 6049.
(2)Special rule to adjust for prema-
ture withdrawal penalty. Solely for
purposes of computing the amount
subject to withholding under section
3406, the payor may elect not to
withhold from the portion of any
interest payment that is not received by
the payee because a penalty is in fact
imposed for premature withdrawal of
funds deposited in a time savings
account, certificate of deposit, or simi-
lar class of deposit.
§31.3406(b)(2)–2 Original issue
discount.
(a)Original issue discount subject to
backup withholding. The amount of
original issue discount, treated as inter-
est, subject to withholding under sec-
tion 3406 is the amount subject to
reporting under section 6049, but is
limited to the amount of cash paid. In
addition, if an original issue discount
obligation, subject to reporting under
section 6045, is sold prior to maturity
and with respect to the seller a
condition exists for imposing withhold-
ing under section 3406 on the gross
proceeds, then withholding under
§31.3406(b)(3)–2 applies to the gross
proceeds of the sale reportable under
section 6045, and not to the amount of
any original issue discount includible in
the gross income of the seller for the
calendar year of the sale. See
§31.6051–4 for the requirement to
furnish a statement to the payee if tax
is withheld under section 3406.
(b)Amount subject to backup with-
holding and time when backup with-
holding is imposed with respect to
short-term obligations. In the case of
an obligation with a fixed maturity date
not exceeding one year from the date
of issue (a short-term obligation), with-
holding under section 3406 applies to
any payment of original issue discount
on the obligation includible in the gross
income of the holder to the extent of
the cash amount of the payment. See
§1.1273–1 of this chapter to determine
the amount of original issue discount
on a short-term obligation. See §1.446–
2(e)(1) of this chapter to determine the
amount of a payment treated as original
issue discount.
(c)Transferred short-term obliga-
tions—(1) Subsequent holder may
establish purchase price—(i) In gen-
eral. At maturity of a short-term
obligation, a subsequent holder (i.e.,
any person who purchased or otherwise
obtained the obligation after the obliga-
tion was issued to the original holder)
may establish the price of the obliga-
tion. The price established by the
subsequent holder must then be treated
as the original issue price for purposes
of computing the amount of the origi-
nal issue discount subject to withhold-
ing under section 3406. The price of a
short-term obligation may be estab-
lished by confirmation receipt or other
record of a similar type or, if the
obligation is redeemed by or through
the person from whom the obligation
was purchased or otherwise obtained,
by the records of the person from
whom or through whom the obligation
was purchased or otherwise obtained.
The subsequent holder is not required
to certify under penalties of perjury
that the price determined under this
paragraph (c)(1)(i) is correct.
(ii)Exception. A payor may elect to
disregard the price at which the subse-
quent holder purchased or otherwise
obtained the obligation if the payor’s
computer or recordkeeping system on
which the details of the obligation are
stored is not able to accept that price
without significant manual intervention.
(2)Subsequent holder unable (or not
permitted) to establish purchase price.
If a subsequent holder fails (or is
unable, pursuant to paragraph (c)(1)(ii)
of this section) to establish the pur-
chase price of the obligation, then the
person redeeming the obligation must
determine the amount subject to with-
holding under section 3406 as though
the obligation had been purchased by
the holder on the date of issue. If the
person redeeming the obligation is the
issuer of the obligation, then the issuer
must determine the amount subject to
withholding from its records. If a
person other than the issuer of the
obligation redeems the obligation and
the obligation is listed in Internal
Revenue Service Publication 1212, List
of Original Issue Discount Obligations,
that person must determine the amount
subject to withholding by using the
issue price indicated in Publication
1212.
(3)Transferred obligation. If a
short-term obligation is transferred, no
part of the purchase price is considered
a reportable interest payment under
section 6049. Withholding under sec-
tion 3406 applies, however, to the

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gross proceeds of the sale of the
obligation if the transfer is subject to
reporting under section 6045 and a
condition exists for imposing withhold-
ing. For the rules regarding withhold-
ing for amounts subject to reporting
under section 6045, see §31.3406-
(b)(3)–2.
(d)Amount subject to backup with-
holding and time when backup with-
holding is imposed with respect to
long-term obligations—(1) No cash
payments prior to maturity. In the case
of an obligation with a fixed maturity
date that is more than one year from
the date of issue (a long-term obliga-
tion) and with no cash payments prior
to maturity, withholding under section
3406 applies at the maturity of the
obligation to the amount of original
issue discount includible in the gross
income of the holder for the calendar
year in which the obligation matures.
The amount required to be withheld
must not exceed the amount of the cash
payment.
(2)Registered long-term obligations
with cash payments prior to maturity.
In the case of a long-term obligation in
registered form that provides for cash
payments prior to maturity, withholding
under section 3406 applies at the time
cash payments are made to the sum of
the amounts of qualified stated interest
and original issue discount includible in
the gross income of the holder for the
calendar year in which the cash pay-
ments are made. The amount required
to be withheld at the time of any cash
payment, however, must not exceed the
amount of the cash payment. If more
than one cash payment is made during
a calendar year, the tax that is required
to be withheld with respect to original
issue discount must be allocated among
all the expected cash payments in the
ratio that each cash payment bears to
the total of the expected cash
payments.
(3)Transferred registered long-term
obligations with payments prior to
maturity. In the case of a long-term
obligation that is transferred after its
issuance from the original holder, the
amount subject to withholding under
section 3406 with respect to a subse-
quent holder is the amount of original
issue discount includible in the gross
income of all holders during the
calendar year (without regard to any
amount paid by a subsequent holder at
the time of transfer). If the person
redeeming the obligation at maturity is
the issuer of the obligation, the issuer
must determine the amount subject to
withholding through its records by
treating the holder as if he were the
original holder. If a person redeeming
the obligation at maturity is a person
other than the issuer of the obligation,
and the obligation is listed in Internal
Revenue Service Publication 1212, List
of Original Issue Discount Obligations,
the person must determine the amount
subject to withholding by using the
issue price indicated in Publication
1212.
(e)Bearer long-term obligations. In
the case of a bearer long-term obliga-
tion with cash payments prior to
maturity—
(1)Payments prior to maturity.
Withholding under section 3406 applies
prior to maturity only to the payment
of qualified stated interest (and not to
any amount of original issue discount)
includible in the gross income of the
holder for the calendar year.
(2)Payments at maturity. At matu-
rity of the obligation, withholding
applies to the sum of any qualified
stated interest payment made at matu-
rity and the total amount of original
issue discount includible in the gross
income of the holder during the calen-
dar year of maturity. The amount re-
quired to be withheld at the time of the
cash payment, however, must not ex-
ceed the amount of the cash payment.
§31.3406(b)(2)–3 Window
transactions.
(a)Requirement to backup withhold.
Withholding under section 3406 applies
to a window transaction (as defined in
paragraph (b) of this section) only if
the payee does not furnish a taxpayer
identification number to the payor in
the manner required in paragraph (c) of
this section or furnishes an obviously
incorrect number as described in
§31.3406(h)–1(b)(2). Withholding does
not apply to a window transaction even
though the Internal Revenue Service
notifies the payor of the payee’s
incorrect taxpayer identification number
under section 3406(a)(1)(B) or of noti-
fied payee underreporting under section
3406(a)(1)(C). The payee in a window
transaction is not required to certify
under penalties of perjury that the
payee is not subject to withholding due
to notified payee underreporting (as
described in §31.3406(d)–2(b)(2)).
(b)Window transaction defined.
Window transaction means a payment
of interest with respect to any of the
following obligations:
(1)An interest coupon in bearer
form that is subject to taxation (i.e.,
other than exempt interest described in
§1.6049–5(b)(1)(ii) of this chapter);
(2)A United States savings bond; or
(3)A discount obligation having a
maturity at issue of one year or less,
including commercial paper and
bankers’ acceptances that are in defini-
tive form (i.e., evidenced by a paper
document other than a confirmation
receipt) but not including short-term
government obligations (as defined in
section 1271(a)(3)(B)).
(c)Manner of furnishing taxpayer
identification number in the case of a
window transaction. A payee must
furnish the payee’s taxpayer identifica-
tion number to the payor with respect
to a window transaction either orally or
in writing at the time that the window
transaction occurs. See §31.3406(g)–
3(c)(1)(i), which provides that a payee
may not claim the payee is awaiting
receipt of a taxpayer identification
number with respect to a window
transaction. The payee is not required
to certify, under penalties of perjury,
that the taxpayer identification number
provided is correct.
§31.3406(b)(2)–4 Reportable dividend
payment.
(a)Dividends subject to backup
withholding. A payment of a kind, and
to a payee, that is required to be
reported under section 6042 (relating to
returns regarding payments of divi-
dends and corporate earnings and
profits) is a reportable payment for
purposes of section 3406. See para-
graph (b) of this section for certain
dividends not subject to withholding
under section 3406. See §31.6051–4 for
the requirement to furnish a statement
to the payee if tax is withheld under
section 3406.
(b)Dividends not subject to backup
withholding. Except as provided in
§31.3406(b)(3)–2 (relating to transac-
tions reportable under section 6045),
withholding under section 3406 does
not apply to—
(1)Any amount treated as a taxable
dividend by reason of section 302
(relating to redemptions of stock),
section 304 (relating to redemptions
through the use of related corpora-
tions), section 306 (relating to disposi-
tion of certain stock), section 356

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(relating to receipt of additional consid-
eration in connection with certain reor-
ganizations), or section 1081(e)(2) (re-
lating to certain distributions pursuant
to an order of the Securities and
Exchange Commission);
(2)Any exempt-interest dividend, as
defined in section 852(b)(5)(A), paid
by a regulated investment company; or
(3)Any amount paid or treated as
paid during a year by a regulated
investment company, provided that the
payor reasonably estimates, as provided
in paragraph (c)(2) of this section, that
95 percent or more of all dividends
paid or treated as paid during the year
are exempt-interest dividends.
(c)Amount subject to backup with-
holding—(1) In general. The amount of
a dividend subject to withholding under
section 3406 is the amount subject to
reporting under section 6042, including
any dividend that is reinvested pursuant
to a plan under which a shareholder
may elect to receive stock as a
dividend instead of property. Except as
otherwise provided in this paragraph
(c), withholding applies to the entire
amount of the distribution.
(2)Reasonable estimate of amount
of dividend subject to backup withhold-
ing. Pursuant to section 6042(b)(3) and
§1.6042–3(c) of this chapter, if the
payor is unable to determine the
portion of a distribution that is a
dividend, the entire amount of the
distribution must be treated as a
dividend for information reporting un-
der section 6042. Hence, withholding
applies to the entire amount of the
distribution. If a payor is able reason-
ably to estimate under section 6042 and
§1.6042–3(c) of this chapter the portion
of a distribution that is not a dividend,
however, the payor must not withhold
on that portion (which is not consid-
ered a dividend). A payor making a
payment, all or a portion of which may
not be a dividend, may use previous
experience to estimate the portion of a
distribution that is not a dividend. The
payor’s estimate is considered reason-
able if—
(i)The estimate does not exceed the
proportion of the distributions made by
the payor during the most recent
calendar year for which a Form 1099
was required to be filed that was not
reported by the payor as a dividend;
and
(ii)The payor has no reasonable
basis to expect that the proportion of
the distribution that is not a dividend
will be substantially different for the
current year.
(3)Reinvested dividends. In the case
of a dividend paid pursuant to a
dividend reinvestment plan, withhold-
ing under section 3406 applies, pur-
suant to §31.3406(a)–4(a), at the time
and to the amount made available to
the shareholder or credited to the
shareholder’s account. At the discretion
of the payor, withholding under section
3406 need not be applied to any excess
of the fair market value of the shares
of stock received by the shareholder or
credited to the shareholder’s account
over the purchase price of the shares
(including shares acquired by the share-
holder at a discount in connection with
the dividend distribution) or to any fee
that is paid by the payor in the nature
of a broker’s fee for purchase of the
stock or service charge for maintenance
of the shareholder’s account. The payor
must, however, treat any excess
amounts and fees on a consistent basis
for each calendar year.
§31.3406(b)(2)–5 Reportable
patronage dividend payment.
(a)Patronage dividends subject to
backup withholding. A payment of a
kind, and to a payee, that is required to
be reported under section 6044 (relat-
ing to returns regarding patronage
dividends) is a reportable payment for
p u r p o s e s o f s e c t i o n 3 4 0 6 . S e e
§31.6051–4 for the requirement to
furnish a statement to the payee if tax
is withheld under section 3406.
(b)Amount subject to backup
withholding—(1) Failure to provide
taxpayer identification number or noti-
fication of incorrect taxpayer identi-
fication number. For purposes of sec-
tions 3406(a)(1)(A) and (B), the
amount of a payment described in
paragraph (a) of this section that is
subject to withholding under section
3406 is the amount subject to reporting
under section 6044, but only to the
extent the payment is made in money.
For purposes of this paragraph (b),
money includes cash or a qualified
c h e c k ( a s d e f i n e d i n s e c t i o n
1388(c)(4)).
(2)Notified payee underreporting or
payee certification failure. For pur-
poses of sections 3406(a)(1)(C) and
(D), the amount of a payment described
in paragraph (a) of this section that is
subject to withholding under section
3406 is the amount subject to withhold-
ing under paragraph (b)(1) of this
section, but only if 50 percent or more
of that reportable amount is paid in
money. Thus, a payor is required to
withhold according to this paragraph
(b)(2) on a payment if—
(i)There has been a notified payee
underreporting described in section
3406(a)(1)(C) and §31.3406(c)–1 or
there has been a payee certification
f a i l u r e d e s c r i b e d i n s e c t i o n
3406(a)(1)(D) and §31.3406(d)–2;
(ii)The payor makes a reportable
payment subject to reporting under
section 6044 to the payee; and
(iii)Fifty percent or more of the
payment is in cash or by qualified
check.
§31.3406(b)(3)–1 Reportable payments
of rents, commissions, nonemployee
compensation, etc.
(a)Section 6041 and 6041A(a) pay-
ments subject to backup withholding. A
payment of a kind, and to a payee, that
is required to be reported under section
6041 (relating to information reporting
of rents, commissions, nonemployee
compensation, etc.) or a payment that
is required to be reported under section
6041A(a) (relating to information re-
porting of payments to nonemployees
for services) is a reportable payment
for purposes of section 3406. See
paragraph (b) of this section for an
exception concerning payments ag-
g r e g a t i n g l e s s t h a n $ 6 0 0 . S e e
§31.6051–4 for the requirement to
furnish a statement to the payee if tax
is withheld under section 3406.
(b)Amount subject to backup with-
holding—(1) In general. The amount of
a payment described in paragraph (a)
of this section subject to withholding
under section 3406 is the amount
subject to reporting under section 6041
or section 6041A(a).
(2)Net commissions. Withholding
under section 3406 does not apply to
net commissions paid to unincorporated
special agents with respect to insurance
policies that are subject to reporting
under section 6041, provided that no
cash is actually paid by the payor to
the special agent.
(3)Payments aggregating $600 or
more for the calendar year—(i) In
general. A payment is a reportable
payment under paragraph (a) of this
section only if the aggregate amount of
the current payment and all previous
payments to the payee during the

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calendar year aggregate $600 or more.
The amount subject to withholding is
the entire amount of the payment that
causes the total amount paid to the
payee to equal $600 or more and the
amount of any subsequent payments
made to the payee during the calendar
year. This paragraph (b)(3)(i) does not
apply to gambling winnings (as
provided in §31.3406(g)–2(e)(1)).
(ii)Exceptions—(A) The $600 ag-
gregation rule. The $600 aggregation
rule of paragraph (b)(3)(i) of this
section does not apply if the payor was
required to make an information return
under section 6041 or 6041A(a) for the
preceding calendar year with respect to
payments to the payee, or the payor
was required to withhold under section
3406 during the preceding calendar
year with respect to payments to the
payee that were reportable under sec-
tion 6041 or 6041A(a).
(B)Determination of whether pay-
ments aggregate $600 or more. In
determining whether payments to a
payee aggregate $600 or more during a
calendar year for purposes of withhold-
ing under section 3406, the payor must
aggregate only payments of the same
kind made to the same payee. For this
purpose, payments are of the same kind
if they are of the same type, regardless
of whether they are reportable under
the same section. However, a payor
with different paying departments mak-
ing reportable payments of the same
kind is not required to aggregate
payments made by all those depart-
ments unless it is the payor’s custom-
ary method to aggregate those pay-
ments. A payor may, in its discretion,
aggregate—
(1) Payments not of the same kind
to the same payee, reportable under
either section 6041 or 6041A(a); and
(2) Payments reportable under sec-
tion 6041 with payments reportable
under section 6041A(a).
§31.3406(b)(3)–2 Reportable barter
exchanges and gross proceeds of
sales of securities or commodities by
brokers.
(a)Transactions subject to backup
withholding. A payment of a kind, and
to a payee, that any broker (as defined
in section 6045(c) and §1.6045–1(a)(1)
of this chapter) or any barter exchange
(as defined in section 6045(c) and
§1.6045–1(a)(4) of this chapter) is
required to report under section 6045 is
a reportable payment for purposes of
section 3406. See §31.6051–4 for the
requirement to furnish a statement to
the payee if tax is withheld under
section 3406.
(b)Amount subject to backup with-
holding—(1) In general. The amount
subject to withholding under section
3406 is the amount subject to reporting
under section 6045. The amount subject
to withholding with respect to broker
reporting is the amount of gross
p r o c e e d s ( a s d e t e r m i n e d u n d e r
§1.6045–1(d)(5) of this chapter). The
amount subject to withholding with
respect to barter exchanges is the
amount received by any member or
client (as determined under §1.6045–
1(f)(4) of this chapter).
(2)Forward contracts, including
foreign currency contracts, and regu-
lated futures contracts—(i) In general.
If a customer is subject to withholding
under section 3406 with respect to a
forward contract (subject to information
reporting under §1.6045–1(c)(5) of this
chapter), including a foreign currency
contract (as defined in section
1256(g)(2)), or a regulated futures
contract (as defined in section
1256(g)(1)), or with respect to an
account through which those contracts
are disposed of or acquired, the broker
must withhold on both of the following
amounts:
(A)All cash or property withdrawn
from the account by the customer
during the relevant year; and
(B)The amount of cash in the
account available for withdrawal by the
customer at the relevant year-end (in-
cluding both gross proceeds and varia-
tion margin).
(ii)Rules concerning withdrawals. A
withdrawal includes the use of money
(including both gross proceeds and
variation margin) or property in the
account to purchase any property other
than property acquired in connection
with the closing of a contract. For this
purpose, the acceptance of a warehouse
receipt or other taking of delivery to
close a contract is in connection with
the closing of a contract only if the
property acquired is disposed of by the
close of the seventh trading day follow-
ing the trading day that the customer
takes delivery under the contract. In
addition, making delivery to close a
contract is in connection with the
closing of a contract only if the broker
is able to determine that the property
used to close the contract was acquired
no earlier than the seventh trading day
prior to the trading day on which
delivery is made. Withdrawals do not
include repayments of debt incurred in
connection with making or taking
delivery that meets the requirements of
this paragraph (b)(2). Withdrawals also
do not include payments of commis-
sions, fees, transfers of cash from the
account to another futures account that
is subject to this paragraph (b)(2) or
cash withdrawals traceable to disposi-
tions of property other than futures (not
including profit on the contract sepa-
rately reportable under §1.6045–
1(c)(5)(i)(b) of this chapter).
(iii)Special rule for forward con-
tracts, including foreign currency con-
tracts, and regulated futures contracts.
The determination of whether the
customer is subject to withholding
under section 3406 with respect to an
account containing forward contracts,
including foreign currency contracts, or
regulated futures contracts must be
made at the time of the cash or
property withdrawals or the relevant
year-end, whichever is applicable.
(3)Security sales made through a
margin account. The amount described
in paragraph (a) of this section that is
subject to withholding under section
3406 in the case of a security sale
made through a margin account (as
defined in 12 CFR part 220 (Regulation
T)) is the gross proceeds (as defined in
§1.6045–1(d)(5) of this chapter) of the
sale. The amount required to be with-
held with respect to the sale, however,
is limited to the amount of cash
available for withdrawal by the
customer immediately after the settle-
ment of the sale. For this purpose, the
amount available for withdrawal by the
customer does not include amounts
required to satisfy margin maintenance
under Regulation T, rules and regula-
tions of the National Association of
Securities Dealers and national se-
curities exchanges, and generally appli-
cable self-imposed rules of the margin
account carrier.
(4)Security short sales—(i) Amount
subject to backup withholding. The
amount subject to withholding under
section 3406 with respect to a short
sale of securities is the gross proceeds
(as defined in §1.6045–1(d)(5) of this
chapter) of the short sale. At the option
of the broker, however, the amount
subject to withholding may be the gain
upon the closing of the short sale (if
any); consequently, the obligation to
withhold under section 3406 would be

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deferred until the closing transaction. A
broker may use this alternative method
of determining the amount subject to
withholding under section 3406 with
respect to a short sale only if at the
time the short sale is initiated, the
broker expects that the amount of gain
realized upon the closing of the short
sale will be determinable from the
broker’s records. If, due to events
unforeseen at the time the short sale
was initiated, the broker is unable to
determine the basis of the property
used to close the short sale, the
property must be assumed for this
purpose to have a basis of zero.
(ii)Time of backup withholding. The
determination of whether a short seller
is subject to withholding under section
3406 must be made on the date of the
initiation or closing, as the case may
be, or on the date that the initiation or
closing, as the case may be, is entered
on the broker’s books and records.
(5)Fractional shares. A broker is
not required to withhold under section
3406 with respect to a sale of a
fractional share of stock resulting in
less than $20 of gross proceeds (as
described in §5f.6045–1(c)(3)(ix) of
this chapter).
§31.3406(b)(3)–3 Reportable payments
by certain fishing boat operators.
(a)Payments subject to backup with-
holding. A payment of a kind, and to a
payee, that is required to be reported
under section 6050A (relating to infor-
mation reporting by certain fishing boat
operators) is a reportable payment for
p u r p o s e s o f s e c t i o n 3 4 0 6 . S e e
§31.6051–4 for the requirement to
furnish a statement to the payee if tax
is withheld under section 3406.
(b)Amount subject to backup with-
holding. The amount described in para-
graph (a) of this section subject to
withholding under section 3406 is the
amount subject to reporting under
section 6050A, but only to the extent
the amount is paid in money and
represents a share of the proceeds of
the catch.
§31.3406(b)(3)–4 Reportable payments
of royalties.
(a)Royalty payments subject to
backup withholding. A payment of a
kind, and to a payee, that is required to
be reported under section 6050N (relat-
ing to information reporting of pay-
ments of royalties) is a reportable
payment for purposes of section 3406.
See §31.6051–4 for the requirement to
furnish a statement to the payee if tax
is withheld under section 3406.
(b)Amount subject to backup with-
holding. In general, the amount de-
scribed in paragraph (a) of this section
that is subject to withholding under
section 3406 is the amount subject to
reporting under section 6050N. How-
ever, if the reportable payment is for an
oil or gas interest, the amount subject
to withholding is the net amount the
payee receives (i.e., the gross proceeds
less production-related taxes such as
state severance taxes).
§31.3406(b)(4)–1 Exemption for
certain minimal payments.
(a)In general. A payor of reportable
interest or dividends (as described in
section 3406(b)(2)) or of royalties (as
described in section 3406(b)(3)(E))
may elect not to withhold from a
payment that does not exceed $10 and
that on an annualized basis does not
exceed $10 (see paragraph (c) of this
section). A broker or barter exchange
may elect not to withhold on gross
proceeds of $10 or less without regard
to the annualization requirement. See
§31.6051–4 for the requirement to
furnish a statement to the payee if tax
is withheld under section 3406.
(b)Manner of making the election.
The election not to withhold from
payments that do not exceed $10 can
be made only for payments described
in paragraph (a) of this section. The
election may be made on a payment-
by-payment basis.
(c)How to annualize—(1) In gen-
eral. To annualize a reportable interest
payment, dividend payment, or royalty
payment, a payor must calculate what
the amount of the payment would be if
it were paid for a 1-year period
(instead of the period for which it
actually is paid). The annualized
amount is determined by dividing the
amount of the payment by the number
of days in the period for which it is
being paid and then multiplying that
result by the number of days in the
year. If the annualized amount is $10
or less, the payor may elect not to
withhold on that payment regardless of
whether more than $10 may be or has
been paid to the payee in other re-
portable payments during the calendar
year. Conversely, if the annualized
amount is more than $10, withholding
applies even if $10 or less is actually
paid to the payee during the calendar
year. For purposes of computing the
annualized amount, the payor may as-
sume that February always consists of
28 days and that the year always
consists of 360 days. For amounts that
are deposited with a payor in a new
account or certificate between the dates
on which the payor customarily pays or
credits interest, the payor may assume
that the period for which the interest is
paid is the payor’s customary period
for paying or crediting interest.
(2)Special aggregation rule for re-
portable interest and dividends. If a
payor maintains records that reflect
multiple holdings of one payee and the
payor makes an aggregate payment of
reportable interest or dividends (as
defined in section 3406(b)(2)) with
respect to those multiple holdings (such
as a dividend check that reflects
payment on all stock owned by the
payee), the payor must annualize the
aggregate payment.
(d)Exception for window transac-
tions and original issue discount. A
payor is not required to annualize
payments made in window transactions
(as defined in §31.3406(b)(2)–3(b)) or
payments of original issue discount.
With respect to a window transaction,
however, the payor is required to
aggregate all payments made in the
same transaction (e.g., payments made
with respect to coupons or obligations
presented for payment at the same time
as described in §1.6049–4(e)(4) of this
chapter).
§31.3406(c)–1 Notified payee
underreporting of reportable interest
or dividend payments.
(a)Overview. Withholding under
section 3406(a)(1)(C) applies to any re-
portable interest or dividend payment
(as defined in section 3406(b)(2)) made
with respect to an account of a payee if
the Internal Revenue Service or a
broker notifies a payor under paragraph
(c)(1) or (2) of this section that the
payee is subject to withholding due to
notified payee underreporting (as de-
fined in paragraph (b)(1) of this sec-
tion), and the payor is required under
paragraph (c)(3) of this section to
identify that account. After receiving
the notice and identifying accounts, the
payor must notify the payee, in accord-
ance with paragraph (d) of this section,

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that withholding due to notified payee
underreporting has started. Paragraph
(e) of this section describes the period
for which withholding due to notified
payee underreporting is required. Para-
graph (f) of this section provides rules
concerning notices that the Internal
Revenue Service will send to a payee
before notifying a payor that the payee
is subject to withholding due to noti-
fied payee underreporting. Paragraph
(g) of this section provides rules that a
payee can use to prevent withholding
due to notified payee underreporting
from starting or to stop it once it has
started. Paragraph (h) of this section
provides special rules for joint accounts
of payees who have filed a joint return.
See section 6682 for the penalties that
may apply to a payee subject to with-
holding under section 3406(a)(1)(C).
(b)Definitions—(1) Notified payee
underreporting. Notified payee under-
reporting means that the Internal Reve-
nue Service has—
(i)Determined that there was a
payee underreporting (as defined in
paragraph (b)(2) of this section);
(ii)Mailed at least four notices
under paragraph (f)(1) of this section to
the payee (over a period of at least 120
days) with respect to the underreport-
ing; and
(iii)Assessed any deficiency attribu-
table to the underreporting in the case
of any payee who has filed a return.
(2)Payee underreporting—(i) In
general. Payee underreporting means
that the Internal Revenue Service has
determined, for a taxable year, that—
(A)A payee failed to include in the
payee’s return of tax under chapter 1 of
the Internal Revenue Code for that year
any portion of a reportable interest or
dividend payment required to be shown
on that tax return; or
(B)A payee may be required to file
a return for that year and to include a
reportable interest or dividend payment
in the return, but failed to file the
return.
(ii)Payments included in making
payee underreporting determination.
The determination of whether there is
payee underreporting is made by treat-
ing as reportable interest or dividend
payments, all payments of dividends
reported under section 6042, all pa-
tronage dividends reported under sec-
tion 6044, and all interest and original
issue discount reported under section
6049, regardless of whether withhold-
ing due to notified payee underreport-
ing applies to those payments.
(c)Notice to payors regarding back-
up withholding due to notified payee
underreporting—(1) In general. If the
Internal Revenue Service or a broker
notifies a payor that a payee is subject
to withholding due to notified payee
underreporting, the payor must—
(i)Identify any accounts of the
payee under the rules of paragraph
(c)(3) of this section; and
(ii)Notify the payee and withhold
under section 3406 on reportable inter-
est or dividend payments made with
respect to any identified account under
the rules of paragraphs (d) and (e) of
this section.
(2)Additional requirements for
payors that are also brokers—(i) In
general. A broker must notify the
payor of a readily tradable instrument
that the payee of the instrument is
subject to withholding due to notified
payee underreporting if—
(A)The broker (in its capacity as a
payor) receives a notice from the
Internal Revenue Service under para-
graph (c)(1) of this section that a payee
is subject to withholding due to noti-
fied payee underreporting and the
broker is required to identify an ac-
count of the payee under paragraph
(c)(3) of this section;
(B)The payee subsequently acquires
the instrument from the broker through
the same account; and
(C)The acquisition of the instrument
occurs after the close of the 30th
business day after the date that the
broker receives the notice (or on any
earlier date that the broker may begin
applying this paragraph (c)(2) after
receipt of the notice described in
paragraph (c)(1) of this section).
(ii)Transfer out of street name. For
purposes of this paragraph (c)(2), an
acquisition includes a transfer of an
instrument out of street name into the
name of the registered owner (i.e., the
payee).
(iii)Method of providing notice. A
broker must provide the notice required
under this paragraph (c)(2) to the payor
of the instrument with the transfer
instructions for the acquisition. See
§31.3406(d)–4(a)(2).
(iv)Termination of obligation to
provide information. The obligation of
a broker to provide notice to payors
under this paragraph (c)(2) terminates
simultaneously with the termination of
the broker’s obligation to withhold (in
its capacity as payor) due to notified
payee underreporting on reportable in-
terest or dividends made with respect
to the account.
(3)Payor identification of accounts
of the payee subject to backup with-
holding due to notified payee under-
reporting—(i) In general—(A) Notice
from the Internal Revenue Service. If a
payor receives a notice from the
Internal Revenue Service under para-
graph (c)(1) of this section, the payor
must identify, exercising reasonable
care, all accounts using the same
taxpayer identification number for in-
formation reporting purposes as the one
provided in the notice. The notice may
provide, however, that the payor need
only identify the account or accounts
corresponding to any account number
or designation and related taxpayer
identification number used for informa-
tion reporting purposes as that listed on
the notice.
(B)Notice from a broker. If a payor
receives a notice from a broker under
paragraphs (c)(1) and (2) of this
section, the payor is not required to
identify any account other than the
account identified in the notice.
(ii)Exercise of reasonable care. If
an account identified pursuant to para-
graph (c)(3)(i)(A) of this section con-
tains a customer identifier that can be
used to retrieve systemically any other
accounts that use the same taxpayer
identification number for information
reporting purposes, the payor must
identify all accounts that can be so
retrieved. Otherwise, a payor is consid-
ered to exercise reasonable care in
identifying accounts subject to with-
holding under section 3406(a)(1)(C) if
the payor searches any computer or
other recordkeeping system for the
region, division, or branch that serves
the geographic area in which the
payee’s mailing address is located and
that was established (or is maintained)
to reflect reportable interest or dividend
payments.
(iii)Newly opened accounts. (A) In
general, a new account is not subject to
withholding under section 3406(a)(1)-
(C) if the payee provides to the payor a
Form W–9 (or other acceptable sub-
stitute) on which the payor may reason-
ably rely (within the meaning of
§31.3406(h)–3(e)(2) without regard to
§31.3406(h)–3(e)(2)(v)), unless the
payor has actual knowledge (within the
meaning of paragraph (c)(3)(iii)(B) of
this section) that the statements made
on the form are not true.

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(B) For purposes of paragraph
(c)(3)(iii)(A) of this section, a payor is
considered to have actual knowledge
that a payee’s statement that the payee
is not subject to withholding under
section 3406(a)(1)(C) is not true if—
(1) The employee or individual
agent of the payor who receives the
payee’s certification knows that the
statement is not true;
(2) In conducting the investigation,
if any, required by paragraph (c)(3)-
(iii)(C) of this section, the payor
identifies any other accounts of the
payee that are already subject to
w i t h h o l d i n g u n d e r s e c t i o n
3406(a)(1)(C); or
(3) In the course of processing the
certification or in administering an
account to which a certification relates,
the payor discovers that the payor was
previously notified by the Internal
Revenue Service that the payee is
subject to withholding under section
3406(a)(1)(C) and no notice was re-
ceived to stop withholding pursuant to
section 3406(c)(3) prior to the time of
the discovery.
(C)Except as provided in this para-
graph (c)(3)(iii)(C), a payor is not
required to investigate whether the
statements made on the Form W–9 de-
scribed in paragraph (c)(3)(iii)(A) of
this section are true. If, however, in
opening a new account, the payor relies
on the same Form W–9 (or appropriate
substitute) that it relied on previously
in opening another account, the payor
must investigate whether any such
existing account is subject to withhold-
ing under section 3406(a)(1)(C). Sim-
ilarly, if the payor utilizes a universal
account system described in the first
sentence of paragraph (c)(3)(ii) of this
section, and in opening a new account
the payor searches its records to
determine whether the new account
should be identified under an existing
identifier (because the payee has exist-
ing accounts with the payor), the payor
must investigate whether any existing
accounts identified with the same iden-
tifier are subject to withholding under
section 3406(a)(1)(C).
(d)Notice from payors of backup
withholding due to notified payee
underreporting—(1) In general. If a
payor receives notice from the Internal
Revenue Service or a broker under
paragraph (c)(1) of this section and is
required to identify an account under
paragraph (c)(3) of this section as an
account of the payee, the payor must
notify the payee in accordance with
paragraph (d)(2) of this section that
withholding due to notified payee
underreporting has started.
(2)Procedures. The payor must
send the notice required by paragraph
(d)(1) of this section to the payee no
later than 15 days after the date that
the payor makes the first payment
subject to withholding due to notified
payee underreporting. The payor must
send the notice by first-class mail to
the payee at the payee’s last known
address. The notice to the payee
required by paragraph (d)(1) of this
section must state—
(i)That the Internal Revenue Service
has given notice that the payee has
underreported reportable interest or
dividends;
(ii)That, as a result of the under-
reporting, the payor is required under
section 3406(a)(1)(C) of the Internal
Revenue Code to withhold 31 percent
of reportable interest or dividend pay-
ments made to the payee;
(iii)The date that the payor started
(or plans to start) withholding due to
notified payee underreporting under
section 3406(a)(1)(C);
(iv)The account number or numbers
that are subject to withholding due to
notified payee underreporting;
(v)That the payee must obtain a
determination from the Internal Reve-
nue Service in order to stop the
withholding due to notified payee
underreporting; and
(vi)That while the payee is subject
to withholding due to notified payee
underreporting, the payee may not
certify to a payor making reportable
interest or dividend payments (or to a
broker acquiring a readily tradable
instrument for the payee) that the payee
is not subject to withholding due to
notified underreporting.
(e)Period during which backup
withholding is required— (1) In gen-
eral. If a payor receives notice from
the Internal Revenue Service or a
broker under paragraph (c)(1) of this
section, the payor must impose with-
holding under section 3406(a)(1)(C) on
all reportable interest or dividend pay-
ments with respect to any account of
the payee required to be identified
under paragraph (c)(3) of this section
made after the close of the 30th
business day after the day on which the
payor receives that notice and before
the stop date (as described in paragraph
(e)(2) of this section). A payor may
choose to start withholding under this
paragraph (e)(1) at any time during the
30-business-day period described in the
preceding sentence.
(2)Stop withholding—(i) When no
underreporting exists or undue hard-
ship exists—(A) Stop date. In the case
of a determination under paragraph
(g)(3)(i) or (iii) of this section that no
underreporting exists or that an undue
hardship exists, the stop date is the day
that is 30 days after the earlier of—
(1) The date on which the payor
receives written notification from the
Internal Revenue Service under para-
graph (g) of this section that withhold-
ing is to stop; or
(2) The date on which the payor
receives a copy of the written certifica-
tion provided to the payee by the
Internal Revenue Service under para-
graph (g) of this section that withhold-
ing is to stop.
(B)Acceleration of stop date. A
payor may choose to stop withholding
at any time during the 30-day period
described in paragraph (e)(2)(i)(A) of
this section.
(ii)When underreporting is cor-
rected or bona fide dispute exists. In
the case of a determination under
paragraph (g)(3)(ii) or (iv) of this
section that the underreporting has been
corrected or that a bona fide dispute
exists, the stop date occurs on the first
day of January (immediately following
a period of at least twelve months
ending on October 15 of any calendar
year in which the determination has
been made) or if later, the stop date
determined under paragraph (e)(2)(i) of
this section.
(3)Dormant accounts. The require-
ment that a payor withhold under this
paragraph (e) on reportable interest or
dividend payments made with respect
to an account terminates no later than
the close of the third calendar year
ending after the later of—
(i)The date that the most recent re-
portable interest or dividend payment
was made with respect to that account;
or
(ii)The date that the payor received
notice under paragraph (c)(1) of this
section.
(f)Notice to payees from the Inter-
nal Revenue Service—(1) Notice
period. After the Internal Revenue
Service determines under paragraph
(b)(2) of this section that payee under-
reporting exists, the Internal Revenue

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Service will mail to the payee at least
four notices over a period of at least
120 days (the notice period) before
payors will be notified under paragraph
(c)(1) of this section that the payee is
subject to withholding due to notified
payee underreporting. The notices may
be accompanied by, or incorporated in,
other notices provided to the payee by
the Internal Revenue Service.
(2)Payee subject to backup with-
holding. After the Internal Revenue
Service provides the notices described
in paragraph (f)(1) of this section, the
Internal Revenue Service will send
notices to payors under paragraph
(c)(1) of this section unless—
(i)A payee obtains a determination
under paragraph (g) of this section; or
(ii)In the case of a payee who has
filed a tax return, the Internal Revenue
Service has not assessed the deficiency
attributable to the underreporting.
(3)Disclosure of names of payors
and brokers. Pursuant to section
3406(c)(5) the Internal Revenue Serv-
ice may require a payee subject to
withholding due to notified payee
underreporting to disclose the names of
all the payee’s payors of reportable
interest or dividend payments and the
names of all of the brokers with whom
the payee has accounts which may
involve reportable interest or dividend
payments. To the extent required in the
request from the Internal Revenue
Service, the payee must also provide
the payee’s account numbers and other
information necessary to identify the
payee’s accounts.
(4)Backup withholding certification.
After a payee receives a final notice
from the Internal Revenue Service
under paragraph (f)(1) of this section,
the payee is not permitted to certify to
any payor or broker, under penalties of
perjury, that the payee is not subject to
withholding under section 3406(a)(1)-
(C), until the payee receives the cer-
tification from the Internal Revenue
Service under paragraph (g) of this
section advising the payee that the
payee is no longer subject to withhold-
ing under section 3406(a)(1)(C). A
final notice will contain the information
described in this paragraph (f)(4). See
sections 6682 and 7205(b) for civil and
criminal penalties for making a false
certification.
(g)Determination by the Internal
Revenue Service that backup withhold-
ing should not start or should be
stopped—(1) In general. A payee may
prevent withholding due to notified
payee underreporting from starting, or
stop the withholding once it has
started, by requesting and receiving a
determination from the Internal Reve-
nue Service under one or more of the
provisions of paragraph (g)(3) of this
section. Following its review of a
request for a determination under para-
graph (g)(3) of this section, the Internal
Revenue Service will either make the
determination or provide the payee
with a written report informing the
payee that the request for determination
is being denied and the reasons for the
denial. If a determination is made
during the notice period (as defined in
paragraph (f)(1) of this section), the
payee is not subject to withholding due
to notified payee underreporting with
respect to any taxable year for which a
determination was made. If a deter-
mination is made after the notice
period, the Internal Revenue Service
will, at the time prescribed in para-
graph (g)(2) of this section, provide
written certification to a payee that
withholding is to stop, and will notify
payors who were contacted pursuant to
paragraph (c)(1) of this section to stop
withholding. A broker who (in its
capacity as payor) under this paragraph
(g)(1) receives a notice from the
Internal Revenue Service or a copy of
the certification provided to a payee by
the Internal Revenue Service is not
required to provide a corresponding
notice to any payors whom the broker
has previously notified under paragraph
(c)(2) of this section.
(2)Date notice to stop backup with-
holding will be provided—(i) Under-
reporting corrected or bona fide dis-
pute. If the Internal Revenue Service
makes a determination under paragraph
(g)(3)(ii) or (iv) of this section during
the 12-month period ending on October
15 of any calendar year (as described
in paragraph (e)(2)(ii) of this section),
the Internal Revenue Service will pro-
vide the certification and the notices
described in paragraph (g)(1) of this
section no later than December 1 of
that calendar year.
(ii)No underreporting or undue
hardship. If the Internal Revenue Serv-
ice makes a determination under para-
graph (g)(3)(i) or (iii) of this section,
the Internal Revenue Service will pro-
vide the notices described in paragraph
(g)(1) of this section no later than the
45th day after the day on which the
Internal Revenue Service makes its
determination.
(3)Grounds for determination. The
Internal Revenue Service will make a
determination that withholding due to
notified payee underreporting should
not start or should stop once it has
started if the payee—
(i)Shows that there was no payee
underreporting (as provided in para-
graph (g)(4) of this section) for each
taxable year with respect to which the
Internal Revenue Service determined
under paragraph (b)(2) of this section
that there was payee underreporting;
(ii)Corrects any payee underreport-
ing (as provided in paragraph (g)(5) of
this section) for each taxable year with
respect to which the Internal Revenue
Service determined under paragraph
(b)(2) of this section that there was
payee underreporting;
(iii)Shows that withholding will
cause or is causing an undue hardship
(as defined in paragraph (g)(6) of this
section) and that it is unlikely that the
payee will underreport interest or divi-
dend payments again; or
(iv)Shows that a bona fide dispute
exists regarding whether any under-
reporting has occurred (as provided in
paragraph (g)(7) of this section) for
each taxable year with respect to which
the Internal Revenue Service deter-
mined under paragraph (b)(2) of this
section that there was payee under-
reporting.
(4)No underreporting. A payee may
show that no underreporting of report-
able interest or dividends payments
exists by presenting—
(i) Receipts or other satisfactory
documentation to the Internal Revenue
Service showing that all taxes relating
to the payments were reported; or
(ii)Evidence showing that the payee
did not have to file a return for the
taxable year in question (e.g., because
the payee did not make enough in-
come) or that the underreporting deter-
mination was based upon a factual,
clerical, or other error.
(5)Correcting any payee under-
reporting—(i) Before issuance of a
statutory notice of deficiency. Before a
statutory notice of deficiency is issued
to a payee pursuant to section 6212, the
payee may correct underreporting—
(A)By filing a return if one was not
previously filed and including the
unreported interest and dividends
thereon;
(B)By filing an amended return in
the event a return was filed and

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including the unreported interest and
dividends thereon; or
(C)By consenting to the additional
assessment according to applicable
notices and forms sent to the payee by
the Internal Revenue Service with
respect to the underreporting, and
paying taxes, penalties, and interest due
with respect to any underreported inter-
est or dividend payments.
(ii)After issuance of a statutory
notice of deficiency. After a statutory
notice of deficiency is issued to a
payee—
(A)The payee may correct under-
reporting at any time, by filing a return
if one was not previously filed and
paying the entire deficiency and any
other taxes including penalties and
interest attributable to any payee under-
reporting of interest or dividend pay-
ments; or
(B)The payee may correct under-
reporting after the mailing of the
statutory notice of deficiency but be-
fore the expiration of the 90-day or
150-day period described in section
6213(a) or, if a petition is filed with
the United States Tax Court, before the
decision of the Tax Court is final, by
making a remittance to the Internal
Revenue Service of the amounts de-
scribed in paragraph (g)(5)(ii)(A) of
this section. The payee must specifi-
cally designate in writing that the
remittance is a deposit in the nature of
a cash bond.
(iii)Special rules. For purposes of
paragraph (g)(5)(ii) of this section, the
payee will not be deemed to have
corrected the payee underreporting un-
der paragraph (g)(5)(ii)(B) of this sec-
tion after the remittance is returned to
the payee in the manner described in
any applicable administrative proce-
dure. For further guidance on a deposit
in the nature of a cash bond, see
subparagraph 2 of section 4.01 of Rev.
Proc. 84–58 (1984–2 C.B. 501). (See
§601.601(d)(2) of this chapter.) Once
the remittance is returned to the payee,
the rules of this section will apply. If
the Internal Revenue Service previously
contacted payors of the payee to start
withholding with respect to the notified
payee underreporting, however, the In-
ternal Revenue Service will recontact
those payors to start withholding under
paragraph (c)(1) of this section with
respect to the payee underreporting
without regard to paragraph (f) of this
section.
(6)Undue hardship—(i) In general.
A determination of undue hardship will
be based on the overall impact to the
payee of having reportable interest or
dividend payments withheld at a 31
percent rate under section 3406. In
addition, a determination of undue
hardship will be made only if the
Internal Revenue Service concludes
that it is unlikely that any payee
underreporting will occur again.
(ii)Factors. Factors that will be
considered in determining whether
withholding causes undue hardship in-
clude, but are not limited to, the
following—
(A) Whether estimated tax pay-
ments, and other credits for current tax
liabilities, or amounts withheld on em-
ployee wages or pensions, in addition
to withholding under section 3406,
would cause significant overwith-
holding;
(B)The payee’s health, including
the payee’s ability to pay foreseeable
medical expenses;
(C)The extent of the payee’s re-
liance on interest and dividend pay-
ments to meet necessary living ex-
penses and the existence, if any, of
other sources of income;
(D)Whether other income of the
payee is limited or fixed (e.g., social
security, pension, and unearned
income);
(E)The payee’s ability to sell or
liquidate stocks, bonds, bank accounts,
trust accounts, or other assets, and the
consequences of doing so;
(F)Whether the payee reported and
timely paid the most recent year’s tax
liability, including interest and dividend
income; and
(G)Whether the payee has filed a
bankruptcy petition with the United
States Bankruptcy Court.
(7)Bona fide dispute. The Internal
Revenue Service may make a deter-
mination under this paragraph (g)(7) if
there is a dispute between the payee
and the Internal Revenue Service on a
question of fact or law that is material
to a determination under paragraph
(g)(3)(i) of this section and, based upon
all the facts and circumstances, the
Internal Revenue Service finds that the
dispute is asserted in good faith by the
payee and there is a reasonable basis
for the payee’s position.
(h)Payees filing a joint return—(1)
In general. For purposes of this sec-
tion, if payee underreporting is found
to exist with respect to a joint return,
then the provisions of this section
apply to both payees (i.e., the husband
and wife). As a result, both payees are
subject to withholding on accounts in
their individual names as well as
accounts in their joint names. Either or
both payees may satisfy the criteria for
a determination that no payee under-
reporting exists, that the underreporting
has been corrected, or that a bona fide
dispute exists (as provided in paragraph
(g)(3)(i), (ii), or (iv) of this section).
Both payees, however, must satisfy the
criteria for a determination that with-
holding will cause or is causing undue
hardship (as provided in paragraph
(g)(3)(iii) of this section).
(2)Exceptions—(i) Innocent spouse.
A spouse who files a joint return may
obtain a determination that withholding
should stop or not start with respect to
payments made to his or her individual
accounts, if the spouse shows that—
(A)He or she did not underreport
income because he or she is a spouse
described in section 6013(e), i.e, inno-
cent spouse; or
(B)There is a bona fide dispute
regarding whether he or she is an
innocent spouse and hence did not
underreport income.
(ii)Divorced or legally separated
payee. A payee who, at the time of the
request for a determination under para-
graph (g) of this section, is divorced or
separated under state law may obtain a
determination that undue hardship ex-
ists (or would exist) under paragraph
(g)(3)(iii) of this section with respect to
reportable interest or dividend pay-
ments made to his or her individual
accounts if the divorced or legally
separated payee satisfies the criteria for
a determination under paragraph
(g)(6) of this section.
(i)Reserved.
(j)Penalties. For the application of
penalties related to this section, see
sections 6682 and 7205(b).
§31.3406(d)–1 Manner required for
furnishing a taxpayer identification
number.
(a)Requirement to backup withhold.
Withholding under section 3406(a)(1)-
(A) applies to a reportable payment (as
defined in section 3406(b)) if the payee
does not furnish the payee’s taxpayer
identification number to the payor in
the manner required by this section.
The period for which withholding is
required is described in §31.3406(e)–

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1(b). See §31.3406(d)–3(a) and (b) for
special rules when an account is
established directly with, or an instru-
ment is acquired directly from, the
payor by electronic transmission or by
mail, or an instrument is sold through a
broker by electronic transmission or by
mail. See §31.3406(d)–4 for special
rules applicable to readily tradable
instruments acquired through a broker.
See §31.3406(h)–3(e) for the rules on
when a payor may rely on a Form W–
9. See also §31.3406(g)–3 for rules
regarding a payee awaiting receipt of a
taxpayer identification number. See the
applicable information reporting sec-
tions and section 6109 and the regula-
tions thereunder to determine whose
taxpayer identification number should
be provided.
(b)Reportable interest or dividend
account—(1) Manner required for fur-
nishing a taxpayer identification num-
ber with respect to a pre–1984 account
or instrument. A payee must furnish
the payee’s taxpayer identification
number to the payor with respect to
any obligation, deposit, certificate,
share, membership, contract, invest-
ment, account, or other relationship or
instrument established or acquired on
or before December 31, 1983 (a pre–
1984 account) and with respect to
which the payor makes a reportable
interest or dividend payment (as de-
fined in section 3406(b)(2)). The man-
ner of determining whether an account
or an instrument is a pre–1984 account
is described in paragraph (b)(2) of this
section. The payee of a pre–1984
account may furnish the payee’s tax-
payer identification number to the
payor orally or in writing. The payee is
not required to certify under penalties
of perjury that the taxpayer identifica-
tion number is correct.
(2)Determination of pre–1984 ac-
count or instrument—(i) In general. An
account that is in existence before
January 1, 1984, will be considered a
pre–1984 account, regardless of
whether additional deposits are made to
the account on or after January 1,
1984. An account established as an
expansion of a credit union prime
account in existence prior to January 1,
1984, constitutes a pre–1984 account.
If funds taken from one account in
existence prior to January 1, 1984, are
used to create a new account on or
after that date, however, the new
account does not constitute a pre–1984
account except as provided in the
preceding sentence. An instrument ac-
quired prior to January 1, 1984, is a
pre–1984 account. Regardless of when
an instrument was acquired, if it is
negotiated in a window transaction as
defined in §31.3406(b)(2)–3(b), it is
treated as an instrument acquired after
December 31, 1983. An obligation in
bearer form and subject to reporting
under section 6045, whenever acquired,
is not a pre–1984 account. Any instru-
ment, whenever acquired, that is held
in a brokerage account is considered a
pre–1984 account if the brokerage
account is not a post–1983 brokerage
account (as described in paragraph
(c)(1)(ii) of this section). If shares of a
corporation are held before January 1,
1984 (or considered held before that
date by operation of this paragraph
(b)(2)), and additional shares are ac-
quired by the holder, irrespective of
whether the shares are received by
reason of a stock dividend, investing
new cash, or otherwise, the new shares,
in the discretion of the payor, may be
considered a pre–1984 account. In the
case of a qualified employee trust that
distributes instruments in kind, any
instrument distributed from the trust is
considered a pre–1984 account with
respect to employees who were partici-
pants in the trust before 1984. Sim-
ilarly, when a payor offers participants
in a plan the opportunity to purchase
stock of the payor after a specified
time, using the money that the payee
invested during that period of time, the
stock so purchased after December 31,
1983, is considered a pre–1984 account
with respect to participants in the plan
who either owned shares or invested
money in the plan before January 1,
1984.
(ii)Account or instrument automat-
ically acquired on the maturity or
termination of an account. When an
account is opened, or an instrument is
acquired, automatically on the maturity
or termination of an account that was
in existence or an instrument that was
held before January 1, 1984 (or consid-
ered to have been in existence or held
before that date by operation of this
paragraph (b)(2)(ii)), without the par-
ticipation of the payee, the new account
or instrument, in the discretion of the
payor, may be considered a pre–1984
account. For purposes of the preceding
sentence, a payee is not considered to
have participated in the acquisition of
the new account or instrument solely
because the payee failed to exercise a
right to withdraw funds at the maturity
or termination of the old account or
instrument.
(iii)Insurance policies. In the case
of insurance policies in effect on
December 31, 1983, the election of a
dividend accumulation option pursuant
to which interest is paid (as defined in
§1.6049–5(a)(4) of this chapter), or the
creation of an account in which pro-
ceeds of a policy are held for the
policy beneficiary, may, in the payor’s
discretion, be treated as a pre–1984
account.
(iv)Acquisitions of accounts and in-
struments—(A) Pre–1984 or post–1983
status known. If a payor acquires
accounts or instruments of another
payor (including through a tax-free
reorganization under section 368), the
acquiring payor must treat the persons
specified in this paragraph (b)(2)(iv)(A)
as having the same requirement to
furnish a taxpayer identification num-
ber in the manner required under this
paragraph (b) to the acquiring payor for
information reporting, withholding, and
related tax provisions as existed with
respect to the payor whose accounts or
instruments were acquired. Persons
specified in this paragraph (b)(2)(iv)(A)
are persons who held accounts or
instruments in the other payor imme-
diately before the acquisition and who
receive an account or instrument in the
acquiring payor immediately after the
acquisition.
(B)Pre–1984 or post–1983 status
unknown. If the acquiring payor, as
described in paragraph (b)(2)(iv)(A) of
this section, is unable to identify from
the business records of the other payor
whether any or all of the accounts or
instruments of the persons specified in
paragraph (b)(2)(iv)(A) of this section
are pre–1984 (or post–1983) accounts
or instruments, then the acquiring
payor may treat these unidentified
accounts or instruments as pre–1984
accounts or instruments.
(C)Cross reference. See §31.3406-
(g)–2(g) for the limited exception from
w i t h h o l d i n g u n d e r s e c t i o n
3406(a)(1)(A) on accounts or instru-
ments described in paragraphs (b)(2)-
(iv)(A) and (B) of this section for
which the payor does not have a
taxpayer identification number.
(3)Manner required for furnishing a
taxpayer identification number with
respect to an account or instrument
that is not a pre–1984 account. A
payee who receives reportable interest
or dividend payments (as defined in
section 3406(b)(2)) from a payor must
certify under penalties of perjury that

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the taxpayer identification number the
payee furnishes to the payor is the
payee’s correct taxpayer identification
number. The payee must make the
certification only with respect to an
account or instrument that is not a pre–
1984 account (as described in para-
graph (b)(2) of this section). See
§31.3406(h)–3 for a description of the
certificate on which the certification
must be made. See §31.3406(d)–2 for
the requirement that the payee must
certify under penalties of perjury that
the payee is not subject to withholding
due to notified payee underreporting.
See §31.3406(d)–3(a) with respect to
an account established directly with, or
an instrument acquired directly from,
the payor by electronic transmission or
by mail. See §31.3406(d)–4 for the
rules applicable to readily tradable
instruments acquired through a broker.
(4)Special rule with respect to the
acquisition of a readily tradable instru-
ment in a transaction between certain
parties acting without the assistance of
a broker. If a payee, at any time,
acquires a readily tradable instrument
without the assistance of a broker, and
no party to the acquisition is a broker
or an agent of the payor, the payee
must furnish the payee’s taxpayer
identification number to the payor prior
to the time reportable payments are
made on the instrument. The payee is
not required to certify under penalties
of perjury that the number is correct.
See §31.3406(d)–2 for the rule that a
payee is not subject to withholding due
to notified payee underreporting with
respect to a readily tradable instrument
acquired in the manner described in
this paragraph (b)(4). A broker is
considered to provide assistance in the
acquisition of an instrument if the
person effecting the acquisition would
be required to make an information
return under section 6045 if such
person were to sell the instrument. See
§31.3406(d)–4 for rules relating to an
acquisition of a readily tradable instru-
ment when a broker is involved.
(c)Brokerage account—(1) Manner
required for furnishing a taxpayer
identification number with respect to a
brokerage relationship that is not a
post–1983 brokerage account—(i) In
general. With respect to any instru-
ment, investment, or deposit made
through a brokerage account that is not
a post–1983 brokerage account, a payee
must furnish the payee’s taxpayer
identification number to the broker
either orally or in writing. The payee is
not required to certify under penalties
of perjury that the taxpayer identifica-
tion number is correct. See paragraph
(b)(2)(i) of this section for the rule that
any instrument, whenever acquired, that
is held in a brokerage account that is
not a post–1983 brokerage account, is
considered held in an account that is
not a post–1983 brokerage account. For
example, in 1983 a payee established
and acquired a readily tradable instru-
ment from a brokerage account; no
activity took place through that account
until the payee purchased a readily
tradable instrument in 1995. That read-
ily tradable instrument is not held in a
post–1983 brokerage account; there-
fore, the payee need not certify under
penalties of perjury that the payee’s
taxpayer identification number is
correct.
(ii)Definition of a brokerage ac-
count that is not a post–1983 bro-
kerage account. A brokerage account
that was established by a payee before
January 1, 1984, through which during
1983 the broker either bought or sold
securities for the payee or held se-
curities on behalf of the payee as a
nominee (i.e., in street name), is an
account that is not a post–1983 bro-
kerage account.
(2)Manner required for furnishing a
taxpayer identification number with
respect to a post–1983 brokerage
account—(i) In general. With respect
to a post–1983 brokerage account, the
payee must furnish the payee’s tax-
payer identification number to the
broker and certify under penalties of
perjury that the taxpayer identification
number furnished is correct, except as
provided in §31.3406(d)–3(b).
(ii)Definition of a post–1983 bro-
kerage account. A brokerage account
established after December 31, 1983
(or before January 1, 1984, through
which during 1983 the broker neither
bought nor sold securities nor held
securities on behalf of the payee as a
nominee (i.e., in street name)), is a
post–1983 brokerage account.
(d)Rents, commissions, nonemployee
compensation, and certain fishing boat
operators, etc.—Manner required for
furnishing a taxpayer identification
number. For accounts, contracts, or
relationships subject to information
reporting under section 6041 (relating
to information reporting at source on
rents, royalties, salaries, etc.), section
6041A(a) (relating to information re-
porting of payments for nonemployee
services), section 6050A (relating to
information reporting by certain fishing
boat operators), or section 6050N (re-
lating to information reporting of pay-
ments of royalties), the payee must
furnish the payee’s taxpayer identifica-
tion number to the payor either orally
or in writing. Except as provided in
§31.3406(d)–5, the payee is not re-
quired to certify under penalties of
perjury that the taxpayer identification
number is correct regardless of when
the account, contract, or relationship is
established.
§31.3406(d)–2 Payee certification
failure.
(a)Requirement to backup withhold.
Withholding under section 3406(a)-
(1)(D) applies to a reportable interest
or dividend payment (as defined in
section 3406(b)(2)) if, and only if, the
payee fails to certify to the payor,
under penalties of perjury, that the
payee is not subject to withholding due
to notified payee underreporting under
section 3406(a)(1)(C). The period for
which withholding applies is described
in §31.3406(e)–1(e). See §31.3406(d)–
3(a) for special rules when an account
is established directly with, or an
instrument is acquired directly from,
the payor by electronic transmission or
by mail. See §31.3406(c)–1(c)(3)(iv)
for rules with respect to a payor’s
reliance on a payee certification for a
new account following notified payee
underreporting. See §31.3406(d)–4 for
special rules relating to the acquisition
of a readily tradable instrument through
a broker. The certificate on which the
certification should be made is de-
scribed in §31.3406(h)–3.
(b)Exceptions. Withholding under
section 3406(a)(1)(D) and paragraph (a)
of this section does not apply to
reportable interest or dividend pay-
ments (as defined in section 3406-
(b)(2)) made—
(1)With respect to a pre–1984 ac-
count (as defined in §31.3406(d)–
1(b)(1));
(2)In a window transaction (as
defined in §31.3406(b)(2)–3(b));
(3)With respect to a readily tradable
instrument described in §31.3406(d)–
1(b)(2)(iv) or §31.3406(d)–4(a)(3); or
(4)During the period and with re-
spect to an account or readily tradable
instrument described in §31.3406(d)–3.

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§31.3406(d)–3 Special 30-day rules
for certain reportable payments.
(a)Accounts or readily tradable in-
struments acquired directly from the
payor (including a broker who holds an
instrument in street name) by electronic
transmission or by mail. In the case of
an account established directly with, or
a readily tradable instrument acquired
directly from, the payor by means of
electronic transmission (i.e., telephone
or wire instruction) or by mail, the
payor may permit the payee to furnish
the certifications required in §31.3406-
(d)–1(b)(3) (relating to certification that
the payee’s taxpayer identification
number is correct) and §31.3406(d)–2
(relating to certification of notified
payee underreporting) within 30 days
after the establishment or acquisition
without subjecting the account to with-
holding during the 30 days. The
preceding sentence applies only if the
payee furnishes a taxpayer identifica-
tion number to the payor at the time of
the establishment or acquisition, and
the payee does not withdraw more than
69 percent of a reportable interest or
dividend payment before the certifica-
tions are received within the 30 days. If
the payee does not provide the required
certifications within 30 days of the
establishment or acquisition, the payor
must withhold 31 percent of any
reportable interest or dividend pay-
ments made to the account after its
acquisition. For purposes of this sec-
tion, an account or instrument is con-
sidered acquired directly from the
payor if the instrument was acquired by
the payee without the assistance of a
broker or the instrument was acquired
directly from a broker who holds the
instrument as nominee for the payee
(i.e., in street name) and who is con-
sidered a payor under §31.3406(a)–2.
(b) Sale of an instrument for a
customer by electronic transmission or
by mail. The special 30-day rules set
forth in paragraph (a) of this section
apply comparably with respect to cer-
tification of the taxpayer identification
number for the sale of an instrument
under section 6045 (as described in
§31.3406(b)(3)–2) through a post–1983
brokerage account (as described in
§31.3406(d)–1(c)(2)) for a customer by
electronic transmission or by mail.
However, these rules apply only if the
payee furnishes the payee’s taxpayer
identification number before the sale
occurs. For purposes of applying those
30-day rules under this paragraph (b), a
payee’s reinvestment of the gross pro-
ceeds of the sale into other instruments
constitutes a withdrawal.
(c)Application to foreign payees.
The rules of paragraphs (a) and (b) of
this section also apply to a payee from
whom the payor is required to obtain a
Form W–8 or a substitute of the form
or is to obtain other evidence of
foreign status (pursuant to the relevant
regulations issued under sections 6049
and 6045), provided the payee repre-
sents orally or otherwise, before or at
the time of the acquisition or sale of
the instrument or the establishment of
the account, that the payee is not a
United States citizen or resident.
§31.3406(d)–4 Special rules for
readily tradable instruments acquired
through a broker.
(a)Readily tradable instruments ac-
quired through post–1983 brokerage
accounts with a broker who is not a
payor—(1) In general. If a readily
tradable instrument is acquired through
a post–1983 brokerage account (as
defined in §31.3406(d)–1(c)(2)) and the
broker is not the payor of the instru-
ment (as defined in §31.3406(a)–2(b)-
(3)), the broker must—
(i)Obtain once with respect to each
account the certifications described in
§31.3406(d)–2(a) and §31.3406(d)–
1(b)(3) and (c)(2) from the payee
(relating to certification regarding
payee underreporting and taxpayer
identification number, respectively);
(ii)Furnish the payee’s taxpayer
identification number to the payor; and
(iii)Notify the payor to impose
withholding if the payee fails to make
either of the required certifications to
the broker or if the broker has been
notified by the Internal Revenue Serv-
ice before the acquisition of the in-
strument that the payee is subject to
withholding due to notified payee
underreporting under section 3406(a)-
(1)(C) or that the payee is subject to
withholding because the payee’s tax-
payer identification number is incorrect
under section 3406(a)(1)(B) (as de-
scribed in §31.3406(d)–5).
(2)Additional requirements. The
broker must give the information re-
quired by paragraphs (a)(1)(ii) and (iii)
of this section to the payor with the
transfer instructions for the acquisition
(including account registration instruc-
tions transmitted by a broker in the
case of acquisitions of shares in a
mutual fund). A notice including the
information described in paragraph
(b)(1) of this section fulfills the
broker’s requirement to give notice to
the payor. Once the broker transmits
the transfer instructions containing the
information required by this section,
the broker has no further responsibility
to obtain a missing taxpayer identifica-
tion number or missing certification or
to provide additional notices to the
payee or payor with respect to the
acquisition of the instrument. Upon
receiving the notice from a broker, the
payor must impose withholding on the
account pursuant to §31.3406(a)–1.
(3)Transactions entered into through
a brokerage account that is not a post–
1983 brokerage account. If a broker
acquires readily tradable instruments
for a payee through an account (with
the broker) that is not a post–1983
brokerage account (as defined in
§31.3406(d)–1(c)(1)), and the broker is
not the payor of the instruments, the
broker must furnish the payee’s tax-
payer identification number to the
payor. In addition, if the broker has
been notified by the Internal Revenue
Service that the payee is subject to
withholding under section 3406 either
because of an incorrect taxpayer identi-
fication number or due to notified
payee underreporting as described in
sections 3406(a)(1)(B) or (C), respec-
tively, the broker must notify the payor
of the instrument to impose withhold-
ing with respect to that payee and
transmit the information in the manner
described in this paragraph (a). After a
payor receives a notice from a broker
pursuant to section 3406(d)(2)(B) and
this paragraph (a), the payor must
impose withholding on any accounts of
the payee paying reportable interest or
dividends as defined in section 3406-
(b)(2) in accordance with §31.3406(a)–
1.
(4)Payor must notify payee—(i)
Failure to provide certifications. If a
payor is notified by a broker, as
required in paragraph (a)(1) of this
section, that a payee is subject to
withholding because the payee failed to
provide the certifications, as described
in §31.3406(d)–2(a) and §31.3406(d)–
1(b)(3) and (c)(2), and the payor has
not received the certifications from the
payee, then the payor must notify the
payee that withholding has started (or
will start) no later than 15 days after
the payor makes the first payment to
the payee that is subject to withholding
under section 3406. A notice that

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contains the information described in
paragraph (b)(2) of this section satisfies
the payor’s requirement to give notice
to the payee. If the broker notifies the
payor that the payee failed to make a
required certification and the payor has
received the certification from the
payee, the payor may disregard the
notice from the broker.
(ii)Notified payee underreporting
and incorrect taxpayer identification
number. The payor must notify the
payee under this section if the Internal
Revenue Service or a broker notifies
the payor to withhold either because of
an incorrect taxpayer identification
number under section 3406(a)(1)(B) (as
described in §31.3406(d)–5) or due to
notified payee underreporting under
section 3406(a)(1)(C) (as described in
§31.3406(c)–1). If a payor is notified
by the Internal Revenue Service or a
broker with respect to a readily trad-
able instrument, the payor may not
ignore the notice even if the payee
previously provided the payee’s tax-
payer identification number under
penalties of perjury to the payor and
even if the payee certified to the payor
that the payee is not subject to backup
withholding due to a notified payee
underreporting. See §31.3406(d)–
5(c)(1) and (2) and (f)(2) for notice
requirements under section 3406(a)-
(1)(B) due to an incorrect taxpayer
identification number. See §31.3406-
(c)–1(c)(2) for notice requirements un-
der section 3406(a)(1)(C) due to noti-
fied payee underreporting.
(b)Notices—(1) Form of notice by
broker to payor. A broker who is
required under paragraphs (a)(1)(iii)
and (2) of this section to notify the
payor with respect to a readily tradable
instrument may notify the payor in
connection with the transfer instruc-
tions by means of magnetic media,
machine readable document, or any
other medium, provided that the notice
includes the following information—
(i)The payee’s name, address, and
taxpayer identification number (if
provided to the broker); and
(ii)A statement that the payee is
subject to withholding under section
3406(a)(1)(A), (B), (C), or (D) of the
Internal Revenue Code, whichever sec-
tion applies; and
(iii)When applicable, a statement
that the broker was notified by the
Internal Revenue Service that the payee
is subject to withholding under sections
3406(a)(1)(B) or (C).
(2)Form of notice by payor to
payee. A payor who is required to
notify a payee that the payee is subject
to withholding must provide notice that
i s s u b s t a n t i a l l y s i m i l a r t o t h e
following—
(i)For a notification concerning a
failure to provide a taxpayer identifica-
tion number in the required manner
under section 3406(a)(1)(A) or a failure
to make the following certification
described in section 3406(a)(1)(D):
Recently, you purchased (identify security
acquired). Because of the existence of one or
more of the following conditions, payments
of interest, dividends, and other reportable
amounts that are made to you will be subject
to withholding of tax at a 31 percent rate:
(specify the condition or conditions, de-
scribed below, that are applicable)
(1)You failed to provide a taxpayer
identification number, or failed to provide
this number under penalties of perjury, in
connection with the purchase of the acquired
security. (An individual’s taxpayer identifica-
tion number is his or her social security
number.)
(2)You failed to certify, under penalties of
perjury, that you are not subject to withhold-
ing due to notified payee underreporting as
required under section 3406(a)(1)(D) of the
Internal Revenue Code.
If condition (1) applies, you may stop
withholding by providing your taxpayer iden-
tification number on the enclosed Form W–9,
signing the form, and returning it to us. If
you do not have a taxpayer identification
number, but have applied (or will soon apply)
for one, you may so indicate on the Form W–
9. Withholding may apply during the 60-day
period you are waiting for your taxpayer
identification number. You must provide us
with your taxpayer identification number
promptly after you receive it in order to
avoid withholding after the end of the 60-day
period or to stop withholding if it has already
begun. Certain persons, described on the
enclosed Form W–9, are exempt from with-
holding. Follow the instructions on that form
if applicable to you.
If condition (2) applies, you may stop
withholding by certifying on the enclosed
Form W–9 that you are not subject to
withholding due to notified payee under-
reporting, signing the form, and returning it
to us.
If more than one condition applies, you
must remove all applicable conditions to stop
withholding.
Please address any questions concerning
this notice to: [Insert payor identifying
information].
(Do not address questions to the broker
who purchased the securities for you.)
(ii)For the form of the notice
concerning imposition of withholding
due to an incorrect taxpayer identifica-
tion number, see §31.3406(d)–5(d)(2)
and (g)(2).
(iii)For the form of the notice
concerning the imposition of withhold-
ing due to notified payee underreport-
ing, see §31.3406(c)–1(d)(2).
(c)Payor’s reliance on information
from broker—(1) In general. A payor
of an instrument acquired by a payee
through a broker may rely on the in-
formation that the payor receives from
the broker pursuant to paragraphs (a)
and (b) of this section.
(2)Amount subject to backup with-
holding. The payor is required to
withhold under section 3406 depending
on the payor’s customary method of
making payment on an instrument or
instruments owned by a payee. If it is
the practice of a payor to combine in
one account all readily tradable instru-
ments of the same issue owned by a
payee and if only certain of those
instruments are subject to withholding,
the payor must withhold on the aggre-
gate payment made with respect to all
the instruments in the account. Other-
wise, the payor must withhold on the
payment made on the instrument or
instruments with respect to which the
payee is subject to withholding.
§31.3406(e)–1 Period during which
backup withholding is required.
(a)In general. A payor must with-
hold under section 3406 at a rate of 31
percent on any reportable payment (as
defined in section 3406(b)) made to a
payee during the period described in
this section (irrespective of the number
of conditions for imposing withholding
under section 3406 that exist with
respect to the payee). A payor must
continue to withhold under section
3406 until no condition for imposing
backup withholding exists with respect
to the payee.
(b)Failure to furnish a taxpayer
identification number in the manner
required—(1) Start withholding. A
payor is required to withhold under
section 3406(a)(1)(A) at a rate of 31
percent on any reportable payment (as
defined in section 3406(b)) at the time
the payor pays the reportable payment
(as described in §31.3406(a)–4) to a
payee if—
(i)The payor has not received the
payee’s taxpayer identification number
in the manner required in §31.3406(d)–
1; or
(ii)The payor has received notice
from a broker (as required in §31.3406-
(d)–4(a)(1)(iii)) with respect to a read-
ily tradable instrument that the payee
did not furnish a taxpayer identification

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number to the broker in the manner re-
quired in §31.3406(d)–1 and the payor
has not received the taxpayer identi-
fication number from the payee in this
manner.
(2)Stop withholding. The payor
must stop withholding under section
3406(a)(1)(A) within 30 days after the
payor receives—
(i)The payee’s taxpayer identifica-
tion number in the manner required
under §31.3406(d)–1; or
(ii)A statement, in such form and
containing such information as is re-
quired under applicable regulations,
that the payee is not a United States
person.
(c)Notification of an incorrect tax-
payer identification number. See
§31.3406(d)–5(e) and (g)(3) for the
period for which withholding is re-
quired in the case of notification of an
i n c o r r e c t t a x p a y e r i d e n t i f i c a t i o n
number.
(d)Notified payee underreporting.
See §31.3406(c)–1(e) for the period for
which withholding is required in the
case of notified payee underreporting.
(e)Payee certification failure—(1)
Start withholding. A payor is required
to withhold under section 3406(a)-
(1)(D) at a rate of 31 percent on any
reportable interest or dividend payment
(as defined in section 3406(b)(2)) at the
time the payor pays such reportable
interest or dividend payment (as de-
scribed in §31.3406(a)–4) to a payee
if—
(i)The payor has not received from
the payee the certification required in
§31.3406(d)–2; or
(ii)The payor has received notice
from a broker (as required in §31.3406-
(d)–4(a)(1)(iii)) with respect to a read-
ily tradable instrument that the payee
did not make the required certification
and the payor has not received the
required certification from the payee.
(2)Stop withholding. The payor
must stop withholding under section
3406(a)(1)(D) on any reportable inter-
est or dividend payment within 30 days
after the payor receives the certification
from the payee in the manner required
by §31.3406(d)–2.
(f)Rule for determining when the
payor receives a taxpayer identification
number or certificate from a payee. In
determining whether a payee has failed
to provide a taxpayer identification
number or any certification to a payor
(including a Form W–8 or substitute
form), a payor is required to process
the taxpayer identification number or
certification within 30 days after the
payor receives the taxpayer identifica-
tion number or certification from the
payee or in certain cases, from a
broker. Thus, the payor may take up to
30 days to treat the taxpayer identifica-
tion number or a certificate as having
been received.
§31.3406(f)–1 Confidentiality of
information.
(a)Confidentiality and liability for
violation. Pursuant to section 3406(f)
no person may use any information ob-
tained under section 3406 for any
purpose except for the purpose of
complying with the requirements of
section 3406 or for purposes permitted
under section 6103 (subject to the
safeguards of section 6103). See sec-
tion 7431 for civil damages for violat-
ing the confidential use of the informa-
tion (subject to an exception for good
faith).
(b)Permissible use of information—
(1) In general. A payor or broker may
transmit information on a Form W–9,
Form W–8, or other acceptable form
relating to withholding to the depart-
ment, institution, or firm (or to any
employee therein) responsible for with-
holding or processing of taxpayer iden-
tification numbers, certifications de-
scribed in §31.3406(h)–3, or other
substitute forms. In addition, a broker
may notify the payor with respect to a
readily tradable instrument of the
requirement to withhold and the con-
dition or conditions for imposing with-
holding (as described in §31.3406(d)–
4) that exist with respect to the payee.
A payor or broker may, without violat-
ing the Internal Revenue Code, close
an account of, refuse to open an
account for, issue an instrument to, or
redeem an instrument for, a person
solely because the person fails to
furnish the person’s taxpayer identifica-
tion number or documentation of for-
eign status in the manner required in
§31.3406(d)–1 and §31.3406(g)–1, re-
spectively. A payor who closes an
account of a payee in the calendar year
in which the account was opened and
during which no taxpayer identification
number or evidence of foreign status
was provided for that account will be
presumed in the absence of evidence to
the contrary to have closed the account
without violating section 3406(f) even
though the payee is subject to backup
withholding under section 3406(a)-
(1)(A). A payor, except as provided in
§§31.3406(d)–3 and 31.3406(g)–3, may
not prohibit a payee who fails to
furnish the payee’s taxpayer identifica-
tion number in the manner required in
§31.3406(d)–1 from withdrawing any
funds in the account.
(2)Window transactions. In the case
of a window transaction (as defined in
§31.3406(b)(2)–3(b)), a payor may,
without violating the Internal Revenue
Code, refuse to redeem or may refuse
to make payment if the payee fails to
provide a taxpayer identification num-
ber regardless of when the obligation
was issued or acquired.
(c)Specific restrictions on the use of
information. Except as provided in
paragraph (b) of this section, a payor or
broker is not permitted to—
(1)Close an account (or instrument)
of a payee solely because that payee
(or the account of a payee) is subject to
withholding under section 3406(a)(1)-
(A), (B), (C), or (D);
(2)Refuse to open an account or to
issue an instrument if the person fails
to certify, under penalties of perjury,
that the person is not subject to
withholding under section 3406(a)-
(1)(C) (relating to notified payee
underreporting);
(3)Use information obtained under
section 3406 (including a payee’s
failure or inability to certify that the
payee is not subject to withholding due
to notified payee underreporting or the
fact that the account is subject to
withholding), surcharge an account
(i.e., charge an account more than the
fee charged a similar account that was
not subject to withholding under sec-
tion 3406), or use that information to
determine whether to open or close an
account, whether to issue or redeem an
instrument, or whether to extend credit
to the payee.
§31.3406(g)–1 Exception for payments
to certain payees and certain other
payments.
(a)Exempt recipients—(1) In gen-
eral. A payor of any reportable pay-
ment (as defined in section 3406(b))
must not withhold under section 3406
if the payee is—
(i)An organization exempt from
taxation under section 501(a) or an
individual retirement account;
(ii)The United States or any wholly
owned agency or instrumentality
thereof;

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(iii)A state, the District of Colum-
bia, a possession of the United States,
any political subdivision of any of the
foregoing, or any wholly owned agency
or instrumentality of any one or more
of the foregoing;
(iv)A foreign government, a politi-
cal subdivision of a foreign govern-
ment, or any wholly owned agency or
instrumentality of any one or more of
the foregoing (as defined in regulations
under section 892); or
(v)An international organization or
any wholly owned agency or instru-
mentality thereof (as defined in section
7701(a)(18)).
(2)Nonexclusive list. Paragraph
(a)(1) of this section does not prescribe
an exclusive list of payees that are
exempt from information reporting and
also are exempt from withholding
under section 3406.
(b)Determination of whether a per-
son is described in paragraph (a)(1) of
this section. The determination of
whether a person is a payee described
in paragraph (a)(1) of this section must
be made as provided in the applicable
provisions of section 6049 and the
regulations issued thereunder. A payor,
even if permitted to treat a person as
an exempt recipient without requiring a
certificate under the provisions of
section 6049, may require a payee,
otherwise not required to file a certifi-
cate regarding its exempt status, to file
a certificate and may treat a payee who
fails to file the certificate as a person
who is not an exempt recipient. See
§31.3406(h)–3 for a description of the
Form W–9 or a substitute form pre-
scribed under section 3406 for claiming
exempt status.
(c)Prepaid or advance premium
life-insurance contracts. A payor of a
reportable payment (as defined in sec-
tion 3406(b)(1)) may, but is not re-
quired to, withhold under section 3406
on reportable payments made from
January 1, 1984, to December 31,
1996, on prepaid or advance premium
life-insurance contracts to a payee who
is the owner for tax purposes of the
prepaid or advance premium life-
insurance contract. For purposes of this
exception from backup withholding, a
prepaid or advance premium life-
insurance contract is one entered into
on or before June 30, 1984, by the
payee and under which the increment
in value of the prepaid or advance
premium is used for the payment of
premiums during the period in which
the exception from backup withholding
applies.
§31.3406(g)–2 Exception for
reportable payments for which
withholding is otherwise required.
(a)In general. A payor of a report-
able payment (as defined in section
3406(b)) must not withhold under
section 3406 if the payment is subject
to withholding under any other provi-
sion of the Internal Revenue Code.
(b)Payment of wages. A payor who
is required to make an information
return under section 6041 with respect
to a payment of wages (as defined in
section 3401) because, e.g., the
employee makes a certification under
section 3402(n) (relating to employees
incurring no income tax liability), must
not withhold under section 3406 on
those wages.
(c)Distribution from a pension, an-
nuity, or other plan of deferred com-
pensation. An amount reportable under
section 6047, such as a designated
distribution under section 3405, is not a
reportable payment subject to withhold-
ing under section 3406. See section
3406(b). Designated distributions not
subject to withholding under section
3406 include—
(1)Distributions from a pension,
annuity, profit-sharing, stock bonus
plan, or other plan deferring the receipt
of compensation;
(2)Distributions from an individual
retirement account or annuity;
(3)Distributions from an owner-
employee plan; and
(4)Certain surrenders of life insur-
ance contracts.
(d)Gambling winnings—(1) In gen-
eral. A payor of a reportable gambling
winning must not withhold under sec-
tion 3406 if tax is required to be
withheld from the gambling winning
under section 3402(q) (relating to the
extension of withholding to certain
gambling winnings). If the reportable
gambling winning is not required to be
withheld upon under section 3402(q),
withholding under section 3406 applies
to the gambling winning if, and only if,
the payee does not furnish a taxpayer
identification number to the payor.
Section 31.3406(b)(3)–1(b)(3) does not
apply to a reportable gambling win-
ning. The payor of a reportable gam-
bling winning is not required to aggre-
gate all such winnings made to a payee
during a calendar year, nor is the payor
required to determine whether an infor-
mation return was required to be made
with respect to the payee for the
preceding year.
(2)Definition of a reportable gam-
bling winning and determination of
amount subject to backup withholding.
For purposes of withholding under
section 3406, a reportable gambling
winning is any gambling winning sub-
ject to information reporting under
section 6041. The amount of a report-
able gambling winning is—
(i)The amount paid with respect to
the amount of the wager reduced, at the
option of the payor; by
(ii)The amount of the wager.
(3)Special rules. Amounts paid with
respect to identical wagers are treated
as paid with respect to a single wager.
The determination of whether wagers
are identical is made under §31.3402-
(q)–1(c)(1)(ii). In addition, a gambling
winning (other than a winning from
bingo, keno, or slot machines) is a
reportable gambling winning only if the
amount paid with respect to the wager
is $600 or more and if the proceeds are
at least 300 times as large as the
amount wagered. See §7.6041–1 of this
chapter to determine whether a winning
from bingo, keno, or slot machines is a
reportable gambling winning and thus
subject to withholding under section
3406.
(e)Certain real estate transactions.
A real estate reporting person (the so-
called broker) as defined in section
6045(e)(2) must not withhold under
section 3406 on a payment made with
respect to a real estate transaction that
is subject to reporting under sections
6045(a) and (e) and §1.6045–4 of this
chapter.
(f)Certain payments after an ac-
quisition of accounts or instruments. A
payor who acquires pre–1984 accounts
or instruments described in §31.3406-
(d)–1(b)(2)(iv) for which the payor
does not have a taxpayer identification
number or has an obviously incorrect
taxpayer identification number as de-
fined in §31.3406(h)–1(b)(2) must start
withholding under section 3406(a)(1)-
(A) and §31.3406(d)–1 on those ac-
counts or instruments no later than
sixty days following the date of the
payor’s acquisition of those accounts or
instruments.
(g)Certain gross proceeds. No with-
holding under section 3406 is required
with respect to any portion of the

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original issue discount on an instrument
or security that is subject to withhold-
ing under section 3406 as reportable
gross proceeds of such instrument or
security under section 6045.
§31.3406(g)–3 Exemption while payee
is waiting for a taxpayer
identification number.
(a)In general—(1) Backup with-
holding not required for 60 days. If a
payor has received an awaiting-TIN
certificate from a payee with respect to
an account or instrument receiving
reportable interest or dividends as
described in section 3406(b)(2), the
payor must exempt the payee from
withholding under section 3406(a)-
(1)(A) during the 60-day exemption
period to the extent and in the manner
described in either paragraph (a)(2) or
(3) of this section. The 60-day exemp-
tion period means the 60-consecutive-
day period beginning with the day the
payor receives the awaiting-TIN certifi-
cate. The payor must withhold under
section 3406 beginning after the 60-day
exemption period if the payor has not
received a taxpayer identification num-
ber from the payee in the manner
required in §31.3406(d)–1. Regardless
of whether the payee provides an
awaiting-TIN certificate to a payor, the
payor is required to withhold under
section 3406(a)(1)(D) and §31.3406(d)–
2 on reportable interest or dividend
payments as described in §31.3406(d)–
2 if the payee fails to certify, under
penalties of perjury, that the payee is
not subject to withholding due to
notified payee underreporting as re-
quired in section 3406(a)(1)(D) and
§31.3406(d)–2.
(2)Reserve method. A payor must
not withhold under section 3406 during
the 60-day exemption period unless the
payee (or a joint payee in the case of a
joint account) desires to make a with-
drawal of more than $500 of either
principal or interest from the account in
any single transaction during the
period. If a payee (or a joint payee)
desires to make a withdrawal of more
than $500 during the 60-day exemption
period, the payor is required under
section 3406 to withhold 31 percent of
all reportable payments made during
the period and at the time of with-
drawal unless the payee reserves 31
percent of all reportable payments
made to the account during the period.
(3)Alternative rule; 7-day grace
period—(i) In general. A payor who
receives an awaiting-TIN certificate
may elect, on a payee-by-payee basis
or in general, to exempt reportable
interest or dividend payments to a
payee from withholding under section
3406 applying the rules in paragraph
(a)(3)(ii) or (iii) of this section.
(ii)Withholding on withdrawals. Un-
der this paragraph (a)(3)(ii), a payor
must obtain a certified taxpayer identi-
fication number from the payee within
60 days after the date that the payor
receives the awaiting-TIN certification.
In addition, the payor must withhold
under section 3406 on any withdrawals
made after the close of 7 business days
after the date the awaiting-TIN cer-
tification is received and before the
earlier of the date that the payor
receives a certified taxpayer identifica-
tion number from the payee, the date
the account is closed (in which case the
payor must withhold on any reportable
payment made at the time the account
or relationship is closed), or the date
withholding under section 3406 starts
on all reportable payments made to the
account, instrument, or relationship. All
cash withdrawals in an amount up to
the reportable payments made from the
day after the date of receipt of the
awaiting-TIN certification to the date
of withdrawal are treated as reportable
payments.
(iii)Withholding regardless of with-
drawals. Under this paragraph (a)(3)-
(iii), a payor must start withholding
under section 3406 on the account not
later than 7 business days after the date
the payor receives the awaiting-TIN
certification on reportable payments
thereafter made to the account (whether
or not the payee makes a cash with-
drawal). The payor must withhold
under section 3406 until the earlier of
the date the payor receives a certified
taxpayer identification number from the
payee, the date the account is closed,
or the date withholding under section
3406 starts on all reportable payments
made to the account, instrument, or
relationship. The payor must obtain a
certified taxpayer identification number
from the payee within 60 days after the
date that the payor receives the
awaiting-TIN certificate or undertake a
mailing each year soliciting the cer-
tified taxpayer identification number
from the payee until the earlier of the
calendar year that the certified taxpayer
identification number is received, or
the calendar year in which the account
is closed. However, if the account is
closed in December of a calendar year,
the mailing must be made after the
account is closed and before January
31 of the subsequent calendar year.
(b)Special rule for readily tradable
instruments. The 60-day awaiting-TIN
exemption described in paragraph
(a)(1) of this section applies to pay-
ments made with respect to readily
tradable instruments only if the payee
provides an awaiting-TIN certificate
directly to the payor. If a broker
acquires a readily tradable instrument
through a post–1983 brokerage account
(as described in §31.3406(d)–1(c)(2))
for a payee who has no taxpayer identi-
fication number, the broker must advise
the payor as required in §31.3406(d)–
4(a)(1) that the payee failed to provide
a taxpayer identification number under
penalties of perjury, regardless of
whether the payee provides an
awaiting-TIN certificate to the broker.
Once a payor is notified by a broker
that a payee failed to provide a
taxpayer identification number in the
required manner, or that the payee is
subject to withholding under section
3406(a)(1)(B) or (C), the payor must
impose withholding under section 3406
for the appropriate period described in
§31.3406(e)–1.
(c)Exceptions—(1) In general. The
60-day awaiting-TIN exemption de-
scribed in paragraph (a) of this section
does not apply to—
(i)Window transactions (as defined
in §31.3406(b)(2)–3(b));
(ii)Redemptions of bearer obliga-
tions that are subject to reporting under
section 6045; or
(iii)Other amounts that are subject
to reporting under section 6045 (except
as described in paragraph (c)(2) of this
section).
(2)Special rule for amounts subject
to reporting under section 6045 other
than proceeds of redemptions of bearer
obligations. If a broker’s customer does
not provide a taxpayer identification
number to the broker, and the broker
effects a sale that is subject to report-
ing under section 6045 (other than a
redemption of a bearer obligation),
§31.3406(d)–3(b) applies, whether or
not the sale is pursuant to an instruc-
tion by electronic transmission, pro-
vided the customer furnishes an
awaiting-TIN certificate to the broker
before the sale. For purposes of this
paragraph (c)(2), the 30-day period
provided in §31.3406(d)–3(b) is a 60-
day period.
(d)Awaiting-TIN certificate. A
payee qualifies for the 60-day awaiting-

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TIN exemption provided in paragraph
(a) of this section if the payee furnishes
a written statement to the payor, signed
under penalties of perjury, that the
payee has not been issued a taxpayer
identification number, that the payee
has applied for a taxpayer identification
number or intends to apply for a
number in the near future, and that the
payee understands that if the payee
does not provide a number to the payor
within 60 days, the payor is required
under section 3406 to withhold 31
percent of any reportable payment
thereafter made to the payee until the
payor receives a number, and 31
percent of a withdrawal to the extent of
reportable payments made to the payee
during the 60-day period, as described
in paragraph (a) of this section. Lan-
guage that is substantially similar to the
awaiting-TIN certification on Form W–
9 will satisfy the requirements of this
paragraph (d).
(e)Form for awaiting-TIN certifi-
cate. A payor may use Form W–9 for
the awaiting-TIN certificate, or a payor
may include language that is substan-
tially similar to the awaiting-TIN cer-
tification on Form W–9 in any other
document of the payor. See §31.3406-
(h)–3, which provides that Form W–9
is the prescribed form but permits use
of substitute forms, and specifies the
length of time the payor is required to
retain the form. If Form W–9 is used,
the payee should write ‘‘Applied For’’
in the space reserved for the taxpayer
identification number.
§31.3406(h)–1 Definitions.
(a)In general. For purposes of
section 3406 and the regulations there-
under, the definitions of this section
apply.
(b)Taxpayer identification num-
ber—(1) In general. Taxpayer identi-
fication number means the identifying
number assigned to a person under
section 6109 (relating to identifying
numbers, generally a nine-digit social
security number for an individual and a
nine-digit employer identification num-
ber for a nonindividual, e.g., a corpora-
tion, partnership, trust, or estate). An
obviously incorrect number is not
considered a taxpayer identification
number. See §31.6011(b)–2 and
§301.6109–1 of this chapter for provi-
sions relating to obtaining a taxpayer
identification number.
(2)Obviously incorrect number. Ob-
viously incorrect number means a
number that does not contain nine
digits or a number that includes an
alpha character as one of the nine
digits.
(c)Broker. Broker is defined in
section 6045(c)(1) and §1.6045–1(a)(1)
of this chapter. If there could be more
than one broker with respect to any
acquisition, only the broker having the
closest contact (as determined under
§5f.6045–1(c)(3)(ii) and (iii) of this
chapter) with the payee is treated as a
broker. In the case of any instrument,
the term broker does not include any
person who is the payor with respect to
the instrument as described in
§31.3406(a)–2.
(d)Readily tradable instrument.
Readily tradable instrument means—
(1)Any instrument that is part of an
issue any portion of which is traded on
an established securities market (within
the meaning of section 453(f)(5)); or
(2)Any instrument that is regularly
quoted by brokers or dealers making a
market.
(e)Day. Day means a calendar day
unless specified otherwise under any
section of the regulations under section
3406. For example, see §§31.3406(d)–
5(a) and 31.3406(g)–3(a)(2).
(f)Business day. Business day
means any day other than a Saturday,
Sunday, or legal holiday (within the
meaning of section 7503).
§31.3406(h)–2 Special rules.
(a)Joint accounts—(1) Relevant
name and taxpayer identification num-
ber combination. For purposes of iden-
tifying the account subject to withhold-
ing under sections 3406(a)(1)(B) and
(C), the relevant name and taxpayer
identification number combination is
that which is used for information
reporting purposes.
(2)Optional rule for accounts sub-
ject to backup withholding under sec-
tion 3406(a)(1)(B) or (C) where the
names are switched. See §31.3406(d)–
5(c)(4)(iii) under which a payor may
withhold under section 3406(a)(1)(B)
as required even though the names or
taxpayer identification numbers on the
account have been switched. The rules
under §31.3406(d)–5(c)(4)(iii) may be
applied comparably by a payor who is
required to withhold under section
3406(a)(1)(C).
(3)Joint foreign payees—(i) In gen-
eral. If the first payee listed on an
account or instrument provides the
penalties of perjury statement regarding
its foreign status, withholding under
section 3406 applies unless—
(A)Every joint payee provides the
statement regarding foreign status (pur-
suant to the relevant regulations issued
under sections 6045 and 6049); or
(B)Any one of the joint payees who
has not established foreign status
provides a taxpayer identification num-
ber to the payor in the manner required
in §31.3406(d)–1.
(ii)Information reporting on an ac-
count including foreign payees. If any
one of the joint payees who has not
established foreign status provides a
taxpayer identification number under
paragraph (a)(3)(i)(B) of this section,
that number is the taxpayer identifica-
tion number that is required to be
furnished for purposes of information
reporting and withholding under section
3406.
(b)Backup withholding from an
alternative source—(1) In general. A
payor may not withhold under section
3406 from a source maintained by the
payor other than the source with
respect to which there exists a liability
to withhold under section 3406 with
respect to the payee. See section 3403
and §31.3403–1, which provide that the
payor is liable for the amount required
to be withheld regardless of whether
the payor withholds.
(2)Exceptions for payments made in
property—(i) Backup withholding from
alternative source. In the case of a
payment that is made in property (other
than money), the payor must withhold
under section 3406 31 percent of the
fair market value of the property
determined immediately before or on
the date of payment. The payor may
withhold under section 3406 from the
principal amount being deposited with
the payor or from another source
maintained by the payee with the
payor. The source from which the tax
is withheld under section 3406 must be
payable to at least one of the persons
listed on the account subject to with-
holding. If the account or source is not
payable exclusively to the same person
or persons listed on the account subject
to withholding under section 3406, then
the payor must obtain a written state-
ment from all other persons to whom
the account or source is payable
authorizing the payor to withhold under
section 3406 from the alternative ac-
count or source. A payor that elects to

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withhold under section 3406 from an
alternative source may determine the
account or source from which the tax is
to be withheld, or may allow the payee
to designate the alternative source. A
payee may not, however, require a
payor to withhold under section 3406
from a specific alternative source. See
§31.3402(q)–1(d), Example 5, for
methods of withholding on prizes,
awards, and gambling winnings paid in
property other than cash.
(ii)Deferral of withholding. If the
payor cannot locate, using reasonable
care (following procedures substantially
similar to those set forth in §31.3406-
(d)–5(c)(3)(ii)(A) and (B)), an alterna-
tive source of cash from which the
payor may satisfy its withholding obli-
gation pursuant to paragraph (b)(2)(i)
of this section, the payor may defer its
obligation to withhold under section
3406, except for reportable payments of
property made in connection with
prizes, awards, or gambling winnings,
until the earlier of—
(A)The date the payor makes a cash
payment to the account subject to
withholding under section 3406 or cash
is otherwise deposited in the account in
a sufficient amount to satisfy the
obligation in full; or
(B)The close of the fourth calendar
year after the obligation arose.
(iii)Barter exchanges. In the case of
a barter exchange that issues scrip to,
or credits the account of, a member or
client of the exchange in payment for
property or services, the barter ex-
change may withhold under section
3406 from—
(A)The scrip or credit, if converted
to cash in order to satisfy the deposit
requirements of section 6302 and
§31.6302–4; or
(B)Any other source maintained by
the exchange for the member or client
in the manner described in paragraph
(b)(2) of this section.
(c)Trusts. Withholding under sec-
tion 3406 applies to reportable pay-
ments made to a trust if any of the
conditions for imposing withholding
under section 3406 apply to the trust.
Generally, a trust is not a payor and
will not be required to withhold under
section 3406 on reportable payments
that it makes to its beneficiary who is
subject to withholding under section
3406. The preceding sentence does not
apply, however, to a grantor trust with
two or more grantors described in
§31.3406(a)–2(b)(4), which is treated
as a middleman payor. The trustee of a
trust described in this paragraph (c)
may certify that the trust’s taxpayer
identification number is correct and
that the trust is not subject to withhold-
ing due to notified payee underreport-
ing, without regard to the status of the
beneficiaries of the trust.
(d)Adjustment of prior withholding
by middlemen. A middleman payor (as
defined in §31.3406(a)–2(b)) who re-
ceives a payment from which tax has
been erroneously withheld under sec-
tion 3406 may seek a refund of the tax
withheld by the payor from whom the
middleman payor received the payment
(referred to as the ‘‘upstream payor’’).
Alternatively, the middleman payor
may obtain a refund of the tax by
claiming a credit for the amount of tax
withheld by the upstream payor against
the deposit of any tax imposed by this
chapter which the middleman payor is
required to withhold and deposit (as
d e s c r i b e d i n s e c t i o n 6 4 1 3 a n d
§31.6413(a)–2). In either case, the
middleman payor must pay or credit
the gross amount of the payment
(including the tax withheld) to its
payee as though it had received the
gross amount of the payment from the
upstream payor and must withhold
under section 3406 only if one of the
conditions for imposing backup with-
holding exists with respect to its payee.
If its payee is not subject to withhold-
ing under section 3406, the middleman
payor must pay or credit the full
amount of the payment to the payee.
See §31.6413(a)–3 regarding repayment
by a payor of tax erroneously collected
from a payee.
(e)Conversion of amounts paid in
foreign currency into United States
dollars—(1) Convertible foreign cur-
rency. If a payment is made in a
currency other than the United States
dollar, the amount subject to withhold-
ing under section 3406 is determined
by applying the statutory rate of
backup withholding to the foreign
currency payment and converting the
amount withheld into United States
dollars on the date of payment at the
spot rate (as defined in §1.988–1(d)(1)
of this chapter) or pursuant to a
reasonable spot rate convention. For
example, a withholding agent may use
a month-end spot rate or a monthly
average spot rate. A spot rate conven-
tion must be used consistently with
respect to all non-dollar amounts with-
held and from year to year. Such
convention cannot be changed without
the consent of the Commissioner.
(2)Nonconvertible foreign currency.
[Reserved]
(f)Coordination with other sections.
For purposes of section 31, chapter 24
(other than section 3402(n)) of subtitle
C of the Internal Revenue Code (relat-
ing to employment taxes and collection
of income tax at source) and so much
of subtitle F (other than section 7205)
of the Internal Revenue Code (relating
to procedure and administration) as
relates to this chapter, and the regula-
tions thereunder—
(1)An amount required to be with-
held under section 3406 must be
treated as a tax required to be withheld
under section 3402;
(2)An amount withheld under sec-
tion 3406 must be treated as an amount
withheld under section 3402;
(3)An amount withheld under sec-
tion 3406 must be deposited as re-
quired under §31.6302–4;
(4)Wages includes the gross amount
of any reportable payment (as defined
in section 3406(b)) except for purposes
of section 6014 (relating to an election
by the taxpayer not to compute the tax
on his annual return);
(5)Employee includes a payee of
any reportable payment; and
(6)Employer includes a payor who
is required to withhold the tax under
section 3406 (as defined in §31.3406-
(a)–2(a)) with respect to any reportable
payment (as defined in section
3406(b)).
(g)Tax liabilities and penalties. A
payor is subject to the same civil and
criminal penalties for failing to impose
withholding under section 3406 as an
employer who fails to withhold on a
payment of wages. In addition, a
broker may be subject to the penalty
under section 6705 (failure of a broker
to provide notice to a payor).
(h)To whom payor is liable for
amount withheld. A payor is not liable
to any person for any amount withheld
under section 3406. A payor is liable
only to the United States for an amount
that is required to be withheld as
provided in §31.3403–1.
§31.3406(h)–3 Certificates.
(a)Prescribed form to furnish infor-
mation under penalties of perjury—(1)
In general. Except as provided in
paragraph (c) of this section, the Form
W–9 is the form prescribed under
section 3406 on which the payee

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certifies, under penalties of perjury,
that—
(i)The taxpayer identification num-
ber furnished to the payor is correct (as
r e q u i r e d i n § 3 1 . 3 4 0 6 ( d ) – 1 a n d
§31.3406(d)–5);
(ii)The payee is not subject to with-
holding due to notified payee under-
reporting (as required in §31.3406(d)–
2);
(iii)The payee is an exempt recip-
ient (as described in §31.3406(g)–1); or
(iv)The payee is awaiting receipt of
a taxpayer identification number (as
described in §31.3406(g)–3).
(2)Use of a single or multiple
Forms W–9 for accounts of the same
payee. A valid Form W–9 must include
the name and taxpayer identification
number of the payee. Except as
provided in paragraph (b) of this
section, the payee must sign under
penalties of perjury and date the Form
W–9 in order to satisfy the require-
ments of this section. A payor or
broker may require a payee to furnish a
separate Form W–9 for each obligation,
deposit, certificate, share, membership,
contract, or other instrument, or one
Form W–9 for all the payee’s obliga-
tions or relationships with the payor or
broker. In addition, a payee of a mutual
fund that has a common investment ad-
visor or common principal underwriter
with other mutual funds (within the
same family of funds) may be permit-
ted, in the discretion of the mutual
fund, to provide one Form W–9 with
respect to shares acquired or owned in
any of the funds.
(b)Prescribed form to furnish a
noncertified taxpayer identification
number. With respect to accounts or
other relationships where the payee is
not required to certify, under penalties
of perjury, that the taxpayer identifica-
tion number being furnished is correct,
the payor or broker may obtain the
taxpayer identification number orally or
may use Form W–9, a substitute form,
or any other document, but the payee is
not required to sign the form.
(c)Forms prepared by payors or
brokers—(1) Substitute forms; in gen-
eral. A payor or broker may prepare
and use a form that contains provisions
that are substantially similar to those of
the official Form W–9. A payor or
broker may use any document relating
to the transaction, such as the signature
card for an account, so long as the
certifications are clearly set forth. A
payor or broker who uses a substitute
form may furnish orally or in writing
the instructions for the Form W–9 that
relate to the account. A payor or broker
may refuse to accept certifications
(including the official Form W–9) that
are not made on the form or forms
provided by the payor or broker. A
payor or broker may refuse to accept a
certification provided by a payee only
if the payor or broker furnishes the
payee with an acceptable form imme-
diately upon receipt of an unacceptable
form or within 5 business days of
receipt of an unacceptable form. An
acceptable form for this purpose must
contain a notice that the payor or
broker has refused to accept the form
submitted by the payee and that the
payee must submit the acceptable form
provided by the payor in order for the
payee not to be subject to withholding
under section 3406. If the payor or
broker requires the payee to furnish a
form for each account of the payee, the
payor or broker is not required to
furnish an acceptable form until the
payee furnishes the payor or broker
with the payee’s account numbers. A
payor or broker may use separate
substitute forms to have a payee certify
under penalties of perjury that—
(i)The payee’s taxpayer identifica-
tion number is correct; and
(ii)The payee is not subject to
withholding under section 3406 due to
notified payee underreporting.
(2)Form for exempt recipient. A
payor or broker may use a substitute
form for the payee to certify, under
penalties of perjury, that the payee is
an exempt recipient (described in
§31.3406(g)–1 or described in the
respective reporting section), provided
the form contains provisions that are
substantially similar to those of the
official Form W–9 relating to exempt
recipients. A certificate must be pre-
pared in accordance with the instruc-
tions applicable to exempt recipients on
Form W–9, and must set forth fully
and clearly the data called for therein.
If a payor will treat the payee as an
exempt recipient only if the payee files
a certificate as to its exempt status, the
certificate is valid only if it contains
the payee’s taxpayer identification
number. Thus, a payee must include the
payee’s taxpayer identification number
on a certificate that a payor requires to
be made in order to treat the payee as
an exempt recipient.
(d)Special rule for brokers. A bro-
ker may act as the payee’s agent for
purposes of furnishing a taxpayer iden-
tification number or certification to a
payor with respect to any readily
tradable instrument (as defined in
§31.3406(h)–1(d)) provided the payee
provides a taxpayer identification num-
ber on Form W–9 or other acceptable
substitute form to the broker. The
payor may rely on a taxpayer identi-
fication number provided by the broker
unless certification is required (as
described in §31.3406(d)–4) and the
broker notifies the payor that the
number was not certified.
(e)Reasonable reliance on certifi-
cate—(1) In general. A payor is not
liable for the tax imposed under section
3406 if the payor’s failure to deduct
and withhold the tax is due to reason-
able reliance, as defined in paragraph
(e)(2) of this section, on a Form W–9
(or other acceptable substitute) required
by this section.
(2)Circumstances establishing rea-
sonable reliance. For purposes of para-
graph (e)(1) of this section, a payor can
reasonably rely on a Form W–9 (or
other acceptable substitute) unless—
(i)The form does not contain the
name and taxpayer identification num-
ber of the payee (or does not state, in
lieu of a taxpayer identification num-
ber, that the payee is awaiting receipt
of a taxpayer identification number
(i.e., an awaiting-TIN certificate));
(ii) The form is not signed and dated
by the payee;
(iii)The form does not contain the
statement, when required, that the
payee is not subject to withholding due
to notified payee underreporting;
(iv)The payee has deleted the jurat
or other similar provisions by which
the payee certifies or affirms the
correctness of the statements contained
on the form; or
( v ) F o r p u r p o s e s o f s e c t i o n
3406(a)(1)(C), the payor is required to
subject the account to which the form
relates to withholding under section
3406(a)(1)(C) under the circumstances
described in §31.3406(c)–1(c)(3)(iii).
(f)Who may sign certificate—(1) In
general. A Form W–9 or other accept-
able substitute form may be signed by
any person who is authorized to sign a
declaration under penalties of perjury
on behalf of the payee as provided in
section 6061 and the regulations there-
under (relating to who may sign
generally for an individual, which
includes certain agents who may sign
returns and other documents), section

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6062 and the regulations thereunder
(relating to who may sign corporate
returns), and section 6063 and the
regulations thereunder (relating to who
may sign partnership returns).
(2)Notified payee underreporting. A
payee who has not been notified that he
is subject to withholding under section
3406(a)(1)(C) as a result of notified
payee underreporting may make the
certification related to notified payee
underreporting. In addition, a payee
who was subject to withholding under
section 3406(a)(1)(C) due to notified
payee underreporting may certify that
he is not subject to withholding under
section 3406(a)(1)(C) due to notified
payee underreporting if the Internal
Revenue Service has provided the
payee with written certification that
withholding under section 3406(a)-
(1)(C) due to notified payee under-
reporting has terminated.
(g)Retention of certificates—(1) Ac-
counts or instruments that are not pre–
1984 accounts and brokerage relation-
ships that are post–1983 brokerage
accounts. With respect to an account or
instrument that is not a pre–1984
account (as described in §31.3406(d)–
1(b)(3)), or with respect to a brokerage
relationship that is a post–1983 bro-
kerage account (as described in
§31.3406(d)–1(c)(2)), a payor or broker
who receives a Form W–9 or other
acceptable substitute form related to
withholding under section 3406 must
retain the form in its records for 3
years from the date the account is
opened or the instrument is purchased.
The form may be retained on microfilm
or microfiche.
(2)Accounts or instruments that are
pre–1984 accounts and brokerage rela-
tionships that are not post–1983 bro-
kerage accounts. With respect to a pre–
1 9 8 4 a c c o u n t ( a s d e s c r i b e d i n
§31.3406(d)–1(b)(1)) or with respect to
a brokerage relationship that is not a
post–1983 brokerage account (as de-
scribed in §31.3406(d)–1(c)(1)), a
payor or broker is not required to retain
any Form W–9 or other acceptable
substitute form. If, however, the payor
or broker requires the payee to file
only one Form W–9 or substitute form
for all accounts or instruments of the
payee, the payor or broker must retain
the single form in the manner and for
the period of time described in para-
graph (g)(1) of this section if that form
relates to any account or instrument
that is not a pre–1984 account or
relates to a post–1983 brokerage ac-
count. If a payee has certified that the
payee is an exempt recipient described
in §31.3406(g)–1, the payor or broker
must retain the form unless the payor
or broker can establish the existence of
procedures that are reasonably calcu-
lated to ensure that a payee who has so
certified is accurately identified in the
payor’s or broker’s records.
(h)Cross references. For the re-
quirement to file an information return
(and furnish the related statement) with
respect to a reportable payment, par-
ticularly if that payment has been
subject to withholding under section
3406, see subtitle F, chapter 61, sub-
parts B and C of the Internal Revenue
Code. See §31.6302–4 for the require-
ment to deposit amounts withheld
under section 3406 on either a monthly
or semi-weekly basis. See §31.6011(a)–
4(b) for the requirement to file Form
945, Annual Return of Withheld Fed-
eral Income Tax, to reflect amounts
withheld under section 3406. See
§31.6071(a)–1 for the time for filing
the Form 945.
§31.3406(i)–1 Effective date.
Sections 31.3406-0 through 31.3406-
(i)–1 (except §§31.3406(d)–5 and
31.3406(g)–1(c) and except for interna-
tional transactions) are effective after
December 31, 1996, and, optionally,
for reportable payments made and
transactions occurring on or after De-
cember 21, 1995. For the effective date
of §31.3406(d)–5, see §31.3406(d)–5(i).
Section 31.3406(g)–1(c) is effective
b e f o r e J a n u a r y 1 , 1 9 9 7 . S e e
§§35a.9999–0T through 35a.9999–5 of
this chapter for rules that apply to
international transactions after Decem-
ber 31, 1996.
Par. 9. Section 31.6011(a)–5(a) is
amended by:
1.Removing the word ‘‘or’’ imme-
diately after the language ‘‘941PR,’’ in
the first and third sentences of para-
graph (a)(1).
2.Adding the language ‘‘, or Form
945’’ immediately after the language
‘‘Form 941VI’’ in the first and third
sentences of paragraph (a)(1).
3.Adding the language ‘‘(or other
person)’’ immediately after the word
‘‘employer’’ in the second, third,
fourth, and sixth sentences of para-
graph (a)(1).
4.Removing the authority citation at
the end of the section.
Par. 10. Section 31.6011(a)–6 is
amended by revising the heading and
the first and third sentences of para-
graph (a)(1) to read as follows:
§31.6011(a)–6 Final returns.
(a)In general—(1) Federal Insur-
ance Contributions Act; income tax
withheld from wages and nonpayroll
payments. An employer (or other per-
son) who is required to make a return
on a particular form pursuant to
§31.6011(a)–1, §31.6011(a)–4, or
§31.6011(a)–5, and who in any return
period ceases to pay wages or non-
payroll payments in respect of which
he is required to make a return on that
form, must make the return for the
period as a final return. * * * Every
such person filing a final return (other
than a final return on Form 942 or
Form 943) must furnish information
showing the date of the last payment of
wages (as defined in section 3121(a) or
section 3401(a)), and, if appropriate,
the date of the last payment of
nonpayroll payments defined in
§31.6011(a)–4(b). * * *
******
Par. 11. Sections 31.6051–4 and
31.6413(a)–3 are added to read as
follows:
§31.6051–4 Statement required in
case of backup withholding.
(a)Statements required from payor.
Every payor of any reportable payment
(as defined in section 3406(b)(1)) who
is required to deduct and withhold tax
under section 3406 must furnish to the
payee a written statement containing
the information required by paragraph
(c) of this section.
(b)Prescribed form. The prescribed
form for the statement required by this
section is Form 1099. In the case of
any reportable interest or dividend
p a y m e n t a s d e f i n e d i n s e c t i o n
3406(b)(2), the prescribed form is the
Form 1099 required in §1.6042–4 of
this chapter (relating to payments of
dividends), §1.6044–5 of this chapter
(relating to payments of patronage
dividends), or §1.6049-6(e) of this
chapter (relating to payments of interest
or original issue discount). Statements
required to be furnished by this section
will be treated as statements required
by the respective sections with respect
to any reportable payment, except that
the statement required under this sec-
tion must include the amount of tax

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withheld under section 3406. In no
event will a statement be required
under this section if a statement with
the same information is required to be
furnished to the recipient under another
section.
(c)Information required. Each state-
ment on Form 1099 must show the
following:
(1)The name, address, and taxpayer
identification number of the person
receiving any reportable payment;
(2)The amount subject to reporting
under section 6041, 6041A(a), 6042,
6044, 6045, 6049, 6050A, or 6050N
whether or not the amount of the
reportable payment is less than the
amount for which an information return
is required. If tax is withheld under
section 3406, the statement must show
the amount of the payment withheld
upon;
(3)The amount of tax deducted and
withheld under section 3406;
(4)The name and address of the
person 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
required by the form.
(d)Time for furnishing statements.
The statement must be furnished to the
payee no later than January 31 of the
year following the calendar year in
which the payment was made.
(e)Aggregation. The payor or bro-
ker may combine the information re-
quired to be shown under this section
with information required to be shown
under another section even if they do
not relate to the same type of report-
able payment.
§31.6413(a)–3 Repayment by payor of
tax erroneously collected from payee.
(a)In general—(1) Erroneous with-
holding under section 3406 of the
Internal Revenue Code. If a payor or
broker withholds under section 3406
from a payee in error or withholds
more than the proper amount of the tax
under section 3406, the payor or broker
may refund the amount erroneously
withheld as provided in section 6413
and this section. A payor or broker will
be considered to have withheld er-
roneously under section 3406 only if
the amount is withheld because of an
error by the payor or broker (e.g., an
error in flagging or identifying an
account that is subject to withholding
under section 3406). The payor or
broker may, in its discretion, treat the
amount withheld as an amount er-
roneously withheld and refund it to the
payee if—
(i)The payor or broker requires a
payee described in §31.3406(g)–1(a) or
described in a provision of the Internal
Revenue Code requiring the reporting
of a payment subject to withholding
under section 3406 to certify that it is
an exempt recipient, the payee fails to
make the required certification, and the
payor or broker subsequently withholds
under section 3406 from a payment to
the payee;
(ii)The payor or broker does not
require the payee to certify concerning
its exempt status and the payor or
broker withholds under section 3406;
or
(iii)The payor or broker withholds
under section 3406 from a payee after
the payee provides a taxpayer identi-
fication number or required certifica-
tion (including the certification relating
to foreign status described in §1.6049–
5(b)(2)(iv) of this chapter or §1.6045–
1(g)(1) of this chapter) to the payor,
but before the payor or broker treats
the number or required certification as
having been received under §31.3406-
(e)–1(b).
(2)Limitation. For purposes of para-
graph (a)(1) of this section, if a payor
or broker withholds because the payor
or broker has not received a taxpayer
identification number or required cer-
tification and the payee subsequently
provides a taxpayer identification num-
ber or a required certification to the
payor, the payor or broker may not
refund the amount to the payee.
(b)Refunding amounts erroneously
withheld—(1) Time and manner. If a
payor or broker withholds under sec-
tion 3406 from a payee in error
(including withholding more than the
correct amount, as described in para-
graph (a) of this section), the payor or
broker may refund the amount er-
roneously withheld to the payee if the
refund is made prior to the end of the
calendar year and prior to the time the
payor or broker furnishes a Form 1099
to the payee with respect to the
payment for which the erroneous with-
holding occurred. If the amount of the
erroneous withholding is refunded to
the payee, the payor or broker must—
(i)Keep as part of its records a
receipt showing the date and amount of
refund and must provide a copy of the
receipt to the payee (a canceled check
or an entry in a statement is sufficient,
provided that the check or statement
contains a specific notation that it is a
refund of tax erroneously withheld);
(ii)Not report on a Form 1099 as
tax withheld any amount which the
payor or broker has refunded to a
payee; and
(iii)Not deposit the amount er-
roneously withheld if the payor or
broker has not deposited the amount of
the tax prior to the time that the refund
is made to the payee.
(2)Adjustment after the deposit of
the tax. For purposes of paragraph
(b)(1) of this section, if the amount
erroneously withheld has been deposi-
ted prior to the time that the refund is
made to the payee, the payor or broker
may adjust any subsequent deposit of
the tax collected under chapter 24 of
the Internal Revenue Code that the
payor or broker is required to make in
the amount of the tax that has been
refunded to the payee.
PART 35a—TEMPORARY
EMPLOYMENT TAX
REGULATIONS UNDER THE
INTEREST AND DIVIDEND TAX
COMPLIANCE ACT OF 1983
Par. 12. The authority citation for
part 35a is amended by removing the
entry for 35a.3406–2 to read, in part, as
follows:
Authority: 26 U.S.C. 7805.* * *
§35a.3406–2 [Removed]
Par. 13. Section 35a.3406–2 is re-
moved.
Par. 14. Section 35a.9999-0T is
added to read as follows:
§35a.9999–0T Effective date
(temporary).
In general, the provisions of
§§35a.9999–1, 35a.9999–2, 35a.9999–
3, 35a.9999–3A, 35a.9999–4T, and
35a.9999–5 are effective before Janu-
ary 1, 1997. The provisions of those
sections remain effective after Decem-
ber 31, 1996, however, for purposes of
§301.6724–1(g) of this chapter, relating
to due diligence safe harbor, and for
international transactions, including
transactions involving a foreign payee,
a foreign payor, a foreign office of a

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U.S. bank or broker, or a payment from
sources without the United States. See
§§31.3406–0 through 31.3406(i)–1 of
this chapter for rules that apply to other
transactions after December 31, 1996.
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 15. The authority for part 301
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 16. Section 301.6109–1 is
amended by:
1.Revising the third sentence in
paragraph (a)(1).
2.Revising the first sentence in
paragraph (h).
The revised sentences read as
follows:
§301.6109–1 Identifying numbers.
(a)In general—(1) Social security
numbers and employer identification
numbers. * * * Social security numbers
identify individual persons, while
employer identification numbers iden-
tify corporations, partnerships, non-
profit associations, trusts, estates of
decedents, and similar nonindividual
persons. * * *
******
(h)Effective date. The provisions of
this section are effective for informa-
tion that must be furnished after April
15, 1974, except that the requirement
that an estate obtain an Employer
Identification Number applies on and
after January 1, 1984. * * *
602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par 17. The authority for part 602
continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 18. In §602.101, paragraph (c) is
amended by adding an entry to the
table in numerical order to read as
follows:
‘‘§31.3406(a)–1—§31.3406(i)–1 . . .
1545–0112’’.
Dated November 28, 1995.
Margaret Milner Richardson,
Commissioner of
Internal Revenue.
Cynthia G. Beerbower,
Deputy Assistant Secretary
of the Treasury.
(Filed by the Office of the Federal Register on
December 20, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 21, 1995, 60 F.R. 66105)
Section 3504.—Acts to be Performed
by Agents
26 CFR 31.3504–1: Acts to be performed by
agents.
Description of acts that may be performed by
reporting agents is provided. See Rev. Proc. 96–
17, page 69.
26 CFR 31.3504–1: Acts to be performed by
agents.
Requirements for the magnetic tape filing of
Forms 940, 941, and 945 by reporting agents are
described. See Rev. Proc. 96–18, page 73.
26 CFR 31.3504–1: Acts to be performed by
agents.
Requirements for the electronic filing of Form
941 by reporting agents are described. See Rev.
Proc. 96–19, page 80.
Section 4980B.—Continuation
Coverage Requirements of Group
Health Plans
Two COBRA premium issues. Guid-
ance is given on two premium issues
that arise under the continuation
coverage requirements for group health
plans in section 4980B of the Code.
Rev. Rul. 96–8
ISSUES
(1)Under the facts of situation 1
below, may the plan require that two
q u a l i f i e d b e n e f i c i a r i e s r e c e i v i n g
COBRA continuation coverage with
respect to the same qualifying event
jointly pay 102 percent of the family
rate?
(2)(a) Under the facts of situation
2(a) below, may the plan require that a
sole qualified beneficiary receiving
COBRA continuation coverage pay 102
percent of the family rate?
(b)Under the facts of situation 2(b)
below, may the plan require that a sole
qualified beneficiary receiving COBRA
continuation coverage pay 102 percent
of the individual rate?
FACTS
Situation 1. Plan P is a group health
plan subject to the COBRA continua-
tion coverage requirements of §4980B
of the Internal Revenue Code. P covers
eligible employees and their eligible
spouses and dependent children. The
benefits under P are provided solely
through a contract with insurance com-
pany I.
I charges P one of two premium
rates for each eligible employee cov-
ered under P: a rate of $150 per month
where only the employee is covered
(the ‘‘individual rate’’), and a rate of
$400 per month where a spouse or one
or more dependent children are covered
together with the employee (the ‘‘fam-
ily rate’’). There are no experience
rebates or dividends under P’s contract
with I.
Employee E has a spouse S. A
qualifying event occurs that results in a
loss of coverage under P for E and S.
Neither E nor S is disabled at the time
of the qualifying event. COBRA con-
tinuation coverage is elected for E and
S. I charges P the family rate for
covering E and S, and P requires that E
and S jointly pay 102 percent of the
family rate.
Situation 2. (a) The facts are the
same as in situation 1, except that,
instead of COBRA continuation cover-
age being elected for both E and S, it is
elected only for S. I charges P the
family rate for S’s coverage, and P
requires that S pay 102 percent of the
family rate.
(b)The facts are the same as in
paragraph (a) of this situation 2 except
that P requires that S pay 102 percent
of the individual rate.
LAW
Title X of the Consolidated Omnibus
Budget Reconciliation Act of 1985
(COBRA), P.L. 99–272, established
continuation coverage requirements for
certain group health plans (the
‘‘COBRA continuation coverage re-
quirements’’). These requirements, as
amended by subsequent legislation, are
now codified in §4980B of the Code.
Section 4980B imposes an excise tax if
a plan subject to the COBRA continua-
tion coverage requirements fails to
comply with those requirements.
Under §4980B(f)(1) of the Code,
‘‘qualified beneficiaries’’ (generally de-
fined in §4980B(g)(1) as employees,

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their spouses, and their dependent
children) are entitled to elect COBRA
continuation coverage upon the occur-
rence of ‘‘qualifying events.’’ A
qualifying event is an event such as a
termination of employment, death, di-
vorce, or other event described in
§ 4980B(f)(3), if the event results in a
loss of coverage under the plan.
Section 4980B(f)(2)(C) permits a
plan to require the payment of a
premium for any period of COBRA
continuation coverage, but limits that
premium to 102 percent of the applica-
ble premium for that period. (This limit
is increased to 150 percent of the
applicable premium in cases where a
qualified beneficiary has obtained an
extension of the maximum required
period of COBRA continuation cover-
age under §4980B(f)(2)(B) because of
disability at the time of the qualifying
event.)
The applicable premium is defined in
§ 4980B(f)(4)(A) of the Code, with
respect to any period of continuation
coverage of qualified beneficiaries, as
the cost to the plan for that period of
the coverage for similarly situated
beneficiaries with respect to whom a
qualifying event has not occurred
(without regard to whether the cost is
paid by the employer or the employee).
Under §4980B(f)(4)(C), the applicable
premium is required to be determined
for a period of 12 months, and the
determination must be made before the
beginning of that period.
Under §4980B(f)(5)(B) of the Code,
if there is a choice among types of
coverage under the plan, each qualified
beneficiary is entitled to make a
separate election among the types of
coverage. H.R. Conf. Rep. No. 841,
99th Cong., 2d Sess. II–859 (1986)
clarifies that each qualified beneficiary
is entitled to a separate election of
continuation coverage, and that a
spouse or dependent child can elect
continuation coverage even when the
employee does not.
In accordance with H.R. Conf. Rep.
No. 453, 99th Cong., 1st Sess. 563
(1985), until final regulations are pub-
lished, the excise tax imposed by
§ 4980B will not apply if employers
and group health plans operate in good
faith compliance with a reasonable
i n t e r p r e t a t i o n o f t h e s t a t u t o r y
requirements.
ANALYSIS
(1)P is charged two rates for plan
beneficiaries with respect to whom a
qualifying event has not occurred, an
individual rate for coverage of the
employee only, and a family rate for
coverage of the employee and a spouse
or one or more dependents. In situation
1, both E and S are receiving COBRA
continuation coverage. If there had not
been a qualifying event, E and S would
have belonged to the category of bene-
ficiaries consisting of an employee and
one or more family members (a spouse
or one or more dependent children), all
of whom are covered as a family. Be-
cause I charges P the family rate for an
employee in this category, it is a
reasonable interpretation of the statu-
tory requirements for P to determine
that the family rate is the applicable
premium for E and S. Consequently, if
P operates in good faith compliance
with this interpretation, P will not fail
to meet the COBRA continuation
coverage requirements by requiring that
E and S jointly pay 102 percent of the
family rate.
The conclusion in situation 1 is the
same for any two or more qualified
beneficiaries with respect to the same
qualifying event. Thus, if E and S had
a dependent child C who also lost
coverage under P as a result of the
qualifying event, it would be a reason-
able interpretation of the statutory
requirements for P to require the joint
payment of up to 102 percent of the
family rate if COBRA continuation
coverage were elected for E and C. The
conclusion in situation 1 would also be
the same if COBRA continuation
coverage were elected for S and C
because these two qualified benefici-
aries are members of the same family,
and they are similarly situated to the
category of two or more beneficiaries
from the same family.
(2)(a) In situation 2(a), only spouse S
has COBRA continuation coverage. As
an individual, the sole qualified bene-
ficiary S is not similarly situated to the
family category of beneficiaries, which
includes only groups of two or more
individuals. Consequently, it is not a
reasonable interpretation of the statu-
tory requirements for P to determine
that the applicable premium for S is the
family rate, and P fails to meet the
COBRA continuation coverage require-
ments in situation 2(a) by requiring that
S pay 102 percent of the family rate.
The conclusion in situation 2(a) is
the same in any case where COBRA
continuation coverage is elected only
for one qualified beneficiary in a
family. Thus, if E and S had a
dependent child C who also lost
coverage under P as a result of the
qualifying event, P would also fail to
meet the COBRA continuation cover-
age requirements by requiring the
payment of 102 percent of the family
rate if COBRA continuation coverage
were elected only for C (or only for E).
(2)(b) In situation 2(b), P requires
that S pay 102 percent of the individual
rate. As noted above, under the facts of
situation 2(b), the sole qualified bene-
ficiary S is not similarly situated to the
family category of beneficiaries, which
includes only groups of two or more
individuals. However, it is a reasonable
interpretation of the statutory require-
ments for P to determine that S, a sole
qualified beneficiary receiving COBRA
continuation coverage, is similarly situ-
ated to the employee-only category of
beneficiaries, for whom P is charged
the individual rate, and that the appli-
cable premium for S is the individual
rate. Consequently, if P operates in
good faith compliance with this inter-
pretation, P will not fail to meet the
COBRA continuation coverage require-
ments by requiring that S pay 102
percent of the individual rate.
The conclusion in situation 2(b) is
the same in any case where COBRA
continuation coverage is elected only
for one qualified beneficiary in a
family. Thus, if E and S had a
dependent child C who also lost
coverage under P as a result of the
qualifying event, it would be a reason-
able interpretation of the statutory
requirements for P to require the
payment of up to 102 percent of the
individual rate if COBRA continuation
coverage were elected only for C (or
only for E).
HOLDINGS
(1)Under the facts of situation 1,
the plan will not fail to meet the
COBRA continuation coverage require-
ments merely because it, in good faith,
requires that two qualified beneficiaries
receiving COBRA continuation cover-
age with respect to the same qualifying
event jointly pay up to 102 percent of
the family rate.
(2)(a) Under the facts of situation
2(a), the plan will fail to meet the
COBRA continuation coverage require-
ments by requiring that a sole qualified
beneficiary receiving COBRA con-
tinuation coverage pay 102 percent of
the family rate.

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(b)Under the facts of situation 2(b),
the plan will not fail to meet the
COBRA continuation coverage require-
ments merely because it, in good faith,
requires that a sole qualified benefici-
ary receiving COBRA continuation
coverage pay up to 102 percent of the
individual rate.
DRAFTING INFORMATION
The principal author of this revenue
ruling is Russ Weinheimer of the
Office of the Associate Chief Counsel
(Employee Benefits and Exempt Orga-
nizations). For further information re-
garding this revenue ruling, contact Mr.
Weinheimer at (202) 622-4695 (not a
toll-free number).
Section 6011.—General Requirements
of Return, Statement or List
26 CFR 31.6011(a)–7: Execution of Returns.
Procedures for execution of tax returns by an
agent is provided. See Rev. Proc. 96–17, page 69.
26 CFR 31.6011(a)–7: Execution of Returns.
Procedures for execution of an electronically
filed Form 941 by an agent is provided. See Rev.
Proc. 96–19, page 80.
26 CFR 31.6011(a)–8: Composite return in lieu
of specified form.
Procedures for using a composite return instead
in lieu of paper Forms 940, 941, or 945 is
provided. See Rev. Proc. 96–18, page 73.
Section 6011.—General Requirement
of Return, Statement or List
26 CFR 31.6011(a)–8: Composite return in lieu
of specified form.
Procedures for using a composite return instead
in lieu of a paper Form 941. See Rev. Proc. 96–
19, page 80.
Section 6012.—Persons Required to
Make Returns of Income
26 CFR 1.6012–5: Composite return in lieu of
specified form.
What are the requirements for participation in
the 1996 On-Line Filing Program for the Form
1040 series? See Rev. Proc. 96–20, page 88.
Section 6051.—Receipts for
Employees
26 CFR 31.6051–1: Statements for employees.
T.D. 8636
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 31 and 301
Time for Furnishing Wage Statements
on Termination of Employer’s
Operations
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains
final regulations concerning the time for
f u r n i s h i n g w a g e s t a t e m e n t s t o
employees and for filing wage state-
ments with the Social Security Admin-
istration upon the termination of an
employer’s operations. These regula-
tions will affect employers and their
employees in the year the employer
ceases to pay wages. These regulations
are intended to improve the wage recon-
ciliation process between the Social Se-
curity Administration and the IRS.
EFFECTIVE DATE: These regulations
are effective January 1, 1997.
ADDRESSES: Send submissions to:
C C : D O M : C O R P : T : R ( E E – 8 3 – 8 9 ) ,
Room 5228, Internal Revenue Service,
POB 7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative,
submissions may be hand delivered be-
tween the hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:T:R (EE–83–89), Cou-
rier’s Desk. Internal Revenue Service,
1111 Constitution Avenue NW, Wash-
ington, DC.
F O R F U R T H E R I N F O R M A T I O N
CONTACT: Jean M. Casey, (202)
622-6040 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On December 22, 1994, the Federal
Register (59 FR 65982 [EE–83–89,
1995–1 C.B. 845]) published a notice of
proposed rulemaking which required an
employer to furnish Forms W–2 to
employees and to file Forms W–2 and
W–3 with the Social Security Admin-
istration (SSA) at the same time that the
employer is required to file the final
Form 941 with the IRS.
Written comments responding to the
notice of proposed rulemaking were re-
ceived. A public hearing was held on
May 8, 1995, pursuant to a notice pub-
lished in the Federal Register on March
24, 1995 (60 FR 15526). After consid-
eration of the comments that were re-
ceived in response to the notice of
proposed rulemaking and at the hearing,
the IRS and Treasury adopt the pro-
posed regulations, as amended and re-
vised by this Treasury decision.
Explanation of Revisions and Summary
of Comments
Availability of Forms W–2
The regulations, as proposed, would
have required an employer who ceases
paying wages to furnish Form W–2 to
employees and file Forms W–2 and W–
3 with SSA on or before the date on
which the final Form 941 is required to
be filed with the IRS. Form 941 is
generally due quarterly, on or before the
last day of the first calendar month
following the period for which it is
made (i.e., April 30, July 31, October
31, and January 31). Consequently, if an
employer ceased paying wages in the
first quarter of the calendar year, the
Forms 941, W–2 and W–3 would be due
by April 30. Some commentators ex-
pressed concern that Forms W–2 and
W–3 are not available in the first quar-
ter of the calendar year. Commentators
questioned whether using prior year
Forms W–2 was an acceptable alterna-
t i v e i f c u r r e n t y e a r f o r m s w e r e
unavailable.
Under the Internal Revenue Code and
the existing regulations, an employee
may request the Form W–2 at any time
during the year if the employee is termi-
nated and there is no reasonable expec-
tation on the part of the employer or the
employee of further employment during
the calendar year. Therefore, Forms W–
2 are available from the IRS, either
through the mail or at the district of-
fices, in January of each year. Specifica-
tions for the private printing of sub-
stitute Forms W–2, however, are not
always available during the first quarter
of the calendar year. Thus, during this
period, employers may be limited to
using the Forms W–2 printed by the
IRS. Neither prior year Forms W–2 nor

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the prior year specifications for the
private printing of substitute Forms W–
2 should be used for filing Forms W–2
on an expedited basis for the current
year because such procedures could re-
sult in significant processing errors.
Availability of Magnetic Media
Specifications
Commentators questioned whether
magnetic media specifications would be
available in the first quarter of the
calendar year for employers who are
required to file on an expedited basis
under the proposed regulations. Regula-
tion section 301.6011–2 and Notice 90–
15, 1990–1 C.B. 326, generally require
an employer to file Forms W–2 with
SSA on magnetic media if the employer
is required to file 250 or more Forms
W–2 in a calendar year. Employers who
do not meet the 250 return threshold
may also file their Forms W–2 with
SSA on magnetic media.
It is not certain that magnetic media
specifications, which are issued by SSA,
will be available in the first quarter of
the calendar year for employers who are
required to file on an expedited basis.
The Commissioner has the authority to
provide for reasonable extensions of
time, upon written application, for an
employer to furnish Forms W–2 to
employees and file Forms W–2 and W–
3 with SSA. To assure that filers need
not shift from magnetic media to paper
filings in order to comply with the
expedited filing requirements, the final
regulations affirm that the Commis-
sioner may adopt automatic extension
procedures where appropriate.
It is anticipated that the Commis-
sioner will establish automatic extension
procedures to the extent necessary to
permit employers that terminate opera-
tions a reasonable period of time, after
the issuance of specifications, to make
their filings on magnetic media.
It is further anticipated that these
procedures will include appropriate au-
tomatic extensions of time to file ex-
pedited Forms W–2 both for employers
required to file on magnetic media and
for employers who have filed on mag-
netic media in the past whether or not
required to do so. Even though Forms
W–2 are furnished to employees on
paper, the automatic extension proce-
dures are anticipated to apply to the
employee copy of the Form W–2 as
well as the SSA copy in order to avoid
the complexities and potential errors
that could arise from processing these
forms at significantly different times.
It is also anticipated that the pub-
lished procedure will provide for an
automatic extension to a specified date
which permits employers a reasonable
period of time after the issuance of
specifications to make their filings on
magnetic media. This date will be com-
municated to filers sufficiently early in
the year to permit adequate systems
planning. In providing for these proce-
dures, it is necessary to balance the
practical issues of compliance with the
concern for timely submission of infor-
mation to SSA. Thus, if prior to a future
year, it is anticipated that specifications
will be issued sufficiently early in the
year to permit a reasonable period of
time for filing, while still complying
with the due dates otherwise required in
this regulation, the Commissioner may
suspend the automatic extension proce-
dures for that year. Discretionary exten-
sions would continue to be considered
on a case-by-case basis.
Comments are requested on the auto-
matic extension procedures and their
implementation.
Regulation section 301.6011–2(c)(4)
provides that the Commissioner may,
upon application, waive the requirement
to file on magnetic media in the case of
hardship. The final regulations clarify
that the unavailability of the specifica-
tions for magnetic media filing of Form
W–2 will be treated as creating a hard-
ship. Therefore, an employer has the
option of applying for a waiver from the
requirement to file Forms W–2 on mag-
netic media and may instead file the
Forms W–2 on paper. The employer
must apply for a waiver within 45 days
of the due date of the return.
Employers may also contact their lo-
cal SSA Magnetic Media Coordinator
for guidance on how to report on mag-
netic media. The Coordinators are listed
in the annual Technical Instructions
Bulletin (TIB–4) published by SSA.
Extension Procedures
Regulation section 31.6051–1(d)(2)
provides procedures for an employer to
request an extension of time to furnish
Forms W–2 to employees. Regulation
section 31.6081(a)–1 provides similar
procedures for employers to request an
extension of time to file Forms W–2 and
W–3 with SSA. These procedures apply
to employers who are required to fur-
nish Forms W–2 to employees or file
Forms W–2 and W–3 with SSA on an
expedited basis. Thus, an employer
who, under the final regulations, is re-
quired to furnish and file the Forms W–
2 on an expedited basis may request an
extension of time if necessary.
Additional month to provide Forms W–
2 and W–3 to SSA
Under existing regulations Forms W–
2 and W–3 are due to SSA one month
after they are due to the employees.
This provides employers an opportunity
t o c o r r e c t a n y e r r o r s f o u n d b y
employees before filing the Forms W–2
with SSA. Some commentators noted
that providing the Forms W–2 to SSA at
the same time the forms are provided to
the employees eliminates the oppor-
tunity for corrections currently provided
by the regulations. To minimize the
need for employers to file corrected
Forms W–2 (Form W–2c, Statement of
Corrected Income and Tax Amounts),
the final regulations include a suggested
one month additional period for provid-
ing the Forms W–2 to SSA. Thus,
Forms W–2 would be due to employees
at the same time as the final Form 941
(generally one month after the end of
the quarter). Forms W–2 and W–3
would be due to SSA two months after
the final Form 941 is due.
Modification of Revenue Procedure
84–77
In Revenue Procedure 84–77, 1984–2
C.B. 753, the IRS provided procedures
for preparing and filing certain forms,
including Form 941, Form W–2 and
Form W–3, when a successor employer
acquires substantially all of the property
(1) used in a trade or business of a
predecessor employer, or (2) used in a
separate unit of a trade or business of a
predecessor, and in connection with, or
immediately after the acquisition (but
during the same calendar year) the suc-
cessor employs individuals who were
employed in the trade or business of the
predecessor immediately prior to the
acquisition. Under the standard proce-
dure described in Rev. Proc. 84–77,
both the predecessor and successor
employer report the wages they paid
employees on Form W–2. Under the
alternate procedure, the predecessor is
relieved from furnishing Form W–2 to
any employee who is employed by the
successor employer and from filing such
Forms W–2 with SSA. Instead, the suc-

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cessor employer assumes the predeces-
sor’s reporting obligation for those
employees. The preamble to the pro-
posed regulation stated that, other than
modifying the time frame for the stand-
ard procedure, the proposed regulation
would not affect the validity of Rev.
Proc. 84–77.
One commentator questioned whether
the proposed regulation expedited the
filing requirements for the predecessor
employer with regard to individuals
who are not employed by the successor
employer. If the predecessor employer
ceases to pay wages, (i.e., is required to
file a final Form 941), the predecessor
employer is required under these regula-
tions to furnish Forms W–2 on an ex-
pedited basis to those individuals who
are not employed by the successor
employer. The predecessor employer
must also file Forms W–2 and W–3
with SSA on an expedited basis for
those individuals who are not employed
by the successor employer. Revenue
Procedure 84–77 is being modified to
reflect this change.
Some commentators asked how the
proposed regulations apply in the con-
text of mergers. If a final Form 941 is
not filed because a merger does not
involve the cessation of business opera-
tions but only a change in corporate or
business form, the expedited filing re-
quirements are inapplicable.
Use of an agent
One commentator suggested the final
regulations provide an exception from
expedited filing for an employer that
appoints an agent to assume the em-
ployer’s reporting obligation. A similar
exception was suggested in the case of a
controlled group of corporations in
which one member of the group acts as
the payroll agent for the group. Because
there is no practically effective enforce-
able manner for shifting liability for
reporting from an employer to an agent
and for assuring that the agent will
satisfy the reporting obligations, these
suggestions were not adopted.
Application to Returns filed by
Employers for Employees in Guam,
U.S. Virgin Islands, American Samoa,
Commonwealth of the Northern
Mariana Islands and Puerto Rico.
One commentator questioned whether
the proposed regulations applied to
wage statements furnished to employees
and filed with SSA by employers for
employees in Guam, U.S. Virgin Is-
lands, American Samoa, Common-
wealth of the Northern Mariana Islands
and Puerto Rico. While these employers
file variations of the Forms 941, W–2
and W–3, they are subject to the filing
requirements for Forms 941, W–2 and
W–3. In addition, employees of these
employers receive social security credit
on the same basis as employers who file
the Forms 941, W–2 and W–3. Thus,
these employers are subject to the
regulations.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
12866. Therefore, a regulatory assess-
ment is not required. It also has been
determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C.
chapter 5) and the Regulatory Flex-
ibility Act (5 U.S.C. chapter 6) do not
apply to these regulations, and, there-
fore, a Regulatory Flexibility Analysis
is not required. Pursuant to section
7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking pre-
ceding these regulations was submitted
to the Small Business Administration
for comment on its impact on small
business.
Drafting Information
The principal author of these regula-
tions is Jean M. Casey, Office of the
Associate Chief Counsel (Employee
Benefits and Exempt Organizations),
IRS. However, other personnel from the
IRS and Treasury Department partici-
pated in their development.
******
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR part 31 and part
301 are amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME
TAX AT SOURCE
Paragraph 1. The authority citation
for part 31 is amended by adding the
following entries in numerical order to
read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 31.6051–1(d) also issued under
26 U.S.C. 6051.
Section 31.6051–2 also issued under 26
U.S.C. 6051 * * *
Section 31.6071–1 also issued under 26
U.S.C. 6071 * * *
Section 31.6081–1 also issued under 26
U.S.C. 6081 * * *
Par. 2. Section 31.6051–1, paragraph
(d) is amended as follows:
1.Paragraph (d)(1) is redesignated as
(d)(1)(i).
2.Paragraph (d)(1)(ii) is added.
3.Paragraph (d)(2) is revised.
The addition and revision read as
follows:
§31.6051–1 Statements for employees.
******
(d)* * * (1)(i) * * *
(ii)Expedited furnishing—(A) Gen-
eral rule. If an employer is required to
make a final return under §31.6011(a)–
6(a)(1) (relating to the final return for
Federal Insurance Contributions Act
taxes and income tax withholding from
wages) on Form 941, or a variation
thereof, the employer must furnish the
statement required by this section on or
before the date required for filing the
final return. See §31.6071(a)–1(a)(1).
However, if the final return under
§31.6011(a)–6(a)(1) is a monthly return,
as described in §31.6011(a)–5, the
employer must furnish the statement
required by this section on or before the
last day of the month in which the final
return is required to be filed. See
§31.6071(a)–1(a)(2). Except as provided
in paragraph (d)(2)(i) of this section, in
no event may an employer furnish the
statement required by this section later
than January 31 of the year succeeding
the calendar year to which it relates.
The requirements set forth in this para-
graph (d)(1)(ii) do not apply to
employers with respect to employees
whose wages are for domestic service in
the private home of the employer. See
§31.6011(a)–1(a)(3).
(B)Requests by employees. An
employer is not permitted to furnish a
statement pursuant to the provisions of
the third sentence of paragraph (d)(1)(i)
of this section (relating to written re-
quests by terminated employees for
Form W–2) at a time later than that
required by the provisions of paragraph
(d)(1)(ii)(A) of this section.
(C)Effective date. This paragraph
(d)(1)(ii) is effective January 1, 1997.

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(2)Extensions of time—(i) In general
(a) The Director, Martinsburg Comput-
ing Center, may grant an extension of
time in which to furnish to employees
the statements required by this section.
A request may be made by a letter to the
Director, Martinsburg Computing Cen-
ter. The request must contain:
( 1 )T h e e m p l o y e r ’ s n a m e a n d
address;
(2)The employer’s taxpayer identi-
fication number;
(3)The type of return (i.e., Form W–
2); and
(4)A concise statement of the rea-
sons for requesting the extension.
(b) The application must be mailed
or delivered on or before the applicable
due date prescribed in paragraph (d)(1)
of this section for furnishing the state-
ments required by this section.
(c) In any case in which an employer
is unable, by reason of illness, absence,
or other good cause, to sign a request
for an extension, any person standing in
close personal or business relationship
to the employer may sign the request on
his behalf, and shall be considered as a
duly authorized agent for this purpose,
provided the request sets forth a reason
f o r a s i g n a t u r e o t h e r t h a n t h e
employer’s and the relationship existing
between the employer and the signer.
For provisions relating to extensions of
time for filing the Social Security Ad-
ministration copies of the statement, see
§31.6081(a)–1(a)(3).
(ii)Automatic Extension of Time.
The Commissioner may, in appropriate
cases, publish procedures for automatic
extensions of time to furnish Forms W–
2 where the employer is required to
furnish the Form W–2 on an expedited
basis.
******
Par. 3. Section 31.6051–2, paragraph
(c), first sentence is revised to read as
follows:
§31.6051–2 Information returns on
Form W–3 and Internal Revenue
Service copies of Form W–2.
******
(c)Cross references. For provisions
relating to the time for filing the infor-
mation returns required by this section
and to extensions of the time for filing,
see §§ 31.6071(a)–1(a)(3) and 31.6081-
(a)–1(a)(3), respectively. * * *
Par. 4. Section 31.6071(a)–1(a)(3) is
amended as follows:
1.Paragraph (a)(3)(i) is removed.
2.Paragraph (a)(3)(ii) is redesignated
as paragraph (a)(3)(i) and the heading is
revised.
3. A new paragraph (a)(3)(ii) is
added.
The addition and revision read as
follows:
§31.6071(a)–1 Time for filing returns
and other documents.
(a)* * *
(3)* * * (i) General rule. * * *
(ii)Expedited filing—(A) General
rule. If an employer who is required to
make a return pursuant to §31.6011(a)–
1 or §31.6011(a)–4 is required to make
a final return on Form 941, or a varia-
tion thereof, under §31.6011(a)–6(a)(1)
(relating to the final return for Federal
Insurance Contributions Act taxes and
income tax withholding from wages),
the return which is required to be made
under §31.6051–2 must be filed on or
before the last day of the second calen-
dar month following the period for
which the final return is filed. The
requirements set forth in this paragraph
(a)(3)(ii) do not apply to employers with
respect to employees whose wages are
for domestic service in the private home
of the employer. See §31.6011(a)–
1(a)(3).
(B)Effective date. This paragraph
(a)(3)(ii) is effective January 1, 1997.
******
Par. 5. Section 31.6081(a)–1(a)(3) is
revised to read as follows:
§31.6081(a)–1 Extensions of time for
filing returns and other documents.
(a)* * *
(3)Information returns of employers
on Forms W–2 and W–3—(i) In gen-
eral. The Director, Martinsburg Com-
puting Center, may grant an extension
of time in which to file the Social
Security Administration copy of Forms
W–2 and the accompanying transmittal
form which constitutes an information
return under paragraph §31.6051–2(a).
The request must contain a concise
statement of the reasons for requesting
the extension. The request must be
mailed or delivered on or before the
date on which the employer is required
to file the Form W–2 with the Social
Security Administration.
(ii)Automatic Extension of Time.
The Commissioner may, in appropriate
cases, publish procedures for automatic
extensions of time to file Forms W–2
where the employer is required to file
the Form W–2 on an expedited basis.
******
PART 301—PROCEDURE AND
ADMINISTRATION
Par. 6. The authority citation for part
301 continues to read in part as follows:
Authority: 26 U. S. C. 7805 * * *
Par. 7. Section 301.6011–2(c)(4)(i) is
revised to read as follows:
§301.6011–2 Required use of magnetic
media.
******
(c)* * *
(4)Waiver. (i) The Commissioner
may waive the requirements of this
section if hardship is shown in a request
for waiver filed in accordance with this
paragraph (c)(4)(i). The principal factor
in determining hardship will be the
amount, if any, by which the cost of
filing the information returns in accord-
ance with this section exceeds the cost
of filing the returns on other media.
Notwithstanding the forgoing, if an
employer is required to make a final
return on Form 941, or a variation
thereof, and expedited filing of Forms
W–2 is required, the unavailability of
specifications for magnetic media filing
will be treated as creating a hardship.
See §31.6071(a)–1(a)(3)(ii). A request
for waiver should be filed at least 45
days before the due date of the informa-
tion return in order for the Service to
have adequate time to respond to the
request for waiver. The waiver will
specify the type of information return
and the period to which it applies and
will be subject to such terms and condi-
tions regarding the method of reporting
a s m a y b e p r e s c r i b e d b y t h e
Commissioner.
******
Margaret Milner Richardson,
Commissioner of
Internal Revenue.
Approved December 12, 1995.
Leslie Samuels,
Assistant Secretary of
the Treasury

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(Filed by the Office of the Federal Register on
December 20, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 21, 1995, 60 F.R. 66139)
26 CFR 1.6061–1: Signing of returns and
other documents by individuals.
What are the requirements for participation in
the 1996 On-Line Filing Program for the Form
1040 series? See Rev. Proc. 96–20, page 88.
Section 6061.—Signing of Returns
and Other Documents
26 CFR 31.6061–1: Signature of returns and
other documents.
Procedures for signing a reporting agent
authorization and tax returns are described. See
Rev. Proc. 96–17, page 69.
Section 6071.—Time for Filing
Returns and Other Documents
26 CFR 31.6071(a)–1: Time for filing returns
and other documents.
Time for filing Forms 940, 941, and 945 is
provided. See Rev. Proc. 96–18, page 73.
26 CFR 31.6071(a)–1: Time for filing returns
and other documents.
Time for filing Form 941 is provided. See
Rev. Proc. 96–19, page 80.
Section 6302.—Mode or Time of
Collection
26 CFR 31.6302–1: Federal tax deposit rules
for withheld income taxes and taxes under the
Federal Insurance Contributions Act (FICA)
attributable to payments made after December
31, 1992.
Scope of a reporting agent’s authorization to
transmit federal tax deposit payments is de-
scribed. See Rev. Proc. 96–17, page 69.
26 CFR 31.6302–1T: Federal tax deposit rules
for withheld income taxes and taxes under the
Federal Insurance Contributions Act (FICA)—
deposits required to be made by electronic
funds transfer after December 31, 1994
(temporary).
Scope of a reporting agent’s authorization to
transmit electronic federal tax deposits is de-
scribed. See Rev. Proc. 96–17, page 69.

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Part III. Administrative, Procedural, and Miscellaneous
Statements to Recipients of
Dividends and Patronage Dividends
Notice 96–4
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Partial withdrawal of a
notice of proposed rulemaking.
SUMMARY: This document withdraws
a portion of the notice of proposed
rulemaking under sections 6042 and
6044 of the Internal Revenue Code that
was published in the Federal Register
on February 29, 1988, as proposed to
be amended on September 27, 1990.
The proposed regulations prescribed
rules for official statements to recip-
ients of dividends and patronage divi-
dends paid after December 31, 1983.
DATE: This withdrawal is effective on
December 21, 1995.
FOR FURTHER INFORMATION
CONTACT: Renay France, (202)
622-4910 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On February 29, 1988, the IRS
issued proposed regulations on backup
withholding (INTL–52–86, 53 FR 5991
[1988–1 C.B. 892]). The proposed
regulations related, in part, to official
statements to recipients of dividends
and patronage dividends under sections
6042 and 6044, respectively (proposed
§§1.6042–5 and 1.6044–6). On Septem-
ber 27, 1990, the IRS issued additional
proposed regulations on backup with-
holding (IA–224–82, 55 FR 39427).
Those proposed regulations contained
amendments to the regulations pre-
viously proposed under sections 6042
and 6044.
In *** [T.D. 8637, page 00, this
Bulletin], the IRS is issuing final
regulations relating to backup withhold-
ing that were proposed in INTL–52–86
and IA–224–82. Those final regulations
do not include proposed §§1.6042–5
and 1.6044–6. Further, when the IRS
issues additional final regulations that
were proposed under INTL–52–86,
those additional final regulations will
not include proposed §§1.6042–5 and
1.6044–6. Accordingly, this document
withdraws those proposed regulations
sections. See §§1.6042–4 and 1.6044–5
of the final regulations for substantive
rules proposed under the withdrawn
sections.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and rec-
ordkeeping requirements.
Withdrawal of Portion of Notice of
Proposed Rulemaking
Accordingly, under the authority of
26 U.S.C. 7805, proposed §§1.6042–5
and 1.6044–6 that were published in
the Federal Register on February 29,
1988 (53 FR 5991) and amended in the
Federal Register on September 27,
1990 (55 FR 39427) are withdrawn.
Margaret Milner Richardson,
Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
December 20, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 21, 1995, 60 F.R. 66227)
26 CFR 601.201: Tax forms and instructions.
(Also Part I, §§ 3504, 6011, 6061, 6302;
31.3504–1, 31.6011(a)–7, 31.6061–1, 31.6302–
1, 31.6302–1T)
Rev. Proc. 96–17
Table of Contents
SECTION 1.PURPOSE
SECTION 2.BACKGROUND
SECTION 3.SIGNIFICANT
CHANGES FROM
REV. PROC. 89–18
SECTION 4.DEFINITIONS
SECTION 5.SCOPE OF
REPORTING AGENT
AUTHORIZATION
SECTION 6.COMPLETING A
REPORTING AGENT
AUTHORIZATION
SECTION 7.SUBMITTING A
REPORTING AGENT
AUTHORIZATION
SECTION 8.INTERNAL
REVENUE SERVICE
CONTACTS
SECTION 9.OTHER RELATED
DOCUMENTS
SECTION 10.EFFECT ON OTHER
DOCUMENTS
SECTION 11.EFFECTIVE DATE
SECTION 1. PURPOSE
.01This revenue procedure provides
the requirements for completing and
submitting Form 8655, Reporting
Agent Authorization for Magnetic
Tape/Electronic Filers (‘‘Authoriza-
tion’’). An Authorization allows a
taxpayer to designate a Reporting
Agent (‘‘Agent’’) to do the following
things on behalf of the taxpayer: (1)
sign and file Forms 940, 941, and 945,
on magnetic tape or electronically; (2)
make federal tax deposit (‘‘FTD’’)
payments and submit FTD information
on magnetic tape or electronically for
the taxes deposited and reported on the
Forms 940, 941, and 945, and certain
other returns; and (3) receive duplicate
copies of official notices, cor-
respondence, transcripts, or other infor-
mation with respect to such tax returns
and FTDs.
.02The technical specifications for
filing Authorization information are
published separately in Publication
1474, Technical Specification Guide
for Reporting Agent Authorization for
Magnetic Tape/Electronic Filers.
SECTION 2. BACKGROUND
.01 Section 31.6011(a)–7 of the
Employment Taxes and Collection of
Income Tax at Source Regulations
provides that each return required
under the regulations of this part,
together with any prescribed copies or
supporting data, must be filled in and
disposed of in accordance with the
forms, instructions, and regulations ap-
plicable thereto. The return may be
made by an agent in the name of the
person required to make the return if
an acceptable power of attorney is filed
with the Internal Revenue Service
office with which such person is re-
quired to file returns and if such a
return includes all taxes required to be
reported by such person on such return.
.02Section 31.6061–1 provides that
the return may be signed for the tax-
payer by an agent who is fully
a u t h o r i z e d i n a c c o r d a n c e w i t h
§ 31.6011(a)–7 to make such return.
.03Section 31.6302–1 provides tax-
payers with the rules for depositing

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withheld employment taxes. Section
31.6302–1T of the temporary regula-
tions supplements these rules by imple-
menting the mandate for the collection
of federal depository taxes through an
electronic funds transfer (‘‘EFT’’) sys-
tem, as required by §6302(h) of the
Internal Revenue Code. EFT is any
transfer of taxes made in accordance
with Rev. Proc. 94–48, 1994–2 C.B.
694, or in accordance with procedures
subsequently published by the Commis-
sioner.
.04The Service has prescribed the
use of Form 8655 as the appropriate
authorization form to use by a taxpayer
for designating an Agent to:
(1)file and sign certain tax re-
turns on magnetic tape or elec-
tronically;
(2)make FTD payments and sub-
mit FTD information on magnetic tape
or electronically for certain tax returns;
(3)receive duplicate copies of
official notices, correspondence, tran-
scripts, or other information with re-
spect to the magnetic tape or electronic
returns filed by the Agent; or
(4)receive duplicate copies of
official notices, correspondence, tran-
scripts, frequency information, or other
information with respect to FTDs sub-
mitted or to be submitted on magnetic
tape or electronically by the Agent.
.05Form 8655 provides an option
for an Agent to receive deposit fre-
quency information on magnetic tape
(ASCII format on 10
1
⁄2 inch round tape
6250 BPI) or on paper. Deposit fre-
quency information will be sent on
magnetic tape to an Agent with 4,000
or more clients, unless that Agent
elects on the Authorization not to
receive the information via magnetic
tape. Deposit frequency information
will be sent on paper to an Agent with
less than 4,000 clients, unless that
Agent elects on the Authorization to
receive the information on magnetic
tape. The cost of producing the tape
will be incurred by the Service. How-
ever, an Agent is responsible for
reading the magnetic tape.
SECTION 3. SIGNIFICANT
CHANGES FROM REV. PROC.
89–18
.01The magnetic tape specifications
are not included in this revenue proce-
dure, but are published separately in
Publication 1474.
.02This revenue procedure has been
updated to reflect the addition of:
(1)Form 945, Annual Return of
Withheld Federal Income Tax, to the
Authorization;
(2)electronic filing as a method
for filing certain returns; and
(3)electronic submission of FTDs
and FTD information as a method for
payment.
.03Section 4 defines certain terms
used in connection with this revenue
procedure.
.04Section 5 clarifies the scope of
an Authorization.
.05Section 6 updates instructions
for completing an Authorization.
.06Section 7 provides the proce-
dures for submitting Authorizations.
.07Section 8 updates information on
Internal Revenue Service contacts.
.08Section 9 lists related docu-
ments.
SECTION 4. DEFINITIONS
.01Reporting Agent. A Reporting
Agent (‘‘Agent’’) is an accounting
service, franchiser, bank, or other entity
authorized to perform one or more of
the following on behalf of a taxpayer:
(1) prepare and electronically file Form
941, Employer’s Quarterly Federal Tax
Return; (2) prepare and use magnetic
tape to file Form 940, Employer’s
Annual Federal Unemployment (FUTA)
Tax Return, Form 941, and Form 945,
Annual Return of Withheld Federal
Income Tax; and (3) make FTD pay-
ments and submit FTD information on
magnetic tape or electronically for the
taxes deposited and reported on Forms
940, 941, and 945, and the other
returns covered by Rev. Proc. 89–48,
1989–2 C.B. 599, or Rev. Proc. 94–48.
.02Reporting Agent Authorization.
A Reporting Agent Authorization
(‘‘Authorization’’) allows a taxpayer to
designate an Agent to sign and to file
Forms 940, 941, and 945, on magnetic
tape or electronically, and to authorize
the making of FTD payments and sub-
mission of FTD information on mag-
netic tape or electronically for the taxes
deposited and reported on the Forms
940, 941, and 945, and the other
returns covered by Rev. Proc. 89–48 or
Rev. Proc. 94–48. The Authorization
may also permit the Agent to receive
duplicate copies of official notices,
correspondence, transcripts, or other
information with respect to such tax
returns and FTDs. The Service has
prescribed Form 8655 as the appropri-
ate authorization form to be used by a
taxpayer for designating an Agent.
.03Reporting Agent’s List. A Re-
porting Agent’s List (‘‘Agent’s List’’)
identifies all taxpayers for whom an
Agent will file tax returns, make FTD
payments, or submit FTD information
either on magnetic tape or electroni-
cally. A separate Authorization must be
submitted for each taxpayer on the
Agent’s List. The Agent’s List must
contain each taxpayer’s employer iden-
tification number (‘‘EIN’’).
SECTION 5. SCOPE OF
REPORTING AGENT
AUTHORIZATION
.01The scope of an Authorization
for the magnetic tape or electronic
filing of forms listed on Form 8655 is
as follows:
(1)a taxpayer may authorize an
Agent to sign and file all or any of the
forms listed on Form 8655 on magnetic
tape or electronically on the taxpayer’s
behalf; and
(2)a taxpayer may authorize an
Agent to receive copies of notices,
correspondence, and transcripts or other
information with respect to such returns
filed by the Agent.
.02The scope of an Authorization
for making FTD payments and submit-
ting FTD information on magnetic tape
or electronically is as follows:
(1)a taxpayer may authorize an
Agent to prepare and make FTD
payments and submit FTD information
on magnetic tape or electronically on
the taxpayer’s behalf;
(2)a taxpayer who is not required,
pursuant to §6302(h) and the regula-
tions thereunder, to make FTD pay-
ments through the EFT system may
select the method for submission of
FTD information (magnetic tape or
electronic);
(3)an Agent must make FTD
payments and submit payment informa-
tion through the EFT system for a
taxpayer that is mandated to make FTD
payments and submit FTD information
through the EFT system pursuant to
§ 6302(h), regardless of the taxpayer’s
designation to the contrary; and
(4)an Authorization that author-
izes an Agent to make FTD payments
only entitles the Agent to receive
copies of FTD-related notices and
correspondence for the taxpayer. Such
an Authorization also permits an Agent
to request information or submit infor-

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mation on the deposits submitted by
the Agent, including any penalties that
may result from such deposits.
.03An Authorization becomes effec-
tive for the tax period designated by
the Agent and taxpayer, and remains in
effect for subsequent periods until
revoked by the taxpayer, terminated by
the Agent, or terminated by the Serv-
ice, subject to the following:
(1)in the case of an Agent
making an FTD payment on behalf of a
taxpayer, the Authorization must be
received by the Service prior to the
Agent’s making the FTD payment and
submitting the FTD information on
magnetic tape or electronically; and
(2)in the case of an Agent filing
a return on behalf of a taxpayer, the
Service must accept the Authorization
and Agent’s List (as set forth in the
magnetic tape or electronic filing reve-
nue procedure for the relevant return)
before an Agent may file any returns.
See section 9 of this revenue procedure
for a list of other applicable revenue
procedures.
.04A new Authorization must be
submitted for any increase or decrease
in the scope of an Authorization
between an Agent and the taxpayer.
Receipt by the Service of a new
Authorization revokes all prior Authori-
zations by the taxpayer but has no
effect on any other power of attorney
or authorization.
.05An Authorization filed under this
revenue procedure does not constitute
the appointment of a recognized repre-
sentative as described in §601.502 of
the Statement of Procedural Rules.
.06An Authorization does not abso-
lve the taxpayer of the responsibility to
ensure that all tax returns are filed and
all taxes are paid on time.
.07An Agent may use an Authoriza-
tion to file paper forms listed on Form
8655 only under the following cir-
cumstances:
(1)the late receipt of payroll
information from a taxpayer that would
jeopardize the timely submission of the
taxpayer’s return;
(2)the amendment of returns filed
under the magnetic tape/electronic fil-
ing programs referenced in section 9 of
this revenue procedure;
(3)the rejection of a magnetic
tape/electronic filing that would jeo-
pardize the timely submission of the
taxpayer’s return; or
(4)a request by the magnetic
tape/electronic filing coordinator for an
Agent participating in a magnetic tape/
electronic filing program referenced in
section 9 of this revenue procedure to
file paper returns.
.08An Agent may prepare a paper
tax return for the taxpayer’s signature.
A taxpayer’s authorized representative
that is not an Agent participating in a
program covered by the Form 8655
(including a suspended Agent) must
have a valid power of attorney in
accordance with §601.504(6) (usually
Form 2848, Power of Attorney and
Declaration of Representative) in order
to sign and file a paper tax return on
behalf of a taxpayer.
.09Each paper tax return must be
signed by the taxpayer, the taxpayer’s
authorized representative, or a par-
ticipating Agent, to the extent permit-
ted in section 5.07 of this revenue
procedure.
.10A copy of each Authorization
should be kept at the Agent’s principal
place of business for examination by
the Service until the statute of limita-
tions for the last return filed under that
Authorization expires.
SECTION 6. COMPLETING A
REPORTING AGENT
AUTHORIZATION
.01An Authorization may be sub-
mitted on Form 8655, or any other in-
strument which clearly contains the
same information required to be
provided on Form 8655. The taxpayer
may strike out the nonapplicable por-
tions of the Form 8655. An Agent may
fax the Authorization to the Service.
.02An Authorization must be signed
by:
(1)the taxpayer, or the taxpayer’s
authorized representative. If, however,
the authorized representative is the
holder of a power of attorney, the
person executing the Authorization
must be specifically authorized to sign
tax returns on behalf of the taxpayer. If
the taxpayer’s authorized representative
wishes to authorize an Agent to receive
tax return notices, correspondence, and
transcripts from the Service, or discuss
taxpayer account information with
Service representatives, the authorized
representative must be someone with
authority both to receive, and to
designate others to receive, tax return
information (as defined by §6103(b)-
(2)) of the taxpayer; or
(2)a person who is duly author-
ized in accordance with §31.6011(a)–7
of the regulations, provided that the
authorizing language explicitly states
that the person may both receive and
designate recipients of the taxpayer’s
tax return information, if the form is
used to designate the person as a
recipient of tax return information.
.03An Authorization executed after
January 31, 1996, must be made on
Form 8655 (with a revision date of
October 1995 or later) or its equivalent.
.04Except to the extent provided in
section 6.05 of this revenue procedure,
an Authorization will remain in effect
until a new Authorization is received
by the Service.
.05The Service will not accept tax
returns filed electronically by an Agent
after December 31, 1996, unless the
Service has received an Authorization
on Form 8655 (with a revision date of
October 1995 or later) or its equivalent
that expressly permits the Agent to file
tax returns electronically on behalf of
the taxpayer. The Service will accept
tax returns filed electronically by an
Agent prior to January 1, 1997, unless
the Service has received an Authoriza-
tion that expressly precludes the Agent
from filing tax returns electronically on
behalf of the taxpayer.
SECTION 7. SUBMITTING A
REPORTING AGENT
AUTHORIZATION
.01An Agent that desires to use an
Authorization to file taxpayer tax re-
turns on magnetic tape or electroni-
cally, or to make FTD payments, and
submit FTD information on magnetic
tape or electronically, must formally
apply to the Service for these priv-
ileges. Currently, the required informa-
tion for these applications is contained
in the documents listed in section 9 of
this revenue procedure. The applica-
tions governed by the these documents
must be accompanied by the individual
Authorizations, signed by the taxpayer
or the authorized representative, and an
Agent’s List (if required by the appli-
cable revenue procedure).
.02For specific information con-
cerning the requirements for submitting
and updating Agent’s Lists, please refer
to Publication 1474, the Service con-
tacts listed in section 8 of this revenue
procedure, and the documents listed in
section 9 of this revenue procedure.
SECTION 8. INTERNAL REVENUE
SERVICE CONTACTS
.01Requests for Publication 1474,
and questions regarding this revenue
procedure, may be addressed to the
Service at any one of the following
service centers:

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(1)Northeast Region
(a)AndoverAndover Service Center
Management Support Branch
Mail Stop 105
310 Lowell Street
Andover, MA 05501
Attn: Magnetic Tape Coordinator
(b)BrookhavenBrookhaven Service Center
Stop 111
P.O. Box 400
Holtsville, NY 11742
Attn: Magnetic Tape Coordinator
(c)CincinnatiUse the Philadelphia Service Center
(d)PhiladelphiaPhiladelphia Service Center
Mag Media Project Office
Mail Stop 115
11601 Roosevelt Blvd.
Philadelphia, PA 19154
(2)Southeast Region
(a)AtlantaAtlanta Service Center
Stop 30
P.O. Box 47–421
Doraville, GA 30362
Attn: Magnetic Tape Coordinator
(b)Memphis
(i)Electronic filingMemphis Service Center
ELF Coordinator, ELF Branch
P.O. Box 30309 AMF
Memphis, TN 38130
Attn: ELF Unit Stop 37
(ii)Magnetic tape filingUse the Philadelphia Service Center
(3)Midstates Region
(a)AustinAustin Service Center
Quality Assurance Division
Mail Stop 1053
P.O. Box 934
Austin, TX 78767
Attn: National Reporting Agent Analyst
(b)Kansas CityUse the Fresno Service Center
(4)Western Region
(a)FresnoFresno Service Center
Stop 44
P.O. Box 12866
Fresno, CA 93779
Attn: Magnetic Tape Coordinator
(b)OgdenUse the Fresno Service Center
.02All questions regarding this rev-
enue procedure may also be addressed
to the National Reporting Agent Ana-
lyst, Austin Service Center, at (512)
460–4201 (not a toll-free number).
SECTION 9. OTHER RELATED
DOCUMENTS
The programs requiring an Authori-
zation as a prerequisite to participation
are described in the following
documents:
(1) For magnetic tape filing of
Forms 940, 941, and 945, see Rev.
Proc. 96–18, page 73, this Bulletin.
(2)For electronic filing of Form
941, see Rev. Proc. 96–19, page 80,
this Bulletin.
(3)For magnetic tape filing of FTD
information, see Rev. Proc. 89–48,
1989–2 C.B. 599; and
(4)For electronic transmission of
FTDs, see Rev. Proc. 94–48, 1994–2
C.B. 694.
SECTION 10. EFFECT ON OTHER
DOCUMENTS
This revenue procedure supersedes
Rev. Proc. 89–18, 1989–1 C.B. 828. In
addition, this revenue procedure super-
sedes the Authorization information
contained in the following revenue
procedures: Rev. Proc. 94–59, 1994–2
C.B. 747; Rev. Proc. 94–18, 1994–1
C.B. 580; Rev. Proc. 93–46, 1993–2
C.B. 545; and Rev. Proc. 89–48, 1989–
2 C.B. 599.

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SECTION 11. EFFECTIVE DATE
This revenue procedure is effective
January 22, 1995.
26 CFR. 601.602: Tax forms and instructions.
(Also Part I, Sections 3504, 6011; 31.3504–1,
31.6011(a)–8, 31.6071(a)–1.)
Rev. Proc. 96–18
Table of Contents
SECTION 1.PURPOSE
SECTION 2.BACKGROUND
SECTION 3.SIGNIFICANT
CHANGES
SECTION 4.DEFINITIONS
SECTION 5.APPLICATION FOR
THE MAGNETIC
TAPE PROGRAMS
SECTION 6.ACCEPTANCE IN
THE MAGNETIC
TAPE PROGRAMS
SECTION 7.ADDING AND DE-
LETING TAXPAYERS
ON THE REPORTING
AGENT’S LIST
SECTION 8.MAGNETIC TAPE
FILING
SECTION 9.ADJUSTMENTS
SECTION 10.RESPONSIBILITIES
OF A REPORTING
AGENT
SECTION 11.PAPER RETURNS
SECTION 12.REVISION OF COM-
PUTER SPECIFICA-
TIONS BY THE
SERVICE
SECTION 13.CHANGES IN COM-
PUTER EQUIPMENT
BY AN AGENT
SECTION 14.ADVERTISING
STANDARDS FOR A
REPORTING AGENT
SECTION 15.REASONS FOR
SUSPENSION
SECTION 16.ADMINISTRATIVE
REVIEW PROCESS
FOR PROPOSED
SUSPENSION
SECTION 17.EFFECT OF SUS-
PENSION
SECTION 18.APPEAL OF SUS-
PENSION
SECTION 19.PENALTY FOR
FAILURE TO
TIMELY FILE A
RETURN
SECTION 20.FILING FORMS W–4
WITH THE INTER-
NAL REVENUE
SERVICE
SECTION 21.FILING FORMS W–2
(COPY A) WITH THE
SOCIAL SECURITY
ADMINISTRATION
SECTION 22.REQUESTING
FORMS AND OTHER
INFORMATION
SECTION 23.EFFECT ON OTHER
DOCUMENTS
SECTION 24.EFFECTIVE DATE
SECTION 1. PURPOSE
.01 This revenue procedure sets
forth the requirements of the various
magnetic tape programs under which a
Reporting Agent (‘‘Agent’’ as defined
in section 4.04 of this revenue proce-
dure) may file the following forms on
m a g n e t i c t a p e : ( 1 ) F o r m 9 4 1 ,
Employer’s Quarterly Federal Tax Re-
turn (‘‘Form 941 Mag Tape Pro-
gram’’); (2) Form 940, Employer’s
Federal Unemployment Tax Return
(‘‘Form 940 Mag Tape Program’’); and
(3) Form 945, Annual Return of
Withheld Income Tax (‘‘Form 945 Mag
Tape Program’’). These magnetic tape
programs are collectively referred to as
the ‘‘Mag Tape Programs.’’
.02The technical specifications for
filing these forms on magnetic tape are
published separately as follows: (1)
Publication 1264, File Specifications,
Processing Criteria and Records
Layouts for Magnetic Tape Filing of
Form 941, Employer’s Quarterly Fed-
eral Tax Return; (2) Publication 1314,
File Specifications, Processing Criteria
and Records Layouts for Magnetic
Tape Filing of Form 940, Employer’s
Federal Unemployment Tax Return;
and (3) Publication 1833, File Specifi-
cations, Processing Criteria and Rec-
ords Layouts for Magnetic Tape Filing
of Form 945, Annual Return of With-
held Income Tax. Publications 1264,
1314, and 1833 are collectively re-
ferred to as ‘‘Publications.’’
.03This revenue procedure super-
sedes Rev. Proc. 94–18, 1994–1 C.B.
580, Rev. Proc. 93–46, 1993–2 C.B.
545, and Rev. Proc. 94–59, 1994–2
C.B. 747.
SECTION 2. BACKGROUND
.01 Section 31.6011(a)–8 of the
Employment Taxes and Collection of
Income Tax at Source Regulations
provides that the Commissioner may
authorize the use, at the option of the
person required to make a return, of a
composite return in lieu of any form
specified in 26 C.F.R. Part 31
(Employment Taxes and Collection of
Income Tax at Source), subject to the
conditions, limitations, and special
rules governing the preparation, execu-
tion, filing, and correction thereof as
t h e C o m m i s s i o n e r m a y d e e m
appropriate.
.02For purposes of this revenue
procedure, a magnetically filed Form
941, 940, or 945 is a composite return
consisting of the data transmitted on
magnetic tape and a Form 4996,
Electronic/Magnetic Media Filing
Transmittal for Wage and Withholding
Tax Returns. Form 4996 must be
received by the Internal Revenue Serv-
ice before any magnetically filed return
is complete. A magnetically filed return
must contain the same information as a
return filed completely on paper.
.03Section 31.6011(a)–7 provides
that each return, together with any
prescribed copies or supporting data,
must be filled in and disposed of in
accordance with the forms, instructions,
and regulations applicable thereto. The
return may be made by an Agent in the
name of the person required to make
the return if an acceptable power of
attorney is filed with the Internal
Revenue Service office with which
such person is required to file returns
and if such a return includes all taxes
required to be reported by such person
on such return. Form 8655, Reporting
Agent Authorization for Magnetic
Tape/Electronic Filers, is an acceptable
power of attorney, if prepared in
accordance with the requirements set
forth in Rev. Proc. 96–17, page 00, this
Bulletin.
.04Section 31.6061–1 provides that
the return may be signed for the
taxpayer by an agent who is fully
a u t h o r i z e d i n a c c o r d a n c e w i t h
§ 31.6011(a)–7 to make such return.
An Agent may sign a magnetic tape
return on behalf of a taxpayer who has
a valid Form 8655 on file with the
Service.
.05Section 31.6071(a)–1 generally
provides that each return required to be
made under §31.6011(a)–1 for the
taxes imposed by the Federal Insurance
Contributions Act (Form 941), or re-
quired to be made under §31.6011(a)–
4 for withheld income taxes (Form 941
and Form 945), or each return required
to be made under §31.6011(a)–3 for
the taxes imposed by the Federal
Unemployment Tax Act (Form 940),
must be filed on or before the last day
of the first calendar month following
the period for which it is made.
However, under §31.6071(a)–1 a re-

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turn may be filed on or before the 10th
day of the second calendar month
following such period if timely deposits
under § 6302(c) of the Internal Reve-
nue Code and the regulations there-
under have been made in full payment
of such taxes due for the period.
.06Procedures for the electronic
filing of Form 941 (‘‘Form 941 ELF
Program’’) are in Rev. Proc. 96–19,
page , this Bulletin, and the specifi-
cations are in the Technical Specifi-
cations Guide for the Electronic Filing
System for Form 941, Employer’s
Quarterly Federal Tax Return.
.07The submission of federal tax
deposit (‘‘FTD’’) information on mag-
netic tape is addressed in Rev. Proc.
89–48, 1989–2 C.B. 599. For taxpayers
who are required to make FTDs by
electronic funds transfer pursuant to
§ 6302(h), the submission of the FTD
information along with the transfer of
funds is addressed in Rev. Proc. 94–48,
1994–2 C.B. 694.
SECTION 3. SIGNIFICANT
CHANGES
.01The procedures in Rev. Procs.
94–18, 93–46, and 94–59 for the mag-
netic tape filing of Forms 941, 940,
and 945, respectively, have been con-
solidated in this revenue procedure.
.02The magnetic tape specifications
in Rev. Procs. 94–18, 93–46, and 94–
59 are published separately in Publica-
tions 1264, 1314, and 1833, respec-
tively.
.03Section 14 provides advertising
standards for an Agent.
.04Sections 15, 16, 17, and 18 add
suspension and appeal procedures.
SECTION 4. DEFINITIONS
.01Error Rate. The ‘‘Error Rate’’ is
the percentage of the total volume of
tax data records that are identified by
the Service’s computer program as
containing errors (as defined in the
applicable Publications).
.02Magnetic Tape Coordinator for
Business Tax Returns (‘‘Coordinator’’).
A Magnetic Tape Coordinator for Busi-
ness Tax Returns (‘‘Coordinator’’) is
responsible for the administration of
the Mag Tape Programs at a particular
Service Center. See section 22 of this
revenue procedure for the addresses of
the Coordinators.
.03Processing Interruption. A
‘‘Processing Interruption’’ is an abnor-
mal termination of a program run
caused by the magnetic tape data
submitted by an Agent.
.04Reporting Agent. A Reporting
Agent (‘‘Agent’’) is an accounting
service, franchiser, bank, or other entity
that complies with Rev. Proc. 96–17,
and is authorized to prepare and file
Forms 941, 940, and 945 on magnetic
tape for a taxpayer.
.05Reporting Agent Authorization.
A Reporting Agent Authorization
(‘‘Authorization’’) allows a taxpayer to
designate an Agent. The Authorization
may be submitted on Form 8655, or
any other instrument that complies with
Rev. Proc. 96–17. An Authorization
must be submitted for each taxpayer on
the Reporting Agent’s List.
.06Reporting Agent’s List. For pur-
poses of the Mag Tape Programs, a
Reporting Agent’s List (‘‘Agent’s
List’’) identifies all taxpayers for
whom an Agent will file returns on
magnetic tape. A separate Form 8655
must be submitted for each taxpayer on
the Agent’s List. The Agent’s List must
contain each taxpayer’s employer iden-
tification number (‘‘EIN’’).
.07Validated Reporting Agent’s
List. A Validated Reporting Agent’s
List (‘‘Validated Agent’s List’’) is the
source of the EIN and name control to
be used as an identification of each
taxpayer on magnetic tape by an Agent.
A Validated Agent’s List is a list of
taxpayers and their EINs prepared by
an Agent that is confirmed and as-
signed name controls by the Service.
Once the Service returns a Validated
Agent’s List, the Agent must use it to
fill in certain required fields (e.g., the
name control field) on the magnetic
tape. See the applicable Publications.
SECTION 5. APPLICATION FOR
THE MAGNETIC TAPE
PROGRAMS
.01 An Agent is automatically
eligible to participate in the Mag Tape
Program(s) for which the Agent files at
least 100 Forms 941, 100 Forms 940,
or 100 Forms 945 per tax period. An
Agent that files less than 100 Forms
941, 940, or 945 per tax period and
wishes to file on magnetic tape must
obtain permission from the Coordinator
at the service center where the Letter
of Application (‘‘Application’’) would
be submitted. See section 5.06 of this
revenue procedure for where to submit
an Application and section 22 for the
addresses of the Coordinators.
.02An Agent (within the scope of
section 5.01 of this revenue procedure)
desiring to file Forms 941, 940, or 945
on magnetic tape must first submit an
Application to participate in the appro-
priate Mag Tape Program(s).
.03An Application must contain the
following:
(1)the name, address, and EIN of
the Agent submitting the Application;
(2)the name, title, and telephone
number of the person to contact regard-
ing the Application;
(3)a list of all the service centers
with which the Agent must file returns
on behalf of taxpayers. A request to
consolidate filings at one service center
may be made in the Application
immediately after this list;
(4)the first tax period for which
the Agent plans to file Forms 941, 940,
or 945 on magnetic tape;
(5)the estimated volume of Forms
941, 940, or 945 the Agent plans to file
at each service center by type of return;
(6)a statement that the Agent will
keep a copy of all the Authorizations
on file at the Agent’s principal place of
business for examination by the Service
upon request;
(7)a representation that the Agent
will comply with section 10 of this
revenue procedure concerning respon-
sibilities of an Agent;
(8)an acknowledgement of any
prior suspension from any of the
magnetic tape or electronic filing pro-
grams, if applicable; and
(9)the signature of the Agent or
the Agent’s employee authorized to
prepare federal tax returns for
taxpayers.
.04An Application must include two
types of attachments:
(1)an Agent’s List; and
(2)an Authorization (Form 8655)
for each taxpayer included on the
Agent’s List. See Rev. Proc. 96–17 for
instructions on preparing Form 8655.
.05An Agent must submit the Ap-
plication to the appropriate service
center (listed in section 22 of this
revenue procedure) that serves the legal
residence or principal business address
of the largest number of taxpayers
filing through that Agent. If the Agent
would like to consolidate filings at
another service center, the Agent must
submit an Application requesting such
consolidation to the service center with
which the consolidated returns would
be filed.

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.06To allow sufficient time for the
approval process for the Form 941 Mag
Tape Program, the Agent should submit
the Application by the Application due
dates preceding the quarter ending
dates, as follows:
Application Due
Date
For Quarter
Ending
December 15
(prior year)
March 31
March 15June 30
June 15September 30
September 15December 31
.07To allow sufficient time for the
approval process for the Form 940 or
Form 945 Mag Tape Program, the
Agent should submit the Application
by August 15 of the year preceding the
due date of the returns that the Agent
will file on magnetic tape.
SECTION 6. ACCEPTANCE IN THE
MAGNETIC TAPE PROGRAMS
.01Within 30 days of receiving an
Application, the service center will
return a Validated Agent’s List to the
Agent. Failure to use the names and
EINs provided on the Validated
Agent’s List may delay processing.
.02 After receiving a Validated
Agent’s List, an Agent must submit a
test tape by the following due dates:
(1)in the case of the Form 941
Mag Tape Program, the Agent must
submit a test tape by the due dates
preceding the corresponding quarter
ending dates, as follows:
Test Tape Due
Date
For Quarter
Ending
January 31March 31
April 30June 30
July 31September 30
October 31December 31
(2)in the case of the Form 940 or
945 Mag Tape Program, the Agent
must submit a test tape by September
30 of the year preceding the due date
of the return that will be filed on
magnetic tape.
.03The following criteria are used
to evaluate a test tape:
(1)the test tape must be readable
by the Service’s computers without a
Processing Interruption; and
(2)the processed data on the test
tape must have an Error Rate of 5
percent or less.
.04If a test tape fails to meet the
evaluation criteria, the Coordinator will
notify the Agent. To receive further
consideration of the Application, the
Agent must submit a new test tape
within 30 days of the Service’s noti-
fication. Submission of a test tape does
not constitute the filing of tax returns.
.05After testing the magnetic tape,
the Service will notify the Agent in
writing of approval or denial of mag-
netic tape filing privileges. An approval
for each Mag Tape Program remains in
effect unless the Agent is suspended
from the particular Mag Tape Program.
See section 17 of this revenue proce-
dure for the effect of suspension.
.06If a Agent is denied, or does not
receive, approval for magnetic tape
filing before the end of the tax period
for which Forms 941, 940, or 945 will
be filed, the Agent should file the re-
turns on paper Forms 941, 940, or 945.
.07If an Agent is denied acceptance
into a Mag Tape Program, the Agent
may reapply for a subsequent tax
period by resubmitting an Application
and test tape in accordance with
sections 5 and 6 of this revenue
procedure.
SECTION 7. ADDING AND
DELETING TAXPAYERS ON THE
REPORTING AGENT’S LIST
.01After an Agent is notified that
the Application for the magnetic tape
filing of Forms 941, 940, or 945 has
been approved, the Agent may want to
add and delete taxpayers from the Mag
Tape Program.
.02To add taxpayers, the Agent
must submit the added names and EINs
(Add List) and an Authorization for
each taxpayer added to a particular
Mag Tape Program. The Service must
validate the Add List and return it to
the Agent before the Agent can file
returns for these taxpayers on magnetic
tape. The Service will generally vali-
date and mail the Add List to the
Agent within 10 business days of
receiving the Add List.
.03To delete taxpayers, the Agent
must submit a list of those taxpayers to
be deleted (Delete List) and, if known,
a short statement indicating which
taxpayers will not remain in business.
SECTION 8. MAGNETIC TAPE
FILING
.01An Agent must ensure that a
magnetic tape return is filed on or
before the due date of the return. The
due dates prescribed for filing paper
returns with the Service also apply to
returns filed under the Mag Tape
Programs. Forms 941, 940, and 945 are
due on or before the last day of the
first calendar month following the
period for which the return is made.
However, a return for which all tax
deposits were made when due for the
filing period may be filed by the 10th
day of the month following the due
date. In no case may one magnetic tape
include returns with more than one due
date.
.02The place for filing returns will
be determined according to the follow-
ing conditions:
(1)under §6091(b), federal tax
returns must be filed at the service
center serving the legal residence or
principal business address of the tax-
payer. However, not all service centers
process returns filed on magnetic tape.
The service center processing the Ap-
plication will inform the Agent of
which service center serves the legal
residence or principal business address
of a taxpayer for magnetic tape filing
purposes;
(2)an Agent may be required to
file taxpayers’ magnetic tape returns at
more than one service center unless the
Agent obtains permission to consolidate
filings under section 8.02(4) of this
revenue procedure;
(3)if, after submitting the Ap-
plication, an Agent obtains clients that
file at a service center other than a
service center(s) listed in the Applica-
tion, the Agent must provide written
notice to the service center that proc-
essed the Application. The written
notice must be submitted at least 60
days before filing with the additional
service center; and
(4)if, after submitting the Ap-
plication, an Agent wishes to consoli-
date filings at one service center, the
Agent must request permission. Gener-
ally, a response will be provided within
21 calendar days. The place to send the
request is as follows:
(a)if a request is made before
any returns have been filed under a
particular Mag Tape Program and the
returns will not be filed under that
program before the Service acts on the
request for consolidation, the request
must be sent to the service center
processing (or that processed) the Ap-
plication; or
(b) if magnetic tape returns
have already been filed or will be filed

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before the Service acts on the request
for consolidation, the Agent must send
the request to the service center where
the Agent requests to consolidate. The
request must include a list of all the
service centers with which returns have
been or will be filed.
.03An Agent must file magnetic
tape returns according to the following
instructions:
(1)the first box of the magnetic
tape shipment to the service center
must contain a Form 4996 with one
duplicate, and a list of taxpayers’
names and addresses (address is op-
tional) in EIN sequence whose returns
are on the magnetic tape being submit-
ted (Control List). These taxpayers
must only be those on the Validated
Agent’s List returned to the Agent.
Detailed packaging, shipping, and mail-
ing instructions will be provided in the
letter granting approval to file on
magnetic tape;
(2)if the Form 4996 is missing,
incomplete, or unsigned, the magnetic
tape filing does not constitute a tax
return. Failure to complete this form
accurately will delay the magnetic tape
processing; and
(3)in the case of the Form 941
mag tape program, if an employee’s
wages and tips are exempt from tax on
social security or medicare, an Agent
must inform the Service by following
specific instructions in Publication
1264.
.04A violation of the following
restrictions will cause a Processing
Interruption:
(1)in no case may one magnetic
tape include returns with more than one
due date; or
(2)the magnetic tape must include
only data for one form of return (e.g.,
Form 941). Data for another form of
return (e.g., Form 940 or Form 945)
must be submitted on a separate
magnetic tape.
.05The service center will send
notification to the Agent of receipt of
the magnetic tape submission. Unless
otherwise advised within 10 business
days of the Service’s receipt of the
Form 4996, an Agent may consider the
returns included in that submission
timely filed if the postmark date is on
or before the due date of the returns. If
the Agent does not receive notification
of receipt of Form 4996 within 15 days
from the date it was sent, the Agent
should contact the appropriate Coordi-
nator listed in section 22 of this
revenue procedure.
.06 A magnetic tape submission
made on or before the due date that
causes a Processing Interruption or that
has an Error Rate exceeding 5 percent
will not be accepted, and the Agent
will be asked to submit a replacement
magnetic tape, an accompanying Form
4996, and paper returns within 30 days
of the Coordinator’s request. If the
Agent submits the replacement mag-
netic tape, Form 4996, and paper
returns within 30 days, the returns will
be considered timely filed. For the
penalty for failure to file a timely
return, see section 19 of this revenue
procedure.
.07If the replacement magnetic tape
is unacceptable, the Coordinator will
process the paper returns and notify the
Agent. In such circumstances, an Agent
is required to submit an acceptable test
tape for the next filing date by the test
tape due dates set forth in section 6.02
of this revenue procedure.
SECTION 9. ADJUSTMENTS
.01In the case of a Form 941,
adjustments may be made on returns
filed on magnetic tape. Except for
adjustments resulting from rounding
fractions of cents or from third-party
sick pay for which an employer is not
responsible, any Form 941 filed on
magnetic tape with an adjustment to
preceding quarters must be supported
by a written statement or Form 941c,
Supporting Statement to Correct Infor-
mation, submitted with the magnetic
tape. The statement must identify the
taxpayer and explain the adjustment.
An Agent must send the paper support-
ing documents and the magnetic tape
containing the Forms 941 in the same
shipment. For specification details, see
Publication 1264.
.02In the case of a Form 940, an
adjustment to a Form 940 filed on
magnetic tape must be submitted on
paper to the service center where the
magnetic tape was filed.
.03In the case of a Form 945,
adjustments must be made as follows:
(1)except as provided in section
9.03(2), an adjustment to a Form 945
filed on magnetic tape must be submit-
ted on paper to the service center
where the magnetic tape was filed; and
(2)beginning with 1995 calendar
year returns, an Agent may adjust a
prior year’s Form 945 by entering a
correction in a new field on a magnetic
tape. However, this adjustment field
only applies to correcting administra-
tive errors. Any Form 945 filed on
magnetic tape with an adjustment to a
preceding year must be supported by a
statement or Form 941c. The statement
must identify the taxpayer and explain
the adjustment. An Agent must send
the paper supporting documents and the
magnetic tape containing the correc-
tions to Forms 945 in the same
shipment. For specification details, see
Publication 1833.
SECTION 10. RESPONSIBILITIES
OF A REPORTING AGENT
.01To ensure that complete returns
are accurately and efficiently filed, an
Agent must comply with the applicable
Publication(s) for the Mag Tape Pro-
gram(s) in which the Agent is par-
ticipating. See Publication 1264 (Form
941), 1314 (Form 940), or 1833 (Form
945).
.02The Agent must retain the fol-
lowing material for 4 years after the
due date of the return (or if the return
is filed late, for a period of 4 years
from the filing date), unless otherwise
notified by the Service:
(1)a complete copy of the mag-
netic tape portion of the return;
(2)a copy of the signed Form
4996;
(3)a copy of the Service’s noti-
fication of receipt of Form 4996; and
(4)a copy of each Authorization.
.03An Agent must:
(1)provide the taxpayer with a
paper copy of the magnetic tape
information that was sent to the Serv-
ice. This information may be provided
on a replica of an official form or on
an unofficial form. However, data
entries on an unofficial form must refer
to the line numbers on an official form;
(2)provide the taxpayer with a
copy of the Form 4996;
(3)advise the taxpayer to retain a
complete copy of the return (a paper
copy of both the magnetic tape infor-
mation and Form 4996) and any
supporting material;
(4)inform the taxpayer of the
service center that processes the tax-
payer’s returns;
(5)advise the taxpayer that an
amended return, if needed, must be
mailed to the service center that
processed the taxpayer’s return; and
(6)provide, upon request, the tax-
payer with the date the taxpayer’s

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return was postmarked and with the
date of the Service’s notification of
receipt of the taxpayer’s return.
SECTION 11. PAPER RETURNS
.01An Agent may use a Mag Tape
Program Authorization to file paper
Forms 941, 940, or 945 only under the
following circumstances:
(1)the late receipt of payroll or
withholding information from a tax-
payer that would jeopardize the timely
submission of the taxpayer’s return;
(2)the amendment of returns filed
under the Mag Tape Programs;
(3)the rejection of a magnetic
tape filing that would jeopardize the
timely submission of the taxpayer’s
return; or
(4)a request by the Coordinator
for an Agent participating in a Mag
Tape Program to file paper returns
instead of magnetic tape.
.02An Agent without a valid power
of attorney may prepare a paper return
for the taxpayer’s signature. A tax-
payer’s authorized representative that is
not an Agent participating in a Mag
Tape Program (including a suspended
Agent) must have a valid power of
attorney (usually a Form 2848, Power
of Attorney and Declaration of Repre-
sentative) that authorizes the Agent to
sign and file a paper return on behalf
of a taxpayer.
.03 Each paper return must be
signed by the taxpayer, the taxpayer’s
authorized representative, or a par-
ticipating Agent, to the extent permit-
ted by section 11.01 of this revenue
procedure.
SECTION 12. REVISION OF
COMPUTER SPECIFICATIONS BY
THE SERVICE
.01If a Publication is revised, the
Coordinator(s), if necessary, will advise
all current Agents to submit test tapes
prior to filing under the new specifica-
tions. Failure to submit a test tape may
later result in a Processing Interruption
or an Error Rate exceeding 5 percent
on returns filed on magnetic tape for
which an Agent may receive a notice
of suspension. See section 15 of this
revenue procedure concerning the rea-
sons for suspension of magnetic tape
filing privileges.
.02If an Agent is unable to comply
with the changes in specifications, the
Agent must contact the appropriate
Coordinator(s) for further instructions.
See section 22 of this revenue proce-
dure for addresses.
SECTION 13. CHANGES IN
COMPUTER EQUIPMENT BY AN
AGENT
If an Agent changes computer equip-
ment, a test tape must be submitted.
The requirements in sections 6.02,
6.03, and 6.04 of this revenue proce-
dure must be followed for the submis-
sion and acceptance of test tapes.
Failure to submit a test tape may later
result in a Processing Interruption or an
Error Rate exceeding 5 percent on
returns filed on magnetic tape for
which an Agent may receive a notice
of suspension. See section 15 of this
revenue procedure.
SECTION 14. ADVERTISING
STANDARDS FOR A REPORTING
AGENT
.01An Agent must comply with the
advertising and solicitation provisions
of 31 C.F.R. Part 10 (Treasury Depart-
ment Circular No. 230). This circular
prohibits the use or participation in the
use of any form of public communica-
tion containing a false, fraudulent,
misleading, deceptive, unduly influenc-
ing, coercive, or unfair statement or
claim. In addition, advertising must not
imply a special relationship with the
Service, Financial Management Service
(FMS), or the Treasury Department.
.02An Agent must adhere to all the
relevant federal, state, and local con-
sumer protection laws.
.03An Agent must not use the
Service’s name, ‘‘Internal Revenue
Service’’ or ‘‘IRS’’, within a firm’s
name.
.04An Agent must not use improper
or misleading advertising in relation to
the Mag Tape Programs.
.05Advertising materials shall not
carry the FMS, IRS, or other Treasury
Seals.
.06Advertising for a cooperative
magnetic tape return project (public/
private sector) must clearly state the
names of all cooperating parties.
.07If an Agent uses radio or televi-
sion broadcasting to advertise, the
broadcast must be pre-recorded. The
Agent must keep a copy of the pre-
recorded advertisement for a period of
at least 36 months from the date of the
last transmission or use.
.08If an Agent uses any direct
mailing or fax communications to
advertise, the Agent must retain a copy
of the actual mailing or fax, along with
a list or other description of persons to
whom the communication was mailed,
faxed, or otherwise distributed for a
period of at least 36 months from the
date of the last mailing, fax, or
distribution.
.09Acceptance to participate in any
of the Mag Tape Programs does not
imply endorsement by the Service or
FMS of the software or quality of
services provided.
SECTION 15. REASONS FOR
SUSPENSION
.01The Service reserves the right to
suspend an Agent from a Mag Tape
Program for the following reasons (this
list is not all-inclusive):
(1) failing to submit tax returns on
magnetic tape according to the applica-
ble Publication(s) as provided in sec-
tion 10.01 of this revenue procedure;
(2) failing to retain the required
records for the period specified in
section 10.02;
(3) failing to provide to the
taxpayer the records, information, or
advice required by section 10.03;
(4) submitting tax returns for
which the Service did not receive
Authorizations;
(5) repeatedly submitting tax re-
turns that have an Error Rate exceeding
5 percent or that cause a Processing
Interruption (regardless of whether re-
placement magnetic tapes have been
provided timely);
(6) submitting tax returns that
have an Error Rate exceeding 5 percent
or that cause a Processing Interruption
after failing to submit the test tape
required by section 12 or 13;
(7) submitting tax returns that are
not in full-paid status;
(8) failing to abide by the advertis-
ing standards in section 14; or
(9) significant complaints about an
Agent’s performance in the Mag Tape
Program(s).
.02 If the Coordinator informs an
Agent that a certain action is a reason
for suspension and the action con-
tinues, the service center director may
send a notice proposing suspension of
the Agent. However, a notice proposing

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suspension may be sent without a
warning if the Agent’s action indicates
an intentional disregard of rules. A
notice proposing suspension will de-
scribe the reason(s) for the proposed
suspension, and indicate the length of
the suspension and the conditions that
need to be met before the suspension
will terminate.
.03 An Agent has an obligation to
notify taxpayers filing through the
Agent if and when such Agent is
suspended from filing under a particu-
lar Mag Tape Program as provided in
section 17.04. The Service reserves the
right to extend the period of suspension
of any Agent that fails to comply with
this requirement.
SECTION 16. ADMINISTRATIVE
REVIEW PROCESS FOR
PROPOSED SUSPENSION
.01 An Agent who receives a notice
proposing suspension from one or more
of the Mag Tape Programs may request
an administrative review prior to the
proposed suspension taking effect.
.02 The request for an administrative
review must be in writing and contain
detailed reasons, with supporting docu-
mentation, for withdrawal of the pro-
posed suspension.
.03 The written request for an
administrative review and a copy of the
notice proposing suspension must be
delivered to the Coordinator within 30
calendar days of the date on the notice
proposing suspension. The Coordinator
will forward the written request to the
National Program Analyst for Magnetic
Tape Program (‘‘National Coordina-
tor’’) if the service center director
continues to believe that suspension is
warranted.
.04 After consideration of the written
request for an administrative review,
the National Coordinator will either
issue a suspension letter or notify the
Agent in writing that the proposed
suspension is withdrawn.
.05 If an Agent receives a suspension
letter, a Coordinator’s subsequent de-
termination of whether a reason for
suspension has been corrected is not
subject to review or appeal.
.06 If an Agent does not timely
submit a written request for an admin-
istrative review, the service center
director will issue a suspension letter.
.07 Failure to submit a written
request for an administrative review
within the 30-day period described in
section 16.03 of this revenue procedure
irrevocably terminates the Agent’s right
to an administrative review of the
proposed suspension.
SECTION 17. EFFECT OF
SUSPENSION
.01 The Agent’s suspension will
continue for the length of time spec-
ified in the suspension letter, or until
the conditions for terminating the sus-
pension have been met, whichever is
later.
.02 If a return to which the suspen-
sion applies is due (without regard to
extensions) within 60 days from the
date on the suspension letter, the Agent
may file the return under the Mag Tape
Program. If a return to which the
suspension applies is due (without
regard to extensions) more than 60
days from the date on the suspension
letter, the Agent may not file the return
under that Mag Tape Program.
.03 A suspended Agent will be able
to sign and file paper Forms 940, 941,
or 945 for a taxpayer if the Agent has a
power of attorney from the taxpayer
that authorizes the Agent to sign and
file such paper return(s). See section
11.02 of this revenue procedure. Form
8655 does not authorize the filing of
paper returns outside of the Mag Tape
Program.
.04 An Agent must provide written
notification of a suspension to a
taxpayer at least 45 days before the due
date of the taxpayer’s first return
affected by the suspension. Such noti-
fication must be provided even though
the Agent may believe that the Agent
will be able to meet the conditions for
terminating the suspension before the
due date.
.05 An Agent will be able to file
returns under the Mag Tape Program
from which the Agent was suspended
without reapplying to the Program
after:
(1) the stated suspension period
expires; and
(2) the reason(s) for suspension
are corrected.
SECTION 18. APPEAL OF A
SUSPENSION
.01 If an Agent receives a suspension
letter from the National Coordinator,
the Agent is entitled to appeal, by
written protest, to the National Director
of Appeals. The written protest must be
sent to the National Coordinator, who
will forward it to the National Director
of Appeals. During the appeals process,
the suspension remains in effect.
.02 The written protest must be
received by the National Coordinator
within 30 calendar days of the date of
the suspension letter. The written pro-
test must contain detailed reasons, with
supporting documentation, for with-
drawal of the suspension.
.03 Within 15 calendar days of
receipt of a written protest, the Na-
tional Coordinator will forward the file
on the Agent and the material de-
scribed in section 18.02 of this revenue
procedure to the National Director of
Appeals.
.04 Failure to appeal within the 30-
day period described in section 18.02
of this revenue procedure irrevocably
terminates the Agent’s right to appeal
the suspension.
SECTION 19. PENALTY FOR A
FAILURE TO TIMELY FILE A
RETURN
Section 6651(a)(1) provides that for
each month (or part thereof) a return is
not filed when required (determined
with regard to any extensions of time
for filing), there is a penalty of 5
percent of the unpaid tax not to exceed
25 percent, absent reasonable cause. A
taxpayer does not establish reasonable
cause simply by engaging a competent
Agent to file the taxpayer’s return.
However, if the Agent has reasonable
cause under §6651(a) for failing to
timely file the taxpayer’s return, the
taxpayer will also have reasonable
cause for that failure, and the failure-
to-file penalty will be abated.
SECTION 20. FILING FORMS W–4
WITH THE INTERNAL REVENUE
SERVICE
.01 An employer is required to send
to the Service by the due date of the
quarterly return copies of all Forms W–
4, Employee’s Withholding Allowance
Certificates, received during the quarter
from employees still employed at the
end of the quarter who claim:
(1) more than 10 withholding
exemptions; or
(2) exempt status and are expect-
ing to earn more than $200 a week.

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Employers should not send other Forms
W–4 unless notified by the Service in
writing to do so.
.02If an employer’s Form 941 is
filed under the Form 941 Mag Tape
Program, copies of paper Forms W–4
along with a cover letter providing the
employer’s name, address, EIN, and the
number of Forms W–4 included must
be sent to the service center that would
have received the employer’s paper
Form 941. See Publication 15, Circular
E, Employer’s Tax Guide, for more
information on sending Forms W–4 to
the Service.
.03Forms W–4 information may
also be filed on magnetic media (5
1
⁄4
inch diskettes, 3
1
⁄2 inch diskettes, or
magnetic tape). See Publication 1245,
Specifications for Filing Form W–4,
Employee’s Withholding Allowance
Certificate, on Magnetic Tape, and 5
1
⁄4-
and 3
1
⁄2-Inch Magnetic Diskettes, for
more information concerning magnetic
media filing of Forms W–4.
SECTION 21. FILING FORMS W–2
(COPY A) WITH THE SOCIAL
SECURITY ADMINISTRATION
Forms W–2, Wage and Tax State-
ments, must be filed directly with the
Social Security Administration on mag-
netic media or paper. For information
on magnetic media reporting of Form
W–2, contact the Social Security Ad-
ministration’s Regional Magnetic
Media Coordinators.
SECTION 22. REQUESTING
FORMS AND OTHER
INFORMATION
.01To obtain forms and publica-
tions, use the order blank included in
Publication 15, Circular E, Employer’s
Tax Guide.
.02Requests for additional copies of
this revenue procedure and other reve-
nue procedures or publications concern-
ing magnetic tape filing, applications
for magnetic tape filing, copies of
Forms 4996 and 8655, or requests for
copies of Publication 1264, 1314, or
1833, should be addressed to the
Service at any one of the following
service centers:
Locations of Service Centers
Service Center Processing
Magnetic Tape Filings for those locations
(1)Northeast Region:
(a)AndoverAndover Service Center
Management Support Branch
Mail Stop 105
310 Lowell Street
Andover, MA 05501
Attn: Magnetic Tape Coordinator
(b)BrookhavenBrookhaven Service Center
Stop 111
P.O. Box 400
Holtsville, NY 11742
Attn: Magnetic Tape Coordinator
(c)CincinnatiMagnetic tape filers use the Philadelphia Service Center
(d)PhiladelphiaPhiladelphia Service Center
Mag Media Project Office
Mail Stop 115
11601 Roosevelt Blvd.
Philadelphia, PA 19154
(2)Southeast Region:
(a)Atlanta
Atlanta Service Center
Stop 30
P.O. Box 47–421
Doraville, GA 30362
Attn: Magnetic Tape Coordinator
(b)MemphisMagnetic tape filers use the Philadelphia Service Center
(3)Midstates Region:
(a)AustinMagnetic tape filers use the Fresno Service Center
(b)Kansas CityMagnetic tape filers use the Fresno Service Center
(4)Western Region:
(a)FresnoFresno Service Center
Stop 44
P.O. Box 12866
Fresno, CA 93779
Attn: Magnetic Tape Coordinator
(b)OgdenMagnetic tape filers use the Fresno Service Center

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SECTION 23. EFFECT ON OTHER
DOCUMENTS
This revenue procedure supersedes
Rev. Proc. 94–18, 1994–1 C.B. 580,
Rev. Proc. 93–46, 1993–2 C.B. 545,
and Rev. Proc. 94-59, 1994–2 C.B.
747.
SECTION 24. EFFECTIVE DATE
This revenue procedure is effective
for returns due after December 31,
1995 (without regard to extensions).
26 CFR. 601.602: Tax forms and instructions.
(Also Part I, Sections 3504, 6011, 6071;
31.3504–1, 31.6011(a)–7, 31.6011(a)–8,
31.6071(a)–1.)
Rev. Proc. 96–19
Table of Contents
SECTION 1.PURPOSE
SECTION 2.BACKGROUND
SECTION 3.SCOPE
SECTION 4.DEFINITIONS
SECTION 5.APPLICATION FOR
THE FORM 941 ELF
PROGRAM
SECTION 6.ACCEPTANCE IN
THE FORM 941 ELF
PROGRAM
SECTION 7.ADDING AND DE-
LETING TAXPAYERS
ON THE REPORTING
AGENT’S LIST
SECTION 8.ELECTRONIC FILING
OF FORM 941
SECTION 9.ADJUSTMENTS TO
FORM 941
SECTION 10.RESPONSIBILITIES
OF AN ELECTRONIC
FILER
SECTION 11.ALTERNATIVE FIL-
ING PROCEDURES
SECTION 12.REVISION OF COM-
PUTER SPECIFICA-
TIONS BY THE
SERVICE
SECTION 13.ADVERTISING
STANDARDS FOR A
REPORTING AGENT
SECTION 14.REASONS FOR
SUSPENSION
SECTION 15.ADMINISTRATIVE
REVIEW PROCESS
FOR PROPOSED
SUSPENSION
SECTION 16.EFFECT OF
SUSPENSION
SECTION 17.APPEAL OF
SUSPENSION
SECTION 18.PENALTY FOR
FAILURE TO
TIMELY FILE A
RETURN
SECTION 19.FILING FORMS W–4
WITH THE INTER-
NAL REVENUE
SERVICE
SECTION 20.FILING FORMS W–2
(COPY A) WITH THE
SOCIAL SECURITY
ADMINISTRATION
SECTION 21.INTERNAL REVE-
NUE SERVICE
CONTACT
SECTION 22.EFFECTIVE DATE
SECTION 1. PURPOSE
This revenue procedure sets forth the
requirements of a program under which
a taxpayer or a Reporting Agent
(‘‘Agent’’ as defined in section 4.06 of
this revenue procedure) may electroni-
cally file Form 941, Employer’s Quar-
terly Federal Tax Return (‘‘Form 941
ELF Program’’). The technical specifi-
cations for filing Form 941 electroni-
cally are published separately in the
Technical Specifications Guide for the
Electronic Filing System for Form 941,
Employer’s Quarterly Federal Tax Re-
turn (‘‘Specifications Guide’’).
SECTION 2. BACKGROUND
.01 Section 31.6011(a)–8 of the
Employment Taxes and Collection of
Income Tax at Source Regulations
provides that the Commissioner may
authorize the use, at the option of the
person required to make a return, of a
composite return in lieu of any form
specified in 26 C.F.R. Part 31
(Employment Taxes and Collection of
Income Tax at Source), subject to the
conditions, limitations, and special
rules governing the preparation, execu-
tion, filing, and correction thereof as
the Commissioner may deem ap-
propriate.
.02For purposes of this revenue
procedure, an electronically filed Form
941 is a composite return consisting of
the electronically transmitted Form 941
data and a Form 4996, Electronic/
Magnetic Media Filing Transmittal for
Wage and Withholding Tax Returns.
Form 4996 must be received by the
Internal Revenue Service before any
electronically filed return is complete.
An electronically filed return must
contain the same information as a
return filed completely on paper.
.03Section 31.6011(a)–7 provides
that each return, together with any
prescribed copies or supporting data,
must be filled in and disposed of in
accordance with the forms, instructions,
and regulations applicable thereto. The
return may be made by an agent in the
name of the person required to make
the return if an acceptable power of
attorney is filed with the Internal
Revenue Service office with which
such person is required to file returns
and if such a return includes all taxes
required to be reported by such person
on such return. Form 8655, Reporting
Agent Authorization for Magnetic
Tape/Electronic Filers, is an acceptable
power of attorney, if prepared in
accordance with the requirements set
forth in Rev. Proc. 96–17, page 00, this
Bulletin.
.04Section 31.6061–1 provides that
the return may be signed for the
taxpayer by an agent who is fully
a u t h o r i z e d i n a c c o r d a n c e w i t h
§ 31.6011(a)–7 to make such return.
An Agent may sign the Form 941 on
behalf of a taxpayer who has a valid
Form 8655 on file with the Service.
.05Section 31.6071(a)–1 generally
provides that each return required to be
made under §31.6011(a)–1 for taxes
imposed by the Federal Insurance
Contributions Act, or required to be
made under §31.6011(a)–4 for with-
held income taxes, must be filed on or
before the last day of the first calendar
month following the period for which it
is made. However, under §31.6071(a)–
1 a return may be filed on or before the
10th day of the second calendar month
following such period if timely deposits
under § 6302(c) of the Internal Reve-
nue Code and the regulations there-
under have been made in full payment
of such taxes due for the period.
.06The Service has conducted a test
of the electronic filing of Forms 941 in
Electronic Data Interchange (‘‘EDI’’)
format developed by the American
National Standards Institute.
.07Procedures for the magnetic fil-
ing of Form 941 are in Rev. Proc. 96–
18, page , this Bulletin, and the
specifications are in Publication 1264,
File Specifications, Processing Criteria
and Record Layouts for Magnetic Tape
Filing of Form 941, Employer’s Quar-
terly Federal Tax Return.
.08The submission of federal tax
deposit (‘‘FTD’’) information on mag-
netic tape is addressed in Rev. Proc.
89–48, 1989–2 C.B. 599. For taxpayers

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who are required to make FTDs by
electronic funds transfer pursuant to
§ 6302(h), the submission of the FTD
information along with the transfer of
funds is addressed in Rev. Proc. 94–48,
1994–2 C.B. 694.
SECTION 3. SCOPE
.01The electronic filing of Forms
941 test referenced in section 2.06 of
this revenue procedure is being re-
placed by this revenue procedure. The
Service will now accept electronically
filed Forms 941 in EDI format filed by
an Electronic Filer (as defined in
section 4.01 of this revenue procedure)
that meets the requirements of this
revenue procedure.
.02An Electronic Filer in the Form
941 ELF Program must use asyn-
chronous communications protocols to
transmit electronic returns. See the
Specifications Guide for further infor-
mation regarding communications and
formatting requirements.
.03The Form 941 ELF Program ac-
cepts timely current returns that are
zero balance or refund returns. The
Form 941 ELF Program will not accept
the electronic filing of the following
returns:
(1) balance due returns;
(2) amended returns;
(3) corrected returns;
(4)returns containing attachments;
or
(5) untimely returns.
A violation of any of these restrictions
will cause a Processing Interruption (as
defined in section 4.05 of this revenue
procedure).
SECTION 4. DEFINITIONS
.01Electronic Filer. After accept-
ance in the Form 941 ELF Program, an
Agent or taxpayer (i.e., employer) that
files Forms 941 electronically will be
referred to as an ‘‘Electronic Filer.’’
.02Electronic Filing Help Desk. The
Electronic Filing Help Desk (‘‘ELF
Help Desk’’) is responsible for the
administration of the Form 941 ELF
Program. See section 21 of this revenue
procedure for the address and telephone
number of the ELF Help Desk.
.03Error Rate. The ‘‘Error Rate’’ is
the percentage of the total volume of
tax data records that are identified by
the Service’s computer program as
containing errors (as defined in the
Specifications Guide).
.04Personal Identification Number.
A Personal Identification Number
(‘‘PIN’’) is a number assigned by the
Service to a person named by the
Electronic Filer who is authorized to
sign Form 941.
.05Processing Interruption. A
‘‘Processing Interruption’’ is an abnor-
mal termination of a program run
caused by the electronic data submitted
by an Electronic Filer.
.06Reporting Agent. A Reporting
Agent (‘‘Agent’’) is an accounting
service, franchiser, bank, or other entity
that complies with Rev. Proc. 96–17,
and is authorized to prepare and file
Form 941 electronically for a taxpayer.
.07Reporting Agent Authorization.
A Reporting Agent Authorization
(‘‘Authorization’’) allows a taxpayer to
designate an Agent. The Authorization
may be submitted on Form 8655, or
any other instrument that complies with
Rev. Proc. 96–17. An Authorization
must be submitted for each taxpayer on
the Reporting Agent’s List.
.08Reporting Agent’s List. For pur-
poses of the Form 941 ELF Program, a
Reporting Agent’s List (‘‘Agent’s
List’’) identifies all taxpayers for
whom an Agent will file Forms 941
electronically. A separate Form 8655
must be submitted for each taxpayer on
the Agent’s List. The Agent’s List must
contain each taxpayer’s employer iden-
tification number (‘‘EIN’’).
.09User identification/password.
T h e u s e r i d e n t i f i c a t i o n / p a s s w o r d
(‘‘userid/password’’) consists of an
identification number (userid) issued by
the Service and a confidential set of
characters (password) that, when used
in conjunction with each other, permit
an Electronic Filer access to the Form
941 ELF system.
.10Validated Reporting Agent’s
List. A Validated Reporting Agent’s
List (‘‘Validated Agent’s List’’) is the
source of the EIN and name control to
be used as an identification of each
taxpayer by an Electronic Filer that is
an Agent. A Validated Agent’s List is a
list of taxpayers and their EINs pre-
pared by an Agent that is confirmed
and assigned name controls by the
Service. Once the Service returns a
Validated Agent’s List, the Agent must
use it to fill in certain required fields
(e.g., the name control field) of the
electronic transmission. See the Speci-
fications Guide.
SECTION 5. APPLICATION FOR
THE FORM 941 ELF PROGRAM
.01A prospective Electronic Filer
desiring to file Form 941 electronically
must first submit a Letter of Applica-
tion (‘‘Application’’) to participate in
the Form 941 ELF Program.
.02An Application must contain the
following:
(1)the name, address, and EIN of
the prospective Electronic Filer submit-
ting the Application;
(2)the name, title, and telephone
number of the person to contact regard-
ing the Application;
(3)the first tax period for which
the prospective Electronic Filer plans to
file Forms 941 electronically;
(4)the estimated volume of re-
turns the prospective Electronic Filer
plans to file under the Form 941 ELF
Program;
(5)the brand name of the soft-
ware translation package and the EDI
version to be used;
(6)a statement that the prospec-
tive Electronic Filer will keep a copy
of all the Authorizations on file at the
prospective Electronic Filer’s principal
place of business for examination by
the Service upon request;
(7)a representation that the pro-
spective Electronic Filer will comply
with section 10 of this revenue proce-
dure concerning responsibilities of an
Electronic Filer;
(8)an acknowledgement of any
prior suspension from any of the
magnetic tape or electronic filing pro-
grams, if applicable;
(9)the signature of the prospec-
tive Electronic Filer’s authorized signa-
tory for filing federal tax returns for
the prospective Electronic Filer; and
(10)the name and title of the
person who is authorized to use the
PIN for returns filed under the Form
941 ELF Program. See Exhibit 1 of
this revenue procedure for a sample
Application.
.03In the case of an Electronic Filer
that is an Agent, an Application must
include two types of attachments:
(1) an Agent’s List; and
(2)an Authorization (Form 8655)
for each taxpayer included on the
Agent’s List fulfilling the following
requirements:
(a)an Authorization executed
after January 31, 1996, must be made

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on Form 8655 (with a revision date of
October 1995 or later) or its equivalent;
( b ) e x c e p t t o t h e e x t e n t
provided in section 5.03(2)(c) of this
revenue procedure, an Authorization
will remain in effect until a new
Authorization is received by the
Service.
(c)the Service will not accept
Forms 941 filed electronically by an
Agent after December 31, 1996, unless
the Service has received an Authoriza-
tion on Form 8655 (with a revision
date of October 1995 or later) or its
equivalent that expressly permits the
Agent to file tax returns electronically
on behalf of the taxpayer. The Service
will accept Forms 941 filed electroni-
cally by an Agent prior to January 1,
1997, unless the Service has received
an Authorization that expressly pre-
cludes the Agent from filing tax returns
electronically on behalf of the taxpayer.
See Rev. Proc. 96–17 for instructions
on preparing Form 8655.
.04To allow sufficient time for the
approval process, the prospective
Electronic Filer should submit the
Application by the Application due
dates preceding the quarter ending
dates, as follows:
Application Due
Date
For Quarter
Ending
December 15
(prior year)
March 31
March 15June 30
June 15September 30
September 15December 31
.05The Application must be submit-
ted to the Service at the address
provided in section 21 of this revenue
procedure.
.06An Application may not include
a request to file Forms 941, 940, and
945 on magnetic tape or make FTD
payments and submit FTD information
to the Service on magnetic tape or
electronically. A prospective Electronic
Filer interested in participating in such
programs should submit an Application
in accordance with the following reve-
nue procedures: Rev. Proc. 96–18
(magnetic tape filing of Forms 941,
940, and 945); Rev. Proc. 94–48,
1994–2 C.B. 694 (electronic transmis-
sion of FTDs); and Rev. Proc. 89–48,
1989–2 C.B. 599 (magnetic tape filing
of FTD information).
SECTION 6. ACCEPTANCE IN THE
FORM 941 ELF PROGRAM
.01In the case of an Electronic Filer
that is an Agent, within 30 days of
receiving the Agent’s Application, the
Memphis Service Center will return a
Validated Agent’s List to the Agent.
Failure to use the names and EINs
provided on the Validated Agent’s List
may delay processing.
.02A prospective Electronic Filer
must contact the ELF Help Desk at the
numbers listed in section 21 of this
revenue procedure to notify the Service
that the prospective Electronic Filer is
ready to begin the testing process. In
the case of an Electronic Filer that is
an Agent, the Agent must contact the
ELF Help Desk after receiving the
Validated Agent’s List.
.03A prospective Electronic Filer
must transmit an initial test electronic
transmission of Form 941 (‘‘test file’’)
by the test file due dates preceding the
corresponding quarter due dates, as
follows:
Initial Test File
Due Date
For Quarter
Ending
April 10March 31
July 10June 30
October 10September 30
January 10December 31
Subsequent test files may be transmit-
ted at any time except during months
when returns are filed (e.g., May,
August, November and February), un-
less an exception is granted by the ELF
Help Desk. Transmission of a test file
does not constitute the filing of a tax
return. See Specifications Guide for
specific testing procedures.
.04After evaluating the test file, the
Service will notify a prospective Elec-
tronic Filer in writing of approval or
denial of electronic filing privileges.
An approval remains in effect unless
the Electronic Filer:
(1)fails to comply with the Au-
thorization requirements of section
5.03(2) of this revenue procedure; or
(2)is suspended from the Form
941 ELF Program. See section 16 of
this revenue procedure for effect of
suspension.
.05If an Application is approved,
the Service will send the Electronic
Filer the following two documents:
(1)a notification of approval that
will contain the userid/password, and
information and procedures regarding
signing onto the system for filing
electronic Forms 941; and
(2)a PIN that may only be used
by the authorized employee named in
the Application.
.06Upon receipt of each document
referenced in section 6.05 of this
revenue procedure, the Electronic Filer
must return the following documents to
the Service:
(1) an acknowledgement signed
by each employee recipient of the
userid/password indicating possession
of, and responsibility for, the userid/
password; and
(2) an acknowledgement signed
by the Electronic Filer’s authorized
signatory indicating possession of, and
responsibility for, the PIN.
See Exhibit 2 of this revenue procedure
for a sample userid/password and PIN
receipt.
.07The Service will activate the
PIN and the userid/password upon
receiving the Electronic Filer’s ac-
knowledgements of the receipt of the
two documents referenced in section
6.05 of this revenue procedure.
.08 If a prospective Electronic
Filer’s test file fails to meet the
evaluation criteria, the prospective
Electronic Filer must, within 15 days of
the Service’s notification of the failure,
transmit a new test file or contact the
ELF Help Desk to make other arrange-
ments.
.09If a prospective Electronic Filer
is denied, or does not receive, approval
for participating in the Form 941 ELF
Program before the end of the tax
quarter for which the Forms 941 will
be filed, the prospective Electronic
Filer should file the returns on paper
Forms 941 (or on magnetic tape if the
prospective Electronic Filer meets the
requirements of Rev. Proc. 96–18).
.10If an Electronic Filer is denied
acceptance into the Form 941 ELF
Program, the Electronic Filer may
reapply for a subsequent tax quarter by
resubmitting an Application and test
file in accordance with sections 5 and 6
of this revenue procedure.
SECTION 7. ADDING AND
DELETING TAXPAYERS BY A
REPORTING AGENT
.01After an Electronic Filer that is
an Agent is notified that the application
for electronic filing of Forms 941 has

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been approved, the Agent may want to
add and delete taxpayers from the Form
941 ELF Program.
.02To add taxpayers, the Agent
must submit the added names and EINs
(Add List) and an Authorization for
each taxpayer added to the Form 941
ELF Program. The Service must vali-
date the Add List and return it to the
A g e n t b e f o r e t h e A g e n t c a n
electronically file returns for these
taxpayers. The Service will generally
validate and mail the Add List to the
Agent within 10 business days of
receiving the Add List.
.03To delete taxpayers, the Agent
must submit a list of those taxpayers to
be deleted (Delete List) and, if known,
a short statement indicating which
taxpayers will not remain in business.
SECTION 8. ELECTRONIC FILING
OF FORM 941
.01An Electronic Filer must ensure
that an electronic return is filed on or
before the due date of the return. The
due dates prescribed for filing paper
Forms 941 with the Service also apply
to returns filed under the Form 941
ELF Program. Forms 941 are due on or
before the last day of the first calendar
month following the period for which
the return is made. However, a return
for which all tax deposits were made
when due for the quarter may be filed
by the 10th day of the month following
the due date. In no case may one
electronic transmission include returns
with more than one due date.
.02An Electronic Filer must com-
plete Form 4996 and submit it within
one work day after the Electronic Filer
receives acknowledgement that the
electronic portion of the taxpayer’s
r e t u r n h a s b e e n a c c e p t e d f o r
processing.
.03An Electronic Filer that is an
Agent must also submit with the Form
4996 a list of taxpayers’ names and
addresses (address is optional) in EIN
sequence whose returns are on the
electronic transmission (Control List).
The taxpayers on the Control List
should be only those on the Validated
Agent’s List returned to the Agent.
.04A tax return is not considered
filed until the electronic portion of the
tax return has been acknowledged as
accepted for processing and a com-
pleted and signed Form 4996 has been
received by the Service. If the Form
4996 is missing, incomplete, or un-
signed, the electronic transmission does
not constitute a tax return. However, if
the electronic portion of a return is
transmitted on or before the due date
and the Electronic Filer complies with
section 8.02 (sections 8.02 and 8.03 for
Agents) of this revenue procedure, the
return will be deemed timely filed. If
the electronic portion of the return is
initially transmitted on or shortly be-
fore the return due date and is ul-
timately rejected, but the Electronic
Filer complies with section 8.05 of this
revenue procedure, the return will be
deemed timely filed.
.05An electronic transmission that
causes a Processing Interruption or that
has an Error Rate exceeding 5 percent
will not be accepted, and the Electronic
Filer will be asked to resubmit the
return(s). If the electronic transmission
is acknowledged as rejected by the
Service, the Electronic Filer should
correct the error(s) and retransmit the
return(s) on the same calendar day. If
the Electronic Filer chooses not to have
the previously rejected return re-
transmitted, or if the return still cannot
be accepted for processing, a paper
Form 941 (or a Form 941 on magnetic
tape if the Electronic Filer meets the
requirements of Rev. Proc. 96–18)
must be filed by the later of: (1) the
due date of the return; or (2) within
five calendar days of the rejection or
notice that the return cannot be re-
transmitted, with an explanation of why
the return is being filed after the due
date. For the penalty for failure to file
a timely return, see section 18 of this
revenue procedure.
.06If the Service does not receive
Form 4996 within 3 business days of
the electronic transmission, the Service
will contact the Electronic Filer. Unless
otherwise advised within 15 days of the
electronic transmission, an Electronic
Filer may consider the returns included
in that transmission timely filed if the
postmark date on the envelope submit-
ting the Form 4996 is on or before the
due date of the returns, and the
Electronic Filer has received acknowl-
edgement that the electronic portion of
the taxpayers’ returns have been ac-
cepted by the Service for processing.
SECTION 9. ADJUSTMENTS TO
FORM 941
Forms 941 filed under the Form 941
ELF Program must not contain adjust-
ments other than adjustments resulting
from rounding fractions of cents or
from third-party sick pay for which an
employer is not responsible. Returns
with other adjustments must be filed on
magnetic tape or on paper.
SECTION 10. RESPONSIBILITIES
OF AN ELECTRONIC FILER
.01To ensure that complete returns
are accurately and efficiently filed, an
Electronic Filer must comply with the
Specifications Guide.
.02The Electronic Filer must retain
the following material for 4 years after
the due date of the return (or if the
return is filed late, for a period of 4
years from the filing date), unless
otherwise notified by the Service:
(1) a complete copy of the
electronic portion of the return;
(2)a copy of the signed Form
4996;
(3)a copy of the Service’s ac-
knowledgement of receipt of the return;
and
(4)a copy of each Authorization.
.03An Electronic Filer that is an
Agent must:
(1)provide the taxpayer with a
paper copy of the electronic informa-
tion that was sent to the Service. This
information may be provided on a
replica of an official form or on an
unofficial form. However, data entries
on an unofficial form must refer to the
line numbers on an official form;
(2)provide the taxpayer with a
copy of the Form 4996;
(3)advise the taxpayer to retain a
complete copy of the return (a paper
copy of both the electronic information
and Form 4996) and any supporting
material;
(4)inform the taxpayer of the
service center that processes the tax-
payer’s returns;
(5)advise the taxpayer that an
amended return, if needed, must be
filed as a paper return and mailed to
the Memphis Service Center. See sec-
tion 9 of this revenue procedure for
adjustments to Forms 941; and
(6)provide, upon request, the tax-
payer with the date the taxpayer’s
return was postmarked and with the
date of the Service’s acknowledgment
of receipt of the electronic portion of
the taxpayer’s return.
.04An Electronic Filer must comply
with the following PIN and userid/
password requirements:

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(1)an authorized employee of the
Electronic Filer must submit a signed
receipt acknowledging receipt of the
userid/password, and accepting the as-
sociated responsibilities. See Exhibit 2
of this revenue procedure for a sample
userid/password receipt;
(2)after submitting the userid/
password receipt to the Service and
receiving the PIN, the authorized signa-
tory for the Electronic Filer must
submit a signed receipt acknowledging
receipt of the PIN, and accepting the
associated responsibilities. See Exhibit
2 of this revenue procedure for a
sample PIN receipt;
(3)the Electronic Filer is respon-
sible for ensuring that the PIN remains
the confidential information of the
Electronic Filer’s authorized signatory.
If the Electronic Filer suspects that the
confidentiality of the PIN and/or pass-
word has been compromised, the
Electronic Filer must contact the ELF
Help Desk within 24 hours for instruc-
tions on how to proceed. See section
21 of this revenue procedure for
Service contact information; and
(4)if the authorized signatory for
an Electronic Filer changes, the
Electronic Filer must notify the Service
of the name and title of the new
a u t h o r i z e d s i g n a t o r y f o r t h e
electronically filed Form 941 and apply
for a new PIN no later than 15 days
before the filing of another return.
After such notification, the Service will
deactivate the current PIN, and issue a
new PIN to the new authorized signa-
tory. The authorized signatory must
submit a PIN receipt as specified in
section 10.04(2) of the revenue proce-
dure in order to activate the PIN.
SECTION 11. ALTERNATIVE
FILING PROCEDURES
.01Procedures for the filing of Form
941 on magnetic tape are in Rev. Proc.
96–18 and the specifications are in
Publication 1264.
.02An Electronic Filer that is an
Agent may use a Form 941 ELF
Program Authorization to file a paper
Form 941 under the Form 941 ELF
Program only under the following
circumstances:
(1)the late receipt of payroll
information from a taxpayer that would
jeopardize the timely submission of the
taxpayer’s return;
(2)the amendment of returns filed
under the Form 941 ELF Program;
(3)the rejection of an electronic
transmission that would jeopardize the
timely submission of the taxpayer’s
return; or
(4)a request by the Service for an
Electronic Filer participating in the
Form 941 ELF Program to file paper
Forms 941 instead of electronically
filed Forms 941.
.03An Agent without a valid power
of attorney may prepare a paper Form
941 for the taxpayer’s signature. A
taxpayer’s authorized representative
that is not an Agent participating in the
Form 941 ELF Program (including a
suspended Agent) must have a valid
power of attorney (usually a Form
2848, Power of Attorney and Declara-
tion of Representative) that authorizes
an Agent to sign and file a paper Form
941 on behalf of a taxpayer.
.04Each paper Form 941 must be
signed by the taxpayer, the taxpayer’s
authorized representative, or a par-
ticipating Agent, to the extent permit-
ted under section 11.02 of this revenue
procedure.
SECTION 12. REVISION OF
COMPUTER SPECIFICATIONS BY
THE SERVICE
.01If the Specifications Guide is
revised, the Service, if necessary, will
advise all current Electronic Filers to
submit test files prior to filing under
the new specifications. Failure to sub-
mit a test file may later result in a
Processing Interruption or an Error
Rate exceeding 5 percent on returns
filed electronically for which a
Electronic Filer may receive a notice of
suspension. See section 14 of this
revenue procedure concerning the rea-
sons for suspension of electronic filing
privileges.
.02If an Electronic Filer is unable
to comply with the changes in specifi-
cations, the Electronic Filer must con-
tact the ELF Help Desk for further
instructions. See section 21 of this
revenue procedure.
SECTION 13. ADVERTISING
STANDARDS FOR A REPORTING
AGENT
.01In the case of an Electronic Filer
that is an Agent, the following adver-
tising standards apply. An Electronic
Filer must:
(1)comply with the advertising
and solicitation provisions of 31 C.F.R.
Part 10 (Treasury Department Circular
No. 230). This circular prohibits the
use or participation in the use of any
form of public communication contain-
ing a false, fraudulent, misleading,
deceptive, unduly influencing, coercive,
or unfair statement or claim. In addi-
tion, advertising must not imply a
special relationship with the Service,
Financial Management Service (FMS),
or the Treasury Department;
(2)adhere to all the relevant
federal, state, and local consumer pro-
tection laws;
(3)not use the Service’s name,
‘‘Internal Revenue Service’’ or ‘‘IRS’’,
within a firm’s name;
(4)not use improper or mislead-
ing advertising in relation to the Form
941 ELF Program;
(5)not carry the FMS, IRS, or
other Treasury Seals on its advertising
material;
(6)clearly state the names of all
cooperating parties if advertising for a
cooperative electronic return project
(public/private sector);
(7)pre-record radio or television
advertisement and keep a copy of such
advertisement for a period of at least
36 months from the date of the last
transmission or use; and
(8)retain a copy of any actual
direct mailing or fax communications,
along with a list or other description of
persons to whom the communication
was mailed, faxed, or otherwise dis-
tributed for a period of at least 36
months from the date of the last
mailing, fax, or distribution.
.02Acceptance to participate in the
Form 941 ELF Program does not imply
endorsement by the Service or FMS of
the software or quality of services
provided.
SECTION 14. REASONS FOR
SUSPENSION
.01The Service reserves the right to
suspend an Electronic Filer from the
Form 941 ELF Program for the follow-
ing reasons (this list is not all-
inclusive):
(1)failing to submit electronic tax
returns according to the Specifications
Guide as provided in section 10.01 of
this revenue procedure;
(2)failing to retain the required
records for the period specified in
section 10.02;
(3)repeatedly submitting tax re-
turns that have an Error Rate exceeding

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5 percent or that cause a Processing
Interruption; (4) submitting tax returns
that have an Error Rate exceeding 5
percent or that cause a Processing
Interruption after failing to submit the
test file required by section 12; or
(5)submitting tax returns that are
not in full-paid status.
.02The Service reserves the right to
suspend an Electronic Filer that is an
Agent from the Form 941 ELF Pro-
gram for the following additional rea-
sons (this list is not all-inclusive):
(1)failing to provide to the tax-
payer the records, information, or ad-
vice required by section 10.03;
(2) submitting tax returns for
which the Service did not receive
Authorizations;
(3)failing to abide by the adver-
tising standards in section 13; or
(4)significant complaints about an
Agent’s performance in the Form 941
ELF Program.
.03If the Chief, Customer Service
and Electronic Filing Branch (‘‘Branch
Chief’’) informs an Electronic Filer
that a certain action is a reason for
suspension and the action continues,
the service center director may send the
Electronic Filer a notice proposing
suspension of the Electronic Filer.
However, a notice proposing suspen-
sion may be sent without a warning if
the Electronic Filer’s action indicates
an intentional disregard of rules. A
notice proposing suspension will de-
scribe the reason(s) for the proposed
suspension, and indicate the length of
the suspension and the conditions that
need to be met before the suspension
will terminate.
.04An Electronic Filer that is an
Agent has an obligation to notify
taxpayers filing through the Agent if
and when such Agent is suspended
from filing under the Form 941 ELF
Program as provided in section 16.02
of this revenue procedure. The Service
reserves the right to extend the period
of suspension of any Agent that fails to
comply with this requirement.
SECTION 15. ADMINISTRATIVE
REVIEW PROCESS FOR
PROPOSED SUSPENSION
.01An Electronic Filer that receives
a notice proposing suspension may
request an administrative review prior
to the proposed suspension taking
effect.
.02 The request for an administrative
review must be in writing and contain
detailed reasons, with supporting docu-
mentation, for withdrawal of the pro-
posed suspension.
.03The written request for an ad-
ministrative review and a copy of the
notice proposing suspension must be
delivered to the Branch Chief within 30
calendar days of the date on the notice
proposing suspension. The Branch
Chief will forward the written request
to the National Program Analyst for
Electronic Filing of Business Returns
(‘‘National Coordinator’’) if the service
center director continues to believe that
suspension is warranted.
.04After consideration of the writ-
ten request for an administrative re-
view, the National Coordinator will
either issue a suspension letter or notify
the Electronic Filer in writing that the
proposed suspension is withdrawn.
.05If an Electronic Filer receives a
suspension letter, the Branch Chief’s
subsequent determination of whether a
reason for suspension has been cor-
rected is not subject to review or
appeal.
.06If an Electronic Filer does not
timely submit a written request for an
administrative review, the service cen-
ter director will issue a suspension
letter.
.07Failure to submit a written re-
quest for an administrative review
within the 30-day period described in
section 15.03 of this revenue procedure
irrevocably terminates the Electronic
Filer’s right to an administrative review
of the proposed suspension.
SECTION 16. EFFECT OF
SUSPENSION
.01An Electronic Filer’s suspension
will continue for the length of time
specified in the suspension letter, or
until the conditions for terminating the
suspension have been met, whichever is
later.
.02In the case of an Electronic Filer
that is an Agent, the following addi-
tional rules apply:
(1)if a Form 941 is due (without
regard to extensions) within 60 days
from the date on the suspension letter,
the Agent may file the Form 941 under
the Form 941 ELF Program;
(2)if a Form 941 is due (without
regard to extensions) more than 60
days from the date on the suspension
letter, the Agent may not file the Form
941 under the Form 941 ELF Program;
(3)if a suspended Agent has a
power of attorney from a taxpayer that
authorizes the Agent to sign and file
Form 941, the suspended Agent will be
able to sign and file paper Form 941
for the taxpayer. See section 11.03 of
this revenue procedure. Form 8655
does not authorize the filing of paper
Forms 941 outside of the Form 941
ELF Program; and
(4)an Agent must provide written
notification of a suspension to a
taxpayer at least 45 days before the due
date of the taxpayer’s first return
affected by the suspension. Such noti-
fication must be provided even though
the Agent may believe that the Agent
will be able to meet the conditions for
terminating the suspension before the
due date.
.03An Electronic Filer will be able
to file returns under the Form 941 ELF
Program from which the Electronic
Filer was suspended, without reapply-
ing to the Form 941 ELF Program,
after:
(1)the stated suspension period
expires; and
(2)the reason(s) for suspension
are corrected.
SECTION 17. APPEAL OF
SUSPENSION
.01If an Electronic Filer receives a
suspension letter from the National
Coordinator, the Electronic Filer is
entitled to appeal, by written protest, to
the National Director of Appeals. The
written protest must be sent to the
National Coordinator, who will forward
it to the National Director of Appeals.
During the appeals process, the suspen-
sion remains in effect.
.02The written protest must be
received by the National Coordinator
within 30 calendar days of the date of
the suspension letter. The written pro-
test must contain detailed reasons, with
supporting documentation, for with-
drawal of the suspension.
.03Within 15 calendar days of
receipt of a written protest, the Na-
tional Coordinator will forward the file
on the Electronic Filer and the material
described in section 17.02 of this
revenue procedure to the National
Director of Appeals.
.04Failure to appeal within the 30-
day period described in section 17.02

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of this revenue procedure irrevocably
terminates the Electronic Filer’s right
to appeal the suspension.
SECTION 18. PENALTY FOR A
FAILURE TO TIMELY FILE A
RETURN
Section 6651(a)(1) provides that for
each month (or part thereof) a return is
not filed when required (determined
with regard to any extensions of time
for filing), there is a penalty of 5
percent of the unpaid tax not to exceed
25 percent, absent reasonable cause. A
taxpayer does not establish reasonable
cause simply by engaging a competent
Agent to file the taxpayer’s return.
However, if the Agent has reasonable
cause under §6651(a) for failing to
timely file the taxpayer’s return, the
taxpayer will also have reasonable
cause for that failure, and the failure-
to-file penalty will be abated.
SECTION 19. FILING FORMS W–4
WITH THE INTERNAL REVENUE
SERVICE
.01An employer is required to send
to the Service by the due date of the
quarterly return copies of all Forms W–
4, Employee’s Withholding Allowance
Certificates, received during the quarter
from employees still employed at the
end of the quarter who claim:
(1)more than 10 withholding ex-
emptions; or
(2)exempt status and are expect-
ing to earn more than $200 a week.
Employers should not send other Forms
W–4 unless notified by the Service in
writing to do so.
.02If an employer’s Form 941 is
filed under the Form 941 ELF Pro-
gram, copies of paper Forms W–4
along with a cover letter providing the
employer’s name, address, EIN, and the
number of Forms W–4 included must
be sent to the service center that would
have received the employer’s paper
Form 941. See Publication 15, Circular
E, Employer’s Tax Guide, for more
information on sending Forms W–4 to
the Service.
.03 Forms W–4 information may also
be filed on magnetic media (5
1
⁄4 inch
diskettes, 3
1
⁄2 inch diskettes, or mag-
netic tape). See Publication 1245, Spec-
ifications for Filing Form W–4,
Employee’s Withholding Allowance
Certificate, on Magnetic Tape, and 5
1
⁄4-
and 3
1
⁄2-Inch Magnetic Diskettes, for
more information concerning magnetic
media filing of Forms W–4.
SECTION 20. FILING FORMS W–2
(COPY A) WITH THE SOCIAL
SECURITY ADMINISTRATION
Forms W–2, Wage and Tax State-
ments, must be filed directly with the
Social Security Administration on mag-
netic media or paper. For information
on magnetic media reporting of Form
W–2, contact the Social Security Ad-
ministration’s Regional Magnetic Me-
dia Coordinators.
SECTION 21. INTERNAL
REVENUE SERVICE
CONTACT
All questions regarding this revenue
procedure should be directed to the
following address and telephone
number:
Internal Revenue Service
Memphis Service Center
Electronic Filing Help Desk
P.O. Box 30309 AMF
Memphis, TN 38130
Attention: ELF Unit Stop 37
The telephone number of this office is
(901) 546-2690 extension
1009 (not a toll-free number).
SECTION 22. EFFECTIVE DATE
This revenue procedure is effective
for returns due after December 31,
1995 (without regard to extensions).

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EXHIBIT 1
Letter of Application
AAA Payroll, Inc
111 Main St.
Columbus, NY 11111
EIN XX-XXXXXXX
[Date]
Internal Revenue Service
Memphis Service Center
Electronic Filing Help Desk
P.O. Box 30309 AMF
Memphis, TN 38130
Attention: ELF Unit Stop 37
To whom it may concern:
This letter is an application to participate in the electronic filing program for Forms 941
(‘‘Form 941 ELF Program’’).
I understand and agree to the following points which are prerequisites for participation in the
Form 941 ELF Program:
1.I will keep copies of the Form 8655, Reporting Agent Authorization for Magnetic Tape/
Electronic Filers (or its equivalent) on file at my principal place of business for a period no less
than required under the period of limitation for assessment for the last return filed under its
authority. I will provide these Authorizations for examination by the Service upon request.
2.I will abide by the recordkeeping requirements as set forth in section 10.02 of Rev. Proc.
96–19.
3.I will provide my clients documentation of filed returns as set forth in section 10.03 of
Rev. Proc. 96–19.
4.I will comply with all electronic security restrictions as set forth in section 10.04 of Rev.
Proc. 96–19 and the Technical Specifications Guide for the Electronic Filing System for Form
941, Employer’s Quarterly Federal Tax Return.
[Name, title] of [firm name] is the individual to contact concerning the userid/password.
[Name] can be reached at [telephone number]. [Name] has read and understands the rules that
apply to the use of the userid/password.
[Name, title] of [firm name and address] is the designated recipient of the Personal
Identification Number (PIN). [Name] is authorized to administer and use the PIN for the returns
being submitted under the Form 941 ELF Program.
I will begin submitting returns using the Form 941 ELF Program for returns due XX quarter
19XX. I estimate that I will be submitting XXX number of returns.
I expect to use [software brand name] translation software and EDI release version [number]
for electronic transmissions.
I have included with this application a Reporting Agent’s List and an Authorization for each
taxpayer on my Reporting Agent’s List.
Please contact [name, title & telephone #] to discuss this letter of application.
[Signature of Electronic Filer’s
authorized signatory]

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Exhibit 2
PIN/Userid/Password Receipt
I,[insert ‘‘name of authorized signatory, title, firm name and address’’]
acknowledge receipt of the [insert ‘‘userid/password’’ or ‘‘PIN’’ as
appropriate] for the Form 941 ELF Program.
I understand that I am bound by the requirements and responsibilities
regarding [insert userid/password, or ‘‘PIN’’ as appropriate] as set forth in
Rev. Proc. 96–19 and the Specifications Guide for Electronic Filers of
Employer’s Quarterly Federal Tax Returns.
For userid/password: [Signature of employee recipient]
For PIN: [Signature of Electronic Filer’s authorized signatory]
NOTE: Separate receipts are required for a user identification/password and
PIN.
26 CFR 601.602: Tax forms and instructions.
(Also Part I, Sections 6012, 6061; 1.6012–5,
1.6061–1.)
Rev. Proc. 96–20
CONTENTS
SECTION 1PURPOSE
SECTION 2BACKGROUND AND
CHANGES
SECTION 3ON-LINE FILING
PARTICIPANTS—
DEFINITIONS
SECTION 4ACCEPTANCE INTO
THE ON-LINE FIL-
ING PROGRAM
SECTION 5RESPONSIBILITIES
OF AN ON-LINE
FILER
SECTION 6PENALTIES
SECTION 7FORM 8453–OL, U.S.
INDIVIDUAL TAX
DECLARATION FOR
ON-LINE SERVICE
ELECTRONIC FILING
SECTION 8INFORMATION AN
ON-LINE FILER
MUST PROVIDE TO
THE TAXPAYER
SECTION 9DIRECT DEPOSIT OF
REFUNDS
SECTION 10BALANCE DUE RE-
TURNS
SECTION 11ADVERTISING
STANDARDS FOR
ON-LINE FILERS
SECTION 12MONITORING AND
SUSPENSION OF AN
ON-LINE FILER
SECTION 13ADMINISTRATIVE
REVIEW PROCESS
FOR DENIAL OF
PARTICIPATION IN
THE ON-LINE FIL-
ING PROGRAM
SECTION 14ADMINISTRATIVE
REVIEW PROCESS
FOR SUSPENSION
FROM THE ON-LINE
FILING PROGRAM
SECTION 15EFFECT ON OTHER
DOCUMENTS
SECTION 16EFFECTIVE DATE
SECTION 17INTERNAL REVE-
NUE SERVICE OF-
FICE CONTACT
SECTION 1. PURPOSE
This revenue procedure informs
those who participate in the 1996 On-
Line Service Electronic Filing Program
(‘‘On-Line Filing Program’’) for Form
1040 and Form 1040A, U.S. Individual
Income Tax Return, and Form 1040EZ,
Income Tax Return for Single and Joint
Filers With No Dependents, of their
obligations to the Internal Revenue
Service, taxpayers, and other partici-
pants. This revenue procedure updates
Rev. Proc. 95–13, 1995–1 C.B. 514.
SECTION 2. BACKGROUND AND
CHANGES
.01During the 1995 federal income
tax filing season, the Service conducted
a limited On-Line Filing Program that
allowed selected on-line service
providers to transmit tax returns sub-
mitted for on-line electronic filing by a
limited number of subscribers. For the
1996 federal income tax filing season,
the On-Line Filing Program is ex-
panded to allow additional participants
to transmit tax returns submitted for
on-line electronic filing.
.02Section 1.6012–5 of the Income
Tax Regulations provides that the
Commissioner may authorize the use,
at the option of a person required to
make a return, of a composite return in
lieu of any form specified in 26 C.F.R.
Part 1 (Income Tax), subject to the
conditions, limitations, and special
rules governing the preparation, execu-
tion, filing, and correction thereof as
the Commissioner may deem ap-
propriate.
.03For purposes of this revenue
procedure, an on-line electronically
filed Form 1040, Form 1040A, or Form
1040EZ is a composite return consist-
ing of electronically transmitted data
and certain paper documents. The non-
electronic portion of the return consists
of Form 8453–OL, U.S. Individual In-
come Tax Declaration for On-Line
Service Electronic Filing, and other
paper documents that cannot be
electronically transmitted. Form 8453-
OL must be received by the Service
before an on-line electronically filed
return is complete. An on-line
electronically filed return must contain
the same information that a return filed
completely on paper contains. See sec-
tion 7 of this revenue procedure for
procedures for completing Form 8453–
OL.
.04The Service will periodically
issue a publication that lists the forms
and schedules associated with a Form

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1040 that can be electronically trans-
mitted.
.05A Form 1040, a Form 1040A, or
a Form 1040EZ cannot be electroni-
cally filed after October 15, 1996,
notwithstanding the fact that the tax-
payer has been granted an extension to
file a return beyond that date.
.06An amended tax return cannot be
electronically filed. A taxpayer must
file an amended tax return on paper in
accordance with the instructions for
Form 1040X, Amended U.S. Individual
Income Tax Return.
.07A tax return that has a foreign
address for the taxpayer cannot be
electronically filed. Army/Air Force
(APO) and Fleet (FPO) post offices are
not considered foreign addresses.
.08A tax return for a decedent
cannot be electronically filed. The
decedent’s spouse or personal repre-
sentative must file a paper tax return
for the decedent.
.09This revenue procedure updates
Rev. Proc. 95–13, which applied to the
On-Line Filing Program for the 1995
filing season. The updates include
changes in the On-Line Filing Program
for the 1996 filing season, clarifications
of prior On-Line Filing Program state-
ments, and additional guidance derived
from other Service documents that
relate to the On-Line Filing Program.
Some of the updates are:
(1)additions to the types of en-
tities that may participate in the On-
Line Filing Program for the 1996 filing
season (section 3.02);
(2)additions to the information
required on Form 8633 (section 4.02);
(3)additions to the reasons to
submit a revised Form 8633 (section
4.03);
(4)certain officers of publicly
held corporations and bank officials
may not need to submit fingerprints
with their applications (section 4.08);
(5)additions to the reasons that
may result in the rejection of an
application to participate in the On-
Line Filing Program (sections 4.11(11)
and 4.11(12));
(6)an On-Line Filer must notify
the Service when it discontinues par-
ticipation in the program (section 5.06);
(7)additions to the responsibilities
of an On-Line Service Provider (sec-
tion 5.09);
(8)additions to the requirements
for accepting and transmitting the
electronic portions of returns (section
5.13);
(9)additions to the information
that must be provided to a taxpayer
(sections 5.14 and 5.15);
(10)additions to the methods of
notifying a taxpayer of the status of a
transmitted return (section 5.17);
(11)a Transmitter is required to
bundle Forms 8453–OL received from
taxpayers and send the forms to the
Austin Service Center on a weekly
basis (section 5.18);
(12)taxpayer inquiries regarding
the status of a refund should be
referred to the IRS Tele-Tax system or
the Austin Service Center Customer
Service Department (section 8.04);
(13)On-Line Filers must adhere
to all relevant federal, state, and local
consumer protection laws that relate to
advertising and soliciting (section
11.02);
(14)the effect of suspending a
Principal or Responsible Official on
entities that listed the Principal or
Responsible Official on Form 8633
(section 12.02);
(15)clarification of the two-year
period for denial or suspension (section
12.09); and
(16)modifications to the admin-
istrative review processes for denials
and suspensions (sections 13 and 14).
SECTION 3. ON-LINE FILING
PARTICIPANTS—DEFINITIONS
.01After acceptance into the On-
Line Filing Program, as described in
section 4 of this revenue procedure, a
participant is referred to as an ‘‘On-
Line Filer.’’
.02An On-Line Filer is categorized
as follows:
(1) ON-LINE SERVICE PRO-
VIDER. An ‘‘On-Line Service Pro-
vider’’ is an on-line information service
organization that provides paying sub-
scribers dial-up access to a variety of
data bases. For purposes of the On-
Line Filing Program, an On-Line Serv-
ice Provider must also have:
(a)an established subscriber or
client base to whom the On-Line
Service Provider offers services on a
continuing basis and about which the
On-Line Service Provider maintains
certain minimum information identify-
ing the subscriber. Such information
could include the subscriber’s name,
account number, or credit card or
demand deposit account number;
(b)a port capacity of at least
1,000 lines or the ability to simul-
taneously service 1,000 customers;
(c)a network of personal com-
puters that are linked by modems;
(d)access to a broad spectrum
of information and/or entertainment
services; and
(e)a client base that has the
ability to communicate using electronic
mail.
(2)SOFTWARE DEVELOPER. A
‘‘Software Developer’’ develops soft-
ware for the purposes of (a) formatting
returns according to the Service’s
electronic return specifications; and/or
(b) transmitting electronic returns di-
rectly to the Service. A Software
Developer may also sell its software.
(3)TRANSMITTER. A ‘‘Trans-
mitter’’ transmits the electronic portion
of a return directly to the IRS Data
Communications Subsystem. An entity
that provides a ‘‘bump-up’’ service is a
Transmitter. A ‘‘bump-up’’ service
provider increases the transmission rate
or line speed of formatted or reformat-
ted information that is being sent to the
Service via a public switched telephone
network. For example, a bump-up serv-
ice provider may increase the transmis-
sion rate or line speed of information
from 4800 bits per second (BPS) to
9600 BPS. Service specifications for
electronic filing require an asyn-
chronous speed of 300 BPS to 19,200
BPS or a bisynchronous speed of 4800
BPS to 19,200 BPS.
.03The On-Line Filer categories are
not mutually exclusive. For example,
an On-line Service Provider can, at the
same time, be considered a Transmitter
or Software Developer depending on
the function(s) performed.
SECTION 4. ACCEPTANCE IN THE
ON-LINE FILING PROGRAM
.01The Service reviewed and proc-
essed applications received on or be-
fore December 1, 1995, for acceptance
into the 1996 On-Line Filing Program.
Revised applications described in sec-
tion 4.03 of this revenue procedure
must be submitted within 14 days of
the change(s) reflected on the revised
Form 8633, Application to Participate
in the Electronic Filing Program.
.02Applicants were required to sub-
mit a new Form 8633 with fingerprint
cards for appropriate individuals to the
Austin Service Center, check the
‘‘new’’ box at the top of the form, and
write the letters ‘‘OLF’’ next to this
box, if:

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(1)the applicant had never ac-
tively participated in the On-Line Fil-
ing Program;
(2)the applicant had previously
been denied participation in the On-
Line Filing Program; or
(3)the applicant had been sus-
pended from the On-Line Filing
Program.
.03Participants in the 1995 On-Line
Filing Program must submit a revised
Form 8633 to the Austin Service
Center, check the ‘‘revised’’ box at the
top of the form, and write the letters
‘‘OLF’’ next to this box, to participate
in the 1996 On-Line Filing Program if:
(1) the participant functioned
solely as a Software Developer during
the 1995 On-Line Filing Program and
intends to function as an On-Line
Service Provider or Transmitter during
the 1996 On-Line Filing Program;
(2)there is an additional Princi-
pal, such as a partner or corporate
officer, that must be listed on Form
8633, line 1k(1), ‘‘Principals of Your
Firm or Organization’’;
(3)there is a ‘‘Principal’’ listed
on Form 8633, line 1k(1), that should
be deleted;
(4)the ‘‘Responsible Official’’ on
Form 8633, line 1k(2) changes; or
(5)there is any change to:
(a) the Firm name or Doing
Business As (DBA) name;
( b ) t h e b u s i n e s s m a i l i n g
address;
(c)the contact representative or
the alternate contact representative’s
name or telephone number;
(d)the On-Line Filer’s form of
organization, as described on Form
8633 line 1k; or
(e)the electronic functions per-
formed by an On-Line Filer, other than
an On-line Filer that functions solely as
a Software Developer.
.04A Form 8633 submitted pursuant
to section 4.03 (1) through (4) of this
revenue procedure must have com-
pleted fingerprint cards attached for the
appropriate individual(s). All Principals
and the Responsible Official must sign
the Form 8633.
.05A Form 8633 submitted pursuant
to section 4.03(5) of this revenue
procedure needs to include only entries
on lines 1a through 1i and the informa-
tion being revised. A Principal or
Responsible Official must sign the
Form 8633.
.06To be accepted into the 1996
On-Line Filing Program, an applicant
or a 1995 On-Line Filing Program
participant that is described in section
4.03(1) through (4) of this revenue
procedure had to:
(1) file a properly completed
Form 8633 with the Austin Service
Center; and
(2)successfully complete the nec-
essary testing at the Austin Service
Center if the applicant intends to
function as a Transmitter or Software
Developer.
.07Each individual listed as a Prin-
cipal or a Responsible Official must:
(1)be a United States citizen or
an alien admitted for lawful permanent
residence as described in 8 U.S.C.
§ 1101(a)(20) (1988);
(2)have attained the age of 21 as
of the date of application;
(3)submit with Form 8633 one
standard fingerprint card with a full set
of fingerprints taken by a law enforce-
ment agency, except as provided in
subsection 4.08 of this revenue proce-
dure; and
(4)pass a suitability check that
includes a credit check and a fin-
gerprint check.
.08An individual may choose to
submit evidence of the individual’s
professional status in lieu of one
standard fingerprint card if the individ-
ual is:
(1)an attorney in good standing
of the bar of the highest court of any
State, possession, territory, Common-
wealth, or the District of Columbia,
and is not currently under suspension
or disbarment from practice before the
Service;
(2)a certified public accountant
who is duly qualified to practice as a
certified public accountant in any State,
possession, territory, Commonwealth,
or the District of Columbia, and is not
currently under suspension or disbar-
ment from practice before the Service;
(3)an enrolled agent pursuant to
part 10 of 31 C.F.R. Subtitle A;
(4)an officer of a publicly held
corporation; or
(5)a banking official who is
bonded and has been fingerprinted
within the last two years.
.09The Service will issue to eligible
applicants for the 1996 On-Line Filing
Program, as well as participants in the
1995 On-Line Filing Program that do
not have to reapply pursuant to section
4.03 of this revenue procedure:
(1)a letter of acceptance into the
On-Line Program for the 1996 filing
season;
(2)an Electronic Filing Identifica-
tion Number (EFIN); and
(3)if appropriate, an Electronic
Transmitter Identification Number
(ETIN).
No one without these credentials may
participate in the 1996 On-Line Filing
Program.
.10If an On-Line Filer is a Software
Developer that performs no other func-
tion in the On-Line Filing Program but
software development, no Principal or
Responsible Official needs to pass a
suitability check.
.11The following reasons may have
resulted in the rejection of an applica-
tion to participate in the 1996 On-Line
Filing Program (this list is not all-
inclusive):
(1)conviction of any criminal of-
fense under the revenue laws of the
United States, or of any offense involv-
ing dishonesty or breach of trust;
(2) failure to file timely and
accurate business or personal tax
returns;
(3)failure to timely pay personal
or business tax liabilities;
(4)assessment of penalties;
(5) suspension/disbarment from
practice before the Service;
(6)other facts or conduct of a
disreputable nature that would reflect
adversely on the On-Line Filing
Program;
( 7 ) m i s r e p r e s e n t a t i o n o n a n
application;
(8)suspension or rejection from
either the Electronic Filing Program or
the On-Line Filing Program in a prior
year;
(9)unethical practices in return
preparation;
(10)stockpiling returns prior to
official acceptance into the On-Line
Filing Program (see section 5.20 of this
revenue procedure);
(11)knowingly and directly or
indirectly employing or accepting as-
sistance from any person who has been
denied acceptance into the Electronic
Filing Program or the On-Line Filing
Program, or is suspended from the
Electronic Filing Program or the On-
Line Filing Program. This includes any
individual whose actions resulted in the
rejection or suspension of a corporation
or a partnership from the Electronic

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Filing Program or the On-Line Filing
Program; or
(12)knowingly and directly or
indirectly accepting employment as an
associate, correspondent, or as a sub-
agent from, or sharing fees with, any
person who has been denied acceptance
into the Electronic Filing Program or
the On-Line Filing Program, or is
suspended from the Electronic Filing
Program or the On-Line Filing Pro-
gram. This includes any individual
whose actions resulted in the rejection
or suspension of a corporation or a
partnership from the Electronic Filing
Program or the On-Line Filing
Program.
SECTION 5. RESPONSIBILITIES
OF AN ON-LINE FILER
.01To ensure that complete returns
are accurately and efficiently filed, an
On-Line Filer must comply with all the
publications and notices of the Service.
Currently, these publications and
notices include:
(1)Rev. Proc. 95–49, 1995–50
I.R.B. 5;
(2)Handbook for Electronic Filers
of Individual Income Tax Returns,
Publication 1345;
(3)Electronic Return File Specifi-
cations and Record Layouts for Indi-
vidual Income Tax Returns, Publication
1346;
(4)Test Package for Electronic
Filing of Individual Income Tax Re-
turns, Test Package 1436; and
(5)Electronic Filing System Bul-
letin Board (EFS Bulletin Board).
.02An On-Line Filer must maintain
a high degree of integrity, compliance,
and accuracy.
.03An On-Line Filer may only
accept returns for on-line electronic
filing directly from taxpayers or from
another On-Line Filer.
.04If an On-Line Filer charges a fee
for the electronic transmission of a tax
return, the fee may not be based on a
percentage of the refund amount or on
the amount of taxes saved. An On-Line
Filer may not charge a separate fee for
Direct Deposit. See section 9 of this
revenue procedure.
.05An On-Line Filer that has been
accepted into the 1996 On-Line Filing
Program must submit a revised Form
8633 to the Austin Service Center
when any of the conditions or changes
described in section 4.03 of this reve-
nue procedure occur.
.06An On-Line Filer must notify
the Austin Service Center within 14
days of discontinuing its participation
in the On-Line Filing Program.
.07An On-Line Filer must ensure
that an on-line electronic return is filed
on or before the due date of the return.
A tax return is not considered filed
until the electronic portion of the tax
return has been acknowledged by the
Service as accepted for processing and
a completed and signed Form 8453–OL
has been received by the Service.
However, if the electronic portion of a
return is successfully transmitted on or
shortly before the due date and the
taxpayer complies with section 7.01 of
this revenue procedure, the return will
be deemed timely filed. If the elec-
tronic portion of a return is initially
transmitted on or shortly before the due
date and is ultimately rejected, but the
taxpayer complies with section 5.16 of
this revenue procedure, the return will
be deemed timely filed. In the case of a
balance due return, see section 10 of
this revenue procedure for instructions
on how to make a timely payment of
tax.
.08An On-Line Filer must ensure
that no other entity uses its EFIN or
ETIN. An On-Line Filer must not
transfer its EFIN or ETIN by sale,
loan, gift, or otherwise to another
entity.
.09An On-Line Filer that functions
as an On-Line Service Provider must:
(1)provide assistance to a sub-
scriber in transmitting the electronic
portion of a tax return;
(2)ensure that no more than three
tax returns are filed electronically by
one subscriber;
(3)not provide to a subscriber
software that has a Service-assigned
production password built into the
software;
(4)immediately deliver to a sub-
scriber the information provided by a
Transmitter under section 5.14 or 5.15
of this revenue procedure; and
(5)if requested, inform a sub-
scriber that information regarding a
refund can be obtained by using the
IRS Tele-Tax system or contacting the
Austin Service Center Customer Serv-
ice Department.
.10An On-Line Filer that functions
as a Software Developer must:
(1)promptly correct any software
error which causes an electronic return
to be rejected;
(2)promptly distribute any soft-
ware correction;
(3)ensure that any software pack-
age that will be used to transmit any
returns from multiple On-Line Filers
has the capability of combining returns
from these On-Line Filers into one
Service transmission file taking into
account the sorting requirements of the
Declaration Control Number (DCN);
and
(4)not incorporate into its soft-
ware a Service-assigned production
password.
.11An On-Line Filer that functions
as a Transmitter must:
(1)assign (as prescribed in Pub-
lication 1345) a Declaration Control
Number (DCN) to the electronic por-
tion of each return received from a
taxpayer;
(2)include the assigned DCN in
the transmission of the electronic por-
tion of a return;
(3)transmit all electronic returns
within three calendar days of receipt;
(4)retrieve the acknowledgement
file within two work days of
transmission;
(5)promptly correct any transmis-
sion error that causes an electronic
transmission to be rejected;
(6)match the acknowledgement
file to the original transmission file and
notify the taxpayer of the status of a
transmitted return as prescribed in
section 5.17 of this revenue procedure;
(7)immediately contact the Elec-
tronic Filing Unit at the Austin Service
Center for further instructions if an
acknowledgement of acceptance for
processing has not been received by the
Transmitter within two work days of
transmission or if the Transmitter re-
ceives an acknowledgement for a return
that was not transmitted on the desig-
nated transmission;
(8) contact the Austin Service
Center Electronic Filing Unit for assist-
ance if a return has been rejected after
three transmission attempts;
(9)ensure the security of all trans-
mitted data;
(10)retain, until the end of the
calendar year in which a return was
filed, an acknowledgement file received
from the Service;
(11)retain, until the end of the
calendar year in which a return was
filed, a complete copy of the electronic
portion of the return (may be retained
on magnetic media) that can be readily

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and accurately converted into an
electronic transmission that the Service
can process;
(12)ensure that it does not trans-
mit or accept for transmission more
than three electronic returns originating
from one software package; and
(13)ensure that it does not use
software that has a Service-assigned
production password built into the
software.
.12 A Transmitter that provides
transmission services to other unrelated
On-Line Filers must only accept
electronic returns for transmission to
the IRS Data Communications Sub-
system from accepted On-Line Filers.
A Transmitter must include an On-Line
Service Provider’s EFIN on each return
that the Transmitter accepts from an
On-Line Service Provider.
.13A Transmitter may only accept
electronic portions of returns for trans-
mitting that contain a consent to
disclose statement. The Transmitter
must remove the consent to disclose
statement from the electronic portion of
the return prior to transmission of that
return to the Austin Service Center.
The Transmitter must retain the consent
to disclose statement until the end of
the calendar year in which the return
was filed.
.14If the electronic portion of a
taxpayer’s return is acknowledged as
accepted by the Service, the Transmit-
ter must notify the taxpayer, as pre-
scribed in section 5.17 of this revenue
procedure, of the following:
(1)the date the transmission was
accepted;
(2)the DCN;
(3)where to put the DCN on
Form 8453–OL;
(4)the requirement to properly
complete and timely submit a Form
8453–OL with accompanying paper
documents within one work day;
(5)the Transmitter’s address to
which Form 8453–OL with accompany-
ing paper documents must be sent;
(6)that a Form 8453–OL must be
received by the Service before an on-
line electronically filed return is com-
plete; and
(7)the taxpayer’s failure to timely
submit a Form 8453–OL with accom-
panying paper documents could result
in the Service not allowing the tax-
payer to file a tax return through the
On-Line Filing Program in the future.
.15If the electronic portion of a
taxpayer’s return is acknowledged as
rejected by the Service, the Transmitter
must notify the taxpayer, as prescribed
in section 5.17 of this revenue proce-
dure, of the following:
(1)that the electronic portion of
the return submitted by the taxpayer
has not been accepted for processing;
(2)the date of the rejection;
(3)what the reject code means;
(4)what steps the taxpayer needs
to take to correct the error that caused
the rejection; and
(5)the information contained in
section 5.16 of this revenue procedure.
.16If the taxpayer chooses not to
have the rejected return retransmitted
or if the return cannot be accepted for
processing, the taxpayer, in order to
file a timely return, must file a paper
return by the later of:
(1)the due date of the return; or
(2)within ten calendar days of the
Service’s acknowledgment that the re-
turn is rejected or the notice that the
return cannot be retransmitted, with an
explanation of why the return is being
filed after the due date.
.17A Transmitter that transmits a
return of a taxpayer who is a subscriber
of an On-Line Service Provider must
notify the taxpayer by sending an
electronic transmission to the On-Line
Service Provider within two work days
of retrieving the acknowledgement file.
A Transmitter that transmits a return of
a taxpayer who is not a subscriber of
an On-Line Service Provider must
notify the taxpayer by:
(1)sending an electronic transmis-
sion to the taxpayer within two work
days of retrieving the acknowledgement
file; or
(2)mailing a written notification
to the taxpayer within one work day of
retrieving the acknowledgement file.
.18 A Transmitter must prepare
batches of Forms 8453–OL (as pre-
scribed in Publication 1345) and send
the batches to the Austin Service
Center on a weekly basis.
.19A Transmitter must, if requested,
make available to the Service all items
required by this section to be retained
until the end of the calendar year in
which a return was filed. The Transmit-
ter must make this material available
either at the business address of the
Transmitter or from the contact person
named on Form 8633.
.20A Transmitter is responsible for
ensuring that stockpiling does not
occur. Stockpiling means collecting
returns from taxpayers prior to official
acceptance into the On-Line Filing
Program, or, after official acceptance
into the On-Line Filing Program, wait-
ing more than three calendar days to
transmit a return to the Service after
receiving the information necessary for
an electronic transmission of a tax
return.
.21An On-Line Filer may not offer,
nor in any way participate in or
facilitate, a Refund Anticipation Loan
(RAL) in connection with any return
filed under the On-Line Filing Pro-
gram. A RAL is money borrowed by a
taxpayer that is based on a taxpayer’s
anticipated income tax refund.
.22 An On-Line Filer may not
charge a separate fee for a Direct
Deposit.
.23In addition to the specific re-
sponsibilities described in this section,
an On-Line Filer must meet all the
requirements in this revenue procedure
to keep the privilege of participating in
the On-Line Filing Program.
SECTION 6. PENALTIES
.01Penalties for Disclosure or Use
of Information.
(1)An On-Line Filer, except a Soft-
ware Developer, is a tax return preparer
(Preparer) under the definition of
§ 301.7216–1(b) of the Regulations on
Procedure and Administration. A Pre-
parer is subject to a criminal penalty
for disclosure or use of tax return
information, as described in §
301.7216–1(a). In general, that regula-
tion provides that any preparer who
discloses or uses any tax return infor-
mation for a purpose other than prepar-
ing, assisting in preparing, or obtaining
or providing services in connection
with the preparation of a tax return is
guilty of a misdemeanor. In addition, §
6713 of the Internal Revenue Code
provides for civil penalties that may be
assessed against a preparer who makes
an unauthorized disclosure or use of
tax return information.
(2)Under §301.7216–2(h), dis-
closure of tax return information
among accepted On-Line Filers for the
purpose of preparing a return is permis-
sible. For example, it is permissible for
an On-Line Service Provider to pass on
tax return information to a Transmitter
for the purpose of having an on-line
electronic return formatted and trans-

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mitted to the Service. However, if the
tax return information is disclosed or
used in any other way, an On-Line
Filer may be guilty of a misdemeanor
as described in section 6.01(1) of this
revenue procedure.
.02Other Preparer Penalties.
(1)Preparer penalties may be as-
serted against an individual or firm
who meets the definition of an income
tax return preparer under §7701(a)(36)
and §301.7701–15. Examples of pre-
parer penalties that may be asserted
under appropriate circumstances in-
clude, but are not limited to, those set
forth in §§6694, 6695, and 6713.
(2)Under §301.7701–15(d), an
On-Line Filer is not an income tax
return preparer for the purpose of
assessing most preparer penalties as
long as the On-Line Filer’s services are
limited to ‘‘typing, reproduction, or
other mechanical assistance in the
preparation of a return or claim for
refund.’’
(3)If an On-Line Filer alters the
return information in a nonsubstantive
way, this alteration will be considered
to come under the ‘‘mechanical assist-
a n c e ’ ’ e x c e p t i o n d e s c r i b e d i n
§ 301.7701–15(d)(1). A nonsubstantive
change is a correction or change
limited to a transposition error, mis-
placed entry, spelling error, or arithme-
tic correction that falls within the
following tolerances:
(a)the Total Tax amount, With-
holding amount, Refund amount, or
Amount Owed shown on Form 8453–
OL differs from the corresponding
amount on the electronic portion of the
tax return by no more than $7;
(b)the Total Income amount
shown on Form 8453–OL differs from
the corresponding amount on the
electronic portion of the tax return by
no more than $25; or
(c)dropping cents and rounding
to whole dollars.
(4)If an On-Line Filer alters the
return information in a substantive
way, rather than having the taxpayer
alter the return, the On-Line Filer will
be considered to be an income tax
return preparer for purposes of
§ 7701(a)(36).
(5) If an On-Line Filer goes
beyond mechanical assistance, the On-
Line Filer may be held liable for
income tax return preparer penalties.
Rev. Rul. 85–189, 1985–2 C.B. 341,
describes a situation where a Software
Developer was determined to be an
income tax return preparer and subject
to certain preparer penalties.
.03In addition to the above spec-
ified provisions, the Service reserves
the right to assert all appropriate
preparer, nonpreparer, and disclosure
penalties against an On-Line Filer as
warranted under the circumstances.
SECTION 7. FORM 8453-OL, U.S.
INDIVIDUAL INCOME TAX
DECLARATION FOR ON-LINE
SERVICE ELECTRONIC FILING
.01Procedures for Completing
Form 8453-OL.
(1)Form 8453–OL must be com-
pleted by the taxpayer in accordance
with the instructions for Form 8453–
OL.
(2)The taxpayer(s)’s name, ad-
dress, social security number(s), tax
return information, and direct deposit
of refund information in the electronic
transmission must be identical to the
information on the Form 8453–OL that
the taxpayer(s) signs and will mail to
the Transmitter.
(3)An On-Line Filer’s address
must not appear on Form 8453–OL or
anywhere in the electronic portion of a
return.
(4)If the electronic portion of a
return was filed as a joint return, both
spouses’ signatures are required on
Form 8453–OL.
(5)The taxpayer’s Form 8453–OL
must be sent to the address provided by
Transmitter within one work day after
the taxpayer is provided notification
that the electronic portion of the
taxpayer’s return has been accepted for
processing.
.02If the Service determines that a
Form 8453–OL is missing, the taxpayer
must provide the Service with a re-
placement. A taxpayer must also
provide a copy of any Form W–2,
Wage and Tax Statement, Form W–2G,
Certain Gambling Winnings, Form
1099–R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc.,
and all other attachments to Form
8453–OL.
.03If a substitute Form 8453–OL is
used, it must be approved by the
Service prior to use. See Rev. Proc.
95–16, 1995–1 C.B. 525.
SECTION 8. INFORMATION AN
ON-LINE FILER MUST PROVIDE
TO THE TAXPAYER
.01The Transmitter must advise a
taxpayer to retain a complete copy of
the return and any supporting material.
.02The Transmitter must advise the
taxpayer that an amended return, if
needed, must be filed as a paper return
and mailed to the service center that
would handle the taxpayer’s paper
return.
.03The Transmitter must give the
taxpayer the Declaration Control Num-
ber (DCN) for the taxpayer’s Form
8453–OL and instructions to the tax-
payer for entering the DCN on Form
8453–OL.
.04If a taxpayer inquires about the
status of a refund, the Transmitter, or
On-Line Service Provider if the tax-
payer is a subscriber, must advise the
taxpayer to use the IRS Tele-Tax
system or contact the Austin Service
Center Customer Service Department.
The Transmitter or On-Line Service
Provider should also advise the tax-
payer to wait at least three weeks from
the acceptance date of the electronic
return before making an inquiry regard-
ing the status of a refund.
.05The Transmitter must inform the
taxpayer that the address on the
electronic portion of the return, once
processed, will be used to update the
taxpayer’s address of record. The Inter-
nal Revenue Service uses the tax-
payer’s address of record for various
notices that are required to be sent to a
taxpayer’s ‘‘last known address’’ under
the Internal Revenue Code and for
refunds of overpayments of tax (unless
otherwise specifically directed by the
taxpayer, such as by Direct Deposit).
SECTION 9. DIRECT DEPOSIT OF
REFUNDS
.01The Service will ordinarily proc-
ess a request for Direct Deposit but
reserves the right to issue a paper
refund check.
.02The Service does not guarantee a
specific date by which a refund will be
directly deposited into the taxpayer’s
financial institution account.
.03Neither the Service nor Financial
Management Service (FMS) is respon-
sible for the misapplication of a Direct
Deposit that is caused by error, negli-
gence, or malfeasance on the part of

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the taxpayer, On-Line Filer, financial
institution, or any of their agents.
SECTION 10. BALANCE DUE
RETURNS
.01An electronically filed balance
due return is transmitted to the Austin
Service Center in the same manner that
a refund or zero balance return is filed.
A balance due return is not complete
unless and until the Service receives
Form 8453–OL completed and signed
by the taxpayer.
.02The Transmitter must furnish
Form 1040–V, Electronic Payment
Voucher, to a taxpayer who electroni-
cally files a balance due return.
.03To expedite the crediting of a
tax payment, a taxpayer who elec-
tronically files a balance due return
should mail his or her tax payment
with either Form 1040–V or the scann-
able payment voucher that is included
in some tax packages. Each of these
o p t i o n s h a s s p e c i f i c m a i l i n g
instructions.
.04A taxpayer who electronically
files a balance due return must make a
full and timely payment of any tax that
is due.
Failure to make full payment of any tax
that is due on or before April 15, 1996,
will result in the imposition of interest
and may result in the imposition of
penalties.
SECTION 11. ADVERTISING
STANDARDS FOR ON-LINE
FILERS
.01An On-Line Filer must comply
with the advertising and solicitation
provisions of 31 C.F.R. Part 10 (Treas-
ury Department Circular No. 230). This
circular prohibits the use or participa-
tion in the use of any form of public
communication containing a false,
fraudulent, misleading, deceptive, un-
duly influencing, coercive, or unfair
statement or claim. In addition, adver-
tising must not imply a special relation-
ship with the Service, FMS, or the
Treasury Department. Any claims con-
cerning faster refunds by virtue of
electronic filing must be consistent
with the language in official Service
publications.
.02An On-Line Filer must adhere to
all relevant federal, state, and local
consumer protection laws that relate to
advertising and soliciting.
.03An On-Line Filer must not use
the Service’s name, ‘‘Internal Revenue
Service’’ or ‘‘IRS’’, within a firm’s
name.
.04An On-Line Filer must not use
improper or misleading advertising in
relation to the On-Line Filing Program
(including the time frames for refunds).
.05Use of Direct Deposit name and
logo.
(1)The name ‘‘Direct Deposit’’ will
be used with initial capital letters or all
capital letters.
(2)The logo/graphic for Direct De-
posit will be used whenever feasible in
advertising copy.
(3)The color or size of the Direct
Deposit logo/graphic may be changed
when used in advertising pieces.
.06Advertising materials shall not
carry the FMS, IRS, or other Treasury
Seals.
.07Advertising for a cooperative
electronic return project (public/private
sector) must clearly state the names of
all cooperating parties.
.08If an On-Line Filer uses radio or
television broadcasting to advertise, the
broadcast must be pre-recorded. The
On-Line Filer must keep a copy of the
pre-recorded advertisement for a period
of at least 36 months from the date of
the last transmission or use.
.09If an On-Line Filer uses direct
mail or fax communications to adver-
tise, the On-Line Filer must retain a
copy of the actual mailing or fax, along
with a list or other description of
persons to whom the communication
was mailed, faxed, or otherwise dis-
tributed for a period of at least 36
months from the date of the last
mailing, fax, or distribution.
.10Acceptance to participate in the
On-Line Filing Program does not imply
endorsement by the Service or FMS of
the software or quality of services
provided.
SECTION 12. MONITORING AND
SUSPENSION OF AN ON-LINE
FILER
.01The Service will monitor an On-
Line Filer for conformity with this
revenue procedure. The Service can
immediately suspend, without notice,
an On-Line Filer from the On-Line
Filing Program. However, in most
circumstances, a suspension from par-
ticipation in the On-Line Filing Pro-
gram is effective as of the date of the
letter informing the On-Line Filer of
the suspension. Before suspending an
On-Line Filer, the Service may issue a
warning letter that describes specific
corrective action for deviations from
this revenue procedure.
.02If a Principal or Responsible
Official is suspended from the On-Line
Filing Program, every entity that listed
the suspended Principal or Responsible
Official on its Form 8633 may also be
suspended.
.03The Service will monitor the
timely receipt of Forms 8453–OL, as
well as their overall legibility
(especially the recording of the DCN).
.04The Service will monitor the
quality of an On-Line Filer’s transmis-
sions throughout the filing season. The
Service will also monitor electronic
returns and tabulate rejections, errors,
and other defects. If quality deterio-
rates, the On-Line Filer will receive a
warning from the Service.
.05The Service will monitor com-
plaints about an On-Line Filer and
issue a warning or suspension letter as
appropriate.
.06The Service reserves the right to
suspend the electronic filing privilege
of any On-Line Filer that violates any
provision of this revenue procedure.
Generally, the Service will advise a
suspended On-Line Filer concerning
the requirements for reacceptance into
the On-Line Filing Program. The fol-
lowing reasons may lead to a warning
letter and/or suspension of an On-Line
Filer from the On-Line Filing Program
(this list is not all-inclusive):
(1)the reasons listed in section
4.11 of this revenue procedure;
(2)deterioration in the format of
individual transmissions;
(3)unacceptable cumulative error
or rejection rate;
(4)stockpiling returns at any time
while participating in the On-Line
Filing Program;
(5)failure on the part of a Trans-
mitter to retrieve acknowledgement
files within two work days of transmis-
sion by the Service;
(6)failure on the part of a Trans-
mitter to notify the taxpayer, as pre-
scribed in section 5.17 of this revenue
procedure, of the status of a transmitted
return within two work days of receipt
of the acknowledgement files from the
Service;
(7)failure on the part of a Trans-
mitter to batch and send Forms 8453–

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OL to the Austin Service Center on a
weekly basis;
(8)significant complaints about an
On-Line Filer;
(9)failure on the part of an On-
Line Filer to ensure that no other entity
uses its EFIN and/or ETIN;
(10)having more than one EFIN
for the same business entity at the
same location (the business entity is
generally the entity that reports on its
return the income derived from
electronic filing), unless the Service
has issued more than one EFIN to a
business entity.
(11)failure on the part of an On-
Line Filer to cooperate with the Serv-
ice’s efforts to investigate electronic
filing abuse;
(12)violation of the advertising
standards described in section 11 of
this revenue procedure;
(13)failure to maintain and make
available records as described in sec-
tion 5.19 of this revenue procedure;
(14)failure to supply a taxpayer
with an accurate DCN;
(15)failure to give effective in-
structions to a taxpayer concerning the
entry of the DCN on Form 8453-OL;
(16)failure to timely pay any
applicable fees, as implemented by
subsequent guidance; or
(17)failure to timely submit a
revised Form 8633 notifying the Serv-
ice of changes described in section 4.03
of this revenue procedure.
.08The Service will list in the
Internal Revenue Bulletin, district of-
fice listings, district office newsletters,
and on the EFS Bulletin Board the
name and owner(s) of any entity
suspended from the On-Line Filing
Program and the effective date of the
suspension.
.09Denials of applications and sus-
pensions of participation in the On-
Line Filing Program will result in:
(1)a rejected applicant not being
reconsidered for participation in the
On-Line Filing Program for at least
two years; and
(2)a suspended On-Line Filer not
being reconsidered for participation in
the On-Line Filing Program for at least
two years.
For purposes of this section 12.09, two
years means the remaining months in
the calendar year of denial of participa-
tion or suspension and the following
two calendar years.
SECTION 13. ADMINISTRATIVE
REVIEW PROCESS FOR DENIAL
OF PARTICIPATION IN THE ON-
LINE FILING PROGRAM
.01An applicant that has been de-
nied participation in the On-Line Filing
Program has the right to an administra-
tive review. During the administrative
review process, the denial of participa-
tion remains in effect.
.02In response to the submission of
a Form 8633, the appropriate district
office will either (1) accept an appli-
cant into the On-Line Filing Program,
or (2) issue a proposed letter of denial
that explains to the applicant why the
district office proposes to reject the
application to participate in the On-
Line Filing Program.
.03An applicant who receives a
proposed letter of denial may respond,
in writing, to the district office that
issued the proposed letter of denial.
The applicant’s response must address
the district office’s explanation for
proposing the denial to participate. The
district office must receive the appli-
cant’s response within 30 calendar days
of the date of the proposed letter of
denial.
.04Upon receipt of an applicant’s
written response, the district office will
reconsider its proposed letter of denial.
The district office may (1) withdraw its
proposed letter of denial and admit the
applicant into the On-Line Filing Pro-
gram, or (2) finalize its proposed letter
of denial and issue it to the applicant.
.05If an applicant receives a final
letter from the district office that denies
the applicant participation in the On-
Line Filing Program, the applicant is
entitled to an appeal, in writing, to the
Director of Practice.
.06The appeal must be filed with
the district office that issued the denial
letter within 30 calendar days of the
date of the denial letter. An applicant’s
written appeal must contain a detailed
explanation, with supporting documen-
tation, of why the denial should be
reversed. In addition, the applicant
must include a copy of the applicant’s
Form 8633 and a copy of the denial
letter.
.07The district office whose denial
is being appealed will, upon receipt of
a written appeal to the Director of
Practice, forward to the Director of
Practice its file on the applicant and the
material described in section 13.06 of
this revenue procedure that the appli-
cant has submitted to the district office.
The district office will forward to the
Director of Practice these materials
within 15 calendar days of receipt of
the applicant’s appeal to the Director of
Practice.
.08Failure to respond within the 30-
day periods described in sections 13.03
and 13.06 of this revenue procedure
irrevocably terminates an applicant’s
right to an administrative review or
appeal.
SECTION. 14. ADMINISTRATIVE
REVIEW PROCESS FOR
SUSPENSION FROM THE ON-LINE
FILING PROGRAM
.01An On-Line Filer that has been
suspended from participation in the On-
Line Filing Program has the right to an
administrative review. During the ad-
ministrative review process, the suspen-
sion remains in effect.
.02If an On-Line Filer receives a
proposed suspension letter from a
district office or a service center, the
On-Line Filer may submit a detailed
written explanation, with supporting
documentation, of why the proposed
suspension letter should be withdrawn.
The On-Line Filer must ensure that the
district office or service center that
issued the proposed suspension letter
receives the On-Line Filer’s written
response within 30 calendar days of the
date of the proposed suspension letter.
.03Upon receipt of the On-Line
Filer’s written response, the district
office or service center will reconsider
its proposed suspension of the On-Line
Filer. The district office or service
center will either withdraw its proposed
suspension letter and reinstate the On-
Line Filer or finalize the suspension
letter and issue it to the On-Line Filer.
.04If the On-Line Filer receives a
suspension letter from a district office
or a service center, the On-Line Filer is
entitled to an appeal, in writing to the
Director of Practice.
.05The On-Line Filer must ensure
that the district office or service center
that issued the suspension letter re-
ceives the On-Line Filer’s written
appeal for review by the Director of
Practice within 30 calendar days of the
date of the suspension letter. The On-
Line Filer’s written appeal for review
must contain detailed reasons, with
supporting documentation, for reversal
of the suspension. In addition, the On-
Line Filer must include a copy of its

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Form 8633 and a copy of the suspen-
sion letter.
.06The district office or service
center whose decision to suspend is
being appealed will, upon receipt of a
written appeal to the Director of
Practice, forward to the Director of
Practice its file on the On-Line Filer
and the material described in section
14.05 of this revenue procedure that the
On-Line Filer has submitted to the
district office or the service center. The
district office or the service center will
forward to the Director of Practice
these materials within 15 calendar days
of the receipt of an On-Line Filer’s
written request for appeal.
.05Failure to appeal within the 30-
day period described in section 14.05
of this revenue procedure irrevocably
terminates an On-Line Filer’s right to
an appeal.
SECTION 15. EFFECT ON OTHER
DOCUMENTS
Rev. Proc. 95–13, 1995–1 C.B. 514,
is superseded.
SECTION 16. EFFECTIVE DATE
This revenue procedure is effective
December 29, 1995.
SECTION 17. INTERNAL
REVENUE SERVICE OFFICE
CONTACT
All questions regarding the electronic
filing aspects of the On-Line Filing
Program should be directed to the
Electronic Filing Office. The telephone
number for this purpose is (202)
283-1010 (not a toll-free number). All
questions regarding the on-line aspects
of this program should be directed to
the National Office Productivity Enhan-
cement Section. The telephone number
for this purpose is (202) 283-0265 (not
a toll-free number).
26 CFR 601.105: Examination of returns and
claims for refund, credit, or abatement;
determination of correct tax liability.
(Also Part I, §§1221, 1502; 1.1221–2(g)(5)(i),
1.1502–13.)
Rev. Proc. 96–21
SECTION 1. PURPOSE
This revenue procedure describes the
manner and time for consolidated
groups to make the retroactive single-
entity election under §1.1221–2(g)-
(5)(i) of the Income Tax Regulations
for purposes of the definition of a
hedging transaction. This revenue pro-
cedure provides alternative procedures
for making the election depending on
whether the group has any taxable
years before the Service on January 8,
1996.
SECTION 2. BACKGROUND
Under §1.1221–2(b), a transaction is
a hedging transaction only if (among
other things) the transaction is entered
into primarily to reduce the taxpayer’s
risk. In general, under § 1.1221–
2(d)(1), if the taxpayer is a member of
a consolidated group, the risk of all of
the members of the group is considered
in determining whether a transaction
reduces the taxpayer’s risk (the single-
entity approach). Under §1.1221–2(d)-
(2), however, a consolidated group can
elect out of single-entity treatment by
making a separate-entity election.
Although §1.1221–2 is generally
retroactive, the single-entity approach
of §1.1221–2(d)(1) applies only to
transactions entered into on or after
March 8, 1996. A consolidated group,
however, may elect to apply the single-
entity approach of the regulations retro-
actively. If the group does so, the
single-entity approach applies to all
transactions entered into in the election
year and in all subsequent consolidated
return years until the effective date of
any separate-entity election made by
the group under §1.1221–2(d)(2). Sec-
tion 1.1221–2(g)(5)(i).
SECTION 3. SCOPE
This revenue procedure applies to a
consolidated group making the retroac-
tive single-entity election under
§ 1.1221–2(g)(5)(i).
SECTION 4. DEFINITIONS
.01Election year. As provided by
§ 1.1221–2(g)(5)(i), the election year is
the earliest taxable year subject to the
single-entity election. The election year
must begin prior to March 8, 1996. A
group may use a particular taxable year
as the election year only if that year
and each subsequent taxable year are
still open for assessment under section
6501 on July 1, 1996 (or such earlier
date as the Commissioner may allow).
(Section 9, below, provides an earlier
date in some situations.) Section
1.1221–2(g)(5)(i).
.02Affected years. Affected years
are the election year and all subsequent
consolidated return years beginning
before March 8, 1996.
.03Before the Service. A taxable
year is before the Service from the
time the consolidated group has been
contacted in any manner by a repre-
sentative of the Service for the purpose
of scheduling any type of examination
of its federal income tax return for that
year until the receipt of a ‘‘no-change’’
letter for that year, the execution of a
waiver of restrictions on assessment
and collection of deficiency in tax and
acceptance of overassessment, the ex-
piration of the period for filing a
petition with the Tax Court for that
year, or the filing of a petition with the
Tax Court.
SECTION 5. STATEMENT OF
ELECTION
A consolidated group makes the
retroactive single-entity election by
filing a separate statement by the time,
and in the manner, prescribed in
Section 6 or 7, as applicable. The
statement must be signed by the
common parent and must say, ‘‘[IN-
SERT NAME AND EMPLOYER
IDENTIFICATION NUMBER OF
COMMON PARENT] hereby elects the
retroactive application of section
1.1221–2(d)(1) (the single-entity ap-
proach) beginning with [IDENTIFY
THE ELECTION YEAR].’’ The state-
ment of election must also contain a
list of the affected years for which the
federal income tax returns are incon-
sistent with the single-entity election or
must state that the federal income tax
returns for all affected years are
consistent with the single-entity
election.
SECTION 6. GROUPS WITH ONE
OR MORE YEARS BEFORE THE
SERVICE ON JANUARY 8, 1996
If the consolidated group has one or
more affected years before the Service
on January 8, 1996, then, except as
provided in Section 6.04, the group
must satisfy the requirements in Sec-
tion 6.01 and, as applicable, Sections
6.02 and 6.03.

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.01Filing the statement of election
and delivering copies of the
statement of election.
The group must file the statement of
election with the Service personnel
handling the earliest affected year
before the Service. If other affected
years are before the Service on the date
the group files the statement of elec-
tion, the group must also deliver copies
of the statement to the Service person-
nel handling those years. In addition, if
an affected year is before a federal
court on the date the group files the
statement of election, the group must
deliver a copy of the statement to the
lawyer representing the Government
with respect to the year. The require-
ments in this Section 6.01 must be
satisfied no later than March 8, 1996.
.02 Furnishing computations.
In the case of any affected year that
is before the Service on the date the
group files the statement of election, if
the federal income tax return for the
year is inconsistent with the single-
entity election, then computations nec-
essary to support any adjustment in tax
must be delivered to the Service
personnel handling the year.
If the year is before the Service on
January 8, 1996, the computations must
be delivered no later than March 8,
1996.
If the year is not before the Service
on January 8, 1996, but becomes a year
before the Service prior to the filing of
the statement of election, then the
computations must be delivered no
later than July 1, 1996.
.03 Filing amended returns.
In the case of any affected year that
is not before the Service on the date
the group files the statement of elec-
tion, if the federal income tax return
for the year is inconsistent with the
single-entity election, then an amended
return containing a copy of the state-
ment of election must be filed on or
before July 1, 1996. If the year
becomes a year before the Service
between the filing of the statement of
election and July 1, 1996, then, in lieu
of filing an amended return, the group
may satisfy the requirement in the
preceding sentence by, not later than
July 1, 1996, delivering to the Service
personnel handling the year a copy of
the statement and the computations
necessary to support any adjustment in
tax.
.04Years that cease to be before
the Service on or before the
date the group files the
statement of election.
If an affected year is before the
Service on January 8, 1996, but ceases
to be before the Service by the earlier
of March 8, 1996, or the date the group
files the statement of election, then, for
purposes of this revenue procedure, the
year is treated as not being before the
Service on January 8, 1996. Thus, if no
other affected years are before the
Service on that date, the group must
follow the procedures in Section 7 in
lieu of those in this Section 6; and, if
other affected years are before the
Service on that date, the group must
follow the procedures in this Section 6.
SECTION 7. GROUPS WITH NO
YEARS BEFORE THE SERVICE
ON JANUARY 8, 1996
If the consolidated group is not
governed by Section 6, then it must
satisfy the requirements in Section 7.01
and, as applicable, Sections 7.02 and
7.03.
.01Filing the statement of election
and delivering copies of the
statement of election.
(1)In general.
If the due date (including extensions)
of the federal income tax return for the
election year is later than July 1, 1996,
the group must file the statement of
election by attaching it to the timely
filed federal income tax return for the
election year. If the due date (including
extensions) of the federal income tax
return for the election year is on or
before July 1, 1996, then, except as
provided in Section 7.01(2) of this
revenue procedure, the group must file
the statement by attaching it to either
the federal income tax return for the
election year or an amended return for
the election year, and the return or
amended return must be filed on or
before July 1, 1996.
(2)Groups with one or more
affected years that have
become years before the
Service.
If one or more affected years have
become years before the Service when
the group files the statement of elec-
tion, then, in lieu of attaching the
statement to an original or amended
return for the election year, the group
must file the statement of election by
delivering it to the Service personnel
handling the earliest affected year that
is then before the Service and by
delivering copies of the statement to
the Service personnel handling any
other affected years that are then before
the Service.
(3)Year before a federal court.
In addition to the requirements stated
in Sections 7.01(1) and 7.01(2), if an
affected year is before a federal court
when the group files the statement of
election, then, on the date the statement
is filed, the group must deliver a copy
of the statement to the lawyer repre-
senting the Government with respect to
the year.
.02 Furnishing computations.
If the federal income tax return for
an affected year is inconsistent with the
single-entity election and if the affected
year is before the Service when the
group files the statement of election,
computations necessary to support any
adjustment in tax for the year must be
delivered with the statement of election
(or the copy of the statement) that is
required under Section 7.01(2) of this
revenue procedure.
.03 Filing other amended returns.
If the federal income tax return for
an affected year is inconsistent with the
single-entity election and if the affected
year is not before the Service when the
group files the statement of election, an
amended return for the year containing
a copy of the statement must be filed
on or before July 1, 1996. If, on or
before July 1, 1996, the year becomes a
year before the Service, then, in lieu of
filing an amended return, the group
may satisfy the requirement in the
preceding sentence by, not later than
July 1, 1996, delivering to the Service

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personnel handling that year a copy of
the statement of election and computa-
tions necessary to support any adjust-
ment in tax.
SECTION 8. HOW TO FILE OR
DELIVER MATERIAL TO SERVICE
PERSONNEL HANDLING A YEAR
BEFORE THE SERVICE
If, under Section 6 or 7, a group is
required to file or deliver material to
the Service personnel handling a par-
ticular affected year that, on the date of
filing or delivery, is before the Service,
the group must file or deliver the
material as follows —
.01Year under examination. If the
affected year is under examination and
not under consideration by an Appeals
office of the Service, the group must
deliver the material to the District
Director with jurisdiction over that year
and, at the same time, must deliver a
copy of the material to the principal
examining agent or team coordinator
with jurisdiction over that year.
.02Year under Appeals considera-
tion. If the affected year is under
consideration by an Appeals office of
the Service, the group must deliver the
material to the Chief of the Appeals
office with jurisdiction over the year
and, at the same time, must deliver a
copy of the material to the principal
Appeals officer or team chief with
jurisdiction over that year.
SECTION 9. MAKING THE
ELECTION FOR AFFECTED
YEARS THAT CLOSE BEFORE
JULY 1, 1996
The Commissioner hereby allows a
group to select a particular year as the
election year even if the resulting
affected years will include one or more
years that are not still open for
assessment under section 6501 on July
1, 1996. This permission is granted
only if, in addition to meeting the other
requirements and filing deadlines of
this revenue procedure, the group files
the statement of election before the
statute of limitations expires for any
affected year and, for each affected
year that is not still open for assess-
ment on July 1, 1996, the group meets
all requirements with respect to that
year before the statute of limitations
expires for that year.
SECTION 10. EFFECTIVE DATE
This revenue procedure is effective
January 8, 1996.
DRAFTING INFORMATION
The principal author of this revenue
procedure is Jo Lynn Ricks of the
Office of Assistant Chief Counsel
(Financial Institutions and Products).
For further information regarding this
revenue procedure contact Ms. Ricks
on (202) 622-3920 (not a toll-free call).

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Part IV. Items of General Interest
Notice of Proposed Rulemaking
Effective Date of Temporary Backup
Withholding Regulations
IA–33–95
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Notice of proposed rulemak-
ing by cross-reference to temporary
regulations.
SUMMARY: In *** [T.D. 8637, page
00, this Bulletin], the IRS is issuing
temporary regulations relating to the
effective date of the Temporary
Employment Tax Regulations under the
Interest and Dividend Tax Compliance
Act of 1983, relating to backup with-
holding, statement mailing require-
ments, and due diligence. The text of
those temporary regulations also serves
as the text of these proposed
regulations.
DATES: Written comments and re-
quests for a public hearing must be
received by March 20, 1996.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (IA–33–95), Room
5228, Internal Revenue Service, POB
7604, Ben Franklin Station, Wash-
ington, DC 20044. In the alternative,
submissions may be hand delivered
between the hours of 8 a.m. and 5 p.m.
to: CC:DOM:CORP:R (IA–33–95),
Courier’s Desk, Internal Revenue Serv-
ice, 1111 Constitution Avenue, NW,
Washington, DC.
FOR FURTHER INFORMATION
CONTACT: Concerning the regula-
tions, Renay France, (202) 622–4910;
concerning submissions, Michael
Slaughter, (202) 622-7190 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Background
Temporary regulations in *** [T.D.
8637, page 00, this Bulletin] amend the
Temporary Employment Tax Regula-
tions under the Interest and Dividend
Tax Compliance Act of 1983 (26 CFR
part 35a). The temporary regulations
contain rules relating to the effective
date of §§35a.9999–1, 35a.9999–2,
35a.9999–3, 35a.9999–3A, 35a.9999–
4T, and 35a.9999–5.
The text of those temporary regula-
tions also serves as the text of these
proposed regulations. The preamble to
the temporary regulations explains the
temporary regulations.
Special Analyses
It has been determined that this
notice of proposed rulemaking is not a
significant regulatory action as defined
in EO 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) and the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations, and
therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, this notice of proposed rulemak-
ing will be submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Comments and Requests for a Public
Hearing
Before these proposed regulations
are adopted as final regulations, consid-
eration will be given to any written
comments (a signed original and eight
(8) copies) that are submitted timely to
the IRS. All comments will be avail-
able for public inspection and copying.
A public hearing may be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of
the date, time, and place for the
hearing will be published in the Federal
Register.
Drafting Information
The principal author of the regula-
tions is Renay France, Office of
Assistant Chief Counsel (Income Tax
and Accounting), IRS. However, other
personnel from IRS and Treasury De-
p a r t m e n t p a r t i c i p a t e d i n t h e i r
development.
List of Subjects in 26 CFR Part 31
Employment taxes, Income taxes,
Penalties, Pensions, Railroad retire-
ment, Reporting and recordkeeping re-
quirements, Social security, Unemploy-
ment compensation.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 31 is
proposed to be amended as follows:
PART 31—EMPLOYMENT TAXES
AND COLLECTION OF INCOME
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 31.9999–0 is added to
read as follows:
§31.9999–0 Effective date.
[The text of this proposed section is
the same as the text of §35a.9999–0T
published elsewhere in *** [T.D. 8637,
this Bulletin].
Margaret Milner Richardson,
Commissioner of
Internal Revenue.
(Filed by the Office of the Federal Register on
December 20, 1995, 8:45 a.m., and published
in the issue of the Federal Register for
December 21, 1995, 60 F.R. 66243)
ADMINISTRATIVE INITIATIVES TO
ENHANCE TAXPAYER RIGHTS
ANNOUNCEMENT 96–5.
AGENCY: Internal Revenue Service
(IRS), Treasury
ACTION: Administrative actions to
enhance taxpayer rights.
BACKGROUND
The IRS and Treasury worked
closely with Congress throughout its
drafting of the ‘‘Taxpayer Bill of
Rights 2’’ (‘‘TBOR 2’’), a part of the
now vetoed Revenue Reconciliation

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Act of 1995. The IRS and Treasury
wish to ensure that the bi-partisan
momentum that led to TBOR 2 is not
lost.
This Announcement identifies the
TBOR 2 proposals that Treasury and
the IRS have already adopted admin-
istratively or will soon implement. For
those TBOR 2 provisions requiring
legislative action, the IRS and Treasury
intend to work with Congress to enact
such provisions as are necessary and
appropriate to continue the ongoing
process of enhancing taxpayer rights.
This Announcement also describes
certain regulatory and guidance projects
that were not part of TBOR 2 but
which Treasury and the IRS either have
already implemented or intend to im-
plement in the next few months to
reduce taxpayer burdens and enhance
taxpayer protections.
NEW ADMINISTRATIVE ACTIONS
BASED ON TBOR 2 PROVISIONS
The IRS administratively adopts the
following TBOR 2 provisions, as
passed by the House of Repre-
sentatives.
1.Increased Taxpayer Ombudsman
Authority to Address Taxpayer
Concerns.
The Taxpayer Ombudsman was au-
thorized by Congress in 1988 to issue
Taxpayer Assistance Orders (‘‘TAOs’’)
to resolve taxpayer problems. Section
7811 of the Code gives the Ombuds-
man the authority to issue a TAO to
direct IRS officials to stop certain
actions to alleviate a hardship faced by
a taxpayer. The Commissioner dele-
gated additional authority to the Om-
budsman to issue TAOs to take positive
actions to relieve taxpayer hardship.
The Commissioner of Internal Reve-
nue (‘‘Commissioner’’) is issuing a
Delegation Order, effective imme-
diately, to clarify the Taxpayer Om-
budsman’s expanded authority to issue
TAOs. For example, the Ombudsman
has the authority to issue a TAO
directing the IRS to pay a refund
immediately to a taxpayer eligible for a
refund to relieve severe hardship facing
such a taxpayer. In addition, a TAO
can temporarily stay an IRS collection
action in order to allow the IRS to
review the appropriateness of the
action.
The Delegation Order will also direct
the Ombudsman to prepare an annual
report on the most serious problems
that taxpayers face with the IRS and
suggest administrative and legislative
solutions to these problems.
2.Commissioner’s Directive to
Track IRS Response to Taxpayer
Ombudsman Annual Reports
The Commissioner is issuing a Dele-
gation Order, effective immediately, to
require the Ombudsman to track the
IRS response to the administrative
problems identified in the Ombuds-
man’s annual report.
3.Greater Protection for Taxpayer
Assistance Orders
Treasury and the IRS will publish
proposed regulations early in 1996
under section 7811 of the Code to limit
the authority to modify or rescind a
TAO to only the Commissioner, Dep-
uty Commissioner, or Ombudsman.
Section 7811 currently allows a greater
number of specified individuals to do
so.
In addition, the Commissioner is
issuing a Delegation Order, effective
immediately, that voluntarily adopts
this new TAO rescission and modifica-
tion limitation.
4.Increased Stature of Taxpayer
Ombudsman Within the IRS
The Commissioner intends to take
the steps necessary to increase the
stature of the Taxpayer Ombudsman
within the IRS by raising the Ombuds-
man’s compensation to that of the
highest level official reporting directly
to the Deputy Commissioner.
5.Greater Participation of
Ombudsman in Selection of
Local Problem Resolution
Officers
The Commissioner is issuing a Di-
rective, effective immediately, that re-
quires the Ombudsman or his delegate,
normally the regional Problem Resolu-
tion Officers (‘‘PROs’’), to participate
in the selection and evaluation of local
district PROs. The Ombudsman’s office
will thus have a strong voice in
choosing field personnel who have a
high degree of familiarity with taxpayer
concerns.
6.New Procedures to Allow
Taxpayers to Appeal Liens,
Levies, and Seizures
Effective April 1, 1996, taxpayers
will have the right to appeal liens,
levies, and seizures proposed by the
IRS. Each taxpayer subject to a lien,
levy, or seizure will receive Publication
1660,‘‘Collection Appeal Rights for
Liens, Levies and Seizures’’, which
will explain the taxpayer’s right to
make such an appeal and the procedure
for requesting an appeal. Form 9423,
‘‘Collection Appeal Request’’, is also
being updated with a summary of the
information included in Publication
1660 on its reverse side. Further,
Publication 594, ‘‘Understanding the
Collection Process,’’ is being amended
to inform taxpayers about the new
appeal process. The IRS will also
amend the Internal Revenue Manual to
direct IRS personnel on the appeals
process and taxpayers’ rights to such
appeals.
7.Notification of Collection
Activity to Divorced and
Separated Spouses
The IRS plans to adopt a rule by
March 1996 to allow its personnel to
notify one spouse of collection activity
against the other spouse to collect a
joint return liability. The IRS will
amend the Internal Revenue Manual
(‘‘IRM’’) to give IRS personnel uni-
form procedures to make such notifica-
tions while providing sufficient privacy
safeguards to each spouse.
8.Prohibition on Compromising
Informant’s Tax Liability
The IRS is issuing procedures to
formalize its longstanding practice of
prohibiting special agents from com-
promising the tax liability of an in-
formant in exchange for information
about another taxpayer. The procedure,
effective immediately, will be included
in § 9373.31:(8) of the IRM.
9.Voluntary Payor Telephone
Numbers on Forms 1099
Effective immediately, the IRS will
request that payors include their tele-
phone numbers on the taxpayers’
copies of Forms 1099. Taxpayers may
thus find it easier to resolve their

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disputes with payors without IRS
involvement.
10.Study of interest netting
Treasury and the IRS are beginning a
formal study of issues relating to the
IRS’s current and future interest netting
procedures. Treasury and the IRS will
soon issue a Notice that will ask for
public comment on specific legal and
administrative issues.
TBOR 2 PROVISIONS THAT HAVE
ALREADY BEEN ADOPTED
ADMINISTRATIVELY
The IRS and Treasury have already
administratively adopted the following
TBOR 2 provisions.
1.Study of Joint Return Issues For
Divorced and Separated Spouses
The IRS has begun a formal study of
the unique tax issues facing divorced
and separated spouses who filed joint
returns. The study’s goal is to recom-
mend specific legislative and admin-
istrative actions, where possible. The
IRS and Treasury will soon issue a
Notice asking for public comment on
specific legal and administrative issues.
2.Increased IRS Investigation of
Disputed Information Returns
The IRS will amend §424(16) of the
IRM, effective January 31, 1996, to
increase current IRS efforts to investi-
gate tax information reported by payors
where a taxpayer challenges the ac-
curacy of the information, such as
wage income reported to the IRS on
Forms W–2 or other income payments
reported on Forms 1099.
3.30 Day Notice Before
Terminating or Modifying
Installment Agreements
Regulation §1.6159–1(c)(4) and in-
ternal IRS procedures already provide a
taxpayer with 30 days notice before the
taxpayer’s installment agreement with
the IRS is either terminated or
modified.
4.Penalty for Trust Fund Taxes
Under §6672
The IRM provides that taxpayers
liable for trust fund taxes should be
given 60 days notice before being
assessed a non-payment penalty. An
IRS policy statement prevents the IRS
from assessing this non-payment
penalty against honorary or volunteer
trustees not involved in an organiza-
tion’s daily operations.
5.Annual Reminders of
Outstanding Delinquent Accounts
The IRM directs IRS personnel to
provide annual, and sometimes semian-
nual, reminders to taxpayers with out-
standing delinquent tax accounts.
6.Notice of Overpayments
The IRM requires the IRS to notify a
taxpayer as soon as reasonably possible
if the IRS receives a payment not
apparently related to a taxpayer’s lia-
bility or not identifiable to a proper
taxpayer account. This notification gen-
erally takes place well before the 60
days specified in TBOR 2.
7.Limitations on the Use of a
Designated Summons
The IRS is adopting a policy state-
ment, effective immediately, that for-
malizes the current IRS practice of
requiring Regional Counsel to review
designated summonses before issuance.
The policy statement also reemphasizes
the current IRS policy of issuing
designated summonses only to large
corporate taxpayers under the Coordi-
nated Examination Program (‘‘CEP’’),
except in unique circumstances.
PUBLISHED PRIORITY GUIDANCE LIST
ITEMS THAT IMPROVE TAXPAYER
RIGHTS
Treasury and the IRS are committed
to completing the following administra-
tive and regulatory projects that were
included on the 1995 published priority
guidance list and ease compliance
burdens on taxpayers.
1.Early Appeal of Employment
Tax Issues
Treasury and the IRS will soon issue
a r e v e n u e p r o c e d u r e t o a l l o w
employers to appeal employment tax
issues while an examination is still in
progress. This procedure, modeled on
the CEP early referral procedures in
Rev. Proc. 96–9, should reduce the
time and expense necessary to resolve
employment tax issues, such as the
classification of a worker as an
employee or independent contractor.
2.Appeals Mediation Procedure
A one-year test of an Appeals
mediation procedure began on October
30, 1995, as described in Announce-
ment 95–86. The mediation procedure
allows taxpayers with certain cases in
Appeals, but not docketed in any court,
to request mediation of one or more
issues. Mediation has already been used
to resolve a multi-million dollar valua-
tion dispute.
3.Obtaining Advance Valuation of
Artworks
Valuing artwork is important for
such tax purposes as estate and gift
taxes and the charitable contribution
deduction. Recently released Rev. Proc.
96–15 tells taxpayers how to obtain
IRS review of a taxpayer’s valuation of
a work of art before filing a return.
4.Making Taxpayer Identification
Numbers Available
Taxpayers must obtain Taxpayer
Identification Numbers (‘‘TINs’’) under
§6109 of the Code. An individual’s
Social Security Number (‘‘SSN’’) gen-
erally serves as a TIN. For taxpayers
ineligible to obtain SSNs, Treasury and
the IRS will soon propose regulations
to provide a method to obtain a TIN.
5.Obtaining Section 9100 Relief
Taxpayers can obtain relief in con-
nection with certain requests for
changes of accounting method or
period under Treas. Reg. § 301.9100–1.
Revenue Procedure 92-85, which sets
forth the procedures for obtaining such
relief, will be revised.
6.Allow Automatic Extensions
Without Payment
Section 6081 of the Code authorizes
the IRS to grant reasonable extensions
of time to file required returns. The
regulations currently allow individuals
to obtain an automatic 4-month exten-
sion of time to file their returns if they
pay any balance due. Notice 93–22
eliminated the requirement that the tax
be fully paid upon application for the

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extension. Treasury and the IRS issued
temporary and proposed regulations on
January 4, 1996, to make this change
permanent. Taxpayers may still be
subject to failure to pay penalties and
interest if they obtain an extension for
a return with a balance due.
7.Permit Use of Imaging Systems
to Store Tax Records
A revenue procedure will be issued
to give taxpayers the option of using
computer imaging systems, rather than
paper copies, to store the tax records
necessary to support their tax returns.
8.Electronic Filing of Form 941
Most employers must file Form 941,
‘‘Employer’s Quarterly Federal Tax
Return,’’ to report the income tax and
Federal Insurance Contributions Act
(‘‘FICA’’) tax paid by the employer
and withheld from employees. Recently
released Rev. Proc. 96–19 sets forth the
procedures to be used by taxpayers who
wish to file Form 941 electronically.
9.Simultaneous Appeals/Competent
Authority Procedure
In December 1995, the Service
issued Rev. Proc.s 96–13 and 14 which
authorize a new simultaneous Appeals/
Competent Authority procedure. Tax-
payers may now request the involve-
ment of Appeals on issues under
competent authority jurisdiction.

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Definition of Terms
Revenue rulings and revenue proce-
dures (hereinafter referred to as ‘‘rul-
ings’’) that have an effect on previous
rulings use the following defined terms
to describe the effect:
Amplified describes a situation where
no change is being made in a prior
published position, but the prior posi-
tion is being extended to apply to a
variation of the fact situation set forth
therein. Thus, if an earlier ruling held
that a principle applied to A, and the
new ruling holds that the same princi-
ple also applies to B, the earlier ruling
is amplified. (Compare with modified,
below).
Clarified is used in those instances
where the language in a prior ruling is
being made clear because the language
has caused, or may cause, some confu-
sion. It is not used where a position in
a prior ruling is being changed.
Distinguished describes a situation
where a ruling mentions a previously
published ruling and points out an
essential difference between them.
Modified is 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 with am-
plified and clarified, above).
Obsoleted describes a previously
published ruling that is not considered
determinative with respect to future
transactions. This term is most com-
monly used in a ruling that lists
previously published rulings that are
obsoleted because of changes in law or
regulations. A ruling may also be
obsoleted because the substance has
been included in regulations subse-
quently adopted.
Revoked describes situations where
the position in the previously published
ruling is not correct and the correct
position is being stated in the new
ruling.
Superseded describes a situation
where the new ruling does nothing
more than restate the substance and
situation of a previously published
ruling (or rulings). Thus, the term is
used to republish under the 1986 Code
and regulations the same position pub-
lished under the 1939 Code and regula-
tions. The term is also used when it is
desired to republish in a single ruling a
series of situations, names, etc., that
were previously published over a
period of time in separate rulings. If
If the new ruling does more than
restate the substance of a prior ruling, a
combination of terms is used. For
example, modified and superseded de-
scribes 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 published ruling is
first modified and then, as modified, is
superseded.
Supplemented is 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 ruling has been
supplemented several times, a new
ruling may be published that includes
the list in the original ruling and the
additions, and supersedes all prior
rulings in the series.
Suspended is 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 following abbreviations in current use and
formerly used will appear in material published
in the Bulletin.
A—Individual.
Acq.—Acquiescence.
B—Individual.
BE—Beneficiary.
BK—Bank.
B.T.A.—Board of Tax Appeals.
C.—Individual.
C.B.—Cumulative Bulletin.
CFR—Code of Federal Regulations.
CI—City.
COOP—Cooperative.
Ct.D.—Court Decision.
CY—County.
D—Decedent.
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—Employer.
ERISA—Employee Retirement Income Security Act.
EX—Executor.
F—Fiduciary.
FC—Foreign Country.
FICA—Federal Insurance Contribution Act.
FISC—Foreign International Sales Company.
FPH—Foreign Personal Holding Company.
F.R.—Federal Register.
FUTA—Federal Unemployment Tax Act.
FX—Foreign Corporation.
G.C.M.—Chief Counsel’s Memorandum.
GE—Grantee.
GP—General Partner.
GR—Grantor
IC—Insurance Company.
I.R.B.—Internal Revenue Bulletin.
LE—Lessee.
LP—Limited Partner.
LR—Lessor.
M—Minor.
Nonacq.—Nonacquiescence.
O—Organization.
P—Parent Corporation.
PHC—Personal Holding Company.
PO—Possession of the U.S.
PR—Partner.
PRS—Partnership.
PTE—Prohibited Transaction Exemption.
Pub. L.—Public Law.
REIT—Real Estate Investment Trust.
Rev. Proc.—Revenue Procedure.
Rev. Rul.—Revenue Ruling.
S—Subsidiary.
S.P.R.—Statements of Procedural Rules.
Stat.—Statutes at Large.
T—Target Corporation.
T.C.—Tax Court.
T.D.—Treasury Decision.
TFE—Transferee.
TFR—Transferor.
T.I.R.—Technical Information Release.
TP—Taxpayer.
TR—Trust.
TT—Trustee.
U.S.C.—United States Code.
X—Corporation.
Y—Corporation.
Z—Corporation.

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Numerical Finding List
1
Bulletins 1996–1 through 1996–3
Announcements:
96–1, 1996–2 I.R.B. 57
96–2, 1996–2 I.R.B. 57
96–3, 1996–2 I.R.B. 57
96–4, 1996–3 I.R.B. 50
Notices:
96–2, 1996–2 I.R.B. 15
96–1, 1996–3 I.R.B. 30
Proposed Regulations:
EE–34–95, 1996–3 I.R.B. 49
Revenue Procedures:
96–1, 1996–1 I.R.B. 8
96–2, 1996–1 I.R.B. 60
96–3, 1996–1 I.R.B. 82
96–4, 1996–1 I.R.B. 94
96–5, 1996–1 I.R.B. 129
96–6, 1996–1 I.R.B. 151
96–7, 1996–1 I.R.B. 185
96–8, 1996–1 I.R.B. 187
96–9, 1996–2 I.R.B. 15
96–10, 1996–2 I.R.B. 17
96–11, 1996–2 I.R.B. 18
96–12, 1996–3 I.R.B. 30
96–13, 1996–3 I.R.B. 31
96–14, 1996–3 I.R.B. 41
96–15, 1996–3 I.R.B. 41
96–16, 1996–3 I.R.B. 45
Revenue Rulings:
96–1, 1996–1 I.R.B. 7
96–2, 1996–2 I.R.B. 5
96–3, 1996–2 I.R.B. 14
96–6, 1996–2 I.R.B. 8
96–4, 1996–3 I.R.B. 16
96–5, 1996–3 I.R.B. 29
96–7, 1996–3 I.R.B. 12
Treasury Decisions:
8630, 1996–3 I.R.B. 19
8631, 1996–3 I.R.B. 7
8634, 1996–3 I.R.B. 17
8635, 1996–3 I.R.B. 5
8640, 1962–2 I.R.B. 10
1
A cumulative list of all Revenue Rulings,
Revenue Procedures, Treasury Decisions, etc.,
published in Internal Revenue Bulletins 1995–27
through 1995–52 will be found in Internal
Revenue Bulletin 1996–1, dated January 2, 1996.

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Finding List of Current Action on
Previously Published Items
1
Bulletins 1996–1 through 1996–3
*Denotes entry since last publication
Revenue Procedures:
65–17
Modified by
96–14, 1996–3 I.R.B. 41
66–49
Modified by
96–15, 1996–3 I.R.B. 41
88–32
Obsoleted by
96–15, 1996–3 I.R.B. 41
88–33
Obsoleted by
96–15, 1996–3 I.R.B. 41
91–22
Modified by
96–1, 1996–1 I.R.B. 8
91–22
Amplified by
96–13, 1996–3 I.R.B. 31
91–23
Superseded by
96–13, 1996–3 I.R.B. 31
91–24
Superseded by
96–14, 1996–3 I.R.B. 41
91–26
Superseded by
96–13, 1996–3 I.R.B. 31
92–20
Modified by
96–1, 1996–1 I.R.B. 8
92–85
Modified by
96–1, 1996–1 I.R.B. 8
93–16
Superseded by
96–11, 1996–2 I.R.B. 18
95–1
Superseded by
96–1, 1996–1 I.R.B. 8
95–2
Superseded by
96–2, 1996–1 I.R.B. 60
95–3
Superseded by
96–3, 1996–1 I.R.B. 82
1
A cumulative finding list for previously
published items mentioned in Internal Revenue
Bulletins 1995–27 through 1995–52 will be
found in Internal Revenue Bulletin 1996–1, dated
January 2, 1996.
Revenue Procedures—Continued
95–4
Superseded by
96–4, 1996–1 I.R.B. 94
95–5
Superseded by
96–5, 1996–1 I.R.B. 129
95–6
Superseded by
96–6, 1996–1 I.R.B. 151
95–7
Superseded by
96–7, 1996–1 I.R.B. 185
95–8
Superseded by
96–8, 1996–1 I.R.B. 187
95–50
Superseded by
96–3, 1996–1 I.R.B. 82
96–3
Amplified by
96–12, 1996–3 I.R.B. 30
Revenue Rulings:
66–307
Obsoleted by
96–3, 1996–2 I.R.B. 14
72–437
Modified by
96–13, 1996–3 I.R.B. 31
80–80
Obsoleted by
96–3, 1996–2 I.R.B. 14
82–80
Modified by
96–14, 1996–3 I.R.B. 41
92–19
Supplemented in part
96–2, 1996–2 I.R.B. 5
92–75
Clarified by
96–13, 1996–3 I.R.B. 31
95–10
Supplemented and superseded by
96–4, 1996–3 I.R.B. 16
95–11
Supplemented and superseded by
96–5, 1996–3 I.R.B. 29