Bulletin No. 2011-23 HIGHLIGHTS OF THIS ISSUEof June 2011. See Rev. Rul. 2011-13, page 841. Section...

Bulletin No. 2011-23June 6, 2011

HIGHLIGHTSOF THIS ISSUEThese synopses are intended only as aids to the reader inidentifying the subject matter covered. They may not berelied upon as authoritative interpretations.

INCOME TAX

Rev. Rul. 2011–13, page 841.Federal rates; adjusted federal rates; adjusted federallong-term rate and the long-term exempt rate. For pur-poses of sections 382, 642, 1274, 1288, and other sectionsof the Code, tables set forth the rates for June 2011.

T.D. 9525, page 837.Final regulations under section 367 of the Code address thetreatment of certain income and assets related to the leasingof aircraft or vessels in foreign commerce. The regulations re-flect statutory changes made by the American Jobs CreationAct of 2004. In general, the regulations will affect United Statesshareholders of controlled foreign corporations that derive in-come from the leasing of aircraft or vessels in foreign com-merce and U.S. persons that transfer property subject to theseleases to a foreign corporation.

ADMINISTRATIVE

T.D. 9524, page 843.Final regulations under section 3402(t) of the Code provideguidance on withholding and reporting requirements that applyto certain payments made by government entities to personsproviding property or services.

REG–151687–10, page 867.Proposed regulations under section 3402(t) of the Code pro-vide guidance on whether section 3402(t) withholding wouldapply to certain payments by government entities made on orafter January 1, 2014, under existing contracts that are notmaterially modified.

Notice 2011–42, page 866.This notice provides interim guidance to third party settlementorganizations (TPSOs) on backup withholding obligations undersection 3406 of the Code and its accompanying regulations.

Finding Lists begin on page ii.

The IRS MissionProvide America’s taxpayers top-quality service by helpingthem understand and meet their tax responsibilities and en-

force the law with integrity and fairness to all.

IntroductionThe Internal Revenue Bulletin is the authoritative instrument ofthe Commissioner of Internal Revenue for announcing officialrulings and procedures of the Internal Revenue Service and forpublishing Treasury Decisions, Executive Orders, Tax Conven-tions, legislation, court decisions, and other items of generalinterest. It is published weekly and may be obtained from theSuperintendent of Documents on a subscription basis. Bulletincontents are compiled semiannually into Cumulative Bulletins,which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all sub-stantive rulings necessary to promote a uniform application ofthe tax laws, including all rulings that supersede, revoke, mod-ify, or amend any of those previously published in the Bulletin.All published rulings apply retroactively unless otherwise indi-cated. Procedures relating solely to matters of internal man-agement are not published; however, statements of internalpractices and procedures that affect the rights and duties oftaxpayers are published.

Revenue rulings represent the conclusions of the Service on theapplication of the law to the pivotal facts stated in the revenueruling. In those based on positions taken in rulings to taxpayersor technical advice to Service field offices, identifying detailsand information of a confidential nature are deleted to preventunwarranted invasions of privacy and to comply with statutoryrequirements.

Rulings and procedures reported in the Bulletin do not have theforce and effect of Treasury Department Regulations, but theymay be used as precedents. Unpublished rulings will not berelied on, used, or cited as precedents by Service personnel inthe disposition of other cases. In applying published rulings andprocedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,and Service personnel and others concerned are cautionedagainst reaching the same conclusions in other cases unlessthe 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 ofthe 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 Other Related Items, and Subpart B, Leg-islation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.To the extent practicable, pertinent cross references to thesesubjects are contained in the other Parts and Subparts. Alsoincluded in this part are Bank Secrecy Act Administrative Rul-ings. Bank Secrecy Act Administrative Rulings are issued bythe Department of the Treasury’s Office of the Assistant Secre-tary (Enforcement).

Part IV.—Items of General Interest.This part includes notices of proposed rulemakings, disbar-ment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative indexfor the matters published during the preceding months. Thesemonthly indexes are cumulated on a semiannual basis, and arepublished in the last Bulletin of each semiannual period.

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, DC 20402.

June 6, 2011 2011–23 I.R.B.

Part I. Rulings and Decisions Under the Internal Revenue Codeof 1986Section 42.—Low-IncomeHousing Credit

The adjusted applicable federal short-term, mid-term, and long-term rates are set forth for the monthof June 2011. See Rev. Rul. 2011-13, page 841.

Section 280G.—GoldenParachute Payments

Federal short-term, mid-term, and long-term ratesare set forth for the month of June 2011. See Rev.Rul. 2011-13, page 841.

Section 367.—ForeignCorporations26 CFR 1.367(a)–2: Exception for transfers of prop-erty for use in the active conduct of a trade or busi-ness.

T.D. 9525

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 1

Modifications to Treatment ofAircraft and Vessel LeasingIncome

AGENCY: Internal Revenue Service(IRS), Treasury.

ACTION: Final regulations and removalof temporary regulations.

SUMMARY: This document contains fi-nal regulations addressing the treatment ofcertain income and assets related to theleasing of aircraft or vessels in foreigncommerce. The regulations reflect statu-tory changes made by the American JobsCreation Act of 2004. In general, the regu-lations will affect United States sharehold-ers of controlled foreign corporations thatderive income from the leasing of aircraftor vessels in foreign commerce and U.S.persons that transfer property subject tothese leases to a foreign corporation.

DATES: Effective Date: These regulationsare effective on May 6, 2011.

Applicability Dates: For dates ofapplicability, see §§1.367(a)–2(e)(2),1.367(a)–4(i), 1.367(a)–5(f)(3)(ii),1.954–2(i) and 1.956–2(e).

FOR FURTHER INFORMATIONCONTACT: Concerning the fi-nal regulations under section 367,Ronald M. Gootzeit at (202) 622–3860;concerning the final regulations undersection 954 or 956, Kristine A. Crabtree at(202) 622–3840; (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

In General

This document contains amendmentsto 26 CFR Part 1 under sections 367, 954and 956 of the Internal Revenue Code(Code). Final and temporary regula-tions (T.D. 9406, 2008–32 I.R.B. 287 [73FR 38113]) (the temporary regulations)and a cross-reference notice of proposedrulemaking (REG–138355–07, 2008–32I.R.B. 311 [73 FR 38162]) were publishedin the Federal Register on July 3, 2008(the proposed regulations). On July 29,2008, corrections to the final regulations(73 FR 43863) were published in the Fed-eral Register. No public hearing wasrequested or held with respect to the pro-posed regulations. After consideration ofthe comments received, the proposed reg-ulations are adopted, as amended by thisTreasury decision.

Explanation of Provisions

Section 415(a) of the American JobsCreation Act of 2004, Public Law 108–357(118 Stat. 1418) (Jobs Act), repealed sec-tion 954(a)(4) and (f), the foreign basecompany shipping income provisions ofsubpart F. As a result of the repeal of theseprovisions, rents derived from leasing anaircraft or vessel in foreign commerce areincluded in subpart F income only if therents are described in another category ofsubpart F income, such as foreign per-sonal holding company income (FPHCI)as defined in section 954(c). Rents aregenerally included in FPHCI under sec-

tion 954(c)(1)(A), subject to certain excep-tions. One such exception is for rents re-ceived from unrelated persons and derivedin the active conduct of a trade or business.See section 954(c)(2)(A).

For this purpose, rents derived by a con-trolled foreign corporation (CFC) are con-sidered derived in the active conduct of atrade or business in certain circumstances,including circumstances whereby the rentsare derived as a result of the performanceof marketing functions by the lessor CFCwith respect to the leased property (themarketing exception). §1.954–2(c)(1)(iv).Specifically, a lessor satisfies the market-ing exception if the lessor, through its ownofficers or staff of employees located ina foreign country, maintains and operatesan organization in the foreign country thatis regularly engaged in the business ofmarketing, or of marketing and servicing,the leased property and that is substan-tial in relation to the amount of rents de-rived from leasing the property. For thispurpose, whether an organization in a for-eign country is substantial in relation tothe amount of rents is determined based onall facts and circumstances; however, suchan organization will be considered sub-stantial if active leasing expenses equal orexceed 25 percent of the adjusted leasingprofit (as defined in §1.954–2(c)(2)(iv)).§1.954–2T(c)(2)(ii).

The Jobs Act amended section954(c)(2)(A) to expand the marketingexception with respect to rents derivedfrom leasing an aircraft or vessel in for-eign commerce. In particular, section954(c)(2)(A) now provides that “rentsderived from leasing an aircraft or vesselin foreign commerce shall not fail to betreated as derived in the active conduct ofa trade or business if, as determined underregulations prescribed by the Secretary,the active leasing expenses are not lessthan 10 percent of the profit on the lease.”In addition, the legislative history to thisprovision states that the Secretary of theTreasury will make “conforming changesto existing regulations, including guid-ance that aircraft or vessel leasing activitythat satisfies the requirements of section954(c)(2)(A) shall also satisfy the re-quirements for avoiding income inclusion

2011–23 I.R.B. 837 June 6, 2011

under section 956 and section 367(a).”H.R. Conf. Rep. No. 755, 108th Cong.,2d Sess. 402 (2004).

On July 3, 2008, the Treasury Depart-ment and the IRS published the proposedregulations providing guidance with re-spect to the treatment of certain incomeand assets related to the leasing of aircraftor vessels in foreign commerce under sec-tions 367, 954, and 956 of the Code inlight of the Jobs Act changes. These finalregulations adopt the proposed regulationswith the modifications described herein.

Section 954 Regulations

Under current regulations, to satisfythe marketing exception, the lessor must,among other things, maintain an organ-ization that is regularly engaged in thebusiness of marketing, or of marketingand servicing, the leased property andthat is “substantial in relation to the rentsderived.” §1.954–2(c)(1)(iv). The pro-posed regulations added a new marketingsafe harbor for purposes of determiningwhether an organization is substantialin relation to rents derived from leasingaircraft or vessels (including componentparts, such as engines, that are leased sepa-rately from an aircraft or vessel) in foreigncommerce. This safe harbor provides thatan organization will be considered sub-stantial for purposes of §1.954–2(c)(1)(iv)if active leasing expenses equal or exceed10 percent of the adjusted leasing profit.For this purpose, the rules in the currentregulations for computing active leasingexpense and adjusted leasing profit con-tinue to apply. The proposed regulationsalso included a definition of when anaircraft or vessel is leased in foreign com-merce, including defining when propertyis used predominantly outside the UnitedStates, that is consistent with the legisla-tive history to the Jobs Act. See H.R.REP. NO. 108–548, pt. 1, at 210 (2004);H.R. CONF. REP. NO. 108–755, at 402(2004). Finally, the proposed regulationsalso clarified that rents derived from cer-tain finance leases and acquired leases areeligible for the active rents exclusion.

One commentator expressed concernthat §1.954–2T(c)(2)(vii), which ad-dresses finance leases, could be interpretedto limit the application of the marketingexception solely to finance leases. Inresponse to this comment, the final regula-

tions clarify that the marketing exceptioncan apply to both operating leases andfinance leases.

The same commentator also sug-gested that, for purposes of applying§1.954–2T(c)(2)(vi), the regulationsshould clarify that “remarketing func-tions” include remarketing for purposesof selling the leased property. The finalregulations adopt this change.

In addition to these changes, the finalregulations clarify that an aircraft or ves-sel is considered to be leased in foreigncommerce if it is used in foreign com-merce, and is used predominantly outsidethe United States. Finally, the language of§1.954–2T(c)(3) Example 6 has been mod-ified to make it consistent with the otherexamples in §1.954–2(c)(3).


Section 956(c)(1)(A) provides that theterm United States property (“U.S. prop-erty”) generally includes tangible propertylocated in the United States. Section956(c)(2) provides exceptions to the gen-eral definition of U.S. property, includingany aircraft, railroad rolling stock, vessel,motor vehicle, or container used in thetransportation of persons or property inforeign commerce and used predominantlyoutside the United States. See section956(c)(2)(D). Prior to issuance of thetemporary regulations, §1.956–2(b)(1)(vi)provided that, as a general rule, such trans-portation property will be considered tobe used predominantly outside the UnitedStates if 70 percent or more of the milestraversed (during the taxable year at theclose of which a determination is madeunder section 956(a)(2)) in the use of suchproperty are traversed outside the UnitedStates or if such property is located outsidethe United States 70 percent of the timeduring such taxable year.

In Notice 2006–48, 2006–1 C.B. 922,the IRS and Treasury Department an-nounced that regulations would be issuedproviding that an aircraft or vessel used inthe transportation of persons or property inforeign commerce is excluded from U.S.property under §1.956–2(b)(1)(vi) if rentsderived from leasing such aircraft or vesselare excluded from FPHCI under section954(c)(2)(A) and such property is consid-ered to be used predominantly outside theUnited States under §1.954–2(b)(1)(vi),

determined by substituting “more than 50percent” for the phrases “70 percent ormore” and “70 percent.” The proposedregulations amended §1.956–2(b)(1)(vi)to provide that an aircraft or vessel isexcluded from U.S. property if rents de-rived from leasing such aircraft or vesselare excluded from FPHCI under section954(c)(2)(A) but inadvertently omitted thelanguage from Notice 2006–48 concern-ing its use in the transportation of personsor property in foreign commerce and itspredominant use outside the United States.Consistent with section 956(c)(2)(D), thelegislative history of section 954(c)(2)(A),and Notice 2006–48, the final regulationsmodify the proposed regulations to clar-ify that an aircraft or vessel is exceptedfrom the definition of U.S. property undersection 956(c)(2)(D) only if the aircraft orvessel is leased in foreign commerce asthat term is defined in §1.954–2(c)(2)(v),and the rents from the aircraft or vesselqualify for the exception to FPHCI undersection 954(c)(2)(A). See §601.601(d)(2).

No comments were received and nochanges other than the change describedherein have been made to the section 956provisions of the proposed regulations.


No written comments were receivedand no changes have been made to thesection 367 provisions of the proposedregulations.

Request for Comments

The Treasury Department and IRS con-tinue to study and request comments onhow to determine whether an aircraft orvessel is used predominantly outside theUnited States during a particular monthfor purposes of calculating depreciation re-capture under section 367. Until furtherguidance is issued, taxpayers may continueto use any reasonable method to make thisdetermination.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It has also been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) does

June 6, 2011 838 2011–23 I.R.B.

not apply to these regulations, and becausethe regulations do not impose a collectionof information on small entities, the Reg-ulatory Flexibility Act (5 U.S.C. Ch. 6)does not apply. Pursuant to section 7805(f)of the Code, this regulation has been sub-mitted to the Chief Counsel for Advocacyof the Small Business Administration forcomment on its impact on small business.

Drafting Information

The principal authors of these reg-ulations are Ronald M. Gootzeit andKristine A. Crabtree, Office of AssociateChief Counsel (International). However,other personnel from the IRS andTreasury Department participated in theirdevelopment.

* * * * *

Adoption of amendments to theRegulations

Accordingly, 26 CFR part 1 is amendedas follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation forpart 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *Par. 2. Section 1.367(a)–2 is added to

read as follows:

§1.367(a)–2 Exception for transfers ofproperty for use in the active conduct ofa trade or business.

(a) through (d) [Reserved]. For furtherguidance, see §1.367(a)–2T(a) through(d).

(e) Special rules for certain transfersoccurring on or after May 2, 2006—(1)General rule. Whether a trade or busi-ness that produces rents or royalties is ac-tively conducted shall be determined un-der the principles of section 954(c)(2)(A)and the regulations thereunder (but with-out regard to whether the rents or royaltiesare received from an unrelated party). See§1.954–2(c) and (d).

(2) Effective/applicability date. Therules of this paragraph (e) apply totransfers occurring on or after May 2,2006. However, if the transferor makesthe election to apply the provisions of§1.367(a)–4(c)(3) for transfers occurring

on or after October 22, 2004, then para-graph (e)(1) of this section will also applyto the transfers occurring on or after Octo-ber 22, 2004.

Par. 3. Section 1.367(a)–2T is amendedby removing and reserving paragraph (e)to read as follows:

§1.367(a)–2T Exception for transfers ofproperty for the use in the active conductof a trade or business (temporary).

* * * * *(e) [Reserved]. For further guidance,

see §1.367(a)–2(e).Par. 4. Section 1.367(a)–4 is added to

read as follows:

§1.367(a)–4 Special rules applicable tospecified transfers of property.

(a) through (c)(2) [Reserved]. Forfurther guidance, see §1.367(a)–4T(a)through (c)(2).

(3) Aircraft and vessels leased in for-eign commerce. For purposes of satisfy-ing §1.367–4T(c)(1), aircraft or vessels,including component parts such as enginesleased separately from aircraft or vessels,transferred to a foreign corporation andleased to other persons by the foreign cor-poration shall be considered to be trans-ferred for use in the active conduct of atrade or business if—

(i) The employees of the foreign corpo-ration perform substantial managerial andoperational activities of leasing aircraft orvessels outside the United States; and

(ii) The leased tangible personalproperty is predominantly used outsidethe United States, as determined under§1.954–2(c)(2)(v).

(d) through (h) [Reserved]. For furtherguidance, see §1.367–4T(d) through (h).

(i) Effective/applicability date. Therules of paragraph (c)(3) of this sectionapply for transfers of property occur-ring on or after May 2, 2006. Trans-ferors may elect to apply these provi-sions to transfers occurring on or afterOctober 22, 2004, by citing the provisionsof paragraph (c)(3) of this section in thedocumentation for such transfers requiredby §1.6038B–1T(c)(4)(i) and (iv).

Par. 5. Section 1.367(a)–4T is amendedby removing and reserving paragraphs(c)(3) and (i) to read as follows:

§1.367(a)–4T Special rules applicableto specified transfers of property(temporary).

* * * * *(c)* * *(3) [Reserved]. For further guidance,

see §1.367(a)–4(c)(3).

* * * * *(i) [Reserved]. For further guidance,

see §1.367(a)–4(i).Par. 6. Section §1.367(a)–5 is added to

read as follows:

§1.367(a)–5 Property subject to section367(a)(1) regardless of use in a trade orbusiness.

(a) through (f)(2) [Reserved]. Forfurther guidance, see §1.367(a)–5T(a)through (f)(2).

(3)(i) With respect to vessels and air-craft, including their component parts, thatwill be leased by the transferee to third per-sons, the transferee satisfies the conditionsset forth in §1.367(a)–4(c)(3).

(ii) Effective/applicability date. Therules of this paragraph (f)(3) apply totransfers of property occurring on or af-ter May 2, 2006. If the transferor makesthe election to apply the provisions of§1.367(a)–4(c)(3) to transfers occurringon or after October 22, 2004, then para-graph (f)(3)(i) of this section will alsoapply to transfers affected by that election.

Par. 7. Section §1.367(a)–5T isamended by removing and reserving para-graph (f)(3) to read as follows:

§1.367(a)–5T Property subject to section367(a)(1) regardless of use in trade orbusiness (temporary).

* * * * *(f) * * *(3) [Reserved]. For further guidance,

see §1.367(a)–5(f)(3).Par. 8. Section 1.954–2 is amended

by revising paragraphs (c)(2)(ii), (c)(2)(v),(c)(2)(vi), (c)(2)(vii), and (c)(3) Example 6and paragraph (i) to read as follows:

§1.954–2 Foreign personal holdingcompany income.

* * * * *(c) * * *(2) * * *

2011–23 I.R.B. 839 June 6, 2011

(ii) Substantiality of foreign organiza-tion. For purposes of paragraph (c)(1)(iv)of this section, whether an organization ina foreign country is substantial in relationto the amount of rents is determined basedon all facts and circumstances. However,such an organization will be consideredsubstantial in relation to the amount ofrents if active leasing expenses, as definedin paragraph (c)(2)(iii) of this section,equal or exceed 25 percent of the adjustedleasing profit, as defined in paragraph(c)(2)(iv) of this section. In addition, forpurposes of aircraft or vessels leased inforeign commerce, an organization willbe considered substantial if active leas-ing expenses, as defined in paragraph(c)(2)(iii) of this section, equal or ex-ceed 10 percent of the adjusted leasingprofit, as defined in paragraph (c)(2)(iv)of this section. For purposes of paragraphs(c)(1)(iv) and (c)(2) of this section and§1.956–2(b)(1)(vi), the term aircraft orvessels includes component parts, such asengines that are leased separately from anaircraft or vessel.

* * * * *(v) Leased in foreign commerce. For

purposes of paragraphs (c)(1)(iv) and(c)(2)(ii) of this section, an aircraft orvessel is considered to be leased in for-eign commerce if the aircraft or vesselis used in foreign commerce and is usedpredominantly outside the United States.An aircraft or vessel is considered to beused in foreign commerce if it is usedfor the transportation of property or pas-sengers between a port (or airport) in theUnited States and a port (or airport) in aforeign country or between foreign ports(or airports). An aircraft or vessel willbe considered to be used predominantlyoutside the United States if more than 50percent of the miles traversed during thetaxable year in the use of the aircraft orvessel are traversed outside the UnitedStates or if the aircraft or vessel is locatedoutside the United States more than 50percent of the time during the taxable year.

(vi) Leases acquired by the CFC lessor.Except as provided in this paragraph(c)(2)(vi), the exception in paragraph(c)(1)(iv) of this section will also applyto rents from leases acquired from anyperson, if following the acquisition thelessor performs active and substantialmanagement, operational, and remarket-

ing (including remarketing for purposesof re-leasing or selling the property) func-tions with respect to the leased property.However, if any person is claiming abenefit with respect to an acquired leasepursuant to section 921 or 114 of the In-ternal Revenue Code or section 101(d)of the American Jobs Creation Act of2004, (Public Law 108–357 (118 Stat.1418) (2004)), the rents from such lease,notwithstanding paragraphs (b)(6) and (c)of this section, are ineligible for the ex-ception in section 954(c)(2)(A).

(vii) Marketing of leases. Paragraph(c)(1)(iv) of this section can apply whethera lessor is engaged in the marketing ofleases as a form of financing or is engagedin marketing the property as such, and re-gardless of whether the lease is classifiedas a finance lease or an operating lease forfinancial accounting purposes, so long assuch lease is treated as a lease for Federalincome tax purposes.

(3) * * *Example 6. The facts are the same as in Exam-

ple 2, except that controlled foreign corporation Dpurchases aircraft which it leases to others. If Cor-poration D incurs active leasing expenses, as definedin paragraph (c)(2)(iii) of this section, equal to or inexcess of 10 percent of its adjusted leasing profit, asdefined in paragraph (c)(2)(iv) of this section, the or-ganization maintained and operated by Corporation Din country X is substantial in relation to the amount ofrents Corporation D receives from leasing the aircraft.Therefore, under paragraph (c)(1)(iv) of this section,such rents are derived in the active conduct of a tradeor business for purposes of section 954(c)(2)(A). If aparticular aircraft subject to lease was not leased bythe lessee corporation in foreign commerce, for ex-ample, because 50 percent or less of the miles dur-ing the taxable year were traversed outside the UnitedStates and the aircraft was located in the United Statesfor 50 percent or more of the taxable year, Corpora-tion D is not prevented from otherwise showing that itactively carries on a trade or business with regard tothe rents derived from that aircraft under paragraph(c)(2)(ii) of this section, based on its facts and cir-cumstances or a showing that active leasing expensesequal or exceed 25 percent of the adjusted leasingprofit.

* * * * *(i) Effective/applicability date. The

last two sentences of paragraph (c)(2)(ii),and paragraphs (c)(2)(v) through (vii)and (c)(3) Example 6 of this section ap-ply to taxable years of controlled for-eign corporations beginning on or afterMay 2, 2006, and for taxable years ofUnited States shareholders with or withinwhich such taxable years of the con-trolled foreign corporations end. Tax-payers may elect to apply the last two

sentences of paragraph (c)(2)(ii) and para-graphs (c)(2)(v) through (vii) to taxableyears of controlled foreign corporationsbeginning after December 31, 2004,and for taxable years of United Statesshareholders with or within which suchtaxable years of the controlled foreigncorporations end. If an election is madeto apply §1.956–2(b)(1)(vi) to taxableyears beginning after December 31, 2004,then the election must also be made forparagraphs (c)(2)(ii) and (c)(2)(v) through(vii) of this section.

§1.954–2T [Removed].

Par. 9. Section 1.954–2T is removed.Par. 10. Section 1.956–2 is amended

by revising paragraphs (b)(1)(vi) and (e) toread as follows:

§1.956–2 Definition of United Statesproperty.

* * * * *(b)* * *(1)* * *(vi) Any aircraft, railroad rolling stock,

vessel, motor vehicle, or container used inthe transportation of persons or propertyin foreign commerce and used predomi-nantly outside the United States. Whethertransportation property described in thisparagraph (b)(1)(vi) is used in foreigncommerce and predominantly outside theUnited States is to be determined fromall the facts and circumstances of eachcase. As a general rule, such transporta-tion property will be considered to beused predominantly outside the UnitedStates if 70 percent or more of the milestraversed (during the taxable year at theclose of which a determination is madeunder section 956(a)(2)) in the use of suchproperty are traversed outside the UnitedStates or if such property is located outsidethe United States 70 percent of the timeduring such taxable year. Notwithstandingthe above, an aircraft or vessel, includingcomponent parts, is excluded from UnitedStates property if the aircraft or vessel isleased in foreign commerce (as the termis defined in §1.954–2(c)(2)(v)) and rentsderived from leasing such aircraft or ves-sel are excluded from foreign personalholding company income under section954(c)(2)(A).

* * * * *

June 6, 2011 840 2011–23 I.R.B.

(e) Effective/applicability date. Thelast sentence of paragraph (b)(1)(vi) ofthis section applies to taxable years ofcontrolled foreign corporations beginningon or after May 2, 2006, and for taxableyears of United States shareholders withor within which such taxable years of thecontrolled foreign corporations end. Tax-payers may elect to apply the rule of thelast sentence of paragraph (b)(1)(vi) ofthis section to taxable years of controlledforeign corporations beginning after De-cember 31, 2004, and for taxable years ofUnited States shareholders with or withinwhich such taxable years of the controlledforeign corporations end. If an election ismade to apply the last two sentences of§1.954–2(c)(2)(ii) and §1.954–2(c)(2)(v)through (vii) to taxable years of a con-trolled foreign corporation beginning afterDecember 31, 2004, then the election mustalso be made for the last sentence of para-graph (b)(1)(vi) of this section.

Par. 11. Section 1.956–2T is amendedby removing and reserving paragraphs(b)(1)(vi) and (e) to read as follows:

§1.956–2T Definition of United Statesproperty (temporary).

* * * * *(b) * * *(1) * * *(vi) [Reserved]. For further guidance,

see §1.956–2(b)(1)(vi).

* * * * *(e) [Reserved]. For further guidance,

see §1.956–2(e).

Steven T. Miller,Deputy Commissioner forServices and Enforcement.

Approved March 30, 2011.

Michael Mundaca,Assistant Secretary of

the Treasury (Tax Policy).

(Filed by the Office of the Federal Register on May 5, 2011,8:45 a.m., and published in the issue of the Federal Registerfor May 6, 2011, 76 F.R. 26178)

Section 382.—Limitationon Net Operating LossCarryforwards and CertainBuilt-In Losses FollowingOwnership Change

The adjusted applicable federal long-term rate isset forth for the month of June 2011. See Rev. Rul.2011-13, page 841.

Section 412.—MinimumFunding Standards


Section 467.—CertainPayments for the Use ofProperty or Services


Section 468.—SpecialRules for Mining and SolidWaste Reclamation andClosing Costs


Section 482.—Allocationof Income and DeductionsAmong Taxpayers


Section 483.—Interest onCertain Deferred Payments


Section 642.—SpecialRules for Credits andDeductions


Section 807.—Rules forCertain Reserves


Section 846.—DiscountedUnpaid Losses Defined


Section 1274.—Determi-nation of Issue Price in theCase of Certain Debt Instru-ments Issued for Property(Also Sections 42, 280G, 382, 412, 467, 468, 482,483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates;adjusted federal long-term rate and thelong-term exempt rate. For purposes ofsections 382, 642, 1274, 1288, and othersections of the Code, tables set forth therates for June 2011.

Rev. Rul. 2011–13

This revenue ruling provides variousprescribed rates for federal income tax pur-poses for June 2011 (the current month).Table 1 contains the short-term, mid-term,and long-term applicable federal rates(AFR) for the current month for purposesof section 1274(d) of the Internal RevenueCode. Table 2 contains the short-term,mid-term, and long-term adjusted appli-cable federal rates (adjusted AFR) forthe current month for purposes of section1288(b). Table 3 sets forth the adjustedfederal long-term rate and the long-termtax-exempt rate described in section382(f). Table 4 contains the appropriatepercentages for determining the low-in-come housing credit described in section42(b)(1) for buildings placed in serviceduring the current month. However, undersection 42(b)(2), the applicable percentagefor non-federally subsidized new build-ings placed in service after July 30, 2008,and before December 31, 2013, shall notbe less than 9%. Finally, Table 5 containsthe federal rate for determining the presentvalue of an annuity, an interest for life

2011–23 I.R.B. 841 June 6, 2011

or for a term of years, or a remainder ora reversionary interest for purposes ofsection 7520.

REV. RUL. 2011–13 TABLE 1

Applicable Federal Rates (AFR) for June 2011

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR .46% .46% .46% .46%110% AFR .51% .51% .51% .51%120% AFR .55% .55% .55% .55%130% AFR .60% .60% .60% .60%

Mid-term

AFR 2.27% 2.26% 2.25% 2.25%110% AFR 2.51% 2.49% 2.48% 2.48%120% AFR 2.73% 2.71% 2.70% 2.69%130% AFR 2.96% 2.94% 2.93% 2.92%150% AFR 3.42% 3.39% 3.38% 3.37%175% AFR 4.00% 3.96% 3.94% 3.93%

Long-term

AFR 4.05% 4.01% 3.99% 3.98%110% AFR 4.46% 4.41% 4.39% 4.37%120% AFR 4.87% 4.81% 4.78% 4.76%130% AFR 5.28% 5.21% 5.18% 5.15%


Adjusted AFR for June 2011

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjustedAFR

.70% .70% .70% .70%

Mid-term adjusted AFR 1.83% 1.82% 1.82% 1.81%

Long-term adjustedAFR

4.17% 4.13% 4.11% 4.09%


Rates Under Section 382 for June 2011

Adjusted federal long-term rate for the current month 4.17%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjustedfederal long-term rates for the current month and the prior two months.) 4.30%

June 6, 2011 842 2011–23 I.R.B.


Appropriate Percentages Under Section 42(b)(1) for June 2011

Note: Under Section 42(b)(2), the applicable percentage for non-federally subsidized new buildings placed in service afterJuly 30, 2008, and before December 31, 2013, shall not be less than 9%.

Appropriate percentage for the 70% present value low-income housing credit 7.73%

Appropriate percentage for the 30% present value low-income housing credit 3.31%


Rate Under Section 7520 for June 2011

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years,or a remainder or reversionary interest 2.8%

Section 1288.—Treatmentof Original Issue Discounton Tax-Exempt Obligations


Section 3402.—Income TaxCollected at Source26 CFR 31.3402(t)–0: Outline of the governmentwithholding regulations.

T.D. 9524

DEPARTMENT OF THETREASURYInternal Revenue Service26 CFR Part 31

Extension of Withholding toCertain Payments Made byGovernment Entities


ACTION: Final regulations.

SUMMARY: This document contains finalregulations relating to withholding by gov-ernment entities. These regulations reflectchanges in the law made by the Tax In-crease Prevention and Reconciliation Actof 2005 that require Federal, State, andlocal government entities to withhold in-come tax when making payments to per-sons providing property or services. These

regulations affect Federal, State, and localgovernment entities that will be required towithhold and report tax from payments topersons providing property or services andalso affect the persons receiving paymentsfor property or services from the govern-ment entities.

DATES: Effective Date: These regulationsare effective on May 9, 2011.

Applicability Date: For dates ofapplicability, see §§31.3402(t)–1(d),31.3402(t)–2(i), 31.3402(t)–3(g),31.3402(t)–4(u), 31.3402(t)–5(e),31.3402(t)–6(d), 31.3402(t)–7(b),31.3406(g)–2(i), 31.6011(a)–4(d),31.6051–5(g), 31.6071(a)–1(g),31.6302–1(n), and 31.6302–4(e).

FOR FURTHER INFORMATIONCONTACT: A. G. Kelley, (202) 622–6040(not a toll-free number).


Background

This document contains amendmentsto 26 CFR Part 31 under section 3402(t) ofthe Internal Revenue Code (Code). Thisdocument also contains amendments to26 CFR Part 31 under sections 3406, 6011,6051, 6071, and 6302 of the Code.

Section 3402(t) of the Code wasadded by section 511 of the Tax IncreasePrevention and Reconciliation Act of2005, Public Law 109–222 (TIPRA),120 Stat. 345, which was enactedinto law on May 17, 2006. Section3402(t)(1) provides that the Governmentof the United States, every State, everypolitical subdivision thereof, and every

instrumentality of the foregoing (includingmulti-State agencies) making any paymentto any person providing any property orservices (including any payment made inconnection with a government voucheror certificate program which functions asa payment for property or services) shalldeduct and withhold from such payment atax in an amount equal to 3 percent of suchpayment. Section 3402(t)(2) providesexceptions to withholding under section3402(t).

Proposed regulations under sections3402(t), 3406, 6011, 6051, 6071, and6302 of the Code were published in theFederal Register on December 5, 2008(REG–158747–06, 2009–4 I.R.B. 362 [73FR 74082]).

After the issuance of the proposed reg-ulations, section 1511 of the AmericanRecovery and Reinvestment Act of 2009,Public Law 111–5 (ARRA), 123 Stat. 115,355, extended the effective date of section3402(t) withholding to payments madeafter December 31, 2011.

Notice 2010–91, 2010–52 I.R.B. 915,provided interim guidance on the appli-cation of section 3402(t) to paymentsby debit cards, credit cards, stored valuecards, and other payment cards.

Written comments were received inresponse to the proposed regulations,and a public hearing was held on April16, 2009. All comments are availableat www.regulations.gov or upon request.After consideration of all the comments,the proposed regulations are adopted asamended by this Treasury decision.

2011–23 I.R.B. 843 June 6, 2011

Summary of Comments andExplanation of Provisions

The Treasury Department and the IRSreceived numerous comments in responseto the proposed regulations, all of whichwere considered in formulating the finalregulations. Commenters generally ex-pressed concerns about the administrativeburdens of compliance and the revenueeffect on persons subject to section 3402(t)withholding. The final regulations areintended to balance the legislative intentto construct a withholding and reportingregime for payments by government enti-ties for property and services (other thanthose specifically excepted under section3402(t)(2)) with the goal of alleviating ad-ministrative burdens on both governmententities required to withhold and personsreceiving payments subject to withholdingwhere appropriate.

As discussed in section VIII of the pre-amble, these final regulations provide anadditional one-year extension from the re-vised statutory effective date of paymentsmade after December 31, 2011. Thus,under the final regulations, section 3402(t)withholding and reporting requirementsapply to payments made after December31, 2012, subject to an exception for pay-ments made under contracts existing onDecember 31, 2012, that are not materi-ally modified (but see section VIII of thispreamble for discussion of accompanyingproposed regulations that would applysection 3402(t) withholding and reportingrequirements to payments made underall contracts after December 31, 2013,regardless of whether the contract wasexisting on December 31, 2012, and hadnot been materially modified).

I. Government Entities Subject to Section3402(t)

A. Exception for political subdivisionsand instrumentalities making totalpayments under $100,000,000 (section3402(t)(2)(G))

Section 3402(t)(2)(G) provides thatsection 3402(t) withholding does not ap-ply to payments by a political subdivisionof a State (or any instrumentality of thatpolitical subdivision) that makes less than$100,000,000 of payments for property orservices annually (other than for payroll orof another type exempt from withholding

under the regulations). Consistent with theproposed regulations, the final regulationsprovide as a general rule that eligibilityfor the exception for each calendar yearis determined based on payments madeduring the accounting year ending with orwithin the second preceding calendar year.All payments for property and servicesduring that accounting year, includingpayments that are less than the $10,000payment threshold, must be consideredexcept payments qualifying for any ofthe exceptions under §31.3402(t)–4(a)through (q) of the final regulations (for ex-ample, payments to the employees of thegovernment entity that are subject to in-come tax withholding and thus excludableunder §31.3402(t)–4(a) (such as salarypayments) and payments to employeesof the government entity with respect totheir services as an employee that are ex-cludable under §31.3402(t)–4(i) (such aspayments of nontaxable fringe benefits)).

Commenters stated that if the po-litical subdivision’s or instrumental-ity’s yearly payments generally are near$100,000,000, but do not always equalor exceed $100,000,000, the entity couldincur considerable expense and difficultyadministering withholding in some yearsbut not in others. In addition, providingfor withholding in contracts would beproblematic and uncertain. Other com-menters noted that due to substantialunusual capital spending, a political subdi-vision or instrumentality could exceed the$100,000,000 threshold in one year, eventhough the entity usually makes annualtotal payments well below the threshold.The burden of applying section 3402(t)withholding for a single year because ofone year of unusual spending could beconsiderable.

In response to these comments, the fi-nal regulations provide an optional rule un-der which a political subdivision or instru-mentality may average the payments madeduring any four of the five consecutive ac-counting years ending with the account-ing year that ends with or within the sec-ond preceding calendar year. An entityapplying this optional rule must keep ad-equate records for each of the five yearsfor the period of limitations for assess-ment applicable to the calendar year forwhich it claimed the exception. This ruleis intended to provide a reasonable alterna-tive method of determining expenditures

for a political subdivision or instrumental-ity with an unusually high year of expen-ditures.

This optional rule will give greater pre-dictability for future years and will allowpolitical subdivisions and their instrumen-talities to moderate the effect of unusualyears of expenditures. The entity may ap-ply the optional rule at its discretion forany given taxable year and is not requiredto file a form or otherwise indicate to theIRS that it is using the optional rule. Addi-tionally, under the final regulations, if a po-litical subdivision or instrumentality with-holds under section 3402(t), pays (or de-posits) the withheld tax, and reports thiswithholding on payments in any calendaryear for which it does not qualify for thesection 3402(t)(2)(G) exception under thegeneral rule, but could have qualified un-der the optional rule, it will be deemed tohave waived any right to use the optionalrule for that year. Thus, an affected entityshould decide before the beginning of thecalendar year whether it will rely on theoptional rule for that year.

One commenter requested a similarexception for Federal Government enti-ties and State entities with total annualpayments of less than $100,000,000. Byits terms, section 3402(t)(2)(G) does notapply to the United States Government,States, or instrumentalities of the UnitedStates Government or States. Therefore,this comment was not adopted.

B. Determining whether an organizationis an instrumentality

The proposed regulations requestedcomments on how to determine whetheran organization is an instrumentality of agovernment entity. Commenters did notrequest a definition. The final regulationsdo not define the term instrumentality,but reserve the issue for future guidance.See §31.3402(t)–2(e). Although the Codecontains multiple references to govern-ment instrumentalities, neither the Codenor the regulations define the term instru-mentality. Several revenue rulings provideguidance on determining whether an or-ganization will be treated as an instrumen-tality of a government entity for purposesof other Code provisions. See Rev. Rul.57–128, 1957–1 C.B. 311 (adopting asix-factor test for use in determining whatis an instrumentality of a State or a politi-

June 6, 2011 844 2011–23 I.R.B.

cal subdivision thereof for purposes of anexception from the requirement to pay taxunder the Federal Insurance ContributionsAct (FICA)); Rev. Rul. 65–26, 1965–1C.B. 444; Rev. Rul. 65–196, 1965–2 C.B.388; and Rev. Rul. 69–453, 1969–2 C.B.182. These rulings may be applied byanalogy to determine whether an entity isan instrumentality for purposes of section3402(t) withholding until final guidanceis issued defining the term instrumental-ity for purposes of section 3402(t). See§601.601(d)(2)(ii)(b).

II. Payments Subject to Section 3402(t)Withholding

A. Payments by credit card or otherpayment card

The final regulations reserve for fu-ture guidance the issue of the potentialapplication of section 3402(t) withholdingto payment card transactions (includingpayments by credit, debit, stored value,and other payment cards). See Notice2010–91 and §31.3402(t)–3(e). The Trea-sury Department and the IRS continueto study whether payments by paymentcard should be subject to section 3402(t)withholding and, if so, in what manner thewithholding should apply. As providedin Notice 2010–91, the section 3402(t)withholding requirements and the relatedreporting requirements will not apply toany payment made by payment card forany calendar year beginning earlier than atleast 18 months from the date further guid-ance is finalized applying section 3402(t)withholding to payments by payment card.This relief does not apply to conveniencechecks issued in connection with paymentcard accounts.

B. The $10,000 payment threshold

Consistent with the proposed regula-tions, the final regulations provide thata payment subject to withholding ariseswhen the government entity or its paymentadministrator pays a person for providingproperty or services. The final regulationsadopt the rule in the proposed regulationsthat withholding will not apply to anypayment that is less than $10,000 (subjectto the anti-abuse rule described in sectionII.B.3 of this preamble).

1. Amount of Payment Threshold

Commenters generally approved of theconcept of a threshold, and many com-menters approved of the proposed $10,000threshold level. However, numerous com-menters requested that the threshold beraised, and some commenters requestedthat the threshold be adjusted each yearbased on changes in the cost of living.

The final regulations adopt the paymentthreshold of $10,000, which correspondsto a minimum withholding of $300. This$10,000 threshold level strikes a reason-able balance between alleviating admin-istrative burdens and preserving the leg-islative intent that the withholding require-ment apply broadly. The final regulationsdo not adopt an annual cost-of-living ad-justment to the threshold. Computer pro-cessing and transaction systems are be-coming increasingly cost-effective so thatincreasing the threshold annually is notwarranted.

2. Application of the Payment Thresholdto Individual Payments

Some commenters requested that thepayment threshold apply cumulativelyrather than to individual payments. Underthis suggestion, section 3402(t) withhold-ing would begin to apply when the payeereceives payments totaling $10,000 inthe aggregate from the government entityduring the calendar year, and then applyto all subsequent payments to the payeeduring the remainder of the year. The finalregulations do not adopt this suggestion.As other commenters noted, one sectionor division of a government entity maynot be able to coordinate its billing withanother section’s or division’s billing ona real-time basis. Thus, a requirementto withhold immediately upon reachingan annual minimum payment thresholdwould require the establishment of newsystems to track and coordinate payments.

3. Application of the Payment Thresholdto Multiple Payments to the SameRecipient

The $10,000 threshold applies on apayment-by-payment basis; therefore, if agovernment entity makes a single paymentof $10,000 or more for multiple items ofproperty or services, the entity must with-hold on the payment. For example, if a

person bills a government entity $5,000each day for seven days of daily services,but the entity pays the bills by making one$35,000 payment, the payment thresholdis applied to the $35,000 payment.

Consistent with the proposed regula-tions, the final regulations provide thatmultiple payments by a government entityto a payee generally will not be aggregatedin applying the $10,000 threshold. Thefinal regulations also adopt the anti-abuserule in the proposed regulations providingthat if a payment is divided into multiplepayments primarily to avoid the paymentthreshold, the payments will be treated asa single payment made on the date of thefirst payment for purposes of applying thethreshold. For example, if a governmententity is scheduled to make a contrac-tual payment for landscaping services of$15,000 on July 2, 2013, but divides thepayment into payments of $7,000 and$8,000 on July 1, 2013, and July 2, 2013,respectively, to avoid withholding, thegovernment entity will be treated as hav-ing made a single payment of $15,000 onJuly 1, 2013. This anti-abuse rule will notapply if the primary reason for makingmultiple payments is unrelated to section3402(t).

Some commenters expressed concernsabout the anti-abuse rule. Some arguedthat it was too subjective and would lead toconflicts between government entities andpayees. Commenters noted that in manycases, the payee controls the billing andthe government entity cannot determinewhether the payee manipulated the billingto avoid the threshold or engaged in a nor-mal business practice. Commenters alsorequested guidance on which entity (thepayor or the payee) determines whether theanti-abuse rule applies. Commenters as-serted that theoretically every payment be-low $10,000 will need to be examined todetermine whether the anti-abuse rule ap-plies.

An anti-abuse rule is necessary becausethe parties could potentially avoid thethreshold by manipulating the amount ofeach payment. Because the governmententity is responsible for withholding andmay not have sufficient information re-garding the payee’s billing process, the fi-nal regulations provide that the anti-abuserule applies only if the government en-tity knew or should have known that thepayment had been divided (whether by

2011–23 I.R.B. 845 June 6, 2011

the government entity or as a result ofdivided billing) with the primary purposeof avoiding the withholding requirements.The final regulations further provide thatin determining whether the anti-abuse ruleapplies, a significant factor is whether thegovernment entity has exhibited a patternor practice of intentionally dividing pay-ments (or intentionally permitting dividedbilling) to avoid withholding. Thus, theanti-abuse rule is intended to apply onlyin a limited number of cases.

Additionally, the final regulations per-mit a government entity and a person pro-viding services or property to that govern-ment entity to contractually agree that thegovernment entity will or may withhold inaccordance with the rules governing with-holding under section 3402(t), on specifiedpayments not subject to section 3402(t)withholding, including payments below$10,000. Therefore, the parties couldcontractually agree to permit the govern-ment entity to apply, in its discretion as itdeemed appropriate, the anti-abuse rule.This type of contractual provision wouldenable the parties to avoid disputes aboutwhether the anti-abuse rule applies. Thisprovision in the final regulations permit-ting additional withholding does not applyto payments already subject to section3402(t) withholding notwithstanding thecontractual provision, including amountssubject to section 3402(t) withholdingsolely due to the anti-abuse rule.

4. Application of the Payment Thresholdto a Single Payment Covering MultipleBilling Items

Commenters objected to applying thethreshold to the payment amount wherethe government entity chooses for its con-venience to make one payment for differ-ent “unrelated transactions” (which theytermed “bundling” the payment), causingthe payment to meet the $10,000 thresh-old. Commenters suggested that if a sin-gle payment covers more than one “unre-lated” transaction, the threshold should ap-ply separately to each transaction, invoice,or billing item, rather than to the full pay-ment amount. According to these com-menters, applying the threshold to bundledpayments makes the threshold difficult toprogram into accounts payable systems be-cause the threshold amount cannot be ap-

plied at the time of the transaction but onlyat the time the payment is processed.

The final regulations adopt the pro-posed rule applying the threshold on apayment-by-payment basis rather than abilling item basis. A billing item approachwould require formulating a method foridentifying a billing item or a similar term,which may not be easily identifiable inevery case. As a result, disputes wouldlikely arise about the number and amountof valid billing items, raising both com-pliance issues for government entities andenforcement issues for the IRS. A billingitem approach also would require the gov-ernment entity to maintain records of theitems covered by a particular payment,and the supporting documentation justi-fying the separate billing item treatment,increasing the administrative burden. Thisapproach could also facilitate abuse byparties seeking to avoid the threshold bydividing billing items.

C. Payments to contractors,subcontractors, and paymentadministrators

Consistent with the proposed regula-tions, the final regulations provide that, ifa government entity or its payment admin-istrator makes a payment to a person thatis subject to section 3402(t) withholding,no subsequent transfer of cash or propertyby that person to another person is treatedas a payment for section 3402(t) purposes.Therefore, if the government entity con-tracts with a prime contractor for prop-erty and services, and that prime contrac-tor separately contracts with subcontrac-tors for delivery of certain property andservices, section 3402(t) withholding ap-plies only to payments by the governmententity or its payment administrator to theprime contractor, and does not apply tosuccessive payments by the prime contrac-tor to its subcontractors.

Also consistent with the proposed regu-lations, the final regulations apply to pay-ments made by the government entity orits payment administrator. A payment ad-ministrator is any person that acts with re-spect to a payment solely as an agent fora government entity by making the pay-ment on behalf of the government entityto a person providing property or servicesto, or on behalf of, the government entity.The government entity is liable for the re-

quired withholding and responsible for allrelated reporting regardless of whether thegovernment entity or its payment admin-istrator makes the payment. Transfers offunds from a government entity to a pay-ment administrator to be used by the pay-ment administrator, on the government en-tity’s behalf, to pay persons for providingproperty or services are not payments sub-ject to section 3402(t) withholding. How-ever, if the government entity pays the pay-ment administrator a fee for its services,the fee is a payment subject to withhold-ing.

Many commenters requested additionalguidance on the application of section3402(t) to prime contractors, subcon-tractors, and payment administrators tospecific factual situations. The final regu-lations adopt the rules in proposed regula-tions without change. These rules providegeneral guidance that can be applied tovarious specific situations and it is notpracticable to describe all those situationsexplicitly in the regulations. However,the Treasury Department and the IRS mayissue other forms of guidance in the futureif it is determined that such guidance isnecessary to assist with particularly prob-lematic situations.

D. Advance and interim payments

Commenters requested guidance onwhether section 3402(t) withholding ap-plies to any of the following paymentsthat are made before the final deliveryand acceptance of service by the govern-ment entity: contract financing payments,performance-based payments, commer-cial advance payments, interim payments,progress payments based on cost, progresspayments based on a percentage or stageof completion, or interim payments undera cost-reimbursement contract. Com-menters requested exceptions for thesetypes of payments because withhold-ing would detrimentally affect the cashflows of contractors and could result inprice increases for government contracts.Commenters also argued that in somecases withholding is unnecessary becauseamounts are already withheld from con-tract payments until the completion of acontract. Finally, commenters suggestedthat government entities are protectedfrom loss through other provisions such asthe Miller Act (40 USC 3131–3134, dis-

June 6, 2011 846 2011–23 I.R.B.

cussed in greater detail in section III.E.1of this preamble).

Commenters specifically requested thatsection 3402(t) withholding apply to con-tract financing payments on the date thegovernment entity accepts the servicesor property provided under the contract.Under Federal Acquisition Regulations(FAR), a contractor is not entitled to liq-uidate contract financing payments untilthe government entity has accepted theproperty or services. On this basis, a com-menter asserted that contract financingpayments are not payments for property orservices until the contract is settled and theproperty or services are “accepted” by thegovernment entity. The commenter main-tained that the payment date for section3402(t) purposes should be the acceptancedate because interest under the PromptPayment Act (31 USC 3903) for late pay-ments under a contract does not begin torun until the acceptance date.

The final regulations do not adopt thesesuggestions. Treating the acceptance dateas the payment date would add adminis-trative complexity to section 3402(t) with-holding, as would any attempt to distin-guish between payments in advance of per-formance by the contractor, interim pay-ments for partial performance, and otherdesignated payments for property or ser-vices. Treating the date the funds are dis-bursed as the payment date ensures thatthere will be funds upon which to with-hold. For these reasons, the final regu-lations provide that payment is made andwithholding applies when the funds aredisbursed and not when the contract is set-tled and the services or property accepted.

E. Utility payments

The proposed regulations providedthat, unless otherwise excepted, utilitypayments are subject to section 3402(t)withholding on the same basis as pay-ments for other property and services.Commenters requested that utility pay-ments be exempted from the withholdingrequirement on the ground that utilitiesare already subject to regulation and thatgovernment entities might lose utility ser-vices if forced to withhold on payment ofthe utility bill.

There is no statutory exception forutility payments. In addition, all per-sons receiving payments subject to sec-

tion 3402(t) withholding, including util-ity companies, are paid the full amountcharged, albeit in the form of a combina-tion of a cash payment and a deposit of taxmade to the IRS. Thus, unless otherwiseexcepted, utility payments are subject tosection 3402(t) withholding.

F. Other payments

Commenters requested exemptionsfrom withholding or lower rates of with-holding based on a particular industry’sprofit margin or a particular payee’s ex-pectation that it will not have any incometax liability (because, for example, thepayee had net operating losses). Com-menters also requested exemptions forpayees that are current in their Federal taxpayments. The final regulations do notadopt these suggestions because differingrates for differing industries or taxpayersare not contemplated by the statute andwould raise administrative complexities.

In addition, many commenters re-quested guidance on whether certain typesof payments or designated portions ofpayments are payments for property orservices subject to section 3402(t) with-holding. The final regulations do notadopt most of these suggestions becausethe general rules provide sufficient guid-ance. For example, commenters requestedguidance on certain amounts that typicallyare part of a payment for a specific serviceor property, but generally are stated sepa-rately in invoices to government entities,such as fuel surcharges. The final regula-tions do not except separately stated costs(other than the optional rule permittingsales, excise, and value-added taxes tobe excepted from the amount subject tosection 3402(t) withholding). In general,separately stated items such as fuel sur-charges are treated as part of the paymentfor property or services by the governmententity, and therefore are subject to section3402(t) withholding unless an exceptionapplies. For example, the amount subjectto withholding includes late payment fees(that are not interest) and shipping andhandling costs in connection with the pur-chase of property that is subject to section3402(t) withholding.

Commenters also requested guidanceon determining the amount subject to with-holding when a portion of one payment issubject to withholding, but the remainder

of the payment is excepted from withhold-ing. Commenters asserted that it would bedifficult to identify which portion of thepayment was excepted and to apply with-holding only to the remainder. In responseto these administrative concerns, the fi-nal regulations permit government entitiesto withhold on the full amount of a pay-ment that combines an amount subject towithholding and an amount excepted fromwithholding, provided the payee has con-sented to this additional withholding.

Commenters requested guidance on de-termining the amount of withholding whena payment for property or services to a per-son is subject to offsets for the person’soutstanding debt or other amounts owedto the government entity. Because thereis no exclusion or other provision undersection 3402(t) for offsets, the payment towhich the section 3402(t) withholding ap-plies is not reduced by offsets. Rather, theamount of the payment subject to section3402(t) withholding includes any portionof the payment that is offset to pay debtowed to the government entity or other off-sets.

III. Payments Excepted from the Section3402(t) Withholding Requirements

A. Payments to certain exempt payees(section 3402(t)(2)(E))

Consistent with the proposed regula-tions, the final regulations except fromsection 3402(t) withholding paymentsto other government entities required towithhold, to foreign governments, and totax-exempt organizations as provided insection 3402(t)(2)(E). A commenter askedwhether the exception for payments totax-exempt organizations extends to pay-ments that are included in determining theorganization’s unrelated business incomethat is subject to income tax. A paymentto a tax-exempt organization is exceptedfrom section 3402(t) withholding regard-less of whether it is treated as unrelatedbusiness income.

B. Payments to Indian tribal governments

Consistent with the proposed reg-ulations, the final regulations exemptpayments to Indian tribal governments.Because Indian tribal governments arenot subject to United States income tax,

2011–23 I.R.B. 847 June 6, 2011

subjecting payments made by govern-ment entities to Indian tribal governmentsto section 3402(t) withholding would beunduly burdensome. In response to com-ments, the final regulations also exemptpayments to passthrough entities that areowned 80 percent or more by one or morepersons each of which is an Indian tribalgovernment or a person described in sec-tion 3402(t)(2)(E).

C. Identifying exempt payees

Commenters requested guidance onhow to identify exempt payees. Exemptpayees include: (1) government entitiesrequired to withhold under section 3402(t),foreign governments, tax-exempt organi-zations, and Indian tribal governments; (2)passthrough entities that are 80 percent ormore owned by those types of entities; and(3) nonresident alien individuals and for-eign corporations that receive certain typesof payments (and partnerships that receivecertain types of payments and that are 80percent or more owned by nonresidentalien individuals and foreign corpora-tions). The Treasury Department and theIRS expect to issue additional guidance onhow a payee can claim an exemption. Theguidance is expected to provide that if thegovernment entity receives a payee state-ment indicating under penalties of perjurythat the payee qualifies for an exemp-tion from section 3402(t) withholding andidentifying the particular exemption, theentity will be able to rely on that statementunless it knew or had reason to know thatthe payee did not actually qualify for theexception. The guidance is also expectedto provide that a government entity neednot obtain a payee statement if the nameof the payee reasonably indicates or thepayor knows the payee to be a governmententity (including an Indian tribal govern-ment) or foreign government. However,it is not anticipated that this “eyeball” testwould apply to tax-exempt organizations,foreign corporations, nonresident alienindividuals, or passthrough entities.

D. Payments of interest (section3402(t)(2)(C))

Section 3402(t)(2)(C) excepts pay-ments of interest from section 3402(t)withholding. Two commenters requestedthat a definition of interest be provided,and other commenters inquired whether

certain specific types of payments arepayments of interest for purposes of thisexception.

The Code and the regulations do notprovide a general definition of inter-est. Rather, a definition of interest hasarisen through case law. Generally, underlong-standing case law, interest is com-pensation paid for the use or forbearanceof money. See, for example, Old ColonyR.R. Co. v. Commissioner, 284 U.S.552 (1932), 1932–1 C.B. 274; Deputy v.DuPont, 308 U.S. 488 (1940), 1940–1C.B. 118; see also Thompson v. Commis-sioner, 73 T.C. 878, 887 (1980) (interestis the charge per unit of time for the use ofborrowed money); Dickman v. Commis-sioner, 465 U.S. 330, 337 (1984), 1984–1C.B. 197 (interest is the equivalent of rentfor the use of funds). The general stan-dard, as developed through the case law,may be applied to particular facts and cir-cumstances. Thus, the final regulations donot provide a definition of interest. How-ever, the Treasury Department and the IRScontinue to study whether any particularguidance with respect to the application ofsection 3402(t) to interest payments mayassist taxpayers in complying with thesection 3402(t) withholding and reportingrequirements, and accordingly continue toreserve that section. See §31.3402(t)–4(c).

E. Payments for real property (section3402(t)(2)(D))

1. Construction Payments

Section 3402(t)(2)(D) excepts pay-ments for real property from section3402(t) withholding. Consistent with theproposed regulations, the final regulationsprovide that the term payments for realproperty includes payments for the pur-chase and the leasing of real property,but does not include payments for theconstruction of buildings or other publicworks projects, such as bridges or roads.

Commenters requested that paymentsfor construction be treated as payments forreal property. One commenter interpreted40 USC 3131–3134 (the “Miller Act”) asalready protecting the Federal Govern-ment for taxes owed by the contractor.The commenter stated that the Miller Actmandates that the contractor provide a per-formance bond to protect the Government,and a separate payment and performance

bond to protect all persons supplying la-bor and material in carrying out the workprovided for in the contract. According tothe commenter, the protection afforded bythese bonds includes taxes due under theCode. See 40 USC 3131(c)(1).

The tax protection afforded by thesebonds relates to employment taxes de-ducted from wages, not to income taxeswhich the contractor may owe. Therefore,these performance bonds do not protectagainst a contractor’s failure to pay itscorrect income tax liability, and the MillerAct does not provide the Federal Govern-ment protection for the contracting entity’sincome tax liability.

Another commenter suggested thattreating payments for construction aspayments for real property would be con-sistent with other tax provisions, includingsection 460(e)(4) and §1.460–3(a) (defin-ing the term construction contract for pur-poses of determining whether an exceptionfrom the required use of the percentage ofcompletion method in determining taxableincome applies), and §1.263A–8 (definingthe term real property to include land,buildings, and inherently permanent struc-tures, and the structural components ofboth buildings and inherently permanentstructures for purposes of the require-ment to capitalize interest under section263A). Another commenter cited otherCode sections and regulations, including:(1) section 469 (relating to passive activitylosses and credits and providing that a“real property trade or business” includes“any real property development, rede-velopment, construction, reconstruction,acquisition, conversion, rental, operation,management, leasing, or brokerage tradeor business”); (2) section 856 (defining“interests in real property” to include “feeownership and co-ownership of land or im-provements thereon, leaseholds of land orimprovements thereon, options to acquireland or improvements thereon, and optionsto acquire leaseholds of land or improve-ments thereon”); and (3) §1.1031(a)–1(b)(relating to like-kind exchanges and pro-viding that the fact that any real estateinvolved is improved or unimproved is notmaterial, for that fact relates only to thegrade or quality of the property and not toits kind or class).

The final regulations do not adopt thesesuggestions. None of these authoritiesprovides as a general rule that payments

June 6, 2011 848 2011–23 I.R.B.

for construction are payments for realproperty. Moreover, the Code and reg-ulations sections cited serve differentpurposes. The relevant distinction here isbetween payment for a completed building(a payment for real property), and pay-ment for the services and materials usedto construct a building (not a payment forreal property). There is no evidence thatCongress intended to exempt paymentsfor construction. Additionally, an exemp-tion for construction would substantiallyreduce the scope of payments subject tosection 3402(t) withholding.

2. Lease Payments

The proposed regulations providedthat the exemption for payments for realproperty extends to payments for the leas-ing of real property. A commenter askedwhether payments for construction inleased buildings are treated as paymentsfor real property if the government entitypays the person providing the property orservices directly for facility improvementsrather than the lessor. Commenters alsoasked whether payments to the lessor forservices or property (such as for utilities orinsurance) or for services under the leaseagreement (such as for utilities providedat the lessor’s expense) are consideredpayments for the lease. In addition, com-menters asked whether payments to thirdparties required by the lease agreement(such as payments for utilities and insur-ance) are considered payments for thelease.

The final regulations distinguish be-tween payments to the lessor as part of thelease and payments to a third party. Pay-ments to the lessor that are required underthe lease agreement, such as paymentsfor utilities or insurance, are paymentsfor leasing, and are not subject to sec-tion 3402(t) withholding. In contrast,payments to third parties for services orproperty are subject to section 3402(t)withholding, even if required by the lease.Thus, under the final regulations, the leaseterms generally govern whether paymentsfor leasehold improvements and for ser-vices or property in connection with a leaseare subject to section 3402(t) withhold-ing. However, because of the potentialto avoid the application of withholding topayments for construction by temporar-ily leasing before purchasing, rather than

simply purchasing, the property on whichthe construction will occur, payments forconstruction are subject to section 3402(t)withholding even if required by a leaseand paid to the lessor.

F. Payments subject to other withholding(section 3402(t)(2)(A) and (B))

Section 3402(t)(2)(A) excepts fromsection 3402(t) withholding amounts thatare subject to withholding under anotherprovision of chapter 3 or chapter 24 (otherthan section 3406). Commenters askedwhether unpaid compensation paid tobeneficiaries or the estates of deceasedemployees is subject to section 3402(t)withholding. Although such amounts gen-erally are not subject to wage withholdingunder section 3402(a) (see Rev. Rul.86–109, 1986–2 C.B. 196), the final reg-ulations provide that these payments areexcepted from section 3402(t) withholdingunder section 3402(t)(2)(I) as payments toan employee.

G. Payments made pursuant to aclassified or confidential contract (section3402(t)(2)(F)).

Section 3402(t)(2)(F) excepts pay-ments made pursuant to a classified orconfidential contract described in section6050M(e)(3). Commenters asked whetherthis exception applies to other govern-ment operations not specifically coveredby section 6050M(e)(3), recommendingthat the exception apply to any contractwhose subject matter contains any scopeof work subject to the National Indus-trial Security Program Operating Manual(NISPOM). Because of the express statu-tory language describing the confidentialcontracts to which the exception applies,the final regulations do not extend theexception beyond contracts described insection 6050M(e)(3).

H. Payments in connection with a publicwelfare or public assistance plan (section3402(t)(2)(H))

Section 3402(t)(2)(H) excepts fromsection 3402(t) withholding any paymentin connection with a public assistance orpublic welfare program for which eligi-bility is determined by a needs or incometest. Consistent with the proposed regula-tions, the final regulations adopt a broad

definition of in connection with to includepayments made to third parties under apublic assistance or public welfare pro-gram for the benefit of the recipient ofbenefits under the program. Consistentwith the legislative history, a program forwhich eligibility is determined under aneeds or income test does not include aprogram under which eligibility is basedon age only (for example, Medicare). Forpurposes of this exception, a program pro-viding disaster relief to victims of a naturalor other disaster is considered to be a pro-gram for which eligibility is determinedunder a needs test.

Many commenters asked that the regu-lations address specific benefits under var-ious plans. Questions about specific planscan be resolved by applying the statute andthese final regulations, and special rulesare not needed. However, the TreasuryDepartment and the IRS may issue otherguidance in the future, as necessary to ad-dress arrangements to which it is particu-larly difficult to determine the applicationof the statute and these final regulations.

Commenters asked how section 3402(t)applies when a government office or por-tion of a government office is used to ad-minister a public welfare program. Com-menters asked whether payments for ex-penses of that office (utilities, property in-surance, maintenance) that are attributableto administering the public welfare pro-gram qualify as payments made in con-nection with a public welfare program un-der section 3402(t)(2)(H). The final reg-ulations provide that government entitiesmay determine the portion of any paymentthat is attributable to expenses to adminis-ter the public welfare program using anyreasonable allocation method (including,for example, using prospective budget al-locations). To ease administration, the fi-nal regulations also provide that, if a gov-ernment entity makes a reasonable, goodfaith determination that only an insignif-icant portion of the government office’spayments are attributable to administeringa public welfare program (or to functionsother than administering a public welfareprogram), that insignificant portion may bedisregarded.

2011–23 I.R.B. 849 June 6, 2011

I. Payments to a government employeefor services as an employee (section3402(t)(2)(l))

Section 3402(t)(2)(I) excepts paymentsto a government employee for the em-ployee’s services as an employee. Con-sistent with the proposed regulations, thefinal regulations interpret this exceptionbroadly to exclude any form of compen-sation that is paid to the employee oron the employee’s behalf. For example,the final regulations exclude employerand employee contributions to employeebenefit and deferred compensation plans,employer-provided fringe benefits, andemployer payments for insurance underthe Federal Employees Health BenefitsProgram.

The final regulations further providethat, consistent with the proposed regula-tions, the section 3402(t)(2)(l) exceptionapplies to payments to employees underan accountable plan for the employee’sbusiness travel expenses, and to paymentsmade by the employee to providers ofthe employee’s travel, meals, and lodg-ing when the employee is traveling ongovernment business and is reimbursedunder the accountable plan. Payments toan employee made under a reimbursementor other expense allowance arrangementthat do not exceed the substantiated ex-penses are treated as paid under an ac-countable plan and are not wages if thearrangement meets the requirements ofsection 62(c) and the expenses are sub-stantiated within a reasonable period oftime. See §31.3401(a)–4(a). In contrast,payments to an employee under a nonac-countable plan are includible in wagessubject to income tax withholding undersection 3402(a), and thus are exceptedfrom section 3402(t) withholding by sec-tion 3402(t)(2)(A).

Commenters requested that paymentsby a government entity to third partyproviders (and not to an employee) foremployee travel and lodging also be ex-cepted from section 3402(t) withholding,arguing that these payments are anotherway to pay for employee business travelexpenses and should be excepted in thesame manner as payments made underaccountable plans. Commenters arguedthat applying withholding in this instancewill complicate the travel arrangementprocess, reduce the use of more efficient

central billing accounts, and create un-justified discrepancies in travel expensereimbursements based on the employermethod of payment.

The section 3402(t)(2)(I) exception byits terms applies only to payments to em-ployees (or their successors in interest). Ifthe government entity pays a provider di-rectly for employee travel expenses, thereis no payment from the government entityto the employee to invoke this exception.Payments to the provider by the govern-ment entity are payments for property andservices, and therefore subject to section3402(t) withholding unless another excep-tion applies. The exception for employeefringe benefits does not apply where a pay-ment is made directly to the provider be-cause, while related to the provision of afringe benefit to the employee, the pay-ment itself is not a fringe benefit and ismade to a third party rather than to theemployee. However, payments made bypayment card are excepted pending futureguidance. See Notice 2010–91.

J. Grants

The proposed regulations did not pro-vide an explicit exception for grant pay-ments. Commenters requested that allgrant payments be excluded from sec-tion 3402(t) withholding because they are“non-exchange” transactions in which thegovernment entity is not making a pay-ment for property or services for the directbenefit or use of the government entity.According to commenters, grant pay-ments are distinguishable from paymentsin a transaction with a vendor in which agovernment entity is directly purchasingproperty or services for its own benefit oruse.

Commenters also recommended thatsection 3402(t) withholding not apply tothe use of grant funds by grant recipientsthat are complying with the grant eligibil-ity and award process. One commentercited the example of a city or county firedepartment that receives a grant from agovernment entity specifically for the pur-chase of an emergency response vehicle.If the purchase of an emergency responsevehicle by the local fire department weresubject to section 3402(t) withholding, thecommenter maintained the withholdingwould divert federal grant money from the

authorized acquisition use into the threepercent withholding process.

In cases where the grant recipient is an-other government entity or a tax-exemptorganization, the grant payment will be ex-cepted from section 3402(t) withholdingunder section 3402(t)(2)(E). In addition,grant payments may qualify as paymentsmade in connection with a public assis-tance or public welfare program for whicheligibility is determined by a needs or in-come test, and thus be excepted from with-holding under section 3402(t)(2)(H). Thus,it seems likely that many grant paymentswill qualify for these statutory exceptions.

In light of the administrative difficultyand potential frustration to the intendeduse of the grant proceeds that may arise,the final regulations explicitly except allgrants from section 3402(t) withholding.For this purpose, the final regulations de-fine a grant as a transfer of funds by a gov-ernment entity to a recipient (which maybe a state government, local government,or other recipient) pursuant to an agree-ment reflecting a relationship between thegovernment entity and the recipient when(1) the principal purpose of the relation-ship is to transfer a thing of value to therecipient to carry out a public purpose ofsupport or stimulation authorized by lawinstead of acquiring (by purchase, lease, orbarter) property or services for the directbenefit or use of the government entity;and (2) substantial involvement is not ex-pected between the government entity andthe recipient when carrying out the activitycontemplated in the agreement.

The exception from section 3402(t)withholding for grants does not apply tothe distribution of grant proceeds by agovernment entity. Commenters’ sugges-tions that grant proceeds be permanentlyexcepted from withholding if the grantrecipient is using the proceeds for thepurposes specified in the grant is notsupported by the statute and would bedifficult to administer. Tracing would berequired to determine which governmententity purchases had been made with grantproceeds. Tracing would be particularlydifficult if the grant agreement does notidentify specific uses for the proceeds (forexample, to purchase items necessary toimprove emergency response time, whichmay include an additional emergency re-sponse vehicle) or if only a portion of apayment consists of grant proceeds. Ac-

June 6, 2011 850 2011–23 I.R.B.

cordingly, the final regulations do notadopt this suggestion.

K. Sales tax, excise tax, and value-addedtax

Commenters requested guidance onwhether the payment subject to withhold-ing includes the amount of any sales tax,excise tax, or value-added tax. Sales taxesare generally paid by the purchaser, col-lected by the vendor, and remitted to thestate. The sales tax amount generally isnot included in the vendor’s gross income.

By comparison, information reportingunder section 6041 and related backupwithholding under section 3406 applyonly to payments that are includible in thepayee’s income. Therefore, if the payee isliable for sales tax and the payor includesthe amount of sales tax in the total pay-ment to the payee, the payor includes theamount of sales tax on Form 1099–MISC,“Miscellaneous Income,” as part of thereportable payment. In contrast, if (as isgenerally the case) the payor is liable forany sales tax and the payee merely collectssales tax from the payor, the payor doesnot include sales tax in the total amountreported on Form 1099–MISC.

A different reporting rule applies to re-portable payment card transactions undersection 6050W. Section 1.6050W–1(a)(6)provides that the gross amount reportableon Form 1099–K, “Merchant Card andThird Party Network Payments,” is the to-tal dollar amount of aggregate reportablepayment transactions for each partici-pating payee without regard to any ad-justments for credit, cash equivalents,discount amounts, fees, refunded amountor any other amounts. Thus, the grossamount reported on Form 1099–K in-cludes the amount of sales tax, excise tax,or value-added tax paid as part of a pay-ment transaction.

Similar to reporting under section6050W, but in contrast to reporting undersection 6041, section 3402(t) withholdingdoes not depend on whether an amountis includible in gross income. The en-tire amount paid for property or servicesis subject to withholding regardless ofwhether the vendor realizes a profit ontransactions covered by the payments.Accordingly, the final regulations providethat the amount subject to withholdingand reporting includes any sales, excise

or value-added tax. However, the finalregulations also permit government enti-ties to exclude the amount of any sales,value-added, or excise tax, for purposesof section 3402(t) withholding, providedthe exclusion is applied consistently to allpayments to a given payee during the cal-endar year. This rule is similar to the rulespermitting payors to exclude the amountof the wager from gambling winningsfor reporting and withholding purposesunder §31.3406(g)–2(d)(2) or to excludecommissions and option premiums indetermining gross proceeds from secu-rities sales for reporting purposes under§1.6045–1(d)(5).

L. Loan guarantees

Commenters requested guidance onwhether loan guarantees provided by gov-ernment entities and payments on loanguarantees are subject to section 3402(t)withholding. The final regulations providethat the loan guarantee itself (meaning aguarantee provided by a government en-tity on a loan by a lender) is not a paymentsubject to section 3402(t). The underlyingamounts are still loans and guaranteeing aloan or making a loan that is expected tobe repaid through the payment of principaland interest is not a payment for propertyor services.

Payments of principal and interest bythe government entity as guarantor of theloan so that the borrower can continue per-forming services under the contract arealso not subject to withholding under sec-tion 3402(t). The government entity ismaking these payments as guarantor of theloan, and the payments are being made tothe lender, not to a third party contractorthat is performing services or transferringproperty. Thus, the final regulations pro-vide that government entity payments ofprincipal and interest on a loan pursuant toa loan guarantee are not subject to section3402(t) withholding.

Under some circumstances, borrowersuse the funds from guaranteed loans tofund a specific project. As part of a loanguarantee, the government has the rightto assume the operation of the underlyingproject if the borrower ceases making pay-ments on the loan. If the government entity(through a right of subrogation) assumesthe operation of the underlying project,the government entity as the operator of

the project makes payments to the con-tractors providing services and propertyfor the project. In that case, paymentsby the government entity to third partycontractors are payments for property orservices. Although the government exer-cised its right of subrogation pursuant tothe loan guarantee or the underlying loan,and not as a party to the underlying con-tract between the borrower and the thirdparty contractors, the government is step-ping into the borrower’s shoes and makingpayments for property or services directlyto the third party contractors. Accordingly,the final regulations provide that section3402(t) withholding applies in that case.

M. Debt repayments and stock and bondpurchases

Commenters requested clarificationthat a government entity’s repaymentsof principal on a loan are not subject tosection 3402(t) withholding. Generally,repayments of principal on a loan will notbe subject to section 3402(t) withholdingbecause they are not payments for prop-erty or services. However, if a governmententity issues a debt obligation to a personproviding services as part of the purchaseprice, the debt’s fair market value is sub-ject to section 3402(t) withholding whenthe obligation becomes effective, unlessan exception applies. If a governmententity issues a debt obligation to a personproviding property as part of the purchaseprice, the debt’s issue price as determinedunder section 1273 or 1274, as applicable,is subject to section 3402(t) withholdingunless an exception applies (for exam-ple, the exception for payments for realproperty will apply to a debt obligationissued as part of a government entity’spurchase of real property). For adminis-trative convenience, the regulations allowthe government entity and the person pro-viding property to agree to use the statedprincipal amount of the debt obligationin lieu of the issue price as the amountof the payment attributable to the debtobligation that is subject to section 3402(t)withholding. Thus, for example underthese rules, if a government entity paysa person in 2013 for the performance ofservices with $50,000 cash and a 5-yearnote valued at $50,000, then the note’s fairmarket value would be subject to section3402(t) withholding in 2013 along with

2011–23 I.R.B. 851 June 6, 2011

the cash payment, but the repayment of theprincipal after the note matured in 2018would not be subject to section 3402(t)withholding. If a government entity uses athird party debt obligation (a debt obliga-tion issued by another government entityor by an entity other than a governmententity) to pay for property or services, thefair market value of the debt obligationis subject to section 3402(t) withholding,unless an exception applies.

The final regulations also except pay-ments to purchase stock, bonds, andother negotiable instruments primarilyfor investment purposes. Although thesepayments are for intangible property, with-holding on purchases in stock and bondmarkets is not practicable given the func-tioning of the investment markets in whichbuyers and sellers are paired on a virtuallyanonymous basis. However, a governmententity’s payment of investment advisoryfees to investment advisors (including apayment from the government entity’saccount) is a payment for services subjectto section 3402(t) withholding. In con-trast, investment advisory fees paid, forexample, by a mutual fund in which a gov-ernment entity owns shares are not subjectto section 3402(t) withholding, since thesepayments are not made by the governmententity.

IV. Application of Section 3402(t) toPassthrough Entities

The final regulations generally adoptthe same basic rules as the proposed regu-lations on applying section 3402(t) whereeither the payor or the payee is a part-nership or S corporation (a passthroughentity). Payments from a passthroughentity generally are not subject to sec-tion 3402(t) withholding unless 80 per-cent or more of the passthrough entity isowned in the aggregate by governmententities required to withhold under sec-tion 3402(t)(1). Similarly, payments toa passthrough entity generally are sub-ject to section 3402(t) withholding unless80 percent or more of the passthroughentity is owned in the aggregate by per-sons described in section 3402(t)(2)(E)(government entities required to withholdunder section 3402(t)(1), tax-exempt enti-ties, and foreign governments) and Indiantribal governments. Expanding on theexceptions in the proposed regulations,

the final regulations additionally providethat certain payments to a partnership thatis 80 percent or more owned by foreigncorporations or nonresident alien indi-viduals are not subject to section 3402(t)withholding. This exception does not ap-ply to S corporations because nonresidentalien individuals and foreign corporationsare not permissible shareholders of anS corporation under section 1361(b)(1).The regulations also provide that, as ageneral rule, whether a passthrough entityis subject to section 3402(t) is determinedon the first day of the passthrough entity’staxable year. However, any manipulationof the ownership percentage with intent toavoid application of section 3402(t) willbe recharacterized as appropriate to reflectthe actual ownership percentage. Becausethe government entity is responsible forwithholding and may not have sufficientinformation regarding the payee’sownership structure, the final regulationsprovide that this rule applies only ifthe government entity knew or shouldhave known that the payee’s ownershippercentage had been manipulated withintent to avoid application of section3402(t).

Commenters requested that paymentsto all passthrough entities be exceptedfrom section 3402(t) withholding. Thefinal regulations do not adopt this sug-gestion. A passthrough entity exemptionwould create opportunities for payeesto circumvent section 3402(t) by usingpassthrough entities to receive govern-ment payments.

V. Deposits and Reporting of AmountsWithheld Under Section 3402(t)

The final regulations adopt the samereporting and payment rules for section3402(t) withholding purposes as the pro-posed regulations. Final regulations undersection 6011 provide that the payor re-quired to withhold under section 3402(t)must file Form 945, “Annual Return ofWithheld Federal Income Tax,” report-ing the amounts withheld. Final regula-tions under section 6302 provide that theamounts withheld under section 3402(t)must be deposited and reported in thesame manner as other nonpayroll withheldamounts, such as withholding on gamblingwinnings and pensions. Pursuant to exist-ing regulations, these amounts are treated

as if they were employment taxes for pur-poses of the deposit rules, but are subjectto special rules for determining the payor’sdeposit schedule. See §31.6302–4. Ad-ditionally, final regulations under section6051 provide that payors required to with-hold amounts under section 3402(t) mustfile information returns and furnish payeestatements on Form 1099–MISC, “Miscel-laneous Income” (or any successor form),reporting such payments and tax withheld.Because this reporting is pursuant to regu-lations under section 6051, the exceptionsprovided in the regulations under section6041 relating to Form 1099 do not apply.

VI. Crediting of Amounts Withheld

A. Credit against income tax

Commenters requested that the regula-tions permit fiscal year taxpayers to creditamounts withheld against their income taxliability for the fiscal year in which thetax is withheld. The final regulations donot adopt this suggestion because it is in-consistent with the statute. Section 31governs the taxable year against which ataxpayer may credit income tax. Section31(a)(1) provides that “[t]he amount with-held as tax under chapter 24 shall be al-lowed to the recipient of the income as acredit against the tax imposed by this sub-title.” Chapter 24 includes section 3402(t),and section 31(a)(1) is in subtitle A, in-come taxes. Thus, by its terms, section31(a)(1) applies to persons who have hadincome tax withheld from a payment pur-suant to section 3402(t). Section 31(a)(2)provides the general rule on the timing ofthe allowance of the credit allowed undersection 31(a)(1): “The amount so withheldduring any calendar year shall be allowedas a credit for the taxable year beginning insuch calendar year. If more than one tax-able year begins in a calendar year, suchamount shall be allowed as a credit for thelast taxable year so beginning.” Thus, ab-sent a special rule, section 31(a)(2) gener-ally applies for purposes of withholdingsrequired under chapter 24, which includessection 3402(t).

Section 31(c) provides a special rulesolely for backup withholding. Under sec-tion 31(c), any credit allowed by section31(a) for backup withholding under sec-tion 3406 must be allowed for the taxableyear of the recipient of the income in which

June 6, 2011 852 2011–23 I.R.B.

the income is received. Section 31(c) islimited by its terms to section 3406 with-holding only, and thus does not apply tosection 3402(t) withholding.

Practical considerations also supportthe section 31(a)(2) crediting rule. Tax-payers generally will have received Forms1099–MISC reporting the withholdingprior to filing income tax returns creditingthe income tax withheld, promoting accu-racy in return filing.

B. Credit against estimated income taxliability

Commenters requested that taxpay-ers be permitted to credit the income taxwithheld against the estimated tax liabil-ity for the specific tax quarter in whichthe income tax is withheld. However, theCode specifically provides that creditingfor estimated tax purposes occurs in thetaxable year in which the tax withheldmay be taken as a credit against incometax liability. See sections 6654(g)(1) and6655(g)(1)(B). Thus, the final regulationsdo not adopt this comment.

C. Credit against employment taxes orother taxes

Many commenters requested that tax-payers be permitted to credit their section3402(t) withholding against employmenttaxes on wages or other taxes. The finalregulations do not adopt this suggestion.Section 3402(t)(3) directs that creditingoccur under the rules in section 31(a),which provides for crediting against in-come tax. As noted in the preamble tothe proposed regulations, if a statute per-mits income tax payments to be treated asemployment tax payments, or vice versa,it makes specific provision for that treat-ment. See, for example, section 3510(b)(providing that domestic employmenttaxes are treated as taxes due for estimatedtax purposes under section 6654); andsection 31(b) (providing for the creditingagainst income tax of the special refund ofsocial security tax under section 6413(c)applicable when an employee receiveswages from two or more employers inexcess of the social security contributionand benefit base). The Code does notprovide for section 3402(t) withholding tobe treated as payments of the taxpayer’semployment tax liability. In addition,payments of income tax and employment

taxes occur under different processes, us-ing different forms, and are subject todifferent procedures for corrections of un-derpayments and overpayments, as wellas different audit procedures and potentialpenalties. Therefore, the crediting of anamount withheld for income tax against anemployment tax obligation is not adminis-tratively feasible.

D. Credits for amounts withheld onpayments to passthrough entities

Amounts withheld on payments topassthrough entities are subject to the samecrediting rules as payments made to otherentities. Thus, a passthrough entity with afiscal year may only claim the credit for itsfiscal year beginning in the calendar yearduring which the amount was withheldpursuant to section 31(a)(2). The timingof when the owners of the passthroughentity take into account the credit wouldthen be determined under the rules appli-cable to that type of passthrough entity (forexample, section 706 for a partnership).Commenters specifically asked how thecredit would be allocated by a partnership.This allocation is governed by the rules setforth in §1.704–1(b)(4)(ii), with appropri-ate adjustments under section 705.

VII. Correction of Errors and Liability ofGovernment Entity

Commenters requested clarificationthat a government entity is liable for taxthat the entity was required to withholdunder section 3402(t) but did not withhold,unless the entity can demonstrate that thepayee has paid its income tax liability.Commenters also requested clarificationof the rules applicable to corrections ofoverwithholding and underwithholding,and guidance on the effect of repayments,underpayments, or overpayments for ser-vices or property on the determination ofsection 3402(t) liability.

A. Corrections of overwithholding andunderwithholding

Section 3402(t)(3) provides that, forpurposes of sections 3403 and 3404 andfor purposes of so much of subtitle F (ex-cept section 7205) as relates to Chapter24, Collection of Income Tax at Source,payments to any person for property orservices that are subject to withholding

are treated as if the payments were wagespaid by an employer to an employee. Ifa government entity fails to withhold thetax imposed by section 3402(t), section3403 applies to determine the governmententity’s liability.

Section 3403 provides that the em-ployer is liable for the payment of taxrequired to be deducted and withheld un-der Chapter 24, and is not liable to anyperson for the amount of that payment.Section 31.3403–1 of the Employment TaxRegulations provides that every employerrequired to deduct and withhold the taxunder section 3402 from an employee’swages is liable for the payment of the taxwhether or not the employer collects thetax from the employee. If the employerfails to withhold all or part of the amountrequired to be withheld, and thereafter theemployee pays the tax, section 3402(d)provides that the tax will not be collectedfrom the employer. Thus, for purposesof section 3402(t), the government entitygenerally will be liable if it fails to with-hold unless under section 3402(d) it candemonstrate that the contractor reportedthe amount subject to section 3402(t)withholding on its return and paid the in-come tax due (which may include paymentthrough an amended return or settlementof an audit).

Pursuant to section 3402(t)(3), therules for adjustments of overpaymentsor underpayments of income tax with-holding on wages also apply to sec-tion 3402(t) withholding. See sec-tion 6413, §31.6413(a)–2(c)(1), and§31.6413(a)–1(b)(1)(i) (repayments andreimbursements to employees of overwith-holding, and correction of overpaymentsof income tax withholding); section 6205and §31.6205–1 (corrections of under-payments of income tax withholding). Ifan error is discovered before a return isfiled, the payor must report on the returnand pay to the IRS the correct amount ofincome tax withholding. Corrections ofoverwithholding or underwithholding ofincome tax before the return is filed are notadjustments, and a payor that discovers anerror before a return is filed but does notreport and pay the correct amount of taxto the IRS may not later correct the errorthrough an adjustment.

For purposes of correcting overpay-ments of income tax withholding, a payormust repay or reimburse the overwithheld

2011–23 I.R.B. 853 June 6, 2011

income tax to the payee in the same calen-dar year as the original payment in order tomake an adjustment. The payor can thenmake that adjustment on its return at anytime before the period of limitations oncredit or refund under section 6511 expiresfor that calendar year. If the amount of theoverwithheld income tax is not repaid orreimbursed to the payee in the same calen-dar year as the original payment, there isno overpayment to be adjusted; rather theamount withheld will be credited to thepayee and subject to a potential tax refund.However, an adjustment may be made tocorrect an administrative error (that is, aninaccurate reporting of the amount actu-ally withheld).

For purposes of correcting underpay-ments of income tax withholding, an ad-justment can generally only be made inthe same calendar year as the original pay-ment. An exception to this general rule ap-plies to corrections for administrative er-rors (that is, an inaccurate reporting of theamount actually withheld).

Pursuant to section 3402(t)(3), the rulesfor claims for refund of income tax with-holding on wages also apply to section3402(t) withholding. See section 6414 and§31.6414–1. Section 6414 permits refundsof income tax withholding only to the ex-tent the amount of the overpayment wasnot actually deducted and withheld fromthe payee.

Amounts withheld under section3402(t) are reported on an annual Form945. Accordingly, any corrections of over-withholding or underwithholding duringthe calendar year are not adjustments; thegovernment entity must report and pay tothe IRS the correct amount of tax on Form945. For example, if a government entitypays an amount subject to section 3402(t)withholding in error to a contractor andthe contractor repays the net amount to thegovernment entity within the same calen-dar year, the government entity should notreport the amount and the related with-holding on the annual Form 945 (that is,the government entity should report andpay the correct amount of tax on Form945). Because the correction is madebefore the return is filed, the correctiondoes not constitute an adjustment. Thegovernment entity may reduce its depositof other withholding reportable on Form945 for that calendar year to account for

the deposit of section 3402(t) withholdingon the amount repaid by the contractor.If the contractor repays the governmententity an amount in a later calendar year,no adjustment can be made because anadjustment is permitted only in the caseof an administrative error (an inaccuratereporting of the amount actually withheld)discovered after the filing of the Form 945.The contractor already received a creditfor the amount withheld under the generalrules for crediting income tax withholding.

Similarly, the government entity cancollect underwithholding only during thesame calendar year as the payment (exceptcorrections made in the case of admin-istrative errors). If the underpayment isdiscovered in a later calendar year, thegovernment entity is liable under section3403 for any amount that should have beenwithheld, unless under section 3402(d)it can demonstrate that the contractorreported the amount subject to section3402(t) withholding on its return and paidthe income tax due (which may includepayment through an amended return orsettlement of an audit). The contractoris liable for any income tax due on anypayment subject to withholding regardlessof whether the government entity actuallywithholds any amount from the payment.

B. Application of the $10,000 threshold tocorrections of erroneous payments

The final regulations provide that the$10,000 payment threshold applies to theactual payment made by the governmententity, even if the amount of the actualpayment is incorrect. For example, if anexcessive payment is subject to section3402(t) withholding, the subsequent re-payment of all or a portion of the ini-tial payment does not affect whether the$10,000 threshold was met with respect tothe initial payment. Any correction of in-come tax withholding applies only to thewithholding on the amount repaid and notto the remaining portion of the originalpayment, even if that remaining portion isless than $10,000. Similarly, if the pay-ment was less than $10,000 due to an insuf-ficient payment to the payee, the $10,000threshold applies separately to the initialpayment and the subsequent payment (tomake up for the insufficient payment) un-less the anti-abuse rule applies (that is,unless the payment was divided into two

or more payments primarily to avoid the$10,000 payment threshold).

VIII. Extension of Applicability Date andTransition Relief for Existing Contracts

Numerous commenters indicated thatan extended period of time following theissuance of final regulations would be nec-essary for government entities to adopt thesystems and processes necessary to com-ply with the §3402(t) withholding and re-lated reporting requirements. Noting thenecessity to formulate government acqui-sition rules that are consistent with the fi-nal regulations, as well as the infrastruc-ture needed to apply those rules, somecommenters stated that government enti-ties would need at least 18 months from theissuance of final regulations under section3402(t) to be able to comply.

In response to these practical consid-erations, the final regulations provide thatthe withholding and reporting require-ments under these regulations apply topayments made after December 31, 2012,subject to an existing contract exception.Thus, under the regulations, paymentsmade under written binding contracts ineffect on December 31, 2012, are notsubject to section 3402(t) withholding,while payments made after December 31,2012, under contracts entered into afterDecember 31, 2012, are subject to section3402(t) withholding unless otherwise ex-cepted. In addition, if an existing contractis materially modified after December 31,2012, the contract ceases to be an existingcontract and payments under the contractbecome subject to section 3402(t) with-holding. With respect to payments beforeJanuary 1, 2013, government entities arenot required to apply section 3402(t) with-holding and the related reporting, andaccordingly will not be subject to any lia-bility, penalties or interest for failure to doso.

Commenters requested that the mate-rial modification rule be removed becauseof the difficulty in determining whether itapplies. Commenters anticipated disputesbetween parties about what constitutes amaterial modification and questioned howsuch disputes would be resolved. Cer-tain commenters also requested that a merecontract renewal not be considered a mate-rial modification. Some commenters sug-gested that, in lieu of a material modifica-

June 6, 2011 854 2011–23 I.R.B.

tion rule, withholding should apply to allcontracts after a certain effective date, in-cluding those that have not been materiallymodified.

In response to these comments, at thesame time that these final regulations arebeing issued, the IRS and the TreasuryDepartment are proposing regulationsto provide that the exception for pay-ments made under existing contracts willnot apply to payments made on or afterJanuary 1, 2014. See REG–151687–10.Thus, under these proposed regulations,payments on or after January 1, 2014,under all contracts (existing and new)would be subject to withholding undersection 3402(t) unless an exceptionapplies.

The final regulations retain the mate-rial modification rule but provide that amere contract renewal will generally notbe considered a material modification. Forthis purpose, a modification is not a ma-terial modification unless it materially af-fects either the payment terms of the con-tract or the services or property to be pro-vided under the contract. Thus, for ex-ample, a change order (meaning a changein the specifications of a contract that thegovernment entity is authorized to makeunder the contract without the contractor’sconsent) generally would not be a mate-rial modification unless the change mate-rially affected the price or other paymentterms, or the services or property to be pro-vided. The final regulations also providethat modifying a contract to conform tochanges in the applicable law is not a ma-terial modification.

Several commenters requested guid-ance on the application of section 3402(t)withholding to payments under Medicareprovider agreements. Under the final reg-ulations, Medicare provider agreementsin effect as of December 31, 2012, areexisting contracts for purposes of the ex-isting contract exception unless materiallymodified after December 31, 2012. Ad-ditionally, renewals of Medicare provideragreements will not be treated as materialmodifications to the extent the agreementis modified to conform to federal law.As with other existing contracts, the pro-posed regulations issued with these finalregulations would provide that paymentsmade by government entities on or afterJanuary 1, 2014, under both existing and

new Medicare provider agreements willbe subject to section 3402(t) withholding.

IX. Transition Rule for Interest andPenalties on Underpayments

Consistent with the proposed regula-tions, the final regulations provide a transi-tion rule for payments for property and ser-vices made before January 1, 2014. Underthis rule, a government entity will not be li-able for interest and penalties for failure towithhold on payments for property or ser-vices made before January 1, 2014, if theentity made a good faith effort to complywith section 3402(t). However, this ruledoes not relieve the entity from liability forthe amount of tax required to be withheldunder section 3402(t).

Effective/Applicability Date

These regulations apply to paymentsmade after December 31, 2012. In addi-tion, the regulations will not apply to pay-ments under a contract existing on Decem-ber 31, 2012, unless the contract is materi-ally modified after December 31, 2012.

Special Analyses

It has been determined that this Trea-sury decision is not a significant regula-tory action as defined in Executive Order12866. Therefore, a regulatory assessmentis not required. It also has been determinedthat section 553(b) of the AdministrativeProcedure Act (5 U.S.C. chapter 5) doesnot apply to this regulation, and becausethe regulation does not impose a collectionof information on small entities, the Regu-latory Flexibility Act (5 U.S.C. chapter 6)does not apply. Pursuant to section 7805(f)of the Internal Revenue Code, the notice ofproposed rulemaking preceding this regu-lation was submitted to the Chief Counselfor Advocacy of the Small Business Ad-ministration for comment on its impact onsmall business.


The principal author of these final reg-ulations is A. G. Kelley, Office of the Di-vision Counsel/Associate Chief Counsel(Tax Exempt and Government Entities).However, other personnel from the IRSand the Treasury Department participatedin their development.

* * * * *

Adoption of Amendments to theRegulations

Accordingly, 26 CFR part 31 isamended as follows:

PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOME TAXAT SOURCE


Authority: 26 U.S.C. 7805 * * *Par. 2. Sections 31.3402(t)–0,

31.3402(t)–1, 31.3402(t)–2, 31.3402(t)–3,31.3402(t)–4, 31.3402(t)–5, 31.3402(t)–6,and 31.3402(t)–7 are added to read as fol-lows:

§31.3402(t)–0 Outline of the Governmentwithholding regulations.

This section lists paragraphs containedin §§31.3402(t)–1 through 31.3402(t)–7.

§31.3402(t)–1 Withholding requirementon certain payments made by governmententities.

(a) In general.(b) Special rules.(c) Deposit and reporting requirements.(d) Effective/applicability date.

§31.3402(t)–2 Government entitiesrequired to withhold under section3402(t).

(a) In general.(b) Government of the United States.(c) State.(d) Political Subdivision.(e) [Reserved].(f) Possessions of the United States.(g) Passthrough entities.(h) Small entity exception.(i) Effective/applicability date.

§31.3402(t)–3 Payments subject towithholding.

(a) In general.(b) Payment threshold of $10,000.(c) No withholding on successive pay-

ments.(d) Payments made through a payment

administrator or to a contractor.(e) [Reserved].

2011–23 I.R.B. 855 June 6, 2011

(f) Examples.(g) Effective/applicability date.

§31.3402(t)–4 Certain payments exceptedfrom withholding.

(a) Payments subject to withholding un-der chapter 3 or chapter 24 (other than sec-tion 3406).

(b) Payments subject to withholding un-der section 3406 with backup withholdingdeducted.

(c) [Reserved].(d) Payments for real property.(e) Payments to government entities,

tax-exempt organizations, and foreigngovernments.

(f) Payments made pursuant to a classi-fied or confidential contract.

(g) Exception for political subdivisionsor instrumentalities thereof making lessthan $100,000,000 of payments for prop-erty or services annually.

(h) Payments made in connection witha public assistance or public welfare pro-gram.

(i) Payments made to any governmentemployee with respect to his or her ser-vices.

(j) Payments received by nonresidentalien individuals and foreign corporations.

(k) Payments to Indian tribal govern-ments.

(l) Payments in emergency or disastersituations.

(m) Grants.(n) Sales tax, excise tax, value-added

tax, and other taxes.(o) Loan guarantees.(p) Debt.(q) Investment securities.(r) Partially exempt payments.(s) Determination of eligibility for ex-

emption.(t) Withholding relief for 2012.(u) Effective/applicability date.

§31.3402(t)–5 Application to passthroughentities.

(a) In general.(b) Definitions.(c) Payments from a passthrough entity.(d) Payments to a passthrough entity.(e) Effective/applicability date.

§31.3402(t)–6 Crediting of tax withheldunder section 3402(t).

(a) Crediting against income tax liabil-ity only.

(b) Taxable year of credit.(c) Estimated tax.(d) Effective/applicability date.

§31.3402(t)–7 Transition relief frominterest and penalties.

(a) Good faith exception for interest andpenalties on payments before January 1,2014.

(b) Effective/applicability date.


(a) In general. Except as provided in§§31.3402(t)–3(b) and 31.3402(t)–4, theGovernment of the United States, everyState, every political subdivision thereof,and every instrumentality of the forego-ing (including multi-State agencies) mak-ing any payment to any person providingany property or services must deduct andwithhold from the payment a tax in anamount equal to 3 percent of such pay-ment.

(b) Special rules. See §31.3402(t)–2 forgovernment entities required to withholdunder this section, §31.3402(t)–3 for whatconstitutes a payment to a person for prop-erty or services and when such payment isdeemed to occur for purposes of this sec-tion, and §31.3402(t)–4 for payments thatare excepted from withholding under thissection.

(c) Deposit and reporting requirements.See §31.6302–4 for deposit requirementswith respect to withholding under sec-tion 3402(t). See §§31.6011(a)–4(b) and31.6051–5 for the reporting requirementswith respect to withholding under section3402(t).

(d) Effective/applicability date. (1) Ex-cept as provided in paragraph (d)(2) ofthis section, this section applies to pay-ments by the Government of the UnitedStates, every State, every political subdivi-sion thereof, and every instrumentality ofthe foregoing (including multi-State agen-cies) to any person providing property orservices made after December 31, 2012.

(2) Payments made under a writtenbinding contract that was in effect on

December 31, 2012, are not subject tothe withholding requirements of this sec-tion. The preceding sentence does notapply to payments made under any con-tract that is materially modified afterDecember 31, 2012. For this purpose,a material modification includes onlya modification that materially affectsthe property or services to be providedunder the contract, the terms of paymentfor the property or services under thecontract, or the amount payable for theproperty or services under the contract.Notwithstanding the foregoing, a materialmodification does not include a mererenewal of a contract that does nototherwise materially affect the property orservices to be provided under the contract,the terms of payment for the property orservices under the contract, or the amountpayable for the property or services underthe contract. A material modificationalso does not include a modification tothe contract to the extent required byapplicable Federal, State or local law.

§31.3402(t)–2 Government entitiesrequired to withhold under section3402(t).

(a) In general. The requirementto withhold under section 3402(t) and§31.3402(t)–1(a) applies to the Govern-ment of the United States (see paragraph(b) of this section) and every State (seeparagraph (c) of this section), as well asinstrumentalities of the foregoing. Therequirement also applies to political sub-divisions of every State (see paragraph (d)of this section) and their instrumentali-ties, unless the small entity exception of§31.3402(t)–4(g) applies.

(b) Government of the United States.The Government of the United States in-cludes the legislative branch, the judicialbranch, and the executive branch, and allcomponents of the United States Govern-ment. Thus, departments and agencies areincluded within the definition of UnitedStates Government.

(c) State. The term State includes theDistrict of Columbia. However, an In-dian tribal government is not considered aState for purposes of section 3402(t) and§31.3402(t)–1(a). See section 7871(a).

(d) Political subdivision. The term po-litical subdivision for purposes of section3402(t) and §31.3402(t)–1(a) is defined as

June 6, 2011 856 2011–23 I.R.B.

a political subdivision within the meaningof §1.103–1(b) of this chapter, except thata subdivision of an Indian tribal govern-ment is not considered a political subdivi-sion. See section 7871(a) and (d).

(e) [Reserved].(f) Possessions of the United States.

For purposes of section 3402(t) and§31.3402(t)–1(a), the government of apossession or territory of the United Statesis not treated as a government entity sub-ject to the withholding requirements ofsection 3402(t)(1).

(g) Passthrough entities. See§31.3402(t)–5(c) for the treatment of pay-ments from certain passthrough entities assubject to the withholding requirements of§31.3402(t)–1.

(h) Small entity exception. See§31.3402(t)–4(g) for the exceptionfrom the withholding requirements of§31.3402(t)–1 for political subdivisionsand instrumentalities thereof making lessthan $100,000,000 of payments for prop-erty or services annually.

(i) Effective/applicability date. Thissection applies to amounts paid on or afterJanuary 1, 2013.

§31.3402(t)–3 Payments subject towithholding.

(a) In general. A payment is sub-ject to withholding for purposes of§§31.3402(t)–1 through 31.3402(t)–7when paid by a government entity to anyperson, as defined in §301.7701–6(a)of this chapter, for property or services.If, however, the government entity usesa payment administrator to pay a per-son for property or services, paymentoccurs when the payment administratorpays such person. The government entitysubject to the withholding requirementsof §31.3402(t)–1 is liable for the with-holding required and responsible for allrelated reporting regardless of whether thegovernment entity or its payment admin-istrator makes the payment for property orservices. For this purpose, if a governmententity makes an advance payment, interimpayment, financing payment, or similarpayment, the amount is treated as paidby the government entity at the time thefunds are disbursed, regardless of whetherthe government entity has received oraccepted the property or services at thattime.

(b) Payment threshold of $10,000—(1)In general. The term payment thresh-old means an amount equal to $10,000.The withholding requirements of§31.3402(t)–1 will not apply to any pay-ment that is less than the payment thresh-old. Whether a payment is equal to or inexcess of the payment threshold is deter-mined when the payment is made. Thus,the payment threshold applies to the actualpayment even if the amount of the actualpayment is incorrect (except to the extentthe anti-abuse rule in paragraph (b)(3) ofthis section applies). A later determinationthat the amount of the payment was inerror does not affect the application of thepayment threshold (except to the extentthe anti-abuse rule in paragraph (b)(3) ofthis section applies), so that the paymentthreshold applies to the erroneous pay-ment when made, and separately to anyadditional payment intended to correct anerroneous underpayment.

(2) Payment threshold applied per pay-ment. If a government entity makes a sin-gle payment to a person for property or ser-vices combining charges for more than onetransaction with the person, the determina-tion of whether the payment threshold pro-vided by paragraph (b)(1) of this section ismet is based on the amount of the singlepayment, rather than the amount attribut-able to each separate transaction. Thus, ifa government entity makes a single pay-ment of $10,000 or more to a person, thegovernment entity is required to withholdon the payment, even if the payment is formore than one property or service. Thesame rule applies if a government entityenters into multiple transactions with a sin-gle person, each of which would result in apayment of less than $10,000 if paid sepa-rately, but elects to make a single paymentcovering all the transactions such that theaggregated payment is $10,000 or more.Under these circumstances, the govern-ment entity is required to withhold on theaggregated payment.

(3) Anti-abuse rule. If a governmententity or payment administrator divides apayment or payments to any person forproperty or services into two or more pay-ments (or permits a person providing prop-erty or services to divide a request forpayment into two or more requests forpayments) primarily to avoid the $10,000payment threshold provided in paragraph(b)(1) of this section on one or more of

these payments, the divided payments willbe treated as a single payment made onthe date that the first of these payments ismade. This rule will not apply to a govern-ment entity or payment administrator thatmakes a payment in accordance with thecontractual terms, including any requestsfor payments submitted by the person pro-viding property or services in compliancewith the contractual terms, unless it knows,or has reason to know, that the contractualterms regarding payments were adopted,or the person providing property or ser-vices implemented such contractual terms,with the primary purpose of avoiding the$10,000 payment threshold. In determin-ing whether this paragraph (b)(3) applies,a significant factor is whether the govern-ment entity or payment administrator hasexhibited a pattern or practice of dividingpayments to avoid the $10,000 paymentthreshold.

(4) Withholding on excepted payments.A government entity and a person pro-viding property or services to that gov-ernment entity may agree in writing thatthe government entity will or may applysection 3402(t) withholding to paymentsnot subject to section 3402(t) withhold-ing, or an identified portion of paymentsnot subject to section 3402(t) withholding(for example, only such payments madefrom a specified agency of the govern-ment entity), including payments belowthe payment threshold provided in para-graph (b)(1) of this section. This para-graph (b)(4) does not apply to governmententity payments that are subject to sec-tion 3402(t) withholding notwithstandinga contractual provision between the par-ties.

(c) No withholding on successive pay-ments. If a government entity or its pay-ment administrator makes a payment thatis subject to the withholding requirementsof §31.3402(t)–1 to a person, no subse-quent transfer of cash or property from thatpayment by such person to another personis treated as a payment subject to with-holding for purposes of §§31.3402(t)–1through 31.3402(t)–7.

(d) Payments made through a paymentadministrator or to a contractor—(1) Def-inition. The following rules apply for pur-poses of this section:

(i) A payment administrator is any per-son that acts with respect to a paymentsolely as an agent for a government en-

2011–23 I.R.B. 857 June 6, 2011

tity by making the payment on behalf ofthe government entity to a person provid-ing property or services to, or on behalf of,the government entity.

(ii) A payment administrator is treatedas a person providing property or servicesfor purposes of the withholding require-ments of section 3402(t) to the extent it re-ceives a fee from the government entity forits services as a payment administrator forthe government entity.

(2) Payments to a contractor. If a per-son provides property or services to a gov-ernment entity under a contract and is nota payment administrator, the person, whois in privity with the government entity,is treated as the person providing prop-erty or services subject to withholding un-der section 3402(t) for all payments re-ceived from the government entity, regard-less of whether some payments the personreceives relate to invoices for property orservices provided by subcontractors.

(3) Application of payment threshold.Where a government entity uses a paymentadministrator to make a payment, the de-termination of whether the payment meetsthe payment threshold is made at the timethe payment administrator makes the pay-ment to the person providing property orservices. If a government entity makes onetransfer of funds to a payment administra-tor that is composed of a fee to compen-sate the payment administrator for its ser-vices and other funds that are to be paidto persons providing property or services,the determination of whether the paymentthreshold is met on the portion that is thefee is made at the time of the transfer of thefunds to the payment administrator.

(e) [Reserved].(f) Examples. This section is illustrated

by the following examples:Example 1. (i) Prime contractor X has a con-

tract with a government entity to provide servicesand property to the government entity. X contractswith numerous subcontractors to provide services andproperty in connection with the contract. While theengagement of any particular subcontractor is subjectto approval by the government entity, the subcontrac-tors are not parties to the contract between X and thegovernment entity, and the government entity is nota party to the contracts between X and subcontrac-tors. Under its contract with the government entity,X submits an invoice for $48,000 for providing ser-vices and property to the government entity, includ-ing charges for services and property provided by twosubcontractors, M and N. The invoice reflects chargesof $16,000 for M and $2,000 for N. The governmententity pays X the entire amount of the invoice in one

payment of $48,000. X pays M for M’s billed portionof the invoice in a single payment of $16,000, and Xpays N for N’s billed portion of the invoice in a singlepayment of $2,000.

(ii) Under the facts of this Example 1, X is the per-son providing property or services to, or for the bene-fit of, the government entity with respect to the entireamount of the $48,000 payment under the invoice,including the charges for services or property pro-vided by its subcontractors M and N. X is not a pay-ment administrator (as defined in paragraph (d)(1)(i)of this section) because X is not making paymentssolely as an agent of the government entity to per-sons providing property or services. Instead, X makespayments to subcontractors M and N pursuant to X’sseparate contracts with these subcontractors to whichthe government entity is not a party. Therefore, un-der paragraphs (a) and (d)(2) of this section, the en-tire amount of the $48,000 payment to X under theinvoice, including the charges for services and prop-erty provided by its subcontractors M and N, is thepayment subject to withholding for purposes of sec-tion 3402(t).

(iii) Under paragraph (b)(1) of this section, thedetermination whether the payment meets the pay-ment threshold is based on the entire amount of thepayment from the government entity to X. Withhold-ing under section 3402(t) applies to the governmententity’s $48,000 payment to X because the paymentmeets the payment threshold and is not otherwise ex-cepted from section 3402(t) withholding. Thus, thepayment is subject to withholding of 3 percent, or$1440.

(iv) Payments made by X to the subcontractors,M and N, are not payments by the government entityor its payment administrator. Thus, X’s $16,000 pay-ment to M and X’s $2,000 payment to N for servicesor property under the contract are not subject to with-holding under section 3402(t). See paragraphs (c) and(d)(2) of this section.

(v) The government entity is liable for the $1440withholding required under section 3402(t) on itspayment to X and is responsible for the related report-ing required under §31.6051–5. See paragraph (a) ofthis section. X is the person receiving the paymentfor purposes of reporting under §31.6051–5. Thus,the government entity is responsible for furnishing Xwith a Form 1099–MISC, “Miscellaneous Income”(or successor form), including the entire amount ofthe payment ($48,000) and the entire amount of thewithholding ($1440) and filing a Form 1099–MISCwith the Internal Revenue Service.

Example 2. (i) Z has a contract with a govern-ment entity to make payments as an agent of the gov-ernment entity to persons providing services or prop-erty to, or on behalf of, the government entity. Theonly services Z provides under the contract are its ser-vices in acting as an agent for the government entityin making payments to persons providing property orservices to, or on behalf of, the government. The gov-ernment entity transfers funds of $71,000 to Z, whichincludes a fee of $1,000 to Z for its services as anagent under the contract. Z then makes payments ofthe $70,000 remainder of the funds to persons provid-ing property or services to, or on behalf of, the gov-ernment entity, including a single payment of $18,000to P and a single payment of $7,000 to R.

(ii) Under the facts of this Example 2, Z is a pay-ment administrator (as defined in paragraph (d)(1)(i)

of this section) because Z makes payments solely asan agent for the government entity to persons provid-ing property or services to, or on behalf of, the gov-ernment entity. Under paragraphs (a) and (d) of thissection, Z is not treated as a person providing prop-erty or services with respect to $70,000 of the transferof funds (the amount of the funds to be paid to per-sons providing property or services to, or on behalfof, the government entity). Because Z is not treatedas a person providing property or services with re-spect to this $70,000 portion of the funds, this portionof the transfer of funds by the government entity toZ is not subject to withholding under section 3402(t)when transferred to Z.

(iii) Under paragraph (d)(1)(ii) of this section, thepayment administrator is treated as a person provid-ing property or services with respect to the portionof the $71,000 fund transfer that is a fee for its ser-vices as a payment administrator, or $1,000. Underparagraph (d)(3) of this section, the determination ofwhether the payment threshold is met with respect tothe fee portion of the payment from the governmententity to Z at the time of the payment from the gov-ernment entity to Z is made. Because the $1,000 feeportion of the payment falls beneath the $10,000 pay-ment threshold, withholding under section 3402(t) isnot required with respect to that portion of the pay-ment.

(iv) P and R are persons providing services orproperty to, or on behalf of, the government entitywith respect to the payments they receive from Z.

(v) Withholding is required under section 3402(t)on the payment by Z, a payment administrator, to aperson providing property or services to, or on be-half of, a government entity provided the paymentmeets the payment threshold and is not otherwise ex-cepted. Under paragraph (d)(3) of this section, the de-termination of whether the payment threshold is meton the payment Z makes to a person providing prop-erty or services is made at the time Z pays the per-son providing property or services. Under the factsof this Example 2, Z’s payment to P of $18,000 meetsthe payment threshold, and therefore withholding of$540 under section 3402(t) applies. Z’s payment to Rof $7,000 does not meet the payment threshold, andtherefore, no withholding under section 3402(t) is re-quired.

(vi) The government entity, not Z, is liable forany withholding required under section 3402(t) on thepayments from Z to persons providing property or ser-vices. Also, the government entity, not Z, is respon-sible for any reporting required under §31.6051–5 onthe payment from Z to persons providing property orservices. See paragraph (a) of this section. Each per-son providing property or services for which with-holding is required, not Z, is the person receiving thepayment for purposes of the reporting required under§31.6051–5 if withholding under section 3402(t) ap-plies. Thus, the government entity is responsible forfurnishing P Form 1099–MISC reflecting the amountof the payment from Z to P of $18,000 and the amountof withholding of $540 and filing a Form 1099–MISCwith the Internal Revenue Service.

Example 3. (i) On March 1, 2013, a governmententity makes a payment of $12,000 to Y for provid-ing property or services. The payment for propertyor services is not excepted from withholding under§31.3402(t)–4. On March 20, 2013, it is determinedthat the payment should have been $9,000, and there-

June 6, 2011 858 2011–23 I.R.B.

fore, Y owes the government entity $3,000 to repaythe excess payment.

(ii) The facts are the same as in paragraph (i) ofthis Example 3, except that, in addition, on April 30,2013, the government entity makes a net payment of$6,000 to Y for providing property or services, whichis based on the payment of a bill for property or ser-vices equal to $11,000, which is offset by the repay-ment of the $3,000 debt that Y owes with respect tothe erroneous March 1, 2013, payment, and the re-payment of a $2,000 unrelated debt to the FederalGovernment. No exception from withholding under§31.3402(t)–4 applies to the $11,000 amount.

(iii) The facts are the same as in paragraph (ii) ofthis Example 3, except that, in addition, on May 31,2013, the government entity makes a single paymentof $14,000 to Y that consists of a $9,000 portion thatis subject to section 3402(t) withholding (without re-gard to the payment threshold) and a $5,000 portionthat is excepted from section 3402(t) withholding un-der §31.3402(t)–4.

(iv) Under the facts of paragraph (i) of this Ex-ample 3, the payment on March 1, 2013, is subject towithholding under section 3402(t) because it meetsthe payment threshold under paragraph (d) of thissection. The government entity is liable for withhold-ing section 3402(t) tax on the payment equal to 3% of$12,000, or $360. The subsequent determination onMarch 20, 2013, that an incorrect amount was paidto Y does not affect the application of the $10,000payment threshold to the payment on March 1, 2013.If there were no additional payments or repaymentsbetween the government entity and Y during 2013,and if the government entity correctly withheld $360under section 3402(t), the government entity wouldissue Y a 2013 Form 1099–MISC (or successor form)reporting $12,000 of payments subject to section3402(t) withholding and $360 of withholding.

(v) Under the facts of paragraph (ii) of this Exam-ple 3, the payment on April 30, 2013, is also subjectto withholding under section 3402(t). As an initialmatter, the government entity calculates its liabilityfor withholding section 3402(t) on the payment equalto 3% of $11,000, or $330, because the amount of thepayment for purposes of section 3402(t) and the pay-ment threshold is not reduced by the amount of offsetsfor debts owed the government. Thus, the paymentexceeds the payment threshold under paragraph (d) ofthis section. However, the repayment within the samecalendar year of the $3,000 excess amount which waspaid on March 1, 2013, means that the government isentitled to correct its income tax withholding liabil-ity with respect to Y by the amount of section 3402(t)withholding paid with respect to the $3,000, or $90.Thus the net withholding amount deducted from the$6,000 net payment is $240. The offset of $2,000 forother unrelated debt owed the Federal Governmenthas no effect on section 3402(t) liability. Neither theoffset for the $3,000 repayment nor the offset for the$2,000 other debt affects the application of the pay-ment threshold to the March 1, 2013, payment or theApril 30, 2013, payment. If there were no additionalpayments or repayments between the government en-tity and Y during 2013, and if the government entitywithheld properly, the government entity would be re-quired to furnish Y a Form 1099–MISC (or successorform) reporting $20,000 of payments subject to sec-tion 3402(t) withholding ($12,000 plus $11,000 less$3,000 repayment) and $600 withholding ($360 plus

$330 less $90) and to file a Form 1099–MISC withthe Internal Revenue Service.

(vi) Under the facts of this paragraph (iii) of thisExample 3, the government entity is not requiredto withhold on the payment because only $9,000 ofthe payment is potentially subject to section 3402(t)withholding and this amount does not meet the pay-ment threshold. However, under the optional ruleof §31.3402(t)–4(r), because only a portion of thepayment is exempt from section 3402(t) withholding,the government entity may treat the entire amount ofthe payment as subject to section 3402(t) withholdingprovided the payee has agreed to this withholding.If the government entity applies the optional ruleof §31.3402(t)–4(r), the payment threshold wouldbe met and the government entity would withholdunder section 3402(t) the amount of $420, or 3%of the $14,000 payment. If the government entitytreats the entire amount of the payment as subject tosection 3402(t) withholding and withholds, the entireamount of the payment ($14,000) plus the $420withholding would be reported on Form 1099–MISC(or successor form).

(g) Effective/applicability date. Thissection applies to payments by the Govern-ment of the United States, every State, ev-ery political subdivision thereof, and everyinstrumentality of the foregoing (includingmulti-State agencies) to any person pro-viding property or services made after De-cember 31, 2012.

§31.3402(t)–4 Certain payments exceptedfrom withholding.

(a) Payments subject to withholdingunder chapter 3 or chapter 24 (otherthansection 3406)—(1) In general. Pay-ments are excepted from withholdingunder section §31.3402(t)–1(a) if they aresubject to withholding under chapter 3of the Internal Revenue Code (Code) orunder sections 3401 through 3405 (otherthan section 3402(t)).

(2) Payments subject to withholding un-der chapter 3. Payments subject to with-holding under chapter 3 of the Code in-clude those payments that are subject to,but exempt from, withholding under chap-ter 3 of the Code on the ground that thepayments are exempt from United Statesincome tax pursuant to an income tax con-vention to which the United States is aparty.

(3) Payments subject to withholding atelection of payee. For purposes of thisexception from section 3402(t), paymentsfor which the payee may elect withhold-ing are exempt from withholding under§31.3402(t)–1(a) regardless of whetherthe payee in fact makes such an election.These payments include—

(i) Unemployment compensation asdefined in section 85(b) (see section3402(p)(2));

(ii) Social security benefits as de-fined in section 86(d) (see section3402(p)(1)(C)(i));

(iii) Any payment referred to in thesecond sentence of section 451(d) that istreated as insurance proceeds, relating tocertain disaster payments received underthe Agricultural Act of 1949, as amended,or Title II of the Disaster Assistance Actof 1988 (see section 3402(p)(1)(C)(ii));

(iv) Any amount that is includible ingross income under section 77(a), relatingto amounts received as loans from theCommodity Credit Corporation that thetaxpayer has elected to treat as income(see section 3402(p)(1)(C)(iii)); and

(v) Any payment of an annuity to anindividual.

(b) Payments subject to withholding un-der section 3406 with backup withhold-ing deducted. A payment is not subjectto withholding under section 3402(t) if thepayment is subject to withholding undersection 3406, relating to backup withhold-ing, and if backup withholding is actuallybeing withheld from such payment.

(c) [Reserved].(d) Payments for real property. Pay-

ments for real property are not sub-ject to the withholding requirements of§31.3402(t)–1. For purposes of this excep-tion, the term payments for real propertyincludes the purchase and the leasing ofreal property (including payments madeby a lessee to a lessor related to the useor occupancy of the leased property andmade in accordance with the terms of theapplicable lease, but not including eithera payment for construction, or paymentto a person other than the lessor, evenif related to the use or occupancy of theleased property and required by the termsof the lease). However, payments for theconstruction of buildings or other publicworks projects, such as bridges or roads,are not payments for real property.

(e) Payments to government entities,tax-exempt organizations, and foreigngovernments—(1) Government entities.Payments are not subject to withholdingunder section 3402(t) if the paymentsare made to government entities thatare subject to the withholding require-ments of section 3402(t)(1) pursuant to§31.3402(t)–2. For purposes of this ex-

2011–23 I.R.B. 859 June 6, 2011

ception, payments to government entitiesthat qualify for the exception for polit-ical subdivisions and instrumentalitiesmaking less than $100,000,000 of pay-ments for property and services annually,as provided by section 3402(t)(2)(G) andparagraph (g) of this section, are treated aspayments to government entities that aresubject to the withholding requirements ofsection 3402(t)(1).

(2) Tax-exempt organizations. Pay-ments to an organization that is exemptfrom taxation under section 501(a) as anorganization described in section 501(c),501(d), or 401(a) are not subject to with-holding under section 3402(t).

(3) Foreign governments. Paymentsto foreign governments are not subject towithholding under section 3402(t). Forpurposes of this paragraph (e), a govern-ment of a possession or territory of theUnited States is treated as a foreign gov-ernment.

(f) Payments made pursuant to a clas-sified or confidential contract. Paymentsmade pursuant to a classified or con-fidential contract described in section6050M(e)(3) are not subject to withhold-ing under section 3402(t).

(g) Exception for political subdivisionsor instrumentalities thereof making lessthan $100,000,000 of payments for prop-erty or services annually—(1) In general.Section 3402(t) withholding is not re-quired on payments made by a politicalsubdivision of a State (or any instrumen-tality of a political subdivision of a State)that makes less than $100,000,000 of pay-ments for property or services annually.

(2) Determination of whether an en-tity is a political subdivision of a State.Whether an entity is a political subdivi-sion of a State for purposes of paragraph(g)(1) of this section is determined under§31.3402(t)–2(d).

(3) Determination of whether a politicalsubdivision or instrumentality makes lessthan $100,000,000 of payments for prop-erty or services annually—(i) Generaldetermination rule. In general, whethera political subdivision or instrumentalitymakes less than $100,000,000 of pay-ments for property or services annuallyfor purposes of paragraph (g)(1) of thissection is determined for each calendaryear based on the total payments madeby the entity for property or services inthe entity’s accounting year ending with

or within the second preceding calendaryear. For this purpose, payments that qual-ify for the exceptions from withholdingunder §31.3402(t)–4(a) through (q) (orwould have qualified had these regula-tions been in effect) are not included indetermining total payments made. How-ever, payments that are not subject towithholding because the payments areless than the $10,000 payment thresholddescribed in §31.3402(t)–3(b), or basedon the applicability date rules or transi-tion rules contained in §31.3402(t)–1(d),§31.3402(t)–2(i), §31.3402(t)–3(g),§31.3402(t)–4(u), or §31.3402(t)–5(e), orbased on the withholding relief for 2012provided in §31.3402(t)–4(t), but are nototherwise excepted, are included in deter-mining total payments. For this purpose,the accounting year refers to the fiscal year(consisting of 12 months) or calendar yearused by the government entity in setting itsbudgets and keeping its accounting books.If a political subdivision or instrumen-tality was not in existence in the secondpreceding calendar year or if no 12-monthaccounting year exists ending in the sec-ond preceding calendar year, eligibility forthis exception is determined based on thetotal projected payments for the account-ing year consisting of 12 months endingin that calendar year.

(ii) Optional determination rule. A po-litical subdivision of a state or an instru-mentality of that political subdivision maytreat itself as eligible for the exception pro-vided in paragraph (g)(1) of this section fora calendar year if the average of the to-tal payments calculated under the rules ofparagraph (g)(3)(i) of this section for fourof the five successive accounting years, thefifth year of which is the entity’s deter-mination year, is less than $100,000,000.For this purpose, for a calendar year thepolitical subdivision’s or instrumentality’sdetermination year is the accounting yearending with or within the second precedingcalendar year. If a political subdivision orinstrumentality withholds and pays (or de-posits) tax under section 3402(t) for a cal-endar year and files a return reporting thewithheld tax under section 3402(t) for thatcalendar year based on the general deter-mination rule of paragraph (g)(3)(i) of thissection, it is deemed to have waived anyright to use the optional determination ruleof this paragraph (g)(3)(ii) of this sectionfor that calendar year.

(4) Examples. The following examplesillustrate the provisions of paragraph (g) ofthis section:

Example 1. (i) Government entity X, which qual-ifies as a political subdivision or instrumentality ofa political subdivision for calendar years 2013 and2014, uses a fiscal year ending June 30 to determineits budgets and to keep its accounting books. Duringits fiscal year ending June 30, 2011, X made paymentsto persons for property and services of $200,000,000,including $102,000,000 of payments that would havebeen excepted under §31.3402(t)–4(a) through (q) ifsection 3402(t) had been in effect.

(ii) During its fiscal year ending June 30, 2012,X made payments for property and services of$210,000,000, including $106,000,000 that wouldhave been excepted under §31.3402(t)–4(a) through(q) if section 3402(t) had been in effect. The pay-ments X made for property or services during the fis-cal year ending June 30, 2012, included $15,000,000of payments below the $10,000 payment thresholddescribed in §31.3402(t)–3(b).

(iii) For the calendar year 2013, the general de-termination rule of paragraph (g)(3)(i) of this sectionapplies to determine whether X is eligible for the ex-ception provided in paragraph (g)(1) of this sectionbased on the total payments X made for its account-ing year ending June 30, 2011. Because total pay-ments for this purpose exclude payments that wouldbe excepted under §31.3402(t)–4(a) through (q), to-tal payments were $200,000,000 less $102,000,000,or $98,000,000. Therefore, for calendar year 2013, Xwould be eligible for the exception provided in para-graph (g)(1) of this section, and would not be requiredto withhold under section 3402(t).

(iv) For the calendar year 2014, the general deter-mination rule of paragraph (g)(3)(i) of this section ap-plies to determine whether X is eligible for the excep-tion provided in paragraph (g)(1) of this section basedon the total payments it made for its accounting yearending June 30, 2012. Because total payments forthis purpose exclude payments that would have beenexcepted under §31.3402(t)–4(a) through (q), but in-clude payments below the $10,000 payment thresholddescribed in §31.3402(t)–3(b), total payments were$210,000,000 less $106,000,000, or $104,000,000.Therefore, for calendar year 2014, X would not qual-ify for the exception provided in paragraph (g)(1) ofthis section and would be required to withhold un-der section 3402(t), provided it is not eligible for ordoes not use the exception under the optional deter-mination rule provided in paragraph (g)(3)(ii) of thissection.

Example 2. (i) Government entity Y, which qual-ifies as a political subdivision or instrumentality ofa political subdivision for calendar years 2013 and2014, uses a fiscal year ending June 30 to determineits budgets and to keep its accounting books. Duringits fiscal year ending June 30, 2007, Y made paymentsto persons for property and services of $195,000,000,including $110,000,000 of payments that would havebeen excepted under §31.3402(t)–4(a) through (q) ifsection 3402(t) had been in effect.

(ii) During its fiscal year ending June 30, 2008,Y made payments to persons for property and ser-vices of $204,000,000, including $115,000,000 ofpayments that would have been excepted under§31.3402(t)–4(a) through (q) if section 3402(t) hadbeen in effect.

June 6, 2011 860 2011–23 I.R.B.

(iii) During its fiscal year ending June 30, 2009,Y made payments to persons for property and ser-vices of $215,000,000, including $124,000,000 ofpayments that would have been excepted under§31.3402(t)–4(a) through (q) if section 3402(t) hadbeen in effect.

(iv) During its fiscal year ending June 30, 2010,Y made payments to persons for property and ser-vices of $225,000,000, including $130,000,000 ofpayments that would have been excepted under§31.3402(t)–4(a) through (q) if section 3402(t) hadbeen in effect.

(v) During its fiscal year ending June 30, 2011,Y made payments to persons for property and ser-vices of $275,000,000, including $135,000,000 ofpayments that would have been excepted under§31.3402(t)–4(a) through (q) if section 3402(t) hadbeen in effect.

(vi) During its fiscal year ending June 30, 2012,Y made payments for property and services of$235,000,000, including $140,000,000 that wouldhave been excepted under §31.3402(t)–4(a) through(q) if section 3402(t) had been in effect.

(vii) For the calendar year 2013, the general de-termination rule of paragraph (g)(3)(i) of this sectionapplies to determine whether Y is eligible for the ex-ception provided in paragraph (g)(1) of this sectionbased on the total payments Y made for its account-ing year ending June 30, 2011. Because total pay-ments for this purpose exclude payments that wouldbe excepted under §31.3402(t)–4(a) through (q), totalpayments were $275,000,000 less $135,000,000, or$140,000,000. Therefore, for calendar year 2013, Ywould not qualify for the exception provided in para-graph (g)(1) of this section and would be required towithhold under section 3402(t), unless it was eligi-ble for, and used, the optional determination rule pro-vided in paragraph (g)(3)(ii) of this section.

(viii) For the calendar year 2013, under theoptional determination rule of paragraph (g)(3)(ii)of this section, Y would have total payments forthis purpose in the accounting year ending June 30,2007, of $85,000,000; in the accounting year endingJune 30, 2008, of $89,000,000; in the accountingyear ending June 30, 2009, of $91,000,000; inthe accounting year ending June 30, 2010, of$95,000,000; and in the accounting year endingJune 30, 2011, of $140,000,000. The average offour of those years (excluding the highest year of$140,000,000) would be $90,000,000 (85,000,000plus 89,000,000 plus 91,000,000 plus 95,000,000equals 360,000,000; 360,000,000 divided by 4 equals90,000,000). Thus, for the calendar year 2013, underthe optional determination rule of paragraph (g)(3)(ii)of this section, Y is eligible for the exception providedin paragraph (g)(1) of this section and is not requiredto withhold under section 3402(t). Alternatively, Ycould apply the general determination rule, ignorethe optional determination rule, and withhold undersection 3402(t).

(ix) For the calendar year 2014, under the gen-eral determination rule of paragraph (g)(3)(i) of thissection, Y has total payments of $95,000,000. Thus,Y is eligible for the exception provided in paragraph(g)(1) of this section and is not required to withholdunder section 3402(t).

(h) Payments made in connection witha public assistance or public welfare pro-

gram—(1) In general. Section 3402(t)withholding does not apply to paymentsmade in connection with a public assis-tance or public welfare program for whicheligibility is determined by a needs or in-come test.

(2) Needs or income test. Eligibility fora public assistance or public welfare pro-gram is not considered to be determinedby a needs or income test if eligibility forthe program is based solely on the age ofthe beneficiary. A public assistance pro-gram providing disaster relief to victimsof a natural or other disaster is consid-ered to be a program for which eligibil-ity is determined under a needs test. Pay-ments under government programs to pro-vide health care or other services that arenot based on the needs or income of the re-cipient are subject to section 3402(t) with-holding, including programs where eligi-bility is based on the age of the beneficiary.

(3) Payments to third parties. The ex-ception provided by this paragraph (h) alsoapplies to payments made to third partiesto provide benefits to beneficiaries undera public assistance or public welfare pro-gram for which eligibility is determined bya needs or income test.

(4) Allocation of payments. If only aportion of a payment is made in connec-tion with a public assistance or public wel-fare program for which eligibility is de-termined by a needs or income test, theportion that is made in connection withthe program and therefore is not subjectto section 3402(t) withholding may be de-termined using any reasonable allocationmethod. If the government entity makes areasonable, good faith determination thateither the excudable or the nonexcludableportion is insignificant in comparison tothe entire payment, the insignificant por-tion may be disregarded for purposes ofthis paragraph (h) (so that the entire pay-ment is either eligible or ineligible for theexception provided by this paragraph (h)).

(i) Payments made to any governmentemployee with respect to his or her ser-vices. Section 3402(t) withholding doesnot apply to payments made to any gov-ernment employee with respect to his orher services as an employee of the gov-ernment. This exception applies to con-tributions to deferred compensation planson behalf of an employee, contributionsto employee benefit plans on behalf of anemployee, fringe benefits provided to em-

ployees, and payments to employees underaccountable plans for expenses incurredby the employee for the employee’s travelwhile on government business. This ex-ception also applies to payments made bythe government employee under account-able plans (as defined in §1.62–2(c)(2)of this chapter) to providers of the em-ployee’s travel, meals, and lodging whenthe government employee is traveling ongovernment business.

(j) Payments received by nonresidentalien individuals and foreign corporations.Section 3402(t) withholding does not ap-ply to any payment received by a nonres-ident alien individual or foreign corpora-tion for providing services or property ifthe payment is derived from sources out-side the United States, as determined undersections 861, 862, 863, and 865, and is noteffectively connected with the conduct of atrade or business within the United Statesby the nonresident alien individual or for-eign corporation.

(k) Payments to Indian tribal govern-ments. Section 3402(t) withholding doesnot apply to any payment made to an In-dian tribal government or its political sub-divisions.

(l) Payments in emergency, disaster,or hardship situations. The Internal Rev-enue Service may provide by publicationin the Internal Revenue Bulletin (see§601.601(d)(2)(ii)(b) of this chapter) foradditional exceptions from section 3402(t)withholding for certain payments madein an emergency, disaster, or hardshipsituation if the Internal Revenue Servicedetermines that withholding from thepayments would impede a government en-tity’s efforts to respond to the emergency,disaster, or hardship.

(m) Grants—(1) In general. Section3402(t) withholding does not apply to anygrant as defined in paragraph (m)(2) of thissection. This exclusion does not apply tothe use by a government entity of the pro-ceeds of a grant received by that govern-ment entity (unless the government entityuses the proceeds to make a grant).

(2) Definition of grant. For purposes ofthis paragraph (m), a grant is a transfer offunds by a government entity to a recipient(which may be a state government, localgovernment, or other recipient) pursuant toan agreement reflecting a relationship be-tween the government entity and the re-cipient when the principal purpose of the

2011–23 I.R.B. 861 June 6, 2011

relationship is to transfer a thing of valueto the recipient to carry out a public pur-pose of support or stimulation authorizedby law instead of acquiring (by purchase,lease, or barter) property or services for thedirect benefit or use of the government en-tity, and substantial involvement is not ex-pected between the government entity andthe recipient when carrying out the activitycontemplated in the agreement.

(n) Sales tax, excise tax, value-addedtax, and other taxes. For purposes of thissection, section 3402(t) withholding ap-plies to any payment of sales tax, excisetax, value-added tax, or other tax made aspart of a payment to any person providingproperty or services. Notwithstanding theforegoing, the payment of sales tax, excisetax, value added tax, or other tax may beexcluded from section 3402(t) withhold-ing, provided this exclusion is applied con-sistently to all payments to a given payeeduring the calendar year.

(o) Loan guarantees. Section 3402(t)withholding does not apply to a loan guar-antee or the payment of principal and inter-est on a loan pursuant to a loan guarantee.However, if a government entity (througha right of subrogation or similar right) as-sumes the operation of a project or activityfunded by the loan, section 3402(t) with-holding applies to payments by the govern-ment entity for property or services relat-ing to the project or activity unless other-wise excepted under this section.

(p) Debt. Section 3402(t) withholdingdoes not apply to payment of principal ona loan. However, if a government entityissues a debt obligation to a person pro-viding services as all or part of the pur-chase price, the debt obligation’s fair mar-ket value is subject to section 3402(t) with-holding, unless an exception applies. Ifa government entity issues a debt obliga-tion to a person providing property as allor part of the purchase price, the debt obli-gation’s issue price as determined undersection 1273 or section 1274, whicheveris applicable to the debt obligation, is sub-ject to section 3402(t) withholding, unlessan exception applies. In lieu of the is-sue price, the government entity and theperson providing property may agree totreat the stated principal amount of the debtobligation as the payment amount attribut-able to the debt obligation that is subjectto section 3402(t) withholding. If a gov-ernment entity uses a third party debt obli-

gation (a debt obligation issued by any en-tity other than that government entity) topay for property or services, the fair mar-ket value of the debt obligation is subjectto section 3402(t) withholding, unless anexception applies.

(q) Investment securities. Section3402(t) withholding does not apply to anypayments to purchase stock, bonds, orother securities primarily for investmentpurposes.

(r) Partially exempt payments. If apayment includes both an amount sub-ject to section 3402(t) withholding andan amount that is not subject to section3402(t) withholding, section 3402(t) with-holding applies only to the relevant portionof the payment. Notwithstanding the fore-going, a government entity may applysection 3402(t) withholding to the entirepayment provided the payee has agreed tothis withholding.

(s) Authorization for additional rulesand procedures on payees and paymentsexempt from section 3402(t) withholding.The Commissioner is authorized to pro-vide rules and procedures concerning pay-ments that are exempt from withholding,including the classification of additionaltypes of payees or payments as exemptfrom section 3402(t) withholding, and pro-cedures under which a government entitymay determine the eligibility of a payee foran exemption from section 3402(t) with-holding (and may rely on this determina-tion notwithstanding the payee’s eligibil-ity for this exemption), in revenue pro-cedures, notices, or other guidance pub-lished in the Internal Revenue Bulletin (see§601.601(d)(2) of this chapter).

(t) Withholding relief for 2012. With-holding under section 3402(t) is not re-quired with respect to payments madebefore January 1, 2013. Any personthat deducts and withholds tax undersection 3402(t) from payments made in2012 shall deposit and report such taxwithheld pursuant to §31.6302–4 and§31.6011(a)–4(b), and include the pay-ment and the amount withheld on Form1099–MISC, “Miscellaneous Income,” orsuccessor form, unless the amount of taxwithheld under section 3402(t) is repaid tothe payee before January 1, 2013.

(u) Effective/applicability date. Thissection applies to payments by the Govern-ment of the United States, every State, ev-ery political subdivision thereof, and every

instrumentality of the foregoing (includingmulti-State agencies) to any person pro-viding property or services made after De-cember 31, 2012, except that paragraph (t)of this section applies to payments madeafter December 31, 2011, and before Jan-uary 1, 2013.

§31.3402(t)–5 Application to passthroughentities.

(a) In general. Section 3402(t)(1)does not apply to payments made bypassthrough entities except as described inparagraph (c) of this section. In addition,section 3402(t)(1) applies to paymentsmade to passthrough entities except asdescribed in paragraph (d) of this section.

(b) Definitions. The following defini-tions apply for purposes of this section:

(1) Passthrough entity. The termpassthrough entity means a partnership(for Federal income tax purposes) or anS corporation.

(2) Owner. The term owner means apartner (for Federal income tax purposes)or an S corporation shareholder.

(3) Ownership percentage. The termownership percentage means an owner’sinterest, as a percentage, in partnershipprofits or capital (whichever is greater) inthe case of a partnership, or an owner’sinterest, as a percentage, in S corporationstock in the case of an S corporation.

(4) Testing day. The term testing dayrefers to the first day of a passthrough en-tity’s taxable year.

(c) Payments from a passthrough en-tity—(1) General rule. Section 3402(t)(1)does not apply to payments made bypassthrough entities during the taxableyear, except as provided in paragraph(c)(2) of this section.

(2) Exception. Section 3402(t)(1) ap-plies to any payment during the taxableyear from a passthrough entity if the aggre-gate ownership percentage held, directly orindirectly, in the entity on the testing dayby one or more of the government entitiesdescribed in section 3402(t)(1) is at least80 percent. For purposes of this paragraph(c)(2), any manipulation of the ownershippercentage with an intent to avoid appli-cation of section 3402(t) will be recharac-terized as appropriate to reflect the actualownership percentage.

(d) Payments to a passthrough en-tity—(1) General rule. Section 3402(t)(1)

June 6, 2011 862 2011–23 I.R.B.

applies to payments made to passthroughentities during the taxable year, except asprovided in paragraph (d)(2) of this sec-tion.

(2) Exception—(i) In general. Section3402(t)(1) does not apply to any paymentduring the taxable year to a passthroughentity if the aggregate ownership percent-age held, directly or indirectly, in the en-tity on the testing day by one or more per-sons each of which is described in section3402(t)(2)(E) or is an Indian tribal govern-ment is at least 80 percent. For purposesof this paragraph (d)(2)(i), any manipu-lation of the ownership percentage withan intent to avoid application of section3402(t) will be recharacterized as appro-priate to reflect the actual ownership per-centage, if the government entity makingthe payment knew or should have knownthat the payee’s ownership percentage hadbeen manipulated with intent to avoid ap-plication of section 3402(t).

(ii) Payments derived from sources out-side the United States. Section 3402(t)(1)does not apply to any payment during thetaxable year to a partnership if the aggre-gate ownership percentage held, directly orindirectly, in the partnership on the test-ing day by one or more persons each ofwhich is a nonresident alien individual orforeign corporation is at least 80 percent,and the payment to the partnership is noteffectively connected with the conduct of atrade or business within the United Statesby the partnership, and is derived fromsources outside the United States, as de-termined under sections 861, 862, 863,and 865. For purposes of this paragraph(d)(2)(ii), any manipulation of the owner-ship percentage with an intent to avoid ap-plication of section 3402(t) will be rechar-acterized as appropriate to reflect the ac-tual ownership percentage, if the govern-ment entity making the payment knew orshould have known that the payee’s own-ership percentage had been manipulatedwith intent to avoid application of section3402(t).

(e) Effective/applicability date. Thissection applies to payments by the Govern-ment of the United States, every State, ev-ery political subdivision thereof, and everyinstrumentality of the foregoing (includingmulti-State agencies) to any person pro-viding property or services made after De-cember 31, 2012.

§31.3402(t)–6 Crediting of tax withheldunder section 3402(t).

(a) Credit against income tax liabilityonly. Tax withheld under section 3402(t)is allowable as a credit against the tax im-posed by Subtitle A of the Internal Rev-enue Code (Code) upon the recipient ofthe income in accordance with the rulesset forth in section 31(a) and §1.31–1 ofthis chapter. Tax withheld under section3402(t) is not allowable as a credit againsttaxes imposed on wages or compensationof employees under Chapters 21, 22, 23, or24 of the Code.

(b) Taxable year of credit. Tax with-held under section 3402(t) during any cal-endar year is allowed as a credit againstthe tax imposed by Subtitle A in accor-dance with section 31(a)(2) of the Codeand §1.31–1(b) of this chapter.

(c) Estimated tax. The tax withheldunder section 3402(t) and allowable as acredit under section 31(a) may be takeninto account in determining estimated taxliability under sections 6654 and 6655 forthe taxable year against which the taxesmay be credited under paragraph (b) of thissection.

(d) Effective/applicability date. Thissection applies with respect to amountswithheld under section 3402(t) after De-cember 31, 2012.

§31.3402(t)–7 Transition relief frominterest and penalties.

(a) Good faith exception for interestand penalties on payments made beforeJanuary 1, 2014. Government entitiesthat make a good faith effort to com-ply with the withholding requirements in§31.3402(t)–1 will not be liable for inter-est and penalties with respect to incometax withholding under section 3402(t) thatthe government entity failed to withholdfrom payments made before January 1,2014. However, this provision does notrelieve the government entity of liabilityfor income tax that it failed to withhold.See, however, §31.3402(d)–1.

(b) Effective/Applicability Date. Thissection applies with respect to paymentsmade after December 31, 2012.

Par. 3. Section 31.3406(g)–2 isamended by adding paragraphs (h) and (i)to read as follows:

§31.3406(g)–2 Exception for reportablepayment for which withholding isotherwise required.

* * * * *(h) Certain payments made by govern-

ment entities. A government entity thatis required to withhold both on reportablepayments pursuant to section 3406(a) andon certain payments pursuant to section3402(t) must comply with the withholdingrequirements of section 3406, and not sec-tion 3402(t), for each payment to whichboth types of withholding would apply.Pursuant to section 3402(t)(2)(B), with-holding under section 3402(t) does not ap-ply to a given payment if amounts are be-ing withheld under section 3406 for thatpayment. If a government entity fails towithhold as required under section 3406,the payment will not be deemed to be sub-ject to withholding under another provi-sion of the Internal Revenue Code for pur-poses of this paragraph (h). Thus, even ifthe government entity withholds on suchpayment pursuant to section 3402(t), it willremain liable for the amount required to bewithheld under section 3406.

(i) Effective/applicability date. Para-graph (h) of this section relating to certainpayments made by government entities ap-plies to payments made by government en-tities under section 3402(t) made after De-cember 31, 2012.

Par. 4. Section 31.6011(a)–4 isamended by revising paragraphs (b)(4)and (5) and adding paragraph (b)(6) andrevising paragraph (d) to read as follows:

§31.6011(a)–4 Returns of income taxwithheld.

* * * * *(b) * * *(4) Pensions, annuities, IRAs, and cer-

tain other deferred income subject to with-holding under section 3405;

(5) Reportable payments subject tobackup withholding under section 3406;and

(6) Certain payments made by govern-ment entities subject to withholding undersection 3402(t).

* * * * *(d) Effective/applicability date. Para-

graph (b)(6) of this section (relating tocertain payments made by government

2011–23 I.R.B. 863 June 6, 2011

entities subject to withholding under sec-tion 3402(t)) applies to payments made bygovernment entities under section 3402(t)made after December 31, 2012.

Par. 5. Section 31.6051–5 is added toread as follows:

§31.6051–5 Statement and informationreturn required in case of withholding bygovernment entities.

(a) Statements required from govern-ment entities. Every government entity re-quired to deduct and withhold tax undersection 3402(t) must furnish to the payee awritten statement containing the informa-tion required by paragraph (d) of this sec-tion.

(b) Information returns required fromgovernment entities. Every governmententity required to furnish a payee statementunder paragraph (a) of this section mustfile a duplicate of such statement with theInternal Revenue Service. Such duplicateconstitutes an information return.

(c) Prescribed form. The prescribedform for the statement required by this sec-tion is Form 1099–MISC, “MiscellaneousIncome,” or any successor form.

(d) Information required. Each state-ment on Form 1099–MISC (or any succes-sor form) must show the following—

(1) The name, address, and taxpayeridentification number of the person receiv-ing the payment subject to withholding un-der section 3402(t);

(2) The amount of the payment with-held upon;

(3) The amount of tax deducted andwithheld under section 3402(t);

(4) The name, address, and taxpayeridentification number of the governmententity filing the form;

(5) A legend stating that such amountis being reported to the Internal RevenueService; and

(6) Such other information as is re-quired by the form and the instructions.

(e) Time for furnishing statements.The statement required by paragraph (a)of this section must be furnished to thepayee no later than January 31 of the yearfollowing the calendar year in which thepayment subject to withholding was made.However, the February 15 due date undersection 6045 applies to the statement if thestatement is furnished in a consolidatedreporting statement under section 6045.

See §§1.6045–1(k(3), 1.6045–2(d)(2),1.6045–3(e)(2), 1.6045–4(m)(3), and1.6045–5(a)(3)(ii) of this chapter.

(f) Cross references. For provisions re-lating to the time for filing the informa-tion returns required by this section withthe Internal Revenue Service and to ex-tensions of the time for filing the returns,see §§31.6071(a)–1(a)(3), 1.6081–1 of thischapter, and 1.6081–8 of this chapter. Forpenalties applicable to failure to file in-formation returns and furnish payee state-ments, see sections 6721 through 6724.

(g) Effective/applicability date. Thissection applies for calendar years begin-ning on or after January 1, 2013.

Par. 6. Section 31.6071(a)–1 isamended by revising paragraphs (a)(3)(i)and (g) to read as follows:

§31.6071(a)–1 Time for filing returns andother documents.

(a) * * *(3) Information returns—(i) General

rule. Each information return in respectof wages as defined in the Federal Insur-ance Contributions Act or of income taxwithheld from wages as required under§31.6051–2 or of income tax withheldfrom payments by government entitiesas required under §31.6051–5 must befiled on or before the last day of February(March 31 if filed electronically) of theyear following the calendar year for whichit is made, except that, if a tax return under§31.6011(a)–5(a) is filed as a final returnfor a period ending prior to December 31,the information return must be filed on orbefore the last day of the second calendarmonth following the period for which thetax return is filed.

* * * * *(g) The requirement under paragraph

(a)(3)(i) of this section pertaining to theinformation return in respect of incometax withheld by government entities as re-quired by §31.6051–5 of this part appliesfor calendar years beginning on or afterJanuary 1, 2013.

Par. 7. Section 31.6302–1 is amendedby:

1. Revising paragraph (e)(1)(iii)(C).2. Adding paragraph (e)(1)(iii)(E).3. Revising paragraph (n).The revisions and additions read as fol-

lows:

§31.6302–1 Deposit rules for taxes underthe Federal Insurance Contributions Act(FICA) and withheld income taxes.

* * * * *(e) * * *(1) * * *(iii) * * *(C) Certain annuities described in sec-

tion 3402(o)(1)(B);

* * * * *(E) Certain payments made by govern-

ment entities under section 3402(t); and

* * * * *(n) Effective/applicability date. Ex-

cept for the deposit of employment taxesattributable to payments made by gov-ernment entities under section 3402(t),§§31.6302–1 through 31.6302–3 applywith respect to the deposit of employ-ment taxes attributable to payments madeafter December 31, 1992. Paragraph(e)(1)(iii)(E) of this section applies withrespect to the deposit of employment taxesattributable to payments made by govern-ment entities under section 3402(t) madeafter December 31, 2012.

* * * * *Par. 8. Section 31.6302–4 is amended

by:1. Revising paragraph (b)(4).2. Revising paragraph (b)(5).3. Adding paragraph (b)(6).4. Revising paragraph (e).The revisions and additions read as fol-

lows:

§31.6302–4 Deposit rules for withheldincome taxes attributable to nonpayrollpayments.

* * * * *(b) * * *(4) Amounts withheld under section

3405, relating to withholding on pensions,annuities, IRAs, and certain other deferredincome;

(5) Amounts withheld under section3406, relating to backup withholding withrespect to reportable payments; and

(6) Amounts withheld under section3402(t), relating to certain payments madeby government entities.

* * * * *(e) Effective/applicability date. Sec-

tion 31.6302–4(d) applies to deposits andpayments made after December 31, 2010.

June 6, 2011 864 2011–23 I.R.B.

Paragraph (b)(6) of this section relating tocertain payments made by government en-tities applies to payments made by govern-ment entities under section 3402(t) madeafter December 31, 2012.


Approved April 26, 2011.

Michael Mundaca,Assistant Secretary of

the Treasury (Tax Policy).


Section 7520.—ValuationTables


Section 7872.—Treatmentof Loans With Below-MarketInterest Rates


2011–23 I.R.B. 865 June 6, 2011

Part III. Administrative, Procedural, and MiscellaneousPayments Subject to BackupWithholding in Payment Cardand Third Party NetworkTransactions

Notice 2011–42

PURPOSE

This notice provides interim guidanceto third party settlement organizations(TPSO) (as defined under section 6050Wof the Internal Revenue Code (Code) andits accompanying regulations) on backupwithholding obligations under section3406 of the Code and its accompanyingregulations. Specifically, this notice es-tablishes that a payment made by a TPSOis a reportable payment potentially subjectto section 3406 backup withholding onlyif the payee has received payment fromthat TPSO in more than 200 transactionswithin a calendar year. Payments madein settlement of payment card transac-tions that are potentially subject to section3406 backup withholding have no limitingthreshold.

The Treasury Department and the Inter-nal Revenue Service intend to amend theexisting regulations under section 3406 toreflect the guidance provided in this no-tice. TPSOs may rely on the interim guid-ance in this notice until the regulations areamended.

BACKGROUND

Section 3406(a)(1) requires certain pay-ors to perform backup withholding by de-ducting and withholding income tax froma reportable payment, regardless of anythreshold amount otherwise applicable tosuch payment, if the payee fails to furnish

the payee’s taxpayer identification number(TIN) or furnishes an incorrect TIN to thepayor. Section 6050W, added by section3091 of the Housing Assistance Tax Actof 2008, Div. C of Pub. L. No. 110–289,122 Stat. 2653 (the Act), requires infor-mation returns to be made by certain pay-ors with respect to payments made in set-tlement of payment card transactions andthird party payment network transactions.All payments made in settlement of pay-ment card transactions are required to bereported under section 6050W. Paymentsmade in settlement of third party networktransactions, however, are required to bereported only if the amount to be reportedexceeds $20,000 and the aggregate numberof transactions exceeds 200 with respect toany payee within a calendar year.

The Act also amended section3406(b)(3) by including as reportablepayments potentially subject to backupwithholding those payments required tobe reported pursuant to section 6050W butwithout regard to the reporting minimumthresholds of that section. See Treas. Reg.§ 31.3406(b)(3)–5(b). The withholdingrequirements under section 3406 will ap-ply to section 6050W payments beginningJanuary 1, 2012.

The regulations under section 3406were amended to provide that whetherpayments made in settlement of thirdparty network transactions were subjectto withholding under section 3406 isdetermined without regard to the statu-tory monetary or transactional thresholdsfound in section 6050W. See Treas. Reg.§ 31.3406(b)(3)–5. Those monetary andtransactional thresholds are consideredsolely for determining whether a TPSOhad an information reporting obligationunder section 6050W for payments made

to a payee. Accordingly, under the regula-tions, TPSOs are required to obtain a TINfrom every payee in a third party paymentnetwork, even the occasional small vol-ume seller, to avoid backup withholding.

DISCUSSION

The Treasury Department and the In-ternal Revenue Service have determinedthat the section 6050W statutory transac-tional threshold for determining informa-tion reporting obligations should be metbefore any section 3406 withholding obli-gation arises with respect to TPSOs. TheTreasury Department and the Internal Rev-enue Service intend to amend the regula-tions under section 3406 to provide thatno backup withholding is required wherethe aggregate number of transactions be-tween a TPSO and a payee do not exceed200 within a calendar year. The mone-tary threshold of $20,000 found in sec-tion 6050W is not considered for purposesof determining backup withholding obli-gations.

Until the amended final regulations arepublished, TPSOs may rely on this noticeto limit any backup withholding obliga-tions to payees who have exceeded the 200transaction threshold. The relief providedby this notice does not apply to paymentcard transactions.

DRAFTING INFORMATION

The principal author of this notice isGirish Prasad of the Office of AssociateChief Counsel (Procedure & Administra-tion). For further information regardingthis notice, please contact Girish Prasad at(202) 622–4910 (not a toll-free call).

June 6, 2011 866 2011–23 I.R.B.

Part IV. Items of General InterestNotice of ProposedRulemaking

Withholding on Paymentsby Government Entities toPersons Providing Property orServices

REG–151687–10


ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains pro-posed regulations relating to withholdingby government entities on payments topersons providing property or services.The proposed regulations reflect changesin the law made by the Tax Increase Pre-vention and Reconciliation Act of 2005that require Federal, State, and local gov-ernment entities to withhold income taxwhen making payments to persons provid-ing property or services. These proposedregulations would change the provisionsrelated to the effective date of the finalregulations concerning these withholdingrequirements that are being issued con-currently with these proposed regulations.The guidance affects government entitiesthat are required to withhold from pay-ments to persons providing property orservices and persons receiving the pay-ments.

DATES: Written or electronic commentsand requests for a public hearing must bereceived by August 8, 2011.

ADDRESSES: Send submissions to:CC:PA:LPD:PR (REG–151687–10), room5205, Internal Revenue Service, PO Box7604, Ben Franklin Station, Washing-ton, DC 20044. Submissions may behand-delivered Monday through Fridaybetween the hours of 8 a.m. and 4 p.m.to CC:PA:LPD:PR (REG–151687–10),Courier’s Desk, Internal RevenueService, 1111 Constitution Avenue, NW,Washington, DC, or sent electronicallyvia the Federal eRulemaking Portalat http://www.regulations.gov/ (IRSREG–151687–10).

FOR FURTHER INFORMATIONCONTACT: Concerning these pro-posed regulations, A. G. Kelley, (202)622–6040; concerning submissionsof comments or to request a publichearing, Oluwafunmilayo Taylor at (202)622–7180 (not toll-free numbers).


Background

This document contains proposedamendments to 26 CFR Part 31 undersection 3402(t) of the Internal RevenueCode (Code). Section 3402(t) of the Codewas added by section 511 of the Tax In-crease Prevention and Reconciliation Actof 2005, Public Law 109–222 (TIPRA),120 Stat. 345, which was enacted into lawon May 17, 2006. Section 3402(t)(1) pro-vides that the Government of the UnitedStates, every State, every political subdi-vision thereof, and every instrumentalityof the foregoing (including multi-Stateagencies) making any payment to anyperson providing any property or services(including any payment made in con-nection with a government voucher orcertificate program which functions as apayment for property or services) shalldeduct and withhold from such payment atax in an amount equal to 3 percent of suchpayment. Section 3402(t)(2) providesexceptions to withholding under section3402(t).

Section 1511 of the American Recov-ery and Reinvestment Act of 2009 (PublicLaw 111–5), 123 Stat. 115, 355, amendedthe effective date of section 3402(t) with-holding. As amended, the statute providesthat section 3402(t) applies to paymentsmade after December 31, 2011.

Notice 2010–91, 2010–52 I.R.B. 915,provided interim guidance on the appli-cation of section 3402(t) to paymentsby debit cards, credit cards, stored valuecards, and other payment cards.

Proposed regulations under sections3402(t), 3406, 6011, 6051, 6071, and6302 of the Code were published inthe Federal Register on December 5,2008 (REG–158747–06, 2009–4 I.R.B.362 [73 FR 74082]) (the “2008 pro-posed regulations”). The 2008 proposedregulations proposed applying the with-

holding obligations to payments begin-ning on January 1, 2011, but proposedexcluding payments made under contractsexisting on January 1, 2011, unless thosecontracts were materially modified. Thefinal regulations provide an additionalone-year extension beyond the amendedeffective date of the statute. Thus, underthe final regulations, the withholdingobligation applies to payments madeafter December 31, 2012, and theexclusion applies to contracts existing onDecember 31, 2012, that are not materiallymodified on or after December 31, 2012.These final regulations under sections3402(t), 3406, 6011, 6051, 6071, and 6302of the Code (REG–158747–06, TreasuryDecision 9524) are being published in theFederal Register concurrently with theseproposed regulations.

Several commenters on the 2008 pro-posed regulations expressed concern thatthe requirement to differentiate betweenpayments subject to withholding and pay-ments not subject to withholding based onwhether the payment was made under acontract existing on December 31, 2011,and whether that contract had been ma-terially modified, would be burdensometo apply. In response to these concerns,these proposed regulations would providethat the exclusion for payments underexisting contracts that had not been ma-terially modified would terminate withpayments after December 31, 2013. Thus,these proposed regulations would subjectpayments under all contracts to section3402(t) withholding after December 31,2013, unless another exception applied.This rule would avoid the administrativeburden of distinguishing between pay-ments made under existing contracts andall other payments while allowing time toaddress concerns about applying the with-holding requirements to existing contracts.

Proposed Effective Date

These regulations are proposed to ap-ply to payments made after December 31,2011.

Special Analyses

It has been determined that this noticeof proposed rulemaking is not a significant

2011–23 I.R.B. 867 June 6, 2011

regulatory action as defined in ExecutiveOrder 12866. Therefore, a regulatory as-sessment is not required. It also has beendetermined that section 553(b) of the Ad-ministrative Procedure Act (5 U.S.C. chap-ter 5) does not apply to this regulation, andbecause the regulation does not impose acollection of information on small entities,the Regulatory Flexibility Act (5 U.S.C.chapter 6) does not apply. Pursuant to sec-tion 7805(f) of the Internal Revenue Code,this regulation has been submitted to theChief Counsel for Advocacy of the SmallBusiness Administration for comment onits impact on small business.

Comments and Requests for PublicHearing

Before these proposed regulations areadopted as final regulations, considera-tion will be given to any written (a signedoriginal and eight (8) copies) or electroniccomments that are timely submitted to theIRS. All comments will be available atwww.regulations.gov or for public inspec-tion and copying upon request. A publichearing will be scheduled if requested inwriting by any person that timely submitswritten or electronic comments. If a publichearing is scheduled, notice of the date,time, and place for the hearing will bepublished in the Federal Register.


The principal author of these proposedregulations is A. G. Kelley, Office of the

Division Counsel/Associate Chief Coun-sel (Tax Exempt and Government Enti-ties). However, other personnel from theIRS and the Treasury Department partici-pated in their development.

* * * * *

Proposed Amendments to theRegulations

Accordingly, 26 CFR part 31 is pro-posed to be amended as follows:

PART 31—EMPLOYMENT TAXESAND COLLECTION OF INCOME TAXAT SOURCE


Authority: 26 U.S.C. 7805 * * *Par. 2. Section 31.3402(t)–1 is

amended by revising paragraph (d)(2) toread as follows:


* * * * *(d) * * *(2) Payments made under a writ-

ten binding contract that was in effecton December 31, 2012, are not sub-ject to the withholding requirements ofthis section for payments made prior toJanuary 1, 2014. The preceding sentencedoes not apply to payments made underany contract that is materially modified

after December 31, 2012. For this purpose,a material modification includes onlya modification that materially affectsthe property or services to be providedunder the contract, the terms of paymentfor the property or services under thecontract, or the amount payable for theproperty or services under the contract.Notwithstanding the forgoing, a materialmodification does not include a mererenewal of a contract that does nototherwise materially affect the property orservices to be provided under the contract,the terms of payment for the property orservices under the contract, or the amountpayable for the property or services underthe contract. A material modification alsodoes not include a modification to thecontract required by applicable Federal,State or local law. The amendment to§31.3402(t)–1(d)(2) applies with respectto payments made after December 31,2012.



June 6, 2011 868 2011–23 I.R.B.

Definition of TermsRevenue rulings and revenue procedures(hereinafter referred to as “rulings”) thathave an effect on previous rulings use thefollowing defined terms to describe the ef-fect:

Amplified describes a situation whereno change is being made in a prior pub-lished position, but the prior position is be-ing extended to apply to a variation of thefact situation set forth therein. Thus, ifan earlier ruling held that a principle ap-plied to A, and the new ruling holds that thesame principle also applies to B, the earlierruling is amplified. (Compare with modi-fied, below).

Clarified is used in those instanceswhere the language in a prior ruling is be-ing made clear because the language hascaused, or may cause, some confusion.It is not used where a position in a priorruling is being changed.

Distinguished describes a situationwhere a ruling mentions a previously pub-lished ruling and points out an essentialdifference between them.

Modified is used where the substanceof a previously published position is beingchanged. Thus, if a prior ruling held that aprinciple applied to A but not to B, and thenew ruling holds that it applies to both A

and B, the prior ruling is modified becauseit corrects a published position. (Comparewith amplified and clarified, above).

Obsoleted describes a previously pub-lished ruling that is not considered deter-minative with respect to future transac-tions. This term is most commonly used ina ruling that lists previously published rul-ings that are obsoleted because of changesin laws or regulations. A ruling may alsobe obsoleted because the substance hasbeen included in regulations subsequentlyadopted.

Revoked describes situations where theposition in the previously published rulingis not correct and the correct position isbeing stated in a new ruling.

Superseded describes a situation wherethe new ruling does nothing more than re-state the substance and situation of a previ-ously published ruling (or rulings). Thus,the term is used to republish under the1986 Code and regulations the same po-sition published under the 1939 Code andregulations. The term is also used whenit is desired to republish in a single rul-ing a series of situations, names, etc., thatwere previously published over a period oftime in separate rulings. If the new rul-ing does more than restate the substance

of a prior ruling, a combination of termsis used. For example, modified and su-perseded describes a situation where thesubstance of a previously published rulingis being changed in part and is continuedwithout change in part and it is desired torestate the valid portion of the previouslypublished ruling in a new ruling that is selfcontained. In this case, the previously pub-lished ruling is first modified and then, asmodified, is superseded.

Supplemented is used in situations inwhich a list, such as a list of the names ofcountries, is published in a ruling and thatlist is expanded by adding further names insubsequent rulings. After the original rul-ing has been supplemented several times, anew ruling may be published that includesthe list in the original ruling and the ad-ditions, and supersedes all prior rulings inthe series.

Suspended is used in rare situations toshow that the previous published rulingswill not be applied pending some futureaction such as the issuance of new oramended regulations, the outcome of casesin litigation, or the outcome of a Servicestudy.

AbbreviationsThe following abbreviations in current useand formerly used will appear in materialpublished 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 Contributions 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.—Statement 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.

2011–23 I.R.B. i June 6, 2011

Numerical Finding List1

Bulletin 2011–1 through 2011–23

Announcements:

2011-1, 2011-2 I.R.B. 304

2011-2, 2011-3 I.R.B. 324

2011-3, 2011-3 I.R.B. 324

2011-4, 2011-4 I.R.B. 424

2011-5, 2011-4 I.R.B. 430

2011-6, 2011-4 I.R.B. 433

2011-7, 2011-5 I.R.B. 446

2011-8, 2011-5 I.R.B. 446

2011-9, 2011-7 I.R.B. 499

2011-10, 2011-7 I.R.B. 499

2011-11, 2011-7 I.R.B. 500

2011-12, 2011-9 I.R.B. 532

2011-13, 2011-8 I.R.B. 525

2011-14, 2011-9 I.R.B. 532

2011-15, 2011-8 I.R.B. 526

2011-16, 2011-7 I.R.B. 500

2011-17, 2011-9 I.R.B. 532

2011-18, 2011-12 I.R.B. 567

2011-19, 2011-11 I.R.B. 553

2011-20, 2011-10 I.R.B. 542

2011-21, 2011-12 I.R.B. 567

2011-22, 2011-16 I.R.B. 672

2011-23, 2011-12 I.R.B. 568

2011-24, 2011-12 I.R.B. 569

2011-25, 2011-14 I.R.B. 608

2011-26, 2011-14 I.R.B. 608

2011-27, 2011-15 I.R.B. 651

2011-28, 2011-18 I.R.B. 748

2011-29, 2011-18 I.R.B. 748

2011-30, 2011-20 I.R.B. 791

2011-31, 2011-22 I.R.B. 836

2011-32, 2011-22 I.R.B. 836

Notices:

2011-1, 2011-2 I.R.B. 259

2011-2, 2011-2 I.R.B. 260

2011-3, 2011-2 I.R.B. 263

2011-4, 2011-2 I.R.B. 282

2011-5, 2011-3 I.R.B. 314

2011-6, 2011-3 I.R.B. 315

2011-7, 2011-5 I.R.B. 437

2011-8, 2011-8 I.R.B. 503

2011-9, 2011-6 I.R.B. 459

2011-10, 2011-6 I.R.B. 463

2011-11, 2011-7 I.R.B. 497

2011-12, 2011-8 I.R.B. 514

2011-13, 2011-9 I.R.B. 529

2011-14, 2011-11 I.R.B. 544

2011-15, 2011-10 I.R.B. 539

2011-16, 2011-17 I.R.B. 720

2011-17, 2011-10 I.R.B. 540

Notices— Continued:

2011-18, 2011-11 I.R.B. 549

2011-19, 2011-11 I.R.B. 550

2011-20, 2011-16 I.R.B. 652

2011-21, 2011-19 I.R.B. 761

2011-22, 2011-12 I.R.B. 557

2011-23, 2011-13 I.R.B. 588

2011-24, 2011-14 I.R.B. 603

2011-25, 2011-14 I.R.B. 604

2011-26, 2011-17 I.R.B. 720

2011-27, 2011-17 I.R.B. 723

2011-28, 2011-16 I.R.B. 656

2011-29, 2011-16 I.R.B. 663

2011-30, 2011-17 I.R.B. 724

2011-31, 2011-17 I.R.B. 724

2011-32, 2011-18 I.R.B. 737

2011-33, 2011-19 I.R.B. 761

2011-34, 2011-19 I.R.B. 765

2011-36, 2011-21 I.R.B. 792

2011-37, 2011-20 I.R.B. 785

2011-38, 2011-20 I.R.B. 785

2011-39, 2011-20 I.R.B. 786

2011-40, 2011-22 I.R.B. 806

2011-41, 2011-21 I.R.B. 798

2011-42, 2011-23 I.R.B. 866

Proposed Regulations:

REG-140108-08, 2011-13 I.R.B. 591

REG-149335-08, 2011-6 I.R.B. 468

REG-118761-09, 2011-21 I.R.B. 803

REG-146097-09, 2011-8 I.R.B. 516

REG-153338-09, 2011-14 I.R.B. 606

REG-154159-09, 2011-19 I.R.B. 777

REG-124018-10, 2011-2 I.R.B. 301

REG-131151-10, 2011-8 I.R.B. 519

REG-131947-10, 2011-8 I.R.B. 521

REG-132724-10, 2011-7 I.R.B. 498

REG-151687-10, 2011-23 I.R.B. 867

Revenue Procedures:

2011-1, 2011-1 I.R.B. 1

2011-2, 2011-1 I.R.B. 90

2011-3, 2011-1 I.R.B. 111

2011-4, 2011-1 I.R.B. 123

2011-5, 2011-1 I.R.B. 167

2011-6, 2011-1 I.R.B. 195

2011-7, 2011-1 I.R.B. 233

2011-8, 2011-1 I.R.B. 237

2011-9, 2011-2 I.R.B. 283

2011-10, 2011-2 I.R.B. 294

2011-11, 2011-4 I.R.B. 329

2011-12, 2011-2 I.R.B. 297

2011-13, 2011-3 I.R.B. 318

2011-14, 2011-4 I.R.B. 330

2011-15, 2011-3 I.R.B. 322

2011-16, 2011-5 I.R.B. 440

Revenue Procedures— Continued:

2011-17, 2011-5 I.R.B. 441

2011-18, 2011-5 I.R.B. 443

2011-19, 2011-6 I.R.B. 465

2011-20, 2011-11 I.R.B. 551

2011-21, 2011-12 I.R.B. 560

2011-22, 2011-18 I.R.B. 737

2011-23, 2011-15 I.R.B. 626

2011-24, 2011-20 I.R.B. 787

2011-25, 2011-17 I.R.B. 725

2011-26, 2011-16 I.R.B. 664

2011-27, 2011-18 I.R.B. 740

2011-28, 2011-18 I.R.B. 743

2011-29, 2011-18 I.R.B. 746

2011-30, 2011-21 I.R.B. 802

2011-31, 2011-22 I.R.B. 808

2011-32, 2010-22 I.R.B. 835

Revenue Rulings:

2011-1, 2011-2 I.R.B. 251

2011-2, 2011-2 I.R.B. 256

2011-3, 2011-4 I.R.B. 326

2011-4, 2011-6 I.R.B. 448

2011-5, 2011-13 I.R.B. 577

2011-6, 2011-10 I.R.B. 537

2011-7, 2011-10 I.R.B. 534

2011-8, 2011-12 I.R.B. 554

2011-9, 2011-12 I.R.B. 554

2011-10, 2011-14 I.R.B. 597

2011-11, 2011-19 I.R.B. 758

2011-13, 2011-23 I.R.B. 841

Treasury Decisions:

9507, 2011-3 I.R.B. 305

9508, 2011-7 I.R.B. 495

9509, 2011-6 I.R.B. 450

9510, 2011-6 I.R.B. 453

9511, 2011-6 I.R.B. 455

9512, 2011-7 I.R.B. 473

9513, 2011-8 I.R.B. 501

9514, 2011-9 I.R.B. 527

9515, 2011-14 I.R.B. 599

9516, 2011-13 I.R.B. 575

9517, 2011-15 I.R.B. 610

9518, 2011-17 I.R.B. 710

9519, 2011-18 I.R.B. 734

9520, 2011-18 I.R.B. 730

9521, 2011-19 I.R.B. 750

9522, 2011-20 I.R.B. 780

9523, 2011-20 I.R.B. 781

9524, 2011-23 I.R.B. 843

9525, 2011-23 I.R.B. 837

1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2010–27 through 2010–52 is in Internal Revenue Bulletin2010–52, dated December 27, 2010.

June 6, 2011 ii 2011–23 I.R.B.

Finding List of Current Actions onPreviously Published Items1

Bulletin 2011–1 through 2011–23

Announcements:

85-88

Obsoleted by

Rev. Proc. 2011-10, 2011-2 I.R.B. 294

2008-11

Modified by

Ann. 2011-6, 2011-4 I.R.B. 433

2009-62

Obsoleted by

Rev. Proc. 2011-10, 2011-2 I.R.B. 294

Notices:

2006-87

Superseded by

Notice 2011-8, 2011-8 I.R.B. 503

2007-25

Superseded by

Notice 2011-8, 2011-8 I.R.B. 503

2007-77

Superseded by

Notice 2011-8, 2011-8 I.R.B. 503

2008-107

Superseded by

Notice 2011-8, 2011-8 I.R.B. 503

2009-23

Modified by

Notice 2011-24, 2011-14 I.R.B. 603

2009-24

Modified by

Notice 2011-24, 2011-14 I.R.B. 603

2009-83

Modified by

Notice 2011-25, 2011-14 I.R.B. 604

2009-93

Modified by

Notice 2011-38, 2011-20 I.R.B. 785

2010-27

Superseded by

Notice 2011-8, 2011-8 I.R.B. 503

2010-32

Modified and superseded by

Notice 2011-37, 2011-20 I.R.B. 785

2010-59

Modified by

Notice 2011-5, 2011-3 I.R.B. 314

Notices— Continued:

2010-60

Supplemented and superseded by

Notice 2011-34, 2011-19 I.R.B. 765

2010-71


Notice 2011-9, 2011-6 I.R.B. 459

2010-79

Clarified and modified by

Notice 2011-4, 2011-2 I.R.B. 282

Proposed Regulations:

REG-132554-08

Corrected by

Ann. 2011-11, 2011-7 I.R.B. 500

REG-149335-08

Hearing scheduled by

Ann. 2011-26, 2011-14 I.R.B. 608

REG-146097-09

Hearing rescheduled by

Ann. 2011-30, 2011-20 I.R.B. 791

Revenue Procedures:

72-50


Rev. Proc. 2011-10, 2011-2 I.R.B. 294

76-34

Modified and supersed by

Rev. Proc. 2011-10, 2011-2 I.R.B. 294

83-23


Rev. Proc. 2011-15, 2011-3 I.R.B. 322

94-17


Rev. Proc. 2011-15, 2011-3 I.R.B. 322

97-27

Clarified and modified by

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

2001-10

Modified by

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

2002-28

Modified by

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

2003-21


Rev. Proc. 2011-15, 2011-3 I.R.B. 322

2004-34

Modified by

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

Modified and clarified by

Rev. Proc. 2011-18, 2011-5 I.R.B. 443


2006-44

Modified by

Ann. 2011-6, 2011-4 I.R.B. 433

2006-56

Modified by

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

2008-52

Modified by

Notice 2011-4, 2011-2 I.R.B. 282Rev. Proc. 2011-17, 2011-5 I.R.B. 441

Superseded in part by

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

2009-39

Superseded in part by

Rev. Proc. 2011-14, 2011-4 I.R.B. 330

2009-44

Modified by

Ann. 2011-6, 2011-4 I.R.B. 433

2010-1

Superseded by

Rev. Proc. 2011-1, 2011-1 I.R.B. 1

2010-2

Superseded by

Rev. Proc. 2011-2, 2011-1 I.R.B. 90

2010-3

Superseded by

Rev. Proc. 2011-3, 2011-1 I.R.B. 111

2010-4

Superseded by

Rev. Proc. 2011-4, 2011-1 I.R.B. 123

2010-5

Superseded by

Rev. Proc. 2011-5, 2011-1 I.R.B. 167

2010-6

Superseded by

Rev. Proc. 2011-6, 2011-1 I.R.B. 195

2010-7

Superseded by

Rev. Proc. 2011-7, 2011-1 I.R.B. 233

2010-8

Superseded by

Rev. Proc. 2011-8, 2011-1 I.R.B. 237

2010-9

Superseded by

Rev. Proc. 2011-9, 2011-2 I.R.B. 283

2010-15

Updated by

Rev. Proc. 2011-13, 2011-3 I.R.B. 318

1 A cumulative list of current actions on previously published items in Internal Revenue Bulletins 2010–27 through 2010–52 is in Internal Revenue Bulletin 2010–52, dated December 27,2010.

2011–23 I.R.B. iii June 6, 2011


2010-18

Amplified and modified by

Rev. Proc. 2011-21, 2011-12 I.R.B. 560

2010-25

Obsoleted in part by

Rev. Proc. 2011-23, 2011-15 I.R.B. 626

2011-1

Corrected by

Ann. 2011-7, 2011-5 I.R.B. 446

2011-8

Corrected by

Ann. 2011-8, 2011-5 I.R.B. 446

2011-11

Corrected by

Ann. 2011-9, 2011-7 I.R.B. 499

2011-14

Modified by

Rev. Proc. 2011-27, 2011-18 I.R.B. 740Rev. Proc. 2011-28, 2011-18 I.R.B. 743

Modified and amplified by

Rev. Proc. 2011-22, 2011-18 I.R.B. 737

2011-21

Amplified by

Rev. Proc. 2011-26, 2011-16 I.R.B. 664

Revenue Rulings:

81-100

Modified by

Rev. Rul. 2011-1, 2011-2 I.R.B. 251

2004-67

Modified by

Rev. Rul. 2011-1, 2011-2 I.R.B. 251

2008-40

Modified by

Rev. Rul. 2011-1, 2011-2 I.R.B. 251

2011-3

Corrected by

Ann. 2011-16, 2011-7 I.R.B. 500

Treasury Decisions:

9391

Corrected by

Ann. 2011-12, 2011-9 I.R.B. 532

9505

Corrected by

Ann. 2011-10, 2011-7 I.R.B. 499

June 6, 2011 iv 2011–23 I.R.B.

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