[Federal Register: October 18, 2005 (Volume 70, Number 200)]
[Proposed Rules]
[Page 60475-60478]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr18oc05-18]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG-114371-05]
RIN 1545-BE43
Disregarded Entities; Employment and Excise Taxes
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations under which
qualified subchapter S subsidiaries and single-owner eligible entities
that currently are disregarded as entities separate from their owners
for federal tax purposes would be treated as separate entities for
employment tax and related reporting requirement purposes. These
regulations also propose to treat such disregarded entities as separate
entities for purposes of certain excise taxes reported on Forms 720,
730, 2290, and 11-C; excise tax refunds or payments claimed on Form
8849; and excise tax registrations on Form 637. These proposed
regulations would affect disregarded entities and the owners and
employees of disregarded entities in the payment and reporting of
federal employment taxes. These regulations also would affect
disregarded entities and their owners in the payment and reporting of
certain Federal excise taxes and in registration and claims related to
certain Federal excise taxes.
DATES: Written or electronic comments and requests for a public hearing
must be received by January 17, 2006.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-114371-05), room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG-
114371-05), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC. Alternatively, taxpayers may submit
electronic comments directly to the IRS Internet site at http://www.irs.gov/regs or via the Federal eRulemaking Portal at http://
http://www.regulations.gov (IRS and REG-114371-05).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
John Richards at (202) 622-6040 (on the employment tax provisions) or
Susan Athy at (202) 622-3130 (on the excise tax provisions); concerning
the submission of comments or requests for a hearing, Robin Jones at
(202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
1. Disregarded Entities
Under the Internal Revenue Code (Code) and its regulations,
qualified subchapter S subsidiaries (QSubs) (under section
1361(b)(3)(B)) and certain single-owner eligible entities (under
Sec. Sec. 301.7701-1 through 301.7701-3 of the Procedure and
Administration Regulations) are disregarded as entities separate from
their owners (``disregarded entities''). The disregarded entity rules
of section 1361(b)(3)(A) and Sec. Sec. 301.7701-1 through 301.7701-3
apply for all purposes of the Code, including employment and excise
taxes.
2. Employment Taxes
Employers are required to deduct and withhold income and Federal
Insurance Contributions Act (FICA) taxes from their employees' wages
under sections 3402(a) and 3102(a), and are separately liable for their
share of FICA taxes as well as for Federal Unemployment Tax Act (FUTA)
taxes under sections 3111 and 3301 (the withholding, FICA and FUTA
taxes are collectively referred to herein as employment taxes).
Sections 3403, 3102(b), 3111, and 3301 provide that the employer is the
person liable for the withholding and payment of employment taxes. In
addition, the employer is required to make timely tax deposits, file
employment tax returns, and issue wage statements (Forms W-2) to
employees (collectively, other employment tax obligations). An employer
is generally defined as the person for whom an individual performs
services as an employee. Sections 3401(d), 3121(d), and 3306(a).
Because a disregarded entity is not recognized for Federal tax
purposes, the owner of the disregarded entity is treated as the
employer for purposes of employment tax liabilities and all other
employment tax obligations related to wages paid to employees
performing services for the disregarded entity.
If an entity is disregarded for Federal tax purposes under section
1361(b)(3)(A) or Sec. Sec. 301.7701-1 through 301.7701-3, Notice 99-6
(1999-1 C.B. 321) provides that employment taxes and other employment
tax obligations with respect to employees performing services for the
disregarded entity may be satisfied in one of two ways: (1) Calculation
and payment of all employment taxes and satisfaction of all other
employment tax obligations with respect to employees performing
services for the disregarded entity by its owner under the owner's name
and employer identification number (EIN); or (2) separate calculation
and payment of all employment taxes and satisfaction of all other
employment tax obligations by the disregarded entity with respect to
employees performing services for the disregarded entity by the
disregarded entity under its own name and EIN. The notice states that
ultimate liability for employment taxes remains with the owner of the
disregarded entity regardless of which alternative is chosen.
3. Excise Taxes
A. Liability for Excise Taxes
Liability for federal excise taxes is imposed on certain
transactions and activities under the following chapters of the
Internal Revenue Code (Code).
Chapter 31 imposes retail excise taxes on the sale or use of
special fuels (section 4041); the use of fuel in commercial
transportation on inland waterways (section 4042); and the sale of
heavy trucks and trailers (section 4051).
Chapter 32 imposes manufacturers excise taxes on the sale of gas
guzzler automobiles (section 4064); the sale of highway-type tires
(section 4071); the removal, entry, or sale of taxable fuel
[[Page 60476]]
(section 4081); the sale of coal (section 4121); the sale of vaccines
(section 4131); and the sale of sporting goods (section 4161).
Chapter 33 imposes excise taxes on payments for communications
facilities and services (section 4251); payments for transportation of
persons by air (section 4261); and payments for transportation of
property by air (section 4271).
Chapter 34 imposes excise taxes on policies issued by foreign
insurers (section 4371).
Chapter 35 imposes excise taxes on wagers (sections 4401 and 4411).
Chapter 36 imposes excise taxes on transportation by water (section
4471) and the use of heavy highway vehicles (section 4481).
Chapter 38 imposes excise taxes on the sale of ozone-depleting
chemicals and imported taxable products (section 4681).
The IRS does not administer, and these regulations have no effect
on the chapter 32 tax on firearms (section 4181) or the chapter 36 tax
on port use (section 4461).
B. Excise Tax Registration
A person may be required to register with the IRS for certain
excise tax purposes. Registration may be required under section 4101
with respect to the taxes imposed on motor fuels or under section 4412
in the case of persons subject to the occupational tax on wagering. In
addition, section 4222 generally permits sales for certain exempt
purposes to be made on a tax-free basis only if the sellers and
purchasers are registered.
C. Excise Tax Credits, Refunds, and Payments
The Code allows excise taxpayers to claim credits or refunds for
overpayments, including overpayments determined under sections 4081(e),
6415, 6416, and 6419 (section 6402). The Code generally allows non-
excise taxpayers to claim credits or payments for fuels used for
nontaxable purposes (sections 6420, 6421, and 6427) and allows blenders
to claim credits or payments for the production of alcohol and
biodiesel mixtures (sections 6426 and 6427(e)). Section 34 provides an
income tax credit for amounts payable for the nontaxable use of fuels
under sections 6420, 6421, and 6427, if these amounts have not been
previously claimed, and section 38 provides an income tax credit
(general business credit) for alcohol or biodiesel used as a fuel
(under sections 40 and 40A).
4. Reason for Change
Administrative difficulties have arisen from the interaction of the
disregarded entity rules and the federal employment tax provisions.
Problems have arisen for both taxpayers and the IRS with respect to
reporting, payment and collection of employment taxes, particularly
where state employment tax law also sets requirements for reporting,
payment and collection that may be in conflict with the federal
disregarded entity rules. The Treasury Department and the IRS believe
that treating the disregarded entity as the employer for purposes of
federal employment taxes will improve the administration of the tax
laws and simplify compliance.
Difficulties also have arisen from the interaction of the
disregarded entity rules and certain federal excise tax provisions.
Many of these provisions rely on state law, rather than federal law, to
determine liability for an excise tax, attachment of a tax, and
allowance of a credit, refund, or payment. For example, Sec. 48.0-2(b)
of the Manufacturers and Retailers Excise Tax Regulations provides that
such excise taxes attach when title to an article passes to the
purchaser. In general, determining when title passes depends on the
intention of the parties. Absent express intention, however, the laws
of the jurisdiction where the sale is made govern this determination.
Such a determination is required also in applying certain excise tax
credit, refund, and payment provisions that allow claims by ultimate
purchasers, ultimate vendors, and producers.
Explanation of Provisions
These proposed regulations would treat QSubs and single-owner
eligible entities that are disregarded entities for Federal tax
purposes as separate entities for purposes of employment taxes and
other requirements of law arising under subtitle C of the Code, certain
excise taxes, and the application of the rules under subtitle F of the
Code relating to matters such as reporting, assessment, collection, and
refunds regarding employment and certain excise taxes. Under the
proposed regulations, these entities generally would continue to be
treated as disregarded entities for other federal tax purposes.
1. Employment Taxes
The proposed regulations would eliminate disregarded entity status
for purposes of federal employment taxes. A disregarded entity would be
regarded for employment tax purposes, and, accordingly, become liable
for employment taxes on wages paid to employees of the disregarded
entity, and be responsible for satisfying other employment tax
obligations (e.g., backup withholding under section 3406, making timely
deposits of employment taxes, filing returns, and providing wage
statements to employees on Forms W-2). The owner of the disregarded
entity would no longer be liable for employment taxes or satisfying
other employment tax obligations with respect to the employees of the
disregarded entity. The disregarded entity would continue to be
disregarded for other Federal tax purposes. The proposed regulations
contain an example illustrating the interaction of the income tax
provisions and employment tax provisions. For example, the proposed
regulations illustrate that an individual owner of a disregarded entity
would continue to be treated as self-employed for purposes of Self
Employment Contributions Act (SECA) taxes (section 1401 et sequitur),
and not as an employee of the disregarded entity for employment tax
purposes.
The employment tax provisions of these regulations are proposed to
apply to wages paid on or after January 1 following the date these
regulations are published as final regulations in the Federal Register.
QSubs, single-owner eligible entities disregarded under Sec. Sec.
301.7701-1 through 301.7701-3, and the owners of such entities may
continue to use the procedures permitted by Notice 99-6 to satisfy the
owners' employment tax liabilities and other employment tax obligations
for periods before the effective date of these regulations. As required
by Notice 99-6, if the owner currently satisfies the employment tax
liabilities and other employment tax obligations with respect to wages
paid to employees performing services for the disregarded entity, then
the owner must continue to satisfy such liabilities and obligations
until these regulations become final and effective, at which time
Notice 99-6 will be obsoleted.
2. Excise Taxes
The proposed regulations would eliminate disregarded entity status
for purposes of certain excise taxes. An entity that is disregarded for
other federal tax purposes would be required to pay and report excise
taxes, required and allowed to register, and allowed to claim any
credits (other than income tax credits), refunds, and payments. The
excise tax provisions that are excluded from the proposed regulations
are specified. Because a disregarded entity does not file an income tax
return, the credit on Form 4136 under section 34 is
[[Page 60477]]
claimed on the owner's income tax return and appropriate identification
of the single-owner entity and its taxpayer identification number is
required. The income tax credit under section 38 (including any credit
under sections 40 and 40A) is not affected by these proposed
regulations.
The excise tax provisions in these regulations are proposed to
apply to liabilities imposed and actions first required or permitted in
periods beginning on or after January 1 following the date these
regulations are published as final regulations in the Federal Register.
For periods beginning before the effective date of these regulations,
the IRS will treat payments made by a disregarded entity, or other
actions taken by a disregarded entity, with respect to the excise taxes
affected by these regulations as having been made or taken by the sole
owner of that entity. Thus, for such periods, the owner of a
disregarded entity will be treated as satisfying the owner's
obligations with respect to the excise taxes affected by these
regulations, provided that those obligations are satisfied either (i)
by the owner itself or (ii) by the disregarded entity on behalf of the
owner.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these proposed regulations, and
because these proposed regulations do not impose a collection of
information on small entities, the Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to section 7805(f) of the Code,
this notice of proposed rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on their impact on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and (8)
copies) or electronic comments that are submitted timely to the IRS.
The IRS and the Treasury Department request comments on the clarity of
the proposed regulations and how they may be made easier to understand.
In addition, comments are requested specifically on any transition
issues that might arise with respect to employment taxes, and any
transition relief that should be provided with respect to employment
tax obligations. All comments will be available for public inspection
and copying. A public hearing will be scheduled if requested in writing
by any person that timely submits written comments. If a public hearing
is scheduled, notice of the date, time, and place for the hearing will
be published in the Federal Register.
Drafting Information
The principal authors of these regulations are Susan Athy, Office
of Associate Chief Counsel (Passthroughs and Special Industries), and
John Richards, Office of Associate Chief Counsel (Tax Exempt and
Government Entities). However, other personnel from the IRS and the
Treasury Department participated in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as
follows:
PART 1--INCOME TAX
Paragraph 1. The authority citation for part 1 continues to read,
in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.34-1 is revised to read as follows:
Sec. 1.34-1 Special rule for owners of certain business entities.
Amounts payable under sections 6420, 6421, and 6427 to a business
entity that is treated as separate from its owner under Sec. 1.1361-
4(a)(8) (relating to certain qualified subchapter S subsidiaries) or
Sec. 301.7701-2(c)(2)(v) of this chapter (relating to certain wholly-
owned entities) are, for purposes of section 34, treated as payable to
the owner of that entity.
Sec. Sec. 1.34-2 through 1.34-6 [Removed]
Par. 3. Sections 1.34-2 through 1.34-6 are removed.
Par. 4. Section 1.1361-4 is amended as follows:
1. In paragraph (a)(1), the language ``Except as otherwise provided
in paragraphs (a)(3) and (a)(6)'' is removed, and ``Except as otherwise
provided in paragraphs (a)(3), (a)(6), (a)(7), and (a)(8)'' is added in
its place.
2. Paragraphs (a)(7) and (a)(8) are added.
The additions read as follows:
Sec. 1.1361-4 Effect of QSub election.
(a) * * *
(7) Treatment of QSubs for purposes of employment taxes--(i) In
general. A QSub is treated as a separate corporation for purposes of
Subtitle C--Employment Taxes and Collection of Income Tax (Chapters 21,
22, 23, 23A, 24, and 25 of the Internal Revenue Code).
(ii) Effective date. This paragraph (a)(7) applies with respect to
wages paid on or after January 1 following the date these regulations
are published as final regulations in the Federal Register.
(8) Treatment of QSubs for purposes of certain excise taxes--(i) In
general. A QSub is treated as a separate corporation for purposes of--
(A) Federal tax liabilities imposed by Chapters 31, 32 (other than
section 4181), 33, 34, 35, 36 (other than section 4461), and 38 of the
Internal Revenue Code, or any floor stocks tax imposed on articles
subject to any of these taxes;
(B) Collection of tax imposed by Chapter 33 of the Internal Revenue
Code;
(C) Registration under sections 4101, 4222, and 4412; and
(D) Claims of a credit (other than a credit under section 34),
refund, or payment related to a tax described in paragraph (a)(8)(A) of
this section.
(ii) Effective date. This paragraph (a)(8) applies to liabilities
imposed and actions first required or permitted in periods beginning on
or after January 1 following the date these regulations are published
as final regulations in the Federal Register.
Par 5. Section 1.1361-6 is amended as follows:
The language ``Except as provided in Sec. Sec. 1.1361-
4(a)(3)(iii), 1.1361-4(a)(5)(i), and 1.1361-5(c)(2)'' is removed, and
``Except as otherwise provided in Sec. Sec. 1.1361-4(a)(3)(iii),
1.1361-4(a)(5)(i), 1.1361-4(a)(6)(iii), 1.1361-4(a)(7)(ii), 1.1361-
4(a)(8)(ii), and 1.1361-5(c)(2)'' is added in its place.
PART 301--PROCEDURE AND ADMINISTRATION
Par. 6. The authority citation for part 301 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 7. Section 301.7701-2 is amended as follows:
1. In paragraph (a), a sentence is added at the end.
[[Page 60478]]
2. In paragraph (c)(2)(i), the language ``A business'' is removed,
and ``Except as otherwise provided in this paragraph (c), a business''
is added in its place.
3. Paragraphs (c)(2)(iv), (c)(2)(v), (e)(3), and (e)(4) are added.
The additions read as follows:
Sec. 301.7701-2 Business entities; definitions.
(a) * * * But see paragraphs (c)(2)(iv) and (v) of this section for
special employment and excise tax rules that apply to an eligible
entity that is otherwise disregarded as an entity separate from its
owner.
* * * * *
(c) * * *
(2) * * *
(iv) Special rule for employment tax purposes--(A) In general.
Paragraph (c)(2)(i) of this section (relating to certain wholly owned
entities) does not apply to taxes imposed under Subtitle C--Employment
Taxes and Collection of Income Tax (Chapters 21, 22, 23, 23A, 24, and
25 of the Internal Revenue Code).
(B) Example. The following example illustrates the application of
paragraph (c)(2)(iv) of this section:
Example. (i) LLCA is an eligible entity owned by individual A
and is generally disregarded as an entity separate from its owner
for federal tax purposes. However, LLCA is treated as an entity
separate from its owner for purposes of subtitle C of the Internal
Revenue Code. LLCA has employees and pays wages as defined in
sections 3121(a), 3306(b), and 3401(a).
(ii) LLCA is subject to the provisions of subtitle C of the
Internal Revenue Code and related provisions under 26 CFR subchapter
C, Employment Taxes and Collection of Income Tax at Source, parts 31
through 39. Accordingly, LLCA is required to perform such acts as
are required of an employer under those provisions of the Code and
regulations thereunder that apply. All provisions of law (including
penalties) and the regulations prescribed in pursuance of law
applicable to employers in respect of such acts are applicable to
LLCA. Thus, for example, LLCA is liable for income tax withholding,
Federal Insurance Contributions Act (FICA) taxes, and Federal
Unemployment Tax Act (FUTA) taxes. See sections 3402 and 3403
(relating to income tax withholding); 3102(b) and 3111 (relating to
FICA taxes), and 3301 (relating to FUTA taxes). In addition, LLCA
must file under its name and EIN the applicable Forms in the 94X
series, for example, Form 941, ``Employer's Quarterly Employment Tax
Return,'' Form 940, ``Employer's Annual Federal Unemployment Tax
Return;'' file with the Social Security Administration and furnish
to LLCA's employees statements on Forms W-2, ``Wage and Tax
Statement;'' and make timely employment tax deposits. See Sec. Sec.
31.6011(a)-1, 31.6011(a)-3, 31.6051-1, 31.6051-2, and 31.6302-1 of
this chapter.
(iii) A is self-employed for purposes of subtitle A, chapter 2,
Tax on Self-Employment Income, of the Internal Revenue Code. Thus, A
is subject to tax under section 1401 on A's net earnings from self-
employment with respect to LLCA's activities. A is not an employee
of LLCA for purposes of subtitle C of the Code. Because LLCA is
treated as a sole proprietorship of A for income tax purposes, A is
entitled to deduct trade or business expenses paid or incurred with
respect to activities carried on through LLCA, including the
employer's share of employment taxes imposed under sections 3111 and
3301, on A's Form 1040, Schedule C, ``Profit or Loss for Business
(Sole Proprietorship).''
(v) Special rule for certain excise tax purposes--(A) In general.
Paragraph (c)(2)(i) of this section (relating to certain wholly owned
entities) does not apply for purposes of--
(1) Federal tax liabilities imposed by Chapters 31, 32 (other than
section 4181), 33, 34, 35, 36 (other than section 4461), and 38 of the
Internal Revenue Code, or any floor stocks tax imposed on articles
subject to any of these taxes;
(2) Collection of tax imposed by Chapter 33 of the Internal Revenue
Code;
(3) Registration under sections 4101, 4222, and 4412; and
(4) Claims of a credit (other than a credit under section 34),
refund, or payment related to a tax described in paragraph
(c)(2)(v)(A)(1) of this section.
(B) Example. The following example illustrates the provisions of
this paragraph (c)(2)(v).
Example. (i) LLCB is an eligible entity that has a single owner,
B. LLCB is generally disregarded as an entity separate from its
owner. However, under paragraph (c)(2)(v) of this section, LLCB is
treated as an entity separate from its owner for certain purposes
relating to excise taxes.
(ii) LLCB mines coal from a coal mine located in the United
States. Section 4121 of chapter 32 of the Internal Revenue Code
imposes a tax on the producer's sale of such coal. Section 48.4121-
1(a) of this chapter defines a ``producer'' generally as the person
in whom is vested ownership of the coal under state law immediately
after the coal is severed from the ground. LLCB is the person that
owns the coal under state law immediately after it is severed from
the ground. Under paragraph (c)(2)(v)(A)(1) of this section, LLCB is
the producer of the coal and is liable for tax on its sale of such
coal under chapter 32 of the Internal Revenue Code. LLCB must report
and pay tax on Form 720, ``Quarterly Federal Excise Tax Return,''
under its own name and taxpayer identification number.
(iii) LLCB uses undyed diesel fuel in an earthmover that is not
registered or required to be registered for highway use. Such use is
an off-highway business use of the fuel. Under section 6427(l), the
ultimate purchaser is allowed to claim an income tax credit or
payment related to the tax imposed on diesel fuel used in an off-
highway business use. Under paragraph (c)(2)(v) of this section, for
purposes of the credit or payment allowed under section 6427(l),
LLCB is the person that could claim the amount on its Form 720 or on
a Form 8849, ``Claim for Refund of Excise Taxes.'' Alternatively, if
LLCB did not claim a payment during the time prescribed in section
6427(i)(2) for making a claim under section 6427, Sec. 1.34-1 of
this chapter provides that B, the owner of LLCB, could claim the
income tax credit allowed under section 34 for the nontaxable use of
diesel fuel by LLCB.
* * * * *
(e) * * *
(3) Paragraph (c)(2)(iv) of this section applies with respect to
wages paid on or after January 1 following the date these regulations
are published as final regulations in the Federal Register.
(4) Paragraph (c)(2)(v) of this section applies to liabilities
imposed and actions first required or permitted in periods beginning on
or after January 1 following the date these regulations are published
as final regulations in the Federal Register.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-20765 Filed 10-17-05; 8:45 am]
BILLING CODE 4830-01-P