Final TD-8706 Regulation

22

Federal Register / Vol. 62, No. 1 / Thursday, January 2, 1997 / Rules and Regulations

under paragraph (i)(4) of this section)/75u
passive earnings). After the inclusion and
deemed-paid taxes are computed, at the close
of 1998 CFC has 100u of general limitation
earnings, 0 of passive limitation earnings
(100u of foreign personal holding company
income — 100u inclusion), and a (50u)
deficit in shipping limitation earnings.
Example 2. (i) The facts are the same as in
Example 1 with the addition of the following
facts. In 1999, CFC distributes 150u to A.
CFC has 100u of previously-taxed earnings
and profits described in section 959(c)(2)
attributable to 1998, all of which is passive
limitation earnings and profits. Under section
959(c), 100u of the 150u distribution is
deemed to be made from earnings and profits
described in section 959(c)(2). The remaining
50u is deemed to be made from earnings and
profits described in section 959(c)(3). The
entire dividend distribution of 50u is treated
as made out of CFC’s general limitation
earnings and profits. See section 904(d)(3)(D).
(ii) For purposes of computing post-1986
undistributed earnings under section 902
with respect to the 1999 dividend of 50u, the
shipping limitation accumulated deficit of
(50u) reduces general limitation earnings and
profits of 100u to 50u. Thus, 100% of CFC’s
post-1986 foreign income taxes with respect
to general limitation earnings are deemed
paid by A under section 902 with respect to
the 1999 dividend of 50u (50u dividend/50u
general limitation earnings). After the
deemed-paid taxes are computed, at the close
of 1999 CFC has 50u of general limitation
earnings (100u opening balance—50u
distribution), 0 of passive limitation earnings,
and a (50u) deficit in shipping limitation
earnings.

(6) Effective date. This paragraph (i)
applies to taxable years of a controlled
foreign corporation beginning after
March 3, 1997.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: December 11, 1996.
Donald C. Lubick,
Assistant Secretary of the Treasury.
[FR Doc. 97–32378 Filed 12–31–96; 8:45 am]
BILLING CODE 4830–01–U

26 CFR Parts 31 and 602
[TD 8706]
RIN 1545–AR67

Electronic Filing of Form W–4
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

SUMMARY: This document contains final
regulations relating to Form W–4,
Employee’s Withholding Allowance
Certificate. The final regulations
authorize employers to establish
electronic systems for use by employees
in filing their Forms W–4. The
regulations provide employers and

employees with guidance necessary to
comply with the law. The regulations
affect employers that establish
electronic systems and their employees.
EFFECTIVE DATE: These final regulations
are effective January 2, 1997.
FOR FURTHER INFORMATION CONTACT:
Karin Loverud, (202) 622–6060 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collection of information
contained in these final regulations has
been reviewed and approved by the
Office of Management and Budget in
accordance with the Paperwork
Reduction Act (44 U.S.C. 3507) under
control number 1545–1435. Responses
to this collection of information are
mandatory.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
displays a valid control number.
The estimated annual burden per
respondent is 20 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, T:FP,
Washington, DC 20224, and to the
Office of Management and Budget, Attn:
Desk Officer for the Department of the
Treasury, Office of Information and
Regulatory Affairs, Washington, DC
20503.
Books or records relating to this
collection of information must be
retained as long as their contents may
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
On April 15, 1994, a notice of
proposed rulemaking [EE–45–93]
containing proposed regulations relating
to Form W–4, Employee’s Withholding
Allowance Certificate, was published in
the Federal Register (59 FR 18057).
On December 21, 1994, temporary
regulations (TD 8577) clarifying the
existing proposed regulations were
published in the Federal Register (59
FR 65712). A notice of proposed
rulemaking (EE–45–93) crossreferencing the temporary regulations
was published in the Federal Register
for the same day (59 FR 65740).
Written comments responding to
these notices were received. Public
hearings were requested and were held
on July 15, 1994, and November 7, 1995.

After consideration of all the
comments, the proposed regulations
under section 3402(f) are adopted as
revised by this Treasury decision. The
comments and revisions are discussed
below.
Explanation of Revisions and Summary
of Comments
1. Relationship between paper and
electronic Forms W–4
A withholding exemption certificate
(Form W–4) may be in either paper or
electronic form. Therefore, an employee
will furnish a Form W–4 to the
employer either on paper or
electronically. To clarify that an
electronic Form W–4 has the same
status as a paper Form W–4, the final
regulations make minor revisions to
§ 31.3402(f)(5)–1, Form and contents of
withholding exemption certificates.
Further, the final regulations appear as
§ 31.3402(f)(5)–1(c), rather than in a
separate regulations section limited to
electronic forms.
2. Electronic filing by all employees.
The existing proposed and temporary
regulations require employers that
establish electronic systems to provide
employees with the option of filing
paper or electronic Forms W–4. Several
commentators requested that employers
be allowed to adopt systems under
which all employees file Forms W–4
electronically. These commentators
stated that a system under which all
employees file electronically would
reduce employer burden in terms of
costs and time (for example, eliminate
maintenance of duplicative paper and
electronic systems). Similarly, it would
reduce employee burden in terms of
time and choosing a filing option.
The IRS and Treasury want to assist
in reducing burdens on both employers
and employees and to make it as easy
as possible for employers to adopt less
burdensome systems. The final
regulations permit an employer to adopt
a system under which all employees file
Forms W–4 electronically. The IRS and
Treasury expect, however, that an
employer will make a paper option
reasonably available upon request to
any employee who has a serious
objection to using the electronic system
or whose access to, or ability to use, the
system may be limited (for example, as
a result of a disability). The paper
option would be satisfied, for example,
if the employer informs employees how
they can obtain a paper Form W–4 and
where they should submit the
completed paper Form W–4. The IRS
and Treasury also expect that employers
will comply with all applicable law

Federal Register / Vol. 62, No. 1 / Thursday, January 2, 1997 / Rules and Regulations
governing the workplace and terms and
conditions of employment, such as the
Americans with Disabilities Act (42
U.S.C. 12112(a)). Compliance with these
regulations does not guarantee that a
system for filing Forms W–4
electronically is in compliance with
those applicable laws.
3. Electronic Forms W–4
Several commentators recommended
that electronic systems be allowed for
all Forms W–4 without exception. The
prior proposed and temporary
regulations specifically exclude (1)
Forms W–4 required upon
commencement of employment (initial
Form W–4), and (2) Forms W–4 required
to be furnished to the IRS by employers
because more than 10 withholding
exemptions are claimed or, if the
employee is expected to earn more than
$200 per week, exemption from
withholding is claimed.
Initial Form W–4. Section
3402(f)(2)(A) of the Internal Revenue
Code (Code) requires a new employee to
furnish the employer with a signed
withholding exemption certificate.
Section 6061 requires all Forms W–4 to
be signed. See discussion below under
‘‘5. Signature Under Penalties of
Perjury’’ and § 301.6061–1(b), which
states that the Secretary may prescribe
in forms, instructions, or other
appropriate guidance the method of
signing any return, statement, or other
document required to be made under
any provision of the internal revenue
laws or regulations. The final
regulations permit electronic systems to
include Forms W–4 required upon
commencement of employment.
Forms W–4 claiming more than 10
exemptions or exemption from
withholding. Section 31.3402(f)(2)–1(g)
requires employers to submit to the IRS
copies of certain Forms W–4 furnished
to them by their employees. The Forms
W–4 required to be submitted are those
on which the employee claims either (1)
more than 10 withholding exemptions,
or (2) exemption from withholding (and
the employee is expected to earn more
than $200 per week).
Under § 31.3402(f)(2)–1(g)(5), if the
IRS determines that a Form W–4, a copy
of which was submitted to the IRS, is
defective, the IRS will notify in writing
both the employer and the employee.
(The notice is referred to as a ‘‘lock-in
letter.’’) A Form W–4 is defective if (1)
the IRS determines that the Form W–4
contains a materially incorrect
statement, or (2) following
communication with the employee, the
IRS lacks sufficient information to
determine whether the certificate is
correct. The lock-in letter issued by the

IRS advises the employer that the
employee either is not entitled to claim
exemption from withholding or is not
entitled to claim more withholding
exemptions than the number specified
by the IRS in the notice, or both. If the
employee subsequently files a new
Form W–4, the employer may withhold
on the basis of that new Form W–4 only
if the new Form W–4 is consistent with
the lock-in letter. The employer must
continue to withhold on the basis of that
advice until the IRS revokes in writing
its lock-in letter.
The final regulations permit
electronic systems to include Forms W–
4 on which employees claim more than
10 withholding exemptions or
exemption from withholding. However,
the IRS and Treasury expect that
electronic systems, alone or in
conjunction with the rest of an
employer’s payroll system, will ensure
compliance with the advice contained
in a lock-in letter. For instance, an
electronic system can ensure
compliance with a lock-in letter by
prohibiting an employee for whom a
lock-in letter was issued from filing any
electronic Form W–4 or prohibiting the
employee from claiming more
withholding exemptions than the
number specified in the IRS notice.
Additionally, an employer may choose
to require any employee to file a paper
Form W–4 if the employee wishes to
claim more than 10 withholding
exemptions or exemption from
withholding.
4. Submission of Certain Forms W–4 to
IRS
Section 31.3402(f)(2)–1(g) requires
employers to submit to the IRS copies
of Forms W–4 on which the employee
claims either more than 10 withholding
exemptions or exemption from
withholding (and the employee is
expected to earn more than $200 per
week). Generally, the copies are sent
quarterly to the IRS along with the
employer’s Form 941, Employer’s
Quarterly Federal Tax Return. Copies
can also be submitted earlier and more
often to the employer’s IRS service
center.
Employers that establish electronic
systems will satisfy the requirement of
§ 31.3402(f)(2)–1(g) if they furnish the
Form W–4 information on magnetic
media. Before using magnetic media,
employers must submit Form 4419,
Application for Filing Information
Returns Magnetically/Electronically, to
request authorization. Rev. Proc. 92–80
(1992–2 C.B. 465) contains
specifications for filing Forms W–4 on
magnetic tape and on 51⁄4- and 31⁄2-inch
magnetic diskettes. Electronic

23

transmission of Form W–4 information
to the IRS is not yet available.
5. Signature Under Penalties of Perjury
Section 6061 of the Code requires that
any return, statement, or other
document required to be made under
any provision of the Code or regulations
be signed. Section 6065 requires that
any such document contain or be
verified by a written declaration that it
is made under the penalties of perjury.
These requirements apply to all Forms
W–4, including those filed
electronically, and are reflected in
§ 31.3402(f)(5)–1(c)(iii) of the final
regulations.
Although sections 6061 and 6065
apply to all Forms W–4, the IRS and
Treasury are concerned that some
electronic systems established under the
temporary regulations may not include
a signature under penalties of perjury.
The final regulations, therefore, include
guidance on the perjury statement and
the electronic signature.
For certain Forms W–4, the final
regulations treat the signature-underpenalties-of-perjury-statement
requirement as satisfied until January 1,
1999. This special rule applies only if
the system precludes the electronic
filing of Forms W–4 required upon
commencement of employment and
Forms W–4 claiming more than 10
withholding exemptions or exemption
from withholding. Moreover, the special
rule applies only to Forms W–4 filed
electronically before the earlier of (1)
January 1, 1999, or (2) the first date on
which the employer’s electronic system
permits the filing of Forms W–4
required upon commencement of
employment or Forms W–4 claiming
more than 10 withholding exemptions
or exemption from withholding.
The IRS and Treasury will consider
written comments pertaining to the
provisions relating to signatures under
penalties of perjury. Submissions
should be sent to: CC:DOM:CORP:R (TD
8706), room 5228, Internal Revenue
Service, POB 7604, Ben Franklin
Station, Washington, DC 20044.
Alternatively, taxpayers may submit
comments electronically via the Internet
by selecting the ‘‘Tax Regs’’ option on
the IRS Home Page, or by submitting
comments directly to the IRS Internet
site at http://www.irs.ustreas.gov/prod/
taxlregs/comments.html. Submissions
may be hand delivered between the
hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (TD 8706), Courier’s
Desk, Internal Revenue Service, 1111
Constitution Avenue NW, Washington,
DC.

24

Federal Register / Vol. 62, No. 1 / Thursday, January 2, 1997 / Rules and Regulations

6. Employer Retention of Forms W–4
and Predecessor and Successor
Employers

PART 31—EMPLOYMENT TAXES AND
COLLECTION OF INCOME TAX AT
SOURCE

One commentator requested guidance
concerning the period for which paper
Forms W–4 are required to be retained
under § 31.6001–1(e) after the employer
establishes an electronic system and in
predecessor-employer/successoremployer situations. Electronic Forms
W–4 have the same status as paper
Forms W–4. Therefore, guidance that
applies to paper Forms W–4 also applies
to electronic Forms W–4. For further
information, see Rev. Proc. 91–59
(1991–2 C.B. 841) (information
regarding the retention of records using
a variety of automatic data processing
systems); and section 5 of Rev. Proc. 96–
60 (1996–53 I.R.B.) (predecessor/
successor situations).

Paragraph 1. The authority citation
for part 31 is amended by adding an
entry for section 31.3402(f)(5)–1 to read
as follows:

Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
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
regulations, and, because the notice of
proposed rulemaking preceding the
regulations was issued prior to March
29, 1996, the Regulatory Flexibility Act
(5 U.S.C. chapter 6) does not apply.
Pursuant to section 7805(f) of the Code,
the notice of proposed rulemaking
preceding these regulations was
submitted to the Small Business
Administration for comment on its
impact on small business.
Drafting Information
The principal author of these
regulations is Karin Loverud, Office of
the Associate Chief Counsel (Employee
Benefits and Exempt Organizations),
IRS. However, other personnel from the
IRS and Treasury Department
participated in their development.
List of Subjects
26 CFR Part 31
Employment taxes, Income taxes,
Penalties, Pensions, Railroad retirement,
Reporting and recordkeeping
requirements, Social Security,
Unemployment compensation.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 31 and 602
are amended as follows:

Authority: 26 U.S.C. 7805 * * * Section
31.3402(f)(5)–1 also issued under 26 U.S.C.
3402 (i) and (m). * * *

Par. 2. Section 31.3402(f)(5)–1 is
amended as follows:
1. Headings are added to paragraphs (a)
and (b).
2. The fourth sentence of paragraph (a)
is revised.
3. Paragraph (c) is added.
4. The authority citation which follows
the end of the section is removed.
The revisions and additions read as
follows:
§ 31.3402(f)(5)–1 Form and contents of
withholding exemption certificates.

(a) Form W–4. * * * Blank copies of
paper Forms W–4 will be supplied to
employers upon request to the Internal
Revenue Service. * * *
(b) Invalid Form W–4. * * *
(c) Electronic Form W–4—(1) In
general. An employer may establish a
system for its employees to file
withholding exemption certificates
electronically.
(2) Requirements—(i) In general. The
electronic system must ensure that the
information received is the information
sent, and must document all occasions
of employee access that result in the
filing of a Form W–4. In addition, the
design and operation of the electronic
system, including access procedures,
must make it reasonably certain that the
person accessing the system and filing
the Form W–4 is the employee
identified in the form.
(ii) Same information as paper Form
W–4. The electronic filing must provide
the employer with exactly the same
information as the paper Form W–4.
(iii) Jurat and signature requirements.
The electronic filing must be signed by
the employee under penalties of perjury.
(A) Jurat. The jurat (perjury statement)
must contain the language that appears
on the paper Form W–4. The electronic
program must inform the employee that
he or she must make the declaration
contained in the jurat and that the
declaration is made by signing the Form
W–4. The instructions and the language
of the jurat must immediately follow the
employee’s income tax withholding
selections and immediately precede the
employee’s electronic signature.
(B) Electronic signature. The
electronic signature must identify the

employee filing the electronic Form W–
4 and authenticate and verify the filing.
For this purpose, the terms
‘‘authenticate’’ and ‘‘verify’’ have the
same meanings as they do when applied
to a written signature on a paper Form
W–4. An electronic signature can be in
any form that satisfies the foregoing
requirements. The electronic signature
must be the final entry in the
employee’s Form W–4 submission.
(iv) Copies of electronic Forms W–4.
Upon request by the Internal Revenue
Service, the employer must supply a
hardcopy of the electronic Form W–4
and a statement that, to the best of the
employer’s knowledge, the electronic
Form W–4 was filed by the named
employee. The hardcopy of the
electronic Form W–4 must provide
exactly the same information as, but
need not be a facsimile of, the paper
Form W–4.
(3) Effective date—(i) In general. This
paragraph applies to all withholding
exemption certificates filed
electronically by employees on or after
January 2, 1997.
(ii) Special rule for certain Forms W–
4. In the case of an electronic system
that precludes the filing of Forms W–4
required on commencement of
employment and Forms W–4 claiming
more than 10 withholding exemptions
or exemption from withholding, the
requirements of paragraph (c)(2)(iii) of
this section will be treated as satisfied
if the Form W–4 is filed electronically
before January 1, 1999.
§ 31.3402(f)(5)–2T

[Removed]

Par. 3. Section 31.3402(f)(5)–2T is
removed.
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 4. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

Par. 5. In § 602.101, paragraph (c) is
amended by:
1. Removing the entry for
31.3402(f)(5)–2T from the table.
2. Revising the entry for 31.3402(f)(5)–
1 to read as follows:
§ 602.101

*

OMB Control numbers.

*
*
(c) * * *

*

*

CFR part or section where
identified and described

Current
OMB Control No.

*
*
*
*
*
31.3402(f)(5)–1 .........................
1545–0010
1545–1435

Federal Register / Vol. 62, No. 1 / Thursday, January 2, 1997 / Rules and Regulations
Current
OMB Control No.

CFR part or section where
identified and described

*

*

*

*

*

Approved: December 12, 1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Donald C. Lubick,
Acting Assistant Secretary of the Treasury.
[FR Doc. 96–32669 Filed 12–31–96; 8:45 am]
BILLING CODE 4830–01–U

26 CFR Part 53
[TD 8705]
RIN 1545–AU65

Requirement of Return and Time for
Filing
Internal Revenue Service (IRS),
Treasury.
ACTION: Final and temporary
regulations.
AGENCY:

SUMMARY: This document contains final
and temporary regulations providing
that disqualified persons and
organization managers liable for Internal
Revenue Code section 4958 excise taxes
are required to file Form 4720. The
regulations also specify the filing date
for returns for the period to which the
new excise taxes applied retroactively.
These excise taxes are imposed on
excess benefit transactions between
disqualified persons, as statutorily
defined, and sections 501(c)(3) and (4)
organizations, except for private
foundations.
DATES: These regulations are effective
January 2, 1997.
For dates of applicability, see
§ 53.6071–1T(f) of these regulations.
FOR FURTHER INFORMATION CONTACT:
Phyllis Haney, (202) 622–4290 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:

Background
This document contains amendments
to the Foundation and Similar Excise
Taxes regulations (26 CFR part 53)
under sections 6011 and 6071. These
regulations provide guidance relating to
the requirement of a return to
accompany payment of section 4958
excise taxes and the time for filing that
return. These rules were first published
in Notice 96–46 (1996–39 I.R.B. 7)
(September 23, 1996).
Taxpayer Bill of Rights 2, Public Law
104–168, 110 Stat. 1452 (TBOR2),
enacted July 30, 1996, added section
4958 to the Code. As described more

fully below, section 4958 imposes
excise taxes on excess benefit
transactions. Section 4958 taxes apply
retroactively to excess benefit
transactions occurring on or after
September 14, 1995. The taxes do not,
however, apply to any benefit arising
from a transaction pursuant to any
written contract which was binding on
September 13, 1995, and at all times
thereafter before such transaction
occurred.
An ‘‘excess benefit transaction’’
subject to tax under section 4958 is any
transaction in which an economic
benefit is provided by an organization
described in section 501(c)(3) (except
for a private foundation) or 501(c)(4)
directly or indirectly to, or for the use
of, any disqualified person if the value
of the economic benefit provided
exceeds the value of the consideration
(including the performance of services)
received for providing the benefit. A
‘‘disqualified person’’ is any person who
was, at any time during the 5-year
period ending on the date of the excess
benefit transaction, in a position to
exercise substantial influence over the
affairs of the organization. Disqualified
persons also include family members
and certain entities in which at least 35
percent of the control or beneficial
interest are held by persons described in
the preceding sentence. An
‘‘organization manager’’ is any officer,
director, trustee, or any individual
having powers or responsibilities
similar to those of any officer, director,
or trustee.
Section 4958 imposes three taxes. The
first tax is equal to 25 percent of the
excess benefit amount, and is to be paid
by any disqualified person who engages
in an excess benefit transaction. The
second tax is equal to 200 percent of the
excess benefit amount, and is to be paid
by any disqualified person if the excess
benefit transaction is not corrected
within the taxable period. The third tax
is equal to 10 percent of the excess
benefit amount, and is to be paid by any
organization manager who knowingly
participates in an excess benefit
transaction. The maximum amount of
this third tax with respect to any one
excess benefit transaction may not
exceed $10,000. These regulations
prescribe Form 4720 for calculating and
paying the first and third taxes
described above.
TBOR2 also amended section 6033(b)
to require section 501(c)(3)
organizations to report the amounts of
the taxes paid under section 4958 with
respect to excess benefit transactions
involving the organization, as well as
any other information the Secretary may
require concerning those transactions.

25

Section 6033(f) also was amended to
impose the same reporting requirements
on section 501(c)(4) organizations.
Those amendments to section 6033 only
apply to organizations’ returns for
taxable years beginning after July 30,
1996. These and other TBOR2
amendments to the reporting
requirements for section 501(c)(3) and
(4) organizations are reflected on IRS
Forms 990 and 990–EZ beginning with
the 1996 versions.
Explanation of Provisions
The regulations provide that
disqualified persons and organization
managers, as defined in sections
4958(f)(1) and (2), who are liable for
section 4958 excise taxes on excess
benefit transactions, as defined in
section 4958(c)(1), are required to file a
return on Form 4720. The general rule
is that returns will be due on or before
the 15th day of the fifth month
following the close of the disqualified
person’s or organization manager’s
taxable year. The regulations also
provide that returns on Form 4720 for
taxable years ending after September 13,
1995, and on or before July 30, 1996,
will be due on or before December 15,
1996. See Notice 96–46 (1996–39 I.R.B.
7) (September 23, 1996).
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in EO
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
regulations, and because the regulation
does not impose a collection of
information on small entities, the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) does not apply. Pursuant to
section 7805(f) of the Internal Revenue
Code, these temporary regulations will
be submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on their
impact on small business.
Drafting Information
The principal author of these
regulations is Phyllis Haney, Office of
Associate Chief Counsel (Employee
Benefits and Exempt Organizations).
However, other personnel from the IRS
and Treasury Department participated
in their development.
List of Subjects in 26 CFR Part 53
Excise taxes, Foundations,
Investments, Lobbying, Reporting and
recordkeeping requirements.