Td 8599

Federal Register / Vol. 60, No. 138 / Wednesday, July 19, 1995 / Rules and Regulations
social purpose. The purposes and
activities of a club, and not its name,
determine whether it is organized for
business, pleasure, recreation, or other
social purpose. Clubs organized for
business, pleasure, recreation, or other
social purpose include any membership
organization if a principal purpose of
the organization is to conduct
entertainment activities for members of
the organization or their guests or to
provide members or their guests with
access to entertainment facilities within
the meaning of paragraph (e)(2) of this
section. Clubs organized for business,
pleasure, recreation, or other social
purpose include, but are not limited to,
country clubs, golf and athletic clubs,
airline clubs, hotel clubs, and clubs
operated to provide meals under
circumstances generally considered to
be conducive to business discussion.
(b) Exceptions. Unless a principal
purpose of the organization is to
conduct entertainment activities for
members or their guests or to provide
members or their guests with access to
entertainment facilities, business
leagues, trade associations, chambers of
commerce, boards of trade, real estate
boards, professional organizations (such
as bar associations and medical
associations), and civic or public service
organizations will not be treated as
clubs organized for business, pleasure,
recreation, or other social purpose.
(3) * * *
(iii) ‘‘Expenditures paid or incurred
before January 1, 1979, with respect to
entertainment facilities or before
January 1, 1994, with respect to clubs’’,
see paragraph (e) of this section, and
*
*
*
*
*
(e) Expenditures paid or incurred
before January 1, 1979, with respect to
entertainment facilities or before
January 1, 1994, with respect to clubs—
(1) In general. Any expenditure paid or
incurred before January 1, 1979, with
respect to a facility, or paid or incurred
before January 1, 1994, with respect to
a club, used in connection with
entertainment shall not be allowed as a
deduction except to the extent it meets
the requirements of paragraph (a)(2)(ii)
of this section.
*
*
*
*
*
(3) * * *
(ii) Club dues—(a) Club dues paid or
incurred before January 1, 1994. Dues or
fees paid before January 1, 1994, to any
social, athletic, or sporting club or
organization are considered
expenditures with respect to a facility
used in connection with entertainment.
The purposes and activities of a club or
organization, and not its name,
determine its character. Generally, the

phrase social, athletic, or sporting club
or organization has the same meaning
for purposes of this section as that
phrase had in section 4241 and the
regulations thereunder, relating to the
excise tax on club dues, prior to the
repeal of section 4241 by section 301 of
Public Law 89–44. However, for
purposes of this section only, clubs
operated solely to provide lunches
under circumstances of a type generally
considered to be conducive to business
discussion, within the meaning of
paragraph (f)(2)(i) of this section, will
not be considered social clubs.
(b) Club dues paid or incurred after
December 31, 1993. See paragraph
(a)(2)(iii) of this section with reference
to the disallowance of deductions for
club dues paid or incurred after
December 31, 1993.
*
*
*
*
*
§ 1.274–5T

[Amended]

Par. 3. In § 1.274–5T, the first two
sentences of paragraph (c)(6)(iii) are
amended by removing the language ‘‘at
any time’’ in each sentence and adding
the language ‘‘before January 1, 1994,’’
in its place.
Margaret M. Richardson,
Commissioner of Internal Revenue.
Approved: June 21, 1995.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95–17665 Filed 7–18–95; 8:45 am]
BILLING CODE 4830–01–U

26 CFR Parts 1 and 602
[TD 8599]
RIN 1545–AN55

Deductions for Transfers of Property
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

This document contains final
regulations concerning deductions for
transfers of property. The regulations
amend the special rule that required an
employer to deduct and withhold
income tax as a prerequisite for claiming
a deduction for property transferred to
an employee in connection with the
performance of services. Under the
former regulation, employers that failed
to deduct and withhold income tax were
denied a deduction even where the
employee reported the income and paid
the tax. The new rules permit service
recipients to claim a deduction for the
amount included in the service
provider’s gross income. The service
provider will be deemed to have
SUMMARY:

36995

included an amount in gross income if
the service recipient provides a timely
Form W–2 or 1099, as appropriate.
These regulations apply to all service
recipients who transfer property in
connection with the performance of
services.
DATES: These regulations are effective
July 19, 1995.
For dates of applicability, see § 1.83–
6(a)(5).
FOR FURTHER INFORMATION CONTACT:
Charles T. Deliee, telephone 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. 3504(h)) under
control number 1545–1448. The
estimated annual burden of reporting
will be reflected in the reporting
requirements for Form 1099–MISC.
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, PC: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.
Background
On December 5, 1994, the IRS
published in the Federal Register (59
FR 62370) proposed amendments to the
income tax regulations (26 CFR part 1)
under section 83(h) of the Internal
Revenue Code (Code), which permits a
deduction for property transferred in
connection with the performance of
services.
Three written comments were
received from the public on the
proposed regulations. No public hearing
was held. After consideration of the
written comments received, the
proposed regulations are adopted by
this Treasury decision with one
technical clarification.
Explanation of Provisions
Under section 83(h) of the Code, in
the case of a transfer of property to
which section 83(a) applies, the person
for whom services were provided may
deduct an amount equal to the amount
included in the service provider’s gross
income. In light of the difficulty that a
service recipient may have in
demonstrating that an amount has

36996

Federal Register / Vol. 60, No. 138 / Wednesday, July 19, 1995 / Rules and Regulations

actually been included in the service
provider’s gross income, the general rule
in former § 1.83–6(a)(1) permitted the
deduction for the amount ‘‘includible’’
in the service provider’s gross income.
Thus, the deduction was allowed to the
service recipient even if the service
provider did not properly report the
includible amount. Where the service
provider was an employee of the service
recipient, however, the special rule in
§ 1.83–6(a)(2) provided that a deduction
could be claimed only if the service
recipient (employer) deducted and
withheld income tax in accordance with
section 3402. The special rule was
designed to ensure that the service
recipient’s deduction was in fact offset
by a corresponding inclusion in the
service provider’s gross income. The
special rule was limited to employeremployee situations because in other
situations there was no underlying
withholding requirement upon which
the deduction could be conditioned.
Taxpayers expressed concern that it
was often difficult to satisfy the
prerequisite that employers must deduct
and withhold income tax from
payments in kind as a condition for
claiming a deduction. These regulations
address this concern by eliminating this
prerequisite, while still ensuring
consistent treatment between service
recipients and service providers as
required by the statute. In addition,
because the deduction no longer is
conditioned on withholding, there no
longer is a need to have different rules
for those who receive services from
employees and those who receive
services from others.
Under these regulations, the former
general rule and special rule are
replaced by a revised general rule that
more closely follows the statutory
language of section 83(h). The service
recipient is allowed a deduction for the
amount ‘‘included’’ in the service
provider’s gross income. For this
purpose, the amount included means
the amount reported on an original or
amended return or included in gross
income as a result of an IRS audit of the
service provider.
Because of the potential difficulty of
demonstrating actual inclusion by the
service provider, a special rule provides
that, if the service recipient timely
complies with applicable Form W–2 or
1099 reporting requirements under
section 6041 (or 6041A), as appropriate,
with respect to the amount includible in
income by the service provider, the
service provider is deemed to have
included the amount in gross income for
this purpose. Thus, the regulations
allow the deduction without requiring
the service recipient to demonstrate

actual inclusion by the service provider.
If a transfer meets the requirements for
exemption from reporting for payments
aggregating less than $600 in any
taxable year, or is eligible for any other
reporting exemption, no reporting is
required in order for the service
recipient to rely on the deemed
inclusion rule.
In order to allow service recipients to
take advantage of the deemed inclusion
rule with respect to property transfers to
all service providers, these regulations
also permit service recipients to use the
special rule in the case of transfers to
corporate service providers. To that end,
service recipients are permitted, solely
for purposes of this rule, to treat the
Form 1099 reporting requirements as
applicable to transfers to corporate
service providers in the same manner as
those requirements apply to transfers to
noncorporate service providers. Thus, if
a service recipient who transferred
property to a corporate service provider
timely reports that income on Form
1099 (to both the service provider and
the federal government), the service
recipient is entitled to rely on the
deemed inclusion rule in claiming a
deduction for the amount of that
income. If the transfer meets the
requirements for exemption from
reporting for payments aggregating less
than $600 in any taxable year, or is
eligible for any other reporting
exemption applicable to a service
provider that is not a corporation, no
reporting is required in order for the
service recipient to rely on the deemed
inclusion rule.
The deemed inclusion rule may be
used only by a service recipient whose
compliance with applicable Form W–2
or 1099 reporting requirements is
timely. Thus, for example, under the
current reporting requirements, if
amounts attributable to one or more
section 83 transfers of property are
includible in an employee’s income in
year 1 (and are not eligible for any
reporting exemption), the employer
generally is required to furnish the
employee a Form W–2 reflecting that
amount by January 31 of year 2 and
generally is required to file a copy of the
Form W–2 with the federal government
by the last day of February of year 2. If
the employer reports to the employee
and the government in a timely manner,
the employer can rely on the deemed
inclusion rule to claim a deduction for
the amount in year 1. If the employee’s
Form W–2 is not furnished until after
January 31 of year 2 or the government’s
copy of Form W–2 is not filed until after
the last day of February of year 2, the
employer generally is required to
demonstrate that the employee actually

included the amount in income in order
to support its deduction of the amount.
Under these regulations, a special rule
applies with respect to an amount
includible in an employee’s or former
employee’s income by reason of a
disqualifying disposition of stock that
had been acquired pursuant to a
statutory stock option. In the case of
such a disposition, and solely for the
purpose of determining whether an
employer may use the deemed inclusion
rule under these regulations, a Form W–
2 or W–2c (as appropriate) will be
considered timely if it is furnished to
the employee or former employee, and
filed with the federal government, by
the date on which the employer files its
tax return (including an amended
return) claiming a deduction for that
amount.
With respect to disqualifying
dispositions, these regulations modify
the conditions for an employer’s
deduction under section 83(h) in a
manner that is not inconsistent with the
guidance provided by Notice 87–49
(Changes to Incentive Stock Option
Requirements by Section 321 of the Tax
Reform Act of 1986), 1987–2 C.B. 355.
These regulations are not intended to
have any effect on the application of
Notice 87–49 or the analysis contained
therein, and therefore should not be
viewed as constituting a reconsideration
of Revenue Ruling 71–52, 1971–1 C.B.
278, within the meaning of Notice 87–
49.
Three written comments were
received from the public on the
proposed regulations. One dealt
specifically with the withholding
requirements as they apply to
disqualifying dispositions of stock
received under an employee stock
purchase plan and, therefore, is beyond
the scope of this regulation. The
remaining two comments generally
applauded the proposed amendments,
but they both expressed a concern that,
even after elimination of the
withholding requirement as a
prerequisite for claiming a deduction
under section 83(h), there remains a
statutory requirement, under subtitle C,
to withhold income tax from
compensatory transfers of property.
Both commentators suggested that
regulations be published to exclude
transfers of property in payment for
services from the withholding
requirements.
Treasury and the IRS have carefully
considered the comments. However,
section 3402 of the Code requires every
employer making payment of wages to
deduct and withhold income tax from
the wages. Section 3401(a) (relating to
the definition of wages for income tax

Federal Register / Vol. 60, No. 138 / Wednesday, July 19, 1995 / Rules and Regulations
withholding purposes), section 3121(a)
(relating to the definition of wages for
FICA tax purposes), and section 3306(b)
(relating to the definition of wages for
FUTA tax purposes) of subtitle C all
provide that ‘‘wages’’ means all
remuneration ‘‘including the cash value
of all remuneration (including benefits)
paid in any medium other than cash,’’
except as specified otherwise in those
sections. A transfer of property in
connection with the performance of
services is not one of the specified
exceptions.
Therefore, although the withholding
requirement is eliminated as a
prerequisite for claiming a deduction,
these regulations do not relieve the
service recipient from any applicable
withholding requirements of subtitle C
or from the statutorily prescribed
penalties or additions to tax for
noncompliance with those
requirements. Thus, for example, if an
employer transferred to an employee
property to which section 83 applies
and failed to withhold income tax on
the payment, the employer would be
liable for the tax under section 3403.
However, under section 3402(d), any tax
liability assessed against the employer
would be offset by any tax paid by the
employee. In addition, nothing in these
regulations relieves the service recipient
from penalties or additions to tax for
noncompliance with the requirements
of section 6041 or 6041A (relating to
information reporting) to the extent they
otherwise apply.
These regulations are effective for
deductions allowable for taxable years
beginning on or after January 1, 1995.
However, taxpayers may apply these
regulations when claiming a deduction
for any year not closed by the statute of
limitations. For example, if substantially
vested (within the meaning of § 1.83–
3(b)) stock was transferred to an
employee in 1992 upon the exercise of
a nonstatutory stock option, and if the
calendar year employer furnished a
Form W–2 to the employee by January
31, 1993, reflecting the income
generated by the transfer and filed the
appropriate Form W–2 with the federal
government by February 28, 1993, then
the employer could apply these
regulations to claim a deduction for
1992 for the amount of the income, even
if the employer failed to withhold in
accordance with section 3402 and could
not demonstrate actual inclusion in
income by the employee. If that
employer did not claim a deduction for
the amount of the income on its 1992
tax return, it could file an amended
return for 1992 claiming such a
deduction pursuant to these regulations,
provided that 1992 is still an open year.

The proposed regulation that was
published in the Federal Register on
November 16, 1983 (48 FR 52079),
proposing to amend the special rule in
§ 1.83–6(a)(2), was withdrawn by the
Notice of Proposed Rulemaking
published on December 5, 1994 (59 FR
62371).
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 has also
been determined that section 553(b) of
the Administrative Procedure Act (5
U.S.C. chapter 5) and the Regulatory
Flexibility Act (5 U.S.C. chapter 6) do
not apply to these regulations and,
therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to
section 7805(f) of the Code, the notice
of proposed rulemaking preceding these
regulations was submitted to the Chief
Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.
Drafting Information: The principal author
of these regulations is Charles T. Deliee,
Office of the Associate Chief Counsel
(Employee Benefits and Exempt
Organizations), IRS. However, personnel
from other offices of the IRS and Treasury
Department participated in their
development.

List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
Paragraph 1. The authority for part 1
continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.83–6 is amended as
follows:
1. Paragraphs (a) (1) and (2) are
revised.
2. Paragraph (a)(5) is added.
3. The revisions and addition read as
follows:
§ 1.83–6

Deduction by employer.

(a) Allowance of deduction—(1)
General Rule. In the case of a transfer of
property in connection with the
performance of services, or a
compensatory cancellation of a
nonlapse restriction described in section

36997

83(d) and § 1.83–5, a deduction is
allowable under section 162 or 212 to
the person for whom the services were
performed. The amount of the
deduction is equal to the amount
included as compensation in the gross
income of the service provider under
section 83 (a), (b), or (d)(2), but only to
the extent the amount meets the
requirements of section 162 or 212 and
the regulations thereunder. The
deduction is allowed only for the
taxable year of that person in which or
with which ends the taxable year of the
service provider in which the amount is
included as compensation. For purposes
of this paragraph, any amount excluded
from gross income under section 79 or
section 101(b) or subchapter N is
considered to have been included in
gross income.
(2) Special Rule. For purposes of
paragraph (a)(1) of this section, the
service provider is deemed to have
included the amount as compensation
in gross income if the person for whom
the services were performed satisfies in
a timely manner all requirements of
section 6041 or section 6041A, and the
regulations thereunder, with respect to
that amount of compensation. For
purposes of the preceding sentence,
whether a person for whom services
were performed satisfies all
requirements of section 6041 or section
6041A, and the regulations thereunder,
is determined without regard to
§ 1.6041–3(c) (exception for payments to
corporations). In the case of a
disqualifying disposition of stock
described in section 421(b), an employer
that otherwise satisfies all requirements
of section 6041 and the regulations
thereunder will be considered to have
done so timely for purposes of this
paragraph (a)(2) if Form W–2 or Form
W–2c, as appropriate, is furnished to the
employee or former employee, and is
filed with the federal government, on or
before the date on which the employer
files the tax return claiming the
deduction relating to the disqualifying
disposition.
*
*
*
*
*
(5) Effective date. Paragraphs (a)(1)
and (2) of this section apply to
deductions for taxable years beginning
on or after January 1, 1995. However,
taxpayers may also apply paragraphs
(a)(1) and (2) of this section when
claiming deductions for taxable years
beginning before that date if the claims
are not barred by the statute of
limitations. Paragraphs (a) (3) and (4) of
this section are effective as set forth in
§ 1.83–8(b).
*
*
*
*
*

36998

Federal Register / Vol. 60, No. 138 / Wednesday, July 19, 1995 / Rules and Regulations

PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
Par. 3. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
§ 602.101

[Amended]

Par. 4. In § 602.101, paragraph (c) is
amended by adding the entry ‘‘1.83–6
* * * 1545–1448’’ in numerical order to
the table.
Approved: June 19, 1995.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 95–17494 Filed 7–18–95; 8:45 am]
BILLING CODE 4830–01–U

PENSION BENEFIT GUARANTY
CORPORATION
29 CFR Part 2627
RIN 1212–AA77

Disclosure to Participants
Pension Benefit Guaranty
Corporation.
ACTION: Final rule; correction.
AGENCY:

SUMMARY: This document makes a
clarifying correction to the final rule on
disclosure to participants (29 CFR part
2627) that was published in the Federal
Register of Friday, June 30, 1995 (60 FR
34412). The final regulations in that
document implement a new notice
requirement under section 4011 of the
Employee Retirement Income Security
Act of 1974, as amended by the
Retirement Protection Act of 1994. The
action is needed to clarify the final
regulations.
EFFECTIVE DATE: July 31, 1995.
FOR FURTHER INFORMATION CONTACT:
Harold J. Ashner, Assistant General
Counsel, or Catherine B. Klion,
Attorney, Office of the General Counsel,
PBGC, 1200 K Street, NW., Washington,
DC 20005–4026, 202–326–4024 (202–
326–4179 for TTY and TDD).
SUPPLEMENTARY INFORMATION: The
following correction is made to the final
rule that was the subject of FR Doc. No.
95–16196, which was published Friday,
June 30, 1995 (60 FR 34412). The final
regulations in that document implement
section 4011 of ERISA, which requires
plan administrators of certain
underfunded plans to provide notice to
plan participants and beneficiaries of
the plan’s funding status and the limits
on the PBGC’s guarantee.

The PBGC is correcting § 2627.3 of the
final regulations to make clear that a
plan does not have to provide the
Participant Notice for a plan year if it
meets the DRC Exception Test in
§ 2627.3(b) for that plan year or for the
prior plan year. Accordingly, on page
34414, in the second and third columns,
paragraph (a) of § 2627.3 is corrected to
read as follows:
§ 2627.3

Notice requirement.

(a) General. Except as otherwise
provided in this part, the plan
administrator of a plan must provide a
Participant Notice for a plan year if a
variable rate premium is payable for the
plan under section 4006(a)(3)(E) of the
Act and part 2610 of this chapter for
that plan year, unless, for that plan year
or for the prior plan year, the plan meets
the Deficit Reduction Contribution
(‘‘DRC’’) Exception Test in paragraph (b)
of this section. The DRC Exception Test
may be applied using the Small Plan
DRC Exception Test rules in § 2627.4(b),
where applicable.
*
*
*
*
*
Issued in Washington, DC, this 12th day of
July 1995.
Martin Slate,
Executive Director, Pension Benefit Guaranty
Corporation.
[FR Doc. 95–17713 Filed 7–18–95; 8:45 am]
BILLING CODE 7708–01–M

DEPARTMENT OF THE INTERIOR
Office of Surface Mining Reclamation
and Enforcement
30 CFR Part 926
Montana Abandoned Mine Land
Reclamation (AMLR) Plan
Office of Surface Mining
Reclamation and Enforcement (OSM),
Interior.
ACTION: Final rule; approval of
amendment.
AGENCY:

OSM is approving a proposed
amendment to the Montana AMLR plan
(hereinafter referred to as the ‘‘Montana
plan’’) under the Surface Mining
Control and Reclamation Act of 1977
(SMCRA). Montana proposed the
addition of new provisions to its AMLR
plan that concern the reclamation of
interim program and bankrupt surety
bond forfeiture coal sites, future setaside funds and an acid mine drainage
program, and water treatment supply
replacement project requirements.
Montana also included in this
amendment updated policies and
procedures concerning purchasing,
SUMMARY:

equal opportunity in employment,
Americans With Disabilities Act,
compliance with the National Oil and
Hazardous Substances Contingency
Plan, and coordination and consultation
with other State and Federal agencies.
The amendment is intended to
incorporate the additional flexibility
afforded by SMCRA, as amended by the
Abandoned Mine Reclamation Act of
1990 (Pub. L. 101–508), and to improve
operational efficiency.
EFFECTIVE DATE:

July 19, 1995.

FOR FURTHER INFORMATION CONTACT: Guy
Padgett, Casper Field Office, Telephone:
(307) 261–5776.
SUPPLEMENTARY INFORMATION:

I. Background on Title IV of SMCRA
Title IV of SMCRA established an
AMLR program for the purposes of
reclaiming and restoring lands and
waters adversely affected by past
mining. The program is funded by a
reclamation fee levied on the
production of coal. Generally, lands and
waters eligible for reclamation under
Title IV are those that were mined or
affected by mining and abandoned or
inadequately reclaimed prior to August
3, 1977, and for which there is no
continuing reclamation responsibility
under State, Federal, or other laws.
Lands and waters abandoned or
inadequately reclaimed after August 3,
1977, are also eligible for reclamation
under provisions at sections 402(g)(4)
and 404 of SMCRA.
Title IV provides for State submittal to
OSM of an AMLR plan. The Secretary
of the Interior adopted regulations at 30
CFR 870 through 888 that implement
Title IV of SMCRA. Under these
regulations, the Secretary reviewed the
plans submitted by States and solicited
and considered comments of State and
Federal agencies and the public. Based
upon the comments received, the
Secretary determined whether a State
had the ability and necessary legislation
to implement the provisions of Title IV.
After making such a determination, the
Secretary decided whether to approve
the State program. Approval granted the
State exclusive authority to administer
its plan.
Upon approval of a State plan by the
Secretary, the State may submit to OSM,
on an annual basis, an application for
funds to be expended by that State on
specific projects that are necessary to
implement the approved plan. Such
annual requests are reviewed and
approved by OSM in accordance with
the requirements of 30 CFR part 886.