Part I. Rulings — Internal Revenue Bulletin 1996-17

Eliminating gain in all circumstances would effectively require complete single entity treatment of P stock. Implementing such a system would significantly increase the complexity of the consolidated return regulations. Notice 94–49 (1994–1 C.B. 358), included a detailed discussion of issues relating to the single entity treatment of P stock.

Limiting the loss disallowance rule to ‘‘abusive situations’’ would allow consolidated groups to rely on the separate-entity treatment of stock to claim losses and single-entity treatment to avoid gains. For example, taxpayers might plan to take advantage of separate entity treatment by having M purchase P stock. If the value of the stock has gone down at a time when the group wants to issue equity, M will sell its P stock at a loss (and claim the loss). If the value of the stock has gone up, the group can take advantage of single entity treatment by having P sell the stock, and no gain would be recognized under section 1032. The same would hold true if instead P had acquired M already owning P stock. Commentators did not suggest any generally applicable method of distinguishing between transactions in which loss should be allowed and those in which loss should not be allowed.

The IRS and Treasury have therefore concluded that the final regulations should retain the general approach of the proposed regulations.

Built-in losses

Some commentators suggested that if M joins the group at a time when it holds P stock with a built-in loss the loss should be allowed because it accrued outside the group. The final regulations do not allow this loss because doing so without ensuring that the built-in gain is taxed would allow the same selectivity and inconsistencies that the regulation is designed to prevent. In addition, allowing the loss would require tracing, which is inconsistent with the approaches to similar issues in §§1.1502–20 and 1.1502–32.

Commentators further suggested that interactions between the proposed regulations and §1.1502–32 could cause the group to recognize an artificial gain from the purchase of a corporation owning depreciated P stock. If M joins the group at a time when it holds P

Section 1502.—Regulations

26 CFR 1.1502–13: Intercompany transactions.

T.D. 8660

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Consolidated Groups—Intercompany Transactions and Related Rules

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations disallowing losses and excluding gain for certain dispositions and other transactions involving stock of the common parent of a consolidated group.

DATES: These regulations are effective March 14, 1996.

For dates of applicability, see the effective date provision of these regulations.

FOR FURTHER INFORMATION CONTACT: Victor Penico or Richard Osborne of the Office of Assistant Chief Counsel (Corporate), (202) 622-7750 or (202) 622-7770 (not tollfree numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations have 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 1545–1433. Responses to these collections of information are required to obtain a benefit, the avoidance of a possible gain because of basis adjustments relating to built-in loss.

An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number.

The estimated average annual burden per respondent is 15 minutes.

Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, T:FP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, D.C. 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 July 12, 1995, the IRS and Treasury issued proposed and temporary regulations disallowing loss incurred by a member (M) of a consolidated group with respect to the stock of the common parent (P stock). The regulations also eliminate gain in certain transactions by M with respect to P stock. The regulations are effective for transactions occurring on or after July 12, 1995.

The IRS received comments on the proposed regulations and held a public hearing on December 11, 1995. After consideration of the comments and the statements made at the hearing, the IRS and Treasury adopt the proposed regulations with revisions in this Treasury decision. The significant comments and changes are discussed below.

Explanation of provisions

Scope of the regulations

The proposed regulations disallow all losses on P stock and eliminate gain in specified circumstances. Some commentators suggested that the regulations should treat gain and loss more symmetrically. Some suggested the regulations should achieve this goal by eliminating gain in all circumstances. Others suggested the regulations should disallow loss only in ‘‘abusive’’ circumstances.

stock with a built-in loss and M subsequently sells the stock, P will have a downward basis adjustment in its M stock because of the disallowed loss. See §1.1502–32(b)(3)(iii)(A). The commentators asserted that this basis adjustment would be inappropriate if the group has a cost basis in M stock because the basis of M will reflect the value of the P stock at the time of acquisition (rather than M’s basis in the P stock). To address this problem, the final regulations allow the built-in loss to be waived immediately before M joins the group. The loss waiver is modeled after a similar provision in §1.1502–32(b)(4). The election, however, is limited to direct acquisitions of a corporation holding P stock in a cost basis transaction.

Gain relief

Commentators suggested that the gain relief should be broadened. Some suggested that the requirement that M receive the P stock in a capital contribution or section 351(a) transaction be eliminated. Others suggested elimination of the requirement that M dispose of the P stock immediately. Commentators also suggested that the gain relief should apply to options and warrants in P stock, and not merely to P stock.

The final regulations retain the requirements for gain relief but extend the relief to positions in P stock. Any further expansion of the gain relief would require additional limitations and complexities.

For instance, if M were not required to dispose of the P stock immediately, the regulations would have to require that M have no minority shareholders. If M had minority shareholders, the gain relief mechanism (treating cash as contributed to M followed by a purchase of the stock by M) would allow P a full basis adjustment in M stock for post-contribution appreciation rather than a pro rata adjustment as required by §1.1502–32 in the case of minority shareholders. Amending the mechanism to allow only pro rata adjustments (for example, through a direct basis adjustment rather than a cash transaction) would create further complexities, such as the interaction with §1.1502–20.

Expanding gain relief would require further adjustments if M stock were sold to another member of the group. For example, if B purchases the stock

of M from another member, B’s basis in M will reflect the value of any P stock held by M. Thus, an increase to B’s basis in the stock of M when M disposes of P stock would be unwarranted. Additional special rules would be needed if M were permitted to acquire P stock by purchase rather than through a capital contribution. Moreover, the IRS and Treasury believe that in many cases gain on P stock is avoidable without further expansion of the regulations. See, e.g., §1.1032–2(b) (no gain or loss on M’s use of certain P stock in triangular reorganizations). Therefore, the final regulations retain the requirements of the proposed regulations for gain relief.

In addition, commentators claimed that the relief when M is newly formed was unclear. The final regulations clarify that M can be newly formed as part of the plan to dispose of P stock.

Dealers in P stock

Some commentators suggested that if a subsidiary is a dealer in P stock, it should be allowed to recognize losses from its dealing activity. They argued that dealing in P stock increases the liquidity of the stock and that the proposed regulations would curtail this activity by forcing the recognition of gain but disallowing loss with respect to P stock.

In response to these comments, the final regulations include an exception for dealers in P stock or positions in P stock. Under the final regulations, a dealer in P stock or positions recognizes both gain and loss on shares of the stock to the extent taken into account because of section 475(a) (or 1256(a) in the case of dealer equity options). To be eligible for this exception, M must regularly trade in P stock (of the same class) in the ordinary course of its business as a dealer. In addition, the gain or loss on a share is eligible only to the extent it is taken into account under section 475(a) (or in the case of dealer equity options, section 1256(a) to the extent that it would be taken into account under the principles of section 475), and the basis of the share of stock must not be adjusted by reference to the basis of any other property (for example, under §1.302–2) or by reference to income, gain, deduction or loss from other property. For example, loss that is suspended under section 475(b)(3) and

that is recognized under section 1001 as the result of a disposition of the security is not eligible for the relief, but loss taken into account under section 475(a) immediately before a taxpayer ceases to be the owner of the security is eligible for relief. Finally, relief is not available if either M or any other member of the group has structured or engaged in any transaction while a member (or in anticipation of becoming a member) during the taxable year or in any year within the preceding five taxable years that is open for assessment under section 6501 with a principal purpose of avoiding gain or creating loss on P stock subject to section 475(a).

Positions in P stock

In response to comments, the final regulations clarify that the scope of loss disallowance is coextensive with the scope of section 1032. For example, cash-settled options are within the scope of loss disallowance. See Rev. Rul. 88–31 (1988–1 C.B. 302). No inference is intended as to the extent to which section 1032 and these regulations apply to derivative positions in P stock other than options.

One commentator argued that the loss disallowance rule should not apply to options in P stock because the selectivity available for stock is not present with respect to options. The final regulations do not adopt this approach. If M purchases an option to acquire P stock and the option expires when it is worthless, M has a loss. If the option is in the money, M can purchase the P stock and hold it indefinitely. Thus, the group would have the ability to recognize losses while avoiding gains.

Effective dates

The final regulations apply to gain or loss taken into account on or after July 12, 1995, and to transactions (such as a member leaving the group) occurring on or after July 12, 1995. Thus, the regulations are intended to cover the same gain, loss and transactions covered by the rules published in 1995–32 I.R.B. 47. If, however, a taxpayer takes a gain or loss into account, or engages in a transaction, on or after July 12, 1995, during a tax year ending prior to December 31, 1995, the taxpayer may treat the gain, loss or transaction under

(while they are members) in a 12– month period of an amount of the nonmember’s stock satisfying the requirements of section 1504(a)(2).

( 2 ) Election . The election described in this paragraph (6)(i)(C) must be made in a separate statement entitled ‘‘ELECTION TO REDUCE BASIS OF P STOCK UNDER §1.1502–13(f)(6).’’ The statement must be filed with the P consolidated group’s return for the year in which the nonmember becomes a member, and it must be signed by both P and the nonmember. The statement must identify the fair market value of, and the amount of the basis reduction in, the P stock.

(ii) Gain stock . If a member, M, would otherwise recognize gain on a qualified disposition of P stock, then immediately before the qualified disposition, M is treated as purchasing the P stock from P for fair market value with cash contributed to M by P (or, if necessary, through any intermediate members). A disposition is a qualified disposition only if—

(A) The member acquires the P stock directly from the common parent (P) through a contribution to capital or a transaction qualifying under section 351(a) (or, if necessary, through a series of such transactions involving only members);

(B) Pursuant to a plan, the member transfers the stock immediately to a nonmember that is not related, within the meaning of section 267(b) or 707(b), to any member of the group; (C) No nonmember receives a substituted basis in the stock within the meaning of section 7701(a)(42);

(D) The P stock is not exchanged for P stock;

(E) P neither becomes nor ceases to be the common parent as part of, or in contemplation of, the disposition or plan; and

(F) M is neither a nonmember that becomes a member nor a member that becomes a nonmember as part of, or in contemplation of, the disposition or plan.

(iii) Mark-to-market of P stock . Paragraphs (f)(6)(i) and (ii) of this section shall not apply to any gain or loss from a share of P stock held by a member, M, if—

(A) M regularly trades in P stock (of the same class) with customers in the ordinary course of its business as a dealer;

the rules of the temporary rules published in 1995–32 I.R.B. 47 instead of under the rules of the final regulations.

Special Analysis

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 is hereby certified that these regulations do not have a significant economic impact on a substantial number of small entities. This certification is based on the fact that these regulations will primarily affect affiliated groups of corporations that have elected to file consolidated returns, which tend to be larger businesses. The regulations do not significantly alter the reporting or recordkeeping duties of small entities. Therefore, a Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Small Business Administration for comment on its impact on small business.

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Adoption of Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by revising the entry for §1.1502–13 to read as follows:

Authority: 26 U.S.C. 7805 * - Section 1.1502–13 also issued under 26 U.S.C. 1502. * - Par. 2. In §1.267(f)–1(k), the first sentence is amended by removing the reference ‘‘1.1502–13T(f)(6)’’ and adding ‘‘1.1502–13(f)(6)’’ in its place.

Par. 3. Section 1.1502–13(f)(6) is added to read as follows:

§1.1502–13 Intercompany transactions .

- - - - -

(f) - - (6) Stock of common parent . In addition to the general rules of this

section, this paragraph (f)(6) applies to parent stock (P stock) and positions in P stock held or entered into by another member. For this purpose, P stock is any stock of the common parent held by another member or any stock of a member (the issuer) that was the common parent if the stock was held by another member while the issuer was the common parent.

(i) Loss stock —(A) Recognized loss . Any loss recognized, directly or indirectly, by a member with respect to P stock is permanently disallowed and does not reduce earnings and profits. See §1.1502–32(b)(3)(iii)(A) for a corresponding reduction in the basis of the member’s stock.

(B) Other cases . If a member, M, owns P stock, the stock is subsequently owned by a nonmember, and, immediately before the stock is owned by the nonmember, M’s basis in the share exceeds its fair market value, then, to the extent paragraph (f)(6)(i)(A) of this section does not apply, M’s basis in the share is reduced to the share’s fair market value immediately before the share is held by the nonmember. For example, if M owns shares of P stock with a $100x basis and M becomes a nonmember at a time when the P shares have a value of $60x, M’s basis in the P shares is reduced to $60x immediately before M becomes a nonmember. Similarly, if M contributes the P stock to a nonmember in a transaction subject to section 351, M’s basis in the shares is reduced to $60x immediately before the contribution. See §1.1502–32(b)(3)(iii)(B) for a corresponding reduction in the basis of M’s stock.

(C) Waiver of built-in loss on P stock —( 1 ) In general . If a nonmember that owns P stock with a basis in excess of its fair market value becomes a member of the P consolidated group in a qualifying cost basis transaction, the group may make an irrevocable election to reduce the basis of the P stock to its fair market value immediately before the nonmember becomes a member of the P group. If the nonmember was a member of another consolidated group immediately before becoming a member of the P group, the reduction in basis is treated as occurring immediately after it ceases to be a member of the prior group. A qualifying cost basis transaction is the purchase ( i.e., a transaction in which basis is determined under section 1012) by members of the P consolidated group

(B) The gain or loss on the share is taken into account by M pursuant to section 475(a);

(C) M’s basis in the share is not adjusted by reference to the basis of any other property or by reference to income, gain, deduction, or loss from other property; and

(D) Neither M nor any other member of the group has structured or engaged in any transaction while a member (or in anticipation of becoming a member), during the taxable year or in any year within the preceding five taxable years that is open for assessment under section 6501, with a principal purpose of avoiding gain or creating loss on P stock subject to section 475(a).

(iv) Options, warrants, and other positions —(A) In general . This paragraph (f)(6) applies with appropriate adjustments to positions in P stock to the extent that P’s gain or loss from an equivalent position would not be recognized under section 1032. Thus, if M purchases an option to buy or sell P stock and sells the option at a loss, the loss is permanently disallowed under paragraph (f)(6)(i)(A) of this section. Similarly, if M is the grantor of such an option and becomes a nonmember, then the principles of paragraph (f)(6)(i)(B) of this section apply to the extent that M would recognize loss from cash settlement of the option at its fair market value immediately before M becomes a nonmember, and proper adjustments must be made in the amount of any gain or loss subsequently realized from the position by M. If P grants M an option to acquire P stock in a transaction meeting the requirements of paragraph (f)(6)(ii) of this section, M is treated as having purchased the option from P for fair market value with cash contributed to M by P.

(B) Mark-to-market of positions in P stock . For purposes of paragraph (f)(6)(iii) of this section, gain or loss with respect to a position taken into account under section 1256(a) is treated as taken into account under section 475(a) to the extent that the gain or loss would be taken into account under the principles of section 475.

(v) Effective date . This paragraph (f)(6) applies to gain or loss taken into account on or after July 12, 1995, and to transactions occurring on or after July 12, 1995. For example, if S sells P stock to B at a loss prior to July 12,

1995, and B sells the P stock to a nonmember after July 12, 1995, S’s loss is disallowed because it is taken into account after July 12, 1995. If a taxpayer takes a gain or loss into account or engages in a transaction on or after July 12, 1995, during a tax year ending prior to December 31, 1995, the taxpayer may treat the gain or loss or the transaction under the rules of §1.1502–13T(f)(6) (published in 1995–32 I.R.B. 47), instead of under the rules of this paragraph (f)(6).

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Par. 5. In §1.1502–13(g)(2)(i)(B), the last sentence is amended by removing the language ‘‘paragraph (f)(4) of this section and §1.1502–13T(f)(6)’’ and adding ‘‘paragraphs (f)(4) and (6) of this section.’’

Margaret Milner Richardson, Commissioner of Internal Revenue.

Approved March 8, 1996.

Leslie Samuels, Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on

March 13, 1996, 8:45 a.m., and published in the issue of the Federal Register for March 14, 1996, 61 F.R. 10447)

Section 6302.—Mode or Time of Collection

26 CFR 1.6302–4T: Use of financial institutions in connection with individual income taxes (temporary).

T.D. 8661

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 1 and 31

Federal Tax Deposits by Electronic Funds Transfer

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains temporary regulations relating to the deposit of Federal taxes by electronic funds transfer (EFT) under section 6302 of the Internal Revenue Code. The document also includes temporary regulations providing authority for the

voluntary payment of certain Federal taxes by EFT. The regulations would provide the public with additional guidance needed to make deposits by EFT and would affect certain taxpayers not previously required to make deposits by EFT. The text of these temporary regulations also serves as the text of a cross-reference notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

EFFECTIVE DATE: March 21, 1996.

FOR FURTHER INFORMATION CONTACT: Vincent G. Surabian, 202– 622–6232 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On July 11, 1994, the IRS issued Treasury Decision 8553 (59 FR 35414), setting forth temporary regulations relating to the deposit of Federal taxes by EFT. Those temporary regulations explained which taxpayers must make deposits by electronic funds transfer, which taxes must be so deposited, and when the deposits must commence. The text of those temporary regulations also served as the text of a cross-reference notice of proposed rulemaking published in the same issue of the Federal Register at 59 FR 35418.

The IRS received many comment letters in response to the publication of those temporary regulations. In addition, a number of oral comments were made at the public hearing held on October 3, 1994. With limited exceptions, those comments will not be addressed in this document, but instead will be addressed in final regulations that the IRS expects to publish in the near future.

Under the temporary regulations currently in place, the requirement to begin EFT deposits is based on the taxpayer’s total deposits of the taxes imposed by chapters 21 (FICA taxes), 22 (railroad retirement taxes) and 24 (income tax withheld at source) of the Internal Revenue Code during certain ‘‘determination periods.’’ If the taxpayer’s deposits of those taxes during a determination period exceed a prescribed dollar threshold, the taxpayer must begin to deposit by EFT on and after the applicable effective date prescribed in the temporary regulations, unless otherwise exempted.

The amendments to the temporary regulations set forth in this document provide a special rule for any taxpayer that does not make deposits of the taxes imposed by chapters 21, 22, and 24, but that does make deposits of other taxes required to be deposited pursuant to regulations issued under

section 6302 (for instance, corporate income taxes). If the taxpayer’s total deposits for all other depository taxes during a prescribed determination period exceed a prescribed dollar threshold, the taxpayer must begin depositing by EFT on and after the applicable effective date prescribed in

these amendments to the temporary regulations, unless otherwise exempted. (A taxpayer will become subject to the EFT requirement for the January 1, 1998, applicable effective date by exceeding the threshold amount during either calendar year 1995 or calendar year 1996.) The phase-in schedule is as follows:

Threshold Amount Determination Period Applicable Effective Date

$50 thousand 1-1-95 to 12-31-95 January 1, 1998 $50 thousand 1-1-96 to 12-31-96 January 1, 1998 $20 thousand 1-1-97 to 12-31-97 January 1, 1999

The current temporary regulations provide that a taxpayer subject to the EFT requirement must use EFT for all deposits required to be made on and after the applicable effective date. This requirement may subject a taxpayer to two different modes of deposit with respect to the same return period. For example, assume an employer is required to deposit by EFT beginning with the January 1, 1997, applicable effective date. The employer pays its employees weekly and has a paydate on December 31, 1996. The employment taxes incurred for that paydate would be reportable on the fourth quarter 1996 Form 941, but the due date for the deposit of those taxes would occur in early January 1997. Under the current rule, all the deposits relating to the fourth quarter 1996 Form 941 would be made by paper coupon (FTD coupon) with the exception of the deposit for the December 31 payroll, which would be made by EFT. For purposes of consistency, this rule is being changed with respect to the January 1, 1997, applicable effective date and thereafter to provide that the first deposit required to be made by EFT is the first deposit with respect to a deposit obligation incurred for a return period beginning on or after the applicable effective date. Thus, under the revised rule, the deposit with respect to the December 31 paydate in the example would be made by FTD coupon rather than by EFT.

The current temporary regulations provide that a deposit by EFT is deemed made (i) at the time a debit is made (the amount is withdrawn from the taxpayer’s account) if the Government’s authorized financial agent debits the taxpayer’s account; or (ii) in all other cases, at the time the funds are

credited to the Treasury’s general account. Comments by the Federal Reserve Board, the Financial Management Service, and IRS personnel recommended a clarification of that provision. Based on those recommendations, the current temporary regulations are amended to provide that a deposit by EFT is deemed made (i) at the time a debit is made (the amount is withdrawn from the taxpayer’s account and not returned or reversed) if the Government’s authorized agent originates a debit entry which instructs the taxpayer’s financial institution to debit the taxpayer’s account for a Federal tax payment; or (ii) in all other cases (assuming the amount is not returned or reversed), either at the time the funds are paid into the Treasury’s general account at the Federal Reserve Bank of New York or at the time the funds are invested under Treasury’s Tax and Loan program (see 31 CFR Part 203). Investment occurs when the funds are credited by the Federal Reserve Bank to the depositary institution’s note balance.

These temporary regulations also define the term taxpayer . For purposes of the EFT requirement, a taxpayer is any person required to deposit federal taxes, including not only individuals, but also any trust, estate, partnership, association, company or corporation. This definition responds to numerous inquiries following the issuance of the current temporary regulations.

Sections 31.6302–1T(h)(2) (describing the taxes required to be deposited by EFT) and 31.6302–1T(h)(8) (describing when a deposit of tax by EFT is deemed to be a payment of tax) have been revised solely for purposes of

clarity. No substantive change is being made to either of the provisions.

These temporary regulations allow individual taxpayers to make voluntary payments of income tax by EFT, even though individual income tax is not required to be deposited with a government depositary. The voluntary EFT payments are to be made in accordance with instructions provided in procedures to be prescribed by the Commissioner at a future date.

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) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these rules and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, a copy of 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 Vincent G. Surabian, Office of the Assistant Chief Counsel (Income Tax & Accounting), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

- - - - -

applicable effective date is January 1, 1995, or January 1, 1996, the requirement to deposit by electronic funds transfer applies to all deposits required to be made on and after the applicable effective date. If the applicable effective date is January 1, 1997, or thereafter, the requirement to deposit by electronic funds transfer applies to all deposits required to be made with respect to deposit obligations incurred for return periods beginning on and after the applicable effective date.

- - The threshold amounts, determination periods and applicable effective dates for purposes of this paragraph (h)(1)(ii)(A)( 1 ) are as follows:
- ( 2 ) Unless exempted under paragraph (h)(4) of this section, a taxpayer that does not deposit any of the taxes imposed by chapters 21, 22, and 24 during the applicable determination periods set forth in paragraph (h)(1)(ii)(A)( 1 ) of this section, but that does make deposits of other depository taxes (as described in paragraph (h)(2) of this section), is nevertheless subject to the requirement to deposit by electronic funds transfer if the taxpayer’s aggregate deposits of all depository taxes exceed the threshold amount set forth in this paragraph (h)(1)(ii)(A)( 2 ) during an applicable 12–month determination period. This requirement to deposit by electronic funds transfer applies to all depository taxes due with respect to deposit obligations incurred on and after the applicable effective date. The threshold amount, determination periods, and applicable effective dates for purposes of this paragraph (h)(1)(ii)(A)( 2 ) are as follows:

Adoption of Amendments to the Regulations .

Accordingly, 26 CFR parts 1 and 31 are amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * - Section 1.6302–4T also issued under 26 U.S.C. 6302(a) and (c). * - Par. 2. Section 1.6302–4T is added to read as follows:

§1.6302–4T Use of financial institutions in connection with individual income taxes (temporary) .

Voluntary payments by electronic funds transfer . An individual may voluntarily remit by electronic funds transfer all payments of tax imposed by subtitle A of the Code, including any payments of estimated tax. Such payments must be made in accordance with procedures to be prescribed by the Commissioner.

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

Par. 3. The authority citation for part 31 continues to read in part as follows: Authority: 26 U.S.C. 7805 * - Par. 4. Section 31.6302–1T is amended as follows:

Paragraph (h)(1)(ii)(A) is redesignated as paragraph (h)(1)(ii)(A)( 1 ); the first sentence in newly designated paragraph (h)(1)(ii)(A)( 1 ) is removed, and three new sentences are added in its place; and, in the last sentence of the newly designated paragraph, the text preceding the table is revised.
Paragraph (h)(1)(ii)(A)( 2 ) is added.
Paragraphs (h)(2), (h)(3), (h)(7) and (h)(8) are revised.

The additions and revisions read as follows:

§31.6302–1T Federal tax deposit rules for withheld income taxes and taxes under the Federal Insurance Contributions Act (FICA)—deposits required to be made by electronic funds transfer after December 31, 1994 (temporary).

- - - - -

(h) - - - (1) * - (ii) Periods after December 31, 1994. (A)( 1 ) Taxpayers whose aggregate deposits of the taxes imposed by Chapters 21 (Federal Insurance Contributions Act), 22 (Railroad Retirement Tax Act), and 24 (Collection of Income Tax at Source on Wages) of the Internal Revenue Code during a 12– month determination period exceed the applicable threshold amount are required to deposit all depository taxes described in paragraph (h)(2) of this section by electronic funds transfer (as defined in paragraph (h)(3) of this section) unless exempted under paragraph (h)(4) of this section. If the

Threshold Amount Determination Period Applicable Effective Date

$50 thousand 1-1-95 to 12-31-95 January 1, 1998 $50 thousand 1-1-96 to 12-31-96 January 1, 1998 $20 thousand 1-1-97 to 12-31-97 January 1, 1999

- - - - -

(2) Taxes required to be deposited by electronic funds transfer . The requirement to deposit by electronic funds transfer under paragraph (h)(1)(ii) of this section applies to all the taxes required to be deposited under §§1.6302–1, 1.6302–2, and 1.6302–3 of this chapter; §§31.6302–1, 31.6302–2, 31.6302–3, 31.6302–4, and 31.6302(c)–3; and §40.6302(c)–1 of this chapter.

(3) Definitions —(i) Electronic funds transfer . An electronic funds transfer is any transfer of depository taxes made in accordance with Revenue Procedure 94– 48 (1994–2 C.B. 694), (see §601.601(d)(2) of this chapter), or in accordance with procedures subsequently prescribed by the Commissioner.

(ii) Taxpayer . For purposes of this section, a taxpayer is any person required to deposit federal taxes, including not only individuals, but also any trust, estate, partnership, association, company or corporation.

- - - - -

(7) Time deemed deposited . A deposit of taxes by electronic funds transfer will be deemed made—

(i) At the time a debit is made (the amount is withdrawn from the taxpayer’s account and not returned or reversed) if the Government’s authorized agent originates a debit entry which instructs the taxpayer’s financial institution to debit the taxpayer’s account for a Federal tax payment; or

(ii) In all other cases (assuming the amount is not returned or reversed), either at the time that the funds are paid into the Treasury’s general account at the Federal Reserve Bank of New York, or at the time that the funds are invested under Treasury’s Tax and Loan program (see 31 CFR Part 203). Investment occurs when the funds are credited by the Federal Reserve Bank to the depositary institution’s note balance.

(8) Time deemed paid . In general, an amount deposited under this paragraph (h) will be considered to be a payment of tax on the last day prescribed for filing the applicable return for the

return period (determined without regard to any extension of time for filing the return) or, if later, at the time deemed deposited under paragraph (h)(7) of this section. In the case of the taxes imposed by chapters 21 and 24 of the Internal Revenue Code, solely for purposes of section 6511 and the regulations thereunder (relating to the period of limitation on credit or refund), if an amount is deposited prior to April 15th of the calendar year immediately succeeding the calendar year that includes the period for which the amount was deposited, the amount will be considered paid on April 15th.

Margaret Milner Richardson, Commissioner of Internal Revenue.

Approved December 22, 1995.

Leslie Samuels, Assistant Secretary of the Treasury.

(Filed by the Office of the Federal Register on

March 20, 1996, 8:45 a.m., and published in the issue of the Federal Register for March 21, 1996, 61 F.R. 11548)