SECTION 2. BACKGROUND

.01 General Requirement of Return or

.01 Interest income on short-term obligations.

(1) Description of change and scope.

(a) This change applies to a cash method bank in the Eighth Circuit that wants to change its method of accounting from accruing stated interest on shortterm loans made in the ordinary course of business to using the cash method for that interest.

(b) In Security Bank Minnesota v. Commissioner, 994 F.2d 432 (8th Cir. 1993), aff’g 98 T.C. 33 (1992), the U.S. Circuit Court of Appeals for the Eighth Circuit held that § 1281 does not require a cash method bank to include in gross income stated interest on short-term loans made in the ordinary course of business as that interest accrues. The Service disagrees with the interpretation of § 1281 in Security Bank Minnesota and intends to pursue this issue in other circuits. In light of Security Bank Minnesota, however, cash method banks in the Eighth Circuit will be granted permission to change to the cash method of accounting for stated interest on short-term loans made in the ordinary course of business. If this change was made on or before November 6, 1995, the Service will not seek to deny cash method banks in the Eighth Circuit the use of the cash method on the ground that there was an unauthorized change in method of accounting.

(2) Section 481(a) adjustment pe- riod. A taxpayer must take the entire § 481(a) adjustment into account in com

(a) This change applies to a taxpayer that wants to change its method of accounting to comply with § 1281 for interest income on short-term obligations.

(b) Under § 1281, a holder of certain short-term obligations, including a bank as defined in § 581, must include in gross income any accrued interest income on such obligations, regardless of the holder’s overall method of accounting. Section 1281 applies to all types of interest income, including acquisition discount, original issue discount (OID), and stated interest. See S. Rep. No. 99–313, 99th Cong., 2d Sess. 903 (1986), 1986–3 (Vol. 3) C.B. 903.

(c) Section 1283(a)(1) generally defines a short-term obligation as any bond, debenture, note, certificate, or other evidence of indebtedness that matures in one year or less from its issue date. A short-term loan, including a short-term loan made in the ordinary course of the taxpayer’s business, is a short-term obligation.

(d) Under §§ 1281(a) and 1283(c), a holder of a short-term obligation subject

1999–52 I.R.B. 757 December 27, 1999

Statement . Section 6011(a) of the Internal Revenue Code provides that, when required by regulations, any person made liable for any tax imposed by the Code, or for the collection of the tax, must make a return or statement according to the forms and regulations prescribed by the Secretary.

.02 Certain Payments Reported on Forms 1042-S. Payments under the Code sections described in this paragraph are reported on Forms 1042-S. Section 1441(a) generally provides that persons having the control, receipt, custody, disposal, or payment of items of gross income specified in § 1441(b) from sources within the United States of any nonresident alien individual or foreign partnership must deduct and withhold a tax equal to either 30 percent or 14 percent of those amounts. Section 1442 provides that, in the case of certain foreign corporations, a tax equal to 30 percent shall be deducted and withheld in the same manner and on the same items of income as provided in § 1441. Section 1443(a) provides that, in the case of certain foreign tax-exempt organizations, a tax equal to 30 percent of the amount of the unrelated business taxable income shall be deducted and withheld in the same manner as provided in § 1441. Section 1443(b) provides that, in the case of certain foreign tax-exempt organizations, a tax on gross investment income derived from sources within the United States equal to 4 percent of such amount shall be deducted and withheld in the same manner as provided in § 1441(a) or § 1442(a). Persons required to deduct and withhold taxes under § 1441, 1442, or 1443 generally must file Forms 1042-S reporting aggregate amounts for the calendar year, as provided in the Income Tax Regulations under § 1461.

.03 Payments Reported on Forms 1098 . Payments and receipts under the following Code sections are reported on forms in the series 1098: §§ 6050H (returns relating to mortgage interest received in trade or business from individuals); and 6050S (returns relating to higher education tuition and related expenses).

.04 Payments Reported on Forms 1099. (1) In general. Payments under the following Code sections are re

ported on forms in the series 1099: §§ 220(h) (medical savings accounts); 408(i) (individual retirement arrangements); 529(d) (qualified state tuition programs); 530(h) (education individual retirement accounts); 6041 (information at source); 6041A (returns regarding payments of remuneration for services and direct sales); 6042 (returns regarding payments of dividends and corporate earnings and profits); 6043 (liquidating, etc., transactions); 6044 (returns regarding payments of patronage dividends); 6045 (returns of brokers); 6047 (information relating to certain trusts and annuity plans); 6049 (returns regarding payments of interest); 6050A (reporting requirements of certain fishing boat operators); 6050B (returns relating to unemployment compensation); 6050D (returns relating to energy grants and financing); 6050E (state and local income tax refunds); 6050J (returns relating to foreclosures and abandonments of security); 6050N (returns regarding payments of royalties); 6050P (returns relating to the cancellation of indebtedness by certain entities); 6050Q (certain long-term care benefits); and 6050R (returns relating to certain purchases of fish).

(2) Persons Made Liable for Backup Withholding. Section 3406 provides that payors of reportable payments (as defined in § 3406(b)) must, in certain circumstances, deduct and withhold a tax equal to 31 percent of the payment (“backup withholding”). Under § 3406(b), reportable payments generally are payments required to be shown on a return under §§ 6041 (relating to certain information at source), 6041A(a) (relating to payments of remuneration for services), 6042(a) (relating to payments of dividends), 6044 (relating to patronage dividends), 6045 (relating to returns of brokers), 6049(a) (relating to payments of interest), 6050A (relating to reporting requirements of certain fishing boat operators), and 6050N (relating to payments of royalties).

(3) Persons Made Liable for With- holding on Pensions, Annuities, and Other Deferred Income. Section 3405 provides that payors of pensions, annuities and certain other deferred income must, in certain circumstances, deduct

and withhold a tax: (1) on periodic payments as defined in § 3405(e)(2), an amount that would be required to be withheld from such payment if such payment were a payment of wages; (2) on nonperiodic distributions as defined in § 3405(e)(3), 10 percent of the distribution; and (3) on eligible rollover distributions as defined in § 3405(c)(3), 20 percent of the distribution. Generally, the persons required to deduct and withhold taxes under § 3405 must file Forms 1099 reporting payments and distributions, as provided under § 35.3405–1 of the Temporary Employment Tax Regulations and § 31.3405(c)–1 of the Employment Tax Regulations.

. 05 Contributions Reported on Forms 5498. Contributions under the following Code sections are reported on forms in the series 5498: §§ 138 (medicare+choice MSA); 220 (medical savings accounts); 408(a) (individual retirement account); 408(b) (individual retirement annuity); 408(k) (simplified employee pension); 408(p) (simple retirement account); 408A (Roth IRA); and 530 (education individual retirement account).

.06 Payments Reported on Forms W- 2G . (1) In general. Section 7.6041–1 of the Temporary Income Tax Regulations provides that payments of winnings of $1,200 or more from a bingo game or slot machine play, and payments of winnings of $1,500 or more from a keno game, are reportable on Forms W-2G. Section 31.3406(g)–2(d) generally provides that under § 3406 a reportable gambling winning is any gambling winning subject to information reporting under § 6041. In addition, a gambling winning (other than a winning from bingo, keno, or slot machines) is a reportable gambling winning only if the amount paid with respect to the wager is $600 or more and if the proceeds are at least 300 times as large as the amount wagered.

(2) Extension of Withholding to Cer- tain Gambling Winnings. Section 3402(q) provides that every person making a payment of winnings that are subject to withholding (defined in §§ 3402(q)(3) and 31.3402(q)–1) shall deduct and withhold a tax in an amount equal to 28 percent of such payment.

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