Part IV. Items — Internal Revenue Bulletin 2006-6

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations, Notice of Proposed Rulemaking, and Notice of Public Hearing

Time for Filing Employment Tax Returns and Modifications to the Deposit Rules

REG–148568–04

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations, notice of proposed rulemaking, and notice of public hearing.

SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9239) relating to the annual filing of Federal employment tax returns and requirements for employment tax deposits for employers in the Employers’ Annual Federal Tax Program (Form 944) (hereinafter referred to as the “Form 944 Program”). Those temporary regulations provide requirements for filing returns to report the Federal Insurance Contributions Act (FICA) taxes and income tax withheld under section 6011 of the Internal Revenue Code (Code) and §§31.6011(a)–1 and 31.6011(a)–4. Those regulations also require employers qualified for the Form 944 Program to file Federal employment tax returns annually. In addition, those regulations provide requirements for employers to make deposits of tax under FICA and the income tax withholding provisions of the Code (collectively, employment taxes) under section 6302 of the Code and §31.6302–1. The text of those regulations serves, in part, as the text of these proposed regulations. In addition to rules related to the Form 944 Program, these proposed regulations provide an additional method for quarterly return filers to determine whether the amount of accumulated employment taxes is considered

de minimis . This document also provides notice of a public hearing.

DATES: Written or electronic comments must be received by April 3, 2006. Outlines of topics to be discussed at the public hearing scheduled for April 26, 2006, at 10 a.m. must be received by April 5, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–148568–04), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–148568–04), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the IRS Internet site at http://www.irs.gov/regs or via the Federal eRulemaking Portal at http://www.regulations.gov (IRS REG–148568–04). The public hearing will be held in the Auditorium, Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations relating to section 6011, Raymond Bailey, (202) 622–4910; concerning the proposed regulations relating to section 6302, Audra M. Dineen, (202) 622–4940; concerning submissions of comments and the hearing, Treena Garrett, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Temporary regulations in this issue of the Bulletin amend the Regulations on Employment Taxes and Collection of Income Tax at Source (26 CFR Part 31) under sections 6011 and 6302. These amendments are designed to require employers qualified for the Form 944 Program to file Federal employment tax returns annually and to permit most employers in the Form 944 Program to remit their accumulated employment taxes annually with their return. The text of those temporary regulations also serves, in part, as the text of these proposed regulations. The preamble to the

temporary regulations explains the temporary regulations and these proposed regulations. These proposed regulations are one part of the IRS’s effort to reduce taxpayer burden by requiring certain employers to file Federal employment tax returns annually rather than quarterly and by permitting certain employers to remit employment taxes annually with their return.

De Minimis Deposit Rule

In addition to establishing the Form 944 Program, these proposed regulations will provide a safe harbor for small employers that have an unexpected increase in their deposit liability for a quarterly return period. The proposed regulations provide an alternate method for determining whether the employer’s employment tax obligations are de minimis, which is based on its employment taxes due for the prior return period. This special rule applies only to employers filing quarterly tax returns and therefore has no application to the Form 944 Program.

Under the existing regulations, deposits of taxes reported on Form 941, “ Em- ployer’s Quarterly Federal Tax Return,” generally are due monthly or semi-weekly. If an employer fails to make timely deposits of employment taxes, then, absent reasonable cause, the employer will be subject to the penalty for failure to deposit under section 6656. Currently, §31.6302–1(f)(4) (the de minimis deposit rule) provides that, for quarterly and annual return periods, if the aggregate amount of employment taxes for the return period is less than $2,500 and that amount is deposited or remitted with a timely filed return for that return period, the amount will be deemed to have been timely deposited and the employer will not be subject to the penalty for failure to deposit. Thus, currently under the de minimis deposit rule, employers remitting their employment taxes with their timely filed quarterly returns will only be deemed to have timely deposited their taxes if the amount of taxes due is less than $2,500 for that quarter. Similarly, under the current de minimis deposit rule, employers remitting their employment taxes with their timely filed annual returns will only be deemed to have timely deposited if the

February 6, 2006 417 2006–6 I.R.B.

Drafting Information

The principal authors of these proposed regulations are Raymond Bailey, Audra M. Dineen, and Emly B. Berndt of the Office of the Associate Chief Counsel (Procedure and Administration), Administrative Provisions and Judicial Practice Division.

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Proposed Amendments to the Regulations

Accordingly, 26 CFR part 31 is proposed to be amended as follows:

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

Paragraph 1. The authority citation for part 31 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 31.6011(a)–1 is amended by revising paragraph (a)(5) to read as follows:

§31.6011(a)–1 Returns under Federal Insurance Contributions Act.

(a) * - (5) [The text of proposed §31.6011(a)–1(a)(5) is the same as the text of §31.6011(a)–1T(a)(5) published elsewhere in this issue of the Bulletin].

- - - Par. 3. Section 31.6011(a)–4 is amended by revising paragraph (a)(4) to read as follows:

§31.6011(a)–4 Returns of income tax withheld.

(a) * - (4) [The text of proposed §31.6011(a)–4(a)(4) is the same as the text of §31.6011(a)–4T(a)(4) published elsewhere in this issue of the Bulletin].

- - - Par. 4. Section 31.6302–1 is amended by revising paragraphs (b)(4), (c)(5) and 6, (d) Example 6, (f)(4), and (f)(5) Example 3 to read as follows:

amount of taxes due is less than $2,500 for the entire year.

Under the proposed amendments, employers may remit their employment taxes with their timely filed quarterly returns and be deemed to have timely deposited if the amount of the taxes due for the current quarter or for the prior quarter is less than $2,500. This special rule can be illustrated by the following example: an employer has less than $50,000 in employment taxes reported during the lookback period and is therefore a monthly depositor under §31.6302–1(b)(2). The employer’s employment tax liabilities for the first and second quarters of 2004 were $2,450 and $2,400, respectively. In the third quarter of 2004, however, the employer’s employment tax liability was $2,550. Under the existing de minimis deposit rule, if the employer remits the $2,550 with its third quarter return, the amount is not considered timely deposited for that quarter and, therefore, the employer would be assessed the section 6656 penalty for failure to deposit. Modifying the de minimis deposit rule to allow employers to base the determination on the employment taxes due for the immediately preceding quarter provides a safe harbor for employers regarding their deposit obligations. Thus, in this example, when the employer had an increase in its employment tax liability for the third quarter of 2004, its remittance would still be deemed to have been timely deposited because the taxes for the immediately preceding return period were de minimis . The proposed amendment has no application to the One-Day rule in §31.6302–1(c)(2), which requires employers to make a deposit on the next banking day if they accumulate $100,000 or more of employment taxes.

Special Analyses

Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant to section 7805(f) of the Internal Revenue Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department request comments on the clarity of the proposed rules and how they can be made easier to understand. In addition, the IRS and Treasury Department are considering expanding the Form 944 program in the future and seek comments on the eligibility requirements and how best to change them. All comments will be available for public inspection and copying.

A public hearing has been scheduled for April 26, 2006, beginning at 10 a.m. in the Auditorium of the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section of this preamble.

The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing must submit electronic or written comments and an outline of the topics to be discussed and the time to be devoted to each topic (signed original and eight (8) copies) by April 5, 2006. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

2006–6 I.R.B. 418 February 6, 2006

§31.6302–1 Federal tax deposit rules for withheld income taxes and taxes under the Federal Insurance Contributions Act (FICA) attributable to payments made after December 31, 1992.

- - - (b) - * (4) - * (i) [The text of the proposed §31.6302–1(b)(4)(i) is the same as the text of §31.6302–1T(b)(4)(i) published elsewhere in this issue of the Bulletin].

(ii) [The text of the proposed §31.6302–1(b)(4)(ii) is the same as the text of §31.6302–1T(b)(4)(ii) published elsewhere in this issue of the Bulletin].

(c) - * (5) [The text of proposed §31.6302–1(c)(5) is the same as the text of §31.6302–1T(c)(5) published elsewhere in this issue of the Bulletin].

(6) [The text of proposed §31.6302–1(c)(6) is the same as the text of §31.6302–1T(c)(6) published elsewhere in this issue of the Bulletin].

(d) - * Example 6 . [The text of proposed §31.6302–1(d) Example 6 is the same as the text of §31.6302–1T(d) Example 6 published elsewhere in this issue of the Bulletin].

- - - (f) - - (4) De minimis rule —(i) De minimis deposit rule for quarterly and annual re- turn periods beginning on or after January 1, 2001 . If the total amount of accumulated employment taxes for the return period is de minimis and the amount is fully deposited or remitted with a timely filed return for the return period, the amount deposited or remitted will be deemed to have been timely deposited. The total amount of accumulated employment taxes is de min- imis if it is less than $2,500 for the return period or if it is de minimis pursuant to paragraph (f)(4)(ii) of this section.

(ii) De minimis deposit rule for quar- terly return periods . For purposes of paragraph (f)(4)(i) of this section, if the total amount of accumulated employment taxes for the immediately preceding quarter was less than $2,500, unless paragraph (c)(3) of this section applies to require a deposit at the close of the next banking day, then the employer will be deemed

to have timely deposited the employer’s employment taxes for the current quarter if the employer complies with the time and method of payment requirements contained in paragraph (f)(4)(i) of this section.

(iii) [The text of proposed §31.6302–1(f)(4)(iii) is the same as the text of §31.6302–1T(f)(4)(iii) published elsewhere in this issue of the Bulletin].

(5) - - Example 3 . [The text of proposed §31.6302–1(f)(5) Example 3 is the same as the text of §31.6302–1T(f)(5) Example 3 published elsewhere in this issue of the Bulletin]

Mark E. Matthews, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on December 30, 2005, 8:45 a.m., and published in the issue of the Federal Register for January 3, 2006, 71 F.R. 46)

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations and Notice of Public Hearing

Guidance Under Section 7874 for Determining Ownership by Former Shareholders or Partners of Domestic Entities

REG–143244–05

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations and notice of public hearing.

SUMMARY: In this issue of the Bulletin, the IRS is issuing temporary regulations (T.D. 9238) relating to the disregard of affiliate-owned stock in determining the percentage of stock of a foreign corporation held by former shareholders or partners of a domestic entity, in order to determine whether the foreign corporation is a surrogate foreign corporation under section 7874 of the Internal Revenue Code (Code).

The text of those regulations also serves as the text of these proposed regulations. This document also provides notice of a public hearing on these proposed regulations.

DATES: Written or electronic comments must be received by April 6, 2006. Outlines of topics to be discussed at the public hearing scheduled for April 27, 2006 at 10 a.m., must be received by April 6, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG–143244–05), room 5203, Internal Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to: CC:PA:LPD:PR (REG–143244–05), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC, or sent electronically, via the IRS Internet site at: www.irs.gov/regs or via the Federal eRulemaking Portal at www.regulations.gov (IRS-REG–143244–05).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Jefferson VanderWolk at (202) 622–3810; concerning submission and delivery of comments and the public hearing, Robin R. Jones, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background and Explanation of Provisions

Temporary regulations in this issue of the Bulletin amend the Income Tax Regulations (26 CFR part 1) relating to section 7874. The temporary regulations set forth rules on disregarding affiliate-owned stock in determining the percentage of stock of a foreign corporation held by former shareholders or partners of a domestic entity by reason of holding stock or a partnership interest in the domestic entity, for purposes of determining whether the foreign corporation is a surrogate foreign corporation under section 7874(a)(2)(B). The text of those regulations also serves as the text of these proposed regulations. The preamble to the temporary regulations explains the amendments.

February 6, 2006 419 2006–6 I.R.B.

Special Analyses

It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It has also 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 these regulations do not impose a collection of information on small entities, the provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Comments and Requests for a Public Hearing

Before these proposed regulations are adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8) copies) or electronic comments that are submitted timely to the IRS. The IRS and Treasury Department specifically request comments on the clarity of the proposed regulations and how they can be made easier to understand. All comments will be available for public inspection and copying.

A public hearing has been scheduled for April 27, 2006, at 10 a.m., in the auditorium of the Internal Revenue Building, 1111 Constitution Avenue, NW, Washington, DC. Due to building security procedures, visitors must enter at the Constitution Avenue entrance. In addition, all visitors must present photo identification to enter the building. Because of access restrictions, visitors will not be admitted beyond the immediate entrance area more than 30 minutes before the hearing starts. For information about having your name placed on the building access list to attend the hearing, see the “FOR FURTHER INFORMATION CONTACT” section of this preamble.

(a signed original and eight (8) copies) by April 6, 2006. A period of 10 minutes will be allotted to each person for making comments. An agenda showing the scheduling of the speakers will be prepared after the deadline for receiving outlines has passed. Copies of the agenda will be available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Jefferson VanderWolk of the Office of the Associate Chief Counsel (International). However, other personnel from the IRS and Treasury Department participated in their development.

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Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be 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, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.7874–1 also issued under 26 U.S.C. 7874(c)(6) and (g). - * *

Par. 2. Section 1.7874–1 is added to read as follows:

§1.7874–1 Disregard of affiliate-owned stock.

[The text of proposed §1.7874–1 is the same as the text of §1.7874–1T published elsewhere in this issue of the Bulletin].

Mark E. Matthews, Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on December 27, 2005, 8:45 a.m., and published in the issue of the Federal Register for December 28, 2005, 70 F.R. 76732)

Application of Section 409A to Nonqualified Deferred Compensation Plans; Correction

Announcement 2006–11

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to notice of proposed rulemaking.

SUMMARY: This document corrects a notice of proposed rulemaking (REG–158080–04, 2005–43 I.R.B. 786) that was published in the Federal Reg- ister on Tuesday, October 4, 2005 (70 FR 57930), regarding the application of section 409A to nonqualified deferred compensation plans. The regulations affect service providers receiving amounts of deferred compensation, and the service recipients for whom the service providers provide services.

FOR FURTHER INFORMATION CONTACT: Stephen Tackney, (202) 927–9639 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

The notice of proposed rulemaking (REG–158080–04) that is the subject of this correction is under section 409A of the Internal Revenue Code.

Need for Correction

As published, REG–158080–04 contains an error that may prove to be misleading and is in need of clarification.

Correction of Publication

Accordingly, the publication of the notice of proposed rulemaking (REG–158080–04) that was the subject of FR. Doc. 05–19379, is corrected as follows:

On page 57930, column 1, in the preamble, under the paragraph heading “FOR FURTHER INFORMATION CONTACT:”, lines 4 thru 8, the language “concerning submissions of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Richard A. Hurst at (202) 622–7116 (not toll-free numbers).”. is corrected to read “concerning submission of comments, the hearing, and/or to be placed on the building access list to attend the hearing, Richard A. Hurst at (202) 622–7180 (not toll-free numbers).”.

2006–6 I.R.B. 420 February 6, 2006

entity for the taxable year of the owner that includes the date on which the election was effective. An indirect owner of the entity does not have to attach a copy of the Form 8832 to its return if an entity in which it has an interest is already filing a copy of the Form 8832 with its return. If an entity, or one of its direct or indirect owners, fails to attach a copy of a Form 8832 to its return as directed in this section, an otherwise valid election under §301.7701–3(c)(1)(i) will not be invalidated, but the non-filing party may be subject to penalties, including any applicable penalties if the Federal tax or information returns are inconsistent with the entity’s election under §301.7701–3(c)(1)(i). In the case of returns for taxable years beginning after December 31, 2002, the copy of Form 8832 attached to a return pursuant to this paragraph (c)(1)(ii) is not required to be a signed copy.

(c)(1)(iii) through (h)(3) [Reserved]. For further guidance, see §301.7701–3(c)(1)(iii) through (h)(3).

Guy R. Traynor, Federal Register Liaison, Publications and Regulations Branch,

Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

(Filed by the Office of the Federal Register on January 19, 2006, 8:45 a.m., and published in the issue of the Federal Register for January 20, 2006, 71 F.R. 3219)

Guy R. Traynor, Acting Chief, Publications

and Regulations Branch, Legal Processing Division,

Associate Chief Counsel (Procedure and Administration).

(Filed by the Office of the Federal Register on January 12, 2006, 8:45 a.m., and published in the issue of the Federal Register for January 17, 2006, 71 F.R. 2496)

Deemed Election to Be an Association Taxable as a Corporation for a Qualified Electing S Corporation; Correction

Announcement 2006–12

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Correction to final regulations.

SUMMARY: This document adds the text that was inadvertently removed from the Code of Federal Regulations in T.D. 9203, 2005–25 I.R.B. 1285, which was published in the Federal Register on Monday, May 23, 2005 (70 FR 29452).

DATES: This correction is effective on May 23, 2005.

FOR FURTHER INFORMATION CONTACT: Jian H. Grant, (202) 622–3050 (not a toll-free number).

SUPPLEMENTAL INFORMATION:

Background

This document adds §301.7701–3T to the Code of Federal Regulations. The final

regulations (T.D. 9203) that are the subject of this correction are under section 7701 of the Internal Revenue Code.

Need for Correction

As published, §301.7701–3T was inadvertently removed in its entirety from the Code of Federal Regulations in T.D. 9203.

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Correction of Publication

Accordingly, 26 CFR part 301 is corrected as follows:

PART 301—PROCEDURE AND ADMINISTRATION

Paragraph 1. The authority citation for part 301 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 301.7701–3T is added to read as follows:

§301.7701–3T Classification of certain business entities (temporary).

(a) through (c)(1)(i) [Reserved]. For further guidance, see §301.7701–3(a) through (c)(1)(i).

(ii) Further notification of elections. An eligible entity required to file a Federal tax or information return for the taxable year for which an election is made under §301.7701–3(c)(1)(i) must attach a copy of its Form 8832 to its Federal tax or information return for that year. If the entity is not required to file a return for that year, a copy of its Form 8832, “ Entity Clas- sification Election,” must be attached to the Federal income tax or information return of any direct or indirect owner of the

February 6, 2006 421 2006–6 I.R.B.