Withholding on Payments of Certain Gambling Winnings, 96406-96413 [2016-31579]
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Federal Register / Vol. 81, No. 251 / Friday, December 30, 2016 / Proposed Rules
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[FR Doc. 2016–31606 Filed 12–29–16; 8:45 am]
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Background
Internal Revenue Service
This document contains proposed
regulations to amend the Employment
Tax Regulations (26 CFR 31) under
section 3402 of the Internal Revenue
Code relating to withholding from
gambling winnings for horse races, dog
races, and jai alai. The proposed
regulations update and clarify other
provisions of § 31.3402(q)–1 and make
conforming changes to § 31.3406(g)–2.
Section 3402(q)(1) requires every
person, including the United States
government, a state, a political
subdivision thereof, or any
instrumentality of the foregoing, that
makes any payment of gambling
winnings to deduct and withhold tax on
certain payments at the third-lowest tax
rate applicable under section 1(c),
which for the 2016 tax year is 25
percent. Section 3402(q)(2) provides an
exemption from withholding under this
section for payments of winnings to
nonresident aliens and foreign
corporations subject to withholding
under sections 1441(a) or 1442(a).
Section 3402(q)(3) describes the
winnings subject to withholding as
proceeds from a wager determined in
accordance with the rules in that
subsection.
Whether winnings are subject to
withholding depends on the type of
wagering transaction, the proceeds from
a wager, and in some cases the odds
associated with a wager. Under sections
3402(q)(3)(B) and (C)(i), payers generally
must withhold if the proceeds from a
wager exceed $5,000 in a Stateconducted lottery, other lottery,
sweepstakes, or wagering pool. Under
section 3402(q)(3)(A) and (C)(ii), in the
case of a wagering transaction in a
parimutuel pool with respect to horse
races, dog races, or jai alai, the payer
must withhold if the proceeds exceed
$5,000 and are at least 300 times as large
as the amount wagered. Winnings from
bingo, keno, and slot machines are
exempted from withholding under
section 3402(q)(1) by section 3402(q)(5).
26 CFR Part 31
[REG–123841–16]
RIN 1545–BN58
Withholding on Payments of Certain
Gambling Winnings
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking.
AGENCY:
This document contains
proposed regulations under section
3402(q) with respect to withholding on
certain payments of gambling winnings
from horse races, dog races, and jai alai
and on certain other payments of
gambling winnings. The proposed
regulations affect both payers and
payees of the gambling winnings subject
to withholding under section 3402(q).
DATES: Written or electronic comments
and requests for a public hearing must
be received by March 30, 2017.
ADDRESSES: Send submissions to:
CC:PA:LPD:PR (REG–123841–16), Room
5203, Internal Revenue Service, P.O.
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–123841–
16), Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue NW.,
Washington, DC 20224, or sent
electronically, via the Federal
eRulemaking Portal at https://
www.regulations.gov (IRS REG–123841–
16).
FOR FURTHER INFORMATION CONTACT:
Concerning the proposed regulations,
David Bergman, (202) 317–6845;
concerning submissions of comments or
to request a public hearing, Regina
Johnson, (202) 317–6901 (not toll-free
numbers).
SUMMARY:
Carissa Doody, Center for Veterinary
Medicine (HFV–228), Food and Drug
Administration, 7519 Standish Pl.,
Rockville, MD 20855, 240–402–6283,
carissa.doody@fda.hhs.gov.
SUPPLEMENTARY INFORMATION:
DEPARTMENT OF TREASURY
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information
contained in this notice of proposed
rulemaking has been approved by the
Office of Management and Budget
through Form W–2G (OMB No. 1545–
0238) in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C.
3507(d)). Notice and an opportunity to
comment on the proposed changes to
burden hours for the forms related to
this proposed rule will be published in
a separate notice in the Federal
Register.
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Proceeds From a Wager and Identical
Wagers
Section 3402(q)(4) provides that
proceeds from a wager are determined
by reducing the amount received by the
amount of the wager, and proceeds
which are not money are taken into
account at fair market value. The
current regulations provide rules for
determining the amount of proceeds
from a wager, including a special rule
for ‘‘identical wagers.’’ The rule treats
‘‘identical wagers’’ as paid with respect
to a single wager for purposes of
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calculating the proceeds from the wager.
See § 31.3402(q)–1(c)(ii).
Neither the statute nor the existing
regulations explicitly define the terms
‘‘wager’’ or ‘‘identical wagers,’’ but the
regulation text of § 31.3402(q)–1(c)(ii),
regarding rules for determining the
amount of proceeds from a wager, and
§ 31.3402(q)–1(d) provide examples of
wagers that are and are not identical
wagers. For example, amounts paid on
two bets placed in a parimutuel pool on
a particular horse to win a particular
race are treated as paid with respect to
the same wager. These two bets would
not be identical, however, if one bet was
for the horse to win and the other bet
was for the horse to place (which are
bets in two separate parimutuel pools,
as explained below). Those two bets
would also not be identical if one bet
was placed in a pool conducted by the
racetrack and the other bet was placed
in a separate pool conducted by an offtrack betting establishment and such
wagers are not pooled with those placed
at the racetrack. In addition, two bets on
the same race are not identical where
the bettor makes an exacta bet on horse
M to win and horse N to place and a
trifecta bet on horse M to win, horse N
to place, and horse O to show. See
§ 31.3402(q)–1(d), Example 11. The
preamble to the current regulations
provides the following definition for
identical bets: ‘‘Identical bets are those
in which winning depends on the
occurrence (or non-occurrence) of the
same event or events.’’ T.D. 7919 (48 FR
46296) (Oct. 12, 1983).
The statute does not explicitly
address how to determine the amount of
the wager in the case of exotic wagers.
Exotic wagers are those other than
straight wagers. Straight wagers include
bets to win (selecting the first-place
finisher), place (selecting a finisher to
place first or second), and show
(selecting a finisher to place first,
second, or third). Examples of exotic
bets include multi-contestant bets, such
as an exacta (selecting the first and
second-place finishers in a single
contest, in the correct order) and a
trifecta (selecting the first, second, and
third-place finishers in a single contest,
in the correct order). Other examples
include multi-contest bets such as a
Pick 6 (selecting the first-place finisher
in six consecutive contests).
The instructions to Form W–2G
provide the rule for multiple wagers
reflected on a single ticket as follows:
‘‘For multiple wagers sold on one ticket,
such as the $12 box bet on a Big Triple
or Trifecta, the wager is considered as
six $2 bets and not one $12 bet for
purposes of computing the amount to be
reported or withheld.’’ See, e.g., 2016
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Instructions to Forms W–2G and 5754,
at 2, available at https://www.irs.gov/
pub/irs-pdf/iw2g.pdf. Thus, according to
the instructions, the bettor may only
consider the cost of a single winning
combination when determining the
amount wagered for purposes of
determining whether proceeds from a
wager meets the threshold for
withholding in section 3402(q)(3)(C)(ii).
2015 Request for Comments
The Treasury Department and the IRS
requested comments from the public on
the treatment of wagers in parimutuel
gambling on March 4, 2015, in a notice
of proposed rulemaking (REG–132253–
11) under section 6041 regarding
information returns to report winnings
from bingo, keno, and slot machine
play. The notice of proposed rulemaking
stated that taxpayers required to report
winnings from parimutuel gambling
may have concerns relating to when
wagers with respect to horse races, dog
races, and jai alai may be treated as
identical and that the Treasury
Department and the IRS intend to
amend the regulations under
§ 31.3402(q)–1.
Multiple commentators requested a
rule that would take into account all
money wagered in a particular
parimutuel pool when determining
proceeds from a wager for purposes of
determining whether withholding under
section 3402(q) was required. In
particular, some commentators
requested that the Treasury Department
and the IRS revise the regulations to
provide a definition of the ‘‘amount of
the wager’’ when multiple bets are
placed in the same pool to include the
total amount wagered by a bettor into a
specific parimutuel pool for purposes of
determining whether wagering proceeds
are subject to withholding and
reporting. The commentators stated that
this change would reflect innovations
and changes to today’s modern
parimutuel wagering strategies.
Reporting Rules
Section 3402(q)(6) provides that
recipients of gambling winnings subject
to withholding must furnish a statement
to the payer, under penalties of perjury,
containing the name, address, and
taxpayer identification number of the
recipient and each person entitled to
any portion of the payment. The current
regulations provide that the statement,
furnished on a Form W–2G, Certain
Gambling Winnings, or Form 5754,
Statement by Person(s) Receiving
Gambling Winnings, also must indicate
if the payee and any other persons
entitled to payment are entitled to
winnings from identical wagers.
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§§ 1.6011–3, 31.3402(q)–1(c)(ii). The
payer may rely on this statement in
determining the amount of proceeds
from the wager. § 31.3402(q)–1(c)(ii).
On or before February 28 (March 31
if filed electronically) of the calendar
year following the calendar year in
which the payment is made, the payer
must file a return on Form W–2G with
the Internal Revenue Service reporting
the gambling winnings subject to
withholding. § 31.3402(q)–1(f). Section
6041(d) and the instructions to Form
W–2G require that the payer filing a
Form W–2G also furnish a statement to
the payee on or before January 31 of the
calendar year following the calendar
year in which the payment is made.
Explanation of Provisions
The current regulations for
withholding from gambling winnings
under section 3402(q) were last
substantively amended in 1983.
According to commentators, since that
time, exotic bets on horse races, dog
races, and jai alai have accounted for an
increasing percentage of total bets
placed on horse races, dog races, and jai
alai. The increase in exotic betting, and
in particular the use of certain methods
of exotic betting, has resulted in
scenarios where the current rules may
result in withholding that significantly
exceeds the individual gambler’s
ultimate income tax liability. In light of
this, the proposed regulations amend
the rules regarding how payers
determine the amount of the wager in
parimutuel wagering transactions with
respect to horse races, dog races, and jai
alai. Specifically, these proposed
regulations address exotic bets on horse
races, dog races, and jai alai by
providing a new rule to determine the
amount of the wager when wagers are
placed in a single parimutuel pool and
are reflected on a single ticket. In
addition, the current regulations under
section 3402(q) are updated to reflect
current law regarding the withholding
thresholds and certain information
reporting requirements.
I. Wagers in the Case of Horse Races,
Dog Races, and Jai Alai
A. Parimutuel Betting
In parimutuel betting, which
translates to betting ‘‘amongst
ourselves,’’ the bettors themselves
establish the odds and payouts, as
opposed to having fixed odds. Each type
of bet on a contest or series of contests
goes into its own parimutuel pool. For
example, each win bet goes into the win
pool for that contest, regardless of the
finisher selected to win. As amounts are
wagered in the pool, the odds and
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payouts adjust accordingly. Following
the contest or contests determinative of
a particular pool, all bettors who placed
a winning bet share the money placed
in that particular pool, less the
applicable takeout. Parimutuel betting
in the United States is used in betting
on horse races, dog races, and jai alai.
Parimutuel betting involves both
straight and exotic bets. Each type of
straight or exotic bet is placed in its own
parimutuel pool. For example, a trifecta
bet on a particular contest goes into that
contest’s trifecta pool, regardless of the
finishers or order of finish selected, and
the trifecta pool is separate from the win
pool, the exacta pool, and all other
pools associated with that particular
contest. Exotic bets provide greater odds
and bigger pay-offs than straight bets.
Multiple combinations of exotic bets
may be placed on a single ticket, making
it easier for bettors to place wagers on
the various possible outcomes. For
example in horse racing, bettors often
use box, key, and wheel bets to place
the same type of exotic bet (e.g., exacta
or trifecta) on multiple combinations of
outcomes. Box bets involve betting on
all possible outcomes of a specific group
of horses in the same race; for example,
a three-horse exacta box is a bet in
which three specific horses are selected
to place first or second in any
combination or order of finish. A bettor
wins a three-horse exacta box bet if any
combination of the bettor’s three horses
finishes first and second. Key bets
involve betting a single horse in one
position with all possible combinations
of the other selected horses; for
example, a trifecta key is a bet where a
single horse is selected to win and the
other horses included in the bet are
selected to place second or third in any
combination or order of finish. Finally,
a wheel bet involves multiple horses in
multiple combinations in multiple
races; for example, a Daily Double
wheel is a bet where a single horse is
selected to win the first race and every
horse is selected in the second race.
B. Comments Regarding Current
Treatment of Parimutuel Betting
Commentators stated that since the
regulations were last substantively
amended, the rise in the number of
exotic bets available at certain
racetracks and the popularity of exotic
betting has altered parimutuel betting
practices. Commentators stated that, for
example, in the 1978 Kentucky Derby,
there were three types of bets available
to be placed at Churchill Downs
racetrack, where the Kentucky Derby is
run. Those bets were bets to win, place,
or show. By contrast, in the 2015
Kentucky Derby, there were twenty-
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three types of bets available to be placed
at Churchill Downs racetrack, including
the superfecta, super high five, and pick
7 jackpot. Furthermore, commentators
stated that today approximately 67% of
all parimutuel wagering occurs on
exotic wagers (versus straight wagers),
as compared to the 1970s when
approximately 10% of parimutuel
wagering occurred on exotic wagers.
Further, commentators stated that the
increase in availability of exotic betting
has caused bettors to substantially
increase their amounts wagered, often
by placing box, key, and wheel bets, in
a particular parimutuel pool to increase
their chances of winning and increase
the potential payout. In addition,
commentators attributed the rise in
popularity of exotic bets to the fact that
exotic bets offer significantly higher
odds. As a result, commentators stated
that modern bettors are putting more
money towards bets with greater
potential payouts in anticipation of
significant winnings.
Commentators also stated that
payouts from straight bets were rarely
subject to withholding because they
virtually never came close to exceeding
the 300 to 1 ratio of proceeds to the
amount of the wager. On the other hand,
exotic bets do result in proceeds
exceeding the amount of the wager by
a 300 to 1 ratio; for example, seven
different exotic bets at the 2015
Kentucky Derby produced payouts
exceeding the 300 to 1 ratio. However,
given the vast number of potential
outcomes possible with exotic bets, the
commentators stated that bettors are
using techniques such as box, key, or
wheel bets to increase their odds. As a
result, it is undoubtedly the case that
the winners wagered far more into the
pool than the cost of the winning bet.
Commentators stated that the tax
treatment under the current rules
ignores the actual investment in a single
parimutuel pool and may result in
withholding that significantly exceeds
the amount necessary to cover the
individual gambler’s ultimate income
tax liability and suggested changing the
rule to take into account all wagers in
the same parimutuel pool. The
commentators provided the following
example to illustrate this. A bettor
makes a seven-horse trifecta box wager,
which involves selecting a group of
seven horses to place first, second, and
third, in any order. This bet has 210
unique possible results. Assuming the
bettor bets $20 on each combination, the
total amount wagered is $4,200. At race
time the winning combination carries
304 to 1 odds. After the race, the bettor
holds a winning ticket that pays $6,100
($304 × $20 wagered + $20 return of
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bet). Under the current rules, the
racetrack would withhold $1,520
(($6,100¥20) × 25%) and report $6,080
in winnings ($6,100¥$20) because the
rules treat only the $20 paid for the
single winning combination as the
amount wagered. However, the
commentators stated that the individual
has netted only $1,900 ($6,100 winnings
less $4,200 wagered), and is left with
$380 ($1,900¥$1,520) once withholding
taxes are taken out, which makes the
withholding rate 80% of net winnings.
Under the commentators’ proposed
change, the amount of the wager would
be considered to be $4,200. Thus the
racetrack would not withhold because
the proceeds from the wager ($1,900) are
less than the $5,000 withholding
threshold and are also less than
$1,260,000 (300 times the amount
wagered). Similarly, the racetrack would
not report the proceeds because they are
not at least 300 times the amount
wagered.
The commentators noted that
although the bettor may be able to
deduct the losing wagers on the bettor’s
tax return at the end of the year as a
miscellaneous itemized deduction, there
would be other consequences. For
example, the $1,520 withholding lowers
the amount of money in circulation at
the racetrack that day and reduces the
bettor’s cash on hand, whereas the
commentators’ proposed change would
result in additional cash on hand to be
bet in subsequent races.
In addition, the commentators stated
that the deduction for losing wagers
results in reporting of higher adjusted
gross income than would result under
the commentator’s proposed change.
Commentators further stated that a
higher adjusted gross income can cause
the bettor to lose unrelated tax benefits.
In addition, the deduction is only
available if the bettor itemizes
deductions and is not subject to the
alternative minimum tax. Finally the
commentators noted that many states
limit itemized deductions for state tax
purposes.
C. Proposed Rule for the Amount of the
Wager in the Case of Horse Races, Dog
Races, and Jai Alai
Proposed § 31.3402(q)–1(c)(ii)
provides a new rule for purposes of
determining the amount of the wager for
wagering transactions in horse races,
dog races, and jai alai. The proposed
rule allows all wagers placed in a single
parimutuel pool and represented on a
single ticket to be aggregated and treated
as a single wager for purposes of
determining the amount of the wager.
The proposed rule allows a payer to take
into account the total amount wagered
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in a particular pool as reflected on a
single ticket to determine whether the
winnings are subject to withholding and
reporting. This treatment better reflects
the full cost of exotic bets. In addition,
straight wagers are unlikely to have
odds and produce payouts of at least
300 to 1, so they generally are not
subject to withholding, regardless of the
application of the proposed rule. The
proposed regulations contain examples
to illustrate the proposed rule for
wagering transactions in the case of
horse races, dog races, and jai alai.
The proposed rule for determining the
amount of the wager addresses the fact
that the current rules may result in
withholding that significantly exceeds
the amount necessary to cover the
individual gambler’s ultimate income
tax liability, and that creates an
unnecessary burden on the bettor and
the horse racing, dog racing, and jai alai
industries. As described in the
commentators’ example, current rules
for exotic bets placed as box, key, or
wheel bets can result in an 80%
withholding rate on net winnings from
wagers placed in the same pool. This
result has become more common in the
decades since the regulations were last
amended because the number of exotic
bet types and the popularity of exotic
bets have increased substantially, and
various combinations of these exotic
bets are often placed together on a single
ticket as part of the same transaction.
By limiting the amount of the wager
in a wagering transaction with respect to
horse races, dog races, and jai alai to the
wagers represented on a single ticket,
the proposed rule limits the potential
for fraud and creates an administrable
system for payers. The rule is
administrable because it does not
require payers to collect information
regarding winning wagers where
additional wagers placed in the same
pool are reflected on multiple tickets. If
bettors want to place additional wagers
in the same parimutuel pool after
already having purchased a ticket,
commentators stated that bettors may be
able to cancel the first ticket and place
the original and additional wagers for
that pool on a new ticket.
The proposed regulations maintain
the current rule regarding identical
wagers. To clarify the meaning of the
term, however, the proposed regulations
provide a definition of identical wagers
taken from the preamble of the current
regulations. T.D. 7919 (48 FR 46296).
The proposed regulations also move
examples of identical wagers from the
regulatory text to the examples section.
The Treasury Department and the IRS
request comments regarding whether
the proposed rule addressing the
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amount of the wager in a wagering
transaction in the case of horse races,
dog races, and jai alai should apply to
other types of gambling subject to
withholding under section 3402(q), such
as lotteries.
II. Ministerial Updates to Current
Regulations
In addition to the proposed rule for
wagers in horse races, dog races, and jai
alai, the proposed regulations make
ministerial updates to the current
regulations to reflect current law.
Proposed regulations § 31.3402(q)–
1(a) and (b) are amended to reflect the
current statutory tax rate for
withholding (the third-lowest tax rate
under section 1(c)) and the current
statutory thresholds for withholding for
all types of gambling covered by this
regulation ($5,000). In 1992 and again in
2001, Congress amended section
3402(q)(1) to change the withholding
rate first from 20 percent to 28 percent
and then to its current level of ‘‘the
third lowest rate of tax applicable under
section 1(c),’’ but the current regulations
do not reflect either of these statutory
amendments. See Economic Growth and
Tax Relief Reconciliation Act of 2001,
Public Law 107–16, § 101(c)(8); Energy
Policy Act of 1992, Public Law 102–486,
§ 1934(a). In 1992, Congress also
amended sections 3402(q)(3)(A) and (C)
to change the withholding threshold for
certain types of gambling from $1,000 to
$5,000, which the current regulations do
not reflect. Energy Policy Act, § 1942(a).
In addition, the proposed regulations
remove certain dates reflecting
transition periods, which are no longer
necessary.
In addition, proposed regulation
§ 31.3402(q)–1(c)(4) updates the rule
regarding payments to nonresident
aliens or foreign corporations.
III. Information Reporting for Gambling
Winnings Subject to Withholding Under
Section 3402(q)
Proposed regulations § 31.3402(q)–
1(d) and (e) update and clarify the
reporting rules for gambling winnings
subject to withholding under section
3402(q). The amendments to
§ 31.3402(q)–1(d), regarding the
statement by the payee of gambling
winnings subject to withholding under
section 3402(q), reorganize the current
regulations into new sub-sections.
Proposed § 31.3402(q)–1(d)(1) provides
the general rule that each payer of
gambling winnings subject to
withholding under section 3402(q) must
obtain a payee statement. Proposed
§ 31.3402(q)–1(d)(2) describes the
content of the payee statement.
Proposed § 31.3402(q)–1(d)(3) states the
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reliance rule currently described in
§ 31.3402(q)–1(c)(1)(ii) that where a
payee furnishes the required payee
statement and, as required by § 1.6011–
3, indicates that he or she is entitled to
winnings from identical wagers, the
payer may rely on the statement in
determining the total amount of
proceeds from the wager.
The amendments to proposed
§ 31.3402(q)–1(e), regarding the
information return filed by the payer on
Form W–2G, modernize the current
reporting rules. First, the proposed
regulations replace outdated references
to the place of filing with a requirement
that the return be filed with the
appropriate Internal Revenue Service
location designated in the instructions
to the form.
Second, the proposed regulations
require the payer to report the taxpayer
identification number of the winner in
lieu of the social security number to
allow for a broader range of taxpayer
identification numbers, including
individual taxpayer identification
numbers (ITINs) and adoption taxpayer
identification numbers (ATINs). This
amendment allows truncation of the
taxpayer identification number on the
statement furnished by the payer to the
payee because the regulation no longer
requires a social security number. For
provisions relating to the use of
truncated taxpayer identification
numbers, see § 31.6109–4 of this
chapter.
Third, the proposed regulations
update the payee identification
provisions. Section 31.3402(q)–1(f)(1)(v)
of the current regulations provides that
the identification verifying the payee’s
identity must include the payee’s social
security number. According to the
current regulations, examples of
acceptable identification include a
driver’s license, a social security card,
or a voter registration card. However,
today most forms of identification do
not include a person’s social security
number. Therefore, many payees do not
have identification that contains the
payee’s social security number and,
even if they do, they may not have this
identification with them at the time that
they receive a payment of gambling
winnings subject to withholding under
section 3402(q).
To address this issue, proposed
§§ 31.3402(q)–1(e)(1)(v) and (e)(2)
provide that, in addition to governmentissued identification, a properly
completed Form W–9 signed by the
payee is an acceptable form of
identification to verify the payee’s
identifying information. Payers who
verify payee information using
identification set forth in proposed
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§§ 31.3402(q)–1(e)(1)(v) and (e)(2) before
the date that final regulations
implementing these provisions are
published in the Federal Register will
be treated as meeting the requirements
of § 31.3402(q)–1(f)(1)(v) of the current
regulations.
Fourth, the proposed regulations
contain a special rule in § 31.3402(q)–
1(e)(3) that tribal member identification
cards need not contain the payee’s
photograph to meet the identification
requirements in § 31.3402(q)–1(e)(1)(v)
of the proposed regulations, provided
specific criteria are met. This special
rule responds to comments raised by
Indian tribes in response to the notice
of proposed rulemaking (REG–132253–
11) under section 6041 regarding
information returns to report winnings
from bingo, keno, and slot machine play
that many tribal identification cards do
not contain photographs.
Fifth, the proposed regulations update
the obsolete reference to Form W–3G to
reflect that payers should use Form
1096 to transmit Forms W–2G to the
Internal Revenue Service.
Finally, the proposed regulations in
§ 31.3402(q)–1(e)(5) provides that a
payer filing an information return with
the Internal Revenue Service must
furnish a statement to the payee
containing the same information on or
before January 31st of the year following
the calendar year in which payment of
the winnings subject to withholding is
made. See section 6041(d).
Proposed amendments to the
regulations under section 3406 update
the reporting requirements to address
horse races, dog races, and jai alai.
Proposed § 31.3406(g)–2(d) is amended
to clarify the definition of a reportable
gambling winning and to add a crossreference to § 31.3402(q)–1(c) for
determining the amount of the wager in
a wagering transaction with respect to
horse races, dog races, and jai alai, or
amounts paid with respect to identical
wagers.
Proposed Effective/Applicability Date
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These regulations are proposed to
apply to payments made after the date
of publication of the Treasury Decision
adopting these rules as final regulations
in the Federal Register.
Statement of Availability of IRS
Documents
IRS published guidance cited in this
preamble is published in the Internal
Revenue Bulletin and is available from
the Superintendent of Documents, U.S.
Government Publishing Office,
Washington, DC 20402, or by visiting
the IRS Web site at https://www.irs.gov.
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Special Analyses
Certain IRS regulations, including this
one, are exempt from the requirements
of Executive Order 12866, as
supplemented and reaffirmed by
Executive Order 13563. Therefore, a
regulatory assessment is not required. It
is hereby certified that this rule will not
have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact
that this rule merely provides guidance
regarding withholding and reporting
requirements for payers of certain
gambling winnings. The requirement for
payers to withhold and make
information returns is imposed by
statute and not these regulations. In
addition, this rule reduces the existing
burden on payers to comply with the
statutory requirement by decreasing the
number of payments subject to
withholding and reporting. 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, this notice of
proposed rulemaking has been
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on its
impact on small business.
Comments and 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. In
addition to the requests for comments
noted in the Background Section,
Treasury and the IRS request comments
on any other aspects of the proposed
rules, and any other issues relating to
the payment of gambling winnings that
are not addressed in the proposed
regulations. All comments will be
available at www.regulations.gov for
public inspection or upon request.
A public hearing will be scheduled if
requested in writing by any person that
timely submits written comments. If a
public hearing is scheduled, notice of
the date, time, and place for the public
hearing will be published in the Federal
Register.
Drafting Information
The principal author of these
proposed regulations is David Bergman
of the Office of the Associate Chief
Counsel (Procedure and
Administration).
List of Subjects in 26 CFR Part 31
Employment taxes and collection of
income tax at source.
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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 TAXES AT
THE 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 31.3402(q)–1 is
amended:
■ 1. By revising paragraphs (a)(1), (b),
and (c)(1) and (4).
■ 2. By redesignating paragraph (d) as
paragraph (f), paragraph (e) as paragraph
(d), and paragraph (f) as paragraph (e).
■ 3. By revising newly designated
paragraphs (d) and (e).
■ 4. In paragraph (f), removing Example
3 and Example 11, by redesignating
Examples 4 through 10 as Examples 3
through 9, and adding examples 10
through 16.
■ 5. In paragraph (f), in newly
redesignated Example 4 by removing the
language ‘‘Example 4’’ and adding in its
place the language ‘‘Example 3’’ and in
newly redesignated Example 6 by
removing the language ‘‘Example 6’’ and
adding in its place the language
‘‘Example 5’’ wherever it appears.
■ 6. By adding paragraph (g).
The revisions and additions read as
follows:
■
§ 31.3402(q)–1 Extension of withholding to
certain gambling winnings.
(a) Withholding obligation—(1)
General rule. Every person, including
the Government of the United States, a
State, or a political subdivision thereof,
or any instrumentality of any of the
foregoing making any payment of
‘‘winnings subject to withholding’’
(defined in paragraph (b) of the section)
shall deduct and withhold a tax in an
amount equal to the product of the third
lowest rate of tax applicable under
section 1(c) and such payment. The tax
shall be deducted and withheld upon
payment of the winnings by the person
making such payment (‘‘payer’’). See
paragraph (c)(5)(ii) of this section for a
special rule relating to the time for
making deposits of withheld amounts
and filing the return with respect to
those amounts. Any person receiving a
payment of winnings subject to
withholding must furnish the payer a
statement as required in paragraph (d) of
this section. Payers of winnings subject
to withholding must file a return with
the Internal Revenue Service and
furnish a statement to the payee as
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required in paragraph (e) of this section.
With respect to reporting requirements
for certain payments of gambling
winnings not subject to withholding, see
section 6041 and the regulations
thereunder.
*
*
*
*
*
(b) Winnings subject to withholding.
(1) In general. Winnings subject to
withholding means any payment from—
(i) A wager placed in a Stateconducted lottery (defined in paragraph
(c)(2) of this section) but only if the
proceeds from the wager exceed $5,000;
(ii) A wager placed in a sweepstakes,
wagering pool, or lottery other than a
State-conducted lottery but only if the
proceeds from the wager exceed $5,000;
or
(iii) Any other wagering transaction
(as defined in paragraph (c)(3) of this
section) but only if the proceeds from
the wager (A) exceed $5,000 and (B) are
at least 300 times as large as the amount
of the wager.
(2) Total proceeds subject to
withholding. If proceeds from the wager
qualify as winnings subject to
withholding, then the total proceeds
from the wager, and not merely amounts
in excess of $5,000, are subject to
withholding.
(c) Definitions; special rules—(1)
Rules for determining amount of
proceeds from a wager—(i) In general.
The amount of ‘‘proceeds from a wager’’
is the amount paid with respect to the
wager, less the amount of the wager.
(ii) Amount of the wager in the case
of horse races, dog races, and jai alai.
In the case of a wagering transaction
with respect to horse races, dog races, or
jai alai, all wagers placed in a single
parimutuel pool and represented on a
single ticket are aggregated and treated
as a single wager for purposes of
determining the amount of the wager. A
ticket in the case of horse races, dog
races, or jai alai is a written or electronic
record that the payee must present to
collect proceeds from a wager or wagers.
(iii) Amount paid with respect to a
wager—(A) Identical wagers. Amounts
paid with respect to identical wagers are
treated as paid with respect to a single
wager for purposes of calculating the
amount of proceeds from a wager. Two
or more wagers are identical wagers if
winning depends on the occurrence (or
non-occurrence) of the same event or
events; the wagers are placed with the
same payer; and, in the case of horse
races, dog races, or jai alai, the wagers
are placed in the same parimutuel pool.
Wagers may be identical wagers even if
the amounts wagered differ as long as
the wagers are otherwise treated as
identical wagers under this paragraph
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(c)(1)(iii)(A). Tickets purchased in a
lottery generally are not identical
wagers, because the designation of each
ticket as a winner generally would not
be based on the occurrence of the same
event, e.g., the drawing of a particular
number.
(B) Non-monetary proceeds. In
determining the amount paid with
respect to a wager, proceeds which are
not money are taken into account at the
fair market value.
(C) Periodic payments. Periodic
payments, including installment
payments or payments which are to be
made periodically for the life of a
person, are aggregated for purposes of
determining the amount paid with
respect to the wager. The aggregate
amount of periodic payments to be
made for a person’s life is based on that
person’s life expectancy. See §§ 1.72–5
and 1.72–9 of this chapter for rules used
in computing the expected return on
annuities. For purposes of determining
the amount subject to withholding, the
first periodic payment shall be reduced
by the amount of the wager.
*
*
*
*
*
(4) Certain payments to nonresident
aliens or foreign corporations. A
payment of winnings that is subject to
withholding tax under section 1441(a)
(relating to withholding on nonresident
aliens) or 1442(a) (relating to
withholding on foreign corporations) is
not subject to the tax imposed by
section 3402(q) and this section if the
payer complies with the requirements of
withholding, documentation, and
information reporting rules of section
1441(a) or 1442(a) and the regulations
thereunder. A payment is treated as
being subject to withholding tax under
section 1441(a) or 1442(a)
notwithstanding that the rate of such tax
is reduced (even to zero) as may be
provided by an applicable treaty with
another country. However, a reduced or
zero rate of withholding of tax shall not
be applied by the payer in lieu of the
rate imposed by sections 1441 and 1442
unless the person receiving the
winnings has provided to the payer the
documentation required by § 1.1441–6
of this chapter to establish entitlement
to treaty benefits.
*
*
*
*
*
(d) Statement furnished by payee—(1)
In general. Each person who is making
a payment subject to withholding under
this section must obtain from the payee
a statement described in paragraph
(d)(2) of this section.
(2) Contents of statement. (i) Each
person who is to receive a payment of
winnings subject to withholding under
this section must furnish the payer a
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96411
statement on Form W–2G or 5754
(whichever is applicable) made under
the penalties of perjury containing—
(A) The name, address, and taxpayer
identification number of the winner
accompanied by a declaration that no
other person is entitled to any portion
of such payment, or
(B) The name, address, and taxpayer
identification number of the payee and
of every person entitled to any portion
of such payment.
(3) If more than one payment of
winnings subject to withholding is to be
made with respect to a single wager, for
example in the case of an annuity, the
payee is required to furnish the payer a
statement with respect to the first such
payment only, provided that such other
payments are taken into account in a
return required by paragraph (e) of this
section.
(4) Reliance on statement for identical
wagers. If the payee furnishes the
statement which may be required
pursuant to § 1.6011–3 of this chapter
(regarding the requirement of a
statement from payees of certain
gambling winnings), indicating that the
payee (and any other persons entitled to
a portion of the winnings) is entitled to
winnings from identical wagers, as
defined in paragraph (c)(1)(iii)(A) of this
section, and indicating the amount of
such winnings, if any, then the payer
may rely upon such statement in
determining the total amount of
proceeds from the wager under
paragraph (c)(1) of this section.
(e) Return of payer—(1) In general.
Every person making payment of
winnings for which a statement is
required under paragraph (d) of this
section shall file a return on Form W–
2G with the Internal Revenue Service
location designated in the instructions
to the form on or before February 28
(March 31 if filed electronically) of the
calendar year following the calendar
year in which the payment of winnings
is made. The return required by this
paragraph (e) need not include the
statement by the payee required by
paragraph (d) of this section and,
therefore, need not be signed by the
payee, provided such statement is
retained by the payer as long as the
contents thereof may become material in
the administration of any internal
revenue law. In addition, the return
required by this paragraph (e) need not
contain the information required by
paragraph (e)(1)(v) of this section
provided such information is obtained
with respect to the payee and retained
by the payer as long as the contents
thereof may become material in the
administration of any internal revenue
law. For payments to more than one
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winner, a separate Form W–2G, which
in no event need be signed by the
winner, shall be filed with respect to
each such winner. Each Form W–2G
shall contain the following:
(i) The name, address, and employer
identification number of the payer;
(ii) The name, address, and taxpayer
identification number of the winner;
(iii) The date, amount of the payment,
and amount withheld;
(iv) The type of wagering transaction;
(v) Except with respect to winnings
from a wager placed in a Stateconducted lottery, a general description
of the two types of identification (as
described in paragraph (e)(2) of this
section), one of which must have the
payee’s photograph on it (except in the
case of tribal member identification
cards in certain circumstances as
described in paragraph (e)(3) of this
section), that the payer relied on to
verify the payee’s name, address, and
taxpayer identification number;
(vi) The amount of winnings from
identical wagers; and
(vii) Any other information required
by the form, instructions, or other
applicable guidance published in the
Internal Revenue Bulletin.
(2) Identification. The following items
are treated as identification for purposes
of paragraph (e)(1)(v) of this section—
(i) Government-issued identification
(for example, a driver’s license,
passport, social security card, military
identification card, tribal member
identification card issued by a federallyrecognized Indian tribe, or voter
registration card) in the name of the
payee; and
(ii) A Form W–9, ‘‘Request for
Taxpayer Identification Number and
Certification,’’ signed by the payee that
includes the payee’s name, address,
taxpayer identification number, and
other information required by the form.
A Form W–9 is not acceptable for this
purpose if the payee has modified the
form (other than pursuant to
instructions to the form) or if the payee
has deleted the jurat or other similar
provisions by which the payee certifies
or affirms the correctness of the
statements contained on the form.
(3) Special rule for tribal member
identification cards. A tribal member
identification card need not contain the
payee’s photograph to meet the
identification requirement described in
paragraph (e)(1)(v) of this section if—
(i) The payee is a member of a
federally-recognized Indian tribe;
(ii) The payee presents the payer with
a tribal member identification card
issued by a federally-recognized Indian
tribe stating that the payee is a member
of such tribe; and
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(iii) The payer is a gaming
establishment (as described in § 1.6041–
10(b)(2)(iv) of this chapter) owned or
licensed (in accordance with 25 U.S.C.
2710) by the tribal government that
issued the tribal member identification
card referred to in paragraph (e)(3)(ii) of
this section.
(4) Transmittal form. Persons making
payments of winnings subject to
withholding shall use Form 1096 to
transmit Forms W–2G to the Internal
Revenue Service.
(5) Furnishing a statement to the
payee. Every payer required to make a
return under paragraph (e)(1) of this
section must also make and furnish to
each payee, with respect to each
payment of winnings subject to
withholding, a written statement that
contains the information that is required
to be included on the return under
paragraph (e)(1) of this section. The
payer must furnish the statement to the
payee on or before January 31st of the
year following the calendar year in
which payment of the winnings subject
to withholding is made. The statement
will be considered furnished to the
payee if it is provided to the payee at
the time of payment or if it is mailed to
the payee on or before January 31st of
the year following the calendar year in
which payment was made.
(f) Examples. * * *
Example 10. B places a $15 bet at the
cashier window at the racetrack for horse A
to win the fifth race at the racetrack that day.
After placing the first bet, B gains confidence
in horse A’s prospects to win and places an
additional $40 bet at the cashier window at
the racetrack for horse A to win the fifth race,
receiving a second ticket for this second bet.
Horse A wins the fifth race, and B wins a
total of $5,500 (100 to 1 odds) on those bets.
The $15 bet and the $40 bet are identical
wagers under paragraph (c)(1)(iii)(A) of this
section because winning on both bets
depended on the occurrence of the same
event and the bets are placed in the same
parimutuel pool with the same payer. This is
true regardless of the fact that the amount of
the wager differs in each case.
B cashes the tickets at different cashier
windows. Pursuant to paragraph (d) of this
section and § 1.6011–3, B completes a Form
W–2G indicating that the amount of
winnings is from identical wagers and
provides the form to each cashier. The
payments by each cashier of $1,500 and
$4,000 are less than the $5,000 threshold for
withholding, but under paragraph
(c)(1)(iii)(A) of this section, identical wagers
are treated as paid with respect to a single
wager for purposes of determining the
proceeds from a wager. The payment is not
subject to withholding or reporting because
although the proceeds from the wager are
$5,445 ($1,500 + $4,000 ¥ $55), the proceeds
from the wager are not at least 300 times as
great as the amount wagered ($55 × 300 =
$16,500).
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Example 11. B makes two $1,000 bets in
a single ‘‘show’’ pool for the same jai alai
game, one bet on Player X to show and one
bet on Player Y to show. A show bet is a
winning bet if the player comes in first,
second, or third in a single game. The bets
are placed at the same time at the same
cashier window, and B receives a single
ticket showing both bets. Player X places
second in the game, and Player Y does not
place first, second, or third in the game. B
wins $8,000 from his bet on Player X.
Because winning on both bets does not
depend on the occurrence of the same event,
the bets are not identical bets under
paragraph (c)(1)(iii)(A) of this section.
However, pursuant to the rule in paragraph
(c)(1)(ii) of this section, the amount of the
wager is the aggregate amount of both wagers
($2,000) because the bets were placed in a
single parimutuel pool and reflected on a
single ticket. The payment is not subject to
withholding or reporting because although
the proceeds from the wager are $6,000
($8,000 ¥ $2,000), the proceeds from the
wager are not at least 300 times as great as
the amount wagered ($2,000 × 300 =
$600,000).
Example 12. B bets a total of $120 on a
three-dog exacta box bet ($20 for each one of
the six combinations played) at the dog
racetrack and receives a single ticket
reflecting the bet from the cashier. B wins
$5,040 from one of the selected
combinations. Pursuant to the rule in
paragraph (c)(1)(ii) of this section, the
amount of the wager is $120, not $20 for the
single winning combination of the six
combinations played. The payment is not
subject to withholding under section 3402(q)
because the proceeds from the wager are
$4,920 ($5,040 ¥ $120), which is below the
section 3402(q) withholding threshold.
Example 13. B makes two $12 Pick 6 bets
at the horse racetrack at two different cashier
windows and receives two different tickets
each representing a single $12 Pick 6 bet. In
his two Pick 6 bets, B selects the same horses
to win races 1–5 but selects different horses
to win race 6. All Pick 6 bets on those races
at that racetrack are part of a single
parimutuel pool from which Pick 6 winning
bets are paid. B wins $5,020 from one of his
Pick 6 bets. Pursuant to the rule in paragraph
(c)(1)(ii) of this section, the bets are not
aggregated for purposes of determining the
amount of the wager because the bets are
reflected on separate tickets. Assuming that
the applicable rate is 25%, the racetrack must
deduct and withhold $1,252 (($5,020 ¥ $12)
× 25%) because the amounts of the proceeds
of $5,008 ($5,020 ¥ $12) is greater than
$5,000 and is at least 300 times as great as
the amount wagered ($12 × 300 = $3,600).
The racetrack also must report B’s winnings
on Form W–2G pursuant to paragraph (e) of
this section and furnish a copy of the Form
W–2G to B.
Example 14. C makes two $50 bets in two
different parimutuel pools for the same jai
alai game. One bet is an ‘‘exacta’’ in which
C bets on player M to win and player N to
‘‘place’’. The other bet is a ‘‘trifecta’’ in
which C bets on player M to win, player N
to ‘‘place,’’ and player O to ‘‘show.’’ C wins
both bets and is paid $2,000 with respect to
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the bet in the ‘‘exacta’’ pool and $3,100 with
respect to the bet in the ‘‘trifecta’’ pool.
Under paragraph (c)(1)(iii)(A) of this section,
the bets are not identical bets. Under
paragraph (c)(1)(ii) of this section, the bets
are not aggregated for purposes of
determining the amount of the wager for
either payment because they are not wagers
in the same parimutuel pool. No section
3402(q) withholding is required on either
payment because neither payment separately
exceeds the $5,000 withholding threshold.
Example 15. C makes two $100 bets for the
same dog to win a particular race. C places
one bet at the racetrack and one bet at an offtrack betting establishment, but the two pools
constitute a single pool. C receives separate
tickets for each bet. C wins both bets and is
paid $4,000 from the racetrack and $4,000
from the off-track betting establishment.
Under paragraph (c)(1)(ii) of this section, the
bets are not aggregated for purposes of
determining the amount of the wager because
the wager placed at the racetrack and the
wager placed at the off-track betting
establishment are reflected on separate
tickets, despite being placed in the same
parimutuel pool. No section 3402(q)
withholding is required because neither
payment separately exceeds the $5,000
withholding threshold.
Example 16. C places a $200 Pick 6 bet
for a series of races at the racetrack on a
particular day and receives a single ticket for
the bet. No wager correctly picks all six races
that day, so that portion of the pool carries
over to the following day. On the following
day, C places an additional $200 Pick 6 bet
for that day’s series of races and receives a
new ticket for that bet. C wins $100,000 on
the second day. Pursuant to the rule in
paragraph (c)(1)(ii) of this section, the bets
are on two separate tickets, so C’s two Pick
6 bets are not aggregated for purposes of
determining the amount of the wager.
Assuming that the applicable rate is 25%, the
racetrack must deduct and withhold $24,950
(($100,000 ¥ $200) × 25%) because the
amount of the proceeds of $99,800 ($100,000
¥ $200) is greater than $5,000, and is at least
300 times as great as the amount wagered
($200 × 300 = $60,000). The racetrack also
must report C’s winnings on Form W–2G
pursuant to paragraph (e) of this section and
furnish a copy of the Form W–2G to C.
(g) Applicability date. These rules
apply to payments made after [the date
of publication of the Treasury decision
adopting these rules as final regulations
in the Federal Register]. For rules that
apply to payments made before that
date, see 26 CFR 31.3402(q)–1 (revised
April 2015).
■ Par. 3. Section 31.3406–0 is amended
by adding an entry for paragraph (h) to
§ 31.3406(g)–2 to read as follows:
§ 31.3406–0 Outline of the backup
withholding regulations.
*
*
*
*
*
*
VerDate Sep<11>2014
*
§ 31.3406(g)–2 Exception for reportable
payment for which withholding is otherwise
required.
*
*
*
*
*
(d) * * *
(2) Definition of a reportable gambling
winning and determination of amount
subject to backup withholding. For
purposes of withholding under section
3406, a reportable gambling winning is
any gambling winning subject to
information reporting under section
6041. 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. See
§ 1.6041–10 of this chapter to determine
whether a winning from bingo, keno, or
slot machines is a reportable gambling
winning and thus subject to
withholding under section 3406. The
amount of a reportable gambling
winning is—
(i) The amount paid with respect to
the amount of the wager reduced, at the
option of the payer; by
(ii) The amount of the wager.
(3) Special rules. For special rules for
determining the amount of the wager in
a wagering transaction with respect to
horse racing, dog racing, and jai alai, or
amounts paid with respect to identical
wagers, see § 31.3402(q)–1(c).
*
*
*
*
*
(h) Applicability date. The rules apply
to reportable gambling winnings paid
after [the date of publication of the
Treasury decision adopting these rules
as final regulations in the Federal
Register]. For reportable gambling
winnings paid on or before [the date of
publication of the Treasury decision
adopting these rules as final regulations
in the Federal Register], § 31.3406(g)–
2 (as contained in 26 CFR part 31,
revised April 2015) applies.
John Dalrymple,
Deputy Commissioner for Services and
Enforcement.
*
§ 31.3406(g)–2 Exception for reportable
payments for which backup withholding is
otherwise required.
*
(h) Effective/applicability date.
*
*
*
*
■ Par. 4. Section 31.3406(g)–2 is
amended by revising paragraphs (d)(2)
and (3) and adding paragraph (h) to read
as follows:
*
[FR Doc. 2016–31579 Filed 12–29–16; 8:45 am]
BILLING CODE 4830–01–P
*
17:43 Dec 29, 2016
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96413
ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Parts 87 and 1068
[EPA–HQ–OAR–2014–0828; FRL–9957–73–
OAR]
Reconsideration of Finding That
Greenhouse Gas Emissions From
Aircraft Cause or Contribute to Air
Pollution That May Reasonably Be
Anticipated To Endanger Public Health
and Welfare
Environmental Protection
Agency (EPA).
ACTION: Notice of final action denying
petition for reconsideration.
AGENCY:
This action provides notice
that the U.S. Environmental Protection
Agency (EPA) Administrator, Gina
McCarthy, denied a petition for
reconsideration of the final Finding that
Greenhouse Gas Emissions from Aircraft
Cause or Contribute to Air Pollution that
May Reasonably Be Anticipated to
Endanger Public Health and Welfare,
published in the Federal Register on
August 15, 2016.
DATES: The EPA took final action to
deny the petition for reconsideration on
December 21, 2016.
FOR FURTHER INFORMATION CONTACT:
Lesley Jantarasami, Office of
Atmospheric Programs, Climate Change
Division, Environmental Protection
Agency, 1200 Pennsylvania Ave. NW.,
Mail Code 6207–A, Washington DC
20460; Telephone number: (202) 343–
9990; Email address:
ghgendangerment@epa.gov.
SUPPLEMENTARY INFORMATION:
SUMMARY:
I. General Information
A. How can I get copies of this
document and other related
information?
This Federal Register document, the
petition for reconsideration and the
EPA’s response addressing the petition
for reconsideration are available in the
docket under Docket ID No. EPA–HQ–
OAR–2014–0828.
Docket. The EPA has established a
docket for this action under Docket ID
No. EPA–HQ–OAR–2014–0828.
Publicly available docket materials are
available either electronically through
https://www.regulations.gov or in hard
copy at the EPA Docket Center (EPA/
DC), EPA WJC West, Room 3334, 1301
Constitution Ave. NW., Washington,
DC. The EPA Docket Center Public
Reading Room is open from 8:30 a.m. to
4:30 p.m., Monday through Friday,
excluding legal holidays. The telephone
number for the Public Reading Room is
E:\FR\FM\30DEP1.SGM
30DEP1
Agencies
[Federal Register Volume 81, Number 251 (Friday, December 30, 2016)]
[Proposed Rules]
[Pages 96406-96413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31579]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF TREASURY
Internal Revenue Service
26 CFR Part 31
[REG-123841-16]
RIN 1545-BN58
Withholding on Payments of Certain Gambling Winnings
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: This document contains proposed regulations under section
3402(q) with respect to withholding on certain payments of gambling
winnings from horse races, dog races, and jai alai and on certain other
payments of gambling winnings. The proposed regulations affect both
payers and payees of the gambling winnings subject to withholding under
section 3402(q).
DATES: Written or electronic comments and requests for a public hearing
must be received by March 30, 2017.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-123841-16), Room
5203, Internal Revenue Service, P.O. 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-
123841-16), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC 20224, or sent electronically, via the
Federal eRulemaking Portal at https://www.regulations.gov (IRS REG-
123841-16).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
David Bergman, (202) 317-6845; concerning submissions of comments or to
request a public hearing, Regina Johnson, (202) 317-6901 (not toll-free
numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been approved by the Office of Management and Budget
through Form W-2G (OMB No. 1545-0238) in accordance with the Paperwork
Reduction Act of 1995 (44 U.S.C. 3507(d)). Notice and an opportunity to
comment on the proposed changes to burden hours for the forms related
to this proposed rule will be published in a separate notice in the
Federal Register.
Background
This document contains proposed regulations to amend the Employment
Tax Regulations (26 CFR 31) under section 3402 of the Internal Revenue
Code relating to withholding from gambling winnings for horse races,
dog races, and jai alai. The proposed regulations update and clarify
other provisions of Sec. 31.3402(q)-1 and make conforming changes to
Sec. 31.3406(g)-2.
Section 3402(q)(1) requires every person, including the United
States government, a state, a political subdivision thereof, or any
instrumentality of the foregoing, that makes any payment of gambling
winnings to deduct and withhold tax on certain payments at the third-
lowest tax rate applicable under section 1(c), which for the 2016 tax
year is 25 percent. Section 3402(q)(2) provides an exemption from
withholding under this section for payments of winnings to nonresident
aliens and foreign corporations subject to withholding under sections
1441(a) or 1442(a). Section 3402(q)(3) describes the winnings subject
to withholding as proceeds from a wager determined in accordance with
the rules in that subsection.
Whether winnings are subject to withholding depends on the type of
wagering transaction, the proceeds from a wager, and in some cases the
odds associated with a wager. Under sections 3402(q)(3)(B) and (C)(i),
payers generally must withhold if the proceeds from a wager exceed
$5,000 in a State-conducted lottery, other lottery, sweepstakes, or
wagering pool. Under section 3402(q)(3)(A) and (C)(ii), in the case of
a wagering transaction in a parimutuel pool with respect to horse
races, dog races, or jai alai, the payer must withhold if the proceeds
exceed $5,000 and are at least 300 times as large as the amount
wagered. Winnings from bingo, keno, and slot machines are exempted from
withholding under section 3402(q)(1) by section 3402(q)(5).
Proceeds From a Wager and Identical Wagers
Section 3402(q)(4) provides that proceeds from a wager are
determined by reducing the amount received by the amount of the wager,
and proceeds which are not money are taken into account at fair market
value. The current regulations provide rules for determining the amount
of proceeds from a wager, including a special rule for ``identical
wagers.'' The rule treats ``identical wagers'' as paid with respect to
a single wager for purposes of
[[Page 96407]]
calculating the proceeds from the wager. See Sec. 31.3402(q)-1(c)(ii).
Neither the statute nor the existing regulations explicitly define
the terms ``wager'' or ``identical wagers,'' but the regulation text of
Sec. 31.3402(q)-1(c)(ii), regarding rules for determining the amount
of proceeds from a wager, and Sec. 31.3402(q)-1(d) provide examples of
wagers that are and are not identical wagers. For example, amounts paid
on two bets placed in a parimutuel pool on a particular horse to win a
particular race are treated as paid with respect to the same wager.
These two bets would not be identical, however, if one bet was for the
horse to win and the other bet was for the horse to place (which are
bets in two separate parimutuel pools, as explained below). Those two
bets would also not be identical if one bet was placed in a pool
conducted by the racetrack and the other bet was placed in a separate
pool conducted by an off-track betting establishment and such wagers
are not pooled with those placed at the racetrack. In addition, two
bets on the same race are not identical where the bettor makes an
exacta bet on horse M to win and horse N to place and a trifecta bet on
horse M to win, horse N to place, and horse O to show. See Sec.
31.3402(q)-1(d), Example 11. The preamble to the current regulations
provides the following definition for identical bets: ``Identical bets
are those in which winning depends on the occurrence (or non-
occurrence) of the same event or events.'' T.D. 7919 (48 FR 46296)
(Oct. 12, 1983).
The statute does not explicitly address how to determine the amount
of the wager in the case of exotic wagers. Exotic wagers are those
other than straight wagers. Straight wagers include bets to win
(selecting the first-place finisher), place (selecting a finisher to
place first or second), and show (selecting a finisher to place first,
second, or third). Examples of exotic bets include multi-contestant
bets, such as an exacta (selecting the first and second-place finishers
in a single contest, in the correct order) and a trifecta (selecting
the first, second, and third-place finishers in a single contest, in
the correct order). Other examples include multi-contest bets such as a
Pick 6 (selecting the first-place finisher in six consecutive
contests).
The instructions to Form W-2G provide the rule for multiple wagers
reflected on a single ticket as follows: ``For multiple wagers sold on
one ticket, such as the $12 box bet on a Big Triple or Trifecta, the
wager is considered as six $2 bets and not one $12 bet for purposes of
computing the amount to be reported or withheld.'' See, e.g., 2016
Instructions to Forms W-2G and 5754, at 2, available at https://www.irs.gov/pub/irs-pdf/iw2g.pdf. Thus, according to the instructions,
the bettor may only consider the cost of a single winning combination
when determining the amount wagered for purposes of determining whether
proceeds from a wager meets the threshold for withholding in section
3402(q)(3)(C)(ii).
2015 Request for Comments
The Treasury Department and the IRS requested comments from the
public on the treatment of wagers in parimutuel gambling on March 4,
2015, in a notice of proposed rulemaking (REG-132253-11) under section
6041 regarding information returns to report winnings from bingo, keno,
and slot machine play. The notice of proposed rulemaking stated that
taxpayers required to report winnings from parimutuel gambling may have
concerns relating to when wagers with respect to horse races, dog
races, and jai alai may be treated as identical and that the Treasury
Department and the IRS intend to amend the regulations under Sec.
31.3402(q)-1.
Multiple commentators requested a rule that would take into account
all money wagered in a particular parimutuel pool when determining
proceeds from a wager for purposes of determining whether withholding
under section 3402(q) was required. In particular, some commentators
requested that the Treasury Department and the IRS revise the
regulations to provide a definition of the ``amount of the wager'' when
multiple bets are placed in the same pool to include the total amount
wagered by a bettor into a specific parimutuel pool for purposes of
determining whether wagering proceeds are subject to withholding and
reporting. The commentators stated that this change would reflect
innovations and changes to today's modern parimutuel wagering
strategies.
Reporting Rules
Section 3402(q)(6) provides that recipients of gambling winnings
subject to withholding must furnish a statement to the payer, under
penalties of perjury, containing the name, address, and taxpayer
identification number of the recipient and each person entitled to any
portion of the payment. The current regulations provide that the
statement, furnished on a Form W-2G, Certain Gambling Winnings, or Form
5754, Statement by Person(s) Receiving Gambling Winnings, also must
indicate if the payee and any other persons entitled to payment are
entitled to winnings from identical wagers. Sec. Sec. 1.6011-3,
31.3402(q)-1(c)(ii). The payer may rely on this statement in
determining the amount of proceeds from the wager. Sec. 31.3402(q)-
1(c)(ii).
On or before February 28 (March 31 if filed electronically) of the
calendar year following the calendar year in which the payment is made,
the payer must file a return on Form W-2G with the Internal Revenue
Service reporting the gambling winnings subject to withholding. Sec.
31.3402(q)-1(f). Section 6041(d) and the instructions to Form W-2G
require that the payer filing a Form W-2G also furnish a statement to
the payee on or before January 31 of the calendar year following the
calendar year in which the payment is made.
Explanation of Provisions
The current regulations for withholding from gambling winnings
under section 3402(q) were last substantively amended in 1983.
According to commentators, since that time, exotic bets on horse races,
dog races, and jai alai have accounted for an increasing percentage of
total bets placed on horse races, dog races, and jai alai. The increase
in exotic betting, and in particular the use of certain methods of
exotic betting, has resulted in scenarios where the current rules may
result in withholding that significantly exceeds the individual
gambler's ultimate income tax liability. In light of this, the proposed
regulations amend the rules regarding how payers determine the amount
of the wager in parimutuel wagering transactions with respect to horse
races, dog races, and jai alai. Specifically, these proposed
regulations address exotic bets on horse races, dog races, and jai alai
by providing a new rule to determine the amount of the wager when
wagers are placed in a single parimutuel pool and are reflected on a
single ticket. In addition, the current regulations under section
3402(q) are updated to reflect current law regarding the withholding
thresholds and certain information reporting requirements.
I. Wagers in the Case of Horse Races, Dog Races, and Jai Alai
A. Parimutuel Betting
In parimutuel betting, which translates to betting ``amongst
ourselves,'' the bettors themselves establish the odds and payouts, as
opposed to having fixed odds. Each type of bet on a contest or series
of contests goes into its own parimutuel pool. For example, each win
bet goes into the win pool for that contest, regardless of the finisher
selected to win. As amounts are wagered in the pool, the odds and
[[Page 96408]]
payouts adjust accordingly. Following the contest or contests
determinative of a particular pool, all bettors who placed a winning
bet share the money placed in that particular pool, less the applicable
takeout. Parimutuel betting in the United States is used in betting on
horse races, dog races, and jai alai.
Parimutuel betting involves both straight and exotic bets. Each
type of straight or exotic bet is placed in its own parimutuel pool.
For example, a trifecta bet on a particular contest goes into that
contest's trifecta pool, regardless of the finishers or order of finish
selected, and the trifecta pool is separate from the win pool, the
exacta pool, and all other pools associated with that particular
contest. Exotic bets provide greater odds and bigger pay-offs than
straight bets.
Multiple combinations of exotic bets may be placed on a single
ticket, making it easier for bettors to place wagers on the various
possible outcomes. For example in horse racing, bettors often use box,
key, and wheel bets to place the same type of exotic bet (e.g., exacta
or trifecta) on multiple combinations of outcomes. Box bets involve
betting on all possible outcomes of a specific group of horses in the
same race; for example, a three-horse exacta box is a bet in which
three specific horses are selected to place first or second in any
combination or order of finish. A bettor wins a three-horse exacta box
bet if any combination of the bettor's three horses finishes first and
second. Key bets involve betting a single horse in one position with
all possible combinations of the other selected horses; for example, a
trifecta key is a bet where a single horse is selected to win and the
other horses included in the bet are selected to place second or third
in any combination or order of finish. Finally, a wheel bet involves
multiple horses in multiple combinations in multiple races; for
example, a Daily Double wheel is a bet where a single horse is selected
to win the first race and every horse is selected in the second race.
B. Comments Regarding Current Treatment of Parimutuel Betting
Commentators stated that since the regulations were last
substantively amended, the rise in the number of exotic bets available
at certain racetracks and the popularity of exotic betting has altered
parimutuel betting practices. Commentators stated that, for example, in
the 1978 Kentucky Derby, there were three types of bets available to be
placed at Churchill Downs racetrack, where the Kentucky Derby is run.
Those bets were bets to win, place, or show. By contrast, in the 2015
Kentucky Derby, there were twenty-three types of bets available to be
placed at Churchill Downs racetrack, including the superfecta, super
high five, and pick 7 jackpot. Furthermore, commentators stated that
today approximately 67% of all parimutuel wagering occurs on exotic
wagers (versus straight wagers), as compared to the 1970s when
approximately 10% of parimutuel wagering occurred on exotic wagers.
Further, commentators stated that the increase in availability of
exotic betting has caused bettors to substantially increase their
amounts wagered, often by placing box, key, and wheel bets, in a
particular parimutuel pool to increase their chances of winning and
increase the potential payout. In addition, commentators attributed the
rise in popularity of exotic bets to the fact that exotic bets offer
significantly higher odds. As a result, commentators stated that modern
bettors are putting more money towards bets with greater potential
payouts in anticipation of significant winnings.
Commentators also stated that payouts from straight bets were
rarely subject to withholding because they virtually never came close
to exceeding the 300 to 1 ratio of proceeds to the amount of the wager.
On the other hand, exotic bets do result in proceeds exceeding the
amount of the wager by a 300 to 1 ratio; for example, seven different
exotic bets at the 2015 Kentucky Derby produced payouts exceeding the
300 to 1 ratio. However, given the vast number of potential outcomes
possible with exotic bets, the commentators stated that bettors are
using techniques such as box, key, or wheel bets to increase their
odds. As a result, it is undoubtedly the case that the winners wagered
far more into the pool than the cost of the winning bet.
Commentators stated that the tax treatment under the current rules
ignores the actual investment in a single parimutuel pool and may
result in withholding that significantly exceeds the amount necessary
to cover the individual gambler's ultimate income tax liability and
suggested changing the rule to take into account all wagers in the same
parimutuel pool. The commentators provided the following example to
illustrate this. A bettor makes a seven-horse trifecta box wager, which
involves selecting a group of seven horses to place first, second, and
third, in any order. This bet has 210 unique possible results. Assuming
the bettor bets $20 on each combination, the total amount wagered is
$4,200. At race time the winning combination carries 304 to 1 odds.
After the race, the bettor holds a winning ticket that pays $6,100
($304 x $20 wagered + $20 return of bet). Under the current rules, the
racetrack would withhold $1,520 (($6,100-20) x 25%) and report $6,080
in winnings ($6,100-$20) because the rules treat only the $20 paid for
the single winning combination as the amount wagered. However, the
commentators stated that the individual has netted only $1,900 ($6,100
winnings less $4,200 wagered), and is left with $380 ($1,900-$1,520)
once withholding taxes are taken out, which makes the withholding rate
80% of net winnings.
Under the commentators' proposed change, the amount of the wager
would be considered to be $4,200. Thus the racetrack would not withhold
because the proceeds from the wager ($1,900) are less than the $5,000
withholding threshold and are also less than $1,260,000 (300 times the
amount wagered). Similarly, the racetrack would not report the proceeds
because they are not at least 300 times the amount wagered.
The commentators noted that although the bettor may be able to
deduct the losing wagers on the bettor's tax return at the end of the
year as a miscellaneous itemized deduction, there would be other
consequences. For example, the $1,520 withholding lowers the amount of
money in circulation at the racetrack that day and reduces the bettor's
cash on hand, whereas the commentators' proposed change would result in
additional cash on hand to be bet in subsequent races.
In addition, the commentators stated that the deduction for losing
wagers results in reporting of higher adjusted gross income than would
result under the commentator's proposed change. Commentators further
stated that a higher adjusted gross income can cause the bettor to lose
unrelated tax benefits. In addition, the deduction is only available if
the bettor itemizes deductions and is not subject to the alternative
minimum tax. Finally the commentators noted that many states limit
itemized deductions for state tax purposes.
C. Proposed Rule for the Amount of the Wager in the Case of Horse
Races, Dog Races, and Jai Alai
Proposed Sec. 31.3402(q)-1(c)(ii) provides a new rule for purposes
of determining the amount of the wager for wagering transactions in
horse races, dog races, and jai alai. The proposed rule allows all
wagers placed in a single parimutuel pool and represented on a single
ticket to be aggregated and treated as a single wager for purposes of
determining the amount of the wager. The proposed rule allows a payer
to take into account the total amount wagered
[[Page 96409]]
in a particular pool as reflected on a single ticket to determine
whether the winnings are subject to withholding and reporting. This
treatment better reflects the full cost of exotic bets. In addition,
straight wagers are unlikely to have odds and produce payouts of at
least 300 to 1, so they generally are not subject to withholding,
regardless of the application of the proposed rule. The proposed
regulations contain examples to illustrate the proposed rule for
wagering transactions in the case of horse races, dog races, and jai
alai.
The proposed rule for determining the amount of the wager addresses
the fact that the current rules may result in withholding that
significantly exceeds the amount necessary to cover the individual
gambler's ultimate income tax liability, and that creates an
unnecessary burden on the bettor and the horse racing, dog racing, and
jai alai industries. As described in the commentators' example, current
rules for exotic bets placed as box, key, or wheel bets can result in
an 80% withholding rate on net winnings from wagers placed in the same
pool. This result has become more common in the decades since the
regulations were last amended because the number of exotic bet types
and the popularity of exotic bets have increased substantially, and
various combinations of these exotic bets are often placed together on
a single ticket as part of the same transaction.
By limiting the amount of the wager in a wagering transaction with
respect to horse races, dog races, and jai alai to the wagers
represented on a single ticket, the proposed rule limits the potential
for fraud and creates an administrable system for payers. The rule is
administrable because it does not require payers to collect information
regarding winning wagers where additional wagers placed in the same
pool are reflected on multiple tickets. If bettors want to place
additional wagers in the same parimutuel pool after already having
purchased a ticket, commentators stated that bettors may be able to
cancel the first ticket and place the original and additional wagers
for that pool on a new ticket.
The proposed regulations maintain the current rule regarding
identical wagers. To clarify the meaning of the term, however, the
proposed regulations provide a definition of identical wagers taken
from the preamble of the current regulations. T.D. 7919 (48 FR 46296).
The proposed regulations also move examples of identical wagers from
the regulatory text to the examples section.
The Treasury Department and the IRS request comments regarding
whether the proposed rule addressing the amount of the wager in a
wagering transaction in the case of horse races, dog races, and jai
alai should apply to other types of gambling subject to withholding
under section 3402(q), such as lotteries.
II. Ministerial Updates to Current Regulations
In addition to the proposed rule for wagers in horse races, dog
races, and jai alai, the proposed regulations make ministerial updates
to the current regulations to reflect current law.
Proposed regulations Sec. 31.3402(q)-1(a) and (b) are amended to
reflect the current statutory tax rate for withholding (the third-
lowest tax rate under section 1(c)) and the current statutory
thresholds for withholding for all types of gambling covered by this
regulation ($5,000). In 1992 and again in 2001, Congress amended
section 3402(q)(1) to change the withholding rate first from 20 percent
to 28 percent and then to its current level of ``the third lowest rate
of tax applicable under section 1(c),'' but the current regulations do
not reflect either of these statutory amendments. See Economic Growth
and Tax Relief Reconciliation Act of 2001, Public Law 107-16, Sec.
101(c)(8); Energy Policy Act of 1992, Public Law 102-486, Sec.
1934(a). In 1992, Congress also amended sections 3402(q)(3)(A) and (C)
to change the withholding threshold for certain types of gambling from
$1,000 to $5,000, which the current regulations do not reflect. Energy
Policy Act, Sec. 1942(a). In addition, the proposed regulations remove
certain dates reflecting transition periods, which are no longer
necessary.
In addition, proposed regulation Sec. 31.3402(q)-1(c)(4) updates
the rule regarding payments to nonresident aliens or foreign
corporations.
III. Information Reporting for Gambling Winnings Subject to Withholding
Under Section 3402(q)
Proposed regulations Sec. 31.3402(q)-1(d) and (e) update and
clarify the reporting rules for gambling winnings subject to
withholding under section 3402(q). The amendments to Sec. 31.3402(q)-
1(d), regarding the statement by the payee of gambling winnings subject
to withholding under section 3402(q), reorganize the current
regulations into new sub-sections. Proposed Sec. 31.3402(q)-1(d)(1)
provides the general rule that each payer of gambling winnings subject
to withholding under section 3402(q) must obtain a payee statement.
Proposed Sec. 31.3402(q)-1(d)(2) describes the content of the payee
statement. Proposed Sec. 31.3402(q)-1(d)(3) states the reliance rule
currently described in Sec. 31.3402(q)-1(c)(1)(ii) that where a payee
furnishes the required payee statement and, as required by Sec.
1.6011-3, indicates that he or she is entitled to winnings from
identical wagers, the payer may rely on the statement in determining
the total amount of proceeds from the wager.
The amendments to proposed Sec. 31.3402(q)-1(e), regarding the
information return filed by the payer on Form W-2G, modernize the
current reporting rules. First, the proposed regulations replace
outdated references to the place of filing with a requirement that the
return be filed with the appropriate Internal Revenue Service location
designated in the instructions to the form.
Second, the proposed regulations require the payer to report the
taxpayer identification number of the winner in lieu of the social
security number to allow for a broader range of taxpayer identification
numbers, including individual taxpayer identification numbers (ITINs)
and adoption taxpayer identification numbers (ATINs). This amendment
allows truncation of the taxpayer identification number on the
statement furnished by the payer to the payee because the regulation no
longer requires a social security number. For provisions relating to
the use of truncated taxpayer identification numbers, see Sec.
31.6109-4 of this chapter.
Third, the proposed regulations update the payee identification
provisions. Section 31.3402(q)-1(f)(1)(v) of the current regulations
provides that the identification verifying the payee's identity must
include the payee's social security number. According to the current
regulations, examples of acceptable identification include a driver's
license, a social security card, or a voter registration card. However,
today most forms of identification do not include a person's social
security number. Therefore, many payees do not have identification that
contains the payee's social security number and, even if they do, they
may not have this identification with them at the time that they
receive a payment of gambling winnings subject to withholding under
section 3402(q).
To address this issue, proposed Sec. Sec. 31.3402(q)-1(e)(1)(v)
and (e)(2) provide that, in addition to government-issued
identification, a properly completed Form W-9 signed by the payee is an
acceptable form of identification to verify the payee's identifying
information. Payers who verify payee information using identification
set forth in proposed
[[Page 96410]]
Sec. Sec. 31.3402(q)-1(e)(1)(v) and (e)(2) before the date that final
regulations implementing these provisions are published in the Federal
Register will be treated as meeting the requirements of Sec.
31.3402(q)-1(f)(1)(v) of the current regulations.
Fourth, the proposed regulations contain a special rule in Sec.
31.3402(q)-1(e)(3) that tribal member identification cards need not
contain the payee's photograph to meet the identification requirements
in Sec. 31.3402(q)-1(e)(1)(v) of the proposed regulations, provided
specific criteria are met. This special rule responds to comments
raised by Indian tribes in response to the notice of proposed
rulemaking (REG-132253-11) under section 6041 regarding information
returns to report winnings from bingo, keno, and slot machine play that
many tribal identification cards do not contain photographs.
Fifth, the proposed regulations update the obsolete reference to
Form W-3G to reflect that payers should use Form 1096 to transmit Forms
W-2G to the Internal Revenue Service.
Finally, the proposed regulations in Sec. 31.3402(q)-1(e)(5)
provides that a payer filing an information return with the Internal
Revenue Service must furnish a statement to the payee containing the
same information on or before January 31st of the year following the
calendar year in which payment of the winnings subject to withholding
is made. See section 6041(d).
Proposed amendments to the regulations under section 3406 update
the reporting requirements to address horse races, dog races, and jai
alai. Proposed Sec. 31.3406(g)-2(d) is amended to clarify the
definition of a reportable gambling winning and to add a cross-
reference to Sec. 31.3402(q)-1(c) for determining the amount of the
wager in a wagering transaction with respect to horse races, dog races,
and jai alai, or amounts paid with respect to identical wagers.
Proposed Effective/Applicability Date
These regulations are proposed to apply to payments made after the
date of publication of the Treasury Decision adopting these rules as
final regulations in the Federal Register.
Statement of Availability of IRS Documents
IRS published guidance cited in this preamble is published in the
Internal Revenue Bulletin and is available from the Superintendent of
Documents, U.S. Government Publishing Office, Washington, DC 20402, or
by visiting the IRS Web site at https://www.irs.gov.
Special Analyses
Certain IRS regulations, including this one, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory assessment is not
required. It is hereby certified that this rule will not have a
significant economic impact on a substantial number of small entities.
This certification is based on the fact that this rule merely provides
guidance regarding withholding and reporting requirements for payers of
certain gambling winnings. The requirement for payers to withhold and
make information returns is imposed by statute and not these
regulations. In addition, this rule reduces the existing burden on
payers to comply with the statutory requirement by decreasing the
number of payments subject to withholding and reporting. 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, this
notice of proposed rulemaking has been submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small business.
Comments and 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. In addition to the requests for comments noted in the
Background Section, Treasury and the IRS request comments on any other
aspects of the proposed rules, and any other issues relating to the
payment of gambling winnings that are not addressed in the proposed
regulations. All comments will be available at www.regulations.gov for
public inspection or upon request.
A public hearing will be scheduled if requested in writing by any
person that timely submits written comments. If a public hearing is
scheduled, notice of the date, time, and place for the public hearing
will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is David Bergman
of the Office of the Associate Chief Counsel (Procedure and
Administration).
List of Subjects in 26 CFR Part 31
Employment taxes and collection of income tax at source.
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 TAXES AT THE
SOURCE
0
Paragraph 1. The authority citation for part 31 continues to read in
part as follows:
Authority: 26 U.S.C. 7805. * * *
0
Par. 2. Section 31.3402(q)-1 is amended:
0
1. By revising paragraphs (a)(1), (b), and (c)(1) and (4).
0
2. By redesignating paragraph (d) as paragraph (f), paragraph (e) as
paragraph (d), and paragraph (f) as paragraph (e).
0
3. By revising newly designated paragraphs (d) and (e).
0
4. In paragraph (f), removing Example 3 and Example 11, by
redesignating Examples 4 through 10 as Examples 3 through 9, and adding
examples 10 through 16.
0
5. In paragraph (f), in newly redesignated Example 4 by removing the
language ``Example 4'' and adding in its place the language ``Example
3'' and in newly redesignated Example 6 by removing the language
``Example 6'' and adding in its place the language ``Example 5''
wherever it appears.
0
6. By adding paragraph (g).
The revisions and additions read as follows:
Sec. 31.3402(q)-1 Extension of withholding to certain gambling
winnings.
(a) Withholding obligation--(1) General rule. Every person,
including the Government of the United States, a State, or a political
subdivision thereof, or any instrumentality of any of the foregoing
making any payment of ``winnings subject to withholding'' (defined in
paragraph (b) of the section) shall deduct and withhold a tax in an
amount equal to the product of the third lowest rate of tax applicable
under section 1(c) and such payment. The tax shall be deducted and
withheld upon payment of the winnings by the person making such payment
(``payer''). See paragraph (c)(5)(ii) of this section for a special
rule relating to the time for making deposits of withheld amounts and
filing the return with respect to those amounts. Any person receiving a
payment of winnings subject to withholding must furnish the payer a
statement as required in paragraph (d) of this section. Payers of
winnings subject to withholding must file a return with the Internal
Revenue Service and furnish a statement to the payee as
[[Page 96411]]
required in paragraph (e) of this section. With respect to reporting
requirements for certain payments of gambling winnings not subject to
withholding, see section 6041 and the regulations thereunder.
* * * * *
(b) Winnings subject to withholding. (1) In general. Winnings
subject to withholding means any payment from--
(i) A wager placed in a State-conducted lottery (defined in
paragraph (c)(2) of this section) but only if the proceeds from the
wager exceed $5,000;
(ii) A wager placed in a sweepstakes, wagering pool, or lottery
other than a State-conducted lottery but only if the proceeds from the
wager exceed $5,000; or
(iii) Any other wagering transaction (as defined in paragraph
(c)(3) of this section) but only if the proceeds from the wager (A)
exceed $5,000 and (B) are at least 300 times as large as the amount of
the wager.
(2) Total proceeds subject to withholding. If proceeds from the
wager qualify as winnings subject to withholding, then the total
proceeds from the wager, and not merely amounts in excess of $5,000,
are subject to withholding.
(c) Definitions; special rules--(1) Rules for determining amount of
proceeds from a wager--(i) In general. The amount of ``proceeds from a
wager'' is the amount paid with respect to the wager, less the amount
of the wager.
(ii) Amount of the wager in the case of horse races, dog races, and
jai alai. In the case of a wagering transaction with respect to horse
races, dog races, or jai alai, all wagers placed in a single parimutuel
pool and represented on a single ticket are aggregated and treated as a
single wager for purposes of determining the amount of the wager. A
ticket in the case of horse races, dog races, or jai alai is a written
or electronic record that the payee must present to collect proceeds
from a wager or wagers.
(iii) Amount paid with respect to a wager--(A) Identical wagers.
Amounts paid with respect to identical wagers are treated as paid with
respect to a single wager for purposes of calculating the amount of
proceeds from a wager. Two or more wagers are identical wagers if
winning depends on the occurrence (or non-occurrence) of the same event
or events; the wagers are placed with the same payer; and, in the case
of horse races, dog races, or jai alai, the wagers are placed in the
same parimutuel pool. Wagers may be identical wagers even if the
amounts wagered differ as long as the wagers are otherwise treated as
identical wagers under this paragraph (c)(1)(iii)(A). Tickets purchased
in a lottery generally are not identical wagers, because the
designation of each ticket as a winner generally would not be based on
the occurrence of the same event, e.g., the drawing of a particular
number.
(B) Non-monetary proceeds. In determining the amount paid with
respect to a wager, proceeds which are not money are taken into account
at the fair market value.
(C) Periodic payments. Periodic payments, including installment
payments or payments which are to be made periodically for the life of
a person, are aggregated for purposes of determining the amount paid
with respect to the wager. The aggregate amount of periodic payments to
be made for a person's life is based on that person's life expectancy.
See Sec. Sec. 1.72-5 and 1.72-9 of this chapter for rules used in
computing the expected return on annuities. For purposes of determining
the amount subject to withholding, the first periodic payment shall be
reduced by the amount of the wager.
* * * * *
(4) Certain payments to nonresident aliens or foreign corporations.
A payment of winnings that is subject to withholding tax under section
1441(a) (relating to withholding on nonresident aliens) or 1442(a)
(relating to withholding on foreign corporations) is not subject to the
tax imposed by section 3402(q) and this section if the payer complies
with the requirements of withholding, documentation, and information
reporting rules of section 1441(a) or 1442(a) and the regulations
thereunder. A payment is treated as being subject to withholding tax
under section 1441(a) or 1442(a) notwithstanding that the rate of such
tax is reduced (even to zero) as may be provided by an applicable
treaty with another country. However, a reduced or zero rate of
withholding of tax shall not be applied by the payer in lieu of the
rate imposed by sections 1441 and 1442 unless the person receiving the
winnings has provided to the payer the documentation required by Sec.
1.1441-6 of this chapter to establish entitlement to treaty benefits.
* * * * *
(d) Statement furnished by payee--(1) In general. Each person who
is making a payment subject to withholding under this section must
obtain from the payee a statement described in paragraph (d)(2) of this
section.
(2) Contents of statement. (i) Each person who is to receive a
payment of winnings subject to withholding under this section must
furnish the payer a statement on Form W-2G or 5754 (whichever is
applicable) made under the penalties of perjury containing--
(A) The name, address, and taxpayer identification number of the
winner accompanied by a declaration that no other person is entitled to
any portion of such payment, or
(B) The name, address, and taxpayer identification number of the
payee and of every person entitled to any portion of such payment.
(3) If more than one payment of winnings subject to withholding is
to be made with respect to a single wager, for example in the case of
an annuity, the payee is required to furnish the payer a statement with
respect to the first such payment only, provided that such other
payments are taken into account in a return required by paragraph (e)
of this section.
(4) Reliance on statement for identical wagers. If the payee
furnishes the statement which may be required pursuant to Sec. 1.6011-
3 of this chapter (regarding the requirement of a statement from payees
of certain gambling winnings), indicating that the payee (and any other
persons entitled to a portion of the winnings) is entitled to winnings
from identical wagers, as defined in paragraph (c)(1)(iii)(A) of this
section, and indicating the amount of such winnings, if any, then the
payer may rely upon such statement in determining the total amount of
proceeds from the wager under paragraph (c)(1) of this section.
(e) Return of payer--(1) In general. Every person making payment of
winnings for which a statement is required under paragraph (d) of this
section shall file a return on Form W-2G with the Internal Revenue
Service location designated in the instructions to the form on or
before February 28 (March 31 if filed electronically) of the calendar
year following the calendar year in which the payment of winnings is
made. The return required by this paragraph (e) need not include the
statement by the payee required by paragraph (d) of this section and,
therefore, need not be signed by the payee, provided such statement is
retained by the payer as long as the contents thereof may become
material in the administration of any internal revenue law. In
addition, the return required by this paragraph (e) need not contain
the information required by paragraph (e)(1)(v) of this section
provided such information is obtained with respect to the payee and
retained by the payer as long as the contents thereof may become
material in the administration of any internal revenue law. For
payments to more than one
[[Page 96412]]
winner, a separate Form W-2G, which in no event need be signed by the
winner, shall be filed with respect to each such winner. Each Form W-2G
shall contain the following:
(i) The name, address, and employer identification number of the
payer;
(ii) The name, address, and taxpayer identification number of the
winner;
(iii) The date, amount of the payment, and amount withheld;
(iv) The type of wagering transaction;
(v) Except with respect to winnings from a wager placed in a State-
conducted lottery, a general description of the two types of
identification (as described in paragraph (e)(2) of this section), one
of which must have the payee's photograph on it (except in the case of
tribal member identification cards in certain circumstances as
described in paragraph (e)(3) of this section), that the payer relied
on to verify the payee's name, address, and taxpayer identification
number;
(vi) The amount of winnings from identical wagers; and
(vii) Any other information required by the form, instructions, or
other applicable guidance published in the Internal Revenue Bulletin.
(2) Identification. The following items are treated as
identification for purposes of paragraph (e)(1)(v) of this section--
(i) Government-issued identification (for example, a driver's
license, passport, social security card, military identification card,
tribal member identification card issued by a federally-recognized
Indian tribe, or voter registration card) in the name of the payee; and
(ii) A Form W-9, ``Request for Taxpayer Identification Number and
Certification,'' signed by the payee that includes the payee's name,
address, taxpayer identification number, and other information required
by the form. A Form W-9 is not acceptable for this purpose if the payee
has modified the form (other than pursuant to instructions to the form)
or if the payee has deleted the jurat or other similar provisions by
which the payee certifies or affirms the correctness of the statements
contained on the form.
(3) Special rule for tribal member identification cards. A tribal
member identification card need not contain the payee's photograph to
meet the identification requirement described in paragraph (e)(1)(v) of
this section if--
(i) The payee is a member of a federally-recognized Indian tribe;
(ii) The payee presents the payer with a tribal member
identification card issued by a federally-recognized Indian tribe
stating that the payee is a member of such tribe; and
(iii) The payer is a gaming establishment (as described in Sec.
1.6041-10(b)(2)(iv) of this chapter) owned or licensed (in accordance
with 25 U.S.C. 2710) by the tribal government that issued the tribal
member identification card referred to in paragraph (e)(3)(ii) of this
section.
(4) Transmittal form. Persons making payments of winnings subject
to withholding shall use Form 1096 to transmit Forms W-2G to the
Internal Revenue Service.
(5) Furnishing a statement to the payee. Every payer required to
make a return under paragraph (e)(1) of this section must also make and
furnish to each payee, with respect to each payment of winnings subject
to withholding, a written statement that contains the information that
is required to be included on the return under paragraph (e)(1) of this
section. The payer must furnish the statement to the payee on or before
January 31st of the year following the calendar year in which payment
of the winnings subject to withholding is made. The statement will be
considered furnished to the payee if it is provided to the payee at the
time of payment or if it is mailed to the payee on or before January
31st of the year following the calendar year in which payment was made.
(f) Examples. * * *
Example 10. B places a $15 bet at the cashier window at the
racetrack for horse A to win the fifth race at the racetrack that
day. After placing the first bet, B gains confidence in horse A's
prospects to win and places an additional $40 bet at the cashier
window at the racetrack for horse A to win the fifth race, receiving
a second ticket for this second bet. Horse A wins the fifth race,
and B wins a total of $5,500 (100 to 1 odds) on those bets. The $15
bet and the $40 bet are identical wagers under paragraph
(c)(1)(iii)(A) of this section because winning on both bets depended
on the occurrence of the same event and the bets are placed in the
same parimutuel pool with the same payer. This is true regardless of
the fact that the amount of the wager differs in each case.
B cashes the tickets at different cashier windows. Pursuant to
paragraph (d) of this section and Sec. 1.6011-3, B completes a Form
W-2G indicating that the amount of winnings is from identical wagers
and provides the form to each cashier. The payments by each cashier
of $1,500 and $4,000 are less than the $5,000 threshold for
withholding, but under paragraph (c)(1)(iii)(A) of this section,
identical wagers are treated as paid with respect to a single wager
for purposes of determining the proceeds from a wager. The payment
is not subject to withholding or reporting because although the
proceeds from the wager are $5,445 ($1,500 + $4,000 - $55), the
proceeds from the wager are not at least 300 times as great as the
amount wagered ($55 x 300 = $16,500).
Example 11. B makes two $1,000 bets in a single ``show'' pool
for the same jai alai game, one bet on Player X to show and one bet
on Player Y to show. A show bet is a winning bet if the player comes
in first, second, or third in a single game. The bets are placed at
the same time at the same cashier window, and B receives a single
ticket showing both bets. Player X places second in the game, and
Player Y does not place first, second, or third in the game. B wins
$8,000 from his bet on Player X. Because winning on both bets does
not depend on the occurrence of the same event, the bets are not
identical bets under paragraph (c)(1)(iii)(A) of this section.
However, pursuant to the rule in paragraph (c)(1)(ii) of this
section, the amount of the wager is the aggregate amount of both
wagers ($2,000) because the bets were placed in a single parimutuel
pool and reflected on a single ticket. The payment is not subject to
withholding or reporting because although the proceeds from the
wager are $6,000 ($8,000 - $2,000), the proceeds from the wager are
not at least 300 times as great as the amount wagered ($2,000 x 300
= $600,000).
Example 12. B bets a total of $120 on a three-dog exacta box
bet ($20 for each one of the six combinations played) at the dog
racetrack and receives a single ticket reflecting the bet from the
cashier. B wins $5,040 from one of the selected combinations.
Pursuant to the rule in paragraph (c)(1)(ii) of this section, the
amount of the wager is $120, not $20 for the single winning
combination of the six combinations played. The payment is not
subject to withholding under section 3402(q) because the proceeds
from the wager are $4,920 ($5,040 - $120), which is below the
section 3402(q) withholding threshold.
Example 13. B makes two $12 Pick 6 bets at the horse racetrack
at two different cashier windows and receives two different tickets
each representing a single $12 Pick 6 bet. In his two Pick 6 bets, B
selects the same horses to win races 1-5 but selects different
horses to win race 6. All Pick 6 bets on those races at that
racetrack are part of a single parimutuel pool from which Pick 6
winning bets are paid. B wins $5,020 from one of his Pick 6 bets.
Pursuant to the rule in paragraph (c)(1)(ii) of this section, the
bets are not aggregated for purposes of determining the amount of
the wager because the bets are reflected on separate tickets.
Assuming that the applicable rate is 25%, the racetrack must deduct
and withhold $1,252 (($5,020 - $12) x 25%) because the amounts of
the proceeds of $5,008 ($5,020 - $12) is greater than $5,000 and is
at least 300 times as great as the amount wagered ($12 x 300 =
$3,600). The racetrack also must report B's winnings on Form W-2G
pursuant to paragraph (e) of this section and furnish a copy of the
Form W-2G to B.
Example 14. C makes two $50 bets in two different parimutuel
pools for the same jai alai game. One bet is an ``exacta'' in which
C bets on player M to win and player N to ``place''. The other bet
is a ``trifecta'' in which C bets on player M to win, player N to
``place,'' and player O to ``show.'' C wins both bets and is paid
$2,000 with respect to
[[Page 96413]]
the bet in the ``exacta'' pool and $3,100 with respect to the bet in
the ``trifecta'' pool. Under paragraph (c)(1)(iii)(A) of this
section, the bets are not identical bets. Under paragraph (c)(1)(ii)
of this section, the bets are not aggregated for purposes of
determining the amount of the wager for either payment because they
are not wagers in the same parimutuel pool. No section 3402(q)
withholding is required on either payment because neither payment
separately exceeds the $5,000 withholding threshold.
Example 15. C makes two $100 bets for the same dog to win a
particular race. C places one bet at the racetrack and one bet at an
off-track betting establishment, but the two pools constitute a
single pool. C receives separate tickets for each bet. C wins both
bets and is paid $4,000 from the racetrack and $4,000 from the off-
track betting establishment. Under paragraph (c)(1)(ii) of this
section, the bets are not aggregated for purposes of determining the
amount of the wager because the wager placed at the racetrack and
the wager placed at the off-track betting establishment are
reflected on separate tickets, despite being placed in the same
parimutuel pool. No section 3402(q) withholding is required because
neither payment separately exceeds the $5,000 withholding threshold.
Example 16. C places a $200 Pick 6 bet for a series of races at
the racetrack on a particular day and receives a single ticket for
the bet. No wager correctly picks all six races that day, so that
portion of the pool carries over to the following day. On the
following day, C places an additional $200 Pick 6 bet for that day's
series of races and receives a new ticket for that bet. C wins
$100,000 on the second day. Pursuant to the rule in paragraph
(c)(1)(ii) of this section, the bets are on two separate tickets, so
C's two Pick 6 bets are not aggregated for purposes of determining
the amount of the wager. Assuming that the applicable rate is 25%,
the racetrack must deduct and withhold $24,950 (($100,000 - $200) x
25%) because the amount of the proceeds of $99,800 ($100,000 - $200)
is greater than $5,000, and is at least 300 times as great as the
amount wagered ($200 x 300 = $60,000). The racetrack also must
report C's winnings on Form W-2G pursuant to paragraph (e) of this
section and furnish a copy of the Form W-2G to C.
(g) Applicability date. These rules apply to payments made after
[the date of publication of the Treasury decision adopting these rules
as final regulations in the Federal Register]. For rules that apply to
payments made before that date, see 26 CFR 31.3402(q)-1 (revised April
2015).
0
Par. 3. Section 31.3406-0 is amended by adding an entry for paragraph
(h) to Sec. 31.3406(g)-2 to read as follows:
Sec. 31.3406-0 Outline of the backup withholding regulations.
* * * * *
Sec. 31.3406(g)-2 Exception for reportable payments for which backup
withholding is otherwise required.
* * * * *
(h) Effective/applicability date.
* * * * *
0
Par. 4. Section 31.3406(g)-2 is amended by revising paragraphs (d)(2)
and (3) and adding paragraph (h) to read as follows:
Sec. 31.3406(g)-2 Exception for reportable payment for which
withholding is otherwise required.
* * * * *
(d) * * *
(2) Definition of a reportable gambling winning and determination
of amount subject to backup withholding. For purposes of withholding
under section 3406, a reportable gambling winning is any gambling
winning subject to information reporting under section 6041. 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. See Sec. 1.6041-10 of this chapter to
determine whether a winning from bingo, keno, or slot machines is a
reportable gambling winning and thus subject to withholding under
section 3406. The amount of a reportable gambling winning is--
(i) The amount paid with respect to the amount of the wager
reduced, at the option of the payer; by
(ii) The amount of the wager.
(3) Special rules. For special rules for determining the amount of
the wager in a wagering transaction with respect to horse racing, dog
racing, and jai alai, or amounts paid with respect to identical wagers,
see Sec. 31.3402(q)-1(c).
* * * * *
(h) Applicability date. The rules apply to reportable gambling
winnings paid after [the date of publication of the Treasury decision
adopting these rules as final regulations in the Federal Register]. For
reportable gambling winnings paid on or before [the date of publication
of the Treasury decision adopting these rules as final regulations in
the Federal Register], Sec. 31.3406(g)-2 (as contained in 26 CFR part
31, revised April 2015) applies.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-31579 Filed 12-29-16; 8:45 am]
BILLING CODE 4830-01-P