Disregarded Entities; Employment and Excise Taxes, 60475-60478 [05-20765]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 70, Number 200 (Tuesday, October 18, 2005)]
[Proposed Rules]
[Pages 60475-60478]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-20765]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-114371-05]
RIN 1545-BE43


Disregarded Entities; Employment and Excise Taxes

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under which 
qualified subchapter S subsidiaries and single-owner eligible entities 
that currently are disregarded as entities separate from their owners 
for federal tax purposes would be treated as separate entities for 
employment tax and related reporting requirement purposes. These 
regulations also propose to treat such disregarded entities as separate 
entities for purposes of certain excise taxes reported on Forms 720, 
730, 2290, and 11-C; excise tax refunds or payments claimed on Form 
8849; and excise tax registrations on Form 637. These proposed 
regulations would affect disregarded entities and the owners and 
employees of disregarded entities in the payment and reporting of 
federal employment taxes. These regulations also would affect 
disregarded entities and their owners in the payment and reporting of 
certain Federal excise taxes and in registration and claims related to 
certain Federal excise taxes.

DATES: Written or electronic comments and requests for a public hearing 
must be received by January 17, 2006.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-114371-05), 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-
114371-05), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Alternatively, taxpayers may submit 
electronic comments directly to the IRS Internet site at https://
www.irs.gov/regs or via the Federal eRulemaking Portal at https://
www.regulations.gov (IRS and REG-114371-05).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
John Richards at (202) 622-6040 (on the employment tax provisions) or 
Susan Athy at (202) 622-3130 (on the excise tax provisions); concerning 
the submission of comments or requests for a hearing, Robin Jones at 
(202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

1. Disregarded Entities

    Under the Internal Revenue Code (Code) and its regulations, 
qualified subchapter S subsidiaries (QSubs) (under section 
1361(b)(3)(B)) and certain single-owner eligible entities (under 
Sec. Sec.  301.7701-1 through 301.7701-3 of the Procedure and 
Administration Regulations) are disregarded as entities separate from 
their owners (``disregarded entities''). The disregarded entity rules 
of section 1361(b)(3)(A) and Sec. Sec.  301.7701-1 through 301.7701-3 
apply for all purposes of the Code, including employment and excise 
taxes.

2. Employment Taxes

    Employers are required to deduct and withhold income and Federal 
Insurance Contributions Act (FICA) taxes from their employees' wages 
under sections 3402(a) and 3102(a), and are separately liable for their 
share of FICA taxes as well as for Federal Unemployment Tax Act (FUTA) 
taxes under sections 3111 and 3301 (the withholding, FICA and FUTA 
taxes are collectively referred to herein as employment taxes). 
Sections 3403, 3102(b), 3111, and 3301 provide that the employer is the 
person liable for the withholding and payment of employment taxes. In 
addition, the employer is required to make timely tax deposits, file 
employment tax returns, and issue wage statements (Forms W-2) to 
employees (collectively, other employment tax obligations). An employer 
is generally defined as the person for whom an individual performs 
services as an employee. Sections 3401(d), 3121(d), and 3306(a). 
Because a disregarded entity is not recognized for Federal tax 
purposes, the owner of the disregarded entity is treated as the 
employer for purposes of employment tax liabilities and all other 
employment tax obligations related to wages paid to employees 
performing services for the disregarded entity.
    If an entity is disregarded for Federal tax purposes under section 
1361(b)(3)(A) or Sec. Sec.  301.7701-1 through 301.7701-3, Notice 99-6 
(1999-1 C.B. 321) provides that employment taxes and other employment 
tax obligations with respect to employees performing services for the 
disregarded entity may be satisfied in one of two ways: (1) Calculation 
and payment of all employment taxes and satisfaction of all other 
employment tax obligations with respect to employees performing 
services for the disregarded entity by its owner under the owner's name 
and employer identification number (EIN); or (2) separate calculation 
and payment of all employment taxes and satisfaction of all other 
employment tax obligations by the disregarded entity with respect to 
employees performing services for the disregarded entity by the 
disregarded entity under its own name and EIN. The notice states that 
ultimate liability for employment taxes remains with the owner of the 
disregarded entity regardless of which alternative is chosen.

3. Excise Taxes

A. Liability for Excise Taxes
    Liability for federal excise taxes is imposed on certain 
transactions and activities under the following chapters of the 
Internal Revenue Code (Code).
    Chapter 31 imposes retail excise taxes on the sale or use of 
special fuels (section 4041); the use of fuel in commercial 
transportation on inland waterways (section 4042); and the sale of 
heavy trucks and trailers (section 4051).
    Chapter 32 imposes manufacturers excise taxes on the sale of gas 
guzzler automobiles (section 4064); the sale of highway-type tires 
(section 4071); the removal, entry, or sale of taxable fuel

[[Page 60476]]

(section 4081); the sale of coal (section 4121); the sale of vaccines 
(section 4131); and the sale of sporting goods (section 4161).
    Chapter 33 imposes excise taxes on payments for communications 
facilities and services (section 4251); payments for transportation of 
persons by air (section 4261); and payments for transportation of 
property by air (section 4271).
    Chapter 34 imposes excise taxes on policies issued by foreign 
insurers (section 4371).
    Chapter 35 imposes excise taxes on wagers (sections 4401 and 4411).
    Chapter 36 imposes excise taxes on transportation by water (section 
4471) and the use of heavy highway vehicles (section 4481).
    Chapter 38 imposes excise taxes on the sale of ozone-depleting 
chemicals and imported taxable products (section 4681).
    The IRS does not administer, and these regulations have no effect 
on the chapter 32 tax on firearms (section 4181) or the chapter 36 tax 
on port use (section 4461).
B. Excise Tax Registration
    A person may be required to register with the IRS for certain 
excise tax purposes. Registration may be required under section 4101 
with respect to the taxes imposed on motor fuels or under section 4412 
in the case of persons subject to the occupational tax on wagering. In 
addition, section 4222 generally permits sales for certain exempt 
purposes to be made on a tax-free basis only if the sellers and 
purchasers are registered.
C. Excise Tax Credits, Refunds, and Payments
    The Code allows excise taxpayers to claim credits or refunds for 
overpayments, including overpayments determined under sections 4081(e), 
6415, 6416, and 6419 (section 6402). The Code generally allows non-
excise taxpayers to claim credits or payments for fuels used for 
nontaxable purposes (sections 6420, 6421, and 6427) and allows blenders 
to claim credits or payments for the production of alcohol and 
biodiesel mixtures (sections 6426 and 6427(e)). Section 34 provides an 
income tax credit for amounts payable for the nontaxable use of fuels 
under sections 6420, 6421, and 6427, if these amounts have not been 
previously claimed, and section 38 provides an income tax credit 
(general business credit) for alcohol or biodiesel used as a fuel 
(under sections 40 and 40A).

4. Reason for Change

    Administrative difficulties have arisen from the interaction of the 
disregarded entity rules and the federal employment tax provisions. 
Problems have arisen for both taxpayers and the IRS with respect to 
reporting, payment and collection of employment taxes, particularly 
where state employment tax law also sets requirements for reporting, 
payment and collection that may be in conflict with the federal 
disregarded entity rules. The Treasury Department and the IRS believe 
that treating the disregarded entity as the employer for purposes of 
federal employment taxes will improve the administration of the tax 
laws and simplify compliance.
    Difficulties also have arisen from the interaction of the 
disregarded entity rules and certain federal excise tax provisions. 
Many of these provisions rely on state law, rather than federal law, to 
determine liability for an excise tax, attachment of a tax, and 
allowance of a credit, refund, or payment. For example, Sec.  48.0-2(b) 
of the Manufacturers and Retailers Excise Tax Regulations provides that 
such excise taxes attach when title to an article passes to the 
purchaser. In general, determining when title passes depends on the 
intention of the parties. Absent express intention, however, the laws 
of the jurisdiction where the sale is made govern this determination. 
Such a determination is required also in applying certain excise tax 
credit, refund, and payment provisions that allow claims by ultimate 
purchasers, ultimate vendors, and producers.

Explanation of Provisions

    These proposed regulations would treat QSubs and single-owner 
eligible entities that are disregarded entities for Federal tax 
purposes as separate entities for purposes of employment taxes and 
other requirements of law arising under subtitle C of the Code, certain 
excise taxes, and the application of the rules under subtitle F of the 
Code relating to matters such as reporting, assessment, collection, and 
refunds regarding employment and certain excise taxes. Under the 
proposed regulations, these entities generally would continue to be 
treated as disregarded entities for other federal tax purposes.

1. Employment Taxes

    The proposed regulations would eliminate disregarded entity status 
for purposes of federal employment taxes. A disregarded entity would be 
regarded for employment tax purposes, and, accordingly, become liable 
for employment taxes on wages paid to employees of the disregarded 
entity, and be responsible for satisfying other employment tax 
obligations (e.g., backup withholding under section 3406, making timely 
deposits of employment taxes, filing returns, and providing wage 
statements to employees on Forms W-2). The owner of the disregarded 
entity would no longer be liable for employment taxes or satisfying 
other employment tax obligations with respect to the employees of the 
disregarded entity. The disregarded entity would continue to be 
disregarded for other Federal tax purposes. The proposed regulations 
contain an example illustrating the interaction of the income tax 
provisions and employment tax provisions. For example, the proposed 
regulations illustrate that an individual owner of a disregarded entity 
would continue to be treated as self-employed for purposes of Self 
Employment Contributions Act (SECA) taxes (section 1401 et sequitur), 
and not as an employee of the disregarded entity for employment tax 
purposes.
    The employment tax provisions of these regulations are proposed to 
apply to wages paid on or after January 1 following the date these 
regulations are published as final regulations in the Federal Register. 
QSubs, single-owner eligible entities disregarded under Sec. Sec.  
301.7701-1 through 301.7701-3, and the owners of such entities may 
continue to use the procedures permitted by Notice 99-6 to satisfy the 
owners' employment tax liabilities and other employment tax obligations 
for periods before the effective date of these regulations. As required 
by Notice 99-6, if the owner currently satisfies the employment tax 
liabilities and other employment tax obligations with respect to wages 
paid to employees performing services for the disregarded entity, then 
the owner must continue to satisfy such liabilities and obligations 
until these regulations become final and effective, at which time 
Notice 99-6 will be obsoleted.

2. Excise Taxes

    The proposed regulations would eliminate disregarded entity status 
for purposes of certain excise taxes. An entity that is disregarded for 
other federal tax purposes would be required to pay and report excise 
taxes, required and allowed to register, and allowed to claim any 
credits (other than income tax credits), refunds, and payments. The 
excise tax provisions that are excluded from the proposed regulations 
are specified. Because a disregarded entity does not file an income tax 
return, the credit on Form 4136 under section 34 is

[[Page 60477]]

claimed on the owner's income tax return and appropriate identification 
of the single-owner entity and its taxpayer identification number is 
required. The income tax credit under section 38 (including any credit 
under sections 40 and 40A) is not affected by these proposed 
regulations.
    The excise tax provisions in these regulations are proposed to 
apply to liabilities imposed and actions first required or permitted in 
periods beginning on or after January 1 following the date these 
regulations are published as final regulations in the Federal Register. 
For periods beginning before the effective date of these regulations, 
the IRS will treat payments made by a disregarded entity, or other 
actions taken by a disregarded entity, with respect to the excise taxes 
affected by these regulations as having been made or taken by the sole 
owner of that entity. Thus, for such periods, the owner of a 
disregarded entity will be treated as satisfying the owner's 
obligations with respect to the excise taxes affected by these 
regulations, provided that those obligations are satisfied either (i) 
by the owner itself or (ii) by the disregarded entity on behalf of the 
owner.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these proposed regulations, and 
because these proposed regulations do not impose a collection of 
information on small entities, the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply. Pursuant to section 7805(f) of the Code, 
this notice of proposed rulemaking will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

Comments and Requests for a Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and (8) 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and the Treasury Department request comments on the clarity of 
the proposed regulations and how they may be made easier to understand. 
In addition, comments are requested specifically on any transition 
issues that might arise with respect to employment taxes, and any 
transition relief that should be provided with respect to employment 
tax obligations. All comments will be available for public inspection 
and copying. 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 hearing will 
be published in the Federal Register.

Drafting Information

    The principal authors of these regulations are Susan Athy, Office 
of Associate Chief Counsel (Passthroughs and Special Industries), and 
John Richards, Office of Associate Chief Counsel (Tax Exempt and 
Government Entities). However, other personnel from the IRS and the 
Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 301 are proposed to be amended as 
follows:

PART 1--INCOME TAX

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

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.34-1 is revised to read as follows:


Sec.  1.34-1  Special rule for owners of certain business entities.

    Amounts payable under sections 6420, 6421, and 6427 to a business 
entity that is treated as separate from its owner under Sec.  1.1361-
4(a)(8) (relating to certain qualified subchapter S subsidiaries) or 
Sec.  301.7701-2(c)(2)(v) of this chapter (relating to certain wholly-
owned entities) are, for purposes of section 34, treated as payable to 
the owner of that entity.


Sec. Sec.  1.34-2 through 1.34-6  [Removed]

    Par. 3. Sections 1.34-2 through 1.34-6 are removed.
    Par. 4. Section 1.1361-4 is amended as follows:
    1. In paragraph (a)(1), the language ``Except as otherwise provided 
in paragraphs (a)(3) and (a)(6)'' is removed, and ``Except as otherwise 
provided in paragraphs (a)(3), (a)(6), (a)(7), and (a)(8)'' is added in 
its place.
    2. Paragraphs (a)(7) and (a)(8) are added.
    The additions read as follows:


Sec.  1.1361-4  Effect of QSub election.

    (a) * * *
    (7) Treatment of QSubs for purposes of employment taxes--(i) In 
general. A QSub is treated as a separate corporation for purposes of 
Subtitle C--Employment Taxes and Collection of Income Tax (Chapters 21, 
22, 23, 23A, 24, and 25 of the Internal Revenue Code).
    (ii) Effective date. This paragraph (a)(7) applies with respect to 
wages paid on or after January 1 following the date these regulations 
are published as final regulations in the Federal Register.
    (8) Treatment of QSubs for purposes of certain excise taxes--(i) In 
general. A QSub is treated as a separate corporation for purposes of--
    (A) Federal tax liabilities imposed by Chapters 31, 32 (other than 
section 4181), 33, 34, 35, 36 (other than section 4461), and 38 of the 
Internal Revenue Code, or any floor stocks tax imposed on articles 
subject to any of these taxes;
    (B) Collection of tax imposed by Chapter 33 of the Internal Revenue 
Code;
    (C) Registration under sections 4101, 4222, and 4412; and
    (D) Claims of a credit (other than a credit under section 34), 
refund, or payment related to a tax described in paragraph (a)(8)(A) of 
this section.
    (ii) Effective date. This paragraph (a)(8) applies to liabilities 
imposed and actions first required or permitted in periods beginning on 
or after January 1 following the date these regulations are published 
as final regulations in the Federal Register.
    Par 5. Section 1.1361-6 is amended as follows:
    The language ``Except as provided in Sec. Sec.  1.1361-
4(a)(3)(iii), 1.1361-4(a)(5)(i), and 1.1361-5(c)(2)'' is removed, and 
``Except as otherwise provided in Sec. Sec.  1.1361-4(a)(3)(iii), 
1.1361-4(a)(5)(i), 1.1361-4(a)(6)(iii), 1.1361-4(a)(7)(ii), 1.1361-
4(a)(8)(ii), and 1.1361-5(c)(2)'' is added in its place.

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 6. The authority citation for part 301 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 7. Section 301.7701-2 is amended as follows:
    1. In paragraph (a), a sentence is added at the end.

[[Page 60478]]

    2. In paragraph (c)(2)(i), the language ``A business'' is removed, 
and ``Except as otherwise provided in this paragraph (c), a business'' 
is added in its place.
    3. Paragraphs (c)(2)(iv), (c)(2)(v), (e)(3), and (e)(4) are added.
    The additions read as follows:


Sec.  301.7701-2  Business entities; definitions.

    (a) * * * But see paragraphs (c)(2)(iv) and (v) of this section for 
special employment and excise tax rules that apply to an eligible 
entity that is otherwise disregarded as an entity separate from its 
owner.
* * * * *
    (c) * * *
    (2) * * *
    (iv) Special rule for employment tax purposes--(A) In general. 
Paragraph (c)(2)(i) of this section (relating to certain wholly owned 
entities) does not apply to taxes imposed under Subtitle C--Employment 
Taxes and Collection of Income Tax (Chapters 21, 22, 23, 23A, 24, and 
25 of the Internal Revenue Code).
    (B) Example. The following example illustrates the application of 
paragraph (c)(2)(iv) of this section:

    Example. (i) LLCA is an eligible entity owned by individual A 
and is generally disregarded as an entity separate from its owner 
for federal tax purposes. However, LLCA is treated as an entity 
separate from its owner for purposes of subtitle C of the Internal 
Revenue Code. LLCA has employees and pays wages as defined in 
sections 3121(a), 3306(b), and 3401(a).
    (ii) LLCA is subject to the provisions of subtitle C of the 
Internal Revenue Code and related provisions under 26 CFR subchapter 
C, Employment Taxes and Collection of Income Tax at Source, parts 31 
through 39. Accordingly, LLCA is required to perform such acts as 
are required of an employer under those provisions of the Code and 
regulations thereunder that apply. All provisions of law (including 
penalties) and the regulations prescribed in pursuance of law 
applicable to employers in respect of such acts are applicable to 
LLCA. Thus, for example, LLCA is liable for income tax withholding, 
Federal Insurance Contributions Act (FICA) taxes, and Federal 
Unemployment Tax Act (FUTA) taxes. See sections 3402 and 3403 
(relating to income tax withholding); 3102(b) and 3111 (relating to 
FICA taxes), and 3301 (relating to FUTA taxes). In addition, LLCA 
must file under its name and EIN the applicable Forms in the 94X 
series, for example, Form 941, ``Employer's Quarterly Employment Tax 
Return,'' Form 940, ``Employer's Annual Federal Unemployment Tax 
Return;'' file with the Social Security Administration and furnish 
to LLCA's employees statements on Forms W-2, ``Wage and Tax 
Statement;'' and make timely employment tax deposits. See Sec. Sec.  
31.6011(a)-1, 31.6011(a)-3, 31.6051-1, 31.6051-2, and 31.6302-1 of 
this chapter.
    (iii) A is self-employed for purposes of subtitle A, chapter 2, 
Tax on Self-Employment Income, of the Internal Revenue Code. Thus, A 
is subject to tax under section 1401 on A's net earnings from self-
employment with respect to LLCA's activities. A is not an employee 
of LLCA for purposes of subtitle C of the Code. Because LLCA is 
treated as a sole proprietorship of A for income tax purposes, A is 
entitled to deduct trade or business expenses paid or incurred with 
respect to activities carried on through LLCA, including the 
employer's share of employment taxes imposed under sections 3111 and 
3301, on A's Form 1040, Schedule C, ``Profit or Loss for Business 
(Sole Proprietorship).''

    (v) Special rule for certain excise tax purposes--(A) In general. 
Paragraph (c)(2)(i) of this section (relating to certain wholly owned 
entities) does not apply for purposes of--
    (1) Federal tax liabilities imposed by Chapters 31, 32 (other than 
section 4181), 33, 34, 35, 36 (other than section 4461), and 38 of the 
Internal Revenue Code, or any floor stocks tax imposed on articles 
subject to any of these taxes;
    (2) Collection of tax imposed by Chapter 33 of the Internal Revenue 
Code;
    (3) Registration under sections 4101, 4222, and 4412; and
    (4) Claims of a credit (other than a credit under section 34), 
refund, or payment related to a tax described in paragraph 
(c)(2)(v)(A)(1) of this section.
    (B) Example. The following example illustrates the provisions of 
this paragraph (c)(2)(v).

    Example. (i) LLCB is an eligible entity that has a single owner, 
B. LLCB is generally disregarded as an entity separate from its 
owner. However, under paragraph (c)(2)(v) of this section, LLCB is 
treated as an entity separate from its owner for certain purposes 
relating to excise taxes.
    (ii) LLCB mines coal from a coal mine located in the United 
States. Section 4121 of chapter 32 of the Internal Revenue Code 
imposes a tax on the producer's sale of such coal. Section 48.4121-
1(a) of this chapter defines a ``producer'' generally as the person 
in whom is vested ownership of the coal under state law immediately 
after the coal is severed from the ground. LLCB is the person that 
owns the coal under state law immediately after it is severed from 
the ground. Under paragraph (c)(2)(v)(A)(1) of this section, LLCB is 
the producer of the coal and is liable for tax on its sale of such 
coal under chapter 32 of the Internal Revenue Code. LLCB must report 
and pay tax on Form 720, ``Quarterly Federal Excise Tax Return,'' 
under its own name and taxpayer identification number.
    (iii) LLCB uses undyed diesel fuel in an earthmover that is not 
registered or required to be registered for highway use. Such use is 
an off-highway business use of the fuel. Under section 6427(l), the 
ultimate purchaser is allowed to claim an income tax credit or 
payment related to the tax imposed on diesel fuel used in an off-
highway business use. Under paragraph (c)(2)(v) of this section, for 
purposes of the credit or payment allowed under section 6427(l), 
LLCB is the person that could claim the amount on its Form 720 or on 
a Form 8849, ``Claim for Refund of Excise Taxes.'' Alternatively, if 
LLCB did not claim a payment during the time prescribed in section 
6427(i)(2) for making a claim under section 6427, Sec.  1.34-1 of 
this chapter provides that B, the owner of LLCB, could claim the 
income tax credit allowed under section 34 for the nontaxable use of 
diesel fuel by LLCB.

* * * * *
    (e) * * *
    (3) Paragraph (c)(2)(iv) of this section applies with respect to 
wages paid on or after January 1 following the date these regulations 
are published as final regulations in the Federal Register.
    (4) Paragraph (c)(2)(v) of this section applies to liabilities 
imposed and actions first required or permitted in periods beginning on 
or after January 1 following the date these regulations are published 
as final regulations in the Federal Register.

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 05-20765 Filed 10-17-05; 8:45 am]
BILLING CODE 4830-01-P