Information Reporting for Payments Made in Settlement of Payment Card and Third Party Network Transactions, 61294-61305 [E9-28076]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 74, Number 225 (Tuesday, November 24, 2009)]
[Proposed Rules]
[Pages 61294-61305]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-28076]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 31, and 301

[REG-139255-08]
RIN 1545-BI51


Information Reporting for Payments Made in Settlement of Payment 
Card and Third Party Network Transactions

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations relating to 
information reporting requirements, information reporting penalties, 
and backup withholding requirements for payment card and third party 
network transactions. The proposed regulations reflect the enactment of 
section 6050W and related changes in the law made by the Housing 
Assistance Tax Act of 2008 that require payment settlement 
organizations to report payments in settlement of payment card and 
third party network transactions for each calendar year. The proposed 
regulations in this document will affect persons that make payment in 
settlement of payment card and third party network transactions and the 
payees of these transactions. The proposed regulations provide guidance 
to assist persons who will be required to make returns reporting 
payment card and third party network transactions and to the payees of 
those transactions. This document also provides notice of a public 
hearing on these proposed amendments to the regulations.

DATES: Written or electronic comments must be received by January 25, 
2010. Outlines of topics to be discussed at the public hearing 
scheduled for February 10, 2010, at 10 a.m. must be received by January 
27, 2010.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-139255-08), room 
5205, 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-
139255-08), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov/ (IRS REG-139255-08).

FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, 
Barbara Pettoni, (202) 622-4910; concerning submissions of comments or 
the public hearing, Regina Johnson, (202) 622-7180 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains proposed amendments to 26 CFR Part 1 
relating to information reporting under sections 6041, 6050W, and 6051 
of the Internal Revenue Code (Code). This document also contains 
proposed amendments to 26 CFR Part 31 relating to backup withholding 
under section 3406, and to 26 CFR Part 301 relating to information 
reporting penalties under sections 6721 and 6722.
    A new reporting requirement, section 6050W, was added to the Code 
by section 3091(a) of the Housing Assistance Tax Act of 2008, Div. C of 
Public Law 110-289, 122 Stat. 2654 (the Act), enacted on July 30, 2008. 
Section 6050W requires merchant acquiring entities and third party 
settlement organizations to file an information return for each 
calendar year reporting all payment card transactions and third party 
network transactions with participating payees occurring in that 
calendar year. This requirement to file information returns applies to 
returns for calendar years beginning after December 31, 2010. This 
section also requires statements to be furnished to participating 
payees on or before January 31st of the year following the year for 
which the return is required.
    The Act also amended section 3406(b)(3) to provide that amounts 
reportable under section 6050W are subject to backup withholding 
requirements. Section 3406(a)(1) requires certain payors to perform 
backup withholding by deducting and withholding income tax from a 
reportable payment (as defined in section 3406(b)(1)) if the payee 
fails to furnish the payee's taxpayer identification number (TIN) to 
the payor on a required return, or if the Secretary notifies the payor 
that the TIN furnished by the payee is incorrect. Backup withholding 
for amounts reportable under section 6050W applies to amounts paid 
after December 31, 2011.
    Prior to making an information return, a payor may check the TIN 
furnished by the payee against the name/TIN combination contained in 
the IRS's database maintained for the program, and the IRS will inform 
the participant whether or not the name/TIN combination furnished by 
the payee matches a name/TIN combination in the database. The matching 
information provided to participants will help avoid TIN errors and 
reduce the number of backup withholding notices required under section 
3406(a)(1)(B) of the Code. A verified TIN/name match will also provide 
participants with reasonable cause relief from penalties under section 
6724(a). The Act further provides that, solely for purposes of carrying 
out TIN matching under section 3406, section 6050W is effective on the 
date of enactment, July 30, 2008. The TIN matching program described in 
Rev. Proc. 2003-9, 2003-1 CB 516, permits program participants to 
verify the payee TINs required to be reported on information returns 
and payee statements. On February 6, 2009, the IRS announced that 
persons who will be required to make returns under section 6050W may 
match TINs under the procedures established by Rev. Proc. 2003-9. See 
Announcement 2009-6, ``Taxpayer Identification Number (``TIN'') 
Matching Program is Available to Persons Required to Make Returns Under 
New Section 6050W of the Internal Revenue Code'' (Announcement 2009-6, 
2009-9 IRB 643 (March 2, 2009)). See Sec.  601.601(d)(2)(ii)(b).
    The Act also amended section 6724(d) by adding returns required by 
section 6050W to the definition of information return for purposes of 
penalties for failure to comply with certain information reporting 
requirements. The amendments to section 6724(d) apply to returns for 
calendar years beginning after December 31, 2010.
    Notice 2009-19 invited public comments regarding guidance under 
section 6050W. See Notice 2009-19, ``Information Reporting of Payments 
Made in Settlement of Payment Card

[[Page 61295]]

and Third Party Network Transactions'' (Notice 2009-19, 2009-10 IRB 660 
(March 9, 2009)). In particular, Notice 2009-19 requested comments on 
the interpretation of the statutory definitions of terms used in 
section 6050W, how to administer the reporting requirements so as to 
prevent reporting of the same transaction more than once, and whether 
the ``gross amount'' of the reportable payment transaction should be 
defined as ``gross receipts or sales'' or whether adjustments should be 
made for credits, cash equivalents, discounts, fees, refunds, or other 
amounts. Notice 2009-19 also requested comments on how to address 
differences between section 6050W reporting and payee reporting on Form 
1040, ``U.S. Individual Income Tax Return,'' Form 1065, ``U.S. Return 
of Partnership Income,'' or Form 1120, ``U.S. Corporation Income Tax 
Return,'' and whether the time, form and manner of reporting should 
conform to existing practices for information reporting to the IRS 
under other provisions of the Code.
    Comments were received in response to Notice 2009-19, and the 
comments were taken into consideration in developing these proposed 
regulations. The IRS and the Treasury Department invite any additional 
comments on the issues discussed in this preamble or on other issues 
relating to section 6050W. See Sec.  601.601(d)(2)(ii)(b).

Explanation of Provisions

In General

    The proposed regulations provide guidance to interpret the 
definitions used in the statute and examples to illustrate the rules in 
the proposed regulations. The new law requires any payment settlement 
entity making payment to a participating payee in settlement of 
reportable payment transactions to make an annual return for each 
calendar year reporting the gross amount of the reportable 
transactions, and the name, address, and TIN of the participating 
payee. See section 6050W(a). The law also requires payment settlement 
entities to furnish written statements to persons with respect to whom 
such a return is required showing the name, address, and telephone 
number of the information contact of the person required to make the 
return and the gross amount of the reportable payment transactions with 
respect to the person required to be shown on the return. See section 
6050W(f).
    Section 6050W(b) provides that the term payment settlement entity 
means, in the case of a payment card transaction, a merchant acquiring 
entity; and in the case of a third party network transaction, a third 
party settlement organization. Section 6050W(b)(2) defines merchant 
acquiring entity as the bank or other organization with the contractual 
obligation to make payment to participating payees in settlement of 
payment card transactions, and section 6050W(b)(3) defines third party 
settlement organization as the central organization that has the 
contractual obligation to make payment to participating payees of third 
party network transactions. The proposed regulations clarify that a 
``payment settlement entity'' may be a domestic or foreign entity.
    A reportable payment transaction is any transaction in which a 
payment card is accepted as payment and any transaction that is settled 
through a third party payment network. See section 6050W(c). The 
proposed regulations provide guidance to interpret the meaning of this 
term in the context of both payment card transactions and third party 
network transactions, and to determine the gross amount of the 
transaction to be reported. Many commenters suggested meanings for the 
term ``gross amount.'' Some commenters suggested defining ``gross 
amount'' as the total amount of the transaction reduced by the fees 
deducted by the merchant acquiring entity. Other commenters suggested 
defining ``gross amount'' as the total amount of the transaction 
reduced by not only fees but also chargebacks and refunds. Commenters 
did not suggest, however, that reporting a gross amount with no 
reductions for any amounts would be burdensome for payment settlement 
entities. The proposed regulations provide that gross amount means the 
total dollar amount of aggregate reportable payment transactions for 
each participating payee without regard to any adjustments for credits, 
cash equivalents, discount amounts, fees, refunded amounts, or any 
other amounts.
    The proposed regulations require reporting, with respect to each 
participating payee, of the gross amount of the aggregate reportable 
payment transactions for the calendar year and the gross amount of the 
aggregate reportable payment transactions for each month of the 
calendar year. The inclusion of monthly amounts on the return filed 
with the IRS and on the statement furnished to the payee will aid in 
reconciling payment card and third party network transaction receipts 
for fiscal year payees.
    Section 6050W(e) provides an exception for de minimis payments by 
third party settlement organizations to certain participating payees. 
Under the proposed regulations, a third party settlement organization 
must report payments made to a participating payee only if its 
aggregate payments to that payee from third party network transactions 
exceed $20,000 and the aggregate number of those transactions with the 
payee exceeds 200. Several commenters requested that the exception for 
de minimis payments be extended to include payments in settlement of 
payment card transactions. The proposed regulations do not adopt this 
suggestion. Further comments are requested on the application of the de 
minimis rule exception, including whether the exception should be 
mandatory or voluntary.
    Section 6050W(d)(1)(A) provides that participating payee means: (i) 
In the case of a payment card transaction, any person who accepts a 
payment card as payment; and (ii) in the case of a third party network 
transaction, any person who accepts payment from a third party 
settlement organization in settlement of such transaction. Under 
section 6050W(d)(1)(B), the term participating payee excludes any 
person with a foreign address, except as the Secretary may provide. The 
proposed regulations provide that a payment settlement entity that is a 
person described as a U.S. payor or U.S. middleman in Sec.  1.6049-
5(c)(5) is not required to report payments to participating payees with 
a foreign address as long as, prior to payment, the payee has provided 
the payment settlement entity with documentation upon which the payment 
settlement entity may rely to treat the payment as made to a foreign 
person in accordance with Sec.  1.1441-1(e)(1)(ii). By contrast, a 
payment settlement entity that is not a person described as a U.S. 
payor or U.S. middleman in Sec.  1.6049-5(c)(5) is not required to 
report payments to participating payees that do not have a United 
States address as long as the payment settlement entity neither knows 
nor has reason to know that the participating payee is a United States 
person. For purposes of this section, foreign address means any address 
that is not within the United States, as defined in section 7701(a)(9) 
(the States and the District of Columbia). United States address means 
any address that is within the United States. The IRS and the Treasury 
Department request comments on the treatment of payment settlement 
entities that are not U.S. payors or U.S. middlemen within the meaning 
of Sec.  1.6049-5(c)(5).
    Under section 6050W(d)(1)(C), the term ``participating payee'' 
includes any

[[Page 61296]]

governmental unit and any agency or instrumentality thereof. 
Accordingly, the proposed regulations do not provide for any exceptions 
to reporting for payments made to governmental units. Payments to 
governmental units that are made using transit cards and electronic 
toll collection systems are included within the scope of section 6050W 
if such payments meet the other requirements of section 6050W. Comments 
were not received from governmental units regarding these issues. 
Therefore, the IRS and the Treasury Department request comments from 
governmental units and other interested parties regarding the impact of 
these proposed regulations on governmental units that accept payments 
made using transit cards, electronic toll collection systems, and 
similar electronic payment mechanisms.

Payment Card Transactions

    A payment card transaction is any transaction in which a payment 
card is accepted as payment. See section 6050W(c)(2). Under section 
6050W(d)(2), a payment card is a card issued pursuant to an agreement 
or arrangement that provides for: (1) One or more issuers of such 
cards; (2) a network of persons unrelated to each other, and to the 
issuer, who agree to accept the cards as payment; and (3) standards and 
mechanisms for settling the transactions between the merchant acquiring 
entities and the persons who agree to accept the cards as payment.
    Funds generally do not pass directly from the cardholder to the 
provider of goods or services for purchases made with a payment card. 
For example, in the case of a credit card transaction, a credit card 
organization may direct the transfer of funds from an issuing bank (the 
bank that issued the credit card) through the debit of the funds on 
account at an acceptable institution (such as a Federal Reserve Bank) 
and a credit of those funds to the merchant's bank (the merchant 
acquiring bank), which in turn pays the provider of goods or services. 
The cardholder frequently does not pay the issuing bank until after 
receipt of the payment card monthly billing statement. Thus, the 
merchant acquiring bank makes the payment to the provider of goods or 
services to settle the transaction, and the cardholder, who is the 
ultimate payor, generally does not make payment until after the 
transaction occurs. The information reporting requirements under 
section 6050W reflect that the merchant acquiring bank is in the best 
position to file the information return reporting the payment to the 
provider of goods or services.
    Commenters suggested adopting the definition of ``payment card'' in 
Sec.  31.3406(g)-1(f)(2)(i) for purposes of section 6050W. However, the 
definition of ``payment card'' in section 6050W(d)(2) is broader than 
in Sec.  31.3406(g)-1(f)(2)(i), which defines payment card as a card 
issued by a payment card organization (for example, a credit card 
organization). The proposed regulations reflect the broader statutory 
definition of ``payment card'' under section 6050W. Accordingly, a 
payment card is a card, issued to a cardholder, that a network of 
unrelated persons has agreed to accept as payment under an agreement 
that provides standards and mechanisms for settling the transactions 
between a merchant acquiring bank or similar entity and the providers 
who accept the cards. Under the proposed regulations, a payment card 
includes, but is not limited to, all credit cards, debit cards, and 
stored-value cards (including gift cards), and also includes the 
acceptance as payment of any account number or other indicia associated 
with a payment card.

Cards Issued in Connection With a Flexible Spending Account or a Health 
Reimbursement Arrangement

    Several commenters requested that the definition of payment card be 
interpreted to exclude cards issued in connection with flexible 
spending arrangements (FSAs) (as defined in section 106(c)(2)) or 
health reimbursement arrangements (HRAs) that are treated as employer-
provided coverage under an accident or health plan for purposes of 
section 106. The commenters expressed concern that section 6050W may be 
interpreted to override the exception to information reporting under 
section 6041(f) for payments made for medical care (as defined in 
section 213(d)) under FSAs and HRAs. Other commenters indicated that it 
would be difficult for merchant acquiring entities to identify FSA and 
HRA card transactions and segregate them from other payment card 
transactions. In general, FSA and HRA cards have the imprint of a 
credit card association and function like credit or debit cards. 
Therefore, merchant acquiring entities may have difficulty 
distinguishing these transactions from typical credit or debit card 
transactions. In keeping with the broad interpretation of the 
definition of ``payment card,'' the proposed regulations do not except 
payments for medical care using an FSA or HRA card from reporting under 
section 6050W. Therefore, under the proposed regulations, the 
definition of payment card encompasses a card issued in connection with 
an FSA or HRA. Payments made for medical care under FSAs or HRAs will 
continue to be exempt from reporting under section 6041.

Stored-Value Cards and Gift Cards

    The proposed regulations provide that the term ``stored-value 
card'' means any card with a prepaid value, including any gift card. 
Under the proposed regulations, a stored-value card is not a payment 
card within the meaning of section 6050W when the card is accepted as 
payment by a person who is related to the issuer of the card. Under 
these circumstances, the transaction is not a payment card transaction 
within the meaning of section 6050W and thus not a reportable 
transaction. However, if the stored-value card itself is purchased with 
a payment card issued by an unrelated entity, that purchase transaction 
is reportable under section 6050W.
    In contrast, a stored-value card that a network of persons 
unrelated to the issuer has agreed to accept as payment (such as a 
stored-value card issued by a college that may be used at various local 
merchants unrelated to the college) is a payment card when it is 
accepted as payment in a transaction with an unrelated person. Under 
these circumstances, the transaction is a payment card transaction 
within the meaning of section 6050W that is reportable by the payment 
settlement entity. Use of a stored-value card within a network of both 
related persons and unrelated persons is a reportable transaction only 
when it is accepted as payment by an unrelated person. For purposes of 
this section, unrelated means any person who is not related within the 
meaning of section 267(b) (providing a list of relationships), 
including the application of section 267(c) and (e)(3) (providing rules 
relating to constructive ownership), or section 707(b)(1) 
(relationships with partnerships).

Third Party Network Transactions

    Section 6050W(c)(3) provides that a third party network transaction 
means any transaction that is settled through a third party payment 
network. Section 6050W(d)(3) provides that third party payment network 
means any agreement or arrangement that: (A) Involves the establishment 
of accounts with a central organization by a substantial number of 
persons who (i) are unrelated to such organization, (ii) provide goods 
or services, and (iii) have agreed to settle transactions for the 
provision of such goods or services pursuant to such agreement or 
arrangement; (B) provides for standards and mechanisms for

[[Page 61297]]

settling such transactions; and (C) guarantees persons providing goods 
or services pursuant to such agreement or arrangement that those 
persons will be paid for providing such goods or services. Section 
6050W(d)(3) provides that a third party payment network does not 
include any agreement or arrangement that provides for the issuance of 
payment cards.
    The Joint Committee on Taxation (JCT) technical explanation of 
section 6050W explains that, in the case of a third party network 
transaction, the payment settlement entity is the third party 
settlement organization, defined as a central organization with the 
contractual obligation to make payment to participating payees of third 
party payment networks. According to the technical explanation, the 
central organization is a payment settlement entity required to report 
under section 6050W if it provides ``a network enabling buyers to 
transfer funds to sellers who have established accounts with the 
organization and have a contractual obligation to accept payments 
through the network.'' See ``Technical Explanation of Division C of 
H.R. 3221, the `Housing Assistance Act of 2008' as Scheduled for 
Consideration by the House of Representatives on July 23, 2008'' (JCX-
63-08), Joint Committee on Taxation, at 61 (July 23, 2008) (JCT 
Technical Explanation). Consistent with this explanation, the proposed 
regulations provide that the central organization of a third party 
settlement organization must provide a third party payment network that 
enables purchasers to transfer funds to providers of goods and 
services.
    The JCT Technical Explanation also gives an example of 
``substantial number of persons'' as that phrase is used in the 
definition of ``third party payment network'' in section 6050W(d)(3). 
The JCT Technical Explanation describes a ``third party payment 
network'' as any agreement or arrangement that, among other 
requirements, involves the establishment of accounts with a central 
organization by ``a substantial number of persons (e.g., more than 
50).'' JCT Technical Explanation at 61. Comments are requested on the 
interpretation of ``substantial number of persons'' as used in the 
definition of ``third party payment network.''
    Many comments were received requesting clarification on the meaning 
of third party payment network, in particular with respect to 
healthcare networks, accounts payable departments and ``shared-
service'' organizations, and organizations that settle payment 
transactions on behalf of others.

Healthcare Networks

    Several commenters expressed concern that the broad definition of 
third party payment network will include health carriers that have 
contracts with a network of providers who provide services to covered 
persons under both insured and administrative service contract 
healthcare arrangements. A typical healthcare network (sometimes 
referred to as a ``managed care'' network) may include ``covered 
persons'' (policyholders, subscribers, enrollees or other individuals 
participating in a health benefit plan), a ``health care provider'' or 
``participating provider'' (a healthcare professional or a facility 
that agrees under contract with a health carrier to provide services to 
covered persons with the expectation of receiving payment directly from 
the health carrier), and a ``health carrier'' (an entity that enters 
into an agreement to provide, deliver, arrange for, pay for, or 
reimburse any of the cost of health care services). Each of these 
parties may be a primary party with respect to its agreements with the 
other parties in the network.
    Under the proposed regulations, health carriers operating a 
healthcare network are outside the scope of section 6050W because a 
healthcare network does not enable the transfer of funds from buyers to 
sellers. Health carriers do not facilitate the transfer of payments 
from a covered person to a healthcare provider: the payments by covered 
persons to health carriers and the payments by health carriers to 
healthcare providers are separate and distinct. Health carriers collect 
premiums from covered persons pursuant to a plan agreement between the 
health carrier and the covered person for the cost of participation in 
the healthcare network. Separately, health carriers pay healthcare 
providers to compensate providers for services rendered to covered 
persons pursuant to provider agreements. Accordingly, because the 
purpose of a healthcare network is not to enable buyers to transfer 
funds to sellers, a healthcare network is not a ``third party payment 
network'' within the meaning of the proposed regulations.

Accounts Payable Departments and Shared-Service Organizations

    Many comments were received requesting guidance on the 
interpretation of ``third party payment network'' with respect to 
accounts payable departments. Under the proposed regulations, an in-
house accounts payable department is not a third party settlement 
organization of a third party payment network because an in-house 
accounts payable department is not a ``third party.'' Rather, an in-
house accounts payable department is merely an accounting function of 
the purchaser of goods and services by which the purchaser makes 
payments directly to sellers on the purchaser's own behalf.
    In contrast, many purchasers outsource their accounts payable 
function to a third party organization, sometimes referred to as a 
``shared-service'' organization. In a shared-service business model, 
the shared-service organization acts as an independent contractor with 
respect to the accounts payable of purchasers of goods and services. A 
shared-service arrangement allows purchasers to transfer funds to 
providers who have established accounts with the shared-service 
organization and have agreed to accept payment for their goods and 
services from the shared-service organization. Thus, the shared-service 
business model consists of a central organization that provides ``a 
network enabling buyers to transfer funds to sellers who have 
established accounts with the organization and have a contractual 
obligation to accept payments through the network.'' JCT Technical 
Explanation at 61.
    Accordingly, under the proposed regulations, a shared-service 
organization is a third party settlement organization of a third party 
payment network if: (1) A substantial number of unrelated providers of 
goods and services have established accounts with the shared-service 
organization, and (2) this arrangement enables purchasers of goods and 
services to transfer funds to these providers, who are obligated by 
contract to accept guaranteed payments from the shared-service 
organization in settlement of their transactions with the purchasers. 
The shared service organization must report these transactions as third 
party network transactions unless the de minimis exception applies 
(that is, the aggregate payments to each payee do not exceed $20,000 or 
the aggregate number of transactions for each payee does not exceed 
200).

Automated Clearing House (ACH) Networks

    As stated previously, the JCT Technical Explanation states that an 
organization generally is required to report if it provides ``a network 
enabling buyers to transfer funds to sellers who have established 
accounts with the organization and have a contractual obligation to 
accept payment through

[[Page 61298]]

the network.'' JCT Technical Explanation at 61. The JCT Technical 
Explanation further states: ``However, an organization operating a 
network which merely processes electronic payments (such as wire 
transfers, electronic checks, and direct deposit payments) between 
buyers and sellers, but does not have contractual agreements with 
sellers to use such network, is not required to report under the 
provision.'' JCT Technical Explanation at 61.
    Consistent with the JCT Technical Explanation, an example in the 
proposed regulations illustrates that payments settled through an 
automated clearing house (ACH) network are not settled through a third 
party payment network. An ACH merely processes electronic payments 
between payors and payees, and does not itself have contractual 
agreements with payees to use the ACH network. Accordingly, the 
proposed regulations reflect that an ACH network is not a third party 
payment network, and an ACH is therefore not required to report under 
section 6050W.

Aggregated Payees

    Section 6050W(b)(4)(A) imposes special rules for persons who 
receive payments from a payment settlement entity on behalf of one or 
more participating payees and distribute such payments to one or more 
participating payees. Under section 6050W(b)(4)(A), such persons are 
treated (i) as participating payees with respect to the payment 
settlement entity, and (ii) as payment settlement entities with respect 
to the participating payees to whom the person distributes payments.
    For example, in the case of a corporation that receives payment 
from a bank for credit card sales transacted at corporate 
independently-owned franchise stores, the bank is required to report 
the gross amount of the reportable transactions settled through the 
corporation even though the corporation does not accept credit cards 
and would not otherwise be treated as a participating payee under this 
section. In turn, the corporation is required to report the gross 
amount of reportable transactions allocable to each franchise store. 
The bank has no obligation to report the payments allocated by the 
corporation to the franchise stores. See Technical Explanation at 61-
62. The proposed regulations provide an example of persons that are 
aggregated payees for purposes of this section. This example is not 
meant to exclude other aggregated payee arrangements.

Electronic Payment Facilitators

    A payment settlement entity may contract with a third party to 
settle reportable payment transactions on behalf of the payment 
settlement entity. Section 6050W(b)(4)(B) provides a special rule for 
such arrangements. In any case where an ``electronic payment 
facilitator'' or other third party makes payments in settlement of 
reportable payment transactions on behalf of the payment settlement 
entity, the return under section 6050W must be filed by the electronic 
payment facilitator or other third party in lieu of the payment 
settlement entity.
    Under the proposed regulations, any person that has contracted with 
a payment settlement entity to make payments on behalf of the payment 
settlement entity to a participating payee in settlement of reportable 
payment transactions is subject to the electronic payment facilitator 
rule. Because the electronic payment facilitator or other third party 
is required by statute to file the return if it makes the payment on 
behalf of the payment settlement entity, and because the electronic 
payment facilitator or other third party files in lieu of the payment 
settlement entity, the payment facilitator or other third party, not 
the payment settlement entity, is the party with the obligation to file 
the return under section 6050W in these cases. Therefore, the 
electronic payment facilitator or other third party that makes payment 
on behalf of the payment settlement entity is the party that will be 
liable for any applicable penalties for failure to comply with the 
information reporting requirements under section 6050W.

Duplicate Reporting of the Same Transaction

    Section 6050W(g) grants authority to the Secretary to issue 
guidance to implement the reporting requirement, including rules to 
prevent the reporting of the same transaction more than once. Numerous 
commenters requested relief from reporting the same transaction under 
more than one Code section, in particular with respect to transactions 
that will be subject to reporting under both sections 6041 (relating to 
information at source) and 6050W.
    Depending on the circumstances, reporting of the same transaction 
more than once may be warranted for several reasons. First, the burden 
for reporting may fall on different persons. For example, under section 
6041, the reporting person is the payor, whereas under section 6050W, 
the reporting person is the payment settlement entity. Requiring 
reporting from both reporters will help ensure that the transaction is 
reported even where one reporter fails to report.
    Second, information reporting under other Code sections may provide 
different information that may be useful to the IRS. For example, 
section 6041 requires reporting of fixed or determinable gains, profits 
and income, whereas section 6050W requires reporting of gross amounts.
    Third, exceptions to information reporting may apply under one Code 
section but not the other, which makes rules to avoid reporting the 
same transaction more than once difficult to coordinate. For example, 
Sec.  1.6041-3(p) provides that payments made to corporations are 
generally exempt from reporting under section 6041, whereas no 
corporate payee exception exists under section 6050W. Conversely, for 
third party network transactions under section 6050W, a de minimis 
exception applies where the aggregate payments to each payee do not 
exceed $20,000 or the aggregate number of transactions for each payee 
does not exceed 200, but no similar exception exists under section 
6041. Thus, there are compelling reasons to require reporting under 
both Code sections.
    Nevertheless, for payment card transactions, relief from reporting 
under section 6041 is warranted because section 6050W reporting covers 
all payment card transactions and thus effectively encompasses all 
payments subject to section 6041 reporting made by payment card. 
Accordingly, the proposed regulations amend section Sec.  1.6041-1 to 
provide that any payment card transaction that otherwise would be 
reportable under both sections 6041 and 6050W must be reported under 
section 6050W and not section 6041.
    Relief from reporting under section 6041 is not warranted, however, 
for third party network transactions because such transactions are not 
subject to reporting unless the de minimis thresholds are met. The 
payor with the obligation to report under section 6041 cannot determine 
with certainty whether a third party network transaction is required to 
be reported under section 6050W. Additional comments are requested 
regarding the application of this rule to prevent the reporting of the 
same transaction more than once.
    Commenters also requested relief from reporting the same 
transaction under both sections 3402(t) (relating to withholding on 
certain payments made by Government entities) and 6050W. Government 
entities frequently use payment cards for payments for

[[Page 61299]]

property and services. Such payment card transactions will be subject 
both to information reporting under section 6050W and to withholding 
and information reporting under section 3402(t).
    Information reporting under section 3402(t) and section 6050W serve 
different purposes, however. The purpose of information reporting under 
section 6050W is to encourage voluntary compliance in the reporting of 
gross receipts. In contrast, the purpose of information reporting under 
section 3402(t) is to report the amounts of tax withheld from payments 
and to furnish this information to payees and to the IRS. Both payees 
and the IRS must have mechanisms in place to account for the income tax 
that has been withheld from payments. Therefore, reporting under 
section 3402(t) cannot be eliminated for transactions that will also be 
required to be reported under section 6050W.
    Further, an exception from reporting under section 6050W when the 
same transaction will be reported under section 3402(t) is not feasible 
because the payment settlement entity, such as a merchant acquiring 
entity in the case of a payment card transaction, may not have access 
to the identity of the actual card user. Thus, the payment settlement 
entity would not know whether the card user is a government entity 
required to withhold on payments pursuant to section 3402(t) and would 
not be able to determine whether reporting under section 6050W is 
excepted. Also, the proposed rules under section 3402(t) provide for a 
$10,000 payment threshold amount, whereas section 6050W has no payment 
threshold amount for payment card transactions. See REG-158747-06, 
2009-4 IRB 362 (73 FR 74,082) (Dec. 5, 2008). Accordingly, the proposed 
regulations do not provide relief from reporting the same transaction 
under both sections 3402(t) and 6050W.

Time, Form and Manner for Reporting

    Many commenters recommended that the IRS create a new form to be 
used solely for reporting under section 6050W. A draft form for this 
purpose, Form 1099-K, ``Merchant card and third-party payments,'' is 
expected to be released contemporaneously with these proposed 
regulations. Draft Form 1099-K will be available for viewing and 
comment on the IRS Web site at https://www.irs.gov/pub/irs-dft/f1099k-dft.pdf. Additional guidance regarding the proper form for reporting 
under this section will be issued in time for filing the first returns 
due under this section (returns for calendar year 2011 due in 2012).
    The draft form is expected to require reporting, with respect to 
each participating payee, of the gross amount of the aggregate 
reportable payment transactions for the calendar year and the gross 
amount of the aggregate reportable payment transactions for each month 
of the calendar year. The inclusion of monthly amounts on the return 
filed with the IRS and on the statement furnished to the payee will aid 
in reconciling payment card and third party network transaction 
receipts for fiscal year payees. Additionally, the proposed regulations 
provide that the time and manner for reporting under section 6050W will 
follow the existing procedures for information reporting under other 
Code sections.
    Section 6050W(f) provides that payee statements may be furnished 
electronically. Commenters requested that the existing procedures for 
payee statements be modified to eliminate the requirement for an 
affirmative consent to receive the payee statement under section 6050W 
electronically. Instead, commenters requested that merchants already 
receiving business communications electronically be deemed to have 
consented to receive electronic payee statements under section 6050W. 
Commenters also suggested that reporting entities not be required to 
send a separate communication to payees to inform them of their option 
to receive payee statements electronically; rather, the communication 
may be included in another business communication. Commenters also 
suggested that merchants receiving paper communications who wish to 
receive electronic payee statements be allowed to consent to electronic 
payees statements by logging onto a Web site to indicate their consent, 
with no further written consent required. The proposed regulations do 
not adopt these suggestions to eliminate the existing consent 
procedures for furnishing electronic statements to payees. Additional 
comments are requested on whether the existing consent procedures 
should be modified.

Backup Withholding

    The Act amended section 3406(b)(3) to provide that reportable 
payment transactions subject to information reporting under section 
6050W generally are subject to backup withholding requirements. Section 
3406 requires backup withholding in the case of any reportable payment 
if a condition for backup withholding, as set forth in section 
3406(a)(1), exists. In the case of reportable payments, backup 
withholding generally applies if the payee fails to furnish his TIN to 
the payor or if the IRS notifies the payor that the TIN furnished by 
the payee is incorrect.
    Section 3091(c) of the Act amended section 3406(b) by expanding the 
meaning of reportable payments subject to backup withholding to include 
payments required to be shown on a return required under section 6050W, 
effective for amounts paid after December 31, 2011. Accordingly, the 
proposed regulations amend the regulations under section 3406 to 
provide that persons making information returns with respect to any 
reportable payment under section 6050W made after December 31, 2011 are 
included in the definition of ``payors'' obligated to backup withhold.
    Several commenters expressed concern that when backup withholding 
for reportable payments reportable under section 6050W becomes 
effective, duplicate backup withholding on the same payment could 
potentially occur. The same reportable payment may be reportable under 
section 6050W and under another Code section, such as section 6041 or 
6041A, thus potentially subjecting the payee to as much as 56-percent 
withholding for the same transaction.
    Because the proposed regulations provide relief from reporting 
under section 6041 for payment card transactions that would otherwise 
be reportable under both sections 6041 and 6050W, the potential for 
duplicate backup withholding in such situations is eliminated. There 
continues, however, to be a potential for duplicate backup withholding 
for reportable payments made after December 31, 2011 that are 
reportable under section 6050W and another Code section. Also, in the 
case of a payment for services using a third party payment network 
after December 31, 2011, the payment potentially could be subject to 
backup withholding by the payor for these services as a reportable 
payment under section 6041, and by the third party settlement 
organization as a reportable payment under section 6050W.
    A payment settlement entity reporting under section 6050W is in a 
better position to perform backup withholding for a third party network 
transaction than the payor reporting under section 6041. Backup 
withholding compliance is difficult for payors in third party network 
transactions because an invoice may not be issued, and the payor in the 
transaction may not be in a position to backup withhold easily at the 
time of the transaction. Backup withholding may also be difficult 
because the payor does not make payment directly to the

[[Page 61300]]

provider of services; rather, the third party settlement organization 
makes payment to the provider. However, relief from backup withholding 
for third party network transactions reportable under both section 
6050W and section 6041 is not warranted because such transactions are 
not subject to reporting under section 6050W unless the de minimis 
thresholds are met. Thus, the payor with the obligation to report under 
section 6041 cannot determine with certainty whether a third party 
network transaction is required to be reported under section 6050W.
    For payments that are subject to withholding under both sections 
3402(t) and 6050W, the potential for duplicate withholding is 
complicated by the 3-percent withholding requirement contained within 
section 3402(t) itself. Section 3402(t) expressly provides exceptions 
to the 3-percent withholding requirement for payments that are subject 
to backup withholding under section 3406 if backup withholding is 
actually being deducted from the payment. Thus, where there is no 3-
percent withholding on a government payment card transaction, the 
transaction will be subject to the higher 28-percent backup withholding 
under section 3406 instead of the 3-percent withholding under section 
3402(t). However, a potential for duplicate backup withholding may 
arise if information reporting is required under both sections 3402(t) 
and 6050W but neither reporting requirement is satisfied.
    The proposed regulations do not eliminate the requirement for 
backup withholding for transactions that are reportable under section 
6050W and another Code section. Comments are requested on the 
circumstances under which relief for duplicate backup withholding is 
appropriate once backup withholding under section 6050W becomes 
effective.

Proposed Effective/Applicability Dates

    The amendments to the regulations as proposed will be effective on 
the date they are published as final regulations in the Federal 
Register.
    With respect to the regulations under sections 6041, 6050W, 6051, 
6721 and 6722, the regulations are proposed to apply to returns for 
calendar years beginning after December 31, 2010. With respect to the 
regulations under section 3406, the regulations are proposed to apply 
to amounts paid after December 31, 2011.

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 regulations. Pursuant to 
the Regulatory Flexibility Act (5 U.S.C. chapter 6), it is hereby 
certified that the regulations will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that the persons required to report under section 
6050W, payment settlement entities, will generally not be small 
businesses. Merchant acquiring entities, the payment settlement 
entities required to report payment card transactions, will primarily 
be banks with over $175 million in assets. Third party settlement 
organizations, the payment settlement entities required to report third 
party network transactions, will generally not be small entities by 
virtue of the definition of a third party payment network, which 
requires the establishment of accounts with a central organization (the 
third party settlement organization) by a substantial number of 
persons. Further, section 6050W(e) provides a de minimis exception that 
exempts third party settlement organizations from reporting 
transactions with respect to a payee if the aggregate amount of such 
transactions does not exceed $20,000 or the aggregate number of such 
transactions does not exceed 200. The IRS and the Treasury Department 
also request comments on the accuracy of the statement that the 
regulations in this document will not have a significant economic 
impact on a substantial number of small entities. Pursuant to section 
7805(f) of the Code, this regulation has been submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department request comments on the 
clarity of the proposed regulations and how they can be made easier to 
understand. Comments are requested on the examples in the proposed 
regulations, and commentators are specifically invited to suggest 
changes to these examples or to suggest new examples that they believe 
would better illustrate the principles that should be included in the 
final regulations. All comments will be available for public inspection 
and copying.
    A public hearing has been scheduled for February 10, 2010 at 10 am 
in room 2615, Internal Revenue Building, 1111 Constitution Avenue, NW., 
Washington, DC. Due to building security procedures, visitors must 
enter at the Constitution Avenue entrance. In addition, all visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 30 minutes before the hearing starts. For 
information about having your name placed on the building access list 
to attend the hearing, see the FOR FURTHER INFORMATION CONTACT section 
of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments and an outline of the topics to be discussed and 
the time to be devoted to each topic (a signed original and eight (8) 
copies) by January 27, 2010. A period of 10 minutes will be allotted to 
each person for making comments. An agenda showing the scheduling of 
the speakers will be prepared after the deadline for receiving outlines 
has passed. Copies of the agenda will be available free of charge at 
the hearing.

Drafting Information

    The principal author of these proposed regulations is Barbara 
Pettoni, Office of Associate Chief Counsel (Procedure and 
Administration).

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 31

    Employment taxes, Income taxes, Penalties, Pensions, Railroad 
retirement, Reporting and recordkeeping requirements, Social Security, 
Unemployment compensation.

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, 31 and 301 are proposed to be amended 
as follows:

[[Page 61301]]

PART 1--INCOME TAXES

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

    Authority: 26 U.S.C. 7805 * * *
    Par. 2. Section 1.6041-1 is amended by adding a sentence at the end 
of paragraph (a)(1)(ii) and adding paragraphs (a)(1)(iv) and (a)(1)(v) 
to read as follows:


Sec.  1.6041-1  Return of information as to payments of $600 or more.

    (a) * * *
    (1) * * *
    (ii) * * * For payment card transactions (as described in Sec.  
1.6050W-1(b)) required to be reported on information returns required 
under section 6050W (relating to payment card and third party network 
transactions), see special rules in Sec.  1.6041-1(a)(1)(iv).
* * * * *
    (iv) Information returns required under section 6050W for calendar 
years beginning after December 31, 2010. For payments made by payment 
card after December 31, 2010, that are required to be reported on an 
information return under section 6050W (relating to payment card and 
third party network transactions), the following rule applies. Payment 
card transactions that are described in paragraph (a)(1)(ii) of this 
section that otherwise would be reportable under both sections 6041 and 
6050W are reported under section 6050W and not section 6041. For 
provisions relating to information reporting for payment card 
transactions, see Sec.  1.6050W-1.
    (v) Example. The provisions of paragraph (a)(1)(iv) are illustrated 
by the following example:

    Example. Restaurant owner A, in the course of business, pays 
$600 of fixed or determinable income to B, a repairman, by credit 
card. B is one of a network of unrelated persons that has agreed to 
accept A's credit card as payment under an agreement that provides 
standards and mechanisms for settling the transaction between a 
merchant acquiring bank and the persons who accept the cards. 
Merchant acquiring bank Y is responsible for making the payment to 
B. Under paragraph (a)(1)(iv) of this section, A, as payor, is not 
required to file an information return under section 6041 with 
respect to the transaction because Y, as the payment settlement 
entity for the payment card transaction, is required to file an 
information return under section 6050W.
* * * * *

    Par. 3. Section Sec.  1.6050W-1 is added to read as follows:


Sec.  1.6050W-1  Information reporting for payments made in settlement 
of payment card and third party network transactions.

    (a) In general--(1) General rule. Every payment settlement entity, 
as defined in paragraph (a)(3) of this section, must file an 
information return for each calendar year with respect to payments made 
in settlement of reportable payment transactions, as defined in 
paragraph (a)(2) of this section, setting forth the following 
information:
    (i) The name, address, and taxpayer identification number (TIN) of 
each participating payee, as defined in paragraph (a)(4) of this 
section, to whom one or more payments in settlement of reportable 
payment transactions are made.
    (ii) With respect to each participating payee, the gross amount, as 
defined in paragraph (a)(5) of this section, of--
    (A) The aggregate reportable payment transactions for the calendar 
year; and
    (B) The aggregate reportable payment transactions for each month of 
the calendar year.
    (iii) Any other information required by the form, instructions or 
current revenue procedures.
    (2) Reportable payment transaction. The term reportable payment 
transaction means any payment card transaction (as defined in paragraph 
(b)(1) of this section) and any third party network transaction (as 
defined in paragraph (c)(1) of this section).
    (3) Payment settlement entity. The term payment settlement entity 
means a domestic or foreign entity that is--
    (i) In the case of a payment card transaction, a merchant acquiring 
entity (as defined in paragraph (b)(2) of this section); and
    (ii) In the case of a third party network transaction, a third 
party settlement organization (as defined in paragraph (c)(2) of this 
section).
    (4) Participating payee--(i) Definition. In general, the term 
participating payee means any person, including any governmental unit 
(and any agency or instrumentality thereof), who:
    (A) In the case of a payment card transaction, accepts a payment 
card (as defined in paragraph (b)(3) of this section) as payment; and
    (B) In the case of a third party network transaction, accepts 
payment from a third party settlement organization (as defined in 
paragraph (c)(2) of this section) in settlement of such transaction.
    (ii) Foreign payees. For special rules relating to foreign payees, 
see paragraph (d)(3) of this section.
    (5) Gross amount. For purposes of this section, gross amount means 
the total dollar amount of aggregate reportable payment transactions 
for each participating payee without regard to any adjustments for 
credits, cash equivalents, discount amounts, fees, refunded amounts or 
any other amounts.
    (b) Payment card transactions--(1) Definition. The term payment 
card transaction means any transaction in which a payment card, or any 
account number or other indicia associated with a payment card, is 
accepted as payment.
    (2) Merchant acquiring entity. The term merchant acquiring entity 
means the bank or other organization that has the contractual 
obligation to make payment to participating payees (as defined in 
paragraph (a)(4)(i)(A) of this section) in settlement of payment card 
transactions.
    (3) Payment card. (i) The term payment card means any card, 
including any stored-value card as defined in paragraph (b)(4) of this 
section, issued pursuant to an agreement or arrangement that provides 
for--
    (A) One or more issuers of such cards;
    (B) A network of persons unrelated to each other, and to the 
issuer, who agree to accept such cards as payment; and
    (C) Standards and mechanisms for settling the transactions between 
the merchant acquiring entities and the persons who agree to accept the 
cards as payment.
    (ii) Persons who agree to accept such cards as payment as described 
in this paragraph (b)(3) are participating payees within the meaning of 
paragraph (a)(4)(i)(A) of this section.
    (4) Stored-value cards. The term stored-value card means any card 
with a prepaid value, including any gift card.
    (c) Third party network transactions--(1) Definition. The term 
third party network transaction means any transaction that is settled 
through a third party payment network.
    (2) Third party settlement organization. The term third party 
settlement organization means the central organization that has the 
contractual obligation to make payments to participating payees (as 
defined in paragraph (a)(4)(i)(B) of this section) of third party 
network transactions. A central organization is a third party 
settlement organization if it provides a third party payment network 
(as defined in paragraph (c)(3)(i) of this section) that enables 
purchasers to transfer funds to providers of goods and services.
    (3) Third party payment network. (i) The term third party payment 
network means any agreement or arrangement that--
    (A) Involves the establishment of accounts with a central 
organization by

[[Page 61302]]

a substantial number of providers of goods or services who are 
unrelated to the organization and who have agreed to settle 
transactions for the provision of the goods or services to purchasers 
according to the terms of the agreement or arrangement;
    (B) Provides standards and mechanisms for settling the 
transactions; and
    (C) Guarantees payment to the persons providing goods or services 
in settlement of transactions with purchasers pursuant to the agreement 
or arrangement.
    (ii) Persons who are providers of goods and services as described 
in this paragraph (c)(3) are participating payees within the meaning of 
paragraph (a)(4)(i)(B) of this section.
    (4) Exception for de minimis payments. A third party settlement 
organization is required to report any information under paragraph 
(a)(1) of this section with respect to third party network transactions 
of any participating payee only if--
    (i) The amount that would otherwise be reported under paragraph 
(a)(1)(ii) of this section with respect to such transactions exceeds 
$20,000; and
    (ii) The aggregate number of such transactions exceeds 200.
    (d) Special rules--(1) Aggregated payees. In any case where a 
person receives payments from a payment settlement entity (as defined 
in paragraph (a)(3) of this section) on behalf of one or more 
participating payees and distributes such payments to one or more 
participating payees (as defined in paragraph (a)(4) of this section), 
the person is treated as:
    (i) The participating payee with respect to the payment settlement 
entity; and
    (ii) The payment settlement entity with respect to the 
participating payees to whom the person distributes payments.
    (2) Electronic payment facilitator. If a payment settlement entity 
(as defined in paragraph (a)(3) of this section) contracts with an 
electronic payment facilitator or other third party to settle 
reportable payment transactions on behalf of the payment settlement 
entity, the electronic payment facilitator or other third party must 
file the annual information return under this section in lieu of the 
payment settlement entity. The electronic payment facilitator or other 
third party who makes payment on behalf of the payment settlement 
entity is the party that will be liable for any applicable penalties 
for failure to comply with the information reporting requirements of 
section 6050W.
    (3) Foreign payees--(i) In general. A payment settlement entity 
that is a person described as a U.S. payor or U.S. middleman in Sec.  
1.6049-5(c)(5) is not required to make a return of information for 
payments to a participating payee with a foreign address as long as, 
prior to payment, the payee has provided the payment settlement entity 
with documentation upon which the payment settlement entity may rely to 
treat the payment as made to a foreign person in accordance with Sec.  
1.1441-1(e)(1)(ii). For purposes of this paragraph (d)(3)(i), the 
provisions of Sec.  1.1441-1 shall apply by substituting the term payor 
for the term withholding agent and without regard to the limitation to 
amounts subject to withholding under chapter 3 of the Internal Revenue 
Code and the regulations under that chapter.
    (ii) Special rule. A payment settlement entity that is not a person 
described as a U.S. payor or U.S. middleman in Sec.  1.6049-5(c)(5) is 
not required to make a return of information for a payment to a 
participating payee that does not have a United States address as long 
as the payment settlement entity neither knows nor has reason to know 
that the participating payee is a United States person.
    (iii) Foreign address; United States address. For purposes of this 
section, foreign address means any address that is not within the 
United States, as defined in section 7701(a)(9) of the Internal Revenue 
Code (the States and the District of Columbia). United States address 
means any address that is within the United States.
    (4) Unrelated persons. For purposes of this section, unrelated 
means any person who is not related to another person within the 
meaning of section 267(b) (providing a list of relationships), 
including the application of section 267(c) and (e)(3) (providing rules 
relating to constructive ownership), and section 707(b)(1) 
(relationships with partnerships).
    (e) Examples. The following examples illustrate the provisions of 
this section:

    Example 1. Merchant acquiring entity. Customer A purchases goods 
from merchant B using a credit card issued by Bank X. B is one of a 
network of unrelated persons that has agreed to accept credit cards 
issued by X as payment under an agreement that provides standards 
and mechanisms for settling the transaction between a merchant 
acquiring bank and the persons who accept the cards. Bank Z is the 
bank with the contractual obligation to make payment to B for goods 
provided to A in the above transaction. As defined in paragraph 
(b)(2) of this section, Z is the merchant acquiring entity that must 
file the annual information return required under paragraph (a)(1) 
of this section to report the payment made to settle the transaction 
for the sale of goods from B to A.
    Example 2. Third party settlement organization. (i) Merchant B 
is one of a substantial number of persons selling goods or services 
over the Internet that have an account with X, an Internet payment 
service provider. None of these persons, including B, are related to 
X, and all have agreed to settle transactions for the sale of goods 
or services to customers according to the terms of their contracts 
with X. X has guaranteed payment to all of these persons, including 
B, for the sale of goods or services to customers. Customer A 
purchases goods from B. A pays X for the goods purchased from B. X, 
in turn, makes payment to B in settlement of the transaction for the 
sale of goods from B to A.
    (ii) X's arrangement constitutes a third party payment network 
as defined in paragraph (c)(3) of this section because a substantial 
number of persons that are unrelated to X, including B, have 
established accounts with X, and X is contractually obligated to 
settle transactions for the provision of goods or services by these 
persons to purchasers. Thus, under paragraph (c)(2) of this section, 
X is a third party settlement organization and the transaction 
discussed in this example is a third party network transaction under 
paragraph (c)(1) of this section. Therefore, X must file the annual 
information return required under paragraph (a)(1) of this section 
to report the payment made to B in settlement of the transaction 
with A provided that X's aggregate payments to B from third party 
network transactions exceed $20,000 and the aggregate number of X's 
transactions with B exceeds 200 (as provided in paragraph (c)(4) of 
this section).
    Example 3. Automated clearinghouse network. A operates an 
automat