Withholding on Certain Distributions Under Section 3405(a) and (b), 25209-25212 [2019-11292]

Download as PDF Federal Register / Vol. 84, No. 105 / Friday, May 31, 2019 / Proposed Rules notice of proposed rulemaking (REG– 104464–18) that was published in the Federal Register on Wednesday, March 6, 2019 (84 FR 8188). The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who wish to present oral comments at the hearing that submitted written comments by May 6, 2019, must submit an outline of the topics to be addressed and the amount of time to be devoted to each topic by Monday, July 1, 2019. A period of 10 minutes is allotted to each person for presenting oral comments. After the deadline for receiving outlines has passed, the IRS will prepare an agenda containing the schedule of speakers. Copies of the agenda will be made available, free of charge, at the hearing or by contacting the Publications and Regulations Branch at (202) 317–6901 (not a toll-free number) fdms.database@ irscounsel.treas.gov. Because of access restrictions, the IRS will not admit visitors 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 document. Martin V. Franks, Chief, Publications and Regulations Branch, Legal Processing Division, Associate Chief Counsel (Procedure and Administration). [FR Doc. 2019–11388 Filed 5–30–19; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 31 [REG–132240–15] RIN 1545–BN52 Withholding on Certain Distributions Under Section 3405(a) and (b) Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. AGENCY: This document contains a proposed regulation regarding withholding on certain periodic and nonperiodic distributions under section 3405, other than eligible rollover distributions. This regulation would affect payors and payees of these distributions. khammond on DSKBBV9HB2PROD with PROPOSALS SUMMARY: Written or electronic comments and must be received by August 29, 2019. DATES: VerDate Sep<11>2014 16:12 May 30, 2019 Jkt 247001 Send submissions to CC:PA:LPD:PR (REG–132240–15), 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–132240– 15), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC 20224, or sent electronically via the Federal eRulemaking Portal at https:// www.regulations.gov (indicate IRS REG– 132240–15). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulation, Jeremy D. Lamb at (202) 317–6799; concerning submissions of comments, Regina Johnson at (202) 317–6901 (not toll-free numbers). SUPPLEMENTARY INFORMATION: ADDRESSES: Background Section 3405(a)(1) requires the payor of any periodic payment to withhold income tax from the payment. Under section 3405(a)(2), an individual generally may elect not to have section 3405(a)(1) apply with respect to periodic payments made to the individual. Section 3405(b)(1) requires the payor of any nonperiodic distribution to withhold income tax from the distribution. Under section 3405(b)(2), an individual generally may elect not to have section 3405(b)(1) apply with respect to any nonperiodic distribution. Section 3405(e)(2) defines a periodic payment as a designated distribution that is an annuity or similar periodic payment. Section 3405(e)(3) defines a nonperiodic distribution as any designated distribution that is not a periodic payment. A designated distribution generally is defined in section 3405(e)(1) as any distribution or payment from or under an employer deferred compensation plan, an individual retirement plan (as defined in section 7701(a)(37)), or a commercial annuity. For this purpose, an employer deferred compensation plan is defined in section 3405(e)(5) as any pension, annuity, profit sharing, or stock bonus plan or other plan deferring the receipt of compensation, and a commercial annuity is defined in section 3405(e)(6) as an annuity, endowment, or life insurance contract issued by an insurance company licensed to do business under the laws of any State. Section 3405(e)(1)(B) identifies certain amounts or payments that are not a ‘‘designated distribution’’ for purposes of section 3405 withholding. Under section 3405(e)(1)(B)(iii), any PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 25209 amount that is subject to withholding under subchapter A of chapter 3 (relating to withholding of tax on nonresident aliens and foreign corporations) by the person paying such amount or which would be so subject but for a tax treaty is not a designated distribution. Section 3405(e)(13)(A) provides generally that, in the case of any periodic payment or nonperiodic distribution that is ‘‘to be delivered outside of the United States and any possession of the United States,’’ no election may be made under section 3405(a)(2) or (b)(2) with respect to such payment, with the result that withholding may not be waived. Section 3405(e)(13)(B) provides that section 3405(e)(13)(A) does not apply if the recipient certifies to the payor, in such manner as the Secretary of the Treasury may prescribe, that the recipient is not (i) a United States citizen or a resident alien of the United States, or (ii) an individual to whom section 877 applies. Section 877(h) provides that section 877 applies to certain nonresident alien individuals whose expatriation date, as defined in section 877A(g)(3), is before June 17, 2008. Notice 87–7 (1987–1 C.B. 420), see § 601.601(d)(2)(ii)(b), provides guidance under section 3405(e)(13)(A) to payors of designated distributions with respect to their duty to withhold income tax from such distributions. The notice addresses designated distributions to the following categories of payees: (1) Payees who have provided the payors with a residence address outside of the United States; 1 (2) payees who have provided the payors with a residence address within the United States; and (3) payees who have not provided the payors with a residence address. Notice 87–7 specifies that, if a payee has provided the payor with a residence address outside of the United States, the payor is required to withhold income tax from designated distributions to the payee. If a payee has provided the payor with a residence address within the United States, the payor is required to withhold income tax from these distributions to the payee unless the payee has elected no withholding in accordance with the applicable provisions of section 3405. If a payee has not provided the payor with a residence address, the payor is required to withhold income tax from designated distributions; included within this category is a payee who has provided the payor with an address for the 1 For purposes of this preamble, references to the ‘‘United States’’ include any possession of the United States. E:\FR\FM\31MYP1.SGM 31MYP1 25210 Federal Register / Vol. 84, No. 105 / Friday, May 31, 2019 / Proposed Rules payee’s nominee, trustee, or agent without also providing the payee’s residence address. Explanation of Provisions The Department of the Treasury and the IRS have concluded that Notice 87– 7 generally provides an administrable standard with respect to withholding under section 3405 that is consistent with the purposes of the statute. Thus, the proposed regulation is based on the guidance provided in Notice 87–7. However, stakeholders have requested clarification regarding the application of Notice 87–7 and section 3405(e)(13)(A) in the following situations: • The payee provides the payor with an Army Post Office (APO), Fleet Post Office (FPO), or Diplomatic Post Office (DPO) address.2 • The payee provides the payor with a residence address located within the United States but provides payment instructions that request delivery of the designated distribution to a financial institution or other person located outside of the United States. The proposed regulation includes rules that would address these situations, and the regulation when finalized would supersede the guidance in Notice 87–7 for payors of designated distributions with respect to their duty to withhold under sections 3405(a)(1) or (b)(1). A. Payees With a Military or Diplomatic Post Office Address khammond on DSKBBV9HB2PROD with PROPOSALS For purposes of section 3405(e)(13)(A), the proposed regulation treats an APO, FPO, or DPO address as an address located within the United States. In 1986, section 3405(e) was amended to add section 3405(e)(13) as one of several provisions intended to increase compliance with the internal revenue laws by United States persons resident abroad and green card holders. The legislative history indicates that Congress was concerned, based on data gathered by the General Accounting Office (GAO),3 that the percentage of taxpayers who fail to file returns is substantially higher among Americans living abroad than it is among those resident in the United States and that it is often difficult for the IRS to enforce 2 Army Post Office (APO) is associated with Army or Air Force installations. Fleet Post Office (FPO) is associated with Navy installations and ships. APO/FPO addresses are utilized by Department of Defense personnel, their family members, and other authorized users. Diplomatic Post Office (DPO) provides global mail service to authorized personnel assigned to designated posts abroad. 3 Effective July 7, 2004, the GAO’s legal name was changed from the General Accounting Office to the Government Accountability Office. VerDate Sep<11>2014 16:12 May 30, 2019 Jkt 247001 compliance by these taxpayers. S. Rep. No. 99–313, pt. 4, at 390 (1986). The GAO data referred to in the legislative history does not include United States military personnel and their families as taxpayers who are living abroad. Johnny C. Finch, United States Citizens Living in Foreign Countries and Not Filing Federal Income Tax Returns, United States General Accounting Office, May 8, 1985. In addition, enforcement of compliance by individuals receiving mail at an APO, FPO, or DPO address generally does not involve the same challenges as enforcing compliance by other taxpayers living abroad. Because APO, FPO, and DPO delivery destinations are generally United States military or diplomatic facilities, taxpayers with an APO, FPO, or DPO address commonly maintain a current or former employment or contractor relationship with the United States federal government. Moreover, these addresses are generally treated as ‘‘domestic’’ by the United States Postal Service. United States Domestic Mail Manual, 608.2.2. Accordingly, the Department of the Treasury and the IRS have concluded that designated distributions to United States military and diplomatic personnel or their families should not be treated as delivered outside of the United States solely because those payments or distributions are to be delivered to a United States military or diplomatic post office address. For these reasons, the Department of the Treasury and the IRS have determined that treating an APO, FPO, or DPO address as located within the United States for purposes of section 3405(e)(13)(A) is consistent with the tax avoidance concerns underlying the enactment of section 3405(e)(13). B. Payees With a Residence Address Located Within the United States The proposed regulation would impose new withholding requirements on payors regarding certain payees who have provided the payor with a residence address located within the United States. Under Notice 87–7, payors are not required to withhold if a payee provides a residence address located within the United States and the payee elects no withholding. Notice 87– 7 does not specifically address whether payors are required to withhold when a payee provides a residence address located within the United States but also provides payment instructions indicating that the funds are to be delivered outside of the United States. As explained above, section 3405(e)(13)(A) was enacted because Congress was concerned about noncompliance. Section 3405(e)(13)(A) PO 00000 Frm 00008 Fmt 4702 Sfmt 4702 refers to ‘‘any periodic payment or nonperiodic distribution which is to be delivered outside of the United States.’’ Consistent with the text of section 3405(e)(13)(A) and its purpose, the proposed regulation requires payors to withhold in certain circumstances when a payee provides a residence address located within the United States but also provides payment instructions indicating that the funds are to be delivered outside of the United States. C. Payees With a Residence Address Located Outside of the United States and Payees Who Have Not Provided a Residence Address Unless section 3405(e)(13)(B) applies, if the payee’s residence address that is provided to the payor is located outside of the United States, the payor is required to withhold income tax under section 3405 from any designated distribution, without regard to the delivery instructions and without regard to any attempt to elect no withholding. Thus, for example, withholding under section 3405 would be required even if a payee with a foreign residence address has requested that the distribution be deposited with a financial institution located within the United States. Given the ease with which the funds deposited with a financial institution in the United States can be withdrawn by a person located outside the United States, the Department of the Treasury and the IRS have concluded that the payee’s residence address is more likely to be indicative of the place the distribution is ultimately to be delivered than the location of the financial institution. As proposed, the same requirement to withhold income tax under section 3405 would apply if a payor has not provided a residence address to the payee. Furthermore, a payee who has provided the payor with an address for the payee’s nominee, trustee, or agent without also providing the payee’s residence address has not provided a residence address for purposes of this regulation. These rules are consistent with the approach in Notice 87–7, which uses the residence address of the payee in order to determine whether a taxpayer is permitted to make an election not to have withholding apply under section 3405(a)(2) or (b)(2). The Department of the Treasury and the IRS have determined that this interpretation articulated in Notice 87–7 should be retained because it provides an administrable standard that has been relied upon for many years, is consistent with the legislative history, and appropriately addresses tax avoidance E:\FR\FM\31MYP1.SGM 31MYP1 Federal Register / Vol. 84, No. 105 / Friday, May 31, 2019 / Proposed Rules concerns underlying section 3405(e)(13)(A).4 Comments and Requests for Public Hearing D. Payments Subject to Withholding Under Subchapter A of Chapter 3 Before this proposed regulation is adopted as a final regulation, consideration will be given to any comments that are submitted timely to the IRS as prescribed in this preamble under the ADDRESSES heading. The Department of the Treasury and the IRS request comments on all aspects of the proposed rules, including any administrative concerns and how they should be addressed. All comments will be available at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person who timely submits written comments. If a public hearing is scheduled, notice of the date, time, and place of the public hearing will be published in the Federal Register. In accordance with section 3405(e)(1)(B)(iii), the proposed regulation clarifies that a designated distribution does not include a distribution that is subject to withholding under subchapter A of chapter 3 or that would be so subject but for a tax treaty and, therefore, the withholding rules under section 3405(a) and (b) do not apply to such distributions. For example, section 3405(a) or (b) withholding would not apply to a United States-source distribution to a nonresident alien individual from a trust described in section 401(a). In such a case, the withholding rules of section 1441 (within subchapter A of chapter 3) would apply to such distributions. See § 1.1441–1(b)(1). Proposed Applicability Date This regulation is proposed to apply with respect to distributions on or after the applicability date of the final regulation. Taxpayers may continue to rely upon Notice 87–7 until this regulation is finalized. Upon publication of a final regulation, Notice 87–7 will be superseded. Notwithstanding the previous sentence, taxpayers may rely upon § 31.3405(e)– 1(b)(1) and (2) of the proposed regulation until the applicability date of the final regulation. khammond on DSKBBV9HB2PROD with PROPOSALS Special Analyses This regulation is not subject to review under section 6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement (April 11, 2018) between the Department of the Treasury and the Office of Management and Budget regarding review of tax regulations. Because this regulation does 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 Internal Revenue Code, this regulation has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. 4 The committee report states that ‘‘it will be appropriate to require withholding with respect to pension payments to persons with foreign addresses absent a showing that withholding is not required.’’ S. Rep. No. 99–313, pt. 4, at 391 (1986). VerDate Sep<11>2014 16:12 May 30, 2019 Jkt 247001 Statement of Availability of IRS Documents IRS revenue procedures, revenue rulings, notices and other guidance cited in this preamble are published in the Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov. Drafting Information The principal author of this proposed regulation is Jeremy D. Lamb, IRS Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes). However, other personnel from the Department of the Treasury and the IRS participated in the development of the proposed regulation. List of Subjects in 26 CFR Part 31 Employment taxes, Income taxes, Penalties, Pensions, Railroad retirement, Reporting and recordkeeping requirements, Social security, Unemployment compensation. Proposed Amendments to the Regulations Accordingly, 26 CFR part 31 is proposed to be amended as follows: PART 31—EMPLOYMENT TAXES AND COLLECTION OF INCOME AT THE SOURCE Paragraph 1. The authority citation for part 31 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805. * * * * * Par. 2. Section 31.3405(e)–1 is added to read as follows: ■ PO 00000 Frm 00009 Fmt 4702 Sfmt 4702 25211 § 31.3405(e)–1 Questions and answers relating to withholding on pensions, annuities, and certain other deferred income. (a) The following questions and answers apply for purposes of determining whether a payor of a distribution described in section 3405(a) or (b) must withhold income tax under this section. For purposes of this section, references to the United States include possessions of the United States. (b)(1) Q–1: Is an Army Post Office (APO), Fleet Post Office (FPO), or Diplomatic Post Office (DPO) address an address located within the United States for purposes of section 3405(e)(13)(A)? (2) A–1: For purposes of section 3405(e)(13)(A), an APO, FPO, or DPO address is an address located within the United States. (c)(1) Q–2: Is the payor required to withhold income tax from any distribution described in section 3405(a) or (b) if the payee’s residence address that is provided to the payor is located within the United States? (2) A–2: If the payee’s residence address that is provided to the payor is located within the United States, the payor is required to withhold income tax from any distribution described in section 3405(a) or (b) unless the payee has made a valid election of no withholding in accordance with section 3405(a)(2) or (b)(2). Any election of no withholding with respect to a distribution under section 3405(a)(2) or (b)(2) is not valid if the payee instructs the payor to do one or more of the following in connection with the distribution: (i) Send the distribution to a financial institution or other person located outside of the United States; (ii) Send the distribution to a financial institution or other person located within the United States with further instructions (such as ‘‘for further credit to’’ instructions) directing that the funds be forwarded to a financial institution or other person located outside of the United States; or (iii) Send the distribution to a financial institution or other person pursuant to payment instructions (including addenda information) that reference an International Automated Clearing House Transaction (IAT), International Bank Account Number (IBAN), or Society for Worldwide Interbank Financial Telecommunication (SWIFT) Business Identifier Code (BIC) linked to a financial institution or other person located outside of the United States. (d)(1) Q–3: Is the payor required to withhold income tax from a distribution E:\FR\FM\31MYP1.SGM 31MYP1 khammond on DSKBBV9HB2PROD with PROPOSALS 25212 Federal Register / Vol. 84, No. 105 / Friday, May 31, 2019 / Proposed Rules described in section 3405(a) or (b) if the payee’s residence address that is provided to the payor is located outside of the United States? (2) A–3: Unless section 3405(e)(13)(B) (which provides an exception for certain nonresident aliens) applies, if the payee’s residence address that is provided to the payor is located outside of the United States, the payor is required to withhold income tax from a distribution described in section 3405(a) or (b), without regard to the delivery instructions and without regard to any request by the payee to elect no withholding. Withholding would be required, in this case, even if the payee has requested that the distribution be delivered to a financial institution or other person located within the United States. (e)(1) Q–4: Is the payor required to withhold income tax from a distribution described in section 3405(a) or (b) if the payee has not provided the payor with the payee’s residence address? (2) A–4: If a payee has not provided the payor with the payee’s residence address, the payor is required to withhold income tax from a distribution described in section 3405(a) or (b). A payee may not elect no withholding under section 3405(a)(2) or (b)(2) and any purported election of no withholding by such payee is not valid. For purposes of this section, a payee who has provided the payor with an address for the payee’s nominee, trustee, or agent without also providing the payee’s residence address has not provided a residence address. (f)(1) Q–5: Do the withholding rules under section 3405(a) and (b) apply to a payee who is to receive a distribution that is subject to withholding under subchapter A of chapter 3 (or that would be so subject but for a tax treaty)? (2) A–5: In accordance with section 3405(e)(1)(B)(iii), a designated distribution does not include a distribution of a United States-source payment that is subject to withholding under the rules of section 1441 and § 1.1441–1(b)(1) of this chapter (or that would be so subject but for a tax treaty), such as a pension or other deferred compensation plan distribution to be made to a payee who is a nonresident alien (or other individual payee who is presumed to be a foreign person under the presumption rules of § 1.1441– 1(b)(3) of this chapter). Withholding under the rules of section 1441 and § 1.1441–1(b)(1) of this chapter, rather than under the rules of section 3405(a) or (b), would apply to such a distribution. (g)(1) Q–6: What is the effective date and applicability date of this section? VerDate Sep<11>2014 16:12 May 30, 2019 Jkt 247001 (2) A–6: This section is effective on the date of publication of the Treasury decision adopting these rules as a final regulation in the Federal Register. The regulation in this section applies with respect to distributions on or after the applicability date of the final regulation. Kirsten Wielobob, Deputy Commissioner for Services and Enforcement. [FR Doc. 2019–11292 Filed 5–30–19; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF HOMELAND SECURITY Coast Guard 33 CFR Part 165 [Docket Number USCG–2018–1009] RIN 1625–AA00 Safety Zones; Sector Upper Mississippi River Annual and Recurring Safety Zones Update Coast Guard, DHS. Notice of proposed rulemaking. AGENCY: ACTION: The Coast Guard proposes to amend and update its tables of annual and recurring safety zones that take place within the Eighth Coast Guard District listed in our regulations. We invite your comments on this proposed rulemaking. DATES: Comments and related material must be received by the Coast Guard on or before July 1, 2019. ADDRESSES: You may submit comments identified by docket number USCG– 2018–1009 using the Federal eRulemaking Portal at https:// www.regulations.gov. See the ‘‘Public Participation and Request for Comments’’ portion of the SUPPLEMENTARY INFORMATION: section for further instructions on submitting comments. SUMMARY: If you have questions about this proposed rulemaking, call or email Lieutenant Commander Christian Barger, Sector Upper Mississippi River Waterways Management Division, U.S. Coast Guard; telephone 314–269–2560, email Christian.J.Barger@uscg.mil. SUPPLEMENTARY INFORMATION: FOR FURTHER INFORMATION CONTACT: I. Table of Abbreviations CFR Code of Federal Regulations COTP Captain of the Port Sector Upper Mississippi River DHS Department of Homeland Security FR Federal Register NPRM Notice of proposed rulemaking PO 00000 Frm 00010 Fmt 4702 Sfmt 4702 § Section U.S.C. United States Code II. Background, Purpose, and Legal Basis The Captain of the Port Sector Upper Mississippi River (COTP) proposes to amend and update section 165.801 Table 2 of Title 33 of the Code of Federal Regulations (CFR) (33 CFR 165.801 Table 2) titled Sector Upper Mississippi River Annual and Recurring Safety Zones to accurately reflect safety zones occurring on a regular basis in the Sector Upper Mississippi River Captain of the Port Zone. We propose to remove four safety zones that are no longer necessary. In addition, the COTP proposes to amend Table 2 by updating details of all safety zones. The updated details of all safety zones include correcting errors in the names of twelve safety zones, re-defining the date of safety zones for fireworks displays for 4th of July celebrations to permit greater flexibility in planning of these events, correcting errors in the nearest city for nine safety zones, and removing sponsor names from all safety zones. Finally, the COTP proposes to amend Table 2 by rearranging the Table to display safety zones first by the body of water on which they take place (alphabetically), second by the date(s) on which those safety zones will be enforced, and third by mile marker (descending). This proposed rule would ensure that the public is informed of annual and recurring safety zones taking place within the Sector Upper Mississippi River Captain of the Port Zone, that the table of annual and recurring safety zones is easy to read, and would considerably reduce administrative burden to both the Coast Guard and those requesting the enforcement of recurring safety zones. The Coast Guard is proposing this rulemaking under the authority in 46 U.S.C. 70034 (previously 33 U.S.C. 1231). The Coast Guard encourages the public to participate in this proposed rulemaking through the comment process so that any necessary changes not already contained in this proposed rule, can be identified and implemented in a timely and efficient manner. III. Discussion of Proposed Rule Section 165.801 of Title 33 CFR contains regulations related to annual and recurring safety zones. From time to time, this section requires amendment to properly reflect safety zones recurring within the Eighth Coast Guard District. This proposed rule would remove four safety zones that are no longer necessary, update details for all safety zones to include the correction of E:\FR\FM\31MYP1.SGM 31MYP1

Agencies

[Federal Register Volume 84, Number 105 (Friday, May 31, 2019)]
[Proposed Rules]
[Pages 25209-25212]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-11292]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 31

[REG-132240-15]
RIN 1545-BN52


Withholding on Certain Distributions Under Section 3405(a) and 
(b)

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains a proposed regulation regarding 
withholding on certain periodic and nonperiodic distributions under 
section 3405, other than eligible rollover distributions. This 
regulation would affect payors and payees of these distributions.

DATES: Written or electronic comments and must be received by August 
29, 2019.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-132240-15), 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-
132240-15), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW, Washington, DC 20224, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov (indicate IRS REG-
132240-15).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulation, 
Jeremy D. Lamb at (202) 317-6799; concerning submissions of comments, 
Regina Johnson at (202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    Section 3405(a)(1) requires the payor of any periodic payment to 
withhold income tax from the payment. Under section 3405(a)(2), an 
individual generally may elect not to have section 3405(a)(1) apply 
with respect to periodic payments made to the individual. Section 
3405(b)(1) requires the payor of any nonperiodic distribution to 
withhold income tax from the distribution. Under section 3405(b)(2), an 
individual generally may elect not to have section 3405(b)(1) apply 
with respect to any nonperiodic distribution.
    Section 3405(e)(2) defines a periodic payment as a designated 
distribution that is an annuity or similar periodic payment. Section 
3405(e)(3) defines a nonperiodic distribution as any designated 
distribution that is not a periodic payment. A designated distribution 
generally is defined in section 3405(e)(1) as any distribution or 
payment from or under an employer deferred compensation plan, an 
individual retirement plan (as defined in section 7701(a)(37)), or a 
commercial annuity. For this purpose, an employer deferred compensation 
plan is defined in section 3405(e)(5) as any pension, annuity, profit 
sharing, or stock bonus plan or other plan deferring the receipt of 
compensation, and a commercial annuity is defined in section 3405(e)(6) 
as an annuity, endowment, or life insurance contract issued by an 
insurance company licensed to do business under the laws of any State.
    Section 3405(e)(1)(B) identifies certain amounts or payments that 
are not a ``designated distribution'' for purposes of section 3405 
withholding. Under section 3405(e)(1)(B)(iii), any amount that is 
subject to withholding under subchapter A of chapter 3 (relating to 
withholding of tax on nonresident aliens and foreign corporations) by 
the person paying such amount or which would be so subject but for a 
tax treaty is not a designated distribution.
    Section 3405(e)(13)(A) provides generally that, in the case of any 
periodic payment or nonperiodic distribution that is ``to be delivered 
outside of the United States and any possession of the United States,'' 
no election may be made under section 3405(a)(2) or (b)(2) with respect 
to such payment, with the result that withholding may not be waived. 
Section 3405(e)(13)(B) provides that section 3405(e)(13)(A) does not 
apply if the recipient certifies to the payor, in such manner as the 
Secretary of the Treasury may prescribe, that the recipient is not (i) 
a United States citizen or a resident alien of the United States, or 
(ii) an individual to whom section 877 applies. Section 877(h) provides 
that section 877 applies to certain nonresident alien individuals whose 
expatriation date, as defined in section 877A(g)(3), is before June 17, 
2008.
    Notice 87-7 (1987-1 C.B. 420), see Sec.  601.601(d)(2)(ii)(b), 
provides guidance under section 3405(e)(13)(A) to payors of designated 
distributions with respect to their duty to withhold income tax from 
such distributions. The notice addresses designated distributions to 
the following categories of payees: (1) Payees who have provided the 
payors with a residence address outside of the United States; \1\ (2) 
payees who have provided the payors with a residence address within the 
United States; and (3) payees who have not provided the payors with a 
residence address.
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    \1\ For purposes of this preamble, references to the ``United 
States'' include any possession of the United States.
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    Notice 87-7 specifies that, if a payee has provided the payor with 
a residence address outside of the United States, the payor is required 
to withhold income tax from designated distributions to the payee. If a 
payee has provided the payor with a residence address within the United 
States, the payor is required to withhold income tax from these 
distributions to the payee unless the payee has elected no withholding 
in accordance with the applicable provisions of section 3405. If a 
payee has not provided the payor with a residence address, the payor is 
required to withhold income tax from designated distributions; included 
within this category is a payee who has provided the payor with an 
address for the

[[Page 25210]]

payee's nominee, trustee, or agent without also providing the payee's 
residence address.

Explanation of Provisions

    The Department of the Treasury and the IRS have concluded that 
Notice 87-7 generally provides an administrable standard with respect 
to withholding under section 3405 that is consistent with the purposes 
of the statute. Thus, the proposed regulation is based on the guidance 
provided in Notice 87-7. However, stakeholders have requested 
clarification regarding the application of Notice 87-7 and section 
3405(e)(13)(A) in the following situations:
     The payee provides the payor with an Army Post Office 
(APO), Fleet Post Office (FPO), or Diplomatic Post Office (DPO) 
address.\2\
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    \2\ Army Post Office (APO) is associated with Army or Air Force 
installations. Fleet Post Office (FPO) is associated with Navy 
installations and ships. APO/FPO addresses are utilized by 
Department of Defense personnel, their family members, and other 
authorized users. Diplomatic Post Office (DPO) provides global mail 
service to authorized personnel assigned to designated posts abroad.
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     The payee provides the payor with a residence address 
located within the United States but provides payment instructions that 
request delivery of the designated distribution to a financial 
institution or other person located outside of the United States.
    The proposed regulation includes rules that would address these 
situations, and the regulation when finalized would supersede the 
guidance in Notice 87-7 for payors of designated distributions with 
respect to their duty to withhold under sections 3405(a)(1) or (b)(1).

A. Payees With a Military or Diplomatic Post Office Address

    For purposes of section 3405(e)(13)(A), the proposed regulation 
treats an APO, FPO, or DPO address as an address located within the 
United States. In 1986, section 3405(e) was amended to add section 
3405(e)(13) as one of several provisions intended to increase 
compliance with the internal revenue laws by United States persons 
resident abroad and green card holders. The legislative history 
indicates that Congress was concerned, based on data gathered by the 
General Accounting Office (GAO),\3\ that the percentage of taxpayers 
who fail to file returns is substantially higher among Americans living 
abroad than it is among those resident in the United States and that it 
is often difficult for the IRS to enforce compliance by these 
taxpayers. S. Rep. No. 99-313, pt. 4, at 390 (1986).
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    \3\ Effective July 7, 2004, the GAO's legal name was changed 
from the General Accounting Office to the Government Accountability 
Office.
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    The GAO data referred to in the legislative history does not 
include United States military personnel and their families as 
taxpayers who are living abroad. Johnny C. Finch, United States 
Citizens Living in Foreign Countries and Not Filing Federal Income Tax 
Returns, United States General Accounting Office, May 8, 1985. In 
addition, enforcement of compliance by individuals receiving mail at an 
APO, FPO, or DPO address generally does not involve the same challenges 
as enforcing compliance by other taxpayers living abroad. Because APO, 
FPO, and DPO delivery destinations are generally United States military 
or diplomatic facilities, taxpayers with an APO, FPO, or DPO address 
commonly maintain a current or former employment or contractor 
relationship with the United States federal government. Moreover, these 
addresses are generally treated as ``domestic'' by the United States 
Postal Service. United States Domestic Mail Manual, 608.2.2. 
Accordingly, the Department of the Treasury and the IRS have concluded 
that designated distributions to United States military and diplomatic 
personnel or their families should not be treated as delivered outside 
of the United States solely because those payments or distributions are 
to be delivered to a United States military or diplomatic post office 
address. For these reasons, the Department of the Treasury and the IRS 
have determined that treating an APO, FPO, or DPO address as located 
within the United States for purposes of section 3405(e)(13)(A) is 
consistent with the tax avoidance concerns underlying the enactment of 
section 3405(e)(13).

B. Payees With a Residence Address Located Within the United States

    The proposed regulation would impose new withholding requirements 
on payors regarding certain payees who have provided the payor with a 
residence address located within the United States. Under Notice 87-7, 
payors are not required to withhold if a payee provides a residence 
address located within the United States and the payee elects no 
withholding. Notice 87-7 does not specifically address whether payors 
are required to withhold when a payee provides a residence address 
located within the United States but also provides payment instructions 
indicating that the funds are to be delivered outside of the United 
States. As explained above, section 3405(e)(13)(A) was enacted because 
Congress was concerned about noncompliance. Section 3405(e)(13)(A) 
refers to ``any periodic payment or nonperiodic distribution which is 
to be delivered outside of the United States.'' Consistent with the 
text of section 3405(e)(13)(A) and its purpose, the proposed regulation 
requires payors to withhold in certain circumstances when a payee 
provides a residence address located within the United States but also 
provides payment instructions indicating that the funds are to be 
delivered outside of the United States.

C. Payees With a Residence Address Located Outside of the United States 
and Payees Who Have Not Provided a Residence Address

    Unless section 3405(e)(13)(B) applies, if the payee's residence 
address that is provided to the payor is located outside of the United 
States, the payor is required to withhold income tax under section 3405 
from any designated distribution, without regard to the delivery 
instructions and without regard to any attempt to elect no withholding. 
Thus, for example, withholding under section 3405 would be required 
even if a payee with a foreign residence address has requested that the 
distribution be deposited with a financial institution located within 
the United States. Given the ease with which the funds deposited with a 
financial institution in the United States can be withdrawn by a person 
located outside the United States, the Department of the Treasury and 
the IRS have concluded that the payee's residence address is more 
likely to be indicative of the place the distribution is ultimately to 
be delivered than the location of the financial institution. As 
proposed, the same requirement to withhold income tax under section 
3405 would apply if a payor has not provided a residence address to the 
payee. Furthermore, a payee who has provided the payor with an address 
for the payee's nominee, trustee, or agent without also providing the 
payee's residence address has not provided a residence address for 
purposes of this regulation.
    These rules are consistent with the approach in Notice 87-7, which 
uses the residence address of the payee in order to determine whether a 
taxpayer is permitted to make an election not to have withholding apply 
under section 3405(a)(2) or (b)(2). The Department of the Treasury and 
the IRS have determined that this interpretation articulated in Notice 
87-7 should be retained because it provides an administrable standard 
that has been relied upon for many years, is consistent with the 
legislative history, and appropriately addresses tax avoidance

[[Page 25211]]

concerns underlying section 3405(e)(13)(A).\4\
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    \4\ The committee report states that ``it will be appropriate to 
require withholding with respect to pension payments to persons with 
foreign addresses absent a showing that withholding is not 
required.'' S. Rep. No. 99-313, pt. 4, at 391 (1986).
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D. Payments Subject to Withholding Under Subchapter A of Chapter 3

    In accordance with section 3405(e)(1)(B)(iii), the proposed 
regulation clarifies that a designated distribution does not include a 
distribution that is subject to withholding under subchapter A of 
chapter 3 or that would be so subject but for a tax treaty and, 
therefore, the withholding rules under section 3405(a) and (b) do not 
apply to such distributions. For example, section 3405(a) or (b) 
withholding would not apply to a United States-source distribution to a 
nonresident alien individual from a trust described in section 401(a). 
In such a case, the withholding rules of section 1441 (within 
subchapter A of chapter 3) would apply to such distributions. See Sec.  
1.1441-1(b)(1).

Proposed Applicability Date

    This regulation is proposed to apply with respect to distributions 
on or after the applicability date of the final regulation. Taxpayers 
may continue to rely upon Notice 87-7 until this regulation is 
finalized. Upon publication of a final regulation, Notice 87-7 will be 
superseded. Notwithstanding the previous sentence, taxpayers may rely 
upon Sec.  31.3405(e)-1(b)(1) and (2) of the proposed regulation until 
the applicability date of the final regulation.

Special Analyses

    This regulation is not subject to review under section 6(b) of 
Executive Order 12866 pursuant to the Memorandum of Agreement (April 
11, 2018) between the Department of the Treasury and the Office of 
Management and Budget regarding review of tax regulations. Because this 
regulation does 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 Internal Revenue Code, this 
regulation has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Requests for Public Hearing

    Before this proposed regulation is adopted as a final regulation, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Department of the Treasury and the IRS request comments on all 
aspects of the proposed rules, including any administrative concerns 
and how they should be addressed. All comments will be available at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person who timely submits written 
comments. If a public hearing is scheduled, notice of the date, time, 
and place of the public hearing will be published in the Federal 
Register.

Statement of Availability of IRS Documents

    IRS revenue procedures, revenue rulings, notices and other guidance 
cited in this preamble are published in the Internal Revenue Bulletin 
(or Cumulative Bulletin) and are available from the Superintendent of 
Documents, U.S. Government Publishing Office, Washington, DC 20402, or 
by visiting the IRS website at https://www.irs.gov.

Drafting Information

    The principal author of this proposed regulation is Jeremy D. Lamb, 
IRS Office of Associate Chief Counsel (Employee Benefits, Exempt 
Organizations, and Employment Taxes). However, other personnel from the 
Department of the Treasury and the IRS participated in the development 
of the proposed regulation.

List of Subjects in 26 CFR Part 31

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

Proposed Amendments to the Regulations

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

PART 31--EMPLOYMENT TAXES AND COLLECTION OF INCOME AT THE SOURCE

0
Paragraph 1. The authority citation for part 31 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805.
* * * * *
0
Par. 2. Section 31.3405(e)-1 is added to read as follows:


Sec.  31.3405(e)-1  Questions and answers relating to withholding on 
pensions, annuities, and certain other deferred income.

    (a) The following questions and answers apply for purposes of 
determining whether a payor of a distribution described in section 
3405(a) or (b) must withhold income tax under this section. For 
purposes of this section, references to the United States include 
possessions of the United States.
    (b)(1) Q-1: Is an Army Post Office (APO), Fleet Post Office (FPO), 
or Diplomatic Post Office (DPO) address an address located within the 
United States for purposes of section 3405(e)(13)(A)?
    (2) A-1: For purposes of section 3405(e)(13)(A), an APO, FPO, or 
DPO address is an address located within the United States.
    (c)(1) Q-2: Is the payor required to withhold income tax from any 
distribution described in section 3405(a) or (b) if the payee's 
residence address that is provided to the payor is located within the 
United States?
    (2) A-2: If the payee's residence address that is provided to the 
payor is located within the United States, the payor is required to 
withhold income tax from any distribution described in section 3405(a) 
or (b) unless the payee has made a valid election of no withholding in 
accordance with section 3405(a)(2) or (b)(2). Any election of no 
withholding with respect to a distribution under section 3405(a)(2) or 
(b)(2) is not valid if the payee instructs the payor to do one or more 
of the following in connection with the distribution:
    (i) Send the distribution to a financial institution or other 
person located outside of the United States;
    (ii) Send the distribution to a financial institution or other 
person located within the United States with further instructions (such 
as ``for further credit to'' instructions) directing that the funds be 
forwarded to a financial institution or other person located outside of 
the United States; or
    (iii) Send the distribution to a financial institution or other 
person pursuant to payment instructions (including addenda information) 
that reference an International Automated Clearing House Transaction 
(IAT), International Bank Account Number (IBAN), or Society for 
Worldwide Interbank Financial Telecommunication (SWIFT) Business 
Identifier Code (BIC) linked to a financial institution or other person 
located outside of the United States.
    (d)(1) Q-3: Is the payor required to withhold income tax from a 
distribution

[[Page 25212]]

described in section 3405(a) or (b) if the payee's residence address 
that is provided to the payor is located outside of the United States?
    (2) A-3: Unless section 3405(e)(13)(B) (which provides an exception 
for certain nonresident aliens) applies, if the payee's residence 
address that is provided to the payor is located outside of the United 
States, the payor is required to withhold income tax from a 
distribution described in section 3405(a) or (b), without regard to the 
delivery instructions and without regard to any request by the payee to 
elect no withholding. Withholding would be required, in this case, even 
if the payee has requested that the distribution be delivered to a 
financial institution or other person located within the United States.
    (e)(1) Q-4: Is the payor required to withhold income tax from a 
distribution described in section 3405(a) or (b) if the payee has not 
provided the payor with the payee's residence address?
    (2) A-4: If a payee has not provided the payor with the payee's 
residence address, the payor is required to withhold income tax from a 
distribution described in section 3405(a) or (b). A payee may not elect 
no withholding under section 3405(a)(2) or (b)(2) and any purported 
election of no withholding by such payee is not valid. For purposes of 
this section, a payee who has provided the payor with an address for 
the payee's nominee, trustee, or agent without also providing the 
payee's residence address has not provided a residence address.
    (f)(1) Q-5: Do the withholding rules under section 3405(a) and (b) 
apply to a payee who is to receive a distribution that is subject to 
withholding under subchapter A of chapter 3 (or that would be so 
subject but for a tax treaty)?
    (2) A-5: In accordance with section 3405(e)(1)(B)(iii), a 
designated distribution does not include a distribution of a United 
States-source payment that is subject to withholding under the rules of 
section 1441 and Sec.  1.1441-1(b)(1) of this chapter (or that would be 
so subject but for a tax treaty), such as a pension or other deferred 
compensation plan distribution to be made to a payee who is a 
nonresident alien (or other individual payee who is presumed to be a 
foreign person under the presumption rules of Sec.  1.1441-1(b)(3) of 
this chapter). Withholding under the rules of section 1441 and Sec.  
1.1441-1(b)(1) of this chapter, rather than under the rules of section 
3405(a) or (b), would apply to such a distribution.
    (g)(1) Q-6: What is the effective date and applicability date of 
this section?
    (2) A-6: This section is effective on the date of publication of 
the Treasury decision adopting these rules as a final regulation in the 
Federal Register. The regulation in this section applies with respect 
to distributions on or after the applicability date of the final 
regulation.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-11292 Filed 5-30-19; 8:45 am]
BILLING CODE 4830-01-P

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