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Notice 99-6
The following is the complete text of Notice 99-6.
(Click on a heading to expand it and see the text)
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PURPOSE
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This notice solicits comments
from taxpayers and practitioners regarding issues related to employment tax
reporting and payment by qualified subchapter S subsidiaries and other
entities that are disregarded as entities separate from their owners for
federal tax purposes. This notice also discusses two methods of employment
tax compliance that will be accepted by the Service until such time as
formal reporting procedures are provided in other guidance. |
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Since the recent enactment of
legislation and promulgation of regulations providing that certain wholly
owned entities will be disregarded as entities separate from their owners,
the Service has received many questions from taxpayers concerning the
treatment of disregarded entities for federal employment tax purposes. To
help employers comply with the employment tax requirements, the Department
of the Treasury and the Internal Revenue Service intend to issue guidance
illustrating the proper method for reporting employment taxes with respect
to these entities. |
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BACKGROUND
| Under section 1361 of the Internal Revenue
Code (as amended by section 1308 of the Small Business Job Protection Act of
1996, Pub. L. No. 104-188, 110 Stat. 1755 and section 1601 of the Taxpayer
Relief Act of 1997, Public Law 105-34, 111 Stat. 788), an S corporation may
own a qualified subchapter S subsidiary. Section 1361(b)(3)(B) defines the
term "qualified subchapter S subsidiary" (QSub) as a domestic corporation that
is not an ineligible corporation (as defined in section 1361(b)(2)), if (1) an
S corporation holds 100 percent of the stock of the corporation, and (2) that
S corporation elects to treat the subsidiary as a QSub. Except as otherwise
provided in regulations, a corporation for which a QSub election is made is
not treated as a separate corporation for federal tax purposes, and all
assets, liabilities, and items of income, deduction, and credit of the QSub
are treated as assets, liabilities, and items of income, deduction, and credit
of the parent S corporation. Similar rules apply to qualified REIT
subsidiaries under section 856(i). |
| Regulations issued under section 7701 of the Code provide for another type of
disregarded entity. Section 301.7701-2(c)(2) of the Procedure and
Administration Regulations provides that a business entity that has a single
owner and that is not a corporation under section 301.7701-2(b) is disregarded
as an entity separate from its owner for all federal tax purposes.
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| In general, employment tax responsibilities rest
with an employer. For federal employment tax purposes, the common law rules for
determining the identity of the employer ordinarily apply. Under these rules,
the person for whom services are performed as an employee is generally
considered the employer for purposes of the employment tax provisions. An
employer generally is required to withhold and pay over applicable taxes from
employees' wages, pay employer taxes, make timely tax deposits, file employment
tax returns, and issue wage statements to employees (collectively, "employment
tax obligations"). |
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| REQUEST FOR COMMENTS
| Section 1361(b)(3) and section 301.7701-2(c)(2)
cause the owner of a disregarded entity to be treated as the employer of the
disregarded entity's employees for federal employment tax purposes. Thus, the
owner generally is responsible for complying with all the employment tax
obligations related to those employees. |
| Since enactment of the QSub statute and
promulgation of the disregarded entity provision of the regulations, however,
many taxpayers have mistakenly interpreted section 1361(b)(3) and section
301.7701-2(c)(2) as applying only for federal income tax purposes. In addition,
the Service has received numerous comments and questions from other taxpayers
that have properly interpreted the statute concerning the difficulties that
arise from application of these provisions. Some of these taxpayers have
expressed a strong preference for the continued recognition for employment tax
purposes of the separate state law entities. Other taxpayers have expressed a
preference for a literal application of the provisions, resulting in the
treatment of the owner of the disregarded entity as the employer. |
| Prior to issuing formal guidance, the Service is
requesting comments concerning employment tax and certain reporting issues
relating to disregarded entities that should be addressed in future guidance.
This notice solicits comments from taxpayers and practitioners regarding the
following issues:
1) Any increase or decrease in the administrative burden on taxpayers created by
a system of filing employment tax returns under the owner's name and taxpayer
identification number where employees are actually employed by a state law
entity that is disregarded as an entity separate from its owner for federal tax
purposes;
2) Whether different rules should apply to newly formed disregarded entities
with no previous employment tax history as opposed to entities in existence
prior to the time when they became disregarded;
3) Different results (both in amount of tax, type of tax, and time and method of
deposits) that arise from filing as one employer as compared to filing as
separate employers;
4) Appropriate methods for notifying the service center about changes in
employment tax obligations when an entity's status as a disregarded entity
changes;
5) Possible issues arising in situations where the owner or the disregarded
entity is formed or domiciled in a country other than the United States;
6) Additional issues relating to employment taxes and disregarded entities
including, but not limited to, confusion for employees, employers, and state and
federal agencies resulting from a single entity reporting structure for
employment tax purposes; and
7) Whether any guidance issued should also apply to qualified REIT subsidiaries
(as defined in section 856(i)). |
| Comments are also requested concerning issues
related to disregarded entities but outside the employment tax area. Those
issues include but are not limited to the following:
1) Information reporting on IRS Form 1099s issued by, or with respect to,
disregarded entities and their owners; and
2) Issues related to qualified or nonqualified deferred compensation plans,
fringe benefit and welfare plans, and other compensation arrangements.
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| Written comments should be sent to the following
address:
Internal Revenue Service
CC:DOM:CORP (NT 99-6; CC:DOM:P&SI:1)
P.O. Box 7604, Ben Franklin Station
Washington, DC 20044
In the alternative, comments may be hand delivered between the hours of 8:00
a.m. and 5:00 p.m. to the courier's desk at 1111 Constitution Avenue, NW.,
Washington, DC, or submitted electronically via the IRS Internet site at
http://www.irs.ustreas.gov/prod/tax_regs/comments.html.
[NOTE: This URL is no longer valid.]
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| Because the Service and Treasury would like to
receive comments early in the developmental stages of potential guidance,
comments should be forwarded to one of the addresses above prior to April 20,
1999. However, to the extent possible, consideration will be given to comments
received after that date. |
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| TEMPORARY EMPLOYMENT TAX PROCEDURES
| Until additional guidance is issued, the Service
generally will accept reporting and payment of employment taxes with respect to
the employees of a QSub or an entity disregarded as an entity separate from its
owner under section 301.7701-2(c)(2) if made in one of two ways:
1) Calculation, reporting, and payment of all employment tax obligations with
respect to employees of a disregarded entity by its owner (as though the
employees of the disregarded entity are employed directly by the owner) and
under the owner's name and taxpayer identification number; or
2) Separate calculation, reporting, and payment of all employment tax
obligations by each state law entity with respect to its employees under its own
name and taxpayer identification number. |
| If the second method is chosen, the owner
retains ultimate responsibility for the employment tax obligations incurred with
respect to employees of the disregarded entity. This method merely permits the
employment tax obligations of the owner incurred with respect to the disregarded
entity to be fulfilled through the separate calculation, reporting, and payment
of employment taxes by the disregarded entity. Accordingly, the Service will not
proceed against the owner for employment tax obligations relating to employees
of a disregarded entity if those obligations are fulfilled by the disregarded
entity using its own name and taxpayer identification number, even if there are
differences in the timing or amount of payments or deposits as calculated under
the second method. If the first method is selected, a final employment tax
return should be filed with respect to a disregarded entity that formerly
calculated, reported, and paid its employment tax obligations on a separate
basis. |
| An owner of multiple disregarded entities may
choose the first method with respect to some disregarded entities and the second
method with respect to its other disregarded entities. The fact that an owner of
a disregarded entity chooses to calculate, report, and pay its employment tax
obligations under the second method with respect to a given disregarded entity
for one taxable year will not preclude the owner from switching to the first
method in a subsequent taxable year. However, if the owner uses the first method
of calculating, reporting, and paying employment tax obligations with respect to
a given disregarded entity for a return period that begins on or after April 20,
1999, the taxpayer must continue to use the first method unless and until
otherwise permitted by the Commissioner. |
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| DRAFTING INFORMATION
| The principal authors of this notice are Deanna
Walton of the Office of Assistant Chief Counsel (Passthroughs and Special
Industries) and John Richards of the Office of Associate Chief Counsel (Employee
Benefits and Exempt Organizations). For further information regarding this
notice contact Ms. Walton at (202) 622- 3050 or Mr. Richards at (202) 622-6040
(not toll-free calls). |
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