Proposed Regs Address Reporting Requirements for Credit Card and Third-Party Network Transactions (IR-2009-106; NPRM REG-139255-08)

Proposed regulations relating to information-reporting requirements under new Code Sec. 6050W for issuers of credit, debit, gift and similar payment cards have been issued. The regulations provide guidance to interpret the definitions used in the statute and contain numerous illustrative examples.

Code Sec. 6050W, as added by the Housing Assistance Act of 2008 (P.L. 110-289), requires payment settlement entities (e.g., a bank) to annually report payments to participating payees (e.g., a merchant) in settlement of reportable payment transactions (e.g,. a credit or debit card transaction). The reporting requirement also applies to transactions settled through third-party payments networks, such as third-party organizations that settle online transactions (e.g., PayPal).

Information reporting will begin to apply to 2011 transactions. Form 1099-K has been proposed for this purpose and is now available in draft form.

Form 1099-K will be prepared for each calendar year and report the gross amount of reportable transactions for the year and for each month of the year. The inclusion of monthly amounts on the return filed with the IRS and the copy furnished to the payee will help fiscal-year payees reconcile payment carD and third-party network transaction receipts. The gross amount of a transaction is not reduced by fees, chargebacks, refunds, or any other amount.

Payees may be given an electronic version of the form but only pursuant to current rules which require affirmative written consent.

Individuals who use payment cards are not affected by the reporting requirements. No personal information regarding a payment card user is given to the IRS.

Under the proposals, a payment card includes, but is not limited to, credit cards, debit cards, and stored-value cards (e.g., gift cards or similar cards with a prepaid value). A payment card also includes the acceptance as payment of any account number or other indicia associated with a payment card. A payment card issued in connection with a flexible spending arrangement or a health reimbursement arrangement is not exempted from the reporting requirements.

Transactions using a stored-valued card that a network of persons has agreed to accept as payment (such as card issued by a college that may be used at specified local merchants) are subject to reporting. However, transactions involving a person (e.g., merchant) related to the issuer are excepted from the reporting requirements.

A payment settlement entity may be a domestic or a foreign entity. A payment settlement entity that is not a U.S. payor or U.S. middleman is not required to report payments to participating payees that do not have a U.S. address so long as the payment settlement entity neither knows nor has reason to know that the participating payee is a U.S. person. Other payment settlement entities are exempt from the reporting requirements only if they obtain specified documentation from a payee with a foreign address establishing that the payee is a foreign person.

An electronic payment facilitator (i.e., a person that contracts to make payments on behalf of a payment settlement entity) is subject to the reporting requirements and is liable for any penalties for failure to comply with those requirements. The facilitator's failure to comply with the reporting requirements will not cause the payment settlement entity to be liable for penalties.

Under a de minimIs rule, 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. This de minimIs exception does not apply to payments in settlement of payment card transactions. The IRS is seeking comments on whether the de minimIs exception should be mandatory or voluntary.

Payments made to governmental units are subject to the reporting requirements under the proposals. No exception is provided for payments made using transit cards, electronic tool collection systems, and similar electronic payment mechanisms. The IRS seeks comments on the impact the regulations would have on government units that use such payment methods.

The proposals clarify that health carriers operating health care networks, in-house accounts payable departments, and automated clearinghouse networks are not subject to the reporting requirements under the third-party payment network rules.

Pursuant to rules for aggregated payees, the proposals require a corporation that receives payment from a bank for credit card sales transacted at its independently owned franchise stores to report the gross amount of the reportable transactions settled through the corporation. The corporation is required to separately report the gross amount of reportable transactions allocable to each franchise store.

Under the proposals, any payment card transaction that would otherwise be reportable under both Code Sec. 6041 (relating to information at source) and new Code Sec. 6050W are excepted from the Code Sec. 6041 reporting requirements. This relief, however, does not apply to third-party network transactions. No further exceptions from duplicating reporting are provided.

The proposed regulations also provide guidance on backup withholding requirements for reportable amounts that are paid after December 31, 2011.

The proposals would be effective on the date published as final regulations in the Federal Register and would generally apply to returns for calendar years beginning after December 31, 2010.

Comments on the proposed regulations must be received by January 25, 2010, and may be submitted electronically by mail or hand-delivered to the IRS.

A public hearing on the proposals is scheduled for February 10, 2010.

2009FED ¶46,535

Proposed Regulations, NPRM REG-139255-08, 2009FED ¶49,437

Other References:

Code Sec. 3406

CCH Reference - 2009FED ¶33,640AD

CCH Reference - 2009FED ¶33,640CD

CCH Reference - 2009FED ¶33,641BG

CCH Reference - 2009FED ¶33,641EC

Code Sec. 6041

CCH Reference - 2009FED ¶35,821C

Code Sec. 6050W

CCH Reference - 2009FED ¶36,381C

Code Sec. 6051

CCH Reference - 2009FED ¶36,424AC

Code Sec. 6721

CCH Reference - 2009FED ¶40,213C

Code Sec. 6722

CCH Reference - 2009FED ¶40,232C

Tax Research Consultant

CCH Reference - TRC FILEBUS: 9,320

CCH Reference - TRC FILEBUS: 18,050

CCH Reference - TRC PENALTY: 3,204.05

Proposed Regulations On Notice Requirements for Pension Plan Amendments Reducing Future Benefit Accrual Rate Finalized (T.D. 9472)

The IRS has finalized, with modifications, proposed regulations under Code Secs. 411(d)(6) and 4980F providing guidance on the application of the notice requirements for plan amendments that are allowed to provide for reduction in benefits accrued before the plan amendment's applicable amendment date. The final regulations reflect changes made by the Pension Protection Act of 2006 (2006 PPA) (P.L. 109-280). The final regulations apply also for purposes of ERISA Sec. 204(g) and (h), which contain rules parallel to the rules in Code Secs. 411(d)(6) and 4980F, respectively.

Background

Code Sec. 411(d)(6) generally provides that a plan is treated as not satisfying the Code Sec. 411 minimum vesting requirements if the accrued benefit of a participant is decreased by an amendment of the plan, other than an amendment described in Code Sec. 412(d)(2), ERISA Sec. 4281, or any other applicable law. ERISA Act sec. 204(g) contains parallel rules to Code Sec. 411(d)(6). Act Sec. 1107 of P.L. 109-280 provides that any plan amendment made pursuant to a change made by P.L. 109-280 may be retroactively effective and, except as provided by the IRS, does not violate the anti-cutback rules of Code Sec. 411(d)(6) or ERISA Act sec. 204(g) if, in addition to satisfying the conditions specified in Act sec. 1107(b)(2) of P.L. 109-280, the amendment is made on or before the last day of the first plan year beginning on or after January 1, 2009 (January 1, 2011, with respect to governmental plans).

Code Sec. 4980F imposes an excise tax when a plan administrator fails to provide timely notice of a plan amendment that provides for a significant reduction in the rate of future benefit accrual. Except as provided in regulations, the notice must be provided within a reasonable time before the effective date of the plan amendment. ERISA Act sec. 204(h) contains parallel rules to Code Sec. 4980F, and a notice required under any of these two provisions is generally referred to as a "section 204(h) notice". P.L. 109-280 amended Code Sec. 4980F and ERISA Act sec. 204(h) to require that a section 204(h) notice be provided to any employer that has an obligation to contribute to a plan. P.L. 109-280 also provided that, in the case of a plan amendment adopted in order to comply with the rules in Act Sec. 402 of P.L. 109-280 (i.e., funding rules for plans maintained by an employer that is a commercial passenger airline or the principal business of which is providing catering services to a commercial passenger airline), any notice required under Code Sec. 4980F(e) or ERISA Act sec. 204(h) must be provided within 15 days of the effective date of the plan amendment.

In addition to the section 204(h) notice requirement, both the Code and ERISA include a number of other notice requirements to provide information to certain parties (such as participants, beneficiaries, and contributing employers) regarding the potential effect of a plan amendment that is permitted to reduce or eliminate previously accrued benefits.

Final Regulations

To reflect the changes made by P.L. 109-280, the final regulations clarify that the requirement that a section 204(h) notice be given to contributing employers applies only to employers in a multiemployer plan, not to employers in a single employer plan. For certain plans maintained by an employer that is a commercial passenger airline or the principal business of which is providing catering services to a commercial passenger airline, a section 204(h) notice must be provided at least 15 days before the effective date of the amendment. The final rules also retain the proposal that no section 204(h) notice is required if a defined benefit plan is amended to reflect changes to the Code Sec. 417(e)(3) applicable interest or mortality assumptions made by P.L. 109-280.

In addition, the final regulations provide a conforming amendment to the current regulations under Code Sec. 411(d)(6) to include Act sec. 1107 of P.L. 109-280 as a statutory exception to the general anti-cutback rule in Code Sec. 411(d)(6). Moreover, in the case of an amendment that is permitted to be adopted retroactively, the effective date of the amendment, for purposes of Code Sec. 4980F, is the date the amendment is put into effect on an operational basis under the plan, so that a section 204(h) notice must generally be provided at least 45 days before the date the amendment is put into effect on an operational basis (15 days for multiemployer plans). The cross-references in Reg. §54.4980F-1, Q&A-7(b), are also revised to provide that any plan amendment that is permitted to eliminate or reduce a Code Sec. 411(d)(6) protected benefit under certain provisions, is not an amendment for which a section 204(h) notice is required.

The final regulations further provide that for any section 204(h) notice that is required to be provided in connection with an amendment to a Code Sec. 411(a)(13)(C) statutory hybrid plan that is first effective before January 1, 2009, and that limits the amount of a distribution to the account balance under Code Sec. 411(a)(13)(A), a section 204(h) notice does not fail to be timely if the notice is provided at least 30 days before the date the amendment is first effective. This special timing rule reflects the 30-day timing rule described in Notice 2007-6, 2007-1 CB 272. The final regulations permit the use of this transitional timing rule through the end of 2008. Thereafter, the general 45-day timing rule applies to such amendments.

To eliminate the need for a plan to provide multiple notices at different dates and with substantially the same function and information to affected persons, the final regulations provide that, with respect to an amendment that triggers a section 204(h) notice requirement as well as another statutory notice requirement listed in the regulations, if a plan provides the latter notice in accordance with the applicable standards for such a notice, then the plan is treated as having timely complied with the requirement to provide a section 204(h) notice. However, this special treatment does not apply if a plan is amended to implement benefit reductions independent of the reductions permitted under the relevant notice requirement. The final regulations remove the proposed rule under which the timing and content of a Code Sec. 432(e)(8)(C) notice for a multiemployer plan in a critical status would also satisfy such requirements for a section 204(h) notice because such interaction will be addressed in a separate guidance. The regulations, however, add the Code Sec. 432(b)(3)(D) notice to the list of similarly-situated benefit reduction notices.

Finally, the regulations delegate authority to the IRS to publish revenue rulings, notices, or other guidance under Code Sec. 4980F, which would also apply to ERISA Act sec. 204(h), that the IRS determines to be necessary or appropriate for a plan amendment that applies with respect to benefits accrued before the applicable amendment date but that does not violate Code Sec. 411(d)(6). This delegation authority provides the IRS with greater flexibility to develop special rules to address special circumstances in the future, such as future statutory changes, and also extends to circumstances in which such a plan amendment may require another notice in addition to a section 204(h) notice.

Effective and Applicability Dates

The final regulations generally apply to section 204(h) amendments that are effective on or after January 1, 2008. With respect to the timing rules on providing a section 204(h) notice for a plan amendment that has a retroactive effective date, the final rules generally apply to plan amendments adopted in plan years beginning after July 1, 2008. With respect to any amendment to a lump sum-based benefit formula, the special rules under the regulations relating to an amendment that applies to benefits accrued before the applicable amendment date apply to amendments adopted after December 21, 2006. In addition, the special 30-day limit timing rule for providing a section 204(h) notice applies to such amendments effective on or after December 21, 2006, and no later than December 31, 2008. The IRS anticipates issuing guidance in the near future relating to the application of Code Sec. 4980F to plan amendments that are adopted to comply with the Code Sec. 411(b)(5)(B)(i) requirements regarding market rates of return. This future guidance may provide a special timing rule for when a section 204(h) notice must be provided.

T.D. 9472, 2009FED ¶47,040

Other References:

Code Sec. 411

CCH Reference - 2009FED ¶19,072

Code Sec. 4980F

CCH Reference - 2009FED ¶34,618B

Tax Research Consultant

CCH Reference - TRC RETIRE: 15,404.05

CCH Reference - TRC RETIRE: 36,154.20

IRS Announces Interest Rates Unchanged for Calendar Quarter Beginning January 1, 2010 (IR-2009-107; Rev. Rul. 2009-37)

The IRS has announced that the interest rates for the calendar quarter beginning January 1, 2010, will remain at 4 percent for overpayments (3 percent in the case of a corporation), 4 percent for underpayments and 6 percent for large corporate underpayments. The interest rate for the portion of a corporate overpayment exceeding $10,000 remains at 1.5 percent. The interest rates are computed by using the federal short-term rate based on daily compounding determined during October 2009.

Code Sec. 6621 provides that the rate of interest is to be determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus three percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus three percentage points, and the overpayment rate is the federal short-term rate plus two percentage points. The rate for large corporate underpayments is the federal short-term rate plus five percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a tax period is the federal short-term rate plus one half of a percentage point.

2009FED ¶46,537

Rev. Rul. 2009-37, 2009FED ¶46,538

Rev. Rul. 2009-37, FINH ¶30,633

Rev. Rul. 2009-37, ETR ¶66,884

Other References:

Code Sec. 6601

CCH Reference - 2009FED ¶174.01

CCH Reference - 2009FED ¶175.01

CCH Reference - 2009FED ¶175.30

Code Sec. 6621

CCH Reference - 2009FED ¶39,455.01

CCH Reference - 2009FED ¶39,455.51

CCH Reference - FINH ¶21,685.01

CCH Reference - FINH ¶21,685.30

CCH Reference - ETR ¶102

CCH Reference - ETR ¶50,615.01

Code Sec. 6622

CCH Reference - 2009FED ¶39,465.01

Tax Research Consultant

CCH Reference - TRC ACCTNG: 33,204.15

CCH Reference - TRC PENALTY: 9,152

Deficiency Determinations Not Arbitrary; U.S. Corporation Required to Withhold on Interest Payments to Hong Kong-Based Lender; Penalty for Failure to File Properly Imposed (New York Guangdong Finance Inc., CA-5)

The IRS properly determined withholding tax deficiencies and additions to tax with respect to a U.S. corporation. The burden of proof to overcome the presumption that the IRS's determinations of tax liability were correct remained with the taxpayer corporation. Although interest paid by the taxpayer to a corporation wholly owned and operated by the People's Republic of China was incorrectly included in the IRS's notice of deficiency, the IRS's determination was not arbitrary. In fact, the IRS had relied on information reported by the taxpayer in its Forms 5472, Information Return of a 25 Percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. Consequently, the burden to prove the correct amount of taxes owed did not shift to the government.

The U.S.-China tax treaty did not exempt the taxpayer corporation from the requirement to withhold tax on its interest payments to a Hong Kong-based subsidiary of the Chinese corporation. The treaty was inapplicable because the subsidiary principally conducted its business in and filed its returns as a resident of Hong Kong, prior to its acquisition by the People's Republic of China. A loan from the Hong Kong subsidiary was not in substance a loan from the Chinese corporation. Moreover, the loan agreement did not mention an agency relationship or that the Chinese corporation guaranteed the debt or controlled the loan in any way.

The taxpayer was liable for additions to tax for failure to file Forms 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, because it did not establish reasonable cause for such failure. The corporation's reliance on incorrect advice from its president did not absolve it from its duty to file returns. Even if the advice it received regarding withholding had been correct, it was still required to file the returns. The taxpayer did not show that it sought professional advice regarding filing.

Affirming the Tax Court, 95 TCM 1228, Dec. 57,367(M), TC Memo. 2008-62.

New York Guangdong Finance Inc., CA-5, 2009-2 USTC ¶50,757

Other References:

Code Sec. 894

CCH Reference - 2009FED ¶2300.57

CCH Reference - 2009FED ¶26,870.20

Code Sec. 1442

CCH Reference - 2009FED ¶32,723.198

Code Sec. 1461

CCH Reference - 2009FED ¶32,828.20

Code Sec. 6203

CCH Reference - 2009FED ¶37,514.27

Code Sec. 6651

CCH Reference - 2009FED ¶39,475.23

CCH Reference - 2009FED ¶39,475.355

CCH Reference - 2009FED ¶39,475.42

Tax Research Consultant

CCH Reference - TRC PENALTY: 3,060.55

CCH Reference - TRC EXPAT: 15,052.15

CCH Reference - TRC EXPAT: 15,102.10

TRC INTL: 18,250

CCH Reference - TRC IRS: 27,210.05

West Virginia --Miscellaneous Tax: Medical Center Entitled to Health Care Provider Tax Refund

The West Virginia Supreme Court of Appeals reversed the denial of a medical center's petition seeking a reassessment and refund of broad-based health care provider taxes imposed on its gross receipts.

The medical center furnished optional in-house health care benefits to its employees and retirees, entitling participants to receive health care at both the center's facilities and outside facilities. To fund the program, retirees made monthly contributions and the center withheld monthly "premiums" from the participating employees paychecks. The center deposited the money into a trust fund and only withdrew money from the fund when a participant obtained care from an outside facility. In addition, the center treated covered employees as regular patients with respect to its billing system. It removed the value of the participants' care from its "accounts receivable" because it was not reimbursed for these costs by the participants or an insurer. The center also removed these amounts from its taxable "gross receipts" and thus did not pay the health care provider tax on these amounts.

The circuit court below held that the benefits were "gross receipts" under the state's Health Care Provider Tax Act of 1993. On appeal, the Supreme Court of Appeals found that the circuit court overlooked the code provision that requires that a health care provider's method of accounting for purposes of the Act be consistent with the method of accounting that it uses for federal income taxes. For federal income tax purposes, the center did not include accounting entries related to the benefits in its gross receipts. As a result, the Supreme Court of Appeals reversed the decision and remanded the case for the entry of an order requiring a refund.

Subscribers can view the decision.

Charleston Area Medical Center, Inc. v. State Tax Department of West Virginia, Supreme Court of Appeals of West Virginia, No. 34710, November 23, 2009