[House Report 114-748]
[From the U.S. Government Publishing Office]
114th Congress } { Report
HOUSE OF REPRESENTATIVES
2d Session } { 114-748
======================================================================
EMPOWERING EMPLOYEES THROUGH STOCK OWNERSHIP ACT
_______
September 16, 2016.--Committed to the Committee of the Whole House on
the State of the Union and ordered to be printed
_______
Mr. Brady of Texas, from the Committee on Ways and Means, submitted the
following
R E P O R T
[To accompany H.R. 5719]
[Including cost estimate of the Congressional Budget Office]
The Committee on Ways and Means, to whom was referred the
bill (H.R. 5719) to amend the Internal Revenue Code of 1986 to
modify the tax treatment of certain equity grants, having
considered the same, report favorably thereon with an amendment
and recommend that the bill as amended do pass.
CONTENTS
Page
I. SUMMARY AND BACKGROUND...........................................5
A. Purpose and Summary................................. 5
B. Background and Need for Legislation................. 6
C. Legislative History................................. 6
II. EXPLANATION OF THE BILL..........................................6
A. Treatment of Qualified Equity Grants (sec. 2 of the
bill and secs. 83, 3401, 3402, and 6061 of the
Code).............................................. 6
III. VOTES OF THE COMMITTEE..........................................14
IV. BUDGET EFFECTS OF THE BILL......................................15
A. Committee Estimate of Budgetary Effects............. 15
B. Statement Regarding New Budget Authority and Tax
Expenditures Budget Authority...................... 15
C. Cost Estimate Prepared by the Congressional Budget
Office............................................. 15
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE......17
A. Committee Oversight Findings and Recommendations.... 17
B. Statement of General Performance Goals and
Objectives......................................... 17
C. Information Relating to Unfunded Mandates........... 17
D. Applicability of House Rule XXI 5(b)................ 17
E. Tax Complexity Analysis............................. 17
F. Congressional Earmarks, Limited Tax Benefits, and
Limited Tariff Benefits............................ 18
G. Duplication of Federal Programs..................... 18
H. Disclosure of Directed Rule Makings................. 18
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED...........18
A. Text of Existing Law Amended or Repealed by the
Bill, as Reported.................................. 18
B. Changes in Existing Law Proposed by the Bill, as
Reported........................................... 60
The amendment is as follows:
Strike all after the enacting clause and insert the
following:
SECTION 1. SHORT TITLE.
This Act may be cited as the ``Empowering Employees through Stock
Ownership Act''.
SEC. 2. TREATMENT OF QUALIFIED EQUITY GRANTS.
(a) In General.--
(1) Election to defer income.--Section 83 of the Internal
Revenue Code of 1986 is amended by adding at the end the
following new subsection:
``(i) Qualified Equity Grants.--
``(1) In general.--For purposes of this subtitle, if
qualified stock is transferred to a qualified employee who
makes an election with respect to such stock under this
subsection--
``(A) except as provided in subparagraph (B), no
amount shall be included in income under subsection (a)
for the first taxable year in which the rights of the
employee in such stock are transferable or are not
subject to a substantial risk of forfeiture, whichever
is applicable, and
``(B) an amount equal to the amount which would be
included in income of the employee under subsection (a)
(determined without regard to this subsection) shall be
included in income for the taxable year of the employee
which includes the earliest of--
``(i) the first date such qualified stock
becomes transferable (including transferable to
the employer),
``(ii) the date the employee first becomes an
excluded employee,
``(iii) the first date on which any stock of
the corporation which issued the qualified
stock becomes readily tradable on an
established securities market (as determined by
the Secretary, but not including any market
unless such market is recognized as an
established securities market by the Secretary
for purposes of a provision of this title other
than this subsection),
``(iv) the date that is 7 years after the
first date the rights of the employee in such
stock are transferable or are not subject to a
substantial risk of forfeiture, whichever
occurs earlier, or
``(v) the date on which the employee revokes
(at such time and in such manner as the
Secretary may provide) the election under this
subsection with respect to such stock.
``(2) Qualified stock.--
``(A) In general.--For purposes of this subsection,
the term `qualified stock' means, with respect to any
qualified employee, any stock in a corporation which is
the employer of such employee, if--
``(i) such stock is received--
``(I) in connection with the exercise
of an option, or
``(II) in settlement of a restricted
stock unit, and
``(ii) such option or restricted stock unit
was provided by the corporation--
``(I) in connection with the
performance of services as an employee,
and
``(II) during a calendar year in
which such corporation was an eligible
corporation.
``(B) Limitation.--The term `qualified stock' shall
not include any stock if the employee may sell such
stock to, or otherwise receive cash in lieu of stock
from, the corporation at the time that the rights of
the employee in such stock first become transferable or
not subject to a substantial risk of forfeiture.
``(C) Eligible corporation.--For purposes of
subparagraph (A)(ii)(II)--
``(i) In general.--The term `eligible
corporation' means, with respect to any
calendar year, any corporation if--
``(I) no stock of such corporation
(or any predecessor of such
corporation) is readily tradable on an
established securities market (as
determined under paragraph (1)(B)(iii))
during any preceding calendar year, and
``(II) such corporation has a written
plan under which, in such calendar
year, not less than 80 percent of all
employees who provide services to such
corporation in the United States (or
any possession of the United States)
are granted stock options, or
restricted stock units, with the same
rights and privileges to receive
qualified stock.
``(ii) Same rights and privileges.--For
purposes of clause (i)(II)--
``(I) except as provided in
subclauses (II) and (III), the
determination of rights and privileges
with respect to stock shall be
determined in a similar manner as
provided under section 423(b)(5),
``(II) employees shall not fail to be
treated as having the same rights and
privileges to receive qualified stock
solely because the number of shares
available to all employees is not equal
in amount, so long as the number of
shares available to each employee is
more than a de minimis amount, and
``(III) rights and privileges with
respect to the exercise of an option
shall not be treated as the same as
rights and privileges with respect to
the settlement of a restricted stock
unit.
``(iii) Employee.--For purposes of clause
(i)(II), the term `employee' shall not include
any employee described in section 4980E(d)(4)
or any excluded employee.
``(iv) Special rule for calendar years before
2017.--In the case of any calendar year
beginning before January 1, 2017, clause
(i)(II) shall be applied without regard to
whether the rights and privileges with respect
to the qualified stock are the same.
``(3) Qualified employee; excluded employee.--For purposes of
this subsection--
``(A) In general.--The term `qualified employee'
means any individual who--
``(i) is not an excluded employee, and
``(ii) agrees in the election made under this
subsection to meet such requirements as
determined by the Secretary to be necessary to
ensure that the withholding requirements of the
corporation under chapter 24 with respect to
the qualified stock are met.
``(B) Excluded employee.--The term `excluded
employee' means, with respect to any corporation, any
individual--
``(i) who was a 1-percent owner (within the
meaning of section 416(i)(1)(B)(ii)) at any
time during the 10 preceding calendar years,
``(ii) who is or has been at any prior time--
``(I) the chief executive officer of
such corporation or an individual
acting in such a capacity, or
``(II) the chief financial officer of
such corporation or an individual
acting in such a capacity,
``(iii) who bears a relationship described in
section 318(a)(1) to any individual described
in subclause (I) or (II) of clause (ii), or
``(iv) who has been for any of the 10
preceding taxable years one of the 4 highest
compensated officers of such corporation
determined with respect to each such taxable
year on the basis of the shareholder disclosure
rules for compensation under the Securities
Exchange Act of 1934 (as if such rules applied
to such corporation).
``(4) Election.--
``(A) Time for making election.--An election with
respect to qualified stock shall be made under this
subsection no later than 30 days after the first time
the rights of the employee in such stock are
transferable or are not subject to a substantial risk
of forfeiture, whichever occurs earlier, and shall be
made in a manner similar to the manner in which an
election is made under subsection (b).
``(B) Limitations.--No election may be made under
this section with respect to any qualified stock if--
``(i) the qualified employee has made an
election under subsection (b) with respect to
such qualified stock,
``(ii) any stock of the corporation which
issued the qualified stock is readily tradable
on an established securities market (as
determined under paragraph (1)(B)(iii)) at any
time before the election is made, or
``(iii) such corporation purchased any of its
outstanding stock in the calendar year
preceding the calendar year which includes the
first time the rights of the employee in such
stock are transferable or are not subject to a
substantial risk of forfeiture, unless--
``(I) not less than 25 percent of the
total dollar amount of the stock so
purchased is deferral stock, and
``(II) the determination of which
individuals from whom deferral stock is
purchased is made on a reasonable
basis.
``(C) Definitions and special rules related to
limitation on stock redemptions.--
``(i) Deferral stock.--For purposes of this
paragraph, the term `deferral stock' means
stock with respect to which an election is in
effect under this subsection
``(ii) Deferral stock with respect to any
individual not taken into account if individual
holds deferral stock with longer deferral
period.--Stock purchased by a corporation from
any individual shall not be treated as deferral
stock for purposes of clause (iii) if such
individual (immediately after such purchase)
holds any deferral stock with respect to which
an election has been in effect under this
subsection for a longer period than the
election with respect to the stock so
purchased.
``(iii) Purchase of all outstanding deferral
stock.--The requirements of subclauses (I) and
(II) of subparagraph (B)(iii) shall be treated
as met if the stock so purchased includes all
of the corporation's outstanding deferral
stock.
``(iv) Reporting.--Any corporation which has
outstanding deferral stock as of the beginning
of any calendar year and which purchases any of
its outstanding stock during such calendar year
shall include on its return of tax for the
taxable year in which, or with which, such
calendar year ends the total dollar amount of
its outstanding stock so purchased during such
calendar year and such other information as the
Secretary may require for purposes of
administering this paragraph.
``(5) Controlled groups.--For purposes of this subsection,
all corporations which are members of the same controlled group
of corporations (as defined in section 1563(a)) shall be
treated as one corporation.
``(6) Notice requirement.--Any corporation that transfers
qualified stock to a qualified employee shall, at the time that
(or a reasonable period before) an amount attributable to such
stock would (but for this subsection) first be includible in
the gross income of such employee--
``(A) certify to such employee that such stock is
qualified stock, and
``(B) notify such employee--
``(i) that the employee may elect to defer
income on such stock under this subsection, and
``(ii) that, if the employee makes such an
election--
``(I) the amount of income recognized
at the end of the deferral period will
be based on the value of the stock at
the time at which the rights of the
employee in such stock first become
transferable or not subject to
substantial risk of forfeiture,
notwithstanding whether the value of
the stock has declined during the
deferral period,
``(II) the amount of such income
recognized at the end of the deferral
period will be subject to withholding
under section 3401(i) at the rate
determined under section 3402(t), and
``(III) the responsibilities of the
employee (as determined by the
Secretary under paragraph (3)(A)(ii))
with respect to such withholding.''.
(2) Deduction by employer.--Subsection (h) of section 83 of
the Internal Revenue Code of 1986 is amended by striking ``or
(d)(2)'' and inserting ``(d)(2), or (i)''.
(b) Withholding.--
(1) Time of withholding.--Section 3401 of the Internal
Revenue Code of 1986 is amended by adding at the end the
following new subsection:
``(i) Qualified Stock for Which an Election Is in Effect Under
Section 83(i).--For purposes of subsection (a), qualified stock (as
defined in section 83(i)) with respect to which an election is made
under section 83(i) shall be treated as wages--
``(1) received on the earliest date described in section
83(i)(1)(B), and
``(2) in an amount equal to the amount included in income
under section 83 for the taxable year which includes such
date.''.
(2) Amount of withholding.--Section 3402 of such Code is
amended by adding at the end the following new subsection:
``(t) Rate of Withholding for Certain Stock.--In the case of any
qualified stock (as defined in section 83(i)) with respect to which an
election is made under section 83(i)--
``(1) the rate of tax under subsection (a) shall not be less
than the maximum rate of tax in effect under section 1, and
``(2) such stock shall be treated for purposes of section
3501(b) in the same manner as a non-cash fringe benefit.''.
(c) Coordination With Other Deferred Compensation Rules.--
(1) Election to apply deferral to statutory options.--
(A) Incentive stock options.--Section 422(b) of the
Internal Revenue Code of 1986 is amended by adding at
the end the following: ``Such term shall not include
any option if an election is made under section 83(i)
with respect to the stock received in connection with
the exercise of such option.''.
(B) Employee stock purchase plans.--Section 423(a) of
such Code is amended by adding at the end the following
flush sentence:
``The preceding sentence shall not apply to any share of stock with
respect to which an election is made under section 83(i).''.
(2) Exclusion from definition of nonqualified deferred
compensation plan.--Subsection (d) of section 409A of the
Internal Revenue Code of 1986 is amended by adding at the end
the following new paragraph:
``(7) Treatment of qualified stock.--An arrangement under
which an employee may receive qualified stock (as defined in
section 83(i)(2)) shall not be treated as a nonqualified
deferred compensation plan solely because of an employee's
ability to defer recognition of income pursuant to an election
under section 83(i).''.
(d) Information Reporting.--Section 6051(a) of the Internal Revenue
Code of 1986 is amended by striking ``and'' at the end of paragraph
(13), by striking the period at the end of paragraph (14) and inserting
a comma, and by inserting after paragraph (14) the following new
paragraphs:
``(15) the amount excludable from gross income under
subparagraph (A) of section 83(i)(1),
``(16) the amount includible in gross income under
subparagraph (B) of section 83(i)(1) with respect to an event
described in such subparagraph which occurs in such calendar
year, and
``(17) the aggregate amount of income which is being deferred
pursuant to elections under section 83(i), determined as of the
close of the calendar year.''.
(e) Penalty for Failure of Employer To Provide Notice of Tax
Consequences.--Section 6652 of the Internal Revenue Code of 1986 is
amended by adding at the end the following new subsection:
``(o) Failure to Provide Notice Under Section 83(i).--In the case of
each failure to provide a notice as required by section 83(i)(6), at
the time prescribed therefor, unless it is shown that such failure is
due to reasonable cause and not to willful neglect, there shall be
paid, on notice and demand of the Secretary and in the same manner as
tax, by the person failing to provide such notice, an amount equal to
$100 for each such failure, but the total amount imposed on such person
for all such failures during any calendar year shall not exceed
$50,000.''.
(f) Effective Dates.--
(1) In general.--Except as provided in paragraph (2), the
amendments made by this section shall apply to stock
attributable to options exercised, or restricted stock units
settled, after December 31, 2016.
(2) Requirement to provide notice.--The amendments made by
subsection (e) shall apply to failures after December 31, 2016.
(g) Transition Rule.--Until such time as the Secretary (or the
Secretary's delegate) issue regulations or other guidance for purposes
of implementing the requirements of paragraph (2)(C)(i)(II) of section
83(i) of the Internal Revenue Code of 1986 (as added by this section),
or the requirements of paragraph (6) of such section, a corporation
shall be treated as being in compliance with such requirements
(respectively) if such corporation complies with a reasonable good
faith interpretation of such requirements.
I. SUMMARY AND BACKGROUND
A. Purpose and Summary
The bill, H.R. 5719, as reported by the Committee on Ways
and Means, allows qualifying employees to elect to defer the
tax on certain restricted stock attributable to stock options
or restricted stock units until there is an opportunity for the
employee to liquidate the stock and pay the tax on such
compensation, but no longer than seven years.
B. Background and Need for Legislation
Employees of companies that are not publicly traded may be
required to include the value of stock-based compensation in
income for tax purposes well before they generally have the
ability to sell shares to pay the tax on such compensation. As
a result, such employees may have significant taxable income
upon receipt of such stock, but without sufficient cash to pay
the taxes due. As a practical matter there is no formal market
for stock of privately held companies, and there are limited
opportunities for employees to liquidate their restricted
stock. H.R. 5719 would make it easier for start-up companies to
allow employees to share in the company's upside by including
equity grants as part of their compensation while ensuring that
income is deferred only until there is an opportunity for the
employee to liquidate shares, which could provide cash
sufficient to pay the tax on the stock-based compensation.
C. Legislative History
Background
H.R. 5719 was introduced on July 11, 2016, and was referred
to the Committee on Ways and Means.
Committee action
The Committee on Ways and Means marked up H.R. 5719, the
Empowering Employees through Stock Ownership Act, on September
14, 2016, and ordered the bill, as amended, favorably reported
(with a quorum being present).
Committee hearings
The Committee discussed issues relating to employee stock
ownership at the Committee Hearing on Tax Reform and Tax-
Favored Retirement Accounts (April 17, 2012), the Select
Revenue Measures Subcommittee Hearing on Small Business and
Pass-through Entity Tax Reform Discussion Draft (May 15, 2013),
and as part of the Committee's tax reform working groups in
2013.\1\
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\1\See Joint Committee on Taxation, Report to the House Committee
on Ways and Means on Present Law and Suggestions for Reform Submitted
to the Tax Reform Working Groups (JCS-3-13), May 6, 2013.
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II. EXPLANATION OF THE BILL
A. Treatment of Qualified Equity Grants (sec. 2 of the Bill and secs.
83, 3401, 3402, and 6061 of the Code)
PRESENT LAW
Income tax treatment of employer stock transferred to an employee
Specific rules apply to property, including employer stock,
transferred to an employee in connection with the performance
of services.\2\ These rules govern the amount and timing of
income inclusion by the employee and the amount and timing of
the employer's compensation deduction.
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\2\Sec. 83. Section 83 applies generally to transfers of any
property, not just employer stock, in connection with the performance
of services by any service provider, not just an employee. However, the
provision described herein applies only with respect to certain
employer stock transferred to employees.
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Under these rules, an employee generally must recognize
income for the taxable year in which the employee's right to
the stock is transferable or is not subject to a substantial
risk of forfeiture (referred to herein as ``substantially
vested''). Thus, if the employee's right to the stock is
substantially vested when the employee receives the stock,
income is recognized for the taxable year in which received. If
the employee's right to the stock is not substantially vested
at the time of receipt, in general, income is recognized for
the taxable year in which the employee's right becomes
substantially vested.\3\ The amount includible in the
employee's income is the excess of the fair market value of the
stock (at the time of receipt if substantially vested at that
time or, if not, at the time of substantial vesting) over the
amount, if any, paid by the employee for the stock.
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\3\Under section 83(b), if an employee's right to the stock is not
substantially vested at the time of receipt (nonvested stock), the
employee may nevertheless elect within 30 days of receipt to recognize
income for the taxable year of receipt, referred to as a ``section
83(b)'' election. Under Treas. Reg. sec. 1.83-2, the employee makes an
election by filing with the Internal Revenue Service a written
statement that includes the fair market value of the property at the
time of receipt and the amount (if any) paid for the property. The
employee must also provide a copy of the statement to the employer.
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In general, an employee's right to stock or other property
is subject to a substantial risk of forfeiture if the
employee's right to full enjoyment of the property is subject
to a condition, such as the future performance of substantial
services.\4\ An employee's right to stock or other property is
transferable if the employee can transfer an interest in the
property to any person other than the transferor of the
property.\5\ Thus, generally, employer stock transferred to an
employee by an employer is not transferable merely because the
employee can sell it back to the employer.
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\4\See section 83(c)(1) and Treas. Reg. sec. 1.83-3(c) for the
definition of substantial risk of forfeiture.
\5\Treas. Reg. sec. 1.83-3(d). In addition, under section 83(c)(2),
the right to stock is transferable only if any transferee's right to
the stock would not be subject to a substantial risk of forfeiture.
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In the case of stock transferred to an employee, the
employer is allowed a deduction (to the extent a deduction for
a business expense is otherwise allowable) equal to the amount
included in the employee's income as a result of receipt of the
stock.\6\ The deduction is allowed for the employer's taxable
year in which or with which ends the taxable year for which the
amount is included in the employee's income.
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\6\Sec. 83(h).
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These rules do not apply to the grant to an employee of a
nonqualified option on employer stock unless the option has a
readily ascertainable fair market value.\7\ Instead, these
rules apply to the receipt of employer stock by the employee on
exercise of the option. That is, if the right to the stock is
substantially vested on receipt, income recognition applies for
the taxable year of receipt. If the right to the stock is not
substantially vested on receipt, the timing of income inclusion
is determined under the rules applicable to the receipt of
nonvested stock. In either case, the amount includible in
income by the employee is the excess of the fair market value
of the stock as of the time of income inclusion, less the
exercise price paid by the employee and the amount, if any,
paid by the employee for the option. The employer's deduction
is also determined under these rules.
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\7\See section 83(e)(3) and Treas. Reg. sec. 1.83-7. A nonqualified
option is an option on employer stock that is not a statutory option,
discussed below.
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In some cases, the transfer of employer stock to an
employee may be in settlement of restricted stock units.
Restricted stock unit (``RSU'') is a term used for an
arrangement under which an employee has the right to receive at
a specified time in the future an amount determined by
reference to the value of one or more shares of employer stock.
An employee's right to receive the future amount may be subject
to a condition, such as continued employment for a certain
period or the attainment of certain performance goals. The
payment to the employee of the amount due under the arrangement
is referred to as settlement of the RSU. The arrangement may
provide for the settlement amount to be paid in cash or in
employer stock (or either). The receipt of employer stock in
settlement of an RSU is subject to the same rules as other
receipts of employer stock with respect to the timing and
amount of income inclusion by the employee and the employer's
deduction.
Employment taxes and reporting
Employment taxes generally consist of taxes under the
Federal Insurance Contributions Act (``FICA''), tax under the
Federal Unemployment Tax Act (``FUTA''), and income taxes
required to be withheld by employers from wages paid to
employees (``income tax withholding'').\8\ Unless an exception
applies under the applicable rules, compensation provided to an
employee constitutes wages subject to these taxes.
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\8\Secs. 3101-3128 (FICA), 3301-3311 (FUTA), and 3401-3404 (income
tax withholding). Instead of FICA taxes, railroad employers and
employees are subject, under the Railroad Retirement Tax Act
(``RRTA''), sections 3201-3241, to taxes equivalent to FICA taxes with
respect to compensation as defined for RRTA purposes. Sections 3501-
3510 provide additional rules relating to all these taxes.
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FICA imposes tax on employers and employees, generally
based on the amount of wages paid to an employee during the
year. The tax imposed on the employer and on the employee is
each composed of two parts: (1) the Social Security or old age,
survivors, and disability insurance (``OASDI'') tax equal to
6.2 percent of covered wages up to the OASDI wage base
($118,500 for 2016); and (2) the Medicare or hospital insurance
(``HI'') tax equal to 1.45 percent of all covered wages.\9\ The
employee portion of FICA tax generally must be withheld and
remitted to the Federal government by the employer. FICA tax
withholding applies regardless of whether compensation is
provided in the form of cash or a noncash form, such as a
transfer of property (including employer stock) or in-kind
benefits.\10\
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\9\The employee portion of the HI tax under FICA (not the employer
portion) is increased by an additional tax of 0.9 percent on wages
received in excess of a threshold amount. The threshold amount is
$250,000 in the case of a joint return, $125,000 in the case of a
married individual filing a separate return, and $200,000 in any other
case.
\10\Under section 3501(b), employment taxes with respect to noncash
fringe benefits are to be collected (or paid) by the employer at the
time and in the manner prescribed by the Secretary of the Treasury
(``Treasury''). Announcement 85-113, 1985-31 I.R.B. 31, provides
guidance on the application of employment taxes with respect to noncash
fringe benefits.
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FUTA imposes a tax on employers of six percent of wages up
to the FUTA wage base of $7,000.
Income tax withholding generally applies when wages are
paid by an employer to an employee, based on graduated
withholding rates set out in tables published by the Internal
Revenue Service (``IRS'').\11\ Like FICA tax withholding,
income tax withholding applies regardless of whether
compensation is provided in the form of cash or a noncash form,
such as a transfer of property (including employer stock) or
in-kind benefits.
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\11\Sec. 3402. Specific withholding rates apply in the case of
supplemental wages.
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An employer is required to furnish each employee with a
statement of compensation information for a calendar year,
including taxable compensation, FICA wages, and withheld income
and FICA taxes.\12\ In addition, information relating to
certain nontaxable items must be reported, such as certain
retirement and health plan contributions. The statement, made
on Form W-2, Wage and Tax Statement, must be provided to each
employee by January 31 of the succeeding year.\13\
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\12\Secs. 6041 and 6051.
\13\Employers send Form W-2 information to the Social Security
Administration, which records information relating to Social Security
and Medicare and forwards the Form W-2 information to the IRS.
Employees include a copy of Form W-2 with their income tax returns.
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Statutory options
Two types of statutory options apply with respect to
employer stock: incentive stock options (``ISOs'') and options
provided under an employee stock purchase plan (``ESPP'').\14\
Stock received pursuant to a statutory option is subject to
special rules, rather than the rules for nonqualified options,
discussed above. No amount is includible in an employee's
income on the grant or exercise of a statutory option.\15\ In
addition, no deduction is allowed to the employer with respect
to the option or the stock transferred to an employee on
exercise.
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\14\Sections 421-424 govern statutory options.
\15\Under section 56(b)(3), this income tax treatment with respect
to stock received on exercise of an ISO does not apply for purposes of
the alternative minimum tax under section 55.
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If a holding requirement is met with respect to the stock
received on exercise of a statutory option and the employee
later disposes of the stock, the employee's gain generally is
treated as capital gain rather than ordinary income. Under the
holding requirement, the employee must not dispose of the stock
within two years after the date the option is granted or one
year after the date the option is exercised. If a disposition
occurs before the end of the required holding periods (a
``disqualifying disposition''), statutory option treatment no
longer applies. Instead, the income realized on the
disqualifying disposition, up to the amount of income that
would have applied if the option had been a nonqualified
option, is includible in income by the employee as compensation
received in the taxable year in which the disposition occurs
and a corresponding deduction is allowable to the employer for
the taxable year in which the disposition occurs.
Employment taxes do not apply with respect to the grant of
a statutory option, the receipt of stock pursuant to the
option, or a disqualifying disposition of the stock.\16\
---------------------------------------------------------------------------
\16\Secs. 3121(a)(22), 3306(b)(19), and the last sentence of
section 421(b).
---------------------------------------------------------------------------
Nonqualified deferred compensation
Compensation is generally includible in an employee's
income when paid to the employee. However, in the case of a
nonqualified deferred compensation plan,\17\ unless the
arrangement meets certain requirements, the amount of deferred
compensation is includible in income for the taxable year when
earned (or, if later, when not subject to a substantial risk of
forfeiture) even if payment will not occur until a later
year.\18\ In general, under these requirements, the time when
nonqualified deferred compensation will be paid must be
specified at the time of deferral with limits on further
deferral after the time for payment.
---------------------------------------------------------------------------
\17\Compensation earned by an employee is generally paid to the
employee shortly after being earned. However, in some cases, payment is
deferred to a later period, referred to as ``deferred compensation.''
Deferred compensation may be provided through a plan that receives tax-
favored treatment, such as a qualified retirement plan under section
401(a). Deferred compensation provided through a plan that is not
eligible for tax-favored treatment is referred to as ``nonqualified''
deferred compensation.
\18\Section 409A and the regulations thereunder provide rules for
nonqualified deferred compensation.
---------------------------------------------------------------------------
Nonqualified options on employer stock may be structured so
as not to be considered nonqualified deferred compensation and
thus not subject to these rules.\19\ An arrangement providing
RSUs is considered a nonqualified deferred compensation plan
and is subject to these rules, including the limits on further
deferral of the amount due in settlement of an RSU.
---------------------------------------------------------------------------
\19\Treas. Reg. sec. 1.409A-1(b)(5). In addition, statutory option
arrangements are not nonqualified deferred compensation arrangements.
---------------------------------------------------------------------------
REASONS FOR CHANGE
Employer stock may provide a valuable form of employee
compensation. In some cases, the receipt of employer stock with
a high fairmarket value may result in compensation income, and
a related tax liability, disproportionately large in comparison
to an employee's regular salary or wages. In the case of
publicly traded employer stock, an employee may sell some of
the stock to provide funds to cover that tax liability.
However, that approach often is not available in the case of a
closely held company that restricts the transferability of its
stock. This may make employer stock a less attractive form of
compensation. In the case of stock options, the inability to
pay the tax liability that would result from the stock received
on exercise of the option may mean employees let options lapse,
thus losing compensation they have already earned. The bill
addresses these situations by allowing employees to elect to
defer recognition of income attributable to stock received on
exercise of an option or settlement of an RSU until an
opportunity to sell some of the stock arises, but in no event
longer than seven years from the date that the employee's right
to the stock becomes substantially vested.
EXPLANATION OF PROVISION
In general
The provision allows a qualified employee to elect to
defer, for income tax purposes, the inclusion in income of the
amount of income attributable to qualified stock transferred to
the employee by the employer.\20\ An election to defer income
inclusion (``inclusion deferral election'') with respect to
qualified stock must be made no later than 30 days after the
first time the employee's right to the stock is substantially
vested.\21\ Absent an inclusion deferral election under the
provision, the income is includable for the taxable year in
which the qualified employee's right to the qualified stock is
substantially vested under present law.
---------------------------------------------------------------------------
\20\The provision does not apply to income with respect to
nonvested stock that is includible as a result of a section 83(b)
election.
\21\An inclusion deferral election is made in a manner similar to
the manner in which a section 83(b) election is made. Thus, as in the
case of a section 83(b) election under present law, the employee must
provide a copy of the inclusion deferral election to the employer.
---------------------------------------------------------------------------
If an employee elects to defer income inclusion, the income
must be included in the employee's income for the taxable year
that includes the earliest of (1) the first date the qualified
stock becomes transferable, including transferable to the
employer;\22\ (2) the date the employee first becomes an
excluded employee (as described below); (3) the first date on
which any stock of the employer becomes readily tradable on an
established securities market;\23\ (4) the date seven years
after the date the employee's right to the stock becomes
substantially vested; and (5) the date on which the employee
revokes his or her inclusion deferral election.\24\
---------------------------------------------------------------------------
\22\Thus, for this purpose, the qualified stock is considered
transferable if the employee has the ability to sell the stock to the
employer (or any other person).
\23\An established securities market is determined for this purpose
by the Secretary, but does not include any market unless the market is
recognized as an established securities market for purposes of another
Code provision.
\24\An inclusion deferral election is revoked at the time and in
the manner as the Secretary provides.
---------------------------------------------------------------------------
An employee may not make an inclusion deferral election for
a year with respect to qualified stock if, in the preceding
calendar year, the corporation purchased any of its outstanding
stock unless at least 25 percent of the total dollar amount of
the stock so purchased is stock with respect to which an
inclusion deferral election is in effect (``deferral stock'')
and the determination of which individuals from whom deferral
stock is purchased is made on a reasonable basis.\25\ For
purposes of this requirement, stock purchased from an
individual is not treated as deferral stock (and the purchase
is not treated as a purchase of deferral stock) if, immediately
after the purchase, the individual holds any deferral stock
with respect to which an inclusion deferral election has been
in effect for a longer period than the election with respect to
the purchased stock. Thus, in general, in applying the purchase
requirement, an individual's deferral stock with respect to
which an inclusion deferral election has been in effect for the
longest periods must be purchased first. A corporation that has
deferral stock outstanding as of the beginning of any calendar
year and that purchases any of its outstanding stock during the
calendar year must report on its income tax return for the
taxable year in which, or with which, the calendar year ends
the total dollar amount of the outstanding stock purchased
during the calendar year and such other information as the
Secretary may require for purposes of administering this
requirement.
---------------------------------------------------------------------------
\25\This requirement is met if the stock purchased by the
corporation includes all the corporation's outstanding deferral stock.
---------------------------------------------------------------------------
A qualified employee may make an inclusion deferral
election with respect to qualified stock attributable to a
statutory option. In that case, the option is not treated as a
statutory option and the rules relating to statutory options
and related stock do not apply. In addition, an arrangement
under which an employee may receive qualified stock is not
treated as a nonqualified deferred compensation plan solely
because of an employee's ability to make an inclusion deferral
election.
Deferred income inclusion applies also for purposes of the
employer's deduction of the amount of income attributable to
the qualified stock. That is, if an employee makes an inclusion
deferral election, the employer's deduction is deferred until
the employer's taxable year in which or with which ends the
taxable year of the employee for which the amount is included
in the employee's income as described in (1)-(5) above.
Qualified employee and qualified stock
Under the provision, a qualified employee means an
individual who is not an excluded employee and who agrees, in
the inclusion deferral election, to meet the requirements
necessary (as determined by the Secretary) to ensure the income
tax withholding requirements of the employer corporation with
respect to the qualified stock (as described below) are met.
For this purpose, an excluded employee with respect to a
corporation is any individual (1) who is, or has been at any
time during the 10 preceding calendar years, a one-percent
owner of the corporation,\26\ (2) who is, or has been at any
prior time, the chief executive officer or chief financial
officer of the corporation or an individual acting in either
capacity, (3) who is a family member of an individual described
in (1) or (2),\27\ or (4) who is, or has been for any of the 10
preceding taxable years, one of the four highest compensated
officers of the corporation.\28\
---------------------------------------------------------------------------
\26\One-percent owner status is determined under the top-heavy
rules for qualified retirement plans, that is, section
416(i)(1)(B)(ii).
\27\In the case of one-percent owners, this results from
application of the attribution rules of section 318 under section
416(i)(1)(B)(i)(II). Family members are determined under section
318(a)(1) and generally include an individual's spouse, children,
grandchildren and parents.
\28\Highest paid employee status is determined at the close of the
corporation's taxable year.
---------------------------------------------------------------------------
Qualified stock is any stock of a corporation if--
an employee receives the stock in connection
with the exercise of an option or in settlement of an
RSU, and
the option or RSU was provided by the
corporation to the employee in connection with the
performance of services and in a year in which the
corporation was an eligible corporation (as described
below).
However, qualified stock does not include any stock if, at
the time the employee's right to the stock becomes
substantially vested, the employee may sell the stock to, or
otherwise receive cash in lieu of stock from, the corporation.
A corporation is an eligible corporation with respect to a
calendar year if (1) no stock of the employer corporation (or
any predecessor) is readily tradable on an established
securities market during any preceding calendar year,\29\ and
(2) the corporation has a written plan under which, in the
calendar year, not less than 80 percent of all employees who
provide services to the corporation in the United States (or
any U.S. possession) are granted stock options, or RSUs, with
the same rights and privileges to receive qualified stock
(``80-percent requirement'').\30\ For this purpose, in general,
the determination of rights and privileges with respect to
stock is determined in a similar manner as provided under the
present-law ESPP rules.\31\ However, employees will not fail to
be treated as having the same rights and privileges to receive
qualified stock solely because the number of shares available
to all employees is not equal in amount, provided that the
number of shares available to each employee is more than a de
minimis amount. In addition, rights and privileges with respect
to the exercise of a stock option are not treated for this
purpose as the same as rights and privileges with respect to
the settlement of an RSU.\32\
---------------------------------------------------------------------------
\29\This requirement continues to apply up to the time an inclusion
deferral election is made. That is, under the provision, no inclusion
deferral election may be made with respect to qualified stock if any
stock of the corporation is readily tradable on an established
securities market at any time before the election is made.
\30\In applying the requirement that 80 percent of employees
receive stock options or RSUs, excluded employees and part-time
employees are not taken into account. For this purpose, part-time
employee is defined as under section 4980E(d)(4), that is, an employee
customarily employed for fewer than 30 hours per week.
\31\Sec. 423(b)(5).
\32\Under a transition rule, in the case of a calendar year
beginning before January 1, 2017, the 80-percent requirement is applied
without regard to whether the rights and privileges with respect to the
qualified stock are the same.
---------------------------------------------------------------------------
For purposes of the provision, corporations that are
members of the same controlled group are treated as one
corporation.
Notice, withholding and reporting requirements
Under the provision, a corporation that transfers qualified
stock to a qualified employee must provide a notice to the
qualified employee at the time (or a reasonable period before)
the employee's right to the qualified stock is substantially
vested (and income attributable to the stock would be
includible absent an inclusion deferral election). The notice
must (1) certify to the employee that the stock is qualified
stock, and (2) notify the employee (a) that the employee may
elect to defer income inclusion with respect to the stock and
(b) that, if the employee makes an inclusion deferral election,
the amount of income required to be included at the end of the
deferral period will be based on the value of the stock at the
time the employee's right to the stock is substantially vested,
notwithstanding whether the value of the stock has declined
during the deferral period, and the amount of income to be
included at the end of the deferral period will be subject to
withholding as provided under the provision, as well as of the
employee's responsibilities with respect to required
withholding. Failure to provide the notice may result in the
imposition of a penalty of $100 for each failure, subject to a
maximum penalty of $50,000 for all failures during any calendar
year.
An inclusion deferral election applies only for income tax
purposes. The application of FICA and FUTA are not affected.
The provision includes specific income tax withholding and
reporting requirements with respect to income subject to an
inclusion deferral election.
For the taxable year for which income subject to an
inclusion deferral election is required to be included in
income by the employee (as described above), the amount
required to be included in income is treated as wages with
respect to which the employer is required to withhold income
tax at a rate not less than the highest income tax rate
applicable to individual taxpayers.\33\ The employer must
report on Form W-2 the amount of income covered by an inclusion
deferral election (1) for the year of deferral and (2) for the
year the income is required to be included in income by the
employee. In addition, for any calendar year, the employer must
report on Form W-2 the aggregate amount of income covered by
inclusion deferral elections, determined as of the close of the
calendar year.
---------------------------------------------------------------------------
\33\That is, the maximum rate of tax in effect for the year under
section 1. The provision specifies that qualified stock is treated as a
noncash fringe benefit for income tax withholding purposes.
---------------------------------------------------------------------------
EFFECTIVE DATE
The provision generally applies with respect to stock
attributable to options exercised or RSUs settled after
December 31, 2016. Under a transition rule, until the Secretary
(or the Secretary's delegate) issues regulations or other
guidance implementing the 80-percent and employer notice
requirements under the provision, a corporation will be treated
as complying with those requirements (respectively) if it
complies with a reasonable good faith interpretation of the
requirements. The penalty for a failure to provide the notice
required under the provision applies to failures after December
31, 2016.
III. VOTES OF THE COMMITTEE
In compliance with clause 3(b) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the vote of the Committee on Ways and Means in its
consideration of H.R. 5719, the ``Empowering Employees through
Stock Ownership Act,'' on September 14, 2016.
The vote on the motion by Mr. Reichert to table Mr.
Crowley's motion to appeal the ruling of the Chair that the
amendment offered by Mr. Crowley was not germane was agreed to
by a roll call vote of 21 yeas to 12 nays (with a quorum bring
present). The vote was as follows:
----------------------------------------------------------------------------------------------------------------
Representative Yea Nay Present Representative Yea Nay Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady...................... X ........ ......... Mr. Levin........ ........ X .........
Mr. Johnson.................... ........ ........ ......... Mr. Rangel....... ........ X .........
Mr. Nunes...................... ........ ........ ......... Mr. McDermott.... ........ X .........
Mr. Tiberi..................... X ........ ......... Mr. Lewis........ ........ ........ .........
Mr. Reichert................... X ........ ......... Mr. Neal......... ........ X .........
Mr. Boustany................... ........ ........ ......... Mr. Becerra...... ........ ........ .........
Mr. Roskam..................... X ........ ......... Mr. Doggett...... ........ ........ .........
Mr. Price...................... X ........ ......... Mr. Thompson..... ........ X .........
Mr. Buchanan................... X ........ ......... Mr. Larson....... ........ X .........
Mr. Smith (NE)................. X ........ ......... Mr. Blumenauer... ........ X .........
Ms. Jenkins.................... X ........ ......... Mr. Kind......... ........ X .........
Mr. Paulsen.................... X ........ ......... Mr. Pascrell..... ........ X .........
Mr. Marchant................... X ........ ......... Mr. Crowley...... ........ X .........
Ms. Black...................... X ........ ......... Mr. Davis........ ........ X .........
Mr. Reed....................... X ........ ......... Ms. Sanchez...... ........ X .........
Mr. Young...................... X ........ .........
Mr. Kelly...................... X ........ .........
Mr. Renacci.................... X ........ .........
Mr. Meehan..................... X ........ .........
Ms. Noem....................... X ........ .........
Mr. Holding.................... X ........ .........
Mr. Smith (MO)................. X ........ .........
Mr. Dold....................... X ........ .........
Mr. Rice....................... X ........ .........
----------------------------------------------------------------------------------------------------------------
The Chairman's amendment in the nature of a substitute was
adopted by a voice vote (with a quorum being present).
The bill, H.R. 5719, as amended, was ordered favorably
reported to the House of Representatives by a voice vote (with
a quorum being present).
IV. BUDGET EFFECTS OF THE BILL
A. Committee Estimate of Budgetary Effects
In compliance with clause 3(d) of rule XIII of the Rules of
the House of Representatives, the following statement is made
concerning the effects on the budget of the bill, H.R. 5719, as
reported.
The bill, as reported, is estimated to have the following
effect on Federal fiscal year budget receipts for the period
2017-2026:
----------------------------------------------------------------------------------------------------------------
Fiscal years [millions of dollars]
-----------------------------------------------------------------------------------------------------------------
2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-21 2017-26
----------------------------------------------------------------------------------------------------------------
-116 -160 -166 -159 -142 -115 -81 -48 -32 -13 -744 -1,031
----------------------------------------------------------------------------------------------------------------
Note: Details do not add to totals due to rounding.
Pursuant to clause 8 of rule XIII of the Rules of the House
of Representatives, the following statement is made by the
Joint Committee on Taxation with respect to the provisions of
the bill amending the Internal Revenue Code of 1986: The gross
budgetary effect (before incorporating macroeconomic effects)
in any fiscal year is less than 0.25 percent of the current
projected gross domestic product of the United States for that
fiscal year; therefore, the bill is not ``major legislation''
for purposes of requiring that the estimate include the
budgetary effects of changes in economic output, employment,
capital stock and other macroeconomic variables.
B. Statement Regarding New Budget Authority and Tax Expenditures Budget
Authority
In compliance with clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives, the Committee states that the
bill involves no new or increased budget authority. The
Committee further states that the revenue-reducing provisions
of the bill involve increased tax expenditures. See amounts
shown in the table in Part IV.A. above.
C. Cost Estimate Prepared by the Congressional Budget Office
In compliance with clause 3(c)(3) of rule XIII of the Rules
of the House of Representatives, requiring a cost estimate
prepared by the CBO, the following statement by CBO is
provided.
U.S. Congress,
Congressional Budget Office,
Washington, DC, September 16, 2016.
Hon. Kevin Brady,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 5719, the
Empowering Employees through Stock Ownership Act.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Peter
Huether.
Sincerely,
Keith Hall.
Enclosure.
H.R. 5719--Empowering Employees through Stock Ownership Act
H.R. 5719 would amend the Internal Revenue Code to allow
certain employees to defer for up to seven years the
recognition of income on compensation paid to them in the form
of certain company restricted stock units or stock options.
Under current law, employees must generally include such
compensation in taxable income for both income and payroll tax
purposes, in the case of stock grants, when they become
substantially vested or, in the case of nonqualified stock
options, when they exercise the option. At the same time, the
business can take an equal deduction for compensation paid.
Under H.R. 5719, a company's employees would be eligible
for the deferral, for income tax purposes only, if the company
provides the stock compensation to at least 80 percent of its
workforce and the stock of the company has not been traded on a
securities market in any preceding year. The income deferral
period would end upon any of several events, such as the sale
of the stock or the stock becoming tradable on securities
markets, and the period would be limited to seven years after
the employee exercises an option and is vested in the stock, or
becomes vested in the restricted unit. The income deferral
would not be available to certain individuals, including
highly-paid employees and top management. In addition, as under
current law, businesses would take a deduction at the same time
as the employee would recognize the income. The changes under
HR. 5719 would be effective for options exercised and
restricted stock units settled after December 31, 2016.
The staff of the Joint Committee on Taxation (JCT)
estimates that the legislation would reduce revenues by about
$1.0 billion over the 2016-2026 period.
The Statutory Pay-As-You Go Act of 2010 establishes budget-
reporting and enforcement procedures for legislation affecting
revenues and direct spending. The net changes in revenues that
are subject to those pay-as-you-go procedures are shown in the
following table. Enacting the bill would not affect direct
spending.
CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R 5719, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON SEPTEMBER 14, 2016
--------------------------------------------------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-------------------------------------------------------------------------------------------------------------
2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2016-2021 2016-2026
--------------------------------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN THE DEFICIT
Statutory Pay-As-You-Go Effects........... 0 116 160 166 159 142 115 81 48 32 13 744 1,031
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Note: Components do not add to totals due to rounding.
JCT and CBO estimate that enacting the bill would not
increase net direct spending in any of the four consecutive 10-
year periods beginning in 2027 and would not increase on-budget
deficits by more than $5 billion in any of those periods.
JCT has determined that the bill contains no
intergovernmental or private-sector mandates as defined in the
Unfunded Mandates Reform Act
The CBO staff contact for this estimate is Peter Huether.
The estimate was approved by John McClelland, Assistant
Director for Tax Analysis.
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE
A. Committee Oversight Findings and Recommendations
With respect to clause 3(c)(1) of rule XIII of the Rules of
the House of Representatives (relating to oversight findings),
the Committee advises that it was as a result of the
Committee's review of the provisions of H.R. 5719 that the
Committee concluded that it is appropriate to report the bill,
as amended, favorably to the House of Representatives with the
recommendation that the bill do pass.
B. Statement of General Performance Goals and Objectives
With respect to clause 3(c)(4) of rule XIII of the Rules of
the House of Representatives, the Committee advises that the
bill contains no measure that authorizes funding, so no
statement of general performance goals and objectives for which
any measure authorizes funding is required.
C. Information Relating to Unfunded Mandates
This information is provided in accordance with section 423
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
The Committee has determined that the bill does not contain
Federal mandates on the private sector. The Committee has
determined that the bill does not impose a Federal
intergovernmental mandate on State, local, or tribal
governments.
D. Applicability of House Rule XXI 5(b)
Rule XXI 5(b) of the Rules of the House of Representatives
provides, in part, that ``A bill or joint resolution,
amendment, or conference report carrying a Federal income tax
rate increase may not be considered as passed or agreed to
unless so determined by a vote of not less than three-fifths of
the Members voting, a quorum being present.'' The Committee has
carefully reviewed the bill and states that the bill does not
involve any Federal income tax rate increases within the
meaning of the rule.
E. Tax Complexity Analysis
Section 4022(b) of the Internal Revenue Service
Restructuring and Reform Act of 1998 (``IRS Reform Act'')
requires the staff of the Joint Committee on Taxation (in
consultation with the Internal Revenue Service and the Treasury
Department) to provide a tax complexity analysis. The
complexity analysis is required for all legislation reported by
the Senate Committee on Finance, the House Committee on Ways
and Means, or any committee of conference if the legislation
includes a provision that directly or indirectly amends the
Internal Revenue Code of 1986 and has widespread applicability
to individuals or small businesses.
Pursuant to clause 3(h)(1) of rule XIII of the Rules of the
House of Representatives, the staff of the Joint Committee on
Taxation has determined that a complexity analysis is not
required under section 4022(b) of the IRS Reform Act because
the bill contains no provisions that amend the Internal Revenue
Code of 1986 and that have ``widespread applicability'' to
individuals or small businesses, within the meaning of the
rule.
F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff
Benefits
With respect to clause 9 of rule XXI of the Rules of the
House of Representatives, the Committee has carefully reviewed
the provisions of the bill and states that the provisions of
the bill do not contain any congressional earmarks, limited tax
benefits, or limited tariff benefits within the meaning of the
rule.
G. Duplication of Federal Programs
In compliance with Sec. 3(g)(2) of H. Res. 5 (114th
Congress), the Committee states that no provision of the bill
establishes or reauthorizes: (1) a program of the Federal
Government known to be duplicative of another Federal program,
(2) a program included in any report from the Government
Accountability Office to Congress pursuant to section 21 of
Public Law 111-139, or (3) a program related to a program
identified in the most recent Catalog of Federal Domestic
Assistance, published pursuant to the Federal Program
Information Act (Public Law 95-220, as amended by Public Law
98-169).
H. Disclosure of Directed Rule Makings
In compliance with Sec. 3(i) of H. Res. 5 (114th Congress),
the following statement is made concerning directed rule
makings: The Committee estimates that the bill requires no
directed rule makings within the meaning of such section.
VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED
A. Text of Existing Law Amended or Repealed by the Bill, as Reported
In compliance with clause 3(e)(1)(A) of rule XIII of the
Rules of the House of Representatives, the text of each section
proposed to be amended or repealed by the bill, as reported, is
shown below:
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e)(1)(A) of rule XIII of the
Rules of the House of Representatives, the text of each section
proposed to be amended or repealed by the bill, as reported, is
shown below:
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME
* * * * * * *
SEC. 83. PROPERTY TRANSFERRED IN CONNECTION WITH PERFORMANCE OF
SERVICES.
(a) General Rule.--If, in connection with the performance of
services, property is transferred to any person other than the
person for whom such services are performed, the excess of--
(1) the fair market value of such property
(determined without regard to any restriction other
than a restriction which by its terms will never lapse)
at the first time the rights of the person having the
beneficial interest in such property are transferable
or are not subject to a substantial risk of forfeiture,
whichever occurs earlier, over
(2) the amount (if any) paid for such property, shall
be included in the gross income of the person who
performed such services in the first taxable year in
which the rights of the person having the beneficial
interest in such property are transferable or are not
subject to a substantial risk of forfeiture, whichever
is applicable. The preceding sentence shall not apply
if such person sells or otherwise disposes of such
property in an arm's length transaction before his
rights in such property become transferable or not
subject to a substantial risk of forfeiture.
(b) Election to Include in Gross Income in Year of
Transfer.--
(1) In general.-- Any person who performs services in
connection with which property is transferred to any
person may elect to include in his gross income for the
taxable year in which such property is transferred, the
excess of--
(A) the fair market value of such property at
the time of transfer (determined without regard
to any restriction other than a restriction
which by its terms will never lapse), over
(B) the amount (if any) paid for such
property.
If such election is made, subsection (a) shall not
apply with respect to the transfer of such property,
and if such property is subsequently forfeited, no
deduction shall be allowed in respect of such
forfeiture.
(2) Election.-- An election under paragraph (1) with
respect to any transfer of property shall be made in
such manner as the Secretary prescribes and shall be
made not later than 30 days after the date of such
transfer. Such election may not be revoked except with
the consent of the Secretary.
(c) Special Rules.--For purposes of this section--
(1) Substantial risk of forfeiture.-- The rights of a
person in property are subject to a substantial risk of
forfeiture if such person's rights to full enjoyment of
such property are conditioned upon the future
performance of substantial services by any individual.
(2) Transferability of property.-- The rights of a
person in property are transferable only if the rights
in such property of any transferee are not subject to a
substantial risk of forfeiture.
(3) Sales which may give rise to suit under section
16(b) of the Securities Exchange Act of 1934.-- So long
as the sale of property at a profit could subject a
person to suit under section 16(b) of the Securities
Exchange Act of 1934, such person's rights in such
property are--
(A) subject to a substantial risk of
forfeiture, and
(B) not transferable.
(4) For purposes of determining an individual's basis
in property transferred in connection with the
performance of services, rules similar to the rules of
section 72(w) shall apply.
(d) Certain Restrictions Which Will Never Lapse.--
(1) Valuation.-- In the case of property subject to a
restriction which by its terms will never lapse, and
which allows the transferee to sell such property only
at a price determined under a formula, the price so
determined shall be deemed to be the fair market value
of the property unless established to the contrary by
the Secretary, and the burden of proof shall be on the
Secretary with respect to such value.
(2) Cancellation.-- If, in the case of property
subject to a restriction which by its terms will never
lapse, the restriction is canceled, then, unless the
taxpayer establishes--
(A) that such cancellation was not
compensatory, and
(B) that the person, if any, who would be
allowed a deduction if the cancellation were
treated as compensatory, will treat the
transaction as not compensatory, as evidenced
in such manner as the Secretary shall prescribe
by regulations,
the excess of the fair market value of the property
(computed without regard to the restrictions) at the
time of cancellation over the sum of--
(C) the fair market value of such property
(computed by taking the restriction into
account) immediately before the cancellation,
and
(D) the amount, if any, paid for the
cancellation, shall be treated as compensation
for the taxable year in which such cancellation
occurs.
(e) Applicability of Section.--This section shall not apply
to--
(1) a transaction to which section 421 applies,
(2) a transfer to or from a trust described in
section 401(a) or a transfer under an annuity plan
which meets the requirements of section 404(a)(2),
(3) the transfer of an option without a readily
ascertainable fair market value,
(4) the transfer of property pursuant to the exercise
of an option with a readily ascertainable fair market
value at the date of grant, or
(5) group-term life insurance to which section 79
applies.
(f) Holding Period.--In determining the period for which the
taxpayer has held property to which subsection (a) applies,
there shall be included only the period beginning at the first
time his rights in such property are transferable or are not
subject to a substantial risk of forfeiture, whichever occurs
earlier.
(g) Certain Exchanges.--If property to which subsection (a)
applies is exchanged for property subject to restrictions and
conditions substantially similar to those to which the property
given in such exchange was subject, and if section 354, 355,
356, or 1036 (or so much of section 1031 as relates to section
1036) applied to such exchange, or if such exchange was
pursuant to the exercise of a conversion privilege--
(1) such exchange shall be disregarded for purposes
of subsection (a), and
(2) the property received shall be treated as
property to which subsection (a) applies.
(h) Deduction by Employer.--In the case of a transfer of
property to which this section applies or a cancellation of a
restriction described in subsection (d), there shall be allowed
as a deduction under section 162, to the person for whom were
performed the services in connection with which such property
was transferred, an amount equal to the amount included under
subsection (a), (b), or (d)(2) in the gross income of the
person who performed such services. Such deduction shall be
allowed for the taxable year of such person in which or with
which ends the taxable year in which such amount is included in
the gross income of the person who performed such services.
* * * * * * *
Subchapter D--Deferred Compensation, Etc
* * * * * * *
PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC
* * * * * * *
Subpart A--General Rule
* * * * * * *
SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED COMPENSATION UNDER
NONQUALIFIED DEFERRED COMPENSATION PLANS.
(a) Rules Relating to Constructive Receipt.--
(1) Plan failures.--
(A) Gross income inclusion.--
(i) In general.-- If at any time
during a taxable year a nonqualified
deferred compensation plan--
(I) fails to meet the
requirements of paragraphs (2),
(3), and (4), or
(II) is not operated in
accordance with such
requirements, all compensation
deferred under the plan for the
taxable year and all preceding
taxable years shall be
includible in gross income for
the taxable year to the extent
not subject to a substantial
risk of forfeiture and not
previously included in gross
income.
(ii) Application only to affected
participants.-- Clause (i) shall only
apply with respect to all compensation
deferred under the plan for
participants with respect to whom the
failure relates.
(B) Interest and additional tax payable with
respect to previously deferred compensation.--
(i) In general.-- If compensation is
required to be included in gross income
under subparagraph (A) for a taxable
year, the tax imposed by this chapter
for the taxable year shall be increased
by the sum of--
(I) the amount of interest
determined under clause (ii),
and
(II) an amount equal to 20
percent of the compensation
which is required to be
included in gross income.
(ii) Interest.-- For purposes of
clause (i), the interest determined
under this clause for any taxable year
is the amount of interest at the
underpayment rate plus 1 percentage
point on the underpayments that would
have occurred had the deferred
compensation been includible in gross
income for the taxable year in which
first deferred or, if later, the first
taxable year in which such deferred
compensation is not subject to a
substantial risk of forfeiture.
(2) Distributions.--
(A) In general.-- The requirements of this
paragraph are met if the plan provides that
compensation deferred under the plan may not be
distributed earlier than--
(i) separation from service as
determined by the Secretary (except as
provided in subparagraph (B)(i)),
(ii) the date the participant becomes
disabled (within the meaning of
subparagraph (C)),
(iii) death,
(iv) a specified time (or pursuant to
a fixed schedule) specified under the
plan at the date of the deferral of
such compensation,
(v) to the extent provided by the
Secretary, a change in the ownership or
effective control of the corporation,
or in the ownership of a substantial
portion of the assets of the
corporation, or
(vi) the occurrence of an
unforeseeable emergency.
(B) Special rules.--
(i) Specified employees.-- In the
case of any specified employee, the
requirement of subparagraph (A)(i) is
met only if distributions may not be
made before the date which is 6 months
after the date of separation from
service (or, if earlier, the date of
death of the employee). For purposes of
the preceding sentence, a specified
employee is a key employee (as defined
in section 416(i) without regard to
paragraph (5) thereof) of a corporation
any stock in which is publicly traded
on an established securities market or
otherwise.
(ii) Unforeseeable emergency.-- For
purposes of subparagraph (A)(vi)--
(I) In general.-- The term
``unforeseeable emergency''
means a severe financial
hardship to the participant
resulting from an illness or
accident of the participant,
the participant's spouse, or a
dependent (as defined in
section 152(a)) of the
participant, loss of the
participant's property due to
casualty, or other similar
extraordinary and unforeseeable
circumstances arising as a
result of events beyond the
control of the participant.
(II) Limitation on
distributions.-- The
requirement of subparagraph
(A)(vi) is met only if, as
determined under regulations of
the Secretary, the amounts
distributed with respect to an
emergency do not exceed the
amounts necessary to satisfy
such emergency plus amounts
necessary to pay taxes
reasonably anticipated as a
result of the distribution,
after taking into account the
extent to which such hardship
is or may be relieved through
reimbursement or compensation
by insurance or otherwise or by
liquidation of the
participant's assets (to the
extent the liquidation of such
assets would not itself cause
severe financial hardship).
(C) Disabled.-- For purposes of subparagraph
(A)(ii), a participant shall be considered
disabled if the participant--
(i) is unable to engage in any
substantial gainful activity by reason
of any medically determinable physical
or mental impairment which can be
expected to result in death or can be
expected to last for a continuous
period of not less than 12 months, or
(ii) is, by reason of any medically
determinable physical or mental
impairment which can be expected to
result in death or can be expected to
last for a continuous period of not
less than 12 months, receiving income
replacement benefits for a period of
not less than 3 months under an
accident and health plan covering
employees of the participant's
employer.
(3) Acceleration of benefits.-- The requirements of
this paragraph are met if the plan does not permit the
acceleration of the time or schedule of any payment
under the plan, except as provided in regulations by
the Secretary.
(4) Elections.--
(A) In general.-- The requirements of this
paragraph are met if the requirements of
subparagraphs (B) and (C) are met.
(B) Initial deferral decision.--
(i) In general.-- The requirements of
this subparagraph are met if the plan
provides that compensation for services
performed during a taxable year may be
deferred at the participant's election
only if the election to defer such
compensation is made not later than the
close of the preceding taxable year or
at such other time as provided in
regulations.
(ii) First year of eligibility.-- In
the case of the first year in which a
participant becomes eligible to
participate in the plan, such election
may be made with respect to services to
be performed subsequent to the election
within 30 days after the date the
participant becomes eligible to
participate in such plan.
(iii) Performance-based
compensation.-- In the case of any
performance-based compensation based on
services performed over a period of at
least 12 months, such election may be
made no later than 6 months before the
end of the period.
(C) Changes in time and form of
distribution.-- The requirements of this
subparagraph are met if, in the case of a plan
which permits under a subsequent election a
delay in a payment or a change in the form of
payment--
(i) the plan requires that such
election may not take effect until at
least 12 months after the date on which
the election is made,
(ii) in the case of an election
related to a payment not described in
clause (ii), (iii), or (vi) of
paragraph (2)(A), the plan requires
that the payment with respect to which
such election is made be deferred for a
period of not less than 5 years from
the date such payment would otherwise
have been made, and
(iii) the plan requires that any
election related to a payment described
in paragraph (2)(A)(iv) may not be made
less than 12 months prior to the date
of the first scheduled payment under
such paragraph.
(b) Rules Relating to Funding.--
(1) Offshore property in a trust.-- In the case of
assets set aside (directly or indirectly) in a trust
(or other arrangement determined by the Secretary) for
purposes of paying deferred compensation under a
nonqualified deferred compensation plan, for purposes
of section 83 such assets shall be treated as property
transferred in connection with the performance of
services whether or not such assets are available to
satisfy claims of general creditors--
(A) at the time set aside if such assets (or
such trust or other arrangement) are located
outside of the United States, or
(B) at the time transferred if such assets
(or such trust or other arrangement) are
subsequently transferred outside of the United
States.
This paragraph shall not apply to assets located in a
foreign jurisdiction if substantially all of the
services to which the nonqualified deferred
compensation relates are performed in such
jurisdiction.
(2) Employer's financial health.-- In the case of
compensation deferred under a nonqualified deferred
compensation plan, there is a transfer of property
within the meaning of section 83 with respect to such
compensation as of the earlier of--
(A) the date on which the plan first provides
that assets will become restricted to the
provision of benefits under the plan in
connection with a change in the employer's
financial health, or
(B) the date on which assets are so
restricted, whether or not such assets are
available to satisfy claims of general
creditors.
(3) Treatment of employer's defined benefit plan
during restricted period.--
(A) In general.-- If--
(i) during any restricted period with
respect to a single-employer defined
benefit plan, assets are set aside or
reserved (directly or indirectly) in a
trust (or other arrangement as
determined by the Secretary) or
transferred to such a trust or other
arrangement for purposes of paying
deferred compensation of an applicable
covered employee under a nonqualified
deferred compensation plan of the plan
sponsor or member of a controlled group
which includes the plan sponsor, or
(ii) a nonqualified deferred
compensation plan of the plan sponsor
or member of a controlled group which
includes the plan sponsor provides that
assets will become restricted to the
provision of benefits under the plan to
an applicable covered employee in
connection with such restricted period
(or other similar financial measure
determined by the Secretary) with
respect to the defined benefit plan, or
assets are so restricted,
such assets shall, for purposes of section 83,
be treated as property transferred in
connection with the performance of services
whether or not such assets are available to
satisfy claims of general creditors. Clause (i)
shall not apply with respect to any assets
which are so set aside before the restricted
period with respect to the defined benefit
plan.
(B) Restricted period.-- For purposes of this
section, the term ``restricted period'' means,
with respect to any plan described in
subparagraph (A)--
(i) any period during which the plan
is in at-risk status (as defined in
section 430(i));
(ii) any period the plan sponsor is a
debtor in a case under title 11, United
States Code, or similar Federal or
State law, and
(iii) the 12-month period beginning
on the date which is 6 months before
the termination date of the plan if, as
of the termination date, the plan is
not sufficient for benefit liabilities
(within the meaning of section 4041 of
the Employee Retirement Income Security
Act of 1974).
(C) Special rule for payment of taxes on
deferred compensation included in income.-- If
an employer provides directly or indirectly for
the payment of any Federal, State, or local
income taxes with respect to any compensation
required to be included in gross income by
reason of this paragraph--
(i) interest shall be imposed under
subsection (a)(1)(B)(i)(I) on the
amount of such payment in the same
manner as if such payment was part of
the deferred compensation to which it
relates,
(ii) such payment shall be taken into
account in determining the amount of
the additional tax under subsection
(a)(1)(B)(i)(II) in the same manner as
if such payment was part of the
deferred compensation to which it
relates, and
(iii) no deduction shall be allowed
under this title with respect to such
payment.
(D) Other definitions.-- For purposes of this
section--
(i) Applicable covered employee.--
The term ``applicable covered
employee'' means any--
(I) covered employee of a
plan sponsor,
(II) covered employee of a
member of a controlled group
which includes the plan
sponsor, and
(III) former employee who was
a covered employee at the time
of termination of employment
with the plan sponsor or a
member of a controlled group
which includes the plan
sponsor.
(ii) Covered employee.-- The term
``covered employee'' means an
individual described in section
162(m)(3) or an individual subject to
the requirements of section 16(a) of
the Securities Exchange Act of 1934.
(4) Income inclusion for offshore trusts and
employer's financial health.-- For each taxable year
that assets treated as transferred under this
subsection remain set aside in a trust or other
arrangement subject to paragraph (1), (2), or (3), any
increase in value in, or earnings with respect to, such
assets shall be treated as an additional transfer of
property under this subsection (to the extent not
previously included in income).
(5) Interest on tax liability payable with respect to
transferred property.--
(A) In general.-- If amounts are required to
be included in gross income by reason of
paragraph (1), (2), or (3) for a taxable year,
the tax imposed by this chapter for such
taxable year shall be increased by the sum of--
(i) the amount of interest determined
under subparagraph (B), and
(ii) an amount equal to 20 percent of
the amounts required to be included in
gross income.
(B) Interest.-- For purposes of subparagraph
(A), the interest determined under this
subparagraph for any taxable year is the amount
of interest at the underpayment rate plus 1
percentage point on the underpayments that
would have occurred had the amounts so required
to be included in gross income by paragraph
(1), (2), or (3) been includible in gross
income for the taxable year in which first
deferred or, if later, the first taxable year
in which such amounts are not subject to a
substantial risk of forfeiture.
(c) No Inference on Earlier Income Inclusion or Requirement
of Later Inclusion.--Nothing in this section shall be construed
to prevent the inclusion of amounts in gross income under any
other provision of this chapter or any other rule of law
earlier than the time provided in this section. Any amount
included in gross income under this section shall not be
required to be included in gross income under any other
provision of this chapter or any other rule of law later than
the time provided in this section.
(d) Other Definitions and Special Rules.--For purposes of
this section:
(1) Nonqualified deferred compensation plan.-- The
term ``nonqualified deferred compensation plan'' means
any plan that provides for the deferral of
compensation, other than--
(A) a qualified employer plan, and
(B) any bona fide vacation leave, sick leave,
compensatory time, disability pay, or death
benefit plan.
(2) Qualified employer plan.-- The term ``qualified
employer plan'' means--
(A) any plan, contract, pension, account, or
trust described in subparagraph (A) or (B) of
section 219(g)(5) (without regard to
subparagraph (A)(iii)),
(B) any eligible deferred compensation plan
(within the meaning of section 457(b)), and
(C) any plan described in section 415(m).
(3) Plan includes arrangements, etc..-- The term
``plan'' includes any agreement or arrangement,
including an agreement or arrangement that includes one
person.
(4) Substantial risk of forfeiture.-- The rights of a
person to compensation are subject to a substantial
risk of forfeiture if such person's rights to such
compensation are conditioned upon the future
performance of substantial services by any individual.
(5) Treatment of earnings.-- References to deferred
compensation shall be treated as including references
to income (whether actual or notional) attributable to
such compensation or such income.
(6) Aggregation rules.-- Except as provided by the
Secretary, rules similar to the rules of subsections
(b) and (c) of section 414 shall apply.
(e) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section, including regulations--
(1) providing for the determination of amounts of
deferral in the case of a nonqualified deferred
compensation plan which is a defined benefit plan,
(2) relating to changes in the ownership and control
of a corporation or assets of a corporation for
purposes of subsection (a)(2)(A)(v),
(3) exempting arrangements from the application of
subsection (b) if such arrangements will not result in
an improper deferral of United States tax and will not
result in assets being effectively beyond the reach of
creditors,
(4) defining financial health for purposes of
subsection (b)(2), and
(5) disregarding a substantial risk of forfeiture in
cases where necessary to carry out the purposes of this
section.
* * * * * * *
PART II--CERTAIN STOCK OPTIONS
* * * * * * *
SEC. 422. INCENTIVE STOCK OPTIONS.
(a) In General.--Section 421(a) shall apply with respect to
the transfer of a share of stock to an individual pursuant to
his exercise of an incentive stock option if--
(1) no disposition of such share is made by him
within 2 years from the date of the granting of the
option nor within 1 year after the transfer of such
share to him, and
(2) at all times during the period beginning on the
date of the granting of the option and ending on the
day 3 months before the date of such exercise, such
individual was an employee of either the corporation
granting such option, a parent or subsidiary
corporation of such corporation, or a corporation or a
parent or subsidiary corporation of such corporation
issuing or assuming a stock option in a transaction to
which section 424(a) applies.
(b) Incentive Stock Option.--For purposes of this part, the
term ``incentive stock option'' means an option granted to an
individual for any reason connected with his employment by a
corporation, if granted by the employer corporation or its
parent or subsidiary corporation, to purchase stock of any of
such corporations, but only if--
(1) the option is granted pursuant to a plan which
includes the aggregate number of shares which may be
issued under options and the employees (or class of
employees) eligible to receive options, and which is
approved by the stockholders of the granting
corporation within 12 months before or after the date
such plan is adopted;
(2) such option is granted within 10 years from the
date such plan is adopted, or the date such plan is
approved by the stockholders, whichever is earlier;
(3) such option by its terms is not exercisable after
the expiration of 10 years from the date such option is
granted;
(4) the option price is not less than the fair market
value of the stock at the time such option is granted;
(5) such option by its terms is not transferable by
such individual otherwise than by will or the laws of
descent and distribution, and is exercisable, during
his lifetime, only by him; and
(6) such individual, at the time the option is
granted, does not own stock possessing more than 10
percent of the total combined voting power of all
classes of stock of the employer corporation or of its
parent or subsidiary corporation.
Such term shall not include any option if (as of the time the
option is granted) the terms of such option provide that it
will not be treated as an incentive stock option.
(c) Special Rules.--
(1) Good faith efforts to value of stock.-- If a
share of stock is transferred pursuant to the exercise
by an individual of an option which would fail to
qualify as an incentive stock option under subsection
(b) because there was a failure in an attempt, made in
good faith, to meet the requirement of subsection
(b)(4), the requirement of subsection (b)(4) shall be
considered to have been met. To the extent provided in
regulations by the Secretary, a similar rule shall
apply for purposes of subsection (d).
(2) Certain disqualifying dispositions where amount
realized is less than value at exercise.-- If--
(A) an individual who has acquired a share of
stock by the exercise of an incentive stock
option makes a disposition of such share within
either of the periods described in subsection
(a)(1), and
(B) such disposition is a sale or exchange
with respect to which a loss (if sustained)
would be recognized to such individual,
then the amount which is includible in the gross income
of such individual, and the amount which is deductible
from the income of his employer corporation, as
compensation attributable to the exercise of such
option shall not exceed the excess (if any) of the
amount realized on such sale or exchange over the
adjusted basis of such share.
(3) Certain transfers by insolvent individuals.-- If
an insolvent individual holds a share of stock acquired
pursuant to his exercise of an incentive stock option,
and if such share is transferred to a trustee,
receiver, or other similar fiduciary in any proceeding
under title 11 or any other similar insolvency
proceeding, neither such transfer, nor any other
transfer of such share for the benefit of his creditors
in such proceeding, shall constitute a disposition of
such share for purposes of subsection (a)(1).
(4) Permissible provisions.-- An option which meets
the requirements of subsection (b) shall be treated as
an incentive stock option even if--
(A) the employee may pay for the stock with
stock of the corporation granting the option,
(B) the employee has a right to receive
property at the time of exercise of the option,
or
(C) the option is subject to any condition
not inconsistent with the provisions of
subsection (b).
Subparagraph (B) shall apply to a transfer of property
(other than cash) only if section 83 applies to the
property so transferred.
(5) 10-percent shareholder rule.-- Subsection (b)(6)
shall not apply if at the time such option is granted
the option price is at least 110 percent of the fair
market value of the stock subject to the option and
such option by its terms is not exercisable after the
expiration of 5 years from the date such option is
granted.
(6) Special rule when disabled.-- For purposes of
subsection (a)(2), in the case of an employee who is
disabled (within the meaning of section 22(e)(3)), the
3-month period of subsection (a)(2) shall be 1 year.
(7) Fair market value.-- For purposes of this
section, the fair market value of stock shall be
determined without regard to any restriction other than
a restriction which, by its terms, will never lapse.
(d) $100,000 per year limitation
(1) In general.-- To the extent that the aggregate
fair market value of stock with respect to which
incentive stock options (determined without regard to
this subsection) are exercisable for the 1st time by
any individual during any calendar year (under all
plans of the individual's employer corporation and its
parent and subsidiary corporations) exceeds $100,000,
such options shall be treated as options which are not
incentive stock options.
(2) Ordering rule.-- Paragraph (1) shall be applied
by taking options into account in the order in which
they were granted.
(3) Determination of fair market value.-- For
purposes of paragraph (1), the fair market value of any
stock shall be determined as of the time the option
with respect to such stock is granted.
* * * * * * *
SEC. 423. EMPLOYEE STOCK PURCHASE PLANS.
(a) General Rule.--Section 421(a) shall apply with respect to
the transfer of a share of stock to an individual pursuant to
his exercise of an option granted under an employee stock
purchase plan (as defined in subsection (b)) if--
(1) no disposition of such share is made by him
within 2 years after the date of the granting of the
option nor within 1 year after the transfer of such
share to him; and
(2) at all times during the period beginning with the
date of the granting of the option and ending on the
day 3 months before the date of such exercise, he is an
employee of the corporation granting such option, a
parent or subsidiary corporation of such corporation,
or a corporation or a parent or subsidiary corporation
of such corporation issuing or assuming a stock option
in a transaction to which section 424(a) applies.
(b) Employee Stock Purchase Plan.--For purposes of this part,
the term ``employee stock purchase plan'' means a plan which
meets the following requirements:
(1) the plan provides that options are to be granted
only to employees of the employer corporation or of its
parent or subsidiary corporation to purchase stock in
any such corporation;
(2) such plan is approved by the stockholders of the
granting corporation within 12 months before or after
the date such plan is adopted;
(3) under the terms of the plan, no employee can be
granted an option if such employee, immediately after
the option is granted, owns stock possessing 5 percent
or more of the total combined voting power or value of
all classes of stock of the employer corporation or of
its parent or subsidiary corporation. For purposes of
this paragraph, the rules of section 424(d) shall apply
in determining the stock ownership of an individual,
and stock which the employee may purchase under
outstanding options shall be treated as stock owned by
the employee;
(4) under the terms of the plan, options are to be
granted to all employees of any corporation whose
employees are granted any of such options by reason of
their employment by such corporation, except that there
may be excluded--
(A) employees who have been employed less
than 2 years,
(B) employees whose customary employment is
20 hours or less per week,
(C) employees whose customary employment is
for not more than 5 months in any calendar
year, and
(D) highly compensated employees (within the
meaning of section 414(q));
(5) under the terms of the plan, all employees
granted such options shall have the same rights and
privileges, except that the amount of stock which may
be purchased by any employee under such option may bear
a uniform relationship to the total compensation, or
the basic or regular rate of compensation, of
employees, and the plan may provide that no employee
may purchase more than a maximum amount of stock fixed
under the plan;
(6) under the terms of the plan, the option price is
not less than the lesser of--
(A) an amount equal to 85 percent of the fair
market value of the stock at the time such
option is granted, or
(B) an amount which under the terms of the
option may not be less than 85 percent of the
fair market value of the stock at the time such
option is exercised;
(7) under the terms of the plan, such option cannot
be exercised after the expiration of--
(A) 5 years from the date such option is
granted if, under the terms of such plan, the
option price is to be not less than 85 percent
of the fair market value of such stock at the
time of the exercise of the option, or
(B) 27 months from the date such option is
granted, if the option price is not
determinable in the manner described in
subparagraph (A) (8) under the terms of the
plan, no employee may be granted an option
which permits his rights to purchase stock
under all such plans of his employer
corporation and its parent and subsidiary
corporations to accrue at a rate which exceeds
$25,000 of fair market value of such stock
(determined at the time such option is granted)
for each calendar year in which such option is
outstanding at any time. For purposes of this
paragraph--
(A) the right to purchase stock under an
option accrues when the option (or any portion
thereof) first becomes exercisable during the
calendar year;
(B) the right to purchase stock under an
option accrues at the rate provided in the
option, but in no case may such rate exceed
$25,000 of fair market value of such stock
(determined at the time such option is granted)
for any one calendar year; and
(C) a right to purchase stock which has
accrued under one option granted pursuant to
the plan may not be carried over to any other
option; and
(9) under the terms of the plan, such option is not
transferable by such individual otherwise than by will
or the laws of descent and distribution, and is
exercisable, during his lifetime, only by him.
For purposes of paragraphs (3) to (9), inclusive, where
additional terms are contained in an offering made under a
plan, such additional terms shall, with respect to options
exercised under such offering, be treated as a part of the
terms of such plan.
(c) Special Rule Where Option Price Is Between 85 Percent and
100 Percent of Value of Stock.--If the option price of a share
of stock acquired by an individual pursuant to a transfer to
which subsection (a) applies was less than 100 percent of the
fair market value of such share at the time such option was
granted, then, in the event of any disposition of such share by
him which meets the holding period requirements of subsection
(a), or in the event of his death (whenever occurring) while
owning such share, there shall be included as compensation (and
not as gain upon the sale or exchange of a capital asset) in
his gross income, for the taxable year in which falls the date
of such disposition or for the taxable year closing with his
death, whichever applies, an amount equal to the lesser of--
(1) the excess of the fair market value of the share
at the time of such disposition or death over the
amount paid for the share under the option, or
(2) the excess of the fair market value of the share
at the time the option was granted over the option
price.
If the option price is not fixed or determinable at the time
the option is granted, then for purposes of this subsection,
the option price shall be determined as if the option were
exercised at such time. In the case of the disposition of such
share by the individual, the basis of the share in his hands at
the time of such disposition shall be increased by an amount
equal to the amount so includible in his gross income. No
amount shall be required to be deducted and withheld under
chapter 24 with respect to any amount treated as compensation
under this subsection.
* * * * * * *
Subtitle C--Employment Taxes
* * * * * * *
CHAPTER 24--COLLECTION OF INCOME TAX AT SOURCE ON WAGES
* * * * * * *
SEC. 3401. DEFINITIONS.
(a) Wages.--For purposes of this chapter, the term ``wages''
means all remuneration (other than fees paid to a public
official) for services performed by an employee for his
employer, including the cash value of all remuneration
(including benefits) paid in any medium other than cash; except
that such term shall not include remuneration paid--
(1) for active service performed in a month for which
such employee is entitled to the benefits of section
112 (relating to certain combat zone compensation of
members of the Armed Forces of the United States) to
the extent remuneration for such service is excludable
from gross income under such section; or
(2) for agricultural labor (as defined in section
3121(g)) unless the remuneration paid for such labor is
wages (as defined in section 3121(a)); or
(3) for domestic service in a private home, local
college club, or local chapter of a college fraternity
or sorority; or
(4) for service not in the course of the employer's
trade or business performed in any calendar quarter by
an employee, unless the cash remuneration paid for such
service is $50 or more and such service is performed by
an individual who is regularly employed by such
employer to perform such service. For purposes of this
paragraph, an individual shall be deemed to be
regularly employed by an employer during a calendar
quarter only if--
(A) on each of some 24 days during such
quarter such individual performs for such
employer for some portion of the day service
not in the course of the employer's trade or
business; or
(B) such individual was regularly employed
(as determined under subparagraph (A)) by such
employer in the performance of such service
during the preceding calendar quarter; or
(5) for services by a citizen or resident of the
United States for a foreign government or an
international organization; or
(6) for such services, performed by a nonresident
alien individual, as may be designated by regulations
prescribed by the Secretary; or
(8)(A) for services for an employer (other than the
United States or any agency thereof)--
(i) performed by a citizen of the
United States if, at the time of the
payment of such remuneration, it is
reasonable to believe that such
remuneration will be excluded from
gross income under section 911; or
(ii) performed in a foreign country
or in a possession of the United States
by such a citizen if, at the time of
the payment of such remuneration, the
employer is required by the law of any
foreign country or possession of the
United States to withhold income tax
upon such remuneration; or
(B) for services for an employer (other than
the United States or any agency thereof)
performed by a citizen of the United States
within a possession of the United States (other
than Puerto Rico), if it is reasonable to
believe that at least 80 percent of the
remuneration to be paid to the employee by such
employer during the calendar year will be for
such services; or
(C) for services for an employer (other than
the United States or any agency thereof)
performed by a citizen of the United States
within Puerto Rico, if it is reasonable to
believe that during the entire calendar year
the employee will be a bona fide resident of
Puerto Rico; or
(D) for services for the United States (or
any agency thereof) performed by a citizen of
the United States within a possession of the
United States to the extent the United States
(or such agency) withholds taxes on such
remuneration pursuant to an agreement with such
possession; or
(9) for services performed by a duly ordained,
commissioned, or licensed minister of a church in the
exercise of his ministry or by a member of a religious
order in the exercise of duties required by such order;
or
(10)(A) for services performed by an individual under
the age of 18 in the delivery or distribution of
newspapers or shopping news, not including delivery or
distribution to any point for subsequent delivery or
distribution; or
(B) for services performed by an individual
in, and at the time of, the sale of newspapers
or magazines to ultimate consumers, under an
arrangement under which the newspapers or
magazines are to be sold by him at a fixed
price, his compensation being based on the
retention of the excess of such price over the
amount at which the newspapers or magazines are
charged to him, whether or not he is guaranteed
a minimum amount of compensation for such
services, or is entitled to be credited with
the unsold newspapers or magazines turned back;
or
(11) for services not in the course of the employer's
trade or business, to the extent paid in any medium
other than cash; or
(12) to, or on behalf of, an employee or his
beneficiary--
(A) from or to a trust described in section
401(a) which is exempt from tax under section
501(a) at the time of such payment unless such
payment is made to an employee of the trust as
remuneration for services rendered as such
employee and not as a beneficiary of the trust;
or
(B) under or to an annuity plan which, at the
time of such payment, is a plan described in
section 403(a); or
(C) for a payment described in section
402(h)(1) and (2) if, at the time of such
payment, it is reasonable to believe that the
employee will be entitled to an exclusion under
such section for payment; or
(D) under an arrangement to which section
408(p) applies; or
(13) pursuant to any provision of law other than
section 5(c) or 6(1) of the Peace Corps Act, for
service performed as a volunteer or volunteer leader
within the meaning of such Act; or
(E) under or to an eligible deferred
compensation plan which, at the time of such
payment, is a plan described in section 457(b)
which is maintained by an eligible employer
described in section 457(e)(1)(A), or
(14) in the form of group-term life insurance on the
life of an employee; or
(15) to or on behalf of an employee if (and to the
extent that) at the time of the payment of such
remuneration it is reasonable to believe that a
corresponding deduction is allowable under section 217
(determined without regard to section 274(n)); or
(16)(A) as tips in any medium other than cash;
(B) as cash tips to an employee in any
calendar month in the course of his employment
by an employer unless the amount of such cash
tips is $20 or more;
(17) for service described in section 3121(b)(20);
(18) for any payment made, or benefit furnished, to
or for the benefit of an employee if at the time of
such payment or such furnishing it is reasonable to
believe that the employee will be able to exclude such
payment or benefit from income under section 127, 129,
134(b)(4), or 134(b)(5);
(19) for any benefit provided to or on behalf of an
employee if at the time such benefit is provided it is
reasonable to believe that the employee will be able to
exclude such benefit from income under section 74(c),
108(f)(4), 117, or 132;
(20) for any medical care reimbursement made to or
for the benefit of an employee under a self-insured
medical reimbursement plan (within the meaning of
section 105(h)(6));
(21) for any payment made to or for the benefit of an
employee if at the time of such payment it is
reasonable to believe that the employee will be able to
exclude such payment from income under section 106(b);
(22) any payment made to or for the benefit of an
employee if at the time of such payment it is
reasonable to believe that the employee will be able to
exclude such payment from income under section 106(d);
or
(23) for any benefit or payment which is excludable
from the gross income of the employee under section
139B(b).
The term ``wages'' includes any amount includible in gross
income of an employee under section 409A and payment of such
amount shall be treated as having been made in the taxable year
in which the amount is so includible.
(b) Payroll Period.--For purposes of this chapter, the term
``payroll period'' means a period for which a payment of wages
is ordinarily made to the employee by his employer, and the
term ``miscellaneous payroll period'' means a payroll period
other than a daily, weekly, biweekly, semimonthly, monthly,
quarterly, semiannual or annual payroll period.
(c) Employee.--For purposes of this chapter, the term
``employee'' includes an officer, employee, or elected official
of the United States, a State, or any political subdivision
thereof, or the District of Columbia, or any agency or
instrumentality of any one or more of the foregoing. The term
``employee'' also includes an officer of a corporation.
(d) Employer.--For purposes of this chapter, the term
``employer'' means the person for whom an individual performs
or performed any service, of whatever nature, as the employee
of such person, except that--
(1) if the person for whom the individual performs or
performed the services does not have control of the
payment of the wages for such services, the term
``employer'' (except for purposes of subsection (a))
means the person having control of the payment of such
wages, and
(2) in the case of a person paying wages on behalf of
a nonresident alien individual, foreign partnership, or
foreign corporation, not engaged in trade or business
within the United States, the term ``employer'' (except
for purposes of subsection (a)) means such person.
(e) Number of Withholding Exemptions Claimed.--For purposes
of this chapter, the term ``number of withholding exemptions
claimed'' means the number of withholding exemptions claimed in
a withholding exemption certificate in effect under section
3402(f), or in effect under the corresponding section of prior
law, except that if no such certificate is in effect, the
number of withholding exemptions claimed shall be considered to
be zero.
(f) Tips.--For purposes of subsection (a), the term ``wages''
includes tips received by an employee in the course of his
employment. Such wages shall be deemed to be paid at the time a
written statement including such tips is furnished to the
employer pursuant to section 6053(a) or (if no statement
including such tips is so furnished) at the time received.
(g) Crew Leader Rules to Apply.--Rules similar to the rules
of section 3121(o) shall apply for purposes of this chapter.
(h) Differential Wage Payments to Active Duty Members of the
Uniformed Services.--
(1) In general.-- For purposes of subsection (a), any
differential wage payment shall be treated as a payment
of wages by the employer to the employee.
(2) Differential wage payment.-- For purposes of
paragraph (1), the term ``differential wage payment''
means any payment which--
(A) is made by an employer to an individual
with respect to any period during which the
individual is performing service in the
uniformed services (as defined in chapter 43 of
title 38, United States Code) while on active
duty for a period of more than 30 days, and
(B) represents all or a portion of the wages
the individual would have received from the
employer if the individual were performing
service for the employer.
SEC. 3402. INCOME TAX COLLECTED AT SOURCE.
(a) Requirement of Withholding.--
(1) In general.-- Except as otherwise provided in
this section, every employer making payment of wages
shall deduct and withhold upon such wages a tax
determined in accordance with tables or computational
procedures prescribed by the Secretary. Any tables or
procedures prescribed under this paragraph shall--
(A) apply with respect to the amount of wages
paid during such periods as the Secretary may
prescribe, and
(B) be in such form, and provide for such
amounts to be deducted and withheld, as the
Secretary determines to be most appropriate to
carry out the purposes of this chapter and to
reflect the provisions of chapter 1 applicable
to such periods.
(2) Amount of wages.-- For purposes of applying
tables or procedures prescribed under paragraph (1),
the term ``the amount of wages'' means the amount by
which the wages exceed the number of withholding
exemptions claimed multiplied by the amount of one such
exemption. The amount of each withholding exemption
shall be equal to the amount of one personal exemption
provided in section 151(b), prorated to the payroll
period. The maximum number of withholding exemptions
permitted shall be calculated in accordance with
regulations prescribed by the Secretary under this
section, taking into account any reduction in
withholding to which an employee is entitled under this
section.
(b) Percentage Method of Withholding.--
(1) If wages are paid with respect to a period which
is not a payroll period, the withholding exemption
allowable with respect to each payment of such wages
shall be the exemption allowed for a miscellaneous
payroll period containing a number of days (including
Sundays and holidays) equal to the number of days in
the period with respect to which such wages are paid.
(2) In any case in which wages are paid by an
employer without regard to any payroll period or other
period, the withholding exemption allowable with
respect to each payment of such wages shall be the
exemption allowed for a miscellaneous payroll period
containing a number of days equal to the number of days
(including Sundays and holidays) which have elapsed
since the date of the last payment of such wages by
such employer during the calendar year, or the date of
commencement of employment with such employer during
such year, or January 1 of such year, whichever is the
later.
(3) In any case in which the period, or the time
described in paragraph (2), in respect of any wages is
less than one week, the Secretary, under regulations
prescribed by him, may authorize an employer to compute
the tax to be deducted and withheld as if the aggregate
of the wages paid to the employee during the calendar
week were paid for a weekly payroll period.
(4) In determining the amount to be deducted and
withheld under this subsection, the wages may, at the
election of the employer, be computed to the nearest
dollar.
(c) Wage Bracket Withholding.--
(1) At the election of the employer with respect to
any employee, the employer shall deduct and withhold
upon the wages paid to such employee a tax (in lieu of
the tax required to be deducted and withheld under
subsection (a)) determined in accordance with tables
prescribed by the Secretary in accordance with
paragraph (6).
(2) If wages are paid with respect to a period which
is not a payroll period, the amount to be deducted and
withheld shall be that applicable in the case of a
miscellaneous payroll period containing a number of
days (including Sundays and holidays) equal to the
number of days in the period with respect to which such
wages are paid.
(3) In any case in which wages are paid by an
employer without regard to any payroll period or other
period, the amount to be deducted and withheld shall be
that applicable in the case of a miscellaneous payroll
period containing a number of days equal to the number
of days (including Sundays and holidays) which have
elapsed since the date of the last payment of such
wages by such employer during the calendar year, or the
date of commencement of employment with such employer
during such year, or January 1 of such year, whichever
is the later.
(4) In any case in which the period, or the time
described in paragraph (3), in respect of any wages is
less than one week, the Secretary, under regulations
prescribed by him, may authorize an employer to
determine the amount to be deducted and withheld under
the tables applicable in the case of a weekly payroll
period, in which case the aggregate of the wages paid
to the employee during the calendar week shall be
considered the weekly wages.
(5) If the wages exceed the highest wage bracket, in
determining the amount to be deducted and withheld
under this subsection, the wages may, at the election
of the employer, be computed to the nearest dollar.
(6) In the case of wages paid after December 31,
1969, the amount deducted and withheld under paragraph
(1) shall be determined in accordance with tables
prescribed by the Secretary. In the tables so
prescribed, the amounts set forth as amounts of wages
and amounts of income tax to be deducted and withheld
shall be computed on the basis of the table for an
annual payroll period prescribed pursuant to subsection
(a).
(d) Tax Paid by Recipient.--If the employer, in violation of
the provisions of this chapter, fails to deduct and withhold
the tax under this chapter, and thereafter the tax against
which such tax may be credited is paid, the tax so required to
be deducted and withheld shall not be collected from the
employer; but this subsection shall in no case relieve the
employer from liability for any penalties or additions to the
tax otherwise applicable in respect of such failure to deduct
and withhold.
(e) Included and Excluded Wages.--If the remuneration paid by
an employer to an employee for services performed during one-
half or more of any payroll period of not more than 31
consecutive days constitutes wages, all the remuneration paid
by such employer to such employee for such period shall be
deemed to be wages; but if the remuneration paid by an employer
to an employee for services performed during more than one-half
of any such payroll period does not constitute wages, then none
of the remuneration paid by such employer to such employee for
such period shall be deemed to be wages.
(f) Withholding Exemptions.--
(1) In general.-- An employee receiving wages shall
on any day be entitled to the following withholding
exemptions:
(A) an exemption for himself unless he is an
individual described in section 151(d)(2);
(B) if the employee is married, any exemption
to which his spouse is entitled, or would be
entitled if such spouse were an employee
receiving wages, under subparagraph (A) or (D),
but only if such spouse does not have in effect
a withholding exemption certificate claiming
such exemption;
(C) an exemption for each individual with
respect to whom, on the basis of facts existing
at the beginning of such day, there may
reasonably be expected to be allowable an
exemption under section 151(c) for the taxable
year under subtitle A in respect of which
amounts deducted and withheld under this
chapter in the calendar year in which such day
falls are allowed as a credit;
(D) any allowance to which he is entitled
under subsection (m), but only if his spouse
does not have in effect a withholding exemption
certificate claiming such allowance; and
(E) a standard deduction allowance which
shall be an amount equal to one exemption (or
more than one exemption if so prescribed by the
Secretary) unless (i) he is married (as
determined under section 7703) and his spouse
is an employee receiving wages subject to
withholding or (ii) he has withholding
exemption certificates in effect with respect
to more than one employer.
For purposes of this title, any standard deduction
allowance under subparagraph (E) shall be treated as if
it were denominated a withholding exemption.
(2) Exemption certificates.--
(A) On commencement of employment.-- On or
before the date of the commencement of
employment with an employer, the employee shall
furnish the employer with a signed withholding
exemption certificate relating to the number of
withholding exemptions which he claims, which
shall in no event exceed the number to which he
is entitled.
(B) Change of status.-- If, on any day during
the calendar year, the number of withholding
exemptions to which the employee is entitled is
less than the number of withholding exemptions
claimed by the employee on the withholding
exemption certificate then in effect with
respect to him, the employee shall within 10
days thereafter furnish the employer with a new
withholding exemption certificate relating to
the number of withholding exemptions which the
employee then claims, which shall in no event
exceed the number to which he is entitled on
such day. If, on any day during the calendar
year, the number of withholding exemptions to
which the employee is entitled is greater than
the number of withholding exemptions claimed,
the employee may furnish the employer with a
new withholding exemption certificate relating
to the number of withholding exemptions which
the employee then claims, which shall in no
event exceed the number to which he is entitled
on such day.
(C) Change of status which affects next
calendar year.-- If on any day during the
calendar year the number of withholding
exemptions to which the employee will be, or
may reasonably be expected to be, entitled at
the beginning of his next taxable year under
subtitle A is different from the number to
which the employee is entitled on such day, the
employee shall, in such cases and at such times
as the Secretary may by regulations prescribe,
furnish the employer with a withholding
exemption certificate relating to the number of
withholding exemptions which he claims with
respect to such next taxable year, which shall
in no event exceed the number to which he will
be, or may reasonably be expected to be, so
entitled.
(3) When certificate takes effect.--
(A) First certificate furnished.-- A
withholding exemption certificate furnished the
employer in cases in which no previous such
certificate is in effect shall take effect as
of the beginning of the first payroll period
ending, or the first payment of wages made
without regard to a payroll period, on or after
the date on which such certificate is so
furnished.
(B) Furnished to take place of existing
certificate.--
(i) In general.-- Except as provided
in clauses (ii) and (iii), a
withholding exemption certificate
furnished to the employer in cases in
which a previous such certificate is in
effect shall take effect as of the
beginning of the 1st payroll period
ending (or the 1st payment of wages
made without regard to a payroll
period) on or after the 30th day after
the day on which such certificate is so
furnished.
(ii) Employer may elect earlier
effective date.-- At the election of
the employer, a certificate described
in clause (i) may be made effective
beginning with any payment of wages
made on or after the day on which the
certificate is so furnished and before
the 30th day referred to in clause (i).
(iii) Change of status which affects
next year.-- Any certificate furnished
pursuant to paragraph (2)(C) shall not
take effect, and may not be made
effective, with respect to any payment
of wages made in the calendar year in
which the certificate is furnished.
(4) Period during which certificate remains in
effect.-- A withholding exemption certificate which
takes effect under this subsection, or which on
December 31, 1954, was in effect under the
corresponding subsection of prior law, shall continue
in effect with respect to the employer until another
such certificate takes effect under this subsection.
(5) Form and contents of certificate.-- Withholding
exemption certificates shall be in such form and
contain such information as the Secretary may by
regulations prescribe.
(6) Exemption of certain nonresident aliens.--
Notwithstanding the provisions of paragraph (1), a
nonresident alien individual (other than an individual
described in section 3401(a)(6)(A) or (B)) shall be
entitled to only one withholding exemption.
(7) Exemption where certificate with another employer
is in effect.-- If a withholding exemption certificate
is in effect with respect to one employer, an employee
shall not be entitled under a certificate in effect
with any other employer to any withholding exemption
which he has claimed under such first certificate.
(g) Overlapping Pay Periods, and Payment by Agent or
Fiduciary.--If a payment of wages is made to an employee by an
employer--
(1) with respect to a payroll period or other period,
any part of which is included in a payroll period or
other period with respect to which wages are also paid
to such employee by such employer, or
(2) without regard to any payroll period or other
period, but on or prior to the expiration of a payroll
period or other period with respect to which wages are
also paid to such employee by such employer, or
(3) with respect to a period beginning in one and
ending in another calendar year, or
(4) through an agent, fiduciary, or other person who
also has the control, receipt, custody, or disposal of,
or pays, the wages payable by another employer to such
employee,
the manner of withholding and the amount to be deducted and
withheld under this chapter shall be determined in accordance
with regulations prescribed by the Secretary under which the
withholding exemption allowed to the employee in any calendar
year shall approximate the withholding exemption allowable with
respect to an annual payroll period.
(h) Alternative Methods of Computing Amount to be Withheld.--
The Secretary may, under regulations prescribed by him,
authorize--
(1) Withholding on basis of average wages.-- An
employer--
(A) to estimate the wages which will be paid
to any employee in any quarter of the calendar
year,
(B) to determine the amount to be deducted
and withheld upon each payment of wages to such
employee during such quarter as if the
appropriate average of the wages so estimated
constituted the actual wages paid, and
(C) to deduct and withhold upon any payment
of wages to such employee during such quarter
(and, in the case of tips referred to in
subsection (k), within 30 days thereafter) such
amount as may be necessary to adjust the amount
actually deducted and withheld upon the wages
of such employee during such quarter to the
amount required to be deducted and withheld
during such quarter without regard to this
subsection.
(2) Withholding on basis of annualized wages.-- An
employer to determine the amount of tax to be deducted
and withheld upon a payment of wages to an employee for
a payroll period by--
(A) multiplying the amount of an employee's
wages for a payroll period by the number of
such payroll periods in the calendar year,
(B) determining the amount of tax which would
be required to be deducted and withheld upon
the amount determined under subparagraph (A) if
such amount constituted the actual wages for
the calendar year and the payroll period of the
employee were an annual payroll period, and
(C) dividing the amount of tax determined
under subparagraph (B) by the number of payroll
periods (described in subparagraph (A)) in the
calendar year.
(3) Withholding on basis of cumulative wages.-- An
employer, in the case of any employee who requests to
have the amount of tax to be withheld from his wages
computed on the basis of his cumulative wages, to--
(A) add the amount of the wages to be paid to
the employee for the payroll period to the
total amount of wages paid by the employer to
the employee during the calendar year,
(B) divide the aggregate amount of wages
computed under subparagraph (A) by the number
of payroll periods to which such aggregate
amount of wages relates,
(C) compute the total amount of tax that
would have been required to be deducted and
withheld under subsection (a) if the average
amount of wages (as computed under subparagraph
(B)) had been paid to the employee for the
number of payroll periods to which the
aggregate amount of wages (computed under
subparagraph (A)) relates,
(D) determine the excess, if any, of the
amount of tax computed under subparagraph (C)
over the total amount of tax deducted and
withheld by the employer from wages paid to the
employee during the calendar year, and
(E) deduct and withhold upon the payment of
wages (referred to in subparagraph (A)) to the
employee an amount equal to the excess (if any)
computed under subparagraph (D).
(4) Other methods.-- An employer to determine the
amount of tax to be deducted and withheld upon the
wages paid to an employee by any other method which
will require the employer to deduct and withhold upon
such wages substantially the same amount as would be
required to be deducted and withheld by applying
subsection (a) or (c), either with respect to a payroll
period or with respect to the entire taxable year.
(i) Changes in Withholding.--
(1) In general.-- The Secretary may by regulations
provide for increases in the amount of withholding
otherwise required under this section in cases where
the employee requests such changes.
(2) Treatment as tax.-- Any increased withholding
under paragraph (1) shall for all purposes be
considered tax required to be deducted and withheld
under this chapter.
(j) Noncash Remuneration to Retail Commission Salesman.--In
the case of remuneration paid in any medium other than cash for
services performed by an individual as a retail salesman for a
person, where the service performed by such individual for such
person is ordinarily performed for remuneration solely by way
of cash commission an employer shall not be required to deduct
or withhold any tax under this subchapter with respect to such
remuneration, provided that such employer files with the
Secretary such information with respect to such remuneration as
the Secretary may by regulation prescribe.
(k) Tips.--In the case of tips which constitute wages,
subsection (a) shall be applicable only to such tips as are
included in a written statement furnished to the employer
pursuant to section 6053(a), and only to the extent that the
tax can be deducted and withheld by the employer, at or after
the time such statement is so furnished and before the close of
the calendar year in which such statement is furnished, from
such wages of the employee (excluding tips, but including funds
turned over by the employee to the employer for the purpose of
such deduction and withholding) as are under the control of the
employer; and an employer who is furnished by an employee a
written statement of tips (received in a calendar month)
pursuant to section 6053(a) to which paragraph (16)(B) of
section 3401(a) is applicable may deduct and withhold the tax
with respect to such tips from any wages of the employee
(excluding tips) under his control, even though at the time
such statement is furnished the total amount of the tips
included in statements furnished to the employer as having been
received by the employee in such calendar month in the course
of his employment by such employer is less than $20. Such tax
shall not at any time be deducted and withheld in an amount
which exceeds the aggregate of such wages and funds (including
funds turned over under section 3102(c)(2) or section
3202(c)(2)) minus any tax required by section 3102(a) or
section 3202(a) to be collected from such wages and funds.
(l) Determination and Disclosure of Marital Status.--
(1) Determination of status by employer.-- For
purposes of applying the tables in subsections (a) and
(c) to a payment of wages, the employer shall treat the
employee as a single person unless there is in effect
with respect to such payment of wages a withholding
exemption certificate furnished to the employer by the
employee after the date of the enactment of this
subsection indicating that the employee is married.
(2) Disclosure of status by employee.-- An employee
shall be entitled to furnish the employer with a
withholding exemption certificate indicating he is
married only if, on the day of such furnishing, he is
married (determined with the application of the rules
in paragraph (3)). An employee whose marital status
changes from married to single shall, at such time as
the Secretary may by regulations prescribe, furnish the
employer with a new withholding exemption certificate.
(3) Determination of marital status.-- For purposes
of paragraph (2), an employee shall on any day be
considered--
(A) as not married, if (i) he is legally
separated from his spouse under a decree of
divorce or separate maintenance, or (ii) either
he or his spouse is, or on any preceding day
within the calendar year was, a nonresident
alien; or
(B) as married, if (i) his spouse (other than
a spouse referred to in subparagraph (A)) died
within the portion of his taxable year which
precedes such day, or (ii) his spouse died
during one of the two taxable years immediately
preceding the current taxable year and, on the
basis of facts existing at the beginning of
such day, the employee reasonably expects, at
the close of his taxable year, to be a
surviving spouse (as defined in section 2(a)).
(m) Withholding Allowances.--Under regulations prescribed by
the Secretary, an employee shall be entitled to additional
withholding allowances or additional reductions in withholding
under this subsection. In determining the number of additional
withholding allowances or the amount of additional reductions
in withholding under this subsection, the employee may take
into account (to the extent and in the manner provided by such
regulations)--
(1) estimated itemized deductions allowable under
chapter 1 (other than the deductions referred to in
section 151 and other than the deductions required to
be taken into account in determining adjusted gross
income under section 62(a) (other than paragraph (10)
thereof)),
(2) estimated tax credits allowable under chapter 1,
and
(3) such additional deductions (including the
additional standard deduction under section 63(c)(3)
for the aged and blind) and other items as may be
specified by the Secretary in regulations.
(n) Employees Incurring No Income Tax Liability.--
Notwithstanding any other provision of this section, an
employer shall not be required to deduct and withhold any tax
under this chapter upon a payment of wages to an employee if
there is in effect with respect to such payment a withholding
exemption certificate (in such form and containing such other
information as the Secretary may prescribe) furnished to the
employer by the employee certifying that the employee--
(1) incurred no liability for income tax imposed
under subtitle A for his preceding taxable year, and
(2) anticipates that he will incur no liability for
income tax imposed under subtitle A for his current
taxable year.
The Secretary shall by regulations provide for the coordination
of the provisions of this subsection with the provisions of
subsection (f).
(o) Extension of Withholding to Certain Payments Other Than
Wages.--
(1) General rule.-- For purposes of this chapter (and
so much of subtitle F as relates to this chapter)--
(A) any supplemental unemployment
compensation benefit paid to an individual,
(B) any payment of an annuity to an
individual, if at the time the payment is made
a request that such annuity be subject to
withholding under this chapter is in effect,
and
(C) any payment to an individual of sick pay
which does not constitute wages (determined
without regard to this subsection), if at the
time the payment is made a request that such
sick pay be subject to withholding under this
chapter is in effect,
shall be treated as if it were a payment of wages by an
employer to an employee for a payroll period.
(2) Definitions.--
(A) Supplemental unemployment compensation
benefits.-- For purposes of paragraph (1), the
term ``supplemental unemployment compensation
benefits'' means amounts which are paid to an
employee, pursuant to a plan to which the
employer is a party, because of an employee's
involuntary separation from employment (whether
or not such separation is temporary), resulting
directly from a reduction in force, the
discontinuance of a plant or operation, or
other similar conditions, but only to the
extent such benefits are includible in the
employee's gross income.
(B) Annuity.-- For purposes of this
subsection, the term ``annuity'' means any
amount paid to an individual as a pension or
annuity.
(C) Sick pay.-- For purposes of this
subsection, the term ``sick pay'' means any
amount which--
(i) is paid to an employee pursuant
to a plan to which the employer is a
party, and
(ii) constitutes remuneration or a
payment in lieu of remuneration for any
period during which the employee is
temporarily absent from work on account
of sickness or personal injuries.
(3) Amount withheld from annuity payments or sick
pay.-- If a payee makes a request that an annuity or
any sick pay be subject to withholding under this
chapter, the amount to be deducted and withheld under
this chapter from any payment to which such request
applies shall be an amount (not less than a minimum
amount determined under regulations prescribed by the
Secretary) specified by the payee in such request. The
amount deducted and withheld with respect to a payment
which is greater or less than a full payment shall bear
the same relation to the specified amount as such
payment bears to a full payment.
(4) Request for withholding.-- A request that an
annuity or any sick pay be subject to withholding under
this chapter--
(A) shall be made by the payee in writing to
the person making the payments and shall
contain the social security number of the
payee,
(B) shall specify the amount to be deducted
and withheld from each full payment, and
(C) shall take effect--
(i) in the case of sick pay, with
respect to payments made more than 7
days after the date on which such
request is furnished to the payor, or
(ii) in the case of an annuity, at
such time (after the date on which such
request is furnished to the payor) as
the Secretary shall by regulations
prescribe.
Such a request may be changed or terminated by
furnishing to the person making the payments a written
statement of change or termination which shall take
effect in the same manner as provided in subparagraph
(C). At the election of the payor, any such request (or
statement of change or revocation) may take effect
earlier than as provided in subparagraph (C).
(5) Special rule for sick pay paid pursuant to
certain collective-bargaining agreements.-- In the case
of any sick pay paid pursuant to a collective-
bargaining agreement between employee representatives
and one or more employers which contains a provision
specifying that this paragraph is to apply to sick pay
paid pursuant to such agreement and contains a
provision for determining the amount to be deducted and
withheld from each payment of such sick pay--
(A) the requirement of paragraph (1)(C) that
a request for withholding be in effect shall
not apply, and
(B) except as provided in subsection (n), the
amounts to be deducted and withheld under this
chapter shall be determined in accordance with
such agreement.
The preceding sentence shall not apply with respect to
sick pay paid pursuant to any agreement to any
individual unless the social security number of such
individual is furnished to the payor and the payor is
furnished with such information as is necessary to
determine whether the payment is pursuant to the
agreement and to determine the amount to be deducted
and withheld.
(6) Coordination with withholding on designated
distributions under section 3405.-- This subsection
shall not apply to any amount which is a designated
distribution (within the meaning of section
3405(e)(1)).
(p) Voluntary Withholding Agreements.--
(1) Certain Federal payments.--
(A) In general.-- If, at the time a specified
Federal payment is made to any person, a
request by such person is in effect that such
payment be subject to withholding under this
chapter, then for purposes of this chapter and
so much of subtitle F as relates to this
chapter, such payment shall be treated as if it
were a payment of wages by an employer to an
employee.
(B) Amount withheld.-- The amount to be
deducted and withheld under this chapter from
any payment to which any request under
subparagraph (A) applies shall be an amount
equal to the percentage of such payment
specified in such request. Such a request shall
apply to any payment only if the percentage
specified is 7 percent, any percentage
applicable to any of the 3 lowest income
brackets in the table under section 1(c), or
such other percentage as is permitted under
regulations prescribed by the Secretary.
(C) Specified Federal payments.-- For
purposes of this paragraph, the term
``specified Federal payment'' means--
(i) any payment of a social security
benefit (as defined in section 86(d)),
(ii) any payment referred to in the
second sentence of section 451(d) which
is treated as insurance proceeds,
(iii) any amount which is includible
in gross income under section 77(a),
and
(iv) any other payment made pursuant
to Federal law which is specified by
the Secretary for purposes of this
paragraph.
(D) Requests for withholding.-- Rules similar
to the rules that apply to annuities under
subsection (o)(4) shall apply to requests under
this paragraph and paragraph (2).
(2) Voluntary withholding on unemployment benefits.--
If, at the time a payment of unemployment compensation
(as defined in section 85(b)) is made to any person, a
request by such person is in effect that such payment
be subject to withholding under this chapter, then for
purposes of this chapter and so much of subtitle F as
relates to this chapter, such payment shall be treated
as if it were a payment of wages by an employer to an
employee. The amount to be deducted and withheld under
this chapter from any payment to which any request
under this paragraph applies shall be an amount equal
to 10 percent of such payment.
(3) Authority for other voluntary withholding.-- The
Secretary is authorized by regulations to provide for
withholding--
(A) from remuneration for services performed
by an employee for the employee's employer
which (without regard to this paragraph) does
not constitute wages, and
(B) from any other type of payment with
respect to which the Secretary finds that
withholding would be appropriate under the
provisions of this chapter,
if the employer and employee, or the person making and
the person receiving such other type of payment, agree
to such withholding. Such agreement shall be in such
form and manner as the Secretary may by regulations
prescribe. For purposes of this chapter (and so much of
subtitle F as relates to this chapter), remuneration or
other payments with respect to which such agreement is
made shall be treated as if they were wages paid by an
employer to an employee to the extent that such
remuneration is paid or other payments are made during
the period for which the agreement is in effect.
(q) Extension of Withholding to Certain Gambling Winnings.--
(1) General rule.-- Every person, including the
Government of the United States, a State, or a
political subdivision thereof, or any instrumentalities
of the foregoing, making any payment of winnings which
are subject to withholding shall deduct and withhold
from such payment a tax in an amount equal to the
product of the third lowest rate of tax applicable
under section 1(c) and such payment.
(2) Exemption where tax otherwise withheld.-- In the
case of any payment of winnings which are subject to
withholding made to a nonresident alien individual or a
foreign corporation, the tax imposed under paragraph
(1) shall not apply to any such payment subject to tax
under section 1441(a) (relating to withholding on
nonresident aliens) or tax under section 1442(a)
(relating to withholding on foreign corporations).
(3) Winnings which are subject to withholding.-- For
purposes of this subsection, the term ``winnings which
are subject to withholding'' means proceeds from a
wager determined in accordance with the following:
(A) In general.-- Except as provided in
subparagraphs (B) and (C), proceeds of more
than $5,000 from a wagering transaction, if the
amount of such proceeds is at least 300 times
as large as the amount wagered.
(B) State-conducted lotteries.-- Proceeds of
more than $5,000 from a wager placed in a
lottery conducted by an agency of a State
acting under authority of State law, but only
if such wager is placed with the State agency
conducting such lottery, or with its authorized
employees or agents.
(C) Sweepstakes, wagering pools, certain
parimutuel pools, jai alai, and lotteries.--
Proceeds of more than $5,000 from--
(i) a wager placed in a sweepstakes,
wagering pool, or lottery (other than a
wager described in subparagraph (B)),
or
(ii) a wagering transaction in a
parimutuel pool with respect to horse
races, dog races, or jai alai if the
amount of such proceeds is at least 300
times as large as the amount wagered.
(4) Rules for determining proceeds from a wager.--
For purposes of this subsection--
(A) proceeds from a wager shall be determined
by reducing the amount received by the amount
of the wager, and
(B) proceeds which are not money shall be
taken into account at their fair market value.
(5) Exception for bingo, keno, and slot machines.--
The tax imposed under paragraph (1) shall not apply to
winnings from a slot machine, keno, and bingo.
(6) Statement by recipient.-- Every person who is to
receive a payment of winnings which are subject to
withholding shall furnish the person making such
payment a statement, made under the penalties of
perjury, containing the name, address, and taxpayer
identification number of the person receiving the
payment and of each person entitled to any portion of
such payment.
(7) Coordination with other sections.-- For purposes
of sections 3403 and 3404 and for purposes of so much
of subtitle F (except section 7205) as relates to this
chapter, payments to any person of winnings which are
subject to withholding shall be treated as if they were
wages paid by an employer to an employee.
(r) Extension of Withholding to Certain Taxable Payments of
Indian Casino Profits.--
(1) In general.-- Every person, including an Indian
tribe, making a payment to a member of an Indian tribe
from the net revenues of any class II or class III
gaming activity conducted or licensed by such tribe
shall deduct and withhold from such payment a tax in an
amount equal to such payment's proportionate share of
the annualized tax.
(2) Exception.-- The tax imposed by paragraph (1)
shall not apply to any payment to the extent that the
payment, when annualized, does not exceed an amount
equal to the sum of--
(A) the basic standard deduction (as defined
in section 63(c)) for an individual to whom
section 63(c)(2)(C) applies, and
(B) the exemption amount (as defined in
section 151(d)).
(3) Annualized tax.-- For purposes of paragraph (1),
the term ``annualized tax'' means, with respect to any
payment, the amount of tax which would be imposed by
section 1(c) (determined without regard to any rate of
tax in excess of the fourth lowest rate of tax
applicable under section 1(c)) on an amount of taxable
income equal to the excess of--
(A) the annualized amount of such payment,
over
(B) the amount determined under paragraph
(2).
(4) Classes of gaming activities, etc..-- For
purposes of this subsection, terms used in paragraph
(1) which are defined in section 4 of the Indian Gaming
Regulatory Act (25 U.S.C. 2701 et seq.), as in effect
on the date of the enactment of this subsection, shall
have the respective meanings given such terms by such
section.
(5) Annualization.-- Payments shall be placed on an
annualized basis under regulations prescribed by the
Secretary.
(6) Alternate withholding procedures.-- At the
election of an Indian tribe, the tax imposed by this
subsection on any payment made by such tribe shall be
determined in accordance with such tables or
computational procedures as may be specified in
regulations prescribed by the Secretary (in lieu of in
accordance with paragraphs (2) and (3)).
(7) Coordination with other sections.-- For purposes
of this chapter and so much of subtitle F as relates to
this chapter, payments to any person which are subject
to withholding under this subsection shall be treated
as if they were wages paid by an employer to an
employee.
(s) Exemption from Withholding for Any Vehicle Fringe
Benefit.--
(1) Employer election not to withhold.-- The employer
may elect not to deduct and withhold any tax under this
chapter with respect to any vehicle fringe benefit
provided to any employee if such employee is notified
by the employer of such election (at such time and in
such manner as the Secretary shall by regulations
prescribe). The preceding sentence shall not apply to
any vehicle fringe benefit unless the amount of such
benefit is included by the employer on a statement
timely furnished under section 6051.
(2) Employer must furnish W-2.-- Any vehicle fringe
benefit shall be treated as wages from which amounts
are required to be deducted and withheld under this
chapter for purposes of section 6051.
(3) Vehicle fringe benefit.-- For purposes of this
subsection, the term ``vehicle fringe benefit'' means
any fringe benefit--
(A) which constitutes wages (as defined in
section 3401), and
(B) which consists of providing a highway
motor vehicle for the use of the employee.
* * * * * * *
Subtitle F--Procedure and Administration
* * * * * * *
CHAPTER 61--INFORMATION AND RETURNS
* * * * * * *
Subchapter A--Returns and Records
* * * * * * *
PART III--INFORMATION RETURNS
* * * * * * *
Subpart C--Information Regarding Wages Paid Employees
* * * * * * *
SEC. 6051. RECEIPTS FOR EMPLOYEES.
(a) Requirement.--Every person required to deduct and
withhold from an employee a tax under section 3101 or 3402, or
who would have been required to deduct and withhold a tax under
section 3402 (determined without regard to subsection (n)) if
the employee had claimed no more than one withholding
exemption, or every employer engaged in a trade or business who
pays remuneration for services performed by an employee,
including the cash value of such remuneration paid in any
medium other than cash, shall furnish to each such employee in
respect of the remuneration paid by such person to such
employee during the calendar year, on or before January 31 of
the succeeding year, or, if his employment is terminated before
the close of such calendar year, within 30 days after the date
of receipt of a written request from the employee if such 30-
day period ends before January 31, a written statement showing
the following:
(1) the name of such person,
(2) the name of the employee (and an identifying
number for the employee if wages as defined in section
3121(a) have been paid),
(3) the total amount of wages as defined in section
3401(a),
(4) the total amount deducted and withheld as tax
under section 3402,
(5) the total amount of wages as defined in section
3121(a),
(6) the total amount deducted and withheld as tax
under section 3101,
(8) the total amount of elective deferrals (within
the meaning of section 402(g)(3)) and compensation
deferred under section 457, including the amount of
designated Roth contributions (as defined in section
402A),
(9) the total amount incurred for dependent care
assistance with respect to such employee under a
dependent care assistance program described in section
129(d),
(10) in the case of an employee who is a member of
the Armed Forces of the United States, such employee's
earned income as determined for purposes of section 32
(relating to earned income credit),
(11) the amount contributed to any Archer MSA (as
defined in section 220(d)) of such employee or such
employee's spouse,
(12) the amount contributed to any health savings
account (as defined in section 223(d)) of such employee
or such employee's spouse,
(13) the total amount of deferrals for the year under
a nonqualified deferred compensation plan (within the
meaning of section 409A(d)), and
(14) the aggregate cost (determined under rules
similar to the rules of section 4980B(f)(4)) of
applicable employer-sponsored coverage (as defined in
section 4980I(d)(1)), except that this paragraph shall
not apply to--
(A) coverage to which paragraphs (11) and
(12) apply, or
(B) the amount of any salary reduction
contributions to a flexible spending
arrangement (within the meaning of section
125).
In the case of compensation paid for service as a member of a
uniformed service, the statement shall show, in lieu of the
amount required to be shown by paragraph (5), the total amount
of wages as defined in section 3121(a), computed in accordance
with such section and section 3121(i)(2). In the case of
compensation paid for service as a volunteer or volunteer
leader within the meaning of the Peace Corps Act, the statement
shall show, in lieu of the amount required to be shown by
paragraph (5), the total amount of wages as defined in section
3121(a), computed in accordance with such section and section
3121(i)(3). In the case of tips received by an employee in the
course of his employment, the amounts required to be shown by
paragraphs (3) and (5) shall include only such tips as are
included in statements furnished to the employer pursuant to
section 6053(a). The amounts required to be shown by paragraph
(5) shall not include wages which are exempted pursuant to
sections 3101(c) and 3111(c) from the taxes imposed by sections
3101 and 3111. In the case of the amounts required to be shown
by paragraph (13), the Secretary may (by regulation) establish
a minimum amount of deferrals below which paragraph (13) does
not apply.
(b) Special Rule as to Compensation of Members of Armed
Forces.--In the case of compensation paid for service as a
member of the Armed Forces, the statement required by
subsection (a) shall be furnished if any tax was withheld
during the calendar year under section 3402, or if any of the
compensation paid during such year is includible in gross
income under chapter 1, or if during the calendar year any
amount was required to be withheld as tax under section 3101.
In lieu of the amount required to be shown by paragraph (3) of
subsection (a), such statement shall show as wages paid during
the calendar year the amount of such compensation paid during
the calendar year which is not excluded from gross income under
chapter 1 (whether or not such compensation constituted wages
as defined in section 3401(a)).
(c) Additional Requirements.--The statements required to be
furnished pursuant to this section in respect of any
remuneration shall be furnished at such other times, shall
contain such other information, and shall be in such form as
the Secretary may by regulations prescribe. The statements
required under this section shall also show the proportion of
the total amount withheld as tax under section 3101 which is
for financing the cost of hospital insurance benefits under
part A of title XVIII of the Social Security Act.
(d) Statements to Constitute Information Returns.--A
duplicate of any statement made pursuant to this section and in
accordance with regulations prescribed by the Secretary shall,
when required by such regulations, be filed with the Secretary.
(e) Railroad Employees.--
(1) Additional requirement.-- Every person required
to deduct and withhold tax under section 3201 from an
employee shall include on or with the statement
required to be furnished such employee under subsection
(a) a notice concerning the provisions of this title
with respect to the allowance of a credit or refund of
the tax on wages imposed by section 3101(b) and the tax
on compensation imposed by section 3201 or 3211 which
is treated as a tax on wages imposed by section
3101(b).
(2) Information to be supplied to employees.-- Each
person required to deduct and withhold tax under
section 3201 during any year from an employee who has
also received wages during such year subject to the tax
imposed by section 3101(b) shall, upon request of such
employee, furnish to him a written statement showing--
(A) the total amount of compensation with
respect to which the tax imposed by section
3201 was deducted,
(B) the total amount deducted as tax under
section 3201, and
(C) the portion of the total amount deducted
as tax under section 3201 which is for
financing the cost of hospital insurance under
part A of title XVIII of the Social Security
Act.
(f) Statements Required in Case of Sick Pay Paid by Third
Parties.--
(1) Statements required from payor.--
(A) In general.-- If, during any calendar
year, any person makes a payment of third-party
sick pay to an employee, such person shall, on
or before January 15 of the succeeding year,
furnish a written statement to the employer in
respect of whom such payment was made showing--
(i) the name and, if there is
withholding under section 3402(o), the
social security number of such
employee,
(ii) the total amount of the third-
party sick pay paid to such employee
during the calendar year, and
(iii) the total amount (if any)
deducted and withheld from such sick
pay under section 3402.
For purposes of the preceding sentence, the
term ``third-party sick pay'' means any sick
pay (as defined in section 3402(o)(2)(C)) which
does not constitute wages for purposes of
chapter 24 (determined without regard to
section 3402(o)(1)).
(B) Special rules.--
(i) Statements are in lieu of other
reporting requirements.-- The reporting
requirements of subparagraph (A) with
respect to any payments shall, with
respect to such payments, be in lieu of
the requirements of subsection (a) and
of section 6041.
(ii) Penalties made applicable.-- For
purposes of sections 6674 and 7204, the
statements required to be furnished by
subparagraph (A) shall be treated as
statements required under this section
to be furnished to employees.
(2) Information required to be furnished by
employer.-- Every employer who receives a statement
under paragraph (1)(A) with respect to sick pay paid to
any employee during any calendar year shall, on or
before January 31 of the succeeding year, furnish a
written statement to such employee showing--
(A) the information shown on the statement
furnished under paragraph (1)(A), and
(B) if any portion of the sick pay is
excludable from gross income under section
104(a)(3), the portion which is not so
excludable and the portion which is so
excludable.
To the extent practicable, the information required
under the preceding sentence shall be furnished on or
with the statement (if any) required under subsection
(a).
* * * * * * *
CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE
PENALTIES
* * * * * * *
Subchapter A--Additions to the Tax and Additional Amounts
* * * * * * *
PART I--GENERAL PROVISIONS
* * * * * * *
SEC. 6652. FAILURE TO FILE CERTAIN INFORMATION RETURNS, REGISTRATION
STATEMENTS, ETC.
(a) Returns With Respect to Certain Payments Aggregating Less
Than $10.--In the case of each failure to file a statement of a
payment to another person required under the authority of--
(1) section 6042(a)(2) (relating to payments of
dividends aggregating less than $10), or
(2) section 6044(a)(2) (relating to payments of
patronage dividends aggregating less than $10),
on the date prescribed therefor (determined with regard to any
extension of time for filing), unless it is shown that such
failure is due to reasonable cause and not to willful neglect,
there shall be paid (upon notice and demand by the Secretary
and in the same manner as tax) by the person failing to so file
the statement, $1 for each such statement not so filed, but the
total amount imposed on the delinquent person for all such
failures during the calendar year shall not exceed $1,000.
(b) Failure to Report Tips.--In the case of failure by an
employee to report to his employer on the date and in the
manner prescribed therefor any amount of tips required to be so
reported by section 6053(a) which are wages (as defined in
section 3121(a)) or which are compensation (as defined in
section 3231(e)), unless it is shown that such failure is due
to reasonable cause and not due to willful neglect, there shall
be paid by the employee, in addition to the tax imposed by
section 3101 or section 3201 (as the case may be) with respect
to the amount of tips which he so failed to report, an amount
equal to 50 percent of such tax.
(c) Returns by Exempt Organizations and by Certain Trusts.--
(1) Annual returns under section 6033(a)(1) or
6012(a)(6).--
(A) Penalty on organization.-- In the case
of--
(i) a failure to file a return
required under section 6033(a)(1)
(relating to returns by exempt
organizations) or section 6012(a)(6)
(relating to returns by political
organizations) on the date and in the
manner prescribed therefor (determined
with regard to any extension of time
for filing), or
(ii) a failure to include any of the
information required to be shown on a
return filed under section 6033(a)(1)
or section 6012(a)(6) or to show the
correct information,
there shall be paid by the exempt organization
$20 for each day during which such failure
continues. The maximum penalty under this
subparagraph on failures with respect to any 1
return shall not exceed the lesser of $10,000
or 5 percent of the gross receipts of the
organization for the year. In the case of an
organization having gross receipts exceeding
$1,000,000 for any year, with respect to the
return required under section 6033(a)(1) or
section 6012(a)(6) for such year, in applying
the first sentence of this subparagraph, the
amount of the penalty for each day during which
a failure continues shall be $100 in lieu of
the amount otherwise specified, and, in lieu of
applying the second sentence of this
subparagraph, the maximum penalty under this
subparagraph shall not exceed $50,000.
(B) Managers.--
(i) In general.-- The Secretary may
make a written demand on any
organization subject to penalty under
subparagraph (A) specifying therein a
reasonable future date by which the
return shall be filed (or the
information furnished) for purposes of
this subparagraph.
(ii) Failure to comply with demand.--
If any person fails to comply with any
demand under clause (i) on or before
the date specified in such demand,
there shall be paid by the person
failing to so comply $10 for each day
after the expiration of the time
specified in such demand during which
such failure continues. The maximum
penalty imposed under this subparagraph
on all persons for failures with
respect to any 1 return shall not
exceed $5,000.
(C) Public inspection of annual returns and
reports.-- In the case of a failure to comply
with the requirements of section 6104(d) with
respect to any annual return on the date and in
the manner prescribed therefor (determined with
regard to any extension of time for filing) or
report required under section 527(j), there
shall be paid by the person failing to meet
such requirements $20 for each day during which
such failure continues. The maximum penalty
imposed under this subparagraph on all persons
for failures with respect to any 1 return or
report shall not exceed $10,000.
(D) Public inspection of applications for
exemption and notice of status.-- In the case
of a failure to comply with the requirements of
section 6104(d) with respect to any exempt
status application materials (as defined in
such section) or notice materials (as defined
in such section) on the date and in the manner
prescribed therefor, there shall be paid by the
person failing to meet such requirements $20
for each day during which such failure
continues.
(E) No penalty for certain annual notices.--
This paragraph shall not apply with respect to
any notice required under section 6033(i).
(2) Returns under section 6034 or 6043(b).--
(A) Penalty on organization or trust.-- In
the case of a failure to file a return required
under section 6034 (relating to returns by
certain trusts) or section 6043(b) (relating to
terminations, etc., of exempt organizations),
on the date and in the manner prescribed
therefor (determined with regard to any
extension of time for filing), there shall be
paid by the exempt organization or trust
failing so to file $10 for each day during
which such failure continues, but the total
amount imposed under this subparagraph on any
organization or trust for failure to file any 1
return shall not exceed $5,000.
(B) Managers.-- The Secretary may make
written demand on an organization or trust
failing to file under subparagraph (A)
specifying therein a reasonable future date by
which such filing shall be made for purposes of
this subparagraph. If such filing is not made
on or before such date, there shall be paid by
the person failing so to file $10 for each day
after the expiration of the time specified in
the written demand during which such failure
continues, but the total amount imposed under
this subparagraph on all persons for failure to
file any 1 return shall not exceed $5,000.
(C) Split-interest trusts.-- In the case of a
trust which is required to file a return under
section 6034(a), subparagraphs (A) and (B) of
this paragraph shall not apply and paragraph
(1) shall apply in the same manner as if such
return were required under section 6033, except
that--
(i) the 5 percent limitation in the
second sentence of paragraph (1)(A)
shall not apply,
(ii) in the case of any trust with
gross income in excess of $250,000, in
applying the first sentence of
paragraph (1)(A), the amount of the
penalty for each day during which a
failure continues shall be $100 in lieu
of the amount otherwise specified, and
in lieu of applying the second sentence
of paragraph (1)(A), the maximum
penalty under paragraph (1)(A) shall
not exceed $50,000, and
(iii) the third sentence of paragraph
(1)(A) shall be disregarded.
In addition to any penalty imposed on the trust
pursuant to this subparagraph, if the person
required to file such return knowingly fails to
file the return, such penalty shall also be
imposed on such person who shall be personally
liable for such penalty.
(3) Disclosure under section 6033(a)(2).--
(A) Penalty on entities.-- In the case of a
failure to file a disclosure required under
section 6033(a)(2), there shall be paid by the
tax-exempt entity (the entity manager in the
case of a tax-exempt entity described in
paragraph (4), (5), (6), or (7) of section
4965(c)) $100 for each day during which such
failure continues. The maximum penalty under
this subparagraph on failures with respect to
any 1 disclosure shall not exceed $50,000.
(B) Written demand.--
(i) In general.-- The Secretary may
make a written demand on any entity or
manager subject to penalty under
subparagraph (A) specifying therein a
reasonable future date by which the
disclosure shall be filed for purposes
of this subparagraph.
(ii) Failure to comply with demand.--
If any entity or manager fails to
comply with any demand under clause (i)
on or before the date specified in such
demand, there shall be paid by such
entity or manager failing to so comply
$100 for each day after the expiration
of the time specified in such demand
during which such failure continues.
The maximum penalty imposed under this
subparagraph on all entities and
managers for failures with respect to
any 1 disclosure shall not exceed
$10,000.
(C) Definitions.-- Any term used in this
section which is also used in section 4965
shall have the meaning given such term under
section 4965.
(4) Notices under section 506.--
(A) Penalty on organization.-- In the case of
a failure to submit a notice required under
section 506(a) (relating to organizations
required to notify Secretary of intent to
operate as 501(c)(4)) on the date and in the
manner prescribed therefor, there shall be paid
by the organization failing to so submit $20
for each day during which such failure
continues, but the total amount imposed under
this subparagraph on any organization for
failure to submit any one notice shall not
exceed $5,000.
(B) Managers.-- The Secretary may make
written demand on an organization subject to
penalty under subparagraph (A) specifying in
such demand a reasonable future date by which
the notice shall be submitted for purposes of
this subparagraph. If such notice is not
submitted on or before such date, there shall
be paid by the person failing to so submit $20
for each day after the expiration of the time
specified in the written demand during which
such failure continues, but the total amount
imposed under this subparagraph on all persons
for failure to submit any one notice shall not
exceed $5,000.
(5) Reasonable cause exception.-- No penalty shall be
imposed under this subsection with respect to any
failure if it is shown that such failure is due to
reasonable cause.
(6) Other special rules.--
(A) Treatment as tax.-- Any penalty imposed
under this subsection shall be paid on notice
and demand of the Secretary and in the same
manner as tax.
(B) Joint and several liability.-- If more
than 1 person is liable under this subsection
for any penalty with respect to any failure,
all such persons shall be jointly and severally
liable with respect to such failure.
(C) Person.-- For purposes of this
subsection, the term ``person'' means any
officer, director, trustee, employee, or other
individual who is under a duty to perform the
act in respect of which the violation occurs.
(7) Adjustment for inflation.--
(A) In general.-- In the case of any failure
relating to a return required to be filed in a
calendar year beginning after 2014, each of the
dollar amounts under paragraphs (1), (2), and
(3) shall be increased by such dollar amount
multiplied by the cost-of-living adjustment
determined under section 1(f)(3) determined by
substituting ``calendar year 2013'' for
``calendar year 1992'' in subparagraph (B)
thereof.
(B) Rounding.-- If any amount adjusted under
subparagraph (A)--
(i) is not less than $5,000 and is
not a multiple of $500, such amount
shall be rounded to the next lowest
multiple of $500, and
(ii) is not described in clause (i)
and is not a multiple of $5, such
amount shall be rounded to the next
lowest multiple of $5.
(d) Annual Registration and Other Notification by Pension
Plan.--
(1) Registration.-- In the case of any failure to
file a registration statement required under section
6057(a) (relating to annual registration of certain
plans) which includes all participants required to be
included in such statement, on the date prescribed
therefor (determined without regard to any extension of
time for filing), unless it is shown that such failure
is due to reasonable cause, there shall be paid (on
notice and demand by the Secretary and in the same
manner as tax) by the person failing so to file, an
amount equal to $1 for each participant with respect to
whom there is a failure to file, multiplied by the
number of days during which such failure continues, but
the total amount imposed under this paragraph on any
person for any failure to file with respect to any plan
year shall not exceed $5,000.
(2) Notification of change of status.-- In the case
of failure to file a notification required under
section 6057(b) (relating to notification of change of
status) on the date prescribed therefor (determined
without regard to any extension of time for filing),
unless it is shown that such failure is due to
reasonable cause, there shall be paid (on notice and
demand by the Secretary and in the same manner as tax)
by the person failing so to file, $1 for each day
during which such failure continues, but the total
amounts imposed under this paragraph on any person for
failure to file any notification shall not exceed
$1,000.
(e) Information Required in Connection With Certain Plans of
Deferred Compensation, Etc..--In the case of failure to file a
return or statement required under section 6058 (relating to
information required in connection with certain plans of
deferred compensation), 6047 (relating to information relating
to certain trusts and annuity and bond purchase plans), or
6039D (relating to returns and records with respect to certain
fringe benefit plans) on the date and in the manner prescribed
therefor (determined with regard to any extension of time for
filing), unless it is shown that such failure is due to
reasonable cause, there shall be paid (on notice and demand by
the Secretary and in the same manner as tax) by the person
failing so to file, $25 for each day during which such failure
continues, but the total amount imposed under this subsection
on any person for failure to file any return shall not exceed
$15,000. This subsection shall not apply to any return or
statement which is an information return described in section
6724(d)(1)(C)(ii) or a payee statement described in section
6724(d)(2)(Y).
(f) Returns Required Under Section 6039C.--
(1) In general.-- In the case of each failure to make
a return required by section 6039C which contains the
information required by such section on the date
prescribed therefor (determined with regard to any
extension of time for filing), unless it is shown that
such failure is due to reasonable cause and not to
willful neglect, the amount determined under paragraph
(2) shall be paid (upon notice and demand by the
Secretary and in the same manner as tax) by the person
failing to make such return.
(2) Amount of penalty.-- For purposes of paragraph
(1), the amount determined under this paragraph with
respect to any failure shall be $25 for each day during
which such failure continues.
(3) Limitation.-- The amount determined under
paragraph (2) with respect to any person for failing to
meet the requirements of section 6039C for any calendar
year shall not exceed the lesser of--
(A) $25,000, or
(B) 5 percent of the aggregate of the fair
market value of the United States real property
interests owned by such person at any time
during such year.
For purposes of the preceding sentence, fair market
value shall be determined as of the end of the calendar
year (or, in the case of any property disposed of
during the calendar year, as of the date of such
disposition).
(h) Failure to Give Notice to Recipients of Certain Pension,
Etc., Distributions.--In the case of each failure to provide
notice as required by section 3405(e)(10)(B), at the time
prescribed therefor, unless it is shown that such failure is
due to reasonable cause and not to willful neglect, there shall
be paid, on notice and demand of the Secretary and in the same
manner as tax, by the person failing to provide such notice, an
amount equal to $10 for each such failure, but the total amount
imposed on such person for all such failures during any
calendar year shall not exceed $5,000.
(i) Failure to Give Written Explanation to Recipients of
Certain Qualifying Rollover Distributions.--In the case of each
failure to provide a written explanation as required by section
402(f), at the time prescribed therefor, unless it is shown
that such failure is due to reasonable cause and not to willful
neglect, there shall be paid, on notice and demand of the
Secretary and in the same manner as tax, by the person failing
to provide such written explanation, an amount equal to $100
for each such failure, but the total amount imposed on such
person for all such failures during any calendar year shall not
exceed $50,000.
(j) Failure to File Certification With Respect to Certain
Residential Rental Projects.--In the case of each failure to
provide a certification as required by section 142(d)(7) at the
time prescribed therefor, unless it is shown that such failure
is due to reasonable cause and not to willful neglect, there
shall be paid, on notice and demand of the Secretary and in the
same manner as tax, by the person failing to provide such
certification, an amount equal to $100 for each such failure.
(k) Failure to Make Reports Required Under Section 1202.--
In the case of a failure to make a report required under
section 1202(d)(1)(C) which contains the information required
by such section on the date prescribed therefor (determined
with regard to any extension of time for filing), there shall
be paid (on notice and demand by the Secretary and in the same
manner as tax) by the person failing to make such report, an
amount equal to $50 for each report with respect to which there
was such a failure. In the case of any failure due to
negligence or intentional disregard, the preceding sentence
shall be applied by substituting ``$100'' for ``$50''. In the
case of a report covering periods in 2 or more years, the
penalty determined under preceding provisions of this
subsection shall be multiplied by the number of such years. No
penalty shall be imposed under this subsection on any failure
which is shown to be due to reasonable cause and not willful
neglect.
(l) Failure to File Return With Respect to Certain Corporate
Transactions.--In the case of any failure to make a return
required under section 6043(c) containing the information
required by such section on the date prescribed therefor
(determined with regard to any extension of time for filing),
unless it is shown that such failure is due to reasonable
cause, there shall be paid (on notice and demand by the
Secretary and in the same manner as tax) by the person failing
to file such return, an amount equal to $500 for each day
during which such failure continues, but the total amount
imposed under this subsection with respect to any return shall
not exceed $100,000.
(m) Alcohol and Tobacco Taxes for Penalties for Failure to
File Certain Information Returns.--with respect to alcohol and
tobacco taxes, see, generally, subtitle E.
(n) Failure to Make Reports Required Under Sections 3511,
6053(C)(8), and 7705.--In the case of a failure to make a
report required under section 3511, 6053(c)(8), or 7705 which
contains the information required by such section on the date
prescribed therefor (determined with regard to any extension of
time for filing), there shall be paid (on notice and demand by
the Secretary and in the same manner as tax) by the person
failing to make such report, an amount equal to $50 for each
report with respect to which there was such a failure. In the
case of any failure due to negligence or intentional disregard
the preceding sentence shall be applied by substituting
``$100'' for ``$50''.
* * * * * * *
B. Changes in Existing Law Proposed by the Bill, as Reported
In compliance with clause 3(e)(1)(B) of rule XIII of the
Rules of the House of Representatives, changes in existing law
proposed by the bill, as reported, are shown as follows
(existing law proposed to be omitted is enclosed in black
brackets, new matter is printed in italics, existing law in
which no change is proposed is shown in roman):
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e)(1)(B) of rule XIII of the
Rules of the House of Representatives, changes in existing law
made by the bill, as reported, are shown as follows (existing
law proposed to be omitted is enclosed in black brackets, new
matter is printed in italics, and existing law in which no
change is proposed is shown in roman):
INTERNAL REVENUE CODE OF 1986
* * * * * * *
Subtitle A--Income Taxes
* * * * * * *
CHAPTER 1--NORMAL TAXES AND SURTAXES
* * * * * * *
Subchapter B--Computation of Taxable Income
* * * * * * *
PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME
* * * * * * *
SEC. 83. PROPERTY TRANSFERRED IN CONNECTION WITH PERFORMANCE OF
SERVICES.
(a) General Rule.--If, in connection with the performance of
services, property is transferred to any person other than the
person for whom such services are performed, the excess of--
(1) the fair market value of such property
(determined without regard to any restriction other
than a restriction which by its terms will never lapse)
at the first time the rights of the person having the
beneficial interest in such property are transferable
or are not subject to a substantial risk of forfeiture,
whichever occurs earlier, over
(2) the amount (if any) paid for such property, shall
be included in the gross income of the person who
performed such services in the first taxable year in
which the rights of the person having the beneficial
interest in such property are transferable or are not
subject to a substantial risk of forfeiture, whichever
is applicable. The preceding sentence shall not apply
if such person sells or otherwise disposes of such
property in an arm's length transaction before his
rights in such property become transferable or not
subject to a substantial risk of forfeiture.
(b) Election to Include in Gross Income in Year of
Transfer.--
(1) In general.--Any person who performs services in
connection with which property is transferred to any
person may elect to include in his gross income for the
taxable year in which such property is transferred, the
excess of--
(A) the fair market value of such property at
the time of transfer (determined without regard
to any restriction other than a restriction
which by its terms will never lapse), over
(B) the amount (if any) paid for such
property.
If such election is made, subsection (a) shall not
apply with respect to the transfer of such property,
and if such property is subsequently forfeited, no
deduction shall be allowed in respect of such
forfeiture.
(2) Election.--An election under paragraph (1) with
respect to any transfer of property shall be made in
such manner as the Secretary prescribes and shall be
made not later than 30 days after the date of such
transfer. Such election may not be revoked except with
the consent of the Secretary.
(c) Special Rules.--For purposes of this section--
(1) Substantial risk of forfeiture.--The rights of a
person in property are subject to a substantial risk of
forfeiture if such person's rights to full enjoyment of
such property are conditioned upon the future
performance of substantial services by any individual.
(2) Transferability of property.--The rights of a
person in property are transferable only if the rights
in such property of any transferee are not subject to a
substantial risk of forfeiture.
(3) Sales which may give rise to suit under section
16(b) of the Securities Exchange Act of 1934.--So long
as the sale of property at a profit could subject a
person to suit under section 16(b) of the Securities
Exchange Act of 1934, such person's rights in such
property are--
(A) subject to a substantial risk of
forfeiture, and
(B) not transferable.
(4) For purposes of determining an individual's basis
in property transferred in connection with the
performance of services, rules similar to the rules of
section 72(w) shall apply.
(d) Certain Restrictions Which Will Never Lapse.--
(1) Valuation.--In the case of property subject to a
restriction which by its terms will never lapse, and
which allows the transferee to sell such property only
at a price determined under a formula, the price so
determined shall be deemed to be the fair market value
of the property unless established to the contrary by
the Secretary, and the burden of proof shall be on the
Secretary with respect to such value.
(2) Cancellation.--If, in the case of property
subject to a restriction which by its terms will never
lapse, the restriction is canceled, then, unless the
taxpayer establishes--
(A) that such cancellation was not
compensatory, and
(B) that the person, if any, who would be
allowed a deduction if the cancellation were
treated as compensatory, will treat the
transaction as not compensatory, as evidenced
in such manner as the Secretary shall prescribe
by regulations,
the excess of the fair market value of the property
(computed without regard to the restrictions) at the
time of cancellation over the sum of--
(C) the fair market value of such property
(computed by taking the restriction into
account) immediately before the cancellation,
and
(D) the amount, if any, paid for the
cancellation, shall be treated as compensation
for the taxable year in which such cancellation
occurs.
(e) Applicability of Section.--This section shall not apply
to--
(1) a transaction to which section 421 applies,
(2) a transfer to or from a trust described in
section 401(a) or a transfer under an annuity plan
which meets the requirements of section 404(a)(2),
(3) the transfer of an option without a readily
ascertainable fair market value,
(4) the transfer of property pursuant to the exercise
of an option with a readily ascertainable fair market
value at the date of grant, or
(5) group-term life insurance to which section 79
applies.
(f) Holding Period.--In determining the period for which the
taxpayer has held property to which subsection (a) applies,
there shall be included only the period beginning at the first
time his rights in such property are transferable or are not
subject to a substantial risk of forfeiture, whichever occurs
earlier.
(g) Certain Exchanges.--If property to which subsection (a)
applies is exchanged for property subject to restrictions and
conditions substantially similar to those to which the property
given in such exchange was subject, and if section 354, 355,
356, or 1036 (or so much of section 1031 as relates to section
1036) applied to such exchange, or if such exchange was
pursuant to the exercise of a conversion privilege--
(1) such exchange shall be disregarded for purposes
of subsection (a), and
(2) the property received shall be treated as
property to which subsection (a) applies.
(h) Deduction by Employer.--In the case of a transfer of
property to which this section applies or a cancellation of a
restriction described in subsection (d), there shall be allowed
as a deduction under section 162, to the person for whom were
performed the services in connection with which such property
was transferred, an amount equal to the amount included under
subsection (a), (b), [or (d)(2)] (d)(2), or (i) in the gross
income of the person who performed such services. Such
deduction shall be allowed for the taxable year of such person
in which or with which ends the taxable year in which such
amount is included in the gross income of the person who
performed such services.
(i) Qualified Equity Grants.--
(1) In general.--For purposes of this subtitle, if
qualified stock is transferred to a qualified employee
who makes an election with respect to such stock under
this subsection--
(A) except as provided in subparagraph (B),
no amount shall be included in income under
subsection (a) for the first taxable year in
which the rights of the employee in such stock
are transferable or are not subject to a
substantial risk of forfeiture, whichever is
applicable, and
(B) an amount equal to the amount which would
be included in income of the employee under
subsection (a) (determined without regard to
this subsection) shall be included in income
for the taxable year of the employee which
includes the earliest of--
(i) the first date such qualified
stock becomes transferable (including
transferable to the employer),
(ii) the date the employee first
becomes an excluded employee,
(iii) the first date on which any
stock of the corporation which issued
the qualified stock becomes readily
tradable on an established securities
market (as determined by the Secretary,
but not including any market unless
such market is recognized as an
established securities market by the
Secretary for purposes of a provision
of this title other than this
subsection),
(iv) the date that is 7 years after
the first date the rights of the
employee in such stock are transferable
or are not subject to a substantial
risk of forfeiture, whichever occurs
earlier, or
(v) the date on which the employee
revokes (at such time and in such
manner as the Secretary may provide)
the election under this subsection with
respect to such stock.
(2) Qualified stock.--
(A) In general.--For purposes of this
subsection, the term ``qualified stock'' means,
with respect to any qualified employee, any
stock in a corporation which is the employer of
such employee, if--
(i) such stock is received--
(I) in connection with the
exercise of an option, or
(II) in settlement of a
restricted stock unit, and
(ii) such option or restricted stock
unit was provided by the corporation--
(I) in connection with the
performance of services as an
employee, and
(II) during a calendar year
in which such corporation was
an eligible corporation.
(B) Limitation.--The term ``qualified stock''
shall not include any stock if the employee may
sell such stock to, or otherwise receive cash
in lieu of stock from, the corporation at the
time that the rights of the employee in such
stock first become transferable or not subject
to a substantial risk of forfeiture.
(C) Eligible corporation.--For purposes of
subparagraph (A)(ii)(II)--
(i) In general.--The term ``eligible
corporation'' means, with respect to
any calendar year, any corporation if--
(I) no stock of such
corporation (or any predecessor
of such corporation) is readily
tradable on an established
securities market (as
determined under paragraph
(1)(B)(iii)) during any
preceding calendar year, and
(II) such corporation has a
written plan under which, in
such calendar year, not less
than 80 percent of all
employees who provide services
to such corporation in the
United States (or any
possession of the United
States) are granted stock
options, or restricted stock
units, with the same rights and
privileges to receive qualified
stock.
(ii) Same rights and privileges.--For
purposes of clause (i)(II)--
(I) except as provided in
subclauses (II) and (III), the
determination of rights and
privileges with respect to
stock shall be determined in a
similar manner as provided
under section 423(b)(5),
(II) employees shall not fail
to be treated as having the
same rights and privileges to
receive qualified stock solely
because the number of shares
available to all employees is
not equal in amount, so long as
the number of shares available
to each employee is more than a
de minimis amount, and
(III) rights and privileges
with respect to the exercise of
an option shall not be treated
as the same as rights and
privileges with respect to the
settlement of a restricted
stock unit.
(iii) Employee.--For purposes of
clause (i)(II), the term ``employee''
shall not include any employee
described in section 4980E(d)(4) or any
excluded employee.
(iv) Special rule for calendar years
before 2017.--In the case of any
calendar year beginning before January
1, 2017, clause (i)(II) shall be
applied without regard to whether the
rights and privileges with respect to
the qualified stock are the same.
(3) Qualified employee; excluded employee.--For
purposes of this subsection--
(A) In general.--The term ``qualified
employee'' means any individual who--
(i) is not an excluded employee, and
(ii) agrees in the election made
under this subsection to meet such
requirements as determined by the
Secretary to be necessary to ensure
that the withholding requirements of
the corporation under chapter 24 with
respect to the qualified stock are met.
(B) Excluded employee.--The term ``excluded
employee'' means, with respect to any
corporation, any individual--
(i) who was a 1-percent owner (within
the meaning of section
416(i)(1)(B)(ii)) at any time during
the 10 preceding calendar years,
(ii) who is or has been at any prior
time--
(I) the chief executive
officer of such corporation or
an individual acting in such a
capacity, or
(II) the chief financial
officer of such corporation or
an individual acting in such a
capacity,
(iii) who bears a relationship
described in section 318(a)(1) to any
individual described in subclause (I)
or (II) of clause (ii), or
(iv) who has been for any of the 10
preceding taxable years one of the 4
highest compensated officers of such
corporation determined with respect to
each such taxable year on the basis of
the shareholder disclosure rules for
compensation under the Securities
Exchange Act of 1934 (as if such rules
applied to such corporation).
(4) Election.--
(A) Time for making election.--An election
with respect to qualified stock shall be made
under this subsection no later than 30 days
after the first time the rights of the employee
in such stock are transferable or are not
subject to a substantial risk of forfeiture,
whichever occurs earlier, and shall be made in
a manner similar to the manner in which an
election is made under subsection (b).
(B) Limitations.--No election may be made
under this section with respect to any
qualified stock if--
(i) the qualified employee has made
an election under subsection (b) with
respect to such qualified stock,
(ii) any stock of the corporation
which issued the qualified stock is
readily tradable on an established
securities market (as determined under
paragraph (1)(B)(iii)) at any time
before the election is made, or
(iii) such corporation purchased any
of its outstanding stock in the
calendar year preceding the calendar
year which includes the first time the
rights of the employee in such stock
are transferable or are not subject to
a substantial risk of forfeiture,
unless--
(I) not less than 25 percent
of the total dollar amount of
the stock so purchased is
deferral stock, and
(II) the determination of
which individuals from whom
deferral stock is purchased is
made on a reasonable basis.
(C) Definitions and special rules related to
limitation on stock redemptions.--
(i) Deferral stock.--For purposes of
this paragraph, the term ``deferral
stock'' means stock with respect to
which an election is in effect under
this subsection
(ii) Deferral stock with respect to
any individual not taken into account
if individual holds deferral stock with
longer deferral period.--Stock
purchased by a corporation from any
individual shall not be treated as
deferral stock for purposes of clause
(iii) if such individual (immediately
after such purchase) holds any deferral
stock with respect to which an election
has been in effect under this
subsection for a longer period than the
election with respect to the stock so
purchased.
(iii) Purchase of all outstanding
deferral stock.--The requirements of
subclauses (I) and (II) of subparagraph
(B)(iii) shall be treated as met if the
stock so purchased includes all of the
corporation's outstanding deferral
stock.
(iv) Reporting.--Any corporation
which has outstanding deferral stock as
of the beginning of any calendar year
and which purchases any of its
outstanding stock during such calendar
year shall include on its return of tax
for the taxable year in which, or with
which, such calendar year ends the
total dollar amount of its outstanding
stock so purchased during such calendar
year and such other information as the
Secretary may require for purposes of
administering this paragraph.
(5) Controlled groups.--For purposes of this
subsection, all corporations which are members of the
same controlled group of corporations (as defined in
section 1563(a)) shall be treated as one corporation.
(6) Notice requirement.--Any corporation that
transfers qualified stock to a qualified employee
shall, at the time that (or a reasonable period before)
an amount attributable to such stock would (but for
this subsection) first be includible in the gross
income of such employee--
(A) certify to such employee that such stock
is qualified stock, and
(B) notify such employee--
(i) that the employee may elect to
defer income on such stock under this
subsection, and
(ii) that, if the employee makes such
an election--
(I) the amount of income
recognized at the end of the
deferral period will be based
on the value of the stock at
the time at which the rights of
the employee in such stock
first become transferable or
not subject to substantial risk
of forfeiture, notwithstanding
whether the value of the stock
has declined during the
deferral period,
(II) the amount of such
income recognized at the end of
the deferral period will be
subject to withholding under
section 3401(i) at the rate
determined under section
3402(t), and
(III) the responsibilities of
the employee (as determined by
the Secretary under paragraph
(3)(A)(ii)) with respect to
such withholding.
* * * * * * *
Subchapter D--Deferred Compensation, Etc
* * * * * * *
PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC
* * * * * * *
Subpart A--General Rule
* * * * * * *
SEC. 409A. INCLUSION IN GROSS INCOME OF DEFERRED COMPENSATION UNDER
NONQUALIFIED DEFERRED COMPENSATION PLANS.
(a) Rules Relating to Constructive Receipt.--
(1) Plan failures.--
(A) Gross income inclusion.--
(i) In general.--If at any time
during a taxable year a nonqualified
deferred compensation plan--
(I) fails to meet the
requirements of paragraphs (2),
(3), and (4), or
(II) is not operated in
accordance with such
requirements, all compensation
deferred under the plan for the
taxable year and all preceding
taxable years shall be
includible in gross income for
the taxable year to the extent
not subject to a substantial
risk of forfeiture and not
previously included in gross
income.
(ii) Application only to affected
participants.--Clause (i) shall only
apply with respect to all compensation
deferred under the plan for
participants with respect to whom the
failure relates.
(B) Interest and additional tax payable with
respect to previously deferred compensation.--
(i) In general.--If compensation is
required to be included in gross income
under subparagraph (A) for a taxable
year, the tax imposed by this chapter
for the taxable year shall be increased
by the sum of--
(I) the amount of interest
determined under clause (ii),
and
(II) an amount equal to 20
percent of the compensation
which is required to be
included in gross income.
(ii) Interest.--For purposes of
clause (i), the interest determined
under this clause for any taxable year
is the amount of interest at the
underpayment rate plus 1 percentage
point on the underpayments that would
have occurred had the deferred
compensation been includible in gross
income for the taxable year in which
first deferred or, if later, the first
taxable year in which such deferred
compensation is not subject to a
substantial risk of forfeiture.
(2) Distributions.--
(A) In general.--The requirements of this
paragraph are met if the plan provides that
compensation deferred under the plan may not be
distributed earlier than--
(i) separation from service as
determined by the Secretary (except as
provided in subparagraph (B)(i)),
(ii) the date the participant becomes
disabled (within the meaning of
subparagraph (C)),
(iii) death,
(iv) a specified time (or pursuant to
a fixed schedule) specified under the
plan at the date of the deferral of
such compensation,
(v) to the extent provided by the
Secretary, a change in the ownership or
effective control of the corporation,
or in the ownership of a substantial
portion of the assets of the
corporation, or
(vi) the occurrence of an
unforeseeable emergency.
(B) Special rules.--
(i) Specified employees.--In the case
of any specified employee, the
requirement of subparagraph (A)(i) is
met only if distributions may not be
made before the date which is 6 months
after the date of separation from
service (or, if earlier, the date of
death of the employee). For purposes of
the preceding sentence, a specified
employee is a key employee (as defined
in section 416(i) without regard to
paragraph (5) thereof) of a corporation
any stock in which is publicly traded
on an established securities market or
otherwise.
(ii) Unforeseeable emergency.--For
purposes of subparagraph (A)(vi)--
(I) In general.--The term
``unforeseeable emergency''
means a severe financial
hardship to the participant
resulting from an illness or
accident of the participant,
the participant's spouse, or a
dependent (as defined in
section 152(a)) of the
participant, loss of the
participant's property due to
casualty, or other similar
extraordinary and unforeseeable
circumstances arising as a
result of events beyond the
control of the participant.
(II) Limitation on
distributions.--The requirement
of subparagraph (A)(vi) is met
only if, as determined under
regulations of the Secretary,
the amounts distributed with
respect to an emergency do not
exceed the amounts necessary to
satisfy such emergency plus
amounts necessary to pay taxes
reasonably anticipated as a
result of the distribution,
after taking into account the
extent to which such hardship
is or may be relieved through
reimbursement or compensation
by insurance or otherwise or by
liquidation of the
participant's assets (to the
extent the liquidation of such
assets would not itself cause
severe financial hardship).
(C) Disabled.--For purposes of subparagraph
(A)(ii), a participant shall be considered
disabled if the participant--
(i) is unable to engage in any
substantial gainful activity by reason
of any medically determinable physical
or mental impairment which can be
expected to result in death or can be
expected to last for a continuous
period of not less than 12 months, or
(ii) is, by reason of any medically
determinable physical or mental
impairment which can be expected to
result in death or can be expected to
last for a continuous period of not
less than 12 months, receiving income
replacement benefits for a period of
not less than 3 months under an
accident and health plan covering
employees of the participant's
employer.
(3) Acceleration of benefits.--The requirements of
this paragraph are met if the plan does not permit the
acceleration of the time or schedule of any payment
under the plan, except as provided in regulations by
the Secretary.
(4) Elections.--
(A) In general.--The requirements of this
paragraph are met if the requirements of
subparagraphs (B) and (C) are met.
(B) Initial deferral decision.--
(i) In general.--The requirements of
this subparagraph are met if the plan
provides that compensation for services
performed during a taxable year may be
deferred at the participant's election
only if the election to defer such
compensation is made not later than the
close of the preceding taxable year or
at such other time as provided in
regulations.
(ii) First year of eligibility.--In
the case of the first year in which a
participant becomes eligible to
participate in the plan, such election
may be made with respect to services to
be performed subsequent to the election
within 30 days after the date the
participant becomes eligible to
participate in such plan.
(iii) Performance-based
compensation.--In the case of any
performance-based compensation based on
services performed over a period of at
least 12 months, such election may be
made no later than 6 months before the
end of the period.
(C) Changes in time and form of
distribution.--The requirements of this
subparagraph are met if, in the case of a plan
which permits under a subsequent election a
delay in a payment or a change in the form of
payment--
(i) the plan requires that such
election may not take effect until at
least 12 months after the date on which
the election is made,
(ii) in the case of an election
related to a payment not described in
clause (ii), (iii), or (vi) of
paragraph (2)(A), the plan requires
that the payment with respect to which
such election is made be deferred for a
period of not less than 5 years from
the date such payment would otherwise
have been made, and
(iii) the plan requires that any
election related to a payment described
in paragraph (2)(A)(iv) may not be made
less than 12 months prior to the date
of the first scheduled payment under
such paragraph.
(b) Rules Relating to Funding.--
(1) Offshore property in a trust.--In the case of
assets set aside (directly or indirectly) in a trust
(or other arrangement determined by the Secretary) for
purposes of paying deferred compensation under a
nonqualified deferred compensation plan, for purposes
of section 83 such assets shall be treated as property
transferred in connection with the performance of
services whether or not such assets are available to
satisfy claims of general creditors--
(A) at the time set aside if such assets (or
such trust or other arrangement) are located
outside of the United States, or
(B) at the time transferred if such assets
(or such trust or other arrangement) are
subsequently transferred outside of the United
States.
This paragraph shall not apply to assets located in a
foreign jurisdiction if substantially all of the
services to which the nonqualified deferred
compensation relates are performed in such
jurisdiction.
(2) Employer's financial health.--In the case of
compensation deferred under a nonqualified deferred
compensation plan, there is a transfer of property
within the meaning of section 83 with respect to such
compensation as of the earlier of--
(A) the date on which the plan first provides
that assets will become restricted to the
provision of benefits under the plan in
connection with a change in the employer's
financial health, or
(B) the date on which assets are so
restricted, whether or not such assets are
available to satisfy claims of general
creditors.
(3) Treatment of employer's defined benefit plan
during restricted period.--
(A) In general.--If--
(i) during any restricted period with
respect to a single-employer defined
benefit plan, assets are set aside or
reserved (directly or indirectly) in a
trust (or other arrangement as
determined by the Secretary) or
transferred to such a trust or other
arrangement for purposes of paying
deferred compensation of an applicable
covered employee under a nonqualified
deferred compensation plan of the plan
sponsor or member of a controlled group
which includes the plan sponsor, or
(ii) a nonqualified deferred
compensation plan of the plan sponsor
or member of a controlled group which
includes the plan sponsor provides that
assets will become restricted to the
provision of benefits under the plan to
an applicable covered employee in
connection with such restricted period
(or other similar financial measure
determined by the Secretary) with
respect to the defined benefit plan, or
assets are so restricted,
such assets shall, for purposes of section 83,
be treated as property transferred in
connection with the performance of services
whether or not such assets are available to
satisfy claims of general creditors. Clause (i)
shall not apply with respect to any assets
which are so set aside before the restricted
period with respect to the defined benefit
plan.
(B) Restricted period.--For purposes of this
section, the term ``restricted period'' means,
with respect to any plan described in
subparagraph (A)--
(i) any period during which the plan
is in at-risk status (as defined in
section 430(i));
(ii) any period the plan sponsor is a
debtor in a case under title 11, United
States Code, or similar Federal or
State law, and
(iii) the 12-month period beginning
on the date which is 6 months before
the termination date of the plan if, as
of the termination date, the plan is
not sufficient for benefit liabilities
(within the meaning of section 4041 of
the Employee Retirement Income Security
Act of 1974).
(C) Special rule for payment of taxes on
deferred compensation included in income.--If
an employer provides directly or indirectly for
the payment of any Federal, State, or local
income taxes with respect to any compensation
required to be included in gross income by
reason of this paragraph--
(i) interest shall be imposed under
subsection (a)(1)(B)(i)(I) on the
amount of such payment in the same
manner as if such payment was part of
the deferred compensation to which it
relates,
(ii) such payment shall be taken into
account in determining the amount of
the additional tax under subsection
(a)(1)(B)(i)(II) in the same manner as
if such payment was part of the
deferred compensation to which it
relates, and
(iii) no deduction shall be allowed
under this title with respect to such
payment.
(D) Other definitions.--For purposes of this
section--
(i) Applicable covered employee.--The
term ``applicable covered employee''
means any--
(I) covered employee of a
plan sponsor,
(II) covered employee of a
member of a controlled group
which includes the plan
sponsor, and
(III) former employee who was
a covered employee at the time
of termination of employment
with the plan sponsor or a
member of a controlled group
which includes the plan
sponsor.
(ii) Covered employee.--The term
``covered employee'' means an
individual described in section
162(m)(3) or an individual subject to
the requirements of section 16(a) of
the Securities Exchange Act of 1934.
(4) Income inclusion for offshore trusts and
employer's financial health.--For each taxable year
that assets treated as transferred under this
subsection remain set aside in a trust or other
arrangement subject to paragraph (1), (2), or (3), any
increase in value in, or earnings with respect to, such
assets shall be treated as an additional transfer of
property under this subsection (to the extent not
previously included in income).
(5) Interest on tax liability payable with respect to
transferred property.--
(A) In general.--If amounts are required to
be included in gross income by reason of
paragraph (1), (2), or (3) for a taxable year,
the tax imposed by this chapter for such
taxable year shall be increased by the sum of--
(i) the amount of interest determined
under subparagraph (B), and
(ii) an amount equal to 20 percent of
the amounts required to be included in
gross income.
(B) Interest.--For purposes of subparagraph
(A), the interest determined under this
subparagraph for any taxable year is the amount
of interest at the underpayment rate plus 1
percentage point on the underpayments that
would have occurred had the amounts so required
to be included in gross income by paragraph
(1), (2), or (3) been includible in gross
income for the taxable year in which first
deferred or, if later, the first taxable year
in which such amounts are not subject to a
substantial risk of forfeiture.
(c) No Inference on Earlier Income Inclusion or Requirement
of Later Inclusion.--Nothing in this section shall be construed
to prevent the inclusion of amounts in gross income under any
other provision of this chapter or any other rule of law
earlier than the time provided in this section. Any amount
included in gross income under this section shall not be
required to be included in gross income under any other
provision of this chapter or any other rule of law later than
the time provided in this section.
(d) Other Definitions and Special Rules.--For purposes of
this section:
(1) Nonqualified deferred compensation plan.--The
term ``nonqualified deferred compensation plan'' means
any plan that provides for the deferral of
compensation, other than--
(A) a qualified employer plan, and
(B) any bona fide vacation leave, sick leave,
compensatory time, disability pay, or death
benefit plan.
(2) Qualified employer plan.--The term ``qualified
employer plan'' means--
(A) any plan, contract, pension, account, or
trust described in subparagraph (A) or (B) of
section 219(g)(5) (without regard to
subparagraph (A)(iii)),
(B) any eligible deferred compensation plan
(within the meaning of section 457(b)), and
(C) any plan described in section 415(m).
(3) Plan includes arrangements, etc..--The term
``plan'' includes any agreement or arrangement,
including an agreement or arrangement that includes one
person.
(4) Substantial risk of forfeiture.--The rights of a
person to compensation are subject to a substantial
risk of forfeiture if such person's rights to such
compensation are conditioned upon the future
performance of substantial services by any individual.
(5) Treatment of earnings.--References to deferred
compensation shall be treated as including references
to income (whether actual or notional) attributable to
such compensation or such income.
(6) Aggregation rules.--Except as provided by the
Secretary, rules similar to the rules of subsections
(b) and (c) of section 414 shall apply.
(7) Treatment of qualified stock.--An arrangement
under which an employee may receive qualified stock (as
defined in section 83(i)(2)) shall not be treated as a
nonqualified deferred compensation plan solely because
of an employee's ability to defer recognition of income
pursuant to an election under section 83(i).
(e) Regulations.--The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section, including regulations--
(1) providing for the determination of amounts of
deferral in the case of a nonqualified deferred
compensation plan which is a defined benefit plan,
(2) relating to changes in the ownership and control
of a corporation or assets of a corporation for
purposes of subsection (a)(2)(A)(v),
(3) exempting arrangements from the application of
subsection (b) if such arrangements will not result in
an improper deferral of United States tax and will not
result in assets being effectively beyond the reach of
creditors,
(4) defining financial health for purposes of
subsection (b)(2), and
(5) disregarding a substantial risk of forfeiture in
cases where necessary to carry out the purposes of this
section.
* * * * * * *
PART II--CERTAIN STOCK OPTIONS
* * * * * * *
SEC. 422. INCENTIVE STOCK OPTIONS.
(a) In General.--Section 421(a) shall apply with respect to
the transfer of a share of stock to an individual pursuant to
his exercise of an incentive stock option if--
(1) no disposition of such share is made by him
within 2 years from the date of the granting of the
option nor within 1 year after the transfer of such
share to him, and
(2) at all times during the period beginning on the
date of the granting of the option and ending on the
day 3 months before the date of such exercise, such
individual was an employee of either the corporation
granting such option, a parent or subsidiary
corporation of such corporation, or a corporation or a
parent or subsidiary corporation of such corporation
issuing or assuming a stock option in a transaction to
which section 424(a) applies.
(b) Incentive Stock Option.--For purposes of this part, the
term ``incentive stock option'' means an option granted to an
individual for any reason connected with his employment by a
corporation, if granted by the employer corporation or its
parent or subsidiary corporation, to purchase stock of any of
such corporations, but only if--
(1) the option is granted pursuant to a plan which
includes the aggregate number of shares which may be
issued under options and the employees (or class of
employees) eligible to receive options, and which is
approved by the stockholders of the granting
corporation within 12 months before or after the date
such plan is adopted;
(2) such option is granted within 10 years from the
date such plan is adopted, or the date such plan is
approved by the stockholders, whichever is earlier;
(3) such option by its terms is not exercisable after
the expiration of 10 years from the date such option is
granted;
(4) the option price is not less than the fair market
value of the stock at the time such option is granted;
(5) such option by its terms is not transferable by
such individual otherwise than by will or the laws of
descent and distribution, and is exercisable, during
his lifetime, only by him; and
(6) such individual, at the time the option is
granted, does not own stock possessing more than 10
percent of the total combined voting power of all
classes of stock of the employer corporation or of its
parent or subsidiary corporation.
Such term shall not include any option if (as of the time the
option is granted) the terms of such option provide that it
will not be treated as an incentive stock option. Such term
shall not include any option if an election is made under
section 83(i) with respect to the stock received in connection
with the exercise of such option.
(c) Special Rules.--
(1) Good faith efforts to value of stock.--If a share
of stock is transferred pursuant to the exercise by an
individual of an option which would fail to qualify as
an incentive stock option under subsection (b) because
there was a failure in an attempt, made in good faith,
to meet the requirement of subsection (b)(4), the
requirement of subsection (b)(4) shall be considered to
have been met. To the extent provided in regulations by
the Secretary, a similar rule shall apply for purposes
of subsection (d).
(2) Certain disqualifying dispositions where amount
realized is less than value at exercise.--If--
(A) an individual who has acquired a share of
stock by the exercise of an incentive stock
option makes a disposition of such share within
either of the periods described in subsection
(a)(1), and
(B) such disposition is a sale or exchange
with respect to which a loss (if sustained)
would be recognized to such individual,
then the amount which is includible in the gross income
of such individual, and the amount which is deductible
from the income of his employer corporation, as
compensation attributable to the exercise of such
option shall not exceed the excess (if any) of the
amount realized on such sale or exchange over the
adjusted basis of such share.
(3) Certain transfers by insolvent individuals.--If
an insolvent individual holds a share of stock acquired
pursuant to his exercise of an incentive stock option,
and if such share is transferred to a trustee,
receiver, or other similar fiduciary in any proceeding
under title 11 or any other similar insolvency
proceeding, neither such transfer, nor any other
transfer of such share for the benefit of his creditors
in such proceeding, shall constitute a disposition of
such share for purposes of subsection (a)(1).
(4) Permissible provisions.--An option which meets
the requirements of subsection (b) shall be treated as
an incentive stock option even if--
(A) the employee may pay for the stock with
stock of the corporation granting the option,
(B) the employee has a right to receive
property at the time of exercise of the option,
or
(C) the option is subject to any condition
not inconsistent with the provisions of
subsection (b).
Subparagraph (B) shall apply to a transfer of property
(other than cash) only if section 83 applies to the
property so transferred.
(5) 10-percent shareholder rule.--Subsection (b)(6)
shall not apply if at the time such option is granted
the option price is at least 110 percent of the fair
market value of the stock subject to the option and
such option by its terms is not exercisable after the
expiration of 5 years from the date such option is
granted.
(6) Special rule when disabled.--For purposes of
subsection (a)(2), in the case of an employee who is
disabled (within the meaning of section 22(e)(3)), the
3-month period of subsection (a)(2) shall be 1 year.
(7) Fair market value.--For purposes of this section,
the fair market value of stock shall be determined
without regard to any restriction other than a
restriction which, by its terms, will never lapse.
(d) $100,000 per year limitation
(1) In general.--To the extent that the aggregate
fair market value of stock with respect to which
incentive stock options (determined without regard to
this subsection) are exercisable for the 1st time by
any individual during any calendar year (under all
plans of the individual's employer corporation and its
parent and subsidiary corporations) exceeds $100,000,
such options shall be treated as options which are not
incentive stock options.
(2) Ordering rule.--Paragraph (1) shall be applied by
taking options into account in the order in which they
were granted.
(3) Determination of fair market value.--For purposes
of paragraph (1), the fair market value of any stock
shall be determined as of the time the option with
respect to such stock is granted.
* * * * * * *
SEC. 423. EMPLOYEE STOCK PURCHASE PLANS.
(a) General Rule.--Section 421(a) shall apply with respect to
the transfer of a share of stock to an individual pursuant to
his exercise of an option granted under an employee stock
purchase plan (as defined in subsection (b)) if--
(1) no disposition of such share is made by him
within 2 years after the date of the granting of the
option nor within 1 year after the transfer of such
share to him; and
(2) at all times during the period beginning with the
date of the granting of the option and ending on the
day 3 months before the date of such exercise, he is an
employee of the corporation granting such option, a
parent or subsidiary corporation of such corporation,
or a corporation or a parent or subsidiary corporation
of such corporation issuing or assuming a stock option
in a transaction to which section 424(a) applies.
The preceding sentence shall not apply to any share of stock
with respect to which an election is made under section 83(i).
(b) Employee Stock Purchase Plan.--For purposes of this part,
the term ``employee stock purchase plan'' means a plan which
meets the following requirements:
(1) the plan provides that options are to be granted
only to employees of the employer corporation or of its
parent or subsidiary corporation to purchase stock in
any such corporation;
(2) such plan is approved by the stockholders of the
granting corporation within 12 months before or after
the date such plan is adopted;
(3) under the terms of the plan, no employee can be
granted an option if such employee, immediately after
the option is granted, owns stock possessing 5 percent
or more of the total combined voting power or value of
all classes of stock of the employer corporation or of
its parent or subsidiary corporation. For purposes of
this paragraph, the rules of section 424(d) shall apply
in determining the stock ownership of an individual,
and stock which the employee may purchase under
outstanding options shall be treated as stock owned by
the employee;
(4) under the terms of the plan, options are to be
granted to all employees of any corporation whose
employees are granted any of such options by reason of
their employment by such corporation, except that there
may be excluded--
(A) employees who have been employed less
than 2 years,
(B) employees whose customary employment is
20 hours or less per week,
(C) employees whose customary employment is
for not more than 5 months in any calendar
year, and
(D) highly compensated employees (within the
meaning of section 414(q));
(5) under the terms of the plan, all employees
granted such options shall have the same rights and
privileges, except that the amount of stock which may
be purchased by any employee under such option may bear
a uniform relationship to the total compensation, or
the basic or regular rate of compensation, of
employees, and the plan may provide that no employee
may purchase more than a maximum amount of stock fixed
under the plan;
(6) under the terms of the plan, the option price is
not less than the lesser of--
(A) an amount equal to 85 percent of the fair
market value of the stock at the time such
option is granted, or
(B) an amount which under the terms of the
option may not be less than 85 percent of the
fair market value of the stock at the time such
option is exercised;
(7) under the terms of the plan, such option cannot
be exercised after the expiration of--
(A) 5 years from the date such option is
granted if, under the terms of such plan, the
option price is to be not less than 85 percent
of the fair market value of such stock at the
time of the exercise of the option, or
(B) 27 months from the date such option is
granted, if the option price is not
determinable in the manner described in
subparagraph (A) (8) under the terms of the
plan, no employee may be granted an option
which permits his rights to purchase stock
under all such plans of his employer
corporation and its parent and subsidiary
corporations to accrue at a rate which exceeds
$25,000 of fair market value of such stock
(determined at the time such option is granted)
for each calendar year in which such option is
outstanding at any time. For purposes of this
paragraph--
(A) the right to purchase stock under an
option accrues when the option (or any portion
thereof) first becomes exercisable during the
calendar year;
(B) the right to purchase stock under an
option accrues at the rate provided in the
option, but in no case may such rate exceed
$25,000 of fair market value of such stock
(determined at the time such option is granted)
for any one calendar year; and
(C) a right to purchase stock which has
accrued under one option granted pursuant to
the plan may not be carried over to any other
option; and
(9) under the terms of the plan, such option is not
transferable by such individual otherwise than by will
or the laws of descent and distribution, and is
exercisable, during his lifetime, only by him.
For purposes of paragraphs (3) to (9), inclusive, where
additional terms are contained in an offering made under a
plan, such additional terms shall, with respect to options
exercised under such offering, be treated as a part of the
terms of such plan.
(c) Special Rule Where Option Price Is Between 85 Percent and
100 Percent of Value of Stock.--If the option price of a share
of stock acquired by an individual pursuant to a transfer to
which subsection (a) applies was less than 100 percent of the
fair market value of such share at the time such option was
granted, then, in the event of any disposition of such share by
him which meets the holding period requirements of subsection
(a), or in the event of his death (whenever occurring) while
owning such share, there shall be included as compensation (and
not as gain upon the sale or exchange of a capital asset) in
his gross income, for the taxable year in which falls the date
of such disposition or for the taxable year closing with his
death, whichever applies, an amount equal to the lesser of--
(1) the excess of the fair market value of the share
at the time of such disposition or death over the
amount paid for the share under the option, or
(2) the excess of the fair market value of the share
at the time the option was granted over the option
price.
If the option price is not fixed or determinable at the time
the option is granted, then for purposes of this subsection,
the option price shall be determined as if the option were
exercised at such time. In the case of the disposition of such
share by the individual, the basis of the share in his hands at
the time of such disposition shall be increased by an amount
equal to the amount so includible in his gross income. No
amount shall be required to be deducted and withheld under
chapter 24 with respect to any amount treated as compensation
under this subsection.
* * * * * * *
Subtitle C--Employment Taxes
* * * * * * *
CHAPTER 24--COLLECTION OF INCOME TAX AT SOURCE ON WAGES
SEC. 3401. DEFINITIONS.
(a) Wages.--For purposes of this chapter, the term ``wages''
means all remuneration (other than fees paid to a public
official) for services performed by an employee for his
employer, including the cash value of all remuneration
(including benefits) paid in any medium other than cash; except
that such term shall not include remuneration paid--
(1) for active service performed in a month for which
such employee is entitled to the benefits of section
112 (relating to certain combat zone compensation of
members of the Armed Forces of the United States) to
the extent remuneration for such service is excludable
from gross income under such section; or
(2) for agricultural labor (as defined in section
3121(g)) unless the remuneration paid for such labor is
wages (as defined in section 3121(a)); or
(3) for domestic service in a private home, local
college club, or local chapter of a college fraternity
or sorority; or
(4) for service not in the course of the employer's
trade or business performed in any calendar quarter by
an employee, unless the cash remuneration paid for such
service is $50 or more and such service is performed by
an individual who is regularly employed by such
employer to perform such service. For purposes of this
paragraph, an individual shall be deemed to be
regularly employed by an employer during a calendar
quarter only if--
(A) on each of some 24 days during such
quarter such individual performs for such
employer for some portion of the day service
not in the course of the employer's trade or
business; or
(B) such individual was regularly employed
(as determined under subparagraph (A)) by such
employer in the performance of such service
during the preceding calendar quarter; or
(5) for services by a citizen or resident of the
United States for a foreign government or an
international organization; or
(6) for such services, performed by a nonresident
alien individual, as may be designated by regulations
prescribed by the Secretary; or
(8)(A) for services for an employer (other than the
United States or any agency thereof)--
(i) performed by a citizen of the
United States if, at the time of the
payment of such remuneration, it is
reasonable to believe that such
remuneration will be excluded from
gross income under section 911; or
(ii) performed in a foreign country
or in a possession of the United States
by such a citizen if, at the time of
the payment of such remuneration, the
employer is required by the law of any
foreign country or possession of the
United States to withhold income tax
upon such remuneration; or
(B) for services for an employer (other than
the United States or any agency thereof)
performed by a citizen of the United States
within a possession of the United States (other
than Puerto Rico), if it is reasonable to
believe that at least 80 percent of the
remuneration to be paid to the employee by such
employer during the calendar year will be for
such services; or
(C) for services for an employer (other than
the United States or any agency thereof)
performed by a citizen of the United States
within Puerto Rico, if it is reasonable to
believe that during the entire calendar year
the employee will be a bona fide resident of
Puerto Rico; or
(D) for services for the United States (or
any agency thereof) performed by a citizen of
the United States within a possession of the
United States to the extent the United States
(or such agency) withholds taxes on such
remuneration pursuant to an agreement with such
possession; or
(9) for services performed by a duly ordained,
commissioned, or licensed minister of a church in the
exercise of his ministry or by a member of a religious
order in the exercise of duties required by such order;
or
(10)(A) for services performed by an individual under
the age of 18 in the delivery or distribution of
newspapers or shopping news, not including delivery or
distribution to any point for subsequent delivery or
distribution; or
(B) for services performed by an individual
in, and at the time of, the sale of newspapers
or magazines to ultimate consumers, under an
arrangement under which the newspapers or
magazines are to be sold by him at a fixed
price, his compensation being based on the
retention of the excess of such price over the
amount at which the newspapers or magazines are
charged to him, whether or not he is guaranteed
a minimum amount of compensation for such
services, or is entitled to be credited with
the unsold newspapers or magazines turned back;
or
(11) for services not in the course of the employer's
trade or business, to the extent paid in any medium
other than cash; or
(12) to, or on behalf of, an employee or his
beneficiary--
(A) from or to a trust described in section
401(a) which is exempt from tax under section
501(a) at the time of such payment unless such
payment is made to an employee of the trust as
remuneration for services rendered as such
employee and not as a beneficiary of the trust;
or
(B) under or to an annuity plan which, at the
time of such payment, is a plan described in
section 403(a); or
(C) for a payment described in section
402(h)(1) and (2) if, at the time of such
payment, it is reasonable to believe that the
employee will be entitled to an exclusion under
such section for payment; or
(D) under an arrangement to which section
408(p) applies; or
(13) pursuant to any provision of law other than
section 5(c) or 6(1) of the Peace Corps Act, for
service performed as a volunteer or volunteer leader
within the meaning of such Act; or
(E) under or to an eligible deferred
compensation plan which, at the time of such
payment, is a plan described in section 457(b)
which is maintained by an eligible employer
described in section 457(e)(1)(A), or
(14) in the form of group-term life insurance on the
life of an employee; or
(15) to or on behalf of an employee if (and to the
extent that) at the time of the payment of such
remuneration it is reasonable to believe that a
corresponding deduction is allowable under section 217
(determined without regard to section 274(n)); or
(16)(A) as tips in any medium other than cash;
(B) as cash tips to an employee in any
calendar month in the course of his employment
by an employer unless the amount of such cash
tips is $20 or more;
(17) for service described in section 3121(b)(20);
(18) for any payment made, or benefit furnished, to
or for the benefit of an employee if at the time of
such payment or such furnishing it is reasonable to
believe that the employee will be able to exclude such
payment or benefit from income under section 127, 129,
134(b)(4), or 134(b)(5);
(19) for any benefit provided to or on behalf of an
employee if at the time such benefit is provided it is
reasonable to believe that the employee will be able to
exclude such benefit from income under section 74(c),
108(f)(4), 117, or 132;
(20) for any medical care reimbursement made to or
for the benefit of an employee under a self-insured
medical reimbursement plan (within the meaning of
section 105(h)(6));
(21) for any payment made to or for the benefit of an
employee if at the time of such payment it is
reasonable to believe that the employee will be able to
exclude such payment from income under section 106(b);
(22) any payment made to or for the benefit of an
employee if at the time of such payment it is
reasonable to believe that the employee will be able to
exclude such payment from income under section 106(d);
or
(23) for any benefit or payment which is excludable
from the gross income of the employee under section
139B(b).
The term ``wages'' includes any amount includible in gross
income of an employee under section 409A and payment of such
amount shall be treated as having been made in the taxable year
in which the amount is so includible.
(b) Payroll Period.--For purposes of this chapter, the term
``payroll period'' means a period for which a payment of wages
is ordinarily made to the employee by his employer, and the
term ``miscellaneous payroll period'' means a payroll period
other than a daily, weekly, biweekly, semimonthly, monthly,
quarterly, semiannual or annual payroll period.
(c) Employee.--For purposes of this chapter, the term
``employee'' includes an officer, employee, or elected official
of the United States, a State, or any political subdivision
thereof, or the District of Columbia, or any agency or
instrumentality of any one or more of the foregoing. The term
``employee'' also includes an officer of a corporation.
(d) Employer.--For purposes of this chapter, the term
``employer'' means the person for whom an individual performs
or performed any service, of whatever nature, as the employee
of such person, except that--
(1) if the person for whom the individual performs or
performed the services does not have control of the
payment of the wages for such services, the term
``employer'' (except for purposes of subsection (a))
means the person having control of the payment of such
wages, and
(2) in the case of a person paying wages on behalf of
a nonresident alien individual, foreign partnership, or
foreign corporation, not engaged in trade or business
within the United States, the term ``employer'' (except
for purposes of subsection (a)) means such person.
(e) Number of Withholding Exemptions Claimed.--For purposes
of this chapter, the term ``number of withholding exemptions
claimed'' means the number of withholding exemptions claimed in
a withholding exemption certificate in effect under section
3402(f), or in effect under the corresponding section of prior
law, except that if no such certificate is in effect, the
number of withholding exemptions claimed shall be considered to
be zero.
(f) Tips.--For purposes of subsection (a), the term ``wages''
includes tips received by an employee in the course of his
employment. Such wages shall be deemed to be paid at the time a
written statement including such tips is furnished to the
employer pursuant to section 6053(a) or (if no statement
including such tips is so furnished) at the time received.
(g) Crew Leader Rules to Apply.--Rules similar to the rules
of section 3121(o) shall apply for purposes of this chapter.
(h) Differential Wage Payments to Active Duty Members of the
Uniformed Services.--
(1) In general.--For purposes of subsection (a), any
differential wage payment shall be treated as a payment
of wages by the employer to the employee.
(2) Differential wage payment.--For purposes of
paragraph (1), the term ``differential wage payment''
means any payment which--
(A) is made by an employer to an individual
with respect to any period during which the
individual is performing service in the
uniformed services (as defined in chapter 43 of
title 38, United States Code) while on active
duty for a period of more than 30 days, and
(B) represents all or a portion of the wages
the individual would have received from the
employer if the individual were performing
service for the employer.
(i) Qualified Stock for Which an Election Is in Effect Under
Section 83(i).--For purposes of subsection (a), qualified stock
(as defined in section 83(i)) with respect to which an election
is made under section 83(i) shall be treated as wages--
(1) received on the earliest date described in
section 83(i)(1)(B), and
(2) in an amount equal to the amount included in
income under section 83 for the taxable year which
includes such date.
SEC. 3402. INCOME TAX COLLECTED AT SOURCE.
(a) Requirement of Withholding.--
(1) In general.--Except as otherwise provided in this
section, every employer making payment of wages shall
deduct and withhold upon such wages a tax determined in
accordance with tables or computational procedures
prescribed by the Secretary. Any tables or procedures
prescribed under this paragraph shall--
(A) apply with respect to the amount of wages
paid during such periods as the Secretary may
prescribe, and
(B) be in such form, and provide for such
amounts to be deducted and withheld, as the
Secretary determines to be most appropriate to
carry out the purposes of this chapter and to
reflect the provisions of chapter 1 applicable
to such periods.
(2) Amount of wages.--For purposes of applying tables
or procedures prescribed under paragraph (1), the term
``the amount of wages'' means the amount by which the
wages exceed the number of withholding exemptions
claimed multiplied by the amount of one such exemption.
The amount of each withholding exemption shall be equal
to the amount of one personal exemption provided in
section 151(b), prorated to the payroll period. The
maximum number of withholding exemptions permitted
shall be calculated in accordance with regulations
prescribed by the Secretary under this section, taking
into account any reduction in withholding to which an
employee is entitled under this section.
(b) Percentage Method of Withholding.--
(1) If wages are paid with respect to a period which
is not a payroll period, the withholding exemption
allowable with respect to each payment of such wages
shall be the exemption allowed for a miscellaneous
payroll period containing a number of days (including
Sundays and holidays) equal to the number of days in
the period with respect to which such wages are paid.
(2) In any case in which wages are paid by an
employer without regard to any payroll period or other
period, the withholding exemption allowable with
respect to each payment of such wages shall be the
exemption allowed for a miscellaneous payroll period
containing a number of days equal to the number of days
(including Sundays and holidays) which have elapsed
since the date of the last payment of such wages by
such employer during the calendar year, or the date of
commencement of employment with such employer during
such year, or January 1 of such year, whichever is the
later.
(3) In any case in which the period, or the time
described in paragraph (2), in respect of any wages is
less than one week, the Secretary, under regulations
prescribed by him, may authorize an employer to compute
the tax to be deducted and withheld as if the aggregate
of the wages paid to the employee during the calendar
week were paid for a weekly payroll period.
(4) In determining the amount to be deducted and
withheld under this subsection, the wages may, at the
election of the employer, be computed to the nearest
dollar.
(c) Wage Bracket Withholding.--
(1) At the election of the employer with respect to
any employee, the employer shall deduct and withhold
upon the wages paid to such employee a tax (in lieu of
the tax required to be deducted and withheld under
subsection (a)) determined in accordance with tables
prescribed by the Secretary in accordance with
paragraph (6).
(2) If wages are paid with respect to a period which
is not a payroll period, the amount to be deducted and
withheld shall be that applicable in the case of a
miscellaneous payroll period containing a number of
days (including Sundays and holidays) equal to the
number of days in the period with respect to which such
wages are paid.
(3) In any case in which wages are paid by an
employer without regard to any payroll period or other
period, the amount to be deducted and withheld shall be
that applicable in the case of a miscellaneous payroll
period containing a number of days equal to the number
of days (including Sundays and holidays) which have
elapsed since the date of the last payment of such
wages by such employer during the calendar year, or the
date of commencement of employment with such employer
during such year, or January 1 of such year, whichever
is the later.
(4) In any case in which the period, or the time
described in paragraph (3), in respect of any wages is
less than one week, the Secretary, under regulations
prescribed by him, may authorize an employer to
determine the amount to be deducted and withheld under
the tables applicable in the case of a weekly payroll
period, in which case the aggregate of the wages paid
to the employee during the calendar week shall be
considered the weekly wages.
(5) If the wages exceed the highest wage bracket, in
determining the amount to be deducted and withheld
under this subsection, the wages may, at the election
of the employer, be computed to the nearest dollar.
(6) In the case of wages paid after December 31,
1969, the amount deducted and withheld under paragraph
(1) shall be determined in accordance with tables
prescribed by the Secretary. In the tables so
prescribed, the amounts set forth as amounts of wages
and amounts of income tax to be deducted and withheld
shall be computed on the basis of the table for an
annual payroll period prescribed pursuant to subsection
(a).
(d) Tax Paid by Recipient.--If the employer, in violation of
the provisions of this chapter, fails to deduct and withhold
the tax under this chapter, and thereafter the tax against
which such tax may be credited is paid, the tax so required to
be deducted and withheld shall not be collected from the
employer; but this subsection shall in no case relieve the
employer from liability for any penalties or additions to the
tax otherwise applicable in respect of such failure to deduct
and withhold.
(e) Included and Excluded Wages.--If the remuneration paid by
an employer to an employee for services performed during one-
half or more of any payroll period of not more than 31
consecutive days constitutes wages, all the remuneration paid
by such employer to such employee for such period shall be
deemed to be wages; but if the remuneration paid by an employer
to an employee for services performed during more than one-half
of any such payroll period does not constitute wages, then none
of the remuneration paid by such employer to such employee for
such period shall be deemed to be wages.
(f) Withholding Exemptions.--
(1) In general.--An employee receiving wages shall on
any day be entitled to the following withholding
exemptions:
(A) an exemption for himself unless he is an
individual described in section 151(d)(2);
(B) if the employee is married, any exemption
to which his spouse is entitled, or would be
entitled if such spouse were an employee
receiving wages, under subparagraph (A) or (D),
but only if such spouse does not have in effect
a withholding exemption certificate claiming
such exemption;
(C) an exemption for each individual with
respect to whom, on the basis of facts existing
at the beginning of such day, there may
reasonably be expected to be allowable an
exemption under section 151(c) for the taxable
year under subtitle A in respect of which
amounts deducted and withheld under this
chapter in the calendar year in which such day
falls are allowed as a credit;
(D) any allowance to which he is entitled
under subsection (m), but only if his spouse
does not have in effect a withholding exemption
certificate claiming such allowance; and
(E) a standard deduction allowance which
shall be an amount equal to one exemption (or
more than one exemption if so prescribed by the
Secretary) unless (i) he is married (as
determined under section 7703) and his spouse
is an employee receiving wages subject to
withholding or (ii) he has withholding
exemption certificates in effect with respect
to more than one employer.
For purposes of this title, any standard deduction
allowance under subparagraph (E) shall be treated as if
it were denominated a withholding exemption.
(2) Exemption certificates.--
(A) On commencement of employment.--On or
before the date of the commencement of
employment with an employer, the employee shall
furnish the employer with a signed withholding
exemption certificate relating to the number of
withholding exemptions which he claims, which
shall in no event exceed the number to which he
is entitled.
(B) Change of status.--If, on any day during
the calendar year, the number of withholding
exemptions to which the employee is entitled is
less than the number of withholding exemptions
claimed by the employee on the withholding
exemption certificate then in effect with
respect to him, the employee shall within 10
days thereafter furnish the employer with a new
withholding exemption certificate relating to
the number of withholding exemptions which the
employee then claims, which shall in no event
exceed the number to which he is entitled on
such day. If, on any day during the calendar
year, the number of withholding exemptions to
which the employee is entitled is greater than
the number of withholding exemptions claimed,
the employee may furnish the employer with a
new withholding exemption certificate relating
to the number of withholding exemptions which
the employee then claims, which shall in no
event exceed the number to which he is entitled
on such day.
(C) Change of status which affects next
calendar year.--If on any day during the
calendar year the number of withholding
exemptions to which the employee will be, or
may reasonably be expected to be, entitled at
the beginning of his next taxable year under
subtitle A is different from the number to
which the employee is entitled on such day, the
employee shall, in such cases and at such times
as the Secretary may by regulations prescribe,
furnish the employer with a withholding
exemption certificate relating to the number of
withholding exemptions which he claims with
respect to such next taxable year, which shall
in no event exceed the number to which he will
be, or may reasonably be expected to be, so
entitled.
(3) When certificate takes effect.--
(A) First certificate furnished.--A
withholding exemption certificate furnished the
employer in cases in which no previous such
certificate is in effect shall take effect as
of the beginning of the first payroll period
ending, or the first payment of wages made
without regard to a payroll period, on or after
the date on which such certificate is so
furnished.
(B) Furnished to take place of existing
certificate.--
(i) In general.--Except as provided
in clauses (ii) and (iii), a
withholding exemption certificate
furnished to the employer in cases in
which a previous such certificate is in
effect shall take effect as of the
beginning of the 1st payroll period
ending (or the 1st payment of wages
made without regard to a payroll
period) on or after the 30th day after
the day on which such certificate is so
furnished.
(ii) Employer may elect earlier
effective date.--At the election of the
employer, a certificate described in
clause (i) may be made effective
beginning with any payment of wages
made on or after the day on which the
certificate is so furnished and before
the 30th day referred to in clause (i).
(iii) Change of status which affects
next year.--Any certificate furnished
pursuant to paragraph (2)(C) shall not
take effect, and may not be made
effective, with respect to any payment
of wages made in the calendar year in
which the certificate is furnished.
(4) Period during which certificate remains in
effect.--A withholding exemption certificate which
takes effect under this subsection, or which on
December 31, 1954, was in effect under the
corresponding subsection of prior law, shall continue
in effect with respect to the employer until another
such certificate takes effect under this subsection.
(5) Form and contents of certificate.--Withholding
exemption certificates shall be in such form and
contain such information as the Secretary may by
regulations prescribe.
(6) Exemption of certain nonresident aliens.--
Notwithstanding the provisions of paragraph (1), a
nonresident alien individual (other than an individual
described in section 3401(a)(6)(A) or (B)) shall be
entitled to only one withholding exemption.
(7) Exemption where certificate with another employer
is in effect.--If a withholding exemption certificate
is in effect with respect to one employer, an employee
shall not be entitled under a certificate in effect
with any other employer to any withholding exemption
which he has claimed under such first certificate.
(g) Overlapping Pay Periods, and Payment by Agent or
Fiduciary.--If a payment of wages is made to an employee by an
employer--
(1) with respect to a payroll period or other period,
any part of which is included in a payroll period or
other period with respect to which wages are also paid
to such employee by such employer, or
(2) without regard to any payroll period or other
period, but on or prior to the expiration of a payroll
period or other period with respect to which wages are
also paid to such employee by such employer, or
(3) with respect to a period beginning in one and
ending in another calendar year, or
(4) through an agent, fiduciary, or other person who
also has the control, receipt, custody, or disposal of,
or pays, the wages payable by another employer to such
employee,
the manner of withholding and the amount to be deducted and
withheld under this chapter shall be determined in accordance
with regulations prescribed by the Secretary under which the
withholding exemption allowed to the employee in any calendar
year shall approximate the withholding exemption allowable with
respect to an annual payroll period.
(h) Alternative Methods of Computing Amount to be Withheld.--
The Secretary may, under regulations prescribed by him,
authorize--
(1) Withholding on basis of average wages.--An
employer--
(A) to estimate the wages which will be paid
to any employee in any quarter of the calendar
year,
(B) to determine the amount to be deducted
and withheld upon each payment of wages to such
employee during such quarter as if the
appropriate average of the wages so estimated
constituted the actual wages paid, and
(C) to deduct and withhold upon any payment
of wages to such employee during such quarter
(and, in the case of tips referred to in
subsection (k), within 30 days thereafter) such
amount as may be necessary to adjust the amount
actually deducted and withheld upon the wages
of such employee during such quarter to the
amount required to be deducted and withheld
during such quarter without regard to this
subsection.
(2) Withholding on basis of annualized wages.--An
employer to determine the amount of tax to be deducted
and withheld upon a payment of wages to an employee for
a payroll period by--
(A) multiplying the amount of an employee's
wages for a payroll period by the number of
such payroll periods in the calendar year,
(B) determining the amount of tax which would
be required to be deducted and withheld upon
the amount determined under subparagraph (A) if
such amount constituted the actual wages for
the calendar year and the payroll period of the
employee were an annual payroll period, and
(C) dividing the amount of tax determined
under subparagraph (B) by the number of payroll
periods (described in subparagraph (A)) in the
calendar year.
(3) Withholding on basis of cumulative wages.--An
employer, in the case of any employee who requests to
have the amount of tax to be withheld from his wages
computed on the basis of his cumulative wages, to--
(A) add the amount of the wages to be paid to
the employee for the payroll period to the
total amount of wages paid by the employer to
the employee during the calendar year,
(B) divide the aggregate amount of wages
computed under subparagraph (A) by the number
of payroll periods to which such aggregate
amount of wages relates,
(C) compute the total amount of tax that
would have been required to be deducted and
withheld under subsection (a) if the average
amount of wages (as computed under subparagraph
(B)) had been paid to the employee for the
number of payroll periods to which the
aggregate amount of wages (computed under
subparagraph (A)) relates,
(D) determine the excess, if any, of the
amount of tax computed under subparagraph (C)
over the total amount of tax deducted and
withheld by the employer from wages paid to the
employee during the calendar year, and
(E) deduct and withhold upon the payment of
wages (referred to in subparagraph (A)) to the
employee an amount equal to the excess (if any)
computed under subparagraph (D).
(4) Other methods.--An employer to determine the
amount of tax to be deducted and withheld upon the
wages paid to an employee by any other method which
will require the employer to deduct and withhold upon
such wages substantially the same amount as would be
required to be deducted and withheld by applying
subsection (a) or (c), either with respect to a payroll
period or with respect to the entire taxable year.
(i) Changes in Withholding.--
(1) In general.--The Secretary may by regulations
provide for increases in the amount of withholding
otherwise required under this section in cases where
the employee requests such changes.
(2) Treatment as tax.--Any increased withholding
under paragraph (1) shall for all purposes be
considered tax required to be deducted and withheld
under this chapter.
(j) Noncash Remuneration to Retail Commission Salesman.--In
the case of remuneration paid in any medium other than cash for
services performed by an individual as a retail salesman for a
person, where the service performed by such individual for such
person is ordinarily performed for remuneration solely by way
of cash commission an employer shall not be required to deduct
or withhold any tax under this subchapter with respect to such
remuneration, provided that such employer files with the
Secretary such information with respect to such remuneration as
the Secretary may by regulation prescribe.
(k) Tips.--In the case of tips which constitute wages,
subsection (a) shall be applicable only to such tips as are
included in a written statement furnished to the employer
pursuant to section 6053(a), and only to the extent that the
tax can be deducted and withheld by the employer, at or after
the time such statement is so furnished and before the close of
the calendar year in which such statement is furnished, from
such wages of the employee (excluding tips, but including funds
turned over by the employee to the employer for the purpose of
such deduction and withholding) as are under the control of the
employer; and an employer who is furnished by an employee a
written statement of tips (received in a calendar month)
pursuant to section 6053(a) to which paragraph (16)(B) of
section 3401(a) is applicable may deduct and withhold the tax
with respect to such tips from any wages of the employee
(excluding tips) under his control, even though at the time
such statement is furnished the total amount of the tips
included in statements furnished to the employer as having been
received by the employee in such calendar month in the course
of his employment by such employer is less than $20. Such tax
shall not at any time be deducted and withheld in an amount
which exceeds the aggregate of such wages and funds (including
funds turned over under section 3102(c)(2) or section
3202(c)(2)) minus any tax required by section 3102(a) or
section 3202(a) to be collected from such wages and funds.
(l) Determination and Disclosure of Marital Status.--
(1) Determination of status by employer.--For
purposes of applying the tables in subsections (a) and
(c) to a payment of wages, the employer shall treat the
employee as a single person unless there is in effect
with respect to such payment of wages a withholding
exemption certificate furnished to the employer by the
employee after the date of the enactment of this
subsection indicating that the employee is married.
(2) Disclosure of status by employee.--An employee
shall be entitled to furnish the employer with a
withholding exemption certificate indicating he is
married only if, on the day of such furnishing, he is
married (determined with the application of the rules
in paragraph (3)). An employee whose marital status
changes from married to single shall, at such time as
the Secretary may by regulations prescribe, furnish the
employer with a new withholding exemption certificate.
(3) Determination of marital status.--For purposes of
paragraph (2), an employee shall on any day be
considered--
(A) as not married, if (i) he is legally
separated from his spouse under a decree of
divorce or separate maintenance, or (ii) either
he or his spouse is, or on any preceding day
within the calendar year was, a nonresident
alien; or
(B) as married, if (i) his spouse (other than
a spouse referred to in subparagraph (A)) died
within the portion of his taxable year which
precedes such day, or (ii) his spouse died
during one of the two taxable years immediately
preceding the current taxable year and, on the
basis of facts existing at the beginning of
such day, the employee reasonably expects, at
the close of his taxable year, to be a
surviving spouse (as defined in section 2(a)).
(m) Withholding Allowances.--Under regulations prescribed by
the Secretary, an employee shall be entitled to additional
withholding allowances or additional reductions in withholding
under this subsection. In determining the number of additional
withholding allowances or the amount of additional reductions
in withholding under this subsection, the employee may take
into account (to the extent and in the manner provided by such
regulations)--
(1) estimated itemized deductions allowable under
chapter 1 (other than the deductions referred to in
section 151 and other than the deductions required to
be taken into account in determining adjusted gross
income under section 62(a) (other than paragraph (10)
thereof)),
(2) estimated tax credits allowable under chapter 1,
and
(3) such additional deductions (including the
additional standard deduction under section 63(c)(3)
for the aged and blind) and other items as may be
specified by the Secretary in regulations.
(n) Employees Incurring No Income Tax Liability.--
Notwithstanding any other provision of this section, an
employer shall not be required to deduct and withhold any tax
under this chapter upon a payment of wages to an employee if
there is in effect with respect to such payment a withholding
exemption certificate (in such form and containing such other
information as the Secretary may prescribe) furnished to the
employer by the employee certifying that the employee--
(1) incurred no liability for income tax imposed
under subtitle A for his preceding taxable year, and
(2) anticipates that he will incur no liability for
income tax imposed under subtitle A for his current
taxable year.
The Secretary shall by regulations provide for the coordination
of the provisions of this subsection with the provisions of
subsection (f).
(o) Extension of Withholding to Certain Payments Other Than
Wages.--
(1) General rule.--For purposes of this chapter (and
so much of subtitle F as relates to this chapter)--
(A) any supplemental unemployment
compensation benefit paid to an individual,
(B) any payment of an annuity to an
individual, if at the time the payment is made
a request that such annuity be subject to
withholding under this chapter is in effect,
and
(C) any payment to an individual of sick pay
which does not constitute wages (determined
without regard to this subsection), if at the
time the payment is made a request that such
sick pay be subject to withholding under this
chapter is in effect,
shall be treated as if it were a payment of wages by an
employer to an employee for a payroll period.
(2) Definitions.--
(A) Supplemental unemployment compensation
benefits.--For purposes of paragraph (1), the
term ``supplemental unemployment compensation
benefits'' means amounts which are paid to an
employee, pursuant to a plan to which the
employer is a party, because of an employee's
involuntary separation from employment (whether
or not such separation is temporary), resulting
directly from a reduction in force, the
discontinuance of a plant or operation, or
other similar conditions, but only to the
extent such benefits are includible in the
employee's gross income.
(B) Annuity.--For purposes of this
subsection, the term ``annuity'' means any
amount paid to an individual as a pension or
annuity.
(C) Sick pay.--For purposes of this
subsection, the term ``sick pay'' means any
amount which--
(i) is paid to an employee pursuant
to a plan to which the employer is a
party, and
(ii) constitutes remuneration or a
payment in lieu of remuneration for any
period during which the employee is
temporarily absent from work on account
of sickness or personal injuries.
(3) Amount withheld from annuity payments or sick
pay.--If a payee makes a request that an annuity or any
sick pay be subject to withholding under this chapter,
the amount to be deducted and withheld under this
chapter from any payment to which such request applies
shall be an amount (not less than a minimum amount
determined under regulations prescribed by the
Secretary) specified by the payee in such request. The
amount deducted and withheld with respect to a payment
which is greater or less than a full payment shall bear
the same relation to the specified amount as such
payment bears to a full payment.
(4) Request for withholding.--A request that an
annuity or any sick pay be subject to withholding under
this chapter--
(A) shall be made by the payee in writing to
the person making the payments and shall
contain the social security number of the
payee,
(B) shall specify the amount to be deducted
and withheld from each full payment, and
(C) shall take effect--
(i) in the case of sick pay, with
respect to payments made more than 7
days after the date on which such
request is furnished to the payor, or
(ii) in the case of an annuity, at
such time (after the date on which such
request is furnished to the payor) as
the Secretary shall by regulations
prescribe.
Such a request may be changed or terminated by
furnishing to the person making the payments a written
statement of change or termination which shall take
effect in the same manner as provided in subparagraph
(C). At the election of the payor, any such request (or
statement of change or revocation) may take effect
earlier than as provided in subparagraph (C).
(5) Special rule for sick pay paid pursuant to
certain collective-bargaining agreements.--In the case
of any sick pay paid pursuant to a collective-
bargaining agreement between employee representatives
and one or more employers which contains a provision
specifying that this paragraph is to apply to sick pay
paid pursuant to such agreement and contains a
provision for determining the amount to be deducted and
withheld from each payment of such sick pay--
(A) the requirement of paragraph (1)(C) that
a request for withholding be in effect shall
not apply, and
(B) except as provided in subsection (n), the
amounts to be deducted and withheld under this
chapter shall be determined in accordance with
such agreement.
The preceding sentence shall not apply with respect to
sick pay paid pursuant to any agreement to any
individual unless the social security number of such
individual is furnished to the payor and the payor is
furnished with such information as is necessary to
determine whether the payment is pursuant to the
agreement and to determine the amount to be deducted
and withheld.
(6) Coordination with withholding on designated
distributions under section 3405.--This subsection
shall not apply to any amount which is a designated
distribution (within the meaning of section
3405(e)(1)).
(p) Voluntary Withholding Agreements.--
(1) Certain Federal payments.--
(A) In general.--If, at the time a specified
Federal payment is made to any person, a
request by such person is in effect that such
payment be subject to withholding under this
chapter, then for purposes of this chapter and
so much of subtitle F as relates to this
chapter, such payment shall be treated as if it
were a payment of wages by an employer to an
employee.
(B) Amount withheld.--The amount to be
deducted and withheld under this chapter from
any payment to which any request under
subparagraph (A) applies shall be an amount
equal to the percentage of such payment
specified in such request. Such a request shall
apply to any payment only if the percentage
specified is 7 percent, any percentage
applicable to any of the 3 lowest income
brackets in the table under section 1(c), or
such other percentage as is permitted under
regulations prescribed by the Secretary.
(C) Specified Federal payments.--For purposes
of this paragraph, the term ``specified Federal
payment'' means--
(i) any payment of a social security
benefit (as defined in section 86(d)),
(ii) any payment referred to in the
second sentence of section 451(d) which
is treated as insurance proceeds,
(iii) any amount which is includible
in gross income under section 77(a),
and
(iv) any other payment made pursuant
to Federal law which is specified by
the Secretary for purposes of this
paragraph.
(D) Requests for withholding.--Rules similar
to the rules that apply to annuities under
subsection (o)(4) shall apply to requests under
this paragraph and paragraph (2).
(2) Voluntary withholding on unemployment benefits.--
If, at the time a payment of unemployment compensation
(as defined in section 85(b)) is made to any person, a
request by such person is in effect that such payment
be subject to withholding under this chapter, then for
purposes of this chapter and so much of subtitle F as
relates to this chapter, such payment shall be treated
as if it were a payment of wages by an employer to an
employee. The amount to be deducted and withheld under
this chapter from any payment to which any request
under this paragraph applies shall be an amount equal
to 10 percent of such payment.
(3) Authority for other voluntary withholding.--The
Secretary is authorized by regulations to provide for
withholding--
(A) from remuneration for services performed
by an employee for the employee's employer
which (without regard to this paragraph) does
not constitute wages, and
(B) from any other type of payment with
respect to which the Secretary finds that
withholding would be appropriate under the
provisions of this chapter,
if the employer and employee, or the person making and
the person receiving such other type of payment, agree
to such withholding. Such agreement shall be in such
form and manner as the Secretary may by regulations
prescribe. For purposes of this chapter (and so much of
subtitle F as relates to this chapter), remuneration or
other payments with respect to which such agreement is
made shall be treated as if they were wages paid by an
employer to an employee to the extent that such
remuneration is paid or other payments are made during
the period for which the agreement is in effect.
(q) Extension of Withholding to Certain Gambling Winnings.--
(1) General rule.--Every person, including the
Government of the United States, a State, or a
political subdivision thereof, or any instrumentalities
of the foregoing, making any payment of winnings which
are subject to withholding shall deduct and withhold
from such payment a tax in an amount equal to the
product of the third lowest rate of tax applicable
under section 1(c) and such payment.
(2) Exemption where tax otherwise withheld.--In the
case of any payment of winnings which are subject to
withholding made to a nonresident alien individual or a
foreign corporation, the tax imposed under paragraph
(1) shall not apply to any such payment subject to tax
under section 1441(a) (relating to withholding on
nonresident aliens) or tax under section 1442(a)
(relating to withholding on foreign corporations).
(3) Winnings which are subject to withholding.--For
purposes of this subsection, the term ``winnings which
are subject to withholding'' means proceeds from a
wager determined in accordance with the following:
(A) In general.--Except as provided in
subparagraphs (B) and (C), proceeds of more
than $5,000 from a wagering transaction, if the
amount of such proceeds is at least 300 times
as large as the amount wagered.
(B) State-conducted lotteries.--Proceeds of
more than $5,000 from a wager placed in a
lottery conducted by an agency of a State
acting under authority of State law, but only
if such wager is placed with the State agency
conducting such lottery, or with its authorized
employees or agents.
(C) Sweepstakes, wagering pools, certain
parimutuel pools, jai alai, and lotteries.--
Proceeds of more than $5,000 from--
(i) a wager placed in a sweepstakes,
wagering pool, or lottery (other than a
wager described in subparagraph (B)),
or
(ii) a wagering transaction in a
parimutuel pool with respect to horse
races, dog races, or jai alai if the
amount of such proceeds is at least 300
times as large as the amount wagered.
(4) Rules for determining proceeds from a wager.--For
purposes of this subsection--
(A) proceeds from a wager shall be determined
by reducing the amount received by the amount
of the wager, and
(B) proceeds which are not money shall be
taken into account at their fair market value.
(5) Exception for bingo, keno, and slot machines.--
The tax imposed under paragraph (1) shall not apply to
winnings from a slot machine, keno, and bingo.
(6) Statement by recipient.--Every person who is to
receive a payment of winnings which are subject to
withholding shall furnish the person making such
payment a statement, made under the penalties of
perjury, containing the name, address, and taxpayer
identification number of the person receiving the
payment and of each person entitled to any portion of
such payment.
(7) Coordination with other sections.--For purposes
of sections 3403 and 3404 and for purposes of so much
of subtitle F (except section 7205) as relates to this
chapter, payments to any person of winnings which are
subject to withholding shall be treated as if they were
wages paid by an employer to an employee.
(r) Extension of Withholding to Certain Taxable Payments of
Indian Casino Profits.--
(1) In general.--Every person, including an Indian
tribe, making a payment to a member of an Indian tribe
from the net revenues of any class II or class III
gaming activity conducted or licensed by such tribe
shall deduct and withhold from such payment a tax in an
amount equal to such payment's proportionate share of
the annualized tax.
(2) Exception.--The tax imposed by paragraph (1)
shall not apply to any payment to the extent that the
payment, when annualized, does not exceed an amount
equal to the sum of--
(A) the basic standard deduction (as defined
in section 63(c)) for an individual to whom
section 63(c)(2)(C) applies, and
(B) the exemption amount (as defined in
section 151(d)).
(3) Annualized tax.--For purposes of paragraph (1),
the term ``annualized tax'' means, with respect to any
payment, the amount of tax which would be imposed by
section 1(c) (determined without regard to any rate of
tax in excess of the fourth lowest rate of tax
applicable under section 1(c)) on an amount of taxable
income equal to the excess of--
(A) the annualized amount of such payment,
over
(B) the amount determined under paragraph
(2).
(4) Classes of gaming activities, etc..--For purposes
of this subsection, terms used in paragraph (1) which
are defined in section 4 of the Indian Gaming
Regulatory Act (25 U.S.C. 2701 et seq.), as in effect
on the date of the enactment of this subsection, shall
have the respective meanings given such terms by such
section.
(5) Annualization.--Payments shall be placed on an
annualized basis under regulations prescribed by the
Secretary.
(6) Alternate withholding procedures.--At the
election of an Indian tribe, the tax imposed by this
subsection on any payment made by such tribe shall be
determined in accordance with such tables or
computational procedures as may be specified in
regulations prescribed by the Secretary (in lieu of in
accordance with paragraphs (2) and (3)).
(7) Coordination with other sections.--For purposes
of this chapter and so much of subtitle F as relates to
this chapter, payments to any person which are subject
to withholding under this subsection shall be treated
as if they were wages paid by an employer to an
employee.
(s) Exemption from Withholding for Any Vehicle Fringe
Benefit.--
(1) Employer election not to withhold.--The employer
may elect not to deduct and withhold any tax under this
chapter with respect to any vehicle fringe benefit
provided to any employee if such employee is notified
by the employer of such election (at such time and in
such manner as the Secretary shall by regulations
prescribe). The preceding sentence shall not apply to
any vehicle fringe benefit unless the amount of such
benefit is included by the employer on a statement
timely furnished under section 6051.
(2) Employer must furnish W-2.--Any vehicle fringe
benefit shall be treated as wages from which amounts
are required to be deducted and withheld under this
chapter for purposes of section 6051.
(3) Vehicle fringe benefit.--For purposes of this
subsection, the term ``vehicle fringe benefit'' means
any fringe benefit--
(A) which constitutes wages (as defined in
section 3401), and
(B) which consists of providing a highway
motor vehicle for the use of the employee.
(t) Rate of Withholding for Certain Stock.--In the case of
any qualified stock (as defined in section 83(i)) with respect
to which an election is made under section 83(i)--
(1) the rate of tax under subsection (a) shall not be
less than the maximum rate of tax in effect under
section 1, and
(2) such stock shall be treated for purposes of
section 3501(b) in the same manner as a non-cash fringe
benefit.
* * * * * * *
Subtitle F--Procedure and Administration
* * * * * * *
CHAPTER 61--INFORMATION AND RETURNS
* * * * * * *
Subchapter A--Returns and Records
* * * * * * *
PART III--INFORMATION RETURNS
* * * * * * *
Subpart C--Information Regarding Wages Paid Employees
SEC. 6051. RECEIPTS FOR EMPLOYEES.
(a) Requirement.--Every person required to deduct and
withhold from an employee a tax under section 3101 or 3402, or
who would have been required to deduct and withhold a tax under
section 3402 (determined without regard to subsection (n)) if
the employee had claimed no more than one withholding
exemption, or every employer engaged in a trade or business who
pays remuneration for services performed by an employee,
including the cash value of such remuneration paid in any
medium other than cash, shall furnish to each such employee in
respect of the remuneration paid by such person to such
employee during the calendar year, on or before January 31 of
the succeeding year, or, if his employment is terminated before
the close of such calendar year, within 30 days after the date
of receipt of a written request from the employee if such 30-
day period ends before January 31, a written statement showing
the following:
(1) the name of such person,
(2) the name of the employee (and an identifying
number for the employee if wages as defined in section
3121(a) have been paid),
(3) the total amount of wages as defined in section
3401(a),
(4) the total amount deducted and withheld as tax
under section 3402,
(5) the total amount of wages as defined in section
3121(a),
(6) the total amount deducted and withheld as tax
under section 3101,
(8) the total amount of elective deferrals (within
the meaning of section 402(g)(3)) and compensation
deferred under section 457, including the amount of
designated Roth contributions (as defined in section
402A),
(9) the total amount incurred for dependent care
assistance with respect to such employee under a
dependent care assistance program described in section
129(d),
(10) in the case of an employee who is a member of
the Armed Forces of the United States, such employee's
earned income as determined for purposes of section 32
(relating to earned income credit),
(11) the amount contributed to any Archer MSA (as
defined in section 220(d)) of such employee or such
employee's spouse,
(12) the amount contributed to any health savings
account (as defined in section 223(d)) of such employee
or such employee's spouse,
(13) the total amount of deferrals for the year under
a nonqualified deferred compensation plan (within the
meaning of section 409A(d)), [and]
(14) the aggregate cost (determined under rules
similar to the rules of section 4980B(f)(4)) of
applicable employer-sponsored coverage (as defined in
section 4980I(d)(1)), except that this paragraph shall
not apply to--
(A) coverage to which paragraphs (11) and
(12) apply, or
(B) the amount of any salary reduction
contributions to a flexible spending
arrangement (within the meaning of section
125)[.],
(15) the amount excludable from gross income under
subparagraph (A) of section 83(i)(1),
(16) the amount includible in gross income under
subparagraph (B) of section 83(i)(1) with respect to an
event described in such subparagraph which occurs in
such calendar year, and
(17) the aggregate amount of income which is being
deferred pursuant to elections under section 83(i),
determined as of the close of the calendar year.
In the case of compensation paid for service as a member of a
uniformed service, the statement shall show, in lieu of the
amount required to be shown by paragraph (5), the total amount
of wages as defined in section 3121(a), computed in accordance
with such section and section 3121(i)(2). In the case of
compensation paid for service as a volunteer or volunteer
leader within the meaning of the Peace Corps Act, the statement
shall show, in lieu of the amount required to be shown by
paragraph (5), the total amount of wages as defined in section
3121(a), computed in accordance with such section and section
3121(i)(3). In the case of tips received by an employee in the
course of his employment, the amounts required to be shown by
paragraphs (3) and (5) shall include only such tips as are
included in statements furnished to the employer pursuant to
section 6053(a). The amounts required to be shown by paragraph
(5) shall not include wages which are exempted pursuant to
sections 3101(c) and 3111(c) from the taxes imposed by sections
3101 and 3111. In the case of the amounts required to be shown
by paragraph (13), the Secretary may (by regulation) establish
a minimum amount of deferrals below which paragraph (13) does
not apply.
(b) Special Rule as to Compensation of Members of Armed
Forces.--In the case of compensation paid for service as a
member of the Armed Forces, the statement required by
subsection (a) shall be furnished if any tax was withheld
during the calendar year under section 3402, or if any of the
compensation paid during such year is includible in gross
income under chapter 1, or if during the calendar year any
amount was required to be withheld as tax under section 3101.
In lieu of the amount required to be shown by paragraph (3) of
subsection (a), such statement shall show as wages paid during
the calendar year the amount of such compensation paid during
the calendar year which is not excluded from gross income under
chapter 1 (whether or not such compensation constituted wages
as defined in section 3401(a)).
(c) Additional Requirements.--The statements required to be
furnished pursuant to this section in respect of any
remuneration shall be furnished at such other times, shall
contain such other information, and shall be in such form as
the Secretary may by regulations prescribe. The statements
required under this section shall also show the proportion of
the total amount withheld as tax under section 3101 which is
for financing the cost of hospital insurance benefits under
part A of title XVIII of the Social Security Act.
(d) Statements to Constitute Information Returns.--A
duplicate of any statement made pursuant to this section and in
accordance with regulations prescribed by the Secretary shall,
when required by such regulations, be filed with the Secretary.
(e) Railroad Employees.--
(1) Additional requirement.--Every person required to
deduct and withhold tax under section 3201 from an
employee shall include on or with the statement
required to be furnished such employee under subsection
(a) a notice concerning the provisions of this title
with respect to the allowance of a credit or refund of
the tax on wages imposed by section 3101(b) and the tax
on compensation imposed by section 3201 or 3211 which
is treated as a tax on wages imposed by section
3101(b).
(2) Information to be supplied to employees.--Each
person required to deduct and withhold tax under
section 3201 during any year from an employee who has
also received wages during such year subject to the tax
imposed by section 3101(b) shall, upon request of such
employee, furnish to him a written statement showing--
(A) the total amount of compensation with
respect to which the tax imposed by section
3201 was deducted,
(B) the total amount deducted as tax under
section 3201, and
(C) the portion of the total amount deducted
as tax under section 3201 which is for
financing the cost of hospital insurance under
part A of title XVIII of the Social Security
Act.
(f) Statements Required in Case of Sick Pay Paid by Third
Parties.--
(1) Statements required from payor.--
(A) In general.--If, during any calendar
year, any person makes a payment of third-party
sick pay to an employee, such person shall, on
or before January 15 of the succeeding year,
furnish a written statement to the employer in
respect of whom such payment was made showing--
(i) the name and, if there is
withholding under section 3402(o), the
social security number of such
employee,
(ii) the total amount of the third-
party sick pay paid to such employee
during the calendar year, and
(iii) the total amount (if any)
deducted and withheld from such sick
pay under section 3402.
For purposes of the preceding sentence, the
term ``third-party sick pay'' means any sick
pay (as defined in section 3402(o)(2)(C)) which
does not constitute wages for purposes of
chapter 24 (determined without regard to
section 3402(o)(1)).
(B) Special rules.--
(i) Statements are in lieu of other
reporting requirements.--The reporting
requirements of subparagraph (A) with
respect to any payments shall, with
respect to such payments, be in lieu of
the requirements of subsection (a) and
of section 6041.
(ii) Penalties made applicable.--For
purposes of sections 6674 and 7204, the
statements required to be furnished by
subparagraph (A) shall be treated as
statements required under this section
to be furnished to employees.
(2) Information required to be furnished by
employer.--Every employer who receives a statement
under paragraph (1)(A) with respect to sick pay paid to
any employee during any calendar year shall, on or
before January 31 of the succeeding year, furnish a
written statement to such employee showing--
(A) the information shown on the statement
furnished under paragraph (1)(A), and
(B) if any portion of the sick pay is
excludable from gross income under section
104(a)(3), the portion which is not so
excludable and the portion which is so
excludable.
To the extent practicable, the information required
under the preceding sentence shall be furnished on or
with the statement (if any) required under subsection
(a).
* * * * * * *
CHAPTER 68--ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE
PENALTIES
* * * * * * *
Subchapter A--Additions to the Tax and Additional Amounts
* * * * * * *
PART I--GENERAL PROVISIONS
* * * * * * *
SEC. 6652. FAILURE TO FILE CERTAIN INFORMATION RETURNS, REGISTRATION
STATEMENTS, ETC.
(a) Returns With Respect to Certain Payments Aggregating Less
Than $10.--In the case of each failure to file a statement of a
payment to another person required under the authority of--
(1) section 6042(a)(2) (relating to payments of
dividends aggregating less than $10), or
(2) section 6044(a)(2) (relating to payments of
patronage dividends aggregating less than $10),
on the date prescribed therefor (determined with regard to any
extension of time for filing), unless it is shown that such
failure is due to reasonable cause and not to willful neglect,
there shall be paid (upon notice and demand by the Secretary
and in the same manner as tax) by the person failing to so file
the statement, $1 for each such statement not so filed, but the
total amount imposed on the delinquent person for all such
failures during the calendar year shall not exceed $1,000.
(b) Failure to Report Tips.--In the case of failure by an
employee to report to his employer on the date and in the
manner prescribed therefor any amount of tips required to be so
reported by section 6053(a) which are wages (as defined in
section 3121(a)) or which are compensation (as defined in
section 3231(e)), unless it is shown that such failure is due
to reasonable cause and not due to willful neglect, there shall
be paid by the employee, in addition to the tax imposed by
section 3101 or section 3201 (as the case may be) with respect
to the amount of tips which he so failed to report, an amount
equal to 50 percent of such tax.
(c) Returns by Exempt Organizations and by Certain Trusts.--
(1) Annual returns under section 6033(a)(1) or
6012(a)(6).--
(A) Penalty on organization.--In the case
of--
(i) a failure to file a return
required under section 6033(a)(1)
(relating to returns by exempt
organizations) or section 6012(a)(6)
(relating to returns by political
organizations) on the date and in the
manner prescribed therefor (determined
with regard to any extension of time
for filing), or
(ii) a failure to include any of the
information required to be shown on a
return filed under section 6033(a)(1)
or section 6012(a)(6) or to show the
correct information,
there shall be paid by the exempt organization
$20 for each day during which such failure
continues. The maximum penalty under this
subparagraph on failures with respect to any 1
return shall not exceed the lesser of $10,000
or 5 percent of the gross receipts of the
organization for the year. In the case of an
organization having gross receipts exceeding
$1,000,000 for any year, with respect to the
return required under section 6033(a)(1) or
section 6012(a)(6) for such year, in applying
the first sentence of this subparagraph, the
amount of the penalty for each day during which
a failure continues shall be $100 in lieu of
the amount otherwise specified, and, in lieu of
applying the second sentence of this
subparagraph, the maximum penalty under this
subparagraph shall not exceed $50,000.
(B) Managers.--
(i) In general.--The Secretary may
make a written demand on any
organization subject to penalty under
subparagraph (A) specifying therein a
reasonable future date by which the
return shall be filed (or the
information furnished) for purposes of
this subparagraph.
(ii) Failure to comply with demand.--
If any person fails to comply with any
demand under clause (i) on or before
the date specified in such demand,
there shall be paid by the person
failing to so comply $10 for each day
after the expiration of the time
specified in such demand during which
such failure continues. The maximum
penalty imposed under this subparagraph
on all persons for failures with
respect to any 1 return shall not
exceed $5,000.
(C) Public inspection of annual returns and
reports.--In the case of a failure to comply
with the requirements of section 6104(d) with
respect to any annual return on the date and in
the manner prescribed therefor (determined with
regard to any extension of time for filing) or
report required under section 527(j), there
shall be paid by the person failing to meet
such requirements $20 for each day during which
such failure continues. The maximum penalty
imposed under this subparagraph on all persons
for failures with respect to any 1 return or
report shall not exceed $10,000.
(D) Public inspection of applications for
exemption and notice of status.--In the case of
a failure to comply with the requirements of
section 6104(d) with respect to any exempt
status application materials (as defined in
such section) or notice materials (as defined
in such section) on the date and in the manner
prescribed therefor, there shall be paid by the
person failing to meet such requirements $20
for each day during which such failure
continues.
(E) No penalty for certain annual notices.--
This paragraph shall not apply with respect to
any notice required under section 6033(i).
(2) Returns under section 6034 or 6043(b).--
(A) Penalty on organization or trust.--In the
case of a failure to file a return required
under section 6034 (relating to returns by
certain trusts) or section 6043(b) (relating to
terminations, etc., of exempt organizations),
on the date and in the manner prescribed
therefor (determined with regard to any
extension of time for filing), there shall be
paid by the exempt organization or trust
failing so to file $10 for each day during
which such failure continues, but the total
amount imposed under this subparagraph on any
organization or trust for failure to file any 1
return shall not exceed $5,000.
(B) Managers.--The Secretary may make written
demand on an organization or trust failing to
file under subparagraph (A) specifying therein
a reasonable future date by which such filing
shall be made for purposes of this
subparagraph. If such filing is not made on or
before such date, there shall be paid by the
person failing so to file $10 for each day
after the expiration of the time specified in
the written demand during which such failure
continues, but the total amount imposed under
this subparagraph on all persons for failure to
file any 1 return shall not exceed $5,000.
(C) Split-interest trusts.--In the case of a
trust which is required to file a return under
section 6034(a), subparagraphs (A) and (B) of
this paragraph shall not apply and paragraph
(1) shall apply in the same manner as if such
return were required under section 6033, except
that--
(i) the 5 percent limitation in the
second sentence of paragraph (1)(A)
shall not apply,
(ii) in the case of any trust with
gross income in excess of $250,000, in
applying the first sentence of
paragraph (1)(A), the amount of the
penalty for each day during which a
failure continues shall be $100 in lieu
of the amount otherwise specified, and
in lieu of applying the second sentence
of paragraph (1)(A), the maximum
penalty under paragraph (1)(A) shall
not exceed $50,000, and
(iii) the third sentence of paragraph
(1)(A) shall be disregarded.
In addition to any penalty imposed on the trust
pursuant to this subparagraph, if the person
required to file such return knowingly fails to
file the return, such penalty shall also be
imposed on such person who shall be personally
liable for such penalty.
(3) Disclosure under section 6033(a)(2).--
(A) Penalty on entities.--In the case of a
failure to file a disclosure required under
section 6033(a)(2), there shall be paid by the
tax-exempt entity (the entity manager in the
case of a tax-exempt entity described in
paragraph (4), (5), (6), or (7) of section
4965(c)) $100 for each day during which such
failure continues. The maximum penalty under
this subparagraph on failures with respect to
any 1 disclosure shall not exceed $50,000.
(B) Written demand.--
(i) In general.--The Secretary may
make a written demand on any entity or
manager subject to penalty under
subparagraph (A) specifying therein a
reasonable future date by which the
disclosure shall be filed for purposes
of this subparagraph.
(ii) Failure to comply with demand.--
If any entity or manager fails to
comply with any demand under clause (i)
on or before the date specified in such
demand, there shall be paid by such
entity or manager failing to so comply
$100 for each day after the expiration
of the time specified in such demand
during which such failure continues.
The maximum penalty imposed under this
subparagraph on all entities and
managers for failures with respect to
any 1 disclosure shall not exceed
$10,000.
(C) Definitions.--Any term used in this
section which is also used in section 4965
shall have the meaning given such term under
section 4965.
(4) Notices under section 506.--
(A) Penalty on organization.--In the case of
a failure to submit a notice required under
section 506(a) (relating to organizations
required to notify Secretary of intent to
operate as 501(c)(4)) on the date and in the
manner prescribed therefor, there shall be paid
by the organization failing to so submit $20
for each day during which such failure
continues, but the total amount imposed under
this subparagraph on any organization for
failure to submit any one notice shall not
exceed $5,000.
(B) Managers.--The Secretary may make written
demand on an organization subject to penalty
under subparagraph (A) specifying in such
demand a reasonable future date by which the
notice shall be submitted for purposes of this
subparagraph. If such notice is not submitted
on or before such date, there shall be paid by
the person failing to so submit $20 for each
day after the expiration of the time specified
in the written demand during which such failure
continues, but the total amount imposed under
this subparagraph on all persons for failure to
submit any one notice shall not exceed $5,000.
(5) Reasonable cause exception.--No penalty shall be
imposed under this subsection with respect to any
failure if it is shown that such failure is due to
reasonable cause.
(6) Other special rules.--
(A) Treatment as tax.--Any penalty imposed
under this subsection shall be paid on notice
and demand of the Secretary and in the same
manner as tax.
(B) Joint and several liability.--If more
than 1 person is liable under this subsection
for any penalty with respect to any failure,
all such persons shall be jointly and severally
liable with respect to such failure.
(C) Person.--For purposes of this subsection,
the term ``person'' means any officer,
director, trustee, employee, or other
individual who is under a duty to perform the
act in respect of which the violation occurs.
(7) Adjustment for inflation.--
(A) In general.--In the case of any failure
relating to a return required to be filed in a
calendar year beginning after 2014, each of the
dollar amounts under paragraphs (1), (2), and
(3) shall be increased by such dollar amount
multiplied by the cost-of-living adjustment
determined under section 1(f)(3) determined by
substituting ``calendar year 2013'' for
``calendar year 1992'' in subparagraph (B)
thereof.
(B) Rounding.--If any amount adjusted under
subparagraph (A)--
(i) is not less than $5,000 and is
not a multiple of $500, such amount
shall be rounded to the next lowest
multiple of $500, and
(ii) is not described in clause (i)
and is not a multiple of $5, such
amount shall be rounded to the next
lowest multiple of $5.
(d) Annual Registration and Other Notification by Pension
Plan.--
(1) Registration.--In the case of any failure to file
a registration statement required under section 6057(a)
(relating to annual registration of certain plans)
which includes all participants required to be included
in such statement, on the date prescribed therefor
(determined without regard to any extension of time for
filing), unless it is shown that such failure is due to
reasonable cause, there shall be paid (on notice and
demand by the Secretary and in the same manner as tax)
by the person failing so to file, an amount equal to $1
for each participant with respect to whom there is a
failure to file, multiplied by the number of days
during which such failure continues, but the total
amount imposed under this paragraph on any person for
any failure to file with respect to any plan year shall
not exceed $5,000.
(2) Notification of change of status.--In the case of
failure to file a notification required under section
6057(b) (relating to notification of change of status)
on the date prescribed therefor (determined without
regard to any extension of time for filing), unless it
is shown that such failure is due to reasonable cause,
there shall be paid (on notice and demand by the
Secretary and in the same manner as tax) by the person
failing so to file, $1 for each day during which such
failure continues, but the total amounts imposed under
this paragraph on any person for failure to file any
notification shall not exceed $1,000.
(e) Information Required in Connection With Certain Plans of
Deferred Compensation, Etc..--In the case of failure to file a
return or statement required under section 6058 (relating to
information required in connection with certain plans of
deferred compensation), 6047 (relating to information relating
to certain trusts and annuity and bond purchase plans), or
6039D (relating to returns and records with respect to certain
fringe benefit plans) on the date and in the manner prescribed
therefor (determined with regard to any extension of time for
filing), unless it is shown that such failure is due to
reasonable cause, there shall be paid (on notice and demand by
the Secretary and in the same manner as tax) by the person
failing so to file, $25 for each day during which such failure
continues, but the total amount imposed under this subsection
on any person for failure to file any return shall not exceed
$15,000. This subsection shall not apply to any return or
statement which is an information return described in section
6724(d)(1)(C)(ii) or a payee statement described in section
6724(d)(2)(Y).
(f) Returns Required Under Section 6039C.--
(1) In general.--In the case of each failure to make
a return required by section 6039C which contains the
information required by such section on the date
prescribed therefor (determined with regard to any
extension of time for filing), unless it is shown that
such failure is due to reasonable cause and not to
willful neglect, the amount determined under paragraph
(2) shall be paid (upon notice and demand by the
Secretary and in the same manner as tax) by the person
failing to make such return.
(2) Amount of penalty.--For purposes of paragraph
(1), the amount determined under this paragraph with
respect to any failure shall be $25 for each day during
which such failure continues.
(3) Limitation.--The amount determined under
paragraph (2) with respect to any person for failing to
meet the requirements of section 6039C for any calendar
year shall not exceed the lesser of--
(A) $25,000, or
(B) 5 percent of the aggregate of the fair
market value of the United States real property
interests owned by such person at any time
during such year.
For purposes of the preceding sentence, fair market
value shall be determined as of the end of the calendar
year (or, in the case of any property disposed of
during the calendar year, as of the date of such
disposition).
(h) Failure to Give Notice to Recipients of Certain Pension,
Etc., Distributions.--In the case of each failure to provide
notice as required by section 3405(e)(10)(B), at the time
prescribed therefor, unless it is shown that such failure is
due to reasonable cause and not to willful neglect, there shall
be paid, on notice and demand of the Secretary and in the same
manner as tax, by the person failing to provide such notice, an
amount equal to $10 for each such failure, but the total amount
imposed on such person for all such failures during any
calendar year shall not exceed $5,000.
(i) Failure to Give Written Explanation to Recipients of
Certain Qualifying Rollover Distributions.--In the case of each
failure to provide a written explanation as required by section
402(f), at the time prescribed therefor, unless it is shown
that such failure is due to reasonable cause and not to willful
neglect, there shall be paid, on notice and demand of the
Secretary and in the same manner as tax, by the person failing
to provide such written explanation, an amount equal to $100
for each such failure, but the total amount imposed on such
person for all such failures during any calendar year shall not
exceed $50,000.
(j) Failure to File Certification With Respect to Certain
Residential Rental Projects.--In the case of each failure to
provide a certification as required by section 142(d)(7) at the
time prescribed therefor, unless it is shown that such failure
is due to reasonable cause and not to willful neglect, there
shall be paid, on notice and demand of the Secretary and in the
same manner as tax, by the person failing to provide such
certification, an amount equal to $100 for each such failure.
(k) Failure to Make Reports Required Under Section 1202.--
In the case of a failure to make a report required under
section 1202(d)(1)(C) which contains the information required
by such section on the date prescribed therefor (determined
with regard to any extension of time for filing), there shall
be paid (on notice and demand by the Secretary and in the same
manner as tax) by the person failing to make such report, an
amount equal to $50 for each report with respect to which there
was such a failure. In the case of any failure due to
negligence or intentional disregard, the preceding sentence
shall be applied by substituting ``$100'' for ``$50''. In the
case of a report covering periods in 2 or more years, the
penalty determined under preceding provisions of this
subsection shall be multiplied by the number of such years. No
penalty shall be imposed under this subsection on any failure
which is shown to be due to reasonable cause and not willful
neglect.
(l) Failure to File Return With Respect to Certain Corporate
Transactions.--In the case of any failure to make a return
required under section 6043(c) containing the information
required by such section on the date prescribed therefor
(determined with regard to any extension of time for filing),
unless it is shown that such failure is due to reasonable
cause, there shall be paid (on notice and demand by the
Secretary and in the same manner as tax) by the person failing
to file such return, an amount equal to $500 for each day
during which such failure continues, but the total amount
imposed under this subsection with respect to any return shall
not exceed $100,000.
(m) Alcohol and Tobacco Taxes for Penalties for Failure to
File Certain Information Returns.--with respect to alcohol and
tobacco taxes, see, generally, subtitle E.
(n) Failure to Make Reports Required Under Sections 3511,
6053(C)(8), and 7705.--In the case of a failure to make a
report required under section 3511, 6053(c)(8), or 7705 which
contains the information required by such section on the date
prescribed therefor (determined with regard to any extension of
time for filing), there shall be paid (on notice and demand by
the Secretary and in the same manner as tax) by the person
failing to make such report, an amount equal to $50 for each
report with respect to which there was such a failure. In the
case of any failure due to negligence or intentional disregard
the preceding sentence shall be applied by substituting
``$100'' for ``$50''.
(o) Failure to Provide Notice Under Section 83(i).--In the
case of each failure to provide a notice as required by section
83(i)(6), at the time prescribed therefor, unless it is shown
that such failure is due to reasonable cause and not to willful
neglect, there shall be paid, on notice and demand of the
Secretary and in the same manner as tax, by the person failing
to provide such notice, an amount equal to $100 for each such
failure, but the total amount imposed on such person for all
such failures during any calendar year shall not exceed
$50,000.
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