Temporary and Proposed Regs Provide Rules for Withholding on Distributions of Indian Gaming Profits

 [4830-01-u]

 ACTION: Temporary regulations.

 SUMMARY: This document contains temporary regulations relating to the income tax withholding requirement on distributions of profits from certain gaming activities made to members of Indian tribes under section 3402(r) of the Internal Revenue Code of 1986. The regulations reflect changes to the law made by section 701 of the Uruguay Round Agreements Act. Those affected by the regulations are persons, including Indian tribes, making payments to members of Indian tribes from net revenues of certain gaming activities conducted or licensed by the tribes. Also affected are members of Indian tribes who receive the payments. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in the Proposed Rules section of this issue of the Federal Register.

 EFFECTIVE DATE: January 1, 1995.

 FOR FURTHER INFORMATION CONTACT: Rebecca Wilson (202) 622-4606 (not a toll-free number).

 SUPPLEMENTARY INFORMATION:

BACKGROUND

This document contains amendments to the Employment Tax Regulations (26 CFR part 31) under section 3402(r). Section 3402(r) was added by section 701 of the Uruguay Round Agreements Act, which approved the trade agreements resulting from the Uruguay Round of multilateral trade negotiations under the auspices of the General Agreement on Tariffs and Trade (GATT) and the Statement of Administrative Action to implement the Agreements.

 Section 3402(r) requires that persons, including Indian tribes, making payments to members of Indian tribes from the net revenues of certain gaming activities conducted or licensed by the tribes deduct and withhold income taxes from those payments. These regulations provide guidance on how to comply with the new withholding requirement.

EXPLANATION OF PROVISIONS

 Net revenue from certain gaming activities conducted or licensed by an Indian tribe may be used to make taxable distributions to members of the Indian tribe. The tribe must notify its members of the tax liability at the time the payments are made. 25 U.S.C. 2710(b)(3) and (d)(1). Under prior law, the tribe was not required to withhold on such payments except to the extent backup withholding rules applied under section 3406.

 Distributions of net revenues from gaming activity by an Indian tribe may result in significant tax liability to the tribe's members. Withholding on such payments is intended to approximate ultimate tax liability. For some tribal members, this withholding may eliminate the need to make quarterly estimated tax payments. For others, it will reduce the likelihood that they will face penalties for underpayment of tax.

 Section 3402(r) generally requires that, for payments made after December 31, 1994, persons, including Indian tribes, making payments to members of Indian tribes from the net revenues of certain gaming activities conducted or licensed by the tribes deduct and withhold income taxes from those payments.

 This regulation provides for the amounts to be withheld to be determined under the applicable table. Upon publication of this regulation, the IRS will make available tables for withholding on distributions to tribal members in 1995.

 Section 3402(r)(5) requires that payments be placed on an annualized basis under regulations prescribed by the Secretary. While these regulations provide a method for placing payments on an annualized basis, it will ordinarily not be necessary to annualize the payments, because the tables provided by the IRS reflect the annualized payment in prescribing the amount to be withheld.

 Section 3402(r)(6) provides that, at the election of an Indian tribe, the tax imposed by section 3402(r) on any payment made by such tribe shall be determined in accordance with such tables or computational procedures as may be specified in regulations. This regulation allows withholding under section 3402(r) pursuant to any tables or procedures, provided that the amount of tax withheld is substantially the same as it would be using the tables provided by the IRS pursuant to section 3402(r). No written election is required.

 Section 3402(p)(2) authorizes the Secretary to provide in regulations for withholding from payments other than wages if the person making the payment and the person receiving the payment agree to the withholding. This regulation provides that additional withholding is permitted where a tribal member and a tribe enter into a voluntary withholding agreement.

SPECIAL ANALYSES

 It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, these temporary regulations will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of the regulations is Rebecca Wilson, Office of the Associate Chief Counsel (Employee Benefits and Exempt Organizations). However, other personnel from the IRS and Treasury Department participated in their development.

LIST OF SUBJECTS IN 26 CFR PART 31

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

Treasury Decision 8574

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 31 is amended as follows:

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

Paragraph 1. The authority citation for part 31 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 31.3402(r)-1T also issued under 26 U.S.C. 3402(p)(2) and (r), * * *

Par. 2. Section 31.3402(r)-1T is added to read as follows:

SECTION 31.3402(r)-1T WITHHOLDING ON DISTRIBUTIONS OF INDIAN GAMING PROFITS TO TRIBAL MEMBERS (TEMPORARY).

(a)(1) GENERAL RULE. Section 3402(r)(1) requires 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, as defined in 25 U.S.C. 2703, conducted or licensed by such tribe to deduct and withhold from such payment a tax in an amount equal to such payment's proportionate share of the annualized tax, as that term is defined in section 3402(r)(3).

(2) WITHHOLDING TABLES. Except as provided in paragraph (a)(4) of this section, the amount of a payment's proportionate share of the annualized tax shall be determined under the applicable table provided by the Commissioner.

(3) ANNUALIZED AMOUNT OF PAYMENT. Section 3402(r)(5) provides that payments shall be placed on an annualized basis under regulations prescribed by the Secretary. A payment may be placed on an annualized basis by multiplying the amount of the payment by the total number of payments to be made in a calendar year. For example, a monthly payment may be annualized by multiplying the amount of the payment by 12. Similarly, a quarterly payment may be annualized by multiplying the amount of the payment by 4.

(4) ALTERNATE WITHHOLDING PROCEDURES -- (i) IN GENERAL. Any procedure for determining the amount to be deducted and withheld under section 3402(r) may be used, provided that the amount of tax deducted and withheld is substantially the same as it would be using the tables provided by the Commissioner under paragraph (a)(2) of this section. At the election of an Indian tribe, the tax imposed by section 3402(r) shall be determined in accordance with this alternate procedure.

(ii) METHOD OF ELECTION. It is sufficient for purposes of making an election under this paragraph (a)(4) that an Indian tribe evidence the election in any reasonable way, including use of a particular method. Thus, no written election is required.

(5) ADDITIONAL WITHHOLDING PERMITTED. Consistent with the provisions of section 3402(p)(2), a tribal member and a tribe may enter into an agreement to provide for the deduction and withholding of additional amounts from payments in order to satisfy the anticipated tax liability of the tribal member. The agreement may be made in a manner similar to that described in section 31.3402(p)-1 (with respect to voluntary withholding agreements between employees and employers).

(b) EFFECTIVE DATE. This section applies to payments made after December 31, 1994.