Bulletin No. 2019–24

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2019–24

June 10, 2019

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ADMINISTRATIVE

INCOME TAX

NOT. 2019-39, page 1322.

TD 9859, page 1293.

EMPLOYMENT TAX

REV. PROC. 2019-26, page 1323.

This notice provides guidance regarding the issuance of

tax-exempt State and local bonds under section 103 of the

Internal Revenue Code and tax-exempt Indian tribal government bonds under section 7871 in current refunding issues

(as defined in section 1.150-1(d)(3)).

T.D. 9860, page 1297.

The Stephen Beck, Jr., Achieving a Better Life Experience

Act of 2014 requires the establishment of a voluntary certification program for professional employer organizations. A

professional employer organization, sometimes referred to as

an employee leasing company, is an organization that enters

into an agreement with a client to perform some or all of the

federal employment tax withholding, reporting, and payment

functions related to workers performing services for the client.

Being certified by the IRS as a certified professional employer

organization (CPEO) has certain federal employment tax consequences for both the CPEO and its customers and clients.

These proposed regulations describe the requirements a person must satisfy in order to become and remain a CPEO, and

set forth the federal employment tax liabilities and other obligations of persons certified by the IRS as CPEOs.

Finding Lists begin on page ii.

The final regulations reduce the amount determined under

section 956 of the Internal Revenue Code with respect to

certain domestic corporations. The final regulations affect

certain domestic corporations that own (or are treated as

owning) stock in foreign corporations.

This revenue procedure provides: (1) tables of limitations on

depreciation deductions for owners of passenger automobiles first placed in service by the taxpayer during calendar

year 2019; and (2) a table of amounts that must be included

in income by lessees of passenger automobiles first leased

by the taxpayer during calendar year 2019. The tables detailing these depreciation limitations and lessee inclusion

amounts reflect the automobile price inflation adjustments

required by § 280F(d)(7). For purposes of this revenue procedure, the term “passenger automobiles” includes trucks

and vans.

ANN. 2019-06, page 1327.

Notice 2019-32, 2019-21 I.R.B. 1187 (May 20, 2019), contains a typographical error in the first sentence of section

4.01 on page 1189. The sentence states that comments

may be submitted in writing on or before Thursday, June 4,

2019. The correct date is July 4, 2019. The sentence is

amended to delete “June 4,” and replace it with “July 4.”

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

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monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

June 10, 2019 

Bulletin No. 2019–24

Part I.

26 CFR 1.956-1: Shareholder’s pro rata share of

the average of the amounts of United States property

held by a controlled foreign corporation.

T.D. 9859

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Part 1

Amount Determined Under

Section 956 for Corporate

United States Shareholders

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations that reduce the amount determined under section 956 of the Internal

Revenue Code with respect to certain domestic corporations. This document finalizes the proposed regulations published on

November 5, 2018. The final regulations

affect certain domestic corporations that

own (or are treated as owning) stock in

foreign corporations.

DATES: Effective Date: These regulations

are effective on July 22, 2019.

Applicability Date: For the date of applicability, see §1.956-1(g)(4).

FOR FURTHER INFORMATION CONTACT: Rose E. Jenkins, (202) 317-6934.

SUPPLEMENTARY INFORMATION:

Background

On November 5, 2018, the Department

of the Treasury (“Treasury Department”)

and the IRS published proposed regulations (REG-114540-18) under section 956

in the Federal Register (83 FR 55324)

(the “proposed regulations”). No public

hearing was requested or held, and no

substantive comments were received with

respect to the proposed regulations. All

Bulletin No. 2019–24

written comments received in response

to the proposed regulations are available

at www.regulations.gov or upon request.

This Treasury decision adopts the proposed regulations, with the changes described in the Summary of Comments and

Explanation of Revisions section of this

preamble, as final regulations.

Summary of Comments and

Explanation of Revisions

The final regulations, like the proposed

regulations, exclude corporations that are

United States shareholders (as defined

in section 951(b)) (“U.S. shareholders”)

from the application of section 956 to

maintain symmetry between the taxation

of actual repatriations and the taxation

of effective repatriations. To achieve this

result, the final regulations provide that

the amount otherwise determined under

section 956 (the “tentative section 956

amount”) with respect to a U.S. shareholder for a taxable year of a controlled

foreign corporation (as defined in section

957) (“CFC”) is reduced to the extent that

the U.S. shareholder would be allowed a

deduction under section 245A if the U.S.

shareholder had received a distribution

from the CFC in an amount equal to the

tentative section 956 amount (the “hypothetical distribution”).

In general, under section 245A and the

final regulations, respectively, neither an

actual dividend to a corporate U.S. shareholder, nor such a shareholder’s tentative

section 956 amount, will result in additional U.S. tax.

I. Allocation of Hypothetical Distribution

While not raised in any written comments, published commentary on the proposed regulations raised concerns regarding how the proposed rules apply in the

case of a CFC that has prior year earnings

and profits (“E&P”) described in section

959(c)(1) and current-year E&P described

in section 959(c)(3) that do not result in

an inclusion under section 951 or section

951A. Even though a dividend of the current-year E&P would potentially be eligible for a deduction under section 245A, a

distribution by the CFC would not quali-

1293

fy for a section 245A deduction, because

under section 959(c), the distribution

would be allocated to the prior-year E&P

described in section 959(c)(1) first. Therefore, any tentative section 956 amount

for the year might not be reduced by the

proposed rule. To address this issue, the

final regulations include an ordering rule

treating a hypothetical distribution as attributable first to E&P described in section 959(c)(2), then to E&P described in

section 959(c)(3), consistent with the allocation of an amount determined under

section 956 pursuant to section 959(f)(1).

This rule, which differs from the general

rule for allocation of distributions in section 959(c) by not treating any amount as

attributable to E&P described in section

959(c)(1), is necessary to reflect the fact

that the amount to which the hypothetical

distribution applies is in fact a tentative

section 956 amount. This rule is illustrated

in a new example in §1.956-1(a)(3)(iii).

II. Domestic Partnerships and Their

Partners

Section 245A(g) grants the Secretary

authority to prescribe regulations for the

treatment of U.S. shareholders owning

stock of specified 10-percent owned foreign corporations through a partnership.

As noted in the Comments and Request

for Public Hearing section of the preamble

to the proposed regulations, the Treasury

Department and the IRS have studied the

appropriate application of the regulations

to U.S. shareholders that are domestic partnerships, which may have partners that are

a combination of domestic corporations,

U.S. individuals, or other persons. As noted

in the Background section of this preamble,

no substantive comments were received

with respect to the proposed regulations,

including with respect to the two methods

of applying the rules in the case of domestic partnerships that were described in the

preamble to the proposed regulations. Accordingly, consistent with the first method

described in that preamble, the final regulations provide that the tentative section

956 amount with respect to a domestic

partnership is reduced to the extent that one

or more domestic corporate partners would

be entitled to a section 245A deduction if

June 10, 2019

the partnership received such amount as a

distribution, and any remaining amount of

the domestic partnership’s inclusion under

sections 951(a)(1)(B) and 956 is allocated

to the partners in the same proportion as net

income would result to the partners upon a

hypothetical distribution (that is, a distribution from the CFC to the domestic partnership). See §1.956-1(a)(2)(i) and (iii). The

rules concerning domestic partnerships are

illustrated in a new example in §1.956-1(a)

(3)(iv).

III. Revisions to Existing Examples

The final regulations also update certain examples in the regulations under section 956 to reflect that section 956 may no

longer apply in the case of corporate U.S.

shareholders. See §1.956-1(b)(4) (amended facts common to several examples, to

refer to a United States citizen, rather than

domestic corporation).

IV. Applicability Date

The final regulations apply to taxable

years of a CFC beginning on or after July

22, 2019, and to taxable years of a U.S.

shareholder in which or with which such

taxable years of the CFC end. However,

consistent with the reliance allowed for

the proposed regulations, taxpayers may

apply the final regulations for taxable

years of a CFC beginning after December 31, 2017, and for taxable years of a

U.S. shareholder in which or with which

such taxable years of the CFC end, provided that the taxpayer and United States

persons that are related (within the meaning of section 267 or 707) to the taxpayer

consistently apply the regulations with respect to all CFCs in which they are U.S.

shareholders for taxable years of the CFCs

beginning after December 31, 2017. See

section 7805(b)(7).

Special Analyses

OIRA has determined that this final

rule is a significant regulatory action

pursuant to section 3(f) of Executive Order (E.O.) 12866 and the April 11, 2018,

Memorandum of Agreement between the

Department of Treasury and the Office of

Management and Budget (OMB). However, OIRA has waived review of this final

June 10, 2019

rule in accordance with section 6(a)(3)(A)

of E.O. 12866.

Pursuant to the Regulatory Flexibility

Act (5 U.S.C. chapter 6), it is hereby certified that this regulation will not have a significant economic impact on a substantial

number of small entities, although some

small entities that are domestic corporations could be affected by the regulations.

However, even if a substantial number of

small entities were to be affected by this

regulation, the Treasury Department and

the IRS estimate that the economic impact on such small entities would not be

significant as the regulation is expected to

marginally reduce compliance costs for

smaller entities. This is because the Treasury Department and the IRS believe that

the cost-saving benefits of the regulations

with respect to complex third-party borrowing arrangements, internal financial

management structures, and restructurings

of worldwide operations will generally be

available only to large U.S. multinational

corporations with 20 or more CFCs. The

Treasury Department and the IRS believe

that U.S. multinational corporations with

fewer than 20 CFCs generally will not

have the types of arrangements in place

that would otherwise need to be structured

and monitored to avoid section 956. The

regulations generally will not affect small

entities that are not domestic corporations.

Pursuant to section 7805(f), the notice

of proposed rulemaking preceding this

regulation was submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment on its

impact on small businesses. No comments

were received.

There are no information collection

requirements associated with these final

regulations.

The Administrator of OIRA has determined that this is a major rule for purposes

Old Paragraphs

(b)(4)(i)(i) and (ii)

(b)(4)(ii)(i) and (ii)

(b)(4)(iii)(i) and (ii)

(b)(4)(iv)(i) and (ii)

(b)(4)(v)(i) and (ii)

(b)(4)(vi)(i) and (ii)

(b)(4)(vii)(i) and (ii)

(b)(4)(viii)(i) and (ii)

1294

of the Congressional Review Act (CRA)

(5 U.S.C. 801 et seq.). Under section

801(3) of the CRA, a major rule takes effect 60 days after the rule is published in

the Federal Register.

Drafting Information

The principal author of the final regulations is Rose E. Jenkins of the Office of

Associate Chief Counsel (International).

However, other personnel from the Treasury Department and the IRS participated

in their development.

*****

Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by revising the entry for

§ 1.956-1 to read in part as follows:

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

Section 1.956-1 also issued under 26

U.S.C. 245A(g), 956(d), and 956(e).

*****

Par. 2. Section 1.956-1 is amended by:

1. Revising paragraph (a).

2. In the paragraph (b)(4) introductory

text, removing the language “following

examples” and adding in its place “examples in this paragraph (b)(4)” and removing the language “domestic corporation”

and adding in its place “United States citizen.”

3. In paragraph (b)(4), designating Examples 1 through 8 as paragraphs (b)(4)(i)

through (viii), respectively.

4. In newly designated paragraphs (b)

(4)(i) through (viii), redesignating the

paragraphs in the first column as the paragraphs in the second column:

New Paragraphs

(b)(4)(i)(A) and (B)

(b)(4)(ii)(A) and (B)

(b)(4)(iii)(A) and (B)

(b)(4)(iv)(A) and (B)

(b)(4)(v)(A) and (B)

(b)(4)(vi)(A) and (B)

(b)(4)(vii)(A) and (B)

(b)(4)(viii)(A) and (B)

Bulletin No. 2019–24

5. In newly redesignated paragraph (b)

(4)(ii)(A), removing the language “Example 1 of this paragraph (b)(4)” and adding

in its place “paragraph (b)(4)(i)(A) of this

section (the facts in Example 1).”

6. Revising the heading for paragraph

(g).

7. In the first sentence of paragraph (g)

(1), removing the language “Paragraph

(a)” and adding in its place “Paragraph (a)

(1)”.

8. Adding paragraphs (g)(4) and (5).

9. Removing the parenthetical authority citation at the end of the section.

The revisions and additions read as follows:

§1.956-1 Shareholder’s pro rata share

of the average of the amounts of United

States property held by a controlled foreign corporation.

(a) Overview and scope—(1) In general. Subject to the provisions of section

951(a) and the regulations in this part, a

United States shareholder of a controlled

foreign corporation is required to include

in gross income the amount determined

under section 956 with respect to the

shareholder for the taxable year but only

to the extent not excluded from gross income under section 959(a)(2) and the regulations in this part.

(2) Reduction for certain United States

shareholders—(i) In general. For a taxable year of a controlled foreign corporation, the amount determined under

section 956 with respect to each share of

stock of the controlled foreign corporation owned (within the meaning of section

958(a)) by a United States shareholder

is the amount that would be determined

under section 956 with respect to such

share for the taxable year, absent the application of this paragraph (a)(2) for the

taxable year (such amount, the tentative

section 956 amount, and in the aggregate

with respect to all shares owned (within the meaning of section 958(a)) by the

United States shareholder, the aggregate

tentative section 956 amount), reduced by

the amount of the deduction under section

245A, if any, that the shareholder would

be allowed if the shareholder received

as a distribution from the controlled foreign corporation an amount equal to the

tentative section 956 amount with respect

to such share on the last day during the

taxable year on which the foreign corpo-

Bulletin No. 2019–24

ration is a controlled foreign corporation

(hypothetical distribution). For purposes

of the preceding sentence, in the case of a

United States shareholder that is a domestic partnership, the aggregate amount of

the deductions under section 245A, if any,

that domestic corporations that are partners of the domestic partnership (including indirect partners through other partnerships) would be allowed with respect

to a hypothetical distribution is treated as

the amount of the deduction under section

245A that the domestic partnership would

be allowed.

(ii) Determination of the amount of

the deduction that would be allowed under section 245A with respect to a hypothetical distribution. For purposes of

determining the amount of the deduction

under section 245A that a United States

shareholder would be allowed with respect to a share of stock of a controlled

foreign corporation by reason of a hypothetical distribution, the rules in paragraphs (a)(2)(ii)(A) through (C) of this

section apply—

(A) If a United States shareholder owns

a share of stock of a controlled foreign

corporation indirectly (within the meaning

of section 958(a)(2)), then—

(1) Sections 245A(a) through (d),

246(a), and 959 apply to the hypothetical

distribution as if the United States shareholder directly owned (within the meaning of section 958(a)(1)(A)) the share;

(2) Section 245A(e) applies to the

hypothetical distribution as if the distribution were made to the United States

shareholder through each entity by reason

of which the United States shareholder indirectly owns such share and pro rata with

respect to the equity that gives rise to such

indirect ownership;

(3) To the extent that a distribution

treated as made to a controlled foreign

corporation pursuant to the hypothetical

distribution by reason of paragraph (a)(2)

(ii)(A)(2) of this section would be subject

to section 245A(e)(2), the United States

shareholder is treated as not being allowed

a deduction under section 245A by reason

of the hypothetical distribution; and

(4) Section 246(c) applies to the hypothetical distribution by substituting the

phrase “owned (within the meaning of

section 958(a))” for the term “held” each

place it appears in section 246(c);

1295

(B) Section 246(c) applies to the hypothetical distribution by substituting “the

last day during the taxable year on which

the foreign corporation is a controlled foreign corporation” for the phrase “the date

on which such share becomes ex-dividend

with respect to such dividend” in section

246(c)(1)(A); and

(C) The hypothetical distribution is

treated as attributable first to earnings and

profits of the controlled foreign corporation described in section 959(c)(2), then

to earnings and profits of the controlled

foreign corporation described in section

959(c)(3).

(iii) Special rule in the case of domestic

partnerships—(A) In general. In the case

of a domestic partnership whose tentative

section 956 amount with respect to a share

of stock of a controlled foreign corporation is reduced pursuant to paragraph (a)

(2)(i) of this section for a taxable year,

the portion of any inclusion under section

951(a)(1)(B) of the domestic partnership

with respect to such share for the taxable

year allocated to a partner of the domestic

partnership (including an indirect partner

through one or more other partnerships)

must equal the product of the inclusion

and the ratio determined by dividing—

(1) The net hypothetical distribution income with respect to the partner; by

(2) The aggregate of the net hypothetical distribution income with respect to all

of the partners of the domestic partnership.

(B) Definition of net hypothetical distribution income. The term net hypothetical

distribution income means, with respect to

a hypothetical distribution to a domestic

partnership and a partner of the domestic

partnership (including an indirect partner

through one or more other partnerships),

the amount of the hypothetical distribution that would be allocable to the partner

reduced by the amount of the deduction

under section 245A with respect to the

hypothetical distribution that would be allowable to the partner.

(3) Examples. The examples in this

paragraph (a)(3) illustrate the application

of paragraph (a)(2) of this section.

(i) Example 1—(A) Facts. (1) USP, a domestic

corporation, owns all of the single class of stock of

FC, a foreign corporation. The stock of FC consists

of 100 shares, and USP satisfies the holding period

requirement of section 246(c) (as modified by paragraph (a)(2)(ii)(B) of this section) with respect to

June 10, 2019

each share of FC stock. Any dividend from FC to

USP would not constitute a hybrid dividend for purposes of section 245A(e). FC owns all of the stock of

USS, a domestic corporation. FC’s adjusted basis in

the stock of USS is $0.

(2) The functional currency of FC is the U.S.

dollar. FC has $100x of undistributed earnings as defined in section 245A(c)(2) at the end of the taxable

year, $90x of which constitute undistributed foreign

earnings as defined in section 245A(c)(3), and $10x

of which are described in section 245(a)(5)(B) (that

is, earnings attributable to a dividend that FC received from USS). None of the earnings and profits

of FC are described in section 959(c)(1) or (2) or are

earnings and profits attributable to income excluded

from subpart F income under section 952(b). FC’s

applicable earnings (as defined in section 956(b)(1))

are $100x. FC also has held an obligation of USP

with an adjusted basis of $120x on every day during

the taxable year of FC, and such obligation was acquired while all of its stock was owned by USP.

(B) Analysis. Because USP directly owns all

of the stock of FC at the end of FC’s taxable year,

USP’s aggregate tentative section 956 amount with

respect to FC is $100x, the lesser of USP’s pro rata

share of the average amounts of United States property held by FC ($120x) and its pro rata share of FC’s

applicable earnings ($100x). Under paragraph (a)(2)

(i) of this section, USP’s section 956 amount with

respect to FC is its aggregate tentative section 956

amount with respect to FC reduced by the deduction under section 245A that USP would be allowed

if USP received an amount equal to its aggregate

tentative section 956 amount as a distribution with

respect to the FC stock. USP would be allowed a

$90x deduction under section 245A with respect to

the foreign-source portion of the $100x hypothetical

distribution (that is, an amount of the dividend that

bears the same ratio to the dividend as the $90x of

undistributed foreign earnings bears to the $100x of

undistributed earnings). Accordingly, USP’s section

956 amount with respect to FC is $10x, its aggregate

tentative section 956 amount ($100x) with respect to

FC reduced by the amount of the deduction that USP

would have been allowed under section 245A with

respect to the hypothetical distribution ($90x).

(ii) Example 2—(A) Facts. The facts are the

same as in paragraph (a)(3)(i)(A) of this section (the

facts in Example 1), except that all $100x of FC’s undistributed earnings are described in section 959(c)

(2).

(B) Analysis. As in paragraph (a)(3)(i)(B) of this

section (the analysis in Example 1), USP’s aggregate tentative section 956 amount with respect to FC

is $100x, the lesser of USP’s pro rata share of the

average amounts of United States property held by

FC ($120x) and its pro rata share of FC’s applicable

earnings ($100x). However, paragraph (a)(2) of this

section does not reduce USP’s section 956 amount

because USP would not be allowed any deduction

under section 245A with respect to the $100x hypothetical distribution by reason of section 959(a)

and (d). Accordingly, USP’s section 956 amount

is $100x. However, under sections 959(a)(2) and

959(f)(1), USP’s inclusion under section 951(a)(1)

(B) with respect to FC is $0, because USP’s section 956 amount with respect to FC does not exceed

the earnings and profits of FC described in section

June 10, 2019

959(c)(2) with respect to USP. The $100x of earnings and profits of FC described in section 959(c)(2)

are reclassified as earnings and profits described in

section 959(c)(1).

(iii) Example 3—(A) Facts. The facts are the

same as in paragraph (a)(3)(i)(A) of this section (the

facts in Example 1), except that FC has $200x of undistributed earnings, which constitute undistributed

foreign earnings as defined in section 245A(c)(3), of

which $100x are described in section 959(c)(1)(A)

and $100x are described in section 959(c)(3).

(B) Analysis. USP’s aggregate tentative section

956 amount with respect to FC is $20x, the lesser

of $20x, the excess of USP’s pro rata share of the

average amounts of United States property held by

FC ($120x) over the earnings and profits described

in section 959(c)(1)(A) with respect to USP ($100x),

and its pro rata share of FC’s applicable earnings

($100x). Under paragraph (a)(2)(i) of this section,

USP’s section 956 amount with respect to FC is

its aggregate tentative section 956 amount with respect to FC reduced by the deduction under section

245A that USP would be allowed if USP received

an amount equal to its aggregate tentative section

956 amount as a distribution with respect to the FC

stock. USP would be allowed a $20x deduction under section 245A with respect to the foreign-source

portion of the $20x hypothetical distribution, which,

under paragraph (a)(2)(ii)(C) of this section, is treated as attributable to the earnings and profits of FC

described in section 959(c)(3) despite the fact that

FC has $100x of earnings and profits described in

section 959(c)(1)(A) that would otherwise be distributed before earnings and profits described in section

959(c)(3). Accordingly, USP’s section 956 amount

with respect to FC is $0, its aggregate tentative section 956 amount ($20x) with respect to FC reduced

by the amount of the deduction that USP would have

been allowed under section 245A with respect to the

hypothetical distribution after applying the rule in

paragraph (a)(2)(ii)(C) of this section ($20x).

(iv) Example 4—(A) Facts. The facts are the

same as in paragraph (a)(3)(i)(A) of this section (the

facts in Example 1), except that USP is a domestic

partnership in which USC1 and USC2, each a domestic corporation, and USI, a United States citizen,

have owned 50%, 30%, and 20%, respectively, of the

capital and profits interests for five years.

(B) Analysis. As in paragraph (a)(3)(i)(B) of this

section (the analysis in Example 1), USP’s aggregate

tentative section 956 amount with respect to FC is

$100x. Under paragraph (a)(2)(i) of this section,

USP’s section 956 amount with respect to FC is its

aggregate tentative section 956 amount with respect

to FC reduced by the aggregate amount of deductions under section 245A that USC1, USC2, and USI

would be allowed if USP received an amount equal

to its aggregate tentative section 956 amount as a

distribution with respect to the FC stock. Assuming

that, under section 245A, USC1 and USC2 would

be allowed a $45x deduction and a $27x deduction,

respectively, with respect to the foreign-source portion of their $50x and $30x distributive shares of the

$100x hypothetical distribution (that is, an amount

of the dividend that bears the same ratio to the dividend as the $90x of undistributed foreign earnings

bears to the $100x of undistributed earnings), USP’s

section 956 amount with respect to FC is $28x, its

1296

aggregate tentative section 956 amount ($100x) with

respect to FC reduced by the aggregate amount of

the deductions that its partners would have been

allowed under section 245A with respect to the hypothetical distribution ($72x ($45x + $27x)). Under

paragraph (a)(2)(iii) of this section, the portion of its

$28x inclusion under section 951(a)(1)(B) with respect to FC that is allocated to USC1 is $5x ($28x

x (($50x-$45x)/($50x-$45x+$30x-$27x+$20x)));

the portion that is allocated to USC2 is $3x ($28x x

(($30x-$27x)/($50x-$45x+$30x-$27x+$20x))); and

the portion that is allocated to USI is $20x ($28x x

($20x/($50x-$45x+$30x-$27x+$20x))).

(v) Example 5—(A) Facts. (1) USP, a domestic

corporation, owns all of the single class of stock of

FC1, a foreign corporation, and has held such stock

for five years. FC1 has held 70% of the single class of

stock of FC2, a foreign corporation, for three years.

The other 30% of the FC2 stock has been held since

FC2’s formation by a foreign individual unrelated to

USP or FC1. Any dividend from FC2 or FC1 to FC1

or USP, respectively, would not constitute a hybrid

dividend for purposes of section 245A(e). FC2 has a

calendar taxable year. On December 1, Year 1, FC1

acquires the remaining 30% of the stock of FC2 for

cash. On June 30, Year 2, FC1 sells to a third party

the 30% of FC2 stock acquired in Year 1 at no gain.

FC2 made no distributions during Year 1.

(2) The functional currency of FC1 and FC2 is

the U.S. dollar. For Year 1, FC2 has $120x of undistributed earnings as defined in section 245A(c)

(2), all of which constitute undistributed foreign

earnings. None of the earnings and profits of FC2 are

described in section 959(c)(1) or (2) or are earnings

and profits attributable to income excluded from subpart F income under section 952(b). FC2’s applicable

earnings (as defined in section 956(b)(1)) for Year 1

are $120x. FC2 has held an obligation of USP with

an adjusted basis of $100x on every day of Year 1

that was acquired while USP owned all of the stock

of FC1 and FC1 held 70% of the single class of stock

of FC2.

(B) Analysis. Because USP indirectly owns

(within the meaning of section 958(a)) all of the

stock of FC2 at the end of Year 1, USP’s aggregate

tentative section 956 amount with respect to FC2 for

Year 1 is $100x, the lesser of USP’s pro rata share

of the average amounts of United States property

held by FC2 ($100x) and its pro rata share of FC2’s

applicable earnings ($120x). Under paragraph (a)(2)

(i) of this section, USP’s section 956 amount with

respect to FC2 for Year 1 is its aggregate tentative

section 956 amount with respect to FC2 reduced by

the deduction under section 245A that USP would

be allowed if USP received an amount equal to its

aggregate tentative section 956 amount as a distribution with respect to the FC2 stock that USP owns indirectly within the meaning of section 958(a)(2). For

purposes of determining the consequences of this hypothetical distribution, under paragraph (a)(2)(ii)(A)

(1) of this section, USP is treated as owning the FC2

stock directly. In addition, under paragraph (a)(2)(ii)

(A)(4) of this section, the holding period requirement

of section 246(c) is applied by reference to the period during which USP owned (within the meaning

of section 958(a)) the stock of FC2. Therefore, with

respect to the hypothetical distribution from FC2 to

USP, USP would satisfy the holding period require-

Bulletin No. 2019–24

ment under section 246(c) with respect to the 70%

of the FC2 stock that USP indirectly owned for three

years through FC1, but not with respect to the 30%

of the FC2 stock that USP indirectly owned through

FC1 for a period of less than 365 days. Accordingly,

USP’s section 956 amount with respect to FC2 for

Year 1 is $30x, its aggregate tentative section 956

amount ($100x) reduced by the amount of the deduction that USP would have been allowed under

section 245A with respect to the hypothetical distribution ($70x).

*****

(g) Applicability dates.* * *

(4) Paragraphs (a)(2) and (3) of this

section apply to taxable years of controlled foreign corporations beginning on

or after July 22, 2019, and to taxable years

of a United States shareholder in which or

with which such taxable years of the controlled foreign corporations end. Notwithstanding the preceding sentence, a United

States shareholder may apply paragraphs

(a)(2) and (3) of this section to taxable

years of controlled foreign corporations

beginning after December 31, 2017, and

to taxable years of the United States shareholder in which or with which such taxable years of the controlled foreign corporations end, provided that the United

States shareholder and United States persons that are related (within the meaning

of section 267 or 707) to the United States

shareholder consistently apply those paragraphs with respect to all controlled foreign corporations in which they are United States shareholders for taxable years of

the controlled foreign corporations beginning after December 31, 2017.

(5) Paragraph (e)(6) of this section applies to property acquired in exchanges

occurring on or after June 24, 2011.

Kirsten Wielobob,

Deputy Commissioner for Services

and Enforcement.

Approved: May 9, 2019.

David J. Kautter,

Assistant Secretary of the Treasury

(Tax Policy).

(Filed by the Office of the Federal Register on May

22, 2019, 8:45 a.m., and published in the issue of the

Federal Register for May 23, 2019, 84 F.R. 23716)

26 CFR 301.7705-1: Certified professional employer

organization; 26 CFR 301.7705-2: CPEO certification requirements.

T.D. 9860

DEPARTMENT OF THE

TREASURY

Internal Revenue Service

26 CFR Parts 31, 301, and

602

Certified Professional

Employer Organizations

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document sets forth final regulations relating to certified professional employer organizations (CPEOs).

The Stephen Beck, Jr., Achieving a Better

Life Experience Act of 2014, required the

IRS to establish a voluntary certification

program for professional employer organizations. These final regulations set forth

the requirements a person must satisfy in

order to become and remain a CPEO and

the federal employment tax liabilities and

other obligations of persons certified by

the IRS as CPEOs. These final regulations

will affect persons who apply to be treated

as CPEOs and who are certified by the IRS

as meeting the applicable requirements. In

certain instances, the final regulations will

also affect the federal employment tax liabilities and other obligations of customers

of the CPEO.

DATES: Effective date: These regulations

are effective on May 28, 2019.

Applicability date: For dates of applicability see §§31.3511-1(i), 301.7705-1(c), and

301.7705-2(o).

FOR FURTHER INFORMATION CONTACT: Nina Roca at (202) 317-6798 (this

is not a toll-free number)

SUPPLEMENTARY INFORMATION:

Bulletin No. 2019–24

1297

Paperwork Reduction Act

The collection of information contained in these final regulations has been

reviewed and approved by the Office of

Management and Budget in accordance

with the Paperwork Reduction Act of

1995 (44 U.S.C. 3507(d)) under control

number 1545-2266.

The collection of information in these

regulations is in §31.3511-1(g), which

provides that the Secretary shall develop

such reporting and recordkeeping rules,

regulations, and procedures as the Secretary determines necessary or appropriate

to ensure compliance by CPEOs with

subtitle C of the Internal Revenue Code

(Code), and in §301.7705-2, which relates

to the requirements that a person must satisfy to become and remain certified as a

CPEO.

An agency may not conduct or sponsor,

and a person is not required to respond to,

a collection of information unless it displays a valid control number assigned by

the Office of Management and Budget.

Books or records relating to a collection of information must be retained as

long as their contents may become material in the administration of any internal

revenue law. Generally, tax returns and

return information are confidential, as required by 26 U.S.C. 6103.

Background

The Stephen Beck, Jr., Achieving a

Better Life Experience Act of 2014 (the

ABLE Act), enacted on December 19,

2014 (Pub. L. 113-295), added new sections 3511 and 7705 to the Code relating

to the certification requirements for, and

the federal employment tax consequences of, being a “certified professional employer organization” (CPEO). The ABLE

Act required the Internal Revenue Service

(IRS) to establish a voluntary certification

program for persons to become CPEOs.

Additionally, the ABLE Act made conforming amendments to sections 3302,

3303(a), 6053(c), 6652, and 7528 relating

to the obligations, requirements, and penalties applicable to a CPEO.

Section 7705(a) defines a CPEO as a

person who applies to be treated as a CPEO

for purposes of section 3511 and has been

certified by the Secretary as meeting the

June 10, 2019

requirements of section 7705(b), which

include requirements related to tax status

and background, satisfying certain bond,

financial review, and quarterly reporting

requirements (as provided for in section

7705(c)), and notifying the IRS of any

change that materially affects the continuing accuracy of information provided by

the CPEO.

Section 7705(d) gives the Secretary

the authority to suspend or revoke the

certification of any person for purposes of

section 3511 if the Secretary determines

that the person is not satisfying the agreements or requirements of sections 7705(b)

or (c), or fails to satisfy applicable accounting, reporting, payment, or deposit

requirements. Section 7705(f) provides

that the Secretary shall make available to

the public the name and address of each

person certified as a CPEO and each person whose certification is suspended or

revoked.

Under sections 3511(a)(1) and (c)

(1), for purposes of federal employment

taxes and other obligations under the

federal employment tax rules, a CPEO

is generally treated as the employer of

any individual performing services for

a customer of the CPEO and covered by

a contract meeting the requirements of

section 7705(e)(2) (CPEO contract) between the CPEO and the customer (covered employee), but only with respect to

remuneration remitted to the covered employee by the CPEO. With respect to an

individual covered by a CPEO contract

who performs services for a customer at

a work site that meets the coverage requirements of section 7705(e)(3) (a work

site employee), section 3511(a)(1) specifies that no person other than the CPEO

is treated as the employer for federal employment tax purposes with respect to

remuneration remitted by the CPEO to

such individual.

Under section 3511(g), the Secretary is

directed to develop such reporting and recordkeeping rules, regulations, and procedures as the Secretary determines necessary or appropriate to ensure compliance

with the applicable federal employment

tax provisions by CPEOs. In addition,

under section 3511(h), the Secretary is

directed to prescribe such regulations as

may be necessary or appropriate to carry

out the purposes of section 3511.

June 10, 2019

On May 6, 2016, the Department of the

Treasury (Treasury Department) and the

IRS published final and temporary regulations under section 7705 (TD 9768) in

the Federal Register (81 FR 27315, as

corrected July 12, 2016 at 81 FR 45012)

that describe the application process and

certification requirements necessary for

a person to become and remain a CPEO.

On the same date, the Treasury Department and the IRS published a notice of

proposed rulemaking (REG-127561-15)

in the Federal Register (81 FR 27360)

cross-referencing the temporary regulations and proposing additional regulations

under section 3511 that describe the federal employment tax consequences for

CPEOs and their customers. On June 3,

2016, Revenue Procedure 2016-33 (201625 I.R.B. 1034) was also issued, which

set forth the detailed procedures for applying to be certified as a CPEO. The IRS

did not receive any requests for a public

hearing on the regulations, and therefore

no public hearing was held. Several comments responding to the proposed and

temporary regulations and the revenue

procedure were received. The Treasury

Department and the IRS determined that

it was important to respond promptly to

some of these comments and issued Notice 2016-49 (2016-34 I.R.B. 265) on August 5, 2016 in response. Notice 2016-49

provided interim guidance and described

modifications to certain certification requirements, which are reflected in these

final regulations. Finally, the Treasury Department and the IRS also issued Revenue

Procedure 2017-14 (2017-3 I.R.B. 426)

on December 29, 2016, which addressed

the requirements for a CPEO to remain

certified and the procedures relating to

suspension and revocation of CPEO certification. The written comments received

are available for public inspection and

copying at http://www.regulations.gov or

upon request. After consideration of all

the comments, the proposed regulations

are adopted as amended by these final regulations.

Summary of Comments and

Explanation of Revisions

The IRS received seven written comments in response to the proposed and

temporary regulations. Several of the

1298

points made in the comments related to

items specifically addressed in the online

application for certification, Rev. Proc.

2016-33, Notice 2016-49, Rev. Proc.

2017-14, Form 8973 “Certified Professional Employer Organization/Customer

Reporting Agreement”, Schedule R (Form

941) “Allocation Schedule for Aggregate

Form 941 Filers”, and/or Form 14751

“Certified Professional Employer Organization Surety Bond”. Except to the extent

that certain of these comments also relate

to issues covered by the regulations, the

comments are beyond the scope of the

regulations and they are not otherwise

addressed herein. They are under further

consideration for future revisions of the

revenue procedures and possible modifications to the application program and applicable forms.

1. Annual Wage Base and Withholding

Threshold for Covered Employees

Sections 3511(a) and (c), provide that,

for federal employment tax purposes, a

CPEO is treated as the employer of covered employees that are work site employees (section 3511(a)(1)) and covered

employees that are not work site employees (non-work site covered employees)

(section 3511(c)(1)) with regard to remuneration it pays to these covered employees. Remuneration paid by an employer

to an employee within any calendar year

is not subject to the social security portions of Federal Insurance Contributions

Act (FICA) taxes, the equivalent portions

of tier 1 Railroad Retirement Tax Act

(RRTA) taxes, or Federal Unemployment

Tax Act (FUTA) taxes to the extent it exceeds the applicable annual wage base

for these taxes (collectively referred to in

this Summary of Comments and Explanation of Revisions as the “annual wage

base”). See sections 3121(a), 3231(e), and

3306(b) for FICA, RRTA, and FUTA taxes respectively. Under section 3102(f)(1),

employers are required to withhold Additional Medicare Tax (AdMT) from an

employee’s wages only to the extent that

those wages exceed $200,000 in a calendar year (referred to in this Summary of

Comments and Explanation of Revisions

as the “withholding threshold”). The annual wage base applies on an employer-by-employer basis, unless the prede-

Bulletin No. 2019–24

cessor-successor employer rule discussed

below applies; thus, only remuneration

received during any calendar year by an

employee from the same employer is considered in applying the annual wage base

for purposes of the remuneration paid by

that employer. See §§31.3121(a)(1)‑1(a)

(3) and 31.3306(b)(1)–1(a)(3) for FICA

and FUTA taxes, respectively. Similarly,

the AdMT withholding threshold applies

only with regard to remuneration received

during any calendar year by an employee

from the same employer. See §31.31024(a).

By contrast, the annual wage base is not

applied separately to successor and predecessor employers. See section 3121(a)

(1). In accordance with section 3511(b),

§31.3511-1(d) of the proposed regulations

provides that, for purposes of the annual

wage base: (1) a customer is considered a

predecessor employer and a CPEO is considered a successor employer upon entering into a CPEO contract with respect to

a work site employee who is performing

services for the customer, and (2) a CPEO

is considered a predecessor employer and

a customer is considered a successor employer upon termination of the CPEO contract between the CPEO and the customer

with respect to a work site employee who

is performing services for the customer.

The proposed regulations also provide

that, except as provided with respect to

successor and predecessor employers in

§31.3511-1(d), remuneration received

by a covered employee from a CPEO for

performing services for a customer of the

CPEO within any calendar year is subject

to a separate annual wage base and withholding threshold that are each computed

with respect to such remuneration, without regard to any remuneration received

by the covered employee during the calendar year from any other employer (including, if applicable, remuneration received

directly from the customer receiving services from the employee). Thus, upon

entering into a CPEO contract with a customer with respect to a covered employee,

the CPEO starts a new annual wage base

and withholding threshold with respect to

the covered employee (unless the CPEO

is treated as a successor employer under

§31.3511-1(d)).

The proposed regulations also provide

that if, during a calendar year, a covered

Bulletin No. 2019–24

employee receives remuneration from

a CPEO for services performed by the

covered employee for more than one customer of the CPEO, the annual wage base

and withholding threshold do not apply

to the aggregate remuneration received

by the covered employee from the CPEO

for services performed for all such customers. Rather, the annual wage base and

withholding threshold apply separately to

the remuneration received by the covered

employee from the CPEO with respect to

services performed for each customer.

The Treasury Department and the IRS

received several comments on the annual wage base and withholding threshold

rules for covered employees under the

proposed regulations. One commenter

recommended that current law, unaffected by section 3511 and the regulations

thereunder, should apply for purposes of

determining whether remuneration paid

by a CPEO to a non-work site covered

employee is subject to a separate annual

wage base. The commenter asserted that

the statutory distinction between the tax

treatment of work site employees and the

tax treatment of non-work site covered

employees was intended to address CPEO

and customer liability only in each case,

and was not meant to otherwise change

the federal employment tax treatment of

wages paid to work site employees versus

non-work site covered employees.

The Treasury Department and the

IRS disagree with that assertion. Section

31.3121(a)(1)-1(a)(3) provides that if an

employee receives remuneration from

more than one employer in a calendar year,

the annual wage base does not apply to the

aggregate remuneration received from all

of such employers, but instead applies to

the remuneration received during that calendar year from each employer. Because

section 3511 treats a CPEO as an employer separate and apart from the CPEO

customer for whom the employees are

performing services, employees receiving

remuneration from both the CPEO and the

CPEO customer in a calendar year must

be treated as receiving remuneration from

two different employers and the annual

wage base therefore applies separately,

unless the successor and predecessor rules

under section 3511(b) apply.

The same commenter also suggested

that, if an employee performs services for

1299

multiple customers of a CPEO, the annual

wage base should apply to the aggregate

remuneration received by the employee

from the CPEO for services performed

for all customers. The commenter argued

that the customer-by-customer treatment

of the annual wage base in the proposed

regulations was contrary to the statutory

language that treats the CPEO as the sole

employer of work site employees.

A customer-by-customer treatment of

the annual wage base is consistent with

section 3511. Specifically, the maintenance of a separate annual wage base and

withholding threshold with respect to each

customer for which a covered employee

performs services during a calendar year

is consistent with the statutory language

of section 3511(a)(1) which provides that

the CPEO will “be treated as the employer (and no other person will be treated as

the employer) of any work site employee

performing services for any customer of

such organization, but only with respect to

remuneration remitted by such organization to such work site employee” (emphasis added). This language contemplates

that the CPEO will have a separate annual

wage base under 3121(a), 3231(e), and

3306(b) (subject to the application of the

predecessor-successor employer rules on

a customer-by-customer basis). Furthermore, under section 3511(a)(2) (applicable to work site employees) and section

3511(c)(2) (applicable to non-work site

covered employees), the exemptions,

exclusions, definitions, and other rules,

which are based on the type of employer

in most cases will be based on the CPEO

customer (assuming the typical situation

in which the CPEO customer is the common law employer of the covered employees). In these instances, the attributes of

the CPEO customer (e.g. tax-exempt or

not) will be used to determine the taxes

on the remuneration paid by the CPEO

with respect to services performed for a

customer. In addition, section 3511(d)(1)

(A) provides that, for purposes of certain

specified credits, with respect to services

performed by a work site employee for a

CPEO customer, the credits apply to the

CPEO customer, not the CPEO. Thus,

section 3511 requires, for both work site

and non-work site covered employees, the

separate treatment of amounts paid by the

CPEO to one employee with respect to

June 10, 2019

services performed by the employee for

two or more different customers. A separate annual wage base and withholding

threshold with respect to each customer

for which a covered employee performs

services is needed for purposes of applying some of the exemptions, exclusions,

definitions, and other rules addressed

in section 3511(a)(2) and (c)(2) and the

treatment of some of the credits discussed

in section 3511(d). Therefore, if a single

employee receives remuneration from a

CPEO pursuant to multiple CPEO contracts with different customers, the CPEO

must maintain a separate annual wage

base and withholding threshold for the

employee with respect to each customer.

For instance, wages paid to employees

for services performed in the employ of a

religious, charitable, educational, or other

type of organization described under section 501(c)(3) are not subject to FUTA tax

under section 3306(c)(8). Consequently,

under sections 3511(a)(2) and (c)(2), wages paid by a CPEO to covered employees

for services performed for a CPEO customer that is an organization described in

section 501(c)(3) are not subject to FUTA

tax. Wages paid by a CPEO to a covered

employee for services performed for a

CPEO customer that is a section 501(c)(3)

organization cannot be used in determining FUTA tax liability for wages paid by

the CPEO for services performed by that

same employee for a CPEO customer that

is subject to FUTA tax. The FUTA annual

wage base must be applied separately to

the remuneration paid by the CPEO for

services performed for the non-section

501(c)(3) employer because under sections 3511(a)(2) and (c)(2) the exemption

from FUTA tax applies only to the CPEO

customer that is a 501(c)(3) organization.

For these reasons, the commenter’s

proposed changes are not adopted in these

final regulations.

Finally, one commenter suggested that,

because a CPEO that is treated as a successor employer will need to determine the

amount of wages paid and applied toward

the annual wage base by a customer that

is treated as the predecessor employer and

in some cases that information provided

by a customer may be incorrect, the IRS

should issue guidance stating that a CPEO

may rely on the wage report provided by

the customer. Whether, and to what extent,

June 10, 2019

a CPEO relies on a wage report from its

customer is a business decision for the

CPEO. The CPEO still has the obligation

to report accurate information. General

guidance on the procedures applicable to

preparing and reporting wage information

in predecessor and successor employer

situations is addressed in the regulations

under section 3121(a)(1) and in Revenue

Procedure 2004-53, 2004-34 I.R.B. 320,

(the revenue procedure specifically provides guidance on filing Forms 941, W-2,

W-4, and W-5 in predecessor and successor employer situations). CPEOs that are

treated as successor employers should refer to those provisions for guidance. For

these reasons, the commenter’s suggestion

is not adopted in these final regulations.

2. Treatment of Credits

a. Non-work site covered employees

Under section 3302(h), if a CPEO,

or a customer of a CPEO, makes a contribution to a state’s unemployment fund

with respect to wages paid to a work site

employee, the CPEO is eligible for the

credits available under section 3302 for

purposes of calculating FUTA tax with

respect to that contribution. Similarly, under section 3303(a)(4), a CPEO is allowed

an additional credit under section 3302(b)

with respect to any reduced rate of contributions permitted by a state law if the

Secretary of Labor finds that under that

law the CPEO is permitted to collect and

remit contributions during the taxable

year to the state unemployment fund with

respect to a work site employee. Because

section 3302(h) and section 3303(a)(4)

apply exclusively with respect to wages

paid to work site employees, the Treasury

Department and the IRS requested comments on the application of the credits in

sections 3302(h) and 3303(a)(4) with respect to wages paid to non-work site covered employees.

Under section 3511(d), for purposes

of various tax credits enumerated in section 3511(d)(2) under which the amount

of the credit is determined by reference to

the amount of federal employment taxes

or the amount of wages subject to federal

employment taxes, the credit with respect

to a work site employee performing services for a customer applies to the cus-

1300

tomer, not to the CPEO. Consequently, in

determining the amount of the credit, the

customer, and not the CPEO, takes into

account the federal employment taxes and

wages paid by the CPEO with respect to

the work site employee and for which the

CPEO receives payment from the customer. Because the application of the specified

tax credits to the customer under section

3511(d) applies exclusively with respect

to work site employees, the Treasury Department and the IRS requested comments

on the treatment of tax credits with respect

to non-work site covered employees.

One commenter responded to these

requests for comments. Concerning the

application of the FUTA tax credits in sections 3302(h) and 3303(a)(4) to non-work

site covered employees, the commenter

stated that the application of the credits

should be governed by current law without regard to the statutory provisions related to the CPEO program. But the commenter also suggested that “it is equitable,

consistent with the intent of the law, and

in the best interests of employment administration efficiency (without regard to

the application of [section] 3511) to apply

the application of the pass-through of the

FUTA tax credit to a CPEO with respect

to wages paid to … individuals covered

by a CPEO contract that are not Work Site

Employees.” In addition, this commenter

requested that the preamble to the final

regulations note that “as a general matter,

the CPEO that is liable for the FUTA taxes

on remuneration it pays would be eligible

for the tax credits under sections 3302(h)

and 3303(a)(4).”

The Treasury Department and the IRS

have determined that, because amendments to regulations under section 3302(h)

and section 3303(a)(4) were not included

in the notice of proposed rulemaking,

these final regulations will not address

the general application of the credits in

sections 3302(h) and 3303(a)(4) in connection with wages paid to non-work site

covered employees. The Treasury Department and the IRS will continue to consider

this issue.

Concerning the treatment of tax credits

described in section 3511(d) with respect

to non-work site covered employees, the

commenter suggested that, just as with

the credits under sections 3302(h) and

3303(a)(4), the application of these cred-

Bulletin No. 2019–24

its should be governed by current law.

The commenter also added that there is

“no basis or advantage” to treating work

site employees and non-work site covered

employees differently and therefore, as a

general matter, the customer, and not the

CPEO, should be eligible for the tax credits listed in section 3511(d). The Treasury

Department and the IRS agree that current

law should govern the eligibility for the

tax credits listed in section 3511(d) with

respect to wages paid to non-work site

covered employees. For this reason, these

final regulations do not include provisions

regarding the application of the tax credits

in section 3511(d) to non-work site covered employees. The Treasury Department and the IRS note that, in computing

these credits under current law, generally the customer, and not the CPEO, will

take into account wages and federal employment taxes paid by the CPEO with

respect to the covered employee and for

which the CPEO receives payment from

the customer. This is the same treatment

accorded to tax credits listed in section 3511(d) for work site employees.

b. Additional credits

As discussed in the previous section,

section 3511(d) governs the treatment of

various tax credits under which the amount

of the credit is determined by reference to

the amount of wages or federal employment taxes and section 3511(d)(2) specifies these credits. Under section 3511(d)

(2)(H), the Secretary may specify other

credits subject to the treatment provided

for under section 3511(d). Consistent with

this section, the Treasury Department and

the IRS requested comments on whether

other credits should be specified in these

regulations or in other guidance.

One commenter requested that the recently enacted employer credit for paid

family and medical leave under section

45S be added to the list of specified credits

in the regulations. Section 45S was added to the Code by the Tax Cuts and Jobs

Act (Pub. L. 115-97) enacted December

22, 2017. Notice 2018-71, 2018-41 I.R.B.

548, published October 9, 2018, provides

that, for wages paid by a CPEO to qualifying employees for services performed for

an eligible employer, the eligible employer, not the CPEO, may take into account

wages paid to qualifying employees for

services performed for the eligible em-

Bulletin No. 2019–24

ployer in determining the credit under section 45S. The notice also announces the

IRS’s intention to publish proposed regulations under section 45S. The Treasury

Department and the IRS have determined

that, although the credit under section 45S

does not apply to wages paid in taxable

years beginning after December 31, 2019

(unless extended), it is appropriate to add

this credit to the list of specified credits.

Therefore, these final regulations include

the credit under section 45S in the list

of specified credits under §31.3511-1(e)

(2) (which provides a list of credits that

apply to the CPEO customer, and not the

CPEO, with respect to services performed

by a work site employee for a CPEO customer). In addition, §31.3511-1(e)(2)(ix)

of these final regulations provides that the

IRS may specify any other section as a

specified credit in further guidance.

No other comments on the proposed

regulations were received specifying additional credits to be included in the final regulations. However, subsequent to

the issuance of the proposed regulations,

the IRS did receive questions concerning

whether wages paid by a CPEO to employees for services performed for a customer can be used by the customer in determining the employee retention credit in

section 503 of the Disaster Tax Relief and

Airport and Airway Extension Act of 2017

(The Disaster Relief Act (Pub. L. 115-63))

(assuming that the customer otherwise

meets the requirements for the credit). In

response to these inquiries, the IRS provided, in Publication 976 “Disaster Relief”, and on irs.gov, that for purposes of

the employee retention credit, qualified

wages paid by a CPEO to eligible employees of an eligible employer are considered

qualified wages incurred by the eligible

employer. The employee retention credit for disaster relief found in The Disaster Relief Act is substantially similar to

the credit provided for in section 1400R,

which provides an employee retention

credit for employers affected by Hurricane

Katrina. In addition, several other disaster

relief acts have provided employee retention credits modeled after the credit in

section 1400R. Since future disaster relief

acts may continue to include employee retention credits similar to those provided in

section 1400R and in The Disaster Relief

Act, these final regulations add statutory

1301

employee retention credits that are similar

to the employee retention credit in section

1400R and that provide disaster relief to

employers in designated disaster areas to

the list in §31.3511-1(e)(2).

3. Treatment of Self-Employed

Individuals

Consistent with section 3511(f), which

provides that a self-employed individual

is not a work site employee with respect

to remuneration paid by a CPEO, and

with section 3511(c), which provides that

a CPEO is not treated as an employer of

a self-employed individual, the proposed

regulations provide that section 3511 does

not apply to any self-employed individual.

The proposed regulations define a

“self-employed individual” as an individual with net earnings from self-employment (as defined in section 1402(a), without regard to the exceptions thereunder)

derived from providing services covered

by a CPEO contract, whether such net

earnings are derived from providing services as a non-employee to a customer of

a CPEO, from the individual’s own trade

or business as a sole proprietor customer

of the CPEO, or as a partner in a partnership that is a customer of the CPEO, but

only with regard to such net earnings.

In addition, the preamble discussion

of the definition of “work site employee”

in the proposed regulations provides that

a self-employed individual, whether an

independent contractor to the customer,

a sole proprietor customer of the CPEO,

or a partner in a partnership customer of

the CPEO, is not considered to be a work

site employee under section 3511(f) with

regard to those earnings, but also provides

that in the limited case in which a self-employed individual who is an independent

contractor of a customer is also paid wages

by the CPEO under a CPEO contract with

the customer, the individual may nevertheless be a work site employee with respect

to those wages. This latter language was

intended to address the uncommon situation in which one individual is receiving

payments from the CPEO for services

provided to a customer in two separate

capacities, i.e., for services performed for

the CPEO customer as a common law employee of the customer and for completely

separate and distinct services provided to

June 10, 2019

the customer as an independent contractor. The CPEO is treated as the employer

of the individual for federal employment

tax purposes with respect to the payments

the CPEO makes to the individual for the

services the individual performs as a common law employee of the CPEO customer,

and these payments are reported as wages

by the CPEO. The payments for the services provided as an independent contractor are not wages and must be reported as

payments to a self-employed individual.

Further, any payment made by a CPEO

to a partner in a partnership under a contract between the partnership and the

CPEO must always be treated as a payment

to a self-employed individual and reported as such. Under Revenue Ruling 69-184

(1969-1 C.B. 256) “[b]ona fide members

of a partnership are not employees of the

partnership” for federal employment tax

purposes. “Such a partner who devotes

… time and energies in the conduct of the

trade or business of the partnership, or in

providing services to the partnership as an

independent contractor, is, in either event,

a self-employed individual rather than an

individual who, under the usual common

law rules applicable in determining the

employer-employee relationship, has the

status of an employee.” Thus, “[r]emuneration received by a partner from the partnership is not ‘wages’ with respect to ‘employment.’” Instead, under the statutory

framework of Subchapter K of the Code,

an allocation or distribution between a

partnership and a partner for the provision

of services generally can be treated in one

of three ways: (1) a distributive share under section 704(b) (reported as such by the

partnership on Schedule K-1 (Form 1065),

“Partner’s Share of Income, Deductions,

Credits, etc.”); (2) a guaranteed payment

under section 707(c) (reported as such by

the partnership on Schedule K-1 (Form

1065)); or (3) as a transaction in which

a partner has rendered services to the

partnership in its capacity as other than a

partner under section 707(a) (reported by

the partnership like a payment to an independent contractor on Form 1099-MISC,

“Miscellaneous Income”). It is irrelevant

to the characterization of the payment

whether a CPEO pays the partner or the

partnership pays the partner directly.

One commenter requested that the IRS

permit reporting of payments by CPEOs

June 10, 2019

to self-employed individuals using Form

W-2, “Wage and Tax Statement.” However, the reporting of amounts paid to

self-employed individuals is outside of the

scope of these regulations. For example,

under the section 6041 regulations, certain

payments to self-employed individuals are

reported using information returns such

as Form 1099-MISC, “Miscellaneous Income,” and not on Form W-2. Payments

(within the meaning of section 6041

and the regulations thereunder) made to

self-employed individuals should be reported in accordance with the rules under

these and other applicable provisions.

4. Reporting to the IRS by CPEOs

a. R

 eporting commencement or

termination of CPEO contracts and

service agreements

Section 3511(g) sets forth the reporting

requirements and obligations that persons

must satisfy in order to maintain certification as a CPEO. The proposed regulations

provide that a CPEO must report information relating to the commencement or termination of (1) any CPEO contract with

a customer and (2) any service agreement

described in §31.3504-2(b)(2) with a client and the name and EIN of such customer or client. The proposed regulations also

provide that, with any Form 940, “Employer’s Annual Federal Unemployment

(FUTA) Tax Return”, or Form 941, “Employer’s Quarterly Federal Tax Return”,

that a CPEO files, the CPEO must attach

the applicable Schedule R (or any successor form) including such information as

the Commissioner may require about each

of its customers under a CPEO contract

and any clients under a service agreement

described in §31.3504-2(b)(2). The only

comment the IRS received related to these

reporting requirements stated that they

should be eliminated as they relate to clients under a service agreement described

in §31.3504-2(b)(2) because they are unnecessarily burdensome, ineffective, and

not supported by statute. The commenter

also stated that reporting commencement

or termination of CPEO contracts or service agreements should be required only

quarterly.

Section 3511(g) provides that the “Secretary shall develop such reporting and

1302

recordkeeping rules, regulations, and procedures as the Secretary determines necessary or appropriate to ensure compliance

with this title by certified professional employer organizations.” Because a CPEO

contract potentially affects the liability of

CPEO customers under such contracts,

the proposed regulations provide that

CPEOs must report service agreements

described in §31.3504-2(b)(2) with clients so that the IRS has a record that explicitly provides which CPEO clients are

not under a CPEO contract, in the event

that disputes concerning liability arise. In

addition, the instructions to Form 8973,

which is the form used to report a CPEO

contract with a customer and a service

agreement described in §31.3504-2(b)(2)

with a client, require that customers and

clients sign Form 8973 and that a copy of

this form be provided to the customers and

clients to ensure the customers and clients

understand the nature of their relationship

with the CPEO. This requirement is in line

with the statutory requirement in section

7705(e)(2)(F) that a CPEO contract include a provision that the CPEO agrees

to be treated as a CPEO for purposes of

3511 with respect to the CPEO customer’s

employees. Thus, requiring that CPEOs

report service agreements described in

§31.3504-2(b)(2) with clients not only facilitates the IRS’s recordkeeping, but also

provides a means for the IRS to verify that

the CPEO has properly represented to clients and customers the nature of their contractual arrangement (i.e., whether they

are covered by a CPEO contract or not).

Similarly, the proposed regulations provide that CPEOs must include information

about clients under a service agreement

described in §31.3504-2(b)(2) on Schedule R so that the IRS has a record of which

amounts reported on Forms 941 and 940

are not subject to the liability provisions

in sections 3511(a) and (c), in the event

disputes concerning liability arise, and so

that the IRS can better reconcile the total

amounts of wages and taxes reported on

Forms 940 and 941 with the amounts of

wages and taxes reported on Schedule R.

Because the proposed regulations’ reporting requirements relating to clients

under a service agreement described in

§31.3504-2(b)(2) assist the IRS in ensuring CPEO compliance with rules governing federal employment tax liability,

Bulletin No. 2019–24

consistent with section 3511(g), these

final regulations retain the reporting requirements as they were in the proposed

regulations.

The proposed regulations do not address the time and manner of reporting the

commencement or termination of CPEO

contracts and service agreements. Rather, this information is provided in Rev.

Proc. 2017-14 and in the instructions to

the Form 8973. Requirements relating

to the time and manner of reporting the

commencement or termination of CPEO

contracts and service agreements are criteria for tax administration that may need

to be modified as processes or technology

change or more knowledge about administrative challenges is acquired. Therefore,

these requirements are more appropriately

addressed in tax forms and publications or

revenue procedures.

b. Form 943 – attaching Schedule R and

reporting on magnetic media

The proposed regulations provide

that, with every Form 940 and Form 941

it files, a CPEO must attach all required

schedules, including, but not limited to,

the applicable Schedule R (or any successor form). The proposed regulations also

provide that a CPEO must file Forms 940

and 941, and all required accompanying

schedules, on magnetic media unless the

CPEO is provided a waiver by the Commissioner. The proposed regulations define magnetic media as electronic filing, as

well as other media specifically permitted

under the applicable regulations, revenue

procedures, publications, forms, instructions, or other guidance.

For certain agricultural employer clients and customers, CPEOs must report

federal employment taxes using Form

943, “Employer’s Annual Federal Tax Return for Agricultural Employees.” At the

time the proposed regulations were promulgated, a Schedule R was not available

for Form 943, and the form could not be

filed electronically. However, Schedule R

(Form 943) is now available, and electronic filing has since been made available for

Form 943. For this reason, these final regulations provide that, just like Forms 940

and 941, Form 943 must be filed with all

required schedules, including Schedule R,

attached and Form 943 must be filed on

Bulletin No. 2019–24

magnetic media unless the CPEO is provided a waiver by the Commissioner.

c. W

 aivers of the requirement to report on

magnetic media

The proposed regulations provide that

the requirement to file Forms 940 and

941 on magnetic media can be waived in

cases of undue economic hardship. Since

the promulgation of the proposed regulations, some CPEOs experienced difficulties in electronic filing due to temporary

software and technological issues, and

one commenter asked the IRS to clarify

that undue economic hardship can include

economic hardships resulting from software and technological issues. The IRS

provided these clarifications on irs.gov,

and these final regulations also clarify that

undue economic hardship includes economic hardships resulting from software

and technological issues.

5. Applicable Definitions

a. Certified public accountant (CPA)

In connection with the financial statement and quarterly assertion and attestation requirements in the temporary regulations, the CPEO applicant or CPEO must

submit an opinion or an examination level

attestation, as applicable, from a CPA.

The temporary regulations define a CPA

as an individual who is independent of

the CPEO (as prescribed by the American

Institute of Certified Public Accountants’

(AICPA) Professional Standards, Code of

Professional Conduct), and among other

things, files with the IRS a written declaration that he or she is authorized to represent the CPEO applicant or CPEO before

the IRS. The Treasury Department and the

IRS requested comments regarding whether the CPA independence guidelines or

requirements of other governmental agencies or departments of industry self-regulatory bodies (such as the Department of

Labor’s guidelines on the independence of

CPAs retained by employee benefit plans

under 29 CFR 2509.75-9, the Securities

and Exchange Commission’s (SEC) independence guidelines for auditors reporting

on financial statements included in SEC

filings, and the Government Accountability Office’s auditor independence re-

1303

quirements under Government Auditing

Standards that cover federal entities and

organizations receiving federal funds),

as adapted for a CPA of a CPEO, would

better ensure the impartiality of CPAs

providing opinions on a CPEO’s financial

statements. One commenter responded

that the AICPA’s independence guidelines

are the most appropriate for the CPEO

program, and that most CPAs are more familiar with those guidelines than the other

guidelines referenced in the preamble to

the temporary regulations. The Treasury

Department and the IRS agree that the

AICPA’s independence guidelines are the

most appropriate for the CPEO program.

Therefore, these final regulations retain

the reference to the AICPA professional

standards.

Several commenters also noted that the

requirement that a CPA be authorized to

represent the CPEO applicant or CPEO

before the IRS could conflict with the

CPA independence requirements of the

AICPA. Consistent with Notice 2016-49,

and to ensure that the CPA may be “independent” within the meaning of the AICPA guidelines, these final regulations omit

the requirement that the CPA file with the

IRS a written declaration of authorization

to represent the CPEO applicant or CPEO

before the IRS.

b. Responsible individual

Section 7705(b)(1) provides that the

Secretary may establish requirements

for certification that apply not only to the

CPEO applicant or CPEO, but also to “any

owner, officer, and other persons as may

be specified in regulations.” Accordingly,

the temporary regulations include a number of requirements that apply to certain

owners, officers, and other individuals (referred to in the regulations as “responsible

individuals”). The temporary regulations

generally define a responsible individual as

an individual in any of the following categories with respect to the CPEO applicant

or CPEO: (1) certain owners; (2) directors

and officers; (3) individuals with ultimate

responsibility for implementing the decisions of the organization’s governing body;

(4) individuals with ultimate responsibility for the organization’s management and

operations; (5) individuals with ultimate

responsibility for managing the organiza-

June 10, 2019

tion’s finances; (6) managing members or

general partners; (7) the sole proprietor of

a sole proprietorship; and (8) any other individuals with primary responsibility for

federal employment tax compliance of the

organization. With respect to determining

whether an individual is a responsible individual by reason of ownership, the temporary regulations specify that a responsible individual includes any individual who

owns 33 percent or more of the total combined voting power of all classes of stock

of a corporation entitled to vote or the total

value of shares of all classes of stock of a

corporation, or any individual who owns

33 percent or more of the profits interest or

capital interest in a partnership.

The Treasury Department and the IRS

requested comments regarding the administrability of applying the definition

of responsible individual with respect to

ownership of profits interests in a partnership, the value of which may fluctuate

over time. One commenter indicated that,

although there would be situations where

a partner’s capital interest or profits interest will fluctuate, similar fluctuations will

likely occur with respect to changes in

corporate ownership. The commenter did

not suggest revising the definition of responsible individual with respect to ownership percentages, but the commenter

did suggest that the IRS require only annual reporting of responsible individuals

unless there is significant turnover in the

CPEO’s responsible individuals. The temporary regulations require that a CPEO

applicant or CPEO notify the IRS, in the

time and manner prescribed by the Commissioner in further guidance (as defined

in §301.7705-1(b)(8)), of any change that

materially affects the continuing accuracy

of any agreement or information that was

previously made or provided to the IRS.

A change in responsible individuals is

an example of a material change, and the

time and manner for reporting this information to the IRS is currently set forth in

Rev. Proc. 2016-33 and Rev. Proc. 201714. Accordingly, the final regulations do

not adopt this suggestion, but the Treasury

Department and the IRS will consider this

comment in any future updates to these

two revenue procedures. Additionally, the

final regulations adopt the definition of responsible individuals from the temporary

regulations, with additional language regarding disregarded entities as described

June 10, 2019

in paragraph 7(a) of this Summary of

Comments and Explanation of Revisions.

The temporary regulations also require

the CPEO, and each of its responsible individuals, to take such actions as are necessary to authorize the IRS to investigate the

accuracy of statements and submissions

made by the CPEO, including waiving

confidentiality and privilege when necessary and submitting fingerprints to conduct comprehensive background checks,

including, but not limited to, checks on

tax compliance and criminal background.

With respect to suitability requirements

applicable to responsible individuals,

the Treasury Department and the IRS requested comments regarding the possible

expansion of the category of individuals

who must authorize the IRS to conduct

comprehensive background checks and

submit fingerprint cards to include certain

directors, officers, and owners of a CPEO

applicant’s or CPEO’s related entities.

The Treasury Department and the IRS

received one comment in response. The

commenter requested that the category

not be expanded because such an expansion would impose additional paperwork

burdens on professional employer organizations (PEOs), responsible individuals,

and the IRS without any meaningful improvements in the program. The Treasury

Department and the IRS considered the

likely impact on PEOs, responsible individuals, and the IRS of expanding this

category and the likely value of this additional information to the IRS. As of the

date of these final regulations, the IRS has

certified 120 CPEOs, and the information

provided regarding each CPEO applicant,

its related entities, precursor entities, and

responsible individuals, coupled with the

ongoing certification requirements applicable to CPEOs and responsible individuals, has been sufficient for the IRS to make

determinations regarding certification.

Therefore, these final regulations do not

expand the category of individuals who

must authorize the IRS to conduct comprehensive background checks and submit

fingerprint cards beyond what was included in the temporary regulations.

c. P

 rovider of employment-related

services

The temporary regulations define a

provider of employment-related services

1304

as a person that provides employment tax

administration, payroll services, or other

employment-related compliance services

to clients. One commenter suggested that

the phrase “or other employment-related compliance services” in the definition

of provider of employment-related services could be interpreted to include entities that only provide (1) labor through

a staffing service, or (2) employment

background screening services. The commenter suggested revising the definition

to refer to “other similar employment-related compliance services.” The Treasury

Department and the IRS agree with the

commenter that the phrase “or other employment-related compliance services”

could be construed to apply more broadly

than was intended. As noted in the preamble to the temporary regulations, the term

is intended to capture entities that provide

payroll or other federal employment tax

administration and compliance services.

Accordingly, these regulations replace

the term “provider of employment-related services” with “provider of payroll

services” and revise the definition of this

term to clarify that the entity must provide

payroll, federal employment tax administration, or other similar federal employment tax-related compliance services.

d. Work site

The proposed regulations define “work

site” as a physical location at which an individual regularly performs services for a

customer of a CPEO (except that a work

site may not be the individual’s residence

or a telework site unless the customer requires the individual to work at that site)

and if there is no such location, the work

site is the location from which the customer assigns work to the individual. The

proposed regulations also provide that, in

applying the term “work site,” contiguous

locations are treated as a single physical

location and thus a single work site, and

noncontiguous locations that are not reasonably proximate are treated as separate

physical locations and thus separate work

sites. A CPEO may treat noncontiguous

locations that are reasonably proximate

as a single physical location and thus a

single work site, but any two work sites

that are separated by 35 or more miles or

that operate in a different industry or industries will not be treated as reasonably

Bulletin No. 2019–24

proximate. Because the physical location

at which an individual regularly performs

services can, at times, be difficult to ascertain, the Treasury Department and the IRS

requested comments on the definition of

work site and any additional clarifications

that would facilitate a determination of an

individual’s work site.

One commenter responded to this

request for comments. The commenter suggested that the definition focus on

the physical location where an individual

“primarily” performs services and that,

when appropriate, various client locations

should be considered one work site location rather than providing for separate

work sites for each location at which the

CPEO customer’s workers perform services. The commenter also suggested that

work sites in different industries and work

sites that are maintained as a separate

operation for bona fide business reasons

(based on facts and circumstances) are

factors that should be taken into account

for purposes of determining whether two

or more work sites should be treated as

one work site.

The definition of work site in the proposed regulations, as a location where an

individual regularly performs services,

was intended to take into account CPEO

customers whose workers provide services

in multiple noncontiguous, non-proximate

locations and/or locations that operate in a

different industry or industries. Under the

proposed regulations, the determination of

whether a covered employee is a work site

employee is made separately with regard

to each work site at which the covered employee regularly provides services; under

this standard, a covered employee may be

determined to be a work site employee at

more than one work site during a calendar

quarter. Furthermore, the proposed regulations provide that a covered employee will

be considered a work site employee for

the entirety of a calendar quarter if the employee qualifies as a work site employee at

any time during that quarter. Therefore, a

covered employee that regularly performs

services for a customer at multiple sites

need only qualify as a work site employee at one of the sites in a calendar quarter

to be considered a work site employee for

that entire quarter.

The use of the phrase “primarily performs services” instead of the phrase

“regularly performs services” would not

Bulletin No. 2019–24

provide the customer this flexibility, but

would instead require customers with

covered employees at multiple sites either

to identify the site at which covered employees “primarily” perform services or

to make a determination (with appropriate

substantiation) that it maintains separate

work sites for a bona fide business reason

such that these sites can be treated as one

work site. To avoid that result, these final

regulations do not adopt this suggested

change.

However, the Treasury Department and

the IRS recognize that certain employers

have employees regularly working at the

location of clients of varying industries,

all doing work in the employer’s industry rather than the industry of the client.

For example, an information technology

business might have employees regularly

performing services related to information

technology at the locations of clients in

a variety of unrelated industries (factory,

restaurant, museum, etc.). To address this

situation, these final regulations provide

that the determination of the industry of

a work site is based on the nature of the

CPEO customer’s work at that work site,

irrespective of work performed by other

entities at the same site.

In addition, these final regulations provide that when treating noncontiguous locations as a single physical location and

thus a single work site, one noncontiguous location cannot be included in more

than one work site. The final regulations

contain an example illustrating this rule.

Finally, for clarification, non-substantive

changes were made to the language in the

proposed regulations.

e. Work site employee

The proposed regulations, consistent with section 7705(a), provide that a

work site employee means, with respect

to a customer, a covered employee who

performs services for the customer at a

work site where at least 85 percent of the

individuals performing services for the

customer are covered employees of the

customer. The proposed regulations also

provide that a covered employee will be

considered a work site employee for the

entirety of a calendar quarter if he or she

qualifies as a work site employee at any

time during that quarter. Consequently, a

covered employee can be a work site em-

1305

ployee for one or more calendar quarters

of the year and a non-work site covered

employee for other calendar quarters

during the same year. One commenter

suggested a safe harbor rule providing

that a covered employee who qualifies as

a work site employee at any time during a

calendar quarter is considered a work site

employee for the entirety of that quarter

and for the remainder of the calendar year.

Since the CPEO program began in 2016,

the IRS has not been made aware of any

issues concerning the quarterly determination of work site employees. For this

reason, and because a quarter-by-quarter

work site employee determination coincides with a CPEO’s quarterly federal employment tax reporting, these final regulations do not adopt this suggestion.

The same commenter also requested

that the regulations clarify the rules regarding excluded employees under section 414(q)(5). In accordance with section

7705(e)(3), the proposed regulations provide that, in determining whether the 85

percent threshold is met, individuals who

are excluded employees within the meaning of section 414(q)(5) (such as newly

hired or part-time employees) are not taken into account as either covered employees or individuals performing services,

although those individuals may otherwise

be covered employees and work site employees under the proposed regulations.

The commenter was concerned that this

rule could be interpreted to mean that all

employees of a startup company would be

excluded employees for purposes of determining whether the 85 percent threshold

is met. The commenter suggested that the

regulations incorporate the flush language

from section 414(q)(5), which provides

that an employer may substitute a shorter

period of service, smaller number of hours

or months, or lower age for the period of

service, number of hours or months, or age

specified in section 414(q)(5), though the

commenter also suggested that the regulations provide that any such modifications

must be on a consistent and uniform basis with respect to individuals performing

services at the work site.

Because the application of section

414(q)(5) is outside the scope of these

regulations, these final regulations do

not provide for any further explanation

of the application of section 414(q)(5).

Therefore, employers should look to the

June 10, 2019

language of section 414(q)(5) in determining which employees should be excluded under section 7705(e)(3). However, the Treasury Department and the IRS

agree that the flush language from section

414(q)(5) can be applied in the context of

determining whether the 85 percent work

site coverage requirement threshold is

met under section 7705(e)(3), such that

an employer may substitute a shorter period of service, smaller number of hours or

months, or lower age for the period of service, number of hours or months, or age

specified in section 414(q)(5).

Finally, this commenter suggested that

the regulations provide that reasonable

good faith determinations concerning the

application of the 85 percent coverage

test in determining work site employees

will be respected unless there is a pattern

of abuse of this rule by the CPEO or its

customer. The Treasury Department and

the IRS agree that, because applying the

85 percent coverage rules for determining

work site employees may be challenging

in certain situations, a good faith standard

is appropriate. For this reason, these final

regulations provide that a CPEO’s determination that a covered employee is a

work site employee will be respected if

the CPEO has made a good faith determination that the covered employee meets

the requirements of section 7705(e), the

regulations, and further guidance.

6. Application Process

The temporary regulations provide that

a CPEO applicant will be notified by the

IRS whether its application for certification has been approved or denied, as well

as the effective date of certification or the

reason(s) for the denial, each as applicable. One commenter noted that the temporary regulations do not address the reapplication process for CPEO applicants that

are denied certification. The commenter

requested that the final regulations clarify that a CPEO applicant may not reapply

for certification for at least one year following a denial of certification, unless the

CPEO applicant has resolved the issues

identified by the IRS as the reason for the

certification denial. The commenter also

suggested that the final regulations clarify

that a CPEO applicant that withdraws its

application before the IRS makes a deci-

June 10, 2019

sion regarding certification may reapply

for certification at any time. Rev. Proc.

2016-33 sets forth the detailed procedures

for applying to be certified, including the

ability to withdraw an application, but it

does not address reapplication following

a denial of certification. The Treasury Department and the IRS agree that the final

regulations should address the ability to

reapply after a denial of certification or

withdrawal. Accordingly, the final regulations provide that a CPEO applicant may

reapply for certification in such time and

manner, and must include such information, as the Commissioner may prescribe

in further guidance. Because procedural requirements relating to the time and

manner of applying for certification may

need to be modified as processes or technology change or more knowledge about

administrative challenges is acquired, the

Treasury Department and the IRS intend

to address these requirements in a future

revision of Rev. Proc. 2016-33.

7. Suitability

a. D

 isregarded entities and sole

proprietorships

The temporary regulations provide that

a CPEO may not be a business entity that

is disregarded as an entity separate from

its owner for federal tax purposes under

§§301.7701-2 and 301.7701-3 (without regard to the special rule in §301.7701-2(c)

(2)(iv) that provides that such entities are

corporations for federal employment tax

purposes). Several commenters expressed

concerns regarding the prohibition against

disregarded entities becoming CPEOs.

The commenters indicated that the temporary regulations may unnecessarily limit

the ability of persons to apply for certification. They explained that PEOs may be

structured as disregarded entities for legitimate business reasons, such as to reduce

the overall compliance burden associated

with filing state income tax returns. As a

result of those comments, the Treasury

Department and the IRS announced in

Notice 2016-49 the expectation that the final regulations would not prohibit a business entity that is disregarded as separate

from its owner under §§301.7701-2 and

301.7701-3 from becoming a CPEO, provided the disregarded entity is (1) wholly

1306

owned directly (including through one or

more disregarded entities organized in the

United States) by a United States person

(as defined in section 7701(a)(30)), and (2)

created or organized in the United States

or under the law of the United States or

of any state (collectively, a domestic disregarded entity). Consistent with Notice

2016-49, these final regulations allow

domestic disregarded entities to apply for

certification as CPEOs. The Treasury Department and the IRS requested comments

on the appropriateness of allowing a disregarded entity that is domestically organized but not wholly owned directly by a

United States person to apply for certification as a CPEO, but no comments were

received on this issue. Accordingly, these

final regulations require the disregarded

entity to be both domestically organized

and wholly owned directly by a United

States person.

As a result of the change permitting

certain disregarded entities to apply for

certification as a CPEO, these final regulations also revise the definition of “responsible individual” to include: (1) in the

case of a disregarded entity owned by a

corporation or partnership, the responsible

individuals of that corporation or partnership, and (2) in the case of a disregarded

entity owned by an individual, the individual owner. These final regulations also

clarify that CPEO applicants and CPEOs

that, but for their status as disregarded entities, would separately be members of a

controlled group, are treated as members

of a controlled group for purposes of sections 3511 and 7705 and the regulations

thereunder.

One commenter noted that the requirement that a CPEO must be a business entity would preclude an individual operating

a business through a sole proprietorship

from becoming a CPEO. As stated in Notice 2016-49, to ensure parity between

sole proprietorships and disregarded entities that are wholly owned by individuals,

these final regulations also expressly allow sole proprietorships to apply for certification as CPEOs.

b. Fingerprint cards and background

checks

The temporary regulations provide that

each responsible individual must submit

Bulletin No. 2019–24

fingerprints in the time and manner and

under the circumstances prescribed by

the Commissioner in further guidance.

Currently, the specific requirements regarding the time and manner of fingerprint submissions, including whether a

responsible individual needs to submit

multiple cards are included in Rev. Proc.

2016-33, the CPEO application for certification, and in the Responsible Individual

Personal Attestation (RIPA) instructions.

One commenter requested that the temporary regulations be revised to clarify that a

responsible individual may submit a single fingerprint card that will be used for

background check purposes for all CPEO

applicants in a controlled group for which

that person is a responsible individual.

The final regulations do not adopt this

suggestion because the Treasury Department and the IRS have determined that the

regulations should continue to provide the

IRS with the flexibility to include specific instructions regarding fingerprint cards

in other guidance, such as revenue procedures and the application for certification,

as the program develops and as changes

in technology permit new procedures.

The Treasury Department and the IRS

will consider this comment in any future

updates to Rev. Proc. 2016-33. However,

the Treasury Department and the IRS consider it appropriate to include a specific

reference to Federal Bureau of Investigations (FBI) background checks in order to

acknowledge the scope of the background

check. Accordingly, these final regulations

expressly state that a CPEO or CPEO applicant, and each of its responsible individuals must take such actions as are

necessary to authorize the IRS to conduct

comprehensive background checks, including, but not limited to, FBI or other

similar criminal background checks.

One commenter requested that responsible individuals who are attorneys, CPAs,

enrolled agents, and officers of publicly

traded companies be allowed to provide

professional status information (e.g., credential number, state of jurisdiction, and

date of expiration) in lieu of submitting

fingerprints. The commenter indicated that

this would be consistent with the IRS’s

e-file program. Under sections 3511(a)(1)

and (c)(1), with respect to remuneration

remitted to an individual by a CPEO, for

purposes of federal employment taxes and

Bulletin No. 2019–24

other obligations under the federal employment tax rules, the CPEO is treated as

the employer of any individual performing services for a customer of the CPEO

and covered by a CPEO contract. This

treatment and the tax liability associated

with it makes the CPEO program unlike

other contractual arrangements, including a relationship with an e-file provider.

The Treasury Department and the IRS

continue to view the criminal background

of a CPEO applicant and its responsible

individuals as an important factor in determining whether the CPEO applicant’s

or the CPEO’s certification presents a material risk to the IRS’s collection of federal

employment taxes. Accordingly, the final

regulations do not adopt the suggestion to

rely on professional status data in lieu of

an FBI or other similar background check.

financial institutions described in section

265(b)(5) to hold cash and cash equivalents. One commenter stated that CPEOs

may violate this requirement by keeping

small amounts of cash and cash equivalents on their premises. The commenter noted that this is a common practice

and that certain cash equivalents are not

ordinarily deposited in financial institutions. To address this concern, the final

regulations require CPEO applicants and

CPEOs to hold substantially all of their

cash and cash equivalents in financial institutions described in section 265(b)(5).

This change is intended to allow CPEO

applicants and CPEOs to hold petty cash

and cash equivalents (such as undeposited

checks) on their premises.

c. Waiving confidentiality and privilege

The temporary regulations provide that

CPEO applicants and CPEOs must cause

to be prepared and provided to the IRS, by

the same date they must provide a copy of

their annual audited financial statements,

an opinion of an independent CPA that the

financial statements reflect positive working capital for the fiscal year, unless an

exception applies. In addition, the temporary regulations require this opinion to set

forth in detail, a calculation of the CPEO

applicant’s or CPEO’s working capital and

state that the financial statements are presented fairly in accordance with generally

accepted accounting principles (GAAP).

Two commenters suggested that the final regulations eliminate the requirement

that a CPEO applicant and CPEO have

positive working capital. The commenters maintained that because the specific

requirement of positive working capital

is not included in the language of section

7705, the IRS should not impose this requirement on CPEOs. The commenters

suggested that the IRS, instead, make its

decision regarding whether to certify (or

suspend) a CPEO applicant or CPEO, as

applicable, based on the entity’s financial

situation, experience, and other factors in

their entirety. Additionally, the commenters cautioned against the imposition of a

rigid and difficult-to-monitor requirement.

The Treasury Department and the IRS

consider a CPEO with annual audited financial statements that reflect positive

working capital (as determined in accor-

The temporary regulations require that

CPEOs and responsible individuals take

such actions as are necessary to authorize the IRS to investigate the accuracy

of statements and submissions, including

waiving confidentiality and privilege when

necessary. One commenter noted that this

requirement could be read to imply that

responsible individuals and CPEOs are

required to provide a blanket waiver of

confidentiality and privilege on all issues.

The temporary regulations were not intended to require responsible individuals

and CPEOs to provide a blanket waiver.

However, the Treasury Department and

the IRS recognize that the language in the

temporary regulations could be read more

broadly than intended. Accordingly, and

consistent with similar provisions in Rev.

Proc. 2016-33, the final regulations clarify

that the waiver will be required only in instances in which the IRS is otherwise unable to obtain or confirm the information

it needs to evaluate a CPEO applicant’s

or CPEO’s qualification for certification

(e.g., from relevant third parties, such as

former employers, because of the existence of confidentiality, non-disclosure, or

similar agreements).

d. Financial institution

The temporary regulations require

CPEO applicants and CPEOs to use only

1307

8. Working Capital Requirements

June 10, 2019

dance with GAAP) to present a materially

lower risk to the IRS’s collection of federal employment taxes than a CPEO without positive working capital. Accordingly,

pursuant to section 7705(b)(1) and consistent with several state PEO certification

and registration laws, the final regulations

have retained the positive working capital requirement. The Treasury Department and the IRS recognize that working

capital may fluctuate over the course of a

CPEO’s fiscal year due to normal business

operations. To allow for some fluctuation

in working capital, the final regulations retain the exception to the positive working

capital requirement set forth in the temporary regulations. This exception allows the

CPEO applicant or CPEO to have negative working capital for no more than two

consecutive quarters, provided the CPEO

applicant or CPEO explains the reason it

has negative working capital and demonstrates that the failure to have positive

working capital does not present a material risk to the IRS’s collection of federal

employment taxes.

Several commenters indicated that

CPAs may be prevented from including a

statement on working capital in the CPA

opinion due to certain AICPA limitations

on what can be included in a CPA opinion. As stated in Notice 2016-49, to ensure

consistency with the AICPA guidelines

applicable to CPA opinion letters, these

final regulations have been revised to require a CPEO applicant or CPEO to submit a copy of its annual audited financial

statements and an opinion of a CPA that

the annual audited financial statements are

presented fairly in accordance with GAAP,

provided that the audited annual financial

statements covered by the opinion include

a Note to the Financial Statements that

states that the financial statements reflect

positive working capital or that the CPEO

applicant or CPEO satisfies the positive

working capital exception included in

these final regulations. The Treasury Department and the IRS anticipate making

similar changes in future revisions of Rev.

Proc. 2016-33 and Rev. Proc. 2017-14.

The temporary regulations further require a responsible individual of a CPEO

applicant or CPEO to provide, by the last

day of the second month after the end of

each calendar quarter and beginning with

the most recently completed quarter as of

June 10, 2019

the date of the application for certification,

a statement verifying under penalties of

perjury that the CPEO applicant or CPEO

has positive working capital with respect

to the most recently completed fiscal quarter. The temporary regulations further provide that although CPEO applicants and

CPEOs that are members of a controlled

group, within the meaning of sections

414(b) and (c), and the regulations thereunder, will be treated as a single CPEO

applicant or CPEO for purposes of the

annual audited financial statements, quarterly assertion and attestation, and bond

requirements, the annual and quarterly

requirements imposed with respect to positive working capital apply to each CPEO

applicant or CPEO on a separate basis.

With respect to both the annual and

quarterly requirements regarding positive

working capital, two commenters suggested that these requirements should not

apply on an individual CPEO basis. The

commenters noted that many PEOs have

multiple related PEO entities that maintain combined or consolidated financial

statements, and these entities should be

permitted to demonstrate compliance with

any positive working capital requirement

on an aggregate basis. The commenters

suggested that the IRS could impose a requirement that each related entity guarantee the liabilities of its related CPEOs to

the IRS.

Under the CPEO program, the decision

regarding whether to certify, suspend, or

revoke each CPEO applicant or CPEO (as

applicable) is made on an entity-by-entity

basis. Although the suitability of related

and precursor entities is relevant when

determining whether to certify a CPEO

applicant, the IRS makes a separate certification determination with respect to

each CPEO applicant. Accordingly, the

final regulations adopt without change the

provisions in the temporary regulations

that the annual and quarterly requirements

imposed with respect to positive working

capital apply to each CPEO applicant or

CPEO on a separate basis.

9. Examination Level Attestation

In accordance with section 7705(c)

(3)(B), §301.7705-2T(f)(1)(i) and (f)(3)

(i) of the temporary regulations provide

that CPEOs and CPEO applicants must

1308

provide, on a quarterly basis, an assertion, signed by a responsible individual

under penalties of perjury, stating that the

CPEO has withheld and made deposits of

all federal employment taxes (other than

taxes imposed by chapter 23 of the Code)

as required by subtitle C for such calendar

quarter, and an examination level attestation from a CPA stating that this assertion

is fairly stated in all material respects. One

commenter suggested that the final regulations provide the IRS with authority to

provide an agreed-upon procedural alternative to the examination level attestation

requirement because that option would

provide uniformity, greater certainty, and

potential cost savings. The Treasury Department and the IRS note that section

7705(c)(3)(B) specifically requires an examination level attestation on a quarterly

basis and does not provide authority for

other options. For this reason, these final

regulations do not adopt this suggestion.

10. Bond Requirements

Section 7705(c)(2) sets forth the bond

requirements that a person must satisfy in

order to become and remain a CPEO. The

temporary regulations provide, among

other things, that a CPEO must meet the

bond requirements without posting collateral. Two commenters suggested that the

final regulations remove the requirement

that a CPEO meet the bond requirements

without posting collateral. The commenters suggested that the “no collateral” requirement could limit access to CPEO

certification for “small and medium sized

PEOs,” but the commenters did not suggest what size entity would qualify as

a small or medium sized PEO. As an alternative to removing the requirement in

its entirety, one commenter suggested the

IRS include the fact that a CPEO has obtained a bond with collateral as a factor in

evaluating the application for certification.

Alternatively, one commenter suggested

that a surety be permitted to request collateral for small CPEO applicants (those

with a required surety bond penal sum of

under $1,000,000). Finally, one commenter suggested that the IRS retain the discretion to not automatically revoke a CPEO’s

certification merely because the surety

has sought collateralization of its risk after the CPEO is certified. The commenter

Bulletin No. 2019–24

suggested that the request for collateral be

treated as a material change that must be

reported and explained to the IRS.

One commenter remarked that “[a]s

a general matter, a surety prefers to provide bonds on an uncollateralized basis.”

The commenter further noted that a surety may require collateral if a bond applicant is qualified, but the obligation being

secured is “particularly risky.” The commenter noted that the potential duration of

the CPEO bond (which is the time during

which the IRS may make a claim and collect tax under sections 6501 and 6502)

may make the CPEO bond particularly

risky, and indicated that this increased risk

could conceivably be addressed by a collateral requirement.

As indicated in the preamble to the

temporary regulations, one of the main

benefits of the bond requirement in section 7705(c) is that a CPEO must submit

to the bonding surety’s financial underwriting process to obtain the bond. This

underwriting process provides the IRS

with a certain level of assurance concerning the financial condition of the CPEO.

As of the date of these final regulations,

the IRS has certified 120 CPEOs. Each

CPEO (or controlled group, where applicable) has provided the IRS with a bond

without posting collateral, including several with bond amounts below the $1 million threshold. The Treasury Department

and the IRS view the surety’s financial

underwriting process as a fundamental

component of the bond requirement in

section 7705(c), and have determined

that the purpose of the bond requirement

is substantially undermined if the CPEO

obtains the bond by posting collateral in

the amount of the bond. However, the

Treasury Department and the IRS acknowledge that in certain limited circumstances, an exception to the prohibition

on posting collateral may be appropriate.

Accordingly, these final regulations state

that the Commissioner may provide exceptions to this rule in further guidance.

The Treasury Department and the IRS

will continue to consider this issue in connection with anticipated revisions to Rev.

Proc. 2017-14. In addition, the Treasury

Department and the IRS recognize that in

certain situations, a surety may want to

retain the right to request collateral of a

CPEO and that this right by itself does

Bulletin No. 2019–24

not violate the regulatory requirement

that a CPEO must meet the bond requirements without posting collateral. For this

reason, the final regulations provide that

a surety’s retention of the right to request

collateral does not violate the rule against

posting collateral, as long as no collateral

is actually required by the surety or posted by the CPEO. However, if a surety later exercises this right and seeks collateral

for a CPEO’s bond, this action qualifies

as a material change that must be timely

reported to the IRS and will result in the

revocation of the CPEO’s certification

if the CPEO cannot obtain a bond from

another surety that does not require the

CPEO to post collateral, subject to any

exceptions the Commissioner may provide, as described above.

The Treasury Department and the

IRS also received comments requesting

that the regulations clarify whether a

CPEO must provide a separate bond for

each year or adjust the penal sum of the

bond based on its liability for the applicable bond period. One commenter also

requested that the Treasury Department

and the IRS define the terms strengthening bond and superseding bond. Consistent with guidance issued in Rev. Proc.

2017-14, these regulations clarify that

the bond, any riders thereto, and any

strengthening bonds are one continuous

obligation from the effective date of the

bond through the date the bond is superseded or cancelled. These regulations

also provide definitions for riders, and

for strengthening, superseding, and new

bonds, and incorporate other guidance

from Rev. Proc. 2017-14.

the Commissioner to provide for other accounting methods in further guidance, and

the Treasury Department and the IRS will

continue to consider the issue of whether

to allow CPEOs to use the cash method of

accounting.

11. Accrual Method of Accounting

Under section 7705(e)(2)(E), a service contract must provide that a CPEO

will maintain employee records, and the

proposed regulations include the same

requirement with respect to a CPEO contract. One commenter asked for further

guidance regarding this requirement to

maintain employee records. Although

the statutory and regulatory provisions

regarding service agreements and CPEO

contracts require that the contract or

agreement include certain provisions, including that the CPEO maintain employee

records, the CPEO and its customers and

client may choose to include additional

provisions in their contracts. To allow for

Consistent with section 7705(b)(4)

of the Code, the temporary regulations

provide that a CPEO must compute its

taxable income using an accrual method

of accounting or, if applicable, another

method that the Commissioner provides

for in further guidance. One commenter

requested that the IRS issue guidance approving the cash method of accounting as

long as the entity provides audited financial statements using the accrual method.

The final regulations do not adopt this

suggestion. Like the temporary regulations, however, the final regulations allow

1309

12. Tip Reporting

The ABLE Act added section 6053(c)

(8) to the Code regarding the application

of the reporting requirements relating to

certain large food or beverage establishments with respect to CPEOs and their

customers. Section 6053(c)(8) provides

that the CPEO customer with respect to

whom a work site employee performs

services is the employer for purposes of

reporting under section 6053(c), and the

CPEO is required to furnish to the customer and the IRS any information the IRS

prescribes as necessary to complete this

reporting. One commenter requested that

these regulations clarify that the information required to be provided by section

6053(c)(8) is limited to information generated by the CPEO as a function of the

services it performs as a CPEO and that is

not already available to the customer. The

Treasury Department and the IRS have

determined that, because amendments to

the regulations under section 6053 were

not included in the notice of proposed

rulemaking, these final regulations will

not address information that must be provided under section 6053(c)(8). However,

the Treasury Department and the IRS will

continue to consider this issue.

13. Maintain Employee Records

June 10, 2019

some flexibility and business judgment

in negotiating CPEO contracts, the final

regulations do not adopt the suggestion to

expand upon the statutory requirements

concerning maintaining employee records, and retain without modification the

requirements for CPEO contracts set forth

in the proposed regulations.

14. Marketing as CPEOs

One commenter asked the Treasury

Department and the IRS to clarify that

only CPEOs may market themselves as

CPEOs. Section 7705(f) and §301.77052(a)(3) and (n)(4)(ii) provide that the IRS

will make available the name and address

of every person certified as a CPEO and

every CPEO whose certification is suspended or revoked. These regulations

impose rules and requirements on CPEO

applicants and CPEOs, but they do not apply to those entities that do not apply for

or obtain certification. Whether an entity

other than a CPEO incorrectly represents

its classification in its business materials is not a matter for IRS enforcement.

Accordingly, the final regulations do not

adopt this suggestion, but the Treasury

Department and the IRS encourage customers and clients of entities claiming to

be CPEOs to confirm that those entities

are listed and remain listed as CPEOs on

www.irs.gov.

15. Confidentiality of Information

One commenter requested guidance indicating that information submitted to the

IRS will be kept confidential. This comment is beyond the scope of these regulations, so no changes were made in these

final regulations. Generally, returns and

return information, including CPEO applications, are confidential and may only

be disclosed as authorized by the Internal

Revenue Code. See section 6103. Section

7705(f) provides for the public disclosure

of the name and address of CPEOs and

whether a CPEO’s certification was suspended or revoked.

16. No Inference Language

One commenter requested that the

regulations reiterate language in section

206(h) of the ABLE Act that nothing in

June 10, 2019

section 206 of the ABLE Act (which includes sections 3511 and 7705) shall be

construed to create any inference with

respect to the determination of who is an

employee or employer (1) for federal tax

purposes (other than the purposes set forth

in the amendments made by section 206),

or (2) for purposes of any other provision

of law. This suggested addition to the final regulations is not necessary. Section

7705(g) sufficiently addresses the implications of the no inference provisions with

respect to the Code. It provides that except to the extent necessary for purposes

of section 3511, nothing in section 7705

shall be construed to affect the determination of who is an employee or employer

for purposes of Title 26. Comments related to other laws are beyond the scope

of these regulations, and they are not addressed herein.

17. Other Changes

In addition to the changes discussed

above, these final regulations include

non-substantive or clarifying changes to

the text of the proposed and temporary

regulations.

Special Analyses

This regulation is not subject to review

under section 6(b) of Executive Order

12866 pursuant to the Memorandum of

Agreement (April 11, 2018) between the

Treasury Department and the Office of

Management and Budget regarding review of tax regulations. It is hereby certified that the collection of information

contained in these regulations will not

have a significant economic impact on a

substantial number of small entities. The

collection of information is in §§31.35111(g) and 301.7705-2. The certification is

based on the following:

The Treasury Department and the

IRS anticipate that the organizations that

choose to apply for this voluntary certification program are likely to be entities

that already have many of the systems

and processes in place that are needed

to comply with these regulations. For

example, it is expected that CPEOs will

generally maintain annual audited financial statements during the normal course

of their business, rather than solely as

1310

a result of §301.7705-2(e). Moreover,

the requirements in §301.7705-2(e) and

(f) for demonstrating positive working

capital on an annual basis and for the

quarterly assertions regarding federal

employment tax compliance build upon

requirements already reflected in many

state PEO certification and registration

laws, thereby minimizing the economic impact on those CPEO applicants

already subject to the similar state law

requirements.

In addition, many of the requirements

in §§31.3511-1(g) and 301.7705-2 that

impose a collection of information on

CPEOs constitute one-time notifications

to the IRS, customers, or clients or notifications that relate to events in the life cycle of a CPEO that are less predictable and

may be infrequent – such as transfers of

existing CPEO contracts, making material

changes to agreements previously provided to the IRS, suspension or revocation of

the CPEO’s certification, or the reclassification of employees at a particular work

site as non-work site covered employees

– and thus will have a minimal economic

impact on the CPEO. Moreover, the Treasury Department and the IRS expect that

CPEOs participating in this voluntary program will be able to build upon pre-existing systems and processes through which

they already communicate with their clients.

For these reasons, pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter

6) it is hereby certified that this rule will

not have a significant economic impact

on a substantial number of small entities.

Pursuant to section 7805(f) of the Code,

the NPRM preceding these regulations

was submitted to the Chief Counsel for

Advocacy of the Small Business Administration for comment on their impact on

small business.

Drafting Information

The principal authors of these regulations are Melissa Duce, Andrew Holubeck, Nina Roca, and Neil Shepherd of the

Office of Associate Chief Counsel (Employee Benefits, Exempt Organizations,

and Employment Taxes). However, other

personnel from the Treasury Department

and the IRS participated in the development of these regulations.

Bulletin No. 2019–24

Statement of Availability of IRS

Documents

IRS Revenue Procedures, Revenue

Rulings notices, and other guidance cited in this document are published in the

Internal Revenue Bulletin (or Cumulative Bulletin) and are available from the

Superintendent of Documents, U.S. Government Printing Office, Washington, DC

20402, or by visiting the IRS website at

http://www.irs.gov.

*****

Adoption of Amendments to the

Regulations

Accordingly, 26 CFR parts 31, 301,

and 602 are amended as follows:

PART 31—EMPLOYMENT TAXES

AND COLLECTION OF INCOME TAX

AT THE SOURCE

Paragraph 1. The authority citation for

part 31 is amended by adding an entry for

§31.3511-1 in numerical order to read in

part as follows:

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

Section 31.3511-1 is also issued under

26 U.S.C. 3511(h).

*****

Par. 2. Section 31.3511-1 is added to

subpart F to read as follows:

§31.3511-1 Certified professional employer organization.

(a) Treatment as employer--(1) In general. For purposes of the federal employment taxes and other obligations imposed

under chapters 21 through 25 of subtitle C

of the Internal Revenue Code (federal employment taxes), a certified professional

employer organization (CPEO) (as defined in §301.7705-1(b)(1) of this chapter)

is treated as the employer of any covered

employee (as defined in §301.7705-1(b)

(5) of this chapter), but only with respect

to remuneration remitted by the CPEO to

the covered employee.

(2) Work site employee. In the case of

a covered employee who is a work site

employee (as defined in §301.7705-1(b)

(17) of this chapter) of the customer, no

person other than the CPEO is treated as

the employer of the work site employee

with respect to the customer for purposes

of federal employment taxes imposed on

Bulletin No. 2019–24

remuneration remitted by the CPEO to the

work site employee.

(3) Non-work site covered employee. In

the case of a covered employee who is not

a work site employee, a person other than

the CPEO is also treated as an employer of

the employee for purposes of federal employment taxes imposed on remuneration

remitted by the CPEO to the employee if

such person is determined to be an employer of the employee without regard to

the application of this paragraph (a) and

section 3511.

(b) Exemptions, exclusions, definitions,

and other rules--(1) In general. Solely

for purposes of federal employment taxes imposed on remuneration remitted by

a CPEO to a covered employee, the application of exemptions, exclusions, definitions, and other rules that are based on

the type of employer is presumed to be

based on the type of employer of the customer of the CPEO for whom the covered

employee performs services. If a covered

employee performs services for more than

one customer of the CPEO during the calendar year, the presumption described in

the previous sentence applies separately to

remuneration remitted by the CPEO to the

covered employee for services performed

with respect to each such customer.

(2) Presumption rebutted. The presumption set forth in paragraph (b)(1) of

this section may be rebutted if either the

Commissioner determines, or the CPEO

demonstrates by clear and convincing evidence, that the relationship between the

customer and the covered employee is

not the legal relationship of employer and

employee as set forth in §31.3401(c)-1. If

such a determination or demonstration is

made, then, with respect to remuneration

remitted by a CPEO to a covered employee, the application of exemptions, exclusions, definitions, and other rules that

are based on the type of employer will

be based on the type of employer of the

person determined by the Commissioner

or demonstrated by the CPEO to be the

common law employer of the covered employee in accordance with §31.3401(c)-1.

(3) No inference from presumption.

The presumption set forth in paragraph

(b)(1) of this section does not create any

inference with respect to the determination of who is an employer or employee or

whether the legal relationship of employer

1311

and employee exists for federal tax purposes or for purposes of any other provision of law (other than for paragraph (b)

(1) of this section).

(c) Annual wage limitation, contribution base, and withholding threshold--(1)

CPEO has separate taxable wage base,

contribution base, and withholding

threshold. For purposes of applying the

annual wage limitations under sections

3121(a)(1) and 3306(b)(1) (relating to

the Federal Insurance Contributions Act

and the Federal Unemployment Tax Act,

respectively), the contribution base under

section 3231(e)(2) (relating to the Railroad Retirement Tax Act), and the withholding threshold under section 3102(f)

(1) (relating to the Additional Medicare

Tax), remuneration received by a covered

employee from a CPEO for performing

services for a customer of the CPEO

within any calendar year is subject to a

separate annual wage limitation, contribution base, and withholding threshold

that are each computed without regard

to any remuneration received by the covered employee during the calendar year

from any other employer (including, if

applicable, remuneration received directly from the customer receiving services

from the employee). Notwithstanding the

preceding sentence, a CPEO is treated as

a successor or predecessor employer for

purposes of the annual wage limitations

and contribution base upon entering into

or terminating a CPEO contract (as defined in §301.7705‑1(b)(3) of this chapter) with respect to a work site employee, as described in paragraph (d) of this

section.

(2) Performance of services for more

than one customer. If, during a calendar

year, a covered employee receives remuneration from a CPEO for services performed by the covered employee for more

than one customer of the CPEO, the annual wage limitation, contribution base,

and withholding threshold do not apply

to the aggregate remuneration received by

the covered employee from the CPEO for

services performed for all such customers.

Rather, the annual wage limitation, contribution base, and withholding threshold

apply separately to the remuneration received by the covered employee from the

CPEO with respect to services performed

for each customer.

June 10, 2019

(d) Successor employer status--(1) In

general. For purposes of sections 3121(a)

(1), 3231(e)(2)(C), and 3306(b)(1), a

CPEO and its customer are treated as-(i) A successor and predecessor employer, respectively, upon entering into a

CPEO contract with respect to a work site

employee who is performing services for

the customer; and

(ii) A predecessor and successor employer, respectively, upon termination of

the CPEO contract between the CPEO and

the customer with respect to the work site

employee who is performing services for

the customer.

(2) Non-work site covered employee. A

CPEO entering into a CPEO contract with

a customer during a calendar quarter with

respect to a covered employee who is not

a work site employee at any time during

that calendar quarter will not be treated as

a successor employer (and the customer

will not be treated as a predecessor employer) for purposes of paragraph (d)(1)

(i) of this section regardless of whether,

during the term of the CPEO contract,

the covered employee subsequently becomes a work site employee. Similarly, a

CPEO terminating a CPEO contract with

a customer during a calendar quarter with

respect to a covered employee who is not

a work site employee at any time during

that calendar quarter will not be treated as

a predecessor employer (and the customer will not be treated as a successor employer) for purposes of paragraph (d)(1)

(ii) of this section regardless of whether,

during the term of the CPEO contract, the

covered employee had previously been a

work site employee.

(e) Treatment of credits--(1) In general. For purposes of the credits specified in

paragraph (e)(2) of this section-(i) The credit with respect to a work

site employee performing services for a

customer applies to the customer, not to

the CPEO; and

(ii) In computing the credit, the customer, and not the CPEO, is to take into

account wages and federal employment

taxes paid by the CPEO with respect to

the work site employee and for which the

CPEO receives payment from the customer.

(2) Credits specified. A credit is specified in this paragraph (e) if such credit is

allowed under--

June 10, 2019

(i) Section 41 (credit for increasing research activity);

(ii) Section 45A (Indian employment

credit);

(iii) Section 45B (credit for portion of

employer social security taxes paid with

respect to employee cash tips);

(iv) Section 45C (clinical testing expenses for certain drugs for rare diseases

or conditions);

(v) Section 45R (employee health insurance expenses for small employers);

(vi) Section 45S (employer credit for

paid family and medical leave);

(vii) Section 51 (work opportunity

credit);

(viii) Section 1396 (empowerment

zone employment credit);

(ix) Statutory employee retention credits that are similar to the employee retention credit in section 1400R and that

provide disaster relief to employers in

designated disaster areas; and

(x) Any other section specified by the

Commissioner in further guidance (as defined in §301.7705-1(b)(8) of this chapter).

(f) Section not applicable to related

customers, self-employed individuals, and

other circumstances. This section does not

apply-(1) In the case of any customer that-(i) Has a relationship to a CPEO described in section 267(b) (including, by

cross-reference, section 267(f)) or section

707(b), except that “10 percent” shall be

substituted for “50 percent” wherever it

appears in such sections; or

(ii) Has commenced a CPEO contract

with the CPEO but such commencement

has not been reported to the IRS as described in paragraph (g)(3)(i) of this section; or

(2) To remuneration paid by a CPEO to

any self-employed individual (as defined

in §301.7705-1(b)(14) of this chapter) in

that capacity;

(3) To any CPEO contract that a CPEO

enters into while its certification has been

suspended by the IRS; or

(4) To any CPEO whose certification

has been revoked or voluntarily terminated for periods after the effective date of

revocation or voluntary termination.

(g) Reporting and recordkeeping--(1)

Reporting and recordkeeping for employers. A CPEO that is treated as an employer

1312

of a covered employee pursuant to paragraph (a) of this section must meet all reporting and recordkeeping requirements

described in subtitle F of the Code that are

applicable to employers in a manner consistent with such treatment.

(2) Reporting on magnetic media--(i)

In general. A CPEO must file on magnetic

media any Form 940, “Employer’s Annual Federal Unemployment (FUTA) Tax

Return,” Form 941, “Employer’s QUARTERLY Federal Tax Return,” and Form

943, “Employer’s Annual Federal Tax

Return for Agricultural Employees,” and

all required accompanying schedules, as

well as such other returns, schedules, and

other required forms and documents as is

required by further guidance.

(ii) Waiver. The Commissioner may

waive the requirements of this paragraph

(g)(2) in case of undue economic hardship

(including economic hardship resulting

from temporary software and technological issues). The principal factor in determining hardship will be the amount, if

any, by which the cost of filing the return,

schedule, or other required form or document on magnetic media in accordance

with this paragraph (g)(2) exceeds the cost

of filing on or by other media. A request

for a waiver must be made in accordance

with applicable guidance. The waiver

must specify the type of filing (that is, the

name of the form or schedule) and the period to which it applies. In addition, the

waiver will be subject to such terms and

conditions regarding the method of filing

as may be prescribed by the Commissioner in further guidance.

(iii) Magnetic media. The term magnetic media means any magnetic media

permitted under applicable guidance.

These generally include electronic filing,

as well as other media specifically permitted under the applicable guidance.

(3) Reporting to the IRS by CPEOs.

A CPEO must report the following to the

IRS in such time and manner, and including such information, as the Commissioner may prescribe in further guidance:

(i) The commencement or termination of any CPEO contract (as defined in

§301.7705-1(b)(3) of this chapter) with a

customer, or any service agreement as described in §31.3504-2(b)(2) with a client,

and the name and employer identification

number (EIN) of such customer or client.

Bulletin No. 2019–24

(ii) With any Form 940, Form 941, and

Form 943 that it files, all required schedules, including, but not limited to, the

applicable Schedule R (or any successor

form), containing such information as the

Commissioner may require about each of

its customers under a CPEO contract (as

defined in §301.7705-1(b)(3) of this chapter) and each of its clients under a service

agreement (as described in §31.3504-2(b)

(2)). A CPEO must file Form 940, Form

941, and Form 943, along with all required

schedules, on magnetic media, unless the

CPEO is granted a waiver by the Commissioner in accordance with paragraph (g)

(2)(ii) of this section.

(iii) A periodic verification that it

continues to meet the requirements of

§301.7705-2 of this chapter, as described

in §301.7705-2(j).

(iv) Any change that materially affects

the continuing accuracy of any agreement

or information that was previously made

or provided by the CPEO to the IRS, as

described in §301.7705-2(k) of this chapter.

(v) A copy of its audited financial statements and an opinion of a certified public

accountant regarding such financial statements, as described in §301.7705-2(e)(1)

of this chapter.

(vi) The quarterly statements, assertions, and attestations regarding those assertions described in §301.7705-2(f)(1) of

this chapter.

(vii) Any information the IRS determines is necessary to promote compliance

with respect to the credits described in

paragraph (e)(2) of this section and provided in section 3302.

(viii) Any other information the Commissioner may prescribe in further guidance.

(4) Reporting to customers by CPEOs.

A CPEO must meet the following reporting requirements with respect to its

customers in such time and manner, and

including such information, as the Commissioner may prescribe in further guidance:

(i) Provide each of its customers with

the information necessary for the customer to claim the credits described in paragraph (e)(2) of this section.

(ii) Notify any customer if its CPEO

contract has been transferred to another

person (or if another person will report,

Bulletin No. 2019–24

withhold, or pay, under such other person’s EIN, any applicable federal employment taxes with respect to the wages of

any individuals covered by its CPEO contract) and provide the customer with the

name and EIN of such other person.

(iii) If the CPEO’s certification is

suspended or revoked as described in

§301.7705-2(n) of this chapter, notify

each of its current customers of such suspension or revocation.

(iv) If any covered employees are not,

or cease to be, work site employees because they perform services at a location at

which the 85 percent threshold described

in §301.7705-1(b)(17) of this chapter is

not met, notify the customer that it may

also be liable for federal employment taxes imposed on remuneration remitted by

the CPEO to such covered employees, as

described in paragraph (a)(3) of this section.

(5) Information and agreements in any

contract or agreement between a CPEO

and a customer or client. Any CPEO contract (as defined in §301.7705-1(b)(3) of

this chapter) between a CPEO and a customer or service agreement described in

§31.3504-2(b)(2) between a CPEO and a

client must-(i) In the case of a contract that is a

CPEO contract-(A) Contain the name and EIN of the

CPEO reporting, withholding, and paying

any applicable federal employment taxes with respect to any remuneration paid

to individuals covered by the contract or

agreement;

(B) Require the CPEO to provide to the

customer the notices and information required by paragraph (g)(4) of this section;

(C) Describe the information that the

CPEO will provide that is necessary for

the customer to claim the credits specified

in paragraph (e)(2) of this section; and

(D) Require the CPEO to notify the

customer that the customer may also be

liable for federal employment taxes on remuneration remitted by the CPEO to covered employees if the work sites at which

they perform services do not (or ever

cease to) meet the 85 percent threshold

described in §301.7705-1(b)(17) of this

chapter; and

(ii) In the case of a service agreement

described in §31.3504-2(b)(2) that is not

a CPEO contract (and thus the individuals

1313

covered by that contract are not covered

employees), or if this section does not apply to the contract under paragraph (f) of

this section, notify, or be accompanied by

a notification to, the client that the service

agreement or contract is not covered by

section 3511 and does not alter the client’s

liability for federal employment taxes on

remuneration remitted by the CPEO to the

employees covered by the service agreement or contract.

(h) Penalties and additions to tax--(1)

In general. A CPEO that is treated as an

employer of a covered employee under

this section and that is required to meet the

reporting requirements of an employer is

subject to the same penalties and additions

to tax as an employer with respect to such

reporting requirements, including, but not

limited to, penalties and additions to tax

under sections 6651, 6656, 6672, 6721,

6722, and 6723.

(2) Failures to timely make reports

required under section 3511. CPEOs are

subject to penalty under section 6652(n)

with respect to reports required to be made

to the IRS in paragraphs (g)(1) and (3) of

this section and reports required to be

made to customers in paragraph (g)(4) of

this section.

(3) Failures to attach Schedule R. A

CPEO is subject to penalty under section

6652(n) for failure to attach Schedule R

(or successor form) to Forms 941, 940,

or 943 as required by paragraph (g)(3)

(ii) of this section. A CPEO is also subject

to penalty under section 6723 for failure

to include the EIN of each customer on

Schedule R of Form 941, 940, or 943. See

§301.6723-1 of this chapter for the application of the section 6723 penalty in the

case of multiple failures on a single document.

(4) Failures to file on magnetic media. With respect to the requirement in

paragraph (g)(3)(ii) of this section that a

CPEO must file Forms 940, 941, and 943,

along with all required schedules, on

magnetic media, a failure to file on magnetic media does not constitute a failure

to file for purposes of section 6651(a)(1)

nor does it constitute a failure to make

a report for purposes of section 6652(n).

Rather, the requirement to file Forms

940, 941, and 943 on magnetic media is a

condition of maintaining certification as

a CPEO.

June 10, 2019

(i) Applicability date. The rules in this

section apply on and after May 3, 2019.

PART 301—PROCEDURE AND ADMINISTRATION

Par. 3. The authority citation for part

301 is amended by removing entries for

§§301.7705-1T and 301.7705-2T and

adding entries for §§ 301.7705-1 and

301.7705-2 in numerical order to read in

part as follows:

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

Section 301.7705-1 also issued under

26 U.S.C. 7705(h).

Section 301.7705-2 also issued under

26 U.S.C. 7705(h).

*****

Par. 4. Sections 301.7705-1 and

301.7705-2 are added to read as follows:

§301.7705-1 Certified professional employer organization.

(a) In general. The definitions set forth

in this section apply for purposes of this

section, §§31.3511-1 and 301.7705-2, and

sections 3302(h), 3303(a)(4), 6053(c)(8),

and 7528(b)(4).

(b) Definitions--(1) Certified professional employer organization (CPEO)

means a person that applies to be certified

as a CPEO in accordance with §301.77052(a) and has been certified by the Internal

Revenue Service (IRS) as meeting the requirements of §301.7705-2. For purposes

of §301.7705-2(g)(2), the term CPEO also

includes the person before it applied for

certification and while its application is

pending with the IRS. For all other purposes, a person is a CPEO as of the effective date of its certification (as specified in the certification notice described in

§301.7705-2(a)(2)) and until its certification is revoked by the IRS (as described in

§301.7705-2(n)) or, if earlier and applicable, until the CPEO voluntarily terminates

its certification in the time and manner

prescribed by the Commissioner in further

guidance.

(2) CPEO applicant means a person

that has applied to be certified as a CPEO

in accordance with §301.7705-2(a) and

whose application is pending with the

IRS.

(3) CPEO contract means a service

contract between a CPEO and a customer

that is in writing and provides that, with

respect to an individual providing services

to the customer, the CPEO will--

June 10, 2019

(i) Assume responsibility for payment

of wages to the individual, without regard

to the receipt or adequacy of payment

from the customer for the services;

(ii) Assume responsibility for reporting, withholding, and paying any applicable federal employment taxes with respect

to the individual’s wages, without regard

to the receipt or adequacy of payment

from the customer for the services;

(iii) Assume responsibility for any employee benefits that the service contract

may require the CPEO to provide to the

individual, without regard to the receipt or

adequacy of payment from the customer

for such benefits;

(iv) Assume responsibility for recruiting, hiring, and firing the individual in

addition to the customer’s responsibility

for recruiting, hiring, and firing the individual;

(v) Maintain employee records relating

to the individual; and

(vi) Agree to be treated as a CPEO for

purposes of section 3511 with respect to

the individual.

(4) Certified public accountant (CPA)

means a certified public accountant who-(i) With respect to a CPEO applicant

or CPEO, is independent of the CPEO

applicant or CPEO (as prescribed by the

American Institute of Certified Public Accountants’ Professional Standards, Code

of Professional Conduct, and its interpretations and rulings);

(ii) Is not currently under suspension or

disbarment from practice before the IRS;

(iii) Is duly qualified to practice as a

CPA in any state;

(iv) Files with the IRS a written declaration that he or she is currently qualified

to practice as a CPA in any state; and

(v) Meets such other requirements as

the Commissioner may prescribe in further guidance.

(5) Covered employee means, with respect to a customer, any individual (other

than a self-employed individual, as defined in paragraph (b)(14) of this section)

who performs services for the customer

and who is covered by a CPEO contract

between the CPEO and the customer.

(6) Customer--(i) In general. Except

as provided in paragraph (b)(6)(ii) of this

section, a customer is any person who enters into a CPEO contract with a CPEO.

1314

(ii) Persons who are not customers. A

provider of payroll services that uses its

own EIN for filing federal employment tax

returns on behalf of its clients (or that used

its own EIN immediately prior to entering

into a service contract with the CPEO) is

not a customer, even if it has entered into

a service contract with the CPEO that

meets all of the requirements for a CPEO

contract described in paragraph (b)(3) of

this section other than being a contract between a CPEO and a customer.

(7) Federal employment taxes mean

the taxes imposed by subtitle C of the Internal Revenue Code.

(8) Guidance includes guidance published in the Federal Register or Internal

Revenue Bulletin, as well as administrative guidance such as forms, instructions,

publications, or other guidance on the irs.

gov Web site.

(9) Partnership means a business entity (as described in §301.7701-2(a)) that is

classified as a partnership for federal tax

purposes under §§301.7701-1, 301.77012, and 301.7701-3. Accordingly, any references to a managing member or general

partner of a partnership mean a managing

member or general partner of an entity

that is classified as a partnership for federal tax purposes.

(10) Precursor entity--(i) In general. A

precursor entity means, with respect to a

CPEO applicant, any related entity of the

CPEO applicant that is or was a provider

of payroll services that-(A) Has made a substantial asset transfer to the CPEO applicant during the calendar year in which the CPEO applicant

applies for certification or any of the three

preceding calendar years or plans to make

such a substantial asset transfer while the

application for certification is pending or

in the 12-month period following the date

of the CPEO applicant’s application for

certification; or

(B) Has ceased operations or dissolved

during the calendar year in which the

CPEO applicant applied for certification

or any of the three preceding calendar

years.

(ii) Related. For purposes of this paragraph (b)(10), a provider of payroll services is considered a related entity of a

CPEO applicant if it is a related entity

within the meaning of paragraph (b)(12)

of this section or if it would be or would

Bulletin No. 2019–24

have been such a related entity based on

the ownership and responsible individuals

of the provider of payroll services at the

time of its substantial asset transfer, ceasing of operations, or dissolution, as applicable, and the ownership and responsible

individuals of the CPEO applicant at the

time of its application.

(11) Provider of payroll services

means a person that provides federal employment tax administration, payroll services, or other similar federal employment

tax-related compliance services to clients,

including, but not limited to, collecting,

reporting, and paying federal employment

taxes with respect to wages or compensation paid by the person to individuals performing services for the clients. A provider of payroll services includes, but is not

limited to, a CPEO.

(12) Related entity means, with respect

to a CPEO applicant or CPEO, any person

that meets one or more of the following

criteria:

(i) The person is a member of a controlled group of which the CPEO applicant or CPEO is also a member. Additionally, CPEO applicants and CPEOs

that, but for their status as disregarded

entities would separately be members of

a controlled group, are treated as members of a controlled group for purposes of

this paragraph (b)(12)(i). For purposes of

this paragraph (b)(12)(i), controlled group

has the meaning given to such term by

sections 414(b) and (c) and §§1.414(b)-1

and 1.414(c)-1 through 1.414(c)-6 of this

chapter, except that-(A) With respect to a person that is not

a provider of payroll services “more than

50 percent” will be substituted for “at least

80 percent” each place it appears in section 1563(a) (which is cross-referenced

in section 414(b) and §1.414(c)-2 of this

chapter); and

(B) With respect to a person that is a

provider of payroll services, “more than 5

percent” will be substituted for “at least 80

percent” each place it appears in section

1563(a) and §1.414(c)-2 of this chapter; or

(ii) The person is a provider of payroll

services and-(A) A majority of the directors or a

majority of the officers (as described in

paragraph (b)(13)(ii) of this section) of the

CPEO applicant or CPEO are directors or

officers (as described in paragraph (b)(13)

Bulletin No. 2019–24

(ii) of this section), respectively, of the

provider of payroll services; or

(B) An individual is a responsible individual of both the provider of payroll

services and the CPEO applicant or CPEO

by reason of paragraph (b)(13)(i) of this

section.

(13) Responsible individual means,

with respect to a CPEO applicant or

CPEO, (or, for purposes of paragraph (b)

(10)(ii) or (b)(12)(ii) of this section, a provider of payroll services), the following

individuals:

(i) Any individual who owns, directly

or indirectly, applying the constructive

ownership rules of section 1563(e) with

respect to stock ownership and substituting the term “interest” for the term

“stock” and the term “partnership” for the

term “corporation” used in that section, as

appropriate for purposes of determining

whether an interest in a partnership is indirectly owned by any person, 33 percent

or more of-(A) In the case of a corporation, the total combined voting power of all classes

of stock entitled to vote of such corporation or the total value of shares of all classes of stock of such corporation; or

(B) In the case of a partnership, the

capital interest or profits interest of such

partnership.

(ii) Any individual who is a director or

an officer. For purposes of this paragraph

(b)(13)(ii), a director is a voting member

of the governing body (that is, the board

of directors or equivalent controlling body

authorized under state law to make governance decisions on behalf of the organization), and the officers are determined

by reference to the organizing document,

bylaws, or resolutions of the governing

body, or otherwise designated consistent

with state law. Officers may include individuals such as a president, vice-president, secretary, and treasurer.

(iii) Any individual who, regardless of

title, has ultimate responsibility for implementing the decisions of the organization’s

governing body. An individual who serves

with the title of chief executive officer, executive director, and/or president has this

ultimate responsibility. An individual with

this ultimate responsibility may include

an individual who is not treated as an employee of the organization. If this ultimate

responsibility resides with two or more

1315

individuals (for example, co-presidents),

who may exercise such responsibility in

concert or individually, then each such individual is a responsible individual.

(iv) Any individual who, regardless of

title, has ultimate responsibility for supervising the management, administration,

or operation of the organization. An individual who serves with the title of chief

operating officer has this ultimate responsibility. An individual with this ultimate

responsibility may include an individual

who is not treated as an employee of the

organization. If this ultimate responsibility resides with two or more individuals,

who may exercise such responsibility in

concert or individually, then each such individual is a responsible individual.

(v) Any individual who, regardless of

title, has ultimate responsibility for managing the organization’s finances. An individual who serves with the title of chief

financial officer or treasurer has this ultimate responsibility. An individual with

this ultimate responsibility may include

an individual who is not treated as an

employee of the organization. If this ultimate responsibility resides with two or

more individuals who may exercise the

responsibility in concert or individually,

then each such individual is a responsible

individual.

(vi) In the case of a partnership, any

individual who is a managing member or

general partner.

(vii) In the case of a sole proprietorship, the sole proprietor.

(viii) In the case of a disregarded entity

owned by a corporation or partnership, the

responsible individuals of that corporation

or partnership.

(ix) In the case of a disregarded entity owned by an individual, the individual

owner.

(x) Any other individual with primary

responsibility for the organization’s federal employment tax compliance.

(14) Self-employed individual means

an individual with net earnings from

self-employment (as defined in section

1402(a) without regard to the exceptions

thereunder) derived from providing services covered by a CPEO contract, whether such net earnings from self-employment are derived from providing services

as a non-employee to a customer of the

CPEO, from the individual’s own trade

June 10, 2019

or business as a sole proprietor customer

of the CPEO, or as an individual who is a

partner in a partnership that is a customer

of the CPEO, but only with regard to such

net earnings.

(15) Substantial asset transfer means

any transfer of 35 percent or more of the

value of the operating assets of the person making the transfer, whether through

one or a series of transactions and whether accomplished through sale, lease, gift,

assignment, succession, merger, consolidation, corporate separation, or any other

means. For purposes of this paragraph (b)

(15), operating assets include both tangible and intangible resources related to the

conduct of the person’s trade or business,

including, but not limited to, such intangible assets as contracts, agreements, receivables, employees, and goodwill (which

includes the value of a trade or business

based on expected continued customer patronage due to its name, reputation, or any

other factors). In the case of a contract described in section 7705(e)(2) or a service

agreement described in §31.3504-2(b)(2)

of this chapter entered into by a provider

of payroll services, even if the contract or

agreement is not sold, gifted, assigned, or

otherwise formally transferred to a CPEO

applicant, it will be considered transferred

from the provider of payroll services to

the CPEO applicant if the CPEO applicant

reports, withholds, or pays, under its employer identification number (EIN), any

applicable federal employment taxes with

respect to the wages of any individuals

covered by the contract or agreement.

(16) Work site means a physical location at which an individual regularly performs services for a customer of a CPEO

or, if there is no such location, the location

from which the customer assigns work to

the individual. A work site may not be the

individual’s residence or a telework site

unless the customer requires the individual to work at that site. For purposes of

this paragraph (b)(16), work sites that are

contiguous locations will be treated as a

single physical location and thus a single

work site, and noncontiguous locations

will be treated as separate physical locations and thus separate work

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