# Bulletin No. 2019–24

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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
for the matters published during the preceding months. These
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

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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

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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

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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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Airs%3Adffc0be5234417e7. Public record. Not legal advice.