Rev. Rul. 83-55

Rev. Rul. 83-55 [FN1]

                       Internal Revenue Service
                                 Revenue Ruling

        WITHHOLDING ON INTEREST AND DIVIDENDS;  WAIVER;  UNDUE HARDSHIP

                           Published: April 11, 1983

SECTION 3451. - -INCOME TAX COLLECTED AT SOURCE ON INTEREST, DIVIDENDS, AND PATRONAGE DIVIDENDS, 26 CFR 31.3451(a)-1: Requirement of withholding on payments of interest, dividends, and patronage dividends

  Withholding on interest and dividends;  waiver;  undue hardship.  Examples are given of payors of interest, dividends, and patronage dividends who have experienced undue hardship sufficient to be granted a waiver from the withholding requirements for a period not to exceed 6 months.

ISSUE

  In the following situations have the payors of interest, dividends, and patronage dividends experienced undue hardship so that the payor should be granted a temporary waiver from the withholding requirements required by section 3451(a) of the Internal Revenue Code?

FACTS

  Situation 1:  Bank M and Bank N merge on March 1, 1983.  Although Bank MN devotes all of its data processing personnel to consolidating its data processing systems and records and to implementing withholding, MN does not have sufficient time to reprogram and test all of its withholding data processing systems before July 1, 1983.  MN projects that it will accomplish reprogramming a withholding system for its retail operations by July 1, 1983, but that reprogramming a withholding system for the trust operations of MN will require an additional 45 days.  MN can only implement withholding with respect to the trust operations by hiring additional employees to perform the task manually or by contracting with a third party to perform the task. Either alternative would result in a substantial cost that MN would not incur if it were allowed to defer withholding with respect to its trust operations until August 15, 1983.

  Situation 2:  Broker O is a small broker-dealer which is in the process of converting its operations from a manual to a data processing system.  On December 1, 1982, O purchased data processing hardware and software which O expects to be installed on June 15, 1983.  O projects that it will require 7 weeks to convert its records to the data processing system and test it. O can only begin withholding prior to August 3, 1983, by performing withholding manually, which would require O to hire additional employees.

  Situation 3:  Bank P set up a plan to implement withholding on November 25, 1982, after studying the regulations. P's plan projected that it would complete reprogramming of its data processing system by June 1, 1983, and complete testing by June 15, 1983.  P's data processing system is antiquated and poorly documented.  In April 1983, P learns that it cannot reprogram its system because of its age and poor documentation and that it must purchase new data processing hardware and software.  Although P commences a search for a new system immediately, P cannot find one that can be installed before August 19, 1983.  P projects that it will then need 6 weeks to convert its records to the new system for all of its retail operations and an additional 3 weeks for its trust operations.  As soon as practicable after P completes its search, P applies for a waiver of the withholding requirements.

  Situation 4:  Credit Union Q purchased a new data processing system on December 21, 1982.  The new system will provide Q with up-to-date hardware and software and in addition includes a program to perform withholding.  Q prepares a detailed implementation plan which projects that the system will be installed and ready to operate on October 31, 1983.  Q can only begin withholding prior to October 31, 1983, by incurring substantial costs to redesign its existing software.  These costs would be lost when the new system begins operations on October 31, 1983.

  Situation 5:  Savings and Loan R depends on Service Bureau § for its data processing requirements for all of its operations.  § encounters difficulties redesigning its data processing software to perform withholding.  Although § expects to devote all available personnel to the project, S's detailed implementation plan reasonably projects that § cannot complete testing of its software before August 1, 1983, because of the difficulties encountered.  Due to its depending on § for data processing services, R does not have trained personnel qualified to implement a withholding system, and, without incurring substantial additional cost, does not have access to another source.

  Situation 6:  Bank V has been under contract to Service Bureau X for its data processing requirements for all of its operations for several years.  On December 15, 1982, X informed V that it would not be able to implement withholding on its new data processing system until September 15, 1983. Although other service bureau are available that would be able to perform withholding for V before this date, V cannot switch without incurring substantial additional costs.

  Situation 7:  Bank U has assigned its data processing personnel to program its data processing software for some new types of accounts U plans to offer its customers.  On May 1, 1983, U reassigns some of its personnel to reprogram its software to perform withholding.  As the personnel begin the project, they expect that, without additional personnel assigned to the project, they cannot complete reprogramming before August 15, 1983.

LAW AND ANALYSIS

  Section 3451(a) of the Code, which was added by section 301 of the Tax Equity and Fiscal Responsibility Act of 1982, 1982-38 I.R.B. 4, 86, (TEFRA) provides that the payor of any interest, dividend, or patronage dividend must withhold a tax equal to 10 percent of the amount of the payment, effective generally for amounts paid or credited after June 30, 1983, except as otherwise provided.

  Section 308 of TEFRA allows the Secretary to grant waivers to individual payors who are unable to begin withholding on July 1, 1983, until the payor is able to comply without undue hardship.

  Under section 31.3451(a)-1(d) of the Employment Tax and Collection of Income Tax at Source Regulations under the Tax Equity and Fiscal Responsibility Act of 1982, the waiver from the withholding requirements will be granted for only so long as is necessary to allow the payor to avoid undue hardship, but in no event beyond December 31, 1983.  The application must be in writing, and the waiver will apply only to the portion of the operations of the payor as is necessary to permit the avoidance of undue hardship.

  Undue hardship exists when the payor is unable to implement withholding by July 1, 1983, because of:

    (1) substantial additional costs that the payor will not incur if it is allowed to defer withholding to a date that is not later than January 1, 1984,

    (2) acts that are not within the control of the payor, such as a fire,

    (3) the unavailability of trained personnel, data processing hardware or software, or sufficient time because of difficulties encountered in redesigning data processing software or in acquisition of data processing hardware, or

    (4) reliance by the payor for its data processing on a third party that encounters the difficulties described in 1, 2, or 3 above.  In such case, the third party may apply for the waiver on behalf of the payor, but only with respect to the operations that are serviced by the third party and only if the payor files a written statement with the application, signed under penalties of perjury, that the payor does not have the capability to implement a withholding system and, without incurring substantial additional costs, does not have access to another source to provide one.

  Those payors wanting to request a waiver from the withholding requirements for a period not to exceed December 31, 1983, must make a request in writing following the procedures outlined in Rev. Proc. 83-20, page 11, this Bulletin.

HOLDING

  Situation 1:  MN experiences undue hardship with respect to its trust operations until August 15, 1983.

  Situation 2:  O experiences undue hardship until August 3, 1983.

  Situation 3:  P experiences undue hardship until September 30, 1983, with respect to its retail operations and until October 21, 1983, with respect to its trust operations.

  Situation 4: Q experiences undue hardship until October 31, 1983.

  Situation 5:  R experiences undue hardship until August 1, 1983.  § may apply for a waiver of the withholding requirements on behalf of R provided that the application includes a written statement signed by R under penalties of perjury that R does not have the capability to implement a withholding system and, without incurring substantial additional costs, does not have access to another source.

  Situation 6:  Assuming that X can demonstrate undue hardship, V experiences undue hardship until September 15, 1983.  V is not required to switch to another service bureau because V can demonstrate that it would incur substantial additional costs if it did so.  X may apply for a waiver on behalf of V, provided that the application contains a written statement signed by V under penalties of perjury that V does not have the capability to implement a withholding system and, without incurring substantial additional costs, does not have access to another source.

  Situation 7:  By waiting until May 1, 1983 to begin reprogramming its software, U has not made a good faith effort to comply and will not be granted a waiver.  It does not change the result that U's qualified people are otherwise occupied or that additional personnel would have to be employed in this case.

FN1. Also released as News Release IR-83-54, dated March 25, 1983.

Rev. Rul. 83-55, 1983-1 C.B. 240.