[Federal Register Volume 81, Number 251 (Friday, December 30, 2016)]
[Proposed Rules]
[Pages 96406-96413]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31579]


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DEPARTMENT OF TREASURY

Internal Revenue Service

26 CFR Part 31

[REG-123841-16]
RIN 1545-BN58


Withholding on Payments of Certain Gambling Winnings

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations under section 
3402(q) with respect to withholding on certain payments of gambling 
winnings from horse races, dog races, and jai alai and on certain other 
payments of gambling winnings. The proposed regulations affect both 
payers and payees of the gambling winnings subject to withholding under 
section 3402(q).

DATES: Written or electronic comments and requests for a public hearing 
must be received by March 30, 2017.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-123841-16), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
123841-16), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC 20224, or sent electronically, via the 
Federal eRulemaking Portal at http://www.regulations.gov (IRS REG-
123841-16).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
David Bergman, (202) 317-6845; concerning submissions of comments or to 
request a public hearing, Regina Johnson, (202) 317-6901 (not toll-free 
numbers).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been approved by the Office of Management and Budget 
through Form W-2G (OMB No. 1545-0238) in accordance with the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3507(d)). Notice and an opportunity to 
comment on the proposed changes to burden hours for the forms related 
to this proposed rule will be published in a separate notice in the 
Federal Register.

Background

    This document contains proposed regulations to amend the Employment 
Tax Regulations (26 CFR 31) under section 3402 of the Internal Revenue 
Code relating to withholding from gambling winnings for horse races, 
dog races, and jai alai. The proposed regulations update and clarify 
other provisions of Sec.  31.3402(q)-1 and make conforming changes to 
Sec.  31.3406(g)-2.
    Section 3402(q)(1) requires every person, including the United 
States government, a state, a political subdivision thereof, or any 
instrumentality of the foregoing, that makes any payment of gambling 
winnings to deduct and withhold tax on certain payments at the third-
lowest tax rate applicable under section 1(c), which for the 2016 tax 
year is 25 percent. Section 3402(q)(2) provides an exemption from 
withholding under this section for payments of winnings to nonresident 
aliens and foreign corporations subject to withholding under sections 
1441(a) or 1442(a). Section 3402(q)(3) describes the winnings subject 
to withholding as proceeds from a wager determined in accordance with 
the rules in that subsection.
    Whether winnings are subject to withholding depends on the type of 
wagering transaction, the proceeds from a wager, and in some cases the 
odds associated with a wager. Under sections 3402(q)(3)(B) and (C)(i), 
payers generally must withhold if the proceeds from a wager exceed 
$5,000 in a State-conducted lottery, other lottery, sweepstakes, or 
wagering pool. Under section 3402(q)(3)(A) and (C)(ii), in the case of 
a wagering transaction in a parimutuel pool with respect to horse 
races, dog races, or jai alai, the payer must withhold if the proceeds 
exceed $5,000 and are at least 300 times as large as the amount 
wagered. Winnings from bingo, keno, and slot machines are exempted from 
withholding under section 3402(q)(1) by section 3402(q)(5).

Proceeds From a Wager and Identical Wagers

    Section 3402(q)(4) provides that proceeds from a wager are 
determined by reducing the amount received by the amount of the wager, 
and proceeds which are not money are taken into account at fair market 
value. The current regulations provide rules for determining the amount 
of proceeds from a wager, including a special rule for ``identical 
wagers.'' The rule treats ``identical wagers'' as paid with respect to 
a single wager for purposes of

[[Page 96407]]

calculating the proceeds from the wager. See Sec.  31.3402(q)-1(c)(ii).
    Neither the statute nor the existing regulations explicitly define 
the terms ``wager'' or ``identical wagers,'' but the regulation text of 
Sec.  31.3402(q)-1(c)(ii), regarding rules for determining the amount 
of proceeds from a wager, and Sec.  31.3402(q)-1(d) provide examples of 
wagers that are and are not identical wagers. For example, amounts paid 
on two bets placed in a parimutuel pool on a particular horse to win a 
particular race are treated as paid with respect to the same wager. 
These two bets would not be identical, however, if one bet was for the 
horse to win and the other bet was for the horse to place (which are 
bets in two separate parimutuel pools, as explained below). Those two 
bets would also not be identical if one bet was placed in a pool 
conducted by the racetrack and the other bet was placed in a separate 
pool conducted by an off-track betting establishment and such wagers 
are not pooled with those placed at the racetrack. In addition, two 
bets on the same race are not identical where the bettor makes an 
exacta bet on horse M to win and horse N to place and a trifecta bet on 
horse M to win, horse N to place, and horse O to show. See Sec.  
31.3402(q)-1(d), Example 11. The preamble to the current regulations 
provides the following definition for identical bets: ``Identical bets 
are those in which winning depends on the occurrence (or non-
occurrence) of the same event or events.'' T.D. 7919 (48 FR 46296) 
(Oct. 12, 1983).
    The statute does not explicitly address how to determine the amount 
of the wager in the case of exotic wagers. Exotic wagers are those 
other than straight wagers. Straight wagers include bets to win 
(selecting the first-place finisher), place (selecting a finisher to 
place first or second), and show (selecting a finisher to place first, 
second, or third). Examples of exotic bets include multi-contestant 
bets, such as an exacta (selecting the first and second-place finishers 
in a single contest, in the correct order) and a trifecta (selecting 
the first, second, and third-place finishers in a single contest, in 
the correct order). Other examples include multi-contest bets such as a 
Pick 6 (selecting the first-place finisher in six consecutive 
contests).
    The instructions to Form W-2G provide the rule for multiple wagers 
reflected on a single ticket as follows: ``For multiple wagers sold on 
one ticket, such as the $12 box bet on a Big Triple or Trifecta, the 
wager is considered as six $2 bets and not one $12 bet for purposes of 
computing the amount to be reported or withheld.'' See, e.g., 2016 
Instructions to Forms W-2G and 5754, at 2, available at https://www.irs.gov/pub/irs-pdf/iw2g.pdf. Thus, according to the instructions, 
the bettor may only consider the cost of a single winning combination 
when determining the amount wagered for purposes of determining whether 
proceeds from a wager meets the threshold for withholding in section 
3402(q)(3)(C)(ii).

2015 Request for Comments

    The Treasury Department and the IRS requested comments from the 
public on the treatment of wagers in parimutuel gambling on March 4, 
2015, in a notice of proposed rulemaking (REG-132253-11) under section 
6041 regarding information returns to report winnings from bingo, keno, 
and slot machine play. The notice of proposed rulemaking stated that 
taxpayers required to report winnings from parimutuel gambling may have 
concerns relating to when wagers with respect to horse races, dog 
races, and jai alai may be treated as identical and that the Treasury 
Department and the IRS intend to amend the regulations under Sec.  
31.3402(q)-1.
    Multiple commentators requested a rule that would take into account 
all money wagered in a particular parimutuel pool when determining 
proceeds from a wager for purposes of determining whether withholding 
under section 3402(q) was required. In particular, some commentators 
requested that the Treasury Department and the IRS revise the 
regulations to provide a definition of the ``amount of the wager'' when 
multiple bets are placed in the same pool to include the total amount 
wagered by a bettor into a specific parimutuel pool for purposes of 
determining whether wagering proceeds are subject to withholding and 
reporting. The commentators stated that this change would reflect 
innovations and changes to today's modern parimutuel wagering 
strategies.

Reporting Rules

    Section 3402(q)(6) provides that recipients of gambling winnings 
subject to withholding must furnish a statement to the payer, under 
penalties of perjury, containing the name, address, and taxpayer 
identification number of the recipient and each person entitled to any 
portion of the payment. The current regulations provide that the 
statement, furnished on a Form W-2G, Certain Gambling Winnings, or Form 
5754, Statement by Person(s) Receiving Gambling Winnings, also must 
indicate if the payee and any other persons entitled to payment are 
entitled to winnings from identical wagers. Sec. Sec.  1.6011-3, 
31.3402(q)-1(c)(ii). The payer may rely on this statement in 
determining the amount of proceeds from the wager. Sec.  31.3402(q)-
1(c)(ii).
    On or before February 28 (March 31 if filed electronically) of the 
calendar year following the calendar year in which the payment is made, 
the payer must file a return on Form W-2G with the Internal Revenue 
Service reporting the gambling winnings subject to withholding. Sec.  
31.3402(q)-1(f). Section 6041(d) and the instructions to Form W-2G 
require that the payer filing a Form W-2G also furnish a statement to 
the payee on or before January 31 of the calendar year following the 
calendar year in which the payment is made.

Explanation of Provisions

    The current regulations for withholding from gambling winnings 
under section 3402(q) were last substantively amended in 1983. 
According to commentators, since that time, exotic bets on horse races, 
dog races, and jai alai have accounted for an increasing percentage of 
total bets placed on horse races, dog races, and jai alai. The increase 
in exotic betting, and in particular the use of certain methods of 
exotic betting, has resulted in scenarios where the current rules may 
result in withholding that significantly exceeds the individual 
gambler's ultimate income tax liability. In light of this, the proposed 
regulations amend the rules regarding how payers determine the amount 
of the wager in parimutuel wagering transactions with respect to horse 
races, dog races, and jai alai. Specifically, these proposed 
regulations address exotic bets on horse races, dog races, and jai alai 
by providing a new rule to determine the amount of the wager when 
wagers are placed in a single parimutuel pool and are reflected on a 
single ticket. In addition, the current regulations under section 
3402(q) are updated to reflect current law regarding the withholding 
thresholds and certain information reporting requirements.

I. Wagers in the Case of Horse Races, Dog Races, and Jai Alai

A. Parimutuel Betting
    In parimutuel betting, which translates to betting ``amongst 
ourselves,'' the bettors themselves establish the odds and payouts, as 
opposed to having fixed odds. Each type of bet on a contest or series 
of contests goes into its own parimutuel pool. For example, each win 
bet goes into the win pool for that contest, regardless of the finisher 
selected to win. As amounts are wagered in the pool, the odds and

[[Page 96408]]

payouts adjust accordingly. Following the contest or contests 
determinative of a particular pool, all bettors who placed a winning 
bet share the money placed in that particular pool, less the applicable 
takeout. Parimutuel betting in the United States is used in betting on 
horse races, dog races, and jai alai.
    Parimutuel betting involves both straight and exotic bets. Each 
type of straight or exotic bet is placed in its own parimutuel pool. 
For example, a trifecta bet on a particular contest goes into that 
contest's trifecta pool, regardless of the finishers or order of finish 
selected, and the trifecta pool is separate from the win pool, the 
exacta pool, and all other pools associated with that particular 
contest. Exotic bets provide greater odds and bigger pay-offs than 
straight bets.
    Multiple combinations of exotic bets may be placed on a single 
ticket, making it easier for bettors to place wagers on the various 
possible outcomes. For example in horse racing, bettors often use box, 
key, and wheel bets to place the same type of exotic bet (e.g., exacta 
or trifecta) on multiple combinations of outcomes. Box bets involve 
betting on all possible outcomes of a specific group of horses in the 
same race; for example, a three-horse exacta box is a bet in which 
three specific horses are selected to place first or second in any 
combination or order of finish. A bettor wins a three-horse exacta box 
bet if any combination of the bettor's three horses finishes first and 
second. Key bets involve betting a single horse in one position with 
all possible combinations of the other selected horses; for example, a 
trifecta key is a bet where a single horse is selected to win and the 
other horses included in the bet are selected to place second or third 
in any combination or order of finish. Finally, a wheel bet involves 
multiple horses in multiple combinations in multiple races; for 
example, a Daily Double wheel is a bet where a single horse is selected 
to win the first race and every horse is selected in the second race.
B. Comments Regarding Current Treatment of Parimutuel Betting
    Commentators stated that since the regulations were last 
substantively amended, the rise in the number of exotic bets available 
at certain racetracks and the popularity of exotic betting has altered 
parimutuel betting practices. Commentators stated that, for example, in 
the 1978 Kentucky Derby, there were three types of bets available to be 
placed at Churchill Downs racetrack, where the Kentucky Derby is run. 
Those bets were bets to win, place, or show. By contrast, in the 2015 
Kentucky Derby, there were twenty-three types of bets available to be 
placed at Churchill Downs racetrack, including the superfecta, super 
high five, and pick 7 jackpot. Furthermore, commentators stated that 
today approximately 67% of all parimutuel wagering occurs on exotic 
wagers (versus straight wagers), as compared to the 1970s when 
approximately 10% of parimutuel wagering occurred on exotic wagers.
    Further, commentators stated that the increase in availability of 
exotic betting has caused bettors to substantially increase their 
amounts wagered, often by placing box, key, and wheel bets, in a 
particular parimutuel pool to increase their chances of winning and 
increase the potential payout. In addition, commentators attributed the 
rise in popularity of exotic bets to the fact that exotic bets offer 
significantly higher odds. As a result, commentators stated that modern 
bettors are putting more money towards bets with greater potential 
payouts in anticipation of significant winnings.
    Commentators also stated that payouts from straight bets were 
rarely subject to withholding because they virtually never came close 
to exceeding the 300 to 1 ratio of proceeds to the amount of the wager. 
On the other hand, exotic bets do result in proceeds exceeding the 
amount of the wager by a 300 to 1 ratio; for example, seven different 
exotic bets at the 2015 Kentucky Derby produced payouts exceeding the 
300 to 1 ratio. However, given the vast number of potential outcomes 
possible with exotic bets, the commentators stated that bettors are 
using techniques such as box, key, or wheel bets to increase their 
odds. As a result, it is undoubtedly the case that the winners wagered 
far more into the pool than the cost of the winning bet.
    Commentators stated that the tax treatment under the current rules 
ignores the actual investment in a single parimutuel pool and may 
result in withholding that significantly exceeds the amount necessary 
to cover the individual gambler's ultimate income tax liability and 
suggested changing the rule to take into account all wagers in the same 
parimutuel pool. The commentators provided the following example to 
illustrate this. A bettor makes a seven-horse trifecta box wager, which 
involves selecting a group of seven horses to place first, second, and 
third, in any order. This bet has 210 unique possible results. Assuming 
the bettor bets $20 on each combination, the total amount wagered is 
$4,200. At race time the winning combination carries 304 to 1 odds. 
After the race, the bettor holds a winning ticket that pays $6,100 
($304 x $20 wagered + $20 return of bet). Under the current rules, the 
racetrack would withhold $1,520 (($6,100-20) x 25%) and report $6,080 
in winnings ($6,100-$20) because the rules treat only the $20 paid for 
the single winning combination as the amount wagered. However, the 
commentators stated that the individual has netted only $1,900 ($6,100 
winnings less $4,200 wagered), and is left with $380 ($1,900-$1,520) 
once withholding taxes are taken out, which makes the withholding rate 
80% of net winnings.
    Under the commentators' proposed change, the amount of the wager 
would be considered to be $4,200. Thus the racetrack would not withhold 
because the proceeds from the wager ($1,900) are less than the $5,000 
withholding threshold and are also less than $1,260,000 (300 times the 
amount wagered). Similarly, the racetrack would not report the proceeds 
because they are not at least 300 times the amount wagered.
    The commentators noted that although the bettor may be able to 
deduct the losing wagers on the bettor's tax return at the end of the 
year as a miscellaneous itemized deduction, there would be other 
consequences. For example, the $1,520 withholding lowers the amount of 
money in circulation at the racetrack that day and reduces the bettor's 
cash on hand, whereas the commentators' proposed change would result in 
additional cash on hand to be bet in subsequent races.
    In addition, the commentators stated that the deduction for losing 
wagers results in reporting of higher adjusted gross income than would 
result under the commentator's proposed change. Commentators further 
stated that a higher adjusted gross income can cause the bettor to lose 
unrelated tax benefits. In addition, the deduction is only available if 
the bettor itemizes deductions and is not subject to the alternative 
minimum tax. Finally the commentators noted that many states limit 
itemized deductions for state tax purposes.
C. Proposed Rule for the Amount of the Wager in the Case of Horse 
Races, Dog Races, and Jai Alai
    Proposed Sec.  31.3402(q)-1(c)(ii) provides a new rule for purposes 
of determining the amount of the wager for wagering transactions in 
horse races, dog races, and jai alai. The proposed rule allows all 
wagers placed in a single parimutuel pool and represented on a single 
ticket to be aggregated and treated as a single wager for purposes of 
determining the amount of the wager. The proposed rule allows a payer 
to take into account the total amount wagered

[[Page 96409]]

in a particular pool as reflected on a single ticket to determine 
whether the winnings are subject to withholding and reporting. This 
treatment better reflects the full cost of exotic bets. In addition, 
straight wagers are unlikely to have odds and produce payouts of at 
least 300 to 1, so they generally are not subject to withholding, 
regardless of the application of the proposed rule. The proposed 
regulations contain examples to illustrate the proposed rule for 
wagering transactions in the case of horse races, dog races, and jai 
alai.
    The proposed rule for determining the amount of the wager addresses 
the fact that the current rules may result in withholding that 
significantly exceeds the amount necessary to cover the individual 
gambler's ultimate income tax liability, and that creates an 
unnecessary burden on the bettor and the horse racing, dog racing, and 
jai alai industries. As described in the commentators' example, current 
rules for exotic bets placed as box, key, or wheel bets can result in 
an 80% withholding rate on net winnings from wagers placed in the same 
pool. This result has become more common in the decades since the 
regulations were last amended because the number of exotic bet types 
and the popularity of exotic bets have increased substantially, and 
various combinations of these exotic bets are often placed together on 
a single ticket as part of the same transaction.
    By limiting the amount of the wager in a wagering transaction with 
respect to horse races, dog races, and jai alai to the wagers 
represented on a single ticket, the proposed rule limits the potential 
for fraud and creates an administrable system for payers. The rule is 
administrable because it does not require payers to collect information 
regarding winning wagers where additional wagers placed in the same 
pool are reflected on multiple tickets. If bettors want to place 
additional wagers in the same parimutuel pool after already having 
purchased a ticket, commentators stated that bettors may be able to 
cancel the first ticket and place the original and additional wagers 
for that pool on a new ticket.
    The proposed regulations maintain the current rule regarding 
identical wagers. To clarify the meaning of the term, however, the 
proposed regulations provide a definition of identical wagers taken 
from the preamble of the current regulations. T.D. 7919 (48 FR 46296). 
The proposed regulations also move examples of identical wagers from 
the regulatory text to the examples section.
    The Treasury Department and the IRS request comments regarding 
whether the proposed rule addressing the amount of the wager in a 
wagering transaction in the case of horse races, dog races, and jai 
alai should apply to other types of gambling subject to withholding 
under section 3402(q), such as lotteries.

II. Ministerial Updates to Current Regulations

    In addition to the proposed rule for wagers in horse races, dog 
races, and jai alai, the proposed regulations make ministerial updates 
to the current regulations to reflect current law.
    Proposed regulations Sec.  31.3402(q)-1(a) and (b) are amended to 
reflect the current statutory tax rate for withholding (the third-
lowest tax rate under section 1(c)) and the current statutory 
thresholds for withholding for all types of gambling covered by this 
regulation ($5,000). In 1992 and again in 2001, Congress amended 
section 3402(q)(1) to change the withholding rate first from 20 percent 
to 28 percent and then to its current level of ``the third lowest rate 
of tax applicable under section 1(c),'' but the current regulations do 
not reflect either of these statutory amendments. See Economic Growth 
and Tax Relief Reconciliation Act of 2001, Public Law 107-16, Sec.  
101(c)(8); Energy Policy Act of 1992, Public Law 102-486, Sec.  
1934(a). In 1992, Congress also amended sections 3402(q)(3)(A) and (C) 
to change the withholding threshold for certain types of gambling from 
$1,000 to $5,000, which the current regulations do not reflect. Energy 
Policy Act, Sec.  1942(a). In addition, the proposed regulations remove 
certain dates reflecting transition periods, which are no longer 
necessary.
    In addition, proposed regulation Sec.  31.3402(q)-1(c)(4) updates 
the rule regarding payments to nonresident aliens or foreign 
corporations.

III. Information Reporting for Gambling Winnings Subject to Withholding 
Under Section 3402(q)

    Proposed regulations Sec.  31.3402(q)-1(d) and (e) update and 
clarify the reporting rules for gambling winnings subject to 
withholding under section 3402(q). The amendments to Sec.  31.3402(q)-
1(d), regarding the statement by the payee of gambling winnings subject 
to withholding under section 3402(q), reorganize the current 
regulations into new sub-sections. Proposed Sec.  31.3402(q)-1(d)(1) 
provides the general rule that each payer of gambling winnings subject 
to withholding under section 3402(q) must obtain a payee statement. 
Proposed Sec.  31.3402(q)-1(d)(2) describes the content of the payee 
statement. Proposed Sec.  31.3402(q)-1(d)(3) states the reliance rule 
currently described in Sec.  31.3402(q)-1(c)(1)(ii) that where a payee 
furnishes the required payee statement and, as required by Sec.  
1.6011-3, indicates that he or she is entitled to winnings from 
identical wagers, the payer may rely on the statement in determining 
the total amount of proceeds from the wager.
    The amendments to proposed Sec.  31.3402(q)-1(e), regarding the 
information return filed by the payer on Form W-2G, modernize the 
current reporting rules. First, the proposed regulations replace 
outdated references to the place of filing with a requirement that the 
return be filed with the appropriate Internal Revenue Service location 
designated in the instructions to the form.
    Second, the proposed regulations require the payer to report the 
taxpayer identification number of the winner in lieu of the social 
security number to allow for a broader range of taxpayer identification 
numbers, including individual taxpayer identification numbers (ITINs) 
and adoption taxpayer identification numbers (ATINs). This amendment 
allows truncation of the taxpayer identification number on the 
statement furnished by the payer to the payee because the regulation no 
longer requires a social security number. For provisions relating to 
the use of truncated taxpayer identification numbers, see Sec.  
31.6109-4 of this chapter.
    Third, the proposed regulations update the payee identification 
provisions. Section 31.3402(q)-1(f)(1)(v) of the current regulations 
provides that the identification verifying the payee's identity must 
include the payee's social security number. According to the current 
regulations, examples of acceptable identification include a driver's 
license, a social security card, or a voter registration card. However, 
today most forms of identification do not include a person's social 
security number. Therefore, many payees do not have identification that 
contains the payee's social security number and, even if they do, they 
may not have this identification with them at the time that they 
receive a payment of gambling winnings subject to withholding under 
section 3402(q).
    To address this issue, proposed Sec. Sec.  31.3402(q)-1(e)(1)(v) 
and (e)(2) provide that, in addition to government-issued 
identification, a properly completed Form W-9 signed by the payee is an 
acceptable form of identification to verify the payee's identifying 
information. Payers who verify payee information using identification 
set forth in proposed

[[Page 96410]]

Sec. Sec.  31.3402(q)-1(e)(1)(v) and (e)(2) before the date that final 
regulations implementing these provisions are published in the Federal 
Register will be treated as meeting the requirements of Sec.  
31.3402(q)-1(f)(1)(v) of the current regulations.
    Fourth, the proposed regulations contain a special rule in Sec.  
31.3402(q)-1(e)(3) that tribal member identification cards need not 
contain the payee's photograph to meet the identification requirements 
in Sec.  31.3402(q)-1(e)(1)(v) of the proposed regulations, provided 
specific criteria are met. This special rule responds to comments 
raised by Indian tribes in response to the notice of proposed 
rulemaking (REG-132253-11) under section 6041 regarding information 
returns to report winnings from bingo, keno, and slot machine play that 
many tribal identification cards do not contain photographs.
    Fifth, the proposed regulations update the obsolete reference to 
Form W-3G to reflect that payers should use Form 1096 to transmit Forms 
W-2G to the Internal Revenue Service.
    Finally, the proposed regulations in Sec.  31.3402(q)-1(e)(5) 
provides that a payer filing an information return with the Internal 
Revenue Service must furnish a statement to the payee containing the 
same information on or before January 31st of the year following the 
calendar year in which payment of the winnings subject to withholding 
is made. See section 6041(d).
    Proposed amendments to the regulations under section 3406 update 
the reporting requirements to address horse races, dog races, and jai 
alai. Proposed Sec.  31.3406(g)-2(d) is amended to clarify the 
definition of a reportable gambling winning and to add a cross-
reference to Sec.  31.3402(q)-1(c) for determining the amount of the 
wager in a wagering transaction with respect to horse races, dog races, 
and jai alai, or amounts paid with respect to identical wagers.

Proposed Effective/Applicability Date

    These regulations are proposed to apply to payments made after the 
date of publication of the Treasury Decision adopting these rules as 
final regulations in the Federal Register.

Statement of Availability of IRS Documents

    IRS published guidance cited in this preamble is published in the 
Internal Revenue Bulletin and is available from the Superintendent of 
Documents, U.S. Government Publishing Office, Washington, DC 20402, or 
by visiting the IRS Web site at http://www.irs.gov.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory assessment is not 
required. It is hereby certified that this rule will not have a 
significant economic impact on a substantial number of small entities. 
This certification is based on the fact that this rule merely provides 
guidance regarding withholding and reporting requirements for payers of 
certain gambling winnings. The requirement for payers to withhold and 
make information returns is imposed by statute and not these 
regulations. In addition, this rule reduces the existing burden on 
payers to comply with the statutory requirement by decreasing the 
number of payments subject to withholding and reporting. Therefore, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. Chapter 6) is not required.
    Pursuant to section 7805(f) of the Internal Revenue Code, this 
notice of proposed rulemaking has been submitted to the Chief Counsel 
for Advocacy of the Small Business Administration for comment on its 
impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (a signed original 
and eight (8) copies) or electronic comments that are submitted timely 
to the IRS. In addition to the requests for comments noted in the 
Background Section, Treasury and the IRS request comments on any other 
aspects of the proposed rules, and any other issues relating to the 
payment of gambling winnings that are not addressed in the proposed 
regulations. All comments will be available at www.regulations.gov for 
public inspection or upon request.
    A public hearing will be scheduled if requested in writing by any 
person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the public hearing 
will be published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is David Bergman 
of the Office of the Associate Chief Counsel (Procedure and 
Administration).

List of Subjects in 26 CFR Part 31

    Employment taxes and collection of income tax at source.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 31 is proposed to be amended as follows:

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

0
Paragraph 1. The authority citation for part 31 continues to read in 
part as follows:

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

0
Par. 2. Section 31.3402(q)-1 is amended:
0
1. By revising paragraphs (a)(1), (b), and (c)(1) and (4).
0
2. By redesignating paragraph (d) as paragraph (f), paragraph (e) as 
paragraph (d), and paragraph (f) as paragraph (e).
0
3. By revising newly designated paragraphs (d) and (e).
0
4. In paragraph (f), removing Example 3 and Example 11, by 
redesignating Examples 4 through 10 as Examples 3 through 9, and adding 
examples 10 through 16.
0
5. In paragraph (f), in newly redesignated Example 4 by removing the 
language ``Example 4'' and adding in its place the language ``Example 
3'' and in newly redesignated Example 6 by removing the language 
``Example 6'' and adding in its place the language ``Example 5'' 
wherever it appears.
0
6. By adding paragraph (g).
    The revisions and additions read as follows:


Sec.  31.3402(q)-1   Extension of withholding to certain gambling 
winnings.

    (a) Withholding obligation--(1) General rule. Every person, 
including the Government of the United States, a State, or a political 
subdivision thereof, or any instrumentality of any of the foregoing 
making any payment of ``winnings subject to withholding'' (defined in 
paragraph (b) of the section) shall deduct and withhold a tax in an 
amount equal to the product of the third lowest rate of tax applicable 
under section 1(c) and such payment. The tax shall be deducted and 
withheld upon payment of the winnings by the person making such payment 
(``payer''). See paragraph (c)(5)(ii) of this section for a special 
rule relating to the time for making deposits of withheld amounts and 
filing the return with respect to those amounts. Any person receiving a 
payment of winnings subject to withholding must furnish the payer a 
statement as required in paragraph (d) of this section. Payers of 
winnings subject to withholding must file a return with the Internal 
Revenue Service and furnish a statement to the payee as

[[Page 96411]]

required in paragraph (e) of this section. With respect to reporting 
requirements for certain payments of gambling winnings not subject to 
withholding, see section 6041 and the regulations thereunder.
* * * * *
    (b) Winnings subject to withholding. (1) In general. Winnings 
subject to withholding means any payment from--
    (i) A wager placed in a State-conducted lottery (defined in 
paragraph (c)(2) of this section) but only if the proceeds from the 
wager exceed $5,000;
    (ii) A wager placed in a sweepstakes, wagering pool, or lottery 
other than a State-conducted lottery but only if the proceeds from the 
wager exceed $5,000; or
    (iii) Any other wagering transaction (as defined in paragraph 
(c)(3) of this section) but only if the proceeds from the wager (A) 
exceed $5,000 and (B) are at least 300 times as large as the amount of 
the wager.
    (2) Total proceeds subject to withholding. If proceeds from the 
wager qualify as winnings subject to withholding, then the total 
proceeds from the wager, and not merely amounts in excess of $5,000, 
are subject to withholding.
    (c) Definitions; special rules--(1) Rules for determining amount of 
proceeds from a wager--(i) In general. The amount of ``proceeds from a 
wager'' is the amount paid with respect to the wager, less the amount 
of the wager.
    (ii) Amount of the wager in the case of horse races, dog races, and 
jai alai. In the case of a wagering transaction with respect to horse 
races, dog races, or jai alai, all wagers placed in a single parimutuel 
pool and represented on a single ticket are aggregated and treated as a 
single wager for purposes of determining the amount of the wager. A 
ticket in the case of horse races, dog races, or jai alai is a written 
or electronic record that the payee must present to collect proceeds 
from a wager or wagers.
    (iii) Amount paid with respect to a wager--(A) Identical wagers. 
Amounts paid with respect to identical wagers are treated as paid with 
respect to a single wager for purposes of calculating the amount of 
proceeds from a wager. Two or more wagers are identical wagers if 
winning depends on the occurrence (or non-occurrence) of the same event 
or events; the wagers are placed with the same payer; and, in the case 
of horse races, dog races, or jai alai, the wagers are placed in the 
same parimutuel pool. Wagers may be identical wagers even if the 
amounts wagered differ as long as the wagers are otherwise treated as 
identical wagers under this paragraph (c)(1)(iii)(A). Tickets purchased 
in a lottery generally are not identical wagers, because the 
designation of each ticket as a winner generally would not be based on 
the occurrence of the same event, e.g., the drawing of a particular 
number.
    (B) Non-monetary proceeds. In determining the amount paid with 
respect to a wager, proceeds which are not money are taken into account 
at the fair market value.
    (C) Periodic payments. Periodic payments, including installment 
payments or payments which are to be made periodically for the life of 
a person, are aggregated for purposes of determining the amount paid 
with respect to the wager. The aggregate amount of periodic payments to 
be made for a person's life is based on that person's life expectancy. 
See Sec. Sec.  1.72-5 and 1.72-9 of this chapter for rules used in 
computing the expected return on annuities. For purposes of determining 
the amount subject to withholding, the first periodic payment shall be 
reduced by the amount of the wager.
* * * * *
    (4) Certain payments to nonresident aliens or foreign corporations. 
A payment of winnings that is subject to withholding tax under section 
1441(a) (relating to withholding on nonresident aliens) or 1442(a) 
(relating to withholding on foreign corporations) is not subject to the 
tax imposed by section 3402(q) and this section if the payer complies 
with the requirements of withholding, documentation, and information 
reporting rules of section 1441(a) or 1442(a) and the regulations 
thereunder. A payment is treated as being subject to withholding tax 
under section 1441(a) or 1442(a) notwithstanding that the rate of such 
tax is reduced (even to zero) as may be provided by an applicable 
treaty with another country. However, a reduced or zero rate of 
withholding of tax shall not be applied by the payer in lieu of the 
rate imposed by sections 1441 and 1442 unless the person receiving the 
winnings has provided to the payer the documentation required by Sec.  
1.1441-6 of this chapter to establish entitlement to treaty benefits.
* * * * *
    (d) Statement furnished by payee--(1) In general. Each person who 
is making a payment subject to withholding under this section must 
obtain from the payee a statement described in paragraph (d)(2) of this 
section.
    (2) Contents of statement. (i) Each person who is to receive a 
payment of winnings subject to withholding under this section must 
furnish the payer a statement on Form W-2G or 5754 (whichever is 
applicable) made under the penalties of perjury containing--
    (A) The name, address, and taxpayer identification number of the 
winner accompanied by a declaration that no other person is entitled to 
any portion of such payment, or
    (B) The name, address, and taxpayer identification number of the 
payee and of every person entitled to any portion of such payment.
    (3) If more than one payment of winnings subject to withholding is 
to be made with respect to a single wager, for example in the case of 
an annuity, the payee is required to furnish the payer a statement with 
respect to the first such payment only, provided that such other 
payments are taken into account in a return required by paragraph (e) 
of this section.
    (4) Reliance on statement for identical wagers. If the payee 
furnishes the statement which may be required pursuant to Sec.  1.6011-
3 of this chapter (regarding the requirement of a statement from payees 
of certain gambling winnings), indicating that the payee (and any other 
persons entitled to a portion of the winnings) is entitled to winnings 
from identical wagers, as defined in paragraph (c)(1)(iii)(A) of this 
section, and indicating the amount of such winnings, if any, then the 
payer may rely upon such statement in determining the total amount of 
proceeds from the wager under paragraph (c)(1) of this section.
    (e) Return of payer--(1) In general. Every person making payment of 
winnings for which a statement is required under paragraph (d) of this 
section shall file a return on Form W-2G with the Internal Revenue 
Service location designated in the instructions to the form on or 
before February 28 (March 31 if filed electronically) of the calendar 
year following the calendar year in which the payment of winnings is 
made. The return required by this paragraph (e) need not include the 
statement by the payee required by paragraph (d) of this section and, 
therefore, need not be signed by the payee, provided such statement is 
retained by the payer as long as the contents thereof may become 
material in the administration of any internal revenue law. In 
addition, the return required by this paragraph (e) need not contain 
the information required by paragraph (e)(1)(v) of this section 
provided such information is obtained with respect to the payee and 
retained by the payer as long as the contents thereof may become 
material in the administration of any internal revenue law. For 
payments to more than one

[[Page 96412]]

winner, a separate Form W-2G, which in no event need be signed by the 
winner, shall be filed with respect to each such winner. Each Form W-2G 
shall contain the following:
    (i) The name, address, and employer identification number of the 
payer;
    (ii) The name, address, and taxpayer identification number of the 
winner;
    (iii) The date, amount of the payment, and amount withheld;
    (iv) The type of wagering transaction;
    (v) Except with respect to winnings from a wager placed in a State-
conducted lottery, a general description of the two types of 
identification (as described in paragraph (e)(2) of this section), one 
of which must have the payee's photograph on it (except in the case of 
tribal member identification cards in certain circumstances as 
described in paragraph (e)(3) of this section), that the payer relied 
on to verify the payee's name, address, and taxpayer identification 
number;
    (vi) The amount of winnings from identical wagers; and
    (vii) Any other information required by the form, instructions, or 
other applicable guidance published in the Internal Revenue Bulletin.
    (2) Identification. The following items are treated as 
identification for purposes of paragraph (e)(1)(v) of this section--
    (i) Government-issued identification (for example, a driver's 
license, passport, social security card, military identification card, 
tribal member identification card issued by a federally-recognized 
Indian tribe, or voter registration card) in the name of the payee; and
    (ii) A Form W-9, ``Request for Taxpayer Identification Number and 
Certification,'' signed by the payee that includes the payee's name, 
address, taxpayer identification number, and other information required 
by the form. A Form W-9 is not acceptable for this purpose if the payee 
has modified the form (other than pursuant to instructions to the form) 
or if the payee has deleted the jurat or other similar provisions by 
which the payee certifies or affirms the correctness of the statements 
contained on the form.
    (3) Special rule for tribal member identification cards. A tribal 
member identification card need not contain the payee's photograph to 
meet the identification requirement described in paragraph (e)(1)(v) of 
this section if--
    (i) The payee is a member of a federally-recognized Indian tribe;
    (ii) The payee presents the payer with a tribal member 
identification card issued by a federally-recognized Indian tribe 
stating that the payee is a member of such tribe; and
    (iii) The payer is a gaming establishment (as described in Sec.  
1.6041-10(b)(2)(iv) of this chapter) owned or licensed (in accordance 
with 25 U.S.C. 2710) by the tribal government that issued the tribal 
member identification card referred to in paragraph (e)(3)(ii) of this 
section.
    (4) Transmittal form. Persons making payments of winnings subject 
to withholding shall use Form 1096 to transmit Forms W-2G to the 
Internal Revenue Service.
    (5) Furnishing a statement to the payee. Every payer required to 
make a return under paragraph (e)(1) of this section must also make and 
furnish to each payee, with respect to each payment of winnings subject 
to withholding, a written statement that contains the information that 
is required to be included on the return under paragraph (e)(1) of this 
section. The payer must furnish the statement to the payee on or before 
January 31st of the year following the calendar year in which payment 
of the winnings subject to withholding is made. The statement will be 
considered furnished to the payee if it is provided to the payee at the 
time of payment or if it is mailed to the payee on or before January 
31st of the year following the calendar year in which payment was made.
    (f) Examples. * * *

    Example 10.  B places a $15 bet at the cashier window at the 
racetrack for horse A to win the fifth race at the racetrack that 
day. After placing the first bet, B gains confidence in horse A's 
prospects to win and places an additional $40 bet at the cashier 
window at the racetrack for horse A to win the fifth race, receiving 
a second ticket for this second bet. Horse A wins the fifth race, 
and B wins a total of $5,500 (100 to 1 odds) on those bets. The $15 
bet and the $40 bet are identical wagers under paragraph 
(c)(1)(iii)(A) of this section because winning on both bets depended 
on the occurrence of the same event and the bets are placed in the 
same parimutuel pool with the same payer. This is true regardless of 
the fact that the amount of the wager differs in each case.
    B cashes the tickets at different cashier windows. Pursuant to 
paragraph (d) of this section and Sec.  1.6011-3, B completes a Form 
W-2G indicating that the amount of winnings is from identical wagers 
and provides the form to each cashier. The payments by each cashier 
of $1,500 and $4,000 are less than the $5,000 threshold for 
withholding, but under paragraph (c)(1)(iii)(A) of this section, 
identical wagers are treated as paid with respect to a single wager 
for purposes of determining the proceeds from a wager. The payment 
is not subject to withholding or reporting because although the 
proceeds from the wager are $5,445 ($1,500 + $4,000 - $55), the 
proceeds from the wager are not at least 300 times as great as the 
amount wagered ($55 x 300 = $16,500).
    Example 11.  B makes two $1,000 bets in a single ``show'' pool 
for the same jai alai game, one bet on Player X to show and one bet 
on Player Y to show. A show bet is a winning bet if the player comes 
in first, second, or third in a single game. The bets are placed at 
the same time at the same cashier window, and B receives a single 
ticket showing both bets. Player X places second in the game, and 
Player Y does not place first, second, or third in the game. B wins 
$8,000 from his bet on Player X. Because winning on both bets does 
not depend on the occurrence of the same event, the bets are not 
identical bets under paragraph (c)(1)(iii)(A) of this section. 
However, pursuant to the rule in paragraph (c)(1)(ii) of this 
section, the amount of the wager is the aggregate amount of both 
wagers ($2,000) because the bets were placed in a single parimutuel 
pool and reflected on a single ticket. The payment is not subject to 
withholding or reporting because although the proceeds from the 
wager are $6,000 ($8,000 - $2,000), the proceeds from the wager are 
not at least 300 times as great as the amount wagered ($2,000 x 300 
= $600,000).
    Example 12.  B bets a total of $120 on a three-dog exacta box 
bet ($20 for each one of the six combinations played) at the dog 
racetrack and receives a single ticket reflecting the bet from the 
cashier. B wins $5,040 from one of the selected combinations. 
Pursuant to the rule in paragraph (c)(1)(ii) of this section, the 
amount of the wager is $120, not $20 for the single winning 
combination of the six combinations played. The payment is not 
subject to withholding under section 3402(q) because the proceeds 
from the wager are $4,920 ($5,040 - $120), which is below the 
section 3402(q) withholding threshold.
    Example 13.  B makes two $12 Pick 6 bets at the horse racetrack 
at two different cashier windows and receives two different tickets 
each representing a single $12 Pick 6 bet. In his two Pick 6 bets, B 
selects the same horses to win races 1-5 but selects different 
horses to win race 6. All Pick 6 bets on those races at that 
racetrack are part of a single parimutuel pool from which Pick 6 
winning bets are paid. B wins $5,020 from one of his Pick 6 bets. 
Pursuant to the rule in paragraph (c)(1)(ii) of this section, the 
bets are not aggregated for purposes of determining the amount of 
the wager because the bets are reflected on separate tickets. 
Assuming that the applicable rate is 25%, the racetrack must deduct 
and withhold $1,252 (($5,020 - $12) x 25%) because the amounts of 
the proceeds of $5,008 ($5,020 - $12) is greater than $5,000 and is 
at least 300 times as great as the amount wagered ($12 x 300 = 
$3,600). The racetrack also must report B's winnings on Form W-2G 
pursuant to paragraph (e) of this section and furnish a copy of the 
Form W-2G to B.
    Example 14.  C makes two $50 bets in two different parimutuel 
pools for the same jai alai game. One bet is an ``exacta'' in which 
C bets on player M to win and player N to ``place''. The other bet 
is a ``trifecta'' in which C bets on player M to win, player N to 
``place,'' and player O to ``show.'' C wins both bets and is paid 
$2,000 with respect to

[[Page 96413]]

the bet in the ``exacta'' pool and $3,100 with respect to the bet in 
the ``trifecta'' pool. Under paragraph (c)(1)(iii)(A) of this 
section, the bets are not identical bets. Under paragraph (c)(1)(ii) 
of this section, the bets are not aggregated for purposes of 
determining the amount of the wager for either payment because they 
are not wagers in the same parimutuel pool. No section 3402(q) 
withholding is required on either payment because neither payment 
separately exceeds the $5,000 withholding threshold.
    Example 15.  C makes two $100 bets for the same dog to win a 
particular race. C places one bet at the racetrack and one bet at an 
off-track betting establishment, but the two pools constitute a 
single pool. C receives separate tickets for each bet. C wins both 
bets and is paid $4,000 from the racetrack and $4,000 from the off-
track betting establishment. Under paragraph (c)(1)(ii) of this 
section, the bets are not aggregated for purposes of determining the 
amount of the wager because the wager placed at the racetrack and 
the wager placed at the off-track betting establishment are 
reflected on separate tickets, despite being placed in the same 
parimutuel pool. No section 3402(q) withholding is required because 
neither payment separately exceeds the $5,000 withholding threshold.
    Example 16.  C places a $200 Pick 6 bet for a series of races at 
the racetrack on a particular day and receives a single ticket for 
the bet. No wager correctly picks all six races that day, so that 
portion of the pool carries over to the following day. On the 
following day, C places an additional $200 Pick 6 bet for that day's 
series of races and receives a new ticket for that bet. C wins 
$100,000 on the second day. Pursuant to the rule in paragraph 
(c)(1)(ii) of this section, the bets are on two separate tickets, so 
C's two Pick 6 bets are not aggregated for purposes of determining 
the amount of the wager. Assuming that the applicable rate is 25%, 
the racetrack must deduct and withhold $24,950 (($100,000 - $200) x 
25%) because the amount of the proceeds of $99,800 ($100,000 - $200) 
is greater than $5,000, and is at least 300 times as great as the 
amount wagered ($200 x 300 = $60,000). The racetrack also must 
report C's winnings on Form W-2G pursuant to paragraph (e) of this 
section and furnish a copy of the Form W-2G to C.

    (g) Applicability date. These rules apply to payments made after 
[the date of publication of the Treasury decision adopting these rules 
as final regulations in the Federal Register]. For rules that apply to 
payments made before that date, see 26 CFR 31.3402(q)-1 (revised April 
2015).
0
Par. 3. Section 31.3406-0 is amended by adding an entry for paragraph 
(h) to Sec.  31.3406(g)-2 to read as follows:


Sec.  31.3406-0  Outline of the backup withholding regulations.

* * * * *


Sec.  31.3406(g)-2   Exception for reportable payments for which backup 
withholding is otherwise required.

* * * * *
    (h) Effective/applicability date.
* * * * *
0
Par. 4. Section 31.3406(g)-2 is amended by revising paragraphs (d)(2) 
and (3) and adding paragraph (h) to read as follows:


Sec.  31.3406(g)-2   Exception for reportable payment for which 
withholding is otherwise required.

* * * * *
    (d) * * *
    (2) Definition of a reportable gambling winning and determination 
of amount subject to backup withholding. For purposes of withholding 
under section 3406, a reportable gambling winning is any gambling 
winning subject to information reporting under section 6041. A gambling 
winning (other than a winning from bingo, keno, or slot machines) is a 
reportable gambling winning only if the amount paid with respect to the 
wager is $600 or more and if the proceeds are at least 300 times as 
large as the amount wagered. See Sec.  1.6041-10 of this chapter to 
determine whether a winning from bingo, keno, or slot machines is a 
reportable gambling winning and thus subject to withholding under 
section 3406. The amount of a reportable gambling winning is--
    (i) The amount paid with respect to the amount of the wager 
reduced, at the option of the payer; by
    (ii) The amount of the wager.
    (3) Special rules. For special rules for determining the amount of 
the wager in a wagering transaction with respect to horse racing, dog 
racing, and jai alai, or amounts paid with respect to identical wagers, 
see Sec.  31.3402(q)-1(c).
* * * * *
    (h) Applicability date. The rules apply to reportable gambling 
winnings paid after [the date of publication of the Treasury decision 
adopting these rules as final regulations in the Federal Register]. For 
reportable gambling winnings paid on or before [the date of publication 
of the Treasury decision adopting these rules as final regulations in 
the Federal Register], Sec.  31.3406(g)-2 (as contained in 26 CFR part 
31, revised April 2015) applies.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-31579 Filed 12-29-16; 8:45 am]
 BILLING CODE 4830-01-P