Final Regs May Not Be Last Word on Cash-Reporting Requirements

 DEPARTMENT OF THE TREASURY

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations that, under certain circumstances, treat specified monetary instruments as cash for purposes of the requirement under section 6050I of the Internal Revenue Code of 1986 to report cash in excess of $10,000 received in a trade or business. The regulations are needed to implement changes to the applicable law made by the Revenue Reconciliation Act of 1990. The regulations affect persons that, under certain circumstances, receive, in the course of a trade or business in which they are engaged, specified monetary instruments that, together with any currency received, total more than $10,000 in any one transaction (or two or more related transactions).

 EFFECTIVE DATE: These regulations are effective for amounts received on or after February 3, 1992.

 FOR FURTHER INFORMATION CONTACT: Philip Scott, 202-566-3826 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

 The collection of information contained in this final regulation has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act of 1980 (44 U.S.C. 3504(h)) under control number 1545-0892. The estimated annual burden per respondent varies from 11 minutes to 27 minutes, depending upon individual circumstances, with an average of 19 minutes.

 These estimates are an approximation of the average time expected to be necessary for a collection of information. They are based on such information as is available to the Internal Revenue Service. Individual respondents may require greater or less time, depending on their particular circumstances.

 Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be directed to the Internal Revenue Service, Attn: IRS Reports Clearance officer T:FP, Washington, D.C. 20224, and to the Office of Management and Budget, Attention: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, D.C. 20503.

Background

 On May 15, 1991, the Federal Register published a notice of proposed rulemaking (56 F.R. 22379) proposing amendments to the Income Tax Regulations (26 CFR part 1) under section 6050I of the Internal Revenue Code. These amendments were proposed to implement section 11318(a) of the Revenue Reconciliation Act of 1990, Pub. L. 101-508, 104 Stat. 1388 (the "1990" Act).

 Written comments responding to the notice were received. A public hearing was held on June 28, 1991, pursuant to a notice published in the Federal Register on May 15, 1991 (56 F.R. 22379). After consideration of all written and oral comments regarding the proposed amendments, those amendments are adopted as revised by this Treasury Decision.

Explanation of Provisions

IN GENERAL

 Under section 6050I, any person engaged in a trade or business who receives, in the course of that trade or business, cash in excess of $10,000 in one transaction (or two or more related transactions) must make an information return relating to the transaction. Any person required to make an information return under section 6050I must also furnish a statement to any person identified on the return showing the aggregate amount of reportable cash received from that person. Financial institutions are generally excepted from the reporting requirements of section 6050I because, pursuant to regulations prescribed under section 5313 of title 31 of the United States Code (relating to reports on domestic coins and currency transactions), they are required to file similar reports on the receipt of more than $10,000 in currency from a customer in one or more transactions in a business day.

 Section 11318(a) of the 1990 Act amended section 6050I to provide that, to the extent provided in regulations, the term "cash" includes any monetary instrument, whether or not in bearer form, with a face amount of not more than $10,000 (other than certain checks).

 The final regulations, with limited exceptions, treat specified monetary instruments as cash when they are received in connection with designated reporting transactions, i.e., retail sales of consumer durables or collectibles or retail sales of a travel or entertainment activity. In addition, a specified monetary instrument is treated as cash in any transaction if the recipient of the instrument knows that the instrument is being used in an attempt to avoid the reporting of the transaction under section 6050I and the regulations thereunder. The Service will continue to monitor information reporting in trades and businesses generally, including real estate closings and settlements and transactions in the wholesale trade, to determine trends in noncompliance and abuse. If experience warrants, expanded reporting requirements may be proposed on a prospective basis.

CHANGES MADE BY THE FINAL REGULATIONS

 SPECIFIED MONETARY INSTRUMENTS. The final regulations clarify that cashier's checks, by whatever name they are called (including "treasurer's check" and "bank check"), as well as bank drafts, traveler's checks, and money orders, are specified monetary instruments if they have a face amount of not more than $10,000.

 DESIGNATED REPORTING TRANSACTIONS. Under the proposed regulations, specified monetary instruments are treated as cash if they are received in a designated reporting transaction. A designated reporting transaction includes a retail sale of a consumer durable. The proposed regulations define a consumer durable as an item of tangible personal property of a type NORMALLY SOLD for personal consumption or use that can reasonably be expected to be useful for at least one year under ordinary usage and that has a sales price of more than $10,000.

 In response to comments received, the final regulations clarify the definition of the term "consumer durable" to mean an item of tangible personal property of a type that is SUITABLE UNDER ORDINARY USAGE for personal consumption or use, that can reasonably be expected to be useful for at least one year under ordinary usage, and that has a sales price of more than $10,000. Thus, under the final regulations, an item of tangible personal property that is suitable under ordinary usage for personal consumption or use may be a consumer durable whether or not in the experience of a particular merchant/recipient a larger quantity of the item is sold for business use or consumption than for personal use or consumption and whether or not in a particular sale the item is sold for personal use or consumption. For example, a $20,000 automobile is a consumer durable even if the dealer sells a larger quantity of automobiles for business use than it sells for personal use and even if the automobile in a particular sale is sold for business use. Conversely, a dump truck is not a consumer durable.

 Under the proposed regulations, a designated reporting transaction also includes the retail sale of a travel or entertainment activity. A travel or entertainment activity is one or more items of travel or entertainment pertaining to a single trip or event, but only if the aggregate sales price of all items pertaining to the trip or event exceeds $10,000.

 Some commentators suggested that a retail sale of a travel or entertainment activity should not be included as a designated reporting transaction. However, based on law enforcement experience, the retail sale of a travel and entertainment activity has been retained as a designated reporting transaction in the final regulations. In this connection, it should be noted that, as discussed below, the final regulations clarify the down payment plan exception to the designated reporting transaction rules so as to make the exception more readily applicable to items of travel and entertainment.

 The final regulations clarify the definition of "retail sale" by providing that ANY sale (whether for resale or for any other purpose) that is made in the course of a trade or business that principally consists of making sales to ultimate consumers is a retail sale.

 EXCEPTIONS FOR LOANS AND PERIODIC PAYMENT PLANS. The proposed regulations provide that a specified monetary instrument received in a designated reporting transaction is not treated as cash if one of the exceptions discussed below applies and the recipient does not know that the instrument is being used in an attempt to avoid the reporting of the transaction under section 6050I and the regulations.

 The first exception applies if the monetary instrument constitutes the proceeds of a loan from a bank (including a thrift institution or a credit union). The merchant/recipient may rely on a copy of the loan document, a written statement from the bank, or similar documentation to substantiate that the instrument constitutes loan proceeds.

 Commentators recommended that the final regulations should provide examples of documentation (other than a loan document or a written statement from the bank issuing the instrument) that would constitute sufficient substantiation. The proposed regulations contain such an example: example 2 of section 1.6050I-1(c)(1)(vii). The final regulations expand the description of the documentary substantiation in example 2 and revise the text of section 1.6050I- 1(c)(iv) to include as an example of sufficient substantiation a written lien instruction from the issuer of the monetary instrument.

 The second exception applies if (1) the instrument is received in payment on a promissory note or an installment sales contract, (2) the recipient uses promissory notes or installment sales contracts with the same or substantially similar terms in the ordinary course of its trade or business in connection with sales to ultimate consumers, and (3) the total amount of payments received with respect to the sale on or before the 60th day after the date of the sale does not exceed 50 percent of the purchase price of the sale.

 One commentator suggested that the exception for payments received under installment sales contracts should also include payments on leases if the leasing of property is considered a designated reporting transaction. Under the proposed regulations, the leasing of property is not a designated reporting transaction unless, in a particular case, a transaction that is nominally a leasing transaction is considered to be a sale for Federal income tax purposes. See Rev. Rul. 55-540, 1955-2 C.B. 39. In such case, the transaction may be a designated reporting transaction. The final regulations clarify that the exception for installment sales contracts is applicable in that case, provided the conditions contained therein are satisfied.

 The third exception applies if (1) the instrument is received pursuant to a payment plan requiring one or more down payments and the payment of the balance of the purchase price by the time of the sale, (2) the recipient uses plans with the same or substantially similar terms in the ordinary course of its trade or business in connection with sales to ultimate consumers, and (3) the instrument is received more than 60 days prior to the date of the sale.

 In response to a comment concerning the applicability of the third exception with respect to the sale of an item of travel or entertainment, the exception is clarified in the final regulations. In such case, the exception applies if (1) the instrument is received pursuant to a payment plan requiring one or more down payments and the payment of the balance of the purchase price on or before the earliest date that any item of travel or entertainment pertaining to the same trip or event is furnished, (2) the recipient uses payment plans with the same or substantially similar terms in the ordinary course of its trade or business in connection with sales to ultimate consumers, and (3) the instrument is received more than 60 days prior to the date on which the final payment is due. Thus, for example, in the case of amounts received by a travel agency for airfare, accommodations, and admissions pertaining to a single trip, the third exception would apply to a specified monetary instrument received more than 60 days prior to the date by which the final payment is due, provided that the other conditions contained in the exception are met.

 One commentator suggested that a further exception should be made to the designated reporting transaction rules in the case of a specified monetary instrument that is acquired with funds on deposit at a bank. No exception has been made in the final regulations for a monetary instrument so acquired because, in order to avoid abuse, it would be necessary to add considerable substantiation requirements that would impose an additional burden on issuers, payors, and recipients, as well as on the Service.

 RECIPIENT'S KNOWLEDGE OF STRUCTURING. The proposed regulations provide that a specified monetary instrument is treated as cash if the recipient knows that the instrument is being used in an attempt to avoid the reporting of the transaction under section 6050I and the regulations thereunder.

 One commentator suggested that the final regulations should state that reporting is required if the recipient has ACTUAL knowledge that the monetary instrument is being used in an attempt to avoid reporting. The Service believes, however that "knowledge" rather than "actual knowledge," is the better term for this purpose because it has been more clearly defined through judicial interpretation in other contexts and thus should be easier to apply by taxpayers and the Service. See, e.g., United States v. Jewell, 532 F.2d 697 (9th Cir. 1976) (en banc), cert. denied, 426 U.S. 951 (1976), holding that the term "knowledge" comprehends "willful blindness," the deliberate avoidance of knowledge of the facts.

 Another commentator recommended that a criminal defense attorney who knows that a specified monetary instrument received from a client is being used in an attempt to avoid the reporting of the transaction should be excepted from reporting where the attorney's knowledge is derived from communications with the client. The Service is concerned that such a regulatory exception, however limited in scope, would have the effect of encouraging the use of monetary instruments in lieu of currency to avoid the currency reporting rules. Therefore, no exception is provided in the final regulations.

 OTHER COMMENTS. Several commentators addressed matters which more closely pertain to existing regulations under section 6050I. Because these matters involve the interpretation of those regulations, they are not addressed in this document. The Service, however, is considering these comments in the context of its continuing review of the rules promulgated under section 6050I and will provide additional guidance where necessary or appropriate.

Special Analyses

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking for the regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

LIST OF SUBJECTS

26 CFR 1.6031-1 through 1.6060-1

 Income taxes, Reporting and recordkeeping requirements.

Treasury Decision 8373

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR part 1 is amended as follows:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

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

Authority: Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805 * * * Section 1.6050I-1 also issued under 26 U.S.C. 6050I. * * *

Par. 2. Section 1.6050I-1 is amended as follows:

1. Paragraph (c)(l) is revised.

2. Paragraphs (c)(2) through (c)(4) are redesignated as paragraphs (c)(6) through (c)(8), respectively, and paragraph headings are added.

3. New paragraphs (c)(2) through (c)(5) are added.

4. Paragraph (g) is revised.

5. The revised and added provisions read as follows.

SECTION 1.6050I-1 RETURNS RELATING TO CASH IN EXCESS OF $10,000 RECEIVED IN A TRADE OR BUSINESS.

* * * * *

(c) MEANING OF TERMS. The following definitions apply for purposes of this section --

(1) CASH -- (i) AMOUNTS RECEIVED PRIOR TO FEBRUARY 3, 1992. For amounts received prior to February 3, 1992, the term "cash" means the coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued.

(ii) AMOUNTS RECEIVED ON OR AFTER FEBRUARY 3, 1992. For amounts received on or after February 3, 1992, the term cash" means --

(A) The coin and currency of the United States or of any other country, which circulate in and are customarily used and accepted as money in the country in which issued; and

(B) A cashier's check (by whatever name called, including "treasurer's check" and "bank check"), bank draft, traveler's check, or money order having a face amount of not more than $10,000 --

(1) Received in a designated reporting transaction as defined in paragraph (c)(1)(iii) of this section (except as provided in paragraphs (c)(1)(iv), (v), and (vi) of this section), or

(2) Received in any transaction in which the recipient knows that such instrument is being used in an attempt to avoid the reporting of the transaction under section 6050I and this section.

(iii) DESIGNATED REPORTING TRANSACTION. A designated reporting transaction is a retail sale (or the receipt of funds by a broker or other intermediary in connection with a retail sale) of --

(A) A consumer durable,

(B) A collectible, or

(C) A travel or entertainment activity.

(iv) EXCEPTION FOR CERTAIN LOANS. A cashier's check, bank draft, traveler's check, or money order received in a designated reporting transaction is not treated as cash pursuant to paragraph (c)(1)(ii)(B)(1) of this section if the instrument constitutes the proceeds of a loan from a bank (as that term is defined in 31 CFR part 103). The recipient may rely on a copy of the loan document, a written statement from the bank, or similar documentation (such as a written lien instruction from the issuer of the instrument) to substantiate that the instrument constitutes loan proceeds.

(v) EXCEPTION FOR CERTAIN INSTALLMENT SALES. A cashier's check, bank draft, traveler's check, or money order received in a designated reporting transaction is not treated as cash pursuant to paragraph (c)(1)(ii)(B)(1) of this section if the instrument is received in payment on a promissory note or an installment sales contract (including a lease that is considered to be a sale for Federal income tax purposes). However, the preceding sentence applies only if --

(A) Promissory notes or installment sales contracts with the same or substantially similar terms are used in the ordinary course of the recipient's trade or business in connection with sales to ultimate consumers; and

(B) The total amount of payments with respect to the sale that are received on or before the 60th day after the date of the sale does not exceed 50 percent of the purchase price of the sale.

(vi) EXCEPTION FOR CERTAIN DOWN PAYMENT PLANS. A cashier's check, bank draft, traveler's check, or money order received in a designated reporting transaction is not treated as cash pursuant to paragraph (c)(1)(ii)(B)(1) of this section if the instrument is received pursuant to a payment plan requiring one or more down payments and the payment of the balance of the purchase price by a date no later than the date of the sale (in the case of an item of travel or entertainment, a date no later than the earliest date that any item of travel or entertainment pertaining to the same trip or event is furnished). However, the preceding sentence applies only if --

(A) The recipient uses payment plans with the same or substantially similar terms in the ordinary course of its trade or business in connection with sales to ultimate consumers; and

(B) The instrument is received more than 60 days prior to the date of the sale (in the case of an item of travel or entertainment, the date on which the final payment is due).

(vii) EXAMPLES. The following examples illustrate the definition of "cash" set forth in paragraphs (c)(1)(ii) through (vi) of this section.

EXAMPLE 1. D, an individual, purchases gold coins from M, a coin dealer, for $13,200. D tenders to M in payment United States currency in the amount of $6,200 and a cashier's check in the face amount of $7,000 which D had purchased. Because the sale is a designated reporting transaction, the cashier's check is treated as cash for purposes of section 6050I and this section. Therefore, because M has received more than $10,000 in cash with respect to the transaction, M must make the report required by section 6050I and this section.

EXAMPLE 2. E, an individual, purchases an automobile from Q, an automobile dealer, for $11,500. E tenders to Q in payment United States currency in the amount of $2,000 and a cashier's check payable to E and Q in the amount of $9,500. The cashier's check constitutes the proceeds of a loan from the bank issuing the check. The origin of the proceeds is evident from provisions inserted by the bank on the check that instruct the dealer to cause a lien to be placed on the vehicle as security for the loan. The sale of the automobile is a designated reporting transaction. However, under paragraph (c)(1)(iv) of this section, because E has furnished Q documentary information establishing that the cashier's check constitutes the proceeds of a loan from the bank issuing the check, the cashier's check is not treated as cash pursuant to paragraph (c)(1)(ii)(B)(1) of this section.

EXAMPLE 3. F, an individual, purchases an item of jewelry from S, a retail jeweler, for $12,000. F gives S traveler's checks totaling $2,400 and pays the balance with a personal check payable to S in the amount of $9,600. Because the sale is a designated reporting transaction, the traveler's checks are treated as cash for purposes of section 6050I and this section. However, because the personal check is not treated as cash for purposes of section 6050I and this section, S has not received more than $10,000 in cash in the transaction and no report is required to be filed under section 6050I and this section.

EXAMPLE 4. G, an individual, purchases a boat from T, a boat dealer, for $16,500. G pays T with a cashier's check payable to T in the amount of $16,500. The cashier's check is not treated as cash because the face amount of the check is more than $10,000. Thus, no report is required to be made by T under section 6050I and this section.

EXAMPLE 5. H, an individual, arranges with W, a travel agent, for the chartering of a passenger aircraft to transport a group of individuals to a sports event in another city. H also arranges with W for hotel accommodations for the group and for admission tickets to the sports event. In payment, H tenders to W money orders which H had previously purchased. The total amount of the money orders, none of which individually exceeds $10,000 in face amount, exceeds $10,000. Because the transaction is a designated reporting transaction, the money orders are treated as cash for purposes of section 6050I and this section. Therefore, because W has received more than $10,000 in cash with respect to the transaction, W must make the report required by section 6050I and this section.

(2) CONSUMER DURABLE. The term "consumer durable" means an item of tangible personal property of a type that is suitable under ordinary usage for personal consumption or use, that can reasonably be expected to be useful for at least 1 year under ordinary usage, and that has a sales price of more than $10,000. Thus, for example, a $20,000 automobile is a consumer durable (whether or not it is sold for business use), but a $20,000 dump truck or a $20,000 factory machine is not.

(3) COLLECTIBLE. The term "collectible" means an item described in paragraphs (A) through (D) of section 408(m)(2) (determined without regard to section 408(m)(3)).

(4) TRAVEL OR ENTERTAINMENT ACTIVITY "The term "travel or entertainment activity" means an item of travel or entertainment (within the meaning of section 1.274-2(b)(1)) pertaining to a single trip or event where the aggregate sales price of the item and all other items pertaining to the same trip or event that are sold in the same transaction (or related transactions) exceeds $10,000.

(5) RETAIL SALE. The term 'retail sale' means any sale (whether for resale or for any other purpose) made in the course of a trade or business if that trade or business principally consists of making sales to ultimate consumers.

(6) TRADE OR BUSINESS. * * *

(7) TRANSACTION. * * *

(8) RECIPIENT. * * *

* * * * *

(g) CROSS-REFERENCE TO PENALTY PROVISIONS -- (1) FAILURE TO FILE CORRECT INFORMATION RETURN. See section 6721 for civil penalties relating to the failure to file a correct return under section 6050I(a) and paragraph (a) of this section.

(2) FAILURE TO FURNISH CORRECT STATEMENT. See section 6722 for civil penalties relating to the failure to furnish a correct statement to identified persons under section 6050I(e) and paragraph (f) of this section.

(3) CRIMINAL PENALTIES. Any person who willfully fails to make a return or makes a false return under section 6050I and this section may be subject to criminal prosecution.

Par. 3. In paragraph (c)(7), as redesignated, of section 1.6050I-1, all references to paragraphs (c)(3)(i) and (c)(3)(ii) of section 6050I-1 are revised to read "(c)(7)(i)" and "(c)(7)(ii)," respectively.

Par. 4. In paragraph (c)(8), as redesignated, of section 1.6050I-1, all references to paragraphs (c)(4)(i) and (c)(4)(ii) of section 6050I-1 are revised to read "(c)(8)(i)" and "(c)(8)(ii)," respectively.