[Federal Register Volume 65, Number 198 (Thursday, October 12, 2000)]
[Proposed Rules]
[Pages 60822-60824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26350]
[[Page 60821]]
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Part VI
Department of the Treasury
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Internal Revenue Service
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26 CFR Part 301
Classification of Certain Pension and Employee Benefit Trusts, and
Other Trusts; Proposed Rule
Federal Register / Vol. 65, No. 198 / Thursday, October 12, 2000 /
Proposed Rules
[[Page 60822]]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 301
[REG-108553-00]
RIN 1545-AY09
Classification of Certain Pension and Employee Benefit Trusts,
and Other Trusts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed amendments to the regulations
defining a domestic or foreign trust for federal tax purposes. The
proposed regulations will affect certain specified employee benefit
trusts and investment trusts. The proposed amendments provide that
these employee benefit trusts and investment trusts are deemed to
satisfy the control test for domestic trust treatment if United States
trustees control all of the substantial decisions of the trust made by
the trustees of the trust. This document also provides notice of a
public hearing on these proposed regulations.
DATES: Written or electronic comments must be received by January 10,
2001. Requests to speak (with outlines of oral comments to be
discussed) at the public hearing scheduled for January 31, 2001, at 10
a.m. must be submitted by January 10, 2001.
ADDRESSES: Send submissions to: CC:M&SP:RU (REG-108553-00), room 5226,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. Submissions may be hand delivered between the hours of 8 a.m.
and 5 p.m. to: CC:M&SP:RU (REG-108553-00), Courier's Desk, Internal
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC.
Alternatively, taxpayers may submit comments electronically via the
Internet by selecting the ``Tax Regs'' option on the IRS Home Page, or
by submitting comments directly to the IRS Internet site at http://www.irs.ustreas.gov/tax_regs/regslist.html. The public hearing will be
held in the Internal Revenue Service Auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the regulations, James A.
Quinn, (202) 622-3060; concerning submissions and the hearing, Guy R.
Traynor, (202) 622-7180 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 401(a) requires a trust forming part of a pension, profit-
sharing, or stock bonus plan (qualified plan trust) to be created or
organized in the United States in order to be a qualified trust.
Similarly, section 408(a) requires an individual retirement account
trust (IRA trust), which also includes a trust for a Simple IRA
described in section 408(p) and a trust for a Roth IRA described in
section 408A, to be created or organized in the United States. Section
1.401-1(a)(3)(i) further provides that a trust will not constitute a
qualified trust under section 401(a) unless the trust is maintained at
all times as a domestic trust in the United States. Under Sec. 1.408-
2(b), a similar requirement applies to an IRA trust.
Prior to the enactment of the Small Business Job Protection Act
(SBJPA), Public Law 104-188 (110 Stat. 1755) (August 20, 1996), the
status of a qualified plan trust as a domestic trust generally turned
on a facts and circumstances determination that the trust was a
resident trust and was subject to the continuous jurisdiction of the
United States. See, for example, Rev. Rul. 70-242 (1970-1 C.B. 89)
regarding the determination of domestic trust status for purposes of
section 401(a).
The SBJPA and the Taxpayer Relief Act of 1997 (TRA 97), Public Law
105-34 (111 Stat. 788) (August 5, 1997), amended section 7701(a)(30) to
provide objective criteria for determining whether a trust is a
domestic trust. New section 7701(a)(30)(E) provides that a trust will
be treated as a domestic trust if: (1) a court within the United States
is able to exercise primary supervision over the administration of the
trust (court test), and (2) one or more United States persons have the
authority to control all substantial decisions of the trust (control
test). These changes are generally effective for taxable years
beginning after December 31, 1996.
Section 301.7701-7, published in the Federal Register on February
2, 1999 (64 FR 4967), provides guidance under section 7701(a)(30)(E) in
determining whether a trust is treated as a United States person and
therefore as a domestic trust for federal tax purposes. The regulations
are generally effective for taxable years ending after February 2,
1999, but may be applied by taxpayers for taxable years beginning after
December 31, 1996. In addition, section 1907(a)(3) of the SBJPA, as
amended by the TRA 97, generally provides that, to the extent
prescribed in regulations, a trust that was in existence on August 20,
1996, and that was treated as a United States person on August 19,
1996, may elect to continue to be treated as a United States person.
Section 301.7701-7(f) provides rules governing this election to
continue to be treated as a United States person.
Section 301.7701-7(d) provides guidance on the application of the
control test, including defining United States persons, substantial
decisions, and control. Generally, for purposes of the control test,
all persons with any power over substantial decisions of the trust,
whether acting in a fiduciary capacity or not, must be counted for
purposes of the control test.
However, Sec. 301.7701-7(d)(1)(iv) provides a special rule for
certain employee benefit trusts listed therein. These trusts are
required to be created or organized in the United States and are
subject to other detailed requirements for qualification under the
Internal Revenue Code (Code). Therefore, Sec. 301.7701-7(d)(1)(iv)
provides that these trusts are deemed to satisfy the control test,
provided that United States fiduciaries control all of the substantial
decisions of the trust that are made by the trustees or fiduciaries.
Section 301.7701-7(d)(1)(iv) authorizes the Commissioner to designate
additional categories of trusts subject to the special rule in revenue
procedures, notices, or other guidance published in the Internal
Revenue Bulletin.
Explanation
The IRS and the Treasury Department have become aware of two
additional categories of trusts that should qualify for the special
control test rule in Sec. 301.7701-7(d)(1)(iv).
The first category is group trusts consisting of qualified plan
trusts and IRA trusts, as described in Rev. Rul. 81-100 (1981-1 C.B.
326). If the requirements set forth in Rev. Rul. 81-100 are met, a
group trust is itself exempt from tax, and the tax-exempt status of the
participating trusts is not affected by the pooling of their funds in
the group trust. One of the requirements is that the group trust must
be created or organized in the United States and must be maintained at
all times as a domestic trust in the United States. Because these
trusts are required to be created or organized in the United States and
are subject to other detailed requirements, they are similar to the
other categories of employee benefit trusts listed in Sec. 301.7701-
7(d)(1)(iv). Therefore, the proposed regulations add group trusts
described in Rev. Rul. 81-100 to the categories of trusts that may use
the special control test rule.
The second category is certain investment trusts that are
classified as
[[Page 60823]]
trusts under Sec. 301.7701-4(c)(1). An investment trust with a single
class of ownership interests, representing undivided beneficial
interests in the assets in the trust, is classified as a trust if there
is no power under the trust agreement to vary the investment of the
certificate holders. In addition, an investment trust with multiple
classes of ownership interests, in which there is no power under the
trust agreement to vary the investment of the certificate holders, is
classified as a trust if the trust is formed to facilitate direct
investment in the assets of the trust and the existence of multiple
classes of ownership interests is incidental to that purpose. These
trusts are treated as owned by the investors under the grantor trust
rules of subpart E, part I, subchapter J, chapter 1 of the Code.
The proposed regulations add investment trusts classified as trusts
under Sec. 301.7701-4(c)(1) to the categories of trusts that may use
the special control test rule, provided the investment trusts meet the
conditions described in Sec. 301.7701-7(d)(1)(iv)(I). These trusts are
subject to reporting requirements as domestic grantor trusts, and each
investor must report the items of income, deduction, and credit that
are attributable to the investor's portion of the trust. The conditions
set forth in the proposed regulations are intended to ensure that all
trustees are United States persons including at least one institutional
United States trustee, the sponsors (persons who exchange investment
assets for beneficial interests with a view to selling the beneficial
interests) are United States persons, and the beneficial interests are
widely offered for sale primarily in the United States to United States
persons. An investment trust that satisfies these conditions is deemed
to satisfy the control test even though one or more investors may be
foreign persons with the power to make a substantial decision of the
trust.
In addition, the IRS and the Treasury Department have become aware
of concerns expressed by taxpayers in applying the special rule of
Sec. 301.7701-7(d)(1)(iv) with respect to determining whether a person
is or is not a fiduciary for purposes of the control test. For example,
under section 3(14)(A) of the Employee Retirement Income Security Act
of 1974 (ERISA), Public Law 93-406 (88 Stat. 829) (September 2, 1974),
a variety of persons in addition to the trustee(s) is considered
fiduciaries with respect to an employee benefit trust. In contrast,
under ordinary trust principles the fiduciary of a trust is generally
considered to be the trustee holding legal title to the trust assets on
behalf of those having a beneficial interest therein. Section 301.7701-
6(b). Therefore, these regulations propose to amend Sec. 301.7701-
7(d)(1)(iv) relating to the application of the control test of section
7701(a)(30)(E) to clarify that employee benefit trusts and certain
investment trusts identified in the regulations are deemed to satisfy
the control test if United States trustees control all of the
substantial decisions of the trust made by the trustees of the trust.
Taxpayers concerned with maintaining domestic trust status should
also note that, in appropriate cases, it may still be possible to elect
pursuant to Sec. 301.7701-7(f) to treat a trust existing on August 19,
1996, as a United States person.
Application to Certain Pension Trusts Created or Organized in Puerto
Rico
Section 1022(i)(1) of ERISA provides for tax exemption for certain
trusts created or organized in Puerto Rico that form part of a pension,
profit-sharing, or stock bonus plan. Section 1022(i)(2) and
Sec. 1.401(a)-50 generally provide that the administrator of such a
trust may elect to have the trust treated as a trust created or
organized in the United States for purposes of section 401(a). In light
of the changes made to section 7701(a)(30) in the SBJPA and the TRA 97,
and the ensuing regulations, some taxpayers have expressed concerns
regarding the continuing application of sections 1022(i)(1) and (2) and
Sec. 1.401-50 to a pension trust created or organized in Puerto Rico
that is not a domestic trust within the meaning of section 7701(a)(30).
Because the application of these provisions is not restricted to trusts
that are domestic trusts within the meaning of section 7701(a)(30), the
1996 and 1997 amendments to section 7701(a)(30) and the ensuing
regulations do not affect the application of these provisions.
Proposed Effective Date
The amendments to the regulations are proposed to be applicable to
trusts for taxable years ending on or after the date on which these
regulations are published as final regulations in the Federal Register.
It is anticipated that the final regulations will provide that trusts
will be able to rely on the final regulations for taxable years
beginning after December 31, 1996, and for electing trusts under
section 1907(a)(3)(B) of the SBJPA for taxable years ending after
August 20, 1996. In addition, for taxable years beginning after
December 31, 1996, and taxable years ending before these regulations
are finalized, or for electing trusts under section 1907(a)(3)(B) of
the SBJPA for taxable years ending after August 20, 1996, and before
these regulations are finalized, the status of a trust as a qualified
plan trust under section 401(a), an IRA trust under section 408(a), or
any other employee benefit trust described in Sec. 301.7701-7(d)(1)(iv)
of these proposed regulations will not be challenged by the IRS based
on a failure of the trust to satisfy the control test of section
7701(a)(30)(E)(ii) and, therefore, a failure to be maintained at all
times as a domestic trust in the United States, if the trust satisfies
the control test safe harbor set forth in Sec. 301.7701-7(d)(1)(iv) of
these proposed regulations or Sec. 301.7701-7(d)(1)(iv) of the final
regulations published in the Federal Register on February 2, 1999.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It also has
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations, and because
the regulation does not impose a collection of information on small
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not
apply. Pursuant to section 7805(f) of the Internal Revenue Code, this
notice of proposed rulemaking will be 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 (preferably a
signed original and eight (8) copies) that are submitted timely to the
IRS. The IRS and the Treasury Department specifically request comments
on the clarity of the proposed regulations and how they can be made
easier to understand. All comments will be available for public
inspection and copying.
A public hearing has been scheduled for January 31, 2001, at 10
a.m. in the Internal Revenue Service Auditorium, Internal Revenue
Building, 1111 Constitution Avenue, NW., Washington DC. Because of
access restrictions, visitors will not be admitted beyond the Internal
Revenue Building lobby more than 15 minutes before the hearing starts.
The rules of 26 CFR 601.601(a)(3) apply to the hearing.
[[Page 60824]]
Persons that wish to present oral comments at the hearing must
submit written comments by January 10, 2001, and submit an outline of
the topics to be discussed and the time to be devoted to each topic
(preferably a signed original and eight (8) copies) by January 10,
2001.
A period of 10 minutes will be allotted to each person for making
comments.
An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed. Copies of the
agenda will be available free of charge at the hearing.
Drafting Information: The principal author of these regulations is
James A. Quinn of the Office of Associate Chief Counsel (Passthroughs
and Special Industries). However, other personnel from the IRS and
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 301 is proposed to be amended as follows:
PART 301--PROCEDURE AND ADMINISTRATION
Paragraph 1. The authority citation for part 301 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 301.7701-7 is amended as follows:
1. Paragraph (d)(1)(iv) introductory text is revised.
2. Paragraph (d)(1)(iv)(H) is redesignated as paragraph
(d)(1)(iv)(J).
3. New paragraphs (d)(1)(iv)(H) and (I) are added.
4. Paragraph (d)(1)(v) Example 1 is revised and Example 5 is added.
5. The first sentence of paragraph (e)(1) is revised.
6. Paragraph (e)(3) is added.
The revisions and additions read as follows:
Sec. 301.7701-7 Trusts--domestic and foreign.
* * * * *
(d) * * *
(1) * * *
(iv) Safe harbor for certain employee benefit trusts and investment
trusts. Notwithstanding the provisions of this paragraph (d), the
trusts listed in this paragraph (d)(1)(iv) are deemed to satisfy the
control test set forth in paragraph (a)(1)(ii) of this section,
provided that United States trustees control all of the substantial
decisions made by the trustees of the trust--
* * * * *
(H) A group trust described in Rev. Rul. 81-100 (1981-1 C.B. 326)
(See Sec. 601.601(d)(2) of this chapter);
(I) An investment trust classified as a trust under Sec. 301.7701-
4(c), provided that the following conditions are satisfied--
(1) All trustees are United States persons and at least one of the
trustees is a bank, as defined in section 581, or a United States
Government-owned agency or United States Government-sponsored
enterprise;
(2) All sponsors (persons who exchange investment assets for
beneficial interests with a view to selling the beneficial interests)
are United States persons; and
(3) The beneficial interests are widely offered for sale primarily
in the United States to United States persons;
* * * * *
(v) * * *
Example 1. Trust is a testamentary trust with three fiduciaries,
A, B, and C. A and B are United States citizens and C is a
nonresident alien. No persons except the fiduciaries have authority
to make any decisions of the trust. The trust instrument provides
that no substantial decisions of the trust can be made unless there
is unanimity among the fiduciaries. The control test is not
satisfied because United States persons do not control all the
substantial decisions of the trust. No substantial decisions can be
made without C's agreement.
* * * * *
Example 5. X, a foreign corporation, conducts business in the
United States through various branch operations. X has United States
employees and has established a trust as part of a qualified
employee benefit plan under section 401(a) for these employees. The
trust is established under the laws of State A, and the trustee of
the trust is B, a United States bank governed by the laws of State
A. B holds legal title to the trust assets for the benefit of the
trust beneficiaries. A plan committee makes decisions with respect
to the plan and the trust. The plan committee can direct B's actions
with regard to those decisions and under the governing documents B
is not liable for those decisions. Members of the plan committee
consist of United States persons and nonresident aliens, but
nonresident aliens make up a majority of the plan committee.
Decisions of the plan committee are made by majority vote. In
addition, X retains the power to terminate the trust and to replace
the United States trustee or to appoint additional trustees. This
trust is deemed to satisfy the control test under paragraph
(d)(1)(iv) of this section because B, a United States person, is the
trust's only trustee. Any powers held by the plan committee or X are
not considered under the safe harbor of paragraph (d)(1)(iv) of this
section. In the event that X appoints additional trustees including
foreign trustees, any powers held by such trustees must be
considered in determining whether United States trustees control all
substantial decisions made by the trustees of the trust.
* * * * *
(e) Effective date--(1) General rule. Except for the election to
remain a domestic trust provided in paragraph (f) of this section and
except as provided in paragraph (e)(3) of this section, this section is
applicable to taxable years ending after February 2, 1999.
* * * * *
(3) Effective date of safe harbor for certain employee benefit
trusts and investment trusts. Paragraphs (d)(1)(iv) and (v) Examples 1
and 5 of this section apply to trusts for taxable years ending on or
after the date of publication of final regulations in the Federal
Register. Paragraphs (d)(1)(iv) and (v) Examples 1 and 5 of this
section may be relied on by trusts for taxable years beginning after
December 31, 1996, and also may be relied on by trusts whose trustees
have elected to apply sections 7701(a)(30) and (31) to the trusts for
taxable years ending after August 20, 1996, under section 1907(a)(3)(B)
of the SBJP Act.
* * * * *
David A. Mader,
Acting Commissioner of Internal Revenue.
[FR Doc. 00-26350 Filed 10-10-00; 3:31 pm]
BILLING CODE 4830-01-P