[Federal Register Volume 59, Number 233 (Tuesday, December 6, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29702]
[[Page Unknown]]
[Federal Register: December 6, 1994]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 8570]
RIN 1545-AS96
Nonbank Trustee Net Worth Requirements
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
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SUMMARY: This document contains temporary regulations that provide
guidance to nonbank trustees with respect to the adequacy of net worth
requirements of Sec. 1.401-12(n) (6) and (7) of the Income Tax
Regulations. The text of these temporary regulations also serves as the
text of the proposed regulations set forth in the notice of proposed
rulemaking on this subject in the Proposed Rules section of this issue
of the Federal Register.
DATES: These regulations are effective December 6, 1994.
FOR FURTHER INFORMATION CONTACT: Judith E. Alden, (202) 622-6030 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Background
This document contains amendments to the Income Tax Regulations (26
CFR part 1) under section 401(d)(1). Sections 1022(c), 1022(d), and
2002(a)(2) of the Employee Retirement Income Security Act of 1974
(ERISA), Pub. L. 93-406 (1974), amended sections 401(d), 401(f), and
408 of the Internal Revenue Code (Code) to permit an entity that is not
a bank to be a trustee or a custodian for purposes of those Code
sections if such entity demonstrates to the satisfaction of the
Secretary of the Treasury that it will administer the trust and hold
assets in a manner consistent with the law. Although section 401(d)(1)
was repealed by section 237(a) of the Tax Equity and Fiscal
Responsibility Act of 1982, Pub. L. 97-248 (1982), the regulations
under section 401(d)(1) remain in force and effect to the extent that
they govern the determination of whether an entity can be a nonbank
trustee or custodian for purposes of Treasury Regulation
Secs. 1.401(f)-1 and 1.408-2(d). Section 1.401-12(n)(6)(ii) of the
regulations, proposed in 1975 and finalized in 1979 under section
401(d)(1) of the Code, sets forth net worth requirements for nonbank
trustees based on the greater of a specified dollar amount or a
percentage of the value of all assets held by the nonbank trustee in
fiduciary accounts. A primary objective of this adequacy of net worth
requirement has been to ensure that nonbank trustees maintain a level
of solvency commensurate with their financial and fiduciary
responsibilities.
Pursuant to the existing net worth requirements, nonbank trustees
may not accept new accounts unless their net worth exceeds the greater
of $100,000 or four percent of the value of all assets held in
fiduciary accounts. Additionally, nonbank trustees must take whatever
steps are necessary (including the relinquishment of fiduciary
accounts) to ensure that their net worth exceeds the greater of $50,000
or two percent of the value of assets held in their fiduciary accounts.
While similar requirements apply to passive nonbank trustees (qualified
nonbank entities that have no discretion to direct the investment of
assets), the percentage requirements for these trustees are lower.
Specifically, passive nonbank trustees may not accept new accounts
unless their net worth exceeds the greater of $100,000 or two percent
of the value of all assets held in fiduciary accounts and they must
take appropriate action (including the relinquishment of fiduciary
accounts) to ensure that their net worth exceeds the greater of $50,000
or one percent of the value of assets held in their fiduciary accounts.
The IRS has received comments that this requirement is unduly
restrictive in the case of passive trustees who are broker-dealers
regulated by the Securities and Exchange Commission (SEC) and who are
required to have their fiduciary accounts protected by the Securities
Investor Protection Corporation (SIPC). SIPC, established by Congress
in 1970, insures customer assets and funds held by a U.S. broker-dealer
in the case of an insolvency in an amount of up to $500,000 per
customer, of which $100,000 may be cash. Thus, with respect to SIPC
protected assets, the on-going net worth requirement provides little if
any increase in protection of assets held in fiduciary accounts.
Accordingly, these temporary regulations provide that SIPC protected
assets will be disregarded in determining the value of assets held in
fiduciary accounts by passive trustees for purposes of the percentage
prong of the net worth requirement.
These temporary regulations also increase the initial net worth
requirement for all nonbank trustees to better assure that enterprises
are sound and well-funded during their start-up period. Under the
existing net worth requirements, every nonbank trustee must have an
initial net worth that exceeds $100,000. Under these temporary
regulations, all entities applying for nonbank trustee status must have
a net worth of not less than $250,000 for the most recent taxable year
preceding the applicant's initial application. The existing net worth
requirements, as modified for SIPC protected assets, will continue to
apply on an on-going basis after a nonbank trustee has obtained the
approval of the IRS.
In the absence of evidence that the on-going net worth requirements
fail to meet the underlying objectives, these requirements (except with
respect to SIPC protected assets) remain unchanged. However, the IRS
recognizes that the nonbank trustee requirements have been in effect
since 1979. Accordingly, the IRS and Treasury would welcome comments
concerning the net worth requirements generally, as well as other
aspects of the 1979 regulations.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in EO 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)
and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to
these regulations, and, therefore, a Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
these temporary regulations will be submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on their
impact on small business.
Drafting Information
The principal author of these regulations is Judith E. Alden,
Office of the Associate Chief Counsel, (Employee Benefits and Exempt
Organizations). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 continues to read,
in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 1.401-12T is added to read as follows:
Sec. 1.401-12T Requirements for qualification of trusts and plans
benefiting owner-employees (temporary).
(a) through (n)(6)(i) For guidance, see Sec. 1.401-12(a) through
(n)(6)(i).
(n)(6)(ii) Adequacy of net worth--(A) Initial net worth
requirement. In the case of applications received after January 5,
1995, no initial application will be accepted by the Commissioner
unless the applicant has a net worth of not less than $250,000
(determined as of the end of the most recent taxable year). Thereafter,
the applicant must satisfy the adequacy of net worth requirements of
paragraph (n)(6)(ii)(B), of this section.
(B) On-going net worth requirement. For guidance, see Sec. 1.401-
12(n)(6)(ii)(B).
(7) Special rules--(i) Passive trustee.
(A) through (B). For guidance, see Sec. 1.401-12(n)(7)(i) (A)
through (B).
(C) For purposes of determining whether a passive nonbank trustee
who is a broker or dealer within the meaning of 15 U.S.C. Sec. 78lll
satisfies the net worth requirements of subparagraph (n)(6)(ii)(B),
assets held by the passive trustee in fiduciary accounts and protected
by the Securities Investor Protection Corporation (SIPC) created under
the Securities Investor Protection Act of 1970 (15 U.S.C. Sec. 78aaa et
seq., as amended) will not be included in determining the value of
assets held in fiduciary accounts by the passive nonbank trustee. Such
assets are only disregarded, however, in determining the value of
assets held in fiduciary accounts by the passive trustee to the extent
the assets are protected by SIPC.
(ii) [Reserved]
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: November 3, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-29702 Filed 12-5-94; 8:45 am]
BILLING CODE 4830-01-U