[Federal Register Volume 60, Number 150 (Friday, August 4, 1995)]
[Proposed Rules]
[Pages 39903-39905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19286]



-----------------------------------------------------------------------


DEPARTMENT OF THE TREASURY
26 CFR Part 301

[PS-54-94]
RIN 1545-AT02


Environmental Settlement Funds--Classification

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: This document contains proposed regulations relating to the 
classification of certain organizations as trusts for federal tax 
purposes. The proposed regulations would provide guidance to taxpayers 
on the proper classification of trusts formed to collect and disburse 
amounts for environmental remediation of an existing waste site to 
discharge taxpayers' liability or potential liability under applicable 
environmental laws.

DATES: Written comments must be received by October 5, 1995. Requests 
to speak (with outlines of oral comments) at a public hearing scheduled 
for October 26, 1995, at 10 a.m. must be submitted by October 5, 1995.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS-54-94), room 5228, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. In the alternative, submissions may be hand delivered between 
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS-54-94), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington, DC. The public hearing has been scheduled to be held 
in the 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, Michael 
Slaughter, (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act (44 U.S.C. 
3504(h)). Comments on the collection of information should be sent to 
the Office of Management and Budget, Attention: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC 
20224.
    The collection of information is required by Sec. 301.7701-4(e)(2). 
This information is required by the IRS to ensure the proper reporting 
of items of income and expense of an environmental remediation trust in 
which a portion of the trust is treated as owned by a grantor. This 
information will be used to ensure compliance with the proposed 
regulation. The likely respondents are businesses and other for-profit 
institutions, including small businesses.
    Estimated total annual reporting burden: 2,000 hours.
    The estimated annual burden per respondent: 4 hours.
    Estimated number of respondents: 500.
    Estimated annual frequency of responses: 1.

Introduction

    This document proposes to add Sec. 301.7701-4(e) to the Procedure 
and Administration Regulations (26 CFR Part 301) relating to the 
classification of certain environmental remediation trusts as trusts 
for federal tax purposes.

Background

    Unincorporated organizations may be classified as associations 
(which are taxable as corporations), partnerships, or trusts for 
federal tax purposes. The criteria for determining when an organization 
will be classified as a trust are set forth in Sec. 301.7701-4. The 
proposed amendment to Sec. 301.7701-4 provides that an environmental 
remediation trust will be classified as a trust for federal tax 
purposes.
    A trust is an environmental remediation trust if (1) the primary 
purpose of the trust is collecting and disbursing amounts for 
environmental remediation of an existing waste site to resolve, 
satisfy, mitigate, address, or prevent the liability or potential 
liability of persons imposed by federal, state, or local environmental 
laws; (2) all contributors to the trust have potential liability or a 
reasonable expectation of liability under federal, state, or local 
environmental laws for environmental remediation of the waste site; and 
(3) the trust is not a qualified settlement fund within the meaning of 
Sec. 1.468B- 1(a). Environmental remediation trusts include trusts 
formed pursuant to an order of a governmental authority, as well as 
trusts formed by taxpayers to avoid future liability or potential 
liability under federal, state, or local environmental laws. An 
environmental remediation trust is classified as a trust, even though 
it may differ from the traditional trust in which trustees take title 
to property for the purpose of protecting or conserving it for the 
beneficiaries under the ordinary rules applied in chancery or probate 
courts, because the purpose of an environmental remediation trust is to 
pay the costs of environmental remediation of an existing waste site as 
a result of liability or potential liability under federal, state, or 
local environmental laws, not to carry on a for-profit business. 

[[Page 39904]]

    The proposed regulations provide that each contributor to the trust 
will be treated as the owner of the portion of the trust contributed by 
that person, and, therefore, the trust is treated as a grantor trust 
under subpart E of subchapter J. The proposed regulations also require 
the trustee to provide information to the participants that will enable 
them to properly report their share of income, deductions, and credits, 
including information to properly determine whether a payment satisfies 
the economic performance rules of section 461(h).
    The proposed regulations provide certain rules relating to 
participants (cash-out grantors) that contribute a fixed amount to the 
trust and are relieved from making further contributions to the trust, 
even though the participant still is liable or potentially liable under 
applicable environmental laws. Under the proposed regulations, all 
amounts contributed to an environmental remediation trust by a cash-out 
grantor are considered amounts contributed for remediation. In 
addition, the trust agreement may direct the trustee to expend amounts 
contributed by a cash-out grantor (and the earnings thereon) before 
expending amounts contributed by other grantors (and the earnings 
thereon). The proposed regulations also provide that a cash-out grantor 
will cease to be treated as an owner of a portion of the trust when the 
grantor's portion is treated as fully expended.

Effective Date

    The regulations are proposed to apply to trusts that meet the 
requirements of paragraph (e)(1) of the regulations that are formed on 
or after the date of publication of these proposed regulations as final 
regulations in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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 Procedures 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, 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 (a signed original 
and eight (8) copies) that are submitted timely to the IRS. All 
comments will be available for public inspection and copying.
    A public hearing has been scheduled for October 26, 1995, at 10:00 
a.m. in the IRS 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.
    Persons that wish to present oral comments at the hearing must 
submit written comments by October 5, 1995, and submit an outline of 
the topics to be discussed and the time to be devoted to each topic 
(signed original and eight (8) copies) by October 5, 1995.
    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 Assistant 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 301.7701-4(e) is added to read as follows:


Sec. 301.7701-4  Trusts.

* * * * *
    (e) Environmental remediation trusts. (1) An environmental 
remediation trust is considered a trust for purposes of the Internal 
Revenue Code. For purposes of this paragraph (e), an organization is an 
environmental remediation trust if the organization is organized under 
state law as a trust; the primary purpose of the trust is collecting 
and disbursing amounts for environmental remediation of an existing 
waste site to resolve, satisfy, mitigate, address, or prevent the 
liability or potential liability of persons imposed by federal, state, 
or local environmental laws; all contributors to the trust have 
potential liability or a reasonable expectation of liability under 
federal, state, or local environmental laws for environmental 
remediation of the waste site; and the trust is not a qualified 
settlement fund within the meaning of Sec. 1.468B-1(a) of this chapter. 
An environmental remediation trust is classified as a trust because its 
primary purpose is environmental remediation of a waste site and not 
the carrying on of a profit-making business which normally would be 
conducted through business organizations classified as corporations or 
partnerships. However, if the remedial purpose is altered or becomes so 
obscured by business or investment activities that the declared 
remedial purpose is no longer controlling, the organization will no 
longer be classified as a trust. For purposes of this paragraph (e), 
environmental remediation includes the costs of assessing environmental 
conditions, remediating environmental contamination, monitoring 
remedial activities and the release of substances, preventing future 
releases of substances, and collecting amounts from persons liable or 
potentially liable for the costs of these activities. For purposes of 
this paragraph (e), persons have potential liability or a reasonable 
expectation of liability under federal, state, or local environmental 
laws for environmental remediation of the waste site if there is 
authority under a federal, state, or local law that requires such 
persons to satisfy all or a portion of the costs of the environmental 
remediation.
    (2) Each contributor (grantor) to the trust will be treated as the 
owner of the portion of the trust contributed by that grantor. See 
section 677 and Sec. 1.677(a)-1(d) of this chapter for rules regarding 
the treatment of a grantor as the owner of a portion of a trust applied 
in discharge of the grantor's legal obligation. Items of income, 
deduction, and credit attributable to any portion of an environmental 
remediation trust treated as owned by the grantor should not be 
reported by the trust on Form 1041, but should be shown on a separate 
statement to be attached to that form. 

[[Page 39905]]
See Sec. 1.671-4(a) of this chapter. The trustee must also furnish to 
each grantor a statement that shows all items of income, deduction, and 
credit of the trust for the taxable year attributable to the portion of 
the trust treated as owned by the grantor. The statement must provide 
the grantor with the information necessary to take the items into 
account in computing the grantor's taxable income, including 
information necessary to properly take into account items under the 
economic performance rules of section 461(h) and the regulations 
thereunder. See Sec. 1.461-4 of this chapter for rules relating to 
economic performance.
    (3) All amounts contributed to an environmental remediation trust 
by a grantor (cash-out grantor) who, pursuant to an agreement with the 
other grantors, contributes a fixed amount to the trust and is relieved 
of any further obligation to make contributions to the trust, but 
remains liable or potentially liable under the applicable environmental 
laws, will be considered amounts contributed for remediation. An 
environmental remediation trust agreement may direct the trustee to 
expend amounts contributed by a cash-out grantor (and the earnings 
thereon) before expending amounts contributed by other grantors (and 
the earnings thereon). A cash-out grantor will cease to be treated as 
an owner of a portion of the trust when the grantor's portion is fully 
expended by the trust.
    (4) The provisions of this paragraph (e) may be illustrated by the 
following example:

    Example. (a) X, Y, and Z are calendar year corporations that are 
liable for the remediation of an existing waste site under 
applicable federal environmental laws. On June 1, 1996, pursuant to 
an agreement with the governing federal agency, X, Y, and Z create 
an environmental remediation trust within the meaning of paragraph 
(e)(1) to collect funds contributed to the trust by X, Y, and Z and 
to carry out the remediation of the waste site to the satisfaction 
of the federal agency. X, Y, and Z are jointly and severally liable 
under the federal environmental laws for the remediation of the 
waste site, and the federal agency will not release X, Y, or Z from 
liability until the waste site is remediated to the satisfaction of 
the agency.
    (b) The estimated cost of the remediation is $20,000,000. X, Y, 
and Z agree that, if Z contributes $1,000,000 to the trust, Z will 
not be required to make any additional contributions to the trust, 
and X and Y will complete the remediation of the waste site and make 
additional contributions if necessary.
    (c) On June 1, 1996, X, Y, and Z each contribute $1,000,000 to 
the trust. The trust agreement directs the trustee to spend Z's 
contributions to the trust and the income allocable to Z's portion 
before spending X's and Y's portions. On November 30, 1996, the 
trustee pays $2,000,000 for remediation work performed from June 1, 
1996, through September 30, 1996. As of November 30, 1996, the trust 
had $75,000 of interest income, which is allocated in equal shares 
of $25,000 to X, Y, and Z's portions of the trust.
    (d) Pursuant to the agreement between X, Y, and Z, Z made no 
further contributions to the trust. Pursuant to the trust agreement, 
the trustee expended Z's portion of the trust before expending X's 
and Y's portion. Therefore, Z's share of the remediation payment 
made in 1996 is $1,025,000 ($1,000,000 contribution by Z plus 
$25,000 of income allocated to Z's portion of the trust). Z must 
take the $1,025,000 payment into account under the appropriate 
federal tax accounting rules. In addition, X's share of the 
remediation payment made in 1996 is $487,500, and Y's share of the 
remediation payment made in 1996 is $487,500. X and Y must take 
their respective shares of the payment into account under the 
appropriate federal tax accounting rules.
    (e) The trustee made no further remediation payments in 1996, 
and X and Y made no further contributions in 1996. From December 1, 
1996, to December 31, 1996, the trust had $5,000 of interest income, 
which is allocated $2,500 to X's portion and $2,500 to Y's portion. 
Accordingly, for 1996, X and Y each had income of $27,500 from the 
trust.

    (5) This paragraph (e) is applicable to trusts meeting the 
requirements of paragraph (e)(1) of this section that are formed on or 
after the date of publication of these proposed regulations as final 
regulations in the Federal Register.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 95-19286 Filed 8-3-95; 8:45 am]
BILLING CODE 4830-01-U