[Federal Register Volume 61, Number 74 (Tuesday, April 16, 1996)]
[Proposed Rules]
[Pages 16623-16625]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-8240]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 25
[PS-4-96]
RIN 1545-AU12
Sale of Residence From Qualified Personal Residence Trust
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains a proposed regulation permitting the
reformation of a personal residence trust or a qualified personal
residence trust in order to comply with the applicable requirements for
such trusts. The proposed regulation also clarifies that the governing
instruments of such trusts must prohibit the sale of a residence held
in the trust to the grantor of the trust, the grantor's spouse, or an
entity controlled by the grantor or the grantor's spouse. The proposed
regulation will affect trusts created after the proposed effective
date.
DATES: Written comments and outlines of oral comments to be presented
at the public hearing scheduled for July 24, 1996, must be received by
July 15, 1996.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (PS-4-96), room 5228,
Internal Revenue Service, P.O. Box 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:R (PS-
4-96), Courier's Desk Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC 20224. The public hearing will be held in
the IRS auditorium, Seventh Floor, 7400 Corridor, Internal Revenue
Building, 1111 Constitution Avenue NW., Washington, DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Dale Carlton, (202) 622-3090; concerning submissions and the hearing,
Evangelista Lee, (202) 622-7180 (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 of 1995 (44
U.S.C. 3507).
Comments on the collection of information should be sent to the
Office of Management and Budget, Attn: 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, T:FP, Washington, DC 20224.
Comments on the collection of information should be received by June
17, 1996.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.
The collection of information is in Sec. 25.2702-5. This
information is required by the IRS to ensure compliance with the
regulatory requirements. The likely respondents are individuals or
households. Responses to the collection of information are required to
obtain favorable gift tax treatment.
Books or records relating to this collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Estimated total annual reporting/recordkeeping burden: 625 hours.
The estimated annual burden per respondent varies from 3 hours to 3.25
hours depending on individual circumstances with an estimated average
of 3.1 hours.
Estimated number of respondents: 200.
Estimated annual frequency of responses: 2.
Background
This document proposes to amend the Gift Tax Regulations (26 CFR
part 25) under section 2702 relating to ``personal residence trusts''
and ``qualified personal residence trusts.''
Section 2702(a) provides special valuation rules for determining
the value of a gift when a transfer is made in trust to or for the
benefit of a member of the donor's family and the donor retains an
interest in the trust. Under section 2702(a)(2)(A), the value of any
retained interest that is not a ``qualified interest'' is treated as
zero. Therefore, the value of the gift is equal to the full value of
the property at the time of the transfer. In contrast, the value of a
retained interest that is a qualified interest is determined under the
valuation tables prescribed pursuant to section 7520. Section 2702(b)
provides that a qualified interest means an annuity interest, a
unitrust interest, or a remainder interest after either an annuity or
unitrust interest.
Congress recognized that many people desire to maintain the family
ownership of their home and pass ownership on to future generations,
while retaining its use for a period of time. The annuity and unitrust
requirements are not, however, conducive to the transfer of a
residence. Accordingly, section 2702(a)(3)(A)(ii) provides an exception
to the annuity and unitrust requirements. Under this limited exception,
the grantor's retained interest need not be in one of these forms, but
rather can take the form of a right to the use and occupancy of the
residence. Because this is an exception to the general rule of section
2702, a grantor may take into account not only the value of the
retained interest, but also any contingent reversionary interest, in
determining the amount of the gift to the remainderman.
The requirements of section 2702(a)(3)(A)(ii) are satisfied by a
personal residence trust and a qualified personal residence trust as
set forth in the regulations. The governing instruments of these trusts
must prohibit the trust from holding, for the original duration of the
term interest, assets other than one residence to be used or held for
the use as a personal residence of the term holder. In addition, a
qualified personal residence trust can hold limited amounts of cash for
certain specified purposes such as the payment of operating expenses
and expenses for the improvement or replacement of the residence, and
the trustee is permitted to sell the residence during the original
duration of the term interest, if certain requirements are satisfied.
If the trust does not qualify as a personal residence trust or a
qualified personal residence trust, the grantor's retained interest is
valued at zero under section 2702. This is the result even where the
lack of compliance with the requirements in the regulations is the
result of error or poor advice. As most errors are discovered at the
time the gift tax return is prepared, the proposed regulation permits
reformation of the
[[Page 16624]]
trust to be commenced up to 90 days after the gift tax return is due. A
properly reformed trust will be treated as satisfying the regulatory
requirements.
Questions have arisen as to whether it is permissible for the
grantor to place a personal residence in trust, obtain all the tax
benefits of a qualified personal residence trust and then purchase the
residence from the trust. For example, in a transaction described by
one commentator as the ``bait and switch,'' the grantor places the
residence in trust with the intention of purchasing the residence from
the trust just prior to the expiration of the grantor's retained term
so that cash or other assets pass to the remaindermen in place of the
residence.
The Treasury Department and the IRS have previously stated the view
that Congress intended the personal residence trust exception to enable
transferors to pass the family home to younger members of the family.
Preamble to TD 8395, 1992-1 C.B. 316, at 319. Using the ``bait and
switch'' technique, however, the personal residence trust exception
could be used to facilitate the transfer of the grantor's other assets
to future generations. The residence would merely serve as a temporary
``stand-in'' to avoid the annuity and unitrust requirements of section
2702. The proposed regulations clarify that the sale of the residence
to the grantor by the trustee of the personal residence trust or
qualified personal residence trust is not consistent with Congress'
intent in enacting section 2702.
Explanation of Provisions
The proposed regulation provides that a trust that does not comply
with one or more of the regulatory requirements for qualification as a
personal residence trust or a qualified personal residence trust, will
be treated as satisfying those requirements if the trust is reformed by
judicial reformation (or nonjudicial reformation if effective under
state law) to comply with the requirements. The reformation must be
commenced within 90 days of the due date (including extensions) for
filing the gift tax return reporting the transfer of the residence, and
must be completed within a reasonable time after commencement. If the
reformation is not completed by the due date (including extensions) for
filing the gift tax return, the grantor or grantor's spouse must attach
a statement to the gift tax return stating that the reformation has
been commenced, or will be commenced within the 90-day period.
The proposed regulation also requires that, in order to qualify as
a personal residence trust or a qualified personal residence trust, the
trust's governing instrument must prohibit the trust from selling or
transferring the residence, directly or indirectly, to the grantor, the
grantor's spouse, or an entity controlled by the grantor or the
grantor's spouse. A sale or transfer to another grantor trust of the
grantor or the grantor's spouse is considered a sale or transfer to the
grantor or the grantor's spouse. For these purposes, the term grantor
trust is a trust treated as owned by the grantor or the grantor's
spouse within the meaning of sections 671-677. The term control is
defined in Sec. 25.2701-2(b)(5) (ii) and (iii).
Proposed Effective Date
The amendments to Secs. 25.2702-5(b) and (c) are proposed to be
effective for trusts created after May 16, 1996. Thus, a trust created
after this date will not satisfy the requirements of a personal
residence trust or a qualified personal residence trust if the trust
document does not comply with the regulations, as amended. Such a trust
would be eligible for reformation under the proposed regulation.
Notwithstanding the proposed effective date, if the IRS examines a
pre-effective date trust and finds it inconsistent with the purposes of
section 2702 or the regulations thereunder, the IRS, by using
established legal doctrines such as the substance over form doctrine,
may treat the trust as not qualifying under section 2702. Thus, for
example, if the grantor actually purchases the residence from the trust
pursuant to a right or option to purchase that is stated in the trust
instrument or a collateral document, the IRS may not treat the trust as
a qualified personal residence trust.
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 has also 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 this proposed regulation is adopted as a final regulation,
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 July 24, 1996, at 10 a.m. in the
auditorium, Internal Revenue Building, 1111 Constitution Avenue NW.,
Washington, DC. Because of access restrictions, visitors will not be
admitted beyond the 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 July 15, 1996 and an outline of the topics
to be discussed and the time to be devoted to each topic. A period of
10 minutes will be allotted each person for making comments.
An agenda showing the scheduling of 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 this regulation is Dale Carlton, Office of
the Assistant Chief Counsel (Passthroughs and Special Industries).
However, personnel from other offices of the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 25
Gift taxes, Reporting and recordkeeping requirements.
Proposed Amendment to the Regulations
Accordingly, 26 CFR part 25 is proposed to be amended as follows:
PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954
Paragraph 1. The authority citation for part 25 continues to read
in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. Section 25.2702-5 is amended as follows:
1. Paragraph (a) is redesignated as paragraph (a)(1) and paragraph
(a)(2) is added.
2. In paragraph (b)(1), four new sentences are added after the
third sentence.
3. Paragraph (c)(5)(ii)(C) is revised.
4. Paragraph (c)(9) is added.
The additions and revisions read as follows:
[[Page 16625]]
Sec. 25.2702-5 Personal residence trusts.
(a)(1) In general. * * *
(2) Modification of trust. A trust that does not comply with one or
more of the regulatory requirements under paragraph (b) or (c) of this
section will, nonetheless, be treated as satisfying these requirements
if the trust is modified, by judicial reformation (or nonjudicial
reformation if effective under state law), to comply with the
requirements. The reformation must be commenced within 90 days after
the due date (including extensions) for the filing of the gift tax
return reporting the transfer of the residence under section 6075 and
must be completed within a reasonable time after commencement. If the
reformation is not completed by the due date (including extensions) for
filing the gift tax return, the grantor or grantor's spouse must attach
a statement to the gift tax return stating that the reformation has
been commenced or will be commenced within the 90-day period.
(b) * * * (1) * * * In addition, the trust does not meet the
requirements of this section unless the governing instrument prohibits
the trust from selling or transferring the residence, directly or
indirectly, to the grantor, the grantor's spouse, or an entity
controlled by the grantor or the grantor's spouse, at any time after
the original term interest during which the trust is a grantor trust.
For purposes of the preceding sentence, a sale or transfer to another
grantor trust of the grantor or the grantor's spouse is considered a
sale or transfer to the grantor or the grantor's spouse. For purposes
of this section, a grantor trust is a trust treated as owned by the
grantor or the grantor's spouse within the meaning of sections 671-677.
The term control is defined in Sec. 25.2701-2(b)(5) (ii) and (iii). * *
*
* * * * *
(c) * * *
(5) * * *
(ii) * * *
(C) Sale proceeds. The governing instrument may permit the sale of
the residence (except as set forth in paragraph (c)(9) of this section)
and may permit the trust to hold proceeds from the sale of the
residence, in a separate account.
* * * * *
(9) Sale of residence to grantor, grantor's spouse, or entity
controlled by grantor or grantor's spouse. The governing instrument
must prohibit the trust from selling or transferring the residence,
directly or indirectly, to the grantor, the grantor's spouse, or an
entity controlled by the grantor or the grantor's spouse during the
original term interest of the trust, or at any time after the original
term interest that the trust is a grantor trust. For purposes of the
preceding sentence, a sale or transfer to another grantor trust of the
grantor or the grantor's spouse is considered a sale or transfer to the
grantor or the grantor's spouse. For purposes of this section, a
grantor trust is a trust treated as owned by the grantor or the
grantor's spouse within the meaning of sections 671-677. The term
control is defined in Sec. 25.2701-2(b)(5) (ii) and (iii).
* * * * *
Par. 3. Section 25.2702-7 is amended as follows:
1. The first sentence of this section is revised; and
2. A new sentence is added at the end of the section, to read as
follows:
Sec. 25.2702-7 Effective dates.
Except as provided in this section, Secs. 25.2702-1 through
25.2702-6 are effective as of January 28, 1992. * * * The fourth
through seventh sentences of Sec. 25.2702-5(b)(1) and Sec. 25.2702-
5(c)(9) are effective with respect to trusts created after May 16,
1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 96-8240 Filed 4-15-96; 8:45 am]
BILLING CODE 4830-01-U