[Federal Register Volume 61, Number 86 (Thursday, May 2, 1996)]
[Rules and Regulations]
[Pages 19546-19547]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10393]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
26 CFR Part 1
[TD 8662]
RIN 1545-AQ64
Diversification of Common Trust Funds
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
-----------------------------------------------------------------------
SUMMARY: This document contains final regulations relating to the
diversification of common trust funds at the time of a combination or
division. The final regulations affect common trust funds and their
participants.
EFFECTIVE DATE: May 2, 1996.
FOR FURTHER INFORMATION CONTACT: Steven Schneider, (202) 622-3060 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
On August 10, 1995, a notice of proposed rulemaking (PS-29-92) was
published in the Federal Register (60 FR 40796) proposing amendments to
the Income Tax Regulations (26 CFR part 1) under section 584 of the
Internal Revenue Code. Written comments responding to this notice were
received. No public hearing was held because no hearing was requested.
After consideration of all comments received, the proposed regulations
under section 584 are adopted as revised by this Treasury decision.
Explanation of Provisions
The final regulations modify the diversification test applied to
combining, dividing, and resulting common trust funds at the time of a
combination or division. Under the existing regulations, which
incorporate the diversification test of section 368(a)(2)(F)(ii),
Government securities are excluded in determining total assets. These
final regulations modify the diversification test so that Government
securities are included in determining total assets when applying
section 368(a)(2)(F)(ii).
This modified diversification test is the same as that in the final
regulations under section 351(e), which deals with transfers to
investment companies. These corresponding modifications ensure that a
uniform diversification test will be applied to common trust funds and
similar investment entities.
The final regulations also update the regulations under section 584
to conform to changes in the law.
Changes to the Proposed Regulations in Response to Comments
I. Clarification That Government Securities Are Not Treated as
Securities of an Issuer
Two commentators suggested that the final regulations include
specific assurance that Government securities are not treated as
securities of an issuer in applying the 25 and 50-percent tests
contained in section 368(a)(2)(F)(ii) to mergers and divisions of
common trust funds. The proposed regulations provide that Government
securities are included in total assets in applying the 25 and 50-
percent tests to common trust fund combinations and divisions, but do
not specifically state that Government securities are not treated as
securities of an issuer. The final regulations clarify that Government
securities, while included in total assets, are not treated as
securities of an issuer for purposes of the numerator of the 25 and 50-
percent tests of section 368(a)(2)(F)(ii).
II. Clarification of the Definition of Government Securities
One commentator suggested that the regulations broaden the
definition of the term Government securities to include state and local
government obligations. The final regulations do not adopt the
suggestion.
Effective Date
These regulations apply to combinations and divisions of common
trust funds completed on or after May 2, 1996.
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 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 Regulatory Flexibility Analysis is
not required. Pursuant to section 7805(f) of the Internal Revenue Code,
the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on its impact on small business.
Drafting Information
The principal author of this regulation is Brian J. O'Connor,
formerly 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 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is 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 * * *
Sec. 1.584-2 [Amended]
Par. 2. Section 1.584-2 is amended by:
1. Removing paragraph (b)(1).
2. Removing the paragraph designation (b)(2).
Par. 3. Section 1.584-4 is amended by:
1. Removing paragraphs (a)(1) and (a)(2).
2. Removing the last sentence in paragraph (a) and adding 6
sentences in its place.
3. Adding paragraph (e).
The additions read as follows:
Sec. 1.584-4 Admission and withdrawal of participants in the common
trust fund.
(a) * * * When a participating interest is transferred by a bank,
or by two or more banks that are members of the same affiliated group
(within the meaning of section 1504), as a result of the combination of
two or more common trust funds or the division of a single common trust
fund, the transfer to the surviving or divided fund is not considered
to be an admission or a withdrawal if the combining, dividing, and
resulting common trust funds have diversified portfolios. For purposes
of this paragraph (a), a common trust fund has a diversified portfolio
if it satisfies the 25 and 50-percent tests of section
368(a)(2)(F)(ii), applying the relevant provisions of section
368(a)(2)(F). However, Government securities are included in total
assets for purposes of the denominator of the 25 and 50-percent tests
(unless the Government
[[Page 19547]]
securities are acquired to meet the 25 and 50-percent tests), but are
not treated as securities of an issuer for purposes of the numerator of
the 25 and 50-percent tests. In addition, for a transfer of a
participating interest in a division of a common trust fund not to be
considered an admission or withdrawal, each participant's pro rata
interest in each of the resulting common trust funds must be
substantially the same as was the participant's pro rata interest in
the dividing fund. However, in the case of the division of a common
trust fund maintained by two or more banks that are members of the same
affiliated group resulting from the termination of such affiliation,
the division will be treated as meeting the requirements of the
preceding sentence if the written plans of operation of the resulting
common trust funds are substantially identical to the plan of operation
of the dividing common trust fund, each of the assets of the dividing
common trust fund are distributed substantially pro rata to each of the
resulting common trust funds, and each participant's aggregate interest
in the assets of the resulting common trust funds of which he or she is
a participant in substantially the same as was the participant's pro
rata interest in the assets of the dividing common trust fund. The plan
of operation of a resulting common trust fund will not be considered to
be substantially identical to that of the dividing common trust fund
where, for example, the plan of operation of the resulting common trust
fund contains restrictions as to the types of participants that may
invest in the common trust fund where such restrictions were not
present in the plan of operation of the dividing common trust fund.
* * * * *
(e) Effective date. The eighth sentence of paragraph (a) of this
section is effective for combinations and divisions of common trust
funds completed on or after May 2, 1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
Approved: March 6, 1996.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 96-10393 Filed 5-1-96; 8:45 am]
BILLING CODE 4830-01-U