[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]



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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.

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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