[Federal Register Volume 66, Number 154 (Thursday, August 9, 2001)]
[Rules and Regulations]
[Pages 41778-41779]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-19926]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[TD 8962]
RIN 1545-AY09


Classification of Certain Pension and Employee Benefit Trusts, 
and Other Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations amending the 
regulations defining a domestic or foreign trust for federal tax 
purposes. The regulations will affect certain specified employee 
benefit trusts and investment trusts. The regulations provide that 
these employee benefit trusts and investment trusts are deemed to 
satisfy the control test for domestic trust treatment if United States 
trustees control all of the substantial decisions of the trust made by 
the trustees of the trust.

DATES: Effective Date: These regulations are effective August 9, 2001.
    Applicability Dates: For dates of applicability of Sec. 301.7701-
7(d)(1)(iv) and (v) Examples 1 and 5, see Sec. 301.7701-7(e)(3).

FOR FURTHER INFORMATION CONTACT: James A. Quinn at (202) 622-3060 (not 
a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On October 12, 2000, the Treasury Department and the IRS published 
a notice of proposed rulemaking (REG-108553-00) under section 7701 of 
the Internal Revenue Code (Code) in the Federal Register (65 FR 60822). 
The proposed regulations add group trusts consisting of qualified plan 
trusts and IRA trusts, as described in Rev. Rul. 81-100 (1981-1 C.B. 
326), and certain investment trusts to the categories of trusts that 
may use the safe harbor in Sec. 301.7701-7(d)(1)(iv) of the Procedure 
and Administration Regulations relating to the application of the 
control test of section 7701(a)(30)(E). The proposed regulations also 
modify the safe harbor in Sec. 301.7701-7(d)(1)(iv) to clarify that 
employee benefit trusts and investment trusts identified in the 
regulations are deemed to satisfy the control test if United States 
trustees control all of the substantial decisions of the trust made by 
the trustees of the trust. No one requested to speak at the public 
hearing scheduled for January 31, 2001. Accordingly, the public hearing 
was canceled on January 26, 2001 (66 FR 7867). Comments in response to 
the notice of proposed rulemaking were received and are addressed in 
the following Explanation and Summary of Comments. This document 
finalizes the proposed regulations without change.

Explanation and Summary of Comments

Reporting Requirements for Foreign Widely Held Fixed Investment Trusts

    Two commentators were concerned about United States investors in 
widely held fixed investment trusts that are outside the safe harbor 
provided by Sec. 301.7701-7(d)(1)(iv)(I) and therefore are treated as 
foreign trusts. These commentators suggested that United States 
investors in such trusts should not be subject to reporting under 
section 6048 and to the corresponding penalties in section 6677 for 
failure to comply with the section 6048 reporting requirements. A 
guidance project under section 671 concerning reporting requirements 
for all widely held fixed investment trusts is currently under 
consideration. Accordingly, these regulations do not specifically 
address this issue.

Application to Certain Pension Trusts Created or Organized in Puerto 
Rico

    Section 1022(i)(1) of the Employee Retirement Income Security Act 
of 1974, Public Law 93-406 (88 Stat. 829) (September 2, 1974), provides 
for tax exemption for certain trusts created or organized in Puerto 
Rico that form part of a pension, profit-sharing, or stock bonus plan. 
Section 1022(i)(2) and Sec. 1.401(a)-50 of the Income Tax Regulations 
generally provide that the administrator of such a trust may elect to 
have the trust treated as a trust created or organized in the United 
States for purposes of section 401(a). In light of the changes made to 
section 7701(a)(30) in the Small Business Job Protection Act, Public 
Law 104-188 (110 Stat. 1755) (August 20, 1996), and the Taxpayer Relief 
Act of 1997, Public Law 105-34 (111 Stat. 788) (August 5, 1997), and 
the ensuing regulations, some taxpayers have expressed concerns 
regarding the continuing application of sections 1022(i)(1) and (2) and 
Sec. 1.401-50 to a pension trust created or organized in Puerto Rico 
that is not a domestic trust within the meaning of section 7701(a)(30). 
Because the application of these provisions is not restricted to trusts 
that are domestic trusts within the meaning of section 7701(a)(30), the 
1996 and 1997 amendments to section 7701(a)(30) and

[[Page 41779]]

the ensuing regulations do not affect the application of these 
provisions.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 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) does not apply to these regulations, and, because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations was submitted to the Small 
Business Administration for comment on the regulations' impact on small 
business.

Drafting Information

    The principal author of these regulations is James A. Quinn of the 
Office of Associate 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.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 301 is 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 301.7701-7 is amended as follows:

    1. Paragraph (d)(1)(iv) introductory text is revised.
    2. Paragraph (d)(1)(iv)(H) is redesignated as paragraph 
(d)(1)(iv)(J).
    3. New paragraphs (d)(1)(iv)(H) and (d)(1)(iv)(I) are added.
    4. In paragraph (d)(1)(v), Example 1 is revised and Example 5 is 
added.
    5. The first sentence of paragraph (e)(1) is revised.
    6. Paragraph (e)(3) is added.
    The revisions and additions read as follows:


Sec. 301.7701-7  Trusts--domestic and foreign.

* * * * *
    (d) * * * (1) * * *
    (iv) Safe harbor for certain employee benefit trusts and investment 
trusts. Notwithstanding the provisions of this paragraph (d), the 
trusts listed in this paragraph (d)(1)(iv) are deemed to satisfy the 
control test set forth in paragraph (a)(1)(ii) of this section, 
provided that United States trustees control all of the substantial 
decisions made by the trustees of the trust--
* * * * *
    (H) A group trust described in Rev. Rul. 81-100 (1981-1 C.B. 326) 
(See Sec. 601.601(d)(2) of this chapter);
    (I) An investment trust classified as a trust under Sec. 301.7701-
4(c), provided that the following conditions are satisfied--

    (1) All trustees are United States persons and at least one of the 
trustees is a bank, as defined in section 581, or a United States 
Government-owned agency or United States Government-sponsored 
enterprise;
    (2) All sponsors (persons who exchange investment assets for 
beneficial interests with a view to selling the beneficial interests) 
are United States persons; and
    (3) The beneficial interests are widely offered for sale primarily 
in the United States to United States persons;
* * * * *
    (v) * * *
    Example 1. Trust is a testamentary trust with three fiduciaries, 
A, B, and C. A and B are United States citizens, and C is a 
nonresident alien. No persons except the fiduciaries have authority 
to make any decisions of the trust. The trust instrument provides 
that no substantial decisions of the trust can be made unless there 
is unanimity among the fiduciaries. The control test is not 
satisfied because United States persons do not control all the 
substantial decisions of the trust. No substantial decisions can be 
made without C's agreement.
* * * * *
    Example 5. X, a foreign corporation, conducts business in the 
United States through various branch operations. X has United States 
employees and has established a trust as part of a qualified 
employee benefit plan under section 401(a) for these employees. The 
trust is established under the laws of State A, and the trustee of 
the trust is B, a United States bank governed by the laws of State 
A. B holds legal title to the trust assets for the benefit of the 
trust beneficiaries. A plan committee makes decisions with respect 
to the plan and the trust. The plan committee can direct B's actions 
with regard to those decisions and under the governing documents B 
is not liable for those decisions. Members of the plan committee 
consist of United States persons and nonresident aliens, but 
nonresident aliens make up a majority of the plan committee. 
Decisions of the plan committee are made by majority vote. In 
addition, X retains the power to terminate the trust and to replace 
the United States trustee or to appoint additional trustees. This 
trust is deemed to satisfy the control test under paragraph 
(d)(1)(iv) of this section because B, a United States person, is the 
trust's only trustee. Any powers held by the plan committee or X are 
not considered under the safe harbor of paragraph (d)(1)(iv) of this 
section. In the event that X appoints additional trustees including 
foreign trustees, any powers held by such trustees must be 
considered in determining whether United States trustees control all 
substantial decisions made by the trustees of the trust.
* * * * *
    (e) Effective date--(1) General rule. Except for the election to 
remain a domestic trust provided in paragraph (f) of this section and 
except as provided in paragraph (e)(3) of this section, this section is 
applicable to taxable years ending after February 2, 1999. * * *
* * * * *
    (3) Effective date of safe harbor for certain employee benefit 
trusts and investment trusts. Paragraphs (d)(1)(iv) and (v) Examples 1 
and 5 of this section apply to trusts for taxable years ending on or 
after August 9, 2001. Paragraphs (d)(1)(iv) and (v) Examples 1 and 5 of 
this section may be relied on by trusts for taxable years beginning 
after December 31, 1996, and also may be relied on by trusts whose 
trustees have elected to apply sections 7701(a)(30) and (31) to the 
trusts for taxable years ending after August 20, 1996, under section 
1907(a)(3)(B) of the SBJP Act.
* * * * *

    Approved: July 31, 2001.
Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
Mark Weinberger,
Assistant Secretary of the Treasury.
[FR Doc. 01-19926 Filed 8-8-01; 8:45 am]
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