[Federal Register Volume 67, Number 247 (Tuesday, December 24, 2002)]
[Rules and Regulations]
[Pages 78371-78383]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32149]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, and 602

[TD 9032]
RIN 1545-AW24


Election To Treat Trust as Part of an Estate

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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[[Page 78372]]

SUMMARY: This document contains final regulations under section 645 
relating to an election for certain revocable trusts to be treated and 
taxed as part of an estate. The final regulations provide the 
procedures and requirements for making the election, rules regarding 
the tax treatment of the trust and the estate while the election is in 
effect, and rules regarding the termination of the election. This 
document also contains final regulations clarifying the reporting rules 
for a trust, or portion of a trust, that is treated as owned by the 
grantor, or another person under the provisions of subpart E, part I, 
subchapter J, chapter 1 of the Internal Revenue Code, for the taxable 
year ending with the death of the grantor or other person.

DATES: Effective Date: These regulations are effective December 24, 
2002.
    Applicability Date: For dates of applicability of these 
regulations, see Sec. Sec.  1.645-1(j), 1.671-4(i)(3), 1.6072-
1(a)(2)(ii), 301.6109-1(a)(6).

FOR FURTHER INFORMATION CONTACT: Faith Colson, (202) 622-3060 not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been previously reviewed and approved by the Office of Management 
and Budget in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)) under control number 1545-1578. This final rule makes 
no substantive change in the previously approved collection of 
information.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents might 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.

Background

    On December 18, 2000, the IRS and the Treasury Department published 
a notice of proposed rulemaking (REG-106542-98; 2001-1 CB 473) in the 
Federal Register (65 FR 79015) under section 645 relating to an 
election for certain revocable trusts to be treated and taxed as part 
of an estate. This notice also contained proposed amendments to the 
regulations under section 671 relating to reporting rules for a trust, 
or portion of a trust, that is treated as owned by the grantor or 
another person under the provisions of subpart E, part I, subchapter J, 
chapter 1 of the Internal Revenue Code (Code), for the taxable year 
ending with the death of the grantor or other person. Written comments 
responding to the notice of proposed rulemaking were received. A public 
hearing on the notice of proposed rulemaking was scheduled for April 
11, 2001, but was canceled when no one requested to speak at the 
hearing. After consideration of all comments, the proposed regulations, 
with certain changes in response to the comments, are adopted as final 
regulations by this Treasury decision.

Summary of Comments and Explanation of Revisions

A. Comments and Changes to Sec.  1.645-1(b): Definitions

    Under section 645, if both the executor (if any) of an estate and 
the trustee of a qualified revocable trust (QRT) elect the treatment 
provided in section 645, the trust shall be treated and taxed for 
income tax purposes as part of the estate (and not as a separate trust) 
during the election period. The proposed regulations define a QRT as 
any trust (or portion thereof) that on the date of death of the 
decedent was treated as owned by the decedent under section 676 by 
reason of a power held by the decedent (determined without regard to 
section 672(e)). In accordance with the legislative history 
accompanying section 645, the proposed regulations provide that a 
trust, in which the power is held solely by a nonadverse party, is not 
a QRT. See H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. at 711 
(1997). In addition, the proposed regulations provide that a trust, in 
which the power was exercisable by the decedent only with the approval 
or consent of another person, is not a QRT.
    Some commentators suggested that, if the decedent's power to revoke 
the trust was exercisable only with the approval or consent of a 
nonadverse party, the trust should qualify as a QRT. Many persons use 
revocable trusts as property management tools and, to protect the 
grantor from improvident decisions or undue influence, their trust 
agreements may provide that any revocation of the trust by the grantor 
will be effective only if consented to by a nonadverse party. The 
commentators noted that the prohibition described in the legislative 
history addresses trusts in which only a nonadverse party has a power 
to revoke.
    In response to these comments, the final regulations provide that a 
trust that was treated as owned by the decedent under section 676 by 
reason of a power that was exercisable by the decedent with the consent 
or approval of a nonadverse party is a QRT. The final regulations also 
clarify that while a trust, in which the power to revoke is held only 
by the decedent's spouse and not by the decedent, is not a QRT, a 
trust, in which the power to revoke is exercisable by the decedent with 
the approval or consent of the decedent's spouse, is a QRT.
    Clarification has also been requested regarding whether a trust 
qualifies as a QRT if the grantor's power to revoke the trust lapses 
prior to the grantor's death as a result of the grantor's incapacity. 
Some trust documents for revocable trusts provide that the trustee is 
to disregard the instructions of the grantor to revoke the trust if the 
grantor is incapacitated. The IRS and the Treasury Department believe 
that, if an agent or legal representative of the grantor can revoke the 
trust under state law during the grantor's incapacity, the trust will 
qualify as a QRT, even if the grantor is incapacitated on the date of 
the grantor's death.
    The proposed regulations also provide that a QRT must be a domestic 
trust under section 7701(a)(30)(E) and that a section 645 election for 
a QRT must result in a domestic estate under section 7701(a)(30)(D). 
Several commentators suggested that the section 645 election should 
also be available in situations in which either the QRT or the related 
estate, or both, are foreign. According to the commentators, U.S. 
citizens living abroad frequently use revocable trusts to avoid 
jurisdictional disputes concerning the decedent's assets, as well as 
the cumbersome probate and forced heirship rules of several foreign 
countries. Many of the trusts will be foreign trusts upon the grantor's 
death and, if a section 645 election is permitted to be made, will 
become part of a foreign estate. The commentators questioned the 
authority for the domestic restriction provided in the proposed 
regulations given that the statute and the legislative history do not 
explicitly limit the applicability of a section 645 election to 
domestic trusts and domestic estates. Upon consideration of these 
comments, the requirements that a QRT be a domestic trust and that the 
election result in a domestic estate are removed from the final 
regulations. The IRS and the Treasury Department note, however, that a 
trust for which a section 645 election is made is treated as an estate 
for purposes of Subtitle A of the Code, but not for purposes of 
Subtitle F. Accordingly, information reporting

[[Page 78373]]

under section 6048 will continue to apply with respect to a foreign 
trust even though a section 645 election has been made to allow the 
foreign trust to be taxed as part of an estate for purposes of Subtitle 
A of the Code.
    The proposed regulations used the term personal representative to 
denote the fiduciary (or fiduciaries) of the decedent's estate. One 
commentator requested that the definition of personal representative in 
the proposed regulations be expanded to include a personal 
representative, as well as an executor and an administrator. To be 
consistent with the language of the statute, the final regulations use 
the term executor, instead of personal representative, to denote the 
fiduciary of the decedent's estate. With the exception of including a 
personal representative in the definition of an executor as requested 
by the comment, the definition of executor in the final regulations is 
generally the same as the definition of a personal representative in 
the proposed regulations. The definition of executor used in these 
final regulations, however, is not identical to the definition of an 
executor under section 2203 of the Code: under these final regulations, 
a person who has actual or constructive possession of property of the 
decedent is not an executor unless that person is also appointed, or 
qualified as an executor, administrator, or personal representative of 
the decedent's estate.

B. Comments and Changes to Sec.  1.645-1(c): The Election

    The section 645 election may be made whether or not an executor is 
appointed for the decedent's estate. Under the final regulations, if an 
executor is appointed for the decedent's estate, the executor and the 
trustee of the QRT make the section 645 election by filing a form 
provided by the IRS for the purpose of making the section 645 election 
(election form). If an executor is not appointed for the decedent's 
estate, the trustee makes the section 645 election by filing the 
election form. Form 8855, ``Election to Treat a Qualified Revocable 
Trust as Part of an Estate,'' will be available for making the section 
645 election within six months after the publication of these final 
regulations.
    Guidance has also been requested regarding when the section 645 
election must be made if a Form 1041 ``U.S. Income Tax Return for 
Estates and Trusts,'' is not required to be filed for the first taxable 
year of the combined electing trust and related estate, if there is an 
executor, or of the electing trust if there is no executor, because the 
combined electing trust and related estate, or electing trust, as the 
case may be, does not have sufficient income to require the filing of a 
return. A commentator also suggested permitting the section 645 
election to be made at any time during the three year period after the 
due date for the Form 1041 for the estate's first taxable year. The 
final regulations do not adopt this suggestion and clarify that, for 
the election to be valid, the election form must be filed not later 
than the time prescribed under section 6072 for filing the Form 1041 
for the first taxable year of the combined electing trust and related 
estate, if there is an executor, or of the first taxable year of the 
electing trust, if there is no executor (regardless of whether there is 
sufficient income to require the filing of that return). If an 
extension is granted for the filing of the Form 1041 for the first 
taxable year of the combined electing trust and related estate, if 
there is an executor, or the electing trust, if there is no executor, 
the election form will be timely filed if it is filed by the time 
prescribed under section 6072 for filing the Form 1041 including the 
extension granted with respect to the Form 1041.
    A commentator noted that, under the proposed regulations, an 
executor will have direct liability for the tax due on Forms 1041 filed 
for the combined electing trust and related estate. Accordingly, the 
executor can be personally liable for tax on the income from assets 
that are not under the executor's control. Further, the executor may 
not have sufficient assets in the estate to meet the income tax 
responsibilities of the combined electing trust and related estate. A 
commentator also noted that the requirement in the proposed regulations 
that the trustee agree to cooperate to insure that the Forms 1041 for 
the combined related estate and electing trust are timely filed and the 
tax due timely paid places the trustee in an untenable position because 
the executor controls the filing of the return and the payment of the 
tax.
    The IRS and the Treasury Department note that under section 645, 
the electing trust is not treated as part of the related estate for 
purposes of Subtitle F of the Code. Accordingly, although the final 
regulations permit an electing trust and related estate to file a 
single, combined Form 1041, the electing trust and related estate 
continue to be separate taxpayers for purposes of Subtitle F, and the 
fiduciaries of the electing trust and the fiduciaries of the related 
estate each continue to have a responsibility for filing returns and 
paying the tax due for their respective entities even though a section 
645 election has been made. Under the final regulations, the executor 
must file a complete, accurate, and timely Form 1041 for the combined 
related estate and electing trust for each taxable year during the 
election period. The trustee of the electing trust must timely provide 
the executor of the related estate with all the trust information 
necessary to permit the executor to file a complete, accurate, and 
timely Form 1041 for the combined electing trust and related estate for 
each taxable year during the election period. The trustee and the 
executor must allocate the tax burden of the combined electing trust 
and related estate in a manner that reasonably reflects the respective 
tax obligations of the electing trust and related estate. If the tax 
burden is not reasonably allocated, gifts may be deemed to have been 
made. The trustee is responsible for insuring that the electing trust's 
share of the tax burden is paid to the Secretary, and the executor is 
responsible for insuring that the related estate's share of the tax 
burden is timely paid to the Secretary.

C. Comments and Changes to Sec.  1.645-1(d): TIN and Filing 
Requirements for a QRT

    The proposed regulations provide that, in general, a grantor trust 
must obtain a taxpayer identification number (TIN) upon the death of 
the grantor regardless of whether or not the trust had a TIN prior to 
the death of the grantor. See proposed regulation Sec.  301.6109-
1(a)(3). The proposed regulations provide an exception to this general 
rule. The proposed regulations provide that, if there is an executor 
and a section 645 election has been made, a TIN must be obtained for 
the related estate but a TIN is not required to be obtained for the 
electing trust or for a QRT for which a section 645 election will be 
made. Further, under the proposed regulations, the payors (as defined 
in Sec.  301.6109-1(a)(5) of these final regulations) of the electing 
trust or a QRT for which the section 645 election will be made are to 
be furnished with the TIN of the estate on Form W-9, ``Request for 
Taxpayer Identification Number and Certification.'' The proposed 
regulations were designed to simplify and lessen the reporting burdens 
imposed on trustees and executors by the interim guidance in Rev. Proc. 
98-13 (1998-1 C.B. 370) by removing the requirement to obtain a TIN for 
electing trusts and certain QRTs.
    Several commentators reported, however, that many trustees 
automatically obtain a TIN for the QRT immediately after the decedent's 
death and furnish that TIN to payors. Under the proposed regulations, 
if a trustee

[[Page 78374]]

obtains a TIN for a QRT, the trustee must file a completed Form 1041 
for the QRT for the short taxable year of the QRT beginning with the 
decedent's date of death and ending December 31 of that year. If a 
valid section 645 election is made for the QRT, an amended Form 1041 
must be filed for the QRT and the payors of the QRT must be furnished 
with a revised Form W-9 containing the related estate's TIN. As a 
result, for trustees that obtain a TIN for a QRT, the procedures in the 
proposed regulations are more burdensome than the procedures in Rev. 
Proc. 98-13. In response, the final regulations remove the provision in 
the proposed regulations that excepted an electing trust and a QRT for 
which a section 645 election will be made from the general requirement 
that a grantor trust must obtain a TIN upon the death of the grantor. 
Under the final regulations, the trustee of an electing trust or a QRT 
for which a section 645 election will be made obtains a TIN upon the 
death of the decedent as required by Sec.  301.6109-1(a)(3) of these 
final regulations and furnishes this TIN to the payors of the trust. 
Under the final regulations, if a section 645 election will be made for 
a QRT, the trustee is not required to file a Form 1041 for the short 
taxable year of the QRT beginning with the decedent's date of death and 
ending December 31 of that year.
    The final regulations also simplify the procedures for obtaining a 
TIN, furnishing that TIN to the payors, and filing a Form 1041 for a 
QRT if there is no executor. The proposed regulations provide that, if 
there is no executor, the trustee must obtain a TIN for the electing 
trust to file as an estate during the section 645 election period. The 
payors of the electing trust must be furnished with the TIN obtained by 
the trust to file as an estate. Under the proposed regulations, if a 
section 645 election will be made for a QRT, the trustee of the QRT may 
choose to obtain a TIN for the QRT to file as an estate under section 
645 and avoid obtaining a TIN for the QRT to file as a trust. If the 
trustee of the QRT obtains a TIN to file as a trust (and not as an 
estate), the trustee is required to file a completed Form 1041 as a 
trust for the short taxable year of the QRT beginning with the 
decedent's date of death and ending December 31 of that year. If a 
section 645 election to treat the QRT as an estate is made after the 
Form 1041 is filed for the QRT treating the QRT as a trust, the trustee 
of the QRT is required to file an amended Form 1041 as a trust 
(excluding the items of income, deduction, and credits that are to be 
reported on a return filed as an estate), obtain another TIN to file as 
an estate, provide revised Forms W-9 with the new TIN to the payors of 
the QRT, and file a Form 1041 as an estate. Under the final 
regulations, if there is no executor, the trustee of an electing trust 
or a QRT for which a section 645 election will be made obtains a TIN 
upon the death of the decedent as required by Sec.  301.6109-1(a)(3) of 
these final regulations and furnishes this TIN to the payors of the 
trust. The trustee uses this TIN to file Forms 1041 as an estate during 
the election period. If a section 645 election will be made for a QRT, 
the trustee of the QRT is not required to file a Form 1041 for the 
short taxable year beginning with the decedent's date of death and 
ending December 31 of that year.
    Regardless of whether or not there is an executor, the final 
regulations retain the requirement that a Form 1041 (including the 
items of income, deduction, and credit of the QRT) must be filed for 
the short taxable year of the QRT beginning with the decedent's date of 
death if a section 645 election will not be made for the trust, or if 
the trustee and the executor are uncertain whether a section 645 
election will be made for the QRT by the due date of the Form 1041 for 
the short taxable year of the QRT beginning after the decedent's death 
and ending December 31 of that year.

D. Comments and Changes to Sec.  1.645-1(e): Tax Treatment and General 
Filing Requirements of the Electing Trust and Related Estate During the 
Election Period

    The proposed regulations provide that, during the election period, 
if there is an executor, one Form 1041 is filed annually for the 
combined electing trust and related estate under the name and TIN of 
the related estate. Information regarding the electing trust is also 
reported on the Form 1041 as required by the instructions to the Form 
1041.
    The proposed regulations provide that the electing trust and 
related estate are treated as separate shares under section 663(c) for 
purposes of computing distributable net income (DNI) and applying the 
distribution provisions of sections 661 and 662. The proposed 
regulations also provide rules for adjusting the DNI of the separate 
shares with respect to distributions made from one share to another 
share of the combined electing trust and related estate to which 
sections 661 and 662 would apply had the distribution been made to a 
beneficiary other than another share. Under the proposed regulations, 
the share making the distribution reduces its DNI by the amount of the 
distribution deduction that it would have been entitled to under 
section 661 had the distribution been made to a beneficiary other than 
another share of the combined related estate and electing trust, and, 
solely for purposes of calculating its DNI, the share receiving the 
distribution increases its gross income by this amount. One commentator 
noted that, if the amount distributed from one share to another share 
includes an item of DNI that is not included in the gross income of the 
combined electing trust and related estate, this provision in the 
proposed regulations does not produce an appropriate result because of 
the operation of section 661(c). Accordingly, the final regulations are 
revised to provide that the share making the distribution reduces its 
DNI by the amount of the distribution deduction it would be entitled to 
under section 661 (determined without regard to section 661(c)), and 
solely for purposes of calculating DNI, the share receiving the 
distribution increases its gross income by the same amount.
    Commentators requested clarification regarding whether an electing 
trust will be treated as an estate or a trust for purposes of the rules 
under section 401(a)(9). Final regulations (TD 8987) under sections 
401, 403, and 408 were published in the Federal Register (67 FR 18988) 
on April 17, 2002. The preamble to those final regulations provides 
that an electing trust will not fail to be a trust for purposes of 
section 401(a)(9) merely because the trust elects to be treated as an 
estate under section 645, as long as the trust continues to be a trust 
under state law.
    Another commentator asked for clarification regarding whether the 
exception for estates under section 6654(l)(2) with respect to the 
payment of estimated income tax applies to an electing trust. The final 
regulations clarify that each electing trust and related estate, if 
any, is treated as a separate taxpayer for all purposes of Subtitle F 
of the Code, including, without limitation, the application of section 
6654. The final regulations provide, however, that the provisions of 
section 6654(l)(2)(A) relating to the 2 year exception to an estate's 
obligation to make estimated tax payments will apply to each electing 
trust for which a section 645 election has been made.

E. Comments and Changes to Sec.  1.645-1(f): Duration of the Election 
Period

    The proposed regulations provide that the election period 
terminates on the day before the applicable date. One commentator 
suggested that section

[[Page 78375]]

645(a) should be interpreted as terminating the election period on the 
last day of the taxable year ending before the applicable date. Another 
commentator commended the interpretation taken by the proposed 
regulations because, if the estate is required to file a Form 706, 
``United States Estate (and Generation Skipping Transfer) Tax Return,'' 
and the election terminates on the last day of the taxable year ending 
before the applicable date, the election period could terminate prior 
to the date of final determination of liability for the estate tax, 
rather than six months after that date. The final regulations continue 
to provide that the election terminates the day before the applicable 
date.
    If a Form 706 is required to be filed, the proposed regulations 
provide that the applicable date is the day that is 6 months after the 
date of final determination of liability for the estate tax. In 
response to comments, the final regulations provide that the applicable 
date is the day that is the later of 2 years after the date of the 
decedent's death or 6 months after the date of final determination of 
liability for estate tax.
    The proposed regulations provide that the date of final 
determination of liability for the estate tax is the day on which the 
first of a series of events has occurred. One of the events is the 
issuance of an estate tax closing letter, unless a claim for refund 
with respect to the estate tax is filed within six months after the 
issuance of the letter. Two commentators requested that the issuance of 
a closing letter be removed from the list of events that can be 
considered the date of final determination of liability. These 
commentators contended that the closing letter is not a final 
determination of liability because the IRS may impose additional estate 
tax after a closing letter has been issued.
    The IRS and the Treasury Department note that the circumstances in 
which the IRS may impose additional estate tax after a closing letter 
is issued are very limited. See Rev. Proc. 94-68 (1994-2 C.B. 803). In 
many cases, the issuance of a closing letter is sufficient to permit 
the closing of the probate estate and to complete any administration of 
the electing trust that was necessitated by the decedent's death. The 
IRS and the Treasury Department believe that eliminating the closing 
letter from the list of events that are considered a final 
determination of liability may encourage unduly prolonging the 
administration of the electing trust and related estate in order to 
prolong the section 645 election period. While the final regulations 
retain the issuance of the closing letter as one of the triggers for 
the date of the final determination of liability, the final regulations 
have been changed to provide a minimum election period of two years for 
all electing trusts and related estates, as well as to provide that if 
the issuance of the closing letter triggers the date of the final 
determination of liability, the date of the final determination of 
liability is the date that is 6 months after the date the closing 
letter is issued, rather than the date the closing letter is issued as 
provided in the proposed regulations.
    Proposed Sec.  1.641(b)-3 provides that, if an estate has joined in 
making a valid section 645 election, the estate shall not terminate for 
federal tax purposes prior to the termination of the section 645 
election period. Some interpreted proposed Sec.  1.641(b)-3 as 
requiring the filing of Forms 1041 for the estate until the applicable 
date even if, prior to that date, the electing trust and the related 
estate had been completely administered and the assets of the trust and 
the estate completely distributed. In response, the final regulations 
provide that the election period terminates on the earlier of the day 
on which both the electing trust and related estate, if any, have 
distributed all of their assets, or the day before the applicable date. 
The final regulations continue to provide that the election does not 
apply to successor trusts (trusts which are distributees under the 
trust instrument).
    The proposed regulations provide that, if the executor of the 
related estate is not appointed until after the trustee has made a 
section 645 election, the section 645 election period will terminate if 
the later appointed executor refuses to agree to the election. One 
commentator objected to the termination of the election as a result of 
the refusal to agree to the election by the later appointed executor. 
This commentator suggested that the election period should continue 
after the appointment of the executor and that the person seeking 
appointment as an executor could either accept or not accept 
appointment as an executor given the responsibilities of the previously 
made section 645 election. The IRS and the Treasury Department believe 
that the later appointed executor must consent to the section 645 
election for the election to be valid with respect to the related 
estate. Accordingly, the final regulations provide that, for the 
election period to continue, a new election form must be filed by the 
trustee and the newly appointed executor within 90 days of the 
executor's appointment. Otherwise the election period terminates the 
day before the appointment of the executor.

F. Tax Treatment of the Electing Trust and Related Estate Upon 
Termination of the Election Period

    At the close of the last day of the election period, the combined 
electing trust and related estate, if there is an executor, or the 
electing trust, if there is no executor, is deemed to distribute all 
the assets and liabilities of the share (or shares) comprising the 
electing trust to a new trust in a distribution to which sections 661 
and 662 apply. Thus, the combined electing trust and related estate, or 
the electing trust, as appropriate, is entitled to a distribution 
deduction to the extent permitted under section 661 in the taxable year 
in which the election period terminates as a result of the deemed 
distribution. The new trust must include the amount of the deemed 
distribution in gross income to the extent required under section 662.
    One commentator questioned whether the net capital gains 
attributable to the electing trust should be included in the sections 
661 and 662 calculations for the deemed distribution of the electing 
trust to a new trust upon the termination of the election period. The 
final regulations clarify that the net capital gains attributable to 
the electing trust are includible in the DNI of the share (or shares) 
comprising the electing trust for the purpose of applying sections 661 
and 662 to the deemed distribution to the new trust.
    If there is an executor and the electing trust terminates on or 
before the termination of the section 645 election period, the trustee 
must file a final Form 1041 under the name and TIN of the electing 
trust to notify the IRS that the trust no longer exists. This Form 1041 
will not include any of the trust's items of income, deduction, and 
credit because those items will be included on the Form 1041 filed for 
the combined electing trust and related estate.
    If there is an executor, the trustee may not need to obtain a TIN 
for the new trust deemed to have been created upon the termination of 
the election period. The trustee must consult the instructions to the 
Form 1041 upon the termination of the election period to determine if a 
new TIN must be obtained. If a new TIN is not required to be obtained, 
the trustee must file Forms 1041 for the new trust under the TIN 
obtained by the trustee under Sec.  301.6109-1(a)(3) for the QRT 
following the death of the decedent. If there is no executor, the 
trustee must obtain a TIN for the new trust deemed to have been created 
upon the termination of the election period. If a

[[Page 78376]]

new TIN is required under the regulations or the instructions to the 
Form 1041, the trustee must file Forms W-9 with the payors of the trust 
to provide them with the TIN to be used following the termination of 
the election period.

G. Effective Date of Final Regulations Under Section 645

    The final regulations provide that election procedures in paragraph 
(c), the rules in paragraph (d) regarding obtaining a TIN for the 
electing trust and QRT, the rules in paragraph (f) regarding the 
duration of the election period, and paragraph (g) regarding the later 
appointed executor are effective for estates and trusts of decedents 
dying on or after December 24, 2002. The final regulations provide that 
the rules in paragraph (e), regarding the tax treatment and general 
filing requirements of the electing trust and the related estate, if 
any, during the election period, and the rules in paragraph (h) 
regarding the tax treatment of the electing trust and related estate, 
if any, upon termination of the election period are effective for 
taxable years ending on or after December 24, 2002. Estates and trusts 
of decedents dying before December 24, 2002 may follow the election 
procedures provided in the proposed regulations or Rev. Proc. 98-13. 
With respect to obtaining a TIN for a QRT and filing a Form 1041 for 
the short taxable year beginning with the decedent's death and ending 
December 31 of that year, estates and trusts of decedents dying before 
December 24, 2002 may follow the procedures in these final regulations, 
the proposed regulations, or Rev. Proc. 98-13.

H. Clarification of the Reporting Rules for Grantor Trusts Under Sec.  
1.671-4

    The proposed regulations amend Sec.  1.671-4 to clarify that a 
trust, or portion of a trust, reports under Sec.  1.671-4 for the 
taxable year that ends with the death of the grantor or other person 
(decedent) treated as the owner of the trust. If the trust was filing a 
Form 1041 under Sec.  1.671-4(a) during the life of the decedent, the 
due date of the Form 1041 for the taxable year ending with the 
decedent's death is specified in Sec.  1.6072-1(a)(2). Proposed Sec.  
1.6072-1(a)(2) provides that the due date for the Form 1041 for the 
taxable year ending with the death of the decedent is the fifteenth day 
of the fourth month following the close of the 12-month period which 
began with the first day of such fractional part of the year. The final 
regulations under Sec.  1.6072-1(a)(2) are revised to provide that the 
due date for the Form 1041 filed for the taxable year ending with the 
decedent's death is the fifteenth day of the fourth month following the 
close of the 12-month period that began with the first day of the 
decedent's last taxable year.
    Section 301.6109-1(a)(3) of the proposed regulations provides that 
a trust, all of which was treated as owned by the decedent, must obtain 
a new TIN upon the death of the decedent, if the trust will continue 
after the decedent's death. One commentator asked if this provision is 
intended to apply to an ``administrative trust.'' Section 1.641(b)-3 
recognizes that a trust does not automatically terminate upon the 
happening of the event by which the duration of the trust is measured. 
A reasonable period of time is permitted after such event for the 
trustee to perform the duties necessary to complete the administration 
of the trust. Section 301.6109-1(a)(3) is intended to clarify that a 
trust must obtain a new TIN after the death of the decedent, if a trust 
that was treated as owned by the decedent during the decedent's life 
will continue for a period of time following the death of the decedent 
to allow a winding up of the affairs of the trust following the death 
of the decedent.
    For administrative convenience, the proposed regulations provide 
that if a decedent and others are treated as the owners of a trust and 
following the decedent's death the decedent's portion remains in the 
trust, the trust continues to report under the TIN used by the trust 
prior to the death of the decedent. Commentators found this provision 
confusing and asked for clarification. The final regulations clarify 
that this provision applies to a trust that has multiple grantors (or 
other persons treated as the owners) that must report under Sec.  
1.671-4(a) after the death of the decedent because, although a portion 
of the trust continues to be treated as owned by a grantor or another 
person, the decedent's portion of the trust is no longer treated as 
owned by the decedent upon his death. The final regulations provide an 
example of a situation in which this provision applies.

Effect on Other Documents

    The following publications are obsolete as of December 24, 2002:

Revenue Procedure 98-13 (1998-1 CB 370)
Notice 2001-26 (2001-13 IRB 942)

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 has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply and because this rule does not impose 
a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply to these 
regulations, and therefore, a Regulatory Flexibility Analysis is not 
required. 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 their impact on small 
business.

Drafting Information

    The principal author of these regulations is Faith Colson, Office 
of Associate Chief Counsel (Passthroughs and Special Industries). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1, 301, and 602 are amended as follows:

PART 1--INCOME TAXES

    1. The authority citation for part 1 is amended by adding an entry 
in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.645-1 also issued under 26 U.S.C. 645. * * *

    2. Section 1.641(b)-3 is amended by adding a sentence to the end of 
paragraph (a) to read as follows:


Sec.  1.641(b)-3  Termination of estates and trusts.

    (a) * * * Notwithstanding the above, if the estate has joined in 
making a valid election under section 645 to treat a qualified 
revocable trust, as defined under section 645(b)(1), as part of the 
estate, the estate shall not terminate under this paragraph prior to 
the termination of the section 645 election period. See section 645 and 
the regulations thereunder for rules regarding the termination of the 
section 645 election period.
* * * * *

    3. In Sec.  1.642(c)-1, the last sentence of paragraph (a)(1) is 
revised to read as follows:


Sec.  1.642(c)-1  Unlimited deduction for amounts paid for a charitable 
purpose.

    (a) * * * (1) * * * In applying this paragraph without reference to 
paragraph (b) of this section, a deduction shall be allowed for an 
amount paid during the taxable year in

[[Page 78377]]

respect of gross income received in a previous taxable year, but only 
if no deduction was allowed for any previous taxable year to the estate 
or trust, or in the case of a section 645 election, to a related 
estate, as defined under Sec.  1.645-1(b), for the amount so paid.
* * * * *

    4. An undesignated center heading is added immediately after Sec.  
1.642(c)-6A to read as follows:

``Election to Treat Trust as Part of an Estate''

    5. Section 1.645-1 is added under the new undesignated 
centerheading ``Election to Treat Trust as Part of an Estate'' to read 
as follows:


Sec.  1.645-1  Election by certain revocable trusts to be treated as 
part of estate.

    (a) In general. If an election is filed for a qualified revocable 
trust, as defined in paragraph (b)(1) of this section, in accordance 
with the rules set forth in paragraph (c) of this section, the 
qualified revocable trust is treated and taxed for purposes of subtitle 
A of the Internal Revenue Code as part of its related estate, as 
defined in paragraph (b)(5) of this section (and not as a separate 
trust) during the election period, as defined in paragraph (b)(6) of 
this section. Rules regarding the use of taxpayer identification 
numbers (TINs) and the filing of a Form 1041, ``U.S. Income Tax Return 
for Estates and Trusts,'' for a qualified revocable trust are in 
paragraph (d) of this section. Rules regarding the tax treatment of an 
electing trust and related estate and the general filing requirements 
for the combined entity during the election period are in paragraph 
(e)(2) of this section. Rules regarding the tax treatment of an 
electing trust and its filing requirements during the election period 
if no executor, as defined in paragraph (b)(4) of this section, is 
appointed for a related estate are in paragraph (e)(3) of this section. 
Rules for determining the duration of the section 645 election period 
are in paragraph (f) of this section. Rules regarding the tax effects 
of the termination of the election are in paragraph (h) of this 
section. Rules regarding the tax consequences of the appointment of an 
executor after a trustee has made a section 645 election believing that 
an executor would not be appointed for a related estate are in 
paragraph (g) of this section.
    (b) Definitions. For purposes of this section:
    (1) Qualified revocable trust. A qualified revocable trust (QRT) is 
any trust (or portion thereof) that on the date of death of the 
decedent was treated as owned by the decedent under section 676 by 
reason of a power held by the decedent (determined without regard to 
section 672(e)). A trust that was treated as owned by the decedent 
under section 676 by reason of a power that was exercisable by the 
decedent only with the approval or consent of a nonadverse party or 
with the approval or consent of the decedent's spouse is a QRT. A trust 
that was treated as owned by the decedent under section 676 solely by 
reason of a power held by a nonadverse party or by reason of a power 
held by the decedent's spouse is not a QRT.
    (2) Electing trust. An electing trust is a QRT for which a valid 
section 645 election has been made. Once a section 645 election has 
been made for the trust, the trust shall be treated as an electing 
trust throughout the entire election period.
    (3) Decedent. The decedent is the individual who was treated as the 
owner of the QRT under section 676 on the date of that individual's 
death.
    (4) Executor. An executor is an executor, personal representative, 
or administrator that has obtained letters of appointment to administer 
the decedent's estate through formal or informal appointment 
procedures. Solely for purposes of this paragraph (b)(4), an executor 
does not include a person that has actual or constructive possession of 
property of the decedent unless that person is also appointed or 
qualified as an executor, administrator, or personal representative of 
the decedent's estate. If more than one jurisdiction has appointed an 
executor, the executor appointed in the domiciliary or primary 
proceeding is the executor of the related estate for purposes of this 
paragraph (b)(4).
    (5) Related estate. A related estate is the estate of the decedent 
who was treated as the owner of the QRT on the date of the decedent's 
death.
    (6) Election period. The election period is the period of time 
during which an electing trust is treated and taxed as part of its 
related estate. The rules for determining the duration of the election 
period are in paragraph (f) of this section.
    (c) The election--(1) Filing the election if there is an executor--
(i) Time and manner for filing the election. If there is an executor of 
the related estate, the trustees of each QRT joining in the election 
and the executor of the related estate make an election under section 
645 and this section to treat each QRT joining in the election as part 
of the related estate for purposes of subtitle A of the Internal 
Revenue Code by filing a form provided by the IRS for making the 
election (election form) properly completed and signed under penalties 
of perjury, or in any other manner prescribed after December 24, 2002 
by forms provided by the Internal Revenue Service (IRS), or by other 
published guidance for making the election. For the election to be 
valid, the election form must be filed not later than the time 
prescribed under section 6072 for filing the Form 1041 for the first 
taxable year of the related estate (regardless of whether there is 
sufficient income to require the filing of that return). If an 
extension is granted for the filing of the Form 1041 for the first 
taxable year of the related estate, the election form will be timely 
filed if it is filed by the time prescribed for filing the Form 1041 
including the extension granted with respect to the Form 1041.
    (ii) Conditions to election. In addition to providing the 
information required by the election form, as a condition to a valid 
section 645 election, the trustee of each QRT joining in the election 
and the executor of the related estate agree, by signing the election 
form under penalties of perjury, that:
    (A) With respect to a trustee--
    (1) The trustee agrees to the election;
    (2) The trustee is responsible for timely providing the executor of 
the related estate with all the trust information necessary to permit 
the executor to file a complete, accurate, and timely Form 1041 for the 
combined electing trust(s) and related estate for each taxable year 
during the election period;
    (3) The trustee of each QRT joining the election and the executor 
of the related estate have agreed to allocate the tax burden of the 
combined electing trust(s) and related estate for each taxable year 
during the election period in a manner that reasonably reflects the tax 
obligations of each electing trust and the related estate; and
    (4) The trustee is responsible for insuring that the electing 
trust's share of the tax obligations of the combined electing trust(s) 
and related estate is timely paid to the Secretary.
    (B) With respect to the executor--
    (1) The executor agrees to the election;
    (2) The executor is responsible for filing a complete, accurate, 
and timely Form 1041 for the combined electing trust(s) and related 
estate for each taxable year during the election period;
    (3) The executor and the trustee of each QRT joining in the 
election have agreed to allocate the tax burden of the combined 
electing trust(s) and related estate for each taxable year during the 
election period in a manner that reasonably reflects the tax 
obligations of each electing trust and the related estate;

[[Page 78378]]

    (4) The executor is responsible for insuring that the related 
estate's share of the tax obligations of the combined electing trust(s) 
and related estate is timely paid to the Secretary.
    (2) Filing the election if there is no executor--(i) Time and 
manner for filing the election. If there is no executor for a related 
estate, an election to treat one or more QRTs of the decedent as an 
estate for purposes of subtitle A of the Internal Revenue Code is made 
by the trustees of each QRT joining in the election, by filing a 
properly completed election form, or in any other manner prescribed 
after December 24, 2002 by forms provided by the IRS, or by other 
published guidance for making the election. For the election to be 
valid, the election form must be filed not later than the time 
prescribed under section 6072 for filing the Form 1041 for the first 
taxable year of the trust, taking into account the trustee's election 
to treat the trust as an estate under section 645 (regardless of 
whether there is sufficient income to require the filing of that 
return). If an extension is granted for the filing of the Form 1041 for 
the first taxable year of the electing trust, the election form will be 
timely filed if it is filed by the time prescribed for filing the Form 
1041 including the extension granted with respect to the filing of the 
Form 1041.
    (ii) Conditions to election. In addition to providing the 
information required by the election form, as a condition to a valid 
section 645 election, the trustee of each QRT joining in the election 
agrees, by signing the election form under penalties of perjury, that--
    (A) The trustee agrees to the election;
    (B) If there is more than one QRT joining in the election, the 
trustees of each QRT joining in the election have appointed one trustee 
to be responsible for filing the Form 1041 for the combined electing 
trusts for each taxable year during the election period (filing 
trustee) and the filing trustee has agreed to accept that 
responsibility;
    (C) If there is more than one QRT, the trustees of each QRT joining 
in the election have agreed to allocate the tax liability of the 
combined electing trusts for each taxable year during the election 
period in a manner that reasonably reflects the tax obligations of each 
electing trust;
    (D) The trustee agrees to:
    (1) Timely file a Form 1041 for the electing trust(s) for each 
taxable year during the election period; or
    (2) If there is more than one QRT and the trustee is not the filing 
trustee, timely provide the filing trustee with all of the electing 
trust's information necessary to permit the filing trustee to file a 
complete, accurate, and timely Form 1041 for the combined electing 
trusts for each taxable year during the election period;
    (3) Insure that the electing trust's share of the tax burden is 
timely paid to the Secretary;
    (E) There is no executor and, to the knowledge and belief of the 
trustee, one will not be appointed; and
    (F) If an executor is appointed after the filing of the election 
form and the executor agrees to the section 645 election, the trustee 
will complete and file a revised election form with the executor.
    (3) Election for more than one QRT. If there is more than one QRT, 
the election may be made for some or all of the QRTs. If there is no 
executor, one trustee must be appointed by the trustees of the electing 
trusts to file Forms 1041 for the combined electing trusts filing as an 
estate during the election period.
    (d) TIN and filing requirements for a QRT--(1) Obtaining a TIN. 
Regardless of whether there is an executor for a related estate and 
regardless of whether a section 645 election will be made for the QRT, 
a TIN must be obtained for the QRT following the death of the decedent. 
See Sec.  301.6109-1(a)(3) of this chapter. The trustee must furnish 
this TIN to the payors of the QRT. See Sec.  301.6109-1(a)(5) of this 
chapter for the definition of payor.
    (2) Filing a Form 1041 for a QRT--(i) Option not to file a Form 
1041 for a QRT for which a section 645 election will be made. If a 
section 645 election will be made for a QRT, the executor of the 
related estate, if any, and the trustee of the QRT may treat the QRT as 
an electing trust from the decedent's date of death until the due date 
for the section 645 election. Accordingly, the trustee of the QRT is 
not required to file a Form 1041 for the QRT for the short taxable year 
beginning with the decedent's date of death and ending December 31 of 
that year. However, if a QRT is treated as an electing trust under this 
paragraph from the decedent's date of death until the due date for the 
section 645 election but a valid section 645 election is not made for 
the QRT, the QRT will be subject to penalties and interest for failing 
to timely file a Form 1041 and pay the tax due thereon.
    (ii) Requirement to file a Form 1041 for a QRT if paragraph 
(d)(2)(i) of this section does not apply--(A) Requirement to file Form 
1041. If the trustee of the QRT and the executor of the related estate, 
if any, do not treat the QRT as an electing trust as provided under 
paragraph (d)(2)(i) of this section, or if the trustee of the electing 
trust and the executor, if any, are uncertain whether a section 645 
election will be made for a QRT, the trustee of the QRT must file a 
Form 1041 for the short taxable year beginning with the decedent's 
death and ending December 31 of that year (unless the QRT is not 
required to file a Form 1041 under section 6012 for this period).
    (B) Requirement to amend Form 1041 if a section 645 election is 
made--(1) If there is an executor. If there is an executor and a valid 
section 645 election is made for a QRT after a Form 1041 has been filed 
for the QRT as a trust (see paragraph (d)(2)(ii)(A) of this section), 
the trustee must amend the Form 1041. The QRT's items of income, 
deduction, and credit must be excluded from the amended Form 1041 filed 
under this paragraph and must be included on the Form 1041 filed for 
the first taxable year of the combined electing trust and related 
estate under paragraph (e)(2)(ii)(A) of this section.
    (2) If there is no executor. If there is no executor and a valid 
section 645 election is made for a QRT after a Form 1041 has been filed 
for the QRT as a trust (see paragraph (d)(2)(ii)(A) of this section) 
for the short taxable year beginning with the decedent's death and 
ending December 31 of that year, the trustee must file an amended 
return for the QRT. The amended return must be filed consistent with 
paragraph (e)(3) of this section and must be filed by the due date of 
the Form 1041 for the QRT, taking into account the trustee's election 
under section 645.
    (e) Tax treatment and general filing requirements of electing trust 
and related estate during the election period--(1) Effect of election. 
The section 645 election once made is irrevocable.
    (2) If there is an executor--(i) Tax treatment of the combined 
electing trust and related estate. If there is an executor, the 
electing trust is treated, during the election period, as part of the 
related estate for all purposes of subtitle A of the Internal Revenue 
Code. Thus, for example, the electing trust is treated as part of the 
related estate for purposes of the set-aside deduction under section 
642(c)(2), the subchapter S shareholder requirements of section 
1361(b)(1), and the special offset for rental real estate activities in 
section 469(i)(4).
    (ii) Filing requirements--(A) Filing the Form 1041 for the combined 
electing trust and related estate during the election period. If there 
is an executor, the executor files a single income tax return annually 
(assuming a return is required under section 6012) under the name and 
TIN of the related estate for the combined electing trust and the

[[Page 78379]]

related estate. Information regarding the name and TIN of each electing 
trust must be provided on the Form 1041 as required by the instructions 
to that form. The period of limitations provided in section 6501 for 
assessments with respect to an electing trust and the related estate 
starts with the filing of the return required under this paragraph. 
Except as required under the separate share rules of section 663(c), 
for purposes of filing the Form 1041 under this paragraph and computing 
the tax, the items of income, deduction, and credit of the electing 
trust and related estate are combined. One personal exemption in the 
amount of $600 is permitted under section 642(b), and the tax is 
computed under section 1(e), taking into account section 1(h), for the 
combined taxable income.
    (B) Filing a Form 1041 for the electing trust is not required. 
Except for any final Form 1041 required to be filed under paragraph 
(h)(2)(i)(B) of this section, if there is an executor, the trustee of 
the electing trust does not file a Form 1041 for the electing trust 
during the election period. Although the trustee is not required to 
file a Form 1041 for the electing trust, the trustee of the electing 
trust must timely provide the executor of the related estate with all 
the trust information necessary to permit the executor to file a 
complete, accurate and timely Form 1041 for the combined electing trust 
and related estate. The trustee must also insure that the electing 
trust's share of the tax obligations of the combined electing trust and 
related estate is timely paid to the Secretary. In certain situations, 
the trustee of a QRT may be required to file a Form 1041 for the QRT's 
short taxable year beginning with the date of the decedent's death and 
ending December 31 of that year. See paragraph (d)(2) of this section.
    (iii) Application of the separate share rules--(A) Distributions to 
beneficiaries (other than to a share (or shares) of the combined 
electing trust and related estate). Under the separate share rules of 
section 663(c), the electing trust and related estate are treated as 
separate shares for purposes of computing distributable net income 
(DNI) and applying the distribution provisions of sections 661 and 662. 
Further, the electing trust share or the related estate share may each 
contain two or more shares. Thus, if during the taxable year, a 
distribution is made by the electing trust or the related estate, the 
DNI of the share making the distribution must be determined and the 
distribution provisions of sections 661 and 662 must be applied using 
the separately determined DNI applicable to the distributing share.
    (B) Adjustments to the DNI of the separate shares for distributions 
between shares to which sections 661 and 662 would apply. A 
distribution from one share to another share to which sections 661 and 
662 would apply if made to a beneficiary other than another share of 
the combined electing trust and related estate affects the computation 
of the DNI of the share making the distribution and the share receiving 
the distribution. The share making the distribution reduces its DNI by 
the amount of the distribution deduction that it would be entitled to 
under section 661 (determined without regard to section 661(c)), had 
the distribution been made to another beneficiary, and, solely for 
purposes of calculating DNI, the share receiving the distribution 
increases its gross income by the same amount. The distribution has the 
same character in the hands of the recipient share as in the hands of 
the distributing share. The following example illustrates the 
provisions of this paragraph (e)(2)(iii)(B):

    Example. (i) A's will provides that, after the payment of debts, 
expenses, and taxes, the residue of A's estate is to be distributed 
to Trust, an electing trust. The sole beneficiary of Trust is C. The 
estate share has $15,000 of gross income, $5,000 of deductions, and 
$10,000 of taxable income and DNI for the taxable year based on the 
assets held in A's estate. During the taxable year, A's estate 
distributes $15,000 to Trust. The distribution reduces the DNI of 
the estate share by $10,000.
    (ii) For the same taxable year, the trust share has $25,000 of 
gross income and $5,000 of deductions. None of the modifications 
provided for under section 643(a) apply. In calculating the DNI for 
the trust share, the gross income of the trust share is increased by 
$10,000, the amount of the reduction in the DNI of the estate share 
as a result of the distribution to Trust. Thus, solely for purposes 
of calculating DNI, the trust share has gross income of $35,000, and 
taxable income of $30,000. Therefore, the trust share has $30,000 of 
DNI for the taxable year.
    (iii) During the same taxable year, Trust distributes $35,000 to 
C. The distribution deduction reported on the Form 1041 filed for 
A's estate and Trust is $30,000. As a result of the distribution by 
Trust to C, C must include $30,000 in gross income for the taxable 
year. The gross income reported on the Form 1041 filed for A's 
estate and Trust is $40,000.

    (iv) Application of the governing instrument requirement of section 
642(c). A deduction is allowed in computing the taxable income of the 
combined electing trust and related estate to the extent permitted 
under section 642(c) for--
    (A) Any amount of the gross income of the related estate that is 
paid or set aside during the taxable year pursuant to the terms of the 
governing instrument of the related estate for a purpose specified in 
section 170(c); and
    (B) Any amount of gross income of the electing trust that is paid 
or set aside during the taxable year pursuant to the terms of the 
governing instrument of the electing trust for a purpose specified in 
section 170(c).
    (3) If there is no executor--(i) Tax treatment of the electing 
trust. If there is no executor, the trustee treats the electing trust, 
during the election period, as an estate for all purposes of subtitle A 
of the Internal Revenue Code. Thus, for example, an electing trust is 
treated as an estate for purposes of the set-aside deduction under 
section 642(c)(2), the subchapter S shareholder requirements of section 
1361(b)(1), and the special offset for rental real estate activities 
under section 469(i)(4). The trustee may also adopt a taxable year 
other than a calendar year.
    (ii) Filing the Form 1041 for the electing trust. If there is no 
executor, the trustee of the electing trust must, during the election 
period, file a Form 1041, under the TIN obtained by the trustee under 
Sec.  301.6109-1(a)(3) of this chapter upon the death of the decedent, 
treating the trust as an estate. If there is more than one electing 
trust, the Form 1041 must be filed by the filing trustee (see paragraph 
(c)(2)(ii)(B) of this section) under the name and TIN of the electing 
trust of the filing trustee. Information regarding the names and TINs 
of the other electing trusts must be provided on the Form 1041 as 
required by the instructions to that form. Any return filed in 
accordance with this paragraph shall be treated as a return filed for 
the electing trust (or trusts, if there is more than one electing 
trust) and not as a return filed for any subsequently discovered 
related estate. Accordingly, the period of limitations provided in 
section 6501 for assessments with respect to a subsequently discovered 
related estate does not start until a return is filed with respect to 
the related estate. See paragraph (g) of this section.
    (4) Application of the section 6654(l)(2) to the electing trust. 
Each electing trust and related estate (if any) is treated as a 
separate taxpayer for all purposes of subtitle F of the Internal 
Revenue Code, including, without limitation, the application of section 
6654. The provisions of section 6654(l)(2)(A) relating to the two year 
exception to an estate's obligation to make estimated tax payments, 
however, will apply to each electing trust for which a section 645 
election has been made.
    (f) Duration of election period--(1) In general. The election 
period begins on

[[Page 78380]]

the date of the decedent's death and terminates on the earlier of the 
day on which both the electing trust and related estate, if any, have 
distributed all of their assets, or the day before the applicable date. 
The election does not apply to successor trusts (trusts that are 
distributees under the trust instrument).
    (2) Definition of applicable date--(i) Applicable date if no Form 
706 ``United States Estate (and Generation Skipping Transfer) Tax 
Return'' is required to be filed. If a Form 706 is not required to be 
filed as a result of the decedent's death, the applicable date is the 
day which is 2 years after the date of the decedent's death.
    (ii) Applicable date if a Form 706 is required to be filed. If a 
Form 706 is required to be filed as a result of the decedent's death, 
the applicable date is the later of the day that is 2 years after the 
date of the decedent's death, or the day that is 6 months after the 
date of final determination of liability for estate tax. Solely for 
purposes of determining the applicable date under section 645, the date 
of final determination of liability is the earliest of the following--
    (A) The date that is six months after the issuance by the Internal 
Revenue Service of an estate tax closing letter, unless a claim for 
refund with respect to the estate tax is filed within twelve months 
after the issuance of the letter;
    (B) The date of a final disposition of a claim for refund, as 
defined in paragraph (f)(2)(iii) of this section, that resolves the 
liability for the estate tax, unless suit is instituted within six 
months after a final disposition of the claim;
    (C) The date of execution of a settlement agreement with the 
Internal Revenue Service that determines the liability for the estate 
tax;
    (D) The date of issuance of a decision, judgment, decree, or other 
order by a court of competent jurisdiction resolving the liability for 
the estate tax unless a notice of appeal or a petition for certiorari 
is filed within 90 days after the issuance of a decision, judgment, 
decree, or other order of a court; or
    (E) The date of expiration of the period of limitations for 
assessment of the estate tax provided in section 6501.
    (iii) Definition of final disposition of claim for refund. For 
purposes of paragraph (f)(2)(ii)(B) of this section, a claim for refund 
shall be deemed finally disposed of by the Secretary when all items 
have been either allowed or disallowed. If a waiver of notification 
with respect to disallowance is filed with respect to a claim for 
refund prior to disallowance of the claim, the claim for refund will be 
treated as disallowed on the date the waiver is filed.
    (iv) Examples. The application of this paragraph (f)(2) is 
illustrated by the following examples:

    Example 1. A died on October 20, 2002. The executor of A's 
estate and the trustee of Trust, an electing trust, made a section 
645 election. A Form 706 is not required to be filed as a result of 
A's death. The applicable date is October 20, 2004, the day that is 
two years after A's date of death. The last day of the election 
period is October 19, 2004. Beginning October 20, 2004, Trust will 
no longer be treated and taxed as part of A's estate.
    Example 2. Assume the same facts as Example 1, except that a 
Form 706 is required to be filed as the result of A's death. The 
Internal Revenue Service issues an estate tax closing letter 
accepting the Form 706 as filed on March 15, 2005. The estate does 
not file a claim for refund by March 15, 2006, the day that is 
twelve months after the date of issuance of the estate tax closing 
letter. The date of final determination of liability is September 
15, 2005, and the applicable date is March 15, 2006. The last day of 
the election period is March 14, 2006. Beginning March 15, 2006, 
Trust will no longer be treated and taxed as part of A's estate.
    Example 3. Assume the same facts as Example 1, except that a 
Form 706 is required to be filed as the result of A's death. The 
Form 706 is audited, and a notice of deficiency authorized under 
section 6212 is mailed to the executor of A's estate as a result of 
the audit. The executor files a petition in Tax Court. The Tax Court 
issues a decision resolving the liability for estate tax on December 
14, 2005, and neither party appeals within 90 days after the 
issuance of the decision. The date of final determination of 
liability is December 14, 2005. The applicable date is June 14, 
2006, the day that is six months after the date of final 
determination of liability. The last day of the election period is 
June 13, 2006. Beginning June 14, 2006, Trust will no longer be 
treated and taxed as part of A's estate.

    (g) Executor appointed after the section 645 election is made--(1) 
Effect on the election. If an executor for the related estate is not 
appointed until after the trustee has made a valid section 645 
election, the executor must agree to the trustee's election, and the 
IRS must be notified of that agreement by the filing of a revised 
election form (completed as required by the instructions to that form) 
within 90 days of the appointment of the executor, for the election 
period to continue past the date of appointment of the executor. If the 
executor does not agree to the election or a revised election form is 
not timely filed as required by this paragraph, the election period 
terminates the day before the appointment of the executor. If the IRS 
issues other guidance after December 24, 2002 for notifying the IRS of 
the executor's agreement to the election, the IRS must be notified in 
the manner provided in that guidance for the election period to 
continue.
    (2) Continuation of election period--(i) Correction of returns 
filed before executor appointed. If the election period continues under 
paragraph (g)(1) of this section, the executor of the related estate 
and the trustee of each electing trust must file amended Forms 1041 to 
correct the Forms 1041 filed by the trustee before the executor was 
appointed. The amended Forms 1041 must be filed under the name and TIN 
of the electing trust and must reflect the items of income, deduction, 
and credit of the related estate and the electing trust. The name and 
TIN of the related estate must be provided on the amended Forms 1041 as 
required in the instructions to that Form. The amended return for the 
taxable year ending immediately before the executor was appointed must 
indicate that this Form 1041 is a final return. If the period of 
limitations for making assessments has expired with respect to the 
electing trust for any of the Forms 1041 filed by the trustee, the 
executor must file Forms 1041 for any items of income, deduction, and 
credit of the related estate that cannot be properly included on 
amended forms for the electing trust. The personal exemption under 
section 642(b) is not permitted to be taken on these Forms 1041 filed 
by the executor.
    (ii) Returns filed after the appointment of the executor. All 
returns filed by the combined electing trust and related estate after 
the appointment of the executor are to be filed under the name and TIN 
of the related estate in accordance with paragraph (e)(2) of this 
section. Regardless of the change in the name and TIN under which the 
Forms 1041 for the combined electing trust and related estate are 
filed, the combined electing trust and related estate will be treated 
as the same entity before and after the executor is appointed.
    (3) Termination of the election period. If the election period 
terminates under paragraph (g)(1) of this section, the executor must 
file Forms 1041 under the name and TIN of the estate for all taxable 
years of the related estate ending after the death of the decedent. The 
trustee of the electing trust is not required to amend any returns 
filed for the electing trust during the election period. Following 
termination of the election period, the trustee of the electing trust 
must obtain a new TIN. See Sec.  301.6109-1(a)(4) of this chapter.
    (h) Treatment of an electing trust and related estate following 
termination of the election--(1) The share (or shares) comprising the 
electing trust is deemed to be distributed upon termination of the 
election period. On the close of the last day of the election period, 
the combined electing trust and related

[[Page 78381]]

estate, if there is an executor, or the electing trust, if there is no 
executor, is deemed to distribute the share (or shares, as determined 
under section 663(c)) comprising the electing trust to a new trust in a 
distribution to which sections 661 and 662 apply. All items of income, 
including net capital gains, that are attributable to the share (or 
shares) comprising the electing trust are included in the calculation 
of the distributable net income of the electing trust and treated as 
distributed by the combined electing trust and related estate, if there 
is an executor, or by the electing trust, if there is no executor, to 
the new trust. The combined electing trust and related estate, if there 
is an executor, or the electing trust, if there is no executor, is 
entitled to a distribution deduction to the extent permitted under 
section 661 in the taxable year in which the election period terminates 
as a result of the deemed distribution. The new trust shall include the 
amount of the deemed distribution in gross income to the extent 
required under section 662.
    (2) Filing of the Form 1041 upon the termination of the section 645 
election--(i) If there is an executor--(A) Filing the Form 1041 for the 
year of termination. If there is an executor, the Form 1041 filed under 
the name and TIN of the related estate for the taxable year in which 
the election terminates includes--
    (1) The items of income, deduction, and credit of the electing 
trust attributable to the period beginning with the first day of the 
taxable year of the combined electing trust and related estate and 
ending with the last day of the election period;
    (2) The items of income, deduction, and credit, if any, of the 
related estate for the entire taxable year; and
    (3) A deduction for the deemed distribution of the share (or 
shares) comprising the electing trust to the new trust as provided for 
under paragraph (h)(1) of this section.
    (B) Requirement to file a final Form 1041 under the name and TIN of 
the electing trust. If the electing trust terminates during the 
election period, the trustee of the electing trust must file a Form 
1041 under the name and TIN of the electing trust and indicate that the 
return is a final return to notify the IRS that the electing trust is 
no longer in existence. The items of income, deduction, and credit of 
the trust are not reported on this final Form 1041 but on the 
appropriate Form 1041 filed for the combined electing trust and related 
estate.
    (ii) If there is no executor. If there is no executor, the taxable 
year of the electing trust closes on the last day of the election 
period. A Form 1041 is filed in the manner prescribed under paragraph 
(e)(3)(ii) of this section reporting the items of income, deduction, 
and credit of the electing trust for the short period ending with the 
last day of the election period. The Form 1041 filed under this 
paragraph includes a distribution deduction for the deemed distribution 
provided for under paragraph (h)(1) of this section. The Form 1041 must 
indicate that it is a final return.
    (3) Use of TINs following termination of the election--(i) If there 
is an executor. Upon termination of the section 645 election, a former 
electing trust may need to obtain a new TIN. See Sec.  301.6109-1(a)(4) 
of this chapter. If the related estate continues after the termination 
of the election period, the related estate must continue to use the TIN 
assigned to the estate during the election period.
    (ii) If there is no executor. If there is no executor, the former 
electing trust must obtain a new TIN if the trust will continue after 
the termination of the election period. See Sec.  301.6109-1(a)(4) of 
this chapter.
    (4) Taxable year of estate and trust upon termination of the 
election--(i) Estate--Upon termination of the section 645 election 
period, the taxable year of the estate is the same taxable year used 
during the election period.
    (ii) Trust. Upon termination of the section 645 election, the 
taxable year of the new trust is the calendar year. See section 644.
    (i) Reserved.
    (j) Effective date. Paragraphs (a), (b), (c), (d), (f), and (g) of 
this section apply to trusts and estates of decedents dying on or after 
December 24, 2002. Paragraphs (e) and (h) of this section apply to 
taxable years ending on or after December 24, 2002.
    6. Section 1.671-4 is amended as follows:
    1. The text of paragraph (d) is redesignated paragraph (d)(1) and a 
paragraph heading is added for newly designated paragraph (d)(1).
    2. Paragraph (d)(2) is added.
    3. Paragraphs (h) and (i) are redesignated as paragraphs (i) and 
(j), respectively.
    4. New paragraph (h) is added.
    5. The text of newly designated paragraph (i)(1) is revised.
    6. Paragraph (i)(3) is added.
    The additions and revisions read as follows:


Sec.  1.671-4  Method of reporting.

* * * * *
    (d) Due date and other requirements with respect to statement 
required to be furnished by trustee--(1) In general. * * *
    (2) Statement for the taxable year ending with the death of the 
grantor or other person treated as the owner of the trust. If a trust 
ceases to be treated as owned by the grantor, or other person, by 
reason of the death of that grantor or other person (decedent), the due 
date for the statement required to be furnished for the taxable year 
ending with the death of the decedent shall be the date specified by 
section 6034A(a) as though the decedent had lived throughout the 
decedent's last taxable year. See paragraph (h) of this section for 
special reporting rules for a trust or portion of the trust that ceases 
to be treated as owned by the grantor or other person by reason of the 
death of the grantor or other person.
* * * * *
    (h) Reporting rules for a trust, or portion of a trust, that ceases 
to be treated as owned by a grantor or other person by reason of the 
death of the grantor or other person--(1) Definition of decedent. For 
purposes of this paragraph (h), the decedent is the grantor or other 
person treated as the owner of the trust, or portion of the trust, 
under subpart E, part I, subchapter J, chapter 1 of the Internal 
Revenue Code on the date of death of that person.
    (2) In general. The provisions of this section apply to a trust, or 
portion of a trust, treated as owned by a decedent for the taxable year 
that ends with the decedent's death. Following the death of the 
decedent, the trust or portion of a trust that ceases to be treated as 
owned by the decedent, by reason of the death of the decedent, may no 
longer report under this section. A trust, all of which was treated as 
owned by the decedent, must obtain a new TIN upon the death of the 
decedent, if the trust will continue after the death of the decedent. 
See Sec.  301.6109-1(a)(3)(i) of this chapter for rules regarding 
obtaining a TIN upon the death of the decedent.
    (3) Special rules--(i) Trusts reporting pursuant to paragraph (a) 
of this section for the taxable year ending with the decedent's death. 
The due date for the filing of a return pursuant to paragraph (a) of 
this section for the taxable year ending with the decedent's death 
shall be the due date provided for under Sec.  1.6072-1(a)(2). The 
return filed under this paragraph for a trust all of which was treated 
as owned by the decedent must indicate that it is a final return.
    (ii) Trust reporting pursuant to paragraph (b)(2)(B) of this 
section for the taxable year of the decedent's death. A trust that 
reports pursuant to paragraph (b)(2)(B) of this section for the

[[Page 78382]]

taxable year ending with the decedent's death must indicate on each 
Form 1096 ``Annual Summary and Transmittal of the U.S. Information 
Returns'' that it files (or appropriately on magnetic media) for the 
taxable year ending with the death of the decedent that it is the final 
return of the trust.
    (iii) Trust reporting under paragraph (b)(3) of this section. If a 
trust has been reporting under paragraph (b)(3) of this section, the 
trustee may not report under that paragraph if any portion of the trust 
has a short taxable year by reason of the death of the decedent and the 
portion treated as owned by the decedent does not terminate on the 
death of the decedent.
    (i) Effective date and transition rule--(1) Effective date. The 
trustee of a trust any portion of which is treated as owned by one or 
more grantors or other persons must report pursuant to paragraphs (a), 
(b), (c), (d)(1), (e), (f), and (g) of this section for taxable years 
beginning on or after January 1, 1996.
* * * * *
    (3) Effective date for paragraphs (d)(2) and (h) of this section. 
Paragraphs (d)(2) and (h) of this section apply for taxable years 
ending on or after December 24, 2002.
    7. Section 1.6012-3 is amended by adding paragraph (a)(1)(iv) to 
read as follows:


Sec.  1.6012-3  Returns by fiduciaries.

    (iv) For each trust electing to be taxed as, or as part of, an 
estate under section 645 for which a trustee acts, and for each related 
estate joining in a section 645 election for which an executor acts, if 
the aggregate gross income of the electing trust(s) and related estate, 
if any, joining in the election for the taxable year is $600 or more. 
(For the respective filing requirements of the trustee of each electing 
trust and executor of any related estate, see Sec.  1.645-1).
* * * * *

    8. Section 1.6072-1 is amended as follows:
    1. The text of paragraph (a) is redesignated as paragraph (a)(1) 
and a paragraph heading is added for newly designated paragraph (a)(1).
    2. Paragraph (a)(2) is added.
    The additions are as follows:


Sec.  1.6072-1  Time for filing returns of individuals, estates, and 
trusts.

    (a) In general--(1) Returns of income for individuals, estates and 
trusts. * * *
    (2) Return of trust, or portion of a trust, treated as owned by a 
decedent--(i) In general. In the case of a return of a trust, or 
portion of a trust, that was treated as owned by a decedent under 
subpart E (section 671 and following), part I, subchapter J, chapter 1 
of the Internal Revenue Code as of the date of the decedent's death 
that is filed in accordance with Sec.  1.671-4(a) for the fractional 
part of the year ending with the date of the decedent's death, the due 
date of such return shall be the fifteenth day of the fourth month 
following the close of the 12-month period which began with the first 
day of the decedent's taxable year.
    (ii) Effective date. This paragraph (a)(2) applies to taxable years 
ending on or after December 24, 2002.
* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

    9. The authority citation for part 301 continues to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *

    10. Section 301.6109-1 is amended as follows:
    1. Paragraph (a)(2)(iii) is removed.
    2. Paragraphs (a)(3) through (a)(6) are added.
    The additions are as follows:


Sec.  301.6109-1  Identifying numbers.

    (a) * * *
    (3) Obtaining a taxpayer identification number for a trust, or 
portion of a trust, following the death of the individual treated as 
the owner--(i) In general--(A) A trust all of which was treated as 
owned by a decedent. In general, a trust all of which is treated as 
owned by a decedent under subpart E (section 671 and following), part 
I, subchapter J, chapter 1 of the Internal Revenue Code as of the date 
of the decedent's death must obtain a new taxpayer identification 
number following the death of the decedent if the trust will continue 
after the death of the decedent.
    (B) Taxpayer identification number of trust with multiple owners. 
With respect to a portion of a trust treated as owned under subpart E 
(section 671 and following), part I, subchapter J, chapter 1 (subpart 
E) of the Internal Revenue Code by a decedent as of the date of the 
decedent's death, if, following the death of the decedent, the portion 
treated as owned by the decedent remains part of the original trust and 
the other portion (or portions) of the trust continues to be treated as 
owned under subpart E by a grantor(s) or other person(s), the trust 
reports under the taxpayer identification number assigned to the trust 
prior to the decedent's death and the portion of the trust treated as 
owned by the decedent prior to the decedent's death (assuming the 
decedent's portion of the trust is not treated as terminating upon the 
decedent's death) continues to report under the taxpayer identification 
number used for reporting by the other portion (or portions) of the 
trust. For example, if a trust, reporting under Sec.  1.671-4(a) of 
this chapter, is treated as owned by three persons and one of them 
dies, the trust, including the portion of the trust no longer treated 
as owned by a grantor or other person, continues to report under the 
tax identification number assigned to the trust prior to the death of 
that person. See Sec.  1.671-4(a) of this chapter regarding rules for 
filing the Form 1041, ``U.S. Income Tax Return for Estates and 
Trusts,'' where only a portion of the trust is treated as owned by one 
or more persons under subpart E.
    (ii) Furnishing correct taxpayer identification number to payors 
following the death of the decedent. If the trust continues after the 
death of the decedent and is required to obtain a new taxpayer 
identification number under paragraph (a)(3)(i)(A) of this section, the 
trustee must furnish payors with a new Form W-9, ``Request for Taxpayer 
Identification Number and Certification,'' or an acceptable substitute 
Form W-9, containing the new taxpayer identification number required 
under paragraph (a)(3)(i)(A) of this section, the name of the trust, 
and the address of the trustee.
    (4) Taxpayer identification number to be used by a trust upon 
termination of a section 645 election--(i) If there is an executor. 
Upon the termination of the section 645 election period, if there is an 
executor, the trustee of the former electing trust may need to obtain a 
taxpayer identification number. If Sec.  1.645-1(g) of this chapter 
regarding the appointment of an executor after a section 645 election 
is made applies to the electing trust, the electing trust must obtain a 
new TIN upon termination of the election period. See the instructions 
to the Form 1041 for whether a new taxpayer identification number is 
required for other former electing trusts.
    (ii) If there is no executor. Upon termination of the section 645 
election period, if there is no executor, the trustee of the former 
electing trust must obtain a new taxpayer identification number.
    (iii) Requirement to provide taxpayer identification number to 
payors. If the trustee is required to obtain a new taxpayer 
identification number for a former electing trust pursuant to this 
paragraph (a)(4), or pursuant to the instructions to the Form 1041, the 
trustee must furnish all payors of the trust with a completed Form W-9 
or acceptable substitute Form W-9 signed under penalties of perjury by 
the trustee providing each payor with the name of

[[Page 78383]]

the trust, the new taxpayer identification number, and the address of 
the trustee.
    (5) Persons treated as payors. For purposes of paragraphs (a)(2), 
(3), and (4) of this section, a payor is a person described in 
Sec. Sec.  1.671-4(b)(4) of this chapter.
    (6) Effective date. Paragraphs (a)(3), (4), and (5) of this section 
apply to trusts of decedents dying on or after December 24, 2002.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    11. The authority citation for part 602 continues to read as 
follows:


    Authority: 26 U.S.C. 7805.
    12. In Sec.  602.101, paragraph (b) is amended by adding an entry 
in numerical order to the table to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
    CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                                * * * * *
1.645-1...................................................     1545-1578
 
                                * * * * *
------------------------------------------------------------------------


David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
    Approved: December 12, 2002.
Pamela T. Olson,
Assistant Secretary of Treasury.
[FR Doc. 02-32149 Filed 12-23-02; 8:45 am]
BILLING CODE 4830-01-P