[Federal Register Volume 71, Number 25 (Tuesday, February 7, 2006)]
[Rules and Regulations]
[Pages 6197-6206]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-1037]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9249]
RIN 1545-AR82


Escrow Funds and Other Similar Funds

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to the 
taxation and reporting of income earned on qualified settlement funds 
and certain other escrow accounts, trusts, and funds, and other related 
rules. The final regulations affect qualified settlement funds, escrow 
accounts established in connection with sales of property, disputed 
ownership funds, and the parties to these escrow accounts, trusts, and 
funds.

DATES: Effective Date: These regulations are effective February 3, 
2006.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.468B-5(c), 1.468B-7(f), and 1.468B-9(j).

FOR FURTHER INFORMATION CONTACT: Richard Shevak or A. Katharine Jacob 
Kiss, (202) 622-4930 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3507(d)) 
under control number 1545-1631. The collections of information in 
Sec. Sec.  1.468B-1(k)(2) and 1.468B-9(c)(2)(ii) are to obtain benefits 
and the collection of information in Sec.  1.468B-9(g) is mandatory.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid control number assigned by the Office of 
Management and Budget.
    The estimated annual burden per respondent is .40 hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, 
SE:W:CAR:MP:T:T:SP, Washington, DC 20224, and to the Office of 
Management and Budget, Attn: Desk Officer for the Department of the 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to 26 CFR part 1 under section 
468B of the Internal Revenue Code (Code). This document does not adopt 
Sec.  1.468B-6 of a notice of proposed rulemaking (REG-209619-93) 
published in the Federal Register on February 1, 1999 (64 FR 4801), 
relating to the current taxation and reporting of income earned on 
qualified settlement funds and certain other escrow accounts, trusts, 
and funds, which is withdrawn and reproposed by a notice of proposed 
rulemaking published elsewhere in this issue of the Federal Register. 
This document also does not adopt Sec.  1.468B-8 of the notice of 
proposed rulemaking, which is reserved.
    Section 468B was added to the Code by section 1807(a)(7)(A) of the 
Tax Reform Act of 1986, Public Law 99-514 (100 Stat. 2814), and was 
amended by section 1018(f) of the Technical and Miscellaneous Revenue 
Act of 1988, Public Law 100-647 (102 Stat. 3582). Section 468B(g) 
provides that nothing in any provision of law shall be construed as 
providing that an escrow account, settlement fund, or similar fund is 
not subject to current income taxation, and that the Secretary shall 
prescribe regulations providing for the taxation of such accounts or 
funds, whether as a grantor trust or otherwise.
    On December 23, 1992, final regulations (TD 8459) under section 
468B(g) concerning the taxation of qualified settlement funds (QSF) 
were published in the Federal Register (57 FR 60983) (the QSF 
regulations). The QSF regulations do not address the taxation of other 
types of escrow accounts, trusts, or funds. The preamble to the QSF 
regulations states that future regulations would address the income tax 
treatment of accounts, trusts, or funds other than QSFs, specifically, 
escrow accounts used in the sale of property and section 1031 qualified 
escrow accounts.
    On February 1, 1999, the IRS and the Treasury Department published 
a notice of proposed rulemaking (REG-209619-93) in the Federal Register 
(64 FR 4801) regarding the proposed income tax treatment of these other 
funds. The proposed regulations provide rules for taxing income earned 
by (1) qualified escrow accounts and qualified trusts used in deferred 
like-kind exchanges under section 1031, (2) pre-closing escrows used in 
sales or exchanges of real or personal property, (3) contingent-at-
closing escrows established on account of contingencies existing at the 
closing of certain sales of business or investment property, and (4) 
disputed ownership funds established under the jurisdiction of a court 
to hold money or property subject to disputed claims of ownership. 
Additionally, the proposed regulations provide rules permitting a 
transferor to a QSF to elect taxation of the QSF as a grantor trust.
    Written comments responding to the notice of proposed rulemaking 
were received. A public hearing was held on May 12, 1999. After 
consideration of the comments, the proposed regulations are adopted as 
revised by this Treasury decision.

Explanation of Provisions and Summary of Comments

1. Election To Treat a Qualified Settlement Fund as a Grantor Trust 
Under Sec.  1.468B-1(k)

    The proposed regulations provide that, if there is only one 
transferor to a qualified settlement fund, the transferor may make an 
election to treat the qualified settlement fund as a grantor trust, all 
of which is treated as owned by the transferor (a grantor trust 
election). The election may be revoked only for compelling 
circumstances upon consent of the Commissioner by private letter 
ruling.
    Commentators recommended expanding the scope of the grantor trust 
election by allowing the election even if there are multiple 
transferors to a qualified settlement fund. Certain commentators 
suggested that this rule could be limited to situations in which all of 
the grantors are members of the same consolidated group. These comments 
were not adopted because they would result in undue complexity. For 
example, extending the grantor trust election to multiple-transferor 
trusts would require the allocation of items of income, deduction and 
credit (including capital gains and losses) among the various 
transferors. Although Sec.  1.671-3 of the Income Tax Regulations 
contains

[[Page 6198]]

rules for making such allocations, the IRS and the Treasury Department 
do not believe that these rules address the complex sharing 
arrangements that may arise in a qualified settlement fund. Moreover, 
if some, but not all, of the transferors elected grantor trust 
treatment, another allocation method would be necessary to allocate the 
items of income, deduction, and credit (including capital gains and 
losses) between the grantor trust portion of the fund and the qualified 
settlement fund portion of the fund.
    Commentators recommended allowing transferors to make the grantor 
trust election in taxable years after the taxable year in which the 
fund is established. This comment was not adopted because allowing a 
grantor trust election for a taxable year other than the taxable year 
in which the fund is established gives rise to complex issues regarding 
the tax treatment of the fund upon conversion to a grantor trust. For 
example, any deduction claimed by the transferor for amounts 
contributed to the qualified settlement fund would need to be 
recaptured. Further, adjustments would be necessary to take into 
account income previously taxed to the qualified settlement fund and 
differences in the accounting methods used by the transferor and the 
fund.
    However, the final regulations allow a transferor to a qualified 
settlement fund to elect grantor trust treatment for the fund's first 
taxable year and all subsequent years if the fund was established on or 
before February 3, 2006, and the applicable period of limitations for 
filing an amended return has not expired for the qualified settlement 
fund's first and all subsequent taxable years, and for the transferor's 
corresponding taxable years. To make the grantor trust election, the 
qualified settlement fund and the transferor must amend all affected 
income tax returns.

2. Treatment of Section 1031 Qualified Escrow Accounts and Qualified 
Trusts Under Sec.  1.468B-6

    Section 1.468B-6 of the proposed regulations provides rules for the 
current taxation of income of a qualified escrow account or qualified 
trust used in a deferred exchange under section 1031. The proposed 
regulations provide that, in general, the taxpayer (the transferor of 
the property) is the owner of the assets in a qualified escrow account 
or qualified trust and must take into account all items of income, 
deduction, and credit (including capital gains and losses) of the 
qualified escrow account or qualified trust. However, if, under the 
facts and circumstances, a qualified intermediary or the transferee has 
the beneficial use and enjoyment of the assets, then the qualified 
intermediary or transferee is the owner of the assets in the qualified 
escrow account or qualified trust and must take into account all items 
of income, deduction, and credit (including capital gains and losses) 
of the qualified escrow account or qualified trust. In addition to 
other relevant facts and circumstances, the proposed regulations list 
three factors that will be considered in determining whether the 
qualified intermediary or transferee, rather than the taxpayer, has the 
beneficial use and enjoyment of assets of a qualified escrow account or 
qualified trust. The proposed regulations further provide that, if a 
qualified intermediary or transferee is the owner of the assets 
transferred, section 7872 may apply if the deferred exchange involves a 
below-market loan from the taxpayer to the owner.
    The comments reflected substantial disagreement on the proper rules 
for taxing these arrangements. For example, some commentators 
recommended that the facts and circumstances test be replaced by a per 
se rule requiring transferors to take into account the trust's or 
account's income in all cases. Other commentators urged that the 
ownership factors should apply in all circumstances. Commentators 
suggested that the rules of Sec.  1.468B-6 should apply to all funds 
held by qualified intermediaries as well as to funds held in a 
qualified escrow account or qualified trust, while other commentators 
argued that the rules should apply only to qualified escrow accounts 
and qualified trusts. Some commentators agreed that certain of these 
transactions create below-market loans, and other commentators asserted 
that the transactions do not create below-market loans.
    The IRS and the Treasury Department have concluded that these 
issues merit further consideration. Therefore, a notice of proposed 
rulemaking published elsewhere in this issue of the Federal Register 
withdraws that portion of the notice of proposed rulemaking that 
relates to the current taxation of income of a qualified escrow account 
or qualified trust used in a deferred exchange under section 1031. This 
section has been omitted from the final regulations and is published as 
proposed regulations elsewhere in this issue of the Federal Register. 
The preamble to those proposed regulations more fully discusses the 
comments received.

3. Pre-Closing Escrows Under Sec.  1.468B-7

    Section 1.468B-7 provides rules for the taxation of income earned 
on certain escrows established in connection with the sale of property, 
or pre-closing escrows. The proposed regulations require the purchaser 
to take into account all items of income, deduction, and credit 
(including capital gains and losses) of the pre-closing escrow. The 
only comments received with respect to this section relate to reporting 
obligations of the escrow holder or trustee. Those comments are 
addressed later in this preamble. The final regulations adopt Sec.  
1.468B-7 as proposed with minor changes to improve clarity.

4. Contingent-at-Closing Escrows Under Sec.  1.468B-8

    Section 1.468B-8 of the proposed regulations provides rules for 
taxing the income of a contingent-at-closing escrow, which is an escrow 
account, trust, or fund established in connection with the sale or 
exchange of real or personal property to account for contingencies 
existing at closing. The proposed regulations provide that, in 
computing taxable income, the purchaser must take into account all 
items of income, deduction, and credit (including capital gains and 
losses) of the escrow until the date on which specified events occur or 
fail to occur (the determination date). Beginning on the determination 
date, the purchaser and seller must each take into account the income, 
deductions, and credits of the escrow that correspond to their 
respective ownership interests in each asset of the escrow.
    The IRS and the Treasury Department have concluded that this 
section requires further consideration. Therefore, this section has 
been omitted from the final regulations and will be published as 
separate regulations.

5. Disputed Ownership Funds Under Sec.  1.468B-9

    Section 1.468B-9 provides rules for the taxation of a disputed 
ownership fund (DOF). Under the proposed regulations, a DOF is an 
escrow account, trust, or fund that is not a QSF and that (1) is 
established to hold money or property subject to conflicting claims of 
ownership, (2) is subject to the continuing jurisdiction of a court, 
and (3) requires approval of the court to pay or distribute money or 
property to, or on behalf of, a claimant or transferor.
    The final regulations specifically exclude bankruptcy estates under 
title 11 of the United States Code from the

[[Page 6199]]

definition of disputed ownership funds to avoid conflict with section 
1398, which provides rules for the taxation of bankruptcy estates in 
cases under chapters 7 and 11 of title 11 involving individual debtors, 
and section 1399, which provides that no separate taxable entity 
results from the commencement of a case under title 11 except in a case 
to which section 1398 applies.
    The final regulations also exclude liquidating trusts from the 
definition of disputed ownership fund, although they may have a similar 
purpose, because liquidating trusts are taxed as grantor trusts. See 
Sec.  301.7701-4(d), which provides that a liquidating trust is 
organized for the primary purpose of liquidating and distributing 
assets. However, in the case of certain liquidating trusts established 
in connection with bankruptcy proceedings, it is uncertain who is 
properly taxable on income earned with respect to assets set aside to 
satisfy disputed claims of creditors. Therefore, the trustee of a 
liquidating trust established pursuant to a plan confirmed by the court 
in a case under title 11 of the United States Code may, in its first 
taxable year, elect to treat an escrow account, trust, or fund that 
holds assets of the liquidating trust that are subject to disputed 
claims as a disputed ownership fund. The trustee makes an election to 
treat this portion of the liquidating trust as a DOF by attaching an 
election statement to a timely filed Federal income tax return of the 
DOF for the taxable year for which the election becomes effective. The 
trustee may revoke the election only with the Commissioner's consent by 
private letter ruling. The regulations do not otherwise affect the 
rules for the taxation of liquidating trusts.
    Under the proposed and final regulations, a DOF generally is 
taxable (1) as a QSF under Sec.  1.468B-2 if all the assets transferred 
to the fund are passive assets, or (2) as a C corporation in all other 
cases. The claimants to a DOF also may request a private letter ruling 
proposing an alternative method of taxation. These final regulations 
clarify that a DOF holding exclusively passive assets is taxable under 
Sec.  1.468B-2 as if it were a qualified settlement fund, but is not 
subject to all of the rules applicable to qualified settlement funds. 
Additionally, because the final regulations include certain rules that 
differ from, and apply in lieu of, the rules in Sec.  1.468B-2, the 
final regulations expressly identify the provisions of Sec.  1.468B-2 
that do not apply.
    The final regulations generally follow the substantive rules of the 
proposed regulations, but have been restructured for greater clarity. 
For example, the final regulations provide separate paragraphs for 
rules applicable to a transferor that is not a claimant to the DOF as 
well as rules applicable to a transferor that is a claimant 
(transferor-claimant).
    Unless a grantor trust election is made, the transfer of money or 
property to a qualified settlement fund generally gives rise to 
economic performance. In contrast, under both the proposed regulations 
and the final regulations, the transfer of money or property to a DOF 
gives rise to economic performance only if the transferor does not 
claim ownership of any part of the property that is transferred to the 
DOF (the transferor is not a transferor-claimant). The transfer of 
property to the DOF is not treated as a transfer to the claimants for 
economic performance purposes if the transferor continues to claim 
ownership of some or all of the transferred property. Consistent with 
this approach, the proposed regulations provide that, if the transferor 
claims ownership of the transferred property after the transfer to the 
fund, then the transfer of property to the DOF is not treated as a sale 
or exchange under section 1001 and the transferor is not taxed on 
distributions that the transferor receives from the DOF.
    The final regulations further provide that a distribution from the 
DOF to a transferor-claimant is not treated as a sale or exchange under 
section 1001(a). Distributions from the DOF to claimants other than the 
transferor-claimant are deemed to be made first to the transferor-
claimant and then from the transferor-claimant to another claimant. 
These rules are intended to put the transferor-claimant in the same 
position for purposes of determining whether a deduction is allowable 
with respect to the transfer as it would have been in if the money or 
property had not been transferred first to a DOF.
    A commentator requested that the final regulations exempt court 
registry funds from the rules for DOFs. The commentator asserted that 
complying with the DOF rules would impose an undue burden on courts. 
This comment was not adopted because an exemption for court registry 
funds would be inconsistent with section 468B(g), which requires 
current income taxation of escrow accounts, settlement funds, and 
similar funds. Because court registry funds are similar to escrow 
accounts and settlement funds, they fall within the plain meaning of 
the statute. The commentator also requested clarification of whether 
bail bonds or appellate bonds filed with a court are DOFs. The final 
regulations include an example to clarify that these types of surety 
bonds do not create DOFs.

6. Information Reporting Requirements

    Generally, Sec. Sec.  1.468B-6 through 1.468B-8 of the proposed 
regulations state that an escrow holder (escrow agent, trustee or other 
person responsible for administering the escrow) must report the income 
of an escrow account, trust, or fund on a Form 1099 ``in accordance 
with'' subpart B, Part III, subchapter A, chapter 61, Subtitle F of the 
Code (currently, sections 6041 through 6050T). Several commentators 
expressed concern that these provisions expand the existing information 
reporting obligations in sections 6041 through 6050T.
    The proposed regulations were not intended to create new 
information reporting requirements but merely to alert escrow holders 
and other responsible persons of the potential obligation to report. To 
clarify this intent, the final regulations provide that a payor must 
report to the extent required by sections 6041 through 6050T and these 
regulations .

Effect on Other Documents

    Rev. Rul. 77-230 (1977-2 C.B. 214) is obsolete as of February 3, 
2006.

Effective Date

    The regulations apply to qualified settlement funds, pre-closing 
escrows, and disputed ownership funds created after February 3, 2006. A 
transferor to a qualified settlement fund, however, may make a grantor 
trust election for a qualified settlement fund created on or before 
February 3, 2006, if the applicable period of limitations on filing an 
amended return has not expired for the qualified settlement fund's 
first taxable year and all subsequent taxable years and for the 
transferor's corresponding taxable year or years. Additionally, for 
pre-closing escrows and disputed ownership funds established after 
August 16, 1986, but before February 3, 2006, the IRS will not 
challenge a reasonable, consistently applied method of taxation.

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. Pursuant to section 
7805(f) of the Code, the notice of proposed rulemaking preceding these 
regulations was submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
businesses.

[[Page 6200]]

Final Regulatory Flexibility Act Analysis

    This final regulatory flexibility analysis has been prepared for 
this Treasury decision under 5 U.S.C. 604. The objective of the 
regulations is to ensure that the income of certain escrow accounts, 
trusts, and funds is subject to current taxation by identifying the 
proper party or parties subject to tax. Section 468B(g) provides the 
legal basis for the requirements of the regulations. The IRS and the 
Treasury Department are not aware of any Federal rules that may 
duplicate, overlap, or conflict with the regulations. An explanation is 
provided below of the burdens on small entities resulting from the 
requirements of the regulations. A description also is provided of 
alternative rules that were considered by the IRS and the Treasury 
Department but rejected as too burdensome.

1. Grantor Trust Election

    Under Sec.  1.468B-1(k), a transferor to a qualified settlement 
fund may elect to have the qualified settlement fund treated as a 
grantor trust all of which is owned by the transferor (grantor trust 
election). The election is available only to a qualified settlement 
fund established after February 3, 2006. However, a transferor may make 
a grantor trust election under Sec.  1.468B-1(k) for a qualified 
settlement fund that was established on or before February 3, 2006, if 
the applicable period of limitations on filing an amended return has 
not expired for both the qualified settlement fund's first taxable year 
and all subsequent taxable years and the transferor's corresponding 
taxable year or years.
    To make a grantor trust election, a transferor must attach a 
statement to a timely filed (including extensions) Form 1041, ``U.S. 
Income Tax Return for Estates and Trusts.'' The statement must include 
the transferor's name, address, taxpayer identification number, and the 
legend, ``Sec.  1.468B-1(k) Election.''
    Approximately 900 qualified settlement fund returns are filed each 
year. Only a small number of these returns are filed for newly created 
qualified settlement funds. Because a grantor trust election may be 
made only for a qualified settlement fund that has one transferor, the 
IRS and the Treasury Department believe that a very small number of 
grantor trust elections will be made each year.
    Similarly, the IRS and the Treasury Department believe that a very 
small number of grantor trust elections will be made for past years. A 
retroactive grantor trust election may impose an additional burden on a 
taxpayer because the taxpayer may be required to file amended returns. 
However, this election is voluntary.
    The alternatives to the regulations are (1) to limit the grantor 
trust election by permitting the elections only for QSFs established on 
or after the date the final regulations are published, or (2) to 
eliminate the opportunity to make a grantor trust election by retaining 
the current rules, which do not permit the election. These alternatives 
were rejected because they might result in a greater burden on small 
entities than that imposed by these regulations.

2. Disputed Ownership Funds

    Section 1.468B-9(c)(1) provides that a disputed ownership fund is a 
separate taxable entity.
    Section 1.468B-9(g) requires that a transferor provide to the IRS 
and the administrator of a disputed ownership fund a statement that 
itemizes the property other than cash transferred to the disputed 
ownership fund during the calendar year. The statement must indicate 
the basis and holding period of the property. This information is 
required to substantiate the transfer and to determine the proper tax 
consequences of the transfer to the fund and of a transfer of property 
from the fund to a claimant. To minimize the burden, no statement is 
required for transfers of cash and any two or more transferors may 
provide a combined statement. There are no known alternatives to these 
rules that are less burdensome to small entities and accomplish the 
purpose of the regulations.
    The trustee of a liquidating trust established pursuant to a plan 
confirmed by the court in a case under title 11 of the United States 
Code may, in the liquidating trust's first taxable year, elect to treat 
an escrow account, trust, or fund that holds assets of the liquidating 
trust that are subject to disputed claims as a disputed ownership fund. 
The trustee makes an election by attaching an election statement to a 
timely filed Federal income tax return of the disputed ownership fund 
for the taxable year for which the election becomes effective. This 
election is voluntary. There are no known alternatives to this 
requirement that are less burdensome and accomplish the purpose of the 
regulations.
    The IRS and the Treasury Department estimate that there are 
approximately 5,000 disputed ownership funds created annually. Many of 
these funds do not involve small entities.

Drafting Information

    The principal authors of these regulations are Richard Shevak and 
A. Katharine Jacob Kiss of the Office of Associate Chief Counsel 
(Income Tax & Accounting). However, other personnel from the IRS and 
the Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by:
0
a. Removing the entries for ``Section 1.468B'' and ``Sections 1.468B-0 
through 1.468B-5.''
0
b. Adding entries for Sec. Sec.  1.468B-1 through 1.468B-9.
    The additions read as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.468B-1 also issued under 26 U.S.C. 461(h) and 468B(g).
    Section 1.468B-2 also issued under 26 U.S.C. 461(h) and 468B(g).
    Section 1.468B-3 also issued under 26 U.S.C. 461(h) and 468B(g).
    Section 1.468B-4 also issued under 26 U.S.C. 461(h) and 468B(g).
    Section 1.468B-5 also issued under 26 U.S.C. 461(h) and 468B(g).
    Section 1.468B-7 also issued under 26 U.S.C. 461(h) and 468B(g).
    Section 1.468B-9 also issued under 26 U.S.C. 461(h) and 468B(g). 
* * *


0
Par. 2. Section 1.468B-0 is amended by:
0
a. Revising the introductory text of Sec.  1.468B-0.
0
b. Revising the entries for Sec.  1.468B-1, paragraph (k).
0
c. Adding an entry for Sec.  1.468B-1, paragraph (l).
0
d. Revising the entry for the section heading for Sec.  1.468B-5.
0
e. Adding an entry for Sec.  1.468B-5, paragraph (c).
0
f. Adding entries for Sec. Sec.  1.468B-6 through 1.468B-9.
    The additions and revisions read as follows:


Sec.  1.468B-0  Table of contents.

    This section lists the table of contents for Sec. Sec.  1.468B-1 
through 1.468B-9.

[[Page 6201]]

Sec.  1.468B-1  Qualified settlement funds.

* * * * *
    (k) Election to treat a qualified settlement fund as a subpart E 
trust.
    (1) In general.
    (2) Manner of making grantor trust election.
    (i) In general.
    (ii) Requirements for election statement.
    (3) Effect of making the election.
    (l) Examples.
* * * * *


Sec.  1.468B-5  Effective dates and transition rules applicable to 
qualified settlement funds.

* * * * *
    (c) Grantor trust elections under Sec.  1.468B-1(k).
    (1) In general.
    (2) Transition rules.
    (3) Qualified settlement funds established by the U.S. government 
on or before February 3, 2006.


Sec.  1.468B-6  Escrow accounts, trusts, and other funds used in 
deferred exchanges of like-kind property under section 1031(a)(3). 
[Reserved]


Sec.  1.468B-7  Pre-closing escrows.

    (a) Scope.
    (b) Definitions.
    (c) Taxation of pre-closing escrows.
    (d) Reporting obligations of the administrator.
    (e) Examples.
    (f) Effective dates.
    (1) In general.
    (2) Transition rule.


Sec.  1.468B-8  Contingent-at-closing escrows. [Reserved]


Sec.  1.468B-9  Disputed ownership funds.

    (a) Scope.
    (b) Definitions.
    (c) Taxation of a disputed ownership fund.
    (1) In general.
    (2) Exceptions.
    (3) Property received by the disputed ownership fund.
    (i) Generally excluded from income.
    (ii) Basis and holding period.
    (4) Property distributed by the disputed ownership fund.
    (i) Computing gain or loss.
    (ii) Denial of deduction.
    (5) Taxable year and accounting method.
    (6) Unused carryovers.
    (d) Rules applicable to transferors that are not transferor-
claimants.
    (1) Transfer of property.
    (2) Economic performance.
    (i) In general.
    (ii) Obligations of the transferor.
    (3) Distributions to transferors.
    (i) In general.
    (ii) Exception.
    (iii) Deemed distributions.
    (e) Rules applicable to transferor-claimants.
    (1) Transfer of property.
    (2) Economic performance.
    (i) In general.
    (ii) Obligations of the transferor-claimant.
    (3) Distributions to transferor-claimants.
    (i) In general.
    (ii) Deemed distributions.
    (f) Distributions to claimants other than transferor-claimants.
    (g) Statement to the disputed ownership fund and the Internal 
Revenue Service with respect to transfers of property other than cash.
    (1) In general.
    (2) Combined statements.
    (3) Information required on the statement.
    (h) Examples.
    (i) [Reserved]
    (j) Effective dates.
    (1) In general.
    (2) Transition rule.

0
Par. 3. Section 1.468B-1 is amended by redesignating paragraph (k) as 
paragraph (l) and adding a new paragraph (k) to read as follows:


Sec.  1.468B-1  Qualified settlement funds.

* * * * *
    (k) Election to treat a qualified settlement fund as a subpart E 
trust--(1) In general. If a qualified settlement fund has only one 
transferor (as defined in paragraph (d)(1) of this section), the 
transferor may make an election (grantor trust election) to treat the 
qualified settlement fund as a trust all of which is owned by the 
transferor under section 671 and the regulations thereunder. A grantor 
trust election may be made whether or not the qualified settlement fund 
would be classified, in the absence of paragraph (b) of this section, 
as a trust all of which is treated as owned by the transferor under 
section 671 and the regulations thereunder. A grantor trust election 
may be revoked only for compelling circumstances upon consent of the 
Commissioner by private letter ruling.
    (2) Manner of making grantor trust election--(i) In general. To 
make a grantor trust election, a transferor must attach an election 
statement satisfying the requirements of paragraph (k)(2)(ii) of this 
section to a timely filed (including extensions) Form 1041, ``U.S. 
Income Tax Return for Estates and Trusts,'' that the administrator 
files on behalf of the qualified settlement fund for the taxable year 
in which the qualified settlement fund is established. However, if a 
Form 1041 is not otherwise required to be filed (for example, because 
the provisions of Sec.  1.671-4(b) apply), then the transferor makes a 
grantor trust election by attaching an election statement satisfying 
the requirements of paragraph (k)(2)(ii) of this section to a timely 
filed (including extensions) income tax return of the transferor for 
the taxable year in which the qualified settlement fund is established. 
See Sec.  1.468B-5(c)(2) for transition rules.
    (ii) Requirements for election statement. The election statement 
must include a statement by the transferor that the transferor will 
treat the qualified settlement fund as a grantor trust. The election 
statement must include the transferor's name, address, taxpayer 
identification number, and the legend, ``Sec.  1.468B-1(k) Election.'' 
The election statement and the statement described in Sec.  1.671-4(a) 
may be combined into a single statement.
    (3) Effect of making the election. If a grantor trust election is 
made--
    (i) Paragraph (b) of this section, and Sec. Sec.  1.468B-2, 1.468B-
3, and 1.468B-5(a) and (b) do not apply to the qualified settlement 
fund. However, this section (except for paragraph (b) of this section) 
and Sec.  1.468B-4 apply to the qualified settlement fund;
    (ii) The qualified settlement fund is treated, for Federal income 
tax purposes, as a trust all of which is treated as owned by the 
transferor under section 671 and the regulations thereunder;
    (iii) The transferor must take into account in computing the 
transferor's income tax liability all items of income, deduction, and 
credit (including capital gains and losses) of the qualified settlement 
fund in accordance with Sec.  1.671-3(a)(1); and
    (iv) The reporting obligations imposed by Sec.  1.671-4 on the 
trustee of a trust apply to the administrator.
* * * * *

0
Par. 4. Section 1.468B-5 is amended by revising the section heading and 
adding paragraph (c) to read as follows:


Sec.  1.468B-5  Effective dates and transition rules applicable to 
qualified settlement funds.

* * * * *
    (c) Grantor trust elections under Sec.  1.468B-1(k)--(1) In 
general. A transferor may make a grantor trust election under Sec.  
1.468B-1(k) if the qualified settlement fund is established after 
February 3, 2006.
    (2) Transition rules. A transferor may make a grantor trust 
election under Sec.  1.468B-1(k) for a qualified settlement fund that 
was established on or before

[[Page 6202]]

February 3, 2006, if the applicable period of limitation on filing an 
amended return has not expired for both the qualified settlement fund's 
first taxable year and all subsequent taxable years and the 
transferor's corresponding taxable year or years. A grantor trust 
election under this paragraph (c)(2) requires that the returns of the 
qualified settlement fund and the transferor for all affected taxable 
years are consistent with the grantor trust election. This requirement 
may be satisfied by timely filed original returns or amended returns 
filed before the applicable period of limitation expires.
    (3) Qualified settlement funds established by the U.S. government 
on or before February 3, 2006. If the U.S. government, or any agency or 
instrumentality thereof, established a qualified settlement fund on or 
before February 3, 2006, and the fund would have been classified as a 
trust all of which is treated as owned by the U.S. government under 
section 671 and the regulations thereunder without regard to the 
regulations under section 468B, then the U.S. government is deemed to 
have made a grantor trust election under Sec.  1.468B-1(k), and the 
election is applicable for all taxable years of the fund.

0
Par. 5. Section 1.468B-6 is added and reserved to read as follows:


Sec.  1.468B-6  Escrow accounts, trusts, and other funds used in 
deferred exchanges of like-kind property under section 1031(a)(3). 
[Reserved]

0
Par. 6. Section 1.468B-7 is added to read as follows:


Sec.  1.468B-7  Pre-closing escrows.

    (a) Scope. This section provides rules under section 468B(g) for 
the current taxation of income of a pre-closing escrow.
    (b) Definitions. For purposes of this section--
    (1) A pre-closing escrow is an escrow account, trust, or fund--
    (i) Established in connection with the sale or exchange of real or 
personal property;
    (ii) Funded with a down payment, earnest money, or similar payment 
that is deposited into the escrow prior to the sale or exchange of the 
property;
    (iii) Used to secure the obligation of the purchaser to pay the 
purchase price for the property;
    (iv) The assets of which, including any income earned thereon, will 
be paid to the purchaser or otherwise distributed for the purchaser's 
benefit when the property is sold or exchanged (for example, by being 
distributed to the seller as a credit against the purchase price); and
    (v) Which is not an escrow account or trust established in 
connection with a deferred exchange under section 1031(a)(3).
    (2) Purchaser means, in the case of an exchange, the intended 
transferee of the property whose obligation to pay the purchase price 
is secured by the pre-closing escrow;
    (3) Purchase price means, in the case of an exchange, the required 
consideration for the property; and
    (4) Administrator means the escrow agent, escrow holder, trustee, 
or other person responsible for administering the pre-closing escrow.
    (c) Taxation of pre-closing escrows. The purchaser must take into 
account in computing the purchaser's income tax liability all items of 
income, deduction, and credit (including capital gains and losses) of 
the pre-closing escrow. In the case of an exchange with a single pre-
closing escrow funded by two or more purchasers, each purchaser must 
take into account in computing the purchaser's income tax liability all 
items of income, deduction, and credit (including capital gains and 
losses) earned by the pre-closing escrow with respect to the money or 
property deposited in the pre-closing escrow by or on behalf of that 
purchaser.
    (d) Reporting obligations of the administrator. For each calendar 
year (or portion thereof) that a pre-closing escrow is in existence, 
the administrator must report the income of the pre-closing escrow on 
Form 1099 to the extent required by the information reporting 
provisions of subpart B, Part III, subchapter A, chapter 61, Subtitle F 
of the Internal Revenue Code and the regulations thereunder. See Sec.  
1.6041-1(f) for rules relating to the amount to be reported when fees, 
expenses, or commissions owed by a payee to a third party are deducted 
from a payment.
    (e) Examples. The provisions of this section may be illustrated by 
the following examples:

    Example 1. P enters into a contract with S for the purchase of 
residential property owned by S for the price of $200,000. P is 
required to deposit $10,000 of earnest money into an escrow. At 
closing, the $10,000 and the interest earned thereon will be 
credited against the purchase price of the property. The escrow is a 
pre-closing escrow. P is taxable on the interest earned on the pre-
closing escrow prior to closing.
    Example 2. X and Y enter into a contract in which X agrees to 
exchange certain construction equipment for residential property 
owned by Y. The contract requires X and Y to each deposit $10,000 of 
earnest money into an escrow. At closing, $10,000 and the interest 
earned thereon will be paid to X and $10,000 and the interest earned 
thereon will be paid to Y. The escrow is a pre-closing escrow. X is 
taxable on the interest earned prior to closing on the $10,000 of 
funds X deposited in the pre-closing escrow. Similarly, Y is taxable 
on the interest earned prior to closing on the $10,000 of funds Y 
deposited in the pre-closing escrow.

    (f) Effective dates--(1) In general. This section applies to pre-
closing escrows established after February 3, 2006.
    (2) Transition rule. With respect to a pre-closing escrow 
established after August 16, 1986, but on or before February 3, 2006, 
the Internal Revenue Service will not challenge a reasonable, 
consistently applied method of taxation for income earned by the escrow 
or a reasonable, consistently applied method for reporting the income.

0
Par. 7. Section 1.468B-8 is added and reserved to read as follows:


Sec.  1.468B-8  Contingent-at-closing escrows. [Reserved]

0
Par. 8. Section 1.468B-9 is added to read as follows:


Sec.  1.468B-9  Disputed ownership funds.

    (a) Scope. This section provides rules under section 468B(g) 
relating to the current taxation of income of a disputed ownership 
fund.
    (b) Definitions. For purposes of this section--
    (1) Disputed ownership fund means an escrow account, trust, or fund 
that--
    (i) Is established to hold money or property subject to conflicting 
claims of ownership;
    (ii) Is subject to the continuing jurisdiction of a court;
    (iii) Requires the approval of the court to pay or distribute money 
or property to, or on behalf of, a claimant, transferor, or transferor-
claimant; and
    (iv) Is not a qualified settlement fund under Sec.  1.468B-1, a 
bankruptcy estate (or part thereof) resulting from the commencement of 
a case under title 11 of the United States Code, or a liquidating trust 
under Sec.  301.7701-4(d) of this chapter (except as provided in 
paragraph (c)(2)(ii) of this section);
    (2) Administrator means a person designated as such by a court 
having jurisdiction over a disputed ownership fund, however, if no 
person is designated, the administrator is the escrow agent, escrow 
holder, trustee, receiver, or other person responsible for 
administering the fund;
    (3) Claimant means a person who claims ownership of, in whole or in 
part, or a legal or equitable interest in, money or property 
immediately before and immediately after that property is transferred 
to a disputed ownership fund;

[[Page 6203]]

    (4) Court means a court of law or equity of the United States or of 
any state (including the District of Columbia), territory, possession, 
or political subdivision thereof;
    (5) Disputed property means money or property held in a disputed 
ownership fund subject to the claimants' conflicting claims of 
ownership;
    (6) Related person means any person that is related to a transferor 
within the meaning of section 267(b) or 707(b)(1);
    (7) Transferor means, in general, a person that transfers disputed 
property to a disputed ownership fund, except that--
    (i) If disputed property is transferred by an agent, fiduciary, or 
other person acting in a similar capacity, the transferor is the person 
on whose behalf the agent, fiduciary, or other person acts; and
    (ii) A payor of interest or other income earned by a disputed 
ownership fund is not a transferor within the meaning of this section 
(unless the payor is also a claimant);
    (8) Transferor-claimant means a transferor that claims ownership 
of, in whole or in part, or a legal or equitable interest in, the 
disputed property immediately before and immediately after that 
property is transferred to the disputed ownership fund. Because a 
transferor-claimant is both a transferor and a claimant, generally the 
terms transferor and claimant also include a transferor-claimant. See 
paragraph (d) of this section for rules applicable only to transferors 
that are not transferor-claimants and paragraph (e) of this section for 
rules applicable only to transferors that are also transferor-
claimants.
    (c) Taxation of a disputed ownership fund--(1) In general. For 
Federal income tax purposes, a disputed ownership fund is treated as 
the owner of all assets that it holds. A disputed ownership fund is 
treated as a C corporation for purposes of subtitle F of the Internal 
Revenue Code, and the administrator of the fund must obtain an employer 
identification number for the fund, make all required income tax and 
information returns, and deposit all tax payments. Except as otherwise 
provided in this section, a disputed ownership fund is taxable as--
    (i) A C corporation, unless all the assets transferred to the fund 
by or on behalf of transferors are passive investment assets. For 
purposes of this section, passive investment assets are assets of the 
type that generate portfolio income within the meaning of Sec.  1.469-
2T(c)(3)(i); or
    (ii) A qualified settlement fund, if all the assets transferred to 
the fund by or on behalf of transferors are passive investment assets. 
A disputed ownership fund taxable as a qualified settlement fund under 
this section is subject to all the provisions contained in Sec.  
1.468B-2, except that the rules contained in paragraphs (c)(3), (4), 
and (c)(5)(i) of this section apply in lieu of the rules in Sec.  
1.468B-2(b)(1), (d), (e), (f) and (j).
    (2) Exceptions. (i) The claimants to a disputed ownership fund may 
submit a private letter ruling request proposing a method of taxation 
different than the method provided in paragraph (c)(1) of this section.
    (ii) The trustee of a liquidating trust established pursuant to a 
plan confirmed by the court in a case under title 11 of the United 
States Code may, in the liquidating trust's first taxable year, elect 
to treat an escrow account, trust, or fund that holds assets of the 
liquidating trust that are subject to disputed claims as a disputed 
ownership fund. Pursuant to this election, creditors holding disputed 
claims are not treated as transferors of the money or property 
transferred to the disputed ownership fund. A trustee makes the 
election by attaching a statement to the timely filed Federal income 
tax return of the disputed ownership fund for the taxable year for 
which the election becomes effective. The election statement must 
include a statement that the trustee will treat the escrow account, 
trust, or fund as a disputed ownership fund and must include a legend, 
``Sec.  1.468B-9(c) Election,'' at the top of the page. The election 
may be revoked only upon consent of the Commissioner by private letter 
ruling.
    (3) Property received by the disputed ownership fund--(i) Generally 
excluded from income. In general, a disputed ownership fund does not 
include an amount in income on account of a transfer of disputed 
property to the disputed ownership fund. However, the accrual or 
receipt of income from the disputed property in a disputed ownership 
fund is not a transfer of disputed property to the fund. Therefore, a 
disputed ownership fund must include in income all income received or 
accrued from the disputed property, including items such as--
    (A) Payments to a disputed ownership fund made in compensation for 
late or delayed transfers of money or property;
    (B) Dividends on stock of a transferor (or a related person) held 
by the fund; and
    (C) Interest on debt of a transferor (or a related person) held by 
the fund.
    (ii) Basis and holding period. In general, the initial basis of 
property transferred by, or on behalf of, a transferor to a disputed 
ownership fund is the fair market value of the property on the date of 
transfer to the fund, and the fund's holding period begins on the date 
of the transfer. However, if the transferor is a transferor-claimant, 
the fund's initial basis in the property is the same as the basis of 
the transferor-claimant immediately before the transfer to the fund, 
and the fund=s holding period for the property is determined under 
section 1223(2).
    (4) Property distributed by the disputed ownership fund--(i) 
Computing gain or loss. Except in the case of a distribution or deemed 
distribution described in paragraph (e)(3) of this section, a disputed 
ownership fund must treat a distribution of disputed property as a sale 
or exchange of that property for purposes of section 1001(a). In 
computing gain or loss, the amount realized by the disputed ownership 
fund is the fair market value of that property on the date of 
distribution.
    (ii) Denial of deduction. A disputed ownership fund is not allowed 
a deduction for a distribution of disputed property or of the net 
after-tax income earned by the disputed ownership fund made to or on 
behalf of a transferor or claimant.
    (5) Taxable year and accounting method. (i) A disputed ownership 
fund taxable as a C corporation under paragraph (c)(1)(i) of this 
section may compute taxable income under any accounting method 
allowable under section 446 and is not subject to the limitations 
contained in section 448. A disputed ownership fund taxable as a C 
corporation may use any taxable year allowable under section 441.
    (ii) A disputed ownership fund taxable as a qualified settlement 
fund under paragraph (c)(1)(ii) of this section may compute taxable 
income under any accounting method allowable under section 446 and may 
use any taxable year allowable under section 441.
    (iii) Appropriate adjustments must be made by a disputed ownership 
fund or transferors to the fund to prevent the fund and the transferors 
from taking into account the same item of income, deduction, gain, 
loss, or credit (including capital gains and losses) more than once or 
from omitting such items. For example, if a transferor that is not a 
transferor-claimant uses the cash receipts and disbursements method of 
accounting and transfers an account receivable to a disputed ownership 
fund that uses an accrual method of accounting, at the time of the 
transfer of the account receivable to the disputed ownership fund, the 
transferor must

[[Page 6204]]

include in its gross income the value of the account receivable 
because, under paragraph (c)(3)(ii) of this section, the disputed 
ownership fund will take a fair market value basis in the receivable 
and will not include the fair market value in its income when received 
from the transferor or when paid by the customer. If the account 
receivable were transferred to the disputed ownership fund by a 
transferor-claimant using the cash receipts and disbursements method, 
however, the disputed ownership fund would take a basis in the 
receivable equal to the transferor's basis, or $0, and would be 
required to report the income upon collection of the account.
    (6) Unused carryovers. Upon the termination of a disputed ownership 
fund, if the fund has an unused net operating loss carryover under 
section 172, an unused capital loss carryover under section 1212, or an 
unused tax credit carryover, or if the fund has, for its last taxable 
year, deductions in excess of gross income, the claimant to which the 
fund's net assets are distributable will succeed to and take into 
account the fund's unused net operating loss carryover, unused capital 
loss carryover, unused tax credit carryover, or excess of deductions 
over gross income for the last taxable year of the fund. If the fund's 
net assets are distributable to more than one claimant, the unused net 
operating loss carryover, unused capital loss carryover, unused tax 
credit carryover, or excess of deductions over gross income for the 
last taxable year must be allocated among the claimants in proportion 
to the value of the assets distributable to each claimant from the 
fund. Unused carryovers described in this paragraph (c)(6) are not 
money or other property for purposes of paragraph (e)(3)(ii) of this 
section and thus are not deemed transferred to a transferor-claimant 
before being transferred to the claimants described in this paragraph 
(c)(6).
    (d) Rules applicable to transferors that are not transferor-
claimants. The rules in this paragraph (d) apply to transferors (as 
defined in paragraph (b)(7) of this section) that are not transferor-
claimants (as defined in paragraph (b)(8) of this section).
    (1) Transfer of property. A transferor must treat a transfer of 
property to a disputed ownership fund as a sale or other disposition of 
that property for purposes of section 1001(a). In computing the gain or 
loss on the disposition, the amount realized by the transferor is the 
fair market value of the property on the date the transfer is made to 
the disputed ownership fund.
    (2) Economic performance--(i) In general. For purposes of section 
461(h), if a transferor using an accrual method of accounting has a 
liability for which economic performance would otherwise occur under 
Sec.  1.461-4(g) when the transferor makes payment to the claimant or 
claimants, economic performance occurs with respect to the liability 
when and to the extent that the transferor makes a transfer to a 
disputed ownership fund to resolve or satisfy that liability.
    (ii) Obligations of the transferor. Economic performance does not 
occur when a transferor using an accrual method of accounting issues to 
a disputed ownership fund its debt (or provides the debt of a related 
person). Instead, economic performance occurs as the transferor (or 
related person) makes principal payments on the debt. Economic 
performance does not occur when the transferor provides to a disputed 
ownership fund its obligation (or the obligation of a related person) 
to provide property or services in the future or to make a payment 
described in Sec.  1.461-4(g)(1)(ii)(A). Instead, economic performance 
occurs with respect to such an obligation as property or services are 
provided or payments are made to the disputed ownership fund or a 
claimant. With regard to interest on a debt issued or provided to a 
disputed ownership fund, economic performance occurs as determined 
under Sec.  1.461-4(e).
    (3) Distributions to transferors--(i) In general. Except as 
provided in section 111(a) and paragraph (d)(3)(ii) of this section, 
the transferor must include in gross income any distribution to the 
transferor (including a deemed distribution described in paragraph 
(d)(3)(iii) of this section) from the disputed ownership fund. If 
property is distributed, the amount includible in gross income and the 
basis in that property are generally the fair market value of the 
property on the date of distribution.
    (ii) Exception. A transferor is not required to include in gross 
income a distribution of money or property that it previously 
transferred to the disputed ownership fund if the transferor did not 
take into account, for example, by deduction or capitalization, an 
amount with respect to the transfer either at the time of the transfer 
to, or while the money or property was held by, the disputed ownership 
fund. The transferor's gross income does not include a distribution of 
money from the disputed ownership fund equal to the net after-tax 
income earned on money or property transferred to the disputed 
ownership fund by the transferor while that money or property was held 
by the fund. Money distributed to a transferor by a disputed ownership 
fund will be deemed to be distributed first from the money or property 
transferred to the disputed ownership fund by that transferor, then 
from the net after-tax income of any money or property transferred to 
the disputed ownership fund by that transferor, and then from other 
sources.
    (iii) Deemed distributions. If a disputed ownership fund makes a 
distribution of money or property on behalf of a transferor to a person 
that is not a claimant, the distribution is deemed made by the fund to 
the transferor. The transferor, in turn, is deemed to make a payment to 
the actual recipient.
    (e) Rules applicable to transferor-claimants. The rules in this 
paragraph (e) apply to transferor-claimants (as defined in paragraph 
(b)(8) of this section).
    (1) Transfer of property. A transfer of property by a transferor-
claimant to a disputed ownership fund is not a sale or other 
disposition of the property for purposes of section 1001(a).
    (2) Economic performance--(i) In general. For purposes of section 
461(h), if a transferor-claimant using an accrual method of accounting 
has a liability for which economic performance would otherwise occur 
under Sec.  1.461-4(g) when the transferor-claimant makes payment to 
another claimant, economic performance occurs with respect to the 
liability when and to the extent that the disputed ownership fund 
transfers money or property to the other claimant to resolve or satisfy 
that liability.
    (ii) Obligations of the transferor-claimant. Economic performance 
does not occur when a disputed ownership fund transfers the debt of a 
transferor-claimant (or of a person related to the transferor-claimant) 
to another claimant. Instead, economic performance occurs as principal 
payments on the debt are made to the other claimant. Economic 
performance does not occur when a disputed ownership fund transfers to 
another claimant the obligation of a transferor-claimant (or of a 
person related to the transferor-claimant) to provide property or 
services in the future or to make a payment described in Sec.  1.461-
4(g)(1)(ii)(A). Instead, economic performance occurs with respect to 
such an obligation as property or services are provided or payments are 
made to the other claimant. With regard to interest on a debt issued or 
provided to a disputed ownership fund, economic performance occurs as 
determined under Sec.  1.461-4(e).

[[Page 6205]]

    (3) Distributions to transferor-claimants--(i) In general. The 
gross income of a transferor-claimant does not include a distribution 
to the transferor-claimant (including a deemed distribution described 
in paragraph (e)(3)(ii) of this section) of money or property from a 
disputed ownership fund that the transferor-claimant previously 
transferred to the fund, or the net after-tax income earned on that 
money or property while it was held by the fund. If such property is 
distributed to the transferor-claimant by the disputed ownership fund, 
then the transferor-claimant's basis in the property is the same as the 
disputed ownership fund's basis in the property immediately before the 
distribution.
    (ii) Deemed distributions. If a disputed ownership fund makes a 
distribution of money or property to a claimant or makes a distribution 
of money or property on behalf of a transferor-claimant to a person 
that is not a claimant, the distribution is deemed made by the fund to 
the transferor-claimant. The transferor-claimant, in turn, is deemed to 
make a payment to the actual recipient.
    (f) Distributions to claimants other than transferor-claimants. 
Whether a claimant other than a transferor-claimant must include in 
gross income a distribution of money or property from a disputed 
ownership fund generally is determined by reference to the claim in 
respect of which the distribution is made.
    (g) Statement to the disputed ownership fund and the Internal 
Revenue Service with respect to transfers of property other than cash--
(1) In general. By February 15 of the year following each calendar year 
in which a transferor (or other person acting on behalf of a 
transferor) makes a transfer of property other than cash to a disputed 
ownership fund, the transferor must provide a statement to the 
administrator of the fund setting forth the information described in 
paragraph (g)(3) of this section. The transferor must attach a copy of 
this statement to its return for the taxable year of transfer.
    (2) Combined statements. If a disputed ownership fund has more than 
one transferor, any two or more transferors may provide a combined 
statement to the administrator. If a combined statement is used, each 
transferor must attach a copy of the combined statement to its return 
and maintain with its books and records a schedule describing each 
asset that the transferor transferred to the disputed ownership fund.
    (3) Information required on the statement. The statement required 
by paragraph (g)(1) of this section must include the following 
information--
    (i) A legend, ``Sec.  1.468B-9 Statement,'' at the top of the first 
page;
    (ii) The transferor's name, address, and taxpayer identification 
number;
    (iii) The disputed ownership fund's name, address, and employer 
identification number;
    (iv) A statement declaring whether the transferor is a transferor-
claimant;
    (v) The date of each transfer;
    (vi) A description of the property (other than cash) transferred; 
and
    (vii) The disputed ownership fund's basis in the property and 
holding period on the date of transfer as determined under paragraph 
(c)(3)(ii) of this section.
    (h) Examples. The following examples illustrate the rules of this 
section:

    Example 1. (i) X Corporation petitions the United States Tax 
Court in 2006 for a redetermination of its tax liability for the 
2003 taxable year. In 2006, the Tax Court determines that X 
Corporation is liable for an income tax deficiency for the 2003 
taxable year. X Corporation files an appellate bond in accordance 
with section 7485(a) and files a notice of appeal with the 
appropriate United States Court of Appeals. In 2006, the Court of 
Appeals affirms the decision of the Tax Court and the United States 
Supreme Court denies X Corporation's petition for a writ of 
certiorari.
    (ii) The appellate bond that X Corporation files with the court 
for the purpose of staying assessment and collection of deficiencies 
pending appeal is not an escrow account, trust or fund established 
to hold property subject to conflicting claims of ownership. 
Although X Corporation was found liable for an income tax 
deficiency, ownership of the appellate bond is not disputed. Rather, 
the bond serves as security for a disputed liability. Therefore, the 
bond is not a disputed ownership fund.
    Example 2. (i) The facts are the same as Example 1, except that 
X Corporation deposits United States Treasury bonds with the Tax 
Court in accordance with section 7845(c)(2) and 31 U.S.C. 9303.
    (ii) The deposit of United States Treasury bonds with the court 
for the purpose of staying assessment and collection of deficiencies 
while X Corporation prosecutes an appeal does not create a disputed 
ownership fund because ownership of the bonds is not disputed.
    Example 3. (i) Prior to A's death, A was the insured under a 
life insurance policy issued by X, an insurance company. X uses an 
accrual method of accounting. Both A's current spouse and A's former 
spouse claim to be the beneficiary under the policy and entitled to 
the policy proceeds ($1 million). In 2005, X files an interpleader 
action and deposits $1 million into the registry of the court. On 
June 1, 2006, a final determination is made that A's current spouse 
is the beneficiary under the policy and entitled to the money held 
in the registry of the court. The interest earned on the registry 
account is $12,000. The money in the registry account is distributed 
to A's current spouse.
    (ii) The money held in the registry of the court consisting of 
the policy proceeds and the earnings thereon are a disputed 
ownership fund taxable as if it were a qualified settlement fund. 
See paragraphs (b)(1) and (c)(1)(ii) of this section. The fund's 
gross income does not include the $1 million transferred to the fund 
by X, however, the $12,000 interest is included in the fund's gross 
income in accordance with its method of accounting. See paragraph 
(c)(3)(i) of this section. Under paragraph (c)(4)(ii) of this 
section, the fund is not allowed a deduction for a distribution to 
A's current spouse of the $1 million or the interest income earned 
by the fund.
    (iii) X is a transferor that is not a transferor-claimant. See 
paragraphs (b)(7) and (b)(8) of this section.
    (iv) Whether A's current spouse must include in income the $1 
million insurance proceeds and the interest received from the fund 
is determined under other provisions of the Internal Revenue Code. 
See paragraph (f) of this section.
    Example 4. (i) Corporation B and unrelated individual C claim 
ownership of certain rental property. B uses an accrual method of 
accounting. The rental property is property used in a trade or 
business. B claims to have purchased the property from C's father. 
However, C asserts that the purported sale to B was ineffective and 
that C acquired ownership of the property through intestate 
succession upon the death of C's father. For several years, B has 
maintained and received the rent from the property.
    (ii) Pending the resolution of the title dispute between B and 
C, the title to the rental property is transferred to a court-
supervised registry account on February 1, 2005. On that date the 
court appoints R as receiver for the property. R collects the rent 
earned on the property and hires employees necessary for the 
maintenance of the property. The rents paid to R cannot be 
distributed to B or C without the court's approval.
    (iii) On June 1, 2006, the court makes a final determination 
that the rental property is owned by C. The court orders C to refund 
to B the purchase price paid by B to C's father plus interest on 
that amount from February 1, 2005. The court also orders that a 
distribution be made to C of all funds held in the court registry 
consisting of the rent collected by R and the income earned thereon. 
C takes title to the rental property.
    (iv) The rental property and the funds held by the court 
registry are a disputed ownership fund under paragraph (b)(1) of 
this section. The fund is taxable as if it were a C corporation 
because the rental property is not a passive investment asset within 
the meaning of paragraph (c)(1)(i) of this section.

    (v) The fund's gross income does not include the value of the 
rental property transferred to the fund by B. See paragraph 
(c)(3)(i) of this section. Under paragraph (c)(3)(ii) of this 
section, the fund's initial basis in the property is the same as B's 
adjusted basis immediately before the transfer to the fund and the 
fund's holding

[[Page 6206]]

period is determined under section 1223(2). The fund's gross income 
includes the rents collected by R and any income earned thereon. For 
the period between February 1, 2005, and June 1, 2006, the fund may 
be allowed deductions for depreciation and for the costs of 
maintenance of the property because the fund is treated as owning 
the property during this period. See sections 162, 167, and 168. 
Under paragraph (c)(4)(ii) of this section, the fund may not deduct 
the distribution to C of the property, or the rents (or any income 
earned thereon) collected from the property while the fund holds the 
property. No gain or loss is recognized by the fund from this 
distribution or from the fund's transfer of the rental property to C 
pursuant to the court's determination that C owns the property. See 
paragraphs (c)(4)(i) and (e)(3) of this section.

    (vi) B is the transferor to the fund. Under paragraphs (b)(8) 
and (e)(1) of this section, B is a transferor-claimant and does not 
recognize gain or loss under section 1001(a) on transfer of the 
property to the disputed ownership fund. The money and property 
distributed from the fund to C is deemed to be distributed first to 
B and then transferred from B to C. See paragraph (e)(3)(ii) of this 
section. Under paragraph (e)(2)(i) of this section, economic 
performance occurs when the disputed ownership fund transfers the 
property and any earnings thereon to C. The income tax consequences 
of the deemed transfer from B to C as well as the income tax 
consequences of C's refund to B of the purchase price paid to C's 
father and interest thereon are determined under other provisions of 
the Internal Revenue Code.

    (i) [Reserved]

    (j) Effective dates--(1) In general. This section applies to 
disputed ownership funds established after February 3, 2006.

    (2) Transition rule. With respect to a disputed ownership fund 
established after August 16, 1986, but on or before February 3, 2006, 
the Internal Revenue Service will not challenge a reasonable, 
consistently applied method of taxation for income earned by the fund, 
transfers to the fund, and distributions made by the fund.

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

0
Par. 9. The authority citation for part 602 continues to read as 
follows:


    Authority: 26 U.S.C. 7805.


0
Par. 10. In Sec.  602.101, paragraph (b) is amended by adding entries 
in numerical order to read, in part, as follows:

Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
 
                                 * * * *
1.468B-1...................................................    1545-1631
1.468B-9...................................................    1545-1631
 
                                 * * * *
------------------------------------------------------------------------


    Approved: January 30, 2006.
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury.

[FR Doc. 06-1037 Filed 2-3-06; 8:45 am]
BILLING CODE 4830-01-P