[Federal Register Volume 71, Number 250 (Friday, December 29, 2006)]
[Rules and Regulations]
[Pages 78351-78361]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-9924]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9308]
RIN 1545-BF75


Reporting Rules for Widely Held Fixed Investment Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of the temporary regulations.

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SUMMARY: This document contains final regulations amending Sec.  1.671-
5 which provides reporting rules for widely held fixed investment 
trusts (WHFITs). These final regulations clarify and simplify reporting 
for trustees and middlemen of non-mortgage widely held fixed investment 
trusts (NMWHFITs). These final regulations also provide temporary safe 
harbor reporting rules for widely held mortgage trusts (WHMTs) that are 
outside the WHMT safe harbor. The preamble to these regulations also 
provides that trustees of WHFITs are to indicate on the Form 1041, 
``U.S. Income Tax Return for Estates and Trusts,'' filed for a WHFIT's 
2006 calendar year that the return is a final return.

DATES: Effective Date: These regulations are effective December 29, 
2006.
    Applicability Date: For date of applicability see Sec.  1.671-5(n).

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) under control number 1545-1540. The collection of 
information in these final regulations is in Sec.  1.671-5. This 
information is required to be reported to beneficial owners of trust 
interests to enable them to correctly report their share of the items 
of income, deduction, and credit of the WHFIT in which they have 
invested. This information is also required to be reported to the IRS 
to enable the IRS to verify that trustees and middlemen are accurately 
reporting information to beneficial owners of trust interests and that 
beneficial owners are properly reporting their ownership of a trust 
interest.
    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.
    The estimated annual burden per recordkeeper varies from 1 to 4 
hours, depending on individual circumstances, with an estimated average 
of 2 hours. Comments concerning the accuracy of this burden estimate 
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 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 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

    This document contains amendments to 26 CFR part 1. On January 24, 
2006, the Internal Revenue Service (IRS) and the Treasury Department 
published the WHFIT reporting rules in the Federal Register (TD 9241) 
(71 FR 4002) under Sec.  1.671-5 (WHFIT reporting rules). On August 3, 
2006, in response to comments received subsequent to the publication of 
the WHFIT reporting rules, the IRS and the Treasury Department 
published final and temporary regulations (TD 9279) (71 FR 43968) 
(temporary regulations) as well as proposed regulations that, in part, 
cross-referenced the temporary regulations (71 FR 43998) (proposed 
regulations) (REG-125071-06) in the Federal Register. No public hearing 
was requested or held with respect to the temporary or proposed 
regulations.

[[Page 78352]]

Written comments responding to those regulations were received. After 
consideration of the comments, the proposed regulations, with certain 
revisions, are adopted as final regulations by this Treasury decision, 
and the corresponding temporary regulations are removed. The comments 
and the revisions are discussed in this preamble.

Summary of Comments and Explanation of Revisions

I. Application of the WHFIT Reporting Rules to NMWHFITs

A. The Qualified NMWHFIT Exception

    Trustees and middlemen of NMWHFITs that satisfy the qualified 
NMWHFIT exception in Sec.  1.671-5(c)(2)(iv)(E) are excepted from 
reporting information regarding market discount and bond premium, and 
are permitted to use the simplified reporting for sales and 
dispositions of trust assets in Sec.  1.671-5(c)(2)(iv)(B) and the 
simplified reporting rules for sales or redemptions of trust interests 
in Sec.  1.671-5(c)(2)(v)(C). The temporary regulations provide that 
the qualified NMWHFIT exception is satisfied if the calendar year for 
which the trustee is reporting begins before January 1, 2011, and the 
NMWHFIT meets any of the following requirements: (1) the NMWHFIT has a 
start-up date as defined in Sec.  1.671-5(b)(19) before February 23, 
2006; (2) the registration statement for the NMWHFIT becomes effective 
under the Securities Act of 1933, as amended (15 U.S.C. 77a, et. seq.) 
(Securities Act of 1933) and trust interests are offered for sale to 
the public before February 23, 2006; or (3) the registration statement 
of the NMWHFIT becomes effective under the Securities Act of 1933 and 
trust interests are offered for sale to the public on or after February 
23, 2006 and before July 31, 2006, and the NMWHFIT is fully funded 
before October 1, 2006. These final regulations retain this amendment 
to the WHFIT reporting rules. Additionally, commentators on the 
temporary regulations expressed concern that certain trusts that 
otherwise satisfy the eligibility requirements for the qualified 
NMWHFIT exception would be disqualified because additional assets are 
deposited into the trust pursuant to a distribution reinvestment 
program. These final regulations clarify that for the purpose of 
determining whether a NMWHFIT is fully funded before October 1, 2006, 
deposits to the NMWHFIT pursuant to a distribution reinvestment program 
that is consistent with the requirements of Sec.  301.7701-4(c) will be 
disregarded.
    Commentators have also expressed concern regarding NMWHFITs that 
hold debt instruments (fixed income trusts) that were originated before 
the WHFIT reporting rules were published in the Federal Register. 
Commentators are concerned because the simplified reporting permitted 
under the exception terminates after December 31, 2010, and many fixed 
income trusts will be unable to comply with the WHFIT reporting rules 
once the simplified reporting permitted under the qualified NMWHFIT 
exception terminates because these NMWHFITs generally are not able to 
engage in pro-rata sales of trust assets to effect redemptions. 
Commentators have requested that these NMWHFITs be permanently 
permitted to report consistent with the qualified NMWHFIT exception. In 
response, these regulations amend Sec.  1.671-5(c)(2)(iv)(E) to 
eliminate the requirement that the trustee must be reporting for a year 
that begins before January 1, 2011 for the NMWHFIT to be eligible for 
the simplified reporting. Accordingly, NMWHFITs that satisfy the 
qualified NMWHFIT exception and continue in existence after December 
31, 2010 may report under the simplified reporting permitted under the 
exception until those NMWHFITs terminate.

B. Simplified Reporting of Sales and Redemptions of Trust Interests

    With respect to the sale or redemption of a trust interest, section 
1.671-5(c)(2)(v) of the WHFIT reporting rules requires trustees and 
middlemen to provide information regarding the sales assets proceeds 
(as defined in Sec.  1.671-5(b)(17)) or the redemption assets proceeds 
(as defined in Sec.  1.671-5(b)(14)) as well as the income that is 
attributable to a redeeming, selling or purchasing beneficial owner up 
to the date of the sale or redemption of a trust interest. Section 
1.671-5(c)(2)(v)(C) excepts a NMWHFIT from the requirement to provide 
information to enable requesting persons to differentiate between 
income and proceeds if substantially all the NMWHFIT's income is 
comprised of dividends (equity trusts) and the NMWHFIT is required by 
its governing document to distribute the cash held for distribution by 
the NMWHFIT at least monthly. The temporary regulations, and these 
final regulations revise Sec.  1.671-5(c)(2)(v)(C) to provide that a 
NMWHFIT will be considered to have satisfied the requirement that it 
distribute the cash held for distribution monthly notwithstanding the 
fact that, although the governing document requires monthly 
distributions, the governing document of the NMWHFIT also permits the 
trustee to forego making its normally required monthly distribution if 
the cash held for distribution is less than 0.1 percent of the net 
asset value of the trust (aggregate fair market value of the trust's 
assets less the trust's liabilities) as of the date that the amount of 
the monthly distribution is required to be determined.
    Commentators have indicated that it will be extremely difficult for 
a certain class of NMWHFITs that are not equity trusts to comply with 
Sec.  1.671-5(c)(2)(v). These NMWHFITs hold assets that produce income 
that is treated as interest income, not dividend income, for Federal 
income tax purposes. The assets of these NMWHFITs, however, are similar 
to assets that produce dividend income in that the assets are traded on 
a recognized exchange or securities market in such a way that the price 
of the assets is determined without a component attributable to accrued 
interest. As with NMWHFITs that hold assets that produce dividend 
income, it is difficult for the trustees and middlemen of these 
NMWHFITs to determine the income attributable to a redeeming, selling, 
or purchasing beneficial owner between trust distribution dates. For 
these reasons, the final regulations provide that NMWHFITs that hold 
assets that produce income that is treated as interest income for 
Federal income tax purposes will also qualify for the simplified 
reporting under Sec.  1.671-5(c)(2)(v)(C) but only if the assets are 
traded on a recognized exchange or securities market in such a way that 
the price of the assets is determined without a component attributable 
to accrued interest.

C. Simplified Reporting for Sales and Dispositions by Certain NMWHFITs

    In addition to the qualified NMWHFIT exception, the WHFIT reporting 
rules provide that the trustees of NMWHFITs that meet the general de 
minimis test in Sec.  1.671-5(c)(2)(iv)(D)(1) are only required, under 
Sec.  1.671-5(c)(2)(iv)(B), to provide information regarding the amount 
of trust sales proceeds distributed to a beneficial owner. A NMWHFIT 
meets the general de minimis test if trust sales proceeds (as defined 
in Sec.  1.671-5(b)(21)) for the calendar year are not more than five 
percent of the net asset value of the trust as of the later of January 
1 of the year for which the trustee is reporting or the start-up date. 
The reason for the de minimis exception, as stated in the preamble to 
the WHFIT reporting rules, is that the IRS and the Treasury

[[Page 78353]]

Department believe that if a NMWHFIT only sells or disposes of assets 
infrequently, although there may be some deferral of gains and losses 
if sales and dispositions are not fully reported, the deferral is 
acceptable, in light of the burden of fully, accurately reporting the 
sales and dispositions.
    Commentators on the WHFIT reporting rules reported that trustees of 
NMWHFITs frequently have to sell trust assets to obtain cash to effect 
redemptions and that, because of those sales, many NMWHFITs will not be 
able to meet the general de minimis test in Sec.  1.671-
5(c)(2)(iv)(D)(1). Commentators on the WHFIT reporting rules requested 
that those regulations be amended to provide for reduced reporting 
where this will have little or no compliance impact. In response to 
those comments, the temporary regulations provide a number of 
modifications to the NMWHFIT reporting rules as applied to certain 
sales and dispositions of trust assets by NMWHFITs. Those 
modifications, as well as additional modification made by these final 
regulations, include:
1. NMWHFIT Final Calendar Year Exception
    Section 1.671-5T(c)(2)(iv)(F) of the temporary regulations provides 
that all NMWHFITs qualify for the simplified reporting in Sec.  1.671-
5T(c)(2)(iv)(B) in the final calendar year of the NMWHFIT, regardless 
of whether the NMWHFIT has otherwise satisfied the general de minimis 
test, provided that a beneficial owner cannot roll over its investment 
in the NMWHFIT to another WHFIT. Commentators on the temporary 
regulations requested that the IRS and Treasury Department clarify that 
a taxable roll-over would not preclude a trustee from reporting under 
the final year exception. Accordingly, these regulations remove the 
reference to a roll-over and instead require that, to be eligible for 
the final year exception, beneficial owners of trust interests must 
exchange their trust interests for cash or be treated as having 
exchanged their trust interests for cash for Federal income tax 
purposes upon the termination of the trust.
2. Pro-rata Sales to Effect Redemptions Exception
    Section 1.671-5T(c)(2)(iv)(G) of the temporary regulations provides 
that a pro-rata sale of a trust asset to effect a redemption is not 
required to be reported under Sec.  1.671-5. The temporary regulations 
describe a pro-rata sale of a trust asset as occurring when (1) a trust 
interest holder tenders one or more trust interests for redemption; (2) 
the trustee sells the pro-rata share of a trust asset that is deemed to 
be owned by the trust interest holder as a result of the trust interest 
holder's ownership of the trust interest or interests tendered for 
redemption; (3) the trustee engages in the sale solely to obtain cash 
that is immediately distributed to the redeeming trust interest holder 
as a result of the redemption; and (4) the redemption is reported as 
required under Sec.  1.671-5(c)(2)(v).
    Commentators on the temporary regulations have requested that the 
pro-rata sales to effect a redemption exception in the temporary 
regulations be adjusted to accommodate economic and practical issues 
that trustees confront in executing sales of trust assets to effect 
redemptions. These commentators requested that the pro-rata sales to 
effect a redemption exception be revised to provide the trustee with 
some flexibility regarding the time period in which the trustee has to 
execute sales following the tender of trust interests for redemptions 
and to permit trustees to aggregate sales of assets from several 
redemptions for the purpose of testing whether the asset sales have 
been pro-rata. In response, the final regulations provide that pro-rata 
sales to effect redemptions occur when (i) one or more trust interests 
are tendered for redemption; (ii) the trustee identifies the pro-rata 
share of the trust assets deemed to be owned by the trust interest or 
interests tendered for redemption, and sells those assets as soon as 
practicable; (iii) proceeds from the sale of the identified assets are 
used solely to effect redemptions; and (iv) the redemptions are 
reported as required under Sec.  1.671-5(c)(2)(v) by the trustee.
    Additionally, the final regulations provide that the trustee may 
compare the aggregate of the pro-rata share of the trust assets deemed 
to be owned by the trust interests tendered for redemption and the 
sales of assets sold to effect redemptions determine the pro-rata sales 
of assets to effect redemptions for a calendar month. Further, if the 
aggregate pro-rata share of the assets deemed to be owned by the 
redeemed trust interests for the month equals a fractional share, the 
trustee may round that amount to the next whole share for the purpose 
of determining the pro-rata sales to effect a redemption for the 
calendar month.
3. De minimis Test Modifications
    Section 1.671-5T(b)(21) of the temporary regulations provides an 
amended definition of trust sales proceeds that excludes the gross 
proceeds paid to a NMWHFIT for a pro-rata sale of a trust asset to 
effect a redemption. The effect of this change in the definition of 
trust sales proceeds is to exclude the proceeds from pro-rata sales of 
trust assets to effect redemptions when determining whether a trust has 
met the general de minimis test. Since only the proceeds from non pro-
rata sales of trust assets are considered for purposes of determining 
whether a NMWHFIT meets the general de minimis test, more trusts will 
meet the general de minimis test and qualify for the reduced reporting 
in Sec.  1.671-5(c)(2)(iv)(B). This amended definition is adopted by 
these final regulations.
    Commentators on the temporary regulations requested that the final 
regulations also except certain other trust sales proceeds for the 
purpose of determining whether a NMWHFIT has met the general de minimis 
test if these sales are fully reported under Sec.  1.671-5(c)(2)(iv)(A) 
(the general reporting rules for sales and dispositions). These sales 
and dispositions include corporate reorganizations and restructurings 
for which the trust receives cash, the sale of securities received by 
the trust in corporate reorganizations and restructurings (including 
conversions of closed-end investment companies to open-end investment 
companies), principal prepayments, bond calls, bond maturities, and the 
sale of securities by the trustee as required by the governing document 
or applicable law governing fiduciaries in order to maintain the sound 
investment character of the trust, and any other nonvolitional 
dispositions.
    The IRS and the Treasury Department agree that this exclusion may 
be appropriate but are concerned that there may be some potential for 
abuse if trustees can choose to fully report some of these sales and 
not fully report other sales. Accordingly, the final regulations 
provide that the trust sales proceeds from these sales and dispositions 
may be excluded when determining whether the general de minimis test 
has been met, provided that the trustee consistently reports all such 
sales or dispositions, other than certain small excepted sales or 
dispositions (described in Sec.  1.671-5(c)(2)(iv)(D)(4)(iii)), under 
Sec.  1.671-5(c)(2)(iv)(A) during the life of the WHFIT.
    The regulations currently provide that a WHFIT meets the general de 
minimis test in Sec.  1.671-5(c)(2)(iv)(D)(1) for its initial year if 
trust sales proceeds equal five percent or less of the net fair market 
value of the trust assets as of the start-up date. The start-up date is 
defined as the date when substantially all of the assets have been 
deposited with the

[[Page 78354]]

trustee. Commentators suggested that the regulations provide trustees 
with an alternative date for measuring whether the de minimis test has 
been met for the initial trust year. They suggested that trustees be 
permitted to measure whether the de minimis test has been met by using 
the net fair market value of the trust's assets as of the date of the 
last deposit of trust assets into the NMWHFIT (not including any 
deposit of assets into the NMWHFIT pursuant to a distribution 
reinvestment program), not to exceed 90 days after the date the 
registration statement of the WHFIT becomes effective under the 
Securities Act of 1933. The final regulations adopt this suggestion.
    The special WHMT de minimis test in Sec.  1.671-5(c)(2)(iv)(D)(2) 
of the WHFIT reporting rules was added to the WHFIT reporting rules in 
response to comments from the WHMT industry indicating that WHMT 
trustees would have difficulty applying the general de minimis test 
because it would be extremely difficult for the trustee to determine 
the fair market value of the mortgages held by the WHMT on an annual 
basis, as required under the general de minimis test. Under the special 
WHMT de minimis test, trustees of certain WHMTs are permitted to 
determine whether the de minimis test has been met using the 
outstanding principal balance of the mortgages of the trust as of 
January 1 rather than the net fair market value of the trust's assets. 
A commentator suggested that this de minimis test be expanded so that 
all WHFITs with hard to value debt instruments be permitted to use this 
de minimis test. In response, the IRS and Treasury Department request 
that trustees of WHFITs that hold hard to value debt instruments and 
that believe the application of the WHMT de minimis test to the 
instruments held by the WHFIT for which the trustees act would be 
useful, submit additional comments on this issue. The final regulations 
amend Sec.  1.671-5(c)(2)(iv)(D)(2) to provide that the application of 
the special de minimis test may be expanded by revenue ruling or other 
published guidance.
4. Non Taxable Exchanges of Assets
    Commentators suggested that the final regulations provide an 
exception to the reporting rules for sales and dispositions of trust 
assets for exchanges of trust assets that result from nontaxable 
corporate reorganizations. The final regulations adopt this suggestion.

D. Market Discount

    Commentators requested amendments to the information required to be 
reported under the NMWHFIT safe harbor with respect to market discount. 
If a NMWHFIT is required to provide information regarding market 
discount under the general rules in Sec.  1.671-5(c)(2)(vii), the 
NMWHFIT safe harbor provides that a trustee's requirement to provide 
information regarding market discount is satisfied by providing 
information regarding the portion of the trust that the assets sold 
represented. Assuming that a trust interest holder purchased its 
interest at a discount, it was contemplated that the trust interest 
holder would allocate the same portion of its discount to the sale as 
the assets represented to the NMWHFIT.
    This information was incomplete, however, with respect to a NMWHFIT 
holding debt instruments with original issue discount (OID). Under both 
the general provisions (Sec.  1.671-5(c)(2)(ii)(A) and (vii)) and the 
safe harbor (Sec.  1.671-5(f)(1)(vii) and (viii)), OID information and 
market discount information are required to be calculated and provided 
separately. Accordingly, for beneficial owners to determine the amount 
of market discount an owner must allocate to a particular sale or 
disposition of a debt instrument by the NMWHFIT, Sec.  1.671-
5(f)(1)(viii)(A) is amended with respect to NMWHFITs that hold debt 
instruments with OID, to include a requirement that trustees provide a 
list of the aggregate adjusted issue prices of the debt instruments 
held by the NMWHFIT per trust interest as of the start-up date or the 
measuring date (as defined in Sec.  1.671-5(c)(2)(iv)(D)(1)) whichever 
will provide the more accurate information, as well as of January 1 of 
each subsequent year of the NMWHFIT. The IRS and the Treasury 
Department expect that beneficial owners of trust interests will use 
the adjusted issue price for the trust's debt instruments per trust 
interest for the year in which the beneficial owner purchased its 
interest to determine whether a trust interest has market discount.

II. Applicability of the WHFIT Reporting Rules to WHMTs

A. Temporary WHMT Safe Harbor for WHMTs That Hold Interests in a REMIC, 
Hold Interests in Another WHFIT, or Hold or Issue Stripped Interests

    The WHFIT reporting rules include a safe harbor for WHMTs that 
directly hold mortgages (as defined in Sec.  1.671-5(b)(11)) and issue 
trust interests that represent an equal pro-rata right to payments of 
interest and principal on the underlying mortgages. WHMTs that hold or 
issue stripped interests, hold interests in another WHFIT, or hold 
interests in a REMIC, are not eligible to report under the WHMT safe 
harbor. The IRS and the Treasury Department received comments 
expressing concern about the application of the WHFIT reporting rules 
to WHMTs that are outside the WHMT safe harbor because trustees and 
middlemen of these WHMTs are required to comply with the general WHFIT 
reporting rules in Sec.  1.671-5(c). The commentators contended that 
some of the information required to be reported under the general 
information rules would be burdensome to obtain and moreover, is not 
required by beneficial owners to accurately report the tax consequences 
of owning a trust interest. In response to these concerns, pending the 
issuance of additional WHMT safe harbors, these final regulations 
provide a temporary safe harbor for all WHMTs that are outside the WHMT 
safe harbor in Sec.  1.671-5(g) of the WHFIT reporting rules because 
they hold or issue stripped interests, hold interests in a REMIC or 
hold an interest in another WHMT. Under the safe harbor, a trustee will 
be deemed to satisfy the requirements of Sec.  1.671-5(c)(1) if the 
trustee calculates and provides trust information in a manner that 
enables a requesting person to provide trust information to a 
beneficial owner of a trust interest that enables the owner to 
reasonably accurately report the tax consequences of its ownership of a 
trust interest on the Federal income tax return of the beneficial 
owner.
    Additionally, in order to be deemed to have satisfied the 
requirements of Sec.  1.671-5(c)(1), the trustee must provide 
information regarding market discount and original issue discount (OID) 
that is calculated in any reasonable manner consistent with section 
1272(a)(6). Pending the issuance of additional guidance, it is intended 
that this safe harbor except trustees from any penalties that may apply 
for not fully complying with paragraph (c) of the WHFIT reporting rules 
where it can be shown that full compliance with paragraph (c) is 
unnecessary in order to provide trust interest holders with appropriate 
information. A trustee or middleman required to provide information to 
the IRS under Sec.  1.671-5(d) and to beneficial owners under paragraph 
Sec.  1.671-5(e) may satisfy those obligations by calculating and 
providing trust information consistent with the information provided by 
the trustee under this safe harbor.

[[Page 78355]]

B. Application of the Requirement To Provide Market Discount and OID 
Information for Existing WHMTs

    Section 1.671-5(c)(2)(ii)(A) requires a trustee of a WHFIT to 
provide information regarding OID. Commentators have expressed concern 
regarding the application of this requirement to existing WHMTs because 
the historical information that would enable the trustee to provide OID 
information has never been provided or maintained by the trustee or the 
persons responsible for information reporting. Commentators contend 
that it is unlikely that these trustees will be able to comply with 
this requirement for existing WHMTs. The IRS and the Treasury 
Department recognize that, in some cases, the information necessary for 
a WHMT to comply with this provision may not be available. If it can be 
demonstrated that a trustee of a WHMT with a start-up date on or after 
August 13, 1998 and on or before January 24, 2006, has attempted in 
good faith, but without success, to obtain the historical information 
required to provide OID information, the IRS will not impose any 
penalties that would apply under Sec.  1.671-5(l) of the WHFIT 
reporting rules (redesignated Sec.  1.671-5(m) by these final 
regulations) as a result of a trustee's failure to comply with the 
requirement to provide OID information. Further, Sec.  1.671-
5(c)(2)(ii)(A) of these final regulations excepts a trustee of a WHMT 
with a start-up date prior to August 13, 1998 from the requirement to 
provide OID information. For purposes of calculating the market 
discount fraction under the WHMT safe harbor in Sec.  1.671-5(g)(1)(v), 
these trustees may assume that the WHMT is holding mortgages that were 
issued without OID.
    The WHMT safe harbor provisions for calculating OID information in 
Sec.  1.671-5(g)(i)(iv) and market discount information in Sec.  1.671-
5(g)(1)(v) require trustees to use the prepayment assumption used in 
pricing the original issue of trust interests. Commentators have 
indicated that trustees of existing WHMTs may not know the prepayment 
assumption used in pricing the original issue of trust interests. In 
response, the safe harbor is amended to provide that if the trustee 
does not know the prepayment assumption used in pricing the original 
issue of trust interests for a WHMT with a start-up date prior to 
January 24, 2006, and the trustee makes a good faith effort without 
success to obtain the prepayment assumption, the trustee may use any 
reasonable prepayment assumption when calculating OID and market 
discount information for that WHMT.

III. Requirement to Register and Continued Consideration of a WHFIT 
Directory

    Prior to the publication of the WHFIT reporting rules, commentators 
expressed concern that middlemen would not be able to identify a 
client's investment as an investment in a WHFIT and suggested that the 
IRS publish a directory or list of WHFITs that would include the name 
and CUSIP number of each WHFIT, along with the name, address and 
telephone number of the WHFIT's representative. Commentators noted that 
a publicly available directory or list would assist middlemen and 
brokers in identifying a client's investment as an investment in a 
WHFIT and in locating the WHFIT's representative. The WHFIT reporting 
rules did not provide for a directory and instead, required the trustee 
to identify a representative of the trust to provide trust information 
in a publication generally read by and available to requesting persons, 
in the trust's prospectus, or on the trustee's Internet Web site.
    Following the publication of the WHFIT reporting rules, additional 
comments were received regarding the need for a directory of WHFITs. In 
response to those comments, the proposed regulations indicated that the 
IRS and Treasury Department considered expanding Publication 938, 
``Real Estate Mortgage Investment Conduits (REMICs) Reporting 
Information (and other Collateralized Debt Obligations (CDOs)),'' or 
creating a separate publication to list WHMT trustees and NMWHFITs. The 
IRS and Treasury Department continue to consider how a directory of 
WHFITs could be implemented. Pending the publication of such a 
directory, trustees must provide information regarding a trust 
representative in the manner provided in the WHFIT reporting rules.

IV. Form 1041 Reporting

    A trustee of a WHFIT must indicate on the Form 1041 filed for the 
2006 calendar year that the return is a final return.

Effective Date

    These final amendments are effective December 29, 2006. In general, 
these final regulations are applicable to the reporting required under 
Sec.  1.671-5 as of January 1, 2007 (see Sec.  1.671-5(m) (redesignated 
Sec.  1.671-5(n) by these final regulations)) and will be applied as 
though these amendments were included in the WHFIT reporting rules. The 
IRS and the Treasury Department are aware that some trustees and 
middlemen were unable to complete updates to their computer and 
information reporting systems to comply with the WHFIT reporting rules 
until the amendments to the WHFIT reporting rules included in these 
regulations are finalized. Accordingly, the IRS will not impose any 
penalties that would apply under Sec.  1.671-5(l) (redesignated Sec.  
1.671-5(m) by these final regulations) of the WHFIT reporting rules as 
a result of the failure to comply with the WHFIT reporting rules as 
amended by these final regulations with respect to the 2007 calendar 
year in cases where a trustee or middleman was unable to change its 
information reporting systems to comply with the WHFIT reporting rules 
because of uncertainty regarding the application of certain provisions 
of those rules pending the publication of these final regulations. For 
example, penalties will not be imposed on a trustee of a NMWHFIT that 
reports the amount of trust sales proceeds distributed to trust 
interest holders for the 2007 calendar year under Sec.  1.671-
5(c)(2)(iv)(B) even though the trustee is unable to determine whether 
the NMWHFIT has met the de minimis test for the 2007 calendar year, 
provided that the trustee's failure to determine whether a NMWHFIT has 
met the de minimis test results from the trustee's inability to alter 
its existing information reporting systems by January 1, 2007, to 
capture the necessary information. As an additional example, penalties 
will not be imposed on the trustees or the middlemen of WHMTs that are 
unable to comply with certain provisions of the WHFIT reporting rules 
with respect to the 2007 calendar year because those trustees and 
middlemen were not able to change their existing reporting systems to 
comply with the WHFIT reporting rules pending the publication of these 
final regulations.

Special Analyses

    It has been determined that these final regulations are not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It is hereby 
certified that this regulation will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that the regulations will not have a significant 
economic impact on small entities because the reporting burdens in 
these regulations will fall primarily on large brokerage firms, large 
banks, and other large entities acting as trustees or middlemen, most 
of which

[[Page 78356]]

are not small entities within the meaning of the Regulatory Flexibility 
Act (5 U.S.C. chapter 6). Thus, a substantial number of small entities 
are not expected to be affected. Therefore, a Regulatory Flexibility 
Analysis under the Regulatory Flexibility Act (5 U.S.C. chapter 6) is 
not required. Pursuant to section 7805(f) of the Internal Revenue Code, 
the notice of proposed rulemaking preceding this regulation was 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Drafting Information

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

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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

0
Par. 2. Section 1.671-5 is amended by:
0
1. Revising paragraph (a) by redesignating entries for paragraphs (h), 
(j), (k), (l), and (m) as entries for paragraphs (j), (k), (l), (m) and 
(n) and adding a new entry for paragraph (h).

0
2. Revising paragraphs (b)(5), (b)(8), (b)(21), (c)(2)(ii)(A), 
(c)(2)(iv), (c)(2)(v), (c)(2)(vi), (c)(2)(vii), (d)(2)(ii)(C), 
(d)(2)(ii)(F), (d)(2)(ii)(G), (f)(1), (f)(1)(i)(A), (f)(1)(viii)(A), 
(f)(2)(viii)(A), (f)(3)(i)(A)(1), (f)(3)(i)(B)(5), (f)(3)(i)(B)(9), 
(f)(3)(ii)(B)(4)(i), (f)(3)(ii)(B)(5), (f)(3)(ii)(B)(6), 
(g)(1)(iv)(A)(2), and (g)(1)(v)(A).

0
3. Redesignating paragraphs (h), (j), (k), (l) and (m) as (j), (k), 
(l), (m) and (n) respectively.

0
4. Adding new paragraph (h).
    Revising newly designated paragraph (m).
    The additions and revisions read as follows:


Sec.  1.671-5  Reporting for widely held fixed investment trusts.

    (a) * * *
    (h) Additional safe harbors.
    (1) Temporary safe harbors.
    (2) Additional safe harbors provided by other published guidance.
* * * * *
    (b) * * *
    (5) The cash held for distribution is the amount of cash held by 
the WHFIT (other than trust sales proceeds and proceeds from sales 
described in paragraphs (c)(2)(iv)(D)(4), (G), and (H) of this section) 
less reasonably required reserve funds as of the date that the amount 
of a distribution is required to be determined under the WHFIT's 
governing document.
* * * * *
    (8) An in-kind redemption is a redemption in which a beneficial 
owner receives a pro-rata share of each of the assets of the WHFIT that 
the beneficial owner is deemed to own under section 671. For example, 
for purposes of this paragraph (b)(8), if beneficial owner A owns a one 
percent interest in a WHFIT that holds 100 shares of X corporation 
stock, so that A is considered to own a one percent interest in each of 
the 100 shares, A's pro-rata share of the X corporation stock for this 
purpose is one share of X corporation stock.
* * * * *
    (21) Trust sales proceeds equal the amount paid to a WHFIT for the 
sale or disposition of an asset held by the WHFIT, including principal 
payments received by the WHFIT that completely retire a debt instrument 
(other than a final scheduled principal payment) and pro-rata partial 
principal prepayments described under Sec.  1.1275-2(f)(2). Trust sales 
proceeds do not include amounts paid for any interest income that would 
be required to be reported under Sec.  1.6045-1(d)(3). Trust sales 
proceeds also do not include amounts paid to a NMWHFIT as the result of 
pro-rata sales of trust assets to effect a redemption described in 
paragraph (c)(2)(iv)(G) of this section or the value of assets received 
as a result of a tax-free corporate reorganization as described in 
paragraph (c)(2)(iv)(H) of this section.
* * * * *
    (c) * * *
    (2) * * *
    (ii) * * *
    (A) All items of gross income (including OID, except that OID is 
not required to be included for a WHMT that has a start-up date (as 
defined in paragraph (b)(19) of this section) prior to August 13, 
1998).
* * * * *
    (iv) Asset sales and dispositions. The trustee must report 
information regarding sales and dispositions of WHFIT assets as 
required in this paragraph (c)(2)(iv). For purposes of this paragraph 
(c)(2)(iv), a payment (other than a final scheduled payment) that 
completely retires a debt instrument (including a mortgage held by a 
WHMT) or a pro-rata prepayment on a debt instrument (see Sec.  1.1275-
2(f)(2)) held by a WHFIT must be reported as a full or partial sale or 
disposition of the debt instrument. Pro-rata sales of trust assets to 
effect redemptions, as defined in paragraph (c)(2)(iv)(G) of this 
section, or exchanges of trust assets as the result of a corporate 
reorganization under paragraph (c)(2)(iv)(H) of this section, are not 
reported as sales or dispositions under this paragraph (c)(2)(iv).
    (A) General rule. Except as provided in paragraph (c)(2)(iv)(B) 
(regarding the exception for certain NMWHFITs) or paragraph 
(c)(2)(iv)(C) (regarding the exception for certain WHMTs) of this 
section, the trustee must report with respect to each sale or 
disposition of a WHFIT asset--
    (1) The date of each sale or disposition;
    (2) Information that enables a requesting person to determine the 
amount of trust sales proceeds (as defined in paragraph (b)(21) of this 
section) attributable to a beneficial owner as a result of each sale or 
disposition; and
    (3) Information that enables a beneficial owner to allocate, with 
reasonable accuracy, a portion of the owner's basis in its trust 
interest to each sale or disposition.
    (B) Exception for certain NMWHFITs. If a NMWHFIT meets paragraph 
(c)(2)(iv)(D)(1)(regarding the general de minimis test), paragraph 
(c)(2)(iv)(E) (regarding the qualified NMWHFIT exception), or paragraph 
(c)(2)(iv)(F) (regarding the NMWHFIT final calendar year exception) of 
this section, the trustee is not required to report under paragraph 
(c)(2)(iv)(A) of this section. Instead, the trustee must report 
sufficient information to enable a requesting person to determine the 
amount of trust sales proceeds distributed to a beneficial owner during 
the calendar year with respect to each sale or disposition of a trust 
asset. The trustee also must provide requesting persons with a 
statement that the NMWHFIT is permitted to report under this paragraph 
(c)(2)(iv)(B).
    (C) Exception for certain WHMTs. If a WHMT meets either the general 
or the special de minimis test of paragraph (c)(2)(iv)(D) of this 
section for the calendar year, the trustee is not required to report 
under paragraph (c)(2)(iv)(A) of this section. Instead, the trustee 
must report information to enable a requesting person to determine the

[[Page 78357]]

amount of trust sales proceeds attributable to a beneficial owner as a 
result of the sale or disposition. The trustee also must provide 
requesting persons with a statement that the WHMT is permitted to 
report under this paragraph (c)(2)(iv)(C).
    (D) De minimis tests--(1) General WHFIT de minimis test. The 
general WHFIT de minimis test is satisfied if trust sales proceeds for 
the calendar year are not more than five percent of the net asset value 
of the trust (aggregate fair market value of the trust's assets less 
the trust's liabilities) as of the later of January 1 and the start-up 
date (as defined paragraph (b)(19) of this section); or, if the trustee 
chooses, the later of January 1 and the measuring date. The measuring 
date is the date of the last deposit of assets into the WHFIT (not 
including any deposit of assets into the WHFIT pursuant to a 
distribution reinvestment program), not to exceed 90 days after the 
date the registration statement of the WHFIT becomes effective under 
the Securities Act of 1933.
    (2) Special WHMT de minimis test. A WHMT that meets the asset 
requirement of paragraph (g)(1)(ii)(E) of this section satisfies the 
special WHMT de minimis test in this paragraph (c)(2)(iv)(D)(2) if 
trust sales proceeds for the calendar year are not more than five 
percent of the aggregate outstanding principal balance of the WHMT (as 
defined in paragraph (g)(1)(iii)(D) of this section) as of the later of 
January 1 of that year or the trust's start-up date. For purposes of 
applying the special WHMT de minimis test in this paragraph 
(c)(2)(iv)(D)(2), amounts that result from the complete or partial 
payment of the outstanding principal balance of the mortgages held by 
the trust are not included in the amount of trust sales proceeds. The 
IRS and the Treasury Department may provide by revenue ruling, or by 
other published guidance, that the special de minimis test of this 
paragraph (c)(2)(iv)(D)(2) may be applied to WHFITs holding debt 
instruments other than those described in paragraph (g)(1)(ii)(E) of 
this section.
    (3) Effect of clean-up call. If a WHFIT fails to meet either de 
minimis test described in this paragraph (c)(2)(iv)(D) solely as the 
result of a clean-up call, as defined in paragraph (b)(6) of this 
section, the WHFIT will be treated as having met the de minimis test.
    (4) Exception for certain fully reported sales--(i) Rule. If a 
trustee of a NMWHFIT reports the sales described in paragraph 
(c)(2)(iv)(D)(4)(ii) of this section as provided under paragraph 
(c)(2)(iv)(A) of this section (regardless of whether the general 
minimis test in paragraph (c)(2)(iv)(D)(1) of this section is satisfied 
for a particular calendar year) consistently throughout the life of the 
WHFIT, a trustee may exclude the trust sales proceeds received by the 
WHFIT as a result of those sales from the trust sales proceeds used to 
determine whether a WHFIT has satisfied the general de minimis test in 
paragraph (c)(2)(iv)(D)(1) of this section.
    (ii) Applicable sales and dispositions. This paragraph 
(c)(2)(iv)(D)(4) applies to sales and dispositions resulting from 
corporate reorganizations and restructurings for which the trust 
receives cash, the sale of assets received by the trust in corporate 
reorganizations and restructurings (including conversions of closed-end 
investment companies to open-end investment companies), principal 
prepayments, bond calls, bond maturities, and the sale of securities by 
the trustee as required by the governing document or applicable law 
governing fiduciaries in order to maintain the sound investment 
character of the trust, and any other nonvolitional dispositions of 
trust assets.
    (iii) Certain small sales and dispositions. If the amount of trust 
sales proceeds from a sale or disposition described in paragraph 
(c)(2)(iv)(D)(4)(ii) of this section is less than .01 percent of the 
net fair market value of the WHFIT as determined for applying the de 
minimis test for the calendar year, the trustee is not required to 
report the sale or disposition under paragraph (c)(2)(iv)(A) of this 
section provided the trustee includes the trust sales proceeds, 
received for purposes of determining whether the trust has met the 
general de minimis test of paragraph (c)(2)(iv)(D)(1) of this section.
    (E) Qualified NMWHFIT exception. The qualified NMWHFIT exception is 
satisfied if--
    (1) The NMWHFIT has a start-up date (as defined in paragraph 
(b)(19) of this section) before February 23, 2006;
    (2) The registration statement of the NMWHFIT becomes effective 
under the Securities Act of 1933, as amended (15 U.S.C. 77a, et seq.) 
and trust interests are offered for sale to the public before February 
23, 2006; or
    (3) The registration statement of the NMWHFIT becomes effective 
under the Securities Act of 1933 and trust interests are offered for 
sale to the public on or after February 23, 2006, and before July 31, 
2006, and the NMWHFIT is fully funded before October 1, 2006. For 
purposes of determining whether a NMWHFIT is fully funded under this 
paragraph (c)(2)(iv)(E), deposits to the NMWHFIT after October 1, 2006, 
that are made pursuant to a distribution reinvestment program that is 
consistent with the requirements of Sec.  301.7701-4(c) of this chapter 
are disregarded.
    (F) NMWHFIT final calendar year exception. The NMWHFIT final 
calendar year exception is satisfied if--
    (1) The NMWHFIT terminates on or before December 31 of the year for 
which the trustee is reporting;
    (2) Beneficial owners exchange their interests for cash or are 
treated as having exchanged their interests for cash upon termination 
of the trust; and
    (3) The trustee makes reasonable efforts to engage in pro-rata 
sales of trust assets to effect redemptions.
    (G) Pro-rata sales of trust assets to effect a redemption--(1) 
Rule. Pro-rata sales of trust assets to effect redemptions are not 
required to be reported under this paragraph (c)(2)(iv).
    (2) Definition. Pro-rata sales of trust assets to effect 
redemptions occur when--
    (i) One or more trust interests are tendered for redemption;
    (ii) The trustee identifies the pro-rata shares of the trust assets 
that are deemed to be owned by the trust interest or interests tendered 
for redemption (See paragraph (b)(8) of this section for a description 
of how pro-rata is to be applied for purposes of this paragraph 
(c)(2)(iv)(G)) and sells those assets as soon as practicable;
    (iii) Proceeds from the sales of the assets identified in paragraph 
(c)(2)(iv)(G)(2)(ii) of this section are used solely to effect 
redemptions; and
    (iv) The redemptions are reported as required under paragraph 
(c)(2)(v) of this section by the trustee.
    (3) Additional rules--(i) Calendar month aggregation. The trustee 
may compare the aggregate pro-rata share of the assets deemed to be 
owned by the trust interests tendered for redemption during the 
calendar month with the aggregate sales of assets to effect redemptions 
for the calendar month to determine the pro-rata sales of trust assets 
to effect redemptions for the calendar month. If the aggregate pro-rata 
share of an asset deemed to be owned by the trust interests tendered 
for redemption for the month is a fractional amount, the trustee may 
round that number up to the next whole number for the purpose of 
determining the pro-rata sales to effect redemptions for the calendar 
month;
    (ii) Sales of assets to effect redemptions may be combined with 
sales of assets for other purposes. Sales of assets to effect 
redemptions may be combined with the sales of assets to obtain cash for 
other purposes but the proceeds from the sales of assets to effect 
redemptions must be used solely

[[Page 78358]]

to provide cash for redemptions and the sales of assets to obtain cash 
for other purposes must be reported as otherwise provided in this 
paragraph (c)(2)(iv). For example, if a trustee sells assets and the 
proceeds are used by the trustee to pay trust expenses, these amounts 
are to be included in the amounts reported under paragraph 
(c)(2)(iv)(A) or (B), as appropriate.

    (4) Example--(i) January 1, 2008. Trust has one million trust 
interests and all interests have equal value and equal rights. The 
number of shares of stock in corporations A through J and the pro-
rata share of each stock that a trust interest is deemed to own as 
of January 1, 2008, is as follows:

------------------------------------------------------------------------
                                                   Total      Per trust
                     Stock                         shares      interest
------------------------------------------------------------------------
A.............................................       24,845      .024845
B.............................................       28,273      .028273
C.............................................       35,575      .035575
D.............................................       13,866      .013866
E.............................................       25,082      .025082
F.............................................       39,154      .039154
G.............................................       16,137      .016137
H.............................................       14,704      .014704
I.............................................       17,436      .017436
J.............................................       31,133      .031133
------------------------------------------------------------------------

    (ii) Transactions of January 2, 2008. On January 2, 2008, 50,000 
trust interests are tendered for redemption. The deemed pro-rata 
ownership of stocks A through J represented by the 50,000 redeemed 
trust interests and the stocks sold to provide cash for the 
redemptions are set out in the following table:

------------------------------------------------------------------------
                                                Deemed pro-
                     Stock                          rata     Shares sold
                                                 ownership
------------------------------------------------------------------------
A.............................................     1,242.25        1,242
B.............................................     1,413.65        1,413
C.............................................     1,778.75        1,779
D.............................................       693.30          694
E.............................................     1,254.10        1,254
F.............................................     1,957.70        1,957
G.............................................       806.85          807
H.............................................       735.20          735
I.............................................       871.80          872
J.............................................     1,556.65        1,557
------------------------------------------------------------------------

    (iii) Transactions on January 15 through 17, 2008. On January 
15, 2008, 10,000 trust interests are tendered for redemption. 
Trustee lends money to Trust for redemptions. On January 16, B 
merges into C at a rate of .55 per share. On January 17, Trustee 
sells stock to obtain cash to be reimbursed the cash loaned to Trust 
to effect the redemptions. The pro-rata share of the stock deemed to 
be owned by the 10,000 redeemed trust interests and the stock sold 
by the trustee to effect the redemptions are set out in the 
following table:

------------------------------------------------------------------------
                                                Deemed pro-
                    Stock                          rata      Shares sold
                                                 ownership
------------------------------------------------------------------------
A............................................        248.45          249
B............................................         00              00
C............................................        511.25          512
D............................................        138.66          138
E............................................        250.82          251
F............................................        391.54          392
G............................................        161.37          162
H............................................        147.04          148
I............................................        174.36          174
J............................................        311.33          311
------------------------------------------------------------------------

    (iv) Transactions on January 28 and 29, 2008. On January 28, 
2008, the value of the H stock is $30.00 per share and Trustee, 
pursuant to Trust's governing document, sells the H stock to 
preserve the financial integrity of Trust and receives $414,630. 
Trustee intends to report this sale under paragraph (c)(2)(iv)(A) of 
this section and to distribute the proceeds of the sale pro-rata to 
trust interest holders on Trust's next scheduled distribution date. 
On January 29, 2008, while trustee still holds the proceeds from the 
January 28 sale, 10,000 trust interests are tendered for redemption. 
The pro-rata share of the stock deemed to be owned by the 10,000 
redeemed trust interests and the stock sold by the trustee to effect 
the redemptions are set out in the following table:

------------------------------------------------------------------------
                                                Deemed pro-
                    Stock                          rata      Shares sold
                                                 ownership
------------------------------------------------------------------------
A............................................        248.45          248
B............................................          0               0
C............................................        511.25          511
D............................................        138.66          139
E............................................        250.82          251
F............................................        391.54          391
G............................................        161.37          161
H............................................      \1\ 0               0
I............................................        174.36          175
J............................................        311.33         312
------------------------------------------------------------------------
\1\Share of cash proceeds: $4,458.39.

    (v) Monthly amounts. To determine the pro-rata sales to effect 
redemptions for January, trustee compares the aggregate pro-rata 
share of stocks A through J (rounded to the next whole number) 
deemed to be owned by the trust interests tendered for redemption 
during the month of January with the sales of stocks A through J to 
effect redemptions:

------------------------------------------------------------------------
                                                Deemed pro-
                     Stock                          rata     Shares sold
                                                 ownership
------------------------------------------------------------------------
A.............................................         1740         1739
B.............................................            0            0
C.............................................         3579         3579
D.............................................          971          971
E.............................................         1756         1756
F.............................................         2741         2741
G.............................................         1130         1130
H.............................................          883          883
I.............................................         1221         1221
J.............................................         2180         2180
------------------------------------------------------------------------

    (vi) Pro-rata sales to effect redemptions for the month of 
January. For the month of January, the deemed pro-rata ownership of 
shares of stocks A through J equal or exceed the sales of stock to 
effect redemptions for the month. Accordingly, all of the sales to 
effect redemptions during the month of January are considered to be 
pro-rata and are not required to be reported under this paragraph 
(c)(2)(iv).

    (H) Corporate Reorganizations. The exchange of trust assets for 
other assets of equivalent value pursuant to a tax free corporate 
reorganization is not required to be reported as a sale or disposition 
under this paragraph (c)(2)(iv).
    (v) Redemptions and sales of WHFIT interests--(A) Redemptions--(1) 
In general. Unless paragraph (c)(2)(v)(C) of this section applies, for 
each date on which the amount of a redemption proceeds for the 
redemption of a trust interest is determined, the trustee must provide 
information to enable a requesting person to determine--
    (i) The redemption proceeds (as defined in paragraph (b)(15) of 
this section) per trust interest on that date;
    (ii) The redemption asset proceeds (as defined in paragraph (b)(14) 
of this section) per trust interest on that date; and
    (iii) The gross income that is attributable to the redeeming 
beneficial owner for the portion of the calendar year that the 
redeeming beneficial owner held its interest (including income earned 
by the WHFIT after the date of the last income distribution.
    (2) In kind redemptions. The value of the assets received with 
respect to an in-kind redemption (as defined in paragraph (b)(8) of 
this section) is not required to be reported under this paragraph 
(c)(2)(v)(A). Information regarding the income attributable to a 
redeeming beneficial owner must, however, be reported under paragraph 
(c)(2)(v)(A)(1)(iii) of this section.
    (B) Sale of a trust interest. Under paragraph (c)(2)(v)(C) of this 
section applies, if a secondary market for interests in the WHFIT is 
established, the trustee must provide, for each day of the calendar 
year, information to enable requesting persons to determine--
    (1) The sale assets proceeds (as defined in paragraph (b)(17) of 
this section) per trust interest on that date; and
    (2) The gross income that is attributable to a selling beneficial 
owner and to a purchasing beneficial owner for the portion of the 
calendar year that each held the trust interest.
    (C) Simplified Reporting for Certain NMWHFITs--(1) In general. The 
trustee of an NMWHFIT described in paragraph (c)(2)(v)(C)(2) of this 
section is not

[[Page 78359]]

required to report the information described in paragraph (c)(2)(v)(A) 
of this section (regarding redemptions) or (c)(2)(v)(B) of this section 
(regarding sales). However, the trustee must report to requesting 
persons, for each date on which the amount of redemption proceeds to be 
paid for the redemption of a trust interest is determined, information 
that will enable requesting persons to determine the redemption 
proceeds per trust interest on that date. The trustee also must provide 
requesting persons with a statement that this paragraph applies to the 
NMWHFIT.
    (2) NMWHFITs that qualify for the exception. This paragraph 
(c)(2)(v)(C) applies to a NMWHFIT if--
    (i) Substantially all the assets of the NMWHFIT produce income that 
is treated as interest income (but only if these assets trade on a 
recognized exchange or securities market without a price component 
attributable to accrued interest) or produce dividend income (as 
defined in section 6042(b) and the regulations under that section). 
(Trust sales proceeds and gross proceeds from sales described in 
paragraphs (c)(2)(iv)(G) and (H) of this section are ignored for the 
purpose of determining if substantially all of a NMWHFIT's assets 
produce dividend or the interest income described in this paragraph); 
and
    (ii) The qualified NMWHFIT exception of paragraph (c)(2)(iv)(E) of 
this section is satisfied, or the trustee is required by the governing 
document of the NMWHFIT to determine and distribute all cash held for 
distribution (as defined in paragraph (b)(5) of this section) no less 
frequently than monthly. A NMWHFIT will be considered to have satisfied 
this paragraph (c)(2)(v)(C)(2)(i) notwithstanding that the governing 
document of the NMWHFIT permits the trustee to forego making a required 
monthly or more frequent distribution, if the cash held for 
distribution is less than 0.1 percent of the aggregate net asset value 
of the trust as of the date specified in the governing document for 
calculating the amount of the monthly distribution.
    (vi) Information regarding bond premium. The trustee generally must 
report information that enables a beneficial owner to determine, in any 
manner that is reasonably consistent with section 171, the amount of 
the beneficial owner's amortizable bond premium, if any, for each 
calendar year. However, if a NMWHFIT meets the general de minimis test 
in paragraph (c)(2)(iv)(D)(1) of this section, the qualified NMWHFIT 
exception of paragraph (c)(2)(iv)(E) of this section, or the NMWHFIT 
final calendar year exception of paragraph (c)(2)(iv)(F) of this 
section, the trustee of the NMWHFIT is not required to report 
information regarding bond premium.
    (vii) Information regarding market discount. The trustee generally 
must report information that enables a beneficial owner to determine, 
in any manner reasonably consistent with section 1276 (including 
section 1276(a)(3)), the amount of market discount that has accrued 
during the calendar year. However, if a NMWHFIT meets the general de 
minimis test in paragraph (c)(2)(iv)(D) of this section, the qualified 
NMWHFIT exception of paragraph (c)(2)(iv)(E) of this section, or the 
NMWHFIT final calendar year exception of paragraph (c)(2)(iv)(F) of 
this section, the trustee of such NMWHFIT is not required to provide 
information regarding market discount.
* * * * *
    (d) * * *
    (2) * * *
    (ii) * * *
    (C) Gross income. All items of gross income of the WHFIT 
attributable to the TIH for the calendar year (including OID (unless 
the exception for certain WHMTs applies (see paragraph (c)(2)(ii)(A) of 
this section)) and all amounts of income attributable to a selling, 
purchasing, or redeeming TIH for the portion of the calendar year that 
the TIH held its interest (unless paragraph (c)(2)(v)(C) of this 
section (regarding an exception for certain NMWHFITs) applies));
* * * * *
    (F) Reporting Redemptions. All redemption asset proceeds (as 
defined in paragraph (b)(14) of this section) paid to the TIH for the 
calendar year, if any, or, if paragraph (c)(2)(v)(C) of this section 
(regarding an exception for certain NMWHFITs) applies, all redemption 
proceeds (as defined in paragraph (b)(15) of this section) paid to the 
TIH for the calendar year;
    (G) Reporting sales of a trust interest on a secondary market. All 
sales asset proceeds (as defined in paragraph (b)(17) of this section) 
paid to the TIH for the sale of a trust interest or interests on a 
secondary market established for the NMWHFIT for the calendar year, if 
any, or, if paragraph (c)(2)(v)(C) of this section (regarding an 
exception for certain NMWHFITs) applies, all sales proceeds (as defined 
in paragraph (b)(18) of this section) paid to the TIH for the calendar 
year; and
* * * * *
    (f) Safe harbor for providing information for certain NMWHFITs--(1) 
Safe harbor for trustee reporting of NMWHFIT information. The trustee 
of a NMWHFIT that meets the requirements of paragraph (f)(1)(i) of this 
section is deemed to satisfy paragraph (c)(1)(i) of this section, if 
the trustee calculates and provides WHFIT information in the manner 
described in this paragraph (f) and provides a statement to a 
requesting person giving notice that information has been calculated in 
accordance with this paragraph (f)(1).
    (i) In general--(A) Eligibility to report under this safe harbor. 
Only NMWHFITs that meet the requirements set forth in paragraphs 
(f)(1)(i)(A)(1) and (2) of this section may report under this safe 
harbor. For purposes of determining whether the requirements of 
paragraph (f)(1)(i)(A)(1) of this section are met, trust sales proceeds 
and gross proceeds from sales described in paragraphs (c)(2)(iv)(G) and 
(H) of this section are ignored.
    (1) Substantially all of the NMWHFIT's income is from dividends or 
interest; and
    (2) All trust interests have identical value and rights.
* * * * *
    (viii) Reporting market discount information under the safe 
harbor--(A) In general--(1) Trustee required to provide market discount 
information. If the trustee is required to provide information 
regarding market discount under paragraph (c)(2)(vii) of this section, 
the trustee must provide--
    (i) The information required to be provided under paragraph 
(f)(1)(iv)(A)(1)(iii) of this section; and
    (ii) If the NMWHFIT holds debt instruments with OID, a list of the 
aggregate adjusted issue prices of the debt instruments per trust 
interest calculated as of the start-up date or measuring date (see 
paragraph (c)(2)(iv)(D)(4) of this section) (whichever provides more 
accurate information) and as of January 1 for each subsequent year of 
the NMWHFIT.
    (2) Trustee not required to provide market discount information. If 
the trustee is not required to provide market discount information 
under paragraph (c)(2)(vii) of this section (because the NMWHFIT meets 
the general de minimis test of paragraph (c)(2)(iv)(D)(1) of this 
section, the qualified NMWHFIT exception of paragraph (c)(2)(iv)(E) of 
this section, or the NMWHFIT final year exception of paragraph 
(c)(2)(iv)(F) of this section), the trustee is not required under this 
paragraph (f) to provide any information regarding market discount.
* * * * *
    (2) * * *
    (viii) * * *

[[Page 78360]]

    (A) Except as provided in paragraph (f)(2)(viii)(B) of this 
section, the trustee or middleman must provide the TIH with the 
information provided under paragraph (f)(1)(viii) of this section.
    (3) * * *
    (i) * * *
    (A) * * *

    (1) Trust is a NMWHFIT that holds common stock in ten different 
corporations and has 100 trust interests outstanding. The start-up 
date for Trust is December 15, 2006, and Trust's registration 
statement under the Securities Act of 1933 became effective after 
July 31, 2006. Trust terminates on March 15, 2008. The agreement 
governing Trust requires Trust to distribute cash held by Trust 
reduced by accrued but unpaid expenses on April 15, July 15, and 
October 15 of the 2007 calendar year. The agreement also provides 
that the trust interests will be redeemed by the Trust for an amount 
equal to the value of the trust interest, as of the close of 
business, on the day the trust interest is tendered for redemption. 
There is no reinvestment plan. A secondary market for interests in 
Trust will be created by Trust's sponsor and Trust's sponsor will 
provide Trustee with a list of dates on which sales occurred on this 
secondary market.

    (B) * * *

    (5) On June 1, 2007, Trustee sells shares of stock for $1000x to 
preserve the soundness of the trust. The stock sold on June 1, 2007, 
equaled 20% of the aggregate fair market value of the assets held by 
Trust on the start-up date of Trust. Trustee has chosen not to 
report sales described in paragraph (c)(2)(iv)(4)(ii) of Trust's 
assets under paragraph (c)(2)(iv)(D)(4) of this section.
* * * * *
    (9) On December 10, 2007, J tenders a trust interest to Trustee 
for redemption through Broker1. Trustee determines that the amount 
of the redemption proceeds to be paid for a trust interest that is 
tendered for redemption on December 10, 2007 is $116x, of which 
$115x represents the redemption asset proceeds. Trustee pays this 
amount to Broker1 on J's behalf. On December 12, 2007, trustee 
engages in a non pro-rata sale of shares of common stock for $115x 
to effect J's redemption of a trust interest. The stock sold on 
December 12, 2007, equals 2% of the aggregate fair market value of 
all the assets of Trust as of the start-up date.
* * * * *
    (ii) * * *
    (B) * * *

    (4) * * * (i) Application of the de minimis test. The aggregate 
fair market value of the assets of Trust as of January 1, 2007, was 
$10,000x. During the 2007 calendar year, Trust received trust sales 
proceeds of $1115x. The trust sales proceeds received by Trust for 
the 2007 calendar year equal 11.15% of Trust's fair market value as 
of January 1, 2007. Accordingly, the de minimis test is not 
satisfied for the 2007 calendar year. The qualified NMWHFIT 
exception in paragraph (c)(2)(iv)(E) of this section and the NMWHFIT 
final calendar year exception in (c)(2)(iv)(F) of this section also 
do not apply to Trust for the 2007 calendar year.
* * * * *
    (5) Reporting redemptions. Because Trust is not required to make 
distributions at least as frequently as monthly, and Trust does not 
satisfy the qualified NMWHFIT exception in paragraph (c)(2)(iv)(E) 
of this section, the exception in paragraph (c)(2)(v)(C) does not 
apply to Trust. To satisfy the requirements of paragraph (f)(1) of 
this section, Trustee provides a list of dates for which the 
redemption proceeds to be paid for the redemption of a trust 
interest was determined for the 2007 calendar year and the 
redemptions asset proceeds paid for each date. During 2007, Trustee 
only determined the amount of redemption proceeds paid for the 
redemption of a trust interest once, for December 10, 2007 and the 
redemption asset proceeds determined for that date was $115x.
    (6) Reporting sales of trust interests. Because trust is not 
required to make distributions at least as frequently as monthly, 
and Trust does not satisfy the qualified NMWHFIT exception in 
paragraph (c)(2)(iv)(E) of this section, the exception in paragraph 
(c)(2)(v)(C) of this section does not apply to Trust. Sponsor, in 
accordance with the trust agreement, provides Trustee with a list of 
dates on which sales on the secondary market occurred. To satisfy 
the requirements of paragraph (f)(1) of this section, Trustee 
provides requesting persons with a list of dates on which sales on 
the secondary market occurred and the amount of cash held for 
distribution, per trust interest, on each date. The first sale 
during the 2007 calendar year occurred on September 30, 2007, and 
the amount of cash held for distribution, per trust interest, on 
that date is $1.35x. The second sale occurred on December 10, 2007, 
and the amount of cash held for distribution, per trust interest, on 
that date is $1.00x.

    (g) * * *
    (1) * * *
    (iv) * * * (A) * * *
    (2) In calculating the daily portion of OID, the trustee must use 
the prepayment assumption used in pricing the original issue of trust 
interests. If the WHMT has a start-up date prior to January 24, 2006, 
and the trustee, after a good faith effort to ascertain that 
information, does not know the prepayment assumption used in pricing 
the original issue of trust interests, the trustee may use any 
reasonable prepayment assumption to calculate OID provided it continues 
to use the same prepayment assumption consistently thereafter.
* * * * *
    (v) * * * (A) * * *
    (3) Computing the total amount of stated interest remaining to be 
paid and the total remaining OID at the beginning of the month. To 
compute the total amount of stated interest remaining to be paid to the 
WHMT as of the beginning of the month and the total remaining OID as of 
the beginning of the month, the trustee must use the prepayment 
assumption used in pricing the original issue of trust interests. If 
the WHMT has a start-up date prior to January 24, 2006, and the 
trustee, after a good faith effort to ascertain that information, does 
not know the prepayment assumption used in pricing the original issue 
of trust interests, the trustee may use any reasonable prepayment 
assumption to calculate these amounts provided it continues to use the 
same prepayment assumption consistently thereafter.
* * * * *
    (h) Additional safe harbors--(1) Temporary safe harbor for WHMTs--
(i) Application. Pending the issuance of additional guidance, the safe 
harbor in this paragraph applies to trustees and middlemen of WHMTs 
that are not eligible to report under the WHMT safe harbor in paragraph 
(g) of this section because they hold interests in another WHFIT, in a 
REMIC, or hold or issue stripped interests.
    (ii) Safe harbor. A trustee is deemed to satisfy the requirements 
of paragraph (c) of this section, if the trustee calculates and 
provides trust information in a manner that enables a requesting person 
to provide trust information to a beneficial owner of a trust interest 
that enables the owner to reasonably accurately report the tax 
consequences of its ownership of a trust interest on its federal income 
tax return. Additionally, to be deemed to satisfy the requirements of 
paragraph (c) of this section, the trustee must calculate and provide 
trust information regarding market discount and OID by any reasonable 
manner consistent with section 1272(a)(6). A middleman or a trustee may 
satisfy its obligation to furnish information to the IRS under 
paragraph (d) of this section and to the trust interest holder under 
paragraph (e) of this section by providing information consistent with 
the information provided under this paragraph by the trustee.
    (2) Additional safe harbors provided by other published guidance. 
The IRS and the Treasury Department may provide additional safe harbor 
reporting procedures for complying with this section or a specific 
paragraph of this section by other published guidance (see Sec.  
601.601(d)(2) of this chapter).
* * * * *
    (m) Penalties for failure to comply--(1) In general. Every trustee 
or middleman who fails to comply with the reporting obligations imposed 
by this section is subject to penalties under sections 6721, 6722, and 
any other applicable penalty provisions.

[[Page 78361]]

    (2) Penalties not imposed on trustees and middlemen of certain 
WHMTs for failure to report OID. Penalties will not be imposed as a 
result of a failure to provide OID information for a WHMT that has a 
start-up date on or after August 13, 1998 and on or before January 24, 
2006, if the trustee of the WHMT does not have the historic information 
necessary to provide this information and the trustee demonstrates that 
it has attempted in good faith, but without success, to obtain this 
information. For purposes of calculating a market discount fraction 
under paragraph (g)(1)(v) of this section, for a WHMT described in this 
paragraph, it may be assumed that the WHMT is holding mortgages that 
were issued without OID. A trustee availing itself of this paragraph 
must include a statement to that effect when providing information to 
requesting persons under paragraph (c) of these regulations.
* * * * *


Sec.  1.671-5T  [Removed]

0
Par. 3. Section 1.671-5T is removed.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Assistant Secretary (Tax Policy).
[FR Doc. 06-9924 Filed 12-26-06; 10:22 am]
BILLING CODE 4830-01-P