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[Federal Register Volume 71, Number 149 (Thursday, August 3, 2006)]
[Proposed Rules]
[Pages 43998-44001]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-6650]

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1

[REG-125071-06]
RIN 1545-BF75

Reporting Rules for Widely Held Fixed Investment Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary 
regulations.

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SUMMARY: In this issue of the Federal Register, the IRS and the 
Treasury Department are issuing final and temporary regulations 
amending

[[Page 43999]]

Sec.  1.671-5 which provides reporting rules for widely held fixed 
investment trusts (WHFITs). The final and temporary regulations clarify 
and simplify reporting for trustees and middlemen of non-mortgage 
widely held fixed investment trusts (NMWHFITs). The text of those final 
and temporary regulations serves, in part, as the text of these 
proposed regulations. In addition to the amendments to Sec.  1.671-5 
included in the final and temporary regulations, these proposed 
regulations provide for the creation of a directory of NMWHFITs and 
trustees of widely held mortgage trusts (WHMTs). These regulations also 
clarify the reporting rules for market discount under the NMWHFIT safe 
harbor for NMWHFITs that hold debt instruments with original issue 
discount (OID). The preamble to these regulations also solicits 
comments regarding the safe harbor for WHMTs.

DATES: Written or electronic comments and requests for a public hearing 
must be received by October 2, 2006.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-125071-06), Internal 
Revenue Service, PO Box 7604, Ben Franklin Station, Washington, DC 
20044, or send electronically, via the IRS Internet site at http://www.irs.gov/regs or via the Federal eRulemaking Portal at http://www.regulations.gov (IRS-REG-125071-06).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Faith Colson, (202) 622-3060 (not a toll-free number); concerning 
submission of comments and/or requests for a public hearing, Richard A 
Hurst at [email protected].

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These proposed regulations amend Sec.  1.671-5. The collection of 
information contained in these proposed 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. Response to this collection of 
information is mandatory. The collection of information in these 
proposed 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 assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents might become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background and Explanation of Provisions

    On January 24, 2006, the Internal Revenue Service (IRS) and the 
Treasury Department published final regulations (TD 9241) under Sec.  
1.671-5 in the Federal Register (71 FR 4002) providing reporting rules 
for WHFITs. Final and temporary regulations in this issue of the 
Federal Register amend Sec.  1.671-5. These amendments are intended to 
clarify and simplify the reporting required by NMWHFITs under Sec.  
1.671-5. The text of the final and temporary regulations also serves, 
in part, as the text of these proposed regulations. The preamble to 
final and temporary regulations explains the final and temporary 
regulations and those parts of these proposed regulations that are 
included in the final and temporary regulations. These proposed 
regulations include proposed amendments to Sec.  1.671-5 in addition to 
those provided by the final and temporary regulations. The proposed 
amendments to Sec.  1.671-5 that are not included in the final and 
temporary regulations are discussed below.

I. Proposed Directory of WHMT Trustees and NMWHFITs and Requirement 
That WHMT Trustees Provide a List of WHMTs for Which They Act on an 
Internet Web Site

    Prior to the publication of the final regulations under Sec.  
1.671-5, 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.
    In response to these comments, the final regulations require a 
trustee to identify the WHFIT as either a WHMT or a NMWHFIT when 
providing trust information. The preamble to the final WHFIT 
regulations provides that the IRS and the Treasury Department are 
studying whether a directory or list of WHFITs can be compiled by the 
IRS and expressed concern that such a directory was not feasible 
because of the large number of WHMTs. In the preamble, the IRS and the 
Treasury Department requested additional comments from middlemen 
regarding the type of WHFITs that should be included in any directory, 
the type of information needed by middlemen (especially middlemen 
holding WHMT interests), and the format of a directory that would be 
most helpful. Trustees were also asked to comment regarding how the IRS 
could obtain the trust information needed for the directory from the 
trustees in the least burdensome manner.
    Since the publication of the final regulations, the IRS has 
received additional comments regarding the need for a directory of 
WHFITs. Commentators indicated that such a directory would 
significantly improve a middleman's ability to comply with Sec.  1.671-
5 and suggested that the IRS provide a directory of WHMT trustees and 
NMWHFITs, with each WHMT trustee maintaining a list of the WHMTs for 
which the trustee acts at an Internet Web site available to middlemen.
    In response to these comments, the IRS proposes to expand 
Publication 938, ``Real Estate Investment Conduits (REMICs) Reporting 
Information (and other Collateralized Debt Obligations (CDOs)),'' or 
create a separate publication to list WHMT trustees and NMWHFITs. The 
IRS currently intends to list NMWHFITs in this directory by trustee 
(listed in alphabetical order) with the NMWHFITs for which the trustee 
acts listed by CUSIP number, followed by any NMWHFITs, listed in 
alphabetical order by name which do not have CUSIP numbers. NMWHFIT 
trustees will be required to file Form 8811, ``Information Return for 
REMICs and Issuers of CDO's,'' or a similar form to provide the IRS 
with the information it needs to list NMWHFITs in the directory.
    The directory will also alphabetically list WHMT trustees and 
provide the address of the Internet Web site that lists the WHMTs for 
which the trustee acts. WHMT trustees will be required to file Form 
8811, or similar form, to identify themselves to the IRS as a

[[Page 44000]]

WHMT trustee and provide an Internet Web site that lists the WHMTs for 
which the trustee acts. The IRS and Treasury Department continue to 
request comments on the need for the directory and the format to be 
used for the directory, as well as comments regarding how to obtain 
information from trustees in the least burdensome manner.

II. Clarification of Market Discount Information Required To Be 
Reported Under the NMWHFIT Safe Harbor

    Commentators also noted the need for amendments to the information 
required to be reported under the NMWHFIT safe harbor with respect to 
market discount. If a NMWHFIT does not qualify for the reduced 
reporting in Sec.  1.671-5(c)(2)(iv)(B), Sec.  1.671-5(f)(1)(viii) 
requires the trustee to provide 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. The trust interest holder would then determine how much of the 
discount allocated to the sold assets had accrued since the trust 
interest holder purchased its interest using either a ratable or 
constant interest method, as appropriate.
    After reviewing the comments received after the publication of TD 
9241, the IRS and the Treasury Department noted that the information 
required to be reported under the safe harbor is incomplete 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 is required to be calculated and provided 
separately from market discount. Accordingly, to enable trust interest 
holders to determine the amount of market discount the interest holder 
is to allocate to a particular sale or disposition of debt instruments 
by the NMWHFIT, Sec.  1.671-5(f)(1)(viii)(A) is proposed to be amended 
with respect to NMWHFITs that hold debt instruments with OID, to 
include a requirement that trustees provide the aggregate adjusted 
issue price of the debt instruments held by the NMWHFIT per trust 
interest as of the start-up date as well as of January 1 of each 
subsequent year of the NMWHFIT. It is contemplated that trust interest 
holders will use the January 1 adjusted issue price for the year in 
which the trust interest holder purchased its interest to determine 
whether a trust interest was acquired with market discount. So as not 
to require trustees to calculate information for calendar years prior 
to the effective date of the final regulations, the proposed 
regulations only apply this requirement to NMWHFITs with a start-up 
date (as defined in Sec.  1.671-5(b)(19)) after January 24, 2006.

III. Request for Comments on the Expansion of the WHMT Safe Harbor

    The final regulations include safe harbor reporting rules for 
WHMTs. Section 1.671-5(g)(1)(ii)(B) provides that, to be eligible to 
report under the WHMT safe harbor, all interests in the WHMT must 
represent the right to receive an equal pro-rata share of both the 
income and the principal payments received by the WHMT on the mortgages 
it holds and that, for example, a WHMT that holds or issues trust 
interests that qualify as stripped interests under section 1286 may not 
report under the safe harbor. Further, a WHMT that holds an interest in 
another WHFIT is not eligible to report under the WHMT safe harbor. See 
Sec.  1.671-5(b)(11) (limiting the definition of a mortgage to exclude 
an interest in another WHFIT) and Sec.  1.671-5(g)(1)(ii)(E)(1) 
(providing that only WHMTs that directly hold mortgages may use the 
safe harbor). Since the publication of the final regulations, a 
commentator has requested that safe harbor reporting rules be developed 
for WHMTs that hold or issue stripped interests and for WHMTs that hold 
interests in other WHMTs. The IRS and the Treasury Department will 
consider this request in connection with further action on this 
proposed regulation and request additional comments regarding the need 
for additional WHMT safe harbor reporting rules, the nature of the 
arrangements for which the additional safe harbors are needed, the safe 
harbor reporting suggested and how such reporting is consistent with 
substantive law.

Effective Date

    The IRS and the Treasury Department expect to take prompt action to 
finalize the proposed regulations so that certain of the provisions 
that are only included in the proposed regulations can be made 
effective as of January 1, 2007 (see Sec.  1.671-5(m)) as though the 
provisions were included in TD 9241. The IRS and Treasury Department 
invite recommendations regarding the effective date of proposed 
paragraphs (c)(3) (requiring trustees to file an information return 
with the IRS and requiring WHMT trustees to provide an Internet Web 
site listing the WHMTs for which they act) and (c)(5) (providing for 
middlemen to refer to a directory created by the IRS), that may require 
some lead time for their implementation.

Special Analysis

    It has been determined that these proposed 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 these regulations 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 to 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 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 Code, 
these regulations will be submitted to the Chief Counsel for Advocacy 
of the Small Business Administration for comment on their impact on 
small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and the Treasury Department request comments on the 
clarity of the proposed rules and how they can be made easier to 
understand. All comments will be available for public inspection and 
copying. A public hearing will be scheduled if requested in writing by 
any person that timely submits written comments. If a public hearing is 
scheduled, notice of the date, time, and place for the public hearing 
will be published in the Federal Register.

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.

[[Page 44001]]

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

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

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

    Par. 2. Section 1.671-5 is amended by:
    1. Revising paragraphs (b)(5), (b)(8), and (b)(21).
    2. Revising paragraph (c)(2)(iv), (v)(C), (vi), and (vii).
    3. Revising paragraph (c)(3).
    4. Adding paragraph (c)(5)(iv).
    5. Revising paragraphs (f)(1)(i)(A) and (viii)(A).
    The revisions and addition read as follows:

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

* * * * *
    (b) * * *
    (5) [The text of proposed Sec.  1.671-5(b)(5) is the same as the 
text of Sec.  1.671-5T(b)(5) published elsewhere in this issue of the 
Federal Register].
* * * * *
    (8) [The text of proposed Sec.  1.671-5(b)(8) is the same as the 
text of Sec.  1.671-5T(b)(8) published elsewhere in this issue of the 
Federal Register].
* * * * *
    (21) [The text of proposed Sec.  1.671-5(b)(21) is the same as the 
text of Sec.  1.671-5T(b)(21) published elsewhere in this issue of the 
Federal Register].
* * * * *
    (c) * * *
    (2) * * *
    (iv) [The text of proposed Sec.  1.671-5(c)(2)(iv) is the same as 
the text of Sec.  1.671-5T(c)(2)(iv) published elsewhere in this issue 
of the Federal Register].
    (v) * * *
    (C) [The text of proposed Sec.  1.671-5(c)(2)(v)(C) is the same as 
the text of Sec.  1.671-5T(c)(2)(v)(C) published elsewhere in this 
issue of the Federal Register].
    (vi) [The text of proposed Sec.  1.671-5(c)(2)(vi) is the same as 
the text of Sec.  1.671-5T(c)(2)(vi) published elsewhere in this issue 
of the Federal Register].
    (vii) [The text of proposed Sec.  1.671-5(c)(2)(vii) is the same as 
the text of Sec.  1.671-5T(c)(2)(vii) published elsewhere in this issue 
of the Federal Register].
* * * * *
    (3) Requirement that trustees file an information return and that 
WHMT trustees list WHMTs on an Internet Web site--(i) Information 
return identifying a NMWHFIT to the IRS. For each NMWHFIT for which the 
trustee acts, the trustee of a NMWHFIT must file the form specified as 
the information return to be used for identifying a NMWHFIT to the IRS. 
The form must be filed by the due date provided by that form and must 
contain the information required to be provided by the form. If, 
following the publication of final regulations in the Federal Register, 
the IRS issues additional guidance that prescribes another method to be 
used to identify and provide information with respect to a NMWHFIT to 
the IRS, this method must be used.
    (ii) Information return for trustees of WHMTs and the requirement 
that the trustee maintain an Internet Web site listing the CUSIP 
numbers and names of the WHMTs for which the trustee acts. The trustee 
of a NMWHFIT must file the form specified as the information return to 
be used for identifying the trustee to the IRS. The form must be filed 
by the due date provided by that form and contain the information 
required to be provided by the form. In addition, the trustee must 
maintain a list of the WHMTs for which the trustee acts on the 
trustee's Internet Web site (or another site designated by the trustee 
for this purpose). If, following the publication of final regulations 
in the Federal Register, the IRS issues additional guidance that 
prescribes another method to be used to identify a trustee as a WHMT 
trustee and provide information with respect to the WHMTs for which the 
trustee acts, this method must be used.
* * * * *
    (5) * * *
    (iv) Directory of WHMT trustees and NMWHFITs. The IRS provides a 
directory of WHMT trustees and NMWHFITs, and WHMT trustees provide an 
Internet Web site at which the trustees list the WHMTs for which they 
act, to assist requesting persons in locating a representative of a 
WHFIT that will provide the information specified in paragraph (c) of 
this section. A requesting person may report consistent with this 
section for any arrangement identified in the directory as a NMWHFIT or 
on a WHMT trustee's Internet Web site as a WHMT provided that the 
requesting person does not have actual knowledge that the arrangement 
is not a WHFIT.
    (f) * * *
    (1) * * *
    (i) * * *
    (A) [The text of proposed Sec.  1.671-5(f)(1)(i)(A) is the same as 
the text of Sec.  1.671-5T(f)(1)(i)(A) published elsewhere in this 
issue of the Federal Register].
* * * * *
    (viii) Reporting market discount information under the safe 
harbor--(A) In general--(1) Trustee is 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 and the NMWHFIT 
has a start-up date on or after January 24, 2006, the aggregate 
adjusted issue price of the debt instruments per trust interest 
calculated as of the start-up date and as of January 1 for each 
subsequent year of the NMWHFIT.
    (2) Trustee is 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 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.
* * * * *

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 06-6650 Filed 7-28-06; 4:15 pm]
BILLING CODE 4830-01-P
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