60822 Federal Register / Vol. 65, No. 198 / Thursday, October 12, 2000 / Proposed Rules

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 301

[REG–108553–00]

RIN 1545–AY09

Classification of Certain Pension and

Employee Benefit Trusts, and Other

Trusts

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Notice of proposed rulemaking

and notice of public hearing.

SUMMARY: This document contains

proposed amendments to the

regulations defining a domestic or

foreign trust for federal tax purposes.

The proposed regulations will affect

certain specified employee benefit trusts

and investment trusts. The proposed

amendments provide that these

employee benefit trusts and investment

trusts are deemed to satisfy the control

test for domestic trust treatment if

United States trustees control all of the

substantial decisions of the trust made

by the trustees of the trust. This

document also provides notice of a

public hearing on these proposed

regulations.

DATES: Written or electronic comments

must be received by January 10, 2001.

Requests to speak (with outlines of oral

comments to be discussed) at the public

hearing scheduled for January 31, 2001,

at 10 a.m. must be submitted by January

10, 2001.

ADDRESSES: Send submissions to:

CC:M&SP:RU (REG–108553–00), room

5226, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. Submissions may be hand

delivered between the hours of 8 a.m.

and 5 p.m. to: CC:M&SP:RU (REG–

108553–00), Courier’s Desk, Internal

Revenue Service, 1111 Constitution

Avenue, NW., Washington, DC.

Alternatively, taxpayers may submit

comments electronically via the Internet

by selecting the ‘‘Tax Regs’’ option on

the IRS Home Page, or by submitting

comments directly to the IRS Internet

site at http://www.irs.ustreas.gov/

tax_regs/regslist.html. The public

hearing will be held in the Internal

Revenue Service Auditorium, Internal

Revenue Building, 1111 Constitution

Avenue, NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, James A.

Quinn, (202) 622–3060; concerning

submissions and the hearing, Guy R.

Traynor, (202) 622–7180 (not toll-free

numbers).

SUPPLEMENTARY INFORMATION:

Background

Section 401(a) requires a trust forming

part of a pension, profit-sharing, or

stock bonus plan (qualified plan trust)

to be created or organized in the United

States in order to be a qualified trust.

Similarly, section 408(a) requires an

individual retirement account trust (IRA

trust), which also includes a trust for a

Simple IRA described in section 408(p)

and a trust for a Roth IRA described in

section 408A, to be created or organized

in the United States. Section 1.401–

1(a)(3)(i) further provides that a trust

will not constitute a qualified trust

under section 401(a) unless the trust is

maintained at all times as a domestic

trust in the United States. Under

§ 1.408–2(b), a similar requirement

applies to an IRA trust.

Prior to the enactment of the Small

Business Job Protection Act (SBJPA),

Public Law 104–188 (110 Stat. 1755)

(August 20, 1996), the status of a

qualified plan trust as a domestic trust

generally turned on a facts and

circumstances determination that the

trust was a resident trust and was

subject to the continuous jurisdiction of

the United States. See, for example, Rev.

Rul. 70–242 (1970–1 C.B. 89) regarding

the determination of domestic trust

status for purposes of section 401(a).

The SBJPA and the Taxpayer Relief

Act of 1997 (TRA 97), Public Law 105–

34 (111 Stat. 788) (August 5, 1997),

amended section 7701(a)(30) to provide

objective criteria for determining

whether a trust is a domestic trust. New

section 7701(a)(30)(E) provides that a

trust will be treated as a domestic trust

if: (1) a court within the United States

is able to exercise primary supervision

over the administration of the trust

(court test), and (2) one or more United

States persons have the authority to

control all substantial decisions of the

trust (control test). These changes are

generally effective for taxable years

beginning after December 31, 1996.

Section 301.7701–7, published in the

Federal Register on February 2, 1999

(64 FR 4967), provides guidance under

section 7701(a)(30)(E) in determining

whether a trust is treated as a United

States person and therefore as a

domestic trust for federal tax purposes.

The regulations are generally effective

for taxable years ending after February

2, 1999, but may be applied by

taxpayers for taxable years beginning

after December 31, 1996. In addition,

section 1907(a)(3) of the SBJPA, as

amended by the TRA 97, generally

provides that, to the extent prescribed in

regulations, a trust that was in existence

on August 20, 1996, and that was

treated as a United States person on

August 19, 1996, may elect to continue

to be treated as a United States person.

Section 301.7701–7(f) provides rules

governing this election to continue to be

treated as a United States person.

Section 301.7701–7(d) provides

guidance on the application of the

control test, including defining United

States persons, substantial decisions,

and control. Generally, for purposes of

the control test, all persons with any

power over substantial decisions of the

trust, whether acting in a fiduciary

capacity or not, must be counted for

purposes of the control test.

However, § 301.7701–7(d)(1)(iv)

provides a special rule for certain

employee benefit trusts listed therein.

These trusts are required to be created

or organized in the United States and

are subject to other detailed

requirements for qualification under the

Internal Revenue Code (Code).

Therefore, § 301.7701–7(d)(1)(iv)

provides that these trusts are deemed to

satisfy the control test, provided that

United States fiduciaries control all of

the substantial decisions of the trust that

are made by the trustees or fiduciaries.

Section 301.7701–7(d)(1)(iv) authorizes

the Commissioner to designate

additional categories of trusts subject to

the special rule in revenue procedures,

notices, or other guidance published in

the Internal Revenue Bulletin.

Explanation

The IRS and the Treasury Department

have become aware of two additional

categories of trusts that should qualify

for the special control test rule in

§ 301.7701–7(d)(1)(iv).

The first category is group trusts

consisting of qualified plan trusts and

IRA trusts, as described in Rev. Rul. 81–

100 (1981–1 C.B. 326). If the

requirements set forth in Rev. Rul. 81–

100 are met, a group trust is itself

exempt from tax, and the tax-exempt

status of the participating trusts is not

affected by the pooling of their funds in

the group trust. One of the requirements

is that the group trust must be created

or organized in the United States and

must be maintained at all times as a

domestic trust in the United States.

Because these trusts are required to be

created or organized in the United

States and are subject to other detailed

requirements, they are similar to the

other categories of employee benefit

trusts listed in § 301.7701–7(d)(1)(iv).

Therefore, the proposed regulations add

group trusts described in Rev. Rul. 81–

100 to the categories of trusts that may

use the special control test rule.

The second category is certain

investment trusts that are classified as

Federal Register / Vol. 65, No. 198 / Thursday, October 12, 2000 / Proposed Rules 60823

trusts under § 301.7701–4(c)(1). An

investment trust with a single class of

ownership interests, representing

undivided beneficial interests in the

assets in the trust, is classified as a trust

if there is no power under the trust

agreement to vary the investment of the

certificate holders. In addition, an

investment trust with multiple classes

of ownership interests, in which there is

no power under the trust agreement to

vary the investment of the certificate

holders, is classified as a trust if the

trust is formed to facilitate direct

investment in the assets of the trust and

the existence of multiple classes of

ownership interests is incidental to that

purpose. These trusts are treated as

owned by the investors under the

grantor trust rules of subpart E, part I,

subchapter J, chapter 1 of the Code.

The proposed regulations add

investment trusts classified as trusts

under § 301.7701–4(c)(1) to the

categories of trusts that may use the

special control test rule, provided the

investment trusts meet the conditions

described in § 301.7701–7(d)(1)(iv)(I).

These trusts are subject to reporting

requirements as domestic grantor trusts,

and each investor must report the items

of income, deduction, and credit that

are attributable to the investor’s portion

of the trust. The conditions set forth in

the proposed regulations are intended to

ensure that all trustees are United States

persons including at least one

institutional United States trustee, the

sponsors (persons who exchange

investment assets for beneficial interests

with a view to selling the beneficial

interests) are United States persons, and

the beneficial interests are widely

offered for sale primarily in the United

States to United States persons. An

investment trust that satisfies these

conditions is deemed to satisfy the

control test even though one or more

investors may be foreign persons with

the power to make a substantial

decision of the trust.

In addition, the IRS and the Treasury

Department have become aware of

concerns expressed by taxpayers in

applying the special rule of § 301.7701–

7(d)(1)(iv) with respect to determining

whether a person is or is not a fiduciary

for purposes of the control test. For

example, under section 3(14)(A) of the

Employee Retirement Income Security

Act of 1974 (ERISA), Public Law 93–406

(88 Stat. 829) (September 2, 1974), a

variety of persons in addition to the

trustee(s) is considered fiduciaries with

respect to an employee benefit trust. In

contrast, under ordinary trust principles

the fiduciary of a trust is generally

considered to be the trustee holding

legal title to the trust assets on behalf of

those having a beneficial interest

therein. Section 301.7701–6(b).

Therefore, these regulations propose to

amend § 301.7701–7(d)(1)(iv) relating to

the application of the control test of

section 7701(a)(30)(E) to clarify that

employee benefit trusts and certain

investment trusts identified in the

regulations are deemed to satisfy the

control test if United States trustees

control all of the substantial decisions of

the trust made by the trustees of the

trust.

Taxpayers concerned with

maintaining domestic trust status

should also note that, in appropriate

cases, it may still be possible to elect

pursuant to § 301.7701–7(f) to treat a

trust existing on August 19, 1996, as a

United States person.

Application to Certain Pension Trusts

Created or Organized in Puerto Rico

Section 1022(i)(1) of ERISA provides

for tax exemption for certain trusts

created or organized in Puerto Rico that

form part of a pension, profit-sharing, or

stock bonus plan. Section 1022(i)(2) and

§ 1.401(a)–50 generally provide that the

administrator of such a trust may elect

to have the trust treated as a trust

created or organized in the United

States for purposes of section 401(a). In

light of the changes made to section

7701(a)(30) in the SBJPA and the TRA

97, and the ensuing regulations, some

taxpayers have expressed concerns

regarding the continuing application of

sections 1022(i)(1) and (2) and § 1.401–

50 to a pension trust created or

organized in Puerto Rico that is not a

domestic trust within the meaning of

section 7701(a)(30). Because the

application of these provisions is not

restricted to trusts that are domestic

trusts within the meaning of section

7701(a)(30), the 1996 and 1997

amendments to section 7701(a)(30) and

the ensuing regulations do not affect the

application of these provisions.

Proposed Effective Date

The amendments to the regulations

are proposed to be applicable to trusts

for taxable years ending on or after the

date on which these regulations are

published as final regulations in the

Federal Register. It is anticipated that

the final regulations will provide that

trusts will be able to rely on the final

regulations for taxable years beginning

after December 31, 1996, and for

electing trusts under section

1907(a)(3)(B) of the SBJPA for taxable

years ending after August 20, 1996. In

addition, for taxable years beginning

after December 31, 1996, and taxable

years ending before these regulations are

finalized, or for electing trusts under

section 1907(a)(3)(B) of the SBJPA for

taxable years ending after August 20,

1996, and before these regulations are

finalized, the status of a trust as a

qualified plan trust under section

401(a), an IRA trust under section

408(a), or any other employee benefit

trust described in § 301.7701–7(d)(1)(iv)

of these proposed regulations will not

be challenged by the IRS based on a

failure of the trust to satisfy the control

test of section 7701(a)(30)(E)(ii) and,

therefore, a failure to be maintained at

all times as a domestic trust in the

United States, if the trust satisfies the

control test safe harbor set forth in

§ 301.7701–7(d)(1)(iv) of these proposed

regulations or § 301.7701–7(d)(1)(iv) of

the final regulations published in the

Federal Register on February 2, 1999.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a

significant regulatory action as defined

in Executive Order 12866. Therefore, a

regulatory assessment is not required. It

also has been determined that section

553(b) of the Administrative Procedure

Act (5 U.S.C. chapter 5) does not apply

to these regulations, and because the

regulation does not impose a collection

of information on small entities, the

Regulatory Flexibility Act (5 U.S.C.

chapter 6) does not apply. Pursuant to

section 7805(f) of the Internal Revenue

Code, this notice of proposed

rulemaking will be submitted to the

Chief Counsel for Advocacy of the Small

Business Administration for comment

on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations,

consideration will be given to any

written comments (preferably a signed

original and eight (8) copies) that are

submitted timely to the IRS. The IRS

and the Treasury Department

specifically request comments on the

clarity of the proposed regulations and

how they can be made easier to

understand. All comments will be

available for public inspection and

copying.

A public hearing has been scheduled

for January 31, 2001, at 10 a.m. in the

Internal Revenue Service Auditorium,

Internal Revenue Building, 1111

Constitution Avenue, NW., Washington

DC. Because of access restrictions,

visitors will not be admitted beyond the

Internal Revenue Building lobby more

than 15 minutes before the hearing

starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

60824 Federal Register / Vol. 65, No. 198 / Thursday, October 12, 2000 / Proposed Rules

Persons that wish to present oral

comments at the hearing must submit

written comments by January 10, 2001,

and submit an outline of the topics to

be discussed and the time to be devoted

to each topic (preferably a signed

original and eight (8) copies) by January

10, 2001.

A period of 10 minutes will be

allotted to each person for making

comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information: The principal

author of these regulations is James A.

Quinn of the Office of Associate Chief

Counsel (Passthroughs and Special

Industries). However, other personnel

from the IRS and Treasury Department

participated in their development.

List of Subjects in 26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 301 is

proposed to be amended as follows:

PART 301—PROCEDURE AND

ADMINISTRATION

Paragraph 1. The authority citation

for part 301 continues to read in part as

follows:

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

Par. 2. Section 301.7701–7 is

amended as follows:

1. Paragraph (d)(1)(iv) introductory

text is revised.

2. Paragraph (d)(1)(iv)(H) is

redesignated as paragraph (d)(1)(iv)(J).

3. New paragraphs (d)(1)(iv)(H) and (I)

are added.

4. Paragraph (d)(1)(v) Example 1 is

revised and Example 5 is added.

5. The first sentence of paragraph

(e)(1) is revised.

6. Paragraph (e)(3) is added.

The revisions and additions read as

follows:

§ 301.7701–7 Trusts—domestic and

foreign.

* * * * *

(d) * * *

(1) * * *

(iv) Safe harbor for certain employee

benefit trusts and investment trusts.

Notwithstanding the provisions of this

paragraph (d), the trusts listed in this

paragraph (d)(1)(iv) are deemed to

satisfy the control test set forth in

paragraph (a)(1)(ii) of this section,

provided that United States trustees

control all of the substantial decisions

made by the trustees of the trust—

* * * * *

(H) A group trust described in Rev.

Rul. 81–100 (1981–1 C.B. 326) (See

§ 601.601(d)(2) of this chapter);

(I) An investment trust classified as a

trust under § 301.7701–4(c), provided

that the following conditions are

satisfied—

(1) All trustees are United States

persons and at least one of the trustees

is a bank, as defined in section 581, or

a United States Government-owned

agency or United States Governmentsponsored enterprise;

(2) All sponsors (persons who

exchange investment assets for

beneficial interests with a view to

selling the beneficial interests) are

United States persons; and

(3) The beneficial interests are widely

offered for sale primarily in the United

States to United States persons;

* * * * *

(v) * * *

Example 1. Trust is a testamentary trust

with three fiduciaries, A, B, and C. A and B

are United States citizens and C is a

nonresident alien. No persons except the

fiduciaries have authority to make any

decisions of the trust. The trust instrument

provides that no substantial decisions of the

trust can be made unless there is unanimity

among the fiduciaries. The control test is not

satisfied because United States persons do

not control all the substantial decisions of the

trust. No substantial decisions can be made

without C’s agreement.

* * * * *

Example 5. X, a foreign corporation,

conducts business in the United States

through various branch operations. X has

United States employees and has established

a trust as part of a qualified employee benefit

plan under section 401(a) for these

employees. The trust is established under the

laws of State A, and the trustee of the trust

is B, a United States bank governed by the

laws of State A. B holds legal title to the trust

assets for the benefit of the trust

beneficiaries. A plan committee makes

decisions with respect to the plan and the

trust. The plan committee can direct B’s

actions with regard to those decisions and

under the governing documents B is not

liable for those decisions. Members of the

plan committee consist of United States

persons and nonresident aliens, but

nonresident aliens make up a majority of the

plan committee. Decisions of the plan

committee are made by majority vote. In

addition, X retains the power to terminate the

trust and to replace the United States trustee

or to appoint additional trustees. This trust

is deemed to satisfy the control test under

paragraph (d)(1)(iv) of this section because B,

a United States person, is the trust’s only

trustee. Any powers held by the plan

committee or X are not considered under the

safe harbor of paragraph (d)(1)(iv) of this

section. In the event that X appoints

additional trustees including foreign trustees,

any powers held by such trustees must be

considered in determining whether United

States trustees control all substantial

decisions made by the trustees of the trust.

* * * * *

(e) Effective date—(1) General rule.

Except for the election to remain a

domestic trust provided in paragraph (f)

of this section and except as provided

in paragraph (e)(3) of this section, this

section is applicable to taxable years

ending after February 2, 1999.

* * * * *

(3) Effective date of safe harbor for

certain employee benefit trusts and

investment trusts. Paragraphs (d)(1)(iv)

and (v) Examples 1 and 5 of this section

apply to trusts for taxable years ending

on or after the date of publication of

final regulations in the Federal Register.

Paragraphs (d)(1)(iv) and (v) Examples 1

and 5 of this section may be relied on

by trusts for taxable years beginning

after December 31, 1996, and also may

be relied on by trusts whose trustees

have elected to apply sections

7701(a)(30) and (31) to the trusts for

taxable years ending after August 20,

1996, under section 1907(a)(3)(B) of the

SBJP Act.

* * * * *

David A. Mader,

Acting Commissioner of Internal Revenue.

[FR Doc. 00–26350 Filed 10–10–00; 3:31 pm]

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