[Federal Register Volume 65, Number 198 (Thursday, October 12, 2000)]
[Proposed Rules]
[Pages 60822-60824]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26350]



[[Page 60821]]

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Part VI





Department of the Treasury





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Internal Revenue Service



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26 CFR Part 301



Classification of Certain Pension and Employee Benefit Trusts, and 
Other Trusts; Proposed Rule

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

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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.

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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 Sec. 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, Sec. 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, Sec. 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 Sec. 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 Sec. 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

[[Page 60823]]

trusts under Sec. 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 Sec. 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 Sec. 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 
Sec. 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 Sec. 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 Sec. 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 
Sec. 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 
Sec. 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 Sec. 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 Sec. 301.7701-7(d)(1)(iv) of 
these proposed regulations or Sec. 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.

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    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:


Sec. 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 Sec. 601.601(d)(2) of this chapter);
    (I) An investment trust classified as a trust under Sec. 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 Government-sponsored 
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]
BILLING CODE 4830-01-P