Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations 19189

these issues, the regulations proposed

by CO–26–95 are adopted without any

change in language. However, although

the regulations specifically concern

underwriters, it is intended that its

principles could apply equally in

factually analogous situations. For

example, if the ownership by other

intermediaries in the distribution of

stock or partnership interests, such as

broker-dealers, is transitory, that

ownership should also be disregarded.

Effect on Other Documents

The following publication is obsolete

as of May 1, 1996: Rev. Rul. 78–294

(1978–2 C.B. 141).

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

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) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Internal Revenue

Code, the notice of proposed rulemaking

preceding these regulations was

submitted to the Chief Counsel for

Advocacy of the Small Business

Administration for comment on its

impact on small business.

Drafting Information

The principal authors of these

regulations are Susan T. Edlavitch of the

Office of Assistant Chief Counsel

(Corporate) and Brian J. O’Connor,

formerly of the Office of Assistant Chief

Counsel (Passthroughs and Special

Industries). However, other personnel

from the IRS and Treasury participated

in their development.

List of Subjects in 26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

Adoption of 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 is amended by adding entries

in numerical order to read as follows:

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

Section 1.351–1 also issued under 26

U.S.C. 351. * * *

Section 1.721–1 also issued under 26

U.S.C. 721. * * *

Par. 2. In § 1.351–1, paragraph (a)(3)

is added to read as follows:

§ 1.351–1 Transfer to corporation

controlled by transferor.

(a) * * *

(3) Underwritings of stock—(i) In

general. For the purpose of section 351,

if a person acquires stock of a

corporation from an underwriter in

exchange for cash in a qualified

underwriting transaction, the person

who acquires stock from the

underwriter is treated as transferring

cash directly to the corporation in

exchange for stock of the corporation

and the underwriter is disregarded. A

qualified underwriting transaction is a

transaction in which a corporation

issues stock for cash in an underwriting

in which either the underwriter is an

agent of the corporation or the

underwriter’s ownership of the stock is

transitory.

(ii) Effective date. This paragraph

(a)(3) is effective for qualified

underwriting transactions occurring on

or after May 1, 1996.

* * * * *

Par. 3. In § 1.721–1, paragraph (c) is

added to read as follows:

§ 1.721–1 Nonrecognition of gain or loss

on contribution.

* * * * *

(c) Underwritings of partnership

interests—(1) In general. For the

purpose of section 721, if a person

acquires a partnership interest from an

underwriter in exchange for cash in a

qualified underwriting transaction, the

person who acquires the partnership

interest is treated as transferring cash

directly to the partnership in exchange

for the partnership interest and the

underwriter is disregarded. A qualified

underwriting transaction is a transaction

in which a partnership issues

partnership interests for cash in an

underwriting in which either the

underwriter is an agent of the

partnership or the underwriter’s

ownership of the partnership interests is

transitory.

(2) Effective date. This paragraph (c)

is effective for qualified underwriting

transactions occurring on or after May 1,

1996.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: March 26, 1996.

Leslie Samuels,

Assistant Secretary of Treasury.

[FR Doc. 96–10396 Filed 4–30–96; 8:45 am]

BILLING CODE 4830–01–P

26 CFR Parts 1, 301, and 602

[TD 8668]

RIN 1545–AT02

Environmental Settlement Funds—

Classification

AGENCY: Internal Revenue Service (IRS),

Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final

regulations relating to the classification

of certain organizations as trusts for

federal tax purposes. The final

regulations provide guidance to

taxpayers on the proper classification of

trusts formed to collect and disburse

amounts for environmental remediation

of an existing waste site to discharge

taxpayers’ liability or potential liability

under applicable environmental laws.

DATES: These regulations are effective

May 1, 1996.

For dates of applicability, see

§ 301.7701–4(e)(5).

FOR FURTHER INFORMATION CONTACT:

James A. Quinn, (202) 622–3060 (not a

toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information

contained in these final regulations has

been reviewed and approved by the

Office of Management and Budget in

accordance with the Paperwork

Reduction Act (44 U.S.C. 3507) under

control number 1545–1465. This

information is required by the IRS to

ensure the proper reporting of items of

income and expense of an

environmental remediation trust in

which a portion of the trust is treated as

owned by a grantor.

An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information

displays a valid control number.

The estimated annual burden per

respondent is 4 hours.

Comments concerning the accuracy of

this burden estimate and suggestions for

reducing this burden should be sent to

the Internal Revenue Service, Attn: IRS

Reports Clearance Officer, T:FP,

Washington, DC 20224, and to the

Office of Management and Budget, Attn:

Desk Officer for the Department of the

Treasury, Office of Information and

Regulatory Affairs, Washington, DC

20503.

Books or records relating to this

collection of information must be

retained as long as their contents may

become material in the administration
19190 Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations

of any internal revenue law. Generally,

tax returns and tax return information

are confidential, as required by 26

U.S.C. 6103.

Background

On August 4, 1995, the IRS published

in the Federal Register a notice of

proposed rulemaking (60 FR 39903) to

provide guidance on the classification of

certain organizations as trusts for federal

tax purposes. Written comments

responding to the notice were received,

and a public hearing was held on

October 26, 1995. After consideration of

the comments received, the proposed

regulations are adopted as revised by

this Treasury decision.

Summary of Significant Comments and

Revisions

The proposed regulations provide that

an environmental remediation trust is

considered a trust for purposes of the

Internal Revenue Code. Under the

proposed regulations, a trust is an

environmental remediation trust if the

primary purpose of the trust is

collecting and disbursing amounts for

environmental remediation of an

existing waste site. One commentator

suggested that ‘‘response costs’’ should

be considered amounts incurred for

environmental remediation. To address

this concern, the final regulations clarify

that environmental remediation

includes the costs of remedying and

removing environmental contamination.

One commentator also suggested that

the final regulations define the term

existing waste site. The final regulations

do not adopt this comment. The term

existing waste site should be sufficiently

specific to allow taxpayers to establish

an environmental remediation trust for

any contaminated site that currently

requires remediation under

environmental laws.

The proposed regulations provide that

all contributors to an environmental

remediation trust must have potential

liability or a reasonable expectation of

liability under federal, state, or local

environmental laws for environmental

remediation of the waste site. A

commentator suggested that the final

regulations be clarified to provide that

eligible contributors include

contributors with ‘‘actual’’ as well as

potential liability and contributors who

are released from liability upon their

contribution to the trust. The final

regulations clarify that contributors

having ‘‘actual’’ liability are eligible

contributors. The final regulations do

not address the treatment of

contributors that are released from

liability by the governmental authority

upon contribution to the trust; the

regulations are intended only to address

the tax treatment of environmental

remediation trusts in which contributors

continue to have actual or potential

liability (and thus are treated as owners

of the trust under section 677). In

situations where one or more

contributors are released from liability

by the governmental authority upon

contribution to the trust, the rules for

qualified settlement funds may apply to

the entire trust. See § 1.468B–1(c) and

(h)(2). If such contributors contribute

amounts to a trust that is separate from

the environmental remediation trust,

however, the classification of the

environmental remediation trust as a

trust will not be affected.

One commentator suggested that a

cross-reference to these regulations be

inserted in § 1.671–4(a) and § 1.677(a)–

1(d) because the proposed regulations

address reporting and grantor trust

issues. The final regulations include the

suggested cross-references.

Other commentators suggested that

the final regulations address the timing

of deductions for contributions to the

trust, the treatment of interest earned by

the trust, and other federal tax

consequences of the trust. The final

regulations do not adopt these

suggestions. The regulations are limited

to the classification of an environmental

remediation trust as a trust for purposes

of section 7701 and do not address or

affect the timing or amount of a

deduction for environmental

remediation costs. Amounts contributed

to an environmental remediation trust

and interest earned on those amounts

must be taken into account under the

appropriate federal tax accounting rules,

including the economic performance

rules of section 461(h). Under those

rules, taxpayers generally cannot deduct

contributions to the trust at the time of

contribution or deduct earnings at the

time they are received by the trust.

The proposed regulations provide that

the regulations will apply to trusts

formed on or after the date of

publication of final regulations. One

commentator suggested that the final

regulations should be effective, at the

trustee’s option, to trusts meeting the

requirements of an environmental

remediation trust established prior to

such date, effective as of any date

designated by the trustee. The

commentator further suggested that,

with respect to amounts held in a fund,

account, or trust meeting the

requirements of an environmental

remediation trust prior to the date of

publication of the final regulations, the

IRS should not challenge the

classification of the fund, account, or

trust as a trust for federal tax purposes.

The final regulations are effective for

trusts meeting the definition of an

environmental remediation trust that are

formed on or after May 1, 1996. The

final regulations may be relied on by

trusts formed before May 1, 1996, if the

trust has at all times met all

requirements of the final regulations

and the grantors reported items of

income and deduction consistent with

the final regulations on original or

amended returns. This provision allows

a trust and grantors that have met all of

the requirements of the final regulations

throughout the existence of the trust to

treat the trust as an environmental

remediation trust. The final regulations

also provide that, for trusts formed

before May 1, 1996, that are not

described by the preceding rule, the

Commissioner may permit by letter

ruling, in appropriate circumstances,

the final regulations to be applied

subject to appropriate terms and

conditions.

Special Analyses

It has been determined that this

Treasury decision is not a significant

regulatory action as defined in EO

12866. Therefore, a regulatory

assessment is not required. It has also

been determined that section 553(b) of

the Administrative Procedure Act (5

U.S.C. chapter 5) and the Regulatory

Flexibility Act (5 U.S.C. chapter 6) do

not apply to these regulations, and,

therefore, a Regulatory Flexibility

Analysis is not required. Pursuant to

section 7805(f) of the Code, the notice

of proposed rulemaking preceding these

regulations was submitted to the Small

Business Administration for comment

on its impact on small business.

Drafting Information

The principal author of these

regulations is James A. Quinn of the

Office of Assistant Chief Counsel

(Passthroughs and Special Industries).

However, other personnel from the IRS

and Treasury Department participated

in their development.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and

recordkeeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

26 CFR Part 602

Reporting and recordkeeping

requirements.
Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations 19191

Amendments to the Regulations

Accordingly, 26 CFR parts 1, 301, and

602 are 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 1.671–4 is amended by

adding a sentence to the end of

paragraph (a) as follows:

§ 1.671–4 Method of reporting.

(a) * * * Section 301.7701–4(e)(2) of

this chapter provides guidance on how

these reporting rules apply to an

environmental remediation trust.

* * * * *

Par. 3. Section 1.677(a)–1 is amended

by adding a sentence to the end of

paragraph (d) as follows:

§ 1.677(a)–1 Income for benefit of grantor;

general rule.

* * * * *

(d) * * * See § 301.7701–4(e) of this

chapter for rules on the classification of

and application of section 677 to an

environmental remediation trust.

* * * * *

PART 301—PROCEDURE AND

ADMINISTRATION

Par. 4. The authority citation for part

301 continues to read as follows:

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

Par. 5. Section 301.7701–4(e) is added

to read as follows:

§ 301.7701–4 Trusts.

* * * * *

(e) Environmental remediation trusts.

(1) An environmental remediation trust

is considered a trust for purposes of the

Internal Revenue Code. For purposes of

this paragraph (e), an organization is an

environmental remediation trust if the

organization is organized under state

law as a trust; the primary purpose of

the trust is collecting and disbursing

amounts for environmental remediation

of an existing waste site to resolve,

satisfy, mitigate, address, or prevent the

liability or potential liability of persons

imposed by federal, state, or local

environmental laws; all contributors to

the trust have (at the time of

contribution and thereafter) actual or

potential liability or a reasonable

expectation of liability under federal,

state, or local environmental laws for

environmental remediation of the waste

site; and the trust is not a qualified

settlement fund within the meaning of

§ 1.468B–1(a) of this chapter. An

environmental remediation trust is

classified as a trust because its primary

purpose is environmental remediation

of an existing waste site and not the

carrying on of a profit-making business

that normally would be conducted

through business organizations

classified as corporations or

partnerships. However, if the remedial

purpose is altered or becomes so

obscured by business or investment

activities that the declared remedial

purpose is no longer controlling, the

organization will no longer be classified

as a trust. For purposes of this

paragraph (e), environmental

remediation includes the costs of

assessing environmental conditions,

remedying and removing environmental

contamination, monitoring remedial

activities and the release of substances,

preventing future releases of substances,

and collecting amounts from persons

liable or potentially liable for the costs

of these activities. For purposes of this

paragraph (e), persons have potential

liability or a reasonable expectation of

liability under federal, state, or local

environmental laws for remediation of

the existing waste site if there is

authority under a federal, state, or local

law that requires or could reasonably be

expected to require such persons to

satisfy all or a portion of the costs of the

environmental remediation.

(2) Each contributor (grantor) to the

trust is treated as the owner of the

portion of the trust contributed by that

grantor under rules provided in section

677 and § 1.677(a)–1(d) of this chapter.

Section 677 and § 1.677(a)–1(d) of this

chapter provide rules regarding the

treatment of a grantor as the owner of

a portion of a trust applied in discharge

of the grantor’s legal obligation. Items of

income, deduction, and credit

attributable to an environmental

remediation trust are not reported by the

trust on Form 1041, but are shown on

a separate statement to be attached to

that form. See § 1.671–4(a) of this

chapter. The trustee must also furnish to

each grantor a statement that shows all

items of income, deduction, and credit

of the trust for the grantor’s taxable year

attributable to the portion of the trust

treated as owned by the grantor. The

statement must provide the grantor with

the information necessary to take the

items into account in computing the

grantor’s taxable income, including

information necessary to determine the

federal tax treatment of the items (for

example, whether an item is a

deductible expense under section 162(a)

or a capital expenditure under section

263(a)) and how the item should be

taken into account under the economic

performance rules of section 461(h) and

the regulations thereunder. See § 1.461–

4 of this chapter for rules relating to

economic performance.

(3) All amounts contributed to an

environmental remediation trust by a

grantor (cash-out grantor) who, pursuant

to an agreement with the other grantors,

contributes a fixed amount to the trust

and is relieved by the other grantors of

any further obligation to make

contributions to the trust, but remains

liable or potentially liable under the

applicable environmental laws, will be

considered amounts contributed for

remediation. An environmental

remediation trust agreement may direct

the trustee to expend amounts

contributed by a cash-out grantor (and

the earnings thereon) before expending

amounts contributed by other grantors

(and the earnings thereon). A cash-out

grantor will cease to be treated as an

owner of a portion of the trust when the

grantor’s portion is fully expended by

the trust.

(4) The provisions of this paragraph

(e) may be illustrated by the following

example:

Example. (a) X, Y, and Z are calendar year

corporations that are liable for the

remediation of an existing waste site under

applicable federal environmental laws. On

June 1, 1996, pursuant to an agreement with

the governing federal agency, X, Y, and Z

create an environmental remediation trust

within the meaning of paragraph (e)(1) of this

section to collect funds contributed to the

trust by X, Y, and Z and to carry out the

remediation of the waste site to the

satisfaction of the federal agency. X, Y, and

Z are jointly and severally liable under the

federal environmental laws for the

remediation of the waste site, and the federal

agency will not release X, Y, or Z from

liability until the waste site is remediated to

the satisfaction of the agency.

(b) The estimated cost of the remediation

is $20,000,000. X, Y, and Z agree that, if Z

contributes $1,000,000 to the trust, Z will not

be required to make any additional

contributions to the trust, and X and Y will

complete the remediation of the waste site

and make additional contributions if

necessary.

(c) On June 1, 1996, X, Y, and Z each

contribute $1,000,000 to the trust. The trust

agreement directs the trustee to spend Z’s

contributions to the trust and the income

allocable to Z’s portion before spending X’s

and Y’s portions. On November 30, 1996, the

trustee disburses $2,000,000 for remediation

work performed from June 1, 1996, through

September 30, 1996. For the six-month

period ending November 30, 1996, the

interest earned on the funds in the trust was

$75,000, which is allocated in equal shares

of $25,000 to X’s, Y’s, and Z’s portions of the

trust.

(d) Z made no further contributions to the

trust. Pursuant to the trust agreement, the

trustee expended Z’s portion of the trust

before expending X’s and Y’s portion.
19192 Federal Register / Vol. 61, No. 85 / Wednesday, May 1, 1996 / Rules and Regulations

Therefore, Z’s share of the remediation

disbursement made in 1996 is $1,025,000

($1,000,000 contribution by Z plus $25,000 of

interest allocated to Z’s portion of the trust).

Z takes the $1,025,000 disbursement into

account under the appropriate federal tax

accounting rules. In addition, X’s share of the

remediation disbursement made in 1996 is

$487,500, and Y’s share of the remediation

disbursement made in 1996 is $487,500. X

and Y take their respective shares of the

disbursement into account under the

appropriate federal tax accounting rules.

(e) The trustee made no further

remediation disbursements in 1996, and X

and Y made no further contributions in 1996.

From December 1, 1996, to December 31,

1996, the interest earned on the funds

remaining in the trust was $5,000, which is

allocated $2,500 to X’s portion and $2,500 to

Y’s portion. Accordingly, for 1996, X and Y

each had interest income of $27,500 from the

trust and Z had interest income of $25,000

from the trust.

(5) This paragraph (e) is applicable to

trusts meeting the requirements of

paragraph (e)(1) of this section that are

formed on or after May 1, 1996. This

paragraph (e) may be relied on by trusts

formed before May 1, 1996, if the trust

has at all times met all requirements of

this paragraph (e) and the grantors have

reported items of ,income and

deduction consistent with this

paragraph (e) on original or amended

returns. For trusts formed before May 1,

1996, that are not described in the

preceding sentence, the Commissioner

may permit by letter ruling, in

appropriate circumstances, this

paragraph (e) to be applied subject to

appropriate terms and conditions.

PART 602—OMB CONTROL NUMBERS

UNDER THE PAPERWORK

REDUCTION ACT

Par. 6. The authority citation for part

602 continues to read as follows:

Authority: 26 U.S.C. 7805.

§ 602.101 [Amended]

Par. 7. In § 602.101, paragraph (c) is

amended by adding the entry

‘‘301.7701–4 . . . . 1545–1465’’ in

numerical order to the table.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

Approved: April 5, 1996.

Leslie Samuels,

Assistant Secretary of the Treasury.

[FR Doc. 96–10544 Filed 4–30–96; 8:45 am]

BILLING CODE 4830–01–P

DEPARTMENT OF TRANSPORTATION

Coast Guard

33 CFR Parts 100 and 165

[CGD 96–024]

Safety Zones, Security Zones, and

Special Local Regulations

AGENCY: Coast Guard, DOT.

ACTION: Notice of temporary rules

issued.

SUMMARY: This document provides

required notice of substantive rules

adopted by the Coast Guard and

temporarily effective between January 1,

1996 and March 31, 1996, which were

not published in the Federal Register.

This quarterly notice lists temporary

local regulations, security zones, and

safety zones, which were of limited

duration and for which timely

publication in the Federal Register was

not possible.

DATES: This notice lists temporary Coast

Guard regulations that became effective

and were terminated between January 1,

1996 and March 31, 1996, as well as

several regulations which were not

included in the previous quarterly list.

ADDRESSES: The complete text of these

temporary regulations may be examined

at, and is available on request, from

Executive Secretary, Marine Safety

Council (G–LRA), U.S. Coast Guard

Headquarters, 2100 Second Street, SW.,

Washington, DC 20593–0001.

FOR FURTHER INFORMATION CONTACT:

Commander Stephen J. Darmody,

Executive Secretary, Marine Safety

Council at (202) 267–1477 between the

hours of 8 a.m. and 3 p.m., Monday

through Friday.

SUPPLEMENTARY INFORMATION: District

Commanders and Captains of the Port

(COTP) must be immediately responsive

to the safety needs of the waters within

their jurisdiction; therefore, District

Commanders and COTPs have been

delegated the authority to issue certain

local regulations. Safety zones may be

established for safety or environmental

purposes. A safety zone may be

stationary and described by fixed limits

or it may be described as a zone around

a vessel in motion. Security zones limit

access to vessels, ports, or waterfront

facilities to prevent injury or damage.

Special local regulations are issued to

enhance the safety of participants and

spectators at regattas and other marine

events. Timely publication of these

regulations in the Federal Register is

often precluded when a regulation

responds to an emergency, or when an

event occurs without sufficient advance

notice. However, the affected public is

informed of these regulations through

Local Notices to Mariners, press

releases, and other means. Moreover,

actual notification is provided by Coast

Guard patrol vessels enforcing the

restrictions imposed by the regulation.

Because mariners are notified by

Coast Guard officials on-scene prior to

enforcement action, Federal Register

notice is not required to place the

special local regulation, security zone,

or safety zone in effect. However, the

Coast Guard, by law, must publish in

the Federal Register notice of

substantive rules adopted. To discharge

this legal obligation without imposing

undue expense on the public, the Coast

Guard periodically publishes a list of

these temporary special local

regulations, security zones, and safety

zones. Permanent regulations are not

included in this list because they are

published in their entirety in the

Federal Register. Temporary regulations

may also be published in their entirety

if sufficient time is available to do so

before they are placed in effect or

terminated. These safety zones, special

local regulations and security zones

have been exempted from review under

E.O. 12866 because of their emergency

nature, or limited scope and temporary

effectiveness.

The following regulations were placed

in effect temporarily during the period

January 1, 1996 and March 31, 1996,

unless otherwise indicated.

Stephen J. Darmody,

Commander, U.S. Coast Guard, Executive

Secretary Marine Safety Council.

QUARTERLY REPORT

Docket No. Location Type Effective

date

Corpus Christi 96–001 ........ Gulf Intracoastal Waterway ............................................................................ Safety Zone ............... 1/13/96

Corpus Christi 96–002 ........ Gulf Intracoastal Waterway ............................................................................ Safety Zone ............... 1/22/96

Hampton Roads 95–079 ..... Chesapeake Bay, VA ..................................................................................... Safety Zone ............... 11/13/95