Classification of Certain Pension &
Employee Benefit Trusts, & Other Trusts

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 301 [TD 8962 ] RIN 1545-AY09

TITLE: Classification of Certain Pension and Employee Benefit
Trusts, and Other Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations amending the
regulations defining a domestic or foreign trust for federal tax
purposes. The regulations will affect certain specified employee
benefit trusts and investment trusts. The regulations 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.

DATES: Effective Date: These regulations are effective August 9,
2001. Applicability DATES: For dates of applicability of
§301.7701-7(d)(1)(iv) and (v) Examples 1 and 5, see
§301.7701-7(e)(3).

FOR FURTHER INFORMATION CONTACT: James A. Quinn at (202) 622-3060
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On October 12, 2000, the Treasury Department and the IRS published a
notice of proposed rulemaking (REG-108553-00) under section 7701 of
the Internal Revenue Code (Code) in the Federal Register (65 FR
60822). The proposed regulations add group trusts consisting of
qualified plan trusts and IRA trusts, as described in Rev. Rul.
81-100 (1981-1 C.B. 326), and certain investment trusts to the
categories of trusts that may use the safe harbor in
§301.7701-7(d)(1)(iv) of the Procedure and Administration
Regulations relating to the application of the control test of
section 7701(a)(30)(E). The proposed regulations also modify the
safe harbor in §301.7701-7(d)(1)(iv) to clarify that employee
benefit trusts and 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. No one requested to speak at the public
hearing scheduled for January 31, 2001. Accordingly, the public
hearing was canceled on January 26, 2001 (66 FR 7867). Comments in
response to the notice of proposed rulemaking were received and are
addressed in the following Explanation and Summary of Comments. This
document finalizes the proposed regulations without change.

Exp anation and Summary of Comments

Reporting Requirements for Foreign Widely Held Fixed Investment
Trusts Two commentators were concerned about United States investors
in widely held fixed investment trusts that are outside the safe
harbor provided by §301.7701-7(d)(1)(iv)(I) and therefore are
treated as foreign trusts. These.3 commentators suggested that
United States investors in such trusts should not be subject to
reporting under section 6048 and to the corresponding penalties in
section 6677 for failure to comply with the section 6048 reporting
requirements. A guidance project under section 671 concerning
reporting requirements for all widely held fixed investment trusts
is currently under consideration. Accordingly, these regulations do
not specifically address this issue.

Application to Certain Pension Trusts Created or Organized in Puerto
Rico Section 1022(i)(1) of the Employee Retirement Income Security
Act of 1974, Public Law 93-406 (88 Stat. 829) (September 2, 1974),
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 of the Income
Tax Regulations 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 Small
Business Job Protection Act, Public Law 104-188 (110 Stat. 1755)
(August 20, 1996), and the Taxpayer Relief Act of 1997, Public Law
105-34 (111 Stat. 788) (August 5, 1997), 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),.4 the 1996 and 1997 amendments to section
7701(a)(30) and the ensuing regulations do not affect the
application of these provisions.

Special Analyses

It has been determined that this Treasury decision 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 regulations do 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 Code, the notice
of proposed rulemaking preceding these regulations was submitted to
the Small Business Administration for comment on the regulations'
impact on small business.

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. Adoption of Amendments to the Regu ations Accordingly,
26 CFR part 301 is 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 (d)(1)(iv)(I) are added.

4. In 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);.6

(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 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.7 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 August 9, 2001. 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.

* * * * *

Deputy Commissioner of Internal Revenue

Approved:

Assistant Secretary of the Treasury

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