[Federal Register Volume 60, Number 150 (Friday, August 4, 1995)]
[Proposed Rules]
[Pages 39903-39905]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-19286]
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DEPARTMENT OF THE TREASURY
26 CFR Part 301
[PS-54-94]
RIN 1545-AT02
Environmental Settlement Funds--Classification
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 regulations relating to the
classification of certain organizations as trusts for federal tax
purposes. The proposed regulations would 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: Written comments must be received by October 5, 1995. Requests
to speak (with outlines of oral comments) at a public hearing scheduled
for October 26, 1995, at 10 a.m. must be submitted by October 5, 1995.
ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS-54-94), room 5228,
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington,
DC 20044. In the alternative, submissions may be hand delivered between
the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (PS-54-94),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue,
NW., Washington, DC. The public hearing has been scheduled to be held
in the 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, Michael
Slaughter, (202) 622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act (44 U.S.C.
3504(h)). Comments on the collection of information should be sent to
the Office of Management and Budget, Attention: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC
20224.
The collection of information is required by Sec. 301.7701-4(e)(2).
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. This
information will be used to ensure compliance with the proposed
regulation. The likely respondents are businesses and other for-profit
institutions, including small businesses.
Estimated total annual reporting burden: 2,000 hours.
The estimated annual burden per respondent: 4 hours.
Estimated number of respondents: 500.
Estimated annual frequency of responses: 1.
Introduction
This document proposes to add Sec. 301.7701-4(e) to the Procedure
and Administration Regulations (26 CFR Part 301) relating to the
classification of certain environmental remediation trusts as trusts
for federal tax purposes.
Background
Unincorporated organizations may be classified as associations
(which are taxable as corporations), partnerships, or trusts for
federal tax purposes. The criteria for determining when an organization
will be classified as a trust are set forth in Sec. 301.7701-4. The
proposed amendment to Sec. 301.7701-4 provides that an environmental
remediation trust will be classified as a trust for federal tax
purposes.
A trust is an environmental remediation trust if (1) 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; (2) all contributors to the trust have potential liability or a
reasonable expectation of liability under federal, state, or local
environmental laws for environmental remediation of the waste site; and
(3) the trust is not a qualified settlement fund within the meaning of
Sec. 1.468B- 1(a). Environmental remediation trusts include trusts
formed pursuant to an order of a governmental authority, as well as
trusts formed by taxpayers to avoid future liability or potential
liability under federal, state, or local environmental laws. An
environmental remediation trust is classified as a trust, even though
it may differ from the traditional trust in which trustees take title
to property for the purpose of protecting or conserving it for the
beneficiaries under the ordinary rules applied in chancery or probate
courts, because the purpose of an environmental remediation trust is to
pay the costs of environmental remediation of an existing waste site as
a result of liability or potential liability under federal, state, or
local environmental laws, not to carry on a for-profit business.
[[Page 39904]]
The proposed regulations provide that each contributor to the trust
will be treated as the owner of the portion of the trust contributed by
that person, and, therefore, the trust is treated as a grantor trust
under subpart E of subchapter J. The proposed regulations also require
the trustee to provide information to the participants that will enable
them to properly report their share of income, deductions, and credits,
including information to properly determine whether a payment satisfies
the economic performance rules of section 461(h).
The proposed regulations provide certain rules relating to
participants (cash-out grantors) that contribute a fixed amount to the
trust and are relieved from making further contributions to the trust,
even though the participant still is liable or potentially liable under
applicable environmental laws. Under the proposed regulations, all
amounts contributed to an environmental remediation trust by a cash-out
grantor are considered amounts contributed for remediation. In
addition, the 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). The proposed regulations also provide that a cash-out grantor
will cease to be treated as an owner of a portion of the trust when the
grantor's portion is treated as fully expended.
Effective Date
The regulations are proposed to apply to trusts that meet the
requirements of paragraph (e)(1) of the regulations that are formed on
or after the date of publication of these proposed regulations as final
regulations in the Federal Register.
Special Analyses
It has been determined that this notice of proposed rulemaking 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 Procedures 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, 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 (a signed original
and eight (8) copies) that are submitted timely to the IRS. All
comments will be available for public inspection and copying.
A public hearing has been scheduled for October 26, 1995, at 10:00
a.m. in the IRS 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.
Persons that wish to present oral comments at the hearing must
submit written comments by October 5, 1995, and submit an outline of
the topics to be discussed and the time to be devoted to each topic
(signed original and eight (8) copies) by October 5, 1995.
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 Assistant 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 301.7701-4(e) is added to read as follows:
Sec. 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
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 Sec. 1.468B-1(a) of this chapter.
An environmental remediation trust is classified as a trust because its
primary purpose is environmental remediation of a waste site and not
the carrying on of a profit-making business which 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, remediating 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 environmental remediation of the waste site if there is
authority under a federal, state, or local law that requires such
persons to satisfy all or a portion of the costs of the environmental
remediation.
(2) Each contributor (grantor) to the trust will be treated as the
owner of the portion of the trust contributed by that grantor. See
section 677 and Sec. 1.677(a)-1(d) of this chapter for 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 any portion of an environmental
remediation trust treated as owned by the grantor should not be
reported by the trust on Form 1041, but should be shown on a separate
statement to be attached to that form.
[[Page 39905]]
See Sec. 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 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 properly take into account items under the
economic performance rules of section 461(h) and the regulations
thereunder. See Sec. 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
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) 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 pays $2,000,000 for remediation work performed from June 1,
1996, through September 30, 1996. As of November 30, 1996, the trust
had $75,000 of interest income, which is allocated in equal shares
of $25,000 to X, Y, and Z's portions of the trust.
(d) Pursuant to the agreement between X, Y, and Z, 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. Therefore, Z's share of the remediation payment
made in 1996 is $1,025,000 ($1,000,000 contribution by Z plus
$25,000 of income allocated to Z's portion of the trust). Z must
take the $1,025,000 payment into account under the appropriate
federal tax accounting rules. In addition, X's share of the
remediation payment made in 1996 is $487,500, and Y's share of the
remediation payment made in 1996 is $487,500. X and Y must take
their respective shares of the payment into account under the
appropriate federal tax accounting rules.
(e) The trustee made no further remediation payments in 1996,
and X and Y made no further contributions in 1996. From December 1,
1996, to December 31, 1996, the trust had $5,000 of interest income,
which is allocated $2,500 to X's portion and $2,500 to Y's portion.
Accordingly, for 1996, X and Y each had income of $27,500 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 the date of publication of these proposed regulations as final
regulations in the Federal Register.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 95-19286 Filed 8-3-95; 8:45 am]
BILLING CODE 4830-01-U
