Grantor Trust Reporting Requirements

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[PS-79-93]

RIN 1545-AN77

Grantor Trust Reporting Requirements

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

method of reporting for trusts which are treated as owned by grantors

or other persons under the provisions of subpart E (section 671 and

following), part I, subchapter J, chapter 1 of the Internal Revenue

Code. The proposed regulations are intended to reduce the current

filing burden on trustees, to provide necessary information to grantors

or other persons treated as the owners of trusts, to reduce any cases

of duplicate filing, and to provide more meaningful information to the

IRS. The proposed regulations would affect grantors and trustees of

trusts that are treated as owned by grantors or other persons, as well

as persons who are required to file information returns with respect to

payments to these trusts.

DATES: Written comments must be received by August 31, 1994. Requests

to speak (with outlines of oral comments) at a public hearing scheduled

for September 21, 1994, at 1 p.m., must be received by August 31, 1994.

ADDRESSES: Send submissions to: CC:DOM:CORP:T:R (PS-79-93), 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-79-93),

Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,

Washington, DC. The public hearing will be held in the IRS Auditorium,

7th floor, 7400 corridor, Internal Revenue Building, 1111 Constitution

Avenue NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT:

Concerning the regulations, Robert Rio, 202-622-3060; concerning

submissions and the hearing, Carol Savage, 202-622-8452. These are 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 Secs. 1.671-4 and

1.6012-3 of the proposed Income Tax Regulations and Sec. 301.6109-1 of

the proposed Regulations on Procedure and Administration. This

information is required by the IRS to insure the proper reporting of

income and proceeds paid to a trust any portion of which is treated as

owned by the grantor or another person. The likely respondents are

individuals, trusts, businesses and other for-profit institutions, and

small businesses.

Estimated total annual reporting burden: 920,000 hours.

The estimated annual burden per respondent: 30 minutes.

Estimated number of respondents: 1,840,000.

Estimated annual frequency of responses: once.

Background

This document proposes amendments to the Income Tax Regulations (26

CFR part 1) under sections 671 and 6012 of the Internal Revenue Code

(Code), and to the Regulations on Procedure and Administration (26 CFR

part 301) under section 6109 of the Code. The proposed amendments are

to be issued under the authority of section 7805 of the Code.

Explanation of Provisions

Reporting Requirements Under the Current Regulations

In general, every fiduciary (which includes a trustee of a trust)

must make a return of income on Form 1041. Under the current

regulations, items of income, loss, deduction, and credit attributable

to any portion of a trust which is treated as owned by the grantor or

another person generally must be shown by the trustee on a separate

statement attached to a Form 1041, rather than on the form itself.

There are two exceptions to this rule. The first exception applies when

the same individual is both grantor and trustee (or co-trustee) of the

trust, and that individual is treated for the taxable year as the owner

of the entire trust under section 676 of the Code. The second exception

applies when a husband and wife are the grantors of certain revocable

trusts.

Section 301.6109-1(a)(2) of the current Regulations on Procedure

and Administration provides that a grantor trust reporting under one of

these two exceptions shall not obtain an employer identification number

until such time as the reporting exceptions no longer apply to the

trust. Instead, the grantor of such a trust must furnish his or her

social security number (or, when applicable, his or her employer

identification number) to payors of income, and payors must report

income as if paid to the grantor, not the trust.

Reporting Requirements Under the Proposed Regulations

The proposed regulations will reduce the reporting burden on

certain trustees by expanding the current exceptions to the requirement

of filing a Form 1041 to other trusts all of which are treated as owned

by one or more grantors or other persons. Thus, considerably more

trustees will not be required to file a Form 1041.

The proposed regulations retain the general rule of the current

regulations that items of income, deduction, and credit attributable to

any portion of a trust which is treated as owned by the grantor or

another person must be reported by the trustee on a separate statement

attached to a Form 1041.

The proposed regulations, however, provide alternative methods of

reporting for a trust all of which is treated as owned by one or more

grantors or other persons, including a trust treated as owned by a

person other than an individual and a trust with a third-party trustee.

Under these alternative methods, the trustee does not file a Form 1041

with an attached statement.

If the trust is treated as owned by one grantor or other person,

the trustee may choose between two alternative methods of reporting.

The trustee must furnish to all payors of income and proceeds during

the taxable year either: (i) the name and taxpayer identification

number (TIN) of the grantor or other person, and the address of the

trust; or (ii) the name, TIN, and address of the trust. If the trust is

treated as owned by more than one grantor or other person, the trustee

must furnish the name, TIN, and address of the trust to all payors of

income and proceeds during the taxable year.

If the trustee furnishes the name and TIN of the grantor or other

person and the address of the trust to all payors, the trustee is not

required to file any type of return with the IRS.

If the trustee furnishes the name, TIN, and address of the trust to

all payors, the trustee must file with the IRS appropriate Forms 1099

which: (1) report each type of income and each item of gross proceeds

paid to the trust; (2) show the trust as the payor; and (3) show each

grantor or other person treated as an owner of the trust as the payee.

Under all of the alternative methods of reporting, unless the

trustee or co-trustee is also the only grantor or other person treated

as an owner of the trust, the trustee must furnish each grantor or

other person with a statement that: (1) shows all items of income,

deduction, and credit of the trust attributable to the grantor or other

person for the taxable year; (2) provides the grantor or other person

with the information necessary to take the items into account in

computing the grantor's or other person's taxable income; and (3)

states that all items of income or gross proceeds that are required to

be reported to the IRS have been included on the statement.

The statement furnished by the trustee is not subject to the

requirements set forth in Internal Revenue Service Publication 1179

(Specifications for Paper Document Reporting and Paper Substitutes for

Forms 1096, 1098, 1099 Series, 5498, and W-2G) for furnishing

substitute statements to form recipients. When these proposed

regulations are issued as final, a conforming change will be made to

Publication 1179.

Regardless of which TIN the trustee furnishes to payors, the payors

will furnish statements to recipients to the trustee of the trust, and

not to the grantors or other persons.

Conforming changes to the current regulations under sections 6012

and 6109 of the Code are also proposed.

Effective Date and Transition Rule

The proposed regulations are effective for taxable years beginning

on or after the first day of the first calendar year after the date of

publication of the final regulations in the Federal Register, subject

to a requirement that certain trustees file a final Form 1041 before

adopting one of the alternative methods of reporting.

In addition, the proposed regulations provide that, for taxable

years beginning prior to the effective date of the proposed

regulations, the IRS will not challenge the manner of reporting of

certain trustees of trusts all of which are treated as owned by one or

more grantors or other persons who did not report in accordance with

Sec. 1.671-4(a) of the current regulations.

Special Analysis

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 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 Internal Revenue Code, these regulations will be submitted to the

Chief Counsel for Advocacy of the Small Business Administration for

comment on their impact on small businesses.

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. All comments will be available for public inspection and copying.

A public hearing has been scheduled for Wednesday, September 21,

1994, at 1 p.m., in the IRS Auditorium, 7th floor, 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 have submitted written comments by August 31, 1994,

and wish to present oral comments at the hearing must submit, not later

than August 31, 1994, an outline of the topics to be discussed

(preferably a signed original and eight (8) copies) and the time to be

devoted to each topic. 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 proposed regulations is Robert Rio of

the Office of Assistant Chief Counsel (Passthroughs and Special

Industries), IRS. 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.

Proposed Amendments to the Regulations

The proposed amendments to 26 CFR parts 1 and 301 are 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 revised to read as follows:

Sec. 1.671-4 Method of reporting.

(a) Portion of trust treated as owned by the grantor or another

person. Except as otherwise provided in paragraph (b) of this section,

items of income, deduction, and credit attributable to any portion of a

trust which, under the provisions of subpart E (section 671 and

following), part I, subchapter J, chapter 1 of the Internal Revenue

Code, is treated as owned by the grantor or another person are not

reported by the trust on Form 1041, but are shown on a separate

statement to be attached to that form.

(b) A trust all of which is treated as owned by one or more

grantors or other persons. In the case of a trust all of which is

treated as owned by one or more grantors or other persons, the trustee

has the option of reporting by one of the methods described in this

paragraph (b) rather than by the method described in paragraph (a) of

this section. However, if the trustee reports by one of the methods

described in this paragraph (b) for a taxable year of the trust, the

trustee must continue to report by that method until the first taxable

year that the trust is no longer a trust described in this paragraph

(b).

(1) A trust all of which is treated as owned by one grantor or by

one other person--(i) In general. In the case of a trust all of which

is treated as owned by one grantor or one other person, the trustee

reporting under this paragraph must--

(A) Furnish the name and taxpayer identification number (TIN) of

the grantor or other person treated as the owner of the trust, and the

address of the trust, to all payors of income and proceeds during the

taxable year, and comply with the additional requirements described in

paragraph (b)(1)(ii) of this section; or

(B) Furnish the name, TIN, and address of the trust to all payors

of income and proceeds during the taxable year, and comply with the

additional requirements described in paragraph (b)(1)(iii) of this

section.

(ii) Additional obligations of the trustee when name and TIN of the

grantor or other person and the address of the trust are furnished to

payors. (A) Unless the grantor or other person treated as the owner of

the trust is the trustee or a co-trustee of the trust, the trustee must

furnish the grantor or other person with a statement that--

(1) Shows all items of income, deduction, and credit of the trust

for the taxable year;

(2) Identifies the payor of each item of income;

(3) Provides the grantor or other person with the information

necessary to take the items into account in computing the grantor's or

other person's taxable income; and

(4) States that all items of income or gross proceeds that the

payors reported to the Internal Revenue Service on Form 1099 have been

included on the statement.

(B) The trustee, however, is not required to file any type of

return with the Internal Revenue Service reporting those payments.

(iii) Additional obligations of the trustee when name, TIN, and

address of the trust are furnished to payors--(A) Obligation to file

Forms 1099. The trustee reporting under this paragraph must file with

the Internal Revenue Service the appropriate Forms 1099, reporting the

income or gross proceeds paid to the trust during the taxable year, and

showing the trust as the payor and the grantor or other person as the

payee. The trustee has the same obligations for filing the appropriate

Forms 1099 as would a payor making reportable payments directly to the

grantor or other person, except that the trustee must report each type

of income in the aggregate, and each item of gross proceeds separately.

(B) Obligation to furnish statement. (1) Unless the grantor or

other person treated as the owner of the trust is the trustee or a co-

trustee of the trust, the trustee reporting under this paragraph must

also furnish the grantor or other person with a statement that--

(i) shows all items of income, deduction, and credit of the trust

for the taxable year;

(ii) provides the grantor or other person with the information

necessary to take the items into account in computing the grantor's or

other person's taxable income; and

(iii) states that all items of income or gross proceeds that the

trustee is required to report to the Internal Revenue Service on Form

1099 have been included on the statement.

(2) By furnishing the statement, the trustee is treated as having

satisfied any obligation to furnish statements to recipients with

respect to the Forms 1099 filed by the trustee.

(iv) Examples. The following examples illustrate the provisions of

this paragraph (b)(1).

Example 1. G creates an irrevocable trust which provides that

the ordinary income is to be payable to him for life and that on his

death the corpus shall be distributed to B, an unrelated person.

Except for the right to receive income, G retains no right or power

which would cause him to be treated as an owner under sections 671

through 677. Under the applicable local law, capital gains must be

added to corpus. Since G has a right to receive income, he is

treated as an owner of a portion of the trust under section 677. The

tax consequences of any items of capital gain of the trust are

governed by the provisions of subparts A, B, C, and D (section 641

and following), part I, subchapter J, chapter 1 of the Internal

Revenue Code. Because not all of the trust is treated as owned by

the grantor, the trustee may not report by the methods described in

paragraph (b)(1) of this section.

Example 2. (i)(A) On January 1, 1995, G, a United States

citizen, creates a revocable trust all of which is treated as owned

by G. The trustee of the trust is T. During the 1995 taxable year

the trust has the following items of income and gross proceeds:

Interest

$2,500

Dividends

3,205

Proceeds from sale of B stock

2,000

(B) The trust has no items of deduction or credit.

(ii)(A)(1) The payors of the interest paid to the trust are X

($2,000), Y ($300), and Z ($200). The payors of the dividends paid

to the trust are A ($3,200) and B ($5). The payor of the gross

proceeds from the sale of B stock is S ($2,000). The B stock was

purchased by T for $1,500 on January 2, 1995, and sold by T on

November 30, 1995. T furnishes the name, TIN, and address of the

trust to X, Y, Z, A, B, and S. T timely files a Form 1099-INT with

the Internal Revenue Service on which T reports interest

attributable to G, as the owner of the trust, of $2,500; a Form

1099-DIV on which T reports dividends attributable to G, as the

owner of the trust, of $3,205; and a Form 1099-B on which T reports

proceeds from the sale of B stock attributable to G, as the owner of

the trust, of $2,000. On or before the date specified in section

6034A(a), T furnishes a statement to G which lists the following

items of income and information necessary for G to take the items

into account in computing G's taxable income:

Interest.

$2,500

Dividends.

3,205

Gain from sale of B stock

500

Information regarding sale of B stock:

Proceeds

$2,000

Basis

1,500

Date acquired

1/02/95

Date sold

11/30/95

(2) In addition, the statement furnished to G states that all

items of income or gross proceeds that T is required to report to

the Internal Revenue Service are included on the statement.

(B) T has complied fully with T's obligations under paragraph

(b)(1)(iii)(B) of this section.

(iii)(A)(1) Same facts as paragraph (ii) of this Example 2,

except that G owned the B stock and contributed it to the trust on

January 1, 1995. On or before the date specified in section

6034A(a), T furnishes a statement to G which lists the following

items of income and information necessary for G to take the items

into account in computing G's taxable income:

Interest

$2,500

Dividends

3,205

Information regarding sale of B stock:

Proceeds

$2,000

Date sold

11/30/95

(2) In addition, the statement furnished to G states that all

items of income or gross proceeds that T is required to report to

the Internal Revenue Service are included on the statement.

(B) T has complied fully with T's obligations under paragraph

(b)(1)(iii)(B) of this section.

(2) A trust all of which is treated as owned by two or more

grantors or other persons--(i) In general. In the case of a trust all

of which is treated as owned by two or more grantors or other persons,

the trustee reporting under this paragraph must furnish the name, TIN,

and address of the trust to all payors of income and proceeds during

the taxable year, and comply with the additional requirements described

in paragraph (b)(2)(ii) of this section.

(ii) Additional obligations of trustee--(A) Obligation to file

Forms 1099. The trustee must file with the Internal Revenue Service the

appropriate Forms 1099, reporting the income or gross proceeds paid to

the trust during the taxable year attributable to the portion of the

trust treated as owned by each grantor or other person, and showing the

trust as the payor and each grantor or other person as a payee. The

trustee has the same obligations for filing the appropriate Forms 1099

as would a payor making reportable payments directly to the grantor or

other person, except that the trustee must report each type of income

in the aggregate, and each item of gross proceeds separately.

(B) Obligation to furnish statement. (1) The trustee must also

furnish to each grantor or other person a statement that--

(i) 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 or other person;

(ii) Provides the grantor or other person with the information

necessary to take the items into account in computing the grantor's or

other person's taxable income; and

(iii) States that all items of income or gross proceeds that the

trustee is required to report to the Internal Revenue Service on Form

1099 have been included on the statement.

(2) By furnishing the statement, the trustee is treated as having

satisfied any obligation to furnish statements to recipients with

respect to the Forms 1099 filed by the trustee.

(3) Common Trust Funds. This paragraph (b) does not apply to a

common trust fund as defined in section 584.

(4) Trusts with foreign situs or assets. This paragraph (b) does

not apply to a trust if its situs or any of its assets are located

outside the United States.

(c) Due date for Forms 1099 required to be filed by trustee. The

due date otherwise in effect for filing Forms 1099 applies in the case

of any Forms 1099 required to be filed with the Internal Revenue

Service by a trustee pursuant to paragraph (b) of this section.

(d) Due date and other requirements with respect to statement

required to be furnished by trustee. The due date for the statement

required to be furnished by a trustee to the grantor or other person

pursuant to paragraph (b) of this section is the date specified in

section 6034A(a). The trustee must maintain in its records a copy of

the statement furnished to the grantor or other person for a period of

three years from the due date for furnishing such statement specified

in this paragraph.

(e) Application to brokers and customers. For purposes of this

section, a broker within the meaning of section 6045 is considered a

payor, and a customer within the meaning of section 6045 is considered

a payee.

(f) Effective date and transition rule--(1) In general. The trustee

of a trust any portion of which is treated as owned by the grantor or

another person must report pursuant to this section for taxable years

beginning on or after the first day of the first calendar year after

the date of publication of the final regulations in the Federal

Register. However, if the trustee has filed a Form 1041 for any taxable

year ending before that date (and has not filed a final Form 1041

pursuant to Sec. 1.671-4(b)(3) in the 26 CFR part 1 edition revised as

of April 1, 1994), or files a Form 1041 for any taxable year

thereafter, the trustee must file a final Form 1041 for the taxable

year which ends after the date of publication of the final regulations

in the Federal Register and which immediately precedes the first

taxable year for which the trustee reports pursuant to paragraph (b)

(1) or (2) of this section, on the front of which form the trustee must

write: ``Pursuant to Sec. 1.671-4(f), this is the final Form 1041 for

this grantor trust.''.

(2) Transition rule. For taxable years beginning prior to the first

day of the first calendar year following the date of publication of the

final regulations in the Federal Register, the Internal Revenue Service

will not challenge the manner of reporting of--

(i) A trustee of a trust all of which is treated as owned by one or

more grantors or other persons who did not report in accordance with

Sec. 1.671-4(a) (26 CFR part 1 revised as of April 1, 1994) as in

effect for taxable years beginning prior to the first day of the first

calendar year following the date of publication of the final

regulations in the Federal Register, but did report in a manner

substantially similar to one of the reporting methods described in

paragraph (b) of this section; or

(ii) A trustee of two or more trusts all of which are treated as

owned by grantors or other persons who filed a single Form 1041 for all

of the trusts, rather than a separate Form 1041 for each trust,

provided that the items of income, deduction, and credit of each trust

were shown on a statement attached to the single Form 1041.

(g) Cross-references. For special rules relating to backup

withholding requirements, see section 3406 and the regulations

thereunder. For rules relating to employer identification numbers, and

to the obligation of a payor of income or proceeds to the trust to

furnish to the payee a statement to recipients with respect to the

information return filed by the payor, see Sec. 301.6109-1(a)(2) of

this chapter.

Par. 3. Section 1.6012-3 is amended by revising paragraph (a)(9) to

read as follows:

Sec. 1.6012-3 Returns by fiduciaries.

(a) * * *

(9) A trust any portion of which is treated as owned by the grantor

or another person pursuant to section 671 and following. In the case of

a trust any part of which is treated as owned by the grantor or another

person under the provisions of subpart E (section 671 and following)

part I, subchapter J, chapter 1 of the Internal Revenue Code, see

Sec. 1.671-4.

* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

Par. 4. The authority citation for part 301 continues to read in

part as follows:

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

Par. 5. Section 301.6109-1 is amended by revising paragraph (a)(2)

to read as follows:

Sec. 301.6109-1 Identifying numbers.

(a) * * *

(2) A trust all of which is treated as owned by the grantor or

another person pursuant to section 671 and following--(i) Obtaining an

employer identification number.

If the trustee furnishes the name and taxpayer identification

number of the grantor or other person and the address of the trust to

all payors pursuant to Sec. 1.671- 4(b)(1)(i)(A) of this chapter, the

trustee need not obtain an employer identification number for the trust

until the first taxable year of the trust in which the trust is no

longer described in Sec. 1.671-4(b) of this chapter. If the trustee

furnishes the name, taxpayer identification number, and address of the

trust to all payors pursuant to Sec. 1.671-4 (b)(1)(i)(B) or (b)(2)(i)

of this chapter, and the trustee has not already obtained a taxpayer

identification number for the trust, the trustee must obtain an

employer identification number for the trust as provided in paragraph

(d)(2) of this section.

(ii) Obligations of persons who make payments of income or proceeds

to certain trusts. Any payors of income or proceeds that are required

to file an information return with respect to payments of income or

proceeds to a trust must show the name and taxpayer identification

number that the trustee has furnished to the payor on the return.

Regardless of whether the trustee furnishes to the payor the name and

taxpayer identification number of the grantor or other person, or the

name and taxpayer identification number of the trust, the payor must

furnish a statement to recipients to the trustee of the trust, rather

than to the grantor or other person. Under these circumstances, the

payor is considered to have satisfied any obligation to show the name

and taxpayer identification number of the payee on the information

return and to furnish to the person whose taxpayer identification

number is required to be shown on the form a statement to recipients.

* * * * *

Margaret Milner Richardson,

Commissioner of Internal Revenue.

[FR Doc. 94-17567 Filed 7-21-94; 8:45 am]

BILLING CODE 4830-01-U