Environmental Settlement FundsClassification

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]

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