[Federal Register Volume 71, Number 149 (Thursday, August 3, 2006)]
[Rules and Regulations]
[Pages 43968-43973]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-6649]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9279]
RIN 1545-BF86
Reporting Rules for Widely Held Fixed Investment Trusts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and Temporary regulations.
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SUMMARY: This document contains final and temporary regulations
amending Sec. 1.671-5, a provision which provides reporting rules for
widely held fixed investment trusts (WHFITs). These regulations clarify
and simplify reporting for trustees and middlemen of non-mortgage
widely held fixed investment trusts (NMWHFITs). The text of these final
and temporary regulations also serves, in part, as the text of the
proposed regulations set forth in the notice of proposed rulemaking
(REG-125071-06) on this subject in this issue of the Federal Register.
DATES: Effective Date: These regulations are effective July 28, 2006.
Applicability Date: For dates of applicability see Sec. 1.671-
5(m).
FOR FURTHER INFORMATION CONTACT: Faith Colson, 202-622-3060 (not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
These final and temporary regulations amend Sec. 1.671-5. The
collection of information contained in these regulations is in Sec.
1.671-5 and has been previously reviewed and approved by the Office of
Management and Budget in accordance with the Paperwork Reduction Act of
1995 (44 U.S.C. 3507) under control number 1545-1540. Response to this
collection of information is mandatory. This information is required to
be reported to beneficial owners of trust interests to enable them to
correctly report their share of the items of income, deduction, and
credit of the WHFIT in which they have invested. This information is
also required to be reported to the IRS to enable the IRS to verify
that trustees and middlemen are accurately reporting information to
beneficial owners of trust interests and that beneficial owners are
properly reporting their ownership of a trust interest.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents might become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains amendments to 26 CFR part 1. On January 24,
2006, the Internal Revenue Service (IRS) and the Treasury Department
published final regulations (TD 9241) (final regulations) under Sec.
1.671-5 in the Federal Register (71 FR 4002) providing reporting rules
for WHFITs. On February 23, 2006, in response to comments received
subsequent to the publication of the final regulations, the IRS and the
Treasury Department issued Notice 2006-29 (2006-12 I.R.B. 644). Notice
2006-29 informed trustees and middlemen of NMWHFITs that Sec. 1.671-5
would be amended to extend the availability of the qualified NMWHFIT
exception (discussed in section I) beyond February 23, 2006, the cut-
off date provided in the final regulations for funding a NMWHFIT that
satisfied the exception, and to clarify the application of certain
provisions in the final regulations to NMWHFITs. On May 25, 2006, the
IRS and Treasury Department issued Notice 2006-30 (2006-24 I.R.B. 1044)
stating that the IRS and the
[[Page 43969]]
Treasury Department expected to issue the additional guidance under
Sec. 1.671-5 discussed in Notice 2006-29 in the near future but that
such guidance would not be issued prior to the expiration of the
extended cut-off date for the qualified NMWHFIT exception in Notice
2006-29. Accordingly, Notice 2006-30 extended the cut-off date for the
availability of the qualified NMWHFIT exception in Notice 2006-29 for
an additional 60 days. These temporary regulations extend the
availability of the qualified NMWHFIT exception to the dates provided
in Notice 2006-30 and clarify the NMWHFIT reporting rules as described
in Notice 2006-29. These temporary regulations also simplify the
application of Sec. 1.671-5 as it applies to NMWHFIT sales and
dispositions as well as sales or redemptions of trust interests in an
equity trust (a trust, substantially all of whose income is comprised
of dividends).
Summary and Explanation of Revisions
I. The Qualified NMWHFIT Exception
In general, under the final regulations, trustees and middlemen of
NMWHFITs are required to report information regarding market discount,
bond premium, sales and dispositions of trust assets, redemptions, and
sales of trust interests. Trustees and middlemen of NMWHFITs that
satisfy the qualified NMWHFIT exception in Sec. 1.671-5(c)(2)(iv)(E)
are, however, excepted from reporting market discount and bond premium
and are permitted to use the simplified reporting rules for sales and
dispositions of trust assets in Sec. 1.671-5(c)(2)(iv)(B) and the
simplified reporting rules for sales or redemptions of trust interests
in Sec. 1.671-5(c)(2)(v)(C). As provided in Notice 2006-29 and
subsequently modified in Notice 2006-30, Sec. 1.671-5T(c)(2)(iv)(E) of
these final and temporary regulations provides that the qualified
NMWHFIT exception is satisfied if the calendar year for which the
trustee is reporting begins before January 1, 2011, and the NMWHFIT
meets any of the following requirements: (1) The NMWHFIT has a start-up
date as defined in Sec. 1.671-5(b)(19) before February 23, 2006; (2)
the registration statement for the NMWHFIT becomes effective under the
Securities Act of 1933 (15 U.S.C. 77a) (Securities Act of 1933) and
trust interests are offered for sale to the public before February 23,
2006; or (3) the registration statement of the NMWHFIT becomes
effective under the Securities Act of 1933 and trust interests are
offered for sale to the public on or after February 23 and before July
31, 2006, and the NMWHFIT is fully funded before October 1, 2006. The
IRS and the Treasury Department have also received comments suggesting
that the January 1, 2011 cut-off date be extended or eliminated. The
IRS and the Treasury Department are not adopting that suggestion.
II. Availability of the NMWHFIT Safe Harbor
Section 1.671-5(f) provides a reporting safe harbor for NMWHFITs.
If trustees and middlemen report consistently with the safe harbor,
trustees and middlemen are deemed to have provided information in a
manner that enables a trust interest holder to reasonably accurately
report the items of income, deduction, and credit of the trust on the
trust interest holder's own federal income tax return. Section 1.671-
5(f)(1)(i) provides that if substantially all of a NMWHFIT's income is
from dividends (as defined in section 6042(b) and the regulations
thereunder) or interest (as defined in section 6049(b) and the
regulations thereunder) and all trust interests have identical value
and rights, a NMWHFIT may report under the safe harbor in Sec. 1.671-
5(f). Commentators have expressed concern that, if a trustee of a
NMWHFIT must sell or dispose of a significant number of trust assets
and trust sales proceeds are included in the determination of whether
``substantially all'' of a trust's income is from interest or
dividends, the NMWHFIT will be ineligible for the safe harbor reporting
rules in Sec. 1.671-5(f). To address this concern, Sec. 1.671-
5T(f)(1)(i) of the final and temporary regulations provides that trust
sales proceeds are to be ignored in determining whether a NMWHFIT is
eligible to report under the NMWHFIT safe harbor in Sec. 1.671-5(f).
Accordingly, a NMWHFIT may be eligible to report under the NMWHFIT safe
harbor even if it has significant trust sales proceeds from the sale or
disposition of trust assets.
Commentators also noted that Sec. 1.671-5(f)(1)(i)(1) refers to
section 6049(b) and the definition of interest in sectional 6049(b)
does not include interest that is exempt from tax under section 103 of
the Internal Revenue Code. These commentators were concerned that if a
NMWHFIT's income is from tax-exempt interest, the NMWHFIT would not be
eligible to report under the NMWHFIT safe harbor reporting rules. To
address this concern, Sec. 1.671-5T(f)(1)(i)(A)(1) of the final and
temporary regulations does not refer to sections 6042(b) and 6049(b)
and the regulations thereunder. Accordingly, NMWHFITs whose income is
from tax[pi]exempt interest, may be eligible to report under the
NMWHFIT safe harbor reporting rules.
III. Simplified Reporting of Sales and Redemptions of Trust Interests
for Equity Trusts
Section 1.671-5(c)(2)(v) requires trustees and middlemen to provide
information regarding the income that is attributable to a redeeming,
selling or purchasing beneficial owner up to the date of the sale or
redemption of a trust interest. Section 1.671-5(c)(2)(v)(C) provides an
exception to this rule for NMWHFITs if substantially all their income
is comprised of dividends (equity trusts) and the NMWHFIT is required
by its governing document to distribute income at least monthly.
Commentators reported that some equity trusts do not receive
significant dividend income and that it would not be feasible for these
trusts to make monthly distributions. These commentators suggested that
there be a de minimis exception to the requirement that the trust make
monthly distributions.
Accordingly, Sec. 1.671-5T(c)(2)(v)(C) provides that a NMWHFIT
will be considered to have satisfied the requirement that it make
monthly distributions notwithstanding the fact that, although the
governing document requires monthly distributions, the governing
document of the NMWHFIT also permits the trustee to forego making its
normally required monthly distribution if the cash held for
distribution is less than 0.1% of the net asset value of the trust
(aggregate fair market value of the trust's assets less the trust's
liabilities) as of the date that the amount of the monthly distribution
is required to be determined. Commentators suggested various other
modifications to the Sec. 1.675(c)(2)(v)(C) exception; however, the
IRS and Treasury Department believe that the modification adopted above
addresses the majority of the commentators' concerns while maintaining
the integrity of the reporting information to be provided under Sec.
1.671-5.
Similar to the ``substantially all'' test for eligibility to use
the NMWHFIT safe harbor discussed in section II above, commentators
have expressed concern that if a NMWHFIT has significant sales and
dispositions and trust sales proceeds are included for the purpose of
determining if ``substantially all'' of the NMWHFIT's income is from
dividends, then the NMWHFIT will not qualify for this exception even
though the NMWHFIT only holds assets that produce dividend income. To
address this concern, Sec. 1.671-5T(c)(2)(v)(C) of
[[Page 43970]]
the final and temporary regulations provides that proceeds received by
a NMWHFIT from the sale or disposition of trust assets are to be
ignored for the purpose of determining whether an equity trust is
eligible to report under that paragraph.
IV. Simplified Reporting for Certain NMWHFIT Sales and Dispositions
In addition to the qualified NMWHFIT exception, the final
regulations provide that the trustees of NMWHFITs that meet the general
de minimis test in Sec. 1.671-5(c)(2)(iv)(D)(1) are only required,
under Sec. 1.671-5(c)(2)(iv)(B), to provide information regarding the
amount of trust sales proceeds distributed to a trust interest holder.
The reason for the de minimis exception, as stated in the preamble to
the final regulations, is that the IRS and the Treasury Department
believe that if a NMWHFIT only sells or disposes of assets
infrequently, although there will be some deferral of gains and losses
if sales and dispositions are not fully reported, the deferral is
acceptable, in light of the burden of fully, accurately reporting the
sales and dispositions.
Commentators reported that trustees of NMWHFITs frequently have to
sell trust assets to obtain cash to effect redemptions. These
commentators indicated that because of certain securities laws,
trustees of many NMWHFITs must redeem trust interests every time an
interest is tendered for redemption. Trustees have no control over the
number of trust interests tendered for redemption and as a result, have
no control over the number of corresponding sales of trust assets to
obtain cash for these redemptions. Because of these sales to effect
redemptions, many NMWHFITs will also not be able to meet the general de
minimis test in Sec. 1.671-5(c)(2)(iv)(D)(1). If a NMWHFIT does not
meet the general de minimis test, trustees and middlemen must provide
information regarding the amount of trust sales proceeds that are
attributable to a trust interest holder, and information that will
enable a trust interest holder to allocate with reasonable accuracy a
portion of its basis and a portion of its market discount or premium to
the assets sold. Commentators indicated that, under the final
regulations, a significant number of NMWHFITs do not qualify for the
reduced reporting in Sec. 1.671-5(c)(2)(iv)(B) and that as a result,
many investors will be provided with more information than they can
accurately process and trustees and middlemen will be subject to the
significant reporting costs of supplying this information. These
commentators requested that the final regulations be amended to provide
for reduced reporting for other situations in which it will have little
or no compliance impact. In response to these comments, the IRS and the
Treasury Department provide the following modifications to the sales
and disposition reporting rules for NMWHFITs in the final regulations:
1. NMWHFIT Final Calendar Year Exception
Commentators requested that the IRS and Treasury Department extend
the simplified reporting in Sec. 1.671-5(c)(2)(iv)(B) to the final
calendar year of a NMWHFIT regardless of whether the de minimis test or
the qualified NMWHFIT exception is satisfied. The commentators reported
that for a significant number of NMWHFITs, 95% of a trustee's sales of
assets to effect redemptions occur during the last three months of the
NMWHFIT. The commentators asserted that there would not be significant
deferral of gains or losses on sales or dispositions of assets by
NMWHFITs in their final calendar year if information regarding the
sales and dispositions of trust assets during these final months were
not communicated to non-redeeming trust interest holders because the
non-redeeming trust interest holders would be cashing out their
investment during that calendar year. Accordingly, Sec. 1.671-
5T(c)(2)(iv)(F) of the final and temporary regulations provide that all
NMWHFITs qualify for the simplified reporting in Sec. 1.671-
5T(c)(2)(iv)(B) in the final calendar year of the NMWHFIT, regardless
of whether the NMWHFIT has otherwise satisfied the de minimis test,
provided that a trust interest holder cannot roll-over its investment
in the NMWHFIT to another WHFIT.
2. Pro-Rata Sale Exception
Commentators also requested that pro-rata sales of trust assets be
excepted from reporting. The commentators contended that trustees
generally sell a redeeming trust interest holder's pro-rata share of
the trust assets to effect a redemption so that there is no change in
the investments of the non-redeeming trust interest holders and
therefore little or no compliance benefit of reporting to the non-
redeeming trust interest holders. Accordingly, the commentators
requested that pro-rata sales of trust assets to effect redemptions be
excepted from the reporting requirements of Sec. 1.671-5(c)(2)(iv).
In response to this request, Sec. 1.671-5T(c)(2)(iv)(G) of the
final and temporary regulations provides that a pro-rata sale of a
trust asset to effect a redemption is not required to be reported under
Sec. 1.671-5. A pro-rata sale of a trust asset occurs when (1) a trust
interest holder tenders one or more trust interests for redemption; (2)
the trustee sells the pro-rata share of a trust asset that is deemed to
be owned by the trust interest holder as a result of the trust interest
holder's ownership of the trust interest or interests tendered for
redemption; (3) the trustee engages in the sale solely to obtain cash
that is immediately distributed to the redeeming trust interest holder
as a result of the redemption; and (4) the redemption is reported as
required under Sec. 1.671-5(c)(2)(v).
Commentators strongly urged the IRS and the Treasury Department to
except NMWHFITs with a duration of no more than 15 months and that span
no more than two calendar years (short-term NMWHFITs) from all
reporting of sales and dispositions of trust assets. The IRS and the
Treasury Department believe that the NMWHFIT final year exception,
discussed in section IV(1), adequately provides reporting relief for
most short-term NMWHFITs for the sales and dispositions of trust assets
to effect redemptions that a trustee must make during the final three
months of the NMWHFIT. Further, Sec. 1.671-5T(b)(21) provides an
amended definition of trust sales proceeds excluding the gross proceeds
paid to a NMWHFIT for a pro-rata sale of a trust asset to effect a
redemption from the definition of trust sales proceeds. The effect of
this change in the definition of trust sales proceeds is to exclude the
proceeds from a pro-rata sale of a trust asset to effect a redemption
when determining whether a trust has met the de minimis test. Since
only the proceeds from non pro-rata sales of trust assets are
considered for purposes of determining whether a NMWHFIT meets the de
minimis test, more trusts will meet the de minimis test and qualify for
the reduced reporting in Sec. 1.671-5T(c)(2)(iv)(B). The IRS and the
Treasury Department believe that the combined application of the pro-
rata sales exception, the revised definition of trust sales proceeds,
and the de minimis test adequately address the commentators' concerns
regarding sales and dispositions of trust assets by trustees of short-
term NMWHFITs during the first year of the trust.
Commentators also suggested that there be a reporting exception for
when a trustee engages in a non pro-rata sale of a trust asset because
the redeeming trust interest holder is only deemed to own a fractional
share of a trust asset or because market conditions or restrictions
prevent a pro-rata sale of a trust asset. The IRS and the Treasury
[[Page 43971]]
Department believe that this issue is also adequately addressed by the
combined application of the pro-rata sale exception, the revised
definition of trust sales proceeds and the de minimis test.
Effective Date
These amendments are effective July 28, 2006. The amendments are
applicable to the reporting required under Sec. 1.671-5 as of January
1, 2007 (see Sec. 1.671-5(m)) and will be applied as though these
amendments were included in TD 9241.
Special Analysis
These regulations are necessary to provide trustees and middlemen
of NMWHFITs with immediate guidance on the application of the final
regulations so they can take measures necessary to be able to comply
with the final regulations on their January 1, 2007, effective date.
Additionally, the IRS and the Treasury Department have published Notice
2006-29 and Notice 2006-30 indicating that Sec. 1.671-5 would be
amended as provided in these temporary regulations and received
comments regarding the application of Sec. 1.671-5 from trustees and
middlemen of NMWHFITs. Accordingly, good cause is found for dispensing
with notice and public comment pursuant to 5 U.S.C. 553(b)(B)(3). The
final and temporary regulations are applicable more than 30 days after
they are published in the Federal Register and accordingly, no
exemption is required under 5 U.S.C. 553(d). For the applicability of
the Regulatory Flexibility Act (5 U.S.C. chapter 6) refer to the
Special Analysis section of the preamble to the cross-referenced notice
of proposed rulemaking published in this issue of the Federal Register.
Pursuant section 7805(f) of the Code, these final and temporary
regulations will be submitted to the Chief Counsel for Advocacy of
Small Business Administration for comment on its impact on small
business.
Drafting Information
The principal author of these regulations is Faith Colson, Office
of Associate Chief Counsel (Passthroughs & Special Industries).
However, other personnel from the IRS and the Treasury Department
participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read, in
part, as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.671-5 is amended by:
0
1. Revising paragraphs (b)(5), (b)(8), and (b)(21)
0
2. Revising paragraphs (c)(2)(iv), (v)(C), (vi), and (vii)
0
3. Revising paragraphs (f)(1)(i)(A) and (viii)(A)
The revisions read as follows:
Sec. 1.671-5 Reporting for widely held fixed investment trusts.
* * * * *
(b) * * *
(5) [Reserved.] For further guidance, see Sec. 1.671-5T(b)(5).
* * * * *
(8) [Reserved.] for further guidance, see Sec. 1.671-5T(b)(8).
* * * * *
(21) [Reserved.] For further guidance, see Sec. 1.671-5T(b)(21).
* * * * *
(c) * * *
(2) * * *
(iv) [Reserved.] For further guidance, see Sec. 1.671-
5T(c)(2)(iv).
(v) * * *
(C) [Reserved.] For further guidance, see Sec. 1.671-
5T(c)(2)(v)(C).
(vi) [Reserved.] For further guidance, see Sec. 1.671-
5T(c)(2)(vi).
(vii) [Reserved.] For further guidance, see Sec. 1.671-
5T(c)(2)(vii).
* * * * *
(f) * * *
(1) * * *
(i) * * *
(A) [Reserved] For further guidance, see Sec. 1.671-
5T(f)(1)(i)(A).
* * * * *
(viii) * * *
(A) [Reserved.] For further guidance, see Sec. 1.671-
5T(f)(1)(viii).
0
Par. 3. Section 1.671-5T is added to read as follows:
Sec. 1.671-5T Reporting for widely held fixed investment trusts
(temporary).
(a) Through (b)(4) [Reserved.] For further guidance, see Sec.
1.671-5(a) through (b)(4).
(5) The cash held for distribution is the cash held by the WHFIT
(other than trust sales proceeds and proceeds from sales described in
paragraph (c)(2)(iv)(G) of this section) less reasonably required
reserve funds as of the date that the amount of a distribution is
required to be determined under the WHFIT's governing document.
(b)(6) and (b)(7) [Reserved.] For further guidance, see Sec.
1.671-5(b)(6) and (b)(7).
(8) An in-kind redemption is a redemption in which a beneficial
owner receives a pro-rata share of each of the assets of the WHFIT that
the beneficial owner is deemed to own under section 671. For example,
for purposes of this paragraph (b)(8), if beneficial owner A owns a one
percent interest in a WHFIT that holds 100 shares of X corporation
stock, so that A is considered to own a one percent interest in each of
the 100 shares, A's pro-rata share of the X corporation stock for this
purpose is one share of X corporation stock.
(b)(9) through (b)(20) [Reserved.] For further guidance, see Sec.
1.671-5(b)(9) through (b)(20).
(21) Trust sales proceeds equal the amount paid to a WHFIT for the
sale or disposition of an asset held by the WHFIT, including principal
payments received by the WHFIT that completely retire a debt instrument
(other than a final scheduled principal payment) and pro-rata partial
principal prepayments described under Sec. 1.1275-2(f)(2). Trust sales
proceeds do not include amounts paid for any interest income that would
be required to be reported under Sec. 1.6045-1(d)(3). Trust sales
proceeds also do not include amounts paid to a NMWHFIT as the result of
a pro-rata sales of trust assets to effect a redemption described in
paragraph (c)(2)(iv)(G) of this section.
(b)(22) through (c)(2)(iii) [Reserved.] For further guidance, see
Sec. 1.671-5(b)(22) through (c)(2)(iii).
(iv) Asset sales and dispositions. The trustee must report
information regarding sales and dispositions of WHFIT assets as
required in this paragraph (c)(2)(iv). For purposes of this paragraph
(c)(2)(iv), a payment (other than a final scheduled payment) that
completely retires a debt instrument (including a mortgage held by a
WHMT) or a pro-rata prepayment on a debt instrument (see Sec. 1.1275-
2(f)(2)) held by a WHFIT must be reported as a full or partial sale or
disposition of the debt instrument. A pro-rata sale of a trust asset to
effect a redemption, as defined in paragraph (c)(2)(iv)(G) of this
section, is not reported as a sale or disposition under this paragraph
(c)(2)(iv).
(A) General rule. Except as provided in paragraph (c)(2)(iv)(B) of
this section (regarding the exception for certain NMWHFITs) or
paragraph (c)(2)(iv)(C) (regarding the exception for certain WHMTs) of
this section, the trustee
[[Page 43972]]
must report with respect to each sale or disposition of a WHFIT asset--
(1) The date of each sale or disposition;
(2) Information that enables a requesting person to determine the
amount of trust sales proceeds (as defined in paragraph (b)(21) of this
section) attributable to a beneficial owner as a result of each sale or
disposition; and
(3) Information that enables a beneficial owner to allocate, with
reasonable accuracy, a portion of the owner's basis in its trust
interest to each sale or disposition.
(B) Exception for certain NMWHFITs. If a NMWHFIT meets either the
general WHFIT de minimis test of paragraph (c)(2)(iv)(D)(1) of this
section for a calendar year, the qualified NMWHFIT exception of
paragraph (c)(2)(iv)(E) of this section, or the NMWHFIT final calendar
year exception of paragraph (c)(2)(iv)(F) of this section, the trustee
is not required to report under paragraph (c)(2)(iv)(A) of this
section. Instead, the trustee must report sufficient information to
enable a requesting person to determine the amount of trust sales
proceeds distributed to a beneficial owner during the calendar year
with respect to each sale or disposition of a trust asset. The trustee
also must provide requesting persons with a statement that the NMWHFIT
is permitted to report under this paragraph (c)(2)(iv)(B).
(C) Exception for certain WHMTs. If a WHMT meets either of the de
minimis tests of paragraph (c)(2)(iv)(D) of this section for the
calendar year, the trustee is not required to report under paragraph
(c)(2)(iv)(A) of this section. Instead, the trustee must report
information to enable a requesting person to determine the amount of
trust sales proceeds attributable to a beneficial owner as a result of
the sale or disposition. The trustee also must provide requesting
persons with a statement that the WHMT is permitted to report under
this paragraph (c)(2)(iv)(C).
(D) De minimis tests--(1) General WHFIT de minimis test. The
general WHFIT de minimis test applies to a NMWHFIT or to a WHMT that
does not meet the requirements for the special WHMT test in paragraph
(c)(2)(iv)(D)(2) of this section. The general WHFIT de minimis test is
satisfied if trust sales proceeds for the calendar year are not more
than five percent of the net asset value of the trust (aggregate fair
market value of the trust's assets less the trust's liabilities) as of
the later of January 1 of that year or the trust's start-up date (as
defined in Sec. 1.671-5(b)(19)).
(2) Special WHMT de minimis test. A WHMT that meets the asset
requirement of Sec. 1.671-5(g)(1)(ii)(E) satisfies the special WHMT de
minimis test in this paragraph (c)(2)(iv)(D)(2) if trust sales proceeds
for the calendar year are not more than five percent of the aggregate
outstanding principal balance of the WHMT (as defined in Sec. 1.671-
5(g)(1)(iii)(D)) as of the later of January 1 of that year or the
trust's start-up date. For purposes of applying the special WHMT de
minimis test in this paragraph (c)(2)(iv)(D)(2), amounts that result
from the complete or partial payment of the outstanding principal
balance of the mortgages held by the trust are not included in the
amount of trust sales proceeds.
(3) Effect of clean-up call. If a WHFIT fails to meet either de
minimis test described in this paragraph (c)(2)(iv)(D) solely as the
result of a clean-up call, as defined in Sec. 1.671-5(b)(6), the WHFIT
will be treated as having met the de minimis test.
(E) Qualified NMWHFIT exception. The qualified NMWHFIT exception is
satisfied if the calendar year for which the trustee is reporting
begins before January 1, 2011 and--
(1) The NMWHFIT has a start-up date (as defined in Sec. 1.671-
5(b)(19)) before February 23, 2006;
(2) The registration statement of the NMWHFIT becomes effective
under the Securities Act of 1933, as amended (15 U.S.C. 77a, et seq.)
and trust interests are offered for sale to the public before February
23, 2006; or
(3) The registration statement of the NMWHFIT become effective
under the Securities Act of 1933 and trust interests are offered for
sale to the public on or after February 23, 2006, and before July 31,
2006, and the NMWHFIT is fully funded before October 1, 2006.
(F) NMWHFIT final calendar year exception. The NMWHFIT final
calendar year exception is satisfied if--
(1) The NMWHFIT terminates on or before December 31 of the year for
which the trustee is reporting;
(2) A trust interest holder may not roll-over its investment in the
NMWHFIT to another WHFIT; and
(3) The trustee makes reasonable efforts to engage in pro-rata
sales of trust assets to effect redemptions.
(G) Pro-rata sales of trust assets to effect a redemption--(1)
Definition. A pro-rata sale of a trust asset to effect a redemption is
not required to be reported under this paragraph (c)(2)(iv). A pro-rata
sale of a trust asset to effect a redemption occurs when a--
(i) A trust interest holder tenders one or more trust interests for
redemption;
(ii) The trustee sells the pro-rata share of the trust asset that
is deemed to be owned by the trust interest holder under section 671 as
a result of the trust interest holder's ownership of the trust interest
or interests tendered for redemption (See paragraph (b)(8) of this
section for a description of how pro-rata is to be applied for purposes
of this paragraph (c)(2)(iv)(G));
(iii) The trustee engages in the sale solely to obtain cash that is
immediately distributed to the redeeming trust interest holder as a
result of the redemption; and
(iv) The redemption is reported as required under Sec. 1.671-
5(c)(2)(v) by the trustee.
(2) Example. The following example illustrates the definition of a
pro-rata sale of a trust asset to effect a redemption:
Example: Trust has two hundred trust interests and all interests
have equal value and rights. Trust owns two hundred shares of stock
in corporation X, two hundred shares of stock in corporation Y, and
one hundred shares of stock in corporation Z. C owns one trust
interest and tenders it for redemption. To obtain cash for the
redemption, the trustee of Trust sells one share of each of the X
and Y stock and one share of Z stock. Trustee immediately
distributes the proceeds from the sale of the X and the Y stock, as
well as 50% of the proceeds from the sale of the Z stock to C as
redemption proceeds. Trustee will report the redemption under Sec.
1.671-5(c)(2)(v). The sale of the share of X stock and the sale of
the share of Y stock are each a pro-rata sale of a trust asset to
effect a redemption and are not required to be reported under this
paragraph (c)(2)(iv)(G). The proceeds from the sale of the X stock
and the Y stock are not trust sales proceeds under paragraph (b)(21)
of this section and are not included for the purpose of determining
whether Trust meets the de minimis test. The sale of the Z stock,
because it was not a sale of the pro-rata share of the trust asset
that is treated as owned by C is not a pro-rata sale of a trust
asset to effect a redemption and is required to be reported as
provided under paragraph (c)(2)(iv)(A) or (B) of this section,
whichever is applicable. The proceeds from the sale of the Z stock
are trust sales proceeds under paragraph (b)(21) of this section and
included for the purpose of determining whether Trust meets the de
minimis test in paragraph (c)(2)(iv)(D)(1) of this section.
(c)(2)(v)(A) and (B) [Reserved.] For further guidance, see Sec.
1.671-5(c)(2)(v)(A) and (B).
(C) Exception for certain NMWHFITs with dividend income--(1) In
general. The trustee of a NMWHFIT described in paragraph
(c)(2)(v)(C)(2) of this section is not required to report the
information described in Sec. 1.671-5(c)(2)(v)(A) (regarding
redemptions) or (c)(2)(v)(B) (regarding sales). However, the trustee
must report to requesting persons, for
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each date on which the amount of redemption proceeds to be paid for the
redemption of a trust interest is determined, information that will
enable requesting persons to determine the redemption proceeds per
trust interest on that date. The trustee also must provide requesting
persons with a statement that this paragraph applies to the NMWHFIT.
(2) NMWHFITs that qualify for the exception. This paragraph
(c)(2)(v)(C) applies to a NMWHFIT if substantially all the income of
the NMWHFIT consists of dividends (as defined in section 6042(b) and
the regulations thereunder) and the NMWHFIT satisfies either paragraph
(c)(2)(v)(C)(2)(i) or (ii) of this section. Trust sales proceeds and
gross proceeds from a sale described in paragraph (c)(2)(iv)(G) of this
section are ignored for the purpose of determining if substantially all
of a NMWHFIT's income consists of dividends.
(i) The trustee is required by the governing document of the
NMWHFIT to determine and distribute all cash held for distribution (as
defined in paragraph (b)(5) of this section) no less frequently than
monthly. A NMWHFIT will be considered to have satisfied this paragraph
(c)(2)(v)(C)(2)(i) notwithstanding that the governing document of the
NMWHFIT permits the trustee to forego making a required monthly or more
frequent distribution, if the cash held for distribution is less than
0.1% of the aggregate net asset value of the trust as of the date
specified in the governing document for calculating the amount of the
monthly distribution.
(ii) The qualified NMWHFIT exception of paragraph (c)(2)(iv)(E) of
this section is satisfied.
(vi) Information regarding bond premium. The trustee generally must
report information that enables a beneficial owner to determine, in any
manner that is reasonably consistent with section 171, the amount of
the beneficial owner's amortizable bond premium, if any, for each
calendar year. However, if a NMWHFIT meets the general de minimis test
of paragraph (c)(2)(iv)(D)(1) of this section, the qualified NMWHFIT
exception of paragraph (c)(2)(iv)(E) of this section, or the NMWHFIT
final calendar year exception of paragraph (c)(2)(iv)(F) of this
section, the trustee of such NMWHFIT is not required to report
information regarding bond premium.
(vii) Information regarding market discount. The trustee generally
must report information that enables a beneficial owner to determine,
in any manner reasonably consistent with section 1276 (including
section 1276(a)(3)), the amount of market discount that has accrued
during the calendar year. However, if a NMWHFIT meets the general de
minimis test of paragraph (c)(2)(iv)(D)(1) of this section, the
qualified NMWHFIT exception of paragraph (c)(2)(iv)(E) of this section,
NMWHFIT final calendar year exception of paragraph (c)(2)(iv)(F) of
this section, the trustee of such NMWHFIT is not required to provide
information regarding market discount.
(c)(3) through (f)(1)(i) [Reserved.] For further guidance, see
Sec. 1.671-5(c)(3) through (e)(4).
(f) Safe harbor for providing information for certain NMWHFITs--(1)
Safe harbor for trustee reporting of NMWHFIT information. The trustee
of a NMWHFIT that meets the requirements of paragraph (f)(1)(i) of this
section is deemed to satisfy paragraph (c)(1)(i) of this section, if
the trustee calculates and provides WHFIT information in the manner
described in this paragraph (f) and provides a statement to a
requesting person giving notice that information has been calculated in
accordance with this paragraph (f)(1).
(i) In general--(A) Eligibility to report under this safe harbor.
Only NMWHFITs that meet the requirements set forth in paragraphs
(f)(1)(i)(A)(1) and (2) of this section may report under this safe
harbor. For purposes of determining whether paragraph (f)(1)(i)(A)(1)
of this section is met, trust sales proceeds and gross proceeds from
sales described in paragraph (c)(2)(iv)(G) of this section are ignored:
(1) Substantially all of the NMWHFIT's income is from dividends or
interest; and
(2) All trust interests have identical value and rights.
(f)(1)(i)(B) through (f)(vii) [Reserved.] For further guidance, see
Sec. 1.671-5(f)(1)(i)(B) through (f)(vii).
(viii) Reporting market discount information under the safe
harbor--(A) In general. If the trustee of a NMWHFIT is required to
provide information regarding market discount under paragraph
(c)(2)(vii) of this section, the trustee must provide the information
required under Sec. 1.671-5(f)(1)(iv)(A)(1)(iii) of this section. If
the trustee is not required to provide market discount information
under paragraph (c)(2)(vii) of this section (because paragraph
(c)(2)(iv) of this section applies to the NMWHFIT), the trustee is not
required under this paragraph (f) to provide any information regarding
market discount.
(f)(1)(viii)(B) through (m) [Reserved.] For further guidance, see
Sec. 1.671-5(f)(1)(viii)(B) through (m).
Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
Approved: July 28, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary (Tax Policy).
[FR Doc. 06-6649 Filed 7-28-06; 4:15 pm]
BILLING CODE 4830-01-P