SECTION 1. PURPOSE

This revenue procedure provides guidance to persons that consider entering into a withholding agreement with the Internal Revenue Service (‘‘Service’’) in order to be treated as a Qualified Intermediary (‘‘QI’’) for pur

Drafting Information

The principal author of this regulation is Dale Carlton, Office of the Assistant Chief Counsel (Passthroughs and Special Industries). However, personnel from other offices of the IRS and Treasury Department participated in their development.

- - - - -

Proposed Amendment to the Regulations

Accordingly, 26 CFR part 25 is proposed to be amended as follows:

PART 25—GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954

Paragraph 1. The authority citation for part 25 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * - Par. 2. Section 25.2702–5 is amended as follows:

1. Paragraph (a) is redesignated as paragraph (a)(1) and paragraph (a)(2) is added.

2. In paragraph (b)(1), four new sentences are added after the third sentence.

3. Paragraph (c)(5)(ii)(C) is revised.

4. Paragraph (c)(9) is added. The additions and revisions read as follows:

§25.2702–5. Personal residence trusts.

(a)(1) In general . * - (2) Modification of trust . A trust that does not comply with one or more of the regulatory requirements under paragraph (b) or (c) of this section will, nonetheless, be treated as satisfying these requirements if the trust is modified, by judicial reformation (or nonjudicial reformation if effective under state law), to comply with the requirements. The reformation must be commenced within 90 days after the due date (including extensions) for the filing of the gift tax return reporting the transfer of the residence under section 6075 and must be completed within a reasonable time after commencement. If the reformation is not completed by the due date (including extensions) for filing the gift tax return,

the grantor or grantor’s spouse must attach a statement to the gift tax return stating that the reformation has been commenced or will be commenced within the 90-day period.

(b) - - - (1) * - - In addition, the trust does not meet the requirements of this section unless the governing instrument prohibits the trust from selling or transferring the residence, directly or indirectly, to the grantor, the grantor’s spouse, or an entity controlled by the grantor or the grantor’s spouse, at any time after the original term interest during which the trust is a grantor trust. For purposes of the preceding sentence, a sale or transfer to another grantor trust of the grantor or the grantor’s spouse is considered a sale or transfer to the grantor or the grantor’s spouse. For purposes of this section, a grantor trust is a trust treated as owned by the grantor or the grantor’s spouse within the meaning of sections 671– 677. The term control is defined in §25.2701–2(b)(5)(ii) and (iii). * -

- - - - -

(c) - - (5) - - (ii) - - (C) Sale proceeds . The governing instrument may permit the sale of the residence (except as set forth in paragraph (c)(9) of this section) and may permit the trust to hold proceeds from the sale of the residence, in a separate account.

- - - - -

(9) Sale of residence to grantor, grantor’s spouse, or entity controlled by grantor or grantor’s spouse . The governing instrument must prohibit the trust from selling or transferring the residence, directly or indirectly, to the grantor, the grantor’s spouse, or an entity controlled by the grantor or the grantor’s spouse during the original term interest of the trust, or at any time after the original term interest that the trust is a grantor trust. For purposes of the preceding sentence, a sale or transfer to another grantor trust of the grantor or the grantor’s spouse is considered a sale or transfer to the grantor or the grantor’s spouse. For purposes of this section, a grantor trust is a trust treated as owned by the grantor or the grantor’s spouse within the meaning of sections 671–677. The

7 1996–27 I.R.B.

poses of section 1.1441–1 (e)(5) of the Income Tax Regulations. The withholding agreements described in this revenue procedure are relevant to payments of interest, dividends, and gross proceeds on portfolio investments held through one or more intermediaries. This revenue procedure describes the application procedures for a withholding agreement and the terms that the Service will ordinarily require to be incorporated into the agreement.