Part III. Administrative, Procedural, and Miscellaneous

take into account, as of the last day of the deemed owner’s 2000 taxable year, the S corporation pass-thru items allocable to stock held by the ESBT.

METHOD FOR CREDITING ESTIMATED TAX PAYMENTS TO DEEMED OWNER AND CALCULATING ANY UNDERPAYMENT OF ESTIMATED TAX PENALTY

An ESBT that wants estimated tax payments that were made by the trust under the trust’s EIN to be treated as made by the deemed owner of the ESBT must file Form 1041-T, Allocation of Estimated Tax Payments to Beneficiaries, in the time and manner specified in the Instructions to Form 1041-T with the following modifications. At the top of the Form 1041-T, the following statement should be written, “FILED PURSUANT TO NOTICE 200125.” Each reference in the Form 1041-T to beneficiary is deemed to refer to the deemed owner of the ESBT solely for purposes of this notice and the Form 1041-T should be completed accordingly. The trust’s estimated tax payments included on Form 1041-T will be treated as a payment of estimated tax made by the deemed owner of the ESBT on January 15, 2001. If the deemed owner of the ESBT is required to file Form 2210, Underpayment of Estimated Tax by Individuals, Estates, and Trusts, the deemed owner may use Schedule AI, Annualized Income Install- ment Method . For this purpose, the deemed owner may take into account, as of the last day of the deemed owner’s 2000 taxable year, all S corporation items allocable to the grantor portion of the ESBT.

EFFECTIVE DATE

This notice applies only for taxable years of ESBTs and of the deemed owners of those ESBTs ending on December 29, 30, or 31, 2000.

DRAFTING INFORMATION

The principal author of this notice is James A. Quinn of the Office of the Associate Chief Counsel (Passthroughs and Special Industries). For further information re

Estimated Tax Election for Owners of ESBTs

Notice 2001–25

PURPOSE AND BACKGROUND

This notice provides guidance to electing small business trusts (ESBTs) and individuals who are treated as the owners of ESBTs (deemed owners) under subpart E, part I, subchapter J, chapter 1 of the Internal Revenue Code (subpart E), regarding estimated tax payments mistakenly made by ESBTs rather than the deemed owners of the ESBTs for taxable years ending on December 29, 30, or 31, 2000. Questions have arisen whether these estimated tax payments made by ESBTs (under the ESBTs’ employer identification numbers (EINs)) for the 2000 taxable year can be credited to the accounts of the deemed owners of the ESBTs, and whether any penalties for underpayment of estimated tax are applicable.

Proposed Income Tax Regulations (REG–251701–96, 2001–4 I.R.B. 396) under § 1361(e) and § 641(c) were published in the Federal Register on December 29, 2000 (65 Fed. Reg. 82963) providing guidance with respect to ESBTs. Section 1.641(c)–1(a) provides that an ESBT is treated as two separate trusts for purposes of determining income tax. The portion of an ESBT that consists of stock in one or more S corporations (the S portion) is treated as one trust. The portion of an ESBT that consists of all the other assets in the trust is treated as a separate trust. The grantor or another person may be treated as the owner of all or a portion of either or both trusts under subpart E (grantor portion).

Section 1.641(c)–1(c) provides that the grantor or another person who is treated as the owner of a portion of the ESBT includes in computing taxable income items of income, deductions, and credits against tax attributable to that portion of the ESBT under § 671.

Section 1.641(c)–1(j) provides that § 1.641(c)–1(a), (b), and (c) are proposed to be applicable for taxable years of ESBTs that end on and after December 29, 2000. Prior to the issuance of the proposed

ESBT regulations, some taxpayers took the position that an ESBT election could be made for a grantor trust and that the rules relating to the taxation of ESBTs applied to the entire portion of the trust holding S corporation stock. Consistent with this position, these ESBTs made estimated tax payments for the 2000 taxable year under the trusts’ EINs, and the deemed owners did not take into account the S corporation income in calculating their estimated tax payments for the 2000 taxable year.

Section 6654(a) provides that except as otherwise provided in § 6654, in the case of any underpayment of estimated tax by an individual, there shall be added to the tax under chapter 1 and the tax under chapter 2 for the taxable year an amount determined by applying (1) the underpayment rate established by § 6621, (2) to the amount of the underpayment, (3) for the period of the underpayment.

Section 6654(d)(2)(B) provides that in the case of any required installment, the annualized income installment is the excess of (i) the amount equal to the applicable percentage of the tax for the taxable year computed by placing on an annualized basis the taxable income, alternative minimum taxable income, and adjusted self-employment income for months in the taxable year ending before the due date for the installment, over (ii) the aggregate amount of any prior required installments for the taxable year.

Section 6654(e)(3)(A) provides that no addition to tax shall be imposed under § 6654(a) with respect to any underpayment to the extent the Secretary determines that by reason of casualty, disaster, or other unusual circumstances the imposition of such addition to tax would be against equity and good conscience.

SCOPE

This notice provides a method for having the estimated tax payments that were made by an ESBT under the trust’s EIN credited to the deemed owner’s account for estimated tax purposes. This notice also provides that for purposes of the deemed owner’s computation of annualized income installments under § 6654(d)(2)(B), the deemed owner may

2001–13 I.R.B. 941 March 26, 2001

garding this notice contact Mr. Quinn at (202) 622-3060 (not a toll-free call).

Trust 645 Election

Notice 2001–26

This notice provides guidance regarding the election for a trust to be treated as part of an estate under § 645 of the Internal Revenue Code and the filing of a Form 1041, U.S. Income Tax Return for Estates and Trusts, for the first (short) taxable year of the trust.

ACTION: Notice of solicitation of comments.

SUMMARY: This notice was published in the Federal Register on March 7, 2001, as BPG-132413-00. The IRS and Treasury Department are soliciting comments on the criteria that should be used to determine whether a taxpayer is a dealer in securities futures contracts (or options on such contracts) for purposes of section 1256 of the Internal Revenue Code.

DATES: Written and electronic comments are requested on or before May 5, 2001.

ADDRESSES: Send submissions to: CC:M&SP:RU (BPG–132413–00), room 5226, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered between the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (BPG–132413– 00), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC. Alternatively, taxpayers may submit comments electronically via the Internet by submitting comments directly to the IRS Internet site at http://www.irs.gov/tax_regs/regslist.html.

FOR FURTHER INFORMATION CONTACT: Concerning the notice, Patrick E. White (202) 622–3920; concerning submission and delivery of comments, Treena Garrett, (202) 622–7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

The Commodities Futures Modernization Act of 2000, enacted as part of the Consolidated Appropriations Act, 2001 (Public Law 106–554, 114 Stat. 2763), authorizes the trading of securities futures contracts, a new type of derivative financial product. Another portion of the same enactment—the Community Renewal Tax Relief Act of 2000 (the Act)—prescribes the tax treatment of these financial products. In general, gain or loss is recognized on securities futures contracts upon disposition, and the character of such gain or loss is determined by newly enacted section 1234B.

The timing and character of gains and losses on dealer securities futures contracts, however, is determined by section 1256. Thus, dealer securities futures contracts are subject to mark-to-market treatment, and capital gains or losses are

Section 645 provides that a qualified revocable trust may elect to be treated and taxed for income tax purposes as part of an estate (and not as a separate trust) for all taxable years of the estate ending after the date of the decedent’s death and before the applicable date described in § 645(b)(2).

Proposed income tax regulations under § 645 published in the Federal Register on December 18, 2000 (65 Fed. Reg. 79015), contain different procedures for making the election and filing the short year return for the trust. These procedures are proposed to replace the procedures in Rev. Proc. 98–13 when the regulations are finalized. Under the proposed regulations, the § 645 election is considered made upon the filing of the Form 1041, with the required election statement attached, for the first taxable year of the estate, or if there is no personal representative, for the first taxable year of the trust filing as an estate. Section 1.645–1(c) of the proposed Income Tax Regulations. The proposed regulations also provide that if the § 645 election will be made, the trust is not required to obtain a TIN for the trust or file a Form 1041 for the short year. In such a situation, the trust’s items of income, deductions, and credits are included on the combined Form 1041 for the electing trust and related estate under the TIN for the related estate. Section 1.645–1(d)(1)(i) and (ii)(A). The Internal Revenue Service has received numerous requests that taxpayers be permitted to use the procedures in the proposed regulations prior to the time that the final regulations are issued. Accordingly, estates and qualifying revocable trusts of decedents who die after December 31, 1999, and before the effective date of the final § 645 regulations, may choose to use either the election and reporting procedures set forth in Rev. Proc. 98–13, or the election and reporting procedures set forth in § 1.645–1(c) and § 1.645–1(d)(1)(i) and (ii)(A) of the proposed regulations.

The principal author of this notice is Pietro Canestrelli of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice contact Pietro Canestrelli at (202) 622-3060 (not a tollfree call).

Dealers in Securities Futures Contracts; Request for Comments

Notice 2001–27

AGENCY: Internal Revenue Service (IRS), Treasury.

Rev. Proc. 98–13, 1998–1 C.B. 370, sets forth procedures for making the § 645 election and filing the appropriate tax returns. A qualified revocable trust that will make the § 645 election generally is required to obtain a taxpayer identification number (TIN) and to file a Form 1041 for the trust’s short taxable year beginning with the decedent’s death and ending December 31 of that year. A trust does not have to file a short year return if: (1) the Form 1041 for the estate’s first taxable year is filed before the due date for filing a Form 1041 for the trust for the taxable year ending after the date of the decedent’s death; (2) the trust items attributable to the decedent are reported pursuant to § 1.671–4(b)(2)(i)(A) or (B); and (3) the entire trust is a qualified revocable trust.

Under Rev. Proc. 98–13, if the trust is required to file a Form 1041 for the short taxable year, a copy of the required election statement must be attached to that form. The original of the required statement must be attached to the Form 1041 filed for the estate’s first taxable year. The § 645 election is considered made on the first to occur of the filing of the estate’s Form 1041 with the original required statement attached or the filing of the trust’s Form 1041 with the copy of the required statement attached. Once the election is made, the items of income, deductions, and credits attributable to the trust for the short year must be excluded from the trust’s Form 1041 and reported on the estate’s Form 1041.

March 26, 2001 942 2001–13 I.R.B.

treated as 60 percent long-term capital gain or loss and 40 percent short-term capital gain or loss. Section 1256(g)(9) defines dealer securities futures contracts as securities futures contracts (and options on such contracts) that are traded on a qualified board or exchange and are entered into by a dealer in the normal course of the dealer’s business of dealing in such contracts or options. For this purpose, a person is a dealer in securities futures contracts or options on such contracts if the Secretary of the Treasury determines that the person performs functions with respect to such contracts or options similar to the functions performed with respect to stock options by persons registered with a national securities exchange as a market maker or specialist in listed options. The Act requires the Secretary of the Treasury or his delegate to make this determination no later than July 1, 2001.

The legislative history of the Act states the following with respect to the determination process:

The determination of who is a dealer in securities futures contracts is to be made in a manner that is appropriate to carry out the purposes of the provision, which generally is to provide comparable tax treatment between dealers in securities futures contracts, on the one hand, and dealers in equity options, on the other. Although traders in securities futures contracts (and options on such contracts) may not have the same market-making obligations as market makers or specialists in equity options, many traders are expected to perform analogous functions to such market makers or specialists by providing market liquidity for securities futures contracts (and options) even in the absence of a legal obligation to do so. Accordingly, the absence of market-making obligations is not inconsistent with a determination that a class of traders are dealers in securities futures contracts (and options), if the relevant factors, including providing market liquidity for such contracts (and options), indicate that the market functions of the traders is comparable to that of equity options dealers. H.R. Conf. Rep. No. 106–1033, 106th Cong., 2d Sess. 1036 (2000).

The IRS and Treasury Department, therefore, seek taxpayers’ suggestions concerning both the substance of these determinations and the manner in which they should be made. As described in more detail below, of particular interest are comments that will aid in establishing objective criteria and processes for making the determinations. In addition, comments are solicited in certain specific areas.

First, comments are requested about the activities and obligations of equity options dealers, especially those activities and obligations that contribute to the establishment and maintenance of an orderly market. For purposes of this notice, the term equity options dealer means a market maker or specialist described in section 1256(g)(8) with respect to options that are described in section 1256(g)(6) without regard to the requirement that indices be narrow based. Any relevant way in which the activities and obligations of market makers differ from those of specialists should be described; and the significance of this difference for any comment or other response to this notice should be explained when relevant.

Among the questions on which information is sought are the following: What are the activities imposed on, or undertaken by, equity option dealers that are considered making a market? Do equity option dealers engage in activities that extend beyond making a market but that contribute to the establishment and maintenance of orderly markets? For example, equity options dealers trading for their own accounts (and not in response to orders placed by an off-exchange customer) may be a significant source of market volume. Is that the case? If so, to what extent does this added volume contribute to market liquidity? Are there other ways in which these dealers contribute to the markets in which they participate? What differences are there, in scale or kind, between the activities of equity options dealers and similar activities of other market participants?

Although some relevant activities of equity options dealers may be ongoing, other critical activities may commence, or change significantly in nature or scope, during periods of market disequilibrium. Information with respect to equity options dealers’ activities at these times will be particularly welcome.

Second, information is requested regarding activities of traders ¹ on futures markets. Although traders on futures markets may not have specific marketmaking obligations, their trading activities may contribute to the establishment and maintenance of orderly markets. Is that typically the case? Descriptions of trading activities on futures markets generally will be helpful, and insights and supporting data on the nature and extent of trading by specific groups of futures traders will be particularly useful. Relevant groups for this purpose may be based on the type of contract traded, the extent of trading for one’s own account (as opposed to trading in response to orders from off-exchange customers), and the class of exchange membership.

This discussion should be accompanied, if possible, by an explanation of the extent to which the activities of traders in securities futures contracts are expected to resemble the activities of the specific groups described. In general, expectations of how trading in securities futures contracts may or may not differ from trading in current products will also be helpful.

Third, comments are solicited on administrable and economically meaningful criteria for identifying any traders that should be treated as dealers in securities futures contracts. Criteria for identifying these persons might include, among others, the nature and extent of trading activities (including the extent to which the person’s trading is concentrated in certain products), class of exchange membership, capital, and share of net income derived from trading activities. Should it be possible for a person to be a dealer in securities futures contracts with respect to some such contracts but not with respect to others?

If a taxpayer’s satisfaction of the suggested criteria may vary over time, comments are also requested respecting rules for determining when a taxpayer becomes, or ceases to be, a dealer in securities futures contracts. For example, should it be possible for the status as a

1 The references here, and in the following paragraphs, to traders are not intended to exclude any taxpayers who are not treated as traders for tax purposes but who may perform functions similar to the functions performed by equity options dealers.

2001–13 I.R.B. 943 March 26, 2001

dealer in securities futures contracts to change within a single taxable year or only between taxable years? Does a taxpayer need to know before it enters a transaction whether it is treated as a dealer for purposes of that transaction? Will special rules be required for taxpayers who have not previously traded in the contracts? (Initially, all taxpayers fall into this category.) Comments regarding both substantive criteria and the method of application will be useful.

Comments

Written or electronic comments (a signed original and eight (8) copies, if written) should be timely submitted (in the manner described in the ADDRESSES portion of this notice) to the IRS. All comments will be available for public inspection and copying.

Drafting Information

The principal authors of this notice are Patrick E. White, Office of Associate

Chief Counsel (Financial Institutions and Products), and Matthew J. Eichner, Office of Tax Analysis, United States Department of the Treasury. However, other personnel from the IRS and Treasury Department participated in its development.

Lon B. Smith, Acting Associate Chief Counsel (Financial Institutions & Products)

Weighted Average Interest Rate Update

Notice 2001–28

Notice 88–73 provides guidelines for determining the weighted average interest rate and the resulting permissible range of interest rates used to calculate current liability for the purpose of the full funding limitation of § 412(c)(7) of the Internal Revenue Code as amended by the Omnibus Budget Reconciliation Act of 1987 and as further amended by the Uruguay

Round Agreements Act, Pub. L. 103-465 (GATT).

The average yield on the 30-year Treasury Constant Maturities for February 2001 is 5.45 percent. The following rates were determined for the plan years beginning in the month shown below.

90% to 105% 90% to 110% Weighted Permissible Permissible Month Year Average Range Range

March 2001 5.87 5.29 to 6.17 5.29 to 6.46

Drafting Information

The principal author of this notice is Todd Newman of the Employee Plans, Tax Exempt and Government Entities Division. For further information regarding this notice, please call Mr. Newman at (202) 283-9702 (not a toll-free number).

March 26, 2001 944 2001–13 I.R.B.