Part I. Rulings — Internal Revenue Bulletin 2003-50

Section 1.—Tax Imposed of the Code with respect to a contribution Section 661(a) provides that a trust

Section 1(h) of the Code provides that certain dividends paid to an individual shareholder from either a domestic corporation or a "qualified foreign corporation" are subject to tax at the reduced rates applicable to certain capital gains. See Notice 2003-79, page 1206.

Section 170.—Charitable, etc., Contributions and Gifts

Is a trust allowed a charitable deduction under section 642(c) of the Internal Revenue Code or a distribution deduction under section 661(a)(2) with respect to a contribution to charity of trust principal that meets the requirements of a qualified conservation contribution under section 170(h)? See Rev. Rul. 2003-123, page 1200.

Section 401.—Qualified Pension, Profit-Sharing, and Stock Bonus Plans

26 CFR 1.401(a)–2: Impossibility of diversion under qualified plan or trust.

A revenue procedure describes limited relief from disqualification for certain defined contribution retirement plans currently maintained by Professional Employer Organizations. See Rev. Proc. 2003-86, page 1211.

Section 641.—Imposition of Tax

26 CFR 1.641(a)–2: Gross income of estates and trusts.

Section 642.—Special Rules for Credits and Deductions

26 CFR 1.642(c)–1: Unlimited deduction for amounts paid for a charitable purpose. (Also §§ 170, 661, 662, 663; 1.641(a)–2, 1.663(a)–2.)

Qualified conservation contribution. This ruling clarifies the Service’s position that a trust is not allowed either a charitable deduction under section 642(c) or a distribution deduction under section 661(a)(2)

of the Code with respect to a contribution to charity of trust principal that meets the requirements of a qualified conservation contribution under section 170(h). Rev. Rul. 68–667 amplified.

Rev. Rul. 2003–123

ISSUE

Is a trust allowed a charitable deduction under § 642(c) of the Internal Revenue Code or a distribution deduction under § 661(a)(2) with respect to a contribution to charity of trust principal that meets the requirements of a qualified conservation contribution under § 170(h)?

FACTS

Trust is a complex trust subject to the provisions of §§ 661–663. Since its inception, Trust has owned two adjacent parcels of real property located in State A . One parcel is 20 acres of undeveloped land, and the other parcel is 50 acres with improvements. The governing instrument of Trust authorizes the trustee to make contributions to charity, including contributions of Trust’s gross income. The trustee conveys a perpetual conservation easement, valued at $10 x, in the 20-acre parcel to State Agency, an organization described in § 170(c)(1). The contribution meets the requirements of a qualified conservation contribution within the meaning of § 170(h). For the year of the contribution, Trust’s gross income is $20 x, and no distributions are made to Trust’s beneficiaries.

LAW AND ANALYSIS

Section 642(c)(1) provides that a trust (other than a trust subject to §§ 651 and 652) is allowed a deduction in computing its taxable income for any amount of gross income, without limitation, that pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in § 170(c) (determined without regard to § 170(c)(2)(A)). This deduction is in lieu of the charitable deduction allowed by § 170(a).

Section 1.641(a)–2 of the Income Tax Regulations provides that the gross income of an estate or trust is determined in the same manner as that of an individual.

Section 661(a) provides that a trust (other than a trust subject to §§ 651 and 652) is allowed as a deduction in computing its taxable income the sum of (1) any amount of income for the taxable year required to be distributed currently (including any amount required to be distributed that may be paid out of income or corpus to the extent the amount is paid out of income for the taxable year) and (2) any amount properly paid or credited or required to be distributed for a taxable year. The deduction, however, cannot exceed the distributable net income of the trust.

Section 662(a) provides that the beneficiary of a trust must include in the beneficiary’s gross income the amount described in § 661(a) that is paid, credited, or required to be distributed by the trust to that beneficiary.

Section 663(a)(2) provides that any amount paid or permanently set aside or otherwise qualifying for the deduction provided in § 642(c) (computed without regard to §§ 508(d), 681, and 4948(c)(4)) shall not be included as an amount falling within §§ 661(a) and 662(a).

Section 1.663(a)–2 provides that any amount that is paid, permanently set aside, or to be used for the charitable purposes specified in § 642(c) and that is allowable as a deduction under that section is not allowed as a deduction to an estate or trust under § 661 or treated as an amount distributed for purposes of determining the amounts includible in gross income of beneficiaries under § 662. Amounts paid, permanently set aside, or to be used for charitable purposes are deductible by estates or trusts only as provided in § 642(c). See also Rev. Rul. 68–667, 1968–2 C.B. 289, holding that an amount paid to charity from a trust’s corpus does not qualify either for the charitable deduction under § 642(c) or for the distribution deduction under § 661(a)(2).

Under § 642(c), a trust is generally allowed an unlimited charitable deduction for amounts that are paid from gross income for charitable purposes pursuant to the terms of the governing instrument. Because § 642(c) specifically requires that a charitable deduction is available only if the source of the contribution is

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3201(b), 3221(b), and 3211(b) of the Internal Revenue Code. See Notice 2003-78, page 1205.

Section 3241.—Determi- nation of Tier 2 Tax Rate Based on Average Account Benefits Ratio

A notice publishes the tier 2 Railroad Retirement Tax Act (RRTA) tax rates for 2004 under sections 3201(b), 3221(b), and 3211(b) of the Internal Revenue Code. See Notice 2003-78, page 1205.

Section 6031(a).—Return of Partnership Income

26 CFR 1.6031(a)–1: Return of partnership income.

T.D. 9094

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Return of Partnership Income

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

SUMMARY: This document contains final and temporary regulations that authorize the Commissioner to provide exceptions to the requirements of section 6031(a) of the Internal Revenue Code for certain partnerships by guidance published in the Internal Revenue Bulletin. The text of these temporary regulations also serves as the text of the proposed regulations (REG–115472–03) set forth in this issue of the Bulletin.

DATES: Effective Date : These regulations are effective November 5, 2003.

Applicability Date : For dates of applicability, see §§1.6031(a)–1(f)(2) and 1.6031(a)–1T(f)(2).

FOR FURTHER INFORMATION CONTACT: David A. Shulman, (202) 622–3070 (not a toll-free number).

gross income, tracing of the contribution is required in determining its source. Van Buren v. Commissioner, 89 T.C. 1101, 1109 (1987); Riggs National Bank v. United States, 352 F.2d 812 (Ct. Cl. 1965); Mott v. United States, 462 F.2d 512 (Ct. Cl. 1972), cert. denied, 409 U.S. 1108 (1973); see also Crestar Bank v. Internal Revenue Service, 47 F. Supp. 2d 670 (E.D. Va. 1999). In the present situation, Trust’s contribution of the conservation easement in the 20-acre parcel is made pursuant to the terms of Trust’s governing instrument. The contribution meets the requirements of a qualified conservation contribution within the meaning of § 170(h) and thus is for a charitable purpose. The charitable contribution, however, is made with respect to Trust principal, not from the gross income of Trust. Because the contribution of the conservation easement is not paid from Trust’s gross income, Trust is not allowed a charitable deduction under § 642(c) for the contribution.

Furthermore, no deduction is allowed under § 661(a)(2) because amounts paid, permanently set aside, or to be used for charitable purposes are deductible by trusts only as provided in § 642(c). Section 1.663(a)–2. See also U.S. Trust Company v. Internal Revenue Service, 803 F.2d 1363 (5 ^th Cir. 1986); Mott, supra ; Rev. Rul. 68–667.

HOLDING

A trust is not allowed a charitable deduction under § 642(c) and is not allowed a distribution deduction under § 661(a)(2) with respect to a contribution to charity of trust principal that meets the requirements of a qualified conservation contribution under § 170(h).

EFFECT ON OTHER REVENUE RULING

Rev. Rul. 68–667 is amplified.

DRAFTING INFORMATION

The principal author of this revenue ruling is DeAnn K. Malone of the Office of the Associate Chief Counsel (Passthroughs

and Special Industries). For further information regarding this revenue ruling, contact DeAnn K. Malone at (202) 622–7830 (not a toll-free call).

Section 661.—Deduction for Estates and Trusts Accumulating Income or Distributing Corpus

Is a trust allowed a distribution deduction under section 661(a)(2) with respect to a contribution to charity of trust principal that meets the requirements of a qualified conservation contribution under section 170(h)? See Rev. Rul. 2003-123, page 1200.

Section 662.—Inclusion of Amounts in Gross Income of Beneficiaries of Estates and Trusts Accumulating Income or Distributing Corpus

Section 663.—Special Rules Applicable to Sections 661 and 662

26 CFR 1.663(a)–2: Charitable, etc., distributions.

Section 3201.—Rate of Tax

A notice publishes the tier 2 Railroad Retirement Tax Act (RRTA) tax rates for 2004 under sections 3201(b), 3221(b), and 3211(b) of the Internal Revenue Code. See Notice 2003-78, page 1205.

Section 3211.—Rate of Tax

A notice publishes the tier 2 Railroad Retirement Tax Act (RRTA) tax rates for 2004 under sections 3201(b), 3221(b), and 3211(b) of the Internal Revenue Code. See Notice 2003-78, page 1205.

Section 3221.—Rate of Tax

A notice publishes the tier 2 Railroad Retirement Tax Act (RRTA) tax rates for 2004 under sections

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Counsel for Advocacy of the Small Business Administration for comment on its impact on small business.

Drafting Information

The principal author of these regulations is David A. Shulman of the Office of the Associate Chief Counsel (Passthroughs & Special Industries), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

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Amendments to the Regulations

Accordingly, 26 CFR part 1 is amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding the following citation:

Authority: 26 U.S.C. 7805. - * * Section 1.6031(a)–1T is also issued under section 404 of the Tax Equity and Fiscal Responsibility Act of 1982 (Public Law 97–248; 96 Stat. 324, 669) (TEFRA). * * * Par. 2. Section 1.6031(a)–1 is amended as follows:

In paragraph (a)(1), the first sentence is amended by adding the language “and §1.6031(a)–1T” immediately following the language “of this section”.
The text of paragraph (a)(3) is redesignated as paragraph (a)(3)(i).
Paragraph (a)(3)(ii) is added.
Paragraph (f) is revised. The additions and revisions read as follows:

§1.6031(a)–1 Return of partnership income.

(a) * - (3) * * * (i) * * * (ii) [Reserved]. For further guidance see §1.6031(a)–1T(a)(3)(ii).

- - - (f) Effective dates . This section applies to taxable years of a partnership beginning after December 31, 1999, except that—

(1) Paragraph (b)(3) of this section applies to taxable years of a foreign partnership beginning after December 31, 2000; and

SUPPLEMENTARY INFORMATION:

Background

A partnership may be used to create the economic equivalent of a variable-rate taxexempt bond. The partnership acquires a tax-exempt obligation and issues both interests that are entitled to preferred returns based on current short-term yields on tax-exempt obligations (variable-rate interests) and interests that are entitled to the rest of the partnership’s income (inverse interests). As a consequence of this structure, the partner that holds a variable-rate interest in the partnership receives a return that is equivalent to the return on a variable-rate tax-exempt bond. Under section 702(b), income received by a partnership generally retains its character when allocated to a partner.

Section 6031(a) requires every partnership to make a return for each taxable year stating specifically the items of its gross income and the deductions allowable by subtitle A of the Internal Revenue Code, as well as other specified information. Section 6031(b) requires every partnership that is required to file a return under section 6031(a) to provide each person who is a partner with such information as may be required by regulations. Section 1.6031(b)–1T(a)(3) provides that the partner must be provided such information as is required by any form or instructions that may be required. Generally, a Schedule K–1 (Form 1065) must be provided to each partner.

Section 404 of the Tax Equity and Fiscal Responsibility Act of 1982 (Public Law 97–248; 96 Stat. 324, 669) (TEFRA) authorizes regulations that provide exceptions to the filing requirement of section 6031. Current §1.6031(a)–1(a)(3) and (c) provides exceptions for partnerships that have no income, deductions, or credits for a taxable year and for eligible partnerships that elect to be excluded from the application of subchapter K in the manner specified by §1.761–2(b)(2)(i) or are deemed to have so elected under §1.761–2(b)(2)(ii).

The Treasury Department and the IRS believe that it is in the interest of sound and efficient administration of the tax laws to permit the Commissioner to provide in a timely and flexible manner for an additional exception to the requirements of

section 6031(a) in situations in which all or substantially all of the partnership’s income is derived from the holding or disposition of tax-exempt obligations or shares in a regulated investment company (as defined in section 851(a)) (RIC) that pays exempt-interest dividends (as defined in section 852(b)(5)).

Explanation of Provisions

Under temporary regulations, the Commissioner may, in guidance published in the Internal Revenue Bulletin, provide an exception to the reporting requirements of section 6031(a) for partnerships in situations in which all or substantially all of the partnership’s income is derived from the holding or disposition of tax-exempt obligations (as defined in section 1275(a)(3) and §1.1275–1(e)) or shares in a RIC that pays exempt-interest dividends (as defined in section 852(b)(5)). The exception may be conditioned on substitute reporting and eligibility and other requirements. In conjunction with issuance of this temporary regulation, the Commissioner is publishing Rev. Proc. 2003–84, 2003–48 I.R.B. 1159, which provides for an exception to section 6031 for specified eligible partnerships.

Effective Date

These regulations are effective November 5, 2003.

Special Analyses

These temporary regulations are necessary to allow the publication of guidance in the Internal Revenue Bulletin to reduce the burden on certain partnerships. Accordingly, good cause is found for dispensing with notice and public procedure pursuant to 5 U.S.C. 553(b)(B) and with a delayed effective date pursuant to 5 U.S.C. 553(d)(1) and (3). It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. Because no preceding notice of proposed rulemaking is required for this temporary regulation, the provisions of the Regulatory Flexibility Act do not apply. Pursuant to section 7805(f) of the Code, these temporary regulations will be submitted to the Chief

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Section 6042.—Returns Regarding Payments of Dividends and Corporate Earnings and Profits

A notice provides guidance for persons required to make returns and provide statements under section 6042 ( e.g., Form 1099-DIV) regarding distributions with respect to securities issued by a foreign corporation, and for individuals receiving such statements. See Notice 2003-79, page 1206.

Section 6048.—Information With Respect to Certain Foreign Trusts

A notice describes information reporting for certain Canadian retirement plans. See Notice 2003-75, page 1204.

(2) [Reserved]. For further guidance, see §1.6031(a)–1T(f)(2).

Par. 3. Section 1.6031(a)–1T is added to read as follows:

§1.6031(a)–1T Return of partnership income (temporary).

(a) through (a)(3)(i) [Reserved]. For further guidance, see §1.6031(a)–1(a) through (a)(3)(i).

(ii) The Commissioner may, in guidance published in the Internal Revenue Bulletin (see §601.601(d)(2)(ii)( b ) of this chapter), provide for an exception to partnership reporting under section 6031 and for conditions for the exception, if all or substantially all of a partnership’s income is derived from the holding or disposition of tax-exempt obligations (as defined in section 1275(a)(3) and §1.1275–1(e)) or shares in a regulated investment company (as defined in section 851(a)) that pays

exempt-interest dividends (as defined in section 852(b)(5)).

(a)(4) through (f)(1) [Reserved]. For further guidance, see §1.6031(a)–1(a)(4) through (f)(1).

(f)(2) Effective dates . Paragraph (a)(3)(ii) of this section applies to taxable years of a partnership beginning on or after November 5, 2003. The applicability of paragraph (a)(3)(ii) of this section expires on or before November 6, 2006.

Mark E. Matthews, Deputy Commissioner for Services and Enforcement .

Approved October 30, 2003.

Pamela F. Olson, Assistant Secretary of the Treasury .

(Filed by the Office of the Federal Register on November 5, 2003, 1:41 p.m., and published in the issue of the Federal Register for November 10, 2003, 68 F.R. 63733)

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