Part I. Rulings — Internal Revenue Bulletin 2006-36

Section 42.—Low-Income Housing Credit

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 105.—Amounts Received Under Accident and Health Plans

Health reimbursement arrange- ments. This ruling holds that amounts that may be paid as medical benefits to a designated beneficiary (other than an employee’s spouse or an employee’s dependent) are not excludable from the employee’s gross income under section 105(b) of the Code. Notice 2002–45 and Rev. Ruls. 2002–41 and 2005–24 amplified.

Rev. Rul. 2006–36

ISSUE

Are amounts paid to an employee under a reimbursement plan excludable from the employee’s gross income under § 105(b) of the Internal Revenue Code (the Code) if the plan provides that amounts may be paid as § 213(d) medical benefits to a designated beneficiary (other than the employee’s spouse or dependents or an employee)?

FACTS

Employer sponsors a reimbursement plan (the Plan) that reimburses an employee solely for substantiated medical care expenses (as defined in § 213(d)). The Plan provides reimbursements up to an annual maximum dollar amount for the coverage period and reimburses medical expenses only to the extent that the expenses have not been reimbursed from any other plan. Under the Plan, each employee’s unused reimbursement amount available at the end of each plan year is carried forward for use in later plan years. The Plan reimburses the substantiated medical care expenses of both current and

former employees (including retired employees), their spouses and dependents (as defined in § 152, determined without regard to § 152(b)(1), (b)(2), and (d)(1)(B)). The Plan also reimburses the substantiated medical care expenses of the surviving spouse and dependents of a deceased employee. Upon the death of the deceased employee’s surviving spouse and last dependent, or upon the death of the employee if there is no surviving spouse or dependents, any unused reimbursement amount is paid as reimbursement of substantiated medical care expenses of a beneficiary designated by the employee. The Plan does not include the fair market value of the coverage for the designated beneficiary in the gross income of the employee. The Plan treats the reimbursement as taxable to the designated beneficiary.

The Plan is paid for solely by Employer and is not provided pursuant to a salary-reduction election or otherwise under a § 125 cafeteria plan. Neither the employee nor any other person has the right, currently or for any future year, to receive any benefit other than the reimbursement of substantiated medical care expenses incurred by the employee, his or her spouse and dependents or the employee’s designated beneficiary.

LAW AND ANALYSIS

Section 61(a)(1) provides that, except as otherwise provided in Subtitle A, gross income includes compensation for services, including fees, commissions, fringe benefits, and similar items. Section 1.61–21(a)(3) and (4) of the Income Tax Regulations states that a fringe benefit provided in connection with the performance of services shall be considered to have been provided as compensation to the person performing such services. Thus, a fringe benefit may be taxable to a person even though that person did not actually receive the fringe benefit. If a fringe benefit is furnished to someone other than the service provider, such benefit is considered as furnished to the service provider and use by the other person is considered use by the service provider.

Section 106 provides that the gross income of an employee does not include employer-provided coverage under an accident or health plan. Section 1.106–1 of the regulations provides that the gross income of an employee does not include contributions which the employee’s employer makes to an accident or health plan for compensation (through insurance or otherwise) for personal injuries or sickness to the employee or the employee’s spouse or dependents.

Section 105(a) provides that, except as otherwise provided in § 105, amounts received by an employee through accident or health insurance for personal injuries or sickness shall be included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer.

Section 105(b) states that except in the case of amounts attributable to (and not in excess of) deductions allowed under § 213 (relating to medical expenses) for any prior taxable year, gross income does not include amounts referred to in § 105(a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by the taxpayer for the medical care (as defined in § 213(d)) of the taxpayer or the taxpayer’s spouse or dependents (as defined in § 152, determined without regard to § 152(b)(1), (b)(2), and (d)(1)(B)).

Section 1.105–2 of the Income Tax Regulations provides that only amounts that are paid specifically to reimburse the taxpayer for expenses incurred by the taxpayer, spouse or dependents for the prescribed medical care are excludable from gross income. Section 1.105–2 further provides that payments to or on behalf of the taxpayer’s spouse or dependents shall constitute indirect payment to the taxpayer. Section 1.105–2 also states that “. . . section 105(b) does not apply to amounts which the taxpayer would be entitled to receive irrespective of whether or not he incurs expenses for medical care.” Thus, if an employee has the opportunity to receive a payment irrespective of whether any medical expenses have been incurred

2006–36 I.R.B. 353 September 5, 2006

stating that upon the death of a deceased employee’s surviving spouse and last dependent, or upon the death of the employee, if there is no surviving spouse or dependents, any unused reimbursement amount will be paid as a reimbursement of substantiated medical care expenses of a beneficiary designated by the employee, this revenue ruling is effective with respect to that provision for plan years beginning after December 31, 2008.

DRAFTING INFORMATION

The principal author of this revenue ruling is Shoshanna Tanner of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities). For further information regarding this revenue ruling, contact Elizabeth Purcell at (202) 622–6080 (not a toll-free call).

Section 280G.—Golden Parachute Payments

Federal short-term, mid-term, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-In Losses Following Ownership Change

The adjusted applicable federal long-term rate is set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 412.—Minimum Funding Standards

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 467.—Certain Payments for the Use of Property or Services

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

by the employee or the employee’s spouse or dependents, the payment is not excludable from gross income under § 105(b) even if the employee (or his or her spouse or dependents) incurred medical expenses during the year.

Notice 2002–45, 2002–2 C.B. 93, describes the tax treatment of health reimbursement arrangements (HRAs) excludable under § 105(b). The notice explains that an HRA is an arrangement that is paid for solely by the employer and not pursuant to a salary reduction election or otherwise under a § 125 cafeteria plan. An HRA reimburses the employee for medical care expenses (as defined in § 213(d)) incurred by the employee or by the employee’s spouse or dependents, and provides reimbursements up to a maximum dollar amount with any unused portion of that amount at the end of the coverage period carried forward to subsequent coverage periods.

Notice 2002–45 also states that to qualify for the exclusion from gross income under § 105(b), an HRA may only provide benefits that reimburse expenses for medical care as defined in § 213(d). An HRA does not qualify for the exclusion under § 105(b) if any person has the right to receive cash or any other taxable or non-taxable benefit under the arrangement other than the reimbursement of medical care expenses. If any person has such a right, currently or for any future year, all payments to all persons made from the arrangement in the current year are included in gross income, even amounts paid to reimburse medical care expenses of the employee, spouse or dependents.

Situation 3 of Rev. Rul. 2005–24, 2005–1 C.B. 892, describes a plan that, after the death of an employee and the employee’s surviving spouse and dependents, pays all or a portion of the unused reimbursement amount in cash to a beneficiary or beneficiaries designated by the employee, and if no beneficiary is designated, to the deceased employee’s estate. Rev. Rul. 2005–24 holds that an amount (including an amount paid to reimburse medical expenses) paid from a plan that provides for the payment of the unused reimbursement amount in cash or other benefits is not excludable from the employee’s gross income under § 105(b). Rev. Rul. 2005–24 does not specifically address reimbursement of § 213(d) med

ical expenses incurred by a non-spouse or non-dependent. Nevertheless, the ruling also states that it applies to any purported employer-provided medical reimbursement arrangement that provides for the receipt by the employee or any other person of cash or any other taxable or nontaxable benefit other than the reimbursement of medical care expenses of employees and their spouses and dependents. This principle applies to amounts paid for reimbursement of medical expenses to designated beneficiaries other than the employee’s spouse or dependents.

The Plan described in this ruling does not meet the requirements of § 105(b) and § 1.105–2. Because a beneficiary who is not the employee’s spouse or dependent may receive some or all of the medical reimbursements under the Plan, amounts paid under the Plan are not excludable under § 105(b) even if those amounts are paid to reimburse the medical expenses of the employee or the employee’s spouse or dependents. Because the benefit is provided in connection with the performance of services by the employee, the benefit is considered provided to the employee and must be included in the employee’s gross income. See § 1.61–21(a)(3) and (4).

HOLDING

Amounts paid to an employee under the reimbursement plan described in this ruling are not excludable from gross income under § 105(b) if the plan permits amounts to be paid as § 213(d) medical benefits to a designated beneficiary (other than the employee’s spouse or dependents of the employee). None of the payments made from the reimbursement plan during the plan year to any person, including amounts paid to reimburse the medical expenses of an employee or the employee’s spouse or dependents, is excludable from the gross income.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2005–24, 2005–1 C.B. 892, Rev. Rul. 2002–41, 2002–2 C.B. 75, and Notice 2002–45, 2002–2 C.B. 93 are amplified.

EFFECTIVE DATE

For reimbursement plans containing a provision on or before August 14, 2006

September 5, 2006 354 2006–36 I.R.B.

Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 482.—Allocation of Income and Deductions Among Taxpayers

Federal short-term, mid-term, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 483.—Interest on Certain Deferred Payments

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 642.—Special Rules for Credits and Deductions

Federal short-term, mid-term, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 671.—Trust Income, Deductions, and Credits Attributable to Grantors and Others as Substantial Owners

26 CFR 1.671–5: Reporting for widely held fixed in- vestment trusts.

T.D. 9279

DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1

Reporting Rules for Widely Held Fixed Investment Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and Temporary regulations

SUMMARY: This document contains final and temporary regulations amending §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 Bulletin.

DATES: Effective Date: These regulations are effective July 28, 2006.

Applicability Date: For dates of applicability, see §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 §1.671–5. The collection of information contained in these regulations is in §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 (T.D. 9241, 2006–7 I.R.B. 427) (final regulations) under §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 §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 Treasury Department expected to issue the additional guidance under §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 §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).

2006–36 I.R.B. 355 September 5, 2006

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, §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 §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 §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

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 §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 §1.671–5(c)(2)(iv)(B) and the simplified reporting rules for sales or redemptions of trust interests in §1.671–5(c)(2)(v)(C). As provided in Notice 2006–29 and subsequently modified in Notice 2006–30, §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 §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 §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 §1.671–5(f). To address this concern, §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 §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 §1.671–5(f)(1)(i)( 1 ) refers to section 6049(b) and the definition of interest in section 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, §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-exempt interest, may be eligible to report under the NMWHFIT safe harbor reporting rules.

September 5, 2006 356 2006–36 I.R.B.

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 §1.671–5(c)(2)(iv).

In response to this request, §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 §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 §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) above, 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, §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

qualify for this exception even though the NMWHFIT only holds assets that produce dividend income. To address this concern, §1.671–5T(c)(2)(v)(C) of 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 §1.671–5(c)(2)(iv)(D)( 1 ) are only required, under §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 min- imis 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 min- imis test in §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 §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:

NMWHFIT final calendar year exception

Commentators requested that the IRS and Treasury Department extend the simplified reporting in §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, §1.671–5T(c)(2)(iv)(F) of the final and temporary regulations provide that all NMWHFITs qualify for the simplified reporting in §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.

2006–36 I.R.B. 357 September 5, 2006

- - - (8) [Reserved.] For further guidance, see §1.671–5T(b)(8).
- - - (21) [Reserved.] For further guidance, see §1.671–5T(b)(21).
- - - (c) * - (2) - * (iv) [Reserved.] For further guidance, see §1.671–5T(c)(2)(iv).

(v) - * (C) [Reserved.] For further guidance, see §1.671–5T(c)(2)(v)(C).

(vi) [Reserved.] For further guidance, see §1.671–5T(c)(2)(vi).

(vii) [Reserved.] For further guidance, see §1.671–5T(c)(2)(vii).

- - - (f) - - (1) - * (i) - - (A) [Reserved.] For further guidance, see §1.671–5T(f)(1)(i)(A).
- - - (viii) * * * (A) [Reserved.] For further guidance, see §1.671–5T(f)(1)(viii).

Par. 3. Section 1.671–5T is added to read as follows:

§1.671–5T Reporting for widely held fixed investment trusts (temporary).

(a) through (b)(4) [Reserved.] For further guidance, see §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 §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

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 §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 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 §1.671–5 as of January 1, 2007 (see §1.671–5(m)) and will be applied as though these amendments were included in T.D. 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 §1.671–5 would be amended as provided in these temporary regulations

and received comments regarding the application of §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 Bulletin. 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.

- - - -

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 continues to read, in part, as follows:

Authority: 26 U.S.C. 7805 * * * Par. 2. Section 1.671–5 is amended by:

Revising paragraphs (b)(5), (b)(8), and (b)(21).
Revising paragraphs (c)(2)(iv), (v)(C), (vi), and (vii).
Revising paragraphs (f)(1)(i)(A) and (viii)(A).

The revisions read as follows:

§1.671–5 Reporting for widely held fixed investment trusts.

- - - (b) - - (5) [Reserved.] For further guidance, see §1.671–5T(b)(5).

September 5, 2006 358 2006–36 I.R.B.

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 §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 §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 §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 §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 §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 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 de minimis 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 §1.671–5(b)(19)).

( 2 ) Special WHMT de minimis test . A WHMT that meets the asset requirement of §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 §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 §1.671–5(b)(6), the WHFIT will be treated as having met the de min- imis 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 §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 ex- ception . 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 rollover 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 ef- fect a redemption —( 1 ) Definition . A pro- rata sale of a trust asset to effect a redemp

2006–36 I.R.B. 359 September 5, 2006

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 min- imis 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 §1.671–5(c)(3) through (e)(4).

(f) Safe harbor for providing informa- tion 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 ) 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 §1.671–5(f)(1)(i)(B) through (f)(vii).

tion 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 §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 §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 §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 §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 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 NMWHFITs 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 pre- mium . 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

September 5, 2006 360 2006–36 I.R.B.

(viii) Reporting market discount in- formation 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 §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 §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).

(Filed by the Office of the Federal Register on July 28, 2006, 4:15 p.m., and published in the issue of the Federal Register for August 3, 2006, 71 F.R. 43968)

Section 807.—Rules for Certain Reserves

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 846.—Discounted Unpaid Losses Defined

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 1274.—Determi- nation of Issue Price in the Case of Certain Debt Instru- ments Issued for Property

(Also Sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for September 2006.

Rev. Rul. 2006–44

This revenue ruling provides various prescribed rates for federal income tax purposes for September 2006 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.

Applicable Federal Rates (AFR) for September 2006

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term

AFR 5.13% 5.07% 5.04% 5.02% 110% AFR 5.66% 5.58% 5.54% 5.52% 120% AFR 6.17% 6.08% 6.03% 6.00% 130% AFR 6.70% 6.59% 6.54% 6.50%

Mid-term

AFR 5.01% 4.95% 4.92% 4.90% 110% AFR 5.52% 5.45% 5.41% 5.39% 120% AFR 6.03% 5.94% 5.90% 5.87% 130% AFR 6.54% 6.44% 6.39% 6.36% 150% AFR 7.57% 7.43% 7.36% 7.32% 175% AFR 8.85% 8.66% 8.57% 8.51%

Long-term

AFR 5.21% 5.14% 5.11% 5.09% 110% AFR 5.73% 5.65% 5.61% 5.58% 120% AFR 6.27% 6.17% 6.12% 6.09% 130% AFR 6.79% 6.68% 6.63% 6.59%

2006–36 I.R.B. 361 September 5, 2006

REV. RUL. 2006–44 TABLE 2

Adjusted AFR for September 2006

Period for Compounding

Annual Semiannual Quarterly Monthly

Short-term adjusted 3.65% 3.62% 3.60% 3.59% AFR

Mid-term adjusted AFR 3.83% 3.79% 3.77% 3.76%

Long-term adjusted 4.41% 4.36% 4.34% 4.32% AFR

REV. RUL. 2006–44 TABLE 3

Rates Under Section 382 for September 2006

Adjusted federal long-term rate for the current month 4.41%

Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 4.52%

REV. RUL. 2006–44 TABLE 4

Appropriate Percentages Under Section 42(b)(2) for September 2006 Appropriate percentage for the 70% present value low-income housing credit 8.19%

Appropriate percentage for the 30% present value low-income housing credit 3.51%

REV. RUL. 2006–44 TABLE 5

Rate Under Section 7520 for September 2006

Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 6.0%

Section 7872.—Treatment of Loans With Below-Market Interest Rates

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 1288.—Treatment of Original Issue Discount on Tax-Exempt Obligations

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

Section 7520.—Valuation Tables

The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 2006. See Rev. Rul. 2006-44, page 361.

September 5, 2006 362 2006–36 I.R.B.