SECTION 2. BACKGROUND

In general, the interest on bonds issued by State and local governments is excludable from gross income under § 103(a) if certain requirements are met. Section 148 imposes arbitrage investment restrictions on tax-exempt bonds that limit the investment of proceeds of tax-exempt bonds in higher-yielding investments and that require issuers to rebate certain excess earnings above the yield on tax-exempt bonds to the Federal Government. The arbitrage restrictions apply to ordinary proceeds derived from the sale of tax-exempt bonds

SECTION VII: FURNISHING TAX INFORMATION PACKAGES FOR CERTAIN NMWHFITS

There are a number of royalty trusts and commodity trusts that meet the definition of a WHFIT. The IRS and the Treasury Department have been asked to clarify the application of the WHFIT rules with respect to furnishing TIHs in a royalty trust or a commodity trust with information necessary to properly report the tax consequences of their ownership interest in the trust. Under the structure of the WHFIT reporting rules, trustees are to make trust information available to middlemen. See § 1.671–5(c). The middlemen are then required to provide Forms 1099 to the IRS and to furnish written tax information statements to TIHs on whose behalf or account the middleman holds an interest in the WHFIT or acts as an intermediary. See §§ 1.671–5(d) and (e).

TIHs in royalty and commodity trusts need certain information ( e.g., cost depletion schedules) in order for them to properly report the tax consequences of ownership of a trust interest. Historically, some royalty trusts have distributed annual tax packages or booklets to TIHs that included this information. In some cases, the trustee of a royalty trust makes this information available on an Internet website.

Middlemen are concerned that the WHFIT rules now require them to publish and mail this information, which was formerly provided by the trustees of these trusts. Middlemen have inquired whether they can provide this additional information by providing a TIH with the address of an Internet website where the information can be found. Until further guidance is issued, the IRS and the Treasury Department have determined that providing the TIH of a royalty or commodity trust with the address of an Internet website where the information can be found is sufficient to meet the requirements of § 1.671–5(e) if the trustee or middleman also informs the TIH that a written tax information package will be provided if requested and the middleman or trustee does in fact furnish a written package if requested. This does not, however, relieve trustees and middlemen of any requirement to provide the IRS and TIHs with individualized calculation of

the items of income that are required to be reported to the IRS on a Form 1099.

It has been suggested that the IRS and the Treasury Department clarify the application of the WHFIT reporting rules to royalty and commodity trusts. One suggested clarification is to limit the burden on middlemen to providing the IRS with appropriate Forms 1099 and providing TIHs with statements regarding the information provided on the Form 1099, and to require trustees to maintain an Internet website capable of providing investor-specific information for other items that are required to be provided to the TIH under § 1.671–5(e) but are not required to be included on the Form 1099. The IRS and the Treasury Department request comments regarding this suggestion and also welcome any alternative suggestions on how trustees and middlemen should share the reporting burden. The IRS and the Treasury Department also request comments on whether there are other types of NMWHFITs from which TIHs need significant information to report the tax consequences of ownership of an interest in the NMWHFIT on their individual tax returns and suggestions on how this information could best be provided.

Comments should include a reference to Notice 2010–4. Send submissions to CC:PA:LPD:RU (Notice 2010–4), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to CC:PA:LPD:RU (Notice 2010–4), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20224, or sent electronically via the following email address: Comments@irscounsel.treas.gov. Please include the notice number 2010–4 in the subject line of any electronic communication. All materials submitted will be available for public inspection and copying.

SECTION VIII: EFFECTIVE DATE

This notice is effective on December 17, 2009.

2010–2 I.R.B. 256 January 11, 2010

lower of the cost or fair market value of the fund.

The recent financial crisis has resulted in significant volatility in the fair market value of assets in these perpetual trust funds and has constrained the availability of credit enhancement in the municipal bond market. As a result, certain perpetual trust funds that otherwise could provide credit enhancement under the special exception to the arbitrage restrictions for eligible pledged funds under § 1.148–11(d)(1) have been limited in their capacity to provide guarantees for tax-exempt bonds at a time when there is a significant need for such guarantees.