[Federal Register: December 24, 2002 (Volume 67, Number 247)]
[Rules and Regulations]
[Page 78371-78383]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24de02-15]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 301, and 602
[TD 9032]
RIN 1545-AW24
Election To Treat Trust as Part of an Estate
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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[[Page 78372]]
SUMMARY: This document contains final regulations under section 645
relating to an election for certain revocable trusts to be treated and
taxed as part of an estate. The final regulations provide the
procedures and requirements for making the election, rules regarding
the tax treatment of the trust and the estate while the election is in
effect, and rules regarding the termination of the election. This
document also contains final regulations clarifying the reporting rules
for a trust, or portion of a trust, that is treated as owned by the
grantor, or another person under the provisions of subpart E, part I,
subchapter J, chapter 1 of the Internal Revenue Code, for the taxable
year ending with the death of the grantor or other person.
DATES: Effective Date: These regulations are effective December 24,
2002.
Applicability Date: For dates of applicability of these
regulations, see Sec. Sec. 1.645-1(j), 1.671-4(i)(3), 1.6072-
1(a)(2)(ii), 301.6109-1(a)(6).
FOR FURTHER INFORMATION CONTACT: Faith Colson, (202) 622-3060 not a
toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
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(d)) under control number 1545-1578. This final rule makes
no substantive change in the previously approved collection of
information.
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
On December 18, 2000, the IRS and the Treasury Department published
a notice of proposed rulemaking (REG-106542-98; 2001-1 CB 473) in the
Federal Register (65 FR 79015) under section 645 relating to an
election for certain revocable trusts to be treated and taxed as part
of an estate. This notice also contained proposed amendments to the
regulations under section 671 relating to reporting rules for a trust,
or portion of a trust, that is treated as owned by the grantor or
another person under the provisions of subpart E, part I, subchapter J,
chapter 1 of the Internal Revenue Code (Code), for the taxable year
ending with the death of the grantor or other person. Written comments
responding to the notice of proposed rulemaking were received. A public
hearing on the notice of proposed rulemaking was scheduled for April
11, 2001, but was canceled when no one requested to speak at the
hearing. After consideration of all comments, the proposed regulations,
with certain changes in response to the comments, are adopted as final
regulations by this Treasury decision.
Summary of Comments and Explanation of Revisions
A. Comments and Changes to Sec. 1.645-1(b): Definitions
Under section 645, if both the executor (if any) of an estate and
the trustee of a qualified revocable trust (QRT) elect the treatment
provided in section 645, the trust shall be treated and taxed for
income tax purposes as part of the estate (and not as a separate trust)
during the election period. The proposed regulations define a QRT as
any trust (or portion thereof) that on the date of death of the
decedent was treated as owned by the decedent under section 676 by
reason of a power held by the decedent (determined without regard to
section 672(e)). In accordance with the legislative history
accompanying section 645, the proposed regulations provide that a
trust, in which the power is held solely by a nonadverse party, is not
a QRT. See H.R. Conf. Rep. No. 220, 105th Cong., 1st Sess. at 711
(1997). In addition, the proposed regulations provide that a trust, in
which the power was exercisable by the decedent only with the approval
or consent of another person, is not a QRT.
Some commentators suggested that, if the decedent's power to revoke
the trust was exercisable only with the approval or consent of a
nonadverse party, the trust should qualify as a QRT. Many persons use
revocable trusts as property management tools and, to protect the
grantor from improvident decisions or undue influence, their trust
agreements may provide that any revocation of the trust by the grantor
will be effective only if consented to by a nonadverse party. The
commentators noted that the prohibition described in the legislative
history addresses trusts in which only a nonadverse party has a power
to revoke.
In response to these comments, the final regulations provide that a
trust that was treated as owned by the decedent under section 676 by
reason of a power that was exercisable by the decedent with the consent
or approval of a nonadverse party is a QRT. The final regulations also
clarify that while a trust, in which the power to revoke is held only
by the decedent's spouse and not by the decedent, is not a QRT, a
trust, in which the power to revoke is exercisable by the decedent with
the approval or consent of the decedent's spouse, is a QRT.
Clarification has also been requested regarding whether a trust
qualifies as a QRT if the grantor's power to revoke the trust lapses
prior to the grantor's death as a result of the grantor's incapacity.
Some trust documents for revocable trusts provide that the trustee is
to disregard the instructions of the grantor to revoke the trust if the
grantor is incapacitated. The IRS and the Treasury Department believe
that, if an agent or legal representative of the grantor can revoke the
trust under state law during the grantor's incapacity, the trust will
qualify as a QRT, even if the grantor is incapacitated on the date of
the grantor's death.
The proposed regulations also provide that a QRT must be a domestic
trust under section 7701(a)(30)(E) and that a section 645 election for
a QRT must result in a domestic estate under section 7701(a)(30)(D).
Several commentators suggested that the section 645 election should
also be available in situations in which either the QRT or the related
estate, or both, are foreign. According to the commentators, U.S.
citizens living abroad frequently use revocable trusts to avoid
jurisdictional disputes concerning the decedent's assets, as well as
the cumbersome probate and forced heirship rules of several foreign
countries. Many of the trusts will be foreign trusts upon the grantor's
death and, if a section 645 election is permitted to be made, will
become part of a foreign estate. The commentators questioned the
authority for the domestic restriction provided in the proposed
regulations given that the statute and the legislative history do not
explicitly limit the applicability of a section 645 election to
domestic trusts and domestic estates. Upon consideration of these
comments, the requirements that a QRT be a domestic trust and that the
election result in a domestic estate are removed from the final
regulations. The IRS and the Treasury Department note, however, that a
trust for which a section 645 election is made is treated as an estate
for purposes of Subtitle A of the Code, but not for purposes of
Subtitle F. Accordingly, information reporting
[[Page 78373]]
under section 6048 will continue to apply with respect to a foreign
trust even though a section 645 election has been made to allow the
foreign trust to be taxed as part of an estate for purposes of Subtitle
A of the Code.
The proposed regulations used the term personal representative to
denote the fiduciary (or fiduciaries) of the decedent's estate. One
commentator requested that the definition of personal representative in
the proposed regulations be expanded to include a personal
representative, as well as an executor and an administrator. To be
consistent with the language of the statute, the final regulations use
the term executor, instead of personal representative, to denote the
fiduciary of the decedent's estate. With the exception of including a
personal representative in the definition of an executor as requested
by the comment, the definition of executor in the final regulations is
generally the same as the definition of a personal representative in
the proposed regulations. The definition of executor used in these
final regulations, however, is not identical to the definition of an
executor under section 2203 of the Code: under these final regulations,
a person who has actual or constructive possession of property of the
decedent is not an executor unless that person is also appointed, or
qualified as an executor, administrator, or personal representative of
the decedent's estate.
B. Comments and Changes to Sec. 1.645-1(c): The Election
The section 645 election may be made whether or not an executor is
appointed for the decedent's estate. Under the final regulations, if an
executor is appointed for the decedent's estate, the executor and the
trustee of the QRT make the section 645 election by filing a form
provided by the IRS for the purpose of making the section 645 election
(election form). If an executor is not appointed for the decedent's
estate, the trustee makes the section 645 election by filing the
election form. Form 8855, ``Election to Treat a Qualified Revocable
Trust as Part of an Estate,'' will be available for making the section
645 election within six months after the publication of these final
regulations.
Guidance has also been requested regarding when the section 645
election must be made if a Form 1041 ``U.S. Income Tax Return for
Estates and Trusts,'' is not required to be filed for the first taxable
year of the combined electing trust and related estate, if there is an
executor, or of the electing trust if there is no executor, because the
combined electing trust and related estate, or electing trust, as the
case may be, does not have sufficient income to require the filing of a
return. A commentator also suggested permitting the section 645
election to be made at any time during the three year period after the
due date for the Form 1041 for the estate's first taxable year. The
final regulations do not adopt this suggestion and clarify that, for
the election to be valid, the election form must be filed not later
than the time prescribed under section 6072 for filing the Form 1041
for the first taxable year of the combined electing trust and related
estate, if there is an executor, or of the first taxable year of the
electing trust, if there is no executor (regardless of whether there is
sufficient income to require the filing of that return). If an
extension is granted for the filing of the Form 1041 for the first
taxable year of the combined electing trust and related estate, if
there is an executor, or the electing trust, if there is no executor,
the election form will be timely filed if it is filed by the time
prescribed under section 6072 for filing the Form 1041 including the
extension granted with respect to the Form 1041.
A commentator noted that, under the proposed regulations, an
executor will have direct liability for the tax due on Forms 1041 filed
for the combined electing trust and related estate. Accordingly, the
executor can be personally liable for tax on the income from assets
that are not under the executor's control. Further, the executor may
not have sufficient assets in the estate to meet the income tax
responsibilities of the combined electing trust and related estate. A
commentator also noted that the requirement in the proposed regulations
that the trustee agree to cooperate to insure that the Forms 1041 for
the combined related estate and electing trust are timely filed and the
tax due timely paid places the trustee in an untenable position because
the executor controls the filing of the return and the payment of the
tax.
The IRS and the Treasury Department note that under section 645,
the electing trust is not treated as part of the related estate for
purposes of Subtitle F of the Code. Accordingly, although the final
regulations permit an electing trust and related estate to file a
single, combined Form 1041, the electing trust and related estate
continue to be separate taxpayers for purposes of Subtitle F, and the
fiduciaries of the electing trust and the fiduciaries of the related
estate each continue to have a responsibility for filing returns and
paying the tax due for their respective entities even though a section
645 election has been made. Under the final regulations, the executor
must file a complete, accurate, and timely Form 1041 for the combined
related estate and electing trust for each taxable year during the
election period. The trustee of the electing trust must timely provide
the executor of the related estate with all the trust information
necessary to permit the executor to file a complete, accurate, and
timely Form 1041 for the combined electing trust and related estate for
each taxable year during the election period. The trustee and the
executor must allocate the tax burden of the combined electing trust
and related estate in a manner that reasonably reflects the respective
tax obligations of the electing trust and related estate. If the tax
burden is not reasonably allocated, gifts may be deemed to have been
made. The trustee is responsible for insuring that the electing trust's
share of the tax burden is paid to the Secretary, and the executor is
responsible for insuring that the related estate's share of the tax
burden is timely paid to the Secretary.
C. Comments and Changes to Sec. 1.645-1(d): TIN and Filing
Requirements for a QRT
The proposed regulations provide that, in general, a grantor trust
must obtain a taxpayer identification number (TIN) upon the death of
the grantor regardless of whether or not the trust had a TIN prior to
the death of the grantor. See proposed regulation Sec. 301.6109-
1(a)(3). The proposed regulations provide an exception to this general
rule. The proposed regulations provide that, if there is an executor
and a section 645 election has been made, a TIN must be obtained for
the related estate but a TIN is not required to be obtained for the
electing trust or for a QRT for which a section 645 election will be
made. Further, under the proposed regulations, the payors (as defined
in Sec. 301.6109-1(a)(5) of these final regulations) of the electing
trust or a QRT for which the section 645 election will be made are to
be furnished with the TIN of the estate on Form W-9, ``Request for
Taxpayer Identification Number and Certification.'' The proposed
regulations were designed to simplify and lessen the reporting burdens
imposed on trustees and executors by the interim guidance in Rev. Proc.
98-13 (1998-1 C.B. 370) by removing the requirement to obtain a TIN for
electing trusts and certain QRTs.
Several commentators reported, however, that many trustees
automatically obtain a TIN for the QRT immediately after the decedent's
death and furnish that TIN to payors. Under the proposed regulations,
if a trustee
[[Page 78374]]
obtains a TIN for a QRT, the trustee must file a completed Form 1041
for the QRT for the short taxable year of the QRT beginning with the
decedent's date of death and ending December 31 of that year. If a
valid section 645 election is made for the QRT, an amended Form 1041
must be filed for the QRT and the payors of the QRT must be furnished
with a revised Form W-9 containing the related estate's TIN. As a
result, for trustees that obtain a TIN for a QRT, the procedures in the
proposed regulations are more burdensome than the procedures in Rev.
Proc. 98-13. In response, the final regulations remove the provision in
the proposed regulations that excepted an electing trust and a QRT for
which a section 645 election will be made from the general requirement
that a grantor trust must obtain a TIN upon the death of the grantor.
Under the final regulations, the trustee of an electing trust or a QRT
for which a section 645 election will be made obtains a TIN upon the
death of the decedent as required by Sec. 301.6109-1(a)(3) of these
final regulations and furnishes this TIN to the payors of the trust.
Under the final regulations, if a section 645 election will be made for
a QRT, the trustee is not required to file a Form 1041 for the short
taxable year of the QRT beginning with the decedent's date of death and
ending December 31 of that year.
The final regulations also simplify the procedures for obtaining a
TIN, furnishing that TIN to the payors, and filing a Form 1041 for a
QRT if there is no executor. The proposed regulations provide that, if
there is no executor, the trustee must obtain a TIN for the electing
trust to file as an estate during the section 645 election period. The
payors of the electing trust must be furnished with the TIN obtained by
the trust to file as an estate. Under the proposed regulations, if a
section 645 election will be made for a QRT, the trustee of the QRT may
choose to obtain a TIN for the QRT to file as an estate under section
645 and avoid obtaining a TIN for the QRT to file as a trust. If the
trustee of the QRT obtains a TIN to file as a trust (and not as an
estate), the trustee is required to file a completed Form 1041 as a
trust for the short taxable year of the QRT beginning with the
decedent's date of death and ending December 31 of that year. If a
section 645 election to treat the QRT as an estate is made after the
Form 1041 is filed for the QRT treating the QRT as a trust, the trustee
of the QRT is required to file an amended Form 1041 as a trust
(excluding the items of income, deduction, and credits that are to be
reported on a return filed as an estate), obtain another TIN to file as
an estate, provide revised Forms W-9 with the new TIN to the payors of
the QRT, and file a Form 1041 as an estate. Under the final
regulations, if there is no executor, the trustee of an electing trust
or a QRT for which a section 645 election will be made obtains a TIN
upon the death of the decedent as required by Sec. 301.6109-1(a)(3) of
these final regulations and furnishes this TIN to the payors of the
trust. The trustee uses this TIN to file Forms 1041 as an estate during
the election period. If a section 645 election will be made for a QRT,
the trustee of the QRT is not required to file a Form 1041 for the
short taxable year beginning with the decedent's date of death and
ending December 31 of that year.
Regardless of whether or not there is an executor, the final
regulations retain the requirement that a Form 1041 (including the
items of income, deduction, and credit of the QRT) must be filed for
the short taxable year of the QRT beginning with the decedent's date of
death if a section 645 election will not be made for the trust, or if
the trustee and the executor are uncertain whether a section 645
election will be made for the QRT by the due date of the Form 1041 for
the short taxable year of the QRT beginning after the decedent's death
and ending December 31 of that year.
D. Comments and Changes to Sec. 1.645-1(e): Tax Treatment and General
Filing Requirements of the Electing Trust and Related Estate During the
Election Period
The proposed regulations provide that, during the election period,
if there is an executor, one Form 1041 is filed annually for the
combined electing trust and related estate under the name and TIN of
the related estate. Information regarding the electing trust is also
reported on the Form 1041 as required by the instructions to the Form
1041.
The proposed regulations provide that the electing trust and
related estate are treated as separate shares under section 663(c) for
purposes of computing distributable net income (DNI) and applying the
distribution provisions of sections 661 and 662. The proposed
regulations also provide rules for adjusting the DNI of the separate
shares with respect to distributions made from one share to another
share of the combined electing trust and related estate to which
sections 661 and 662 would apply had the distribution been made to a
beneficiary other than another share. Under the proposed regulations,
the share making the distribution reduces its DNI by the amount of the
distribution deduction that it would have been entitled to under
section 661 had the distribution been made to a beneficiary other than
another share of the combined related estate and electing trust, and,
solely for purposes of calculating its DNI, the share receiving the
distribution increases its gross income by this amount. One commentator
noted that, if the amount distributed from one share to another share
includes an item of DNI that is not included in the gross income of the
combined electing trust and related estate, this provision in the
proposed regulations does not produce an appropriate result because of
the operation of section 661(c). Accordingly, the final regulations are
revised to provide that the share making the distribution reduces its
DNI by the amount of the distribution deduction it would be entitled to
under section 661 (determined without regard to section 661(c)), and
solely for purposes of calculating DNI, the share receiving the
distribution increases its gross income by the same amount.
Commentators requested clarification regarding whether an electing
trust will be treated as an estate or a trust for purposes of the rules
under section 401(a)(9). Final regulations (TD 8987) under sections
401, 403, and 408 were published in the Federal Register (67 FR 18988)
on April 17, 2002. The preamble to those final regulations provides
that an electing trust will not fail to be a trust for purposes of
section 401(a)(9) merely because the trust elects to be treated as an
estate under section 645, as long as the trust continues to be a trust
under state law.
Another commentator asked for clarification regarding whether the
exception for estates under section 6654(l)(2) with respect to the
payment of estimated income tax applies to an electing trust. The final
regulations clarify that each electing trust and related estate, if
any, is treated as a separate taxpayer for all purposes of Subtitle F
of the Code, including, without limitation, the application of section
6654. The final regulations provide, however, that the provisions of
section 6654(l)(2)(A) relating to the 2 year exception to an estate's
obligation to make estimated tax payments will apply to each electing
trust for which a section 645 election has been made.
E. Comments and Changes to Sec. 1.645-1(f): Duration of the Election
Period
The proposed regulations provide that the election period
terminates on the day before the applicable date. One commentator
suggested that section
[[Page 78375]]
645(a) should be interpreted as terminating the election period on the
last day of the taxable year ending before the applicable date. Another
commentator commended the interpretation taken by the proposed
regulations because, if the estate is required to file a Form 706,
``United States Estate (and Generation Skipping Transfer) Tax Return,''
and the election terminates on the last day of the taxable year ending
before the applicable date, the election period could terminate prior
to the date of final determination of liability for the estate tax,
rather than six months after that date. The final regulations continue
to provide that the election terminates the day before the applicable
date.
If a Form 706 is required to be filed, the proposed regulations
provide that the applicable date is the day that is 6 months after the
date of final determination of liability for the estate tax. In
response to comments, the final regulations provide that the applicable
date is the day that is the later of 2 years after the date of the
decedent's death or 6 months after the date of final determination of
liability for estate tax.
The proposed regulations provide that the date of final
determination of liability for the estate tax is the day on which the
first of a series of events has occurred. One of the events is the
issuance of an estate tax closing letter, unless a claim for refund
with respect to the estate tax is filed within six months after the
issuance of the letter. Two commentators requested that the issuance of
a closing letter be removed from the list of events that can be
considered the date of final determination of liability. These
commentators contended that the closing letter is not a final
determination of liability because the IRS may impose additional estate
tax after a closing letter has been issued.
The IRS and the Treasury Department note that the circumstances in
which the IRS may impose additional estate tax after a closing letter
is issued are very limited. See Rev. Proc. 94-68 (1994-2 C.B. 803). In
many cases, the issuance of a closing letter is sufficient to permit
the closing of the probate estate and to complete any administration of
the electing trust that was necessitated by the decedent's death. The
IRS and the Treasury Department believe that eliminating the closing
letter from the list of events that are considered a final
determination of liability may encourage unduly prolonging the
administration of the electing trust and related estate in order to
prolong the section 645 election period. While the final regulations
retain the issuance of the closing letter as one of the triggers for
the date of the final determination of liability, the final regulations
have been changed to provide a minimum election period of two years for
all electing trusts and related estates, as well as to provide that if
the issuance of the closing letter triggers the date of the final
determination of liability, the date of the final determination of
liability is the date that is 6 months after the date the closing
letter is issued, rather than the date the closing letter is issued as
provided in the proposed regulations.
Proposed Sec. 1.641(b)-3 provides that, if an estate has joined in
making a valid section 645 election, the estate shall not terminate for
federal tax purposes prior to the termination of the section 645
election period. Some interpreted proposed Sec. 1.641(b)-3 as
requiring the filing of Forms 1041 for the estate until the applicable
date even if, prior to that date, the electing trust and the related
estate had been completely administered and the assets of the trust and
the estate completely distributed. In response, the final regulations
provide that the election period terminates on the earlier of the day
on which both the electing trust and related estate, if any, have
distributed all of their assets, or the day before the applicable date.
The final regulations continue to provide that the election does not
apply to successor trusts (trusts which are distributees under the
trust instrument).
The proposed regulations provide that, if the executor of the
related estate is not appointed until after the trustee has made a
section 645 election, the section 645 election period will terminate if
the later appointed executor refuses to agree to the election. One
commentator objected to the termination of the election as a result of
the refusal to agree to the election by the later appointed executor.
This commentator suggested that the election period should continue
after the appointment of the executor and that the person seeking
appointment as an executor could either accept or not accept
appointment as an executor given the responsibilities of the previously
made section 645 election. The IRS and the Treasury Department believe
that the later appointed executor must consent to the section 645
election for the election to be valid with respect to the related
estate. Accordingly, the final regulations provide that, for the
election period to continue, a new election form must be filed by the
trustee and the newly appointed executor within 90 days of the
executor's appointment. Otherwise the election period terminates the
day before the appointment of the executor.
F. Tax Treatment of the Electing Trust and Related Estate Upon
Termination of the Election Period
At the close of the last day of the election period, the combined
electing trust and related estate, if there is an executor, or the
electing trust, if there is no executor, is deemed to distribute all
the assets and liabilities of the share (or shares) comprising the
electing trust to a new trust in a distribution to which sections 661
and 662 apply. Thus, the combined electing trust and related estate, or
the electing trust, as appropriate, is entitled to a distribution
deduction to the extent permitted under section 661 in the taxable year
in which the election period terminates as a result of the deemed
distribution. The new trust must include the amount of the deemed
distribution in gross income to the extent required under section 662.
One commentator questioned whether the net capital gains
attributable to the electing trust should be included in the sections
661 and 662 calculations for the deemed distribution of the electing
trust to a new trust upon the termination of the election period. The
final regulations clarify that the net capital gains attributable to
the electing trust are includible in the DNI of the share (or shares)
comprising the electing trust for the purpose of applying sections 661
and 662 to the deemed distribution to the new trust.
If there is an executor and the electing trust terminates on or
before the termination of the section 645 election period, the trustee
must file a final Form 1041 under the name and TIN of the electing
trust to notify the IRS that the trust no longer exists. This Form 1041
will not include any of the trust's items of income, deduction, and
credit because those items will be included on the Form 1041 filed for
the combined electing trust and related estate.
If there is an executor, the trustee may not need to obtain a TIN
for the new trust deemed to have been created upon the termination of
the election period. The trustee must consult the instructions to the
Form 1041 upon the termination of the election period to determine if a
new TIN must be obtained. If a new TIN is not required to be obtained,
the trustee must file Forms 1041 for the new trust under the TIN
obtained by the trustee under Sec. 301.6109-1(a)(3) for the QRT
following the death of the decedent. If there is no executor, the
trustee must obtain a TIN for the new trust deemed to have been created
upon the termination of the election period. If a
[[Page 78376]]
new TIN is required under the regulations or the instructions to the
Form 1041, the trustee must file Forms W-9 with the payors of the trust
to provide them with the TIN to be used following the termination of
the election period.
G. Effective Date of Final Regulations Under Section 645
The final regulations provide that election procedures in paragraph
(c), the rules in paragraph (d) regarding obtaining a TIN for the
electing trust and QRT, the rules in paragraph (f) regarding the
duration of the election period, and paragraph (g) regarding the later
appointed executor are effective for estates and trusts of decedents
dying on or after December 24, 2002. The final regulations provide that
the rules in paragraph (e), regarding the tax treatment and general
filing requirements of the electing trust and the related estate, if
any, during the election period, and the rules in paragraph (h)
regarding the tax treatment of the electing trust and related estate,
if any, upon termination of the election period are effective for
taxable years ending on or after December 24, 2002. Estates and trusts
of decedents dying before December 24, 2002 may follow the election
procedures provided in the proposed regulations or Rev. Proc. 98-13.
With respect to obtaining a TIN for a QRT and filing a Form 1041 for
the short taxable year beginning with the decedent's death and ending
December 31 of that year, estates and trusts of decedents dying before
December 24, 2002 may follow the procedures in these final regulations,
the proposed regulations, or Rev. Proc. 98-13.
H. Clarification of the Reporting Rules for Grantor Trusts Under Sec.
1.671-4
The proposed regulations amend Sec. 1.671-4 to clarify that a
trust, or portion of a trust, reports under Sec. 1.671-4 for the
taxable year that ends with the death of the grantor or other person
(decedent) treated as the owner of the trust. If the trust was filing a
Form 1041 under Sec. 1.671-4(a) during the life of the decedent, the
due date of the Form 1041 for the taxable year ending with the
decedent's death is specified in Sec. 1.6072-1(a)(2). Proposed Sec.
1.6072-1(a)(2) provides that the due date for the Form 1041 for the
taxable year ending with the death of the decedent is the fifteenth day
of the fourth month following the close of the 12-month period which
began with the first day of such fractional part of the year. The final
regulations under Sec. 1.6072-1(a)(2) are revised to provide that the
due date for the Form 1041 filed for the taxable year ending with the
decedent's death is the fifteenth day of the fourth month following the
close of the 12-month period that began with the first day of the
decedent's last taxable year.
Section 301.6109-1(a)(3) of the proposed regulations provides that
a trust, all of which was treated as owned by the decedent, must obtain
a new TIN upon the death of the decedent, if the trust will continue
after the decedent's death. One commentator asked if this provision is
intended to apply to an ``administrative trust.'' Section 1.641(b)-3
recognizes that a trust does not automatically terminate upon the
happening of the event by which the duration of the trust is measured.
A reasonable period of time is permitted after such event for the
trustee to perform the duties necessary to complete the administration
of the trust. Section 301.6109-1(a)(3) is intended to clarify that a
trust must obtain a new TIN after the death of the decedent, if a trust
that was treated as owned by the decedent during the decedent's life
will continue for a period of time following the death of the decedent
to allow a winding up of the affairs of the trust following the death
of the decedent.
For administrative convenience, the proposed regulations provide
that if a decedent and others are treated as the owners of a trust and
following the decedent's death the decedent's portion remains in the
trust, the trust continues to report under the TIN used by the trust
prior to the death of the decedent. Commentators found this provision
confusing and asked for clarification. The final regulations clarify
that this provision applies to a trust that has multiple grantors (or
other persons treated as the owners) that must report under Sec.
1.671-4(a) after the death of the decedent because, although a portion
of the trust continues to be treated as owned by a grantor or another
person, the decedent's portion of the trust is no longer treated as
owned by the decedent upon his death. The final regulations provide an
example of a situation in which this provision applies.
Effect on Other Documents
The following publications are obsolete as of December 24, 2002:
Revenue Procedure 98-13 (1998-1 CB 370)
Notice 2001-26 (2001-13 IRB 942)
Special Analyses
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. It has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply and because this rule does not impose
a collection of information on small entities, the Regulatory
Flexibility Act (5 U.S.C. chapter 6) does not apply to these
regulations, and therefore, a Regulatory Flexibility Analysis is not
required. Pursuant to section 7805(f) of the Code, the notice of
proposed rulemaking preceding these regulations was submitted to the
Small Business Administration for comment on their impact on small
business.
Drafting Information
The principal author of these regulations is Faith Colson, Office
of Associate Chief Counsel (Passthroughs and Special Industries).
However, other personnel from the IRS and Treasury Department
participated in their development.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1, 301, and 602 are amended as follows:
PART 1--INCOME TAXES
1. The authority citation for part 1 is amended by adding an entry
in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.645-1 also issued under 26 U.S.C. 645. * * *
2. Section 1.641(b)-3 is amended by adding a sentence to the end of
paragraph (a) to read as follows:
Sec. 1.641(b)-3 Termination of estates and trusts.
(a) * * * Notwithstanding the above, if the estate has joined in
making a valid election under section 645 to treat a qualified
revocable trust, as defined under section 645(b)(1), as part of the
estate, the estate shall not terminate under this paragraph prior to
the termination of the section 645 election period. See section 645 and
the regulations thereunder for rules regarding the termination of the
section 645 election period.
* * * * *
3. In Sec. 1.642(c)-1, the last sentence of paragraph (a)(1) is
revised to read as follows:
Sec. 1.642(c)-1 Unlimited deduction for amounts paid for a charitable
purpose.
(a) * * * (1) * * * In applying this paragraph without reference to
paragraph (b) of this section, a deduction shall be allowed for an
amount paid during the taxable year in
[[Page 78377]]
respect of gross income received in a previous taxable year, but only
if no deduction was allowed for any previous taxable year to the estate
or trust, or in the case of a section 645 election, to a related
estate, as defined under Sec. 1.645-1(b), for the amount so paid.
* * * * *
4. An undesignated center heading is added immediately after Sec.
1.642(c)-6A to read as follows:
``Election to Treat Trust as Part of an Estate''
5. Section 1.645-1 is added under the new undesignated
centerheading ``Election to Treat Trust as Part of an Estate'' to read
as follows:
Sec. 1.645-1 Election by certain revocable trusts to be treated as
part of estate.
(a) In general. If an election is filed for a qualified revocable
trust, as defined in paragraph (b)(1) of this section, in accordance
with the rules set forth in paragraph (c) of this section, the
qualified revocable trust is treated and taxed for purposes of subtitle
A of the Internal Revenue Code as part of its related estate, as
defined in paragraph (b)(5) of this section (and not as a separate
trust) during the election period, as defined in paragraph (b)(6) of
this section. Rules regarding the use of taxpayer identification
numbers (TINs) and the filing of a Form 1041, ``U.S. Income Tax Return
for Estates and Trusts,'' for a qualified revocable trust are in
paragraph (d) of this section. Rules regarding the tax treatment of an
electing trust and related estate and the general filing requirements
for the combined entity during the election period are in paragraph
(e)(2) of this section. Rules regarding the tax treatment of an
electing trust and its filing requirements during the election period
if no executor, as defined in paragraph (b)(4) of this section, is
appointed for a related estate are in paragraph (e)(3) of this section.
Rules for determining the duration of the section 645 election period
are in paragraph (f) of this section. Rules regarding the tax effects
of the termination of the election are in paragraph (h) of this
section. Rules regarding the tax consequences of the appointment of an
executor after a trustee has made a section 645 election believing that
an executor would not be appointed for a related estate are in
paragraph (g) of this section.
(b) Definitions. For purposes of this section:
(1) Qualified revocable trust. A qualified revocable trust (QRT) is
any trust (or portion thereof) that on the date of death of the
decedent was treated as owned by the decedent under section 676 by
reason of a power held by the decedent (determined without regard to
section 672(e)). A trust that was treated as owned by the decedent
under section 676 by reason of a power that was exercisable by the
decedent only with the approval or consent of a nonadverse party or
with the approval or consent of the decedent's spouse is a QRT. A trust
that was treated as owned by the decedent under section 676 solely by
reason of a power held by a nonadverse party or by reason of a power
held by the decedent's spouse is not a QRT.
(2) Electing trust. An electing trust is a QRT for which a valid
section 645 election has been made. Once a section 645 election has
been made for the trust, the trust shall be treated as an electing
trust throughout the entire election period.
(3) Decedent. The decedent is the individual who was treated as the
owner of the QRT under section 676 on the date of that individual's
death.
(4) Executor. An executor is an executor, personal representative,
or administrator that has obtained letters of appointment to administer
the decedent's estate through formal or informal appointment
procedures. Solely for purposes of this paragraph (b)(4), an executor
does not include a person that has actual or constructive possession of
property of the decedent unless that person is also appointed or
qualified as an executor, administrator, or personal representative of
the decedent's estate. If more than one jurisdiction has appointed an
executor, the executor appointed in the domiciliary or primary
proceeding is the executor of the related estate for purposes of this
paragraph (b)(4).
(5) Related estate. A related estate is the estate of the decedent
who was treated as the owner of the QRT on the date of the decedent's
death.
(6) Election period. The election period is the period of time
during which an electing trust is treated and taxed as part of its
related estate. The rules for determining the duration of the election
period are in paragraph (f) of this section.
(c) The election--(1) Filing the election if there is an executor--
(i) Time and manner for filing the election. If there is an executor of
the related estate, the trustees of each QRT joining in the election
and the executor of the related estate make an election under section
645 and this section to treat each QRT joining in the election as part
of the related estate for purposes of subtitle A of the Internal
Revenue Code by filing a form provided by the IRS for making the
election (election form) properly completed and signed under penalties
of perjury, or in any other manner prescribed after December 24, 2002
by forms provided by the Internal Revenue Service (IRS), or by other
published guidance for making the election. For the election to be
valid, the election form must be filed not later than the time
prescribed under section 6072 for filing the Form 1041 for the first
taxable year of the related estate (regardless of whether there is
sufficient income to require the filing of that return). If an
extension is granted for the filing of the Form 1041 for the first
taxable year of the related estate, the election form will be timely
filed if it is filed by the time prescribed for filing the Form 1041
including the extension granted with respect to the Form 1041.
(ii) Conditions to election. In addition to providing the
information required by the election form, as a condition to a valid
section 645 election, the trustee of each QRT joining in the election
and the executor of the related estate agree, by signing the election
form under penalties of perjury, that:
(A) With respect to a trustee--
(1) The trustee agrees to the election;
(2) The trustee is responsible for timely providing the executor of
the related estate with all the trust information necessary to permit
the executor to file a complete, accurate, and timely Form 1041 for the
combined electing trust(s) and related estate for each taxable year
during the election period;
(3) The trustee of each QRT joining the election and the executor
of the related estate have agreed to allocate the tax burden of the
combined electing trust(s) and related estate for each taxable year
during the election period in a manner that reasonably reflects the tax
obligations of each electing trust and the related estate; and
(4) The trustee is responsible for insuring that the electing
trust's share of the tax obligations of the combined electing trust(s)
and related estate is timely paid to the Secretary.
(B) With respect to the executor--
(1) The executor agrees to the election;
(2) The executor is responsible for filing a complete, accurate,
and timely Form 1041 for the combined electing trust(s) and related
estate for each taxable year during the election period;
(3) The executor and the trustee of each QRT joining in the
election have agreed to allocate the tax burden of the combined
electing trust(s) and related estate for each taxable year during the
election period in a manner that reasonably reflects the tax
obligations of each electing trust and the related estate;
[[Page 78378]]
(4) The executor is responsible for insuring that the related
estate's share of the tax obligations of the combined electing trust(s)
and related estate is timely paid to the Secretary.
(2) Filing the election if there is no executor--(i) Time and
manner for filing the election. If there is no executor for a related
estate, an election to treat one or more QRTs of the decedent as an
estate for purposes of subtitle A of the Internal Revenue Code is made
by the trustees of each QRT joining in the election, by filing a
properly completed election form, or in any other manner prescribed
after December 24, 2002 by forms provided by the IRS, or by other
published guidance for making the election. For the election to be
valid, the election form must be filed not later than the time
prescribed under section 6072 for filing the Form 1041 for the first
taxable year of the trust, taking into account the trustee's election
to treat the trust as an estate under section 645 (regardless of
whether there is sufficient income to require the filing of that
return). If an extension is granted for the filing of the Form 1041 for
the first taxable year of the electing trust, the election form will be
timely filed if it is filed by the time prescribed for filing the Form
1041 including the extension granted with respect to the filing of the
Form 1041.
(ii) Conditions to election. In addition to providing the
information required by the election form, as a condition to a valid
section 645 election, the trustee of each QRT joining in the election
agrees, by signing the election form under penalties of perjury, that--
(A) The trustee agrees to the election;
(B) If there is more than one QRT joining in the election, the
trustees of each QRT joining in the election have appointed one trustee
to be responsible for filing the Form 1041 for the combined electing
trusts for each taxable year during the election period (filing
trustee) and the filing trustee has agreed to accept that
responsibility;
(C) If there is more than one QRT, the trustees of each QRT joining
in the election have agreed to allocate the tax liability of the
combined electing trusts for each taxable year during the election
period in a manner that reasonably reflects the tax obligations of each
electing trust;
(D) The trustee agrees to:
(1) Timely file a Form 1041 for the electing trust(s) for each
taxable year during the election period; or
(2) If there is more than one QRT and the trustee is not the filing
trustee, timely provide the filing trustee with all of the electing
trust's information necessary to permit the filing trustee to file a
complete, accurate, and timely Form 1041 for the combined electing
trusts for each taxable year during the election period;
(3) Insure that the electing trust's share of the tax burden is
timely paid to the Secretary;
(E) There is no executor and, to the knowledge and belief of the
trustee, one will not be appointed; and
(F) If an executor is appointed after the filing of the election
form and the executor agrees to the section 645 election, the trustee
will complete and file a revised election form with the executor.
(3) Election for more than one QRT. If there is more than one QRT,
the election may be made for some or all of the QRTs. If there is no
executor, one trustee must be appointed by the trustees of the electing
trusts to file Forms 1041 for the combined electing trusts filing as an
estate during the election period.
(d) TIN and filing requirements for a QRT--(1) Obtaining a TIN.
Regardless of whether there is an executor for a related estate and
regardless of whether a section 645 election will be made for the QRT,
a TIN must be obtained for the QRT following the death of the decedent.
See Sec. 301.6109-1(a)(3) of this chapter. The trustee must furnish
this TIN to the payors of the QRT. See Sec. 301.6109-1(a)(5) of this
chapter for the definition of payor.
(2) Filing a Form 1041 for a QRT--(i) Option not to file a Form
1041 for a QRT for which a section 645 election will be made. If a
section 645 election will be made for a QRT, the executor of the
related estate, if any, and the trustee of the QRT may treat the QRT as
an electing trust from the decedent's date of death until the due date
for the section 645 election. Accordingly, the trustee of the QRT is
not required to file a Form 1041 for the QRT for the short taxable year
beginning with the decedent's date of death and ending December 31 of
that year. However, if a QRT is treated as an electing trust under this
paragraph from the decedent's date of death until the due date for the
section 645 election but a valid section 645 election is not made for
the QRT, the QRT will be subject to penalties and interest for failing
to timely file a Form 1041 and pay the tax due thereon.
(ii) Requirement to file a Form 1041 for a QRT if paragraph
(d)(2)(i) of this section does not apply--(A) Requirement to file Form
1041. If the trustee of the QRT and the executor of the related estate,
if any, do not treat the QRT as an electing trust as provided under
paragraph (d)(2)(i) of this section, or if the trustee of the electing
trust and the executor, if any, are uncertain whether a section 645
election will be made for a QRT, the trustee of the QRT must file a
Form 1041 for the short taxable year beginning with the decedent's
death and ending December 31 of that year (unless the QRT is not
required to file a Form 1041 under section 6012 for this period).
(B) Requirement to amend Form 1041 if a section 645 election is
made--(1) If there is an executor. If there is an executor and a valid
section 645 election is made for a QRT after a Form 1041 has been filed
for the QRT as a trust (see paragraph (d)(2)(ii)(A) of this section),
the trustee must amend the Form 1041. The QRT's items of income,
deduction, and credit must be excluded from the amended Form 1041 filed
under this paragraph and must be included on the Form 1041 filed for
the first taxable year of the combined electing trust and related
estate under paragraph (e)(2)(ii)(A) of this section.
(2) If there is no executor. If there is no executor and a valid
section 645 election is made for a QRT after a Form 1041 has been filed
for the QRT as a trust (see paragraph (d)(2)(ii)(A) of this section)
for the short taxable year beginning with the decedent's death and
ending December 31 of that year, the trustee must file an amended
return for the QRT. The amended return must be filed consistent with
paragraph (e)(3) of this section and must be filed by the due date of
the Form 1041 for the QRT, taking into account the trustee's election
under section 645.
(e) Tax treatment and general filing requirements of electing trust
and related estate during the election period--(1) Effect of election.
The section 645 election once made is irrevocable.
(2) If there is an executor--(i) Tax treatment of the combined
electing trust and related estate. If there is an executor, the
electing trust is treated, during the election period, as part of the
related estate for all purposes of subtitle A of the Internal Revenue
Code. Thus, for example, the electing trust is treated as part of the
related estate for purposes of the set-aside deduction under section
642(c)(2), the subchapter S shareholder requirements of section
1361(b)(1), and the special offset for rental real estate activities in
section 469(i)(4).
(ii) Filing requirements--(A) Filing the Form 1041 for the combined
electing trust and related estate during the election period. If there
is an executor, the executor files a single income tax return annually
(assuming a return is required under section 6012) under the name and
TIN of the related estate for the combined electing trust and the
[[Page 78379]]
related estate. Information regarding the name and TIN of each electing
trust must be provided on the Form 1041 as required by the instructions
to that form. The period of limitations provided in section 6501 for
assessments with respect to an electing trust and the related estate
starts with the filing of the return required under this paragraph.
Except as required under the separate share rules of section 663(c),
for purposes of filing the Form 1041 under this paragraph and computing
the tax, the items of income, deduction, and credit of the electing
trust and related estate are combined. One personal exemption in the
amount of $600 is permitted under section 642(b), and the tax is
computed under section 1(e), taking into account section 1(h), for the
combined taxable income.
(B) Filing a Form 1041 for the electing trust is not required.
Except for any final Form 1041 required to be filed under paragraph
(h)(2)(i)(B) of this section, if there is an executor, the trustee of
the electing trust does not file a Form 1041 for the electing trust
during the election period. Although the trustee is not required to
file a Form 1041 for the electing trust, the trustee of the electing
trust must timely provide the executor of the related estate with all
the trust information necessary to permit the executor to file a
complete, accurate and timely Form 1041 for the combined electing trust
and related estate. The trustee must also insure that the electing
trust's share of the tax obligations of the combined electing trust and
related estate is timely paid to the Secretary. In certain situations,
the trustee of a QRT may be required to file a Form 1041 for the QRT's
short taxable year beginning with the date of the decedent's death and
ending December 31 of that year. See paragraph (d)(2) of this section.
(iii) Application of the separate share rules--(A) Distributions to
beneficiaries (other than to a share (or shares) of the combined
electing trust and related estate). Under the separate share rules of
section 663(c), the electing trust and related estate are treated as
separate shares for purposes of computing distributable net income
(DNI) and applying the distribution provisions of sections 661 and 662.
Further, the electing trust share or the related estate share may each
contain two or more shares. Thus, if during the taxable year, a
distribution is made by the electing trust or the related estate, the
DNI of the share making the distribution must be determined and the
distribution provisions of sections 661 and 662 must be applied using
the separately determined DNI applicable to the distributing share.
(B) Adjustments to the DNI of the separate shares for distributions
between shares to which sections 661 and 662 would apply. A
distribution from one share to another share to which sections 661 and
662 would apply if made to a beneficiary other than another share of
the combined electing trust and related estate affects the computation
of the DNI of the share making the distribution and the share receiving
the distribution. The share making the distribution reduces its DNI by
the amount of the distribution deduction that it would be entitled to
under section 661 (determined without regard to section 661(c)), had
the distribution been made to another beneficiary, and, solely for
purposes of calculating DNI, the share receiving the distribution
increases its gross income by the same amount. The distribution has the
same character in the hands of the recipient share as in the hands of
the distributing share. The following example illustrates the
provisions of this paragraph (e)(2)(iii)(B):
Example. (i) A's will provides that, after the payment of debts,
expenses, and taxes, the residue of A's estate is to be distributed
to Trust, an electing trust. The sole beneficiary of Trust is C. The
estate share has $15,000 of gross income, $5,000 of deductions, and
$10,000 of taxable income and DNI for the taxable year based on the
assets held in A's estate. During the taxable year, A's estate
distributes $15,000 to Trust. The distribution reduces the DNI of
the estate share by $10,000.
(ii) For the same taxable year, the trust share has $25,000 of
gross income and $5,000 of deductions. None of the modifications
provided for under section 643(a) apply. In calculating the DNI for
the trust share, the gross income of the trust share is increased by
$10,000, the amount of the reduction in the DNI of the estate share
as a result of the distribution to Trust. Thus, solely for purposes
of calculating DNI, the trust share has gross income of $35,000, and
taxable income of $30,000. Therefore, the trust share has $30,000 of
DNI for the taxable year.
(iii) During the same taxable year, Trust distributes $35,000 to
C. The distribution deduction reported on the Form 1041 filed for
A's estate and Trust is $30,000. As a result of the distribution by
Trust to C, C must include $30,000 in gross income for the taxable
year. The gross income reported on the Form 1041 filed for A's
estate and Trust is $40,000.
(iv) Application of the governing instrument requirement of section
642(c). A deduction is allowed in computing the taxable income of the
combined electing trust and related estate to the extent permitted
under section 642(c) for--
(A) Any amount of the gross income of the related estate that is
paid or set aside during the taxable year pursuant to the terms of the
governing instrument of the related estate for a purpose specified in
section 170(c); and
(B) Any amount of gross income of the electing trust that is paid
or set aside during the taxable year pursuant to the terms of the
governing instrument of the electing trust for a purpose specified in
section 170(c).
(3) If there is no executor--(i) Tax treatment of the electing
trust. If there is no executor, the trustee treats the electing trust,
during the election period, as an estate for all purposes of subtitle A
of the Internal Revenue Code. Thus, for example, an electing trust is
treated as an estate for purposes of the set-aside deduction under
section 642(c)(2), the subchapter S shareholder requirements of section
1361(b)(1), and the special offset for rental real estate activities
under section 469(i)(4). The trustee may also adopt a taxable year
other than a calendar year.
(ii) Filing the Form 1041 for the electing trust. If there is no
executor, the trustee of the electing trust must, during the election
period, file a Form 1041, under the TIN obtained by the trustee under
Sec. 301.6109-1(a)(3) of this chapter upon the death of the decedent,
treating the trust as an estate. If there is more than one electing
trust, the Form 1041 must be filed by the filing trustee (see paragraph
(c)(2)(ii)(B) of this section) under the name and TIN of the electing
trust of the filing trustee. Information regarding the names and TINs
of the other electing trusts must be provided on the Form 1041 as
required by the instructions to that form. Any return filed in
accordance with this paragraph shall be treated as a return filed for
the electing trust (or trusts, if there is more than one electing
trust) and not as a return filed for any subsequently discovered
related estate. Accordingly, the period of limitations provided in
section 6501 for assessments with respect to a subsequently discovered
related estate does not start until a return is filed with respect to
the related estate. See paragraph (g) of this section.
(4) Application of the section 6654(l)(2) to the electing trust.
Each electing trust and related estate (if any) is treated as a
separate taxpayer for all purposes of subtitle F of the Internal
Revenue Code, including, without limitation, the application of section
6654. The provisions of section 6654(l)(2)(A) relating to the two year
exception to an estate's obligation to make estimated tax payments,
however, will apply to each electing trust for which a section 645
election has been made.
(f) Duration of election period--(1) In general. The election
period begins on
[[Page 78380]]
the date of the decedent's death and terminates on the earlier of the
day on which both the electing trust and related estate, if any, have
distributed all of their assets, or the day before the applicable date.
The election does not apply to successor trusts (trusts that are
distributees under the trust instrument).
(2) Definition of applicable date--(i) Applicable date if no Form
706 ``United States Estate (and Generation Skipping Transfer) Tax
Return'' is required to be filed. If a Form 706 is not required to be
filed as a result of the decedent's death, the applicable date is the
day which is 2 years after the date of the decedent's death.
(ii) Applicable date if a Form 706 is required to be filed. If a
Form 706 is required to be filed as a result of the decedent's death,
the applicable date is the later of the day that is 2 years after the
date of the decedent's death, or the day that is 6 months after the
date of final determination of liability for estate tax. Solely for
purposes of determining the applicable date under section 645, the date
of final determination of liability is the earliest of the following--
(A) The date that is six months after the issuance by the Internal
Revenue Service of an estate tax closing letter, unless a claim for
refund with respect to the estate tax is filed within twelve months
after the issuance of the letter;
(B) The date of a final disposition of a claim for refund, as
defined in paragraph (f)(2)(iii) of this section, that resolves the
liability for the estate tax, unless suit is instituted within six
months after a final disposition of the claim;
(C) The date of execution of a settlement agreement with the
Internal Revenue Service that determines the liability for the estate
tax;
(D) The date of issuance of a decision, judgment, decree, or other
order by a court of competent jurisdiction resolving the liability for
the estate tax unless a notice of appeal or a petition for certiorari
is filed within 90 days after the issuance of a decision, judgment,
decree, or other order of a court; or
(E) The date of expiration of the period of limitations for
assessment of the estate tax provided in section 6501.
(iii) Definition of final disposition of claim for refund. For
purposes of paragraph (f)(2)(ii)(B) of this section, a claim for refund
shall be deemed finally disposed of by the Secretary when all items
have been either allowed or disallowed. If a waiver of notification
with respect to disallowance is filed with respect to a claim for
refund prior to disallowance of the claim, the claim for refund will be
treated as disallowed on the date the waiver is filed.
(iv) Examples. The application of this paragraph (f)(2) is
illustrated by the following examples:
Example 1. A died on October 20, 2002. The executor of A's
estate and the trustee of Trust, an electing trust, made a section
645 election. A Form 706 is not required to be filed as a result of
A's death. The applicable date is October 20, 2004, the day that is
two years after A's date of death. The last day of the election
period is October 19, 2004. Beginning October 20, 2004, Trust will
no longer be treated and taxed as part of A's estate.
Example 2. Assume the same facts as Example 1, except that a
Form 706 is required to be filed as the result of A's death. The
Internal Revenue Service issues an estate tax closing letter
accepting the Form 706 as filed on March 15, 2005. The estate does
not file a claim for refund by March 15, 2006, the day that is
twelve months after the date of issuance of the estate tax closing
letter. The date of final determination of liability is September
15, 2005, and the applicable date is March 15, 2006. The last day of
the election period is March 14, 2006. Beginning March 15, 2006,
Trust will no longer be treated and taxed as part of A's estate.
Example 3. Assume the same facts as Example 1, except that a
Form 706 is required to be filed as the result of A's death. The
Form 706 is audited, and a notice of deficiency authorized under
section 6212 is mailed to the executor of A's estate as a result of
the audit. The executor files a petition in Tax Court. The Tax Court
issues a decision resolving the liability for estate tax on December
14, 2005, and neither party appeals within 90 days after the
issuance of the decision. The date of final determination of
liability is December 14, 2005. The applicable date is June 14,
2006, the day that is six months after the date of final
determination of liability. The last day of the election period is
June 13, 2006. Beginning June 14, 2006, Trust will no longer be
treated and taxed as part of A's estate.
(g) Executor appointed after the section 645 election is made--(1)
Effect on the election. If an executor for the related estate is not
appointed until after the trustee has made a valid section 645
election, the executor must agree to the trustee's election, and the
IRS must be notified of that agreement by the filing of a revised
election form (completed as required by the instructions to that form)
within 90 days of the appointment of the executor, for the election
period to continue past the date of appointment of the executor. If the
executor does not agree to the election or a revised election form is
not timely filed as required by this paragraph, the election period
terminates the day before the appointment of the executor. If the IRS
issues other guidance after December 24, 2002 for notifying the IRS of
the executor's agreement to the election, the IRS must be notified in
the manner provided in that guidance for the election period to
continue.
(2) Continuation of election period--(i) Correction of returns
filed before executor appointed. If the election period continues under
paragraph (g)(1) of this section, the executor of the related estate
and the trustee of each electing trust must file amended Forms 1041 to
correct the Forms 1041 filed by the trustee before the executor was
appointed. The amended Forms 1041 must be filed under the name and TIN
of the electing trust and must reflect the items of income, deduction,
and credit of the related estate and the electing trust. The name and
TIN of the related estate must be provided on the amended Forms 1041 as
required in the instructions to that Form. The amended return for the
taxable year ending immediately before the executor was appointed must
indicate that this Form 1041 is a final return. If the period of
limitations for making assessments has expired with respect to the
electing trust for any of the Forms 1041 filed by the trustee, the
executor must file Forms 1041 for any items of income, deduction, and
credit of the related estate that cannot be properly included on
amended forms for the electing trust. The personal exemption under
section 642(b) is not permitted to be taken on these Forms 1041 filed
by the executor.
(ii) Returns filed after the appointment of the executor. All
returns filed by the combined electing trust and related estate after
the appointment of the executor are to be filed under the name and TIN
of the related estate in accordance with paragraph (e)(2) of this
section. Regardless of the change in the name and TIN under which the
Forms 1041 for the combined electing trust and related estate are
filed, the combined electing trust and related estate will be treated
as the same entity before and after the executor is appointed.
(3) Termination of the election period. If the election period
terminates under paragraph (g)(1) of this section, the executor must
file Forms 1041 under the name and TIN of the estate for all taxable
years of the related estate ending after the death of the decedent. The
trustee of the electing trust is not required to amend any returns
filed for the electing trust during the election period. Following
termination of the election period, the trustee of the electing trust
must obtain a new TIN. See Sec. 301.6109-1(a)(4) of this chapter.
(h) Treatment of an electing trust and related estate following
termination of the election--(1) The share (or shares) comprising the
electing trust is deemed to be distributed upon termination of the
election period. On the close of the last day of the election period,
the combined electing trust and related
[[Page 78381]]
estate, if there is an executor, or the electing trust, if there is no
executor, is deemed to distribute the share (or shares, as determined
under section 663(c)) comprising the electing trust to a new trust in a
distribution to which sections 661 and 662 apply. All items of income,
including net capital gains, that are attributable to the share (or
shares) comprising the electing trust are included in the calculation
of the distributable net income of the electing trust and treated as
distributed by the combined electing trust and related estate, if there
is an executor, or by the electing trust, if there is no executor, to
the new trust. The combined electing trust and related estate, if there
is an executor, or the electing trust, if there is no executor, is
entitled to a distribution deduction to the extent permitted under
section 661 in the taxable year in which the election period terminates
as a result of the deemed distribution. The new trust shall include the
amount of the deemed distribution in gross income to the extent
required under section 662.
(2) Filing of the Form 1041 upon the termination of the section 645
election--(i) If there is an executor--(A) Filing the Form 1041 for the
year of termination. If there is an executor, the Form 1041 filed under
the name and TIN of the related estate for the taxable year in which
the election terminates includes--
(1) The items of income, deduction, and credit of the electing
trust attributable to the period beginning with the first day of the
taxable year of the combined electing trust and related estate and
ending with the last day of the election period;
(2) The items of income, deduction, and credit, if any, of the
related estate for the entire taxable year; and
(3) A deduction for the deemed distribution of the share (or
shares) comprising the electing trust to the new trust as provided for
under paragraph (h)(1) of this section.
(B) Requirement to file a final Form 1041 under the name and TIN of
the electing trust. If the electing trust terminates during the
election period, the trustee of the electing trust must file a Form
1041 under the name and TIN of the electing trust and indicate that the
return is a final return to notify the IRS that the electing trust is
no longer in existence. The items of income, deduction, and credit of
the trust are not reported on this final Form 1041 but on the
appropriate Form 1041 filed for the combined electing trust and related
estate.
(ii) If there is no executor. If there is no executor, the taxable
year of the electing trust closes on the last day of the election
period. A Form 1041 is filed in the manner prescribed under paragraph
(e)(3)(ii) of this section reporting the items of income, deduction,
and credit of the electing trust for the short period ending with the
last day of the election period. The Form 1041 filed under this
paragraph includes a distribution deduction for the deemed distribution
provided for under paragraph (h)(1) of this section. The Form 1041 must
indicate that it is a final return.
(3) Use of TINs following termination of the election--(i) If there
is an executor. Upon termination of the section 645 election, a former
electing trust may need to obtain a new TIN. See Sec. 301.6109-1(a)(4)
of this chapter. If the related estate continues after the termination
of the election period, the related estate must continue to use the TIN
assigned to the estate during the election period.
(ii) If there is no executor. If there is no executor, the former
electing trust must obtain a new TIN if the trust will continue after
the termination of the election period. See Sec. 301.6109-1(a)(4) of
this chapter.
(4) Taxable year of estate and trust upon termination of the
election--(i) Estate--Upon termination of the section 645 election
period, the taxable year of the estate is the same taxable year used
during the election period.
(ii) Trust. Upon termination of the section 645 election, the
taxable year of the new trust is the calendar year. See section 644.
(i) Reserved.
(j) Effective date. Paragraphs (a), (b), (c), (d), (f), and (g) of
this section apply to trusts and estates of decedents dying on or after
December 24, 2002. Paragraphs (e) and (h) of this section apply to
taxable years ending on or after December 24, 2002.
6. Section 1.671-4 is amended as follows:
1. The text of paragraph (d) is redesignated paragraph (d)(1) and a
paragraph heading is added for newly designated paragraph (d)(1).
2. Paragraph (d)(2) is added.
3. Paragraphs (h) and (i) are redesignated as paragraphs (i) and
(j), respectively.
4. New paragraph (h) is added.
5. The text of newly designated paragraph (i)(1) is revised.
6. Paragraph (i)(3) is added.
The additions and revisions read as follows:
Sec. 1.671-4 Method of reporting.
* * * * *
(d) Due date and other requirements with respect to statement
required to be furnished by trustee--(1) In general. * * *
(2) Statement for the taxable year ending with the death of the
grantor or other person treated as the owner of the trust. If a trust
ceases to be treated as owned by the grantor, or other person, by
reason of the death of that grantor or other person (decedent), the due
date for the statement required to be furnished for the taxable year
ending with the death of the decedent shall be the date specified by
section 6034A(a) as though the decedent had lived throughout the
decedent's last taxable year. See paragraph (h) of this section for
special reporting rules for a trust or portion of the trust that ceases
to be treated as owned by the grantor or other person by reason of the
death of the grantor or other person.
* * * * *
(h) Reporting rules for a trust, or portion of a trust, that ceases
to be treated as owned by a grantor or other person by reason of the
death of the grantor or other person--(1) Definition of decedent. For
purposes of this paragraph (h), the decedent is the grantor or other
person treated as the owner of the trust, or portion of the trust,
under subpart E, part I, subchapter J, chapter 1 of the Internal
Revenue Code on the date of death of that person.
(2) In general. The provisions of this section apply to a trust, or
portion of a trust, treated as owned by a decedent for the taxable year
that ends with the decedent's death. Following the death of the
decedent, the trust or portion of a trust that ceases to be treated as
owned by the decedent, by reason of the death of the decedent, may no
longer report under this section. A trust, all of which was treated as
owned by the decedent, must obtain a new TIN upon the death of the
decedent, if the trust will continue after the death of the decedent.
See Sec. 301.6109-1(a)(3)(i) of this chapter for rules regarding
obtaining a TIN upon the death of the decedent.
(3) Special rules--(i) Trusts reporting pursuant to paragraph (a)
of this section for the taxable year ending with the decedent's death.
The due date for the filing of a return pursuant to paragraph (a) of
this section for the taxable year ending with the decedent's death
shall be the due date provided for under Sec. 1.6072-1(a)(2). The
return filed under this paragraph for a trust all of which was treated
as owned by the decedent must indicate that it is a final return.
(ii) Trust reporting pursuant to paragraph (b)(2)(B) of this
section for the taxable year of the decedent's death. A trust that
reports pursuant to paragraph (b)(2)(B) of this section for the
[[Page 78382]]
taxable year ending with the decedent's death must indicate on each
Form 1096 ``Annual Summary and Transmittal of the U.S. Information
Returns'' that it files (or appropriately on magnetic media) for the
taxable year ending with the death of the decedent that it is the final
return of the trust.
(iii) Trust reporting under paragraph (b)(3) of this section. If a
trust has been reporting under paragraph (b)(3) of this section, the
trustee may not report under that paragraph if any portion of the trust
has a short taxable year by reason of the death of the decedent and the
portion treated as owned by the decedent does not terminate on the
death of the decedent.
(i) Effective date and transition rule--(1) Effective date. The
trustee of a trust any portion of which is treated as owned by one or
more grantors or other persons must report pursuant to paragraphs (a),
(b), (c), (d)(1), (e), (f), and (g) of this section for taxable years
beginning on or after January 1, 1996.
* * * * *
(3) Effective date for paragraphs (d)(2) and (h) of this section.
Paragraphs (d)(2) and (h) of this section apply for taxable years
ending on or after December 24, 2002.
7. Section 1.6012-3 is amended by adding paragraph (a)(1)(iv) to
read as follows:
Sec. 1.6012-3 Returns by fiduciaries.
(iv) For each trust electing to be taxed as, or as part of, an
estate under section 645 for which a trustee acts, and for each related
estate joining in a section 645 election for which an executor acts, if
the aggregate gross income of the electing trust(s) and related estate,
if any, joining in the election for the taxable year is $600 or more.
(For the respective filing requirements of the trustee of each electing
trust and executor of any related estate, see Sec. 1.645-1).
* * * * *
8. Section 1.6072-1 is amended as follows:
1. The text of paragraph (a) is redesignated as paragraph (a)(1)
and a paragraph heading is added for newly designated paragraph (a)(1).
2. Paragraph (a)(2) is added.
The additions are as follows:
Sec. 1.6072-1 Time for filing returns of individuals, estates, and
trusts.
(a) In general--(1) Returns of income for individuals, estates and
trusts. * * *
(2) Return of trust, or portion of a trust, treated as owned by a
decedent--(i) In general. In the case of a return of a trust, or
portion of a trust, that was treated as owned by a decedent under
subpart E (section 671 and following), part I, subchapter J, chapter 1
of the Internal Revenue Code as of the date of the decedent's death
that is filed in accordance with Sec. 1.671-4(a) for the fractional
part of the year ending with the date of the decedent's death, the due
date of such return shall be the fifteenth day of the fourth month
following the close of the 12-month period which began with the first
day of the decedent's taxable year.
(ii) Effective date. This paragraph (a)(2) applies to taxable years
ending on or after December 24, 2002.
* * * * *
PART 301--PROCEDURE AND ADMINISTRATION
9. The authority citation for part 301 continues to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
10. Section 301.6109-1 is amended as follows:
1. Paragraph (a)(2)(iii) is removed.
2. Paragraphs (a)(3) through (a)(6) are added.
The additions are as follows:
Sec. 301.6109-1 Identifying numbers.
(a) * * *
(3) Obtaining a taxpayer identification number for a trust, or
portion of a trust, following the death of the individual treated as
the owner--(i) In general--(A) A trust all of which was treated as
owned by a decedent. In general, a trust all of which is treated as
owned by a decedent under subpart E (section 671 and following), part
I, subchapter J, chapter 1 of the Internal Revenue Code as of the date
of the decedent's death must obtain a new taxpayer identification
number following the death of the decedent if the trust will continue
after the death of the decedent.
(B) Taxpayer identification number of trust with multiple owners.
With respect to a portion of a trust treated as owned under subpart E
(section 671 and following), part I, subchapter J, chapter 1 (subpart
E) of the Internal Revenue Code by a decedent as of the date of the
decedent's death, if, following the death of the decedent, the portion
treated as owned by the decedent remains part of the original trust and
the other portion (or portions) of the trust continues to be treated as
owned under subpart E by a grantor(s) or other person(s), the trust
reports under the taxpayer identification number assigned to the trust
prior to the decedent's death and the portion of the trust treated as
owned by the decedent prior to the decedent's death (assuming the
decedent's portion of the trust is not treated as terminating upon the
decedent's death) continues to report under the taxpayer identification
number used for reporting by the other portion (or portions) of the
trust. For example, if a trust, reporting under Sec. 1.671-4(a) of
this chapter, is treated as owned by three persons and one of them
dies, the trust, including the portion of the trust no longer treated
as owned by a grantor or other person, continues to report under the
tax identification number assigned to the trust prior to the death of
that person. See Sec. 1.671-4(a) of this chapter regarding rules for
filing the Form 1041, ``U.S. Income Tax Return for Estates and
Trusts,'' where only a portion of the trust is treated as owned by one
or more persons under subpart E.
(ii) Furnishing correct taxpayer identification number to payors
following the death of the decedent. If the trust continues after the
death of the decedent and is required to obtain a new taxpayer
identification number under paragraph (a)(3)(i)(A) of this section, the
trustee must furnish payors with a new Form W-9, ``Request for Taxpayer
Identification Number and Certification,'' or an acceptable substitute
Form W-9, containing the new taxpayer identification number required
under paragraph (a)(3)(i)(A) of this section, the name of the trust,
and the address of the trustee.
(4) Taxpayer identification number to be used by a trust upon
termination of a section 645 election--(i) If there is an executor.
Upon the termination of the section 645 election period, if there is an
executor, the trustee of the former electing trust may need to obtain a
taxpayer identification number. If Sec. 1.645-1(g) of this chapter
regarding the appointment of an executor after a section 645 election
is made applies to the electing trust, the electing trust must obtain a
new TIN upon termination of the election period. See the instructions
to the Form 1041 for whether a new taxpayer identification number is
required for other former electing trusts.
(ii) If there is no executor. Upon termination of the section 645
election period, if there is no executor, the trustee of the former
electing trust must obtain a new taxpayer identification number.
(iii) Requirement to provide taxpayer identification number to
payors. If the trustee is required to obtain a new taxpayer
identification number for a former electing trust pursuant to this
paragraph (a)(4), or pursuant to the instructions to the Form 1041, the
trustee must furnish all payors of the trust with a completed Form W-9
or acceptable substitute Form W-9 signed under penalties of perjury by
the trustee providing each payor with the name of
[[Page 78383]]
the trust, the new taxpayer identification number, and the address of
the trustee.
(5) Persons treated as payors. For purposes of paragraphs (a)(2),
(3), and (4) of this section, a payor is a person described in
Sec. Sec. 1.671-4(b)(4) of this chapter.
(6) Effective date. Paragraphs (a)(3), (4), and (5) of this section
apply to trusts of decedents dying on or after December 24, 2002.
PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
11. The authority citation for part 602 continues to read as
follows:
Authority: 26 U.S.C. 7805.
12. In Sec. 602.101, paragraph (b) is amended by adding an entry
in numerical order to the table to read as follows:
Sec. 602.101 OMB Control numbers.
* * * * *
(b) * * *
------------------------------------------------------------------------
Current OMB
CFR part or section where identified and described control No.
------------------------------------------------------------------------
* * * * *
1.645-1................................................... 1545-1578
* * * * *
------------------------------------------------------------------------
David A. Mader,
Assistant Deputy Commissioner of Internal Revenue.
Approved: December 12, 2002.
Pamela T. Olson,
Assistant Secretary of Treasury.
[FR Doc. 02-32149 Filed 12-23-02; 8:45 am]
BILLING CODE 4830-01-P