NPRM_Reg-209826-96

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Federal Register / Vol. 61, No. 189 / Friday, September 27, 1996 / Proposed Rules

reasonably be expected to be safe. Any
reference to published information
offered in support of the notification
shall be accompanied by reprints or
photostatic copies of such references. If
any part of the material submitted is in
a foreign language, it shall be
accompanied by an accurate and
complete English translation; and
(5) The signature of an authorized
official of the manufacturer or
distributor of the dietary supplement
that contains the new dietary ingredient.
(c) The date that the agency receives
the notification submitted under
paragraph (a) of this section is the filing
date for the notification. For 75 days
after the filing date, the manufacturer or
distributor of a dietary supplement that
contains a new dietary ingredient shall
not introduce, or deliver for
introduction, into interstate commerce
the dietary supplement that contains the
new dietary ingredient.
(d) If the manufacturer or distributor
of a dietary supplement that contains a
new dietary ingredient, or of the new
dietary ingredient, provides additional
information in support of the new
dietary ingredient notification, the date
of receipt by FDA of the additional
information in support of the new
dietary ingredient notification shall
constitute the filling date.
(e) FDA will not disclose the
existence of, or the information
contained in, the new dietary ingredient
notification for 90 days after the filing
date of the notification. After the 90th
day, all information in the notification
will be placed on public display, except
for any information that is trade secret
or otherwise confidential commercial
information.
(f) Failure of the agency to respond to
a notification does not constitute a
finding by the agency that the new
dietary ingredient or the dietary
supplement that contains the new
dietary ingredient is safe or is not
adulterated under section 402 of the act.
Dated: September 19, 1996.
William B. Schultz,
Deputy Commissioner for Policy.
[FR Doc. 96–24752 Filed 9–26–96; 8:45 am]
BILLING CODE 4160–01–F

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG–209826–96]
RIN 1545–AU29

Application of the Grantor Trust Rules
to Nonexempt Employees’ Trusts
Internal Revenue Service (IRS),
Treasury.
ACTION: Notice of proposed rulemaking
and notice of public hearing.
AGENCY:

This document contains
proposed regulations relating to the
application of the grantor trust rules to
nonexempt employees’ trusts. The
proposed regulations clarify that the
grantor trust rules generally do not
apply to domestic nonexempt
employees’ trusts, and clarify the
interaction between the grantor trust
rules, the rules generally governing the
taxation of nonqualified deferred
compensation arrangements, and the
antideferral rules for United States
persons holding interests in foreign
entities. The proposed regulations affect
nonexempt employees’ trusts funding
deferred compensation arrangements, as
well as U.S. persons holding interests in
certain foreign corporations and foreign
partnerships with deferred
compensation arrangements funded
through foreign nonexempt employees’
trusts. In addition, the proposed
regulations affect U.S. persons that have
deferred compensation arrangements
funded through certain foreign
nonexempt employees’ trusts. This
document also provides notice of a
public hearing on these proposed
regulations.
DATES: Written comments must be
received by December 26, 1996.
Requests to speak (with outlines of oral
comments to be discussed) at the public
hearing scheduled for January 15, 1997,
at 10:00 a.m. must be submitted by
December 24, 1996.
ADDRESSES: Send submissions to:
CC:DOM:CORP:R (REG–209826–96),
room 5226, Internal Revenue Service,
POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions
may be hand delivered between the
hours of 8 a.m. and 5 p.m. to:
CC:DOM:CORP:R (REG–209826–96),
Courier’s Desk, Internal Revenue
Service, 1111 Constitution Avenue,
NW., Washington, DC. The public
hearing will be held in room 2615,
Internal Revenue Building, 1111
Constitution Avenue, NW., Washington,
DC. Alternatively, taxpayers may submit
SUMMARY:

comments electronically via the Internet
by selecting the ‘‘Tax Regs’’ option on
the IRS Home Page, or by submitting
comments directly to the IRS Internet
site at http://www.irs.ustreas.gov/prod/
tax regs/comments.html.
FOR FURTHER INFORMATION CONTACT:
Concerning the regulations, James A.
Quinn, (202) 622–3060; Linda S. F.
Marshall, (202) 622–6030; Kristine K.
Schlaman (202) 622–3840; and M. Grace
Fleeman (202) 622–3850; concerning
submissions and the hearing, Michael
Slaughter, (202) 622–7190 (not toll-free
numbers).

l

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act
The collection of information
contained in this notice of proposed
rulemaking has been submitted to the
Office of Management and Budget for
review in accordance with the
Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the
collection of information should be sent
to the Office of Management and
Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503, with copies to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer, T:FP,
Washington, DC 20224. Comments on
the collection of information should be
received by November 26, 1996.
Comments are specifically requested
concerning:
Whether the proposed collection of
information is necessary for the proper
performance of the functions of the
Internal Revenue Service, including
whether the information will have
practical utility;
The accuracy of the estimated burden
associated with the proposed collection
of information (see below);
How the quality, utility, and clarity of
the information to be collected may be
enhanced;
How the burden of complying with
the proposed collection of information
may be minimized, including through
the application of automated collection
techniques or other forms of information
technology; and
Estimates of capital or start-up costs
and costs of operation, maintenance,
and purchase of services to provide
information.
The collection of information in this
proposed regulation is in § 1.671–
1(h)(3)(iii). This information is required
by the IRS to determine accurately the
portion of certain foreign employees’
trusts properly treated as owned by the
employer. This information will be used
to notify the Commissioner that certain

Federal Register / Vol. 61, No. 189 / Friday, September 27, 1996 / Proposed Rules
entities are relying on an exception for
reasonable funding. The collection of
information is mandatory. The likely
respondents are businesses or other forprofit organizations.
Estimated total annual reporting
burden: 1,000 hours.
The estimated annual burden per
respondent varies from .5 hours to 1.5
hours, depending on individual
circumstances, with an estimated
average of 1 hour.
Estimated number of respondents:
1,000.
Estimated annual frequency of
responses: On occasion.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless the collection of information
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 may
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 May 7, 1993, the IRS issued
proposed regulations under section
404A (58 FR 27219). The section 404A
proposed regulations provide that
section 404A is the exclusive means by
which an employer may take a
deduction or reduce earnings and
profits for amounts used to fund
deferred compensation in situations
other than those in which a deduction
or reduction of earnings and profits is
permitted under section 404 (the
‘‘exclusive means’’ rule).
The section 404A proposed
regulations do not provide rules
regarding the treatment of income and
ownership of assets of foreign trusts
established to fund deferred
compensation arrangements, but refer to
‘‘other applicable provisions,’’ including
the grantor trust rules of subpart E of the
Internal Revenue Code of 1986, as
amended. Thus, the 1993 proposed
section 404A regulations imply that, if
an employer cannot or does not elect
section 404A treatment for a foreign
trust established to fund the employer’s
deferred compensation arrangements,
the employer may be treated as the
owner of the entire trust for purposes of
subtitle A of the Code under sections
671 through 679 even though all or part
of the trust assets are set aside for
purposes of satisfying liabilities under
the plan. Conversely, some
commentators believe that, for U.S. tax

purposes, a foreign employer would not
be treated as the owner of any portion
of a foreign trust established to fund a
section 404A qualified foreign plan even
though all or part of the trust assets
might be used for purposes other than
satisfying liabilities under the plan. A
number of different rules, in addition to
the grantor trust rules, potentially affect
the taxation of foreign trusts established
to fund deferred compensation
arrangements. These rules include: the
nonexempt deferred compensation trust
rules of sections 402(b) and 404(a)(5);
the partnership rules of subchapter K;
and the antideferral rules, which
include subpart F and the passive
foreign investment company (PFIC)
rules (sections 1291 through 1297).
Following publication of the proposed
1993 regulations and enactment of
section 956A in August of 1993,
comments were received concerning
both the asset ownership rules for
foreign employees’ trusts and the
‘‘exclusive means’’ rule for deductions
or reductions in earnings and profits.
These proposed regulations address
only comments concerning income and
asset ownership rules for foreign
employees’ trusts for federal income tax
purposes. A foreign employees’ trust is
a nonexempt employees’ trust described
in section 402(b) that is part of a
deferred compensation plan, and that is
a foreign trust within the meaning of
section 7701(a)(31). Comments
concerning the ‘‘exclusive means’’ rule
will be addressed in future regulations.
Statutory Background
1. Transfers of Property Not Complete
for Tax Purposes
In certain situations, assets that are
owned by a trust as a legal matter may
be treated as owned by another person
for tax purposes. Thus, assets may be
treated as owned by a pension trust for
non-tax legal purposes but not for tax
purposes. This occurs, for example, if
the person who has purportedly
transferred assets to the trust retains the
benefits and burdens of ownership. See,
e.g., Frank Lyon Co. v. United States,
435 U.S. 561 (1978); Corliss v. Bowers,
281 U.S. 376 (1930); Grodt & McKay
Realty, Inc. v. Commissioner, 77 T.C.
1221 (1981); Rev. Proc. 75–21 (1975–1
C.B. 715). If, under these principles, no
assets have been transferred to an
employees’ trust for federal tax
purposes, these proposed regulations do
not apply.
2. Subpart E—Grantors and Others
Treated as Substantial Owners
Even if there has been a completed
transfer of trust assets, the subpart E

50779

rules may apply to treat the grantor as
the owner of a portion of the trust for
federal income tax purposes. Subpart E
of part I of subchapter J, chapter 1 of the
Code (sections 671 through 679) taxes
income of a trust to the grantor or
another person notwithstanding that the
grantor or other person may not be a
beneficiary of the trust. Under section
671, a grantor or another person
includes in computing taxable income
and credits those items of income,
deduction, and credit against tax that
are attributable to or included in any
portion of a trust of which that person
is treated as the owner.
Sections 673 through 679 set forth the
rules for determining when the grantor
or another person is treated as the
owner of a portion of a trust for federal
income tax purposes. Under sections
673 through 678, the grantor trust rules
apply only if the grantor or other person
has certain powers or interests. For
example, section 676 provides that the
grantor is treated as the owner of a
portion of a trust where, at any time, the
power to revest in the grantor title to
that portion is exercisable by the grantor
or a nonadverse party, or both. A grantor
who is the owner of a trust under
subpart E is treated as the owner of the
trust property for federal income tax
purposes. See Rev. Rul. 85–13 (1985–1
C.B. 184). This document is made
available by the Superintendent of
Documents, U.S. Government Printing
Office, Washington, DC 20402.
Section 679 generally applies to a U.S.
person who directly or indirectly
transfers property to a foreign trust,
subject to certain exceptions described
below. Section 679 generally treats a
U.S. person transferring property to a
foreign trust as the owner of the portion
of the trust attributable to the
transferred property for any taxable year
of that person for which there is a U.S.
beneficiary of any portion of the trust.
In general, a trust is treated as having a
U.S. beneficiary for a taxable year of the
U.S. transferor unless, under the terms
of the trust, no part of the income or
corpus of the trust may be paid or
accumulated during the taxable year to
or for the benefit of a U.S. person, and
unless no part of the income or corpus
of the trust could be paid to or for the
benefit of a U.S. person if the trust were
terminated at any time during the
taxable year. A U.S. person is treated as
having made an indirect transfer to the
foreign trust of property if a non-U.S.
person acts as a conduit with respect to
the transfer or if the U.S. person has
sufficient control over the non-U.S.
person to direct the transfer by the nonU.S. person rather than itself.

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Section 679(a) provides several
exceptions from the application of
section 679 for certain compensatory
trusts. Under these exceptions, section
679 does not apply to a trust described
in section 404(a)(4) or section 404A.
Pursuant to amendments made in
section 1903(b) of the Small Business
Job Protection Act of 1996 (SBJPA),
section 679 also does not apply to any
transfer of property after February 6,
1995, to a trust described in section
402(b).
3. Taxability of Beneficiary of
Nonexempt Employees’ Trust
Section 402(b) provides rules for the
taxability of beneficiaries of a
nonexempt employees’ trust. Under
section 402(b)(1), employer
contributions to a nonexempt
employees’ trust generally are included
in the gross income of the employee in
accordance with section 83. Section
402(b)(2) provides that amounts
distributed or made available from a
nonexempt employees’ trust generally
are taxable to the distributee under the
rules of section 72 in the taxable year in
which distributed or made available.
Section 402(b)(4) provides that, under
certain circumstances, a highly
compensated employee is taxed each
year on the employee’s vested accrued
benefit (other than the employee’s
investment in the contract) in a
nonexempt employees’ trust. Under
section 402(b)(3), a beneficiary of a
nonexempt employees’ trust generally is
not treated as the owner of any portion
of the trust under subpart E. The rules
of section 402(b) apply to a beneficiary
of a nonexempt employees’ trust
regardless of whether the trust is a
domestic trust or a foreign trust.
4. Employer Deduction for Contributions
to a Nonexempt Employees’ Trust
Section 404(a)(5) provides rules
regarding the deductibility of
contributions to a nonqualified deferred
compensation plan. Under section
404(a)(5), any contribution paid by an
employer under a deferred
compensation plan, if otherwise
deductible under chapter 1 of the Code,
is deductible only in the taxable year in
which an amount attributable to the
contribution is includible in the gross
income of employees participating in
the plan, and only if separate accounts
are maintained for each employee.
Section 1.404(a)–12(b)(1) clarifies that
an employer’s deduction for
contributions to a nonexempt
employees’ trust is restricted to the
amount of the contribution, and
excludes any income received by the

trust with respect to contributed
amounts.
5. The Partnership Rules of Subchapter
K
A partnership is not subject to income
taxation. However, a partner must take
into account separately on its return its
distributive share of the partnership’s
income, gain, loss, deduction, or credit.
A U.S. partner of a foreign partnership
is subject to U.S. tax on its distributive
share of partnership income. In
addition, a foreign partnership may
have a controlled foreign corporation
(CFC) partner which must take into
account its distributive share of
partnership income, gain, loss, or
deduction in determining its taxable
income. These distributive share
inclusions of the CFC may result in
subpart F income and thus income to a
U.S. shareholder of the CFC. If the
grantor trust rules do not apply to any
portion of a foreign employees’ trust, a
foreign partnership could fund a foreign
employees’ trust in excess of the amount
needed to meet its obligations to its
employees under its deferred
compensation plan and yet retain
control over the excess amount. As a
result, the foreign partnership would
not have to include items in taxable
income attributable to the excess
amount, and consequently the U.S.
partner or CFC would not have to
include those items in its income.
6. The Antideferral Rules of Subpart F,
Including Section 956A, and PFIC
A U.S. person that owns stock in a
foreign corporation generally pays no
U.S. tax currently on income earned by
the foreign corporation. Instead, the
United States defers taxation of that
income until it is distributed to the U.S.
person. The antideferral rules, however,
which include subpart F and the PFIC
rules, limit this deferral in certain
situations.
Subpart F of part III of Subchapter N
(sections 951 through 964) applies to
CFCs. A foreign corporation is a CFC if
more than 50 percent of the total voting
power of all classes of stock entitled to
vote, or the total value of the stock in
the corporation, is owned by ‘‘U.S.
shareholders’’ (defined as U.S. persons
who own ten percent or more of the
voting power of all classes of stock
entitled to vote) on any day during the
foreign corporation’s taxable year. The
United States generally taxes U.S.
shareholders of the CFC currently on
their pro rata share of the CFC’s subpart
F income and sections 956 and 956A
amounts. In effect, the U.S. shareholders
are treated as having received a

distribution out of the earnings and
profits (E&P) of the CFC.
The types of income earned by a
foreign employees’ trust (dividends,
interest, income equivalent to interest,
rents and royalties, and annuities) are
generally subpart F income. The
inclusion under section 956 is based on
the CFC’s investment in U.S. property,
which generally includes stock of a U.S.
shareholder of the CFC. A U.S.
shareholder’s section 956A amount for a
taxable year is the lesser of two
amounts. The first amount is the excess
of the U.S. shareholder’s pro rata share
of the CFC’s ‘‘excess passive assets’’
over the portion of the CFC’s E&P
treated as previously included in gross
income by the U.S. shareholder under
section 956A. For purposes of section
956A, ‘‘passive asset’’ includes any asset
which produces (or is held for the
production of) passive income, and
generally includes property that
produces dividends, interest, income
equivalent to interest, rents and
royalties, and annuities, subject to
exceptions that generally are not
relevant in this context. The second
amount is the U.S. shareholder’s pro
rata share of the CFC’s ‘‘applicable
earnings’’ to the extent accumulated in
taxable years beginning after September
30, 1993.
Section 1501(a)(2) of SBJPA repeals
section 956A. The repeal is effective for
taxable years of foreign corporations
beginning after December 31, 1996, and
for taxable years of U.S. shareholders
with or within which such taxable years
of foreign corporations end.
If a CFC employer is not treated for
federal income tax purposes as the
owner of any portion of a foreign
employees’ trust under the grantor trust
rules, then to the extent that passive
assets contributed by a CFC to a
nonexempt employees’ trust would
otherwise result in subpart F
consequences for the CFC and its
shareholders, the CFC’s contribution
could allow those consequences to be
avoided. For example, a contribution by
a CFC of passive assets to its foreign
employees’ trust could reduce the CFC’s
subpart F earnings and profits, and its
applicable earnings or passive assets for
section 956A purposes, and could affect
the CFC’s increase in investment in U.S.
property for purposes of section 956, all
of which could affect a U.S.
shareholder’s pro rata subpart F
inclusions for the taxable year.
In contrast to the subpart F rules, the
PFIC rules apply to any U.S. person who
directly or indirectly owns any stock in
a foreign corporation that is a PFIC
under either an income or asset test. A
foreign corporation, including a CFC, is

Federal Register / Vol. 61, No. 189 / Friday, September 27, 1996 / Proposed Rules
a PFIC if either (1) 75 percent or more
of its gross income for the taxable year
is passive income or (2) at least 50
percent of the value of the corporation’s
assets produce passive income or are
held for the production of passive
income. For this purpose, passive
income generally is the same type of
income (dividends, interest, income
equivalent to interest, rents and
royalties, and annuities) that would be
earned by a foreign employees’ trust.
Under the PFIC rules, a U.S. person
who is a direct or indirect shareholder
of a PFIC is subject to a special tax
regime upon either disposition of the
PFIC’s stock or receipt of certain
distributions (excess distributions) from
the PFIC. A shareholder, however, may
avoid the application of this special
regime by electing to include its pro rata
share of certain of the PFIC’s passive
income in the year in which the foreign
corporation earns it.
If the grantor trust rules did not apply
to any portion of a foreign employees’
trust, a contribution by a foreign
corporation of passive assets to a
nonexempt employees’ trust would
enable a U.S. person to avoid the PFIC
rules if those assets would otherwise
generate PFIC consequences for the
foreign corporation and its shareholders.
For example, by transferring passive
assets to its nonexempt employees’ trust
in excess of the amount needed to meet
obligations to its employees under its
deferred compensation plan while
retaining control over the excess
amount, a foreign corporation could
divest itself of a sufficient amount of
passive assets and the passive income
they produce to avoid meeting the
income and asset tests. Furthermore, a
foreign corporation that is a PFIC could
minimize income inclusions for a U.S.
shareholder that has made an election to
include PFIC income currently by
transferring income-producing assets to
a foreign employees’ trust.
Overview of Proposed Regulations
Under the proposed regulations, an
employer is not treated as an owner of
any portion of a domestic nonexempt
employees’ trust described in section
402(b) for federal income tax purposes.
Section 404(a)(5) and § 1.404(a)–12(b)
provide a deduction to the employer
solely for contributions to a nonexempt
employees’ trust, and not for any
income of the trust. This rule is
inconsistent with treating the employer
as owning any portion of a nonexempt
employees’ trust, which would require
the employer to recognize the trust’s
income that it may not deduct under
section 404(a)(5). Accordingly, such a
trust is treated as a separate taxable trust

that is taxed under the rules of section
641 et seq. The rule in the proposed
regulations is consistent with the
holdings of a number of private letter
rulings with respect to nonexempt
employees’ trusts and with the Service’s
treatment of trusts that no longer qualify
as exempt under 501(a) (because they
are no longer described in section
401(a)) as separate taxable trusts rather
than as grantor trusts. See also Rev. Rul.
74–299 (1974–1 C.B. 154). This
document is made available by the
Superintendent of Documents, U.S.
Government Printing Office,
Washington, DC 20402.
Under the proposed regulations, an
employer generally is not treated as the
owner of any portion of a foreign
nonexempt employees’ trust for federal
income tax purposes, except as
provided under section 679. The
proposed regulations, however, also
provide that the grantor trust rules
apply to determine whether an
employer that is a CFC or a U.S.
employer is treated as the owner of a
specified ‘‘fractional interest’’ in a
foreign employees’ trust. This rule
applies whether or not the employer
elects section 404A treatment for the
trust. Under the proposed regulations,
this rule also applies in the case of an
employer that is a foreign partnership
with one or more partners that are U.S.
persons or CFCs (U.S.-related
partnership). Such an employer is
treated as the owner of a portion of a
foreign employees’ trust under these
proposed regulations only if the
employer retains a grantor trust power
or interest over a foreign employees’
trust and has a specified ‘‘fractional
interest’’ in the trust.
Under these proposed regulations, the
grantor trust rules of subpart E do not
apply to a foreign employees’ trust with
respect to a foreign employer other than
a CFC or a U.S.-related foreign
partnership, except for cases in which
assets are transferred to a foreign
employees’ trust with a principal
purpose of avoiding the PFIC rules. The
IRS and Treasury will continue to
consider whether these regulations
should provide additional antiabuse
rules that may be necessary for other
purposes, including for purposes of
calculating earnings and profits,
determining the foreign tax credit
limitation, and applying the interest
allocation rules of § 1.882–5.
Explanation of Provisions
1. § 1.671–1(g): Domestic Nonexempt
Employees’ Trusts
The proposed regulations provide that
an employer is not treated for federal

50781

income tax purposes as an owner of any
portion of a nonexempt employees’ trust
described in section 402(b) that is part
of a deferred compensation plan, and
that is not a foreign trust within the
meaning of section 7701(a)(31),
regardless of whether the employer has
a power or interest described in sections
673 through 677 over any portion of the
trust. This rule is analogous to the rule
set forth in § 1.641(a)–0, which provides
that subchapter J, including the grantor
trust rules, does not apply to tax-exempt
employees’ trusts.
2. § 1.671–1(h): Subpart E Rules for
Certain Foreign Employees’ Trusts
The proposed regulations provide
Subpart E rules for foreign employees’
trusts of CFCs, foreign partnerships, and
U.S. employers that apply for all federal
income tax purposes. Under the
proposed regulations, except as
provided under section 679 or the
proposed regulations (as described
below), an employer is not treated as an
owner of any portion of a foreign
employees’ trust for federal income tax
purposes. If an employer is treated as
the owner of a portion of a foreign
employees’ trust for federal income tax
purposes as described below, then the
employer is considered to own the trust
assets attributable to that portion of the
trust for all federal income tax purposes.
Thus, for example, if an employer is
treated as the owner of a portion of a
foreign employees’ trust for federal
income tax purposes as described
below, then income of the trust that is
attributable to that portion of the trust
increases the employer’s earnings and
profits for purposes of sections 312 and
964.
A foreign employees’ trust is a
nonexempt employees’ trust described
in section 402(b) that is part of a
deferred compensation plan, and that is
a foreign trust within the meaning of
section 7701(a)(31). The proposed
regulations apply to any foreign
employees’ trust of a CFC or U.S.-related
foreign partnership, whether or not a
trust funds a qualified foreign plan (as
defined in section 404A(e)). The
proposed regulations clarify that the
income inclusion and asset ownership
rules apply to the entity whose
employees or independent contractors
are covered under the deferred
compensation plan.
A. Plan of CFC Employer
The proposed regulations provide
that, if a CFC maintains a deferred
compensation plan funded through a
foreign employees’ trust, then, with
respect to the CFC, the provisions of
subpart E apply to the portion of the

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trust that is the fractional interest of the
trust described in the proposed
regulations.
B. Plan of U.S. Employer
The proposed regulations provide that
if a U.S. person maintains a deferred
compensation plan funded through a
foreign employees’ trust, then, with
respect to the U.S. person, the
provisions of subpart E apply to the
portion of the trust that is the fractional
interest of the trust described in the
proposed regulations.
C. Plan of U.S.-Related Foreign
Partnership Employer
The proposed regulations provide
that, if a U.S.-related foreign partnership
maintains a deferred compensation plan
funded through a foreign employees’
trust, then, with respect to the U.S.related foreign partnership, the
provisions of subpart E apply to the
portion of the trust that is the fractional
interest of the trust described in the
proposed regulations. The IRS and
Treasury solicit comments on whether
these regulations should provide a safe
harbor rule for a U.S.-related foreign
partnership that maintains a deferred
compensation plan funded through a
foreign employees’ trust if U.S. or CFC
partnership interests are de minimis.
The IRS and Treasury specifically solicit
comments concerning the amount of
U.S. or CFC partnership interests that
would qualify as ‘‘de minimis.’’
D. Plan of Non-CFC Foreign Employer
The proposed regulations provide that
a foreign employer that is not a CFC is
treated as an owner of a portion of a
foreign employees’ trust only as
provided in the antiabuse rule of
§ 1.1297–4.
E. Fractional Interest
The fractional interest of a foreign
employees’ trust described above is
defined in the proposed regulations as
an undivided fractional interest in the
trust for which the fraction is equal to
the relevant amount determined for the
employer’s taxable year divided by the
fair market value of trust assets
determined for the employer’s taxable
year.
F. Relevant Amount
The relevant amount for the
employer’s taxable year is defined in the
proposed regulations as the amount, if
any, by which the fair market value of
trust assets, plus the fair market value
of any assets available to pay plan
liabilities (including any amount held
under an annuity contract that exceeds
the amount that is needed to satisfy the

liabilities provided for under the
contract) that are held in the equivalent
of a trust within the meaning of section
404A(b)(5)(A), exceed the plan’s
accrued liability, determined using a
projected unit credit funding method.
The relevant amount is reduced to the
extent the taxpayer demonstrates to the
Commissioner that the relevant amount
is attributable to amounts that were
properly contributed to the trust
pursuant to a reasonable funding
method, or experience that is favorable
relative to any actuarial assumptions
used that the Commissioner determines
to be reasonable. In addition, if an
employer that is a controlled foreign
corporation otherwise would be treated
as the owner of a fractional interest in
a foreign employees’ trust, the taxpayer
may rely on this rule only if it so
indicates on a statement attached to a
timely filed Form 5471. The IRS and
Treasury solicit comments regarding the
most appropriate way in which to
extend a filing requirement to partners
in U.S.-related foreign partnerships and
other affected taxpayers.
G. Plan’s Accrued Liability
Under the proposed regulations, the
plan’s accrued liability for a taxable year
of the employer is computed as of the
plan’s measurement date for the
employer’s taxable year. The plan’s
accrued liability is determined using a
projected unit credit funding method,
taking into account only liabilities
relating to services performed for the
employer or a predecessor employer. In
addition, the plan’s accrued liability is
reduced (but not below zero) by any
liabilities that are provided for under
annuity contracts held to satisfy plan
liabilities.
Because CFCs generally are required
to determine their taxable income by
reference to U.S. tax principles, the
definition of a plan’s ‘‘accrued liability’’
refers to § 1.412(c)(3)–1. This definition
generally is intended to track the
method used for calculating pension
costs under Statement of Financial
Accounting Standards No. 87,
Employers’ Accounting for Pensions
(FAS 87), available from the Financial
Accounting Standards Board, 401
Merritt 7, Norwalk, CT 06856. Under the
method required to be used to calculate
FAS 87’s projected benefit obligation
(PBO), plan costs are based on projected
salary levels. Because many taxpayers
already compute PBO annually to
determine the pension costs of their
nonexempt employees’ trusts for
financial reporting, the timing, interval
and method to compute plan liabilities
under § 1.671–1(h) should minimize
taxpayer burden. The IRS and Treasury

solicit comments regarding the extent to
which the proposed regulations conform
to existing procedures under FAS 87
and applicable foreign law, and
regarding appropriate conforming
adjustments.
H. Fair Market Value of Trust Assets
Under the proposed regulations, for a
taxable year of the employer, the fair
market value of trust assets, and the fair
market value of retirement annuities or
other assets held in the equivalent of a
trust, equals the fair market value of
those assets, as of the measurement date
for the employer’s taxable year. The fair
market value of these assets is adjusted
to include contributions made between
the measurement date and the end of
the employer’s taxable year.
I. De Minimis Exception
The proposed regulations provide an
exception to the general rule for
determining the relevant amount. If the
relevant amount would not otherwise be
greater than the plan’s normal cost for
the plan year ending with or within the
employer’s taxable year, then the
relevant amount is considered to be
zero.
J. Proposed Effective Date and
Transition Rules
The proposed regulations are
proposed to be prospective. For taxable
years ending prior to September 27,
1996, employers generally would not be
treated for federal income tax purposes
as owning the assets of foreign
nonexempt employees’ trusts (except as
provided under section 679), consistent
with the rules applying to domestic
nonexempt employees’ trusts. A
transition rule, for purposes of § 1.671–
1(h), exempts certain amounts from the
application of the proposed regulations.
This exemption is phased out over a
ten-year period. There is a special
transition rule for any foreign
corporation that becomes a CFC after
September 27, 1996. In addition, there
is a special transition rule for certain
entities that become U.S.-related foreign
partnerships after September 27, 1996.
3. § 1.671–2: General Asset Ownership
Rules
The proposed regulations provide that
a person who is treated as the owner of
any portion of a trust under subpart E
is considered to own the trust assets
attributable to that portion of the trust
for all federal income tax purposes.

Federal Register / Vol. 61, No. 189 / Friday, September 27, 1996 / Proposed Rules
4. § 1.1297–4: Subpart E Rules for
Foreign Employers That Are Not
Controlled Foreign Corporations
Under the proposed regulations, a
foreign employer other than a CFC is not
treated as the owner of any portion of
a foreign nonexempt employees’ trust
for purposes of sections 1291 through
1297, except for cases in which a
principal purpose for transferring
property to the trust is to avoid
classification of a foreign corporation as
a PFIC (as defined in section 1296) or,
if the foreign corporation is classified as
a PFIC, in cases in which a principal
purpose for transferring property to the
trust is to avoid or to reduce taxation of
U.S. shareholders of the PFIC under
section 1291 or 1293. The effective date
of this rule is September 27, 1996.
Income Inclusion and Related Asset
Ownership Rules for Foreign Welfare
Benefit Plans
The IRS and Treasury solicit
comments on the need for (and content
of) income inclusion and asset
ownership rules for foreign welfare
benefit trusts.
Special Analyses
It has been determined that this notice
of proposed rulemaking is not a
significant regulatory action as defined
in Executive Order 12866. Therefore, a
regulatory assessment is not required. It
is hereby certified that these regulations
do not have a significant economic
impact on a substantial number of small
entities. This certification is based on
the fact that these regulations will
primarily affect U.S. owners of
significant interests in foreign entities,
which owners generally are large
multinational corporations. This
certification is also based on the fact
that the burden imposed by the
collection of information in the
regulation, which is a requirement that
certain entities may rely on an
exception for reasonable funding only if
they indicate such reliance on a
statement attached to a timely filed
Form 5471, is minimal, and, therefore,
the collection of information will not
impose a significant economic impact
on such entities. Therefore, a Regulatory
Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, this notice of proposed
rulemaking will be submitted to the
Chief Counsel for Advocacy of the Small
Business Administration for comment
on its impact on small business.

Comments and Public Hearing
Before these proposed regulations are
adopted as final regulations,
consideration will be given to any
written comments (a signed original and
eight (8) copies) that are submitted
timely to the IRS. All comments will be
available for public inspection and
copying.
A public hearing has been scheduled
for January 15, 1997, at 10:00 a.m. in
room 2615, Internal Revenue Building,
1111 Constitution Avenue, NW.,
Washington DC. Because of access
restrictions, visitors will not be
admitted beyond the Internal Revenue
Building lobby more than 15 minutes
before the hearing starts.
The rules of 26 CFR 601.601(a)(3)
apply to the hearing.
Persons that wish to present oral
comments at the hearing must submit
written comments by December 26,
1996, and submit an outline of the
topics to be discussed and the time to
be devoted to each topic (signed original
and eight (8) copies) by December 24,
1996.
A period of 10 minutes will be
allotted to each person for making
comments.
An agenda showing the scheduling of
the speakers will be prepared after the
deadline for receiving outlines has
passed. Copies of the agenda will be
available free of charge at the hearing.
Drafting Information
The principal authors of these
regulations are James A. Quinn of the
Office of Assistant Chief Counsel
(Passthroughs and Special Industries),
Linda S. F. Marshall of the Office of
Associate Chief Counsel (Employee
Benefits and Exempt Organizations),
and Kristine K. Schlaman and M. Grace
Fleeman of the Office of Associate Chief
Counsel (International). However, other
personnel from the IRS and Treasury
Department participated in their
development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Proposed Amendments to the
Regulations
Accordingly, 26 CFR part 1 is
proposed to be amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by removing the
entry for sections 1.1291–10T, 1.1294–
1T, 1.1295–1T, and 1.1297–3T and
adding entries in numerical order to
read as follows:

50783

Authority: 26 U.S.C. 7805 * * *
Section 1.671–1 also issued under 26
U.S.C. 404A(h) and 672(f)(2)(B). * * *
Section 1.1291–10T also issued under 26
U.S.C. 1291(d)(2).
Section 1.1294–1T also issued under 26
U.S.C. 1294.
Section 1.1295–1T also issued under 26
U.S.C. 1295.
Section 1.1297–3T also issued under 26
U.S.C. 1297(b)(1).
Section 1.1297–4 also issued under 26
U.S.C. 1297(f). * * *

Par. 2. Section 1.671–1 is amended by
adding paragraphs (g) and (h) to read as
follows:
§ 1.671–1 Grantors and others treated as
substantial owners; scope.

*

*
*
*
*
(g) Domestic nonexempt employees’
trust—(1) General rule. An employer is
not treated as an owner of any portion
of a nonexempt employees’ trust
described in section 402(b) that is part
of a deferred compensation plan, and
that is not a foreign trust within the
meaning of section 7701(a)(31),
regardless of whether the employer has
a power or interest described in sections
673 through 677 over any portion of the
trust. See section 402(b)(3) and
§ 1.402(b)–1(b)(6) for rules relating to
treatment of a beneficiary of a
nonexempt employees’ trust as the
owner of a portion of the trust.
(2) Example. The following example
illustrates the rules of paragraph (g)(1)
of this section:
Example. Employer X provides
nonqualified deferred compensation through
Plan A to certain of its management
employees. Employer X has created Trust T
to fund the benefits under Plan A. Assets of
Trust T may not be used for any purpose
other than to satisfy benefits provided under
Plan A until all plan liabilities have been
satisfied. Trust T is classified as a trust under
§ 301.7701–4 of this chapter, and is not a
foreign trust within the meaning of section
7701(a)(31). Under § 1.83–3(e), contributions
to Trust T are considered transfers of
property to participants within the meaning
of section 83. On these facts, Trust T is a
nonexempt employees’ trust described in
section 402(b). Because Trust T is a
nonexempt employees’ trust described in
section 402(b) that is part of a deferred
compensation plan, and that is not a foreign
trust within the meaning of section
7701(a)(31), Employer X is not treated as an
owner of any portion of Trust T.

(h) Foreign employees’ trust—(1)
General rules. Except as provided under
section 679 or as provided under this
paragraph (h)(1), an employer is not
treated as an owner of any portion of a
foreign employees’ trust (as defined in
paragraph (h)(2) of this section),
regardless of whether the employer has
a power or interest described in sections

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Federal Register / Vol. 61, No. 189 / Friday, September 27, 1996 / Proposed Rules

673 through 677 over any portion of the
trust.
(i) Plan of CFC employer. If a
controlled foreign corporation (as
defined in section 957) maintains a
deferred compensation plan funded
through a foreign employees’ trust, then,
with respect to the controlled foreign
corporation, the provisions of subpart E
apply to the portion of the trust that is
the fractional interest described in
paragraph (h)(3) of this section.
(ii) Plan of U.S. employer. If a United
States person (as defined in section
7701(a)(30)) maintains a deferred
compensation plan that is funded
through a foreign employees’ trust, then,
with respect to the U.S. person, the
provisions of subpart E apply to the
portion of the trust that is the fractional
interest described in paragraph (h)(3) of
this section.
(iii) Plan of U.S.-related foreign
partnership employer—(A) General rule.
If a U.S.-related foreign partnership (as
defined in paragraph (h)(1)(iii)(B) of this
section) maintains a deferred
compensation plan funded through a
foreign employees’ trust, then, with
respect to the U.S.-related foreign
partnership, the provisions of subpart E
apply to the portion of the trust that is
the fractional interest described in
paragraph (h)(3) of this section.
(B) U.S.-related foreign partnership.
For purposes of this paragraph (h), a
U.S.-related foreign partnership is a
foreign partnership in which a U.S.
person or a controlled foreign
corporation owns a partnership interest
either directly or indirectly through one
or more partnerships.
(iv) Application of § 1.1297–4 to plan
of foreign non-CFC employer. A foreign
employer that is not a controlled foreign
corporation may be treated as an owner
of a portion of a foreign employees’ trust
as provided in § 1.1297–4.
(v) Application to employer entity.
The rules of paragraphs (h)(1)(i) through
(h)(1)(iv) of this section apply to the
employer whose employees benefit
under the deferred compensation plan
funded through a foreign employees’
trust, or, in the case of a deferred
compensation plan covering
independent contractors, the recipient
of services performed by those
independent contractors, regardless of
whether the plan is maintained through
another entity. Thus, for example,
where a deferred compensation plan
benefitting employees of a controlled
foreign corporation is funded through a
foreign employees’ trust, the controlled
foreign corporation is considered to be
the grantor of the foreign employees’
trust for purposes of applying paragraph
(h)(1)(i) of this section.

(2) Foreign employees’ trust. A foreign
employees’ trust is a nonexempt
employees’ trust described in section
402(b) that is part of a deferred
compensation plan, and that is a foreign
trust within the meaning of section
7701(a)(31).
(3) Fractional interest for paragraph
(h)(1)—(i) In general. The fractional
interest for a foreign employees’ trust
used for purposes of paragraph (h)(1) of
this section for a taxable year of the
employer is an undivided fractional
interest in the trust for which the
fraction is equal to the relevant amount
for the employer’s taxable year divided
by the fair market value of trust assets
for the employer’s taxable year.
(ii) Relevant amount—(A) In general.
For purposes of applying paragraph
(h)(3)(i) of this section, and except as
provided in paragraph (h)(3)(iii) of this
section, the relevant amount for the
employer’s taxable year is the amount,
if any, by which the fair market value
of trust assets, plus the fair market value
of any assets available to pay plan
liabilities that are held in the equivalent
of a trust within the meaning of section
404A(b)(5)(A), exceed the plan’s
accrued liability. The following rules
apply for this purpose:
(1) The plan’s accrued liability is
determined using a projected unit credit
funding method that satisfies the
requirements of § 1.412(c)(3)–1, taking
into account only liabilities relating to
services performed through the
measurement date for the employer or a
predecessor employer.
(2) The plan’s accrued liability is
reduced (but not below zero) by any
liabilities that are provided for under
annuity contracts held to satisfy plan
liabilities.
(3) Any amount held under an
annuity contract that exceeds the
amount that is needed to satisfy the
liabilities provided for under the
contract (e.g., the value of a
participation right under a participating
annuity contract) is added to the fair
market value of any assets available to
pay plan liabilities that are held in the
equivalent of a trust.
(4) If the relevant amount as
determined under this paragraph
(h)(3)(ii), without regard to this
paragraph (h)(3)(ii)(A)(4), is greater than
the fair market value of trust assets, then
the relevant amount is equal to the fair
market value of trust assets.
(B) Permissible actuarial assumptions
for accrued liability. For purposes of
paragraph (h)(3)(ii)(A) of this section, a
plan’s accrued liability must be
calculated using an interest rate and
other actuarial assumptions that the
Commissioner determines to be

reasonable. It is appropriate in
determining this interest rate to look to
available information about rates
implicit in current prices of annuity
contracts, and to look to rates of return
on high-quality fixed-income
investments currently available and
expected to be available during the
period prior to maturity of the plan
benefits. If the qualified business unit
computes its income or earnings and
profits in dollars pursuant to the dollar
approximate separate transactions
method under § 1.985–3, the employer
must use an exchange rate that can be
demonstrated to clearly reflect income,
based on all relevant facts and
circumstances, including appropriate
rates of inflation and commercial
practices.
(iii) Exception for reasonable funding.
The relevant amount does not include
an amount that the taxpayer
demonstrates to the Commissioner is
attributable to amounts that were
properly contributed to the trust
pursuant to a reasonable funding
method, applied using actuarial
assumptions that the Commissioner
determines to be reasonable, or any
amount that the taxpayer demonstrates
to the Commissioner is attributable to
experience that is favorable relative to
any actuarial assumptions used that the
Commissioner determines to be
reasonable. For this paragraph (h)(3)(iii)
to apply to a controlled foreign
corporation employer described in
paragraph (h)(1)(i) of this section, the
taxpayer must indicate on a statement
attached to a timely filed Form 5471
that the taxpayer is relying on this rule.
For purposes of this paragraph
(h)(3)(iii), an amount is considered
contributed pursuant to a reasonable
funding method if the amount is
contributed pursuant to a funding
method permitted to be used under
section 412 (e.g., the entry age normal
funding method) that is consistently
used to determine plan contributions. In
addition, for purposes of this paragraph
(h)(3)(iii), if there has been a change to
that method from another funding
method, an amount is considered
contributed pursuant to a reasonable
funding method only if the prior
funding method is also a funding
method described in the preceding
sentence that was consistently used to
determine plan contributions. For
purposes of this paragraph (h)(3)(iii), a
funding method is considered
reasonable only if the method provides
for any initial unfunded liability to be
amortized over a period of at least 6
years, and for any net change in accrued
liability resulting from a change in

Federal Register / Vol. 61, No. 189 / Friday, September 27, 1996 / Proposed Rules
funding method to be amortized over a
period of at least 6 years.
(iv) Reduction for transition amount.
The relevant amount is reduced (but not
below zero) by any transition amount
described in paragraphs (h)(5), (h)(6), or
(h)(7) of this section.
(v) Fair market value of assets. For
purposes of paragraphs (h)(3) (i) and (ii)
of this section, for a taxable year of the
employer, the fair market value of trust
assets, and the fair market value of other
assets held in the equivalent of a trust
within the meaning of section
404A(b)(5)(A), equals the fair market
value of those assets, as of the
measurement date for the employer’s
taxable year, adjusted to include
contributions made after the
measurement date and by the end of the
employer’s taxable year.
(vi) Annual valuation. For purposes of
determining the relevant amount for a
taxable year of the employer, the fair
market value of plan assets, and the
plan’s accrued liability as described in
paragraphs (h)(3) (ii) and (iii) of this
section, and the normal cost as
described in paragraph (h)(4) of this
section, must be determined as of a
consistently used annual measurement
date within the employer’s taxable year.
(vii) Special rule for plan funded
through multiple trusts. In cases in
which a plan is funded through more
than one foreign employees’ trust, the
fractional interest determined under
paragraph (h)(3)(i) of this section in
each trust is determined by treating all
of the trusts as if their assets were held
in a single trust for which the fraction
is determined in accordance with the
rules of this paragraph (h)(3).
(4) De minimis exception. If the
relevant amount is not greater than the
plan’s normal cost for the plan year
ending with or within the employer’s
taxable year, computed using a funding
method and actuarial assumptions as
described in paragraph (h)(3)(ii) of this
section or as described in paragraph
(h)(3)(iii) of this section if the
requirements of that paragraph are met,
that are used to determine plan
contributions, then the relevant amount
is considered to be zero for purposes of
applying paragraph (h)(3)(i) of this
section.
(5) General rule for transition
amount—(i) General rule. If paragraphs
(h)(6) and (h)(7) of this section do not
apply to the employer, the transition
amount for purposes of paragraph
(h)(3)(iv) of this section is equal to the
preexisting amount multiplied by the
applicable percentage for the year in
which the employer’s taxable year
begins.

(ii) Preexisting amount. The
preexisting amount is equal to the
relevant amount of the trust, determined
without regard to paragraphs (h)(3)(iv)
and (h)(4) of this section, computed as
of the measurement date that
immediately precedes September 27,
1996 disregarding contributions to the
trust made after the measurement date.
(iii) Applicable percentage. The
applicable percentage is equal to 100
percent for the employer’s first taxable
year ending after this document is
published as a final regulation in the
Federal Register and prior taxable years
of the employer, and is reduced (but not
below zero) by 10 percentage points for
each subsequent taxable year of the
employer.
(6) Transition amount for new CFCs—
(i) General rule. In the case of a new
controlled foreign corporation
employer, the transition amount for
purposes of paragraph (h)(3)(iv) is equal
to the pre-change amount multiplied by
the applicable percentage for the year in
which the new controlled foreign
corporation employer’s taxable year
begins.
(ii) Pre-change amount. The prechange amount for purposes of
paragraph (h)(6)(i) is equal to the
relevant amount of the trust, determined
without regard to paragraphs (h)(3)(iv)
and (h)(4) of this section and
disregarding contributions to the trust
made after the measurement date, for
the new controlled foreign corporation
employer’s last taxable year ending
before the corporation becomes a new
controlled foreign corporation
employer.
(iii) Applicable percentage—(A)
General rule. Except as provided in
paragraph (h)(6)(iii)(B) of this section,
the applicable percentage is equal to 100
percent for a new controlled foreign
corporation employer’s first taxable year
ending after the corporation becomes a
controlled foreign corporation. The
applicable percentage is reduced (but
not below zero) by 10 percentage points
for each subsequent taxable year of the
new controlled foreign corporation.
(B) Interim rule. For any taxable year
of a new controlled foreign corporation
employer that ends on or before the date
this document is published as a final
regulation in the Federal Register, the
applicable percentage is equal to 100
percent. The applicable percentage is
reduced by 10 percentage points for
each subsequent taxable year of the new
controlled foreign corporation employer
that ends after the date this document
is published as a final regulation in the
Federal Register.
(iv) New CFC employer. For purposes
of paragraph (h)(6) of this section, a new

50785

controlled foreign corporation employer
is a corporation that first becomes a
controlled foreign corporation within
the meaning of section 957 after
September 27, 1996. A new controlled
foreign corporation employer includes a
corporation that was a controlled
foreign corporation prior to, but not on,
September 27, 1996 and that first
becomes a controlled foreign
corporation again after September 27,
1996.
(v) Anti-stuffing rule.
Notwithstanding paragraph (h)(6)(iii) of
this section, if, prior to becoming a
controlled foreign corporation, a
corporation contributes amounts to a
foreign employees’ trust with a
principal purpose of obtaining tax
benefits by increasing the pre-change
amount, the applicable percentage with
respect to those amounts is 0 percent for
all taxable years of the new controlled
foreign corporation employer.
(7) Transition amount for new U.S.related foreign partnerships—(i) General
rule. In the case of a new U.S.-related
foreign partnership employer, the
transition amount for purposes of
paragraph (h)(3)(iv) of this section is
equal to the pre-change amount
multiplied by the applicable percentage
for the year in which the new U.S.related foreign partnership employer’s
taxable year begins.
(ii) Pre-change amount. The prechange amount for purposes of
paragraph (h)(7)(i) of this section is
equal to the relevant amount of the
trust, determined without regard to
paragraphs (h)(3)(iv) and (h)(4) of this
section and disregarding contributions
to the trust made after the measurement
date, for the entity’s last taxable year
ending before the entity becomes a new
U.S.-related foreign partnership
employer.
(iii) Applicable percentage—(A)
General rule. Except as provided in
paragraph (h)(7)(iii)(B) of this section,
the applicable percentage is equal to 100
percent for a new U.S.-related foreign
partnership employer’s first taxable year
ending after the entity becomes a new
U.S.-related foreign partnership
employer. The applicable percentage is
reduced (but not below zero) by 10
percentage points for each subsequent
taxable year of the new U.S.-related
foreign partnership employer.
(B) Interim rule. For any taxable year
of a new U.S.-related foreign
partnership employer that ends on or
before the date this document is
published as a final regulation in the
Federal Register, the applicable
percentage is equal to 100 percent. The
applicable percentage is reduced by 10
percentage points for each subsequent

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Federal Register / Vol. 61, No. 189 / Friday, September 27, 1996 / Proposed Rules

taxable year of the new U.S.-related
foreign partnership employer that ends
after the date this document is
published as a final regulation in the
Federal Register.
(iv) New U.S.-related foreign
partnership employer. For purposes of
paragraph (h)(7) of this section, a new
U.S.-related foreign partnership
employer is an entity that was a foreign
corporation other than a controlled
foreign corporation, or that was a
foreign partnership other than a U.S.related foreign partnership, and that
changes from this status to a U.S.related foreign partnership after
September 27, 1996. A new U.S.-related
foreign partnership employer includes a
corporation that was a U.S.-related
foreign partnership prior to, but not on,
September 27, 1996 and that first
becomes a U.S.-related foreign
partnership again after September 27,
1996.
(v) Anti-stuffing rule.
Notwithstanding paragraph (h)(7)(iii) of
this section, if, prior to becoming a new
U.S.- related foreign partnership
employer, an entity contributes amounts
to a foreign employees’ trust with a
principal purpose of obtaining tax
benefits by increasing the pre-change
amount, the applicable percentage with
respect to those amounts is 0 percent for
all taxable years of the new U.S.-related
foreign partnership employer.
(8) Examples. The following examples
illustrate the rules of paragraph (h) of
this section. In each example, the
employer has a power or interest
described in sections 673 through 677
over the foreign employees’ trust, and
the monetary unit is the applicable
functional currency (FC) determined in
accordance with section 985(b) and the
regulations thereunder.
Example 1. (i) Employer X is a controlled
foreign corporation (as defined in section
957). Employer X maintains a defined benefit
retirement plan for its employees. Employer
X’s taxable year is the calendar year. Trust T,
a foreign employees’ trust, is the sole funding
vehicle for the plan. Both the plan year of the
plan and the taxable year of Trust T are the
calendar year.
(ii) As of December 31, 1997, Trust T’s
measurement date, the fair market value (as
described in paragraph (h)(3)(iv) of this
section) of Trust T’s assets is FC 1,000,000,
and the amount of the plan’s accrued liability
is FC 800,000, which includes a normal cost
for 1997 of FC 50,000. The preexisting
amount for Trust T is FC 40,000. Thus, the
relevant amount for 1997 is FC 160,000
(which is greater than the plan’s normal cost
for the year). Employer X’s shareholder does
not indicate on a statement attached to a
timely filed Form 5471 that any of the
relevant amount qualifies for the exception
described in paragraph (h)(3)(iii) of this
section. Therefore, the fractional interest for

Employer X’s taxable year ending on
December 31, 1997, is 16 percent. Employer
X is treated as the owner for federal income
tax purposes of an undivided 16 percent
interest in each of Trust T’s assets for the
period from January 1, 1997 through
December 31, 1997. Employer X must take
into account a 16 percent pro rata share of
each item of income, deduction or credit of
Trust T during this period in computing its
federal income tax liability.
Example 2. Assume the same facts as in
Example 1, except that Employer X’s
shareholder indicates on a statement attached
to a timely filed Form 5471 and can
demonstrate to the satisfaction of the
Commissioner that, in reliance on paragraph
(h)(3)(iii) of this section, FC 100,000 of the
fair market value of Trust T’s assets is
attributable to favorable experience relative
to reasonable actuarial assumptions used.
Accordingly, the relevant amount for 1997 is
FC 60,000. Because the plan’s normal cost for
1997 is less than FC 60,000, the de minimis
exception of paragraph (h)(4) of this section
does not apply. Therefore, the fractional
interest for Employer X’s taxable year ending
on December 31, 1997, is 6 percent.
Employer X is treated as the owner for
federal income tax purposes of an undivided
6 percent interest in each of Trust T’s assets
for the period from January 1, 1997, through
December 31, 1997. Employer X must take
into account a 6 percent pro rata share of
each item of income, deduction or credit of
Trust T during this period in computing its
federal income tax liability.

(9) Effective date. Paragraphs (g) and
(h) of this section apply to taxable years
of an employer ending after September
27, 1996.
Par. 3. Section 1.671–2 is amended by
adding paragraph (f) to read as follows:
§ 1.671–2

Applicable principles

*

*
*
*
*
(f) For purposes of subtitle A of the
Internal Revenue Code, a person that is
treated as the owner of any portion of
a trust under subpart E is considered to
own the trust assets attributable to that
portion of the trust.
Par. 4. Section 1.1297–4 is added to
read as follows:
§ 1.1297–4 Application of subpart E of
subchapter J with respect to foreign
employees’ trusts.

(a) General rules. For purposes of part
VI of subchapter P, chapter 1 of the
Code, a foreign employer that is not a
controlled foreign corporation is not
treated as the owner of any portion of
a foreign employees’ trust (as defined in
§ 1.671–1(h)(2)) except as provided in
this paragraph (a), regardless of whether
the employer has a power or interest
described in sections 673 through 677
over any portion of the trust.
(1) Principal purpose to avoid
classification as a passive foreign
investment company. If a principal
purpose for a transfer of property by any

person to a foreign employees’ trust (as
defined in § 1.671–1(h)(2)) is to avoid
classification of a foreign corporation as
a passive foreign investment company,
then the following rule applies. If the
foreign employer has a power or interest
described in sections 673 through 677
over the trust, then the grantor trust
rules of subpart E of part I of subchapter
J, chapter 1 of the Code will apply, for
purposes of part VI of subchapter P, to
a fixed dollar amount in the trust that
is equal to the fair market value of the
property that is transferred for the
purpose of avoiding classification as a
passive foreign investment company.
Whether a principal purpose for a
transfer is the avoidance of
classification as a passive foreign
investment company will be determined
on the basis of all of the facts and
circumstances, including whether the
amount of assets held by the foreign
employees’ trust is reasonably related to
the plan’s anticipated liabilities, taking
into account any local law and practice
relating to proper funding levels.
(2) Principal purpose to reduce or
eliminate taxation under section 1291 or
1293. If a principal purpose for a
transfer of property by any person to a
foreign employees’ trust (as defined in
§ 1.671–1(h)(2)) is to reduce or eliminate
taxation under section 1291 or 1293,
then the following rule applies. If the
foreign employer has a power or interest
described in sections 673 through 677
over the trust, then the provisions of
subpart E will apply, for purposes of
part VI of subchapter P, to a fixed dollar
amount in the trust that is equal to the
fair market value of the property
transferred for the purpose of reducing
or eliminating taxation under section
1291 or 1293. Whether a principal
purpose for a transfer is to reduce or
eliminate taxation under section 1291 or
1293 will be determined on the basis of
all the facts and circumstances,
including whether the amount of assets
held by the foreign employees’ trust is
reasonably related to the plan’s
anticipated liabilities, taking into
account any local law and practice
relating to proper funding levels.
(3) Application to employer entity.
The rules of this section apply to the
employer whose employees benefit
under the deferred compensation plan
funded through the foreign employees’
trust, or, in the case of a deferred
compensation plan covering
independent contractors, the recipient
of services performed by those
independent contractors, regardless of
whether the plan is maintained through
another entity. Thus, for example,
where a deferred compensation plan
benefitting employees of a foreign

Federal Register / Vol. 61, No. 189 / Friday, September 27, 1996 / Proposed Rules
employer that is not a controlled foreign
corporation is funded through a foreign
employees’ trust, the foreign employer
is considered to be the grantor of the
foreign employees’ trust for purposes of
this paragraph (a).
(b) Effective date. This section applies
to taxable years of a foreign corporation
ending after September 27, 1996.
Margaret Milner Richardson,
Commissioner of Internal Revenue.
[FR Doc. 96–24864 Filed 9–26–96; 8:45 am]
BILLING CODE 4830–01–U

ENVIRONMENTAL PROTECTION
AGENCY
40 CFR Part 52
[MD033–7157b; FRL–5603–2]

Approval and Promulgation of Air
Quality Implementation Plans;
Maryland 1990 Base Year Emission
Inventory
Environmental Protection
Agency (EPA).
ACTION: Proposed rule.
AGENCY:

EPA proposes to approve the
State Implementation Plan (SIP)
revision submitted by the State of
Maryland for the purpose of establishing
1990 ozone base year emission
inventories for the Maryland ozone
nonattainment areas. In the Final Rules
section of this Federal Register, EPA is
approving the state’s SIP revision as a
direct final rule without prior proposal
because the Agency views this as
noncontroversial SIP revision and
anticipates no adverse comments. A
detailed rationale for the approval is set
forth in the direct final rule. If no
adverse comments are received in
response to this proposed rule, no
further activity is contemplated in
relation to this rule. If EPA receives
adverse comments, the direct final rule
will be withdrawn and all public
comments received will be addressed in
a subsequent final rule based on this
proposed rule. EPA will not institute a
second comment period on this action.
Any parties interested in commenting
on this action should do so at this time.
DATES: Comments must be received in
writing by October 28, 1996.
ADDRESSES: Comments may be mailed to
David Arnold, Section Chief, Ozone/CO
& Mobile Sources Section, Mailcode
3AT21, Environmental Protection
Agency, Region III, 841 Chestnut
Building, Philadelphia, Pennsylvania
19107. Copies of the documents relevant
to this action are available for public
inspection during normal business
SUMMARY:

hours at the EPA office listed above; and
Maryland Department of the
Environment, 2500 Broening Highway,
Baltimore, Maryland 21224.
FOR FURTHER INFORMATION CONTACT: Rose
Quinto, (215) 566–2182, at the EPA
Region III office, or via e-mail at
quinto.rose@epamail.epa.gov. While
information may be requested via email, comments must be submitted in
writing in the above Region III address.
SUPPLEMENTARY INFORMATION: See the
information provided in the Direct Final
action of the same title, Maryland 1990
Base Year Emission Inventory, which is
located in the Rules and Regulations
section of this Federal Register.
Authority: 42 U.S.C. 7401–7671q.
Dated: August 21, 1996.
W. Michael McCabe,
Regional Administrator, Region III.
[FR Doc. 96–24525 Filed 9–26–96; 8:45 am]
BILLING CODE 6560–50–P

40 CFR Part 258, 264, and 265
[FRL–5617–3]
RIN 2050–A77

Financial Assurance Mechanisms
Corporate Owners and Operators of
Municipal Solid Waste Landfill
Facilities and Hazardous Waste
Treatment, Storage, and Disposal
Facilities
Environmental Protection
Agency.
ACTION: Notice of data availability.
AGENCY:

EPA is soliciting public
comment on a document that the
Agency relied upon in promulgating a
notice of proposed rulemaking on
October 12, 1994. The Agency
inadvertently omitted the document
from the rulemaking docket for part of
the public comment period on the
proposal. The October 12, 1994,
proposal relates to financial assurance
mechanisms for corporate owners and
operators of municipal landfill facilities
and hazardous waste treatment, storage,
and disposal facilities. Today’s notice
provides additional time to submit
comments on the missing document.
Today’s request for comment is limited
to the issues addressed by the missing
document; it does not solicit comment
on other aspects of the October 12, 1994,
proposal.
DATES: Written comments must be
received on or before October 28, 1996.
ADDRESSES: Written comments on the
document should be addressed to the
docket clerk at the following address:
U.S. Environmental Protection Agency,
SUMMARY:

50787

RCRA Docket (OS–305), 401 M Street
SW., Washington, DC 20460.
Commenters should send one original
and two copies and place the docket
number (F–93–FTMP–FFFFF) in the
comments. The docket is open from 9
a.m. to 4 p.m., Monday through Friday,
except for Federal holidays. Docket
materials may be reviewed by
appointment by calling (202) 260–9327.
Copies of docket material may be made
at no cost, with a maximum of 100
pages of material from any one
regulatory docket. Additional copies are
$0.15 per page.
FOR FURTHER INFORMATION CONTACT:
RCRA Hotline at 1–800–424–9346 (in
Washington, D.C., call (703) 412–9810),
or Dale Ruhter (703) 308–8192, Office of
Solid Waste, U.S. Environmental
Protection Agency, 401 M Street SW.,
Washington, DC 20460.
SUPPLEMENTARY INFORMATION: On
October 12, 1994 EPA proposed to
amend the financial assurance
regulations under the Resource
Conservation and Recovery Act by
adding two financial assurance
mechanisms to those currently available
to assure closure, post-closure, or
corrective action costs associated with
municipal solid waste landfills under
subtitle D: (1) A financial test for use by
corporate owners and operators, and (2)
a guarantee for use by firms that wish
to guarantee the costs for an owner or
operator (59 FR 51523).
In developing the Agency’s proposed
corporate financial test, the Agency
considered an alternate financial test
developed by the Meridian Corporation.
The alternative test had been submitted
for EPA’s consideration by the National
Solid Waste Management Association
(NSWMA). As discussed in the October
12, 1994, proposal (59 FR at 51531), the
Agency determined that the alternate
financial test was not as effective in
minimizing public and private costs as
the Agency’s previously proposed
financial test (56 FR 30201, July 1,
1991). Accordingly, the Agency
indicated that it would not conduct
further analysis of the Meridian
Corporation’s alternate financial test.
The October 12, 1994, proposal
indicated that the Agency had included
an analysis of the Meridian
Corporation’s alternate financial test in
the rulemaking docket. However, the
analysis, Evaluation of the Meridian
Report on Financial Assurance (October
4, 1989, 14 pages), had been
inadvertently omitted from the
rulemaking docket at the beginning of
the public comment period. The
Agency’s analysis was placed in the
docket on December 1, 1994. The public