Reporting for Widely Held Fixed Investment Trusts, 4002-4025 [06-396]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 71, Number 15 (Tuesday, January 24, 2006)]
[Rules and Regulations]
[Pages 4002-4025]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-396]



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Part III





Department of the Treasury





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Internal Revenue Service



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26 CFR Parts 1, 301, and 602



Reporting for Widely Held Fixed Investment Trusts; Final Rule

Federal Register / Vol. 71, No. 15 / Tuesday, January 24, 2006 / 
Rules and Regulations

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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 301, and 602

[TD 9241]
RIN 1545-BA83


Reporting for Widely Held Fixed Investment Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that define widely 
held fixed investment trusts, clarify the reporting obligations of the 
trustees and the middlemen connected with these trusts, and provide for 
communication of tax information to beneficial owners of trust 
interests. The regulations will affect trustees of, and middlemen 
holding interests on behalf of beneficial owners of trust interests 
with respect to, widely held fixed investment trusts.

DATES: Effective Date: These regulations are effective January 24, 
2006.
    Applicability Date: For dates of applicability of these 
regulations, see Sec.  1.671-5(m).

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 (44 U.S.C. 
3507) under control number 1545-1540. Response to this collection of 
information is mandatory.
    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.
    The estimated annual burden per recordkeeper varies from 1 to 4 
hours, depending on individual circumstances, with an estimated average 
of 2 hours. Comments concerning the accuracy of this burden estimate 
and suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, 
SE:W:CAR:MP:T:T:SP, Washington DC 20224, and to the Office of 
Management and Budget, Attn: Desk Officer for the Department of 
Treasury, Office of Information and Regulatory Affairs, Washington, DC 
20503.
    Books or records relating to a collection of information must be 
retained as long as their contents might become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    This document contains amendments to 26 CFR parts 1, 301 and 602. 
On June 20, 2002, the Internal Revenue Service (IRS) and the Treasury 
Department withdrew proposed regulations (REG-209813-96) relating to 
the reporting requirements for widely held fixed investment trusts 
(WHFITs) previously published in the Federal Register (63 FR 43354) on 
August 13, 1998 (1998 Proposed Regulations) and published a new notice 
of proposed rulemaking (REG-106871-00) in the Federal Register (67 FR 
41892) on June 20, 2002 (Reproposed Regulations). No public hearing was 
requested or held with respect to the Reproposed Regulations. Comments 
responding to the Reproposed Regulations were received. After 
consideration of the comments, the Reproposed Regulations, with certain 
revisions, are adopted as final regulations by this Treasury decision.
    Section 301.7701-4(c) of the Procedure and Administration 
Regulations provides grantor trust treatment to an investment trust 
with a single class of ownership interests, representing undivided 
beneficial interests in the assets of the trust, if there is no power 
to vary the investment of the owners (a fixed investment trust). An 
investment trust with multiple classes of ownership interests, in which 
there is no power to vary the investment of the owners will also be 
treated as a grantor trust, if the trust is formed to facilitate direct 
investment in the assets of the trust and the existence of multiple 
classes is incidental to that purpose. Beneficial owners of trust 
interests are treated as grantors. See Sec.  301.7701-4(c); see also 
Rev. Rul. 84-10, (1984-1 C.B. 155); Rev. Rul. 61-175, (1961-2 C.B. 
128).
    Trustees of fixed investment trusts frequently do not know the 
identities of the beneficial owners of the trust interests and are 
unable to communicate tax information directly to them because trust 
interests often are held in street name, i.e., in the name of a 
middleman. The reproposed and final regulations provide rules that 
specifically require the sharing of tax information among trustees, 
middlemen, and beneficial owners of fixed investment trusts that meet 
the definition of a widely held fixed investment trust (WHFIT). (See 
section IA below.)
    In general, the final regulations retain the structure of the 
Reproposed Regulations. Paragraph (c) of the reproposed and final 
regulations provides general reporting requirements for trustees to 
provide information to requesting persons, which include: (1) 
Middlemen, (2) beneficial owners who are brokers, (3) exempt recipients 
who hold their trust interests directly (and not through a middleman), 
(4) noncalendar-year beneficial owners who hold their trust interests 
directly, and (5) a representative or agent of any of the above. 
Paragraphs (d) and (e) of the reproposed and final regulations describe 
the responsibility of trustees and middlemen for information reporting 
to the IRS and beneficial owners. Paragraphs (f) and (g) of the 
reproposed and final regulations provide reporting safe harbors.

Explanation of Revisions to Reproposed Regulations and Summary of 
Comments

I. Definitions

A. Definition of a Widely Held Fixed Investment Trust and 
Classification as a Widely Held Mortgage Trust or a Non-Mortgage Widely 
Held Fixed Investment Trust

    The Reproposed Regulations define a WHFIT as an arrangement 
classified as a trust under Sec.  301.7701-4(c) in which at least one 
interest is held by a middleman, provided that the trust is classified 
as a United States person under section 7701(a)(30)(E). The final 
regulations retain this definition.
    The Reproposed Regulations introduced the term widely held mortgage 
trust (WHMT) to describe a WHFIT, the assets of which are mortgages, 
amounts received on mortgages, and reasonably required reserve funds, 
as measured by value. The final regulations expand the definition of a 
WHMT, to provide that a WHFIT is also a WHMT if substantially all its 
assets also include trust interests in one or more WHMTs and regular 
interests in one or more real estate mortgage investment conduits 
(REMICs).
    The final regulations also introduce a new term, non-mortgage 
widely held fixed investment trust (NMWHFIT), to clarify and 
distinguish the requirements and reporting safe-harbor for WHMTs from 
the requirements and reporting safe harbor applicable to other WHFITS. 
A NMWHFIT is any WHFIT that is not a WHMT.

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B. Definition of a Mortgage

    The Reproposed Regulations provide a reporting safe harbor for 
WHMTs that directly hold interests in mortgages; the safe harbor is not 
available to tiered arrangements. The IRS and the Treasury Department, 
after considering the comments received with respect to the Reproposed 
Regulations, have determined that the definition of a mortgage should 
be clarified in the final regulations to provide that an interest in a 
WHMT is not a mortgage under the regulations. Accordingly, the final 
regulations define a mortgage as an obligation that is principally 
secured by an interest in real property within the meaning of Sec.  
1.860G-2(a)(5) of the Income Tax Regulations, except that a mortgage 
does not include an interest in another WHMT or an interest in a 
mortgage held by another WHMT. The principal effect of this change is 
to clarify that, although a WHFIT investing in another WHMT is 
classified as a WHMT and is subject to the general reporting provisions 
that apply only to WHMTs, it is not eligible for the WHMT safe harbor 
reporting rules for the reasons discussed in section VI(B) below.

C. Definition of Trust Interest Holders, Beneficial Owners and 
Middleman

    Under the Reproposed Regulations, a unit interest holder is defined 
as any person who holds a direct or indirect interest in a WHFIT at any 
time during the calendar year. The final regulations replace the term 
unit interest holder with two new terms: Trust interest holder (TIH) 
and beneficial owner. A TIH is any person who holds a direct or 
indirect interest in a WHFIT at any time during the calendar year. A 
beneficial owner is a TIH who holds a beneficial interest in a WHFIT. 
As in the Reproposed Regulations, in the final regulations, the term 
middleman refers to a TIH that holds a trust interest on behalf of, or 
for the account of, another person, or who otherwise acts in a capacity 
as an intermediary for the account of another person.

D. Definition of Item

    The Reproposed Regulations use the term item without defining that 
term. Item as used in the final regulations refers broadly to an item 
of income, expense, or credit as well as any trust event (for example, 
the sale of an asset) or any characteristic or attribute of the above 
that affects the income, deductions, or credits reported by a 
beneficial owner in any taxable year that the beneficial owner holds a 
trust interest. Item also may refer to an individual item or to a group 
of items depending on whether the item must be reported individually 
under Sec.  1.671-5(c)(1)(i) and (e)(1).

E. Definition of Start-Up Date

    The Reproposed Regulations define the start-up date of a WHFIT as 
the date on which substantially all of the assets and the contracts for 
the purchase of assets are deposited with the trustee of the WHFIT. The 
Reproposed Regulations also define an asset to include an interest in a 
contract. Because the definition of an asset includes an interest in a 
contract, the definition of the start-up date in the Reproposed 
Regulations is revised in the final regulations to provide that the 
start-up date is the date on which substantially all of the assets are 
deposited with the trustee.

II. General Reporting and Record Retention Obligations

A. Requirement That the Trustee Provide Trust Information on a Calendar 
Year Basis

    In general, the reproposed and final regulations require the 
trustee to provide information regarding the WHFIT to requesting 
persons. The Reproposed Regulations provide that the trustee could 
choose either a calendar month, calendar quarter, or half or full 
calendar year reporting period, provided that the information furnished 
by the trustee under the chosen reporting period allowed the recipient 
to determine the WHFIT items attributable to a particular beneficial 
owner with reasonable accuracy, regardless of the owner's taxable year 
or the period of time during the calendar year that the owner held the 
unit interest.
    One commentator was concerned that if a trustee choose a reporting 
period shorter than a full calendar year, the trustee might also report 
trust information to middlemen more than once a year and because of 
this, middlemen would be required to process WHFIT information more 
than once a year. Another commentator was concerned that, if a trustee 
chose a reporting period shorter than a calendar year, the trustee 
could be required to report trust information more than once a year.
    In response to these comments, the final regulations provide that, 
regardless of the period chosen by the trustee for calculating trust 
information, the trustee must provide the information required under 
these regulations on a calendar year basis. The trustee, of course, may 
provide additional trust information to requesting persons throughout 
the calendar year at the trustee's discretion. For example, if a 
trustee uses a monthly calculation period, the trustee must provide a 
single statement to requesting persons at the end of the year that 
contains the information required to be reported under these 
regulations for each month of the calendar year. In addition to the 
calendar year statement, the trustee may, but is not required to, 
provide additional statements to requesting persons during the calendar 
year.
    To further clarify that a trustee may choose the period for 
calculating the information required to be reported under these 
regulations, but in all events must report that information to 
requesting persons on a calendar year basis, the final regulations 
refer to the period chosen by the trustee for calculating trust 
information as the calculation period rather than the reporting period.

B. Trustee's Burden To Retain Information and Supplemental Data

    The Reproposed Regulations provide that, throughout the duration of 
the trust and for a period of five years following the termination of 
the trust, a trustee must retain: (1) A copy of the information 
required to be provided to requesting persons each year; and (2) any 
supplemental data necessary to establish that the information provided 
to requesting persons is correct and meets the requirements of 
paragraph (c) (supplemental data).
    One commentator noted that some WHFITs, particularly WHMTs, may be 
in existence for up to 30 years and that the requirement in the 
Reproposed Regulations for a trustee to maintain the WHFIT's records 
for up to 35 years is overly burdensome. The commentator acknowledged 
that the IRS and investors may need to obtain WHFIT information from 
the trustee before the limitations period applicable to a beneficial 
owner's taxable year expires and suggested that the final regulations 
provide that a trustee only be required to retain information for a 
certain period after the close of the calendar year to which the 
information relates.
    The IRS and the Treasury Department adopt this suggestion with 
respect to supplemental data. However, information with respect to each 
calendar year of the WHFIT may be required by the IRS and by beneficial 
owners in order to determine tax items of a beneficial owner (for 
example, market discount or basis) for the entire life of the WHFIT and 
for several years after its termination. For this reason, the final 
regulations continue to require the

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trustee to retain a copy of the information required to be provided to 
requesting persons for the duration of the WHFIT and for at least five 
years after its termination. The IRS and the Treasury Department 
believe that this requirement is not overly burdensome because this 
information can be maintained electronically. The final regulations 
modify the requirement with respect to supplemental data by providing 
that trustees need only retain supplemental data for five years after 
the close of the calendar year to which the supplemental data relates.

C. Manner in Which WHFIT Information Is To Be Provided

    The Reproposed Regulations provide that WHFIT information may be 
provided in any manner that enables a requesting person to determine, 
with reasonable accuracy, the WHFIT items that are attributable to a 
beneficial owner for the taxable year of that beneficial owner. The 
Reproposed Regulations further require that this information be 
furnished in a format that generally conforms to industry practice for 
the reporting of a particular item of income, deduction, or credit for 
the type of asset or assets held by the WHFIT.
    One commentator suggested that, if the trustee is not providing 
trust information under a safe harbor, information could be shared more 
accurately and processed more efficiently if trustees were required to 
calculate and provide trust information on the basis of trust 
interests. The IRS and the Treasury Department do not agree that 
calculating and providing trust information on a per trust interest 
basis is always the best method for conveying information with respect 
to trust items that are not reported under the safe harbors. The 
requirement that the trustee provide information consistent with 
industry practice is intended to ensure that trustees provide WHFIT 
information in a format that can be processed by the systems used by 
the majority of middlemen. Accordingly, the final regulations do not 
adopt the suggestion.
    One commentator also suggested that middlemen be permitted to 
furnish beneficial owners with information calculated on a trust 
interest basis rather than the amount of the item that is attributable 
to the beneficial owner. The final regulations permit a middleman or a 
trustee to furnish information calculated on a trust interest basis to 
a beneficial owner with respect to a trust item, if: (1) The amount of 
the item is not required to be provided to the IRS on an information 
return; and (2) the trustee calculates and provides information on the 
basis of a trust interest with respect to that trust item under 
paragraph (c) of the regulations.

D. Elimination of Separate General Reporting Rules for WHMTs

    The Reproposed Regulations include separate reporting requirements 
for trustees and middlemen of WHMTs and trustees and middlemen of 
WHFITs other than WHMTs (i.e., non-mortgage widely-held fixed 
investment trusts or NMWHFITs as defined in these final regulations), 
with respect to market discount, bond premium, and principal payments. 
The final regulations include general reporting requirements with 
respect to market discount, bond premium, and non pro-rata partial 
principal payment information that apply to all WHFITs. As under the 
Reproposed Regulations, the final regulations require WHMTs to provide 
market discount, bond premium, and non pro-rata partial principal 
payment information regardless of whether the WHMT meets one of the de 
minimis tests described in section III of the Preamble. Under the final 
regulations, however, NMWHFITs that meet the general de minimis test or 
the qualified NMWHFIT exception (also described in section III of the 
Preamble) are not required to provide information regarding bond 
premium and market discount.

E. Requirement That a Trustee Identify a Representative of the WHFIT 
and Identify the WHMT or as a NMWHFIT

    The Reproposed Regulations require a trustee of a WHFIT to provide 
the name, address and telephone number of the WHFIT representative in a 
publication widely available to middlemen, in the trust's prospectus, 
or at the trustee's Internet website. The final regulations retain this 
requirement. Further, if the trustee provides trust information at an 
Internet website, the final regulations also require trustees, in 
addition to providing information regarding the WHFIT representative, 
to provide the address of the Internet website at which the trustee 
provides WHFIT information.
    Two commentators were concerned that middlemen would not be able to 
identify a client's investment as an investment in a WHFIT and 
suggested that the IRS publish a directory or list of WHFITs that would 
include the name and CUSIP number of each WHFIT, along with the name, 
address and telephone number of the WHFIT's representative. 
Commentators noted that a publicly available directory or list would 
assist middlemen and brokers in identifying investment trusts as WHFITs 
and in locating the WHFIT's representatives.
    In response to these comments, the final regulations require a 
trustee to identify the WHFIT as either a WHMT or a NMWHFIT when 
identifying the trust representative. Further, the IRS and the Treasury 
Department are studying whether a directory or list of WHFITs can be 
compiled by the IRS. The IRS and Treasury Department are concerned that 
such a directory is not currently feasible because of the large number 
of WHMTs. However, the IRS and Treasury request additional comments 
from middlemen regarding the type of WHFITs that should be included in 
any directory, the type of information needed by middlemen (especially, 
middlemen holding WHMT interests), and the format of a directory that 
would be most helpful. The IRS and Treasury Department also request 
comments from trustees regarding how the IRS could obtain the trust 
information needed for the directory from the trustees in the least 
burdensome manner for taxpayers as well as the Government.

III. Reporting of Asset Sales and Dispositions

A. General Information Reporting Requirements

    Under the Reproposed Regulations, the trustee is required to 
provide information that would enable a requesting person to calculate 
the amount of trust sales proceeds attributable to a beneficial owner 
with respect to each sale or disposition of an asset by the trust. In 
addition, consistent with grantor trust treatment, unless a WHFIT meets 
the ``de minimis test,'' (discussed in III(B) of this Preamble), the 
trustee is required under the Reproposed Regulations to provide 
information that would enable a beneficial owner to allocate with 
reasonable accuracy a portion of its basis in its trust interest and to 
allocate a portion of its market discount or bond premium, if any, to 
each sale or disposition of an asset by the trust. The final 
regulations retain these general information reporting requirements for 
asset sales and dispositions. Although the requirements to provide 
market discount and bond premium information (discussed in section 
II(D) of this Preamble), are the same as those in the Reproposed 
Regulations, in the final regulations, for purposes of clarity, these 
requirements are provided separately from the requirement to provide 
information with respect to

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sales and dispositions of assets by the trust.
    The final regulations retain the exception from the general 
information reporting requirements for WHFITs that meet the general de 
minimis test. In addition, the final regulations provide an exception 
for WHMTs that meet a special de minimis test for WHMTs that directly 
hold interests in mortgages (the WHMT de minimis test is discussed in 
section III(E) of this Preamble). The final regulations also provide an 
exception from the general information reporting requirements for 
NMWHFITs that meet the qualified NMWHFIT exception, which is applicable 
only to NMWHFITs with a start up date that is on or before February 23, 
2006.

B. Simplified Reporting for WHFITs That Meet the General WHFIT de 
minimis Test

    For WHFITs that meet a de minimis test, the Reproposed Regulations 
substantially simplified reporting with respect to the sale or 
disposition of a trust asset from that required under the 1998 Proposed 
Regulations. These simplified rules balanced current industry practice 
with the need for beneficial owners to accurately report the tax 
consequences of ownership of a trust interest. Under the Reproposed 
Regulations, the WHFIT de minimis test is satisfied for the calendar 
year if the aggregate amount of trust sales proceeds for that calendar 
year is not more than five percent of the fair market value of the 
assets of the trust as of January 1 of that year (the general WHFIT de 
minimis test). The Reproposed Regulations define trust sales proceeds 
as the gross proceeds received by the WHFIT with respect to a sale or 
disposition of an asset by the WHFIT.
    Under the Reproposed Regulations, if the trust meets the general 
WHFIT de minimis test, the trustee is excepted from the requirement to 
report information regarding basis, market discount and bond premium. 
The IRS and Treasury Department recognize that this method of reporting 
will likely result in some deferral of both gain and loss for 
investors, but have determined that, in cases where the WHFIT has de 
minimis sales and dispositions, the level of deferral is acceptable 
given the costs of fully accurate reporting of sales and dispositions. 
The final regulations retain this exception from the general 
requirement to provide basis, market discount and bond premium 
information for WHFITs that meet the general de minimis test.

C. Extension of Simplified Reporting to NMWHFITs That Meet the 
Qualified NMWHFIT Exception

    Several commentators requested that the final regulations except 
WHFITs having a start-up date prior to the date of publication of these 
final regulations from the requirement to report basis, market 
discount, and bond premium information with respect to sales and 
dispositions. These commentators also requested that trustees and 
middlemen be permitted to report information regarding distributed 
trust sales proceeds rather than attributable trust sales proceeds.
    To accommodate the industry's concerns regarding existing NMWHFITs, 
the final regulations add an exception for qualified NMWHFITs (the 
qualified NMWHFIT exception). The qualified NMWHFIT exception is met if 
a NMWHFIT has a start-up date that is on or before February 23, 2006 
and the calendar year for which the trustee is reporting begins before 
January 1, 2011. NMWHFITs that meet the qualified NMWHFIT exception are 
excepted from the requirement that trustees and middlemen provide 
information regarding basis, market discount, and bond premium.

D. Distributed Trust Sales Proceeds May Be Reported by Trustees and 
Middlemen of Trusts Meeting the General de minimis Test or the 
Qualified NMWHFIT Exception

    Several commentators noted that the requirement in the Reproposed 
Regulations that trustees of WHFITs other than WHMTs (NMWHFITs in these 
final regulations) report information to enable a requesting person to 
determine the amount of trust sales proceeds attributable to a 
beneficial owner would impose an undue burden. These commentators noted 
that, under current industry practice, trustees and middlemen of WHFITs 
other than WHMTs only report to the IRS and the beneficial owner the 
amount of trust sales proceeds distributed to the beneficial owner.
    The IRS and Treasury Department have determined that if a NMWHFIT 
meets either the general WHFIT de minimis test for the calendar year or 
the qualified NMWHFIT exception, the purpose of reporting trust sales 
proceeds information to beneficial owners (e.g., to enable beneficial 
owners to adjust their basis in their trust interest to account for the 
sale or disposition of the trust asset) is met if the beneficial owner 
is given information regarding the amount of trust sales proceeds 
distributed to the beneficial owner. Accordingly, if a NMWHFIT meets 
either the general WHFIT de minimis test for the calendar year, or the 
qualified NMWHFIT exception, the final regulations require: (1) 
Trustees to report information that will enable middlemen to determine 
the amount of trust sales proceeds distributed to each beneficial owner 
during the calendar year; and (2) middlemen and trustees to report to 
the IRS and to each beneficial owner the amount of trust sales proceeds 
that are distributed to that beneficial owner.

E. Simplified Reporting for WHMTs That Meet the General de minimis Test 
or the Special WHMT de minimis Test

    In addition to the general WHFIT de minimis test, the final 
regulations also provide a special WHMT de minimis test that applies to 
WHMTs that directly hold interests in mortgages (the special WHMT de 
minimis test). The special WHMT de minimis test is met if the trust 
sales proceeds received by the WHMT for the calendar year are not more 
than five percent of the aggregate outstanding principal balance of the 
WHMT (as defined in paragraph (g)(1)(iii)(D) of the final regulations) 
as of January 1 of that year. In applying the special WHMT de minimis 
test, amounts that result from the complete or partial payment of the 
outstanding principal balance of the mortgages held by the WHMT are not 
included in the amount of trust sales proceeds. A WHMT that holds 
interests in another WHMT or that holds interests in a REMIC may not 
use the special WHMT de minimis test, but may use the general WHFIT de 
minimis test (discussed in section III(B), above).
    If a WHMT meets the special WHMT de minimis test or the general 
WHFIT de minimis test, trustees and middlemen are excepted from the 
general requirement to report information to enable a beneficial owner 
to allocate basis to a sale or disposition and are only required to 
report information regarding the trust sales proceeds that are 
attributable to a particular beneficial owner. If a WHMT does not meet 
a de miminis test, trustees and middlemen must report information to 
enable a beneficial owner to allocate basis to the sale or disposition 
as well as the trust sales proceeds that are attributable to the 
beneficial owner.

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IV. Exception for Certain Equity Trusts From the Requirement That 
Trustees and Middlemen Report Information To Enable a Requesting Person 
To Determine the Income That Is Attributable to a Redeeming or Selling 
Beneficial Owner Up to the Date of Redemption or Sale

    The Reproposed Regulations require trustees and middlemen to report 
information to enable requesting persons to determine the income of the 
WHFIT attributable to a selling, purchasing, or redeeming beneficial 
owner for the portion of the calendar year that the beneficial owner 
held its trust interest. Commentators objected to this requirement for 
WHFITs if substantially all the income of the WHFIT is comprised of 
dividends (equity trusts). These commentators noted that although 
trustees and middlemen report interest income earned by the WHFIT up to 
the date of redemption or sale of a trust interest, providing this 
information with respect to dividend income is inconsistent with long-
standing WHFIT industry reporting practice. Currently there is no 
mechanism in place for communicating this information between trustees 
and middlemen of equity trusts. Under current industry practice, the 
entire amount paid to a beneficial owner who sells or redeems an 
interest in an equity trust, including the amount paid for 
undistributed dividends held by the trust at the time of the sale or 
redemption, is reported to the IRS and to the beneficial owner as gross 
proceeds. As a result, a selling or redeeming beneficial owner may 
report the ordinary dividend income portion of the payment as a capital 
gain. The purchasing beneficial owner also receives incorrect income 
information that may lead the purchasing beneficial owner to overstate 
its dividend income. Commentators objected to expending resources for 
the development and testing of new tax reporting systems to accurately 
report dividend income to selling, purchasing, and redeeming beneficial 
owners, especially with respect to existing equity trusts.
    Commentators acknowledge, however, that the net asset value of an 
equity trust, including the cash held for distribution, generally is 
calculated on a daily basis. Because in the final regulations, the cash 
held for distribution is a key component in calculating the amount of 
income attributable to a selling, purchasing, or redeeming beneficial 
owner under the safe harbor for NMWHFITs, the final regulations retain 
the general requirement that trustees and middlemen provide information 
to determine the trust income that should be attributed to a redeeming, 
selling, or purchasing beneficial owner.
    The IRS and the Treasury Department recognize, however, that if an 
equity trust frequently distributes its income, the trust is not likely 
to accumulate significant undistributed dividend income. In such a 
case, the increased accuracy that results from providing beneficial 
owners with accurate income information up to the date of sale or 
redemption does not warrant the burden of compiling and reporting this 
information. Accordingly, under the final regulations, trustees or 
middlemen of equity trusts that are required by their governing 
documents to distribute all cash (less reasonably required reserve 
funds) held by the NMWHFIT at least monthly need not provide 
information regarding the income that is attributable to a redeeming, 
selling, or purchasing beneficial owner up to the date of sale or 
redemption. The final regulations also except trustees and middlemen of 
an equity trust that meets the qualified NMWHFIT exception (described 
in section III of this Preamble) from the requirement that trustees and 
middlemen provide information regarding the income that is attributable 
to a redeeming, selling, or purchasing beneficial owner up to the date 
of sale or redemption.

V. Safe Harbor Reporting for WHFITs

A. The Safe Harbors Must Be Used Consistently

    Under the Reproposed Regulations, a trustee of a WHFIT can decide 
whether or not to use the safe harbor reporting practices on a year-by-
year basis. The IRS and the Treasury Department have concluded, 
however, that middlemen and beneficial owners should receive WHFIT 
information that is calculated consistently from one calendar year to 
the next because, assuming beneficial owners report trust items 
consistent with the WHFIT information provided to them, a trustee's 
change in reporting could result in changes in the timing that may 
impact beneficial owners. Further, allowing trustees to report under 
the safe harbor one year and not the next, likely would confuse and 
burden the middlemen and beneficial owners that must process WHFIT 
information. Accordingly, the final regulations require trustees that 
choose to use the safe harbor to report under the safe harbor for the 
life of the WHFIT. WHFITs that have a start-up date prior to January 1, 
2007 may choose to report under the safe harbor provided the trustee 
begins to report according to the safe harbor requirements on or before 
January 1, 2007 and does so for the life of the WHFIT.
    Under the Reproposed Regulations and the final regulations, a WHMT 
must meet the eligibility requirements of Sec.  1.671-5(g)(1)(ii) and 
report consistently with the safe harbor reporting rules to be deemed 
to have met its reporting requirements under paragraph (c) of the 
regulations with respect to the trust items described in the safe 
harbor. The final regulations eliminate two of the eligibility 
requirements in the Reproposed Regulations that are inconsistent with 
the rule that the safe harbor must be used for the life of the WHMT.

B. Request for Comments Regarding the Need for Safe Harbors for 
NMWHFITs That Are Outside the Safe Harbor in the Final Regulations

    The Reproposed Regulations include safe harbor reporting rules 
available to WHFITs other than WHMTs (i.e., NMWHFITs). If the trustee 
of a WHFIT other than a WHMT reports consistently with the safe harbor, 
the trustee is deemed to have met the requirements of paragraph (c)(1) 
of the Reproposed Regulations. Those safe harbor reporting rules were 
developed in response to comments received on the 1998 Proposed 
Regulations describing the current reporting practices of WHFITs that 
primarily receive dividend and interest income.
    Upon reconsideration of those safe harbor reporting rules and the 
various types of NMWHFITs, the IRS and the Treasury Department 
recognize that the type of information reported under those reporting 
rules is only relevant to NMWHFITs that hold stock and debt instruments 
and that information reported under the safe harbor probably would not 
be useful to middlemen and beneficial owners of NMWHFITs that hold 
other types of assets. As a result, the IRS and Treasury concluded that 
safe harbor treatment should only be available to NMWHFITs for which 
the safe harbors were designed (e.g., NMWHFITs that hold stock and debt 
instruments) and that other safe harbor reporting rules should govern 
NMWHFITs that are outside the safe harbor. Accordingly, in the final 
regulations only NMWHFITs substantially all the income of which is 
comprised of dividends (as defined in section 6042(b) and the 
regulations thereunder) or interest (as defined in section 6049(b) and 
the regulations thereunder) that report as provided in the NMWHFIT safe 
harbor will be deemed to have met the requirements of paragraph (c)(1) 
of the final regulations.

[[Page 4007]]

The IRS and the Treasury Department are considering providing 
additional safe harbor reporting rules for NMWHFITs that are not under 
the NMWHFIT safe harbor in the final regulations and encourage trustees 
and middlemen to submit comments regarding NMWHFITs for which further 
reporting safe harbors should be provided, including information 
regarding current industry reporting practice for NMWHFITs that do not 
qualify for the NMWHIFIT safe harbor in the final regulations.

C. Safe Harbor Reporting for WHMTs

1. Reporting Sales and Dispositions Under the WHMT Safe Harbor
    The 1998 Proposed Regulations did not allow trustees and middlemen 
to aggregate sales and dispositions of trust assets, even fungible 
trust assets, for reporting purposes. In response to comments on the 
1998 Proposed Regulations, as well as the addition of section 
1272(a)(6)(C)(iii) to the Code in 1997, the Reproposed Regulations 
permit aggregate reporting for sales and dispositions and principal 
receipts for WHMTs eligible to report under the WHMT safe harbor. Under 
the WHMT safe harbor, a trustee is permitted to combine, for reporting 
purposes, amounts received as trust sales proceeds from the sale or 
disposition of some mortgages (including principal receipts that 
completely retire a mortgage) with non pro-rata partial principal 
payments from other mortgages. Thus, the safe harbor permits trustees 
and middlemen to report trust information as if the WHMT, in effect, 
held only one mortgage, and to report the aggregate of trust sales 
proceeds and non pro-rata partial principal payments as though the 
trustee had received a non pro-rata partial principal payment on that 
mortgage.
    The WHMT safe harbor in the Reproposed Regulations is only 
available to WHMTs that met the requirements of Sec.  1.671-5(g)(1)(ii) 
of those regulations. Commentators requested that the final regulations 
provide that trustees of all WHMTs, not just those meeting the 
eligibility requirements of Sec.  1.671-5(g)(1)(ii), be allowed to 
apply this treatment for reporting purposes. The commentators suggested 
that reporting sales and dispositions separately from principal 
payments is unnecessary because receipt by the trust of trust sales 
proceeds and receipt of principal payments have identical tax 
consequences for a beneficial owner.
    Under Rev. Rul. 84-10 (1984-1 C.B. 155), a beneficial owner of a 
WHMT is treated for federal income tax purposes as having a 
proportionate share of equitable ownership in each of the mortgages of 
the WHMT. If a taxpayer owns mortgages outright and not in trust, the 
taxpayer does not report mortgage sales proceeds or the complete 
prepayment of a mortgage in the same manner as the receipt of a non 
pro-rata partial principal payment. That is, a taxpayer that owns two 
mortgages does not combine the sale of one mortgage with the receipt of 
non pro-rata partial principal payments from the other mortgage for 
purposes of calculating the taxpayer's federal income tax liability. 
For this reason and the reasons discussed in section V(B)(3) of this 
Preamble, the IRS and Treasury Department do not adopt the 
commentators' request.
2. Requirement That Trustees Use a Prepayment Assumption When Providing 
Market Discount and OID Information Under the WHMT Safe Harbor
    The Reproposed Regulations require trustees and middlemen of all 
WHMTs to report information to enable beneficial owners to calculate 
market discount in any reasonable manner that is consistent with 
section 1276(a)(3). Regulations have not been issued under the market 
discount provisions of the Code (sections 1276 to 1278). The preamble 
to the Reproposed Regulations notes that, in the absence of regulations 
governing accrual of market discount, guidance regarding the accrual of 
market discount with respect to the partial payment of a debt 
instrument is provided in the conference report (see H.R. Rep. No. 841, 
99th Cong., 2nd Sess., at II-842 (1986)) accompanying the amendment 
that enacted section 1276(a)(3) (see section 1803(a)(13)(A) of the Tax 
Reform Act of 1986, Public Law 99-514, 100 Stat. 2085) (the Conference 
Report). Consistent with Congressional intent expressed in the 
Conference Report indicating that holders must report market discount 
in the absence of regulations, the Reproposed Regulations impose a 
general requirement that trustees and middlemen of WHMTs report market 
discount information.
    The WHMT safe harbor provision for reporting market discount 
information in the Reproposed Regulations is based on the Conference 
Report. Under that safe harbor, trustees report market discount by 
providing one market discount fraction for the WHMT that is the ratio 
of, either: (1) The OID accrued during the month to the total remaining 
OID as of the beginning of the month; or (2) the interest paid during 
the month to the remaining interest payable on the mortgages held by 
the WHMT as of the beginning of the month. The Reproposed Regulations 
require trustees to utilize a method that takes into account the 
prepayment assumption used in pricing the original issue of trust 
interests. The Reproposed Regulations also include a WHMT safe harbor 
provision for OID information that required the use of the same 
prepayment assumption.
    Commentators reported that they assumed that the Reproposed 
Regulations permit trustees to use the safe harbor for reporting only 
sales and dispositions and the receipt of principal payments and to 
ignore other trust items, such as market discount and OID, when 
reporting under the safe harbor.
    The WHMT safe harbor in the final regulations permits trustees and 
middlemen of WHMTs that meet the requirements of Sec.  1.671-
5(g)(1)(ii), to aggregate the trust sales proceeds received from sales 
and dispositions of some mortgages with non pro-rata partial principal 
payments on other mortgages, but the safe harbor also requires trustees 
and middlemen to report market discount and OID information consistent 
with section 1272(a)(6). Safe harbor treatment is available to WHMTs 
that meet the requirements of Sec.  1.671-5(g)(1)(ii) because the IRS 
and the Treasury Department have determined that, for those WHMTs, if 
market discount and OID are reported as provided in the safe harbor, 
mortgage-by-mortgage reporting with respect to sales and dispositions 
and principal payments is unnecessary. Accordingly, the final 
regulations clarify that, for a trustee to be deemed to have met the 
requirements of paragraph (c)(1) of the regulations, the trustee must 
report all items identified in the WHMT safe harbor consistent with the 
WHMT safe harbor.
3. Reporting for WHMTs That Are Outside the Safe Harbor
    Some commentators may view the Conference Report as providing 
authority to report market discount information using a single 
composite fraction, regardless of whether the trustee is permitted to, 
and does in fact, report under the WHMT safe harbor. The IRS and the 
Treasury Department disagree with the commentators' reading of the 
Conference Report as applied to WHMTs. The Conference Report simply 
provides that, until such time as the Treasury Department issues 
regulations regarding the computation of the accrual of market 
discount, holders may elect to accrue market discount using either a 
constant interest method or a market discount fraction.

[[Page 4008]]

    The Conference Report may implicitly discuss aggregate reporting in 
that it states that, in the case of debt instruments that would be 
subject to the OID rules contained in section 1272(a)(6) (without 
regard to whether the debt instruments have OID), the same prepayment 
assumption that would be made in computing OID would be made in 
computing the accrual of market discount (whether or not the taxpayer 
elects to accrue market discount on the basis of a constant interest 
rate). Section 1272(a)(6)(C)(iii) provides that section 1272(a)(6) 
applies to any pool of debt instruments, the yield on which may be 
affected by reason of prepayments. However, no guidance has been issued 
regarding the application of section 1272(a)(6)(C)(iii). Until guidance 
is issued under section 1272(a)(6)(C)(iii), the IRS and Treasury 
Department believe that it is appropriate to provide safe harbor 
treatment only for trustees of relatively straight forward arrangements 
who report information consistent with the application of section 
1272(a)(6) as provided by the safe harbor reporting rules.
4. Reporting Bond Premium Under the WHMT Safe Harbor
    The Reproposed Regulations include a general requirement that 
trustees and middlemen of all WHMTs report information to enable 
beneficial owners to determine the amount of amortizable bond premium, 
if any, in any manner that is reasonably consistent with section 171. 
The Reproposed Regulations reserve the portion of the WHMT safe harbor 
on reporting information regarding bond premium. None of the comments 
on the Reproposed Regulations specifically addressed bond premium 
issues. Accordingly, the final regulations continue to reserve guidance 
on the issue while the IRS and the Treasury Department study how bond 
premium information is to be appropriately reported for WHMTs. The IRS 
and the Treasury Department welcome comments on this issue. Until safe 
harbor reporting rules are provided for bond premium, a trustee will 
not be penalized if the trustee reports information that enables a 
beneficial owner to determine, in any manner reasonably consistent with 
section 171, the amount of the beneficial owner's amortizable bond 
premium, if any, for the calendar year.

VI. Application of Reporting Rules to Foreign Fixed Investment Trusts

    A fixed investment trust that is not classified as a United States 
person is not a WHFIT under the Reproposed Regulations or the final 
regulations. Nothing in the Reproposed Regulations or these final 
regulations alters the application of section 6048 to United States 
investors in a foreign fixed investment trust. The preamble to the 
Reproposed Regulations notes that the IRS and the Treasury Department 
continue to study how to facilitate the application of section 6048 
rules to foreign fixed investment trusts and requested comments on this 
issue, including how forms 3520 and 3520A could be adapted for use with 
foreign fixed investment trusts.
    Commentators suggested that many beneficial owners of interests in 
a foreign fixed investment trust cannot comply with the reporting 
requirements of section 6048 because they cannot obtain the necessary 
information from the trustee. These commentators suggested that, rather 
than adapting Forms 3520 and 3520A to foreign fixed investment trusts, 
the IRS and the Treasury Department should permit certain foreign fixed 
investment trusts to report pursuant to the reporting rules in these 
regulations. The commentators also suggested that the final regulations 
provide that, if a foreign fixed investment trust reports pursuant to 
these reporting rules, United States investors in the trust be excepted 
from the reporting rules in section 6048. The IRS and the Treasury 
Department intend to provide guidance in the area of foreign trust 
reporting and will consider whether any of the suggested approaches for 
WHFITs are more appropriate in this context.

VII. Effective Date of Final Regulations and Applicability to Existing 
WHFITs

    The Reproposed Regulations provide that the reporting rules were to 
be applicable beginning January 1, 2004. Most commentators requested 
that the applicability date be delayed until January 1, 2005, to enable 
trustees and middlemen to change their reporting systems to comply with 
the new reporting rules. To ensure that there is sufficient time to 
comply with the reporting requirements, the final regulations provide 
that these regulations are effective January 1, 2007. Accordingly, 
beginning with the 2007 calendar year, trustees must report trust 
information in accordance with paragraph (c) of the final regulations. 
Trustees and middlemen must file Forms 1099 with the IRS and furnish 
tax information statements to beneficial owners that meet the 
requirements of paragraphs (d) and (e) of the final regulations with 
respect to the 2007 calendar year and all subsequent years.
    Regarding the applicability of these reporting rules to existing 
WHFITs, one commentator requested that the final regulations except all 
WHFITs in existence as of the effective date of the final regulations 
from the new reporting rules. Other commentators requested that WHFITs 
in existence as of the effective date of the final regulations be 
excepted from specific provisions. The final regulations apply to all 
WHFITs, including those in existence as of the effective date. However, 
in response to the comments, the final regulations except certain 
NMWHFITs that have a start-up date on or before February 23, 2006 from 
specific reporting requirements regarding market discount, bond 
premium, sales and dispositions, redemptions, and sales of trust 
interests until January 1, 2011. The details of these exceptions have 
been discussed in sections IID, III, and IV of this preamble.

Special Analysis

    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 is hereby 
certified that these regulations will not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that the regulations generally clarify existing 
reporting obligations and are expected, for the most part, to have 
minimal impact on industry practice, and to not have a significant 
economic impact on entities subject to the regulations. Further, the 
reporting burdens in these regulations will fall primarily on large 
brokerage firms, large banks, and other large entities acting as 
trustees or middlemen, most of which are not small entities within the 
meaning of the Regulatory Flexibility Act (5 U.S.C. chapter 6). Thus, a 
substantial number of small entities are not expected to be affected. 
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 Code, the proposed and the Reproposed 
Regulations preceding these regulations were submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

Drafting Information

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

[[Page 4009]]

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of the Amendments to the Regulations

0
Accordingly, 26 CFR parts 1, 301, and 602 are amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.671-4 is amended by revising paragraph (a) to read as 
follows:


Sec.  1.671-4  Method of reporting.

    (a) Portion of trust treated as owned by the grantor or another 
person. Except as otherwise provided in paragraph (b) of this section 
and Sec.  1.671-5, items of income, deduction, and credit attributable 
to any portion of a trust that, under the provisions of subpart E 
(section 671 and following), part I, subchapter J, chapter 1 of the 
Internal Revenue Code, is treated as owned by the grantor or another 
person, are not reported by the trust on Form 1041, ``U.S. Income Tax 
Return for Estates and Trusts,'' but are shown on a separate statement 
to be attached to that form. Section 1.671-5 provides special reporting 
rules for widely held fixed investment trusts. Section 301.7701-4(e)(2) 
of this chapter provides guidance regarding the application of the 
reporting rules in this paragraph (a) to an environmental remediation 
trust.
* * * * *

0
Par. 3. Section 1.671-5 is added to read as follows:


Sec.  1.671-5  Reporting for widely held fixed investment trusts.

    (a) Table of contents. This table of contents lists the major 
paragraph headings for this section.

(a) Table of contents.
(b) Definitions.
(c) Trustee's obligation to report information.
(1) In general.
(i) Calculation.
(ii) Calculation period.
(iii) Accounting method.
(iv) Gross income requirement.
(2) Information to be reported by all WHFITs.
(i) Trust identification and calculation period chosen.
(ii) Items of income, expense, and credit.
(iii) Non pro-rata partial principal payments.
(iv) Asset sales and dispositions.
(v) Redemptions and sales of WHFIT interests.
(vi) Information regarding bond premium.
(vii) Information regarding market discount.
(viii) Other information.
(3) Identifying the representative who will provide trust 
information.
(4) Time and manner of providing information.
(i) Time.
(ii) Manner.
(iii) Inclusion of information with respect to all calculation 
periods.
(5) Requesting information from a WHFIT.
(i) In general.
(ii) Manner of requesting information.
(iii) Period of time during which a requesting person may request 
WHFIT information.
(6) Trustee's requirement to retain records.
(d) Form 1099 requirement for trustees and middlemen.
(1) Obligation to file Form 1099 with the IRS.
(i) In general.
(ii) Forms 1099 not required for exempt recipients.
(iii) Reporting and withholding with respect to foreign persons.
(2) Information to be reported.
(i) Determining amounts to be provided on Forms 1099.
(ii) Information to be provided on Forms 1099.
(3) Time and manner of filing Forms 1099.
(i) Time and place.
(ii) Reporting trust sales proceeds, redemption asset proceeds, 
redemption proceeds, sales asset proceeds, sales proceeds, and non 
pro-rata partial principal payments.
(e) Requirement to furnish a written tax information statement to 
the TIH.
(1) In general.
(2) Information required.
(i) WHFIT information.
(ii) Identification of the person furnishing the statement.
(iii) Items of income, expense, and credit.
(iv) Non pro-rata partial principal payments.
(v) Asset sales and dispositions.
(vi) Redemption or sale of a trust interest.
(vii) Information regarding market discount and bond premium.
(viii) Other information.
(ix) Required statement.
(3) Due date and other requirements.
(4) Requirement to retain records.
(f) Safe harbor for providing information for certain NMWHFITs.
(1) Safe harbor for trustee reporting of NMWHFIT information.
(i) In general.
(ii) Reporting NMWHFIT income and expenses.
(iii) Reporting non pro-rata partial principal payments under the 
safe harbor.
(iv) Reporting sales and dispositions of NMWHFIT assets under the 
safe harbor.
(v) Reporting redemptions under the safe harbor.
(vi) Reporting the sale of a trust interest under the safe harbor.
(vii) Reporting OID information under the safe harbor.
(viii) Reporting market discount information under the safe harbor.
(ix) Reporting bond premium information under the safe harbor.
(x) Reporting additional information.
(2) Use of information provided by trustees under the safe harbor 
for NMWHFITs.
(i) In general.
(ii) Determining NMWHFIT income and expenses under the safe harbor.
(iii) Reporting non pro-rata partial principal payments under the 
safe harbor.
(iv) Reporting sales and dispositions of NMWHFIT assets under the 
safe harbor.
(v) Reporting redemptions under the safe harbor.
(vi) Reporting sales of trust interests under the safe harbor.
(vii) Reporting OID information under the safe harbor.
(viii) Reporting market discount information under the safe harbor.
(ix) Reporting bond premium information under the safe harbor.
(3) Example of the use of the safe harbor for NMWHFITs.
(i) Facts.
(ii) Trustee reporting.
(iii) Brokers' use of information provided by Trustee.
(g) Safe Harbor for certain WHMTs.
(1) Safe harbor for trustees of certain WHMTs for reporting 
information.
(i) In general.
(ii) Requirements.
(iii) Reporting WHMT income, expenses, non pro-rata partial 
principal payments, and sales and dispositions under the safe 
harbor.
(iv) Reporting OID information under the safe harbor.
(v) Reporting market discount information under the safe harbor.
(vi) Reporting bond premium information under the safe harbor.
(2) Use of information provided by a trustee under the safe harbor.
(i) In general.
(ii) Reporting WHMT income, expenses, non pro-rata partial principal 
payments, and sales and dispositions under the safe harbor.
(iii) Reporting OID information under the safe harbor.
(iv) Requirement to provide market discount information under the 
safe harbor.
(v) Requirement to provide bond premium information under the safe 
harbor.
(3) Example of safe harbor in paragraph (g)(1) of this section.
(i) Facts.
(ii) Trustee reporting.
(iii) Broker's use of the information provided by Trustee.
(h) Requirement that middlemen furnish information to beneficial 
owners that are exempt recipients and non calendar year beneficial 
owners.
(1) In general.
(2) Time for providing information.
(3) Manner of providing information.
(4) Clearing organization.

[[Page 4010]]

(i) Reserved.
(j) Coordination with other information reporting rules.
(k) Backup withholding requirements.
(l) Penalties for failure to comply.
(m) Effective date.

    (b) Definitions. Solely for purposes of this section:
    (1) An asset includes any real or personal, tangible or intangible 
property held by the trust, including an interest in a contract.
    (2) An affected expense is an expense described in Sec.  1.67-
2T(i)(1).
    (3) A beneficial owner is a trust interest holder (TIH) (as defined 
in paragraph (b)(20) of this section) that holds a beneficial interest 
in a widely held fixed investment trust (WHFIT) (as defined in 
paragraph (b)(22) of this section.)
    (4) The calculation period is the period the trustee chooses under 
paragraph (c)(1)(ii) of this section for calculating the trust 
information required to be provided under paragraph (c) of this 
section.
    (5) The cash held for distribution is the amount of cash (other 
than trust sales proceeds) that would be payable to TIHs if the amount 
of a distribution were required to be determined as of the date in 
question.
    (6) A clean-up call is the redemption of all trust interests in 
termination of the WHFIT when the administrative costs of the WHFIT 
outweigh the benefits of maintaining the WHFIT.
    (7) An exempt recipient is--
    (i) Any person described in Sec.  1.6049-4(c)(1)(ii);
    (ii) A middleman (as defined in paragraph (b)(10) of this section);
    (iii) A real estate mortgage investment conduit (as defined in 
section 860(D)(a)) (REMIC);
    (iv) A WHFIT; or
    (v) A trust or an estate for which the trustee or middleman of the 
WHFIT is also required to file a Form 1041, ``U.S. Income Tax Return 
for Estates and Trusts,'' in its capacity as a fiduciary of that trust 
or estate.
    (8) An in-kind redemption is a redemption in which a beneficial 
owner receives a pro-rata share of each of the assets of the WHFIT that 
the beneficial owner is deemed to own under section 671.
    (9) An item refers to an item of income, expense, or credit as well 
as any trust event (for example, the sale of an asset) or any 
characteristic or attribute of the trust that affects the income, 
deductions, and credits reported by a beneficial owner in any taxable 
year that the beneficial owner holds an interest in the trust. An item 
may refer to an individual item or a group of items depending on 
whether the item must be reported separately under paragraphs (c)(1)(i) 
and (e)(1) of this section.
    (10) A middleman is any TIH, other than a qualified intermediary as 
defined in Sec.  1.1031(k)-1(g), who, at any time during the calendar 
year, holds an interest in a WHFIT on behalf of, or for the account of, 
another TIH, or who otherwise acts in a capacity as an intermediary for 
the account of another person. A middleman includes, but is not limited 
to--
    (i) A custodian of a person's account, such as a bank, financial 
institution, or brokerage firm acting as custodian of an account;
    (ii) A nominee;
    (iii) A joint owner of an account or instrument other than--
    (A) A joint owner who is the spouse of the other owner; and
    (B) A joint owner who is the beneficial owner and whose name 
appears on the Form 1099 filed with respect to the trust interest under 
paragraph (d) of this section; and
    (iv) A broker (as defined in section 6045(c)(1) and Sec.  1.6045-
1(a)(1)), holding an interest for a customer in street name.
    (11) A mortgage is an obligation that is principally secured by an 
interest in real property within the meaning of Sec.  1.860G-2(a)(5), 
except that a mortgage does not include an interest in another WHFIT or 
mortgages held by another WHFIT.
    (12) A non-mortgage widely held fixed investment trust (NMWHFIT) is 
a WHFIT other than a widely held mortgage trust (as defined in 
paragraph (b)(23) of this section).
    (13) A non pro-rata partial principal payment is any partial 
payment of principal received on a debt instrument which does not 
retire the debt instrument and which is not a pro-rata prepayment 
described in Sec.  1.1275-2(f)(2).
    (14) The redemption asset proceeds equal the redemption proceeds 
(as defined in paragraph (b)(15) of this section) less the cash held 
for distribution with respect to the redeemed trust interest.
    (15) The redemption proceeds equal the total amount paid to a 
redeeming TIH as the result of a redemption of a trust interest.
    (16) A requesting person is--
    (i) A middleman;
    (ii) A beneficial owner who is a broker;
    (iii) A beneficial owner who is an exempt recipient who holds a 
trust interest directly and not through a middleman;
    (iv) A noncalendar-year beneficial owner who holds a trust interest 
directly and not through a middleman; or
    (v) A representative or agent of a person specified in this 
paragraph (b)(16).
    (17) The sales asset proceeds equal the sales proceeds (as defined 
in paragraph (b)(18) of this section) less the cash held for 
distribution with respect to the sold trust interest at the time of the 
sale.
    (18) The sales proceeds equal the total amount paid to a selling 
TIH in consideration for the sale of a trust interest.
    (19) The start-up date is the date on which substantially all of 
the assets have been deposited with the trustee of the WHFIT.
    (20) A trust interest holder (TIH) is any person who holds a direct 
or indirect interest, including a beneficial interest, in a WHFIT at 
any time during the calendar year.
    (21) Trust sales proceeds equal the amount paid to a WHFIT for the 
sale or disposition of an asset held by the WHFIT, including principal 
payments received by the WHFIT that completely retire a debt instrument 
(other than a final scheduled principal payment) and pro-rata partial 
principal prepayments described under Sec.  1.1275-2(f)(2). Trust sales 
proceeds do not include amounts paid for any interest income that would 
be required to be reported under Sec.  1.6045-(d)(3).
    (22) A widely held fixed investment trust (WHFIT) is an arrangement 
classified as a trust under Sec.  301.7701-4(c) of this chapter, 
provided that--
    (i) The trust is a United States person under section 
7701(a)(30)(E);
    (ii) The beneficial owners of the trust are treated as owners under 
subpart E, part I, subchapter J, chapter 1 of the Internal Revenue 
Code; and
    (iii) At least one interest in the trust is held by a middleman.
    (23) A widely held mortgage trust (WHMT) is a WHFIT, the assets of 
which consist only of one or more of the following--
    (i) Mortgages;
    (ii) Regular interests in a REMIC;
    (iii) Interests in another WHMT;
    (iv) Reasonably required reserve funds;
    (v) Amounts received on the assets described in paragraphs