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Final regulations on new grantor trust reporting requirements.

On Dec. 20, 1995, the IRS released the final amendments to Regs. Sec. 1.6714 (addressing the grantor trust reporting requirements). Like the proposed amendments, the final amendments implement two alternative reporting methods--eligibility for which depends on whether the trust is treated as owned by one grantor (or other person) or more than one grantor (or other person).

Trust Owned by One Person

If a trust is treated as owned by one grantor or other person, the trustee may choose between two alternative methods of reporting.

[] Alternative 1: The trustee must furnish to all payors of income and proceeds during the tax year (1) the name and taxpayer identification number (TIN) of the grantor or other person, and (2) the address of the trust.

If the trustee furnishes this information to all payors, the trustee is not required to file any type of return with the Service.

[] Alternative 2: The trustee must (1) furnish to all payors of income and proceeds during the tax year the trust's name, TIN and address, and (2) file with the IRS appropriate Forms 1099 reporting each type of income and each item of gross proceeds paid to the trust, showing the trust as the payor, and showing each grantor or other person treated as an owner of the trust as the payee.

Trust Owned by More Than One Person

If the trust is treated as owned by more than one grantor or other person, the trustee may use only the: alternative method of reporting described under Alternative 2 or continue to use the "old" reporting method set forth under Regs. Sec. 1.671-4(a) (i.e., file a "skeleton" Form 1041 with an information statement attached).

Under both alternative methods of reporting, unless the trustee or cotrustee is also the only grantor or other person treated as an owner of the trust, the final regulations require the trustee to furnish each grantor or other person with a statement that:

[] Shows all items of income, deduction and credit of the trust for the tax year.

[] Identifies the payor of each item of income (necessary only if the Alternative 1 reporting method is used).

[] Provides the grantor or other person with the information necessary to take the items into account in computing taxable income.

[] Informs the grantor or other person that the items of income, deduction, credit and other information shown on the statement must be included in computing the grantor's (or other person's) taxable income.

The final amendments, effective Jan. 1, 1996, also contain the following changes/additions to the proposed amendments issued on July 22, 1994:

[] Regs. Sec. 1.671-4(b) clarifies that the trustee of a trust all of which is treated as owned by one or more grantors or other persons may (but is not required to) report using one of the two alternative reporting methods discussed.

[] Regs. Sec. 1.671-4(b)(4) defines the term "payor" as including any person required by any provision of the Code and regulations to make any type of information return for the trust for the tax year.

[] Regs. Sec. 1.671-4(b) (5) clarifies that the amounts that must be included on any Forms 1099 required to be filed by the trustee do not include any amounts reportable by the payor on an information return other than Form 1099 (e.g., partnership items reported on a Form 1065 Schedule K-1). However, the statement furnished to the grantor or other person treated as the trust's owner by the trustee must show all items of income, deduction and credit reported on such other information return.

[] Regs. Sec. 1.671-4(c) provides that the due date for any Forms 1099 required to be filed with the Service by a trustee is the due date otherwise in effect for filing Forms 1099 (i.e., February 28). Regs. Sec. 1.671-4(d) provides that the due date for furnishing the grantor or other person treated as a trust owner with the required information statement is the date specified in Sec. 6034A(a) (i.e., April 15).

[] Pursuant to Regs. Sec. 1.6714(e) (1), a trustee may not use the first alternative reporting method unless (1) the grantor or other person treated as the owner of the trust provides the trustee with a complete Form W-9 (or other acceptable substitute form); (2) the trustee gives the name and TIN shown on that Form W-9 (but does not give the actual Form W-9) to all payors; and (3) if the Form W-9 indicates that the grantor (or other person) is subject to backup withholding, the trustee notifies all payors of reportable interest and dividend payments of the requirement to backup withhold.

[] Regs. Sec. 1.6714(g) allows a trustee who has used one of the alternative reporting methods to switch between alternative reporting methods (unless otherwise prohibited) and to switch back to the "old" reporting method (i.e., file a "skeleton" Form 1041 with an information statement attached).

[] Regs. Sec. 1.6714(b) (6) prohibits the following trusts from using the alternative reporting methods:

1. Common trust funds.

2. A trust that has its situs or any of its assets outside the U.S.

3. A qualified subchapter S trust.

4. A trust all of which is treated as owned by one grantor or other person whose tax year is a fiscal year.

5. A trust all of which is treated as owned by one grantor or other person who is not a U.S. person.

6. A trust all of which is treated as owned by two or more grantors or other persons one of whom is not a U.S. person.

The preamble to the final regulations states, in part, that the regulations are "intended to reduce the current filing burden on trustees, to provide necessary information to grantors or other persons treated as the owners of trusts, to reduce any cases of duplicate filing, and to provide more meaningful information to the IRS." Unfortunately, the situations in which the new reporting methods will "reduce the current filing burden on trustees" and "reduce any cases of duplicate filing" appear to be limited. Consequently, many trustees may continue to use the "old" grantor trust reporting method (i.e., file a "skeleton" Form 1041 with an information statement attached) and thereby impair the intended purposes of the Regs. Sec. 1.671-4 amendments.

FROM MARK T. WATSON, CPA, MS, WASHINGTON, D.C.
COPYRIGHT 1996 American Institute of CPA's
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Watson, Mark T.
Publication:The Tax Adviser
Date:Jun 1, 1996
Words:1070
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