Td 9348

7. A simplified employee pension of an
employer that satisfies the requirements of
§ 408(k);
8. A plan described in § 501(c)(18);
9. A simple retirement account described in § 408(p);
10.
A deemed IRA described in
§ 408(q);
11. A Roth IRA described in § 408A;
12. A § 415(m) plan that is also a
“governmental plan” within the meaning
of § 414(d);
13. A § 457(f) plan that has as its
sponsor either (i) a charitable organization described in § 818(a)(4), or (ii) a
governmental organization described in
§ 818(a)(4), whose employees are described in § 403(b)(1)(A)(ii); and
14. Any other trust, plan, account, contract, or annuity that the Internal Revenue
Service has determined in a letter ruling to
be within the scope of § 1.817–5(f)(3)(iii).
EFFECT ON OTHER REVENUE
RULING(S)
Rev. Rul. 94–62 is supplemented.
DRAFTING INFORMATION
The principal author of this revenue ruling is Melissa S. Luxner of the Office of
Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact
Melissa S. Luxner at (202) 622–3970 (not
a toll-free call).

Section 2642.—Inclusion
Ratio
26 CFR 26.2642–6: Qualified severance.

T.D. 9348
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1, 26, and 602
Qualified Severance of a
Trust for Generation-Skipping
Transfer (GST) Tax Purposes
AGENCY: Internal Revenue Service
(IRS), Treasury.

September 10, 2007

ACTION: Final regulations.
SUMMARY: This document contains
final regulations providing guidance regarding the qualified severance of a trust
for generation-skipping transfer (GST)
tax purposes under section 2642(a)(3) of
the Internal Revenue Code (Code), which
was added to the Code by the Economic
Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA). The regulations will
affect trusts that are subject to the GST
tax.
DATES: Effective Date: The regulations
are effective August 2, 2007.
Applicability Date: For dates of applicability, see §26.2642–6(k)(1) and
§26.2642–6(k)(2).
FOR
FURTHER
INFORMATION
CONTACT: Mayer R. Samuels, (202)
622–3090 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained
in these final regulations has been previously reviewed and approved by the Office
of Management and Budget in accordance
with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)) under control number
1545–1902.
The collection of information in these
final regulations is in §26.2642–6(e). This
information is requested by the IRS to
identify whether a trust is exempt from
the GST tax. This information is required
to determine whether the amount of tax
has been calculated correctly. The respondents are trustees of trusts that are being
severed.
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.
The estimated average annual burden
per respondent / recordkeeper is .5 hours
per respondent. Comments concerning the
accuracy of this burden estimate should
be sent to the Internal Revenue Service,
Attn: IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC
20224 and the Office of Management

563

and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
Books or records relating to this 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
Section 2642(a)(3) was added to the
Internal Revenue Code by the Economic
Growth and Tax Relief Reconciliation Act
of 2001 (EGTRRA), Public Law 107–16
(115 Stat. 38 (2001)). Under section
2642(a)(3), if a trust is divided into two
or more trusts in a “qualified severance,”
the resulting trusts will be recognized as
separate trusts for GST tax purposes. In
many cases, a qualified severance of a trust
will facilitate the most efficient and effective use of the transferor’s GST tax exemption. The GST tax exemption is each person’s lifetime exemption that may be allocated to a generation-skipping transfer.
If the transfer is made in trust, allocation
of the donor’s GST tax exemption reduces
the trust’s inclusion ratio, which in turn determines the amount of GST tax imposed
on any generation-skipping transfer made
with regard to the trust.
On August 24, 2004, the IRS published in the Federal Register a notice of
proposed rulemaking (REG–145987–03,
2004–2 C.B. 519 [69 FR 51967]), providing rules under section 2642(a)(3)
regarding the qualified severance of a trust
for GST tax purposes. The IRS received
written and oral comments responding to
the notice of proposed rulemaking. No
public hearing was requested or held.
After consideration of all the comments,
the proposed regulations are adopted as
amended by this Treasury decision, and
the corresponding proposed regulations
are removed. The comments and revisions
to the proposed regulations are discussed
below. In addition, additional proposed
regulations (REG–128843–05) are being
issued contemporaneously with these final
regulations in order to respond to certain
comments that the Treasury Department
and the IRS believe merit further consideration in proposed regulations.

2007–37 I.R.B.

Summary of Comments
The proposed regulations take the
position that the severance rules contained in §26.2654–1(b) of the regulations were superseded by the enactment
of section 2642(a)(3), and therefore that
§26.2654–1(b) is no longer effective.
However, many commentators noted that
sections 2654(b) and 2642(a)(3) address
different situations, and they suggested
that section 2642(a)(3) was intended to
supplement, rather than to replace, section 2654(b), and to thereby provide more
flexibility in severing trusts for GST tax
purposes. The commentators noted that
section 2642(a)(3) qualified severances
are effective prospectively from the date
of severance and thus, that section only
addresses severances that typically would
occur after an irrevocable trust (whether
inter vivos or testamentary) has been in
existence for a period of time. In contrast,
§26.2654–1(b) addresses only severances
of testamentary trusts and revocable inter
vivos trusts included in the transferor’s
gross estate, and a severance satisfying
§26.2654–1(b) is effective retroactively to
the date of death. Section 26.2654–1(b)
provides for the recognition of severances
of separate shares of such trusts, and of
discretionary severances that, although not
provided for in the governing instrument,
are necessary to fully utilize available tax
benefits (for example, the reverse qualified terminable interest property election
under section 2652(a)(3)). To fulfill the
purpose of these severances (generally,
efficient utilization and allocation of the
decedent’s GST exemption), the severance must be effective retroactive to the
date of death. Thus, section 2642(a)(3)
and §26.2654–1(b) address different circumstances.
In response to these comments,
the final regulations do not supersede
§26.2654–1(b). Rather, §26.2654–1(b)
is retained, but, as explained hereafter, is
proposed to be amended as described in a
notice of proposed rulemaking issued contemporaneously with these final regulations. Subject to those proposed changes,
§26.2654–1(b) will continue to provide
rules for mandatory and discretionary
severances of trusts includible in the transferor’s gross estate, effective retroactively
to the transferor’s date of death. The final
regulations under §26.2642–6 generally

2007–37 I.R.B.

provide rules for the qualified severance
of a trust (whether or not includible in the
transferor’s gross estate) if the severance
will be effective only prospectively from
the date of severance.
One commentator requested that the
regulations provide that separate trusts,
created as the result of a mandated division of a single trust that is effective
under state law, be recognized prospectively as separate trusts for certain GST
tax purposes, even if the severance does
not satisfy the requirements of a qualified
severance. This comment will be addressed in the proposed regulations under
section 2642, issued contemporaneously
with these final regulations.
One commentator requested that the
regulations provide additional flexibility
in severing a trust that has an inclusion
ratio between zero and one. Specifically,
the commentator requested that the final
regulations permit the qualified severance
of a trust into one or more separate resulting trusts, as long as one or more of the
resulting trusts, in the aggregate, would
receive a fractional share of the total value
of the original trust’s assets that equals the
applicable fraction of the original trust.
In such a qualified severance, the resulting trust or trusts receiving this fractional
share would each have an inclusion ratio
of zero, and each of the other resulting
trusts would have an inclusion ratio of
one. This comment will be addressed in
the proposed regulations under section
2642, issued contemporaneously with
these final regulations.
In response to comments, the final regulations continue to require that, in notifying the IRS of the severance of a trust, the
words “Qualified Severance” should appear at the top of Form 706–GS(T), “Generation-Skipping Transfer Tax Return For
Terminations,” but the use of red ink for
that purpose is not required.
One commentator questioned the requirement in the proposed regulations that
any non-pro rata funding of trusts resulting from a qualified severance must be
based on the value of the trust assets as
of the date of funding. The commentator pointed out that, in many cases, the
funding of trusts resulting from a qualified
severance will take place over a period
of time, rather than on one specific date.
Accordingly, under the final regulations,
the non-pro rata funding of trusts result-

564

ing from a qualified severance must be
achieved by applying the appropriate fraction or percentage to the total value of the
trust assets as of the “date of severance.”
The term “date of severance” is defined as
the date selected for determining the value
of the trust assets (whether selected on a
discretionary basis or by a court order),
provided that funding is commenced immediately and occurs within a reasonable
time before or after the selected date of
severance. For this purpose, a reasonable
time may differ depending upon the type
of asset involved, but in no event may be
more than 90 days.
Several commentators requested that
the regulations address the severance of
a trust that was irrevocable on September 25, 1985, but with respect to which
an addition was made to the trust after
September 25, 1985. For purposes of determining the inclusion ratio with respect
to such a trust, §26.2601–1(b)(1)(iv)(A)
provides that the trust is deemed to consist
of two portions, one portion not subject to
GST tax (the non-chapter 13 portion) with
an inclusion ratio of zero, and one portion
subject to GST tax (the chapter 13 portion) with an inclusion ratio determined
under section 2642. In response to these
comments, the final regulations provide
guidance regarding a qualified severance
of the chapter 13 portion of these trusts.
The proposed regulations include a
mandatory reporting requirement, without
which a severance would not constitute
a qualified severance. One commentator
noted that, in some situations, it may be
advantageous to sever a trust but to avoid
qualification under section 2642(a)(3)
as a qualified severance. The Treasury
Department and the IRS believe that the
qualified severance rules were not intended to be optional; that is, able to be
employed or avoided depending upon the
tax consequences of a particular severance.
Therefore, under the final regulations, the
reporting provisions do not constitute a
requirement for qualified severance status,
but each severance should be reported to
ensure that the provisions of Chapter 13
of the Code may be properly applied with
regard to the trusts.
One
commentator
noted
that
§1.1001–1(h)(1) of the proposed regulations provides favorable income tax
treatment only with respect to a qualified severance. The commentator re-

September 10, 2007

quested that the regulations also address
the income tax treatment of all other trust
modifications and severances. The commentator noted that the failure to address,
for example, the income tax consequences
of severances that are not qualified severances for GST tax purposes implies
that such severances are taxable events
for income tax purposes. In response to
these comments, the category of severances to which §1.1001–1(h)(1) will apply
has been broadened. No inference should
be drawn with respect to the income
tax consequences under section 1001 of
any severance that is not described in
§1.1001–1(h)(1).
Commentators noted that some qualified severances may result in a taxable termination or taxable distribution, for example, if after the severance, one of the resulting trusts is a skip person. The final regulations clarify that, if the qualified severance
itself results in a GST taxable event, the
taxable event is treated as occurring immediately after the severance. As a result, if
the resulting trust that is a skip person is
also the trust that has a zero inclusion ratio after the severance, then no GST tax
will result from the taxable event that is
deemed to occur after the severance. An
example was added illustrating this rule.
Finally, in response to comments, an
example has been added addressing the
qualified severance rules in the case of a
trust where the beneficiary is granted a
contingent testamentary general power of
appointment that is dependent upon the
trust’s inclusion ratio.
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment
is not required. It also has been determined
that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) does
not apply to these regulations. It is hereby
certified that the collection of information
in these regulations will not have a significant economic impact on a substantial
number of small entities. This certification is based upon the fact that the collection of information imposed by this regulation is not significant as reflected in the
estimated burden of information collection
for, which is 0.5 hours per respondent, and

September 10, 2007

that few trustees are likely to be small 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 Code,
the notice of proposed rulemaking preceding these regulations was submitted to the
Small Business Administration for comment on their impact on small business.
Drafting Information
The principal author of these final regulations is Mayer R. Samuels, Office of the
Associate Chief Counsel (Passthroughs
and Special Industries), IRS. Other personnel from the IRS and the Treasury
Department participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1, 26 and
602 are amended as follows:

(2) Effective/applicability date. This
paragraph (h) applies to severances occurring on or after August 2, 2007. Taxpayers
may apply this paragraph (h) to severances
occurring on or after August 24, 2004, and
before August 2, 2007.
PART 26—GENERATION-SKIPPING
TRANSFER TAX REGULATIONS
UNDER THE TAX REFORM ACT OF
1986
Par. 3. The authority citation for part
26 is amended by adding an entry in numerical order to read, in part, as follows:
Authority: 26 U.S.C. 7805 * * *
Section 26.2642–6 also issued under 26
U.S.C. 2642. * * *
Par. 4. In §26.2600–1, the table of
contents is amended by adding entries for
§§26.2642–6 and 26.2654–1 to read as follows:
§26.2600–1 Table of contents.
*****
§26.2642–6 Qualified severance.

PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Par. 2. In §1.1001–1, paragraph (h) is
added to read as follows:
§1.1001–1 Computation of gain or loss.
*****
(h) Severances of trusts—(1) In general. The severance of a trust (including
without limitation a severance that meets
the requirements of §26.2642–6 or of
§26.2654–1(b) of this chapter) is not an
exchange of property for other property
differing materially either in kind or in
extent if—
(i) An applicable state statute or the
governing instrument authorizes or directs
the trustee to sever the trust; and
(ii) Any non-pro rata funding of the
separate trusts resulting from the severance (including non-pro rata funding as described in §26.2642–6(d)(4) or
§26.2654–1(b)(1)(ii)(C) of this chapter),
whether mandatory or in the discretion of
the trustee, is authorized by an applicable
state statute or the governing instrument.

565

(a) In general.
(b) Qualified severance defined.
(c) Effective date of qualified severance.
(d) Requirements for a qualified severance.
(e) Reporting a qualified severance.
(f) Time for making a qualified severance.
(g) Trusts that were irrevocable on
September 25, 1985.
(1) In general.
(2) Trusts in receipt of a post-September 25, 1985, addition.
(h) [Reserved]
(i) [Reserved]
(j) Examples.
(k) Effective date.
(1) In general.
(2) Transition rule.
*****
§26.2654–1 Certain trusts treated as
separate trusts.
*****
(c) Cross reference.
*****

2007–37 I.R.B.

Par. 5. Section 26.2642–6 is added to
read as follows:
§26.2642–6 Qualified severance.
(a) In general. If a trust is divided in a
qualified severance into two or more trusts,
the separate trusts resulting from the severance will be treated as separate trusts
for generation-skipping transfer (GST) tax
purposes and the inclusion ratio of each
new resulting trust may differ from the
inclusion ratio of the original trust. Because the post-severance resulting trusts
are treated as separate trusts for GST tax
purposes, certain actions with respect to
one resulting trust will generally have no
GST tax impact with respect to the other
resulting trust(s). For example, GST exemption allocated to one resulting trust
will not impact on the inclusion ratio of
the other resulting trust(s); a GST tax election made with respect to one resulting
trust will not apply to the other resulting
trust(s); the occurrence of a taxable distribution or termination with regard to a
particular resulting trust will not have any
GST tax impact on any other trust resulting
from that severance. In general, the rules
in this section are applicable only for purposes of the GST tax and are not applicable
in determining, for example, whether the
resulting trusts may file separate income
tax returns or whether the severance may
result in a gift subject to gift tax, may cause
any trust to be included in the gross estate
of a beneficiary, or may result in a realization of gain for purposes of section 1001.
See §1.1001–1(h) of this chapter for rules
relating to whether a qualified severance
will constitute an exchange of property for
other property differing materially either in
kind or in extent.
(b) Qualified severance defined. A
qualified severance is a division of a
trust (other than a division described in
§26.2654–1(b)) into two or more separate
trusts that meets each of the requirements
in paragraph (d) of this section.
(c) Effective date of qualified severance. A qualified severance is applicable
as of the date of the severance, as defined
in §26.2642–6(d)(3), and the resulting
trusts are treated as separate trusts for
GST tax purposes as of that date.
(d) Requirements for a qualified severance. For purposes of this section, a quali-

2007–37 I.R.B.

fied severance must satisfy each of the following requirements:
(1) The single trust is severed pursuant
to the terms of the governing instrument,
or pursuant to applicable local law.
(2) The severance is effective under local law.
(3) The date of severance is either the
date selected by the trustee as of which the
trust assets are to be valued in order to determine the funding of the resulting trusts,
or the court-imposed date of funding in the
case of an order of the local court with jurisdiction over the trust ordering the trustee
to fund the resulting trusts on or as of a specific date. For a date to satisfy the definition in the preceding sentence, however,
the funding must be commenced immediately upon, and funding must occur within
a reasonable time (but in no event more
than 90 days) after, the selected valuation
date.
(4) The single trust (original trust) is
severed on a fractional basis, such that
each new trust (resulting trust) is funded
with a fraction or percentage of the original
trust, and the sum of those fractions or percentages is one or one hundred percent, respectively. For this purpose, the fraction or
percentage may be determined by means
of a formula (for example, that fraction of
the trust the numerator of which is equal
to the transferor’s unused GST tax exemption, and the denominator of which is the
fair market value of the original trust’s assets on the date of severance). The severance of a trust based on a pecuniary
amount does not satisfy this requirement.
For example, the severance of a trust is
not a qualified severance if the trust is divided into two trusts, with one trust to be
funded with $1,500,000 and the other trust
to be funded with the balance of the original trust’s assets. With respect to the particular assets to be distributed to each resulting trust, each resulting trust may be
funded with the appropriate fraction or percentage (pro rata portion) of each asset
held by the original trust. Alternatively,
the assets may be divided among the resulting trusts on a non-pro rata basis, based
on the fair market value of the assets on the
date of severance. However, if funded on
a non-pro rata basis, each resulting trust
must be funded by applying the appropriate fraction or percentage to the total fair
market value of the trust assets as of the
date of severance.

566

(5) The terms of the resulting trusts
must provide, in the aggregate, for the
same succession of interests of beneficiaries as are provided in the original trust.
This requirement is satisfied if the beneficiaries of the separate resulting trusts and
the interests of the beneficiaries with respect to the separate trusts, when the separate trusts are viewed collectively, are the
same as the beneficiaries and their respective beneficial interests with respect to the
original trust before severance. With respect to trusts from which discretionary
distributions may be made to any one or
more beneficiaries on a non-pro rata basis, this requirement is satisfied if—
(i) The terms of each of the resulting
trusts are the same as the terms of the original trust (even though each permissible
distributee of the original trust is not a beneficiary of all of the resulting trusts);
(ii) Each beneficiary’s interest in the resulting trusts (collectively) equals the beneficiary’s interest in the original trust, determined by the terms of the trust instrument or, if none, on a per-capita basis. For
example, in the case of the severance of a
discretionary trust established for the benefit of A, B, and C and their descendants
with the remainder to be divided equally
among those three families, this requirement is satisfied if the trust is divided into
three separate trusts of equal value with
one trust established for the benefit of A
and A’s descendants, one trust for the benefit of B and B’s descendants, and one trust
for the benefit of C and C’s descendants;
(iii) The severance does not shift a beneficial interest in the trust to any beneficiary in a lower generation (as determined
under section 2651) than the person or persons who held the beneficial interest in the
original trust; and
(iv) The severance does not extend the
time for the vesting of any beneficial interest in the trust beyond the period provided
for in (or applicable to) the original trust.
(6) In the case of a qualified severance
of a trust with an inclusion ratio as defined
in §26.2642–1 of either one or zero, each
trust resulting from the severance will have
an inclusion ratio equal to the inclusion
ratio of the original trust.
(7) In the case of a qualified severance occurring after GST tax exemption
has been allocated to the trust (whether by
an affirmative allocation, a deemed allocation, or an automatic allocation pursuant

September 10, 2007

to the rules contained in section 2632), if
the trust has an inclusion ratio as defined
in §26.2642–1 that is greater than zero and
less than one, then the trust must be severed initially into two trusts. One resulting
trust must receive that fractional share of
the total value of the original trust as of the
date of severance that is equal to the applicable fraction, as defined in §26.2642–1(b)
and (c), used to determine the inclusion ratio of the original trust immediately before
the severance. The other resulting trust
must receive that fractional share of the total value of the original trust as of the date
of severance that is equal to the excess of
one over the fractional share described in
the preceding sentence. The trust receiving the fractional share equal to the applicable fraction shall have an inclusion ratio
of zero, and the other trust shall have an inclusion ratio of one. If the applicable fraction with respect to the original trust is .50,
then, with respect to the two equal trusts
resulting from the severance, the Trustee
may designate which of the resulting trusts
will have an inclusion ratio of zero and
which will have an inclusion ratio of one.
Each separate trust resulting from the severance then may be further divided in accordance with the rules of this section. See
paragraph (j), Example 7 of this section.
(e) Reporting a qualified severance—(1) In general.
A qualified
severance is reported by filing Form
706–GS(T), “Generation-Skipping Transfer Tax Return For Terminations,” (or
such other form as may be provided from
time to time by the Internal Revenue Service (IRS) for the purpose of reporting
a qualified severance). Unless otherwise
provided in the applicable form or instructions, the IRS requests that the filer write
“Qualified Severance” at the top of the
form and attach a Notice of Qualified Severance (Notice). The return and attached
Notice should be filed by April 15th of
the year immediately following the year
during which the severance occurred or by
the last day of the period covered by an
extension of time, if an extension of time
is granted, to file such form.
(2) Information concerning the original trust. The Notice should provide, with
respect to the original trust that was severed—
(i) The name of the transferor;
(ii) The name and date of creation of the
original trust;

September 10, 2007

(iii) The tax identification number of
the original trust; and
(iv) The inclusion ratio before the severance.
(3) Information concerning each new
trust. The Notice should provide, with respect to each of the resulting trusts created
by the severance—
(i) The name and tax identification
number of the trust;
(ii) The date of severance (within the
meaning of paragraph (c) of this section);
(iii) The fraction of the total assets of
the original trust received by the resulting
trust;
(iv) Other details explaining the basis
for the funding of the resulting trust (a fraction of the total fair market value of the assets on the date of severance, or a fraction
of each asset); and
(v) The inclusion ratio.
(f) Time for making a qualified severance. (1) A qualified severance of a trust
may occur at any time prior to the termination of the trust. Thus, provided that the
separate resulting trusts continue in existence after the severance, a qualified severance may occur either before or after—
(i) GST tax exemption has been allocated to the trust;
(ii) A taxable event has occurred with
respect to the trust; or
(iii) An addition has been made to the
trust.
(2) Because a qualified severance is effective as of the date of severance, a qualified severance has no effect on a taxable
termination as defined in section 2612(a)
or a taxable distribution as defined in section 2612(b) that occurred prior to the date
of severance. A qualified severance shall
be deemed to occur before a taxable termination or a taxable distribution that occurs
by reason of the qualified severance. See
paragraph (j) Example 8 of this section.
(g) Trusts that were irrevocable on
September 25, 1985—(1) In general. See
§26.2601–1(b)(4) for rules regarding severances and other actions with respect to
trusts that were irrevocable on September
25, 1985.
(2) Trusts in receipt of a post-September 25, 1985, addition. A trust described
in §26.2601–1(b)(1)(iv)(A) that is deemed
for GST tax purposes to consist of one separate share not subject to GST tax (the nonchapter 13 portion) with an inclusion ratio of zero, and one separate share subject

567

to GST tax (the chapter 13 portion) with
an inclusion ratio determined under section 2642, may be severed into two trusts
in accordance with §26.2654–1(a)(3). One
resulting trust will hold the non-chapter 13
portion of the original trust (the non-chapter 13 trust) and will not be subject to GST
tax, and the other resulting trust will hold
the chapter 13 portion of the original trust
(the chapter 13 trust) and will have the
same inclusion ratio as the chapter 13 portion immediately prior to the severance.
The chapter 13 trust may be further divided
in a qualified severance in accordance with
the rules of this section. The non-chapter
13 trust may be further divided in accordance with the rules of §26.2601–1(b)(4).
(h) [Reserved].
(i) [Reserved].
(j) Examples. The rules of this section
are illustrated by the following examples:
Example 1. Succession of interests. T dies in
2006. T’s will establishes a testamentary trust (Trust)
providing that income is to be paid to T’s sister, S, for
her life. On S’s death, one-half of the corpus is to be
paid to T’s child, C (or to C’s estate if C fails to survive S), and one-half of the corpus is to be paid to T’s
grandchild, GC (or to GC’s estate if GC fails to survive S). On the Form 706, “United States Estate (and
Generation-Skipping Transfer) Tax Return,” filed for
T’s estate, T’s executor allocates all of T’s available
GST tax exemption to other transfers and trusts, such
that Trust’s inclusion ratio is 1. Subsequent to filing
the Form 706 in 2007 and in accordance with applicable state law, the trustee divides Trust into two separate trusts, Trust 1 and Trust 2, with each trust receiving 50 percent of the value of the assets of the original
trust as of the date of severance. Trust 1 provides that
trust income is to be paid to S for life with remainder
to C or C’s estate, and Trust 2 provides that trust income is to be paid to S for life with remainder to GC
or GC’s estate. Because Trust 1 and Trust 2 provide
for the same succession of interests in the aggregate
as provided in the original trust, the severance constitutes a qualified severance, provided that all other
requirements of section 2642(a)(3) and this section
are satisfied.
Example 2. Succession of interests in discretionary trust. In 2006, T establishes Trust, an
irrevocable trust providing that income may be paid
from time to time in such amounts as the trustee
deems advisable to any one or more members of
the group consisting of T’s children (A and B) and
their respective descendants. In addition, the trustee
may distribute corpus to any trust beneficiary in
such amounts as the trustee deems advisable. On
the death of the last to die of A and B, the trust is to
terminate and the corpus is to be distributed in two
equal shares, one share to the then-living descendants
of each child, per stirpes. T elects, under section
2632(c)(5), to not have the automatic allocation rules
contained in section 2632(c) apply with respect to
T’s transfers to Trust, and T does not otherwise allocate GST tax exemption with respect to Trust. As a
result, Trust has an inclusion ratio of one. In 2008,

2007–37 I.R.B.

the trustee of Trust, pursuant to applicable state law,
divides Trust into two equal but separate trusts, Trust
1 and Trust 2, each of which has terms identical to
the terms of Trust except for the identity of the beneficiaries. Trust 1 and Trust 2 each has an inclusion
ratio of one. Trust 1 provides that income is to be
paid in such amounts as the trustee deems advisable
to A and A’s descendants. In addition, the trustee
may distribute corpus to any trust beneficiary in such
amounts as the trustee deems advisable. On the death
of A, Trust 1 is to terminate and the corpus is to be
distributed to the then-living descendants of A, per
stirpes, but, if A dies with no living descendants, the
principal will be added to Trust 2. Trust 2 contains
identical provisions, except that B and B’s descendants are the trust beneficiaries and, if B dies with
no living descendants, the principal will be added to
Trust 1. Trust 1 and Trust 2 in the aggregate provide
for the same beneficiaries and the same succession
of interests as provided in Trust, and the severance
does not shift any beneficial interest to a beneficiary
who occupies a lower generation than the person
or persons who held the beneficial interest in Trust.
Accordingly, the severance constitutes a qualified
severance, provided that all other requirements of
section 2642(a)(3) and this section are satisfied.
Example 3. Severance based on actuarial value of
beneficial interests. In 2004, T establishes Trust, an
irrevocable trust providing that income is to be paid
to T’s child C during C’s lifetime. Upon C’s death,
Trust is to terminate and the assets of Trust are to be
paid to GC, C’s child, if living, or, if GC is not then
living, to GC’s estate. T properly elects, under section 2632(c)(5), to not have the automatic allocation
rules contained in section 2632(c) apply with respect
to T’s transfers to Trust, and T does not otherwise
allocate GST tax exemption with respect to Trust.
Thus, Trust has an inclusion ratio of one. In 2008,
the trustee of Trust, pursuant to applicable state law,
divides Trust into two separate trusts, Trust 1 for the
benefit of C (and on C’s death to C’s estate), and Trust
2 for the benefit of GC (and on GC’s death to GC’s estate). The document severing Trust directs that Trust
1 is to be funded with an amount equal to the actuarial
value of C’s interest in Trust prior to the severance,
determined under section 7520 of the Internal Revenue Code. Similarly, Trust 2 is to be funded with
an amount equal to the actuarial value of GC’s interest in Trust prior to the severance, determined under
section 7520. Trust 1 and Trust 2 do not provide for
the same succession of interests as provided under the
terms of the original trust. Therefore, the severance
is not a qualified severance.
Example 4. Severance of a trust with a 50% inclusion ratio. On September 1, 2006, T transfers
$100,000 to a trust for the benefit of T’s grandchild,
GC. On a timely filed Form 709, “United States Gift
(and Generation-Skipping Transfer) Tax Return,” reporting the transfer, T allocates all of T’s remaining
GST tax exemption ($50,000) to the trust. As a result
of the allocation, the applicable fraction with respect
to the trust is .50 [$50,000 (the amount of GST tax exemption allocated to the trust) divided by $100,000
(the value of the property transferred to the trust)].
The inclusion ratio with respect to the trust is .50
[1 - .50]. In 2007, pursuant to authority granted under
applicable state law, the trustee severs the trust into
two trusts, Trust 1 and Trust 2, each of which is identical to the original trust and each of which receives

2007–37 I.R.B.

a 50 percent fractional share of the total value of the
original trust, valued as of the date of severance. Because the applicable fraction with respect to the original trust is .50 and the trust is severed into two equal
trusts, the trustee may designate which resulting trust
has an inclusion ratio of one, and which resulting trust
has an inclusion ratio of zero. Accordingly, in the Notice of Qualified Severance reporting the severance,
the trustee designates Trust 1 as having an inclusion
ratio of zero, and Trust 2 as having an inclusion ratio
of one. The severance constitutes a qualified severance, provided that all other requirements of section
2642(a)(3) and this section are satisfied.
Example 5. Funding of severed trusts on a nonpro rata basis. T’s will establishes a testamentary
trust (Trust) for the benefit of T’s descendants, to be
funded with T’s stock in Corporation A and Corporation B, both publicly traded stocks. T dies on May
1, 2004, at which time the Corporation A stock included in T’s gross estate has a fair market value of
$100,000 and the stock of Corporation B included in
T’s gross estate has a fair market value of $200,000.
On a timely filed Form 706, T’s executor allocates
all of T’s remaining GST tax exemption ($270,000)
to Trust. As a result of the allocation, the applicable
fraction with respect to Trust is .90 [$270,000 (the
amount of GST tax exemption allocated to the trust)
divided by $300,000 (the value of the property transferred to the trust)]. The inclusion ratio with respect
to Trust is .10 [1 - .90]. On August 1, 2008, in accordance with applicable local law, the trustee executes
a document severing Trust into two trusts, Trust 1 and
Trust 2, each of which is identical to Trust. The instrument designates August 3, 2008, as the date of
severance (within the meaning of paragraph (d)(3) of
this section). The terms of the instrument severing
Trust provide that Trust 1 is to be funded on a non-pro
rata basis with assets having a fair market value on
the date of severance equal to 90% of the value of
Trust’s assets on that date, and Trust 2 is to be funded
with assets having a fair market value on the date of
severance equal to 10% of the value of Trust’s assets
on that date. On August 3, 2008, the value of the
Trust assets totals $500,000, consisting of Corporation A stock worth $450,000 and Corporation B stock
worth $50,000. On August 4, 2008, the trustee takes
all action necessary to transfer all of the Corporation
A stock to Trust 1 and to transfer all of the Corporation B stock to Trust 2. On August 6, 2008, the stock
transfers are completed and the stock is received by
the appropriate resulting trust. Accordingly, Trust 1
is funded with assets having a value equal to 90% of
the value of Trust as of the date of severance, August 3, 2008, and Trust 2 is funded with assets having
a value equal to 10% of the value of Trust as of the
date of severance. Therefore, the severance constitutes a qualified severance, provided that all other requirements of section 2642(a)(3) and this section are
satisfied. Trust 1 will have an inclusion ratio of zero
and Trust 2 will have an inclusion ratio of one.
Example 6. [Reserved].
Example 7. Statutory qualified severance. T dies
on October 1, 2004. T’s will establishes a testamentary trust (Trust) to be funded with $1,000,000. Trust
income is to be paid to T’s child, S, for S’s life. The
trustee may also distribute trust corpus from time to
time, in equal or unequal shares, for the benefit of
any one or more members of the group consisting of
S and T’s three grandchildren (GC1, GC2, and GC3).

568

On S’s death, Trust is to terminate and the assets are
to be divided equally among GC1, GC2, and GC3 (or
their respective then-living descendants, per stirpes).
On a timely filed Form 706, T’s executor allocates
all of T’s remaining GST tax exemption ($300,000)
to Trust. As a result of the allocation, the applicable fraction with respect to the trust is .30 [$300,000
(the amount of GST tax exemption allocated to the
trust) divided by $1,000,000 (the value of the property transferred to the trust)]. The inclusion ratio with
respect to the trust is .70 [1 - .30]. On June 1, 2007,
the trustee determines that it is in the best interest of
the beneficiaries to sever Trust to provide a separate
trust for each of T’s three grandchildren and their respective families. The trustee severs Trust into two
trusts, Trust 1 and Trust 2, each with terms and beneficiaries identical to Trust and thus each providing that
trust income is to be paid to S for life, trust principal
may be distributed for the benefit of any or all members of the group consisting of S and T’s grandchildren, and, on S’s death, the trust is to terminate and
the assets are to be divided equally among GC1, GC2,
and GC3 (or their respective then-living descendants,
per stirpes). The instrument severing Trust provides
that Trust 1 is to receive 30% of Trust’s assets and
Trust 2 is to receive 70% of Trust’s assets. Further,
each such trust is to be funded with a pro rata portion
of each asset held in Trust. The trustee then severs
Trust 1 into three equal trusts, Trust GC1, Trust GC2,
and Trust GC3. Each trust is named for a grandchild
of T and provides that trust income is to be paid to
S for life, trust principal may be distributed for the
benefit of S and T’s grandchild for whom the trust
is named, and, on S’s death, the trust is to terminate
and the trust proceeds distributed to the respective
grandchild for whom the trust is named. If that grandchild has predeceased the termination date, the trust
proceeds are to be distributed to that grandchild’s
then-living descendants, per stirpes, or, if none, then
equally to the other two trusts resulting from the severance of Trust 1. Each such resulting trust is to be
funded with a pro rata portion of each Trust 1 asset.
The trustee also severs Trust 2 in a similar manner,
into Trust GC1(2), Trust GC2(2), and Trust GC3(2).
The severance of Trust into Trust 1 and Trust 2, the
severance of Trust 1 into Trust GC1, Trust GC2, Trust
GC3, and the severance of Trust 2 into Trust GC1(2),
Trust GC2(2) and Trust GC3(2), constitute qualified
severances, provided that all other requirements of
section 2642(a)(3) and this section are satisfied with
respect to each severance. Trust GC1, Trust GC2,
Trust GC3 will each have an inclusion ratio of zero
and Trust GC1(2), Trust GC2(2), and Trust GC3(2)
will each have an inclusion ratio of one.
Example 8. Qualified severance deemed to precede a taxable termination. In 2004, T establishes an
inter vivos irrevocable trust (Trust) for a term of 10
years providing that Trust income is to be paid annually in equal shares to T’s child C and T’s grandchild
GC (the child of another then-living child of T). If either C or GC dies prior to the expiration of the 10-year
term, the deceased beneficiary’s share of Trust’s income is to be paid to that beneficiary’s then-living
descendants, per stirpes, for the balance of the trust
term. At the expiration of the 10-year trust term, the
corpus is to be distributed equally to C and GC; if either C or GC is not then living, then such decedent’s
share is to be distributed instead to such decedent’s
then-living descendants, per stirpes. T allocates T’s

September 10, 2007

GST tax exemption to Trust such that Trust’s applicable fraction is .50 and Trust’s inclusion ratio is .50
[1-.50]. In 2006, pursuant to applicable state law, the
trustee severs the trust into two equal trusts, Trust 1
and Trust 2. The instrument severing Trust provides
that Trust 1 is to receive 50% of the Trust assets, and
Trust 2 is to receive 50% of Trust’s assets. Both resulting trusts are identical to Trust, except that each
has different beneficiaries: C and C’s descendants are
designated as the beneficiaries of Trust 1, and GC
and GC’s descendants are designated as the beneficiaries of Trust 2. The severance constitutes a qualified severance, provided all other requirements of
section 2642(a)(3) and this section are satisfied. Because the applicable fraction with respect to Trust is
.50 and Trust was severed into two equal trusts, the
trustee may designate which resulting trust has an inclusion ratio of one, and which has an inclusion ratio
of zero. Accordingly, in the Notice of Qualified Severance reporting the severance, the trustee designates
Trust 1 as having an inclusion ratio of one, and Trust
2 as having an inclusion ratio of zero. Because Trust
2 is a skip person under section 2613, the severance
of Trust resulting in the distribution of 50% of Trust’s
corpus to Trust 2 would constitute a taxable termination or distribution (as described in section 2612(a))
of that 50% of Trust for GST tax purposes, but for the
rule that a qualified severance is deemed to precede
a taxable termination that is caused by the qualified
severance. Thus, no GST tax will be due with regard
to the creation and funding of Trust 2 because the inclusion ratio of Trust 2 is zero.
Example 9. [Reserved].
Example 10. Beneficiary’s interest dependent
on inclusion ratio. On August 8, 2006, T transfers
$1,000,000 to Trust and timely allocates $400,000
of T’s remaining GST tax exemption to Trust.
As a result of the allocation, the applicable fraction with respect to Trust is .40 [$400,000 divided
by $1,000,000] and Trust’s inclusion ratio is .60
[1 - .40]. Trust provides that all income of Trust
will be paid annually to C, T’s child, for life. On
C’s death, the corpus is to pass in accordance with
C’s exercise of a testamentary limited power to appoint the corpus of Trust to C’s lineal descendants.
However, Trust provides that if, at the time of C’s
death, Trust’s inclusion ratio is greater than zero,
then C may also appoint that fraction of the trust
corpus equal to the inclusion ratio to the creditors of
C’s estate. On May 3, 2008, pursuant to authority
granted under applicable state law, the trustee severs
Trust into two trusts. Trust 1 is funded with 40%
of Trust’s assets, and Trust 2 is funded with 60% of
Trust’s assets in accordance with the requirements of
this section. Both Trust 1 and Trust 2 provide that
all income of Trust will be paid annually to C during
C’s life. On C’s death, Trust 1 corpus is to pass
in accordance with C’s exercise of a testamentary
limited power to appoint the corpus to C’s lineal
descendants. Trust 2 is to pass in accordance with
C’s exercise of a testamentary power to appoint the
corpus of Trust to C’s lineal descendants and to the
creditors of C’s estate. The severance constitutes
a qualified severance, provided that all other requirements of section 2642(a)(3) and this section are
satisfied. No additional contribution or allocation of
GST tax exemption is made to either Trust 1 or Trust
2 prior to C’s death. Accordingly, the inclusion ratio
with respect to Trust 1 is zero. The inclusion ratio

September 10, 2007

with respect to Trust 2 is one until C’s death, at which
time C will become the transferor of Trust 2 for GST
tax purposes. (Some or all of C’s GST tax exemption
may be allocated to Trust 2 upon C’s death.)
Example 11. Date of severance. Trust is an irrevocable trust that has both skip person and non-skip
person beneficiaries. Trust holds two parcels of real
estate, Property A and Property B, stock in Company
X, a publicly traded company, and cash. On June 16,
2008, the local court with jurisdiction over Trust issues an order, pursuant to the trustee’s petition authorized under state law, severing Trust into two resulting trusts of equal value, Trust 1 and Trust 2. The
court order directs that Property A will be distributed
to Trust 1 and Property B will be distributed to Trust
2, and that an appropriate amount of stock and cash
will be distributed to each trust such that the total
value of property distributed to each trust as of the
date of severance will be equal. The court order does
not mandate a particular date of funding. Trustee receives notice of the court order on June 24, and selects
July 16, 2008, as the date of severance. On June 26,
2008, Trustee commences the process of transferring
title to Property A and Property B to the appropriate
resulting trust(s), which process is completed on July
8, 2008. Also on June 26, the Trustee hires a professional appraiser to value Property A and Property B
as of the date of severance and receives the appraisal
report on Friday, October 3, 2008. On Monday, October 6, 2008, Trustee commences the process of transferring to Trust 1 and Trust 2 the appropriate amount
of Company X stock valued as of July 16, 2008, and
that transfer (as well as the transfer of Trust’s cash) is
completed by October 9, 2008. Under the facts presented, the funding of Trust 1 and Trust 2 occurred
within 90 days of the date of severance selected by
the trustee, and within a reasonable time after the date
of severance taking into account the nature of the assets involved and the need to obtain an appraisal. Accordingly, the date of severance for purposes of this
section is July 16, 2008, the resulting trusts are to be
funded based on the value of the original trust assets
as of that date, and the severance is a qualified severance assuming that all other requirements of section 2642(a)(3) and this section are met. (However,
if Trust had contained only marketable securities and
cash, then in order to satisfy the reasonable time requirement, the stock transfer would have to have been
commenced, and generally completed, immediately
after the date of severance, and the cash distribution
would have to have been made at the same time.)

(k) Effective date—(1) In general. This
section applies to severances occurring on
or after August 2, 2007.
(2) Transition rule. In the case of a
qualified severance occurring after December 31, 2000, and before August 2,
2007, taxpayers may rely on any reasonable interpretation of section 2642(a)(3)
as long as reasonable notice concerning
the qualified severance and identification
of the trusts involved has been given to
the IRS. For this purpose, the proposed
regulations (69 FR 51967) are treated as
a reasonable interpretation of the statute.
For purposes of the reporting provisions

569

of §26.2642–6(e), notice to the IRS should
be mailed by the due date of the gift tax
return (including extensions granted) for
gifts made during the year in which the
severance occurred. If no gift tax return is
filed, notice to the IRS should be mailed
by April 15th of the year immediately
following the year during which the severance occurred. For severances occurring
between December 31, 2000, and January
1, 2007, notification should be mailed to
the IRS as soon as reasonably practicable
after August 2, 2007, if sufficient notice
has not already been given.
Par. 6. Section 26.2654–1 is amended
by adding paragraphs (b)(4) Example 3
and (c) to read as follows:
§26.2654–1 Certain trusts treated as
separate trusts.
*****
(b) * * * *
(4) Examples. * * *
Example 3. Formula severance. T’s will establishes a testamentary marital trust (Trust) that
meets the requirements of qualified terminable interest property (QTIP) if an election under section
2056(b)(7) is made. Trust provides that all trust
income is to be paid to T’s spouse for life. On the
spouse’s death, the trust corpus is to be held in further
trust for the benefit of T’s then-living descendants.
On T’s date of death in January of 2004, T’s unused
GST tax exemption is $1,200,000, and T’s will includes $200,000 of bequests to T’s grandchildren.
Prior to the due date for filing the Form 706, “United
States Estate (and Generation-Skipping Transfer)
Tax Return,” for T’s estate, T’s executor, pursuant to
applicable state law, divides Trust into two separate
trusts, Trust 1 and Trust 2. Trust 1 is to be funded
with that fraction of the Trust assets, the numerator of which is $1,000,000, and the denominator
of which is the value of the Trust assets as finally
determined for federal estate tax purposes. Trust 2 is
to be funded with that fraction of the Trust assets, the
numerator of which is the excess of the Trust assets
over $1,000,000, and the denominator of which is
the value of the Trust assets as finally determined for
federal estate tax purposes. On the Form 706 filed
for the estate, T’s executor makes a QTIP election
under section 2056(b)(7) with respect to Trust 1 and
Trust 2 and a “reverse” QTIP election under section
2652(a)(3) with respect to Trust 1. Further, T’s executor allocates $200,000 of T’s available GST tax
exemption to the bequests to T’s grandchildren, and
the balance of T’s exemption ($1,000,000) to Trust
1. If the requirements of paragraph (b) of this section are otherwise satisfied, Trust 1 and Trust 2 are
recognized as separate trusts for GST tax purposes.
Accordingly, the “reverse” QTIP election and allocation of GST tax exemption with respect to Trust 1
are recognized and effective for generation-skipping
transfer tax purposes.

(c) Cross reference. For rules applicable to the qualified severance of trusts

2007–37 I.R.B.

(whether or not includible in the transferor’s gross estate), see §26.2642–6.

PART 602—OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT

Par. 8. In §602.101, paragraph (b) is
amended by adding entries in numerical
order to the table to read as follows:

Par. 7. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.

§602.101 OMB Control numbers.
*****
(b) * * *

CFR part or section where
identified and described
*****
1.1001–1
*****
26.2642–6
*****
26.2654–1
*****

Current OMB
control No.
...........................................................

1545–1902

...........................................................

1545–1902

...........................................................

1545–1902

Linda E. Stiff,
Acting Deputy Commissioner for
Services and Enforcement.
Approved July 24, 2007.
Eric Solomon,
Assistant Secretary of
the Treasury (Tax Policy).
(Filed by the Office of the Federal Register on August 1,
2007, 8:45 a.m., and published in the issue of the Federal
Register for August 2, 2007, 72 F.R. 42291)

Section 4081.—Imposition
of Tax
26 CFR 48.4081–1: Taxable fuel; definitions.

T.D. 9346
DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 48 and 602
Entry of Taxable Fuel
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations and removal
of temporary regulations.
SUMMARY: This document contains final
regulations relating to the tax on the entry
of taxable fuel into the United States. The
final regulations affect enterers of taxable

2007–37 I.R.B.

fuel, other importers of record, and certain
sureties.
DATES: Effective Date: These regulations
are effective July 27, 2007.
Applicability Dates: For dates of
applicability, see §§48.4081–1(f) and
48.4081–3(j).
FOR
FURTHER
INFORMATION
CONTACT: Celia Gabrysh at (202)
622–3130 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations has been
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 1545–1897. The collection of information in these final regulations is
in §48.4081–3(c)(2)(iii) and (iv). This
collection of information allows certain
importers of record and sureties to avoid
liability for the tax on the entry of taxable
fuel into the United States.
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 respondent and/or recordkeeper varies from
15 minutes to 2.25 hours, depending on in-

570

dividual circumstances, with an estimated
average of 1.25 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 the Office of Management
and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.
Books or records relating to this 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
This document amends the Manufacturers and Retailers Excise Tax Regulations (26 CFR part 48) to provide rules
relating to the tax that section 4081 of
the Internal Revenue Code (Code) imposes on the entry of taxable fuel into
the United States. On July 30, 2004, a
temporary regulation (T.D. 9145, 2004–2
C.B. 464 [69 FR 45587]) relating to this
topic was published in the Federal Register. A notice of proposed rulemaking
(REG–120616–03, 2004–2 C.B. 474 [69
FR 45631]) cross-referencing the temporary regulations was published in the Federal Register on the same day. Written

September 10, 2007