Td 9249

Part I. Rulings and Decisions Under the Internal Revenue Code
of 1986
Section 42.—Low-Income
Housing Credit
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of March 2006. See Rev. Rul. 2006-10, page 557.

Section 468B.—Special
Rules for Designated
Settlement Funds
26 CFR 1. 468B–1: Qualified settlement funds.

T.D. 9249

Section 280G.—Golden
Parachute Payments
Federal short-term, mid-term, and long-term rates
are set forth for the month of March 2006. See Rev.
Rul. 2006-10, page 557.

Section 382.—Limitation
on Net Operating Loss
Carryforwards and Certain
Built-In Losses Following
Ownership Change
The adjusted applicable federal long-term rate is
set forth for the month of March 2006. See Rev. Rul.
2006-10, page 557.

Section 412.—Minimum
Funding Standards
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of March 2006. See Rev. Rul. 2006-10, page 557.

Section 467.—Certain
Payments for the Use of
Property or Services
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of March 2006. See Rev. Rul. 2006-10, page 557.

Section 468.—Special
Rules for Mining and Solid
Waste Reclamation and
Closing Costs
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month
of March 2006. See Rev. Rul. 2006-10, page 557.

DEPARTMENT OF
THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
Escrow Funds and Other
Similar Funds
AGENCY: Internal Revenue Service
(IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final
regulations relating to the taxation and reporting of income earned on qualified settlement funds and certain other escrow accounts, trusts, and funds, and other related
rules. The final regulations affect qualified
settlement funds, escrow accounts established in connection with sales of property,
disputed ownership funds, and the parties
to these escrow accounts, trusts, and funds.
DATES: Effective Date: These regulations
are effective on February 3, 2006.
Applicability Dates: For dates of applicability, see §§1.468B–5(c), 1.468B–7(f),
and 1.468B–9(j).
FOR
FURTHER
INFORMATION
CONTACT:
Richard
Shevak
or
A. Katharine Jacob Kiss, (202) 622–4930
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collections of information contained in these final regulations have
been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction
Act (44 U.S.C. 3507(d)) under control
number 1545–1631. The collections of
information in §§1.468B–1(k)(2) and

2006–10 I.R.B.

546

1.468B–9(c)(2)(ii) are to obtain benefits and the collection of information in
§1.468B–9(g) is mandatory.
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 annual burden per respondent is .40 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 the 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 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 contains amendments
to 26 CFR part 1 under section 468B of
the Internal Revenue Code (Code). This
document does not adopt §1.468B–6
of a notice of proposed rulemaking
(REG–209619–93, 1999–1 C.B. 689)
published in the Federal Register on February 1, 1999 (64 FR 4801), relating to
the current taxation and reporting of income earned on qualified settlement funds
and certain other escrow accounts, trusts,
and funds, which is withdrawn and reproposed by a notice of proposed rulemaking
(REG–113365–04) published elsewhere
in this issue of the Bulletin. This document also does not adopt §1.468B–8 of
the notice of proposed rulemaking, which
is reserved.
Section 468B was added to the Code
by section 1807(a)(7)(A) of the Tax Reform Act of 1986, Public Law 99–514
(100 Stat. 2814), and was amended by

March 6, 2006

section 1018(f) of the Technical and Miscellaneous Revenue Act of 1988, Public
Law 100–647 (102 Stat. 3582). Section
468B(g) provides that nothing in any provision of law shall be construed as providing that an escrow account, settlement
fund, or similar fund is not subject to current income taxation, and that the Secretary shall prescribe regulations providing
for the taxation of such accounts or funds,
whether as a grantor trust or otherwise.
On December 23, 1992, final regulations (T.D. 8459, 1993–1 C.B. 68) under
section 468B(g) concerning the taxation
of qualified settlement funds (QSF) were
published in the Federal Register (57 FR
60983) (the QSF regulations). The QSF
regulations do not address the taxation of
other types of escrow accounts, trusts, or
funds. The preamble to the QSF regulations states that future regulations would
address the income tax treatment of accounts, trusts, or funds other than QSFs,
specifically, escrow accounts used in the
sale of property and section 1031 qualified
escrow accounts.
On February 1, 1999, the IRS and the
Treasury Department published a notice of
proposed rulemaking (REG–209619–93)
in the Federal Register (64 FR 4801) regarding the proposed income tax treatment
of these other funds. The proposed regulations provide rules for taxing income
earned by (1) qualified escrow accounts
and qualified trusts used in deferred likekind exchanges under section 1031, (2)
pre-closing escrows used in sales or exchanges of real or personal property, (3)
contingent-at-closing escrows established
on account of contingencies existing at the
closing of certain sales of business or investment property, and (4) disputed ownership funds established under the jurisdiction of a court to hold money or property subject to disputed claims of ownership. Additionally, the proposed regulations provide rules permitting a transferor
to a QSF to elect taxation of the QSF as a
grantor trust.
Written comments responding to the
notice of proposed rulemaking were received. A public hearing was held on
May 12, 1999. After consideration of the
comments, the proposed regulations are
adopted as revised by this Treasury decision.

March 6, 2006

Explanation of Provisions and
Summary of Comments
1. Election to Treat a Qualified
Settlement Fund as a Grantor Trust Under
§1.468B–1(k)
The proposed regulations provide that,
if there is only one transferor to a qualified settlement fund, the transferor may
make an election to treat the qualified settlement fund as a grantor trust, all of which
is treated as owned by the transferor (a
grantor trust election). The election may
be revoked only for compelling circumstances upon consent of the Commissioner
by private letter ruling.
Commentators recommended expanding the scope of the grantor trust election
by allowing the election even if there
are multiple transferors to a qualified
settlement fund. Certain commentators
suggested that this rule could be limited to
situations in which all of the grantors are
members of the same consolidated group.
These comments were not adopted because they would result in undue complexity. For example, extending the grantor
trust election to multiple-transferor trusts
would require the allocation of items of
income, deduction and credit (including
capital gains and losses) among the various transferors. Although §1.671–3 of the
Income Tax Regulations contains rules for
making such allocations, the IRS and the
Treasury Department do not believe that
these rules address the complex sharing
arrangements that may arise in a qualified
settlement fund. Moreover, if some, but
not all, of the transferors elected grantor
trust treatment, another allocation method
would be necessary to allocate the items
of income, deduction, and credit (including capital gains and losses) between the
grantor trust portion of the fund and the
qualified settlement fund portion of the
fund.
Commentators recommended allowing
transferors to make the grantor trust election in taxable years after the taxable year
in which the fund is established. This comment was not adopted because allowing
a grantor trust election for a taxable year
other than the taxable year in which the
fund is established gives rise to complex
issues regarding the tax treatment of the
fund upon conversion to a grantor trust.
For example, any deduction claimed by the

547

transferor for amounts contributed to the
qualified settlement fund would need to
be recaptured. Further, adjustments would
be necessary to take into account income
previously taxed to the qualified settlement fund and differences in the accounting methods used by the transferor and the
fund.
However, the final regulations allow a
transferor to a qualified settlement fund to
elect grantor trust treatment for the fund’s
first taxable year and all subsequent years
if the fund was established on or before
February 3, 2006, and the applicable period of limitations for filing an amended
return has not expired for the qualified settlement fund’s first and all subsequent taxable years, and for the transferor’s corresponding taxable years. To make the
grantor trust election, the qualified settlement fund and the transferor must amend
all affected income tax returns.
2. Treatment of Section 1031 Qualified
Escrow Accounts and Qualified Trusts
under §1.468B–6
Section 1.468B–6 of the proposed regulations provides rules for the current
taxation of income of a qualified escrow
account or qualified trust used in a deferred exchange under section 1031. The
proposed regulations provide that, in general, the taxpayer (the transferor of the
property) is the owner of the assets in a
qualified escrow account or qualified trust
and must take into account all items of
income, deduction, and credit (including
capital gains and losses) of the qualified
escrow account or qualified trust. However, if, under the facts and circumstances,
a qualified intermediary or the transferee
has the beneficial use and enjoyment of the
assets, then the qualified intermediary or
transferee is the owner of the assets in the
qualified escrow account or qualified trust
and must take into account all items of
income, deduction, and credit (including
capital gains and losses) of the qualified
escrow account or qualified trust. In addition to other relevant facts and circumstances, the proposed regulations list three
factors that will be considered in determining whether the qualified intermediary
or transferee, rather than the taxpayer, has
the beneficial use and enjoyment of assets
of a qualified escrow account or qualified
trust. The proposed regulations further

2006–10 I.R.B.

provide that, if a qualified intermediary
or transferee is the owner of the assets
transferred, section 7872 may apply if the
deferred exchange involves a below-market loan from the taxpayer to the owner.
The comments reflected substantial disagreement on the proper rules for taxing
these arrangements. For example, some
commentators recommended that the facts
and circumstances test be replaced by a per
se rule requiring transferors to take into account the trust’s or account’s income in
all cases. Other commentators urged that
the ownership factors should apply in all
circumstances. Commentators suggested
that the rules of §1.468B–6 should apply to
all funds held by qualified intermediaries
as well as to funds held in a qualified escrow account or qualified trust, while other
commentators argued that the rules should
apply only to qualified escrow accounts
and qualified trusts. Some commentators
agreed that certain of these transactions
create below-market loans, and other commentators asserted that the transactions do
not create below-market loans.
The IRS and the Treasury Department
have concluded that these issues merit further consideration. Therefore, a notice of
proposed rulemaking published elsewhere
in this issue of the Bulletin withdraws that
portion of the notice of proposed rulemaking that relates to the current taxation of
income of a qualified escrow account or
qualified trust used in a deferred exchange
under section 1031. This section has been
omitted from the final regulations and is
published as proposed regulations elsewhere in this issue of the Bulletin. The
preamble to those proposed regulations
more fully discusses the comments received.
3. Pre-Closing Escrows under §1.468B–7
Section 1.468B–7 provides rules for the
taxation of income earned on certain escrows established in connection with the
sale of property, or pre-closing escrows.
The proposed regulations require the purchaser to take into account all items of
income, deduction, and credit (including
capital gains and losses) of the pre-closing escrow. The only comments received
with respect to this section relate to reporting obligations of the escrow holder
or trustee. Those comments are addressed
later in this preamble. The final regula-

2006–10 I.R.B.

tions adopt §1.468B–7 as proposed with
minor changes to improve clarity.
4. Contingent-at-Closing Escrows under
§1.468B–8
Section 1.468B–8 of the proposed regulations provides rules for taxing the income of a contingent-at-closing escrow,
which is an escrow account, trust, or fund
established in connection with the sale or
exchange of real or personal property to
account for contingencies existing at closing. The proposed regulations provide
that, in computing taxable income, the purchaser must take into account all items of
income, deduction, and credit (including
capital gains and losses) of the escrow until
the date on which specified events occur or
fail to occur (the determination date). Beginning on the determination date, the purchaser and seller must each take into account the income, deductions, and credits
of the escrow that correspond to their respective ownership interests in each asset
of the escrow.
The IRS and the Treasury Department
have concluded that this section requires
further consideration. Therefore, this section has been omitted from the final regulations and will be published as separate
regulations.
5. Disputed Ownership Funds under
§1.468B–9
Section 1.468B–9 provides rules for
the taxation of a disputed ownership fund
(DOF). Under the proposed regulations, a
DOF is an escrow account, trust, or fund
that is not a QSF and that (1) is established
to hold money or property subject to conflicting claims of ownership, (2) is subject
to the continuing jurisdiction of a court,
and (3) requires approval of the court to
pay or distribute money or property to, or
on behalf of, a claimant or transferor.
The final regulations specifically exclude bankruptcy estates under title 11 of
the United States Code from the definition of disputed ownership funds to avoid
conflict with section 1398, which provides
rules for the taxation of bankruptcy estates
in cases under chapters 7 and 11 of title
11 involving individual debtors, and section 1399, which provides that no separate
taxable entity results from the commencement of a case under title 11 except in a
case to which section 1398 applies.

548

The final regulations also exclude liquidating trusts from the definition of disputed ownership fund, although they may
have a similar purpose, because liquidating trusts are taxed as grantor trusts. See
§301.7701–4(d), which provides that a liquidating trust is organized for the primary
purpose of liquidating and distributing assets. However, in the case of certain liquidating trusts established in connection
with bankruptcy proceedings, it is uncertain who is properly taxable on income
earned with respect to assets set aside to
satisfy disputed claims of creditors. Therefore, the trustee of a liquidating trust established pursuant to a plan confirmed by
the court in a case under title 11 of the
United States Code may, in its first taxable year, elect to treat an escrow account,
trust, or fund that holds assets of the liquidating trust that are subject to disputed
claims as a disputed ownership fund. The
trustee makes an election to treat this portion of the liquidating trust as a DOF by
attaching an election statement to a timely
filed Federal income tax return of the DOF
for the taxable year for which the election
becomes effective. The trustee may revoke
the election only with the Commissioner’s
consent by private letter ruling. The regulations do not otherwise affect the rules for
the taxation of liquidating trusts.
Under the proposed and final regulations, a DOF generally is taxable (1) as
a QSF under §1.468B–2 if all the assets
transferred to the fund are passive assets,
or (2) as a C corporation in all other cases.
The claimants to a DOF also may request
a private letter ruling proposing an alternative method of taxation. These final regulations clarify that a DOF holding exclusively passive assets is taxable under
§1.468B–2 as if it were a qualified settlement fund, but is not subject to all of
the rules applicable to qualified settlement
funds. Additionally, because the final regulations include certain rules that differ
from, and apply in lieu of, the rules in
§1.468B–2, the final regulations expressly
identify the provisions of §1.468B–2 that
do not apply.
The final regulations generally follow
the substantive rules of the proposed regulations, but have been restructured for
greater clarity. For example, the final regulations provide separate paragraphs for
rules applicable to a transferor that is not
a claimant to the DOF as well as rules ap-

March 6, 2006

plicable to a transferor that is a claimant
(transferor-claimant).
Unless a grantor trust election is made,
the transfer of money or property to a qualified settlement fund generally gives rise
to economic performance. In contrast, under both the proposed regulations and the
final regulations, the transfer of money or
property to a DOF gives rise to economic
performance only if the transferor does not
claim ownership of any part of the property that is transferred to the DOF (the
transferor is not a transferor-claimant).
The transfer of property to the DOF is
not treated as a transfer to the claimants
for economic performance purposes if the
transferor continues to claim ownership
of some or all of the transferred property. Consistent with this approach, the
proposed regulations provide that, if the
transferor claims ownership of the transferred property after the transfer to the
fund, then the transfer of property to the
DOF is not treated as a sale or exchange
under section 1001 and the transferor is
not taxed on distributions that the transferor receives from the DOF.
The final regulations further provide
that a distribution from the DOF to a transferor-claimant is not treated as a sale or
exchange under section 1001(a). Distributions from the DOF to claimants other
than the transferor-claimant are deemed
to be made first to the transferor-claimant
and then from the transferor-claimant to
another claimant. These rules are intended to put the transferor-claimant in the
same position for purposes of determining
whether a deduction is allowable with respect to the transfer as it would have been
in if the money or property had not been
transferred first to a DOF.
A commentator requested that the final
regulations exempt court registry funds
from the rules for DOFs. The commentator asserted that complying with the DOF
rules would impose an undue burden on
courts. This comment was not adopted
because an exemption for court registry
funds would be inconsistent with section
468B(g), which requires current income
taxation of escrow accounts, settlement
funds, and similar funds. Because court
registry funds are similar to escrow accounts and settlement funds, they fall
within the plain meaning of the statute.
The commentator also requested clarification of whether bail bonds or appellate

March 6, 2006

bonds filed with a court are DOFs. The
final regulations include an example to
clarify that these types of surety bonds do
not create DOFs.
6. Information Reporting Requirements
Generally,
§§1.468B–6
through
1.468B–8 of the proposed regulations
state that an escrow holder (escrow agent,
trustee or other person responsible for
administering the escrow) must report
the income of an escrow account, trust,
or fund on a Form 1099 “in accordance
with” subpart B, Part III, subchapter A,
chapter 61, Subtitle F of the Code (currently, sections 6041 through 6050T).
Several commentators expressed concern
that these provisions expand the existing
information reporting obligations in sections 6041 through 6050T.
The proposed regulations were not intended to create new information reporting
requirements but merely to alert escrow
holders and other responsible persons of
the potential obligation to report. To clarify this intent, the final regulations provide that a payor must report to the extent
required by sections 6041 through 6050T
and these regulations.
Effect on Other Documents
Rev. Rul. 77–230, 1977–2 C.B. 214, is
obsolete as of February 3, 2006.
Effective Date
The regulations apply to qualified settlement funds, pre-closing escrows, and
disputed ownership funds created after February 3, 2006. A transferor to a
qualified settlement fund, however, may
make a grantor trust election for a qualified settlement fund created on or before
February 3, 2006, if the applicable period of limitations on filing an amended
return has not expired for the qualified
settlement fund’s first taxable year and
all subsequent taxable years and for the
transferor’s corresponding taxable year
or years. Additionally, for pre-closing
escrows and disputed ownership funds established after August 16, 1986, but before
February 3, 2006, the IRS will not challenge a reasonable, consistently applied
method of taxation.

549

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. Pursuant to section 7805(f)
of the Code, the notice of proposed rulemaking preceding these regulations was
submitted to the Chief Counsel for Advocacy of the Small Business Administration
for comment on its impact on small businesses.
Final Regulatory Flexibility Act
Analysis
This final regulatory flexibility analysis has been prepared for this Treasury decision under 5 U.S.C. 604. The objective
of the regulations is to ensure that the income of certain escrow accounts, trusts,
and funds is subject to current taxation
by identifying the proper party or parties
subject to tax. Section 468B(g) provides
the legal basis for the requirements of the
regulations. The IRS and the Treasury
Department are not aware of any Federal
rules that may duplicate, overlap, or conflict with the regulations. An explanation
is provided below of the burdens on small
entities resulting from the requirements of
the regulations. A description also is provided of alternative rules that were considered by the IRS and the Treasury Department but rejected as too burdensome.
1. Grantor Trust Election
Under §1.468B–1(k), a transferor to
a qualified settlement fund may elect to
have the qualified settlement fund treated
as a grantor trust all of which is owned by
the transferor (grantor trust election). The
election is available only to a qualified settlement fund established after February 3,
2006. However, a transferor may make a
grantor trust election under §1.468B–1(k)
for a qualified settlement fund that was established on or before February 3, 2006, if
the applicable period of limitations on filing an amended return has not expired for
both the qualified settlement fund’s first
taxable year and all subsequent taxable
years and the transferor’s corresponding
taxable year or years.
To make a grantor trust election, a
transferor must attach a statement to a
timely filed (including extensions) Form

2006–10 I.R.B.

1041, “U.S. Income Tax Return for Estates
and Trusts.” The statement must include
the transferor’s name, address, taxpayer
identification number, and the legend,
“§1.468B–1(k) Election.”
Approximately 900 qualified settlement fund returns are filed each year.
Only a small number of these returns
are filed for newly created qualified settlement funds. Because a grantor trust
election may be made only for a qualified
settlement fund that has one transferor, the
IRS and the Treasury Department believe
that a very small number of grantor trust
elections will be made each year.
Similarly, the IRS and the Treasury Department believe that a very small number
of grantor trust elections will be made for
past years. A retroactive grantor trust election may impose an additional burden on a
taxpayer because the taxpayer may be required to file amended returns. However,
this election is voluntary.
The alternatives to the regulations are
(1) to limit the grantor trust election by permitting the elections only for QSFs established on or after the date the final regulations are published, or (2) to eliminate the
opportunity to make a grantor trust election by retaining the current rules, which
do not permit the election. These alternatives were rejected because they might result in a greater burden on small entities
than that imposed by these regulations.
2. Disputed Ownership Funds
Section 1.468B–9(c)(1) provides that a
disputed ownership fund is a separate taxable entity.
Section 1.468B–9(g) requires that a
transferor provide to the IRS and the administrator of a disputed ownership fund
a statement that itemizes the property
other than cash transferred to the disputed
ownership fund during the calendar year.
The statement must indicate the basis and
holding period of the property. This information is required to substantiate the
transfer and to determine the proper tax
consequences of the transfer to the fund
and of a transfer of property from the fund
to a claimant. To minimize the burden,
no statement is required for transfers of
cash and any two or more transferors may
provide a combined statement. There are
no known alternatives to these rules that

2006–10 I.R.B.

are less burdensome to small entities and
accomplish the purpose of the regulations.
The trustee of a liquidating trust established pursuant to a plan confirmed by the
court in a case under title 11 of the United
States Code may, in the liquidating trust’s
first taxable year, elect to treat an escrow
account, trust, or fund that holds assets of
the liquidating trust that are subject to disputed claims as a disputed ownership fund.
The trustee makes an election by attaching
an election statement to a timely filed Federal income tax return of the disputed ownership fund for the taxable year for which
the election becomes effective. This election is voluntary. There are no known alternatives to this requirement that are less
burdensome and accomplish the purpose
of the regulations.
The IRS and the Treasury Department
estimate that there are approximately
5,000 disputed ownership funds created
annually. Many of these funds do not
involve small entities.
Drafting Information
The principal authors of these
regulations are Richard Shevak and
A. Katharine Jacob Kiss of the Office
of Associate Chief Counsel (Income Tax
& Accounting). However, other personnel
from the IRS and the Treasury Department
participated in their development.
*****
Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for
part 1 is amended by:
a. Removing the entries for “Section
1.468B” and “Sections 1.468B–0 through
1.468B–5.”
b. Adding entries for §§1.468B–1
through 1.468B–9.
The additions read as follows:
Authority: 26 U.S.C. 7805***
Section 1.468B–1 also issued under 26
U.S.C. 461(h) and 468B(g).
Section 1.468B–2 also issued under 26
U.S.C. 461(h) and 468B(g).

550

Section 1.468B–3 also issued under 26
U.S.C. 461(h) and 468B(g).
Section 1.468B–4 also issued under 26
U.S.C. 461(h) and 468B(g).
Section 1.468B–5 also issued under 26
U.S.C. 461(h) and 468B(g).
Section 1.468B–7 also issued under 26
U.S.C. 461(h) and 468B(g).
Section 1.468B–9 also issued under 26
U.S.C. 461(h) and 468B(g).* * *
Par. 2. Section 1.468B–0 is amended
by:
a. Revising the introductory text of
§1.468B–0.
b. Revising the entries for §1.468B–1,
paragraph (k).
c. Adding an entry for §1.468B–1,
paragraph (l).
d. Revising the entry for the section
heading for §1.468B–5.
e. Adding an entry for §1.468B–5,
paragraph (c).
f. Adding entries for §§1.468B–6
through 1.468B–9.
The additions and revisions read as follows:
§1.468B–0 Table of contents.
This section lists the table of contents
for §§1.468B–1 through 1.468B–9.
§1.468B–1 Qualified settlement funds.
*****
(k) Election to treat a qualified settlement fund as a subpart E trust.
(1) In general.
(2) Manner of making grantor trust
election.
(i) In general.
(ii) Requirements for election statement.
(3) Effect of making the election.
(l) Examples.
*****
§1.468B–5 Effective dates and transition
rules applicable to qualified settlement
funds.
*****
(c) Grantor trust elections under
§1.468B–1(k).
(1) In general.
(2) Transition rules.

March 6, 2006

(3) Qualified settlement funds established by the U.S. government on or before
February 3, 2006.
§1.468B–6 Escrow accounts, trusts, and
other funds used in deferred exchanges
of like-kind property under section
1031(a)(3). [Reserved].
§1.468B–7 Pre-closing escrows.
(a) Scope.
(b) Definitions.
(c) Taxation of pre-closing escrows.
(d) Reporting obligations of the administrator.
(e) Examples.
(f) Effective dates.
(1) In general.
(2) Transition rule.
§1.468B–8 Contingent-at-closing
escrows. [Reserved].
§1.468B–9 Disputed ownership funds.
(a) Scope.
(b) Definitions.
(c) Taxation of a disputed ownership
fund.
(1) In general.
(2) Exceptions.
(3) Property received by the disputed
ownership fund.
(i) Generally excluded from income.
(ii) Basis and holding period.
(4) Property distributed by the disputed
ownership fund.
(i) Computing gain or loss.
(ii) Denial of deduction.
(5) Taxable year and accounting
method.
(6) Unused carryovers.
(d) Rules applicable to transferors that
are not transferor-claimants.
(1) Transfer of property.
(2) Economic performance.
(i) In general.
(ii) Obligations of the transferor.
(3) Distributions to transferors.
(i) In general.
(ii) Exception.
(iii) Deemed distributions.
(e) Rules applicable to transferor-claimants.
(1) Transfer of property.
(2) Economic performance.
(i) In general.

March 6, 2006

(ii) Obligations of the transferor-claimant.
(3) Distributions to transferorclaimants.
(i) In general.
(ii) Deemed distributions.
(f) Distributions to claimants other than
transferor-claimants.
(g) Statement to the disputed ownership fund and the Internal Revenue Service
with respect to transfers of property other
than cash.
(1) In general.
(2) Combined statements.
(3) Information required on the statement.
(h) Examples.
(i) [Reserved]
(j) Effective dates.
(1) In general.
(2) Transition rule.
Par. 3. Section 1.468B–1 is amended
by redesignating paragraph (k) as paragraph (l) and adding a new paragraph (k)
to read as follows:
§1.468B–1 Qualified settlement funds.
*****
(k) Election to treat a qualified settlement fund as a subpart E trust—(1) In general. If a qualified settlement fund has
only one transferor (as defined in paragraph (d)(1) of this section), the transferor
may make an election (grantor trust election) to treat the qualified settlement fund
as a trust all of which is owned by the transferor under section 671 and the regulations
thereunder. A grantor trust election may be
made whether or not the qualified settlement fund would be classified, in the absence of paragraph (b) of this section, as a
trust all of which is treated as owned by the
transferor under section 671 and the regulations thereunder. A grantor trust election
may be revoked only for compelling circumstances upon consent of the Commissioner by private letter ruling.
(2) Manner of making grantor trust
election—(i) In general. To make a
grantor trust election, a transferor must
attach an election statement satisfying the
requirements of paragraph (k)(2)(ii) of
this section to a timely filed (including
extensions) Form 1041, “U.S. Income Tax
Return for Estates and Trusts,” that the
administrator files on behalf of the qualified settlement fund for the taxable year in

551

which the qualified settlement fund is established. However, if a Form 1041 is not
otherwise required to be filed (for example, because the provisions of §1.671–4(b)
apply), then the transferor makes a grantor
trust election by attaching an election
statement satisfying the requirements of
paragraph (k)(2)(ii) of this section to a
timely filed (including extensions) income
tax return of the transferor for the taxable
year in which the qualified settlement fund
is established. See §1.468B–5(c)(2) for
transition rules.
(ii) Requirements for election statement. The election statement must include
a statement by the transferor that the transferor will treat the qualified settlement
fund as a grantor trust. The election statement must include the transferor’s name,
address, taxpayer identification number,
and the legend, “§1.468B–1(k) Election.”
The election statement and the statement
described in §1.671–4(a) may be combined into a single statement.
(3) Effect of making the election. If a
grantor trust election is made—
(i) Paragraph (b) of this section, and
§§1.468B–2, 1.468B–3, and 1.468B–5(a)
and (b) do not apply to the qualified settlement fund. However, this section (except for paragraph (b) of this section) and
§1.468B–4 apply to the qualified settlement fund;
(ii) The qualified settlement fund is
treated, for Federal income tax purposes,
as a trust all of which is treated as owned
by the transferor under section 671 and the
regulations thereunder;
(iii) The transferor must take into account in computing the transferor’s income tax liability all items of income, deduction, and credit (including capital gains
and losses) of the qualified settlement fund
in accordance with §1.671–3(a)(1); and
(iv) The reporting obligations imposed
by §1.671–4 on the trustee of a trust apply
to the administrator.
*****
Par. 4. Section 1.468B–5 is amended
by revising the section heading and adding
paragraph (c) to read as follows:
§1.468B–5 Effective dates and transition
rules applicable to qualified settlement
funds.
*****

2006–10 I.R.B.

(c) Grantor trust elections under
§1.468B–1(k)—(1) In general. A transferor may make a grantor trust election
under §1.468B–1(k) if the qualified settlement fund is established after February 3,
2006.
(2) Transition rules.
A transferor
may make a grantor trust election under
§1.468B–1(k) for a qualified settlement
fund that was established on or before
February 3, 2006, if the applicable period of limitation on filing an amended
return has not expired for both the qualified settlement fund’s first taxable year
and all subsequent taxable years and the
transferor’s corresponding taxable year or
years. A grantor trust election under this
paragraph (c)(2) requires that the returns
of the qualified settlement fund and the
transferor for all affected taxable years
are consistent with the grantor trust election. This requirement may be satisfied by
timely filed original returns or amended
returns filed before the applicable period
of limitation expires.
(3) Qualified settlement funds established by the U.S. government on or before
February 3, 2006. If the U.S. government,
or any agency or instrumentality thereof,
established a qualified settlement fund
on or before February 3, 2006, and the
fund would have been classified as a trust
all of which is treated as owned by the
U.S. government under section 671 and
the regulations thereunder without regard
to the regulations under section 468B,
then the U.S. government is deemed to
have made a grantor trust election under
§1.468B–1(k), and the election is applicable for all taxable years of the fund.
Par. 5. Section 1.468B–6 is added and
reserved to read as follows:
§1.468B–6 Escrow accounts, trusts, and
other funds used in deferred exchanges
of like-kind property under section
1031(a)(3). [Reserved].
Par. 6. Section 1.468B–7 is added to
read as follows:
§1.468B–7 Pre-closing escrows.
(a) Scope. This section provides rules
under section 468B(g) for the current taxation of income of a pre-closing escrow.
(b) Definitions. For purposes of this
section—

2006–10 I.R.B.

(1) A pre-closing escrow is an escrow
account, trust, or fund—
(i) Established in connection with the
sale or exchange of real or personal property;
(ii) Funded with a down payment,
earnest money, or similar payment that is
deposited into the escrow prior to the sale
or exchange of the property;
(iii) Used to secure the obligation of the
purchaser to pay the purchase price for the
property;
(iv) The assets of which, including any
income earned thereon, will be paid to the
purchaser or otherwise distributed for the
purchaser’s benefit when the property is
sold or exchanged (for example, by being
distributed to the seller as a credit against
the purchase price); and
(v) Which is not an escrow account or
trust established in connection with a deferred exchange under section 1031(a)(3).
(2) Purchaser means, in the case of an
exchange, the intended transferee of the
property whose obligation to pay the purchase price is secured by the pre-closing
escrow;
(3) Purchase price means, in the case
of an exchange, the required consideration
for the property; and
(4) Administrator means the escrow
agent, escrow holder, trustee, or other
person responsible for administering the
pre-closing escrow.
(c) Taxation of pre-closing escrows.
The purchaser must take into account in
computing the purchaser’s income tax liability all items of income, deduction, and
credit (including capital gains and losses)
of the pre-closing escrow. In the case of an
exchange with a single pre-closing escrow
funded by two or more purchasers, each
purchaser must take into account in computing the purchaser’s income tax liability
all items of income, deduction, and credit
(including capital gains and losses) earned
by the pre-closing escrow with respect to
the money or property deposited in the
pre-closing escrow by or on behalf of that
purchaser.
(d) Reporting obligations of the administrator. For each calendar year (or portion
thereof) that a pre-closing escrow is in existence, the administrator must report the
income of the pre-closing escrow on Form
1099 to the extent required by the information reporting provisions of subpart B,
Part III, subchapter A, chapter 61, Subti-

552

tle F of the Internal Revenue Code and the
regulations thereunder. See §1.6041–1(f)
for rules relating to the amount to be reported when fees, expenses, or commissions owed by a payee to a third party are
deducted from a payment.
(e) Examples. The provisions of this
section may be illustrated by the following
examples:
Example 1. P enters into a contract with S for the
purchase of residential property owned by S for the
price of $200,000. P is required to deposit $10,000
of earnest money into an escrow. At closing, the
$10,000 and the interest earned thereon will be credited against the purchase price of the property. The
escrow is a pre-closing escrow. P is taxable on the interest earned on the pre-closing escrow prior to closing.
Example 2. X and Y enter into a contract in which
X agrees to exchange certain construction equipment
for residential property owned by Y. The contract requires X and Y to each deposit $10,000 of earnest
money into an escrow. At closing, $10,000 and the
interest earned thereon will be paid to X and $10,000
and the interest earned thereon will be paid to Y. The
escrow is a pre-closing escrow. X is taxable on the interest earned prior to closing on the $10,000 of funds
X deposited in the pre-closing escrow. Similarly, Y
is taxable on the interest earned prior to closing on
the $10,000 of funds Y deposited in the pre-closing
escrow.

(f) Effective dates—(1) In general. This
section applies to pre-closing escrows established after February 3, 2006.
(2) Transition rule. With respect to a
pre-closing escrow established after August 16, 1986, but on or before February 3, 2006, the Internal Revenue Service
will not challenge a reasonable, consistently applied method of taxation for income earned by the escrow or a reasonable,
consistently applied method for reporting
the income.
Par. 7. Section 1.468B–8 is added and
reserved to read as follows:
§1.468B–8 Contingent-at-closing
escrows. [Reserved].
Par. 8. Section 1.468B–9 is added to
read as follows:
§1.468B–9 Disputed ownership funds.
(a) Scope. This section provides rules
under section 468B(g) relating to the current taxation of income of a disputed ownership fund.
(b) Definitions. For purposes of this
section—
(1) Disputed ownership fund means an
escrow account, trust, or fund that—

March 6, 2006

(i) Is established to hold money or property subject to conflicting claims of ownership;
(ii) Is subject to the continuing jurisdiction of a court;
(iii) Requires the approval of the court
to pay or distribute money or property to,
or on behalf of, a claimant, transferor, or
transferor-claimant; and
(iv) Is not a qualified settlement fund
under §1.468B–1, a bankruptcy estate
(or part thereof) resulting from the commencement of a case under title 11 of the
United States Code, or a liquidating trust
under §301.7701–4(d) of this chapter (except as provided in paragraph (c)(2)(ii) of
this section);
(2) Administrator means a person designated as such by a court having jurisdiction over a disputed ownership fund, however, if no person is designated, the administrator is the escrow agent, escrow holder,
trustee, receiver, or other person responsible for administering the fund;
(3) Claimant means a person who
claims ownership of, in whole or in part,
or a legal or equitable interest in, money
or property immediately before and immediately after that property is transferred
to a disputed ownership fund;
(4) Court means a court of law or equity of the United States or of any state
(including the District of Columbia), territory, possession, or political subdivision
thereof;
(5) Disputed property means money or
property held in a disputed ownership fund
subject to the claimants’ conflicting claims
of ownership;
(6) Related person means any person
that is related to a transferor within the
meaning of section 267(b) or 707(b)(1);
(7) Transferor means, in general, a person that transfers disputed property to a
disputed ownership fund, except that—
(i) If disputed property is transferred by
an agent, fiduciary, or other person acting
in a similar capacity, the transferor is the
person on whose behalf the agent, fiduciary, or other person acts; and
(ii) A payor of interest or other income
earned by a disputed ownership fund is not
a transferor within the meaning of this section (unless the payor is also a claimant);
(8) Transferor-claimant means a transferor that claims ownership of, in whole
or in part, or a legal or equitable interest in, the disputed property immediately

March 6, 2006

before and immediately after that property is transferred to the disputed ownership fund. Because a transferor-claimant
is both a transferor and a claimant, generally the terms transferor and claimant also
include a transferor-claimant. See paragraph (d) of this section for rules applicable only to transferors that are not transferor-claimants and paragraph (e) of this
section for rules applicable only to transferors that are also transferor-claimants.
(c) Taxation of a disputed ownership
fund—(1) In general. For Federal income
tax purposes, a disputed ownership fund
is treated as the owner of all assets that
it holds. A disputed ownership fund is
treated as a C corporation for purposes of
subtitle F of the Internal Revenue Code,
and the administrator of the fund must obtain an employer identification number for
the fund, make all required income tax
and information returns, and deposit all tax
payments. Except as otherwise provided
in this section, a disputed ownership fund
is taxable as—
(i) A C corporation, unless all the assets transferred to the fund by or on behalf of transferors are passive investment
assets. For purposes of this section, passive investment assets are assets of the type
that generate portfolio income within the
meaning of §1.469–2T(c)(3)(i); or
(ii) A qualified settlement fund, if all
the assets transferred to the fund by or
on behalf of transferors are passive investment assets. A disputed ownership fund
taxable as a qualified settlement fund under this section is subject to all the provisions contained in §1.468B–2, except that
the rules contained in paragraphs (c)(3),
(4), and (c)(5)(i) of this section apply in
lieu of the rules in §1.468B–2(b)(1), (d),
(e), (f) and (j).
(2) Exceptions. (i) The claimants to
a disputed ownership fund may submit
a private letter ruling request proposing
a method of taxation different than the
method provided in paragraph (c)(1) of
this section.
(ii) The trustee of a liquidating trust established pursuant to a plan confirmed by
the court in a case under title 11 of the
United States Code may, in the liquidating
trust’s first taxable year, elect to treat an escrow account, trust, or fund that holds assets of the liquidating trust that are subject
to disputed claims as a disputed ownership
fund. Pursuant to this election, creditors

553

holding disputed claims are not treated as
transferors of the money or property transferred to the disputed ownership fund. A
trustee makes the election by attaching a
statement to the timely filed Federal income tax return of the disputed ownership
fund for the taxable year for which the
election becomes effective. The election
statement must include a statement that
the trustee will treat the escrow account,
trust, or fund as a disputed ownership fund
and must include a legend, “§1.468B–9(c)
Election,” at the top of the page. The election may be revoked only upon consent of
the Commissioner by private letter ruling.
(3) Property received by the disputed
ownership fund—(i) Generally excluded
from income. In general, a disputed ownership fund does not include an amount in
income on account of a transfer of disputed
property to the disputed ownership fund.
However, the accrual or receipt of income
from the disputed property in a disputed
ownership fund is not a transfer of disputed
property to the fund. Therefore, a disputed
ownership fund must include in income all
income received or accrued from the disputed property, including items such as—
(A) Payments to a disputed ownership
fund made in compensation for late or delayed transfers of money or property;
(B) Dividends on stock of a transferor
(or a related person) held by the fund; and
(C) Interest on debt of a transferor (or a
related person) held by the fund.
(ii) Basis and holding period. In general, the initial basis of property transferred by, or on behalf of, a transferor
to a disputed ownership fund is the fair
market value of the property on the date
of transfer to the fund, and the fund’s
holding period begins on the date of the
transfer. However, if the transferor is a
transferor-claimant, the fund’s initial basis
in the property is the same as the basis
of the transferor-claimant immediately
before the transfer to the fund, and the
fund’s holding period for the property is
determined under section 1223(2).
(4) Property distributed by the disputed
ownership fund—(i) Computing gain or
loss. Except in the case of a distribution or deemed distribution described in
paragraph (e)(3) of this section, a disputed
ownership fund must treat a distribution
of disputed property as a sale or exchange
of that property for purposes of section
1001(a). In computing gain or loss, the

2006–10 I.R.B.

amount realized by the disputed ownership
fund is the fair market value of that property on the date of distribution.
(ii) Denial of deduction. A disputed
ownership fund is not allowed a deduction
for a distribution of disputed property or
of the net after-tax income earned by the
disputed ownership fund made to or on
behalf of a transferor or claimant.
(5) Taxable year and accounting
method. (i) A disputed ownership fund
taxable as a C corporation under paragraph (c)(1)(i) of this section may compute taxable income under any accounting
method allowable under section 446 and
is not subject to the limitations contained
in section 448. A disputed ownership fund
taxable as a C corporation may use any
taxable year allowable under section 441.
(ii) A disputed ownership fund taxable
as a qualified settlement fund under paragraph (c)(1)(ii) of this section may compute taxable income under any accounting
method allowable under section 446 and
may use any taxable year allowable under
section 441.
(iii) Appropriate adjustments must be
made by a disputed ownership fund or
transferors to the fund to prevent the fund
and the transferors from taking into account the same item of income, deduction, gain, loss, or credit (including capital
gains and losses) more than once or from
omitting such items. For example, if a
transferor that is not a transferor-claimant
uses the cash receipts and disbursements
method of accounting and transfers an account receivable to a disputed ownership
fund that uses an accrual method of accounting, at the time of the transfer of the
account receivable to the disputed ownership fund, the transferor must include
in its gross income the value of the account receivable because, under paragraph
(c)(3)(ii) of this section, the disputed ownership fund will take a fair market value
basis in the receivable and will not include the fair market value in its income
when received from the transferor or when
paid by the customer. If the account receivable were transferred to the disputed
ownership fund by a transferor-claimant
using the cash receipts and disbursements
method, however, the disputed ownership
fund would take a basis in the receivable
equal to the transferor’s basis, or $0, and
would be required to report the income
upon collection of the account.

2006–10 I.R.B.

(6) Unused carryovers. Upon the termination of a disputed ownership fund,
if the fund has an unused net operating
loss carryover under section 172, an unused capital loss carryover under section
1212, or an unused tax credit carryover,
or if the fund has, for its last taxable year,
deductions in excess of gross income, the
claimant to which the fund’s net assets are
distributable will succeed to and take into
account the fund’s unused net operating
loss carryover, unused capital loss carryover, unused tax credit carryover, or excess of deductions over gross income for
the last taxable year of the fund. If the
fund’s net assets are distributable to more
than one claimant, the unused net operating loss carryover, unused capital loss
carryover, unused tax credit carryover, or
excess of deductions over gross income
for the last taxable year must be allocated
among the claimants in proportion to the
value of the assets distributable to each
claimant from the fund. Unused carryovers described in this paragraph (c)(6) are
not money or other property for purposes
of paragraph (e)(3)(ii) of this section and
thus are not deemed transferred to a transferor-claimant before being transferred to
the claimants described in this paragraph
(c)(6).
(d) Rules applicable to transferors that
are not transferor-claimants. The rules
in this paragraph (d) apply to transferors
(as defined in paragraph (b)(7) of this section) that are not transferor-claimants (as
defined in paragraph (b)(8) of this section).
(1) Transfer of property. A transferor
must treat a transfer of property to a disputed ownership fund as a sale or other disposition of that property for purposes of
section 1001(a). In computing the gain or
loss on the disposition, the amount realized
by the transferor is the fair market value
of the property on the date the transfer is
made to the disputed ownership fund.
(2) Economic performance—(i) In
general. For purposes of section 461(h),
if a transferor using an accrual method
of accounting has a liability for which
economic performance would otherwise
occur under §1.461–4(g) when the transferor makes payment to the claimant or
claimants, economic performance occurs
with respect to the liability when and to the
extent that the transferor makes a transfer
to a disputed ownership fund to resolve or
satisfy that liability.

554

(ii) Obligations of the transferor. Economic performance does not occur when
a transferor using an accrual method of
accounting issues to a disputed ownership fund its debt (or provides the debt
of a related person). Instead, economic
performance occurs as the transferor (or
related person) makes principal payments
on the debt. Economic performance does
not occur when the transferor provides to
a disputed ownership fund its obligation
(or the obligation of a related person) to
provide property or services in the future or to make a payment described in
§1.461–4(g)(1)(ii)(A). Instead, economic
performance occurs with respect to such
an obligation as property or services are
provided or payments are made to the
disputed ownership fund or a claimant.
With regard to interest on a debt issued
or provided to a disputed ownership fund,
economic performance occurs as determined under §1.461–4(e).
(3) Distributions to transferors—(i)
In general. Except as provided in section 111(a) and paragraph (d)(3)(ii) of
this section, the transferor must include
in gross income any distribution to the
transferor (including a deemed distribution described in paragraph (d)(3)(iii) of
this section) from the disputed ownership
fund. If property is distributed, the amount
includible in gross income and the basis in
that property are generally the fair market
value of the property on the date of distribution.
(ii) Exception. A transferor is not required to include in gross income a distribution of money or property that it previously transferred to the disputed ownership fund if the transferor did not take into
account, for example, by deduction or capitalization, an amount with respect to the
transfer either at the time of the transfer
to, or while the money or property was
held by, the disputed ownership fund. The
transferor’s gross income does not include
a distribution of money from the disputed
ownership fund equal to the net after-tax
income earned on money or property transferred to the disputed ownership fund by
the transferor while that money or property
was held by the fund. Money distributed to
a transferor by a disputed ownership fund
will be deemed to be distributed first from
the money or property transferred to the
disputed ownership fund by that transferor,
then from the net after-tax income of any

March 6, 2006

money or property transferred to the disputed ownership fund by that transferor,
and then from other sources.
(iii) Deemed distributions. If a disputed ownership fund makes a distribution
of money or property on behalf of a transferor to a person that is not a claimant, the
distribution is deemed made by the fund to
the transferor. The transferor, in turn, is
deemed to make a payment to the actual
recipient.
(e) Rules applicable to transferor-claimants. The rules in this paragraph (e) apply to transferor-claimants (as
defined in paragraph (b)(8) of this section).
(1) Transfer of property. A transfer of
property by a transferor-claimant to a disputed ownership fund is not a sale or other
disposition of the property for purposes of
section 1001(a).
(2) Economic performance—(i) In general. For purposes of section 461(h), if
a transferor-claimant using an accrual
method of accounting has a liability for
which economic performance would otherwise occur under §1.461–4(g) when
the transferor-claimant makes payment to
another claimant, economic performance
occurs with respect to the liability when
and to the extent that the disputed ownership fund transfers money or property to
the other claimant to resolve or satisfy that
liability.
(ii) Obligations of the transferor-claimant. Economic performance
does not occur when a disputed ownership fund transfers the debt of a transferor-claimant (or of a person related
to the transferor-claimant) to another
claimant. Instead, economic performance
occurs as principal payments on the debt
are made to the other claimant. Economic performance does not occur when
a disputed ownership fund transfers to
another claimant the obligation of a transferor-claimant (or of a person related to the
transferor-claimant) to provide property or
services in the future or to make a payment
described in §1.461–4(g)(1)(ii)(A). Instead, economic performance occurs with
respect to such an obligation as property
or services are provided or payments are
made to the other claimant. With regard
to interest on a debt issued or provided
to a disputed ownership fund, economic
performance occurs as determined under
§1.461–4(e).

March 6, 2006

(3) Distributions to transferorclaimants—(i) In general. The gross
income of a transferor-claimant does
not include a distribution to the transferor-claimant (including a deemed distribution described in paragraph (e)(3)(ii)
of this section) of money or property
from a disputed ownership fund that the
transferor-claimant previously transferred
to the fund, or the net after-tax income
earned on that money or property while
it was held by the fund. If such property
is distributed to the transferor-claimant
by the disputed ownership fund, then the
transferor-claimant’s basis in the property
is the same as the disputed ownership
fund’s basis in the property immediately
before the distribution.
(ii) Deemed distributions. If a disputed
ownership fund makes a distribution of
money or property to a claimant or makes
a distribution of money or property on behalf of a transferor-claimant to a person
that is not a claimant, the distribution is
deemed made by the fund to the transferor-claimant. The transferor-claimant, in
turn, is deemed to make a payment to the
actual recipient.
(f) Distributions to claimants other than
transferor-claimants. Whether a claimant
other than a transferor-claimant must include in gross income a distribution of
money or property from a disputed ownership fund generally is determined by reference to the claim in respect of which the
distribution is made.
(g) Statement to the disputed ownership
fund and the Internal Revenue Service with
respect to transfers of property other than
cash—(1) In general. By February 15 of
the year following each calendar year in
which a transferor (or other person acting
on behalf of a transferor) makes a transfer of property other than cash to a disputed ownership fund, the transferor must
provide a statement to the administrator of
the fund setting forth the information described in paragraph (g)(3) of this section.
The transferor must attach a copy of this
statement to its return for the taxable year
of transfer.
(2) Combined statements. If a disputed
ownership fund has more than one transferor, any two or more transferors may provide a combined statement to the administrator. If a combined statement is used,
each transferor must attach a copy of the
combined statement to its return and main-

555

tain with its books and records a schedule describing each asset that the transferor
transferred to the disputed ownership fund.
(3) Information required on the statement. The statement required by paragraph (g)(1) of this section must include
the following information—
(i) A legend, “§1.468B–9 Statement,”
at the top of the first page;
(ii) The transferor’s name, address, and
taxpayer identification number;
(iii) The disputed ownership fund’s
name, address, and employer identification number;
(iv) A statement declaring whether the
transferor is a transferor-claimant;
(v) The date of each transfer;
(vi) A description of the property (other
than cash) transferred; and
(vii) The disputed ownership fund’s basis in the property and holding period on
the date of transfer as determined under
paragraph (c)(3)(ii) of this section.
(h) Examples. The following examples
illustrate the rules of this section:
Example 1. (i) X Corporation petitions the United
States Tax Court in 2006 for a redetermination of its
tax liability for the 2003 taxable year. In 2006, the
Tax Court determines that X Corporation is liable for
an income tax deficiency for the 2003 taxable year.
X Corporation files an appellate bond in accordance
with section 7485(a) and files a notice of appeal with
the appropriate United States Court of Appeals. In
2006, the Court of Appeals affirms the decision of the
Tax Court and the United States Supreme Court denies X Corporation’s petition for a writ of certiorari.
(ii) The appellate bond that X Corporation files
with the court for the purpose of staying assessment
and collection of deficiencies pending appeal is not
an escrow account, trust or fund established to hold
property subject to conflicting claims of ownership.
Although X Corporation was found liable for an income tax deficiency, ownership of the appellate bond
is not disputed. Rather, the bond serves as security
for a disputed liability. Therefore, the bond is not a
disputed ownership fund.
Example 2. (i) The facts are the same as Example
1, except that X Corporation deposits United States
Treasury bonds with the Tax Court in accordance with
section 7845(c)(2) and 31 U.S.C. 9303.
(ii) The deposit of United States Treasury bonds
with the court for the purpose of staying assessment
and collection of deficiencies while X Corporation
prosecutes an appeal does not create a disputed ownership fund because ownership of the bonds is not disputed.
Example 3. (i) Prior to A’s death, A was the insured under a life insurance policy issued by X, an
insurance company. X uses an accrual method of accounting. Both A’s current spouse and A’s former
spouse claim to be the beneficiary under the policy
and entitled to the policy proceeds ($1 million). In
2005, X files an interpleader action and deposits $1
million into the registry of the court. On June 1, 2006,

2006–10 I.R.B.

a final determination is made that A’s current spouse
is the beneficiary under the policy and entitled to the
money held in the registry of the court. The interest earned on the registry account is $12,000. The
money in the registry account is distributed to A’s current spouse.
(ii) The money held in the registry of the court
consisting of the policy proceeds and the earnings
thereon are a disputed ownership fund taxable as if
it were a qualified settlement fund. See paragraphs
(b)(1) and (c)(1)(ii) of this section. The fund’s gross
income does not include the $1 million transferred to
the fund by X, however, the $12,000 interest is included in the fund’s gross income in accordance with
its method of accounting. See paragraph (c)(3)(i) of
this section. Under paragraph (c)(4)(ii) of this section, the fund is not allowed a deduction for a distribution to A’s current spouse of the $1 million or the
interest income earned by the fund.
(iii) X is a transferor that is not a transferor-claimant. See paragraphs (b)(7) and (b)(8)
of this section.
(iv) Whether A’s current spouse must include in
income the $1 million insurance proceeds and the
interest received from the fund is determined under
other provisions of the Internal Revenue Code. See
paragraph (f) of this section.
Example 4. (i) Corporation B and unrelated individual C claim ownership of certain rental property.
B uses an accrual method of accounting. The rental
property is property used in a trade or business. B
claims to have purchased the property from C’s father. However, C asserts that the purported sale to B
was ineffective and that C acquired ownership of the
property through intestate succession upon the death
of C’s father. For several years, B has maintained and
received the rent from the property.
(ii) Pending the resolution of the title dispute between B and C, the title to the rental property is transferred to a court-supervised registry account on February 1, 2005. On that date the court appoints R as
receiver for the property. R collects the rent earned
on the property and hires employees necessary for the
maintenance of the property. The rents paid to R cannot be distributed to B or C without the court’s approval.

(iii) On June 1, 2006, the court makes a final determination that the rental property is owned by C.
The court orders C to refund to B the purchase price
paid by B to C’s father plus interest on that amount
from February 1, 2005. The court also orders that
a distribution be made to C of all funds held in the
court registry consisting of the rent collected by R and
the income earned thereon. C takes title to the rental
property.
(iv) The rental property and the funds held by the
court registry are a disputed ownership fund under
paragraph (b)(1) of this section. The fund is taxable
as if it were a C corporation because the rental property is not a passive investment asset within the meaning of paragraph (c)(1)(i) of this section.
(v) The fund’s gross income does not include the
value of the rental property transferred to the fund
by B. See paragraph (c)(3)(i) of this section. Under
paragraph (c)(3)(ii) of this section, the fund’s initial
basis in the property is the same as B’s adjusted basis immediately before the transfer to the fund and
the fund’s holding period is determined under section 1223(2). The fund’s gross income includes the
rents collected by R and any income earned thereon.
For the period between February 1, 2005, and June
1, 2006, the fund may be allowed deductions for depreciation and for the costs of maintenance of the
property because the fund is treated as owning the
property during this period. See sections 162, 167,
and 168. Under paragraph (c)(4)(ii) of this section,
the fund may not deduct the distribution to C of the
property, or the rents (or any income earned thereon)
collected from the property while the fund holds the
property. No gain or loss is recognized by the fund
from this distribution or from the fund’s transfer of
the rental property to C pursuant to the court’s determination that C owns the property. See paragraphs
(c)(4)(i) and (e)(3) of this section.
(vi) B is the transferor to the fund. Under paragraphs (b)(8) and (e)(1) of this section, B is a transferor-claimant and does not recognize gain or loss under section 1001(a) on transfer of the property to the
disputed ownership fund. The money and property
distributed from the fund to C is deemed to be distributed first to B and then transferred from B to C.
See paragraph (e)(3)(ii) of this section. Under paragraph (e)(2)(i) of this section, economic performance

occurs when the disputed ownership fund transfers
the property and any earnings thereon to C. The income tax consequences of the deemed transfer from
B to C as well as the income tax consequences of C’s
refund to B of the purchase price paid to C’s father
and interest thereon are determined under other provisions of the Internal Revenue Code.

(i) [Reserved]
(j) Effective dates—(1) In general.
This section applies to disputed ownership
funds established after February 3, 2006.
(2) Transition rule. With respect to a
disputed ownership fund established after
August 16, 1986, but on or before February 3, 2006, the Internal Revenue Service will not challenge a reasonable, consistently applied method of taxation for income earned by the fund, transfers to the
fund, and distributions made by the fund.
PART 602 — OMB CONTROL
NUMBERS UNDER THE PAPERWORK
REDUCTION ACT
Par. 9. The authority citation for part
602 continues to read as follows:
Authority: 26 U.S.C. 7805.
Par. 10. In §602.101, paragraph (b)
is amended by adding entries in numerical
order to read, in part, as follows:
§602.101 OMB Control numbers.
*****
(b) * * *

CFR part or section where
identified and described

Current OMB
control No.

*****
1.468B–1
1.468B–9
*****

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

Mark E. Matthews,
Deputy Commissioner for
Services and Enforcement.
Approved January 30, 2006.

2006–10 I.R.B.

Eric Solomon,
Acting Deputy Assistant
Secretary of the Treasury.
(Filed by the Office of the Federal Register on February 3,
2006, 8:45 a.m., and published in the issue of the Federal
Register for February 7, 2006, 71 F.R. 6197)

556

1545–1631
1545–1631

Section 482.—Allocation
of Income and Deductions
Among Taxpayers
Federal short-term, mid-term, and long-term rates
are set forth for the month of March 2006. See Rev.
Rul. 2006-10, page 557.

March 6, 2006