IRS FINALIZES ENVIRONMENTAL REMEDIATION TRUST REGULATIONS.

The IRS has published final regulations (T.D. 8668) under section 7701 on the classification of environmental cleanup trusts. The final rules clarify the proposed regs in some respects; they are effective as of May 1, 1996 -- but may be applied earlier if certain conditions are met. (For a summary of the proposed regs, see TaxPractice, Aug. 14, 1995, p. 202)

The regulations describe when an environmental remediation trust (ERT) will be classified as a trust for federal tax purposes. Generally, such a trust collects and disburses funds for cleaning up waste sites. Eligible contributors to the trust must have potential liability for cleaning up a site. An ERT may not be a qualified settlement fund under reg. section 1.468B-1(a).

The final regulations clarify that eligible contributors to an ERT include not only persons with "potential" liability, but also those with "actual" liability for a cleanup. The regs do not address the treatment of contributors who are released from liability by a governmental authority. Nor do they address the timing of deductions for contributions to a trust, the treatment of interest earned by the trust, or other federal tax consequences of the trust.

Accepting a commentator's suggestion, the IRS modified the effective date of the regulations. In general, they apply to trusts that meet the definition of an ERT and that are formed on or after May 1, 1996. Also, the regs may be relied on by a trust formed before May 1 if the trust has at all times met all the requirements of the final regulations and the grantors reported items of income and deduction consistent with the final regs on original or amended returns. Trusts that do not meet that limited rule -- for example, one that has met the regs' requirements for some time, but not since inception -- may apply for a ruling on whether the regs may be applied to the trust.

FULL TEXT: 61 F.R. 19189-19192; Doc 96-13077 (4 pages)