n-10-04.pdf

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Part III - Administrative, Procedural, and Miscellaneous

WHFIT Transition Guidance

Notice 2010-4

SECTION I: PURPOSE
This notice provides guidance to trustees, middlemen and trust interest holders
(TIHs) of widely held fixed investment trusts (WHFITs) regarding the WHFIT reporting
rules in § 1.671-5 of the Income Tax Regulations. Specifically, this notice provides (1)
guidance on transition payments (as defined in Section III below) and limited penalty
relief for trustees and middlemen required to file Forms 1099 and furnish written tax
information statements under the widely held mortgage trust (WHMT) safe harbor in §
1.671-5(g); (2) guidance regarding the TIHs’ treatment of the transition payments; (3)
guidance regarding the inclusion of WHFIT interest, dividend, and miscellaneous
income in the summary totals on Forms 1099; (4) guidance regarding the format of the
written tax information statement provided to TIHs under § 1.671-5(e); and (5) guidance
regarding the obligations of trustees and middlemen with respect to reporting under the
WHFIT rules for certain non-mortgage WHFITs (NMWHFITs).
SECTION II: BACKGROUND
Section 1.671-5 provides the WHFIT reporting rules. A WHFIT is an
arrangement classified as a trust under § 301.7701-4(c), provided that: (i) the trust is a
United States person under § 7701(a)(30)(E); (ii) the beneficial owners of the trust are

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treated as owners under subpart E, part I, subchapter J, chapter 1 of the Code; and (iii)
at least one interest in the trust is held by a middleman. See § 1.671-5(b)(22). A
WHMT is a WHFIT, the assets of which consist only of mortgages, regular interests in a
REMIC, interests in another WHMT, reasonably required reserve funds, amounts
received with respect to these assets, and during a brief initial funding period, cash and
short-term contracts to purchase these assets. See § 1.671-5(b)(23).
Trustees of fixed investment trusts frequently do not know the identities of the
beneficial owners of the trust interests because the trust interests are often held in the
name of a middleman. Thus, trustees are unable to communicate tax information
directly to the beneficial owners of the trust interests. The WHFIT reporting rules in
§ 1.671-5 provide rules that specifically require the sharing of tax information among
trustees, middlemen, and beneficial owners of the trust interests. To accomplish this,
§ 1.671-5 generally requires trustees to make trust tax information available to
middlemen. Sections 1.671-5(d) and (e) require middlemen, and in some cases,
trustees, to file a Form 1099 with the IRS and to furnish a written tax information
statement to a TIH for the trust interests that the trustee or middleman holds on behalf
of, or for the account of, the TIH.
Section 1.671-5(n) provides that the WHFIT reporting rules are applicable
January 1, 2007. The preamble to the final regulations under § 1.671-5 (T.D. 9308,
2007-8 I.R.B. 523 [71 FR 78351] (December 29, 2006)) informed trustees and
middlemen that the IRS would not impose any penalties that would otherwise apply as a
result of a failure to comply with the WHFIT reporting rules with respect to the 2007

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calendar year in cases where the trustee or middleman was unable to change its
information reporting systems to comply with the WHFIT reporting rules. In September
of 2008, the IRS and the Treasury Department issued Notice 2008-77, 2008-40 I.R.B.
814, which informed trustees and middlemen of WHFITs that the IRS would not assert
penalties as a result of a failure to comply with the WHFIT reporting rules with respect to
calendar year 2008.
Except as provided in Section III below, trustees and middlemen must comply
with the WHFIT reporting rules for calendar year 2009.
SECTION III: TRANSITION PAYMENTS AND LIMITED PENALTY RELIEF FOR
TRUSTEES AND MIDDLEMEN REPORTING UNDER THE WHMT SAFE HARBOR
The WHMT safe harbor in § 1.671-5(g) provides safe harbor reporting rules for
trustees of certain WHMTs. If a trustee reports WHMT items in accordance with the
safe harbor, the information provided by a middleman or trustee with respect to WHMT
items on the Forms 1099 required to be filed with the IRS and on the written tax
information statement furnished to the TIH must be determined as provided in
§ 1.671-5(g)(2). For the purpose of determining the timing of when an item of trust
income that is attributable to a TIH is included on the Form 1099 filed for that TIH, the
WHMT safe harbor looks to the record date for the payment rather than the actual
payment date. See § 1.671-5(g)(2)(ii). Further, the regulations require that a TIH be
provided with information regarding the amount of the gross income and separately
provided with information regarding the amount of the expenses of a WHMT that are
attributable to the TIH. See § 1.671-5(g)(1)(iii)(C).

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Prior to the effective date of the WHFIT reporting rules, many trustees and
middlemen reported income from a WHMT to a beneficial owner based on payment
dates and amounts rather than based on record dates and amounts as required under
the WHMT safe harbor. As a result, when a trustee or middleman transitions to the new
reporting rules, some income might not be reported to the IRS on Forms 1099 and
some income and expense information may not be furnished to TIHs. These omissions
could occur where the record date for a payment falls in a year prior to the first year of
reporting under the WHMT safe harbor and the payment date falls in the first year of
reporting under the safe harbor. For example, income received by many WHMTs for
December 2008 and payable to record holders as of December 31, 2008, was paid on
January 15, 2009. The income and expenses which relate to the December 31
st
record
date and January 15
th
payment date were not included on the Form 1099 or written tax
information statement for 2008 under the reporting method used by the trustees and
middlemen for 2008 if the trustees and middlemen were reporting based on the
payment date, which occurred in 2009. If the trustees or middlemen transition to the
WHMT safe harbor for 2009, absent the rules contained in this Section III, the income
and expenses also would not be included by trustees and middlemen in calculating trust
income for 2009 under the safe harbor because they would be reporting based on the
record date, which occurred in 2008.
To address this problem, trustees and middlemen must report as provided in this
Section III in the first year that the trustee or middleman transitions from reporting based
on payment dates to reporting based on record dates under the WHMT safe harbor.

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For purposes of this Notice, a Transition Payment is any payment (gross income less
applicable expenses) that has (1) a payment date in the first year that the trustee or
middleman transitions to reporting under § 1.671-5(g)(2) of the WHMT safe harbor
(“transition year”); and (2) a record date in a year prior to the transition year. Trustees
and middlemen that are transitioning to reporting under the WHMT safe harbor must
include information with respect to Transition Payments on Forms 1099 filed with the
IRS for the transition year, if information for these payments has not previously been
included on a Form 1099 for a prior year. Additionally, the trustee or middleman must
include information with respect to Transition Payments in the written tax information
statement furnished to the TIH for the transition year. Although § 1.671-5(g)(1)(iii)(C)
requires middlemen and trustees reporting under the WHMT safe harbor to provide
TIHs with information regarding gross income and separately provide information
regarding the expenses of the WHMT attributable to the TIH, trustees and middlemen
may report net amounts with respect to Transition Payments. The trustee or middleman
need not separately identify the information with respect to the Transition Payments on
the Form 1099 or on the written tax information statement.
Trustees and middlemen also must provide the TIH with a statement that
explains that (i) the WHFIT is transitioning from reporting based on payment dates to
reporting based on record dates to comply with the newly applicable WHFIT reporting
rules; (ii) to effect this transition, the information reported on the statement and to the
IRS includes information with respect to Transition Payments and that a Transition
Payment is a payment that had a record date in a prior year and payment date in the

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current year, which was not previously included on a prior Form 1099; and (iii) the TIH
must include the Transition Payment in computing its taxable income for the transition
year as a § 481(a) adjustment to prevent omission of income caused by the reporting
transition (see Section IV below).
The IRS and the Treasury Department recognize that trustees and middlemen
may not have adequate time to modify their reporting systems to report Transition
Payments that span the 2008 and 2009 calendar years as required under this Section
III. Accordingly, the IRS will not impose any penalties on trustees and middlemen for
2009 for a failure to comply with §§ 1.671-5(d), (e), and (g)(2) with respect to TIHs in a
WHMT. However, trustees and middlemen must continue to comply with §§ 6041
through 6050W to the extent applicable, and this Notice does not provide penalty relief
with respect to a failure to comply with those reporting sections. In addition, a trustee or
middleman must report Transition Payments as required under this Section III in the first
year that the trustee or middleman transitions to reporting under the WHMT safe harbor,
regardless of whether the trustee transitions for 2009 or 2010.
SECTION IV: TREATMENT OF TRANSITION PAYMENTS BY THE TIHs
A change from recognizing trust income in the year of the payment date to the
year of the record date in accordance with the transition to record date reporting under
the WHMT safe harbor is a change in method of accounting under § 446(e) and
§ 1.446-1(e)(2)(ii)(a). A taxpayer generally must secure the consent of the
Commissioner before changing a method of accounting for federal income tax
purposes. Section 446(e) and § 1.446-1(e)(2)(i). Section 1.446-1(e)(3)(ii) authorizes

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the Commissioner to prescribe administrative procedures setting forth the limitations,
terms, and conditions deemed necessary to permit a taxpayer to obtain consent to
change a method of accounting. Section 481(a) requires those adjustments necessary
to prevent amounts from being duplicated or omitted when the taxpayer’s taxable
income is computed under a method of accounting different from the method used to
compute taxable income for the preceding taxable year.
In accordance with § 1.446-1(e)(3)(ii), the Commissioner hereby grants consent
to a cash method TIH who included income on its individual income tax return
consistent with the amount reported on a Form 1099 for the year prior to the transition
year, to change its method of accounting for trust income from recognizing the income
based on the payment date to recognizing the income based on the record date in
accordance with the transition to record date reporting under the WHMT safe harbor.
The Transition Payment reported on a TIH’s Form 1099 and written tax information
statement for the transition year is an adjustment required under § 481(a). The entire
amount of the § 481(a) adjustment (i.e., the Transition Payment) must be taken into
account in computing a TIH’s taxable income for the transition year. A TIH who
changes its method of accounting for the trust income in accordance with this section
does not need to file a Form 3115, Application for Change in Accounting Method.
SECTION V: WHFIT INTEREST AND DIVIDEND INCOME MAY BE INCLUDED IN
THE SUMMARY TOTALS PROVIDED TO THE IRS ON FORMS 1099
Middlemen and trustees have also indicated that they provide the IRS with a
summary total for interest, dividends and miscellaneous payments made to a TIH during

8
the calendar year on the relevant Form 1099. These middlemen and trustees have
questioned whether including WHFIT items of income in these summary totals is
permissible under § 1.671-5(d) or whether a separate Form 1099 must be filed to report
WHFIT income to the IRS. This notice informs middlemen and trustees that WHFIT
income that is appropriately reported on a Form 1099-INT, a Form 1099-DIV, or a Form
1099-MISC under § 1.671-5(d) may be included in the summary total on the Form 1099
filed with the IRS.
SECTION VI: PROCEDURES FOR FURNISHING THE WRITTEN TAX
INFORMATION STATEMENT TO BENEFICIAL OWNERS UNDER REGULATION
§ 1.671-5
(a) Electronic statements.

Section 1.671-5(k) provides that the information reporting sections in subpart B,
part III, subchapter A, chapter 61, of the Code (§§ 6041 through 6050W) and the
regulations thereunder are incorporated into the WHFIT rules to the extent those
provisions are not inconsistent with the WHFIT reporting rules.
Effective March 9, 2002, § 401 of the Job Creation and Worker Assistance Act of
2002, an off-Code provision, removed the paper delivery impediment by authorizing all
payee statements required by §§ 6041 through 6050W to be furnished electronically.
Additionally, § 4.5.1 of Rev. Proc. 2008-36, 2008-33 I.R.B. 340, provides that if a person
is required to furnish a written statement (Copy B or acceptable substitute) to a
recipient, then the statement may be furnished electronically instead of on paper.
Provided that the trustee or middleman has followed the rules and procedures outlined

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in § 4.5.1 of Rev. Proc. 2008-36, a trustee or middleman may provide electronically the
written tax information statement required to be furnished to a beneficial owner under
§ 1.671-5(e).
(b) Composite statements
.

Section 4.2.1 of Rev. Proc. 2008-36 indicates that a composite recipient
statement may be used for certain Forms 1099 and provides the rules for providing
such a composite statement. Composite statements that meet the requirements of
§ 4.2.1 of Rev. Proc. 2008-36 may be used to provide the WHFIT information required
to be furnished to beneficial owners under the WHFIT reporting rules, provided that the
information required to be provided to the beneficial owner that is not required to be
reported to the IRS on Forms 1099 also is included in an accompanying statement.
(c) Summary totals
.

As noted above, it is permissible for middlemen and trustees to include income
from a WHFIT in the summary totals on Forms 1099-INT, Forms 1099-DIV, and Forms
1099-MISC, when these forms are provided to the IRS. Middlemen and trustees may
also include income from a WHFIT in a summary total provided to a beneficial owner,
but only if the summary total is accompanied by sufficient information to enable the
beneficial owner to properly report its items of income, deduction and credits from the
WHFIT on its federal income tax return and such information satisfies the requirements
of § 1.671-5(e) as modified by the reporting safe harbors in §§ 1.671-5(f) and (g) and for
the transition year, satisfies Section III of this Notice.
However, the deadline for furnishing WHFIT information to a TIH may differ from

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that for furnishing information with respect to other securities that the middleman may
hold for the TIH. Where WHFIT information is included in a summary total with
information regarding securities that are required to be reported at an earlier date, the
inclusion of WHFIT information on the statement does not alter the earlier deadline.
Additionally, if the amount of WHFIT income is determined to be different than what was
reported on the earlier date, a corrected Form 1099 must be sent to the TIH.
SECTION VII: FURNISHING TAX INFORMATION PACKAGES FOR CERTAIN
NMWHFITS
There are a number of royalty trusts and commodity trusts that meet the
definition of a WHFIT. The IRS and the Treasury Department have been asked to
clarify the application of the WHFIT rules with respect to furnishing TIHs in a royalty
trust or a commodity trust with information necessary to properly report the tax
consequences of their ownership interest in the trust. Under the structure of the WHFIT
reporting rules, trustees are to make trust information available to middlemen. See
§ 1.671-5(c). The middlemen are then required to provide Forms 1099 to the IRS and
to furnish written tax information statements to TIHs on whose behalf or account the
middleman holds an interest in the WHFIT or acts as an intermediary. See
§§ 1.671-5(d) and (e).
TIHs in royalty and commodity trusts need certain information (e.g., cost
depletion schedules) in order for them to properly report the tax consequences of
ownership of a trust interest. Historically, some royalty trusts have distributed annual
tax packages or booklets to TIHs that included this information. In some cases, the

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trustee of a royalty trust makes this information available on an Internet website.
Middlemen are concerned that the WHFIT rules now require them to publish and
mail this information, which was formerly provided by the trustees of these trusts.
Middlemen have inquired whether they can provide this additional information by
providing a TIH with the address of an Internet website where the information can be
found. Until further guidance is issued, the IRS and the Treasury Department have
determined that providing the TIH of a royalty or commodity trust with the address of an
Internet website where the information can be found is sufficient to meet the
requirements of § 1.671-5(e) if the trustee or middleman also informs the TIH that a
written tax information package will be provided if requested and the middleman or
trustee does in fact furnish a written package if requested. This does not, however,
relieve trustees and middlemen of any requirement to provide the IRS and TIHs with
individualized calculation of the items of income that are required to be reported to the
IRS on a Form 1099.
It has been suggested that the IRS and the Treasury Department clarify the
application of the WHFIT reporting rules to royalty and commodity trusts. One
suggested clarification is to limit the burden on middlemen to providing the IRS with
appropriate Forms 1099 and providing TIHs with statements regarding the information
provided on the Form 1099, and to require trustees to maintain an Internet website
capable of providing investor-specific information for other items that are required to be
provided to the TIH under § 1.671-5(e) but are not required to be included on the Form
1099. The IRS and the Treasury Department request comments regarding this

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suggestion and also welcome any alternative suggestions on how trustees and
middlemen should share the reporting burden. The IRS and the Treasury Department
also request comments on whether there are other types of NMWHFITs from which
TIHs need significant information to report the tax consequences of ownership of an
interest in the NMWHFIT on their individual tax returns and suggestions on how this
information could best be provided.
Comments should include a reference to Notice 2010-4. Send submissions to
CC:PA:LPD:RU (Notice 2010-4), Room 5203, Internal Revenue Service, P.O. Box
7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-
delivered Monday through Friday between the hours of 8:00 a.m. and 4:00 p.m. to
CC:PA:LPD:RU (Notice 2010-4) , Courier's Desk, Internal Revenue Service, 1111
Constitution Avenue, NW, Washington, DC 20224, or sent electronically via the
following email address: Comments@ irscounsel.treas.gov. Please include the notice
number 2010-4 in the subject line of any electronic communication. All materials
submitted will be available for public inspection and copying.
SECTION VIII: EFFECTIVE DATE
This notice is effective on December 17, 2009.
SECTION IX: DRAFTING INFORMATION
The principal author of this notice is Michala P. Irons of the Office of Associate
Chief Counsel (Passthroughs & Special Industries). For further information regarding
this notice contact Michala P. Irons at (202) 622-3050 (not a toll-free call).