n-98-25.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part III - Administrative, Procedural, and Miscellaneous
Election to Continue To Treat Trust as a United States Person
Notice 98-25
SECTION 1. PURPOSE
This notice provides guidance regarding the election under
§ 1161 of the Taxpayer Relief Act of 1997, Pub. L. No. 105-34,
111 Stat. 788 (1997) (Taxpayer Relief Act). Section 1161(a)
provides that to the extent prescribed in regulations by the
Secretary of the Treasury or his delegate, a trust that was in
existence on August 20, 1996 (other than a trust treated as owned
by the grantor under subpart E of part I of subchapter J of
chapter 1 of the Internal Revenue Code of 1986), and that was
treated as a United States person on August 19, 1996, may elect
to continue to be treated as a United States person
notwithstanding § 7701(a)(30)(E). The Internal Revenue Service
and the Department of the Treasury will incorporate the guidance
contained in this notice in regulations. Accordingly, trusts
should follow the procedures set forth in this notice.
SECTION 2. BACKGROUND
Prior to the Small Business Job Protection Act of 1996,
Pub. L. 104-188, 110 Stat. 1755 (1996) (SBJP Act), the status of
a trust as domestic or foreign turned upon the subjective
determination of whether the trust was more comparable to a
resident or a nonresident alien individual. See Rev. Rul.
60-181, 1960-1 C.B. 257, citing B.W. Jones Trust v. Commissioner,
46 B.T.A. 531 (1942), aff'd, 132 F.2d 914 (4th Cir. 1943) (prior

-2-
As originally enacted by the SBJP Act, new
1
§ 7701(a)(30)(E)(ii) required one or more United States
fiduciaries to have the authority to control all substantial
decisions of the trust. The Taxpayer Relief Act substituted the
word "persons" for the word "fiduciaries."
law).
Section 1907(a) of the SBJP Act amended § 7701(a)(30) and
(31) of the Code to provide more objective criteria for
determining the status of a trust. New § 7701(a)(30)(E) provides
that a trust will be treated as a domestic trust if: (1) a court
within the United States is able to exercise primary supervision
over the administration of the trust, and (2) one or more United
States persons have the authority to control all substantial
1
decisions of the trust. New § 7701(a)(31) provides that a
foreign trust is any trust that is not a domestic trust.
New § 7701(a)(30) and (31) apply in determining the status
of a trust for taxable years beginning after December 31, 1996.
A trust may, however, elect pursuant to § 1907(a)(3)(B) of the
SBJP Act to have the new criteria apply to the first taxable year
of the trust ending after August 20, 1996 (the date of enactment
of the SBJP Act).
A trust that qualified as a domestic trust under prior law
could fail to qualify as a domestic trust under new
§ 7701(a)(30)(E). Thus, solely due to the change in law, a
domestic trust could become a foreign trust as of the first day
of its first taxable year beginning after December 31, 1996.
Such a change may have significant adverse tax consequences. A
nongrantor trust whose status changed from domestic to foreign

-3-
prior to August 5, 1997 (the effective date of the repeal of
§ 1491), was treated for purposes of § 1491 as having
transferred, upon becoming a foreign trust, all of its assets to
a foreign trust, and therefore may have been subject to the
§ 1491 excise tax. A nongrantor trust whose status changed from
domestic to foreign on or after August 5, 1997 (the effective
date of § 684) is treated as having transferred all of its assets
to a foreign trust and must recognize as gain the excess of the
fair market value of the property transferred over its adjusted
basis under § 684.
To avoid the change from domestic to foreign status, a
domestic trust needed to amend its provisions to meet the
definition set forth in new § 7701(a)(30)(E) by the first day of
its first taxable year beginning after December 31, 1996. To
assist domestic trusts that may have had difficulty conforming to
the new domestic trust criteria, the Service published Notice
96-65, 1996-2 C.B. 232. That notice permits a domestic trust in
existence on August 20, 1996, to continue to file tax returns as
a domestic trust for taxable years beginning after December 31,
1996, notwithstanding the status of the trust under new
§ 7701(a)(30)(E), if certain conditions are satisfied. See also
§ 1601(i)(4) of the Taxpayer Relief Act. To obtain the relief
provided in Notice 96-65, a trust is required to: (1) initiate
modification of the trust to conform to new
§ 7701(a)(30)(E) by the due date (including extensions) for
filing the trust's income tax return for its first taxable year

-4-
beginning after December 31, 1996; (2) complete the modification
within two years of that date; and (3) attach a statement to the
trust’s income tax return, as described in Notice 96-65.
Subsequent to the publication of Notice 96-65, Congress
enacted § 1161 of the Taxpayer Relief Act. Section 1161 allows a
trust that was in existence on August 20, 1996 (other than a
trust treated as owned by the grantor), and that was treated as a
domestic trust on August 19, 1996, to elect to continue treatment
as a domestic trust, regardless of the result of the application
of new § 7701(a)(30)(E) to the trust.
SECTION 3. TRUSTS ELIGIBLE TO MAKE THE ELECTION
.01 Basic Rule.
A trust that was in existence on August 20, 1996, and that
was treated as a domestic trust on August 19, 1996, as provided
in section 3.02, may elect to continue treatment as a domestic
trust notwithstanding § 7701(a)(30)(E). This election is not
available to a trust that was wholly-owned by its grantor under
subpart E, part I, subchapter J, chapter 1, of the Code on August
20, 1996. (Wholly-owned grantor trusts may, however, follow the
procedures in Notice 96-65.) The election is available to a
trust if only a portion of the trust was treated as owned by the
grantor under subpart E on August 20, 1996. If a partially-owned
grantor trust makes the election, the election is effective for
the entire trust. Also, a trust may not make the election if the
trust has made an election pursuant to § 1907(a)(3)(B) of the
SBJP Act to apply the new trust criteria to the first taxable

-5-
year of the trust ending after August 20, 1996, because that
election, once made, is irrevocable.
.02 Determining Whether a Trust was Treated as a Domestic
Trust on August 19, 1996
(1) Trusts Filing Form 1041 for the Taxable Year that
Includes August 19, 1996
For purposes of the election, a trust is considered to have
been treated as a domestic trust on August 19, 1996, if: (i) the
trustee filed a Form 1041, U.S. Income Tax Return for Estates and
Trusts, for the trust for the period that includes August 19,
1996 (and did not file a Form 1040NR, U.S. Nonresident Alien
Income Tax Return, for that year); and (ii) the trust had a
reasonable basis (within the meaning of § 6662) under the prior
law for reporting as a domestic trust for that period.
(2) Trusts Not Filing a Form 1041
Some domestic trusts are not required to file Form 1041.
For example, group trusts described in Rev. Rul. 81-100, 1981-1
C.B. 326, are not required to file Form 1041. Also, a domestic
trust whose gross income for the taxable year is less than the
amount required for filing an income tax return and that has no
taxable income is not required to file a Form 1041. Section
6012(a)(4).
For purposes of the election, a trust that filed neither a
Form 1041 nor a Form 1040NR for the period that includes August
19, 1996, will be considered to have been treated as a domestic
trust on August 19, 1996, if the trust had a reasonable basis
(within the meaning of § 6662) under prior law (i) for being

-6-
treated as a domestic trust for that period and (ii) for filing
neither a Form 1041 nor a Form 1040NR for that period.
SECTION 4. PROCEDURE FOR MAKING THE ELECTION
.01 Required Statement.
To make the election, a statement must be filed with the
Service in the manner and time described in this notice. The
statement must be entitled "Election to Remain a Domestic Trust
under § 1161 of the Taxpayer Relief Act of 1997," be signed under
penalties of perjury by at least one trustee of the trust, and
contain the following information:
(1) A statement that the trust is electing to continue to
be treated as a domestic trust under § 1161 of the Taxpayer
Relief Act of 1997;
(2) A statement that the trustee had a reasonable basis
(within the meaning of § 6662) under prior law for treating the
trust as a domestic trust on August 19, 1996. (The trustee need
not explain the reasonable basis on the election statement);
(3) A statement either that the trust filed a Form 1041
treating the trust as a domestic trust for the period that
includes August 19, 1996, (and that the trust did not file a Form
1040NR for that period), or that the trust was not required to
file a Form 1041 or a Form 1040NR for the period that includes
August 19, 1996, with an accompanying brief explanation as to why
a Form 1041 was not required to be filed; and
(4) The name, address, and employer identification number
of the trust.

-7-
.02 Filing the Required Statement with the Service
Except as provided below, the trust must attach the
statement to a Form 1041. The statement may be attached to
either the Form 1041 that is filed for the first taxable year of
the trust beginning after December 31, 1996 (1997 taxable year),
or to the Form 1041 filed for the first taxable year of the trust
beginning after December 31, 1997 (1998 taxable year). The
statement, however, must be filed no later than the due date for
filing a Form 1041 for the 1998 taxable year, plus extensions.
The election will be effective for the 1997 taxable year, and
thereafter, until revoked or terminated. If the trust has
already filed a Form 1041 for the 1997 taxable year without the
statement attached, the statement should be attached to the Form
1041 filed for the 1998 taxable year.
If the trust has insufficient gross income and no taxable
income for its 1997 or 1998 taxable year, or both, and therefore
is not required to file a Form 1041 for either or both years, the
trust must make the election by filing a Form 1041 for either the
1997 or 1998 taxable year with the statement attached (even
though not otherwise required to file a Form 1041 for that year).
The trust should only provide on the Form 1041 the trust’s name,
name and title of fiduciary, address, employer identification
number, date created, and type of entity. The statement must be
attached to a Form 1041 that is filed no later than October 15,
1999.
If the trust files a Form 1040NR for the 1997 taxable year

-8-
based on application of new § 7701(a)(30)(E) to the trust, and
satisfies Section 3.01 of this notice, in order for the trust to
make the election the trust must file an amended Form 1040NR
return for the 1997 taxable year. The trust must note on the
amended Form 1040NR that it is making an election under § 1161 of
the Taxpayer Relief Act of 1997. The trust must attach to the
amended Form 1040NR the statement required by this notice and a
completed Form 1041 for the 1997 taxable year. The items of
income, deduction and credit of the trust must be excluded from
the amended Form 1040NR and reported on the Form 1041. The
amended Form 1040NR for the 1997 taxable year, with the statement
and the Form 1041 attached, must be filed with the Philadelphia
Service Center no later than the due date, plus extensions, for
filing a Form 1041 for the 1998 taxable year.
If a trust has made estimated tax payments as a foreign
trust based on application of new § 7701(a)(30)(E) to the trust,
but has not yet filed a Form 1040NR for the 1997 taxable year,
when the trust files its Form 1041 for the 1997 taxable year it
must note on its Form 1041 that it made estimated tax payments
based on treatment as a foreign trust. The Form 1041 must be
filed with the Philadelphia Service Center (and not with the
service center where the trust ordinarily would file its Form
1041).
If a trust forms part of a qualified stock bonus, pension,
or profit sharing plan, the election provided by this notice must
be made by attaching the statement to the plan's annual return

-9-
required under § 6058 (information return) for the first plan
year beginning after December 31, 1996, or to the plan's
information return for the first plan year beginning after
December 31, 1997. The statement must be attached to the plan's
information return that is filed no later than the due date for
filing the plan's information return for the first plan year
beginning after December 31, 1997, plus extensions. The election
will be effective for the first plan year beginning after
December 31, 1996, and thereafter, until revoked or terminated.
Any other type of trust that is not required to file a Form
1041 for the taxable year, but that is required to file an
information return (for example, Form 5227) for the 1997 or 1998
taxable year must attach the statement to the trust's information
return for the 1997 or 1998 taxable year. However, the statement
must be attached to an information return that is filed no later
than the due date for filing the trust's information return for
the 1998 taxable year, plus extensions. The election will be
effective for the 1997 taxable year, and thereafter, until
revoked or terminated.
A group trust under Rev. Rul. 81-100, 1981-1 C.B. 326, (and
any other trust that is not described above and that is not
required to file a Form 1041 or an information return) need not
attach the statement to any return and should file the statement
with the Philadelphia Service Center. The trust must make the
election provided by this notice by filing the statement by
October 15, 1999. The election will be effective for the 1997

-10-
taxable year, and thereafter, until revoked or terminated.
.03 Failure to File the Statement in the Required Manner
and Time.
If a trust fails to file the statement in the manner or time
provided in Section 4.01 and 4.02, the trustee may provide a
written statement to the district director having jurisdiction
over the trust setting forth the reasons for failing to file the
statement in the required manner or time. If the district
director determines that the failure to file the statement in the
required manner or time was due to reasonable cause, the district
director may grant the trust an extension of time to file the
statement. Whether an extension of time is granted shall be in
the sole discretion of the district director. However, the
relief provided by this notice is not ordinarily available if the
statute of limitations for the trust’s 1997 taxable year has
expired. Additionally, if the district director grants an
extension of time, it may contain terms with respect to
assessment as may be necessary to ensure that the correct amount
of tax will be collected from the trust, its owners, and its
beneficiaries.
SECTION 5. REVOCATION OR TERMINATION OF THE ELECTION AND PUBLIC
COMMENTS
Section 1161(a) of the Taxpayer Relief Act authorizes the
Secretary to prescribe regulations regarding the election to
remain a domestic trust. The regulations will incorporate the
rules contained in this notice and provide guidance with respect
to when the occurrence of certain significant changes in

-11-
circumstances related to the trust will terminate the election
(for example, changes in the trustees from United States persons
to foreign persons). The regulations will also contain
procedures for revoking the election. The Service and the
Treasury Department request comments on the rules in this notice
and, in particular, the change in circumstances that would cause
a termination of the election.
Comments should be submitted by June 30, 1998 to: Internal
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington,
DC 20044, Attn: CC:DOM:CORP:R (Notice 98-25 CC:DOM:P&SI:2), Room
5226. Submissions may be hand-delivered between the hours of 8
a.m. and 5 p.m. to: Courier’s Desk, Internal Revenue Service,
1111 Constitution Ave., NW, Washington, DC, Attn: CC:DOM:CORP:R
(Notice 98-25 CC:DOM:P&SI:2), Room 5226. Alternatively,
taxpayers may submit comments electronically at
http://www.irs.ustreas.gov/prod/tax__regs/comments.html
(the Service’s internet site). All comments submitted will be
available for public inspection and copying. Please identify the
comments as relating to this Notice 98-25.
SECTION 6. EFFECT OF THIS NOTICE ON NOTICE 96-65
A trust that otherwise qualifies for the relief under this
notice has the option of proceeding under the provisions of
Notice 96-65 or this Notice 98-25, or both. If the trustee has
begun conforming a trust’s provisions under Notice 96-65 to meet
the definition set forth in new § 7701(a)(30)(E), the trustee may
discontinue conforming the trust's provisions to meet the new

-12-
domestic trust criteria if the trustee proceeds under this Notice
98-25 instead of Notice 96-65.
SECTION 7. EFFECTIVE DATE
This notice applies to an election made for the first
taxable year of a trust beginning after December 31, 1996. The
provisions of this notice will be incorporated into regulations
that will be effective for taxable years beginning after December
31, 1996.
PAPERWORK REDUCTION ACT
The collections of information contained in this notice have
been reviewed and approved by the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act (44
U.S.C. 3507) under control number 1545-1600.
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.
The collections of information in this notice are in section
4 headed Procedure for Making the Election. This information is
required by the IRS to assure compliance with the provisions of
the Small Business Job Protection Act of 1996 and the Taxpayer
Relief Act of 1997. The likely respondents are trusts.
The estimated total annual reporting burden is 250,000
hours.
The estimated average annual burden per respondent is 30
minutes.
The estimated number of respondents is 500,000.

-13-
The estimated annual frequency of responses is once.
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.
DRAFTING INFORMATION
The principal authors of this notice are Eliana Dolgoff and
James A. Quinn of the Office of Assistant Chief Counsel
(Passthroughs & Special Industries). For further information
regarding this notice contact Ms. Dolgoff or Mr. Quinn on (202)
622-3060 (not a toll-free call). For further information about
the international tax consequences of the election that is the
subject of this notice contact Trina Dang of the Office of the
Associate Chief Counsel (International) on (202) 622-3880.