[Code of Federal Regulations]
[Title 26, Volume 6]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.468B-5]

[Page 378-379]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.468B-5  Effective dates and transition rules.

    (a) In general. Section 468B, including section 468B(g), is 
effective as provided in the Tax Reform Act of 1986 and the Technical 
and Miscellaneous Revenue Act of 1988. Except as otherwise provided in 
this section, Sec. Sec. 1.468B-1 through 1.468-4 are effective on 
January 1, 1993. Thus, the regulations apply to income of a qualified 
settlement fund earned after December 31, 1992, transfers to a fund 
after December 31, 1992, and distributions from a fund after December 
31, 1992. For purposes of Sec. 1.468B-3(c) (relating to economic 
performance), previously transferred assets held by a qualified 
settlement fund on the date these regulations first apply to the fund 
(i.e., January 1, 1993, or the earlier date provided under paragraph 
(b)(2) of this section) are treated as transferred to the fund on that 
date, to the extent no taxpayer has previously claimed a deduction for 
the transfer.
    (b) Taxation of certain pre-1996 fund income--(1) Reasonable 
method--(i) In general. With respect to a fund, account, or trust 
established after August 16, 1986, but prior to February 15, 1992, that 
satisfies (or, if it no longer exists, would have satisfied) the 
requirements of Sec. 1.468B-1(c), the Internal Revenue Service will not 
challenge a reasonable, consistently applied method of taxation for 
transfers to the fund, income earned by the fund, and distributions made 
by the fund after August 16, 1986, but prior to January 1, 1996. A 
method is generally considered reasonable if, depending on the facts and 
circumstances, all transferors and the administrator of the fund have 
consistently treated transfers to the fund, income earned by the fund, 
and distributions made by the fund after August 16, 1986, as if the fund 
were--
    (A) A grantor trust and the transferors are the grantors;
    (B) A complex trust and the transferors are the grantors; or
    (C) A designated settlement fund.
    (ii) Qualified settlement funds established after February 14, 1992, 
but before January 1, 1993. With respect to a fund, account, or trust 
established after February 14, 1992, but prior to January 1, 1993, that 
satisfies the requirements of Sec. 1.468B-1(c), the Internal Revenue 
Service will not challenge a reasonable, consistently applied method of 
taxation as described in paragraph (b)(1)(i) of this section for 
transfers to, income earned by, and distributions made by the fund prior 
to January 1, 1993. However, pursuant to paragraph (a) of this section, 
sections 1.468B-1 through 1.468B-4 apply to transfers to, income earned 
by, and distributions made by the qualified settlement fund after 1992.
    (iii) Use of cash method of accounting. For purposes of paragraphs 
(b)(i) and (b)(ii) of this section, for taxable years beginning prior to 
January 1, 1996, the Internal Revenue Service will not challenge the use 
of the cash receipts and disbursement method of accounting by a fund, 
account, or trust.
    (iv) Unreasonable position. In no event is it a reasonable position 
to assert, pursuant to Rev. Rul. 71-119 (see Sec. 601.601(d)(2)(ii)(b) 
of this chapter), that there is no current taxation of the income of a 
fund established after August 16, 1986.
    (v) Waiver of penalties. For taxable years beginning prior to 
January 1, 1993, if a fund, account or trust is subject to section 
468B(g) and the Internal Revenue Service does not challenge the method 
of taxation for transfers to, income earned by, and distributions

[[Page 379]]

made by, the fund pursuant to paragraph (b)(1)(i) or (b)(1)(ii) of this 
section, penalties will not be imposed in connection with the use of 
such method. For example, the penalties under section 6655 for failure 
to pay estimated tax, section 6651(a)(1) for failure to file a return, 
section 6651(a)(2) for failure to pay tax, section 6656 for failure to 
make deposit of taxes, and section 6662 for accuracy-related 
underpayments will generally not be imposed.
    (2) Election to apply qualified settlement fund rules--(i) In 
general. The person that will be the administrator of a qualified 
settlement fund may elect to apply Sec. Sec. 1.468B-1 through 1.468B-4 
to transfers to, income earned by, and distributions made by, the fund 
in taxable years ending after August 16, 1986. The election is effective 
beginning on the first day of the earliest open taxable year of the 
qualified settlement fund. For purposes of this paragraph (b)(2), a 
taxable year is considered open if the period for assessment and 
collection of tax has not expired pursuant to the rules of section 6501. 
The election statement must provide the information described in 
paragraph (b)(2)(ii) of this section and must be signed by the person 
that will be the administrator. Such person must also provide each 
transferor of the qualified settlement fund with a copy of the election 
statement on or before March 15, 1993.
    (ii) Election statement. The election statement must provide the 
following information--
    (A) A legend, ``Sec. 1.468B-5(b)(2) Election'', at the top of the 
first page;
    (B) Each transferor's name, address, and taxpayer identification 
number;
    (C) The qualified settlement fund's name, address, and employer 
identification number; and
    (D) The date the qualified settlement fund was established within 
the meaning of Sec. 1.468B-1(j).
    (iii) Due date of returns and amended returns. The election 
statement described in paragraph (b)(2)(ii) of this section must be 
filed with, and as part of, the qualified settlement fund's timely filed 
tax return for the taxable year ended December 31, 1992. In addition, 
the qualified settlement fund must file an amended return that is 
consistent with the requirements of Sec. Sec. 1.468B-1 through 1.468B-4 
for any taxable year to which the election applies in which the fund 
took a position inconsistent with those requirements. Any such amended 
return must be filed no later than March 15, 1993, and must include a 
copy of the election statement described in paragraph (b)(2)(ii) of this 
section.
    (iv) Computation of interest and waiver of penalties. For purposes 
of section 6601 and section 6611, the income tax return for each taxable 
year of the qualified settlement fund to which the election applies is 
due on March 15 of the year following the taxable year of the fund. For 
taxable years of a qualified settlement fund ending prior to January 1, 
1993, the income earned by the fund is deemed to have been earned on 
December 31 of each taxable year for purposes of section 6655. Thus, the 
addition to tax for failure to pay estimated tax under section 6655 will 
not be imposed. The penalty for failure to file a return under section 
6651(a)(1), the penalty for failure to pay tax under section 6651(a)(2), 
the penalty for failure to make deposit of taxes under section 6656, and 
the accuracy-related penalty under section 6662 will not be imposed on a 
qualified settlement fund if the fund files its tax returns for taxable 
years ending prior to January 1, 1993, and pays any tax due for those 
taxable years, on or before March 15, 1993.

[T.D. 8459, 57 FR 60994, Dec. 23, 1992]