Unit Trusts

<div class="Section1">A unit trust (unit investment trust) holds a fixed portfolio of specified assets, such as tax-exempt bonds, Ginnie Maes, corporate bonds, or certificates of deposit. The trust issues redeemable securities, each of which represents an undivided interest in the assets held by the trust.<a href="#_ftn1" name="_ftnref1">¹</a> The assets in the trust are not traded, but are monitored instead. When the assets mature, the trust ends. A contractual or periodic payment plan mutual fund is a type of unit trust.<div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. 15 USC &sect;80a-4.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> If the trust is established as a &ldquo;grantor&rdquo; trust (that is, a trust under subpart E, subchapter J of Chapter 1 of the Internal Revenue Code, as the prospectus may say), the unit holder is treated as the owner of a part of the trust assets in proportion to his or her investment. In a grantor trust, income, deductions, and credits against tax of the trust are attributed to the investor as if the investor directly owned a share of the securities themselves.<a href="#_ftn1" name="_ftnref1">¹</a> (Expenses of the trust that would have been &ldquo;miscellaneous itemized deductions&rdquo; had they been incurred by an individual are included with the investor&rsquo;s miscellaneous itemized deductions for purposes of calculating the investor&rsquo;s taxation. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="733">733</a>.) Thus, gain on any sale of trust assets by the trust is taxable to the unit holders. What is passed through by the trust depends on the character of its assets. For example, the unit holder may have to reduce basis in the unit to reflect amortization of bond premium, especially in exempt-interest trusts. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7664">7664</a>. The unit holder may also have to reduce basis for accrued interest received, if any, on bonds delivered after payment is made for the unit.<br /> <br /> Gain on the sale of a unit by the unit holder is capital gain, to the extent it does not include accrued interest or earned original issue discount. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7650">7650</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7653">7653</a>. For the treatment of capital gain, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="702">702</a>.<br /> <br /> If the trust qualifies and makes the election to be taxed as a regulated investment company (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7922">7922</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7935">7935</a>), unit holders will be taxed like shareholders in a mutual fund. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7938">7938</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7951">7951</a>.<br /> <br /> Interest on indebtedness incurred or continued to purchase or carry exempt-interest units is not deductible. See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="7948">7948</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8044">8044</a>.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> The IRS released regulations clarifying the reporting obligations for trustees and middlemen of widely-held fixed investment trusts (WHFITs).<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC &sect; 671.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>. IRC &sect; 265(a)(2).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>. See TD 9308, 71 Fed. Reg. 78351 (129006). See also TD 9241, 71 Fed. Reg. 4002 (14006); Notice 2006-30, 2006-1 CB 1044, Notice 20069, 2006-1 CB 644.<br /> <br /> </div></div><br />