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however, the IRS reached the opposite result on facts similar to those in Rothstein. That is, the IRS held that the acquisition of the trust's property by the grantor in exchange for a note could not be a sale because the grantor was both the maker and owner of the note. As a result, the grantor did not receive a new cost basis in the stock purchased from the trust. The IRS has explicitly stated that it will not follow the Second Circuit's decision in Rothstein. Indeed, many estate planners rely heavily on Rev. Rul. 85-13's conclusions for a variety of estate planning techniques involving sales to grantor trusts. Consequently, the lasting impact of the Rothstein decision may prove negligible. Even if disregarded for federal income tax purposes, states may not disregard a wholly grantor trust for certain purposes. For example, Pennsylvania varies from federal law regarding grantor trusts and imposes state income tax on grantor trusts according to the same personal income tax rules that apply to irrevocable trusts, unless the grantor trust is a revocable trust. © For some non-income tax purposes (e.g., sales tax), a wholly grantor trust that is disregarded for federal income tax purposes may be respected as the owner of the trust's corpus by some states. I k, fe ale between a gr and | antor trust could be s Foreign Tax Planning Considerations Practitioners should be aware that foreign countries may not treat U.S. grantor trusts as disregarded entities. As noted below, a wholly grantor trust is treated as a separate entity for Canadian tax purposes. Various planning opportunities may arise as a result of such divergent treatment. Conduit Financing. Treasury has proposed respecting DREs in an attempt to combat perceived tax avoidance achieved through the use of multiple-party financing transactions. © In general, a financing arrangement is a series of transactions in which one person advances money or other property or grants rights to use property and another person receives money or other property or rights to use property, the advance and receipt are effected through one or more other persons, and financing transactions link all of the entities. °° Examples of a financing transaction include debt and any lease or license. & Since 1995, regulations have allowed the IRS to ignore intermediate entities participating in a financing arrangement where the intermediate entities are acting as conduit entities and to recharacterize the financing arrangement as a transaction directly between the remaining parties for purposes of imposing tax under Sections 871 and 881 and withholding obligations under Sections 1441 and 1442, In December 2008, the IRS issued proposed regulations under Section 881.2 Under Prop. Reg. 1.881-3(a)(2)(i)(C), any transaction entered into by a DRE will be taken into account for purposes of determining whether a conduit financing arrangement exists. The proposed regulation accomplishes this by stating that, for purposes of the regulations under Section 881, the term “person” includes a business entity that is disregarded as an entity separate from its single member owner under the check-the-box regulations. 7” Currently, this change to the regulation remains only proposed. The proposed regulation states that it is not effective until the date it is adopted as a final regulation. 2 It is interesting to note, HOUSE_OVERSIGHT_026590