• Internal Revenue Service adds four new “no rule” areas in the field of trusts and estates—Revenue Procedure 2022-3 added the following to the list of areas in which the IRS won’t grant private letter rulings, pending internal resolution of the issues:
- whether an act of self-dealing occurs when a private foundation (PF) (or other entity subject to Internal Revenue Code Section 4941) owns or receives an interest in a limited liability company or other entity that owns a promissory note issued by a disqualified person;
- whether an estate is entitled to an estate tax marital deduction for any portion of the annuity or unitrust interest of a charitable remainder trust (CRT) that may be distributed between the decedent’s spouse and a charitable organization at the discretion of the trustee;
- whether a donor is entitled to a gift tax marital deduction for any portion of the annuity or unitrust interest of a CRT that may be distributed between the donor’s spouse and a charitable organization at the discretion of a trustee; and any issues involving interpretation of distributions from donor-advised funds under IRC Sections 4966 and 4967.
• IRS clarifies imposition of excise tax under self-dealing rules—In Private Letter Ruling 202204003 (released Jan. 28, 2022), the IRS found that the distribution of an extensive art collection from a settlor’s trust to a private charitable foundation, as well as the recognition the donor and his family received for their donation, weren’t acts of self-dealing under IRC Section 4941. Section 4941 imposes an excise tax on acts of self-dealing between a disqualified person and a PF, including any direct or indirect furnishing of goods, services or facilities (as well as income or assets).
An individual donor served on the board of directors of a PF under Section 509(a). The individual was also the settlor of his trust, which owned the art collection. The trust required distribution of the art collection and cash to the PF on the individual donor’s death. The PF would in turn enter into long-term artwork loan arrangements for the public exhibition of the art collection. At these exhibitions, the donor and his family would be publicly recognized for the gift of the art collection.
The PF requested rulings on whether an excise tax would be imposed on the transfer of the art collection from the donor’s trust to the PF or on the recognition of the donor and his family. It also requested clarification on whether the value of the art collection would be excludible in computing the PF’s minimum investment return under IRC Section 4942.
The IRS ruled that because the art collection would be provided to the PF without cost as a charitable donation, its distribution isn’t self-dealing. Section 4941(d)(2)(C) provides that the furnishing of goods, services or facilities aren’t acts of self-dealing when the furnishing is without charge and if the use is exclusively for the purposes specified in IRC Section 501(c)(3). The distribution of the art collection met these requirements and wouldn’t trigger excise tax.
The IRS also ruled that the public recognition of the donor didn’t itself rise to the level of an act of self-dealing. Section 4941(d)(1)(E) defines the use of income or assets of a PF for the benefit of a disqualified person as an act of self-dealing. Despite a clear finding that certain members of the donor’s family would, in fact, be “disqualified person[s]” within the meaning of Section 4946(a)(1), the mere fact that a disqualified person receives incidental benefits from the use by the PF of its own assets doesn’t make the use an act of self-dealing. Apparently, the public recognition of family members arising from the donation was only incidental.
The IRS issued a second ruling that the value of the art collection would be excludible in computing the PF’s minimum investment return under Section 4942. Section 4942(a) generally imposes excise tax on undistributed income of a PF (generally, the requirement to distribute at least 5% per year). Treasury Regulations Section 53.4942(a)-2(c)(2)(v), however, expressly excludes any asset used directly in carrying out the PF’s exempt purpose from that calculation. The IRS found that the use of the art collection in active loan programs for exhibition and display carried out the exempt purposes of the PF. Therefore, the value of the art collection may be excluded for these purposes.
• Ninth Circuit denies increase in estate’s charitable deduction—In Moore, et al. v. Commissioner, 128 A.F.T.R.2d 2021-6604 (9th Cir. Nov. 8, 2021), the U.S. Court of Appeals for the Ninth Circuit denied an increased charitable deduction because of language in the trust instruments directing the charitable distribution. Under Treas. Regs. Section 20.2055-1(a), a deduction can be taken for the value of property included in the decedent’s gross estate transferred to a charitable entity if expressly required by the trust documents.
Howard Moore created an estate plan consisting of multiple trusts, a family limited partnership (FLP), and a charitable foundation. Howard funded the FLP with a majority interest in his family farm. The FLP was owned by Howard’s living trust. After the farm was sold to a third party, but during Howard’s life, the living trust then sold its interest in the FLP to Howard’s irrevocable trust.
The irrevocable trust required the trustee to make distributions on Howard’s death to the living trust (which in turn would distribute such asset to a charitable trust) to reduce estate tax liability if an asset of the irrevocable trust was included in Howard’s gross estate. On Howard’s death, the FLP distributed its assets to Howard’s irrevocable trust, which then transferred the assets to Howard’s living trust, which in turn distributed the assets to his charitable trust. The estate claimed estate tax charitable deductions for those funds distributed to the charitable trust.
However, the Tax Court upheld the Commissioner’s decision and denied the claimed deductions for transfers to the charitable trust. The Ninth Circuit agreed with the Tax Court that while the irrevocable trust owned the FLP, the irrevocable trust didn’t directly own the FLP assets, because a limited partner doesn’t have ownership rights to the partnership’s assets. The FLP assets (but not the FLP interests themselves) were includible in the taxable estate, and the estate wasn’t appealing that determination. The court looked to the express language of the irrevocable trust, which provided that the trustees were to distribute any asset owned by the irrevocable trust that was includible in the estate. Because what was includible in Howard’s taxable estate were the FLP’s assets, which weren’t assets of the irrevocable trust subject to the distribution requirement, the charitable deduction was denied. This case shows how critical each word is. Perhaps if the language of the irrevocable trust had been more general and referred to value or used a formula, instead of referring to specific assets, Howard’s intent would have been achieved.