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Tax Law Update: March 2022

• The Internal Revenue Service adds four new “no rules” areas to trusts and estates—Revenue Process 2022-3 added the following to the list of areas in which the IRS will not give a private letter decision pending internal resolution of the issues:

  • Whether an act of self-dealing occurs when a private foundation (PF) (or other entity subject to section 4941 of the Internal Revenue Code) acquires or acquires an interest in a limited liability company or other entity that is a disqualified person owns a promissory note issued by ,
  • Whether an estate is entitled to the estate tax matrimonial deduction for any portion of the annuity or UnitTrust interest of a charitable balance trust (CRT) that may be distributed among the spouse of the deceased or a charitable organization at the discretion of the trustee;
  • Whether a donor is entitled to a gift tax matrimonial deduction for any portion of the annuity or UnitTrust 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 issue relating to the interpretation of distributions from donor-advised funds under IRC sections 4966 and 4967.

• IRS clarifies the levy of excise tax under self-dealing rules-In Private Letter Ruling 202204003 (issued January 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 recognition of the donor and his family for their donation, There were no acts of self-dealing under IRC section 4941. Section 4941 levies excise tax on acts of self-dealing between the ineligible person and the PF, including the direct or indirect rendering of goods, services or facilities (as well as income or property).

An individual donor served on the Board of Directors of PF under section 509(a). The man was also the settlor of his trust, which owned the art collection. The trust requires the art collection and distribution of cash to PF on the death of the individual donor. PF will enter into a long-term artwork loan arrangement for public exhibition of art collections. In these exhibitions, the donor and his family will be publicly recognized for the gift of the art collection.

PF requested to take a decision on whether excise tax would be levied on transfer of art collection from donor’s trust to PF or on recognition of donor and his family. It also requested clarification whether the value of art collection would be excluded in computing the minimum investment return of PF under IRC section 4942.

The IRS ruled that because the art collection will be provided at no cost to PF as a charitable donation, its distribution is not self-treating. Section 4941(d)(2)(c) provides that furnishing of goods, services or facilities is not an act of self-dealing when the furnishing is without charge and if used exclusively for the purposes specified in IRC section 501 is (c)(3). Distribution of art collections meets these requirements and will not trigger excise duty.

The IRS also ruled that public recognition of the donor has not risen to the level of self-determination. Section 4941(d)(1)(e) defines self-dealing as the use of PF income or property for the benefit of an ineligible person. Despite the clear conclusion that some members of the donor’s family would actually be “disqualified persons”[s]”Within the meaning of section 4946(a)(1), a fact received by a disqualified person only Casual The benefits arising out of the use of his assets by the PF do not make the use an act of self-dealing. Obviously, the public recognition of family members arising from the donation was only accidental.

The IRS issued a second ruling that the value of the art collection would not be included in the calculation of PF’s minimum investment return under section 4942. Section 4942(a) generally levies excise tax on the undivided income of a PF (generally, at least 5% per annum on the requirement to be distributed). Treasury Regulations Section 53.4942(a)-2(c)(2)(v), however, does not expressly exclude any asset used directly in fulfilling the exempt purpose of PF from that calculation. The IRS found that the use of art collections in active loan programs for exhibition and performance meets PF’s exempt purposes. Therefore, the value of art collections for these purposes can be excluded.

• The Ninth Circuit denies an increase in the charitable deduction of assets—In Moore, et al. V Commissioner, 128 AFTR2d 2021-6604 (9.)th Sir. November 8, 2021), the U.S. Court of Appeals for the Ninth Circuit denied the increased charitable deduction because of language in trust instruments directing charitable distributions. under the trees. Registration section 20.2055-1(a), may be transferred to a charitable entity for the value of assets included in the gross estate of the deceased, if expressly required by trust documents.

Howard Moore created an estate plan consisting of several trusts, a family limited partnership (FLP), and a charitable foundation. Howard funded the FLP with a majority interest in his family’s 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 surviving trust sold its interest in the FLP to Howard’s irrevocable trust.

The irrevocable trust requires the trustee to make distributions to the surviving trust upon Howard’s death (who will in turn distribute such assets to a charitable trust) to reduce the estate tax liability if the irrevocable trust’s assets are included in Howard’s gross was included in the property. Upon 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 the estate tax charitable deduction for those funds distributed to the charitable trust.

However, the Tax Court upheld the commissioner’s decision and denied the deduction claimed for transfer to the charitable trust. The Ninth Circuit Tax Court agreed that the irrevocable trust owned the FLP, but the irrevocable trust did not directly own the FLP assets, because a limited partner does not have ownership rights to the assets of the partnership. FLP assets (but not FLP interests themselves) were eligible for inclusion in taxable assets, and the assets were not attracting that assessment. The court looked at the explicit language of the irrevocable trust, which provided that the trustees were to distribute any assets owned by the irrevocable trust to be included in the assets. Because Howard’s taxable assets included the assets of the FLP, which were not the property of the irrevocable trust, subject to the distribution requirement, the charitable deduction was disallowed. This case shows how important each word is. Perhaps if the language of irrevocable trusts had been more general and used values ​​or formulas instead of referring to specific assets, Howard’s intention would have been achieved.

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