PLR 200003055: Pension and IRA proceeds passing to a foundation are not investment income

Plain-English summary

A private foundation expected to receive an individual's interests in pension plans and individual retirement accounts after his death. The IRS ruled that the proceeds passing to the foundation would not be gross investment income subject to the § 4940 excise tax at that time. The letter treats those distributions as deferred compensation, which the statute's definition of gross investment income does not include. The ruling addresses only § 4940. The foundation had withdrawn a separate request, and the IRS did not rule on it.

Ruling snapshot

• Question: Are pension and IRA proceeds passing to the foundation subject to the § 4940 investment income tax when received?
• Outcome: Approved for § 4940; a separate request was withdrawn and received no ruling.
• Key authorities: IRC § 4940(a), (c).

Full text (IRS public release)

200003055

Internal Revenue Service                 Department of the Treasury
Washington, DC 20224
Significant Index No. 4940.00-00
In Reference to: OP:E:EO:T:3
Date: OCT 27 1999

Legend:
M =
N =

Dear Sir or Madam:

This is in response to M’s request for certain rulings under
sections 501(c) (3) and 4940 of the Internal Revenue Code of 1986
(hereafter "Code") submitted on M’s behalf by M’s authorized
representative.

M has been recognized exempt under section 501(c)(3) of the
Code and classified as a private foundation under section 509(a).
M's purposes include providing financial assistance and grants
to other organizations described in section 501(c)(3).

N is an individual and a disqualified person with respect to
M. N proposes to transfer to M certain interests in various
pension plans described in section 401(a) and individual
retirement accounts upon his death.

Section 4940(a) of the Code provides for the imposition of a
tax equal to 2 percent on the net investment income of private
foundations.

Section 4940(c) (1) of the Code provides that for purposes of
subsection (a), the net investment income is the amount by which
(A) the sum of the gross investment income and the capital gain
net income exceeds (B) the allowable deductions.

Section 4940(c) (2) of the Code provides that the term "gross
investment income" means the gross amount of income from
interest, dividends, rents, payments with respect to securities
loans (as defined in section 512(a)(5)), and royalties, but not

including any such income to the extent included in computing the
tax imposed by section 511.

M has been recognized as exempt from federal income tax as
an organization described in section 501(c)(3) of the Code.
The transfer to M of N's interest in various pension plans
described in section 401(a) and individual retirement accounts
will be accomplished upon N’s death. N’s estate will transfer
N’s interest in such plans and individual retirement accounts to
M. Distribution amounts from qualified employee pension plans
and individual retirement accounts are treated as deferred
compensation for federal income tax purposes.

As indicated above, under section 4940 the term "gross
investment income" includes interest, rents dividends, payments
with respect to securities loans, and royalties. Such term does
not include deferred compensation. The transfer of the proceeds
from various pension plans and individual retirement accounts to
M under the circumstances described will not constitute gross
investment income for purposes of imposing the excise tax
described in section 4940 of the Code.

Based on the above we rule that M will not be subject to the
Federal excise tax on investment income under section 4940 of the
Code at the time the proceeds from certain individual retirement
accounts and qualified retirement plans described in section
401(a) previously held by N pass to M.

This ruling letter concerns only section 4940 of the Code.
No opinion is expressed as to any other provision of the Code.
This ruling is directed only to the organization that requested
it. Section 6110(k)(3) of the Code provides that it may not be
used or cited as precedent.

We have received your letter of September 8, 1999
withdrawing your ruling request number 4. Therefore, we are not
ruling on the issues raised in request number 4. We express no
opinion on the statements and conclusions in your letter of
September 8, 1999.

Sincerely yours,

Robert C. Harper, Jr.
Chief, Exempt Organizations

Technical Branch 3