PLR 200850046: a court reformed the trust on condition the IRS approve it first

Plain-English summary

A charitable remainder unitrust was drafted wrong. The donor meant the non-charitable interest to run for the lives of the donor and the donor's spouse or for a twenty-year term, whichever was longer, and meant that if neither survived the full term the remaining payments would go to the donor's issue by right of representation. What the donor signed measured the interest by the two lives alone. The trustee, which is also the charitable beneficiary, went to court to reform the trust and then asked whether doing so would be an act of self-dealing. The Service ruled that it would not.

The order of operations is the striking thing. The state court granted reformation, but "contingent upon you receiving a favorable Private Letter Ruling from the Internal Revenue Service". The Service's analysis then rests on that same order, listing among the evidence of the donor's true intent "a signed order from the appropriate court evidencing that the court found by clear and convincing evidence" of the mistake. The order proving the error has no effect unless the ruling is favorable, and the ruling is favorable in part because of the order. Neither instrument moves first. Conditional reformation orders are ordinary practice, but this letter prints both halves of the loop on the same page.

The analysis also concedes more than the result suggests. The donor, the donor's spouse and the donor's issue are all disqualified persons under sections 4946(a) and 4946(d). The letter accepts that reformation "may have the effect of increasing the annual amount payable" to them and "may be considered a transfer to, or use by or for the benefit of, disqualified persons of the income or assets of a private foundation under section 4941". Value does move toward disqualified persons. What takes it out of section 4941 is intent: the donor never meant the provision being removed, so there is nothing to transfer that was ever properly theirs.

Then there is an exception that is quoted and never used. The letter sets out section 4947(a)(2)(A) and section 53.4947-1(c)(2)(i), under which section 4941 simply does not apply to amounts payable to the income beneficiaries of a split-interest trust unless a charitable deduction was allowed for that income interest under sections 170(f)(2)(B), 2055(e)(2)(B) or 2522(e)(2)(B). Whether any such deduction was allowed here is never stated. The exception is laid out in the Law section, restated in the Analysis, and then left alone while the case is decided on the scrivener's error instead.

A last structural point. This is one of two rulings requested, and the letter says so: the office is answering "your ruling request originally numbered two on your submission", and the "other ruling will be dealt with separately by another office". The letter then disclaims the section 664 question, expressing no opinion on whether the trust as reformed qualifies as a charitable remainder unitrust. But its own route into section 4941 begins "As a Charitable remainder unitrust under section 664(d)(2) of the Code, the Trust is a split-interest trust described in section 4947(a)(2)". The premise carrying the whole analysis is the one thing the letter will not confirm.

The letter is signed by Robert C. Harper, Jr., Manager, Exempt Organizations Technical Group 3, and dated September 17, 2008, the same day Group 1 issued the paired endowment rulings at 0850049 and 0850048. All three carry the identical defective sentence "Because it could help resolved questions concerning your federal income tax status". Two technical groups producing the same broken clause on the same day settles that it is template text rather than a scanning artifact.

This is a scanned document, but no corrections were required. The scan is clean.

Four things are left as published. The sentence disclaiming the section 664 question reads "no opinion is expressed concerning whether and Trust as reformed qualify", where a redaction has removed a legend term and left the sentence ungrammatical. There is a mid-sentence capital in "As a Charitable remainder unitrust". The possessive is dropped in three places, giving "donors intent" and "donor's intent" in the same paragraph. And the gift tax split-interest provision is printed three times as section 2522(e)(2)(B). Because it is identical on all three appearances rather than varying as a scanner error would, it is reproduced here exactly as released; citation lookup was unavailable in this session, so it was not independently checked.

Ruling snapshot

• Question: Is judicial reformation of a charitable remainder unitrust, correcting a scrivener's error so that the non-charitable term runs for the longer of two lives or twenty years and then to the donor's issue, an act of self-dealing under section 4941 between the trust and the donor, the donor's spouse and the donor's issue?
• Outcome: Approved. The proposed reformation will not be an act of self-dealing under section 4941. This is one of two rulings requested; the other was routed to a different office, and no opinion is expressed on whether the reformed trust still qualifies as a charitable remainder unitrust under section 664.
• Key authorities: Sections 4941(a)(1), 4941(a)(2) and 4941(d)(1)(E); sections 4946(a) and 4946(d) defining disqualified persons to include a substantial contributor, family members and a trustee; sections 4947(a)(2) and 4947(a)(2)(A) and section 53.4947-1(c)(2)(i) on split-interest trusts; section 664(d)(2); and the deduction provisions 170(f)(2)(B), 2055(e)(2)(B) and 2522(e)(2)(B) as printed in the letter.

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 200850046 Contact Person:
Release Date: 12/12/08
Date: September 17, 2008 Identification Number:

Telephone Number:

Employer Identification Number:

UIL: 4941.00-00

Legend:
Trust =

Dear

We have considered your ruling request dated December 21, 2007, and subsequent
submissions, concerning the federal income and excise tax consequences under section 4941,
of the Internal Revenue Code of 1986, as amended (“Code”), related to a proposed reformation
of a charitable remainder unitrust, in the manner and for the purposes described below. Our
office is responding to your ruling request originally numbered two on your submission. The
other ruling will be dealt with separately by another office.

Facts:

The information submitted shows that you are the trustee and charitable beneficiary of
the Trust, which qualifies as a charitable remainder unitrust under section 664(d)(2) of the Code.
The donor of the Trust intended to establish the non-charitable interest of the Trust for the lives
of donor and donor’s spouse, or for a twenty-year term, whichever was longer, and that in the
event that donor or donor’s spouse did not survive the entire twenty-year term, the income
interest during the remainder of the term would be payable to donor’s issue by right of
representation. You report that because of a scrivener’s error the Trust was executed with a
provision that established the non-charitable interest of the Trust only for the lives of donor and
donor’s spouse. As trustee, you seek reformation of the Trust to conform to donor’s intentions.

You have submitted the following documents in support of your ruling request. These
documents include the following: (1) the original Trust executed by donor, evidencing the
current provision that is sought to be reformed; (2) a copy of the new Trust, evidencing the
reformed provision; (3) your sworn Petition for Reformation filed with the appropriate court
giving a detailed account as to donor’s intent, the scrivener’s error and how donor executed the
Trust without noticing the error; (4) donor’s signed affidavit clearly evidencing donor’s intent to

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establish a Trust under the reformed provision, which affidavit was filed in conjunction with the
above referenced petition; and, (5) a signed order from the appropriate court evidencing that the
court found by clear and convincing evidence that: (i) due to a mistake in the expression of
donor's intent, the Trust failed to accurately implement donors intent; (ii) that you, as both
trustee and charitable beneficiary of the Trust, consent to the reformation of the Trust; (iii) that
the state’s attorney general consents to the reformation of the Trust; and, (iv) that donor and her
spouse, as successor beneficiary under the Trust, consent to the reformation. The court
granted the requested relief of trust reformation contingent upon you receiving a favorable
Private Letter Ruling from the Internal Revenue Service.

You have requested the following ruling:

Reformation of the Unitrust to provide that the unitrust period extends for the longer of the
lifetimes of the Donor and her spouse, or twenty years from the date of execution, and that
during that term the Unitrust payments shall be made to the Donor, then to her spouse if he
survives her, then to her issue by right or representation, is not a prohibited self-dealing
transaction between a disqualified person and a foundation manager within the meaning of
section 4941.

Law:

Section 4941(a)(1) of the Code imposes an excise tax on each act of self-dealing
between a disqualified person and a private foundation.

Section 4941(a)(2) of the Code generally imposes a tax on the participation of a
foundation manager in an act of self-dealing.

Section 4941(d)(1)(E) of the Code provides that the term “self-dealing” includes any
direct or indirect transfer to, or the use by or for the benefit of, a disqualified person of the
income or assets of a private foundation.

Section 4946(a) of the Code provides the term “disqualified person” with respect to a
private foundation includes a substantial contributor to the foundation (including the creator of a
trust), a family member of a substantial contributor (including children), and a foundation
manager (including a trustee). Under section 4946(d), the term “family members” includes
spouses.

Section 4947(a)(2) of the Code provides generally that split-interest trusts are subject to
the provisions of section 4941 in the same manner as if such trusts were private foundations,
but, under section 4947(a)(2)(A), not with respect to any amounts payable under the terms of
such trust to income beneficiaries, unless a deduction was allowed under section 170(f)(2)(B),
2055(e)(2)(B), or 2522(e)(2)(B).

Section 53.4947-1(c)(2)(i) of the Foundation and Similar Excise Taxes Regulations
provides that under section 4947(a)(2)(A) of the Code, section 4941 does not apply to any
amounts payable under the terms of a split-interest trust to income beneficiaries unless a
deduction was allowed under section 170(f)(2)(B), 2055(e)(2)(B), or 2522(e)(2)(B) with respect

to the income interest of any such beneficiary.

Analysis:

The issue is whether judicial reformation of the Trust from its inception will be considered
an act of self-dealing between the Trust and donor, donor’s spouse and donor’s issue, as
disqualified persons, under section 4941 of the Code.

As a Charitable remainder unitrust under section 664(d)(2) of the Code, the Trust is a
split-interest trust described in section 4947(a)(2) and, therefore, subject to section 4941, which
imposes an excise tax on acts of self-dealing. Under section 4947(a)(2), the self-dealing rules
of section 4941 do not apply to any amounts payable under the terms of the split-interest trust to
income beneficiaries as long as no deduction was allowed for such income interest under
sections 170(f)(2)(B), 2055(e)(2)(B), or 2522(e)(2)(B).

The donor of the Trust is considered a substantial contributor to the Trust, and as such,
the donor, the donor's spouse and the donor’s issue are each disqualified persons with respect
to the Trust under section 4946(a) of the Code. Judicial reformation of the Trust may have the
effect of increasing the annual amount payable to donor, donors spouse and donor's issue, and
may be considered a transfer to, or use by or for the benefit of, disqualified persons of the
income or assets of a private foundation under section 4941.

Review of the facts presented does not reveal any act of self-dealing. The facts clearly
show that donor never intended to create a charitable remainder unitrust with the provision that
established the non-charitable interest of the Trust only for the lives of donor and donor’s
spouse. Certain evidence supports this intent: (1) your sworn Petition for Reformation filed with
the appropriate court giving a detailed account as to donor's intent, the scrivener’s error and
how the donor executed the Trust without noticing the error; (2) donor’s signed affidavit clearly
evidencing donor’s intent to establish a Trust under the reformed provision, which affidavit was
filed in conjunction with the above referenced petition; (3) a signed order from the appropriate
court evidencing that the court found by clear and convincing evidence that due to a mistake the
Trust failed to accurately implement donors intent; and, (4) the state’s attorney general's
consent to the reformation. We conclude that the judicial reformation of the Trust will not be an
act of self-dealing under section 4941 of the Code.

Ruling:

Accordingly, based upon the information submitted in your ruling request, we rule that the
proposed reformation of the Trust will not be an act of self-dealing under section 4941 of the
Code.

This ruling will be made available for public inspection under section 6110 of the Code
after certain deletions of identifying information are made. For details, see enclosed Notice 437,
Notice of Intention to Disclose. A copy of this ruling with deletions that we intend to make
available for public inspection is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions in Notice 437.

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 by others as precedent.

This ruling is based on the facts as they were presented and on the understanding that
there will be no material changes in these facts. This ruling does not address the applicability of
any section of the Code or regulations to the facts submitted other than with respect to the
sections described. Specifically, no opinion is expressed concerning whether and
Trust as reformed qualify as a charitable remainder unitrust under section 664 of the Code.
Because it could help resolved questions concerning your federal income tax status, this ruling
should be kept in your permanent records.

If you have any questions about this ruling, please contact the person whose name and
telephone number are shown in the heading of this letter.

In accordance with the Power of Attorney currently on file with the Internal Revenue
Service, we are sending a copy of this letter to your authorized representative.

Sincerely,

Robert C. Harper, Jr.
Manager, Exempt Organizations
Technical Group 3

Enclosure
Notice 437