PLR 1026005: IRS treated a reformed trust as a valid charitable remainder unitrust

Plain-English summary

The IRS treated a trust as a valid charitable remainder unitrust from its creation date after a state court retroactively corrected a scrivener's error in the trust's unitrust percentage. The individual beneficiary had received excess payments under the original wording, but returned the excess amounts and accrued interest, and no additional charitable deduction was claimed from the correction. The IRS concluded that the reformation and repaid overpayment did not constitute self-dealing under IRC § 4941. The ruling was based on the stated facts, including the trustee's intended CRUT structure and repayment of the funds with adequate interest.

Ruling snapshot

• Question: Could a trust be treated as a valid charitable remainder unitrust from its creation date after a court corrected its unitrust percentage, and did the resulting repaid overpayment constitute self-dealing?
• Outcome: approved
• Key authorities: IRC §§ 664, 4941, 4946, 4947, 170, 2055, 2522, and 7520; Treas. Reg. §§ 1.664-3(a)(4), 53.4941(d)-2(f)(2), and 53.4947-1(c)(2); IRC § 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201026005 Third Party Communication: None
Release Date: 7/2/2010 Date of Communication: Not Applicable
Person To Contact:
Index Number: 664.00-00 ------------------------, ID No. -------------
Telephone Number:

                                                           Refer Reply To:

---------- CC:PSI:B1
------------------------- PLR-101296-10
----------------------- Date:
-------------------------------- March 16, 2010

Legend:

X = -----------------------

Trust = -----------------------------------------------------------------

Date 1 = --------------------

Date 2 = -------------------------

State = ---------

a = --------

b = --

Dear --------------:

   This letter responds to a letter dated ------------------, and subsequent

correspondence, submitted on behalf of the Trust by its authorized representative,
requesting rulings under sections 664 and 4941 of the Internal Revenue Code (“Code”).

FACTS

     The information submitted states that on Date 1, X created Trust with the

intention that Trust qualify as a charitable remainder unitrust (CRUT) described in
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section 664(d)(2) of the Code. The terms of Trust provide that the trustee of Trust shall
pay an annual fixed percentage unitrust amount to X. After X's death, the trustee is to
distribute the then remaining trust assets to organizations represented as being
organizations described in sections 170(c), 2055(a), and 2522(a).

   X created Trust with the assistance of his attorney. However, due to a

scrivener’s error, an incorrect unitrust percentage was originally included in the Trust
instrument. X had intended for Trust to pay a unitrust amount of a percent, rather than
b percent, the amount originally provided for in the Trust instrument. On Date 2, a State
court, after giving notice to the charities and the State Attorney General, entered an
order correcting the scrivener’s error and amending retroactively the unitrust amount,
conditioned upon a ruling by the Service that Trust will be treated as a valid CRUT since
Date 1. X represents that X has returned the excess amounts and all accrued interest
to Trust consistent with the treatment of Trust as a CRUT with a stated a percent
unitrust amount since Date 1. X also represents that X has not, and will not, claim any
additional charitable deduction as a result of the retroactive amendment of Trust. All
parties to the Trust have consented in writing to the reformation.

LAW AND ANALYSIS

   RULING 1

    Section 664(d)(2) defines a CRUT for the purposes of section 664 as a trust (A)

from which a fixed percentage (which is not less than 5 percent nor more than 50
percent) of the net fair market value of its assets, valued annually, is to be paid, not less
often than annually, to one or more persons (at least one of which is not an organization
described in section 170(c) and, in the case of individuals, only to an individual who is
living at the time of the creation of the trust) for a term of years (not in excess of 20
years) or for the life or lives of such individual or individuals, (B) from which no amount
other than the payments described in section 664(d)(2)(A) and other than qualified
gratuitous transfers described in section 664(d)(2)(C) may be paid to or for the life or
lives of such individual or individuals, (C) following the termination of the payments
described in section 664(d)(2)(A), the remainder interest in the trust is to be transferred
to, or for the use of, an organization described in section 170(c) or is to be retained by
the trust for such a use or, to the extent the remainder interest is in qualified employer
securities (as defined in section 664(g)(4)), all or part of such securities are to be
transferred to an employee stock ownership plan (as defined in section 4975(e)(7)) in a
gratuitous transfer (as defined by section 664(g)), and (D) with respect to each
contribution of property to the trust, the value (determined under section 7520) of such
remainder interest in such property is at least 10 percent of the net fair market value of
such property as of the date such property is contributed to the trust.

   Section 1.664-3(a)(4) of the Income Tax Regulations provides that no amount

other than the unitrust amount may be paid to or for the use of any person other than an
PLR-101296-10 3

organization described in section 170(c). The CRUT may not be subject to a power to
invade, alter, amend, or revoke for the beneficial use of a person other than an
organization described in section 170(c).

   RULING 2

  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(d)(1)(E) of the Code defines the term “self-dealing” as 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 defines the term “disqualified person” with respect to

a private foundation as including a substantial contributor to the foundation (including
the creator of a trust).

    Section 4947(a)(2) of the Code provides, in pertinent part, that in the case of a

trust which is not exempt from tax under section 501(a), not all of the unexpired
interests of which are devoted to charitable purposes, and which has amounts in trust
for which a charitable deduction was allowed, section 4941 and other provisions apply
as if such trust were a private foundation.

  Section 53.4941(d)-(2)(f)(2) of the Foundation and Similar Excise Tax

Regulations (the “regulations”) provides that an incidental or tenuous benefit to a
disqualified person does not constitute an act of self-dealing.

   Sections 53.4947-1(c)(2) and 53.4947-1(c)(2)(ii), Example (1), of the regulations

indicate, in pertinent part, that the payment of income under the terms of the trust by a
charitable remainder unitrust to its individual income beneficiaries do not result in any
tax on self-dealing under section 4941 of the Code.

   The analysis is two-fold in that we must first delve into whether the self-dealing

rules of Chapter 42 of the Code apply to X in his role as income beneficiary. We must
also determine if there are any self-dealing issues regarding whether X, as a substantial
contributor, is involved in any self-dealing transactions with regard to the Trust.

   As a charitable remainder unitrust under section 664(d)(2) of the Code, Trust is

considered to be a split-interest trust as described in section 4947(a)(2). By virtue of
being described in section 4947(a)(2), Trust is subject to the provisions of section 4941,
which imposes an excise tax on acts of self dealing. The involvement of disqualified
persons in certain transactions with Trust constitutes self-dealing under section 4941.
Since X is a substantial contributor to Trust under section 4946, he is considered to be a
disqualified person with respect to Trust. However, under section 4947(a)(2) of the
PLR-101296-10 4

Code, the self-dealing rules of section 4941 do not apply to any amounts payable under
the terms of a split-interest trust to income beneficiaries as long as no deduction was
allowed for such income interest under section 170(f)(2)(B), 20555(e)(2)(B), or
2522(e)(2)(B) with respect to the income interest of any such beneficiary. Trust
represents that no deduction, under the above Code sections, was taken by X with
respect to any amounts of income payable to them by Trust. As a result, the self-
dealing rules of section 4941 do not apply to X as income beneficiary.

   Regarding whether X as a substantial contributor is engaged in self-dealing

under section 4941 of the Code, the circumstances presented above indicate that there
is no act of self-dealing since we are satisfied that the signatory to Trust intended to
create a trust that qualified as a CRUT. X received the use of the funds for a period due
to a verified mistake rather than a deliberate act of self-dealing, and has repaid the
funds with adequate interest.

CONCLUSION

   RULING 1

    Based solely on the facts and representations submitted, we conclude that Trust

will be treated as a valid CRUT described in section 664(d)(2) since Date 1.

   RULING 2

   Based solely on the facts and representations submitted, we rule that the since

the Trust is qualified as a CRUT under section 664 (d)(2) of the Code, then the
reformation of the Trust, and the resulting overpayment to X which has subsequently
been repaid, does not constitute self-dealing under section 4941.

   Except as specifically set forth above, no opinion is expressed concerning the

federal tax consequences of the facts described above under any other provision of the
Code.

  This ruling is directed only to the taxpayer(s) requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.
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   Pursuant to the power of attorney on file, a copy of this letter is being sent to X’s

authorized representatives.

                                   Sincerely,

                                      /s/

                                   David R. Haglund
                                   Chief, Branch 1
                                   Office of the Associate Chief Counsel
                                   (Passthroughs & Special Industries)



   Enclosures (2)
   Copy of this letter
   Copy for § 6110 purposes



   cc: