PLR 1123044: IRS approves endowment-pool treatment for charitable trusts

Plain-English summary

The IRS approved a university's proposed treatment of investments by two charitable remainder trusts in the university's general endowment pool. The IRS ruled that issuing, holding, redeeming, and receiving distributions from the pool units would not generate unrelated business taxable income for the university or the trusts. It also ruled that the pool units would be capital assets and that gains or losses on their termination or redemption would receive capital treatment based on the holding period. The ruling applied to the specific contract, trust arrangements, and facts submitted by the university.

Ruling snapshot

• Question: How should the university and charitable remainder trusts treat pool-unit investments for unrelated business income and capital-gain purposes?
• Outcome: Approved.
• Key authorities: IRC §§ 501, 511, 512, 513, 6110, 1221, 1222, 1234; Treas. Reg. §§ 1.501(c)(3)-1, 1.512(b)-1, 1.513-1.

Full text (IRS public release)

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201123044 Contact Person:
Release Date: 6/10/2011
Date: March 15, 2011 Identification Number:

Uniform Issue List Numbers: Telephone Number:

512.04-00 Employer Identification Number:
1221.00-00

1222.01-00

1234A.00-00

Legend:
University =
State =
Trust A =
Trust B =

Foundation =

Dear

This is in response to your letter dated December 10, 2009, in which you request rulings
regarding the application of the unrelated business income tax provisions of Part III, Subchapter
F, Chapter 1, and the capital gains provisions of Subchapter P, Chapter 1 of the Internal
Revenue Code (the “Code”) to the transaction described below.

Facts

The University is a legal entity formed pursuant to the State constitution and incorporated under
State law for the purposes of teaching, research, and public service. In furtherance of those
purposes, the University provides educational instruction to students at campuses throughout
the State. The University is exempt from federal income tax under section 501(a) of the Code
as an organization described in section 501(c)(3).

The University manages gift assets held as endowment in its general endowment pool (the
“Pool”). The Pool is invested in a highly diversified portfolio of U.S. and foreign stocks, bonds,
and other investments. Each year, a portion of each endowment fund invested in the Pool is
severed from the Pool and distributed to University campuses and programs to be spent for the
purposes set forth by the donors.

The University uses a unit concept with respect to the various endowments that are invested in
the Pool. Each endowment is assigned a certain number of Pool Units. The value of a Pool
Unit is set monthly, and is based on the value of the underlying Pool investments. Pool Units
may be redeemed for value. Each endowment is entitled to an annual distribution in an amount
equal to the spending policy rate per Pool Unit times the number of Pool Units it holds (a
“Spending Policy Distribution”). The spending policy rate, determined from time to time by the
University, is a percentage of the market value of the investments in the Pool, calculated on a
sixty-month rolling average.

The University is the trustee of a number of charitable remainder trusts including Trust A and
Trust B (together, the “Trusts”). The Trusts are charitable remainder unitrusts within the
meaning of section 664(d)(2) of the Code. The sole charitable remainder beneficiary of Trust A
is the University. The sole charitable remainder beneficiary of Trust B is the Foundation. The
Foundation is exempt from federal income tax under section 501(a) of the Code as an
organization described under section 501(c)(3). The Foundation was established to provide
financial assistance to one of the University’s campuses. While the University does not legally
control the Foundation, the Foundation is organized and operated to support the University
through the campus's operations and, upon the Foundation’s dissolution, its assets will be
distributed to the University. Thus, the University is the indirect charitable remainder beneficiary
of Trust B through the Trust's support for the Foundation.

To date, the Trusts’ assets have been invested primarily in income and index funds. The
investment return experienced by the Pool has outperformed the return experienced by the
Trusts since their creation. To achieve greater economies of scale in the management of the
Trusts, a potentially higher investment return for the Trusts, and increased diversification of the
Trusts’ investments, the University would like the Trusts to participate in the return that the Pool
experiences. To that end, the University proposes to enter into a contract with itself, acting in its
capacity as trustee of the Trusts, under which the University will issue, and the University, as
trustee, will purchase Pool Units (the “Contract”). The value of a Pool Unit would be based on
the value of all underlying investment assets held in the Pool, and would have the same value
as the “units” that the University uses for internal accounting purposes. Each investment by the
Trusts in Pool Units will be transacted at the appropriate unit value. The Trusts will receive a
Spending Policy Distribution, based on the number of Pool Units owned, to the same extent and
at the same spending policy rate as any of the various endowments of the University with funds
held in the Pool, except that Spending Policy Distributions with respect to Pool Units held by the
Trusts will be made to the Trusts quarterly. The Trusts will treat Spending Policy Distributions
as ordinary income, regardless of the character of the underlying income of the Pool, whether
capital gain, ordinary income, or return of capital.

The University, acting as trustee, may elect to have all or part of a Spending Policy Distribution
reinvested in Pool Units at the then-current valuation. In addition, on a quarterly basis, the
University may purchase additional Pool Units on a Trust’s behalf, or may have part or all of the
Pool Units owned by a Trust redeemed for cash, in either case at the then-current value of Pool
Units.

The University receives reimbursement for all of its costs with respect to the Pool, and also
retains investment managers who receive compensation (including incentive compensation)
through charges against the Pool. These charges are thereby borne by all University funds and
by any trusts holding Pool Units. The Pool also bears such costs as brokerage expenses.

The University will not charge the Trusts a fee for management of the Trusts or in connection
with the investment by the Trusts in Pool Units. The University will not manage funds for any
third parties other than entities related to the University. If the Pool’s earnings exceed the
amount calculated according to the annual spending policy rate declared by the University, any
return exceeding the spending policy amounts will increase the principal of the Pool, thus
increasing the value of each Pool Unit. The University will not reserve or segregate any part of
the Pool’s earnings from inclusion in the value of the Pool Units held by the Trusts.

The Contract will provide that an investment in Pool Units gives the Trusts neither an ownership
interest in the underlying assets of the Pool nor any rights with respect to any other trust that
invests in Pool Units. Moreover, the Trusts will have no right to veto or opt out of any of the
Pool’s underlying investments, and no power or right to control, direct, supervise, recommend,
or review the University’s business activities, operations, or decisions with respect to the Pool,
except the right to review their individual Spending Policy Distribution computations. The
Contract will also provide that, with respect to the issuance and holding of Pool Units, the
University is neither a partner nor an agent of the Trusts (other than in its capacity as trustee),
and the Trusts will never be liable for any cost, expense, or payment incurred or due by the
University, for which the University is liable, relating to the Pool or the underlying investment
assets. The University represents that it will pay any unrelated business income tax generated
by any of the investment assets in the Pool, with no deduction taken against unrelated business
taxable income for any payments made to the Trusts.

If the Foundation ever changed its organizational structure so that either (i) it is no longer
organized and operated for the benefit of the University, or (ii) its assets would go to some entity
other than the University upon dissolution, Trust B would no longer be permitted to participate in
the Pool Unit investment program, and all Pool Units held by Trust B would be redeemed for
cash at the then current value of Pool Units.

Rulings Requested

You have requested the following rulings—

1. The issuance of Pool Units by the University to the Trusts, the making or receipt of
   payments with respect to the Pool Units, and the holding or redemption of the Pool Units
   will not generate unrelated business taxable income to the University or to the Trusts.

2. Pool Units held by the Trusts will be treated as capital assets for purposes of section
   1221 of the Code, and section 1234A will apply to treat gain or loss from the
   cancellation, lapse, expiration, or other termination of a Pool Unit as gain or loss from
   the sale of a capital asset.

3. The redemption of Pool Units by the Trusts will generate short-term or long-term capital
   gain or loss to the Trusts, depending on the holding period of the Pool Unit as set forth in
   section 1222 of the Code.

ISSUE 1

Whether the issuance of Pool Units by the University to the Trusts, the making or receipt of
Spending Policy Distributions with respect to the Pool Units, or the holding or redemption of
Pool Units will generate unrelated business taxable income (within the meaning of section
512(a)(1) of the Code) to the University or to the Trusts.

Law

Section 511 of the Code imposes a tax for each taxable year on the unrelated business taxable
income of every organization which is exempt from taxation by reason of section 501(a), as well
as any college or university which is an agency or instrumentality of any government or any
political subdivision thereof, or which is owned or operated by a government or any political
subdivision thereof.

Section 512(a)(1) of the Code defines the term “unrelated business taxable income” as the
gross income derived from any unrelated trade or business regularly carried on, less the
allowable deductions that are directly connected with the carrying on of the trade or business,
computed with the modifications set forth in section 512(b).

Section 512(b)(1) of the Code excludes from “unrelated business taxable income” all dividends,
interest, payments with respect to securities loans, amounts received or accrued as
consideration for entering into agreements to make loans, and annuities, and all deductions
directly connected with such income.

Section 1.512(b)-1(a)(1) of the income tax regulations (the “regulations”) provides that
dividends, interest, payments with respect to securities loans, annuities, income from notional
principal contracts, other substantially similar income from ordinary and routine investments,
and all deductions directly connected with any of the foregoing items of income shall be
excluded in computing unrelated business taxable income.

Section 513(a) of the Code defines the term “unrelated trade or business” as any trade or
business the conduct of which is not substantially related (aside from the need of an
organization for income or funds or the use it makes of the profits derived) to the exercise or
performance by such organization of its charitable, educational, or other purpose or function
constituting the basis for its exemption under section 501 (or, in the case of an organization
described in section 511(a)(2)(B), to the exercise or performance of any purpose or function
described in section 501(c)(3)).

Section 513(c) of the Code provides that the term “trade or business” includes any activity which
is carried on for the production of income from the sale of goods or the performance of services.

Section 1.513-1(b) of the regulations states that Congress’s primary objective in adopting the
unrelated business income tax was to eliminate a source of unfair competition by placing the
unrelated business activities of exempt organizations upon the same tax basis as the
nonexempt business endeavors with which they compete. On the other hand, where an activity
does not possess the characteristics of a trade or business within the meaning of section 162,
the unrelated business income tax does not apply since the organization is not in competition
with taxable organizations. Accordingly, for purposes of section 513, the term “trade or
business” has the same meaning it has in section 162, and generally includes any activity
carried on for the production of income from the sale of goods or performance of services.

Section 1.513-1(d)(1) of the regulations provides that gross income derives from “unrelated
trade or business’ if the conduct of the trade or business which produces the income is not
substantially related (other than through the production of funds) to the purposes for which
exemption is granted.

Section 1.513-1(d)(2) of the regulations provides that trade or business is related to exempt
purposes, in the relevant sense, only where the conduct of the business activities has causal
relationship to the achievement of exempt purposes (other than through the production of
income), and it is “substantially related,” for purposes of section 513, only if the causal
relationship is a substantial one. Thus, for the conduct of trade or business from which a
particular amount of gross income is derived to be substantially related to purposes for which
exemption is granted, the production or distribution of the goods or the performance of the
services from which the gross income is derived must contribute importantly to the
accomplishment of those purposes. Where the production or distribution of the goods or the
performance of the services does not contribute importantly to the accomplishment of the
exempt purposes of an organization, the income from the sale of the goods or the performance
of the services does not derive from the conduct of related trade or business. Whether activities
productive of gross income contribute importantly to the accomplishment of any purpose for
which an organization is granted exemption depends in each case upon the facts and
circumstances involved.

Section 664(c)(2) of the Code imposes an excise tax on the unrelated business taxable income
(as defined in section 512) for a taxable year of a charitable remainder annuity trust or
charitable remainder unitrust (determined as if part III of subchapter F applied to such trust) in
the amount of the unrelated business taxable income.

Rev. Rul. 69-528, 1969-2 C.B. 127, concerns an organization that was formed to provide
investment services on a fee basis exclusively to organizations exempt under section 501(c)(3)
of the Code. It receives funds from the participating exempt organizations, invests in common
stocks, reinvests income and realized appreciation, and, upon request, liquidates a participant's
interest and distributes the proceeds to the participant. The ruling states that providing
investment services on a regular basis for a fee is a trade or business ordinarily carried on for
profit. If the services were regularly provided by one tax-exempt organization for other tax-
exempt organizations, such activity would constitute unrelated trade or business.
Consequently, the organization described in the ruling is not exempt under section 501(c)(3).

Analysis

(a) As to the University

Under the reasoning of Rev. Rul. 69-528, an organization that otherwise qualifies for recognition
of exemption under section 501(c)(3) of the Code and provides investment services on a regular
basis for a fee to other exempt or nonexempt organizations would be engaged in an unrelated
trade or business within the meaning of section 513(a). Such activity would constitute a “trade
or business” under section 513(c) of the Code and section 1.513-1(b) of the regulations, and the
conduct of such trade or business would not be substantially related (within the meaning of
section 1.513-1(d) of the regulations) to the exercise or performance of any purpose or function
described in section 501(c)(3). Thus, if the University charged a fee for investment
management services provided to organizations unrelated to it, or generated income from the
management of the funds invested by such organizations, such activities could result in
unrelated business taxable income within the meaning of section 512(a)(1). Here, however, the
University is not charging the Trusts a fee for its services and not otherwise receiving income
from the services it provides to the Trusts. Thus, under these circumstances, the University will
not receive unrelated business taxable income within the meaning of section 512(a)(1).

The fact that the University will engage in the investment activity for the benefit of individuals
who are co-beneficiaries of the Trusts at the same time that it engages in investment activity for
its own benefit as the direct or indirect remainder beneficiary limits the scope of the service
provided to “others” and distinguishes it from a commercial venture.

(b) As to the Trusts

The investment of the Trusts’ assets in Pool Units would be an investment activity, and the
receipt of Spending Policy Distributions with respect to those Units would be income from
ordinary and routine investments of the type that is excludible from unrelated business taxable
income by reason of section 512(b)(1) of the Code and section 1.512(b)-1(a)(1) of the
regulations. Thus, neither the Spending Policy Distributions nor the holding or redemption of
the Pool Units themselves would result in the receipt of unrelated business taxable income
(within the meaning of section 512(a)(1) of the Code) by the Trusts on which the Trusts would
owe an excise tax under section 664(c)(2). For although some of the Pool’s other investments
might generate unrelated business taxable income, no portion of such income would be
attributed or assigned to the Trusts merely because their assets are invested in Pool Units.

The holding of Pool Units does not give the Trusts beneficial ownership in the Pool. Rather, a
Pool Unit represents a mere contractual right to receive Spending Policy Distributions as
determined by the University. Furthermore, the commingling of the Trusts’ assets with other
property in the Pool for investment purposes cannot be characterized as a partnership for
federal income tax purposes. The University and the Trusts do not hold themselves out as
partners, and show no intention to join together in the present conduct of an enterprise. On the
contrary, the Contract will specifically state that the University is not a partner or an agent of the
Trusts with respect to the issuance and holding of Pool Units. Furthermore, the proposed

arrangement between the University and the Trusts has none of the characteristics that are
commonly associated with a partnership. The commingling of the Trusts’ assets with other
assets in the Pool does not give the Trusts a capital interest in the Pool or any other ownership
interest or rights in the other assets in the Pool. An investment in Pool Units does not give the
Trusts any power or right to control, direct, supervise, recommend, or review the University’s
business activities, operations, or decisions with respect to the Pool, nor does it give the Trusts
a right to veto or opt out of any underlying investment in the Pool. Likewise, an investment in
Pool Units does not give the Trusts a proprietor’s interest in the profits and losses of the Pool,
but only a right to Spending Policy Distributions. Since the relationship between the University
and the Trusts is not in the nature of a partnership or agency, the Spending Policy Distributions
reflect ordinary income and do not take on the character of the income of the underlying assets.
The University would pay any tax owed on the unrelated business taxable income earned by the
Pool, with no deduction taken against unrelated business taxable income for any payments
made to the Trusts.

ISSUES 2 AND 3

2) Whether Pool Units will be treated as capital assets for purposes of Section 1221 of the
Code, and whether section 1234A will apply to treat gain or loss from the cancellation, lapse,
expiration, or other termination of a Pool Unit as a gain or loss from the sale of a capital asset.

3) Whether the redemption of Pool Units will generate short-term or long-term capital gain or
loss to the Trusts, depending on the holding period of the Pool Unit, as set forth in section 1222
of the Code.

Law

Section 1222 of the Code provides that capital gain or loss is generated upon the sale or
exchange of a capital asset.

Section 1234A of the Code provides that gain or loss attributable to the cancellation, lapse,
expiration, or other termination of a right or obligation with respect to property which is (or on
acquisition would be) a capital asset in the hands of the taxpayer shall be treated as gain or loss
of a capital asset.

Section 1221 of the Code defines the term “capital asset” as property held by the taxpayer,
regardless of whether it is connected with the taxpayer’s trade or business, unless the property
meets one of eight listed exceptions: (1) inventory; (2) property of a character which is subject to
the allowance for depreciation provided in section 167, or real property used in a trade or
business; (3) certain intangible property; (4) accounts receivable acquired in the ordinary course
of a trade or business; (5) certain publications of the United States government; (6) certain
commodities financial derivatives; (7) certain hedging transactions; and (8) supplies of a type
regularly consumed by the taxpayer in the ordinary course of a trade or business. None of
these listed exceptions applies to a Pool Unit.

But although section 1221 appears to give broad meaning to the term “capital asset,” the

Supreme Court has said that “not everything which can be called property in the ordinary sense
and which is outside the statutory exclusions [of section 1221] qualifies as a capital asset.”
Rather, “the term ‘capital asset’ is to be construed narrowly in accordance with the purpose of
Congress to afford capital-gains treatment only in situations involving the realization of
appreciation in value accrued over a substantial period of time....”. Comm’r v. Gillette Motor
Transp., Inc., 364 U.S. 130, 134 (1960) (citing Burnet v. Harmel, 287 U.S. 103, 106 (1932)).
Accordingly, the Court has held that certain interests that concededly are “property” in the
ordinary sense are not capital assets. For instance, capital gain treatment has been denied for
transactions involving payments in return for interests carved out of, or related to, an interest
retained by the taxpayer. See, e.g., Comm’r v. P.G. Lake, Inc., 356 U.S. 260 (1958) (denying
capital gain treatment on the disposition of certain mineral payments carved out of established
oil and gas interests); Hort v. Comm’r, 313 U.S. 28 (1941) (denying capital gain treatment on the
disposition of a term of years carved out from a fee simple).

The Supreme Court has also denied capital gain treatment for transactions on the grounds that
the payments at issue were a substitute for ordinary income. In Hort, for example, a tenant
cancelled its lease in the taxpayer’s building, and paid the taxpayer a cancellation fee. The
Court held that the cancellation fee was ordinary income because the cancellation of the lease
involved nothing more than relinquishment of the right to future rental payments in return for a
present substitute payment and possession of the leased premises. Hort, 313 U.S. at 32. The
Court reinforced this “substitute-for-ordinary-income” doctrine in P.G. Lake, stating that “the
lump sum consideration seems essentially a substitute for what would otherwise be received at
a future time as ordinary income.” P.G. Lake, 356 U.S. at 265.

Consistent with the substitute-for-ordinary-income doctrine, courts have denied capital gain
treatment for transactions involving interests related to compensation for past or future personal
services. See, e.g., Freese v. United States, 455 F.2d 1146 (10th Cir. 1972) (lump sum
representing unpaid commissions due under an employment contract); Elliott v. United States,
431 F.2d 1149 (10th Cir. 1970) (lump sum paid for the surrender of right to future sales
commissions); Holt v. Comm’r, 303 F.2d 687 (9" Cir. 1962) (payment for interest in films to be
produced by taxpayer). Similarly, courts have denied capital gain treatment for interests relating
to income already earned or about to be earned. See, e.g., United States v. Midland-Ross
Corp., 381 U.S. 54 (1965) (earned original issue discount); Lattera v. Comm’r, 437 F.3d 399 (3d
Cir. 2006) (lump sum payment for annual installments of lottery prize); Rhodes’ Estate v.
Comm’r, 131 F.2d 50 (6th Cir. 1942) (right to dividend that was already declared).

On the other hand, “simply because the property transferred will produce ordinary income, and
such income is a major factor in determining the value of the property, does not necessarily
mean that the amount received for the property is essentially a lump-sum substitute for ordinary
income.” Guggenheim v. Comm’r, 46 T.C. 559, 569 (1966). In Guggenheim, the court focused
on whether the taxpayer transferred substantial investment risks in the sale of undivided
interests in a stallion. The court noted that if the value of the stallion subsequently increased,
the taxpayer would not share in that increase with regard to the interests transferred. Instead,
the new owners would receive all the benefits of an increase in the value of the stallion and all
the burdens of a decrease in value. Therefore, the court found that the taxpayer had transferred
substantial investment risks and was entitled to capital gain treatment on the sale of the

interests.

In United States v. Dresser Indus., Inc., 324 F.2d 56 (5th Cir. 1963), the court distinguished
between proceeds from the present sale of the future right to earn income, which is capital gain,
and the present sale of the future right to earned income, which is ordinary income. The court
found that the sale of an income-producing asset was not merely the sale of the right to income
already earned, because the taxpayer had an asset that would produce income in the future.
Noting that “there is, in law and fact, a vast difference between the present sale of the future
right to earn income and the present sale of the future right to earned income,” the court held
that the taxpayer’s sale of the asset generated capital gain. Id. at 59.

Similarly, in Comm’r v. Ferrer, 304 F.2d 125 (2d Cir. 1962), the court held that the taxpayer's
surrender of the lease of a play constituted the sale or exchange of a capital asset, despite the
fact that receipts from the play would have been ordinary income. Id. at 132. In rejecting the
government’s argument against capital gain treatment, the court noted that there was no
equivalence between amounts paid for the surrender of the lease and the income that would
have been realized by its retention. Id. at 133.

Analysis

The bundle of contract rights represented by a Pool Unit is property, and may be treated as a
capital asset for purposes of section 1221 of the Code. The most important characteristic of the
Pool Unit is that significant investment risks are associated with, and included in, each Unit.
With respect to each Pool Unit, there is an opportunity for appreciation as well as a risk of loss.
Each Unit represents a substantial investment by the Trust, and each Unit has an ascertainable
basis. The value of each Unit is directly tied to the Pool’s investment performance; poor
performance will result in a decrease in the value of each Unit, while performance above the
spending policy rate set by the University will increase the value of each Unit. The opportunity
for appreciation, risk of loss, and basis in each Unit are characteristics of other contract rights
that are treated as capital assets, for example, financial derivatives, notional principal contracts,
mutual fund shares, and corporate stock. Furthermore, the benefits and burdens associated
with each Unit are similar to those associated with the property judged to be capital assets in
Guggenheim, Dresser, and Ferrer.

In addition, although the Trusts will receive ordinary income in the form of the quarterly
Spending Policy Distributions that are based on the number of Pool Units owned by the Trusts,
consideration received upon a redemption of a Pool Unit is not a substitute for what would
otherwise be received as an ordinary income payout, whether due and payable or about to be
due and payable to the Trust under the terms of the Contract. Rather, the amount paid for a
Pool Unit upon a redemption is equal to the value of the Unit on the date of redemption. Unit
value on any given date is equal to overall asset value of the Pool divided by the number of
Units outstanding. In addition, a Pool Unit is not an interest related to compensation for past or
future personal services. Instead, the Unit is an asset that will produce income in the future.

Finally, a Pool Unit does not represent a carve-out of a larger estate retained by the Trust. The
appreciation of each Unit is attributable to overall Pool property appreciation, much of which, in

10

turn, is attributable to increases in the value of capital assets in the Pool. The Contract
specifically provides that the Trust has no ownership interest or rights to the Pool.

Thus, we conclude that a Pool Unit is a capital asset for purposes of section 1221 of the Code.
Furthermore, section 1234A will apply to treat gain or loss from the cancellation, lapse,
expiration, or other termination of a Pool Unit as gain or loss from the sale of a capital asset.
Consequently, in general, the redemption of a Pool Unit will generate short-term or long-term
capital gain or loss to the Trusts, depending on the holding period of the Unit.

Conclusion
Accordingly, based on the information submitted in your ruling request, we rule as follows:

1. The issuance of Pool Units by the University to the Trusts, the making or receipt of
   Spending Policy Distributions with respect to Pool Units, and the holding or redemption
   of Pool Units will not generate unrelated business taxable income (within the meaning of
   section 512(a)(1) of the Code) to the University or the Trusts.

2. A Pool Unit will be treated as a capital asset for purposes of section 1221 of the Code,
   and section 1234A will apply to treat gain or loss from the cancellation, lapse, expiration,
   or other termination of a Pool Unit as gain or loss from the sale of a capital asset.

3. The redemption of a Pool Unit will generate short-term or long-term capital gain or loss
   to the Trusts as set forth in section 1222 of the Code, depending on the holding period of
   the Pool Unit.

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. !f 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. Because it could help resolve 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.

11

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,

Theodore R. Lieber
Manager, Exempt Organizations
Technical Group 3

Enclosure
Notice 437

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

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

Release Number: 201123044 Contact Person:
Release Date: 6/10/2011
Date: March 15, 2011 Identification Number:

Uniform Issue List Numbers: Telephone Number:

512.04-00 Employer Identification Number:
1221.00-00

1222.01-00

1234A.00-00

Legend:
University =
State =
Trust A =
Trust B =

Foundation =

Dear

This is in response to your letter dated December 10, 2009, in which you request rulings
regarding the application of the unrelated business income tax provisions of Part Ill, Subchapter
F, Chapter 1, and the capital gains provisions of Subchapter P, Chapter 1 of the Internal
Revenue Code (the “Code’”) to the transaction described below.

Facts

The University is a legal entity formed pursuant to the State constitution and incorporated under
State law for the purposes of teaching, research, and public service. In furtherance of those
purposes, the University provides educational instruction to students at campuses throughout
the State. The University is exempt from federal income tax under section 501(a) of the Code
as an organization described in section 501(c)(3).

The University manages gift assets held as endowment in its general endowment pool (the
“Pool”). The Pool is invested in a highly diversified portfolio of U.S. and foreign stocks, bonds,
and other investments. Each year, a portion of each endowment fund invested in the Pool is
severed from the Pool and distributed to University campuses and programs to be spent for the
purposes set forth by the donors.

The University uses a unit concept with respect to the various endowments that are invested in
the Pool. Each endowment is assigned a certain number of Pool Units. The value of a Pool
Unit is set monthly, and is based on the value of the underlying Pool investments. Pool Units
may be redeemed for value. Each endowment is entitled to an annual distribution in an amount
equal to the spending policy rate per Pool Unit times the number of Pool Units it holds (a
“Spending Policy Distribution”). The spending policy rate, determined from time to time by the
University, is a percentage of the market value of the investments in the Pool, calculated on a
sixty-month rolling average.

The University is the trustee of a number of charitable remainder trusts including Trust A and
Trust B (together, the “Trusts”). The Trusts are charitable remainder unitrusts within the
meaning of section 664(d)(2) of the Code. The sole charitable remainder beneficiary of Trust A
is the University. The sole charitable remainder beneficiary of Trust B is the Foundation. The
Foundation is exempt from federal income tax under section 501(a) of the Code as an
organization described under section 501(c)(3). The Foundation was established to provide
financial assistance to one of the University’s campuses. While the University does not legally
control the Foundation, the Foundation is organized and operated to support the University
through the campus's operations and, upon the Foundation’s dissolution, its assets will be
distributed to the University. Thus, the University is the indirect charitable remainder beneficiary
of Trust B through the Trust’s support for the Foundation.

To date, the Trusts’ assets have been invested primarily in income and index funds. The
investment return experienced by the Pool has outperformed the return experienced by the
Trusts since their creation. To achieve greater economies of scale in the management of the
Trusts, a potentially higher investment return for the Trusts, and increased diversification of the
Trusts’ investments, the University would like the Trusts to participate in the return that the Pool
experiences. To that end, the University proposes to enter into a contract with itself, acting in its
capacity as trustee of the Trusts, under which the University will issue, and the University, as
trustee, will purchase Pool Units (the “Contract”). The value of a Pool Unit would be based on
the value of all underlying investment assets held in the Pool, and would have the same value
as the “units” that the University uses for internal accounting purposes. Each investment by the
Trusts in Pool Units will be transacted at the appropriate unit value. The Trusts will receive a
Spending Policy Distribution, based on the number of Pool Units owned, to the same extent and
at the same spending policy rate as any of the various endowments of the University with funds
held in the Pool, except that Spending Policy Distributions with respect to Pool Units held by the
Trusts will be made to the Trusts quarterly. The Trusts will treat Spending Policy Distributions
as ordinary income, regardless of the character of the underlying income of the Pool, whether
capital gain, ordinary income, or return of capital.

The University, acting as trustee, may elect to have all or part of a Spending Policy Distribution
reinvested in Pool Units at the then-current valuation. In addition, on a quarterly basis, the
University may purchase additional Pool Units on a Trust’s behalf, or may have part or all of the
Pool Units owned by a Trust redeemed for cash, in either case at the then-current value of Pool
Units.

The University receives reimbursement for all of its costs with respect to the Pool, and also
retains investment managers who receive compensation (including incentive compensation)
through charges against the Pool. These charges are thereby borne by all University funds and
by any trusts holding Pool Units. The Pool also bears such costs as brokerage expenses.

The University will not charge the Trusts a fee for management of the Trusts or in connection
with the investment by the Trusts in Pool Units. The University will not manage funds for any
third parties other than entities related to the University. If the Pool’s earnings exceed the
amount calculated according to the annual spending policy rate declared by the University, any
return exceeding the spending policy amounts will increase the principal of the Pool, thus
increasing the value of each Pool Unit. The University will not reserve or segregate any part of
the Pool’s earnings from inclusion in the value of the Pool Units held by the Trusts.

The Contract will provide that an investment in Pool Units gives the Trusts neither an ownership
interest in the underlying assets of the Pool nor any rights with respect to any other trust that
invests in Pool Units. Moreover, the Trusts will have no right to veto or opt out of any of the
Pool’s underlying investments, and no power or right to control, direct, supervise, recommend,
or review the University’s business activities, operations, or decisions with respect to the Pool,
except the right to review their individual Spending Policy Distribution computations. The
Contract will also provide that, with respect to the issuance and holding of Pool Units, the
University is neither a partner nor an agent of the Trusts (other than in its capacity as trustee),
and the Trusts will never be liable for any cost, expense, or payment incurred or due by the
University, for which the University is liable, relating to the Pool or the underlying investment
assets. The University represents that it will pay any unrelated business income tax generated
by any of the investment assets in the Pool, with no deduction taken against unrelated business
taxable income for any payments made to the Trusts.

If the Foundation ever changed its organizational structure so that either (i) it is no longer
organized and operated for the benefit of the University, or (ii) its assets would go to some entity
other than the University upon dissolution, Trust B would no longer be permitted to participate in
the Pool Unit investment program, and all Pool Units held by Trust B would be redeemed for
cash at the then current value of Pool Units.

Rulings Requested

You have requested the following rulings—

1. The issuance of Pool Units by the University to the Trusts, the making or receipt of
   payments with respect to the Pool Units, and the holding or redemption of the Pool Units
   will not generate unrelated business taxable income to the University or to the Trusts.

2. Pool Units held by the Trusts will be treated as capital assets for purposes of section
   1221 of the Code, and section 1234A will apply to treat gain or loss from the
   cancellation, lapse, expiration, or other termination of a Pool Unit as gain or loss from
   the sale of a capital asset.

3. The redemption of Pool Units by the Trusts will generate short-term or long-term capital
   gain or loss to the Trusts, depending on the holding period of the Pool Unit as set forth in
   section 1222 of the Code.

ISSUE 1

Whether the issuance of Pool Units by the University to the Trusts, the making or receipt of
Spending Policy Distributions with respect to the Pool Units, or the holding or redemption of
Pool Units will generate unrelated business taxable income (within the meaning of section
512(a)(1) of the Code) to the University or to the Trusts.

Law

Section 511 of the Code imposes a tax for each taxable year on the unrelated business taxable
income of every organization which is exempt from taxation by reason of section 501(a), as well
as any college or university which is an agency or instrumentality of any government or any
political subdivision thereof, or which is owned or operated by a government or any political
subdivision thereof.

Section 512(a)(1) of the Code defines the term “unrelated business taxable income” as the
gross income derived from any unrelated trade or business regularly carried on, less the
allowable deductions that are directly connected with the carrying on of the trade or business,
computed with the modifications set forth in section 512(b).

Section 512(b)(1) of the Code excludes from “unrelated business taxable income” all dividends,
interest, payments with respect to securities loans, amounts received or accrued as
consideration for entering into agreements to make loans, and annuities, and all deductions
directly connected with such income.

Section 1.512(b)-1(a)(1) of the income tax regulations (the “regulations”) provides that
dividends, interest, payments with respect to securities loans, annuities, income from notional
principal contracts, other substantially similar income from ordinary and routine investments,
and all deductions directly connected with any of the foregoing items of income shall be
excluded in computing unrelated business taxable income.

Section 513(a) of the Code defines the term “unrelated trade or business” as any trade or
business the conduct of which is not substantially related (aside from the need of an
organization for income or funds or the use it makes of the profits derived) to the exercise or
performance by such organization of its charitable, educational, or other purpose or function
constituting the basis for its exemption under section 501 (or, in the case of an organization
described in section 511(a)(2)(B), to the exercise or performance of any purpose or function
described in section 501(c)(3)).

Section 513(c) of the Code provides that the term “trade or business” includes any activity which
is carried on for the production of income from the sale of goods or the performance of services.

Section 1.513-1(b) of the regulations states that Congress’s primary objective in adopting the
unrelated business income tax was to eliminate a source of unfair competition by placing the
unrelated business activities of exempt organizations upon the same tax basis as the
nonexempt business endeavors with which they compete. On the other hand, where an activity
does not possess the characteristics of a trade or business within the meaning of section 162,
the unrelated business income tax does not apply since the organization is not in competition
with taxable organizations. Accordingly, for purposes of section 513, the term “trade or
business” has the same meaning it has in section 162, and generally includes any activity
carried on for the production of income from the sale of goods or performance of services.

Section 1.513-1(d)(1) of the regulations provides that gross income derives from “unrelated
trade or business’ if the conduct of the trade or business which produces the income is not
substantially related (other than through the production of funds) to the purposes for which
exemption is granted.

Section 1.513-1(d)(2) of the regulations provides that trade or business is related to exempt
purposes, in the relevant sense, only where the conduct of the business activities has causal
relationship to the achievement of exempt purposes (other than through the production of
income), and it is “substantially related,” for purposes of section 513, only if the causal
relationship is a substantial one. Thus, for the conduct of trade or business from which a
particular amount of gross income is derived to be substantially related to purposes for which
exemption is granted, the production or distribution of the goods or the performance of the
services from which the gross income is derived must contribute importantly to the
accomplishment of those purposes. Where the production or distribution of the goods or the
performance of the services does not contribute importantly to the accomplishment of the
exempt purposes of an organization, the income from the sale of the goods or the performance
of the services does not derive from the conduct of related trade or business. Whether activities
productive of gross income contribute importantly to the accomplishment of any purpose for
which an organization is granted exemption depends in each case upon the facts and
circumstances involved.

Section 664(c)(2) of the Code imposes an excise tax on the unrelated business taxable income
(as defined in section 512) for a taxable year of a charitable remainder annuity trust or
charitable remainder unitrust (determined as if part III of subchapter F applied to such trust) in
the amount of the unrelated business taxable income.

Rev. Rul. 69-528, 1969-2 C.B. 127, concerns an organization that was formed to provide
investment services on a fee basis exclusively to organizations exempt under section 501(c)(3)
of the Code. It receives funds from the participating exempt organizations, invests in common
stocks, reinvests income and realized appreciation, and, upon request, liquidates a participant's
interest and distributes the proceeds to the participant. The ruling states that providing
investment services on a regular basis for a fee is a trade or business ordinarily carried on for
profit. If the services were regularly provided by one tax-exempt organization for other tax-
exempt organizations, such activity would constitute unrelated trade or business.
Consequently, the organization described in the ruling is not exempt under section 501(c)(3).

Analysis
(a) As to the University

Under the reasoning of Rev. Rul. 69-528, an organization that otherwise qualifies for recognition
of exemption under section 501(c)(3) of the Code and provides investment services on a regular
basis for a fee to other exempt or nonexempt organizations would be engaged in an unrelated
trade or business within the meaning of section 513(a). Such activity would constitute a “trade
or business” under section 513(c) of the Code and section 1.513-1(b) of the regulations, and the
conduct of such trade or business would not be substantially related (within the meaning of
section 1.513-1(d) of the regulations) to the exercise or performance of any purpose or function
described in section 501(c)(3). Thus, if the University charged a fee for investment
management services provided to organizations unrelated to it, or generated income from the
management of the funds invested by such organizations, such activities could result in
unrelated business taxable income within the meaning of section 512(a)(1). Here, however, the
University is not charging the Trusts a fee for its services and not otherwise receiving income
from the services it provides to the Trusts. Thus, under these circumstances, the University will
not receive unrelated business taxable income within the meaning of section 512(a)(1).

The fact that the University will engage in the investment activity for the benefit of individuals
who are co-beneficiaries of the Trusts at the same time that it engages in investment activity for
its own benefit as the direct or indirect remainder beneficiary limits the scope of the service
provided to “others” and distinguishes it from a commercial venture.

(b) As to the Trusts

The investment of the Trusts’ assets in Pool Units would be an investment activity, and the
receipt of Spending Policy Distributions with respect to those Units would be income from
ordinary and routine investments of the type that is excludible from unrelated business taxable
income by reason of section 512(b)(1) of the Code and section 1.512(b)-1(a)(1) of the
regulations. Thus, neither the Spending Policy Distributions nor the holding or redemption of
the Pool Units themselves would result in the receipt of unrelated business taxable income
(within the meaning of section 512(a)(1) of the Code) by the Trusts on which the Trusts would
owe an excise tax under section 664(c)(2). For although some of the Pool’s other investments
might generate unrelated business taxable income, no portion of such income would be
attributed or assigned to the Trusts merely because their assets are invested in Pool Units.

The holding of Pool! Units does not give the Trusts beneficial ownership in the Pool. Rather, a
Pool Unit represents a mere contractual right to receive Spending Policy Distributions as
determined by the University. Furthermore, the commingling of the Trusts’ assets with other
property in the Pool for investment purposes cannot be characterized as a partnership for
federal income tax purposes. The University and the Trusts do not hold themselves out as
partners, and show no intention to join together in the present conduct of an enterprise. On the
contrary, the Contract will specifically state that the University is not a partner or an agent of the
Trusts with respect to the issuance and holding of Pool Units. Furthermore, the proposed

arrangement between the University and the Trusts has none of the characteristics that are
commonly associated with a partnership. The commingling of the Trusts’ assets with other
assets in the Pool does not give the Trusts a capital interest in the Pool or any other ownership
interest or rights in the other assets in the Pool. An investment in Pool Units does not give the
Trusts any power or right to control, direct, supervise, recommend, or review the University’s
business activities, operations, or decisions with respect to the Pool, nor does it give the Trusts
a right to veto or opt out of any underlying investment in the Pool. Likewise, an investment in
Pool Units does not give the Trusts a proprietor's interest in the profits and losses of the Pool,
but only a right to Spending Policy Distributions. Since the relationship between the University
and the Trusts is not in the nature of a partnership or agency, the Spending Policy Distributions
reflect ordinary income and do not take on the character of the income of the underlying assets.
The University would pay any tax owed on the unrelated business taxable income earned by the
Pool, with no deduction taken against unrelated business taxable income for any payments
made to the Trusts.

ISSUES 2 AND 3

2) Whether Pool Units will be treated as capital assets for purposes of Section 1221 of the
Code, and whether section 1234A will apply to treat gain or loss from the cancellation, lapse,
expiration, or other termination of a Pool Unit as a gain or loss from the sale of a capital asset.

3) Whether the redemption of Pool Units will generate short-term or long-term capital gain or
loss to the Trusts, depending on the holding period of the Pool Unit, as set forth in section 1222
of the Code.

Law

Section 1222 of the Code provides that capital gain or loss is generated upon the sale or
exchange of a capital asset.

Section 1234A of the Code provides that gain or loss attributable to the cancellation, lapse,
expiration, or other termination of a right or obligation with respect to property which is (or on
acquisition would be) a capital asset in the hands of the taxpayer shall be treated as gain or loss
of a capital asset.

Section 1221 of the Code defines the term “capital asset” as property held by the taxpayer,
regardless of whether it is connected with the taxpayer’s trade or business, unless the property
meets one of eight listed exceptions: (1) inventory; (2) property of a character which is subject to
the allowance for depreciation provided in section 167, or real property used in a trade or
business; (3) certain intangible property; (4) accounts receivable acquired in the ordinary course
of a trade or business; (5) certain publications of the United States government; (6) certain
commodities financial derivatives; (7) certain hedging transactions; and (8) supplies of a type
regularly consumed by the taxpayer in the ordinary course of a trade or business. None of
these listed exceptions applies to a Pool Unit.

But although section 1221 appears to give broad meaning to the term “capital asset,” the

Supreme Court has said that “not everything which can be called property in the ordinary sense
and which is outside the statutory exclusions [of section 1221] qualifies as a capital asset.”
Rather, “the term ‘capital asset’ is to be construed narrowly in accordance with the purpose of
Congress to afford capital-gains treatment only in situations involving the realization of
appreciation in value accrued over a substantial period of time....”. Comm’r v. Gillette Motor
Transp., Inc., 364 U.S. 130, 134 (1960) (citing Burnet v. Harmel, 287 U.S. 103, 106 (1932)).
Accordingly, the Court has held that certain interests that concededly are “property” in the
ordinary sense are not capital assets. For instance, capital gain treatment has been denied for
transactions involving payments in return for interests carved out of, or related to, an interest
retained by the taxpayer. See, e.g., Comm’r v. P.G. Lake, Inc., 356 U.S. 260 (1958) (denying
capital gain treatment on the disposition of certain mineral payments carved out of established
oil and gas interests); Hort v. Comm’r, 313 U.S. 28 (1941) (denying capital gain treatment on the
disposition of a term of years carved out from a fee simple).

The Supreme Court has also denied capital gain treatment for transactions on the grounds that
the payments at issue were a substitute for ordinary income. In Hort, for example, a tenant
cancelled its lease in the taxpayer’s building, and paid the taxpayer a cancellation fee. The
Court held that the cancellation fee was ordinary income because the cancellation of the lease
involved nothing more than relinquishment of the right to future rental payments in return for a
present substitute payment and possession of the leased premises. Hort, 313 U.S. at 32. The
Court reinforced this “substitute-for-ordinary-income” doctrine in P.G. Lake, stating that “the
lump sum consideration seems essentially a substitute for what would otherwise be received at
a future time as ordinary income.” P.G. Lake, 356 U.S. at 265.

Consistent with the substitute-for-ordinary-income doctrine, courts have denied capital gain
treatment for transactions involving interests related to compensation for past or future personal
services. See, e.g., Freese v. United States, 455 F.2d 1146 (10th Cir. 1972) (lump sum
representing unpaid commissions due under an employment contract); Elliott v. United States,
431 F.2d 1149 (10th Cir. 1970) (lump sum paid for the surrender of right to future sales
commissions); Holt v. Comm’r, 303 F.2d 687 (9" Cir. 1962) (payment for interest in films to be
produced by taxpayer). Similarly, courts have denied capital gain treatment for interests relating
to income already earned or about to be earned. See, e.g., United States v. Midland-Ross
Corp., 381 U.S. 54 (1965) (earned original issue discount); Lattera v. Comm’r, 437 F.3d 399 (3d
Cir. 2006) (lump sum payment for annual installments of lottery prize); Rhodes’ Estate v.
Comm'r, 131 F.2d 50 (6th Cir. 1942) (right to dividend that was already declared).

On the other hand, “simply because the property transferred will produce ordinary income, and
such income is a major factor in determining the value of the property, does not necessarily
mean that the amount received for the property is essentially a lump-sum substitute for ordinary
income.” Guggenheim v. Comm’r, 46 T.C. 559, 569 (1966). In Guggenheim, the court focused
on whether the taxpayer transferred substantial investment risks in the sale of undivided
interests in a stallion. The court noted that if the value of the stallion subsequently increased,
the taxpayer would not share in that increase with regard to the interests transferred. Instead,
the new owners would receive all the benefits of an increase in the value of the stallion and all
the burdens of a decrease in value. Therefore, the court found that the taxpayer had transferred
substantial investment risks and was entitled to capital gain treatment on the sale of the

interests.

In United States v. Dresser Indus., Inc., 324 F.2d 56 (5 Cir. 1963), the court distinguished
between proceeds from the present sale of the future right to earn income, which is capital gain,
and the present sale of the future right to earned income, which is ordinary income. The court
found that the sale of an income-producing asset was not merely the sale of the right to income
already earned, because the taxpayer had an asset that would produce income in the future.
Noting that “there is, in law and fact, a vast difference between the present sale of the future
right to earn income and the present sale of the future right to earned income,” the court held
that the taxpayer’s sale of the asset generated capital gain. Id. at 59.

Similarly, in Comm’r v. Ferrer, 304 F.2d 125 (2d Cir. 1962), the court held that the taxpayer's
surrender of the lease of a play constituted the sale or exchange of a capital asset, despite the
fact that receipts from the play would have been ordinary income. Id. at 132. In rejecting the
government's argument against capital gain treatment, the court noted that there was no
equivalence between amounts paid for the surrender of the lease and the income that would
have been realized by its retention. Id. at 133.

Analysis

The bundle of contract rights represented by a Pool Unit is property, and may be treated as a
capital asset for purposes of section 1221 of the Code. The most important characteristic of the
Pool Unit is that significant investment risks are associated with, and included in, each Unit.
With respect to each Pool Unit, there is an opportunity for appreciation as well as a risk of loss.
Each Unit represents a substantial investment by the Trust, and each Unit has an ascertainable
basis. The value of each Unit is directly tied to the Pool’s investment performance; poor
performance will result in a decrease in the value of each Unit, while performance above the
spending policy rate set by the University will increase the value of each Unit. The opportunity
for appreciation, risk of loss, and basis in each Unit are characteristics of other contract rights
that are treated as capital assets, for example, financial derivatives, notional principal contracts,
mutual fund shares, and corporate stock. Furthermore, the benefits and burdens associated
with each Unit are similar to those associated with the property judged to be capital assets in
Guggenheim, Dresser, and Ferrer.

In addition, although the Trusts will receive ordinary income in the form of the quarterly
Spending Policy Distributions that are based on the number of Pool Units owned by the Trusts,
consideration received upon a redemption of a Pool Unit is not a substitute for what would
otherwise be received as an ordinary income payout, whether due and payable or about to be
due and payable to the Trust under the terms of the Contract. Rather, the amount paid for a
Pool Unit upon a redemption is equal to the value of the Unit on the date of redemption. Unit
value on any given date is equal to overall asset value of the Pool divided by the number of
Units outstanding. In addition, a Pool Unit is not an interest related to compensation for past or
future personal services. Instead, the Unit is an asset that will produce income in the future.

Finally, a Pool Unit does not represent a carve-out of a larger estate retained by the Trust. The
appreciation of each Unit is attributable to overall Pool property appreciation, much of which, in

10

turn, is attributable to increases in the value of capital assets in the Pool. The Contract
specifically provides that the Trust has no ownership interest or rights to the Pool.

Thus, we conclude that a Pool Unit is a capital asset for purposes of section 1221 of the Code.
Furthermore, section 1234A will apply to treat gain or loss from the cancellation, lapse,
expiration, or other termination of a Pool Unit as gain or loss from the sale of a capital asset.
Consequently, in general, the redemption of a Pool Unit will generate short-term or long-term
capital gain or loss to the Trusts, depending on the holding period of the Unit.

Conclusion
Accordingly, based on the information submitted in your ruling request, we rule as follows:

1. The issuance of Pool Units by the University to the Trusts, the making or receipt of
   Spending Policy Distributions with respect to Pool Units, and the holding or redemption
   of Pool Units will not generate unrelated business taxable income (within the meaning of
   section 512(a)(1) of the Code) to the University or the Trusts.

2. A Pool Unit will be treated as a capital asset for purposes of section 1221 of the Code,
   and section 1234A will apply to treat gain or loss from the cancellation, lapse, expiration,
   or other termination of a Pool Unit as gain or loss from the sale of a capital asset.

3. The redemption of a Pool Unit will generate short-term or long-term capital gain or loss
   to the Trusts as set forth in section 1222 of the Code, depending on the holding period of
   the Pool Unit.

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. Because it could help resolve 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.

11

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,

Theodore R. Lieber
Manager, Exempt Organizations
Technical Group 3

Enclosure
Notice 437