No-deduction charitable trust avoided split-interest trust rules

Plain-English summary

A charitable remainder unitrust pays the grantor, then another individual after the grantor's death, for at least 20 years before its remainder passes to a tax-exempt charity. The grantor represented that no charitable deduction had ever been claimed for the trust under any of the listed income, estate, or gift tax provisions. The IRS ruled that the trust was therefore not subject to the private-foundation rules imposed on certain split-interest trusts by IRC § 4947(a)(2). The trust must preserve records throughout its life proving that no deduction was ever taken. If it cannot provide that proof, the regulation would presume that a deduction was allowed and section 4947(a)(2) would apply.

Ruling snapshot

• Question: Did IRC § 4947(a)(2) apply to the charitable remainder unitrust when no charitable deduction had ever been claimed?
• Outcome: approved, the split-interest trust rules did not apply on the represented facts
• Key authorities: IRC §§ 170, 501, and 4947(a)(2); Treas. Reg. § 53.4947-1(a)

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201713002                                              Third Party Communication: None
Release Date: 3/31/2017                                        Date of Communication: Not Applicable
Index Number: 4947.02-00
                                                               Person To Contact:
------------------------------------------------------------   --------------------------, ID No.
------------------------------------------                     ------------------
-----------------------------------------------                Telephone Number:
----------------------------                                   ----------------------
--------------------------------                               Refer Reply To:
                                                               CC:TEGE:EOEG:EO2
                                                               PLR-120750-16
                                                               Date:
                                                               December 20, 2016


Legend

Trust                   =   -------------------------------------------------------------------------------------------------------
Grantor                 =   -------------------------------------------------------------------------------------------------------
Date 1                  =   ---------------------------
Charitable              =   ----------------------------------------------------
Beneficiary




Dear -------:

This letter is in response to the ruling request from your authorized representative dated
June 23, 2016. That request, and subsequent correspondence, seeks a ruling
concerning the applicability of section 4947(a)(2) of the Internal Revenue Code (Code)
to the Trust.

Facts

Grantor executed the Trust on Date 1 as a charitable remainder unitrust. The Trust is
not exempt from federal income tax under section 501(a) of the Code. The non-
charitable unitrust recipient is Grantor. Upon Grantor’s death, another individual is the
non-charitable unitrust recipient. The unitrust payments are to continue for a period of
20 years or the non-charitable beneficiaries’ lifetimes, whichever is longer. The
remainder is to be distributed to Charitable Beneficiary, an organization exempt from
federal income tax under section 501(c)(3) of the Code at the end of the unitrust term.
Grantor has not claimed a deduction under sections 170, 545(b)(2), 556(b)(2), 642(c),
2055, 2106(a)(2), or 2522 of the Code with respect to the Trust, for any tax year, since
its inception.
PLR-120750-16                                2




Rulings Requested:

The Trust requests a ruling that section 4947(a)(2) of the Code is not applicable to the
Trust.

Law
    Section 4947(a)(2) of the Code provides that in the case of a trust which is not
exempt from tax under section 501(a), not all of the unexpired interests in which are
devoted to one or more of the purposes described in section 170(c)(2)(B), and which
has amounts in trust for which a deduction was allowed under section 170, 545(b)(2),
642(c), 2055, 2106(a)(2), or 2522, section 507 (relating to termination of private
foundation status), section 508(e) (relating to governing instruments) to the extent
applicable to a trust described in this paragraph, section 4941(relating to taxes on self-
dealing), section 4943 (relating to taxes on excess business holdings) except as
provided in subsection (b)(3), section 4944 (relating to investments which jeopardize
charitable purpose) except as provided in subsection (b)(3), and section 4945 (relating
to taxes on taxable expenditures) shall apply as if such trust were a private foundation.
    Section 53.4947-1(a) of the Foundation Excise Tax Regulations provides that
section 4947 of the Code subjects trusts which are not exempt from taxation under
section 501(a), all or part of the unexpired interest in which are devoted to one or more
of the purposes described in section 170(c)(2)(B), and which have amounts in trust for
which a deduction was allowed under sections 170, 545(b)(2), 556(b)(2), 642(c), 2055,
2106(a)(2), or 2522 of the Code to the same requirements and restrictions as are
imposed on private foundations. The basic purpose of section 4947 of the Code is to
prevent these trusts from being used to avoid the requirements and restrictions
applicable to private foundations. For purposes of this section, a trust shall be presumed
(in the absence of proof to the contrary) to have amounts in trust for which a deduction
was allowed under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522
of the Code if a deduction would have been allowable under one of these sections.

Analysis

    The Trust is not exempt from taxation under section 501(a). Because the remainder
will be distributed to Charitable Beneficiary, part of the Trust’s unexpired interest is
devoted to one or more of the purposes described in section 170(c)(2)(B). Because no
deduction has ever been taken (allowed) under section 170, 545(b)(2), 642(c), 2055,
2106(a)(2), or 2522, the Trust is not subject to section 4947(a)(2) of the Code, even
though a deduction under section 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522 was
allowable.
PLR-120750-16                                  3

    For future tax years, the burden will be on the taxpayer to keep the records to show,
through the life of the unitrust, that no deduction is ever taken. Without this proof, that
no deduction has ever been taken, section 53.4947-1(a) of the regulations would cause
section 4947(a)(2) of the Code to be applied.

Conclusion

Based on the foregoing, we rule that the Trust is not subject to section 4947(a)(2) of the
Code.

This ruling is based on the facts as they were presented in the ruling request and on the
understanding that there will be no material changes to those 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 expressly described herein.

The ruling contained in this letter is based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the ruling request, that material is subject to verification during an
examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

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 taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent. Because it could help resolve
questions concerning your federal income tax status, this ruling should be kept in your
permanent records.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.
PLR-120750-16                             4


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

                                    Sincerely,



                                    Taina Edlund
                                    Senior Technician Reviewer
                                    (Tax Exempt & Government Entities)



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