UNITRUST'S RETENTION OF STOCK WILL NOT TRIGGER EXCISE TAXES

Reference:

Section 4945 -- Taxable Expenditures
UIL Number(s) 4945.04-00, 4941.04-00

Full Text:

Date: December 11, 1991

Refer Reply to: * * *

Legend:

Dear * * *

This is in reference to a letter dated April 26, 1991, and previous correspondence, submitted on your behalf by your authorized representative, requesting rulings concerning Trust, a proposed trust intended to qualify as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Internal Revenue Code. Specifically, you have requested rulings that the retention of certain stock by Trust will not constitute a violation of sections 4941, 4942, 4943, 4944, and 4945 of the Code.

Grantor proposes to establish Trust, and to donate to it shares in Company. At the time that Grantor transfers Company stock to Trust, the Trustee of Trust will become the holder of a majority of the issued and outstanding voting stock of Company. Grantor will not retain any substantial amount of Company's stock, but may retain less than 2% of Company's stock. Company is engaged almost exclusively in the passive rental of real estate.

On October 29, 1991 a ruling was issued by the Internal Revenue Service holding that Trust will qualify as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code for any year in which it continues to meet the definition of and functions exclusively as a charitable remainder unitrust. This ruling further held that Grantor will be entitled to an income tax deduction under the provisions of section 170(f)(2)(A) of the Code for her proposed contribution to Trust. The amount of the deduction allowable will be the value of the remainder interest passing to organizations described in section 170(c).

Paragraph 3 of the governing instrument of Trust provides in part as follows:

3. PAYMENT OF UNITRUST AMOUNT. In each taxable year of the Trust, the Trustee shall pay to the [Grantor] during the [Grantor's] life, a unitrust amount equal to the lesser of (a) the Trust income for the taxable year, as defined in section 643(b) of the Code and the regulations thereunder, and (b) five percent (5%) of the net fair market value of the assets of the Trust valued as of the first day of each taxable year of the Trust (the "valuation date.")

Paragraph 5 of the governing instrument provides in part as follows:

5. DISTRIBUTION TO CHARITY. Upon the death of the [Grantor], the Trustee shall distribute all of the then principal and income of the Trust (other than any amount due the [Grantor] or the [Grantor's] estate under the provisions above) as follows: [in varying shares to several named charitable trusts].

Section 4947(a)(2) of the Code provides, in relevant part, 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 or section 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 purposes) 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 4947(a)(2)(A) further provides that this paragraph shall not apply 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(c)(2)(B).

Section 4947(b)(3)(B) of the Code provides, in relevant part, that sections 4943 and 4944 shall not apply to a trust which is described in subsection (a)(2) if a deduction was allowed under section 170 or section 2522 for amounts payable under the terms of such trust to every remainder beneficiary but not to any income beneficiary.

Section 4941 of the Code imposes a tax on each act of self- dealing between a disqualified person and a private foundation. The definition of self-dealing contained in section 4941(d) includes a variety of direct and indirect transactions.

Section 4945 of the Code imposes a tax on each taxable expenditure made by a private foundation. Section 4945(d) defines the term "taxable expenditure" to include any amount paid or incurred by a private foundation to carry on propaganda, or otherwise to attempt, to influence legislation, to influence the outcome of any specific public election, as a grant to an individual for travel, study or other similar purpose (unless certain requirements are satisfied), as a grant to a non-public charity unless expenditure responsibility is exercised, or for any purpose other than one specified in section 170(c)(2)(B).

Section 4942 of the Code is not listed in section 4947(a)(2). It therefore does not apply to split-interest trusts. By operation of section 4947(b)(3), sections 4943 and 4944 do not apply to charitable remainder unitrusts if unitrust payments are made only for private purposes, and if all remainder interests are devoted to charitable purposes, as is the case with Trust.

Retention of donated stock is not a transaction which could be considered an act of self-dealing within the meaning of section 4941 of the Code. Likewise, retention of donated stock is not an expenditure. It therefore cannot be a taxable expenditure within the meaning of section 4945.

Based on the foregoing, we rule as follows:

1. Sections 4942, 4943, and 4944 of the Code do not apply to Trust.

2. The retention of stock as described in your ruling request is not an act of self-dealing that will result in the imposition of tax under section 4941 of the Code.

3. The retention of stock as described in your ruling request is not an act which could result in the imposition of tax under section 4945 of the Code.

This ruling is directed only to the organization that requested it. Section 6110(j)(3) of the Internal Revenue Code provides that it may not be used or cited by others as precedent.

Sincerely,

Jeanne S. Gessay
Chief, Exempt Organizations
Rulings Branch 2