Writing on behalf of the Estate & Gift Taxation Committee of the Association of the Bar of the City of New York, Michael I. Frankel has pointed out inconsistencies in private letter rulings regarding the calculation of income interests for net income charitable remainder unitrusts that propose to terminate early. Some rulings indicate that "one" reasonable method of calculating the actuarial value of the income interest use the lower of the stated percentage distribution rate of the NIMCRUT or the Code § 7520 rate in effect for the month of termination while others use only the Code § 7520 rate in effect for the month of termination. The bar urges IRS to issue guidance that uses the same method that is used to value income interests when a NIMCRUT is created.
Full Text:
April 4, 2008
Internal Revenue Service
William P. O'Shea Associate
Chief Counsel
(Passthroughs and Special Industries)
CC: PSI; 5300 IR
1111 Constitution Avenue, NW
Washington, D. C. 20224
Internal Revenue Service
Lois G. Lerner
Director
Exempt Organizations
SE:T:EO; 341 Penn Bldg.
1111 Constitution Avenue, NW
Washington, D. C. 20224
This letter addresses two recently issued Private Letter Rulings ("PLRs"), PLR 200725044 and PLR 200733014, which set forth the calculation method of the income interest upon early termination of a net income with makeup charitable remainder unitrust (a "NIMCRUT"). As discussed below, the calculation method provided in the two PLRs with respect to early termination of NIMCRUTs is inconsistent with previous guidance provided by the Internal Revenue Service (the "IRS") with respect to the calculation method to be used upon creation of a NIMCRUT. We request that the IRS issue guidance that eliminates this inconsistency.
PLR 200725044 and PLR 200733014 both indicate that "one" reasonable method of calculating the actuarial value of the income interest in a NIMCRUT upon termination is to use the lower of the stated percentage distribution rate of the NIMCRUT or the Code § 7520 rate in effect for the month of termination. The authority cited in PLR 200725044 for its conclusion is Treas. Reg. § 1.7520-3(b)(1)(h), which provides that the valuation of a beneficial interest subject to a contingency, power or restriction must take into account the contingency, power or restriction. Treas. Reg. § 1.7520-3(b)(l)(ii) refers to Treas. Reg. § 1.7520-3(b)(4) Example 2, for an illustration involving a transfer in which an income beneficiary has a 50% probability of dying within one year. PLR 200733014 gives no authority for its conclusion.
The valuation method used in PLR 200725044 and PLR 200733014 will always minimize the value of the income interest, regardless of the circumstances. Use of this method indicates that the IRS may be concerned that a NIMCRUT may distribute less than the stated percentage distribution rate of the NIMCRUT to an income beneficiary so that valuation of the income interest based on the stated percentage distribution rate in an early termination of a NIMCRUT could possibly overvalue the income interest.
This contrasts with the valuation method used for computing the charitable contribution deduction upon the creation of a NIMCRUT which expressly requires the assumption that the NIMCRUT will distribute the stated percentage distribution rate of the NIMCRUT. Treas. Reg. §§ 1.664-4(a)(3) and 1.664-3(a)(1)(i)(a). Neither PLR 200725044 nor PLR 200733014 suggest that a NIMCRUT should take into account any contingency, power or restriction in computing the charitable contribution deduction upon the creation of a NIMCRUT.
Before issuing PLR 200725044 and PLR 200733014, the IRS had issued numerous rulings dealing with the termination of a charitable remainder trust which are listed in the attached chart. Two of those rulings, PLR 200127023 and PLR 200408031, do not discuss a valuation method. However, all of the other rulings substantially provide that:
A consistent approach to valuation of the income interest when the NIMCRUT is created and upon early termination protects all parties. Given the existing authority of Treas. Reg. §§ 1.664-4(a)(3) and 1.664-3(a)(1)(i)(a), we urge you to issue a published ruling confirming that the proper method for valuing the income interest and the remainder interest of a NIMCRUT that is being terminated early is the same method that is used to value those interests when a NIMCRUT is created, and that is used in the PLRs listed in the attached table.