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Private Letter Rulings August 2019

Formula In Trust Document Satisfied Estate Tax Charitable Deduction Term of Years Requirement

PLR 201933007

The IRS has determined, in a letter ruling, that a formula used to determine the term of years for which an annuity will be paid to a charity satisfied the estate tax charitable deduction requirement under Code Sec. 2055(e)(2)(B) that a guaranteed annuity must be paid for a specified term of years.

Background. Code Sec. 2055(a) provides an estate tax deduction for charitable contributions made by estates.

Code Sec. 2055(e)(2)(B) disallows the estate tax deduction under Code Sec. 2055(a) when an interest in property passes first to a qualified charity (lead interest) and then the same property passes to a noncharitable beneficiary (remainder interest), unless the lead interest is in the form of a guaranteed annuity or is a fixed percentage of the fair market value of property in a trust and is distributed annually.

A charitable lead annuity trust (CLAT) is an irrevocable trust designed to (1) provide financial support to one or more charities for a specific period, with the remaining assets eventually going to family members or other noncharitable beneficiaries, and (2) qualify for an estate tax charitable deduction under Code Sec. 2055(a).

A “deductible interest” for purposes of Code Sec. 2055(a) includes a charitable interest in property where the charitable interest is a guaranteed annuity interest. Generally, the term “guaranteed annuity interest” means the right to receive a guaranteed annuity. A guaranteed annuity is an arrangement under which a determinable amount is paid periodically, but not less often than annually, for a specified term of years. (Reg §20.2055-2(e)(2)(vi)(a))

An amount is determinable if the exact amount which must be paid under the document transferring the property can be ascertained as of the appropriate valuation date. For example, the amount to be paid may be a stated sum for a term of years. (Reg §20.2055-2(e)(2)(vi)(a))

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Facts. On Date 1, Grantor established Revocable Trust. In part, Revocable Trust provides that the remainder of Revocable Trust will be distributed to a CLAT if Grantor survives Spouse.

The CLAT provides that its trustee will pay the Annuity Amount to the Annuity Beneficiary commencing with the date of death of Grantor in each tax year prior to the Termination Date. the Annuity Amount is equal to 5% of the fair market value of the property transferred to the CLAT. The Annuity Beneficiary is Charity.

The term of years and Termination Date of the CLAT is established using a formula contained in the trust document. Upon the Termination Date, the remaining principal of the CLAT, together with all accumulated and undistributed income, will be added to other family trusts.

Requested rulings. The taxpayer requested the following rulings: (1) that the trust’s use of the formula to determine the term of years for the annuity payments satisfies the requirement that a guaranteed annuity must be paid for a specified term of years under Code Sec. 2055(e)(2)(B), and (2) that Grantor's estate will be entitled to an estate tax charitable deduction under Code Sec. 2055(a) for the present value of the annuity interest payable to Charity, as determined in accordance with Reg §20.2055-2(f)(2)(iv).

Rulings. The IRS found that the Annuity Amount is equal to 5% of the fair market value of the property transferred to the CLAT; therefore, the Annuity Amount is determinable and ascertainable as of the date of death of Grantor. Also, the provision for determining the CLAT’s term of years is permissible because the term is determinable as of the date of death of Grantor based on the formula in the instrument. Therefore, the CLAT satisfies both the specified term requirement in Reg §20.2055-2(e)(2)(vi) and the requirement that a guaranteed annuity must be paid for a specified term of years under Code Sec. 2055(e)(2)(B).

The IRS also determined that Grantor's estate will be entitled to an estate tax charitable deduction under Code Sec. 2055(a) for the present value of the annuity interest provided the recipient of the annuity from the CLAT is a charitable organization described in Code Sec. 2055(a).

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IRS Can Require Withholding Return Filers To Use Same EIN On Information Returns

Program Manager Technical Advice 2019-010

In a Program Manager Technical Advice (PMTA), the IRS said that it has the authority to require taxpayers that file Forms 945, Annual Return of Withheld Federal Income Tax, to use the same Employer Identification Number (EIN) when filing related information returns.

Background. Code Sec. 6011(b) authorizes the IRS to require information with respect to persons subject to taxes as is necessary or helpful in securing the proper identification of those persons.

Code Sec. 6109(a)(1) provides generally that when required by regulations, any person required to make a return, statement, or other document must include the identifying number as may be prescribed for securing proper identification of such person.

Any person required to withhold tax from nonpayroll payments (as defined in Reg. § 31.6011(a)-4(b)) must file Form 945. The withholding should be deposited under the payor's name/EIN and reported on Form 945 associated with that same name/EIN. The same person is the payor for purposes of information reporting and, thus, should file information returns using the same name/EIN. (Reg. § 31.6011(a)-4(b))

The PMTA reports that, according to a draft memorandum from the Backup Withholding Team, Small Business/Self-Employed Examination(SBSE), Headquarters, to the Acting Director, SBSE Examination Headquarters Operation, payors are sometimes reporting and remitting backup withholding on Form 945 using one EIN, but then filing information returns (Form 1099 series and Form W-2G, Certain Gambling Winnings) under a different EIN, such as a parent or related entity's EIN.

Issue. Does the IRS have the authority to require taxpayers that file Forms 945 to use the same EIN when filing related information returns?

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Decision. Yes. The broad language contained in Code Sec. 6011(b) and Code Sec. 6109(a) indicates that Congress has vested in the IRS discretionary authority to require the use of whatever identifying number is deemed necessary or helpful for the proper identification of a taxpayer, employer, employee, or other person. Accordingly, the PMTA concludes that under the authority of Code Sec. 6011 and Code Sec. 6109, the IRS has the statutory authority to require taxpayers to use the same EIN on Form 945 and related information returns. No legislative change is necessary to effectuate this requirement.

The PMTA points out that the IRS can implement this requirement through form instructions and other administrative guidance.

Chief Counsel Advice Discusses Third Party Refund Procedures

Chief Counsel Advice 201933011

The IRS has discussed, in a Chief Counsel Advice (CCA), how a third party who pays another person’s tax liability can obtain a refund.

Background. In 1995, the Supreme Court held that a woman could bring a refund suit in federal court because she paid her ex-husband’s tax liability under protest to remove a lien from her property and she had exhausted her administrative remedies. The Court reasoned that the IRS could not leave the woman, from whom the IRS had erroneously collected taxes, without a remedy and there was not an adequate remedy available under the Code. (Williams, (S Ct 1995) 75 AFTR 2d 95-1805)

Code Sec. 6325(b)(4) and Code Sec. 7426(a)(4) were added to the Code by the IRS Restructuring and Reform Act of 1998 (PL 105-206; 7/22/1998) in response to the inadequate remedy problem identified by the Supreme Court in Williams. (S. Rep. No. 105-174, 1998-3 CB 537)

Under Code Sec. 6325(b)(4)(A), a third-party owner (or part owner) of a property subject to a federal tax lien that secures another person's taxes (liened property) has the right to obtain a lien discharge upon either depositing cash with, or furnishing a bond to, the IRS. The IRS must

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refund the amount deposited or release the bond if the IRS determines that (1) the tax liability giving rise to the lien can be satisfied from a source other than the liened property, or (2) the value of its interest in the liened property is less than the IRS's prior determination of that value (Code Sec. 6325(b)(4)(B)). Any amount not used to satisfy the tax liability is refunded to the third-party owner of the property. (Code Sec. 6325(b)(4)(C))

Under Code Sec. 7426(a)(4), a third-party owner of liened property has 120 days from the date the IRS issues a certificate of discharge under Code Sec. 6325(b)(4), to file a substitution of value action in district court challenging the IRS’s valuation of its interest in the liened property. The judicial remedy available to third parties to challenge the value or attachment of a tax lien to their property is exclusive and no other action may be brought by a third-party claimant. (Code Sec. 7426(a)(4))

If the property owner does not challenge the IRS’s determination within the 120-day period, the IRS will, within 60 days of the expiration of the 120-day period, apply the amount deposited or collect on the bond to the extent necessary to satisfy the tax liability secured by the lien. (Code Sec. 6325(b)(4)(C))

If the property owner successfully challenges the IRS’s determination of the value of the IRS’s lien interest, the court will enter judgment ordering a refund of the amount deposited or a release of the bond to the extent the deposit or bond exceeds the court’s determination of the lien’s value. (Code Sec. 7426(b)(5))

In Rev Rul 2005-50, 2005-30 IRB 124, the IRS clarified that because of the amendments to Code Sec. 6325 and Code Sec. 7426 made by the IRS Restructuring and Reform Act of 1998, a person not liable for the underlying tax (third-party) may not file a refund action under the holding in Williams.

Chief Counsel’s position. The CCA states that it is the IRS's position that Code Sec. 6325(b)(4) and Code Sec. 7426(a)(4), and not Williams, apply when a third party pays another person’s tax liability. Thus, according to the CCA, a third party cannot pay another person’s tax liability and then sue for a refund. Rather, the third party must use the deposit and bond remedy provided in Code Sec.

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6325(b)(4) to obtain a lien discharge and then file a substitution of value suit as provided in Code Sec. 7426(a)(4).

The CCA goes on to note that Code Sec. 6325(b)(4) and Code Sec. 7426(a)(4) apply whether or not the third party sought and obtained a lien discharge and that the IRS's position hasn't changed since it issued Rev Rul 2005-50.

Examiners Will Not Challenge Foreign Tax Credit Claims Regarding Certain French Taxes

In a Joint Directive memorandum to all Large Business and International division and Small Business/Self-Employed division employees, and in an Internal Revenue Manual (IRM) update, the IRS has instructed IRS examiners not to challenge foreign tax credit (FTC) claims, including claims for refund, for payments of two French social taxes. It has also provided instructions for IRS account managers on how to handle calls from taxpayers regarding those French taxes.

Background. Code Sec. 901 generally permits taxpayers to claim an FTC for income, war profits, and excess profits taxes paid or accrued during the tax year to any foreign country or to any U.S. possession.

However, Sec. 317(b)(4) of the Social Security Amendments of '77 (SSA, P.L. 95-216, 1977) provides that taxes paid by any individual to a foreign country with respect to any period of employment or self-employment which is covered under the social security system of that foreign country in accordance with the terms of an agreement entered into pursuant to section 233 of the SSA are not deductible or creditable against the U.S. income tax that individual.

Section 233 of the SSA authorizes agreements with foreign countries to establish "totalization arrangements" concerning the social security systems of the U.S. and those other countries.

In other words, taxes paid to a foreign country in accordance with a social security totalization agreement aren't eligible for the FTC.

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In 1988, the US and France entered into a totalization agreement (the "Totalization Agreement").

There had been questions whether two French social taxes—Contribution Sociale Généralisée (CSG) and Contribution pour le Remboursement de la Dette Sociate (CRDS, also sometimes referred to as Contribution au Remboursement de la Dette Sociate)—were social security taxes covered by the Totalization agreement.

The IRS has stated that the US and France memorialized through diplomatic communications an understanding that the CSG and CRDS taxes are not social security taxes covered by the Totalization Agreement. Accordingly, the IRS will not challenge FTC claims for CSG and CRDS payments on the basis that the Totalization Agreement applies to those taxes. See IRS to allow foreign tax credit for previously non-creditable French taxes (07/08/2019).

No examiner challenges. The Joint Directive instructs IRS examiners not to challenge FTC claims, including claims for refund, for CSG and CRDS payments on the basis that the Totalization Agreement applies to these taxes and not to assert that the CSG and CRDS are not creditable income taxes.

The IRS has also updated the IRM to show how IRS account managers are to handle calls from taxpayers regarding the CSG and CRDS. The IRM has been updated to show how to handle calls regarding how to file an amended return; calls inquiring about a taxpayer's refund based on an amended return claiming CSG and CRDS credits; and calls from taxpayers filing a Form 1040-X noting "French Social Taxes," "CSG," or "CRDS" on top or in part 3 of the Form 1040-X. (IRM 21.8.1.4.3.1)

Scholarship Grants of Employer's Private Foundation Not Taxable Expenditures

PLR 201932018

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In a Private Letter Ruling, the IRS has found that a private foundation’s employer-related scholarship grants are not taxable expenditures.

Background. Under Code Sec. 4945, an excise tax is imposed on the taxable expenditures of private foundations. The term "taxable expenditure" includes any amount a private foundation pays as a grant to an individual for travel, study, or other similar purposes, unless that expense satisfied the requirements in Code Sec. 4945(g). (Code Sec. 4945(d)(3))

A grant to an individual for travel, study, or other similar purposes is not a taxable expenditure of a private foundation when:

1. The foundation awards the grant on an objective and nondiscriminatory basis;

2. The IRS approves in advance the procedure for awarding the grant;

3. The grant is a scholarship or fellowship subject to Code Sec. 117(a);

4. The grant is to be used to study at an educational institution described in Code Sec. 170(b)(1)(A)(ii). (Code Sec. 4945(g)(1))

Rev Proc 76-47, 1976-2 CB 670, provides guidelines to determine whether a grant made by a private foundation under an employer-related program to employees or children of employees are scholarship or fellowship grants under Code Sec. 117(a). If a program satisfies the seven conditions in Rev Proc 76-47, secs 4.01 through 4.07, and meets the percentage tests in Rev Proc 76-47, sec 4.08, then the IRS assumes that the grants are subject to the provisions in Code Sec. 117(a).

The percentage tests in Rev Proc 76-47, sec. 4.08, require that the number of grants awarded will not exceed the lesser of (1) 25% of the number of employees’ children who were eligible for grants, applied for grants, or were considered by a selection committee for grants; or (2) 10% of the number of employees’ children who were eligible for grants (whether or not they applied).

When determining how many employee children are eligible for a scholarship under the 10% test, a private foundation may include only

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those children who meet the foundation’s eligibility requirements. The children must also satisfy certain enrollment conditions. (Rev Proc 85-51, 1985-2 CB 717).

Facts. H wanted to operate an employer-related scholarship fund through a private foundation called X. X’s purpose is to provide educational scholarships to lineal descendants of H’s employees by selecting qualified individuals to receive grants to advance their education. H applied to the IRS for a private letter ruling that X's scholarship grant procedures would not result in the private foundation incurring taxable expenditures.

H represented that X’s procedure for awarding grants will meet the requirements of Rev Proc 76-47. Specifically, H represented that:

1. An independent selection committee will select individual grant recipients.

2. H will not use the grants to recruit employees, nor will H end a grant if an employee leaves H.

3. H will not limit the student to a course of study that will particularly benefit H.

H also represented that X would include only employee children who meet the eligibility standards in Rev Proc 85-51, when applying the 10% test.

Private foundation’s scholarship procedure approved. The IRS approved private foundation X's procedures for awarding employer-related scholarships based on the information H submitted and assuming X will conduct the program as proposed. The IRS determined that the proposed procedures for awarding employer-related scholarships met the requirements under Code Sec. 4945(g)(1). Therefore, expenditures made under these procedures will not be taxable expenditures of private foundation X.

Also, the IRS determined that the awards made under these procedures are scholarship or fellowship grants and, therefore, are not taxable to the recipients if the recipients use the grants for tuition and related expenses.

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IRS OKs Regulated Investment Company’s Revocation of Excise Tax Election

PLR 201932013

In a Private Letter Ruling, the IRS has consented to a regulated investment company's (RIC's) request to revoke its election to calculate its RIC excise tax based on its tax year.

Background. Code Sec. 4982(a) imposes an excise tax on every RIC (subject to certain exceptions) for each calendar year, equal to 4% of the excess, if any, of the "required distribution" over the "distributed amount" for the calendar year.

Code Sec. 4982(b)(1) defines the term "required distribution" to mean, with respect to any calendar year, the sum of (A) 98% of the RIC's ordinary income for the calendar year plus (B) 98.2% of its capital gain net income for the one-year period ending on October 31 of that calendar year.

Code Sec. 4982(e)(4) provides that, if a RIC's tax year ends with the month of November or December, the RIC may elect to have its tax year taken into account in lieu of the one-year period ending on October 31 of the calendar year for purposes of satisfying the required distribution defined in Code Sec. 4982(b)(1)(B).

Code Sec. 4982(e)(4)(B) provides that the election, once made, may be revoked only with the IRS's consent.

Facts. Fund is a Code Sec. 851 regulated investment company ("RIC"). Fund's tax year is the calendar year.

Fund had elected under Code Sec. 4982(e)(4) to define required distribution using its tax year in lieu of the one-year period ending October 31 of the calendar year.

Issue. Fund seeks IRS consent to revoke its election under Code Sec. 4982(e)(4) for Year 1 and subsequent years.

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Fund makes the following representations:

1. Fund's desire to revoke its election is due to administrative and non-tax-related financial burdens caused by the election;

2. Fund is not seeking to revoke its election in order to preserve or secure a tax benefit;

3. Fund will neither benefit through hindsight, nor prejudice the interests of the government if permitted to revoke its election; and

4. Fund will not make a subsequent election under Code Sec. 4982(e)(4) for at least five calendar years following Year 1.

Ruling. The IRS consented to the revocation, for Year 1 and subsequent years, of the election made by Fund under Code Sec. 4982(e)(4).

The IRS noted that if a calendar year RIC revokes an election under Code Sec. 4982(e)(4), then the months of November and December of the last calendar year to which the election applies are part of both (a) that calendar year and (b) the one-year period ending on October 31 of the first calendar year to which the election does not apply.

Therefore, for purposes of Code Sec. 4982(b)(1), IRS ruled that Fund's capital gain net income for Year 1 will be determined for the period beginning on January 1, Year 1, and ending on October 31, Year 1.

As a condition to IRS's consent to the revocation, Fund may not make a subsequent election under Code Sec. 4982(e)(4) for a period of five calendar years following Year 1.

Portion of Ancestry Genetic Testing Is Medical Care

PLR 201933005

In a redacted Private Letter Ruling the IRS has ruled that a portion of ancestry genetic testing (consisting of a DNA collection kit and health

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services) is medical care and, hence, that portion of the costs of the services and kit is potentially deductible. The IRS left it to the taxpayer to allocate the costs of the services and kit among the medical and non-medical items and services he received.

Background. Code Sec. 213(a) allows a taxpayer to deduct expenses paid for medical care of the taxpayer to the extent the expenses exceed 10% of the taxpayer's adjusted gross income.

Code Sec. 213(d)(1)(A) provides that "medical care" is for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.

Reg. § 1.213-1(e)(1)(ii) provides that medical care includes medical, laboratory, surgical, dental, and other diagnostic and healing services.

However, Code Sec. 262 and Reg. § 1.213-1(e)(1)(vi) prohibit taxpayers from deducting personal, family, or living expenses if the expenses do not fall within the Code Sec. 213 definition of medical care. An expenditure that is merely beneficial to the general health of an individual is personal and is not for medical care. (Reg. § 1.213-1(e)(1)(ii)) For example, ordinary education is not medical care. (Reg. § 1.213-1(e)(1)(v)(a))

When a university charges a student a lump-sum fee that includes medical care as well as other expenses, the portion of the charge that is allocable to medical care is considered a proper medical expense deduction if there is a breakdown showing the amount of the fee that is allocable to medical care or such information is readily available from the university. Therefore, if non-medical items or services are provided, for purposes of Code Sec. 213, the fee paid must be allocated between items and services that are medical care and those that are not medical care. (Rev Rul 54-457, 1954-2 CB 100)

The fee paid for storage of medical information in a computer data bank is an amount paid for medical care expense because the information facilitates the diagnosis of disease. (Rev Rul 71-282, 1971-2 CB 166)

The term "diagnosis" encompasses the determination that a disease may or may not be present and includes testing of changes to the

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function of the body that are unrelated to disease. Amounts paid by individuals for diagnostic and similar procedures and devices, such as a full-body scan performed without a physician's recommendation and on an individual not experiencing symptoms of an illness or disease, and a pregnancy test that tests the healthy functioning of the body, qualify as medical care. (Rev Rul 2007-72, 2007-72 CB 1154)

A healthcare flexible spending account (FSA) may reimburse its owner only for expenses related to medical care as defined in Code Sec. 213. (Prop Reg § 1.125-5(k)(1))

Facts. Taxpayer has an FSA, and seeks to use the FSA to purchase genetic testing services and resultant reports offered by X.

X offers a version of its services that includes reports on an individual's ancestry and health.

A purchaser of X's ancestry and health services receives a DNA collection kit, which is used to collect a DNA sample from the individual and is sent to X for genetic testing. Once received by X, the sample is sent to be tested by a third party laboratory through a process called genotyping.

After the genotyping, X then provides health services. The genetic information collected from the laboratory is sent to X to be analyzed. From the data, for its health services, X generates reports that provide an individual with the results from the laboratory and general information regarding, according to the unredacted version of the PLR obtained by the Wall Street Journal, genetic health risks, carrier status, wellness, and traits.

The goal of the health services is to encourage individuals to provide the information to a healthcare provider for additional testing, diagnosis, or treatment. According to the unredacted version of the ruling, X’s services and reports may be purchased through X’s website or through resellers, but the health services may not be purchased from X without also purchasing services relating to ancestry.

Issue. In order to use the FSA to purchase the items and services, Taxpayer is seeking a determination that the services and reports that are offered by X are medical care as defined in Code Sec. 213(d).

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Ruling. X's health services contain items that are considered medical care under Code Sec. 213(d), such as the genotyping, and not medical care, such as the reports that provide general information to an individual. As a result, Taxpayer must allocate the price paid for the DNA collection kit and health services between the medical and non-medical items and services to determine what is medical care under Code Sec. 213(d).

There are two steps to making this allocation.

First, the price of the DNA collection kit must be allocated between the ancestry services and the health services using a percentage (cost of the health services / total cost of ancestry plus health services).

Second, as to the health services, the taxpayer may use a reasonable method to value and allocate the cost of the health services between services that are medical care (such as the testing at the laboratory) and non-medical services or items (such as the reports that provide general information on a test result).

The PLR does not say whether X will be required to provide the data necessary for the Taxpayer to make these allocations. If X is not required to, then it is not clear how the Taxpayer will be able to make the allocations.

IRS OKs Spousal Rollover Although Decedent’s IRA Didn’t Designate A Beneficiary

PLR 201931006

Generally, a surviving spouse may make a tax-free spousal rollover from a deceased spouse's IRA only if the survivor is designated as the IRA’s beneficiary. However, in a private letter ruling (PLR), IRS said this general rule didn’t apply—and a tax-free spousal rollover was OK--where the decedent failed to designate an IRA beneficiary, died without a will, and the surviving spouse was the administrator and sole heir to the decedent’s estate.

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Background on surviving spouse's IRA choices. A surviving spouse designated as the beneficiary of an IRA need not leave the IRA in the decedent's name. The surviving spouse can either:

(1) roll over the decedent's IRA into an IRA in the spouse's name (Code Sec. 408(d)(3)(C)(ii)(II)), or

(2) elect to treat the decedent's IRA as the spouse's own IRA. (Reg. § 1.408-8, Q&A 5(a))

Observation There is much to gain by choosing one of these options. For example, the surviving spouse can designate his or her own beneficiaries. And the surviving spouse can compute required minimum distributions as if he or she had funded the receiving IRA, generally resulting in a longer payout than would be the result if the surviving spouse were treated as the beneficiary (rather than the owner of) the decedent's IRA.

However, the regs say the election to treat the decedent's IRA as the surviving spouse beneficiary's IRA is available only if the spouse is “the sole beneficiary” of the IRA and has an unlimited right to withdraw amounts from it. The sole beneficiary requirement is not met if a trust is named as the IRA's beneficiary, even if the spouse is the sole beneficiary of the trust. (Reg. § 1.408-8, Q&A 5(a))

Background on IRA rollovers. There is no immediate tax if distributions from an IRA are rolled over to an IRA or other eligible retirement plan (i.e., qualified trust, governmental Code Sec. 457plan, Code Sec. 403(a) annuity or Code Sec. 403(b) tax-sheltered annuity). For the rollover to be tax-free, the amount distributed from the IRA generally must be recontributed to an IRA or other eligible retirement plan no later than 60 days after the date that the taxpayer received the withdrawal from the IRA. (Code Sec. 408(d)(3)) A distribution rolled over after the 60-day period generally will be taxed (and also may be subject to a 10% premature withdrawal penalty tax). (Code Sec. 72(t)) Under Code Sec. 408(d)(3)(B), an individual is permitted to make only one nontaxable 60-day rollover between IRAs in any 1-year period.

Background on inherited IRAs. In the case of an inherited IRA, Code Sec. 408(d)(3) does not apply to any amount received by an individual from such an account, and the inherited account is not treated as an

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IRA for purposes of determining whether any other amount is a rollover contribution. (Code Sec. 408(d)(3)(C)(i)) An IRA is treated as inherited if the individual for whose benefit the account is maintained acquired the account by reason of the death of another individual, and that individual was not the surviving spouse of such other individual. (Code Sec. 408(d)(3)(C)(ii))

Facts. Decedent B established an IRA but failed to designate a beneficiary for the account. The IRA was maintained by a custodian that provided that if no beneficiary is designated for the IRA, the account balance remaining at B’s death is payable to her estate. B died without a will and, under relevant state law, Taxpayer A, as B’s surviving spouse, is the sole heir to B’s estate. Taxpayer A is also the sole administrator of the estate.

Taxpayer A intends to distribute the IRA to the estate, and as administrator of B’s estate, he will pay the proceeds of the IRA to himself. Within 60 days of receipt, A will roll over the proceeds of the IRA into one or more IRAs in his own name.

Rulings requested. Taxpayer A asked IRS to rule that: (1) He will be treated, for purposes of Code Sec. 408(d)(3), as the payee or distributee of the IRA proceeds; (2) The IRA won’t be treated as an inherited IRA within the meaning of (Code Sec. 408(d)(3)(C); and (3) He will be eligible to do a tax-free 60-day rollover from the decedent’s IRA to his own IRA.

Favorable rulings. The PLR points out that, generally, Taxpayer A, as the surviving spouse of Decedent B, would not be permitted to treat the IRA as his own, because he was not named the beneficiary of the IRA. However, because Taxpayer A is the administrator and sole heir to Decedent B’s estate, for purposes of applying Code Sec. 408(d)(3)(A) to the IRA, he is effectively the individual for whose benefit the account is maintained. As a result, if Taxpayer A receives a distribution of the proceeds of the IRA, he may roll over the distribution into his own IRA.

In response to the ruling requests, IRS concluded that: Taxpayer A will be treated, for Code Sec. 408(d)(3) purposes, as the payee or distributee of the proceeds from the IRA; that the IRA won’t be treated as an inherited IRA; and that Taxpayer A will be eligible to make a tax-free rollover of the proceeds from B’s IRA to an IRA set up and maintained

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in his own name, as long as the rollover occurs no later than 60 days after the proceeds are received by Taxpayer A in his capacity as administrator of Decedent B’s estate, and all other applicable Code Sec. 408(d)(3)requirements are satisfied.

Termination Of Trust Did Not Result In Imposition Of Termination Tax

PLR 201930017

In a Private Letter Ruling, IRS has determined that the termination of a trust did not result in the imposition of a termination tax under Code Sec. 507(c). IRS also ruled that the date on which the trust would terminate was the “termination date” stated in the trust instrument.

Background—valuation of deductible interest. An estate tax deduction is allowed for charitable bequests. (Code Sec. 2055(a)) This deduction is not allowed where an interest in property passes from the decedent to a charitable recipient and an interest in the same property passes for less than full consideration from the decedent to a non-charitable recipient unless (1) in the case of a remainder interest, the interest is in a trust which is a charitable remainder annuity trust or a charitable remainder unitrust or a pooled income fund, or (2) in the case of any other interest, the interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair market value (FMV) of the property. (Code Sec. 2055(e)(2))

Where a property interest passes from the decedent for charitable purposes and an interest in the same property passes from the decedent for private purposes, the estate charitable deduction is not allowed unless the property interest is a “deductible interest” under Reg. §20.2055-2(e)(2). (Reg. §20.2055-2(e)(1)) The term “deductible interest” includes a guaranteed annuity interest. The FMV of annuities is their present value determined under Code Sec. 7520. (Reg. §20.7520-1) The FMV of annuities for which an estate tax charitable deduction is allowable is the present value of the annuities determined under Reg.

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§20.7520-1. (Reg. §20.7520-2) This value cannot be determined without knowing the date on which the trust will terminate, i.e., the termination date.

Background—imposition of termination tax. The split-interest rules of Code Sec. 4947(a)(2)provide that in the case of a trust that is not exempt under Code Sec. 501(a) in which some of the unexpired interests are devoted to a charitable purpose and which has amounts in trust for which a deduction was allowed under Code Sec. 2055, Code Sec. 507 (relating to termination of private foundation status) applies as if that trust were a private foundation. (Code Sec. 4947(a)(2)) A termination tax is imposed on any private foundation that notifies IRS of its intention to terminate or the status of which is terminated by IRS as a result of willful or flagrant violations of the private foundation provisions. (Code Sec. 507) Generally, Code Sec. 507 does not apply to split-interest trusts due to a payment to a beneficiary that is directed by the terms of the trust’s governing instrument and is not discretionary with the trustee or, in the case of a discretionary payment, by reason of, or following, the expiration of the last remaining charitable interest in the trust. (Reg. §53.4947-1(e)(1))

Facts. The grantor of a trust died, and under the grantor’s will, the grantor’s interests in several grantor retained annuity trusts were distributed to the trustee of the trust to administer and distribute in accordance with the terms of the trust. The trust was established as a charitable lead annuity trust, and Charity C was granted an interest in the trust in the form of a guaranteed annuity interest under Code Sec. 2055(e)(2)(B). The trust was a split-interest trust as described in Code Sec. 4947(a)(2).

The trust was to have a term, computed with respect to the date of the grantor’s death, just sufficient to make the income interest in the trust for which a deduction would be allowed under Code Sec. 2055 have an aggregate value of a set percentage of the aggregate FMV of all amounts in the trust at its commencement (Trust Income Interest FMV). On the expiration of this term, the trustee was to distribute all trust principal to the grantor’s children, the remainder beneficiaries.

Charity C was divided into two separate foundations by court order, Charity A and Charity B, each of which received one-half of Charity

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C’s guaranteed annuity interest in the trust. The trustee represented that, before any distribution to the remainder beneficiaries, all annuity payments, including interest, would be made to Charities A and B in accordance with the grantor’s will and the trust instrument. The trust and IRS entered into a closing agreement recognizing that the Charities’ interest in the trust was a guaranteed annuity interest and that the trust was a testamentary charitable lead annuity trust.

IRS rules on termination date of trust. Because the trust’s closing agreement with IRS recognized that the Charities’ interest in the trust was a guaranteed annuity interest and that the trust was a testamentary charitable lead annuity trust, the closing agreement allowed an estate tax deduction of a set percentage of the estate’s initial fair market value, Trust Income Interest FMV. To determine whether the trust would properly terminate under the terms of the grantor’s will, a termination date had to be calculated under the valuation tables set out in Code Sec. 7520 so that the present value of the Charities’ guaranteed annuity interest equaled Trust Income Interest FMV. IRS performed the calculation and determined that the trust would terminate on the termination date.

IRS rules termination tax did not apply to trust. The trust was terminating due to a non-discretionary payment to a beneficiary that was directed by the terms of the governing instrument of the trust. The split-interest provisions of Code Sec. 4947(a)(2) did not apply because the trust no longer retained any amounts for which the estate charitable deduction was allowed. Thus, the final payment to the remainder beneficiaries would not be considered a termination of the trust's private foundation status within the meaning of Code Sec. 507(a), and so no termination tax under Code Sec. 507(c) applied.

S Election Inadvertently Terminated By Operating Agreement Amendment

PLR 201930023

In a Private Letter Ruling, the IRS has concluded that a limited liability company (LLC)’s S election was inadvertently terminated after its

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members adopted an amendment to the distribution provisions in the LLC’s operating agreement.

Background. Code Sec. 1361 defines a small business corporation (S corporation) as an eligible domestic corporation, which does not have (1) more than 100 shareholders; (2) a shareholder who is not an U.S. resident individual (there are exceptions); and (3) more than one class of stock. (Code Sec. 1361(b)(1))

A corporation is treated as having only one class of stock if all outstanding shares of stock of the corporation confer identical rights to distribution and liquidation proceeds. (Reg. §1.1361-1(l)(1)) Whether all outstanding shares of stock confer identical rights to distribution and liquidation proceeds is determined by looking at the corporation’s governing provisions, including any binding agreements relating to distributions and liquidation proceeds. (Reg. §1.1361-1(l)(2)(i))

An entity's election to be taxed as an S corporation may be terminated if the entity ceases to qualify as an S corporation. (Code Sec. 1362(d)(2)) A corporation ceases to qualify as an S corporation if it has more than one class of stock. (Code Sec. 1361(b)(1))

If the IRS determines that (1) the termination of the corporation’s S election was inadvertent, (2) the corporation promptly took reasonable steps to correct the problem, and (3) the shareholders agreed to make any adjustments required by the IRS, then the corporation will continue to be treated as an S corporation during the period specified by the IRS. (Code Sec. 1362(f))

Facts. The taxpayer, an LLC, elected to be treated as an S corporation effective Date 2. On Date 3, the LLC’s members agreed to amend the LLC’s operating agreement to provide that all distributions would be made to the members in proportion to their respective membership interests, including upon liquidation.

On Date 4, the members adopted the amendment, which stated that upon liquidation, distributions would be paid to members with positive capital accounts in accordance with their respective positive capital account balances.

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On Date 5, the amendment was amended to correct the liquidating distribution language and to provide for distributions on a pro rata basis in accordance with each member’s ownership percentage.

The LLC represented that it, and its members, filed all returns consistent with the LLC’s status as an S corporation and that all distributions made to the LLC’s members were based on their pro rata shares of ownership of the LLC. The LLC and its members also agreed to any adjustments consistent with the treatment of the LLC as an S corporation required by the IRS.

S election termination inadvertent. The IRS concluded that the LLC’s S election terminated on Date 4 because the first amendment did not provide the members with identical rights to distribution and liquidation proceeds as required by Reg. §1.1361-1(l)(1). However, that termination was inadvertent within the meaning of Code Sec. 1362(f) and was promptly corrected. Therefore, the termination of the LLC's S election was disregarded and, provided the LLC was otherwise eligible to be an S corporation and that the LLC’s S election was not otherwise terminated, the LLC remained an S corporation on Date 4 and thereafter.

Trust Established To Mitigate Harm Caused By Manufacturer Was Qualified Settlement Fund

PLR 201930004

In a Private Letter Ruling, IRS has held that a trust funded by a manufacturer, where the trust's sole beneficiaries were governments that received funds from the trust to compensate for damage done by the manufacturer's products, was a qualified settlement fund (QSF). IRS also ruled on whether certain amounts received by the trust were taxable income.

Background—definition of QSF. Reg § 1.468B-1(a) provides that a QSF is a fund, account, or trust that satisfies the three requirements of Reg §

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1.468B-1(c). First, Reg §1.468B-1(c)(1) requires that the fund, account, or trust is established under governmental order or approval and is subject to the continuing jurisdiction of that governmental authority. Second, Reg §1.468B-1(c)(2)requires that the fund, account, or trust is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event that has occurred and that has given rise to at least one claim asserting liability (i) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980; (ii) arising out of a tort, breach of contract, or violation of law; or (iii) designated by IRS in a revenue ruling or revenue procedure. Third, Reg §1.468B-1(c)(3) provides that the fund, account, or trust must be a trust under applicable state law, or its assets must be otherwise segregated from other assets of the transferor (and related persons).

Background—funds transferred to QSF. Reg §1.468B-2(a) provides that a QSF is a United States person and is subject to tax on its modified gross income. Reg §1.468B-2(b) provides that the term modified gross income means gross income, as defined in Code Sec. 61, computed with certain modifications.

Under Reg §1.468B-2(b)(1), amounts transferred to the QSF by, or on behalf of, a transferor to resolve or satisfy a liability for which the fund is established are excluded from gross income. However, dividends on stock of a transferor (or a related person), interest on debt of a transferor (or a related person), and payments in compensation for late or delayed transfers, are not excluded from gross income.

Background—income of states, municipalities, etc. Code Sec. 115(1) provides that gross income does not include income derived from any public utility or the exercise of any essential governmental function and accruing to a state or any political subdivision thereof.

Rev Rul 77-261, 1977-2 CB 45, holds that income from an investment fund, established under a written declaration of trust by a state, for the temporary investment of cash balances of the state and its participating political subdivisions, is excludable from gross income for federal income tax purposes under Code Sec. 115(1). The ruling reasons that the investment of cash balances by a state or political subdivision thereof in order to receive some yield on the funds until needed to meet

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expenses is a necessary incident of the power of the state or political subdivision to collect taxes and other revenue to fund government expenses.

Rev Rul 90-74, 1990-2 CB 34, IRS determined that the income of an organization formed, funded, and operated by political subdivisions to pool various risks (casualty, public liability, workers' compensation, and employees' health) is excludable from gross income under Code Sec. 115(1). In Rev Rul 90-74, private interests neither materially participated in the organization nor benefitted more than incidentally from the organization.

Facts. A U.S. agency (Agency) filed a complaint in the Court alleging that the Defendants violated certain provisions of law (the Act) with regard to the manufacture and design of Product Z. State X filed a separate complaint with regard to Product Z.

The Court entered Consent Decrees pursuant to which the Defendants agreed to pay Amount in partial settlement of the claims asserted by both Agency and State X. Amount would be used to fund projects designed to mitigate the Harm caused by the Defendants to the Beneficiaries from the manufacture and design of Product Z (Mitigation Projects).

Trust was established for the Beneficiaries.

The first two installments of Amount were to be paid by the Defendants into the Court's registry (Court Registry), and after Trust was established, the final two installments were to be paid by the Defendants to the Court appointed Trustee.

Interest earned on Amount while held in the Court Registry did not reduce the Defendants' obligations to pay the entire Amount as established in the Consent Decrees.

In addition to Trustee's disbursement of funds for Mitigation Projects, Trustee may disburse funds for administrative expenditures associated with implementing the Mitigation Project.

Beneficiaries must return any unused funds to the Trust no later than the Trust's fifteenth anniversary. At such time, the Trustee will

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distribute any funds not needed for the expenses incurred with winding up and dissolving the Trust solely among the Beneficiaries. After this distribution, the Trustee will distribute any remaining assets entirely among the Beneficiaries.

Pursuant to the Trust Agreement, the Defendants retain no ownership or residual interest with respect to the portion of Amount and investment income that the Trust received.

None of the transfers to Trust represent dividends on stock of a transferor (or a related person), interest on debt of a transferor (or a related person), or payments in compensation for late or delayed transfers.

Trust is a QSF. The Trust is a QSF under Reg. §1.468B-1(c).

The three requirements of Reg §1.468B-1(c) are satisfied. First, the Court entered an order approving the establishment of the Trust, and the Trust remains subject to the continuing jurisdiction of the Court. Second, the Trust was established to resolve or satisfy claims of the United States and State X that arose from Defendants' violations of the Act and State X laws which have given rise to at least one claim asserting liability. Third, the Trust was organized as a trust under applicable state law.

Transferred funds excluded from modified gross income. The Trust may exclude from its modified gross income, under Reg §1.468B-2(b)(1), the amount of the funds transferred to the Trust after its establishment as a QSF.

The Trust was established to resolve or satisfy claims of the United States and State X that arose from the Defendants' violations of the Act and State X laws. The transfers to Trust (Transfers of Funds) will be made to resolve or satisfy the related liabilities. Such transfers will be made by the Defendants to the Trust via the Trustee, or from the Court Registry to the Trust via the Trustee. None of the Transfers of Funds fall within the three specific exceptions to the general provision in Reg §1.468B-2(b)(1) that excludes transfers into the Trust from the Trust 's gross income.

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Investment income isn't taxable. Investment income earned by the Trust is excluded from its gross income under Code Sec. 115.

Trust will use its assets and income to mitigate Harm suffered by Beneficiaries and their citizens. All the Beneficiaries are either a state or a government of a possession of the United States. By carrying on this activity, Trust is performing an essential governmental function.

Trust will devote its entire operation to the purpose of funding Mitigation Projects that benefit Beneficiaries. Other than payments for goods and services necessary for Trust to perform the task of mitigating Harm and for administering Trust for this purpose, none of Trust's income will revert to a private party.

Upon dissolution, Trustee will distribute any funds not needed for the expenses incurred with winding up and dissolving the Trust solely among the Beneficiaries. After this distribution, the Trustee will distribute any remaining assets entirely among the Beneficiaries. All of the Beneficiaries are either a state or a government of a possession of the United States. None of Trust's assets will be distributed or revert to any entity whose income is not excludable from gross income under Code Sec. 115.

Policy With Death Benefit Met Qualified Long-term Care Insurance Rule

PLR 201930025

In a Private Letter Ruling, IRS has held that an insurance policy that provided coverage for qualified long-term care services, and also had a refund of premium death benefit, met the qualified long-term care insurance contract (QLTCI) rule regarding death benefits.

Background. Amounts paid for insurance that covers qualified long-term care services are deductible as medical expenses. (Code Sec. 213(d)(1)(D)) Eligible long-term care insurance payments are amounts

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paid during a tax year for any QLTCI, up to specified dollar limits (depending on the age of the individual). (Code Sec. 213(d)(10)(A))

Code Sec. 7702B(b)(1) defines a QLTCI contract as any insurance contract that meets all of the requirements listed in Code Sec. 7702B(b)(1)(A)–Code Sec. 7702B(b)(1)(F). Code Sec. 7702B(b)(1)(D) provides that a QLTCI contract cannot provide for a cash surrender value or other money that can be paid, assigned, or pledged as collateral for a loan, or borrowed, other than as provided in Code Sec. 7702B(b)(1)(E) or Code Sec. 7702B(b)(2)(C).

Code Sec. 7702B(b)(1)(E) provides that all refunds of premiums, and all policyholder dividends or similar amounts, under such contract are to be applied as a reduction in future premiums or to increase future benefits. Code Sec. 7702B(b)(2)(C) provides that Code Sec. 7702B(b)(1)(E) does not apply to any refund on the death of the insured, or on a complete surrender or cancellation of the contract, which cannot exceed the aggregate premiums paid under the contract.

Facts. The taxpayer, a life insurance company, offers a group long-term care contract ("Contract") that entitles insureds to insurance coverage of qualified long-term care services within the meaning of Code Sec. 7702B(c)(1).

The Contract includes a premium stabilization feature ("PS Feature") and a refund of premium death benefit ("ROP Death Benefit").

Under the PS Feature, a premium stabilization amount ("PS Amount") may be applied in one or both of the following ways:

1. After the insured has attained a stated age, and the insured has been enrolled for at least Number B years, the PS Amount if sufficient in amount may be applied to offset Number C percent of the Contract owner's premium obligation for a specified period (such as for the next Number D months) under the Contract. This option automatically applies unless the Contract owner affirmatively opts out of this use of the PS Amount.

2. Upon the death of the insured, any remaining PS Amount will be paid to the Contract owner's estate or beneficiary as an ROP Death Benefit. The ROP Death Benefit cannot exceed Number E percent of the

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premiums that have been paid for the Contract less insurance benefit claims paid under the Contract. Only premiums paid by the owner can be refunded under the ROP Death Benefit. Premiums paid from the PS Amount cannot be refunded under the ROP Death Benefit.

No benefit under the PS Feature is provided upon termination of a Contract other than a termination due to the death of the insured. If a contingent nonforfeiture benefit becomes applicable under the Contract, the PS Feature ceases to apply and no ROP Death Benefit is provided on the death of the insured.

The PS Amount with respect to a Contract is determined under a formula, which may be adjusted from time to time, but the PS Amount, and resulting ROP Death Benefit, can never exceed Number E percent of premiums paid. Apart from the ROP Death Benefit, the PS Amount cannot be received in cash, nor can it be assigned or pledged as collateral for a loan.

Contract met the death benefit rule. IRS held that the ROP Death Benefit under the Contract was consistent with the requirements of Code Sec. 7702B(b)(2)(C) for the treatment of the Contract as a QLTCI contract within the meaning of Code Sec. 7702B(b).

The ROP Death Benefit is payable only upon the death of the insured and thus satisfies the timing restriction imposed by Code Sec. 7702B(b)(2)(C). Also, the amount of the ROP Death Benefit cannot exceed Number E percent of the aggregate premiums paid by the Contract's owner. Such a benefit is therefore consistent with the amount restriction imposed by Code Sec. 7702B(b)(2)(C).

IRS Approves Retroactive Qualified Electing Fund Election

PLR 201925002

In a Private Letter Ruling, IRS has granted permission for a resident alien individual who owned a portion of two foreign corporations to make a retroactive qualified electing fund (QEF) election under Code Sec. 1295(b) for her investments in the two corporations.

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Background. Under Code Sec. 1295(a), a passive foreign investment company (PFIC) will be treated as a QEF with respect to a shareholder if (1) an election by the shareholder under Code Sec. 1295(b) applies to the PFIC for the tax year, and (2) the PFIC complies with IRS requirements for purposes of determining the ordinary earnings and net capital gains of the company.

If the election is made, the electing shareholder is not subject to a deferred tax and interest charge. (Code Sec. 1291) Instead, the electing shareholder must currently include in current income his or her share of the PFIC's earnings and profits. The QEF's ordinary income and net capital gain are passed through to the shareholder as ordinary income and long-term capital gain. (Code Sec. 1293)

A QEF election can be made for a tax year at any time prior to the due date for filing the return. (Code Sec. 1295(b)(2)) An election may be made after the due date if the shareholder reasonably believed that the company was not a PFIC. (Code Sec. 1295(b)(2)) A shareholder may request IRS permission to make a retroactive QEF election under Reg. §1.1295-3(f) if certain conditions are met, including: (1) the taxpayer reasonably relied on a qualified tax professional; (2) the granting of consent will not prejudice the interests of the US; and (3) the shareholder satisfies the procedural requirements of Reg. §1.1295-3(f)(4). (Reg. §1.1295-3(f)(1))

Those procedural requirements include filing a request for permission to make a retroactive QEF election, paying a user fee, and submitting affidavits that describe the reasons that the QEF election was not timely made, the discovery of the failure, the engagement of a tax professional, and the extent to which the taxpayer relied on the professional. (Reg. §1.1295-3(f)(4)(i), Reg. §1.1295-3(f)(4)(ii))

Facts. A taxpayer was a resident alien individual who owned a percentage of two foreign corporations. Her accountant failed to advise her on the need to make a QEF election, so no election was made. The taxpayer consulted an attorney, who inspected the corporations' tax forms and discovered the taxpayer's failure to make a QEF election. The attorney took corrective action, including entering into a closing agreement between the taxpayer and the IRS. Pursuant to that agreement, the taxpayer paid the IRS an amount sufficient to negate

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any prejudice to the U.S. resulting from the failure to make the election and agreed to file any necessary amended returns for years affected by the retroactive election, if any.

IRS concludes retroactive election is permissible. IRS determined that the taxpayer complied with the requirements of the regs. As a result, IRS granted permission to the taxpayer to make a retroactive QEF election with respect to the two corporations.

No Gain Or Loss On Trust Termination And Transfer Of Assets To Foundation

PLR 201928005

In a Private Letter Ruling, IRS determined that no gain or loss resulted from a trust's distribution of property to a charitable foundation. None of the seemingly relevant gain or loss provisions, e.g., the realization event provision where a distribution is in satisfaction of a right to receive a specific amount or of specific property other than that distributed, applied.

Background. Gain or loss is realized by a trust if property is distributed in kind by the trust as a result of the distribution, if the distribution is in satisfaction of a right to receive a distribution of (1) a specific dollar amount, (2) specific property other than that distributed, or (3) income that is currently required to be distributed. (Reg. §1.661(a)-2(f))

In Kenan v. Commissioner, (CA 2 1940) 25 AFTR 607, the trustees of a trust were directed to pay a beneficiary $5 million when the beneficiary reached age 40. At the stated time, the trustee paid the beneficiary partly in cash and partly in appreciated securities. The Court of Appeals for the Second Circuit held that the beneficiary had a general claim against the trust corpus, and the satisfaction of this general claim for an ascertainable value by a transfer of specific assets was an exchange that caused the trust to realize gain.

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A charitable lead trust (CLT) is a trust in which an income interest is given to charity, with the remainder interest going to a noncharitable beneficiary when the charity's interest terminates. A charitable lead annuity trust is a CLT in which payments of the income interest are made to the charitable beneficiary in annual payments of a set amount.

Facts. A trustor created a charitable lead annuity trust (annuity trust) which was to provide annual annuity payments to a state non-profit corporation (foundation). The foundation was a charitable foundation as described in Code Sec. 501(c)(3) and Code Sec. 509(a). After a set period of years, the trust property would revert to the trustor or its assigns. The trustor assigned its interest in the trust to an individual. Prior to the passage of the stated period of years, the individual died. Under the individual's will, the individual's estate transferred the individual's interest in the trust (remainder trust) to the foundation. Under state law, when the foundation acquired both the annuity trust and the remainder trust, the annuity trust merged into the remainder trust.

However, despite the merger of the foundation's interests, state law provided that the trust did not automatically terminate if there was a trustee other than the beneficiary. A state statute provided that a court could terminate a trust if, due to circumstances unanticipated by the trustor, termination would further the interests of the trust. The trust requested a state court order terminating the interests of the trustees and transferring all the trust's property, minus payment of all obligations, to the foundation. The trustees of the trust requested an IRS determination of the tax consequences of the termination of the trust and the distribution of all its assets.

PLR Discusses Real Estate Firm Not Qualifying For 501(c)(3) Status

PLR 201929021

In a Private Letter Ruling, IRS has determined that an organization does not qualify for Code Sec. 501(c)(3) exempt status because, among other things, the organization's articles of incorporation don't limit its

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purposes to one or more exempt purposes and expressly empower it to engage in business activities under state law.

Background. Code Sec. 501(c)(3) provides an exemption from federal income tax to organizations organized and operated exclusively for charitable or educational purposes, provided no part of the net earnings inures to the benefit of any private shareholder or individual.

Reg. §1.501(c)(3)-1(a)(1) provides that in order to be exempt as an organization, the organization must be both organized and operated exclusively for one or more purposes specified in such section. If an organization fails to meet either the organizational test or the operational test, it is not exempt.

Reg. §1.501(c)(3)-1(b)(1)(i) provides that an organization is organized exclusively for one or more exempt purposes only if its organizing document limits the purposes of such organization to one or more exempt purposes and does not expressly empower the organization to engage, otherwise than as an insubstantial part of its activities, in activities which in themselves are not in furtherance of one or more exempt purposes.

Reg. §1.501(c)(3)-1(c)(1) provides that an organization is regarded as operated exclusively for one or more exempt purposes only if it engages primarily in activities which accomplish one or more exempt purposes specified in Code Sec. 501(c)(3). An organization is not so regarded if more than an insubstantial part of its activities is not in furtherance of an exempt purpose.

Reg. §1.501(c)(3)-1(c)(2) provides that an organization is not operated exclusively for one or more exempt purposes if its net earnings inure in whole or in part to the benefit of private shareholders or individuals.

Reg. §1.501(c)(3)-1(d)(1)(ii) provides that an organization is not organized or operated exclusively for one or more exempt purposes unless it serves a public rather than a private interest.

Facts. A taxpayer was formed as a general stock corporation. Its articles of incorporation state that it was formed for the purpose of engaging in any lawful act or activity for which a corporation may be organized under state law and that it is authorized to issue shares of stock.

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The taxpayer's sole employee and board member is V, an individual.

The taxpayer is a residential real estate broker. V is a real estate agent.

The taxpayer advertises its services through direct marketing (door knocking), referrals, telemarketing, and advertising. It says that sellers enjoy a full-service brokerage with a market-leading real estate firm.

Taxpayer promotes the use of the Multiple Listing Service ("MLS") and publications to buy or sell homes. It targets consumers, employees, and retirees to promote the sales of their homes.

Taxpayer plans to use government money to create a training/apprentice program. V will work inside the community creating a need for the real estate apprentice program which will allow training, advancement, and community development, which lessens the burdens of government.

Issue. Does the taxpayer qualify for exemption under Code Sec. 501(c)(3)?

Decision. The taxpayer does not qualify for exemption under Code Sec. 501(c)(3).

To meet the requirements of Code Sec. 501(c)(3), an organization must satisfy both the organizational and operational tests as described in Reg. §1.501(c)(3)-1(a)(1). The taxpayer was formed as a for-profit corporation with stock and it conducts substantial non-exempt real estate activities. As a result, it satisfies neither the organizational nor the operational test.

It does not meet the provisions of Reg. §1.501(c)(3)-1(b)(1)(i) because its articles of incorporation are those of a for-profit entity with stock and they lack a purpose clause limiting its activities to those described in Code Sec. 501(c)(3).

It is not operated exclusively for an exempt purpose as described in Reg. §1.501(c)(3)-1(c)(1) because the taxpayer is engaged in substantial non-exempt activities. Specifically, it provides real estate services for a fee identical to those provided by other for-profit real estate agencies.

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To meet the requirements of Reg. §1.501(c)(3)-1(c)(2) and Reg. §1.501(c)(3)-1(d)(1)(ii), a taxpayer must serve a public interest rather than a private interest. The taxpayer is operating for the private interests of V. For example, it intends to get grants to help get V's real estate business off the ground.

The taxpayer has a significant non-exempt purpose of selling real estate, which is not incidental to any educational or charitable purpose, which precludes it from exemption.