Letter Ruling 9739033, June 27, 1997
Uniform Issue List Information:
UIL No. 4941.00-00
Taxes on self-dealing
UIL No. 4941.04-00
Taxes on self-dealing
- Definition of self-dealing
Code Sec. 4941
This is in response to M's request for a ruling under section 4941 of the Internal Revenue Code submitted by M's legal representative. M has requested a ruling that (i) the proposed like-kind exchange and (ii) proposed partition of M's undivided interest in certain timberlands do not constitute acts of self-dealing as described in section 4941 of the Code.
N has been recognized as exempt under section 501(c)(3) and classified as a private foundation described in section 509(a) of the Code. N was created as an inter vivos trust by 0 who died in x. Q is the sole trustee for N.
N's distribution committee has the responsibility for making decisions concerning N's charitable distributions. The committee has four members which includes P, who is O's nephew. M states that P and Q also serve as the executors of O's will.
Under the terms of O's will, O bequeathed to N a y percent interest in certain timberlands located in R. The y percent interest bequeathed to N is currently held by M, on behalf of N.
O also bequeathed an undivided y percent interest in a tract in R, a tract in S, and a tract in T to P and U, O's niece and nephew. Portions of the y percent property interests in S and T were distributed to two generation-skipping trusts (GST) for the benefit of P and his family and U and her family under the terms of O's will. The trustees of the GST trusts are P and Q. M states that P and U also received the balance of the y percent interest in the S and T properties and the entire y percent interest in the tract in the R property outright.
In addition to the GST trusts, P and U created two revocable timber trusts and conveyed various interests held in the R, S, and T timberland properties to these revocable trusts, referred to as P's revocable timber trust and U's revocable timber trust. The trustees of P's revocable timber trust are P and Q. The trustees for U's revocable timber trust are U's sons and Q.
M states that P and U are also the lifetime income beneficiaries of two separate testamentary trusts created by the will of W, their mother. Each trust holds an undivided z percent interest in the R, S, and T timberland properties. The trustees of these two trusts are P, U's son, and Q.
In summary, M states that Q is one of two executors of O's will, the sole trustee of N, and a trustee of all of the various trusts created by O, P, U, and W, collectively referred to as the "family trusts." P is also an executor of O's will, a member of the distribution committee for N, and a trustee of the various "family trusts", except U's revocable timber trust. The distribution committee has the power to make decisions regarding charitable distributions from N and amend the trust creating N in any manner that does not conflict with the provisions of section 501(c)(3) of the Code.
M states that potential unrelated buyers have expressed an interest in acquiring the S timberland property. M states that prior to the completion of the timberland transaction with any prospective buyer, M proposes to complete a like-kind exchange so that a 100% fee simple interest in the S timberland property currently held by the "family trusts" will be exchanged for an interest of equivalent fair market value in the y percent interest in the R timberland property consisting of c acres currently administered by M, on behalf of N. M will also receive a 100% fee simple interest in the T property, a b percent interest in the R property, and cash as part of the exchange. As a result of the exchange, M will hold a 100% fee simple interest in d acres in the R property. After the completion of the exchange, M will complete the sale of the S property and distribute the proceeds to N. M has received an appraisal from an independent appraiser indicating the fair market value of the various property interests subject to the exchange.
M and the "family trusts" have received approval from the state probate court, with jurisdiction over the administration of M, to execute the exchange of property and have their remaining undivided interests in the R timberland property partitioned so that M and each "family trust" will hold a 100% interest in fee simple in the R property. M has also received an opinion from V, the Attorney General for the state in which these transactions are taking place, expressing no objections to the decree issued by the probate court approving the exchange of property. This opinion was issued after the proposed exchange was reviewed by the state's forestry commission.
M states that after the exchange and partition, the fair market value of the R, S, and T property interests held by M, on behalf of N, including cash, will be equal to the property interest held by M before the transfer. M represents that the proposed exchange will enable it to distribute cash to N and a 100% fee simple interest in timber properties which is preferable to the distribution of an undivided y percent interest in acreage which has failed historically to generate a steady source of income.
Section 4941(a)(1) of the Code provides for the imposition of tax on each act of self-dealing between a disqualified person and a private foundation.
Section 4941(d)(1)(A) of the Code provides that the term "self-dealing" means any direct or indirect sale or exchange, or leasing of property between a private foundation and disqualified person.
Section 4941(d)(1)(E) of the Code states that the term "self dealing" means any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation.
Section 4941(d)(2)(A) of the Code provides that the transfer of real or personal property by a disqualified person to a private foundation shall be treated as a sale or exchange if the property is subject to a mortgage or similar lien which the foundation assumes or if it is subject to a mortgage or similar lien which a disqualified person placed on the property within the 10-year period ending on the date of the transfer.
Section 4946(a)(1)(A) provides that the term "disqualified person" means, with respect to a private foundation, a person who is a substantial contributor to the foundation.
Section 4946(a)(1)(G) of the Code defines a disqualified person to include with respect to a private foundation a trust or estate in which persons described in subparagraph (A), (B), (C), or (D) hold more than 35 percent of the beneficial interest.
Section 53.4941(d)-l(a) of the Foundation and Similar Excise Tax Regulations provides that the term "self-dealing" does not, however, include a transaction between a private foundation and a disqualified person where the disqualified person status arises only as a result of such transaction. For example, the bargain sale of property to a private foundation is not a direct act of self-dealing if the seller becomes a disqualified person only by reason of his becoming a substantial contributor as a result of the bargain element of the sale. For the effect of sections 4942 , 4943 , 4944 , and 4945 upon an act of self-dealing which also results in the imposition of tax under one or more of such sections, see the regulations under those sections.
Section 53.4941(d)-1(b)(5) of the regulations provides that for purposes of this paragraph, an organization is controlled by a private foundation if the foundation or one or more of its foundation managers (acting only in such capacity) may, only by aggregating their votes or positions of authority, require the organization to engage in a transaction which if engaged in with the private foundation would constitute self-dealing. Similarly, for purposes of this paragraph, an organization is controlled by a private foundation in the case of such a transaction between the organization and a disqualified person, if such disqualified person, together with one or more persons who are disqualified persons by reason of such a person's relationship (within the meaning of section 4946(a)(1)(C) through (G) ) to such disqualified person, may, only by aggregating their votes or positions of authority with that of the foundation, require the organization to engage in such a transaction. The 'controlled' organization need not be a private foundation; for example, it may be any type of exempt or nonexempt organization including a school, hospital, operating foundation, or social welfare organization. For purposes of this paragraph, an organization will be considered to be controlled by a private foundation or by a private foundation and disqualified persons referred to in the second sentence of this subparagraph if such persons are able, in fact, to control the organization (even if their aggregate voting power is less than 50 percent of the total voting power of the organization's governing body) or if one or more of such persons has the right to exercise veto power over the actions of such organization relevant to any potential acts of self-dealing. A private foundation shall not be regarded as having control over an organization merely because it exercises expenditure responsibility (as defined in section 4945(d)(4) and (h)) with respect to contributions to such organization. See example (6) of subparagraph (8) of this paragraph.
Section 53.4941(d)-1(b)(3) of the regulations provides that the term "indirect self-dealing" shall not include a transaction with respect to a private foundation's interest or expectancy in property (whether or not encumbered) held by an estate (or revocable trust, including a trust which has become irrevocable on a grantor's death), regardless of when title to the property vests under local law, if--
(i) The administrator or executor of an estate or trustee of a revocable trust either--
(a) Possesses a power of sale with respect to the property,
(b) Has the power to reallocate the property to another beneficiary, or
(c) Is required to sell the property under the terms of any option subject to which the property was acquired by the estate (or revocable trust);
(ii) Such transaction is approved by the probate court having jurisdiction over the estate (or by another court having jurisdiction over the estate (or trust) or over the private foundation);
(iii) Such transaction occurs before the estate is considered terminated for Federal income tax purposes pursuant to paragraph (a) of Sec. 1.641(b)-3 of this chapter (or in the case of a revocable trust, before it is considered subject to section 4947 );
(iv) The estate (or trust) receives an amount which equals or exceeds the fair market value of the foundation's interest or expectancy in such property at the time of the transaction, taking into account the terms of any option subject to which the property was acquired by the estate (or trust); and
(v) With respect to transactions occurring after April 16, 1973, the transaction either--
(a) Results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up,
(b) Results in the foundation receiving an asset related to the active carrying out of its exempt purposes, or
(c) Is required under the terms of any option which is binding on the estate (or trust).
Q, as co-executor of M and trustee of N, and P, as co-executor of M and a member of the distribution committee of N, have the power to reallocate the property held by M, on behalf of N, to another beneficiary pursuant to section 53.4941(d)-1(b)(3)(i) of the regulations. N was created as an inter vivos trust by O. Under the terms of O's will, N is entitled to receive a y percent interest in the R timberland property. The probate court with jurisdiction over the administration of O's will has approved an exchange of the y percent interest in the R property held by M, on N's behalf, pursuant to section 53.4941(d)-1(b)(3) (ii) of the regulations. The transaction is occurring as part of the estate administration and M has not been terminated for federal income tax purposes pursuant to section 53.4941(d)-1(b)(3) (iii) of the regulations.
Pursuant to the proposed transaction, M will receive an interest in the S timberland property as well as cash. M will also receive an interest in the R and T properties as part of the exchange. The interest in the R property to be received by M will be a b percent interest in a d acre tract in which M currently holds a y percent interest. Therefore, after the exchange, M's interests in the R, S, and T properties will be a 100% fee simple interest in each property held on behalf of N. M has submitted appraisals of the various property interests and represents that the fair market value of the R, S, and T property interests, and cash, received in the exchange are equivalent in value to the y percent interest in the R property held by M, on N's behalf, before the exchange pursuant to section 53.4941(d)-1(b)(3) (vi) of the regulations.
M states that there is a potential buyer for the S timberland property. After the exchange, M proposes to sell the S property and distribute the proceeds to N. Therefore, N's 100% fee simple interest in the R, S, and T properties will be at least as liquid as the y percent interest in the R property it gave up as part of the exchange approved by the probate court pursuant to section 53.4941(d)-1(b)(3)(v) (a) of the regulations.
Based on the above we rule that (i) the proposed like-kind exchange and (ii) proposed partition of M's undivided interest in certain timberlands do not constitute acts of self-dealing as described in section 4941 of the Code.
This ruling does not purport to rule on transactions that occur after the distributions from M to N. Further, this ruling does no purport to rule on whether the transfer of property between the parties constitutes a like-kind exchange under section 1031(f) of the Code.
This ruling is directed only to the organization that requested it. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent.
We are informing your key District Director of this ruling.
Sincerely yours, Edward K. Karcher, Chief, Exempt Organizations, Technical Branch 3.