Charitable trust's receipt of UBTI caused all income to be taxable.

• Author: Baumann, Dale R.
• Position: Unrelated business taxable income

On Jan. 21, 1997, the Ninth Circuit affirmed the Tax Court's decision that a charitable remainder unitrust's (CRUT's) receipt of unrelated business taxable income (UBTI) from three publicly traded partnerships caused it to be taxable on all of its income for that year (Leila G. Newhall Unitrust, aff'g 104TC 236 (1995)).

The Leila G. Newhall Unitrust (Unitrust) was created in 1975 and was funded with common stock of the Newhall Land and Farming Company (Company), a publicly traded corporation. In 1983, Company entered into a partial liquidation and transferred certain real estate and mineral rights to two publicly traded limited partnerships (PTLPs). The Unitrust received units of both PTLPs from Company. In 1985, the Company completely liquidated and transferred its remaining assets to a third PTLP. The Unitrust received units of the third PTLP in exchange for its Company shares. The three PTLPs were publicly traded on the New York Stock Exchange during tax years 1988 and 1989. Petitioner did not purchase or acquire any other interests in the three PTLPs.

The Service determined deficiencies against the Unitrust for 1988 and 1989, asserting that the amounts received through the three PTLPs were UBTI, and that under Sec. 66.4(c) and Regs. Sec. 1.664-1(c), the trust's receipt of UBTI caused it to be taxable on all of its income in those years. Sec. 664(c) provides that "a charitable remainder unitrust shall, for any taxable year, not be subject to any [income tax], unless such trust, for such year, has unrelated business taxable income (within the meaning of section 512)."

Regs. Sec. 1.664-1(c) provides that "[i]f the charitable remainder trust has any unrelated business taxable income... for any taxable year, the trust is subject to all of the taxes imposed by... the Code for such taxable year."

The Tax Court ruled for the IRS, rejecting the trust's position that it should be taxable (if at all) on only its UBTI. While the trust pointed out that its income tax was approximately three times its actual UBTI, the Tax Court found Sec. 664(c) to be unambiguous and Regs. Sec. 1.664-1(c) to be a reasonable interpretation.

The Unitrust appealed, arguing that PTLPs are not "partnerships" for Sec. 512(c) purposes, but instead should be treated as corporations. The Unitrust also argued that because its investment in the PTLPs was merely passive, its income from the PTLPs should not be treated as UBTI. Finally, the Unitrust reiterated its argument that...