Charities and Bankruptcy 101

• Date: 01 October 2019
• DOI: http://doi.org/10.1002/npc.30649
• Published date: 01 October 2019

Bruce R. Hopkins’ NONPROFIT COUNSEL

October 2019 7

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc

CHARITIES AND BANKRUPTCY

101

A tax-exempt charitable organization filed for a Chap-

ter 7 bankruptcy. The trustee in the case, having deter-

mined that a surplus in the bankruptcy estate will exist,

brought to the attention of the bankruptcy court the

existence of two exempt entities with purposes similar to

those of the debtor’s. The trustee proposed to the court

that he file tardy proofs of claim on behalf of these two

charities and thereafter distribute the surplus to them.

The court denied the trustee’s request, for three rea-

sons (In re National Emergency Medicine Association (US

Bankruptcy Court for the District of Columbia)).

First, it was not clear to the court that the debtor is

undergoing a dissolution. No facts in that regard were

provided to the court. The court noted that a charitable

organization may file a Chapter 7 case without intending

to dissolve.

Second, the trustee did not provide the court with

any source dictating how the assets, on any dissolution,

are to be distributed. The trustee provided the court with

the text of the dissolution provision in the federal tax reg-

ulations (Reg. § 1.501(c)(3)-1(b)(4)). But the trustee failed

to point to a provision in the debtor’s articles of incorpo-

ration or under state law pursuant to which the assets

would be distributed for one or more exempt purposes

on a dissolution. The court observed that “[s]uch a provi-

sion might dictate distribution of assets on dissolution to

entities different from what the trustee has proposed.”

Third, the trustee sought permission to file proofs

of claim on behalf of the two exempt organizations

that he proposes should receive the funds. He proposed

distributions to them pursuant to their proofs of claim as

allowed tardy claims. As the court pointed out, however,

these entities are not creditors. The court wrote that “[i]f

some provision in the debtor’s articles or under state law

authorizes the trustee to make payment to these enti-

ties, such payments to them would not be payments to

them as creditors in the bankruptcy case and should not

be administered through the claims process.”

The court ordered the parties to file responses to the

court’s order within 21 days. [4.3(b)] ◆

CHARITABLE ESTATE

PLANNING: A CASE STUDY

The IRS ruled that a formula to be used in determin-

ing the income interest term of a charitable lead annuity

trust is a permissible one and that an estate tax chari-

table deduction will be available under the stated facts

(Priv. Ltr. Rul. 201933007).

Facts

A grantor established a revocable trust, with the

grantor as trustee. The trust instrument provides that,

on the grantor’s death, following certain specified pay-

ments and distributions, the remainder of the assets in

the trust will be distributed to (1) a marital trust for the

benefit of the grantor’s spouse, if the spouse survives the

grantor, or (2) a charitable lead annuity trust (CLAT), if

the grantor survives the spouse.

The annuity amount from the CLAT is an amount

equal to 5 percent of the fair market value of the initial

trust estate. The term of years and termination date of

the CLAT is established by a formula in the trust instru-

ment. The annuity beneficiary is, of course, a charitable

organization. The CLAT contains the requisite private

foundation law provisions.

Law and Analysis

The IRS stated that the amount of the annual annuity

payment will be a determinable amount, ascertainable

as of the date of death of the survivor of the grantor or

the spouse. As to the formula fixing the term, the IRS

noted that the computation of the term is based in part

on the initial net fair market value of the assets passing

to the CLAT. Thus, held the IRS, this provision is permis-

sible because the term is determinable as of the date of

death of the survivor, thereby satisfying the “specified

term” requirement (Reg. § 20.2055-2(e)(2)(vi)). Conse-

quently, the IRS ruled that use of the formula in the CLAT

instrument satisfies the requirement that a guaranteed

annuity must be paid for a specified term of years (IRC

§ 2055(e)(2)(B)).

The IRS also ruled that if the grantor survives the

spouse and dies without modifying or revoking the

trust, the grantor’s estate will be entitled to an estate

charitable contribution deduction (IRC § 2055(a)) for the

present value of the annuity from the CLAT (provided, of

course, that the charity involved is a qualified one). The

IRS further ruled as to the circumstances whereby, if the

spouse survives the grantor, the spouse’s estate will be

entitled to a charitable deduction for the present value

of the annuity from the CLAT. [16] ◆

SAD CASE FOR EXEMPT

AMATEUR ORGANIZATION

STATUS

A membership organization has as its purpose the

conduct of outboard motor boat races that are open to

the public. Prizes are awarded. It attempted to qualify as

a charitable and educational entity, and more particularly

an organization that fosters national or international

sports (an IRC § 501(j) entity). The IRS commenced

an examination of this organization, with the revenue