Distributions from split-interest trust are not included in distributable amount; Regs. Sec. 53.4942(a)-2(b) (2) is invalid.

• Author: Fiore, Nicholas J.

In 1978, J created the private non-operating F Foundation. In 1979, J created the Trust to distribute 7% of J's trust estate annually to F. The Trust made distributions to F in 1983, 1984 and 1985.

The IRS assessed excise taxes on these distributions, for F's undistributed income, based on Regs. Sec 53.4942(a)-2(b)(2). The Tax Court (opinion Tannenwald, J.) holds for F, invalidating the regulation and ruling that none of the Trust's distributions were includible in F's undistributed income.

The issue before us is straight-forward: Does the increase in the distributable amount st forth in Regs. Sec. 53.4942(a)-2 constitute an unwarranted extension of the statutory provision that defines "distributable amount" in terms of "minimum investment return," or is it a reasonable interpretation of that provision which carries out the intent of congress?

An understanding of the historical framework of the statutory provisions and the regulations involved is an essential element in the resolution of this issue. Sec. 4942 was first enacted as part of the Tax Reform Act of 1969, which imposed the excise tax on the "undistributed income" of a private foundation. Undistributed income was defined as the excess of "distributable amount" over "qualifying distributions" and "distributable amount" was defined as an amount equal to "minimum investment return or the adjusted gross income (wichever is higher)" reduced by the amount of specified taxes. Thus, there was a dual basis for the tax. Sec. 4942(g)(3) specified that a contribution from one private foundation to another private foundation would constitute a "qualifying distribution" only if the recipient foundation prior to the close of the next tax year distributed an amount equal to the contribution for exempt purposes. the abuse to which Sec. 4942 was directed was the opportunity then existing for individuals to receive an immediate benefit of deductible charitable contributions while deferring the actual transfer of funds for charitable purposes. This was the origin of the minimum investment return. Congress wanted to be sure that a foundation did not invest in lowyield assets to skirt the requirement of distributing net income.

The Tax Reform Act of 1969 also enacted Sec. 4947, which dealt with nonexempt trusts, including split-interest trusts such as the trust involved here, and imposed various restrictions, comparable to those imposed on private foundations in respect of self-dealing, retention of...