Final Regulations Issued Concerning VEBA/SUB UBI Calculations

Published date01 February 2020
Date01 February 2020
February 2020 5
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
of the foreign law involved prevented the entity from
amending its articles to come into compliance with the
organizational test (Priv. Ltr. Rul. 201947020).
An organization was formed for the advancement of
education, science, and research in the fields of business
administration, economics, law, medicine, chemistry,
physics, and biology. It provides funding for qualified
institutions and individuals. It sought recognition of tax
exemption as a private foundation.
This entity was created by means of an individual’s
will. It is obligated to provide financial support to this
individual’s surviving spouse. The principal financial sup-
port for this organization is a bequest pursuant to this
will. At least 85 percent of its noninvestment income has
been received from sources outside the United States.
This organization formed a title-holding company
in the United States, which provides the organization
with income. It is attempting to secure exempt status
to prevent taxation of that income. The organization is
claiming status as a foreign charity (IRC § 4948).
This entity was established under a foreign country’s
law as a stiftung (essentially the equivalent of a US foun-
dation). (Stiftung is a body of nonprofit law that was
largely developed during the Roman Empire and spread
throughout Europe, according to extensive research on
the subject published in the November 26 EO Tax Journal.)
Law and Analysis
The IRS denied recognition of exemption in this case on
the grounds of violation of the organizational and opera-
tional tests. The operational test was violated because of
transgression of the private inurement doctrine, in the form
of financial assistance for the surviving spouse. This orga-
nization’s articles of organization do not comport with
the requirements of the organizational test. The entity
advised the IRS that the law under which it is organized
does not allow alteration of its purposes, so it cannot
amend the document to comply with the organizational
test. The organization’s (unavailing) argument was, as
stated in the ruling, that there is “no meaningful differ-
ence in the Section 501(c)(3) language and the language
contained in the Stiftung, other than the Stiftung does
not specifically refer to Section 501(c)(3).” [4.3, 4.5]
It took three attempts to properly reform a trust into
a qualified remainder trust, but the trustees (and their
lawyers) eventually got the job done (Priv. Ltr. Rul.
An individual created a trust that provides that, on
this individual’s death, the residue of the estate is to
be administered as a unitrust for the benefit of seven
children. One feature of this trust was that the unitrust
amount was set at 3.5 percent of the trust’s fair market
value. Another feature was that, on the death of a ben-
eficiary, the portion of the amount attributable to the
beneficiary was to be paid to a foundation. At the death
of the last of the beneficiaries, the balance of the trust
estate was to be paid to the foundation.
At this individual’s death, the trust was not eligible
for the estate tax charitable deduction because the trust
was not a qualified charitable remainder unitrust. The
trustees of the trust filed a petition for reformation of
the trust with the appropriate state court, to change
the unitrust amount from 3.5 percent to 5 percent. The
court granted the petition.
The trustees thereafter determined that the trust did
not qualify as a CRUT because one share was not limited
to a term of 20 years and the payments to the special
needs trust were not limited to a term or life expectancy.
They once again petitioned the court for a reformation,
which was approved.
As part of the process for seeking a private letter rul-
ing from the IRS, it was discovered that the trustees did
not properly calculate the value of the charitable interest
in the trust. They adjusted the calculations to reflect the
correct value. The trustees represented that they will
once again petition the state court to amend its order to
state the proper value.
Law and Analysis
The IRS ruled that the charitable interests passing to
the foundation pursuant to the terms of the trust, prior
to its reformation, are reformable interests (IRC § 2055(e)
(3)(C)), that the second round of reformations will result
in a qualified reformation of the trust (IRC § 2055(e)(3)
(B)), and that the present value of the remainder interest
in the CRUT, and the present value of the foundation’s
portion of the unitrust interest, as reformed on the sec-
ond try, will be interests that qualify for the estate tax
charitable deduction (IRC § 2055(a)). [8.6(c)]
The Department of the Treasury and the IRS, on
December 9, published final regulations interpreting
a statutory limitation (IRC § 512(a)(3)(E)(i)) as to the
amount of investment income tax-exempt voluntary
employees’ beneficiary associations and supplemental
unemployment benefit trusts may treat as nontaxable

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