Final Regulations Issued Concerning VEBA/SUB UBI Calculations

• DOI: http://doi.org/10.1002/npc.30685
• Published date: 01 February 2020
• Date: 01 February 2020

Bruce R. Hopkins’ NONPROFIT COUNSEL

February 2020 5

THE LAW OF TAX-EXEMP T ORGANIZATIONS MONTHLY

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).

Facts

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] ◆

AFTER THREE EFFORTS,

TRUST BECOMES REFORMED

REMAINDER TRUST

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.

201947007).

Facts

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)] ◆

FINAL REGULATIONS ISSUED

CONCERNING VEBA/SUB UBI

CALCULATIONS

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