Sad Case for Exempt Amateur Organization Status

Date01 October 2019
Published date01 October 2019
October 2019 7
Bruce R. Hopkins’ Nonpr ofit Counsel DOI:10.10 02/n pc
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)]
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).
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]
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

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