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Friday, April 26, 2024
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GiftLaw Pro |
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GiftLaw Note:
In PLR 9425004 a family corporation was created to provided trust management and financial services to various family members. The stock in the corporation is owned by two grandchildren and the corporation serves a number of family members. The Service noted that an exception to the self dealing rules under Sec. 4941(d)(2)(E) enables the payment of compensation to disqualified persons for "services which are reasonable and necessary to carrying out the exempt purpose" so long as the compensation is not excessive. In effect, there is a reasonable or incidental exception to the self dealing rules that allows payment to qualified persons for providing services to a charitable trust. These services must be customary or necessary for the functioning of the trust and the compensation must be fair and appropriate.
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This is in reply to a letter dated August 23, 1993, in which a ruling was requested on behalf of M and N concerning the applicability of the self-dealing rules of section 4941(d) of the Internal Revenue Code to certain proposed transactions involving M and N and certain disqualified persons.
M was created under A's Will upon the death of A on w. M currently has assets worth approximately y. N was formed on x. It was initially funded with assets worth z. It is assumed, based on your representations, that M and N constitute split-interest trusts within the meaning of section 4947(a)(2) of the Code.
It is planned that O, a newly-created for-profit corporation, will replace M's current corporate trustee. N's trustees, C, D, and E, also plan to designate O to serve as N's fourth trustee.
As a trustee, O will provide necessary trust management services in order to assist in the accomplishment of M and N's exempt purposes including services related to the administration of M and N's grantmaking process. O will also provide fiduciary and trust management services to A's son, B, A's spouse, C, and A's grandchildren, D and E, and to trusts established for their benefit. It is planned that O will also serve other unrelated customers.
D and E will initially own O's stock. Outside persons will hold O's officer and director positions.
O will charge its clients a fee and use a portion of this fee to compensate outside advisors, including investment counselors, accountants, attorneys, banks, insurance agents and pay for any services that it subcontracts with third parties. It is represented that the total fee that will be paid by M and N should not materially exceed the amount M and N currently pay for trust company services and the services rendered by its outside advisors. It is further represented that the fee charged by O will not exceed the going rate in the community for the types of services covered by the fee.
Based upon these representations, M and N have requested a ruling that the payment of compensation by M and N to O in return for service as a trustee and the furnishing of related services will not constitute self-dealing because the exception under section 4941(d)(2)(E) of the Code will apply.
Section 4947(a)(2) of the Code provides that the self-dealing rules of section 4941 of the Code are applicable to a charitable lead trust as if the charitable lead trust were a private foundation.
Section 4941 of the Code imposes an excise tax on each direct or indirect act of self-dealing between a disqualified person and a private foundation, or in the case of a charitable lead trust between a disqualified person and the charitable lead trust. The tax under section 4941 is imposed on the self-dealer. An additional tax is imposed on a foundation manager who knowingly participated in the act of self-dealing.
Section 4941(d)(1)(D) of the Code provides that the term "self-dealing" means any direct or indirect payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person.
Section 4941(d)(2)(E) of the Code provides that, except in the case of a government official (as defined in section 4946(c)), the payment of compensation (and the payment or reimbursement of expenses) by a private foundation to a disqualified person for personal services which are reasonable and necessary to carrying out the exempt purpose of the private foundation shall not be an act of self-dealing if the compensation (or payment or reimbursement) is not excessive.
Section 53.4941(d)-3(c)(1) of the Foundation and Similar Excise Taxes Regulations provides that "personal services" include the services of a broker serving as an agent for the private foundation, and refers to section 1.162-7 of the Income Tax Regulations for determining whether compensation is excessive. The test under section 1.162-7 for determining whether compensation is excessive is whether the compensation payments are reasonable and are in fact payments purely for services.
Example (2) of section 53.4941(d)-3(c)(2) of the regulations provides as follows:
C, a manager of private foundation X (and hence a disqualified person with respect to X), owns an investment counseling business. Acting in his capacity as an investment counselor, C manages X's investment portfolio for which he receives an amount which is determined not to be excessive. The payment of such compensation to C shall not constitute an act of self-dealing.
Example (3) of section 53.4941(d)-3(c)(2) of the regulations provides as follows:
M, a commercial bank, serves as a trustee for private foundation Y. In addition to M's duties as trustee, M maintains Y's checking and savings accounts and rents a safety deposit box to Y. The use of the funds by M and the payment of compensation by Y to M for such general banking services shall be treated as the payment of compensation for the performance of personal services which are reasonable and necessary to carry out the exempt purposes of Y if such compensation is not excessive.
Section 53.4941(d)-2(c)(4) of the regulations provides that, under section 4941(d)(2)(E) of the Code, the performance by a bank or trust company which is a disqualified person of trust functions and certain general banking services for a private foundation is not an act of self-dealing, where the banking services are reasonable and necessary to carrying out the exempt purposes of the private foundation, if the compensation paid to the bank or trust company, taking into account the fair interest rate for the use of the funds by the bank or trust company, for such services is not excessive. The general banking services allowed by this subparagraph are:
(i) Checking accounts, as long as the bank does not charge interest on any overwithdrawals,
(ii) Savings accounts, as long as the foundation may withdraw its funds on no more than 30 days' notice without subjecting itself to a loss of interest on its money for the time during which the money was on deposit, and
(iii) Safekeeping activities.
Section 4946(a)(1) of the Code provides, in part, that the term "disqualified person" means, with respect to a private foundation, a person who is -
(A) a substantial contributor to the foundation, (B) a foundation manager; or (C) an owner of more than 20 percent of (i) the total combined voting power of a corporation,
(ii) the profits interest of a partnership, or
(iii) the beneficial interest of a trust or unincorporated enterprise, which is a substantial contributor to the foundation,
(D) a member of the family of any individual described in subparagraphs (A), (B), or (C). (E) a corporation of which persons described in subparagraph (A), (B), (C), or (D) own more than 35 percent of the total combined voting power.
Section 4946(d) of the Code provides that, for purposes of section 4946(a)(1) of the Code, the family of any individual shall include only his spouse, ancestors, children, grandchildren, great grandchildren, and the spouses of children, grandchildren, and great grandchildren. We have determined that O is a disqualified person within the meaning of section 4946(a)(1)(E) with respect to M and N by virtue of D and E's ownership of O's stock.
Based on the information submitted, we rule that the payment of compensation by M and N to O in return for services as a trustee and the furnishing of related services will not constitute self-dealing under section 4941(d)(1) of the Code. This ruling is based on the stipulation that the compensation paid by M and N for such services will be reasonable, necessary, and not excessive. See section 4941(d)(2)(E) of the Code and sections 53.4941(d)-3(c) and 53.4941(d)-2(c)(4) of the regulations.
No statement in this letter should be construed to imply that the Internal Revenue Service has considered whether or not, under the terms of M and N's Trust Agreements, O can be designated as an M or N trustee.
These rulings are directed to M and N only. Section 6110(j)(3) of the Code provides that it may not be used or cited as precedent. Your key District Director will be furnished a copy of this ruling.
Sincerely,
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Marvin Friedlander
Chief, Exempt Organizations Rulings Branch 1
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