Thursday, March 28, 2024
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GiftLaw Note: Many officers of corporations that go public receive stock restricted under Rule 144 of the 1934 Securities and Exchange Act. In this PLR, an officer was permitted to transfer stock into a two-life unitrust, even though it still had the restricted status. The donor is self-trusteeing the trust, but a bank is an "Independent Special Trustee" for the purpose of ascertaining market value of the stock.

While the funding of the trust was permitted, the Service noted that under Sec. 4941 (d)(2)(F), the trustee would be precluded from using the stock in the trust to manipulate the value of the stock. While it is presumably acceptable to serve as a self-trustee, a donor in this circumstance should make certain that when the stock is finally sold, appropriate fair value is received by the trust.

This responds to your letter dated February 20, 1996, and prior correspondence submitted on behalf of A, requesting rulings under the Internal Revenue Code.

A owns shares of stock in Company, a public corporation whose common stock is registered under the Securities Act of 1933 and the Securities and Exchange Act of 1934. Company's stock is traded on the National Association of Securities Dealers Automated Quotation System (NASDAQ),

A's stock is not subject to any liens, and equals approximately x% of the Company's common stock. A's daughters also own a small percentage of Company stock. In addition, A is an officer and director of the Company.

The taxpayer indicates that, by virtue of the positions held by A with Company, A is considered an "insider" or "affiliate" of Company under federal securities rules and regulations. As a result, the timing and method of selling, transferring, or otherwise disposing of A's common stock is restricted under section 16(b) of the 1934 Act, Rule 14 promulgated under the 1933 Act, and the laws governing insider trading.

A plans to establish Trust, funding it by transfer of all of A's Company stock without consideration. The Trust is irrevocable and is intended to be a charitable remainder unitrust under section 664 of the Code.

The Trust agreement provides that, in each taxable year of Trust, an amount equal to eight percent (the unitrust amount) of the fair market value of Trust assets, valued as of the first day of such taxable year, is payable in equal shares to A and A's spouse. Upon the death of either A or Ns spouse, the entire unitrust amount is payable to the survivor. Upon the last death of A or A's spouse, the Trust will terminate and the remainder will be paid to organizations described in sections 170(c), 2055(a), and 2522(a).

A will be the initial trustee of the Trust, and Bank will be the "Independent Special Trustee." The only power of the independent special trustee shall be to value those assets contributed to the Trust that do not have a readily ascertainable fair market value. The Trust agreement provides the manner for selecting the persons who will act as successor trustees or successor Special Independent Trustees if A ceases to act as trustee or Bank ceases to act as Special Independent Trustee.

At some time following the establishment of the Trust, A, as trustee, may sell some or all of the shares of Company stock in order to diversify the Trust's assets. However, A represents that he has not entered into any agreement and has no other obligation to sell the stock to the Company or any other person. Neither the Company nor any other person can require A or the Trust to sell the stock or to direct the manner or amount of any sale of stock. Any sales that do occur will be over NASDAQ.

A receives substantial compensation for services as an officer of the Company, and none as a director. The Company has ten directors, and its bylaws and other rules do not provide for cumulative voting of directors.

Neither A not any other disqualified person has any present plan to purchase Company stock while the Trust holds such stock, but may do so in the future. A represents that all decisions regarding the timing an amount of sales of stock by the Trust will be based solely on the best interest of the Trust, and not on the interests of disqualified persons who hold such stock.

Based on these facts, you have submitted requests for rulings that: (1) A will not be considered to have entered into an act of self-dealing under section 4941 of the Code in connection with the proposed transaction; and (2) that A will be allowed a charitable deduction under section 170 of the Code for the stock transferred to Trust.

Section 507(a)(2) provides that a "substantial contributor' includes the creator of a trust.

Section 4941 (d)(1) provides that the term "self-dealing" means any direct or indirect--
  1. sale or exchange, or leasing, of property between a private foundation and a disqualified person,
  2. lending of money or other extension of credit between a private foundation and a disqualified person;
  3. furnishing of goods, services, or facilities between a private foundation and a disqualified person;
  4. payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person; or
  5. transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and
  6. agreement by a private foundation to make any payment of money or other property to a government official (as defined in section 4946(c)), other than an agreement to employ such individual for any period after the termination of his government service if such individual is terminating his government service within a 90-day period.
Section 4946 provides that a "disqualified person" with respect to a private foundation includes a person who is a substantial contributor to the foundation as described in section 507(a)(2), and a foundation manager (including a trustee of a trust).

Section 4947(a)(2) provides that in the case of a trust which is not exempt form tax under section 501 (a), not all of the unexpired interests in which are devoted to one or more of the purposes in section 170(c)(2)(B), and which has amounts in trust for which a deduction was allowed under section 170, section 4941 shall apply as if such trust were a private foundation.

Section 53.4941 (a)-l (a)(1) of the Excise and Similar Taxes Regulations provides that a transaction between a disqualified person and a private foundation will not constitute an act of self-dealing if --
  1. The transaction is a purchase or sale of securities by a private foundation through a stockbroker where normal trading procedures on a stock exchange or recognized over-the-counter market are followed;
  2. Neither the buyer not the seller of the securities not the agent of either knows the identity of the other party involved; and
  3. The sale is made in the ordinary course of business, and does not involve a block of securities larger than the average daily trading volume of that stock over the previous four weeks.
However, the preceding sentence shall not apply to a transaction involving a dealer who is a disqualified person acting as a principal or to a transaction which is an act of self-dealing pursuant to section 4941(d)(1)(B).

Section 53.4941 (d)-l (a) provides that the term "self-dealing" does not include a transaction between a private foundation and a disqualified person where the disqualified person status arise only as a result of such transaction. For example, the bargain sale of property to a private foundation is not a direct act of self-dealing if the seller becomes a disqualified person only by reason of his becoming a substantial contributor as a result of the bargain sale.

Section 53.4941 (d)-2(f)1) provides that the purchase or sale of stock by a private foundation shall be an act of self-dealing if such purchase or sale is made in an attempt to manipulate the stock price to the advantage of a disqualified person. Section 53.4941 (d)-2(f)(1) provides that the fact that a disqualified person receives an incidental or tenuous benefit from the use by a foundation of its income or assets will not, by itself, make such use an act of self-dealing.

If A is allowed a deduction under section 170 of the Code for his transfer of stock to the Trust, then the Trust will be treated as a private foundation for purposes of the prohibition against self-dealing under section 4941, pursuant to section 4947(a)(2). A will be a disqualified person under section 4947(a)(1)(A) and (B) as a substantial contributor (creator of the Trust) and as a foundation manager (trustee). The self-dealing rules under section 4941 prohibit certain transactions between a private foundation and a disqualified person. The question is whether the Trust's receipt of stock from A, use of the stock, or sale of the stock will be an act of self-dealing.

A's initial gift of stock to the Trust will not constitute an act of self-dealing, as A becomes a disqualified person only as a result of the transfer. Section 53.4941(d)-l (a) of the regulations.

Because A is a director and a paid officer of the Company, the Trust could use the stock to benefit A by voting in the board election for A (the board elects the officers), or otherwise voting the will of A. However, we consider this benefit tenuous or incidental under the circumstances, given the small percentage of A's stock ownership.

The Trust's subsequent sale of the stock will not constitute an act of self-dealing, given that the Trust will not sell the stock in an attempt to manipulate the price to the benefit of any disqualified persons. Even a sale to a disqualified person would not be an act of self-dealing if the sale meets the conditions under section 53.4941 (a)-l (a)(1).

Under the circumstances described, we conclude that the initial transfer of A's stock in Company to the Trust, and the Trust's possible future sale of some or all of the stock over the NASDAQ to an anonymous buyer in order to diversify Trust assets will not be acts of self-dealing under section 4941.

Section 170(a) permits a deduction for any charitable contribution (as defined in section 170(c)) payment of which is made within the taxable year.

Section 1.17OA-l(c)(1) of the Income Tax Regulations states that if a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution reduced as provided in section 170(e)(1) and paragraph (a) of section 1. 1 7OA-4.

Under the substantiation rules of section 1. 1 7OA-1 3(c), a taxpayer making a contribution of publicly traded securities is generally not required to obtain a qualified appraisal to determine their value, Publicly traded securities include securities that are regularly traded in the national or regional over-the-counter market for which published quotations are available. Section 1.17OA-13(c)(7)(xi)(A). If, however, the securities are subject to any restrictions that materially affect the value of the securities to the donor or prevent the securities from being freely traded, the exemption from the substantiation rules does not apply and the taxpayer is required to obtain a qualified appraisal. Section 1.1 7OA-1 3(c)(7)(xi)(C)(1).

Rev. Rul. 77-287, 1977-2 C.B. 319 addresses the problem of establishing the fair market value, for federal tax purposes, of stock that has not been registered for public trading (i.e., stock subject to Rule 144 restrictions) when the issuing company's stock of the same class is actively traded in one or more securities markets. The revenue ruling sets out a methodology for determining the difference in fair market value between registered shares that are actively traded and unregistered shares that are subject to trading restrictions. The appropriate discount to the fair market value of the actively traded securities is determined by weighing the facts and circumstances material to valuation of restricted stock. These facts and circumstances include earnings, sales, trading market, and resale agreement provisions. Other facts and circumstances to be considered are discussed in Rev. Rul. 59-60, 1959-1 C.B. 237, as modified by Rev. Rul. 65-193, 1965-2 C.B. 370, and extended by Rev. Rul. 68-609, 1968-2 C.B. 327.

Accordingly, provided that the proposed trust qualifies as a charitable remainder unitrust, the SEC restrictions on the stock to be transferred will not result in a denial of a charitable contribution deduction. Instead, the rules under section 170 for substantiation of a charitable contribution of stock require taxpayers to obtain a qualified appraisal for securities that are subject to any restrictions that materially affect the value of the securities or prevent the securities from being freely traded.

Pursuant to section 4.01(37) of Rev. Proc. 96-3, 1996-1 I.R.B. 82, the Service ordinarily will not issue rulings concerning whether a charitable remainder trust that provides for unitrust payments for two measuring lives satisfies the requirements described in section 664. Furthermore, sections 4.01(16), (42), and (44) of that revenue procedure state that the Service will not issue rulings as to whether a transfer to a charitable remainder unitrust described in section 664 that provides for unitrust payments for two measuring lives qualifies for a charitable deduction under section 170(f)(2)(A).

In lieu of seeking the Service's advance approval of the deduction, taxpayers are directed to follow the sample charitable remainder unitrusts provisions outlined in Rev. Proc. 90-30, 1990-1 C.B. 534. By following these models, taxpayers can be assured that the Service will recognize a trust as meeting all of the requirements of a qualified charitable remainder unitrust under section 664 of the Code, provided that the trust operates in a manner consistent with the terms of an trust instrument that is valid under state law. If the trust is so qualified, the present value of the remainder interest of transfers to the trust will be deductible under section 170(f)(2)(A) if the charitable beneficiary otherwise meets all of the requirements of these sections.

In the present case, you have noted certain securities laws that raise questions not addressed by the model trust agreements provided in the revenue procedure. Therefore, we will issue a ruling on whether those laws, and their effect on the Trust corpus, disallow the charitable deduction under section 170, assuming it otherwise qualifies under section 664.

Section 664(d)(2) provides, in part, that a charitable remainder unitrust is a trust (A) from which a fixed percentage of the net fair market value of its assets, valued annually is to be paid, not less often than annually, to one or more persons for a term of years or the life or lives of such individuals, and (B) from which no amount other than the payments described in (A) may be paid to or for the use of any person other than an organization described in section 170(c).

Section 1.664-1 (a)(3) provides that a trust is not a charitable remainder trust if the provisions of the trust include a provision that restricts the trustee from investing the trust assets in a manner that could result in the annual realization of a reasonable amount of income or gain from the sale or disposition of trust assets.

The legislative history of the Tax Reform Act of 1969, Pub. L. 9-172, 83 Stat. 487 (1969), indicates that Congress contemplated that a charitable contribution deduction would be denied where assets which do not have an objective, ascertainable market value, such as real estate or stock in a closely held corporation, are transferred in trust, unless an independent trustee is the sole party responsible for making the annual determination of value. See H. R. Rep. No. 413 (Part 1), 91st Cong., lst Sess. 50 (1969).

Because of the restrictions placed on Company stock, the shares held by the Trust do not have a readily ascertainable fair market value. Under the Trust agreement, however, the independent special trustee is the sole party responsible for making the annual determination of the value of such assets. As a result, the presence of the restrictions imposed by the securities laws in this case will not disqualify the charitable deduction that A will receive on contribution to the charitable remainder trust -provided, of course, that the trust otherwise qualifies under section 664.

Except as set forth above, no opinion is expressed or implied as to any provisions of the Trust. Furthermore, no opinion is expressed regarding the federal income tax consequences of the formation and operation of the Trust under any other provisions of the Code. Specifically, no opinion is expressed as to whether the Trust qualifies as a charitable remainder trust under section 664 of the Code.

This ruling is directed only to the taxpayer on whose behalf it was requested. Section 6110(j)(3) provides that it may not be used or cited as precedent.

This letter is sent to you, X's authorized representative, pursuant to a power of attorney on file with this office. A copy of this letter should be attached to A's federal tax return for the taxable year in which the Trust is formed. A copy of this letter is enclosed for that purpose.

Sincerely yours,
____
David R. Haglund
Assistant to the Branch Chief, Branch 1
Office of the Assistant Chief Counsel
(Passthroughs and Special Industries)




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