Thursday April 25, 2024

4.14.8 Self-Dealing Issues

Self-Dealing Issues

Potential Self-Dealing with Lease UBI Solution:  When an S corporation contributes assets to a CRT and employs the Lease UBI Solution discussed in GiftLaw Pro 4.14.7 to ensure that all income paid to the CRT is passive, potential self-dealing issues may arise.

Potential Self-Dealing with Sale of Assets in CRT:  After a CRT receives assets from an S corporation, it may wish to sell those assets.

Who is a Disqualified Person?:  Whether someone is a disqualified person with respect to a CRT is determined by facts and circumstances but generally includes the S corporation itself.

A CRT is prohibited from engaging in any direct or indirect transaction with a disqualified person. Sec. 4941.

Potential Self-Dealing with Lease UBI Solution

When an S corporation contributes assets to a CRT and employs the Lease UBI Solution discussed in GiftLaw Pro 4.14.7 to ensure that all income paid to the CRT is passive, potential self-dealing issues arise. Specifically, if the S corporation leases its assets to someone who is a disqualified person with respect to the CRT, once the assets are contributed to the CRT the disqualified person's lease and lease payments with the CRT, violate the self-dealing prohibitions. For this reason it is important to ensure that an S corporation lease assets to a non-disqualified person if those assets will later be contributed to a CRT.

Potential Self-Dealing with Sale of Assets in CRT

After a CRT receives assets from an S corporation, it may wish to sell those assets. Self-dealing rules prohibit the CRT from selling the assets back to the S corporation or to any other disqualified person. As a result, a CRT may wish to consider whether or not it will be able to sell the assets to an unrelated party prior to accepting a gift of the S corporation assets. (Note that a charity is not subject to self-dealing restrictions and may sell S corporation stock or assets back to the donor so long as the transaction is reasonable, for fair market value, and not pursuant to a pre-arranged plan).

After an S corporation contributes assets to a CRT, the S corporation and CRT each own assets that later may be sold to a single purchaser. If the S corporation and CRT jointly list and sell those assets to a third-party purchaser, there is some concern that self-dealing might occur because the S corporation benefits from the joint sale. It is generally agreed that in this situation any benefit to the disqualified person will be incidental or tenuous and therefore not self-dealing. Reg. 53.4941(d)-2(f)(2).

Nevertheless, and so that no self-dealing occurs in the event of a such a joint sale, it is important that the CRT and S corporation (1) not be controlled by the same person(s), (2) each independently participate in the sale, and (3) each receive proceeds from the sale equal to their respective ownership of assets sold. It is also important to be sure that the purchaser is not a disqualified person with respect to the CRT.

Who is a Disqualified Person?

Whether someone is a disqualified person with respect to a CRT is determined by facts and circumstances but generally includes the S corporation itself, anyone who owns more than 20% of the S corporation, a trustee of the CRT or a family member of any disqualified person (not including his or her brothers and sisters). Sec. 4946.

Private Letter Rulings

PLR 200241048 No Self-Dealing When CLAT Makes Payments to Disqualified S Corp:   Taxpayer created a charitable lead annuity trust as part of his estate plan. Pursuant to the trust document, the CLAT will make annual payments to private foundation. At the end of the trust term, the remaining assets will be distributed to taxpayer's children.

PLR 200326039 Management Contract Between FLIP Unitrust & Disqualified Grandchild Not Self-Dealing:   An S Corporation intends on creating a FLIP unitrust. Pursuant to this plan, the S Corporation will first transfer real property into a limited liability company and in exchange will receive 98% of the LLC units. Afterwards, the S Corporation will transfer all its LLC units into the twenty-year FLIP unitrust. The S Corporation is the sole income beneficiary, yet it reserves the right to change the charitable remainder beneficiaries.

PLR 200720021 Redemption of Stock from CRT by Disqualified For-Profit is Not Self-Dealing:   A is a for profit corporation with common stock owned by B, C and X. B is a charitable remainder unitrust formed by X and Y under the meaning of Sec. 664(d)(2). C is an employee stock ownership plan. X is a trustee of B and the sole unitrust income beneficiary. A offers to redeem for cash, the common stock held by all shareholders.

PLR 201243015 IRS Rules on Foundation's Proposed Transfer of Property:   Foundation was organized as a Sec. 501(c)(3) organization and classified as a private foundation under Sec. 509(a). Foundation's charitable purpose was to receive and administer funds for religious, charitable, scientific and educational purposes.

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