Grantor executes a charitable remainder unitrust (CRUT). CRUTs are normally subject to certain private foundation rules. However, Grantor never claims an income tax or gift tax charitable deduction with respect to the trust. Is the CRUT still subject to the private foundation rules?
A quick review of I.R.C. § 4947(a)(2) would suggest the answer is yes. It provides that:
In the case of a trust which is not exempt from tax under section 501(a), not all of the unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B), and which has amounts in trust for which a deduction was allowed under section 170, 545(b)(2), 642(c), 2055, 2106(a)(2), or 2522, section 507 (relating to termination of private foundation status), section 508(e) (relating to governing instruments) to the extent applicable to a trust described in this paragraph, section 4941 (relating to taxes on self-dealing), section 4943 (relating to taxes on excess business holdings) except as provided in subsection (b)(3), section 4944 (relating to investments which jeopardize charitable purpose) except as provided in subsection (b)(3), and section 4945 (relating to taxes on taxable expenditures) shall apply as if such trust were a private foundation. (emphasis added)
Nonetheless, in a recent private letter ruling (PLR), the IRS took a different position. It interpreted the phrase “for which a deduction was allowed” as “for which a deduction taken.” In the instant case, the Grantor never claimed a charitable deduction. Thus, the IRS concluded that Section 4947(a)(2), and the private foundation rules mentioned therein, was not applicable to the CRUT in question.
The PLR would appear to have implications for the early termination of a charitable remainder trust (CRT). As noted in a prior post, one of the issues associated with early termination is the I.R.C. § 507 excise tax on the termination of a private foundation. Section 507 applies to CRTs by virtue of Section 4947(a)(2) cited above. However, if no charitable deduction was ever claimed with respect to the trust, the PLR tells us that Section 4947(a)(2), and thus the Section 507 excise tax, does not apply.
As always, the standard caveat applies. A PLR is only binding on the person who requested it. Therefore, this PLR should be taken as guidance only and may not be relied upon as precedential authority.
Source: PLR 201713002
Posted by Joel D. Roettger, JD, LLM, EPLS