Gerald B. Treacy, Jr.

De-UBIT-izing CRTs: Recent Rulings

PLR 200252096: CRUT – For-Profit Corporation – For-Profit LLC

In PLR 200252096, the Service considered the following situation. A charitable remainder unitrust (“CRUT”) intends to form and fund a wholly-owned for-profit corporation; neither the formation nor the funding will involve the incurring of any debt by the CRUT. It is expected that the corporation will invest in a for-profit LLC that engages in the business of leasing equipment, and which expects to use “debt financing” to pay part of its equipment acquisition costs. The ruling request indicated a number of business reasons for the arrangement, including the sheltering of the CRUT from liability, the ability of the CRUT to invest indirectly with the LLC, and the shielding of the CRUT from UBTI as to the debt-financed property acquisitions of the LLC. The IRS approved of this arrangement, ruling that the CRUT will not recognize UBTI in connection with the corporation’s allocable share under Code Section 704 of the LLC’s income and gains, and that the CRUT’s gain realized on the ultimate sale of its interest in the corporation would not constitute UBTI to the CRUT.

PLRs 2002516016 ff.: CRT – Limited Partnership – Foreign Corporation

The Service considered and approved a somewhat more complex format in PLRs 2002516016 – 018. In the situation considered in these rulings, a CRT is a limited partner in M partnership, which plans to create a foreign corporation, N, and will initially hold all of N’s stock. N is expected to acquire interests in a number of foreign funds, to which N will make capital contributions and in which N will receive minority interests. N may borrow from third parties to finance its commitment to the funds. The business purposes of this arrangement were said to include the following: (1) more flexibility in disposing of interests in the funds, as M will not need to obtain prior consent as to a disposition of N stock (as it would for a disposition of an interest in the funds); (2) the investments will further insulate the CRT from fund liabilities; (3) N will be able to manage M’s investments more efficiently; and (4) this format shelters the CRT from UBTI. The IRS ruled that the CRT will not recognize UBTI under this arrangement, as Code Section 512(b)(17) was not intended to apply to non-insurance income, such as the income derived from the funds, which will be taxed as UBTI-exempt dividends.

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