Charitable lead trust termination caused no gain or loss

Plain-English summary

A charitable lead annuity trust paid an annuity to a charitable foundation and originally provided for the remainder to revert to the settlor or the settlor's assigns. The settlor assigned the remainder interest to an individual, whose estate later transferred it to the same foundation. State law merged the foundation's annuity and remainder interests, and the trust proposed seeking a court order terminating the trustees' interests and distributing the remaining property to the foundation. The IRS ruled that the distribution would not satisfy a right to a specific dollar amount, specific property, or a general claim of ascertainable value, so the trust would recognize no gain or loss.

Ruling snapshot

• Question: Would distributing all trust assets to the charitable foundation after a court-ordered termination trigger gain or loss?
• Outcome: Approved: the trust would recognize no gain or loss from the distribution.
• Key authorities: Treas. Reg. § 1.661(a)-2(f)(1); Rev. Rul. 83-75; Kenan v. Commissioner

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201928005                                              Third Party Communication: None
Release Date: 7/12/2019                                        Date of Communication: Not Applicable
Index Number: 661.00-00
                                                               Person To Contact:
------------------------------------------------------------   --------------------, ID No. ----------------
-----------------                                              Telephone Number:
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------------------------------------------------------------   Refer Reply To:
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-------------------                                            PLR-125515-18
--------------------------------------                         Date:
                                                               April 01, 2019




X               =         ----------------------------------------------
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Trust           =         ----------------------------------------------------------------------------------
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Foundation =              -----------------------------------------------------
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A                 =        --------------------------------------

n                 =        ----

State             =        -------------

Date 1            =        -------------------

Date 2            =        -------

Statute           =        -----------------------------------------


Dear -------------- ----- ----------------:

PLR-125515-18                                   2

This letter responds to a letter dated August 22, 2018, submitted by the authorized
representative of Trust, requesting a ruling on the federal income tax consequences of
the termination of Trust.

On Date 1, X created Trust, a charitable lead annuity trust, to provide annual annuity
payments to Foundation, a State non-profit corporation which is a charitable foundation
described in § 501(c)(3) and § 509(a) At the end of n years, the property of Trust would
revert to X or its assigns. On Date 1, X assigned its interest to A, an individual. On
Date 2, before the n years had passed, A died. Pursuant to A’s last will, A’s estate
transferred the interest in Trust to Foundation.

Under the law of State, at the time Foundation acquired both the annuity interest and
the remainder interest, the annuity interest merged into the remainder interest.

Under the law of State, despite the merger of the Foundation’s interests, Trust does not
automatically terminate if there is a trustee who is not the beneficiary. Under Statute, a
court may terminate a trust, if because of circumstances not anticipated by the settlor,
termination will further the purposes of the trust. Consistent with Statute, Trust
proposes to seek a State court order to terminate the interests of the trustees and to
transfer all of Trust’s property, after the payment of all obligations, to Foundation.

Section 1.661(a)-2(f)(1) of the Income Tax Regulations provides that if property is paid,
credited, or required to be distributed in kind by a trust or estate, no gain or loss is
realized by the trust or estate (or the other beneficiaries) by reason of the distribution,
unless the distribution is in satisfaction of a right to receive a distribution in a specific
dollar amount or in specific property other than that distributed.

Rev. Rul. 83-75, 1983-1 C.B. 114, holds that the distribution by a trust of appreciated
securities in satisfaction of its obligation to pay a fixed annuity to a charitable
organization results in a taxable gain to the trust. Rev. Rul. 83-75 cites § 1.661(a)-
2(f)(1) and Kenan v. Commissioner, 114 F.2d 217 (2d Cir. 1940) in determining the
proper treatment of an in-kind distribution of property.

In Kenan v. Commissioner, the trustees of a trust were directed to pay a beneficiary
$5 million when the beneficiary reached age 40. At the directed time, the trustee paid
the beneficiary partly in cash and partly in appreciated securities. The court held that
the beneficiary had a general claim against the trust corpus, and the satisfaction of this
general claim for an ascertainable value by a transfer of specific assets was an
exchange that caused the trust to realize gain.

Based solely on the facts and representations submitted, we conclude that the
distribution of Trust’s assets to Foundation as a result of the State court order is not a
distribution in satisfaction of a right to receive a distribution of a specific dollar amount or
in specific property other than that distributed, nor is it a distribution in satisfaction of a

PLR-125515-18                                  3

general claim for an ascertainable value, and therefore no gain or loss will be
recognized by Trust as a result of such distribution.

Except as specifically set forth above, we express or imply no opinion concerning the
federal tax consequences of the transactions described above.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

Pursuant to a power of attorney on file with this office, copies of this letter are being
forwarded to Y and to Y’s authorized representative.



                                       Sincerely,



                                       Faith P. Colson
                                       Faith P. Colson
                                       Senior Counsel, Branch 1
                                       Office of the Associate Chief Counsel
                                       (Passthroughs & Special Industries)


Enclosures (2)
      Copy of this letter
      Copy for § 6110 purposes