Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 42.—Low-Income Housing Credit

Low–income housing credit; satisfac- tory bond; “bond factor” amounts for the period January through September 2008. This ruling provides the monthly bond factor amounts to be used by taxpayers who dispose of qualified low-income buildings or interests therein during the period January through September 2008.

Rev. Rul. 2008–36

In Rev. Rul. 90–60, 1990–2 C.B. 3, the Internal Revenue Service provided

guidance to taxpayers concerning the general methodology used by the Treasury Department in computing the bond factor amounts used in calculating the amount of bond considered satisfactory by the Secretary under § 42(j)(6) of the Internal Revenue Code. It further announced that the Secretary would publish in the Internal Revenue Bulletin a table of bond factor amounts for dispositions occurring during each calendar month.

Rev. Proc. 99–11, 1999–1 C.B. 275, established a collateral program as an alternative to providing a surety bond for taxpayers to avoid or defer recapture of the low-income housing tax credits under

§ 42(j)(6). Under this program, taxpayers may establish a Treasury Direct Account and pledge certain United States Treasury securities to the Internal Revenue Service as security.

This revenue ruling provides in Table 1 the bond factor amounts for calculating the amount of bond considered satisfactory under § 42(j)(6) or the amount of United States Treasury securities to pledge in a Treasury Direct Account under Rev. Proc. 99–11 for dispositions of qualified low income buildings or interests therein during the period January through September 2008.

2008–30 I.R.B. 165 July 28, 2008

Rev. Rul. 2008–40

ISSUES

1. Whether a transfer of amounts from a trust under a plan qualified under § 401(a) of the Internal Revenue Code ¹ to a nonqualified foreign trust is treated as a distribution.

2. Whether this result is different if the transferee plan satisfies the requirements of section 1165(a) of the Puerto Rico Internal Revenue Code and is described in section 1022(i)(1) of the Employee Retirement Income Security Act of 1974.

FACTS

Situation 1 . An employer maintains two retirement plans, Plan A and Plan B, each of which is funded through a trust. Plan A is a qualified plan under § 401(a). Plan A covers employees of the employer who perform all of their services within the United States and employees who perform all of their services within Country X. The Plan A trust is created and organized within the United States, and is classified as a U.S. person under § 7701(a)(30)(E). Plan B covers only Country X employees who perform all of their services within Country X, and is maintained for the exclusive purpose of providing retirement benefits to those employees. The Plan B trust is created and organized under the laws of

For a list of bond factor amounts applicable to dispositions occurring during other calendar years, see: Rev. Rul. 98–3, 1998–1 C.B. 248; Rev. Rul. 2001–2, 2001–1 C.B. 255; Rev. Rul. 2001–53, 2001–2 C.B. 488; Rev. Rul. 2002–72, 2002–2 C.B. 759; Rev. Rul. 2003–117, 2003–2 C.B. 1051; Rev. Rul. 2004–100, 2004–2 C.B. 718; Rev. Rul. 2005–67, 2005–2 C.B. 771; Rev. Rul. 2006–51, 2006–2 C.B. 632; and Rev. Rul. 2007–62, 2007–41 I.R.B. 767.

DRAFTING INFORMATION

The principal author of this revenue ruling is David McDonnell of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Mr. McDonnell at (202) 622–3040 (not a toll-free call).

Section 45.—Electricity Produced From Certain Renewable Resources, etc.

A notice, modifying Notice 2006–88, provides guidance under section 45 of the Internal Revenue Code for electricity produced from certain renewable resources. See Notice 2008-60, page 178.

Section 170.—Charitable, etc., Contributions and Gifts

26 CFR 1.170A–6: Charitable contribution in trust.

Sample inter vivos charitable lead unitrusts. This revenue procedure contains sample declarations of trust for nongrantor and grantor charitable lead unitrusts. This revenue procedure also contains annotations to the sample trusts and alternate provisions that may be integrated into the sample trusts. See Rev. Proc. 2008-45, page 224.

Section 401.—Qualified Pension, Profit-Sharing, and Stock Bonus Plans

(Also, §§ 402, 404A, 410, 414, 933, 7805; 26 CFR 1.410(b)–6, 1.414(l)–1, 1.933–1, 301.7805–1.)

Transfer of amounts; nonqualified foreign trust; transition relief. This ruling provides that the transfer of amounts from a trust under a plan qualified under section 401(a) of the Code to a nonqualified foreign trust is treated as a distribution from the transferor plan. The ruling also holds that a transfer of assets and liabilities from a plan qualified under section 401(a) of the Code to a plan that satisfies section 1165 of the Puerto Rico Code is also treated as a distribution from the transferor plan. Rev. Rul. 67–213 amplified.

1 For purposes of this revenue ruling, unless otherwise indicated, all section references are to the U.S. Internal Revenue Code of 1986, as amended.

July 28, 2008 166 2008–30 I.R.B.

that, in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other plan, each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he or she would have been entitled to receive immediately before the merger, consolidation, or transfer (if the plan had then terminated). Section 414(l) requires a plan to satisfy this minimum benefit requirement and also provides rules for how plan assets must be allocated. Regulations under § 414(l) treat a transfer of assets and liabilities from one plan to another as a combination of events that is fundamentally the same as a spinoff of a plan from the transferor plan followed by a merger of the spun off plan with the transferee plan. See §§ 1.414(l)–1(o), 1.414(l)–1(b)(4), and 1.414(l)–1(b)(2). Thus, as is the case for a plan that results from the merger of two plans, a transferee plan is a continuation of the transferor plan with regard to transferred assets and liabilities.

Section 402(a) provides that a participant’s interest in a trust forming part of a qualified plan is includible in gross income in the taxable year in which it is distributed from the trust.

Section 402(c) describes rules applicable to rollovers from exempt trusts. An eligible rollover distribution is excluded from income if, among other requirements, the distribution is rolled over to an eligible retirement plan. Section 402(c)(8)(B) defines “eligible retirement plan” to mean (i) an individual retirement account described in § 408(a); (ii) an individual retirement annuity described in § 408(b); (iii) a qualified trust, i.e., an employees’ trust described in § 401(a) that is exempt from tax under § 501(a); (iv) an annuity plan described in § 403(a); (v) an eligible deferred compensation plan described in § 457(b) which is maintained by an eligible employer described in § 457(e)(1)(A); or (vi) an annuity contract described in § 403(b).

Section 402(d) provides that, for purposes of subsections (a), (b), and (c) of § 402, a stock bonus, pension, or profitsharing trust that would qualify for exemption from tax under § 501(a) except for the fact that it is a trust created or organized outside the United States is treated as if it were a trust exempt from tax under § 501(a).

Country X, and is classified as a foreign trust under § 7701(a)(31)(B). Plan B is not a qualified plan under § 401(a) (and would not satisfy the qualification requirements of § 401(a) even if the Plan B trust were a domestic trust). Plans A and B are each amended to provide for the assets and liabilities held in the Plan A trust on behalf of the Country X employees who perform all of their services within Country X to be transferred from the Plan A trust to the Plan B trust. There is no income tax treaty in force between the United States and Country X.

Situation 2 . An employer maintains two retirement plans, Plan C and Plan D, each of which is funded through a trust. Plan C is a qualified plan under § 401(a) of the Internal Revenue Code, and also satisfies the requirements of section 1165(a) of the Puerto Rico Internal Revenue Code (Puerto Rico Code). Plan C covers both employees of the employer who perform all of their services within the United States and employees who are bona fide residents of Puerto Rico who perform all of their services within Puerto Rico. The Plan C trust is created and organized within the United States, and is classified as a U.S. person under § 7701(a)(30)(E). Plan D is a plan described in section 1022(i)(1) of the Employee Retirement Income Security Act of 1974 (ERISA) that satisfies the requirements of section 1165(a) of the Puerto Rico Code, but does not satisfy the requirements of § 401(a) of the Internal Revenue Code (and would not satisfy § 401(a) even if the Plan D trust were a domestic trust). Plan D covers only bona fide residents of Puerto Rico who perform all of their services for the employer within Puerto Rico, and is maintained for the exclusive purpose of providing retirement benefits to those employees. The Plan D trust is created and organized under the laws of Puerto Rico, and is classified as a foreign trust under § 7701(a)(31)(B). Plans C and D are each amended to provide for the assets and liabilities held in the Plan C trust on behalf of bona fide residents of Puerto Rico who perform all of their services within Puerto Rico to be transferred from the Plan C trust to the Plan D trust.

LAW

Section 401(a) provides that a trust created or organized in the United States and forming a part of a stock bonus, pension, or profit-sharing plan that satisfies the requirements set out in § 401(a) constitutes a qualified trust. Section 501(a) provides that a trust described in § 401(a) is exempt from tax under Subtitle A.

Section 401(a)(7) provides that a trust is not a qualified trust unless the plan of which it is part satisfies the requirements of § 411 (relating to minimum vesting standards). Section 411(d)(6)(A) provides that a plan is not a qualified plan if an employee’s accrued benefit is decreased by any amendment of the plan, and § 1.411(d)–3(a)(1) of the Income Tax Regulations provides that a plan is not a qualified plan (and a trust forming a part of such plan is not a qualified trust) if a plan amendment decreases the accrued benefit of any plan participant. For this purpose, a plan amendment includes any changes to the terms of a plan. Section 1.411(d)–3(a)(2)(i) provides that, for purposes of determining whether or not any participant’s accrued benefit is decreased, amendments to all the provisions of a plan affecting, directly or indirectly, the computation of accrued benefits are taken into account. Section 1.411(d)–4, Q&A–3(a)(1), provides that § 411(d)(6) protected benefits may not be eliminated by reason of a transfer or any transaction amending or having the effect of amending a plan to transfer benefits. Section 411(d)(6)(D) and paragraph (b) of § 1.411(d)–4, Q&A–3, provide an exception for elective transfers between qualified defined contribution plans, provided certain requirements are met.

Under § 401(a)(11)(B)(iii), the qualified joint and survivor annuity (QJSA) requirements of § 417 do not apply to certain defined contribution plans. Under § 401(a)(11)(B)(iii)(III), in order for a defined contribution plan to not be subject to the QJSA requirements for a participant, the plan cannot be a direct or indirect transferee of a plan that is subject to the QJSA requirements with respect to assets and liabilities that were transferred with respect to the participant.

Section 401(a)(12) provides that a trust is not qualified under § 401(a) unless the plan of which such trust is a part provides

2008–30 I.R.B. 167 July 28, 2008

nized in Puerto Rico and is classified as a foreign trust under § 7701(a)(31)(B).

Under the Puerto Rico Code, any retirement plan that covers Puerto Rican employees must satisfy the requirements of section 1165(a) of the Puerto Rico Code. Section 1165(a) of the Puerto Rico Code contains rules similar to the qualification requirements of § 401(a). However, there are many significant differences between the two sets of requirements, such as different definitions of a highly compensated employee, so that there are circumstances under which a plan sponsor may not be able to design a retirement plan that is assured of being able to satisfy both sets of requirements.

Revenue Ruling 67–213, 1967–2 C.B. 149, holds that, where the interests of participants are transferred from a trust forming part of one qualified plan to a trust forming part of another qualified plan, no amounts are considered distributed or made available to the participants by reason of the transfer.

Revenue Ruling 94–76, 1994–2 C.B. 46, describes a transfer of participant accounts from a § 401(a) qualified money purchase pension plan to a § 401(a) qualified profit-sharing plan that permitted distribution upon events that would not have been permitted under a qualified pension plan. The revenue ruling notes that, under the regulations issued under § 414(l), a transfer is the same as a merger of assets and liabilities of a qualified money purchase pension plan with the assets and liabilities of a qualified profit-sharing plan. Accordingly, the revenue ruling holds that the transfer does not divest the assets and liabilities of the money purchase pension plan of their attributes as pension plan assets and liabilities and that the transferee plan is disqualified if the transferred amounts fail to remain subject to the restrictions on distributions applicable to a qualified money purchase pension plan.

ANALYSIS

A transfer of assets and liabilities from one plan to another that constitutes a continuation of the transferor plan with regard to the transferred assets and liabilities is not a distribution of benefits. A nonqualified plan cannot be a continuation of a qualified plan. Accordingly, the hold

Section 404(a)(4) provides that, if a stock bonus, pension, or profit-sharing trust would qualify for exemption under § 501(a) except for the fact that it is a trust created or organized outside the United States, contributions to such a trust by an employer that is a resident, or corporation, or other entity of the United States, shall be deductible under the preceding paragraphs of § 404(a).

Under § 404A(e) and (f), a qualified funded plan is a written plan of an employer for deferring the receipt of compensation if: the plan is for the exclusive benefit of the employer’s employees or their beneficiaries; 90 percent or more of the amounts taken into account for the taxable year under the plan are attributable to services performed by nonresident aliens and the compensation for which is not subject to tax under Chapter 1 of the Code; the employer elects to have section 404A apply to the plan; and the plan is not a funded reserve plan.

Section 933(1) generally provides that, in the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof) is excluded from gross income and is exempt from tax under subtitle A of the Internal Revenue Code of 1986, as amended. See § 937(a) and the regulations thereunder for rules for determining whether an individual is a bona fide resident of any of the possessions of the United States, including Puerto Rico.

Section 937(b)(1) generally provides that rules similar to the rules for determining whether income is income from sources within the United States apply for purposes of determining whether income is from sources within a possession.

For purposes of determining the source of pension payments from a qualified trust under § 401(a), the portion of each payment that is attributable to employer contributions with respect to services rendered within the United States is treated as income from sources within the United States and the portion that is attributable to employer contributions with respect to services rendered outside the United States is treated as income from sources without the United States. For rules regarding the treatment of earnings and accretions

with respect to contributions of either the employer or the employee, see Rev. Rul. 79–388, 1979–2 C.B. 270, and Rev. Proc. 2004–37, 2004–1 C.B. 1099. See also Clayton v. United States, 33 Fed. Cl. 628 (1995), aff’d without published opinion, 91 F.3d 170 (Fed. Cir.), cert. denied, 519 U.S. 1040 (1996).

Section 1022(i)(1) of ERISA provides that, for purposes of § 501(a), any trust forming part of a pension, profit-sharing, or stock bonus plan all the participants of which are residents of Puerto Rico is treated as an organization described in § 401(a), and therefore generally exempt from income taxation, if the trust both forms part of a pension, profit-sharing, or stock bonus plan and is exempt from income tax under the laws of Puerto Rico. For purposes of section 1022(i) of ERISA, a resident of Puerto Rico is either a bona fide resident of Puerto Rico or a person who performs labor or services primarily within Puerto Rico, regardless of residence for other purposes, and a participant is a current employee who is not excluded under the eligibility provisions of the plan. Section 1.501(a)–1(e). Section 1022(i)(1) of ERISA does not extend qualified status under § 401(a) to a plan, favorable tax treatment under § 402(a) for distributions to participants, or favorable treatment under § 404(a) for employer contributions.

Section 1022(i)(2)(A) of ERISA provides that if the administrator of a pension, profit-sharing, or stock bonus plan that is created or organized in Puerto Rico elects, at such time and in such manner as the Secretary of the Treasury may require, to have the provisions of, and amendments made by, Title II of ERISA apply, then, for plan years beginning after the date of election, any trust forming a part of the plan is treated as a trust created or organized in the United States for purposes of § 401(a) of the Internal Revenue Code. Section 1.401(a)–50 provides that plans created or organized in Puerto Rico whose administrators have made the election referred to in section 1022(i)(2) of ERISA are to be treated as trusts created or organized in the United States for purposes of § 401(a). Thus, in contrast to a plan under section 1022(i)(1) of ERISA, a plan for which an election under section 1022(i)(2) has been made is treated as a qualified plan for purposes of §§ 401(a), 402(a), and 404(a), even though the trust is created and orga

July 28, 2008 168 2008–30 I.R.B.

HOLDINGS

1. A transfer of amounts from a trust under a plan qualified under § 401(a) to a nonqualified foreign trust is treated as a distribution from the transferor plan.

2. A transfer of assets and liabilities from a qualified plan to a plan that satisfies section 1165 of the Puerto Rico Code is also treated as a distribution from the transferor plan, even if the plan is described in section 1022(i)(1) of ERISA.

TRANSITION RELIEF

1. Transfers to certain foreign plans before October 1, 2008. With regard to a transfer from a qualified plan to a plan that would be a qualified funded plan under § 404A(f)(1) if the employer were to elect to have § 404A apply to the plan, the holdings in this revenue ruling are not effective for a transfer made before October 1, 2008.

2. Transfers to plans under section 1022(i)(1) of ERISA. With regard to a transfer from a qualified plan to a plan described in section 1022(i)(1) of ERISA (“section 1022(i)(1) transferee plan”) that would satisfy the requirements of § 414(l) but for the fact that the transferee trust is not a qualified trust within the meaning of § 401(a), the holdings in this revenue ruling are not effective for the transfer if the date of transfer is before January 1,

3. In the case of a transfer to a section 1022(i)(1) plan with respect to which the holdings in this revenue ruling are not effective under the preceding sentence, the transfer is not treated as a distribution from the transferor plan and the transfer will not be treated as causing the transferor plan to fail to satisfy the requirements of § 401(a) solely on account of the holdings in this revenue ruling.

4. Application of § 933 to distribu- tions from section 1022(i)(1) transferee plans . For purposes of § 933, the portion of each distribution from a section 1022(i)(1) transferee plan that is attributable to amounts that were transferred from a qualified plan before January 1, 2011, will be treated as income from sources within Puerto Rico.

5. Application of section 410(b) to U.S. plans of employers with excluded Puerto Rico employees. (a) Background. Section 410(b) requires the sponsor of a

ing described in Rev. Rul. 67–213 for a transfer from one qualified plan to another does not apply to a transfer from a qualified plan to a nonqualified plan. Under the facts in this revenue ruling (including the fact that the nonqualified plan is maintained for the exclusive purpose of providing benefits to participants or beneficiaries), the transfer is a distribution of the participant’s or beneficiary’s beneficial interest in the transferor plan. Any such distribution would result in disqualification of the transferor plan if the distribution failed to satisfy the applicable qualification requirements ( e.g., if any participant was not eligible for a distribution or if the transfer impermissibly eliminated rights protected under § 411(d)(6)).

Section 402(c)(8) lists the types of arrangements that constitute eligible retirement plans for purposes of excluding eligible rollover distributions from income under § 402(c), which does not include nonqualified foreign trusts. Section 402(d) provides that a nonqualified foreign trust is nonetheless treated as qualified under § 501(a) for purposes of § 402(c)(8) if it satisfies all of the qualification requirements of § 401(a) other than having a U.S. trust. Accordingly, a distribution to a nonqualified foreign trust is excluded from income under § 402(c) only if it is rolled over to a trust described in § 402(d).

Under the facts of Situation 1, the transfer of the assets and liabilities of the Country X employees from the Plan A trust to the Plan B trust is treated as a distribution from Plan A. In the case of a Plan B participant or beneficiary who is a nonresident alien, the portion of the distribution sourced to the United States ( i.e., the earnings and accretions) is subject to 30-percent withholding under §§ 871(a) and 1441(a) unless the distribution is exempt under § 871(f) (relating to annuities from plans under which at least 90 percent of the employees are citizens or residents of the United States). In the case of a participant or beneficiary who is a resident alien ( e.g., a green-card holder) or a U.S. citizen, the distribution is includible in the gross income of the participant or beneficiary to the extent applicable under §§ 402 and 72 ( i.e., the distribution is includible in the gross income of the participant except to the extent it consists of investment in the contract).

Under the facts of Situation 2, the transfer of assets and liabilities of the Puerto Rican employees to the Plan D trust is treated as a distribution from the Plan C trust. If the distribution fails to satisfy the applicable qualification requirements, the distribution will result in disqualification of the transferor plan and is generally includible in the gross income of the participant or beneficiary to the extent applicable under §§ 402 and 72. In the case of a Plan D participant who is a bona fide resident of Puerto Rico (within the meaning of § 937(a)) who has performed all of his or her services for the employer in Puerto Rico, the source of the distribution for purposes of § 933 is based on the source of plan contributions and the source of earnings and accretions with respect to plan contributions. Accordingly, in Situation 2, with respect to the distribution from Plan C that results from the transfer, the portion of the distribution that is attributable to employer contributions to the plan is treated as income from sources within Puerto Rico, and the portion that represents earnings and accretions with respect to contributions of either the employer or the employee is treated as income from sources within the United States. Subsequent distributions to the employee from Plan D that are attributable to contributions made by the employer, along with post-transfer earnings and accretions with respect to employer or employee contributions, will be treated entirely as income from sources within Puerto Rico for purposes of § 933 provided that the Plan D trust remains a Puerto Rico trust and all of the employee’s subsequent services covered by Plan D are performed within Puerto Rico.

By contrast, a transfer from a qualified plan to a plan that has made an election under section 1022(i)(2) of ERISA is not treated as a distribution from the transferor plan because a plan that has made an election under section 1022(i)(2) of ERISA is treated as a qualified plan for purposes of § 401(a). This conclusion only applies if the transfer is not part of a series of transfers or amendments under which assets and liabilities are subsequently transferred to a nonqualified plan.

For purposes of this revenue ruling, a transfer includes a transaction that is structured as a merger or consolidation.

2008–30 I.R.B. 169 July 28, 2008

Section 642.—Special Rules for Credits and Deductions

26 CFR 1.642(c)–1: Unlimited deduction for amounts paid for a charitable purpose.

Sample inter vivos charitable lead unitrusts. This revenue procedure contains sample declarations of trust for nongrantor and grantor charitable lead unitrusts. This revenue procedure also contains annotations to the sample trusts and alternate provisions that may be integrated into the sample trusts. See Rev. Proc. 2008-45, page 224.

Sample testamentary charitable lead unitrust. This revenue procedure contains a sample declaration of trust for a testamentary charitable lead unitrust. This revenue procedure also contains annotations to the sample trust and alternate provisions that may be integrated into the sample trust. See Rev. Proc. 2008-46, page 238.

Section 664.—Charitable Remainder Trusts

(Also: §§ 507, 1015, 1223, 4941, 4945, 4947.)

Charitable remainder trust (CRT). This ruling provides taxpayers with guidelines on dividing a charitable remainder trust into two or more separate and equal CRTs without violating the provisions of section 664 of the Code. It also provides that, if the division of the CRT is made in accordance with the situations described in the ruling, (i) the division is not a sale, exchange, or other disposition producing gain or loss, the basis under section 1015 of each separate trust’s share of each asset is the same share of the basis of that asset in the hands of the trust immediately before the division of the trust, and, under section 1223, each separate trust’s holding period for an asset transferred to it by the original trust includes the holding period of the asset as held by the original trust immediately before the division, (ii) the division of the CRT does not terminate under section 507(a)(1) the CRT’s status as a trust described in, and subject to, the private foundation provisions of section 4947(a)(2), or result in the imposition of an excise tax under section 507(c), (iii) the division of the CRT does not constitute an act of self-dealing under section 4941, and (iv) the division of the CRT does not constitute a taxable expenditure under section 4945.

qualified plan to include all employees in testing coverage regardless of whether the employees benefit under the plan. Section 410(b)(3) provides certain exceptions to this coverage requirement, such as § 410(b)(3)(C) which permits the exclusion of nonresident aliens who receive no U.S.-sourced earned income from the employer. However, employees in possessions of the United States, such as Puerto Rico, are not excluded from coverage testing under § 410(b)(3)(C) because they generally are not nonresident aliens. Section 410(b) also precludes the aggregation of a nonqualified plan, such as a plan qualified only under the Puerto Rico Code, with a qualified plan for purposes of testing coverage.

(b) Relief. In accordance with § 7805(b), employees participating under a section 1022(i)(1) transferee plan may be treated as excludable employees for purposes of applying § 410(b) with respect to the transferor plan for plan years beginning prior to January 1, 2011. This relief is only available if either: (1) the U.S. plan would satisfy the requirements of § 410(b) if the U.S. plan and the section 1022(i)(1) transferee plan were aggregated for testing purposes, and the U.S. plan by itself would satisfy the average deferral percentage test of § 401(k)(3) (disregarding subparagraph § 401(k)(3)(A)(i)) and the average contribution percentage test of § 401(m), if applicable; or (2) in the case of a defined contribution plan that provides for contributions other than elective contributions (as defined in §1.401(k)–6), for employees benefiting under the section 1022(i)(1) transferee plan, the rate of such contributions following the date of the transfer is not reduced from the rate of such contributions under the transferor plan prior to the date of transfer.

EFFECT ON OTHER GUIDANCE

Rev. Rul. 67–213 is amplified.

DRAFTING INFORMATION

The principal author of this revenue ruling is Diane S. Bloom. For further information regarding this revenue ruling, please contact Ms. Bloom at RetirementPlanQuestions@irs.gov ; for information regarding the sourcing of distributions under this revenue ruling,

please contact Quyen P. Huynh at (202) 622–3880 (not a toll-free number).

Section 402.—Taxability of Beneficiary of Employees’ Trust

Whether, in the instance of participating in a section 1022(i)(1) transferee plan, transferred amounts will be treated as a distribution. See Rev. Rul. 200840, page 166.

Section 404A.—Deduction for Certain Foreign Deferred Compensation Plans

Whether amounts transferred to a 404A plan from a qualified plan under 401(a) before October 1, 2008, are treated as distributions. See Rev. Rul. 2008-40, page 166.

Section 410.—Minimum Participation Standards

26 CFR 1.410(b)–6: Excludable employees.

Whether, in the instance of a section 1022(i)(1) transferee plan, relief will be granted for purposes of applying section 410(b) coverage. See Rev. Rul. 2008-40, page 166.

Section 414.—Definitions and Special Rules

26 CFR 1.411(l)–1: Mergers and consolidations of plans or transfers of plan assets.

Whether there was a transfer of plan assets or liabilities that would be considered as a combination of separate mergers and spinoffs. See Rev. Rul. 2008-40, page 166.

Section 507.—Termination of Private Foundation Status

This revenue ruling provides taxpayers with guidelines on dividing a charitable remainder trust (CRT) into two or more separate and equal CRTs without violating the provisions of § 664. It also provides rulings involving §§ 507, 1015, 1223, 4941, 4945, and 4947. See Rev. Rul. 2008-41, page 170.

July 28, 2008 170 2008–30 I.R.B.

Rev. Rul. 2008–41

ISSUES

Under the facts of this revenue ruling: (1) Does the pro rata division of a trust that qualifies as a charitable remainder trust (CRT) under § 664(d) of the Internal Revenue Code into two or more separate trusts cause the trust or any of the separate trusts to fail to qualify as a CRT under § 664(d)?

(2) When a trust that qualifies as a CRT under § 664(d) is divided pro rata into two or more separate trusts, is the basis under § 1015 of each separate trust’s share of each asset the same share of the basis of that asset in the hands of the trust immediately before the division of the trust, and, under § 1223, does each separate trust’s holding period for an asset transferred to it by the original trust include the holding period of the asset as held by the original trust immediately before the division?

(3) Does the pro rata division of a trust that qualifies as a CRT under § 664(d) into two or more separate trusts terminate under § 507(a)(1) the trust’s status as a trust described in, and subject to, the private foundation provisions of § 4947(a)(2), and result in the imposition of an excise tax under § 507(c)?

(4) When a trust that qualifies as a CRT under § 664(d) is divided pro rata into two or more separate trusts, does the division constitute an act of self-dealing under § 4941?

(5) When a trust that qualifies as a CRT under § 664(d) is divided pro rata into two or more separate trusts, does the division constitute a taxable expenditure under § 4945?

FACTS

Situation 1 . Trust qualifies as either a charitable remainder annuity trust (CRAT) described in § 664(d)(1) or a charitable remainder unitrust (CRUT) described in § 664(d)(2). Under the terms of Trust, two or more individuals (recipients) are each entitled to an equal share of the annuity or unitrust amount, payable annually, during the recipient’s lifetime, and upon the death of one recipient, each surviving recipient becomes entitled for life to an equal share of the deceased recipient’s annuity or unitrust amount. Thus, the last surviving re

cipient becomes entitled to the entire annuity or unitrust amount for his or her life. Upon the death of the last surviving recipient, the assets of Trust are to be distributed to one or more charitable organizations described in § 170(c) (remainder beneficiaries).

Trust has not committed any act (or failure to act) in the past giving rise to liability for tax under chapter 42 (Private Foundations and Certain Other Tax-Exempt Organizations). Moreover, Trust has made no distributions to charitable beneficiaries.

The state court having jurisdiction over Trust has approved a pro rata division of Trust into as many separate and equal trusts as are necessary to provide one such separate trust for each recipient living at the time of the division, with each separate trust being intended to qualify as the same type of CRT ( i.e., CRAT, CRUT, net income CRUT with makeup) as Trust. Either the court’s order or the trust agreement itself incorporates the provisions described in these facts that will govern the separate trusts.

The separate trusts may have different trustees. To carry out the division of Trust into separate trusts, each asset of Trust is divided equally among and transferred to the separate trusts. For purposes of determining the character of distributions to the recipient of each separate trust, each separate trust upon the division of Trust is deemed to have an equal share of Trust’s income in each tier described in § 664(b) and, similarly, on each subsequent consolidation of separate trusts by reason of the death of a recipient, the income in each tier of the consolidated trust is the sum of the income in that tier formerly attributed to the trusts being combined. The recipients pay all the costs associated with the division of Trust into separate trusts, including (i) legal fees relating to the court proceeding, and (ii) the administrative costs of the creation and funding of the separate trusts.

Each of the separate trusts has the same governing provisions as Trust, except that: (i) immediately after the division of Trust, each separate trust has only one recipient, and each recipient is the annuity or unitrust recipient of only one of the separate trusts (that recipient’s separate trust); (ii) each separate trust is administered and invested independently by its trustee(s); (iii) upon the death of the recipient, each asset of that recipient’s separate trust is to

be divided on a pro rata basis and transferred to the separate trusts of the surviving recipient(s), and the annuity amount payable to the recipient of each such separate CRAT is thereby increased by an equal share of the deceased recipient’s annuity amount (the unitrust amount of each separate CRUT is similarly increased as a result of the augmentation of the CRUT’s corpus, and each separate CRUT incorporates the requirements of § 1.664–3(b) of the Income Tax Regulations with respect to the subsequent computation of the unitrust amount from that trust); and (iv) upon the death of the last surviving recipient, that recipient’s separate trust (being the only separate trust remaining) terminates, and the assets are distributed to the remainder beneficiaries.

The remainder beneficiaries of Trust are the remainder beneficiaries of each of the separate trusts and are entitled to the same (total) remainder interest after the division of Trust as before. In addition, each recipient is entitled to receive from his or her separate trust the same annuity or unitrust amount as the recipient was entitled to receive under the terms of Trust. Because the annual net fair market value of the assets in each of the separate trusts may vary from one another due to differing investment strategies of the separate trusts, in situations where Trust is a CRUT, the amount of the unitrust payments from each separate CRUT may vary over time, both from year to year and among the separate CRUTs. Nevertheless, the unitrust percentage of each separate CRUT remains the same as each recipient’s share of the unitrust percentage under the terms of Trust, and the recipients and the remainder beneficiaries are entitled to the same benefits after the division of Trust as before.

For example, assume Trust is a CRUT. Under the terms of Trust, X, Y, and Z are entitled to share equally the annual payments of a 15 percent unitrust amount (5 percent each) while all three are living, and upon the death of one recipient, the surviving recipients are entitled to the deceased recipient’s share. Thus, if X dies first, the surviving recipients (Y and Z) are entitled to share equally in the annual payments of the 15 percent unitrust amount (7.5 percent each) while both are living. Thereafter, if Y predeceases Z, then upon the death of Y, Z is entitled to receive annual payments of

2008–30 I.R.B. 171 July 28, 2008

and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals;

(B) from which no amount other than the payments described in § 664(d)(2)(A) and qualified gratuitous transfers described in § 664(d)(2)(C) may be paid to or for the use of any person other than an organization described in § 170(c);

(C) the remainder interest of which (following the termination of the payments described in § 664(d)(2)(A)), is to be transferred to, or for the use of, an organization described in § 170(c) or is to be retained by the trust for such a use or, to the extent the remainder interest is in qualified employer securities (as defined in § 664(g)(4)), all or part of such securities are to be transferred to an employee stock ownership plan (as defined in § 4975(e)(7)) in a qualified gratuitous transfer (as defined in § 664(g)); and

(D) the remainder interest of which, with respect to each contribution of property to the trust, has a value (determined under § 7520) that is at least 10 percent of the net fair market value of such property as of the date such property is contributed to the trust.

Section 1.664–1(a)(4) provides, in part, that in order for a trust to be a CRT, it must meet the definition of and function exclusively as a CRT from the creation of the trust.

Section 1.664–2(b) provides that a trust is not a CRAT unless its governing instrument provides that no additional contributions may be made to the CRAT after the initial contribution.

Section 1.664–3(b) provides that a trust is not a CRUT unless its governing instrument either prohibits additional contributions to the trust after the initial contribution or provides that the rules in § 1.664–3(b)(1) and (2) must be satisfied with regard to each additional contribution, if any.

To carry out the division of Trust in Situation 1 and Situation 2, each asset of Trust is divided on a pro rata basis (in these cases, equally) among and distributed to the separate trusts. Each of the separate trusts has the same governing provisions as Trust, with the exceptions noted above, and the same recipients and remainder beneficiaries, collectively, as

the entire 15 percent unitrust amount for life. Upon the division of Trust, three separate trusts are created (one for each of X, Y, and Z) and each of the separate trusts holds one-third of the assets of Trust. X, Y, and Z are each entitled to annual payments of a 15 percent unitrust amount from his or her separate trust (15 percent of one-third of the assets is equivalent to 5 percent of all the assets of Trust). After the division of Trust and upon the death of X, each asset of X’s separate trust is divided on a pro rata basis and transferred to Y and Z’s separate trusts. Y and Z each remain entitled to annual payments of a 15 percent unitrust amount from his or her respective separate trust, each of which is now funded with the equivalent of one-half the assets of Trust (15 percent of one-half of the assets is equivalent to 7.5 percent of all the assets of Trust). Upon the death of Y, the assets of Y’s separate trust are transferred to Z’s separate trust, and Z remains entitled to annual payments of a 15 percent unitrust amount from Z’s separate trust. These are the same interests to which X, Y, and Z would have been entitled under the terms of Trust if Trust had not been divided into separate trusts.

Situation 2 . The facts are the same as in Situation 1 except that Trust has only two recipients who are U.S. citizens married to each other but in the process of obtaining a divorce, and, instead of the provision described in (iii) of Situation 1, each separate trust in Situation 2 has governing provisions providing that upon the death of the recipient, that recipient’s separate trust terminates and the assets of that separate trust then are distributed to the remainder beneficiaries. Because the remainder beneficiaries of Trust (and thus of each separate trust) receive a distribution of one-half of the assets of Trust upon the death of the first spouse to die and the remaining half of the assets upon the death of the surviving spouse (rather than a distribution of all of the assets of Trust upon the later death of the surviving recipient), the value of the remainder payable to the remainder beneficiaries as a result of the division of Trust into separate trusts may be larger than the present value of that interest as computed at the creation of Trust; no additional charitable deduction is permitted, however.

Each recipient (spouse) is entitled to receive from his or her separate trust the same share of the annuity or unitrust

amount as the recipient was entitled to receive under the terms of Trust. However, each spouse relinquishes all interests in Trust to which he or she would have been entitled by reason of having survived the other (survivorship right).

LAW AND ANALYSIS

Issue 1 . Qualification of Trusts under § 664(d)

Section 664(d)(1) provides that a CRAT is a trust:

(A) from which a sum certain (which is not less than 5 percent or more than 50 percent of the initial net fair market value of all property placed in trust) is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in § 170(c) and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or individuals;

(B) from which no amount other than the payments described in § 664(d)(1)(A) and qualified gratuitous transfers described in § 664(d)(1)(C) may be paid to or for the use of any person other than an organization described in § 170(c);

(C) the remainder interest of which (following the termination of the payments described in § 664(d)(1)(A)), is to be transferred to, or for the use of, an organization described in § 170(c) or is to be retained by the trust for such a use or, to the extent the remainder interest is in qualified employer securities (as defined in § 664(g)(4)), all or part of such securities are to be transferred to an employee stock ownership plan (as defined in § 4975(e)(7)) in a qualified gratuitous transfer (as defined in § 664(g)); and

(D) the remainder interest of which has a value (determined under § 7520) that is at least 10 percent of the initial net fair market value of all property placed in trust.

Section 664(d)(2) provides that a CRUT is a trust:

(A) from which a fixed percentage (which is not less than 5 percent nor more than 50 percent) 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 (at least one of which is not an organization described in § 170(c)

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tarily terminated by the Secretary due to willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), giving rise to chapter 42 liability. See § 1.507–1(a)(1) and § 1.507–1(b)(1) regarding filing the notice of termination. Upon such a termination, § 507(c) imposes a termination tax that generally equals the lower of the “aggregate tax benefit” (as defined in § 507(d)) resulting from the tax exempt status of the terminating foundation or the fair market value of that foundation’s net assets.

Section 507(b)(2) provides that, in the case of the transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitalization, or other adjustment, organization, or reorganization, the transferee foundation is not treated as a newly created organization.

Section 1.507–1(b)(6) generally confirms that, if a private foundation transfers all or part of its assets to one or more other private foundations pursuant to a transfer described in §§ 507(b)(2) and 1.507–3(c), such transferor foundation will not have terminated its private foundation status under § 507(a)(1).

Section 1.507–3(a)(1) and (2) provide, in substance, that in a § 507(b)(2) transfer of assets from one private foundation to one or more other private foundations, no transferee private foundation shall be treated as a newly created organization, but instead shall succeed to the transferor’s aggregate tax benefit within the meaning of § 507(d).

Section 1.507–3(c)(1) generally provides that, as used in § 507(b)(2), the term “other adjustment, organization or reorganization” shall include any partial liquidation or any other significant disposition of assets to one or more private foundations.

Section 1.507–3(c)(2)(ii) provides that the term a “significant disposition of assets” includes the transfer of a total of 25 percent or more of the fair market value (as of the beginning of the taxable year, or of the first taxable year in which any of a series of dispositions was made) of the net assets of the foundation to one or more private foundations. Such disposition may be made for a single year or in a series of related dispositions over more than one year.

Section 1.507–4(b) provides that the excise tax on termination of private foun

Trust. In Situation 1, after the division of Trust into separate trusts, the total annuity amount or unitrust percentage to be paid annually by the separate trusts remains the same as under the terms of Trust. Each recipient and remainder beneficiary essentially has the same beneficial interest after the division as before. A transfer of the assets from a deceased recipient’s separate trust to the separate trust(s) of the surviving recipient(s) in Situation 1 is not treated as a transferred remainder interest that would violate § 664(d)(1)(C) or § 664(d)(2)(C), and is not treated as a prohibited additional contribution to a CRAT under § 1.664–2(b). In Situation 2, after the division of Trust into separate trusts, the total annuity amount or unitrust percentage to be paid annually remains the same as it was under the terms of Trust, with the exception of the survivorship right to the annuity or unitrust payments the recipients relinquish. Consequently, in Situation 1 and Situation 2, the division of Trust into separate trusts does not cause Trust or any of the separate trusts to fail to qualify as a CRT under § 664(d).

Issue 2 . Basis and Holding Period of Assets

Section 1015(b) provides that, if property is acquired by a transfer in trust (other than by a transfer in trust by a gift, bequest, or devise) after December 31, 1920, the basis shall be the same as it would be in the hands of the grantor, increased by the amount of gain, or decreased by the amount of loss, recognized by the grantor on such a transfer in trust under the law applicable to the year in which the transfer was made. Section 1.1015–2(a)(1) provides that, if the taxpayer acquired property by such a transfer in trust, this basis rule applies whether the property is in the hands of the trustee or the beneficiary, and whether the property was acquired before, upon, or after termination of the trust and distribution of the property.

Section 1223(2) provides that, in determining the period for which the taxpayer has held property, however acquired, there shall be included the period during which the property was held by another person if, under chapter 1 (Normal Taxes and Surtaxes), the property has, for purposes of determining gain or loss from a sale or exchange, the same basis, in whole or in part,

in the taxpayer’s hands as it would have in the hands of the other person.

In Situation 1 and Situation 2, the pro rata division of Trust into separate trusts is not a sale, exchange, or other disposition producing gain or loss. Pursuant to § 1015(b), in Situation 1 and Situation 2, the basis of each separate trust’s share of each asset immediately after the division of Trust is the same share of the basis of that asset in the hands of Trust immediately before the division. Furthermore, pursuant to § 1223(2), each separate trust’s holding period of each asset transferred to it by Trust includes the holding period of the asset as held by Trust immediately before the division. Similarly, upon the death of a recipient and the consolidation of the assets of the deceased recipient’s separate trust into the separate trust(s) of the surviving recipient(s) in Situation 1, each separate trust of a surviving recipient receives the same share of each asset of the deceased recipient’s separate trust and of the basis of each asset in the hands of the deceased recipient’s separate trust immediately before the consolidation, and the holding period of each asset transferred to a separate trust of a surviving recipient includes the holding period of the asset as held by the deceased recipient’s separate trust immediately before the consolidation.

Issue 3 . Status as Trust Subject to Private Foundation Rules of § 4947(a)(2) and Imposition of § 507(c) Excise Tax

Section 4947(a)(2) and § 53.4947–1(c) of the Foundation and Similar Excise Taxes Regulations provide that split-interest trusts generally are subject to the provisions of § 507 (among other provisions) in the same manner as if such trusts were private foundations, but, under § 4947(a)(2)(A), not with respect to any amounts payable under the terms of such trust to income beneficiaries, unless a deduction was allowed for those amounts under §§ 170(f)(2)(B), 2055(e)(2)(B), or 2522(e)(2)(B). Both CRATs and CRUTs are split-interest trusts for this purpose and are, thus, subject to the rules of § 507(a).

Section 507(a) provides that, except as provided in § 507(b), a private foundation’s tax status shall be terminated only if (1) the organization notifies the Secretary of its intent to terminate its status as a private foundation, or (2) it is involun

2008–30 I.R.B. 173 July 28, 2008

no self-dealing transaction occurs by reason of the division of Trust in either Situa- tion 1 or Situation 2, or by reason of a subsequent consolidation of the separate trusts arising from the death of a recipient in Sit- uation 1 .

Issue 5 . Taxable Expenditures under § 4945

Section 4947(a)(2) and § 53.4947–1(c) provide that split-interest trusts generally are subject to the provisions of § 4945 (among other provisions) in the same manner as if such trusts were private foundations, but, under § 4947(a)(2)(A), not with respect to any amounts payable under the terms of such trust to income beneficiaries, unless a deduction was allowed for those amounts under §§ 170(f)(2)(B), 2055(e)(2)(B), or 2522(e)(2)(B). Both CRATs and CRUTs are split-interest trusts for this purpose and are, thus, subject to the rules of § 4945.

Section 4945 imposes an excise tax on each taxable expenditure described in § 4945(d) made by a private foundation.

Section 4945(d)(4) provides that a taxable expenditure includes any amount paid or incurred by a private foundation as a grant to an organization unless the private foundation exercises expenditure responsibility with respect to such grant in accordance with § 4945(h).

Section 53.4945–5(b)(7) confirms that §§ 1.507–3(a)(7), 1.507–3(a)(8)(ii)(f), and 1.507–3(a)(9) govern the extent to which the expenditure responsibility rules contained in § 4945(d)(4) and (h) apply to transfers of assets described in § 507(b)(2).

Section 1.507–3(a)(7) provides, in part, that, except as provided in § 1.507–3(a)(9), if the transferor has disposed of all of its assets, then during any period in which the transferor has no assets, § 4945(d)(4) and (h) shall not apply to the transferee or the transferor with respect to any “expenditure responsibility” grants made by the transferor.

Section 1.507–3(a)(9) provides, in part, that if a private foundation transfers all of its net assets to one or more private foundations which are effectively controlled (within the meaning of § 1.482–1(a)(3)), directly or indirectly, by the same person or persons which effectively controlled the transferor private foundation, then for certain purposes, such a transferee private

dation status under § 507(c) generally does not apply to a transfer of assets pursuant to § 507(b)(2).

In Situation 1 and Situation 2, the separate trusts have the same governing provisions as Trust, with the exceptions noted above, and collectively, the same recipients, remainder beneficiaries, and assets as Trust. In addition, each recipient and remainder beneficiary is entitled to the same benefits both before and after the division of Trust, with the exceptions noted above. Further, in both Situation 1 and Situation 2, Trust transfers all of its assets to the separate trusts pursuant to a transfer described in § 507(b)(2). Thus, in Situation 1 and Sit- uation 2, Trust has not terminated its private foundation status under § 507(a)(1) as a result of the division of Trust (or a subsequent consolidation of the separate trusts arising from the death of a recipient in Sit- uation 1 ), because no notice of termination was filed or was required to be filed. See § 1.507–1(b)(6). Accordingly, the excise tax imposed under § 507(c) does not apply.

Issue 4 . Act of Self-Dealing under § 4941

Section 4947(a)(2) and § 53.4947– 1(c)(1)(ii) provide that split-interest trusts generally are subject to the provisions of § 4941 (among other provisions) in the same manner as if such trusts were private foundations, but, under § 4947(a)(2)(A), not with respect to any amounts payable under the terms of such trust to income beneficiaries, unless a deduction was allowed for those amounts under §§ 170(f)(2)(B), 2055(e)(2)(B), or 2522(e)(2)(B). Both CRATs and CRUTs are split-interest trusts for this purpose and are, thus, subject to the rules of § 4941.

Section 4941(a)(1) imposes an excise tax on each act of self-dealing between a disqualified person and a private foundation.

Section 4941(d)(1)(A) provides that the term “self-dealing” includes any direct or indirect sale or exchange, or leasing, between a private foundation and a disqualified person.

Section 4941(d)(1)(E) provides that the term “self-dealing” includes any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation.

Section 4946(a)(1)(A), (B), and (D) defines the term “disqualified person” with respect to a private foundation as including (among others) a substantial contributor to the private foundation, a foundation manager, and a member of the family of a substantial contributor or foundation manager.

Section 4947(a)(2)(A) and § 53.4947– 1(c)(2) provide that annuity or unitrust amounts payable to the recipients under the terms of a charitable remainder split-interest trust are not subject to § 4941.

In Situation 1 and Situation 2, the recipients might be disqualified persons with respect to Trust under § 4946. The only interest that the recipients have in Trust is the right to the payment of the annuity or unitrust amount under § 664(d)(1) or (2), respectively. As a result of the division of Trust in Situation 1 and Situation 2, each separate trust holds a pro rata (in these cases, equal) share of each asset of Trust, and each recipient receives his or her annuity or unitrust payment from only one of the separate trusts. The annuity or unitrust payments a recipient receives from his or her separate trust remains equivalent to the recipient’s share of the annuity or unitrust payments under the terms of Trust, with the exception of the survivorship right to the annuity or unitrust payments each recipient relinquishes in Situation 2 .

Thus, upon the division of Trust in Sit- uation 1 and Situation 2, the recipients are insulated from self-dealing with respect to their annuity or unitrust interests. Because of the pro rata (equal) distributions to the separate trusts, none of the disqualified persons, if any, receive any additional interest in the assets of Trust, and no self-dealing transaction occurs within the meaning of § 4941(d). The remainder interest of Trust remains preserved exclusively for charitable interests, and there is no increase in the annuity or unitrust amount at the expense of the charitable interest. Additionally, the pro rata division of the assets of Trust among the separate trusts in Situation 1 and Situation 2 is not a sale or exchange and, therefore, is not a sale or exchange between a private foundation and a disqualified person. All legal and other expenses and costs incident to the division of Trust are paid by the recipients. Situation 1 and Situation 2 involve no other transactions with the recipients that affect the principal of Trust; accordingly,

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Section 1015.—Basis of Property Acquired by Gifts and Transfers in Trust

This revenue ruling provides taxpayers with guidelines on dividing a charitable remainder trust (CRT) into two or more separate and equal CRTs without violating the provisions of § 664. It also provides rulings involving §§ 507, 1015, 1223, 4941, 4945, and 4947. See Rev. Rul. 2008-41, page 170.

Section 1223.—Holding Period of Property

This revenue ruling provides taxpayers with guidelines on dividing a charitable remainder trust (CRT) into two or more separate and equal CRTs without violating the provisions of § 664. It also provides rulings involving §§ 507, 1015, 1223, 4941, 4945, and 4947. See Rev. Rul. 2008-41, page 170.

Section 1368.—Distri- butions

26 CFR 1.1368–2: Accumulated adjustments ac- count. (Also: §§ 101, 264, 1.264–1.)

S corporation; life insurance con- tract; accumulated adjustments ac- count (AAA). This ruling, under section 1368 of the Code, outlines the effects of premiums paid by an S corporation on an employer-owned life insurance contract and the benefits received by reason of death of the insured on its AAA.

Rev. Rul. 2008–42

ISSUES

(1) Do premiums paid by an S corporation on an employer-owned life insurance contract, of which the S corporation is directly or indirectly a beneficiary, reduce the S corporation’s accumulated adjustments account (AAA)?

(2) Do the benefits received by reason of the death of the insured from an employer-owned life insurance contract that meets an exception under § 101(j)(2) increase an S corporation’s AAA?

FACTS

X is a corporation that has a valid S election in effect. X purchases an employer-owned life insurance contract on the life of one of its employees in order

foundation shall be treated as if it were the transferor.

Rev. Rul. 2002–28, 2002–1 C.B. 941, provides, in part, that, once a private foundation distributes all of its assets to one or more other effectively controlled private foundations under a plan of dissolution, the obligation to exercise expenditure responsibility under § 4945(h) with respect to the transfers made by the transferor foundation passes from that foundation to the transferee foundation(s).

Section 4945(d)(5) provides that a taxable expenditure includes any amount paid or incurred by a private foundation for a non-charitable purpose.

Section 53.4945–6(b)(2) provides that expenditures for unreasonable administrative expenses will ordinarily be taxable expenditures under § 4945(d)(5).

The transfers of Trust’s assets to the separate trusts in Situation 1 and Situation 2 are not expenditures that require expenditure responsibility by Trust, pursuant either to § 1.507–3(a)(9) (if Trust and the separate trust are controlled by the same person or persons) or § 1.507–3(a)(7) (if Trust and the separate trust are not controlled by the same person or persons). Because Trust made no prior distributions for which expenditure responsibility is required, the separate trusts assume no preexisting expenditure responsibility from Trust under § 1.507–3(a)(9). A similar analysis applies regarding a subsequent consolidation of the separate trusts arising from the death of a recipient in Situation 1 . Thus, in Situation 1 and Situation 2, Trust is not required to exercise “expenditure responsibility” under § 4945(d) and (h) with respect to the assets transferred to the separate trusts.

HOLDINGS

Under the facts of this revenue ruling: (1) In Situation 1 and Situation 2, the pro rata division of a trust that qualifies as a CRT under § 664(d) into two or more separate trusts does not cause the trust or any of the separate trusts to fail to qualify as a CRT under § 664(d).

(2) In Situation 1 and Situation 2, where a trust that qualifies as a CRT under § 664(d) is divided pro rata into two or more separate trusts, the division is not a sale, exchange, or other disposition producing gain or loss, the basis under § 1015

of each separate trust’s share of each asset is the same share of the basis of that asset in the hands of the trust immediately before the division of the trust, and, under § 1223, each separate trust’s holding period for an asset transferred to it by the original trust includes the holding period of the asset as held by the original trust immediately before the division.

(3) In Situation 1 and Situation 2, the pro rata division of a trust that qualifies as a CRT under § 664(d) into two or more separate trusts does not terminate under § 507(a)(1) the trust’s status as a trust described in, and subject to, the private foundation provisions of § 4947(a)(2), and does not result in the imposition of an excise tax under § 507(c).

(4) In Situation 1 and Situation 2, where a trust that qualifies as a CRT under § 664(d) is divided pro rata into two or more separate trusts, the division does not constitute an act of self-dealing under § 4941.

(5) In Situation 1 and Situation 2, where a trust that qualifies as a CRT under § 664(d) is divided pro rata into two or more separate trusts, the division does not constitute a taxable expenditure under § 4945.

DRAFTING INFORMATION

The principal authors of this revenue ruling are Megan A. Stoner of the Office of Associate Chief Counsel (Passthroughs & Special Industries) and Ward L. Thomas of the Office of the Commissioner (Tax Exempt & Government Entities) Exempt Organizations Ruling Division. For further information regarding this revenue ruling, contact Ms. Stoner with respect to issues 1 and 2 at (202) 622–3070 (not a toll-free call) and contact Mr. Thomas with respect to issues 3–5 at (202) 283–8913 (not a toll-free call).

Section 933.—Income From Sources Within Puerto Rico

26 CFR 1.933–1: Exclusion of certain income from sources within Puerto Rico.

Whether distributions from a section 1022(i)(1) transferee plan are granted special transition relief under section 933. See Rev. Rul. 2008-40, page 166.

2008–30 I.R.B. 175 July 28, 2008

Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this revenue ruling, contact Vishal R. Amin at (202) 622–3060 (not a toll-free call).

Section 2055.—Transfers for Public, Charitable, and Religious Uses

26 CFR 20.2055–2: Transfers not exclusively for charitable purposes.

Sample inter vivos charitable lead unitrusts. This revenue procedure contains sample declarations of trust for nongrantor and grantor charitable lead unitrusts. This revenue procedure also contains annotations to the sample trusts and alternate provisions that may be integrated into the sample trusts. See Rev. Proc. 2008-45, page 224.

Sample testamentary charitable lead unitrust. This revenue procedure contains a sample declaration of trust for a testamentary charitable lead unitrust. This revenue procedure also contains annotations to the sample trust and alternate provisions that may be integrated into the sample trust. See Rev. Proc. 2008-46, page 238.

Section 2522.—Charitable and Similar Gifts

26 CFR 25.2522(c)–3: Transfers not exclusively for charitable, etc., purposes in the case of gifts made after July 31, 1969.

Sample inter vivos charitable lead unitrusts. This revenue procedure contains sample declarations of trust for nongrantor and grantor charitable lead unitrusts. This revenue procedure also contains annotations to the sample trusts and alternate provisions that may be integrated into the sample trusts. See Rev. Proc. 2008-45, page 224.

Section 4941.—Taxes on Self-Dealing

This revenue ruling provides taxpayers with guidelines on dividing a charitable remainder trust (CRT) into two or more separate and equal CRTs without violating the provisions of § 664. It also provides rulings involving §§ 507, 1015, 1223, 4941, 4945, and 4947. See Rev. Rul. 2008-41, page 170.

Section 4945.—Taxes on Taxable Expenditures

This revenue ruling provides taxpayers with guidelines on dividing a charitable remainder trust (CRT)

to cover expenses the company would incur as a result of the death of the employee (also known as a key-man policy). The employee is a highly compensated employee of X. X pays all of the premiums for the policy. X is a beneficiary of the policy. At the end of the taxable year, X has subchapter C accumulated earnings and profits (E&P).

LAW AND ANALYSIS

Section 101(a)(1) provides that gross income does not include amounts received under a life insurance contract, if such amounts are paid by reason of the death of the insured.

Section 101(j)(1) provides that death benefits from employer-owned life insurance contracts shall be taxable, in excess of premiums and other amounts paid, unless the employer-owned life insurance contract meets one of the exceptions provided under § 101(j)(2).

Section 101(j)(2)(A) provides that § 101(j)(1) shall not apply to any amount received by reason of the death of an insured who, with respect to an applicable policyholder (i) was an employee at any time during the 12-month period before the insured’s death, or (ii) is, at the time the contract is issued a director, a highly compensated employee within the meaning of § 414(q) (without regard to paragraph (1)(B)(ii) thereof), or a highly compensated individual within the meaning of § 105(h)(5), except that “35 percent” shall be substituted for “25 percent” in subparagraph (C) thereof.

Section 264(a)(1) provides that no deduction is allowed for premiums paid on any life insurance policy, or endowment or annuity contract, if the taxpayer is directly or indirectly a beneficiary under the policy or contract.

Section 1.264–1(a) provides that the premiums paid for life insurance on the life of any officer, employee, or person financially interested in a business carried on by the taxpayer are not deductible where the taxpayer is directly or indirectly a beneficiary of the policy.

Section 1.1366–1(a)(2)(viii) provides that for the purposes of subchapter S, tax-exempt income is income that is permanently excludible from gross income in all circumstances in which the applicable provision of the Code applies and provides

as an example that income that is excludible from gross income under § 101 (certain death benefits) is tax-exempt income.

Section 1368(e)(1)(A) provides that the term “accumulated adjustments account” means an account of the S corporation which is adjusted for the S period in a manner similar to the adjustments under § 1367 (except that no adjustment shall be made for income (and related expenses) which is exempt from tax under Title 26 and the phrase “(but not below zero)” shall be disregarded in § 1367(a)(2)).

Section 1.1368–2 provides for the calculation and maintenance of the AAA. The AAA is an account of the S corporation and is not apportioned among shareholders. The AAA is generally increased by the items of income described in § 1366(a)(1)(A), other than income that is exempt from tax, and any nonseparately computed income determined under § 1366(a)(1)(B). The AAA is generally decreased by the items of loss or deduction described in § 1366(a)(1)(A), any nonseparately computed loss determined under § 1366(a)(1)(B), and any nondeductible expense not properly chargeable to a capital account other than expenses related to tax-exempt income.

An S corporation’s AAA tracks the amount of undistributed income that has been taxed to the shareholders, similar to the manner in which E&P generally tracks a C corporation’s undistributed income. The AAA is the mechanism that allows previously taxed but undistributed income to be distributed tax-free to S corporation shareholders to the extent of the shareholders’ basis in their stock.

HOLDINGS

(1) Premiums paid by an S corporation on an employer-owned life insurance contract, of which the S corporation is directly or indirectly a beneficiary, do not reduce the S corporation’s AAA.

(2) The benefits received by reason of the death of the insured from an employerowned life insurance contract that meets an exception under § 101(j)(2) do not increase the S corporation’s AAA.

DRAFTING INFORMATION

The principal author of this revenue ruling is Vishal R. Amin of the Office of

July 28, 2008 176 2008–30 I.R.B.

into two or more separate and equal CRTs without violating the provisions of § 664. It also provides rulings involving §§ 507, 1015, 1223, 4941, 4945, and 4947. See Rev. Rul. 2008-41, page 170.

Section 4947.—Application of Taxes to Certain Nonexempt Trusts

This revenue ruling provides taxpayers with guidelines on dividing a charitable remainder trust (CRT) into two or more separate and equal CRTs without vi

olating the provisions of § 664. It also provides rulings involving §§ 507, 1015, 1223, 4941, 4945, and 4947. See Rev. Rul. 2008-41, page 170.

Section 7805.—Rules and Regulations

26 CFR 301.7805–1: Rules and regulations.

Whether, in the instance of a section 1022(i)(1) transferee plan, relief will be granted for purposes

of applying section 410(b) coverage. See Rev. Rul. 2008-40, page 166.

2008–30 I.R.B. 177 July 28, 2008