internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc psi - plr-156262-02 date date legend x d1 year company dear this letter responds to your letter dated date and subsequent correspondence submitted by you on behalf of x as x’s authorized representative requesting certain rulings regarding the proposed transfer of company stock to a charitable_remainder_unitrust crut the information submitted states that x is a retired executive officer of company and currently serves on its board_of directors x was a participant in company’s executive stock purchase plan the plan and has substantial net_worth in the company stock acquired under the plan while employed at company x has entered into fourteen different stock restriction agreements in connection with purchases of stock under the plan one stock restriction agreement as amended dated d1 between company and x pertains to stock purchases made before year sec_2 of this agreement provides that company shall have the exclusive right to purchase any or all of the stock if x sells assigns transfers hypothecates encumbers pledges or otherwise disposes of all or any part of company’s stock without complying with the agreement x ceases for any reason whatsoever with or without cause other than retirement to be employed by at least one of company or its affiliates and their subsidiaries or x dies without a surviving_spouse under sec_4 company has the right to exercise its option commencing on the date on which the event occurred giving rise to company’s right to exercise its option and continuing until two months after x has given the required notice of the occurrence of such event to company section provides that if company does not timely exercise its option x plr-156262-02 -2- may sell or otherwise dispose_of the shares during the two-month period after the expiration of the option period but that any transferee will be subject_to all of the provisions of the agreement section contains a formula for determining the purchase_price of any shares company purchases under its option in subsequent years x entered into thirteen further stock restriction agreements with company governing stock purchased in those years each agreement contains provisions substantially the same as the initial agreement regarding the events that trigger company’s exclusive option to purchase the shares if x wants to transfer such shares and the method and timing of the exercise of company’s option accordingly all of the stock purchased by x from company pursuant to the plan in each of these years remains subject_to the company’s right_of_first_refusal to acquire the stock from x x proposes to establish a crut as defined in sec_664 of the internal_revenue_code upon establishment of the crut x will notify company of x’s intent to transfer a portion of x’s company stock purchased under the plan to the crut thereby triggering company’s option to purchase the stock for the formula price set forth in the stock restriction agreements applicable to such stock taxpayer represents that company will likely decline to purchase the stock for the formula price set forth in the stock restriction agreements and thus x will be free to transfer the stock to the crut the stock transferred to the crut will continue to be subject_to the terms of the stock restriction agreements under the plan in accordance with the terms of the stock restriction agreements therefore if the trustee of the crut wishes to sell or otherwise dispose_of the stock company will have a right to purchase the stock for the formula price set forth in the stock restriction agreements the trustee will notify company that the crut wishes to sell company stock prior to any proposed sale or disposition x represents that company has always exercised its option under the stock restriction agreements in the past for the formula price set forth therein each of the annual restricted_stock agreements also contains provisions to the effect that any outstanding promissory notes given by x to company with respect to financing the acquisition of the restricted_stock will be satisfied from the proceeds of the purchase of the restricted_stock by company pursuant to the exercise of its rights of first refusal under the restricted_stock agreements these provisions would carry over to successors in interest in the stock including the crut x represents that all encumbrances shall be removed from the restricted_stock prior to the time such stock is transferred to crut by x in 62_tc_684 aff'd on other grounds 523_f2d_1308 8th cir acq 1978_1_cb_2 a shareholder in control of a corporation gifted stock of that corporation to a charitable foundation also controlled by the donor shareholder subsequent to the gift and as part of the same plan the shareholder caused the corporation to redeem the gifted stock from the donee foundation the next plr-156262-02 -3- day the tax_court respected the form of the transaction and did not recharacterize the transaction as a redemption of the stock by the donor shareholder followed by a gift of the redemption proceeds to the charitable foundation because it found that a gift of stock had in fact been made to the foundation and the foundation was not legally obligated to redeem the stock at the time it received title to the shares in reaching its decision the court noted there were two paths which the donor shareholder could have taken -- he could have had the stock redeemed and then made a contribution of the proceeds or he could have contributed the stock and let the donee arrange for the redemption the tax consequences to the donor turn on which path he chooses and so long as there is substance to what he does there is no requirement that he choose the more expensive way citation omitted palmer v commissioner supra pincite the service has acquiesced in the palmer decision see 1978_1_cb_2 in revrul_78_197 1978_1_cb_83 the service concluded that it will treat the proceeds of a redemption of stock under facts similar to those in palmer as income to the donor only if the donee is legally bound or can be compelled by the corporation to surrender the shares for redemption the tax_court has characterized the legally bound standard in revrul_78_197 as a bright line test for determining if a contribution of stock to a charity followed by a redemption of that stock from that charity should be respected in form or recharacterized as a redemption of the stock from the donor followed by a contribution of the proceeds by the donor to the charity see generally rauenhorst v commissioner t c no date consequently the test for purposes of this ruling_request is whether the crut will be legally bound or can be compelled by company to surrender the stock for redemption at the time of the donation here x proposes to transfer the company stock to the crut under the restrictions contained in each year’s stock restriction agreement the crut must first offer the stock to company at a set formula price should the crut propose to dispose_of the shares this provision amounts to a right_of_first_refusal however it does not mean that the crut is legally bound or can be compelled by company to surrender the stock to company at the time of the donation the information submitted contains no indication that the crut will be legally bound or could be compelled by company to redeem or sell the gifted stock that all or a portion of the gifted stock was subject_to restrictions upon transfer to a third party by x and thus by the crut following the transfer does not give company the ability to compel its redemption or sale from the crut the crut is free to retain title to and ownership of the stock indefinitely because the crut is not legally bound and cannot be compelled by company to redeem or sell the stock we conclude that the transfer of the company stock by x to plr-156262-02 -4- the crut followed by any subsequent redemption of the stock by company will not be recharacterized for federal_income_tax purposes as a redemption of the stock by company from x followed by a contribution of the redemption proceeds to the crut see palmer v commissioner supra and revrul_78_197 supra the same principles apply if the stock is sold by the crut rather than redeemed by company thus provided there is no prearranged sale contract whereby the crut is legally bound to sell the stock upon the contribution we conclude that any subsequent sale will not be recharacterized for federal_income_tax purposes as a sale of the stock by x followed by a contribution of the sale proceeds to the crut accordingly any redemption proceeds or sales proceeds received by the crut for the stock will not be treated as taxable_income received by x except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the proposed transaction specifically we express no opinion as to whether the crut will meet the requirements of sec_664 and the regulations thereunder as to the tax consequences if company exercises its rights to acquire the company stock which x proposes to transfer to the crut and as to the tax consequences if the stock is transferred to the crut subject_to any encumbrance arising from obligations from x to company or the use of the stock to satisfy any such encumbrances this ruling is directed only to the taxpayer s requesting it sec_6110 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 x and to x’s other authorized representative sincerely yours j thomas hines chief branch office of the associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


internal_revenue_service number release date index number ------------------- ----------------------------------------- ---------------------------- ------------------------------- department of the treasury washington dc third party communication none date of communication not applicable_person to contact --------------------------- ------------------------- ----------------- telephone number ---------------------- refer reply to cc psi b04 plr-130492-14 date february legend grantor spouse trust state state statute charity charity charity charity date grantor’s charities trustee investment direction adviser distribution adviser trust_protector company state state statute state statute state statute state statute state statute state statute case ---------------------------------------------- -------------------------------------------- ----------------------------------------------------------------------- -------------- ----------------------------------------- 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----------------------------------------------------------------------------------------- ----------- ------------------ -------------- -------- -------------- ---- ---- ---- ------ ---- case a b c d e f g h i dear -------------- this letter responds to your authorized representative’s letter dated date requesting rulings regarding the gift_tax consequences of two transfers to trust and the release of certain powers held by grantor the facts and representations submitted are summarized as follows on date grantor a resident of state created trust to benefit grantor and three-named charities charity charity and charity trust is irrevocable and is sited in state grantor initially funded trust with dollar_figurec the fiduciaries include trustee a corporate trust company and four trust advisers the four trust advisers are investment direction adviser a corporation distribution adviser a five-member limited_liability_company llc charitable distribution adviser cda who is initially spouse and trust_protector a five-member llc if and when spouse is no longer able to serve as cda company a five-member llc will serve as cda initially the same five individuals are members or shareholders and officers of distribution adviser company and trust_protector none of the individuals are beneficiaries of trust it is represented that charitie sec_1 through are organizations described in sec_501 of the internal_revenue_code charitie sec_1 and and any replacement charity are referred to as grantor’s charities it is represented that charity is also an organization described in sec_501 under trust charity may receive distributions indirectly through one or more of grantor’s charities distributions to grantor article i b i of trust provides that during grantor’s life the trustee at the direction of the distribution adviser shall distribute to grantor quarterly payments of plr-130492-14 h percent of the value of the trust assets determined pursuant to article xxiv c as of the end of the calendar_year grantor’s quarterly distributions article i b provides that during grantor’s life the trustee at the direction of the distribution adviser shall distribute to grantor first from income and to the extent income is not sufficient from principal such amounts as necessary to maintain grantor in her accustomed standard of living and an additional_amount up to the difference between the grantor’s quarterly distributions in the preceding year and the payment due under article i b i in the current_year grantor’s support distributions article i b provides that the trustee shall have the discretion exercisable at any time at the direction of the distribution adviser to distribute any part or all of the income and principal of the trust to grantor grantor’s special contingent distributions in the event that during grantor’s life the trust_protector determines in its discretion that any law regulation ordinance judicial decision or other rule enforceable by any governmental body that is adopted after date has the result that a material tax_assessment fee penalty or other charge or required_payment is imposed on trust or on the recipient with respect to the transfer of trust assets to any exempt charitable_organization to which transfers are permitted under the trust provisions distributions to grantor’s charities article i b ii provides that during grantor’s life the trustee at the direction of the distribution adviser shall distribute dollar_figureb each quarter to charity subject_to the condition that any amount in excess of i percent of the total quarterly distributions made to charity and charity shall be expended by charity only to support certain activities charity quarterly distribution article i b iii provides that during grantor’s life the trustee at the direction of the distribution adviser shall distribute dollar_figured to charity each quarter charity quarterly distribution these distributions to charity and charity are subject_to certain restrictions as provided in trust pursuant to article i b the trustee in the trustee’s discretion at the direction of the distribution adviser may at any time and from time to time distribute part of all of the trust estate during grantor’s life to any one or more of grantor’s charities provided charity receives at least i percent and charity receives at least e percent of the aggregate distributions to grantor’s charities charity discretionary distributions grantor’s veto powers and testamentary limited_power_of_appointment article i c grants grantor certain veto powers over distributions to grantor and to grantor’s charities article i c i provides that during grantor’s life grantor has the right to veto at any time and from time to time in whole or in part for any reason or for no reason any grantor quarterly distribution grantor support distribution grantor plr-130492-14 special contingent distribution and charity discretionary distribution grantor’s sole discretionary veto powers pursuant to article i c ii through iv grantor may veto certain distributions to grantor’s charities based on certain objective standards grantor’s sole objective veto powers pursuant to article i c ii grantor may veto any other distributions to grantor’s charities if grantor has made a good_faith determination that the charity is not fulfilling the purposes for which it was created as provided in the article under article i c iii grantor may veto any charity quarterly distribution to charity if charity has not met certain requirements regarding distributions to charity or charity has failed to meet certain requirements as provided in the article pursuant to article i c iv grantor may exercise her power to veto any charity quarterly distribution to charity if charity has failed to meet certain reporting requirements as provided in the article article i c provides that grantor may veto any charity quarterly distribution to charity and any charity quarterly distribution to charity for any reason or no reason provided that the then serving cda consents to the veto and the cda does not have a substantial adverse_interest to the grantor with respect to these distributions within the meaning of sec_25_2511-2 grantor’s consent veto power however if the cda is not serving or is substantially adverse to grantor then the trust_protector if one is serving and does not have a substantial adverse_interest to grantor with respect to these distributions must consent to the veto the determination of whether the cda or the trust_protector has a substantial adverse_interest to grantor with respect to the disposition of the trust assets or income within the meaning of sec_25_2511-2 is made by the trust_protector with the advice of tax counsel if the value of the trust assets in the immediate preceding quarter falls below a certain amount determined under article i b iv grantor may exercise this veto power without the consent of the cda article i c provides that grantor may at any time or from time to time release any one or more of the veto powers listed above by providing notice to the trust advisers and the trustee article i f grants grantor a testamentary limited power to appoint the trust estate to spouse grantor’s charities or two other charities grantor’s testamentary power grantor may not appoint any trust property in favor of grantor grantor’s creditors grantor’s estate or the creditors of grantor’s estate in the event that grantor fails to exercise effectively the limited_power_of_appointment the remainder of trust will be distributed f percent to charity and g percent to charity article ix provides that the investment direction adviser has powers limited to investment decisions regarding trust assets article x provides that the distribution adviser serves in a fiduciary capacity and has the full power to direct the trustee to distribute income and principal of trust pursuant to the provisions of trust and subject plr-130492-14 to grantor’s veto powers the trust_protector has the power to remove any distribution adviser and appoint a successor article xi provides that the cda holds the powers granted in article i including the power to consent or not to grantor’s veto of charity and charity quarterly distributions the trust_protector has the power to remove any cda and appoint a successor article xii provides that the trust_protector has the powers already described and other powers that do not include any powers regarding distributions from trust article xxi b provides in relevant part that an individual is considered incapacitated if i during any period that such individual is legally incompetent as determined by a court of competent jurisdiction ii during any period that a conservator or guardian for such individual has been appointed based upon his or her incapacity or iii during any period that a certification is in effect that has been issued by two physicians who have examined the individual at issue and who certify to the trustee that such individual as a result of illness accident age or other cause no longer has the capacity to act prudently and effectively in financial affairs grantor proposes to release the grantor’s sole objective veto powers and retain only the grantor’s consent veto power and grantor’s sole discretionary veto powers grantor also proposes to transfer property in excess of dollar_figurea to trust proposed transfer after she releases the grantor’s sole objective veto powers grantor’s consent veto power and grantor’s sole discretionary veto powers will be referred to collectively as grantor’s veto powers further grantor intends to execute a springing durable special power_of_attorney to permit the attorney-in-fact to exercise grantor’s veto powers only at such times grantor is incapacitated as defined in trust the draft document provides that in the event that grantor is incapacitated as defined under article xxi b of trust an attorney-in-fact will have the authority and the duty either to exercise or to decline to exercise any veto powers held by grantor under trust the attorney-in-fact cannot serve as a director trustee or officer of one of grantor’s charities and cannot be a_trust adviser the power_of_attorney will become effective upon the grantor’s incapacity and shall terminate upon grantor’s death grantor reserves the right to revoke the power_of_attorney at a time when the grantor is not incapacitated the language of trust will be amended to provide that at any time an attorney-in-fact is named and grantor is incapacitated for all purposes the attorney-in-fact shall have all the same rights powers duties and authorities with respect to the exercise and non-exercise of the veto powers as are held by grantor under trust the attorney-in-fact shall not have the power to release any of the veto powers in grantor’s name you have requested the following rulings plr-130492-14 the date transfer and the proposed transfer of property to trust by grantor is and will be treated as wholly incomplete gifts for gift_tax purposes when grantor releases her right to exercise her grantor’s objective veto powers but retains grantor’s veto powers and grantor’s testamentary power such release will not result in a completed_gift of the date transfer or the proposed transfer of property to trust should grantor become incapacitated and unable to exercise the grantor’s veto powers and the grantor’s testamentary power such incapacity will not result in a completed_gift of the date transfer or the proposed transfer of property to trust should grantor execute a springing durable_power_of_attorney which gives the attorney-in-fact the authority to exercise grantor’s veto powers the existence of the springing durable_power_of_attorney will not result in a completed_gift of the date transfer or the proposed transfer of property to trust sec_2702 does not apply to the date transfer or the proposed transfer of property to trust by grantor law and analysis ruling sec_2501 imposes a tax for each calendar_year on the transfer of property by gift by an individual sec_2511 provides that the tax imposed by sec_2501 applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition whether for the donor's own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 also provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor's descendants the example concludes that no portion of plr-130492-14 the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer's gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer's gift was complete in when he relinquished his right to change the beneficiaries of the trust a grantor's retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantor retained grantor’s testamentary power to appoint the property in trust to spouse grantor’s charities and two other named charitable organizations under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly based upon the facts submitted and the representations made we conclude that the retention of this power causes the date transfer to trust to be incomplete with respect to the remainder_interest in trust if grantor retains the grantor’s testamentary power the proposed transfer of property will also be an incomplete_gift of the remainder in trust if at any time grantor releases the grantor’s testamentary power such release will result in a completed_gift of the remainder_interest in trust in this case the date transfer is also an incomplete_gift of the lifetime interests in trust for the following reasons grantor retained the grantor’s sole discretionary plr-130492-14 veto powers to veto discretionary distributions to grantor’s charities and quarterly support and contingent distributions to grantor grantor also retained the grantor’s sole objective veto powers and grantor’s consent veto power to veto quarterly distributions to grantor’s charities pursuant to these powers at the time of the date transfer to trust grantor retained the right to veto any distributions of income and principal to any one or more of grantor’s charities during her lifetime under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries in this case grantor's sole discretionary veto powers grantor’s consent veto power and grantor’s sole objective veto powers give grantor the power to change the interests of the beneficiaries during her lifetime accordingly based upon the facts submitted and the representations made we conclude that the retention of these veto powers causes the date transfer to trust to be an incomplete_gift of the lifetime interests in trust ruling grantor proposes to release the grantor’s sole objective veto powers while retaining the grantor’s consent veto power and grantor’s sole discretionary veto powers grantor’s veto powers grantor’s sole discretionary veto powers give grantor the power to veto any charity discretionary distributions to grantor’s charities during grantor’s lifetime grantor’s consent veto power gives grantor the power to veto any quarterly distribution to grantor’s charities for any reason or for no reason with the consent of the cda during grantor’s lifetime further if the value of the trust assets in the immediate preceding quarter falls below a certain amount determined under article i b iv grantor may exercise this veto power without the consent of the cda sec_25_2511-2 provides that a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides that a coholder of the power has no adverse_interest merely because of his joint possession of the power or merely because he is a permissible appointee under a power at least one court has considered whether a person’s interest in a_trust was a substantial adverse_interest for purposes of sec_25_2511-2 in 195_f2d_999 1st cir the donor reserved the power_to_revoke a_trust in conjunction with his half-brother or his mother the trust provided for income to donor’s wife during her lifetime and upon her death the principal of the trust would be paid to his mother for her life and upon her death to his half-brother the court concluded that since the mother and the half-brother had no interest in the life_estate for the wife that neither the interests of the mother or the plr-130492-14 half-brother were adverse to the withdrawal of the life_estate for the wife the court stated that the regulation the predecessor to sec_25_2511-2 recognizes realistically that when the donor has reserved the power to withdraw any of the donated interests with the concurrence of some third person who has no interest in the trust adverse to such withdrawal it is in substance the same as if the donor had reserved such power in himself alone see also 57_tc_627 paxton’s interest in the trust whether regarded as substantial or insignificant would not be adversely affected by the exercise or nonexercise of the power he possesses with respect to the trust because his interest will not change or be adversely affected for purposes of the predecessor of sec_672 8_tc_213 revocation of trust by grantor with wife’s consent would not be an act that is adverse to the interests of the wife for purposes of the predecessor of sec_672 the internal_revenue_service considered the same question in the context of sec_2041 in revrul_79_63 1979_1_cb_102 decedent's spouse who died in created a testamentary_trust under the terms of which the trust income was payable to the decedent for life and the remainder was payable equally to the decedent's children or to any one of such children as the decedent might direct by will in addition the trust terms provided that at any time during the decedent's lifetime the decedent with the consent of a one of the decedent's children could direct the trustees to distribute all or any part of the trust property to anyone including the decedent under the terms of the governing instrument the decedent and a were trustees of the trust and they continued in those positions until the decedent's death in the question presented was whether any amount of the trust property is includible in the decedent's gross_estate under sec_2041 as the value of property subject_to a general_power_of_appointment in view of the fact that the power held by the decedent was exercisable only with the consent of a the revenue_ruling concludes that a is a taker in default not of the lifetime power in which a has a power of consent but rather of the testamentary power exercisable solely by the decedent in such a situation a would not have necessarily been in a better economic position after the decedent's death by refusing to exercise the power in favor of the decedent during the decedent's lifetime thus the fact that a might survive the decedent and receive an interest in the property if the decedent failed to exercise the testamentary power in favor of persons other than a does not elevate a's interest as a consenting party of the lifetime power to a substantial adverse_interest in this case spouse’s interest will be adverse to the exercise of grantor’s consent veto power if the exercise of grantor’s consent veto power will diminish or eliminate spouse’s significant economic_interest in the property subject_to grantor’s power in this case grantor reserved the power to veto quarterly distributions to charity and charity spouse has no interest adverse to such distributions spouse is merely a permissible appointee of the remainder of trust spouse’s interest as a permissible appointee does not elevate spouse's interest as a consenting party of the lifetime power to a substantial adverse_interest further spouse’s consent to grantor’s plr-130492-14 veto would benefit the permissible appointees including spouse because a veto of a quarterly distribution would result in the accumulation of that amount in trust further spouse’s interest as a permissible appointee is not a substantial interest for purposes of sec_25_2511-2 sec_25_2514-3 provides that an interest adverse to the exercise of a power is considered as substantial if its value in relation to the total value of the property subject_to the power is not insignificant several cases in which the courts considered whether a contingent_remainder is a substantial interest for purposes of the predecessor of sec_672 concluded that a contingent_remainder is not a substantial interest see 225_f2d_621 8th cir 19_tc_672 8_tc_213 4_tc_286 669_fsupp_751 d c w d va the same rationale applies in determining whether spouse’s interest as a permissible appointee is a substantial interest spouse is only one of four permissible appointees in default of the exercise of grantor’s testamentary power trust assets will be distributed to charity and charity we conclude that spouse’s interest as a permissible appointee is insignificant for purposes of sec_25_2511-2 accordingly we conclude that spouse’s interest is not an adverse substantial interest for purposes of sec_25_2511-2 if spouse ceases to serve as cda a five-member llc will serve as cda the llc and none of its members are income or remainder beneficiaries of trust therefore the llc members do not have substantial adverse interests to the exercise of grantor’s consent veto power further both spouse and the successor cda are prohibited from exercising the consent power if spouse or the successor cda have substantial adverse interests to the grantor consent veto power in such a case the trust_protector has the power to consent to this power the trust_protector is not a beneficiary of the trust and does not have a substantial adverse_interest to the exercise of grantor’s consent veto power in conclusion because the cda either spouse or the llc or in default the trust_protector does not have a substantial adverse_interest to grantor’s consent veto power under sec_25_2511-2 grantor is considered as having herself the power to veto any charitable quarterly distribution to grantor’s charities for any reason and for no reason accordingly based upon the facts submitted and representations made we conclude that the proposed transfer of property to trust will be an incomplete_gift assuming grantor retains grantor’s consent veto power grantor’s sole discretionary veto powers and grantor’s testamentary power furthermore while the proposed transfer of property to trust will not result in a completed_gift a distribution from trust to grantor’s charities will be a completed_gift from grantor to that charity a distribution from trust to grantor will be considered as a return_of_capital and will not be considered a completed_gift upon grantor's death the plr-130492-14 fair_market_value of the property in trust is includible in grantor's gross_estate for federal estate_tax purposes ruling state law the state where trust is sited allows the trustor’s state of residence in this case state to control the guardianship of property state statute in revrul_75_350 1975_2_cb_366 husband’s will provided for the creation of a_trust for the benefit of his wife the trust granted wife a testamentary general_power_of_appointment under state law wife was legally incapable of executing a will from the time her husband died until her death upon wife’s death the trust passed to her children in default of wife’s power_of_appointment over the trust the service considered whether the trust principal was includible in the wife’s gross_estate under sec_2042 in view of her legal incapacity during the existence of the trust the service stated that the requirements of sec_2041 require only that the decedent has at the time of death a general_power_of_appointment which is exercisable further the practical inability to exercise or release a general power did not affect the existence of the power at her death therefore incapacity is immaterial in view of the requirements of sec_2041 the service ruled that the trust property was includible in wife’s gross_estate because wife held a general_power_of_appointment under sec_2041 see also revrul_55_518 1955_2_cb_384 the service ruled that property subject_to the power to alter amend revoke or terminate is includible in the powerholder’s gross_estate if the power exists at the date of death regardless of the manner in which it may be exercised in 613_f2d_1213 2nd cir aff’g 71_tc_351 husband’s will established a_trust for the benefit of his wife decedent and granted decedent a testamentary general_power_of_appointment over the trust subsequent to husband’s death a state court declared decedent incompetent decedent lacked capacity from husband’s death until her death the service included the trust property in decedent’s gross_estate under sec_2041 decedent’s counsel claimed that because of the decedent's incompetence she was never able after her husband's death to exercise the power vested in her by his will and thus the property subject_to the general_power_of_appointment should not be included in decedent’s estate under sec_2041 the court_of_appeals held that on the basis of statutory language legislative_history of sec_2041 administrative interpretation and case law that when an instrument has conferred a testamentary power which by its terms can be exercised in favor of the donee’s estate the property subject plr-130492-14 to the power is part of the donee’s gross_estate even though the donee by virtue of incompetency was unable to make a valid will at any time after the power was granted id pincite2 see also 630_f2d_340 5th cir 597_f2d_382 3rd cir 432_f2d_1278 9th cir sec_25_2511-2 provides that if upon the transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case emphasis added the statute and regulations under sec_2511 require only that the donee reserve the power to make the gift incomplete in this case as in revrul_75_350 and the cases cited above grantor if incapacitated will continue to have reserved the grantor’s veto powers and grantor’s testamentary power incapacity is not a release or termination of grantor’s veto powers for purposes of sec_25_2511-2 the practical inability of grantor to exercise his veto powers due to his incapacity does not affect the existence of the power accordingly as in revrul_75_350 and the cases cited above grantor’s incapacity will not cause a completed_gift to occur provided the grantor does not release such powers prior to incapacity accordingly based on the facts submitted and the representations made we conclude that should grantor become incapacitated and unable to exercise grantor’s veto powers or grantor’s testamentary power her incapacity will not result in a completed_gift of the date transfer or the proposed transfer of property to trust on the date when grantor is declared incapacitated assuming grantor has not released any of these powers prior to being declared incapacitated ruling grantor intends to execute a springing durable_power_of_attorney that would be effective if grantor becomes incapacitated as defined in trust and would give the attorney-in-fact grantor’s veto powers in 387_us_456 the court held that where the issue involved is the determination of property interests for federal estate_tax purposes and the determination is based on state law the highest court of the state is the best authority on its own law the court held that if there is no decision by the state’s highest court federal authorities must apply what they find to be the state law after giving proper regard to relevant rulings of other courts in this case state case law and statutory law recognize the validity of a durable_power_of_attorney and state statutory law specifies the rights or limitations of the attorney-in- fact with respect to veto powers plr-130492-14 in case the court addressed whether gifts of the principal’s property made by an attorney-in-fact under a durable_power_of_attorney were includible in the principal’s gross_estate where the power_of_attorney did not authorize the giving of such gifts the court stated that the legal effect of gifts made pursuant to a power_of_attorney is determined according to state law case in case the court stated that the court must decide state law issues as it concludes the state supreme court would citing estate of bosch the court defined a power_of_attorney as a written authorization to an agent to perform specified acts in behalf of his principal citing case id when a power_of_attorney is executed a fiduciary relationship between the principal and the attorney-in-fact is created id there are many obligations which arise under such a relationship not the least of which is the agent’s duty to act exclusively in the interest of the principal and forego any personal advantage aside from compensation in the exercise of his or her work id while a power_of_attorney is merely a formalized agency agreement it must be in writing in order to be valid and effective id the court concluded that the power_of_attorney did not authorize the giving of the gifts and therefore under state law the gifts were void and thus includible in the principal’s gross_estate under state statute a fiduciary includes an attorney-in-fact under a power_of_attorney state statute provides that in a power_of_attorney a principal may grant authority to an attorney-in-fact to act on the principal’s behalf with respect to all lawful subjects and purposes or with respect to one or more express subjects or purposes the attorney-in-fact may be granted authority with regard to the principal’s property personal care or any other matter all acts done by an attorney-in-fact pursuant to a durable_power_of_attorney during any period of incapacity of the principal have the same effect and inure to the benefit of and bind the principal and the principal’s successors in interest as if the principal had capacity state statute an attorney-in-fact has a duty to act solely in the interest of the principal state statute if a power_of_attorney grants limited authority to an attorney-in-fact the attorney-in-fact has the authority granted in the power_of_attorney as limited with respect to permissible actions subjects or purposes state statute a power_of_attorney may not be construed to grant authority to an attorney-in-fact to perform the power_to_revoke a gift of the principal’s property in trust unless expressly authorized in the power_of_attorney state statute in this case state statute authorizes the principal to execute a springing durable_power_of_attorney under state statute if the instrument expressly provides that the attorney-in-fact may veto a gift the instrument is construed to grant such powers therefore in this case the execution of a springing durable_power_of_attorney that expressly gives the attorney-in-fact the authority to exercise grantor's veto powers is valid under state law pursuant to state statute the attorney-in-fact acts on behalf of the principal the fact that an attorney-in-fact is acting on the grantor’s behalf does not cause grantor to release or terminate such veto powers and therefore the plr-130492-14 execution of the springing durable_power_of_attorney is not a release or termination of grantor’s veto powers under sec_25_2511-2 further if grantor is declared incapacitated and the springing durable_power_of_attorney becomes effective grantor’s incapacity will not cause a release or termination of grantor’s veto powers see ruling finally if the attorney-in-fact exercises one of grantor’s veto powers such exercise does not result in a distribution from trust the attorney-in-fact is acting on behalf of the grantor and the exercise of the veto power not does result in a completed_gift however if the attorney-in-fact does not exercise such veto powers and the trustee distributes trust income and or principal to any beneficiary other than to grantor or on grantor’s behalf the distribution is a completed_gift by grantor and not the attorney-in-fact even though grantor is incapacitated at the time accordingly based on the facts presented and the representations made we conclude that the existence of the springing durable_power_of_attorney does not result in a completed_gift of the date transfer or the proposed transfer of property to trust ruling sec_2702 provides special valuation rules in the case of transfers of interests in trusts under sec_2702 solely for the purpose of determining whether a transfer of an interest in trust to or for the benefit of a member_of_the_transferor's_family is a gift and the value of such transfer the value of any interest in such trust retained by the transferor or any applicable_family_member as defined in sec_2701 shall be determined as provided in sec_2702 sec_2702 provides that the value of any retained_interest that is not a qualified_interest shall be treated as being zero the value of any retained_interest that is a qualified_interest is determined under sec_7520 sec_2702 provides that sec_2702 does not apply to a transfer if the transfer is an incomplete_gift sec_2702 defines an incomplete_gift as any transfer which would not be treated as a gift whether or not consideration was received for such transfer sec_25_2702-1 of the gift_tax regulations provides that sec_2702 does not apply to a transfer no portion of which would be treated as a completed_gift without regard to any consideration received by the transferor in this case the date transfer to trust by grantor is incomplete as to both the lifetime interests and the remainder interests therefore no portion of the transfer is a completed_gift under sec_2702 sec_2702 does not apply to a transfer that is an incomplete_gift accordingly based on the facts submitted and the representations plr-130492-14 made we conclude that sec_2702 does not apply to the date transfer to trust by grantor and if grantor retains both the grantor’s consent veto power and the grantor’s testamentary power at the time of the proposed transfer of property to trust we conclude that sec_2702 will not apply to this transfer in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to your authorized representatives except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter the rulings contained in this letter are based upon information and representations submitted by the taxpayer and accompanied by a penalty of perjury statement executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination this ruling is directed only to the taxpayer requesting it sec_6110 provides that it may not be used or cited as precedent sincerely _________________________ lorraine e gardner senior counsel branch office of the associate chief_counsel passthroughs and special industries enclosures copy for sec_6110 purposes copy of this letter


internal_revenue_service number release date index number department of the treasury washington dc person to contact ------------------------------ id no ------------ --------- telephone number ---------------------- refer reply to cc psi b04 - plr-120842-16 date date ------------------------ --------------------------------- -------------------------------------- --------------------------- legend date grantor distribution committee -------------------- ------------------------------------------------------- ----------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------- --------------------------------------------------- son son daughter daughter daughter granddaughter granddaughter trust ------------------------------------------------------- ------------------------------------------------------- ---------------------------------------------------------- ------------------------------------------------- --------------------------------------------------- ----------------------------------------- ------------------------------------------------------------ ------------------------------------------------------------------------------ -------------------------------------------------------------------------------------- foundation state trustee permissible beneficiaries ------------------------------------------------------------------------------ -------------------------------------------------------- -------------- -------------------------------------------------------- ------------------------------------- dear ------------------ plr-120842-16 this letter responds to your authorized representative’s letter of date requesting rulings under sec_671 sec_2501 sec_2514 and sec_2041of the internal_revenue_code the facts submitted and representations made are as follows on date grantor created an irrevocable_trust trust for the benefit of himself his descendants and foundation permissible beneficiaries a corporate trustee trustee is the sole trustee trust is represented to be a domestic_trust sited in state and pursuant to the trust agreement is governed by the laws of state during grantor’s lifetime trustee must distribute such amounts of net_income and or principal of trust to grantor and the permissible beneficiaries as directed by the distribution committee and or grantor as follows trustee pursuant to the direction of a majority of the distribution committee with the written consent of grantor shall distribute to or for the benefit of the permissible beneficiaries all or any portion of the net_income and principal of trust grantor’s consent power trustee pursuant to the direction of all of the distribution committee members shall distribute to any permissible beneficiaries all or any portion of the net_income or principal of trust unanimous member power and at any time trustee shall distribute to any of the permissible beneficiaries other than grantor and foundation all or any portion of the principal of trust as the grantor directs for the health education maintenance or support of the permissible beneficiaries grantor’s sole power such distribution power shall be exercisable by the grantor in a nonfiduciary capacity the distribution committee may appoint income or principal equally or unequally and to or for the benefit of any one or more of the permissible beneficiaries of trust to the exclusion of others any net_income not distributed by trustee will be accumulated and added to principal upon the death of grantor trustee shall distribute the remaining property of trust as grantor appoints in grantor’s last will in any manner and in favor of any person other than grantor’s estate the grantor’s creditors or the creditors of grantor’s estate grantor’s testamentary power any remaining property held in trust that has not been effectively appointed by will shall be distributed to trusts for the benefit of grantor’s descendants the distribution committee is initially composed of son son daughter daughter and daughter trust provides that at all times at least two adult plr-120842-16 individuals who are permissible beneficiaries other than grantor must be members of the distribution committee if at any time there are fewer than three adult members serving on the distribution committee then the vacancy will be filled in the following order first by granddaughter and then by granddaughter grantor shall not serve as a member of the distribution committee the members of the distribution committee shall serve or act in a non-fiduciary capacity the distribution committee ceases to exist upon the earlier of the death of grantor or the date the distribution committee has less than two members other than grantor if the distribution committee ceases to exist during grantor’s life distributions to the beneficiaries may only be made to the grantor’s descendants pursuant to the grantor’s sole power the permissible beneficiaries grantor and trustee are all united_states persons within the meaning of sec_7701 trust provides that grantor also has the authority and responsibility exercisable solely in a fiduciary capacity to direct the trustee of the trust with respect to all decisions of the trust relating to the investment management and voting powers granted to the trustee with respect to trust property you have requested the following rulings as long as the distribution committee is serving no portion of the items of income deductions and credits against tax of trust shall be included in computing the taxable_income deductions and credits of grantors or any member of the distribution committee under sec_671 the contribution of property to trust by grantor will not be a completed_gift subject_to federal gift_tax any distribution_of_property by the distribution committee from trust to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee any distribution_of_property by the distribution committee from trust to any beneficiary of trust other than to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee the members of the distribution committee do not possess a general_power_of_appointment within the meaning of sec_2041 and accordingly trust will not be includible in any distribution committee member’s gross_estate under sec_2041 ruling sec_671 provides that where it is specified in subpart e of part i of subchapter_j that the grantor or another person shall be treated as the owner of any portion of a plr-120842-16 trust there shall then be included in computing the taxable_income and credits of the grantor or the other person those items of income deductions and credits against tax of the trust which are attributable to that portion of the trust to the extent that such items would be taken into account under chapter in computing taxable_income or credits against the tax of an individual sec_672 provides for purposes of subpart e the term adverse_party means any person having a substantial_beneficial_interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses respecting the trust sec_673 through specify the circumstances under which the grantor is treated as the owner of a portion of a_trust sec_673 provides that the grantor shall be treated as the owner of any portion of a_trust in which the grantor has a reversionary_interest in either the corpus or the income therefrom if as of the inception of that portion of the trust the value of such interest exceeds five percent of the value of such portion sec_674 provides in general that the grantor shall be treated as the owner of any portion of a_trust in respect of which the beneficial_enjoyment of the corpus or the income therefrom is subject_to a power of disposition exercisable by the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to the powers described in sec_674 regardless of whom held sec_674 provides that sec_674 shall not apply to a power exercisable only by will other than a power in the grantor to appoint by will the income of the trust where the income is accumulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse_party or both without the approval or consent of any adverse_party sec_674 provides that sec_674 shall not apply to a power to distribute corpus to or for a beneficiary provided that the power is limited by a reasonably_definite_standard under sec_675 and applicable regulations the grantor is treated as the owner of any portion of a_trust if under the terms of the trust agreement or circumstances attendant on its operation administrative control is exercisable primarily for the benefit of the grantor rather than the beneficiary of the trust plr-120842-16 sec_675 provides that the grantor shall be treated as the owner of any portion of a_trust in respect of which a power_of_administration is exercisable in a nonfiduciary capacity by any person without the approval or consent of any person in a fiduciary capacity for purposes of sec_675 the term power_of_administration includes a a power to vote or direct the voting of stock or other_securities of a corporation in which the holdings of the grantor and the trust are significant from the viewpoint of voting control and b a power to control the investment of the trust funds either by directing investments or reinvestments or by vetoing proposed investments or reinvestments to the extent that the trust funds consist of stocks or securities of corporations in which the holdings of the grantor and the trust are significant from the viewpoint of voting control under sec_675 the power_of_administration includes the power to control the investment of the trust funds either by directing investments or reinvestment sec_1_675-1 of the income_tax regulations provides that if a power is not exercisable by a person as trustee the determination of whether the power is exercisable in a fiduciary or a nonfiduciary capacity depends on all the terms of the trust and the circumstances surrounding its creation and administration sec_676 provides that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under any other provision of part i subchapter_j chapter where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a nonadverse_party or both sec_677 provides in general that the grantor shall be treated as the owner of any portion of a_trust whether or not he is treated as such owner under sec_674 whose income without the approval or consent of any adverse_party is or in the discretion of the grantor or a nonadverse_party or both may be distributed to the grantor or the grantor's spouse held or accumulated for future distribution to the grantor or the grantor's spouse or applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse sec_678 provides that a person other than the grantor shall be treated as the owner of any portion of a_trust with respect to which such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself or such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would within the principles of inclusive subject a grantor of a_trust to treatment as the owner thereof sec_679 provides that a united_states_person who directly or indirectly transfers property to a foreign_trust shall be treated as the owner for his taxable_year of the portion of such trust attributable to such property if for such year there is a united_states_beneficiary of any portion of such trust plr-120842-16 accordingly based solely on the facts submitted and the representations made we conclude that an examination of trust reveals none of the circumstances that would cause grantor to be treated as the owner of any portion of trust under sec_673 sec_674 sec_676 or sec_677 as long as the distribution committee remains in existence also as long as trust is a domestic_trust grantor will not be treated as the owner of any portion of trust under sec_679 we cannot determine at this time whether grantor will be treated as the owner of trust under sec_675 the circumstances surrounding the administration of trust determine whether grantor holds the power_of_administration in a fiduciary capacity this is a question of fact the determination of which must be deferred until the federal_income_tax returns of the parties involved have been examined by the office of the district_director having examination jurisdiction over the returns further because none of the members of the distribution committee has a power exercisable by himself to vest trust income or corpus in himself none shall be treated as the owner of trust under sec_678 ruling sec_2 and sec_2501 provides that a tax is imposed for each calendar_year on the transfer of property by gift during such calendar_year by any individual resident or nonresident sec_2511 provides that the gift_tax applies whether the transfer is in trust or otherwise whether the gift is direct or indirect and whether the property is real or personal tangible or intangible sec_25_2511-2 of the gift_tax regulations provides that a gift is complete as to any property or part thereof or interest therein of which the donor has so parted with dominion and control as to leave in the donor no power to change its disposition whether for his own benefit or for the benefit of another but if upon a transfer of property whether in trust or otherwise the donor reserves any power over its disposition the gift may be wholly incomplete or may be partially complete and partially incomplete depending upon all the facts in the particular case accordingly in every case of a transfer of property subject_to a reserved power the terms of the power must be examined and its scope determined sec_25_2511-2 provides an example where the donor transfers property to another in trust to pay the income to the donor or accumulate it in the discretion of the trustee and the donor retains a testamentary power to appoint the remainder among the donor's descendants the regulation concludes that no portion of the transfer is a completed_gift however if the donor had not retained a testamentary_power_of_appointment but instead provided that the remainder should go to x or his heirs the plr-120842-16 entire transfer would be a completed_gift sec_25_2511-2 provides that a gift is incomplete in every instance in which a donor reserves the power to revest the beneficial title in himself or herself a gift is also incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by the donor in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom a trustee as such is not a person having an adverse_interest in the disposition of the trust property or its income sec_25_2511-2 provides that the relinquishment or termination of a power to change the beneficiaries of transferred property occurring otherwise than by death of the donor is regarded as the event which completes the gift and causes the gift_tax to apply sec_25_2511-2 provides that if a donor transfers property to himself as trustee or to himself and some other person not possessing a substantial adverse_interest as trustees and retains no beneficial_interest in the trust property and no power over it except fiduciary powers the exercise or nonexercise of which is limited by a fixed_or_ascertainable_standard to change the beneficiaries of the transferred property the donor has made a completed_gift and the entire value of the transferred property is subject_to the gift_tax sec_25_2511-2 does not define substantial adverse_interest sec_25_2514-3 provides in part that a taker in default of appointment under a power has an interest that is adverse to an exercise of the power sec_25_2514-3 also provides that a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in 308_us_39 the taxpayer created a_trust for the benefit of named beneficiaries and reserved the power_to_revoke the trust in whole or in part and to designate new beneficiaries other than himself six years later in the taxpayer relinquished the power_to_revoke the trust but retained the right to change the beneficiaries in the taxpayer relinquished the right to change the beneficiaries the court stated that the taxpayer’s gift is not complete for purposes of the gift_tax when the donor has reserved the power to determine those others who would ultimately receive the property accordingly the court held that the taxpayer's plr-120842-16 gift was complete in when he relinquished his right to change the beneficiaries of the trust a’s retention of a power to change the beneficial interests in a_trust causes the transfer to the trust to be incomplete for gift_tax purposes even though the power may be defeated by the actions of third parties 37_tc_897 see also 51_tc_352 in this case grantor retained the grantor’s consent power over the net_income and principal of trust under sec_25_2511-2 a donor is considered as himself having a power if it is exercisable by him in conjunction with any person not having a substantial adverse_interest in the disposition of the transferred property or the income therefrom the distribution committee members are not takers in default for purposes of sec_25_2514-3 they are merely co-holders of the power under sec_25_2514-3 a co-holder of a power is only considered as having an adverse_interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate in this case the distribution committee ceases to exist upon the death of grantor accordingly the distribution committee members do not have interests adverse to grantor under sec_25_2514-3 and for purposes of sec_25_2511-2 therefore grantor is considered as possessing the power to distribute net_income and principal to any beneficiary himself because he retained the grantor’s consent power grantor also retained the grantor’s sole power over the principal of trust under sec_25_2511-2 a gift is incomplete if and to the extent that a reserved power gives the donor the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves unless the power is a fiduciary power limited by a fixed_or_ascertainable_standard in this case the grantor’s sole power gives grantor the power to change the interests of the beneficiaries even though grantor's power is limited by an ascertainable_standard ie health education maintenance and support grantor's power is not a fiduciary power accordingly the retention of the grantor’s consent power and the grantor’s sole power causes the transfer of property to trust to be incomplete for federal gift_tax purposes further grantor retained the grantor’s testamentary power to appoint the property in trust to any persons other than to the grantor’s estates grantor’s creditors or the creditors of grantor’s estates under sec_25_2511-2 the retention of a testamentary power to appoint the remainder of a_trust is considered a retention of dominion and control_over the remainder accordingly the retention of this power causes the transfer of property to trust to be incomplete with respect to the remainder for federal tax purposes finally the distribution committee members possess the unanimous member power over net_income and principal this power is not a condition_precedent to grantor’s powers grantor’s powers over the net_income and principal are presently plr-120842-16 exercisable and not subject_to a condition_precedent grantor retains dominion and control_over the net_income and principal of trust until the distribution committee members exercise their unanimous member power accordingly the unanimous member power does not cause the transfer of property to be complete with respect to the income_interest for federal gift_tax purposes see 37_tc_897 51_tc_352 accordingly based on the facts submitted and the representations made we conclude that the contribution of property to trust by grantor is not a completed_gift subject_to federal gift_tax any distribution from trust to grantor is merely a return of grantor’s property therefore we conclude that any distribution_of_property from trust by the distribution committee to grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further upon the death of grantor the fair_market_value of the property in trust is includible in his gross_estate for federal estate_tax purposes ruling sec_4 and sec_2514 provides that the exercise or release of a general_power_of_appointment created after date shall be deemed a transfer of property by the individual possessing such power sec_2514 provides that the term general_power_of_appointment means a power which is exercisable in favor of the individual possessing the power possessor the possessor's estate the possessor's creditors or the creditors of the possessor's estate sec_25_2514-1 provides that a power_of_appointment is not a general power if by its terms it is exercisable only in favor of one or more designated persons or classes other than the possessor or his creditors or the possessor's estate or the creditors of the estate or expressly not exercisable in favor or the possessor or his creditors or the possessor’s estate or the creditors of his estate sec_2514 provides that in the case of a power_of_appointment created after date if the power is exercisable by the possessor only in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2514 provides that in the case of a power_of_appointment created after date if the power is not exercisable by the possessor except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the possessor such power shall not be deemed a general_power_of_appointment for purposes of plr-120842-16 sec_2514 a person who after the death of the possessor may be possessed of a power_of_appointment with respect to the property subject_to the possessor's power which he may exercise in his own favor shall be deemed as having an interest in the property and such interest shall be deemed adverse to such exercise of the possessor's power sec_25_2514-3 provides in part that a coholder of a power has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the possessor's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y's death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y sec_2041 provides that the value of the gross_estate shall include the value of all property to the extent of any property with respect to which the decedent has at the time of death a general_power_of_appointment created after date or with respect to which the decedent has at any time exercised or released such a power by a disposition which is of such nature that if it were a transfer of property owned by the decedent such property would be includible in the decedent's gross_estate under sec_2035 to inclusive under sec_2041 the term general_power_of_appointment is defined in relevant part to mean a power which is exercisable in favor of the decedent his estate his creditors or the creditors of his estate sec_2041 provides however that in the case of a power_of_appointment created after date if the power is not exercisable by the decedent except in conjunction with the creator of the power such power is not deemed a general_power_of_appointment sec_2041 provides however that in the case of a power_of_appointment created after date if the power is not exercisable by the decedent except in conjunction with a person having a substantial interest in the property subject_to the power which is adverse to the exercise of the power in favor of the decedent -- such power shall not be deemed a general_power_of_appointment for purposes of sec_2041 a person who after the death of the decedent may be possessed of a power_of_appointment with respect to the property subject_to the decedent's power which he may exercise in his own favor shall be deemed as having plr-120842-16 an interest in the property and such interest shall be deemed adverse to such exercise of the decedent's power sec_20_2041-3 of the estate_tax regulations provides in part that a co-holder of a power_of_appointment has no adverse_interest merely because of his joint possession of the power nor merely because he is a permissible appointee under a power however a co-holder of a power is considered as having an adverse_interest where he may possess the power after the decedent's death and may exercise it at that time in favor of himself his estate his creditors or the creditors of his estate thus for example if x y and z held a power jointly to appoint among a group of persons which includes themselves and if on the death of x the power will pass to y and z jointly then y and z are considered to have interests adverse to the exercise of the power in favor of x similarly if on y's death the power will pass to z z is considered to have an interest adverse to the exercise of the power in favor of y the power held by the distribution committee members under the grantor’s consent power is a power that is exercisable only in conjunction with the creator grantor accordingly under sec_2514 and sec_2041 the distribution committee members do not possess general powers of appointment by virtue of possessing this power further the power held by the distribution committee members under the unanimous member power is not a general_power_of_appointment for purposes of sec_2514 and sec_2041 as in the examples in sec_25_2514-3 and c the distribution committee members have substantial adverse interests in the property subject_to this power accordingly any distribution made from trust to a beneficiary other than to grantor pursuant to the exercise of these powers the grantor's consent power and the unanimous member power are not gifts by the distribution committee members instead such distributions are gifts by grantor based on the facts and representations made we conclude that any distribution_of_property from trust by the distribution committee to any beneficiary of trust other than grantor will not be a completed_gift subject_to federal gift_tax by any member of the distribution committee further we conclude that any distribution_of_property from trust to a beneficiary other than to grantor will be completed gifts by grantor finally we conclude that the powers held by the distribution committee are not general powers of appointment for purposes of sec_2041 and accordingly no member of the distribution committee upon his or her death will include in his or her estate any property held in trust because such member is deemed to have a general_power_of_appointment within the meaning of sec_2041 over property held in trust except as specifically ruled herein we express no opinion on the federal tax consequences of the transaction under the cited provisions or under any other provisions of the code specifically we express no opinion on the trust provisions plr-120842-16 permitting trustee to distribute income or principal to trustees of other trusts decanting this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely enclosure copy for sec_6110 purposes lorraine e gardner lorraine e gardner senior counsel branch office of associate chief_counsel passthroughs and special industries


department of the treasury int ernal revenue service washington d c date o f f i c e o f c h i e f c o u n s e l number release date cc pa apjp preno-105361-02 uilc 6050i internal_revenue_service national_office chief_counsel_advice memorandum for anti-money laundering specialist sb_se compliance from pamela w fuller senior technician reviewer cc pa apjp subject requirement to issue information returns under sec_6050i this chief_counsel_advice addresses how sec_6050i of the internal_revenue_code code applies to retail and wholesale scenarios in accordance with sec_6110 this chief_counsel_advice should not be cited as precedent scenario a retail auto auction sells a vehicle to customer b the vehicle has a selling_price of dollar_figure customer b indicates he will pay in cash currency to settle the transaction when the sales manager is gathering information necessary to complete form_8300 customer b decides to change the form of payment from currency to money orders he takes back the currency and provide sec_50 money orders each with a face value of dollar_figure as full payment for the vehicle scenario same as scenario except the business is a wholesale auto auction law and analysis sec_6050i of the code provides that any person who is engaged in a trade_or_business and who in the course of such trade_or_business receives more than dollar_figure in cash in one transaction or or more related transactions shall make the return described in sec_6050i with respect to such transaction or related transactions at such time as the secretary may by regulations prescribe form_8300 is the form required to comply with this provision according to sec_6050i of the code every person required to make a return under subsection a shall furnish to each person whose name is required to be set forth in such return a written_statement that shall be furnished to the person on or before january of the year following the calendar_year for which the return under subsection a was required to be made sec_1_6050i-1 and of the income_tax regulations regulations describes cash as a cashier’s check bank draft traveler’s check or money order having a face_amount of not more than dollar_figure received in a designated reporting transaction or received in any transaction in which the recipient knows that such instrument is being used in an attempt to avoid the reporting of the transaction under sec_6050i and this section sec_1_6050i-1 defines a designated reporting transaction as a retail_sale of a consumer durable a collectible or a travel or entertainment activity a consumer durable means an item of tangible_personal_property of a type that is suitable under ordinary usage for personal consumption or use that can reasonably be expected to be useful for at least year under ordinary usage and that has a sales_price of more than dollar_figure see sec_1_6050i-1 sec_1_6050i-1 of the regulations states that a report required by paragraph a must be made on form_8300 in addition any person required to make an information_return under this section must furnish a single annual written_statement to each person whose name is set forth in a return filed with the service see sec_1_6050i-1 scenario in scenario customer b uses money orders in the amount of dollar_figure to purchase an automobile from a retail auto auction the customer provide sec_50 money orders each with a face value of dollar_figure as stated above sec_1 6050i- c ii b defines cash as a money order having a face_amount of not more than dollar_figure received in a designated reporting transaction none of the individual money orders in this scenario exceeds a face value of dollar_figure thus the money orders fall within the definition of cash the auto auction retailer received cash in the amount of dollar_figure during one transaction as a result this transaction falls within the parameters of sec_6050i therefore the auto auction retailer must file form_8300 with the service and furnish a statement to customer b scenario in scenario customer b indicates that he will purchase an automobile with cash however customer b uses money orders in the amount of dollar_figure to purchase an automobile from the wholesale auto auction as stated above sec_1 6050i- c ii b defines cash as a money order having a face_amount of not more than dollar_figure received in a designated reporting transaction a designated reporting transaction is a retail_sale of a consumer durable a collectible or a travel or entertainment activity sec_1_6050i-1 a wholesale sale is not a retail_sale therefore a wholesale sale paid for with money orders is not a designated reporting transaction accordingly the wholesale auto auction is not required to file form_8300 though the wholesale auto auction is not required to file form_8300 the auction may voluntarily file the form if the transaction is suspicious a suspicious transaction is a transaction in which it appears that a person is attempting to cause form_8300 not to be filed or to file a false or incomplete form or there is an indication of illegal activity if in light of the facts and circumstances the salesperson determines the switch from cash to money orders is a suspicious transaction then the wholesale auto auction may file form_8300 see publication reporting cash payments of over dollar_figure received in a trade_or_business however because of the voluntary nature of the filing sec_6050i does not require the wholesale auto auction to furnish a statement to customer b if you have any questions please contact