Bob Murray and Katie French of our office have just resolved a multi-million dollar case with the Internal Revenue Service in which the Service conceded the proposed imposition of excise taxes under I.R.C. § 4941(a)(1) and (b)(1).

The case in point involved the early termination of a Charitable Remainder Unitrust (“CRUT”).  The IRS conceded the issue of self-dealing after the taxpayers demonstrated that they had followed the rationale of a number of Private Letter Rulings (“PLRs”) and were able to further demonstrate that the early termination of the CRUT did not result in a greater allocation of the [Trust’s] assets to the income beneficiaries than would have otherwise resulted from a non-early termination. As a consequence, the IRS determined that the income beneficiaries had not violated the self-dealing rules.

At the present time, there is no case law or other controlling legal authority which provides guidance to taxpayers who are similarly situated to the clients which we have assisted in this case.

In achieving the IRS concession, the income beneficiaries successfully distinguished the rationale and holding of Revenue Ruling 69-486.  Although the relevant PLRs uniformly state that they are not to be used as precedent for other similarly situated taxpayers, the Service did follow the rationale of a number of PLRs holding that the self-dealing rules do not apply when a distribution of the actuarially-calculated income interest does not inappropriately inflate the grantor’s interest in the CRUT to the detriment of the charitable remaindermen.

There are a number of nuances with respect to the income tax consequences of the early termination of a split interest trust, but it was conceded by representatives of the IRS that those income tax consequences were entirely separate and apart from a consideration of alleged self-dealing.