An introduction to the estate administration exception to indirect self-dealing under Treas. Reg. 53.4941(d)-1(b)(3). IRC Section and Treasury Regulations IRC 4941 Taxes on self-dealing IRC 4941(d)(1) Self-dealing, in general IRC 4946 Disqualified person, definitions and special rules Treas. Reg. 53.4941(d)-1 Definition of self-dealing Treas. Reg. 53.4941(d)-1(b) Indirect self-dealing Treas. Reg. 53.4941(d)-1(b)(3) Indirect self-dealing, exception for transactions during the administration of an estate or revocable trust. Resources (court cases, Chief Counsel Advice, Revenue Rulings, internal resources) Rockefeller v. U.S., 572 F.Supp. 9 (E.D. Ark., 1982), aff'd per curiam 718 F.2d 290 (8th Cir. 1983), cert. den. 466 U.S. 962 (1984). In Rockefeller, the court upheld the constitutionality of Treas. Reg. 53.4941(d)-1(b)(3) providing for the estate administration exception to IRC 4941 excise tax on self-dealing. It held that the regulation implements IRC 4941 in a reasonable manner and effectuates the will of Congress as expressed by the statute. The Eighth Circuit affirmed the district court's holding in a one page opinion, adopting the district court's reasoning. Estate of Reis, 87 T.C. 1016 (November 10, 1986). In Estate of Reis, the petitioner conceded that its conduct did not satisfy the estate administration exception set forth in Treas. Reg. 53.4941(d)-1(b)(3). However, petitioner argued that, as a matter of law, assets of an estate are not assets of a foundation with a beneficial interest in such estate. The Tax Court rejected this argument. It held that acts of self-dealing with respect to estate property also will be regarded as acts of self-dealing with respect to assets of a private foundation that has a beneficial interest in the property of such estate. Such acts fall within the scope of IRC 4941 unless they meet an exception to the rule — including, but not limited to, the estate administration exception under Treas. Reg. 53.4941(d)-1(b)(3). Analysis Self-dealing: IRC 4941 imposes an excise tax on each act of self-dealing between a private foundation and a disqualified person (within the meaning of IRC 4946). IRC 4941(d)(1) defines self-dealing as any direct or indirect act provided in that statute as described: (A) Sale or exchange, or leasing of property between a private foundation and a disqualified person; (B) Lending of money or other extension of credit between a private foundation and a disqualified person; (C) Furnishing of goods, services, or facilities between a private foundation and a disqualified person; (D) Payment of compensation (or payment or reimbursement of expenses) by a private foundation to a disqualified person; (E) Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation; and (F) Agreement by a private foundation to make any payment of money or other property to a government official (as defined in IRC 4946(c)), other than an agreement to employ such individual for any period after the termination of his or her government service if such individual is terminating his or her government service within a 90-day period. Indirect self-dealing: Treas. Reg. 53.4941(d)-1(a) adds that self-dealing means any direct or indirect transaction described in Treas. Reg. 53.4941(d)-2. It is immaterial whether the transaction results in a benefit or a detriment to the private foundation. An indirect act of self-dealing may occur as a transaction between a disqualified person and an organization controlled by a private foundation. However, Treas Reg. 53.4941(d)-1(b) provides that certain transactions between a disqualified person and an organization controlled by a private foundation will not be treated as indirect self-dealing. One of these exceptions is the Estate Administration Exception. Estate administration exception: Treas. Reg. 53.4941(d)-1(b)(3) states that the term "indirect self-dealing" shall not include a transaction with respect to a private foundation's interest or expectancy in property (whether or not encumbered) held by an estate (or revocable trust, including a trust which has become irrevocable on a grantor's death), regardless of when title to the property vests under local law, if certain requirements are satisfied. The sale or exchange of property to a disqualified person while held by an estate or trust in which a foundation has an interest or expectancy may be an act of indirect self-dealing. However, a transaction involving a private foundation's interest or expectancy in property held by an estate (or revocable trust, including a trust that has become irrevocable on a grantor's death), regardless of when title to the property vests under local law, is not indirect self-dealing if the requirements under Treas. Reg. 53.4941(d)-1(b)(3) are met. The requirements of the estate administration exception set forth in Treas. Reg. 53.4941(d)-1(b)(3) are the following: (i) The administrator or executor of an estate or trustee of a revocable trust either (a) possesses a power of sale with respect to the property, (b) has the power to reallocate the property to another beneficiary, or (c) is required to sell the property under the terms of any option subject to which the property was acquired by the estate (or revocable trust); (ii) Such transaction is approved by the probate court having jurisdiction over the estate (or by another court having jurisdiction over the estate (or trust) or over the private foundation); (iii) Such transaction occurs before the estate is considered terminated for Federal income tax purposes pursuant to Treas. Reg. 1.641(b)-3(a) (or in the case of a revocable trust, before it is considered subject to IRC 4947); (iv) The estate (or trust) receives an amount which equals or exceeds the fair market value of the foundation's interest or expectancy in such property at the time of the transaction, taking into account the terms of any option subject to which the property was acquired by the estate (or trust); and (v) With respect to transactions occurring after April 16, 1973, the transaction either (a) results in the foundation receiving an interest or expectancy at least as liquid as the one it gave up, (b) results in the foundation receiving an asset related to the carrying out of its exempt purposes, or (c) is required under the terms of any option which is binding on the estate (or trust). If the sale or exchange of property to a disqualified person while held by an estate or trust in which a foundation has an interest or expectancy meets the requirements for the estate administration exception (as described above), the transaction will not be considered an act of indirect self-dealing under IRC 4941. Issue indicators or audit tips Issue indicators: Evidence of a transaction between an estate holding property in which the foundation has an interest or expectancy and disqualified persons or organizations controlled by one or more disqualified persons. Evidence of improper valuation of estate property disposed of pursuant to the estate administration exception. Evidence that a transaction for which the estate administration exception is invoked lacked necessary advance judicial approval (such as from a probate court). Audit tips: Identify all disqualified persons with respect to the foundation. Review all transactions undertaken between the foundation and any disqualified person(s). Review other Chapter 42 excise taxes to ensure no other Chapter 42 violations occurred. These potential violations include IRC 4942 (Mandatory Distributions), IRC 4943 (Excess Business Holdings), IRC 4944 (Jeopardizing Investments), and IRC 4945 (Taxable Expenditures). Generally, any act of self-dealing that violates IRC 4941 will also be a taxable expenditure pursuant to IRC 4945(d)(5). Compile a list of all estates or revocable trusts in which the foundation has a beneficial interest. Investigate any transactions involving such estates or revocable trusts to ensure compliance with Treas. Reg. 53.4941(d)-1(b)(3). Verify proper valuation techniques for all assets involved in transactions for which the estate administration exception is invoked. Confirm that any transaction for which the estate administration exception is invoked results in the foundation receiving proper compensation under Treas. Reg. 53.4941(d)-1(b)(3)(v)(a) or (b). Alternatively, confirm the transaction is required under the terms of any option binding on the estate (or trust).
