Originally published April 28, 2004
The Exempt Organizations Advisory summarizes legal developments of interest to our exempt organization clients and friends of the firm. It is published on a periodic basis as developments warrant.
Distributions from Split-Interest Trusts to Private Foundations Are Not Includable in Net Investment Income or Yearly Distributable Amount
By: Suzanne Ross McDowell (smcdowell@steptoe.com)
Last week, the IRS and Treasury issued Notices 2004-35 and 2004-36, announcing that new regulations will be promulgated under sections 4940 (relating to tax on investment income) and 4942 (relating to mandatory distributions) in light of the decision in Ann Jackson Family Foundation v. Commissioner, 97 T.C. 534 (1991), aff’d, 15 F.3d 917 (9th Cir. 1994). That case held that regulations under section 4942, which required private foundations to treat distributions from split interest-trusts as if they were income of the private foundation, and thus redistribute the full amount, were invalid.
The new regulations will provide that a private foundation’s net investment income and mandatory annual distribution amount do not include distributions received from a split-interest trust (described in section 4947(a)(2)). It has been more than ten years since the Tax Court’s decision in Ann Jackson Family Foundation was affirmed by the Ninth Circuit but, until last week, the IRS had never issued any formal guidance to indicate whether it would follow the Ninth Circuit decision and had not amended its regulations. The IRS had suggested in its 2000 Continuing Professional Education Text that it would follow the Ann Jackson Family Foundation case, providing some informal guidance to exceptionally attentive practitioners.
Notice 2004-35 announces that the IRS and Treasury intend to propose regulations that provide that a private foundation’s net investment income for purposes of section 4940 does not include distributions received from trusts and estates. The Notice states that until further guidance is issued, income distributions received from trusts and estates should not be included in net investment income.
Notice 2004-36 announces that the IRS and Treasury intend to propose regulations that modify existing regulations under section 4942 in a manner consistent with the decision in Ann Jackson Family Foundation. The Notice states that until further guidance is issued, the distributable amount under section 4942(d) should be computed without regard to Treas. Reg. § 53.4942(a)-2(b)(2), and therefore distributions received by a private foundation from a split-interest trust should not be included in distributable amount.
Current or amended returns affected by these notices should be marked "Filed pursuant to Notice 2004-35" and/or "Filed pursuant to Notice 2004-36" as appropriate.
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