Summary

In PLR 201208038, the Service approved an arrangement under which a college proposed to issue contract rights in its endowment fund to a CRUT of which it was the trustee and a 50% remainderman.

Extended Summary

As with prior similar rulings, the Service determined that the contract rights in the endowment did not constitute direct ownership of the underlying fund assets. Thus, the CRUT would not be required to recognize any portion of UBTI incurred within the endowment fund itself.

The endowment fund would make distributions to the CRUT in accordance with its established spending rate, and these would be treated as ordinary income regardless of the character of earnings within the endowment fund. The redemption of units would cause the CRUT to recognize long- or short-term capital gain (or loss), depending on the holding period.

Although the present ruling was requested by the trustee of the CRUT, the text included an analysis of the question whether any management fees that might be charged by the endowment fund to the CRUT would generate UBTI to the fund itself. The Service concluded that under Rev. Rul. 69-528 they would not, because management of the fund was substantially related to the exempt purpose of the college. As is typical in these rulings, however, the fund did not propose to charge management fees, though third party management fees would effectively be passed through.

CPC Commentary

This ruling is the latest in a series of over fifty PLRs issued since early 2007, when the Service rescinded and then modified three similar rulings issued in 2003 (see our earlier commentary ).

A potentially significant difference here is that the foundation serving as trustee of the CRT was not the sole remainderman of the CRT, but was to receive only 50% of the remainder after the death of both income beneficiaries of the unitrust. The Service reached similar conclusions in PLRs 201105049 and 201105050, where the endowment fund was the remainderman as to only 25% of the CRT (see our earlier commentary).

Typically these rulings come in pairs, with one copy addressed to the trustee of the remainder trust and the other to the endowment fund. Thus, we may expect to see a related ruling released in the next week or two.

Notice the present ruling and prior ones require the trust income distributed from the CRT to the beneficiary to be taxed as ordinary income, even if the underlying asset was producing capital gains. One must ask whether the benefit of being part of the charity's endowment, is offset by this difference in tax treatment, especially given the spread in tax rates between ordinary income and capital gains.

Relevant Documents

	201208038: Unrelated Business Taxable Income (Taxable v. Not Taxable)	2/24/12
	CPC Commentary: Two More "Harvard" CRT Rulings, with a Wrinkle	2/7/11
	201105050: Unrelated Business Taxable Income (Taxable v. Not Taxable)	2/4/11
	201105049: Unrelated Business Taxable Income (Taxable v. Not Taxable)	2/4/11
	Rev. Rul. 1969-528	3/1/07
	CPC Commentary: The Harvard UBTI Rulings - And Then There Were 10; Oops, 25!!	3/19/07
	Reg. Sec. 1.513-1: Definition of unrelated trade or business.	9/16/12