PLR on Bequesting a Promissory Note

The IRS recently publishedPLR-201129049 in which it found that a bequest of a promissory note is not self-dealing. The PLR is below, in full:

PLR – 201129049 Bequest of Promissory Note Not Self-Dealing

A is a privately held corporation created and majority owned by B. B is also the founder of and a substantial contributor to X, a tax-exempt private foundation under Sec. 509(a). B and C created M and O, trusts that will become irrevocable upon each parties’ death. Upon B’s death, all of his assets will be transferred to M. X is the ultimate beneficiary of M and will receive all of the non-voting shares of A held by M at B’s death. X will receive similar assets from O upon the death of C. Pursuant to the terms of the shareholders’ agreement, when B and C die, A will elect to exercise its options and purchase the non-voting shares of A owned by M and O. The shares will be purchased for cash and/or an A promissory note. The promissory note(s) pay interest at a rate not lower than the applicable federal rate and will have a term of no longer than 25 years. M and O will then transfer any notes and/or cash from the sale to X. The parties involved requested a ruling that the holding of an A issued promissory will not violate the prohibition on acts of self-dealing under Sec. 4941.
Both B and C are disqualified persons to X under Sec. 4946(a)(1). Section 4941(a) imposes a tax on each incident of direct or indirect self-dealing between a disqualified person and a private foundation. Section 53.4941(d)-2(c)(1) provides, that except in the case of the receipt and holding of a note pursuant to a transaction described in Sec. 4941(d)-1(b)(3), an act of self-dealing occurs when a note, where obligor is a disqualified person, is transferred by a third party to a private foundation. However, transactions during the administration of an estate regarding a foundation’s interests are not self-dealing if the estate administration exception of Sec. 53.4941(d)-1(b)(3) applies. In order for the exception to apply five conditions must be met. First, the administrator or trustee is, among other options, required to sell the property under the terms of an option subject to which the property was acquired by the estate or trust. Second, the transaction must be approved by the probate court. Third, the transaction occurs before the estate is considered terminated for federal income tax purposes. Fourth, the estate or trust receives an amount which equals or exceeds the fair market value of the foundation’s interest in the asset(s) at the time of the. And fifth, 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 active carrying out of its exempt purposes; or

(c) Is required under the terms of any option which is binding on the estate or trust.

The Service determined that the terms of B’s and C’s estate plans comply with the estate administration exception of Sec. 53.4941(d)-1(b)(3). Therefore, the transfer of the promissory notes will not result in a violation of the self-dealing rules.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this to my attention.