November 12, 2008
The Honorable Douglas Shulman The Honorable Donald Korb
Commissioner Chief Counsel
Internal Revenue Service Internal Revenue Service
1111 Constitution Ave., N.W. 1111 Constitution Ave., N.W.
Washington, D.C. 20224 Washington, D.C. 20224
Mr. Curtis Wilson Ms. Mary A. Berman
Acting Associate Chief Counsel for Attorney, Office of the
Passthroughs and Special Industries Associate Chief Counsel
Internal Revenue Service (Passthroughs & Special
1111 Constitution Ave., N.W. Industries)
Washington, D.C. 20224 Internal Revenue Service
1111 Constitution Ave., N.W.
Room 5300
Washington, D.C. 20224
HAND DELIVERED: Courier’s Desk, CC:PSI:B04 (Notice 2008-63)
RE: IRS Notice (Notice 2008-63) Regarding Proposed Guidance on Transfers with Retained Life Estate and the Creation of a Private Trust Company
Dear Messrs. Shulman, Korb, and Wilson, and Ms. Berman:
The American Institute of Certified Public Accountants (AICPA) is submitting comments on Notice 2008-63, 2008-31 I.R.B. 261, relating to proposed guidance on transfers with a retained life estate and the creation of a private trust company (PTC).
The AICPA is the national professional organization of certified public
accountants comprised of approximately 350,000 members. Our members’ advise clients of federal, state and international tax matters and prepare income and other tax returns for millions of Americans. Our members provide services to individuals, not-for-profit organizations, small and medium-sized business, as well as America’s largest businesses.
Notice 2008-63 sets forth the contents of a proposed revenue ruling concerning the income, estate, gift and generation-skipping transfer tax consequences in situations in which family members create a private trust company to serve as the trustee of trusts having family members as grantors and beneficiaries. We appreciate the guidance in the notice and think it favorably covers many of our previously submitted issues (see our March 29, 2006 comments available at /Resources/Trust+Estate+and+Gift/Regulation+and+Administration/
AICPA+Suggests+Parameters+for+Private+Trust+Company+Guidance.htm). In the below comments, we request additional clarification and guidance in several specific areas that we think would be helpful.
Participation in the Activities of the Discretionary Distribution Committee
The governing documents in Situation 2 of the proposed ruling provide that no member of the Discretionary Distribution Committee (DDC) “may participate in the activities of the DDC” with respect to any trust of which the DDC member or his or her spouse is a grantor or a beneficiary, or any trust with a beneficiary to whom either of them owes a legal obligation of support.
Private letter rulings previously issued by the IRS involving PTCs typically dealt with situations where the bylaws of the PTC provided that no DDC member who is a member of the family that owns the PTC may participate in a decision of the DDC or its equivalent. The facts in one private letter ruling went further than this in that such individuals were not only precluded from voting, but they could not even “(be present during any committee discussion of or vote on such a decision).” (See, e.g., Priv. Ltr. Rul. 2005-46-052 (Aug. 2, 2008); emphasis added.) It is unknown whether this was required by the IRS as a condition to the issuance of a favorable ruling, or was voluntarily self-imposed by the taxpayer requesting the ruling.
In either case, it is not clear whether, under the proposed ruling, a family member or spouse of a family member who is prohibited from voting on a decision of the DDC, would be considered to have “participate[d] in the activities of the DDC” if he or she were present “during any committee discussion of or vote on such a decision.” Clarity on what is meant by “participation” should be provided in final guidance.
We believe that an affected beneficiary should be able to address the DDC in order to plead his or her case or provide relevant information, provided that he or she does not participate in the vote on such a distribution.
Defining a Beneficiary
As discussed above, the proposed ruling indicates that a beneficiary of a trust may not participate in the activities of the DDC, but it provides no guidance relating to the definition of a beneficiary. The ruling should specify that with respect to contingent or remainder beneficiaries of a trust, such beneficiaries should be excluded from the definition of a beneficiary for purposes of participating in the activities of the DDC. At a minimum, contingent or remainder beneficiaries should be excluded from the definition of a beneficiary if there is less than a 5% probability that a contingent beneficiary will receive a distribution from the trust or the present value of a remainder interest in the trust is less than 5%.
Applicability to Trusts with Ascertainable Standards
The proposed ruling attempts to validate the premise that adverse tax consequences should not result from the use of a PTC provided that the powers provided to officers, directors, managers, or committee members of the PTC will not otherwise cause adverse tax consequences if held individually, as a trustee or beneficiary. Accordingly, for beneficiaries of trusts whose distributions are limited by an ascertainable standard within the meaning of Reg. sec. 1.2041-1(c)(2), there should be no restrictions on the beneficiaries of such trusts participating as a member of the DDC in making distributions under such a standard. We suggest that an exception for trusts with an ascertainable standard be included in final guidance.
Members of the Discretionary Distribution Committee
The proposed ruling does not indicate how the members of the DDC are chosen, their terms of office and whether they can be removed with or without cause and replaced, and if so, by whom. Typically, members of corporate committees are appointed by the board of directors of the corporation and serve for a specified term at the pleasure of the board. Presumably, these same governance provisions would apply to the appointment or termination of a member of the DDC, notwithstanding the fact that grantors and/or beneficiaries of trusts in which the PTC serves as trustee may be members of the board. We believe this should be made clear in final guidance.
Amendment Committee
Amendments to a corporation’s governing documents generally require the approval of the corporation’s directors or shareholders, or both. As proposed, the approval would be required of a separate amendment committee, a majority of whose members must always be individuals who are neither family members nor persons related or subordinate to any shareholder of the PTC. Instead, we suggest that it should be sufficient if the PTC’s governing documents require the approval of a majority of the independent directors to any change in the PTC’s governing documents regarding the creation, function, or membership of the DDC.
Some commentators have suggested that a provision preventing the shareholders of a PTC from amending the governing documents (i.e. by unanimous consent) may not be enforceable under state law. Accordingly, we suggest that as an alternative, the guidance would provide that if the shareholders were to override a provision which the guidance requires be approved by the independent directors, that the protections provided by the proposed ruling would be lost with respect to that PTC.
Personnel Matters
Decisions regarding personnel of a corporation (including the hiring, discharge, promotion and compensation of employees) are generally made by the officers and managers of a corporation, except that decisions regarding the employment of the officers and senior management of a corporation are frequently made by the board of directors in concert with management. Accordingly, we question why it is necessary to exclude the board of directors from personnel decisions. Since there is no restriction on family members serving as officers of the PTC, there is no reason why the board of directors could not have the exclusive authority over all personnel decisions regarding officers or management.
Form of Private Trust Company
While the PTC in the proposed ruling is a corporation, the entity of choice these days may very well be a limited liability company, limited partnership, or other unincorporated entity. Whether the PTC is a corporation only has relevance, if at all, for income tax purposes, under the two clauses of section 672(c)(2) of the Internal Revenue Code referred to in the proposed ruling.
The first is the clause that defines a “related or subordinate party” as “a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are significant from the viewpoint of voting control.” The proposed ruling concludes that this clause has been made irrelevant as it applies to the power over discretionary distributions because there are adequate safeguards against the exercise of this power by the grantor.
The second is the clause that defines a “related or subordinate party” as “a subordinate employee of a corporation in which the grantor is an executive.” The proposed ruling concludes that a non-family member serving on the DDC who is an employee of the PTC will be related and subordinate to any family member who is the grantor of any trust of which the PTC is trustee if such family member is also an officer or manager of the PTC. However, many jurisdictions permit PTCs to operate in unincorporated form, such as limited partnerships or limited liability companies. For a family that chooses to form a PTC as an unincorporated entity, there could be disparate treatment since section 672(c) is silent on such arrangements in defining related or subordinate parties. Uncertainty as to the application of this provision could be avoided if the IRS were to eliminate the specific reference to section 672(c) and simply conclude that non-family members of the DDC and the amendment committee are deemed not to be “subordinate” to the grantor unless the grantor has direct authority over personnel decisions that affect them.
* * * * *
We thank you for the opportunity to present our comments and welcome the opportunity to discuss our comments further with you or others at the IRS. Please feel free to contact Justin P. Ransome, Chair of the AICPA Trust, Estate, and Gift Tax Technical Resource Panel, at justin.ransome@gt.com; Steven A. Thorne, Chair of the PTC Task Force, at stethorne@deloitte.com; or Eileen R. Sherr, AICPA Technical Manager, at esherr@aicpa.org, to discuss the above comments or if you require any additional information.
Sincerely,
Alan R. Einhorn
Chair, AICPA Tax Executive Committee