Trust’s Payments to S Corporation for Personal Services Not Act of Self-Dealing

In Letter Ruling 200241048, the IRS ruled that a trust’s payments to a related S corporation for personal services to be performed by the latter’s employees on the trust’s behalf is not an act of self-dealing under Sec. 4941.

Facts

A charitable lead trust was established via a will to provide annual annuity payments to a private foundation; at the end of the annuity term, the trust will terminate and distribute the remaining assets to the decedent’s children. The split-interest trust would generally be subject to Sec. 4947(a)(2) private foundation self-dealing rules (among others).

The trust proposed to enter into a property management agreement with an S corporation that will manage a rental property. The S corporation, which is a disqualified person as to the trust for Sec. 4946(a) purposes, will solicit and negotiate leases, locate tenants, collect rent and arrange for employing and engaging independent contractors, obtaining insurance coverage and paying utility bills, taxes and service fees.

Under the agreement, the S corporation cannot enter into contracts for services to be provided by related persons, or for services to operate other real properties owned by such persons. However, an exception applies to insurance policies, which the S corporation can obtain to cover both a partnership’s properties (in which the trust has an interest) and the related persons’ properties, with all parties paying their allocable share of premiums.

Another exception is that the S corporation can retain persons to prepare rent registrations for the partnership and other properties it manages. It cannot charge the partnership for form preparation; however, the partnership will pay fees attributable to its properties directly to a local government agency. None of the properties owned by the partnership are debt financed.

Ruling

The IRS ruled that the S corporation’s services are not self-dealing, because they are reasonable and necessary to carrying out the trust’s exempt purposes; further, all fees are reasonable. It also concluded that any benefit received by disqualified persons through inclusion of the partnership’s properties in an insurance policy with other related property interests is not an act of self-dealing. The provision of incidental and tenuous benefits to disqualified persons is permitted, as long as each party pays its allocable share of the premiums, and the inclusion of the trust’s properties does not result in lower premiums (as opposed to the cost of separate policies) to the disqualified persons.

From Phillip G. Royalty, Washington, DC