IRS written determination 201433023

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

TREASURY
DEVENUR ORT
SERVIC

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION

# DEPARTMENT OF THE TREASURY INTERNAL REVENUE SERVICE WASHINGTON, D.C. 20224

Release Number: 201433023

Release Date: 8/15/2014

Date: May 21, 2014

UIL: 4941.00-00
4943.00-00

Contact Person:

Identification Number:

Telephone Number:

Employer Identification Number:

Founder A =
Founder B =
Trustee
\=
Daughter
\=

=

Son
Grandchild A
\=
Grandchild B =
Grandchild C =
Bank
\=

Corporation
\=

Dear

:

This is in response to your letters dated August 22, 2012, and February 8, 2013, requesting
certain rulings on the application of Part II of Subchapter F of Chapter 1, Subtitle A (IRC §§ 507-
509), Part IV of Subchapter A of Chapter 11, Subtitle B (§§ 2051-2058), and Subchapter A of
Chapter 42, Subtitle D (§§ 4940-4948) to the proposed transactions described below.

Facts

You have stated that you intend to submit your Form 1023, Application for Recognition of
Exemption Under Section 501(c)(3) of the Internal Revenue Code. The rulings contained in this
letter are expressly contingent upon your being recognized as an organization described in §
501(a) and classified as a private foundation within the meaning of § 509 at the time of receipt
of any distribution from the charitable lead annuity trust described below.

You are the charitable recipient of an annuity interest in the Founder A and Founder B
Charitable Lead Annuity Trust ("CLAT") Number Three ("CLAT Three") to be created under the
Founder A Revocable Trust or the Founder B Revocable Trust, upon the death of the second to
die of Founder A and Founder B. Founder A and Founder B have two children, Son and
Daughter. Son has one child, Grandchild A, and Daughter has two children, Grandchild B and
Grandchild C. Son has created through a trust agreement the Founder A and Founder B
Foundation Number One ("Foundation One"). Daughter has created, through trust agreements,
you, the Founder A and Founder B Foundation Number Three ("Foundation Three"), and the

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Founder A and Founder B Foundation Number Two ("FoundationTwo"). You have represented
that all three foundation trusts are expected to be classified by the Internal Revenue Service as
private foundations within the meaning of § 509.

Bank will serve as Trustee of each of the three private foundations. Upon attainment of age
thirty-five, Grandchild A will become the Foundation Advisor for Foundation One. Upon the
attainment of age thirty-five, Grandchild C will become the Foundation Advisor for Foundation
Two. Upon the attainment of age thirty-five, Grandchild B will become the Foundation Advisor
for Foundation Three. You have represented that the primary responsibilities of a Foundation
Advisor will be to appoint a Philanthropy Committee to determine certain charitable distributions.
A Foundation Advisor is also given the authority to remove and appoint corporate trustees
meeting certain requirements. Until Grandchild B and Grandchild C reach age thirty-five,
Daughter is given the authority to remove and appoint corporate trustees for Foundation Two
and Foundation Three. The corporate trustee of each foundation must obtain the consent of
Daughter or the adult owners of 55 percent of the beneficial interests of any trusts that hold
stock in Corporation, depending on the circumstances, before the corporate trustee can transfer
any stock in Corporation.

At the deaths of each of Founder A and Founder B, their Last Wills and Testaments leave their
residuary estates to the Founder A Revocable Trust and the Founder B Revocable Trust,
respectively. Under the revocable trusts, the residue of the estate of the first to die passes to a
marital trust for the surviving spouse. The marital trust is intended to qualify for the marital
deduction under § 2056. At the surviving spouse's death, 55 percent of the assets of the marital
trust established by the first to die and 55 percent of the residue of the surviving spouse's estate
will be distributed equally to the three CLATs. One-third of those assets will pass to the
Founder A and Founder B CLAT Number One ("CLAT One"), one-third will pass to CLAT Two,
and one-third will pass to the Founder A and Founder B CLAT Number Three ("CLAT Three").
All three CLATs will be created under the revocable trust of the second to die of Founder A and
Founder B. You have represented that estate taxes, administration expenses, and claims
against the estate will not be charged against the bequests to the CLATs or, in the case of the
surviving spouse, to the trust assets being distributed from the marital trust to the CLATs. Each
CLAT is intended to satisfy the requirements of Rev. Proc. 2007-46, 2007-29 I.R.B. 102.

CLAT One will pay an annuity amount to Foundation One. A trust established for the benefit of
Son and Grandchild A will be the remainder beneficiary of CLAT One. CLAT Two will pay an
annuity amount to Foundation Two. A trust established for the benefit of Daughter and
Grandchild C will be the remainder beneficiary of CLAT Two. CLAT Three will pay an annuity
amount to Foundation Three. A trust established for the benefit of Daughter and Grandchild B
will be the reminder beneficiary of CLAT Three.

You have represented that prior to receiving payments from the CLATs, which will only begin to
occur after the deaths of both Founder A and Founder B, none of the private foundations will
own any stock which could give rise to tax on excess business holdings under § 4943.

With respect to any property passing to the three CLATs, the Trustee of each CLAT is directed
to pay an annuity amount, annually, at the end of each taxable year for a term of 20 years to the
corresponding private foundation. Using values as finally determined for federal estate tax
purposes for the estate of the last to die of Founder A and Founder B, the Trustee of each CLAT

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is directed to use a formula to determine the annuity amount to be paid each year. This annual
annuity amount is to be paid from income and, to the extent income is not sufficient, from
principal. In the event the income of a CLAT is in excess of the annuity amount in any taxable
year, such excess income will also be distributed to the charitable beneficiary. The first day of
the annuity period is the date of death of the surviving spouse, but payment of the annuity
amount may be deferred from this date until the end of the taxable year in which a CLAT is
completely funded. Within a reasonable time after the end of the taxable year in which a CLAT
is completely funded, the trustee must pay to the charitable beneficiary the difference between
any annuity amounts actually paid and the annuity amounts payable, plus interest. The interest
for any period is to be computed at the § 7520 rate of interest in effect for the date of the
surviving spouse's death. All interest is to be compounded annually. The last day of the annuity
period is the day preceding the twentieth anniversary of the date of death of the surviving
spouse. If a designated foundation is not an organization described in § 170(c) and § 2055(a) at
the time any payment is to be made to it, the trustee will distribute the annuity to one or more
other organizations described in § 170(c) and § 2055(a), as the trustee selects in the trustee's
discretion. During the trust term of each CLAT, no payment will be made to any person other
than the charitable beneficiary.

No additional contributions can be made to a CLAT after the initial contribution. The initial
contribution, however, will be deemed to consist of all property passing to the trust by reason of
the surviving spouse's death. You have represented that the charitable lead annuity interests
bequeathed to each of the foundations will comprise substantially all of all contributions or
bequests made and to be made to each of the foundations. It also is assumed that each
charitable lead annuity interest will be worth more than $5,000 at the time of the making of the
bequests.

The CLATs are irrevocable. However, the trustee of each CLAT has the power, acting alone, to
amend a CLAT from time to time in any manner required for the sole purpose of ensuring that
the annuity passing to the charitable beneficiary is a guaranteed annuity interest under
§ 2055(e)(2)(B) and the regulations thereunder and that payment of the annuity to the charitable
beneficiary will be deductible from the gross income of the CLAT to the extent provided by
§ 642(c)(1) and the regulations thereunder.

You represent that the formula for calculating the annuity amount will adhere to the
requirements of the Internal Revenue Code, specifically §§ 2032 and 7520. We specifically are
not ruling as to whether your valuations will meet such requirements of the Code.

You also have represented that the annuity amount payable annually by each CLAT to each
foundation shall be an amount, rounded down to the nearest whole dollar amount, which, when
multiplied by certain represented factors for a 20-year term, will result in the value of the
charitable lead annuity interest in each CLAT to be as close as possible to, but not exceeding,
60 percent of the total value of the trust assets of each CLAT, using values as finally determined
for estate tax purposes.

Foundation One and Foundation Two have submitted substantially identical requests for rulings,
based on the same facts.

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## Rulings Requested

You have requested the following rulings:

1\. The estate of the surviving spouse of Founder A and Founder B will be entitled to a
charitable deduction under § 2055(e)(2) for assets passing to the three CLATs created
under the revocable trust of the surviving spouse, including the assets passing from the
marital trust created under the revocable trust of the predeceased spouse.

2\. Founder A and Founder B will not be considered substantial contributors as defined in §
507(d)(2) and therefore will not be considered disqualified persons under §
4946(a)(1)(A) with respect to you.

3\. Stock owned by Founder A and Founder B before their deaths shall not be counted in
determining whether or not you are subject to the excise tax on excess business
holdings as provided under § 4943.

4\. The only disqualified persons with respect to you will be:

a. Daughter, the creator of you, and Grandchild B, your Foundation Advisor, both
being the remainder beneficiaries of the corresponding CLAT,

b. The CLAT of which you are a beneficiary, which will be a substantial contributor
to you,

c. The living family members, as defined under §4946(d) (but not including Founder
A and Founder B), of Daughter and Grandchild B,

d. Certain entities in which Daughter and Grandchild B have an interest, as defined
under § 4946(a)(1)(E) and (F), and

e. Certain entities in which the family members, as defined under § 4946(d), of
Daughter and Grandchild B (but not including Founder A and Founder B) have
an interest, as defined under § 4946(a)(1)(E) and (F).

5\. The three private foundations will not be disqualified persons with respect to each other
under § 4946(a)(1)(H).

## Law

I.R.C. § 501(c)(3) exempts from federal income tax an organization organized and operated
exclusively for charitable or educational purposes.

I.R.C. § 507(d)(2)(A) defines a substantial contributor as any person who contributed or
bequeathed an aggregate amount of more than $5,000 to a private foundation, if such amount is
more than 2 percent of the total contributions and bequests received by the foundation before
the close of the taxable year of the foundation in which the contribution or bequest is received
by the foundation from such person. In the case of a trust, the term "substantial contributor" also
means the creator of the trust.

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I.R.C. § 2044(a) and (b) provides that, for purposes of the federal estate tax, the gross estate of
a decedent will include the value of property with respect to which a deduction was allowed for
the transfer of the property to the decedent under § 2056(b)(7). Section 2044(c) treats this
property as passing from the decedent.

I.R.C. § 2055(a) provides that for purposes of the federal estate tax, the value of the taxable
estate is determined by deducting from the value of the gross estate the amount of all bequests,
legacies, devises, or transfers to or for the use of certain charitable organizations.

I.R.C. § 2055(e)(1) provides that no deduction is allowed under § 2055(a) for a transfer to or for
the use of an organization or trust described in § 508(d) or § 4948(c)(4) subject to the conditions
specified in such sections.

I.R.C. § 2055(e)(2)(B) disallows the deduction under § 2055(a) where the lead interest in
property passes to a charitable or other organization described in § 2055(a) and the remainder
interest in the same property passes to a noncharitable beneficiary, unless the lead interest is in
the form of a guaranteed annuity or is a fixed percentage of the fair market value of all the
property (to be determined yearly) and distributed annually.

I.R.C. § 2056(a) provides that the value of the taxable estate will, except as limited by
§ 2056(b), be determined by deducting from the value of the gross estate an amount equal to
the value of any interest in property which passes or has passed from the decedent to his
surviving spouse, but only to the extent that such interest is included in determining the value of
the gross estate.

I.R.C. § 2056(b)(1) provides that where, on the lapse of time, on the occurrence of an event or
contingency, or on the failure of an event or contingency to occur, the interest transferred to the
surviving spouse will terminate or fail, no deduction will be allowed with respect to the interest if
the decedent transfers to any person other than the surviving spouse an interest in the property,
and if by reason of the transfer the other person may possess or enjoy any part of the property
after the termination or failure of the interest transferred to the surviving spouse.

I.R.C. § 2056(b)(7)(A) provides that, in the case of qualified terminable interest property, for
purposes of § 2056(b)(1) no part of the property will be considered as transferred to any person
other than the surviving spouse.

I.R.C. § 2056(b)(7)(B) provides that the term "qualified terminable interest property" (QTIP)
means property that passes from the decedent, in which the surviving spouse has a qualifying
income interest for life, and to which an election under § 2056(b)(7) applies. The surviving
spouse has a qualifying income interest for life if: (i) the surviving spouse is entitled to all the
income from the property, payable annually or at more frequent intervals, or has a usufruct
interest for life in the property, and (ii) no person has a power to appoint any part of the property
to any person other than the surviving spouse. A specific portion of property will be treated as
separate property. An election under the paragraph with respect to any property will be made
by the executor on the return of tax imposed by § 2001. The election, once made, is
irrevocable.

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I.R.C. § 4943(a) imposes a tax on the excess business holdings of any private foundation in a
business enterprise during any taxable year.

I.R.C. § 4943(c)(1) defines the term "excess business holdings" as the amount of stock in a
corporation that a foundation would have to dispose of to a person other than a disqualified
person in order for the remaining holdings of the foundation in the corporation to be permitted
holdings.

I.R.C. § 4943(c)(2)(A) provides that the permitted holdings of any private foundation in an
incorporated business enterprise are:

(i) 20 percent of the voting stock, reduced by

(ii) The percentage of the voting stock owned by all disqualified persons.
In any case in which all disqualified persons together do not own more than 20 percent of the
voting stock of an incorporated business enterprise, nonvoting stock held by the private
foundation shall also be treated as permitted holdings.

I.R.C. § 4943(c)(2)(C) provides that a private foundation shall not be treated as having excess
business holdings in any corporation in which it (together with all other private foundations
which are described in § 4946(a)(1)(H)) owns not more than 2 percent of the voting stock and
not more than 2 percent in value of all outstanding shares of all classes of stock.

I.R.C.§ 4943(c)(6)(A) provides that, with certain exceptions not applicable here, if after May 26,
1969, there is a change in the holdings in a business enterprise (other than by purchase by the
private foundation or by a disqualified person-such as receipt of a gift or bequest) which
causes the private foundation to have excess business holdings in such enterprise, the interest
of the foundation in such enterprise (immediately after such change) shall (while held by the
foundation) be treated as held by a disqualified person (rather than by the foundation) during the
5-year period beginning on the date of such change in holdings.

I.R.C. § 4943(c)(6)(B) provides that, with certain exceptions not applicable here, if after May 26,
1969, there is a change in the holdings in a business enterprise (other than by purchase by the
private foundation or by a disqualified person) which causes the private foundation to have an
increase in excess business holdings in such enterprise (determined without regard to §
4943(c)(6)(A), § 4943(c)(6)(A) shall apply, except that the excess holdings immediately
preceding the increase therein shall not be treated, solely because of such increase, as held by
a disqualified person (rather than by the foundation).

I.R.C. § 4943(d)(1) provides that in computing the business holdings of a private foundation, or
a disqualified person with respect thereto, in any business enterprise, any stock or other interest
owned, directly or indirectly, by or for a trust shall be considered as being owned proportionately
by or for its beneficiaries.

I.R.C. § 4946(a)(1) defines the term "disqualified person" with respect to a private foundation to
include (A) a substantial contributor to the foundation and (B) a foundation manager. It also
includes a member of the family of any individual substantial contributor or foundation manager.
In addition, it includes a trust or estate in which persons described above hold more than 35
percent of the beneficial interest.

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I.R.C. § 4946(b) defines the term foundation manager to include an officer, director, or trustee of
a foundation or an individual having powers or responsibilities similar to those of officers,
directors, or trustees of the foundation.

I.R.C. § 4946(d) states that for purposes of determining who is a "disqualified person," the family
of any individual shall include only his spouse, ancestors, children, grandchildren, great
grandchildren, and the spouses of children, grandchildren, and great grandchildren.

I.R.C. § 4946(a)(1)(H) provides that for the purposes of § 4943, the term "disqualified person"
includes (i) a private foundation which is effectively controlled (directly or indirectly) by the same
person or persons who control the private foundation in question, or (ii) a private foundation to
which substantially all of the contributions were made (directly or indirectly) by the same person
or persons described in subparagraph (A), (B), or (C) of § 4946(a)(1), or members of their
families, who made (directly or indirectly) substantially all of the contributions to the private
foundation in question.

I.R.C. § 4947(b)(3)(A) provides, in part, that § 4943 shall not apply to a trust which is described
in subsection (a)(2) if all the income interest (and none of the remainder interest) of such trust is
devoted solely to one or more of the purposes described in section 170(c)(2)(B), and all
amounts in such trust for which a deduction was allowed under section 170, 545(b)(2), 642(c),
2055, 2106(a)(2), or 2522 have an aggregate value not more than 60 percent of the aggregate
fair market value of all amounts in such trusts. Treas. Reg. § 53.4947-2(b)(1)(i) restates §
4947(b)(3)(A), and adds that the determination of the aggregate value of the income interest is
to be made as of "the time for which the deduction was allowed."

I.R.C. § 7520(a)(1) provides, in part, that if an income, estate, or gift tax charitable contribution
is allowable for any part of the property transferred, the taxpayer may elect to use the federal
midterm rate for either of the two months preceding the month in which the valuation date falls.
Section 20.7520-2 provides the method to determine the value of a charitable lead annuity
interest.

Treas. Reg. § 1.507-6(c)(1) provides, in part, that the term "contribution" shall, for purposes of
section 507(d)(2), have the same meaning as such term has under section 170(c) and also
include bequests, legacies, devises, and transfers within the meaning of section 2055 or
2106(a)(2). Thus, for purposes of section 507(d)(2), any payment of money or transfer of
property without adequate consideration shall be considered a contribution.

Treas. Reg. § 20.2055-2(e) provides, in part, that in the case of decedents dying after
December 31, 1969, where an interest in property passes or has passed from the decedent for
charitable purposes and an interest (other than an interest which is extinguished upon the
decedent's death) in the same property passes or has passed from the decedent for private
purposes (for less than an adequate and full consideration in money or money's worth) after
October 9, 1969, no deduction is allowed under section 2055 for the value of the interest which
passes or has passed for charitable purposes unless the interest in property is a deductible
interest described in subparagraph (2) of § 20.2055-2(e).

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Subparagraph (2)(vi) of Treas. Reg. § 20.2055-2(e) provides, in relevant part, that a "deductible
interest" for purposes of subparagraph (1) includes a charitable interest in property where the
charitable interest is a guaranteed annuity interest, whether or not such interest is in trust. For
this purpose, the term "guaranteed annuity interest" means the right pursuant to the instrument
of transfer to receive a guaranteed annuity. A guaranteed annuity is an arrangement under
which a determinable amount is paid periodically, but not less often than annually. An amount is
determinable if the exact amount which must be paid under the conditions specified in the
instrument of transfer can be ascertained as of the appropriate valuation date. For example, the
amount to be paid may be a stated sum for a term of years.

Treas. Reg. § 20.2055-2(e)(2)(vi)(e) provides that where a charitable interest in the form of a
guaranteed annuity interest is in trust and the present value, on the appropriate valuation date,
of all the income interests for a charitable purpose exceeds 60 percent of the aggregate fair
market value of all amounts in such trust (after the payment of estate taxes and all other
liabilities), the charitable interest will not be considered a guaranteed annuity interest unless the
governing instrument of the trust prohibits both the acquisition and the retention of assets which
would give rise to a tax under § 4944 if the trustee had acquired such assets.

Treas. Reg. § 53.4943-8(a)(1) provides, in part, that for purposes of § 4943, in computing the
holdings in a business enterprise of a private foundation, or a disqualified person (as defined in
§ 4946), any stock or other interest owned, directly or indirectly, by or for a corporation,
partnership, estate or trust shall be considered as being owned proportionately by or for its
shareholders, partners, or beneficiaries except as otherwise provided in paragraphs (b), (c) and
(d) of this section.

Treas. Reg. §53.4943-8(b) provides, in part, that any interest actually or constructively owned
by an estate or trust is deemed constructively owned, in the case of an estate, by its
beneficiaries or, in the case of a trust, by its remainder beneficiaries. Thus, if a trust owns 100
percent of the stock of a corporation A, and if, on an actuarial basis, W's life interest in the trust
is 15 percent, Y's life interest is 25 percent, and Z's remainder interest is 60 percent, under this
paragraph (b), Z will be considered to be the owner of 100 percent of the stock of corporation A.

Treas. Reg. § 53.4943-2(a)(2) provides, in relevant part, that in calculating the amount of the tax
imposed by § 4943 for a taxable year, the tax shall be imposed on the last day of the private
foundation's taxable year, but the amount of such tax and the value of the excess business
holdings subject to such tax shall be determined with respect to the foundation's holdings in any
business enterprise as of that day during the foundation's taxable year when the foundation's
excess holdings in such enterprise were the greatest.

Treas. Reg. § 53.4946-1(a)(5) provides that for purposes of subparagraph (1)(iii)(a) and (v) of §
53.4946-1(a), the term "combined voting power" includes voting power represented by holdings
of voting stock, actual or constructive (under § 4946(a)(3)), but does not include voting rights
held only as a director or trustee.

Treas. Reg. § 53.4947-2(b)(1)(i) restates § 4947(b)(3)(A) (which exempts from § 4943 certain
charitable lead trusts in which the charitable lead interests do not exceed 60 percent of the
aggregate fair market value of all amounts in such trusts), and adds that the determination of

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the aggregate value of the income interest is to be made as of "the time for which the deduction
was allowed."

## Analysis

Ruling 1: The estate of the surviving spouse of Founder A and Founder B will be entitled to a
charitable deduction under § 2055(e)(2) for assets passing to the three CLATs created under
the revocable trust of the surviving spouse, including the assets passing from the marital trust
created under the revocable trust of the predeceased spouse ..

In this case, the formula set forth in each revocable trust to determine the annuity from each
CLAT results in an amount that is determinable because it is ascertainable as of the valuation
date of the surviving spouse's estate. Therefore, based upon the facts submitted and the
representations made, we conclude that the formula results in a guaranteed annuity within the
meaning of § 2055(e)(2)(B) because it satisfies the requirement that the annuity be a
determinable amount.

Accordingly, based upon the facts submitted and the representations made, we also conclude
that the estate of the surviving spouse will be entitled to a deduction under § 2055(a) for the
present value of the annuity from each CLAT provided: (1) the marital trust's terms satisfy the
requirements of § 2056(b)(7) and the election under § 2056(b)(7) is properly made for the
assets of the marital trust that actually pass from the marital trust to each of the CLATs; (2) the
assets that actually pass from the marital trust to each of the CLATs are not subject to the
liabilities of the surviving spouse's estate; (3) the CLATs' terms satisfy the requirements of Rev.
Proc. 2007-46 (or the requirements of any successor guidance); and (4) the recipient of the
annuity from each CLAT is a charitable foundation described in § 170(c), § 2055(a), and
§ 501(c)(3) and classified as a private foundation under § 509, which is not otherwise described
in § 508(d) or § 4948(c)(4), or an organization described in § 170(c), § 2055(a), and § 501(c)(3),
which is not otherwise described in § 508(d) or § 4948(c)(4).

Ruling 2: Founder A and Founder B will not be considered substantial contributors as defined in
§ 507(d)(2) and therefore will not be considered disqualified persons under § 4946(a)(1)(A) with
respect to you.

Under § 4946(a)(1)(A), the term "disqualified person" is defined to include a person who is a
substantial contributor. Section 507(d)(2)(A) defines the term "substantial contributor" to include
any person who contributed or bequeathed an aggregate amount of more than $5,000 to a
private foundation, if such amount is more than two percent of the total contributions and
bequests received by the foundation before the close of the taxable year of the foundation in
which the contribution or bequest is received by the foundation from such person. Treas. Reg. §
1.507-6(c)(1) provides, in part, that the term "contribution" shall, for purposes of section
507(d)(2), have the same meaning as such term has under section 170(c) and also include
bequests, legacies, devises, and transfers within the meaning of section 2055 or 2106(a)(2).
Thus, for purposes of section 507(d)(2), any payment of money or transfer of property without
adequate consideration shall be considered a contribution.

Founder A or Founder B will bequeath charitable lead annuity interests in the CLATs to the
foundations. The annuity interests are designed to qualify as "guaranteed annuity interests" and,

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therefore, as "deductible interests" for purposes of the estate tax, as defined in Treas. Reg. §
20.2055(e)(2)(vi). It is assumed that the value of each of these bequeathed charitable lead
annuity interests will exceed $5,000. In addition, it is expected that such bequests will constitute
substantially all of all bequests that will be made to the foundations and, thus, will exceed the
two-percent minimum prescribed by § 507(d)(2) in defining "substantial contributor."
Accordingly, the later to die of Founder A or Founder B will be considered a substantial
contributor, as defined in § 507(d)(2) to the foundations to which he or she will bequeath the
charitable lead annuity interests.

Ruling 3: Stock owned by Founder A and Founder B before their deaths shall not be counted in
determined whether or not you are subject to the excise tax on excess business holdings as
provided under § 4943.

Generally, § 4943(a)(1) imposes a tax on the excess business holdings in a business enterprise
of a private foundation. Section 4943(c)(2) provides, in part, that the permitted holdings of any
private foundation in an incorporated business enterprise are 20 percent of the voting stock,
reduced by the percentage of the voting stock owned by all disqualified persons.

The proposed transfers of assets to the CLATs, including any Corporation stock, will not take
place until after the deaths of Founder A and Founder B. The foundations will not acquire any
stock in Corporation unless it is distributed to them by the CLATs in satisfaction of the
foundations' rights to receive the annual annuity amounts.

Treas. Reg. § 53.4943-2(a)(2) provides, in relevant part, that in calculating the amount of the tax
imposed by § 4943 for a taxable year, the tax shall be imposed on the last day of the private
foundation's taxable year. But, the amount of such tax and the value of the excess business
holdings subject to such tax shall be determined with respect to the foundation's holdings in any
business enterprise as of the day during the foundation's taxable year when the foundation's
excess holdings in the enterprise were the greatest. By definition, this computation for any
given year will have to occur following the deaths of Founder A and Founder B. Also, by
definition, at the time of any such computations, Founder A and Founder B will no longer be
shareholders in Corporation. Your computations under § 4943 will be made by taking into
account the stock owned by you and your disqualified persons as of each computation date.
Accordingly the stock owned by Founder A and Founder B before their deaths shall not be
counted in determining whether or not you are subject to the excise tax on excess business
holdings as provided under § 4943.

Ruling 4: The only disqualified persons with respect to you will be:

a. Daughter, the creator of you and Grandchild B, the Foundation Advisor of you,
both being the remainder beneficiaries of the corresponding CLAT,

b. The CLAT of which you are the beneficiary, which will be a substantial contributor
to you,

c. The living family members, as defined under §4946(d) (but not including Founder
A and Founder B) of Daughter and Grandchild B,

d. Certain entities in which Daughter and Grandchild B have an interest, as defined
under § 4946(a)(1)(E) and (F), and

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e. Certain entities in which the family members, as defined under § 4946(d), of
Daughter and Grandchild B (but not including Founder A and Founder B) have
an interest, as defined under § 4946(a)(1)(E) and (F).

We will rule as to whether a certain person or entity may or may not be a disqualified person if
we are provided sufficient facts. However, we normally decline to rule as to whether certain
named persons are the sole disqualified persons with regard to a transaction.

Daughter, as your creator is a disqualified person because she is the child of Founder A and
Founder B, one of which will be a substantial contributor to you, and also is the creator of you.
Thus, Daughter is described in § 4946(a)(1)(D) as a member of the family of a substantial
contributor and is described in § 4946(a)(1)(A) because she is the creator of a trust that is a
private foundation (i.e., you) described in the last sentence of § 507(d)(2)(A). Grandchild B will
be a disqualified person since he will be the child and grandchild of a disqualified person and
will be described in § 4946(a)(1)(D).

CLAT Three, because it is merely paying an annuity, is not a substantial contributor to you.
However, CLAT Three will be a disqualified person with respect to you. A trust is a disqualified
person if more than 35 percent of the beneficial interest in the trust, including constructive
holdings, is owned by substantial contributors, foundation managers, 20 percent owners, or
members of the family of any of these individuals. See § 4946(a)(1)(G). The beneficiaries of
the trust that will be the remainder beneficiary of CLAT Three are disqualified persons. They will
be treated as owning no less than 40 percent of the total interests in the trust (because the
annuity interest cannot exceed 60 percent). Accordingly, the interests of disqualified persons in
CLAT Three will exceed the 35 percent minimum requirement of § 4946(a)(1)(G), and CLAT
Three will be a disqualified person with respect to you. In addition, for purposes of section
4943, the voting stock of Corporation that is owned by CLAT Three will be deemed to be owned
by its ultimate remainderman-i.e., Daughter and Grandchild B through the trust that is
remainder holder. See Treas. Reg. § 53.4943-8(b).

With respect to ruling 4(c), the members of the families of Daughter and Grandchild B also will
be disqualified persons with respect to you because they will be described in § 4946(a)(1)(D)
and (d).

For the reasons set forth above, we decline to rule with regard to requested rulings 4(d) and
4(e).

Ruling 5: The three private foundations will not be disqualified persons with respect to each
other under § 4946(a)(1)(H).

A private foundation may be a disqualified person with respect to another private foundation for
purposes of the excess business holding rules pursuant to § 4946(a)(1)(H). A disqualified
person private foundation must be effectively controlled, directly or indirectly, by the same
persons who control the private foundation in question, or must be the recipient of contributions
substantially all of which were made, directly or indirectly, by substantial contributors, foundation
managers, 20 percent owners, and members of their family(ies) who made, directly or indirectly,
substantially all of the contributions to the private foundation in question. See § 52.4946-

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1(b)(1). Here, the Founder A or Founder B will be a substantial contributor to all three private
foundations.

## Rulings

1\. The estate of the surviving spouse of Founder A and Founder B will be entitled to a
charitable deduction under § 2055(e)(2) for assets passing to the three CLATs created
under the revocable trust of the surviving spouse, including the assets passing from the
marital trust created under the revocable trust of the predeceased spouse, subject to the
assumptions and qualifications specified previously.

2\. Founder A or Founder B will be considered a substantial contributor as defined in §
507(d)(2) and, therefore, will be a disqualified person under § 4946(a)(1)(A) with respect to
you.

3\. Stock owned by Founder A and Founder B before their deaths shall not be counted in
determined whether or not you are subject to the excise tax on excess business holdings as
provided under § 4943.

4\. With respect to you, Daughter, the creator of you, and Grandchild B, Daughter's child and
the Foundation Advisor of you, both being the remainder beneficiaries of CLAT Three will be
disqualified persons. CLAT Three also will be a disqualified person with respect to you
because disqualified persons will hold more than 35 percent of the beneficial interests in
CLAT Three. For purposes of § 4943, CLAT Three's shares of Corporation will be
considered to be held by Daughter and Grandchild B. Also, members of the families of
Daughter and Grandchild B will be disqualified persons with respect to you.

5\. The three private foundations will be disqualified persons with respect to each other under §
4946(a)(1)(H).

These rulings are based on the facts as they were presented, which are summarized and
restated under the heading "Facts," above, and on the understanding that there will be no
material changes in these facts. These rulings also are based on applicable law in effect on the
date of this letter. If there is a change in a material fact or law (local or Federal) before the
transactions considered in this ruling take effect, the ruling will have no force or effect. This
letter does not address the applicability of any section of the Code or regulations to the facts
submitted other than with respect to the sections described, and, in particular, it does not
address tax matters relating to grantor trusts, powers of appointment, or gift and estate taxation
other than the issue addressed under § 2055. Further, nothing in this letter should be construed
to provide that the terms of the marital trust satisfy the requirements of § 2056. Because it could
help resolve questions concerning your federal income tax status, this letter should be kept in
your permanent records.

If you have any questions about this letter, please contact the person whose name and
telephone number are shown in the heading of this letter.

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In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we
are sending a copy of this letter to your authorized representative.

Sincerely,

Michael Seto
Manager, EO Technical

Enclosure
Notice 437