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§ 13.7 PASS-THROUGH OF DEPRECIATION§ 13.6 PRIVATE FOUNDATION RULESBecause pooled income funds are split-interest trusts, 67 they are subject to at leastsome of the prohibitions that are imposed on private foundations, most particularlythe rules concerning self-dealing 68 and taxable expenditures. 69 Althoughreference to the other private foundation rules may not be necessary, 70 it is commonpractice to include references in the pooled income fund declaration of trustto the other private foundation restrictions, such as distribution and the prohibitionson excess business holdings 71 and jeopardizing investments. 72§ 13.7 PASS-THROUGH OF DEPRECIATIONIn private letter rulings, the IRS recognized that the tax deduction for depreciationcan flow through a pooled income fund to the income beneficiaries of thefund in determining their federal income tax liability. 73 The benefits arising fromthis circumstance were, however, initially curbed when the IRS required applicationof the tax-exempt entity rules in certain of these circumstances, which hadthe effect of reducing the allowable depreciation deduction. 74 These circumstancesarise when the property that is the (or a) medium of investment of thepooled income fund is located on the premises of the charitable organization thatmaintains the fund or is otherwise available to those who are served by the charitableorganization. This is because of the provision of the tax-exempt entity rulesthat includes within the definition of a lease the grant of the right to use property,thereby causing the grant of a right to use property to be a disqualified lease. 75Thereafter, however, the IRS ruled that a pooled income fund, to qualify underthese rules, must have adequate language concerning a depreciation reserve fund. 76Specifically, the IRS held that:• If a trustee of a trust that otherwise qualifies as a pooled income fund isnot required by the governing instrument of the trust or state law toestablish a depreciation reserve fund with respect to any depreciableproperty held by the trust, the trust does not meet the requirements for apooled income fund under these rules• If a trustee of a trust that otherwise qualifies as a pooled income fund isrequired by the governing instrument of the trust to establish a depreciationreserve fund with respect to any depreciable property held by thetrust, but the depreciation to be added to the reserve is not required to bedetermined in accordance with generally accepted accounting principles67 IRC § 4947(a)(2); Reg. § 53.4947-1(c)(1)(ii). See Private Foundations § 3.7.68 IRC § 4941. See Private Foundations ch. 5.69 IRC § 4945. See Private Foundations ch. 9.70 Reg. § 1.642(c)-5(a)(6).71 IRC §§ 4943, 4944. See Private Foundations chs. 7, 8.72 IRC § 4944. See Private Foundations ch. 8.73 See, e.g., Priv. Ltr. Rul. 8616020.74 The tax-exempt entity leasing rules are the subject of Tax-Exempt Organizations § 29.5.75 Reg. § 1.168(j)-IT, Q-5, A-5.76 Rev. Rul. 90-103, 1990-2 C.B. 159, amplifying Rev. Rul. 82-38, 1982-1 C.B. 96. 489