Contents

§ 16.7 PRIVATE FOUNDATION RULEStax purposes. 31 When the charitable donee is not a public charitable organization 32and the subject of the gift is capital gain property, the 20 percent limitationapplies. 33 Nonetheless, amounts in excess of these limitations may be carried forwardto subsequent years. 34§ 16.7 PRIVATE FOUNDATION RULESAs is the case with many types of trusts used in the planned giving context, acharitable lead trust—being a split-interest trust 35 —is treated as a private foundationfor certain purposes. 36 In general, the private foundation rules that pertainto a charitable lead trust are those concerning self-dealing, 37 excess businessholdings, 38 jeopardizing investments, 39 and taxable expenditures. 40 A charitablelead trust is exempt from the excess business holdings and jeopardizing investmentsrules, however, when all of the amounts in the trust for which a charitablecontribution deduction was allowed (namely, the income interest), and none ofthe remainder interest, have an aggregate value of no more than 60 percent ofthe total fair market value of all amounts in the trust. 41The IRS applied these rules (in the gift tax setting), in considering a trustunder which trust income in excess of the guaranteed annuity payable to charitywas to be added to trust corpus for distribution to noncharitable remainder beneficiariesupon expiration of the guaranteed annuity period. All of the excessincome, along with any other property held by the trust, could be applied, if necessary,to pay the guaranteed annuity during the term of the annuity, and wasnot available for any private purpose during the term. In the case considered,because the value of the income interest did not exceed 60 percent of trust corpus,and because the income interest of the trust was devoted solely to charitablepurposes, the value of the annuity was held to be deductible even though thetrust instrument lacked references to the excess business holdings and jeopardizinginvestments rules. If the trust, however, had provided that all income earnedby the trust in any year in excess of the amount needed for the annuity paymentwas to be paid currently to the individuals named as remainder interest beneficiaries,the value of the annuity interest would not have been deductible,because (1) the income interest in the trust would not have been devoted solelyto charitable purposes; and (2) the trust instrument would not contain referencesto the excess business holdings and jeopardizing investments rules, even thoughthe value of the charitable interest was less than 60 percent of the trust corpus. 4231 IRC § 170(b)(1)(B).32 See § 3.4.33 IRC § 170(b)(1)(D).34 IRC §§ 170(b)(1)(B), 170(b)(1)(D)(ii).35 IRC § 4947(a)(2); Reg. § 53.4947-1(c)(1)(ii). See Private Foundations § 3.7.36 The concept of a private foundation is summarized in § 3.4.37 IRC § 4941. See Private Foundations ch. 5.38 IRC § 4943. See Private Foundations ch. 7.39 IRC § 4944. See Private Foundations ch. 8.40 IRC § 4945. See Private Foundations ch. 9.41 IRC § 4947(b)(3).42 Rev. Rul. 88-82, 1988-2 C.B. 336. 521