Tax Law Update: March 2025Tax Law Update: March 2025

• Private operating foundation’s (PF’s) loans to companies owned and operated by PF managers found to be self-dealing—In Chief Counsel Advice (CCA) 202504014 (Jan. 24, 2025), a married couple established a PF. The taxpayers, who both served as the PF managers, funded it with stock. Then, over several years, the PF loaned funds to two companies that the taxpayers had also founded and continued to operate or manage in various ways. For example, the taxpayers served as board members of the entities and were majority or significant equity owners. One of the taxpayers was also responsible for managing the day-to-day operations of one of the companies. The loans were interest-only and extended multiple times.

The CCA found that the PF’s unsecured loans to the business entities and the repeated extension of those loans served the private interests of the taxpayers and entities, which meant that the PF was being operated in furtherance of a nonexempt purpose. Under Internal Revenue Code Section 501(c)(3), an organization will lose its tax-exempt status if more than an insubstantial part of its activities further nonexempt purposes. If the exempt organization is a source of credit for its founder, that counts as serving a private interest.

In addition, the loans were indirect self-dealing. Self-dealing includes any direct or indirect lending of money between the PF and a disqualified person. The taxpayers were clearly disqualified persons with respect to the PF, but the transactions were between the PF and the entities, which weren’t disqualified persons because the taxpayers didn’t own 35% or more of the entities. Treasury Regulations Section 53.4941(d)-1(b)(4) provides that a transaction between a PF and an organization that’s not controlled by the PF (within the meaning of Treas. Regs. Section 53.4941(d)-1(b)(5)), and of which disqualified persons don’t own more than 35% of the total combined voting power or profits or beneficial interest, shall not be treated as an indirect act of self-dealing between the PF and such disqualified persons solely because of the ownership interest of such persons in such organization.

However, indirect self-dealing can still occur as a result of a transaction between a PF and an organization that isn’t a disqualified person but has owners who are disqualified persons if the facts and circumstances show that the PF’s assets are being used to indirectly benefit such owners. Because the taxpayers benefited from the PF’s loans to the companies they established, owned significant stakes in and even operated those companies, there was indirect self-dealing. 

The taxpayers proposed assigning the loans to public charities to “correct” the self-dealing under IRC Section 4941, which requires that the transaction be undone to place the PF in a financial position no worse than it would be if the disqualified person were dealing under the highest fiduciary standards. However, assigning the notes to public charities didn’t improve the condition of the PF at all, nor did it make it whole. As a result, it wouldn’t correct the self-dealing.

• Pennsylvania Superior Court untangles jurisdictional quagmire—In the case of In re Dille Family Trust (26 WDA 2023 J-A06027-24 (May 16, 2024), an unreported decision, the Pennsylvania Superior Court affirmed the rulings of the Pennsylvania Orphans’ Court and concluded that the beneficiaries of a trust couldn’t unilaterally remove the trustee and change the trust’s situs. 

A California couple established the Dille Family Trust in 1979. The trust was governed by California law. It became irrevocable after the grantors’ deaths. After a series of trustee and situs changes, Pennsylvania attorney Louise Greer was accepted as trustee in 2011. After Louise became trustee, the trust was governed by Pennsylvania law. For various reasons, eight years later, the beneficiaries wanted to remove Louise as trustee and change the trust’s situs back to California. They notified Louise that she was no longer trustee and then filed various petitions in California courts to terminate the trust and transfer situs. Louise contested these actions, filing a petition in the Pennsylvania Orphans’ Court arguing that the beneficiaries had no authority to remove her under the trust document or move the trust’s situs while she was acting as trustee. In the meantime, a third party purported to be the trustee and filed various motions in California, including to terminate the trust.

The court agreed with Louise and determined that the beneficiaries had no right under the trust to unilaterally remove her (or any other trustee). Additionally, while the beneficiaries had the power under the trust instrument to “transfer the Trust situs to a more convenient jurisdiction,” such power wasn’t unlimited. As Louise remained the trustee in Pennsylvania, the situs couldn’t be moved to California because California courts have no jurisdiction over her and couldn’t oversee the administration of the trust. Without trustee consent or court approval, the ability of the beneficiaries to unilaterally change the situs of the trust would allow them to undermine both the grantors’ intent and the authority of the courts. This wasn’t allowed.  

• Internal Revenue Service issues final regulations (regs) on gifts and bequests from covered expatriates—On Jan. 10, 2025, the Treasury issued final regs, T.D. 10027, regarding gifts and bequests made by “covered expatriates.” A covered expatriate is a former U.S. citizen or permanent resident who renounced such status after June 17, 2008 and: (1) has an average annual net income tax liability for the last five years exceeding $124,000 (adjusted for inflation), (2) has a net worth of $2 million or more, or (3) fails to certify on Form 8854 that they’ve complied with all U.S. federal tax obligations for the last five years. The purpose of the regs is to ensure compliance under IRC Section 2801 and avoid the renunciation of citizenship or residency as a means to avoid taxes.

The regs apply to covered expatriates’ gifts and bequests to U.S. citizens and residents, as well as to domestic trusts and certain foreign trusts treated as domestic trusts. They also apply to gifts of any property, regardless of its location worldwide.   

Under the regs, recipients of such transfers are responsible for the tax liability and must use Form 708, “United States Return of Tax for Gifts and Bequests Received from Covered Expatriates,” to report the transfers. For amounts that exceed the annual exclusion amount, the tax is calculated by applying the highest applicable estate tax rate. Foreign gift or estate taxes paid can be credited, and certain exceptions exist. 

Gifts or bequests from a covered expatriate to their U.S. citizen spouse are excluded if they qualify for the marital deduction. Additionally, a gift recipient isn’t responsible if a covered expatriate reports the gift on a gift tax return, emphasizing the goal of encouraging reporting and preventing tax avoidance. So, the recipient needs to determine if the transferor meets the definition of a covered expatriate and confirm what filings they’ve made.

The regs took effect on Jan. 14, 2025.