Mr. LYONS. Thank you, Mr. Chairman. (The prepared statement follows:) PREPARED STATEMENT OF FRANCIS J. LYONS ON BEHALF OF THE FIDUCIARIES SECTION OF THE DISTRICT OF COLUMBIA BANKERS ASSOCIATION, ON S. 2409 My name is Francis J. Lyons and I appear on behalf of the Fiduciaries Section, District of Columbia Bankers Association, in support of S. 2409. The purpose of the bill is to facilitate the amendment of the governing instruments of certain trusts and corporations with charitable beneficiaries which are subject to the jurisdiction of the District of Columbia and which are treated as "private foundations" for Federal tax purposes, in order to conform to the requirements of section 508(e) of the Federal Internal Revenue Code, as amended by the Tax Reform Act of 1969. This is accomplished by amending Title 21 of the D.C. Code to add a new chapter relating to charitable and splitinterest trusts, and by adding a provision relating to charitable corporations, providing in effect that certain provisions required by the Internal Revenue Code are deemed to be included in the governing instruments of the trusts and corporations affected. Technical explanation of S. 2409, previously submitted to the District Committee, is attached hereto. The definition of "private foundations” in 509(a) of the Internal Revenue Code covers a broad range of trusts and corporations which are organized and operated for religious, charitable, scientific, literary and educational purposes. The Tax Reform Act of 1969 imposes a variety of excise taxes and penalties on such private foundations for self-dealing, retaining excess business holdings, investing amounts so as to jeopardize the charitable purpose, making certain improper expenditures and failing to distribute income currently. In addition, the Tax Refom Act amended the Internal Revenue Code to provide that a private foundation will not be exempt from Federal income tax unless its governing instrument specifically requires compliance with the above-mentioned requirements and prohibitions of the law, namely, that income be distributed currently, that the trust or corporation not engage in any act of self-dealing that it not retain any excess business holdings, that it not make investments which jeopardize the charitable purpose of the organization and that it not make improper expenditures. The Tax Reform Act further provides that charitable trusts and corporations organized before 1970 which are treated as "private foundations" must, in order to preserve their tax exemption, have their governing instruments amended to include the required provisions by December 31, 1971. In Temp. Reg. Sec. 13.8 (35 Fed. Reg. 7300 [May 9, 1970]), the Internal Revenue Service ruled that a statute which treats the required provisions as contained in the foundation's governing instrument will satisfy the Tax Reform Act requirement as to governing instruments. (Sec. 508 of the Internal Revenue Code). By letter dated April 22, 1971 (copy attached), the Revenue Service ruled that the provisions of S. 2409, if enacted by December 31, 1971, will effectively amend the governing instruments of private foundations and certain charitable and split-interest trusts to meet the requirements of section 508 (e) of the Internal Revenue Code. Most charitable corporations, and some trusts where the grantor is living and the instrument so permits, will be able to amend their by-laws or governing instruments to comply with the provisions of the Act. However, the only recourse open to the trustees of charitable trusts where the grantors are deceased and those charitable corporations whose governing instruments do not permit amendment would be to seek equitable relief in the courts permitting the conforming amendments, which court action must at least be initiated prior to December 31, 1971. In view of the position of the Internal Revenue Service in accepting legislative relief in lieu of court determination, affected parties throughout the United States have sought appropriate legislation in the various state legislatures. To date, at least 35 states (including Maryland, Virginia, New York, Georgia, Texas and Tennessee) have adopted the legislation to conform the governing instru ments of the charitable trusts and charitable corporations to the requirement of the 1969 Tax Reform Act. A list of states which have enacted bills similar to S. 2409 is attached. The need for S. 2409 arises from the fact that it is not sufficient for a charitable corporation or trust to operate in compliance with the Tax Reform Act of 1969. The tax exemption will be denied to it unless its governing instrument specifically requires such compliance. If this bill is not enacted, most, if not all, trusts with charitable beneficiaries and some charitable corporations will be each required to institute separate court proceedings to amend their individual charters to include these same provisions. The Trust Departments of the city's banks have estimated that approximately 400 separate actions would have to be prepared and filed before December 31, 1971. No estimate is available for nonbank trustees. These numerous law suits would burden court dockets in the District of Columbia and delay trials of important criminal and civil cases. In addition, the charities would be forced to incur legal fees and court costs which would reduce the amount of funds distributable for charitable purposes in the District of Columbia. In the case of relatively small charitable trusts, the legal fees for such litigation might well exhaust one year's income or more which otherwise would be used for charitable purposes. The beneficiaries of many of the trusts involved are local institutions such as the Children's Hospital, the Red Cross, Georgetown University, George Washington University, American University, Howard University, Catholic University, and many, many other similar charitable and educational institutions, as well as religious organizations and their affiliates. Enactment of this statute will free the courts from much burdensome litigation and protect assets donated for charitable purposes, and will thereby carry out the intent of Congress in the Tax Reform Act to ensure that funds of entities granted tax benefits are totally devoted to charitable purposes. S. 2409 is a wholly meritorious bill which would allow literally hundreds of charitable organizations in the District of Columbia to comply with the provisions of the 1969 Tax Reform Act without the expense and court congestion which would follow if the governing instrument of each such charity had to be amended through separate judicial proceedings. Accordingly, it is respectfully requested that this bill be approved and enacted by December 31, 1971. STATES WHICH HAVE ENACTED LEGISLATION TO CONFORM GOVERNING INSTRUMENTS OF CHARITABLE TRUSTS AND CORPORATIONS TO THE REQUIREMENTS OF THE TAX REFORM ACT OF 1969 TECHNICAL EXPLANATION Reasons for the bill.--Section 508 (e) of the Internal Revenue Code of 1954, added by the Tax Reform Act of 1969 (P.L. 91-172), denies exemption from federal income tax to any charitable 1 corporation which is a "private foundation" (as defined in sec. 509) unless its governing instrument contains provisions requiring the organization to act or refrain from acting so as to avoid imposition of taxes under §§ 4941-4945 of the Code. Pursuant to secs. 508 (e) and 642 (c) (6) of the Code, nonexempt charitable trusts described in sec. 4947(a)(1) will be denied the right to take deductions under sec. 642 (c) for charitable distributions unless their governing instruments contain the same provisions. Certain of these provisions must also appear in the governing instruments of nonexempt "split-interest" trusts described in sec. 4947 (a) (2), with respect to all or part of the amounts in trust, or else such trusts will be denied the right to take sec. 642 (c) deductions for distributions to charitable beneficiaries." The Internal Revenue Service has published a Temporary Regulation (Temp. Reg. § 13.8, 35 Fed. Reg. 7300 (May 9, 1970)) that recognizes as the equivalent of actual amendment of governing instruments the enactment of a statute which treats the required provisions as contained in the foundation's governing instrument. If such a statute is not timely enacted in the District of Columbia, many, if not all, existing trusts with charitable beneficiaries (no matter how long in existence) would have to institute separate court proceedings to include the provisions required by sec. 508 (e), since the trustees of such trusts, generally speaking, lack authority to make the necessary conforming changes in the trust instrument. Furthermore, even though charitable corporations treated as private foundations in many instances may be able to amend their charters to include the required provisions, some corporate trustees might by inadvertence fail to make timely charter amendments required by sec. 508 (e)—which is merely one of the numerous and complex new requirements imposed on charities by the Tax Reform Act--and thus jeopardizing the charitable assets of the corporation. To avoid imposing the burden of numerous law suits on the District of Columbia court system, and to preserve charitable assets, this legislation is desirable and necessary. General explanation of bill.-Section 1 of this bill applies to a trust, whether created before or after the bill's effective date, if the trust (i) is described in sec. 509(a) as a private foundation; (ii) is a nonexempt charitable trust described in sec. 4947(a)(1) and treated as a private foundation; or (ii) is a nonexempt "split-interest' 'trust described in sec. 4947(a)(2), to the extent treated as a private foundation by sec. 4947. The term "trust" includes those trusts enumerated in subsection (c) of Section 1 of the bill. Section 2 of this bill applies to corporations organized (whether before or after the effective date) under any law of the District of Columbia (including but not limited to the District of Columbia Nonprofit Corporation Act) or under any special Act of Congress applicable to the District of Columbia, if the corporation is described in sec. 509 (a) as a private foundation. The term corporation" includes an association (other than a trust), if it is described in sec. 509 (a) of the Code as a private foundation. The bill treats the governing instruments of such corporations and of nonexempt charitable trusts described in sec. 4947 (a) (1) as including each of the following requirements: (1) to refrain from engaging in any act of self-dealing which is subject to tax under sec. 4941; (2) to make distributions at such time and in such manner as not to subject the organization to tax under sec. 4942; (3) to refrain from retaining any excess business holdings which would subject the organization to tax under sec. 4943; (4) to refrain from making any investments which would subject the organization to tax under sec. 4944; and (5) to refrain 1 The term "charitable" is used herein as a shorthand reference to the charitable, educational, religious, scientific, etc., purposes enumerated in sec. 501(c)(3) or sec. 642 (c) of the Code, as the case may be. 2 In addition, charitable deductions are not allowed for gifts or bequests to a private foundation (corporation or trust) which has not included the required provisions in its governing instrument. See secs. 508 (d) (2) and 170(f) (1). The directors or trustees of some charitable organizations other than trusts may also lack authority to amend the governing instrument except through judicial proceedings. 69-108 71 12 from making any taxable expenditures which would subject the organization to tax under sec. 4945. In the case of a "split-interest" trust described in sec. 4947 (a) (2), such provisions will be deemed included in the governing instrument only to the extent required by secs. 4947 and 508(e). The enumerated provisions, to the extent deemed included in the governing instruments of foundations, are not intended to require any foundation (corporation or trust) to take or refrain from any action which would give rise to tax liability under secs. 4941-4945 of the Code but for the "savings provisions" in sec. 101 (1) of the Tax Reform Act of 1969, inasmuch as the latter section provides that sec. 508 (e) of the Code shall not apply to require inclusion in governing instruments of any provisions inconsistent with said savings clauses. The bill authorizes charitable corporations and the trustees of charitable trusts deemed to be private foundations to make such amendments (in the manner provided by the bill) as may be necessary to bring the organization into conformity with the requirements of sec. 508 (e). This authorization is added for the benefit of any foundation which may wish to comply with the language of sec. 508(e) by expressly amending the terms of the applicable governing instrument." The bill also provides that the enumerated provisions (in whole or in part) shall not be deemed included in the governing instrument of a trust treated as a private foundation to the extent that a court of competent jurisdiction shall determine that including such provisions would be contrary to the terms of the governing instrument and that the instrument may not properly be amended to conform with the new requirements. A charitable corporation treated as a private foundation may avoid application of the enumerated provisions by amending its governing instrument, in the manner provided by law for amendment, expressly to exclude application of this bill (in whole or in part). It is not considered The bill affects the governing instruments of both inter vivos and testamentary trusts, to the extent such trusts are treated as private foundations. In the case of an inter vivos trust which is initially revocable but subsequently becomes irrevocable and is then treated as a private foundation, the required provisions (to the extent applicable) are deemed included in the trust's governing instrument as of the date it becomes irrevocable and first is treated as a private foundation. In the case of a testamentary trust, the required provisions (to the extent applicable) are deemed included in the trust governing instrument when such trust is created on the testator's death. On expiration of the noncharitable interests of a "split-interest" trust described in sec. 4947(a)(2), all the provisions required by sec. 508 in the case of a nonexempt charitable trust described in sec. 4947 (a) (1) are deemed included in the trust's governing instrument if the trust is then treated as a private foundation. 5 Since pursuant to sec. 4947 some of the foundation rules set forth in secs. 4941-4945 of the Code are not applicable to split-interest trusts, the governing instruments of such trusts must contain the sec. 508(e) requirements and prohibitions only to the extent that the substantive rules of secs. 4941-4945 are applicable to such trusts. For example, the distribution requirement of sec. 4942 would not apply to a split-interest trust with noncharitable income beneficiaries and a charitable remainder, and therefore the governing instrument (prior to expiration of the income interests) need not contain a provision requiring the trust to make distributions at such time and in such manner as not to subject it to tax under sec. 4942. To the extent that sec. 4947(a) (2) does not apply with respect to certain amounts in or payable under a split-interest trust (for example, amounts transferred in trust before May 27, 1969) sec. 508(e) and this bill do not apply to require inclusion of any of the new foundation provisions. In the case of a "split-interest" trust described in sec. 4947 (a) (2), which includes noncharitable interests and may include an interest reserved or retained by the creator or creators, the trustee or trustees must obtain the written consent of all creators of such trust then living and competent. If no creators of the trust are then living and competent, the trustee or trustees may amend the governing instrumet, without application to any court, by executing a written amendment and delivering a copy thereof, by certified mail, to each named beneficiary (charitable or noncharitable), if any. 7 The amendment authorization in the bill is not intended to call into question any action properly taken by a foundation prior to enactment of this bill to conform its governing instrument to the requirements of sec. 508 of the Code, either pursuant to provisions in its governing instrument authorizing amendment thereof or pursuant to a judicial proceeding. 8The authorization in the bill permitting a corporation expressly to exclude application of the enumerated provisions by amendment is not intended to prohibit such a charitable corporation from seeking a judicial determination that such application would be contrary to the terms of the governing instrument and that the same may not properly be so amended, and any such judicial determination shall have the same effect as if the corporation had, to the same extent, expressly excluded application of this bill by amendment without obtaining any judicial determination. likely that any private foundation would elect to avoid amendment of its governing instrument pursuant to this bill to the extent that such avoidance would result in loss of tax exemption." Effective date. This bill applies to private foundations created or organized either before or after the enactment date, commencing with taxable years of trusts and corporations beginning on or after January 1, 1970, except that in the case of foundations created or organized prior to January 1, 1970, this bill applies only for taxable years of such foundations beginning on or after January 1, 1972. ARENT, FOX, KINTNER & KAHN, Re Statement on S. 2409, regarding limitations on District of Columbia founda- Chairman, Committee on the District of Columbia, United States Senate, New Senate Office Building, Washington, D.C. DEAR SENATOR EAGLETON: The Shriners Hospitals for Crippled Children, Chicago, Illinois is interested in S. 2409 because of the opportunity it provides to facilitate amendments to certain trust instruments of charitable remainder trusts and obtain the appropriate federal tax deduction on the basis of the reformed instrument. Shriners Hospitals is hopeful the Senate District Committee would conform the provisions of S. 2409 to H.R. 11489 by adding to S. 2409 what is proposed Sec. 21-1801 (d) of H.R. 11489. Proposed Sec. 21-1801 (d) is aimed at facilitating amendments to certain trust instruments in order to permit the creator or contributor to the trust to claim a charitable contribtion deduction for federal income, estate or gift taxes, whichever is applicable. In effect, it authorizes the trustee or trustees of an unqualified charitable remainder trust to join with the beneficiaries and amend the governing instrument to conform the instrument to the requirements of Sec. 664 of the Internal Revenue Code. For a number of different reasons, there are times when a charitable trust or corporation cannot carry out its specified charitable purposes and, accordingly. must seek court assistance to formulate new or related purposes for the general benefit of the public. Like most jurisdictions, the District of Columbia courts apply the common law rules of the "cy pres" doctrine to assure that a charitable trust or corporation fulfills its general charitable purposes. In this connection, if charitable purposes would be frustrated or thwarted, the courts, in the exercise of equity jurisdiction, may reform governing instruments of charitable trusts for this purpose. Under the Tax Reform Act of 1969, the Congress altered the charitable deduction and exemption treatment of certain partially charitable trusts to require their governing instrument to contain particular limitations and mechanical rules for the pay-out of income to private beneficiaries and to assure preservation of corpus to public charities. Internal Revenue Code Sec. 664, creating the concept of charitable remainder annuity trusts or charitable remainder unitrusts, was effective for inter vivos trusts created on or after August 1, 1969, and for testamentary trusts created on or after January 1, 1970. Under ordinary circumstances, a charitable remainder trust which was improperly drafted after the effective date of Section 664 would cost the donor a charitable deduction (either income, estate or gift tax) for his gift or bequest and, in the case of the testamentary dispositions, reduce the amount of funds eventually available to public charities, such as Shriners Hospitals for Crippled Children. The Treasury Department promulgated regulations which, subject to certain effective date rules, permit unqualified charitable remainder trusts to be amended to conform their instruments to the provisions of Sec. 664 of the Internal Revenue Code.* The amendment to conform the charitable remainder trust to a 9 Pursuant to sec. 508(e) (2), a private foundation organized before Jan. 1. 1970, will retain exempt status after the termination of timely initiated judicial proceedings resulting in a finding that the governing instrument cannot properly be amended to comply with sec. 508(e) (1). However, pursuant to sec. 508 (d) (2) (A). gifts or bequests to the foundation would not be deductible as to taxable years of the foundation beginning on or after Jan. 1, 1972. *Prop. Regs. § 1.663-1 (f), 35 Fed. Reg. 12469 (Aug. 5, 1970). Prop. Regs. § 1.664-1(g), 36 Fed. Reg. 18667 (Sept. 18, 1971). |