whither the ING

Awhile back, I wrote in this space about the so-called incomplete nongrantor trust, which is a device some aggressive planning lawyers use to move the nominal situs of portfolio income from a state that taxes income to another state that does not. With the incidental benefit of protecting the assets from the settlor's creditors.

The strategem is often promoted with a four-letter acronym ending in ING, the first letter representing the name of the zero tax state in which the trustee resides.

At the time, I was decrying the result in PLR 202017018, which has turned out to be probably the last of well over a hundred private letter rulings issued over more than a dozen years lending credence to what my alter ego Jack Straw says is a terrible idea, namely

that an ostensibly irrevocable trust over which the settlor has reserved sufficient controls to render the gift "incomplete" can be a "nongrantor" trust for income tax purposes even if the settlor herself is among the class of discretionary distributees,

on the theory that the discretion whether to distribute and to whom is to be exercised in a nonfiduciary capacity by a committee who are also permitted distributees, and who have contingent interests in the trust remainder after the settlor's death, albeit defeasible by her exercise of a reserved limited testamentary power of appointment.

Something north of eighty words here, but I am not sure it can be stated more simply.

What made the particular ruling so egregious was that members of the distributions committee were not even the takers in default of the exercise of the settlor's reserved appointment power, which had hitherto been a feature of these trusts.

For the nonspecialists playing at home, all this has to do with whether a member of the distributions committee has a "substantial" beneficial interest in the trust that would be "adversely affected" by her participating in approving a distribution to someone else. This has both income tax and transfer tax implications.

Even at the time, it seemed likely we would not see many more of these rulings, as IRS had placed some poorly defined subset of these trusts on the annual update of its "no rule" list in Rev. Proc. 2020-3 in January 2020.

It is not clear this particular trust would have fallen into that subset, but in any event the request had been made and the letter actually issued back in 2019, before the "no rule" position took hold.

Shortly after the publication of the rev. proc., I wrote to Lorraine Gardner, a lawyer in the Chief Counsel's office who is the named signatory on quite a number of these ING letter rulings, attaching my critique both of the analysis that had informed the hundred-odd "favorable" ING rulings and of the inadequacies of the "no rule" position as framed.

That critique concluded with the suggestion that

IRS should refuse to rule in these circumstances altogether. Or they should offer an adverse determination and in effect force the taxpayer to withdraw the request. And then open an examination[,]

with a footnote saying

One ground for an adverse determination is that the ING is not a trust at all, as there is no "beneficiary" with an enforceable interest, and no fiduciary who owes anyone a duty of impartiality, apart from the "independent" trustee, whose role is limited to managing investments.

"This is a corporation," the footnote concluded, "and should be taxed as such."

Probably Ms. Gardner has a responsibility to pass this kind of communication up the food chain, but I have no illusions that anyone at the Chief Counsel's office cares what I say, either in my own voice or in that of a fictional alter ego.

Nonetheless, in this year's update of the "no rule" list, Rev. Proc. 2021-3, IRS has finally, belatedly relegated incomplete nongrantor trusts to category five, no rulings pending further study and possible, eventual formal guidance.

And not just on the question whether the ING is in fact a "nongrantor" trust, which is all that was on the table last year. The agency's position now is that they will not give advance determinations on

(a) whether the settlor should be treated as the income tax "owner" of "any portion of a transfer in trust that is purported to be an incomplete gift," emphasis supplied, regardless whether we have a distributions committee or whatnot, and conversely,

(b) whether a transfer to a "purported" nongrantor trust can be treated as an incomplete gift at all.

Also

(c), whether the members of a distributions committee might themselves be treated as income tax "owners" of any portion of a trust to which their power to distribute income or principal to themselves by unanimous consent extends -- which no one has been asking, and which could indicate IRS is getting ready to open another can of worms --, and

(d) whether one or more members of a distributions committee might be treated as holding general powers of appointment under specified circumstances,

which latter is a question on which the Chief Counsel had issued a request for comments more than a dozen years ago, and received a mixed bag, some of which is discussed in the most recent issue of my newsletter, but has resulted in no formal guidance to date.

The fact that INGs have now been relegated to category five of the "no rule" list does not mean, incidentally, that the agency is actually planning to undertake a formal guidance project anytime soon.

And specifically it does not mean that IRS is looking at revoking any of these hundred-odd "favorable" rulings. Though one can hope.