May 21, 2022 - Douglas Myser

No step up basis part two. The case in question involves a prior IRS Letter Ruling made regarding the step up basis of a Private Foundation, and then a subsequent Foundation relying on that ruling to make Tax Filins judgements that were then reversed in Tax Court. The IRS, under similar facts in IRS Letter Ruling 9852023, held that the basis of property for the purpose of determining capital gain for the Sec. 4940 excise tax was the property's FMV on the date an organization ceased to be a public charity and became a private foundation. The letter ruling involved the tax-exempt successor as parent to a publicly traded for profit health maintenance organization, of whose stock the corporation had held more than 40% by vote for less than 15 years. The corporation planned to undertake transactions that would result in its conversation to a private foundation. Among other rulings requested, the corporation asked that the adjusted basis of the stock and other assets, the gain on the sale of which would be subject to tax under Sec. 4940 (A), would be equal to the FMV upon the conversion. No step up basis part two.

In a footnote to PMTA 2022-01, the IRS office of Chief Counsel stated it was aware of this letter ruling and summarily dismissed it, stating "We believe Private Letter Ruling 9852023 is incorrect. Chapter 1, subsection O, part two of the Code, where private foundations must look for the "usual rules" in this instance, includes Sec. 1014, which does provide a step up in basis to Fair Market Value, FMV. But this provision applies only to property acquired from a decedent, so it would not be usual in the conversion of a public charity to a private foundation.

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