Tax Law Update: September 2026
• Related shareholders benefit from estate administration exception—In Private Letter Ruling 115158-25 (June 18, 2026), the Internal Revenue Service reviewed the private foundation (PF) self-dealing restrictions for several related individuals (collectively, the taxpayers) who co-owned a closely held business (the company) and included charitable beneficiaries in their estate plan. They also executed an option agreement with the company.
Internal Revenue Code Section 4941 imposes a tax on acts of self-dealing between a PF and a “disqualified person,” which essentially includes individuals or family members with significant ties to the PF.
Here, the taxpayers owned a majority interest in the company. Each individual taxpayer established a revocable trust that directed the trustees to set aside a fixed portion of the trust property after the taxpayer’s (and their spouse’s) death to be distributed to charitable organizations selected by the trustees, which could include a certain PF. The trustees were required to make an irrevocable determination of the charitable beneficiaries within six months of the taxpayer’s (or their spouse’s) death. There was no requirement to benefit the PF.
The company held an option to purchase stock from each taxpayer’s revocable trust at fair market value (FMV) within 15 months of the taxpayer’s death. At issue was whether this option to purchase would be considered self-dealing with the PF under IRC Section 4941.
The IRS determined that the company and the taxpayers were disqualified persons with respect to the PF under Section 4941, but the PF didn’t have an interest or expectancy in the company’s stock merely because it could potentially receive the company’s shares. Once the trustees decided to benefit the PF, however, the PF would have an interest or expectancy, and transactions among the trustees and the PF would be subject to Section 4941’s self-dealing restrictions.
However, the IRS determined “the estate administration exception” would apply. Treasury Regulations Section 53.4941(d)-1(b)(3) provides that indirect self-dealing doesn’t include a transaction involving property in which a PF has an interest or expectancy, held by an estate or revocable trust, if the following requirements are met: (1) the executor or trustee has the power to sell the property; (2) the court approves the transaction; (3) the transaction occurs before the estate is considered terminated for federal income tax purposes; (4) the trust receives at least FMV; and (5) the PF receives an interest or expectancy at least as liquid as the one it gave up. In this case, if the option was exercised, the company’s payment to the trustee to exercise the option and distribution of that payment to the PF fell within the estate administration exception. Further, sales of company stock to other family members or to trusts for their benefit before the estate terminated and before the trustees made the irrevocable determination similarly fell under the estate administration exception.
• Valuation of gift on termination of qualified terminable interest property (QTIP) trust—In Lewis v. Commissioner, T.C. Memo. 2026-58 (July 20, 2026), the Tax Court examined how to value gifts that resulted from the termination of a QTIP trust. Clotilde McDougall died in 2011, and a QTIP trust valued at $117,604,143 was established under her will for her husband Bruce. The QTIP trust property would be divided among Clotilde’s children equally on Bruce’s death, subject to his testamentary power of appointment (POA) to appoint the trust property to Clotilde’s descendants. In 2016, Bruce executed a will that exercised his POA to his own revocable trust, which benefited his descendants.
Shortly after Bruce executed his will, he entered into a nonjudicial agreement with his and Clotilde’s two children, Linda and Peter, by which the QTIP trust would terminate, and the entirety of the trust property would be distributed to Bruce. In McDougall v. Comm’r, 163 T.C. No. 5 (Sept. 17, 2024), the Tax Court held that the agreement resulted in taxable gifts by the children to Bruce because, before the termination, they had a remainder interest in the QTIP trust and, after the termination, they had nothing. The issue before the court in this 2026 case was how to value these gifts.
Linda and Peter presented expert valuations valuing the gifts at $156,000, whereas the IRS placed the value of the gifts at approximately $53 million. The court defined the gifts to Bruce as the value of the remainder interests that Linda and Peter gave up by executing the nonjudicial agreement, meaning the value they would have received had the trust terminated and passed under the terms of Clotilde’s will and residuary trust.
Linda and Peter argued that Bruce’s POA should severely discount the remainder interests because a hypothetical purchaser would receive nothing on Bruce’s death unless Bruce updated his will to refrain from exercising his POA. The IRS disagreed and convinced the court that Bruce’s POA was irrelevant because the actual trust termination rendered it moot. The court agreed with the IRS’ conclusion but focused on Clotilde’s intent under her will. The court recognized the relevance of Bruce’s POA but that the heavily discounted valuation of Linda and Peter’s interests based on it was contrary to Clotilde’s intent. If Clotilde had wanted Bruce to receive the lion’s share outright, she wouldn’t have set up the QTIP trust as she did. She clearly intended to leave the trust assets to her children.
The court next considered the question of reimbursement under IRC Section 2207A. If the children hadn’t entered into the nonjudicial agreement and the QTIP trust had been terminated based on the respective interests of the beneficiaries, Bruce would have received a payment equal to the value of the income interest, and the value of the remainder interests would have been paid to the children. IRC Section 2519 would have treated Bruce as making a gift of the remainder interests to Linda and Peter. Bruce would be obligated to pay gift tax, but under Section 2207A, he could seek reimbursement from Peter and Linda to pay the gift tax, and the value of Bruce’s hypothetical gift to Linda and Peter would be reduced by the gift tax. The court therefore concluded that Peter and Linda’s gifts to Bruce should be reduced by the amount they would have been obligated to pay Bruce back for the gift tax.
Lastly, the court noted that the IRC Section 7520 tables weren’t controlling in valuing the income and remainder interests because the question of what Peter and Linda would be entitled to receive from the trust is a matter of state law before it can be evaluated for federal tax purposes. The court concluded that each gift was worth approximately $35 million.
In sum, the court ultimately agreed with the IRS’ basic framework but modified it to reduce the gifts by Linda and Peter’s hypothetical reimbursements under Section 2207A for related gift tax and rejected the IRS’ use of the Section 7520 tables.
