TENNESSEE’S MADDOX FOUNDATION TRUST RECEIVES FAVORABLE TAX RULING

DATELINE: December 3, 2007, Chicago

On November 29, 2007, the IRS issued a private letter ruling to the Maddox Foundation Trust blessing the transfer of $55 million from the Maddox Foundation, a Mississippi nonprofit corporation, to the trust. Specifically, the IRS ruled that the distribution would not...

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jeopardize the tax-exempt status of the trust or the corporation; the distribution is not a transfer within the meaning of Section 507(b)(2); and the $55 million distribution will not result in the imposition of self-dealing, excess business holding, jeopardizing investment, or taxable expenditure excise taxes. The IRS rooted its decision in the fact that the transaction was more akin to a restoration of assets rather than a distribution.

At the end of the day, the ruling eliminates the trust's potential exposure to transferee liability from the acts of the Mississippi corporation, permitting the Tennessee trust to now exist as freestanding, funded charitable organization.

Over the next week or so, the Mississippi foundation must deliver $19 million to the Tennessee trust, and the remaining $35 million will be delivered to the trust 60 days later, according to a press release. The Mississippi foundation previously distributed $1 million to the trust when the settlement agreement was approved by the Davidson County Probate Court in May of this year.

The open question is whether the IRS or Mississippi will take any further action against the Mississippi corporation or those who have been responsible for it. Although the Tennessee and Mississippi attorneys general did not satisfactorily address the core allegations in the original lawsuit, those allegations raise the possibility of breaches of fiduciary duties under state law and self-dealing and excise business holding excise taxes under the Internal Revenue Code. Stephanie Strom of the New York Times reported that "foundation" was still under IRS investigation, apparently referencing the Mississippi entity. In Settlement, Charity Will Split Assets, Dec. 1, 2007. With Tennessee now out of the picture under the terms of the settlement, if state action is to be taken, it is up to Mississippi to take it.

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