Several years ago Mother and Father built a unique home on 45 acres of beautiful rolling hills and woods. Father passed away three years ago and Mother now solely owns the 45-acre parcel and home.

She enjoys the peaceful country view out her front window. However, the university adjacent to the property is very interested in acquiring the property for eventual future growth. Not surprisingly, Mother is concerned. She does not want a new dormitory filled with college students in her front yard. In fact, she enjoys the peace and protection of her lovely home in the wooded countryside. However, at age 80, she recognizes that eventually some planning will have to be accomplished.

After a thorough understanding of Mother's needs and desires, her advisor suggested a wonderful four-part solution which incorporated an outright sale, a unitrust, a gift annuity and a gift of a remainder interest in a home. (See Case Study "Peace in the Countryside" for a full explanation.)

In addition, another component of the plan involves the potential sale of the home to Son after Mother's death. Specifically, Son enters into an option agreement with the university. It is a contingent agreement that permits Son to purchase the home from the university. This transaction is not an act of self-dealing, (See Case Study "Son's Intentions Paved with Gold, Part 1.") so, naturally, it is part of the final plan.

However, Son wants an additional option contract with Mother's unitrust. Specifically, Mother's unitrust will receive the 20-acre rear parcel, which university intends on developing. In the event university does not develop the land itself, Son wants the right to purchase back the "family land" from the unitrust. However, Son's potential transaction with Mother's unitrust is a prohibited act of self-dealing. (See Case Study "Son's Intentions Paved with Gold, Part 2.") Accordingly, the university and Mother's advisors strongly discourage such a transaction. Never liking to hear he cannot do something, Son retains his own counsel.

Despite the prohibition on self-dealing, may Son nevertheless purchase the 20-acre rear parcel from the unitrust? What types of penalties may be imposed on Son?

Charitable remainder trusts, charitable lead trusts and private foundations are subject to Sec. 4941 which prohibits acts of self-dealing. Self-dealing means any direct or indirect transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a private foundation or charitable trust. Consequently, a disqualified person may not buy, sell, lease or otherwise transact business with a charitable trust or foundation.

If an act of self-dealing is found, then an excise tax may result. The rate of tax is 10% of the amount involved. In this case, the amount involved is $1 million, which is the fair market value and selling price of the 20-acre rear parcel. Therefore, the tax may equal $100,000 ($1 million x 10%). Furthermore, if the act is not corrected within the taxable period, a 200% rate of tax may apply. Thus, the tax may increase by $2 million ($1 million x 200%)!

The tax is imposed on any disqualified person who participates in an act of self-dealing. In general, disqualified persons include lineal descendants of a donor. For example, children and grandchildren of a donor are disqualified persons. In this case, Mother created the unitrust and Son is clearly a lineal descendant of Mother. Therefore, Son is a disqualified person with respect to Mother's unitrust. As a result, Son may be liable for the self-dealing taxes. This is true regardless of the potential benefit to the unitrust. In other words, Son's offer to pay a fair market value price does not negate the application of the self-dealing rules.

Based upon Son's counsel's findings, Son wisely decides to avoid the 20-acre rear parcel purchase plan. The potential self-dealing taxes quickly turns Son's interest away from the 20-acre rear parcel. Nevertheless, Son still finds solace in knowing he will purchase the family home - the most important component of the family land - from the university at some future date.