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Patent Issued for Contribuon of Exempt Bonds to CRAT

Nov 23, 2009
Document Id: 1461662

Strategy touted as capital fundraising mechanism for charies.

Summary

The Patent Office issued a patent to a financial consultant for a strategy of selling tax‐exempt bonds to selected investors, who would
then place the bonds into CRATs for the ulmate benefit of the issuing charity.

Extended Summary

The applicaon was filed more than seven years ago by Leigh S. Fultz, the managing principal of a financial consulng firm called The
Cambridge Companies. In broad strokes, the patented method consists of the following steps:

1. A charity issues tax‐exempt bonds.

2. Investors affiliated with the charity purchase the bonds.
3. Each investor places the bonds in a CRAT with the charity as the remainderman.
4. The charity makes interest payments on the bonds to the CRAT, which the CRAT uses to make interest payments to the annuitant.
5. A6er the annuity term, the trustee distributes the bond to the charity. Because the charity is both the obligor and obligee on the
bond, the obligaon to repay disappears.

The plan also contemplates that the investor would use the annuity payout from the CRAT to fund an ILIT to replace the assets gi6 to the
CRAT.

CPC Commentary

The patented strategy uses a computer to select potenal investors from a database, but otherwise consists of combining exisng tax
planning strategies in straigh8orward ways. Evidently, the involvement of a computer meets the requirement that a set of otherwise
abstract ideas be ed to a machine to be patentable. The patent le6 the door open for others to use Mr. Fultz's method, minus the
computerized selecon of investors.

It is unfortunate that the Patent Office is connuing to issue such patents while Bilski, which was recently argued before the Supreme
Court, is sll pending (see our commentary earlier this year of June 3, July 10, and August 14).

As presently marketed, the patented strategy may be subject to IRS disclosure requirements. The plan requires a parcipang charity, and
possibly individual investors, to sign nondisclosure agreements. However, Regs require a taxpayer to report any transacon with respect
to which either:

1. the taxpayer has paid a fee of at least $50,000 to an advisor (or $250,000 if the taxpayer is a corporaon) and has agreed not to
disclose the tax strategy to others; or
2. the advisor's fee is conngent or refundable in whole or in part if the tax treatment of the strategy is not sustained.

For this purpose, "fees" may include not only fees for access to the strategy itself, but also fees (i) for advice in structuring and
implemenng the transacons, (ii) for documenng the transacons, and (iii) for return preparaon services in reporng the transacon,
to the extent return preparaon fees are unreasonable in light of the facts and circumstances. It is not clear whether the insurance
commissions involved in the ILIT would be within the definion, but the Reg treats as fees "consideraon in whatever form paid."

If the transacon falls within the descripon of category #1 or #2 above, another Reg requires a "material advisor" to maintain a list of
parcipants, which is subject to disclosure to the IRS on demand.

Relevant Documents

United States Patent 7620593 11/23/09

08‐964 11/13/09

CPC Commentary: ABA to File Amicus Brief in Bilski 8/14/09

Highlights CPC Commentary: Patent Sought for Method of Segregang UBTI 7/10/09

CPC Commentary: Supreme Court Grants Cert in Bilski 6/3/09

07‐1130 6/2/09

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Patent Issued for Contribution of Exempt Bonds to CRAT https://charitableplanning.com/commentary/comments/1461662

10/5/06
Reg. Sec. 301.6112‐1: Requirement to prepare, maintain, and furnish lists with respect to potenally abusive tax shelters.

Reg. Sec. 1.6011‐4: Requirement of statement disclosing parcipaon in certain transacons by taxpayers. 10/5/06

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