Rev. Rul. 67-33

Advice has been requested concerning the applicability of the principle of Revenue Ruling 60-385, C.B. 1960-2, 77, regarding the ascertainability of the value of a charitable remainder interest in trust, where the governing instrument does not expressly authorize the trustee to invest corpus in the stock of regulated investment companies and to pay out capital gains distributions therefrom as income, but where the local law, either by statute or an outstanding court decision, permits such investment under a trustee's general power of investment and allows capital gains distributions to be paid out as income.

The general rule, with respect to allocation of capital gains distributions of regulated investment companies, is that such distributions are allocable to principal. This is the rule adopted in section 6(c) of the Revised Uniform Principal and Income Act (1962). Corresponding provisions are found in some other State statutes, and the law is to the same effect in certain States whose legislatures have not considered the question. See Brock Estate , 420 Pa. 454, 218 A.2d 281 (1966); Tait v. Peck , 346 Mass. 521, 194 N.E.2d 707 (1963). To the contrary, however, are decisions in Minnesota and Missouri, holding the capital gains distributions are allocable to income. See In re Gardner's Trust , 266 Minn. 127, 123 N.W.2d 69 (1963); Coates v. Coates , 304 S.W.2d 874 (Mo. 1957).

It is apparent that if the trustee has the authority to invest in regulated investment companies and to treat capital gains distributions as income, whether by the express provisions of the governing instrument or by virtue of the local law, he has the power to divert corpus from the remainder beneficiaries for the benefit of the income beneficiaries. If there are noncharitable income beneficiaries, a charitable remainder interest in corpus which is subject to such power of investment, and diversion, cannot be severed from the noncharitable income interest in the absence of an acceptable formula for ascertaining the value of the remainder interest. No generally acceptable formula for this purpose is known. Thus, a charitable deduction is not allowable under section 170 (income tax), section 2055 (estate tax) or section 2522 (gift tax) of the Internal Revenue Code of 1954 with respect to charity's remainder interest in the corpus of a trust where the trustee may invest in stock of regulated investment companies and treat capital gains distributions as income either under the express terms of the governing instrument or under the applicable local law (that is, a statute or outstanding court decision). Deduction will be allowed where the governing trust instrument clearly provides for the allocation of capital gains distributions to principal.

The above conclusion regarding instruments which do not expressly grant trustees the powers in question, but where the local law makes it clear that a trustee has authority both to invest trust funds in shares of regulated investment companies and to treat capital gains distributions as income, was not considered in Revenue Ruling 60-385 as one of the conditions taken into consideration in the revocation of Revenue Ruling 55-620, C.B. 1955-2, 56. Accordingly, under the authority of section 7805(b) of the Code. Accordingly, under the applied with respect to transfers completed prior to May 1, 1967, or to transfers made under instruments executed prior to that date which could not be altered or amended, unless the instrument expressly authorizes the trustee to pay out capital gains distributions as income.

Revenue Ruling 60-385 is hereby supplemented.