Rev. Rul. 70-452

Advice has been requested whether a deduction is allowable under section 2522 of the Internal Revenue Code of 1954 (prior to amendment by the Tax Reform Act of 1969, P.L. 91-172, C.B. 1969-3, 10) with respect to a remainder interest in a trust that is payable to charity under the circumstances described below.

During 1968, a donor transferred property valued at $162,000 to an irrevocable trust. Under the terms of the trust agreement, the trustees are directed to pay to A, aged 62, all the trust income plus $6,000 of the trust principal each year during her lifetime. The trust is to terminate upon the death of A at which time the principal and any accumulated income is to be paid to a named charitable organization.

Where a portion of trust principal in addition to the income must be distributed periodically, the length of time the trust can exist is susceptible of calculation. A fund of $162,000 from which $6,000 is payable annually from principal will last for a period of 27 years. Based upon U.S. Life Table 38, prescribed by section 25.2512-5(e) of the Gift Tax Regulations, the probability that a person aged 62 will be alive 27 years hence is 0.072 or 7.2 percent.

Section 25.2522(a)-2(b) of the regulations provides that if, as of the date of the gift, a transfer for charitable purposes is dependent upon the performance of some act or the happening of a precedent event in order that it might become effective, no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible.

The charitable deduction is not allowable where the probability exceeds 5 percent that the noncharitable income beneficiary will survive the exhaustion of the fund in which charity has a remainder interest. Any possibility in excess of 5 percent that the contingency will occur and defeat charity's interest is not considered so remote as to be negligible within the meaning of the regulations. In this connection see sections 2037 and 2042 of the Code which specify that 5 percent is the value at which a reversionary interest will be considered significant. The charitable deduction was disallowed in Estate of George M. Moffett v. Commissioner, 269 F. 2d 738 (1959), where the probability that the fund would be exhausted was 19 percent and in United States v. Bertha Dean, 224 F. 2d 26 (1955), where the probability was 9 percent.

In the above-described circumstances, the probability that charity will not take is in excess of 5 percent. Accordingly, it is held that the charitable deduction is not allowable for the transfer in trust. Similarly, the estate tax charitable deduction is not allowable with respect to comparable testamentary transfers. Section 20.2055-2(b) of the Estate Tax Regulations.