Rev. Rul. 76-523

Advice has been requested whether, under the circumstances described below, the donation of the reversionary interests in several trusts is deductible under the provisions of section 170 of the Internal Revenue Code of 1954.

In 1960, the taxpayers established several trusts for the benefit of their relatives, who were to receive the income interests from these trusts during their lifetimes. The taxpayers retained the reversionary interests in the trusts. In 1971, the taxpayers established a similar trust for the benefit of an individual who had been a life-long friend and valued former employee.

The corpus of each of the trusts consisted of stock in a closely held family corporation. The reversionary interests were retained by the taxpayers to, (1) insure their future financial security, and (2) to prevent outsiders, who might be potential dissidents, from acquiring the stock. To accomplish this second purpose, the trust instrument prevented the trustees from alienating the stock in any manner. In 1975 the family corporation was merged with a large publicly owned corporation actively traded on one of the major stock exchanges. Thereafter, the corpus of each of the trusts consisted of stock of this publicly owned corporation. This merger insured the taxpayers' future financial security and eliminated the need to retain the reversionary interests in the several trusts to prevent the stock in the family corporation from being acquired by outsiders. Thereupon, the taxpayers donated their reversionary interests in the several trusts to an organization described in section 170(c) of the Code. They also removed the restriction regarding alienation of the stock.

Section 170 of the Code provides, subject to certain limitations, a deduction for gifts and contributions to or for the use of organizations described in section 170(c), payment of which is made within the taxable year.

However, section 170(f)(3)(A) of the Code denies a charitable contribution deduction for the donation of an interest in property that consists of less than the taxpayer's entire interest in the property.

Section 1.170A-7(a)(2)(i) of the Income Tax Regulations states that notwithstanding the provisions of section 170(f)(3)(A) of the Code, a deduction is allowed for the donation of a partial interest in property transferred after July 31, 1969, if such interest is the taxpayer's entire interest in the property, such as an income interest or a remainder interest. Thus, if securities are given to A for life with the remainder over to B, and B makes a charitable contribution of the remainder interest to an organization described in section 170(c), a deduction is allowed under section 170 for the present value of B's remainder interest in the securities. If, however, the property in which such partial interest exists was divided in order to create such interest and thus avoid section 170(f)(3)(A), the deduction will not be allowed. Thus, for example, if a taxpayer desires to contribute to a charitable organization the reversionary interest in a portfolio of stocks and bonds, and the taxpayer grants a life estate in such property to a son and immediately thereafter contributes the reversionary interest to a charitable organization, no deduction will be allowed under section 170 for the contribution of the taxpayer's entire interest consisting of the reversionary interest.

Thus, as a general rule, section 170(f)(3)(A) of the Code, as enacted by the Tax Reform Act of 1969, section 201(a), (Pub. L. 91-172) 1969-3 C.B. 10, 49, denies a charitable contribution deduction in the case of a contribution of property that consists of less than the taxpayer's entire interest in such property. However, a deduction is allowed, as an exception to section 170(f)(3)(A), if the taxpayer created the partial interest for a reason other than the avoidance of the provisions of section 170(f)(3)(A).

In the instant case, the 1960 trusts were set up long before the revision of section 170 of the Code by the enactment of the Tax Reform Act of 1969. Thus, the taxpayers' purpose in setting up these trusts could not have been the avoidance of the provisions of section 170(f)(3)(A). Further, in view of all of the above circumstances, the taxpayer's purpose in setting up the 1971 trust was not the avoidance of the provisions of section 170(f)(3)(A), but to provide financial security to an old friend and valued former employee, while insuring their future financial security and protecting their interests in the family corporation from outside incursions. Only when these concerns were no longer relevant, because of the merger of the family corporation, did the taxpayers donate their remainder interests, which were their entire interests, to a charitable organization.

Accordingly, in the instant case, the donation of the taxpayers' reversionary interests in the several trusts qualifies for a charitable contribution deduction in the manner and to the extent provided in section 170 of the Code.