Rev. Rul. 76-307

Advice has been requested whether the transfer of property to the X Foundation as trustee of a charitable remainder trust described in section 664(d)(2) of the Internal Revenue Code of 1954, under the following circumstances, will entitle the donor to the applicable deductions for charitable contributions provided under the Code.

The governing instrument of the charitable remainder trust provides that the X Foundation, an organization described in sections 170(c), 2055(a)(2), 2106(a)(2), 2522(a), and 2522(b) of the Code, is the trustee and remainder beneficiary and the donor is the recipient for life of a unitrust amount. The instrument further provides that if the X Foundation is not an organization described in section 170(c) upon the termination of the trust, final distribution shall be made to one or more organizations then described in section 170(c) as the trustee shall select. The possibility that the X Foundation will not be an organization described in sections 170(c), 2055(a)(2), 2106(a), 2522(a), and 2522(b) upon the termination of the trust is so remote as to be negligible. The executed instrument meets all the requirements of section 664(d)(2) and the applicable Income Tax Regulations, and created a valid trust within the meaning of applicable local law.

The specific question is whether the transfer of property to the X Foundation as trustee under the executed governing instrument entitles the donor to the applicable deduction allowed by section 170, 2055, 2106, or 2522 of the Code.

Section 170(a) of the Code provides that there shall be allowed as a deduction any charitable contribution described in section 170(c), payment of which is made within the taxable year. Section 2055(a) provides, in part, that in determining the taxable estate of a decedent, there shall be deducted from the value of the gross estate the amount of all bequests, legacies, devises, or transfers to be used exclusively for certain religious, charitable, scientific, literary, or educational purposes. Section 2106(a)(2) provides for a similar deduction from the value of the gross estate of a decedent nonresident not a citizen of the United States. Sections 2522(a) and 2522(b) provide for a deduction from total gifts for all transfers made for certain similar purposes by a citizen or resident and a nonresident not a citizen, respectively.

Section 25.2522(c)-3(b) of the Gift Tax Regulations provides that if an estate or interest has passed to, or is vested in, charity on the date of the gift, and the estate or interest would be defeated by the performance of some act or the happening of some event, the possibility of occurrence of which appeared on the date of the gift to be so remote as to be negligible, the deduction is allowable. A similar provision is included in section 20.2055-2(b) of the Estate Tax Regulations.

Accordingly, since the trust in this case satisfies the requirements of a charitable remainder unitrust described in section 664(d)(2) of the Code, the transfer of property to the X Foundation as trustee entitles the donor to a charitable deduction under section 170(a) for the value of the remainder interest.

With respect to the Federal gift (or estate) tax, in order for a deduction to be allowable for the value of the remainder interest of a charitable remainder unitrust, the charitable organization to or for the use of which the remainder interest passes must meet the requirements of both section 2522(a) of the Code (or section 2055(a) or 2106(a)(2), whichever is applicable) and section 664(d)(2). Substantial differences exist between the charitable deduction provisions for income and gift (or estate) taxation. Therefore, in order to be certain that a gift (or estate) tax deduction will be allowed, the governing instrument must expressly limit the ultimate distribution of the transferred property to one or more organizations described in section 170(c) that also are described in section 2522 (or section 2055 or 2106, if applicable). See Section 6.02, Comment (1), and section 4.03, Comment (2) (cross references) of Rev. Rul. 72-395, 1972-2 C.B. 340.

In the instant case, however, although the governing instrument limits the alternative remainderman only to organizations described in section 170(c) of the Code, the named charitable remainderman (X Foundation) is a qualified charity within the meaning of sections 170(c), and 2522(a), at the time of the transfer in trust, and the possibility that the X Foundation will not be an organization described in sections 170(c) and 2522(a), upon the termination of the trust (and thus will not receive the trust corpus) is so remote as to be negligible. Thus, the charitable transfer is not subject to a condition or power that would deny a gift tax deduction. Section 25.2522(c)-3(b) of the Gift Tax Regulations.

Accordingly, a charitable deduction is allowable under section 2522(a) of the Code for the value of the remainder interest in the property transferred to the X Foundation by the donor. Whether the donor's estate will be entitled to a charitable deduction under section 2055 will depend on the facts existing at the donor's death.

The above conclusions are equally applicable under sections 2106 and 2522(b) of the Code with respect to gifts made by a nonresident not a citizen donor under like circumstances.