Rev. Rul. 76-143

Advice has been requested whether a charitable contribution deduction is allowable under section 170 of the Internal Revenue Code of 1954 in the situations set forth below.

Situation 1: A taxpayer made a contribution to a college after July 31, 1969, by irrevocably assigning to it the cash surrender value of a paid-up life insurance policy on the taxpayer's life. The college is an educational organization within the meaning of section 170(b)(1)(A)(ii) of the Code and an organization described in section 170(c). The college was given possession of the policy. However, the taxpayer retained the right to name or change the beneficiary and to assign the balance of the policy subject to the college's right to the cash surrender value. Pursuant to the assignment, the college would share in the death benefits of the policy to the extent of its cash surrender value one day prior to the death of the donor, if the policy were not terminated prior to the donor's death. According to its terms, the policy would terminate if (1) it were surrendered, or (2) amounts borrowed against it plus accrued interest equalled or exceeded the cash surrender value at any time. The college was given the right to surrender the policy for its cash surrender value or to borrow from the insurer a sum up to the amount of the cash surrender value without the taxpayer's permission.

Situation 2: The facts are the same as in Situation 1 except that the policy is nonpaid-up life insurance and the taxpayer retained possession of the policy.

Section 170(a) of the Code allows a deduction, subject to certain limitations, for any charitable contribution (as defined in section 170(c)) payment of which is made within the taxable year.

Section 170(f)(3)(A) of the Code, as amended 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 certain contributions (not made by a transfer in trust) of partial interests in property made after July 31, 1969.

Section 170(f)(3)(B)(ii) of the Code provides an exemption from the operation of section 170(f)(3)(A) in the case of a contribution of an undivided portion of the taxpayer's entire interest in property.

Section 1.170A-7(b)(1)(i) of the Income Tax Regulations provides, in part, that:

An undivided portion of a donor's entire interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the donor in such property and must extend over the entire term of the donor's interest in such property and in other property into which such property is converted.

Further, section 1.170A-7(a)(2)(i) of the regulations states, in part, that a deduction is allowed for a contribution of a partial interest in property if that interest is the taxpayer's entire interest in the property, such as an income interest or a remainder interest. However, if the property in which the partial interest exists was divided in order to create that interest and thus avoid section 170(f)(3)(A) of the Code, the deduction will not be allowed.

In Situation 1, the gift made by the taxpayer of the right to the cash surrender value of the policy was a gift of less than an entire interest in the property. Furthermore, a gift of this kind is not a gift of a fraction or percentage of each and every substantial interest owned by the donor in such property since the taxpayer retained the right to designate the beneficiary. Even if the taxpayer irrevocably designated the beneficiary prior to making the gift in order to create a remainder interest that would then constitute the taxpayer's entire interest in the property, such division would be regarded as having been made to avoid section 170(f)(3)(A) of the Code and the deduction would not be allowed.

Accordingly, a charitable contribution deduction is not allowable under section 170 of the Code for the irrevocable assignment described in Situation 1.

In Situation 2, the gift made by the taxpayer of the right to the cash surrender value of a nonpaid-up life insurance policy was also a gift of less than the taxpayer's entire interest in the property. Since the taxpayer retains the right to designate the beneficiary, and the right to surrender the policy and defeat the college's interest, the gift is not a gift of a fraction or percentage of each and every substantial interest in the property.

Accordingly, in Situation 2 a charitable contribution deduction is not allowable under section 170 of the Code for the amount of the increase in cash surrender value of the insurance policy attributable to the taxpayer's annual payment of premium.

Rev. Rul. 69-79, 1969-1 C.B. 63, holds that a charitable contribution deduction is allowable for a gift like the one described in Situation 1 herein, and Rev. Rul. 69-215, 1969-1 C.B. 63, holds that a charitable contribution deduction is allowable for a gift like the one described in Situation 2 herein.

Therefore, in view of the foregoing, a charitable contribution deduction is allowable for gifts of the type described in Rev. Ruls. 69-79 and 69-215 made on or before July 31, 1969, but a deduction is not allowable for such gifts made after July 31, 1969, the effective date of the provisions of section 201(a) of the Tax Reform Act of 1969 (Pub. L. 91-172), 1969-3 C.B. 10, 49, that amended the law on which Rev. Ruls. 69-79 and 69-215 are based.

Rev. Ruls. 69-79 and 69-215 are revoked for gifts made after July 31, 1969.