Rev. Rul. 77-385

Advice has been requested whether any portion of the charitable remainder unitrust described below qualifies for an estate tax charitable deduction under section 2055(a) of the Internal Revenue Code of 1954.

A died in 1976. Under the terms of A's will, the residue of A's estate is transferred to a testamentary trust which meets the requirements of a charitable remainder unitrust described in section 664 of the Code. Under the terms of the trust, the trustee is to pay a unitrust amount in quarterly installments, equal to 5 percent of the net fair market value of the trust assets valued annually, to B, for B's life. Upon the death of B, the corpus of the trust, and any accumulated income, is to be divided into 4 equal parts. One part is to be distributed to each of 4 organizations; namely, W, X, Y and Z. Organizations W, X, and Y are charitable organizations described in both sections 170(c) and 2055(a) of the Code. Organization Z, a nonprofit cemetery association, is described in section 170(c)(5) but does not meet the requirements of section 2055(a). See Rev. Rul. 67-170, 1967-1 C.B. 272. The possibility that W, X, or Y will not be an organization described in section 170(c) and 2055(a) upon termination of the trust is so remote as to be negligible. See Rev. Rul. 76-307, 1976-2 C.B. 56.

Section 2055(a) of the Code provides that, for purposes of the estate tax, the value of the taxable estate is determined by deducting from the gross estate the amount of all bequests to be used exclusively for certain religious, charitable, scientific, literary or educational purposes described in section 2055(a)(1) through 2055(a)(4).

Section 2055(e) of the Code contains an exception to the general rule of section 2055(a). Section 2055(e)(2) provides, in part:

Where an interest in property (other than a remainder interest in a personal residence or farm . . .) passes or has passed from the decedent to a person, or for a use, described in subsection (a), and an interest . . . in the same property passes or has passed . . . from the decedent to a person, or for a use, not described in subsection (a), no deduction shall be allowed under this section for the interest which passes or has passed to the person, or for the use, described in subsection (a) unless--

(A) in the case of a remainder interest, such interest is in a trust which is a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664) or a pooled income fund (described in section 642(d)(5)). . . .

Pursuant to section 2055(e)(2), in order to qualify for an estate tax charitable deduction, a remainder interest, other than a remainder interest in a farm or personal residence, must pass to an organization described in section 2055(a) and, in addition, the remainder interest must be in a trust which is a charitable remainder trust that meets the requirements of section 664, or a pooled income fund that meets the requirements of section 642(c)(5). Section 664(d)(2)(C) of the Code requires that in order to qualify as a charitable remainder unitrust, the trust corpus, upon termination of the trust, must be payable in its entirety to one or more organizations described in section 170(c) of the Code. Section 1.664-3(a)(6)(i) of the Income Tax Regulations.

In the instant case, 4 organizations, all of which meet the requirements of section 170(c), each receive a remainder interest in a portion of the trust corpus. Since the entire trust corpus is distributable to organizations meeting the requirements of section 170(c) and the trust otherwise satisfies the requirements of section 664, the charitable remainder unitrust is described in section 664. The remainder interests payable to organizations W, X, and Y are payable to organizations that meet the requirements of section 2055(a). Therefore, these remainder interests qualify for an estate tax charitable deduction, because these interests are payable to organizations in section 2055(a), and these interests are in a charitable remainder trust which meets the requirements of section 664. However, the remainder interest payable to organization Z is not payable to an organization described in section 2055(a) of the Code. Consequently, although this remainder interest is in a charitable remainder trust that meets the requirements of section 664, it is not eligible for a charitable deduction because it is not distributable to an organization described in section 2055(a).

Accordingly, in the instant case, the present value of the remainder interests in trust corpus passing to organizations W, X, and Y is deductible under section 2055(a) of the Code. However, the value of the remainder interest passing to organization Z, an organization that does not meet the requirements of section 2055(a), is not deductible.

This Revenue Ruling is distinguishable from Rev. Rul. 76-544, 1976-2 C.B. 288, which holds that the transfer to charity of a remainder interest in a personal residence not in trust qualifies for a charitable deduction under section 2055(e)(2) only if entire residence passes to an organization described in section 2055(a).