Rev. Rul. 79-368

ISSUE

What percentage limitation is applicable to a charitable contributions deduction under section 170 of the Internal Revenue Code under the circumstances described below?

FACTS

A made an inter vivos transfer of property to a valid charitable remainder trust described in section 664(d) of the Code. A charitable organization described in section 170(b)(1)(A) was designated as the recipient of the remainder interest upon termination of the trust.

The terms of the trust instrument provide that the grantor and surviving beneficiaries of the income interest have the power at any time to change the identity of the charitable organization designated in the trust instrument to another charitable organization described in section 170(c) of the Code.

LAW AND ANALYSIS

Section 170 of the Code provides, subject to certain limitations, a deduction for charitable contributions (as defined in subsection (c)) when payment is made within the taxable year.

Section 170(f)(2) of the Code provides that in the case of property transferred in trust, no deduction shall be allowed under section 170 for the value of a contribution of a remainder interest unless the trust is one of the specified forms described in sections 664(d) or 642(c)(5).

Under section 664(d)(1)(C) and 664(d)(2)(C) of the Code, a charitable remainder trust must provide for payment of the remainder interest to an organization described in section 170(c).

Section 170(c) of the Code describes various types of charitable organizations to which transfers qualify as charitable contributions for the purposes of section 170. However, an organization that is described in section 170(c) may be an organization described in section 170(b)(1)(A) or it may be an organization described in section 170(b)(1)(B).

Section 170(b)(1)(A) of the Code provides that in the case of an individual, charitable contributions made to organizations described therein shall be allowed as a deduction to the extent that the aggregate of such contributions does not exceed 50 percent of the taxpayer's contribution base for the taxable year.

Section 170(b)(1)(B) of the Code provides that where a charitable contribution does not qualify for treatment under section 170(b)(1)(A) it shall be allowed as a deduction to the extent that the total of such charitable contributions does not exceed the lesser of 20 percent of the taxpayer's contribution base for the taxable year or the excess of 50 percent of the taxpayer's contribution base for the taxable year over the amount of charitable contributions allowable under section 170(b)(1)(A).

Because the grantor and the life beneficiaries have the power to change the organization designated as the recipient of the remainder interest from one that qualifies for the 50 percent limitation on contributions under section 170(b)(1)(A) of the Code to an organization that is subject to the 20 percent limitation under section 170(b)(1)(B), it is not certain that the ultimate recipient of the remainder interest will be the designated organization or any organization described in section 170(b)(1)(A). Compare Rev. Rul. 68-417, 1968-2 C.B. 103 (issued prior to enactment of section 664), which deals with a power retained by a grantor to designate the remainder beneficiary.

HOLDING

Even though A transferred property to a charitable remainder trust that requires payment of the remainder to a charitable organization described in section 170(c) of the Code, the charitable deduction allowable for the contribution is subject to the 20 percent limitation described in section 170(b)(1)(B) of the Code rather than the 50 percent limitation described in section 170(b)(1)(A).

The holding in this revenue ruling is equally applicable to the treatment of charitable deductions in the case of inter vivos transfers to testamentary charitable remainder unitrusts where the donor or life beneficiaries have the power to designate organizations other than those described in section 170(b)(1)(A) of the Code to receive the remainder interest.