Rev. Rul. 80-38

ISSUE

What percentage limitation is applicable to a charitable contributions deduction under section 170 of the Internal Revenue Code, in view of the trustee's power to designate an alternative remainder beneficiary, in the circumstances described below?

FACTS

The taxpayer made an inter vivos transfer of property to a valid charitable remainder trust described in section 664(d) of the Code. Under the terms of the trust, the remainder interest is payable to a public university that qualifies as an educational organization described in section 170(c)(2)(B) and in section 170(b)(1)(A)(ii).

The trust instrument also provides that if the designated charitable remainder beneficiary is not an organization described in section 170(c) of the Code when the trust remainder is to be distributed, the remainder shall be distributed to one or more organizations, to be selected in the sole discretion of the trustee, that are then described in section 170(c). The trust terms do not expressly require that, in exercising the power to select alternative remainder beneficiaries, the trustee must choose organizations that are described in section 170(b)(1)(A) as well as in section 170(c).

LAW AND ANALYSIS

Section 170 of the Code provides, subject to certain limitations, a deduction for charitable contributions (as defined in subsection (c)).

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 the contribution of a remainder interest unless the trust is one of the specified types described in section 664(d) or section 642(c)(5).

Under sections 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. 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 to which a contribution described in section 170(b)(1)(B) is made.

Section 170(b)(1)(A) of the Code sets forth a list of various types of organizations and provides that contributions by an individual taxpayer to those organizations are allowable as deductions in a total amount of not more than 50 percent of the taxpayer's contribution base for the taxable year.

Under section 170(b)(1)(B) of the Code, if charitable contributions are made to organizations that are not described in section 170(b)(1)(A), the maximum amount allowable as a deduction for such contributions by an individual taxpayer is 20 percent of the taxpayer's contribution base for the taxable year.

Thus, if a contribution is made by an individual taxpayer to an organization described in section 170(c) of the Code, the amount deductible is subject to either the 50 percent limitation of section 170(b)(1)(A) or the 20 percent limitation of section 170(b)(1)(B), depending on whether the transferee organization is described in section 170(b)(1)(A).

Section 1.170A-1(e) of the Income Tax Regulations provides that if the interest in property transferred to charity may be defeated by the subsequent performance of some act or by the happening of some event, the deduction is nevertheless allowable if the possibility that the act or event will occur and defeat the charity's interest is so remote as to be negligible.

In Rev. Rul. 76-307, 1976-2 C.B. 56, a trustee was empowered to select one or more organizations described in section 170(c) of the Code if the designated remainder beneficiary was not described in section 170(c) when the trust terminated. The revenue ruling concludes that although the governing instrument limited the alternative remainder beneficiaries to organizations described in section 170(c), without reference to their also being described in section 2522(a), a charitable deduction is allowable for federal gift tax purposes under section 2522 because the possibility that the designated beneficiary would not continue to be an organization described in both sections 170(c) and 2055(a) was so remote as to be negligible.

Rev. Rul. 76-307 also concludes that in the situation described a deduction is allowable for federal income tax purposes under section 170(a) of the Code. The revenue ruling did not reach the question as to the proper percentage limitation under section 170(b).

Because the designated organization in the present case is a public university, there is small likelihood that it will cease to exist as an organization described in sections 170(c) and 170(b)(1)(A) of the Code. Therefore, the possibility that the remainder interest will not go to an organization described in section 170(b)(1)(A) is so remote as to be negligible.

HOLDING

The 50 percent limitation of section 170(b)(1)(A) of the Code is applicable with respect to the taxpayer's transfer to the charitable remainder trust.