Rev. Rul. 82-128

ISSUE

Is a charitable contribution deduction allowable under section 170 of the Internal Revenue Code for federal income tax purposes and under section 2522 for federal gift tax purposes in the situations described below?

FACTS

Situation (1). In 1982, A transferred 100x dollars to a trust created by A on that day. Under the terms of the trust instrument, 6 percent of the net fair market value of the trust assets, valued annually, is to be paid to A until death. This amount is then payable to B until death. Upon the death of the survivor of A and B, the remaining trust assets are payable to a charitable organization that meets the definitions set forth in sections 170(c) and 2522(a) of the Code.

Under the law of state X, where A and B reside and where the trust was created, federal estate or state death taxes, in the absence of a clear direction to the contrary in a decedent's will, must be equitably apportioned against and payable from the separate interests in the estate that will give rise to these taxes. Taxes that are apportioned against the various interests in trusts are payable out of the general assets of the trusts.

The trust A created qualifies as a charitable remainder unitrust under section 664 of the Code in every respect except that a possibility exists that federal estate taxes or state death taxes may be payable from the trust assets at A's death.

Situation (2). The facts are the same as those in Situation (1), except that the trust instrument contains a provision that the life estate of B will take effect upon A's death only if B furnishes the funds for payment of any federal estate taxes or state death taxes for which the trustee may be liable upon A's death.

LAW AND ANALYSIS

Section 170(a)(1) of the Code allows as a deduction any charitable contribution (as defined in section 170(c)) paid within the tax year.

Section 170(f)(2)(A) of the Code provides that, in the case of property transferred in trust, a deduction is allowed for the value of a contribution of a remainder interest only if the trust is a charitable remainder annuity trust or a charitable remainder unitrust described in section 664, or a pooled income fund described in section 642(c)(5). The amount of any charitable contribution deduction with respect to the remainder interest for any tax year of a donor is determined in accordance with the general provisions of section 170 and the applicable regulations.

Section 2522 of the Code allows as a deduction, for federal gift tax purposes, the value of transfers for certain charitable and similar purposes. Under section 2522(c)(2), however, no deduction is allowed with respect to the charitable interest when (1) a donor transfers an interest in property (other than an interest described in section 170(f)(3)(B)) to a person or for a use described in section 2522(a) or (b), and (2) an interest in the same property is retained by the donor or is transferred to a person or for a use that does not benefit charity. There is an exception in the case of a remainder interest: such a deduction is allowed if the interest is in either a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664) or a pooled income fund (described in section 642(c)(5)).

Under section 664(d)(2)(A) of the Code, a charitable remainder unitrust is a trust from which a fixed percentage of not less than 5 percent of the net fair market value of its assets, valued annually, must be paid at least annually to one or more persons for up to 20 years or, if for an individual, for the life of the individual. At least one of these persons paid must not be an organization described in section 170(c). In the case of individuals, the individual must be living at the time of the creation of the trust.

Section 664(d)(2)(B) of the Code states, generally, that no amount other than the unitrust amount may be paid to or for the use of any person other than an organization described in section 170(c). In this regard, see example (3) under section 1.664-1(a)(6) of the Income Tax Regulations.

Section 2036(a)(1) of the Code provides that a decedent's gross estate shall include the value of any interest in property transferred by the decedent if the decedent retained for life the possession or enjoyment of, or the right to income from, the property.

Section 20.2036-1(a) of the Estate Tax Regulations provides that if the decedent retained or reserved an interest or right with respect to all of the property transferred, the amount included in the gross estate is the value of the entire property, less only the value of any outstanding income interest that is not subject to the decedent's interest or right and that is actually being enjoyed by another person at the time of the decedent's death.

Because A, in both Situations (1) and (2), retains the right to the entire trust payment until death, the entire value of the trust corpus will be includible in A's gross estate under section 2036 of the Code. See Rev. Rul. 72-395, 1972-2 C.B. 340, is modified. See Rev. Rul. 72-395, which contains illustrations describing the mandatory and optional provisions for inclusion in the governing instrument of a charitable remainder annuity and a charitable remainder unitrust.