Rev. Rul. 60-385

Advice has been requested concerning the amount of allowable charitable deduction in a case where the charitable remainder interest in a trust may or may not be severable from the noncharitable interest, depending upon whether the capital gains received are added to the trust income or corpus.

A taxpayer transferred property to an irrevocable trust, with directions to pay the trust income to his son for life and on the son's death to deliver the trust corpus to a charitable organization which meets the requirements of section 170 (income tax), section 2055 (estate tax) and section 2522 (gift tax) of the Internal Revenue Code of 1954. The trust instrument provides that the corpus of the trust may be invested in stock of regulated investment companies and that dividends received by the trustee which represent capital gains realized from the sale of securities owned by such companies shall be treated as corpus and held for the benefit of the charitable remainderman.

I.T. 3707, C.B. 1945, 114, holds that where a taxpayer creates an irrevocable trust, reserving the income to himself for life with remainder to a charitable organization which meets the requirements of section 23(o) of the Internal Revenue Code of 1939 (corresponding to section 170 of the 1954 Code), the present value of the remainder interest is deductible in the manner and to the extent provided in such section.

Section 20.2055-2 of the Estate Tax Regulations and section 25.2522(a)-2 of the Gift Tax Regulations provide, in part, that where a trust is created or property transferred for both a charitable and a private purpose, a deduction may be taken only insofar as the charitable interest is presently ascertainable and hence severable from the noncharitable interest.

Accordingly, it is held that where, as under the present facts, the charitable remainder interest is severable from the noncharitable interest, its present worth may be ascertained by multiplying the fair market value of the transferred property by the appropriate actuarial remainder factor from Table I of section 25.2512-5 of the Gift Tax Regulations or Table I or II of section 20.2031-7 of the Estate Tax Regulations, whichever is applicable. The present worth so determined is deductible for income, estate or gift tax purposes in the manner and to the extent provided in sections 170, 2055, and 2522 of the Code.

However, if the trust instrument provides that dividends representing capital gains realized as aforesaid shall (or, in the trustee's discretion, may) be treated as income and paid to the life tenant, or if the instrument could be so construed under applicable local law, then the charitable interest is not severable from the non-charitable interest since no known formula has been advanced for ascertaining the value of the charitable interest. Therefore, no deduction for income, estate, or gift tax purposes is allowable with respect to the transfer.

In view of the position taken in Revenue Ruling 55-620 and pursuant to authority contained in section 7805(b) of the Internal Revenue Code of 1954, the latter conclusion above, relating to capital gains treated as income to the life tenant, will not be applied in the case of contributions and gifts made before January 1, 1961.

Revenue Ruling 55-620, C.B. 1955-2, 56, holds that the present worth of the remainder interest in an irrevocable trust passing to a charity, where the trust corpus is to be invested in stock of a regulated investment company and trust income is to be paid to the donor for life, is deductible by the donor in the manner and to the extent provided by section 170 of the Code, irrespective of whether the capital gain dividends received by the trustee are distributed as income to the donor or added to the corpus of the trust. Because Revenue Ruling 55-620 is contrary to the above-stated position, it is hereby revoked.