Rev. Proc. 73-9

Section 1. Purpose

The purpose of this Revenue Procedure is to set forth procedures relative to the allowance of the charitable deduction for Federal estate tax purposes in certain cases where, by reason of the nature of the administrative or investment powers granted to the trustee, there is substantial doubt as to whether the value of an interest in trust passing from the decedent is ascertainable.

Sec. 2. Background

.01 In the case of a charitable contribution of an income or remainder interest in a split-interest trust, the presence of certain administrative or investment powers exercisable by the trustee may render the value of the income or remainder interest unascertainable, with the result that no estate tax deduction is allowable. For instance, Revenue Ruling 60-385, 1960-2 C.B. 77, holds that the charitable deduction for a remainder interest in trust is not allowable where the trustee is permitted, under the trust instrument, to invest in mutual funds and treat capital gains distributions (ordinarily held to be corpus) as income. In Revenue Ruling 67-33, 1967-1 C.B. 62, the Internal Revenue Service extended that holding to cases where the power to allocate capital gains distributions to income is granted under applicable local law instead of the trust instrument. Similarly, Revenue Ruling 65-144, 1965-1 C.B. 442, holds that the charitable deduction for a remainder interest in trust is not allowable where the trust instrument granted the trustee the power to allocate stock, extraordinary, and liquidating dividends, taxes, and other expenses between income and principal in his absolute discretion.

.02 Since the issuance of these Revenue Rulings, each of which illustrates a situation where the noncharitable beneficiary can be favored over the charitable beneficiary by the trustee's exercise of his administrative or investment powers, a number of cases have been litigated involving the allowance of the charitable deduction for an interest in a split-interest trust where the trustee is granted certain administrative or investment powers with respect to such matters as permissible investments of the characterization of receipts and disbursements. In many of these cases, the courts have concluded that in view of these powers the charitable interest could not be valued in a dollar amount and that the charitable deduction was, therefore, not allowable. These conclusions were based upon the finding by the courts that the trustees could shift substantial portions of the trust interests between charitable and noncharitable beneficiaries through exercise of the administrative or investment powers in a manner that would not be obviously inconsistent with the testamentary purpose of the decedent and that such exercise would not violate the standard of fairness and good faith to which a fiduciary is held. In other cases, the trustee's administrative or investment powers have been found to be strictly limited by an overriding duty of impartiality, thus enabling the value of the charitable interest to be ascertained.

.03 The Tax Reform Act of 1969, P.L. 91-172, 1969-3 C.B. 10, amended section 2055(e) of the Internal Revenue Code of 1954 to provide that no deduction will be allowed for a charitable contribution of an interest in a split-interest trust unless such interest is a remainder interest in a charitable remainder annuity trust (as described in section 664(d)(1) of the Code), a charitable remainder unitrust (as described in section 664(d)(2) and (3) of the Code), or a pooled income fund (as described in section 642(c)(5) of the Code), or is a guaranteed annuity or a fixed percentage distributed yearly of the fair market value of the property (determined yearly). In general, this amendment applies to devises and bequests made after December 31, 1969.

.04 In order to provide guidelines for settling cases governed by the provisions of section 2055 of the Code in effect prior to the Tax Reform Act of 1969, the following procedure is established.

Sec. 3. Instructions to Taxpayers and Service Personnel

.01 Unless the Service determines that it is not clear whether the discretion of the trustee would be strictly limited by a duty of impartiality, the charitable deduction will be allowed.

.02 In cases where the Service determines that it is not clear whether the discretion of the trustee would be strictly limited by a duty of impartiality, the district director shall notify the estate of such determination and the charitable deduction may nevertheless be allowed for the value of the charitable bequest or transfer in trust if the appropriate parties enter into a prescribed agreement with the Service that the trustee of the trust will exercise enumerated administrative or investment powers in an impartial manner and will not favor the interests of noncharitable beneficiaries as against those of charitable beneficiaries.

.03 The appropriate parties to the agreement must include the fiduciary of the decedent's estate, the trustees of the trust, and all charitable and noncharitable beneficiaries (both vested and contingent).

.04 If any of the charitable beneficiaries are not ascertainable, then the attorney general for the State that is the situs of the trust must also be a party to the agreement. Any unascertained noncharitable beneficiaries must be made parties to, or otherwise bound by, the agreement through appropriate process under the local law.

.05 If the trustee and other necessary parties fail to enter into such an agreement, then it will be necessary to determine whether the trustee's discretion is sufficiently limited under local law.

.06 The execution and performance of the agreement described in this Revenue Procedure will not be considered to be a gift.

Sec. 4. Scope

.01 The Service will not enter into such an agreement where section 2055(e) of the Code, as amended by the Tax Reform Act of 1969, applies. See section 201(g)(4) of that Act for effective date provisions as applicable to amendments made by the Act to section 2055(e) of the Code.

.02 The Service will not enter into such an agreement where the dispositive instrument clearly states, or the surrounding circumstances establish, an intention that the noncharitable beneficiaries should be favored over the charitable beneficiaries. See, for example, Joseph Sachter v. United States, 312 F. Supp. 670 (1970).

.03 This Revenue Procedure relates only to the effect of administrative or investment powers on the allowance of a charitable deduction under section 2055 of the Code. It does not relate to administrative or investment powers for purposes of any other provision of the income, estate, and gift tax laws or to direct powers of invasion.

.04 The agreement described in this Revenue Procedure will be effective for purposes of section 2055 of the Code if (1) it is executed within 30 days after the district director notifies the estate that there appears to be cause for denying the deduction unless such agreement is executed (or within such extension of the 30-day period as he may grant), or (2) before the expiration of the period of limitations on credits or refunds as prescribed by section 6511 of the Code, whichever of the two dates occurs first.

Sec. 5. Form of Agreement

An agreement in substantially the following form satisfies the requirements of Section 3:

In the event of the allowance by or on behalf of the Commissioner of Internal Revenue of a charitable deduction under section 2055 of the Internal Revenue Code of 1954 in the amount of $____________, for a transfer in trust for the benefit of ________________________, claimed in connection with the settlement of the Federal estate tax liability of the estate of _____________________ (decedent), and as part of the consideration for this settlement, it is hereby agreed that the powers listed below, that have been granted by said decedent, will be exercised in an impartial manner as between charitable and noncharitable beneficiaries and that such powers will not be used to favor the noncharitable beneficiaries at the expense of charitable beneficiaries or to divert the charitable interest to noncharitable beneficiaries.

(1) ________________

(2) ________________

(3) ________________

__________________________ Trustee

__________________________ Executor of the Estate

__________________________ Noncharitable Beneficiary

__________________________ Charitable Beneficiary (or Attorney General)

__________________________ District Director