Final Regs Provide Rules for Valuing Partial Interests in Property

 ACTION: Final regulations.

 SUMMARY: This document contains final regulations relating to the valuation of annuities, interests for life or terms of years, and remainder or reversionary interests. Changes to the applicable tax law were made by section 5031 of the Technical and Miscellaneous Revenue Act of 1988. These regulations will provide the public with the guidance needed to comply with the Act.

 DATES: These regulations are effective May 1, 1989. For dates of applicability of these regulations, see the Effective Dates portion under Supplementary Information.

 FOR FURTHER INFORMATION CONTACT: William L. Blodgett (202) 622-3090 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

The collection of information contained in these final regulations has been reviewed and approved by the Office of Management and Budget in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)) under control number 1545-1343. The estimated annual burden per respondent varies from 30 minutes to one hour, depending on individual circumstances, with an estimated average of 45 minutes.

 Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be sent to the Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, Washington, DC 20224, and to the Office of Management and Budget, Attn: Desk Officer for the Department of Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503.

BACKGROUND

 On November 2, 1992, the IRS published in the Federal Register proposed amendments to the income tax regulations (26 CFR part 1) under sections 170, 642, 664, and 7520 of the Internal Revenue Code (Code), and to the estate and gift tax regulations (26 CFR part 20 and part 25) under sections 2031, 2512, and 7520 of the Code. Conforming changes were proposed for regulations under other sections of the Code. On February 3, 1993, the IRS published in the Federal Register certain corrections to the proposed regulations. This project finalizes those amendments. Written comments responding to the Notice of Proposed Rulemaking were received. No public hearing was requested, and none was held. After consideration of all of the comments received regarding the proposed regulations, those amendments are adopted by this Treasury decision with revisions in response to those comments. A summary of the principal comments received and revisions made in the final regulations in response to those comments is provided below.

EXPLANATION OF PROVISIONS

 The notice of proposed rulemaking included estate tax regulations that described the implementation of the new valuation standard, including an explanation of the general effective date of May 1, 1989 (section 20.7520-1), an explanation of the special elections for charitable interests (section 20.7520-2), a listing of Code provisions that are not subject to section 7520 (section 20.7520-3), and a description of transitional rules for income, estate, and gift tax valuations (section 20.7520-4). In the final regulations, the substance of sections 20.7520-1 through 20.7520-4 has been incorporated into analogous provisions for the Income Tax Regulations (sections 1.7520-1 through 1.7520-4) and the Gift Tax Regulations (sections 25.7520-1 through 25.7520-4).

 In response to comments, several editorial changes were made to clarify certain of the formulas contained in the proposed regulations. These clarifications principally involve the insertion of additional parentheses or brackets in order to make the formulas easier for the reader to understand and apply.

 Also in response to comments, section 1.170A-12(b) was updated in a correction to the proposed regulations that was published in the Federal Register on February 3, 1993. The update includes a formula for the computation of the special factor to value a remainder interest following one life where the property is subject to exhaustion, wear and tear, or obsolescence. A similar formula in section 1.170A-12(e), which is applicable to the valuation of a remainder interest following two lives, was also updated. The change in formulas avoids the need to include lengthy commutation factor tables in the regulations.

 Clarifying amendments have been made in the final regulations concerning the meaning of "valuation date" for purposes of an election to value a transfer to a charitable remainder trust. In the case of an election under section 7520 to compute the present value of the charitable interest by use of the interest rate component for either of the 2 months preceding the month in which the transfer is made, the month so elected is the valuation date for purposes of determining the interest rate and mortality tables. Sections 1.664-2(c) and 1.664-4(e)(4) of the final regulations have been revised accordingly.

 Comments were received pertaining to the rule in the proposed regulations under section 7520 concerning the transfer of more than one partial interest in the same property at different times. In response to these comments, the regulations have been amended to make it clear that, generally, each separate transfer is valued with the interest rate applicable in the month of the transfer.

 The proposed regulations provide for making the election to use a prior month's interest rate in the case of a transfer to charity. Comments questioned the need for requiring the filing of detailed information as part of a prior-month election. This information is already required to be filed with the tax return for certain situations involving charitable interests that are subject to measuring lives. See, for example, section 20.2055-2(f)(5). This requirement is now explained in the regulations under section 7520. Comments also raised a question about the revocability of the election and the time for making the election. The final regulations provide that the taxpayer makes the prior-month election by so stating on the return and identifying the elected month. The failure to include with the return other information that is required to describe the transfer, whether or not the election is made, will ordinarily not invalidate the election. For elections made on or before June 10, 1994, a reasonable attempt to make the election and submit the required information will be treated as a valid election. The final regulations also provide that the election is generally made on a timely filed tax return for the year of the transfer. However, the election may also be made or changed on an amended or supplemented return that is made within 24 months after the original return is filed.

 Comments were received concerning whether the five percent de minimis test (i.e., a transfer to charity of at least five percent of the value of the interest) set forth in the proposed regulations should be applied in determining if the taxpayer may elect to use an alternative prior month interest rate. The final regulations delete this de minimis test.

 Comments were received concerning the application of these regulations in situations where an individual is expected to die prematurely or where two individuals die simultaneously. See, for example, Rev. Rul. 80-80, 1980-1 C.B. 194, which holds that, in cases where the individual's death is imminent, the standard actuarial tables prescribed by the regulations are not to be used. See, also, Carter v. United States, 291 F.2d 63 (5th Cir. 1991), where the court refused to ascribe value to an income interest for purposes of the section 2013 credit where the death of the transferee was simultaneous with the death of the transferor. Comments were also received concerning the scope of these regulations in light of O'Reilly v. Commissioner, 973 F.2d 1403 (8th. Cir. 1992), rem'd, T.C.M. 1994-61. In O'Reilly, the Circuit Court held that the standard actuarial tables were not applicable to a situation in which the application of those tables would have produced an unreasonable result. In that case, the property held in trust produced an extraordinarily low rate of return. A similar result was reached by the Tax Court in Froh v. Commissioner, 100 T.C. 1 (1993), dealing with depletable property. Consistent with these comments, the Service and Treasury are contemporaneously proposing an amendment to these regulations that defines the circumstances in which the section 7520 tables would not apply in valuing a transferred interest. That Notice of Proposed Rulemaking is published elsewhere in this issue of the Federal Register.

Notice 89-60, 1989-1 C.B. 700, announced a method for determining the deemed yearly rate of return for new pooled income funds. This method defined the deemed rate as the highest annual average section 7520 interest rate for the preceding three years, reduced by one percentage point. The proposed regulations would have defined the deemed rate as the highest annual average section 7520 interest rate for the preceding three years, multiplied by 90 percent. Both methods produced the same result for each of the years after the enactment of section 7520:

                               5/1/89

 Comments were received concerning whether, in valuing transfers to a new pooled income fund, the same deemed rate of return would be used throughout the entire three-year period. The final regulations provide that the deemed rate of return for transfers to a new pooled income fund is recomputed each calendar year using the monthly section 7520 rates for the three-year period immediately preceding the calendar year in which each transfer to the fund is made until the fund has been in existence for three taxable years and can compute its highest rate of return for the three taxable years immediately preceding the taxable year in which the transfer of property to the fund is made.

 A commentator suggested that, with respect to the interpolation method for valuing transfers to pooled income funds and charitable remainder unitrusts, a taxpayer be permitted to elect a more exact method of computing the appropriate interest rate. The method prescribed in the proposed regulations has been in use for many years and is prescribed by the Internal Revenue Service in Publication 1457, "Actuarial Values, Alpha Volume," (8-89) and Internal Revenue Service Publication 1458, "Actuarial Values, Beta Volume," (8-89). The IRS and Treasury believe that any change from the method prescribed in these publications, which are in current use, would create undue confusion for taxpayers. Consequently, the commentator's suggested change is not being adopted at this time.

 Comments were received inquiring about the application of section 7520 to the valuation of annuities issued by certain organizations other than insurance companies. In response to these comments, the final regulations explain that the section 7520 tables are to be used in valuing these annuities. This is an application of the principle adopted in Rev. Rul. 84-162, 1984-2 C.B. 200, for transfers after November 23, 1984. A different method of valuation continues to apply for purposes of computing the exclusion ratio in reporting the annuity payments under section 72. These clarifications have been made by updating section 1.101-2(e)(1)(iii)(b) and Example 8 of section 1.1011-2(c).

 Comments were received concerning the presumption in the proposed regulations under section 664 that, if a governing instrument for a charitable remainder unitrust does not prescribe when the distribution is made during the period, the distribution is presumed to be made on the first day of the period. Unitrusts have traditionally been regarded as providing for distributions at the beginning of each period unless the governing instrument provides to the contrary. This presumption has been reflected in unitrust factors prescribed in the regulations under section 664 since the enactment of that section. Therefore, the presumption that distributions are made on the first day of the period, if not otherwise provided for in the instrument, is continued in the final regulations.

EFFECTIVE DATES

 These regulations are generally effective in the case of annuities, interests for life or terms of years, and remainder or reversionary interests created after April 30, 1989. The regulations provide certain transitional rules intended to alleviate any adverse consequences resulting from the statutory amendments. Several principal provisions of the regulations were announced in Notice 89-24, 1989-1 C.B. 660 (which announced the change from the 10 percent fixed rate of interest to the section 7520 floating rate of interest), and Notice 89-60 (which announced the change in mortality tables) (See section 601.601(d)(2)(ii)(b) of the Statement of Procedural Rules). A transitional rule in the final regulations provides that, for valuation dates of transfers after April 30, 1989, and before June 10, 1994, a transferor can rely on Notice 89-24 or Notice 89-60 in valuing the transferred interest. For gift tax purposes, a transitional rule in the final regulations provides that if, after December 31, 1988, but before May 1, 1989, a donor transferred an interest in property, retaining an interest in the same property, and the donor later transferred the retained interest in the property after April 30, 1989, and before January 1, 1990, the donor may elect to value the transfer of the retained interest under either the 10 percent tables or the section 7520 tables (whichever is more beneficial). For estate tax purposes, a transitional rule in the final regulations provides that the estate of a mentally incompetent decedent may elect to value the property interest included in the gross estate under the mortality table and interest rate in effect at the time the decedent became mentally incompetent or the mortality table and interest rate in effect on the decedent's date of death if the decedent was under a mental incapacity that existed on May 1, 1989, and continued uninterrupted until the decedent's death. For purposes of determining the value of the remainder interest in a testamentary charitable remainder unitrust or annuity trust, a transitional rule in the final regulations provides that the mortality table and 10 percent interest rate in effect before May 1, 1989, or the mortality table and interest rate under section 7520 may be used if the decedent was mentally incompetent on May 1, 1989, and (1) such incompetency continued uninterrupted until death, or (2) the decedent died within 90 days of first regaining competency after April 30, 1989.

SPECIAL ANALYSES

 It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code, the notice of proposed rulemaking preceding these regulations was submitted to the Small Business Administration for comment on its impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is William L. Blodgett, Office of Chief Counsel (Passthroughs and Special Industries), IRS. However, other personnel from the IRS and Treasury Department participated in their development.

LIST OF SUBJECTS

26 CFR Part 1

 Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 20

 Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 25

 Gift taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

 Reporting and recordkeeping requirements.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR parts 1, 20, 25, and 602 are amended as follows:

Paragraph 1. In the list below, for each section indicated in the left column, remove the language in the middle column and add the language in the right column:

 Section                Remove                     Add

Par. 2. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.170A-12 also issued under 26 U.S.C. 170(f)(4). * * *

Section 1.642(c)-6 also issued under 26 U.S.C. 642(c)(5).

Section 1.642(c)-6A also issued under 26 U.S.C. 642(c)(5).

Section 1.664-1 also issued under 26 U.S.C. 664(a).

Section 1.664-2 also issued under 26 U.S.C. 664(a).

Section 1.664-3 also issued under 26 U.S.C. 664(a).

Section 1.664-4 also issued under 26 U.S.C. 664(a).

Section 1.664-4A also issued under 26 U.S.C. 664(a). * * *

Section 1.7520-1 also issued under 26 U.S.C. 7520(c)(2).

Section 1.7520-2 also issued under 26 U.S.C. 7520(c)(2).

Section 1.7520-3 also issued under 26 U.S.C. 7520(c)(2).

Section 1.7520-4 also issued under 26 U.S.C. 7520(c)(2).

Par. 3. Section 1.101-2 is amended as follows:

1. Paragraphs (e)(1)(iii)(b)(1) and (2) are revised.

2. Paragraph (e)(1)(iii)(b)(3) is removed.

3. The revised provisions read as follows:

SECTION 1.101-2. EMPLOYEES' DEATH BENEFITS.

* * * * *

(e) * * *

(1) * * *

(iii) * * *

(b) * * *

(1) In the case of an annuity paid by an insurance company or by an organization (other than an insurance company) regularly engaged in issuing annuity contracts with an insurance company as the coinsurer or reinsurer of the obligations under the contract, by use of the discount interest rates and mortality tables used by the insurance company involved to determine the installment benefits; and

(2) In the case of an annuity issued after November 23, 1984, to which paragraph (e)(1)(iii)(b)(1) of this section is not applicable, by use of the appropriate tables in section 20.2031-7 of this chapter (Estate Tax Regulations).

* * * * *

Par. 4. Section 1.170A-12 is amended as follows:

1. In Paragraph (a)(3), a sentence is added between the fourth and fifth sentences.

2. Paragraphs (b), and (e)(1) and (2) are revised.

3. Paragraph (f) is removed.

4. The authority citation at the end of the section is removed.

5. The added and revised provisions read as follows:

SECTION 1.170A-12 VALUATION OF A REMAINDER INTEREST IN REAL PROPERTY FOR CONTRIBUTIONS MADE AFTER JULY 31, 1969.

(a) * * *

(3) * * * Except as provided in section 1.7520-3(b) of this chapter, for transfers of remainder interests after April 30, 1989, the present value of the remainder interest is determined under section 25.2512-5 of this chapter by use of the interest rate component on the date the interest is transferred unless an election is made under section 7520 and section 1.7520-2 of this chapter to compute the present value of the interest transferred by use of the interest rate component for either of the 2 months preceding the month in which the interest is transferred. * * *

(b) VALUATION OF A REMAINDER INTEREST FOLLOWING ONLY ONE LIFE -- (1) GENERAL RULE. The value of a remainder interest in real property following only one life is determined under the rules provided in section 20.2031-7 (or for certain prior periods, section 20.2031-7A) of this chapter (Estate Tax Regulations), using the interest rate and life contingencies prescribed for the date of the gift. See, however, section 1.7520-3(b)(relating to exceptions to the use of prescribed tables under certain circumstances). However, if any part of the real property is subject to exhaustion, wear and tear, or obsolescence, the special factor determined under paragraph (b)(2) of this section shall be used in valuing the remainder interest in that part. Further, if any part of the property is subject to depletion of its natural resources, such depletion is taken into account in determining the value of the remainder interest.

(2) COMPUTATION OF DEPRECIATION FACTOR. If the valuation of the remainder interest in depreciable property is dependent upon the continuation of one life, a special factor must be used. The factor determined under this paragraph (b)(2) is carried to the fifth decimal place. The special factor is to be computed on the basis of the interest rate and life contingencies prescribed in section 20.2031-7 (or for certain prior periods, section 20.2031-7A) of this chapter (Estate Tax Regulations) and on the assumption that the property depreciates on a straight-line basis over its estimated useful life. For transfers for which the valuation date is after April 30, 1989, special factors for determining the present value of a remainder interest following one life and an example describing the computation are contained in Internal Revenue Service Publication 1459, "Actuarial Values, Gamma Volume," (8-89). This publication is no longer available for purchase from the Superintendent of Documents. However, it may be obtained by requesting a copy from: CC:DOM:CORP:T:R (IRS Publication 1459), room 5228, Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, DC 20044. See, however, section 1.7520-3(b) (relating to exceptions to the use of prescribed tables under certain circumstances). Otherwise, in the case of the valuation of a remainder interest following one life, the special factor may be obtained through use of the following formula:

[formula omitted]

(3) The following example illustrates the provisions of this paragraph (b):

EXAMPLE. In June 1992, A, who is 62, donates to Y University a remainder interest in a personal residence, consisting of a house and land, subject to a reserved life estate in A. At the time of the gift, the land has a value of $30,000 and the house has a value of $100,000 with an estimated useful life of 45 years, at the end of which the value of the house is expected to be $20,000. The portion of the property considered to be depreciable is $80,000 (the value of the house ($100,000) less its expected value at the end of 45 years ($20,000)). The portion of the property considered to be nondepreciable is $50,000 (the value of the land at the time of the gift ($30,000) plus the expected value of the house at the end of 45 years ($20,000)). The interest rate prescribed under section 7520 for June 1992 is 8.4 percent. Based on an interest rate of 8.4 percent, the remainder factor for $1.00 prescribed in section 20.2031-7 of this chapter for a person age 62 is 0.29567. The value of the nondepreciable remainder interest is $14,783.50 (0.29567 times $50,000). The value of the depreciable remainder interest is $17,387.20 (0.21734, computed under the formula described in paragraph (b)(2) of this section, times $80,000). Therefore, the value of the remainder interest is $32,170.70.

* * * * *

(e) * * *

(1)(i) If the valuation of the remainder interest in the real property is dependent upon the continuation or the termination of more than one life or upon a term certain concurrent with one or more lives, a special factor must be used.

(ii) The special factor is to be computed on the basis of --

(A) Interest at the rate prescribed under section 25.2512-5 (or, for certain prior periods, section 25.2512-5A) of this chapter, compounded annually;

(B) Life contingencies determined from the values that are set forth in the mortality table in section 20.2031-7 (or, for certain prior periods, section 20.2031-7A) of this chapter; and

(C) If depreciation is involved, the assumption that the property depreciates on a straight-line basis over its estimated useful life.

(iii) If any part of the property is subject to depletion of its natural resources, such depletion must be taken into account in determining the value of the remainder interest.

(2) In the case of the valuation of a remainder interest following two lives, the special factor may be obtained through use of the following formula:

[formula omitted]

Par. 5. Section 1.170A-13 is amended by removing the authority citation immediately following paragraph (d)(3).

Par. 6. Section 1.170A-14 is amended by:

1. Revising the third and fourth sentences of paragraph (h)(4), Example 2, as set forth below.

2. Removing the fifth sentence of paragraph (h)(4), Example 2.

SECTION 1.170A-14 QUALIFIED CONSERVATION CONTRIBUTIONS.

* * * * *

(h) * * *

(4) * * *

EXAMPLE 2. * * * Under section 1.170A-12(b), the value of a remainder interest in real property following one life is determined under section 25.2512-5 of this chapter (Gift Tax Regulations). (See section 25.2512-5A of this chapter with respect to the valuation of annuities, interests for life or term of years, and remainder or reversionary interests transferred before December 1, 1983).

* * * * *

Par. 7. Immediately following section 1.643(d)-2, an undesignated center heading and section 1.642(c)-6A are added to read as follows:

POOLED INCOME FUND ACTUARIAL TABLES APPLICABLE

BEFORE MAY 1, 1989

SECTION 1.642(c)-6A VALUATION OF CHARITABLE REMAINDER INTERESTS FOR WHICH THE VALUATION DATE IS BEFORE MAY 1, 1989.

(a) VALUATION OF CHARITABLE REMAINDER INTERESTS FOR WHICH THE VALUATION DATE IS BEFORE JANUARY 1, 1952. There was no provision for the qualification of pooled income funds under section 642 until 1969. See section 20.2031-7A(a) of this chapter (Estate Tax Regulations) for the determination of the present value of a charitable remainder interest created before January 1, 1952.

(b) VALUATION OF CHARITABLE REMAINDER INTERESTS FOR WHICH THE VALUATION DATE IS AFTER DECEMBER 31, 1951, AND BEFORE JANUARY 1, 1971. No charitable deduction is allowable for a transfer to a pooled income fund for which the valuation date is after the effective dates of the Tax Reform Act of 1969 unless the pooled income fund meets the requirements of section 642(c)(5). See section 20.2031-7A(b) of this chapter (Estate Tax Regulations) for the determination of the present value of a charitable remainder interest for which the valuation date is after December 31, 1951, and before January 1, 1971.

(c) PRESENT VALUE OF REMAINDER INTEREST IN THE CASE OF TRANSFERS TO POOLED INCOME FUNDS FOR WHICH THE VALUATION DATE IS AFTER DECEMBER 31, 1970, AND BEFORE DECEMBER 1, 1983. For the determination of the present value of a remainder interest in property transferred to a pooled income fund for which the valuation date is after December 31, 1970, and before December 1, 1983, see section 20.2031-7A(c) of this chapter (Estate Tax Regulations) and former section 1.642(c)-6(e) (as contained in the 26 CFR Part 1 edition revised as of April 1, 1994).

(d) PRESENT VALUE OF REMAINDER INTEREST DEPENDENT ON THE TERMINATION OF ONE LIFE IN THE CASE OF TRANSFERS TO POOLED INCOME FUNDS MADE AFTER NOVEMBER 30, 1983, FOR WHICH THE VALUATION DATE IS BEFORE MAY 1, 1989 -- (1) IN GENERAL. For transfers to pooled income funds made after November 30, 1983, for which the valuation date is before May 1, 1989, the present value of the remainder interest at the time of the transfer of property to the fund is determined by computing the present value (at the time of the transfer) of the life income interest in the transferred property (as determined under paragraph (d)(2) of this section) and subtracting that value from the fair market value of the transferred property on the valuation date. The present value of a remainder interest that is dependent on the termination of the life of one individual is computed by use of Table G in paragraph (d)(4) of this section. For purposes of the computation under this section, the age of an individual is to be taken as the age of the individual at the individual's nearest birthday.

(2) PRESENT VALUE OF LIFE INCOME INTEREST. The present value of the life income interest in property transferred to a pooled income fund shall be computed on the basis of:

(i) Life contingencies determined from the values of 1x that are set forth in Table LN of section 20.2031-7A(d)(6) of this chapter (Estate Tax Regulations); and

(ii) Discount at a rate of interest, compounded annually, equal to the highest yearly rate of return of the pooled income fund for the 3 taxable years immediately preceding its taxable year in which the transfer of property to the fund is made. For purposes of this paragraph (d)(2), the yearly rate of return of a pooled income fund is determined as provided in section 1.642(c)-6(c) unless the highest yearly rate of return is deemed to be 9 percent. For purposes of this paragraph (d)(2), the first taxable year of a pooled income fund is considered a taxable year even though the taxable year consists of less than 12 months. However, appropriate adjustments must be made to annualize the rate of return earned by the fund for that period. Where it appears from the facts and circumstances that the highest yearly rate of return for the 3 taxable years immediately preceding the taxable year in which the transfer of property is made has been purposely manipulated to be substantially less than the rate of return that would otherwise be reasonably anticipated with the purpose of obtaining an excessive charitable deduction, that rate of return may not be used. In that case, the highest yearly rate of return of the fund is determined by treating the fund as a pooled income fund that has been in existence for less than 3 preceding taxable years. If a pooled income fund has been in existence less than 3 taxable years immediately preceding the taxable year in which the transfer of property to the fund is made, the highest yearly rate of return is deemed to be 9 percent.

Par. 8. Section 1.642(c)-6 is amended as follows:

1. The section heading is revised.

2. Paragraphs (a) and (b) are revised.

3. Paragraph (c)(1) is revised.

4. Paragraphs (d)(2) and (d)(3) are redesignated as section 1.642(c)-6A, paragraphs (d)(3) and (d)(4), respectively.

5. Paragraph (d)(1) is redesignated paragraph (d) and revised.

6. Paragraph (e) is revised.

7. The authority citation at the end of the section is removed.

8. Paragraph (f) is added.

9. The added and revised provisions read as follows:

SECTION 1.642(e)-6 VALUATION OF A REMAINDER INTEREST IN PROPERTY TRANSFERRED TO A POOLED INCOME FUND AFTER APRIL 30, 1989.

(a) IN GENERAL. (1) For purposes of sections 170, 2055, 2106, and 2522, the fair market value of a remainder interest in property transferred to a pooled income fund is its present value determined under paragraph (d) of this section.

(2) The present value of a remainder interest at the time of the transfer of property to the pooled income fund is determined by computing the present value (at the time of the transfer) of the life income interest and subtracting that value from the fair market value of the transferred property on the valuation date. The fact that the income beneficiary may not receive the last income payment, as provided in paragraph (b)(7) of section 1.642(c)-5, is not taken into account for purposes of determining the value of the life income interest. For purposes of this section, the valuation date is the date on which property is transferred to the fund by the donor except that, for purposes of section 2055 or 2106, it is the alternate valuation date, if elected, under the provisions and limitations set forth in section 2032 and the regulations thereunder.

(3) Any claim for a deduction on any return for the value of the remainder interest in property transferred to a pooled income fund must be supported by a statement attached to the return showing the computation of the present value of the interest.

(b) ACTUARIAL COMPUTATIONS BY THE INTERNAL REVENUE SERVICE. The regulations in this and in related sections provide tables of actuarial factors and examples that illustrate the use of the tables in determining the value of remainder interests in property. Section 1.7520-1(c)(2) refers to government publications that provide additional tables of factors and examples of computations for more complex situations. If the computation requires the use of a factor that is not provided in this section, the Commissioner may supply the factor upon a request for a ruling. A request for a ruling must be accompanied by a recitation of the facts including the pooled income fund's highest yearly rate of return for the 3 taxable years immediately preceding the date of transfer, the date of birth of each measuring life, and copies of the relevant documents. A request for a ruling must comply with the instructions for requesting a ruling published periodically in the Internal Revenue Bulletin (see sections 601.201 and 601.601(d)(2)(ii)(b) of this chapter) and include payment of the required user fee. If the Commissioner furnishes the factor, a copy of the letter supplying the factor should be attached to the tax return in which the deduction is claimed. If the commissioner does not furnish the factor, the taxpayer must furnish a factor computed in accordance with the principles set forth in this section.

(c) COMPUTATION OF POOLED INCOME FUND'S YEARLY RATE OF RETURN. (1) For purposes of determining the present value of the life income interest, the yearly rate of return earned by a pooled income fund for a taxable year is the percentage obtained by dividing the amount of income earned by the pooled income fund for the taxable year by an amount equal to --

(i) The average fair market value of the property in such fund for that taxable year; less

(ii) The corrective term adjustment.

* * * * *

(d) VALUATION. The present value of the remainder interest in property transferred to a pooled income fund after April 30, 1989, is determined under paragraph (e) of this section. The present value of the remainder interest in property transferred to a pooled income fund for which the valuation date is before May 1, 1989, is determined under the following sections:

   Valuation Dates

(2) PRESENT VALUE OF A REMAINDER INTEREST. The present value of a remainder interest in property transferred to a pooled income fund is computed on the basis of --

(i) Life contingencies determined from the values of 1x that are set forth in Table 80CNSMT in section 20.2031-7(d)(6) of this chapter (Estate Tax Regulations); and

(ii) Discount at a rate of interest, compounded annually, equal to the highest yearly rate of return of the pooled income fund for the 3 taxable years immediately preceding its taxable year in which the transfer of property to the fund is made. For purposes of this paragraph (e), the yearly rate of return of a pooled income fund is determined as provided in section 1.642(c)-6(c) unless the highest rate of return is deemed to be the rate described in paragraph (e)(3) of this section for funds in existence less than 3 taxable years. For purposes of this paragraph (e)(2)(ii), the first taxable year of a pooled income fund is considered a taxable year even though the taxable year consists of less than 12 months. However, appropriate adjustments must be made to annualize the rate of return earned by the fund for that period. Where it appears from the facts and circumstances that the highest yearly rate of return of the fund for the 3 taxable years immediately preceding the taxable year in which the transfer of property is made has been purposely manipulated to be substantially less than the rate of return that would otherwise be reasonably anticipated with the purpose of obtaining an excessive charitable deduction, that rate of return may not be used. In that case, the highest yearly rate of return of the fund is determined by treating the fund as a pooled income fund that has been in existence for less than 3 preceding taxable years.

(3) POOLED INCOME FUNDS IN EXISTENCE LESS THAN 3 TAXABLE YEARS. If a pooled income fund has been in existence less than 3 taxable years immediately preceding the taxable year in which the transfer is made to the fund and the transfer to the fund is made after April 30, 1989, the highest rate of return is deemed to be the interest rate (rounded to the nearest two-tenths of one percent) that is 1 percent less than the highest annual average of the monthly section 7520 rates for the 3 calendar years immediately preceding the calendar year in which the transfer to the pooled income fund is made. The deemed rate of return for transfers to new pooled income funds is recomputed each calendar year using the monthly section 7520 rates for the 3-year period immediately preceding the calendar year in which each transfer to the fund is made until the fund has been in existence for 3 taxable years and can compute its highest rate of return for the 3 taxable years immediately preceding the taxable year in which the transfer of property to the fund is made in accordance with the rules set forth in the first sentence of paragraph (e)(2)(ii) of this section.

(4) COMPUTATION OF VALUE OF REMAINDER INTEREST. The factor that is used in determining the present value of a remainder interest that is dependent on the termination of the life of one individual is the factor from Table S in paragraph (e)(5) of this section under the appropriate yearly rate of return opposite the number that corresponds to the age of the individual upon whose life the value of the remainder interest is based. The tables in paragraph (e)(5) of this section include factors for yearly rates of return from 4.2 to 14 percent. Many actuarial factors not contained in the tables in paragraph (e)(5) of this section are contained in Table S in Internal Revenue Service Publication 1457, "Actuarial Values, Alpha Volume," (8-89). A copy of this publication may be purchased from the Superintendent of Documents, United States Government Printing Office, Washington, Dc 20402. For other situations, see section 1.642(c)-6(b). If the yearly rate of return is a percentage that is between the yearly rates of return for which factors are provided, a linear interpolation must be made. The present value of the remainder interest is determined by multiplying the fair market value of the property on the valuation date by the appropriate remainder factor. This paragraph may be illustrated by the following example:

EXAMPLE. A, who will be 55 years old on May 8, 1990, transfers $100,000 to a pooled income fund on January 1, 1990, and retains a life income interest in the property. The highest yearly rate of return earned by the fund for its 3 preceding taxable years is 9.47 percent. In Table S, the remainder factor opposite 55 years under 9.4 percent is .18785 and under 9.6 percent is .18322. The present value of the remainder interest is $18,623.00, computed as follows:

 Factor at 9.4 percent for age 55             .18785

 TABLE S

Par. 9. Section 1.642(c)-6A is further amended by revising the heading for Table G in newly designated paragraph (d)(4) to read as follows:

SECTION 1.642(c)-6A VALUATION OF CHARITABLE REMAINDER INTERESTS FOR WHICH THE VALUATION DATE IS BEFORE MAY 1, 1989.

* * * * *

(d) PRESENT VALUE OF REMAINDER INTEREST DEPENDENT ON THE TERMINATION OF ONE LIFE IN THE CASE OF TRANSFERS TO POOLED INCOME FUNDS MADE AFTER NOVEMBER 30, 1983, FOR WHICH THE VALUATION DATE IS BEFORE MAY 1, 1989.

* * * * *

(4) * * *

TABLE G

TABLE G -- SINGLE LIFE, UNISEX -- TABLE SHOWING THE PRESENT WORTH OF THE REMAINDER INTEREST IN PROPERTY TRANSFERRED TO A POOLED INCOME FUND HAVING THE YEARLY RATE OF RETURN SHOWN -- APPLICABLE FOR TRANSFERS AFTER NOVEMBER 30, 1983, AND BEFORE MAY 1, 1989

* * * * *

Par. 10. Section 1.664-1 is amended as follows:

1. Paragraph (a)(5)(ii)(b) is revised.

2. Paragraphs (a)(5)(iv)(a) through (c) are revised and paragraph (a)(5)(iv)(d) is added.

3. Paragraph (a)(6), the introductory text, is revised.

4. The authority citation at the end of the section is removed.

5. The added and revised provisions read as follows:

SECTION 1.664-1 CHARITABLE REMAINDER TRUSTS.

(a) * * *

(5) * * *

(ii) * * *

(b)(1) In the case of transfers made after November 30, 1983, for which the valuation date is before May 1, 1989, a factor equal to 1.000000 less the factor under the appropriate adjusted payout rate in column 2 of Table D in section 1.664-4A(d)(6) opposite the number of years in column 1 between the date of death of the decedent and the date of the earlier of the death of the last recipient or the last day of such taxable year.

(2) In the case of transfers for which the valuation date is after April 30, 1989, a factor equal to 1.000000 less the factor under the appropriate adjusted payout rate in Table D in section 1.664-4(e)(6) opposite the number of years in column 1 between the date of death of the decedent and the date of the earlier of the death of the last recipient or the last day of such taxable year. The appropriate adjusted payout rate is determined by using the appropriate Table F contained in section 1.664-4(e)(6) for the section 7520 rate for the month of the valuation date.

(3) If the number of years between the date of death and the date of the earlier of the death of the last recipient or the last day of such taxable year is between periods for which factors are provided, a linear interpolation must be made.

* * * * *

(iv) * * *

(a) The section 7520 rate for the month in which the valuation date with respect to the transfer is (or one of the prior two months if elected under section 1.7520-2(b)) after April 30, 1989;

(b) 10 percent for instruments executed or amended (other than in the case of a reformation under section 2055(e)(3)) on or after August 9, 1984, and before May 1, 1989, and not subsequently amended;

(c) 6 percent or 10 percent for instruments executed or amended (other than in the case of a reformation under section 2055(e)(3)) after October 24, 1983, and before August 9, 1984; and

(d) 6 percent for instruments executed before October 25, 1983, and not subsequently amended (other than in the case of a reformation under section 2055(e)(3)).

(6) EXAMPLES. The application of the rules in paragraphs (a)(4) and (a)(5) of this section require the use of actuarial factors contained in section 1.664-4(e), section 1.664-4A(d), and former section 1.664-4(d) (as contained in the 26 CFR Part 1 edition revised as of April 1, 1994) and may be illustrated by use of the following examples:

* * * * *

Par. 11. Section 1.664-2 is amended as follows:

1. Paragraph (c) is revised as set forth below.

2. The authority citation at the end of the section is removed.

SECTION 1.664-2 CHARITABLE REMAINDER ANNUITY TRUST.

* * * * *

(c) CALCULATION OF THE FAIR MARKET VALUE OF THE REMAINDER INTEREST OF A CHARITABLE REMAINDER ANNUITY TRUST. For purposes of sections 170, 2055, 2106, and 2522, the fair market value of the remainder interest of a charitable remainder annuity trust (as described in this section ) is the net fair market value (as of the appropriate valuation date) of the property placed in trust less the present value of the annuity. For purposes of this section, VALUATION DATE means, in general, the date on which the property is transferred to the trust by the donor regardless of when the trust is created. In the case of transfers to a charitable remainder annuity trust for which the valuation date is after April 30, 1989, if an election is made under section 7520 and section 1.7520-2(b) to compute the present value of the charitable interest by use of the interest rate component for either of the 2 months preceding the month in which the transfer is made, the month so elected is the valuation date for purposes of determining the interest rate and mortality tables. For purposes of section 2055 or 2106, the valuation date is the date of death unless the alternate valuation date is elected in accordance with section 2032, in which event, and within the limitations set forth in section 2032 and the regulations thereunder, the valuation date is the alternate valuation date. If the decedent's estate elects the alternate valuation date under section 2032 and also elects, under section 7520 and section 1.7520-2(b), to use the interest rate component for one of the 2 months preceding the alternate valuation date, the month so elected is the valuation date for purposes of determining the interest rate and mortality tables. The present value of an annuity is computed under section 20.2031-7(d) of this chapter (Estate Tax Regulations) for transfers for which the valuation date is after April 30, 1989, or under section 20.2031-7A(a) through (d) of this chapter, whichever is applicable, for transfers for which the valuation date is before May 1, 1989. See, however, section 1.7520- 3(b)(relating to exceptions to the use of prescribed tables under certain circumstances). If the valuation date of a transfer to a charitable remainder annuity trust is after April 30, 1989, and before June 10, 1994, a transferor can rely on Notice 89-24, 1989-1 C.B. 660, or Notice 89-60, 1989-1 C.B. 700 (See section 601.601(d)(2)(ii)(b) of this chapter), in valuing the transferred interest.

Par. 12. Immediately following section 1.664-4 an undesignated center heading and section 1.664-4A are added to read as follows:

UNITRUST ACTUARIAL TABLES APPLICABLE BEFORE MAY 1, 1989

SECTION 1.664-4A VALUATION OF CHARITABLE REMAINDER INTERESTS FOR WHICH THE VALUATION DATE IS BEFORE MAY 1, 1989.

(a) VALUATION OF CHARITABLE REMAINDER INTERESTS FOR WHICH THE VALUATION DATE IS BEFORE JANUARY 1, 1952. There was no provision for the qualification of a charitable remainder unitrust under section 664 until 1969. See section 20.2031-7A(a) of this chapter (Estate Tax Regulations) for the determination of the present value of a charitable interest for which the valuation date is before January 1, 1952.

(b) VALUATION OF CHARITABLE REMAINDER INTERESTS FOR WHICH THE VALUATION DATE IS AFTER DECEMBER 31, 1951, AND BEFORE JANUARY 1, 1971. No charitable deduction is allowable for a transfer to a unitrust for which the valuation date is after the effective dates of the Tax Reform Act of 1969 unless the unitrust meets the requirements of section 664. See section 20.2031-7A(b) of this chapter (Estate Tax Regulations) for the determination of the present value of a charitable remainder interest for which the valuation date is after December 31, 1951, and before January 1, 1971.

(c) VALUATION OF CHARITABLE REMAINDER UNITRUSTS HAVING CERTAIN PAYOUT SEQUENCES FOR TRANSFERS FOR WHICH THE VALUATION DATE IS AFTER DECEMBER 31, 1970, AND BEFORE DECEMBER 1, 1983. For the determination of the present value of a charitable remainder unitrust for which the valuation date is after December 31, 1970, and before December 1, 1983, see section 20.2031-7A(c) of this chapter (Estate Tax Regulations) and former section 1.664-4(d)(as contained in the 26 CFR Part 1 edition revised as of April 1, 1994)

(d) VALUATION OF CHARITABLE REMAINDER UNITRUSTS HAVING CERTAIN PAYOUT SEQUENCES FOR TRANSFERS FOR WHICH THE VALUATION DATE IS AFTER NOVEMBER 30, 1983, AND BEFORE MAY 1, 1989 -- (1) IN GENERAL. Except as otherwise provided in paragraph (d)(2) of this section, in the case of transfers made after November 30, 1983, for which the valuation date is before May 1, 1989, the present value of a remainder interest that is dependent on a term of years or the termination of the life of one individual is determined under paragraphs (d)(3) through (d)(6) of this section, provided that the amount of the payout as of any payout date during any taxable year of the trust is not larger than the amount that the trust could distribute on such date under section 1.664-3(a)(1)(v) if the taxable year of the trust were to end on such date. The present value of the remainder interest in the trust is determined by computing the adjusted payout rate (as defined in paragraph (d)(3) of this section) and following the procedure outlined in paragraph (d)(4) or (d)(5) of this section, whichever is applicable. The present value of a remainder interest that is dependent on a term of years is computed under paragraph (d)(4) of this section. The present value of a remainder interest that is dependent on the termination of the life of one individual is computed under paragraph (d)(5) of this section. See paragraph (d)(2) of this section for testamentary transfers for which the valuation date is after November 30, 1983, and before August 9, 1984.

(2) RULES FOR DETERMINING THE PRESENT VALUE FOR TESTAMENTARY TRANSFERS WHERE THE DECEDENT DIES AFTER NOVEMBER 30, 1983, AND BEFORE AUGUST 9, 1984. For purposes of section 2055 or 2106, if --

(i) The decedent dies after November 30, 1983, and before August 9, 1984; or

(ii) On December 1, 1983, the decedent was mentally incompetent so that the disposition of the property could not be changed, and the decedent died after November 30, 1983, without regaining competency to dispose of the decedent's property, or died within 90 days of the date on which the decedent first regained competency, the present value determined under this section of a remainder interest is determined in accordance with paragraph (d)(1) and paragraphs (d)(3) through (d)(6) of this section, or section 1.664-4A(c), at the option of the taxpayer.

Par. 13. Section 1.664-4 is amended as follows:

1. Paragraph (a) is revised.

2. Paragraphs (b)(2) through (b)(5) are redesignated as paragraphs (d)(3) through (d)(6) of section 1.664-4A, respectively.

3. Paragraph (b)(1) is redesignated as paragraph (b) and revised.

4. Paragraphs (c) and (d) are revised.

5. The authority citation at the end of the section is removed.

6. Paragraphs (e) and (f) are added.

7. The revisions and additions read as follows:

SECTION 1.664-4 CALCULATION OF THE FAIR MARKET VALUE OF THE REMAINDER INTEREST IN A CHARITABLE REMAINDER UNITRUST.

(a) RULES FOR DETERMINING PRESENT VALUE. For purposes of section s 170, 2055, 2106, and 2522, the fair market value of a remainder interest in a charitable remainder unitrust (as described in section 1.664-3) is its present value determined under paragraph (d) of this section. The present value determined under this section shall be computed on the basis of --

(1) Life contingencies determined as to each life involved, from the values of 1x set forth in Table 80CNSMT contained in section 20.2031-7(d)(6) of this chapter (Estate Tax Regulations) in the case of transfers for which the valuation date is after April 30, 1989, or column 2 of Table LN, of section 20.2031-7A(d)(6) of this chapter in the case of transfers made after November 30, 1983, for which the valuation date is before May 1, 1989. See section 20.2031-7A(a) through (c) of this chapter, whichever is applicable, for transfers for which the valuation date is before December 1, 1983;

(2) Interest at the section 7520 rate in the case of transfers for which the valuation date is after April 30, 1989, or 10 percent in the case of transfers to charitable remainder unitrusts made after November 30, 1983, for which the valuation date is before May 1, 1989. See section 20.2031-7A(a) through (c) of this chapter, whichever is applicable, for transfers for which the valuation date is before December 1, 1983; and

(3) The assumption that the amount described in section 1.664-3(a)(1)(i)(a) is distributed in accordance with the payout sequence described in the governing instrument. If the governing instrument does not prescribe when the distribution is made during the period for which the payment is made, for purposes of this section, the distribution is considered payable on the first day of the period for which the payment is made.

(b) ACTUARIAL COMPUTATIONS BY THE INTERNAL REVENUE SERVICE. The regulations in this and in related sections provide tables of actuarial factors and examples that illustrate the use of the tables in determining the value of remainder interests in property. Section 1.7520-1(c)(2) refers to government publications that provide additional tables of factors and examples of computations for more complex situations. If the computation requires the use of a factor that is not provided in this section, the Commissioner may supply the factor upon a request for a ruling. A request for a ruling must be accompanied by a recitation of the facts including the date of birth of each measuring life, and copies of the relevant documents. A request for a ruling must comply with the instructions for requesting a ruling published periodically in the Internal Revenue Bulletin (See section 601.601(d)(2)(ii)(b) of this chapter) and include payment of the required user fee. If the Commissioner furnishes the factor, a copy of the letter supplying the factor should be attached to the tax return in which the deduction is claimed. If the Commissioner does not furnish the factor, the taxpayer must furnish a factor computed in accordance with the principles set forth in this section.

(c) STATEMENT SUPPORTING DEDUCTION REQUIRED. Any claim for a deduction on any return for the value of a remainder interest in a charitable remainder unitrust must be supported by a full statement attached to the return showing the computation of the present value of such interest.

(d) VALUATION. The fair market value of a remainder interest in a charitable remainder unitrust (as described in section 1.664-3) for transfers for which the valuation date is after April 30, 1989, is its present value determined under paragraph (e) of this section. The fair market value of a remainder interest in a charitable remainder unitrust (as described in section 1.664-3) for transfers for which the valuation date is before May 1, 1989, is its present value determined under the following sections:

   Valuation Dates

(2) TRANSITIONAL RULES FOR VALUATION OF CHARITABLE REMAINDER UNITRUSTS. (i) If the valuation date of a transfer to a charitable remainder unitrust is after April 30, 1989, and before June 10, 1994, a transferor can rely upon Notice 89-24, 1989-1 C.B. 660, or Notice 89-60, 1989-1 C.B. 700, in valuing the transferred interest. (See section 601.601(d)(2)(ii)(b) of this chapter.)

(ii) For purposes of sections 2055, 2106, or 2624, if on May 1, 1989, the decedent was mentally incompetent so that the disposition of the property could not be changed, and the decedent died after April 30, 1989, without having regained competency to dispose of the decedent's property, or the decedent died within 90 days of the date that the decedent first regained competency after April 30, 1989, the present value of a remainder interest determined under this section is determined as if the valuation date with respect to the decedent's gross estate is either before May 1, 1989, or after April 30, 1989, at the option of the decedent's executor.

(3) ADJUSTED PAYOUT RATE. For transfers for which the valuation date is after April 30, 1989, the adjusted payout rate is determined by using the appropriate Table F, contained in paragraph (e)(6) of this section, for the section 7520 interest rate applicable to the transfer. If the interest rate is between 4.2 and 14 percent, see paragraph (e)(6) of this section. If the interest rate is below 4.2 percent or greater than 14 percent, see section 1.664-4(b). The adjusted payout rate is determined by multiplying the fixed percentage described in section 1.664-3(a)(1)(i)(a) by the factor describing the payout sequence of the trust and the number of months by which the valuation date for the first full taxable year of the trust precedes the first payout date for such taxable year. If the governing instrument does not prescribe when the distribution or distributions shall be made during the taxable year of the trust, see section 1.664-4(a). In the case of a trust having a payout sequence for which no figures have been provided by the appropriate table, and in the case of a trust that determines the fair market value of the trust assets by taking the average of valuations on more than one date during the taxable year, see section 1.664-4(b).

(4) PERIOD IS A TERM OF YEARS. If the period described in section 1.664-3(a)(5) is a term of years, the factor that is used in determining the present value of the remainder interest for transfers for which the valuation date is after April 30, 1989, is the factor under the appropriate adjusted payout rate in Table D in paragraph (e)(6) of this section corresponding to the number of years in the term. If the adjusted payout rate is an amount that is between adjusted payout rates for which factors are provided in Table D, a linear interpolation must be made. The present value of the remainder interest is determined by multiplying the net fair market value (as of the appropriate valuation date) of the property placed in trust by the factor determined under this paragraph. For purposes of this section, the valuation date is, in the case of an inter vivos transfer, the date on which the property is transferred to the trust by the donor. However, if an election is made under section 7520 and section 1.7520-2(b) to compute the present value of the charitable interest by use of the interest rate component for either of the 2 months preceding the month in which the date of transfer falls, the month so elected is the valuation date for purposes of determining the interest rate and mortality tables. In the case of a testamentary transfer under section 2055, 2106, or 2624, the valuation date is the date of death, unless the alternate valuation date is elected under section 2032, in which event, and within the limitations set forth in section 2032 and the regulations thereunder, the valuation date is the alternate valuation date. If the decedent's estate elects the alternate valuation date under section 2032 and also elects, under section 7520 and section 1.7520-2(b), to use the interest rate component for one of the 2 months preceding the alternate valuation date, the month so elected is the valuation date for purposes of determining the interest rate and mortality tables. If the adjusted payout rate is between 4.2 and 14 percent, see paragraph (e)(6) of this section. If the adjusted payout rate is less than 4.2 percent or greater than 14 percent, see section 1.664-4(b). The application of this paragraph may be illustrated by the following example:

EXAMPLE. D transfers $100,000 to a charitable remainder unitrust on January 1, 1990. The trust instrument requires that the trust pay 8 percent of the fair market value of the trust assets as of January 1st for a term of 12 years to D in quarterly payments (March 31, June 30, September 30, and December 31). The section 7520 rate for January 1990 is 9.6 percent. Under Table F(9.6), the appropriate adjustment factor is.944628 for quarterly payments payable at the end of each quarter. The adjusted payout rate is 7.557 (8% X .944628). Based on the remainder factors in Table D, the present value of the remainder interest is $38,950.30, computed as follows:

 Factor at 7.4 percent for 12 years           .397495

EXAMPLE. A, who will be 45 years old on February 19, 1990, transfers $100,000 to a charitable remainder unitrust on January 1, 1990. The trust instrument requires that the trust pay to A semiannually (on June 30 and December 31) 9 percent of the fair market value of the trust assets as of January 1st during A's life. The section 7520 rate for January 1990 is 9.6 percent. Under Table F(9.6), the appropriate adjustment factor is .933805 for semiannual payments payable at the end of the semiannual period. The adjusted payout rate is 8.404 (9% X .933805). Based on the remainder factors in Table U(1), the present value of the remainder interest is $11,098.00, computed as follows:

 Factor at 8.4 percent at age 45                     .11106

 TABLE D