The Service has revoked a prior Ltr. Rul. 9440010 in which it ruled that a charitable trust that doesn't qualify for the federal estate tax charitable deduction would qualify as a charitable remainder annuity trust under section 2652(c)(1)(C)(i).

Ltr. Rul. 9532006

Date: May 4, 1995

Refer Reply to CC:DOM:P&SI:4/TR-31-2729-94
Re: * * *

LEGEND: * * *

Dear * * *

On July 5, 1994, the Service issued a letter ruling (Ltr. Rul. 9440010) to you with respect to the above captioned taxpayer.

Under the facts presented in the ruling, the decedent created a testamentary trust in which a grandniece and grandnephew were to receive an annuity of 8 percent annually for their lives with the remainder passing to a charitable organization. Based on the applicable section 7520 rate at the date of the decedent's death of 6.6 percent and the stated annuity rate under the charitable trust of 8 percent, and based upon the ages of the grandniece and grandnephew, the trust fund would likely exhaust prior to the deaths of the grandniece and grandnephew, and the possibility that the charitable transfer would become effective was so remote as to be negligible. Thus, no federal estate tax charitable deduction was allowable for the property passing to the charitable organization.

We concluded in the ruling that, even though the estate would receive no estate tax charitable deduction for the property passing to the charitable trust, the charitable trust would qualify as a charitable remainder annuity trust for purposes of section 2652(c) of the Internal Revenue Code. We further concluded that, because the charitable organization would have an interest in the trust and would be considered a nonskip person, the trust would not be a skip person for purposes of section 2613, and distributions from the trust would be taxable distributions for purposes of section 2612(b).

However, section 1.664-1(a)(1)(iii)(a) of the Income Tax Regulations provides that the term "charitable remainder trust" means a trust with respect to which a deduction is allowable under sections 170, 2055, 2106, or 2522, and which meets the description of a charitable remainder annuity trust or a charitable remainder unitrust.

Thus, our original conclusion that the trust would qualify as a charitable remainder trust was in error. As provided in section 1.664-1(a)(1)(iii)(a), the trust is not a charitable remainder trust because no estate tax charitable deduction is allowable to the trust.

Since the trust is not a charitable remainder trust, section 2652(c) provides that the charitable organization does not have an interest in the trust. Consequently, the only remaining persons having an interest in the trust are skip persons. As provided in section 2613, a trust with only skip persons is treated as a skip person.

Therefore, in the present case, the initial funding of the trust was a direct skip and should have been taxed as such for generation- skipping transfer tax purposes. Subsequent distributions from the trust would not be taxable distributions as set forth in the original ruling.

Section 11.04 of Rev. Proc. 95-1, 1995-1 I.R.B. 10, provides in part that a letter ruling found to be in error or not in accord with the current views of the Service may be modified or revoked. Accordingly, the original ruling is modified as set forth above. Rev. Proc. 95-1 provides that if the letter ruling is modified or revoked, the modification or revocation applies to all years open under the statute, unless the Service uses its discretionary authority under section 7805(b) to limit the retroactive effect of the modification or revocation.

Section 7805(b) provides that the Secretary may prescribe the extent, if any, to which any ruling or regulation relating to the internal revenue laws shall be applied without retroactive effect.

As a result of this modification, you have requested that the retroactive effect of the modified ruling be restricted under section 7805(b) with respect to the treatment of the trust for income tax purposes. After review of your request, we conclude that you have acted in good faith in relying on the letter ruling, and modifying the letter ruling retroactively with respect to the income taxation of the trust would be to your detriment. Therefore, we grant your request under section 7805(b) that the ruling as it affects the income tax treatment of the trust be applied without retroactive effect. The transfer to the trust will be treated as a direct skip for generation-skipping transfer tax purposes. However, for income tax purposes, the trust will be treated as a charitable remainder annuity trust. The grant of this request is conditioned on your payment of the generation-skipping transfer tax currently as a direct skip and your continuing to treat the trust as a charitable remainder annuity trust for income tax purposes.

Except as we have specifically ruled herein, we express no opinion under the cited provisions or under any other provision of the Code. This ruling is based on the facts and applicable law in effet on the date of the original letter ruling.

This ruling is directed only to the taxpayer who requested the prior letter ruling. Section 6110(j)(3) provides that it may not be used or cited as precedent.

Sincerely yours,

Assistant Chief Counsel
(Passthroughs and Special Industries)

By: George Masnik
Branch Chief
Branch 4

Enclosure
Copy for 6110 purposes