IRS Headnote:

Charitable bequest; remainder interest; mortmain statute. A bequest of a remainder interest in a farm qualifies for an estate tax charitable deduction under section 2055 of the Code even though the applicable state mortmain statute requires the charitable recipient to dispose of the farm within ten years after its acquisition.

Reference:

Section 2055 -- Estate Tax Charitable Deductions

Full Text:

ISSUE

Does the bequest of a remainder interest in a farm qualify for an estate tax charitable deduction under section 2055 of the Internal Revenue Code if the applicable state mortmain statute requires the charitable recipient to dispose of the farm within ten years of acquisition?

FACTS

D, a resident of State X, died in 1982. Under D's will, executed in 1980, D's farm was bequeathed to A, D's spouse, for life. The remainder interest in the farm was bequeathed to charitable organization Y, an organization described in section 2055 of the Code. State X has a mortmain statute that provides that a charitable organization may not retain a bequest of real estate for more than ten years. Under this statute, if D's farm is held by Y for ten years after the death of A, the farm will revert to other beneficiaries of D's estate. Thus, Y must sell the farm within ten years or be divested of all right, title, and interest therein. The State X statute has no comparable provisions concerning inter vivos transfers.

LAW AND ANALYSIS

Section 2055(a) of the Code provides, in part, that in determining the taxable estate of a decedent, a deduction from the value of the gross estate is allowed for the amount of all bequests, legacies, devises, or transfers to certain religious, charitable, scientific, literary, or educational organizations.

Section 2055(e)(2) of the Code provides that, in the case of decedents dying after December 31, 1969, when an interest in property (other than an interest described in section 170(f)(3)(B)) passes or has passed from the decedent for charitable purposes and an interest in the same property passes or has passed from the decedent for noncharitable purposes, no deduction is allowed for the charitable interest unless, in the case of a remainder interest, such 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)).

The interests described in section 170(f)(3)(B) of the Code include a remainder interest, not in trust, in a personal residence or a farm. Thus, for example, if a decedent devises to charity a remainder interest in a farm and bequeaths to a noncharitable beneficiary a life estate in such property, the value of the remainder interest is deductible under section 2055. Section 20.2055-2(e)(2)(iii) of the Estate Tax Regulations.

In Rev. Rul. 77-169, 1977-1 C.B. 286, amplifying Rev. Rul. 76-543, 1976-2 C.B. 287, a decedent devised a life estate in a personal residence to an individual and, after the death of that individual, the property was to be sold and the entire sale proceeds were to be distributed to a qualified charity. Rev. Rul. 77-169 concludes that no charitable deduction is allowable for the value of the charity's interest in the sale proceeds because the charitable remainder interest was not in the residence itself. However, in Rev. Rul. 83-158, 1983-2 C.B. 159, a charitable deduction was allowed under section 2055(a) of the Code for the value of the proceeds from the sale of a decedent's personal residence because, under local law, the charity had the option to take the residence instead of the sale proceeds.

In contrast to the situations described in the two rulings above, here the charity's interest is in the residence itself, as required by sections 2055(e)(2) and 170(f)(3)(B) of the Code. Accordingly, the charity's interest meets the definition of a legal remainder in the residence.

One of the purposes of section 2055(e)(2) is to prevent abuses where property is transferred in trust with a remainder interest given to charity. A primary concern of Congress was that many kinds of trust arrangements would permit the trustee, in exercising his or her discretion, to shift beneficial interests from charitable beneficiaries to noncharitable beneficiaries. S.Rep. No. 91-552, 91st Cong., 1st Sess.; 1969-3 C.B. 423, 480. This committee report indicates that certain "outright gifts of real property", such as residences or farms not in trust, would present loss of a possibility for the allowance of an excessive deduction.

Although in this case the mortmain statute requires the charity to sell the property within ten years of receiving it or the charity will be divested of all right, title, and interest in the property, such circumstance does not lend itself to abuse. The charity is receiving the farm in its original form and can sell the property for itself in the way that is most advantageous and most likely to realize the full value of the property. Accordingly, a section 2055 charitable deduction is allowed in this situation.

CONCLUSION

A bequest of a remainder interest in a farm qualifies for an estate tax charitable deduction under section 2055 of the Code where the applicable state mortmain statute requires the charitable recipient to dispose of the farm within ten years after its acquisition.