Charitable Bequest to Foreign Charity

Charitable Bequest to Foreign Charity

News story posted in Technical Advice Memoranda on 20 October 1998| comments
audience: National Publication | last updated: 18 May 2011
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Summary

In TAM 9842004, the IRS rules that a bequest to a trust to be held in a foreign country for cultural endeavors and assistance to the needy qualifies for the charitable estate tax deduction under Code Section 2055(a)(3).

TAM 9842004

PGDC SUMMARY:

In this Technical Advice Memorandum, the IRS rules that a bequest to a trust to be held in a foreign country for cultural endeavors and assistance to the needy qualifies for the charitable estate tax deduction under Code Section 2055(a)(3). In addition, the IRS found that the failure of the trust instrument to require the distribution of income annually does not come within the disallowance provisions of Code Section 2055(e)(1) pertaining to an organization described in Code Section 508(d) because the trust qualifies under Code Section 4948(b) as a foreign organization receiving substantially all of its support from sources outside of the United States. The decedent, a citizen of the United States and a foreign country, died in the foreign country and bequeathed to the trust the proceeds from the sale of property in that foreign country.

POINTS TO PONDER:

This ruling demonstrates that providing for bequests to foreign charitable organizations to be funded with and supported by assets in the foreign country may allow more flexibility in the governing instrument.

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Date: July 7, 1998

Control No.: TAM-108319-98

Taxpayer Name: * * *
Taxpayer Address: * * *
Taxpayer Identification No.: * * *
Date of death: * * *
No conference held

LEGEND:
Decedent = * * *
Foreign Country = * * *
Town = * * *
State = * * *
Village = * * *
Trust = * * *

ISSUE 1:

[1] Does the Decedent's bequest to the Trust meet the charitable or educational purposes requirement of section 2055(a)(3)?

ISSUE 2:

[2] Because the trustees can accumulate undistributed income in a given year for distribution in a later year, does the Trust come within the disallowance provision of section 2055(e)(1) for an organization described in section 508(d)?

CONCLUSIONS:

ISSUE 1:

[3] The bequest to the Trust meets the charitable and educational purposes requirement of section 2055(a)(3).

ISSUE 2:

[4] The Trust comes within the purview of section 4948(b), and is exempt from the application of section 508, including section 508(d). Therefore, the fact that the trustees may accumulate undistributed income in a given year for distribution in a later year does not disqualify the Trust, for purposes of section 2055(e)(1), as an organization described in section 508(d).

FACTS:

[5] The Decedent, a dual citizen of the United States and Foreign Country, died in 1994 while domiciled in Foreign Country. She was a resident of Town, situated in Foreign Country.

[6] In her will, executed in 1990, the Decedent instructed her executor to sell her vineyard in Foreign Country and transfer the sale proceeds to the Trust. The Trust is to be administered by three people consisting of the executor (who, on retirement, will be replaced by the mayor of Town) and two people named by the Town city council.

[7] Section VII of the will provided that the purposes of the Trust were to be:

"[PARAGRAPH] (a) for the advancement of all cultural endeavors in the area of [Town], especially for joint financing (subsidizing) of cultural works, cultural entertainment, etc., to the extent that the resources from other endowments [trusts] or urban communities or [towns] does not suffice.

[PARAGRAPH] (b) Furthermore, the proceeds from the property of the endowment of the [trust] shall be used for the advancement of organic farming, by supporting domestic farmers in [Village] among others, who cultivate or care for organic farms, to manage their environmentally friendly farms as well as to help the [Foreign Country] countryside."

[8] In 1992, the Decedent executed a codicil to amend Section VII of her disposition to the Trust as follows:

1. Section VII paragraph a [relating to cultural endeavors] is amended by the following addition:

The maximum amount applied annually for the furtherance of cultural efforts shall not exceed a moiety [one-half share] of the revenue from the foundation's capital. If in any given year(s) such applicability does not exist, the moiety of the annual revenue may be capitalized and used at a later date for a cultural purpose.

2. Section VII, paragraph b [relating to the promotion of organic farming, etc.] is hereby set aside. In its stead I make the following disposition:

The residual moiety of the revenue from the foundation's capital shall go in equal parts to the Protestant and Roman Catholic Public Assistance Societies, for use as they deem fit in order to help the needy.

[9] A charter for the Trust was approved and registered by the State authorities. The charter states that the office of the Trust is to be in Town. The charter describes the purposes of the Trust as follows.

To promote all cultural efforts on the territory of [Town], in particular to help in the financing of works of culture, cultural productions, etc, in so far as the means available from other foundations, the municipality, or the [Town] are inadequate, and an annual contribution of a moiety of the annual revenue in equal parts to the established Protestant and Roman Catholic churches with the specific purpose that each set up a "[Fund]" therewith and use the monies that flow into these funds for assistance to needy persons on the territory of [State].

[10] The charter redirects the Decedent's bequest to "Protestant and Catholic Public Assistance Societies" for the needy to "Protestant and Roman Catholic churches" to be used in the same manner. This was done because there is no organization in Foreign Country with the name of "Protestant and Catholic Public Assistance Societies."

LAW AND RATIONALE:

ISSUE 1:

[11] Section 2055(a)(3) provides that the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests to a trustee or trustees but only if such contributions or gifts are to be used by such trustee or trustees exclusively for religious, charitable, scientific, literary, or educational purposes.

BEQUEST TO A FOREIGN CHARITY

[12] For estate tax purposes, a bequest to be held in a trust in a foreign country and to be administered for exclusively charitable or educational purposes in the foreign country can qualify for the deduction allowed under section 2055(a)(3) for transfers for charitable or educational purposes. Old Colony Trust Company v. United States, 438 F.2d 684 (1st Cir. 1971) (bequest to a private charitable hospital in Canada); National Savings and Trust Company v. United States, 436 F.2d 458 (Ct. Cl. 1971) (bequest to a trust in Germany to build a home for the aged). Cf. Continental Illinois National Bank and Trust Company of Chicago v. United States, 403 F.2d 721 (Ct. C1. 1968), cert. den., 394 U.S. 973 (1969) (bequest to a trust in Germany not clearly restricted to a charitable use there).

PURPOSE TO PROMOTE CULTURE

[13] It has long been the position of the Internal Revenue Service that so-called "cultural" type organizations may be considered charitable or educational for federal tax purposes. Thus, a bequest devoted exclusively to promoting and supporting the arts may come within the purview of section 2055(a)(3) as a bequest for charitable or educational purposes. See, e.g., Rev. Rul. 64-175, 1964-1 C.B. 185 (nonprofit organization created to produce plays and make the classic works of the theater available throughout the United States through a permanent touring repertory company); Rev. Rul. 64- 174, 1964-1 C.B. 183 (foundation created to support the development of theater outside of New York so that its benefits may inure to a greater segment of the American people); Rev. Rul. 73-45, 1973-1 C.B. 220 (nonprofit organization created to foster development of drama and musical arts in the community by sponsoring professional presentations, such as plays, musicals, and concerts).

[14] In her will executed in 1990, the Decedent listed the advancement of organic farming and the support of local village farmers in managing environmentally friendly farms as one of the purposes of the Trust. Such a bequest would inure to the benefit of private farming interests and would not, therefore, be eligible for the deduction under section 2055(a)(3). In the codicil executed in 1992, the Decedent changed this purpose to that of helping the needy, in general, through the offices of the Protestant and Roman Catholic churches. This purpose satisfies the requirements of section 2055(a)(3).

[15] Therefore, based on the facts submitted and representations made, we conclude that the Decedent's bequest in trust meets the charitable and educational purposes requirement of section 2055(a)(3).

ISSUE 2:

[16] Section 2055(e)(1) provides that no deduction is allowed under section 2055 for a transfer to or for the use of an organization or trust described in sections 508(d) or 4948(c)(4) subject to the conditions specified in those sections.

[17] Section 508(d)(2)(A) provides that no bequest to an organization is allowed as a deduction under section 2055 if the bequest is to a private foundation or trust in a taxable year for which it fails to meet the requirements of section 508(e) (determined without regard to section 508(e)(2)).

[18] Section 508(e)(1)(A) provides that a private foundation is not exempt from taxation under section 501(a) unless its governing instrument includes provisions the effects of which are to require its income for each taxable year to be distributed at such time and in such manner so as not to subject the foundation to tax under section 4942.

[19] Section 4948(b) provides that section 508 (relating to special rules with respect to section 501(c)(3) organizations) and Chapter 42 (other than section 4948) shall not apply to any foreign organization which has received substantially all of its support (other than gross investment income) from sources outside the United States.

[20] In this case, the trustees may accumulate any undistributed income designated for cultural endeavors and distribute it at a later date. Thus, the trust instrument does not include a provision (as required by section 508(e)) stating that income must be distributed annually.

[21] However, because the Trust assets are situated in Foreign Country, the Trust comes within the purview of section 4948(b) as a foreign organization which has received substantially all of its support (other than gross investment income) from sources outside the United States. Since section 4948(b) exempts those foreign organizations, including the Trust, from the application of section 508, the Trust instrument is not required to include a provision (otherwise required by section 508(e)(1)) stating that income must be distributed annually.

[22] Therefore, the fact that, in a given year, the trustees may accumulate undistributed income designated for cultural endeavors for distribution in a later year does not disqualify the Trust under section 2055(e)(1) as an organization described in section 508(d).

[23] A copy of this technical advice memorandum is to be given to the taxpayer. Section 6110(j)(3) provides that it may not be used or cited as precedent.

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