WIFE'S CONTRIBUTION OF UNITRUST INTEREST TO CHARITY NOT DEDUCTIBLE BECAUSE HUSBAND RETAINED RIGHT TO REVOKE WIFE'S INTEREST

Reference:

Section 664 -- Charitable Remainder Trusts

UIL Number(s) 0664.03-02

Full Text:

Date: November 5, 1987

Refer Reply to: CC:IND:Br.7/TR-31-03792-87
Re: * * *

LEGEND:
A = * * *
B = * * *
X = * * *
Y = * * *

Dear * * *

On June 11, 1987, your attorney asked us to issue certain rulings regarding the tax consequences of the transfer of a portion of your unitrust interest in a charitable remainder trust to the charitable remainderman of the X unitrust. The facts presented in support of the request are as follows.

In 1975, A established a charitable remainder unitrust. Under the terms of the trust, the trustee is to pay to A 5% unitrust interest during A's lifetime. On A's death the unitrust interest is to be paid to B, A's spouse. However, A has retained the right to revoke B's survivorship interest by will. Y, an educational institution, was named as remainderman.

A and B now intend to transfer a portion of their unitrust interest to Y as a charitable contribution. Upon receipt of the interest, Y will seek a merger of its unitrust interest with a portion of its remainder interest.

It is represented that at the time of the funding of the trust, A intended to keep the trust in effect throughout his lifetime. The trust corpus, however, has appreciated significantly in value and A now wishes to accelerate a portion of the benefit to Y.

A's birthdate is April 11, 1920 and his spouse's birthdate is January 13, 1921.

Specifically, your attorney has asked us to rule:

1. That A and B will each be entitled to an income tax charitable contribution deduction for the present value of so much of their unitrust interests as they transfer to Y.

2. That the merger of Y's unitrust interest and a portion of its remainder interest which results in an outright distribution of corpus from the trust to X will not disqualify the trust as a charitable remainder trust described in section 664 of the Internal Revenue code of 1986.

3. That following the merger of Y's unitrust interest with a portion of its remainder interest, the unitrust interest of A and the contingent unitrust interest of B will be 5% of the remaining trust corpus.

4. That the Internal Revenue Service supply the present value factors to be used in determining the value of the charitable contribution deduction of A and B applicable to their transfer of a portion of their unitrust interests to Y.

RULING REQUEST NO. 1

Section 170 (a)(1) of the Code allows as an income tax deduction any contribution or gift to or for the use of organizations described in section 170(c), payment of which is made within the taxable year.

Section 170(f)(3)(A) of the Code provides that a contribution (not made by a transfer in trust) of less than the taxpayer's entire interest in property is not allowed as a charitable contribution deduction except to the extent such contribution would have been allowed as a deduction had it been transferred in trust.

Treas. Reg. section 1.170A-6(a)(2) and section 1.170A-7(a)(2)(i) provide that a deduction is allowed for a contribution of a partial interest in property if such interest is the taxpayer's entire interest in the property, such as an income interest or a remainder interest. If, however, the property in which such partial interest exists was divided in order to create such interest and thus avoid certain provisions of section 170(f), the deduction will not be allowed.

A proposes to transfer a portion of A's unitrust interest to Y, an organization described in section 170(c) of the Code. Although A had previously divided the interest A held in the property, it is represented that the division was not to avoid section 170(f)(2)(A) of the Code. Therefore, A's transfer of a portion of his unitrust interest will qualify for a charitable deduction under section 1.170A-7(a)(2)(i) of the Income Tax Regulations. See Rev. Rul. 86-60, 1986-1 C.B. 302; Rev. Rul. 79-295, 1979-2 C.B. 22.

A made an incomplete gift of a survivorship unitrust interest to B since he retained a testamentary power to revoke it. See Rev. Rul. 79-243, 1979-2 C.B. 343. B's interest is, therefore, contingent upon two factors. First, B must survive A and secondly, A must not exercise his testamentary power to revoke B's survivorship interest. Thus, there is no ascertainable assurance that B's contingent interest will ever pass to charity. Accordingly, B's contribution of such interest does not qualify for the income tax charitable deduction.

RULING REQUEST NO. 2 & 3

Section 1.664-3(a)(4) of the income tax regulations provides that in the case of a charitable remainder unitrust no amount other than the unitrust amount described in either section 664(a)(2) or section 664(d)(3) may be paid to or for the use of any person other than an organization described in section 170(c). Under section 1.664-3(a)(3)(i) of the regulations, the unitrust amount must be payable to or for the use of a named person or persons, at least one of which is not an organization described in section 170(c). Thus, section 664 and the accompanying regulations implicitly contemplate ownership by a charitable organization of a portion of the unitrust interest in a charitable remainder unitrust. Consequently, assuming there is no merger of Y's unitrust and remainder interests under state law, we do not believe the proposed gift to the charitable remainderman of an undivided portion of the right to unitrust payments would disqualify the unitrust under section 664 of the Code.

The question whether the conveyance of a portion of A's unitrust interest and B's contingent unitrust interest will cause a corresponding portion of the trust to merge with the unitrust interest is a question of state law. Based on our analysis of local law, we believe such a transfer will result in a merger and an acceleration of a proportionate share of the remainder interest. If the transfer results in a merger under state law, the trust's continuing qualification as a charitable remainder unitrust under section 664 of the Code will not be effected provided that after the transfer the trust will continue to pay a 5% annual unitrust interest to A on the balance of the trust corpus.

RULING REQUEST NO. 4

As stated above, the income tax charitable deduction is allowable only for the value of A's partial interest being transferred to Y. The formula by which the interest is computed is as follows, assuming there is a merger of Y's unitrust and remainder interests as discussed above.

The amount of the transfer is the percentage of trust corpus being transferred multiplied by 1.0000 minus the remainder factor for a person aged 66 (A's age on the date of the transfer). For example, assume: 1) that the trust provides for a 5% unitrust interest; 2) a 1% unitrust interest is transferred to charity; and 3) as a result of the transfer a merger occurs and 20% of the trust corpus is transferred outright to charity.

The amount of the transfer is 1 minus the appropriate remainder factor determined in accordance with section 1.664-4(b) of the regulations, based on a 5% unitrust interest, multiplied by 20% of the trust corpus (the amount of corpus transferred to charity as a result of the merger).

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

Sincerely yours,

Lee A. Dunn
Chief, Branch 7
Individual Tax Division

Enclosure