Saturday, April 20, 2024
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GiftLaw Note: Gary Grantor created Trust during his lifetime. Upon his death, Trust was to distribute the entire trust principal in equal shares to eight of the ten named beneficiaries. Eight of the 10 named beneficiaries are charitable organizations described in Sec. 170(c). Gary died and Trust began to fulfill its obligations under the trust document.

In year one, Trust had gross income but made no distributions to any of the eight charities. Trust claimed no charitable contributions for year one. In year two, Trust made distributions to all eight charities, but Trust incorrectly treated the year two distributions under Sec. 661. Trust desired to deduct the charitable distributions in year one under Sec. 642(c)(1). If the proper election had been made, Trust could have deducted the year two distributions in year one.

Therefore, Trust wanted to file an amended return and file an election to have Sec. 642 apply to the charitable distributions. Unfortunately, the time for filing an election for year one had passed. Therefore, Trust requested an extension to file a Sec. 642(c)(1) election.

Sec. 642(c)(1) provides that a deduction shall be allowed in computing taxable income for any amount of gross income, without limitation, which, pursuant to the terms of the governing instrument, is paid for a charitable purpose. Further, if a charitable contribution is paid after the close of such taxable year and on or before the last day of the taxable year following the close of such taxable year, then the trustee may elect to treat such contribution as paid during such taxable year.

In this case, Reg. 1.642(c)-(1)(b)(2) provides that a Sec. 642(c)(1) election shall be made not later than the time for filing the income tax return (including extensions). If the time to make the election has passed, under Reg. 301.9100-1(c), the Commissioner may grant a reasonable extension of time to make a regulatory election if the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith.

After reviewing the record, the Service held that the requirements of Reg. 301.9100-3 had been satisfied, since Trust acted reasonably and in good faith. As a result, the Service granted Trust an extension of time for 60 days to file an election under Sec. 642(c)(1) for Trust's year one taxable year. The Service required that the election be made on the amended return for Trust's year one taxable year. In addition to amending Trust's year one return, Trust must file an amended year two return to correct the original treatment of the charitable distributions.

Editor's Note: This letter ruling reminds tax advisors that sometimes it is too late and sometimes it is not too late. While many tax rules are written in stone, other tax rules have some flexibility. The rules regarding elections is one of those areas. Therefore, it is important to remember Reg. 301.9100 whenever a taxpayer misses a deadline for making a regulatory or statutory election.
Dear * * *:

This is in reply to a letter dated December 22, 2003, and subsequent correspondence, submitted by the Trust's authorized representative on behalf of the Trust, requesting that the Service grant the Trust an extension of time pursuant to section 301.9100-3 of the Procedure and Administration Regulations to make an election under section 642(c)(1) of the Internal Revenue Code for its Year 1 taxable year.

The information submitted states that X, the grantor of the Trust, died on d1. The Trust provides that, after the payment of taxes and other expenses, the trustee shall distribute the trust principal in equal shares to the named beneficiaries. Eight of the ten named beneficiaries are represented as being qualified charitable organizations described in section 170(c).

In Year 1, Trust had gross income of x and made no distributions to the charities. In Year 2, Trust made total distributions to the charities of y, which were incorrectly treated as distributions under section 661. The date to file an effective election under section 642(c)(1) for the Year 1 taxable year, allowing a deduction for amounts paid to charity in Year 2, had passed. Therefore, the Trust requested an extension to file a section 642(c)(1) election for Year 1 under section 301.9100-3.

Section 642(c)(1) provides that in the case of an estate or trust, there shall be allowed as a deduction in computing its taxable income any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170(c). If a charitable contribution is paid after the close of such taxable year and on or before the last day of the taxable year following the close of such taxable year, then the trustee or administrator may elect to treat such contribution as paid during such taxable year. The election shall be made at such time and in such manner as the Secretary prescribes by regulation.

Section 1.642(c)-1(b)(2) of the Income Tax Regulations provides that the election under section 642(c)(1) shall be made not later than the time, including extensions thereof, prescribed by law for filing the federal income tax return for the succeeding taxable year.

Section 1.642(c)-1(b)(3) provides that the election shall be made by filing with the income tax return (or amended return) for the taxable year in which the contribution is treated as paid a statement which (i) states the name and address of the fiduciary, (ii) identifies the estate or trust for which the fiduciary is acting, (iii) indicates that the fiduciary is making an election under section 642(c)(1) in respect of contributions treated as paid during such taxable year, (iv) gives the name and address of each organization to which any such contribution is paid, and (v) states the amount of each contribution and date of actual payment or, if applicable, the total amount of contributions paid to each organization during the succeeding taxable year, to be treated as paid in the preceding taxable year.

Under section 301.9100-1(c), the Commissioner may grant a reasonable extension of time to make a regulatory election, or a statutory election (but no more than six months except in the case of a taxpayer who is abroad), under all subtitles of the Code, except E, G, H, and I. Requests for relief under section 301.9100-3 will be granted when the taxpayer provides evidence to establish that the taxpayer acted reasonably and in good faith, and that granting relief will not prejudice the interests of the government. Section 301.9100-3(a). Section 301.9100-1(b) defines a regulatory election to include an election whose due date is prescribed by a regulation published in the Federal Register, or a revenue ruling, revenue procedure, notice, or announcement published in the Internal Revenue Bulletin.

Sections 301.9100-1 through 301.9100-3 provide the standards the Commissioner will use to determine whether to grant an extension of time to make an election. Section 301.9100-1(a)

Section 301.9100-2 provides automatic extensions of time for making certain elections. Section 301.9100-3 provides extensions of time for making elections that do not meet the requirements of section 301.9100-2.

Based on the information submitted and the representations made, we conclude that the requirements of section 301.9100-3 have been satisfied. As a result, the Trust is granted an extension of time for 60 days from the date of this letter to file an election under section 642(c)(1) for the Trust's Year 1 taxable year. The election must be made on the amended return for the Trust's Year 1 taxable year. An amended Year 2 return must be filed which does not claim any deduction for amounts of Year 1 gross income paid to the charities in Year 2 and does not treat any distributions to charities as deductible under section 661. The amended returns must be filed within the sixty day period with the service center where the Trust files its returns. A copy of this letter should be attached to the amended returns. Copies are included for that purpose.

Except as specifically set forth above, we express no opinion concerning the federal tax consequences of the transactions described above under any other provisions of the Code.

This ruling is directed only to the taxpayer on whose behalf it was requested. Section 6110(k)(3) provides that it may not be used or cited as precedent.

Pursuant to a power of attorney on file with this office, a copy of this letter is being sent to the Trust's authorized representative.

Sincerely,

HEATHER C. MALOY
Associate Chief Counsel
(Passthroughs & Special Industries)

Related Topics On Trust Granted Additional Time to Deduct Charitable Gifts

1.1.2  When is a Gift Deductible?:    The basic rule is that a gift to a charity is deductible when the property or cash is delivered to a charity. Since title to property is normally governed by state law, the delivery is usually complete when, under state law, the charity has legal ownership of the property. However, in some specific circumstances, there are examples in the income tax regulations that supersede the state laws.



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