Thursday, April 25, 2024
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GiftLaw Note: In PLR 9452026 the Service allowed the transfer of TPP to a charitable remainder annuity trust. While the intervening interest rule of Sec. 170(a)(3) precludes a current deduction, "an income tax deduction would be allowed under Sec. 170(a)(3) when the trustee sells a musical instrument." The deduction would be determined by multiplying the basis in the TPP, in this case a musical instrument, times the appropriate remainder factor. Because the deduction has been reduced to basis times the factor, this would be a 50% type deduction if the reminder recipient is a public charity.
This is in response to a letter dated February 22, 1994, and supplemental correspondence submitted on your behalf by your authorized representative concerning a proposed charitable remainder annuity trust. Specifically, the following rulings have been requested: (1) that the Trust qualifies as a charitable remainder annuity trust under section 664(d)(1) of the Internal Revenue Code; (2) that the charitable contribution of the stock contributed to the Trust is deductible to the extent of the charitable remainder interest; (3) that, in accordance with the provisions of sections 170(b)(1)(C)(i), 170(e)(1)(A), 2055(a)(2), and 2522(a)(2), the charitable contribution of the stock is deductible up to 30 percent of the contribution base for the year in which the property is contributed to the Trust; (4) that the charitable contribution of a musical instrument contributed to the Trust is deductible to the extent of the charitable remainder interest; (5) that, in accordance with sections 170(b)(1)(C)(i), 2055(a)(2), and 2522(a)(2), provided there is no prearranged contract for the sale of the musical instrument, if the Trust sells the musical instrument before the end of the calendar year in which the musical instrument is contributed to the Trust, the charitable contribution is deductible up to 30 percent of the contribution base, and because the musical instrument has been sold, section 170(a)(3) does not apply; and (6) that, provided there are no prearranged contracts for the sale of the property contributed to the Trust, Taxpayer does not realize gain with respect to the property sold by the Trust and any gain is properly reportable by the Trust and the beneficiary includes in income only such amounts of income or gain distributed by the trust.

Under the terms of the proposed Trust, Taxpayer and two other individuals are named as trustees. The terms of the proposed Trust provide that, for each year of Taxpayer's life, Taxpayer will receive an annuity amount of 10 percent of the initial net fair market value of the assets contributed to the Trust.

Under the terms of the Trust, upon Taxpayer's death, the remainder will be distributed to a charitable organization described in sections 170(c), 2055(a), and 2522(a) of the Code. A charitable remainder donee (the Donee) for the Trust has not been specifically designated, and, under the terms of the Trust, Taxpayer reserves a testamentary power and a lifetime power of appointment to designate the charitable remainder beneficiary. The Trust also provides that certain charities will be the recipients of the remainder interest in the event that Taxpayer fails to exercise the power of appointment.

Because the terms of the Trust allow Taxpayer to designate any section 170(c) organization as the recipient of the remainder interest, it is not certain that the ultimate recipient will be an organization described in section 170(b)(1)(A) of the Code. We, therefore, must assume that the Donee may be an organization under section 170(b)(1)(B).

Taxpayer plans to contribute n shares of X stock to the Trust. Taxpayer acquired the stock on a. The stock is traded on the American Stock Exchange.

Taxpayer also plans to contribute a musical instrument to the Trust. Taxpayer acquired the musical instrument on b at a cost of $Y. The fair market value of the musical instrument is approximately $Z. Taxpayer has used the musical instrument in Taxpayer's profession. Taxpayer at no time was, nor is Taxpayer now, engaged in the trade or business of dealing in this type of musical instrument. Taxpayer did not depreciate the musical instrument in Taxpayer's profession because the musical instrument does not have a determinable life. Thus, the section 1221(2) exception from capital asset definition is not applicable.

RULING REQUEST 1: QUALIFICATION OF THE CHARITABLE REMAINDER ANNUITY TRUST UNDER SECTION 664(d)(1) OF THE CODE


A ruling has been requested that the proposed trust qualifies as a charitable remainder annuity trust within the meaning of section 664(d)(1) of the Code. Pursuant to Section 4.01(39) of Rev. Proc. 94-3, 1994-1 I.R.B. 79, 87, the Internal Revenue Service ordinarily does not issue rulings concerning whether a charitable remainder annuity trust for one or two measuring lives satisfies the requirements described in section 664. Also, pursuant to Rev. Proc. 94-3, the Service ordinarily does not issue rulings concerning whether a transfer to such trust qualifies for a charitable deduction under section 170(f)(2)(A), an estate tax charitable deduction under section 2055(e)(2)(A), or a gift tax charitable deduction under section 2522(c)(2)(A).

In lieu of seeking the Service's advance approval of a charitable remainder annuity trust, taxpayers are directed to follow the sample provisions for charitable remainder annuity trusts outlined in Rev. Proc. 89-21, 1989-1 C.B. 842, and Rev. Proc. 90-32, 1990-1 C.B. 546. By following the models contained therein, taxpayers can be assured that the Service will recognize a trust as meeting all of the requirements of a qualified charitable remainder annuity trust, provided that the trust operates in a manner consistent with the terms of the trust instrument and provided that it is a valid trust under local law.

Accordingly, we refuse to rule on whether the proposed Trust qualifies as a charitable remainder annuity trust under section 664 of the Code. We will rule on any limitation to the charitable deduction arising from the type of property transferred to the Trust and whether Taxpayer recognizes any gain from the sale of the property contributed to the Trust, provided the Trust otherwise qualifies.

PROVISIONS UNDER SECTION 170 OF THE CODE AND REGULATIONS UNDER SECTIONS 170 and 664 RELEVANT TO RULING REQUESTS 2 THROUGH 5

Section 170(a)(1) of the Code allows as a deduction any charitable contribution to an organization described in section 170(c), payment of which is made within the taxable year. However, a charitable contribution is allowable as a deduction only if verified under regulations prescribed by the Secretary.

Section 170(f)(2)(A) of the Code disallows deduction for a contribution in trust of a remainder interest unless the trust is a charitable annuity trust or a charitable remainder unitrust or a pooled income fund.

Section 1.664-2(c) of the Income Tax Regulations provides that for purposes of sections 170, 2055, 2106, and 2522 of the Code, the fair market value of the remainder interest of a charitable remainder annuity trust is the net fair market value (as of the appropriate valuation date) of the property placed in trust less the present value of the annuity. For purposes of section 170, the term "appropriate valuation date" means the date on which the property is transferred to the trust by the donor.

Section 1.170A-1(c)(1) of the regulations provides that if the charitable contribution is property other than money, the amount of the charitable contribution is the fair market value of the property at the time of the contribution reduced as provided in section 170(e)(1) of the Code.

RULING REQUEST 2: DEDUCTIBILITY OF THE VALUE OF THE REMAINDER INTEREST OF THE STOCK UNDER SECTION 170(e)(5) OF THE CODE


Because the Donee may be a foundation which is not described in section 170(b)(1)(E) of the Code, the section 170(e)(5) special rule for contribution of publicly-traded stock to a nonoperating private foundation must be met for Taxpayer to receive a charitable deduction for the fair market value of the remainder interest in the stock.

Section 170(e)(1)(B)(ii) of the Code provides, as a general rule, that donors making charitable contributions of capital gain property to or for the use of a private foundation as defined in section 509(a), other than a private foundation described in section 170(b)(1)(E), are not permitted a charitable contribution deduction for the value of the contributed property that would have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of the contribution).

Section 170(e)(5) of the Code, enacted in 1984, creates an exception to the general rule for "qualified appreciated stock", so long as the contribution is made before the end of 1994. Under section 170(e)(5), donors may be allowed to deduct the fair market value for gifts of "qualified appreciated stock" to a private foundation as defined in section 509(a), other than a private foundation as described in section 170(b)(1)(E).

Section 170(e)(5)(B) of the Code defines "qualified appreciated stock", except as provided in section 170(e)(5)(C), to mean any stock of a corporation (i) for which (as of the date of the contribution) market quotations are readily available on an established securities market, and (ii) which is capital gain property as defined in section 170(b)(1)(C)(iv).

Section 170(b)(1)(C)(iv) of the Code defines the term "capital gain property" to mean, with respect to any contribution, any capital asset the sale of which at its fair market value at the time of the contribution would have resulted in gain which would have been long-term capital gain.

Section 1221 of the Code defines the term "capital asset" to mean property held by the taxpayer (whether or not connected with his trade or business) but does not include (1) stock in trade; (2) certain property used in trade or business; (3) certain property that is the product of the taxpayer's personal efforts; (4) accounts or notes receivable acquired in the ordinary course of the taxpayer's trade or business; and (5) certain publications of the United States Government.

Section 1222(3) of the Code defines "long-term capital gain" to mean gain from the sale or exchange of a "capital asset" held for more than 1 year, if and to the extent the gain is taken into account in computing gross income.

For stock to be "qualified appreciated stock" under section 170(e)(5) of the Code, it must meet the requirements under both sections 170(e)(5)(B)(i) and 170(e)(5)(B)(ii) of the Code. Section 170(e)(5)(B)(i) requires that the market quotations for the stock be readily available on an established securities market as of the date of the contribution. In the present case, the stock is traded on American Stock Exchange, and, therefore, it meets the section 170(e)(5)(B)(i) requirement.

To meet the section 170(e)(5)(B)(ii) requirement, the stock must be "capital gain property" within the meaning of section 170(b)(1)(C)(iv) of the Code, which means that the stock would have had to result in long-term capital gain if sold at its fair market value. In the present case, the stock is a "capital asset" because it does not meet any of the exceptions to the definition of a "capital asset" as set forth in section 1221(1) through (5). Furthermore, the stock has been held by Taxpayer for more than one year, and the fair market value of the stock exceeds its basis. Thus, if the stock were sold, it would have resulted in long-term capital gain as described under section 170(e)(5)(B)(ii). Accordingly, Taxpayer may deduct the fair market value of the remainder interest in the stock, so long as the contribution to the Trust is made on or before December 31, 1994.

RULING REQUEST 3: PERCENTAGE LIMITATION ON CONTRIBUTION BASE OF THE STOCK UNDER SECTION 170(b)(1)(D)(i)(I) OF THE CODE


Section 170(b)(1)(D)(i)(I) of the Code describes a special limitation to the deductibility of certain capital gain property to organizations not described in section 170(b)(1)(A). It states that in the case of charitable contributions (other than charitable contributions to which section 170(b)(1)(A) applies) of capital gain property, the total amount of such contribution of such property which may be taken into account under subsection (a) for any taxable year shall not exceed 20 percent of the taxpayer's contribution base for such year.

In the present case, the contribution of stock would be to a charitable remainder annuity trust with a remainder donee that may not be an organization described in section 170(b)(1)(A) of the Code. In addition, as discussed above, the stock qualifies as capital gain property. Accordingly, under section 170(b)(1)(D)(i)(I) of the Code, the total amount of the charitable contribution with respect to the stock shall not exceed 20 percent of Taxpayer's contribution base for such year.

RULING REQUEST 4: DEDUCTIBILITY OF THE VALUE OF THE REMAINDER INTEREST IN THE MUSICAL INSTRUMENT UNDER SECTIONS 170(a)(3) AND 170(e)(1)(B) OF THE CODE


Section 170(a)(3) of the Code provides that payment of a charitable contribution which consists of a future interest in tangible personal property shall be treated as made only when all intervening interests in, and rights to the actual possession or enjoyment of, the property have expired or are held by persons other than the taxpayer or those standing in a relationship to the taxpayer described in section 267(b) or 707(b).

Section 1.170A-5(b) of the regulations, Example (7), illustrates the application of section 170(a)(3) of the Code. This example provides:

On January 15, 1972, D, an individual who reports his income on the calendar year basis, transfers a capital asset held for more than 6 months consisting of a valuable painting to a pooled income fund described in section 642(c)(5), which is maintained by a university, and creates an income interest in such painting for E for life. E is an individual not standing in a relationship to D described in section 267(b). The remainder interest in the property is contributed by D to the university. The trustee of the pooled income fund puts the painting to an unrelated use within the meaning of paragraph (b)(3) of section 1.170A-4. Accordingly, D is allowed a deduction under section 170 in 1972 for the present value of the remainder interest in the painting, after reducing such amount under section 170(e)(1)(B)(i) and paragraph (a)(2) of section 1.170A-4. This reduction in the amount of the contribution is required since under paragraph (b)(3) of that section the use by the pooled income fund of the painting is a use which would have been an unrelated use if it had been made by the university.

Section 170(e)(1)(B)(i) of the Code provides that the amount of charitable contribution of tangible personal property, if the use by the donee is unrelated to the purpose or function constituting the basis for its exemption under section 501, shall be reduced by the amount of gain which would have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (determined at the time of such contribution).

Section 1.170A-4(b)(3)(i) of the regulations provides, in part, that the term "unrelated use" means a use which is unrelated to the purpose or function constituting the basis of the charitable organization's exemption under section 501 of the Code. The regulation provides:

... For example, if the painting contributed to an educational institution is used by that organization for educational purposes by being placed in its library for display and study by art students, the use is not an unrelated use; but if the painting is sold and the proceeds used by the organization for educational purposes, the use of the property is an unrelated use. ... The use by a trust of tangible personal property contributed to it for the benefit of a charitable organization is an unrelated use if the use by the trust is one which would have been unrelated if made by the charitable organization.

Because the musical instrument is tangible personal property, section 170(a)(3) of the Code prevents any deduction for the remainder interest so long as Taxpayer retains an income interest in the musical instrument. However, an income tax deduction would be allowed under section 170(a)(3) when the trustee sells the musical instrument. When the musical instrument is sold, Taxpayer no longer retains an intervening interest in the tangible personal property as contemplated under section 170(a)(3), that is, Taxpayer is only holding an income interest in the sale proceeds from the musical instrument. Accordingly, Taxpayer's intervening interest in the musical instrument is treated as terminated upon its sale.

In addition to the rule of section 170(a)(3) of the Code for tangible personal property, section 170(e)(1)(B)(i) also imposes a "related use" rule for contributions of tangible personal property. Here, the sale by the Donee would be considered as putting the musical instrument to an unrelated use for section 170(e)(1)(B)(i) purposes. Thus, the sale of the musical instrument by the Trust would be putting the musical instrument to an unrelated use. Accordingly, Taxpayer's deduction would be reduced to that portion of Taxpayer's basis which is allocable to the remainder interest in the musical instrument under section 170(e)(1)(B)(i).

RULING REQUEST 5: PERCENTAGE LIMITATION OF CONTRIBUTION BASE OF THE MUSICAL INSTRUMENT UNDER SECTION 170(b)(1)(B) OF THE CODE


Section 170(b)(1)(B) of the Code describes certain qualified organizations not described under section 170(b)(1)(A), to which an individual taxpayer's charitable contribution for the year can be deducted to the extent of the lesser of (i) 30 percent of the taxpayer's contribution base for the year, or (ii) the excess of 50 percent of the taxpayer's contribution base for the taxable year over the amount of charitable contributions allowable under section 170(b)(1)(A).

Rev. Rul. 79-368, 1979-2 C.B. 109, concludes that the allowable charitable deduction for property transferred to a valid charitable remainder trust is subject to the 20 percent contributions limitation when the organization designated to receive the remainder interest may be redesignated from an organization qualifying for the 50 percent limitation under section 170(b)(1)(A) of the Code to an organization subject to the 20 percent limitation under section 170(b)(1)(B).

In the present case, it is possible that the designated charitable remainder beneficiary may not be a charity described in section 170(b)(1)(A) of the Code. Thus, Taxpayer is subject to the lower percentage limitation under section 170(b)(1)(B). Accordingly, Taxpayer's charitable contribution for the year can be deducted up to 30 percent of taxpayer's contribution base under section 170(b)(1)(B), provided that the 50 percent-limit gifts have not exhausted the 50 percent limit for that year. For examples, see section 1.170A-8(f) of the regulations.

RULING REQUEST 6: ANY GAIN ON THE SALE OF THE MUSICAL INSTRUMENT OR THE STOCK BY THE TRUST IS NOT ATTRIBUTABLE TO TAXPAYER


In Palmer v. Commissioner, 62 T.C. 684 (1974), aff'd on another issue, 523 F.2d 1308 (8th Cir. 1975), acq., Rev. Rul. 78-197, 1978-1 C.B. 83, the donor had voting control of both a corporation and a tax-exempt private foundation. Pursuant to a single plan, the donor contributed shares of the corporation's stock to the foundation and then caused the corporation to redeem the stock from the foundation. The Tax Court held that the transfer of stock to the foundation was a valid gift on the following grounds: (i) The foundation was not bound to go through with the redemption at the time it received title to the shares, and (ii) the corporation's right to redeem is based upon a purchase at fair market value.

The Service has acquiesced in the Palmer decision and will treat the redemption proceeds of stock under facts similar to those of Palmer as income to the donor only if the donee is legally bound or can be compelled by the corporation to surrender the shares for redemption. See Rev. Rul. 78-197, supra.

In the present case, provided there is no prearranged sale contract where the Trust is legally bound to sell the musical instrument or the stock upon the contribution, Taxpayer is not required to recognize any gain from the sale of the musical instrument or the stock by the Trust. In addition, the annuity payments received by Taxpayer will have the character specified in section 664(b) of the Code.

Except as we have specifically ruled herein, we express no opinion as to tax consequences of the transaction under the cited provisions of the Code or under any other provisions of the Code.

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

A copy of this letter should be attached to the federal tax return for the tax year that the proposed Trust is established. A copy of this letter is enclosed for that purpose.

In accordance with the power of attorney submitted, a copy of this ruling is being sent to your authorized representative.

Sincerely yours,
____
Frances D. Schafer
Senior Technician Reviewer
Branch 3
Office of Assistant Chief Counsel
(Passthroughs and Special Industries)

Related Topics On Tangible Personal Property to Unitrust

1.1.4  Gift Reduction Rules:    Gifts of cash are deductible at face value. Most gifts of appreciated property are deductible at fair market value. Value is usually defined as the price that a willing buyer would pay to a willing seller. Reg. 1.170A-1(c)(1). However, some types of property gifts are not deductible at fair market value. For specific policy reasons, these gifts will be reduced in value for deduction purposes.


4.3.1  Tangible Personal Property Deductions:    Tangible personal property (TPP) is a physical item that can ordinarily be moved. Collections of stamps, coins, art and vehicles are the most common kinds of TPP.


4.3.2  Tangible Personal Property Gift Methods:    State law governs transfer of ownership of art, crops, vehicles, collections or other tangible personal property. This state law determines whether or not a specific title or registration document is required for the assets. If there is a state document of title, it is preferable to transfer the asset using that document. For assets that do not have state title documents, such as crops or collections, a deed of gift or letter indicating the description of the asset, the date and the intent to make an irrevocable transfer to charity would be appropriate.



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