Tuesday, April 23, 2024
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GiftLaw Note: If a trust or estate satisfies a pecuniary legacy with a distribution of appreciated property, the distribution may be treated as a taxable sale or exchange. Donors in this case established a net income revocable trust during their lifetimes. At death of the second the trust owned Series E bonds. At termination of the trust, the trustee was to pay specific dollar amounts to both charitable and non-charitable beneficiaries with any remainder to the non-charitable beneficiaries. The trustee proposed paying the charity with the savings bonds. The trust did not specifically state to use the bonds to satisfy that charity's gift. While the trustee can distribute the bonds to the charity in satisfaction of their gift, there is no tax benefit because the trust must recognize the income from the bonds as if they were sold. In fact the IRS views this transaction as a sale or exchange of the bonds thus causing the trust to recognize the appreciation. The better planning idea is to specifically state in the trust document that the charity is to receive the bonds rather than a specific dollar amount.
PRIVATE RULING 9507008

DATE: November 10, 1994


This letter responds to a letter submitted on July 7, 1994, and subsequent correspondence, requesting a ruling on behalf of Trust under section 642(c) of the Internal Revenue Code.

On February 28, 1991, A and B ("Grantors") executed Trust, a joint revocable grantor trust.

Article 3(A) of Trust's declaration of trust provides that, during the grantors' lifetimes, the trustee shall pay to or for the benefit of each grantor all of the net income of such grantor's share and so much of the principal of each grantor's share as each grantor may from time to time direct. Article 3(B)(3) provides that, upon the death of the first grantor, the trust is still revocable and the remaining assets in trust shall continue to be held and administered according to the terms of the surviving grantor's original share, as set forth in Article 3(A). Article 3(C) provides that, upon the death of the surviving grantor or the simultaneous deaths of the grantors, the trustee shall pay over and deliver specific dollar amounts to noncharitable and charitable beneficiaries and then pay over and deliver the remaining trust assets to noncharitable beneficiaries.

A died on April 13, 1993, and B died on September 11, 1993. As a result, the trustee is in the process of distributing Trust's assets. Trust's assets include Series E United States Savings Bonds contributed by Grantors. Grantors used the cash receipts and disbursements methods of accounting and did not elect under section 454(a) to report the increase in redemption price of the Series E bonds each year as it accrued. Trustee proposes to distribute the Series E bonds to satisfy the charitable organizations' pecuniary legacies. Trust's declaration does not specifically direct that the Series E bonds be used to satisfy the charitable organizations' pecuniary legacies.

Section 691(a)(1) provides the general rule that the amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period shall be included in the gross income, for the taxable year when received, of: (A) the estate of the decedent, if the right to receive the amount is acquired by the decedent's estate from the decedent; (B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the decedent's estate from the decedent; or (C) the person who acquires from the decedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right.

Rev. Rul. 64-104, 1964-1 C.B. 223, holds that the unreported increment in value reflected in the redemption value of Series E bonds as of the date of the decedent's death constitutes income in respect of a decedent under section 691(a). Therefore, the unreported increment in value of the Series E bonds still held by the decedent at his death should be returned as income for the taxable year in which the bonds are disposed of, are redeemed or have reached final maturity, whichever is earlier, by the estate of the decedent, or by the person entitled to the bonds by bequest or inheritance or by reason of the death of the decedent.

Section 691(a)(2) provides that if a right, described in section 691(a)(1), to receive an amount is transferred by the estate of the decedent or a person who received such right by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent, there shall be included in the gross income of the estate or such person, as the case may be, for the taxable period in which the transfer occurs, the fair market value of such right at the time of such transfer plus the amount by which any consideration for the transfer exceeds such fair market value. For purposes of section 691(a)(2), the term "transfer" includes sale, exchange, or other disposition, or the satisfaction of an installment obligation at other than face value, but does not include transmission at death to the estate of the decedent or a transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent.

The increase in the redemption price of the Series E bonds during the life of Grantors is income in respect of a decedent under section 691(a)(1). If an estate or trust satisfies a pecuniary legacy with property, the payment is treated as a sale or exchange. See Keenan v. Commissioner, 114 F.2d 217 (2d Cir. 1940). Because Trust used the Series E bonds to satisfy its pecuniary legacies, Trust must treat the payments as sales or exchanges. Therefore, under section 691(a)(2), Trust must recognize the unreported increment in the redemption price of the Series E bonds as income in respect of a decedent to the extent the bonds are used to satisfy the pecuniary legacies.

Section 642(c)(1) provides that in the case of a trust (other than a trust meeting the specifications of subpart B, part I, subchapter J, chapter 1), there shall be allowed as a deduction in computing its taxable income (in lieu of the deduction allowed by section 170(a), relating to the deduction for charitable, etc., contributions and gifts) 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) (determined without regard to section 170(c)(2)(A)).

The terms of Trust's governing instrument do not direct or require that the trustee pay the pecuniary legacies from Trust's gross income. Accordingly, the transfer of Series E bonds in satisfaction of the pecuniary legacies do not entitle Trust to a deduction under section 642(c).

Except as specifically ruled upon above, no opinion is expressed concerning the federal income tax consequences of the above-described facts under any other provision of the Code.

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

In accordance with the power of attorney on file with this office, we are sending a copy of this letter to your authorized representative.

Sincerely yours,

J. Thomas Hines
Senior Technician Reviewer
Branch 2
Office of the Assistant
Chief Counsel
(Passthroughs and Special Industries)




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