Saturday, April 27, 2024
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GiftLaw Note: In PLR 9550026 the donors had previously created a charitable remainder unitrust. Since the trust had grown substantially, they thought that their desire to make a $1,000,000 gift to a university could be accomplished by giving 20% of their interest in the trust. The Service allowed them to give an undivided 20% of their income interest and receive a tax deduction for that value, based on a factor calculated using their ages and 20% of trust fair market value on the date of the gift. Since the university was the remainder recipient and now held both the income and remainder interests in the 20% of the trust that equaled $1,000,000, that amount could be severed from the trust and used to fund the new building.
This is in response to your letter ruling request on behalf of Taxpayer A and Taxpayer B (Taxpayers) dated March 21, 1995. Taxpayers request a ruling on the proper treatment under the Internal Revenue Code of the gift to University of a portion of their right to receive payments from Trust formed by a trust agreement in 1989.

ISSUES


Taxpayers request the following rulings:
  1. Taxpayers will be entitled to an income tax deduction under section 170(a)(1) for the value of the undivided interest in the Unitrust Payment transferred to University.
  2. Taxpayers will be entitled to a gift tax deduction under section 2522 for the value of the undivided interest in the Unitrust Payment transferred to University.
  3. The value of Taxpayers' gift under sections 170(a)(1) and 2522 will be the present value of the right to receive annual payments equal to nine percent of the value of twenty percent of the Trust assets determined annually for a term starting on the date of the transfer of the gift to University and ending on the date of death of the survivor of Taxpayers.
  4. The gift of the undivided part interest in Trust will not cause the trust to cease to be a trust described in section 664(d)(2).
  5. To the extent that in prior years Trust had capital gain income, and that income was not realized or included in the income of Taxpayers, such capital gain shall not be included in the income of, or realized by, Taxpayers solely because of their transfer of the undivided interest in the Unitrust Payment to University.

FACTS


Taxpayers are income beneficiaries of Trust. They are entitled to receive the lesser of the net income of Trust or 9% of the fair market value of Trust's assets determined annually ("Unitrust Payment"). Trust is an irrevocable trust governed by State A law that is intended to be a charitable remainder unitrust under section 664(d)(2) of the Code. Trust makes the Unitrust Payment to Taxpayers jointly and will continue to make it to the survivor of them. Upon the death of the survivor of Taxpayers, Trust will distribute its assets to University an organization described in sections 170(b)(1)(A), 170(c), 2055(a), and 2522(a). Taxpayer A has the right by will to revoke Taxpayer B's interest in Trust as to his community property interest in the trust. Taxpayer B has the night by will to revoke Taxpayer A's interest in Trust as to her community property interest in the trust.

It has been represented to us that when Trust was created in 1989, there was no intention to divide the income and remainder interests as a way to get around the partial interest rules in section 170(f).

PROPOSED TRANSACTION


University has a building project for which it needs $X. Taxpayers propose to make a gift of a twenty percent undivided partial interest in the Unitrust Payment to University. The market value of the assets in Trust, as valued on January 1, 1994, was $5X. Taxpayers propose to make a gift to fund the construction project as follows:
  1. Taxpayer A will execute a disclaimer that is substantially similar to the one submitted with your ruling request. This disclaimer provides that Taxpayer A disclaims his contingent right to receive Taxpayer B's unitrust interest after Taxpayer B's death. Taxpayer B will execute a disclaimer that is substantially similar to the one submitted with your ruling request. This disclaimer provides that Taxpayer B disclaims her contingent right to receive Taxpayer A's unitrust interest after Taxpayer A's death.
  2. Taxpayers will make a gift of a twenty percent undivided interest in the Unitrust Payment to University, by execution and delivery of an irrevocable assignment valid under State A law.
  3. The income interest in Trust which University receives in this gift will merge with its remainder interest in Trust, leaving University with a twenty percent undivided interest in the entire trust and an eighty percent undivided interest in the remainder of the trust.
  4. Taxpayers and University will consent to the partial termination of Trust in their respective capacities as grantors and beneficiaries so that all of the grantors and beneficiaries will have consented to termination of twenty percent of the trust.
  5. The trustee of Trust will distribute to University twenty percent of the trust assets. The distributed assets will be fairly representative of the relative bases of the various assets in the trust. The trustee will continue to hold the balance of the Trust assets in accordance with the terms of the trust.

LAW AND ANALYSIS


RULING REQUEST 1:


Section 170(a)(1) of the Code provides that there shall be allowed as a deduction any charitable contribution (as defined 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.

Section 170(f)(3)(B)(ii) of the Code provides that section 170(f)(3)(A) does not apply to a contribution of an undivided portion of the taxpayer's entire interest in property.
Section 1.170A-6(a)(2) and section 1.170A-7(a)(2)(i) of the Income Tax Regulations 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.

In Rev. Rul. 86-60, 1986-1 C.B. 302, we considered whether a donation qualifies for the charitable contribution deduction under section 170 of the Code, if a taxpayer, A, who is the grantor/life beneficiary of a charitable remainder annuity trust (CRAT) donates A's annuity interest in the CRAT to the remainder beneficiary of the CRAT. In 1980, A had created a CRAT described in section 664(d)(1). A retained an annuity interest in the CRAT for life. The remainder beneficiary was X, a charitable organization described in section 170(c). In 1984 (four years later), A transferred the annuity interest in the CRAT to X.

Rev. Rul. 86-60 concludes, based on sections 1.170A-6(a)(2) and 1.170A-7(a)(2)(i) of the Regulations, that the gift by A, the grantor, to the remainder beneficiary of A's retained life annuity in the CRAT qualifies for a charitable contribution deduction under section 170 of the Code.

The present case is analogous to the situation in Rev. Rul. 86-60. Taxpayers retained an income interest in Trust which they created six years ago in 1989. Now, Taxpayers propose to transfer a portion of their income interest to University, the remainder beneficiary of Trust. Unlike the taxpayer in Rev. Rul. 86-60, Taxpayers propose to contribute twenty percent of their income interest instead of all of their interest. It is represented that Taxpayers did not divide their interest in the property, in 1989, to avoid the partial interest rules. Taxpayers' representation is creditable in part because of the six year period between the creation of Trust and the proposed contribution. Since Taxpayers now intend to contribute an undivided portion of their entire interest in the property to University, under section 170(f)(3)(B)(ii) of the Code, section 170(f)(3)(A) does not apply to the contribution of 20 percent of Taxpayers' income interest in Trust to University. Therefore, Taxpayers' transfer of a portion of their unitrust interest will qualify for a charitable contribution deduction under section 170.

RULING REQUEST 2:


Section 2501(a) imposes a tax for each calendar year on the transfer of property by gift during such calendar year by a individual, resident or nonresident.

Section 2511(a) provides that the gift tax applies to a transfer by way of gift whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.

Section 25.2511-2(b) of the Gift Tax Regulations provides that a gift is complete to the extent that a donor has so parted with dominion and control as to leave the donor with no power to change its disposition, whether for his own benefit, or the benefit of another.

Section 2522 provides for a gift tax charitable deduction for the value of property transferred to organizations described in section 2522(a). However, section 2522(c)(2) and section 25.2522(c)-3(c)(1) and (2) provide that if a donor transfers an interest in property for charitable purposes and an interest in the same property is retained by the donor, or is transferred or has been transferred (for less than adequate and full consideration) for private purposes, no gift tax deduction is allowed under section 2522 unless the charitable interest is:
  1. an undivided portion of the donor's entire interest,
  2. a remainder interest in a personal residence,
  3. a remainder interest in a farm,
  4. a remainder interest in a charitable remainder trust or a pooled income fund,
  5. a guaranteed annuity interest,
  6. a unitrust interest, or
  7. a qualified conservation contribution.
Under section 25.2522(c)-3(c)(2)(i), an undivided portion of a donor's entire interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the donor in such property and must extend over the entire term of the donor's interest in such property. For example, if the donor gave a life estate in an office building to his wife for her life and retained a reversionary interest in the office building, the gift by the donor of one-half of that reversionary interest to charity while his wife is still alive will not be considered the transfer of a deductible interest; because an interest in the same property has already passed from the donor for private purposes the reversionary interest will not be considered the donor's entire interest in the property. If, on the other hand, the donor had been given a life estate in Blackacre for life of his wife and the donor had no other interest in Blackacre on or before the time of gift, the gift by the donor of one-half of that life estate would be considered the transfer of a deductible interest; because the life estate would be considered the donor's entire interest in the property, the gift would be of an undivided portion of such entire interest.

Under section 2522(c)-3(c)(2)(vii), for purposes of the gift tax charitable deduction, the term "unitrust interest" means an irrevocable right pursuant to an instrument of transfer to receive payment, not less often than annually, of a fixed percentage of the net fair market value determined annually, of the property which funds the unitrust interest.

Section 1.664-3(a)(4) provides that the unitrust instrument may provide that any amount other than the unitrust amount shall be paid (or may be paid in the discretion of the trustee) to an organization described in section 170(c) if, in the case of distributions in kind, the adjusted basis of the property distributed is fairly representative of the adjusted basis of the property available for payment on the date of the payment.

In the present case, in 1989, Taxpayer A and Taxpayer B, as donors, established a charitable remainder unitrust. The donors transferred certain community property to the trustee. During the donors' lifetime, they are entitled to receive the lesser of the net income of trust or 9 percent of the fair market value of the trust assets determined annually. Upon the death of the survivor of Taxpayer A and Taxpayer B, the trustee is to distribute the trust assets to University.

Taxpayer A and Taxpayer B, each expressly reserved the power, exercisable by will, to revoke the rights of the other donor in any portion of the trust attributable to the donor's contribution to the trust.

Taxpayer A and Taxpayer B propose to make a gift of a 20 percent undivided interest of their unitrust interest to University.

The 20 percent unitrust interest that University will receive as a result of Taxpayer A's and Taxpayer B's gift will merge with the University's remainder interest in the Unitrust, so that University will have a twenty percent undivided interest in the entire trust and an eighty percent undivided interest in the remainder of the Unitrust.

Taxpayers A and B have each retained the right, exercisable by will, to revoke the rights of the other donor in the trust attributable to Taxpayers A and B respectively. Further, Taxpayer A will execute a disclaimer that is substantially similar to the one submitted with your ruling request (which provides that Taxpayer A disclaims his contingent right to receive Taxpayer B's unitrust interest after Taxpayer B's death) and Taxpayer B will execute a disclaimer that is substantially similar to the one submitted with your ruling request (which provides that Taxpayer B disclaims her contingent right to receive Taxpayer A's unitrust interest after Taxpayer A's death). Accordingly, neither Taxpayer A nor Taxpayer B shall be deemed to have made a transfer for private purposes upon creation of the trust within the meaning of section 25.2522(c)-3(c)(2)(i). See Rev. Rul. 79-243, 1979-2 C.B. 343. In addition, the transfer by Taxpayer A and Taxpayer B respectively of a 20 percent undivided interest in their respective unitrust interests to University will consist of a fraction or percentage of each and every right owned by each of Taxpayer A and Taxpayer B in the property. Under the facts presented, specifically because as a result of the transfer by Taxpayer A and Taxpayer B, University will receive a fee interest in twenty percent of the trust corpus, we conclude that Taxpayer A and Taxpayer B will be entitled to a gift tax charitable deduction under section 2522 for the value of the undivided portion of Taxpayer A's and Taxpayer B's entire interest in the unitrust interests transferred to University. See, Rev. Rul. 86-60, 1986-1 C.B. 302, Situation 1.

RULING REQUEST 3:


The value of Taxpayer A's and Taxpayer B's gift under sections 170 and 2522 will be equal to the present value of the right to receive annual payments equal to nine percent of the net fair market value of twenty percent of the trust assets. Although the trust provides for a net income limitation on the amount required to be distributed annually, under the specific facts of this case, this limitation is disregarded for purposes of valuing Taxpayer A's and Taxpayer B's gifts of a twenty percent undivided portion of their unitrust interest because the transfer of the undivided portion of Taxpayer A's and Taxpayer B's unitrust interests results in a merger with a twenty percent undivided portion of University's remainder interest in the trust.

In order to compute the actuarial factor necessary to determine the value of Taxpayer A's and Taxpayer B's gift of a twenty percent undivided unitrust interest, IRS Publication 1458, Actuarial Values Beta Volume, is required. The nine percent payout factor is first adjusted under Table F by the adjusted payout rate factor (which takes into consideration the applicable Federal Midterm Rate). This factor along with the ages of Taxpayer A and Taxpayer B at the time of the proposed transfer are used in Table U(2) to determine the remainder factor for the unitrust. The income factor is then determined by subtracting the remainder factor from one. This factor is then multiplied by twenty percent. The actuarial factor so obtained, times the value of fifty percent of the unitrust corpus at the time of the transfer will equal the value of Taxpayer A's and Taxpayer B's respective gifts for purposes of sections 170 and 2522.

RULING REQUEST 4:


Section 1.664-3(a)(4) provides that the unitrust instrument may provide that any amount other than the unitrust amount shall be paid (or may be paid in the discretion of the trustee) to an organization described in section 170(c) if certain conditions are met. The regulations, therefore, authorize the current distribution of unitrust assets to a charitable organization. Upon Taxpayer A's and Taxpayer B's transfer of an undivided twenty percent portion of their unitrust payment to University, University's interest in the unitrust payment and twenty percent of its interest in the remainder of the trust will merge. Although a partial termination of the trust will occur, the unitrust will continue to be in the form of, and to function as a charitable remainder unitrust within the meaning of section 664(d)(2). Accordingly, we rule that the gift of the undivided partial interest in the unitrust will not cause the trust to cease to be a trust described in section 664(d)(2).

RULING REQUEST 5:


The case of Palmer v. Comm'r, 62 T.C. 684 (1974), aff'd on another issue, 523 F.2d 1308 (8th Cir. 1975), acq. and nonacq., 1978-1 C.B. 2, provides an example of the fact that a donor does not normally recognize gain on the contribution of appreciated property to charity. The taxpayer, in Palmer, had voting control of both a corporation and a tax-exempt private foundation. Pursuant to a single plan, the taxpayer donated shares of the corporation's stock to the foundation and then caused the corporation to redeem the stock from the foundation. The Tax Court treated the transaction according to its form because the foundation was not a sham, the transfer of the stock to the foundation was a valid gift, and the foundation was not bound to go through with the redemption at the time it received title to the shares. In Rev. Rul. 78-197, 1978-1 C.B. 83, we stated that "[t]he Service will treat the proceeds of a redemption of stock under facts similar to those in 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."

Based on the premise of Palmer and Rev. Rul. 78-197 that a donor does not normally recognize gain on the contribution of appreciated property to charity, we conclude that capital gain that Trust had in prior years, that was not realized or included in the income of Taxpayers, will not be included in the income of, or realized by, Taxpayers solely because of the transfer of the undivided interest in the Unitrust Payment to University.

CONCLUSIONS


Based on the facts stated above, we conclude as follows:
  1. Taxpayers will be entitled to an income tax deduction under section 170 of the Code for the value of the undivided interest in the Unitrust Payment transferred to University.
  2. Taxpayers will be entitled to a gift tax deduction under section 2522 of the Code for the value of the undivided interest in the Unitrust Payment transferred to University.
  3. The value of Taxpayers' gift under sections 170 and 2522 of the Code will be the present value of the right to receive annual payments equal to nine percent of the value of twenty percent of the Trust assets determined annually for a term starting on the date of the transfer of the gift to University and ending on the date of death of the survivor of Taxpayers.
  4. The gift of the undivided part interest in Trust will not cause the trust to cease to be a trust described in section 664(d)(2) of the Code.
  5. To the extent that in prior years, Trust had capital gain income, and that income was not realized or included in the income of Taxpayers, such capital gain shall not be included in the income of, or realized by, Taxpayers solely because of the transfer of the undivided interest in the Unitrust Payment to University.
No opinion is expressed concerning the federal tax consequences of the proposed transaction under any other provisions of the Code.

No opinion is expressed concerning the federal tax consequences of the proposed transaction under any other provisions of the Code.

A copy of this ruling should be attached to Taxpayer's federal income tax returns for the tax years affected.

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

Sincerely,
Assistant Chief Counsel
(Income Tax & Accounting)
By: ____
Michael D. Finley
Chief, Branch 3

Related Topics On Gift of Portion of Unitrust Income Interest

3.1.6  Gifts from an Annuity Trust:    After the annuity trust has been funded, it is permissible to use the trust corpus to make a current gift. However, the arrangement should be created to avoid the application of the partial interest rules. Sec. 170(f)(3)(A). For example, it would not be appropriate to create a charitable remainder trust on Monday and then give the income interest to charity on Wednesday of the same week. If the gift of an income interest is contemplated, it should generally be made a year or more after creation of the trust.


3.10.6  Gifts from a Charitable Remainder Unitrust During Life:    After the unitrust has been funded, it is permissible to use the trust corpus to make a current gift. However, the arrangement should not be created to avoid the application of the partial interest rules. Sec. 170(f)(3)(A). For example, it would not be appropriate to create a charitable remainder trust on Monday and then give the income interest to charity on Wednesday of the same week. If the gift of an income interest is contemplated, it should generally be made a year or more after creation of the trust.


3.8.5  Gift of Pooled Income Fund to Charity:    An income interest is a property right under state law. An individual who owns a property right may transfer that property to a charity. The transfer of an annuity interest or a charitable remainder unitrust interest to charity has been permitted by the Service. PLR 9550026. When the income interest is irrevocably transferred by the donor to the charity, he or she has made a gift and should receive a charitable income tax deduction for the value transferred.



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