(a) Sections 503(e) and 681(b)(5) provide that no deduction which
would otherwise be allowable under section 2522 for a gift for
religious, charitable, scientific, literary or educational purposes,
including the encouragement of art and the prevention of cruelty to
children or animals, is allowed if--
(1) The gift is made in trust and, for income tax purposes for the
taxable year of the trust in which the gift is made, the deduction
otherwise allowable to the trust under section 642(c) is limited by
section 681(b)(1) by reason of the trust having engaged in a prohibited
transaction described in section 681(b)(2); or
(2) The gift is made to any corporation, community chest, fund or
foundation which, for its taxable year in which the gift is made is not
exempt from income tax under section 501(a) by reason of having engaged
in a prohibited transaction described in section 503(c).
(b) For purposes of section 503(e) and section 681(b)(5) the term
"gift" includes any gift, contribution, or transfer without adequate
consideration.
(c) Regulations relating to the income tax contain the rules for the
determination of the taxable year of the trust for which the deduction
under section 642(c) is limited by section 681(b), and for the
determination of the taxable year of the organization for which an exemption is denied under
section 503(a). Generally, such taxable year is a taxable year
subsequent to the taxable year during which the trust or organization
has been notified by the Internal Revenue Service that it has engaged in
a prohibited transaction. However, if the trust or organization during
or prior to the taxable year entered into the prohibited transaction for
the purpose of diverting its corpus or income from the charitable or
other purposes by reason of which it is entitled to a deduction or
exemption, and the transaction involves a substantial part of such
income or corpus, then the deduction of the trust under section 642(c)
for such taxable year is limited by section 681(b), or the exemption of
the organization for such taxable year is denied under section 503(a),
whether or not the organization has previously received notification by
the Internal Revenue Service that it has engaged in a prohibited
transaction. In certain cases, the limitation of section 503 or 681 may
be removed or the exemption may be reinstated for certain subsequent
taxable years under the rules set forth in the income tax regulations
under sections 503 and 681.
(d) In cases in which prior notification by the Internal Revenue
Service is not required in order to limit the deduction of the trust
under section 681(b), or to deny exemption of the organization under
section 503, the deduction otherwise allowable under Sec. 25.2522(a)-1
is not disallowed with respect to gifts made during the same taxable
year of the trust or organization in which a prohibited transaction
occurred, or in a prior taxable year, unless the donor or a member of
his family was a party to the prohibited transaction. For purposes of
the preceding sentence, the members of the donor's family include only
his brothers and sisters (whether by whole or half blood), spouse,
ancestors, and lineal descendants.
(e) This section applies only to gifts made before January 1, 1970.
In the case of gifts made after December 31, 1969, see Sec. 25.2522(c)-
2.
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