(1) Application of provisions. Section 642(c)(5)
prescribes certain rules for the valuation of contributions involving
transfers to certain funds described in that section as
pooled income funds. This section sets forth the requirements for
qualifying as a pooled income fund and provides for the manner of
allocating the income of the fund to the beneficiaries. Section
1.642(c)-6 provides for the valuation of a remainder interest in
property transferred to a pooled income fund. Section 1.642(c)-7
provides transitional rules under which certain funds may be amended so
as to qualify as pooled income funds in respect to transfers of property
occurring after July 31, 1969.
(2) Tax status of fund and its beneficiaries. Notwithstanding any
other provision of this chapter, a fund which meets the requirements of
a pooled income fund, as defined in section 642(c)(5) and paragraph (b)
of this section, shall not be treated as an association within the
meaning of section 7701(a)(3). Such a fund, which need not be a trust
under local law, and its beneficiaries shall be taxable under part I,
subchapter J, chapter 1 of the Code, but the provisions of subpart E
(relating to grantors and others treated as substantial owners) of such
part shall not apply to such fund.
(3) Recognition of gain or loss on transfer to fund. No gain or loss
shall be recognized to the donor on the transfer of property to a pooled
income fund. In such case, the fund's basis and holding period with
respect to property transferred to the fund by a donor shall be
determined as provided in sections 1015(b) and 1223(2). If, however, a
donor transfers property to a pooled income fund and, in addition to
creating or retaining a life income interest therein, receives property
from the fund, or transfers property to the fund which is subject to an
indebtedness, this subparagraph shall not apply to the gain realized by
reason of (i) the receipt of such property or (ii) the amount of such
indebtedness, whether or not assumed by the pooled income fund, which is
required to be treated as an amount realized on the transfer. For
applicability of the bargain sale rules, see section 1011(b) and the
regulations thereunder.
(4) Charitable contributions deduction. A charitable contributions
deduction for the value of the remainder interest, as determined under
Sec. 1.642(c)-6, may be allowed under section 170, 2055, 2106, or 2522,
where there is a transfer of property to a pooled income fund. For a
special rule relating to the reduction of the amount of a charitable
contribution of certain ordinary income property or capital gain
property, see section 170(e)(1) (A) or (B)(i) and the regulations
thereunder.
(5) Definitions. For purposes of this section, Secs. 1.642(c)-6 and
1.642(c)-7:
(i) The term income has the same meaning as it does under section
643(b) and the regulations thereunder.
(ii) The term donor includes a decedent who makes a testamentary
transfer of property to a pooled income fund.
(iii) The term governing instrument means either the governing plan
under which the pooled income fund is established and administered or
the instrument of transfer, as the context requires.
(iv) The term public charity means an organization described in
clause (i) to (vi) of section 170(b)(1)(A). If an organization is
described in clause (i) to (vi) of section 170(b)(1)(A) and is also
described in clause (viii) of such section, it shall be treated as a
public charity.
(v) The term fair market value, when used with respect to property,
means its value in excess of the indebtedness or charges against such
property.
(vi) The term determination date means each day within the taxable
year of a pooled income fund on which a valuation is made of the
property in the fund. The property in the fund shall be valued on the
first day of the taxable year of the fund and on at least 3 other days
within the taxable year. The period between any two consecutive
determination dates within the taxable year shall not be greater than 3
calendar months. In the case of a taxable year of less than 12 months,
the property in the fund shall be valued on the first day of such
taxable year and on such other days within such year as occur at
successive intervals of no greater than 3 calendar months. Where a
valuation date falls on a Saturday, Sunday, or legal holiday (as defined
in section 7503 and the regulations thereunder), the valuation may be
made on either the next preceding day which is not a Saturday, Sunday,
or legal holiday or the next succeeding day which
is not a Saturday, Sunday, or legal holiday, so long as the next such
preceding day or next such succeeding day is consistently used where the
valuation date falls on a Saturday, Sunday, or legal holiday.
(6) Cross references.
(i) See section 4947(a)(2) and section 4947(b)(3)(B) for the application to pooled income funds of the
provisions relating to private foundations and section 508(e) for rules
relating to provisions required in the governing instrument prohibiting
certain activities specified in section 4947(a)(2).
(ii) For rules for postponing the time for deduction of a charitable
contribution of a future interest in tangible personal property, see
section 170(a)(3) and the regulations thereunder.
(b) Requirements for qualification as a pooled income fund. A pooled
income fund to which this section applies must satisfy all of the
following requirements:
(1) Contribution of remainder interest to charity. Each donor must
transfer property to the fund and contribute an irrevocable remainder
interest in such property to or for the use of a public charity,
retaining for himself, or creating for another beneficiary or
beneficiaries, a life income interest in the transferred property. A
contingent remainder interest shall not be treated as an irrevocable
remainder interest for purposes of this subparagraph.
(2) Creation of life income interest. Each donor must retain for
himself for life an income interest in the property transferred to such
fund, or create an income interest in such property for the life of one
or more beneficiaries, each of whom must be living at the time of the
transfer of the property to the fund by the donor. The term one or more
beneficiaries includes those members of a named class who are alive and
can be ascertained at the time of the transfer of the property to the
fund. In the event more than one beneficiary of the income interest is
designated, such beneficiaries may enjoy their shares of income
concurrently, consecutively, or both concurrently and consecutively. The
donor may retain the power exercisable only by will to revoke or
terminate the income interest of any designated beneficiary other than
the public charity. The governing instrument must specify at the time of
the transfer the particular beneficiary or beneficiaries to whom the
income is payable and the share of income distributable to each person
so specified. The public charity to or for the use of which the
remainder interest is contributed may also be designated as one of the
beneficiaries of an income interest. The donor need not retain or create
a life interest in all the income from the property transferred to the
fund provided any income not payable under the terms of the governing
instrument to an income beneficiary is contributed to, and within the
taxable year in which it is received is paid to, the same public charity
to or for the use of which the remainder interest is contributed. No
charitable contributions deduction shall be allowed to the donor for the
value of such income interest of the public charity or for the amount of
any such income paid to such organization.
(3) Commingling of property required. The property transferred to
the fund by each donor must be commingled with, and invested or
reinvested with, other property transferred to the fund by other donors
satisfying the requirements of subparagraphs (1) and (2) of this
paragraph. The governing instrument of the pooled income fund must
contain a provision requiring compliance with the preceding sentence.
The public charity to or for the use of which the remainder interest is
contributed may maintain more than one pooled income fund, provided that
each such fund is maintained by the organization and is not a device to
permit a group of donors to create a fund which may be subject to their
manipulation. The fund must not include property transferred under
arrangements other than those specified in section 642(c)(5) and this
paragraph. However, a fund shall not be disqualified as a pooled income
fund under this paragraph because any portion of its properties is
invested or reinvested jointly with other properties, not a part of the
pooled income fund, which are held by, or for the use of, the public
charity which maintains the fund, as for example, with securities in the
general endowment fund of the public charity to
or for the use of which the remainder interest is contributed. Where
such joint investment or reinvestment of properties occurs, records must
be maintained which sufficiently identify the portion of the total fund
which is owned by the pooled income fund and the income earned by, and
attributable to, such portion. Such a joint investment or reinvestment
of properties shall not be treated as an association or partnership for
purposes of the Code. A bank which serves as trustee of more than one
pooled income fund may maintain a common trust fund to which section 584
applies for the collective investment and reinvestment of moneys of such
funds.
(4) Prohibition against exempt securities. The property transferred
to the fund by any donor must not include any securities, the income
from which is exempt from tax under subtitle A of the Code, and the fund
must not invest in such securities. The governing instrument of the fund
must contain specific prohibitions against accepting or investing in
such securities.
(5) Maintenance by charitable organization required. The fund must
be maintained by the same public charity to or for the use of which the
irrevocable remainder interest is contributed. The requirement of
maintenance will be satisfied where the public charity exercises control
directly or indirectly over the fund. For example, this requirement of
control shall ordinarily be met when the public charity has the power to
remove the trustee or trustees of the fund and designate a new trustee
or trustees. A national organization which carries out its purposes
through local organizations, chapters, or auxiliary bodies with which it
has an identity of aims and purposes may maintain a pooled income fund
(otherwise satisfying the requirements of this paragraph) in which one
or more local organizations, chapters, or auxiliary bodies which are
public charities have been named as recipients of the remainder
interests. For example, a national church body may maintain a pooled
income fund where donors have transferred property to such fund and
contributed an irrevocable remainder interest therein to or for the use
of various local churches or educational institutions of such body. The
fact that such local organizations or chapters have been separately
incorporated from the national organization is immaterial.
(6) Prohibition against donor or beneficiary serving as trustee. The
fund must not have, and the governing instrument must prohibit the fund
from having, as a trustee a donor to the fund or a beneficiary (other
than the public charity to or for the use of which the remainder
interest is contributed) of an income interest in any property
transferred to such fund. Thus, if a donor or beneficiary (other than
such public charity) directly or indirectly has general responsibilities
with respect to the fund which are ordinarily exercised by a trustee,
such fund does not meet the requirements of section 642(c)(5) and this
paragraph. The fact that a donor of property to the fund, or a
beneficiary of the fund, is a trustee, officer, director, or other
official of the public charity to or for the use of which the remainder
interest is contributed ordinarily will not prevent the fund from
meeting the requirements of section 642(c)(5) and this paragraph.
(7) Income of beneficiary to be based on rate of return of fund.
Each beneficiary entitled to income of any taxable year of the fund must
receive such income in an amount determined by the rate of return earned
by the fund for such taxable year with respect to his income interest,
computed as provided in paragraph (c) of this section. The governing
instrument of the fund shall direct the trustee to distribute income
currently or within the first 65 days following the close of the taxable
year in which the income is earned. Any such payment made after the
close of the taxable year shall be treated as paid on the last day of
the taxable year. A statement shall be attached to the return of the
pooled income fund indicating the date and amount of such payments after
the close of the taxable year. Subject to the provisions of part I,
subchapter J, chapter 1 of the Code, the beneficiary shall include in
his gross income all amounts properly paid, credited, or required to be
distributed to the beneficiary during the taxable year or years of the
fund ending within or with his taxable year. The governing instrument shall provide that the income
interest of any designated beneficiary shall either terminate with the
last regular payment which was made before the death of the beneficiary
or be prorated to the date of his death.
(8) Termination of life income interest. Upon the termination of the
income interest retained or created by any donor, the trustee shall
sever from the fund an amount equal to the value of the remainder
interest in the property upon which the income interest is based. The
value of the remainder interest for such purpose may be either (i) its
value as of the determination date next succeeding the termination of
the income interest or (ii) its value as of the date on which the last
regular payment was made before the death of the beneficiary if the
income interest is terminated on such payment date. The amount so
severed from the fund must either be paid to, or retained for the use
of, the designated public charity, as provided in the governing
instrument. However, see subparagraph (3) of this paragraph for rules
relating to commingling of property.
(c) Allocation of income to beneficiary--
(1) In general. Every income interest retained or created in property transferred to a pooled
income fund shall be assigned a proportionate share of the annual income
earned by the fund, such share, or unit of participation, being based on
the fair market value of such property on the date of transfer, as
provided in this paragraph.
(2) Units of participation--
(i) Unit plan.
(a) On each transfer of property by a donor to a pooled income fund, one or more units of
participation in the fund shall be assigned to the beneficiary or
beneficiaries of the income interest retained or created in such
property, the number of units of participation being equal to the number
obtained by dividing the fair market value of the property by the fair
market value of a unit in the fund at the time of the transfer.
(b) The fair market value of a unit in the fund at the time of the
transfer shall be determined by dividing the fair market value of all
property in the fund at such time by the number of units then in the
fund. The initial fair market value of a unit in a pooled income fund
shall be the fair market value of the property transferred to the fund
divided by the number of units assigned to the income interest in that
property. The value of each unit of participation will fluctuate with
each new transfer of property to the fund in relation to the
appreciation or depreciation in the fair market value of the property in
the fund, but all units in the fund will always have equal value.
(c) The share of income allocated to to each unit of participation
shall be determined by dividing the income of the fund for the taxable
year by the outstanding number of units in the fund at the end of such
year, except that, consistently with paragraph (b)(7) of this section,
income shall be allocated to units outstanding during only part of such
year by taking into consideration the period of time such units are
outstanding. For this purpose the actual income of such part of the
taxable year, or a prorated portion of the annual income, may be used,
after making such adjustments as are reasonably necessary to reflect
fluctuations during the year in the fair market value of the property in
the fund.
(ii) Other plans. The governing instrument of the fund may provide
any other reasonable method not described in subdivision (i) of this
subparagraph for assigning units of participation in the fund and
allocating income to such units which reaches a result reasonably
consistent with the provisions of such subdivision.
(iii) Transfers between determination dates. For purposes of
subdivisions (i) and (ii) of this subparagraph, if a transfer of
property to the fund by a donor occurs on other than a determination
date, the number of units of participation assigned to the income
interest in such property may be determined by using the fair market
value of the property in the fund on the determination date immediately
preceding the date of transfer (determined without regard to the
property so transferred), subject, however, to appropriate adjustments
on the next succeeding determination date. Such adjustments may be made
by any reasonable method, including the use of a method whereby the fair
market value of the property in the fund at the time of the
transfer is deemed to be the average of the fair market values of the
property in the fund on the determination dates immediately preceding
and succeeding the date of transfer. For purposes of determining such
average any property transferred to the fund between such preceding and
succeeding dates, or on such succeeding date, shall be excluded. The
application of this subdivision may be illustrated by the following
example:
Example. The determination dates of a pooled income fund are the
first day of each calendar month. On April 1, 1971, the fair market
value of the property in the fund is $100,000, at which time 1,000 units
of participation are outstanding with a value of $100 each. On April 15,
1971, B transfers property with a fair market value of $50,000 to the
fund, retaining for himself for life an income interest in such
property. No other property is transferred to the fund after April 1,
1971. On May 1, 1971, the fair market value of the property in the fund,
including the property transferred by B, is $160,000. The average of the
fair market values of the property in the fund (excluding the property
transferred by B) on April 1 and May 1, 1971, is $105,000 ($100,000+
[$160,000-$50,000] 2). Accordingly, the fair market value of a
unit of participation in the fund on April 15, 1971, at the time of B's
transfer may be deemed to be $105 ($105,000/1,000 units), and B is
assigned 476.19 units of participation in the fund ($50,000/$105).
(3) Special rule for partial allocation of income to charity.
Notwithstanding subparagraph (2) of this paragraph, the governing
instrument may provide that a unit of participation is entitled to share
in the income of the fund in a lesser amount than would otherwise be
determined under such subparagraph, provided that the income otherwise
allocable to the unit under such subparagraph is paid within the taxable
year in which it is received to the public charity to or for the use of
which the remainder interest is contributed under the governing
instrument.
(4) Illustrations. The application of this paragraph may be
illustrated by the following examples:
Example 1. On July 1, 1970, A and B transfer separate properties
with a fair market value of $20,000 and $10,000, respectively, to a
newly created pooled income fund which is maintained by Y University and
uses as its taxable year the fiscal year ending June 30. A and B each
retain in themselves for life an income interest in such property, the
remainder interest being contributed to Y University. The pooled income
fund assigns an initial value of $100 to each unit of participation in
the fund, and under the governing instruments A receives 200 units, and
B receives 100 units, in the fund. On October 1, 1970, which is a
determination date, C transfers property to the fund with a fair market
value of $12,000, retaining in himself for life an income interest in
such property and contributing the remainder interest to Y University.
The fair market value of the property in the fund at the time of C's
transfer is $36,000. The fair market value of A's and B's units at the
time of such transfer is $120 each ($36,000/300). By reason of his
transfer of property C is assigned 100 units of participation in the
fund ($12,000/$120).
Example 2. Assume that the pooled income fund in example 1 earns
$2,600 for its taxable year ending June 30, 1971, and there are no
further contributions of property to the fund in such year. Further
assume $300 is earned in the first quarter ending September 30, 1970.
Therefore, the fund earns $1 per unit for the first quarter ($300
divided by 300 units outstanding) and $5.75 per unit for the remainder
of the taxable year ( [$2,600-$300] divided by 400 units outstanding).
If the fund distributes its income for the year based on its actual
earnings per quarter, the income must be distributed as follows:
Beneficiary | Share of income |
A | $1,350 ( [200 x $1]+[200 x $5.75] ) |
B | $675 ( [100 x $1]+[100 x $5.75] ) |
C | $575 (100 x $5.75) |
Example 3. (a) On July 1, 1970, A and B transfer separate properties
with a fair market value of $10,000 and $20,000, respectively, to a
newly created pooled income fund which is maintained by X University and
uses as its taxable year the fiscal year ending June 30. A and B each
retain in themselves an income interest for life in such property, the
remainder interest being contributed to X University. The governing
instrument provides that each unit of participation in the fund shall
have a value of not more than its initial fair market value; the
instrument also provides that the income allocable to appreciation in
the fair market value of such unit (to the extent in excess of its
initial fair market value) at the end of each quarter of the fiscal year
is to be distributed currently to X University. On October 1, 1970,
which is a determination date, C contributes to the fund property with a
fair market value of $60,000 and retains in himself an income interest
for life in such property, the remainder interest being contributed to X
University. The initial fair market value of the units assigned to A, B,
and C is $100. A, B, and C's units of participation are as follows:
Beneficiary | Units of participation |
A | 100 ($10,000 divided by $100) |
B | 200 ($20,000 divided by $100) |
C | 100 ($10,000 divided by $100) |
(b) The fair market value of the property in the fund at the time of
C's contribution is $40,000. Assuming the fair market value of the
property in the fund is $100,000 on December 31, 1970, and that the
income of the fund for the second quarter ending December 31, 1970, is
$2,000, the income is shared by the income beneficiaries and X
University as follows:
Beneficiary | Allocation of income |
A, B, and C | 90% ($90,000 divided by $100,000) |
X University | 10% ($10,000 divided by $100,000) |
(c) For the quarter ending December 31, 1970, each unit of
participation is allocated $2 (90 percent x $2,000 divided by 900) of
the income earned for that quarter. A, B, C, and X University share in
the income as follows:
Beneficiary | Share of income |
A | $200 (100 x $2) |
B | $400 (200 x $2) |
C | $1,200 (600 x $2) |
X University | $200 (10% x $2,000) |
[Jan. 2, 2004]
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