(a) IN GENERAL.
No deduction is allowed under section 170 for the fair market value of
a charitable contribution of any interest in property which
is less than the donor's entire interest in the property and which is
transferred in trust unless the transfer meets the requirements of
paragraph (b) or (c) of this section. If the donor's entire interest
in the property is transferred in trust and is contributed to a
charitable organization described in section 170(c), a deduction is
allowed under section 170. Thus, if on July 1, 1972, property is
transferred in trust with the requirement that the income of the
trust be paid for a term of 20 years to a church and thereafter the
remainder be paid to an educational organization described in section170(b)(1)(A),
a deduction is allowed for the value of such property.See section 170(f)(2) and (3)(B),
and paragraph (b)(1) of Section 1.170A-7.
(2) A deduction is allowed without regard to this section 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 section 170(f)(2), the deduction will not be allowed. Thus,
for example, assume that a taxpayer desires to
contribute to a charitable organization the reversionary interest in
certain stocks and bonds which he owns. If the taxpayer transfers
such property in trust with the requirement that the income of the
trust be paid to his son for life and that the reversionary interest
be paid to himself and immediately after creating the trust
contributes the reversionary interest to a charitable organization,
no deduction will be allowed under section 170 for the contribution
of the taxpayer's entire interest consisting of the reversionary
interest in the trust.
(b) CHARITABLE CONTRIBUTION OF A
REMAINDER INTEREST IN TRUST--
(1) IN GENERAL. No deduction is allowed under section 170 for the
fair market value of a charitable contribution of a remainder
interest in property which is less than the donor's entire interest
in the property and which the donor transfers in trust unless the
trust is:
(i) A pooled income fund described in section 642(c)(5) and
Section 1.642(c)-5,
(ii) A charitable remainder annuity trust described in section
664(d)(1) and Section 1.664-2, or
(iii) A charitable remainder unitrust described in section
664(d)(2) and Section 1.664-3.
(2) VALUE OF A REMAINDER INTEREST. The fair market value of a
remainder interest in a pooled income fund shall be computed under
Section 1.642(c)-6. The fair market value of a remainder interest in
a charitable remainder annuity trust shall be computed under Section
1.664-2. The fair market value of a remainder interest in a
charitable remainder unitrust shall be computed under Section 1.664-
4. However, in some cases a reduction in the amount of a charitable
contribution of the remainder interest may be required. See section
170(e) and Section 1.170A-4.
(c) CHARITABLE CONTRIBUTION OF
AN INCOME INTEREST IN TRUST--
(1) IN GENERAL. No deduction is allowed under section 170 for the fair
market value of a charitable contribution of an income interest
in property which is less than the donor's entire interest in the
property and which the donor transfers in trust unless the income
interest is either a guaranteed annuity interest or a unitrust
interest, as defined in paragraph (c)(2) of this section, and the
grantor is treated as the owner of such interest for purposes of
applying section 671, relating to grantors and others treated as
substantial owners. See section 4947(a)(2) for the application to
such income interests in trust of the provisions relating to private
foundations and section 508(e) for rules relating to provisions
required in the governing instruments.
(2) DEFINITIONS. For purposes of this paragraph:
(i) GUARANTEED ANNUITY INTEREST.(A) An
income interest is a "guaranteed annuity interest"
only if it is an irrevocable right pursuant to the
governing instrument of the trust to receive a guaranteed
annuity. A guaranteed annuity is an arrangement under which
a determinable amount is paid periodically, but not less often
than annually, for a specified term of years or for
the life or lives of certain individuals, each of whom must be
living at the date of transfer and can be ascertained at
such date. Only one or more of the following individuals may
be used as measuring lives: the donor, the donor's
spouse, and an individual who, with respect to all remainder
beneficiaries (other than charitable organizations described in
section 170, 2055, or 2522), is either a lineal ancestor or the
spouse of a lineal ancestor of those beneficiaries. A trust will satisfy the
requirement that all noncharitable remainder beneficiaries
are lineal descendants of the individual who is the
measuring life, or that individual's spouse, if there is
less than a 15% probability that individuals who are not
lineal descendants will receive any trust corpus. This
probability must be computed, based on the current
applicable Life Table contained in Sec. 20.2031-7, at the
time property is transferred to the trust taking into
account the interests of all primary and contingent
remainder beneficiaries who are living at that time. An
interest payable for a specified term of years can qualify
as a guaranteed annuity interest even if the governing
instrument contains a savings clause intended to ensure
compliance with a rule against perpetuities. The savings
clause must utilize a period for vesting of 21 years after
the deaths of measuring lives who are selected to maximize,
rather than limit, the term of the trust. The rule in this
paragraph that a charitable interest may be payable for the
life or lives of only certain specified individuals does
not apply in the case of a charitable guaranteed annuity interest
payable under a charitable remainder trust described in section 664.
An amount is determinable if the exact amount which must be paid under
the conditions specified in the governing instrument of the trust can be
ascertained as of the date of transfer. For example, the
amount to be paid may be a stated sum for a term of years,
or for the life of the donor, at the expiration of which it may
be changed by a specified amount, but it may not be
redetermined by reference to a fluctuating index such as the
cost of living index. In further illustration, the
amount to be paid may be expressed in terms of a fraction
or percentage of the cost of living index on the date of transfer.
(B) An income interest is a guaranteed annuity interest
only if it is a guaranteed annuity interest in every
respect. For example, if the income interest is the right
to receive from a trust each year a payment equal to the
lesser of a sum certain or a fixed percentage of the net
fair market value of the trust assets, determined annually,
such interest is not a guaranteed annuity interest.
(C) Where a charitable interest is in the form of a
guaranteed annuity interest, the governing instrument of
the trust may provide that income of the trust which is in
excess of the amount required to pay the guaranteed annuity
interest shall be paid to or for the use of a charitable
organization. Nevertheless, the amount of the deduction
under section 170(f)(2)(B) shall be limited to the fair
market value of the guaranteed annuity interest as
determined under paragraph (c)(3) of this section. For a
rule relating to treatment by the grantor of any
contribution made by the trust in excess of the amount
required to pay the guaranteed annuity interest, see
paragraph (d)(2)(ii) of this section.
(D) If the present value on the date of transfer of all the
income interests for a charitable purpose exceeds 60
percent of the aggregate fair market value of all amounts in
the trust (after the payment of liabilities), the income
interest will not be considered a guaranteed annuity
interest unless the governing instrument of the trust
prohibits both the acquisition and the retention of assets
which would give rise to a tax under section 4944 if the
trustee had acquired such assets. The requirement in this
subdivision (D) for a prohibition in the governing
instrument against the retention of assets which would give
rise to a tax under section 4944 if the trustee had
acquired the assets shall not apply to a transfer in trust
made on or before May 21, 1972.
(E) An income interest consisting of an annuity transferred
in trust after May 21, 1972, will not be considered a
guaranteed annuity interest if any amount other than an
amount in payment of a guaranteed annuity interest may be
paid by the trust for a private purpose before the
expiration of all the income interests for a charitable
purpose, unless such amount for a private purpose is paid
from a group of assets which, pursuant to the governing
instrument of the trust, are devoted exclusively to private
purposes and to which section 4947(a)(2) is inapplicable by
reason of section 4947(a)(2)(B). The exception in the
immediately preceding sentence with respect to any
guaranteed annuity for a private purpose shall apply only
if the obligation to pay the annuity for a charitable purpose
begins as of the date of creation of the trust and the obligation
to pay the guaranteed annuity for a private purpose does not precede
in point of time the obligation to pay the annuity for a charitable
purpose and only if the governing instrument of the trust does not provide for any
preference or priority in respect of any payment of the
guaranteed annuity for a private purpose as opposed to any
payment of any annuity for a charitable purpose. For
purposes of this subdivision (E), an amount is not paid for
a private purpose if it is paid for an adequate and full
consideration in money or money's worth. See Section
53.4947-1(c) of this chapter (Foundation Excise Tax Regulations)
for rules relating to the inapplicability of section 4947(a)(2)
to segregated amounts in a split-interest trust.
EXAMPLE. In 1975, E transfers $75,000 in trust with
the requirement that an annuity of $5,000 a year,
payable annually at the end of each year, be paid to
B, an individual, for a period of 5 years and
thereafter an annuity of $5,000 a year, payable
annually at the end of each year, be paid to M Charity
for a period of 5 years. The remainder is to be paid
to C, an individual. No deduction is allowed under
subparagraph (1) of this paragraph with respect to the
charitable annuity because it is not a "guaranteed annuity
interest" within the meaning of this subdivision.
(F) For rules relating to certain governing instrument
requirements and to the imposition of certain excise taxes
where the guaranteed annuity interest is in trust and for rules governing payment of private income interests by a split-interest trust, see section 4947(a)(2) and (b)(3)(A),
and the regulations thereunder.
(ii) UNITRUST INTEREST. (A) An income interest is a "unitrust interest" only if it
is an irrevocable right pursuant to the governing
instrument of the trust to receive payment, not less often than annually of a fixed percentage of the net fair market
value of the trust assets, determined annually. In
computing the net fair market value of the trust assets,
all assets and liabilities shall be taken into account
without regard to whether particular items are taken into
account in determining the income of the trust. The net
fair market value of the trust assets may be determined on
any one date during the year or by taking the average of
valuations made on more than one date during the year,
provided that the same valuation date or dates and valuation methods are used each year. Where the governing instrument of the trust does not specify the valuation date or dates, the trustee shall select such date or dates and shall indicate his selection on the first return on Form1041 which the trust is required to file. Payments under a
unitrust interest may be paid for a specified term of years or for the life or lives of certain individuals, each of
whom must be living at the date of transfer and can be
ascertained at such date. Only one or more of the following
individuals may be used as measuring lives: the donor, the donor's spouse, and an individual who, with respect to all
remainder beneficiaries (other than charitable
organizations described in section 170, 2055, or 2522), is
either a lineal ancestor or the spouse of a lineal ancestor
of those beneficiaries. A trust will satisfy the
requirement that all noncharitable remainder beneficiaries
are lineal descendants of the individual who is the
measuring life, or that individual's spouse, if there is
less than a 15% probability that individuals who are not
lineal descendants will receive any trust corpus. This
probability must be computed, based on the current applicable Life Table contained in Sec. 20.2031-7, at the time property is transferred to the trust taking into account the interests of all primary and contingent remainder beneficiaries who are living at that time. An
interest payable for a specified term of years can qualify
as a unitrust interest even if the governing instrument contains a savings clause intended to ensure compliance
with a rule against perpetuities. The savings clause must
utilize a period for vesting of 21 years after the deaths
of measuring lives who are selected to maximize, rather
than limit, the term of the trust. The rule in this
paragraph that a charitable interest may be payable for the
life or lives of only certain specified individuals does
not apply in the case of a charitable unitrust interest
payable under a charitable remainder trust described in
section 664.
(B) An income interest is a unitrust interest only if it is
a unitrust interest in every respect. For example, if the
income interest is the right to receive from a trust each
year a payment equal to the lesser of a sum certain or a
fixed percentage of the net fair market value of the trust
assets, determined annually, such interest is not a
unitrust interest.
(C) Where a charitable interest is in the form of a
unitrust interest, the governing instrument of the trust
may provide that income of the trust which is in excess of
the amount required to pay the unitrust interest shall be
paid to or for the use of a charitable organization.
Nevertheless, the amount of the deduction under section
170(f)(2)(B) shall be limited to the fair market value of
the unitrust interest as determined under paragraph (c)(3)
of this section. For a rule relating to treatment by the
grantor of any contribution made by the trust in excess of
the amount required to pay the unitrust interest, see
paragraph (d)(2)(ii) of this section.
(D) An income interest in the form of a unitrust interest
will not be considered a unitrust interest if any amount
other than an amount in payment of a unitrust interest may
be paid by the trust for a private purpose before the
expiration of all the income interests for a charitable
purpose, unless such amount for a private purpose is paid
from a group of assets which, pursuant to the governing
instrument of the trust, are devoted exclusively to private purposes and to which section 4947(a)(2) is inapplicable by
reason of section 4947(a)(2)(B). The exception in the
immediately preceding sentence with respect to any unitrust
interest for a private purpose shall apply only if the
obligation to pay the unitrust interest for a charitable
purpose begins as of the date of creation of the trust and
the obligation to pay the unitrust interest for a private
purpose does not precede in point of time the obligation to
pay the unitrust interest for a charitable purpose and only
if the governing instrument of the trust does not provide
for any preference or priority in respect of any payment of
the unitrust interest for a private purpose as opposed to
any payments of any unitrust interest for a charitable
purpose. For purposes of this subdivision (D), an amount is
not paid for a private purpose if it is paid for an
adequate and full consideration in money or money's worth.
See Section 53.4947-1(c) of this chapter (Foundation Excise
Tax Regulations) for rules relating to the inapplicability
of section 4947(a)(2) to segregated amounts in a split-
interest trust.
(E) For rules relating to certain governing instrument requirements and to the imposition of certain excise taxes
where the unitrust interest is in trust and for rules
governing payment of private income interests by a split-
interest trust, see section 4947(a)(2) and (b)(3)(A), and
the regulations thereunder.
(3) VALUATION OF INCOME INTEREST.(i) The deduction allowed by section 170(f)(2)(B) for a
charitable contribution of a guaranteed annuity interest is
limited to the fair market value of such interest on the date of
contribution, as computed under Section 20.2031-7 or, for
certain prior periods, 20.2031-7A of this chapter (Estate Tax
Regulations).
(ii) The deduction allowed under section 170(f)(2)(B) for a
charitable contribution of a unitrust interest is limited to the
fair market value of the unitrust interest on the date of
contribution. The fair market value of the unitrust interest
shall be determined by subtracting the present value of all
interests in the transferred property other than the unitrust
interest from the fair market value of the transferred property.
(iii) If by reason of all the conditions and circumstances
surrounding a transfer of an income interest in property in
trust it appears that the charity may not receive the beneficial
enjoyment of the interest, a deduction will be allowed under
paragraph (c)(1) of this section only for the minimum amount it
is evident the charity will receive. The application of this
subdivision may be illustrated by the following examples:
EXAMPLE 1. In 1972, B transfers $20,000 in trust with the
requirement that M Church be paid a guaranteed annuity
interest (as defined in subparagraph (2)(i) of this paragraph) of $4,000, payable annually at the end of each
year for 9 years, and that the residue revert to himself.Since the fair market value of an annuity of $4,000 a year
for a period of 9 years, as determined under section
20.2031-7A(c) of this chapter, is $27,206.80 ($4,000 x
6.8017), it appears that M will not receive the beneficial
enjoyment of the income interest. Accordingly, even though
B is treated as the owner of the trust under section 673,
he is allowed a deduction under subparagraph (1) of this
paragraph for only $20,000, which is the minimum amount it
is evident M will receive.
EXAMPLE 2. In 1975, C transfers $40,000 in trust with the
requirement that D, an individual, and X Charity be paid
simultaneously guaranteed annuity interests (as defined in
subparagraph (2)(i) of this paragraph) of $5,000 a year each, payable annually at the end of each year, for a
period of 5 years and that the remainder be paid to C's
children. The fair market value of two annuities of $5,000
each a year for a period of 5 years is $42,124 ([$5,000 x
4.2124] x 2), as determined under section 20.2031-7A(c)
of this chapter. The trust instrument provides that in the
event the trust fund is insufficient to pay both annuities
in a given year, the trust fund will be evenly divided
between the charitable and private annuitants. The
deduction under subparagraph (1) of this paragraph with
respect to the charitable annuity will be limited to
$20,000, which is the minimum amount it is evident X will receive.
EXAMPLE 3. In 1975, D transfers $65,000 in trust with the
requirement that a guaranteed annuity interest (as defined
in subparagraph (2)(i) of this paragraph) of $5,000 a year,
payable annually at the end of each year, be paid to Y
Charity for a period of 10 years and that a guaranteed
annuity interest (as defined in subparagraph (2)(i) of this
paragraph) of $5,000 a year, payable annually at the end of
each year, be paid to W, his wife, aged 62, for 10 years or
until her prior death. The annuities are to be paid
simultaneously, and the remainder is to be paid to D's
children. The fair market value of the private annuity is section 20.2031-7A(c) of this chapter and by the use of
factors involving one life and a term of years as published
in Publication 723A (12-70). The fair market value of the charitable annuity is $36,800.50 ($5,000 x 7.3601), as determined under section 20.2031-7A(c) of this chapter. It is not evident from the governing instrument of the trust or from local law that the trustee would be required to apportion the trust fund between the wife and charity in
the event the fund were insufficient to pay both annuities
in a given year. Accordingly, the deduction under
subparagraph (1) of this paragraph with respect to the
charitable annuity will be limited to $31,123 ($65,000 less$33,877 [the value of the private annuity]), which is the
minimum amount it is evident Y will receive.
(iv) See paragraph (b)(1) of Section 1.170A-4 for rule that the
term "ordinary income property" for purposes of section 170(e)
does not include an income interest in respect of which a deduction is allowed under section 170(f)(2)(B) and this
paragraph.
(4) RECAPTURE UPON TERMINATION OF TREATMENT AS OWNER. If for and reason the donor of an income interest in property ceases at any time
before the termination of such interest to be treated as the owner of
such interest for purposes of applying section 671, as for example,
where he dies before the termination of such interest, he shall for
purposes of this chapter be considered as having received, on the
date he ceases to be so treated, an amount of income equal to (i) the
amount of any deduction he was allowed under section 170 for the
contribution of such interest reduced by (ii) the discounted value of
all amounts which were required to be, and actually were, paid with
respect to such interest under the terms of trust to the charitable organization before the time at which he ceases to be treated as the owner of the interest. The discounted value of the amounts described
in subdivision (ii) of this subparagraph shall be computed by treating each such amount as a contribution of a remainder interest
after a term of years and valuing such amount as of the date of
contribution of the income interest by the donor, such value to be
determined under Section 20.2031-7 of this chapter consistently with the manner in which the fair market value of the income interest was
determined pursuant to subparagraph (3)(i) of this paragraph. The
application of this subparagraph will not be construed to disallow a
deduction to the trust for amounts paid by the trust to the
charitable organization after the time at which the donor ceased to
be treated as the owner of the trust.
(5) ILLUSTRATIONS. The application of this paragraph may be
illustrated by the following examples:
EXAMPLE 1. On January 1, 1971, A contributes to a church in
trust a 9-year irrevocable income interest in property. Both A
and the trust report income on a calendar year basis. The fair market value of the property placed in trust is $10,000. The
trust instrument provides that the church will receive an
annuity of $500, payable annually at the end of each year for 9years. The income interest is a guaranteed annuity interest as
defined in subparagraph (2)(i) of this paragraph; upon
termination of such interest the residue of the trust is to
revert to A. By reference to section 20.2031-7A(c) of this
chapter, it is found that the figure in column (2) opposite 9
years is 6.8017. The present value of the annuity is therefore
$3,400.85 ($500 x 6.8017). The present value of the income
interest and A's charitable contribution for 1971 is $3,400.85.
EXAMPLE 2. (a) On January 1, 1971, B contributes to a church in trust a 9-year irrevocable income interest in property. Both B
and the trust report income on a calendar year basis. The
fair market value of the property placed in trust is$10,000. The trust instrument provides that the trust will
pay to the church at the end of each year for 9 years 5
percent of the fair market value of all property in the
trust at the beginning of the year. The income interest is
a unitrust interest as defined in subparagraph (2)(ii) of
this paragraph; upon termination of such interest the
residue of the trust is to revert to B.
(b) The section 7520 rate at the time of the transfer was
6.0 percent. By reference to Table F(6.0) in Sec. 1.664-
4(e)(6), the adjusted payout rate is 4.717% (5% x
0.943396). The present value of the reversion is $6,473.75,
computed by reference to Table D in Sec. 1.664-4(e)(6), as
follows:
Factor at 4.6 percent for 9 years | 0.654539 |
Factor at 4.8 percent for 9 years | 0.642292 |
Difference | 0.012247 |
Interpolation adjustment: |
4.717%-4.6% = x |
x 0.2% |
x = 0.007164 |
Factor at 4.6 percent for 9 years | 0.654539 |
Less: Interpolation adjustment | 0.007164 |
Interpolated factor | 0.647375 |
Present value of reversion ($10,000 x 0.647375) | $6,473.75 |
EXAMPLE 3. (a) On January 1, 1971, C contributes to a church in trust
a 9-year irrevocable income interest in property. Both C
and the trust report income on a calendar year basis. The
fair market value of the property placed in trust is
$10,000. The trust instrument provides that the church will
receive an annuity of $500, payable annually at the end of
each year for 9 years. The income interest is a guaranteed
annuity interest as defined in subparagraph (2)(i) of this paragraph;
upon termination of such interest the residue of
the trust is to revert to C. C's charitable contribution for 1971
is $3,400.85, determined as provided in example (1).
The trust earns income of $600 in 1971, $400 in 1972,
and $500 in 1973, all of which is taxable to C under
section 671. The church is paid $500 at the end of 1971,1972,
and 1973, respectively. On December 31, 1973, C dies and ceases
to be treated as the owner of the income interest under section 673.
(b) Pursuant to subparagraph (4) of this paragraph, the discounted value as of January 1, 1971, of the amounts paid to the church by the trust is $1,336.51, determined by
reference to column (4) of Table B in section 20.2031-7A(c)
of this chapter, as follows:
Annuity Payment Date |
Annuity Amount Paid |
Years From 1/1/1971 to Pament Date |
Discount Factor |
Discounted Value as of 1/1/1971 |
12/31/1971 | $500 | 1 | 0.943396 | $471.70 |
12/31/1972 | $500 | 2 | 0.889996 | $445.00 |
12/31/1973 | $500 | 3 | 0.839619 | $419.81 |
Total discounted value | $1,336.51 |
(c) Pursuant to subparagraph (4) of this paragraph, there
must be included in C's gross income for 1973 the amount of
$2,064.34 ($3,400.85 less $1,336.51).
(d) For deduction by the trust for amounts paid to the
church after December 31, 1973, see section 642(c)(1) and
the regulations thereunder.
(d) DENIAL OF DEDUCTION FOR CERTAIN CONTRIBUTIONS BY A TRUST.
(1) If by reason of section 170(f)(2)(B) and paragraph (c) of this section a charitable contributions deduction is allowed under section170 for the fair market value of an income interest transferred intrust, neither the grantor of the income interest, the trust, nor any
other person shall be allowed a deduction under section 170 or any
other section for the amount of any charitable contribution made by
the trust with respect to, or in fulfillment of, such income
interest.
(2) Section 170(f)(2)(C) and subparagraph (1) of this paragraph shall not be construed, however, to:
(i) Disallow a deduction to the trust, pursuant to section
642(c)(1) and the regulations thereunder, for amounts paid by
the trust after the grantor ceases to be treated as the owner of
the income interest for purposes of applying section 671 and
which are not taken into account in determining the amount of
recapture under paragraph (c)(4) of this section, or
(ii) Disallow a deduction to the grantor under section 671 and
Section 1.671-2(c) for a charitable contribution made by the
trust in excess of the contribution required to be made by the
trust under the terms of the trust instrument with respect to,
or in fulfillment of, the income interest.
(3) Although a deduction for the fair market value of an income
interest in property which is less than the donor's entire interest
in the property and which the donor transfers in trust is disallowed under section 170 because such interest is not a guaranteed annuity interest, or a unitrust interest, as defined in paragraph (c)(2) of
this section, the donor may be entitled to a deduction under section671 and Section 1.671-2(c) for any charitable contributions made by
the trust if he is treated as the owner of such interest for purposes
of applying section 671.
(e) EFFECTIVE DATE. This section applies only to transfers in trust made
after July 31, 1969. In addition, the rule in paragraphs (c)(2)(i)(A) and
(ii)(A) of this section that guaranteed annuity interests and unitrust
interests, respectively, may be payable for a specified term of years or
for the life or lives of only certain individuals applies to transfers
made on or after April 4, 2000. If a transfer is made to a trust on or
after April 4, 2000 that uses an individual other than one permitted in
paragraphs (c)(2)(i)(A) and (ii)(A) of this section, the trust may be
reformed to satisfy this rule. As an alternative to reformation,
rescission may be available for a transfer made on or before March 6,
2001. See Sec. 25.2522(c)-3(e) of this chapter for the requirements
concerning reformation or possible rescission of these interests.
[Jul. 7, 2003]
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