Rev. Rul. 82-38, 1982-1 C.B. 96, 1982-11 I.R.B. 6.
Internal Revenue Service Revenue Ruling
POOLED INCOME FUNDS; SAMPLE PROVISIONS FOR GOVERNING INSTRUMENTS
Published: March 15, 1982
SECTION 642.--SPECIAL RULES FOR CREDITS AND DEDUCTIONS, 26 CFR 1.642(c)-5:
Definition of pooled income fund
Pooled income funds; sample provisions for governing instruments. Sample provisions for inclusion in a Declaration of Trust and an Instrument of Transfer that may be used to satisfy section 642(c)(5) of the Code are set forth to serve as a guide in developing governing instruments for pooled income funds. Rev. Rul. 72-196 amplified, clarified, and superseded.
SECTION 1. PURPOSE
The purpose of this revenue ruling is to amplify and clarify the provisions in Rev. Rul. 72-196, 1972-1 C.B. 194. This revenue ruling sets forth illustrative sample provisions for inclusion in a Declaration of Trust and an Instrument of Transfer that may be used to satisfy the requirements of section 642(c)(5) of the Internal Revenue Code with respect to a pooled income fund. Except where the context indicates otherwise, the sample provisions set forth in sections 3 through 10 are based on the following assumptions: (1) Y Pooled Income Fund is established by the Declaration of Trust, (2) property is transferred to the fund pursuant to an Instrument of Transfer in which an income interest is retained and created for the lives of the donor and the donor's spouse and an irrevocable remainder interest in the property is contributed to the Y Public Charity, and (3) the donor has retained the power to terminate by will the income interest for the life of the donor's spouse.
SEC. 2. BACKGROUND AND DEFINITIONS
.01 Section 1.642(c)-5(b) of the Income Tax Regulations sets forth specific requirements for qualification of a pooled income fund.
.02 By virtue of section 4947(a)(2) of the Code, a pooled income fund is subject to the governing instrument requirements of section 508(e). For sample provisions of governing instruments meeting the requirements of section 508(e), see Rev. Rul. 70-270, 1970-1 C.B. 135, but note the exception contained in section 4947(b)(3)(B) with respect to a pooled income fund. See also Rev. Rul. 75-38, 1975-1 C.B. 161, for a list of states that have enacted legislation pursuant to which the governing instruments of private foundations under the jurisdiction of such states are considered to have been amended as required by section 508(e).
.03 Section 1.642(c)-5(a)(5)(iii) of the regulations provides that the term 'governing instrument' means either the governing plan (referred to in this revenue ruling as the Declaration of Trust) under which the pooled income fund is established and administered or the Instrument of Transfer, as the context requires.
.04 Section 1.642(c)-5(a)(5)(iv) of the regulations provides that the term 'public charity' means an organization described in clauses (i) to (vi) of section 170(b)(1)(A) of the Code. If an organization is described in clauses (i) to (vi) of section 170(b)(1)(A) and is also described in clause (viii) of that section, it will be treated as a public charity.
SEC. 3. CONTRIBUTION OF REMAINDER INTEREST TO PUBLIC CHARITY
.01 Each donor must transfer property to a pooled income fund and contribute an irrevocable remainder interest in that property to or for the use of a public charity. A contingent remainder interest is not treated as an irrevocable remainder interest. (See section 1.642(c)-5(b)(1) of the regulations.)
.02 The following sample provision for a Declaration of Trust satisfies the requirement described in Sec. 3.01:
Each donor transferring property to Y Pooled Income Fund shall contribute an irrevocable remainder interest in that property to or for the use of Y Public Charity.
.03 The following sample provision for an Instrument of Transfer satisfies the requirement described in Sec. 3.01:
Upon the death of either the Donor or the Donor's spouse, whichever is later, or upon the death of the Donor if the Donor exercises the power to terminate the life income interest upon the Donor's death, the Trustee of Y Pooled Income Fund 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 and transfer it to Y Public Charity.
SEC. 4. CREATION OF LIFE INCOME INTEREST
.01 Each donor must retain for the donor's life an income interest in the property transferred to the pooled income fund, or create an income interest in the 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. 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 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. No charitable contributions deduction is allowed to the donor for the value of an income interest to which the public charity is a beneficiary or for the amount of any income paid by the fund to the public charity. (See section 1.642(c)-5(b)(2) of the regulations.)
.02 The following sample provision for a Declaration of Trust satisfies the requirements described in Sec. 4.01:
Each donor transferring property to Y Pooled Income Fund shall retain for the donor's life an income interest in the property transferred, or create an income interest in the property for the life of one or more named beneficiaries, each of whom must be living at the time of the transfer of property to the Fund by the donor. Every income interest retained or created in property transferred to the Fund shall be represented by units of participation in the Fund. If more than one beneficiary of the income interest is named, the named beneficiaries may enjoy their shares of income concurrently, consecutively, or both concurrently and consecutively. Y Public Charity may also be designated as one of the beneficiaries of the 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 to an income beneficiary under the terms of the Instrument of Transfer is contributed to, and within the taxable year of the Fund in which it is received is paid to, the Y Public Charity.
.03 If a donor created an income interest to be enjoyed consecutively only, the following sample provision for an Instrument of Transfer will satisfy the requirements described in Sec. 4.01:
The Donor retains for the Donor's life an income interest in the property transferred to Y Pooled Income Fund. In the event that Donor's spouse (insert name) survives the Donor, there is hereby created an income interest in such property to commence on the Donor's death for the rest of the spouse's life. However, the Donor reserves the right to appoint and direct by will that the life income interest created for the Donor's spouse in such property shall terminate upon the Donor's death.
.04 If a donor creates an income interest to be enjoyed concurrently and consecutively, the following sample provision for an Instrument of Transfer will satisfy the requirements described in Sec. 4.01:
The Donor retains and creates for the Donor and the Donor's spouse (insert name) during their joint lives an income interest in the property transferred to Y Pooled Income Fund. During their joint lives the Donor's share of income will be ___ percent and the spouse's share will be ___ percent. Upon the death of the first to die, the survivor shall receive the entire income interest for the rest of his or her life. However, the Donor reserves the right to appoint and direct by will that the life income interest created for the Donor's spouse in the property shall terminate upon the Donor's death.
.05 If two donors transfer jointly owned property (whether their interests are equal or unequal) to a pooled income fund and if either or both donors retain the power, exercisable only by will, to revoke or terminate the income interest of any designated beneficiary, then each donor's power may extend only over that donor's own interest in the property.
.06 If A and B are donors who transfer jointly owned property and retain an income interest for themselves, the following sample provision for an Instrument of Transfer satisfies the requirements described in Secs. 4.01 and 4.05:
The Donors retain for their joint lives an income interest in the property transferred to Y Pooled Income Fund. (Insert Donor A's name) share of income will be ___ percent and (insert Donor B's name) share of income will be ___ percent. Upon the death of the first to die, the survivor shall receive the entire income interest for the rest of the survivor's life. However, each Donor retains the power, exercisable only by will, to revoke or terminate the interest of the survivor created in the deceased Donor's interest in the property.
SEC. 5. COMMINGLING OF PROPERTY REQUIRED
.01 The property transferred to a pooled income fund by a donor must be commingled with, and invested or reinvested with, other property transferred to the fund by other donors satisfying the requirements described in Secs. 3.01 and 4.01. The governing instrument must contain a provision requiring compliance with this requirement on commingling and investing or reinvesting of property. A pooled income fund must not include property transferred nder arrangements other than those specified in section 642(c)(5) of the Code and section 1.642(c)-5(b)(3) of the regulations. A pooled income fund shall not be disqualified if any portion of its properties is invested or reinvested jointly with other properties, not a part of the pooled income fund, that are held by, or for the use of, the public charity that maintains the fund. (See section 1.642(c)-5(b)(3) of the regulations.)
.02 The following sample provision for a Declaration of Trust satisfies the requirement described in Sec. 5.01:
The property transferred to Y Pooled Income 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 this instrument and of section 642(c)(5)(A) of the Code or corresponding provision of any subsequent federal tax law. The Fund shall not include property transferred under arrangements other than those specified in this instrument and section 642(c)(5) or corresponding provision of any subsequent federal tax law. All or any portion of the Fund may, however, be invested or reinvested jointly with other properties, not a part of the Fund, that are held by, or for the use of, Y Public Charity. When joint investment or reinvestment occurs, detailed accounting records shall be maintained by the Trustee of the Fund specifically identifying the portion of the total fund that is owned by the Fund and the income earned by, and attributable to, that portion.
.03 If a bank is the trustee of more than one pooled income fund, section 1.642(c)-5(b)(3) of the regulations provides that the trustee may maintain a common trust fund to which section 584 of the Code applies for the collective investment and reinvestment of moneys from the pooled income funds.
.04 If a bank is the trustee of the pooled income fund, the following sample provision for a Declaration of Trust satisfies the requirement described in Sec. 5.03:
All or any portion of the Fund may be invested or reinvested in a common trust fund, maintained by the Trustee, to which section 584 of the Code applies.
.05 A will, trust agreement, or other instrument may be an Instrument of Transfer if it incorporates the Declaration of Trust by reference and is consistent with the provisions of the Declaration of Trust and section 642(c)(5) of the Code.
.06 The following sample provision for a Declaration of Trust satisfies the requirement described in Sec. 5.05:
This Declaration of Trust may be incorporated by reference in any will, trust agreement, or other instrument that is used to transfer property to Y Pooled Income Fund and to retain or create an income interest for the life of one or more named beneficiaries, each of whom is living at the time of transfer. If property is transferred by an instrument to the Y Pooled Income Fund and the instrument does not incorporate this Declaration of Trust by reference, then the Trustee may accept the property as long as it is not inconsistent with the instrument to hold, manage, and distribute the property according to the Declaration of Trust and section 642(c)(5) of the Code.
SEC. 6. PROHIBITION AGAINST EXEMPT SECURITIES
.01 A pooled income fund must not accept from a donor, or invest in, any securities whose income is exempt from federal income tax. The governing instrument of the pooled income fund must contain specific prohibitions against accepting or investing in exempt securities. (See section 1.642(c)-5(b)(4) of the regulations.)
.02 The following sample provision for a Declaration of Trust satisfies the requirement described in Sec. 6.01:
The property transferred to Y Pooled Income Fund by any donor shall not include any securities whose income is exempt from the taxes imposed by subtitle A of the Code or corresponding provision of any subsequent federal tax law, and the Trustee of the Fund shall not accept or invest in any such securities as part of the Fund.
SEC. 7. MAINTENANCE BY CHARITABLE ORGANIZATION REQUIRED
.01 The pooled income 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 if the public charity exercises control directly or indirectly over the pooled income fund. (See section 1.642(c)-5(b)(5) of the regulations.)
.02 The following sample provision for a Declaration of Trust satisfies the requirement described in Sec. 7.01:
Y Public Charity shall always maintain Y Pooled Income Fund or exercise control, directly or indirectly, over the Fund. The Charity retains the power to remove any Trustee or Trustees and to designate a new Trustee or Trustees.
SEC. 8. PROHIBITION AGAINST DONOR OR BENEFICIARY SERVING AS TRUSTEE
.01 A pooled income fund is prohibited 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 transferred) of an income interest in any property transferred to the fund. It is also required that the governing instrument contain this prohibition. The fact that the 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 complying with this prohibition. (See section 1.642(c)-5(b)(6) of the regulations.)
.02 The following sample provision for a Declaration of Trust satisfies the requirement described in Sec. 8.01:
Y Pooled Income Fund shall not have as a Trustee a donor to the Fund or a beneficiary (other than Y Public Charity) of an income interest in any property transferred to the Fund. No donor or beneficiary (other than the Charity) shall have, directly or indirectly, general responsibilities with respect to the Fund that are ordinarily exercised by a Trustee.
SEC. 9. ALLOCATION OF INCOME TO BENEFICIARY
.01 Sections 1.642(c)-5(b)(7) and 1.642(c)-5(c) of the regulations contain or pertain to the following requirements with respect to the income of a beneficiary of a pooled income fund:
(1) Each beneficiary entitled to income of any taxable year of the fund must receive the income in an amount determined by the rate of return earned by the fund for the year with respect to the beneficiary's income interest.
(2) On each transfer of property to the fund by a donor one or more units of participation in the fund must be assigned to the beneficiary or beneficiaries of the income interest in the property, determined by dividing the fair market value of the property by the fair market value of a unit of participation at the time of transfer.
(3) The fair market value of a unit of participation is determined by dividing the fair market value of all property in the fund by the number of units of participation in the fund at the time of the transfer.
(4) If a transfer of property to a fund occurs on other than a determination date, the number of units of participation assigned to the income interest in the property as of the date of transfer, 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, with appropriate adjustments on the next succeeding determination date.
(5) A determination date is each day of the taxable year of the fund on which there is a valuation of property in the fund. The property of the fund must be valued on the first day of every taxable year and on at least 3 other days within the taxable year. There must be no more than 3 calendar months between any two consecutive determination dates.
(6) The share of income allocated to each unit of participation is to 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 the year, with appropriate adjustment for units outstanding during only a part of the year.
(7) The governing instrument of the fund must 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.
(8) The governing instrument must provide that the income interest of any designated beneficiary must either be terminated with the last regular payment that was made before the death of the beneficiary or be prorated to the date of the beneficiary's death.
(9) The term 'income' has the same meaning as it does under section 643(b) of the Code and the regulations thereunder.
.02 The following sample provisions for a Declaration of Trust satisfy the requirements described in Sec. 9.01:
The taxable year of Y Pooled Income Fund shall be the calendar year. To each beneficiary entitled to income of any taxable year of the Fund, the Trustee of the Fund shall pay income in the amount determined by the rate of return earned by the Fund for the year with respect to the beneficiary's income interest. Payment must be made at least once in the taxable year in which the income is earned. Until the Trustee determines that payments shall be made more or less frequently or at other times, the Trustee shall make income payments to the beneficiary or beneficiaries entitled to them in four quarterly payments on or about March 31, June 30, September 30, and December 31, of each year. An adjusting payment, if necessary, will be made during the taxable year or within the first 65 days following its close to bring the total payment to the actual income to which the beneficiary or beneficiaries are entitled for that year.
On each transfer of property by a donor to the Fund, there shall be assigned to the beneficiary or beneficiaries of the income interest retained or created in the property the number of units of participation equal to the number obtained by dividing the fair market value of the property transferred by the fair market value of a unit in the Fund immediately before the transfer. The fair market value of a unit in the Fund immediately before the transfer shall be determined by dividing the fair market value of all property in the Fund at that time by the number of units them in the Fund. All units in the Fund shall always have equal value.
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 the property shall be determined by using the average fair market value of the property in the Fund immediately before the transfer, which shall be 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 the purpose of determining the average fair market value, the property transferred by the donor and any other property transferred to the Fund between the preceding and succeeding dates, or on such succeeding date, shall be excluded. The fair market value of a unit in the Fund immediately before the transfer shall be determined by dividing the average fair market value of the property in the Fund at that time by the number of units then in the Fund. Units of participation assigned to property transferred on other than a determination date shall be deemed to be assigned as of the date of transfer.
A determination date means each day within a taxable year of the Fund on which a valuation is made of the property in the Fund. The property of the Fund shall be valued on January 1, April 1, July 1, and October 1 of each year.
The amount of income allocated to each unit of participation in the Fund 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 the year, except that income shall be allocated to units outstanding during only part of the year by taking into consideration the period of time the units are outstanding during the year.
For purposes of this Fund, the term 'income' has the same meaning as it does under section 643(b) of the Code or corresponding provision of any subsequent federal tax law, and the regulations thereunder.
The income interest of any beneficiary of the Fund shall terminate with the last regular payment of income that was made before the death of the beneficiary. The Trustee of the Fund shall not be required to prorate any income payment to the date of the beneficiary's death.
SEC. 10. TERMINATION OF LIFE INCOME INTEREST
.01 Upon the termination of the income interest retained or created by any donor, the trustee of the pooled income fund must 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 must be either (1) its value as of the determination date next succeeding the termination of the income interest or (2) 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 that date. (See section 1.642(c)-5(b)(8) of the regulations.)
.02 The following sample provision for a Declaration of Trust satisfies the requirement described in Sec. 10.01:
Upon the termination of the income interest of any designated beneficiary or beneficiaries, the Trustee of Y Pooled Income Fund 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 that purpose shall be its value as of the date on which the last regular payment was made before the death of the beneficiary. The amount so severed from the Fund shall be paid to Y Public Charity.
.03 A donor may specify a purpose for which the amount severed from a pooled income fund is to be used, upon termination of an income interest of any designated beneficiary or beneficiaries, if the purpose is for the charitable use and purpose of the public charity to or for the use of which the remainder interest is contributed. This specification must not create a contingent remainder interest for the public charity.
.04 The following sample provision for an Instrument of Transfer satisfies the requirement of Sec. 10.03:
The amount severed from Y Pooled Income Fund upon the termination of the income interest of the designated beneficiaries shall be paid to Y Public Charity for the following charitable use and purpose of the Y Public Charity: _____. If it is not possible for Y Public Charity to use the severed amount for this specified purpose, then the severed amount will be used for the general purposes of Y Public Charity.
SEC. 11. MISCELLANEOUS
.01 The sample provisions in Sections 3 through 10 are set forth merely as a guide in developing governing instruments for specific pooled income funds and in no way preclude the use of other provisions conforming to the requirements of section 642(c)(5) of the Code and the regulations thereunder.
.02 Provisions corresponding to these sample provisions will be accepted by the Internal Revenue Service in the absence of any showing that they are not enforceable under applicable local law.
SEC. 12. RULINGS ISSUED BY THE NATIONAL OFFICE
Requests for rulings on declarations of trust and instruments of transfer should be submitted in compliance with the general procedures contained in Rev. Proc. 80-20, 1980-1 C.B. 633, pertaining to the issuance of rulings, and should be addressed to the Internal Revenue Service, Assistant Commissioner (Technical), Attention: T:FP:T, 1111 Constitution Avenue, N.W., Washington, D.C. 20224.
SEC. 13. EFFECT ON OTHER DOCUMENTS
Rev. Rul. 72-196 is amplified, clarified, and superseded.
Rev. Rul. 82-38, 1982-1 C.B. 96, 1982-11 I.R.B. 6.
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