Rev. Rul. 72-196, 1972-1 C.B. 194
Service Headnote
Sample provisions for inclusion in Declarations of Trust and Instruments 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.
Full Text
Rev. Rul. 72-196
Section 1.
The purpose of this Revenue Ruling is to set 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 of 1954 with respect to a pooled income fund. These sample provisions, which are set forth in sections 3 through 10, assume the establishment of the Y Pooled Income Fund by the Declaration of Trust and a transfer of property to such fund pursuant to an Instrument of Transfer in which an income interest is retained for the lives of the donor and his spouse and an irrevocable remainder interest in such property is contributed to the Y Public Charity. The donor has retained the power to terminate by will the income interest for the life of his spouse.
Sec. 2.
.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) of the Code. For sample provisions of governing instruments meeting the requirements of section 508(e), see Rev. Rul. 70-270, C.B. 1970-1, 135, but note exception contained in section 4947(b)(3)(B) of the Code with respect to a pooled income fund. See also Rev. Rul. 72-103, page 152, 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) of the Code.
.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.
Sec. 3.
.01 Section 1.642(c)-5(b)(1) of the regulations requires that each donor must transfer property to a pooled income fund and contribute an irrevocable remainder interest in such property to or for the use of a public charity. Under this provision, a contingent remainder interest is not treated as an irrevocable remainder interest.
.02 The following is a sample provision for inclusion in a Declaration of Trust which satisfies the requirement described in sec. 3.01:
Each donor transferring property to Y Pooled Income Fund shall contribute an irrevocable remainder interest in such property to or for the use of Y Public Charity.
.03 The following is a sample provision for inclusion in an Instrument of Transfer which satisfies the requirement described in sec. 3.01:
Upon the death of either the Donor or the Donor's wife, whichever is later, or upon the death of the Donor if the Donor exercises his power to terminate the life income interest upon his 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.
.01 Section 1.642(c)-5(b)(2) of the regulations requires that each donor must retain for himself for life an income interest in the property transferred to the pooled income 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. 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 of which the public charity is a beneficiary or for the amount of any income paid by the fund to such organization.
.02 The following is a sample provision for inclusion in a Declaration of Trust which satisfies the requirement described in sec. 4.01:
Each donor transferring property to Y Pooled Income Fund shall retain for himself for life an income interest in the property transferred, or create an income interest in such property for the life of one or more named beneficiaries, each of whom must be living at the time of the transfer of the property to the Fund by the donor. Such income interest shall be represented by units of participation in the Fund. In the event more than one beneficiary of the income interest is named, such 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, Y Public Charity.
.03 The following is a sample provision for inclusion in an Instrument of Transfer which satisfies the requirement described in sec. 4.01:
The Donor hereby retains for himself for and during his life an income interest in the property transferred to Y Pooled Income Fund. In the event that Donor's wife (insert name) survives the Donor, there is hereby retained and created an income interest in such property to commence on the Donor's death for the Donor's wife for and during her life. However, the Donor hereby reserves the right to appoint and direct by will that the income interest retained or created in such property shall terminate upon his death, whether or not the Donor's wife survives the Donor. Such income interest shall consist of ----- units of participation in Y Pooled Income Fund, and payments of income thereon shall be made in accordance with the Declaration of Trust attached hereto.
Sec. 5.
.01 Section 1.642(c)-5(b)(3) of the regulations requires that 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 of property. A pooled income fund shall not be disqualified 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.
.02 The following is a sample provision for inclusion in a Declaration of Trust which 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 Internal Revenue Code of 1954 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) of the Internal Revenue Code of 1954 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, which are held by, or for the use of, Y Public Charity. When such 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 which is owned by Y Pooled Income Fund and the income earned by, and attributable to, such portion.
Sec. 6.
.01 Section 1.642(c)-5(b)(4) of the regulations prohibits a pooled income fund from accepting from a donor, or investing in, any securities the income from which is exempt from Federal income tax. The governing instrument of the pooled income fund must contain specific prohibitions against accepting or investing in such securities.
.02 The following is a sample provision for inclusion in a Declaration of Trust which satisfies the requirement described in sec. 6.01:
The property transferred to Y Pooled Income Fund by any donor shall not include any securities the income from which is exempt from the taxes imposed by Subtitle A of the Internal Revenue Code of 1954 or corresponding provision of any subsequent Federal tax law, and the trustee of the Fund shall not accept or invest in any such security as part of the Fund.
Sec. 7.
.01 Section 1.642(c)-5(b)(5) of the regulations requires that 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 where the public charity exercises control directly or indirectly over the pooled income fund.
.02 The following is a sample provision for inclusion in a Declaration of Trust which 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. Y Public Charity may resign as Trustee of the Fund and designate a new Trustee or Trustees of the Fund. Y Public Charity retains the power to remove such Trustee or Trustees and to designate a new Trustee or Trustees.
Sec. 8.
.01 Section 1.642(c)-5(b)(6) of the regulations prohibits a pooled income 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 transferred) of an income interest in any property transferred to the fund. It is also required that the governing instrument contain such a 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.
.02 The following is a sample provision for inclusion in a Declaration of Trust which 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 Y Public Charity) shall have, directly or indirectly, general responsibilities with respect to the Fund which are ordinarily exercised by a Trustee.
Sec. 9.
.01 Section 1.642(c)-5(b)(7) of the regulations contains 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 such income in an amount determined by the rate of return earned by the fund for such year with respect to his 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 such 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 the transfer.
(3) The fair market value of a unit of participation is to be 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 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, 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, being the first day of such year and at least 3 other days, with no more than 3 calendar months between 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 such year, with appropriate adjustment for units outstanding during only a part of such year.
(7) 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.
(8) 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.
(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 are sample provisions for inclusion in a Declaration of Trust which 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 such income in the amount determined by the rate of return earned by the Fund for such year with respect to the beneficiary's income interest, payment to 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 he shall make income payments to the beneficiary or beneficiaries entitled thereto 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 such 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 such 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 such time by the number of units then 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 such 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 such average fair market value, the property transferred by the donor and any other property transferred to the Fund between such 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 such time by the number of units then in the Fund.
A determination date means each day within the 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 such year, except that 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 during such year.
For purposes of this trust, the term "income" has the same meaning as it does under section 643(b) of the Internal Revenue Code of 1954, 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 which 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.
.01 Section 1.642(c)-5(b)(8) of the regulations provides that, upon the termination of the income interest retained or created by any donor, the trustee of the pooled income fund shall sever from the fund an amount equal to the value at such time of the remainder interest in the property upon which the income interest is based. The value of the remainder interest shall 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 such payment date.
.02 The following is a sample provision for inclusion in a Declaration of Trust which 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 such 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.
Sec. 11.
.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.
Requests for rulings on declarations of trust and instruments of transfer should be submitted in compliance with the general procedures contained in Revenue Procedure 72-3, page 698, pertaining to the issuance of rulings, and should be addressed to the Assistant Commissioner (Technical), Attention: T:PS:T (T:I:I), Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C., 20224
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