Friday April 26, 2024

Rev. Rul. 87-37

GiftLaw Note: A transfer to charity of a remainder interest in a personal residence or farm is qualified for an income tax deduction under Sec. 170(f)(3)(B). However, in the estate of Blackford v. Comm., the Tax Court determined that it would be permissible to divide the remainder interests among four charities.

There is no legislative history that mandates a transfer of 100% of the remainder interest to a charity. Therefore, it is permissible for 90% of the remainder interest to be given to a non-charitable recipient and for 10% of the remainder interest to be transferred to charity. However, since the charity will receive a minority interest, there could be a discount in the charitable income tax deduction for lack of marketability.

Rev. Rul. 87-37, 1987-1 C.B. 295, 1987-19 I.R.B. 5.

Internal Revenue Service Revenue Ruling

REMAINDER INTEREST IN RESIDENCE; CHARITY AS TENANT IN COMMON WITH NONCHARITABLE INTEREST

Published: May 11, 1987

Section 2522.-Charitable and Similar Gifts, 26 CFR 25.2522(c)-3: Transfers not exclusively for charitable, etc., purposes in the case of gifts made after July 31, 1969

Remainder interest in residence; charity as tenant in common with noncharitable interest. Where a remainder interest in a residence is given to a charity and to an individual as tenants in common, a charitable deduction is allowable for the value of the interest received by the charity. Rev. Rul. 76- 544 revoked.

ISSUE

If a remainder interest in a residence is given to a charity and to a private individual as tenants in common, is a charitable contribution deduction allowable for the value of the interest received by the charity?

FACTS

A conveyed a legal remainder interest in A's personal residence to B, an individual, and to C, a charitable organization described in section 170(b)(1)(A) of the Internal Revenue Code. The gift was subject to A's remained life interest. B received a 90 percent interest and C received a 10 percent interest, as tenants in common in the remainder interest in A's residence. A filed a gift tax return and deducted from the value of the gift the value of C's 10 percent undivided interest in the remainder.

LAW AND ANALYSIS

Section 2501 of the Code imposes a tax on the transfer of property by gift. The gift tax applies, under section 2511, to all transfers by gift, whether the transfer is in trust or otherwise, and whether the gift is direct or indirect. Section 2522 of the Code provides for a gift tax charitable deduction for the value of property transferred to charitable organizations described in section 2522(a).

Section 2522(c)(2) denies the deduction if a donor transfers an interest in property to charity and retains an interest in the same property or transfers an interest in the same property or transfers an interest in the same property to a noncharitable donee. Section 2522(c)(2), however, provides certain exceptions in allowing a charitable deduction for specific kinds of gifts of partial interests, including an exception for charitable interests described in section 170(f)(3)(B).

Section 170(f) places restrictions on the income tax deduction available for gifts of partial interests to charity. Section 170(f)(3)(B) provides exceptions for certain charitable gifts, among them, the gift of a legal remainder interest in a personal residence or farm.

Rev. Rul. 76-357, 1976-2 C.B. 285, holds that the exception applies only to remainders not in trust, Ellis First National Bank v. U.S., 550 F.2d 9 (Ct. Cl. 1977), and Estate of Burgess v. Commissioner, 622 F.2d 700 (4th Cir. 1980), reach the same conclusion.

Estate of Blackford v. Commissioner 77 T.C. 1246 (1981), acq. in result, 1983-2 C.B. 1, held that the section 170(f)(3)(B) exception applied to a legal remainder interest in a residence bequeathed to four different charities, where the executor was instructed to sell the residence and divide the proceeds. Rev. Rul. 83-158, 1983-2 C.B. 159, based the Service's acquiescence in this result on the applicable provisions of local law that would have permitted the four charities to elect to receive the realty as tenants in common in lieu of receiving the cash proceeds.

Rev. Rul. 76-544, 1976-2 C.B. 288, however, holds that the exception for remainder interests in farms or residences does not apply to a remainder interest that vests in a charitable organization and an individual as equal tenants in common, because the entire remainder interest does not pass to charity.

The limitations on the charitable contribution deduction for the gift of split interests to charity were first imposed by section 201 of the Tax Reform Act of 1969, 1969-3 C.B. 10, 51. Extensive discussions in the committee reports show that the intent of these limitations was to deny a charitable deduction in situations where the subsequent administration of a trust or some other contingency might favor a noncharitable beneficiary at the expense of the charitable remainderman. Congress was responding to situations where trusts were administered to the advantage of noncharitable life tenants, where charitable remainders were contingent and never became possessory, or where governing instruments permitted invasions of principal under standards that were too vague to lend themselves to accurate valuation.

Congress concluded, however, that a nontrust gift of a remainder interest in a residence was not subject to such abuses. S. Rep. No. 91-552, 91st Cong., 1st Sess. 88 (1969), 1969-3 C.B. 479, 480. Accordingly, sections 2522(c)(2) and 170(f)(3)(B) of the Code permit a charitable deduction for 'a remainder interest in a personal residence.' In the present situation, the charity did not receive the entire remainder interest; nevertheless, its interest is a remainder interest in the residence.

The legislative history does not suggest that the charity must receive the entire remainder interest. Indeed, section 170(f)(3)(B)(ii) allows a charitable deduction for a gift of 'an undivided portion of the taxpayer's entire interest in property.' The fact that a taxpayer may convey a fractional interest in realty to charity and receive a deduction indicates that there is no statutory policy against a charity and an individual holding real property as tenants in common.

More important, the abuses that the split interest rules were designed to prevent would not be possible in this case. C is certain to receive its 10 percent interest as a tenant in common; thus, the deduction that A receives for the value of the 10 percent remainder interest will correspond to the value of the interest charity ultimately will receive. Should ownership in common involve any disadvantage to C, that disadvantage can be resolved by sale of the property.

In this respect, the present case is similar to Rev. Rul. 83-158. That ruling allowed a charitable deduction because the four charities could have chosen to receive the realty as tenants in common rather than receive the proceeds of its sale. There is no reason to conclude that any one of the four charities would have been worse off had one or more of its prospective co-tenants been individuals rather than unrelated charitable organizations.

Accordingly, a charitable deduction is allowable to A for the value of C's remainder interest in the residence. In determining the amount of the deduction allowable, however, the value of the charitable interest must be reduced to reflect appropriate valuation discount for the cotenancy arrangement. See Estate of Fawcett v. Commissioner, 64 T.C. 889, 900 (1975), acq., 1978-2 C.B. 2.

CONCLUSION

A charitable contribution deduction is allowable for a gift to charity of a legal remainder interest in the donor's personal residence even though the interest conveyed to charity is in the form of a tenancy in common with an individual.

Rev. Rul. 87-37, 1987-1 C.B. 295, 1987-19 I.R.B. 5