Tuesday April 23, 2024

Rev. Rul. 92-107

GiftLaw Note: Some national organizations desire to maintain pooled income funds (PIFs) for their regional and local affiliates. However, the PIF under Sec. 642(c)(5) must be maintained by the charity that is the remainder recipient.

A national charity will be permitted to maintain a PIF if several requirements are met. The national and local charity must be affiliated, with an identity of aims and purposes, the local charities must consent to being designated to receive the remainder and the local charity may not sever its interest prior to a demise of the income recipient. If the local charity is no longer affiliated at time for distribution, an alternative qualified organization must receive the remainder distribution.

REV. RUL. 92-107, 1992-2 C.B. 120, 1992-51 I.R.B. 4.

Internal Revenue Service Revenue Ruling

POOLED INCOME FUNDS; MAINTENANCE REQUIREMENT

Published: November 30, 1992

Section 642. Special Rules for Credits and Deductions, 26 CFR 1.642(c)-5: Definition of pooled income fund.
Pooled income funds; maintenance requirement. This ruling describes a factual situation in which a fund that is maintained by a national organization for itself and its local organizations meets the maintenance requirement of section 642(c)(5)(E) of the Code to be a qualified pooled income fund.

ISSUE

Under the facts described below, does a fund meet the requirements of section 642(c)(5) of the Internal Revenue Code to qualify as a pooled income fund if the governing instrument permits more than one charitable organization to be named as a recipient of the remainder interest in the property transferred to the fund?

FACTS

C, a national organization, has local organizations that are affiliated with it and are under its general supervision and control. C carries out its purposes through these local organizations with which it has an identity of aims and purposes.

C proposes to establish a pooled income fund that C will maintain for itself and for those of its local organizations that expressly consent to participate in the fund. Each of the charitable organizations is an organization described in section 170(b)(1)(a)(i)-(vi) of the Code. The fund's declaration of trust and instruments of transfer (collectively referred to as "governing instrument") would meet all the requirements of section 642(c)(5) and, therefore, the fund would qualify as a pooled income fund if it is determined that the provisions of section 642(c)(5)(E) are met.

Under the terms of the governing instrument, a donor can designate that the remainder interest be transferred either to the national organization or to one of the participating local organizations. The governing instrument provides that a designated local organization may not sever its interest in the fund prior to the death of the named income beneficiary. The governing instrument also provides that if the designated local organization is no longer affiliated with C when the remainder interest is to be transferred, the remainder interest will be transferred to C or to another affiliated local organization chosen by C.

LAW AND ANALYSIS

A pooled income fund is a trust that meets the requirements listed in section 642(c)(5) of the Code. Section 642(c)(5)(A) provides that each donor who transfers property to the trust must contribute an irrevocable remainder interest in the property to, or for the use of, an organization described in section 170(b)(1)(A), other than certain private foundations referred to in clauses (vii) and (viii) of that section. Section 642(c)(5)(E) provides that the trust must be maintained "by the organization to which the remainder interest is contributed" and of which no donor or beneficiary of an income interest is a trustee.

Section 1.642(c)-5(b)(5) of the Income Tax Regulations provides that 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.

Section 1.642(c)-5(b)(5) of the regulations also provides that a national organization that 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 in which one or more local organizations, chapters, or auxiliary bodies that 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 the fund and contributed an irrevocable remainder interest therein to, or for the use of, various local churches or educational institutions of the body. The fact that the local organizations or chapters have been separately incorporated from the national organization is immaterial.

The specific statutory requirements for pooled income funds were added to the Code by section 201(b) of the Tax Reform Act of 1969, 1969-3 C.B. 10, 50-51. The Tax Reform Act of 1969 made major revisions to the types of interests that qualify for the charitable deduction for federal income, gift, and estate tax purposes when charitable and noncharitable interests in the same property are created. Congress was concerned that individuals were taking current charitable deductions for the present value of interests in property that would pass to charitable organizations at some time in the future. In the meantime, those individuals were able to manipulate the property so that the amount the charitable organization ultimately received may have had little relation to the amount for which the donor received the charitable deduction.

[T]he trust assets may be invested in a manner so as to maximize the income interest with the result that there is little relation between the interest assumptions used in calculating present values and the amount received by the charity. For example the trust corpus can be invested in high-income, high- risk assets. This enhances the value of the income interest but decreases the value of the charity's remainder interest.

H.R. Rep. No. 413 (Part 1), 91st Cong., 1st Sess. 61 (1969), 1969-3 C.B. 200, 237, and S. Rep. No. 552, 91st Cong., 1st Sess. 87 (1969), 1969-3 C.B. 423, 479.

As a result of the Tax Reform Act of 1969, a remainder interest in property transferred in trust to a charitable organization qualifies for the charitable deduction for federal income, gift, and estate tax purposes only if the trust is a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund. This requirement is designed to ensure that the amount received by the charitable organization will reflect the amount for which the charitable deduction was allowed to the donor on the transfer to the trust.

The structure of charitable remainder trusts removes any incentive to favor the income beneficiary over the charitable remainder beneficiary by manipulating the trust's investments. The amount received each year by the noncharitable beneficiary is either a stated dollar amount or a fixed percentage of the value of the trust property each year, in which case the amount the noncharitable beneficiary receives will vary directly with the type of investments made by the trust.

In the case of the pooled income funds, the amount that the noncharitable beneficiaries receive is the amount of the trust income. To prevent investment manipulation, Congress established the requirement of section 642(c)(5)(E) of the Code that the fund must be maintained "by the organization to which the remainder interest is contributed ... .11 By requiring that the charitable organization to which the remainder interest is transferred maintain the fund, Congress ensured that the charitable organization would look out for its own best interests by not manipulating the investments and by preserving the value of the remainder.

Under section 1.642(c)-5(b)(5) of the regulations, a national organization that carries out its purposes through local organizations with which it shares an identity of aims and purposes may maintain a pooled income fund in which the local organizations are named as recipients of remainder interests. In general, all the facts and circumstances must be examined to determine whether a national organization and its local organizations meet the standard set forth in section 1.642(c)-5(b)(5).

In the present situation, C carries out its purposes through its local organizations with which it shares an identity of aims and purposes. C's local organizations that desire to participate in the pooled income fund maintained by C have expressly consented to be included in the fund. In addition, under the terms of the governing instrument, a designated local organization cannot sever its interest in the fund prior to the death of the named income beneficiary, and C or another affiliated local organization chosen by C will receive the remainder interest should the designated local organization become disassociated with C. These provisions ensure that there will always be an identity of aims and purposes between C and any local organization that actually receives a remainder interest in the fund.

Under these facts, the Congressional purpose of ensuring that the recipient of the remainder maintain the fund to preserve the value of the remainder is achieved because of the close relationship between C and its local organizations. Therefore, C's proposed fund meets the requirements of section 642(c)(5)(E) of the Code and qualifies as a pooled income fund.

HOLDING

The fund described in this ruling that is maintained by a national organization for itself and its local organizations meets the maintenance requirement of section 642(c)(5)(E) of the Code because (1) the national and local organizations are affiliated and share an identity of aims and purposes; (2) the local organizations that can be named as recipients of a remainder interest have expressly consented to be included in the fund; (3) the governing instrument provides that a designated local organization cannot sever its interest in the fund prior to the death of the named income beneficiary; and (4) the governing instrument provides that if the designated local organization is no longer affiliated with the national organization at the time the remainder interest is to be transferred, the remainder interest will be transferred to the national organization or to another affiliated local organization chosen by the national organization.

DRAFTING INFORMATION

The principal author of this revenue ruling is Donna Welch of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this revenue ruling, contact Ms. Welch at (202) 622-3080 (not a toll-free call).

Rev. Rul. 92-107, 1992-2 C.B. 120, 1992-51 I.R.B. 4.