Thursday April 25, 2024

Rev. Rul. 92-108

GiftLaw Note: Some community foundations desire to maintain pooled income funds (PIFs) for charitable organizations in their area. In this ruling, which was subsequently clarified and expanded by the Service in Rev. Rul. 96-38, the requirement was set forth that the community foundation may maintain PIFs and benefit other charities. However, the community foundation must receive the remainder and then voluntarily choose to make grants to selected local charities. The donor is not permitted to select the local or designated charity other than the community foundation.

REVENUE RULE 92-108

1992-2 C.B. 121, 1992-51 I.R.B. 5.

Internal Revenue Service Revenue Ruling

POOLED INCOME FUND; 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 fund; maintenance requirement. This ruling considers two different factual situations in determining whether a fund maintained by a community trust meets the maintenance requirement of section 642(c)(5)(E) of the Code to be a qualified pooled income fund.

ISSUE

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 fund is maintained by a community trust and either: (1) the donor permits the community trust to determine the charitable organizations that will benefit from the remainder interest, or (2) the donor may designate the specific charitable organization for whose benefit the community trust will use the remainder interest?

FACTS

Each of the charitable organizations in the following situations is an organization described in section 170(b)(1)(a)(i)-(vi) of the Code. Each 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, each fund would qualify as a pooled income fund if it is determined that the provisions of section 642(c)(5)(E) are met.

Situation 1. A, a community trust as described in section 1.170A-9(e)(10) of the Income Tax Regulations, proposes to establish a pooled income fund that A will maintain. Under the terms of the governing instrument, the donor contributes a remainder interest in property to A, and A will determine how, and by whom, the remainder interest will be used for charitable purposes.

Situation 2. B, also a community trust, proposes to establish a pooled income fund that B will maintain. Under the terms of the governing instrument, the donor contributes a remainder interest in property to B, but the donor may designate the specific charitable organization for whose benefit B will use the remainder interest. As required by section 1.170A-(e)(11)(v)(B)(i) of the regulations, the governing body of B has the power to modify any restriction on the distribution of designated funds if in the sole judgment of the governing body the restriction becomes unnecessary, incapable of fulfillment, or inconsistent with the charitable needs of the community or area served.

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 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.

The specific statutory requirements of a pooled income fund 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 that property so that the amount the charitable organization ultimately received may have 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 the 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 ... ." 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.

In Situation 1, each donor permits A, in its discretion, to determine how the remainder interest is to be used for charitable purposes. Although A cannot itself use the property contributed to the pooled income fund, A is given the broadest latitude in choosing the charitable organizations that will benefit from the remainder interest. Therefore, for purposes of section 642(c)(5) of the Code, the donor is making a gift of the remainder interest to A. Because A maintains the fund, the fund meets the requirements of section 642(c)(5)(E) and qualifies as a pooled income fund.

In Situation 2, B purports to maintain a pooled income fund through which donors are transferring remainder interests to B. However, each donor may designate the charitable organization for whose benefit B must use the remainder interest. Except for unusual circumstances described in section 1.170A-(e)(11)(v)(B)(i) of the regulations, B has no discretion as to which organization will benefit from the remainder interest. Therefore, for purposes of section 642(c)(5) of the Code, the donor is treated as having made a gift of the remainder interest not to B, but rather to the charitable organization designated by the donor. Because the charitable organization designated by the donor does not maintain the pooled income fund, the fund fails to meet the requirements of section 642(c)(5)(E) and, therefore, the fund fails to qualify as a pooled income fund within the meaning of section 642(c)(5).

HOLDINGS

A fund maintained by a community trust meets the maintenance requirement of section 642(c)(5)(E) of the Code if the donor permits the community trust to choose the charitable organization that will benefit from the remainder interest. However, a fund maintained by a community trust does not meet the maintenance requirement if the donor may designate the specific charitable organization for whose benefit the community trust will use the remainder interest.

EFFECTIVE DATE

This revenue ruling is effective for all pooled income funds with respect to contributions made after December 31, 1992.

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. 92-108, 1992-2 C.B. 121, 1992-51 I.R.B. 5.