Thursday April 25, 2024

Rev. Rul. 77-305

GiftLaw Note: A gift of a remainder in a personal residence or farm qualifies for a charitable income tax deduction under Sec. 170(f)(3)(A). In this ruling, the donors transferred the remainder interest in a personal residence to charity, but required the charity to sell the residence and receive the cash proceeds from the sale.

However, a deduction is not permitted for a transfer of a partial interest, unless the interest comes squarely within the language of the Code. Since the transfer in this circumstance was not a gift of an unfettered right to the residence, but rather a gift in the future of the cash proceeds from the residence, it did not qualify for the charitable deduction.

Rev. Rul. 77-305, 1977-2 C.B. 72

Section 170 -- Charitable Deduction

Service Headnote

Charitable contributions; remainder interest in personal residence. No deduction is allowable for the gift of a remainder interest in a personal residence to a charity by the donors who placed a condition on the gift requiring the donee to sell its remainder interest and receive cash in lieu thereof if the donors decided to sell the residence before they die.

Full Text
Rev. Rul. 77-305

Advice has been requested whether, under the circumstances described below, a gift of a remainder interest in a personal residence is deductible under section 170(a) of the Internal Revenue Code of 1954.

The taxpayers, husband and wife, in 1977 made a gift of the remainder interest in their personal residence to a foundation, an organization of the type described in section 170(b)(1)(A)(vi) and section 170(c) of the Code.

In giving the remainder interest in their personal residence to the organization, the taxpayers at the same time entered into an agreement with the organization entitled "Memorandum of Gift" which provides, that in the event either holder of the remaining life estate wishes to leave the city of residence or is unable to continue to occupy the residence for good and valid reasons, such as poor health or advanced age, and decides to sell his or her estate, the organization promises to sell its remainder interest to the purchaser of the fee in an arm's-length transaction. In such an event, the sale proceeds will be divided in accordance with the value of the life and remainder interests as determined under section 20.2031-10 of the Estate Tax Regulations. The expenses of the sale will be borne in the same proportions, except that current real estate taxes and other charges that the life tenant would have been required to pay if the life estate had been retained shall be charged to the life tenant's share of the proceeds.

Section 170 of the Code provides, subject to certain limitations, a deduction for contributions or gifts to or for the use of organizations described in section 170(c), payments of which are made within the taxable year.

Section 170(f)(3)(A) of the Code provides that a contribution of less than the taxpayer's entire interest in property is not allowed as a charitable contribution deduction unless such contribution would have been allowed as a deduction had it been transferred in trust, and that a contribution by a taxpayer of the right to use property shall be treated as a contribution of less than the taxpayer's entire interest in the property. However, section 170(f)(3)(B)(i) provides an exception to the rule in section 170(f)(3)(A) for the contribution of a remainder interest in a personal residence or farm.

Section 170(f)(3)(A) of the Code come Tax Regulations allows a deduction under section 170 of the Code for the value of a charitable contribution not in trust of an irrevocable remainder interest in a personal residence that is not the donor's entire interest in such property.

Section 1.170A-1(e) of the regulations provides, in part, that if an interest in property passes to, or is vested in, charity on the date of the gift and the interest would be defeated by the happening of some event, the possibility of occurrence of which appears on the date of the gift to be so remote as to be negligible, the deduction is allowable.

As stated in section 1.170A-7(b)(3) of the regulations, the exception provided in section 170(f)(3)(B)(i) of the Code requires an irrevocable remainder interest in a personal residence. Identical exceptions are provided in sections 2055(e)(2) and 2522(c)(2) of the Code and corresponding regulations, respectively, with respect to the federal estate and gift taxes.

Rev. Rul. 77-169, 1977-1 C.B. 286, holds that no estate tax charitable deduction is allowable under section 2055 of the Code for a remainder interest in a decedent's personal residence bequeathed to charity under a will which provides that the remainder is to be sold upon the life tenant's death and the entire proceeds are to be paid to charity. To be deductible, under section 2055 the remainder interest must be in the residence itself.

Likewise, to be deductible as a charitable contribution under section 170 of the Code a gift of a remainder interest in a personal residence must be in the residence itself. Thus, where any conditions exist at the time the gift is made that could defeat charity's remainder interest in the residence itself, the deduction is allowable under section 170 only if possibility of the occurrence of the condition is so remote as to be negligible. Section 1.170A-1(e) of the regulations.

A contribution to charity of less than the taxpayer's entire interest in property is conditional within the meaning of section 1.170A-1(e) of the regulations, and hence not deductible for Federal income tax purposes, if its vesting is wholly dependent upon some voluntary act of the contributing taxpayer. In Estate of Louis Sternberger v. United States, 348 U.S. 187 (1955), 1955-1 C.B. 450, the Supreme Court of the United States noted that statistical tables are not reliable in forecasting the probability of voluntary acts, especially where self-interest is involved.

In the instant case, for good and valid reasons of self-interest, the donor-taxpayers placed a condition subsequent on their gift that will require the donee-charity to sell its remainder interest and receive cash in lieu thereof if the donor-taxpayers decide to sell the personal residence before they die. The possibility of the happening of this voluntary decision by the taxpayers cannot be said to be so remote as to be negligible. Therefore, the gift made under the stated conditions does not come within the exception of section 170(f)(3)(B)(i) of the Code because it is not an irrevocable contribution of a remainder interest in a personal residence itself.

Accordingly, the gift by the taxpayers is not allowed as a deduction under section 170(a) of the Code.