PIF Valuation
The pooled income fund (PIF) must be valued at least annually to determine the appropriate income to be distributed. The valuation is essential because when new donors are added to the fund, they must be assigned a number of units that fairly reflects their share of the fund. Reg. 1.642(c)-5(c)(2)(i)(c). In addition, the valuation is essential for distributions to the parent charity when an interest terminates.
The valuation is based on determination dates. Any reasonable method for determination dates may be used. The determination dates could be monthly, quarterly or other acceptable method. The fair market value must be determined by an averaging method. Reg. 1.642(c)-5(c)(2).
Income Tax Deduction
The PIF donor will receive a deduction for the present value of the interest in the pooled fund. Based on the highest rate of return for the prior three years, the PIF factor may be obtained from IRS Pub. 1457. This factor, after interpolation, is then multiplied times the gift amount to determine the present value of the remainder interest. This amount is the charitable income tax deduction.
Pooled income funds must calculate the rate of return each year, in order to determine the highest of the prior three-year rates to use for deduction calculation purposes. If the PIF has not been in existence three taxable years, then the fund must use the calculated rate based on the Sec. 7520 rates. The rates for each year are averaged and 1% is subtracted from the average. The averaged number is then rounded to the nearest two-tenths of 1% and the highest rate of the calculated three prior years must then be used for deduction purposes. After the PIF has been in existence for three taxable years, the actual PIF rate of return may then be used.
Example 3.8.2A
Christina Hansen owns stock with a cost basis of $20,000 and a value of $40,000. She transfers the stock to her favorite charity as a contribution to the PIF. Payments will be made to Christina, age 65, for her lifetime.
Based on the highest yearly rate of return for the past three years of 5%, her income tax deduction is $18,902. She will initially receive $2,000 of income or 5% of the $40,000 each year. This income will vary with the return of the PIF each year. When she passes away, based on her units of participation, the charity will sever from the fund the appropriate principal and the deferred gift will be completed.
