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Part XVIII: Charitable gifts.

7950. Can a deduction be taken for a contribution to a charitable remainder trust or a pooled income fund?

Yes. An individual may make an immediately deductible gift in trust to a charity, but keep (or give to another person or persons) the right to receive regular payments from the trust before the charity receives any amount. The IRC narrowly defines the types of charitable trusts, in order to assure that an accurate determination can be made of the value of the contribution.

To receive this special treatment for a split-interest in trust with a charitable remainder, the gift must be to a charitable remainder annuity trust (see Q 7951), a charitable remainder unitrust (see Q 7952), or a pooled income fund (see Q 7953). (1ad) Any individual beneficiaries must be alive when the trust is created.

To be immediately deductible, the gift must be of real property or intangibles; a gift of a remainder interest in tangible personal property is deductible only when all intervening interests have expired or are held by parties unrelated to the donor. (2ac) The IRC also permits a deduction for a gift of regular trust payments to charity in a split-interest trust, generally referred to as a charitable lead trust (see Q 7958).

A gift to a charitable remainder trust (or pooled income fund) may be made during an individual's life or at his death by his will. The right of the noncharitable beneficiary (or beneficiaries) to receive payments may extend for life or for a term of up to 20 years. Obviously, however, the value of the charitable deduction will be inversely proportionate to the length of noncharitable payments. The value of the remainder interest passing to the charity must be at least 10% of the net fair market value of the property placed in the trust. (3ac) See Q 7955 for an explanation of the actual calculation of the amount of the deduction.

The extent to which the deduction may be used in any given year is subject to the general limitations on charitable deductions (see Q 7943, Q 7944, Q 7945). (4w) See Q 7572 regarding the estate tax and Q 7598 regarding the gift tax charitable deduction for a gift to a charitable remainder trust.

7951. What is a charitable remainder annuity trust?

A charitable remainder annuity trust provides to a noncharitable beneficiary a fixed payment at least annually of not less than 5% nor more than 50% of the initial net fair market value of all property placed in the trust, with an irrevocable remainder interest to be paid to or held for a charity. (5v) For example, the trust may provide for concurrent payment of $400 to husband for life and $600 to wife for life, or it may provide for payment of $1000 to husband and wife for their joint lives and then to the survivor for life. (6u) The payment amount is fixed at the inception of the trust, valuation occurs only once, and the payout cannot be limited to the net income of the trust. Furthermore, the donor cannot make additional payments to the trust. (7r)

10% remainder interest requirement. The value of the remainder interest (i.e., the deduction) must equal at least 10% of the initial fair market value of all property placed in the trust. (8m) The value of a remainder interest for this purpose is calculated using the IRC Section 7520 interest rate, which is published every month by the IRS. The calculation of the deduction can be made using the current rate or either of the previous two months' rates. See Q 7955 for an explanation of the calculation of the deduction.

Planning Point: For a charitable remainder annuity trust, the charitable deduction increases as the IRC Section 7520 rate increases; therefore, one should choose the highest rate of the three month period for the best deduction.

Noncharitable beneficiary. The IRC requires that the trust payout be made to one or more persons (at least one of whom is not a charitable organization and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not exceeding 20) or for the life or lives of the individual or individuals. (1ae) All individual beneficiaries must be living at the time of the creation of the trust. (2ad) The trust may provide that a beneficiary's interest will terminate on the happening of a specified contingency. (3ad)

IRC Section 664 and regulations thereunder require that to qualify as a charitable remainder trust, a trust must meet the definition of, and function exclusively as, a charitable remainder trust from the time the trust is created. No payments other than those described may be made to anyone other than a qualified charity. Following the termination of all noncharitable payments, the remainder interest is transferred to the charity or retained by the trust for the benefit of the charity. (4x)

Example. Patty is 74 years old and owns stock worth $100,000 today that she purchased a few years ago for $40,000. If Patty were to sell the stock, she would incur long-term capital gains of $60,000; assuming a 15% capital gains bracket, the tax would equal $9,000. This would leave her with only $91,000 to reinvest. Patty decides to give the stock to a charitable remainder annuity trust. She elects a 6% payout or $6,000 each year throughout her lifetime. Patty is entitled to a charitable income tax deduction of $46,144 assuming quarterly trust payments and a 3.4% 7520 rate. If Patty is in a 28% income tax bracket, this deduction will save her $12,920. In addition, Patty is not subject to up-front capital gains taxes when funding the trust or when the trustee sells her stock and reinvests it. However, the distributions from the charitable remainder annuity trust are subject to tax under a 4-tier structure. See Q 7956.

The Service has ruled that distributions from a CRUT (see Q 7952) to a separate "special needs" trust for the life of a disabled beneficiary, rather than for a term of years, did not preclude the CRUT from qualifying under the Code. (5w)

The IRS has treated the division of a charitable remainder trust into separate trusts as a nontaxable event where the separate trusts are funded pro rata and beneficiaries receive interests that are essentially equal to the original interests. (6v)

The IRS permitted the grantor of a charitable remainder annuity trust to terminate the trust by assigning his annuity interest to the charitable remainder beneficiary. The IRS determined that the gift would not retroactively disqualify the trust, and that once "completed" the gift would qualify for a charitable contribution deduction under IRC Section 170. However, the Service stipulated that the gift would be "completed" only (1) when (and to the extent that) assets traceable to the assignment are expended or distributed, or (2) when the grantor permanently resigned as officer and director of the charity to which the assignment was being made. (7s)

Payout timing. To qualify as a charitable remainder annuity trust, the trust must pay the sum certain to the noncharitable beneficiary at least annually. See, e.g., Atkinson v. Comm. (1af) (estate tax charitable deduction denied where the trust had not paid the required annuity payments to the grantor during her lifetime).

The annuity amount may be paid within a reasonable time after the close of the year for which it is due if either of the following occur: (a) the character of the annuity amount in the recipient's hands is income under IRC Section 664(b)(1), (2), or (3); or (b) the trust distributes property (other than cash) that it owned as of the close of the taxable year to pay the annuity amount, and the trustee elects to treat any income generated by the distribution as occurring on the last day of the taxable year for which the amount is due. Additionally, for CRATs that were created before December 10, 1998, the annuity amount may be paid within a reasonable time after the close of the taxable year for which it is due if the percentage used to calculate the annuity amount is 15% or less. (2ae)

Planning Point: Assets that are hard to sell are not the best assets to donate to a charitable remainder annuity trust. For these types of assets (e.g., real estate), consider a FLIP charitable remainder unitrust instead. See Q 7952.

7952. What is a charitable remainder unitrust?

A charitable remainder unitrust provides to a noncharitable beneficiary a variable payment stream based on an annual valuation of the trust assets, with an irrevocable remainder interest to be paid to or held for the benefit of a charity. The payout must be a fixed percentage of not less than 5% nor more than 50% of the net fair market value of the trust assets, and is paid at least annually to the noncharitable beneficiary or beneficiaries. (3ae) (But see Let. Rul. 200108035, where a split-payout was approved.) Since the trust is valued annually, the donor may make additional contributions to the trust. To qualify as a charitable remainder trust, a trust must meet the definition of, and function exclusively as, a charitable remainder trust from the time the trust is created. (4y) Thus, if a trust does not qualify as a charitable remainder unitrust at its inception, it never will. (5x)

The IRS denied both trust and CRUT status to an entity that was proposed to be established by an S corporation essentially to receive its profits and make distributions to its owners. The Service ruled that the proposed entity would not qualify as a trust underTreasury Regulations [section][section] 1.301.77014(a), 1.301-7701-4(c), or as a valid CRUT. (6w)

10% Remainder Interest Requirement

The value of the remainder interest (i.e., the deduction) must equal at least 10% of the net fair market value of the property as of the date it is contributed to the trust. (7t) The value of a remainder interest for this purpose is calculated using the IRC Section 7520 interest rate, which is published every month by the IRS. The calculation of the deduction can be made using the current rate or either of the previous two months' rates. See Q 7955 for an explanation of the calculation of the deduction.

If a transfer to an existing charitable remainder unitrust does not meet the 10% remainder interest value requirement, the contribution will be treated as if it were made to a separate trust; thus, the existing CRUT will not become disqualified by a contribution that does not meet this requirement. (1ag) It appears that the separate trust will be taxed as a complex trust, since it will not meet the requirements for a CRT.

The Service privately ruled that reducing the unitrust payment percentage for additional contributions to ensure that the value of the charity's interest would be no less than 10% of the fair market value of the additional property would not cause the CRUT to be disqualified if the total annual unitrust payment percentage for the additional contribution did not fall below 5% annually. (2af)

Noncharitable Beneficiary

The IRC requires that the trust payout be made to one or more persons (at least one of whom is not a charitable organization and, in the case of individuals, only to an individual who is living at the time of the creation of the trust) for a term of years (not exceeding 20) or for the life or lives of the individual or individuals. (3af) The IRS has determined that where unitrust amounts were payable to a separate trust for the life of the grantor's son rather than to the son himself, this requirement was not met. (4z)

Any individual noncharitable beneficiary must be living at the time the trust is established. (5y) Of course, the longer the trust has to make unitrust payments, the smaller the value of the remainder interest will be. The trust may provide that the interest of a noncharitable beneficiary will terminate on the happening of a particular contingency. (6x)

No payments other than those described in IRC Section 664 may be made to anyone other than a qualified charity. A trust will not qualify as a charitable remainder unitrust if it makes payments on a liability of the grantor. (7u) Following the termination of all lifetime and term payments, the remainder interest in the trust must be transferred to or for the use of the charity or retained by the trust for such use. (8n)

The Service has ruled that distributions from a CRUT to a separate "special needs" trust for the life of a disabled beneficiary, rather than for a term of years, did not preclude the CRUT from qualifying under the Code. A trust may qualify as a CRUT if: (1) the unitrust amounts will be paid for the life of a financially disabled individual to a separate trust that will administer these payments on behalf of that individual; and (2) upon the individual's death, the trust will distribute the remaining assets to the individual's estate, or, after reimbursing the state for any Medicaid benefits provided to the individual, subject to the individual's general power of appointment. (9j)

Timing of Payout

To qualify as a charitable remainder unitrust, the trust must pay its unitrust amount to the noncharitable beneficiary at least annually. The unitrust amount for fixed percentage CRUTs may be paid within a reasonable time after the close of the year for which it is due if either of the following occur: (a) the character of the unitrust amount in the recipient's hands is income under IRC Section 664(b)(1), (2), or (3); or (b) the trust distributes property (other than cash) that it owned as of the close of the taxable year to pay the unitrust amount, and the trustee elects to treat any income generated by the distribution as occurring on the last day of the taxable year for which the amount is due. Additionally, for fixed percentage CRUTs that were created before December 10, 1998, the unitrust amount may be paid within a reasonable time after the close of the taxable year for which it is due if the percentage used to calculate the unitrust amount is 15% or less. (1ah)

Income Exception CRUTS

A payout that is a fixed percentage of asset value will increase if the trust asset value increases. It is possible for a payout of a fixed percentage of trust asset value to exceed trust income; requiring that trust assets themselves be used to make payments. To prevent invasion of the trust corpus, the trust instrument may limit the payout to the amount of the trust income, if that amount is less than the amount of the specified percentage; this is commonly referred to as a net income unitrust (NICRUT). (2ag)

The trust may also limit the payout to the amount of trust income if it is less than the stated percentage, but provide for the deficiency to be made up to the extent trust income exceeds the amount of the specified percentage in later years. This is commonly referred to as a net income with makeup unitrust (NIMCRUT). (3ag) Under this last alternative payout method, a trust with low-income, high-growth assets can pay little or no income to a high-bracket beneficiary; if trust assets produce high income at a later time, larger payouts can be made that include make-up amounts, perhaps when the beneficiary's marginal tax bracket is lower or his income need is greater (see Q 7949). However, the trust provisions may not restrict the trustee from investing trust assets in a manner that could result in the annual realization of a reasonable amount of income or gain from disposition of trust assets. (4aa)

The trust instrument must specify which, if any, of the income exception methods will be used for any year; the method of determining the unitrust payout must not be discretionary with the trustee. (5z)

Defining income for trust purposes. State statutes are in the process of changing traditional concepts of income and principal in response to investment strategies that seek total positive return on trust assets. These statutes are designed to ensure that, when a trust invests in assets that may generate little traditional income (including dividends, interest, and rents), the income and remainder beneficiaries are allocated reasonable amounts of the total return of the trust (including both traditional income and capital appreciation of trust assets) so that both classes of beneficiaries are treated impartially.

Regulations revise the definition of income under IRC Section 643(b) to reflect changes in the definition of trust accounting income under state laws. (1ai)

Under the regulations, "trust income" generally means income as defined under IRC Section 643(b) and the applicable regulations. The regulations provide that trust income cannot be determined by reference to a fixed percentage of the annual fair market value of the trust property, notwithstanding any contrary provision in applicable state law. (2ah)

The regulations also provide as follows:

(1) Proceeds from the sale or exchange of any assets contributed to the trust by the donor must be allocated to principal, and not to trust income, at least to the extent of the fair market value of those assets on the date of their contribution to the trust.

(2) Proceeds from the sale or exchange of any assets purchased by the trust must be allocated to principal, and not to trust income, at least to the extent of the trust's purchase price of those assets.

(3) Except as provided in (1) and (2), above, proceeds from the sale or exchange of any assets (a) contributed to the trust by the donor or (b) purchased by the trust may be allocated to income, pursuant to the terms of the governing instrument, if not prohibited by applicable local law. A discretionary power to make this allocation may be granted to the trustee under the terms of the governing instrument, but only to the extent that the state statute permits the trustee to make adjustments between income and principal to treat beneficiaries impartially. (3ah)

Capital gain NIMCRUT. The IRS has approved in numerous situations a NIMCRUT provision granting the trustee the power to allocate post-contribution capital gain on assets that produce no income or limited income to trust income. Such a provision coupled with a provision treating a specific amount of any unitrust deficiency as a liability in valuing the trust's assets complied with the requirements for charitable remainder unitrusts. (4ab)

Self-dealing. The Service has ruled that the purchase of deferred annuity contracts by the independent trustee of a NIMCRUT did not adversely affect the CRUT's tax-exempt status. Moreover, where the donor received no present value from the contract right to receive annuity payments, and did not control the investment decision, the purchase of deferred annuity contracts did not constitute an act of self-dealing. (5aa) This technical advice memorandum led to modification of an aggressive approach the Service had taken on the issue of self-dealing by NIMCRUTs in its 1997 Exempt Organizations Continuing Professional Education Text (Topic K). (6y)

The Service determined that the transfer of a life insurance policy to an income exception CRUT would not disqualify the CRUT. (1aj)

FLIP Unitrusts

A CRUT that is funded with assets that are illiquid may require special care. Under the conditions described below, the grantor may employ a net income with makeup provision until the assets are sold, thus preventing an ill-timed sale or an invasion of the trust corpus, then switch (i.e., "flip") to a fixed percentage payout once the assets have been sold. A trust that provides first for the use of a net income with makeup payout, followed by a fixed percentage payout is referred to as a flip unitrust.

Regulations allow the use of flip unitrusts provided all the following conditions are satisfied:

(a) The trust instrument must provide that the one-time change in payout methods (i.e., the flip) is triggered on a specific date, or by a single event whose occurrence is not discretionary with, or within the control of, the trustees or any other persons. (2ai) Permissible triggering events include marriage, divorce, death, the birth of a child, or the sale of "unmarketable assets" (i.e., assets other than cash, cash equivalents, or assets that can be readily sold or changed for cash equivalents). For example, unmarketable assets would include real property, closely held stock, and unregistered securities for which there is no available exemption permitting public sale. (3ai)

(b) Following the "flip," only fixed percentage payouts (i.e., no net income makeup amounts) may be provided under the terms of the trust. (4ac) Any makeup amounts remaining due at the time of the change in payout methods are forfeited when the trust converts to the fixed percentage method. (5ab)

(c) The "flip" may be made only from the net income method to the fixed percentage method. (6z) A CRUT cannot convert from a fixed percentage method to a net income method without losing its status as a CRT. (7v)

(d) The change from the net income with makeup amount method to the fixed percentage payout method must occur at the beginning of the taxable year that immediately follows the taxable year during which the triggering date or event occurs. (8o)

The regulations for flip unitrusts are effective for CRUTs created after December 9, 1998. Generally, a trust may not be amended or reformed to add a flip provision. (9k)

Reformation of Trust

A trust must qualify as a charitable remainder unitrust at its inception in order to generate a charitable deduction. The extent to which the provisions of a CRUT may be changed in any way after its inception has been the subject of a variety of ruling requests.

In a position consistent with the regulations described above, the IRS has prohibited the reformation of a trust to change from a net income with make-up provision to a fixed percentage provision (1ak) or to remove a net income limitation. (2aj)

The Service has ruled that reforming a CRUT by converting the trust from a net income method CRUT (NIMCRUT) to a fixed percentage CRUT would not adversely affect the CRUT's qualification status. (3aj)

The Service has permitted reformation of a trust instrument with respect to certain characteristics that have little or no impact on its payouts. For instance, the reformation of a unitrust to allow a grantor to change or designate other charitable organizations as the remainder beneficiaries did not affect the trust's qualification as a CRUT. (4ad) Moreover, an amendment that merely reallocated the unitrust amount between the beneficiaries during their joint lives to comply with the requirements for a CRUT, effective retroactively to the date of the creation of the trust, was permitted under the qualified reformation provisions of IRC Section 2055(e)(3). (5ac) However, the IRS has determined that a trust would be disqualified by an amendment to change the successive order of the noncharitable lifetime beneficiaries, regardless of the consent of all interested parties. (6aa)

The IRS has also determined that the division of one CRUT into two CRUTs would not cause the original or resultant trusts to fail to qualify under IRC Section 664. (7w) The IRS has treated the division of a charitable remainder trust into separate trusts as a nontaxable event where the separate trusts are funded pro rata and beneficiaries receive interests that are essentially equal to the original interests. (8p)

The Service ruled that the assignment of trust principal to three of four named charitable remainder beneficiaries of the CRUT would not disqualify the trust as a CRUT provided that the named charitable remainder beneficiaries were public charities. (9l)

The IRS has privately ruled that the donor/unitrust recipient of a CRUT could donate his entire unitrust interest in an existing CRUT to the charitable remainderperson in consideration for a gift annuity that would be payable to him. (10g)

The termination of a CRUT and the disposition of the donor/noncharitable beneficiary's interest in the trust resulted in the noncharitable beneficiary having to recognize long-term capital gain on the entire amount realized from the disposition of his unitrust interest in the trust. However, no act of self-dealing resulted from the termination and disposition of the unitrust interest. (1al)

The Service determined that the rescission of a CRUT (because of the charity's misrepresentations about the income tax consequences of the trust) would be recognized for federal income tax purposes as of the date the trust was created. (2ak)

Grantor Powers

The following powers provided by a trust instrument to the grantor did not disqualify a charitable remainder unitrust: (1) the power to terminate all or a portion of the trust early and distribute the trust corpus to any charity, (2) the power to change the charitable remainderpersons, (3) the power to limit the type of assets the trust may accept or hold (provided the restriction did not violate Treas. Reg. [section] 1.664-1(a)(3), above), and (4) the power to remove and replace the trustee. (3ak)

The IRS has determined that a trustee of a charitable remainder unitrust that was funded with an insurance policy on the grantor's life could pay the premiums on that policy without disqualifying the trust under IRC Section 664. The grantor was not treated as the owner of the trust because the premiums were payable only out of trust principal. In addition, all amounts received under the policy were allocable to trust principal. (4ae)

The Service has ruled that there is nothing in the rule governing the tax-exempt status of CRUTs, (5ad) or the applicable regulations, that prohibits a trust from being a permissible grantor/donor for a CRUT. (6ab)

The Service has determined that a second contribution to a CRUT, whose governing instrument expressly prohibited any additional contributions after the first contribution, would be ignored for federal income tax purposes and would not disqualify the CRUT provided that the grantors amended their tax returns and reported any capital gains and dividend income generated by the second contribution. (7x)

In a case of first impression, a bankruptcy court held that a donor's unitrust interest in a self-settled CRUT, and his powers to (1) remove and replace trustees and (2) amend the trust to protect his tax status were the property of the bankruptcy estate. (8q)

Appraisal of Unmarketable Assets

The regulations provide that if the only trustee is the grantor, a noncharitable beneficiary, or a related or subordinate party to the grantor or the noncharitable beneficiary, a CRUT's "unmarketable assets" (defined above) must be valued by either an "independent trustee" or by a "qualified appraisal" from a "qualified appraiser." (1am) An "independent" trustee" is a person who is not the grantor, the grantor's spouse, a noncharitable beneficiary, or a party who is related or subordinate to the grantor, the grantor's spouse, or the noncharitable beneficiary. However, a co-trustee who is an "independent" trustee may value the trust's unmarketable assets. (2al) For an explanation of the application of the Chapter 14 special valuation rules to CRUTs, see Q 7619.

The Service has ruled that a CRUT was not disqualified even though the grantors were also the sole trustees because the trust instrument provided that the trust could only accept, invest in, and hold assets with an objectively ascertainable market value. (3al)

7953. What is a pooled income fund?

A pooled income fund is a trust maintained by the charity into which each donor transfers property and from which each named beneficiary receives an income interest. The amount of the income is determined by the rate of return earned by the trust for the year. The remainder interest ultimately passes to the charity that maintains the fund. (4af)

All contributions to a pooled income fund are commingled, and all transfers to it must meet the requirements for an irrevocable remainder interest. The pooled income fund cannot accept or invest in tax-exempt securities, and no donor or beneficiary of an income interest can be a trustee of the fund. (5ae)

Special rules apply to contributions (if permitted) of depreciable property.A pooled income fund that is not prohibited (either under state law or its governing instrument) from accepting contributions of depreciable property must (1) establish a depreciation reserve fund with respect to any depreciable property held by the trust; and (2) calculate the amount of depreciation additions to the reserve in accordance with generally accepted accounting principles. (6ac) The purpose of these requirements is to insure that the value of the remainder interest is preserved for the charity. (7y)

The amount of the charitable contribution deduction allowable for a donation of property to a pooled income fund is the present value of the remainder interest. The present value of the remainder interest is determined by subtracting the present value of the income interest from the fair market value of the property transferred. (8r) The present value of the income interest is based on the highest rate of return earned by the fund for any of the three years immediately preceding the taxable year of the fund during which the contribution is made. If the fund has not been in existence for three years, the highest rate of return is deemed to be the interest rate (rounded to the nearest 2/10ths of 1%) that is 1% less than the highest annual average of the monthly IRC Section 7520 interest rates for the three years preceding the year in which the transfer to the fund is made. (9m) The deemed rate of return for transfers to new pooled income funds in 2010 is 4.6%. (10h)

Under regulations, the definition of "income" for pooled income funds is amended to reflect certain state statutory changes to the concepts of income and principal. (See Q 7952 for additional background.) The regulations provide that the term "income" has the same meaning as it does under IRC Section 643(b) and the regulations, except that income generally may not include any long-term capital gains. However, in conformance with applicable state statutes, income may be defined as or satisfied by a unitrust amount, or pursuant to a trustee's power to adjust between income and principal to fulfill the trustee's duty of impartiality, if the state statute: (1) provides for a reasonable apportionment between the income and remainder beneficiaries of the total return of the trust; and (2) meets the requirements of Treas. Reg. [section] 1.643(b)-1. In exercising a power to adjust, the trustee must allocate to principal, and not to income, the proceeds from the sale or exchange of any assets contributed to the fund by any donor or purchased by the fund at least to the extent of the fair market value of those assets on the date of their contribution to the fund or of the purchase price of those assets purchased by the fund. (1an)

A group of pooled income funds will be treated as a single community trust if the funds operate under a common name, have a common governing instrument, prepare common reports, and are under the direction of a common governing board that has the power to modify any restriction on distributions from any of the 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. (2am) A pooled income fund is considered maintained by such a trust if, in the instrument of transfer: (1) the donor gives the remainder interest to the community trust with full discretion to choose how the remainder interest will be used to further charitable purposes, or (2) the donor either requests or requires that the community trust place the proceeds of the remainder interest in a fund that is designated to be used for the benefit of specific charitable organizations provided the fund is a component part of the community trust. (3am)

Examples of the calculation for the amount of a charitable contribution deduction of property transferred to a pooled income fund are provided below.

Example 1: In July of 2011, Mr. Green transferred property worth $100,000 to a pooled income fund. Income is to be paid to Mrs. Green (age 70) for life. The highest rate of return earned by the fund for any of the three years immediately preceding 2011 was 5.2%.

The value of the remainder interest payable to charity is calculated as follows:

(1) Find the single life annuity factor for a person age 70 at a 5.2% rate of return--9.1808 (from Single Life Annuity Factors Table in Appendix C).

(2) Convert the factor in (1) to a remainder factor: 1--(9.1808 X rate return of 5.2%) = .52260.

(3) Multiply the value of the property transferred to the pooled income fund ($100,000) by the factor in (2) (.52260). The amount of the charitable contribution deduction is $52,260. [The same procedure applies to calculating a remainder interest following a pooled income interest for a term certain. However, Term Certain Annuity Factors are used instead of Single Life Annuity Factors.]

Example 2: Assume the same facts as in the preceding example except that the highest rate of return earned by the fund for any of the three years immediately preceding 2011 was 5.15%. The 5.15% rate of return falls between interest rates for which factors are given (i.e., annuity factors for 5.0% and 5.2%, but not 5.15%, can be found in Appendix C). A linear interpolation must be made.

The value of the remainder interest payable to charity is calculated as follows:

(1) Find the single life annuity factor for a person age 70 at a 5.0% rate of return--9.3180 (from Single Life Annuity Factors Table in Appendix C).

(2) Convert the factor in (1) to a remainder factor: 1 - (9.3180 X rate of return of 5.0%) = .53410.

(3) Find the single life annuity factor for a person age 70 at a 5.2% rate of return--9.1808 (from Single Life Annuity Factors Table in Appendix C).

(4) Convert the factor in (3) to a remainder factor: 1--(9.1808 X rate of return of 5.2%) = .52260.

(5) Subtract the factor in (4) from the factor in (2): .53410--.52260 = .01150.

(6) 5.150% - 5.000%/5.200% - 5.000% = x/.01150

X = .00863

(7) Subtract X in (6) from the remainder factor at 5.0% from (2): .53410 - .00863 = .52547.

(8) Multiply the value of the property transferred to the pooled income fund ($100,000) by the interpolated remainder factor in (7) (.52547). The amount of the charitable contribution deduction is $52,547. (The same procedure applies to calculating a remainder interest following a pooled income interest for a term certain. However, Term Certain Annuity Factors are used instead of Single Life Annuity Factors.)

The deduction is subject to the regular percentage limits discussed in Q 7941. See Q 7949 for a comparison of pooled income funds with charitable remainder trusts. See Q 7950 for an overview of certain requirements applicable to all such gifts.

7954. What is a donor advised fund?

A donor advised fund is a fund or account that (1) is separately identified by reference to the contributions of the donors, (2) is owned by a sponsoring organization, and (3) allows donors to have advisory privileges with respect to distributions and investments. A donor advised fund does not include a fund or account that makes distributions to only one charity. Nor does a donor advised fund include a fund or account with respect to which the donor advisor advises regarding grants for travel, study, or similar purposes if (1) the advice is given as member of a committee appointed by the sponsoring organization, (2) the committee is not controlled by such donor advisors, and (3) grants are made on a objective and nondiscriminatory basis pursuant to a procedure approved in advance by the sponsoring organization and meeting certain statutory requirements. A sponsoring organization can generally be any charitable organization other than a governmental entity or a private foundation. (1ao)

A donor advised fund allows the donor to avoid the expense of starting a private foundation himself. These funds are sponsored by commercial investment or financial companies (e.g., mutual fund companies), and also by community foundations. Donor advised funds differ from pooled income funds in that they do not provide for a lifetime income stream to the donor or other beneficiary.

A charitable deduction for a contribution to a donor advised fund is allowed only if (1) the sponsoring organization is not a war veterans organization, a fraternal order or society, a cemetery company, or a type III supporting organization that is not functionally integrated; and (2) the donor receives a contemporaneous written acknowledgment from the sponsoring organization of the donor advised fund that the organization has exclusive legal control over the assets contributed. (1ap)

The Service has provided interim guidance regarding the application of certain requirements enacted under PPA 2006 that affect donor advised funds. (2an)

An important factor when analyzing donor advised funds is the amount of control that can be exercised by the donor over the fund's distribution of his contributed funds. (3an) A purported donor advised fund did not qualify as a publicly supported charity, but instead as a private foundation, where: (1) the potential donors had personal connections to the trustee; (2) the trust did not intend to employ a professional fundraiser (or similar fundraising program); (3) the trust did not budget any money on fundraising activities; (3) and no written documents explained how the trust would solicit funds from the general public who were unknown to the trustee. (4ag) The Court of Federal Claims has ruled that a donor advised foundation does not qualify for tax-exempt status under IRC Section 501(c)(3). (5af)

In two private letter rulings approving what the recipient of the letter rulings referred to as "donor managed investment accounts," the Service approved an arrangement where: (1) under agreements between donors and the charity, donations would be placed into an account; (2) each donation would be unconditional and irrevocable; (3) donors would surrender all rights to reclaim ownership, possession, or a beneficial interest in any donation; (4) donors or their investment managers would be permitted to manage the investments in the account for 10 years under a limited power of attorney, subject to certain investment restrictions and limitations; (5) the charity would have the right at any time or for any purpose, and in its sole discretion, to withdraw all of the assets held in the account or to terminate the limited power of attorney and the agreement; and (6) the agreement would terminate automatically in cases of severe loss as determined by the charity in its sole discretion. Approving the arrangement, the Service reasoned that the retention of investment management control by the donors, subject to the restrictions and limitations in the agreements, was not substantial enough to affect the deductibility of the property contributed, and did not constitute the retention of a prohibited partial interest under IRC Section 170(f)(3)(see Q 7948). (6ad) The Service also concluded that a proposed "on-line" donor advised fund would be able to treat contributions made through the donor advised fund as support received from the general public for purposes of meeting the public support test under IRC Section 170(b)(1)(A)(vi) and IRC Section 509(a)(1) and also citing Treas. Reg. [section] 1.507-2(a)(8). (7z) The Service privately ruled that the creation of a donor advised fund by a supporting organization did not adversely affect the tax exempt status of the supporting organization. (1aq) Transfers by donors to donor advised funds established by a public charity were not subject to material restrictions or conditions and, thus, could be treated as public charities. (2ao)

7955. How much can be deducted for a gift to a charitable remainder annuity trust or unitrust? When is the deduction taken?

An income tax deduction may be claimed for the charitable gift in the year the funds are irrevocably placed in trust, unless the gift is of tangible personal property. (A gift of a future interest, such as a remainder interest, in tangible personal property is deductible only when all the intervening interests have expired or are held by parties unrelated to the donor. (3ao)) The fair market value of the gift is the present value of the charity's right to receive the trust assets at the end of the intervening interest. (4ah)

In general, the amount of the charitable contribution deduction allowable for the transfer of property to a charitable remainder annuity trust is equal to the present value of the remainder interest. The present value of the remainder interest is determined by subtracting the present value of the annuity payable to the noncharitable beneficiary (see Appendix C) from the fair market value of the property transferred. (5ag)

Example 1. In September, Mr. Smith transferred property worth $100,000 to a charitable remainder annuity trust. The trust is to make biannual payments (at the end of each 6-month period) of $2,500 to Mrs. Smith (age 85) during her lifetime. Assume the IRC Section 7520 interest rates for September and the two preceding months, July and August, were 3.0%, 2.8%, and 2.6%. Mr. Smith elected to use the 3.0% rate.

The value of the annuity payable to Mrs. Smith is calculated as follows:

(1) Find the single life annuity factor for a person age 85 at a 3.0% interest rate--5.3605 (from Single Life Annuity Factors Table in Appendix C).

(2) Find the adjustment factor at a 3.0% interest rate for semi-annual annuity payments at the end of each period--1.0074 (from Annuity Adjustment Factors Table A in Appendix C).

(3) Multiply the aggregate payments received during a year by the factors in (1) and (2)--$5,000 X 5.3605 x 1.0074 = $27,001.

The amount of the charitable contribution deduction is equal to the value of the property transferred to the charitable remainder annuity trust ($100,000) reduced by the value of the annuity payable to Mrs. Smith ($27,001)--$72,999.

Example 2. If in Example 1, payments were to be made to Mrs. Smith at the beginning of each 6-month period (instead of at the end of each period), one payment is added to the value of the annuity payable at the end of each period. The value of the annuity payable at the beginning of each period would be $29,501 ($27,001 + $2,500). The amount of the charitable contribution deduction would be equal to the value of the property transferred to the charitable remainder annuity trust ($100,000) reduced by the value of the annuity payable to Mrs. Smith ($29,501)--$70,499.

Example 3. If payments in Example 1 were to be made for 20 years rather than for Mrs. Smith's life, the value of the annuity payable to Mrs. Smith (at the end of each 6-month period) is calculated as follows:

(1) Find the term certain annuity factor for 20 years at a 3.0% interest rate--14.8775 (from Term Certain Annuity Factors Table in Appendix C).

(2) Find the adjustment factor at a 3.0% interest rate for semi-annual annuity payments at the end of each period--1.0074 (from Annuity Adjustment Factors Table A in Appendix C).

(3) Multiply the aggregate payments received during a year by the factors in (1) and (2)--$5,000 x 14.8775 x 1.0074 = $74,938.

The amount of the charitable contribution deduction is equal to the value of the property transferred to the charitable remainder annuity trust ($100,000) reduced by the value of the annuity payable to Mrs. Smith ($74,938)--$25,062.

Example 4. If payments in Example 2 were to be made for 20 years rather than for Mrs. Smith's life, the value of the annuity payable to Mrs. Smith (at the beginning of each period) is calculated as follows:

(1) Find the term certain annuity factor for 20 years at a 3.0% interest rate--14.8775 (from Term Certain Annuity Factors Table in Appendix C).

(2) Find the adjustment factor at a 3.0% interest rate for a term certain annuity payable at the beginning of each semi-annual period--1.0224 (from Annuity Adjustment Factors Table B in Appendix C).

(3) Multiply the aggregate payments received during a year by the factors in (1) and (2)--$5,000 X 14.8775 X 1.0224 = $76,054.

The amount of the charitable contribution deduction is equal to the value of the property transferred to the charitable remainder annuity trust ($100,000) reduced by the value of the annuity payable to Mrs. Smith ($76,054)--$23,946.

In general, the amount of the charitable contribution deduction allowable for the transfer of property to a charitable remainder unitrust is equal to the present value of the unitrust remainder interest. (1ar) If the unitrust payments are made annually at the beginning of each year and the annual payout rate is equal to an adjusted payout rate for which factors are given, the present value of the unitrust remainder interest can be calculated simply by multiplying the value of the property transferred to the charitable remainder unitrust by the appropriate unitrust remainder factor (see Appendix C). If the unitrust payments are made other than annually at the beginning of each year or the annual payout rate falls between adjusted payout rates for which factors are given, the calculation of the deduction for a contribution to a charitable remainder unitrust is more complex.

Example 5. In September, Mr. Smith transferred property worth $100,000 to a charitable remainder unitrust. The trust is to make annual payments (at the beginning of each year) of 5% of the value of the trust corpus (valued annually) to Mrs. Smith (age 85) during her lifetime (i.e., a 5% annual payout rate).

The present value of the unitrust remainder interest is calculated as follows: Multiply the value of the property transferred to the charitable remainder unitrust ($100,000) by the single life unitrust remainder factor for a person age 85 at a 5% payout rate (.74516--from Single Life Unitrust Remainder Factors Table in Appendix C). The amount of the charitable contribution deduction is $74,516.

Example 6. If the unitrust payments in Example 5 were to be made for 20 years (at the beginning of each year) rather than for Mrs. Smith's life, the present value of the unitrust remainder interest is calculated as follows: Multiply the value of the property transferred to the charitable remainder unitrust ($100,000) by the term certain unitrust remainder factor for 20 years at a 5% payout rate (.358486--from Term Certain Unitrust Remainder Factors Table in Appendix C). The amount of the charitable contribution deduction is $35,849.

Example 7. Assume the same facts as in Example 5, except that payments are to be made at the end of each year. Assume the valuation table interest rates for September and the two preceding months, July and August, were 3.0%, 2.8%, and 2.6%. Mr. Smith elected to use the 3.0% rate.

The value of the unitrust remainder payable to charity is calculated as follows:

(1) Find the unitrust payout adjustment factor for annual payments to start 12 months after the valuation date at a 3.0% interest rate: .970874 (from Unitrust Payout Adjustment Factors Table in Appendix C).

(2) Multiply the factor in (1) by the annual payout rate to obtain the adjusted payout rate: .970874 X 5% = 4.854%.

(3) Find the single life unitrust remainder factor for a person age 85 at a 4.8% adjusted payout rate: .75352 (from Single Life Unitrust Remainder Factors Table in Appendix C).

(4) Find the single life unitrust remainder factor for a person age 85 at a 5.0% adjusted payout rate: .74516 (from Single Life Unitrust Remainder Factors Table in Appendix C).

(5) Subtract the factor in (4) from the factor in (3): . 75352--. 74516 = .00836.

(6) 4.854% - 4.800%%/5.000% - 4.800% = X/.00836

X = .00226

(7) Subtract X in (6) from the factor at 4.8% from (3): .75352--.00226 = .75126.

(8) Multiply the value of the property transferred to the charitable remainder unitrust ($100,000) by the interpolated unitrust remainder factor in (7) (.75126). The amount of the charitable contribution deduction is $75,126. [The same procedure applies to calculating a unitrust remainder interest following a unitrust interest for a term certain. However, Term Certain Unitrust Remainder Factors are used instead of Single Life Unitrust Remainder Factors.]

The remainder interest must equal at least 10% of the fair market value of the property placed in the trust. (1as) See Q 7951, Q 7952.

The deduction is subject to the regular percentage limits discussed in Q 7941. If depreciable real property is given to the trust, the calculation is more complex. (2ap) If appreciated property is given to the trust, it may be necessary to reduce the value of the gift by the amount of capital gain or ordinary income that would be realized if the property were sold at fair market value (see Q 7943). If so, basis must be allocated between the noncharitable and charitable interests in order to determine the amount of gain or income, if any, that would be realized on sale of the part of the property contributed to the charity. (3ap) Basis is allocated to the present value of the remainder interest in the same proportion that the present value of the gift bears to the fair market value of the property. (4ai) If property given is subject to a loan, the transfer can result in a gain to the donor under the bargain sale rules (see Q 7946).

7956. How are the payments from a charitable remainder trust to a beneficiary taxed?

Amounts distributed to noncharitable beneficiaries retain the character (ordinary income, capital gain, and other income such as tax-exempt income) they had when received by the trust (even if the trust is not taxed on the income). However, the income of the trust is deemed to be distributed in the following order:

First, distributions are treated as made out of the ordinary income of the trust to the extent it has ordinary income for the tax year plus its ordinary income not distributed for prior years. Ordinary income not distributed is carried over as such until the next year. (1at)

Second, distributions in excess of ordinary income are considered to be distributions of net capital gain, to the extent of the trust's net capital gain not previously distributed. (2aq) (See Q 7524 for a detailed explanation of the calculation of capital gains and losses.)

Third, if distributions exceed both accumulated ordinary income and accumulated net capital gain, the excess is treated as other income, including tax-exempt income, to the extent the trust has other income for the tax year and undistributed other income for prior years. (3aq)

Finally, to the extent distributions for the year exceed the above amounts, the distribution is deemed a non-taxable return of trust corpus. (4aj)

Example. Jerry establishes a charitable remainder trust with low basis stock that today is worth $100,000. He elects a 7% payout. Jerry's $7,000 payment will be taxed under four different categories depending on the investment performance of the trust over the year. This year, Jerry's payment consists of $3,000 of ordinary income, $2,000 of capital gain, $1,000 of tax-exempt income and $1,000 of tax-free return of principal.

If there are two or more recipients, each is treated as receiving a pro rata portion of each category of income included in the distribution. (5ah)

The amount of the distribution is includable in income by the recipient for the tax year in which the amount is required to be distributed, even though the amount is not distributed until after the close of the trust's tax year. If the recipient and the trust have different tax years, the amount is includable in the tax year of the recipient in which the trust's tax year (in which the amount is required to be distributed) ends. (6ae) However, if the trust's distributable net income is less than the percentage payout designated in the trust instrument (as may occur by design in the early years of a net income with makeup unitrust--see Q 7949), each beneficiary takes into account only his proportionate share of distributable net income. (7aa)

Amounts received are taxed under these rules, even if the trust itself paid tax on any of its income. (8s) (See Q 7957 regarding taxation of a charitable trust.) A charitable remainder trust must pay a 100% excise tax on its unrelated business taxable income (UBTI). The excise tax is allocated to corpus and does not reduce the taxable income of the trust. The UBTI is considered income of the trust for purposes of determining the character of the distribution to a beneficiary. Trust income is allocated among the trust income categories regardless of whether the income is UBTI. (1au)

The IRS privately ruled that amounts treated as consent dividends may be included in a trust's income for purposes of IRC Section 664(b)(1), but do not constitute trust income for purposes of IRC Section 664(d)(3)(A). (2ar) The IRS determined that where income received by a charitable remainder trust from its ownership of a limited partnership interest constituted rental activity income, such income would be treated as income from a rental activity in the hands of the unitrust beneficiaries. (3ar)

Treatment of Annual Distributions to Recipients

In 2005, the Service released final regulations on the ordering rules of IRC Section 664(b) for characterizing distributions from charitable remainder trusts. The final rules reflect changes made to income tax rates, including the rates applicable to capital gains and certain dividends, by TRA 1997, IRSRRA 1998, and JGTRRA 2003. (4ak)

Assignment of income to categories and classes. A trust's income, including income includible in gross income and other income, is assigned to one of three categories in the year in which it is required to be taken into account by the trust. These categories are: (1) gross income, other than gains and amounts treated as gains from the sale or other disposition of capital assets (the "ordinary income category"); (2) gains and amounts treated as gains from the sale or other disposition of capital assets (the "capital gains category"); and (3) other income. (5ai)

Items within the ordinary income and capital gains categories are assigned to different classes based on the federal income tax rate applicable to each type of income in that category in the year the items are required to be taken into account by the trust. For example, the ordinary income category may include a class of "qualified dividend income" as defined in IRC Section 1(h)(11) (see Q 7524) and a class of all other ordinary income.

In addition, the capital gains category may include separate classes for short-term and long-term capital gains and losses, such as: (1) a short-term capital gain class; (2) a 28% long-term capital gain class (i.e., gains and losses from collectibles and IRC Section 1202 gains); (3) an unrecaptured IRC Section 1250 long-term capital gain class (i.e., long-term gains not treated as ordinary income that would be treated as ordinary income if IRC Section 1250(b)(1) included all depreciation); (4) a qualified 5-year long-term capital gain class (as defined by IRC Section 1(h)(9) prior to amendment by JGTRRA 2003); and (5) an all other long-term capital gain class. (6af)

After items are assigned to a class, the tax rates may change so that items in two or more classes would be taxed at the same rate if distributed during a particular year. If the changes to the tax rates are permanent, the undistributed items in those classes are combined into one class. However, if the changes to the tax rates are only temporary (for example, the new rate for one class will "sunset" (i.e., expire) in a future year), the classes are kept separate. (1av)

Order of distributions .The categories and classes of income (determined underTreas. Reg. [section] 1.664-1(d)(1)(i)) are used to determine the character of an annuity or unitrust distribution from the trust in the hands of the recipient regardless of whether the trust is exempt from taxation under IRC Section 664(c) for the year of the distribution. The determination of the character of amounts distributed or deemed distributed at any time during the taxable year of the trust must be made as of the end of that taxable year.

The tax rate or rates to be used in computing the recipient's tax on the distribution will be the tax rates that are applicable in the year in which the distribution is required to be made, to the classes of income deemed to make up that distribution, and not the tax rates that are applicable to those classes of income in the year the income is received by the trust. (2as)

The character of the distribution in the hands of the annuity or unitrust recipient is determined by treating the distributions as being made from each category in the following order:

(1) First, from ordinary income to the extent of the sum of the trust's ordinary income for the taxable year and its undistributed ordinary income for prior years;

(2) Second, from capital gain to the extent of the trust's capital gains (determined under Treas. Reg. [section] 1.664-1(d)(1)(iv));

(3) Third, from other income to the extent of the sum of the trust's other income for the taxable year and its undistributed other income for prior years; and

(4) Finally, from trust corpus (with "corpus" defined for this purpose as the net fair market value of the trust assets minus the total undistributed income (but not loss) in Treas. Regs. [section][section] 1.664-1(d)(1)(i)(a)(1)-(3)). (3as)

If the trust has different classes of income in the ordinary income category, the distribution from that category is treated as being made from each class, in turn, until exhaustion of the class, beginning with the class subject to the highest federal income tax rate and ending with the class subject to the lowest federal income tax rate. (4al)

If the trust has different classes of net gain in the capital gains category, the distribution from that category is treated as being made first from the short-term capital gain class and then from each class of long-term capital gain, in turn, until the exhaustion of the class, beginning with the class subject to the highest federal income tax rate and ending with the class subject to the lowest rate. (5aj)

If two or more classes within the same category are subject to the same current tax rate, but at least one of those classes will be subject to a different tax rate in a future year (e.g., if the current rate "sunsets," or expires), the order of that class in relation to other classes in the category with the same current tax rate is determined based on the future rate or rates applicable to those classes. (1aw)

Within each category, if there is more than one type of income in a class, amounts treated as distributed from that class are to be treated as consisting of the same proportion of each type of income as the total of the current and undistributed income of that type bears to the total of the current and undistributed income of all types of income included in that class. For example, if rental income and interest income are subject to the same current and future federal income tax rate and, therefore, are in the same class, a distribution from that class will be treated as consisting of a proportional amount of rental income and interest income. (2at)

Treatment of losses. In the ordinary income category, a net ordinary loss for the current year is first used to reduce undistributed ordinary income for prior years that is assigned to the same class as the loss. Any excess loss is then used to reduce the current and undistributed ordinary income from other classes, in turn, beginning with the class subject to the highest federal income tax rate and ending with the class subject to the lowest federal income tax rate. If any of the loss exists after all the current and undistributed ordinary income from all classes has been offset, the excess is carried forward indefinitely to reduce ordinary income for future years. (3at)

A net loss in the other income category for the current year is used to reduce undistributed income in this category for prior years. Any excess is carried forward indefinitely to reduce other income for future years. (4am)

Netting of capital gains and losses. Capital gains of the trust are determined on a cumulative net basis (under the rules of Treas. Reg. [section] 1.664-1(d)(1)) without regard to the provisions of IRC Section 1212. For each taxable year, current and undistributed gains and losses within each class are netted to determine the net gain or loss for that class. The classes of capital gains and losses are then netted against each other in the following order:

(1) First, a net loss from a class of long-term capital gain and loss (beginning with the class subject to the highest federal income tax rate and ending with the class subject to the lowest rate) is used to offset net gain from each other class of long-term capital gain and loss, in turn, until exhaustion of the class, beginning with the class subject to the highest federal income tax rate and ending with the class subject to the lowest rate.

(2) Second, either:

(a) a net loss from all the classes of long-term capital gain and loss (beginning with the class subject to the highest federal income tax rate and ending with the class subject to the lowest rate) is used to offset any net gain from the class of short-term capital gain and loss; or

(b) a net loss from the class of short-term capital gain and loss is used to offset any net gain from each class of long-term capital gain and loss, in turn, until exhaustion of the class, beginning with the class subject to the highest federal income tax rate and ending with the class subject to the lowest federal income tax rate.

Carry forward of net capital gain. If, at the end of a taxable year, and after the application of Treas. Reg. [section] 1.664-1(d)(1)(iv), a trust has any net loss or net gain that is not treated as distributed under Treas. Reg. [section] 1.664-1(d)(1)(ii)(a)(2), the net gain or loss is carried over to succeeding taxable years and retains its character in succeeding taxable years as gain or loss from its particular class. (1ax)

For examples illustrating the application of the above rules, see Treas. Reg. [section] 1.664-1(d)(1)(viii). For special transitional rules, see Treas. Reg. [section] 1.664-1(d)(1)(vi).

7957. Is a charitable remainder annuity trust or unitrust subject to income tax?

Ordinarily, the trust is not taxed on its income. (2au) Under prior law, the trust lost its tax-exempt status for any year in which it had unrelated business taxable income (UBTI). The old rule caused the loss of the CRT's exemption for even one dollar of UBTI. TRHCA 2006 modifies the excise tax on unrelated business taxable income of charitable remainder trusts and changes the loss-of-exemption rule. The current law imposes a 100% excise tax, but leaves the CRT's exempt status intact. (3au) The excise tax is allocated to corpus and does not reduce the taxable income of the trust. (4an) See Q 7956 regarding how distributions from a charitable remainder trust are taxed to a beneficiary.

An unrelated trade or business means any trade or business that is not substantially related to the charitable purpose of the trust. (5ak) In general, UBTI means the gross income derived by the trust from an unrelated trade or business regularly carried on by the trust, reduced by certain modified deductions directly connected to the unrelated trade or business. (6ag) For example, there is a specific deduction for up to $1,000 of UBTI. (7ab) Certain unrelated debt-financed income is also treated as UBTI. (8t)

Unrelated business taxable income includes income from debt-financed property. (9n) Securities purchased on margin have been held to be debt-financed property. (10i) An exempt trust that is a limited partner may receive unrelated business income to the same extent as if it were a general partner. (11c) A charitable remainder trust that received unrelated business taxable income from its investments in three limited partnerships was held to be taxable as a complex trust under IRC Section 664(c) to the full extent of its income. (12a)

Planning Point: A common source of unrelated business taxable Income encountered by charitable remainder trusts Is an Investment In a hedge fund, real estate limited partnership, or other form of pass-through entity. These types of investment products typically rely on debt of some form to achieve their investment goals. The prospectus or other offering statement should be carefully reviewed to determine if the entity will be reporting unrelated business taxable income to its investors. Ted R. Batson, Jr., MBA, CPA, is Senior Vice President of Professional Services for Renaissance.

7958. Can a deduction be taken for a charitable contribution to a charitable lead trust of a right to payment to the charity?

Yes, if certain requirements are met. A charitable lead trust is essentially the reverse of a charitable remainder trust; the donor grants a right to payment to the charity, with the remainder reverting to the donor (or his named beneficiaries). Such trusts are commonly called charitable "lead" trusts because the first or leading interest is in the charitable donee. Even though a gift of such an interest in property is less than the entire interest of the donor, its value will be deductible if the interest is in the form of a "guaranteed annuity interest" or a "unitrust interest." (1ay)

A guaranteed annuity interest is an irrevocable right to receive payment of a determinable amount at least annually. A unitrust interest is an irrevocable right to receive payment at least annually of a fixed percentage of the fair market value of the trust assets, determined annually. In either case, payments may be made to the charity for a term of years or over the life of an individual (or lives of more than one individual) living at the date of the transfer to the trust.

Only one (or more) of the following individuals may be used as measuring lives: (1) the donor; (2) the donor's spouse; (3) a lineal ancestor of all the remainder beneficiaries; or (4) the spouse of a lineal ancestor of all the remainder beneficiaries. A trust will satisfy the requirement that all noncharitable remainder beneficiaries be lineal descendants of the individual who is the measuring life (or that individual's spouse) if there is less than a 15% probability that individuals who are not lineal descendants will receive any trust corpus. This probability must be computed at the time property is transferred to the trust taking into account the interests of all primary and contingent remainder beneficiaries who are living at that time. The computation must be based on the current applicable Life Table in Treas. Reg. [section] 20.2031-7. (2av)

A guaranteed annuity may be made to continue for the shorter of a term of years or lives in being plus a term of years. (3av) The IRS determined that an annuity met the requirements for a "guaranteed annuity" even though neither the term nor the amount was specifically stated; the term was ascertainable as of the death of the grantor, based on a formula described in the trust instrument. (4ao) The annuity cannot be for the lesser of a designated amount or a fixed percentage of the fair market value of trust assets, determined annually. (5al) After termination of the charity's right to payment, the remainder interest in the property is returned to the donor or his designated beneficiaries.

Example: Walter gives $1,000,000 to a charitable lead trust. The trust's term is 21 years paying 5% each year to his favorite charity. At the end of the 21 year period, the assets in the trust will be distributed to Walter's three children. The gift tax charitable deduction is $741,870 assuming annual trust payments and a 3.4 percent 7520 rate. Over the course of 21 years, the charity will receive $1,050,000. The children will receive the trust assets free of any further estate or gift taxes.

According to regulations, an income tax charitable deduction is allowable for a charitable annuity or unitrust interest that is preceded by a noncharitable annuity or unitrust interest. In other words, the regulations eliminate the requirement that the charitable interest start no later than the commencement of a noncharitable interest in the form of a guaranteed annuity or unitrust interest. However, the regulations continue to require that any amounts payable for a private purpose before the expiration of the charitable annuity or unitrust interest must be in the form of a guaranteed annuity or unitrust interest, or must be payable from a separate group of assets devoted exclusively to private purposes. The regulations conform the income tax regulations to the Tax Court's decision in Estate of Boeshore. (1az)

The IRS determined that the requirements for a charitable lead annuity trust were met even though the trust authorized the trustee, who was the grantor's son, to choose among various charities to receive the annuity interest and apportion the payouts among them. (2aw)

The Service ruled that so long as a donor was treated as the owner of a guaranteed annuity interest for purposes of the grantor trust rules, the income interest transferred in trust to a private foundation qualified as a "guaranteed annuity interest" under IRC Section 170(f)(2)(B). Even though the present value on the date of the transfer exceeded 60% of the aggregate fair market value of all the amounts in trust, the Service reasoned that this did not prevent the income interest from being a "guaranteed annuity interest" because the trust agreement provided that the acquisition and retention of assets that would give rise to an excise tax if the trustee had acquired the assets was prohibited, in accordance with Treas. Reg. [section]1.170A-6(c)(2)(i)(D). (3aw)

The partition of a charitable lead annuity trust into three separate trusts to address differences of opinion among trustees as to the choice of charitable beneficiaries and the investment of trust assets did not cause the original trust, the new trusts, or any of the trusts' beneficiaries to realize income or gain. (4ap)

The Service has privately ruled that the sale of assets, which were pledged as collateral for a promissory note to the family's charitable lead annuity trust, to a limited liability company would not constitute self-dealing so long as the value of the collateral remained as required under the terms of the note, and would not give rise to tax liability under IRC Section 4941 to the CLATs, related family members, the estate, or the marital trusts. (5am)

Sample Trusts. The IRS has released sample forms, annotations, and alternate provisions for inter vivos and testamentary charitable lead annuity trusts and unitrusts. (6ah)

7959. Is the deduction for a gift to a charitable lead trust of a right to payment taken in the year of the gift?

An immediate deduction of the present value of all the annual payments to be made over the period may be taken if the trust is structured so that the donor is taxable on the income of the trust each year (under the "grantor trust rules"). If the trust is structured so that he is not taxable on trust income, he will not get an income tax deduction for the gift. (1ba) The IRS has determined that a donor was to be treated as the owner of a charitable lead trust where the donor retained the power to substitute trust property. The donor was entitled to a current deduction in an amount equal to the present value of the unitrust interest. (2ax)

In general, the amount of the charitable contribution deduction allowable for the transfer of property to a charitable lead annuity trust is equal to the present value of the annuity payable to the charity (see Appendix C).

Example 1. In September, Mr. Smith (age 85) transferred property worth $100,000 to a charitable lead annuity trust that is a grantor trust. The trust is to make biannual payments (at the end of each 6-month period) of $2,500 to the charity during his lifetime. Assume the IRC Section 7520 interest rates for September and the two preceding months, July and August, were 3.4%, 3.2%, and 3.0%. Mr. Smith elected to use the 3.0% rate because the lowest 7520 in the 3-month period produces the highest charitable deduction for charitable lead trusts.

The value of the annuity payable to charity is calculated as follows:

(1) Find the single life annuity factor for a person age 85 at a 3.0% interest rate--5.3605 (from Single Life Annuity Factors Table in Appendix C).

(2) Find the adjustment factor at a 3.0% interest rate for semi-annual annuity payments at the end of each period--1.0074 (from Annuity Adjustment Factors Table A in Appendix C).

(3) Multiply the aggregate payments received during a year by the factors in (1) and (2)--$5,000 x 5.3605 x 1.0074 = $27,001.

The amount of the charitable contribution deduction is equal to $27,001.

Example 2. If in Example 1, payments were to be made to charity at the beginning of each 6-month period (instead of at the end of each period), one payment is added to the value of the annuity payable at the end of each period. The value of the annuity payable at the beginning of each period would be $29,501 ($27,001 + $2,500). The amount of the charitable contribution deduction would be equal to $29,501.

Example 3. If payments in Example 1 were to be made for 20 years rather than for Mr. Smith's life, the value of the annuity payable to charity (at the end of each 6-month period) is calculated as follows:

(1) Find the term certain annuity factor for 20 years at a 3.0% interest rate--14.8775 (from Term Certain Annuity Factors Table in Appendix C).

(2) Find the adjustment factor at a 3.0% interest rate for semi-annual annuity payments at the end of each period--1.0074 (from Annuity Adjustment Factors Table A in Appendix C).

(3) Multiply the aggregate payments received during a year by the factors in (1) and (2)--$5,000 x 14.8775 x 1.0074 = $74,938.

The amount of the charitable contribution deduction is equal to $74,938.

Example 4. If payments in Example 2 were to be made for 20 years rather than for Mr. Smith's life, the value of the annuity payable to charity (at the beginning of each period) is calculated as follows:

(1) Find the term certain annuity factor for 20 years at a 3.0% interest rate--14.8775 (from Term Certain Annuity Factors Table in Appendix C).

(2) Find the adjustment factor at a 3.0% interest rate for a term certain annuity payable at the beginning of each semi-annual period--1.0224 (from Annuity Adjustment Factors Table B in Appendix C).

(3) Multiply the aggregate payments received during a year by the factors in (1) and (2)--$5,000 x 14.8775 x 1.0224 = $76,054.

The amount of the charitable contribution deduction is equal to $76,054.

In general, the amount of the charitable contribution deduction allowable for the transfer of property to a charitable lead unitrust is equal to the present value of the unitrust interest. If the unitrust payments are made annually at the beginning of each year and the annual payout rate is equal to an adjusted payout rate for which factors are given, the present value of the unitrust interest can be calculated simply by multiplying the value of the property transferred to the charitable lead unitrust by the appropriate unitrust factor (see Appendix C). If the unitrust payments are made other than annually at the beginning of each year or the annual payout rate falls between adjusted payout rates for which factors are given, the calculation of the deduction for a contribution to a charitable lead unitrust is more complex.

Example 5. In September, Mr. Smith (age 85) transferred property worth $100,000 to a charitable lead unitrust that is a grantor trust. The trust is to make annual payments (at the beginning of each year) of 5% of the value of the trust corpus (valued annually) to charity during his lifetime (i.e., a 5% annual payout rate).

The value of the unitrust payable to charity is calculated as follows:

(1) Find the single life unitrust remainder factor for a person age 85 at a 5.0% adjusted payout rate: .74516 (from Single Life Unitrust Remainder Factors Table in Appendix C).

(2) Calculate the single life unitrust factor for a person age 85 at a 5.0% adjusted payout rate by subtracting the factor in (1) from one--1 - . 74516 = .25484.

(3) Multiply the value of the property transferred to the charitable lead unitrust ($100,000) by the single life unitrust factor for a person age 85 at a 5% payout rate (.25484) - $100,000 x .25484 = $25,484.

The amount of the charitable contribution deduction is $25,484.

Example 6. If the unitrust payments in Example 5 were to be made for 20 years (at the beginning of each year) rather than for Mr. Smith's life, the present value of the unitrust remainder interest is calculated as follows:

(1) Find the term certain unitrust remainder factor for 20 years at a 5.0% adjusted payout rate: .358486 (from Term Certain Unitrust Remainder Factors Table in Appendix C).

(2) Calculate the term certain unitrust factor for 20 years at a 5.0% adjusted payout rate by subtracting the factor in (1) from one--1 - .358486 = .641514.

(3) Multiply the value of the property transferred to the charitable lead unitrust ($100,000) by the term certain unitrust factor for 20 years at a 5% payout rate (.641514)--$100,000 x .641514 = $64,151.

The amount of the charitable contribution deduction is $64,151.

Example 7. Assume the same facts as in Example 5, except that payments are to be made at the end of each year. Assume the valuation table interest rates for September and the two preceding months, July and August, were 3.4%, 3.2%, and 3.0%. Mr. Smith elected to use the 3.0% rate.

The value of the unitrust payable to charity is calculated as follows:

(1) Find the unitrust payout adjustment factor for annual payments to start 12 months after the valuation date at a 3.0% interest rate: .970874 (from Unitrust Payout Adjustment Factors Table in Appendix C).

(2) Multiply the factor in (1) by the annual payout rate to obtain the adjusted payout rate: .970874 x 5% = 4.854%.

(3) Find the single life unitrust remainder factor for a person age 85 at a 4.8% adjusted payout rate: .75352 (from Single Life Unitrust Remainder Factors Table in Appendix C).

(4) Find the single life unitrust remainder factor for a person age 85 at a 5.0% adjusted payout rate: .74516 (from Single Life Unitrust Remainder Factors Table in Appendix C).

(5) Subtract the factor in (4) from the factor in (3): .75352 - .74516 = .00836.

(6) 4.854% - 4.800%%/5.000% - 4.800% = X/.00836 X = .00226

(7) Subtract X in (6) from the factor at 4.8% from (3): .75352 - .00226 = .75126.

(8) Subtract the interpolated unitrust remainder factor in (7) from one--1 - .75126 = .24874.

(9) Multiply the value of the property transferred to the charitable lead unitrust ($100,000) by the interpolated unitrust factor in (8) (.24874).The amount of the charitable contribution deduction is $24,874. [The same procedure applies to calculating a unitrust interest for a term certain. However, Term Certain Unitrust Remainder Factors are used instead of Single Life Unitrust Remainder Factors.]

If the donor of a right to payment ceases to be taxable on the trust income before the termination of the interest, he must "recapture," that is, include in his income, an amount equal to the deduction less the discounted value of all amounts required to be, and which actually were, paid before the time he ceased to be taxable on trust income. (1bb)

7960. Is a gift of a "conservation easement" or a "facade easement" deductible?

The IRC permits a deduction for a contribution of certain real property interests even though the gift is less than the donor's entire interest if the gift is for the preservation of land for recreation or education, the protection of natural habitats, the preservation of open space, or the preservation of historically important land or buildings. (2ay)

If a donor contributes for any of these purposes his entire interest in real property (he may retain the right to subsurface oil, gas, or other minerals), a remainder interest in the property, or a restriction on the use of the property (a conservation easement), he may be entitled to a deduction. The contribution must be made to a qualified organization (a governmental unit and certain charities), and the restriction on use of the property must be protected in perpetuity. (3ax) The Tax Court has held that in order to be protected in perpetuity, the deed of gift used to transfer the easement, once properly recorded as required by state law, must not be subordinate to a mortgage holder's security interest. (4aq)

A trust may not take a charitable deduction (under IRC Sec. 642(c)) or a distribution deduction (under IRC Sec. 661(a)(2)) with respect to a contribution to charity of trust principal that meets the requirements of a qualified conservation contribution (under IRC Section 170(h)). (1bc)

Conservation Easements

A conservation easement is a restriction on the owner's use of the property. A popular form is the open space or scenic easement, wherein the owner of land agrees to set the land aside to preserve natural, scenic, historic, scientific and recreational areas, for public enjoyment. (2az)

The Tax Court held that taxpayers' contributions of conservation easements (encumbered shoreline) were qualified conservation contributions because: (1) they protected a relatively natural habitat of wildlife and plants (in accordance with Treas. Reg. [section]1.170A-14(d)(3)); and (2a) were exclusively for conservation purposes. (3ay)

The Tax Court held that a taxpayer did not make a contribution of a qualified conservation easement because the attempted grant did not satisfy the conservation purposes required (under IRC Sec. 170(h)(4)(A)). Specifically, the deed did not preserve open space, an historically important land area, or a certified historical structure. (4ar)

The IRS approved a contribution of a conservation easement in which the taxpayer retained limited water rights; the conditions of the use of those rights were sufficiently restricted that the Service determined their exercise would not adversely affect the purposes for which the easement was established. (5an) The IRS also determined that the proposed inconsistent use of some of a farm (i.e., construction of eight single-family homes) to be burdened by a conservation easement was not significant enough to cancel the conservation purpose of the easement because the conservation easement would still maintain over 80% of the entire tract in its presently undeveloped state, thereby preserving the habitat. (6ai)

Open space easements have been approved by the Service in several instances. (7ac) (Although some of these rulings were made under prior law, they remain valid under the current IRC Section.)

The deductible value of the easement is generally determined using a "before and after" approach. That is, the value of the total property owned by the taxpayer (including adjacent property that is not encumbered by the easement) before granting the easement is determined. Then, the value of the property after granting the easement is subtracted to determine the value of the easement. (8u) For purposes of determining the value of the property before granting of the easement, the Tax Court determined that the highest and best use of the property had to be taken into account. (9o)

General guidelines for valuing property can be found in Rev. Proc. 66-49. (1bd) If there is a substantial record of sales of easements comparable to the one donated, the fair market value of the donation can be based on the sale prices of the comparable easements. However, where previous sellers of easements to the county had generally intended to make gifts to the county by way of bargain sales, the Tax Court determined that the comparable sales approach was inappropriate in a bargain sale of a conservation easement. (2ba) Increases in the value of any property owned by the donor or a related person that result from the donation, whether or not the other property is contiguous to the donated property, reduce the amount of the deduction by the amount of the increase in the value of the other property. (3az)

The Service privately ruled that an estate could properly claim an estate tax deduction for the value of a conservation easement attributable to a 68.8% tenancy in common interest includible in the decedent's gross estate notwithstanding the fact that the co-tenants would claim an income tax deduction for the conservation easement granted with respect to the interests in the property they owned. (4as)

The Service determined that a taxpayer's exchange of a conservation easement in real property under IRC Section 1031(a) would qualify as a tax-deferred exchange of like-kind property, provided that the properties would be held for productive use in a trade or business, or for investment. (5ao)

In a legal memorandum, the Service analyzed the issues regarding the Colorado conservation easement credit, including: (1) to the extent a taxpayer is effectively reimbursed for the transfer of the easement through the use, refund, or transfer of the credit, whether that benefit is a quid pro quo that either reduces or eliminates a charitable contribution deduction under IRC Section 170; and (2) whether the benefit of the state conservation easement credit is, in substance, an amount realized from the transfer of the easement under IRS Section 1001, generally resulting in capital gain. (6aj)

Improper deductions for conservation easements. The Service has determined that some taxpayers have been claiming inappropriate contribution deductions for cash payments or easement transfers to charitable organizations in connection with purchases of real property. In some of these questionable cases, the charity purchases the property and places a conservation easement on the property. Then, the charity sells the property subject to the easement to a buyer for a price that is substantially less than the price paid by the charity for the property. As part of the sale, the buyer makes a second payment--designated as a "charitable contribution"--to the charity. The total of the payments from the buyer to the charity fully reimburses the charity for the cost of the property. The Service warned that in appropriate cases, it will treat these transactions in accordance with their substance rather than their form. Accordingly, the Service may treat the total of the buyer's payments to the charity as the purchase price paid by the buyer for the property. Taxpayers are advised that the Service intends to disallow all or part of any improper deductions and may impose penalties, and also intends to assess excise taxes (under IRC Section 4958) against any disqualified person who receives an excess benefit from a conservation transaction, and against any organization manager who knowingly participates in the transaction. In appropriate cases, the Service may challenge the tax-exempt status of the organization based on the organization's operation for a substantial nonexempt purpose or impermissible private benefit. (1be)

Guidance on qualified conservation contributions made from 2006 through 2009. A charitable contribution of a qualified conservation easement is available to the extent the contribution does not exceed 50% of adjusted gross income (AGI). (The limit was 100% of AGI for certain farmers or ranchers.) A qualified conservation easement contribution disallowed because it exceeds the percentage of AGI limitation can be carried over for up to 15 years. (2bb) The Service has released question-and-answer guidance relating to the increased percentage limitation and increased carryover period for qualified conservation contributions (see above) made in taxable years beginning after 2005 and before 2008. According to the Service, if a taxpayer has made a qualified conservation contribution, which is subject to the special 50% limitation (under IRC Section 170(b)(1)(E)), and one or more contributions subject to the other percentage limitations (i.e., the 50%, 30%, or 20% limitations under IRC Sections 170(b) (1)(a), 170((b)(1)(B), 170(b)(1)(C), and 170(b)(1)(D)), the qualified conservation contribution may be taken into account only after taking into account the contributions subject to the other percentage limitations. The Service also states that the 50% limit applies to qualified conservation contributions only, not to all contributions of real property interests. The guidance also includes several questions and answers relating to the rules for qualified farmers and ranchers. (3ba)

The qualified easement contribution must be reduced if a rehabilitation credit was taken with respect to the property. (4at)

Facade Easements

A variation on the conservation easement is the use of a "facade easement," wherein the grantor agrees not to alter the facade or modify the architectural characteristics of a building.

If the building, structure, or land is listed in the National Register or is located in a registered historic district, any easement that is a restriction with respect to the exterior of the building must preserve the entire exterior and its historical character. (5ap) If a deduction in excess of $10,000 is claimed with respect to such an exterior easement, a $500 filing fee is required with the tax return. (6ak)

The amount of the deduction for the contribution of a facade easement is the full fair market value of the easement at the time of the contribution. (7ad) The fair market value of the facade donation has been determined by applying the "before and after" approach. (8v) A substantial record of sales of easements comparable to the one donated results in valuation of the fair market value of the donation based on the sale prices of the comparable easements. (9p) If the donation of a facade easement increases the value of the property it would appear that the donation would be reduced by the amount of such increase. (1bf)

A taxpayer who claims an investment credit for the rehabilitation of a historic structure may be required to recapture a portion of the credit upon the gift of a facade easement for the rehabilitated building. The qualified easement contribution is reduced if a rehabilitation credit was taken (see above).

7961. What are the tax consequences of a charitable contribution of a partnership interest?

A partnership interest is a capital asset that, if sold, would be given capital gain or loss treatment except to the extent of the partner's share of certain partnership property that, if sold by the partnership, would produce ordinary gain (i.e., his share of "unrealized receivables" and "substantially appreciated inventory"). (2bc) (See Q 7798. See also Q 7524 regarding the treatment of capital gains and losses.)Thus, if a taxpayer makes a charitable contribution of his partnership interest, and if he has held the interest for long enough to qualify for long-term capital gain treatment (i.e., more than one year, as defined in IRC Section 1222(3); see Q 7943), he may deduct the full fair market value of his interest less the amount of ordinary gain, if any, that would have been realized by the partnership for his share of "unrealized receivables" and "substantially appreciated inventory." (His deduction is subject to the applicable limits. See Q 7943.)

If the partnership interest includes a liability (mortgage, etc.), the amount of the liability is treated as an amount realized on the disposition of the partnership interest. (3bb) Thus, the contribution is subject to the bargain sale rules, and the transfer will be treated, in part at least, as a sale (see Q 7946). (4au) (If the partner's share of partnership liabilities exceeds the fair market value of his partnership interest, he may have taxable income, but no deduction under the bargain sale rules.) In Goodman v. United States, (5aq) the taxpayer contributed her partnership interest to charity, subject to her share of partnership debt. The district court held that the taxpayer recognized gain on the transfer equal to the excess of the amount realized over that portion of the adjusted basis of the partnership interest (at the time of the transfer) allocable to the sale under IRC Section 1011(b). (6al)

In order to determine the taxable income and the amount of charitable deduction under the bargain sale rules, the following steps must be taken:

1. Determine the taxable gain on the sale portion. Under the bargain sale rules, part of the donor's basis is allocated to the portion sold. The basis allocated to the sold portion is the amount of basis that bears the same ratio to his entire basis as the amount realized bears to the market value of the property. Presumably, the sold portion includes the same proportionate part of his share of unrealized receivables and substantially appreciated inventory as it does basis.

Example. Mr. Jones owns a 10% interest in a partnership that he has held for three years. The fair market value of his interest is $100,000 and his adjusted basis is $50,000. His share of a mortgage on partnership property is $40,000, and his share of "unrealized receivables" (potential depreciation recapture on the mortgaged property) is $5,000 in which the partnership's basis is zero. He donates his entire interest to charity. He is deemed to have received $40,000, his share of partnership liabilities, on the transfer. In effect there are two transactions--a sale for $40,000 and a contribution of $60,000.

Of Mr. Jones' $50,000 basis in his partnership interest, $20,000 is allocated to the sale portion: $40,000 (amount realized)/$100,000 (fair market value) x $50,000 (total adjusted basis). The fair market value of the sold portion is $40,000 (amount realized). Mr. Jones must recognize a gain of $20,000 ($40,000 realized less $20,000 adjusted basis allocated to the sold portion). Of that gain, $2,000 is allocable to unrealized receivables ($5,000 unrealized receivables x $40,000/$100,000). Because the partnership has no basis in the unrealized receivables, the entire $2,000 would be ordinary income. Mr. Jones must report a taxable long-term capital gain of $18,000 and a taxable ordinary gain of $2,000.

2. Determine the charitable contribution deduction. As a general rule, the fair market value of the portion given to charity is deductible except to the extent the property would have generated ordinary income if sold. Consequently, the allowable deduction for the gift portion must be reduced to the extent the portion of the partnership interest given to the charity would produce ordinary income if sold.

Example. The fair market value of Mr. Jones' gift to charity is $60,000. Because 60% of the partnership interest was given to the charity ($60,000/$100,000), 60% of Mr. Jones' share of partnership "unrealized receivables," or $3,000 ($5,000 x 60% = $3,000), is considered included in the gift. The balance of the gift would be long-term capital gain on sale. Because $3,000 would be ordinary income on a sale, Mr. Jones' contribution is reduced by $3,000, and his charitable contribution deduction is $57,000.

Other special rules may apply under certain circumstances, for example, if the partnership owns property subject to tax credit recapture, if it has made installment sales, or (as might occur in the case of an oil and gas partnership) if it is receiving income in the form of "production payments." See also Q 7947 with regard to prepaid interest.

7962. What is a charitable IRA rollover or qualified charitable distribution?

For tax years 2006 to 2009, a taxpayer age 70 1/2 or older can make a qualified charitable distribution from an IRA that is not includible in the gross income of the taxpayer. (1bg)

A qualified charitable distribution is any distribution

1. not exceeding $100,000 in the aggregate during the taxable year;

Planning Point: Only distributions from a taxpayer's own IRA are includible in determining that a taxpayer has met the $100,000 limit. Therefore, while married taxpayers may make qualified distributions totaling $200,000, each spouse may only make distributions of up to $100,000 from their own IRA. Ted R. Batson, Jr., MBA, CPA, and Gregory W. Baker, JD, CFP[R], CAP, Renaissance Administration, LLC.

2. made directly, in a trustee-to-charity transfer;

3. from a traditional or Roth IRA (distributions from SEPs and SIMPLE IRAs do not qualify);

Planning Point: A participant in a qualified plan, an IRC Section 403(b) tax sheltered annuity, or an eligible IRC Section 457 governmental plan must first perform a rollover to a traditional IRA before taking advantage of a charitable IRA rollover. Ted R. Batson, Jr., MBA, CPA, and Gregory W. Baker, JD, CFP[R], CAP, Renaissance Administration, LLC.

4. to a public charity (but not a donor-advised fund or supporting organization);

Planning Point: Rollovers to donor-advised funds, supporting organizations, private foundations, charitable remainder trusts, charitable gift annuities, and pooled income funds are not qualified charitable distributions. Ted R. Batson, Jr., MBA, CPA, and Gregory W. Baker, JD, CFP[R], CAP, Renaissance Administration, LLC.

5. that would otherwise qualify as a deductible charitable contribution--not including the percentage of income limits in IRC Section 170(b);

6. to the extent the distribution would otherwise be includible in gross income. (1bh)

No charitable income tax deduction is allowed for a qualified charitable distribution. (2bd)

Planning Point: Rollovers to charities by taxpayers who reside in states that tax IRA distributions and do not have a charitable deduction may not escape tax at the state level. Ted R. Batson, Jr., MBA, CPA, and Gregory W. Baker, JD, CFP[R], CAP, Renaissance Administration, LLC.

If a qualified charitable distribution is made from any IRA funded with nondeductible contributions, the distribution is treated as coming first from deductible contributions and earnings. (3bc) This is contrary to the general rule that distributions from an IRA with both deductible and nondeductible are deemed made on a pro-rata basis. (4av)

Qualified charitable distributions do count toward a taxpayer's required minimum distributions. (5ar)

The prohibition on making a qualified charitable distribution from a SEP IRA or a SIMPLE IRA only applies to "ongoing" SEP IRAs or SIMPLE IRAs. Such an IRA is "ongoing" if a contribution is made to it for the taxable year of the charitable distribution. (6am)

For guidance on qualified charitable contributions (including questions and answers), see Notice 2007-7. (7ae)

(1.) IRC Sec. 170(a).

(2.) Treas. Reg. [section] 1.170A-1(c)(1).

(3.) See Winthrop v. Meisels, 180 F.Supp. 29 (DC NY 1959), aff'd 281 F.2d 694 (2d Cir. 1960).

(4.) Stubbs v. U.S., 70-2 USTC 19468 (9th Cir.), cert. den. 400 U.S. 1009 (1971).

(5.) Blake v. Comm., 83-1 USTC 19121 (2nd Cir. 1982).

(6.) Sheppard v. U.S., 361 F.2d 972 (Ct. Cl. 1966).

(7.) 477 U.S. 105 (1986).

(8.) Treas. Reg. [section] 1.170A-1(h)(1).

(9.) Treas. Reg. [section] 1.170A-1(h)(2).

(10.) See Sklarv. Comm., 125 TC 281 (2005); see also Sklarv. Comm., 2002-1 USTC [paragraph] 50,210 (9th Cir. 2002), aff'g TC Memo 2000-118.

(1a.) Let. Rul. 200142019. See also Let. Ruls. 200228001, 200230039.

(2a.) Treas. Regs. [section][section] 1.170A-1(h), 1.170A-13(f)(8).

(3a.) Treas. Reg. [section] 1.170A-13(f)(8). See also Rev. Proc. Rev. Proc. 2009-50, 2009-45 IRB.

(4a.) IRC Sec. 170(l).

(5a.) See TAM 200004001.

(6a.) 1960-2 CB 73.

(7a.) Let. Rul. 9829053. See also Let. Ruls. 200003013, 199929050.

(8a.) See IRC Sec. 170(a)(10); see also Notice 99-36, 1999-26 CB 1284.

(9a.) 2000-1 CB 952.

(10a.) TD 9092, 68 Fed. Reg. 54336 (9-17-2003); Notice 2002-8, 2002-1 CB 398.

(11.) TC Memo 2004-271; Addis v. Comm., 2004-2 USTC 150,291 (9th Cir. 2004) (cert. denied) aff'g 118 TC 528 (2002); and Weiner v. Comm., TC Memo 2002-153, cert. denied.

(1b.) Treas. Reg. [section] 1.170A-1(c); Rev. Rul. 68-69, 1968-1 CB 80.

(2b.) See Goldman v. Comm., 388 F.2d 476 (6th Cir. 1967).

(3b.) Anselmo v. Comm., 80 TC 872 (1983), aff'd 757 F.2d 1208 (11th Cir. 1985).

(4b.) See Tripp v. Comm., 337 F.2d 432 (7th Cir. 1964); Est. of DeBie v. Comm., 56 TC 876 (1971), acq. 1972-2 CB 1 and 1972-2 CB 2.

(5b.) TC Memo 1992-450.

(6b.) TC Memo 1992-98.

(7b.) TC Memo 2001-141.

(8b.) IR 83-89.

(9b.) Mathias v. Comm., 50 TC 994 (1968), acq. 1969-2 CB xxiv. But see McGuire v. Comm., 44 TC 801 (1965), acq. in result 1966-2 CB 6.

(10b.) See Weil v. Comm., TC Memo 1967-78; Schapiro v. Comm., TC Memo 1968-44.

(11a.) Barringer v. Comm., TC Memo 1972-334. See also Kerner v. Comm., TC Memo 1976-12.

(12.) Herman v. U.S. and Brown v. U.S. (consolidated actions), 99-2 USTC 150,889 (E.D. Tenn. 1999).

(13.) TAM 9828001.

(1c.) 1966-2 CB 1257, as modified by Rev. Proc. 96-15, 1996-2 CB 627.

(2c.) 2001-11 IRB 895.

(3c.) TC Memo 1998-204.

(4c.) IRC Sec. 170(f)(16), as added by PPA 2006.

(5c.) See IRC Secs. 170(e)(1)(B), 6050L; IRC Sec. 170(m). See also Rev. Rul. 2003-28, 2003-11 IRB 594; Notice 2005-41, 2005-23 IRB 1203; Notice 2004-7, 2004-3 IRB 310; and IRS News Release IR-2003-141 (12-22-2003).

(6c.) 70 Fed. Reg. 29450 (5-23-2005).

(7c.) 2005-29 IRB 119. See also Notice 2005-41, 2005-23 IRB 1203.

(8c.) IRC Sec. 170(a)(1).

(9c.) IRC Sec. 170(f)(17), as added by PPA 2006.

(10c.) Notice 2006-110, 2006-51 IRB 1127.

(1d.) IRC Sec. 170(f)(8)(A).

(2d.) IRC Sec. 170(f)(8)(B); Treas. Reg. [section] 1.170A-13(f)(2).

(3d.) IRC Sec. 170(f)(8)(C); Treas. Reg. [section] 1.170A-13(f)(3).

(4d.) IRC Sec. 170(f)(8)(D).

(5d.) Publication 1771.

(6d.) Treas. Reg. [section] 1.170A-13(b)(1).

(7d.) Treas. Reg. [section] 1.170A-13(f)(11).

(8d.) IRC Sec. 170(f)(11)(A)(i).

(1e.) IRC Sec. 170(f)(11)(A)(ii).

(2e.) IRC Sec. 170(f)(11)(F).

(3e.) IRC Sec. 170(f)(11)(B).

(4e.) IRC Secs. 170(f)(11)(C), 170(f)(11)(D).

(5e.) IRC Sec. 170(f)(11)(G).

(6e.) IRC Secs. 170(f)(11)(C), 170(f)(11)(E).

(7e.) Treas. Reg. [section] 1.170A-13(c)(2).

(8e.) Hewitt v. Comm., 109 TC 258 (1997), aff'd, 166 F.3d 332 (4th Cir. 1998).

(9d.) See Bond v. Comm., 100 TC 32 (1993).

(1f.) Treas. Reg. [section] 1.170A-13(c)(5)(iv).

(2f.) TC Memo 1999-250.

(3f.) TC Memo 2005-227.

(4f.) Treas. Reg. [section] 1.170A-13(c)(6).

(5f.) Treas. Reg. [section] 1.170A-13(c)(4)(iv)(B).

(6f.) Treas. Reg. [section] 1.170A-13(c)(4)(iii).

(7f.) See Rev. Proc. 96-15, 1996-1 CB 627, as modified by Announcement 2001-22, 2001-11 IRB 895.

(8f.) Rev. Proc. 96-15, above, Sec. 7.01(2).

(9e.) Treas. Reg. [section] 1.170A-13(c)(7)(ix)(A).

(1g.) Treas. Reg. [section] 1.170A-13(c)(7)(ix)(B).

(2g.) Ann. 86-4, 1986-4 IRB 51.

(3g.) IRC Secs. 170(f)(11)(D), 170(f)(11)(E).

(4g.) IRC Sec. 6050L.

(5g.) IRC Sec. 6721; Treas. Reg. [section] 1.6050L-1. See SCA 200101031.

(6g.) Instructions for IRS Form 8282

(1h.) IRC Sec. 170(f)(12)(A).

(2h.) IRC Sec. 170(f)(12)(A)(i).

(3h.) IRC Secs. 170(f)(12)(B).

(1i.) IRC Sec. 170(f)(12)(C).

(2i.) IRC Sec. 170(f)(12)(E).

(3i.) IRC Sec. 170(f)(12)(D).

(4h.) IRC Sec. 6720.

(5h.) IRC Sec. 170(f)(12)(F).

(6h.) H.R. Conf. Rep. No. 108-755.

(7g.) Notice 2005-44, 2005-25 IRB 1287. Notice 2006-001 supplements Notice 2005-44.

(1j.) See H.R. Conf. Rep. No. 755, 108th Cong., 2nd Session 750 (2004).

(2j.) Notice 2005-44, above. Notice 2006-001 supplements Notice 2005-44.

(3j.) Notice 2005-44, above. Notice 2006-001 supplements Notice 2005-44.

(4i.) IRC Sec. 170(f)(12).

(1k.) Notice 2005-44, above. Notice 2006-001 supplements Notice 2005-44.

(2k.) Treas. Reg. [section] 1.170A-1(c)(2).

(3k.) See, e.g., Rev. Rul. 2002-67, 2002-47 IRB. 873.

(1l.) Notice 2005-44, above.

(2l.) IRC Sec. 170(f)(11)(A)(ii)(I).

(3l.) Notice 2005-44, above.

(4j.) IRC Sec. 170(f)(8).

(5i.) Notice 2005-44, above.

(6i.) See IRS Information Letter INFO 2005-0129.

(7h.) See Notice 2006-1, 2006-4 IRB 347.

(1m.) IR-2005-145.

(2m.) IR-2005-149.

(3m.) IRC Secs. 6662(a), 6662(b)(3).

(4k.) See IRC Sec. 6662(d).

(5j.) IRC Sec. 6662(e)(1)(A), as amended by PPA 2006.

(6j.) IRC Sec. 6662(h)(2)(A)(i), as amended by PPA 2006.

(7i.) 2005-50 IRB 1137.

(1n.) See IRC Sec. 170(b)(1)(E).

(2n.) IRC Sec. 170(b)(1)(A).

(3n.) IRC Secs. 170(b)(1)(B), 170(b)(1)(C).

(4l.) IRC Sec. 170(b)(1)(D).

(5k.) IRC Secs. 170(d)(1), 170(b)(1)(D)(ii); Treas. Reg. [section] 1.170A-10(b).

(6k.) IRC Sec. 170(j); Rockefeller v. Comm., 676 F.2d 35 (2nd Cir. 1982), aff'g 76 TC 178 (1981), acq. in part 1984-2 CB 2; Rev. Rul. 84-61, 19841 CB 39. See Rev. Rul. 58-279, 1958-1 CB 145.

(7j.) See Treas. Reg. [section] 1.170A-8(a)(2). See Davis v. United States, 495 U.S. 472 (1990).

(8g.) IRC Sec. 170(a)(1).

(1o.) IRC Sec. 170(a)(3). See also Treas. Reg. [section] 1.170A-5.

(2o.) Treas. Regs. [section][section] 1.170A-5(a)(2), 1.170A-5(a)(3).

(3o.) Let. Ruls. 200202034, 8849018.

(4m.) TAM 9828001.

(5l.) IRC Sec. 170(a)(3).

(6l.) TAM 200004001. See also Rev. Rul. 2000-43, 2000-2 CB 333.

(7k.) See IRC Sec. 170(b)(1)(C); Treas. Reg. [section] 1.170A-8(d)(1).

(8h.) IRC Secs. 170(b)(1)(C); Treas. Reg. [section] 1.170A-10(c).

(9f.) IRC Secs. 170(b)(1)(C)(iii), 170(e)(1).

(10d.) Woodbury v. Comm., 90-1 USTC [paragraph] 50,199 (10th Cir. 1990), aff'g TC Memo 1988-272.

(1p.) IRC Sec. 170(e)(1)(A); Treas. Reg. [section] 1.170A-4(a).

(2p.) IRC Sec. 170(e)(1).

(3p.) Greene v. U.S., 79 F.3d 1348 (2nd Cir. 1996).

(4n.) Greene v. U.S., 84 AFTR 2d 99-5415 (2nd Cir. 1999).

(5m.) See Ferguson v. Comm., 174 F.3d 997 (9th Cir. 1999).

(6m.) 1978-1 CB 83.

(7l.) Rauenhoorst v. Comm., 119 TC 157 (2002).

(8i.) Let Rul. 200108012.

(1q.) IRC Sec. 170(b)(1)(C); Treas. Reg. [section] 1.170A-8(d)(1).

(2q.) IRC Sec. 170(e)(1)(B).

(3q.) Treas. Reg. [section] 1.170A-4(b)(3)(i).

(4o.) Let. Ruls. 9131052, 9147049.

(5n.) Let. Rul. 9833011.

(6n.) IRC Secs. 170(b)(1)(C)(iii), 170(e)(1).

(7m.) Woodbury v. Comm., 90-1 USTC 150,199 (10th Cir. 1990), aff'g TC Memo 1988-272.

(8j.) See IRC Sec. 170(e)(1)(A); Treas. Reg. [section] 1.170A-4(a).

(9g.) Treas. Reg. [section] 1.170A-4(b)(1).

(1r.) IRC Sec. 170(e)(7), as added by PPA 2006.

(2r.) IRC Sec. 6050L, as added by PPA 2006.

(3r.) IRC Sec. 6720B, as added by PPA 2006.

(4p.) See IRC Secs. 170(b)(1)(F), 170(b)(1)(A)(vii).

(5o.) See IRC Sec. 170(b)(1)(D)(i).

(6o.) IRC Sec. 170(b)(1)(D)(ii).

(7n.) IRC Sec. 170(e)(1)(B).

(8k.) IRC Sec. 170(e)(1)(B)(ii); IRC Sec. 170(e)(5).

(1s.) See IRC Sec. 170(e)(5).

(2s.) IRC Sec. 170(e)(5)(C). See, e.g., Let. Ruls. 200112022, 200112024, 200112025.

(3s.) Let. Rul. 199925029. See also Let. Rul. 200322005 (American Depositary Receipts (ADRs) constitute qualified appreciated stock).

(4q.) Let. Rul. 9320016. Cf. Let. Ruls. 9825031, 9746050.

(5p.) See e.g., Let. Rul. 199915053.

(6p.) See e.g., Todd v. Comm., 118 TC 334 (2002).

(7o.) IRC Sec. 170(b)(1)(B).

(8l.) See IRC Sec. 170(e)(1)(A).

(9h.) Treas. Reg. [section] 1.170A-4(c)(3).

(10e.) IRC Sec. 1011(b); Treas. Regs. [section][section] 1.170A-4(c)(2)(i), 1.1011-2.

(1t.) IRC Sec. 170(e)(1)(A); Treas. Reg. [section] 1.1011-2(a).

(2t.) IRC Sec. 170(e)(1)(B).

(3t.) See Treas. Reg. [section] 1.170A-4(d), Example 5.

(4r.) IRC Secs. 170(e)(2), 1011(b); Treas. Reg. [section] 1.170A-4(c)(2).

(5q.) Treas. Reg. [section] 1.1001-1(e).

(1u.) Treas. Reg. [section] 1.1011-2(a)(3).

(2u.) See Musgrave v. Comm., TC Memo 2000-285.

(3u.) Styron v. Comm., TC Sum. Op. 2001-64.

(4s.) Treas. Reg. [section] 1.1001-2; Rev. Rul. 81-163, 1981-1 CB 433. See Let. Rul. 9329017; Guest v. Comm., 77 TC 9 (1981), acq. 1982-2 CB 1; Crane v. Comm., 331 U.S. 1 (1947).

(5r.) IRC Sec. 170(f)(5); Treas. Reg. [section] 1.170A-3(a).

(6q.) IRC Sec. 170(f)(5)(B); Treas. Reg. [section] 1.170A-3(c).

(1v.) See Treas. Reg. [section] 1.170A-3(d) Example (2).

(2v.) IRC Sec. 170(f)(3)(A); Treas. Reg. [section] 1.170A-7(a).

(3v.) Treas. Reg. [section] 1.170A-7(a)(2)(i).

(4t.) IRC Sec. 170(f)(3)(B)(i); Treas. Regs. [section][section] 1.170A-7(b)(3), 1.170A-7(b)(4).

(5s.) IRC Sec. 170(f)(3)(B)(iii).

(6r.) IRC Sec. 170(f)(3)(B)(ii).

(7p.) Treas. Reg. [section] 1.170A-7(b)(1).

(8l.) 1957-2 CB 153.

(9i.) 1972-2 CB 104.

(10f.) See Let. Ruls. 8145055, 8639019.

(11b.) See Winokur v. Comm., 90 TC 733 (1988), acq. 1989-1 CB 1.

(1w.) Let. Rul. 9303007.

(2w.) See Rev. Rul. 88-37, 1988-1 CB 522.

(3w.) Let. Rul. 200209020.

(4u.) Rev. Rul. 2003-28, 2003-1 CB 594.

(5t.) IRC Sec. 170(o), as added by PPA 2006.

(6s.) IRC Sec. 170(f)(3)(A).

(1x.) See Est. of Carroll v. Comm., 38 TC 868 (1962); Rev. Rul. 58-279, 1958-1 CB 145.

(2x.) Rev. Rul. 58-279, above; Rev. Rul. 69-239, 1969-1 CB 198.

(3x.) Rev. Rul. 58-279, above.

(4v.) Rev. Rul. 89-51, 1989-1 CB 89.

(5u.) See FSA 200149007.

(6t.) See Treas. Reg. [section] 1.664-1(a)(1)(i).

(7q.) IRC Sec. 170(a)(3); Treas. Reg. [section] 1.170A-5.

(1y.) IRC Sec. 664(d).

(1z.) See IRC Sec. 664(d)(3); Treas. Reg. [section] 1.664-3(a)(1).

(2y.) See Treas. Reg. [section] 1.664-3(a)(1)(i)(c).

(3y.) See Let. Ruls. 200215032, 200202078, 200038050, 199919039.

(1aa.) IRC Sec. 642(c)(5)(E).

(2z.) Rev. Rul. 77-285, 1977-2 CB 213; Let. Ruls. 200029031, 9048050, 8809085.

(3z.) Rev. Proc. 2005-24, 2005-16 IRB 909.

(1ab.) Rev. Proc. 2006-15, 2006-8 IRB 501.

(2aa.) Rev. Proc. 2009-3, 2009-1 IRB 107, Sec. 4.36.

(3aa.) See Rev. Procs. 90-30, 90-31, 90-32 (but see below), 90-33, 1990-1 CB 534, 539, 546, 551; Rev. Proc. 89-20, 1989- 1 CB 841.

(1ac.) IRC Sec. 6034, as amended by PPA 2006.

(2ab.) IRC Sec. 6652(c)(2)(C), as amended by PPA 2006.

(3ab.) IRC Sec. 6104(b), as amended by PPA 2006.

(1ad.) IRC Sec. 170(f)(2)(A); Treas. Reg. [section] 1.170A-6(b).

(2ac.) IRC Sec. 170(a)(3); Treas. Reg. [section] 1.170A-5.

(3ac.) IRC Sec. 664(d).

(4w.) Treas. Reg. [section] 1.170A-6(b)(2).

(5v.) IRC Sec. 664(d)(1); Treas. Reg. [section] 1.664-1(a)(1).

(6u.) Treas. Reg. [section] 1.664-2(a)(1).

(7r.) Treas. Reg. [section] 1.664-2(b).

(8m.) IRC Sec. 664(d)(1)(D).

(1ae.) IRC Sec. 664(d)(1)(A).

(2ad.) Treas. Reg. [section] 1.664-2(a)(3).

(3ad.) IRC Sec. 664(f).

(4x.) IRC Sec. 664(d)(1).

(5w.) See Rev. Rul. 2002-20, 2002-1 CB 794, superseding, Rev. Rul. 76-270, 1976-2 CB 194. See also Let. Rul. 200240012.

(6v.) Rev. Rul. 2008-41, 2008-30 IRB 171.

(7s.) Let. Rul. 9124031.

(1af.) 115 TC 26 (2000), aff'd, 2002-2 USTC 160,449 (11th Cir. 2002).

(2ae.) Treas. Reg. [section] 1.664-2(a)(1)(i).

(3ae) IRC Sec. 664(d)(2)(A); Treas. Reg. [section] 1.664-1(a)(1).

(4y.) Treas. Reg. [section] 1.664-1(a)(4).

(5x.) See, e.g., Let. Rul. 200122045.

(6w.) Let. Rul. 200203034.

(7t.) IRC Sec. 664(d)(2)(D).

(1ag.) See IRC Sec. 664(d)(4).

(2af.) Let. Rul. 200245048.

(3af.) IRC Sec. 664(d)(2)(A).

(4z.) See Let. Ruls. 9710008, 9710009, 9710010, revoking Let. Ruls. 9619042, 9619043, 9619044.

(5y.) IRC Sec. 664(d)(2)(A).

(6x.) IRC Sec. 664(f).

(7u.) Let. Rul. 9015049.

(8n.) IRC Sec. 664(d)(2)(C).

(9j.) Rev. Rul. 2002-20, 2002-1 CB 561, superseding, Rev. Rul. 76-270, 1976-2 CB 194. See also Let. Rul. 200240012.

(1ah.) Treas. Reg. [section] 1.664-2(a)(1)(i).

(2ag.) IRC Sec. 664(d)(3)(A).

(3ag.) IRC Sec. 664(d)(3)(B).

(4aa.) Treas. Reg. [section] 1.664-1(a)(3).

(5z.) See Treas. Reg. [section] 1.664-3.

(1ai.) Preamble, TD 9102, 69 Fed. Reg. 12, 13 (1-2-2004).

(2ah.) Treas. Reg. [section] 1.664-3(a)(1)(i)(b)(3).

(3ah.) Treas. Reg. [section] 1.664-3(a)(1)(i)(b)(3).

(4ab.) See Let. Ruls. 9711013, 9511029, 9511007, 9442017.

(5aa.) TAM 9825001.

(6y.) See Internal Revenue Service Exempt Organizations Continuing Professional Education Text for Fiscal Year 1999, Chapter P, 30 Years After the 1969 TRA--Recent Developments Under Chapter 42 (IRC Section 4940--Investment Income Tax).

(1aj.) See Let. Rul. 199915045. See also Let. Rul. 200117016 (stock redemptions did not result in self-dealing).

(2ai.) Treas. Reg. [section] 1.664-3(a)(1)(i)(c).

(3ai.) Treas. Regs. [section][section] 1.664-1(a)(7), 1.664-3(a)(1)(i)(d).

(4ac.) Treas. Reg. [section] 1.664-3(a)(1)(i)(c)(3).

(5ab.) TD 8791, 63 Fed. Reg. 68188 (12-10-98).

(6z.) Treas. Reg. [section] 1.664-3(a)(1)(i)(c).

(7v.) TD 8791, 63 Fed. Reg. 68188 (12-10-98).

(8o.) Treas. Reg. [section] 1.664-3(a)(1)(i)(c).

(9k.) Treas. Reg. [section] 1.664-3(a)(1)(i)(f)(2).

(1ak.) Let. Rul. 9506015.

(2aj.) Let. Rul. 9516040.

(3aj.) Let. Rul. 200002029.

(4ad.) Let. Rul. 9517020. See also Let. Ruls. 200002029, 9826021, 9818027.

(5ac.) Let. Rul. 9845001.

(6aa.) Let. Rul. 9143030.

(7w.) See Let. Ruls. 200301020, 200221042, 200143028, 200140027, 200120016, 200109006, 200045038, 200035014, 9851007, 9851006, 9403030. See also Let. Ruls. 200207026, 200205008 (involving partial terminations).

(8p.) Rev. Rul. 2008-41, 2008-30 IRB 171.

(9l.) See Let. Rul. 200124010.

(10g.) Let. Rul. 200152018.

(1al.) See Let. Ruls. 200208039, 200127033.

(2ak.) Let. Rul. 200219012.

(3ak.) Let. Rul. 9138024.

(4ae.) Let. Rul. 9227017; see also Let. Rul. 199915045.

(5ad.) IRC Section 664.

(6ab.) Let. Rul. 9821029.

(7x.) Let. Rul. 200052026.

(8q.) See Lindquist v. Mack, 2001-2 USTC [paragraph] 50,754 (D. Minn. 2001).

(1am.) Treas. Reg. [section] 1.664-1(a)(7). See, e.g., Let. Rul. 200245048.

(2al.) Treas. Reg. [section] 1.664-1(a)(7).

(3al.) Let. Rul. 200029031.

(4af.) IRC Sec. 642(c)(5).

(5ae.) IRC Sec. 642(c)(5); Treas. Reg. [section] 1.642(c)-5(b).

(6ac.) Rev. Rul. 92-81, 1992-2 CB 119.

(7y.) Rev. Rul. 90-103, 1990-2 CB 159; Let. Rul. 9334020.

(8r.) Treas. Reg. [section] 1.642(c)-6(a)(2).

(9m.) Treas. Reg. [section] 1.642(c)-6(e).

(10h.) Rev. Rul. 2010-1, 2010-2 IRB 248.

(1an.) Treas. Reg. [section] 1.642(c)-5(a)(5)(i).

(2am.) Treas. Reg. [section] 1.170A-9(e)(11)(i).

(3am.) Rev. Rul. 96-38, 1996-2 CB 44; See Treas. Reg. [section] 1.170A-9(e)(11)(ii).

(1ao.) IRC Sec. 4966(d), as added by PPA 2006.

(1ap.) IRC Sec. 170(f)(18), as added by PPA 2006.

(2an.) See Notice 2006-109, 2006-51 IRB 1121.

(3an.) See, e.g., National Foundation, Inc. v. U.S., 13 Cl. Ct. 486 (1987); The Fund for Anonymous Gifts v. Internal Revenue Service, 97-2 USTC [paragraph] 50,710 (1997), vacated, and remanded, 194 F.3d 173 (D.C. Cir. 1999).

(4ag.) TheFundfor Anonymous Gifts v. IRS, 88 AFTR2d [paragraph] 6040 (D.C. Cir. 2001).

(5af.) See New Dynamics Foundation v. U.S., 2006-1 USTC [paragraph] 50,286 (Cl. Ct. 2006).

(6ad.) Let. Ruls. 200445024, 200445023.

(7z.) Advanced Letter Ruling 2000ARD 203-3 (8-2-2000), superseding, Let. Rul. 200037053.

(1aq.) See Let. Rul. 200149005.

(2ao.) See Let. Rul. 200150039.

(3ao.) IRC Sec. 170(a)(3); Treas. Reg. [section] 1.170A-5.

(4ah.) Treas. Regs. [section][section] 1.664-2(c), 1.664-4(a).

(5ag.) Treas. Reg. [section] 1.664-2(c).

(1ar.) Treas. Reg. [section] 1.664-4(a).

(1as.) IRC Sec. 664(d).

(2ap.) See Treas. Reg. [section] 1.170A-12.

(3ap.) IRC Sec. 170(e)(2).

(4ai.) Treas. Reg. [section] 1.170A-4(c)(1).

(1at.) IRC Sec. 664(b)(1).

(2aq.) IRC Sec. 664(b)(2).

(3aq.) IRC Sec. 664(b)(3).

(4aj.) IRC Sec. 664(b)(4); Treas. Reg. [section] 1.664-1(d).

(5ah.) Treas. Reg. [section] 1.664-1(d)(3).

(6ae.) Treas. Reg. [section] 1.664-1(d)(4)(i).

(7aa.) IRC Sec. 662(a)(1).

(8s.) Treas. Reg. [section] 1.664-1(d)(1)(ii).

(1au.) Treas. Reg. [section] 1.664-1(c).

(2ar.) Let. Rul. 199952035.

(3ar.) Let. Rul. 9114025.

(4ak.) See TD 9190, 70 Fed. Reg. 12793 (3-16-2005).

(5ai.) Treas. Reg. [section] 1.664-1(d)(1)(i)(a).

(6af.) Treas. Reg. [section] 1.664-1(d)(1)(i)(b).

(1av.) Treas. Reg. [section] 1.664-1(d)(1)(i)(b).

(2as.) Treas. Reg. [section] 1.664-1(d)(1)(ii)(a).

(3as.) Treas. Reg. [section] 1.664-1(d)(1)(ii)(a).

(4al.) Treas. Reg. [section] 1.664-1(d)(1)(ii)(b).

(5aj.) Treas. Reg. [section] 1.664-1(d)(1)(ii)(b).

(1aw.) Treas. Reg. [section] 1.664-1(d)(1)(ii)(b).

(2at.) Treas. Reg. [section] 1.664-1(d)(1)(ii)(b).

(3at.) Treas. Reg. [section] 1.664-1(d)(1)(iii)(a).

(4am.) Treas. Reg. [section] 1.664-1(d)(1)(iii)(b).

(1ax.) Treas. Reg. 1.664-1(d)(1)(v).

(2au.) IRC Sec. 664(c)(1).

(3au.) IRC Sec. 664(c), as amended by TRHCA 2006.

(4an.) Treas. Reg. [section] 1.664-1.

(5ak.) IRC Sec. 513.

(6ag.) IRC Sec. 512.

(7ab.) IRC Sec. 512(b)(12).

(8t.) IRC Sec. 514.

(9n.) Treas. Reg. [section] 1.664-1(c).

(10i.) Elliot Knitwear Profit Sharing Plan v. Comm., 614 F.2d 347 (3rd Cir. 1980).

(11c.) Service Bolt & Nut Co. Profit Sharing Trust v. Comm., 84-1 USTC [paragraph] 9127 (6th Cir. 1983).

(12a.) Newhall Unitrust v. Comm., 104 TC 236 (1995), aff'd, 97-1 USTC [paragraph] 50,159 (9th Cir. 1997).

(1ay.) IRC Sec. 170(f)(2)(B).

(2av.) Treas. Regs. [section][section] 1.170A-6(c)(2)(i)(A), 1.170A-6(c)(2)(ii)(A).

(3av.) Rev. Rul. 85-49, 1985-1 CB 330.

(4ao.) Let. Rul. 9118040.

(5al.) Treas. Reg. [section] 1.170A-6(c)(2)(B).

(1az.) 78 TC 523 (1982), acq. in result, 1987-2 CB 1. See Treas. Regs. [section][section]1.170A-6(c)(2)(i)(E), 1.170A- 6(c)(2)(ii)(D); TD 9068, 68 Fed. Reg. 40130 (7-7-2003), revoking, Rev. Rul. 76-225, 1976-1 CB 281.

(2aw.) See Let. Rul. 9748009. See also Let. Ruls 200138018, 200043039, 200030014 (charitable gifts were not incomplete even though one or more family members would serve as directors of the charitable beneficiary of the grantors' CLUTs).

(3aw.) Let. Rul. 9810019.

(4ap.) Let. Rul. 199930036. See also Let. Rul. 200149016.

(5am.) See Let. Rul. 200124029.

(6ah.) See Rev. Proc. 2007-45, 2007-29 IRB 89 (inter vivos CLATs); Rev. Proc. 2007-46, 2007-29 IRB 102 (testamentary CLATs); Rev. Proc. 2008-45, 2008-30 IRB 224 (inter vivos CLUTs); Rev. Proc. 2008-46, 2008-30 IRB 238 (testamentary CLUTs).

(1ba.) Treas. Reg. [section]1.170A-6(c). See, e.g., Let. Rul. 200108032.

(2ax.) Let. Rul. 9247024.

(1bb.) Treas. Reg. [section]1.170A-6(c)(4).

(2ay.) IRC Secs. 170(f)(3)(B)(iii), 170(h).

(3ax.) IRC Sec. 170(h)(2); Treas. Regs. [section][section]1.170A-14(a),1.170A-14(b), 1.170A-14(c).

(4aq.) Satullo v. Comm.,TC Memo 1993-614, aff'd without opinion, 67 F.3d 314 (11th Cir. 1995).

(1bc.) Rev. Rul. 2003-123, 2003-2 CB 1200, amplifying, Rev. Rul. 68-667, 1968-2 CB 289.

(2az.) IRC Sec. 170(h); Treas. Reg. [section] 1.170A-14(d).

(3ay.) Glass v. Comm., 124 TC 258 (2005), aff'd, 2007-1 USTC [paragraph] 150,111 (6th Cir. 2006).

(4ar.) Turner v. Comm., 126 TC 299 (2006).

(5an.) Let. Rul. 9736016.

(6ai.) Let. Rul. 200208019.

(7ac.) See Rev. Rul. 74-583, 1974-2 CB 80; Rev. Rul. 75-373, 1975-2 CB 77; Let. Ruls. 200002020, 199952037, 9603018, 8641017, 8313123, 8248069.

(8u.) Symington v. Comm., 87 TC 892 (1986); Fannon v. Comm.,TC Memo 1986-572; Rev. Rul. 73-339, 1973-2 CB 68; Rev. Rul. 76-376, 1976-2 CB 53. See also Thayer v. Comm., TC Memo 1977-370.

(9o.) Schapiro v. Comm., TC Memo 1991-128.

(1bd.) 1966-2 CB 1257, as modified by Rev. Proc. 96-15, 1996-2 CB 627.

(2ba.) See Browning v. Comm., 109 TC 303 (1997).

(3az.) Treas. Reg. [section]1.170A-14(h)(3).

(4as.) Let. Rul. 200143011.

(5ao.) Let. Rul. 200201007. See also Let. Ruls. 200203033, 200203042.

(6aj.) CCA 200238041.

(1be.) Notice 2004-41, 2004-28 IRB 31. See also IR-2004-86 (6-30-2004).

(2bb.) IRC Sec. 170(b)(1)(E). As added by PPA 2006 and extended by the Food, Conservation and Energy Act of 2008.

(3ba.) Notice 2007-50, 2007-25 IRB 1430.

(4at.) IRC Sec. 170(f)(14).

(5ap.) IRC Secs. 170(h)(4)(B), 170(h)(4)(C).

(6ak.) IRC Sec. 170(f)(13).

(7ad.) Let. Rul. 8449025.

(8v.) Hilborn v. Comm., 85 TC 677 (1985); Nicoladis v. Comm. TC Memo 1988-163; Dorsey v. Comm., TC Memo 1990-242; Griffin v. Comm., TC Memo 1989-130, aff'd 90-2 USTC 150,507 (5th Cir. 1990).

(9p.) See Akers v. Comm., 799 F.2d 243 (6th Cir. 1986).

(1bf.) See Treas. Reg. [section]1.170A-14(h)(3).

(2bc.) IRC Sec. 741.

(3bb.) Treas. Reg. [section]1.1001-2. See Crane v. Comm., 331 U.S. 1 (1947).

(4au.) Rev. Rul. 75-194, 1975-1 CB 80.

(5aq.) 2000-1 USTC [paragraph]50,162 (S.D. Fl. 1999).

(6al.) Citing Rev. Rul. 75-194 and Treas. Reg. [section]1.1001-2.

(1bg.) IRC Sec. 408(d)(8).

(2bd.) IRC Sec. 408(d)(8)(E).

(3bc.) IRC Sec. 408(d)(8)(D).

(4av.) IRC Secs. 72, 408(d)(1).

(5ar.) IRC Sec. 408(d)(8).

(6am.) Notice 2007-7, 2007-5 IRB 395.

(7ae.) 2007-5 IRB 395.
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Title Annotation:TAX FACTS ON INVESTMENTS: Part 2
Publication:Tax Facts on Investments
Date:Jan 1, 2011
Words:20561
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