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 Rev. Rul. 77-97

1977-1 C.B. 285

Section 2055 -- Estate Tax Charitable Deduction

IRS Headnote

Charitable deduction; interests in property; undivided portion in trust. A charitable deduction is not allowable to the estate of a decedent who bequeathed the residuary estate in trust, with the spouse and a charity each entitled to half the income and, upon the spouse's death, half of the trust corpus is to be distributed to the charity and half of the trust corpus is to be distributed to the spouse's heirs.

Full Text

Rev. Rul. 77-97

Advice has been requested whether a charitable deduction is allowable under section 2055 of the Internal Revenue Code of 1954 for an undivided interest in a decedent's residuary estate bequeathed to charity, under the circumstances described below.

The decedent died testate on January 1, 1976. The decedent's will directs that the decedent's residuary estate be placed in trust. The terms of the trust provide that 50 percent of the trust income is to be distributed to A (the decedent's spouse) for life and 50 percent of the trust income is to be distributed to X (a charitable organization within the meaning of sections 170(c), 2522, and 2055(a) of the Code) until A's death. At A's death, 50 percent of the trust corpus is to be distributed to A's heirs and 50 percent of the trust corpus is to be distributed to X charity.

The specific question is whether X charity's interest qualifies for the charitable deduction under section 2055(e)(2) of the Code as an undivided portion of the decedent's entire interest in property.

Section 2055(a) of the Code provides for a deduction of amounts passing to or for the use of the organizations, persons and purposes described in section 2055(a), such as certain charitable organizations. However, with respect to decedents dying after December 31, 1969, section 2055(e)(2) provides:

Where an interest in property (other than a remainder interest in a personal residence or farm or an undivided portion of the decedent's entire interest in property) passes or has passed from the decedent to a person, or for a use, described in subsection (a), and an interest * * * in the same property passes or has passed (for less than an adequate and full consideration in money or money's worth) from the decedent to a person, or for a use, not described in subsection (a), no deduction shall be allowed under this section for the interest which passes or has passed to the person, or for the use, described in subsection (a), unless--

(A) in the case of a remainder interest, such interest is in a trust which is a charitable remainder annuity trust or a charitable remainder unitrust (described in section 664) or a pooled income fund (described in section 642(c)(5)), or

(B) in the case of any other interest, such interest is in the form of a guaranteed annuity or is a fixed percentage distributed yearly of the fair market value of the property (to be determined yearly).

Section 20.2055-2(e)(1) of the Estate Tax Regulations provides in part, as follows:

In general, in the case of decedents dying after December 31, 1969, where an interest in property passes or has passed from the decedent for charitable purposes and an interest (other than an interest which is extinguished upon the decedent's death) in the same property passes or has passed from the decedent for private purposes (for less than an adequate and full consideration in money or money's worth) after October 9, 1969, no deduction is allowed under section 2055 for the value of the interest which passes or has passed for charitable purposes unless the interest in property is a deductible interest described in subparagraph (2) of this paragraph. The principles of section 2056 and the regulations thereunder shall apply for purposes of determining under this paragraph whether an interest in property passes or has passed from the decedent.

Under section 20.2055-2(e)(2) of the regulations, a deductible interest in an undivided portion of the decedent's entire interest in property is defined as follows:

(i) Undivided portion of decedent's entire interest. The charitable interest is an undivided portion, not in trust, of the decedent's entire interest in property. An undivided portion of a decedent's entire interest in property must consist of a fraction or percentage of each and every substantial interest or right owned by the decedent in such property and must extend over the entire term of the decedent's interest in such property and in other property into which such property is converted. [Emphasis added]

Section 2056(b)-1(e)(2) of the regulations provides as follows:

In determining whether an interest in the same property passed from the decedent both to his surviving spouse and to some other person, a distinction is to be drawn between "property", as such term is used in section 2056, and an "interest in property". The term "property" refers to the underlying property in which various interests exist; each such interest is not for this purpose to be considered as "property".

Section 2055(e)(2) of the Code is applicable in the instant case because an interest in property has passed from the decedent for private purposes (the 50 percent life income interest to A and the 50 percent remainder interest to A's heirs) and an interest in the same underlying property has also passed for charitable purposes (the 50 percent income interest to X for A's life and 50 percent remainder interest to X). The interest received by X is an undivided portion of the decedent's entire interest in property for the purposes of this section. However, the regulations, at section 20.2055-2(e)(2)(i), are clear in their requirement that where an undivided interest in property passes from the decedent for private purposes and an undivided interest in the same underlying property passes from the decedent for charitable purposes, the charitable interest must be an undivided portion, not in trust, of the decedent's entire interest in the underlying property.

Because the decedent's property passed to charity in trust, no "undivided portion of the decedent's entire interest in property" passed directly to charity as is required if the transfer is to fall within the parenthetical language of section 2055(e)(2) of the Code. In addition, the trust is neither a charitable remainder annuity trust or unitrust nor a pooled income fund, and does not create a guaranteed annuity for charity. The transfer thus fails to meet the requirements of section 2055(e)(2)(A) or (B).

Accordingly, no deduction is allowable under section 2055 of the Code.

Further, if the decedent had established two separate trusts, one for charitable purposes and one for private purposes, instead of one trust for both purposes, the charitable deduction would have been allowable.