Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 77-99

1977-1 C.B. 295

Section 2511 -- Gift Tax

IRS Headnote

Remainder interest in trust; value not ascertainable. A trust provision that capital gains from the sale or exchange of trust assets shall be allocated to income and that capital losses shall be allocated to principal renders a donor's reversionary interest incapable of valuation and the entire value of property transferred in trust is subject to gift tax.

Full Text

Rev. Rul. 77-99

The Internal Revenue Service has been asked to state its position under the rationale of Rev. Rul. 76-275, 1976-2 C.B. 299, with respect to a ten year and ten day gift of an income interest in trust, with reversion of the principal to the grantor or the grantor's estate, when the governing trust instrument provides that "All receipts derived from sale or exchange of assets subject to this Trust to the extent such receipts constitute capital gain for federal income tax purposes shall be allocated to income and capital losses shall be allocated to principal."

If a donor's reversionary interest is preceded by contingencies with respect to the disposition of the corpus of a trust that render the reversionary interest incapable of valuation, the Supreme Court has held that the donor may not reduce the value of the gift by taking into account the donor's reversionary interest. Robinette v. Helvering, 318 U.S. 184 (1943), 1943 C.B. 1141.

If the applicable state law provides that a portion of all receipts from oil and gas interests is considered to be principal and not income, Rev. Rul. 76-275 concludes that the entire value of property transferred in trust is subject to the gift tax with respect to a ten year and one day income interest in trust with reversion of the principal to the grantor or the grantor's estate, when the trust instrument gives the trustee absolute discretion to allocate all proceeds from the sale of any minerals to income. The effect of such discretionary power is to make it possible for the trustee to distribute the entire principal of the trust as income so that the donor's retained interest cannot be valued on the basis of generally acceptable valuation principles.

Held, when a trust instrument provides that capital gains from the sale or exchange of trust property must be allocated to income and capital losses from the sale or exchange of trust property must be allocated to principal, then under the rationale of Robinette v. Helvering, cited above, and Rev. Rul. 76-275, the entire value of property transferred in trust is subject to the gift tax under section 2511 of the Code and section 25.2511-1(e) of the Gift Tax Regulations.