Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 79-61

1979-1 C.B. 220

Section 170
Section 642

IRS Headnote

Pooled income fund; beneficiary's income interest measured by another's life. An otherwise qualifying fund whose governing instrument permits the duration of a beneficiary's income interest to be measured by the life of another does not qualify as a pooled income fund under section 642(c)(5) of the Code, and the value of a remainder under section 170, 2055, 2106, or 2522, even though the instrument of transfer bases the duration of the designated beneficiary's income interest on the beneficiary's life. The fund's governing instrument may be amended to qualify prospectively if the fund has not accepted property under a defective instrument of transfer.

Full Text

Rev. Rul. 79-61

ISSUES

1. Does a funded pooled income fund qualify under section 642(c)(5) of the Internal Revenue Code of 1954 where the fund's governing instrument provides that the individual income beneficiary's interest may be based on the life of another individual?

2. If not, where the donor's instrument of transfer did not provide that the beneficiary's interest would be based on the life of another, does the disqualification of the fund negate the donor's charitable deduction?

3. Can the governing instrument of the fund be amended to correct the defective provision where the fund has not received any contributions subject to the defective provision; and, if so, does the amendment protect the deductibility of the donor's charitable contribution?

FACTS

On August 15, 1977, X, a charitable organization described in section 170(b)(1)(A) of the Code (other than in clauses (vii) and (viii)), established the fund to be used exclusively for the investment of properties transferred to the fund by donors contributing an irrevocable remainder interest in such property to the charitable organization.

The governing instrument of the fund provides that the donor's instrument of transfer shall designate each beneficiary, other than X, who is to have an income interest attributable to the contributed property. The governing instrument further provides that the individual beneficiary who is to receive the income interest may be designated to receive the specified share of income for life or during the lifetime of another individual.

On August 17, 1977, S, an individual, contributed $10,000 to the fund. In the instrument of transfer S designated W to receive the income interest for the life of W. The instrument of transfer further provided that upon the death of W, the income interest of W would terminate and the remainder interest would be transferred to X.

In all other respects the provisions of the fund's declaration of trust and instrument of transfer meet the requirements of a pooled income fund as defined in section 642(c)(5) of the Code and the applicable Income Tax Regulations.

LAW AND ANALYSIS

Section 642(c)(5) of the Code defines a pooled income fund and section 1.642(c)-5(b) of the regulations sets forth the requirements that must be satisfied for qualification as a pooled income fund.

Section 642(c)(5)(A) of the Code provides that a pooled income fund is a trust to which each donor transfers property, contributing an irrevocable remainder interest in such property to or for the use of an organization described in section 170(b)(1)(A) (other than in clauses (vii) or (viii)), and retaining an income interest for the life of one or more beneficiaries (living at the time of such transfer).

Section 642(c)(5)(D) of the Code provides that a pooled income fund is a trust which includes only amounts received from transfers which meet the requirements of this paragraph.

Section 1.642(c)-5(b)(1) of the regulations provides that each donor must transfer property to the fund and contribute an irrevocable remainder interest in such property to or for the use of a public charity, retaining, or creating for another beneficiary or beneficiaries, a life income interest in the transferred property.

Section 1.642(c)-5(b)(2) of the regulations provides, in part, that each donor must retain for life an income interest in the property transferred to such fund, or create an income interest in such property for the life of one or more beneficiaries, each of whom must be living at the time of the transfer of the property to the fund by the donor. The donor may retain the power exercisable only by will to revoke or terminate the income interest of any designated beneficiary other than the public charity.

In describing the income interest in the property transferred to the fund, S. Rep. No. 91-552, 91st Sess. (1969), 1969-3 C.B. 423, 478, stated that the charity pays the donor (and perhaps another person) the income attributable to the property for life. This indicates it was contemplated that the donor or other beneficiary would receive the income for their own life.

That the measuring period of the life beneficiary designated to receive the income interest is the measuring life of the income interest is further indicated in the last sentence of section 1.642(c)-5(b)(7) of the regulations. That sentence states that the governing instrument shall provide that the income interest of any designated beneficiary shall either terminate with the last regular payment which was made before the death of the beneficiary or be prorated to the date of such beneficiary's death.

Thus, under section 1.642(c)-5(b)(2) of the regulations an individual beneficiary of an income interest may not receive an income interest where the duration of the enjoyment of such income interest is measured by the lifetime of another individual even if the other individual is also a beneficiary of an income interest established by the same gift. A provision in the governing instrument of the fund authorizing the creation of such an interest would prevent the fund from qualifying as a pooled income fund.

Section 1.642(c)-5(b)(3) of the regulations provides that the fund must not include property transferred under arrangements other than those specified in section 642(c)(5) and this paragraph.

A contribution to a pooled income fund made subject to a provision that the income interest of the designated beneficiary shall be measured by the life of another individual, is a transfer under an arrangement other than one specified in section 642(c)(5) of the Code and section 1.642(c)-5(b)(3) of the regulations.

Under section 1.642(c)-7 of the regulations, the governing instrument of an unqualified pooled income fund created after May 6, 1971, that has accepted transfers of property under arrangements other than those prescribed in section 1.642(c)-5 of the regulations may not be amended for the purpose of qualifying under section 642(c)5 of the Code and the applicable regulations. HOLDINGS 1. Even though the income interest given to W was for the lifetime of W, the provision of the governing instrument of the fund that permits a life income beneficiary to receive the income interest during the life-time of another individual does not comport with the Code and regulations. Therefore, the fund does not qualify as a pooled income fund under section 642(c)(5) of the Code.

2. Because the fund was not qualified at the time S transferred the property, a charitable contributions deduction for the value of the remainder interest in the property contributed to the fund would not be allowed to S under section 170 of the Code. See section 170(f)(2)(A) and section 1.642(c)-5(a)(4) of the regulations. Similarly no deduction would be allowed for estate and gift tax purposes under sections 2055, 2106, and 2522.

3. Although the fund was not qualified as a pooled income fund under section 642(c)(5) of the Code at the time of the transfer of property by S, the instrument of transfer executed by S met the requirements of section 1.642(c)-5(b) of the regulations. Thus, until the fund accepts property under a defective instrument of transfer, the governing instrument of the fund may be amended to comply with the requirements of section 1.642(c)-5(b) of the regulations. Such an amendment would not, however, permit a charitable contribution deduction for S's transfer of property to the fund prior to the amendment.