Rev. Rul. 80-66
1980-1 C.B. 204, 1980-10 I.R.B. 11.
Internal Revenue Service
Revenue Ruling
CHARITABLE DEDUCTION; RESIDUARY ESTATE; STATE INHERITANCE TAXES
Published: March 10, 1980
26 CFR 20.2055-2: Transfers not exclusively for charitable purposes.
Charitable deduction; residuary estate; state inheritance taxes. A decedent's will created a trust giving an individual a lifetime income interest and a testamentary general power of appointment over the corpus. Failure to exercise the power of appointment would cause the trust corpus to pass to a chartiy described in section 2055(a) of the Code. State law exempts property passing to such charities from inheritance taxes and taxes the estate of the creator of a power of appointment upon the exercise of the power. A charitable deduction for the residue of the estate passing to the same charity is not reduced by the hypothetical state inheritance taxes that would be imposed upon the exercise of the power, if the donee of the power dies before exercising the power and before the due date for filing the state tax return.
ISSUE
Is the amount of the charitable deduction allowable under section 2055 of the Internal Revenue Code reduced by the amount of state inheritance taxes that could have been imposed upon the exercise of a power of appointment over the assets in a trust and that would have been payable from the residue of the estate passing to charity, if the donee of the power dies before the due date for filing the federal estate tax return, without having exercised the power?
D, a resident of State X, died in 1978. D's will provides for the creation of a trust, in which A has the right to all the income during life and a testamentary general power of appointment over the trust corpus. If A does not exercise the power of appointment, the trust corpus passes to Y Charity. The will also provides that the residue of the estate, after the payment of all debts, expenses and taxes arising by reason of D's death, passes to Y Charity, an organization that meets the requirements of section 2055(a) of the Code and that is a qualified charitable organization under the law of State X.
Under the inheritance tax law of State X, property subject to a power of appointment is taxed only as a part of the estate of the person creating the power. The rate of tax is based on the classes of the persons who receive the property upon the donee's exercise or nonexercise of the power of appointment. Property passing to qualified charitable organizations is exempt from inheritance tax.
A died three months after D, and before the due date for filing D's estate tax return. A did not exercise the testamentary power of appointment over the trust created by D's will.
LAW AND ANALYSIS
Section 2055(a) of the Code provides that, for purposes of the estate tax, the value of the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises, or transfers to or for the use of charity. Section 2055(a) also provides that if a power to consume, invade or appropriate property for the benefit of an individual is completely terminated by the death of the individual before the date prescribed for filing the decedent's estate tax return (including extensions granted under section 6081) and before such power has been exercised, the termination of the power shall be deemed to be a qualified disclaimer with the same force and effect as though the individual had filed such a disclaimer. See section 20.2055-2(c)(2) of the Estate Tax Regulations.
Section 2055(c) of the Code provides that the amount of the charitable deduction shall be reduced by the inheritance taxes which are required to be paid out of the bequests, legacies, or devises passing to charity.
In the present situation, A died without having exercised the power of appointment over the trust created by D's will. A's death operates to terminate A's power to appoint the trust corpus. Such a termination prior to the due date for filing D's estate tax return is deemed to be a qualified disclaimer under section 2055(a). Because the power is deemed disclaimed for purposes of section 2055(a) and, under the laws of State X, no inheritance tax will be imposed on the trust corpus, the amount of the charitable deduction is not reduced by the maximum hypothetical state inheritance tax that would have been imposed, if A had exercised the power of appointment. See Farmers Trust Company v. United States, 458 F.Supp. 94 (M.D. Pa. 1978).
The present situation is distinguishable from the situations presented in Brook's Estate v. Commissioner, 250 F.2d 937 (3rd Cir. 1958), and Connecticut Bank and Trust Company v. United States, 439 F.2d 931 (2nd Cir. 1971), in which the holders of the powers of appointment were living on the date the estate tax returns were due. In each case, the amount of the charitable deduction was reduced by the maximum amount of state inheritance taxes the could be imposed upon the exercise of the power of appointment and that would be payable from the property otherwise passing to charity.
HOLDING
The charitable deduction allowable for the residue of the estate is not reduced by the hypothetical state inheritance taxes that would be imposed upon the exercise of a power of appointment over trust property, if the donee of the power dies before the due date for filing the decedent's estate tax return, without having exercised the power.
Rev. Rul. 80-66, 1980-1 C.B. 204, 1980-10 I.R.B. 11.