Rev. Rul. 81-20

                       Internal Revenue Service
                                 Revenue Ruling

              CHARITABLE DEDUCTION; RESIDUE; EXECUTOR'S DISCRETION

                          Published: January 19, 1981

SECTION 2055.--TRANSFERS FOR PUBLIC, CHARITABLE, AND RELIGIOUS USES, 26 CFR 20.2055-2: Transfers not exclusively for charitable purposes

  Charitable deduction; residue; executor's discretion. A decedent's will provides for a legacy of specific dollar value to the decedent's adult child and for distribution of the estate's residue to a qualified charitable organization.  The executor has absolute power to satisfy the legacy in cash, in property valued at fair market value on the date of distribution, or a combination of both, and to select the date for distribution of the estate's assets. Applicable state law requires the executor to act impartially with respect to the beneficiaries.  A deduction is allowable under section 2055 of the Code for the bequest of the residue.

ISSUE

  Is a deduction allowable under section 2055 of the Internal Revenue Code with respect to the transfer of the residue of a decedent's probate estate to a charitable organization if the executor is granted absolute discretion (1) in the selection of assets, to be valued at fair market value on date or dates of distribution, with which to satisfy a general legacy and (2) in the timing of the distribution of the assets of the estate?

FACTS

  The decedent, a resident of State X, died on November 5, 1977.  The will of the decedent provides for 4x dollars to be paid to the decedent's adult child. The residue of the estate passes, after payment of all taxes and debts and other expenses, to a charitable organization that qualifies as such under section 2055(a) of the Code.

  The will empowers the executor to satisfy the 4x dollar legacy in cash or in kind or by a combination of both.  The executor is required to use the fair market value, as of the date of distribution, of any assets selected to satisfy the legacy.  The will also empowers the executor to select the date for distribution of assets from the estate.

  Under the law of State X, in the absence of an expression in the will to the contrary, an executor must not favor one beneficiary over another or otherwise behave in a manner that deviates from strict impartiality as between beneficiaries.

LAW AND ANALYSIS

  Section 2055 of the Code allows a deduction from the value of the gross estate for the amount of property bequeathed to charity.

  Section 20.2055-2(b)(1) of the Estate Tax Regulations provides the rules for transfers subject to a condition or a power.  It provides, in part, that if, as of the date of a decedent's death, a transfer for charitable purposes is dependent upon the performance of some act or happening of a precedent even in order that it might become effective, no deduction is allowable unless the possibility that the charitable transfer will not become effective is so remote as to be negligible.  Also, if the legatee, devisee, donee or trustee is empowered to divert the property or fund, in whole or part, to a use or purpose which would have rendered it, to the extent that it is subject to such power, not deductible had it been directly so bequeathed, devised, or given by the decedent, the deduction will be limited to that portion, if any, of the property or fund which is exempt from the exercise of the power.

  At the date of the decedent's death, the charitable transfer of the residuary interest was not dependent upon the performance of any act or the happening of a precedent event in order that it might become effective.  The only event to take place after the decedent's death was the administration of the estate.  The charity was to receive the residuary interest after the specific bequest was made.  The amount of the residue could be determined at the date of death, in the absence of an election to use the alternative valuation date, by deducting from the then value of the estate the debts of the decedent, taxes, cost of administration and other specific bequest and devises.  The residue is the charitable bequest.  See Y. M. C. A. v. Davis, 264 U.S. 47 (1924).  When a decedent dies, his successors acquire their rights as of the date of death.  The fact of estate administration does not change such acquisition.  The property is valued at the date of death in terms of money, and later actual diminution or increase in such property's value does not change the reality of date of death valuation for estate tax purposes.  See Ithaca Trust Co. v. United States, 279 U.S. 151 (1929), Ct.D. 61, VIII-1 C.B. 313 (1929) and Brewster v. Gage, 280 U.S. 327 (1930), Ct.D. 148, IX-1 C.B. 274 (1930).

  The 4x dollars noncharitable bequest was to be comprised, at the discretion of the executor, of cash, property, or any

combination of them, the amount of property to be determined at its fair market value at the date or dates of distribution, which dates also were to be selected by the executor.  Because the law of State X requires the executor to act impartially with respect to all beneficiaries, the powers above do not amount to a power to divert the property of the charity for purposes of section 20.2055-2(b)(1) of the regulations. Thus, the value of charity's interest in the residue is ascertainable.

HOLDING

  A deduction is allowable under section 2055 of the Code with respect to the decedent's bequest of the residue to charity, under the circumstances described above.

Rev. Rul. 81-20, 1981-1 C.B. 471, 1981-3 I.R.B. 11.