Rev. Rul. 83-20

1983-1 C.B. 231, 1983-4 I.R.B. 13.

                       Internal Revenue Service
                                 Revenue Ruling

    CHARITABLE BEQUEST;  TRUST REMAINDER;  WIDOW'S ALLOWANCE; SPLIT INTEREST

                          Published: January 24, 1983

SECTION 2055. - -TRANSFERS FOR PUBLIC, CHARITABLE AND RELIGIOUS USES, 26 CFR 20.2055-1: Transfers not exclusively for charitable purposes

(Also Section 2056; 20.2056(b)-1.)

  Charitable bequest;  trust remainder;  widow's allowance;  split interest.  The portion of a residuary bequest that is certain to be received by a charitable beneficiary is not considered to be a split interest for purposes of section 2055(e) of the Code, even though a temporary allowance for the surviving spouse is payable from the residuary property.  Rev. Rul. 74-97 clarified.

ISSUE

  Has an interest in property passed from the decedent for both a charitable and noncharitable purpose within the meaning of section 2055(e)(2) of the Internal Revenue Code resulting in a disallowance of any estate tax charitable deduction for a residuary bequest to charity, when under state law a surviving spouse's allowance (sometimes referred to as a widow's allowance) is payable from the estate assets until the end of the period of the estate's administration or the spouse's earlier death or remarriage?

FACTS

  D, a resident of State X, died on October 1, 1981.  Under D's will, the residue of D's estate was bequeathed to Y, a charitable organization described in section 2055(a) of the Code.  Under the law of State X, D's surviving spouse, S, petitioned the probate court for an allowance for support that is payable during the period of administration of D's estate.  Under state law, if § should die or remarry during that period, S's right to any further allowance will terminate.  The amount of the allowance awarded § by the probate court was 5x dollars per month.  The allowance is payable out of D's residuary estate.

  On the basis of relevant facts, particularly the size and nature of D's estate and the probate court practices in the county in which it is being administered, there is less than a 5% probability that the administration of the estate could extend more than 5 years beyond D's death.

LAW AND ANALYSIS

  Section 2055(a)(2) of the Code provides that a deduction is allowable from the gross estate equal to the amount of all bequests, legacies, devises, or transfers to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes.  The amount deductible from the gross estate, however, may not be greater than the value of what charity is actually entitled to and does in fact receive.  See Young Men's Christian Ass'n. v. Davis, 264 U.S. 47 (1924).  See also Rev. Rul. 82-6, 1982-1 C.B. 137.

  Section 2055(e)(2) of the Code provides that when an interest in property passes or has passed from the decedent for charitable purposes and an interest in the same property passes or has passed from the decedent for private purposes, no deduction will be allowed under section 2055 for the value of the interest that passes or has passed for charitable purposes.  However, in the case of a transfer of a charitable remainder interest, a deduction will be allowed for the remainder interest if the interest is in a charitable remainder annuity trust, a charitable remainder unitrust, or a pooled income fund.  See also section 20.2055-2(e) of the Estate Tax Regulations.

  Section 20.2055-2(e)(1) of the regulations provides that the principles of section 2056 of the Code and the regulations thereunder apply for purposes of determining whether an interest in the same property passes or has passed from the decedent.  Section 2056(a) provides for a marital deduction from the value of the gross estate in an amount equal to the value of any interest in property that passes or has passed from the decedent to the surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate.  Section 2056(b) provides, however, that no marital deduction shall be allowed (1) if the interest passing to the surviving spouse will terminate on the lapse of time, on the occurrence of an event or on the failure of an event or contingency to occur, and (2) if any interest in the property passes or has passed from the decedent to some other person who may possess or enjoy any part of the property upon termination or failure of the surviving spouse's interest.

  Section 20.2056(b)-1(e)(2) of the regulations provides that:

    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."  (Emphasis added.)

Thus, in applying section 2055(e)(2), a determination must be made as to what the underlying property is in which a non-charitable interest exists.

  In this case, D's surviving spouse, S, has elected under state law a support allowance during the period of administration.  The allowance is an interest in property passing from the decedent to S.  Section 20.2056(e)(2)(a) of the regulations.  Under section 2056(b)(1) of the Code, the allowance is a nondeductible terminable interest, because it will terminate on S's death or remarriage, and if the allowance should terminate before the end of administration, any portion of the allowance not received by § during that period will pass to charity as part of the residuary estate.  Jackson v. United States, 376 U.S. 503 (1964), 1964-2 C.B. 522.

  The property in which § has an interest is that portion of the residuary estate equal to the maximum amount payable to § as an allowance for support. Because an interest in such property may pass from the decedent both to the surviving spouse and to charity, there is a dual interest in that property. Thus, the interest in such property that passes to charity is a non-deductible split interest under section 2055(e)(2) of the Code.

  That portion of the residuary estate certain to be received by charity (or not subject to diversion for a noncharitable purpose) is property in which no noncharitable interest exists and is therefore deductible and not a split interest.  For that portion to be determined, however, the property in which § has an interest (i.e., the maximum possible amount of the widow's allowance) must be capable of being measured and severed from the solely charitable property in the residuary estate.  The probability that the administration of D's estate could extend more than 5 years beyond D's death is less than 5%, which is so remote as to negligible.  See Rev. Rul. 70-452, 1970-2 C.B. 199, which provides that a probability of less than 5% is so remote as to be negligible under section 20.2055-2(b) of the regulations.  The maximum amount that charity can be said to be certain to receive is computed by reducing the value of the residue by the amount that represents the property in which § has an interest by reason of the potential diversion to pay the allowance.  The amount of this property equals the amount of the potential diversion to S, which is 300x dollars (5x dollars per month x 12 months x 5 years).

HOLDING

  The property in the residuary estate certain to be received by charity is not a split interest under section 2055(e)(2) of the Code and, accordingly, an estate tax deduction is allowable under section 2055 equal to the value of that portion of the residuary estate.  A charitable deduction, however, is not allowable for the property in the residue in which the surviving spouse has an interest.  There is a split interest in that portion of the residuary property, and because the bequest is not in a form required by section 2055(e), the interest of charity in that property is not deductible.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 74-97, 1974-1 C.B. 281, is clarified in order not to imply that under its facts the decedent transferred a charitable and noncharitable interest in the entire residuary estate bequeathed to charity.

Rev. Rul. 83-20, 1983-1 C.B. 231, 1983-4 I.R.B. 13.