Rev. Rul. 85-23

1985-1 C.B. 327, 1985-10 I.R.B. 9.

CHARITABLE BEQUEST; CONTINGENT REMAINDER INTEREST

Published: March 11, 1985

Section 2055.-Transfers for Public, Charitable, and Religious Uses, 26 CFR 20.2055-2: Transfers not exclusively for charitable purpose.

  Charitable bequest; contingent remainder interest. A deduction is not allowable under section 2055 of the Code for a bequest of a contingent remainder interest in a farm.

ISSUE

  Is a deduction allowable under section 2055 of Internal Revenue Code for the bequest to charity of a contingent remainder interest in a farm?

FACTS

  The decedent, D died testate in 1984. Under the provisions of the will, D bequeathed a farm to a child A for life with remainder to C, an organization considered charitable under sections 170(c), 2055(a) and 2522(a) of the Code. The will further provides that if B, another child, survives A, the remainder in the farm will vest in B instead of C. A and B are both 45 years old as of D's death.

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(e)(2) of the Code (which was added to section 2055 as part of the Tax Reform Act of 1969 I.R.B. L. 91-172, 1969-3 C.B. 10, 51) provides for disallowance of a deduction for certain charitable bequests that would otherwise be deductible under section 2055. Under section 2055(e)(2), if an interest in property is bequeathed by the decedent to a noncharitable beneficiary, no deduction is allowable for a bequest of a remainder interest in the same property to a charitable beneficiary unless the remainder interest is in a charitable remainder annuity trust or charitable remainder unitrust (described in section 664), or in pooled income fund (described in section 642(c)(5)), or is in the form of an outright transfer (not in trust) of a remainder in a personal residence or a farm.

  Section 2055(e)(3) of the Code (which was amended by the Tax Reform Act of 1984, P.L. 98-369) provides that, under certain conditions, a bequest which fails to meet the requirements of section 2055(e)(2) may be amended or conformed through qualified probate or judicial reformation proceedings to meet the requirements of section 2055(e)(2). One of the conditions is that a deduction for the bequest would have been allowable under section 2055(a) at the time of the decedent's death but for section 2055(e)(2).

  Section 20.2055-(a) of the Estate Tax Regulations provides that if a trust is created or property is transferred for both a charitable and a private purpose, deduction may be taken of the value of the charitable beneficial interest only insofar as that interest is presently ascertainable, and hence severable from the noncharitable interest. Section 20.2055-2(b) of the regulations provides that in the case of a charitable transfer subject to a condition, no deduction is allowable 'unless the possibility that the charitable transfer will become effective is so remote as to be negligible.'

  In Commissioner v. Estate of Louis Sternberger, 348 U.S. 187 (1955), 1955-1 C.B. 450, no estate tax charitable deduction was allowed for a bequest of a remainder interest which was contingent on the life tenant dying without any surviving descendants. At the time of the decedent's death, the life tenant was unmarried and had never had any children. In upholding the predecessor of section 20.2055-2(a) of the regulations, the decision explains that even though a charitable remainder bequest may have a determinable present value, the deduction may nevertheless be disallowed if the bequest is sufficiently contingent.

  As set forth in Rev. Rul. 70-452, 1970-2 C.B. 199, and Rev. Rul. 77-374, 1977-2 C.B. 329, a charitable deduction is not allowable where the probability exceeds 5 percent that a noncharitable beneficiary will survive the exhaustion of a fund in which charity has a remainder interest. Any possibility in excess of 5 percent that such a contingency will occur and defeat charity's interest is not considered so remote as to be negligible within the meaning of section 20.2055-2(b) of the regulations. In this connection, see sections 2037 and 2042 of the Code which specify that 5 percent is the value of which a reversionary interest will be considered significant. The charitable deduction was disallowed in Estate of Moffett v. Commissioner, 269 F.2d 738 (4th Cir. 1959), where the probability that the fund would be exhausted was 19 percent, and United States v. Dean, 224 F.2d 26 (1st Cir. 1955), where the probability was 9 percent.

  Rev. Rul. 77-374 considered a charitable remainder trust that was created after the enactment of section 2055(e) and concluded that, even though the trust was in a form which met the requirements of section 2055(e)(2), no deduction would be allowable under section 2055 because the bequest to charity was too contingent. The ruling also concluded that the contingency could not be removed under the amendment and conformation provision of section 2055(e)(3). This was the restrictions on contingent bequests that are described in section 20.2055-2(b) of the regulations relate to section 2055(a), rather than section 2055(e). These restrictions have been an inherent part of section 2055(a) since prior to the 1969 Tax Reform Act, and were not affected by that Act.

  In the present case, because the ages of A and B are equal, the actuarial probability that B will survive A and divest charity of its remainder interest in the farm is 50 percent. This exceeds the 5 percent limit referred to in Rev. Rul. 70-452 and Rev. Rul. 77-374. Thus the possibility that the charitable remainder transfer in this case will not take effect in possession and enjoyment is not so remote as to be negligible. The fact that the bequest is in the form of a remainder interest in a farm, which meets the requirements of section 2055(e)(2) does not permit allowance of the deduction. The amendment and conformation provisions of section 2055(e)(3) could not be employed to remove the contingency and thereby avoid disallowance of the charitable deduction.

HOLDING

  No deduction is allowable under section 2055 of the Code for the bequest of a contingent remainder interest in a farm to charity.

Rev. Rul. 85-23, 1985-1 C.B. 327, 1985-10 I.R.B. 9.