PLR 200003059: Corrected page accompanies a charitable lead trust ruling

Plain-English summary

The IRS sent a corrected first page for an earlier ruling about a proposed charitable lead trust. In the attached ruling, it concluded that the charities' annuity interest qualified for a gift tax deduction measured by its actuarial value. The trust could deduct annuity payments made from gross income to qualifying charities under § 642(c), subject to limits including unrelated business income; principal distributions were not deductible unless the distributed amount had entered gross income without a prior deduction. The trust instrument did not itself trigger grantor trust ownership under §§ 673, 674, 676, or 677. The IRS left possible ownership under § 675 to a later review of how the trust actually operated, so it did not fully grant the request that none of the trust income be taxable to the grantor.

Ruling snapshot

• Question: Would the charitable annuity qualify for gift and trust income deductions, and would the grantor be taxed on trust income?
• Outcome: Mixed: deductions allowed on stated terms; § 675 grantor trust status reserved for factual review.
• Key authorities: IRC §§ 2522(c)(2)(B), 642(c), 671 through 677, 681; Treas. Reg. § 25.2522(c)-3(c)(2)(vi).

Full text (IRS public release)

200003059

Internal Revenue Service Department of the Treasury

Index Number: 642.03-00, 671.00-00, Washington, DC 20224
2522.02-04

Person to Contact:
Telephone Number:

Refer Reply To:
CC:DOM:P&SI:7-PLR- 112855-99

Date:

October 21, 1999

Dear Sir:

This letter responds to you request for the correction of an obvious error on
page 1 of our prior ruling letter (PLR-115942-98), dated April 6, 1999. A corrected
copy of page 1 is with this letter. Please replace the page 1 originally issued with the
corrected page.

Pursuant to the power of attorney on file in this office, a copy of this letter and
the enclosed material is being sent to the taxpayer.

Sincerely yours,

Christine E. Ellison

Chief, Branch 7

Office of Assistant Chief Counsel
(Passthroughs and Special Industries)

Prior Written Determination 199927010

200003059

Internal Revenue Service Department of the Treasury

Index Number: 642.03-00, 671.00-00, Washington, DC 20224

2522.02-04
Person to Contact:
Telephone Number:
Refer Reply To:
CC:DOM:P&SI:7-PLR-115942-98
Date:

April 6, 1999

Legend:

Taxpayer =

Termination Date =

a =

b =

Charity 1 =

Charity 2 =

Charity 3 =

A =

B

Dear Sir:

We received your letter, dated , requesting several rulings

concerning the income and gift tax consequences of a charitable lead trust. This letter
responds to your request.

PLR-115942-98

The facts and representations submitted are summarized as follows: Taxpayer
proposes to establish a trust that will qualify as a charitable lead trust under § 2522 of
the Internal Revenue Code. Article First Paragraph (W) of the proposed trust
instrument provides that notwithstanding anything in the trust instrument to the
contrary, no power enumerated in the trust instrument or accorded to the trustees
generally pursuant to law is to be construed to enable Taxpayer, Taxpayer's spouse (if
any), or the trustees, or any of them, or any other person to purchase, exchange, or
otherwise deal with or dispose of all or any part of the corpus or income of the trust for
less than an adequate consideration in money or money’s worth, or to enable Taxpayer
or Taxpayer's spouse (if any) to borrow all or any part of the corpus or income of the
trust, directly or indirectly. No person other than the trustees acting in a fiduciary
capacity is to have or exercise the power to vote or direct or authorize the voting of any
shares or other securities of the trust, to control the investment of the trust either by
directing investments or to reacquire or exchange any property of the trust by
substituting other property of an equivalent value. The trustees are not to pay
premiums on (or purchase) any policy of insurance on the life of Taxpayer or
Taxpayer's spouse.

Article First Paragraph (X) of the proposed trust instrument provides that,
notwithstanding any other provision of the trust instrument to the contrary, no trustee or
other person acting on behalf of the trust is to:

(1) Engage in any act of self-dealing as defined in § 4941(d) of the Internal
Revenue Code or corresponding provision of any subsequent federal tax laws;

(2) Cause any excess business holding, as defined in § 4943(c) or
corresponding provision of any subsequent federal tax laws, to be retained;

(3) Cause any investment to be acquired or retained in a manner that subjects
the trust to tax under § 4945(d) or corresponding provision of any subsequent federal
tax laws; or

(4) Make any taxable expenditures as defined in § 4944 or corresponding
provision of any subsequent federal tax laws

Article Second Paragraph (A)(1) of the proposed trust instrument provides that
up to and including the Termination Date, the trustees are to distribute (in cash or in
kind, valued at the date of distribution, or partly in each, in the trustees’ sole discretion)
an annuity at the rate of a per year to and among such qualified charities in such
proportions (or all to one) as the trustees shall from time to time select. The trustees
are authorized in the selection to commit irrevocably the entire annuity or any payment
or payments to one or more qualified charities in advance of the payment and (or) the

PLR-115942-98

year of payment and to evidence the commitment by promissory note or otherwise.
The annuity is to commence on and accrue from the date of the execution of the trust
agreement and may, in the trustees’ discretion, be paid in convenient installments (but
not less frequently than annually).

In the event that the trust agreement is executed on such a day that the first
fiscal year of the trust is not a full year (or if the Termination Date is other than the end
of the year), the amount distributable for that first year (or last year) is to be determined
as a pro rata portion of the annuity amount, taking into account the number of days
remaining in the first year (or last year) using the date the trust agreement is executed
as the first of the remaining days (or the Termination Date as the last remaining day).
For each taxable year, the annuity is to be paid from current income, and to the extent
current income is insufficient, from accumulated income, and to the extent accumulated
income is insufficient, from principal (including, but not limited to, capital gains). Any
income not distributed may be added currently to principal in the trustees’ sole
discretion.

Article Second Paragraph A)(2) of the proposed trust instrument provides that in
the event that, on or before that date b days prior to the close of the year, the trustees
have not selected the qualified charities or charity to receive any portion (or all) of the
annuity for that year (the selection is to be evidenced either by payment prior to that
date or by written instrument signed by a majority of the trustees prior to that date),
then the portion is to be paid in equal shares to such of Charity 1, Charity 2, and
Charity 3 that are then qualified charities (but only if either is then a qualified charity).

Article Second Paragraph (A)(3) of the proposed trust instrument provides that
the term "qualified charities" means and includes only those organization that are
described in both §§ 170(c) and 2522(a) of the Internal Revenue Code of 1986, as
amended (or corresponding provisions of any subsequent federal tax laws), gifts to
which qualify for charitable deduction under both the federal gift tax and federal income
tax laws or for comparable treatment under any subsequent federal tax laws. In the
event, however, that for any year, no applicable federal tax law contains provision for
reduction of tax on account of a charitable gift, no annuity payment is to be made for
that year.

Article Second Paragraph (A)(4) of the proposed trust instrument prohibits
commutation or prepayment of the annuity prior to the Termination Date.

Article Second Paragraph (B) of the proposed trust instrument provides that at
the Termination Date, the trustees are to distribute the entire trust estate remaining in
equal shares so as to provide one share to each of Taxpayer's daughters, A and B,
their heirs, executors, and administrators.

PLR-115942-98

Article Sixth of the proposed trust instrument provides that the trust is to be
irrevocable. Taxpayer will expressly acknowledge that Taxpayer will have no right or
power, either alone or in conjunction with others, or in whatever capacity to alter,
amend, revoke, or terminate the trust or any of the terms of the trust instrument, in
whole or in part, or to designate the persons who are to posses or enjoy the trust
property or the income from the trust during its continuance.

You have requested the following rulings:

1. The annuity interest in the trust will be a guaranteed annuity interest within the
meaning of § 2522(c)(2)(B) and § 25.2522(c)-3(c)(2)(vi) of the Gift Tax Regulations and
that a gift tax deduction will be allowed to Taxpayer pursuant to § 2522 equal to the
value of the guaranteed annuity.

2. The trust will be allowed a deduction under § 642(c) each taxable year in an
amount equal to the annuity amount paid from the trust’s gross income (except to the
extent that the trust has unrelated business income under § 681(a) and except to the
extent that contributions are nondeductible under §§ 508(d) or 4948(c)(4) during the
taxable year in accordance with the terms of the trust.)

3. No portion of the trust’s income will be taxable to Taxpayer under §§ 671-678.

Gift Tax Ruling:

Section 2501(a)(1) imposes for each calendar year a tax on the transfer of
property by gift during the calendar year by any individual, resident or nonresident.

Section 2522(a) provides that, in computing taxable gifts for the calendar year,
there is allowed a deduction for: (1) all gifts to or for the use of federal or other
government entities for exclusively public purposes, (2) all gifts to or for the use of a
corporation or trust operated exclusively for religious, charitable, scientific, literary, or
educational purposes, or (3) certain transfers to fraternal or veterans organizations.

Section 2522(c)(2) provides that where a donor transfers an interest in property
(other than an interest described in § 170(f)(3)(B)) to a person, or for a use, described
in § 2522(a) or (b) and an interest in the same property is retained by the donor, or is
transferred or has been transferred (for less than an adequate and full consideration in
money or money's worth) from the donor to a person, or for a use, not described in
§ 2522(a) or (b), no deduction is allowed for the interest that is, or has been transferred
to the person, or for the use, described in § 2522(a) or (b), unless—

PLR-115942-98

(A) in the case of a remainder interest, the interest is in a trust that is a
charitable remainder annuity trust or a charitable remainder unitrust (described in
§ 664) or a pooled income fund (described in § 642(c)(5)), or

(B) in the case of any other interest, the interest is in the form of a guaranteed
annuity or is a fixed percentage distributed yearly of the fair market value of the
property (to be determined yearly).

Section 25.2522(c)-3(a) 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 25.2522(c)-3(c)(2)(vi)(a) provides that a deductible interest is a
charitable interest in property only where the charitable interest is a guaranteed annuity
whether or not the interest is in trust. For purposes of § 25.2522(c)-3(2)(vi), the term
"guaranteed annuity" means an irrevocable right pursuant to the instrument of transfer
to receive a guaranteed annuity. A guaranteed annuity is an arrangement under which
a determinable amount is paid periodically, but not less often than annually, for a
specified term or for the life or lives of a named individual or individuals each of whom
must be living at the date of the gift and can be ascertained at that date. An amount is
determinable if the exact amount that must be paid under the conditions specified in the
instrument of transfer is ascertainable as of the date of the gift. For example, the
amount to be paid may be a stated sum for a term, or for the life of an individual, at the
expiration of which it may be changed by a specified amount, but it may not be
redetermined by reference to a fluctuating index such as the cost of living index. In
further illustration, the amount to be paid may be expressed as a fraction or percentage
of the cost of living index on the date of the gift.

Section 25.2522(c)-3(c)(2)(vi)(b) provides that a charitable interest is a
guaranteed annuity interest but only if it is a guaranteed annuity interest in every
respect. For example, if the charitable interest is the right to receive from a trust each
year a payment equal to the lesser of a sum certain or a fixed percentage of the net fair
market value of the trust assets, determined annually, the interest is not a guaranteed
annuity interest.

Section 25.2522(c)-3(c)(2)(vi)(e) provides that where a charitable interest in the
form of guaranteed annuity interest is in trust and the present value of all income
interests for charitable purposes exceeds 60 percent of the aggregate fair market value
of all amounts in the trust (after payment of liabilities), the charitable interest will not be
considered a guaranteed annuity interest unless the governing instrument of the trust

PLR-115942-98

prohibits both the acquisition and retention of the assets which would give rise to a tax
under § 4944 if the trust acquired such assets.

Based on the information submitted and the representations made, the annuity
payable under the terms of the proposed trust satisfies the requirements of
§ 25.2522(c)-3(c)(2)(vi) and, therefore, will be a guaranteed annuity for purposes of
§ 2522(c)(2)(B). Accordingly, we conclude that Taxpayer will be entitled to a gift tax
deduction under § 2522, based on the actuarial value of the guaranteed annuity
payable to the charities from the trust, determined under § 25.2522(c)-3(d)(2)(iv).

Income Tax Rulings:

Section 642(c)(1) provides that in the case of an estate or trust, there is allowed
as a deduction in computing its taxable income (in lieu of the deduction allowed by
§ 170(a), relating to the deduction for charitable, etc., contributions and gifts) any
amount of the gross income, without limitation, which pursuant to the terms of the
governing instrument is during the taxable year, paid for a purpose specified in
§ 170(c) (determined without regard to § 170(c)(2)(A)). If a charitable contribution is
paid after the close of such taxable year and on or before the last day of the taxable
year following the close of such taxable year, then the trustee or administrator may
elect to treat such contribution as paid during such taxable year. The election is to be
made at such time and in such manner as the Secretary prescribes by regulations.

Section 1.642(c)-3(b)(2) of the Income Tax Regulations provides that in
determining whether the amounts of income so paid, permanently set aside, or used for
a purpose specified in § 642(c)(1), (2), or (3) include particular items of income of an
estate or trust not included in gross income, the specific provision controls if the
governing instrument specifically provides as to the source out of which amounts are to
be paid, permanently set aside, or used for such purpose. In the absence of specific
provisions in the governing instrument, an amount to which § 642(c)(1), (2), or (3)
applies is deemed to consist of the same proportion of each class of the items of
income of the estate or trust as the total of each class bears to the total of all classes.

Section 671 provides the general rule that when the grantor or another person is
treated as the owner of any portion of a trust, there shall then be included in computing
the taxable income and credits of the grantor or the other person those items of
income, deductions, and credits against tax of the trust which are attributable to that
portion of the trust to the extent that such items would be taken into account in
computing taxable income or credits against the tax of an individual.

Sections 673 through 677 specify the circumstances under which the grantor is
regarded as the owner of a portion of a trust.

PLR-115942-98

Section 681 provides that in computing the deduction allowable under § 642(c)
to a trust, no amount otherwise allowable under § 642(c) as a deduction shall be
allowed as a deduction with respect to income of the taxable year which is allocable to
its unrelated business income for such year. For purposes of the preceding sentence,
the term "unrelated business income" means an amount equal to the amount which, if
such trust were exempt from tax under § 501(a) by reason of § 501(c)(3), would be
computed as its unrelated business taxable income under § 512 (relating to income
derived from certain business activities and from certain property acquired with
borrowed funds).

Except to the extent that the trust has unrelated business income within the
meaning of § 681, the trust will be allowed deductions under § 642(c)(1) for amounts of
gross income paid out to charitable beneficiaries described in § 170(c) during the
taxable year, or by the close of the following taxable year if the trustees so elect under
§ 1.642(c)-1(b). Because the deduction under § 642(c)(1) is limited to amounts of
gross income, no deduction will be allowed for a distribution of an amount of trust
principal except to the extent that the amount distributed has been included in the
trust's gross income and provided no deduction was allowed for any previous taxable
year for the amount distributed.

Our examination of the proposed trust instrument reveals none of the
circumstances that would cause the grantor to be treated as the owner of the trust
under §§ 673, 676, or 677.

Section 674(a) provides that the grantor shall be treated as the owner of any
portion of a trust in respect of which the beneficial enjoyment of the corpus or the
income therefrom is subject to a power of disposition, exercisable by the grantor or a
nonadverse party, or both, without the approval or consent of any adverse party.

Section 674(b)(4) provides that § 674(a) does not apply to a power to determine
the beneficial enjoyment of the corpus or the income therefrom if the corpus or income
is irrevocably payable for a purpose specified is § 170(c). .

The power given to the trustees in Article Second Paragraph (A)(1) of the
proposed trust is not a power that would cause the grantor to be treated as the owner
of any portion of the trust under § 674(a).

None of the circumstances that cause administrative controls to be considered
exercisable primarily for the benefit of the grantor under § 675 are authorized under the
proposed trust instrument. Thus, whether the grantor will be treated as the owner of
the trust under § 675 will depend on the circumstances attendant upon the operation of
the trust. This is a question of fact, the determination of which necessarily must be

PLR-115942-98

deferred until the federal income tax returns of the parties involved have been
examined by the Office of the District Director in which the returns are filed.

Except as ruled above, we express or imply no opinion concerning the federal
tax consequences of this transaction under the cited provisions of the Code or any
other provision of the Code.

This ruling is directed only to the taxpayer who requested it. Section 6110(j)(3)
provides that it may not be used or cited as precedent.

In accordance with the Power of Attorney on file with this office, a copy of this
letter is being sent to Taxpayer.

Sincerely yours,

Christine E. Ellison

Christine E. Ellison

Chief, Branch 7

Office of the Assistant Chief Counsel
(Passthroughs and Special Industries)