Internal Revenue Service
Revenue Ruling
Rev. Rul. 77-491
1977-2 C.B. 332
Section 2055 -- Estate Tax Charitable Deduction
Caution: Revoked by Rev. Rul. 89-31
Distinguished by Rev. Rul. 78-152
IRS Headnote
Charitable deduction; interest passing directly to charity; settlement
agreement. No charitable deduction is allowable under section 2055(a) of
the Code to the estate of a decedent who executed a will and died in 1975
for a remainder interest passing directly to a charitable beneficiary
pursuant to the settlement of a will contest of a split interest trust that
did not meet the requirements of section 2055(c)(2).
Full Text
Rev. Rul. 77-491
Advice has been requested whether an amount paid outright to a charitable
organization pursuant to a compromise agreement, under the circumstances
described below, is allowable as a deduction under section 2055 of the
Internal Revenue Code of 1954.
The decedent executed a will in 1971 and created a testamentary trust under
which the trust income was payable to A for life with the remainder payable
to X Institution upon A's death. X is a charitable organization within the
meaning of sections 170(c), 2522, and 2055(a) of the Code. Four years later
in 1975, while very seriously ill, the decedent executed a new will and
created a new trust under which the trust income was payable to A for 15
years at the end of which time the remainder interest was payable free of
the trust to X. The decedent died in 1975 at which time the present value
of A's income interest was 150x dollars.
From an order of the State probate court admitting the 1975 will to
probate, A filed a good faith appeal contesting the decedent's testamentary
capacity to execute the 1975 will. A claimed that the decedent's 1971 will
should have been admitted to probate. Before final judgment was rendered on
the merits of A's suit a settlement agreement was reached. The 1975 will
was allowed to stand and was admitted to probate unchanged in all respects,
except that A was immediately paid the present value of A's income interest
(150x dollars). As a consequence of the settlement agreement terminating
A's income interest, X's remainder interest was accelerated and the balance
of the trust was immediately paid to X.
Section 2055(a) of the Code allows a deduction from the gross estate for a
bequest, legacy, devise, or transfer for public, charitable, religious,
etc., purposes.
The Tax Reform Act of 1969, Public Law 91-172, 1969-3 C.B. 10, added
section 2055(e)(2) to the Code and imposed new requirements that must be
satisfied by a charitable remainder trust to qualify for an estate tax
charitable deduction. These amendments apply to decedents dying after
December 31, 1969, who executed their wills after October 9, 1969. As
amended, section 2055(e)(2)(A) provides:
(2) Where an interest in property (other than an interest described in
section 170(f)(3)(B)) passes or has passed from the decedent to a person,
or for a use, described in subsection (a), and an interest (other than an
interest which is extinguished upon the decedent's death) in the same
property passes or has passed (for less than an adequate and full
consideration in money or money's worth) from the decedent to a person, or
for a use, not described in subsection (a), no deduction shall be allowed
under this section for the interest which passes or has passed to the
person, or for the use, described in subsection (a) unless--
(A) in the case of a remainder interest, such interest is a charitable
remainder annuity trust or a charitable remainder unitrust (described in
section 664) or a pooled income fund (described in section 642(c)(5) . . .
.
Section 664(d)(1) of the Code describes a "charitable remainder annuity
trust" as one by which the income beneficiaries annually receive a stated
dollar amount that equals not less than five percent of the initial net
fair market value of all property placed in the trust. A "charitable
remainder unitrust" is described as a trust by which the income
beneficiaries annually receive a fixed percentage not less than five
percent of the value of the trust property valued not less often than
annually. Section 664(d)(2). A "pooled income fund" is a trust to which
each of several donors transfers property and under which each donor
contributes an irrevocable remainder interest in such property to or for
the use of an organization described in section 170(b)(1)(A)(i)-(vi) and
provides an income interest for a specific period or for life to one or
more beneficiaries living at the time of such transfer. Section 642(c)(5).
Section 2055(e)(3) of the Code provides that if a deduction is not
allowable at the time of the decedent's death because a charitable
remainder interest is not in a charitable remainder annuity trust, a
charitable remainder unitrust or a pooled income fund, the deduction
nevertheless will be allowed if the governing instrument is amended or
conformed by judicial proceedings begun on or before December 31, 1977, so
that the charitable interest is placed in one of those arrangements.
Section 24.1(h)(1) of the Temporary Estate Tax Regulations provides,
however, that a deduction will not be allowed for the direct passage of an
interest in property to a person or for a use described in section 2055(a)
of the Code if such passage results from an amendment of a dispositive
provision of the governing instrument occurring after the death of the
decedent.
The specific question is whether the amount paid outright to X by virtue of
the settlement agreement is considered to have been received from the
decedent by outright bequest or devise and, therefore, deductible from the
decedent's gross estate under the provisions of section 2055(a) of the Code
where it was nondeductible in its original remainder interest from under
section 2055(e)(2).
The outright charitable bequest in the instant case resulted from a
postmortem modification pursuant to a compromise agreement. Such amendment
of the decedent's will did not satisfy the requirement of section
2055(e)(3) of the Code that the charitable interest created be placed in a
charitable remainder annuity trust, a charitable remainder unitrust or a
pooled income fund. Furthermore, although this modification caused the
charitable bequest to pass directly to the charitable beneficiary, such
passage did not meet the requirements of Treas. Reg. Section 24.1(h)(1)
since it in fact resulted from an amendment of a dispositive provision of
the governing instrument occurring since the date of the decedent's death.
See section 24.1(h)(1) of the Temporary Regulations.
Accordingly, no deduction is allowable under section 2055(a) of the Code in
respect of the property passing directly to the charity pursuant to the
settlement agreement.
