Rev. Rul. 1983-75

    Rev. Rul. 83-75

1983-1 C.B. 114.

               Internal Revenue Service
                  Revenue Ruling

     TRUST;  DISTRIBUTION OF APPRECIATED SECURITIES TO A CHARITABLE
                   ORGANIZATION

                 Published: May 2, 1983

SECTION 642. - -SPECIAL RULES FOR CREDITS AND DEDUCTIONS, 26 CFR
1.642(c)-3: Adjustments and other special rules for determining unlimited
charitable contributions deduction

(Also Sections 661, 662, 663, 1001, 1202; 1.661(a)-2, 1662(a)-1,
1.663(a)-2, 1.1001-1, 1.1202-1.)

  Trust;  distribution of appreciated securities to a charitable
organization.  The distribution by a trust of appreciated securities in
satisfaction of its obligation to pay a fixed annuity to a charitable
organization results in a taxable gain to the trust.  The trust is entitled
to a charitable deduction under section 642(c) of the Code equal to the
amount of gain recognized upon the distribution after making adjustment for
any deduction under section 1202.

ISSUES

  (1) Does a distribution by a trust of corpus consisting of appreciated
securities in satisfaction of its obligation to pay a fixed annuity to a
qualified charitable organization result in taxable gain to the trust?

  (2) Is the trust entitled to a charitable deduction equal to the amount
of gain resulting from the distribution of appreciated securities?

FACTS

  On December 31, 1978, A, an individual taxpayer, established an
irrevocable trust and funded it with 400x shares of Z corporation stock. 
Under the terms of the trust, the trustee is required to pay to qualified
charities an annuity equal to eight percent of the initial net fair market
value of the transferred stock.  Qualified charities are defined by the
trust instrument as organizations described in section 170(c) of the
Internal Revenue Code.    The annuity is to be paid annually for a term of 10
years and one month after the date of the trust's creation.  To the extent
current ordinary income is insufficient for making payments, the trustee is
to make payments out of capital gains and, if necessary, from corpus.  Upon
termination of the trust, the trustee will distribute the corpus to A's
children or their survivors.

  In 1983, there was insufficient ordinary income and capital gains to
satisfy the annuity to be paid to the qualified charities. Therefore, the
trustee paid the deficiency by distributing out of corpus some of the
shares of stock of Z corporation.  The stock distributed had a fair market
value at the time of distribution of 48x dollars.  The basis of the stock
in the hands of the trustee was 38x dollars.

LAW AND ANALYSIS

  Section 642(c)(1) of the Code provides that in the case of an estate or
trust, there shall be allowed as a deduction in computing its taxable
income any amount of gross income, without limitation, which pursuant to
the terms of the governing instrument is, during the taxable year, paid for
a purpose specified in section 170(c).

  Section 642(c)(4) of the Code provides that to the extent an amount
otherwise allowable as a deduction under subsection 642(c) consists of gain
from the sale or exchange of capital assets held for more than one year,
proper adjustment shall be made for any deduction allowable to the estate
or trust under section 1202 (relating to deduction for excess of capital
gains over capital losses).

  Section 661(a) of the Code provides that in any taxable year there shall
be allowed as a deduction in computing the taxable income of an estate or
trust, the sum of (1) any amount of income for such taxable year required
to be distributed currently (including any amount required to be
distributed which may be paid out of income or corpus to the extent such
amount is paid out of income for such taxable year);  and (2) any other
amount properly paid or credited or required to be distributed for such
taxable year;  but such deduction shall not exceed the distributable net
income of the estate or trust.

  Under section 1.661(a)-2(f)(1) of the Income Tax Regulations, if an
estate or trust distributes property in kind, and if the distribution
satisfies a right to receive a distribution in a specific dollar amount or
in specific property other than that distributed, then the distribution
will cause the estate or trust to realize gain or loss.

  In Kenan v. Commissioner, 114 F.2d 217 (2d Cir. 1940), the trustees of a
trust were directed to pay a beneficiary five million dollars when the
beneficiary reached age 40.  The trustee paid the beneficiary partly in
cash and partly in appreciated securities. The court held that the
beneficiary had a general claim against the trust corpus, and the
satisfaction of this general claim for an ascertainable value by a transfer
of specific assets was an exchange that caused the trust to realize gain.

  In Suisman v. Eaton, 15 F.Supp. 113 (D.Conn.1935) aff'd per curiam, 83
F.2d 1019 (2d Cir. 1936), cert. denied, 299 U.S. 573 (1936), the trustee
transferred appreciated stock to the beneficiary.  The court held that the
trust realized gain on the transfer because an exchange had occurred when
the beneficiary gave up a right to receive 50,000 dollars in return for the
appreciated stock.

  Section 662(a) of the Code provides rules for including in the gross
income of a beneficiary of an estate or trust described in section 661 the
amounts specified in section 661(a) that are paid, credited, or required to
be distributed.

  Section 663(a) of the Code and the regulations thereunder, however,
described certain distributions that are not included within the scope of
sections 661(a) and 662(a) of the Code.  Section 663(a)(2) provides that
any amounts paid or permanently set aside or otherwise qualifying for the
deduction provided in section 642(c) shall not be included as amounts
falling within sections 661(a) and 662(a).

  Section 1.663(a)-2 of the regulations provides that amounts paid,
permanently set aside, or to be used for charitable purposes are deductible
by estates or trusts only as provided in section 642(c).

  Section 1001(a) of the Code provides that the gain from the sale or other
disposition of property shall be the excess of the amount realized
therefrom over the adjusted basis provided in section 1011 for determining
gain.

  Section 1202(a) of the Code provides that if for a taxable year a
taxpayer other than a corporation has a net capital gain, 60 percent of the
amount of the net capital gain shall be a deduction from gross income. 
Section 1202(b) provides specific provisions for capital gains in the case
of an estate or trust.

  The trustee was obligated to pay a fixed annuity to qualified charitable
organizations.    Under the principles of section 1.661(a)-2(f)(1) of the
regulations and the case law cited, the distribution of appreciated
securities causes the trust to realize gain or loss if the distribution
satisfies a right to receive a distribution in a specific dollar amount.
Although the trustee has authority to pay the annuity to qualified
charities of the trustee's choice, the distribution satisfies a right to
receive a specified dollar amount.  It is not necessary or practical to
identify a particular qualified charity with the right to receive a
specified dollar amount.  In Kenan, the court stated that the word
"exchange" does not necessarily have the connotation of a bilateral
agreement which may be said to attach to the word "sale".  Thus, the
distribution in this case is an exchange even though the trustee consulted
with no one before satisfying the obligation to pay the annuity by using
the appreciated securities.

  Section 1.663(a)-2 of the regulations prevents an estate or trust from
claiming as a deduction, under section 661(a)(2) of the Code, any amount
distributed to a charitable beneficiary except as permitted by section
642(c). In Mott v. United States, 462 F.2d 512 (Ct.Cl.1972), cert. denied,
409 U.S. 1108 (1973), the United States Court of Claims rejected the
argument that a distribution of corpus to a qualified charitable
organization qualifies as any other amount paid within the meaning of
section 661(a)(2), and, thus, gives rise to the income tax deduction
permitted by that section. The court concluded that section 1.663(a)-2 of
the regulations is valid and prevents an estate from claiming as a
deduction under section 661(a)(2) any amounts distributed to a charitable
beneficiary except as permitted by section 642(c).  Under the facts of this
case, the principles of section 1.661(a)-2(f)(1) is consistent with section
663(a) when applied for purposes of determining the estate's or trust's
gain or loss from distributions in kind.

  Pursuant to section 642(c)(4) of the Code, to the extent that capital
gains in the present case arose from the sale or exchange, as described
above, of capital assets held for more than one year, the amount of the
section 642(c)(1) deduction must be adjusted for any deduction provided in
section 1202.

HOLDINGS

  1. The distribution by the trust of corpus consisting of appreciated
securities in satisfaction of its obligation to pay a fixed annuity to a
qualified charitable organization is a sale or exchange of the securities
that results in taxable gain to the trust.

  2. The trust is entitled to a charitable deduction equal to the amount of
gain recognized upon the distribution of appreciated securities after
making adjustment for any deduction provided under section 1202.

Rev. Rul. 83-75, 1983-1 C.B. 114.