Internal Revenue Service
Revenue Ruling
Rev. Rul. 70-452
1970-2 C.B. 199
IRS Headnote
A charitable remainder interest in an irrevocable trust subject to invasion
to make fixed payments to the life tenant is not deductible under section
2055 or 2522 of the Code where the probability that the transfer will not
occur is greater than five percent.
Full Text
Rev. Rul. 70-452
Advice has been requested whether a deduction is allowable under section
2522 of the Internal Revenue Code of 1954 (prior to amendment by the Tax
Reform Act of 1969, P.L. 91-172, C.B. 1969-3, 10) with respect to a
remainder interest in a trust that is payable to charity under the
circumstances described below.
During 1968, a donor transferred property valued at $162,000 to an
irrevocable trust. Under the terms of the trust agreement, the trustees are
directed to pay to A, aged 62, all the trust income plus $6,000 of the
trust principal each year during her lifetime. The trust is to terminate
upon the death of A at which time the principal and any accumulated income
is to be paid to a named charitable organization.
Where a portion of trust principal in addition to the income must be
distributed periodically, the length of time the trust can exist is
susceptible of calculation. A fund of $162,000 from which $6,000 is payable
annually from principal will last for a period of 27 years. Based upon U.S.
Life Table 38, prescribed by section 25.2512-5(e) of the Gift Tax
Regulations, the probability that a person aged 62 will be alive 27 years
hence is 0.072 or 7.2 percent.
Section 25.2522(a)-2(b) of the regulations provides that if, as of the date
of the gift, a transfer for charitable purposes is dependent upon the
performance of some act or the happening of a precedent event in order that
it might become effective, no deduction is allowable unless the possibility
that the charitable transfer will not become effective is so remote as to
be negligible.
The charitable deduction is not allowable where the probability exceeds 5
percent that the noncharitable income beneficiary will survive the
exhaustion of the fund in which charity has a remainder interest. Any
possibility in excess of 5 percent that the contingency will occur and
defeat charity's interest is not considered so remote as to be negligible
within the meaning of the regulations. In this connection see sections 2037
and 2042 of the Code which specify that 5 percent is the value at which a
reversionary interest will be considered significant. The charitable
deduction was disallowed in Estate of George M. Moffett v. Commissioner,
269 F. 2d 738 (1959), where the probability that the fund would be
exhausted was 19 percent and in United States v. Bertha Dean, 224 F. 2d 26
(1955), where the probability was 9 percent.
In the above-described circumstances, the probability that charity will not
take is in excess of 5 percent. Accordingly, it is held that the charitable
deduction is not allowable for the transfer in trust. Similarly, the estate
tax charitable deduction is not allowable with respect to comparable
testamentary transfers. Section 20.2055-2(b) of the Estate Tax Regulations.
