From PLI’s Course Handbook38th Annual Estate Planning Institute#10996

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CHARITABLE PLANNING

Conrad TeitellCummings & Lockwood LLC

A principal in the Connecticut-and Florida-based lawfirm of Cummings & Lockwood, resident in the firm’sStamford office. He is an adjunct visiting professorat the University of Miami School of Law and holdsan LL.B. from Columbia University Law School and anLL.M. from New York University Law School.

Cummings & Lockwood LLC, Six Landmark Square, POBox 120, Stamford, CT 06904-0120. Phone: (203) 351-4164, Fax: (203) 351-4535, Email: cteitell@cl-law.com

© Conrad Teitell 2007

BIOGRAPHICAL INFORMATION

PRACTICING LAWYER AND PROFESSOR OF LAWConrad Teitell is a principal in the Connecticut- and Florida-based lawfirm of Cummings & Lockwood, resident in the firm’s Stamford office.He is an adjunct professor (Masters Graduate Program in Estate Planning)at the University of Miami School of Law. He holds an LL.B. fromColumbia University Law School and an LL.M. from New YorkUniversity Law School.

LECTURERHe has lectured nationally on taxes and estate planning for thousands ofhours at programs sponsored by bar associations, estate planning councils,colleges, universities, law schools, community foundations, hospitals,religious, health, social welfare and other organizations.

AUTHORHis publications on taxes, wills and estate planning have been read bymillions—lay people and professional tax advisers. His many articlesinclude columns in Trusts & Estates magazine and the New York LawJournal. He is the editor and publisher of Taxwise Giving, a monthlynewsletter and is the author of the five-volume treatise, Philanthropy andTaxation. His column, Speaking and Writing, has appeared in theAmerican Bar Association’s Journal and in TRIAL, the magazine ofThe Association of Trial Lawyers of America.

A SPEAKER’S SPEAKERConrad Teitell founded and teaches the American Bar Association’s (ALI/ABA’s) public speaking course. He also teaches public speaking to otherprofessional advisers and laypeople. He teaches public speaking in a six-part PBS television series.

TELEVISION AND RADIOTeitell was the on-air tax adviser for the PBS series ON THE MONEYproduced by WGBH/Boston. He has done six PBS television specials ontaxes and estate planning—two produced by WGBH/Boston, twoproduced by KVIE/Sacramento, one produced by WMHT/Schenectadyand one produced by KCTS/Seattle. He has been a commentator onNational Public Radio’s Marketplace.

OTHER STUFFConrad Teitell, the subject of three lengthy interviews in U.S. News &World Report, is regularly quoted in such publications as The New YorkTimes, The Wall Street Journal, The Los Angeles Times, Newsweek,Money Magazine, and Forbes Magazine. Profiled in BloombergPersonal Finance as one of the nation’s lawyers who has reshapedestate planning by helping clients protect wealth, avoid taxes and

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benefit charities, he is listed in The Best Lawyers in America, Who’s Whoin the World, Who’s Who in America and Who’s Who in American Law.He has been awarded the designation “Distinguished Estate Planner” bythe National Association of Estate Planners and Councils. He is a fellowof the American College of Trust and Estate Counsel and the recipient ofthe American Law Institute/American Bar Association’s Harrison TweedAward for Special Merit in Continuing Legal Education.

AT PLAYRunner, sailor, aviator.

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Unless otherwise stated, it is assumed that the gift is made by an individual to a public charity1

(e.g., school, church, hospital, community foundation) or a private operating foundation (e.g., museum,

library). Abbreviations used: IRC = Internal Revenue Code of 1986; Reg. = U.S. Treasury Regulation;

Rev. Rul. = Revenue Ruling; Rev. Proc. = Revenue Procedure; T.D. = Treasury Decision. Caution. A

letter ruling is not a precedent.

To be considered long-term, an asset must be held for more than one year. IRC §1222.2

© Conrad Teitell 2007

WARNING: May Cause Drowsiness

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CHARITABLE GIVING METHODS

I. OUTRIGHT CHARITABLE GIFTS.1

A. GIFTS OF MONEY. Deductible up to 50% of donor's adjusted gross income. IRC§170(b)(1)(A); Reg. §1.170A-8. Five-year carryover allowed for any "excess." IRC§170(d)(1); Reg. §1.170A-10(a).

B. GIFTS OF APPRECIATED SECURITIES AND REAL ESTATE HELD LONG-TERM. Deductible at the full present fair market value, with no tax on the2

appreciation. IRC §170(e). Deductible up to 30% of adjusted gross income. IRC§170(b)(1)(C)(i); Reg. §1.170A-8(d)(1). Five-year carryover allowed for any"excess." IRC §170(b)(1)(C)(ii).

Under election, donor can increase ceiling to 50% of adjusted gross income (witha five-year carryover for any "excess") by making the same gift, but: (1) reducing theamount of the deduction for all long-term property gifts during the year by 100% ofthe appreciation; and (2) similarly reducing the deduction for long-term property giftsbeing carried over from earlier years. IRC §170(b)(1)(C)(iii) and (e)(1)(B); Reg.§1.170A-8(d)(2). The election can't be revoked after the tax return's due date.Woodbury, 55 TCM 1131 (1988), aff'd 90-1 USTC ¶50,199 (CA-10, 4/4/90). Seealso Grynberg, 83 TC 255 (1984) ("Once the taxpayer makes an elective choice, heis stuck with it.")

C. GIFTS OF APPRECIATED SECURITIES AND REAL ESTATE HELD SHORT-TERM. Deduction is for cost basis. IRC §170(e)(1)(A). Deductible up to 50% ofadjusted gross income. IRC §170(b)(1)(A). Five-year carryover allowed for any"excess." IRC §170(d)(1); Reg. §1.170A-10.

D. ORDINARY INCOME PROPERTY (SALE WOULD RESULT IN ORDINARYINCOME). For gifts of inventory, Section 306 stock, collapsible corporation stock,crops, artworks created by the donor (and other property that would generateordinary income on a sale), deduction allowed for property's cost basis. IRC§170(e)(1)(A). Deductible up to 50% of adjusted gross income. IRC §170(b)(1)(A).Five-year carryover allowed for any "excess." IRC §170 (d)(1); Reg. §1.170A-4(b)(1).

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E. APPRECIATED TANGIBLE PERSONAL PROPERTY (e.g., works of art, antiques,books) held long-term. Reg. §1.170A-4.

Related gifts. Deduction is full present fair market value, with no capital gain onappreciation, if use of the property is related to donee's exempt function (e.g., giftof painting to art museum or to school for its art gallery). IRC §170(e)(1)(B)(i).Deductible up to 30% of adjusted gross income. IRC §170(b)(1)(D)(i). Five-yearcarryover allowed for any "excess." IRC §170(d)(1). Deductible up to 50% ofadjusted gross income (with five-year carryover for any "excess") if same electionmade as for gift of long-term securities or real estate, above. Caution: Making theelection results in a deduction for cost basis only.

See Letter Ruling 9833011 for a discussion of an exempt religious communitycenter's innovative program assuring donors full fair market deductibility forappreciated gifts of art.

Unrelated gifts. If gift unrelated to donee's exempt function, deduction must bereduced by the amount of gain that would have been long-term capital gain had theproperty been sold at its fair market value. IRC §170(e)(1)(B). Deductible up to 50%of adjusted gross income. IRC §170(b)(1)(A). Five-year carryover allowed for any"excess."

Artwork bequest deductible despite restrictions. Artie owned a collection of 53paintings, drawings and water colors. He had already contributed a 50% undividedinterest in 32 of the items to Museum; he still owned the remaining one-halfundivided interest and 100% of the remaining pieces. Under Artie’s will, Museumwas to receive the entire art collection subject to an agreement between Artie andMuseum requiring Museum to display the entire collection on a permanent basis,and to identify the works according to Artie’s specifications. Artie’s will also placedconditions on future sales and loans of the artwork; sales were authorized but theproceeds had to be used to acquire similar works.

IRS rules. Artie’s entire interest in his art collection will qualify for an estate taxcharitable deduction (under IRC §2055) equal to the collection’s fair market value.That’s the same amount that will be includable in his gross estate (under IRC§§2031 and 2033), so there’ll be a wash. IRS noted that the agreement can’t divestMuseum of its ownership of the collection and doesn’t prohibit Museum from loaningthe collection. Letter Ruling 200202032.

The art of the deduction—comment. Key elements of the ruling are that therestrictions won’t result in loss of the estate tax charitable deduction and won’treduce its amount. A donor who places restrictions on the use of a charitablebequest could end up getting an estate tax charitable deduction, but for less thanthe value of the property included in his gross estate. Suppose, for example, that adonor’s will gives Green Acre to charity, but restricts its use to current use as farmland. When he dies, the land has a $2 million fair market value based on its highestand best use without a restriction—a shopping center. But as farmland (with the

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restriction), it is worth only $1.5 million. So $2 million (highest and best use value)would be includable in his gross estate, and his estate would get a $1.5 millioncharitable deduction—subjecting $500,000 to estate tax. Not a desirable result.

So a possible problem is highlighted—any suggestions? A donor could satisfyhis wishes for the land’s use and avoid estate tax. While he is still living, he placesa restrictive covenant on the land requiring that it is to be used as farmland forever.He then wills the property to the charity with the “built in” restriction. The amountincludable in his gross estate would be the property’s restricted (instead of highestand best use) value, and the estate tax charitable deduction would be for the sameamount includable in his gross estate, resulting in a wash.

Gift of work of art without the copyright. Gift or bequest of work of art qualifiesfor gift and estate tax charitable deductions (but not income tax deduction) eventhough copyright itself isn't transferred to charity, when: (1) the donee is a pubiccharity described in IRC §501(c)(3) that is not a private foundation (under IRC §509)and (2) the use is related to the donee's charitable purpose. IRC §2055(e)(4); Reg.§20.2055-2(e)(1)(ii); IRC §2522(c)(3); Reg. §25.2522(c)-(3)(c)(1)(ii).

Caveat. IRS may claim under some circumstances that donor's contribution activityis tantamount to being a dealer, or that the fair market value of the property is nogreater than the property's cost basis, thus limiting the deduction to the cost basis.(See below).

F. GIFTS OF APPRECIATED TANGIBLE PERSONAL PROPERTY HELD SHORT-TERM. Same as gifts of short-term securities and real estate, above.

G. BARGAIN SALES.

Charitable deduction. Allowed for difference between fair market value and salesprice for bargain sales for long-term securities and real estate. IRC §170(e)(2);Magnolia Dev. Corp., 19 TCM 934; Waller, 39 TC 665 (acq.); Gladstein, 68-1 USTC¶9197 (D.C. Cir. 1968); Gamble, 68-1 USTC ¶9393 (D.C. Cir. 1968).

Capital gain implications. Cost basis of property must be allocated betweenportion of property "sold" and portion of property "given" to charity on basis of fairmarket value of each. Appreciation allocable to sale is subject to taxation;appreciation allocable to gift is not. IRC §1011(b).

Caveat. Outright gift of mortgaged property is considered a bargain sale. Reg.§1.1011-2(a)(3); Guest, 77 TC 9 (1981).

H. PARTNERSHIP GIFTS. Contributions not deductible on partnership return, butdeductible by individual partners. IRC §702(a)(4); Reg. §1.170A-1(h)(7).

I. CORPORATE GIFTS. Ceiling on deductibility is 10% of taxable income. IRC§170(b)(2). Five-year carryover for any "excess." IRC §170(d)(2).

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Timing flexibility for corporations. Ordinarily, gifts are deemed contributed in thetaxable year payment is made to the charity. However, a special rule allowscorporations to elect to deduct gifts made this tax year on last tax year's return whenthese conditions are met:

•The board of directors authorized the gift last tax year;

•The gift is paid within 2½ months of the beginning of this tax year; and

•The corporation is on the accrual method of tax reporting. IRC §170(a)(2); Reg.§1.170A-11(b).

Corporations meeting certain tests are allowed an increased deduction for inventorygifts (used by charity for the ill, needy or minors) and scientific equipment (used bycolleges, universities or certain tax-exempt scientific research organizations forresearch, experimentation or research training). Deduction is for the lower of: (1)sum of the property's basis plus half of the appreciation; and (2) twice the property'sbasis. IRC §170(e)(3) and (4); Reg. §1.170A-4A. See Letter Rulings 9528022 and9621005.

High-tech property gifts. Corporate gifts of computer technology and equipment(e.g., software and fiber optic cable) made within two years after the donor acquiredor substantially completed constructing the property may qualify for the largerdeduction (described in prior paragraph). The property must be used in the U.S. foreducational purposes from kindergarten through twelfth grade. Further, theproperty's original use must begin with the donor or the charity. S corporationsremain ineligible donors. A private foundation may receive the equipment providedit gives the property to an eligible recipient within 30 days. The charity or foundationmay pay shipping, transfer and installation costs. IRC §170(e)(6). This enhanceddeduction is available for gifts made before 2004. IRC §170(e)(6)(F).

J. PRIVATE FOUNDATIONS (OTHER THAN PRIVATE OPERATINGFOUNDATIONS).

General rule. The charitable contribution deduction for gifts of long-term capital gainproperty of any kind to private foundations (other than private operating foundations)must be reduced by the amount of gain that would have been long-term capital gainhad the property been sold at its fair market value. Thus they are deductible at thelower of cost basis or fair market value. IRC §170(e)(1)(B)(ii).

Special rule—"pass-through" foundations. Deduction allowed for full present fairmarket value where private foundation within 2½ months following the year ofreceipt gives an amount equal to all gifts described in preceding paragraph tochurches, schools, hospitals, public charities or private operating foundations. Note.Unless tangible personal property is for a "related" use (see E. above), deductionis limited to cost basis. IRC §170(b)(1)(D); IRC §170 (e)(1)(B)(ii); Reg. §1.170A-9(g)(2)(iv).

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Special rule—qualifying publicly traded stock gifts. A full fair market value(FMV) deduction is allowed for qualifying publicly traded stock to private founda-tions. IRC §170(e)(5). This special treatment is available to the extent that thecontribution—along with all prior contributions of stock in the same corporation bythe donor and the donor’s family—do not exceed 10% of the value of thecorporation’s outstanding stock.

What is publicly traded stock? Listed securities, of course. IRS's definition alsoincludes mutual fund shares if quotations are published daily in readily availablenewspapers. Reg. §1.170A-13(c)(7)(xi)(A)(3). It also includes securities traded ona national or regional over-the-counter market. Reg. §1.170A-13(c)(7)(xi)(A)(2).Letter Ruling 9623018. Caution. Appreciated publicly traded stock subject to SECrule 144 is deductible at cost basis. Letter Ruing 9247018, Letter Ruling 9320016,Letter Ruling 9734034, Letter Ruling 9746050. But SEC rule 145(e) stock (allowedto be sold under that rule) is deductible at present market value. Letter Ruling9320007.

Carryovers for gifts qualifying for FMV deductibility. "Excess" gifts to privatefoundations may be carried over—until exhausted under the applicable deductibilityceiling—up to five years. IRC §170(b)(1)(B).

Ordinary income and short-term property gifts. Deduction is for cost basis. IRC§170(e)(1)(A).

Ceilings on deductibility.

•Gifts of cash and ordinary income property. Thirty percent of adjusted grossincome.

•Gifts of capital gain property, including those deductible at fair market valueunder marketable securities rule. Twenty percent of adjusted gross income. IRC§170(b)(1)(D).

•"Pass-through" foundations. If foundation meets distribution requirements,ceiling is 30% or 50% of adjusted gross income (as for direct gifts to publiccharities). IRC §170(b)(1)(A)(vii).

Carryover. Five-year carryover for all "excess" gifts. IRC §170(b)(1)(B).

IRA to fund private foundation. When a donor designates a charity as beneficiaryof an IRA on his or her death, the value of the plan is included in the decedent'sgross estate. But there's a fully offsetting estate tax charitable deduction. Thus,there's no estate tax. And, although the distribution to the charity is income inrespect of a decedent (IRD), it isn't taxable because the charity is tax exempt.

In Letter Ruling 9341008, a donor named her private foundation as the beneficiaryof her IRA on her death. If the donor owns the IRA when she dies, it's includable in

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her gross estate, rules IRS. Her estate will get an offsetting estate tax charitablededuction. The proceeds that would have been included in the donor's gross incomeif distributed to her are IRD to the foundation when they're distributed to it. But theIRD won't be taxable to the foundation because it's tax exempt. See also LetterRulings 9818009 and 9838028.

K. REDUCTION FOR SOME ITEMIZERS. Taxpayers must reduce their itemizeddeductions (except medical expenses, casualty and theft losses, and investmentinterest) by an amount that equals 3% of adjusted gross income over $139,500(over $69,750 if married filing separately) in 2003. This amount is adjusted annuallyto take inflation into account.

The charitable deduction generally isn't affected by this rule because mostitemizers pay home mortgage interest and state and local taxes. So, in effect,those non-discretionary payments bear the burden of any reduction. Donors withvery high adjusted gross incomes, however, may be affected.

In any event, the 3% rule won't take away more than 80% of the itemizeddeductions that are subject to that rule.

L. WHEN IS GIFT DEEMED DELIVERED FOR DETERMINING VALUATION ANDYEAR OF DEDUCTION? Reg. §1.170A-1(b).

Gifts of securities. If mailed, date of mailing is delivery date; if hand delivered tocharity, date received by charity is delivery date. If securities delivered to donor'sbank or broker (as donor's agent) or to the issuing corporation (or its agent)instructing corporation to reissue in charity's name, delivery date is date securitiestransferred to charity's name on corporation's books (date on new stock certificatehaving charity's name).

Gifts by check. If mailed, date of mailing is delivery date; if hand delivered tocharity, date received by charity is delivery date.

Gifts of art works and other tangible personal property. Date property receivedby charity is delivery date.

Real estate gifts. Date charity receives properly executed deed is delivery date. Butif deed must be recorded to pass title under local law, delivery date is date deedrecorded.

Pledges. Deductible in year fulfilled—not when made. IRC §170(a)(1). Satisfyingpledge with property does not give rise to taxable gain or deductible loss. Rev. Rul.55-410, 1955-1 CB 297.

Credit card gifts. Charitable contributions made using a bank credit card aredeductible when the bank pays the charity; it isn't necessary to wait until the donorpays the bank. Because use of the credit card creates the cardholder's own debt to

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a third party, it is similar, says IRS, to the use of borrowed funds to make acontribution. Rev. Rul. 78-38, 1978-1 CB 67.

Options. Donors who grant an option to buy real estate at a bargain price to charitycannot take a deduction until the charity exercises the option.

M. DETERMINING FAIR MARKET VALUE FOR GIFTS OF SECURITIES.

When there is a market for securities on a stock exchange or over-the-counter. Fair market value is mean between highest and lowest quoted sellingprices on date of delivery. Reg. §§20.2031-2(b) and 25.2512-2(b).

When there isn't a market for securities on a stock exchange or over-the-counter. Fair market value is mean between bona fide bid and asked prices on dateof delivery. Reg. §§20.2031-2(c) and 25.2512-2(c).

Valuation of mutual fund shares (open-end investment companies). Fair marketvalue is redemption price ("bid"). Cartwright, 411 U.S. 546 (1973).

Closed-end investment company shares. Valued the same way as securitiestraded on a stock exchange or over-the-counter. Reg. §20.2031-2.

N. DETERMINING FAIR MARKET VALUE OF REAL ESTATE, WORKS OF ARTAND OTHER PROPERTY NOT TRADED ON AN EXCHANGE OR OVER-THE-COUNTER. Fair market value is price at which the property would change handsbetween a willing buyer and a willing seller, neither being under any compulsion tobuy or sell and both having reasonable knowledge of relevant facts. Reg. §1.170A-1(c). Determined by expert appraisals. Cost of appraisal deductible as IRC §212(3)deduction, thus percent of adjusted gross income ceiling inapplicable. Rev. Rul. 67-461, 1967-2 CB 125. Cost of appraisal is lumped together with "miscellaneous"deductions, only deductible above a 2% of adjusted gross income floor. Forsubstantiation/appraisal requirements, see Part C.

O. SERVICES. No charitable deduction for value of personal services rendered free forcharity. Reg. §1.170A-1(g); Rev. Rul. 1953-162, 1953-2 CB 127; Rev. Rul. 67-236,1967-2 CB 103. Purnell, T.C. Memo 1993-593.

P. UNREIMBURSED VOLUNTEER EXPENSES. Deductible when incurred inrendering services for charity. Rev. Rul. 55-4, 1955-1 CB 291. Ceiling is 50% ofadjusted gross income, with a five-year carryover. Rockefeller, 76 TC 178, aff'd, 676F.2d 35 (CA-2, 1982); Rev. Rul. 84-61, 1984-1 CB 39.

Travel expenses. Volunteers whose duties keep them away from home overnightmay deduct reasonable payments for meals and lodging as well as travel costs.

Limitation. Deductions for unreimbursed charitable travel expenses are disallowedif there's a significant element of personal pleasure, recreation or vacation in the

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travel. IRC §170(j).

Unreimbursed babysitting expenses incurred to render volunteer services notdeductible. Rev. Rul. 73-597, 1973-2 CB 69.

Unreimbursed automobile expenses. Donors who use their automobiles inrendering gratuitous services to charitable organizations may deduct their gas, oil,tolls and parking costs (but not insurance and depreciation); or they may deduct astandard cents-per-mile rate in computing the cost of operating the automobile whilevolunteering. Optional standard mileage rate is 14¢ per mile. IRC §170(i).

Q. QUID PRO QUO GIFTS. See part C.

R. EXCEPTION FOR COLLEGE SPORTS FANS. IRC §170(i) allows a deduction for80% of the amount paid to a tax-exempt institution of higher education for seatingoptions (but not for the price of the tickets themselves). For the provenance of thisexception, see Letter Ruling 7823051, Rev. Rul. 84-132, 1984-2 CB 55 and Rev.Rul. 86-63, 1986-1 CB 88. S Corp precluded from a business expense deduction(under IRC §274) for cost of skybox at university football field could deduct 80% ofcost as a charitable contribution (under IRC §170(1)) according to an unpublished1999 Technical Advice Memorandum (TAM) and a letter by IRS Chief Counsel tothe Division 1-A Athletic Directors Association. See also Part C.

S. INSTALLMENT OBLIGATION—CAVEAT. Gift of installment (gain is reportable ininstallments under IRC §453) accelerates remaining deferred gain in year of gift.Rev. Rul. 55-157, 1955-2 CB 293.

T. DEPRECIABLE PERSONAL PROPERTY. Contribution deduction reduced by whatwould have been taxed as ordinary income (under IRC §1245) if property had beensold. IRC §170(e)(1)(A).

U. DEPRECIABLE REAL PROPERTY. Contribution deduction reduced by what wouldhave been taxed as ordinary income (under IRC §1250) if property had been sold.IRC §170(e)(1)(A).

V. LIFE INSURANCE GIFTS. Donor names charity beneficiary and irrevocably assignsincidents of ownership to it. Caution. No income, gift or estate tax charitablededuction if charity lacks an "insurable interest" in the donor under state law. LetterRuling 9110016. Proceed with caution: Although IRS has "withdrawn" this ruling, itstill represents IRS's opinion in this matter. Check applicable state law.

Gift of policy on which premiums remain to be paid. Income tax deduction isslightly above cash surrender value. Reg. §25.2512-6(a). However, if that amountexceeds policy's cost basis, deduction is for cost basis. IRC §170(e)(1)(A).Continued payment of premiums gives donor deduction for the annual premiums.Awrey, 25 TC 643.

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Gift of fully paid-up policy. Income tax deduction is generally replacement cost.Reg. §25.2512-6(a). However, if that amount exceeds policy's cost basis, deductionis for cost basis. IRC §170(e)(1)(A).

Endowment policy. Charitable deduction for value minus amount which would betaxed as ordinary income on a sale. IRC §170(e)(1)(A). But see Reg. §1.170A-4(a).Caveat. Donor has ordinary income of difference between cost and maturity valuein year charity receives proceeds. Rev. Rul. 69-102, 1969-1 CB 32; Friedman, 41TC 428.

Charitable gift of group-term insurance. Employees can receive group-term lifeinsurance coverage up to $50,000 tax-free but the value of premiums needed tofurnish coverage over that amount is taxable income to the employees. In LetterRuling 9319026, a company that provides its employees with group-term lifeinsurance allows them to reduce their coverage to avoid inclusion in their grossincome of the cost of the coverage over $50,000. As long as the employees whoreduce coverage aren't entitled to cash or any other benefit as a result of theelection, the group plan qualifies, rules IRS.

•A better and more generous way. The cost of group-term life insuranceprotection over $50,000 isn't taxed to employees who name a charity as thebeneficiary of the "excess" coverage. Donors don't get an income tax charitablededuction for this gift, but they avoid paying income taxes on the value ofpremiums needed to furnish the excess protection. IRC §79(b)(2)(B).

•Caveat. For years, some advisers have wondered whether the value of thepremiums required to furnish coverage over $50,000 could be subject to thefederal gift tax, due to the "partial interest" rule. Surely Congress didn't intendthat although a literal reading of the Code could support that result. The questionhas not arisen, probably due to the annual gift tax exclusion.

•Besides, it seems that the partial interest issue can be side-stepped if the donorsimply names the charity as the beneficiary of all the policy proceeds—not justthe excess. Reg. §1.79-2(c)(3)(ii) allows an employee to donate a fractionalinterest in the coverage. The donor will want to be sure that the charity isdeemed to have an insurable interest in his or her life under state law. Other-wise, there could be some gift tax wrinkles. But that's not a problem in moststates.

Life insurance gift OK even though donor retained title. Donor in Letter Ruling200209020 planned to purchase a single-premium whole life insurance policy on hislife, naming Charity as the policy’s irrevocable beneficiary. He would retain legal titleto the policy, but transfer all rights to Charity; he could cancel the policy at any timewithin 30 days of purchase. State law gave Charity an “insurable interest” on his life.

IRS rules. Donor’s retention of the policy’s title won’t violate the partial-interest rulebecause he will transfer every substantial right and interest in the policy to Charity.

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The retention of legal title alone doesn’t equal the retention of a substantial interest.Thus Donor will be deemed to have transferred the entire policy to Charity. Rev. Rul.75-66, 1975-1 CB 85. Further, since Charity will have an insurable interest onDonor’s life, the possibility that the gift might be defeated by the insurancecompany’s refusal to pay the death benefits to Charity is so remote as to benegligible under Reg. §1.170A-7(a)(3). (Remember, income, gift, and estate taxcharitable deductions aren’t allowable if a charity doesn’t have an insurable interest(under state law) on a donor’s life.)

Timing of gift. The gift is contingent on Donor’s not canceling the policy within 30days. So the gift isn’t made, rules IRS, until the first day following the expiration ofthe 30-day cancellation period.

Value of gift. Donor’s gift equals the initial premium on the policy, rules IRS. That’sthe fair market value—the price that any person of the same age, gender and healthas the insured would have to pay for a similar life insurance policy with the sameinsurance company on the date of the assignment. Rev. Rul. 58-372, 1958-2 CB 99.

Comments:

•Year of deduction. If Donor bought the policy on December 15, 2001, forexample, his gift would be deductible on his 2002 tax return. Why? Donor had30 days to cancel the policy.

•Gift’s value. IRS ruled that the fair market value of the policy was the premiumpaid. But the gift was not deemed made until 30 days later. Suppose theinsurance company went belly-up in the interim and the policy is worthless on thedate the gift is deemed to have been made (the day following the expiration ofthe 30-day cancellation period). Could Donor still deduct the premium paid?

•Donor’s life expectancy. What if on the day before the 30-day cancellationperiod is to expire, Donor learns that he has only one month to live (everyoneincluding the insurance company’s doctor thought he had a normal lifeexpectancy on the date he paid the premium). Naturally, he won’t cancel thepolicy. Will the charitable deduction on his final income tax return be limited tothe premium paid, or can it be argued that the value is close to the policy’s facevalue?

Appraisal requirements. Be mindful of the appraisal requirements for any incometax charitable deduction of over $5,000 for non-marketable property gifts ($10,000for closely held securities)—Form 8283 (Non-cash Charitable Contributions). Reg.§1.170A-13(c). For valuation purposes, a “qualified appraiser” doesn’t include aparty to the transaction in which the donor acquired the property being appraisedunless the property is donated within two months (60 days) of the acquisition date,and its appraised value doesn’t exceed the purchase price. Reg. §1.170A-13(c)(3)(iv)(D). The insurance company that sold Donor the life insurance policy maybe a qualified appraiser because the policy will be transferred to Charity on the first

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day after the 30-day cancellation period (assuming that he doesn’t cancel).

Charitable split-dollar insurance. Income and gift tax charitable deductions arenot achievable and taxpayers and charities could be subject to various penalties.IRS Notice 99-36. IRC §170(f)(10)(F).The Code now imposes penalties andreporting by charities. See IRS Notice 2000-24 for when Form 4720 and Form 8870are required. Trustees of charitable remainder trusts should review the Code’s split-dollar provisions before purchasing insurance contracts. Charities that reinsure giftannuities would have to meet requirements.

W. REQUIREMENTS FOR SUBSTANTIATING CHARITABLE DEDUCTIONS. SeePart C.

X. SOME PLANNING TECHNIQUES.

! Gift of appreciated securities instead of cash, with cash used to buysame securities on open market.

Achieve stepped-up basis without dying.

If new securities go down in value, sale produces loss instead of gain thatwould be incurred on a sale of the original securities.

Example. Linda Smith plans on making a $10,000 cash gift to her college.As it happens, she has some listed securities she bought a number of yearsago for $4,000, which are now worth $10,000. Instead of making a $10,000cash gift, Ms. Smith should contribute her listed securities. She will receivea $10,000 income tax charitable deduction (just as if she gave $10,000 cash)and completely avoid tax on the $6,000 appreciation. With the $10,000 cash(which she initially intended to contribute) she buys stock in the samecorporation on the open market. Now she owns the same stock (only thecertificate number differs) with a $10,000 basis. If two years from now thesecurities are worth $13,000, her gain on a sale will be only $3,000 ($13,000sales price minus $10,000 new basis). If she kept her original securities, hergain would be $9,000 ($13,000 minus $4,000 basis).

If the securities go down in value, Deus vetet, Ms. Smith is still better offhaving given her presently owned securities and using the $10,000 cash tobuy new securities. Suppose the value of the new securities declines to$9,000. Had Ms. Smith contributed $10,000 cash and kept her originalsecurities, on a sale she would have a $5,000 gain ($9,000 sales price minus$4,000 basis). However, if she contributed her present securities and usedthe $10,000 in cash to buy identical securities, she would have a $10,000basis. If the value goes down to $9,000 and she sells, Ms. Smith will havea $1,000 loss (better than a $5,000 gain). Of course, we hope the newsecurities appreciate. But either way, Ms. Smith is better off by giving herpresently owned securities and using the $10,000 cash to replace them.

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! Redemption bailout.

Background—the Palmer case (62 TC 684). Donor had voting control ofboth a corporation and a private foundation. He donated his corporate stockto the foundation and then had the corporation redeem the stock from thefoundation. IRS argued that the corporation actually redeemed the stock fromthe donor and that the donor then contributed the proceeds to the foundation.But the Tax Court respected the form of the transaction and did not tax thedonor because the foundation was not a sham, the contribution of stock wasa valid gift and the foundation was not obligated to go through with theredemption.

IRS rules: "The Service will treat proceeds of a redemption of stock underfacts similar to those in Palmer as income to the donor only if the donee (thecharity) is legally bound, or can be compelled by the corporation, to surrenderthe shares for redemption." Rev. Rul. 78-197, 1978-1 CB 83.

Significance of Rev. Rul. 78-197 for outright charitable gifts. Donors whocontribute stock in their closely held corporations to charity are less likely tohave to litigate with IRS if the corporation redeems the stock from the charityafter the gift is received. It is crucial that the charity not be legally bound tosurrender the shares for redemption—nor can the corporation have the abilityto compel the charity to surrender the shares for redemption. Recent letterrulings highlight the importance of avoiding questionable valuations as well.

Caution. Generally, the gift of stock should not be to a private foundation.Redemption by the corporation from the foundation could be a prohibited actof self-dealing.

More caution. The U.S. Court of Appeals for the Second Circuit said, indicta, that an "understanding" between the donor and the charity that charitywould surrender its shares for redemption is enough to recharacterize thetransaction and generate taxable gain to the donor. In Blake, 697 F.2d 473(CA-2, 1982), the charity agreed not only to give up its shares for redemptionbut also to use the proceeds to purchase donor's yacht. The Court of Appealscould have reached its decision based on a finding that there was a legallybinding obligation on the charity to sell the stock and buy the yacht. Yet, itwent further and held that a mere understanding between the donor and thecharity is sufficient to recharacterize the transactions. How this decision willbear on straight Palmer situations—where there is an understanding that thecharity will offer its stock for redemption but no legally binding agreement todo so—remains to be seen.

Later developments. In Letter Ruling 8411029 (issued after Blake) IRSfollowed Rev. Rul. 78-197 without mentioning Blake. But in Letter Ruling8431014, IRS refused to rule whether a legal obligation existed. State law,

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according to IRS, may give rise to implied obligations to sell (e.g., promissoryestoppel or detrimental reliance), which would cause the proceeds of the saleto be imputed to the donors. IRS cited Blake, until then conspicuously absentfrom similar rulings. Compare Letter Ruling 8552009 (gift valuation hanky-panky: Blake theory applied) and Letter Ruling 8623007 ("no evidence thatthe donor received any value back" from the charity: gain on redemption notimputed to donors).

IRS seems to focus on the potential for abuse, rather than talismanic stan-dard. See, e.g., Letter Ruling 8639046, in which IRS approved agift/redemption "plan" that, although not binding, was proposed by a taxpayerwho was the controlling shareholder of the corporation and a director of thedonee foundation. Because the redemption would be for fair market value,IRS noted the similarity to Palmer and said the donor wouldn't realize anyincome from the transaction.

Blake notwithstanding, a valid business purpose—and proper timing—cankeep the donor out of hot water (even if he has to go to court). In Caruth, 688F. Supp. 1129 (DC-TX, 1988), the majority stockholder in a closely heldcorporation declared a dividend of $1,500 per share, payable to shareholdersof record as of seven days later. The next day Caruth donated 1,000 sharesof the stock to the Dallas Community Chest. So on the dividend record date,the Community Chest owned 1,000 shares, receiving a dividend of $1.5million two days later. Caruth took a $1.6 million tax deduction ($1,500dividend + $100 call value per share x 1,000 shares).

Two months later, the Community Chest asked Caruth if he knew anyonewho might be interested in buying the stock for the call price of $100 pershare. Nine months after that, Caruth told the Community Chest that he didn'tknow of any prospective buyers, but he himself would buy the shares back.

In court, IRS tried a Blake argument: in view of the "economic realities," theformalities of declaring a dividend, setting the record date, donating the stockand paying the dividend were a sham because Caruth held the reins.

But the District Court found Caruth "a very credible witness" and believed histestimony that there was no agreement or understanding that he would laterbuy the shares back. IRS's own regulations say that, had Caruth sold theshares on the date of the gift, the buyer would have been taxed on thedividend:

"To suggest, as the IRS does, that a person who contributes shares of stockto a charity . . . must recognize a dividend over which he has no power ofdisposition—when the same person could have sold the stock and,under Reg. §1.61-9(c), unquestionably avoided recognizing thedividend—is anomalous indeed." [Emphasis in original.]

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On appeal, the Fifth Circuit agreed that Caruth shouldn't be taxed.

"Like a goose that lays golden eggs only upon the command of its originalowner, the preferred stock becomes considerably more valuable when‘pregnant' with what soon must become income to somebody. * * * [Caruth]has surrendered not just the golden egg but also the goose. It does notmatter that the taxpayer may cause the corporation to redeem the sur-rendered stock—to, in effect, kill the goose—or that the taxpayer will himselfdetermine when, if ever, the asset becomes ‘pregnant' with value again. Thatthe goose's original owner may kill the goose or keep it from laying goldeneggs certainly reduces the value of the goose to its new owner, but neitherof these powers entitle the original owner to more golden eggs." 89-1 USTC¶7192 (CA-5, 1989).

Unwilling to disturb the lower court's finding that there had been noagreement between Caruth and the donee to redeem the stock, the courtrejected IRS's Blake argument. Besides, the donor had an independentbusiness purpose for having the corporation issue the large dividend: toencourage his squabbling nephews to sell their shares of stock. That's whyCaruth provided a time lag between declaring the dividend and the recorddate, when a shareholder's right to the dividend was "locked in." (On a salebefore the record date they would have realized capital gain, rather thanordinary income from the dividend.) Finally, the court noted that thecorporation's redemption power was subject to a 30-day notice requirement,so there was no way Caruth could "kill the goose" by redeeming the charity'sshares before it became entitled to the dividend.

See also Letter Ruling 9611047. There, donors gave closely held stock to apass-through private foundation that in turn donated it to a public charity.They're entitled to an income tax charitable deduction for the securities' fullpresent fair market value—with no capital gain on the appreciation—eventhough the corporation plans to redeem the stock and the donors are officersand board members of the corporation and the foundation, rules IRS.

! Donors not taxed on appreciated warrants gift—IRS Bound by Rev. Rul.78-197—latest development: Every schoolchild knows that capital gains taxis generally avoided on charitable gifts of appreciated property. But the kidalso knows that under the anticipatory-assignment-of-income doctrine (andother doctrines discussed soon) a donor can be taxable on the capital gainon a subsequent sale by the donee-charity (and not out of the profit, but outof the pocket—ouch!).

The anticipatory-assignment-of-income doctrine was raised by IRS in a 2002Tax Court case. The court, however, granted summary judgment to thedonors, saying that IRS couldn’t disavow its own favorable-to-taxpayers 1978ruling—Rev. Rul. 78-197.

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What happened. Husband and wife owned stock warrants in NMG, Inc.World Color Press (WCP) wrote to NMG that it intended to purchase all ofNMG’s outstanding stock. The couple then assigned their warrants (the rightto purchase stock at a set price) to the University of St. Thomas, MarquetteUniversity, the Mayo Foundation, and the Archdiocese of St. Paul andMinneapolis, Catholic Community Foundation.

When the gifts were made, the donee-charities weren’t—according to thedonors and the charities—obligated to sell the warrants. However, soon afterreceiving the gifts, the charities sold the warrants to WCP.

Enter IRS. The contributions by the donors were anticipatory assignmentsof income and so they owe IRS an additional $1,322,295 in income taxes (onan unreported $4,722,484 capital gain) plus a $264,459 accuracy-relatedpenalty under IRC §6662(a).

On appeal to the Tax Court. The donors argued that the anticipatory-assignment-of-income doctrine didn’t apply because the charities weren’tlegally obligated, and couldn’t be compelled, to sell the contributed property.They relied on Rev. Rul. 78-197, 1978-1 C.B. 83. (IRS’s acquiescence inPalmer, about which more soon). IRS argued that it wasn’t bound by its ownruling even though it hadn’t withdrawn or modified it.

Tax Court holds. Deciding for the donors, the court noted that IRS, in Rev.Rul. 78-197, said that it will treat proceeds of the sale of contributed stock asincome to the donor only if at the time of the gift, the donee is legally bound,or can be compelled, to sell the shares. The court treated Rev. Rul. 78-197as an IRS concession and granted summary judgment to the donors “as amatter of law.” Rauenhorst, 119 T.C. No. 9; No. 1982-00 (7 Oct 2002).

How did IRS learn that the charities sold the warrants? Each of them fileda Form 8282, Donee Information Return (a/k/a tattletale form), with itsFederal income tax return for 1993, reporting November 12, 1993 as the dateit received the warrants. The Forms 8282 filed by the two universities and theMayo Foundation stated that they sold their warrants on December 22, 1993.The Archdiocese’s Form 8282 reported November 19, 1993 as the sale date.

Tax Court’s rationale in deciding for the donors: . . . . It is wellestablished that “A gift of appreciated property does not result in income tothe donor so long as he gives the property away absolutely and parts withtitle thereto before the property gives rise to income by way of a sale.” [citingcases.] However, it is equally well established that the incidence of taxationdepends on the substance rather than the form of a transaction. [citingcases.] To that end, the Commissioner has used a number of doctrines asa basis for recharacterizing a purported gift of appreciated property, includingthe anticipatory-assignment-of-income doctrine, e.g., Ferguson v.Commissioner, 108 T.C. 244 (1997), affd. 174 F.3d 997 (9th Cir. 1999), the

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step transaction doctrine, e.g., Blake v. Commissioner, T.C. Memo. 1981-579, affd. 697 F.2d 473 (2d Cir. 1982), and the sham transaction doctrine,e.g., Caruth Corp. v. United States, 865 F.2d 644 (5th Cir. 1989). He invokesthe anticipatory-assignment-of-income doctrine as the basis for hisrecharacterizing the purported gifts of stock warrants in this case.

Anticipatory-Assignment-of-Income Doctrine. [That rule] taxes income “tothose who earn or otherwise create the right to receive it and enjoy thebenefit of it when paid.” Helvering v. Horst, 311 U.S. 112, 119 (1940).Further, “the mere assignment of the right to receive income is not enoughto insulate the assignor from income tax liability” where “the assignor actuallyearns the income or is otherwise the source of the right to receive and enjoythe income”. Commissioner v. Sunnen, 333 U.S. 591, 604 (1948). A personcannot escape taxation by anticipatory assignments, however skillfullydevised, where the right to receive income has vested. Harrison v. Schaffner,312 U.S. 579, 582 (1941). A mere transfer which is in form of a gift ofappreciated property may be disregarded for tax purposes if its substance isan assignment of a right to income. See Palmer v. Commissioner, 62 T.C.684, 692 (1974), affd. on other grounds 523 F.2d 1308 (8th Cir. 1975).However, the precise contours of the anticipatory-assignment-of-incomedoctrine in the context of charitable contributions of appreciated propertyhave been the subject of some contention.

! Bright-line test. In language to gladden a tax-planner’s heart, the Tax Courtin Rauenhorst noted that IRS—in Rev. Rul. 78-197— acquiesced to Palmerand thus proclaimed a "bright-line" test that focuses on the donee's controlover the disposition of the appreciated property.

Rev. Rul. 78-197 states: In Palmer v. Commissioner, . . . the United StatesTax Court held that the Internal Revenue Service incorrectly treated a gift ofstock to [a charity], followed by a prearranged redemption of the stock, as aredemption of the stock from the donor followed by a gift of the redemptionproceeds to the donee. The Service will follow Palmer on this issue. . . .

In Palmer, the taxpayer had voting control of both a corporation and a tax-exempt private foundation. Pursuant to a single plan, the taxpayer donatedshares of the corporation's stock to the foundation and then caused thecorporation to redeem the stock from the foundation. It was the position ofthe Service that the substance of the transaction was a redemption of thestock from the taxpayer, taxable under section 301 of the Code, followed bya gift of the redemption proceeds by the taxpayer to the foundation. TheUnited States Tax Court rejected this argument and treated the transactionaccording to its form because the foundation was not a sham, the transfer ofstock to the foundation was a valid gift, and the foundation was not bound togo through with the redemption at the time it received title to the shares.

* * *

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The Service will treat the proceeds of a redemption of stock under factssimilar to those in Palmer as income to the donor only if the donee is legallybound, or can be compelled by the corporation, to surrender the shares forredemption.

! IRS argued that Rev. Rul. 78-197 isn’t controlling. The donors aren’tentitled to judgment as a matter of law because genuine issues of materialfact remain for trial. Whether the donees were bound or could be legallycompelled to surrender their NMG warrants is not "the critical issue" to beresolved and, accordingly, neither Carrington nor Rev. Rul. 78-197 controlsthis case. IRS maintained that the critical issue here is "a factualone"—whether donors’ rights to receive the proceeds of the stock transactioninvolving WCP "ripened to a practical certainty" at the time of theassignments. IRS relied on Ferguson, 174 F.3d 997 (9th Cir. 1999), Jonesv. United States, supra, Kinsey v. Commissioner, 477 F.2d 1058 (2d Cir.1973), affg. 58 T.C. 259 (1972), Hudspeth v. United States, 471 F.2d 275(8th Cir. 1972).

! IRS tried to distinguish both Carrington and Rev. Rul.78-197. Itcontended that Carrington and Rev. Rul. 78-197 aren’t inconsistent with thecases it relies upon. IRS claimed that in this case, and the cases upon whichit relies, there was a pending "global" transaction for the purchase and saleof all the stock of a corporation at the time of the gift or transfer at issue. Itthen surmises that because Carrington and Rev. Rul. 78-197 didn’t involvea pending "global" transaction, the legal principles of those authorities don’tapply.

! The Tax Court dismisses IRS’s arguments. “We cannot agree that [IRS]has effectively distinguished Carrington and Rev. Rul. 78-197, . . . on theirfacts. First, neither this Court nor the Courts of Appeals have adopted [IRS’s]theory of a pending ‘global’ transaction as a means of distinguishing casessuch as Carrington and Palmer. Indeed, the case law in this area appliesessentially the same anticipatory-assignment-of-income principles to casesof a ‘global’ nature as those applicable to cases of a ‘nonglobal’ nature. . . .We cannot agree that [IRS’s] reliance on a pending global transactiondistinguishes either Carrington, Rev. Rul. 78-197, . . . or other cases uponwhich [donors] rely. With that being said and leaving Carrington and thoseother cases aside at this point, the bright-line test of Rev. Rul. 78-197, . . .which focuses solely on the donee's control over the contributed property,stands in stark contrast to the legal test and the cases upon which [IRS]relies and which consider the donee's control to be only a factor.

! The crux of IRS’s position. Rev. Rul. 78-197 isn’t controlling in this case;furthermore revenue rulings aren’t binding on IRS or the courts.

! That’s no way to treat taxpayers. The Tax Court noted that IRS had neitherrevoked nor modified Rev. Rul. 78-197. “We agree with [IRS] that revenue

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rulings are not binding on this Court, or other Federal courts for that matter. . . . However, we cannot agree that the Commissioner is not bound to followhis revenue rulings in Tax Court proceedings. Indeed, we have on severaloccasions treated revenue rulings as concessions by the Commissionerwhere those rulings are relevant to our disposition of the case.

* * *“While this Court may not be bound by the Commissioner's revenue rulings,and in the appropriate case we could disregard a ruling or rulings asinconsistent with our interpretation of the law, see Stark v. Commissioner, 86T.C. 243, 251 (1986), in this case it is [IRS] who argues against the principlesstated in [its] ruling and in favor of our previous pronouncements on thisissue. The Commissioner's revenue ruling has been in existence for nearly25 years, and it has not been revoked or modified. No doubt taxpayers havereferred to that ruling in planning their charitable contributions, and, indeed,[donors] submit that they relied upon that ruling in planning the charitablecontributions at issue. Under the circumstances of this case, we treat theCommissioner's position in Rev. Rul. 78-197, 1978-1 C.B. 83, as aconcession. Accordingly, our decision is limited to the question whether thecharitable donees were legally obligated or could be compelled to sell thestock warrants at the time of the assignments.

Donors argue that as of November 12, 1993, the date the warrants weretransferred on the books of NMG, the donees had not entered into anyagreement to sell the warrants and could not be compelled by any legalmeans to transfer the warrants. Accordingly, they contend that, as a matterof law, there was not an assignment of income. They submitted affidavitsfrom representatives of the donees in support of their motion for partialsummary judgment. Each of those affidavits outlines the events whichpreceded the assignments, each states that the stock warrants were receivedon November 12, 1993, and each also states that, as of that date, the doneeshad not entered into agreements to sell the stock warrants.”

! The Tax Court’s bottom line. “Rev. Rul. 78-197 . . . is contrary to [IRS’s]litigation position in this case. Instead of accepting the legal principlesarticulated in that ruling, [its] counsel contends that the Commissioner is notbound by revenue rulings, and his reliance on Blake v. Commissioner, 697F.2d at 480-481, demonstrates that he is taking the position in this case thatthe ruling is incorrect.

The . . . Treasury's [own] . . . regulations, provide:

* * * * * * *(d) Revenue Rulings . . . do not have the force and effect of TreasuryDepartment Regulations (including Treasury decisions), but are published toprovide precedents to be used in the disposition of other cases, and may becited and relied upon for that purpose. * * *

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(e) Taxpayers generally may rely upon Revenue Rulings published in theBulletin in determining the tax treatment of their own transactions and neednot request specific rulings applying the principles of a published RevenueRuling to the facts of their particular cases. * * *

The Tax Court after noting that similar statements appear in other IRSpublications, stated: “Surely, given these statements, taxpayers should beentitled to rely on revenue rulings in structuring their transactions, and theyshould not be faced with the daunting prospect of the Commissioner'sdisavowing his rulings in subsequent litigation.”

! IRS’s Chief Counsel (apparently in response to Rauenhorst) issued areminder to its attorneys: “It has been a longstanding policy . . . that we arebound by our published positions, whether in regulations, revenue rulings, orrevenue procedures, and that we will not argue to the contrary. Accordingly,we do NOT take positions in litigation, TAMs, PLRs, CCAs, advisoryopinions, etc., inconsistent with a position that the Service has taken inpublished guidance or in proposed regulations. This policy applies even whenattorneys disagree with the published guidance or even if there are plans torevoke, change or clarify the position taken in the published guidance. Thepolicy applies regardless of the age of the guidance and regardless ofwhether courts have chosen to follow the published position. So long as thepublished guidance remains on the books, the Office of Chief Counsel willfollow it. Counsel can, however, take positions inconsistent with prior informaladvice, such as TAMs, CCAs, etc., but should never take a positioninconsistent with published guidance or proposed regulations. CC-2002-043.

! What’s the lesson of this case? Courts don’t have to follow IRS revenuerulings and other IRS pronouncements whether they are favorable orunfavorable to the taxpayer. The Tax Court, however, said that IRS is boundby its revenue rulings.

Rev. Rul. 78-179—the ruling in play in Rauenhorst—simply put, says that adonor of appreciated property is not taxed on the gain on a subsequent saleby the charity if the charity wasn’t legally obligated to sell the property. IRS’spronouncement in Rev. Rul. 78-197 merely confirms the law.

In all cases, however, the factual issue remains: Was the charity under anobligation (express or implied) to sell the contributed property? Had the gain“ripened” before the gift?

! Corporate liquidation and tender offers—the foregone conclusion rule.A shareholder couldn’t avoid capital gains tax when he gave stock to charityafter a liquidation plan had been approved by the shareholder and it wasunlikely (even though possible) that the plan would be rescinded. Hudspeth,471 F.2d 275 (CA-8, 1972). And donors who gave appreciated stock to

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charities just before the corporation merged in a tender offer are taxable onthe gain under the assignment of income doctrine. Ferguson, 174 F.3d 997(9 Cir. 1999). What is Ferguson’s lesson? Watch your step! As the courtth

said: “Walking the line between tax evasion and tax avoidance seems to bea patently dangerous business. Any tax lawyer worth his fees would not haverecommended that a donor make a gift of appreciated stock this close to anongoing tender offer and a pending merger, especially when they werenegotiated and planned by the donor.”

! Undivided interests. An income tax charitable deduction is not allowable forremainder interests in tangible personal property. However, a deduction isallowed for gifts of undivided interests—e.g, an undivided 1/6th interest in oilpainting given to museum, with the museum having possession two monthseach year.

! Extending the income tax charitable deduction beyond the grave.

Instead of making testamentary charitable gifts, consider outright bequest inamount of intended charitable gift to cooperative spouse who then makes agift to charity on his own—generating an income tax deduction for survivingspouse.

No extra taxes in decedent's estate because she has a marital deduction forthe same amount the charitable deduction would have been.

Same technique can be used for testamentary charitable remainder gift.Instead of husband, for example, creating a testamentary charitableremainder unitrust for his wife, he makes an outright bequest to her; she thencreates an inter vivos unitrust—thereby getting an income tax charitablededuction.

Can be used with a cooperative family member (not a spouse) in amountequal to the unified transfer tax exemption.

If the spouse or other family member follows the decedent's wishes, possiblefor a larger gift to be made to the charity (especially if the charity will receivethe survivor's estate).

! Qualifying for special estate tax benefits. If a donor of a sizabletestamentary charitable bequest is close to death and it's questionablewhether the estate will qualify for IRC §6166 deferral or IRC §303 redemptiontreatment, the following technique may help: Donor should cancel thetestamentary charitable bequest and instead make a charitable pledge,binding under state law. The pledge is deductible under IRC §2053 and thuswill reduce the adjusted gross estate for purposes of meeting IRC §§303 and6166 requirements.

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! Specialized Small Business Investment Company (SSBIC). Capital gainthat would otherwise be payable on the sale of publicly traded securities canbe rolled over—without payment of tax. How? Use the sales proceeds to buycommon stock or a partnership interest in a SSBIC within 60 days of sellingthe securities. A SSBIC is a corporation or partnership licensed by the SmallBusiness Administration that finances small businesses owned by the disad-vantaged. The gain that can be rolled over for any year is limited to $50,000,with a $500,000 lifetime cap. Small Business Investment Act of 1958 (asamended, P.L. 85-699, 15 U.S.C. 681 et seq.).

Day of reckoning. The basis in the SSBIC is reduced by the amount of anygain not recognized on the sale of the publicly traded securities. Thus, anygain protected from tax on the rollover will be taxed on a later sale of theSSBIC stock.

The SSBIC roll over can serve as a capital gains escape hatch for an individ-ual who sold appreciated publicly traded securities and then learned that heor she could have made an outright charitable gift of the securities or trans-ferred them to a charitable remainder trust (for sale and reinvestment)without having to pay capital gains tax.

If the discovery is made within 60 days of the sale of the publicly tradedsecurities, a donor can use the sales proceeds (within the $50,000 annuallimit on gain) to buy stock in a SSBIC. Then, the donor either makes anoutright gift of the SSBIC stock to charity or contributes the SSBIC stock toa charitable remainder trust. The charity can keep the SSBIC stock or sellit—without capital gains to the charity or the donor. And a charitableremainder trust can keep the SSBIC stock as an investment or can sell theSSBIC stock and reinvest the sales proceeds—without capital gains to thedonor or the trust.

A directory of SSBIC's is available from: Associate Administrator forInvestment, Investment Division, Small Business Administration, 409 ThirdSt., S.W., Washington, D.C. 20416; (202) 205-6510.

Y. PITFALLS—WATCH YOUR STEP.

! Tax shelter gifts of lithographs, books, bibles, gems. Promoters promisedonors who buy those items of tangible personal property—and hold theproperty long-term—a related-use charitable deduction for the fair marketvalue (claimed to be much higher than the donor's purchase price). IRS limitsthe deduction to the donor's cost basis maintaining: (1) the donor's activitiesare tantamount to that of a dealer and thus the gift is of "ordinary income"property; or (2) that the fair market value is no greater than the cost basis.Rev. Rul. 79-256, 1979-2 CB 105; Rev. Rul. 79-419, 1979-2 CB 107; Rev.Rul. 80-69, 1980-1 CB 55; Rev. Rul. 80-233, 1980-2 CB 69; Rev. Rul. 80-329, 1980-2 CB 70. See also: Anselmo, 80 T.C. 872 (1983); Skripak, 84 TC

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285 (1985).

Several rebuffs in the Tax Court have led IRS to abandon the "dealer" theory,focusing instead on the fair market value issue. IRS has succeeded inconvincing the courts that fair market value exceeded the donor's cost basisonly slightly, Skripak, 84 TC 285 (1985); that the fair market value was equalto the donor's cost basis, Talebi, 49 TCM 1230 (1985); Chiu, 84 TC 722(1985); Lampe, 49 TCM 1505 (1985); Theodotou, 49 TCM 1233 (1985); orthat the fair market value was lower than the donor's cost basis, Anselmo, 80TC 872 (1983), aff'd (CA-11, 4/16/85); Price, 49 TCM 1236 (1985); Harken,T.C. Memo 1985-468; Hecker, T.C. Memo 1987-297. See also Pasqualini,et al. 103 T.C. No. 1 (1994) and a related decision at T.C. Memo 1994-323.

! Valuation. A marine surveyor was convicted by a federal court for knowinglyovervaluing yachts donated to two Florida universities. The conviction (whichcould have carried penalties of a $5,000 fine, three years in the brig, or both)was reversed by a federal appeals court because of "two significant trial courterrors." Wolfson, 573 F.2d 216 (CA-5, 1978).

In that case, the government prosecuted the appraiser. However, donors, taxadvisers, tax return preparers and employees of charitable organizationscould find themselves in the same boat. The substantiation and appraisalrequirements are discussed in Part C.

Case on point. The financier Victor Posner was prosecuted for fraudulentlyovervaluing property donated to a Florida charity. In 1988 he got five year'sprobation in exchange for pleading no contest and agreeing to spend $3million and 5,000 hours aiding the homeless. He also had to pay back taxes($1.2 million), interest (almost $2 million) a penalty ($600,000) and a $75,000fine. A realtor convicted of aiding and abetting the overvaluation got 18months in prison.

! Gift of endowment policy. See V (above).

! Gift of installment obligation. See S (above).

! Donor's broker shouldn't sell appreciated securities that donor wishes tocontribute. If the broker sells, donor will have to report the gain.

! Gift of property having fair market value lower than basis. Deductionlimited to basis. Best to sell and contribute proceeds. The deduction is thesame, but sale preserves capital loss deduction (capital loss deduction notavailable for personal use assets—e.g., personal residence, automobile).

! Gift to charity and sale by charity to buyer with whom donor has beennegotiating or to buyer designated by donor. IRS unsuccessfully tried to

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tax donor on gain in Sheppard, 361 F.2d 972 (Ct. Cl., 1966) and Martin, 255F. Supp. 381 (D.C. Md. 1966). Donors convinced courts that donees werenot required to sell. See above.

! Charitable gift vs. business expense.

Transfers of property to a charitable organization that bear a directrelationship to the taxpayer's trade or business and which are made with areasonable expectation of financial return commensurate with the amount ofthe transfer may constitute allowable deductions as trade or businessexpenses rather than as charitable contributions. See IRC §162 and itsregulations.

If gift deductible as business expense, no ceiling on deduction except that itbe "ordinary and necessary."

Caution. Fact that gift exceeds the percentage of adjusted gross incomeceiling does not in itself make gift deductible as business expense.

See Rev. Rul. 72-314, 1972-1 CB 44; Marquis, 49 TC 695 (1968); JeffersonMills, 259 F. Supp. 305 (D.C. Ga. 1965), aff'd 367 F.2d 392 (CA-5, 1966);Letter Rulings 9309006, 9041009, 9828031, 9431024, 9129043.

! Earmarking gift—background. An otherwise deductible payment to aqualified charity isn’t deductible if the gift is earmarked for a particularindividual—no matter how worthy she may be. Whether a transfer isearmarked is a fact question. After I tell you how IRS favored the taxpayersin Letter Ruling 200250029, I’ll review earlier rulings and cases and we’ll seethe steps to take to keep bad things from happening to gooddonors—keeping in mind that the IRS wasn’t born yesterday.

What happened. For many years, Charity has supported musicalcomposition and performance by hosting composer events, placingcomposers in residencies with professional arts institutions, and com-missioning works to be performed.

In January, Donors (husband and wife) told Charity that they were interestedin supporting the composition of a work by Rosa Composer. In July, theycontributed funds to Charity. At that time, Charity didn’t commit to use thefunds to commission a work by Ms. Composer, and didn’t represent that thefunds would be so used. Rather, Charity told Donors that the funds would beused at the discretion of its officers, and Donors represented to IRS that theyunderstood that. Charity’s acknowledgment letter thanking Donors for theircontribution, stated that there could be no assurance that their contributionwould be used to support Ms. Composer’s work.

In November, Charity, Ms. Composer and Orchestra entered into agreement

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that provided that Charity would pay her a commissioning fee and copyingcosts, and would reimburse her expenses for appearing at her work’spremier. Donors’ contribution was sufficient to pay for all of that.

IRS rules. Donors’ contribution wasn’t impermissibly earmarked for Ms.Composer and thus is deductible. IRS found this situation similar to those inRev. Rul. 62-113, and Peace (discussed later). Although Donors expressedan interest in the selection of a particular individual to compose a work for thecharity, the common understanding was that the contribution would becomepart of the general funds of the charity, and would be distributed asdetermined by its officers.

SOME GUIDELINES—PERHAPS

As noted, whether a gift is earmarked is a fact question and thus it is helpfulto review how the IRS and the courts have viewed the facts in varioussituations.

Professor’s research project. Donor contributed to a university, requiringthat the gift be used for a particular professor’s research project. Theuniversity had no discretion over the gift’s use. IRS ruled (Rev. Rul. 61-66,1961-1 C.B. 19) that the university was a conduit only, that the real doneewas the professor and thus as a payment to an individual it wasn’t deductibleunder IRC §170.

My son, the missionary. Donor gave cash to a missionary fund thatreimbursed missionaries for approved expenses not covered by amountsreceived from the missionaries’ parents, others and personal savings.Donor’s son was a missionary and eligible to receive reimbursements.

IRS ruled (Rev. Rul. 62-113, 1962-2 C.B. 10) that if contributions to themissionary fund are earmarked by Donor, they are treated, in effect, as giftsto the designated individual and aren’t deductible. However, contrary to whatyou might imagine, IRS allowed a charitable deduction saying that the donorintended the gift was for the organization and not a gift to an individual.

The ruling could be viewed as establishing a bright-line test. (1) Does thecharity have full control of the donated funds and discretion as to their use,and (2) does the donor intend to benefit the charity and not the individual? Ifso, a charitable deduction is allowable. The ruling went on to say that unlessthe donor’s contributions to the fund were distinctly marked by him so thatthey could be used only for his son or were received by the fund under anunderstanding that they would be so used, they are deductible.

It is, of course, easy to cite the rule. However, you still have a fact questionin each case.

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Corporate scholarship programs. Corporation, under its scholarshipprogram, contributed to universities from which it drew a substantial numberof its employees. The universities selected scholarship recipients in their owndiscretion and there weren’t employment commitments between Corporationand scholarship recipients.

IRS ruled (Rev. Rul. 68-484, 1968-2 C.B. 105) favorably, finding that theuniversities had full control over the donated funds, and that Corporation’sintent in making the payments was to benefit the universities and notindividual recipients.

Tuition paid by “sponsors.” Students at a religious educational institutionhad their tuition paid by “sponsors” who were often the student’s parents.

The sponsors signed a commitment form that set the contribution amount,the payment schedule, and indicated the names of the sponsor and thestudent. There was also a space on the payment envelopes for the student’sname. Although the form stated that contributions were nonrefundable andthat the use of money was “solely at the discretion” of the organization,IRS—under the “wasn’t- born-yesterday rule”—denied a charitable deduction,stating that deductibility requires both full control by the charity and the intentby the donor to benefit the charity and not a particular recipient (Rev. Rul. 79-81, 1979-1 C.B. 107).

Donor’s intent. In a letter accompanying his payment to a college, Donorstated, “I am aware that a donation to a Scholarship Fund is only deductibleif it is unspecified, however, if in your opinion and that of the authorities, itcould be applied to the advantage of Mr. Robert F. Roble, I think it would beconstructive.” In denying the deduction, the appellate court (Tripp v.Commissioner, 337 F.2d 432 (7 Cir. 1964) stated, “[i]t is clear from theth

record that [Donor] intended to aid Roble in securing an education and thepayments to the college were earmarked for that purpose.”

Charity’s control. Despite the listing of the names of specific missionarieson the checks donated to a missionary fund and the apparent sending offunds by the mission to the particular missionaries, the Tax Court (Peace v.Commissioner, 43 T.C. 1 (1964), acq. 1965-2 C.B. 6) held that the donor’sintention was to donate the funds to the mission’s common fund to be usedas the mission determined. The court reached this result based in part on itsfinding that the mission had exclusive control of both the administration anddistribution of the contributed funds, and that the donor intended that thecontributions go into a common pool to be distributed among all missionaries.

Law of extended consequences. If a gift is held to be earmarked for anindividual, not only will the donor lose the income tax charitable deduction,but he or she could also be subject to federal (and possible state) gift taxeson transfers to individuals. This could be softened by the $11,000-per-donee

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annual exclusion and in some cases the gift tax exclusion for tuition paiddirectly to an educational institution. Then there is the $1 million lifetime gifttax exemption, but you don’t want to dip into that willy-nilly.

Lesson to be learned. As any trial lawyer worth his or her salt will tell you,it’s important to “build a record.” In the Composer ruling discussed at theoutset, IRS was told that Donors expressed an interest to the charity insupporting the composition of a work by a particular composer. But that atthe time of the gift, the charity made no commitment to use the funds tocommission her work and there was no representation that the funds wouldbe so used. The charity represented to Donors that the funds would be usedat its discretion and Donors represented to IRS that they understood that.IRS took Donors and the charity at their word. If the IRS, or a court,determine that the words were spoken, but the parties were winking, theincome tax charitable deduction will be disallowed.

! Rent-free use of property by charity.

No income tax charitable deduction for value of rent-free use of property. IRC§170(f)(3)(A); Reg. §1.170A-7(a); Logan, T.C. Memo 1994-445. Similarly, adonor who contributes rent-free use of her vacation home to a charity isn'tentitled to a charitable deduction. Moreover, the donated time counts as thedonor's "personal use." Rev. Rul. 89-51, 1989-1 C.B. 89. (That's no problemif she treats it as a personal residence when deducting mortgage interest, butit could wreak havoc for a donor who treats the vacation home primarily asrental property.)

Query. Must a donor include in income the foregone rent (income he wouldhave earned on lease to non-charity)? Do rules on no-interest loans extendto the rent-free use of property?

Exception: Artworks loaned to charity. Some donors lend artworks topublic charities and private operating foundations for a related use. Lendersdon't get gift tax charitable deductions; instead, the law pretends that no(taxable) transfer was made at all. IRC §2503(g). That way, neither thedonor nor the IRS has to place a value on the loan, as the Joint Committee'sexplanation of the provision (JCS-10-88, page 393) points out:

"For other transfer tax purposes, the work shall be valued as if the loan hadnot been made. Thus, even if on loan at the time of the owner's death, the fullvalue of the work of art is includable in the owner's estate."

! Gift of stock minus voting rights. No income tax charitable deduction isallowed when a donor transfers stock to charity and retains the right to votethe contributed stock. Rev. Rul. 81-282, 1981-2 CB 78.

Gift tax consequences. Although not ruled on by IRS, no gift tax charitable

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deduction will be allowed for charitable gifts of stock without voting rights.The gift is complete and subject to gift tax unless offset by the unified transfertax credit.

For estate tax purposes, stock transferred without the right to vote is includedin donor's gross estate if he or she owned 20% or more of the stock in thecorporation. IRC §2036(b). Even though an estate tax charitable deductionwill be allowed (the retained voting rights terminate on donor's death),inclusion of the stock in the adjusted gross estate may jeopardizequalification for special use valuation under IRC §2032A, installment paymentof estate taxes under IRC §6166 and special redemption treatment underIRC §303.

However, a charitable deduction was allowed for a donor’s gift of stockwithout voting rights in Letter Ruling 200108012. Under a corporateagreement, which was to facilitate any future changes in corporatemanagement and control, the donor had transferred her voting rights to athird party. She later donated her stock to charity. IRS ruled that the donorwas entitled to a deduction even though her gift only constituted a partialinterest. She had already transferred her voting rights to a third party yearsearlier, but those rights were transferred solely for business purposes; thus,the interests weren’t divided in order to circumvent IRC §170(f)(3)(A).

! Step transactions.

Donor's gift of stock held to be a sale, and his sale of a yacht to charity heldto be a gift. Blake, 42 TCM 1336 (1981), aff'd 697 F.2d 473 (CA-2, 1982).

Caution. A charitable institution can have its tax-exempt status challengedby IRS when it becomes involved in this type of transaction. See, e.g., TheMartin S. Ackerman Foundation, 52 TCM 152 (1986) (foundation stripped ofexempt status when its role as matchmaker between art purchasers andcharitable donees served private interests).

If donated property is subject to the reporting/appraisal requirements, acharity-donee disposing of the property within two years of the gift mustreport the sale to IRS and to the donor. IRC §6050L. See Part C.

Gift was not stock, but rather underlying asset; after taking ordinary-incomerecapture rules [IRC §§170(e) and 1245] into account, $600,000 charitablededuction reduced to zero. Ford, TC Memo 1983-556.

! Charity may be required to give IRS the names of all its donors whenIRS can show that many overvalued their gifts and claimed excessive deduc-tions. Brigham Young University, 679 F.2d 1345 (CA-10, 1982).

! Gift tax reporting. A donor who makes an outright gift to charity of his or her

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entire interest in the property doesn’t have to file a gift tax return. However,gift tax reporting is required for outright gifts of undivided interests and forgifts to charities of remainder and lead interests. Offsetting charitabledeductions are available for those gifts—resulting in a wash. Taxes may,however, be incurred on a noncharity’s interest in those arrangements.

! Gifts of partial interests in co-op—issues galore.

In Field Service Advice 200149007, Homer and Marge Simpson (not theirreal names) owned a cooperative apartment as their personal residence.They contributed 75% of the co-op shares attributable to their unit, along witha proportionate share of the rights and obligations under a proprietary lease,to Sons of Springfield Charity (SOS). SOS’s thank-you letter to the Simpsonsacknowledged the contribution and stated that the couple didn’t receive anygoods or services in exchange for their donation. The Simpsons and SOSsold their respective interests in the co-op to an unrelated third party soonafter the Simpsons’ gift to SOS. The Simpsons claimed a charitablededuction for the value of the 75% interest contributed to SOS (based on anappraisal), and reported the contribution on Form 8283 (Noncash CharitableContributions). They also reported the sale price of their remaining 25%interest on Form 2119 (Sale of Your Home), and claimed an exclusion fromcapital gains tax under IRC §121.

FSA concludes by not concluding. More information is needed todetermine whether the Simpsons, as tenant/shareholders, may transfer onlya partial interest in both the shares and the lease. Even if state law and thecooperative housing board allowed for partial-interest transfers, it’s unclearwhether the Simpsons contributed an undivided portion of their entireproperty interests. Thus it’s uncertain, says the FSA, that a charitablededuction is allowable.

Capital gains issues. For argument’s sake, let’s say that the Simpsonsmade a valid partial-interest transfer. Assuming that the co-op hadappreciated in value, the Simpsons would expect to get a charitablededuction for their generosity and would expect to avoid triggering capitalgains.

Not so fast. Given the close proximity of the transfer to SOS and thesubsequent sale by the Simpsons and SOS, IRS thinks the sale might havebeen arranged before the transfer of the 75% interest to SOS. If theSimpsons arranged the sale as part of an overall plan to avoid therecognition of capital gain, IRS will recharacterize the transaction as a saleof the co-op followed by a donation of the proceeds. Although the Simpsonswould get a charitable deduction, they’d be hit with a capital gains tax (outof their pockets, not out of the sales proceeds).

To find out if the sale was arranged before the transfer to SOS, it’s necessary

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to determine, says the FSA, whether the Simpsons retained control over thedonated co-op shares even after the contribution.

IRS-wasn’t-born-yesterday rule. If a donor contributes appreciated propertyto a charity and the charity sells the property shortly after the contribution,IRS will examine the transaction to determine whether the sale was part ofthe donor’s scheme to avoid taxes. That brings us to the assignment-of-income and the step-transaction doctrines. (Charities frequently sellmarketable securities seconds after receiving them. The sale-soon-after-a-gift issue generally arises only for assets that aren’t publicly traded.)

Assignment-of-income doctrine. If, at the time of a donation, a donor hasa right to any proceeds from a subsequent sale of the donated property, thedonor will be deemed to have derived income from the sale even though thedonor had already “parted” with the property. But a legally enforceable rightto income alone isn’t enough. The assignment-of-income doctrine generallyapplies when it would be reasonable to treat the donor as the incomerecipient because he or she retained sufficient control over the property evenafter the contribution.

Be aware. The mere fact that a charity later sells the donated propertydoesn’t necessarily mean that the donor intended to assign his or herincome. Also, the mere expectation (as opposed to a reasonable certainty)of income doesn’t transform a routine gift into an assignment-of-incomeissue.

Substance over form. In determining the applicability of the assignment-of-income doctrine, courts generally ignore formalities and remote hypotheticalpossibilities. Thus, in looking at the substance of the transactions, courts willconsider things like the degree of certainty that existed at the time of thecontribution that the sale would be completed, and who—the donor or thedonee—had control over the ultimate disposition of the property.

Step-transaction doctrine. A series of seemingly separate steps ortransactions will be compressed and deemed to constitute one transactionif: (1) there was a binding commitment to enter into a subsequent transactionwhen the first step was taken (binding-commitment test); (2) the series ofsteps were prearranged parts of one transaction aimed at reaching anultimate result (end-result test); or (3) the series of steps were so integrated,interdependent, and focused on one result that they should be treated as onetransaction (interdependence test). Like the assignment-of-income doctrine,the step-transaction doctrine also focuses on the reality and substance of thetransaction (e.g., control over property).

Back to the FSA. IRS concluded that it needs more information to determinewhether the Simpsons arranged for the sale before donating the 75% interestin the co-op to SOS. Did the Simpsons retain control over all the shares in

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the co-op and its disposition after the donation, or did SOS have completediscretion as to when and to whom its shares would be sold? In IRS’sopinion, SOS probably wasn’t in control given the unlikelihood that anyonewould buy only a partial interest in the co-op apartment.

Qualified appraisal requirement issue. The Simpsons filed Form 8283(Noncash Charitable Contributions), but did they do it properly? IRS foundthat crucial information (e.g., the appraiser’s qualifications, the contributionand appraisal dates, whether the individual who signed on SOS’s behalf wasauthorized to do so, whether the Simpsons and SOS had an agreement asto the shares’ fair market value) was either missing or inadequate. So evenif the Simpsons can convince IRS (or a court) that they contributed a 75%interest in the co-op (rather than the proceeds of the later sale), they couldstrike out on getting a charitable deduction because they had a bumappraisal.

Valuation—another issue. A contribution of 75% of the co-op may not beworth 75% of the co-op’s total value because of possible lack of marketabilityfor a partial interest in a co-op.

Special capital-gain-avoidance rules on sales of personal residences(including co-ops). A husband and wife can exclude up to $500,000 of gainfrom the sale of their residence; the exclusion is up to $250,000 for singletaxpayers. IRC §121 allows the exclusion if it was then a principal residencefor at least two of the last five years. The FSA emphasized that the Simpsonscan use the entire exclusion (without any allocation) whether they aredeemed to have sold 100% of their cooperative shares followed by acontribution of 75% of the sale proceeds, or whether the form of thetransaction is respected (a sale of 25% by the Simpsons and 75% by SOS).

Thus if the Simpsons prevail, they will get the benefit of the up-to-$500,000exclusion for the sale of their 25% interest. But if the Simpsons are deemedto have sold the entire property (100%), they can exclude up to $500,000 ofthe gain and then pay capital gains tax on any excess.

II. CHARITABLE REMAINDER UNITRUSTS (CRUTS) AND ANNUITY TRUSTS(CRATS).

A. HIGH-SPEED OVERVIEW.

STAN-CRUT—STANDARD CHARITABLE REMAINDER UNITRUST. Pays theincome beneficiary ("recipient" in the regulations) an amount determined bymultiplying a fixed percentage of the net fair market value (FMV) of the trust assets,valued each year. On death of beneficiary or survivor beneficiary (or at end of trustterm if trust measured by term of years—not to exceed 20 years) charity gets theremainder. The fixed percentage can’t be less than 5% nor more than 50% and theremainder interest must be at least 10% of the initial net fair market value of all

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