[Federal Register Volume 67, Number 141 (Tuesday, July 23, 2002)]
[Proposed Rules]
[Pages 48070-48073]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-18185]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1, 20, and 25

[REG-115781-01]
RIN 1545-A031


Definition of Guaranteed Annuity and Lead Unitrust Interests

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations conforming the 
income, gift, and estate tax regulations to the Tax Court's decision in 
Estate of Boeshore v. Commissioner, 78 T.C. 523 (1982), acq. in result, 
1987-2 C.B. 1, holding portions of Sec. 20.2055-2(e)(2)(vi)(e) of the 
Estate Tax Regulations invalid.

DATES: Written or electronic comments and requests to speak at the 
public hearing scheduled for October 16, must be received by September 
25, 2002.

ADDRESSES: Send submissions to: CC:ITA:RU (REG-115781-01), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submission of comments may be hand delivered Monday through 
Friday between the hours of 8 a.m. and 5 p.m. to: CC:ITA:RU (REG-
115781-01), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC. Alternatively, taxpayers may submit 
comments electronically via the Internet directly to the IRS Internet 
site at www.irs.gov/regs. The public hearing will be held in Room 4718, 
Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, 
DC.

[[Page 48071]]


FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Susan Hurwitz (202) 622-3090; concerning submissions of comments, Sonya 
Cruse (202) 622-7180.

SUPPLEMENTARY INFORMATION

Background

    In general, if interests in the same property are transferred for 
both charitable and noncharitable purposes, the charitable interest 
will qualify for the charitable deduction for federal income, gift, and 
estate tax purposes only if the interest is in one of certain 
prescribed forms. If the charitable interest is not a remainder 
interest, sections 170(f), 2522(c)(2), and 2055(e)(2) of the Internal 
Revenue Code (Code) require that the charitable interest be in the form 
of either a guaranteed annuity or a fixed percentage of the annual net 
fair market value of the property (unitrust interest).
    A guaranteed annuity is defined in the regulations under sections 
170, 2522, and 2055 as an arrangement pursuant to which a specified sum 
is paid not less often than annually, for a specified term of years or 
for the life or lives of certain named individuals. A unitrust interest 
is defined as a right to receive not less often than annually a fixed 
percentage of the net fair market value, determined annually, of the 
property funding the unitrust interest, payable for a specified term of 
years or for the life of certain named individuals. The income, estate, 
and gift tax regulations also provide that if guaranteed annuity or 
unitrust interests are payable for private and charitable purposes from 
a trust and the private interest is payable before the expiration of 
the charitable interest, then in order for the charitable guaranteed 
annuity interest or unitrust interest to be deductible, among other 
requirements, the charitable interest must begin either before, or at 
the same time as, the private interest. See, for example, Sec. 20.2055-
2(e)(2)(vii)(e) regarding the estate tax provision applicable to 
unitrust interests. See also, Rev. Rul. 76-225 (1976-1 C.B. 281).
    In Estate of Boeshore v. Commissioner, the decedent devised the 
residue of her estate to a charitable remainder unitrust described in 
section 664 of the Code. Under the terms of the trust, a 6 percent 
unitrust amount was to be paid annually from the trust. During the life 
of the decedent's surviving spouse, 70 percent of the distribution was 
to be paid to the surviving spouse and the remaining 30 percent to the 
decedent's daughter and two grandchildren. Upon the surviving spouse's 
death, 58 percent of the unitrust amount was to be paid to the 
decedent's daughter and two grandchildren for their lives, and the 
remaining 42 percent was to be paid to a qualifying charity. Upon the 
death of the last to die of the four individual beneficiaries, the 
remainder interest was to be paid to charity. The decedent's estate 
claimed an estate tax charitable deduction for the present values of 
the charitable remainder interest and the charitable unitrust interest 
that was to begin upon the spouse's death.
    Under the authority of Sec. 20.2055-2(e)(2)(vi)(e) (currently 
Sec. 20.2055-2(e)(2)(vii)(e)), the IRS disallowed the deduction for the 
present value of the charitable unitrust interest, because it was 
preceded by a noncharitable unitrust interest.
    The court noted that the rules contained in section 2055(e)(2) 
ensure that the value of the charitable interest is not subject to 
manipulation through trustee investment practices and that the actual 
benefit charity receives bears a reasonable relationship to the 
deduction allowed for the value of the charitable interest. Since all 
the nonremainder interests in the Boeshore trust, both charitable and 
noncharitable, were in the form of unitrust interests, any incentives 
to manipulate the income interest were removed. Estate of Boeshore v. 
Commissioner, 78 T.C. at 529. Under these circumstances, the court was 
unable to find any congressional intent to preclude a charitable 
deduction for an otherwise qualified charitable unitrust interest. 
Accordingly, the court held Sec. 20.2055-2(e)(2)(vi)(e) invalid insofar 
as the regulation disallowed a deduction for the charitable unitrust 
interest under the facts presented.

Explanation of Provisions

    The proposed regulations amend the existing regulations under 
sections 170, 2055, and 2522 governing charitable guaranteed annuity 
interests and unitrust interests to eliminate the requirement that the 
charitable interest can not be preceded in point of time by a 
noncharitable interest that is in the form of a guaranteed annuity or 
unitrust interest. The regulations will continue to require that any 
amounts payable for a private purpose before the expiration of the 
charitable annuity or unitrust interest either must be in the form of a 
guaranteed annuity or unitrust interest or must be payable from a 
separate group of assets devoted exclusively to private purposes.

Effective Date

    The regulations are applicable as of the date these regulations are 
published in the Federal Register as final regulations.

Effect on Other Documents

    The following publication is revoked as of the date these 
regulations are published in the Federal Register as final regulations.
    Rev. Rul. 76-225 (1976-1 C.B. 281)

Special Analysis

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedures 
Act (5 U.S.C. chapter 5) does not apply to these regulations, and 
because the regulation does not impose a collection of information 
requirement on small entities, the Regulatory Flexibility Act (5 U.S.C. 
chapter 5) does not apply. Pursuant to section 7805(f) of the Internal 
Revenue Code, this notice of proposed rulemaking will be submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies, if written) or electronic comments that are submitted 
timely (in the manner described in the ADDRESSES portion of this 
preamble) to the IRS. All comments will be available for public 
inspection and copying.
    A public hearing has been scheduled for October 16, 2002, at 10 
a.m., Room 4718, Internal Revenue Building, 1111 Constitution Avenue, 
NW., Washington, DC. Due to building security procedures, visitors must 
enter at the Constitution Avenue entrance. In addition, all visitors 
must present photo identification to enter the building. Because of 
access restrictions, visitors will not be admitted beyond the immediate 
entrance area more than 30 minutes before the hearing starts. For 
information about having your name placed on the building access list 
to attend the hearing, see FOR FURTHER INFORMATION CONTACT section of 
this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit comments and 
an outline of the topics to be discussed and the

[[Page 48072]]

time to be devoted to each topic (preferably a signed original and 
eight (8) copies) by September 25, 2002.
    A period of 10 minutes will be allotted to each person for making 
comments. An agenda showing the scheduling of the speakers will be 
prepared after the deadline for receiving outlines has passed. Copies 
of the agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these proposed regulations is Susan Hurwitz 
of the Office of the Associate Chief Counsel (Passthroughs and Special 
Industries). However, personnel from other offices of the IRS and the 
Treasury Department participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 20

    Estate taxes, Reporting and recordkeeping requirements.

26 CFR Part 25

    Gift taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    1. The authority citation for part 1 continues to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *

    2. Section 1.170A-6 is amended as follows:
    1. Paragraph (c)(2)(i)(E) is revised and the example following 
paragraph (c)(2)(i)(E) is removed.
    2. Paragraph (c)(2)(ii)(D) is revised.
    The revision reads as follows:


Sec. 1.170A-6  Charitable contributions in trust.

* * * * *
    (c) * * *
    (2) * * *
    (i) * * *
    (E) Where a charitable interest in the form of a guaranteed annuity 
interest is transferred after May 21, 1972, the charitable interest 
generally is not a guaranteed annuity interest if any amount may be 
paid by the trust for a private purpose before the expiration of all 
the charitable annuity interests. There are two exceptions to this 
general rule. First, the charitable interest is a guaranteed annuity 
interest if the amount payable for a private purpose is in the form of 
a guaranteed annuity interest and the trust's governing instrument does 
not provide for any preference or priority in the payment of the 
private annuity as opposed to the charitable annuity. Second, the 
charitable interest is a guaranteed annuity interest if under the 
trust's governing instrument the amount that may be paid for a private 
purpose is payable only from a group of assets that are devoted 
exclusively to private purposes and to which section 4947(a)(2) is 
inapplicable by reason of section 4947(a)(2)(B). For purposes of this 
paragraph (c)(2)(i)(E), an amount is not paid for a private purpose if 
it is paid for an adequate and full consideration in money or money's 
worth. See Sec. 53.4947-1(c) of this chapter (Foundation and Similar 
Excise Tax Regulations) for rules relating to the inapplicability of 
section 4947(a)(2) to segregated amounts in a split-interest trust. * * 
*
    (ii) * * *
    (D) Where a charitable interest is in the form of a unitrust 
interest, the charitable interest generally is not a unitrust interest 
if any amount may be paid by the trust for a private purpose before the 
expiration of all the charitable unitrust interests. There are two 
exceptions to this general rule. First, the charitable interest is a 
unitrust interest if the amount payable for a private purpose is in the 
form of a unitrust interest and the trust's governing instrument does 
not provide for any preference or priority in the payment of the 
private unitrust interest as opposed to the charitable unitrust 
interest. Second, the charitable interest is a unitrust interest if 
under the trust's governing instrument the amount that may be paid for 
a private purpose is payable only from a group of assets that are 
devoted exclusively to private purposes and to which section 4947(a)(2) 
is inapplicable by reason of section 4947(a)(2)(B). For purposes of 
this paragraph (c)(2)(ii)(D), an amount is not paid for a private 
purpose if it is paid for an adequate and full consideration in money 
or money's worth. See Sec. 53.4947-1(c) of this chapter (Foundation and 
Similar Excise Tax Regulations) for rules relating to the 
inapplicability of section 4947(a)(2) to segregated amounts in a split-
interest trust.
* * * * *

PART 20--ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 
1954

    3. The authority citation for part 20 continues to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * * *

    4. Section 20.2055-2 is amended as follows:
    1. Paragraph (e)(2)(vi)(f) is revised.
    2. Paragraph (e)(2)(vii)(e) is revised.
    3. In paragraph (f)(2)(iv) Example (4) is removed.
    The revisions read as follows:


Sec. 20.2055-2  Transfers not exclusively for charitable purposes.

* * * * *
    (e) * * *
    (2) * * *
    (vi) * * *
    (f) Where a charitable interest in the form of a guaranteed annuity 
interest is in trust, the charitable interest generally is not a 
guaranteed annuity interest if any amount may be paid by the trust for 
a private purpose before the expiration of all the charitable annuity 
interests. There are two exceptions to this general rule. First, the 
charitable interest is a guaranteed annuity interest if the amount 
payable for a private purpose is in the form of a guaranteed annuity 
interest and the trust's governing instrument does not provide for any 
preference or priority in the payment of the private annuity as opposed 
to the charitable annuity. Second, the charitable interest is a 
guaranteed annuity interest if under the trust's governing instrument 
the amount that may be paid for a private purpose is payable only from 
a group of assets that are devoted exclusively to private purposes and 
to which section 4947(a)(2) is inapplicable by reason of section 
4947(a)(2)(B). For purposes of this paragraph (e)(2)(vi)(f), an amount 
is not paid for a private purpose if it is paid for an adequate and 
full consideration in money or money's worth. See Sec. 53.4947-1(c) of 
this chapter (Foundation and Similar Excise Tax Regulations) for rules 
relating to the inapplicability of section 4947(a)(2) to segregated 
amounts in a split-interest trust.
* * * * *
    (vii) * * *
    (e) Where a charitable interest in the form of a unitrust interest 
is in trust, the charitable interest generally is not a unitrust 
interest if any amount may be paid by the trust for a private purpose 
before the expiration of all the charitable unitrust interests. There 
are two exceptions to this general rule. First, the charitable interest 
is a unitrust

[[Page 48073]]

interest if the amount payable for a private purpose is in the form of 
a unitrust interest and the trust's governing instrument does not 
provide for any preference or priority in the payment of the private 
unitrust interest as opposed to the charitable unitrust interest. 
Second, the charitable interest is a unitrust interest if under the 
trust's governing instrument the amount that may be paid for a private 
purpose is payable only from a group of assets that are devoted 
exclusively to private purposes and to which section 4947(a)(2) is 
inapplicable by reason of section 4947(a)(2)(B). For purposes of this 
paragraph (e)(2)(vii)(e), an amount is not paid for a private purpose 
if it is paid for an adequate and full consideration in money or 
money's worth. See Sec. 53.4947-1(c) of this chapter (Foundation and 
Similar Excise Tax Regulations) for rules relating to the 
inapplicability of section 4947(a)(2) to segregated amounts in a split-
interest trust.
* * * * *

PART 25--GIFT TAX; GIFTS MADE AFTER DECEMBER 31, 1954

    5. The authority for part 25 continues to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    6. Section 25.2522(c)-3 is amended as follows:
    1. Paragraph (c)(2)(vi)(f) is revised.
    2. Paragraph (c)(2)(vii)(e) is revised.
    3. In paragraph (d)(2)(iv), Example 4, is removed.
    The revisions read as follows:


Sec. 25.2522(c)-3  Transfers not exclusively for charitable, etc., 
purposes in the case of gifts made after July 31, 1969.

* * * * *
    (c) * * *
    (2) * * *
    (vi) * * *
    (f) Where a charitable interest in the form of a guaranteed annuity 
interest is in trust, and the gift of such interest is made after May 
21, 1972, the charitable interest generally is not a guaranteed annuity 
interest if any amount may be paid by the trust for a private purpose 
before the expiration of all the charitable annuity interests. There 
are two exceptions to this general rule. First, the charitable interest 
is a guaranteed annuity interest if the amount payable for a private 
purpose is in the form of a guaranteed annuity interest and the trust's 
governing instrument does not provide for any preference or priority in 
the payment of the private annuity as opposed to the charitable 
annuity. Second, the charitable interest is a guaranteed annuity 
interest if under the trust's governing instrument the amount that may 
be paid for a private purpose is payable only from a group of assets 
that are devoted exclusively to private purposes and to which section 
4947(a)(2) is inapplicable by reason of section 4947(a)(2)(B). For 
purposes of this paragraph (c)(2)(vi)(f), an amount is not paid for a 
private purpose if it is paid for an adequate and full consideration in 
money or money's worth. See Sec. 53.4947-1(c) of this chapter 
(Foundation and Similar Excise Tax Regulations) for rules relating to 
the inapplicability of section 4947(a)(2) to segregated amounts in a 
split-interest trust.
* * * * *
    (vii) * * *
    (e) Where a charitable interest in the form of a unitrust interest 
is in trust, the charitable interest generally is not a unitrust 
interest if any amount may be paid by the trust for a private purpose 
before the expiration of all the charitable unitrust interests.
    There are two exceptions to this general rule. First, the 
charitable interest is a unitrust interest if the amount payable for a 
private purpose is in the form of a unitrust interest and the trust's 
governing instrument does not provide for any preference or priority in 
the payment of the private unitrust interest as opposed to the 
charitable unitrust interest. Second, the charitable interest is a 
unitrust interest if under the trust's governing instrument the amount 
that may be paid for a private purpose is payable only from a group of 
assets that are devoted exclusively to private purposes and to which 
section 4947(a)(2) is inapplicable by reason of section 4947(a)(2)(B). 
For purposes of this paragraph (c)(2)(vii)(e), an amount is not paid 
for a private purpose if it is paid for an adequate and full 
consideration in money or money's worth. See Sec. 53.4947-1(c) of this 
chapter (Foundation and Similar Excise Tax Regulations) for rules 
relating to the inapplicability of section 4947(a)(2) to segregated 
amounts in a split-interest trust.
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-18185 Filed 7-22-02; 8:45 am]
BILLING CODE 4830-01-P