office_of_chief_counsel internal_revenue_service memorandum number release date cc psi b03 mhoward postu-104922-16 third party communication none date of communication not applicable uilc date september to small_business self employed examination operations field_examination exam - central area territory - group patricia m assalone supervisory manager from bradford r poston attorney adviser branch passthroughs special industries subject whether trust distributions are deductible under either sec_642 or sec_661 this chief_counsel_advice responds to your request for assistance this advice may not be used or cited as precedent legend grantor -------------- child ------------------ child ------------------- parent trust ------------------------------------------------------------------------------------------ ---------------------------------------------------------------------------------------------------------- trust a -------------------------------------- trust b -------------------------------------- -------------------------------------------------- postu-104922-16 year ------- year ------- year -------- year -------- year ------- year ------- date ---------------------- date ---------------------------- date --------------------------- date --------------------------- date ------------------ foundation ----------------------------------------- -------------------------------------------------- foundation --------------------------------------- ------------------------------------------------- a ------------------ b ------ c ------ d ------ e ----------------- f ----------------- g ---------- issues postu-104922-16 is a_trust which has been modified pursuant to a state court order entitled to a sec_642 charitable deduction for current payments to charitable organizations which could only be made because of the modification assuming no sec_642 deduction is available is the trust entitled to a distribution_deduction under sec_661 to the extent of its distributable_net_income dni for the payments to charity if the trust is entitled to a distribution_deduction does its dni include the capital_gains realized in the year of the payments facts this is a request for assistance from sb_se examination examination operations with regard to a taxpayer that has filed b requests for refund totaling approximately dollar_figurea under sec_6405 each refund request pertains to same issues and includes facts similar to those outlined below grantor created the parent trust parent trust was a simple_trust for the benefit of child and child during their respective lifetimes and then for the benefit of their respective descendants subject_to testamentary powers of appointment granted to child and child to appoint the income among grantor’s descendants the spouses of those descendants and charities child died in year having exercised his power_of_appointment over half of the income of parent trust in favor of his descendants parent trust continued to be administered as a single trust until year distributing half its income among the descendants of child and half to child on date the trustees and beneficiaries of parent trust entered into a settlement agreement dividing parent trust into two trusts trust a and trust b for the respective benefit of child 1’s descendants and child in general the assets and liabilities of parent trust were divided into equal fractional shares except for certain state tax items in dispute which were allocated according to a formula and the terms of parent trust otherwise continued to apply the settlement agreement was contingent on a favorable state court order received date and on the receipt of a private_letter_ruling issued as plr on stating that the division would not cause either trust a or trust b to lose its generation-skipping tax exemption either because of the division itself or because of the state tax adjustments between trust a and trust b no federal_income_tax rulings were requested or granted in the plr on date the trustees of trust b filed an additional petition with the state court requesting certain modifications including that child 2’s testamentary_power_of_appointment be changed to an inter_vivos power and that he be allowed to immediately exercise such inter_vivos power to appoint c of the income and principal to foundation and d to foundation thus causing trust b to terminate foundation ------------------------------------------------------------------------------------------------------------------------------------------ -------------------------------------------------------------------------------------------------------------------------------------------- ---------------------- postu-104922-16 and foundation are private_foundations foundation was preexisting while foundation was newly created to receive funding at the termination of trust b on date the court approved the modification and termination and the distribution of the trust assets to foundation and foundation was completed by the end of year on its original form_1041 u s income_tax return for estates and trusts trust b did not claim any deduction for the payments to foundation and foundation on its amended year return filed date trust b reported approximately dollar_figuree income of which about dollar_figuref represented capital_gain and claimed a deduction for the entire amount less about dollar_figureg in attorney and preparer fees additional information provided by examination indicates that the taxpayers engaged in substantially_similar division modification and partial_termination transactions with other trusts created by grantor or grantor’s spouse in year year and year with most of these trusts receiving favorable gst rulings either in plr cited above or in plr issued the same date the year trust had previously been divided by court order in year and thus did not seek a ruling we do not have full information on the original or amended reporting positions of these other trusts but if they claimed either a sec_642 or sec_661 deduction for the amounts paid to foundation and foundation they would raise the same issues discussed here with regard to trust b the attachment to the amended_return and the form 8275-r regulation disclosure statement for trust b claim the deduction under sec_642 and or c or alternatively under sec_661 we cite to the taxpayer’s specific arguments under each section below law analysis issue sec_642 provides generally that in the case of an estate_or_trust other than a_trust meeting the specifications of subpart b a simple_trust described in sec_651 and sec_652 there shall be allowed as a deduction in computing its taxable_income in lieu of the deduction allowed by sec_170 relating to deduction for charitable etc contributions and gifts any amount of the gross_income without limitation which pursuant to the terms of the governing instrument is during the taxable_year paid for a purpose specified in sec_170 determined without regard to sec_170 emphasis added sec_642 provides that in the case of an estate and in the case of certain trusts in general those created before there shall also be allowed as a deduction in computing its taxable_income any amount of the gross_income without limitation which in addition to claiming a refund based on the deduction which is the subject of this memorandum the amended_return also contests the treatment of certain receipts as ordinary interest_income rather than capital_gain solely for our purposes of this memorandum we assume the characterization adopted by trust b on the amended_return is correct postu-104922-16 pursuant to the terms of the governing instrument is during the taxable_year permanently set_aside for a purpose specified in sec_170 or is to be used exclusively for religious charitable scientific literary or educational_purposes or for the prevention of cruelty to children or animals or for the establishment acquisition maintenance or operation of a public cemetery not operated for profit emphasis added in old colony trust company v commissioner 57_sct_813 the supreme court reversed a decision of the first circuit f 2d a_trust document authorized but did not require the trustees to make current charitable payments if they could do so without jeopardizing the payment of annuities from the trust to non- charitable beneficiaries the board_of_tax_appeals denied most of the income_tax charitable deduction under the predecessor of sec_642 because it found that the taxpayer had not met its burden_of_proof regarding whether most of the payments were actually made from trust income during the year made the first circuit denied the entire deduction because the charitable payments were not imperatively directed by the trust if the trustee exercised discretion in making the payments they were not pursuant to the terms of the trust the supreme court referred to the plain dictionary meaning of pursuant to as acting or done in consequence or in prosecution of anything hence agreeable conformable following according which standard was met by the authorization in the trust instrument in crown income charitable fund v commissioner 8_f3d_571 7th cir aff’g 98_tc_327 the seventh circuit addressed the issue of commutation the trust at issue in crown contained a provision permitting the trustees to commute the charitable interest only if as a matter of law it was clear that doing so would not adversely affect the maximum charitable deduction otherwise available the trustees of the crown income charitable fund distributed trust assets in excess of the annuity amount to the charitable_beneficiary over a number of years and deducted under sec_642 the full amount distributed to the charitable beneficiaries both the seventh circuit and the tax_court held that the excess distributions were not deductible under sec_642 because those instruments were not made pursuant to the terms of the governing instrument in 465_f3d_525 2nd cir a deceased husband’s will created a marital_deduction_trust which granted the husband’s surviving wife a general testamentary_power_of_appointment when the wife died she exercised her power in favor of her estate the residue of which passed to charitable organizations the trustee of the marital_deduction_trust distributed dollar_figure million to the wife’s estate and claimed a charitable_contribution_deduction under sec_642 because the dollar_figure million distribution passed entirely to the charitable beneficiaries under the wife’s will although the taxpayer cites to sec_642 as well as sec_642 the facts as presented only deal with payments to foundation and foundation rather than any amounts set_aside for future distribution therefore we assume that if a sec_642 deduction is allowable it would be under sec_642 and do not further consider sec_642 postu-104922-16 the second circuit in brownstone held that the distribution to the charities was made pursuant to the wife’s power_of_appointment and not pursuant to the governing instrument the deceased husband’s will the second circuit interpreted the definition of governing instrument narrowly stating that an instrument subject_to the creating instrument the wife’s will could not combine with the creating instrument the husband’s will and qualify as the governing instrument the sole governing instrument in brownstone was the husband’s original will therefore the marital_deduction_trust was not entitled to a deduction under sec_642 since the distribution was made pursuant to the wife’s will in 305_us_188 the supreme court held that property received in the settlement of a bona_fide will_contest is treated for federal_income_tax purposes as passing to the beneficiaries by inheritance in 99_fsupp_801 d c pa the court held applying principles derived from lyeth that amounts distributed to a charity pursuant to an agreement compromising a will_contest were made pursuant to the terms of the will the court concluded that the income from the property that was distributed to the charity was permanently set_aside for a charitable purpose and allowed a deduction for these amounts for the years prior to the year that the parties entered into the settlement agreement see also 677_f2d_53 9th cir cert_denied 459_us_909 in 159_fsupp_34 d c conn decedent left two conflicting wills - one which left of the residue of decedent’s estate to certain charities and another which left the entire residue to non-charitable legatees after decedent’s death a controversy arose among the beneficiaries of the two wills the controversy was resolved in a written compromise_agreement between the two sets of beneficiaries under which of the residue passed to the charities named in one of the wills payments made to the charities under the written compromise_agreement were held to be made pursuant to the will revrul_59_15 1959_1_cb_164 citing emanuelson held that a settlement agreement arising from a will_contest qualifies as a governing instrument in the current case the taxpayer makes a summary argument that the payments qualify under sec_642 because they are pursuant to the governing instrument citing to old colony they do not address the authorities concerning deductions under modified trust instruments here there was no conflict with respect to trust b subsequent to the division of parent trust the trust terms were unambiguous the purpose of the court order was not to resolve a conflict in trust b but to obtain the economic benefits which the parties believe they will receive from the modification of the parent trust neither revrul_59_15 nor emanuelson hold that a modification to a governing instrument will be construed to be the governing instrument in situations where the modification does not stem from a conflict of some sort additionally both crown and brownstone have a narrow interpretation of what qualifies as pursuant to a governing instrument therefore any payments to foundation and foundation after the modification of postu-104922-16 trust b would not be considered to be made pursuant to the governing instrument and trust b is not entitled to a deduction for such payments under sec_642 issue sec_661 provides that in any taxable_year there shall be allowed as a deduction in computing the taxable_income of an estate_or_trust other than a_trust to which subpart b applies the sum of any amount of income for such taxable_year required to be distributed currently including any amount required to be distributed which may be paid out of income or corpus to the extent such amount is paid out of income for such taxable_year and any other_amounts_properly_paid_or_credited_or_required_to_be_distributed for such taxable_year but such deduction shall not exceed the dni of the estate_or_trust sec_663 provides that there shall not be included as amounts falling within sec_661 or sec_662 any amount_paid or permanently set_aside or otherwise qualifying for the deduction provided in sec_642 computed without regard to sec_508 sec_681 and sec_4948 relating to limitation or disallowance of certain charitable deductions related to unrelated_business_income or private_foundations sec_1_663_a_-2 provides that any amount_paid permanently set_aside or to be used for the charitable etc purposes specified in sec_642 and which is allowable as a deduction under that section is not allowed as a deduction to an estate_or_trust under sec_661 or treated as an amount distributed for purposes of determining the amounts includible in gross_income of beneficiaries under sec_662 amounts paid permanently set_aside or to be used for charitable etc purposes are deductible by estates or trusts only as provided in sec_642 for purposes of this section the deduction provided in sec_642 is computed without regard to the provisions of sec_508 sec_681 or sec_4948 emphasis added sec_663 provides that for the sole purpose of determining the amount of dni in the application of sec_661 and sec_662 in the case of a single trust having more than one beneficiary substantially separate and independent shares of different beneficiaries in the trust shall be treated as separate trusts rules similar to the rules of the preceding provisions of sec_663 shall apply to treat substantially separate and independent shares of different beneficiaries in an estate having more than one beneficiary as separate shares the existence of such substantially separate and independent shares and the manner of treatment as separate trusts or estates including the application of subpart d the throwback_rules of shall be determined in accordance with regulations prescribed by the secretary sec_661 sec_663 and sec_663 were enacted as part of the original internal_revenue_code of the only subsequent change relevant to the current issue was the amendment of sec_663 by of the taxpayer_relief_act_of_1997 p l to apply to estates as well as trusts sec_642 discussed under issue was also postu-104922-16 included in the original code and was bifurcated by of the tax reform act of p l into current sec_642 and dealing respectively with deductions for current payments to charity and deductions for amounts permanently set_aside for later payment the legislative_history is not entirely clear on the purpose and scope of sec_663 whereas the charitable and distribution_deduction provisions had general counterparts under the code sec_162 and b respectively sec_663 was a new provision as was the entire dni mechanism in general under the code distribution deductions had to be actually traced to the trust’s gross_income whereas such tracing is unnecessary under the and codes since sec_661 distributions automatically take out dni which then is generally taxable under sec_662 to the beneficiaries the tracing requirement formerly applying to all trust and estate distributions now only survives for the charitable deduction under sec_642 the house and senate reports on the code h_r each explain the exclusion of sec_642 amounts from sec_661 and sec_662 with reference to the additional deduction which the entity would be able to claim if not for this provision suggesting that sec_663 is meant simply as an anti-duplication measure not that there is an underlying policy of sec_642 exclusivity the american bar association’s submission regarding the bill also supports the adoption of this provision as preventing an additional deduction for distributions for which a deduction would already be allowed under proposed sec_642 see senate finance comm hearings on h_r 83d cong 2d sess however the example in the senate report demonstrating the application of s rep pincite suggests the opposite interpretation the terms of a testamentary_trust require that half of the trust income be distributed currently to the grantor’s wife for life the remaining half in the trustee’s discretion may either be paid since the estate_or_trust is allowed a deduction under sec_642 for these amounts they are not allowed as an additional deduction for distributions nor are they treated as amounts distributed for purposes of sec_662 in determining the amounts includible in the gross_income of the beneficiaries h_r rep no 83d cong 2d sess similar language at s rep no 83d cong 2d sess the aba comments may have greater weight than ordinary congressional testimony in that subchapter_j under the code generally follows the aba’s prior recommendations for reform of fiduciary income_taxation under the code of seven major recommendations subchapter_j ultimately incorporated the general principles of six a throwback rule to replace certain prior anti-abuse provisions the dni limitation on distribution deductions and beneficiary income inclusion the ability of beneficiaries to use certain excess entity deductions at termination the passthrough of the character of income to beneficiaries codification of the clifford grantor_trust regulations and the separate_share_rule the only major recommendation not adopted was to allow estates to elect to be taxed as individuals rather than trusts at least for a limited period see senate testimony cited above pincite several of the aba proposals were also included in a draft statute prepared by the american law institute see generally holland h brian et al a proposed revision of the federal_income_tax treatment of trusts estates- american law institute draft colum l rev date and kamin sherwin et al the internal_revenue_code of trusts estates beneficiaries colum l rev date postu-104922-16 to the grantor’s daughter paid to designated charities or accumulated at the wife’s death the entire trust principal will be payable to the daughter in the given year the trust income consisted of dividends rentals and tax-exempt_interest of which the trustee distributed half to the wife and one-quarter each to the daughter and a charity in determining the sec_661 distribution_deduction the example excludes the amount distributed to the charity since it was allowed as a deduction under sec_642 to the extent that it was included in the trust’s gross_income however the entire amount_paid to the charity is not deductible under sec_642 because a ratable part of it is attributable to the tax-exempt_interest which does not enter into gross_income and thus fails one prong of the sec_642 test the example does not add the disallowed portion of the charitable payment back into sec_661 for determining the distribution_deduction thus indicating that payments to charity are deductible if at all only under sec_642 the example in the senate report was substantially adopted as the example illustrating in sec_1_662_c_-4 that section and sec_1_663_a_-2 were both published as part of the original subchapter_j regulations t d the latter originally only referred to limits on charitable deductions under sec_681 and was later amended to include the limits under sec_508 and sec_4948 added by the act gcm is the first recorded instance in which the service considered whether sec_661 deductibility was available for charitable payments failing the requirements of sec_642 it discusses a draft technical_advice_memorandum tam which was never issued in its original form a decedent’s will set_aside a quarter of the value of her adjusted_gross_estate for her husband established a_trust with another quarter for the life benefit of her husband with the power_of_appointment over the principal divided a third quarter into twelve equal parts each payable to a different named charity and gave the remainder in trust for the life benefit of her three named nephews with the remainder to the children of those nephews the will authorized the executor to satisfy the bequests out of any estate property of his choice the will was silent as to the disposition of estate income received during the period of administration but default state law required that such income ultimately be paid to the residuary beneficiary in this case the trust for the benefit of the nephews although the record was not entirely clear the estate income was apparently credited to the residuary_trust but not actually paid to it distributions were made to the other three pecuniary beneficiaries again presumably credited against corpus in the estate’s records the estate claimed distribution deductions under sec_661 for payments made to the charitable beneficiaries as well as those made to the husband and the trust created on his behalf the gcm notes that this creates a loophole in that the estate or its beneficiaries are obtaining a deduction for both estate_tax under sec_2055 and income_tax under sec_661 for the same payments however u nless qualifying language could be found elsewhere in the code the bare language of sec_661 does allow a deduction here only sec_663 might be read to bar the sec_661 deduction here sec_663 precludes the application of sec_661 and sec_662 to amounts paid or the westlaw version of gcm actually reads does not allow a deduction here but it is clear from the context and the conclusion of the memorandum that this is a typographical error postu-104922-16 credited in satisfaction of gifts or bequests of a specific sum of money or of specific property section sec_1_663_a_-1 however removes from the operation of sec_663 and thus puts back into the ambit of sec_661 and sec_662 any disposition which is the case here in which the identity of the property used to satisfy the bequest or the amount of money specified are dependent both on the exercise of the executor’s discretion and on payment of administrative expenses and other charges the gcm notes that this regulation creating an exception within the exception for pecuniary amounts was intended to deal with formula clauses for spousal dispositions intended to qualify for the estate_tax_marital_deduction rather than dispositions to tax-exempt charities but nonetheless are covered by the regulatory language it suggests that the sec_663 regulations be revised to close the loophole gcm revisits the case discussed in gcm and revokes the earlier recommendation concluding that sec_663 and sec_1_663_a_-2 disallow the claimed deduction the gcm argues that this reading of the regulation makes its second sentence establishing the exclusivity of sec_642 surplus since the first and third sentences are all that is necessary to remove the tainted sec_681 payments from sec_661 and sec_662 as support for reading the second sentence of sec_1_663_a_-2 as establishing an independent rule the gcm cites to the example in sec_1_661_c_-2 in which dollar_figure is paid to a charity but because the trust had tax-exempt_interest income only dollar_figure was allowed as a charitable deduction the example does not allow the other dollar_figure as a deduction under sec_661 even though it failed sec_642 for a reason other than the application of sec_681 the final issued technical_advice tam 6802210560a repeats this conclusion with respect to the particular taxpayer while revrul_68_667 1968_2_cb_289 restates it in generic terms holding that amounts bequeathed to a charity that are paid out of corpus pursuant to state law are not deductible as charitable_contributions under sec_642 or as distributions under sec_661 462_f2d_512 ct_cl cert_denied 93_sct_902 was the first test of the interpretation set forth in gcm tam 6802210560a and revrul_68_667 a decedent left two-thirds of his estate after the payment of debts expenses and specific bequests to a named charity with the residue including all income earned during administration left in trust for a named individual for her life with specified remaindermen in the estate made a dollar_figure million payment of corpus in partial satisfaction of the charity’s bequest with much smaller additional payments in and and also made payments to the individual beneficiary during the administration period before the creation of the trust including a dollar_figure payment in the estate claimed both an estate_tax charitable deduction and income_tax distribution deductions for the total_amounts paid to charity the latter based on the plain language of sec_661 in any taxable_year there shall be allowed as a deduction in computing the taxable_income of an estate any amounts properly paid for such taxable_year the estate did not make any argument that the payments were deductible under sec_642 admitting that they were not made out of gross_income the court describes the government as conceding that a literal reading would favor the postu-104922-16 estate after a summary of the basic structure of subchapter_j and noting the parties’ agreement that none of the statutory exceptions from in sec_663 apply by a plain reading the court concludes that the second sentence of sec_1_663_a_-2 governs and denies the distribution_deduction and that the regulation is a reasonable interpretation not inconsistent with the statute even though nothing in sec_663 expressly supports the rule announced in the regulation the opinion criticizes an overly-literal reading of sec_661 insofar as such a reading would allow a distribution_deduction all amounts properly paid_by an estate_or_trust whether or not to a beneficiary contrary to prior caselaw moreover this interpretation could allow a double deduction since many properly paid expenses would be deductible under sec_212 without the safeguard of an explicit anti-duplication rule such as sec_663 to avoid this absurd and abusive result the court reads sec_661 in conjunction with sec_662 to be limited to distributions to beneficiaries who then are generally taxed under the latter section since the charity is a beneficiary this did not dispose_of the question the government had asked the court to interpret sec_661 as applying only for distributions to taxable beneficiaries but the opinion does not adopt this as a general position the government’s position seems to be correct in the context of this case but we do not hold that it is a general_rule which may be applied in every conceivable situation that may arise under the provisions of the code instead it relies on the basic incompatibility of the scheme which combines the pre-1954 conduit theory of trust and estate taxation with a conclusive_presumption that distributions are distributions of income to the extent of dni with sec_642 which preserves the prior tracing requirements by the explicit reference to gross_income further the allowance of distribution deductions for charitable payments would lead in some cases including under mott’s own facts to a distortion both the charity and individual are second-tier beneficiaries that is they would be receiving amounts properly paid under sec_661 as opposed to first-tier payments to mandatory income recipients under sec_661 which payments take out dni before any second-tier payments the mott estate had no first-tier beneficiaries if the payments from corpus to the charity qualify under sec_661 then the estate will pay no tax on any current income accumulated for future distribution to the individual since that amount would be much less than the distribution_deduction the accumulated income could be distributed in a later year as income-tax free return_of_capital with regard to the current distributions the dni would be prorated between the two income beneficiaries with the great bulk of it going to a the mott court cites specifically to thomas lonergan 6_tc_715 which denied a distribution_deduction for amounts paid to a creditor in satisfaction of a claim against the estate see also revrul_68_48 1968_1_cb_301 amounts paid_by bankruptcy_estate to creditors are not deductible under sec_661 since payments not made to beneficiaries authority subsequent to mott holds that amounts paid to a beneficiary are not deductible under sec_661 if paid outside of the fiduciary relationship see revrul_73_322 1973_2_cb_44 interest required to be paid under state law on delayed payments of specific sums of money or specific property was deductible under sec_163 rather than sec_661 since the relationship between the parties is that of debtor-creditor rather than fiduciary-beneficiary under current sec_163 such amounts would be non-deductible personal_interest resulting in double_taxation to the entity and recipient and dupont trust v comm 66_tc_761 testamentary_trust paid for maintenance of property inhabited by primary trust_beneficiary under lease entered into before creation of trust not deductible under sec_661 postu-104922-16 tax-exempt party only about of the dollar_figure paid to the individual would consist of taxable_income in given the relative size of the payments to the two beneficiaries three subsequent cases have revisited the mott issue in some detail in o’connor v commissioner 69_tc_165 en_banc a decedent’s will divided his net estate into two equal shares after the disposition of his real_property and tangible_personal_property the first share was bequeathed in trust to his widow who had a right to all its income a power to withdraw any or all the corpus and a general testamentary_power_of_appointment over the corpus in favor of such persons and or corporations as she may appoint the second share after some pecuniary bequests was to be divided into three equal parts each held in trust with the income paid or applied for one of the decedent’s three nieces and nephews within the year of the decedent’s death the widow exercised her withdrawal power over the entire marital trust corpus and on the same day assigned that corpus and the income therefrom to the preexisting private_foundation created by her and her husband she filed a gift_tax_return for that year reporting a contribution of about dollar_figure million in each of its three fiscal years ending after the date of the widow’s withdrawal and assignment the estate made partial distributions to the marital trust in excess of the estate’s dni the major distribution of dollar_figure million coming in the second year when dni was only dollar_figure with the marital trust almost immediately redistributing these amounts to the foundation in these years the estate also made considerable income payments to the nieces and nephews representing their income rights under their trusts but only nominal funding payments to the trusts themselves the estate did make an initial argument that the payments to the marital trust and through it the foundation qualified under sec_642 but the court rejected this in a summary fashion finding that the reference to the widow having the power to appoint to corporations did not cause the transfer to the foundation to be pursuant to the terms of the governing instrument the court then chose to disregard the existence of the marital trust altogether for tax purposes and treated the payments as being made directly from the estate to the foundation this aspect of the decision was the subject of several dissents and of subsequent criticism but we do not need to discuss it for purposes of this memorandum therefore the remaining question was the availability of a distribution_deduction under sec_661 and the application of sec_1_663_a_-2 although noting a factual distinction with mott in that that case only dealt with corpus distributions whereas the foundation received both corpus and income the court agreed with mott that the regulation was a reasonable interpretation of the statute they noted that both sec_661 and sec_642 could be applied to the facts but that the former is general and the latter specific further they recognized the distortion in allowing sec_661 distributions to charities in that an amount will be allocated to such distributions and thus avoid tax altogether that bears no relationship to the amount of income actually paid to the charity following the mott court the opinion does note that there may be a situation where the mechanical application of the regulation would be unwarranted given its conclusion the court did not have to consider alternative arguments put forth by the government that the postu-104922-16 foundation was not a beneficiary or that distribution deductions are only available for payments to taxable beneficiaries the opinion then considers issues not relevant to the current case including the effect of the disallowance on the distribution_deduction related to the non-charitable beneficiaries and the taxation of the individual beneficiaries on the amounts received directly from the estate one judge dissented citing to the legislative_history discussed above as support for sec_663 only applying to prevent a double deduction under sec_661 and sec_642 in pullen v u s wl d neb aff’d by no 8th cir the decedent’s will left two-thirds of his net estate to his family’s private_foundation with the property so transferred required to be representative of the property of the estate in partial satisfaction of this provision the executor transferred an interest_in_real_property to the foundation later in the year of death the estate claimed an estate_tax charitable deduction under sec_2055 but apparently acknowledged that this transfer of corpus would not support a sec_642 deduction due to the gross_income requirement and instead claimed a distribution_deduction extensively citing to mott the court disallowed the deduction noting in particular the possible abuse the estate could trickle out corpus to the foundation each year during the administration of the estate in an amount equal to dni for that year all the dni would therefore be allocated to the foundation the income earned each year would not be taxed and could be accumulated by the estate later on the accumulated income could be distributed tax-free thus it would be possible to completely eliminate tax on the income earned by the assets of the estate by means of successive transfers to a charitable foundation even though none of these transfers were of gross_income as required under sec_642 the court also cited to the supreme court’s statement in 439_us_180 that charitable distributions or set asides are not within the conduit system applicable to non-charitable beneficiaries the specific issue in that case being whether long-term_capital_gains set_aside for charity by an estate were excluded from determining the estate’s income_tax base under the then-existing alternative_tax the court noted however that its holding did not deny the estate a benefit from the charitable_contribution or interfere with any statutory policy encouraging such contributions since the payments of corpus to the foundation were allowable as estate_tax_deductions under this dissent also discusses the argument which the majority had declared moot that a distribution_deduction must be matched with an inclusion to a taxable beneficiary under sec_662 it notes the service has acknowledged in other contexts that there does not have to be a perfect match between deduction and inclusion amounts in tait v comm 11_tc_731 remanded by stipulation in compromise 4th cir holding of t c case not followed by 1950_2_cb_58 the government ultimately agreed that an estate could take a distribution_deduction under the predecessor of sec_661 for payments to nonresident_alien beneficiaries even though those amounts would be excluded from gross_income under treaty provisions subsequent to o’connor in revrul_74_299 1974_1_cb_154 concerning facts previously discussed in gcm the service concluded that a sec_661 distribution_deduction was allowed to a non-exempt employee-benefit trust even though the inclusion to the employee-beneficiaries would be determined under sec_402 rather than sec_662 revrul_2007_48 2007_30_irb_129 amplifies revrul_74_299 maintaining this bifurcated treatment in the post-o’connor cases the government seems to have abandoned the alternative argument for disallowance based on deduction-inclusion mismatch and we do not consider it further here postu-104922-16 sec_2055 the allowance of corpus deductions under the estate_tax and income deductions under the income_tax is a symmetry that insures that all contributions result in a tax_benefit but precludes a double benefit congressional policy is exemplified under sec_642 which insures that any deduction which might be allowable for both income and estate_tax purposes is taken only once in u s trust v i r s 803_f2d_1363 5th cir the circuit_court reversed the taxpayer victory at the district_court level f_supp s d missi but in terms that do not make the scope of the decision entirely clear the decedent’s will left of the value of my gross testamentary estate as finally determined for estate_tax purposes to a charitable foundation provided that such bequest is deductible from my gross_estate in the estate’s taxable_year following death the estate made a series of payments of both cash and stock fulfilling most of the bequest to the foundation with the remaining payments made the following year the account from which the payments were made contained both corpus and income of the estate but the court notes that at all times during the amount of current_year income exceeded the amount distributed to the foundation and necessary to pay the estate’s administrative expenses and the government conceded that no deductions claimed were in excess of dni during no payments were made to the estate’s non- charitable beneficiaries the estate claimed a sec_2055 deduction for the entire bequest to the foundation of the dollar_figure million in cash distributed in the estate claimed a distribution_deduction for about dollar_figure million the entire dni it did not claim any income_tax deduction for the stock distributions the estate did not contest the ineligibility of the payments for sec_642 treatment given that the will did not specify that they should come from gross_income citing to the plain language of sec_663 the legislative_history discussing additional deductions and several cases indicating that charitable deductions should be generously construed the district_court opined that the second sentence of sec_1_663_a_-2 is entitled to no great deference and should not be enforced to preclude the subject deduction the opinion discusses the mott o’connor and pullen decisions but points out the mott court’s refusal to adopt the government’s argument that only distributions to taxable beneficiaries are covered by sec_661 and notes the o’connor dissent adopting a narrow anti-duplication interpretation of the statute the reference to sec_642 in pullen is troublesome in that that section generally disallows as an income_tax deduction or offset against sales_price to the estate or any other person any amount allowable as an estate_tax deduction under sec_2053 or sec_2054 unless a waiver is filed stating that the amounts have not and will not be claimed for estate_tax purposes since pullen sec_642 has been amended to extend to deductions allowable under the generation-skipping_transfer_tax as well as estate_tax sec_2053 relates to administrative expenses indebtedness and certain taxes while sec_2054 includes losses charitable deductions under sec_2055 are not subject_to sec_642 and thus a citation to that section for a general anti-duplication policy is problematic see the u s trust discussion in the main text note also that there is a situation in which a double deduction is uncontroversial when a bequest is made of items of income_in_respect_of_a_decedent ird described in sec_691 ird items which would include for example a decedent’s individual_retirement_accounts less any non-deductible contributions and other forms of deferred_compensation not subjected to income_tax during life are both assets of the gross_estate and income to the estate or other recipient because there are two inclusions there may also be two deductions postu-104922-16 the government apparently made a general argument that duplicative income and estate_tax_deductions should not be allowed but the court cited the general proposition that the income and estate_tax regimes are independent and the specific failure of sec_642 to preclude sec_2055 double deductions in addition to those under sec_2053 and sec_2054 although referring to the double deductibility as a loophole the court concluded that it was the responsibility of congress to close it rather than the service or the courts the circuit_court disagreed finding that the plain language of sec_642 and sec_2055 demonstrates the intent that the benefit for a charitable_bequest be conferred only once as an income_tax deduction for gross_income or as an estate_tax deduction for corpus the circuit_court does not mention sec_642 further the circuit_court notes that congress refused to incorporate charitable_contributions into the conduit scheme of in by failing to pass h_r which would have repealed sec_642 and incorporated charitable distributions into the distribution_deduction provisions language in the legislative_history of that bill suggests that congress interpreted current law as taking any distributions to charities entirely out of sec_661 eg t herefore although under state law a charitable_beneficiary is as much a beneficiary as any other beneficiary the code literally requires two separate rules for the two types of beneficiaries and two separate sets of computations in preparing the income-tax return of the estate_or_trust s rep no 86th cong 2d sessdollar_figure the court notes an inconsistency in the taxpayer’s argument although the taxpayer concedes that the statute cannot be read literally as to allow payments to creditors as amounts properly paid under sec_661 and that a distribution_deduction is only allowed for amounts paid to beneficiaries their claimed deduction is not under sec_661 which would necessarily consist of payments to beneficiaries any amount required to be distributed but under sec_661 which literally could encompass non-beneficiary payments finally the circuit_court noted that the contested regulation had been enacted shortly after the statute and had not been overturned by statute or amended by the service in that time although upholding sec_1_663_a_-2 in its entirety the decision specifically references only the double deduction situation therefore the taxpayer is not entitled as a matter of law to a deduction under sec_661 for the distribution of present income when that distribution had already been the basis of an estate_tax deduction the current taxpayer cites o’connor pullen and the two u s trust decisions include the most considered post-mott discussion of this issue but subsequent caselaw and guidance have also supported the government’s position in tam an estate did not have sufficient assets at death to pay all the charitable_bequests but did have enough income during administration to make up the shortfall the sec_2055 deduction was not allowable because the income was not an item included in the gross_estate and the sec_642 deduction also failed because it was not pursuant to the governing instrument noting mott a distribution_deduction was also denied in crown v comm discussed under issue above the relevant portion of the tax_court decision concluded that certain payments to charity in excess of a fixed annuity which the governing instrument allowed but only if the annuity interest was commuted to the extent of such payments were not pursuant to the governing instrument under sec_642 when no such commutation had occurred citing mott and o’connor the court disallowed an alternative deduction under sec_661 the circuit_court affirmed but its opinion discusses only the gift_tax issues in the case in 47_fsupp2d_670 e d va the estate claimed both a sec_642 and sec_2055 deduction for a contribution of an asset owned by the decedent the court denied the income_tax deduction because it was not traceable to gross_income and because an estate_tax deduction had already been allowed postu-104922-16 the district_court decision in u s trust which it describes as reversed on other grounds in support of its position that the regulation is invalid to the extent it does more than prevent a double income_tax deduction the taxpayer does not cite the other cases and authorities discussing this issue in the materials we have reviewed commentators are divided on the correctness of the mott line of cases one standard treatise supports them on two policy grounds all of the courts but one u s trust district_court that have considered this issue have sustained these regulations even though they substantially exceed the scope of the statutory language the cases supporting the regulations take the appropriate view because a contrary rule has the effect of giving both an estate_tax deduction for the charitable disposition and an income_tax deduction for the item distributed to charity for the same payment also as a result of deducting distributions of corpus to charity the non-charitable legatees in effect receive the estate’s income tax-free the benefit of the income_tax deduction inures to the noncharitable legatees rather than to the charity so the court decisions favoring the regulation seem fundamentally sound citations omitted danforth although the estate did not claim a distribution_deduction the court discussed mott and the circuit decision in u s trust for purposes of establishing an anti-duplication reading of the statute revrul_2003_123 2003_2_cb_1200 amplifies revrul_68_667 specifically concerning the contribution of a conservation_easement as defined in sec_170 concluding that the contribution failed under sec_642 because not traceable to gross_income and per mott and the circuit_court decision in u s trust was not deductible under sec_661 tam presents a slight variation on the issue a beneficiary had the income_interest in a simple_trust as defined in sec_651 all income required to be currently distributed no provision for charitable income payments no principal distributions in the relevant years and made a series of assignments of portions of such interest to charities which was not forbidden by the trust instrument or local law the tam concluded that these assignments did not cause the simple_trust to become a complex_trust the taxpayer conceded that no sec_642 deduction was allowed but asked for a distribution_deduction under sec_651 citing the prior cases the tam found that a charitable deduction was not allowed under sec_651 any more than under sec_661 and additionally such a deduction would create a loophole allowing avoidance of the sec_681 limits on charitable_contributions of unrelated_business_income which only applies to complex trusts subject_to sec_642 the service has recognized a distinction allowing sec_661 deductions for payments to charitable_remainder trusts crts described in sec_664 which although exempt from income_tax are not themselves charities but instead split-interest vehicles in which non-charitable beneficiaries receive a defined payout for a term with the remainder going to charity with that payout taxable to the beneficiary according to a statutory ordering rule generally ordinary_income capital_gains tax-exempt_income and return_of_capital in tam an estate was denied a sec_642 set-aside deduction for payments to a testamentary crt since the amounts set_aside for the charitable remainderman had a more than remote possibility of invasion for the benefit of the non-charitable income recipients but the estate’s payments to the crt and to the individual beneficiaries in anticipation of the creation of the crt during the estate’s period of administration which were treated as if made by the crt to those beneficiaries were allowed as a sec_661 deduction the tam distinguished mott and the subsequent cases as disallowing distribution deductions to wholly-charitable beneficiaries which fail sec_642 on gross_income pursuant to the governing instrument or sec_681 grounds from payments to split-interest_trusts never intended to be included in the exclusive sec_642 regime the deductibility of such funding and in lieu payments by estates to or on behalf of testamentary crts had previously been noted as an area of uncertainty see baetz w timothy tax planning for sophisticated charitable transfers the divide between downright doable and dangerous taxes date pincite postu-104922-16 robert t et al federal income_taxation of estates and trusts current through pincite however at least as many secondary sources in this area disagree with the disallowance under sec_661 at least under some facts another standard treatise ferguson m carr et al federal income_taxation of estates trusts beneficiaries current through states at the analysis explaining why a single payment should not allow double deduction under sec_642 and sec_661 does not however answer the question whether amounts that pass to charity in such a way as not to qualify for the deduction under sec_642 such as amounts that pass to nonqualified quasi-charitable organizations or are used for purposes that are not exclusively charitable escape the proscription of sec_663 obviously such amounts do not qualify ‘for the deduction provided in sec_642 ’ are they therefore deductible as distributions under sec_661 a literal reading of the statute strongly suggests that many such amounts should be even an undisputedly charitable_beneficiary would be treated the same as any other beneficiary under the distribution rules if it were not for sec_642 and sec_663 when no deduction is available under sec_642 sec_663 seems to plainly not apply ferguson then acknowledges that the mott analysis is attractive under its facts because allowing the sec_661 deduction would allow the shifting of almost all of the estate’s dni to the charity thus causing those amounts to escape taxation altogether with the estate and the taxable beneficiaries paying little or no tax on the amounts ultimately received by those beneficiaries it is hardly surprising that a court would try to avoid this sort of awkwardness what is surprising is that the same court that during the same year resorted to an extremely literalistic interpretation of the same statutory structure in deciding harkness v u s ct_cl cert_denied 94_sct_115 in which the taxpayer was unquestionably over-taxed would have so openly defied the statute in mott in harkness a decedent’s will divided the residual estate into equal another treatise somewhat grudgingly concurs otherwise contributions from corpus are not deductible under either sec_642 or sec_661 relating to normal complex_trust distributions the latter conclusion reflects the government’s position that an estate_or_trust is entitled to a deduction for amounts paid or set_aside for charitable purposes only under sec_642 this position can be crucial where the estate_or_trust loses the sec_642 deduction on technical and sometimes debatable grounds but is also denied the benefit of a distributions deduction under sec_661 typically the corpus contribution would be deductible for estate and gift_tax purposes this factor has encouraged some courts to uphold the validity of the income_tax regulations where the requirements of sec_642 have not been satisfied the assumption is that the contribution should be deductible either for income or for transfer_tax purposes but not for both it is interesting to note that congress has expressly adopted in one area administration_expenses and losses a denial of double deductions of the same item for both income and estate_tax purposes sec_642 in contrast sec_663 purports only to disallow a double income_tax deduction for items that qualify under sec_642 and might otherwise be deemed distributions under sec_661 and sec_662 nevertheless the careful opinions in pullen and the fifth circuit in u s trust make a strong argument for a result that will strike some as a legislative repair job to close a loophole compare the lower court opinion in the latter case citations omitted peschel john l spurgeon edward d federal taxation of trusts grantors beneficiaries current through pincite see fn postu-104922-16 parts one for the benefit of his wife and the other to be further divided into four trusts for his children with all estate and inheritance taxes to be paid out of the children’s share in a year prior to final distribution of the residue the executors paid a series of distributions totaling approximately dollar_figure million to the widow dollar_figure million to the children’s trusts and dollar_figure million in state and federal_estate_taxes in other words the total payments out of each half share were very nearly equal with the taxes and children’s payments together equivalent to the widow’s payments this was intentional on behalf of the executors who would make an equalizing distribution to one side whenever a distribution or tax payment was made on the other with the goal of keeping the corpus balance in the remaining residue equal so that the income_tax_liability would also be equal not requiring any calculations based on one side having more or less than a half interest this was apparently an accepted practice under state law the court did not accept this tracing of additional payments to corpus but applied the general_rule of sec_662 and divided the dni proportionally to the beneficiaries based on their relative distributions to the widow rather than the claimed the harkness dissenter actually criticizes the sec_662 anti-tracing rule on constitutional grounds as creating an impermissible unapportioned direct_tax on principal the dissent also notes that mott allowed tracing to defeat the taxpayer while the majority was disallowing it to the same end in the present case ferguson continues much water has passed under the bridge since the decisions in mott and harkness to be sure mott now has a substantial judicial following on the other hand in extending the separate_share_rule to estates as well as to trusts congress has not only overruled harkness it eliminated the over-taxation that accompanied its literalistic interpretation of the statute in extending the separate_share_rule to estates congress also eliminated the need to depart from the statute in cases like mott to keep the estate and its other beneficiaries from going essentially tax-free on income charity never receives by requiring the allocation of a subchapter_j entity’s dni among each of its separate shares the separate_share_rule eliminates both over- taxation in cases like harkness and under-taxation in cases like mott under current law mrs harkness would remain taxable but only on her share of the estate’s dni likewise in mott the estate and its other beneficiaries would be taxable on all of its dni except that portion if any properly allocable to the charity’s separate share in short under current law there is no reason in a case like mott for the court not to interpret the statute literally and to allow a distribution_deduction under sec_661 for a charitable distribution that does not also qualify for the deduction under sec_642 or for a distribution to a nonqualified quasi-charity each of the cases to the contrary arose well before congress’s extension of the separate_share_rule to estates stripped of their rationale they no longer deserve deference all that remains is the innocuous sentence in the regulation which even the mott court admitted found no support in the statute whether the regulation as interpreted by the service remains valid now that congress has extended the separate_share_rule to estates is not obvious footnotes omitted in a footnote ferguson notes that prof leo schmolka also disagrees with the mott line of decisions in his well-known article income_taxation of charitable_remainder trusts and decedents’ estates sixty- six years of astigmatism tax l rev fall pincite schmolka argues that if as mott postu-104922-16 despite the genuine ambiguity of the statutory provisions and the legislative_history we conclude that the second sentence of sec_1_663_a_-2 establishing the exclusivity of sec_642 as a deduction for charitable payments by trusts_and_estates represents a better overall reading of the law for four reasons in this case a specific statute governing income_tax deductions for payments to charitable beneficiaries creates a different set of rules than the general statute which by its literal language covers distributions to all beneficiaries and as noted above could even be read to cover payments to non-beneficiaries though taxpayers have not actually made that argument in the recorded cases the specific provision should be held to control and remove determinations on distributions of this kind from the general_rule altogether rollert v commissioner 80_tc_619 aff’d 752_f2d_1128 6th cir offers a parallel in which the specific provisions of one section of subchapter_j sec_691 were held to override the conflicting general provision of sec_661 in rollert an executive died with rights to receive a bonus that was not formally awarded until after the date of death as well as the remaining installments on bonuses from prior years held it is implicit in the general statutory structure that a charitable distribution is nondeductible under sec_661 where it is not otherwise deductible under sec_642 a distribution deductible under sec_642 is a fortiori nondeductible under sec_661 and congress was not obliged to enact sec_663 to accomplish that result that is if the statutory structure obviously precludes non-qualifying charitable deductions under sec_661 it is even more obvious that it precludes qualifying ones and sec_663 is surplusage secondly the parenthetical in sec_663 removing charitable deductions disallowed by sec_681 sec_508 and sec_4948 from the calculation would be unnecessary if such deductions were already disallowed under the stature simply by their nature as payments to charity in sum it seems clear that congress intended and expected sec_661 to provide a distribution_deduction unless a charitable payment in fact qualifies under sec_642 and the language of sec_663 and sec_661 unambiguously implements that intent this is not to say that congress intended sec_661 to be used as a ticket to wholesale tax_avoidance most likely it overlooked that possibility final grades awarded in evaluating the mott-o’connor-pullen trilogy therefore boil down to one’s estimation of whether the cases were an appropriate exercise in judicial legislation for they go well beyond the bounds of interpretation of either the statute or its legislative_history faced with a loophole the three courts simply plugged it schmolka wrote prior to the u s trust cases or the amendment of sec_663 to include estates other authors agreeing with ferguson and schmolka include carl d bellows recent cases rulings on the taxation of trusts estates the review of the taxation of individuals autumn pincite writing shortly after the o’connor decision bellows criticizes it on three primary grounds first the literal language of sec_663 only deals with double deductions second the parenthetical in sec_663 only makes sense if such disallowed sec_642 amounts would otherwise be included under sec_661 and third that sec_663 is not needed if it is otherwise clear that payments to charities can never support a distribution_deduction he notes the apparent contradiction in the legislative_history between the anti- duplication language and the senate report example as an alternative interpretation of the latter he suggests that it could mean that distributions of corpus to charity could not be deducted under sec_661 but that distributions of gross_income failing the pursuant to the governing instrument requirement of sec_642 could somewhat more recently one commentator said that the mott case and its progeny are troublesome cites to ferguson schmolka frimmer paul n charitable alternatives ali-aba cle course of study later still another supports the ferguson analysis now that the separate_share_rule applies to estates the abuse the courts worried about in mott and o’connor is not possible is the time ripe for the courts to reconsider those cases katzenstein lawrence p how to protect the interests of estates with charities as beneficiaries practical tax lawyer summer postu-104922-16 these rights became part of the decedent’s residual estate and the estate assigned the rights to future payments to the residuary beneficiary both the estate and the beneficiary treated the assignment of the rights as a distribution under of the fmv of the remaining payments when the payments were actually received the beneficiary only reported the increment between the amounts received and the earlier inclusion as income essentially treating the date-of-distribution value of the rights as its basis the court held that the taxpayers’ treatment would undermine the rule_of sec_691 under which the estate or other proper recipient of income_in_respect_of_a_decedent ird is taxed on actual receipt of the income substantially earned by the decedent during life but not includible on the decedent’s final return rather than on the transfer of the rights to such income the taxpayers argued that the distributions of the rights literally fell within sec_661 as amounts properly paid but the court cited mott and o’connor against this literalist reading as well as a number of authorities favoring specific statutes over general ones it is a well-accepted principle of law that a specific statute controls over a general one even if the latter might otherwise appear to govern as we have explained there is an apparent conflict between sec_691 and the distribution rules of sec_661 and sec_662 in view of the nature of sec_691 as a specific statutory scheme for the taxation of ird which would be largely defeated were rights to ird allowed to acquire basis under the distribution rules we believe sec_691 must take precedence here sec_1014 generally allows a step-up_in_basis for property received from a decedent by reason of death but sec_1014 specifically excludes ird from the general_rule the circuit_court accepted the tax court’s conclusion noting that congress did not enact sec_691 merely to have it subsumed by sec_661 and sec_662 the general conduit structure of as modified by the introduction of the dni mechanism in the code eliminates the pre-1954 requirement for tracing of payments to income or corpus sec_642 by reason of its gross_income similarly revrul_68_195 1968_1_cb_305 found that a distribution of the rights to sec_736 payments in liquidation of the rights of a deceased partner to the estate’s beneficiary were not considered payments for purposes of sec_661 if instead of distributing such rights the estate borrowed and then distributed the proceeds to the beneficiary the ruling concludes that this would be treated as though the estate had distributed the rights and then used the loan proceeds to purchase the rights back the beneficiary would have ird under sec_691 and the estate would have an asset with a sec_1012 basis but would not have the right to take a distribution_deduction in dean v comm t c memo decided between the tax and circuit_court rollert decisions the decedent died with rights to future payments under a promissory note for a sale of cattle the estate claimed a distribution_deduction for the assignment of the note to its beneficiaries citing the tax_court in rollert the opinion disallowed the deduction because of the operation of sec_691 it also cites mott for the proposition that the specific controls the general one commentator disagrees with rollert because he believes there is no conflict between sec_661 and sec_691 arguing following the dissenter in the rollert circuit_court decision that sec_691 determines who is taxed on ird while sec_661 if applicable under particular facts determines the timing of the inclusion to such person but he notes that the rollert issue is largely moot under current law because of the adoption of sec_643 under sec_81 of the deficit_reduction_act_of_1984 p l under the general_rule of sec_643 any distribution_in_kind from a_trust or estate is treated as a distribution equal to the trust or estate’s basis in the asset distributed which is generally going to be zero in the case of ird this reaches the rollert result by a different mechanism see abbin byrle m income_taxation of fiduciaries beneficiaries ed at sec_512 postu-104922-16 limitation preserves tracing to include charitable payments within the conduit system eliminates a requirement which congress expressly preserved in this narrow area as noted by the u s trust circuit decision congress refused to incorporate charitable payments into the general conduit system in with regard to those situations in which both an income and an estate_tax charitable deduction are being claimed for the same contribution which do not include the current case we agree with the pullen and u s trust decisions that the basic structure of sec_642 and sec_2055 establishes a bifurcation in which the income of the trust or estate will be deductible if at all under the income_tax deduction provision and the corpus or principal will be deductible under the estate_tax provision the allowance of deductions of corpus under sec_661 would thus create an unintended double benefit the latter decision describes this as a plain language reading of the statutes which we admit may be overstatement given the failure of congress to include sec_2055 with sec_2053 and sec_2054 in the explicit anti-duplication provisions of sec_642 but nonetheless sec_642 and sec_2055 read together seem to contemplate this division of labor between the two deductions again as noted by the fifth circuit in u s trust the disputed regulation was enacted shortly after the statute it interprets and has not been subsequently overturned by congress if sec_1_663_a_-2 as written contravened congressional intent there would have been action to override it if not immediately after the promulgation of the regulations then after those regulations were upheld in mott and the subsequent cases obviously one prior justification for the regulation provision the possible manipulation of distributions to shift income to the tax-exempt beneficiary no longer is relevant after the extension of the separate_share_rule to estates and was never relevant to cases involving trusts such as the current one issue sec_643 defines the term dni for purposes of part i as meaning with respect to any taxable_year the taxable_income of the estate_or_trust computed with certain modifications listed in sec_643 through sec_643 provides that no deduction shall be taken under sec_651 and sec_661 relating to additional deductions sec_643 provides that gains from the sale_or_exchange of capital assets shall be excluded to the extent that such gains are allocated to corpus and are not a paid credited or required to be distributed to any beneficiary during the taxable_year or b paid permanently set_aside or to be used for the purposes specified in sec_642 losses from the sale_or_exchange of capital assets shall be excluded except to the extent such losses are taken into account in determining the amount of gains from the sale_or_exchange of capital assets which are paid credited or required to be distributed to any beneficiary during the taxable_year postu-104922-16 sec_1_643_a_-3 generally provides that gains from the sale_or_exchange of capital assets are ordinarily excluded from dni and are not ordinarily considered as paid credited or required to be distributed to any beneficiary sec_1_643_a_-3 provides in relevant part that gains from the sale_or_exchange of capital assets are included in dni to the extent they are allocated to corpus but actually distributed to the beneficiary sec_1_643_a_-3 lists examples illustrating the rules of sec_1_643_a_-3 in example under the terms of trust’s governing instrument all income is to be paid to a during the trust’s term when a reache sec_35 trust is to terminate and all the principal is to be distributed to a because all the assets of the trust including all capital_gains will be actually distributed to the beneficiary at the termination of trust all capital_gains realized in the year of termination are included in dni see sec_1_641_b_-3 for the determination of the year of the final termination and taxability of capital_gains realized after the terminating event and before final distribution sec_1_641_b_-3 generally provides that the determination of whether a_trust has terminated depends on whether the property held in trust has been distributed to the persons entitled to succeed to the property upon termination of the trust rather than on the technicality of whether or not the trustee has rendered his final accounting the trust may continue to exist for federal purposes for a reasonable period of administration after the event causing its termination we find no cases in which the government has challenged the validity of a_trust termination under state law because that termination took place as the result of a court order or settlement agreement rather than according to the original unmodified trust terms and we do not recommend exploring such a theory to challenge the early termination of trust b sec_643 and the regulations thereunder establish a presumption that capital_gains will not be included in dni but the termination of the trust and distribution of all of its assets is one of the situations in which the capital_gains are considered to be actually distributed conclusions trust b is not entitled to a deduction under sec_642 for the payments to foundation and foundation because such payments are not pursuant to the governing instrument trust b is not entitled to a deduction under sec_661 for the payments to foundation and foundation because sec_642 is the exclusive income_tax provision for deductibility of payments by a_trust or estate to a charitable_beneficiary issue is moot because trust b is not entitled to a deduction under sec_661 for payments to foundation and foundation the amount of capital_gains includible in postu-104922-16 dni would only be relevant in the event a sec_661 deduction is available to trust b however were it ultimately found that trust b was allowed to take a sec_661 deduction dni for the taxable_year including date would include capital_gains this writing may contain privileged information any unauthorized disclosure of this writing may undermine our ability to protect the privileged information if disclosure is determined to be necessary please contact this office for our views


internal_revenue_service number release date index number --------------------------------------- --------------------- ------------------------- ------------- -------------------------------------- - department of the treasury washington dc person to contact ----------------------- id no ------------- telephone number --------------------- refer reply to cc psi - plr-137475-04 date date --------------------- --------------------- --------------------- legend x ------------------------------------------ y ---------------------- ------------------------------------------ a ------------------------- ----------------- b ------------------------------------------ ----------------------- c ------------------------------------------ state d1 d2 d3 dear ----- ----------- ---------------------- --------------------- -------- --------------------------- plr-137475-04 this responds to a letter dated date and additional correspondence submitted on behalf of x requesting a ruling under sec_1362 of the internal_revenue_code facts the represented facts are as follows x was incorporated under state law on d1 x filed an election to be treated as an s_corporation under sec_1362 for its taxable_year beginning d1 as of d2 a b and c were the shareholders of x on d2 y a c_corporation purchased all of x’s stock as part of the purchase transaction the parties made a sec_338 election to treat the stock purchase as an asset purchase on d3 due to unforeseen circumstances y transferred all of x’s stock back to a and b x and its shareholders then requested permission to make a new s election for x beginning d3 law and analysis sec_1361 provides that the term as corporation means with respect to any taxable_year a small_business_corporation for which an election under sec_1362 is in effect for such year sec_1361 defines a small_business_corporation as a domestic sec_1362 provides that except as provided in sec_1362 a small_corporation which is not an ineligible_corporation and which does not a have more than shareholders b have as a shareholder a person other than an estate a_trust described in sec_1361 or an organization described in sec_1361 who is not an individual c have a nonresident_alien as a shareholder and d have more than one class of stock business corporation may elect in accordance with the provisions of sec_1362 to be an s_corporation sec_1362 provides that an election under sec_1362 shall be effective for the taxable_year of the corporation for which it is made and for all succeeding taxable years of the corporation until such election is terminated under sec_1362 terminated whenever at any time on or after the 1st day of the 1st taxable_year for which the corporation is an s_corporation such corporation ceases to be a small_business_corporation effective on and after the date of cessation sec_1362 provides that any termination under sec_1362 shall be sec_1362 provides that an election under sec_1362 shall be plr-137475-04 sec_1362 provides that if a small_business_corporation has made an election under ' a and if such election has been terminated under ' d the corporation and any successor_corporation shall not be eligible to make an election under ' a for any taxable_year before its fifth taxable_year which begins after the first taxable_year for which the termination is effective unless the secretary consents to the election sec_1_338-1 of the income_tax regulations provides in part that elections are available under sec_338 when a purchasing_corporation acquires the stock of another corporation the target in a qualified_stock_purchase it also provides that although target is a single corporation under corporate law if a sec_338 election is made then two separate corporations old target and new target generally are considered to exist for purposes of subtitle a of the internal_revenue_code old target is treated as transferring all of its assets to an unrelated_person in exchange for consideration that includes the discharge of its liabilities see sec_1_1001-2 and new target is treated as acquiring all of its assets from an unrelated_person in exchange for consideration that includes the assumption of those liabilities such transaction is without regard to its characterization for federal_income_tax purposes referred to as the deemed asset sale and the income_tax consequences thereof as the deemed sale tax consequences if a sec_338 election is made old target is deemed to liquidate following the deemed asset sale sec_1_338-1 provides that with exceptions not relevant here the new target is treated as a new corporation that is unrelated to the old target for purposes of subtitle a of the internal_revenue_code sec_1_338-1 provides that old target and new target must use the same employer_identification_number sec_1_338-2 provides the definitions for the terms target old target and new target for purposes of sec_338 target is a target_corporation as defined in sec_338 old target refers to target for periods ending on or before the close of target’s acquisition_date new target refers to target for subsequent periods sec_1_338_h_10_-1 provides that a sec_338 election is made jointly by p purchasing_corporation and the selling s_corporation shareholders on form_8023 in accordance with the instructions to the form s_corporation shareholders who do not sell their stock must also consent to the election sec_1_338_h_10_-1 provides in part that old t is treated as transferring all of its assets to an unrelated_person in exchange for consideration that includes the discharge of its liabilities in a single transaction at the close of the acquisition_date but before the deemed liquidation old t realizes the deemed sale sec_1_338_h_10_-1 provides in part that old t is treated as if before plr-137475-04 tax consequences from the deemed asset sale before the close of the acquisition_date while old t is a member of the selling_consolidated_group or owned by the selling affiliate or owned by the s_corporation shareholders when t is an s_corporation target t’s s election continues in effect through the close of the acquisition_date including the time of the deemed asset sale and the deemed liquidation notwithstanding sec_1362 the close of the acquisition_date after the deemed asset sale in sec_1 h - d and while old t is owned by the s_corporation shareholders it transferred all of its assets to the s_corporation shareholders and ceased to exist the transfer from old t is characterized for federal_income_tax purposes in the same manner as if the parties had actually engaged in the transactions deemed to occur because of sec_338 and taking into account other transactions that actually occurred or are deemed to occur in most cases the transfer will be treated as a distribution in complete_liquidation to which sec_336 or sec_337 applies s_corporation shareholders whether or not they sell their stock take their pro_rata share of the deemed sale tax consequences into account under sec_1366 and increase or decrease their basis in t stock under sec_1367 s_corporation shareholders are treated as if after the deemed asset sale in sec_1 h - d and before the close of the acquisition_date they received the assets transferred by old t in the transaction described in sec_1_338_h_10_-1 in most cases the transfer will be treated as a distribution in complete_liquidation to which sec_331 or sec_332 applies sec_1_338_h_10_-1 provides in part that if t is an s_corporation target conclusion based solely on the information submitted and the representations made we conclude that x’s s_corporation_election did not terminate under sec_1362 when y a c_corporation purchased all of x’s stock because the parties made a sec_338 election a sec_338 election treats x’s s_corporation_election as continuing through y’s deemed purchase of x’s assets and x’s deemed liquidation and treats x as a new corporation after the liquidation thus x’s shareholders do not need permission under sec_1362 to make a new s_corporation_election for x when a and b reacquired x’s stock from y on d3 accordingly provided that x makes an election to be an s_corporation by filing a completed form_2553 with the appropriate service_center effective d3 within days following the date of this letter then such election will be treated as timely made for x’s taxable_year beginning d3 a copy of this letter should be attached to the form_2553 except as specifically set forth above no opinion is expressed concerning the federal tax consequences of the facts described above under any other provision of the code including whether x was or is a small_business_corporation under sec_1361 plr-137475-04 this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent pursuant to a power_of_attorney on file with this office a copy of this letter is being sent to x’s authorized representative sincerely j thomas hines chief branch associate chief_counsel passthroughs and special industries enclosures copy of this letter copy for sec_6110 purposes


id office uilc cca-818110-08 -------------- number release date from ------------------- sent mon am to ---------------- cc --------------------------------------------------------------------------------------------------------------------------- ------------------------- subject re tefra question - please see if you agree with my analysis the form 872-p for a will keep the statute open for the taxability of any distribution to c and c's treatment of such items on its balance_sheet the a proceeding will determine c's share of liabilities contributions to a and a distributions to c and any carryover_basis in distributed property we would need to issue an affected_item pea to c after the conclusion of the a proceeding within the one year period


internal_revenue_service department of the treasury index number u i l no washington dc person to contact telephone number refer reply to cc dom p si plr-114301-99 date date number release date legend company state shareholders a this letter responds to a letter dated date requesting a ruling on behalf of company under sec_1362 of the internal_revenue_code the information submitted discloses that company was incorporated in a under the laws of state company had three shareholders shareholders it is represented that company has intended to be an s_corporation since its incorporation believing itself to be an s_corporation company has operated accordingly since a after the end of its taxable_year beginning on a however company discovered that its s election had not been timely filed company requests a ruling that its sec_1362 election will be treated as timely made for its taxable_year that begins on a sec_1362 provides that a small_business_corporation may elect to be an s plr-114301-99 corporation sec_1362 explains when an s election will be effective generally if an s election is made within the first two and one half months of a corporation’s taxable_year then that corporation will be treated as an s_corporation for the year in which the election is made sec_1362 provides that if an s election is made after the first two and one half months of a corporation’s taxable_year then that corporation will not be treated as an s_corporation until the taxable_year following the year in which the s election is made sec_1362 provides that if no sec_1362 election is made for any taxable_year and the secretary determines that there was reasonable_cause for the failure to timely make such election then the secretary may treat such an election as timely made for such taxable_year and sec_1362 shall not apply applying the relevant law to the facts submitted and representations made we rule that company's sec_1362 election will be treated as timely made for its taxable_year that begins on a however this ruling is contingent on company filing form_2553 election by a small_business_corporation with both an effective date of a and a consent statement from the shareholders with the appropriate service_center within days from the date of this ruling a copy of this letter should be attached to the form_2553 except as specifically set forth above we express no opinion concerning the federal tax consequences of the foregoing facts specifically we express no opinion on whether company otherwise qualifies as an s_corporation this ruling is directed only to the taxpayer who requested it sec_6110 provides that it may not be used or cited as precedent sincerely yours william p o’shea chief branch office of the assistant chief_counsel passthroughs and special industries enclosure copy for sec_6110 purposes


internal_revenue_service department of the treasury number release date index number washington dc person to contact telephone number refer reply to cc intl plr-163651-01 date date a do ty date c date d year e dear this is in response to a letter dated date by a’s authorized representative requesting a ruling under sec_877 of the internal_revenue_code_of_1986 code that a’s loss of long-term_resident status did not have for one of its principal purposes the avoidance of u s taxes under subtitle a or subtitle b of the code the information submitted for consideration is substantially as set forth below the ruling contained in this letter is based upon information and representations submitted by the taxpayer and accompanied by penalty of perjury statements executed by an appropriate party while this office has not verified any of the material submitted in support of the request for rulings it is subject_to verification on examination a a long-term_resident of the united_states within the meaning of sec_877 relinquished his u s lawful permanent resident status expatriate on date c a has been a citizen of country b during his entire life by reason of his birth on date d in country b a's parents were also born in country b a became a permanent resident of the u s and obtained his green card in year e on the date of a’s expatriation his net_worth is expected to exceed the net_worth required under sec_877 sec_877 generally provides that a citizen who loses u s citizenship or a u s long- plr-163651-01 term resident who ceases to be taxed as a lawful permanent resident individuals who expatriate within the 10-year period immediately preceding the close of the taxable_year will be taxed under sec_877 and the special rules of sec_877 for such taxable_year unless such loss did not have for one of its principal purposes the avoidance of u s taxes sec_2107 and sec_2501 provide special estate and gift_tax regimes respectively for individuals who expatriate with a principal purpose to avoid u s taxes a former citizen or former long term-resident will be treated as having expatriated with a principal purpose to avoid u s taxes for purposes of sec_877 sec_2107 and sec_2501 if the individual’s average income_tax_liability or the individual’s net_worth on the date of expatriation exceed certain thresholds see sec_877 sec_2107 and sec_2501 a former u s citizen or former long term-resident whose net_worth or average tax_liability exceeds these thresholds however will not be presumed to have a principal purpose of tax_avoidance if that former citizen is described within certain statutory categories and submits a request for a ruling within one year of the date of loss of u s citizenship for the secretary’s determination as to whether such loss had for one of its principal purposes the avoidance of u s taxes see sec_877 sec_2107 and sec_2501 under notice_98_34 1998_2_cb_29 modifying notice_97_19 1997_1_cb_394 a former long-term_resident whose net_worth or average tax_liability exceeds the applicable thresholds will not be presumed to have a principal purpose of tax_avoidance if that former resident is described within certain categories and submits a complete and good_faith request for a ruling as to whether such loss had for one of its principal purposes the avoidance of u s taxes notice_98_34 requires that certain information be submitted with a request for a ruling that an individual’s expatriation did not have for one of its principal purposes the avoidance of u s taxes a is eligible to request a ruling pursuant to notice_98_34 because on the date of expatriation a was a resident and fully liable to income_tax in country b the country where a was born a submitted all the information required by notice_98_34 including any additional information requested by the service after review of the submission based solely on the information submitted and the representations made we conclude that a has made a complete and good_faith submission in accordance with sec_877 and notice_98_34 therefore a will not be presumed under sec_877 to have as one of his principal purposes for expatriating the avoidance of u s taxes it is further concluded that a will not be treated under sec_877 as plr-163651-01 having as one of his principal purposes of expatriating the avoidance of u s taxes except as expressly provided herein no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter in addition no opinion is expressed as to a’s u s tax_liability for taxable periods prior to his loss of permanent residence status or for taxable periods after his loss of permanent residence status under sections of the code other than sec_877 sec_2107 and sec_2501 a copy of this letter must be attached to a’s u s income_tax return for the year in which a obtained the ruling this ruling is directed only to the taxpayer requesting it sec_6110 of the code provides that it may not be used or cited as precedent in accordance with the power_of_attorney on file with this office a copy of this letter is being sent to a’s representative sincerely yours w edward williams senior technical reviewer branch office of the associate chief_counsel international cc