Tax Aspects of Charitable Contributions and Bequests by Individuals
Tax Aspects of Charitable Contributions and Bequests by Individuals
James W. Quiggle
John Holt Myers
Recommended Citation James W. Quiggle and John Holt Myers, Tax Aspects of Charitable Contributions and Bequests by Individuals, 28 Fordham L. Rev. 579 (1959). Available at: http://ir.lawnet.fordham.edu/flr/vol28/iss4/1
JAMES W. QUIGGLE*
JOHN HOLT MYERS*
PRIVATE giving for the public welfare has long played an important
part in our way of life in the United States. While recognizing
public responsibility for social welfare, a sense of private duty has
expressed itself in support of churches, educational institutions,
hospitals, private welfare groups, and a host of similar organizations
characterized as charitable.
The birth of the income tax marked the end of the period in which
great gifts from very wealthy benefactors could be expected and the
beginning of an era in which individual contributions became more
and more important to private institutions, whose needs increased at an
The current problem of financing higher education in the coming
years exemplifies the ever growing significance of private charitable
contributions. The enigmatic question, "When today's children are
ready for college, will college be ready for them?," barely suggests the
terrible dilemma we face. It is not simply a matter of a number of
children who will be ready for college. If the nation is to maintain its
present world leadership, a greater percentage of our youth will have
to seek the benefits of higher education.' Much more important in an
economic sense is that we are also in the midst of an explosion of
knowledge which has radically increased the expense of higher education
itself. In fields such as science and medicine, the simple tools needed
for instruction call for incredible expenditures, which increase
progressively as the frontiers of knowledge are pushed ever farther. Institutions
of higher education, both public and private, desperately seek the
support of contributions so essential to their operation. Too often we are
unmindful of the fact that even in private institutions of higher learning
tuition rates seldom pay more than three-fifths of the cost of the
At the outset, Congress recognized the vital need for encouraging
pri* Members of the District of Columbia and Maryland Bars.
1. See generally Financing Higher Education 1960-1970 (
) (McGraw-Hill Book
Co.'s 50th anniversary study of the economics of higher education in the United States).
2. See Sparks & Klopsteg, Individual Income Tax Deductions Applying to Gifts to
Colleges and Universities, 3 Tax Revision Compendium 447, submitted to Committee on
Wiays and Mleans, 86th Cong., 1st Sess. (
), in connection with panel dkcuszons
beginning November 16, 1959 [hereinafter cited as Tax Compendium].
vate contributions. The Revenue Acts of 19171 and 19184 first provided
an income and estate tax deduction for charitable gifts and bequests.
Congress, activated by public policy and a concern for institutions
which might become public charges, has through the years abetted
charitable contributions by providing additional tax relief to donors.'
The primary legislative purpose behind the charitable deduction has,
of course, been the desire to promote the support of institutions which
in fact perform a public service, either directly or indirectly. If the
private college lacks adequate funds to meet its annual deficit, it will soon
become a charge upon the state or nation, a fate that more than one
important private institution of higher education has already
encountered. From an economic point of view it must be recognized,
moreover, that a dollar of a private gift given directly to an institution is
of considerably greater benefit to the institution than a dollar received
by way of taxes and ultimately used for the same purpose. It has
been estimated that the federal tax dollar, in its somewhat tortuous
course from taxpayer to college, is so worn down that for each dollar
received by a college, the taxpayer must provide two or three. The loss
occasioned by unavoidable bureaucracy can only be considered waste.
This article proposes to examine those sections of the Internal Revenue
Code of 1954 dealing with deductions for charitable gifts or bequests
by individuals in the hope that both institutions and donors may benefit
from an increased awareness of the possibilities present under the law.
The Internal Revenue Code describes in sections 170(c)0 and 2055
3. Revenue Act of 1917, ch. 63, § 1201(2), 40 Stat. 330.
4. Revenue Act of 1918, ch. 18, § 214(a)(
), 40 Stat. 1068; § 403(a)(3), 40 Stat.
5. The Supreme Court in Helvering v. Bliss, 293 U.S. 144, 150-51 (1934), declared:
"The exemption of income devoted to charity and the reduction of the rate of tax on capital
gains were liberalizations of the law in taxpayer's favor, were begotten from motives of
public policy, and are not to be narrowly construed."
6. Int. Rev. Code of 1954, § 170, provides:
(c) CHuARABLE CONTmuTIoN DEFIE.-For purposes of this section, the term
'charitable contribution' means a contribution or gift to or for the use
) A State, a Territory, a possession of the United States, or any political
subdivision of any of the foregoing, or the United States or the District of Columbia, but
only if the contribution or gift is made for exclusively public purposes.
(2) A corporation, trust, or community chest, fund, or
(A) created or organized in the United States or in any possession thereof, or
under the law of the United States, any State or Territory, the District of Columbia,
or any possession of the United States;
(B) organized and operated exclusively for religious, charitable, scientific, literary,
or educational purposes or for the prevention of cruelty to children or animals;
(C) no part of the net earnings of which inures to the benefit of any private
shareholder or individual; and
(a) 7 those organizations available as donees or beneficiaries for income
and estate tax purposes. 8 Though it is beyond the scope of our
discussion to examine what renders an organization charitable, a comparison
of these sections reveals but two substantial variations in the spectrum
(D) no substantial part of the activities of which is carrying on propaganda, or
otherwise attempting, to influence legislation.
A contribution or gift by a corporation to a trust, chest, fund, or foundation d-all be
deductible by reason of this paragraph only if it is to be used within the United States
or any of its possessions exclusively for purposes specified in subparagraph (B).
(3) A post or organization of war veterans, or an auxiliary unit or society of, or trust
or foundation for, any such post or
organization(A) organized in the United States or any of its possessions,: and
(B) no part of the net earnings of which inures to the benefit of any private
shareholder or individual.
(4) In the case of a contribution or gift by an individual, a domestic fraternal
society, order, or association, operating under the lodge system, but only if such
contribution or gift is to be used exclusively for religious, charitable, scientific, literary, or
educational purposes, or for the prevention of cruelty to children or animals.
(5) A cemetery company owned and operated exclusively for the benefit of its
members, or any corporation chartered solely for burial purposes as a cemetery
corporation and not permitted by its charter to engage in any business not necessarily incident
to that purpose, if such company or corporation is not operated for profit and no part of
the net earnings of such company or corporation inures to the benefit of any private
shareholder or individual.
(a) Ix GENR..-For purposes of the tax imposed by section 2001, the value of the
taxable estate shall be determined by deducting from the value of the gross estate the
amount of all bequests, legacies, devises, or transfers (including the interest which falls
into any such bequest, legacy, devise, or transfer as a result of an irrevocable discaimer of
a bequest, legacy, devise, transfer, or power, if the disclaimer is made before the date
prescribed for the filing of the estate tax
) to or for the use of the United States, any State, Territory, any political
subdivision thereof, or the District of Columbia, for exclusively public purposes;
(2) to or for the use of any corporation organized and operated exclusively for
religious, charitable, scientific, literary, or educational purposes, including the encouragement
of art and the prevention of cruelty to children or animals, no part of the net earnings
of which inures to the benefit of any private stockholder or individual, and no
substantial part of the activities of which is carrying on propaganda, or otherwise attempting,
to influence legislation;
(3) to a trustee or trustees, or a fraternal society, order, or association operating
under the lodge system, but only if such contributions or gifts are to be used by such
trustee or trustees, or by such fraternal society, order, or association, exclusively for
religious, charitable, scientific, literary, or educational purposes, or for the prevention of
cruelty to children or animals, and no substantial part of the activities of such trustee
or trustees, or of such fraternal society, order, or association, is carrying on propaganda, or
otherwise attempting, to influence legislation; or
(4) to or for the use of any veterans' organization incorporated by Act of Congress,
or of its departments or local chapters or posts, no part of the net earnings of which
inures to the benefit of any private shareholder or individual.
For purposes of this subsection, the complete termination before the date prescribed for
the filing of the estate tax return of a power to consume, invade, or appropriate property
for the benefit of an individual before such power has been exercised by reason of the
death of such individual or for any other reason shall be considered and deemed to be an
irrevocable disclaimer with the same full force and effect as though he had filed such
8. It is now elementary that gifts and bequests to individuals are not deductible no
matter how deserving they may be. Bowles, 1 B.T.A. 534 (1925)
taxpayer's dependent mother disallowed); Rev. Rul. 57-183, 1957-1
(support payment to
Cum. Bull. 97
(contribution to fraternal club for sickness and burial expenses of a member disallowed).
of donees listed insofar as citizens or residents are concerned.9
cemetery companies are listed only under the income tax section, which,
more significantly, allows a deduction only for contributions to domestic
institutions, including those organized in a territorial possession. Thus,
no income tax deduction can be taken for a gift, given, let us say, to the
University of Mandalay."° Still, this does not prevent a deduction for
a gift to a domestic organization expending a portion of its funds
While the theory behind the rule is sound, namely, that citizens of the
United States should benefit from any United. States revenue lost as a
result of a charitable deduction, it does prevent a profitable interchange
of gifts with neighboring countries. To date provisions in the income
tax conventions with Canada and Honduras are the only exceptions, and
these are of little practical moment.
Consider, for example, the treaty with Canada.'"
If an American citizen wishes to donate to a Canadian
charity, not only must this organization qualify as charitable under the
9. Except where a treaty is applicable, non-resident aliens with no United States
business, and having a gross income of not more than $15,400, are taxed at 301
income from United States sources and are not allowed any deductions. Int. Rev. Code of
1954, § 871(a)(2).
Non-resident aliens engaged in trade or business here or having a gross
income of more than $15,400 from
States sources are allowed a deduction for
charitable gifts, subject to the limitations of § 170, whether or not connected with United
States income, but only to organizations created in the United States. Int. Rev. Code of
1954, § 873(c).
Muzaffer ErSelcuk, 30 T.C. 962 (
Treas. Reg. § 1.170-2(a)(
There are many organizations ruled charitable
which transmit all their receipts abroad. It is understood that this regulation is under
intensive study by the Treasury. See A.B.A. Section on Taxation Bull., Oct. 1959, p. 33.
See Treaty with Canada on Double Taxation, Aug. 8, 1956 r19571 8 U.S.T. & O.I.A.
1619, T.I.A.S. No. 3916, art. XIII D, wherein it was stated:
1. In the computation of taxable income for any taxable year under the revenue laws of
the United States, there shall be allowed as a deduction contributions to any organization
created or organized under the laws of Canada (and constituting a charitable organization
for the purpose of the income tax laws of Canada) if and to the extent such contributions
would have been deductible as a charitable contribution had such organization been
created or organized under the laws of the United States. Provided, however, that such
deduction shall not exceed an amount determined by applying to the taxpayer's taxable
income (in the case of a corporation) or adjusted gross income (in the case of an
individual) from sources in Canada the same percentage as is applied by Canada to income
in determining the limitation of the deduction for gifts or contributions to charitable
organizations of Canada.
2. In the computation of taxable income for any taxation year under the income tax
laws of Canada, there shall be allowed as a deduction gifts to any organization created or
organized under the laws of the United States (and constituting a charitable contribution
for the purposes of the income tax laws of the United States) if and to the extent such gifts
would have been allowable had such organization been a Canadian charitable organization.
Provided, however, that such deduction shall not exceed an amount determined by applying
to the taxpayer's income from sources in the United States upon which he is subject to tax
in Canada the same percentage as is applied by Canada to income in determining the
limitation of the deduction for such gifts.
laws of both countries, 13 but the deduction cannot exceed the amount
which under Canadian law would be allowed on his income from sources
within Canada. Thus, the treaty does not permit a deduction for gifts
to Canadian institutions unless the American resident has Canadian
income. Article XIV(3) of the treaty with Honduras likewise voids
the deduction if the taxpayer has no income from Honduran sources.
As suggested, the deduction for charitable bequests of citizens or
residents is not restricted to domestic organizations, 14 although total
reliance thereon may be unwise. In its audit procedure, the Internal
Revenue Service has taken the position that an estate seeking to deduct
a bequest to a foreign charity must demonstrate that the charity is the
type specified under the Code. On one occasion, an examining agent
insisted that as a prerequisite to allowance of the deduction, the charity
apply for exemption under this section. The reason given was that
foreign charities do not always operate as do their American counterparts.
For example, some foreign charities may be part of political subdivisions,
and in effect, the bequest will be to a foreign government.
Incidental Income and Gift Tax Problems
Relationship to Sections 501(c) (3) and 2522
To non-profit organizations, two aspects of taxation are paramount:
exemption from income tax and deductibility of gifts and bequests.
Section 501(c) lists those organizations which are, under section 501 (a),
exempt from income tax. Gifts and bequests to or for the use of
ogranizations listed in section 501(c)(3),'1 except those organized to test for
public safety, generally qualify for deduction.' It is of some interest
that veterans' organizations incorporated by act of Congress, deductions
to which are allowed by both sections 170 and 2055 (but not section
2106, which relates to bequests of non-resident aliens), are not
specifically mentioned in section 501(c). Nevertheless, they are generally
considered exempt under section 501(c) (4) as organized for the
promotion of social welfare.
Taxpayers generally overlook the fact that charitable gifts are subject
to the gift tax and that returns must be filed as to those over $3,000.
13. For the method of establishing the exempt status of those charities, see Rev. Proc.
59-31, 1959 Int. Rev. Bull. No. 37, at 43.
14. The deduction for charitable bequests of non-resident aliens is limited to gifts for
domestic organizations and trustees for use within the United States. Int Rev. Code of 1954,
§ 2105(a) (2).
15. The donee organization need not be of the type described in § 170(c) or
§ 501(c) (3) as long as the fund is held for such organizations. John Danz, 18 T.C. 454
); I.T. 3707, 1945 Cum. Bull. 114.
16. Apparently, it was a legislative oversight not to include these organizations in
§§ 170(c), 2055(a), and 2522(a).
However, section 2522 allows a deduction for such donations and
hence no tax is imposed. Except for minor differences in language,
the organizations described therein are the same as those in section 2055
and differ from section 170 organizations in permitting gifts to foreign
charities but not to cemetery companies. The anomalous result of the
omission of cemetery companies is that a gift to one may entitle the
donor to an income tax deduction and at the same time subject him to
a gift tax. As noted above, a donor to a foreign charity obtains a gift
tax but no income tax deduction.
Limitation on Amount of Contribution
There has never been a limitation on the amount one can bequeath to
charity and still obtain a deduction." However, since the Revenue
Act of 1917, there has been an annual limitation on the amount deductible
from income. This has varied from fifteen per cent of net income
(19171943) to fifteen per cent (1944-1951) and twenty per cent (1952 to
date) of adjusted gross income."'
In 1954, Congress, wishing to benefit certain organizations, provided
in section 170(b) (
) (A) for deduction of an additional ten per cent
of adjusted gross income for gifts to a church or convention of churches,
operating educational organizations, and hospitals or medical research
organizations. In computing his maximum charitable deduction, the
taxpayer separates gifts to these organizations from all others. The ten
per cent limitation is applied to them, and any excess is added to gifts
to other organizations, which is then subjected to the twenty per cent
limitation. An important limitation is that qualifying gifts must be "to"
the charities, not merely "for their use," which has been equated with
"in trust for."' 9 Accordingly, an outright donation to XYZ University
will qualify, but a gift to a trust,20 or the payment of premiums on a
life insurance policy?' of which the university is the beneficiary, will not.
The one exception to the percentage restriction is the unlimited
charitable deduction which has been in the law in some form since 1924.
Section 170(b) (
) (C) of the Code provides for an unlimited charitable
deduction if in the taxable year, and in eight of the ten preceding taxable
years, the charitable contributions and income taxes paid - (other than
self-employment taxes) during the year in respect of such year or a
preceding taxable year exceed ninety per cent of taxable income computed
without deduction for charitable contributions, personal exemptions
and net operating loss carry backs. As the result of a 1958 amendment,'
in lieu of the income tax paid during any year, a taxpayer may use the
tax paid in respect of such year as long as the same amount is not
entered into calculations twice. The change would allow deficiencies
and payments of estimated tax to be attributed back to the year to which
they relate. A taxpayer thus has some discretion in selecting his taxes
for a particular year. It should be kept in mind that a refund or credit
will serve to reduce the taxes paid and will be applied against the most
recent payments for the year of refund.24
The regulations treat at length the matter of joint returns. -5 If a
husband and wife make a joint return for the taxable year, and in eight
of the ten preceding taxable years (whether or not joint or separate
returns are filed), they aggregately meet the requirments of section
) (C), they will not be subject to the percentage limitation.
If a separate return is filed by a spouse or by an unremarried widow
or widower, an unlimited deduction is available if this person meets
the test in the taxable year and if, in the prior years, the joint returns
or separate returns fulfilled the conditions. A divorced or remarried
taxpayer who filed a joint return for a prior year with a former spouse
is not permitted to include the contributions and taxes paid by the former
spouse. The separate taxable incomes and taxes of the taxpayer and
former spouse are computed as though they had filed separate returns.
The taxable income and the taxes attributed to the taxpayer from a
joint return is a proportionate allocation of their separate taxable
in22. The only taxes are federal income taxes. Rev. Rul. 55-303, 1955-1 Cum. Bull. 30.
They include payments on estimated tax, the final installment for the preceding year, and a
deficiency for a prior year to the extent that they do not exceed the actual tax. Treas. Reg.
§ 1.170-2(c) (
). An overpayment credited against an estimated tax of a succeeding
year is paid in such year if it does not exceed the actual liability. Rev. Rul. 55-255, 1955-1
Cum. Bull. 374.
23. Section 10(a) of the Technical Amendments Act of 1958, 72 Stat. 1605, amending
Int. Rev. Code of 1954, § 170(b)(
)(C), applicable to taxable years beginning after
December 31, 1957.
24. Treas. Reg. § 1.170-2(c)(
) (1958). The regulations have not been amended to
reflect § 10(a) of the Technical Amendments Act of 1953.
25. Treas. Reg. § 1.170-2(c) (2) (
comes and taxes.2 6 The taxes paid by a divorced or remarried taxpayer
for a taxable year, such as an installment of estimated tax, or for a
prior year, such as the payment of a deficiency, must not exceed his
allocable portion of the tax with respect to the year.
In computing taxable income, a number of questions may arise.
Before the 1954 Code, taxable income was not required to be reduced
by personal exemptions or net operating loss carry back. Under the
regulations, it seems clear that in computing the taxable income of any
year to which the 1939 Code applies, adjustment shall not be made for
exemptions and the carry back even though the taxable year is one
governed by the 1954 Code. Under a recent case,28 two further points
are also clear. Net income includes only that portion of capital gains
actually taxable, not the gross amount. A taxable year meeting the
conditions of section 170(b) (
) (C) will not be disqualified by a later tax
law retroactively increasing net income. It follows that in totaling
charitable deductions and taxable income, the taxpayer is not bound by
the amounts shown on the returns filed. The 1954 Code refers to
"charitable contributions" and "taxable income." These terms should
imply actual, and not merely reported, figures. As a result, it should be
within the province of both the taxpayer and the Commissioner to show
more or less contributions or taxable income than that actually reported,
even though the year is barred by the statute of limitations for refund
or for the assessment of a deficiency.
Denial of Deduction
Second only to the donor's joy in giving is his realization that he or
his estate will obtain a tax deduction for his munificence. Careful
selection of charitable donees is important because spread throughout the
Code are various sections denying a deduction for gifts to
The most common denial of deduction will usually arise from a
gift to an organization which just does not meet the specifications of
sections 170(c), 2055(a), or 2522(a). Perhaps at one time the charity
did pass inspection, but not in the year of gift. Probably the donor
will have relied upon an old exemption letter which does not describe the
institution's present character. Although there is little doubt that the
26. Assume a taxpayer and his former spouse filed a joint return showing taxable Income
of $24,000 and a tax of $6,800. If they had filed separate returns, the figures would be:
Taxpayer: taxable income, $14,000; tax $4,260.
Former spouse: taxable income $10,000; tax $2,640.
Taxpayer's taxable income and tax for the year in question would be, respectively, $14,000
and $4,198.26 (4,260/6,900 X 6,800).
27. Treas. Reg. § 1.170-2(c)(
28. Kress v. United States, 159 F. Supp. 338 (Ct. Cl. 1958).
Commissioner can revoke an exemption retroactively, - his announced
policy is that a deduction remains allowable until an announcement of
revocation is published in the Internal Revenue Bulletin, unless the
donor had knowledge of the revocation before it was published.-" No such
policy is followed with respect to the estate and gift tax deduction. The
question is whether or not the institution qualifies on the date of the
gift or bequest.
Donors must also reckon with section 503 (e) which disallows a
deduction for gifts and bequests to section 501(c) (3)
organizations, with the
noted below, 31
which have had their exemptions
because they have engaged in a prohibited transaction3 - The deduction
is denied for the same years the exemption is revoked, that is, for
taxable years after the year the organization is notified by the Secretary
of the prohibited transaction 3 If, however, the purpose of the
transaction is the diversion of a substantial part of the corpus or income
No. 78, Organizations
described in Section 170(c) of the Internal
Revenue Code of 1954, Cumulative List revised to December 31, 195S.
31. Int. Rev. Code of 1954, § 503, provides:
(b) OnA-%zAno.zs To WmcH SEcTIoN APPLms.-This section shall apply to any
organization described in section 501(c)(3) or section 401(a)
) a religious organization (other than a trust);
(2) an educational organization which normally maintains a regular faculty and
curriculum and normally has a regularly enrolled body of pupils or students in
attendance at the place where its educational activities are regularly carried on;
(3) an organization which normally receives a substantial part of its support
(exclusive of income received in the exercise or performance by such organization of its
charitable, educational, or other purpose or function constituting the basis for its
exemption under section 501(a)) from the United States or any State or political subdivision
thereof or from direct or indirect contributions from the general public;
(4) an organization which is operated, supervised, controlled, or principally supported
by a religious organization (other than a trust) which is itself not subject to the
provisions of this section; and
(5) an organization the principal purposes or functions of which are the providing of
medical or hospital care or medical education or medical research or agricultural re:earch.
Int. Rev. Code of 1954, § 503, provides:
(e) Ds.zowx.cE or CERr.LN Ca m-rTr.u, rc., Dmnucrzo:s.--No gift or bequest
for religious, charitable, scientific, literary, or educational purposes (including the
encouragement of art and the prevention of cruelty to children or animals), othervise
allowable as a deduction under section 170, 642(c), 545(b)(2), 2055, 2105(a)(2), or 2522, shaU
be allowed as a deduction if made to an organization described in section 501(c)(3) which,
in the taxable year of the organization in which the gift or bequest is made, is not exempt
under section 501(a) by reason of this section. With respect to any taxable year of the
organization for which the organization is not exempt pursuant to subsection (a) by
reason of having engaged in a prohibited transaction with the purpose of diverting the
corpus or income of such organization from its exempt purposes and such transaction
involved a substantial part of such corpus or income, and which taxable year is the same
or prior to the, taxable year of the organization in which such transaction occurred, such
deduction shall be disallowed the donor only if such donor or (if such donor is an
individual) any member of his family (as defined in section 267(c)(4)) was a party to such
33. For notification procedure, see Rev. Proc. 57-5, 1957-1 Cum. Bull. 727.
from exempt purposes, no notice is needed to deny exemption," but
'the deduction will not be disallowed in the year of diversion and prior
years unless the donor or a member of his family, as defined in section
267(c) (4), is a party to the transaction. A deduction for contributions
in years subsequent to the diversion will be disallowed.
Under section 504, exemption may also be denied section 501(c)(3)
organizations, to which section 503 is applicable, for unreasonable
accumulations of income." Denial of deduction to organizations
unreasonably accumulating income will apply to those years after the
exemption is denied."0
Section 170(b) (
) (D) disallows an income tax deduction based not
upon the character of the donee but upon the manner in which the
gift is made. No deduction for a gift in trust will be allowed if the
donor has a reversionary interest in the corpus or income of the
contributed property which exceeds five per cent of the value of the trust.
Reversionary interest means the possibility the income or property
may revest in the grantor or his estate or may be subject to a power
exercisable by the grantor or a nonadverse party (as defined in section
672(b)) to return it to the grantor or his estate. An interest of the
grantor in the property which wi3ll8 terminate before the ripening of the
gift is not a reversionary interest.
Also, it should not be forgotten that an income tax deduction will be
denied to organizations which are either listed or ordered to register
on the lists of communist-action or communist-front organizations
maintained by the Attorney General. 9
Measure of a Gift
Where the subject of the gift or bequest is cash, no problem exists
with respect to the valuation of the gift. Even in the case of a bequest
of property, there are few problems which can develop with respect to
the value of the bequest since whatever is included in the gross estate
is also excluded. But, in the case of an inter vivos gift of property, it
is important to determine the value of the gift for deduction purposes.
As indicated above, the deduction for charitable contributions first
appeared in the Revenue Act of 1917. The regulations promulgated
thereunder specified that "the fair market value of the property"
constituted the measure of the deduction.40 Except for a brief period
34. Int. Rev. Code of 1954, § 503(a) (2).
35. See note 31 supra.
36. Treas. Reg. § 1.504-1(f) (
37. Treas. Reg. § 1.170-1(d) (
38. Treas. Reg. § 1.170-1(d) (
39. 64 Stat. 996, 50 U.S.C. § 790 (
40. Treas. Reg. 33, § 9, art. 8 (1917).
from 1920 to 1923, when it ruled that the deduction was limited to
the cost of the property,4 1 the Internal Revenue Bureau has always
acknowledged that a deduction may be taken for the "fair market value"
of the contributed property.4 This well-known and long-standing
administrative rule can be presumed to have the approval of Congress
in view of the frequent re-enactments of the charitable deduction
In 1938, Congress was specifically importuned to change this rule.
As passed by the House, H.R. 9682 included a provision reducing the
deduction to the adjusted basis or fair market value, whichever was the
lower." In rejecting this proposal, the Senate Finance Committee noted:
Representations were made to the committee by officials of educational and charitable
institutions that the effect of such a provision would be to discourage the raklng of
charitable gifts in kind. The committee believes that charitable gifts generally ought
to be encouraged and so has eliminated this provision of the House billV 5
By re-enactment of section 23(q) of the 1939 Code, Congress clearly
approved the rule that fair market value was the measure of the deduction
allowable for contributions of property and rejected the contention that
such deduction be limited to cost.
Just exactly what is meant by "fair market value"? Although
application under certain circumstances is difficult, the general rule is that
fair market value is the price at which the property would change hands
between a willing seller and a willing buyer, neither being obligated to
sell or buy.46 Since the property is being donated to charity, not sold,
it may seem that this rule is not applicable. However, the courts,
realizing that the sale to determine fair market value can be only
imaginative, have held that sales of similar property are strong evidence of
value4 7 Thus, if stock is donated, a taxpayer need only resort to the
financial pages of his newspaper to see what other shares of the company
sold for on the date of gift.4" If the property is of a kind not ordinarily
traded, its initial cost or the cost of reproducing it, with adjustments
for depreciation, may be determinative.49
The reference to comparable sales as the measure of fair market value
has been uniform through the years both in court decisions and the
Commissioner's own regulations.5 0 This should be emphasized despite
the confusion engendered by the Commissioner's occasional and
unsuccessful efforts to tax donors on the difference between the tax basis
of property given (particularly inventory) and its fair market value.
Valuation of Income and Remainder Interests
Where the gift or bequest consists of an income interest or a
remainder interest after an intervening estate, special problems of valuation
are presented. The identical tables appearing in the gift and estate tax
regulations are employed for the determination of an income or remainder
interest where one life is involved.5 1 Where there are complications
(for instance, more than one life is involved), the Service offers to
provide a factor for valuation based upon the same mortality tables or a
taxpayer may do it himself by resort to the tables. 2 Where there is an
annuity purchased from a company regularly engaged in issuing
annuities, the Service generally refers to the price currently charged by
commercial companies engaged in the sale of similar contracts.
It should be remembered that evaluating property interests is
essentially a matter of fact. Although the Service's method of determining
such interests under its tables are generally accepted, it is not necessarily
exclusive. One court, in discussing the question of how to value the
bequest of a remainder interest under regulations in effect with respect
to a prior law declared: "We do not think that [the regulation] directed
the use of Table A in all cases, nor do we think that it would have been
valid if it had.""M
It does seem clear that the value of such a gift is determined as of
the date of the gift or the death of the decedent without reference to
circumstances occurring later. As Justice Holmes commented in
discussing this issue:
But the value of property at a given time depends upon the relative intensity of the
social desire for it at that time, expressed in the money that it would bring in the
market.. . . Like all values, as the word is used by the law, it depends largely on
more or less certain prophecies of the future; and the value is no less real at that
time if later the prophecy turns out false than when it comes out true.G
Ordinarily, where an intervening estate or remainder interest is
concerned, references will, of course, have to be made to predictability as set
forth in the mortality tables using the assumed rate of interest. The
Commissioner's determination on the basis of mortality figures and this
assumed rate of interest is certainly entitled to a presumption of
correctness. Where, however, the actual interest rate clearly and
materially differs from that used by the Commissioner in making his
determination, the taxpayer is free to insist on the use of the actual interest
rate."" Likewise, when at the time of the gift or bequest the life
tenant's physical condition is such that his life expectancy is considerably
less than that predicted by the mortality tables, the value of the
remainder interest donated or bequeathed will be determined with reference
to his actual condition.5 7 Thus, in such instances, the factors upon which
the Commissioner bases the determination of value is clearly subject
A word should be said about the valuation of a remainder interest.
The preferred view is that the value of such an interest should be
determined by valuing the residue subject to the life estate, rather than
valuing the life estate and subtracting that value from the total residuary
Where the valuation of income interests is concerned, the same rules
should prevail. The Commissioner's tables should be presumed correct
in the absence of other circumstances. Where the actual facts indicate
a mortality different from that shown by the tables, or an interest rate
different from that used by the Commissioner, the tables should not
measure the value of the gift."
II. GIFTS INTER VIVos
A gift for income tax purposes must have all the characteristics of
a valid gift at common law, including effectiveness,10 donative intent,0 '
and no consideration in return. 2 A gift, however, may be part of a
larger transaction, featuring quid pro quo, for instance, a bargain sale
to a charity where the gift may be the difference between the fair market
value of that sold and its sales price. 3 There can be no "Indian-giving."
If conditions are attached to a gift, the possibility that the donee will
not receive the beneficial enjoyment must be so remote as to be
negligible. 4 Although a deduction will not be allowed for a gift to a trust
where the creator 65 or anyone else 6 may revoke the trust or deprive
the charity of its interest, the creator may retain the right to select
the charitable recipients within an acceptable group and the amounts
donated.67 Under the prevailing view, at least some of the trustees may
be members of the donor's family. 8
In general, a charitable gift is effective if the donee is assured of
a benefit. Congress is not inclined to sacrifice revenue where only the
Whether on the cash or accrual method of accounting, the individual
taxpayer can deduct only contributions actually made.ca The signing
of a pledge will confer no right to a deduction. 70 Payments, other than
cash, must be of enough substance to be capable of valuation. For
example, permission to use a building is not a payment but merely a
privilege.' But the donation of the use of property in the form of a
determinable fee, though of indefinite duration, does constitute a
payment.' The donation of a leasehold interest should qualify as a payment
since the donee has something of substance in the form of fixed rights,
but the Service would probably not sanction it. The right to occupy
real property for a period of time seems to involve as much property
right as the right to build additional stories on top of a building, which,
as a grant of air space, has been held to qualify for deduction.7 3
Since the beginning of the income tax, a deduction has been allowed
only for gifts of money or property, which includes all manner of
tangible personalty and such intangibles as income 4 and remainder"
No deduction, however, is available for a gift of services,7" such as
those of a carpenter who donated his talents to build observations posts
for a county civil defense organization.77 It is not always clear what
constitutes services. Donations of blood"' and free advertising space
by a newspaper79 have been considered gifts of services.
Out-of-pocket expenses, though, incurred by a taxpayer while
rendering services to a charity are deductible. Uniforms not of general utility,
commuting expenses, and meals and lodging while away from home8"
would be suitable examples. Thus, the expenses of a member of a church
or the American Legion to attend a convention as a delegate, 81
transportation costs to and from a local hospital or church, 82 and the expenses
of civil defense volunteers in traveling to watch atomic bomb tests and
attending meetings8 3 are deductible. Nonreimbursable expenses of local
governmental officials who serve without compensation are also
deductible.8 4 The cost of meals during the performance of services for local
charities is deemed a purely personal expense satisfying a taxpayer's
needs and, unlike commuting expenses which benefit the charity, are not
Date of Gift
Because of the percentage limitation on gifts and variations in
taxpayer's income and tax rates, it is essential to fix accurately the date
gifts become effective. As a general proposition, the date property is
delivered is the date of gift.86 When checks are delivered, the gift is
effective even though they are cashed in a later year. 87 Where the mails
are used, the date of posting constitutes delivery since the mail is agent
for both sender and recipient.88 In the case of stock, delivery of a
properly endorsed certificate marks the date of gift. But if the certificate is
delivered to some agent of the donor, such as a bank or broker, or to the
issuing corporation or its agent, the gift is effective when transferred on
the books of the corporation. 9 Objects which render delivery
inconvenient may be donated without actual exchange of physical possession.
Paintings can be effectively given by delivery of a deed of gift under
seal without being removed from storage.90
When conditions are attached to a gift, the gift is effective only after
the donee has accepted them.91 Hence, a gift of a check to a hospital
accompanied by oral instructions that it be used for specific research
became effective in a later year when the hospital agreed to comply with
Gifts of Specific Types of Property
Remainder interest (life incom e plat). For many years, institutions
have noted the reluctance of potential donors to make substantial gifts
during their lifetime for fear that they, or close relatives, may need the
income to be earned on property which could ordinarily be the subject
of a charitable gift. To meet this objection, charities have encouraged
donations in the form of remainder interests. The gift may be made by
way of contract or trust. The income is payable to the donor or a
designated beneficiary for his lifetime, after which the corpus passes outright
to the charitable institution. The so-called life income contract was
favored in the early days because of a belief, sometimes well-founded,
that local laws did not permit the establishment of a trust. As far as the
Internal Revenue Service is concerned, in either case, a trust has been
established.9 3 Where the trust form is employed, it seems customary to
use a charitable institution as the trustee. Nonetheless, the tax results
are the same whether or not an independent trustee is appointed.
Whatever the form of the gift may be, the Service has long held that
the contribution of a remainder interest is deductible for income tax
purposes by the donor in the year of the gift.04 The value of the gift
is determined by reference to the gift tax regulations.° If the property
transferred under the life income contract or to the trust has a fair
market value in excess of or less than basis, there will be no taxable
gain or deductible loss to the donor. 0 For a number of years, the
Internal Revenue Service has affirmed that no gain is realized to the
donor of appreciated property even though it be contemplated at the
outset that property contributed will be sold by the donee institution
and invested in a particular kind of security. The realization of gain or
loss occurs on sale of the property by the trustee or the institution,
which is considered to be a trustee for these purposes. Any gain will,
therefore, be includable in the gross income of the trust. The trust,
however, will be entitled to a deduction under section 642(c) of the
Code because the gain is permanently set aside for the use of a charity. 7
Where the donor retains a life interest in the income of the trust, he
remains the owner of the trust within the meaning of section 677(a) of
the Code. Thus, the trust income is included in his return as if it had
92. Linwood A. Gagne, 16 T.C. 498 (1951).
93. Rev. Rul. 55-275, 1955-1 Cum. Bull. 295.
94. Rev. Rul. 55-620, 1955-2 Cum. Bull. 56; I.T. 3707, 1945 Cum. BulL 114; I.T. 1776
11-2 Cum. Bull. 151 (1923).
95. Treas. Reg. § 252512-5 (1954).
96. Rev. Rul. 55-275, 1955-1 Cum. Bull. 295.
97. Treas. Reg. § 1.642(c)-3 (1956).
been received directly by him. Therefore, if the corpus is invested in
taxexempt securities, the income of the trust will be tax-exempt in the hands
of the donor. Should the corpus be invested in a regulated investment
company, profit from the sale of investments by the company and
distributable under the instrument to the donor by the trust would
presumably retain its character as capital gains. Similarly, where the
beneficiary of such a trust is not the donor, distributions to him will
have the same character in his hands as they had in the hands of the
When the gift of the remainder interest to a charitable institution is
accompanied by the retention of a life estate in the donor, the corpus
will be included in the donor's estate for federal estate tax purposes.
However, the value of any interest therein which passes to the charity
at the death of the donor will be deductible from his gross estate."
Gifts of remainders have proved particularly beneficial to charitable
institutions in view of their attractiveness to donors in high tax brackets.
By means of a life income plan a donor can obtain a present deduction
for the value of the remainder interest and, at the same time, protect
himself and his family by the availability of the income. If the donor
or the beneficiary is in a high income tax bracket, the assets can be
invested in tax-exempt securities, the income being tax-free to the donor
or the beneficiary. If the donor is more modestly situated, the assets
can be invested in mutual funds or common stock suited to the nature
of his means. If taxes are not a major consideration, investment of the
corpus in the charitable institution's permanent endowment fund can
guarantee the donor a maximum safe return from stock professionally
managed and invested.
In private letter rulings with respect to these plans, the Internal
Revenue Service has raised questions which deserve more than passing
examination, particularly by the charitable institution which accepts life
income contracts or acts as trustee under such instruments. It has
suggested that the tax-exempt status of the institution itself may be
jeopardized if the operation with respect to such plans is substantial when
compared to that comprising the basis for the institution's exemption.
More significant is the Service's suggestion that activities in connection
with the plans, such as the offering of life income contracts on a widely
publicized basis, may constitute a trade or business regularly carried on
and not substantially related to the exercise of the organization's
charitable functions10° Finally, the Service has suggested that common
investment in a fund of a number of gifts, either in trust or under life
98. Int. Rev. Code of 1954, § 652(b).
99. Int. Rev. Code of 1954, § 2055(a).
100. See Int. Rev. Code of 1954, § 511, concerning the tax on the unrelated business
income of charities.
income contracts, may constitute an association taxable as a
corporation. 0 1
Income interest (short-term trusts). Ordinarily a taxpayer cannot
give away anticipated income without being taxed upon it when it is
realized by the donee, charitable or otherwise. A trust, the corpus of
which does not revert until the lapse of ten years, is a well-recognized
exception to this general rule. 02 In enacting the 1954 Code, Congress
provided donors tax exemption upon the income from property set aside
in trust for the benefit of certain charitable institutions for a relatively
shorter period of time. Under section 673(b), the grantor of a trust is
not taxable on the income if it is irrevocably payable for a period of at
least two years to an operating church, hospital, or educational
institution. Unless the grantor has a reversionary interest which exceeds five
per cent of the value of the corpus at the time of transfer, he is also
entitled to a deduction for the commuted value of the income set aside.
The reason for encouraging gifts of income to such institutions
apparently was the same as that behind the enactment of the extra ten
per cent deduction under section 170(b) (
) (A). The purpose of both
sections was "to aid these institutions in obtaining the additional funds
they need, in view of their rising costs and the relatively low rate of
return they are receiving on endowment funds." 0 3
In order to understand fully section 673(b), it is necessary to allude
to the situation which existed with respect to trusts prior to the Internal
Revenue Code of 1954. In that period, the Commissioner established
the "Clifford regulations" whereby trust income would be taxed to the
grantor where he could recover the principal or income before ten or, in
certain cases, fifteen years.0" - In formalizing a general rule based upon
ten years,0" Congress was persuaded that a much shorter period should
be applicable where the income is set aside for a school, hospital, or
church. Prior to that time, it had been clear that a donor was entitled to
a deduction for a contribution of income, under such circumstances, to
any qualified charitable institution."' On the other hand, because of the
"Clifford regulations," it was not clear how long the property had to be
set aside in order that the taxpayer might successfully avoid being taxed
on the income received by the charity. It should be noted that Congress
in enacting section 673(b) has imposed two limitations. First, the
property has to be set aside at least two years; secondly, the beneficiary of
101. See Int. Rev. Code of 1954, § SS4, especially exempting from taxation common
trust funds of banks.
102. nt. Rev. Code of 1954, § 673(a).
103. S. Rep. No. 1622, 83d Cong., 2d Sess. 29 (1954).
104. Treas. Reg. 118, § 39.22(a)-21 (1953).
105. Int. Rev. Code of 1954, § 673(a).
106. Rev. Rul. 194, 1953-2 Cum. BulL 128.
FORDItAM LAW REVIEW
the trust has to be an operating church, hospital, or educational
organization. Under the general rules of section 673, a grantor who wishes to
avoid being taxed upon the income set aside for any other charity will
have to donate the income for at least ten years.'0 7 Whatever the
duration of the trust, the donor will be denied a deduction for the charitable
contribution if he has a reversionary interest in the corpus which exceeds
five per cent of the value of the property transferred."' Thus, to be
entitled to the deduction of a gift of income, the grantor must transfer
the property effectively from his control forever. Yet, the corpus can
revert to the grantor's family or relations, and the grantor will be entitled
to the deduction. As a warning, Congress has on several occasions
considered denying the deduction where the property reverts to the grantor's
When the grantor has forever disposed of the corpus, there is the
added advantage of having the property out of his estate for federal
estate tax purposes. Note here that the value of the remainder interest
given to others constitutes a gift for gift tax purposes and must be
reported as such. Remainder interests, being future interests, are not
subject to the annual gift tax exclusion." 0
Limitationson gifts of remainderandincome interests. Special mention
should be made of the problem inherent in the limitation under section
170 regarding the amount of deduction. Under the Revenue Act of 1918,
individuals were allowed a deduction for contributions "to" charities.11'
Under the Revenue Act of 1921, the words "or for the use of" were
added after the word "to.""' 2 Shortly after enactment of the 1921
legislation, the Bureau of Internal Revenue had occasion to interpret the
phrase "for the use of" in terms repeated many times since, ruling that
such words intended to convey a meaning similar to "in trust for.""'
After the Revenue Act of 1921, the words "to" and "for the use of"
being used in conjunction, it was immaterial whether the gift was to or
in trust for a charitable institution. In either case, the deduction was
allowed. In enacting section 170(b) (
) (A), permitting the special ten
per cent deduction, Congress in 1954 revived the importance of the
distinction between "to" and "for the use of." The deduction up to ten per
cent of the taxpayer's adjusted gross income made available to individuals
is limited to a contribution to an operating church, educational
organization, or hospital.
The Internal Revenue Service has long held that a gift of a remainder
interest constitutes a gift to an institution. A remainder interest in bonds
after a life estate "was an immediate gift to the church of a definite right
which has a present cash value."'" 4 For a time the Commissioner was
reluctant to recognize the application of these holdings to section
Early in 1958, the Service began issuing private letter rulings which
confirmed that the present value of a remainder interest donated to the
specified charitable institutions was a contribution to such an
organization within the meaning of section 170(b) (
) (A), indicating that the
extra ten per cent deduction is available whether or not the institution
itself acts as the trustee of the property being transferred.
It seems equally clear that the gift of income under a short- (or long-)
term charitable trust does not qualify for the extra ten per cent
deduction. In enacting section 170(b) (
) (A), Congress stated:
It is to be noted that such charitable contribution must be paid to the organization
and not for the use of the organization. Accordingly, payments to a trust [v.here the
beneficiary is an organization described in said clauses (i), (ii), or (iii)] are not
included under this special rule."16
Congress apparently had in mind the provisions of section 673(b) and
intended that the deduction available with respect to a gift of income
under a short (or long) term trust should not qualify for the extra ten
per cent deduction.
Annuities. If the cost of the annuity purchased from a charity exceeds
its value, a deduction will be allowed for the excess." 7 The value of an
annuity is determined under the rules of section 101 (b) and the pertinent
regulations." 8 If the charity is not regularly engaged in issuing annuities,
the value of a contract is based upon estate and gift tax actuarial
Where the annuity is purchased with cash or unappreciated property,
the income taxation of the amounts received by the donor is governed
by section 72 of the Code and is relatively simple. The theory of this
section is that since part of the payments constitute return of capital,
the annuitant is able to exclude from income a portion of the yearly
payments representing a proportionate part of the annuity's cost. The
amount to be excluded is the yearly payments multiplied by a fraction,
the numerator of which is the cost of the annuity and the denominator
of which is the return expected by the annuitant considering the years
he has to live. The cost of the annuity is its value and excludes any
amount deemed to be a charitable gift. ° Take, for instance, a male
donor, age fifty-one, who purchases for $100,000 an annuity having a
value of about $54,000. Under the contract, payments totaling $3,000
are to be paid to hini each year. Considering the years he has to live, the
expected return under the contract is $74,100.21 The annuitant would
be able to exclude from income $2,186, which is $3,000 multiplied by the
fraction, 54,000/74,100. The remainder is ordinary income. He would,
of course, have made a charitable contribution of $46,000.
A special problem, however, exists when the annuity is purchased with
appreciated property. If the taxpayer uses appreciated property to
purchase an annuity from an insurance company, he will be treated as
though he had sold the property and used the cash to purchase the
annuity.'2 2 On the other hand, if an annuity is purchased from an
individual, the prevailing view is that the taxpayer should not be taxed on
the gain until he recovers his basis in the property used to purchase the
annuity. The rationale is that private annuities have no fair market value
because of the doubtful ability of individuals to pay over a period of time.
The Internal Revenue Service is actively examining whether annuities
purchased from a charity should be of the private type. For a
long time before charitable institutions were deeply involved, their
annuities were generally considered private. It is not unlikely that at
least some charities will be held to be writing annuities with readily
ascertainable market value in view of their financial stability, the
commercial manner in which they write annuities, and the tendency on the
part of the Service to declare that anything has some fair market value. 23
I.T. 2397, VII-1 Cum. Bull. 90 (1928), in which the value was arrived at by multiplying
the yearly payment ($2,500) by the present value ($5,457) of an annuity of $1 for life at
5%, the annuitant being seventy-two years old.
120. Raymond v. Commissioner, 114 F.2d 140 (7th Cir. 1940).
121. See Table I, Treas. Reg. § 1.72-9 (
). The expected return is produced by
multiplying $3,000 by the multiple shown in the table, 24.7.
122. Commissioner v. Kann's Estate, 174 F.2d 357 (3d Cir. 1949); J. Darsie Lloyd, 33
B.T.A. 903 (1936), acq., 1950-2 Cum. Bull. 3; Rev. Rul. 239, 1953-2 Cum. Bull. 53.
123. See G.C.M. 1022, VI-1 Cum. Bull. 12 (1927), in which immediate gain or loss
inured to a taxpayer who transferred property to a corporation in return for an annuity.
In the example given, assume the donor had transferred to the charity
property worth $100,000 which had a basis to him of $25,000. If the
annuity bought is deemed to have a fair market value, the donor is
taxable immediately in the amount of his gain, $29,000 ($54,000 minus
$25,000). However, if the annuity is private, the excludable portion of
the annuity payments will be considered as a return of capital until the
$25,000 cost is recovered. These payments would then constitute capital
gain until the full $29,000 gain has been reported. Thereafter, tax is
paid only on the difference between the annuity payment and the
excludable portion.2 4
Life insurance. A deduction will be allowed for both the assignment of
an insurance policy and the payment of premiums on the policy of which
a charity is beneficiary.2 As always, the gift must be complete, and the
charity must be the irrevocable assignee or beneficiary.1' The measure
of a gift of the policy is its cash surrender value,27 but the premiums
themselves constitute the gift where a charity is beneficiary. Payment
of premiums is not a gift to but for the use of the charity'2 and does not
qualify for the extra ten per cent deduction. However, it could be argued
that where the policy has been assigned to the charity, the continued
payment of premiums does constitute a gift to in the amount that the
cash surrender value is increased. Likewise, there should be no reason
why a gift of the policy should not be regarded as to the donee.
Fractiona interests. The size of property sometimes makes imperative
its donation in portions. The easiest method is by deed or other
instrument to convey to the charity the fractional interest desired, whether it
be an oil lease or land.13 0 As we shall see, when the right to income is
conveyed, care must be taken that the underlying principal be given also.
Where the donor wishes the charity to have the use of the entire property
from the beginning, as for example, a building, a lease arrangement may
be concluded with respect to the fraction not donated. The only
published ruling involves a lease of the fraction not donated at fair rental
value.3 1 It was clear that no grip was released on the undonated portion.
There is no reason why a rent-free lease is not possible, provided that
the charity's interest in the property not contributed is not the equivalent
The donor may wish to contribute the whole property to the charity,
taking back secured notes which are cancelled from time to time. This
plan has been sanctioned for years, even though the charity may have
been established by the donor. 13 2 Yet, recently, the Tax Court held that
a gift of the entire property took place in the initial year where the notes
were not meant to be consideration for the transfer and there was no
intention from the beginning that they be enforced. 188 Caution should
be exercised where the charity is family-sponsored and lacks funds for
the repayment of the indebtedness.
A variation of the plan involving an exchange of property for notes is
the transfer of property to a charity secured by an obligation in favor of
some third person.134 The taxpayer may wish to make contributions to
the charity which could be used to retire the mortgage. Much care must
be taken to relieve the donor from any liability on the indebtedness after
the transfer. Otherwise, any payment in reduction of the donor's
indebtedness will be income to him. 35
The donor may, of course, retain the use of the property contributed
by the retention of a life estate. The amount of the contribution is the
value of the remainder interest. One plan which has enjoyed some
success is the establishment of a revocable trust for the lifetime of the
donor, the remainder interest being in the charity. If the settlor wishes
to make a contribution within the limitations imposed by section 170, he
can cause a certain fraction of the trust to become irrevocable each year.
The amount of the deduction is the value of the remainder interest to
which the charity has an undisputed right.
Paintings and other objects of art, the enjoyment of which the donor
wishes to retain, have become attractive subjects of charitable giving.
Under Revenue Ruling 57-293,s11 a taxpayer may dispose of an art
object, or any fractional interest therein, 37 but reserve possession of the
whole during his lifetime. His deduction is the present value of that
fraction of the remainder interest donated. One may also donate a
fractional present interest in the art object but retain the remaining portion.
In this case, the gift is valid if the charity receives all the rights, such as
possession, dominion, and control, consistent with the tenancy in common
thus created. If, for instance, a one-third interest is transferred and the
donee may possess and enjoy the art object four months of the year, the
gift qualifies. But it will fail if the donee's rights are restricted by his
retention of full possession for an indefinite period.
132. Andrews v. Burnet, 50 F.2d 332 (D.C. Cir. 1931).
133. Minnie E. Deal, 29 T.C. 730 (
134. Consideration should be given to the effect of Int. Rev. Code of 1954, § 514
(unrelated business), if the property produces income.
135. Herff v. Rountree, 140 F. Supp. 201 (M.D. Tenn. 1956).
136. Rev. Rul. 57-293, 1957-2 Cum. Bull. 153.
137. Rev. Rul. 58-455, 1958-2 Cum. Bull. 100.
Gifts Involving Taxable Income
The possibility that a contribution may give rise to taxable income in
the donor cannot be overlooked. In this area, two general rules deserve
First, if income itself is the subject of a gift, it will be taxed to the
donor upon its receipt by the charity. In an early ruling, the
Commissioner held that a taxpayer who contributed bond coupons to a charity
was required to include the interest in his taxable income when it was
received by the donee.1 18 Thus, the donor may be entitled to a deduction,
but the tax benefit is neutralized by the treatment of any income
contributed as being taxable to him.
On the other hand, despite periodic sniping by the Commissioner,"
it is clear that the gift of appreciated property does not of itself give rise
to taxable income in the donor. This follows from the rather obvious
fact that the donor has not realized any gain as where he sells or
exchanges property. Thus, it may be advantageous for a taxpayer, with
a charitable commitment, to contribute an asset having a value in excess
of its tax basis. This is particularly true where the alternative is sale of
asset and contribution of the proceeds. It is important to realize that
the benefit accruing to the charity which receives the donation is
increased by the amount of the tax which would otherwise have been paid
by the donor.
Whether or not taxable income results from the contribution of
property depends in large measure on which of the above rules is applicable.
The dust apparently has settled over the battle which raged with respect
to the contribution of inventory items-livestock, grain, and machinery
produced. In an early ruling, 40 the Commissioner, perturbed that a
taxpayer could obtain one deduction for the cost of growing agricultural
products and another for their fair market value upon a gift to a charity,
held that at the time of gift, there was a realization of income in the
amount of the fair market value of the products contributed. The ruling
was directly contrary to two later court decisions which had placed the
contribution of inventory items under the second rule above. In
Campbell v. Prothro,4' ' a rancher gave calves to the YAICA. In a lucid opinion,
the court, denying the Commissioner's right to tax the rancher on
appreciation of the calves, predicated its decision upon the following points:
) no vested right to income was conveyed away within the principle
enunciated in Helvering v. Horst;142 the animals do not represent income
per se; (2) the taxation of unrealized appreciation requires a sale; (3) a
gift of appreciated property is a gift of both the principal and the
anticipated income which is outside the Horst principle.
Subsequently, the Commissioner relented in part and revoked his
ruling, recognizing that the fair market value of inventory was not
taxable at the time of donation and that the donor was entitled to a
contribution deduction for the fair market value of an inventory item.1 4 3 Still,
he attempted to limit fair market value to cost or the amount the donor
would have to spend in his most favorable market to replace the donated
property immediately. Still wary of double deductions, the Commissioner
further stated that the following adjustments would have to be made
with respect to the cost of producing the property donated: (
items of producing the property must be removed from inventory; (2)
cost items deducted in prior years must reduce the amount of the
contribution. The unsoundness of the position thus taken was finally
recognized by the Commissioner's present regulations,144 which embody
the foregoing principle with two notable exceptions. Foremost is a
belated acknowledgment that fair market value is measured by sales
price, not replacement cost. In holding that value is determined by the
price at which an object could have been sold in the lowest usual market
in which the taxpayer customarily sells at the time of contribution, the
Commissioner merely confirms long standing case law. The second is that
the Commissioner does not require expenses of producing the article
deducted in prior years to reduce the amount of the contribution. The
regulations state that costs and expenses in the year of contribution are
not deductible, as well as those in a prior year, but only if they are
reflected in cost of goods sold in the year of contribution, in which case
costs of goods must be reduced accordingly.
Quite significantly, the satisfaction of a pledge comes within the second
rule above. No gain or loss is realized by the satisfaction of a pledge
with appreciated property.' 45 This conclusion follows from a decision
not to treat the satisfaction of a pledge in the same manner as the
satisfaction of a debt.
Logically, the contribution of section 306 stock to a charity will not
result in income to the donor. Section 306 stock is certain preference
stock described in that section of the Code, the disposition of which
leads to the receipt of ordinary income. The Commissioner holds that no
income results to the donor of section 306 stock either upon the
con142. 311 U.S. 112 (
143. Rev. Rul. 55-138, 1955-1 Cum. Bull. 223.
144. Treas. Reg. § 1.170-1(c) (1954).
145. Rev. Rul. 55-410, 1955-1 Cum. Bull. 297.
tribution or upon the subsequent sale of the stock by the charity.'*" The
taxpayer will be entitled to a charitable contribution equal to the fair
market value of the stock.
Another kind of gift which does not give rise to taxable income is the
sale of appreciated property at its basis to the donor. A deduction is
available for the excess of the value over the sales price. The
Commissioner in private rulings has held that no taxable gain results from this
transaction if the sales price is equal to or below basis. On the other
hand, if the taxpayer disposes of real estate to a charity in an
installment sale, rather than on a bargain sale basis, and makes a gift of each
apnonseudalopfaaynmiennsttaallsmietnftalolsblidguaet,iohne uwnidllerbesetcatxioanble45a3s othfotuhgehChoedeh.1ad7
Where property subject to an indebtedness is contributed, there is a
danger that the transaction may be considered as one giving rise to
taxable income. This is particularly true where the indebtedness exceeds
the donor's tax basis. For example, a donor wishes to contribute $10,000
by means of a house worth $40,000 in which he has a tax basis of
$20,000. He places a mortgage in the amount of $30,000 and contributes
the property subject thereto, taking a deduction for the $10,000, the
difference between the fair market value and his equity. Although there
are no published rulings or cases on this point, it is the Commissioner's
present view that the transaction gives rise to taxable income.1 s
However, the transaction may possibly be treated as a sale of the property to
the charity for the amount of the liability assumed. The taxation of
such transfer does not embody concepts entirely new to our taxing
system. In certain tax-free reorganizations, section 357 taxes to the
transferor as a gain upon the sale of an asset the excess of the amount
of the liability to which the property is subject over its basis. In such a
case, the gain may be capital or ordinary income depending on how the
property was held by the transferor. On the other hand, the
Commissioner may treat the transaction as resulting in income under the general
provisions of section 61 of the Code, therefore taxable at ordinary rates.
One type of gift to be wary of pertains to that group of tax devices
once promoted by financial counsel in the interest of their clients, but
not encouraged by charities. It was observed that if property was
transferred to a charity subject to an indebtedness, the interest of which was
prepaid by the donor, a deduction might be available not only for the
interest but also for a like amount as a charitable contribution of the
enhanced value of the gift. Taxpayers in brackets above fifty per cent
might actually make money on the gift. A variation in the case of bonds
146. Rev. Rul. 57-328, 1957-2 Cum. Bull. 229.
147. Rev. Rul. 55-157, 1955-1 Cum. Bull. 293.
148. See Merritt, The Incentives for Charitable Giving, 36 Taxes 646, 655 (
subject to an indebtedness was to contribute the bond just before the
receipt of an interest payment. The taxpayer here deducted the interest
to carry the indebtedness and also the unreceived interest payment which
added to the value of the gift. Section 170(b) (4), added in 1958,140
reduces the charitable contribution by the interest prepaid for any period
after the making of the gift and, in the case of bonds, by any interest to
carry them before the date of the gift, but only to the extent that income
from the bonds is not includable in the donor's income.
The nature of a charitable bequest is so similar to a lifetime gift that
it might appear that the differences are hardly worth mentioning.
However, for tax purposes, there are some distinctions worthy of
At the outset, it should be noted that insofar as taxes are concerned,
the over-all advantage lies with the lifetime gift. Not only is the gift
deductible for income tax purposes, but also the property is out of
the donor's estate and hence not subject to the estate tax. When the
donor dies after having made a deductible gift to a charity, a double
tax benefit is thus enjoyed. The life income plan detailed above is a
particularly happy example of "having your cake and eating it too."
The donor, who donates a remainder to a charitable institution after
reserving the income to himself for his life, has in effect made a
testamentary disposition of the property. He has set aside the remainder
irrevocably for the institution concerned. Moreover, in the year of gift,
he obtains a deduction for the value of the remainder for income tax
purposes. Ordinarily, this deduction is subject to the general twenty
per cent limitation of section 170(b) (
) (A). However, if the remainder
is payable to an operating educational organization, hospital, or church,
the extra ten per cent limitation under section 170(b) (
) (A) is
applicable. Even where the income is payable to another beneficiary after
the life of the donor, a partial duplication of tax benefits is obtained in
that the value of the remainder at the time of gift is deductible for
income tax purposes, and the value of the remainder at the time of the
donor's death is excluded from the donor's gross estate.
The general characteristics of the federal estate tax merit review.
First, as previously indicated, there is no limit on the size of the
charitable bequest for deduction purposes. However, whereas the income tax
benefit of a charitable gift is available to any taxpayer depending upon
149. Technical Amendments Act of 1958, § 12, 72 Stat. 1606, amending Int. Rev.
Code of 1954, § 170(b).
his rate, the charitable bequest affords an estate tax benefit primarily in
the case of an estate of some substance, because only an estate in excess
of the $60,000 exemption is subject to the federal estate tax. Where the
decedent is married and leaves half of his estate to his wife, the bequest
to the spouse is deductible to the extent of one-half of the adjusted gross
estate. In such a case, the estate must thus exceed $120,000 before there
is a federal estate tax and a benefit from a charitable bequest. On the
other hand, the rate of tax is rapidly progressive once a federal estate tax
is assessable. The tax rate increases from zero at $60,000 to thirty per
cent at $160,000. Thereafter, the rate increases gradually so that a tax
in excess of sixty per cent is not reached until the estate exceeds
$4,000,000. The lesson to be learned is that even in a modest estate the
deduction for a charitable bequest may prove of substantial value.
Mention should be made of the state tax aspect of charitable bequests,
which is sometimes overlooked. Local death tax duties often take the
form of an inheritance tax on the beneficiary receiving a bequest.
Although the rate does not usually exceed fifteen per cent, it is not unusual
for that rate to be imposed upon the whole bequest without reduction
by way of exemption. For example, a Maryland bequest to a collateral
heir is taxable at the rate of seven and one-half per cent. Thus, even
a small estate may reap some state tax benefit from a charitable bequest.
It should be kept in mind that some states impose an inheritance tax
on a bequest to an out-of-state charity and invalidate charitable bequests
made within a certain period before the decedent's death.
Before dealing with the specific problems inherent in charitable
bequests, it might be well to mention several situations where the charitable
bequest may serve a special purpose. By use of a charitable bequest, a
decedent can actually increase the amount of income available to his
wife or some other beneficiary. The bequest of a remainder after a life
estate is, of course, deductible for federal estate tax purposes. By
reducing the federal estate tax on the decedent's estate, such a bequest
actually increases the assets remaining after taxes and, therefore, the
income which is payable to the surviving beneficiary. This could be of
particular benefit in the case of a childless couple who wish protection
during their lifetimes. Note also that a charitable bequest may, under
some circumstances, provide the means by which a decedent retains
control of a family corporation for his heirs. By making a bequest of
stock in a family corporation to a family foundation, a decedent may
reduce the estate tax on his estate. If the estate is large, the savings
may be substantial, and the need to provide funds for the federal estate
tax greatly reduced. As a result, other family stock need not be sold
and effective control can be retained, at least for a time.
Passage of Property to Charity
Bequests. These dispositions account for most of the charitable
deductions from the gross estate. 15 0 A charitable bequest may take many
forms, whether in the foremost part of a decedent's will or in the
residuary clause. It may convey to the charity such interests as a right to a
sum of money or property, a right to income, 51 or a remainder interest
after the payment of an annuity.1 52 The donee must be one described
in section 2055(a), and the charity must have at the decedent's death
some interest of ascertainable value.
Exercise of a power. Section 2055(b)(
) makes the exercise of a
power of appointment a useful tool in charitable giving. If the decedent
exercises, fails to exercise, releases, or causes to lapse a general power
of appointment over property which is includable in his estate under
section 2041, and by this action, property passes to a charity, the estate
will be allowed a deduction. If, for example, a decedent dies possessed
of a general power of appointment granted him in the will or trust
indenture of another, the exercise of that general power in favor of a
charity qualifies for the estate tax deduction. If the charity is a taker
in default of the exercise of the power by the decedent and he fails to
exercise the power, a deduction would also be obtained.
Disclaimer.5'3 It often results that where the residue of an estate
passes to a charity, a refusal by a legatee to accept the bequest due him
will increase the amount going to charity. Section 2055 allows the
charitable deduction for any amount which accrues to a charitable institution
as result of such disclaimer. The disclaimer must be made before the
estate tax return is due to be filed (i.e., fifteen months after decedent's
death)." 4 A power in a person to divert, by invasion, appointment, or
otherwise, what passes to a charity often causes a charitable bequest to
fail. These powers of diversion may be the subject of disclaimer just as
powers of appointment. 5 5 Section 2055 (a) provides that if this power to
consume, invade, or appropriate is terminated by the death of the holder,
150. A deduction from the gross estate may of course result from an inter vivos transfer,
for instance, where decedent has transferred property to charity from which he has carved
out a life estate. Estate of James M. Schoonmaker, 6 T.C. 404 (1946). Life insurance
payable to a charity which is includable in the gross estate is another example.
151. Estate of Mary V. Eagan, 18 B.T.A. 875 (1930).
152. Estate of Augustus Coe Gurnee, 24 B.T.A. 461 (1931).
153. The word means a complete and unqualified refusal to receive rights before any
acceptance, where there is no consideration for the act. See S. Rep. No. 1631, 77th Cong.,
2d Sess. 240 (1942).
154. The disclaimer need not become irrevocable until the statute of limitations runs
on the assessment of an estate tax deficiency. Conf. Rep. No. 2586, 77th Cong., 2d Sess
155. Commissioner v. Macaulay's Estate, 150 F.2d 847 (2d Cir. 1945).
or otherwise before the due date of the return and before any exercise,
the effect will be that of a formal disclaimer.
Enforceable pledges. Under Section 2053(c) (
) (A), payment by
decedent's estate of his charitable pledge or subscription which is
enforceable 5 6 and evidenced by a promissory note or otherwise will be treated
as a claim against the estate to the extent the same is allowable under
section 2055 if it were a bequest. Before 1942, the Internal Revenue
Service insisted that to qualify for a deduction as a claim, a pledge had
to be not only enforceable but also contracted bona fide and received by
the decedent for an adequate consideration. 5 7
Eighty-year holder of a power. A charitable deduction results from
a disclaimer only if a charity is the taker in default. In 1956, Congress
relaxed this rule in the case of a decedent who leaves property in trust
for a surviving spouse of relatively short life expectancy.u6 If the spouse
is entitled to the all of the net income for life, is over eighty years at the
decedent's death, and has a power over the corpus adequate to pass
property to charities described in section 2055(a)(2), the decedents
estate is entitled to a charitable deduction upon the following conditions:
) the surviving spouse must receive none of the principal during her
life; (2) the surviving spouse must execute within one year after the
decedent's death an affidavit specifying the extent to which the power
in favor of these organizations is intended to be exercised; and (3) the
power must actually be exercised in accordance with the affidavit. The
amount of the deduction will be that portion of the trust transferred to
charity reduced by the life estate.5 9
Disallowance of Deduction
Takers by purchase.With the statutory exceptions already mentioned,
it is essential that the charity take as a result of an act of the decedent.
No deduction will be allowed for a transfer which, uncertain or
defective at the decedent's death, later ripens through negotiations with the
heirs. The heirs, not the decedent, will have made the transfer, and the
charity will have taken by purchaseY ° As an illustration,""' a will
pro156. Enforceability is a question of local law. Estate of Stanley T. SochalskM, 14
T.C.M. 72 (1955). Allowance of an uncontested charitable claim by a probate court is
not proof of enforceability. Ibid.
157. G.C.M. 4784, VIII-2 Cum. Bull. 385 (1929).
158. Int. Rev. Code of 1954, § 2055(b)(2), amended by 70 Stat. 107S (1956).
159. Under Int. Rev. Code of 1954, § 6503(e), the statute of limitations for the
assessment or collection of the tax on the decedent's estate is suspended until thirty days after
the same period with respect to the estate of the surviving spouse.
160. Rev. Rul. 55-335, 1955-1 Cum. Bull. 455. If the charity takes under a compromise
as a legatee, say, under a prior will, the rule does not apply. Dumont's Estate v.
Commissioner, 150 F.2d 691 (3d Cir. 1945).
161. Robbins v. Commissioner, 111 F.2d 828 (lst Cir. 1940).
vided for a bequest after a life estate to Amherst College, the monetary
amount of which was left to the discretion of the life tenant. This
bequest, being indefinite, would have supported no deduction. However,
following the decedent's death, the heirs reached an agreement as to the
amount passing to Amherst, and the estate was administered accordingly.
The court, disallowing the deduction, declared:
Hence, it is clear that whatever rights Amherst College has now come to it through
the compromise agreement and not under the will of the testator .... Obviously, to
allow a deduction of the gift .. . to Amherst College . . .is to allow a deduction
not under the will of the testator but under the compromise agreement. This would
nnoott abedaedturacntisofnerpetarmxiosnsibtlhee upnrdoeprertthyisosftathtueted.e'0ce2dent at the date of his death. It is
The same result is reached where bequests to charity are void under
state law (for instance, because the will was executed too soon before
death) and the takers in default nonetheless agree to honor the
decedent's wishes. 1 3 In these cases, the courts generally hold that the
transfer arose not from the decedent's will but from the bounty of
Conditional bequests. Though it has many applications, the principle
is simple that a charitable deduction will not be allowed unless the
possibility that the transfer will not become a fact is so remote as to be
negligible.' 65 If at the decedent's death it is uncertain that the charity
will benefit, the deduction is lost and cannot be perfected by some later
event. The foregoing does not mean that the facts must be known to
establish the certainty of a charitable bequest, but only that they exist.
In one case, 16 a charity was to benefit only if three aliens were not alive
at the time of the decedent's death. Though it was not known for years
that the aliens had predeceased the decedent, the deduction was upheld
since the gift had vested when the testator died.
There are many factors causing uncertainty. Quite frequently, the
amount passing to charity is left to the discretion of others. No
charitable deduction will result from a provision in a will that a relative of
the decedent shall make charitable gifts in such amounts and to such
institutions as he shall decide." 7 Obviously, such bequests create no
interest that a charity can calculate.
162. Id. at 832.
163. Estate of William A. Carey, 9 T.C. 1047 (1947).
164. Rev. Rul. 55-335, 1955-1 Cum. Bull. 455; Rev. Rul. 55-759, 1955-2 Cum. Bull. 607,
which disallowed a charitable deduction for property turned over to a religious order by
a legatee who, as a member, had taken a vow of poverty.
165. Treas. Reg. § 20.2055-2(b) (1954).
166. United States v. Sullivan, 213 F.2d 765 (1st Cir. 1954).
167. Rev. Rul. 55-335, 1955-1 Cum. Bull. 455; Norris v. Commissioner, 134 F.2d 796
(7th Cir. 1943) (gift of sum "not exceeding $5,000" held equivalent to gift of one cent).
A bequest often miscarries because conditions are attached to the
acceptance of the property.16 One decedent devised a farm to the city
of Milwaukee provided that it be maintained as a public park or, if not,
to other political subdivisions in succession. c9 The third devisee, a
county, after long deliberation accepted the property. Being influenced
by the decline of two charities to accept the property and the hesitance
accompanying the county's acceptance, the court held that the possibility
was not remote that charity would not accept the farm. Another
deduction was disallowed because the consent of the decedent's widow was
necessary before the charitable bequests should become effective. 10 A
bequest to a university for the construction of a dormitory, provided that
within a year funds be raised to make up the difference in construction
costs, is not deductible even if the money is procured in time.'7
A charitable bequest need not be unrestricted, but the conditions made
cannot be so onerous that there is even a small chance that the charity
will refuse the bequest. Each case presents a question of fact. It is
probably true that if charity does in fact accept the bequest, the
Government will find it difficult to argue about the conditions imposed. It might
be prudent to consult the charity at the time the will is drafted if any
material conditions are to be placed on a charitable bequest. Where the
bequest is dependent upon the happening of some event subsequent to
the decedent's death, the deduction will not ordinarily be allowed. In
Humes v. United States,'72 the decedent's cash bequests to charity could
not mature unless a fifteen-year-old unmarried girl died without issue
before attaining the age of forty. The Court declared:
One may guess, or gamble on, or even insure against, any future event. The Solicitor
General tells us that Lloyds of London will insure against having twins. But the
fundamental question in the case at bar, is not whether this contingent interest can
be insured against or its value guessed at, but what construction shall be given to
a statute. Did Congress in providing for the determination of the net estate taxable,
intend that a deduction shall be made for a contingency, the actual value of which
cannot be determined from any known data? Neither taxpayer, nor revenue
officereven if equipped with all the aid which the actuarial art can supply-could do more
than guess at the value of this contingency. It is clear that Congress did not intend
that a deduction should be made for a contingent gift of that character.j 79
Most courts will not try to guess what chance a charity may have of
being actually enriched. If established actuarial tables based upon
168. United States v. Fourth Nat'l Bank., 83 F.2d 85 (10th Cir. 1936) (bequest to
church for building if an equal amount is raised).
169. Churchill v. United States, 6S F. Supp. 267 (E.D. Wis. 1946).
170. First Trust Co. v. Reynolds, 137 F.2d 518 (8th Cir. 1943).
171. But see H.R. 7991, 86th Cong., 1st Sess. (
172. 276 U.S. 487 (1928).
173. Id. at 494.
mortality, such as those showing the present value of a remainder interest
after a life estate, cannot be employed, the deduction will often be denied
as being impossible of calculation. 7 4 The bequest can be deferred but
must be assuredY5. Extraneous facts, however, may show that a charity
has a vested interest in property that passes only upon the fulfillment
of a contingency, such as the death of a life tenant without issue. Most
courts allow a deduction when the life tenant by an operation has been
rendered incapable of having children.170 There appears to be a conflict
when the life tenant is of advanced age. 7
A conditional bequest may occur also when a charity's remainder
interest is subject to erosion because invasion of corpus for the life
tenant is permitted. If the extent of invasion is guided by an
ascertainable standard, the likelihood and the quantum thereof can be thus
computed and the charitable deduction made certain. If no standard is set,
the charity's share may vary from all of the remaining corpus to nothing.
Invasion of the corpus to provide funds "that may be necessary to
suitably maintain [a life tenant] in as much comfort as she now enjoys"
has been held to constitute such a standard. 7 8 The following powers did
not provide a suitable standard: 6
[T]o expend . . . either income or principal, for the pleasure, comfort and welfare
of my mother. The first object to be accomplished is to take care of and provide for
my mother in such manner as she may desire.... 179
[T]o invade the corpus 'at such time or times as my said Trustee shall in its sole
discretion deem wise and proper for the comfort, support, maintenance, and/or
happiness of my said wife, and it is my wish and will that in the exercise of its
discretion with reference to such payments from the principal of the trust fund to my
said wife, May L. Field, my said Trustee shall exercise its discretion with liberality
to my said wife, and consider her welfare, comfort and happiness prior to claims of
residuary beneficiaries under this trust."80
As far as the Service is concerned, if the power of invasion is governed
by such words as "comfort and support," a standard will be supplied
which will be the beneficiary's mode of living prior to the decedent's
death.'"' Once the standard is ascertained, the amount of corpus, if any,
which will be used to meet the necessity of invasion can be computed.
The value of the charity's interest will be reduced, of course, by such
It is clear that the tax benefit is obtained only to the extent that
charity profits. Section 2055 (c) 8 2 requires, therefore, that the deduction
be offset by any taxes which reduce the charitable bequest.'P
Calculation of the federal estate tax is complicated enough when only this tax
does the reducing. If the charitable bequest is reduced by the estate tax,
the deduction is decreased and the tax increased. The final federal
estate tax must be calculated by an algebraic formula or by trial and
error. But when the deduction must be reduced by state taxes as well,
the problem is compounded. The complexity can be illustrated by the
example of a charitable bequest by a District of Columbia resident of
a remainder interest in the residue following a life estate. The amount
passing to charity is not known until the federal estate and District of
Columbia inheritance taxes are calculated. These taxes, being paid here
from the residue, reduce what the charity receives. The District of
Columbia tax cannot be determined until the federal tax, which is a
deduction from the former, is known, and the federal tax cannot be
computed without ascertaining the charitable deduction, which
necessitates knowing both District of Columbia and federal taxes. It is
sufficient to say that the mathematical problem is substantial. If the
charitable bequest is taxed by the state, the confusion is further increased.
The only way to save an executor the mental torture of such problems
is to place the charitable bequest where it will not be reduced by taxes,
as in a paragraph preceding the residue with provision that taxes be paid
out of the residue.
Deduction of Local and Foreign Death Taxes on Charitable Bequests
As was suggested, not all charitable bequests are free of local and
foreign death taxes. These usually constitute a credit against the federal
estate tax.1 4 But the credit is limited in amount, and no credit obtains
181. Rev. Rul. 54-285, 1954-2 Cum. Bull. 302.
182. Treas. Reg. § 20.2055-3 (1954).
183. To what extent the charity will bear the taxes is a matter of apportionment under
184. Int. Rev. Code of 1954, § 2011.
in the case of taxable estates of $40,000 or less. Thus, local and foreign
death taxes may not be recouped by deduction from the federal estate
tax. It follows that a deduction for these death taxes on charitable
bequests would be more beneficial than a credit. Section 2053(d)
provides just this opportunity if the executor of the estate elects the
deduction before the statute of limitations runs upon the assessment of a
deficiency. Conditions to the deduction are either: (
) that the decrease
in federal tax resulting must inure to a charity (as where it receives the
residue from which federal taxes are paid); or (2) that the federal estate
tax is apportioned among all the estate's distributees (as where under
local law each legatee bears his proportionate share of these taxes based
upon the net bequest to him).
There is much discussion these days about the erosion of our tax base
due to the deductions provided, and the privileges given, various
taxpayers. The effect, it is alleged, is to distribute the tax burden
unequally and to cause unnecessarily high tax rates. The upshot of all
the suggestions on this subject to date seems to be something like a
gross income tax. There will then indeed be a broad tax base. All
taxpayers will compute their taxes based upon percentages of income
figured alike, without deductions or any regard for ability to pay.
It has been suggested that the charitable deduction constitutes one of
these undermining factors. Yet, any erosion because of the charitable
deduction stems not from today's events but from the very beginning of
the tax laws from which it originated.
It is true that the charitable deduction deprives the Government of
taxes, and if it were abolished, the Government would of course benefit.
Therefore why not eliminate it? The answer is simple. Elimination of
the charitable deduction would mean the demise of a large segment of
our charitable institutions which depend upon it to stay solvent. If these
are not to succumb, funds must come from that source which will benefit
at their expense, the Government. Then the result will be
governmentsponsored schools, hospitals, and churches. 185 The money to support the
government in these endeavors will inevitably come from the taxpayer.
It is submitted that the charitable deduction does have a place in our
tax laws since it relieves taxpayers generally of obligations they might
have to assume were it not for those generous people throughout the
country who support charities and incidentally derive tax benefits.
7. Int . Rev. Code of 1954 , § 2055 , provides: 17 . The first estate tax appeared in the Revenue Act of 1916, ch . 463 , §§ 200 - 12 , 39
Stat. 777 - 80 . 18 . The maximum charitable deduction is subject to recomputation when adjusted
Mim. 43 , 1952 - 2 Cum. Bull. 112 . Adjusted gross income should include capital gains even
though the alternate method of computing the tax under § 1201 is used . Schultz v. United
States , 156 F. Supp . 811 (S.D. Fla . 1957 ); Springs v . United States , 153 F. Supp . 514
(W.D.S .C. 1957 ). These cases held that "taxable income" need not be reduced by capital
should be analogous. 19 . John Danz, 18 T.C. 454 ( 1952 ). 20. S. Rep . No. 1622 , 83d Cong., 2d Sess . 207 ( 1954 ). 21 . Mortimer C. Adler , 5 B.T.A. 1063 ( 1927 ).
29. Automobile Club v. Commissioner , 353 U.S. ISO ( 1957 ). 41. O.D. 979 , 2 Cum. Bull. 148 ( 1920 ), and TM) . 2998 , 2 Cum. Bull. 151 ( 1920 ), limited
value of property, however, soon became the measure of gift . T.). 3490, I-1 Cum. Bull.
118 ( 1923 ). 42. I.T. 1776 , 11 - 2 Cur. Bull. 151 ( 1923 ); I.T. 3707 , 1945 Cum. Bull. 114 ; Rev . Rul.
55- 620 , 1955 - 2 Cum. Bull. 56 ; Rev . Rul. 55 - 275 , 1955 - 1 Cum. Bull. 295 . 43. See Commissioner v. Wheeler , 324 U.S. 542 ( 1945 ); Helvering v . Reynolds Tobacco
Co., 306 U.S. 110 ( 1939 ). 44 . See H.R. Rep . No. 1860 , 75th Cong., 3d Sess . 19 ( 1938 ). 45. S. Rep . No. 1567 , 75th Cong., 3d Sess . 14 ( 193S ). 46 . Treas . Regs. § 1 . 170 - 1 (c) ( 1958 ); § 20 . 2031 - 1 (b) ( 1954 ); § 25 . 2512 - 1 ( 1954 ); Rev.
Rul. 59 - 60 , 1959 Int. Rev. Bull. No. 9, at 8 . 47. See , e.g., Elmhurst Cemetery Co. v. Commissioner , 300 U.. 37 ( 1937 ); West View
Cemetery Ass'n v . Commissioner , 95 F.2d 714 ( 5th Cir . 1933 ). 48 . For guides to the valuation of stock in closely held corporations , see Rev. Rul . 59 - 60 ,
1959 Int. Rev. Bull. No. 9, at 8 . 49. T.B.R . 57 , 1 Cum. Bull. 40 ( 1919 ). 50 . Treas . Reg. § 1 . 170 -(1) (c)( 1958 ). 51 . Treas . Regs. § 25 . 2512 - 5 (f) ( 1954 ) (gift tax ); § 20 . 2031 - 7 (f) ( 1954 ) (estate tax).
See also Treas . Reg. § 20 . 2055 - 2 ( 1954 ). 52 . See Table 38 of U.S. Life Table & Actuarial Tables 1939 -1941, published by the
11 ( 195S ). 53. See note 118 infra. 54 . Hanley v. United States , 63 F. Supp . 73 , 81 (Ct. Cl. 1945 ). 55 . Ithaca Trust Co. v. Commissioner, 279 U.S. 151 , 155 ( 1929 ). Here a testator left
ment of the mortality tables . 56. Hanley v. United States , 63 F. Supp . 73 ( Ct. Cl . 1945 ). In this case, a remainder
invested in low income bonds, the court allowed an interest rate of 3% for life eztate,
contrary to Table A in art. 10 of Treas . Reg. 81 .10 ( 1942 ), which uses 4%. The effect was
to reduce the value of the life estate and increase that of the remainder . 57. Herron v. Heiner , 24 F.2d 745 (Wi). Pa . 1927 ); Estate of Nicholas Murray Butler,
18 T.C. 914 ( 1952 ) ; Estate of Nellie H . Hennings, 10 T.C. 323 ( 1948 ). 58 . Estate of Leonard S. Waldman, 46 B.T.A. 291 ( 1942 ), acq., 1942 - 1 Cum.
Bull. 17; Estate of William Nelson Cromwell , 24 B.T.A. 461 ( 1931 ). Contra, Hanley v.
United States , 63 F. Supp . 73 ( Ct. Cl . 1945 ). 59 . Perhaps this is what the Commissioner had in mind when he noted in Treas . Reg.
§ 1 . 170 - 1 (e) ( 1958 ):
determining the value of the gift or bequest for income or estate tax purposes. 60. It was early held that an ineffectual gift of an unassignable World War I adjusted
compensation certificate was not deductible . I.T. 2559 , X-1 Cum . Bull. 122 ( 1931 ). 61 . The dedication of land to a county for the widening of a road, necessary to secure
a plot plan for the sale of lots, was not a gift . Rev. Rul . 57 - 488 , 1957 - 2 Cum. Bull. 157 . 62. Payments accompanied by benefits, such as the annual dues of an organization
which bestows privileges, are not deductible . Rev. Rul . 54 - 565 , 1954 - 2 Cum.Bull. 95 . Not
able from, and confer no other privileges than, other forms of church giving. A.R.M. 2 , 1
Cum.Bull. 150 ( 1919 ). 63 . John M. Coulter , 9 T.C.M. 248 ( 1950 ). That portion of the admissions price to a
56- 120 , 1956 - 1 Cum.Bull. $ 14 . 64. Treas . Reg. § 170 - 1 (e) ( 1958 ). 65 . Security First Nat'l Bank , 28 B.T.A. 289 ( 1933 ). 66. I.T. 2403 , VII-1 Cum .Bull. 92 ( 1928 ). 67 . John Danz, 18 T.C. 454 ( 1952 ), acq., 1952-2 Cum. Bull. 1 . 68. See Barber v. Edwards , 130 F. Supp . 83 (M.D. Ga . 1955 ). Although there Is a dlvi80. This phrase means travel overnight, just as in Int . Rev. Code of 1954 , § 162 ( a) (2). 81 . Rev . Rul. 58 - 240 , 1958 - 1 Cum. Bull. 141 . 82. Rev . Rul. 56 - 508 , 1956 - 2 Cum. Bull. 126 . 83. Rev . Rul. 56 - 509 , 1956 - 2 Cum. Bull. 129 . 84. Rev . Rul. 59 - 160 , 1959 - 1 Cum. Bull. 59 . 85. Rev . Rul. 56 - 508 , 1956 - 2 Cum. Bull. 126 . 86. Treas . Reg. § 1 . 170 - 1 (b) ( 1958 ). 87 . Estate of Modie J. Spiegel, 12 T.C. 524 ( 1949 ), acq., 1949-2 Cum. Bull. 3 . 88. Witt 's Estate v . Fahs , 160 F. Supp . 521 (S.D. Fla . 1956 ); Treas. Reg. § 1 . 170 - 1 (b)
( 1958 ). 89 . Treas . Reg. § 1 . 170 - 1 (b) ( 1958 ). 90. A. W. Mellon, 36 B. TA . 977 ( 1937 ), acq., 1938-1 Cum. Bull . 20 . 91. Rev . Rul. 465 , 1954 - 2 Cum. Bull. 93 . 107. Int . Rev. Code of 1954 , § 673 (a). 108. Int. Rev. Code of 1954 , § 170 ( b) (1) (D) . 109 . See H.R. 8381 , 85th Cong., 2d Sess. § 9 ( 1958 ), as passed by the House . This
section was deleted by the Senate Finance Committee . See Trammell, supra note 78, at 461. 110. Int. Rev. Code of 1954 , § 2503 (b); Treas. Reg. § 25 . 2503 - 3 ( 1954 ). 111 . Revenue Act of 1918 , ch. 18 , § 214 (a) ( 11 ), 40 Stat. 1068 . 112. Revenue Act of 1921 , ch. 136 , § 214 (a)( 11 ), 42 Stat. 241 . 113. I.T. 1867 , 1- 2 Cum. Bull. 155 ( 1923 ). 114. I.T. 1776 , HI-2 Cum Bull . 151 ( 1923 ). 115 . But see Rev . Rul . 57 - 507 , 1957 - 2 Cum. Bull. 511 . 116. S. Rep . No. 1622 , 83d Cong., 2d Sess . 207 ( 1954 ). 117 . Treas . Reg. § 1 . 170 -2 (a)(3)(i) ( 1958 ). If someone other than the donor shares
in the annuity payments, there is an additional gift . Rev. RuL 55-383 , 1955 - 1 Cum. Bull.
233. 118. Treas . Reg. § 1 . 101 - 2 (e) ( 1) (iii) (b ) ( 1957 ). Value is here based upon whether the
issuer is (1) an insurance company or an organization regularly engaged in the busness of
issuing contracts with the insurance company as coinsurer or reinsurer; (2) an organization
not described in (1) but regularly engaged in issuing contracts; or (3) an organization not
described in (1) or (2). If the charity issues more than annuity, the Service would consider
it in category (2), and the value would be the cost of a comparable contract purchased
from an insurance company. The table recommended is the 1937 Standard Annuity
Mortality Table . 119 . Treas . Reg. § 20 . 2031 - 7 (f) ( 1954 ). For an example using outmoded tables, see 124. For an excellent discussion of this subject, see Cutler , Various Aspects of Contribu-
tions to Charities, N.Y.U. 17th Inst. on Fed. Tax 1117 , 1127 ( 1959 ). 125 . Ernst R. Behrend , 23 B.T.A. 1037 ( 1931 ), acq, X-2 Cur . Bull. 5 ( 1931 ). 126 . 01). 299 , 1 Cure. BulL 151 ( 1919 ). 127 . Ernst R. Behrend , 23 B.T.A. 1037 ( 1931 ), acq., X-2 Cur. BulL S ( 1931 ). 128 . Mortimer C. Adler , 5 B.T.A. 1063 ( 1927 ). 129 . Lester A . Nordan, 22 T.C. 1132 ( 1954 ) ; Rev . RuL 59-196 , 1959 - 1 Cur. Bull. 56 . 130. Rev . Rul. 58 - 261 , 1958 - 1 Curm. Bull. 143 . 131. Rev . Rul. 58 - 261 , 1958 - 1 Cure. Bull. 143 . 138. O.D. 120 , 1 Cum. Bull. 84 ( 1919 ). See also Helvering v . Horst , 311 US. 312
( 1940 ). 139 . See Gelfand , The Individual Income Tax Base and the Charitable Contributions
Deduction, 3 Tax Revision Compendium 441 . 140. I.T. 3910 , 194S - 1 Cum. Bull. 15 . 141. 209 F.2d 331 ( 5th Cir . 1954 ). See also White v . Broderick , 104 F. Supp . 213 (D.
Del . 1952 ). 174 . Commissioner v. Sternberger's Estate , 348 U.S. 187 ( 1955 ); Melerhof v . Higgins,
129 F.2d 1002 ( 2d Cir . 1942 ). 175 . Commissioner v. Sternberger's Estate , 348 U.S. 187 ( 1955 ). In United States v.
Dean , 224 F.2d 26 ( 1st Cir . 1955 ), a charity would take if the testatrix's sister , aged 82 ,
predeceased two people, aged 67 and 68. The chance charity would benefit was not
having issue. The court thought mortality tables sufficient to evaluate this chance at 11-
to-1 in favor of the charity's receiving property, but disallowed the deduction because the
possibility of failure was not so remote as to be negligible. 176. United States v . Provident Trust Co., 291 U.S. 272 ( 1934 ). 177 . Deduction disallowed: Farrington v. Commissioner , 30 F.2d 915 ( 1st Cir . 1929 )
(life tenant, age 52); deduction allowed: City Bank Farmers' Trust Co . v. United States,
74 F.2d 692 ( 2d Cir . 1935 ) (life tenant, 59 years old); Ninth Bank & Trust Co . v.
United States , 15 F. Supp . 951 (E.D. Pa . 1936 ) (life tenants , 67 , 63, and 57 years old). 178 . Ithaca Trust Co. v. United States , 279 U.S. 151 ( 1929 ). 179 . Henslee v. Union Planters Nat'l Bank , 335 U.S. 595 , 596 ( 1949 ). 180 . Merchants Nat'l Bank v . Commissioner , 320 U.S. 256 , 257 - 58 ( 1943 ). 185 . See Chester , The Charitable Foundation in Wisconsin-Some Tax Considerations,
43 Marquette L. Rev . 301 ( 1959 - 60 ).