§ 1.642(c)-3 Adjustments and other special rules for determining unlimited charitable contributions deduction.
(a) Income in respect of a decedent. For purposes of §§ 1.642(c)-1 and 1.642(c)-2, an amount received by an estate or trust which is includible in its gross income under section 691(a)(1) as income in respect of a decedent shall be included in the gross income of the estate or trust.
(b) Determination of amounts deductible under section 642(c) and the character of such amounts—(1) Reduction of charitable contributions deduction by amounts not included in gross income. If an estate, pooled income fund, or other trust pays, permanently sets aside, or uses any amount of its income for a purpose specified in section 642(c) (1), (2) or (3) and that amount includes any items of estate or trust income not entering into the gross income of the estate or trust, the deduction allowable under § 1.642(c)-1 or § 1.642(c)-2 is limited to the gross income so paid, permanently set aside, or used. In the case of a pooled income fund for which a deduction is allowable under paragraph (c) of § 1.642(c)-2 for amounts permanently set aside, only the gross income of the fund which is attributable to net long-term capital gain (as defined in section 1222(7)) shall be taken into account.
(2) Determination of the character of an amount deductible under section 642(c). In determining whether the amounts of income so paid, permanently set aside, or used for a purpose specified in section 642(c)(1), (2), or (3) include particular items of income of an estate or trust, whether or not included in gross income, a provision in the governing instrument or in local law that specifically provides the source out of which amounts are to be paid, permanently set aside, or used for such a purpose controls for Federal tax purposes to the extent such provision has economic effect independent of income tax consequences. See § 1.652(b)-2(b). In the absence of such specific provisions in the governing instrument or in local law, the amount to which section 642(c) applies is deemed to consist of the same proportion of each class of the items of income of the estate or trust as the total of each class bears to the total of all classes. See § 1.643(a)-5(b) for the method of determining the allocable portion of exempt income and foreign income. This paragraph (b)(2) is illustrated by the following examples:
Example 1.
A charitable lead annuity
trust has
the calendar year as its
taxable year, and is to pay an annuity of $10,000 annually to an
organization described in section 170(c). A provision in
the trust governing instrument provides that
the $10,000 annuity should be deemed to come first from
ordinary income, second from short-term
capital gain, third from fifty percent of
the unrelated business
taxable income, fourth from long-term
capital gain, fifth from
the balance of unrelated business
taxable income, sixth from tax-exempt income, and seventh from principal. This provision in
the governing instrument does not have economic effect independent of
income tax consequences, because
the amount to be paid to
the charity is not dependent upon
the type of income from which it is to be
paid. Accordingly,
the amount to which section 642(c) applies is deemed to consist of
the same proportion of each class of
the items of income of
the trust as
the total of each class bears to
the total of all classes.
Example 2.
A
trust instrument provides that 100 percent of
the trust's
ordinary income must be distributed currently to an
organization described in section 170(c) and that all remaining
items of income must be distributed currently to B, a noncharitable beneficiary. This income ordering provision has economic effect independent of
income tax consequences because
the amount to be paid to
the charitable
organization each
year is
dependent upon
the amount of
ordinary income the trust earns within that
taxable year. Accordingly, for purposes of section 642(c),
the full
amount distributed to charity is deemed to consist of
ordinary income.
(3) Other examples. For examples showing the determination of the character of an amount deductible under § 1.642(c)-1 or § 1.642(c)-2, see examples 1 and 2 in § 1.662(b)-2 and paragraph (e) of the example in § 1.662(c)-4.
(c) Capital gains included in charitable contribution. Where any amount of the income paid, permanently set aside, or used for a purpose specified in section 642(c) (1), (2), or (3), is attributable to net long-term capital gain (as defined in section 1222(7)), the amount of the deduction otherwise allowable under § 1.642(c)-1 or § 1.642(c)-2, must be adjusted for any deduction provided in section 1202 of 50 percent of the excess, if any, of the net long-term capital gain over the net short-term capital loss. For determination of the extent to which the contribution to which § 1.642(c)-1 or § 1.642(c)-2 applies is deemed to consist of net long-term capital gains, see paragraph (b) of this section. The application of this paragraph may be illustrated by the following examples:
Example 1.
Under
the terms of
the trust instrument,
the income of a
trust described in
§ 1.642(c)-2 (b)(3)(i) is currently distributable to A during his life and
capital gains are allocable to corpus. No provision is made in
the trust instrument for
the invasion of corpus for
the benefit of A. Upon A's death
the corpus of
the trust is to be distributed to M University, an
organization described in section 501(c)(3) which is exempt from taxation under section 501(a). During
the taxable year ending December 31, 1970,
the trust has long-term
capital gains of $100,000 from
property transferred to it on or before October 9, 1969, which are permanently set aside for charitable purposes.
The trust includes $100,000 in
gross income but is
allowed a
deduction of $50,000 under section 1202 for
the long-term
capital gains and a charitable contributions deduction of $50,000 under section 642(c)(2) ($100,000 permanently set aside for charitable purposes less $50,000
allowed as a
deduction under section 1202 with respect to such $100,000).
Example 2.
Under
the terms of
the will, $200,000 of
the income (including $100,000
capital gains) for
the taxable year 1972 of an
estate is distributed, one-quarter to each of
two individual beneficiaries and one-half to N University, an
organization described in section 501(c)(3) which is exempt from taxation under section 501(a). During 1972
the estate has
ordinary income of $200,000, long-term
capital gains of $100,000, and no
capital losses. It is assumed that for 1972
the estate has no
other items of income or any
deductions other than those discussed herein.
The entire
capital gains of $100,000 are included in
the gross income of
the estate for 1972, and N University receives $100,000 from
the estate in such
year. However,
the amount allowable to
the estate under section 642(c)(1) is subject to
appropriate adjustment for
the deduction allowable under section 1202. In view of
the distributions of $25,000 of
capital gains to each of
the individual beneficiaries,
the deduction allowable to
the estate under section 1202 is limited by such section to $25,000 [($100,000
capital gains less $50,000
capital gains includible in income of
individual beneficiaries under section 662) × 50%]. Since
the whole of this $25,000
deduction under section 1202 is attributable to
the distribution of $50,000 of
capital gains to N University,
the deduction allowable to
the estate in 1972 under section 642(c)(1) is $75,000 [$100,000 (distributed to N) less $25,000 (proper
adjustment for section 1202
deduction)].
Example 3.
Under
the terms of
the trust instrument, 30 percent of
the gross income (exclusive of
capital gains) of a
trust described in
§ 1.642(c)-2(b)(3)(i) is currently distributed to B,
the sole income beneficiary.
Net capital gains (
capital gain net income for
taxable years beginning after December 31, 1976) and undistributed
ordinary income are allocable to corpus. No provision is made in
the trust instrument for
the invasion of corpus for
the benefit of B. Upon B's death
the remainder of
the trust is to be distributed to M
Church. During
the taxable year 1972,
the trust has
ordinary income of $100,000, long-term
capital gains of $15,000, short-term
capital gains of $1,000, long-term
capital losses of $5,000, and short-term
capital losses of $2,500. It is assumed that
the trust has no
other items of income or any
deductions other than those discussed herein. All
the ordinary income and
capital gains and
losses are attributable to
amounts transferred to
the trust before October 9, 1969.
The trust includes in
gross income for 1972
the total
amount of $116,000 [$100,000 (
ordinary income) + $16,000 (total
capital gains determined without regard to
capital losses)]. Pursuant to
the terms of
the governing instrument
the trust distributes to B in 1972
the amount of $30,000 ($100,000 × 30%).
The balance of $78,500 [($116,000 less $7,500
capital losses) −030,000
distribution] is available for
the set-aside for charitable purposes. In determining
taxable income for 1972
the capital losses of $7,500 ($5,000 + $2,500) are
allowable in full under section 1211(b)(1).
The net capital gain (
capital gain net income for
taxable years beginning after December 31, 1976) of $8,500 ($16,000 less $7,500) is
the excess of
the net long-term
capital gain of $10,000 ($15,000 less $5,000) over
the net short-term
capital loss of $1,500 ($2,500 less $1,000).
The deduction under section 1202 is $4,250 ($8,500 × 50%), all of which is attributable to
the set-aside for charitable purposes. Accordingly, for 1972
the deduction allowable to
the trust under section 642(c)(2) is $74,250 [$78,500 (set-aside for M) less $4,250 (proper
adjustment for section 1202
deduction)].
Example 4.
During
the taxable year a
pooled income fund, as defined in
§ 1.642(c)-5, has in addition to
ordinary income long-term
capital gains of $150,000, short-term
capital gains of $15,000, long-term
capital losses of $100,000, and short-term
capital losses of $10,000. Under
the Declaration of
Trust and pursuant to State law net long-term
capital gain is allocable to corpus and net short-term
capital gain is to be distributed to
the income beneficiaries of
the fund. All
the capital gains and
losses are attributable to
amounts transferred to
the fund after July 31, 1969. In view of
the distribution of
the net short-term
capital gain of $5,000 ($15,000 less $10,000) to
the income beneficiaries,
the deduction allowed to
the fund under section 1202 is limited by such section to $25,000 [($150,000 (long-term
capital gains) less $100,000 (long-term
capital losses)) × 50%]. Since
the whole of this
deduction under section 1202 is attributable to
the set-aside for charitable purposes,
the deduction of $50,000 ($150,000 less $100,000) otherwise
allowable under section 642(c)(3) is subject to
appropriate adjustment under section 642(c)(4) for
the deduction allowable under section 1202. Accordingly,
the amount of
the set-aside
deduction is $25,000 [$50,000 (set-aside for
public charity) less $25,000 (proper
adjustment for section 1202
deduction)].
Example 5.
The facts are
the same as in
example 4 except that under
the Declaration of
Trust and pursuant to State law all
the net capital gain (
capital gain net income for
taxable years beginning after December 31, 1976) for
the taxable year is allocable to corpus of
the fund.
The fund would thus include in
gross income total
capital gains of $165,000 ($150,000 + $15,000). In determining
taxable income for
the taxable year the capital losses of $110,000 ($100,000 + $10,000) are
allowable in full under section 1211(b)(1).
The net capital gain of $55,000 ($165,000 less $110,000) is available for
the set-aside for charitable purposes under section 642(c)(3) only in
the amount of
the net long-term
capital gain of $50,000 ($150,000 long-term gains less $100,000 long-term
losses).
The deduction under section 1202 is $25,000 ($50,000 × 50%), all of which is attributable to
the set-aside for charitable purposes. Accordingly,
the deduction allowable to
the fund under section 642(c)(3) is $25,000 [$50,000 (set-aside for
public charity) less $25,000 (proper
adjustment for section 1202
deduction)].
The $5,000 balance of
net capital gain (
capital gain net income for
taxable years beginning after December 31, 1976) is taken into
account in determining
taxable income of
the pooled income fund for
the taxable year.
(d) Disallowance of deduction for amounts allocable to unrelated business income. In the case of a trust, the deduction otherwise allowable under § 1.642(c)-1 or § 1.642(c)-2 is disallowed to the extent of amounts allocable to the trust's unrelated business income. See section 681(a) and the regulations thereunder.
(e) Disallowance of deduction in certain cases. For disallowance of certain deductions otherwise allowable under section 642(c) (1), (2), or (3), see sections 508(d) and 4948(c)(4).
(f) Information returns. For rules applicable to the annual information return that must be filed by trusts claiming a deduction under section 642(c) for the taxable year, see section 6034 and the regulations thereunder.
(g) Payments resulting in state or local tax benefits—(1) In general. If the trust or decedent's estate makes a payment of gross income for a purpose specified in section 170(c), and the trust or decedent's estate receives or expects to receive a state or local tax benefit in consideration for such payment, § 1.170A-1(h)(3) applies in determining the charitable contribution deduction under section 642(c).
(2) Effective/applicability date. Paragraph (g)(1) of this section applies to payments of gross income after August 27, 2018.
[T.D. 7357,
40 FR 23741, June 2, 1975;
40 FR 24361, June 6, 1975, as amended by T.D. 7728,
45 FR 72650, Nov. 3, 1980; T.D. 9582,
77 FR 22484, Apr. 16, 2012; T.D. 9864,
84 FR 27530, June 13, 2019]
