The late Dr. Jerry Pournelle wrote a column in Byte magazine beginning in the early years of the “microcomputer” era (the term before IBM came out with their Personal Computer when the common reference became PCs) on using the devices.

Dr. Pournelle often used the term “real soon now” in his column to deal with some new feature a vendor promised was almost ready to be released, but which quite often would either take years to arrive or never actually see the light of day.  The term came to mind when I saw a story posted on Tax Notes Today Federal regarding the issue of IRS guidance on excess deductions on termination and comments made by Catherine Hughes, attorney-adviser, Treasury Office of Tax Legislative Counsel in response to questions at a District of Columbia Bar Conference on January 23.[1]

While PLR 201720003 is not really a major ruling—the IRS is merely granting an estate a right to make a late election—it does provide a reminder about the special rules that impact trusts and estates when claiming charitable contributions.  These rules are in some ways more restrictive than those imposed on other taxpayers, but in other ways they are far more generous.

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Charitable contributions are complicated with regard to trusts.  In Chief Counsel Advice 201651013 the question involved a modification of a trust that allowed the distribution of trust assets to a charity. 

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In the case of Harvey C. Hubbell Trust et al. v. Commissioner; T.C. Summary Opinion 2016-67 the IRS was disallowing all of the charitable contributions claimed by the trust for 2009.  The IRS did not deny that the contributions were made.  The agency also did not claim the recipients were not qualified charitable organizations. Rather, the IRS claimed the contributions were not made according to the terms of the will that established the trust.

The trust in question had been making charitable contributions for many years (going back to 1985) and in quite substantial amounts.  For instance, in 1985 the trust made (and deducted) charitable contributions of $384,976, and had made contributions, often in excess of $100,000, for many years between 1985 and 2008.  Apparently the IRS had never raised any issue with regard to these contributions—likely because the IRS had never examined the trust.

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Charitable contribution deductions for trusts and estates are subject to unique rules that are discussed in Private Letter Ruling 201611002.  The conclusions of this ruling aren’t at all surprising, but it does provide a good review of the topic, including the differences between “accounting” and “tax” definitions for trusts.

The trust was the beneficiary of an IRA of a decedent who established the trust.  The trust provided that the IRA is to be distributed to a charitable organization.  That raises a tax concern since the trust is a taxable entity and the IRA, rather than being left directly to the tax exempt charity, had been left to the trust which was to distribute the IRA to that organization.

In the case of Green v. United States, 116 AFTR 2d ¶ 2015-5394, US District Court, Western District of Oklahoma, Case No. CIV-13-1237-D the court was asked to decide the application of the charitable contribution provisions applicable to trusts and estates under IRC §642 and a donation of appreciated property.

The Tax Court, expanding on its earlier decision in the case of Estate of Belmont v. Commissioner, 144 TC No. 6, found that an estate which did not (unlike Belmont) end up spending a portion of the funds supposedly set aside for charity still failed to meet the requirements of §642(c) to have permanently set aside funds for charity due to a pending legal dispute.

In the case of Estate of DiMarco v. Commissioner, T.C. Memo. 2015-184 the Court found that the estate was aware of a potential contest by both the end of the tax year where it attempted to claim to have set aside the funds and by the date the return was actually filed.  The potential dispute over the estate could reasonably be expected to require an expenditure of estate funds and it more than than remotely possible that the expenditure could be substantial.