[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.642(c)-2]

[Page 21-25]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.642(c)-2  Unlimited deduction for amounts permanently set aside 
for a charitable purpose.

    (a) Estates. Any part of the gross income of an estate which 
pursuant to the terms of the will:
    (1) Is permanently set aside during the taxable year for a purpose 
specified in section 170(c), or

[[Page 22]]

    (2) Is to be used (within or without the United States or any of its 
possessions) exclusively for religious, charitable, scientific, 
literary, or educational purposes, or for the prevention of cruelty to 
children or animals, or for the establishment, acquisition, maintenance, 
or operation of a public cemetery not operated for profit,

shall be allowed as a deduction to the estate in lieu of the limited 
charitable contributions deduction authorized by section 170(a).
    (b) Certain trusts--(1) In general. Any part of the gross income of 
a trust to which either subparagraph (3) or (4) of this paragraph 
applies, that by the terms of the governing instrument:
    (i) Is permanently set aside during the taxable year for a purpose 
specified in section 170(c), or
    (ii) Is to be used (within or without the United States or any of 
its possessions) exclusively for religious, charitable, scientific, 
literary, or educational purposes, or for the prevention of cruelty to 
children or animals, or for the establishment, acquisition, maintenance, 
or operation of a public cemetery not operated for profit,

shall be allowed, subject to the limitation provided in subparagraph (2) 
of this paragraph, as a deduction to the trust in lieu of the limited 
charitable contributions deduction authorized by section 170(a). The 
preceding sentence applied only to a trust which is required by the 
terms of its governing instrument to set amounts aside. See section 
642(c)(6) and Sec. 1.642(c)-4 for disallowance of a deduction under 
this section to a trust which is, or is treated under section 4947(a)(1) 
as though it were, a private foundation (as defined in section 509(a) 
and the regulations thereunder) that is not exempt from taxation under 
section 501(a).
    (2) Limitation of deduction. Subparagraph (1) of this paragraph 
applies only to the gross income earned by a trust with respect to 
amounts transferred to the trust under a will executed on or before 
October 9, 1969, and satisfying the requirements of subparagraph (4) of 
this paragraph or transferred to the trust on or before October 9, 1969. 
For such purposes, any income, gains, or losses, which are derived at 
any time from the amounts so transferred to the trust shall also be 
taken into account in applying subparagraph (1) of this paragraph. If 
any such amount so transferred to the trust is invested or reinvested at 
any time, any asset received by the trust upon such investment or 
reinvestment shall also be treated as an amount which was so transferred 
to the trust. In the case of a trust to which this paragraph applies 
which contains (i) amounts transferred pursuant to transfers described 
in the first sentence of this subparagraph and (ii) amounts transferred 
pursuant to transfers not so described, subparagraph (1) of this 
paragraph shall apply only if the amounts described in subdivision (i) 
of this subparagraph, together with all income, gains, and losses 
derived therefrom, are separately accounted for from the amounts 
described in subdivision (ii) of this subparagraph, together with all 
income, gains, and losses derived therefrom. Such separate accounting 
shall be carried out consistently with the principles of paragraph 
(c)(4) of Sec. 53.4947-1 of this chapter (Foundation Excise Tax 
Regulations), relating to accounting for segregated amounts of split-
interest trusts.
    (3) Trusts created on or before October 9, 1969. A trust to which 
this subparagraph applies is a trust, testamentary or otherwise, which 
was created on or before October 9, 1969, and which qualifies under 
either subdivision (i) or (ii) of this subparagraph.
    (i) Transfer of irrevocable remainder interest to charity. To 
qualify under this subdivision the trust must have been created under 
the terms of an instrument granting an irrevocable remainder interest in 
such trust to or for the use of an organization described in section 
170(c). If the instrument granted a revocable remainder interest but the 
power to revoke such interest terminated on or before October 9, 1969, 
without the remainder interest having been revoked, the remainder 
interest will be treated as irrevocable for purposes of the preceding 
sentence.
    (ii) Grantor under a mental disability to change terms of trust. (A) 
To qualify under this subdivision (ii) the trust must have been created 
by a grantor who was at all times after October 9, 1969, under a mental 
disability to

[[Page 23]]

change the terms of the trust. The term mental disability for this 
purpose means mental incompetence to change the terms of the trust, 
whether or not there has been an adjudication of mental incompetence and 
whether or not there has been an appointment of a committee, guardian, 
fiduciary, or other person charged with the care of the person or 
property of the grantor.
    (B) If the grantor has not been adjudged mentally incompetent, the 
trustee must obtain from a qualified physician a certificate stating 
that the grantor of the trust has been mentally incompetent at all times 
after October 9, 1969, and that there is no reasonable probability that 
the grantor's mental capacity will ever improve to the extent that he 
will be mentally competent to change the terms of the trust. A copy of 
this certification must be filed with the first return on which a 
deduction is claimed by reason of this subdivision (ii) and subparagraph 
(1) of this paragraph. Thereafter, a statement referring to such medical 
opinion must be attached to any return for a taxable year for which such 
a deduction is claimed and during which the grantor's mental 
incompetence continues. The original certificate must be retained by the 
trustee of the trust.
    (C) If the grantor has been adjudged mentally incompetent, a copy of 
the judgment or decree, and any modification thereof, must be filed with 
the first return on which a deduction is claimed by reason of this 
subdivision (ii) and subparagraph (1) of this paragraph. Thereafter, a 
statement referring to such judgment or decree must be attached to any 
return for a taxable year for which such a deduction is claimed and 
during which the grantor's mental incompetence continues. A copy of such 
judgment or decree must also be retained by the trustee of the trust.
    (D) This subdivision (ii) applies even though a person charged with 
the care of the person or property of the grantor has the power to 
change the terms of the trust.
    (4) Testamentary trust established by will executed on or before 
October 9, 1969. A trust to which this subparagraph applies is a trust 
which was established by will executed on or before October 9, 1969, and 
which qualifies under either subdivision (i), (ii), or (iii) of this 
subparagraph. This subparagraph does not apply, however, to that portion 
of any trust, not established by a will executed on or before October 9, 
1969, which was transferred to such trust by a will executed on or 
before October 9, 1969. Nor does it apply to that portion of any trust, 
not established by a will executed on or before October 9, 1969, which 
was subject to a testamentary power of appointment that fails by reason 
of the testator's nonexercise of the power in a will executed on or 
before October 9, 1969.
    (i) Testator dying within 3 years without republishing his will. To 
qualify under this subdivision the trust must have been established by 
the will of a testator who died after October 9, 1969, but before 
October 9, 1972, without having amended any dispositive provision of the 
will after October 9, 1969, by codicil or otherwise.
    (ii) Testator having no right to change his will. To qualify under 
this subdivision the trust must have been established by the will of a 
testator who died after October 9, 1969, and who at no time after that 
date had the right to change any portion of such will pertaining to such 
trust. This subdivision could apply, for example, where a contract has 
been entered into for the execution of wills containing reciprocal 
provisions as well as provisions for the benefit of an organization 
described in section 170(c) and under applicable local law the surviving 
testator is prohibited from revoking his will because he has accepted 
the benefit of the provisions of the will of the other contracting 
party.
    (iii) Testator under a mental disability to republish his will. To 
qualify under this subdivision the trust must have been established by 
the will of a testator who died after October 8, 1972, without having 
amended any dispositive provision of such will after October 9, 1969, 
and before October 9, 1972, by codicil or otherwise, and who is under a 
mental disability at all times after October 8, 1972, to amend such 
will, by codicil or otherwise. The provisions of subparagraph (3)(ii) of 
this

[[Page 24]]

paragraph with respect to mental incompetence apply for purposes of this 
subdivision.
    (iv) Amendment of dispositive provisions. The provisions of 
paragraph (e) (4) and (5) of Sec. 20.2055-2 of this chapter (Estate Tax 
Regulations) are to be applied under subdivisions (i) and (iii) of this 
subparagraph in determining whether there has been an amendment of a 
dispositive provision of a will.
    (c) Pooled income funds. Any part of the gross income of a pooled 
income fund to which Sec. 1.642(c)-5 applies for the taxable year that 
is attributable to net long-term capital gain (as defined in section 
1222(7)) which, pursuant to the terms of the governing instrument, is 
permanently set aside during the taxable year for a purpose specified in 
section 170(c) shall be allowed as a deduction to the fund in lieu of 
the limited charitable contributions deduction authorized by section 
170(a). No amount of net long-term capital gain shall be considered 
permanently set aside for charitable purposes if, under the terms of the 
fund's governing instrument and applicable local law, the trustee has 
the power, whether or not exercised, to satisfy the income 
beneficiaries' right to income by the payment of either: an amount equal 
to a fixed percentage of the fair market value of the fund's assets 
(whether determined annually or averaged on a multiple year basis); or 
any amount that takes into account unrealized appreciation in the value 
of the fund's assets. In addition, no amount of net long-term capital 
gain shall be considered permanently set aside for charitable purposes 
to the extent the trustee distributes proceeds from the sale or exchange 
of the fund's assets as income within the meaning of Sec. 1.642(c)-
5(a)(5)(i). No deduction shall be allowed under this paragraph for any 
portion of the gross income of such fund which is (1) attributable to 
income other than net long-term capital gain (2) earned with respect to 
amounts transferred to such fund before August 1, 1969. However, see 
paragraph (b) of this section for a deduction (subject to the 
limitations of such paragraph) for amounts permanently set aside by a 
pooled income fund which meets the requirements of that paragraph. The 
principles of paragraph (b) or (2) of this section with respect to 
investment, reinvestment, and separate accounting shall apply under this 
paragraph in the case of amounts transferred to the fund after July 31, 
1969.
    (d) Disallowance of deduction for certain amounts not deemed to be 
permanently set aside for charitable purposes. No amount will be 
considered to be permanently set aside, or to be used, for a purpose 
described in paragraph (a) or (b)(1) of this section unless under the 
terms of the governing instrument and the circumstances of the 
particular case the possibility that the amount set aside, or to be 
used, will not be devoted to such purpose or use is so remote as to be 
negligible. Thus, for example, where there is possibility of the 
invasion of the corpus of a charitable remainder trust, as defined in 
Sec. 1.664-1(a)(1)(ii), in order to make payment of the annuity amount 
or unitrust amount, no deduction will be allowed under paragraph (a) of 
this section in respect of any amount set aside by an estate for 
distribution to such a charitable remainder trust.
    (e) Effective dates. Generally, the second sentence of paragraph (c) 
of this section, concerning the loss of any charitable deduction for 
long-term capital gains if the fund's income may be determined by a 
fixed percentage of the fair market value of the fund's assets or by any 
amount that takes into account unrealized appreciation in the value of 
the fund's assets, applies for taxable years beginning after January 2, 
2004. In a state whose statute permits income to be determined by 
reference to a fixed percentage of, or the unrealized appreciation in, 
the value of the fund's assets, net long-term capital gain of a pooled 
income fund may be considered to be permanently set aside for charitable 
purposes if the fund's governing instrument is amended or reformed to 
eliminate the possibility of determining income in such a manner and if 
income has not been determined in this manner. For this purpose, a 
judicial proceeding to reform the fund's governing instrument must be 
commenced, or a nonjudicial reformation that is valid under state law 
must be completed, by the date that is nine months after the later of 
January 2, 2004 or the effective date of the state

[[Page 25]]

statute authorizing determination of income in such a manner.

For treatment of distributions by an estate to a charitable remainder 
trust, see paragraph (a)(5)(iii) of Sec. 1.664-1.

[T.D. 7357, 40 FR 23740, June 2, 1975; 40 FR 24361, June 6, 1975, as 
amended by T.D. 9102, 69 FR 17, Jan. 2, 2004]