ART. 7. General.-The law provides that if the gift is made in property, the fair market value thereof at the date of the gift shall be considered the amount of the gift.

DEPARTMENT RULING

I. T. 2145 (IV-11-2074). 1925.

57

Inquiry is made relative to the proper treatment for income and gift tax purposes of the income from a revocable trust. It is suggested that there is a conflict between section 219 (g) of the Revenue Act of 1924 relative to the taxability of income from revocable trusts and Article 1, Regulations 67, relative to the gift tax on the distributions from a revocable trust.

Section 219 (g) of the Revenue Act of 1924 provides: Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor. (Italic supplied.) Article 1, Regulations 67, provides:

"The creation of a trust, where the grantor retains the power to revest in himself title to the corpus of the trust, does not constitute a gift subject to tax, but the annual income of the trust which is paid over to the beneficiaries shall be treated as a taxable gift for the year in which so paid." (Italic supplied.)

The taxpayer expresses the belief that it cannot be the intention of the Government to claim that the same income is taxable not only under the income tax law but also under the gift tax law. Under the Revenue Act of 1924 the creation of a revocable trust, as far as the grantor of such trust is concerned, is disregarded and does not change the taxable status of the grantor or affect his income or gift tax liability. The income from such a trust, therefore, is treated as income to the grantor and must be included with the grantor's other income as though the trust did not exist. (Section 219 (g).) It logically follows that the amounts of such income, when distributed to beneficiaries, are, in contemplation of law, gifts by the grantor to the beneficiaries, and that the grantor is subject to tax upon the transfer in the same manner as if the trust did not exist.

57 The remainder of this article, containing suggestions for estimating the fair market value of gifts, is substantially the same as Article 13 of Regulations 68, ante, p. 489. Ed.

CHAPTER II

DEDUCTIONS

SECTION 1-GIFTS BY RESIDENTS

Revenue Act of 1924.

SEC. 321. In computing the amount of the gifts subject to the tax imposed by section 319, there shall be allowed as deductions:

(a) In the case of a resident:

(1) An exemption of $50,000;

(2) The amount of all gifts or contributions made within the calendar year 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, or 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, or to a trustee or trustees, or fraternal society, order, or association operating under the lodge system, but only if such gifts or contributions 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 the amount of all gifts or contributions made within the calendar year by such corporation, trustee, or fraternal society, order, or association for a religious, charitable, scientific, literary, or educational purpose, or for the prevention of cruelty to children or animals, and the amount of all gifts or contributions made within the calendar year to the special fund for vocational rehabilitation authorized by section 7 of the vocational rehabilitation act;

(3) Gifts the aggregate amount of which to any one person does not exceed $500;

(4) An amount equal to the value of any property transferred by gift within the calendar year, which can be identified (A) as having been received by the donor within five years prior to the time of his making such gift, either from another person by gift or from a decedent by gift, bequest, devise, or inheritance, or (B) as having been acquired in

exchange for property so received. This deduction shall be allowed. only where a gift tax or an estate tax under this or any prior act of Congress was paid by or on behalf of the donor or the estate of such decedent, as the case may be, and only in the amount of the value placed by the Commissioner on such property in determining the value of the gift or the gross estate of such decedent, and only to the extent that the value of such property is included in the total amount of gifts made within the calendar year and not deducted under paragraph (2) or (3) of this subdivision.

Regulations 67.

ART. 8. Specific exemption.-There may be deducted from the total amount of gifts made by any resident donor during the calendar year a specific exemption of $50,000.

ART. 9. Transfers for public, charitable, religious, etc., uses.-There may be deducted from the total amount of gifts made by any resident donor during the calendar year the amount of all gifts made (1) 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; or (2) to or for the use of any corporation or association 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, where no part of the net earnings of the corporation or association inures to the benefit of any private stockholder or individual; or (3) to a trustee or trustees, or to a fraternal society, order, or association operating under the lodge system, provided such gifts are to be used by such trustee or trustees, fraternal society, order, or association exclusively for one or more of the purposes enumerated in (2); and (4) the amount of all gifts made within the calendar year to the special fund for vocational rehabilitation authorized by section 7 of the vocational rehabilitation act, if made prior to June 8, 1924, and by section 12 of the World War veterans' act of 1924, if made on or after June 8, 1924.

Where a trust is created for both a charitable and a private purpose, deduction may be taken of the amount of the beneficial interest in favor of the former only in so far as such interest is presently ascertainable, and hence severable from the interest in favor of the private use. Thus when money or property is placed in trust to pay the income to an individual during his

life and then to pay or deliver the principal to a charitable corporation or to apply it to a charitable purpose the present worth of the remainder interest is deductible. For the manner of determining the value see subdivision 7 of article 7.

The deduction is not limited in the case of resident donors to gifts to domestic corporations or for use within the United States when made to a trustee or trustees, a fraternal society, order, or association operating under the lodge system.

The term "domestic" when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any state or territory.

ART. 10. Religious, charitable, scientific, and educational corporations.-A corporation or association to which a gift is made must meet three tests to entitle the donor to deduct the amount thereof: (1) It must be organized and operated for one or more of the purposes specified in the statute; (2) it must be organized and operated exclusively for such purpose or purposes; and (3) no part of its net earnings shall inure to the benefit of private stockholders or individuals.

The donor is not deprived of the right to deduct an amount equal to the value of property so transferred by reason of the fact that private individuals are the recipients of the benefits which the corporation or association dispenses. Such right is, however, lost wherever any part of the net earnings of the corporation or association inures to the benefit of a private stockholder or individual. Thus if the shareholders or members of the corporation or association are entitled upon a dissolution thereof to receive the proceeds of its property, including accumulated net earnings, no right of deduction exists, even though the by-laws provide that the shareholders or members shall not receive dividends or other return upon their shares or interests.

ART. 11. Proof required.-In order to prove the right to this deduction the donor must submit such documents or evidence as may be requested by the Commissioner on review.

ART. 12. Where there is a power to divert to other purposes. Where the donee or trustee is empowered to divert the property or fund, in whole or in part, to a use or purpose. which would have rendered it, to the extent that it is subject. to such power, not deductible had it been directly so given by the donor, deduction will be limited to that portion, if any, of

the property or fund which is exempt from an exercise of such

power.

ART. 13. Gifts to individuals, when deductible.-The gifts deductible under this section are deductible only to the extent that the amount thereof is included in the total amount of gifts made during the calendar year.

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ART. 14. Deduction of the value of transfers taxed within five years. Where there is included in the total amount of gifts made during the calendar year property received by the donor by gift, bequest, devise, or inheritance within five years prior to the donor's gift thereof, or property acquired in exchange for property so received, the statute authorizes a deduction of the value thereof subject to the following conditions and limitations, namely:

(1) The property constituting the gift must have been received by the donor by gift, bequest, devise, or inheritance within five years prior to the date of his gift thereof.

(2) The property must be identified either as the same which the donor so received or acquired in exchange therefor.

(3) The property must have been included in the total amount of gifts of the person from whom it was received, or formed a part of the gross estate of a decedent from whom it was received by bequest, devise, or inheritance.

(4) A gift tax or an estate tax, as the case may be, must have been paid by or on behalf of such prior donor, or the estate of such decedent.

(5) The property, or that acquired in exchange therefor, in so far as it constitutes a part of the total amount of gifts, is, for the purpose of inclusion therein, to be valued as of the date of the gift.

(6) The deduction, however, cannot exceed the value which the Commissioner placed upon the property in determining the value of the total amount of gifts of the prior donor, or in determining the value of the gross estate of such decedent.

(7) The deduction is limited to the extent that the value of the property, or that acquired in exchange therefor, is included in the total amount of gifts. (See examples following the second paragraph below.)

(8) The deduction is further limited to the extent that the value of the property, or of that so acquired in exchange, is not