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.

The advice describes the facts as follows:

…[T]he trustees of Trust B filed an additional petition with the state court requesting certain modifications including (1) that Child 2's testamentary power of appointment be changed to an inter vivos power and (2) that he be allowed to immediately exercise such inter vivos power to appoint c% of the income and principal to Foundation 1 and d% to Foundation 2, thus causing Trust B to terminate. Foundation 1 and Foundation 2 are private foundations; Foundation 1 was preexisting, while Foundation 2 was newly created to receive funding at the termination of Trust B. On Date 4, the court approved the modification and termination, and the distribution of the trust assets to Foundation 1 and Foundation 2 was completed by the end of Year 2.

Initially no deduction was claimed by the trust for this deduction. But later the trust filed an amended return, arguing either for a charitable contribution deduction under IRC §642(c) as a charitable contribution or, failing that, as an income distribution deduction to the trust under IRC §661.

Under IRC §642(c) certain requirements must be met for a payment to a charity to qualify as a charitable contribution by a trust. The memo describes these provisions as follows:

Section 642(c)(1) provides generally that in the case of an estate or trust (other than a trust meeting the specifications of subpart B [a "simple trust" described in §§ 651 and 652]), there shall be allowed as a deduction in computing its taxable income (in lieu of the deduction allowed by § 170(a)), relating to deduction for charitable, etc., contributions and gifts) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in § 170(c) (determined without regard to § 170(c)(2)(A)). [emphasis added]

Section 642(c)(2) provides that in the case of an estate and in the case of certain trusts (in general, those created before 10/9/69), there shall also be allowed as a deduction in computing its taxable income any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year,permanently set aside for a purpose specified in § 170(c), or is to be used 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. [emphasis added]

The IRS, after analyzing a number of cases, decided that the modification should not be considered as a transfer “pursuant to the trust instrument” for these purposes:

In the current case, the taxpayer makes a summary argument that the payments qualify under § 642(c) because they are pursuant to the governing instrument, citing to Old Colony. They do not address the authorities concerning deductions under modified trust instruments. Here there was no conflict with respect to Trust B subsequent to the division of Parent Trust. The trust terms were unambiguous. The purpose of the court order was not to resolve a conflict in Trust B but to obtain the economic benefits which the parties believe they will receive from the modification of the Parent Trust. Neither Rev. Rul. 59-15 nor Emanuelson hold that a modification to a governing instrument will be construed to be the governing instrument in situations where the modification does not stem from a conflict of some sort. Additionally, both Crown and Brownstone have a narrow interpretation of what qualifies as pursuant to a governing instrument. Therefore, any payments to Foundation 1 and Foundation 2 after the modification of Trust B would not be considered to be made pursuant to the governing instrument, and Trust B is not entitled to a deduction for such payments under § 642(c).

Basically, the IRS found that a revision to change a trust, other than to resolve an ambiguity that existed in the trust, will not serve to make a transfer “pursuant to the trust instrument.” The fact that a state court approved the modification doesn’t change the result, since there were no adverse interests disputing an interpretation of the trust document, nor any clear issue with the language of the trust.

The memorandum next considered the trust’s fallback argument—that the transfer, if not a charitable contribution deductible under IRC §642(c), was nevertheless qualified as an income distribution deduction under IRC §661.

The memorandum notes that the regulations under IRC §661 provide that a charitable contribution is not a distribution but rather governed generally by IRC §642(c):

Section 1.663(a)-2 provides that any amount paid, permanently set aside, or to be used for the charitable, etc., purposes specified in § 642(c) and which is allowable as a deduction under that section is not allowed as a deduction to an estate or trust under § 661 or treated as an amount distributed for purposes of determining the amounts includible in gross income of beneficiaries under § 662. Amounts paid, permanently set aside, or to be used for charitable, etc., purposes are deductible by estates or trusts only as provided in § 642(c). For purposes of this section, the deduction provided in § 642(c) is computed without regard to the provisions of §§ 508(d), 681, or 4948(c)(4). [emphasis added]

Reg. §1.663(a)-2 specifically provides that a distribution deduction is not available, but rather the requirements of §642(c) must be met. The regulation provides:

Any amount paid, permanently set aside, or to be used for the charitable, etc., purposes specified in section 642(c) and which is allowable as a deduction under that section is not allowed as a deduction to an estate or trust under section 661 or treated as an amount distributed for purposes of determining the amounts includible in gross income of beneficiaries under section 662. Amounts paid, permanently set aside, or to be used for charitable, etc., purposes are deductible by estates or trusts only as provided in section 642(c). For purposes of this section, the deduction provided in section 642(c) is computed without regard to the provisions of section 508(d), section 681, or section 4948(c)(4) (concerning unrelated business income and private foundations).