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.

IRC §642 governs the charitable contribution income tax deduction for a trust or estate. Basically, it allows a deduction on Form 1041 under the following conditions:

The charitable contribution must be made from gross income (as defined under IRC §61, not the applicable uniform principal and income act or the trust document); and
The amount must be paid pursuant to the governing instrument (trust, will, etc.).

If those two conditions are met the deduction is allowed “without limitation” unlike that of an individual (generally subject to the 50% of adjusted gross income limitation) or corporation (10% of taxable income limit for a C corporation).

As well, the trust or estate will have a choice of which year in which to claim the deduction, a truly unique feature rarely seen in the tax law. Normally the year an item must be recognized is not an item a taxpayer may “elect” to select. But for a charitable contribution of a trust or estate that meets the rules to be deductible under IRC §642(c), the amount may be deducted in either:

The year in which the contribution was paid;
On the return for the year prior to the year the contribution was paid if the trust elects this option (IRC §642(c)(1)) or
For an estate or certain trusts created on or before October 9, 1969, the year in which amounts are permanently set aside by the trust or estate for charitable purposes. (IRC §642(c)(2))

The last option was discussed in prior posts [1] and is a tough standard to meet as those articles discuss. But the prior year election has no such complex hurdles to clear.

All the fiduciary must do to claim this election is comply with the requirements of Reg. §1.642(c)-1(b). The PLR describes the process as follows:

Section 1.642(c)-1(b)(2) provides that the election under § 1.642(c)-1(b)(1) shall be made not later than the time, including extensions thereof, prescribed by law for filing the income tax return for the succeeding taxable year.

Section 1.642(c)-1(b)(3) provides that the election shall be made by filing with the income tax return (or an amended return) for the taxable year in which the contribution is treated as paid a statement which (i) states the name and address of the fiduciary, (ii) identifies the estate or trust for which the fiduciary is acting, (iii) indicates that the fiduciary is making an election under § 642(c)(1) in respect of contributions treated as paid during such taxable year, (iv) gives the name and address of each organization to which any such contribution is paid, and (v) states the amount of each contribution and date of actual payment or, if applicable, the total amount of contributions paid to each organization during the succeeding taxable year, to be treated as paid in the preceding taxable year.

In this case the estate, for whatever reason, failed to make the election and take those deductions in the year prior to the year paid. The ruling text does not tell us whether this was due to a failure to obtain advice, erroneous advice from an adviser or some other reason—rather it just states the election was not made. Now the estate asks, under the provisions of Reg. §301.9100-1(c), for the IRS to allow the estate to make a late election and to move the charitable deductions into the earlier years.

Reg. §301.9100-1(c) provides the method by which a taxpayer may request, by applying (and paying) for a private letter ruling, that the IRS grant the right to make a late election where the date is set by regulation and not by statute. [2] It is used for extensions that aren’t available under the automatic late election relief provisions of Reg. §301.9100-1(c). As the PLR notes:

Under § 301.9100-3, a request for relief will be granted when the taxpayer provides evidence to establish to the satisfaction of the Commissioner that (1) the taxpayer acted reasonably and in good faith, and (2) granting relief will not prejudice the interests of the government.

In this case, the IRS granted the relief under the following conditions:

Accordingly, Estate is granted an extension of time of 120 days from the date of this letter to file an election under § 642(c)(1) to claim a deduction in the Year 1 taxable year for charitable contributions made in Year 2. Further, Estate is granted an extension of time of 120 days from the date of this letter to file an election under § 642(c) to claim a deduction in the Year 2 taxable year for charitable contributions made in Year 3. This ruling is conditioned on the Estate filing amended returns for Year 1, Year 2, and Year 3 on which the Estate must: (1) make the election under § 642(c)(1) to claim a deduction on the Year 1 amended return for the distributions made by the close of Year 2 and (2) make the election under § 642(c)(1) to claim a deduction on the Year 2 amended return for the distributions made by the close of Year 3. The amended returns must be filed within the 120-day period following the date of this letter with the service center where the Estate files its returns. A copy of this letter should be attached to the amended return.

[1] Estate Did Not Permanently Set Aside Funds for Charitable Purpose When It Knew of Possibility of Prolonged Litigation, https://www.currentfederaltaxdevelopments.com/blog/2015/2/20/estate-did-not-permanently-set-aside-funds-for-charitable-purpose-when-it-knew-of-possibility-of-prolonged-litigation, February 20, 2015 and Existence of Potential Dispute in Estate Sufficient to Block Estate from Treating Funds as Permanently Set Aside for Charity, https://www.currentfederaltaxdevelopments.com/blog/2015/9/25/existence-of-potential-dispute-in-estate-sufficient-to-block-estate-from-treating-funds-as-permanently-set-aside-for-charity?rq=set%20aside, September 25, 2015

[2] The IRS position is that the agency cannot grant relief for missing a date set by statute unless Congress has specifically authorized the agency to grant such relief, which generally is not the case.