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POOLED INCOME FUNDS(GAAP), the trust does not meet the requirements for a pooled incomefund under these rulesThe IRS explained the rationale for these requirements as follows:[T]he purpose of establishing a depreciation reserve for a pooled income fundis the preservation of the value of the property which will pass to the charitableremainderman. This can be accomplished only by a method that systematicallyallocates the cost of a capital asset to the years in which the asset isexpected to produce income. ... It is ... appropriate for a pooled income fundto use a GAAP standard in calculating depreciation, since a GAAP methodensures that the cost of the asset will be allocated systematically over its usefullife. 77Thus, if the trustee of an otherwise qualifying pooled income fund is not prohibitedby state law from accepting or investing in depreciable or depletable property,the governing instrument of the fund must provide either that the trusteeshall establish a depletion or depreciation reserve in accordance with GAAP orthat the trustee shall not accept or invest in any depreciable or depletable assets. 78§ 13.8 TAX STATUS OF FUND AND BENEFICIARIESA qualified pooled income fund is not treated as an association for tax purposes, 79nor does such a fund have to be a trust under local law. 80 Generally, a pooledincome fund and its income interest beneficiaries are subject to federal incometaxation. 81 In actuality, however, a pooled income fund usually is not taxable,because it receives a distribution deduction for amounts paid out to income interestbeneficiaries 82 and a set-aside deduction for the remainder interests permanentlyset aside for the charitable beneficiary. 83 As to this second point, morespecifically, a pooled income fund receives a charitable deduction for any amountof net long-term capital gain that, pursuant to the terms of the governing instrument,is permanently set aside for charitable purposes. 84 A pooled income fund istaxed on any net short-term capital gain that is not required to be distributed tothe income beneficiaries pursuant to the terms of the governing instrument andapplicable state law.Traditionally, long-term capital gain, when permanently set aside, qualifiedfor the income tax charitable contribution deduction available to pooled incomefunds. Pursuant to tax regulations issued in 2003, however, no amount of netlong-term capital gain may be considered permanently set aside for charitablepurposes if, under the terms of the governing instrument of the fund and locallaw, the trustee has the power (whether or not exercised) to satisfy the incomebeneficiaries’ right to income by the payment of (1) an amount equal to a fixed77 Rev. Rul. 90-103, 1990-2 C.B. 159, at 160.78 See, e.g., Priv. Ltr. Rul. 9436035.79 Reg. § 1.642(c)-5(a)(2). The definition of an association, for tax purposes, is the subject of IRC § 7701(a)(3).80 Reg. § 1.642(c)-5(a)(2).81 Id. This taxation is under IRC, pt. 1, subch. J, ch. 1, although the provisions of subpart E containing the grantortrust rules (see § 3.7) do not apply to pooled income funds (id.). Generally, the tax on pooled income funds ispursuant to IRC § 641.82 IRC § 661.83 IRC § 642(c).84 IRC § 642(c)(3). 490