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§ 16.4 TAX TREATMENT OF CHARITABLE LEAD TRUSTS$975,000 annually) to charities. The lead period was 45 years. The trust agreementenabled the trustees to pay charitable annuities in excess of the $975,000amount and in advance of the 45-year term if the payments were in commutationof future annuity payments. The trustees did in fact make excess paymentsto charitable organizations; however, they did not commute any future annuitypayments as a result. The trust claimed income tax deductions for these excesspayments. 20 The IRS and the court denied the deduction. 21The law essentially allows a trust to deduct charitable contributions to thefull extent of gross income as long as the transfers are made pursuant to theterms of the governing instrument. Under the trust agreement, if payments inexcess of the annual annuity would adversely affect the maximum charitablededuction allowable, the trustees are not supposed to make them, but insteadshould accumulate the income and add it to principal. The parties quarreledover whether the trust document, in referring to the “maximum charitablededuction,” was referencing the income tax charitable deduction or the gift taxcharitable deduction. The court decided it was the latter.The court found that commutation is necessary before it can be said that theamounts in dispute were paid pursuant to the trust agreement. The court construedthe term commutation to mean a computation in the formal sense contemporaneouslywith payments to charity in excess of the annual annuity amount.It held that a “definite formula” for a valid commutation must exist.The court held that because the amounts in question were not transferred incommutation of future annuity payments, the amounts were not transferredpursuant to the terms of the trust, and thus the claimed deduction was not available.(The court sidestepped the question of whether the trustees’ ability to20 IRC § 642(c)(1).21 Rebecca K. Crown Income Charitable Fund v. Commissioner, 98 T.C. 276 (1992), aff’d, 8 F.3d 571 (7th Cir.1993). This appellate court decision contains an examination of the legislative objective in creating the statutorycharitable lead trust rules. It fretted about the discount rate to be used in commuting (accelerating) futurepayments, construing outcomes when charitable organizations might annually receive less than the stipulatedamount in a year despite the requirement that there be (in this case) a guaranteed annuity interest. See § 16.2,text accompanied by note 4. The court was quick to state that no abuse had occurred thus far, but also notedthat the “possibility that commutation might be used abusively cannot be considered negligible.” 8 F.3d at 575.Still, this appellate court based its decision on another point, relating to the issue of loss of the gift tax charitablededuction, should the commutation clause be deemed to disqualify the trust. The court held that languagein the governing instrument of the trust required the trustees to obtain, before commuting, either a private letterruling from the IRS or a judicial ruling at an appellate level, establishing the propriety of commutation by acharitable lead trust. The trustees did not do this; the IRS prevailed.The court conceded that the “propriety of commutation” by a charitable lead trust “must be considered uncertain.”8 F.3d at 576. It noted that the views of the Treasury Department on the point have not yet “crystallized”(id.); in an unusual display of judicial deference to the department, the court wrote that “we generalistjudges should be loath to lay down the law on the question” until the IRS decides the issue. Id. The IRS, in1982, announced that it would not issue private letter rulings concerning the propriety of commutation by charitablelead trusts until it had completed its study of the matter. Id. Thus, wrote the court, when the trust wascreated (in 1983), “its draftsmen doubtless expected the IRS to move off the dime eventually, and when and ifit did give a green light to commutation the trustees would be authorized by the trust instrument to commute.”Id. It continued: “Until that happened or some equivalent assurance was received, they were bound by the instrumentto refrain from gambling on the permissibility of commutation. A mistake could conceivably cost thedonors millions [of dollars]. The trustees have a legitimate gripe about the Treasury’s delay in resolving theissue of permissibility. But that delay does not entitle them to disregard the terms of the trust instrument.” Id.In general, see Teitell, Questions Surround Prepayment Clauses of Charitable Trusts, 131 Trusts & Estates(no. 7) 56 (July 1992). 519