Contents

CHARITABLE REMAINDER TRUSTScharacterized as “using the purported option in an attempt to avoid the restrictionsthat would be applicable to a direct transfer of encumbered real estate to a charitableremainder trust.”The IRS thus turned to the question of whether the transfer of the option tothe trust would qualify for an income tax or gift tax charitable contributiondeduction. (The proposed transaction being a lifetime one, the estate tax deductionwas not involved.) The IRS ruled that the grant of an option to a charitableorganization is not a deductible contribution for federal income tax purposes. 241The transfer of an option is akin to the transfer of a note 242 or a pledge, 243 so thatthe grantor of an option is entitled to an income tax charitable deduction in theyear the option is exercised, not the year in which it was granted.In this case, the facts indicated that the trust would not exercise the optionbut would assign it to a third party for compensation. The IRS held that even ifthe third-party purchaser were a charitable organization, there would be a “payment”when the option was exercised, but no charitable deduction because ofthe general rule denying a charitable deduction for the transfer of an interest inproperty consisting of less than the contributor’s interest in the property. 244 Inany event, the payment to the third-party charitable organization or other purchaserwould be outside the trust.As for the gift tax charitable deduction, 245 the same rules largely apply.There is no gift tax deduction for the transfer of a remainder interest in trustunless the trust is a qualifying one, such as a CRT. The transfer of an option topurchase real property for a specified period is a completed gift on the date theoption is transferred. 246 This outcome occurs only when the option is, understate law, binding and enforceable on the date of the transfer. In this instance, theoption would not be binding on the donor when granted because it would havebeen granted gratuitously. Also, the donor would have the power to withdrawthe option at any time. Neither the trustee nor a third-party purchaser of theoption from the trustee could prevent the donor from doing so. Because the proposedtransfer of the option to the trust would not constitute a completed gift, agift tax charitable deduction was not allowable.It was argued that the option would be supported by consideration in theform of the trustee’s obligation to pay the unitrust amount to the donor. The IRSrejected this view, relying on a body of case law. 247The parties also contended that under local contract law, a benefit conferredupon the promisor or upon a third party can constitute consideration, and thatdetrimental reliance by the third-party charitable remainder beneficiary mayresult in consideration. The IRS, not impressed with this position, reiteratedthat the option could not support consideration because it would be granted241 See § 6.9.242 See § 6.7.243 See § 4.9.244 See § 9.23.245 See § 8.2(k).246 Rev. Rul. 80-186, 1980-2 C.B. 280.247 See, e.g., Gregory Estate v. Commissioner, 39 T.C. 1012 (1963) (retention of a life estate in one’s own propertycannot be consideration for a transfer). 444