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CHARITABLE REMAINDER TRUSTSdeduction for the gift of the instrument (after working through the previousthree tax rules), the IRS ruled that the 20 percent limitation would apply.As noted, the IRS also ruled that the deduction would not come into beinguntil the instrument was sold. The gift then would be of the sales proceeds—money. For these types of gifts, the percentage limitations generally are 50 percentfor public charities 266 and 30 percent for other charitable organizations. 267Therefore, the IRS ruled that the 30 percent limitation would apply in this case.(That is, that limit would apply once the aforementioned deduction reductionswere taken into account.)(d) Allocation of Gains to IncomeThe federal tax law on this point has been revised. 268 The following is a summaryof the state of the law preceding and leading up to these changes.The IRS has ruled that the governing instrument of a CRT may direct thetrustee to allocate realized capital gains to trust income, without jeopardizingthe tax status of the trust. 269 The IRS also ruled, however, that this type of allocationmust be in conformity with applicable state law.In general, for federal tax purposes, the word income, when applied in thetrust or estate context, means the amount of income of the trust or estate for thetax year determined under the terms of the governing instrument and applicablelocal law. 270 Nonetheless, trust provisions that depart fundamentally from conceptsof local law in the determination of what constitutes income are not recognizedby the IRS. 271In this case, under the applicable state law, principal included considerationreceived by a trustee on the sale or other transfer of capital property. Thus, capitalgains were generally allocated to principal under state law. The state’s law,however, also allowed the terms of the governing instrument to control the allocationof receipts and expenditures.This case also involved the fact that the CRT was a NIMCRUT. 272 The IRStook note of the fact that the trustee’s ability to allocate capital gains to trustincome created the potential for manipulation of the trust assets to the detrimentof the charitable remainder interest. That is, the trustee would be able to inflatethe unitrust amount each year by amounts that would be payable to the noncharitablebeneficiary upon the sale of assets. Under these circumstances, theamount that would be paid to the charitable organization at the termination ofthe trust could well be less than the amount that would be paid to the charity ifthe fixed unitrust amount were paid annually.The IRS wrote that when the trust’s capital gains are otherwise lawfully allocatedto trust income, the “trust’s obligation to pay the prior years’ deficiency to266 See § 7.5.267 See § 7.8.268 See § 10.13.269 Priv. Ltr. Rul. 9511007.270 IRC § 643(b).271 Reg. § 1.643(b)-1. For example, this would occur when a trust instrument defined ordinary dividends and interestas principal. Id.272 Reg. § 1.664-3(a)(1)(i)(b). See § 12.3(a), text accompanied by notes 155–156. 448