Rev. Rul. 73-98

Advice has been requested as to the amount deductible from a decedent's gross estate under section 2055 of the Internal Revenue Code of 1954, under the circumstances described below.

After certain specific bequests, the decedent bequeathed the entire residue of his estate to charity. He further provided that all debts, expenses, and taxes are to be paid from the income generated by his estate during its administration. If the income proves to be insufficient, the executors are directed to pay the excess obligations from the residue. The will contains no further provisions with regard to the administration of the estate.

Section 2055(a) of the Code provides that the taxable estate shall be determined by deducting from the value of the gross estate the amount of all bequests, legacies, devises or transfers for exclusively religious, charitable, scientific, literary, or educational purposes. If, under the terms of the will, the Federal estate tax, or any estate, succession, legacy, or inheritance tax is payable out of property transferred to charity, section 2055(c) of the Code and section 20.2055-3 of the Estate Tax Regulations require the value of the charitable bequest to be reduced by the amount of such taxes in determining the amount deductible from the gross estate.

If a testator bequeaths to a person absolutely the residue of his estate, the residuary legatee is entitled to receive any income earned by the estate during the period of administration which is not otherwise disposed of. 3 Scott, The Law of Trusts, sec. 234.3 (3d ed.). However, income earned during administration is not a part of a decedent's gross estate for Federal estate tax purposes. The valuation problem here is analogous to that encountered in valuing property passing to the surviving spouse for purposes of the marital deduction. In this connection, in Senate Report No. 1013, Part 2, Eightieth Congress, Second Session, 1948-1 C.B. 285, 335, the Committee on Finance states:

The interest passing to the surviving spouse from the decedent is only such interest as the decedent can give. If the decedent by his will leaves the residue of his estate to the surviving spouse and she pays, or if the estate income is used to pay, claims against the estate so as to increase the residue, such increase in the residue is acquired by purchase and not by bequest. Accordingly, the value of any such additional part of the residue passing to the surviving spouse cannot be included in the amount of the marital deduction.

Similar language to that set out above was used by the Senate Finance Committee in Senate Report No. 1622, Eighty-third Congress, Second Session, page 467 (1954), in explaining that subsection (d) of section 2013 of the Code (relating to the valuation of transferred property for use in computing the credit for tax on prior transfers) was added "* * * so as to provide that the value of property transferred to the decedent shall be determined in the same manner as the value of property interests passing to the surviving spouse under section 2056 of the Code is determined." See also section 20.2013-4(b)(3)(iii), Example (4), of the regulations; Revenue Ruling 66-233, 1966-2 C.B. 428; Estate of May H. Gilruth v. Commissioner, 50 T.C. 850 (1968).

Applying the above rationale to the issue here involved, it is concluded that, for purposes of the charitable deduction, income earned during the administration of the decedent's estate cannot be taken into consideration to offset the debts, expenses, and taxes properly chargeable against the estate.

Accordingly, it is held that the amount of the charitable bequest that qualifies for the charitable deduction in this case is the value of the residue of the decedent's estate reduced by the amount of the debts, expenses, and taxes.