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CFR > Title 26 - Internal Revenue > CHAPTER I—INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY > SUBCHAPTER A—INCOME TAX (Parts 1–19) > PART 1—INCOME TAXES > 1.642(c)-6—Valuation of a remainder interest in property transferred to a pooled income fund.

CFR

1.642(c)-6—Valuation of a remainder interest in property transferred to a pooled income fund.

(a) In general. (1) For purposes of sections 170, 2055, 2106, and 2522, the fair market value of a remainder interest in property transferred to a pooled income fund is its present value determined under paragraph (d) of this section.
(2) The present value of a remainder interest at the time of the transfer of property to the pooled income fund is determined by computing the present value (at the time of the transfer) of the life income interest and subtracting that value from the fair market value of the transferred property on the valuation date. The fact that the income beneficiary may not receive the last income payment, as provided in paragraph (b)(7) of § 1.642(c)-5, is not taken into account for purposes of determining the value of the life income interest. For purposes of this section, the valuation date is the date on which property is transferred to the fund by the donor except that, for purposes of section 2055 or 2106, it is the alternate valuation date, if elected, under the provisions and limitations set forth in section 2032 and the regulations thereunder.
(3) Any claim for a deduction on any return for the value of the remainder interest in property transferred to a pooled income fund must be supported by a statement attached to the return showing the computation of the present value of the interest.
(b) Actuarial computations by the Internal Revenue Service. The regulations in this and in related sections provide tables of actuarial factors and examples that illustrate the use of the tables in determining the value of remainder interests in property. Section 1.7520-1(c)(2) refers to government publications that provide additional tables of factors and examples of computations for more complex situations. If the computation requires the use of a factor that is not provided in this section, the Commissioner may supply the factor upon a request for a ruling. A request for a ruling must be accompanied by a recitation of the facts including the pooled income fund's highest yearly rate of return for the 3 taxable years immediately preceding the date of transfer, the date of birth of each measuring life, and copies of the relevant documents. A request for a ruling must comply with the instructions for requesting a ruling published periodically in the Internal Revenue Bulletin (see §§ 601.201 and 601.601(d)(2)(ii) (b) of this chapter) and include payment of the required user fee. If the Commissioner furnishes the factor, a copy of the letter supplying the factor should be attached to the tax return in which the deduction is claimed. If the Commissioner does not furnish the factor, the taxpayer must furnish a factor computed in accordance with the principles set forth in this section.
(c) Computation of pooled income fund's yearly rate of return. (1) For purposes of determining the present value of the life income interest, the yearly rate of return earned by a pooled income fund for a taxable year is the percentage obtained by dividing the amount of income earned by the pooled income fund for the taxable year by an amount equal to—
(i) The average fair market value of the property in such fund for that taxable year; less
(ii) The corrective term adjustment.
(2) The average fair market value of the property in a pooled income fund for a taxable year shall be the sum of the amounts of the fair market value of all property held by the pooled income fund on each determination date, as defined in paragraph (a)(5)(vi) of § 1.642(c)-5, of such taxable year divided by the number of determination dates in such taxable year. For such purposes the fair market value of property held by the fund shall be determined without including any income earned by the fund.
(3) (i) The corrective term adjustment shall be the sum of the products obtained by multiplying each income payment made by the pooled income fund within its taxable year by the percentage set forth in column (2) of the following table opposite the period within such year, set forth in column (1), which includes the date on which that payment is made:
Table
(1) Payment period (2) Percentage of payment
Last week of 4th quarter 0
Balance of 4th quarter 25
Last week of 3d quarter 25
Balance of 3d quarter 50
Last week of 2d quarter 50
Balance of 2d quarter 75
Last week of 1st quarter 75
Balance of 1st quarter 100
(ii) If the taxable year of the fund consists of less than 12 months, the corrective term adjustment shall be the sum of the products obtained by multiplying each income payment made by the pooled income fund within such taxable year by the percentage obtained by subtracting from 1 a fraction the numerator of which is the number of days from the first day of such taxable year to the date of such income payment and the denominator of which is 365.
(4) A pooled income fund's method of calculating its yearly rate of return must be supported by a full statement attached to the income tax return of the pooled income fund for each taxable year.
(5) The application of this paragraph may be illustrated by the following examples:

Code of Federal Regulations

Example 1. (a) The pooled income fund maintained by W University has established determination dates on the first day of each calendar quarter. The pooled income fund is on a calendar-year basis. The pooled income fund earned $5,000 of income during 1971. The fair market value of its property (determined without including any income earned by the fund), and the income paid out, on the first day of each calendar quarter in 1971 are as follows:
Date Fair market value of property Income payment
Jan. 1 $100,000 $1,200
Apr. 1 105,000 1,200
July 1 95,000 1,200
Oct. 1 100,000 1,400
400,000 5,000
(b) The average fair market value of the property in the fund for 1971 is $100,000 ($400,000, divided by 4). (c) The corrective term adjustment for 1971 is $3,050, determined by applying the percentages obtained in column (2) of the table in subparagraph (3) of this paragraph:
Multiplication: Product
100%×$1,200 $1,200
75%×$1,200 900
50%×$1,200 600
25%×$1,400 350
Sum of products 3,050
(d) The pooled income fund's yearly rate of return for 1971 is 5.157 percent, determined as follows: $5,000÷$100,000−$3,050=0.05157

Code of Federal Regulations

Example 2. (a) The pooled income fund maintained by X University has established determination dates on the first day of each calendar quarter. The pooled income fund is on a calendar-year basis. The pooled income fund earned $5,000 of income during 1971 and paid out $3,000 on December 15, 1971, and $2,000 on January 15, 1972, the last amount being treated under paragraph (b)(7) of § 1.642(c)-5 as paid on December 31, 1971. The fair market value of its property (determined without including any income earned by the fund) on the determination dates in 1971 and the income paid out during 1971 are as follows:
Date Fair market value of property Income payment
Jan. 1 $125,000
Apr. 1 125,000
July 1 75,000
Oct. 1 75,000
Dec. 15 $3,000
Dec. 31 2,000
Code of Federal Regulations 35
400,000 5,000
(b) The average fair market value of the property in the fund for 1971 is $100,000 ($400,000 divided by 4). (c) The corrective term adjustment for 1971 is $750, determined by applying the percentages obtained in column (2) of the table in subparagraph (3) of this paragraph:
Product
Multiplication:
0%×$2,000
25%×$3,000 $750
Sum of products 750
(d) The pooled income fund's yearly rate of return for 1971 is 5.038 percent, determined as follows: $5,000÷$100,000−$750=0.05038
(d) and (e) [Reserved] For further guidance, see § 1.642(c)-6T(d) and (e).
(f) Effective/applicability dates. This section applies after April 30, 1999, and before May 1, 2009.

Code of Federal Regulations

[T.D. 7105, 36 FR 6480, Apr. 6, 1971; 36 FR 9512, May 26, 1971; 36 FR 12290, June 30, 1971, as amended by T.D. 7955, 49 FR 19976, May 11, 1984; T.D. 8540, 59 FR 30105, June 10, 1994; T.D. 8819, 64 FR 23190, Apr. 30, 1999; T.D. 8886, 65 FR 36910, June 12, 2000; T.D. 9448, 74 FR 21440, May 7, 2009]
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