ACGA Urges Treasury to Exempt Pooled Income Funds from 3.8% Medicare Tax

ACGA Urges Treasury to Exempt Pooled Income Funds from 3.8% Medicare Tax

News story posted in Regulations on 26 February 2013| comments
audience: National Publication | last updated: 26 February 2013


Writing on behalf of the American Council on Gift Annuities, Conrad Teitell requests the final regulations under section 1411 should clarify that a pooled income fund's short-term capital gains are not subject to the 3.8 percent tax; otherwise, taxes on those gains would, in effect, be a tax on the charities.

Full Text:

February 26, 2013

CC:PA:LPD:PR (REG-130507-11) Room 5203
Internal Revenue Service
PO Box 7604
Ben Franklin Station Washington, DC 20044

Also submitted to: Federal e-Rulemaking portal at (IRS REG- 130507-11)

Comments on Proposed Regulations under IRC §1411 submitted by the American Council on Gift Annuities (ACGA). Prepared by Conrad Teitell of the Cummings & Lockwood law firm as volunteer legal counsel for ACGA.

The Regulations Should Clarify That Pooled Income Funds Maintained By Charities Are Not Subject To
The 3.8 Percent Medicare Tax On Short-Term Capital Gains Under IRC §1411

The American Council on Gift Annuities (formerly the Committee on Gift Annuities) was formed in 1927, is an IRC §501(c)(3) organization described in IRC §170(b)(1)(A)(vi). ACGA is sponsored by over 1000 social welfare charities, health organizations, environmental organizations, colleges, universities, religious organizations and other charities. ACGA’s mission is to “actively promote responsible philanthropy.”

Pooled Income Funds — Background

  • A public charity’s pooled income fund pays all its income to the fund’s income beneficiaries for each beneficiary’s life based on his or her pro rata participation in the fund.
  • On a beneficiary’s death, the assets attributable to that beneficiary’s participation in the fund are removed from the fund and used by the charity for its charitable purposes.
  • All the income is taxable to the participants at ordinary income tax rates. The life- income beneficiaries are potentially subject to the 3.8 percent Medicare tax on the ordinary income they receive.
  • Pooled income funds are prohibited from investing in tax-exempt bonds.
  • All capital gains of the fund — short- term and long-term — are added to the fund’s principal for eventual distribution to the charitable remainder organization maintaining the fund.
  • Pooled income funds are not taxable on long-term capital gains, but the funds are taxable on short-term capital gains.

ACGA’s Concern

In Treasury’s “Explanation of Provisions — Application to Estates and Trusts, 4A states: “Because Congress did not provide a rule specifying the particular trusts subject to section 1411, the Treasury Department and the IRS have determined that section 1411 applies to . . . .” The paragraph goes on to list the trusts that the Treasury and

the IRS have determined are subject to section 1411. We are concerned about the language in paragraph 4A that states:

“However, section 1411 does apply to trusts subject to the provisions of part I of subchapter J, even though such trusts may have special computational rules within those provisions. These trusts include pooled income funds described in section 642(c)(5). . . .”

ACGA adds its own “however.”

Section 1411(e)(2) specifically excepts from the application of section 1411 a trust all of the “unexpired interests in which are devoted to one or more of the purposes described in section 170(c)(2)(B).”

As stated earlier:

A pooled income fund pays all its income to the fund’s beneficiaries who pay ordinary income tax on those payments and which payments are subject to the 3.8 percent tax for some taxpayers.

Pooled income funds are not taxable on long-term capital gains, but are taxable on short-term capital gains.

Both long-term and short-term capital gains are added to the fund’s principal for eventual distribution to the organization that maintains the fund to be used for the organization’s charitable purposes.

Presumably, the only amounts that could be subject to the 3.8 percent tax to the fund would be short-term gains for the year over the $11,950 threshold (indexed for inflation).

We believe that Congress did not intend to subject pooled income funds in any way to the 3.8 percent tax. Doing so would be a tax on charitable gifts that will go to the charitable organization that maintains the fund.

Pooled Income Funds Are Small Potatoes

  • Pooled income funds are known as the “poor man’s charitable remainder trust.” Most donors have contributed relatively small amounts to pooled income funds because their gifts were not large enough to be separately invested in charitable remainder unitrusts or annuity trusts.
  • The latest statistics for the year 2010 show that returns were filed for only 1,410 pooled income funds with a total end-of-year net asset value of $1,277,204,000. Treasury’s latest statistics show that the number of pooled income funds decreased from 1,415 in 2009 to 1,410 in 2010. Lisa Schreiber Rosenmerkel, “Split-Interest Trusts, Filing Year 2010,” SOI Bulletin, Winter 2012, Vol. 31, No. 3, p. 69.
  • Anecdotally, pooled income funds are not attracting new donors because of their extremely low payments to the beneficiaries.
  • The Treasury’s deemed rate of return for pooled income funds created in 2013 (if one were to be created) for purposes of computing the value of the charitable remainder interest is only 1.8 percent. The deemed rates of return for any new pooled income funds that may have been created in the two prior years: for 2012, it was 1.8 percent; for 2011, it was 2.8 percent.

Public Policy Reasons for Clarifying that Pooled Income Funds
Are Not Subject to the 3.8 Percent Tax on Their Short-Term Capital Gains

The provisions of the Code dealing with charitable organizations and charitable contributions to them should be broadly construed in favor of charitable organizations and their donors.

The Supreme Court of the United States, in the 1937 landmark case, Old Colony Trust Co. v. Commissioner of Internal Revenue, 301 U.S. 379, involving charitable contributions by a trust estate, stated that the statute in question “should be construed with the view of carrying out the purpose of Congress — evidently the encouragement of donations by trust estates.” Id. at 384. Thus, section 1411 of the Code should not be interpreted narrowly.

The U.S. Supreme Court concluded its opinion in Old Colony Trust Co. in favor of the trust estate as follows:

Capital and income accounts in the conduct of the business of estates are well understood. Congress sought to encourage donations out of gross income, and we find no reason for saying that it intended to limit the exemption to sums which the trust could show were actually paid out of receipts during a particular tax year. The design was to forego some possible revenue in order to promote aid to charity. Here the trustee responded to an implied invitation and the estate ought not be burdened in consequence.

A long line of cases consistently hold that it is public policy to promote aid to Charity: “The exemption of income devoted to charity . . . [is] not to be narrowly construed.” Helvering v. Bliss, 293 U.S. 144 (1934). See also Kibbe v. City of Rochester, 57 F.2d 542, Roche’s Beach, Inc., v. Commissioner, 96 F.2d 776, Faulkner v. Commissioner, 112 F.2d 987, Schoellkopf v. U.S., 36 F.Supp. 617 (D.C.N.Y. 1941), aff’d. 124 F.2d 982 (2d Cir. 1942).


The final regulations should clarify that a pooled income fund’s short-term capital gains are not subject to the 3.8 percent tax. Taxes on those gains would, in effect, be a tax on the charities. If Congress had intended that a pooled income fund’s short-term gains be subject to the 3.8 percent tax, it would have specifically so provided in IRC §1411.

For additional information and amplification, contact Conrad Teitell, Chairman, National Charitable Planning Group, Cummings & Lockwood LLC, Six Landmark Square, PO Box 120, Stamford, Connecticut, 06904-0120; phone: (203) 351-4164; fax: (203) 708-3840; e-mail:

The American Council on Gift Annuities — contact information. 1260 Winchester Parkway, SE, Suite 205, Smyrna, GA 30080-6546, Phone: (770) 874-3355, Fax: (770) 433-2907, email:

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