 ESTATE OF ARTHUR E. SCHAEFER, DECEASED, KATHLEEN J.
   WELLS, EXECUTOR, PETITIONER v. COMMISSIONER OF
            INTERNAL REVENUE, RESPONDENT
          Docket No. 13183–11.               Filed July 28, 2015.

        During his life decedent (D) established two irrevocable
      charitable remainder trusts. Each trust was designed so that
      one of D’s sons would receive distributions during his life or
      a term of years with the remainder going to a charity. The
      trust instruments directed the trustees to distribute the lesser
      of each trust’s annual income or a fixed percentage to one of
      the sons. If trust income exceeded the fixed percentage, the
      trustee was directed to make additional distributions to make
      up for previous years when the trust income did not yield
      enough to satisfy a distribution of the fixed percentage. The
      estate (E) claims it is entitled to a charitable contribution
      deduction for the values of the charitable remainder interests
      of the two irrevocable trusts D created. For E to be eligible
      for the deduction, the value of each remainder interest must

134
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        be at least 10% of the net fair market value of the property
        contributed to the trust at the time of contribution. I.R.C. sec.
        664(d)(2)(D). The parties disagree about the appropriate dis-
        tribution amount to use in calculating the values of the chari-
        table remainder interests. Held: Where the trust payout is the
        lesser of the trust income or a fixed percentage, the parties
        must use an annual distribution amount equal to the fixed
        percentage stated in the trust instrument to determine
        whether E is eligible for the charitable contribution deduction.
        I.R.C. sec. 664(e).

  Robert J. Onda, for petitioner.
  Richard J. Hassebrock and                   Emily     J.   Giometti,      for
respondent.

                                   OPINION

   BUCH, Judge: This case involves an estate that seeks a
charitable contribution deduction for the values of remainder
interests in two charitable remainder trusts created during
the decedent’s life. Each trust instrument states that the
trustee must make distributions to the noncharitable bene-
ficiary of the lesser of the net trust accounting income for the
taxable year and a fixed percentage of the net fair market
value of the trust assets, valued annually. Each trust
instrument also allows the trustee to make additional dis-
tributions, limited to trust income, if previous distributions
did not equal the fixed percentage. For each trust to qualify
as a charitable remainder trust, thereby making the estate
eligible for the deduction, the value of the remainder interest
must be at least 10% of the net fair market value of the
property contributed. Sec. 664(d)(2). 1 Respondent argues that
the value of the remainder interest for each trust does not
equal 10% because the parties should use the fixed percent-
age in calculating the values of the distributions. The estate
disagrees and argues that the parties should calculate the
distributions using the expected net income according to the
applicable section 7520 rate so long as the rate is above 5%.
We hold that the parties must calculate the value of the
remainder interest for each trust using a distribution amount
equal to the fixed percentage.
  1 Unless otherwise indicated, all section references are to the Internal

Revenue Code in effect for the date of decedent’s death, and all Rule ref-
erences are to the Tax Court Rules of Practice and Procedure.
136        145 UNITED STATES TAX COURT REPORTS            (134)


                         Background
   This case was submitted without trial under Rule 122.
   Arthur Schaefer was born on August 19, 1908, and had
two sons, Ronald and Benjamin. In November 2004 Mr.
Schaefer formed AES Family Limited Partnership (AES). Ini-
tially, Mr. Schaefer held 10,000 trust certificates or units,
which represented all of the units that AES issued pursuant
to its trust agreement. That same month, Mr. Schaefer trans-
ferred to each of Benjamin and Ronald 3.83% of his trust cer-
tificates in AES. Mr. Schaefer retained the remaining
92.34%. Mr. Schaefer reported the transfers as gifts on his
2004 Form 709, United States Gift (and Generation-Skipping
Transfer) Tax Return.
   Mr. Schaefer formed Schaefer Investment, LLC (Schaefer
LLC), on February 21, 2006. When he formed Schaefer LLC,
Mr. Schaefer owned a 100% interest in it, which consisted of
990 nonvoting units and 10 voting units. He transferred to
Schaefer LLC his remaining trust certificates in AES and a
money market checking account.
   Also on February 21, 2006, Mr. Schaefer created two
trusts: Arthur E. Schaefer Charitable Remainder Unitrust
Number 1 (Trust 1) and Arthur E. Schaefer Charitable
Remainder Unitrust Number 2 (Trust 2). Mr. Schaefer trans-
ferred a 49.5% nonvoting interest in Schaefer LLC into Trust
1 and a 49.5% nonvoting interest in Schaefer LLC into Trust
2. During his lifetime Mr. Schaefer was the income bene-
ficiary of both trusts. Upon his death Ronald became the
income beneficiary of Trust 1 and Benjamin became the
income beneficiary of Trust 2.
   The trust agreements provide for distributions to the
income beneficiaries during the ‘‘Unitrust Period’’ payable in
quarterly installments. The payments equal the lesser of the
net trust accounting income for the taxable year or a percent-
age, 11% for Trust 1 and 10% for Trust 2, of the net fair
market value of the trust assets, valued annually. The
Unitrust Period for each trust starts on the first day property
is transferred into the trust and ends on the date preceding
the date of the death of the last income beneficiary or 20
years from the first date of the Unitrust Period, whichever
is later. At the end of the Unitrust Period the remainder of
(134)       ESTATE OF SCHAEFER v. COMMISSIONER               137


the principal and income in each trust is to be distributed to
a charitable organization.
   Mr. Schaefer died in Wisconsin on March 9, 2007. The
Internal Revenue Service (IRS) received a Form 706, United
States Estate (and Generation-Skipping Transfer) Tax
Return, from the estate on April 16, 2008. The estate did not
claim a charitable contribution deduction for any portion of
the trusts. Instead, the estate reduced the amounts reported
on Schedule G, Transfers During Decedent’s Life, by the
amounts it deemed to be charitable. Subsequently, the IRS
audited the estate tax return.
   The IRS mailed a notice of deficiency making various
adjustments to the estate of Mr. Schaefer on March 7, 2011.
The adjustment that we are asked to address here is an
adjustment to the amounts of transfers during Mr. Schaefer’s
life based on increases in the values of the trusts. The IRS
explained its position in the notice, stating that the estate
was not allowed a charitable contribution deduction for
the values of the remainder interests of the trusts because
the trusts did not meet the requirement that the value of the
charitable remainder interest be at least 10% of the net fair
market value of the property on the date of contribution and
the estate had not shown any other basis upon which the
charitable remainder interests in the trusts should be dis-
counted. The executor of the estate, while living and pro-
bating Mr. Schaefer’s estate in Wisconsin, timely petitioned.
   This case was scheduled for trial during the Court’s trial
session beginning June 3, 2013, in Columbus, Ohio. When
the case was to be heard, the parties orally moved to submit
the case fully stipulated under Rule 122. The parties also
filed a stipulation of facts, a first supplement to stipulation
of facts, a stipulation of settled issues, and a first supplement
to stipulation of settled issues. After the stipulations the only
remaining issue is whether the trusts meet the requirement
of section 664(d)(2)(D) that the value of each charitable
remainder interest be at least 10% of the net fair market
value of the property on the date of contribution. If not, then
the estate is not entitled to a charitable contribution deduc-
tion. The parties agree that the estate is not entitled to the
charitable contribution deduction if the values of the chari-
table remainder interests in Trust 1 and Trust 2 are cal-
culated on the basis that 11% or 10%, respectively, of the net
138        145 UNITED STATES TAX COURT REPORTS            (134)


fair market value of the assets is distributed each year. How-
ever, the parties also agree that the estate is entitled to the
charitable contribution deduction if the values of the chari-
table remainder interests are calculated on the basis that an
amount equal to each trust’s net income, determined using
the section 7520 rate, is distributed each year.
  Neither party addressed on brief whether section 664(e)
requires that a 5% distribution rate be used when valuing
the remainder interest of a trust such as the ones before us.
Accordingly, by order dated April 1, 2015, the Court directed
the parties to file legal memoranda addressing this issue.
Both parties timely filed legal memoranda and, in large part,
simply reiterated their original arguments.

                          Discussion
I. Charitable Remainder Trust
  Generally, when calculating the estate tax imposed under
section 2001, a deduction is allowed from the value of the
gross estate for transfers for charitable purposes. Sec.
2055(a). This general rule is restricted for split-interest
transfers, where an interest in property passes to a chari-
table beneficiary while an interest in the same property also
passes to a noncharitable beneficiary for less than full and
adequate consideration. Sec. 2055(e)(2). If the charitable
organization receives the remainder interest in the property,
no deduction is allowed unless the charitable organization’s
interest is in a charitable remainder annuity trust, a chari-
table remainder unitrust, or a pooled income fund. Sec.
2055(e)(2)(A). Before Congress enacted the Tax Reform Act of
1969 (TRA ’69), Pub. L. No. 91–172, 83 Stat. 487, an estate
could deduct the value of a charitable remainder interest if
the value of the remainder interest was presently ascertain-
able and the possibility that the charitable transfer would
not become effective was so remote as to be negligible. Sec.
20.2055–2(a) and (b), Estate Tax Regs. Concerned about per-
ceived abuses, Congress added section 2055(e)(2)(A), TRA ’69
sec. 201(d)(1), 83 Stat. at 560, to remove any ‘‘incentive to
favor the income beneficiary over the remainder beneficiary
by means of manipulating the trust’s investments’’, H.R.
Rept. No. 91–413 (Part 1), at 59 (1969), 1969–3 C.B. 200,
238; S. Rept. No. 91–552, at 88 (1969), 1969–3 C.B. 423, 480.
(134)       ESTATE OF SCHAEFER v. COMMISSIONER              139


II. Charitable Remainder Unitrust (CRUT)
   Section 664, also added by TRA ’69 sec. 201(e)(1), 83 Stat.
at 562, defines a CRUT. A CRUT has two types of bene-
ficiaries: an income beneficiary and a remainder beneficiary.
Generally, an income beneficiary is limited to distributions
from the CRUT of a fixed percentage of the net fair market
value of its assets, at least annually, for a term of years or
for the lifetime of the income beneficiary. Sec. 664(d)(2)(A)
and (B). After the period for these payments ends, the
remainder beneficiary, which in the case of a CRUT will be
a charitable organization, receives what remains. Sec.
664(d)(2)(C). Additionally, with respect to each property con-
tribution to the CRUT, the value of the remainder interest
in the property (determined under section 7520) must be at
least 10% of the property’s net fair market value on the date
of contribution. Sec. 664(d)(2)(D).
   Section 664(d)(3)(A) provides an exception that allows the
trust instrument to provide that the trustee must distribute
to the income beneficiary only the trust income for the year
but limited by the fixed percentage. Trusts created under
this exception are called net income charitable remainder
unitrusts (NICRUTs). Additionally, section 664(d)(3)(B)
allows the trust instrument to provide that the trustee must
distribute to the income beneficiary the current trust income
in excess of the fixed percentage to the extent that the aggre-
gate amounts distributed in prior years are less than the
aggregate of the fixed percentage amounts for those prior
years. Trusts using this provision are net income with
makeup charitable remainder unitrusts (NIMCRUTs). The
trusts Mr. Schaefer created for his sons are NIMCRUTs.
   Section 664(e) describes how to value a charitable
remainder interest. It provides: ‘‘For purposes of determining
the amount of any charitable contribution, the remainder
interest of a * * * [CRUT] shall be computed on the basis
that an amount equal to 5 percent of the net fair market
value of its assets (or a greater amount, if required under the
terms of the trust instrument) is to be distributed each year.’’
Id. How one computes the value of the remainder interest is
important because, as stated previously, the value of the
remainder interest in the contributed property, calculated
under section 664(e), must be at least 10% of the property’s
140         145 UNITED STATES TAX COURT REPORTS             (134)


net fair market value on the date of contribution. Sec.
664(d)(2)(D). The regulations provide that the charitable
remainder interest is computed using the life contingencies
for those involved, the section 7520 interest rate, and the
assumption that the fixed percentage is distributed in accord-
ance with the payout sequence of the trust. Sec. 1.664–4(a),
Income Tax Regs. The fixed percentage ‘‘may be expressed
either as a fraction or as a percentage and must be payable
each year’’ beginning the first year of the charitable
remainder trust until either the income beneficiary dies or a
term of years, not to exceed 20 years, ends. Sec. 1.664–
3(a)(1)(ii), (5)(i), Income Tax Regs. ‘‘A percentage is fixed if
the percentage is the same either as to each recipient or as
to the total percentage payable each year of such period.’’ Id.
para. (a)(1)(ii).
  The parties disagree whether the regulations expressly
address how to take into account distributions from a
NIMCRUT when valuing the remainder interest. Respondent
points to section 1.664–4(a)(3), Income Tax Regs., which
would have one assume that the fixed percentage is distrib-
uted (implicitly without regard to the net income limitation
in the case of a NIMCRUT). That regulation cross-references
section 1.664–3(a)(1)(i)(a), Income Tax Regs., which sets forth
the general rule for CRUT distributions. The estate argues
that NIMCRUT distributions are determined not under this
rule but under an exception to this rule. See id. subdiv. (i)(b).
Independent of the regulations, the IRS has issued adminis-
trative guidance on the subject of valuing a remainder
interest in a NIMCRUT. See Rev. Rul. 72–395, sec. 7.01,
1972–2 C.B. 340, 349–350; Rev. Proc. 2005–54, sec. 6.09,
2005–2 C.B. 353, 363. That administrative guidance asserts
that the remainder interest of a NIMCRUT is valued using
the fixed percentage stated in the trust instrument, regard-
less of the fact that distributions are limited to trust income.
III. Analysis
  The parties present two different approaches to value the
remainder interests of the trusts. The estate argues that in
valuing the remainder interest the distributions are cal-
culated by using the section 7520 rate to determine the
trust’s expected income, so long as the section 7520 rate is
(134)         ESTATE OF SCHAEFER v. COMMISSIONER                      141


above 5% of the net fair market value of the assets.
Respondent argues that the remainder interest is valued
using a distribution rate equal to the fixed percentage in the
trust instrument. We asked the parties to address another
approach—valuing the remainder interest using a 5% dis-
tribution rate.
    Each approach is arguably flawed. Although the estate’s
approach yields a remainder interest value that is possibly
closer to what the charitable beneficiary will ultimately
receive, there is no basis for this approach in the
statute. Respondent’s approach potentially undervalues the
remainder interest that will pass to the charitable bene-
ficiary because it assumes the maximum distribution
by using the fixed percentage, even though that amount can
be distributed only if the trust produces sufficient income.
And a 5% distribution rate potentially overvalues the
remainder interest that will pass to the charitable bene-
ficiary because if the trust produces income leading to dis-
tributions higher than 5%, the charitable beneficiary receives
less than projected. Nevertheless, our task is not to look to
the varying results and choose the best answer. Instead, we
interpret the statute to the best of our ability, looking beyond
it if necessary.
    The role of legislative history in statutory interpretation is
a topic of constant discussion among courts. The Court of
Appeals for the Seventh Circuit 2 has cautioned that
‘‘[l]egislative history helps us learn what Congress meant by
what it said, but it is not a source of legal rules competing
with those found in the U.S. Code.’’ In re Sinclair, 870 F.2d
1340, 1344 (7th Cir. 1989). And we have said: ‘‘It is well set-
tled that where a statute is ambiguous, we may look to legis-
lative history to ascertain its meaning.’’ Caltex Oil Venture v.
Commissioner, 138 T.C. 18, 34 (2012) (citing Burlington N.
R.R. v. Okla. Tax Comm’n, 481 U.S. 454, 461 (1987)).
    We find that the text of section 664(e) is ambiguous. Sec-
tion 664(d)(1) and (2) defines both charitable remainder
annuity trusts (CRATs) and CRUTs. In the case of a CRAT,
the trust must distribute ‘‘a sum certain’’ that is not less
than 5% and not more than 50% of the initial net fair market
  2 Absent a stipulation to the contrary, an appeal of this case would lie

to the Court of Appeals for the Seventh Circuit. See sec. 7482(b)(1)(A).
142         145 UNITED STATES TAX COURT REPORTS                      (134)


value of the property placed in the trust. Sec. 664(d)(1)(A). In
contrast, a CRUT must distribute a ‘‘fixed percentage’’ of at
least 5% but not more than 50% of the net fair market value
of its assets, valued annually. Sec. 664(d)(2)(A). Although
these rules set forth different ways of expressing the dis-
tribution (sum certain and fixed percentage), section 664(e)
provides instructions regarding how to calculate the
remainder interest in either a CRAT or a CRUT. And in
describing the distribution to be taken into account for valu-
ation purposes, it does not expressly use the words ‘‘sum cer-
tain’’ or ‘‘fixed percentage’’. Instead section 664(e) provides
that a distribution rate ‘‘equal to 5 percent of the net fair
market value of its assets (or a greater amount, if required
under the terms of the trust instrument)’’ is to be used. We
are unable to determine on its face whether this provision
means the sum certain (in the case of a CRAT) or the fixed
percentage (in the case of a CRUT) or whether it means
something different. To help resolve this ambiguity, we look
to the legislative history.
   Section 664(e), which governs valuing a remainder interest
in a CRAT or a CRUT, was enacted as part of TRA ’69. The
underlying House bill containing the provisions for CRATs
and CRUTs did not include a provision allowing for distribu-
tions to be limited to net income. H.R. 13270, 91st Cong., sec.
201 (1969) (as passed by the House, Aug. 7, 1969). A Senate
amendment included both section 664(d)(3), which allowed
for distributions to be limited to net income, and subsection
(e), which provided for valuing the remainder interest of the
trust. Although the statutory text may be ambiguous as to
how to value the remainder interest in a CRUT with a net
income provision, the Senate report, describing the Senate
amendment, could not be clearer.
    A second modification of the annuity trust and unitrust rules made by
 the committee provides that the charitable remainder trust must be
 required by the trust instrument to distribute each year 5 percent of the
 net fair market value of its assets (valued annually in the case of a
 unitrust and valued at the time of the contribution in the case of an
 annuity trust) or the amount of the trust income, whichever is lower. In
 valuing the amount of a charitable contributions deduction in the case
 of a remainder interest given to charity in the form of an annuity trust
 or a unitrust, it is to be computed on the basis that the income bene-
 ficiary of the trust will receive each year the higher of 5 percent of the
 net fair market value of the trust assets or the payment provided for in
(134)        ESTATE OF SCHAEFER v. COMMISSIONER                      143


  the trust instrument. * * * [S. Rept. No. 91–552, supra at 89–90, 1969–
  3 C.B. at 481; emphasis added.]

The Senate report makes clear that where there is a net
income provision, the distribution amount or rate set forth in
the trust instrument is to be used for valuation purposes
even though distributions may be limited by net income.
  The regulations are less clear. The regulation addressing
how to value the remainder interest in a CRUT, section
1.664–4(a)(3), Income Tax Regs., contains an explicit cross-
reference to distributions determined under section 1.664–
3(a)(1)(i)(a), Income Tax Regs. But NIMCRUT distributions
are described under an exception to that regulation. Id.
subdiv. (i)(b). Given the ambiguity of the regulation, we turn
to other administrative guidance.
  The IRS’ administrative guidance is wholly consistent with
this legislative history. The IRS has issued both a revenue
ruling and a revenue procedure describing how to value the
remainder interest in a CRUT with a net income provision.
Rev. Rul. 72–395, sec. 7.01, 1972–2 C.B. at 349–350, provides
a sample trust provision that is very similar to the provisions
before us, in that it provides that the trustee shall pay the
lesser of the trust income from the taxable year or a fixed
percentage of the net fair market value of the trust assets.
The sample provision also allows the trustee to make catchup
distributions for past years when the trust income was less
than the fixed percentage. Id. The revenue ruling goes on to
explain that ‘‘notwithstanding the * * * [net income makeup
provision], the computation of the charitable deduction will
be determined on the basis that the regular unitrust amount
will be distributed in each taxable year of the trust.’’ Id. at
350. Similarly, Rev. Proc. 2005–54, sec. 6.09, 2005–2 C.B. at
363, states: ‘‘For purposes of determining the amount of the
charitable contribution, the remainder interest is computed
on the basis that an amount equal to the fixed percentage
unitrust amount is to be distributed each year, without
regard to the possibility that a smaller or larger amount of
trust income may be the amount distributed.’’
  We are not bound by revenue rulings or procedures. Tap-
root Admin. Servs., Inc. v. Commissioner, 133 T.C. 202, 208–
209 (2009), aff ’d, 679 F.3d 1109 (9th Cir. 2012); Casanova
Co. v. Commissioner, 87 T.C. 214, 223 (1986). They are
144        145 UNITED STATES TAX COURT REPORTS            (134)


simply statements of the Commissioner’s administrative and
litigating positions. But we do owe them the appropriate
level of deference. Under Skidmore v. Swift & Co., 323 U.S.
134, 140 (1944), we determine whether the Commissioner’s
rulings and pronouncements may have the ‘‘power to per-
suade’’ by looking to ‘‘the thoroughness evident in its consid-
eration, the validity of its reasoning, [and] its consistency
with earlier and later pronouncements’’.
   Particularly in the light of the legislative history pre-
viously discussed, we find the Commissioner’s guidance to be
persuasive. Both pieces of guidance are thoroughly reasoned,
providing examples and explanations based on the applicable
provisions. Additionally, the guidance has withstood the test
of time. Rev. Rul. 72–395, supra, has been in effect for over
four decades without any change to the provision before us.
Further, Rev. Proc. 2005–54, supra, reaffirmed that rea-
soning when it was published some 30 years later. The
Commissioner’s position also has remained consistent and
has been the subject of little litigation.
IV. Conclusion
   Section 664(e) is ambiguous in its description of how to
value a remainder interest in a NIMCRUT where actual dis-
tributions will be the lesser of a fixed percentage or net
income. Where the statute is ambiguous, we can look to legis-
lative history as an aid in the interpretation of the statute.
And where a statute is ambiguous, the administrative agency
can fill gaps with administrative guidance to which we owe
the level of deference appropriate under the circumstances.
With regard to the statute before us, the legislative history
and the administrative guidance point us to only one conclu-
sion—that the value of the remainder interest of a
NIMCRUT must be calculated using the greater of 5% or the
fixed percentage stated in the trust instrument. Accordingly,
the estate must use an annual distribution amount of 11%
or 10% of the net fair market value of the trust assets when
valuing the remainder interests of Trust 1 and Trust 2,
respectively. Because the parties have previously stipulated
that the estate would not be entitled to a charitable contribu-
tion deduction if the remainder interests are valued using
(134)     ESTATE OF SCHAEFER v. COMMISSIONER             145


this method, respondent’s determination denying the chari-
table contribution deduction is sustained.
  To reflect the foregoing,
                    Decision will be entered under Rule 155.

                      f
