The Tax Relief and Health Care Act of 2006, P.L. 109-432 (TRAHCA), amended Sec. 664(c) to impose a 100% excise tax on the unrelated business taxable income (UBTI) of charitable remainder trusts (CRTs) that have UBTI (but, unlike under prior law, such CRTs would not lose their tax-exempt status). The Service has now issued proposed regulations to reflect the change made by TRAHCA (REG-127391-07).
The proposed regulations provide that the excise tax is reported and payable on Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code. The proposed regulations clarify that the excise tax imposed upon a CRT with UBTI is treated as paid from corpus, and the trust income that is UBTI is income of the trust for purposes of determining the character of the distribution made to the beneficiary (Prop. Regs. Sec. 1.664-1(d)(2)). The proposed regulations also provide examples illustrating the tax effects of UBTI on a CRT for tax years beginning after December 31, 2006.
The regulations are proposed to be effective for tax years beginning after December 31, 2006 (the effective date of TRAHCA’s amendment to Sec. 664(c)).