In a notice, the IRS has identified as transactions of interest certain transactions in which a sale or other disposition of all interests in a charitable remainder trust (CRT), after the contribution of appreciated assets to and their reinvestment by the trust, results in the grantor (or other noncharitable recipient) receiving the value of his or her trust interest while claiming to recognize little or no taxable gain.
Description of the Transaction
In the variation of the transaction focused on in the notice, the grantor creates a CRT and contributes appreciated assets to it. The grantor retains an annuity or unitrust interest (term interest) in the CRT and designates a charitable organization as the remainder benefi ciary. The charitable organization may, but does not have to, be controlled by the grantor, and the grantor may, but does not have to, reserve the right to change the charitable organization designated as the remainder beneficiary.
Next, the CRT sells or liquidates the appreciated assets and reinvests the net proceeds in other assets such as money market funds, marketable securities, and/or other assets. Because it is generally a tax-exempt entity under Sec. 664, the CRT’s sale of the appreciated assets is exempt from income tax, and the CRT’s basis in the new assets is their purchase price. Some portion of the CRT’s ordinary income and capital gains may become taxable to the grantor as the CRT makes periodic annuity or unitrust payments in accordance with Sec. 664 and the regulations.
Subsequently, the grantor and the charitable organization, in a transaction they claim is described in Sec. 1001(e)(3), sell or otherwise dispose of their respective interests in the CRT to an unrelated third-party purchaser for an amount that approximates the fair market value of the CRT’s assets, including the new assets. The CRT then terminates, and its assets are distributed to the unrelated thirdparty purchaser.
Results Claimed by the Grantor and the Charitable Organization
The tax results claimed from the transaction are as follows: The grantor claims a charitable deduction for the portion of the fair market value of the appreciated assets that is attributable to the remainder interest as of the contribution date. The grantor also claims to recognize no gain from the CRT’s sale or liquidation of the appreciated assets. When the grantor and the charitable organization sell their respective interests in the CRT, they take the position that they have sold the entire interest in the CRT within the meaning of Sec. 1001(e)(3). Because the entire interest in the CRT is sold, the grantor claims that Sec. 1001(e)(1), which disregards basis in the case of a sale of a term interest, does not apply to the transaction.
The grantor also claims that under Sec. 1001(a) and related provisions, the gain on the sale of his or her term interest is computed by taking into account the portion of uniform basis allocable to the grantor’s term interest under Regs. Secs. 1.1014- 5 and 1.1015-1(b) and that this uniform basis is derived from the new assets’ basis rather than the appreciated assets’ basis.
A result of the transaction’s claimed tax treatment is that the gain on the sale of the appreciated assets is never taxed, even though the grantor receives his or her share of those assets’ appreciated fair market value.
The IRS indicated that it is not concerned about the mere creation and funding of a CRT and/or the trust’s reinvestment of the contributed appreciated property. However, it is concerned about the manipulation of the uniform basis rules to avoid tax on gain from the sale or other disposition of appreciated assets. Accordingly, the type of transaction described in the notice includes a coordinated sale or other coordinated disposition of the respective interests of the grantor or other noncharitable recipient and the charitable organization in a charitable remainder trust in a transaction claimed to be described in Sec. 1001(e) (3), subsequent to the contribution of appreciated assets and the trust’s reinvestment of those assets. In particular, the Service is concerned about a grantor claiming an increased basis in the term interest coupled with the CRT’s termination in a single coordinated transaction under Sec. 1001(e) to avoid tax on gain from the sale or other disposition of the appreciated assets.
Therefore, the IRS has identifi ed transactions that are the same as, or substantially similar to, the transaction described above as transactions of interest effective October 31, 2008 (the notice’s release date). Persons entering into these transactions on or after November 2, 2006, must disclose the transaction as described in Regs. Sec. 1.6011-4. Material advisers who make a tax statement on or after November 2, 2006, with respect to transactions entered into on or after that date have disclosure and list maintenance obligations under Secs. 6111 and 6112. The threshold gross income amount for determining whether an adviser is a material adviser for these transactions is $5,000.
It is hard to imagine that the Service would not challenge a transaction like the one described above (or a variation of it) unless the taxpayer could show a real nontax reason for it. Given these transactions’ obvious tax avoidance potential, this is likely to be a hard sell to either the IRS or the courts.
Notice 2008-99, 2008-47 I.R.B. 1194
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