Final Regulations Prevent Manipulation of Trust Uniform Basis Rules to Avoid Gain

The IRS issued final regulations that provide rules for determining a taxable beneficiary’s basis in a term interest in a charitable remainder trust (CRT) when all interests in the trust are sold or otherwise disposed of (T.D. 9729). The regulations, which adopt proposed regulations issued in 2014 without change (REG-154890-03), are aimed at preventing a transaction the IRS identified as a “transaction of interest” in Notice 2008-99.

In the transaction identified in Notice 2008-99, a sale or other disposition of all interests in a 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 that person’s trust interest while claiming to recognize little or no taxable gain. The IRS said it believed this transaction had the potential for tax avoidance or evasion.

The final regulations contain a special rule for determining the basis in certain CRT term interests in transactions in which the sale or other disposition of the CRT term interest is part of a transaction in which all interests in the CRT are transferred. Under the rule, the basis of a term interest of a taxable beneficiary is the portion of the trust’s adjusted uniform basis assignable to that interest reduced by the portion of the sum of the following amounts assignable to that interest: (1) the amount of the trust’s undistributed net ordinary income described in Sec. 664(b)(1); and (2) the amount of the trust’s undistributed net capital gain described in Sec. 664(b)(2).

The regulations do not affect the CRT’s basis in its assets, but rather are for the purpose of determining a taxable beneficiary’s gain arising from a transaction described in Sec. 1001(e)(3) (which provides that the uniform basis rules do not apply to a sale of a term interest in the trust). The application of the regulations is limited to charitable remainder annuity trusts and charitable remainder unitrusts as defined in Sec. 664.

The final regulations apply to sales or other dispositions of interests in CRTs occurring on or after Jan. 16, 2014 (the date the proposed regulations were issued), except for certain grandfathered transactions.

—Sally P. Schreiber (sschreiber@aicpa.org) is a senior editor for The Tax Adviser.