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IRS Eyes Charitable Trust Interest Sales

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The Internal Revenue Service says it is looking to see whether some charitable trust transactions should be identified as tax-avoidance transactions.

IRS officials report in IRS Notice 2008-99 that they have heard of a new type of sale of charitable remainder trust interests.

The sale results in the grantor or other noncharitable recipient receiving the value of the person’s trust interest while claiming to recognize little or now taxable gain, officials write in the notice.

“The IRS and Treasury Department believe this transaction has the potential for tax avoidance or evasion, but lack information to determine whether the transaction should be identified specifically as a tax avoidance transaction,” officials write.

In one kind of CRT interest transaction, the grantor contributes assets that have increased in value to a new charitable remainder trust.

The grantor keeps an annuity interest, or a unitrust interest, and designates a charity as the beneficiary of the remainder.

The trust then sells or liquidates the assets in the trust and reinvests the proceeds in assets such as money market funds or securities.

Normally, because a charitable remainder trust is a tax-exempt entity, the trust’s sale of the assets with the increased value would be exempt from income tax, officials write.

The trust’s basis in the new assets would be the price the trust pays for the new assets, officials write.

The grantor may have to pay taxes on some of the trust’s ordinary income and capital gains, officials write.

Next, officials write, the grantor and charity transfer their interests in the trust to an unrelated party, X, for an amount roughly equal to the fair market value of the assets in the trust, including the new assets.

The trust than shuts down, and the trust assets go to X.

The grantor says the grantor should be taxed based on the value of the new assets rather than the value of the appreciated assets.

“A result of the claimed tax treatment of the transaction is that the gain on the sale of the appreciated assets is never taxed, even though the grantor receives the grantor’s share of the appreciated fair market value of those assets,” officials write.

IRS and Treasury officials have concerns about the use of the basis rules to avoid taxes on gains from the sales of appreciated assets, officials write.

Starting on or after Nov. 2, persons entering into the CRT interest sale transactions must disclose the transactions to the IRS, officials write.

“When the IRS and Treasury Department have gathered enough information to make an informed decision as to whether this transaction is a tax-avoidance type of transaction, the IRS and Treasury Department may take one or more actions, including removing the transaction from the transactions of interest category in published guidance, designating the transaction as a listed transaction, or providing a new category of reportable transaction,” officials write.

Officials say they are seeking public comments on how to handle the kinds of transactions described in the notice in a new batch of guidance.

The IRS could issue new regulations concerning the uniform basis rules, officials write.


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