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November 16, 2008 at 02:00 PM
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 non-charitable recipient receiving the value of the person’s trust interest while claiming to recognize little or no 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.
