Exempt Organizations Advisory - IRS Identifies Charitable Remainder Trust Transactions as Transactions of Interest

Catherine W. Wilkinson (cwilkinson@steptoe.com)
Suzanne Ross McDowell (smcdowell@steptoe.com)

In Notice 2008-99,  the IRS identified certain transactions involving charitable remainder trusts as transactions of interest for purposes of Treas. Reg. § 1.6011-4(b)(6).  The Notice is effective October 31, 2008, and requires disclosure of transactions that were entered into on or after November 2, 2006.  Comments on the notice are due by January 31st.

• The Notice describes the general transaction and notes some variations.  The key features of the transactions are as follows.  A Grantor creates a charitable remainder trust and contributes appreciated assets.  The Grantor retains a term interest in the trust and designates a Charity as the remainder beneficiary.  The Grantor claims a charitable deduction for the fair market value of the portion of the appreciated assets allocable to the Charity’s remainder interest.  The trust then sells the appreciated assets and reinvests the sales proceeds in other assets. Because the trust is tax exempt, the gain on the sale of the appreciated assets is exempt from tax and the basis in the new assets is the price paid for them.  The Grantor and the Charity then sell their interest in the trust to a third party for the fair market value of the assets in the trust.  The Grantor claims that they have sold their entire interest in the trust and, therefore I.R.C. § 1001(e)(3), which disregards basis in the sale of a term interest, is not applicable.  The Grantor further claims that gain on the sale of the Grantor’s interest is determined by taking into account the portion of uniform basis allocable to Grantor’s term interest under Treas. Reg. § 1.1014-5 and § 1.1015-1(b) and that the uniform basis is determined by reference to the newly acquired assets.
• The IRS specifically notes that it is not concerned about the creation and funding of charitable remainder trusts, or the reinvestment of contributed appreciated assets.  Rather, the IRS’s focus is on the coordinated sale of the interests of the Grantor and the Charity after the contribution of appreciated assets and the trust’s reinvestment of the assets.  The IRS and Treasury are concerned that the transaction manipulates the uniform basis rules such that the Grantor avoids tax on appreciated assets even though he receives the proceeds from the sale of his share of the assets.
• The notice can be accessed via: http://www.irs.gov/pub/irs-drop/n-08-99.pdf