IRS identifies sale of charitable remainder trust interests as a transaction of interest.

• Author: Beavers, James

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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 beneficiary. 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 third-party 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...