The Internal Revenue Service has issued final regulations for basis in interests in tax-exempt charitable remainder trusts to safeguard against their use as illegal tax shelters.
The rules apply to determining a taxable beneficiary’s basis in a term interest in a charitable remainder trust upon a sale or other disposition of all interests in the trust, to the extent that basis consists of a share of adjusted uniform basis.
The final regulations affect taxable beneficiaries of CRTs and apply to sales and other dispositions of interests in CRTs occurring on or after Jan.16, 2014, except for those occurring pursuant to a binding commitment entered into before Jan. 16, 2014.
Back in 2008, the Treasury Department and the IRS published Notice 2008- 99 to designate such transactions and substantially similar transactions as “Transactions of Interest,” that is, ones that might be perceived as tax shelters, and to ask for public comments. After studying the comments received from the public, the Treasury and the IRS filed a notice of proposed rulemaking in January 2014. No further comments were received on the proposed rules, and they have been adopted in the final regulations.
The final regulations provide a special rule for determining the basis in certain CRT term interests in transactions to which Section 1001(e)(3) of the Tax Code applies. Such transactions are those 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.
In these cases, the final regulations provide that the basis of a term interest of a taxable beneficiary is the portion of the adjusted uniform basis assignable to that interest reduced by the portion of the sum of the following amounts assignable to that interest: the amount of undistributed net ordinary income; and the amount of undistributed net capital gain. The final regulations do not affect the CRT’s basis in its assets but rather are for the purpose of determining a taxable beneficiary’s gain.
The rules are limited in application to charitable remainder annuity trusts and charitable remainder unitrusts, as defined in Section 664 of the Tax Code.
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