Abusive Tax Shelters

Transactions of Interest

Potentially Abusive Sales of Charitable Remainder Trust Interest
(IRS Notice 2008-99)

The IRS and the Treasury Department are aware of a type of transaction that in which a sale or other disposition of all interests in a charitable remainder trust (subsequent to the contribution of appreciated assets to the trust, and their reinvestment by the trust), whereby the grantor or other noncharitable recipient receives the value of that person’s trust interest while claiming to recognize little or no taxable gain.

The IRS and the Treasury Department believe that this transaction has the potential for tax avoidance or evasion, but lack sufficient information to determine whether the transaction should be “listed” (i.e., as a tax avoidance transaction).  The IRS and the Treasury Department are concerned about the manipulation of the uniform basis rules by which taxpayers are attempting to avoid tax on the gain from the sale or other disposition of their appreciated assets.  In other words, the focus is on a coordination of sales or other dispositions of the respective interests of a grantor or other noncharitable recipient and the charity itself (holding the remainder interest), after there has been a contribution of appreciated assets and a trust’s reinvestment of those assets.  The focus of the IRS’ concern is on the Grantor’s claim to an increased basis in the term interest coupled with a termination of the Trust, in a single, coordinated transaction.  The Grantor and Charity claim that when they collectively sell their respective interests in the charitable remainder trust, that is a sale of their entire interest within the meaning of IRC § 1001(e)(3), and therefore, IRC § 1001(e)(1), disregarding basis in the case of a sale of a term interest, does not apply to the transaction.  Grantor also claims that the gain on the sale of Grantor’s term interest is calculated using a uniform basis, derived from the basis of the new assets (rather than the basis of the appreciated assets originally contributed).  See, e.g., Regs. § 1.1014-5; 1.1015-1(b); cf. IRC § 643(a)(7).

The transaction may use trusts with varying circumstances, such as a NIMCRUT, or a trust that has been in existence for some time, or the appreciated assets already may be in trust, or the recipient and seller of the term interest may be the grantor and/or another person, or the Grantor may contribute the appreciated assets to a partnership or other pass-through entity, and then contribute that interest in the entity to the trust.

Each recipient of the term interest and Trust are participants for the transaction described in this notice.  Charities are participants if it sold or otherwise disposed of its interest in one of these type of trusts after October 31, 2008.

If you believe that you may have engaged in a transaction that is the same or substantially similar to the transaction described above, Federal law may require you to disclose your and other parties’ participation in this “transaction of interest” on IRS Form 8886. For more information about Federal law requirements, please contact us.

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