The Internal Revenue Service (IRS) and Treasury have issued a final regulation (RIN 1545-BQ58) designating certain trust arrangements (“certain arrangements purporting to be charitable remainder annuity trusts”) as listed (tax shelter) transactions. Designation as a listed transaction subjects promoters of the transactions to disclosure rules and potential substantial penalties.

“The Internal Revenue Service remains vigilant and is watching out for tax avoidance schemes,” said IRS Chief Executive Officer Frank J. Bisignano. “Taxpayers should not forget that the IRS will continue to combat abusive tax shelters and transactions.”

Treasury describes the arrangements that will be designated as listed transaction as those that “purport to eliminate ordinary income and/or capital gains on the sale of property.” In abusive transactions of this type:

• “Property with a fair market value in excess of its basis, for example, interests in a closely-held business, and/or assets used or produced in a trade or business is transferred to a purported CRAT.
• “The purported CRAT then sells the property and uses some or all of the net proceeds to purchase a single premium immediate annuity (SPIA).
• “By misapplying the rules under sections 72 and 664, the taxpayer, or beneficiary, claims that the CRAT annuity is taxable to the recipient only to the extent of the income portion of the SPIA annuity payment.”

These final regulations follow the previously proposed regulations identifying certain CRAT transactions and substantially similar transactions as “listed transactions” for tax reporting purposes.

Prospects: This regulation reinforces the risk to trust rules as Congress (Republicans) hunt for revenue to offset the cost of the new all-GOP reconciliation bill. Trusts used in estate planning context are assuredly under the tax policy people’s microscope. Litigation challenging the regulation is entirely possible. Legislation chances are murky at best. But trusts like many CRATs are definitely at risk.

NAIFA Staff Contact: Jayne Fitzgerald – Director – Government Relations, at jfitzgerald@naifa.org