Tuesday, November 4, 2008

IRS Identifies Charitable Remainder Trust Transaction as "Of Interest"

In Notice 2008-99, the Treasury Department and the IRS announced that they have become aware of transactions in which grantors for charitable remainder trusts use their trusts to avoid recognizing gain on appreciated assets contributed to the trusts.  There are a number of apparent variations in the structures of these transactions, but the heart of each transaction is that the grantor either transfers appreciated assets to the trust (claiming a charitable contribution deduction for the full fair market value) or the trust already holds appreciated assets, then the trust sells those assets (not paying any tax on the gain as the trust is tax-exempt), and then the grantor and the beneficiary charity(ies) sell their interests in the trusts to one or more third parties.  The end result is the grantor receives its share of the appreciated fair market value of the trust's assets without having to pay tax on the gain built-in to those assets.  The Notice identifies such transactions as "transactions of interest," which requires that persons, including charities, entering into such transactions on or after November 2, 2006 must disclosure the transactions to the IRS.  The Treasury and the IRS are waiting to see what these disclosures reveal before they determine whether to treat all or some such transactions as abusive.



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