Prop Regs: Some CRATs to be Listed Transactions

The IRS has issued proposed regs that would identify certain charitable remainder annuity trust (CRAT) transactions and substantially similar transactions as listed transactions, a type of reportable transaction. Material advisors and certain participants in these listed transactions would be required to file disclosures with the IRS and would be subject to penalties for failure to disclose. (Preamble to Prop Reg REG-108761-22)

The proposed regs would affect participants in these transactions as well as material advisors but provide that certain organizations whose only role or interest in the transaction is as a charitable remainderman will not be treated as participants in the transaction or as parties to a prohibited tax shelter transaction subject to excise taxes and disclosure requirements.

The IRS is aware of transactions in which taxpayers attempt to use a CRAT and a single premium immediate annuity (SPIA) to permanently avoid recognition of ordinary income and/or capital gain. Taxpayers engaging in these transactions claim that distributions from the trust are not taxable to the beneficiaries as ordinary income or capital gain under Code Sec. 664(b) because the distributions constitute the trust’s unrecovered investment in the SPIA, thus claiming that a significant portion of the distributions is excluded from gross income under Code Sec. 72(b)(2).

Taxpayers also claim that the trust qualifies as a CRAT and thus is not subject to tax on the trust’s realized ordinary income or capital gain under Code Sec. 664(c)(1), even though the trust may not meet all of the requirements of Code Sec. 664(d)(1).

The proposed regs propose to identify the charitable remainder trust transactions described in Prop Reg §1.6011-15(b), and substantially similar transactions, as listed transactions for purposes of Reg §1.6011-4(b)(2) and Code Sec. 6111 and Code Sec. 6112.

In addition, they inform taxpayers that participate in these transactions, and persons who act as material advisors with respect to these transactions, that they would need to disclose the transaction in accordance with the final regs and the regs issued under Code Sec. 6011 and Code Sec. 6111. Material advisors must also maintain lists as required by Code Sec. 6112.

Note that normally the IRS would release information about CRATs potentially being listed transactions via a Notice. But the Sixth Circuit issued an order in Mann Construction v. US, (CA 6 2022) 129 AFTR 2d 2022-885, holding that Notice 2007-83, 2007-2 C.B. 960, which identified certain trust arrangements claiming to be welfare benefit funds and involving cash value life insurance policies as listed transactions, violated the Administrative Procedure Act (APA).

The IRS disagrees with the Sixth Circuit’s decision in Mann Construction and subsequent decisions that have applied that reasoning to find other IRS notices invalid and are continuing to defend the validity of notices identifying transactions as listed transactions in circuits other than the Sixth Circuit. At the same time, however, to avoid any confusion and to ensure consistent enforcement of the tax laws throughout the nation, the IRS has issued this prop reg to identify certain charitable remainder trust transactions as listed transactions for purposes of all relevant provisions of the Code and regs. (Preamble to Prop Reg REG-108761-22)

Effective date.

Prop Reg §1.6011-15 would identify charitable remainder annuity trust transactions described in Prop Reg §1.6011-15(b), and transactions that are substantially similar to those transactions, as listed transactions, effective as of the date the final regs are published.

For more information regarding CRATs, see Checkpoint’s Federal Tax Coordinator ¶K-3261.