Charitable Remainder Trust Rules Curb Basis Manipulation

For over 50 years, Bloomberg Tax’s renowned flagship daily news service, Daily Tax Report® has helped leading practitioners and policymakers stay on the cutting edge of taxation and...

By Laura Davison

Aug. 11 — The IRS issued final rules that will limit taxpayers' ability to manipulate uniform basis rules and avoid taxable gain on the sale of interests in charitable remainder trusts to third parties after the government has sought to crack down on these transactions for nearly seven years.

The regulations (T.D. 9729, RIN 1545-BJ42) curb the amount of basis that may be allocated to a charitable remainder trust annuity or unitrust interest by the amount of undistributed net ordinary income described in tax code Section 664(b)(1) and the amount of undistributed net capital gain described in Section 664(b)(2). The language of the rules is the same as proposed rules (REG-154890-03) issued in January 2014.

In these transactions, beneficiaries had “the best of both worlds,” Richard L. Fox, a partner at Dilworth Paxson LLP in Philadelphia, told Bloomberg BNA Aug. 11. Taxpayers “could sell a highly appreciated asset for essentially no gain and then get a step up in basis of interest in the trust.”

Identifying Abuse

The Internal Revenue Service first identified some of these as “transactions of interest” in Notice 2008-99. 

The guidance is due in part to the IRS and the Treasury Department becoming aware of transactions in which a sale or other disposition of all interests in a charitable remainder trust—subsequent to the contribution of appreciated assets to, and their reinvestment by, the CRT—results in the grantor or taxable beneficiary receiving the value of the taxable beneficiary's trust interest while claiming to recognize little or no gain.

The result is still better than an early termination, where a trust holder wants to get their share of interest in the trust. In these instances, taxpayers won't get any basis under Section 1001(e)(1), Fox said.

The final regulations apply to sales and other dispositions of interests in charitable remainder trusts on or after Jan. 16, 2014, when the proposed regulations were issued, except for sales or dispositions under a binding commitment made before that date. Still, the IRS said, the agency isn't precluded from contesting claimed tax treatment of earlier transactions.

Charitable remainder trusts, a planning technique for taxpayers with appreciated property and charitable intent, still have a number of beneficial uses, Fox said.

T.D. 9729 is scheduled for publication in the Federal Register Aug. 12.

To contact the reporter on this story: Laura Davison in Washington at

To contact the editor responsible for this story: Cheryl Saenz at

Text of T.D. 9729 is in TaxCore.

Request Daily Tax Report