80 FR 48249 - Basis in Interests in Tax-Exempt Trusts

DEPARTMENT OF THE TREASURY
Internal Revenue Service

Federal Register Volume 80, Issue 155 (August 12, 2015)

This document contains final regulations that provide rules for determining a taxable beneficiary's basis in a term interest in a charitable remainder trust (CRT) upon a sale or other disposition of all interests in the trust to the extent that basis consists of a share of adjusted uniform basis. The final regulations affect taxable beneficiaries of CRTs.

[Federal Register Volume 80, Number 155 (Wednesday, August 12, 2015)]
[Rules and Regulations]
[Pages 48249-48251]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2015-19846]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9729]
RIN 1545-BJ42


Basis in Interests in Tax-Exempt Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations that provide rules 
for determining a taxable beneficiary's basis in a term interest in a 
charitable remainder trust (CRT) upon a sale or other disposition of 
all interests in the trust to the extent that basis consists of a share 
of adjusted uniform basis. The final regulations affect taxable 
beneficiaries of CRTs.

DATES: Effective date: These final regulations are effective on August 
13, 2015.
    Applicability date: These final regulations apply to sales and 
other dispositions of interests in CRTs occurring on or after January 
16, 2014, except for sales or dispositions occurring pursuant to a 
binding commitment entered into before January 16, 2014.

FOR FURTHER INFORMATION CONTACT: Allison R. Carmody at (202) 317-5279 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains amendments to 26 CFR part 1. On October 31, 
2008, the Treasury Department and the IRS published Notice 2008-99 
(2008-47 IRB 1194) to designate a transaction and substantially similar 
transactions as Transactions of Interest under Sec.  1.6011-4(b)(6) of 
the Income Tax Regulations and to ask for public comments on how the 
transactions might be addressed in published guidance. After studying 
the transaction and comments received from the public in response to 
Notice 2008-99, the Treasury Department and the IRS filed a notice of 
proposed rulemaking (REG-154890-03) relating to basis in interests in 
tax-exempt trusts in the Federal Register on January 16, 2014. No 
comments were received from the public in response to the notice of 
proposed rulemaking. No public hearing was requested or held. The 
proposed regulations are adopted without change by this Treasury 
decision.

Explanation of Provisions

    These final regulations provide a special rule for determining the 
basis in certain CRT term interests in transactions to which section 
1001(e)(3) applies. Such transactions are those in which the sale or 
other disposition of the CRT term interest is part of a transaction in 
which all interests in the CRT are transferred. In these cases, these 
final regulations provide that the basis of a term interest of a 
taxable beneficiary is the portion of the adjusted uniform basis 
assignable to that interest reduced by the portion of the sum of the 
following amounts assignable to that interest: (1) The amount of 
undistributed net ordinary income described in section 664(b)(1); and 
(2) the amount of undistributed net capital gain described in section 
664(b)(2). These final regulations do not affect the CRT's basis in its 
assets but rather are for the purpose of determining a taxable 
beneficiary's gain arising from a transaction described in section 
1001(e)(3). The rules in these final regulations are limited in 
application to charitable remainder annuity trusts and charitable 
remainder unitrusts as defined in section 664.

Effect on Other Documents

    Notice 2008-99 provides that, when the Treasury Department and the 
IRS have gathered enough information to make an informed decision as to 
whether this transaction is a tax avoidance type of transaction, the 
Treasury Department and the IRS may take one or more actions, including 
removing the transaction from the transactions of interest category in 
published guidance, designating the transaction as a listed 
transaction, or providing a new category of reportable transaction. 
Because the Treasury Department and the IRS believe that these final 
regulations address the proper tax treatment of the transaction 
described in Notice 2008-99,

[[Page 48250]]

transactions that are the same as, or substantially similar to, 
transactions described in Notice 2008-99 are no longer considered 
``transactions of interest,'' effective for transactions entered into 
on or after January 16, 2014. However, the ``transaction of interest'' 
identification for transactions that are the same as, or substantially 
similar to, the transaction described in Notice 2008-99 continues to 
apply for transactions entered into before January 16, 2014, and to 
transactions entered into on or after January 16, 2014, pursuant to a 
binding commitment entered into before January 16, 2014. For example, 
disclosure and other obligations under sections 6011, 6111, and 6112 
continue to apply for these transactions entered into before January 
16, 2014, and to transactions entered into on or after January 16, 
2014, pursuant to a binding commitment entered into before January 16, 
2014.

Effective/Applicability Date

    These final regulations apply to sales and other dispositions of 
interests in CRTs occurring on or after January 16, 2014, except for 
sales or dispositions occurring pursuant to a binding commitment 
entered into before January 16, 2014. However, the fact that a sale or 
disposition occurred, or a binding commitment to complete a sale or 
disposition was entered into, before January 16, 2014, does not 
preclude the IRS from applying legal arguments available to the IRS 
before issuance of these final regulations in order to contest the 
claimed tax treatment of such a transaction.

Availability of IRS Documents

    The IRS notice cited in this preamble is published in the Internal 
Revenue Bulletin and is available at the IRS Web site at http://www.irs.gov or the Superintendent of Documents, U.S. Government 
Printing Office, Washington, DC 20402.

Special Analyses

    Certain IRS regulations, including this one, are exempt from the 
requirements of Executive Order 12866, as supplemented and reaffirmed 
by Executive Order 13563. Therefore, a regulatory impact assessment is 
not required. It also has been determined that section 553(b) of the 
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to 
these final regulations, and the Regulatory Flexibility Act (5 U.S.C. 
chapter 6) does not apply to these final regulations because the final 
regulations do not impose a collection of information on small 
entities. Therefore, a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of the Internal Revenue Code, the notice of 
proposed rulemaking preceding this regulation was submitted to the 
Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal author of these final regulations is Allison R. 
Carmody of the Office of Associate Chief Counsel (Passthroughs and 
Special Industries). Other personnel from the Treasury Department and 
the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *


Sec.  1.1001-1  [Amended]

0
Par. 2. Section 1.1001-1, paragraph (f)(4), is amended by removing the 
language ``paragraph (c)'' and adding ``paragraph (d)'' in its place.
0
Par. 3. Section 1.1014-5 is amended by:
0
1. In paragraph (a)(1), first sentence, removing the language 
``paragraph (b)'' and adding ``paragraph (b) or (c)'' in its place.
0
2. Redesignating paragraph (c) as paragraph (d) and adding paragraph 
(c).

0
3. In newly redesignated paragraph (d), adding Example 7 and Example 8.
    The additions read as follows:


Sec.  1.1014-5  Gain or loss.

* * * * *
    (c) Sale or other disposition of a term interest in a tax-exempt 
trust--(1) In general. In the case of any sale or other disposition by 
a taxable beneficiary of a term interest (as defined in Sec.  1.1001-
1(f)(2)) in a tax-exempt trust (as defined in paragraph (c)(2) of this 
section) to which section 1001(e)(3) applies, the taxable beneficiary's 
share of adjusted uniform basis, determined as of (and immediately 
before) the sale or disposition of that interest, is--
    (i) That part of the adjusted uniform basis assignable to the term 
interest of the taxable beneficiary under the rules of paragraph (a) of 
this section reduced, but not below zero, by
    (ii) An amount determined by applying the same actuarial share 
applied in paragraph (c)(1)(i) of this section to the sum of--
    (A) The trust's undistributed net ordinary income within the 
meaning of section 664(b)(1) and Sec.  1.664-1(d)(1)(ii)(a)(1) for the 
current and prior taxable years of the trust, if any; and
    (B) The trust's undistributed net capital gains within the meaning 
of section 664(b)(2) and Sec.  1.664-1(d)(1)(ii)(a)(2) for the current 
and prior taxable years of the trust, if any.
    (2) Tax-exempt trust defined. For purposes of this section, the 
term tax-exempt trust means a charitable remainder annuity trust or a 
charitable remainder unitrust as defined in section 664.
    (3) Taxable beneficiary defined. For purposes of this section, the 
term taxable beneficiary means any person other than an organization 
described in section 170(c) or exempt from taxation under section 
501(a).
    (4) Effective/applicability date. This paragraph (c) and paragraph 
(d) Example 7 and Example 8 of this section apply to sales and other 
dispositions of interests in tax-exempt trusts occurring on or after 
January 16, 2014, except for sales or dispositions occurring pursuant 
to a binding commitment entered into before January 16, 2014.
    (d) * * *

    Example 7.  (a) Grantor creates a charitable remainder unitrust 
(CRUT) on Date 1 in which Grantor retains a unitrust interest and 
irrevocably transfers the remainder interest to Charity. Grantor is 
an individual taxpayer subject to income tax. CRUT meets the 
requirements of section 664 and is exempt from income tax.
    (b) Grantor's basis in the shares of X stock used to fund CRUT 
is $10x. On Date 2, CRUT sells the X stock for $100x. The $90x of 
gain is exempt from income tax under section 664(c)(1). On Date 3, 
CRUT uses the $100x proceeds from its sale of the X stock to 
purchase Y stock. On Date 4, CRUT sells the Y stock for $110x. The 
$10x of gain on the sale of the Y stock is exempt from income tax 
under section 664(c)(1). On Date 5, CRUT uses the $110x proceeds 
from its sale of Y stock to buy Z stock. On Date 5, CRUT's basis in 
its assets is $110x and CRUT's total undistributed net capital gains 
are $100x.
    (c) Later, when the fair market value of CRUT's assets is $150x 
and CRUT has no undistributed net ordinary income, Grantor and 
Charity sell all of their interests in CRUT to a third person. 
Grantor receives $100x for the retained unitrust interest, and 
Charity receives $50x for its interest. Because the entire interest 
in CRUT is transferred to the third person, section 1001(e)(3) 
prevents section 1001(e)(1) from applying to the transaction. 
Therefore, Grantor's gain on the sale of the retained unitrust 
interest in CRUT is determined under section 1001(a), which

[[Page 48251]]

provides that Grantor's gain on the sale of that interest is the 
excess of the amount realized, $100x, over Grantor's adjusted basis 
in the interest.
    (d) Grantor's adjusted basis in the unitrust interest in CRUT is 
that portion of CRUT's adjusted uniform basis that is assignable to 
Grantor's interest under Sec.  1.1014-5, which is Grantor's 
actuarial share of the adjusted uniform basis. In this case, CRUT's 
adjusted uniform basis in its sole asset, the Z stock, is $110x. 
However, paragraph (c) of this section applies to the transaction. 
Therefore, Grantor's actuarial share of CRUT's adjusted uniform 
basis (determined by applying the factors set forth in the tables 
contained in Sec.  20.2031-7 of this chapter) is reduced by an 
amount determined by applying the same factors to the sum of CRUT's 
$0 of undistributed net ordinary income and its $100x of 
undistributed net capital gains.
    (e) In determining Charity's share of the adjusted uniform 
basis, Charity applies the factors set forth in the tables contained 
in Sec.  20.2031-7 of this chapter to the full $110x of basis.
    Example 8.  (a) Grantor creates a charitable remainder annuity 
trust (CRAT) on Date 1 in which Grantor retains an annuity interest 
and irrevocably transfers the remainder interest to Charity. Grantor 
is an individual taxpayer subject to income tax. CRAT meets the 
requirements of section 664 and is exempt from income tax.
    (b) Grantor funds CRAT with shares of X stock having a basis of 
$50x. On Date 2, CRAT sells the X stock for $150x. The $100x of gain 
is exempt from income tax under section 664(c)(1). On Date 3, CRAT 
distributes $10x to Grantor, and uses the remaining $140x of net 
proceeds from its sale of the X stock to purchase Y stock. Grantor 
treats the $10x distribution as capital gain, so that CRAT's 
remaining undistributed net capital gains amount described in 
section 664(b)(2) and Sec.  1.664-1(d) is $90x.
    (c) On Date 4, when the fair market value of CRAT's assets, 
which consist entirely of the Y stock, is still $140x, Grantor and 
Charity sell all of their interests in CRAT to a third person. 
Grantor receives $126x for the retained annuity interest, and 
Charity receives $14x for its remainder interest. Because the entire 
interest in CRAT is transferred to the third person, section 
1001(e)(3) prevents section 1001(e)(1) from applying to the 
transaction. Therefore, Grantor's gain on the sale of the retained 
annuity interest in CRAT is determined under section 1001(a), which 
provides that Grantor's gain on the sale of that interest is the 
excess of the amount realized, $126x, over Grantor's adjusted basis 
in that interest.
    (d) Grantor's adjusted basis in the annuity interest in CRAT is 
that portion of CRAT's adjusted uniform basis that is assignable to 
Grantor's interest under Sec.  1.1014-5, which is Grantor's 
actuarial share of the adjusted uniform basis. In this case, CRAT's 
adjusted uniform basis in its sole asset, the Y stock, is $140x. 
However, paragraph (c) of this section applies to the transaction. 
Therefore, Grantor's actuarial share of CRAT's adjusted uniform 
basis (determined by applying the factors set forth in the tables 
contained in Sec.  20.2031-7 of this chapter) is reduced by an 
amount determined by applying the same factors to the sum of CRAT's 
$0 of undistributed net ordinary income and its $90x of 
undistributed net capital gains.
    (e) In determining Charity's share of the adjusted uniform 
basis, Charity applies the factors set forth in the tables contained 
in Sec.  20.2031-7 of this chapter to determine its actuarial share 
of the full $140x of basis.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: July 13, 2015.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2015-19846 Filed 8-11-15; 8:45 am]
BILLING CODE 4830-01-P