WASHINGTON, D.C. — The Internal Revenue Service has finalized regulations classifying certain arrangements marketed as Charitable Remainder Annuity Trusts (CRATs) as listed transactions, increasing disclosure requirements and potential penalties for taxpayers and advisers involved in the tax strategies.
The Treasury Department and the IRS finalized the regulations last week after determining that certain transactions involving purported CRATs are being used to improperly eliminate ordinary income or capital gains from the sale of appreciated property.
Under the regulations, material advisers and certain participants in the identified transactions must disclose their involvement to the IRS. Failure to do so may result in penalties.
According to the IRS, the transactions generally involve transferring appreciated property—such as interests in closely held businesses or business assets with a fair market value exceeding their tax basis—to a purported CRAT.
The trust then sells the property and uses some or all of the proceeds to purchase a single premium immediate annuity, commonly known as a SPIA.
The IRS contends taxpayers participating in these arrangements improperly apply tax rules governing annuities and charitable remainder trusts to claim that distributions from the CRAT are taxable only to the extent of the income portion of the SPIA payments, reducing or eliminating taxes that otherwise would be owed on the property’s sale.
“The Internal Revenue Service remains vigilant and is watching out for tax avoidance schemes,” IRS Chief Executive Officer Frank J. Bisignano stated. “Taxpayers should not forget that the IRS will continue to combat abusive tax shelters and transactions.”
The final regulations follow previously proposed rules identifying the same CRAT arrangements, and substantially similar transactions, as listed transactions for federal tax reporting purposes.
By designating the arrangements as listed transactions, the IRS subjects them to enhanced reporting requirements intended to help the agency identify and challenge tax avoidance strategies it considers abusive.
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