[Federal Register Volume 79, Number 12 (Friday, January 17, 2014)]
[Proposed Rules]
[Pages 3142-3145]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-00807]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-154890-03]
RIN 1545-BJ42
Basis in Interests in Tax-Exempt Trusts
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that provide rules
for determining a taxable beneficiary's basis in a term interest in a
charitable remainder trust upon a sale or other disposition of all
interests in the trust to
[[Page 3143]]
the extent that basis consists of a share of adjusted uniform basis.
The regulations affect taxable beneficiaries of charitable remainder
trusts.
DATES: Written or electronic comments and requests for a public hearing
must be received by April 17, 2014.
ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-154890-03), Room 5205,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand-delivered Monday through
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
154890-03), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue NW., Washington, DC or sent electronically via the Federal
eRulemaking Portal at www.regulations.gov (IRS REG-154890-03).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Allison R. Carmody at (202) 317-5279; concerning submissions of
comments and requests for hearing, Oluwafunmilayo (Funmi) Taylor, at
(202) 317-6901 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Statutory and Regulatory Rules
Charitable Remainder Trusts
A charitable remainder trust (CRT) is a trust that provides for the
distribution of an annuity or a unitrust amount, at least annually, to
one or more beneficiaries, at least one of which is not a charity, for
life or for a limited term of years, with an irrevocable remainder
interest held for the benefit of, or paid over to, charity. Thus, there
is at least one current income beneficiary of a CRT, and a charitable
remainder beneficiary. A CRT is not subject to income tax. See section
664(c).
Uniform Basis Rule
Property acquired by a trust from a decedent or as a gift generally
has a uniform basis. This means that property has a single basis even
though more than one person has an interest in that property. See
Sec. Sec. 1.1014-4(a)(1) and 1.1015-1(b). Generally, the uniform basis
of assets transferred to a trust is determined under section 1015 for
assets transferred by lifetime gift, or under section 1014 or 1022 for
assets transferred from a decedent. Adjustments to uniform basis for
items such as depreciation are made even though more than one person
holds an interest in the property (adjusted uniform basis).
When a taxable trust sells assets, any gain is taxed currently to
the trust, to one or more beneficiaries, or apportioned among the trust
and its beneficiaries. If the trust reinvests the proceeds from the
sale in new assets, the trust's basis in the newly purchased assets is
the cost of the new assets. See section 1012. Thus, the adjusted
uniform basis of that taxable trust is attributable to basis obtained
with proceeds from sales that were subject to income tax.
However, a CRT does not pay income tax on gain from the sale of
appreciated assets. A CRT may sell appreciated assets and accumulate
undistributed income and undistributed capital gains, and may reinvest
the proceeds of the sales in new assets. The treatment of distributions
from a CRT to its income beneficiary depends upon the amount of
undistributed income and undistributed capital gains in the CRT.
Sections 664(b)(1) and (2).
Basis in Term and Remainder Interests in a CRT
Section 1001(e) governs the determination of gain or loss from the
sale or disposition of a term interest in property, such as a life or
term interest in a CRT. In general, section 1001(e)(1) provides that
the portion of the adjusted basis of a term interest in property that
is determined pursuant to sections 1014, 1015, or 1041 is disregarded
in determining gain or loss from the sale or other disposition of such
term interest. Thus, the seller of such an interest generally must
disregard that portion of the basis in the transferred interest in
computing the gain or loss.
Section 1001(e)(3), however, provides that section 1001(e)(1) does
not apply to a sale or other disposition that is part of a transaction
in which the entire interest in property is transferred. Therefore, in
the case of a sale or other disposition that is part of a transaction
in which all interests in the property (or trust) are transferred as
described in section 1001(e)(3), the capital gain or loss of each
seller of an interest is the excess of the amount realized from the
sale of that interest over the seller's basis in that interest. Each
seller's basis is the seller's portion of the adjusted uniform basis
assignable to the interest so transferred. See Sec. 1.1014-5(a)(1).
The basis of a term or remainder interest in a trust at the time of
its sale or other disposition is determined under the rules provided in
Sec. 1.1014-5. See also Sec. Sec. 1.1015-1(b) and 1.1015-2(a)(2),
which refer to the rules of Sec. 1.1014-5. Specifically, Sec. 1.1014-
5(a)(3) provides that, in determining the basis in a term or remainder
interest in property at the time of the interest's sale or disposition,
adjusted uniform basis is allocated using the factors for valuing life
estates and remainder interests. Thus, the portions of the adjusted
uniform basis attributable to the interests of the life tenant and
remaindermen are adjusted to reflect the change in the relative values
of such interests due to the lapse of time.
Notice 2008-99
The IRS and the Treasury Department became aware of a type of
transaction involving these provisions and, on October 31, 2008, the
IRS and the Treasury Department published Notice 2008-99 (2008-47 IRB
1194) (``Notice'') 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. In this type of
transaction, a sale or other disposition of all interests in a CRT
subsequent to the contribution of appreciated assets to, and their
reinvestment by, the CRT results in the grantor or other noncharitable
beneficiary (the taxable beneficiary) receiving the value of the
taxable beneficiary's trust interest while claiming to recognize little
or no taxable gain.
Specifically, upon contribution of assets to the CRT, the grantor
claims an income tax deduction under section 170 of the Internal
Revenue Code (Code) for the portion of the fair market value of the
assets contributed to the CRT (which generally have a fair market value
in excess of the grantor's cost basis) that is attributable to the
charitable remainder interest. When the CRT sells or liquidates the
contributed assets, the taxable beneficiary does not recognize gain,
and the CRT is exempt from tax on such gain under section 664(c). The
CRT reinvests the proceeds in other assets, often a portfolio of
marketable securities, with a basis equal to the portfolio's cost. The
taxable beneficiary and charity subsequently sell all of their
respective interests in the CRT to a third party.
The taxable beneficiary takes the position that the entire interest
in the CRT has been sold as described in section 1001(e)(3) and,
therefore, section 1001(e)(1) does not apply to the transaction. As a
result, the taxable beneficiary computes gain on the sale of the
taxable beneficiary's term interest by taking into account the portion
of the uniform basis allocable to the term interest under Sec. Sec.
1.1014-5 and 1.1015-1(b). The taxable beneficiary takes the position
that this uniform basis is
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derived from the basis of the new assets acquired by the CRT rather
than the grantor's basis in the assets contributed to the CRT.
Explanation of Provisions
In response to the request for comments in the Notice, the IRS and
the Treasury Department received three written comments. All three
commenters agreed that a taxable beneficiary of a CRT should not
benefit from a basis step-up attributable to tax-exempt gains, and each
supported amending the uniform basis rules to foreclose this benefit.
The IRS and the Treasury Department agree that it is inappropriate for
a taxable beneficiary to share in the uniform basis obtained through
the reinvestment of income not subject to tax due to a trust's tax-
exempt status.
Accordingly, these proposed regulations provide a special rule for
determining the basis in certain CRT term interests in transactions to
which section 1001(e)(3) applies. In these cases, the proposed
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
proposed 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). However,
the IRS and the Treasury Department may consider whether there should
be any change in the treatment of the charitable remainderman
participating in such a transaction.
In addition to the comments supportive of a basis limitation
described above and proposed to be adopted herein, the commenters
addressed additional issues in response to the Notice. One commenter
requested guidance specifying what valuation methods the IRS will
accept as a reasonable method for determining the amount of a life-
income recipient's gain on the termination of certain types of CRTs.
Another commenter suggested that the IRS and the Treasury Department
could create a rule requiring a zero basis for all interests in CRTs in
order to prevent an inappropriate result while still allowing for early
termination of CRTs. The commenter also proposed that this rule be made
applicable to all early terminations of CRTs. The IRS and the Treasury
Department did not adopt a rule requiring a zero basis for all
interests in CRTs because the IRS and the Treasury Department believe
that the rule provided in the proposed regulations will prevent
inappropriate results while treating parties to the transaction fairly.
Additionally, the IRS and the Treasury Department believe that rules
addressing early terminations other than those arising from a
transaction described in section 1001(e)(3), and rules prescribing
valuation methods, are beyond the scope of the issues intended to be
addressed in these proposed regulations, and thus will not be
considered as part of this guidance.
Finally, the rules in these proposed regulations are limited in
application to charitable remainder annuity trusts and charitable
remainder unitrusts as defined in section 664. The IRS and the Treasury
Department request comments as to whether the rules also should apply
to other types of tax-exempt trusts.
Effect on Other Documents
The issuance of these proposed regulations does not affect the
disclosure obligation set forth in the Notice.
Proposed Effective/Applicability Date
These regulations are proposed to 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
inapplicability of these regulations to an excepted sale or disposition
does not preclude the IRS from applying legal arguments available to
the IRS before issuance of these 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 or Cumulative 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
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866, as supplemented by Executive Order 13563. Therefore, a
regulatory 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 regulations, and the Regulatory Flexibility Act
(5 U.S.C. chapter 6) does not apply to these regulations because the
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 Code, this notice of proposed
rulemaking has been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Comments and Requests for Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any written (a signed original and 8
copies) or electronic comments that are submitted timely to the IRS.
The IRS and the Treasury Department also request comments on the
administrability and clarity of the proposed rules, and how they can be
made easier to understand. All comments will be available for public
inspection and copying at www.regulations.gov or upon request. A public
hearing will be scheduled if requested in writing by any person who
timely submits written or electronic comments. If a public hearing is
scheduled, notice of the date, time, and place of the public hearing
will be published in the Federal Register.
Drafting Information
The principal author of these proposed regulations is Allison R.
Carmody of the Office of Associate Chief Counsel (Passthroughs and
Special Industries). Other personnel from the IRS and the Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be 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.
[[Page 3145]]
Sec. 1.1014-5 [Amended]
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. Re-designating paragraph (c) as newly-designated paragraph (d) and
adding new paragraph (c).
0
3. In newly-designated paragraph (d), adding new 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 described 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 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.
[FR Doc. 2014-00807 Filed 1-16-14; 8:45 am]
BILLING CODE 4830-01-P