The Internal Revenue Service (IRS) released a notice of proposed regulations, REG-108761-22, to identify certain transactions involving charitable remainder annuity trusts (CRAT) and substantially similar transactions as listed transactions. The IRS highlighted these CRAT transactions on their 2023 Dirty Dozen list of potentially abusive arrangements.
The proposed regulations identify a tax avoidance transaction using a CRAT. This is when a taxpayer attempts to use a CRAT and a single premium immediate annuity to avoid recognition of ordinary income and capital gain. Taxpayers engaging in this transaction, or similar transactions, claim distributions from the trust to beneficiaries. These transactions are not taxable as ordinary income or capital gain under Section 664(b) because the distributions constitute the trust’s unrecovered investment in the single premium immediate annuity. The claimed recovery of the investment in the annuity is then deemed to be excluded from gross income under Section 72(b)(2).
The notice also raises questions as to whether the trust arrangement qualifies as a CRAT and whether the trust arrangement matches one of the eight sample CRAT forms provided in Rev. Procs. 2008-53 – 2008-60.
Next Steps for Taxpayers
The IRS will now collect comments on the proposed regulations and address these before the regulations are finalized.
Taxpayers who are considering a transaction like the one described in the proposed regulations should discuss the application of the listed transaction designation to their plans.
Your Guide Forward
For any questions you have about transactions involving CRATs, please reach out to a Cherry Bekaert tax advisor for guidance.
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