Part III. Administrative, Procedural, and Miscellaneous

Transaction of Interest—Potential for Avoidance of Tax Through Sale of Charitable Remainder Trust Interests

Notice 2008–99

The Internal Revenue Service and the Treasury Department are aware of a type of transaction, described below, 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 trust), results in the grantor or other noncharitable recipient receiving the value of that person’s trust interest while claiming to recognize little or no taxable gain. The IRS and Treasury Department believe this transaction has the potential for tax avoidance or evasion, but lack enough information to determine whether the transaction should be identified specifically as a tax avoidance transaction. This notice identifies this transaction and substantially similar transactions as transactions of interest for purposes of § 1.6011–4(b)(6) of the Income Tax Regulations and §§ 6111 and 6112 of the Internal Revenue Code. This notice also alerts persons involved in these transactions to certain responsibilities that may arise from their involvement.

FACTS

In one variation of the transaction, Grantor creates a charitable remainder trust (Trust) and contributes appreciated assets (Appreciated Assets) to Trust. Grantor retains an annuity or unitrust interest (term interest) in Trust and designates an organization described in §§ 170(c), 2055(a) and 2522(a) (Charity) as the remainder beneficiary. Charity may, but need not, be controlled by Grantor; Grantor may, but need not, reserve the right to change the Charity designated as the remainder beneficiary. Next, Trust sells or liquidates the Appreciated Assets and reinvests the net proceeds in other assets (New Assets) such as money market funds, marketable securities, and/or other assets, often to acquire a diversified portfolio. Because a charitable remain

der trust generally is a tax-exempt entity under § 664, Trust’s sale of the Appreciated Assets is exempt from income tax, and Trust’s basis in the New Assets is the price Trust pays for those New Assets. Some portion of Trust’s ordinary income and capital gains may become taxable to Grantor as the periodic annuity or unitrust payments are made by Trust in accordance with the rules of § 664 and the regulations thereunder. Next, Grantor and Charity, in a transaction they claim is described in § 1001(e)(3), sell or otherwise dispose of their respective interests in Trust to X, an unrelated third party, for an amount that approximates the fair market value of the assets of the trust, including the New Assets. Trust then terminates, and the assets of Trust, including the New Assets, are distributed to X.

Grantor takes the following positions regarding the tax consequences of this transaction. Grantor claims a charitable deduction for the portion of the fair market value of the Appreciated Assets as of the date of their contribution to Trust that is attributable to the remainder interest. Grantor claims to recognize no gain from the Trust’s sale or liquidation of the Appreciated Assets. When Grantor and Charity sell their respective interests in Trust to X, Grantor and Charity take the position that they have sold the entire interest in Trust within the meaning of § 1001(e)(3). Because the entire interest in Trust is sold, Grantor claims that § 1001(e)(1), which disregards basis in the case of a sale of a term interest, does not apply to the transaction. Grantor also takes the position that, under § 1001(a) and related provisions, the gain on the sale of Grantor’s term interest is computed by taking into account the portion of uniform basis allocable to Grantor’s term interest under §1.1014–5 and § 1.1015–1(b), and that this uniform basis is derived from the basis of the New Assets rather than the basis of the Appreciated Assets.

The transaction may use trusts with circumstances that vary from the situation described in the facts of this notice. In some variations, a net income with make-up provision charitable remainder unitrust (NIMCRUT) may be used as Trust, Trust may have been in existence for some

time prior to the sale of Trust interests, the Appreciated Assets already may be in Trust prior to the commencement of the transaction, the recipient and seller of the term interest may be the Grantor and/or another person, or Grantor may contribute the Appreciated Assets to a partnership or other passthrough entity and then contribute the interest in the entity to Trust.

A result of the claimed tax treatment of the transaction is that the gain on the sale of the Appreciated Assets is never taxed, even though the Grantor receives the Grantor’s share of the appreciated fair market value of those assets. The IRS and Treasury Department are not concerned about the mere creation and funding of a charitable remainder trust and/or the trust’s reinvestment of the contributed appreciated property, and such events alone do not constitute the transaction subject to this notice.

However, the IRS and Treasury Department are concerned about the manipulation of the uniform basis rules to avoid tax on gain from the sale or other disposition of appreciated assets. Accordingly, the type of transaction described in this notice includes a coordinated sale or other coordinated disposition of the respective interests of the Grantor or other noncharitable recipient and the Charity in a charitable remainder trust in a transaction claimed to be described in § 1001(e)(3), subsequent to the contribution of appreciated assets and the trust’s reinvestment of those assets. In particular, the IRS and Treasury Department are concerned about Grantor’s claim to an increased basis in the term interest coupled with the termination of the Trust in a single coordinated transaction under § 1001(e) to avoid tax on gain from the sale or other disposition of the Appreciated Assets.

TRANSACTION OF INTEREST

Effective Date

Transactions that are the same as, or substantially similar to, the transaction described in this notice are identified as transactions of interest for purposes of § 1.6011–4(b)(6) and §§ 6111 and 6112 effective October 31, 2008, the date this

November 24, 2008 1194 2008–47 I.R.B.

Avenue, N.W., Washington, DC. Comments also may be submitted electronically via the following email address: Notice.Comments@irscounsel.treas.gov . Please include “Notice 2008–99” in the subject line of any electronic submissions. All comments received will be open to public inspection and copying.

DRAFTING INFORMATION

The principal author of this notice is Allison Carmody of the Office of Associate Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Ms. Carmody at (202) 622–3070 (not a toll-free call).

26 CFR 601.601: Rules and regulations. (Also Part I, §§ 582, 702, 1221.)

Rev. Proc. 2008–64