IRS and Treasury Target Abusive Charitable Remainder Annuity Trust Schemes

The Department of the Treasury and the Internal Revenue Service (IRS) today issued final regulations designating certain Charitable Remainder Annuity Trust (CRAT) arrangements as "listed transactions" to combat tax avoidance schemes.

These regulations target abusive transactions where taxpayers attempt to eliminate ordinary income or capital gains from property sales. In such schemes, property with a fair market value exceeding its basis, like interests in a closely-held business, is transferred to a purported CRAT. The CRAT then sells the property and uses the proceeds to purchase a Single Premium Immediate Annuity (SPIA).

Participants in these arrangements misapply tax rules under sections 72 and 664, claiming the CRAT annuity is taxable only on the SPIA's income portion. Material advisors and certain participants are now required to file disclosures with the IRS, facing penalties for non-compliance.

IRS Chief Executive Officer Frank J. Bisignano emphasized, "The Internal Revenue Service remains vigilant and is watching out for tax avoidance schemes. Taxpayers should not forget that the IRS will continue to combat abusive tax shelters and transactions." These final regulations build upon previously proposed rules.