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," targeting schemes designed to avoid tax on ordinary income and capital gains.
These regulations mandate disclosure to the IRS by material advisors and participants involved in such transactions, with penalties for non-compliance. The IRS identified these arrangements as abusive, where property with a fair market value exceeding its basis is transferred to a purported CRAT, which then sells the property and purchases a single premium immediate annuity (SPIA). Taxpayers subsequently misapply tax rules under sections 72 and 664 to claim the CRAT annuity is taxable only on the SPIA's income portion, effectively eliminating significant tax liabilities.
IRS Chief Executive Officer Frank J. Bisignano emphasized the agency's commitment, saying, "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 aimed at curbing such tax avoidance practices.