Professional Tax Research Solutions from the Founder of Kleinrock. tax and accounting research
Parker Tax Pro Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
federal tax research
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software Federal Tax Research tax research


Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

CPA Tax Software

        

 

Tax Court Limits Charitable Contribution Deduction for Remainder Interests in CRTs.

(Parker Tax Publishing August 27, 2015)

Where the payout of two NIMCRUTs is the lesser of the trust income or a fixed percentage, an annual distribution amount equal to the fixed percentage stated in the trust instruments must be used to determine whether the estate of the decedent who created the NIMCRUTs is eligible for a charitable contribution deduction. Est. of Schaefer v. Comm'r, 145 T.C. No. 4 (2015).

During his lifetime, Arthur Schaefer established two irrevocable charitable remainder unitrusts (CRUTs). Each trust was designed so that one of Arthur's sons would receive distributions during his life or a term of years with the remainder going to a charity. Each trust instrument states that the trustee must make distributions to the noncharitable beneficiary (i.e., Arthur's sons) of the lesser of the net trust accounting income for the taxable year and a fixed percentage of the net fair market value of the trust assets, valued annually. Each trust instrument also allows the trustee to make additional distributions, limited to trust income, if previous distributions did not equal the fixed percentage. Trusts using this provision are net income with makeup charitable remainder unitrusts (NIMCRUTs).

For each trust to qualify as a charitable remainder trust, thereby making the estate eligible for a charitable contribution deduction, Code Sec. 664(d)(2) requires that the value of the remainder interest must be at least 10 percent of the net fair market value of the property contributed. Code Sec. 664(e) describes how to value a charitable remainder interest. It provides that, for purposes of determining the amount of any charitable contribution, the remainder interest of a CRUT is computed on the basis that an amount equal to 5 percent of the net fair market value of its assets (or a greater amount, if required under the terms of the trust instrument) is to be distributed each year.

The IRS and estate disagreed on how to take into account distributions from a NIMCRUT when valuing the remainder interest. The IRS pointed to Reg. Sec. 1.664-4(a)(3), which indicates that the fixed percentage is distributed implicitly without regard to the net income limitation in the case of a NIMCRUT. The estate argued that NIMCRUT distributions are determined not under this rule but under an exception to this rule in Reg. Sec. 1.664-3(a)(1)(i)(b). According to the estate, in valuing the remainder interest, the distributions are calculated by using the Code Sec. 7520 rate to determine the trust's expected income, so long as the Code Sec. 7520 rate is above 5 percent of the net fair market value of the assets. The IRS argued that the remainder interest is valued using a distribution rate equal to the fixed percentage in the trust instrument.

The Tax Court found the text of Code Sec. 664(e) ambiguous. In describing the distribution to be taken into account for valuation purposes, Code Sec. 664(e) does not expressly use the words "sum certain" or "fixed percentage", the court noted. Instead Code Sec. 664(e) provides that a distribution rate "equal to 5 percent of the net fair market value of its assets (or a greater amount, if required under the terms of the trust instrument)" is to be used. The Tax Court said it was unable to determine on its face whether this provision meant the sum certain (in the case of a CRAT) or the fixed percentage (in the case of a CRUT) or whether it meant something different. The court found the regulations were also ambiguous, and turned to other administrative guidance.

The court noted that, in Rev. Rul. 72-395 and Rev. Proc. 2005-54, the IRS asserts that the remainder interest of a NIMCRUT is valued using the fixed percentage stated in the trust instrument, regardless of the fact that distributions are limited to trust income. After reviewing the legislative history of Code Sec. 664, the Tax Court found the IRS's guidance to be persuasive. Both pieces of guidance, the court said, were thoroughly reasoned and provided examples and explanations based on the applicable provisions. Additionally, the court said, the guidance has withstood the test of time, and the IRS's position also has remained consistent and has been the subject of little litigation.

The legislative history and the administrative guidance, the court said, pointed to only one conclusion - that the value of the remainder interest of a NIMCRUT must be calculated using the greater of 5 percent or the fixed percentage stated in the trust instrument. Accordingly, the court concluded that the estate had to use an annual distribution amount of 11 percent or 10 percent of the net fair market value of the trust assets when valuing the remainder interests of the two trusts. Because the parties had previously stipulated that the estate would not be entitled to a charitable contribution deduction if the remainder interests were valued using this method, the estate was not entitled to a charitable deduction.

For a discussion of the rules relating to CRUTs, see Parker Tax ¶57,115. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com


Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

    ®2012-2017 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance