Basis in Interests in Tax-Exempt Trusts, 3142-3145 [2014-00807]

Download as PDF 3142 Federal Register / Vol. 79, No. 12 / Friday, January 17, 2014 / Proposed Rules TABLE 1 TO PARAGRAPH (E)—FUEL MANIFOLD INSPECTION AND LOOP CLAMP REPLACEMENT AND INSPECTION CRITERIA— Continued If: Then: • GE CF6–80C2 SB 73–0326, Revision 2, dated August 30, 2007 or earlier; • GE CF6–80E1 SB 73–0061, Revision 2, dated August 30, 2007 or earlier. 3—If the engine is a first-run engine, an engine with zero-time, or has new loop clamps previously installed on-wing or at shop visit. 4—If the engine has already exceeded the 1,750 FH initial inspection threshold on the effective date of this AD but has fewer than 4,500 flight hours TSLI. 5—If the engine has already exceeded the 4,500 FH initial inspection threshold on the effective date of this AD. (3) For CF6–80C2 series engines, with fuel manifold, P/Ns 1303M31G12, 1303M32G12, 2420M70G01, or 2420M71G01, with tube (block) clamp, P/N 1153M26G15, refer to Table 2 to paragraph (e) of this AD, accomplish the initial inspection of the fuel manifold and tube (block) clamp, and replacement of the fuel manifold and tube (block) clamp, if required based on inspection results, in accordance with Then inspect fuel manifold and replace clamps within 1,750 FH timesince-last-shop-visit or within 4 months after the effective date of this AD, whichever occurs first. Then inspect fuel manifold and replace clamps within 7,500 FH timesince-new or since zero-time that new loop clamps were installed. Then inspect fuel manifold and replace clamps within 4,500 FH TSLI or 4 months after the effective date of this AD, whichever occurs first. Then inspect fuel manifold and replace clamps within 4 months after the effective date of this AD. paragraph 3.A of GE SB CF6–80C2 S/B 73– 0414, dated July 2, 2013. (4) For CF6–80E1 series engines, with fuel manifold, P/Ns 1303M31G12, 1303M32G12, 2420M70G01, or 2420M71G01, with tube (block) clamp, P/N 1153M26G15, refer to Table 2 to paragraph (e) of this AD, accomplish the initial inspections of the fuel manifold and tube (block) clamp, and replacement of the fuel manifold and tube (block) clamp, if required based on inspection results, in accordance with paragraph 3.A of GE SB CF6–80E1 S/B 73– 0121, dated July 2, 2013. (5) Thereafter, inspect fuel manifold, P/Ns 1303M31G12, 1303M32G12, 2420M70G01, and 2420M71G01, within every 7,500 flight hours (FH) since the last inspection, in accordance with paragraphs (e)(3) and (e)(4) of this AD. TABLE 2 TO PARAGRAPH (E)—FUEL MANIFOLD AND TUBE (BLOCK) CLAMP INSPECTION AND REPLACEMENT CRITERIA If: Then: 1—If the engine is a first run engine or the engine was previously inspected using either of the following: • GE SB CF6–80C2 S/B 73–0414, dated July 2, 2013; • GE SB CF6–80E1 S/B 73–0121 dated July 02, 2013. 2—If the engine has already exceeded the 7,500 FH initial inspection threshold on the effective date of this AD. Then inspect clamps and replace within 7,500 FH TSLI. Then inspect clamps and replace within 3 months after the effective date of this AD. (f) Prohibition Statement (i) Related Information After the effective date of this AD, do not install fuel manifold, P/Ns 1308M31G04, 1303M32G04, 1303M31G06, 1303M32G06, 1303M31G07, 1303M32G07, 1303M31G08, 1303M32G08, 1308M31G12, 1308M32G12, 2420M70G01, or 2420M71G01, on any engine. (1) For more information about this AD, contact Kasra Sharifi, Aerospace Engineer, Engine Certification Office, FAA, Engine & Propeller Directorate, 12 New England Executive Park, Burlington, MA 01830; phone 781–238–7773; fax: 781–238–7199; email: kasra.sharifi@faa.gov. (2) General Electric Service Bulletin (SB) CF6–80C2 S/B 73–0326, Revision 4, dated December 23, 2009, SB CF6–80E1 S/B 73– 0061, Revision 4, dated December 23, 2009, SB CF6–80C2 S/B 73–0414, dated July 2, 2013, and SB CF6–80E1 S/B 73–0121, dated July 2, 2013, pertain to the subject of this AD and can be obtained from GE using the contact information in paragraph (i)(3) of this AD. (3) For service information identified in this AD, contact General Electric Company, GE Aviation, Room 285, 1 Neumann Way, Cincinnati, OH 45215; phone: 513–552–3272; email: geae.aoc@ge.com. (4) You may view this service information at the FAA, Engine & Propeller Directorate, 12 New England Executive Park, Burlington, MA. For information on the availability of this material at the FAA, call 781–238–7125. (g) Definition pmangrum on DSK3VPTVN1PROD with PROPOSALS-1 For the purpose of this AD, an engine shop visit is the induction of an engine into the shop for maintenance involving separation of pairs of major mating engine flanges (lettered flanges), except that the separation of engine flanges solely for the purposes of transporting the engine without subsequent engine maintenance does not constitute an engine shop visit. (h) Alternative Methods of Compliance (AMOCs) The Manager, Engine Certification Office, FAA, may approve AMOCs for this AD. Use the procedures found in 14 CFR 39.19 to make your request. Previously approved AMOCs for AD 2009–05–02 (74 FR 8161, February 24, 2009) remain approved for the corresponding requirements of paragraphs (e)(1) through (e)(5) of this AD. VerDate Mar<15>2010 14:04 Jan 16, 2014 Jkt 232001 PO 00000 Frm 00004 Fmt 4702 Sfmt 4702 Issued in Burlington, Massachusetts, on December, 24, 2013. Frank P. Paskiewicz, Acting Director, Aircraft Certification Service. [FR Doc. 2014–00833 Filed 1–16–14; 8:45 am] BILLING CODE 4910–13–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG–154890–03] RIN 1545–BJ42 Basis in Interests in Tax-Exempt Trusts Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking. AGENCY: This document contains proposed regulations that provide rules for determining a taxable beneficiary’s basis in a term interest in a charitable remainder trust upon a sale or other disposition of all interests in the trust to SUMMARY: E:\FR\FM\17JAP1.SGM 17JAP1 Federal Register / Vol. 79, No. 12 / Friday, January 17, 2014 / Proposed Rules the extent that basis consists of a share of adjusted uniform basis. The regulations affect taxable beneficiaries of charitable remainder trusts. DATES: Written or electronic comments and requests for a public hearing must be received by April 17, 2014. ADDRESSES: Send submissions to CC:PA:LPD:PR (REG–154890–03), Room 5205, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG–154890– 03), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW., Washington, DC or sent electronically via the Federal eRulemaking Portal at www.regulations.gov (IRS REG–154890– 03). FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, Allison R. Carmody at (202) 317–5279; concerning submissions of comments and requests for hearing, Oluwafunmilayo (Funmi) Taylor, at (202) 317–6901 (not toll-free numbers). SUPPLEMENTARY INFORMATION: Background Statutory and Regulatory Rules Charitable Remainder Trusts A charitable remainder trust (CRT) is a trust that provides for the distribution of an annuity or a unitrust amount, at least annually, to one or more beneficiaries, at least one of which is not a charity, for life or for a limited term of years, with an irrevocable remainder interest held for the benefit of, or paid over to, charity. Thus, there is at least one current income beneficiary of a CRT, and a charitable remainder beneficiary. A CRT is not subject to income tax. See section 664(c). pmangrum on DSK3VPTVN1PROD with PROPOSALS-1 Uniform Basis Rule Property acquired by a trust from a decedent or as a gift generally has a uniform basis. This means that property has a single basis even though more than one person has an interest in that property. See §§ 1.1014–4(a)(1) and 1.1015–1(b). Generally, the uniform basis of assets transferred to a trust is determined under section 1015 for assets transferred by lifetime gift, or under section 1014 or 1022 for assets transferred from a decedent. Adjustments to uniform basis for items such as depreciation are made even though more than one person holds an interest in the property (adjusted uniform basis). VerDate Mar<15>2010 14:04 Jan 16, 2014 Jkt 232001 When a taxable trust sells assets, any gain is taxed currently to the trust, to one or more beneficiaries, or apportioned among the trust and its beneficiaries. If the trust reinvests the proceeds from the sale in new assets, the trust’s basis in the newly purchased assets is the cost of the new assets. See section 1012. Thus, the adjusted uniform basis of that taxable trust is attributable to basis obtained with proceeds from sales that were subject to income tax. However, a CRT does not pay income tax on gain from the sale of appreciated assets. A CRT may sell appreciated assets and accumulate undistributed income and undistributed capital gains, and may reinvest the proceeds of the sales in new assets. The treatment of distributions from a CRT to its income beneficiary depends upon the amount of undistributed income and undistributed capital gains in the CRT. Sections 664(b)(1) and (2). Basis in Term and Remainder Interests in a CRT Section 1001(e) governs the determination of gain or loss from the sale or disposition of a term interest in property, such as a life or term interest in a CRT. In general, section 1001(e)(1) provides that the portion of the adjusted basis of a term interest in property that is determined pursuant to sections 1014, 1015, or 1041 is disregarded in determining gain or loss from the sale or other disposition of such term interest. Thus, the seller of such an interest generally must disregard that portion of the basis in the transferred interest in computing the gain or loss. Section 1001(e)(3), however, provides that section 1001(e)(1) does not apply to a sale or other disposition that is part of a transaction in which the entire interest in property is transferred. Therefore, in the case of a sale or other disposition that is part of a transaction in which all interests in the property (or trust) are transferred as described in section 1001(e)(3), the capital gain or loss of each seller of an interest is the excess of the amount realized from the sale of that interest over the seller’s basis in that interest. Each seller’s basis is the seller’s portion of the adjusted uniform basis assignable to the interest so transferred. See § 1.1014–5(a)(1). The basis of a term or remainder interest in a trust at the time of its sale or other disposition is determined under the rules provided in § 1.1014–5. See also §§ 1.1015–1(b) and 1.1015–2(a)(2), which refer to the rules of § 1.1014–5. Specifically, § 1.1014–5(a)(3) provides that, in determining the basis in a term or remainder interest in property at the PO 00000 Frm 00005 Fmt 4702 Sfmt 4702 3143 time of the interest’s sale or disposition, adjusted uniform basis is allocated using the factors for valuing life estates and remainder interests. Thus, the portions of the adjusted uniform basis attributable to the interests of the life tenant and remaindermen are adjusted to reflect the change in the relative values of such interests due to the lapse of time. Notice 2008–99 The IRS and the Treasury Department became aware of a type of transaction involving these provisions and, on October 31, 2008, the IRS and the Treasury Department published Notice 2008–99 (2008–47 IRB 1194) (‘‘Notice’’) to designate a transaction and substantially similar transactions as Transactions of Interest under § 1.6011– 4(b)(6) of the Income Tax Regulations, and to ask for public comments on how the transactions might be addressed in published guidance. In this type of transaction, a sale or other disposition of all interests in a CRT subsequent to the contribution of appreciated assets to, and their reinvestment by, the CRT results in the grantor or other noncharitable beneficiary (the taxable beneficiary) receiving the value of the taxable beneficiary’s trust interest while claiming to recognize little or no taxable gain. Specifically, upon contribution of assets to the CRT, the grantor claims an income tax deduction under section 170 of the Internal Revenue Code (Code) for the portion of the fair market value of the assets contributed to the CRT (which generally have a fair market value in excess of the grantor’s cost basis) that is attributable to the charitable remainder interest. When the CRT sells or liquidates the contributed assets, the taxable beneficiary does not recognize gain, and the CRT is exempt from tax on such gain under section 664(c). The CRT reinvests the proceeds in other assets, often a portfolio of marketable securities, with a basis equal to the portfolio’s cost. The taxable beneficiary and charity subsequently sell all of their respective interests in the CRT to a third party. The taxable beneficiary takes the position that the entire interest in the CRT has been sold as described in section 1001(e)(3) and, therefore, section 1001(e)(1) does not apply to the transaction. As a result, the taxable beneficiary computes gain on the sale of the taxable beneficiary’s term interest by taking into account the portion of the uniform basis allocable to the term interest under §§ 1.1014–5 and 1.1015– 1(b). The taxable beneficiary takes the position that this uniform basis is E:\FR\FM\17JAP1.SGM 17JAP1 3144 Federal Register / Vol. 79, No. 12 / Friday, January 17, 2014 / Proposed Rules pmangrum on DSK3VPTVN1PROD with PROPOSALS-1 derived from the basis of the new assets acquired by the CRT rather than the grantor’s basis in the assets contributed to the CRT. Explanation of Provisions In response to the request for comments in the Notice, the IRS and the Treasury Department received three written comments. All three commenters agreed that a taxable beneficiary of a CRT should not benefit from a basis step-up attributable to taxexempt gains, and each supported amending the uniform basis rules to foreclose this benefit. The IRS and the Treasury Department agree that it is inappropriate for a taxable beneficiary to share in the uniform basis obtained through the reinvestment of income not subject to tax due to a trust’s tax-exempt status. Accordingly, these proposed regulations provide a special rule for determining the basis in certain CRT term interests in transactions to which section 1001(e)(3) applies. In these cases, the proposed regulations provide that the basis of a term interest of a taxable beneficiary is the portion of the adjusted uniform basis assignable to that interest reduced by the portion of the sum of the following amounts assignable to that interest: (1) The amount of undistributed net ordinary income described in section 664(b)(1); and (2) the amount of undistributed net capital gain described in section 664(b)(2). These proposed regulations do not affect the CRT’s basis in its assets, but rather are for the purpose of determining a taxable beneficiary’s gain arising from a transaction described in section 1001(e)(3). However, the IRS and the Treasury Department may consider whether there should be any change in the treatment of the charitable remainderman participating in such a transaction. In addition to the comments supportive of a basis limitation described above and proposed to be adopted herein, the commenters addressed additional issues in response to the Notice. One commenter requested guidance specifying what valuation methods the IRS will accept as a reasonable method for determining the amount of a life-income recipient’s gain on the termination of certain types of CRTs. Another commenter suggested that the IRS and the Treasury Department could create a rule requiring a zero basis for all interests in CRTs in order to prevent an inappropriate result while still allowing for early termination of CRTs. The commenter also proposed that this rule be made applicable to all early terminations of VerDate Mar<15>2010 14:04 Jan 16, 2014 Jkt 232001 CRTs. The IRS and the Treasury Department did not adopt a rule requiring a zero basis for all interests in CRTs because the IRS and the Treasury Department believe that the rule provided in the proposed regulations will prevent inappropriate results while treating parties to the transaction fairly. Additionally, the IRS and the Treasury Department believe that rules addressing early terminations other than those arising from a transaction described in section 1001(e)(3), and rules prescribing valuation methods, are beyond the scope of the issues intended to be addressed in these proposed regulations, and thus will not be considered as part of this guidance. Finally, the rules in these proposed regulations are limited in application to charitable remainder annuity trusts and charitable remainder unitrusts as defined in section 664. The IRS and the Treasury Department request comments as to whether the rules also should apply to other types of tax-exempt trusts. Effect on Other Documents The issuance of these proposed regulations does not affect the disclosure obligation set forth in the Notice. Proposed Effective/Applicability Date These regulations are proposed to apply to sales and other dispositions of interests in CRTs occurring on or after January 16, 2014, except for sales or dispositions occurring pursuant to a binding commitment entered into before January 16, 2014. However, the inapplicability of these regulations to an excepted sale or disposition does not preclude the IRS from applying legal arguments available to the IRS before issuance of these regulations in order to contest the claimed tax treatment of such a transaction. Availability of IRS Documents The IRS notice cited in this preamble is published in the Internal Revenue Bulletin or Cumulative Bulletin and is available at the IRS Web site at https:// www.irs.gov or the Superintendent of Documents, U.S. Government Printing Office, Washington, DC 20402. Special Analyses It has been determined that this notice of proposed rulemaking is not a significant regulatory action as defined in Executive Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 PO 00000 Frm 00006 Fmt 4702 Sfmt 4702 U.S.C. chapter 5) does not apply to these regulations, and the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply to these regulations because the regulations do not impose a collection of information on small entities. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, this notice of proposed rulemaking has been submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its impact on small business. Comments and Requests for Public Hearing Before these proposed regulations are adopted as final regulations, consideration will be given to any written (a signed original and 8 copies) or electronic comments that are submitted timely to the IRS. The IRS and the Treasury Department also request comments on the administrability and clarity of the proposed rules, and how they can be made easier to understand. All comments will be available for public inspection and copying at www.regulations.gov or upon request. A public hearing will be scheduled if requested in writing by any person who timely submits written or electronic comments. If a public hearing is scheduled, notice of the date, time, and place of the public hearing will be published in the Federal Register. Drafting Information The principal author of these proposed regulations is Allison R. Carmody of the Office of Associate Chief Counsel (Passthroughs and Special Industries). Other personnel from the IRS and the Treasury Department participated in their development. List of Subjects in 26 CFR Part 1 Income taxes, Reporting and recordkeeping requirements. Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is proposed to be amended as follows: PART 1—INCOME TAXES Paragraph 1. The authority citation for part 1 continues to read in part as follows: ■ Authority: 26 U.S.C. 7805 * * * § 1.1001–1 [Amended] Par. 2. Section 1.1001–1, paragraph (f)(4), is amended by removing the language ‘‘paragraph (c)’’ and adding ‘‘paragraph (d)’’ in its place. ■ E:\FR\FM\17JAP1.SGM 17JAP1 Federal Register / Vol. 79, No. 12 / Friday, January 17, 2014 / Proposed Rules § 1.1014–5 [Amended] (d) * * * Par. 3. Section 1.1014–5 is amended by: ■ 1. In paragraph (a)(1), first sentence, removing the language ‘‘paragraph (b)’’ and adding ‘‘paragraph (b) or (c)’’ in its place. ■ 2. Re-designating paragraph (c) as newly-designated paragraph (d) and adding new paragraph (c). ■ 3. In newly-designated paragraph (d), adding new Example 7 and Example 8. The additions read as follows: ■ § 1.1014–5 Gain or loss. pmangrum on DSK3VPTVN1PROD with PROPOSALS-1 * * * * * (c) Sale or other disposition of a term interest in a tax-exempt trust—(1) In general. In the case of any sale or other disposition by a taxable beneficiary of a term interest (as defined in § 1.1001– 1(f)(2)) in a tax-exempt trust (as described in paragraph (c)(2) of this section) to which section 1001(e)(3) applies, the taxable beneficiary’s share of adjusted uniform basis, determined as of (and immediately before) the sale or disposition of that interest, is— (i) That part of the adjusted uniform basis assignable to the term interest of the taxable beneficiary under the rules of paragraph (a) of this section reduced, but not below zero, by (ii) An amount determined by applying the same actuarial share applied in paragraph (c)(1)(i) of this section to the sum of— (A) The trust’s undistributed net ordinary income within the meaning of section 664(b)(1) and § 1.664– 1(d)(1)(ii)(a)(1) for the current and prior taxable years of the trust, if any; and (B) The trust’s undistributed net capital gains within the meaning of section 664(b)(2) and § 1.664– 1(d)(1)(ii)(a)(2) for the current and prior taxable years of the trust, if any. (2) Tax-exempt trust defined. For purposes of this section, the term taxexempt trust means a charitable remainder annuity trust or a charitable remainder unitrust as defined in section 664. (3) Taxable beneficiary defined. For purposes of this section, the term taxable beneficiary means any person other than an organization described in section 170(c) or exempt from taxation under section 501(a). (4) Effective/applicability date. This paragraph (c) and paragraph (d), Example 7 and Example 8, of this section apply to sales and other dispositions of interests in tax-exempt trusts occurring on or after January 16, 2014, except for sales or dispositions occurring pursuant to a binding commitment entered into before January 16, 2014. VerDate Mar<15>2010 14:04 Jan 16, 2014 Jkt 232001 Example 7. (a) Grantor creates a charitable remainder unitrust (CRUT) on Date 1 in which Grantor retains a unitrust interest and irrevocably transfers the remainder interest to Charity. Grantor is an individual taxpayer subject to income tax. CRUT meets the requirements of section 664 and is exempt from income tax. (b) Grantor’s basis in the shares of X stock used to fund CRUT is $10x. On Date 2, CRUT sells the X stock for $100x. The $90x of gain is exempt from income tax under section 664(c)(1). On Date 3, CRUT uses the $100x proceeds from its sale of the X stock to purchase Y stock. On Date 4, CRUT sells the Y stock for $110x. The $10x of gain on the sale of the Y stock is exempt from income tax under section 664(c)(1). On Date 5, CRUT uses the $110x proceeds from its sale of Y stock to buy Z stock. On Date 5, CRUT’s basis in its assets is $110x and CRUT’s total undistributed net capital gains are $100x. (c) Later, when the fair market value of CRUT’s assets is $150x and CRUT has no undistributed net ordinary income, Grantor and Charity sell all of their interests in CRUT to a third person. Grantor receives $100x for the retained unitrust interest, and Charity receives $50x for its interest. Because the entire interest in CRUT is transferred to the third person, section 1001(e)(3) prevents section 1001(e)(1) from applying to the transaction. Therefore, Grantor’s gain on the sale of the retained unitrust interest in CRUT is determined under section 1001(a), which provides that Grantor’s gain on the sale of that interest is the excess of the amount realized, $100x, over Grantor’s adjusted basis in the interest. (d) Grantor’s adjusted basis in the unitrust interest in CRUT is that portion of CRUT’s adjusted uniform basis that is assignable to Grantor’s interest under § 1.1014–5, which is Grantor’s actuarial share of the adjusted uniform basis. In this case, CRUT’s adjusted uniform basis in its sole asset, the Z stock, is $110x. However, paragraph (c) of this section applies to the transaction. Therefore, Grantor’s actuarial share of CRUT’s adjusted uniform basis (determined by applying the factors set forth in the tables contained in § 20.2031–7 of this chapter) is reduced by an amount determined by applying the same factors to the sum of CRUT’s $0 of undistributed net ordinary income and its $100x of undistributed net capital gains. (e) In determining Charity’s share of the adjusted uniform basis, Charity applies the factors set forth in the tables contained in § 20.2031–7 of this chapter to the full $110x of basis. Example 8. (a) Grantor creates a charitable remainder annuity trust (CRAT) on Date 1 in which Grantor retains an annuity interest and irrevocably transfers the remainder interest to Charity. Grantor is an individual taxpayer subject to income tax. CRAT meets the requirements of section 664 and is exempt from income tax. (b) Grantor funds CRAT with shares of X stock having a basis of $50x. On Date 2, CRAT sells the X stock for $150x. The $100x of gain is exempt from income tax under section 664(c)(1). On Date 3, CRAT distributes $10x to Grantor, and uses the PO 00000 Frm 00007 Fmt 4702 Sfmt 4702 3145 remaining $140x of net proceeds from its sale of the X stock to purchase Y stock. Grantor treats the $10x distribution as capital gain, so that CRAT’s remaining undistributed net capital gains amount described in section 664(b)(2) and § 1.664–1(d) is $90x. (c) On Date 4, when the fair market value of CRAT’s assets, which consist entirely of the Y stock, is still $140x, Grantor and Charity sell all of their interests in CRAT to a third person. Grantor receives $126x for the retained annuity interest, and Charity receives $14x for its remainder interest. Because the entire interest in CRAT is transferred to the third person, section 1001(e)(3) prevents section 1001(e)(1) from applying to the transaction. Therefore, Grantor’s gain on the sale of the retained annuity interest in CRAT is determined under section 1001(a), which provides that Grantor’s gain on the sale of that interest is the excess of the amount realized, $126x, over Grantor’s adjusted basis in that interest. (d) Grantor’s adjusted basis in the annuity interest in CRAT is that portion of CRAT’s adjusted uniform basis that is assignable to Grantor’s interest under § 1.1014–5, which is Grantor’s actuarial share of the adjusted uniform basis. In this case, CRAT’s adjusted uniform basis in its sole asset, the Y stock, is $140x. However, paragraph (c) of this section applies to the transaction. Therefore, Grantor’s actuarial share of CRAT’s adjusted uniform basis (determined by applying the factors set forth in the tables contained in § 20.2031–7 of this chapter) is reduced by an amount determined by applying the same factors to the sum of CRAT’s $0 of undistributed net ordinary income and its $90x of undistributed net capital gains. (e) In determining Charity’s share of the adjusted uniform basis, Charity applies the factors set forth in the tables contained in § 20.2031–7 of this chapter to determine its actuarial share of the full $140x of basis. John Dalrymple, Deputy Commissioner for Services and Enforcement. [FR Doc. 2014–00807 Filed 1–16–14; 8:45 am] BILLING CODE 4830–01–P DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1 [REG–121534–12] RIN 1545–BL00 Guidance for Determining Stock Ownership Internal Revenue Service (IRS), Treasury. ACTION: Notice of proposed rulemaking by cross-reference to temporary regulations. AGENCY: In the Rules and Regulations section of this issue of the Federal Register, the IRS and the Treasury SUMMARY: E:\FR\FM\17JAP1.SGM 17JAP1

Agencies

[Federal Register Volume 79, Number 12 (Friday, January 17, 2014)]
[Proposed Rules]
[Pages 3142-3145]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-00807]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-154890-03]
RIN 1545-BJ42


Basis in Interests in Tax-Exempt Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide rules 
for determining a taxable beneficiary's basis in a term interest in a 
charitable remainder trust upon a sale or other disposition of all 
interests in the trust to

[[Page 3143]]

the extent that basis consists of a share of adjusted uniform basis. 
The regulations affect taxable beneficiaries of charitable remainder 
trusts.

DATES: Written or electronic comments and requests for a public hearing 
must be received by April 17, 2014.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-154890-03), Room 5205, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
154890-03), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC or sent electronically via the Federal 
eRulemaking Portal at www.regulations.gov (IRS REG-154890-03).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Allison R. Carmody at (202) 317-5279; concerning submissions of 
comments and requests for hearing, Oluwafunmilayo (Funmi) Taylor, at 
(202) 317-6901 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

Statutory and Regulatory Rules

Charitable Remainder Trusts

    A charitable remainder trust (CRT) is a trust that provides for the 
distribution of an annuity or a unitrust amount, at least annually, to 
one or more beneficiaries, at least one of which is not a charity, for 
life or for a limited term of years, with an irrevocable remainder 
interest held for the benefit of, or paid over to, charity. Thus, there 
is at least one current income beneficiary of a CRT, and a charitable 
remainder beneficiary. A CRT is not subject to income tax. See section 
664(c).

Uniform Basis Rule

    Property acquired by a trust from a decedent or as a gift generally 
has a uniform basis. This means that property has a single basis even 
though more than one person has an interest in that property. See 
Sec. Sec.  1.1014-4(a)(1) and 1.1015-1(b). Generally, the uniform basis 
of assets transferred to a trust is determined under section 1015 for 
assets transferred by lifetime gift, or under section 1014 or 1022 for 
assets transferred from a decedent. Adjustments to uniform basis for 
items such as depreciation are made even though more than one person 
holds an interest in the property (adjusted uniform basis).
    When a taxable trust sells assets, any gain is taxed currently to 
the trust, to one or more beneficiaries, or apportioned among the trust 
and its beneficiaries. If the trust reinvests the proceeds from the 
sale in new assets, the trust's basis in the newly purchased assets is 
the cost of the new assets. See section 1012. Thus, the adjusted 
uniform basis of that taxable trust is attributable to basis obtained 
with proceeds from sales that were subject to income tax.
    However, a CRT does not pay income tax on gain from the sale of 
appreciated assets. A CRT may sell appreciated assets and accumulate 
undistributed income and undistributed capital gains, and may reinvest 
the proceeds of the sales in new assets. The treatment of distributions 
from a CRT to its income beneficiary depends upon the amount of 
undistributed income and undistributed capital gains in the CRT. 
Sections 664(b)(1) and (2).

Basis in Term and Remainder Interests in a CRT

    Section 1001(e) governs the determination of gain or loss from the 
sale or disposition of a term interest in property, such as a life or 
term interest in a CRT. In general, section 1001(e)(1) provides that 
the portion of the adjusted basis of a term interest in property that 
is determined pursuant to sections 1014, 1015, or 1041 is disregarded 
in determining gain or loss from the sale or other disposition of such 
term interest. Thus, the seller of such an interest generally must 
disregard that portion of the basis in the transferred interest in 
computing the gain or loss.
    Section 1001(e)(3), however, provides that section 1001(e)(1) does 
not apply to a sale or other disposition that is part of a transaction 
in which the entire interest in property is transferred. Therefore, in 
the case of a sale or other disposition that is part of a transaction 
in which all interests in the property (or trust) are transferred as 
described in section 1001(e)(3), the capital gain or loss of each 
seller of an interest is the excess of the amount realized from the 
sale of that interest over the seller's basis in that interest. Each 
seller's basis is the seller's portion of the adjusted uniform basis 
assignable to the interest so transferred. See Sec.  1.1014-5(a)(1).
    The basis of a term or remainder interest in a trust at the time of 
its sale or other disposition is determined under the rules provided in 
Sec.  1.1014-5. See also Sec. Sec.  1.1015-1(b) and 1.1015-2(a)(2), 
which refer to the rules of Sec.  1.1014-5. Specifically, Sec.  1.1014-
5(a)(3) provides that, in determining the basis in a term or remainder 
interest in property at the time of the interest's sale or disposition, 
adjusted uniform basis is allocated using the factors for valuing life 
estates and remainder interests. Thus, the portions of the adjusted 
uniform basis attributable to the interests of the life tenant and 
remaindermen are adjusted to reflect the change in the relative values 
of such interests due to the lapse of time.

Notice 2008-99

    The IRS and the Treasury Department became aware of a type of 
transaction involving these provisions and, on October 31, 2008, the 
IRS and the Treasury Department published Notice 2008-99 (2008-47 IRB 
1194) (``Notice'') to designate a transaction and substantially similar 
transactions as Transactions of Interest under Sec.  1.6011-4(b)(6) of 
the Income Tax Regulations, and to ask for public comments on how the 
transactions might be addressed in published guidance. In this type of 
transaction, a sale or other disposition of all interests in a CRT 
subsequent to the contribution of appreciated assets to, and their 
reinvestment by, the CRT results in the grantor or other noncharitable 
beneficiary (the taxable beneficiary) receiving the value of the 
taxable beneficiary's trust interest while claiming to recognize little 
or no taxable gain.
    Specifically, upon contribution of assets to the CRT, the grantor 
claims an income tax deduction under section 170 of the Internal 
Revenue Code (Code) for the portion of the fair market value of the 
assets contributed to the CRT (which generally have a fair market value 
in excess of the grantor's cost basis) that is attributable to the 
charitable remainder interest. When the CRT sells or liquidates the 
contributed assets, the taxable beneficiary does not recognize gain, 
and the CRT is exempt from tax on such gain under section 664(c). The 
CRT reinvests the proceeds in other assets, often a portfolio of 
marketable securities, with a basis equal to the portfolio's cost. The 
taxable beneficiary and charity subsequently sell all of their 
respective interests in the CRT to a third party.
    The taxable beneficiary takes the position that the entire interest 
in the CRT has been sold as described in section 1001(e)(3) and, 
therefore, section 1001(e)(1) does not apply to the transaction. As a 
result, the taxable beneficiary computes gain on the sale of the 
taxable beneficiary's term interest by taking into account the portion 
of the uniform basis allocable to the term interest under Sec. Sec.  
1.1014-5 and 1.1015-1(b). The taxable beneficiary takes the position 
that this uniform basis is

[[Page 3144]]

derived from the basis of the new assets acquired by the CRT rather 
than the grantor's basis in the assets contributed to the CRT.

Explanation of Provisions

    In response to the request for comments in the Notice, the IRS and 
the Treasury Department received three written comments. All three 
commenters agreed that a taxable beneficiary of a CRT should not 
benefit from a basis step-up attributable to tax-exempt gains, and each 
supported amending the uniform basis rules to foreclose this benefit. 
The IRS and the Treasury Department agree that it is inappropriate for 
a taxable beneficiary to share in the uniform basis obtained through 
the reinvestment of income not subject to tax due to a trust's tax-
exempt status.
    Accordingly, these proposed regulations provide a special rule for 
determining the basis in certain CRT term interests in transactions to 
which section 1001(e)(3) applies. In these cases, the proposed 
regulations provide that the basis of a term interest of a taxable 
beneficiary is the portion of the adjusted uniform basis assignable to 
that interest reduced by the portion of the sum of the following 
amounts assignable to that interest: (1) The amount of undistributed 
net ordinary income described in section 664(b)(1); and (2) the amount 
of undistributed net capital gain described in section 664(b)(2). These 
proposed regulations do not affect the CRT's basis in its assets, but 
rather are for the purpose of determining a taxable beneficiary's gain 
arising from a transaction described in section 1001(e)(3). However, 
the IRS and the Treasury Department may consider whether there should 
be any change in the treatment of the charitable remainderman 
participating in such a transaction.
    In addition to the comments supportive of a basis limitation 
described above and proposed to be adopted herein, the commenters 
addressed additional issues in response to the Notice. One commenter 
requested guidance specifying what valuation methods the IRS will 
accept as a reasonable method for determining the amount of a life-
income recipient's gain on the termination of certain types of CRTs. 
Another commenter suggested that the IRS and the Treasury Department 
could create a rule requiring a zero basis for all interests in CRTs in 
order to prevent an inappropriate result while still allowing for early 
termination of CRTs. The commenter also proposed that this rule be made 
applicable to all early terminations of CRTs. The IRS and the Treasury 
Department did not adopt a rule requiring a zero basis for all 
interests in CRTs because the IRS and the Treasury Department believe 
that the rule provided in the proposed regulations will prevent 
inappropriate results while treating parties to the transaction fairly. 
Additionally, the IRS and the Treasury Department believe that rules 
addressing early terminations other than those arising from a 
transaction described in section 1001(e)(3), and rules prescribing 
valuation methods, are beyond the scope of the issues intended to be 
addressed in these proposed regulations, and thus will not be 
considered as part of this guidance.
    Finally, the rules in these proposed regulations are limited in 
application to charitable remainder annuity trusts and charitable 
remainder unitrusts as defined in section 664. The IRS and the Treasury 
Department request comments as to whether the rules also should apply 
to other types of tax-exempt trusts.

Effect on Other Documents

    The issuance of these proposed regulations does not affect the 
disclosure obligation set forth in the Notice.

Proposed Effective/Applicability Date

    These regulations are proposed to apply to sales and other 
dispositions of interests in CRTs occurring on or after January 16, 
2014, except for sales or dispositions occurring pursuant to a binding 
commitment entered into before January 16, 2014. However, the 
inapplicability of these regulations to an excepted sale or disposition 
does not preclude the IRS from applying legal arguments available to 
the IRS before issuance of these regulations in order to contest the 
claimed tax treatment of such a transaction.

Availability of IRS Documents

    The IRS notice cited in this preamble is published in the Internal 
Revenue Bulletin or Cumulative Bulletin and is available at the IRS Web 
site at https://www.irs.gov or the Superintendent of Documents, U.S. 
Government Printing Office, Washington, DC 20402.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866, as supplemented by Executive Order 13563. Therefore, a 
regulatory assessment is not required. It also has been determined that 
section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) 
does not apply to these regulations, and the Regulatory Flexibility Act 
(5 U.S.C. chapter 6) does not apply to these regulations because the 
regulations do not impose a collection of information on small 
entities. Therefore, a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking has been submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and 8 
copies) or electronic comments that are submitted timely to the IRS. 
The IRS and the Treasury Department also request comments on the 
administrability and clarity of the proposed rules, and how they can be 
made easier to understand. All comments will be available for public 
inspection and copying at www.regulations.gov or upon request. A public 
hearing will be scheduled if requested in writing by any person who 
timely submits written or electronic comments. If a public hearing is 
scheduled, notice of the date, time, and place of the public hearing 
will be published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Allison R. 
Carmody of the Office of Associate Chief Counsel (Passthroughs and 
Special Industries). Other personnel from the IRS and the Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority:  26 U.S.C. 7805 * * *


Sec.  1.1001-1  [Amended]

0
Par. 2. Section 1.1001-1, paragraph (f)(4), is amended by removing the 
language ``paragraph (c)'' and adding ``paragraph (d)'' in its place.

[[Page 3145]]

Sec.  1.1014-5  [Amended]

0
Par. 3. Section 1.1014-5 is amended by:
0
1. In paragraph (a)(1), first sentence, removing the language 
``paragraph (b)'' and adding ``paragraph (b) or (c)'' in its place.
0
2. Re-designating paragraph (c) as newly-designated paragraph (d) and 
adding new paragraph (c).
0
3. In newly-designated paragraph (d), adding new Example 7 and Example 
8.
    The additions read as follows:


Sec.  1.1014-5  Gain or loss.

* * * * *
    (c) Sale or other disposition of a term interest in a tax-exempt 
trust--(1) In general. In the case of any sale or other disposition by 
a taxable beneficiary of a term interest (as defined in Sec.  1.1001-
1(f)(2)) in a tax-exempt trust (as described in paragraph (c)(2) of 
this section) to which section 1001(e)(3) applies, the taxable 
beneficiary's share of adjusted uniform basis, determined as of (and 
immediately before) the sale or disposition of that interest, is--
    (i) That part of the adjusted uniform basis assignable to the term 
interest of the taxable beneficiary under the rules of paragraph (a) of 
this section reduced, but not below zero, by
    (ii) An amount determined by applying the same actuarial share 
applied in paragraph (c)(1)(i) of this section to the sum of--
    (A) The trust's undistributed net ordinary income within the 
meaning of section 664(b)(1) and Sec.  1.664-1(d)(1)(ii)(a)(1) for the 
current and prior taxable years of the trust, if any; and
    (B) The trust's undistributed net capital gains within the meaning 
of section 664(b)(2) and Sec.  1.664-1(d)(1)(ii)(a)(2) for the current 
and prior taxable years of the trust, if any.
    (2) Tax-exempt trust defined. For purposes of this section, the 
term tax-exempt trust means a charitable remainder annuity trust or a 
charitable remainder unitrust as defined in section 664.
    (3) Taxable beneficiary defined. For purposes of this section, the 
term taxable beneficiary means any person other than an organization 
described in section 170(c) or exempt from taxation under section 
501(a).
    (4) Effective/applicability date. This paragraph (c) and paragraph 
(d), Example 7 and Example 8, of this section apply to sales and other 
dispositions of interests in tax-exempt trusts occurring on or after 
January 16, 2014, except for sales or dispositions occurring pursuant 
to a binding commitment entered into before January 16, 2014.
    (d) * * *

    Example 7.  (a) Grantor creates a charitable remainder unitrust 
(CRUT) on Date 1 in which Grantor retains a unitrust interest and 
irrevocably transfers the remainder interest to Charity. Grantor is 
an individual taxpayer subject to income tax. CRUT meets the 
requirements of section 664 and is exempt from income tax.
    (b) Grantor's basis in the shares of X stock used to fund CRUT 
is $10x. On Date 2, CRUT sells the X stock for $100x. The $90x of 
gain is exempt from income tax under section 664(c)(1). On Date 3, 
CRUT uses the $100x proceeds from its sale of the X stock to 
purchase Y stock. On Date 4, CRUT sells the Y stock for $110x. The 
$10x of gain on the sale of the Y stock is exempt from income tax 
under section 664(c)(1). On Date 5, CRUT uses the $110x proceeds 
from its sale of Y stock to buy Z stock. On Date 5, CRUT's basis in 
its assets is $110x and CRUT's total undistributed net capital gains 
are $100x.
    (c) Later, when the fair market value of CRUT's assets is $150x 
and CRUT has no undistributed net ordinary income, Grantor and 
Charity sell all of their interests in CRUT to a third person. 
Grantor receives $100x for the retained unitrust interest, and 
Charity receives $50x for its interest. Because the entire interest 
in CRUT is transferred to the third person, section 1001(e)(3) 
prevents section 1001(e)(1) from applying to the transaction. 
Therefore, Grantor's gain on the sale of the retained unitrust 
interest in CRUT is determined under section 1001(a), which provides 
that Grantor's gain on the sale of that interest is the excess of 
the amount realized, $100x, over Grantor's adjusted basis in the 
interest.
    (d) Grantor's adjusted basis in the unitrust interest in CRUT is 
that portion of CRUT's adjusted uniform basis that is assignable to 
Grantor's interest under Sec.  1.1014-5, which is Grantor's 
actuarial share of the adjusted uniform basis. In this case, CRUT's 
adjusted uniform basis in its sole asset, the Z stock, is $110x. 
However, paragraph (c) of this section applies to the transaction. 
Therefore, Grantor's actuarial share of CRUT's adjusted uniform 
basis (determined by applying the factors set forth in the tables 
contained in Sec.  20.2031-7 of this chapter) is reduced by an 
amount determined by applying the same factors to the sum of CRUT's 
$0 of undistributed net ordinary income and its $100x of 
undistributed net capital gains.
    (e) In determining Charity's share of the adjusted uniform 
basis, Charity applies the factors set forth in the tables contained 
in Sec.  20.2031-7 of this chapter to the full $110x of basis.
    Example 8.  (a) Grantor creates a charitable remainder annuity 
trust (CRAT) on Date 1 in which Grantor retains an annuity interest 
and irrevocably transfers the remainder interest to Charity. Grantor 
is an individual taxpayer subject to income tax. CRAT meets the 
requirements of section 664 and is exempt from income tax.
    (b) Grantor funds CRAT with shares of X stock having a basis of 
$50x. On Date 2, CRAT sells the X stock for $150x. The $100x of gain 
is exempt from income tax under section 664(c)(1). On Date 3, CRAT 
distributes $10x to Grantor, and uses the remaining $140x of net 
proceeds from its sale of the X stock to purchase Y stock. Grantor 
treats the $10x distribution as capital gain, so that CRAT's 
remaining undistributed net capital gains amount described in 
section 664(b)(2) and Sec.  1.664-1(d) is $90x.
    (c) On Date 4, when the fair market value of CRAT's assets, 
which consist entirely of the Y stock, is still $140x, Grantor and 
Charity sell all of their interests in CRAT to a third person. 
Grantor receives $126x for the retained annuity interest, and 
Charity receives $14x for its remainder interest. Because the entire 
interest in CRAT is transferred to the third person, section 
1001(e)(3) prevents section 1001(e)(1) from applying to the 
transaction. Therefore, Grantor's gain on the sale of the retained 
annuity interest in CRAT is determined under section 1001(a), which 
provides that Grantor's gain on the sale of that interest is the 
excess of the amount realized, $126x, over Grantor's adjusted basis 
in that interest.
    (d) Grantor's adjusted basis in the annuity interest in CRAT is 
that portion of CRAT's adjusted uniform basis that is assignable to 
Grantor's interest under Sec.  1.1014-5, which is Grantor's 
actuarial share of the adjusted uniform basis. In this case, CRAT's 
adjusted uniform basis in its sole asset, the Y stock, is $140x. 
However, paragraph (c) of this section applies to the transaction. 
Therefore, Grantor's actuarial share of CRAT's adjusted uniform 
basis (determined by applying the factors set forth in the tables 
contained in Sec.  20.2031-7 of this chapter) is reduced by an 
amount determined by applying the same factors to the sum of CRAT's 
$0 of undistributed net ordinary income and its $90x of 
undistributed net capital gains.
    (e) In determining Charity's share of the adjusted uniform 
basis, Charity applies the factors set forth in the tables contained 
in Sec.  20.2031-7 of this chapter to determine its actuarial share 
of the full $140x of basis.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2014-00807 Filed 1-16-14; 8:45 am]
BILLING CODE 4830-01-P

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