Charitable Remainder Trusts and Capital Gains

Charitable Remainder Trusts and Capital Gains

News story posted in IRS Notices on 17 March 1999| comments
audience: National Publication | last updated: 18 May 2011
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Summary

In Notice 99-17, the IRS has corrected the inconsistency between Notice 98-20 and Code Section 1(h)(13)(D) regarding the ordering of capital gains distributions from charitable remainder trusts.

Notice 99-17

PGDC SUMMARY:

Notice 99-17 modifies in two respects Notice 98-20, which the IRS issued to provide guidance on the ordering of capital gain distributions made on or after January 1, 1998, from a charitable remainder trust under Code Section 664(b)(2). First, for taxable years ending after December 31, 1997, the section of Notice 98-20 dealing with pre-effective date capital gains should be ignored. Second, in Notice 98-20's example illustrating the ordering and character rules, the 28% group is changed to gains on collectibles (such as art and coins). These modifications put the IRS's guidance in sync with Code Section 1(h)(13)(D) as added by the Tax and Trade Relief Extension Act of 1998.

POINTS TO PONDER:

Does this Notice constitute the guidance planned for 1999 on the treatment of capital gains taken into account by charitable remainder trusts mentioned in the IRS and Treasury's 1999 Business Plan Guidance? See the upcoming issue of Planned Giving Online for a complete discussion of this issue.

FULL TEXT:

Part III -- Administrative, Procedural, and Miscellaneous

Post-1997 Distributions of Capital Gains from Charitable Remainder Trusts

This notice modifies Notice 98-20, 1998-13 I.R.B. 25, to reflect changes made to section 1(h) of the Internal Revenue Code by sections 4002(i)(3) and 4003(b) of the Tax and Trade Relief Extension Act of 1998 (Division J of H.R. 4328, Omnibus Consolidated and Emergency Supplemental Appropriations Act, 1999), Pub. L. No. 105- 277, 112 Stat. 2681 (1998) (TTREA of 1998). The changes affect the treatment of post-1997 distributions of certain capital gains properly taken into account in 1997 by a charitable remainder trust (CRT) described in section 664.

BACKGROUND

Notice 98-20 provides guidance on the ordering and taxation of distributions under section 664(b)(2) from a CRT to reflect changes made to section 1(h) by the Taxpayer Relief Act of 1997 (TRA 1997), Pub. L. No. 105-34, section 311, 111 Stat. 788, 831. TRA 1997 amended section 1(h) to provide for new capital gain tax rates for noncorporate taxpayers. Under Notice 98-20, a CRT's long- term capital gains (LTCGs) and losses fall into three separate tax rate groups: (1) the 28-percent group, (2) the 25-percent group, and (3) the 20-percent group. Grouping of LTCGs properly taken into account by a CRT is necessary in order to determine the treatment of distributions by the CRT. Notice 98-20 provides that LTCGs properly taken into account by a CRT from January 1, 1997, through May 6, 1997, are treated as LTCGs in the 28-percent group.

Section 4002(i)(3) of the TTREA of 1998 added section 1(h)(13)(D). New section 1(h)(13)(D) provides that section 1(h)(13)(A) and section 1(h)(13)(B)(ii) (providing 28-percent rate treatment for certain LTCGs properly taken into account in 1997) do not apply to any capital gain distribution made by a CRT, effective for taxable years ending after December 31, 1997. Because section 1(h)(13)(A) and section 1(h)(13)(B)(ii) do not apply to a CRT distribution for taxable years ending after December 31, 1997, LTCGs (other than collectibles gain) properly taken into account by a CRT during 1997 and distributed in taxable years ending after December 31, 1997, that would have been in the 28-percent group now fall within either the 25-percent group or the 20-percent group.

To reflect the changes made to section 1(h) by section 4002(i)(3) of the TTREA of 1998, this present notice modifies two sections of Notice 98-20: (1) 1997 PRE-EFFECTIVE DATE LONG-TERM CAPITAL GAINS and (2) EXAMPLE ILLUSTRATING ORDERING AND CHARACTER RULES. The 1997 PRE-EFFECTIVE DATE LONG-TERM CAPITAL GAINS section of Notice 98-20 should be disregarded for taxable years ending after December 31, 1997. In the EXAMPLE ILLUSTRATING ORDERING AND CHARACTER RULES section of Notice 98-20, the 28-percent group gain is changed to collectibles gain.

DISCUSSION

The character of a CRT's income is determined at the time the income is realized by the trust. Under section 1(h)(13)(D), a CRT's LTCG in the 28-percent group (other than collectibles gain) that was properly taken into account during 1997 and distributed in taxable years ending after December 31, 1997, falls within either the 25-percent group or the 20-percent group. Thus, a CRT's LTCG described in the previous sentence now falls within the 25-percent group if the gain (1) was from property held more than 12 months but not more than 18 months, (2) was properly taken into account for the portion of the taxable year after July 28, 1997, and before January 1, 1998, and (3) otherwise satisfies the requirements for unrecaptured section 1250 gain under section 1(h)(7); any remaining LTCG falls within the 20-percent group.

To reflect this change in law, some CRTs will need to remove from the 28-percent group any LTCGs (other than collectibles gain) properly taken into account during 1997 that were not distributed in taxable year 1997 and place those LTCGs in either the 25-percent group or the 20-percent group, as appropriate.

Tables 1 and 2 illustrate the recent changes made to section 1(h) and their effect on CRTs.

                               TABLE 1
       RULES APPLICABLE TO LTCGS DISTRIBUTED IN TAX YEAR 1997
                LTCGs realized    LTCGs realized  LTCGs realized
                     from              from            from
Pre-1997 LTCGs  1/1/97-5/6/97     5/7/97-7/28/97  7/29/97-12/31/97
______________  ______________    ______________  ______________
20%             28% if prop.      28% for         28% if prop.
                held > 12 mos.    collectibles    held > 12 mos.
                                  gain            and less than
                                                  / = 18mos.
                                                  or for
                                                  collectibles
                                                  gain
                                  25% if prop.    25% if prop.
                                  held > 12 mos.  held > 18 mos.
                                  and LTCG is     and LTCG is
                                  unrecaptured    unrecaptured
                                  section 1250    section 1250
                                  gain            gain
                                  20% for all     20% for all
                                  other prop.     other prop.
                                  held > 12 mos.  held > 18 mos.
                               TABLE 2
    RULES APPLICABLE TO LTCGS DISTRIBUTED IN POST-1997 TAX YEARS
                 LTCGs realized   LTCGs realized  LTCGs realized
                     from              from            from
Pre-1997 LTCGs   1/1/97-5/6/97    5/7/97-7/28/97 7/29/97-12/31/97
______________   ______________   ______________ ________________
No change-20%    Change-20% if    No change-28%  Change-28% only
                 property held    for            for collectibles
                 > 12 months      collectibles   gain
                                  gain
                                  No change-25%  Change-25% if
                                  if property    property held
                                  held > 12      > 12 months
                                  months and     and LTCG is
                                  LTCG is        unrecaptured
                                  unrecaptured   section 1250
                                  section 1250   gain
                                  gain
                                  No change-20%  Change-20%
                                  for all other  for all other
                                  property       property held
                                  held > 12      > 12 months
                                  months


EFFECTIVE DATE

The statutory changes described in this notice apply to CRT distributions made in taxable years ending after December 31, 1997.

EFFECT ON OTHER DOCUMENTS

Notice 98-20 is modified.

DRAFTING INFORMATION

The principal author of this notice is Mary Beth Collins of the Office of Assistant Chief Counsel (Passthroughs and Special Industries). For further information regarding this notice, contact Ms. Collins on (202) 622-3080 (not a toll-free call).

$include:RR_NAL-talink$

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