Firm Comments on Notice 2008-99

Firm Comments on Notice 2008-99

News story posted in Comments on 11 February 2009| comments
audience: National Publication | last updated: 18 May 2011


In response to IRS Notice 2008-99 in which the Service described a potentially abusive situation involving the avoidance of tax through the sale of an income interest in a charitable remainder trust, James Linott, writing on behalf of Sterling Foundation Management, has reviewed the legitimate reasons for selling such interests and has urged the Service to address the clearly abusive transaction outlined in the Notice as narrowly as possible.

Full Text:

January 31, 2009

Internal Revenue Service
CC:PA:LPD:PR (Notice 2008-99)
Courier's Desk
1111 Constitution Avenue, NW
Washington, DC

Re: Notice 2008-99

Ladies and Gentlemen:

Sterling Foundation Management, LLC ("Sterling") submits these comments in connection with IRS Notice 2008-99 (Transaction of Interest -- Potential for Avoidance of Tax Through Sale of Charitable Remainder Trust Interests) (the "Notice").

We believe that providing a market for holders of lead interests in CRTs is appropriate and good public policy, and so as not to prevent CRT interest holders who have a legitimate need or preference to sell their interests, we urge that you address the clearly abusive transaction outlined in the Notice in as narrow a manner as possible.

Sterling Foundation Management, LLC was founded in 1998 to provide foundation management services to wealthy individuals, private foundations, and public charities. Sterling has been involved in facilitating the sale of CRT lead interests for approximately six years. During this period, we have looked at hundreds of potential transactions. This has given us insight into the thinking of many CRT grantors. Out of the hundreds of potential transactions we've looked at, only a small fraction, less than ten percent, has resulted in the actual sale of a CRT lead interest.

People sell their lead interests in CRTs for a variety of reasons. Among these are divorce, business reversal, stock market losses, concern over potential future tax rate increases, death of a beneficiary, need for liquidity, family illness, desire for simplification, dislike of administrative costs, disappointment with investment performance, and the desire for increased investment flexibility.

In our preliminary analysis of the feasibility of a sale of a CRT interest, we engaged expert legal counsel. They looked at many issues. One of these issues was a theoretical arrangement involving the income tax basis of the selling donor and the application of the basis rules of IRC § 1001(e). Our counsel concluded that the language of IRC § 1001(e)(3) could, under certain circumstance, allow the seller to claim a portion of the uniform basis of the CRT assets in computing gain on the sale of the lead CRT interest. Counsel also concluded that any pre-arrangement between the lead interest holder and the charitable remainderman to dispose of their respective interests in the CRT in a manner designed to apply the uniform basis rules to eliminate or minimize capital gains on the appreciation assets contributed to the CRT would properly be viewed as a sham and would be disregarded by the IRS.

To the best of our knowledge, none of the potential transactions we have reviewed represented a pre-arranged agreement between the lead interest holder and remainderman as described. Sterling has never facilitated a sale of a lead interest in a CRT from a donor with whom it had an existing relationship. Moreover, Sterling does not facilitate transactions when the CRT has been in existence for only a short period of time.

Motivation of Sellers

As noted above, in reviewing hundreds of cases, we have gained insight into the range of reasons which commonly motivate CRT income beneficiaries to consider selling their income interests. Some of these are discussed further below.


Almost by definition, when people create a CRT they do not have a strong need for cash. They willingly exchange the possibility of an immediate lump sum for a stream of future cash flows. In the case of a unitrust (the large majority of cases we see involve unitrusts), that stream of future cash flows is subject to significant uncertainty. Perhaps it is inevitable that in some percentage of cases, the grantors will find that over time their circumstances change materially. In these new changed circumstances, they find that their need for liquidity is greater than when they created their CRT.


We have seen a significant number of cases in which married couples created a CRT, and subsequently divorced. Often, based on our observations, after the divorce and property settlement, the CRT remains as the sole piece of joint property. Understandably, some of these divorced couples would like to get rid of this last remaining financial tie. In some cases, sale of the CRT interest is a feasible alternative, and resolves for the couple a difficult issue.


Death of one of the spouses is very often traumatic for the survivor. In some cases, it changes the outlook, priorities, or desires of the survivor with respect to the CRT (and no doubt with respect to much more important things as well). Particularly when the decedent was the spouse who dealt with the CRT, the survivor may wish to be rid of that complication. A sale may provide a solution.

Desire for Simplification

A significant percentage of potential sellers have indicated in conversations that they desire to simplify their financial lives. A CRT is seen in these cases as an administrative headache, another tax return to be filed, another fee to be paid. Sale of the interest solves this problem for the seller.

Business Reversal/Need for Capital

Some grantors of CRTs are small business owners. Small businesses often have limited access to capital markets, and depend to a large degree on the owners for financing. A CRT could not invest in a grantor's business because of the private foundation rules applicable to CRTs. We have seen, particularly in the aftermath of the tech bubble collapse early in the decade, and again recently, a significant number of CRT grantors who would like to access the value in their CRTs to invest in their businesses. A sale of the CRT interest may provide a viable means of accessing the capital their business needs.

Economic Analysis of CRT Creation; Impact of a Market for Lead Interests

When a donor funds a CRT, two interests are created: a lead interest and a charitable interest. This transaction has a number of economic effects, including (1) the creation of a charitable interest where none existed before; (2) the transformation of a liquid asset (the property contributed) into an illiquid asset (the lead and remainder interests); and (3) the generation of tax consequences which are likely different from those which would have prevailed in the absence of the CRT.

Creation of Charitable Interest

People vary in their willingness to give to charity: some give happily, some grudgingly, and some not at all. People also vary in their generosity: some give large amounts, some less, some just a little, and again, some not at all.

In the aggregate, the total amount of giving can be increased (or decreased) as a result of some small percentage of the people changing their giving behavior. The incentives created by the tax benefits available through CRTs are designed to nudge behavior in the direction of more giving.

Over the ten plus years that Sterling has been in business, we have probably talked with thousands of donors or potential donors to charities. These charities include private foundations and public charities, in addition to CRTs. We have noted that it seems to be impossible (for us, anyway) to convince someone who doesn't care very much about charity to nevertheless make a large contribution to charity.

Except that this is not the case with CRTs. A significant percentage of CRT donors, in our experience, state that the tax benefits of the CRT helped push them over the hurdle, and make the CRT donation. In other words, when it comes to CRTs, the tax law does exactly what it's supposed to: it encourages people to give more to charity than they otherwise would.

But even with the tax benefits of creating a CRT, a donor is still converting a liquid asset (the property contributed) into an illiquid asset (the CRT lead interest). It is well known that, holding all else equal, a given asset is more valuable if it is liquid than if it is illiquid. Donors know that when they contribute assets to create a CRT, they are taking a liquid asset (in most cases) and converting it to an illiquid asset.

The illiquidity of a CRT lead interest diminishes its value. The illiquidity creates what economists call a "dead-weight loss" -- meaning that no one gains that value. The loss to society is significantly greater than the sum of the dead-weight loss on each CRT created. The loss to society is greater because it includes the total benefits that would arise, especially to charity, from all the CRTs which are not created because the donor is unwilling to bear the dead-weight cost imposed by illiquidity.

A Market for Lead Interests Generates a Net Social Gain

CRTs must be irrevocable. For many years, it has been assumed by most participants -- attorneys and donors -- that this irrevocability meant, perforce, illiquidity. It is true that CRTs must be irrevocable. But they do not need to be illiquid to achieve their purpose.

In fact, the more a market exists for CRT lead interests, the less disincentive there is for a donor's creation of a CRT in the first place. In other words, a market for CRT lead interests, everything else being equal, will lead to more CRTs being created, and, therefore, to more charitable donations from people who otherwise would give less or not at all.

Eliminate Abuse While Preserving Liquidity

Notice 2008-99 contemplates prohibiting the seller of a CRT lead interest from reducing the amount of capital gain realized by the seller's proportionate share of the basis the CRT has in its assets. Based on our knowledge of the market for CRT lead interests, prohibiting the use of basis would have very little or no effect on the salability of CRT interest, because few if any transactions would be affected. Such a prohibition would probably best serve the public interest if it were aimed squarely at the use of basis by the lead interest seller -- perhaps by simply stating that such basis may not be claimed to reduce the seller's capital gain -- rather than by prohibiting any sales of CRT interests. Such an approach would eliminate the potential for abuse while preserving the liquidity which is evolving in the market for lead interests, thereby furthering the legitimate ends of CRT interest holders -- both charities and taxpayers.

* * *

We greatly appreciate your consideration of our comments. If you have any questions or wish to discuss any part of this letter further, please do not hesitate to contact us.

                Sterling Foundation Management LLC

                By James Lintott
                Its Chairman
                Herndon, Virginia
Catherine V. Hughes, Esq.

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