IRS Proposes Adding Certain CRATs to the Naughty List
By Joel N. Crouch on April 8, 2024
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Joel N. Crouch
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After a period of relative inactivity, over the last 18 months the IRS has increased the number of potential listed transactions including syndicated conservation easements, micro-captives, Malta pension plans and monetized installment plans. Most of these were already on the IRS Dirty Dozen list, but, so far, none of the proposed regulations regarding making these listed transactions have been finalized.
In March, the IRS added to this growing list by releasing proposed regulations that designate as a listed transaction a charitable remainder annuity trust (CRAT) that "improperly claims a basis step-up in donated property to avoid taxes". The transaction was included on the 2023 IRS Dirty Dozen list so the proposed designation as a listed transaction is not surprising.
Trust transactions affected by the proposal are those in which the grantor funds a CRAT with property that has a higher fair market value (FMV) than their tax basis in it, then claims that the funding transfer triggers a step-up basis to the FMV. If the treatment is allowed, gains on the trust's sale of the appreciated property would not be taxable to the grantor.
By virtue of listing the transaction, the IRS can seek significant penalties from non-compliant taxpayers. Any taxpayer who fails to file either an initial disclosure with the Office of Tax Shelter Analysis or annual disclosures with the IRS is exposed to disclosure penalties of up to $100,000 for individuals and $200,000 for businesses and an increased accuracy-related penalty from 20% to 30%. There is also the potential for a 40% penalty in the event the IRS concludes that the transaction lacked economic substance. In addition, there is an unlimited statute of limitations for the IRS to audit the transactions and seek additional taxes, penalties, and interest.
Finally, material advisors would be required to disclose their role in the transactions annually to the IRS Office of Tax Shelter Analysis and maintain a list of taxpayers they have advised. Failure to do so would subject a material advisor to significant penalties. A “material advisor” is defined by the IRS as anyone who provides any material aid, assistance, or advice with respect to the organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and directly or indirectly received or expects to receive gross income more than the threshold amount for the material aid, assistance, or advice.
Comments on the proposed regulations are due by May 24, 2024, and a public hearing is scheduled for July 11, 2024.
If you would like more information about this blog post or any other tax-related matter, please free to contact me a jcrouch@meadowscollier.com.
In March, the IRS added to this growing list by releasing proposed regulations that designate as a listed transaction a charitable remainder annuity trust (CRAT) that "improperly claims a basis step-up in donated property to avoid taxes". The transaction was included on the 2023 IRS Dirty Dozen list so the proposed designation as a listed transaction is not surprising.
Trust transactions affected by the proposal are those in which the grantor funds a CRAT with property that has a higher fair market value (FMV) than their tax basis in it, then claims that the funding transfer triggers a step-up basis to the FMV. If the treatment is allowed, gains on the trust's sale of the appreciated property would not be taxable to the grantor.
By virtue of listing the transaction, the IRS can seek significant penalties from non-compliant taxpayers. Any taxpayer who fails to file either an initial disclosure with the Office of Tax Shelter Analysis or annual disclosures with the IRS is exposed to disclosure penalties of up to $100,000 for individuals and $200,000 for businesses and an increased accuracy-related penalty from 20% to 30%. There is also the potential for a 40% penalty in the event the IRS concludes that the transaction lacked economic substance. In addition, there is an unlimited statute of limitations for the IRS to audit the transactions and seek additional taxes, penalties, and interest.
Finally, material advisors would be required to disclose their role in the transactions annually to the IRS Office of Tax Shelter Analysis and maintain a list of taxpayers they have advised. Failure to do so would subject a material advisor to significant penalties. A “material advisor” is defined by the IRS as anyone who provides any material aid, assistance, or advice with respect to the organizing, managing, promoting, selling, implementing, insuring, or carrying out any reportable transaction, and directly or indirectly received or expects to receive gross income more than the threshold amount for the material aid, assistance, or advice.
Comments on the proposed regulations are due by May 24, 2024, and a public hearing is scheduled for July 11, 2024.
If you would like more information about this blog post or any other tax-related matter, please free to contact me a jcrouch@meadowscollier.com.
