Some CRATs are CR*P, So Sayeth the IRS and Department of Justice
By Joel N. Crouch on March 30, 2022
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Joel N. Crouch
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In a February blog post, IRS Sends a Shot Across the Bow to Taxpayers With Grantor-Retained Annuity Trusts, I discussed the IRS blowing up a taxpayer’s GRAT planning and sending a message to taxpayers and tax professionals. Soon after, another message was sent when the Justice Department filed a civil complaint in a Missouri District Court accusing five individuals and two LLCs of promoting an abusive tax scheme involving charitable remainder annuity trusts (CRATs) to eliminate capital gains taxes.
According to the Department of Justice press release, the defendants were involved with at least 70 CRATs, “in a scheme that has resulted in an estimated $40 million of taxable income going unreported and at least $8 million in tax revenue losses”.
“Defendants falsely claim that customers following their CRAT scheme can sell property in a way that eliminates the federal tax on the income generated. Specifically, the government alleges that each defendant participates in one or more of the following steps involved in the scheme: (1) convincing customers to contribute property to a CRAT (usually real property that has gained value over time); (2) unlawfully inflating (stepping-up) the cost basis in the property; (3) selling the property to purchase an annuity; and (4) falsely reporting the annuity payments received by the customers as tax-free distributions of income made by the CRAT. The complaint further alleges that the defendants know or have reason to know that their statements to customers about the supposed tax benefits of the transaction they promote are false or fraudulent”.
CRATs are a widely used and very good estate and charitable planning tool when used properly. However, like any tax planning tool, the government is looking for abusive transactions from both a civil and criminal standpoint.
For questions regarding this blog post or any other civil or criminal tax related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.
According to the Department of Justice press release, the defendants were involved with at least 70 CRATs, “in a scheme that has resulted in an estimated $40 million of taxable income going unreported and at least $8 million in tax revenue losses”.
“Defendants falsely claim that customers following their CRAT scheme can sell property in a way that eliminates the federal tax on the income generated. Specifically, the government alleges that each defendant participates in one or more of the following steps involved in the scheme: (1) convincing customers to contribute property to a CRAT (usually real property that has gained value over time); (2) unlawfully inflating (stepping-up) the cost basis in the property; (3) selling the property to purchase an annuity; and (4) falsely reporting the annuity payments received by the customers as tax-free distributions of income made by the CRAT. The complaint further alleges that the defendants know or have reason to know that their statements to customers about the supposed tax benefits of the transaction they promote are false or fraudulent”.
CRATs are a widely used and very good estate and charitable planning tool when used properly. However, like any tax planning tool, the government is looking for abusive transactions from both a civil and criminal standpoint.
For questions regarding this blog post or any other civil or criminal tax related matter, please feel free to contact Joel Crouch at (214) 749-2456 or jcrouch@meadowscollier.com.
