Charitable Remainder Trusts and Capital Gains
Summary
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).
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