[Code of Federal Regulations]
[Title 26, Volume 8]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.643(a)-8]

[Page 59-60]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.643(a)-8  Certain distributions by charitable remainder trusts.

    (a) Purpose and scope. This section is intended to prevent the 
avoidance of the purposes of the charitable remainder trust rules 
regarding the characterizations of distributions from those trusts in 
the hands of the recipients and should be interpreted in a manner 
consistent with this purpose. This section applies to all charitable 
remainder trusts described in section 664 and the beneficiaries of such 
trusts.
    (b) Deemed sale by trust. (1) For purposes of section 664(b), a 
charitable remainder trust shall be treated as having sold, in the year 
in which a distribution of an annuity or unitrust amount is made from 
the trust, a pro rata portion of the trust assets to the extent that the 
distribution of the annuity or unitrust amount would (but for the 
application of this paragraph (b)) be characterized in the hands of the 
recipient as being from the category described in section 664(b)(4) and 
exceeds the amount of the previously undistributed
    (i) Cash contributed to the trust (with respect to which a deduction 
was allowable under section 170, 2055, 2106, or 2522); plus
    (ii) Basis in any contributed property (with respect to which a 
deduction was allowable under section 170, 2055, 2106, or 2522) that was 
sold by the trust.
    (2) Any transaction that has the purpose or effect of circumventing 
the rules in this paragraph (b) shall be disregarded.
    (3) For purposes of paragraph (b)(1) of this section, trust assets 
do not include cash or assets purchased with the proceeds of a trust 
borrowing, forward sale, or similar transaction.
    (4) Proper adjustment shall be made to any gain or loss subsequently 
realized for gain or loss taken into account under paragraph (b)(1) of 
this section.
    (c) Examples. The following examples illustrate the rules of 
paragraph (b) of this section:

    Example 1. Deemed sale by trust. Donor contributes stock having a 
fair market value of $2 million to a charitable remainder unitrust with 
a unitrust amount of 50 percent of the net fair market value of the 
trust assets and a two-year term. The stock has a total adjusted basis 
of $400,000. In Year 1, the trust receives dividend income of $20,000. 
As of the valuation date, the trust's assets have a net fair market 
value of $2,020,000 ($2 million in stock, plus $20,000 in cash). To 
obtain additional cash to pay the unitrust amount to the noncharitable 
beneficiary, the trustee borrows $990,000 against the value of the 
stock. The trust then distributes $1,010,000 to the beneficiary before 
the end of Year 1. Under section 664(b)(1), $20,000 of the distribution 
is characterized in the hands of the beneficiary as dividend income. The 
rest of the distribution, $990,000, is attributable to an amount 
received by the trust that did not represent either cash contributed to 
the trust or a return of basis in any contributed asset sold by the 
trust during Year 1. Under paragraph (b)(3) of this section, the stock 
is a trust asset because it was not purchased with the proceeds of the 
borrowing. Therefore, in Year 1, under paragraph (b)(1) of this section, 
the trust is treated as having sold $990,000 of stock and as having 
realized $792,000 of capital gain (the trust's basis in the shares 
deemed sold is $198,000). Thus, in the hands of the beneficiary, 
$792,000 of the distribution is characterized as capital gain under 
section 664(b)(2) and $198,000 is characterized as a tax-free return of 
corpus under section 664(b)(4). No part of the $990,000 loan is treated 
as acquisition indebtedness under section 514(c) because the entire loan 
has been recharacterized as a deemed sale.
    Example 2. Adjustment to trust's basis in assets deemed sold. The 
facts are the same as in Example 1. During Year 2, the trust sells the

[[Page 60]]

stock for $2,100,000. The trustee uses a portion of the proceeds of the 
sale to repay the outstanding loan, plus accrued interest. Under 
paragraph (b)(4) of this section, the trust's adjusted basis in the 
stock is $1,192,000 ($400,000 plus the $792,000 of gain recognized in 
Year 1). Therefore, the trust recognizes capital gain (as described in 
section 664(b)(2)) in Year 2 of $908,000.
    Example 3. Distribution of cash contributions. Upon the death of D, 
the proceeds of a life insurance policy on D's life are payable to T, a 
charitable remainder annuity trust. The terms of the trust provide that, 
for a period of three years commencing upon D's death, the trust shall 
pay an annuity amount equal to $x annually to A, the child of D. After 
the expiration of such three-year period, the remainder interest in the 
trust is to be transferred to charity Z. In Year 1, the trust receives 
payment of the life insurance proceeds and pays the appropriate pro rata 
portion of the $x annuity to A from the insurance proceeds. During Year 
1, the trust has no income. Because the entire distribution is 
attributable to a cash contribution (the insurance proceeds) to the 
trust for which a charitable deduction was allowable under section 2055 
with respect to the present value of the remainder interest passing to 
charity, the trust will not be treated as selling a pro rata portion of 
the trust assets under paragraph (b)(1) of this section. Thus, the 
distribution is characterized in A's hands as a tax-free return of 
corpus under section 664(b)(4).

    (d) Effective date. This section is applicable to distributions made 
by a charitable remainder trust after October 18, 1999.

[T.D. 8926, 66 FR 1037, Jan. 5, 2001]