Tax News

CCH (cch.taxgroup.com) reports:

  A deficiency notice issued to an individual partner that recharacterized over $200 million in charitable remainder annuity trust (CRAT) distributions as capital gain income, rather than a return of corpus was invalid because it adjusted affected items that could not be litigated until the Tax Court issued a final decision in the related ongoing partnership-level proceeding. The IRS's motion to dismiss for lack of jurisdiction was, therefore, granted.

  The taxpayer transferred stock to a limited partnership in exchange for a 99-percent limited partnership interest and a .6-percent general partnership interest. The 99-percent limited partnership interest was transferred to a CRAT formed by the taxpayer.. The taxpayer was entitled to monthly distributions as the term beneficiary until the CRAT terminated approximately two years later. The day after forming the CRAT, the partnership entered into a variable forward purchase contract with an investment banking firm, which paid the partnership $198 million for the stock upon execution of the contract although the stated purchase date of the sale was approximately two years later. The CRAT's monthly distributions were reported by the taxpayer as nontaxable return of corpus.

  The IRS determined in its final partnership administrative adjustment (FPAA) that the partnership made a closed and complete sale of the stock when it executed the variable prepaid forward contract and, therefore, pursuant to Code Sec. 664, had approximately $214 million in long-term capital gain, measured by the difference between the $198 million in cash received, plus the contingent right to future appreciation less the partnership's basis in the stock. The tax matters partner immediately filed a petition with the Tax Court which is currently pending. The IRS, however, issued a deficiency notice to the taxpayer on the same day it issued its FPAA. The deficiency notice, which the IRS's motion in this case sought to declare invalid, alleged that the CRAT anti-abuse regulation (Reg. §1.643(a)-8) requires the recharacterization of the distributions as capital gain and treats the CRAT as having sold a pro rata portion of the stock in the tax years it made the distributions.

  According to the court, recharacterization of the CRAT distributions as capital gain under the anti-abuse regulation cited in the notice of deficiency is only possible if the CRAT distributions would otherwise be characterized as corpus in the hands of the taxpayer. The characterization of the distributions as capital gain or a return of capital depended upon a final determination of the partnership gain issue. The deficiency notice, therefore, adjusted affected items that depended upon the outcome of the partnership gain issue in the partnership-level proceeding. Imposition of the accuracy-related penalties also depended upon operation of the anti-abuse regulation and were, therefore, affected items.

S.L. Miller, TC Memo. 2009-182, Dec. 57,901(M)

Other References:

 
Code Sec. 6221

  CCH Reference - 2009FED ¶37,569.12

 
Code Sec. 6231

  CCH Reference - 2009FED ¶37,849.45

  Tax Research Consultant

  CCH Reference - TRC PART: 60,056