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Posted December 27th, 2017

Let’s Look at Some Key IRS Rulings, Part 4

Before we leave our discussion of third-party buyers (buyers-in-the-wings), we need to look at one more IRS ruling, a private ruling from 1994 (LTR 9452026).

Read Part 1 here.

Read Part 2 here.

Read Part 3 here.

This is a good one. The facts are that an individual proposed transferring both securities and a valuable musical instrument to a charitable remainder annuity trust (CRAT). The individual wanted assurance from the IRS that if and when the CRAT sold the musical instrument, which was highly appreciated, he (the individual donor) wouldn’t be considered to have sold the instrument.

Why is this a good one? Because as a practical matter, the trustee of the CRAT is going to want to sell the musical instrument in order to meet the CRAT’s payout obligation. The trustee, however, was under no legal obligation to sell.

Given these facts, IRS ruled that the individual donor would not be deemed to sell the musical instrument when the instrument was sold by the CRAT. Meaning the donor wouldn’t realize any gain on the sale.

What we see here is important. The IRS is drawing a distinction between a legal obligation to sell and a clearly anticipated future sale. Anticipated not because the CRAT agreement requires the trustee to sell but because the trustee naturally is going to want to sell. (I understand the musical instrument was a Stradivarius violin, and the eventual buyer was a symphony orchestra.)

This ruling represents graduate-level gift planning. Such planning involves [a] attention to detail and [b] knowing where the IRS has drawn lines in the sand. As to detail, note that securities were transferred to the CRAT in addition to the musical instrument.

These were publicly traded securities—liquid assets. The securities bought the CRAT trustee time. Time to arrange for an orderly sale, time to avoid the need for a quick sale, of the musical instrument. This was a very good bit of fine tuning. It facilitated the IRS’s ruling the way it did.

Next time, we’ll switch gears and begin to look at some IRS rulings on pledges.

by Jon Tidd, Esq

Read Part 5 here.

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