Notice 2023-27: CRATs Identified as Listed Transactions
Explore how IRS Notice 2023-27 identifies a specific CRAT strategy as a listed transaction, creating new reporting obligations for participants and advisors.
The Internal Revenue Service (IRS) issued Notice 2023-27 to identify a tax avoidance strategy involving Charitable Remainder Annuity Trusts (CRATs) as a “listed transaction.” Effective March 21, 2023, this designation signals the transaction is improper and subjects participants and their advisors to disclosure requirements. The notice alerts taxpayers that the purported tax benefits are not legitimate and participation must be reported to the agency.
The Transaction Identified in the Notice
The targeted transaction begins when a taxpayer contributes appreciated property to a new CRAT. The taxpayer retains the right to receive fixed annual annuity payments for a specified period, while a qualified charity receives the trust’s remaining assets when the annuity term ends.
After funding the trust, the taxpayer sells their retained annuity interest to a third party. The taxpayer then claims an artificially high basis in that interest, often equal to the fair market value of the contributed property. This inflated basis is used to offset the sale proceeds, allowing the taxpayer to report little to no taxable gain.
The IRS states this outcome is improper and relies on a misapplication of rules under Section 72 of the Internal Revenue Code. According to the agency, the taxpayer has no legitimate basis in the annuity interest. Therefore, the proceeds from the sale should be recognized as capital gain.
Defining Substantially Similar Transactions
The scope of Notice 2023-27 also includes arrangements that are “substantially similar” to prevent minor alterations to the scheme. A transaction is considered substantially similar if it produces the same tax consequences and is either factually similar or based on the same tax strategy.
For example, a transaction may be deemed substantially similar if it uses a different trust, like a Charitable Remainder Unitrust (CRUT), but follows the same steps of contributing appreciated assets and selling the retained interest to eliminate gain. The determinant is whether the arrangement achieves the same improper tax result.
Disclosure Requirements for Participants
Taxpayers who have engaged in the identified CRAT transaction or a substantially similar one must disclose their participation to the IRS by filing Form 8886, Reportable Transaction Disclosure Statement. Failure to file this form can result in significant penalties.
On Form 8886, the taxpayer must provide a detailed description of the transaction, identify any material advisors, and quantify the expected tax benefits. The taxpayer must also identify the transaction by referencing Notice 2023-27.
Filing Procedures and Deadlines
The taxpayer must attach a completed Form 8886 to their federal income tax return for each year of participation. Participation includes any year the tax return reflects the consequences or strategy described in the notice. A separate copy of the form must also be mailed to the IRS Office of Tax Shelter Analysis (OTSA) at: Internal Revenue Service, OTSA, Mail Stop 4915, 1973 Rulon White Blvd., Ogden, UT 84404.
The filing deadline for the disclosure coincides with the taxpayer’s income tax return filing date for the year of participation. Filing this disclosure is a compliance measure and does not grant IRS approval of the transaction’s tax treatment.
Obligations for Material Advisors
The notice imposes obligations on tax professionals who act as “material advisors.” A person is a material advisor if they provide aid, assistance, or advice regarding the transaction and receive a minimum level of compensation. For transactions involving individuals, the fee threshold is $10,000.
Material advisors must file Form 8918, Material Advisor Disclosure Statement, with the IRS. This form is due by the last day of the month following the end of the calendar quarter in which the advisor provided assistance or advice regarding the transaction.
Material advisors must also maintain a list of all clients they have advised on the listed transaction. This list must detail each client, the advice provided, and the fees received. The advisor must furnish this list to the IRS upon request.