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§ 12.4 ISSUESthird-party purchaser and receive as consideration an amount approximatingthe difference between the fair market value of the real property at the time ofthe assignment and the exercise price. The trust would invest the sales proceedsin income-producing securities, to be held by the trust to pay the unitrustamount. The third-party purchaser of the option would not be related to thedonor or the trustee, and the donor would not participate in any negotiationsrelating to the assignment of the option.The IRS was asked to rule that the donor would not be treated as the ownerof the trust under the grantor trust rules 235 and that the donor would not recognizeany gain or loss as a result of the trust’s contemplated assignment of theoption to a third-party purchaser for valuable consideration. The IRS was askedto assume that the trust was a valid CRT. The IRS refused to proceed on thisassumption. Instead, it first considered whether the transfer of the option woulddisqualify the trust as a charitable remainder trust for federal tax purposes. Asnoted, the IRS ruled that it would.In this ruling, the IRS reviewed the rules for CRUTs 236 and observed thatthese rules were created to ensure that the amount a charitable organizationreceives at the end of the income payment period reflects the amount on whichthe donor’s charitable deduction was based. Notice was taken of the fact thatthese trusts provide various benefits, including a charitable deduction for thepresent value of the donated remainder interest 237 and tax exemption for thetrust’s income. 238A CRT is a trust with respect to which a charitable deduction is allowable—forincome, gift, or estate tax purposes. The IRS added that a trust must be a CRT inevery respect, and must meet the definition of and function exclusively as a CRTfrom its creation. 239 The core of its position is that these requirements cannot be met“unless each transfer to the trust during its life qualifies for a charitable deduction.”The IRS continued with this analysis, stating that in situations in which a taxdeduction is not allowable for a transfer to the trust, “it appears that the donoris merely using the trust as a means to take advantage of the exemption fromcurrent income tax on the gain from the sale of the property.” This use of a CRTwas held to be inconsistent with the purpose intended by Congress in writingrules for these trusts.The IRS pointed out that certain federal tax law provisions limit the type ofproperty that can be transferred directly to a CRT. 240 The agency wrote that “[w]henan option to purchase property, rather than the property itself, is transferred to acharitable remainder trust, the donor is attempting to avoid the requirements thatwould be applicable to a direct transfer of the property.” In this case, the donor was235 These rules are the subject of § 3.7.236 These rules are the subject of § 12.3.237 The deduction is the subject of § 12.11.238 This exemption is the subject of § 12.7.239 See § 12.1.240 The ruling does not contain any citation to these provisions—because there are none. The reference in this caseis to the fact that encumbered real estate that gives rise to unrelated debt-financed income would likely, when ina CRT, cause the trust to lose its tax-exempt status because of the receipt of unrelated business taxable income.See § 12.7. Likewise, there can be tax law difficulties when the property transferred is tangible personal property.See § 12.4(c). There are, however, no “limitations” (in the nature of prohibitions) on these types of transfers. 443