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§ 12.5 TAX TREATMENT OF DISTRIBUTIONS(b) Capital Gains TaxationThe federal tax law as to taxation of capital gains was significantly altered in1997, when the maximum rate of tax on long-term capital gains was reduced.This change entailed a variety of rates, categorizing capital gains and losses intothree groups: a 28 percent group, a 25 percent group, and a 20 percent group.This law change generally became effective as to dispositions occurring on orafter May 7, 1997. 308 These developments, of course, affect the tax treatment ofdistributions of capital gains from a charitable remainder trust. This is becausethe general principle of these rules is that income subject to the highest federalincome tax rate is deemed distributed prior to income subject to a lower (or no)federal income tax rate; thus, short-term capital gain is deemed distributed priorto any long-term capital gain. The IRS issued guidance on the point, stating that(1) undistributed long-term capital gains that a CRT took into account beforeJanuary 1, 1997, are taxed at the 20 percent rate; and (2) long-term capital gainstaken into account from January 1, 1997, through May 6, 1997, are taxed at the 28percent rate. 309A law change in 1998 changed this aspect of the law somewhat, causing certainlong-term capital gains, which would be in the 28 percent group under the1998 IRS guidance, to be in the 25 percent group or the 20 percent group. The IRSissued guidance in 1999 reflecting the alterations in this area wrought by the1998 legislation. 310This guidance states that a CRT’s long-term capital gain in the 28 percentgroup (other than collectibles gain) that was properly taken into account during1997 and distributed in years ending after 1997 falls within either the 25 percentgroup or the 20 percent group. Thus, a remainder trust’s long-term capital gainof this type now falls within the 25 percent group if the gain• was from property held more than 12 months but not more than 18 months,• was properly taken into account for the portion of the year after July 28,1997, and before January 1, 1998, and• otherwise satisfies certain requirements for unrecaptured gain from dispositionsof certain depreciable realty. 311Any remaining long-term capital gain falls within the 20 percent group.This IRS notice observes that some CRTs will need to remove from the 28percent group any long-term capital gains (other than collectibles gain) properlytaken into account during 1997 that were not distributed in 1997 and place thosegains in either the 25 percent group or the 20 percent group, as appropriate.A change in the law in 2003 further altered and reduced the tax law schemefor the taxation of capital gains. 312308 See § 2.16(a).309 Notice 98-20, 1998-1 C.B. 776.310 Notice 99-17, 1999-1 C.B. 871.311 IRC § 1250.312 See § 2.16(b). 455