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§ 12.5 TAX TREATMENT OF DISTRIBUTIONScontribution of money to the trust as to which a charitable deduction was allowable,the trust will be treated as having sold, in the year for which the distributionis due, a pro rata portion of the trust assets. 337A transaction that has the purpose or effect of circumventing this rule will bedisregarded. 338 For example, a return of basis in an asset sold by a CRT wouldnot include basis in an asset purchased by the trust from the proceeds of a borrowingsecured by previously contributed assets. Notwithstanding the foregoing,a distribution of money made within a reasonable period of time after theclose of the year may be characterized as corpus to the extent it was attributableto: (1) a contribution of money to the trust with respect to which a charitablededuction was allowable; or (2) a return of basis in any asset contributed to thetrust with respect to which a charitable deduction was allowable, and sold bythe trust during the year for which the income payment amount was due. 339EXAMPLE 12.13An example as to how this deemed sale rule works concerns an individual who contributesstock to a CRUT. The stock has a basis of $400,000 and a value of $2 million. The CRUT has atwo-year term and a unitrust amount of 50 percent of the net fair market value of trust assets.In year 1, the CRUT receives dividend income of $20,000. As of the valuation date, theCRUT’s assets have a value of $2,020,000 (the original $2 million value plus the dividendincome). To obtain additional money to pay the unitrust amount ($1,010,000), the trusteeborrows $990,000, using the stock as collateral. Before the close of year 1, the CRUTdistributes $1,010,000 to the income beneficiary.Under prior law, $20,000 of this distribution was characterized in the hands of the incomeinterest beneficiary as dividend income. a Arguably, under prior law, the remaining $990,000was tax free, b inasmuch as it was not characterized within one of the preceding tiers. cThis $990,000 is attributable to an amount received by the CRUT that did not representeither a return of basis in any asset sold by the trust or a cash contribution to the trust to whicha charitable deduction was available. Under the rule, the stock is a trust asset because it wasnot purchased with the proceeds of the borrowing.Under this rule, in year 1, the CRUT is treated as having sold $990,000 of stock and ashaving realized $792,000 of capital gain. (The CRUT’s basis in the stock deemed sold is$198,000.) Thus, in the hands of the income beneficiary, $792,000 of the distribution ischaracterized as capital gain d and $198,000 is characterized as a tax-free return of corpus. eaIRC § 664(b)(1).bIRC § 664(b)(4).cThat is, the preceding tiers of IRC § 664(b).dIRC § 664(b)(2).eIRC § 664(b)(4). This example is based on Reg. § 1.643(a)-8(c), example 1.EXAMPLE 12.14The facts are the same as in the previous example. During year 2, the CRUT sells the stock for$2,100,000. The trustee uses a portion of the proceeds of the sale to repay the outstandingloan, plus accrued interest.Under the rule, the CRUT’s basis in the stock is $1,192,000 ($400,000 plus the $792,000 ofgain recognized in year 1). Therefore, the CRUT recognizes capital gain a in year 2 of $908,000. baFor purposes of IRC § 664(b)(2).bReg. § 1.643(a)-8(c), example 2.337 Reg. § 1.643(a)-8(b)(1).338 Reg. § 1.643-8(b)(2).339 Reg. §§ 1.664-2(a)(1)(i)(a), 1.664-3(a)(1)(i)(g). 459