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CHARITABLE REMAINDER TRUSTS§ 12.7 TAXATION OF CHARITABLE REMAINDER TRUSTSIf a CRT has any unrelated business taxable income for a tax year, the trust issubject to federal tax for that year. 371 In applying this rule, activities of the trustdeemed unrelated are those unrelated activities of the charitable organizationthat is the remainder interest beneficiary of the trust. 372This rule may be illustrated by the following example:EXAMPLE 12.16In 2005, a CRT, which uses the calendar year as its tax year, has $1,000 of ordinary income,including $100 of unrelated business taxable income, and no deductions other than thoseunder general trust rules. a The trust is required to pay out $700 for 2005 to a noncharitablerecipient. Because the trust had some unrelated business taxable income in 2005, it was nottax-exempt for that year. Consequently, the trust was taxable on all of its income for that yearas a complex trust. The trust was allowed a deduction for the $700. b The trust was alsoallowed a deduction of $100. c Consequently, the taxable income of the trust for 2005 was$200 ($1,000 − $700 − $100). daThat is, under IRC §§ 642(b) and 661(a).bIRC § 661(a).cIRC § 642(b).dReg. § 1.664-1(c).The nature of this rule was litigated, with those advocating on behalf of aCRT arguing that the rule does not literally mean what it says. Nonetheless, itwas held that, under this rule, a CRT is taxable on all of its net income once itreceives any unrelated business income; the thought that the tax is applicableonly as to the unrelated income was rejected. 373The case concerned a CRT that was funded with shares of stock of a publiclytraded corporation. Eight years later, the corporation underwent a partial liquidation.It transferred certain real estate and mineral rights holdings in limitedpartnerships and distributed depository receipts for units in the partnerships toits stockholders. Thus, the trust acquired one unit each in two limited partnerships.Two years after that, the corporation underwent a complete liquidation. Ittransferred the remainder of its assets to a limited partnership and distributeddepository receipts for units in the limited partnership to its stockholders,including the trust. The three limited partnerships were publicly traded. Thetrust did not purchase or otherwise acquire any interests in these or any otherpartnerships.The trust did not have any influence in the decision to liquidate the corporationand convert its structure to a partnership. It did not intend to use its statusas a CRT to gain any competitive advantage for its investment in the corporationor the partnerships. The amount of annual income received by the trusts fromthe partnerships was substantial (nearly $292,000 in one year).371 Reg. § 1.664-1(c).372 See § 3.5.373 Leila G. Newhall Trust v. Commissioner, 104 T.C. 236 (1995), aff’d, 105 F.3d 482 (9th Cir. 1996). The appellatecourt concluded: “If the statute has unintended consequences, it is for Congress, not the courts, to takeappropriate measures to avert them.” Id., 105 F.3d at 487. 464