Contents

§ 12.7 TAXATION OF CHARITABLE REMAINDER TRUSTSThe trust advanced the argument that it never possessed the requisite intent toform a partnership; that is, its investments in corporate stock were converted tointerests in limited partnerships through no effort of its own. The court, however,held that persons are ordinarily bound by the form of their transaction. Also, therecord was devoid of evidence that the trust did not sign and transmit proxies infavor of the creation of and participation in the partnerships. The court thus concludedthat the proxies were signed by the trust, so that it did join with the otherstockholders in the formation of the partnerships. This “vote” was construed bythe court as the equivalent of an application to become a partner in the partnership.Inasmuch as the businesses conducted by the partnerships would have beenunrelated businesses if conducted directly by the trust, the income received bythe trust as the consequence of being a member of the partnerships was foundtaxable as unrelated business income.The court held that the regulation, which extends the tax to all net income, isvalid. It conceded the possibility of some ambiguity in the statute, but ruled thatany vagueness was removed by the regulation, which the court in turn found tobe a reasonable interpretation of the statute. The court left open the possibility ofa different result in the case of a de minimis level of unrelated income.A donor may contribute a sole or majority interest in a corporation to a CRT,causing the trust to become a controlling organization for purposes of the unrelatedbusiness rules. 374 Thus, the trust would have unrelated business income when theincome paid by the corporation to the trust is in the form of interest, annuities,royalties, and/or rent. 375 By contrast, if the income received by the trust from thecorporation is in the form of dividends, that income would not be unrelatedbusiness income to the trust. 376Likewise, a CRT may form a wholly owned for-profit corporation for thepurpose of making investments. This use of a corporation can provide flexibilityin making and disposing of investments. It can also provide the trust with additionallimited liability protection. Moreover, the corporation can receive incomethat would be unrelated business income if received directly by the trust, either asinterest, annuities, royalties, and/or rent, or as unrelated debt-financed income.If, however, income flows from the corporation to the trust as dividends, therewould not be unrelated business income taxation. 377Thus, this rule as to taxation of a CRT applies when the trust has unrelatedbusiness taxable income. If the unrelated business income is protected from taxationby a statutory exception, however, such as for dividends, 378 interest, 379 royalties,380 or capital gain, 381 the CRT is not taxable. Other instances are when theincome would be debt-financed income but for an exception from the acquisitionindebtedness rules, 382 or when the volunteer labor exception is available. 383374 IRC § 512(b)(13)(A). In general, see § 3.5.375 IRC § 512(b)(13)(C).376 See, e.g., Priv. Ltr. Rul. 200230004.377 See, e.g., Priv. Ltr. Rul. 200252096.378 IRC § 512(b)(1). See, e.g., Priv. Ltr. Rul. 199952086.379 IRC § 512(b)(1).380 IRC § 512(b)(3).381 IRC § 512(b)(5). See, e.g., Priv. Ltr. Rul. 199952071.382 IRC § 514(c)(2)(B). See, e.g., Priv. Ltr. Rul. 9533014.383 IRC § 513(a)(1). See, e.g., Priv. Ltr. Rul. 9517037. 465