Federal Register / Vol. 73, No. 122 / Tuesday, June 24, 2008 / Rules and Regulations 35583 

of section 954(d)(3)). This paragraph 

(e)(6)(v) shall apply regardless of 

whether a subsequent transfer was part 

of a plan (or series of related 

transactions) that includes the 

controlled foreign corporation’s 

acquisition of the United States 

property. 

(vi) Examples. The rules of this 

paragraph (e)(6) are illustrated by the 

following examples: 

Example 1. (i) Facts. USP, a domestic 

corporation, is the common parent of an 

affiliated group that joins in the filing of a 

consolidated return. USP owns 100 percent 

of the stock of US1 and US2, both domestic 

corporations and members of the USP 

consolidated group. US1 owns 100 percent of 

the stock of CFC, a controlled foreign 

corporation. US2 issues $100x of its stock to 

CFC in exchange for $10x of CFC stock and 

$90x cash. US2’s transfer of its stock to CFC 

is described in section 351, US2 recognizes 

no gain in the exchange under section 

1032(a), and CFC’s basis in the US2 stock 

acquired in the exchange is determined 

under section 362(a). 

(ii) Analysis. The US2 stock acquired by 

CFC in the exchange constitutes United 

States property under paragraph (e)(6)(ii) of 

this section because CFC acquires the US2 

stock from US2, the issuing corporation. 

Therefore, because CFC’s basis in the US2 

stock is determined under section 362(a), 

then for purposes of section 956, CFC’s basis 

in the US2 stock shall, under paragraph 

(e)(6)(iii) of this section, be no less than $90x, 

the fair market value of the property 

exchanged by CFC for the US2 stock (the 

$10x of CFC stock issued in the exchange 

does not constitute property for purposes of 

paragraph (e)(6)(iii) of this section). Pursuant 

to paragraph (e)(6)(iv) of this section, for 

purposes of § 1.956–2(d)(1)(i)(a) CFC shall be 

treated as acquiring its basis of no less than 

$90x in the US2 stock at the time of its 

transfer of property to US2 in exchange for 

the US2 stock. The result would be the same 

if, instead of CFC transferring $90x of cash 

to US2 in the exchange, CFC assumes a $90x 

liability of US2. 

Example 2. (i) Facts. USP, a domestic 

corporation owns 100 percent of the stock of 

USS, a domestic corporation. USP also owns 

100 percent of the stock of CFC, a controlled 

foreign corporation. USP’s basis in its USS 

stock equals the fair market value of the USS 

stock, or $100x. USP transfers its USS stock 

to CFC in exchange for $100x of CFC stock. 

USP’s transfer of its USS stock to CFC is 

described in section 351, USP recognizes no 

gain in the exchange under section 351(a), 

and CFC’s basis in the USS stock acquired in 

the exchange, determined under section 

362(a), equals $100x. 

(ii) Analysis. The USS stock acquired by 

CFC in the exchange does not constitute 

United States property under paragraph 

(e)(6)(ii) of this section because CFC acquires 

the USS stock from USP. Therefore, CFC’s 

basis in the US2 stock, for purposes of 

section 956, is not determined under this 

paragraph (e)(6). Instead, CFC’s basis in the 

USS stock is determined under the general 

rule of section 956(a) and under § 1.956–

1(e)(1)–(4). As determined under section 

362(a), CFC’s basis in the USS stock is $100x. 

Example 3. (i) Facts. USP, a domestic 

corporation, owns 100 percent of the stock of 

CFC1, a controlled foreign corporation. CFC1 

holds United States property (within the 

meaning of paragraph (e)(6)(ii) of this 

section) with a basis of $30x for purposes of 

section 956 that was determined under 

paragraph (e)(6)(iii) of this section. CFC1 

owns 100 percent of the stock of CFC2, a 

controlled foreign corporation. CFC1 

transfers the United States property to CFC2 

in an exchange described in section 351. 

CFC2’s basis in the United States property is 

determined under section 362(a). 

(ii) Analysis. In the section 351 exchange, 

CFC1 transferred United States property to 

CFC2 with a basis that was determined under 

paragraph (e)(6)(iii) of this section. Further, 

CFC2’s basis in the United States property is 

determined under section 362(a) by 

reference, in whole or in part, to CFC’s basis 

in such property. Therefore, for purposes of 

section 956, pursuant to paragraph (e)(6)(v) of 

this section CFC2’s basis in the United States 

property shall be no less than $30x. 

Paragraph (e)(6)(v) of this section would also 

apply if CFC2 subsequently transfers the 

United States property to another person 

related to CFC1 (within the meaning of 

section 954(d)(3)) if such related person’s 

basis in the United States property is 

determined by reference, in whole or in part, 

to CFC2’s basis in such property. 

(f) Effective/applicability date. (1) 

Paragraph (e)(5) of this section is 

effective June 14, 1988, with respect to 

investments made on or after June 14, 

1988. Paragraph (e)(6) of this section 

applies to nonrecognition property 

acquired in exchanges occurring on or 

after June 24, 2008. 

(2) The applicability of paragraph 

(e)(6) of this section will expire on June 

23, 2011. 

Steven T. Miller, 

Acting Deputy Commissioner for Services and 

Enforcement. 

Approved: June 6, 2008. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. E8–14171 Filed 6–23–08; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9403] 

RIN 1545–BH02 

Guidance Under Section 664 

Regarding the Effect of Unrelated 

Business Taxable Income on 

Charitable Remainder Trusts 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations that provide guidance under 

Internal Revenue Code (Code) section 

664 on the tax effect of unrelated 

business taxable income (UBTI) on 

charitable remainder trusts. The 

regulations reflect the changes made to 

section 664(c) by section 424(a) and (b) 

of the Tax Relief and Health Care Act of 

2006. The regulations affect charitable 

remainder trusts that have UBTI in 

taxable years beginning after December 

31, 2006. 

DATES: Effective Date: The regulations 

are effective on June 24, 2008. 

Applicability Date: For dates of 

applicability, see § 1.664–1(c)(3). 

FOR FURTHER INFORMATION CONTACT: 

Cynthia Morton at (202) 622–3060 (not 

a toll-free number). 

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

The collections of information 

contained in these final regulations have 

been reviewed and approved by the 

Office of Management and Budget in 

accordance with the Paperwork 

Reduction Act of 1995 (44 U.S.C. 

3507(d)) under control number 1545–

2101. The collection of information in 

these final regulations is in § 1.664–

1(c)(1). This information is required to 

enable a charitable remainder trust to 

report and pay the excise tax due on any 

UBTI of the trust. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless the collection information 

displays a valid control number. 

Books or records relating to a 

collection of information must be 

retained as long as their contents might 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax information are 

confidential, as required by 26 U.S.C. 

6103. 


ebenthall on PRODPC60 with RULES
35584 Federal Register / Vol. 73, No. 122 / Tuesday, June 24, 2008 / Rules and Regulations 

Background and Explanation of 

Provisions 

This document contains amendments 

to 26 CFR part 1 under section 664 of 

the Code. On March 7, 2008, proposed 

regulations (REG–127391–07) relating to 

the tax effect of UBTI on charitable 

remainder trusts were published in the 

Federal Register (73 FR 12313). 

Although two comments were received 

in response to the proposed regulations, 

no request to speak was submitted, so 

no public hearing was held (see 73 FR 

18729). After consideration of the 

comments, the proposed regulations are 

adopted by this Treasury decision 

without substantive change. 

For taxable years beginning before 

January 1, 2007, section 664(c) provided 

that a charitable remainder trust 

(whether a charitable remainder annuity 

trust or a charitable remainder unitrust) 

would not be exempt from income tax 

for any year in which the trust had any 

UBTI (within the meaning of section 

512). Instead, such trust was taxed for 

each such year under subchapter J as 

though it were a nonexempt, complex 

trust. The final regulations reflect the 

changes to section 664(c) made by 

section 424 of the Tax Relief and Health 

Care Act of 2006 (Act), Public Law 109–

432, 120 Stat. 2922. Section 424(a) of 

the Act, which applies to taxable years 

beginning after December 31, 2006, 

provides that charitable remainder 

trusts that have UBTI remain exempt 

from Federal income tax, but imposes a 

100-percent excise tax on their UBTI. 

The regulations confirm that, for 

purposes of determining the character of 

the distribution made to the beneficiary, 

the charitable remainder trust income 

that is UBTI is considered income of the 

trust. Specifically, income of the 

charitable remainder trust is allocated 

among the trust income categories in 

Treasury Regulation § 1.664–1(d)(1) 

without regard to whether any part of 

that income constitutes UBTI under 

section 512. The regulations also 

confirm that, consistent with § 1.664–

1(d)(2), the excise tax imposed upon a 

charitable remainder trust with UBTI is 

treated as paid from corpus. 

Summary of Comments 

Comments Relating to Transitional 

Relief 

The two commentators requested 

transitional relief to allow time for 

charitable remainder trusts with 

investments producing significant UBTI 

to restructure these investments. The 

commentators noted that the Tax Relief 

and Health Care Act of 2006 revising 

section 664(c) was signed into law on 

December 20, 2006, and became 

effective for tax years beginning after 

December 31, 2006. Consequently, 

charitable remainder trusts had 11 days 

to make changes in their investments in 

response to the legislation. 

The Treasury Department and the IRS 

have carefully considered the concerns 

of the commentators and the request for 

transitional relief, but have not adopted 

this comment. The primary objective of 

adopting the tax on UBTI was to 

eliminate a source of unfair competition 

by placing the unrelated business 

activities of certain exempt 

organizations on the same tax basis as 

the nonexempt businesses with which 

they compete. See § 1.513–1(b). The 

provision denying the income tax 

exemption for charitable remainder 

trusts in years in which the trust has 

UBTI was enacted because Congress did 

‘‘not believe that it is appropriate to 

allow the unrelated business income tax 

to be avoided by the use of a charitable 

remainder trust rather than a tax-exempt 

organization’’. See Public Law 91–172, 

Senate Report 91–552 (H.R. 13270), CB 

1969–3, P. 481–2. The sanction imposed 

under prior law on a charitable 

remainder trust investing in UBTIproducing asset(s), specifically the loss 

of tax-exempt status, was generally 

viewed as particularly onerous. Section 

424 of the Act changed the sanction to 

alleviate its severity, but did not reflect 

any change in the long-standing policy 

to sanction and thus to discourage such 

investment by charitable remainder 

trusts. 

Special Analyses 

It has been determined that this 

Treasury decision is not a significant 

regulatory action as defined in 

Executive Order 12866. Therefore, a 

regulatory assessment is not required. It 

has also been determined that section 

553(b) of the Administrative Procedure 

Act (5 U.S.C. chapter 5) does not apply 

to these regulations. It is hereby 

certified that the collection of 

information in these regulations will not 

have a significant economic impact on 

a substantial number of small entities. 

This reporting burden flows directly 

from the statute implemented by these 

regulations. Accordingly, a regulatory 

flexibility analysis under the Regulatory 

Flexibility Act (5 U.S.C. chapter 6) 

(RFA) is not required. Pursuant to 

section 7805(f) of the Code, the notice 

of proposed rulemaking preceding these 

regulations was submitted to the Chief 

Counsel for Advocacy of the Small 

Business Administration for comment 

on its impact on small business. 

Drafting Information 

The principal author of the 

regulations is Cynthia Morton, Office of 

the Associate Chief Counsel 

(Passthroughs and Special Industries). 

List of Subjects 

26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

26 CFR Part 602 

Reporting and recordkeeping 

requirements. 

Adoption of Amendments to the 

Regulations 

■ Accordingly, 26 CFR parts 1 and 602 

are amended as follows: 

PART 1—INCOME TAXES 

■ Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805. * * * 

■ Par. 2. Section 1.664–1 is amended as 

follows: 

■ 1. In paragraph (a)(1)(i), the last 

sentence is revised and two sentences 

are added to the end of the paragraph. 

■ 2. Paragraph (c) is revised. 

■ 3. In paragraph (d)(2), the fourth 

sentence is revised. 

The revisions and addition read as 

follows: 

§ 1.664–1 Charitable remainder trusts. 

(a) * * * (1) * * * (i) * * * A trust 

created after July 31, 1969, which is a 

charitable remainder trust, is exempt 

from all of the taxes imposed by subtitle 

A of the Code for any taxable year of the 

trust, except for a taxable year beginning 

before January 1, 2007, in which it has 

unrelated business taxable income. For 

taxable years beginning after December 

31, 2006, an excise tax, treated as 

imposed by chapter 42, is imposed on 

charitable remainder trusts that have 

unrelated business taxable income. See 

paragraph (c) of this section. 

* * * * * 

(c) Excise tax on charitable remainder 

trusts—(1) In general. For each taxable 

year beginning after December 31, 2006, 

in which a charitable remainder annuity 

trust or a charitable remainder unitrust 

has any unrelated business taxable 

income, an excise tax is imposed on that 

trust in an amount equal to the amount 

of such unrelated business taxable 

income. For this purpose, unrelated 

business taxable income is as defined in 

section 512, determined as if part III, 

subchapter F, chapter 1, subtitle A of 

the Internal Revenue Code applied to 


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Federal Register / Vol. 73, No. 122 / Tuesday, June 24, 2008 / Rules and Regulations 35585 

such trust. Such excise tax is treated as 

imposed by chapter 42 (other than 

subchapter E) and is reported and 

payable in accordance with the 

appropriate forms and instructions. 

Such excise tax shall be allocated to 

corpus and, therefore, is not deductible 

in determining taxable income 

distributed to a beneficiary. (See 

paragraph (d)(2) of this section.) The 

charitable remainder trust income that 

is unrelated business taxable income 

constitutes income of the trust for 

purposes of determining the character of 

the distribution made to the beneficiary. 

Income of the charitable remainder trust 

is allocated among the charitable 

remainder trust income categories in 

paragraph (d)(1) of this section without 

regard to whether any part of that 

income constitutes unrelated business 

taxable income under section 512. 

(2) Examples. The application of the 

rules in this paragraph (c) may be 

illustrated by the following examples: 

Example 1. For 2007, a charitable 

remainder annuity trust with a taxable year 

beginning on January 1, 2007, has $60,000 of 

ordinary income, including $10,000 of gross 

income from a partnership that constitutes 

unrelated business taxable income to the 

trust. The trust has no deductions that are 

directly connected with that income. For that 

same year, the trust has administration 

expenses (deductible in computing taxable 

income) of $16,000, resulting in net ordinary 

income of $44,000. The amount of unrelated 

business taxable income is computed by 

taking gross income from an unrelated trade 

or business and deducting expenses directly 

connected with carrying on the trade or 

business, both computed with modifications 

under section 512(b). Section 512(b)(12) 

provides a specific deduction of $1,000 in 

computing the amount of unrelated business 

taxable income. Under the facts presented in 

this example, there are no other 

modifications under section 512(b). The 

trust, therefore, has unrelated business 

taxable income of $9,000 ($10,000 minus the 

$1,000 deduction under section 512(b)(12)). 

Undistributed ordinary income from prior 

years is $12,000 and undistributed capital 

gains from prior years are $50,000. Under the 

terms of the trust agreement, the trust is 

required to pay an annuity of $100,000 for 

year 2007 to the noncharitable beneficiary. 

Because the trust has unrelated business 

taxable income of $9,000, the excise tax 

imposed under section 664(c) is equal to the 

amount of such unrelated business taxable 

income, $9,000. The character of the 

$100,000 distribution to the noncharitable 

beneficiary is as follows: $56,000 of ordinary 

income ($44,000 from current year plus 

$12,000 from prior years), and $44,000 of 

capital gains. The $9,000 excise tax is 

allocated to corpus, and does not reduce the 

amount in any of the categories of income 

under paragraph (d)(1) of this section. At the 

beginning of year 2008, the amount of 

undistributed capital gains is $6,000, and 

there is no undistributed ordinary income. 

Example 2. During 2007, a charitable 

remainder annuity trust with a taxable year 

beginning on January 1, 2007, sells real estate 

generating gain of $40,000. Because the trust 

had obtained a loan to finance part of the 

purchase price of the asset, some of the 

income from the sale is treated as debtfinanced income under section 514 and thus 

constitutes unrelated business taxable 

income under section 512. The unrelated 

debt-financed income computed under 

section 514 is $30,000. Assuming the trust 

receives no other income in 2007, the trust 

will have unrelated business taxable income 

under section 512 of $29,000 ($30,000 minus 

the $1,000 deduction under section 

512(b)(12)). Except for section 512(b)(12), no 

other exceptions or modifications under 

sections 512–514 apply when calculating 

unrelated business taxable income based on 

the facts presented in this example. Because 

the trust has unrelated business taxable 

income of $29,000, the excise tax imposed 

under section 664(c) is equal to the amount 

of such unrelated business taxable income, 

$29,000. The $29,000 excise tax is allocated 

to corpus, and does not reduce the amount 

in any of the categories of income under 

paragraph (d)(1) of this section. Regardless of 

how the trust’s income might be treated 

under sections 511–514, the entire $40,000 is 

capital gain for purposes of section 664 and 

is allocated accordingly to and within the 

second of the categories of income under 

paragraph (d)(1) of this section. 

(3) Effective/applicability date. This 

paragraph (c) is applicable for taxable 

years beginning after December 31, 

2006. The rules that apply with respect 

to taxable years beginning before 

January 1, 2007, are contained in 

§ 1.664–1(c) as in effect prior to June 24, 

2008. (See 26 CFR part 1, § 1.664–1(c)(1) 

revised as of April 1, 2007.) 

(d) * * * 

(2) * * * All taxes imposed by 

chapter 42 of the Code (including 

without limitation taxes treated under 

section 664(c)(2) as imposed by chapter 

42) and, for taxable years beginning 

prior to January 1, 2007, all taxes 

imposed by subtitle A of the Code for 

which the trust is liable because it has 

unrelated business taxable income, shall 

be allocated to corpus. * * * 

* * * * * 

PART 602—OMB CONTROL NUMBERS 

UNDER THE PAPERWORK 

REDUCTION ACT 

■ Par. 3. The authority citation for part 

602 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

■ Par. 4. In § 602.101, paragraph (b) is 

amended by adding the following entry 

in numerical order to the table as 

follows: 

§ 602.101 OMB Control numbers. 

* * * * * 

(b) * * * 

CFR part of section where 

identified and described 

Current 

OMB control No. 

*****

1.664–1(c) ................................... 1545–2101 

*****

Linda E. Stiff, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: June 18, 2008. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 08–1380 Filed 6–19–08; 1:29 pm] 

BILLING CODE 4830–01–P 

DEPARTMENT OF DEFENSE 

Department of the Navy 

32 CFR Part 706 

Certifications and Exemptions Under 

the International Regulations for 

Preventing Collisions at Sea, 1972 

AGENCY: Department of the Navy, DoD. 

ACTION: Final rule. 

SUMMARY: The Department of the Navy 

is amending its certifications and 

exemptions under the International 

Regulations for Preventing Collisions at 

Sea, 1972 (72 COLREGS), to reflect that 

the Deputy Assistant Judge Advocate 

General (Admiralty and Maritime Law) 

has determined that USS STOCKDALE 

(DDG 106) is a vessel of the Navy which, 

due to its special construction and 

purpose, cannot fully comply with 

certain provisions of the 72 COLREGS 

without interfering with its special 

function as a naval ship. The intended 

effect of this rule is to warn mariners in 

waters where 72 COLREGS apply. 

DATES: This rule is effective June 24, 

2008 and is applicable beginning 13 

June 2008. 

FOR FURTHER INFORMATION CONTACT: 

Commander M. Robb Hyde, JAGC, U.S. 

Navy, Deputy Assistant Judge Advocate 

General (Admiralty and Maritime Law), 

Office of the Judge Advocate General, 

Department of the Navy, 1322 Patterson 

Ave., SE., Suite 3000, Washington Navy 

Yard, DC 20374–5066, telephone: 202–

685–5040. 

SUPPLEMENTARY INFORMATION: Pursuant 

to the authority granted in 33 U.S.C. 

1605, the Department of the Navy 


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