Court Opinion

ID: 8210005
Source: CourtListenerOpinion
Date Created: 2022-09-28 19:01:45.059028+00
Date Added: 2024-06-11T16:41:46.791521
License: Public Domain

United States Tax Court

                              T.C. Memo. 2022-100

                 DONALD FURRER AND RITA FURRER,
                           Petitioners

                                          v.

              COMMISSIONER OF INTERNAL REVENUE,
                          Respondent

                                     —————

Docket No. 7633-19.                                    Filed September 28, 2022.

                                     —————

Anita L. Steburg, for petitioners.

Kristin M. Bourland, Stephen A. Haller, Joline M. Wang, and Philip Ed-
ward Blondin, for respondent.

                          MEMORANDUM OPINION

       LAUBER, Judge: Petitioners seek redetermination of deficien-
cies determined by the Internal Revenue Service (IRS or respondent) in
connection with two charitable remainder annuity trusts (CRATs). Pe-
titioners, who were engaged in the farming business, made in-kind
transfers of agricultural crops to the CRATs in 2015 and 2016. The
CRATs sold the crops and used the proceeds to purchase annuity plans.
During 2015–2017 the annuity plans made cash distributions to peti-
tioners. After concessions two questions remain for decision, which re-
spondent has presented by Motion for Partial Summary Judgment:
(1) whether petitioners are entitled under section 170 1 to noncash char-
itable contribution deductions for 2015 and 2016 for portions of the crops

       1 Unless otherwise indicated, all statutory references are to the Internal Reve-

nue Code, Title 26 U.S.C. (Code), in effect at all relevant times, all regulation refer-
ences are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in effect at all
relevant times, and all Rule references are to the Tax Court Rules of Practice and Pro-
cedure. We round all monetary amounts to the nearest dollar.

                                 Served 09/28/22
                                   2

[*2] transferred to the CRATs; and (2) whether the annuity distribu-
tions were taxable to petitioners as ordinary income for 2015–2017. We
resolve both questions in respondent’s favor.

                              Background

      There is no dispute as to the following facts, which are drawn from
the parties’ joint Stipulation of Facts, motion papers, and exhibits and
declarations attached thereto. Petitioners resided in Indiana when they
timely petitioned this Court.

       During 2015–2017 petitioners were actively engaged in the farm-
ing business, growing and selling corn and soybeans. In July 2015, after
seeing an advertisement in a farming magazine, petitioners formed the
Donald & Rita Furrer Charitable Remainder Annuity Trust of 2015
(CRAT I), of which their son was named trustee. The trust instrument
designated petitioners as life beneficiaries and three eligible section
501(c)(3) charities as remaindermen.

        When forming CRAT I petitioners transferred to it 100,000 bush-
els of corn and 10,000 bushels of soybeans grown on their farm. In Au-
gust 2015 CRAT I sold the crops for $469,003. The sales were effected
by Co-Alliance LLP, a grain marketing and storage facility in Avon, In-
diana, where petitioners stored the crops. CRAT I distributed $47,000
of the proceeds to the charitable remaindermen and used most of the
balance to purchase a Single Premium Immediate Annuity (SPIA) from
Symetra Life Insurance Co. (Symetra). The SPIA made annual annuity
payments of $84,368 to petitioners in 2015–2017.

       For each year Symetra issued to the trustee a Form 1099–R, Dis-
tributions From Pensions, Annuities, Retirement or Profit-Sharing
Plans, IRAs, Insurance Contracts, etc. These forms listed the annuity
payments as “gross distributions” and showed a small amount of inter-
est as the “taxable amount.”

       On January 13, 2016, petitioners created the Donald & Rita Fur-
rer Charitable Remainder Annuity Trust of 2016 (CRAT II). Following
the previous pattern, petitioners designated themselves as life benefi-
ciaries, with the remainder going to seven eligible section 501(c)(3)
                                         3

[*3] charities. Petitioners funded CRAT II by transferring to it 111,335
bushels of corn and 31,064 bushels of soybeans grown on their farm. 2

       In April 2016 CRAT II sold the crops for $691,827. The sales were
again effected by Co-Alliance LLP, the grain marketing and storage fa-
cility where petitioners stored the crops. CRAT II distributed $69,294
of the proceeds to the charitable remaindermen and used the balance to
purchase another SPIA from Symetra. This SPIA made annual annuity
payments of $124,921 to petitioners in 2016 and 2017. Symetra again
issued a Form 1099–R to the trustee, listing the annuity payments as
“gross distributions” and showing a small amount of interest as the “tax-
able amount.”

      Petitioners timely filed joint Federal income tax returns for 2015–
2017. They attached to each return a Schedule F, Profit or Loss From
Farming, reporting farming income and expenses as follows:

                                     2015            2016           2017

      Income                      $1,050,571       $294,595       $159,797

      Expenses                    (1,058,051)      (247,476)       (152,308)

        Total Profit/(Loss)          ($7,480)      $47,119           $7,489

       On their 2015 and 2016 returns petitioners claimed charitable
contribution deductions for cash gifts but claimed no deductions for their
in-kind crop transfers to the CRATs. On each return they reported in-
terest income from the SPIA as shown on the Form 1099–R issued to the
trustee. But they did not report the balance of the annuity distributions,
taking the position that these payments constituted a nontaxable return
of corpus under section 664(b)(4).

       For 2015 and 2016 petitioner husband filed Forms 709, United
States Gift (and Generation-Skipping Transfer) Tax Return. On the
2015 return he reported that petitioners had contributed to CRAT I corn
and soybeans with a fair market value (FMV) of $469,003 and a cost
basis of zero. On the 2016 return he reported that petitioners had con-
tributed to CRAT II corn and soybeans with an FMV of $666,975 and a
cost basis of zero.

      2 For purposes of this litigation respondent has not challenged the validity of

CRAT I or CRAT II.
                                          4

[*4] For each year the trustee filed for each CRAT a Form 5227, Split-
Interest Trust Information Return. The trustee attached to each of the
2015 and 2016 information returns a Form 4797, Sales of Business Prop-
erty, reporting sale of the crops contributed by petitioners. For 2015 he
reported that CRAT I had received proceeds of $469,003 from sale of
crops with a basis of $471,000, for a loss of $1,997. For 2016 he reported
that CRAT II had received proceeds of $691,827 from sale of crops with
a basis of $666,975, for a gain of $24,852.

       The IRS selected petitioners’ 2015–2017 income tax returns for
examination. It determined that their characterization of the SPIA dis-
tributions as nontaxable returns of corpus under section 664(b)(4) was
improper. Rather, the examining agent concluded that these distribu-
tions represented proceeds from the sale of petitioners’ corn and soy-
beans and as such were taxable to them as ordinary income. The IRS
accordingly increased their Schedule F farm income by $83,440 in 2015
and by $206,967 in 2016 and 2017. 3

       During the examination petitioners contended that they had ne-
glected to claim on their 2015 and 2016 returns, but should be allowed,
noncash charitable contribution deductions for portions of their dona-
tions to the CRATs. In petitioners’ view, the allowable deduction for
each year was equal to the proportion of the FMV of the donated crops
that was destined to the charitable remaindermen. Petitioners had not
secured an appraisal for either donation or attached a Form 8283, Non-
cash Charitable Contributions, to their 2015 or 2016 income tax return.
The examining agent nevertheless agreed with their position and al-
lowed additional charitable contribution deductions of $67,788 for 2015
and $106,413 for 2016. 4

       The IRS issued petitioners a timely notice of deficiency determin-
ing deficiencies of $55,040, $56,904, and $95,907 for 2015–2017, respec-
tively, plus accuracy-related penalties. The IRS has conceded the

       3  The Schedule F adjustments are approximately equal to the annuity distri-
butions petitioners received—$84,368 in 2015 and $209,289 ($84,368 + $124,921) in
2016 and 2017—minus the interest they reported as taxable. (Respondent represents
that the adjustments involve a small math error in petitioners’ favor.)
        4 There is a discrepancy between the amounts allowed by the examining agent

as charitable contribution deductions and the amounts distributed by the CRATs to
the charitable remainderman. The record suggests that the examining agent employed
a “time value calculation” to compute the deductions, but the record does not disclose
what formula the examining agent employed. Because we hold that no deductions are
allowable, we need not resolve this discrepancy.
                                    5

[*5] penalties for inability to show timely supervisory approval. See
§ 6751(b)(1). On November 22, 2021, we granted respondent’s Motion
for Leave to Amend Answer to disallow the noncash charitable contri-
bution deductions that the examining agent had allowed for 2015 and
2016.

       On January 28, 2022, respondent filed a Motion for Partial Sum-
mary Judgment, to which petitioners timely replied. On November 1,
2021, and April 11, 2022, the parties filed Stipulations of Settled Issues
that resolve all issues in this case apart from the two issues presented
by respondent’s summary judgment motion. Those issues are: (1) whe-
ther petitioners are entitled to noncash charitable contribution deduc-
tions for 2015 and 2016, and (2) whether the annuity distributions were
taxable to petitioners as ordinary income in 2015–2017.

                               Discussion

A.    Summary Judgment Standard

       The purpose of summary judgment is to expedite litigation and
avoid costly, unnecessary, and time-consuming trials. See FPL Grp.,
Inc. & Subs. v. Commissioner, 116 T.C. 73, 74 (2001). We may grant
summary judgment regarding an issue as to which there is no genuine
dispute of material fact and a decision may be rendered as a matter of
law. Rule 121(b); Sundstrand Corp., 98 T.C. 518, 520 (1992), aff’d, 17
F.3d 965 (7th Cir. 1994). Petitioners have alleged no genuine dispute of
material fact affecting the questions that respondent has proposed for
summary judgment. We conclude that these questions may appropri-
ately be adjudicated summarily.

B.    Charitable Contribution Deductions

       During the examination petitioners raised, as an affirmative is-
sue, their alleged entitlement to noncash charitable contribution deduc-
tions for portions of the crops they transferred to the CRATs. The ex-
amining agent allowed such deductions. By timely amended answer,
respondent contends that the examining agent erred and that these de-
ductions should be disallowed. Because this is a “new matter,” respond-
ent bears the burden of proof on this point. See Rule 142(a)(1). We con-
clude that respondent has carried his burden and that the deductions
are impermissible.
                                            6

[*6]    1.      Substantiation

        Income tax deductions are a “matter of legislative grace.”
INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992). Charitable
contribution deductions may be allowable for transfers to a CRAT, cor-
responding to the value of the charitable remainder interest. See
§ 170(f)(2)(A); Treas. Reg. § 1.170A-6(b). However, as is true for any
other deduction, charitable contribution deductions are permitted “only
if verified under regulations prescribed by the Secretary.” § 170(a)(1).

       The Code imposes strict substantiation requirements for noncash
gifts, especially where the claimed value of the contribution exceeds
$5,000. For gifts of property (other than publicly traded securities) val-
ued in excess of $5,000, the taxpayer generally must (1) obtain a quali-
fied appraisal of the property and (2) attach to the return on which the
deduction is claimed a fully completed appraisal summary on Form
8283. See § 170(f)(11)(C); Oakhill Woods, LLC v. Commissioner, T.C.
Memo. 2020-24, 119 T.C.M. (CCH) 1144, 1147. A “qualified appraisal”
must be prepared by a “qualified appraiser” no later than the due date
of the return, including extensions. See § 170(f)(11)(E); Treas. Reg.
§ 1.170A-13(c)(3). The taxpayer must also maintain records substanti-
ating the deduction. See Treas. Reg. § 1.170A-13(b)(2)(ii)(D) (mandating
written records demonstrating the FMV of the property, the methodol-
ogy used to determine the FMV, and a copy of the signed report of an
appraiser where applicable).
       Petitioners did not satisfy (and do not contend that they satisfied)
these substantiation requirements. At no time did they secure an ap-
praisal—“qualified” or otherwise—of the crops they transferred to the
CRATs. They did not attach to their 2015 or 2016 return a completed
Form 8283 substantiating the gifts. And they did not maintain the writ-
ten records required by the regulations.
       Deductions are allowable for charitable gifts “only if verified un-
der regulations prescribed by the Secretary.” § 170(a)(1). “[N]o deduc-
tion shall be allowed” for gifts of property described in section 170(f)(11)
unless its strict substantiation requirements are met.                   See
§ 170(f)(11)(A)(i). Because petitioners failed to satisfy these require-
ments, they are not entitled to any noncash charitable contribution de-
ductions. 5

         5 Section 170(f)(11) may not operate to deny a deduction “if it is shown that the

failure to meet [its] requirements is due to reasonable cause and not to willful neglect.”
                                          7

[*7]   2.      Application of Section 170(e)(1)

       Even if petitioners had complied with the statutory substantia-
tion requirements, they would not be entitled to charitable contribution
deductions for donating to the CRATs bushels of soybeans and corn,
which were ordinary income property in their hands.              Section
170(e)(1)(A) provides that the deduction otherwise allowable for a con-
tribution of property shall be reduced by “the amount of gain which
would not have been long-term capital gain . . . if the property contrib-
uted had been sold by the taxpayer at its fair market value (determined
at the time of such contribution).”

       Inventory held primarily for sale to customers in the regular
course of a trade or business is ordinary income property. No portion of
the gain from the sale of such property could be long-term capital gain.
§ 1221(a)(1). Thus, the deduction for a contribution of ordinary income
property is typically limited to the donor’s cost basis in the property. See
Jones v. Commissioner, 560 F.3d 1196, 1199 (10th Cir. 2009), aff’g 129
T.C. 146 (2007); Strasburg v. Commissioner, T.C. Memo. 2000-94, 79
T.C.M. (CCH) 1697, 1704 (“The allowable charitable contribution deduc-
tion for ordinary income property is limited to the basis of the property
donated.”) Accordingly, if a taxpayer has zero basis in ordinary income
property, section 170(e)(1)(A) “require[s] that the deduction for donating
that property be reduced by the property’s entire value—leaving the tax-
payer with no deduction at all.” Jones v. Commissioner, 560 F.3d at
1199; see Lary v. United States, 787 F.2d 1538, 1540–41 (11th Cir. 1986);
Conner v. Commissioner, T.C. Memo. 2018-6, 115 T.C.M. (CCH) 1013,
1023, aff’d, 770 F. App’x 1016 (11th Cir. 2019).

       Petitioners were engaged in the farming business, and the corn
and soybeans grown on their farm constituted ordinary income property.
Thus, any charitable contribution deduction would be limited to their
cost or adjusted basis in the crops. See Jones v. Commissioner, 560 F.3d
at 1199. As petitioner husband conceded when filing the 2015 and 2016
gift tax returns, petitioners’ basis in the corn and soybeans transferred
to the CRATs was zero. See supra p. 3. That was because petitioners
had fully expensed, on their 2015 and 2016 income tax returns, all the
costs of growing the crops. See supra p. 3. In order to have a basis in
the donated crops, petitioners would have had to incur, with respect to

§ 170(f)(11)(A)(ii)(II). Petitioners do not contend that they could make this showing,
and they have advanced no argument to this effect in their response to the summary
judgment motion.
                                           8

[*8] those crops, farming expenses in addition to those deducted on their
2015 and 2016 income tax returns. They do not allege that they incurred
any such additional farming expenses. Accordingly, the available de-
duction for the transfers of corn and soybeans to the CRATs is reduced
to zero under section 170(e)(1)(A).

C.     Taxability of CRAT Distributions

       1.      Governing Statutory Structure

      A CRAT is a type of charitable remainder trust (CRT). In general,
a CRT provides for annual distributions to the grantor (or other non-
charitable life beneficiaries) and an irrevocable remainder interest des-
ignated for one or more qualified charities. See § 664; Treas. Reg.
§ 1.664-1(a). A trust is a CRT only if it is a CRAT or a charitable
unitrust. See Treas. Reg. § 1.664-1(a)(2).

      As a rule, no gain is recognized by the donor upon transfer of ap-
preciated property to a CRT. See Buehner v. Commissioner, 65 T.C. 723,
740 (1976) (“A gift of appreciated property [to a CRT] does not result in
income to the donor . . . .” (quoting Humacid Co. v. Commissioner, 42
T.C. 894, 913 (1964))). And because CRTs are exempt from income tax,
appreciated property can be sold by the trust tax free. See § 664(c)(1);
Treas. Reg. § 1.664-1(a)(1)(i). However, notwithstanding a CRT’s tax-
exempt status, the income earned by the trust is taxable to its income
beneficiaries upon distribution. See Alpha I, L.P. v. United States, 682
F.3d 1009, 1015 (Fed. Cir. 2012) (citing section 664(b) and (c)(1)).

        Congress has set forth specific ordering rules that govern the
characterization and reporting of annuity amounts distributed by a
CRAT to its income beneficiaries. See § 664(b). 6 Under this regime,
distributions from a CRAT to income beneficiaries are deemed to have
the following character, and to be distributed in the following order:
first, as ordinary income, to the extent of the trust’s current and previ-
ously undistributed ordinary income; second, as capital gain, to the ex-
tent of the trust’s current and previously undistributed capital gain;
third, as other income, to the extent of the trust’s current and previously
undistributed other income; and fourth, as a nontaxable distribution of
trust corpus. § 664(b)(1)‒(4).

        6 The ordering rules specified in section 664(b) supersede the general rules set

forth in subchapter J, sections 652 and 662, for income taxation of estates, trusts, and
beneficiaries.
                                    9

[*9] We have previously discussed the application of section 664(b)
and the treatment of CRAT distributions. See Miller v. Commissioner,
T.C. Memo. 2009-182, 98 T.C.M. (CCH) 87. A distribution from a CRAT
is deemed to consist first of income that is subject to the highest Federal
tax rate (ordinary income), and then, upon exhaustion of that class, of
income subject to progressively lower tax rates. Only after all taxable
income has been distributed is a beneficiary deemed to receive a nontax-
able return of corpus. See id. at 88–89.

        CRATs are subject to strict reporting requirements to ensure com-
pliance with the statutory ordering rules. See § 4947(a)(2); Treas. Reg.
§ 1.664-1(a)(1)(ii). A CRAT must file an annual information return on
Form 5227 reflecting its income, deductions, accumulations, and distri-
butions for the year. See § 6011; Treas. Reg. § 53.6011-1(d). It must
issue to each income beneficiary a Schedule K–1, Beneficiary’s Share of
Income, Deductions, Credits, etc., properly describing the tax character
of all distributions. See § 6034(a); Treas. Reg. § 1.6012-3(a)(6). And it
must maintain a record of the basis of all property contributed to it. See
§ 1015(a).

      2.     Analysis

       As petitioner husband conceded when filing the 2015 and 2016
gift tax returns, petitioners’ basis in the corn and soybeans transferred
to the CRATs was zero. That was because petitioners had fully ex-
pensed, on their 2015 and 2016 income tax returns, all the costs of grow-
ing the crops. See supra p. 7.

        Section 1015 provides that, if property is transferred (in trust or
otherwise) by gift, “the basis shall be the same as it would be in the
hands of the donor,” increased by any gift tax paid on the transfer. See
§ 1015(a), (d). The transferee acquires an FMV basis only if the donor’s
basis was “greater than the fair market value of the property at the time
of the gift.” § 1015(a). Section 1015(a) applies to property “acquired by
gift after December 31, 1920.” These basic tax principles have thus been
established for a very long time. See Veterans Found. v. Commissioner,
38 T.C. 66, 72 (1962), aff’d, 317 F.2d 456 (10th Cir. 1963); Magness v.
Commissioner, T.C. Memo. 1965-260, 24 T.C.M. (CCH) 1413.

       Petitioners did not pay any gift tax upon transfer of the crops to
the CRATs. Under section 1015(a), each CRAT thus acquired a basis of
zero in the corn and soybeans, the same basis that the crops had in pe-
titioners’ hands. The FMV of the transferred crops is irrelevant in
                                          10

[*10] determining the CRATs’ basis because petitioners’ basis was lower
than the FMV of the crops. See § 1015(a).

       CRAT I and CRAT II sold the corn and soybeans transferred to
them for $469,003 and $691,827, respectively. Because each CRAT had
a basis of zero in the crops, they realized profits of $469,003 and
$691,827, respectively, on those sales. See § 1001. The corn and soy-
beans were ordinary income property in petitioners’ hands. See
§ 1221(a)(1) (defining “capital asset” to exclude “property of a kind which
would properly be included in inventory of the taxpayer”). The crop sales
were effected in the ordinary course of business by Co-Alliance LLP, in
whose grain elevators the crops had been stored. In responding to the
Motion for Partial Summary Judgment, petitioners do not contend that
the corn and soybeans were capital assets in the hands of the CRATs. 7

       CRAT I and CRAT II thus realized ordinary income of $469,003
and $691,827, respectively, upon sale of the crops, just as petitioners
would have done if they had sold the crops themselves. Under the stat-
utory ordering rules, annuity amounts distributed by a CRAT to its life
beneficiaries are treated first as ordinary income, to the extent of the
CRAT’s ordinary income. See § 664(b)(1). All ordinary income must be
distributed before any other category of income, including nontaxable
return of corpus, can be deemed to be distributed. See Miller, 98 T.C.M.
(CCH) at 88–89. Accordingly, the annuity distributions of $83,440,
$206,967, and $206,967 for taxable years 2015, 2016, and 2017, respec-
tively, are characterized as ordinary income to petitioners.

        3.     Petitioners’ Arguments

      Petitioners’ response to the summary judgment motion is not a
model of clarity. As best we can tell, they appear to make three argu-
ments. None has merit.

               a.      Stepped-Up Basis

      Petitioners advance two theories to support the proposition that
the CRATs acquired a stepped-up basis, rather than a zero basis, in the

        7 Even if the corn and soybeans were considered capital assets in the CRATs’
hands, the CRATs sold the crops a few months after receiving them. The gains realized
by the CRATs would thus be short-term capital gains taxable at ordinary income rates.
See § 1222(3) (defining “long-term capital gain” as “gain from the sale or exchange of a
capital asset held for more than 1 year”). Any short-term capital gain is taxed as ordi-
nary income. See §§ 1(a), (h)(1), 1222(1) (defining short-term capital gain).
                                    11

[*11] corn and soybeans. First, they contend that they sold the crops to
the CRATS, so that the CRATs acquired a “cost basis” under section
1012. This argument does not pass the straight-face test. As evidenced
by the filing of gift tax returns, petitioners contributed the crops to the
CRATs. There is no evidence that the CRATs, which had no assets be-
fore the crops were transferred to them, paid any consideration that
could give rise to a “sale or exchange.” See § 1222. And if petitioners
had sold the crops to the CRATs, they would have had to report addi-
tional farming income on their Schedules F for 2015 and 2016, which
they did not do.

       Equally unpersuasive is petitioners’ reliance on the Forms 4797
attached to the CRATs’ information returns. These forms, prepared by
petitioners’ son as trustee, reported that CRAT I had received proceeds
of $469,003 from sale of crops with a basis of $471,000, for a loss of
$1,997, and that CRAT II had received proceeds of $691,827 from sale
of crops with a basis of $666,975, for a gain of $24,852. Petitioners have
supplied no factual support for the basis numbers reported by the trus-
tee, and those numbers are utterly implausible. As noted earlier, the
corn and soybeans had a basis of zero when the CRATs acquired them.
Petitioners offer no explanation as to how the CRATs’ basis could have
been adjusted upward, by more than $1 million in the aggregate, during
the brief period in which the CRATs held the crops before selling them.

             b.     Nontaxable Distribution

       Section 664(c)(1) provides that a CRAT “shall, for any taxable
year, not be subject to any tax imposed by this subtitle.” Citing the
“plain language” of this provision, petitioners assert that a CRAT’s dis-
tributions to life beneficiaries must also be exempt from tax. In essence,
petitioners contend that all distributions from a CRAT constitute non-
taxable returns of corpus, because Congress supposedly intended that
“[t]he donor’s beneficiaries and the charity benefit rather than the Ser-
vice.”

        Petitioners cite no legal authority to support their position, and
there is none. Section 664(c), captioned “Taxation of Trusts,” provides
that the CRAT itself is exempt from tax. Petitioners ignore section
664(b), which specifies the taxability and character of amounts distrib-
uted by a CRAT “in the hands of the beneficiary to whom is paid the
annuity.” Section 664(b)(1) mandates that annuity amounts distributed
to life beneficiaries are taxable as ordinary income “to the extent of such
income of the trust.” As discussed previously, the CRATs received
                                    12

[*12] ordinary income of $469,003 and $691,827, respectively, from sale
of the donated crops. See supra p. 10. The distributions to petitioners
did not exceed those amounts, and those distributions were thus taxable
in full as ordinary income.

       Petitioners argue that they “should not be double taxed on income
from the sale of the asset and then taxed on the annuity proceeds pur-
chased from the sale of the assets.” No double taxation exists: Petition-
ers paid no tax when transferring appreciated crops to the CRATs, and
the CRATs paid no tax on their gain from selling the crops. There is a
single level of taxation, expressly mandated by section 664(b)(1), when
proceeds from sale of the crops are distributed to petitioners. Petitioners
seek to avoid any taxation whatever of the income generated by the sale
of their ordinary income property. The Code does not permit that result.

             c.     Taxation of Annuities Under Section 72

       Lastly, petitioners contend that distributions from the SPIAs
should be taxed under section 72, which sets forth general rules for the
taxation of annuities. Section 72(b)(1) generally provides that taxable
income excludes any amount received as an annuity “which bears the
same ratio to such amount as the investment in the contract . . . bears
to the expected return under the contract.”

       For at least two reasons petitioners err in relying on the general
annuity rules. First, these rules apply “[e]xcept as otherwise provided
in this chapter,” viz., in chapter 1, governing normal taxes and surtaxes.
See § 72(a)(1). Section 664(b), a provision within chapter 1, specifies
distinct rules applicable to annuity distributions from CRATs. Thus, to
the extent sections 72 and 664 called for different treatment, section 664
would control.

       Second, section 72 does not call for different treatment. Section
72(b)(1) allows an exclusion from income only to the extent the taxpayer
has an “investment in the contract.” Neither petitioners nor the CRATs
had any investment in the annuity contracts. See § 72(c)(1). That is
because both contracts were purchased with proceeds from the sale of
agricultural crops that had a basis of zero.

      To implement the foregoing,

      An appropriate order will be issued, and decision will be entered
under Rule 155.