Judge Albert G (“Scholar Al”) Lauber gets ’em all, from GA boondocks to IN cornfields.

Donald Furrer and Rita Furrer, T. C. Memo. 2022-100, filed 9/28/22, are farmers who donated a lot of the soybeans and corn they grew on their IN farmstead to two (count ’em, two) charitable remainder annuity trusts (CRATs, in taxspeak) in two different years. The trustee (their son) immediately sold the crops to the usual buyer, who paid cash. From that, the trustee distributed some small interest earned on the cash (which Don and Rita reported) and a lot of cash (which they didn’t report, claiming return of investment).

IRS allowed some of this at Exam, but bounced the rest, and amended their answer to disallow the whole lot when Don and Rita petitioned the bounce.

The matter comes up on partial summary J to the scholar, Judge Albert G (“Scholar Al”) Lauber. IRS has BoP, as the disallowance is new matter.

First, Don and Rita have zero basis in the crops, as they expensed all the costs of producing same on their Sched Fs. And they admit they have zero basis.

Don and Rita claim charitable contribution for whatever portion of the crops would vest in the 501(c)(3) remaindertypes. But they submitted no Form 8283 or qualified appraisal of the crops, and compliance is a strict requirement per Section 170(f)(11)(a)(i). FMV is irrelevant, because the crops are ordinary income property (goods held for sale in the usual course of business), and Section 170(e)(1)(A) says that grantor thereof only gets a deduction for whatever isn’t taxable at ordinary rates. But all of the proceeds are, because Don and Rita expensed their costs of production. So their contribution for tax purposes is zero.

See also Section 1015. The trusts get the donors’ carryover basis, except where basis is more than FMV at date of donation (in which case trusts’ basis is FMV), plus any gift tax paid. None was paid, and basis is less than FMV here.

So when the trustee sold the crops, all the proceeds were taxable gain.

Except CRATs are tax-exempt.

Except distributions from CRATs are taxable to non-exempt recipients. Trust me, they are: I have a CRAT, and I know.

“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 nontaxable return of corpus.” T. C. Memo. 2022-100, at p. 9.

Don’s and Rita’s trusty attorney gets a ding from Judge Scholar Al.

“Petitioners’ response to the summary judgment motion is not a model of clarity. As best we can tell, they appear to make three arguments. None has merit.” T. C. Memo. 2022-100, at p. 10.

Trusty attorney claims sale to CRATs, except CRATs had nothing wherewith to pay, and any gain on a sale would have been taxable to Don and Rita. The trustee claimed a basis in the donated corn and soybeans when he sold them, but his numbers are “utterly implausible,” T. C. Memo. 2022-100, at p. 11.

Trusty attorney claims distributions should be exempt, as CRAT is exempt.

Section 664(a) exempts the CRAT, but Section 664(b) taxes the distributions.

Finally, trusty attorney tries the Section 72 investment-in-the-contract argument, except Section 72(a)(1) defers to the Section 664 waterfall. And even if Section 72 applied, the basis (investment in the contract) is still zero.