In Uncategorized on 04/20/2023 at 19:32

No, that’s not a misprint, rather it is the intro to Judge Emin (“Eminent”) Toro’s send-off of the trusty tax advisers of Gladys L. Gerhardt, et al., 160 T. C. 9, filed 4/20/23. Gladys is lead-off for la famille Gerhardt, who contribute low-basis, high-FMV property to a charitable remainder annuity trust (CRAT), which promptly cashes out, buying with said cash single payment immediate annuities, payable over a five-year term, the payout of which Gladys and la famille claim is exempt from income tax, bar some small amount of interest.

Judge Eminent refers us back to Furrer, for which see my blogpost “From Boondocks to Cornfields,” 9/28/22. The CRAT may be exempt, but payouts to nonexempts are taxable at highest rate. And said trusty tax advisers also advised the Furrers, 160 T. C. 9, at p. 4, footnote 5; the too-successful dodgeflogger paints a target on every floggee.

The sale of the appreciated properties by the CRAT triggered gain to the CRAT, although nontaxable to the CRAT per Section 664. The CRAT got Gladys’ carryover basis, so sale generated gain; and Section 1245(a) makes that gain ordinary income when distributed.

“The Gerhardts resist the straightforward analysis set out above. In their telling, the Code does a lot more than exempt the CRATs from paying tax on built-in gains realized when contributed property is sold. According to the Gerhardts, the Code also relieves them from paying tax on the distributions that were made possible by the CRATs’ realization of the built-in gains. As they put it, ‘all taxable gains (on the sale of the asset[s contributed to the CRATs]) disappear and the full amount of the proceeds [is] converted to principal to be invested by the CRAT.’ Pet’rs’ Opening Br. 6–7 (emphasis added). In the Gerhardts’ view, ‘[i]t becomes obvious that Congress intended [this treatment] to promote charitable giving while offering large tax benefits as incentives.” Id. at 7. The gain disappearing act the Gerhardts attribute to the CRATs is worthy of a Penn and Teller magic show. But it finds no support in the Code, regulations, or caselaw.” 160 T. C. 9, at p. 26.

Judge Eminent gave Gladys’ trusty counsel a chance to distinguish their case from Furrer. I’ll let Judge Eminent tell what happened.

“But, tellingly, their briefs fail to mention the case at all. Their silence confirms our view that the reasoning in Furrer applies with equal force here.” 160 T. C. 9, at pp. 26-27. (Footnote omitted, but, as usual, the footnote tells the whole story.)

“This is particularly notable given that the Gerhardts’ counsel in these cases also represented the Furrers. Moreover, neither the Gerhardts’ Opening Brief nor their Reply to Respondent’s Opening Brief cites a single case in support of their position. As we have already explained, no such support exists.” 160 T. C. 9, at p. 27, footnote 36.

Besides this, a couple of the Gerhardts swapped some hog buildings and related property in a 1031 like-kind exchange. That was valid, but rather than deferring gain, IRS claims Section 1245 turns depreciable “a single-purpose agricultural or horticultural structure,” per Section 1245(a)(3)(A), (D) into ordinary income. And the couple can’t prove otherwise.

Two other Gerhardts faced five-and-ten Section 6662 understatement of tax chops. They never put in evidence as to their preparer’s qualifications.

I can see these Midwestern CRAT games next on IRS’ list of reportables, right below the Dixieland Boondockery.


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