The CPA Journal

Caveat for Charitable Remainder Trusts

By Max Wasser, CPA, Wasser Brettler Klar & Lipstein LLP

A recent Tax Court decision illustrates the extreme care required in estate planning. Jorgl v. Comm’r (Tax Court Memo 2000-10) involved a couple that owned and operated a child-care business. When the couple decided to sell the business and direct some of the proceeds toward estate planning and charitable goals, an attorney advised them to form a charitable remainder trust (CRT), with the couple as income beneficiaries and a charity of their choice as remainder beneficiary. The attorney further advised the couple to transfer ownership of the business to the CRT. Subsequently, the CRT listed the business with a business broker.

Two years later, a customer agreed to purchase the business. The buyer insisted that the couple sign a covenant not to compete as a supplement to the sales agreement. The closing documents set the purchase price of the business at $350,000 and the purchase price of the noncompetition covenant at $300,000.

After an audit of the transaction, the IRS held that the couple, by signing the noncompetition covenant, was liable for tax on the portion of the purchase price ($300,000) designated for such covenant. The IRS’s rationale was that the couple had made an anticipatory assignment of income to the CRT. The Tax Court held for the IRS but reduced the purchase price assigned to the noncompetition covenant from $300,000 to $200,000. The court also removed an accuracy-related penalty assessed by the IRS, on the grounds that the couple had acted in good faith based on reasonable cause.

The irony of this decision is that the couple personally received none of the purchase price; all of it was directed into the CRT. Had the court held in favor of the couple, and subsequently had there been a violation of the noncompetition covenant, any payment out of the CRT to the buyer would have terminated the CRT’s tax-exempt status. The CRT was established in order to pay current income to the couple with the remainder of the income directed to a charity. Any payments made to other parties during the life of the couple would violate the strict requirements imposed by the CRT.

Editors:
Lawrence M. Lipoff, CPA
Deloitte & Touche LLP

Susan R. Schoenfeld, JD, LLM, CPA
Bessemer Trust Company N.A.

Contributing Editors:
Jerome Landau, CPA

Debra M. Simon, CPA
Merdinger Sruchter Rosen & Corso P.C.

Richard H. Sonet, JD, CPA
Marks Paneth & Shron LLP

Peter Brizard, CPA

Ellen G. Gordon, CPA
Margolin Winer & Evens LLP

Jeffrey S. Gold, CPA
Joseph R. Beyda & Company P.C.

Harriet B. Salupsky, CPA
Weinick Sanders Leventhal & Company LLP

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