UBTI Subject to Excise, Not Income Tax

BY TED BATSON

In new proposed regulations issued March 6, the IRS amended regulations under IRC § 664(c) to provide that charitable remainder trusts with unrelated business taxable income (UBTI) are now exempt from federal income tax but are subject to a 100% excise tax on the UBTI. These changes are necessary to reflect an amendment to IRC § 664(c) enacted by the Tax Relief and Health Care Act of 2006. The new regulations address four specific topics:

  • The applicability of the $1,000 specific deduction found at IRC § 512(b)(12) in computing the unrelated business taxable income of a charitable remainder trust.
  • The requirement to include the unrelated business income in the appropriate income category, notwithstanding the fact that it is subject to a 100% excise tax.
  • The requirement to pay the excise tax from trust corpus.
  • The excise tax is to be reported on the appropriate form—currently Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code.

The proposed regulations are proposed to be effective for taxable years beginning after Dec. 31, 2006. Comments on REG-127391-07 are requested by May 6.

Prepared by Ted Batson, CPA, MBA, CFP.

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