n-99-17.pdf

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Part III - Administrative, Procedural, and Miscellaneous
Post-1997 Distributions of Capital Gains from Charitable Remainder Trusts
Notice 99-17
This notice modifies Notice 98-20, 1998-13 I.R.B. 25, to reflect changes made to
§ 1(h) of the Internal Revenue Code by §§ 4002(i)(3) and 4003(b) of the Tax and Trade
Relief Extension Act of 1998 (Division J of H.R. 4328, Omnibus Consolidated and
Emergency Supplemental Appropriations Act, 1999), Pub. L. No. 105-277, 112 Stat.
2681 (1998) (TTREA of 1998). The changes affect the treatment of post-1997
distributions of certain capital gains properly taken into account in 1997 by a charitable
remainder trust (CRT) described in § 664.
BACKGROUND
Notice 98-20 provides guidance on the ordering and taxation of distributions
under § 664(b)(2) from a CRT to reflect changes made to § 1(h) by the Taxpayer Relief
Act of 1997 (TRA 1997), Pub. L. No. 105-34, § 311, 111 Stat. 788, 831. TRA 1997
amended § 1(h) to provide for new capital gain tax rates for noncorporate taxpayers.
Under Notice 98-20, a CRT’s long-term capital gains (LTCGs) and losses fall into three
separate tax rate groups: (1) the 28-percent group, (2) the 25-percent group, and

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(3) the 20-percent group. Grouping of LTCGs properly taken into account by a CRT is
necessary in order to determine the treatment of distributions by the CRT. Notice 98-
20 provides that LTCGs properly taken into account by a CRT from January 1, 1997,
through May 6, 1997, are treated as LTCGs in the 28-percent group.
Section 4002(i)(3) of the TTREA of 1998 added § 1(h)(13)(D). New
§ 1(h)(13)(D) provides that § 1(h)(13)(A) and § 1(h)(13)(B)(ii) (providing 28-percent rate
treatment for certain LTCGs properly taken into account in 1997) do not apply to any
capital gain distribution made by a CRT, effective for taxable years ending after
December 31, 1997. Because § 1(h)(13)(A) and § 1(h)(13)(B)(ii) do not apply to a CRT
distribution for taxable years ending after December 31, 1997, LTCGs (other than
collectibles gain) properly taken into account by a CRT during 1997 and distributed in
taxable years ending after December 31, 1997, that would have been in the 28-percent
group now fall within either the 25-percent group or the 20-percent group.
To reflect the changes made to § 1(h) by § 4002(i)(3) of the TTREA of 1998, this
present notice modifies two sections of Notice 98-20: (1) 1997 PRE-EFFECTIVE DATE
LONG-TERM CAPITAL GAINS and (2) EXAMPLE ILLUSTRATING ORDERING AND
CHARACTER RULES. The 1997 PRE-EFFECTIVE DATE LONG-TERM CAPITAL
GAINS section of Notice 98-20 should be disregarded for taxable years ending after
December 31, 1997. In the EXAMPLE ILLUSTRATING ORDERING AND
CHARACTER RULES section of Notice 98-20, the 28-percent group gain is changed to
collectibles gain.

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DISCUSSION
The character of a CRT’s income is determined at the time the income is
realized by the trust. Under § 1(h)(13)(D), a CRT’s LTCG in the 28-percent group
(other than collectibles gain) that was properly taken into account during 1997 and
distributed in taxable years ending after December 31, 1997, falls within either the 25-
percent group or the 20-percent group. Thus, a CRT’s LTCG described in the previous
sentence now falls within the 25-percent group if the gain (1) was from property held
more than 12 months but not more than 18 months, (2) was properly taken into account
for the portion of the taxable year after July 28, 1997, and before January 1, 1998, and
(3) otherwise satisfies the requirements for unrecaptured § 1250 gain under § 1(h)(7);
any remaining LTCG falls within the 20-percent group.
To reflect this change in law, some CRTs will need to remove from the
28-percent group any LTCGs (other than collectibles gain) properly taken into account
during 1997 that were not distributed in taxable year 1997 and place those LTCGs in
either the 25-percent group or the 20-percent group, as appropriate.
Tables 1 and 2 illustrate the recent changes made to § 1(h) and their effect on
CRTs.

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Table 1
Rules Applicable to LTCGs Distributed in Tax Year 1997
Pre-1997 LTCGsLTCGs realizedLTCGs realizedLTCGs realized
from 1/1/97-5/6/97from 5/7/97-from 7/29/97-
7/28/9712/31/97
20%28% if property28% for collectibles 28% if property
held > 12 monthsgainheld > 12 months
and <
18 months or
for collectibles gain
25% if property25% if property
held > 12 monthsheld > 18 months
and LTCG isand LTCG is
unrecaptured unrecaptured
§ 1250 gain§ 1250 gain
20% for all other20% for all other
property held > 12property held > 18
monthsmonths
Table 2
Rules Applicable to LTCGs Distributed in Post-1997 Tax Years
Pre-1997 LTCGsLTCGs realizedLTCGs realizedLTCGs realized
from 1/1/97-5/6/97from 5/7/97-from 7/29/97-
7/28/9712/31/97
No change–20%No change–28%
Change–20% ifChange–28% only
property held > 12for collectibles gain
months
for collectibles gain
No change–25% ifChange–25% if
property held > 12
months and LTCG
is unrecaptured
§ 1250 gain
property held > 12
months and LTCG
is unrecaptured
§ 1250 gain
No change–20%Change–20% for
for all otherall other property
property held > 12
months
held > 12 months

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EFFECTIVE DATE
The statutory changes described in this notice apply to CRT distributions made
in taxable years ending after December 31, 1997.
EFFECT ON OTHER DOCUMENTS
Notice 98-20 is modified.
DRAFTING INFORMATION
The principal author of this notice is Mary Beth Collins of the Office of Assistant
Chief Counsel (Passthroughs and Special Industries). For further information
regarding this notice, contact Ms. Collins on (202) 622-3080 (not a toll-free call).