The regulation on charitable trust reporting still points at a form the IRS replaced for those trusts nineteen years ago, and Treasury has proposed to catch it up

Two changes sit in this proposal and the smaller one is the more revealing.

Treasury and the IRS filed a notice of proposed rulemaking on Friday morning, REG-109082-25, that would lift a filing requirement from a class of trusts. Alongside it, almost in passing, the document records that the regulation on charitable trust reporting has been pointing at the wrong form since the Bush administration.

Form 5227 replaced Form 1041-A for split interest trusts for taxable years beginning on or after 1 January 2007. The regulation at section 1.6034-1 still requires every one of those trusts to file Form 1041-A.

Nineteen years, two documents, one contradiction.

How the gap opened

The Pension Protection Act of 2006 let the IRS change what it asked of trusts described in section 4947(a)(2), and the agency responded by revising Form 5227 to absorb what Form 1041-A had collected. The form instructions were updated. They even note that the regulation still references the older form. The regulation itself was not touched.

The proposal would rewrite section 1.6034-1(a) so that split interest trusts file Form 5227, and every other trust claiming a section 642(c) deduction files Form 1041-A.

The substantive change

The other half of the proposal creates an exception that does not exist now.

A trust can end up with a charitable deduction it had no part in. If it holds a partnership interest, section 702 pushes down its distributive share of the partnership's charitable contributions. If it holds S corporation stock, section 1366 does the same with its pro rata share. In both cases the entity made the gift, the deduction reaches the trust, and the amount is already reported to the IRS on the Schedule K-1 the entity issues.

Under the current rule that trust files Form 1041-A anyway.

The document sets out why that is the wrong result. Section 6034(b) exists because Congress worried in 1950 that trusts were claiming deductions for income they had accumulated and might not pay to charity for years. A trust in this position accumulated nothing. In the drafters' own words, the trusts never received the amounts that were given to charity and never made any direct charitable contributions, and the deduction rests entirely on a current gift made somewhere else.

The proposal notes that commenters asked for this, and repeats their reasoning: trustees may not know the requirement exists and may not hold the information the form asks for.

Dates, and the part that bites early

Comments are due 60 days after publication, set here for 17 August. The rules would apply to taxable years ending on or after the date they are finalised.

One sentence undercuts that timetable in a useful direction. A trust within the new exception, or a split interest trust, may rely on the proposed regulations for taxable years ending before finalisation. Reliance is permitted, not required.

The Office of Information and Regulatory Affairs marked the proposal not significant, and the document carries a deregulatory designation under Executive Order 14192. It is signed by Frank J. Bisignano, the chief executive officer of the IRS.