The Tax Times: July 2026

On July 8, 2026, the Treasury Department and IRS issued IR-2026-82 announcing that it issued final regulations formally identifying certain Charitable Remainder Annuity Trust (CRAT) structures as “listed transactions.” This designation significantly raises the compliance stakes for taxpayers and advisors involved in these arrangements, triggering mandatory disclosure requirements and potential penalties.

What the IRS Is Targeting

The regulations focus on transactions that attempt to improperly eliminate or defer recognition of ordinary income and capital gains through a purported CRAT structure.

In the typical fact pattern described by the IRS:

· A taxpayer contributes appreciated property (often a closely held business interest or business-use assets) to a purported CRAT.

· The CRAT sells the contributed property, generating significant gain.

· The trust then uses the proceeds to acquire a single premium immediate annuity (SPIA).

· The taxpayer claims that annuity distributions are only partially taxable, relying on a misapplication of Sections 72 and 664.

The intended result is a substantial distortion of the CRAT tier system, allowing taxpayers to avoid recognizing the full amount of gain that would otherwise flow out under the four-tier regime of Section 664.

Why the Structure Fails

The IRS takes the position that these transactions fundamentally misapply both:

· Section 664, which governs the ordering rules for CRAT distributions (ordinary income, capital gains, tax-exempt income, and return of corpus), and

· Section 72, which applies to annuity contracts but does not override CRAT distribution character rules.

In substance, the SPIA does not “convert” the character of the underlying income inside the CRAT. The trust’s realized gain retains its character and must be distributed accordingly under the statutory tier system.

Listed Transaction Consequences

By designating these arrangements as listed transactions, the IRS imposes strict reporting obligations:

· Participants must disclose involvement on Form 8886.

· Material advisors must file Form 8918 and maintain investor lists under Section 6112.

· Penalties may apply under Sections 6707A, 6707, and 6708 for failure to disclose or maintain required records.

The “substantially similar” standard also expands the reach of these rules beyond the exact fact pattern described.

Practical Implications for Advisors

For practitioners advising high-net-worth clients or closely held business owners, this development reinforces several key points:

· CRATs remain valid planning tools, but only when structured and operated in strict compliance with Section 664.

· Any attempt to “wrap” a CRAT around annuity products to alter income character should be treated as high risk.

· Due diligence on existing CRAT structures is critical, particularly where annuity products are involved.

· Prior transactions may require review for disclosure obligations or potential exposure.

Example

Consider a taxpayer who contributes a business interest with a million basis and million fair market value to a CRAT. After the CRAT sells the asset, it purchases a SPIA and distributes annuity payments to the taxpayer.

Under a proper application of Section 664, distributions should carry out capital gain from the sale. However, in the abusive structure, the taxpayer reports only a portion of each payment as taxable under Section 72—effectively deferring or avoiding recognition of the million gain. The IRS now explicitly identifies this treatment as improper and reportable.

Final Thoughts

This guidance is part of a broader enforcement trend targeting transactions that exploit technical mismatches between Code provisions. The IRS is signaling that it will continue to challenge structures that attempt to recharacterize income through intermediaries like CRATs.

Taxpayers and advisors should approach any CRAT strategy involving annuities or income “conversion” techniques with heightened scrutiny and ensure full compliance with disclosure rules where applicable.

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Keysight in a nutshell

GILTI, enacted in the Tax Cuts and Jobs Act, was designed to impose current U.S. tax on certain low‑taxed foreign earnings of controlled foreign corporations (CFCs). Treasury identified what it viewed as a design flaw: when a CFC’s tax year did not align with the U.S. shareholder’s year, timing mismatches could arise between foreign‑law accounting and U.S. inclusions.

To address this, Treasury promulgated regulations—most notably Treas. Reg. § 1.951A‑2(c)(5)—that effectively reallocated or adjusted tested income across years to neutralize perceived timing distortions. Keysight, a U.S. multinational, filed a refund suit in the Court of Federal Claims attacking that “fix” and the way it impacted its GILTI calculations, including the government’s position on amortization deductions under section 197 within GILTI.

In a July 2026 decision, the Court of Federal Claims held the GILTI regulation invalid, concluding that Treasury had gone beyond the statute Congress actually enacted. The decision rejects the idea that Treasury can cure structural or timing mismatches by rewriting section 951A’s framework via regulation when Congress itself did not provide that solution.

Why the regulation fell: statutory limits after Loper Bright

Although Keysight is a tax case, its logic sits comfortably in the broader administrative law shift following the Supreme Court’s decision in Loper Bright Enterprises v. Raimondo. In Loper Bright, the Court curtailed the deference traditionally afforded to agencies in interpreting ambiguous statutes, emphasizing that it is the judiciary’s role—not the agency’s—to determine what the law means, and that “gap‑filling” cannot amount to rewriting statutory schemes under the guise of interpretation.

Keysight applies that same sensibility to GILTI. Treasury saw a mismatch problem with fiscal‑year CFCs and decided to fix it by regulation. The Court of Federal Claims, however, focused on statutory boundaries: section 951A lays out a detailed scheme for computing tested income, determining the inclusion, and coordinating timing, and the regulation’s cure could not be squared with that statutory architecture.

In effect, the court treats Treasury’s fix as policy‑driven rather than text‑driven. Where Loper Bright insists courts must independently construe statutes without reflexive deference to agency “solutions,” Keysight demonstrates what that looks like in the international tax context: if the statute doesn’t authorize the timing reallocation Treasury prefers, the regulation cannot stand—even if Treasury’s policy concerns are real.

Practical implications for multinationals

For U.S. multinationals with CFCs on fiscal years, Keysight has immediate practical consequences:

· It undercuts the government’s ability to rely on Treas. Reg. § 1.951A‑2(c)(5) to force timing adjustments that increase GILTI inclusions, at least for taxpayers similarly situated to Keysight.

· It invites taxpayers to revisit prior‑year GILTI computations where the now‑invalid regulation moved income into, or out of, particular years in a way that was unfavorable, and to evaluate refund or protective claims for open years.

· It strengthens arguments that existing deduction regimes—such as section 197 amortization—must be respected in GILTI computations where the statute, rather than regulation, leads to that result.

More broadly, Keysight will likely become a key citation for challenges to other TCJA regulations that “fix” perceived statutory flaws by stretching interpretive authority. In a post–Loper Bright world, courts are increasingly willing to ask whether the statute itself authorizes the agency’s solution; if it does not, the regulation is vulnerable even in complex tax areas.

What tax departments should do now

In light of Keysight and Loper Bright, tax departments and advisors should:

· Inventory situations where GILTI computations relied on Treas. Reg. § 1.951A‑2(c)(5) or similar “fix‑it” rules and quantify the impact on inclusions and deductions.

· Consider refund or protective claims for affected years, balancing potential benefits against controversy risk and IRS responses as the government reassesses its position.

· Monitor closely for IRS or Treasury reactions—whether in the form of litigation strategy, non‑acquiescence, new guidance, or a push for legislative change to address timing mismatches expressly.

For cross‑border clients, the key takeaway is that agency efforts to repair perceived statutory defects are now subject to much stricter judicial review. GILTI may have been designed quickly and imperfectly, but under Loper Bright and cases like Keysight, it is Congress—not Treasury—that must fix those imperfections.

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