June 12, 2008
Mr. Donald Korb
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C. 20224
Fax: (202) 622-4277
Mr. William P. O’Shea
Associate Chief Counsel for Passthroughs and Special Industries
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C. 20224
Fax: (202) 622 – 4524
RE: REG-127391-07 - Guidance Under Section 664 Regarding the Effect of Unrelated
Business Taxable Income on Charitable Remainder Trusts - AICPA request for the
final regulations under section 664(c) to clarify that unrelated business taxable
income (“UBTI”) does not retain its character as such if it is distributed by a
charitable remainder trust (“CRT”) to a charitable organization as part of the annual
annuity or unitrust payment.
Dear Mr. Korb and Mr. O’Shea:
The American Institute of Certified Public Accountants (AICPA) is submitting this letter to
request for the final regulations under section 664(c) to clarify that unrelated business taxable
income (“UBTI”) does not retain its character as such if it is distributed by a charitable
remainder trust (“CRT”) to a charitable organization as part of the annual annuity or unitrust
payment.
The AICPA is the national professional organization of certified public accountants comprised of
approximately 330,000 members. Our members advise clients on federal, state and international
tax matters, and prepare income and other tax returns for millions of Americans. Our members
provide services to individuals, not-for-profit organizations, small and medium-sized business, as
well as America’s largest businesses.
Proposed
regulations,
issued
on
March
6,
2008,
(REG-127391-07,
http://edocket.access.gpo.gov/2008/E8-4576.htm) address the statutory change to section 664(c),
which provides that a CRT will be subject to an excise tax equal to 100 percent of the trust’s
UBTI. Section 1.664-1(c)(1) of the proposed regulations provides that the CRT’s income that is
unrelated business taxable income constitutes income of the trust for purposes of determining the
Mr. Donald Korb and Mr. William O’Shea
June 12, 2008
Page 2 of 3
character of the distribution made to the beneficiary. The income is allocated among the income
categories without regard to whether any part of that income constitutes UBTI. The examples in
the proposed regulations show the UBTI being placed in the ordinary income or capital gain
categories, but there is no further mention of the type of income retaining its status as UBTI.
The question has arisen as to whether a distribution of part of an annuity or unitrust amount to a
charitable organization should be considered UBTI in the hands of the charity to the extent the
distribution is from UBTI received by the CRT. The regulations, when they are finalized, should
clarify that an annuity or unitrust distribution from a CRT will not retain its character as UBTI in
the hands of the charitable organization.
We believe that treating the income from a CRT as not retaining its character as UBTI in the
hands of a charitable organization is the appropriate result. It is similar to the treatment of
distributions of gross income from a regular taxable trust to a charitable organization because
distributions that qualify for the charitable deduction under section 642(c) do not retain their
character as income in the hands of the charitable recipient. See G.C.M. 38,486 (Aug. 25, 1980),
concluding that a private foundation is not required to take into income amounts distributed from
a trust which qualify for the section 642(c) charitable deduction.
In Notice 2004-35, 2004-1 C.B. 889, the Treasury Department and Internal Revenue Service
state that they intend to propose regulations modifying regulations under section 53.49401(d)(2). The new regulations will provide that a private foundation’s net investment income for
purposes of section 4940 does not include distributions from trusts and estates and that income
distributions from trusts and estates will not retain their character in the hands of a distributee
private foundation. Even though this rule is for purposes of determining the amount of a private
foundation’s net investment income under section 4940, it is further indication that the character
of a distribution from a trust should be immaterial in the hands of a charitable organization.
Because special statutory rules apply when a CRT earns UBTI, we believe that nothing further
should be done if some of the UBTI is treated as distributed to a charitable recipient as part of
the annuity or unitrust amount. Before 2007, a CRT with UBTI was penalized by making it a
taxable trust, and after 2007 a CRT pays a 100% excise tax on any UBTI. Since these are the
statutory penalties imposed on all CRTs with UBTI, irrespective of the identity of the annuity or
unitrust recipient, we believe there should be no additional penalty for those few CRTs who have
a charity as a partial recipient of the annuity or unitrust amount by making that recipient treat
some or all of what it receives as UBTI. In the proposed regulations addressing the new 100%
excise tax on UBTI, section 1.664-1(c)(2) contains two examples and in both of them the income
that is UBTI is categorized for purposes of section 664(b) as ordinary income in example 1 and
capital gains in example 2 and there is no suggestion that it retains its character as UBTI. We
suggest that those two examples explicitly state that the income, while retaining its character as
ordinary income or capital gain income, does not retain its character as UBTI.
*
*
*
*
*
Mr. Donald Korb and Mr. William O’Shea
June 12, 2008
Page 3 of 3
We thank you for the opportunity to present our suggestion and welcome the opportunity to
discuss our comments further with you or others at the IRS. Please feel free to contact me at
(212) 773-2858 or jeffrey.hoops@ey.com; or Justin P. Ransome, Chair of the AICPA Trust,
Estate, and Gift Tax Technical Resource Panel, at (202) 521-1520 or justin.ransome@gt.com; or
Eileen R. Sherr, AICPA Technical Manager, at (202) 434-9256 or esherr@aicpa.org; to discuss
the above suggestion or if you require any additional information.
Sincerely,
Jeffrey R. Hoops
Chair, AICPA Tax Executive Committee
cc:
Mr. Eric Solomon, Assistant Secretary for Tax Policy, Treasury Department
Ms. Catherine Hughes, Attorney Advisor, Treasury Department
Ms Cynthia Morton, Attorney, Office of Associate Chief Counsel for Passthroughs and
Special Industries