Bankers Association Says Definition of Trust Income Conflicts With State Law

William Bosies of the New York Bankers Association has forwarded to Treasury a 2004 letter in which he described to the IRS how some state laws are in conflict with revised regulations governing the definition of income for trust purposes.

Date: Mar. 28, 2005

Full Text Published by Tax AnalystsTM

From: Bill Bosies []
Sent: Monday, March 28, 2005 11:33 AM
To: Hughes, Catherine
Subject: Definition of Income for Trust Purposes

Dear Cathy:

Thank you for taking my call. Attached is the letter I described detailing the conflict with some state laws of one of the newly adopted provisions of Section 1.664-3(a)(1). Please feel free to give me a call if you have any questions.


William J. Bosies
Senior Vice President, Legislation
and Regulation
New York Bankers Association
99 Park Avenue, 4th Floor
New York, NY 10016-1502
Tel. 212-297-1664
Fax. 212-297-1622

* * * * *

July 7, 2004

Mr. Bradford R. Poston
Ms. Mary Berman
Office of the Associate Chief Counsel (Passthroughs and Special
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224-0002

RE: Definition of Income for Trust Purposes 12 CFR Parts 1, 20, 25 and 26

Dear Mr. Poston and Ms. Berman:

On January 2, 2004, the Service published revised regulations governing the definition of income for trust purposes. Our Association greatly appreciates the work of the Service in revising these regulations and, particularly, in taking into account the concerns of trustees in States such as New York that had amended their Principal and Income Acts prior to 2004. The regulations specifically provide for these amendments, as requested by our Association and others, in permitting taxpayers to rely on the provisions of the final regulations for any taxable years in which a trust or estate is governed by a state statute authorizing a unitrust payment in satisfaction of the income interest of the income beneficiaries or granting the trustee a power to adjust between income and principal.

The final regulations include a number of changes from those originally proposed. Most of these changes are unobjectionable. However, one alteration made in section 1.664-3(a)(1)(i)(b)(3) of the final regulations that differs from that proposed establishes a potential conflict with State law. Section 1.664-3(a)(1)(i)(b)(3) formerly provided that the proceeds from the sale of property contributed to a charitable remainder trust were considered as principal to the extent of their value on the date of contribution. There was no comparable provision dealing with the sale of property purchased by the charitable remainder trust. Some tax professionals took the view that the proceeds from the sale of property purchased by the trust had to become part of principal but did not have to remain as principal in a state with a non-productive or under-productive property law.

However, in the final regulations published on January 2, a new sentence was added to section 1.664-3(a)(1)(i)(b)(3) stating that, "Proceeds form the sale or exchange of any property purchased by the trust must be allocated to principal and not to trust income at least to the extent of the trust's purchase price of those assets." In states with strong non-productive or under-productive property statutes, this new sentence appears to directly conflict with such state laws. For example, section 11-2.1(k) of New York's Estates, Powers and Trusts Law (derived from the Uniform. Principal and Income Act) states that a portion of the net proceeds of a sale by a fiduciary . . . of any principal property of an estate or trust, other than securities listed on a national securities exchange or traded in over the counter (sic), held for more than a year which has not produced over the period held an average net income of one per cent per annum of its inventory value . . . shall be allocated to income as delayed income. . ." We have attached the entire section 11-2.1(k) to this letter = for you consideration.

We therefore respectfully request that the Service consider a clarification to section 1664-3(a)(1)(i)(b)(3) of its regulations. We request that the Service clarify that, where a State non-productive or under-productive property law so provides, or, where there is no relevant state law, where state judicial decisions so provide, nothing in section 6643(a)(1)(1)(b)(3) will limit the ability of a trustee to treat as income the proceeds from the sale of property purchased by a charitable remainder trust to the extent that the state law requires it to be so considered.

We would also note that such a clarification would simply reestablish the consistent and equal tax treatment of charitable remainder unitrusts and income only charitable remainder unitrusts which existed in the regulations prior to these current revisions.

Once more, we greatly appreciate the efforts of the Service to revise the regulations governing the definition of income for trust purposes. We welcome any questions you may have on this request.


William J. Bosies
Senior Vice President, Legislation
and Regulations
New York Bankers Association
New York, NY


Tax Analysts Information

Code Section: Section 664 -- Charitable Remainder Trusts
Geographic Identifier: United States
Subject Area: Trusts and estates taxation
Author: Bosies, William J.
Institutional Author: New York Bankers Association
Tax Analysts Document Number: Doc 2005-10198 [PDF]
Tax Analysts Electronic Citation: 2005 TNT 91-23
Cross Reference: For T.D. 9102, see Doc 2004-149 [PDF] or 2004 TNT 7-19 Database 'Tax Notes Today 2004', View '(Number'.