October 8, 2007

Mr. David M. English

University of Missouri-Columbia

203 Hulston Hall

Columbia, MO65211-4300

Mr. Scot W. Boulton

Polsinelli Shalton Welte Suelthaus PC

Suite 1200, 7733 Forsyth

Clayton, MO63105

Mr. James D. Spratt, Jr.

King & Spalding LLP

1180 Peachtree Street

Atlanta, Georgia 30309

Mr. Steven B. Gorin

Thompson Coburn LLP

One USBankPlaza

St. Louis, Missouri63101

RE: AICPA Comments on NCCUSL Proposed Changes to UPIA Sections 401, 505 and 409

Dear Mssrs. English, Boulton, Spratt, and Gorin:

The American Institute of Certified Public Accountants (AICPA) is submitting comments on proposed changes submitted by the American Bar Association (ABA) and American College of Trust and Estate Counsel (ACTEC) to the National Conference of Commissioners on Uniform State Laws (NCCUSL) relating to the Uniform Principal and Income Act (UPIA) Sections 401, 409, and, 505. The UPIA defines how receipts and disbursements of an estate or trust are allocated between income and principal. We are in general agreement with the proposals submitted by ABA and ACTEC with slight modifications as outlined in our comments.

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, providing. Our members provide services to individuals, not-for-profit organizations, small and medium-sized business, as well as America’s largest businesses.

We suggest additional changes to UPIA section 401 to allow trustees to allocate to income only that portion of a receipt that can, at the time of receipt, be determined to be truly income from the nature of the receipt. Remaining cash will be allocated to principal, until final determination of the proper classification can be made.

In addition, we note that while the proposed revisions to UPIA section 401 go a long way toward easing the burden on trustees who do not possess a power to adjust, we believe that they do not go far enough in addressing the confusion that currently exists over the interplay between UPIA sections 401 and 505.These sections instruct the trustee how to allocate receipts from an entity and the taxes related thereto between income and principal beneficiaries. In particular, it is unclear in which order UPIA sections 505(c) and 505(d) should apply. Applying them in different order achieves a vastly different tax allocation between income and principal. If the desired tax allocation is the Gamble interpretation as explained in our comments, then we suggest specific language for UPIA section 505(d).

Further, the AICPA believes that NCCUSL should address the issues raised by Rev. Rul. 2006-26, which rejects the applicability of UPIA section 409 to IRA accounts held in trusts intended to qualify for the marital deduction under IRC section 2056. For an IRA, and other similar types of plans for which the underlying earnings and growth are ascertainable, the trustee should be able to look through to the underlying investments and determine the amount of interest, dividends or their equivalent earned during the period and allocate this amount to income and the balance to principal. For those accounts for which the underlying earnings and growth are not ascertainable, AICPA recommends the adoption of a unitrust approach allowing the trustee to allocate an amount equal to no less than 3 percent nor greater than 5 percent of the fair market value of the IRA account to income and the balance to principal. Thus, we support the recommendation of ABA and ACTEC members to NCCUSL to include an “income allocation provision” and a “mandatory distribution provision” in UPIA section 409 as further described in their Memorandum to James Gamble dated July 1, 2007.

We thank you for the opportunity to present our comments and welcome the opportunity to discuss our comments further with you or others at NCCUSL or the IRS. Please feel free to contact me at ; Steven A. Thorne, Chair of the AICPA Trust, Estate, and Gift Tax Technical Resource Panel, at ; F. Gordon Spoor, Chair of the AICPA Technical Issues Task Force, at ; or Eileen R. Sherr, AICPA Technical Manager, at to discuss the above comments or if you require any additional information.

Sincerely,

Jeffrey R. Hoops

Chair, AICPA Tax Executive Committee

A MERICAN I NSTITUTE OF C ERTIFIED P UBLIC A CCOUNTANTS

Comments on Proposed Changes to

UPIA Section 401 , 409, and 505

October 3, 2007

Executive Summary

The American Institute of Certified Public Accountants (AICPA) is providing these comments on the proposed changes submitted by the American Bar Association (ABA) and the American College of Trust and Estate Counsel (ACTEC) committees to the National Conference of Commissioners on Uniform State Laws (NCCUSL) relating to the Uniform Principal and Income Act (UPIA) sections 401, 409 and 505.[1] The UPIA defines how receipts and disbursements of an estate or trust are allocated between income and principal. Part of these comments are also in response to Rev. Rul. 2006-26, IRB 2006-22, May 30, 2006,[2] which rejected UPIA section 409, relating to distributions from individual retirement accounts (IRAs) held in trusts that are intended to qualify for the marital deduction. We are in general agreement with the proposals submitted by ABA and ACTEC with slight modifications as outlined below.

Specifically, we suggest additional changes to UPIA section 401 to allow the trustee to allocate to income only that portion of a receipt that they are able to determine, at the time of receipt, is truly income from the nature of the receipt. Any remaining cash will be allocated to principal, until such time as the final determination of the proper classification can be made.

In addition, we note that while the proposed revisions to section 401 go a long way toward easing the burden on trustees who do not possess a power to adjust, we believe that they do not go far enough in addressing the confusion that currently exists over the interplay between UPIA sections 401 and 505. These sections instruct the trustee how to allocate receipts from an entity and the taxes related thereto between income and principal beneficiaries. In particular, it is unclear in which order UPIA sections 505(c) and 505(d) should apply. Applying them in different order achieves a vastly different tax allocation between income and principal. If the desired tax allocation is the Gamble interpretation as explained in our comments below, then we suggest specific language for UPIA section 505(d).

Finally, the AICPA believes that NCCUSL should address the issues raised by Rev. Rul. 2006-26, which rejects the applicability of UPIA section 409 to IRA accounts held in trusts intended to qualify for the marital deduction under Internal Revenue Code (IRC) section 2056. For an IRA, and other similar types of plans for which the underlying earnings and growth are ascertainable, the trustee should be able to look through to the underlying investments and determine the amount of interest, dividends or their equivalent earned during the period and allocate this amount to income and the balance to principal. For those accounts for which the underlying earnings and growth are not ascertainable, AICPA recommends the adoption of a unitrust approach allowing the trustee to allocate an amount equal to no less than 3 percent nor greater than 5 percent of the fair market value of the IRA account to income and the balance to principal. Thus, we support the recommendation of ABA and ACTEC members to NCCUSL to include an “income allocation provision” and a “mandatory distribution provision” in UPIA section 409 as further described in their Memorandum to James Gamble dated July 1, 2007.

Background

The proposed changes to the Uniform Principal and Income Act (UPIA) section 401, dealing with power to adjust – as outlined by James E. Gamble, co-reporter of the UPIA, over the past few months to various professionals – go a long way in solving some of the practical problems that trustees have faced with when attempting to follow the guidance provided in the original Act. The AICPA Trust Accounting Income Technical Issues Task Force offers the following comments to the proposed changes (all section references herein are to the UPIA unless otherwise noted) as well as suggestions for other changes to the UPIA caused by Rev. Rul. 2006-26, relating to distributions from IRAs held in trusts that are intended to qualify for the marital deduction.

UPIA Section 401 and E liminating the “20 P ercent R ule”

As originally written and with the proposed changes, UPIA section 401 classifies all entities the same for purposes of determining whether distributions from those entities to a trust constitute income or principal. Although this treatment may be appropriate for trustees who possess a power to adjust under UPIA section 104, trustees without such a power are left with little guidance. Much of the confusion and controversy over the application of this section is driven by the unique problems presented by the complexities of entities that are “pass-through” entities for federal income tax purposes. Business conducted by such entities can range from the operation of a traditional business in the retail, manufacturing or service industries to an investment type entity that is invested exclusively in marketable securities and other marketable investments for the purpose of generating traditional income in the form of dividends, interest, or their equivalent along with capital appreciation.

As presently written, UPIA section 401 allows a change in the character of the return on an investment simply by placing the investments in a single member limited liability company (LLC), which, while ignored for all tax purposes, is treated in the same manner as an operating business. For example, a trustee could transfer an investment portfolio into a single member LLC in order to dispose of certain highly appreciated assets followed by a distribution of the proceeds, not in excess of 20 percent of the entity’s gross assets, and change the character of the proceeds from principal to income through the use of the entity.

We agree with the proposed changes that would eliminate the 20 percent requirement currently contained in section 401(d)(2) and provide a laundry list of other factors to be considered by the trustee in making the determination regarding the proper classification of the receipt. Specifically, the addition of UPIA sections 401(e)-(h) appears to provide the trustee the ability to look through the entity to determine the underlying source of the monies received.

However, under UPIA section 401(e)(4), which allows the trustee to determine whether the amount of the distribution represents accumulated earnings of the entity that are no longer needed within the entity, no distinction is drawn between the amount of the accumulation that occurred prior to or after the time the entity was subject to the trust. For example: Shortly after a decedent’s death, e.g., within 30 days, a trust receives a distribution from an entity (assume for now the entity is not a pass-through entity for federal income tax purposes) that represents ordinary earnings of the entity that occurred prior to the entity becoming subject to the trust. Treating this distribution as income would seem to be the wrong result since all of the income was earned prior to the decedent’s death.

To address the concerns above, we suggest UPIA section 401((e)(4), as already suggested by the ABA and ACTEC committees, be revised to read as follows (added text underlined):

The amount of earnings the entity has accumulated while the entity has been subject to the trust to the extent the entity’s governing body has decided the money is no longer needed for the entity’s business or investment needs.”

Timing is often an issue with cash receipts from pass-through entities. A trustee may be receiving distributions from an entity throughout the year, but has no knowledge of the nature of the source of the income until after the close of the taxable year. Sections 401(d), (e), (f) and (g) do not seem to take this into account. It would be helpful if UPIA section 401 allowed the trustee to allocate to income only that portion of the receipt that they are able to determine, at the time of receipt, is truly income from the nature of the receipt. Any remaining cash will be allocated to principal, until such time as the final determination can be made. This same problem occurs while trying to apply the provisions of UPIA section 505 since the trusts share of the income tax payable on distributions from the entity can often not be determined until long after the receipt occurs.

We also suggest the following language be added as UPIA section 401(i) to the ABA and ACTEC committee proposal:

T he trustee shall allocate to principal that portion of the receipt for which the trustee has insufficient information to make a final determination of the nature of the distribution. If the trustee later determines that such amounts so classified should be properly classified as income they shall transfer from principal to income such amounts.

UPIA Section 505 A mbiguity R egarding T ax A llocations

Trying to revise the law to take into account all of the possible situations that may be encountered is not an easy task. The proposed revisions go a long ways toward easing the burden on trustees who do not possess a power to adjust. However, we feel that the proposed revisions do not go far enough in addressing the confusion that currently exists over the interplay between UPIA sections 401 and 505.