Mr. Donald Korb and Mr. William O’Shea

June 26, 2007

Page 1 of 3

June 26, 2007

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: AICPA Request forGuidance on the Allocation of Indirect Deductions for Charitable Remainder Trusts

Dear Mr. Korb and Mr. O’Shea:

The American Institute of Certified Public Accountants (AICPA) is submitting this letter to suggest that guidance be issued by the Internal Revenue Service (IRS) on the allocation of indirect deductions for charitable remainder trusts.

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.

Charitable remainder trusts routinely incur administration expenses, such as trustee’s fees and tax return preparation fees, which are not directly attributable to a particular type of income. It is unclear how these expenses are to be allocated to the income of a charitable remainder trust.

Income of a charitable remainder trust is assigned to one of three categories: ordinary income, capital gain income, and other income (such as tax-exempt income). Within each category, income is assigned to a class based on the type of income. Regulation section 1.664-1(d)(2) provides the rules for the allocation of expenses that are deductible in determining taxable income, as well as taxes and items not deductible in determining taxable income. For items that are deductible in determining taxable income, an expense that is directly attributable to one or more classes of income within a category or to corpus is allocated to such classes or to corpus. An expense that is not directly attributable to a class of income or to corpus is allocated among the classes within the category (excluding classes with net losses) on the basis of the gross income of such class for the taxable year reduced by any directly attributable deductions, but not in excess of the income of the class for the taxable year. Any items that are deductible in determining taxable income and that are not allocated under the rules stated above may be allocated in any manner.

Generally for purposes of these regulations, categories refer to the big buckets of ordinary income, capital gain, other income, and corpus, while classes refer to the type of income within each category. For example, interest, dividends, and rents are classes of income within the ordinary income category. While the regulations provide specific rules on how indirect expenses must be allocated to the various classes of income within a category once the expenses are allocated to a specific category, they are silent concerning how indirect expenses are initially allocated among the categories, if the expenses are not attributable to just one category.

Trustee’s fees, for example, are not attributable to any particular class of income or even to any particular category. May these trustee’s fees be allocated in any manner under the third rule of reg. section 1.664-1(d)(2) or must they be allocated pro rata among all types of income of the trust irrespective of categories and classes (even though it would be allocated to more than one category)?

The trustee should be able to allocate indirect expenses to items of income in any manner under the third rule of reg. section 1.664-1(d)(2). This treatment is consistent with the manner in which indirect expenses of regular trusts are permitted to be allocated. Section 652(b) provides that items of deduction entering into the computation of distributable net income (DNI) shall be allocated among the items of DNI in accordance with the regulations prescribed by the Secretary. Regulation section 1.652(b)-3(b) provides that any deductions not directly attributable to a specific class of income may (after a mandatory allocation of a portion of these deductions is made to tax-exempt income) be allocated to any item of income included in DNI as the trustee elects. Treatment of indirect expenses by charitable remainder trusts should be consistent with their treatment by regular trusts.

* * * * *

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 ; or Steven A. Thorne, Chair of the AICPA Trust, Estate, and Gift Tax Technical Resource Panel, at (312) 486-9847 or ; or Eileen R. Sherr, AICPA Technical Manager, at (202) 434-9256 or ; 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

Mr. George Masnik, IRS Branch Chief, Branch Chief, Passthroughs and Special Industries (Fax: (202) 622-4451)

Mr. James F. Hogan, IRS Attorney – Senior Technical Reviewer, Passthroughs and Special Industries (Fax: (202) 622 -4451)