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Gorin Memo Sec. 505 changes 1 (March 20, 2008)

handle is hein.nccusl/nccpub01192 and id is 1 raw text is: THOMPSON COBURN Thompson Coburn LLP Memorandum To: JEB From: Steven B. Gorin Phone 314-552-6151; Fax 314-552-7151; E-mail SGORIN@thompsoncoburn.com Date: March 20, 2008 Re: Effect of Tax Distributions from Flow-Through Entities to Trusts: Proposed Changes to the Uniform Principal & Income Act This memorandum reflects our discussion March 15, 2008 and changes a cross-reference in Section 505(d). As you know, trusts include in their income their distributive share of income from flow-though entities, such as partnerships, whether they receive distributions equal to none, part, or all of the income. Generally, to the extent that trusts distribute (or are deemed to distribute) their distributive net income to their beneficiaries, trusts are not taxed on such income. When distributions from a flow-through entity to a trust are less than the trust's distributive share of income, the trust will be taxed on the undistributed income. Thus, the trust will need to retain some of the cash the entity distributed to pay tax on this undistributed income. Uniform Principal & Income Act (UPIA) section 505 addresses this issue. However, its ambiguity has led to litigation. The Subcommittee on Uniform State Laws of the State Law Committee of the American College of Trust and Estate Counsel (ACTEC) agreed that Section 505 should be clarified. The American Bar Association's Real Property, Trust & Estate Law Section (RPTE) and the American Institute of Certified Public Accountants (the AICPA) formally agreed with this recommendation, as did (on an informal basis) the National Conference of Lawyers and Corporate Fiduciaries (the NCLCF). The Joint Editorial Board for Uniform Trust and Estate Acts (JEB) met December 7, 2007. The JEB asked that ACTEC propose changes to UPIA section 505 as a technical correction. This procedure would provide expedited processing with the Uniform Laws Commission procedure for amending uniform laws. Attached is a memo prepared by Carol Cantrell discussing these issues and providing a couple of approaches. Carol spearheaded the AICPA's efforts in responding to a request for comments. She is also a vice chair in RPTE's committee that has jurisdiction over this issue, as well as having served as an expert in litigation on UPIA section 505.1 The NCLCF and all practicing lawyers with whom I have talked agreed that the first priority should be to use the distributions from the entity first to pay the trust's taxes and then to make income distributions. Accordingly, I propose the following restatement to UPIA section 505(c) and (d): ' She is also the practitioner who supported the taxpayer throughout the Rudkin case. 4656725 -1I-

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