Comment on FR Doc # E8-00859

March 10, 2008 www.regulations.gov (IRS-REG-127127-05) Re: Advance Notice of Proposed Rulemaking ("Notice") Guidance on Qualified Tuition Programs Under Section 529 Dear Mary Berman and Monice Rosenbaum: This letter is submitted on behalf of the College Savings Foundation ("CSF"). CSF is a 501(c)(6) organization dedicated to the advancement of 529 college savings programs. CSF's mission is to help American families achieve their education savings goals by working with public policy makers, media representatives and financial services industry executives in support of education savings programs. CSF's members include many of the country's leading financial services firms, and collectively manage more than $50 billion in savings-type section 529 accounts, representing more than one half of the dollars in such programs. CSF also includes associate members that are governmental and non-profit agencies that establish and maintain section 529 programs and individuals who support CSF and its mission. A complete list of CSF members is attached at the end of this letter. CSF serves the education savings industry as a central repository of information and an expert resource for its members and for representatives of state and federal government, institutions of higher education and other related organizations and associations. The primary focus of CSF is building public awareness of and providing public policy support for 529 plans - an increasingly vital college-savings vehicle. We thank you for this opportunity to comment prior to the time regulations will be proposed under Section 529. In general, we believe that the concepts embodied in the Notice are a great step forward, and are optimistic that they set the stage for final regulations that will be workable for section 529 accounts while curbing the potential for abuse. We are particularly pleased to see that the proposed rules are predicated in substantial part on the idea that account owners should be responsible for tax consequences resulting from events they initiate. Following are more specific thoughts on the contents of the Notice and on select other issues not discussed in the Notice. The comments below associated with Roman numbers I, II and III are associated with similarly captioned provisions in the Notice. Comments under other Roman numerals cover a variety of topics, including some from the Overview section of the Notice. In the interest of brevity, we generally have not copied the provisions of the Notice commented upon. I. Anti-Abuse Rule We agree with the proposition that section 529 accounts not established with the expectation that a designated beneficiary will eventually use the funds in the account for the payment of qualified higher education expenses should be treated as abusive. We also agree that in the final regulations, such a rule should be retroactive. However, we urge restraint in enforcing such a rule. The mere fact that distributions are not used for a beneficiary's qualified higher education expenses, or are not so used by a particular time, is not dispositive of the account owner's intent at the time an account is set up, or when additional contributions are made. Circumstances do change, particularly over a lengthy period such as the time between the birth of a child and the child finishing secondary education. II.A. Tax Treatment of Contributions and Participants We are in full agreement with the idea that a change of designated beneficiary that results in the imposition of any tax will be treated as a deemed distribution to the account owner followed by a new gift resulting in liability on the part of the account owner for any taxes due. As noted above, this is a most welcome development. We are not aware of situations in which ownership by a non-natural person might result in a need for special rules, and will wait for the proposed regulations to evaluate whether such rules might be needed. We are not in favor of limiting account owners to individuals. Currently the vast majority of accounts are owned by individuals, but not-for-profit entities (primarily to fund scholarships), trusts, and other entities also are account owners. With regard to entities not subject to tax, we trust that there are no concerns of potential abuse. With regard to trusts, we are not aware of any potential for abuse, as the funding of trust accounts already carries transfer tax consequences. We will wait for proposed regulations to further evaluate any need for provisions related specifically to trusts. Very few accounts are owned by corporations. We concur that a corporation set up specifically to pool contributions from multiple sources in order to avoid transfer taxes could potentially result in abusive transactions. We do not object in principle to rules designed to prevent such abuses, but we believe that the general anti- abuse rule should be sufficient to cover any such situations. Accounts are also held in UGMA and UTMA form; we request that you confirm our understanding that these are viewed as essentially the equivalent of ownership by an individual, i.e. the UGMA/UTMA beneficiary. The UGMA/UTMA beneficiary should also, in all instances, be the designated beneficiary of the account in the qualified tuition program, absent malfeasance by the UGMA/UTMA custodian. With regard to accounts owned by banks, we do not see the potential for abuse. Such accounts would be held for the benefit of an individual named beneficiary, who would also be the designated beneficiary of the account in the section 529 account, and would thus seem to fall under the same logical regime as accounts that are held in UGMA or UTMA form. II.B. Account Owner's Liability for Withdrawals for Account Owners' Benefit and Changes in Account Ownership As noted in II.A. above, we are not in favor of limiting account owners to natural persons. We concur with the principle that account owners should be liable for taxes on distributions made for the benefit of the account owner except to the extent that the account owner can substantiate that he or she has an investment in the account within the meaning of section 72. We believe that this approach is administratively much more workable than a regime that would require programs to track contributions from non-account owners in order to assign transfer tax liability at what could be a much later date, and will preserve the ability of programs to accept money from persons other than the account owner. Such contributions are typically small contributions made by family members of the account owner and beneficiary, often coinciding with birthdays and similarly important family events, and the ability to continue to receive such contributions without undue administrative burden is much to be desired. We do note that at least one fact pattern contemplated in the Notice should not, in our view, result in the imposition of income tax on an account owner. This would be where the account owner has become the designated beneficiary of an account and the distribution is used for qualified higher education expenses. This fact pattern would appear to be no different in principle from a situation in which an account owner is also the designated beneficiary of an account from the outset. We think it is possible that there are other fact patterns that would also warrant an exception from the imposition of income tax. II.C. Application of Transfer Tax Where Permissible Contributors Include Persons Other Than Individuals Please see our comments under II.A. above re the treatment of accounts owned by other than individuals. Regarding corporations funding section 529 accounts for employees' children, we believe that amounts so contributed would logically constitute additional compensation to each employee, not a gift to the beneficiary of the 529 account. We believe that employers would be able to handle employment tax payments and income tax withholding and reporting as they do with other items of employee compensation. Corollary to this line of thinking, we believe that the employee would be subject to the transfer tax regime on the amounts contributed, just as with any other contributions to the account. For accounts owned by the employee, this should not result in any additional complications. For accounts owned by another person, the same rules governing other third-party contributions to the account should apply. We do note one situation in which the above approach would result in unforeseen complications for account owners. Assume that an account owner makes a contribution equal to the annual exclusion amount to his or her child's 529 account early in the year. Later in the year the account owner's employer announces a program under which it will contribute to the same 529 account. This would cause transfer tax complications for the account owner. We urge that there be a de minimis exception that would exempt small contributions made by employers from the transfer tax regime. We do acknowledge the possibility of a small, closely held corporation being formed to fund 529 account contributions for the benefit of employees' children. In such circumstances we would not object to a look through rule attributing a pro-rata portion of each 529 account contribution to each shareholder of the corporation. However, with an existing corporation and an employee who has no say in management's activities, we do not believe that such a rule would make sense, as it could lead to transfer tax consequences as described in the preceding paragraph. Regarding a debtor funding a section 529 account for a child of the lender, we can only observe that we have never heard of such an arrangement and are not able to offer any suggestions at this time. II.D. Individuals Who Contribute to Section 529 Accounts For Their Own Benefit and UGMA/UTMA Accounts that Contribute to Such Accounts For the Benefit of their Minor Beneficiaries We concur with the proposition that if an account is set up with the 529 account owner as designated beneficiary, and the account owner later changes the designated beneficiary, the transaction should be treated as a rollover distribution to the account owner followed by a new contribution to the new designated beneficiary, with all attendant transfer tax consequences. The Notice indicates that proposed regulations will address the tax consequences resulting from a distribution from a UGMA or UTMA account into a section 529 account, followed by a change of beneficiary of the 529 account. We suggest that this is not necessary, as the presumed fact pattern is one that should not occur. We do not believe that any UGMA/UTMA custodian would permit funds to leave a UGMA/UTMA arrangement for the purpose of being placed in any account unless that subsequent account is either owned by the beneficiary of the UGMA/UTMA or is another UGMA/UTMA for the benefit of the same minor. II.E. Deceased Beneficiaries Rule 1 states that if an account owner distributes an entire section 529 account to the estate of a deceased designated beneficiary under a section 529 account within 6 months of death, the entire value of the account will be includible in the deceased beneficiary's estate. We agree with that treatment, but the rule leaves some questions unanswered. For example, what is the proper treatment if the amount is distributed later, but before the due date of the deceased beneficiary's estate tax return? What is the proper treatment if a partial distribution is made to a beneficiary's estate? We concur with Rules 2, 3 and 4. We find Rule 5 troubling. Human nature being what it is, we expect that families who suffer the loss of a child will often not undertake to notify a qualified tuition program of that fact, and despite any advance disclosure to the contrary, will not think to change the beneficiary of the account before a federal estate tax return must be filed. We note that the vast majority of deceased beneficiaries will not be subject to any federal estate tax return filing obligation due to the small size of their estates. Reading the rule literally, such accounts could remain without a living beneficiary indefinitely. We think this is a sensible result, but are not sure if this is a correct reading of the Notice, and would appreciate clarification on this point. III.A. Election to Treat Contributions as Being Made Over a Five Year Period The rules concerning five year averaging appear to be consistent with our understanding of current treatment, and we concur with them. III.B. Income Tax Issues - Losses in Section 529 Accounts and Required Timing of Distributions We concur with the treatment of losses in section 529 accounts. We agree generally with the idea that distributions from a section 529 account should occur in reasonable proximity to the qualified higher education expense associated with the distribution. However, we believe that the three month limit provided in the Notice may in some circumstances be too short, and urge that it be changed to six months. An account owner might well take a distribution at the end of December to pay for a semester's worth of expenses with the semester beginning in January, only to find that the exact amount of expenses to be incurred is not finalized until the end of that semester. III.C. Recordkeeping Requirements Section 529 accounts are already subject to numerous and complex record keeping requirements. We strongly urge you not to burden the programs with additional record keeping requirements except to the extent absolutely necessary. Some types of additional record keeping may be less burdensome than others; for example, 5498 type record keeping would probably be quite feasible for most if not all programs, but requiring programs to identify multiple sources of contributions to an account, and to retain such records for a period of decades, would probably be quite infeasible. In many circumstances, such as substantiating the source of contributions to section 529 accounts, programs will not be able to provide the sought after information as easily as account owners or other interested persons, and to the extent possible record keeping requirements should fall on account owners and others with interests in the accounts. IV. Prospective Versus Retrospective Application of Final Regulations The Need for A Single Set of Rules As noted above, we believe that accounts established ab initio for the purpose of abusing the provisions of Section 529 should be subject to a retroactive, general anti-abuse rule. We believe generally that other provisions of the final regulations should probably be applied on a prospective basis only. It is possible that once we see specific language in proposed regulations we may urge that certain other provisions be applied retrospectively as well. We believe as a general matter that programs should be able to operate under a single set of regulations, not one set for accounts established before a certain date and another set for accounts established after that date. The resulting complexities, in terms of administration and disclosure, would likely prove far too cumbersome for both the programs and for those who save for higher education through them. However, allowance needs to be made for actions taken before the effective date of final regulations. For example, if a particular type of ownership of a section 529 account will be prohibited by the final regulations, accounts established under that form of ownership before the effective date should be able to continue to exist, and to receive additional contributions, even if new accounts utilizing such form of ownership cannot be established. V. Grace Period Pending review of the proposed regulations, we believe that a 15 month grace period is likely to be adequate to implement changes required by any final regulations. However, the content of the final regulations may result in the need for a longer grace period. For example, the timing of the issuance of final regulations, and whether requirements in the final regulations take effect early or late in a calendar year may play a part in this analysis. If administrative systems need to be modified, the length of time needed to do so may well depend on the time of year the regulations are adopted, as program administrators are often constrained by annual planning and budget cycles. Also, a number of state statutes have fairly detailed provisions governing qualified tuition program features. Some, for example, specifically permit enumerated classes of account owners. If, for example, the final regulations eliminate certain types of ownership specifically enumerated in a state's law, a grace period of as long as two years might be needed. Many states have short legislative sessions, and it is common for legislatures to meet only for a portion of the year. Some legislatures, in fact, convene only once every two years. Finally, state constitutions sometimes provide that all changes adopted by a legislature go into effect on a given date later in the same year, and such a date might be many months even after the legislation is passed and signed into law. VI. Notice 2001-55 The Notice indicates that the provisions of Notice 2001-55 will be reflected in the proposed regulations. As we have in the past, we urge you to consider permitting greater investment flexibility for section 529 accounts. Expanding the ability of account owners to change investments once per calendar quarter, instead of once per calendar year, would seem to be a reasonable accommodation to the fact that market conditions can change quickly and dramatically, possibly stranding account owners in unsuitable investments at inopportune times. We look forward to seeing the text of proposed regulations in the near future. In the interim, we would be more than happy to sit down with you in Washington, D.C. to discuss any or all of the topics above, so that all parties can have a clearer understanding of the issues to be addressed and the means of addressing them. We will contact you in the very near future to inquire about having such a meeting. Sincerely, David J. Pearlman Chair, Legal and Regulatory Affairs Committee MEMBERS OF THE COLLEGE SAVINGS FOUNDATION AIM Investments AKF Consulting LLC AllianceBernstein Investments, Inc. Allianz Global Investors (PIMCO) American Century Investments Boston Financial/DST Systems Cogent Research CollegeInvest Columbia Management Education Trust of Alaska Fidelity Investments Franklin Templeton Investments Hartford Life Insurance Company John Hancock Financial Services Massachusetts Education Finance Authority MFS Investment Management Merrill Lynch Mintz Levin Morgan Stanley New Hampshire College Tuition Savings Plan Advisory Commission OppenheimerFunds Rhode Island Higher Education Assistance Authority Ropes & Gray LLP State Farm ScholarShare Investment Board Sutherland Asbill & Brennan Virginia College Savings Plan Wells Fargo