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Newly Enacted Section 67(g) Won't Prevent Certain Estate and Trust Deductions
(Parker Tax Publishing July 2018)
The IRS issued a notice stating its intention to issue regulations which will provide that the suspension under Code Sec. 67(g) of the deductibility of miscellaneous itemized deductions under Code Sec. 67(a) does not affect the deductibility under Code Sec. 67(e)(1) of certain estate and trust administration fees as well as the deductibility of expenses under Code Sec. 642(b), Code Sec. 651, and Code Sec. 661. Estates and non-grantor trusts may rely on this notice for tax years beginning after December 31, 2017. Notice 2018-61.
Background
The Tax Cuts and Jobs Act of 2017, which was signed into law on December 22, 2017, enacted new Code Sec. 67(g). Code Sec. 67(g) generally provides that, notwithstanding Code Sec. 67(a), no miscellaneous itemized deductions are allowed for any tax year beginning after December 31, 2017, and before January 1, 2026.
Code Sec. 67(a) provides generally that, in the case of an individual, a miscellaneous itemized deduction for any tax year is allowed only to the extent that the aggregate of such deductions exceed 2 percent of adjusted gross income. Code Sec. 67(b) defines the term "miscellaneous itemized deductions" for purposes of Code Sec. 67 as meaning the itemized deductions other than those listed in Code Sec. 67(b)(1) through Code Sec. 67(b)(12).
Code Sec. 67(e) provides that, for purposes of Code Sec. 67, the adjusted gross income of an estate or trust is computed in the same manner as that of an individual, except that (1) the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such estate or trust, and (2) the deductions allowable under Code Sec. 642(b), Code Sec. 651, and Code Sec. 661 are treated as allowable in arriving at adjusted gross income.
Reg. Sec. 1.67-4(a) states that Code Sec. 67(e) provides an exception to the 2-percent floor on miscellaneous itemized deductions for costs that are paid or incurred in the administration of an estate or a trust not described in Reg. Sec. 1.67-2T(g)(1)(i) (i.e., a non-grantor trust) and that would not have been incurred if the property were not held in such estate or trust. A cost is subject to the 2-percent floor to the extent that it is included in the definition of miscellaneous itemized deductions under Code Sec. 67(b), is incurred by an estate or non-grantor trust, and commonly or customarily would be incurred by a hypothetical individual holding the same property.
Reg. Sec. 1.67-4(b) provides generally that, in analyzing a cost to determine whether it commonly or customarily would be incurred by a hypothetical individual owning the same property, it is the type of product or service rendered to the estate or non-grantor trust in exchange for the cost, rather than the description of the cost of that product or service, that is determinative. It further provides specific examples of costs that will be considered commonly or customarily incurred by individuals and those that will not.
Reg. Sec. 1.67-4(c) provides that, subject to certain exceptions, if an estate or non-grantor trust pays a single fee, commission, or other expense for both costs that are subject to the 2-percent floor and costs (in a more than de minimis amount) that are not, then, except to the extent provided otherwise by IRS guidance, the single fee, commission, or other expense (i.e., bundled fee) must be allocated for purposes of computing the adjusted gross income of the estate or non-grantor trust between the costs that are subject to the 2-percent floor and those that are not.
Upcoming Regulations Will Allow Deductibility of Expenses Described in Code Section 67(e)(1) and Reg. Section 1.67-4
On July 13, 2018, the IRS issued Notice 2018-61 in which it noted that tax practitioners have been expressing concern that newly enacted Code Sec. 67(g) might be read to eliminate the ability of estates and non-grantor trusts to deduct any expenses described in Code Sec. 67(e)(1) and Reg. Sec. 1.67-4 for the tax years during which the application of Code Sec. 67(a) is suspended. In Notice 2018-61, the IRS opined that this is not a correct reading of Code Sec. 67(g). For the tax years during which it is effective, Code Sec. 67(g) denies a deduction for miscellaneous itemized deductions. Code Sec. 67(b) defines miscellaneous itemized deductions as itemized deductions other than those listed therein. Code Sec. 63(d), the IRS noted, defines itemized deductions by excluding personal exemptions, Code Sec. 199A deductions, and deductions used to arrive at adjusted gross income. Therefore, the IRS said, neither the above-the-line deductions used to arrive at adjusted gross income nor the expenses listed Code Sec. 67(b)(1) through Code Sec. 67(b)(12) are miscellaneous itemized deductions.
The IRS stated that Code Sec. 62(a) defines adjusted gross income of an individual, and Code Sec. 67(e) provides that the adjusted gross income of a trust or estate is determined in the same way as for an individual, except that expenses described in Code Sec. 67(e)(1) and deductions pursuant to Code Sec. 642(b), Code Sec. 651, and Code Sec. 661 are allowable as deductions in arriving at adjusted gross income. Thus, the IRS stated, Code Sec. 67(e) removes the expenses described in Code Sec. 67(e)(1) from the category of itemized deductions (and thus necessarily also from the subset of miscellaneous itemized deductions) and instead treats them as above-the-line deductions allowable in determining adjusted gross income under Code Sec. 62(a). Therefore, the suspension of the deductibility of miscellaneous itemized deductions under Code Sec. 67(a) does not affect the deductibility of payments described in Code Sec. 67(e)(1). However, an expense that commonly or customarily would be incurred by an individual (including the appropriate portion of a bundled fee) is affected by Code 67(g) and thus is not deductible to the estate or non-grantor trust during the suspension of Code Sec. 67(a). Nothing in Code Sec. 67(g), the IRS stated, impacts the determination of what expenses are described in Code Sec. 67(e)(1).
According to the IRS, nothing in Code Sec. 67(g) affects the ability of the estate or trust to take a deduction listed under Code Sec. 67(b) and such deductions remain outside of the definition of "miscellaneous itemized deduction." For example, Code Sec. 691(c) deductions (relating to the deduction for estate tax on income in respect of the decedent), which are identified in Code Sec. 67(b)(7), remain unaffected by the enactment of Code Sec. 67(g).
As a result of the above analysis, the IRS said it intends to issue regulations clarifying that estates and non-grantor trusts may continue to deduct expenses described in Code Sec. 67(e)(1) and amounts allowable as deductions under Code Sec. 642(b), Code Sec. 651 or Code Sec. 661, including the appropriate portion of a bundled fee, in determining the estate or non-grantor trust's adjusted gross income during tax years for which the application of Code Sec. 67(a) is suspended pursuant to Code Sec. 67(g). Additionally, the regulations will clarify that deductions enumerated in Code Sec. 67(b) and (e) continue to remain outside the definition of "miscellaneous itemized deductions" and thus are unaffected by Code Sec. 67(g).
Observation: The IRS stated that it is aware of some concerns that the enactment of Code Sec. 67(g) will affect a beneficiary's ability to deduct Code Sec. 67(e) expenses upon the termination of the trust or estate as provided in Code Sec. 642(h). The IRS said it intends to issue regulations in this area and is requesting comments regarding the effect of Code Sec. 67(g) on the ability of the beneficiary to deduct amounts comprising the Code Sec. 642(h)(2) excess deduction upon the termination of a trust or estate in light of Code Sec. 642(h) and Reg. Sec. 1.642(h)-2(a). In particular, the IRS would like comments concerning whether the separate amounts comprising the Code Sec. 642(h)(2) excess deduction, such as any amounts that are Code Sec. 67(e) deductions, should be separately analyzed when applying Code Sec. 67.
Notice 2018-61 is effective July 13, 2018, and estates and non-grantor trusts may rely on this notice for tax years beginning after December 31, 2017.
For a discussion of the deductibility of estate and trust administration costs under Code Sec. 67(e), see Parker Tax ¶53,125.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
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