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IRS Delays Effective Date of Regs on Bundled Estate and Trust Costs.
(Parker Tax Publishing August 11, 2014)

As a result of concerns over certain costs incurred by estates and trusts other than grantor trusts after the effective date of the regulations under Code. Sec. 67 (originally scheduled to take effect for tax years beginning on or after May 9, 2014), the IRS has delayed that date to tax years beginning after December 31, 2014. T.D. 9664 (7/17/14).

Generally, under Code Sec. 67(a), miscellaneous itemized deductions incurred by an individual are deductible only to the extent the aggregate of those deductions exceeds two percent of adjusted gross income (AGI). Under Code Sec. 67(b), certain itemized deductions are excluded from the definition of miscellaneous itemized deductions. Code Sec. 67(e) provides that the AGI of an estate or nongrantor trust is computed in the same manner as an individual. However, the deduction for costs paid or incurred in connection with the administration of the estate or nongrantor trust that would not have been incurred if the property were not held in such estate or trust are deductible in arriving at AGI. Therefore, such deductions are not subject to the two-percent-of-AGI floor. In May of 2014, the IRS issued final regulations providing guidance on which costs incurred by estates and nongrantor trusts are subject to the two-percent floor on miscellaneous itemized deductions.

OBSERVATION: The rule in Code Sec. 67(e) does not apply to expenses of grantor trusts because, under Reg. Sec. 1.67-2T(b)(1), such expenses are treated as miscellaneous itemized deductions of the grantor or other person treated as the owner of the trust. They are not treated as expenses of the trust itself.

As originally issued, the final regulations apply to tax years beginning on or after May 9, 2014. Therefore, fiduciaries of existing trusts and calendar-year estates would implement the rules beginning January 1, 2015. However, the rules would apply immediately to any non-grantor trust created after May 8, 2014, the estate of any decedent who dies after May 8, 2014, and any existing fiscal-year estate with a tax year beginning after May 8, 2014. Practitioners complained that that the effective date in the regulations did not give fiduciaries of these trusts and estates sufficient time to implement the changes necessary to comply with the regulations. Specifically, practitioners were concerned about allowing fiduciaries sufficient time to design and implement the necessary program changes to determine the portion of a bundled fee attributable to costs that are subject to the two-percent floor versus costs that are not subject to the two-percent floor.

In response to practitioners' requests, the IRS amended the effective date of the final regulations to apply to tax years beginning on or after January 1, 2015.

For a discussion of the deductibility of administration and fiduciary expenses, see Parker Tax ¶53,125. (Staff Editor Parker Tax Publishing)

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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