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Volume XII, Number 179

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New Proposed Regulation § 1.67-4

The IRS has issued new proposed regulations governing the income tax deductibility of certain expenses and costs incurred by an estate or non-grantor trust.

Code Section 67(e):

Deductibility of Certain Costs and Expenses. Generally, costs and expenses that are characterized as “miscellaneous itemized deductions” under the Internal Revenue Code (the “Code”) are deductible on an income tax return only to the extent such costs and expenses exceed 2% of the taxpayer’s adjusted gross income. When the taxpayer is an estate or non-grantor trust, however, a special Code section (“Code Section 67(e)”) provides that costs and expenses are fully deductible, and thus not subject to the 2% floor, if such costs or expenses are paid or incurred in connection with the administration of an estate or non-grantor trust and would not have been incurred if the property with which such costs or expenses are associated were not held in such estate or trust.

Conflicting Interpretations of Code Section 67(e).

In 2007, the IRS issued proposed regulations interpreting Code Section 67(e) as rendering a cost or expense incurred by an estate or non-grantor trust fully deductible only if that cost or expense is unique to an estate or trust. The following year, the U.S. Supreme Court held that a proper interpretation of Code Section 67(e) would allow a cost or expense incurred by an estate or non-grantor trust to be fully deductible unless such cost or expense customarily or commonly would be incurred by a hypothetical individual holding the same property outside of an estate or trust. 

New Proposed Regulations.

In accordance with the Supreme Court’s interpretation of Code Section 67(e), on Sept. 6, 2011, the IRS withdrew the 2007 proposed regulations and issued new proposed regulations providing that a cost or expense incurred by an estate or non-grantor trust is subject to the 2% floor if such cost or expense is commonly or customarily incurred by a hypothetical individual holding the same property. The new proposed regulations provide the following examples of costs and expenses, which are and are not commonly or customarily incurred by a hypothetical individual:

  • In General. Expenses that do not depend on the identity of the payor (in particular, whether the payor is an individual, estate or trust) are commonly or customarily incurred by a hypothetical individual.

Commonly or Customarily Incurred: costs incurred in defense of a claim against an estate, decedent or non-grantor trust that are unrelated to the existence, validity or administration of such estate or trust.

  • Ownership Costs. Costs incurred by an owner of property simply by reason of being the owner are commonly or customarily incurred by a hypothetical individual.

Commonly or Customarily Incurred: condominium fees, real estate taxes, insurance premiums, maintenance and lawn services, automobile registration and insurance costs and partnership costs deemed passed-thru to a partner.

  • Tax Preparation Fees. Costs incurred in connection with the preparation of a tax return may or may not be commonly or customarily incurred by a hypothetical individual.

Commonly or Customarily Incurred: fees associated with preparation of individual income tax returns, gift tax returns, tax returns for a sole proprietorship and tax returns for a retirement plan.

Not Commonly or Customarily Incurred: fees associated with preparation of estate tax returns, generation-skipping transfer tax returns, fiduciary income tax returns and decedent final individual income tax returns.

  • Investment Advisory Fees. Investment advisory fees may or may not be commonly or customarily incurred by a hypothetical individual.

Commonly or Customarily Incurred: fees for investment advice that would be provided to an individual investor as part of an investment advisory fee.

Not Commonly or Customarily Incurred: certain “incremental costs” of investment advice beyond the amount that normally would be charged to an individual investor. An “incremental cost” is a special, additional charge added solely because the investment advice is rendered to a trust or estate instead of to an individual, and that is attributable to an unusual investment objective or the need for a specialized balancing of the interests of various parties (beyond the usual balancing of the varying interests of current beneficiaries and remaindermen).

Any bundled fee (a single fee, commission or expense (other than an out-of-pocket expense), such as a trustee’s fee, attorney’s fee or accountant’s fee) of more than a de minimus amount must be allocated between costs subject to and costs not subject to the 2% floor. The new proposed regulations provide the following guidance for allocating bundled fees:

  • A payment made from a bundled fee to a third party is subject to the 2% floor if such payment would have been subject to the 2% floor had such payment been paid directly to such third party.
  • If a bundled fee is not computed on an hourly basis (e.g., if computed as a percentage of the value of the trust income), then only that portion of that fee that is attributable to investment advice is subject to the 2% floor.
  • In making allocations from bundled fees, any reasonable method may be used.

 

Tax advice disclosure:  Any tax advice contained in this publication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
© 2022 Neal, Gerber & Eisenberg LLP.National Law Review, Volume I, Number 304
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About this Author

Lawrence I. Richman, attorney, neal gerber law firm
Partner

Lawrence I. Richman’s practice involves advising entrepreneurs, tax-exempt organizations, fiduciaries and high net worth families on estate, gift and charitable planning issues, including business succession, tax-efficient ownership structures, sophisticated tax-exempt structures, trust and estate administration, executive benefits, life insurance and international estate planning issues.

Larry has served as chairman of the Trust Law Committee of the Chicago Bar Association, and is a frequently published author and speaker. He is also the Estate and Succession Planning columnist for...

312-269-8070
Scott J. Bakal, attorney, neal gerber law firm, Partner
Partner

Scott J. Bakal, co-chair of Neal Gerber Eisenberg's Taxation practice group, specializes in finding tax-sensitive solutions to complex financial situations, business transactions, and estate planning matters. Scott works primarily with entrepreneurial companies and high net worth individuals. Scott frequently represents commodities and securities traders, family offices, owners of business jets and companies and executives in employment...

312- 269-8022
Susan L. Goldenberg, Partner, Neal Gerber law firm
Partner

Susan L. Goldenberg concentrates her practice in sophisticated estate planning for family business owners and wealthy individuals on a multi-generational basis. She also has extensive experience in real estate law.

Susan has spoken to numerous organizations regarding estate planning considerations for women and family businesses owned by women. She has been a member of the governing board of Ravinia Associates, the Metropolitan Board of Youth Guidance (a private social...

312-269-8046
Martin H. Tish, Private Wealth Services attorney, Neal Gerber law firm
Partner

Martin H. Tish counsels business owners, executives, entrepreneurs, traders, charities, family offices and individuals from virtually every field regarding asset ownership and structure, prenuptial agreements, retirement planning and charitable planning. He has successfully administered estates and trusts ranging in size from $500,000 to more than $100 million, achieving excellent tax results without forgetting the human concerns that are of paramount importance to a sound estate plan.

Marty has lectured on estate planning before the Chicago Bar Association, the American Bar...

312-269-8031
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