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Future regulations to clarify effect of section 67(g) for estates and trusts

IRS Notice 2018-61

The IRS today released an advance version of Notice 2018-61 to clarify the effect of newly enacted section 67(g) (the new tax law provision that suspends miscellaneous itemized deductions for years 2018-2025) on the ability of estates and non-grantor trusts to deduct certain expenses.

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Notice 2018-61 [PDF 30 KB] states that the Treasury Department and IRS intend to issue regulations to clarify that estates and non-grantor trusts may continue to deduct expenses described in section 67(e)(1) and amounts allowable as deductions under section 642(b), 651 or 661—including the appropriate portion of a bundled fee—for purposes of determining the estate or non-grantor trust’s adjusted gross income during certain tax years (i.e., the years during which application of section 67(a) is suspended because of section 67(g)).

Expenses under section 67(e)(1) are costs that are paid or incurred in the administration of an estate or trust and that would not have been incurred if the property were not held in such estate or trust (unlike the costs that commonly or customarily would be incurred by a hypothetical individual holding the same property).

According to the IRS notice, the future regulations will clarify:

…deductions enumerated in section 67(b) and (e) continue to remain outside the definition of ‘miscellaneous itemized deductions’ and thus are unaffected by section 67(g).

Notice 2018-61 further states that the IRS and Treasury are aware of concerns that the enactment of section 67(g) will affect a beneficiary’s ability to deduct section 67(e) expenses upon the termination of the trust or estate as provided in section 642(h). The IRS notice states that the IRS and Treasury:

…are studying whether section 67(e) deductions, as well as other deductions that would not be subject to the limitations imposed by sections 67(a) and (g) in the hands of the trust or estate, should continue to be treated as miscellaneous itemized deductions when they are included as a section 642(h)(2) excess deduction.

Today’s IRS notice provides that the IRS and Treasury intend to issue regulations in this area and request comments, specifically concerning whether the separate amounts comprising the section 642(h)(2) excess deduction—such as any amounts that are section 67(e) deductions—are to be separately analyzed when applying section 67.

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