Under Section 67(e), the adjusted gross income of an estate or nongrantor trust is to be computed in the same manner as in the case of an individual, except that the deduction 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 trust or estate are treated as allowable in arriving at adjusted gross income. When the adjusted gross income of an estate is computed in the same manner as in the case of an individual, miscellaneous itemized deductions are subject to a two-percent floor. The two-percent floor only allows miscellaneous deductions that are over two percent of adjusted gross income. The IRS released the final regulations with the new revisions and the comments which impacted those revisions to be effective as of May 9, 2014. A comparison of the revision to the Section 67(e) regulations and the comments by the ABA Task Force illustrates the impact that the ABA Task Force had on five guidance topic areas of the Section 67(e) revisions.
The first of these topic areas relates to the definition of commonly or customarily incurred costs in regards to the two-percent floor. The ABA Task Force commented that there was confusion in the proposed regulation. The proposed language which purposed to treat costs that do not depend on the identity of the payor as costs that are commonly or customarily incurred in all cases was overly broad. Specifically the ABA Task Force noted that certain types of fees, such as fees paid to trustees, are not commonly and customarily incurred by individual tax payers and are generally only incurred by trusts. The IRS responded to this comment by removing the reference to costs that do not depend on the identity of the payor, thus reducing but not totally eliminating confusion.
Another comment area regarded the treatment of fiduciary income tax return preparation fees. The ABA Task Force recommended that all fiduciary income tax return preparation fees should be exempt from the two-percent floor, since individuals do not commonly incur these fees. The IRS revised the Section 67(e) regulation to exempt costs relating to fiduciary income tax returns from the two-percent floor. However the costs of preparing tax returns that are common and customarily incurred by individuals, such as gift tax returns, are still subject to the two-percent floor.
A third comment area regarded the treatment of certain fiduciary expenses. The ABA Task Force recommended that, in general, fiduciary fees should be treated as within the meaning of the exclusion provided by the Section 67(e) regulations. The reasoning was that fiduciary fees are a type of cost that individuals do not commonly incur, and should not be treated as a similar deduction. Alternatively, in the event that the IRS did not accept the recommendation, the ABA Task Force advised that the IRS should exclude certain types of fiduciary fees, such as customary fiduciary fees, fiduciary accounting fees, and fiduciary legal fees. The IRS has since developed examples of fiduciary expenses that are not commonly or customarily incurred by individuals and thus are not subject to the two-percent floor. Some of those costs now excluded are: probate court fees and costs, fiduciary bond premiums, legal publication costs of notices to creditors and heirs, the cost of certified copies of the decedent's death certificate, and costs related to fiduciary accounts. However those miscellaneous fees listed in Section 67(b) are still subject to the two-percent floor.
Furthermore, the IRS requested comments in regards to the treatment of bundled fees. The ABA Task Force recommended that the IRS judge the allocation of unbundled fees on a reasonable basis, by allowing allocations that are consistent with fees charged by the fiduciary to nonfiduciary accounts. The allowance of a reasonable basis would insure that costs not commonly and customarily incurred by individuals would not be subject to the two-percent floor. The proposed regulation by the ABA Task Force was that, if a fiduciary charged a bundled fee, the fiduciary must unbundle the fee by making a reasonable allocation of the bundled fee among the principal portions of the fee charged for the responsibility of acting as a fiduciary and the principal portions of the fee charged for each of the additional services provided in consideration for the bundled fee. The IRS was in full support of judging the allocation of fees based on a reasonable basis as a way to reduce the administrative burden of unbundling fees.
Finally the ABA Task Force proposed that there should be qualitative and, at the very least, quantitative percentage safe harbor. Qualitative safe harbors would prevent certain types of fees in which the two-percent floor would not be applied. The ABA Task Force proposed that fees associated with customary fiduciary fees, directed fiduciary fees, trustees with independent investment management, nonprofessional fiduciaries, income tax preparation fees, fiduciary accounting fees, and fiduciary legal fees, be excluded from the two-percent floor. Quantitative safe harbors would create a threshold in which the two-percent floor would only apply to trusts above a certain amount. In essence this would create a de minimis rule and any trust under a certain threshold would not be subject to the two-percent floor. The IRS noted in its comments accompanying the regulation that such safe harbor comments are being considered; however, definitive action has yet to be taken. The IRS further mentioned that they might permit safe harbors in future published guidance.
The comments provided by the ABA Task Force have helped to shape and clarify Code Section 67(e) regulations. Additionally its comments have helped to ensure that the regulations are more administrable for fiduciaries who are impacted by Section 67(e) regulations.
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