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IRS Confirms Continued Deductibility of Administrative Expenses for Trusts and Estates

Publisher: Day Pitney Advisory
July 25, 2018
Day Pitney Author(s) Von E. Sanborn

On July 13, the Internal Revenue Service (IRS) issued Notice 2018-61, confirming that non-grantor trusts and estates may continue to take deductions under Section 67(e) of the Internal Revenue Code (Code) for certain administrative expenses, including trustee and attorney fees.

The Tax Cuts and Jobs Act (TCJA), signed into law on December 22, 2017, added Section 67(g) to the Code, which provides that miscellaneous itemized deductions will not be permitted for tax years 2018 through 2025. Notwithstanding that provision, Section 67(e)(1) of the Code provides that non-grantor trusts and estates may claim certain deductions for expenses unique to their administration. Thus, in eliminating miscellaneous itemized deductions, the TCJA created uncertainty as to whether non-grantor trusts and estates could continue to claim deductions under Section 67(e)(1).

Generally, miscellaneous itemized deductions include all deductions subject to the so-called 2% floor (i.e., deductions limited to the excess of the deductible amount over 2% of the taxpayer's adjusted gross income). IRS regulations specifically provide that expenses of non-grantor trusts and estates taken pursuant to Section 67(e)(1) are not subject to the 2% floor, suggesting that they would not be treated as miscellaneous itemized deductions. Instead, expenses of administration described in Section 67(e)(1) should be considered "above-the-line" deductions, used by non-grantor trusts and estates to arrive at adjusted gross income for purposes of this rule. On that theory, many practitioners took the position following the TCJA that non-grantor trusts and estates were still entitled to take Section 67(e)(1) deductions, though the IRS had not yet taken a position on the matter.

In issuing Notice 2018-61, the IRS clarified that non-grantor trusts and estates continue to be entitled to take Section 67(e)(1) deductions, noting specifically that suspending the non-grantor trust and estate expense deductions is not a "correct reading" of Section 67(g). Miscellaneous itemized deductions, according to the IRS, do not include any above-the-line deductions, and therefore "the suspension of the deductibility of miscellaneous itemized deductions … does not affect the deductibility of payments described in Section 67(e)(1)." Finally, the IRS also notes that the Treasury Department intends to issue regulations clarifying that estates and non-grantor trusts may continue to deduct expenses described in Section 67(e)(1).

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