ABA Comments on IRS Proposal on Trust and Estate Deductions

Internal Revenue Service
1111 Constitution Avenue, NW
Washington, DC 20224

Dear Ladies and Gentlemen:

The American Bankers Association (ABA) appreciates this opportunity to comment on the Internal Revenue Services (IRS) proposed rule under section 67(g) of the Internal Revenue Code (IRC). The proposed rule addresses the treatment of itemized deductions by non-grantor trusts and estates after changes made in the Tax Cuts and Jobs Act of 2018. The guidance confirms that deductions made pursuant to section 67(e), such as fees charged by banks acting as trustee or executor, are not disallowed by the temporary suspension of miscellaneous itemized deductions imposed under 67(g).

In particular, the proposed regulations clarify the following deductions are allowable in figuring the adjusted gross income of an estate or non-grantor trust and are not miscellaneous itemized deductions:

• Costs paid or incurred in connection with the administration of the estate or trust which would not have been incurred otherwise;
• Deductions concerning the personal exemption of an estate or non-grantor trust;
• Deductions for trusts distributing current income; and
• Deductions for trusts accumulating income.

The proposed regulations also address the treatment of deductions in excess of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust.

Comments

On behalf of our members, we appreciate the IRS’s confirmation in the proposed regulation that certain trust and estate expenses are fully deductible, because they are not miscellaneous itemized deductions subject to section 67(g).

With respect to the treatment of deductions in excess of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust, we urge the IRS to provide additional guidance to facilitate compliance. In particular, we suggest that Schedule K-1 (Form 1041) include specific codes for the three categories of excess deductions: (1) deductions allowed in arriving at adjusted gross income; (2) non-miscellaneous itemized deductions; and (3) miscellaneous itemized deductions. This additional guidance may be accomplished by expanding the options for Schedule K-1, box 11, Code A (Final year deductions, Excess deductions) to include Codes A-1, A-2, and A-3 for the three categories listed above. In addition, we suggest that the Schedule K-1, page 2 and related detailed instructions provide an explanation as to where these three categories are to be reported by beneficiaries who file Form 1040. Relatedly, we suggest that corresponding changes should be made to Form 1040 and its Schedules to accommodate these changes.

Lastly, we suggest the IRS modify Example 2 in the proposal to allow real estate taxes in excess of rents to pass to beneficiaries as either net operating losses (NOL) or as a passive loss carryover.

Conclusion

Thank you for this opportunity to comment on the IRS proposal. We support the rule’s explanation of the treatment of expenses under section 67(e). We also suggest providing additional guidance to facilitate the proper treatment of deductions in excess of gross income succeeded to by a beneficiary on the termination of an estate or non-grantor trust.

Sincerely,

Phoebe A. Papageorgiou
Vice President, Trust Policy