[Federal Register Volume 85, Number 91 (Monday, May 11, 2020)]
[Proposed Rules]
[Pages 27693-27698]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-09801]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-113295-18]
RIN 1545-BO87
Effect of Section 67(g) on Trusts and Estates
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations clarifying that
the following deductions allowed to an estate or non-grantor trust are
not miscellaneous itemized deductions: Costs paid or incurred in
connection with the administration of an estate or non-grantor trust
that would not have been incurred if the property were not held in the
estate or trust, the personal exemption of an estate or non-grantor
trust, the distribution deduction for trusts distributing current
income, and the distribution deduction for estates and trusts
accumulating income. Therefore, these deductions are not affected by
the suspension of the deductibility of miscellaneous itemized
deductions for taxable years beginning after December 31, 2017, and
before January 1, 2026. The proposed regulations also provide guidance
on determining the character, amount, and allocation of deductions in
excess of gross income succeeded to by a beneficiary on the termination
of an estate or non-grantor trust. These proposed regulations affect
estates, non-grantor trusts (including the S portion of an electing
small business trust), and their beneficiaries.
DATES: Written or electronic comments and requests for a public hearing
must be received by June 25, 2020.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-113295-
18) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have limited personnel available to
process public comments that are submitted on paper through mail. Until
further notice, any comments submitted on paper will be considered to
the extent practicable. The Department of the Treasury (Treasury
Department) and the IRS will publish for public availability any
comment submitted electronically, and to the extent practicable on
paper, to its public docket.
Send paper submissions to: CC:PA:LPD:PR (REG-113295-18), Room 5203,
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
Requests for a public hearing must be submitted as prescribed in
the ``Comments and Requests for a Public Hearing'' section.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Margaret Burow, (202) 317-5279; concerning submissions of comments and/
or requests for a public hearing, Regina Johnson, (202) 317-5177 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) under sections 67 and 642 of the Internal
Revenue Code (Code).
I. Section 67(g)
Section 67(g) was added to the Code on December 22, 2017, by
section 11045(a) of the Tax Cuts and Jobs Act, Public Law 115-97, 131
Stat. 2054, 2088 (2017) (Act). Section 67(g) prohibits individual
taxpayers from claiming miscellaneous itemized deductions for any
taxable year beginning after December 31, 2017, and before January 1,
2026.
For purposes of subtitle A of the Code, an individual's adjusted
gross income is defined in section 62(a) as gross income minus the
deductions listed in section 62(a)(1) through (21). Individuals then
may subtract itemized deductions from adjusted gross income to arrive
at taxable income. See section 63(a). Section 63(d) defines itemized
deductions as deductions allowable under chapter 1 of subtitle A of the
Code, other than (1) deductions allowable in arriving at adjusted gross
income, (2) deductions for personal exemptions provided by section 151,
and (3) the deduction under section 199A. A subset of these itemized
deductions, identified as miscellaneous itemized deductions, are
subject to special rules. Prior to the Act, miscellaneous itemized
deductions were allowable for any taxable year only if the sum of such
deductions exceeded two percent of adjusted gross income. See section
67(a). Section 67(b) defines miscellaneous itemized deductions as
itemized deductions other than those listed in section 67(b)(1) through
(12).
II. Section 67(e)
Section 67(e) provides that an estate or trust computes its
adjusted gross income in the same manner as that of an individual,
except that the following additional deductions are treated as
allowable in arriving at adjusted gross income: (1) The deductions 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 estate or trust, and (2) deductions
allowable under section 642(b) (concerning the personal exemption of an
estate or non-grantor trust), section 651 (concerning the deduction for
trusts distributing current income), and section 661 (concerning the
deduction for trusts accumulating income). Accordingly, section 67(e)
removes the deductions in section 67(e)(1) and (2) from the definition
of itemized deductions under section 63(d), and thus from the
definition of miscellaneous itemized deductions under section 67(b),
and treats them as deductions allowable in arriving at adjusted gross
income under section 62(a). Section 67(e) further provides regulatory
authority to make appropriate adjustments in the application of part I
of subchapter J of chapter 1 of the Code to take into account the
provisions of section 67.
On July 13, 2018, the Treasury Department and the IRS issued Notice
2018-61, 2018-31 I.R.B. 278, announcing that proposed regulations would
be issued concerning the effect of section 67(g) on the deductibility
of certain expenses described in section 67(b) and (e) incurred by
estates and non-grantor trusts. The notice states that regulations
would clarify that expenses described in section 67(e) remain
deductible in determining the adjusted gross income of an estate or
non-grantor trust during the taxable years in which section 67(g)
applies.
[[Page 27694]]
III. Section 642(h)
Section 642(h) provides that if, on the termination of an estate or
trust, the estate or trust has: (1) A net operating loss carryover
under section 172 or a capital loss carryover under section 1212, or
(2) for the last taxable year of the estate or trust, deductions (other
than the deductions allowed under section 642(b) (relating to the
personal exemption) or section 642(c) (relating to charitable
contributions)) in excess of gross income for such year, then such
carryover or such excess shall be allowed as a deduction, in accordance
with the regulations prescribed by the Secretary of the Treasury or his
delegate, to the beneficiaries succeeding to the property of the estate
or trust.
Net operating loss and capital loss carryovers under section
642(h)(1) are used to compute adjusted gross income on the return of a
beneficiary, formerly referred to as an above-the-line deduction. See
Sec. 1.642(h)-1. The excess deduction under section 642(h)(2) is not,
however, used to compute adjusted gross income on the return of a
beneficiary. Instead, Sec. 1.642(h)-2(a) provides that the section
642(h)(2) excess deduction is ``allowed only in computing taxable
income and must be taken into account in computing the items of tax
preference of beneficiaries; it is not allowed in computing adjusted
gross income.'' As a result, under the existing regulations, excess
deductions on termination of an estate or trust are treated as a single
miscellaneous itemized deduction (section 642(h)(2) excess deduction)
of the beneficiary subject to disallowance under section 67(g). See
also sections 63(d) and 67(b).
The section 642(h)(2) excess deduction may be comprised of several
types of deductions including: (1) Those deductions allowable in
arriving at adjusted gross income under sections 62 and 67(e); (2)
itemized deductions under section 63(d) allowable in computing taxable
income; and (3) miscellaneous itemized deductions currently disallowed
under section 67(g). See section 67(b). Notice 2018-61 explained that
the Treasury Department and the IRS were studying whether section 67(e)
deductions, as well as other deductions not subject to the limitations
imposed by sections 67(a) and (g) in the hands of the estate or trust,
should continue to be treated as miscellaneous itemized deductions when
included as a section 642(h)(2) excess deduction.
Notice 2018-61 requested comments regarding the effect of section
67(g) on the ability of the beneficiary to deduct amounts comprising
the section 642(h)(2) excess deduction on the termination of an estate
or trust considering section 642(h) and Sec. 1.642(h)-2(a) and
expressed the intent to address this issue in regulations. The Treasury
Department and the IRS requested comments regarding whether the
separate deductions comprising the section 642(h)(2) excess deduction,
such as section 67(e) deductions, should be analyzed separately when
applying section 67.
The Treasury Department and the IRS received comments addressing
issues concerning section 67(e), as well as excess deductions on
termination of an estate or trust under section 642(h), as discussed in
more detail in the Explanation of Provisions section of this preamble.
All comments were considered and are available for public inspection.
The Treasury Department and the IRS continue to study issues related to
sections 67 and 642 that are beyond the scope of these proposed
regulations and may discuss those comments in future guidance.
Explanation of Provisions
I. Section 1.67-4
Commenters agreed with the statements in Notice 2018-61 that
deductions described in section 67(e)(1) and (2) are not miscellaneous
itemized deductions subject to disallowance by section 67(g) and asked
that the language in Sec. 1.67-4 be amended to clarify this position.
This document contains proposed regulations amending Sec. 1.67-4 to
clarify that section 67(g) does not deny an estate or non-grantor trust
(including the S portion of an electing small business trust) a
deduction for expenses described in section 67(e)(1) and (2) because
such deductions are allowable in arriving at adjusted gross income and
are not miscellaneous itemized deductions under section 67(b).
One commenter asked that the regulations address the treatment of
expenses and deductions described in section 67(e)(1) and (2) in
determining an estate or non-grantor trust's income for alternative
minimum tax (AMT) purposes. The commenter requested that regulations
provide that such expenses and deductions continue to be deductible for
AMT purposes. The treatment of expenses and deductions described in
section 67(e) for purposes of determining AMT is outside the scope of
these proposed regulations concerning the effects of section 67(g);
therefore, these proposed regulations do not address the AMT.
II. Regulations Under Section 642(h)
A. Character and Amount of the Excess Deductions
Commenters opined that the Treasury Department and the IRS have and
should exercise their regulatory authority not to treat the section
642(h)(2) excess deduction as a single miscellaneous itemized
deduction. Commenters noted that the regulations under Sec. 1.642(h)-2
were written before the concept of miscellaneous itemized deductions
was added to the Code and need to be updated.
In response to the request for comments in Notice 2018-61
concerning analysis of the separate deductions that comprise the
section 642(h)(2) excess deduction, commenters stated that the Treasury
Department and the IRS should provide regulations for the segregation
of the section 642(h)(2) excess deduction into its components to
determine the character, computation, and deductibility of costs. One
commenter said that failure to provide for such segregation could
result in either the prolonged administration of estates or trusts, or
the sale of assets, to fully utilize deductible costs at the estate or
trust level. Another commenter stated that the portion of the section
642(h)(2) excess deduction that qualifies as section 67(e)(1) expenses
should remain deductible in arriving at a beneficiary's adjusted gross
income and that the remaining section 642(h)(2) excess deduction should
be treated as a single itemized deduction, which would avoid having to
further separate out the individual costs comprising the excess
deduction to determine deductibility at the beneficiary level. Other
commenters proposed treating the section 642(h)(2) excess deduction as
allowable in full in arriving at the beneficiary's adjusted gross
income similar to the treatment of a section 67(e) deduction.
Another commenter requested more specific guidance on the character
of the excess deductions. The commenter recommended that the fiduciary
be required to separate deductions into at least three categories: (1)
Deductions allowed in arriving at adjusted gross income, (2) non-
miscellaneous itemized deductions, and (3) miscellaneous itemized
deductions. This commenter stated that the character of the deductions
should not change when succeeded to by the beneficiaries on termination
of the estate or trust. Further, the commenter suggested that
regulations require that deductions subject to limitation when claimed
by a beneficiary be separately identified (for example, the limitation
on state and local property and income tax
[[Page 27695]]
deductions under section 164(b)(6)). The commenter also requested
guidance on how each item of deduction offsets items of income of the
estate or trust in the final year of administration for purposes of
determining the character of the excess deductions. The character of
the excess deductions will vary based on how an executor or trustee
allocates deductions against the income of the estate or trust. The
same commenter suggested that the rules under Sec. 1.652(b)-3, which
are used for determining the character of distributable net income to
beneficiaries under sections 652 and 662, be used as a model to
determine how deductions are allocated to offset income in the final
year of administration of the estate or trust for purposes of
determining the character of the section 642(h)(2) excess deduction.
The Treasury Department and the IRS adopt the more specific
suggestion from commenters of preserving the tax character of the three
categories of expenses, rather than the suggestion of grouping all non-
section 67(e) expenses together, to allow for such expenses to be
separately stated and to facilitate reporting to beneficiaries. Thus,
under these proposed regulations, each deduction comprising the section
642(h)(2) excess deduction retains its separate character,
specifically: As an amount allowed in arriving at adjusted gross
income; a non-miscellaneous itemized deduction; or a miscellaneous
itemized deduction. The character of these deductions does not change
when succeeded to by a beneficiary on termination of the estate or
trust. Further, these proposed regulations require that the fiduciary
separately state (that is, separately identify) deductions that may be
limited when claimed by the beneficiary as provided in the instructions
to Form 1041, U.S. Income Tax Return for Estates and Trusts and the
Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions,
Credit, etc.
The proposed regulations adopt the suggestion that the principles
under Sec. 1.652(b)-3 be used to allocate each item of deduction among
the classes of income in the year of termination for purposes of
determining the character and amount of the excess deductions under
section 642(h)(2). Section 1.652(b)-3(a) provides that deductions
directly attributable to one class of income are allocated to that
income. Any remaining deductions that are not directly attributable to
a specific class of income, as well as any deductions that exceed the
amount of directly attributable income, may be allocated to any item of
income (including capital gains), but a portion must be allocated to
tax-exempt income, if any. See Sec. 1.652(b)-3(b) and (d). The
proposed regulations provide that the character and amount of each
deduction remaining after application of Sec. 1.652(b)-3 comprises the
excess deductions available to the beneficiaries succeeding to the
property as provided under section 642(h)(2).
These proposed regulations incorporate a new example to illustrate
the rule for determining the character of excess deductions in proposed
Sec. 1.642(h)-2. The proposed regulations also update the current
example in Sec. 1.642(h)-5 to account for changes in the Code since
this example was last modified on June 16, 1965, in T.D. 6828, 1965-2
C.B. 264.
B. Allocation of the Excess Deduction Among Beneficiaries
One commenter requested guidance on allocating the excess
deductions among multiple beneficiaries and suggested that the
allocation could be made generally, in proportion to the entire amount
of deductions, or specifically, based on the burden the beneficiary
bears as to each deduction. The commenter noted, however, that a
specific allocation may increase fiduciary reporting and IRS
administrative burdens and may not be worth the added complexity.
Existing regulations under Sec. 1.642(h)-4 provide that carryovers
and excess deductions to which section 642(h) applies are allocated
among the beneficiaries succeeding to the property of an estate or
trust proportionately according to the share of each in the burden of
the loss or deduction. A person who qualifies as a beneficiary
succeeding to the property of an estate or trust with respect to one
amount and who does not qualify with respect to another amount is a
beneficiary succeeding to the property of the estate or trust as to the
amount with respect to which the beneficiary qualifies. These proposed
regulations do not change the allocation method among beneficiaries set
forth in Sec. 1.642(h)-4.
One commenter asked that the Treasury Department and the IRS
address the treatment of suspended deductions on the termination of a
trust, such as those under section 163(d) for investment interest, and
asked that such suspended deductions be treated in the same manner as
the excess deduction under section 642(h). While the Treasury
Department and the IRS acknowledge the comment, addressing suspended
deductions under section 163(d) and other Code sections is beyond the
scope of these proposed regulations.
Proposed Applicability Date
These proposed regulations apply to taxable years beginning after
the date these regulations are published as final regulations in the
Federal Register. However, estates, non-grantor trusts, and their
beneficiaries may rely on these proposed regulations under section 67
for taxable years beginning after December 31, 2017, and on or before
the date these regulations are published as final regulations in the
Federal Register. Taxpayers may also rely on the proposed regulations
under section 642(h) for taxable years of beneficiaries beginning after
December 31, 2017, and on or before the date these regulations are
published as final regulations in the Federal Register in which an
estate or trust terminates.
One commenter asked that the Treasury Department and the IRS
clarify that expenses incurred during an estate's fiscal year beginning
before January 1, 2018, which properly are characterized as
miscellaneous itemized deductions, remain deductible as such even if
some of the costs were paid after January 1, 2018. Section 67(g)
applies to taxable years beginning after December 31, 2017; therefore
section 67(g) would not apply to an estate's or trust's taxable years
beginning before that date.
Special Analyses
This regulation is not subject to review under section 6(b) of
Executive Order 12866 pursuant to the Memorandum of Agreement (April
11, 2018) between the Treasury Department and the Office of Management
and Budget regarding review of tax regulations. Therefore, a regulatory
impact assessment is not required.
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these regulations will not have a significant
economic impact on a substantial number of small entities. This
certification is based on the fact that the amount of time necessary to
report the required information will be minimal in that it requires
fiduciaries of estates and trusts to provide information already
maintained and reported to the IRS on Form 1041, on the Schedule K-1
(Form 1041) issued to beneficiaries. Moreover, it should take an estate
or trust no more than 2 hours to satisfy the information requirement in
these regulations. Pursuant to section 7805(f) of the Code, this notice
of proposed rulemaking has been submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small businesses.
[[Page 27696]]
Paperwork Reduction Act
The collection of information related to these proposed regulations
under section 642(h) is reported on Schedule K-1 (Form 1041),
Beneficiary's Share of Income, Deductions, Credits, etc., and has been
reviewed in accordance with the Paperwork Reduction Act (44 U.S.C.
3507) and approved by the Office of Management and Budget under control
number 1545-0092. Comments concerning the collection of information and
the accuracy of estimated average annual burden and suggestions for
reducing this burden should be sent to the Office of Management and
Budget, Attn: Desk Officer for the Department of the Treasury, Office
of Information and Regulatory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service, IRS Reports Clearance Officer,
SE:W:CAR:MP:T:T:SP, Washington, DC 20224. Comments on the burden
associated with this collection of information must be received by July
10, 2020.
The collection of information in these proposed regulations is in
proposed Sec. 1.642(h)-2(b)(1). The IRS requires this information to
ensure that excess deductions on an estate's or trust's termination
that are subject to additional applicable limitations retain their
character when taken into account by beneficiaries on their returns.
The respondents will be estates, trusts and their fiduciaries.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by section 6103.
Comments and Requests for Public Hearing
Before these proposed amendments to the regulations are adopted as
final regulations, consideration will be given to comments that are
submitted timely to the IRS as prescribed in the preamble under the
ADDRESSES section. The Treasury Department and the IRS request comments
on all aspects of the proposed regulations. Any electronic comments
submitted, and to the extent practicable any paper comments submitted,
will be made available at www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register. Announcement 2020-4,
2020-17 IRB 1, provides that until further notice, public hearings
conducted by the IRS will be held telephonically. Any telephonic
hearing will be made accessible to people with disabilities.
Drafting Information
The principal author of these proposed regulations is Margaret
Burow of the Office of Associate Chief Counsel (Passthroughs and
Special Industries). Other personnel from the Treasury Department and
the IRS, however, participated in their development.
Statement of Availability of IRS Documents
The IRS notice cited in this document is published in the Internal
Revenue Bulletin and available from the Superintendent of Documents,
U.S. Government Publishing Office, Washington, DC 20402, or by visiting
the IRS website at http://www.irs.gov.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry for Sec. 1.67-4 and an entry for Sec. Sec. 1.642(h)-2 and
1.642(h)-5 in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.67-4 also issued under 26 U.S.C. 67(e).
* * * * *
Sections 1.642(h)-2 and 1.642(h)-5 also issued under 26 U.S.C.
642(h).
* * * * *
0
Par. 2. Section 1.67-4 is amended by revising paragraph (a) and the
heading of paragraph (d) and adding a sentence at the end of paragraph
(d) to read as follows:
Sec. 1.67-4 Costs paid or incurred by estates or non-grantor trusts.
(a) In general--(1) Section 67(e) deductions. (i) An estate or
trust (including the S portion of an electing small business trust) not
described in Sec. 1.67-2T(g)(1)(i) (a non-grantor trust) shall compute
its adjusted gross income in the same manner as an individual, except
that the following deductions (Section 67(e) deductions) are allowed in
arriving at adjusted gross income:
(A) Costs that are paid or incurred in connection with the
administration of the estate or trust, which would not have been
incurred if the property were not held in such estate or trust; and
(B) Deductions allowable under section 642(b) (relating to the
personal exemption) and sections 651 and 661 (relating to
distributions).
(ii) Section 67(e) deductions are not itemized deductions under
section 63(d) and are not miscellaneous itemized deductions under
section 67(b). Therefore, section 67(e) deductions are not disallowed
under section 67(g).
(2) Deductions subject to 2-percent floor. A cost is not a section
67(e) deduction and thus is subject to both the 2-percent floor in
section 67(a) and section 67(g) to the extent that it is included in
the definition of miscellaneous itemized deductions under section
67(b), is incurred by an estate or non-grantor trust (including the S
portion of an electing small business trust), and commonly or
customarily would be incurred by a hypothetical individual holding the
same property.
* * * * *
(d) Applicability date. * * * Paragraph (a) of this section applies
to taxable years beginning after [date these regulations are published
as final in the Federal Register].
0
Par. 3. Section 1.642(h)-2 is amended by:
0
1. Revising paragraph (a).
0
2. Redesignating paragraph (b) as paragraph (d) and adding a heading
for newly redesignated paragraph (d).
0
3. Redesignating paragraph (c) as paragraph (e) and adding a heading
for newly redesignated paragraph (e).
0
4. Adding new paragraphs (b), (c), and (f).
The revisions and additions read as follows:
Sec. 1.642(h)-2 Excess deductions on termination of an estate or
trust.
(a) In general. If, on the termination of an estate or trust, the
estate or trust has for its last taxable year deductions (other than
the deductions allowed under section 642(b) (relating to the personal
exemption) or section 642(c) (relating to charitable contributions)) in
excess of gross income, the excess deductions are allowed under section
642(h)(2) as items of deduction to the beneficiaries succeeding to the
property of the estate or trust.
[[Page 27697]]
(b) Character and amount of excess deductions--(1) Character. The
character and amount of the excess deductions on termination of an
estate or trust will be determined as provided in this paragraph (b).
Each deduction comprising the excess deductions under section 642(h)(2)
retains, in the hands of the beneficiary, its character (specifically,
as allowable in arriving at adjusted gross income, as a non-
miscellaneous itemized deduction, or as a miscellaneous itemized
deduction) while in the estate or trust. An item of deduction succeeded
to by a beneficiary remains subject to any additional applicable
limitation under the Code and must be separately stated if it could be
so limited, as provided in the instructions to Form 1041, U.S. Income
Tax Return for Estates and Trusts and the Schedule K-1 (Form 1041),
Beneficiary's Share of Income, Deductions, Credit, etc., or successor
forms.
(2) Amount. The amount of the excess deductions in the final year
is determined as follows:
(i) Each deduction directly attributable to a class of income is
allocated in accordance with the provisions in Sec. 1.652(b)-3(a);
(ii) To the extent of any remaining income after application of
paragraph (b)(2)(i) of this section, deductions are allocated in
accordance with the provisions in Sec. 1.652(b)-3(b) and (d); and
(iii) Deductions remaining after the application of paragraph
(b)(2)(i) and (ii) of this section comprise the excess deductions on
termination of the estate or trust. These deductions are allocated to
the beneficiaries succeeding to the property of the estate of or trust
in accordance with Sec. 1.642(h)-4.
(c) Year of termination--(1) In general. The deductions provided
for in paragraph (a) of this section are allowable only in the taxable
year of the beneficiary in which or with which the estate or trust
terminates, whether the year of termination of the estate or trust is
of normal duration or is a short taxable year.
(2) Example. Assume that a trust distributes all its assets to B
and terminates on December 31, Year X. As of that date, it has
excess deductions of $18,000, all characterized as allowable in
arriving at adjusted gross income under section 67(e). B, who
reports on the calendar year basis, could claim the $18,000 as a
deduction allowable in arriving at B's adjusted gross income for
Year X. However, if the deduction (when added to B's other
deductions) exceeds B's gross income, the excess may not be carried
over to any year subsequent to Year X.
(d) Net operating loss carryovers. * * *
(e) Items included in net operating loss or capital loss
carryovers. * * *
(f) Applicability date. Paragraphs (a) and (b) of this section
apply to taxable years beginning after [date these regulations are
published as final in the Federal Register].
Par. 4. Section 1.642(h)-5 is revised to read as follows:
Sec. 1.642(h)-5 Examples.
The following examples illustrate the application of section
642(h).
(a) Example 1. Computations under section 642(h) when an estate
has a net operating loss--(1) Facts. On January 31, 2020, A dies
leaving a will that provides for the distribution of all of A's
estate equally to B and an existing trust for C. The period of
administration of the estate terminates on December 31, 2020, at
which time all the property of the estate is distributed to B and
the trust. For tax purposes, B and the trust report income on a
calendar year basis. During the period of administration, the estate
has the following items of income and deductions:
Table 1 to Paragraph (a)(1)
------------------------------------------------------------------------
------------------------------------------------------------------------
Income
Taxable interest...................................... $2,500
Business income....................................... 3,000
--------
Total income...................................... 5,500
========
------------------------------------------------------------------------
Table 2 to Paragraph (a)(1)
------------------------------------------------------------------------
------------------------------------------------------------------------
Deductions
Business expenses (including administrative expense 5,000
allocable to business income)........................
Administrative expenses not allocable to business 9,800
income that would not have been incurred if property
had not been held in a trust or estate (section 67(e)
deductions)..........................................
---------
Total deductions.................................. 14,800
------------------------------------------------------------------------
(2) Computation of net operating loss. (i) Under section
642(h)(1), B and the trust are each allocated $1,000 of the $2,000
unused net operating loss carryover of the terminated estate in the
taxable year, with the allowance of any net operating loss and loss
carryover to B and the trust determined under section 172. The
amount of the net operating loss carryover is computed as follows:
Table 3 to Paragraph (a)(2)(i)
------------------------------------------------------------------------
------------------------------------------------------------------------
Gross income.......................................... $5,500
Total deductions...................................... 14,800
Less adjustment under section 172(d)(4) (allowable 7,300
non-business expenses ($9,800) limited to non-
business income ($2,500))..........................
---------
Deductions as adjusted................................ 7,500
========
Net operating loss................................ 2,000
------------------------------------------------------------------------
(ii) Neither B nor the trust can carry back any of the net
operating loss of A's estate made available to them under section
642(h)(1).
(3) Section 642(h)(2) excess deductions. The $7,300 of
deductions not taken into account in determining the net operating
loss of the estate are excess deductions on termination of the
estate under section 642(h)(2). Under Sec. 1.642(h)-2(b)(1), such
deductions retain their character as section 67(e) deductions. Under
Sec. 1.642(h)-4, B and the trust each are allocated $3,650 of
excess deductions based on B's and the trust's respective shares of
the burden of each cost.
(4) Consequences for C. The net operating loss carryovers and
excess deductions are not allowable directly to C, the trust
beneficiary. To the extent the distributable net income of the trust
is reduced by the carryovers and excess deductions, however, C may
receive an indirect benefit from the carryovers and excess
deductions.
(b) Example 2. Computations under section 642(h)(2)--(1) Facts.
D dies in 2019 leaving an estate of which the residuary legatees are
E (75%) and F (25%). The estate's income and deductions in its final
year are as follows:
Table 4 to Paragraph (b)(1)
------------------------------------------------------------------------
------------------------------------------------------------------------
Income
Dividends............................................. $3,000
Taxable Interest...................................... 500
Rents................................................. 2,000
Capital Gain.......................................... 1,000
---------
Total Income...................................... 6,500
------------------------------------------------------------------------
Table 5 to Paragraph (b)(1)
------------------------------------------------------------------------
------------------------------------------------------------------------
Deductions
Section 67(e) deductions:
Probate fees........................................ 1,500
Estate tax preparation fees......................... 8,000
Legal fees.......................................... 4,500
---------
Total Section 67(e) deductions.................... 14,000
Itemized deductions:
Real estate taxes on rental property................ 3,500
Total deductions.............................. 17,500
------------------------------------------------------------------------
(2) Determination of character. Pursuant to Sec. 1.642(h)-
2(b)(2), the character and amount of the excess deductions is
determined by allocating the deductions among the estate's items of
income as provided under
[[Page 27698]]
Sec. 1.652(b)-3. Under Sec. 1.652(b)-3(a), $2,000 of real estate
taxes is allocated to the $2,000 of rental income. In the exercise
of the executor's discretion pursuant to Sec. 1.652(b)-3(b) and
(d), D's executor allocates $4,500 of section 67(e) deductions to
the remaining $4,500 of income. As a result, the excess deductions
on termination of the estate are $11,000, consisting of $9,500 of
section 67(e) deductions and $1,500 of itemized deductions.
(3) Allocations among beneficiaries. Pursuant to Sec. 1.642(h)-
4, the excess deductions are allocated in accordance with E's (75
percent) and F's (25 percent) interests in the residuary estate. E's
share of the excess deductions is $8,250, consisting of $7,125 of
section 67(e) deductions and $1,125 of real estate taxes. F's share
of the excess deductions is $2,750, consisting of $2,375 of section
67(e) deductions and $375 of real estate taxes. The real estate
taxes on rental property must be separately stated as provided in
Sec. 1.642(h)-2(b)(1).
(c) Applicability date. This section is applicable to taxable years
beginning after [date these regulations are published as final in the
Federal Register].
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-09801 Filed 5-7-20; 4:15 pm]
BILLING CODE 4830-01-P