[Federal Register Volume 72, Number 144 (Friday, July 27, 2007)]
[Proposed Rules]
[Pages 41243-41245]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-14489]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-128224-06]
RIN 1545-BF80


Section 67 Limitations on Estates or Trusts

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations that provide 
guidance on which costs incurred by

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estates or non-grantor trusts are subject to the 2-percent floor for 
miscellaneous itemized deductions under section 67(a). The regulations 
will affect estates and non-grantor trusts. This document also provides 
notice of a public hearing on these proposed regulations.

DATES: Written and electronic comments must be received by October 25, 
2007. Outlines of topics to be discussed at the public hearing 
scheduled for November 14, 2007 must be received by October 24, 2007.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-128224-06), room 5203, 
Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
128224-06), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue, NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov/ (indicate IRS and 
REG-128224-06). The public hearing will be held in the IRS Auditorium, 
Internal Revenue Building, 1111 Constitution Avenue, NW., Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Jennifer N. Keeney, (202) 622-3060; concerning submissions of comments, 
the hearing, or to be placed on the building access list to attend the 
hearing, Richard A. Hurst, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to 26 CFR part 1. 
Section 67(a) of the Internal Revenue Code (Code) provides that, for an 
individual taxpayer, miscellaneous itemized deductions are allowed only 
to the extent that the aggregate of those deductions exceeds 2 percent 
of adjusted gross income. Section 67(b) excludes certain itemized 
deductions from the definition of ``miscellaneous itemized 
deductions.'' Section 67(e) provides that, for purposes of section 67, 
the adjusted gross income of an estate or trust shall be computed in 
the same manner as in the case of an individual. However, section 
67(e)(1) provides that the deductions for costs 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 shall be treated as allowable in arriving at adjusted 
gross income. Therefore, deductions described in section 67(e)(1) are 
not subject to the 2-percent floor for miscellaneous itemized 
deductions under section 67(a).
    United States courts of appeals have interpreted the language of 
section 67(e)(1) differently in determining whether costs incurred by 
trustees are subject to the 2-percent floor. The issue in each case has 
been whether the trust's costs (specifically, investment advisory fees) 
``would not have been incurred if the property were not held in such 
trust or estate.'' In O'Neill v. Commissioner, 994 F.2d 302 (6th Cir. 
1993), the Court of Appeals for the Sixth Circuit held that investment 
advisory fees paid for professional investment services were fully 
deductible under section 67(e)(1) where the trustees lacked experience 
in managing large sums of money. The court found that, under state law, 
the trustee was required to engage an investment advisor to meet its 
fiduciary obligations and to incur fees that the trust would not have 
incurred if the property were not held in trust. The court held that 
estate or trust expenditures that are necessary to meet specific 
fiduciary obligations under state law are not subject to the 2-percent 
floor. In contrast, in Mellon Bank, N.A. v. United States, 265 F.3d 
1275 (Fed. Cir. 2001), Scott v. United States, 328 F.3d 132 (4th Cir. 
2003), and Rudkin v. Commissioner, 467 F.3d 149 (2d Cir. 2006), the 
courts held that investment advisory fees are subject to the 2-percent 
floor. These courts read the language of section 67(e)(1) differently 
than the Sixth Circuit. Specifically, the courts in Scott and Mellon 
Bank concluded that a trust expense is subject to the 2-percent floor 
if it is an expense ``commonly'' or ``customarily'' incurred by 
individuals; and the court in Rudkin looked to whether such an expense 
was ``peculiar to trusts'' and ``could not'' be incurred by an 
individual.
    The result of this lack of consistency in the case law is that the 
deductions of similarly situated taxpayers may or may not be subject to 
the 2-percent floor, depending upon the jurisdiction in which the 
executor or the trustee is located. The IRS and the Treasury Department 
believe that similarly situated taxpayers should be treated 
consistently by having section 67(e)(1) construed and applied in the 
same way in all jurisdictions. The proposed regulations are intended to 
provide a uniform standard for identifying the types of costs that are 
not subject to the 2-percent floor under section 67(e)(1).

Explanation of Provisions

    These proposed regulations provide that costs incurred by estates 
or non-grantor trusts that are unique to an estate or trust are not 
subject to the 2-percent floor. For this purpose, a cost is unique to 
an estate or trust if an individual could not have incurred that cost 
in connection with property not held in an estate or trust. To the 
extent that expenses paid or incurred by an estate or non-grantor trust 
do not meet this standard, they are subject to the 2-percent floor of 
section 67(a). (Neither section 67 nor this rule applies to expenses 
that are excluded under section 67(b) from the definition of 
miscellaneous itemized deductions, or to expenses related to a trade or 
business.)
    Under the proposed regulations, whether costs are subject to the 2-
percent floor on miscellaneous itemized deductions depends on the type 
of services provided, rather than on taxpayer characterizations or 
labels for such services. Thus, taxpayers may not circumvent the 2-
percent floor by ``bundling'' investment advisory fees and trustees' 
fees into a single fee. The regulations provide that, if an estate or 
non-grantor trust pays a single fee that includes both costs that are 
unique to estates and trusts and costs that are not, then the estate or 
non-grantor trust must use a reasonable method to allocate the single 
fee between the two types of costs. The regulations also provide a non-
exclusive list of services for which the cost is either exempt from or 
subject to the 2-percent floor. The IRS and the Treasury Department 
invite comments on whether any safe harbors or other guidance, 
concerning allocation methods or otherwise, would be helpful.

Proposed Effective Date

    The regulations, as proposed, apply to payments made after the date 
final regulations are published in the Federal Register.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Therefore, a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of

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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 business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The IRS and Treasury Department request comments on the proposed 
rules, as well as their clarity and how they can be made easier to 
understand. All comments will be available for public inspection and 
copying.
    A public hearing has been scheduled for November 14, 2007, 
beginning at 10 a.m. in the IRS Auditorium, Internal Revenue Building, 
1111 Constitution Avenue, NW., Washington, DC. Due to building security 
procedures, visitors must enter at the Constitution Avenue entrance. In 
addition, all visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance area more than 15 minutes before the 
hearing starts. For information about having your name placed on the 
building access list to attend the hearing, see the FOR FURTHER 
INFORMATION CONTACT section of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments at the hearing must submit written or 
electronic comments and an outline of the topics to be discussed and 
the time to be devoted to each topic (signed original and eight (8) 
copies) by October 24, 2007. A period of 10 minutes will be allotted to 
each person for making comments. An agenda showing the schedule of 
speakers will be prepared after the deadline for receiving outlines has 
passed. Copies of the agenda will be available free of charge at the 
hearing.

Drafting Information

    The principal author of these regulations is Jennifer N. Keeney, 
Office of the Office of Associate Chief Counsel (Passthroughs and 
Special Industries).

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

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.67-4 is added to read as follows:


Sec.  1.67-4  Costs paid or incurred by estates or non-grantor trusts.

    (a) In general. Section 67(e) provides an exception to the 2-
percent floor on miscellaneous itemized deductions for costs that are 
paid or incurred in connection with the administration of an estate or 
a trust not described in Sec.  1.67-2T(g)(1)(i) (a non-grantor trust) 
and which would not have been incurred if the property were not held in 
such estate or trust. To the extent that a cost incurred by an estate 
or non-grantor trust is unique to such an entity, that cost is not 
subject to the 2-percent floor on miscellaneous itemized deductions. To 
the extent that a cost included in the definition of miscellaneous 
itemized deductions and incurred by an estate or non-grantor trust is 
not unique to such an entity, that cost is subject to the 2-percent 
floor.
    (b) Unique. For purposes of this section, a cost is unique to an 
estate or a non-grantor trust if an individual could not have incurred 
that cost in connection with property not held in an estate or trust. 
In making this determination, it is the type of product or service 
rendered to the estate or trust, rather than the characterization of 
the cost of that product or service, that is relevant. A non-exclusive 
list of products or services that are unique to an estate or trust 
includes those rendered in connection with: Fiduciary accountings; 
judicial or quasi-judicial filings required as part of the 
administration of the estate or trust; fiduciary income tax and estate 
tax returns; the division or distribution of income or corpus to or 
among beneficiaries; trust or will contest or construction; fiduciary 
bond premiums; and communications with beneficiaries regarding estate 
or trust matters. A non-exclusive list of products or services that are 
not unique to an estate or trust, and therefore are subject to the 2-
percent floor, includes those rendered in connection with: Custody or 
management of property; advice on investing for total return; gift tax 
returns; the defense of claims by creditors of the decedent or grantor; 
and the purchase, sale, maintenance, repair, insurance or management of 
non-trade or business property.
    (c) ``Bundled fees.'' If an estate or a non-grantor trust pays a 
single fee, commission or other expense for both costs that are unique 
to estates and trusts and costs that are not, then the estate or non-
grantor trust must identify the portion (if any) of the legal, 
accounting, investment advisory, appraisal or other fee, commission or 
expense that is unique to estates and trusts and is thus not subject to 
the 2-percent floor. The taxpayer must use any reasonable method to 
allocate the single fee, commission or expense between the costs unique 
to estates and trusts and other costs.
    (d) Effective/applicability date. These regulations are proposed to 
be effective for payments made after the date final regulations are 
published in the Federal Register.

Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
[FR Doc. E7-14489 Filed 7-26-07; 8:45 am]
BILLING CODE 4830-01-P