IRS Proposes New Rules for Deducting Fiduciary Fees

The IRS released new due regulations Sep 6 (REG-128224-06)  dictated to simulate a U.S. Supreme Court’s 2008 holding in Knight, 552 U.S. 181 (2008), on income taxation deductibility by estates and nongrantor trusts of investment advisory and other fees.

The IRS concurrently withdrew Jul 2007 due regulations with a same plan number.

The Supreme Court hold in Knight that fees paid to an investment confidant by a nongrantor trust or estate are generally diverse itemized deductions theme to a building of 2% of practiced sum income (AGI) underneath a ubiquitous order of Sec. 67(a), rather than entirely deductible as an responsibility of administering an estate or trust underneath Sec. 67(e)(1). The latter sustenance boundary such diagnosis to losses that would not have been incurred if skill were not hold in a trust or estate.

Under a new due regulations, a price is entirely deductible to a border it exceeds that generally charged to an particular investor, where a additional is “attributable to an surprising investment objective” of a trust or estate or to “the need for a specialized balancing of a interests of several parties . . . such that a reasonable comparison with particular investors would be improper” (Prop. Regs. Sec. 1.67-4(b)(4)).

Bundled Fees

The new due regulations also yield superintendence on “bundled” fees, with a apportionment entirely deductible and another apportionment theme to a 2%-of-AGI floor. Generally, a apportionment of a bundled fiduciary price attributable to investment recommendation (including any associated services that would be supposing to any particular financier as partial of an investment advisory fee) will be theme to a 2% floor. Any fiduciary price not allocated to investment recommendation and not distributed on an hourly basement might be entirely deductible but courtesy to a 2% floor, solely for (1) payments done to a third celebration out of a bundled price that would have been theme to a 2% building if paid directly by a trust or estate, and (2) alone assessed losses (in serve to common or simple fees or commissions) that are ordinarily or entirely incurred by an individual.

The 2007 due regulations sought to forestall a use of circumventing a 2% building by bundling investment fees with executive costs. They supposing generally that curators contingency allot fees between those entirely deductible and those theme to a 2%-of-AGI floor. They also supposing serve superintendence on a focus of Sec. 67(e)(1) to entirely deductible expenses.

Acknowledging complaints of a executive problem of “unbundling,” a IRS in 2008 supposing halt superintendence (Notice 2008-32) providing that curators were not compulsory to establish a apportionment of bundled losses theme to a 2%-of-AGI building for taxation years commencement before 2008. That service was subsequently continued in a period of notices and recently was extended until a due regulations are finalized (Notice 2011-37).

The new due regulations will be effective for taxation years commencement on or after their announcement as final regulations. Comments are requested within 90 days after a new due regulations’ announcement in a Federal Register, and a open conference is scheduled for December19. The IRS requests comments quite on a reasonable process of allocating losses and their substantiation, generally on methods for pretty estimating a apportionment of a bundled price that is attributable to investment advice.

The AICPA has sent several criticism letters to a IRS and Congress on this subject given a 2007 due regulations were issued.

About Emil Estafanous, CPA
Certified Public Accountant (CPA) Tax Professional committed in representing taxpayers and resolving their tax problems.

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