Effect of Section 67(g) on Trusts and Estates

Cited as:85 FR 66219
Court:Internal Revenue Service, Treasury Department
Publication Date:19 Oct 2020
Record Number:2020-21162
66219
Federal Register / Vol. 85, No. 202 / Monday, October 19, 2020 / Rules and Regulations
even if it is excluded from certain label
declarations. Finally, we reorganized
the section detailing our consideration
of allulose as a sugar.
The guidance announced in this
notice finalizes the draft guidance with
respect to: (1) Our views on the
declaration of allulose on Nutrition
Facts and Supplement Facts labels and
on the caloric content of allulose; and
(2) our intent to exercise enforcement
discretion for the exclusion of allulose
from the amount of Total Sugars and
Added Sugars declared on the label and
use of a general factor of 0.4 kcal/g for
allulose when calculating declarations
on Nutrition and Supplement Facts
labels pending review of the issues in a
rulemaking.
II. Paperwork Reduction Act of 1995
This guidance contains no collection
of information. Therefore, clearance by
the Office of Management and Budget
(OMB) under the Paperwork Reduction
Act of 1995 (PRA) (44 U.S.C. 3501–
3521) is not required.
However, this guidance refers to
previously approved FDA collections of
information. These collections of
information are subject to review by
OMB under the PRA. The collections of
information in 21 CFR part 101 have
been approved under OMB control
number 0910–0381.
II. Electronic Access
Persons with access to the internet
may obtain the guidance at either
https://www.fda.gov/FoodGuidances or
https://www.regulations.gov. Use the
FDA website listed in the previous
sentence to find the most current
version of the guidance.
Dated: October 9, 2020.
Lauren K. Roth,
Acting Principal Associate Commissioner for
Policy.
[FR Doc. 2020–22901 Filed 10–16–20; 8:45 am]
BILLING CODE 4164–01–P
DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9918]
RIN 1545–BO87
Effect of Section 67(g) on Trusts and
Estates
AGENCY
: Internal Revenue Service (IRS),
Treasury.
ACTION
: Final regulations.
SUMMARY
: This document contains final
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 final 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. The final regulations affect estates,
non-grantor trusts (including the S
portion of an electing small business
trust), and their beneficiaries.
DATES
:
Effective date: These regulations are
effective on October 19, 2020.
Applicability dates: For dates of
applicability, see §§ 1.67–4(d),
1.642(h)–2(f) and 1.642(h)–5(c).
FOR FURTHER INFORMATION CONTACT
:
Margaret Burow at (202) 317–5279 (not
a toll-free number).
SUPPLEMENTARY INFORMATION
:
Background
This document contains amendments
to Income Tax Regulations (26 CFR part
1) under sections 67 and 642 of the
Internal Revenue Code (Code). On May
11, 2020, the Department of Treasury
(Treasury Department) and the IRS
published a notice of proposed
rulemaking (REG–113295–18) in the
Federal Register (85 FR 27693)
containing proposed regulations under
sections 67 and 642(h) (proposed
regulations). The Summary of
Comments and Explanation of Revisions
section of this preamble summarizes the
provisions of sections 67 and 642(h) and
the provisions of the proposed
regulations, which are explained in
greater detail in the preamble to the
proposed regulations.
On July 17, 2020, the Treasury
Department and the IRS published in
the Federal Register (85 FR 43512) a
notice of public hearing on the proposed
regulations scheduled for August 12,
2020. The Treasury Department and the
IRS received no requests to speak at a
hearing in response to that notice. On
August 5, 2020, the Treasury
Department and the IRS published in
the Federal Register (85 FR 47323) a
cancellation of the notice of public
hearing.
The Treasury Department and the IRS
received written and electronic
comments in response to the proposed
regulations. All comments were
considered and are available at
www.regulations.gov or upon request.
After full consideration of the comments
received, this Treasury decision adopts
the proposed regulations with
modifications described in the
Summary of Comments and Explanation
of Revisions.
Summary of Comments and
Explanation of Revisions
Most of the comments addressing the
proposed regulations are summarized in
this Summary of Comments and
Explanation of Revisions. Comments
merely summarizing or interpreting the
proposed regulations or recommending
statutory revisions are not discussed in
this preamble. The Treasury Department
and the IRS continue to study comments
on issues related to sections 67 and
642(h) that are beyond the scope of
these regulations, which may be
discussed in future guidance if guidance
on those issues is published. The scope
of the proposed regulations and these
regulations is limited to the effect of
section 67(g) on the deductibility of
certain expenses described in section
67(b) and (e) that are incurred by estates
and non-grantor trusts and the treatment
of excess deductions on termination of
an estate or trust under section 642(h).
This Summary of Comments and
Explanation of Revisions also describes
each of the final rules contained in this
document.
A. Section 67
Section 67(g) was added to the Code
on December 22, 2017, by section
11045(a) of Public Law 115–97, 131
Stat. 2054, 2088 (2017), commonly
referred to as the Tax Cuts and Jobs Act
(TCJA). 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. Prior to the TCJA,
miscellaneous itemized deductions
were allowable for any taxable year only
to the extent that 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).
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Section 67(e) provides that, for
purposes of section 67, 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 estates and trusts
accumulating income). Accordingly,
section 67(e) removes the deductions
described 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.
The proposed regulations under
§ 1.67–4 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. Accordingly, 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). Commenters agreed with the
proposed amendments. These
regulations adopt the proposed
regulations under § 1.67–4 without
modification.
Two commenters requested that the
regulations address the treatment of
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
commenters suggested that such
deductions are allowable as deductible
in computing the AMT. The treatment
of deductions described in section 67(e)
for purposes of determining the AMT is
outside the scope of these regulations
concerning the effects of section 67(g);
therefore, these regulations do not
address the AMT. Further, no
conclusions should be drawn from the
absence of a discussion of the AMT in
these regulations regarding the
treatment of deductions described in
section 67(e) for purposes of
determining the AMT.
One commenter suggested that the
Treasury Department and the IRS
exercise their regulatory authority under
section 67(e) to exempt cemetery trusts
under section 642(i) and qualified
funeral trusts (QFTs) under section 685
from the application of section 67(g).
The commenter stated that the primary
type of expense incurred by these trusts
is investment advisory expenses, the tax
treatment of which differs under the
Code from management expense. That
is, trust management expenses generally
are allowable in computing adjusted
gross income under section 67(e)(1),
while trust investment advisory
expenses are miscellaneous itemized
deductions. See § 1.67–4(b)(4). The
commenter asserted that it was not the
intent of Congress to disallow
investment advisory expenses incurred
by cemetery and funeral trusts when
Congress enacted section 67(g).
The commenter suggested that
exercising the regulatory authority
under section 67(e) in this manner
would be consistent with the exercise of
regulatory authority under section 1411
to exempt section 642(i) cemetery
perpetual care funds and QFTs. See
§ 1.1411–3(b)(1) (providing that certain
types of trusts, including section 642(i)
cemetery perpetual care funds, are
excepted from the net investment
income tax) and § 1.1411–3(b)(2)
(providing a special rule for QFTs that,
for purposes of calculating any tax
under section 1411, section 1411 and
the regulations thereunder are applied
to each QFT by treating each
beneficiary’s interest in the trust as a
separate trust). As stated in the
preamble to TD 9644 (78 FR 72393), the
Treasury Department and the IRS
exercised their regulatory authority
under section 1411 to exclude cemetery
trusts from the net investment income
tax because, by benefiting an operating
company, such trusts are considered
similar to the business trusts that are
excluded from the operation of section
1411. The preamble also states that
QFTs are not excluded from the
application of the net income
investment tax, but that the section 1411
tax is calculated consistent with the
taxation of QFTs under chapter 1. The
commenter noted that they advocated
the treatment of each beneficiary’s
interest in the QFT as a separate trust
because such treatment reduces the
likelihood of the QFT beneficiaries
being subject to the net investment
income tax. The Treasury Department
and the IRS continue to consider these
comments but providing an exemption
for cemetery and funeral trusts under
section 67(g) is outside the scope of
these regulations.
B. Section 642(h)
1. In General
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 excess will be allowed as
a deduction, in accordance with the
regulations prescribed by the Secretary
of the Treasury or his delegate
(Secretary), to the beneficiaries
succeeding to the property of the estate
or trust.
Section 1.642(h)–2(a), as articulated
in the proposed regulations and these
final regulations, provides that if, on
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) or section
642(c)) 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 terminated estate or
trust.
2. Character and Amount of Excess
Deductions
Section 1.642(h)–2(b)(1) of the
proposed regulations provides that 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. The character of these
deductions does not change when
succeeded to by a beneficiary on
termination of the estate or trust.
Furthermore, an item of deduction
succeeded to by a beneficiary remains
subject to any limitation applicable
under the Code in the computation of
the beneficiary’s tax liability.
One commenter noted that section
642(h) states that excess deductions on
termination of an estate or trust are to
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be ‘‘allowed as a deduction, in
accordance with regulations prescribed
by the Secretary’’ and that there is no
express authority to treat excess
deductions as miscellaneous or non-
miscellaneous itemized deductions (or
tax preference items for AMT purposes).
The Treasury Department and the IRS
disagree with this comment. The
characterization of these excess
deductions as a single miscellaneous
itemized deduction in the current
regulations was made before the
enactment of section 67(g) and served as
an administrative convenience. Making
a change to that characterization is now
appropriate to reflect the temporary
disallowance of miscellaneous itemized
deductions under section 67(g) since the
regulations were written and is a proper
exercise of the Secretary’s specific grant
of regulatory authority in section 642(h).
Another commenter requested that
non-miscellaneous itemized deductions
included in excess deductions be fully
deductible by the beneficiary and not
subject to a second level of limitation
applicable on the beneficiary’s return,
because the amounts already would
have been subject to limitation on the
return of the estate or trust. The
commenter provided an example of a
terminated trust that paid $25,000 of
state income tax, for which the trust is
limited to a $10,000 deduction under
section 164(b)(6)(B) for taxable years
beginning after December 31, 2017, and
before January 1, 2026. In the
commenter’s example, the entire
amount of the allowable $10,000
deduction was passed through to the
beneficiary as an excess deduction on
termination of the trust. The excess of
state income tax over the $10,000
limitation ($15,000) would not pass
through as an excess deduction to the
beneficiaries in this circumstance
because the excess amount was not
deductible to the trust. Excess state
income tax on termination of the estate
or trust may, however, pass through to
a beneficiary if the estate or trust had
insufficient income to absorb the entire
$10,000 of state income tax deduction.
In that circumstance, the commenter
opined that the limitation under section
164(b)(6)(B), having already been
applied at the trust level, should not
again be applied at the beneficiary level.
The Treasury Department and the IRS
carefully considered the comment but
determined that beneficiaries remain
subject to the limitation in section
164(b)(6)(B). The Treasury Department
and the IRS found no authority to
exempt such items from the application
of any limitations applicable to the
beneficiary under the Code. The excess
deductions retain their character in the
hands of the beneficiary on termination
of the trust, and all applicable
limitations apply to all of the
beneficiary’s items of that character,
regardless of their origin.
One commenter noted that, under
§ 1.641(c)–1(j), if an electing small
business trust (ESBT) election
terminates or is revoked and the S
portion has a net operating loss or
capital loss carryover or deductions in
excess of gross income, then any such
loss, carryover or excess deductions are
allowed as a deduction, in accordance
with the regulations under section
642(h), to the trust or to the
beneficiaries succeeding to the property
of the trust if the entire trust terminates.
However, the commenter also noted that
under the TCJA, section 641(c)(2)(E) was
amended to provide that ESBT
charitable contributions are deductible
under section 170, rather than under
section 642(c), so that, unlike other trust
charitable deductions, an ESBT’s
charitable deduction could constitute
part of the excess deductions on
termination of the trust. The commenter
stated that neither the legislative history
nor the explanation of the staff of the
Joint Committee on Taxation addressed
whether this result was intended. The
Treasury Department and the IRS note
that charitable contribution deductions
under both sections 170 and 642(c) are
non-miscellaneous itemized deductions
under sections 63(d) and 67(b)(4) to the
estate or trust and maintain that such
character is retained in the hands of the
beneficiary in these regulations.
Although the Treasury Department and
the IRS continue to consider the
application of section 170 to ESBT
charitable contributions under section
641(c)(2)(E), this issue is outside the
scope of these regulations.
Another commenter requested
clarification of whether an excess
deduction on termination of a trust or
estate that is allowed in determining the
net investment income under section
1411 of the estate or trust remains
deductible in the hands of the
beneficiary in determining the net
investment income of the beneficiary
under section 1411. These final
regulations provide that each excess
deduction retains its separate character
as a section 67(e) deduction, non-
miscellaneous itemized deduction, or
miscellaneous itemized deduction in
the hands of the beneficiary. Whether a
deduction retains its character as
allowable in computing the net
investment income of the beneficiary,
however, is outside the scope of these
regulations.
3. Reporting of Excess Deductions
Section 1.642(h)–2(b)(1) of the
proposed regulations provides that 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. Commenters
requested that the Treasury Department
and the IRS provide guidance on how
the excess deductions are to be reported
by both the terminated estate or trust
and by its beneficiaries. The Treasury
Department and the IRS released
instructions for beneficiaries that chose
to claim excess deductions on Form
1040 in the 2019 or 2018 taxable year
based on the proposed regulations. In
addition, the Treasury Department and
the IRS plan to update the instructions
for Form 1041, Schedule K–1 (Form
1041), and Form 1040, U.S. Individual
Income Tax Return, for the 2020 and
subsequent tax years to provide for the
reporting of excess deductions that are
section 67(e) expenses or non-
miscellaneous itemized deductions.
The Treasury Department and the IRS
are aware that the income tax laws of
some U.S. states do not conform to the
Code with respect to section 67(g), such
that beneficiaries may need information
on miscellaneous itemized deductions
of a terminated estate or trust. However,
because miscellaneous itemized
deductions are currently not allowed for
Federal income tax purposes, that
information is not needed for Federal
income tax purposes. Therefore, it
would not be appropriate to modify
Federal income tax forms to require or
accommodate the collection of such
information while this deduction is
suspended. Estates, trusts, and
beneficiaries are advised to consult the
relevant state taxing authority for
information about deducting
miscellaneous itemized expenses on
their state tax returns.
4. Determinations of Deductions in Year
of Termination of the Trust
Section 1.642(h)–2(b)(2) of the
proposed regulations provides that the
provisions of § 1.652(b)–3 are 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).
Accordingly, the amount of each
separate deduction remaining after
application of § 1.652(b)–3 comprises
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the excess deductions available to the
beneficiaries succeeding to the property
of the estate or trust as provided under
section 642(h)(2). In addition, as
previously explained, an item of
deduction succeeded to by a beneficiary
remains subject to any additional
applicable limitation under the Code.
Furthermore, § 1.642(h)–2(c) of the
proposed regulations provides that
excess deductions are allowable only in
the taxable year of the beneficiary in
which or with which the estate or trust
terminates. That is, excess deductions of
a terminated estate or trust may not
carry over to a subsequent year of the
beneficiary.
One commenter requested that these
regulations provide an ordering rule
clarifying whether excess deductions on
termination of a trust allowed as a
deduction to the beneficiary are claimed
before, after, or ratably with the
beneficiary’s other deductions,
particularly when the amount of the
excess deductions and other deductions
exceed the beneficiary’s gross income.
These final regulations clarify that
beneficiaries may claim all or part of the
excess deductions under section
642(h)(2) before, after, or together with
the same character of deductions
separately allowable to the beneficiary
under the Code.
That commenter also requested that
the final regulations include an
exception for investment interest
expense under section 163(d) from the
general rule that excess deductions on
termination of a trust or estate may be
claimed only in the beneficiary’s taxable
year during which the trust or estate
terminated. That section permits the
carryforward of investment interest
under section 163(d)(2) to the taxpayer’s
subsequent taxable years if the taxpayer
is unable to deduct the investment
interest in the current taxable year. The
commenter stated that the disallowance
of the carryover of section 642(h)(2)
excess deductions should not apply to
those excess deductions that are no
longer treated as miscellaneous itemized
deductions under the proposed
regulations, and that carryover should
be permitted to the extent otherwise
permitted under the Code. The
preamble to the proposed regulations
states that addressing suspended
deductions under section 163(d) is
beyond the scope of the regulations and
the same is true of these final
regulations.
A commenter requested that the
amount of a beneficiary’s net operating
loss carryover to a later taxable year
under section 172 should include all of
the beneficiary’s section 642(h)(2)
excess deductions that are section 67(e)
deductions, as deductions that are
attributable to the beneficiary’s trade or
business and thus deductions
attributable to a trade or business under
section 172(d)(4). Section 642(h) makes
it clear that a net operating loss
carryover under paragraph (1) of that
section is separate and distinct from the
excess deductions on termination
described in paragraph (2) of that
section. Furthermore, § 1.642(h)–2(d)
provides that a deduction based upon a
net operating loss carryover generally
will not be allowed to beneficiaries
under both paragraphs (1) and (2) of
section 642(h). Therefore, an excess
deduction allowable to the beneficiary
under section 642(h)(2) is not a net
operating loss carryover succeeded to by
the beneficiary under section 642(h)(1)
and (with one exception) a net operating
loss carryover is not an excess
deduction on termination. Moreover,
these regulations provide that it is the
character of the excess deductions as
section 67(e) deductions, non-
miscellaneous itemized deductions, and
miscellaneous itemized deductions, and
not the character of a deduction as
attributable to a trade or business, that
is retained in the hands of the
beneficiary. Thus, whether section
642(h)(2) excess deductions that are
section 67(e) deductions may be
included in a beneficiary’s net operating
loss carryovers under section 172,
separate from those it succeeds to from
a terminated estate or trust, is beyond
the scope of these regulations. Because
§ 1.642(h)–2(a) is clear that excess
deductions on termination of an estate
or trust are not carried over to future
years and that such deductions are
separate from a net operating loss
carryover from the estate or trust, the
Treasury Department and the IRS do not
adopt this comment.
6. Example 1
Section 1.642(h)–5(a), Example 1, of
the proposed regulations (Example 1)
updates an existing example illustrating
computations under section 642(h)
when there is a net operating loss.
Section 1.642–5(a)(2)(ii) of Example 1
explains that the beneficiaries of the
trust cannot carry back any of the net
operating loss of the terminating estate
that was made available to them under
section 642(h)(1).
Two commenters requested that
Example 1 be revised to take into
account the amendments to section
172(b)(1)(D) under sec. 2302(b) of the
Coronavirus Aid, Relief, and Economic
Security Act, Public Law 116–136, 134
Stat. 281 (2020) (CARES Act), by
allowing a beneficiary to carry back the
net operating loss carryover the
beneficiary succeeds to under section
642(h)(1) for net operating losses arising
in taxable years beginning after
December 31, 2017, and before January
1, 2021. Under section 2303 of the
CARES Act, net operating losses arising
in taxable years beginning after
December 31, 2017, and before January
1, 2021, generally may be carried back
five years before being carried forward.
One of these commenters further
requested confirmation that a
beneficiary is allowed a carryback of the
net operating loss under section
642(h)(1) for net operating losses of an
estate or trust arising in taxable years
ending before January 1, 2018, to the
extent the beneficiary succeeds to a net
operating loss carryover attributable to
those net operating losses on a
termination of the estate or trust
between January 1, 2018, and December
31, 2020.
Unless otherwise provided under the
Code, a net operating loss incurred by
a taxpayer may only be used as a
deduction by that taxpayer and cannot
be transferred to another taxpayer for
use by that other taxpayer. Calvin v.
U.S. 354 F.2d 202 (10th Cir. 1965),
Mellott v. U.S., 257 F.2d 798 (3d Cir.
1958). As an exception to this general
principle, section 642(h) provides that
if, on termination of an estate or trust,
the estate or trust has a net operating
loss carryover under section 172, then
such carryover is allowed as a
deduction, in accordance with the
regulations prescribed by the Secretary,
to the beneficiaries succeeding to the
property of the estate or trust. Section
1.642(h)–1(a) provides that if, on the
termination of an estate or trust, a net
operating loss carryover under section
172 would be allowable to the estate or
trust in a taxable year subsequent to the
taxable year of termination but for the
termination, a carryover is allowed
under section 642(h)(1) to the
beneficiaries succeeding to the property
of the estate or trust. In addition,
§ 1.642(h)–1(b) provides that the first
taxable year of the beneficiary to which
the net operating loss will be carried
over is the taxable year of the
beneficiary in which or with which the
estate or trust terminates.
Section 642(h)(1) provides a specific
rule that allows the beneficiary to
succeed to a net operating loss carryover
of the estate or trust and deduct the
amount of the net operating loss over
the remaining carryover period that
would have been allowable to the estate
or trust but for the termination of the
estate or trust. The phrase in section
642(h)(1) ‘‘the estate or trust has a net
operating loss carryover’ ’’ means that
the estate or trust incurred a net
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operating loss and either already carried
it back to the earliest allowable year
under section 172 or elected to waive
the carryback period under section
172(b)(3), and now is limited to carrying
over the remaining net operating loss.
Accordingly, because the net operating
loss is a carryover for the estate or trust,
the beneficiary succeeding to that net
operating loss may, under section
642(h)(1), only carry it forward.
The CARES Act amendments to
section 172(b) mentioned by the
commenters allow taxpayers a five-year
carryback of certain net operating losses
incurred by that taxpayer. The CARES
Act amendments do not change the
result that a beneficiary succeeding to
the net operating loss carryover of a
terminated estate or trust may only
carryover that net operating loss in the
same manner as the terminated estate or
trust, but for the termination.
Consequently, the Treasury Department
and the IRS do not adopt these
comments and add a citation to
§ 1.642(h)–1 to reference the rule that a
beneficiary that succeeds to a net
operating loss carryover of a terminated
estate or trust may only carry forward
the net operating loss.
7. Example 2
Section § 1.642(h)–5(b), Example 2, of
the proposed regulations (Example 2)
demonstrates computations under
section 642(h)(2). The expenses in
Example 2 include rental real estate
taxes in an attempt to illustrate a
deduction subject to limitation under
section 164(b)(6) to the beneficiary that
must be separately stated as provided in
§ 1.642(h)–2(b)(1).
Multiple commenters noted that
Example 2 raises several issues that
could be potentially relevant to that
example, such as whether the decedent
was in a trade or business and the
application of section 469 to estates and
trusts. To avoid these issues, which are
extraneous to the point being illustrated,
one commenter suggested that the
example be revised so that the entire
amount of real estate expenses on rental
property equals the amount of rental
income. The Treasury Department and
the IRS did not intend to raise such
issues in the example and consider both
issues to be outside the scope of these
regulations. Accordingly, the Treasury
Department and the IRS adopt the
suggestion by the commenter and
modify Example 2 to avoid these issues
by having rental real estate expenses
entirely offset rental income with no
unused deduction.
Commenters also noted that Example
2 does not properly allocate rental real
estate expenses because the example
characterizes the rental real estate taxes
as itemized deductions. These
commenters asserted that real estate
taxes on property held for the
production of rental income are not
itemized deductions but instead are
allowed in computing gross income and
cited to section 62(a)(4) as providing
that ordinary and necessary expenses
paid or incurred during the taxable year
for the management, conservation, or
maintenance of property held for the
production of income under section
212(2) that are attributable to property
held for the production of rents are
deductible as above-the-line deductions
in arriving at adjusted gross income.
One commenter suggested that, if the
goal of Example 2 is to illustrate state
and local taxes passing through to the
beneficiary, then the example should
include state income taxes rather than
real estate taxes on rental real estate.
The Treasury Department and the IRS
have revised this example in the final
regulations to include personal property
tax paid by the trust rather than taxes
attributable to rental real estate.
Lastly, commenters noted that
Example 2 does not demonstrate the
broad range of trustee discretion in
§ 1.652(b)–3(b) and (d) for deductions
that are not directly attributable to a
class of income, or deductions that are,
but which exceed such class of income,
respectively. In response to these
comments, the Treasury Department
and the IRS have modified Example 2 to
illustrate the application of trustee
discretion as found in § 1.652(b)–3(b)
and (d).
C. Applicability Dates
The proposed regulations provide that
the changes to §§ 1.67–4, 1.642(h)–2,
and 1.642(h)–5 apply to taxable years
beginning after the date the regulations
are published as final. The preamble to
the proposed regulations explains that
estates, non-grantor trusts, and their
beneficiaries may rely on the 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.
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 the regulations are
published as final, in which an estate or
trust terminates.
One commenter requested that
§ 1.642(h)–2 of the proposed regulations
be applied retroactively not only to
taxable years beginning after December
31, 2017, but to all open years. The
commenter asserted that the existing
regulation treating excess deductions on
termination of an estate as a
miscellaneous itemized deduction was
in error. As an example, the commenter
argues that the current regulations
mistakenly describe section 67(e)
expenses as an exception to the rules
applicable to miscellaneous itemized
deductions, and therefore requested that
the final regulations be applicable to all
open years. The Treasury Department
and the IRS have the authority to treat
an excess deduction on termination of
an estate or trust as a single
miscellaneous itemized deduction. See
section 642(h). The suspension under
section 67(g) of miscellaneous itemized
deductions caused the Treasury
Department and the IRS to reconsider
the treatment of excess deductions
under section 642(h)(2) because the
Treasury Department and the IRS do not
interpret section 67(g) as suspending
such deductions allowable under
section 642(h)(2). The Treasury
Department and the IRS interpret
section 67(g) as not disallowing excess
deductions succeeded to beneficiaries
from terminated estates and trusts under
section 642(h)(2). Therefore, taxpayers
may rely on these regulations as of the
effective date of section 67(g), but not
for earlier periods.
The final regulations apply to taxable
years beginning after October 19, 2020.
Pursuant to section 7805(b)(7),
taxpayers may choose to apply the
amendments to § 1.67–4 and
§§ 1.642(h)–2 and 1.642(h)–5 set forth
in this Treasury decision to taxable
years beginning after December 31,
2017, and on or before October 19, 2020.
Special Analysis
These regulations are 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 on the
Schedule K–1 (Form 1041) issued to
beneficiaries information that is already
maintained and reported to the IRS on
Form 1041. Moreover, it should take an
estate or trust no more than 2 hours to
satisfy the information requirement in
these regulations. Accordingly, the
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Secretary certifies that the rule will not
have a significant economic impact on
a substantial number of small entities.
Pursuant to section 7805(f) of the
Code, the notice of proposed rulemaking
that preceded these regulations was
submitted to the Chief Counsel for the
Office of Advocacy of the Small
Business Administration for comment
on its impact on small businesses, and
no comments were received.
Paperwork Reduction Act (PRA)
The collection of information related
to these 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.
The collection of information in these
regulations is in § 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.
Drafting Information
The principal author of these
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.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is
amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation
for part 1 is amended by adding entries
for §§ 1.67–4, 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).
* * * * *
Section 1.642(h)–2 also issued under 26
U.S.C. 642(h).
Section 1.642(h)–5 also issued under 26
U.S.C. 642(h).
* * * * *
Par. 2. Section 1.67–4 is amended by
revising paragraph (a) and the heading
of paragraph (d) and adding two
sentences to the end of paragraph (d) to
read as follows:
§ 1.67–4 Costs paid or incurred by estates
or non-grantor trusts.
(a) Deductions—(1) Section 67(e)
deductions—(i) In general. An estate or
trust (including the S portion of an
electing small business trust) not
described in § 1.67–2T(g)(1)(i) (a non-
grantor trust) must 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 that 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) Not disallowed under section
67(g). 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 October 19,
2020. Taxpayers may choose to apply
paragraph (a) of this section to taxable
years beginning after December 31,
2017, and on or before October 19, 2020.
Par. 3. Section 1.642(h)–2 is amended
by:
1. Revising paragraph (a).
2. Redesignating paragraph (b) as
paragraph (d) and adding a heading for
newly redesignated paragraph (d).
3. Redesignating paragraph (c) as
paragraph (e) and adding a heading for
newly redesignated paragraph (e).
4. Adding new paragraphs (b) and (c)
and paragraph (f).
The revisions and additions read as
follows:
§ 1.642(h)–2 Excess deductions on
termination of an estate or trust.
(a) Excess deductions—(1) 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 as
determined under paragraph (b) of this
section are allowed under section
642(h)(2) as items of deduction to the
beneficiaries succeeding to the property
of the estate or trust.
(2) Treatment by beneficiary. A
beneficiary may claim all or part of the
amount of the deductions provided for
in paragraph (a) of this section, as
determined after application of
paragraph (b) of this section, before,
after, or together with the same
character of deductions separately
allowable to the beneficiary under the
Internal Revenue Code for the
beneficiary’s taxable year during which
the estate or trust terminated as
provided in paragraph (c) of this
section.
(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 Internal
Revenue 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.
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(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 § 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 § 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 § 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 other allowable
deductions that B claims for the year)
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)
through (c) of this section apply to
taxable years beginning after October 19,
2020. The rules applicable to taxable
years beginning on or before October 19,
2020 are contained in § 1.642(h)-2 as in
effect prior to October 19, 2020 (see 26
CFR part 1 revised as of April 1, 2020).
Taxpayers may choose to apply
paragraphs (a) through (c) of this section
to taxable years beginning after
December 31, 2017, and on or before
October 19, 2020.
Par. 4. Section 1.642(h)–5 is revised to
read as follows:
§ 1.642(h)–5 Examples.
Paragraphs (a) and (b) of this section
(Examples 1 and 2) 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:
T
ABLE
1
TO
P
ARAGRAPH
(a)(1)
Income:
Taxable interest ........................................................................................................................................................................ $2,500
Business income ...................................................................................................................................................................... 3,000
Total income ...................................................................................................................................................................... 5,500
T
ABLE
2
TO
P
ARAGRAPH
(a)(1)
Deductions:
Business expenses (including administrative expense allocable to business income) ........................................................... 5,000
Administrative expenses not allocable to business income that would not have been incurred if property had not been
held in a trust or estate (section 67(e) deductions) ............................................................................................................. 9,800
Total deductions ................................................................................................................................................................ 14,800
(2) Computation of net operating loss.
(i) The amount of the net operating loss
carryover is computed as follows:
T
ABLE
3
TO
P
ARAGRAPH
(a)(2)(i)
Gross income ................................................................................................................................................................................... $5,500
Total deductions .............................................................................................................................................................................. 14,800
Less adjustment under section 172(d)(4) (allowable non-business expenses ($9,800) limited to non-business income
($2,500)) ................................................................................................................................................................................ 7,300
Deductions as adjusted ................................................................................................................................................................... 7,500
Net operating loss .................................................................................................................................................................... 2,000
(ii) 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
2020, with the allowance of any net
operating loss carryover to B and the
trust determined under section 172.
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). See § 1.642(h)–1(b).
(3) Section 642(h)(2) excess
deductions. The $7,300 of non-business
deductions not taken into account in
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determining the net operating loss of the
estate are excess deductions on
termination of the estate under section
642(h)(2). Under § 1.642(h)–2(b)(1),
such deductions retain their character as
section 67(e) deductions. Under
§ 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 carryover 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 net operating loss
carryover and excess deductions,
however, C may receive an indirect
benefit from the carryover 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:
T
ABLE
4
TO
P
ARAGRAPH
(b)(1)
Income:
Dividends .................................................................................................................................................................................. $3,000
Taxable Interest ........................................................................................................................................................................ 500
Rent .......................................................................................................................................................................................... 2,000
Capital Gain .............................................................................................................................................................................. 1,000
Total Income ...................................................................................................................................................................... 6,500
T
ABLE
5
TO
P
ARAGRAPH
(b)(1)
Deductions:
Section 62(a)(4) deductions:
Rental real estate expenses ............................................................................................................................................. 2,000
Section 67(e) deductions:
Probate fees ...................................................................................................................................................................... 1,500
Estate tax preparation fees ............................................................................................................................................... 8,000
Legal fees .......................................................................................................................................................................... 2,500
Total Section 67(e) deductions .................................................................................................................................. 12,000
Non-miscellaneous itemized deductions:
Personal property taxes .................................................................................................................................................... 3,500
Total deductions ......................................................................................................................................................... 17,500
(2) Determination of character.
Pursuant to § 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 § 1.652(b)–
3. Under § 1.652(b)–3(a), the $2,000 of
rental real estate expenses is allocated to
the $2,000 of rental income. In the
exercise of the executor’s discretion
pursuant to § 1.652(b)–3(b), D’s
executor allocates $3,500 of personal
property taxes and $1,000 of section
67(e) deductions to the remaining
income. As a result, the excess
deductions on termination of the estate
are $11,000, all consisting of section
67(e) deductions.
(3) Allocations among beneficiaries.
Pursuant to § 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, all consisting of section 67(e)
deductions. F’s share of the excess
deductions is $2,750, also all consisting
of section 67(e) deductions.
(4) Separate statement. If the executor
instead allocated $4,500 of section 67(e)
deductions to the remaining income of
the estate, the excess deductions on
termination of the estate would be
$11,000, consisting of $7,500 of section
67(e) deductions and $3,500 of personal
property taxes. The non-miscellaneous
itemized deduction for personal
property taxes may be subject to
limitation on the returns of both B and
C’s trust under section 164(b)(6)(B) and
would have to be separately stated as
provided in § 1.642(h)–2(b)(1).
(c) Applicability date. This section is
applicable to taxable years beginning
after October 19, 2020. Taxpayers may
choose to apply this section to taxable
years beginning after December 31,
2017, and on or before October 19, 2020.
Sunita Lough,
Deputy Commissioner for Services and
Enforcement.
Approved: September 16, 2020.
David J. Kautter,
Assistant Secretary of the Treasury (Tax
Policy).
[FR Doc. 2020–21162 Filed 10–16–20; 8:45 am]
BILLING CODE 4830–01–P
DEPARTMENT OF JUSTICE
Bureau of Prisons
28 CFR Part 541
[Docket No. BOP–1172–F]
RIN 1120–AB72
Inmate Discipline Program: New
Prohibited Act Code for Pressuring
Inmates for Legal Documents.
AGENCY
: Bureau of Prisons, Department
of Justice.
ACTION
: Final rule.
SUMMARY
: In this document, the Bureau
of Prisons (Bureau) adds a new code to
the list of prohibited act codes in the
inmate discipline regulations which
will clarify that the Bureau may
discipline inmates for pressuring or
otherwise intimidating other inmates
into producing copies of their own legal
documents, such as pre-sentence reports
(PSRs), or statement of reasons (SORs).
DATES
: This rule is effective November
18, 2020.
FOR FURTHER INFORMATION CONTACT
:
Sarah N. Qureshi, Rules Unit, Office of
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