The American Institute of CPAs has written a letter to the leaders of the House Ways and Means Committee and the Senate Finance Committee asking them to amend the Tax Code to allow estates and nongrantor trusts to fully deduct the cost of complying with the fiduciary duties of administering estates and trusts.
Under current law, Section 67(e) of the Tax Code denies a deduction for the cost of complying with the many fiduciary duties involved with the administration of estates and trusts to the extent that their aggregate cost does not exceed 2 percent of the taxpayer’s adjusted gross income, known as the “2 percent floor.”
The AICPA wants to simplify the law by amending Section 67(e). The Institute said it believes the proposed amendment would simplify the statute and modernize it for the prudent investor rule. The amended law would also make it easier to administer, and provide a consistent definition of AGI for estates and nongrantor trusts throughout the Tax Code.
“By way of background, Congress enacted section 67(a) in 1986 to limit deductions for miscellaneous itemized deductions to those in excess of 2 percent of adjusted gross income (AGI),” wrote AICPA Tax Executive Committee chair Patricia A. Thompson, in the letter. “Congress’s purpose was to reduce recordkeeping for numerous small expenditures and eliminate deductions for many, essentially personal expenditures claimed in error. Because estates and nongrantor trusts are taxed in the same manner as individuals, Congress provided an exception to the 2-percent floor in section 67(e) for fiduciary administrative costs that would not have been incurred “if the property were not held in such trust or estate.”
Because of the statute’s unusual wording, there have been numerous judicial battles over its meaning, she noted. In 2008, the U.S. Supreme Court held in Knight v. CIR, that the statute allows a full deduction for “only those costs that it would be uncommon (or unusual, or unlikely) for such a hypothetical individual to incur.”
To make that determination, the Court held that the trustee must “predict” whether a hypothetical person with the trust property would have incurred the cost. “Unfortunately this interpretation imposes significant uncertainty, complexity, recordkeeping, and enforcement burdens on both the trustee and the government,” wrote Thompson. “In short, it raises more questions than it answers.”