All Bundled Up

May 1, 2008

In the wake of the Supreme Court’s decision in Knight v. Commissioner (101 AFTR2d 2008-380), the IRS permitted full deduction of “bundled” commissions or fees paid to a trustee or executor of a nongrantor trust or estate for tax years 2007 and previously without parsing portions that qualify for “above the line” income tax treatment under IRC § 67(e)(1) from those subject to the 2% of adjusted gross income floor for miscellaneous itemized deductions. Notice 2008-32 tells how trusts may report and treat such bundled expenses and extended the comment period on Prop. Treas. Reg. § 1.67-4 to May 27. The IRS also said in the notice that after the comment period it would publish “without delay” final regulations consistent with the court’s holding in Knight that may contain safe harbors for distinguishing fiduciary fees and expenses not subject to the 2% floor.

The proposed regulations, issued after the court agreed to hear Knight but before it released its opinion, identified costs subject to the floor as those that are not “unique” to the trust. They also required taxpayers to allocate portions of bundled costs to those that are subject to the floor from those that are not. The court in Knight ruled that costs paid to an investment adviser by a nongrantor trust or estate generally are subject to the 2% floor and said fully deductible costs are those that would not commonly have been incurred by an individual.

In a letter dated March 12, the AICPA thanked the Service for its prompt issuance of the notice and for the guidance’s “clarity and helpfulness,” as well as for the extended comment period, which the AICPA had requested Feb. 8. The letter, from Jeffrey Hoops, chair of the Tax Executive Committee, also said the AICPA will submit comments on the possible safe harbors.

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