The Deductibility of Fees and Expenses Paid by a Non-Grantor Trust or Estate

An Overview of Final Treasury Regulations Section 1.67-4

Michelle Davidowitz, CPA, MBA

On May 8, 2014, the IRS released the final Treasury Regulations section 1.67-4 regarding the deductibility of fees and expenses paid by a non-grantor trust or an estate under IRC section 67(e). In essence, the final regulations clarify which expenses incurred by a non-grantor trust or estate are subject to the 2% floor under IRC section 67(e)(1). The final regulations pertain to taxable years beginning on or after January 1, 2015. Prior to the release of the final regulations, there had been a lack of consistency in opinion as to the deductibility of trustee fees and expenses. The Treasury Department had previously drafted legislation on the matter, releasing proposed regulations in 2007 and 2011. Additionally, the issue had been litigated in various courts, including ultimately the Supreme Court. This article attempts to explain the rationale behind the final regulations by recounting their legislative and litigation history, as well as address some practical applications for tax professionals.