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IRS Notice 2010-32 Allows Full Deduction of Bundled Fiduciary Fees on 2009 Returns

Good news, T&E Community, particularly for fiduciaries: 2009 investment advisory fees charged to nongrantor trusts or to estates continue to be fully deductible without regard to the two percent floor under section 67(a) of the Code. IRS Notice 2010-32 extends the interim guidance provided in Notice 2008-116 and Notice 2008-32 regarding investment advisory costs subject to the 2 percent “floor” under section 67(a) that are integrated into a single fiduciary fee paid to a trustee or executor (a “bundled fiduciary fee”). Notice 2010-32 applies to taxable years beginning before January 1, 2010 for nongrantor trusts and estates (but not grantor trusts).

Readers are probably well familiar with Knight v. Comm’r, 552 U.S. 181 (2008), which held that investment advisory fees for nongrantor trusts or estates generally are subject to the two percent “floor” for miscellaneous itemized deductions under section 67(a). Treasury expects to issue regulations implementing the Knight holding which will address how nongrantor trusts and estates should prepare income tax returns when they pay bundled fiduciary fees that are partly investment advisory fees subject to the two percent “floor” and partly “pure fiduciary” fees not subject to the two percent “floor”. Treasury will not have these regulations ready for use in connection with the 2009 taxable year.

Until the regulations are ready, Treasury is actually being quite reasonable. Notice 2008-32 provided that taxpayers would not be required to determine the portion of a bundled fiduciary fee that is subject to the two percent floor under section 67 for any taxable year before January 1, 2008. Notice 2008-116 extended this interim guidance to any taxable years before January 1, 2009. Notice 2010-32 extends the same guidance to any taxable years before January 1, 2010.

Instead, taxpayers may deduct the full amount of a bundled fiduciary fee without regard to the two percent “floor”. The Notice cautions, however, that “payments by the fiduciary to third parties for expenses subject to the [two percent “floor”] are readily identifiable and must be treated separately from the otherwise [bundled fiduciary fee].”

The extension of the interim guidance will save clients some small amount of fiduciary income taxes, and delay implementation burdens on fiduciaries. At KYEstates that’s welcome news.

In unrelated news on this perfect spring day in Louisville

1) Entries continue to arrive for the KYEstates Estate Tax Forecasting Contest, which was remarked upon by Professor Beyer at Wills Trusts & Estate Prof Blog.  Thanks, Professor Beyer, and welcome to any of his readers!  For more information on the Contest, visit here.

2) For an insightful article on why deficits do matter, and what the U.S. ought to do about its rather frightening deficit, read “America in the Red” by Donald B. Marron at National Affairs.

3) KYEstates is sorry to report Oxford’s losses today on the Thames in The Boat Race 156 and the reserve crew Isis-Goldie race, but congratulates the Cambridge main and Goldie (reserve) crews on very well rowed races.  The Cambridge boat stayed in contact even when behind, handled the turns well, and managed their power really effectively over the full four mile course.  By general consensus, Cambridge was the underdog.  Their victory might be due to cohesion and performance as a team, good coxing and use of the current, and (possibly) coaching.  The series now stands at 80-75 in favor of the Tabs [for mathematically gifted readers, yes, that adds to 155 – the 1877 race was a tie].

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