Form 1041 investment fees

[oceanlovin'ea]

I am preparing 2018 Form 1041. Client died in March 2017. She had investments that are still in the trust account. The fee for handling the trust account for 2018 was over $4000.00. Is this a deductible expense on the 1041. I've read the instructions and am still confused. I can see that tax preparation fees and accountant fees and fiduciary fees are deductible. Would the investment fees be considered accountant fees?

Thanks

Linda F

[ATSMAN]

There were the misc deductions on Sch A (subject to 2% haircut) that were disallowed for 2018 so I think they are not deductible anymore on 1041 either.

[Burke]

I believe that subsequent information provided by the IRS did allow the fees to be deducted on 1041. The theory being that these expenses are normal administrative expenses to the entity,not itemized deductions. However, there is still no deduction for them as a pass-through item on Schedule A, so nothing is deductible by the heirs/beneficiaries from the final return as an excess deduction pass-through. See IRS Notice 2018-61 and several articles on Google that reference this matter.

[New York Enrolled Agent]

I don't think routine investment expenses qualify for deduction. Abnormal expenses yes, normal expenses no. I think the Notice confirms this.

The Supreme Court ruled in Knight(Trustee) Rudkin (Estate) 552 US 181 (2008). Always read the source document for you own interpretation but here is part of the headnote.

Individuals may subtract from their federal taxable income certain itemized deductions, 26 U. S. C. Sec. 63(d), but only to the extent the deductions exceed 2% of adjusted gross income, Sec. 67(a). A trust may also take such deductions subject to the 2% floor, Sec. 67(e), except that when the relevant cost is "paid or incurred in connection with the administration of the . . . trust" and "would not have been incurred if the property were not held in such trust," the cost may be deducted without regard to the floor, Sec. 67(e)(1). After petitioner Knight (Trustee), the trustee of a testamentary trust (Trust), hired the Warfield firm to advise as to Trust investments, the Trust deducted in full on its fiduciary income tax return the investment advisory fees paid to Warfield. Respondent Commissioner found the fees subject to the 2% floor and therefore allowed the deduction only to the extent the fees exceeded 2% of the Trust's adjusted gross income. The Tax Court decided for the Commissioner, and the Second Circuit affirmed, holding that because such fees were costs of a type that could be incurred if the property were held individually rather than in trust, their deduction by the Trust was subject to the 2% floor.

Held: Investment advisory fees generally are subject to the 2% floor when incurred by a trust. Pp. 5-13.

[Burke]

While this ruling is dated 2008, the IRS Notice 2018-61 pertaining to this issue was published last year after the new Tax Act passed by Congress went into effect, and seems to digress from this treatment. I know there has been a lot of controversy about it.

[New York Enrolled Agent]

While this ruling is dated 2008, the IRS Notice 2018-61 pertaining to this issue was published last year after the new Tax Act passed by Congress went into effect, and seems to digress from this treatment. .

I don't think the Notice overrules the Supreme Court holding. Congress didn't. There are multiple parts in §67 - a snip from the Notice.

Therefore, the suspension of the deductibility of miscellaneous itemized deductions under section 67(a) does not affect the deductibility
of payments described in section 67(e)(1). However, an expense that commonly or customarily would be incurred by an individual (including the appropriate portion of a
bundled fee) is affected by section 67(g) and thus is not deductible to the estate or non grantor trust during the suspension of section 67(a). Nothing in section 67(g) impacts the determination of what expenses are described in section 67(e)(1).

[ATSMAN]

I agree with NY EA. I had one 1041 this year with close to $4200 in investment fees.

[Kram BergGold]

I agree with Atsman, not deductible.

[oceanlovin'ea]

Thank you very much for your help in understanding this issue. I have loved this board so much. It has helped me to do my job better for many years.

Linda F