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even if it is excluded from certain label SUMMARY: This document contains final hearing in response to that notice. On declarations. Finally, we reorganized regulations clarifying that the following August 5, 2020, the Treasury the section detailing our consideration deductions allowed to an estate or non- Department and the IRS published in of allulose as a sugar. grantor trust are not miscellaneous the Federal Register (85 FR 47323) a The guidance announced in this itemized deductions: Costs paid or cancellation of the notice of public notice finalizes the draft guidance with incurred in connection with the hearing. respect to: (1) Our views on the administration of an estate or non- The Treasury Department and the IRS declaration of allulose on Nutrition grantor trust that would not have been received written and electronic Facts and Supplement Facts labels and incurred if the property were not held comments in response to the proposed on the caloric content of allulose; and in the estate or trust, the personal regulations. All comments were (2) our intent to exercise enforcement exemption of an estate or non-grantor considered and are available at discretion for the exclusion of allulose trust, the distribution deduction for www.regulations.gov or upon request. from the amount of Total Sugars and trusts distributing current income, and After full consideration of the comments Added Sugars declared on the label and the distribution deduction for estates received, this Treasury decision adopts use of a general factor of 0.4 kcal/g for and trusts accumulating income. the proposed regulations with allulose when calculating declarations Therefore, these deductions are not modifications described in the on Nutrition and Supplement Facts affected by the suspension of the Summary of Comments and Explanation labels pending review of the issues in a deductibility of miscellaneous itemized of Revisions. rulemaking. deductions for taxable years beginning Summary of Comments and after December 31, 2017, and before II. Paperwork Reduction Act of 1995 Explanation of Revisions January 1, 2026. The final regulations Most of the comments addressing the This guidance contains no collection also provide guidance on determining proposed regulations are summarized in of information. Therefore, clearance by the character, amount, and allocation of this Summary of Comments and the Office of Management and Budget deductions in excess of gross income Explanation of Revisions. Comments (OMB) under the Paperwork Reduction succeeded to by a beneficiary on the merely summarizing or interpreting the Act of 1995 (PRA) (44 U.S.C. 3501– termination of an estate or non-grantor proposed regulations or recommending 3521) is not required. trust. The final regulations affect estates, statutory revisions are not discussed in However, this guidance refers to non-grantor trusts (including the S this preamble. The Treasury Department previously approved FDA collections of portion of an electing small business and the IRS continue to study comments information. These collections of trust), and their beneficiaries. information are subject to review by on issues related to sections 67 and DATES: 642(h) that are beyond the scope of OMB under the PRA. The collections of Effective date: These regulations are these regulations, which may be information in 21 CFR part 101 have effective on October 19, 2020. discussed in future guidance if guidance been approved under OMB control Applicability dates: For dates of on those issues is published. The scope number 0910–0381. applicability, see §§ 1.67–4(d), of the proposed regulations and these II. Electronic Access 1.642(h)–2(f) and 1.642(h)–5(c). regulations is limited to the effect of FOR FURTHER INFORMATION CONTACT: Persons with access to the internet section 67(g) on the deductibility of Margaret Burow at (202) 317–5279 (not certain expenses described in section may obtain the guidance at either a toll-free number). https://www.fda.gov/FoodGuidances or 67(b) and (e) that are incurred by estates SUPPLEMENTARY INFORMATION: https://www.regulations.gov. Use the and non-grantor trusts and the treatment of excess deductions on termination of FDA website listed in the previous Background an estate or trust under section 642(h). sentence to find the most current This document contains amendments version of the guidance. This Summary of Comments and to Income Tax Regulations (26 CFR part Explanation of Revisions also describes Dated: October 9, 2020. 1) under sections 67 and 642 of the each of the final rules contained in this Lauren K. Roth, Internal Revenue Code (Code). On May document. Acting Principal Associate Commissioner for 11, 2020, the Department of Treasury Policy. (Treasury Department) and the IRS A. Section 67 [FR Doc. 2020–22901 Filed 10–16–20; 8:45 am] published a notice of proposed Section 67(g) was added to the Code BILLING CODE 4164–01–P rulemaking (REG–113295–18) in the on December 22, 2017, by section Federal Register (85 FR 27693) 11045(a) of Public Law 115–97, 131 containing proposed regulations under Stat. 2054, 2088 (2017), commonly sections 67 and 642(h) (proposed referred to as the Tax Cuts and Jobs Act DEPARTMENT OF THE TREASURY regulations). The Summary of (TCJA). Section 67(g) prohibits Internal Revenue Service Comments and Explanation of Revisions individual taxpayers from claiming section of this preamble summarizes the miscellaneous itemized deductions for 26 CFR Part 1 provisions of sections 67 and 642(h) and any taxable year beginning after the provisions of the proposed December 31, 2017, and before January [TD 9918] regulations, which are explained in 1, 2026. Prior to the TCJA, greater detail in the preamble to the miscellaneous itemized deductions RIN 1545–BO87 proposed regulations. were allowable for any taxable year only On July 17, 2020, the Treasury to the extent that the sum of such Effect of Section 67(g) on Trusts and Department and the IRS published in deductions exceeded two percent of Estates the Federal Register (85 FR 43512) a adjusted gross income. See section AGENCY: Internal Revenue Service (IRS), notice of public hearing on the proposed 67(a). Section 67(b) defines Treasury. regulations scheduled for August 12, miscellaneous itemized deductions as 2020. The Treasury Department and the itemized deductions other than those ACTION: Final regulations. IRS received no requests to speak at a listed in section 67(b)(1) through (12).

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Section 67(e) provides that, for therefore, these regulations do not likelihood of the QFT beneficiaries purposes of section 67, an estate or trust address the AMT. Further, no being subject to the net investment computes its adjusted gross income in conclusions should be drawn from the income tax. The Treasury Department the same manner as that of an absence of a discussion of the AMT in and the IRS continue to consider these individual, except that the following these regulations regarding the comments but providing an exemption additional deductions are treated as treatment of deductions described in for cemetery and funeral trusts under allowable in arriving at adjusted gross section 67(e) for purposes of section 67(g) is outside the scope of income: (1) The deductions for costs determining the AMT. these regulations. which are paid or incurred in One commenter suggested that the connection with the administration of Treasury Department and the IRS B. Section 642(h) the estate or trust and which would not exercise their regulatory authority under 1. In General have been incurred if the property were section 67(e) to exempt cemetery trusts Section 642(h) provides that if, on the not held in such estate or trust, and (2) under section 642(i) and qualified termination of an estate or trust, the deductions allowable under section funeral trusts (QFTs) under section 685 estate or trust has: (1) A net operating 642(b) (concerning the personal from the application of section 67(g). loss carryover under section 172 or a exemption of an estate or non-grantor The commenter stated that the primary capital loss carryover under section trust), section 651 (concerning the type of expense incurred by these trusts 1212, or (2) for the last taxable year of deduction for trusts distributing current is investment advisory expenses, the tax the estate or trust, deductions (other income), and section 661 (concerning treatment of which differs under the the deduction for estates and trusts Code from management expense. That than the deductions allowed under accumulating income). Accordingly, is, trust management expenses generally section 642(b) (relating to the personal section 67(e) removes the deductions are allowable in computing adjusted exemption) or section 642(c) (relating to described in section 67(e)(1) and (2) gross income under section 67(e)(1), charitable contributions)) in excess of from the definition of itemized while trust investment advisory gross income for such year, then such deductions under section 63(d), and expenses are miscellaneous itemized carryover or excess will be allowed as thus from the definition of deductions. See § 1.67–4(b)(4). The a deduction, in accordance with the miscellaneous itemized deductions commenter asserted that it was not the regulations prescribed by the Secretary under section 67(b), and treats them as intent of Congress to disallow of the Treasury or his delegate deductions allowable in arriving at investment advisory expenses incurred (Secretary), to the beneficiaries adjusted gross income under section by cemetery and funeral trusts when succeeding to the property of the estate 62(a). Section 67(e) further provides Congress enacted section 67(g). or trust. regulatory authority to make appropriate The commenter suggested that Section 1.642(h)–2(a), as articulated adjustments in the application of part I exercising the regulatory authority in the proposed regulations and these of subchapter J of chapter 1 of the Code under section 67(e) in this manner final regulations, provides that if, on to take into account the provisions of would be consistent with the exercise of termination of an estate or trust, the section 67. regulatory authority under section 1411 estate or trust has for its last taxable year The proposed regulations under to exempt section 642(i) cemetery deductions (other than the deductions § 1.67–4 clarify that expenses described perpetual care funds and QFTs. See allowed under section 642(b) or section in section 67(e) remain deductible in § 1.1411–3(b)(1) (providing that certain 642(c)) in excess of gross income, the determining the adjusted gross income types of trusts, including section 642(i) excess deductions are allowed under of an estate or non-grantor trust during cemetery perpetual care funds, are section 642(h)(2) as items of deduction the taxable years in which section 67(g) excepted from the net investment to the beneficiaries succeeding to the applies. Accordingly, section 67(g) does income tax) and § 1.1411–3(b)(2) property of the terminated estate or not deny an estate or non-grantor trust (providing a special rule for QFTs that, trust. (including the S portion of an electing for purposes of calculating any tax 2. Character and Amount of Excess small business trust) a deduction for under section 1411, section 1411 and Deductions expenses described in section 67(e)(1) the regulations thereunder are applied and (2) because such deductions are to each QFT by treating each Section 1.642(h)–2(b)(1) of the allowable in arriving at adjusted gross beneficiary’s interest in the trust as a proposed regulations provides that each income and are not miscellaneous separate trust). As stated in the deduction comprising the excess itemized deductions under section preamble to TD 9644 (78 FR 72393), the deductions under section 642(h)(2) 67(b). Commenters agreed with the Treasury Department and the IRS retains, in the hands of the beneficiary, proposed amendments. These exercised their regulatory authority its character (specifically, as allowable regulations adopt the proposed under section 1411 to exclude cemetery in arriving at adjusted gross income, as regulations under § 1.67–4 without trusts from the net investment income a non-miscellaneous itemized modification. tax because, by benefiting an operating deduction, or as a miscellaneous Two commenters requested that the company, such trusts are considered itemized deduction) while in the estate regulations address the treatment of similar to the business trusts that are or trust. The character of these deductions described in section 67(e)(1) excluded from the operation of section deductions does not change when and (2) in determining an estate or non- 1411. The preamble also states that succeeded to by a beneficiary on grantor trust’s income for alternative QFTs are not excluded from the termination of the estate or trust. minimum tax (AMT) purposes. The application of the net income Furthermore, an item of deduction commenters suggested that such investment tax, but that the section 1411 succeeded to by a beneficiary remains deductions are allowable as deductible tax is calculated consistent with the subject to any limitation applicable in computing the AMT. The treatment taxation of QFTs under chapter 1. The under the Code in the computation of of deductions described in section 67(e) commenter noted that they advocated the beneficiary’s tax liability. for purposes of determining the AMT is the treatment of each beneficiary’s One commenter noted that section outside the scope of these regulations interest in the QFT as a separate trust 642(h) states that excess deductions on concerning the effects of section 67(g); because such treatment reduces the termination of an estate or trust are to

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be ‘‘allowed as a deduction, in deductions retain their character in the 3. Reporting of Excess Deductions accordance with regulations prescribed hands of the beneficiary on termination Section 1.642(h)–2(b)(1) of the by the Secretary’’ and that there is no of the trust, and all applicable proposed regulations provides that an express authority to treat excess limitations apply to all of the item of deduction succeeded to by a deductions as miscellaneous or non- beneficiary’s items of that character, beneficiary remains subject to any miscellaneous itemized deductions (or regardless of their origin. additional applicable limitation under tax preference items for AMT purposes). One commenter noted that, under the Code and must be separately stated The Treasury Department and the IRS § 1.641(c)–1(j), if an electing small if it could be so limited, as provided in disagree with this comment. The business trust (ESBT) election the instructions to Form 1041, U.S. characterization of these excess terminates or is revoked and the S Income Tax Return for Estates and deductions as a single miscellaneous portion has a net operating loss or Trusts, and the Schedule K–1 (Form itemized deduction in the current capital loss carryover or deductions in 1041), Beneficiary’s Share of Income, regulations was made before the excess of gross income, then any such Deductions, Credit, etc. Commenters enactment of section 67(g) and served as loss, carryover or excess deductions are requested that the Treasury Department an administrative convenience. Making allowed as a deduction, in accordance and the IRS provide guidance on how a change to that characterization is now with the regulations under section the excess deductions are to be reported appropriate to reflect the temporary 642(h), to the trust or to the by both the terminated estate or trust disallowance of miscellaneous itemized beneficiaries succeeding to the property and by its beneficiaries. The Treasury deductions under section 67(g) since the of the trust if the entire trust terminates. Department and the IRS released regulations were written and is a proper However, the commenter also noted that instructions for beneficiaries that chose exercise of the Secretary’s specific grant under the TCJA, section 641(c)(2)(E) was to claim excess deductions on Form of regulatory authority in section 642(h). amended to provide that ESBT 1040 in the 2019 or 2018 taxable year Another commenter requested that charitable contributions are deductible based on the proposed regulations. In non-miscellaneous itemized deductions under section 170, rather than under addition, the Treasury Department and included in excess deductions be fully section 642(c), so that, unlike other trust the IRS plan to update the instructions deductible by the beneficiary and not charitable deductions, an ESBT’s for Form 1041, Schedule K–1 (Form subject to a second level of limitation charitable deduction could constitute 1041), and Form 1040, U.S. Individual applicable on the beneficiary’s return, part of the excess deductions on Income Tax Return, for the 2020 and because the amounts already would termination of the trust. The commenter subsequent tax years to provide for the have been subject to limitation on the stated that neither the legislative history reporting of excess deductions that are return of the estate or trust. The nor the explanation of the staff of the section 67(e) expenses or non- commenter provided an example of a Joint Committee on Taxation addressed miscellaneous itemized deductions. terminated trust that paid $25,000 of whether this result was intended. The The Treasury Department and the IRS state income tax, for which the trust is Treasury Department and the IRS note are aware that the income tax laws of limited to a $10,000 deduction under that charitable contribution deductions some U.S. states do not conform to the section 164(b)(6)(B) for taxable years under both sections 170 and 642(c) are Code with respect to section 67(g), such beginning after December 31, 2017, and non-miscellaneous itemized deductions that beneficiaries may need information before January 1, 2026. In the under sections 63(d) and 67(b)(4) to the on miscellaneous itemized deductions commenter’s example, the entire estate or trust and maintain that such of a terminated estate or trust. However, amount of the allowable $10,000 character is retained in the hands of the because miscellaneous itemized deduction was passed through to the beneficiary in these regulations. deductions are currently not allowed for beneficiary as an excess deduction on Although the Treasury Department and Federal income tax purposes, that termination of the trust. The excess of the IRS continue to consider the information is not needed for Federal state income tax over the $10,000 application of section 170 to ESBT income tax purposes. Therefore, it limitation ($15,000) would not pass charitable contributions under section would not be appropriate to modify through as an excess deduction to the 641(c)(2)(E), this issue is outside the Federal income tax forms to require or beneficiaries in this circumstance scope of these regulations. accommodate the collection of such because the excess amount was not Another commenter requested information while this deduction is deductible to the trust. Excess state clarification of whether an excess suspended. Estates, trusts, and income tax on termination of the estate deduction on termination of a trust or beneficiaries are advised to consult the or trust may, however, pass through to estate that is allowed in determining the relevant state taxing authority for a beneficiary if the estate or trust had net investment income under section information about deducting insufficient income to absorb the entire 1411 of the estate or trust remains miscellaneous itemized expenses on $10,000 of state income tax deduction. deductible in the hands of the their state tax returns. In that circumstance, the commenter beneficiary in determining the net opined that the limitation under section investment income of the beneficiary 4. Determinations of Deductions in Year 164(b)(6)(B), having already been under section 1411. These final of Termination of the Trust applied at the trust level, should not regulations provide that each excess Section 1.642(h)–2(b)(2) of the again be applied at the beneficiary level. deduction retains its separate character proposed regulations provides that the The Treasury Department and the IRS as a section 67(e) deduction, non- provisions of § 1.652(b)–3 are used to carefully considered the comment but miscellaneous itemized deduction, or allocate each item of deduction among determined that beneficiaries remain miscellaneous itemized deduction in the classes of income in the year of subject to the limitation in section the hands of the beneficiary. Whether a termination for purposes of determining 164(b)(6)(B). The Treasury Department deduction retains its character as the character and amount of the excess and the IRS found no authority to allowable in computing the net deductions under section 642(h)(2). exempt such items from the application investment income of the beneficiary, Accordingly, the amount of each of any limitations applicable to the however, is outside the scope of these separate deduction remaining after beneficiary under the Code. The excess regulations. application of § 1.652(b)–3 comprises

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the excess deductions available to the deductions, as deductions that are beneficiary succeeds to under section beneficiaries succeeding to the property attributable to the beneficiary’s trade or 642(h)(1) for net operating losses arising of the estate or trust as provided under business and thus deductions in taxable years beginning after section 642(h)(2). In addition, as attributable to a trade or business under December 31, 2017, and before January previously explained, an item of section 172(d)(4). Section 642(h) makes 1, 2021. Under section 2303 of the deduction succeeded to by a beneficiary it clear that a net operating loss CARES Act, net operating losses arising remains subject to any additional carryover under paragraph (1) of that in taxable years beginning after applicable limitation under the Code. section is separate and distinct from the December 31, 2017, and before January Furthermore, § 1.642(h)–2(c) of the excess deductions on termination 1, 2021, generally may be carried back proposed regulations provides that described in paragraph (2) of that five years before being carried forward. excess deductions are allowable only in section. Furthermore, § 1.642(h)–2(d) One of these commenters further the taxable year of the beneficiary in provides that a deduction based upon a requested confirmation that a which or with which the estate or trust net operating loss carryover generally beneficiary is allowed a carryback of the terminates. That is, excess deductions of will not be allowed to beneficiaries net operating loss under section a terminated estate or trust may not under both paragraphs (1) and (2) of 642(h)(1) for net operating losses of an carry over to a subsequent year of the section 642(h). Therefore, an excess estate or trust arising in taxable years beneficiary. deduction allowable to the beneficiary ending before January 1, 2018, to the One commenter requested that these under section 642(h)(2) is not a net extent the beneficiary succeeds to a net regulations provide an ordering rule operating loss carryover succeeded to by operating loss carryover attributable to clarifying whether excess deductions on the beneficiary under section 642(h)(1) those net operating losses on a termination of a trust allowed as a and (with one exception) a net operating termination of the estate or trust deduction to the beneficiary are claimed loss carryover is not an excess between January 1, 2018, and December before, after, or ratably with the deduction on termination. Moreover, 31, 2020. beneficiary’s other deductions, these regulations provide that it is the Unless otherwise provided under the particularly when the amount of the character of the excess deductions as Code, a net operating loss incurred by excess deductions and other deductions section 67(e) deductions, non- a taxpayer may only be used as a exceed the beneficiary’s gross income. miscellaneous itemized deductions, and deduction by that taxpayer and cannot These final regulations clarify that miscellaneous itemized deductions, and be transferred to another taxpayer for beneficiaries may claim all or part of the not the character of a deduction as use by that other taxpayer. Calvin v. excess deductions under section attributable to a trade or business, that U.S. 354 F.2d 202 (10th Cir. 1965), 642(h)(2) before, after, or together with is retained in the hands of the Mellott v. U.S., 257 F.2d 798 (3d Cir. the same character of deductions beneficiary. Thus, whether section 1958). As an exception to this general separately allowable to the beneficiary 642(h)(2) excess deductions that are principle, section 642(h) provides that under the Code. section 67(e) deductions may be if, on termination of an estate or trust, That commenter also requested that included in a beneficiary’s net operating the estate or trust has a net operating the final regulations include an loss carryovers under section 172, loss carryover under section 172, then exception for investment interest separate from those it succeeds to from such carryover is allowed as a expense under section 163(d) from the a terminated estate or trust, is beyond deduction, in accordance with the general rule that excess deductions on the scope of these regulations. Because regulations prescribed by the Secretary, termination of a trust or estate may be § 1.642(h)–2(a) is clear that excess to the beneficiaries succeeding to the claimed only in the beneficiary’s taxable deductions on termination of an estate property of the estate or trust. Section year during which the trust or estate or trust are not carried over to future 1.642(h)–1(a) provides that if, on the terminated. That section permits the years and that such deductions are termination of an estate or trust, a net carryforward of investment interest separate from a net operating loss operating loss carryover under section under section 163(d)(2) to the taxpayer’s carryover from the estate or trust, the 172 would be allowable to the estate or subsequent taxable years if the taxpayer Treasury Department and the IRS do not trust in a taxable year subsequent to the is unable to deduct the investment adopt this comment. taxable year of termination but for the interest in the current taxable year. The termination, a carryover is allowed commenter stated that the disallowance 6. Example 1 under section 642(h)(1) to the of the carryover of section 642(h)(2) Section 1.642(h)–5(a), Example 1, of beneficiaries succeeding to the property excess deductions should not apply to the proposed regulations (Example 1) of the estate or trust. In addition, those excess deductions that are no updates an existing example illustrating § 1.642(h)–1(b) provides that the first longer treated as miscellaneous itemized computations under section 642(h) taxable year of the beneficiary to which deductions under the proposed when there is a net operating loss. the net operating loss will be carried regulations, and that carryover should Section 1.642–5(a)(2)(ii) of Example 1 over is the taxable year of the be permitted to the extent otherwise explains that the beneficiaries of the beneficiary in which or with which the permitted under the Code. The trust cannot carry back any of the net estate or trust terminates. preamble to the proposed regulations operating loss of the terminating estate Section 642(h)(1) provides a specific states that addressing suspended that was made available to them under rule that allows the beneficiary to deductions under section 163(d) is section 642(h)(1). succeed to a net operating loss carryover beyond the scope of the regulations and Two commenters requested that of the estate or trust and deduct the the same is true of these final Example 1 be revised to take into amount of the net operating loss over regulations. account the amendments to section the remaining carryover period that A commenter requested that the 172(b)(1)(D) under sec. 2302(b) of the would have been allowable to the estate amount of a beneficiary’s net operating Coronavirus Aid, Relief, and Economic or trust but for the termination of the loss carryover to a later taxable year Security Act, Public Law 116–136, 134 estate or trust. The phrase in section under section 172 should include all of Stat. 281 (2020) (CARES Act), by 642(h)(1) ‘‘the estate or trust has a net the beneficiary’s section 642(h)(2) allowing a beneficiary to carry back the operating loss carryover’ ’’ means that excess deductions that are section 67(e) net operating loss carryover the the estate or trust incurred a net

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operating loss and either already carried characterizes the rental real estate taxes termination of an estate as a it back to the earliest allowable year as itemized deductions. These miscellaneous itemized deduction was under section 172 or elected to waive commenters asserted that real estate in error. As an example, the commenter the carryback period under section taxes on property held for the argues that the current regulations 172(b)(3), and now is limited to carrying production of rental income are not mistakenly describe section 67(e) over the remaining net operating loss. itemized deductions but instead are expenses as an exception to the rules Accordingly, because the net operating allowed in computing gross income and applicable to miscellaneous itemized loss is a carryover for the estate or trust, cited to section 62(a)(4) as providing deductions, and therefore requested that the beneficiary succeeding to that net that ordinary and necessary expenses the final regulations be applicable to all operating loss may, under section paid or incurred during the taxable year open years. The Treasury Department 642(h)(1), only carry it forward. for the management, conservation, or and the IRS have the authority to treat The CARES Act amendments to maintenance of property held for the an excess deduction on termination of section 172(b) mentioned by the production of income under section an estate or trust as a single commenters allow taxpayers a five-year 212(2) that are attributable to property miscellaneous itemized deduction. See carryback of certain net operating losses held for the production of rents are section 642(h). The suspension under incurred by that taxpayer. The CARES deductible as above-the-line deductions section 67(g) of miscellaneous itemized Act amendments do not change the in arriving at adjusted gross income. deductions caused the Treasury result that a beneficiary succeeding to One commenter suggested that, if the Department and the IRS to reconsider the net operating loss carryover of a goal of Example 2 is to illustrate state the treatment of excess deductions terminated estate or trust may only and local taxes passing through to the under section 642(h)(2) because the carryover that net operating loss in the beneficiary, then the example should Treasury Department and the IRS do not same manner as the terminated estate or include state income taxes rather than interpret section 67(g) as suspending trust, but for the termination. real estate taxes on rental real estate. such deductions allowable under Consequently, the Treasury Department The Treasury Department and the IRS section 642(h)(2). The Treasury and the IRS do not adopt these have revised this example in the final Department and the IRS interpret comments and add a citation to regulations to include personal property section 67(g) as not disallowing excess § 1.642(h)–1 to reference the rule that a tax paid by the trust rather than taxes deductions succeeded to beneficiaries beneficiary that succeeds to a net attributable to rental real estate. from terminated estates and trusts under operating loss carryover of a terminated Lastly, commenters noted that section 642(h)(2). Therefore, taxpayers estate or trust may only carry forward Example 2 does not demonstrate the may rely on these regulations as of the the net operating loss. broad range of trustee discretion in effective date of section 67(g), but not § 1.652(b)–3(b) and (d) for deductions 7. Example 2 for earlier periods. that are not directly attributable to a The final regulations apply to taxable Section § 1.642(h)–5(b), Example 2, of class of income, or deductions that are, years beginning after October 19, 2020. the proposed regulations (Example 2) but which exceed such class of income, Pursuant to section 7805(b)(7), demonstrates computations under respectively. In response to these taxpayers may choose to apply the section 642(h)(2). The expenses in comments, the Treasury Department amendments to § 1.67–4 and Example 2 include rental real estate and the IRS have modified Example 2 to §§ 1.642(h)–2 and 1.642(h)–5 set forth taxes in an attempt to illustrate a illustrate the application of trustee in this Treasury decision to taxable deduction subject to limitation under discretion as found in § 1.652(b)–3(b) years beginning after December 31, section 164(b)(6) to the beneficiary that and (d). 2017, and on or before October 19, 2020. must be separately stated as provided in § 1.642(h)–2(b)(1). C. Applicability Dates Special Analysis Multiple commenters noted that The proposed regulations provide that These regulations are not subject to Example 2 raises several issues that the changes to §§ 1.67–4, 1.642(h)–2, review under section 6(b) of Executive could be potentially relevant to that and 1.642(h)–5 apply to taxable years Order 12866 pursuant to the example, such as whether the decedent beginning after the date the regulations Memorandum of Agreement (April 11, was in a trade or business and the are published as final. The preamble to 2018) between the Treasury Department application of section 469 to estates and the proposed regulations explains that and the Office of Management and trusts. To avoid these issues, which are estates, non-grantor trusts, and their Budget regarding review of tax extraneous to the point being illustrated, beneficiaries may rely on the proposed regulations. Therefore, a regulatory one commenter suggested that the regulations under section 67 for taxable impact assessment is not required. example be revised so that the entire years beginning after December 31, Pursuant to the Regulatory Flexibility amount of real estate expenses on rental 2017, and on or before the date these Act (5 U.S.C. chapter 6), it is hereby property equals the amount of rental regulations are published as final. certified that these regulations will not income. The Treasury Department and Taxpayers may also rely on the have a significant economic impact on the IRS did not intend to raise such proposed regulations under section a substantial number of small entities. issues in the example and consider both 642(h) for taxable years of beneficiaries This certification is based on the fact issues to be outside the scope of these beginning after December 31, 2017, and that the amount of time necessary to regulations. Accordingly, the Treasury on or before the date the regulations are report the required information will be Department and the IRS adopt the published as final, in which an estate or minimal in that it requires fiduciaries of suggestion by the commenter and trust terminates. estates and trusts to provide on the modify Example 2 to avoid these issues One commenter requested that Schedule K–1 (Form 1041) issued to by having rental real estate expenses § 1.642(h)–2 of the proposed regulations beneficiaries information that is already entirely offset rental income with no be applied retroactively not only to maintained and reported to the IRS on unused deduction. taxable years beginning after December Form 1041. Moreover, it should take an Commenters also noted that Example 31, 2017, but to all open years. The estate or trust no more than 2 hours to 2 does not properly allocate rental real commenter asserted that the existing satisfy the information requirement in estate expenses because the example regulation treating excess deductions on these regulations. Accordingly, the

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Secretary certifies that the rule will not 5 in numerical order to read in part as ■ Par. 3. Section 1.642(h)–2 is amended have a significant economic impact on follows: by: ■ a substantial number of small entities. Authority: 26 U.S.C. 7805 * * * 1. Revising paragraph (a). ■ Pursuant to section 7805(f) of the Section 1.67–4 also issued under 26 U.S.C. 2. Redesignating paragraph (b) as Code, the notice of proposed rulemaking 67(e). paragraph (d) and adding a heading for that preceded these regulations was newly redesignated paragraph (d). * * * * * ■ submitted to the Chief Counsel for the Section 1.642(h)–2 also issued under 26 3. Redesignating paragraph (c) as Office of Advocacy of the Small U.S.C. 642(h). paragraph (e) and adding a heading for Business Administration for comment Section 1.642(h)–5 also issued under 26 newly redesignated paragraph (e). on its impact on small businesses, and U.S.C. 642(h). ■ 4. Adding new paragraphs (b) and (c) no comments were received. * * * * * and paragraph (f). The revisions and additions read as Paperwork Reduction Act (PRA) ■ Par. 2. Section 1.67–4 is amended by follows: The collection of information related revising paragraph (a) and the heading of paragraph (d) and adding two § 1.642(h)–2 Excess deductions on to these regulations under section termination of an estate or trust. 642(h) is reported on Schedule K–1 sentences to the end of paragraph (d) to read as follows: (a) Excess deductions—(1) In general. (Form 1041), Beneficiary’s Share of If, on the termination of an estate or Income, Deductions, Credits, etc., and § 1.67–4 Costs paid or incurred by estates trust, the estate or trust has for its last has been reviewed in accordance with or non-grantor trusts. taxable year deductions (other than the the Paperwork Reduction Act (44 U.S.C. (a) Deductions—(1) Section 67(e) deductions allowed under section 3507) and approved by the Office of deductions—(i) In general. An estate or 642(b) (relating to the personal Management and Budget under control trust (including the S portion of an exemption) or section 642(c) (relating to number 1545–0092. electing small business trust) not charitable contributions)) in excess of The collection of information in these described in § 1.67–2T(g)(1)(i) (a non- gross income, the excess deductions as regulations is in § 1.642(h)–2(b)(1). The grantor trust) must compute its adjusted determined under paragraph (b) of this IRS requires this information to ensure gross income in the same manner as an section are allowed under section that excess deductions on an estate’s or individual, except that the following 642(h)(2) as items of deduction to the trust’s termination that are subject to deductions (section 67(e) deductions) beneficiaries succeeding to the property additional applicable limitations retain are allowed in arriving at adjusted gross of the estate or trust. their character when taken into account income: (2) Treatment by beneficiary. A by beneficiaries on their returns. The (A) Costs that are paid or incurred in beneficiary may claim all or part of the respondents will be estates, trusts, and amount of the deductions provided for their fiduciaries. connection with the administration of the estate or trust that would not have in paragraph (a) of this section, as An agency may not conduct or determined after application of sponsor, and a person is not required to been incurred if the property were not held in such estate or trust; and paragraph (b) of this section, before, respond to, a collection of information after, or together with the same unless it displays a valid control (B) Deductions allowable under section 642(b) (relating to the personal character of deductions separately number assigned by the Office of allowable to the beneficiary under the Management and Budget. Books or exemption) and sections 651 and 661 (relating to distributions). Internal Revenue Code for the records relating to a collection of beneficiary’s taxable year during which (ii) Not disallowed under section information must be retained as long as the estate or trust terminated as 67(g). Section 67(e) deductions are not their contents may become material in provided in paragraph (c) of this itemized deductions under section 63(d) the administration of any internal section. revenue law. Generally, tax returns and and are not miscellaneous itemized (b) Character and amount of excess tax return information are confidential, deductions under section 67(b). deductions—(1) Character. The as required by section 6103. Therefore, section 67(e) deductions are character and amount of the excess not disallowed under section 67(g). Drafting Information deductions on termination of an estate (2) Deductions subject to 2-percent or trust will be determined as provided The principal author of these floor. A cost is not a section 67(e) in this paragraph (b). Each deduction regulations is Margaret Burow of the deduction and thus is subject to both comprising the excess deductions under Office of Associate Chief Counsel the 2-percent floor in section 67(a) and section 642(h)(2) retains, in the hands of (Passthroughs and Special Industries). section 67(g) to the extent that it is the beneficiary, its character Other personnel from the Treasury included in the definition of (specifically, as allowable in arriving at Department and the IRS, however, miscellaneous itemized deductions adjusted gross income, as a non- participated in their development. under section 67(b), is incurred by an miscellaneous itemized deduction, or as List of Subjects in 26 CFR Part 1 estate or non-grantor trust (including the a miscellaneous itemized deduction) S portion of an electing small business while in the estate or trust. An item of Income taxes, Reporting and trust), and commonly or customarily deduction succeeded to by a beneficiary recordkeeping requirements. would be incurred by a hypothetical remains subject to any additional Amendments to the Regulations individual holding the same property. applicable limitation under the Internal * * * * * Accordingly, 26 CFR part 1 is Revenue Code and must be separately amended as follows: (d) Applicability date. *** stated if it could be so limited, as Paragraph (a) of this section applies to provided in the instructions to Form PART 1—INCOME TAXES taxable years beginning after October 19, 1041, U.S. Income Tax Return for 2020. Taxpayers may choose to apply Estates and Trusts, and the Schedule K– ■ Paragraph 1. The authority citation paragraph (a) of this section to taxable 1 (Form 1041), Beneficiary’s Share of for part 1 is amended by adding entries years beginning after December 31, Income, Deductions, Credit, etc., or for §§ 1.67–4, 1.642(h)–2, and 1.642(h)– 2017, and on or before October 19, 2020. successor forms.

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(2) Amount. The amount of the excess is of normal duration or is a short CFR part 1 revised as of April 1, 2020). deductions in the final year is taxable year. Taxpayers may choose to apply determined as follows: (2) Example. Assume that a trust paragraphs (a) through (c) of this section (i) Each deduction directly distributes all its assets to B and to taxable years beginning after attributable to a class of income is terminates on December 31, Year X. As December 31, 2017, and on or before allocated in accordance with the of that date, it has excess deductions of October 19, 2020. $18,000, all characterized as allowable provisions in § 1.652(b)–3(a); ■ in arriving at adjusted gross income Par. 4. Section 1.642(h)–5 is revised to (ii) To the extent of any remaining read as follows: income after application of paragraph under section 67(e). B, who reports on (b)(2)(i) of this section, deductions are the calendar year basis, could claim the § 1.642(h)–5 Examples. $18,000 as a deduction allowable in allocated in accordance with the Paragraphs (a) and (b) of this section provisions in § 1.652(b)–3(b) and (d); arriving at B’s adjusted gross income for Year X. However, if the deduction (Examples 1 and 2) illustrate the and (when added to other allowable application of section 642(h). (iii) Deductions remaining after the deductions that B claims for the year) (a) Example 1: Computations under application of paragraph (b)(2)(i) and (ii) exceeds B’s gross income, the excess section 642(h) when an estate has a net of this section comprise the excess may not be carried over to any year operating loss—(1) Facts. On January deductions on termination of the estate subsequent to Year X. 31, 2020, A dies leaving a will that or trust. These deductions are allocated (d) Net operating loss carryovers. provides for the distribution of all of A’s to the beneficiaries succeeding to the *** estate equally to B and an existing trust property of the estate of or trust in (e) Items included in net operating for C. The period of administration of accordance with § 1.642(h)–4. loss or capital loss carryovers. *** the estate terminates on December 31, (c) Year of termination—(1) In (f) Applicability date. Paragraphs (a) 2020, at which time all the property of general. The deductions provided for in through (c) of this section apply to the estate is distributed to B and the paragraph (a) of this section are taxable years beginning after October 19, trust. For tax purposes, B and the trust allowable only in the taxable year of the 2020. The rules applicable to taxable report income on a calendar year basis. beneficiary in which or with which the years beginning on or before October 19, During the period of administration, the estate or trust terminates, whether the 2020 are contained in § 1.642(h)-2 as in estate has the following items of income year of termination of the estate or trust effect prior to October 19, 2020 (see 26 and deductions:

TABLE 1 TO PARAGRAPH (a)(1)

Income: Taxable interest ...... $2,500 Business income ...... 3,000

Total income ...... 5,500

TABLE 2 TO PARAGRAPH (a)(1)

Deductions: Business expenses (including administrative expense allocable to business income) ...... 5,000 Administrative expenses not allocable to business income that would not have been incurred if property had not been held in a trust or estate (section 67(e) deductions) ...... 9,800

Total deductions ...... 14,800

(2) Computation of net operating loss. (i) The amount of the net operating loss carryover is computed as follows:

TABLE 3 TO PARAGRAPH (a)(2)(i)

Gross income ...... $5,500 Total deductions ...... 14,800 Less adjustment under section 172(d)(4) (allowable non-business expenses ($9,800) limited to non-business income ($2,500)) ...... 7,300

Deductions as adjusted ...... 7,500

Net operating loss ...... 2,000

(ii) Under section 642(h)(1), B and the operating loss carryover to B and the estate made available to them under trust are each allocated $1,000 of the trust determined under section 172. section 642(h)(1). See § 1.642(h)–1(b). $2,000 unused net operating loss Neither B nor the trust can carry back (3) Section 642(h)(2) excess carryover of the terminated estate in any of the net operating loss of A’s deductions. The $7,300 of non-business 2020, with the allowance of any net deductions not taken into account in

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determining the net operating loss of the based on B’s and the trust’s respective benefit from the carryover and excess estate are excess deductions on shares of the burden of each cost. deductions. (4) Consequences for C. The net termination of the estate under section (b) Example 2: Computations under operating loss carryover and excess 642(h)(2). Under § 1.642(h)–2(b)(1), section 642(h)(2)—(1) Facts. D dies in deductions are not allowable directly to such deductions retain their character as 2019 leaving an estate of which the section 67(e) deductions. Under C, the trust beneficiary. To the extent the distributable net income of the trust residuary legatees are E (75%) and F § 1.642(h)–4, B and the trust each are (25%). The estate’s income and allocated $3,650 of excess deductions is reduced by the net operating loss carryover and excess deductions, deductions in its final year are as however, C may receive an indirect follows:

TABLE 4 TO PARAGRAPH (b)(1)

Income: Dividends ...... $3,000 Taxable Interest ...... 500 Rent ...... 2,000 Capital Gain ...... 1,000

Total Income ...... 6,500

TABLE 5 TO PARAGRAPH (b)(1)

Deductions: Section 62(a)(4) deductions: Rental real estate expenses ...... 2,000 Section 67(e) deductions: Probate fees ...... 1,500 Estate tax preparation fees ...... 8,000 Legal fees ...... 2,500

Total Section 67(e) deductions ...... 12,000 Non-miscellaneous itemized deductions: Personal property taxes ...... 3,500

Total deductions ...... 17,500

(2) Determination of character. termination of the estate would be DEPARTMENT OF JUSTICE Pursuant to § 1.642(h)–2(b)(2), the $11,000, consisting of $7,500 of section character and amount of the excess 67(e) deductions and $3,500 of personal Bureau of Prisons deductions is determined by allocating property taxes. The non-miscellaneous the deductions among the estate’s items itemized deduction for personal 28 CFR Part 541 of income as provided under § 1.652(b)– property taxes may be subject to 3. Under § 1.652(b)–3(a), the $2,000 of limitation on the returns of both B and [Docket No. BOP–1172–F] rental real estate expenses is allocated to C’s trust under section 164(b)(6)(B) and the $2,000 of rental income. In the would have to be separately stated as RIN 1120–AB72 exercise of the executor’s discretion provided in § 1.642(h)–2(b)(1). pursuant to § 1.652(b)–3(b), D’s Inmate Discipline Program: New executor allocates $3,500 of personal (c) Applicability date. This section is Prohibited Act Code for Pressuring property taxes and $1,000 of section applicable to taxable years beginning Inmates for Legal Documents. 67(e) deductions to the remaining after October 19, 2020. Taxpayers may AGENCY: Bureau of Prisons, Department income. As a result, the excess choose to apply this section to taxable of Justice. deductions on termination of the estate years beginning after December 31, are $11,000, all consisting of section 2017, and on or before October 19, 2020. ACTION: Final rule. 67(e) deductions. SUMMARY: In this document, the Bureau (3) Allocations among beneficiaries. Sunita Lough, of Prisons (Bureau) adds a new code to Pursuant to § 1.642(h)–4, the excess Deputy Commissioner for Services and the list of prohibited act codes in the deductions are allocated in accordance Enforcement. inmate discipline regulations which with E’s (75 percent) and F’s (25 Approved: September 16, 2020. will clarify that the Bureau may percent) interests in the residuary estate. David J. Kautter, discipline inmates for pressuring or E’s share of the excess deductions is Assistant Secretary of the Treasury (Tax otherwise intimidating other inmates $8,250, all consisting of section 67(e) Policy). into producing copies of their own legal deductions. F’s share of the excess [FR Doc. 2020–21162 Filed 10–16–20; 8:45 am] documents, such as pre-sentence reports deductions is $2,750, also all consisting BILLING CODE 4830–01–P (PSRs), or statement of reasons (SORs). of section 67(e) deductions. (4) Separate statement. If the executor DATES: This rule is effective November instead allocated $4,500 of section 67(e) 18, 2020. deductions to the remaining income of FOR FURTHER INFORMATION CONTACT: the estate, the excess deductions on Sarah N. Qureshi, Rules Unit, Office of

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