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IRS Announces Forthcoming Section 67(g) Clarifications

IRS Notice 2018-61: Deductibility of Section 67(e) expenses confirmed.

The 2017 Tax Cuts and Jobs Act introduced Internal Revenue Code Section 67(g), which temporarily disallows miscellaneous itemized deductions until Jan. 1, 2026. Some commentators expressed concerns that IRC Section 67(g)’s disallowance of itemized deductions would include certain expenses of trust and estate administration allowed under Section 67(e), while many commentators took the position that Section 67(g) wouldn’t have a bearing on these expenses. On July 13, 2018, the Internal Revenue Service and the Treasury Department issued Notice 2018-61, which confirms that Section 67(e) expenses remain deductible in determining the adjusted gross income of a non-grantor trust or estate during the taxable years to which Section 67(g) applies. The Notice also acknowledges a more complicated issue—whether a beneficiary may deduct Section 67(e) expenses on the termination of a non-grantor trust or estate pursuant to IRC Section 642(h)(2). The IRS and Treasury have announced that they intend to issue regulations pertaining to this issue as well and have requested comments. 

Section 67(e) Expenses Aren’t Miscellaneous Itemized Deductions

Section 67(g) provides that “Notwithstanding subsection (a), no miscellaneous itemized deduction shall be allowed for any taxable year, beginning after December 31, 2017 and before January 1, 2026.”1 Section 67(a) provides that miscellaneous itemized deductions are allowed only to the extent that they exceed a floor of 2 percent AGI. Itemized deductions are defined as those allowable other than: (1) deductions allowable in arriving at AGI, (2) the deduction of personal exemptions under IRC Section 151, and (3) the deduction provided in IRC Section 199A.2 Miscellaneous itemized deductions are those itemized deductions other than those listed in Section 67(b).3 Among those deductions that aren’t listed in Section 67(b) are deductions for costs paid or incurred in the administration of an estate or a non-grantor trust that wouldn’t have been incurred if the property weren’t held in such estate or trust under Section 67(e). These costs can include certain tax preparation fees, appraisal fees and certain fiduciary expenses.4

After the enactment of Section 67(g), some expressed concern as to whether Section 67(g) eliminated the ability of estates and non-grantor trusts to deduct Section 67(e) expenses. The outcome of this question depends on whether these expenses should be categorized as miscellaneous itemized deductions that fall within Section 67(g). Section 67(e) provides that the computation of AGI for estates and non-grantor trusts will generally be computed in the same manner as that of an individual, except that: (1) deductions for costs paid or incurred in connection with the administration of an estate or trust that wouldn’t have been incurred had the property not been held in such estate or trust are allowable, and (2) deductions allowable under Sections 642(b), 651 and 661 are allowable in arriving at AGI. The latter category, as deductions allowable in arriving at AGI, don't fall within the definition of itemized deductions. The uncertainty focuses on the deductibility of Section 67(e)(1) expenses. The ambiguity may have been furthered by the characterization of Section 67(e)—including under Treasury Regulations Section 1.67-4(a)—as “an exception” to the requirement under Section 67(a) that miscellaneous itemized deductions are allowable only to the extent that they exceed the 2 percent AGI floor, suggesting to some commentators that these expenses should be categorized as miscellaneous itemized deductions.

Notice 2018-61 clarifies that characterization of Section 67(e) as miscellaneous itemized deductions subject to temporary disallowance under Section 67(g) is incorrect.5 Rather, Section 67(e) “removes the expenses described in Section 67(e)(1) from the category of itemized deductions (and thus also necessarily from the subset of miscellaneous itemized deductions) and instead treats them as above-the-line deductions allowable in determining [AGI] under Section 62(a).”6 As a result, Section 67(g) doesn’t affect the deductibility of Section 67(e)(1) expenses; however, expenses that are commonly or customarily incurred by an individual would be impacted by 67(g). The proposed regulations will confirm this point, as well as confirm that deductions enumerated in 67(b) are unaffected by 67(g).7

Deductibility of Section 67(e) Expenses on Termination of Trust or Estate

Section 642(h) permits beneficiaries receiving property of a terminating non-grantor trust or estate to deduct unused net operating loss carryovers and unused capital loss carryovers, as well as the trust’s deductions in excess of gross income in its final taxable year, on their individual returns.

As discussed above, Section 63(d) provides that deductions allowable in arriving at AGI aren’t itemized deductions. Unused net operating loss carryovers and capital loss carryovers are allowed in determining AGI,8 so their deductibility remains intact. However, excess deductions under Section 642(h)(2) aren’t allowed in arriving at AGI under Section 62(a) and are itemized deductions that aren’t listed under Section 67(b). Accordingly, as Section 642(h)(2) deductions are miscellaneous itemized deductions, the IRS noted that Section 67(g) “appears” to disallow 642(h)(2) deductions until 2026.9

What’s important to consider regarding the analysis of Section 642(h)(2) is that while the deduction itself under Section 642(h)(2) may not be considered in determining AGI, some of the underlying deductions at the estate or trust level would’ve been considered in determining the estate’s or the trust’s AGI—specifically Section 67(e) expenses may be included in the Section 642(h)(2) excess deduction. The IRS and Treasury are evaluating whether Section 67(e) deductions should be treated as miscellaneous itemized deductions if included as a Section 642(h)(2) excess deduction or whether Section 67(e) expenses should instead be separately analyzed. The IRS has requested comments on the interplay between Sections 67(g) and 642(h)(2).10

In reviewing the legislative history of Section 642(h), the provision was enacted with the aim of avoiding “wasted” deductions by allowing unused loss carryovers and deductions in excess of gross income in the year of termination to the beneficiaries.11 The legislative history of Section 67(g) indicates that the objective underlying the enactment of the provision was targeting miscellaneous itemized deductions subject to the 2 percent of AGI floor.12 While the legislative history of Section 67(g) lists deductions under Section 642(h) as one of the many deductions that would be barred by the implementation of Section 67(g),13 to do so would be to undermine the purpose of both Sections 642(h) and 67(g). Separately analyzing Section 67(e) expenses would be consistent with the purpose underlying both Sections 642(h) and 67(g). It would ensure that a deduction that would be allowed at the estate or trust for Section 67(e) isn’t “wasted” simply because the estate or trust terminates. This issue could be resolved by amending the Treasury Regulations to allow excess deductions on termination to be claimed by carrying out the character of the deductions to the beneficiaries.

Additional Guidance Needed

Notice 2018-61 provides needed and clear guidance regarding the operation of Section 67(g). While additional questions remain outstanding relating to the deductibility of Section 67(e) expenses included as Section 642(h)(2) excess deductions, it’s very encouraging that the IRS is examining this issue further. The forthcoming proposed regulations will bring additional clarity to this area, although practitioners will need to wait for additional guidance following the submission of comments on the treatment of 67(e) expenses on estate or trust termination. Notice 2018-61 may be relied on for taxable years beginning after Dec. 31, 2017 on points relating to the continued deductibility of those deductions enumerated in Sections 67(b) and 67(e).


1. IRC § 67(g) (2012).

2. IRC § 63(d) (2012).

3. IRC § 67(b) (2012).

4. Treas. Regs. § 1.67-4

5. Notice 2018-61.

6. Ibid.  

7. Ibid. at 6.

8. Treas. Regs. §§ 1.642(h)–1(b).

9. Notice 2018-61 at 7.

10. Ibid. at 8.

11. S. Rep. No. 83-1622, at 4714-16 (1954) (Conf. Rep.).

12. H.R. Rep. No. 115-466, at 276 (2017) (Conf. Rep.).

13. Ibid. at 274.

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