November 30, 2009
Mr. Jeffrey M. Arre
Internal Revenue Service
Forms and Publications
1111 Constitution Avenue, NW
Washington, DC 20224
RE:
Recommendation Regarding Instructions to Form 4952 (Investment Interest
Expense Deduction) for Estates and Trusts
Dear Mr. Arre:
The American Institute of Certified Public Accountants (AICPA) is submitting comments on
suggested clarifications to the instructions to Form 4952, Investment Interest Expense
Deduction, as it relates to estates and trusts.
The AICPA is the national professional organization of certified public accountants comprised of
approximately 360,000 members. Our members advise clients of federal, state and international
tax matters, and prepare income and other tax returns for millions of Americans. Our members
provide services to individuals, not-for-profit organizations, small and medium-sized business, as
well as America’s largest businesses.
The AICPA suggests a change to the instructions to Form 4952, “Investment Interest Expense
Deduction” with respect to interest expense passed-through to trusts from partnerships
conducting a trade or business of trading in securities for their own account. The instructions to
line 8 of Form 4952, which specify the line on which to carry (i.e., report) the deduction for
investment interest, provide a different treatment for the investment interest related to a security
trading business for trusts and estates than is provided for individual taxpayers. We believe that
the treatment of such interest expense for trusts and estates should be identical to that provided
for individual taxpayers. Our detailed analysis follows.
The instructions to line 8 of Form 4952, when addressing the reporting of investment interest
expense for individual taxpayers, provide that:
“… if any part of the interest is attributable to a trade or business that is not a passive
activity, enter that part on the schedule where you report other expenses for that trade or
business.”
The instructions to line 8 for estates and trusts provide that all investment interest expense should
be reported on line 10 of Form 1041 (e.g., the deductible interest, which is shown on Form 4952,
should be added to all other interest deductible on Line 10, and the total is entered on Line 10).
This treatment appears to apply regardless of whether or not the interest expense is related to a
trade or business. We believe that the treatment for estates and trusts should match that of
Mr. Jeffrey M. Arre
November 30, 2009
Page 2 of 3
individual taxpayers, and investment interest expense for an estate or trust should be reported on
the schedule where the estate or trust reports other expenses for that trade or business.
We recognize that the instructions for Form 4952 have contained this disparate treatment of trade
or business investment interest expense between that of individuals and estates and trusts for a
number of years. This treatment may have had its origin in the fact that estates and trusts do not
generally engage in trade or business activities of their own. However, as investment vehicles
have evolved over the years, we find that many estates and trusts are passive investors in
partnerships engaged in a business of trading securities. In Rev. Rul. 2008-12, the IRS discussed
the fairly unique tax treatment of a noncorporate limited partner’s distributive share of
partnership interest expense incurred in the partnership’s trade or business of trading securities
for its own account in that they are involved in a trade or business, but the interest expense
associated with the trade or business is subject to the investment interest expense limitation to a
partner who does not materially participate in the activity.
Rev. Rul. 2008-38 provides that, in the case of an individual taxpayer, interest paid on debt
allocable to property held for investment, including any interest held by a taxpayer in an activity
involving the conduct of a trade or business that is not a passive activity and with respect to
which the taxpayer does not materially participate, is a trade or business deduction deductible to
arrive at adjusted gross income.
In Announcement 2008-65, the IRS, described the proper tax reporting for interest expense
flowing to investors from security trading partnerships. Specifically, Announcement 2008-65
holds that the interest expense incurred by a securities trading partnership owned by an
individual who does not materially participate in the partnership is subject to the investment
interest expense limitation, but that the allowable investment interest expense is reportable by the
individual on Schedule E.
IRC section 163(d)(5)(A) stipulates two objective tests for “property held for investment,” which
are “(1) property which produces portfolio income under the passive activity loss rule as
described in IRC section 469(e)(1), and (2) any interest in an activity involving the conduct of a
trade or business which is not a passive activity, and with respect to which the taxpayer doesn’t
materially participate.” As indicated in ‘Field Service Advice 200111001, interest expense
attributable to the trading activity of a “trading” partnership is not investment interest under test
(1), since it is generated in the ordinary course of the partnership’s business. For partners who do
not materially participate in the trading activity; however, the interest expense is investment
interest under test (2), because the activity is not treated as passive and the partners did not
materially participate (See Rev Rul. 2008-12, 2008-10 IRB 520, as amplified by Rev Rul. 200838, 2008-31 IRB).
These rulings conclude that by applying the definition of property held for investment in IRC
section 163(d)(5)(A)(ii) (test [2]), a noncorporate limited partner’s (LP’s) distributive share of
interest expense(s) on indebtedness allocable to the partnership’s trade or business of trading
securities for its own account is investment interest for purposes of the investment interest
Mr. Jeffrey M. Arre
November 30, 2009
Page 3 of 3
deduction. These rulings also concluded that the LP’s distributive share of the partnership’s
interest expense that is allowed under section 163(d)(1) is deductible in arriving at the LP’s
adjusted gross income under section 62(a)(1), as a trade or business deduction taken above-theline.
Under IRC section 641(b), the taxable income of an estate or trust is computed in the same
manner as an individual (except as modified by Part I of Subchapter J). Part I of Subchapter J
does not provide for any modifications with respect to the treatment of investment interest
expense for estate and trusts that would cause it to be treated differently from that of individuals.
Given the recent guidance of the IRS (as detailed above) concerning the proper treatment of
interest expense incurred by securities trading partnerships and the increasing importance of
these types of partnerships as investment vehicles for estates and trusts, we recommend that the
instructions for line 8 of Form 4952 prescribe the same treatment for estates and trusts as they do
for individuals.
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We welcome the opportunity to further discuss our comments with you or others at the IRS and
Treasury. Please contact F. Gordon Spoor, Chair of the Trust, Estate, and Gift Tax Technical
Resource Panel, at (727) 343-7166, or fgs@spoorcpa.com; David Boyle, Chair of the Form 4952
Working Group, at (206) 654-7690; or Eileen R. Sherr, AICPA Senior Technical Manager, at
(202) 434-9256, or esherr@aicpa.org.
Sincerely,
Alan R. Einhorn
Chair, AICPA Tax Executive Committee