September 24, 2008
The Honorable Douglas Shulman
Commissioner
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, D.C. 20224
The Honorable Donald Korb
Chief Counsel
Internal Revenue Service
1111 Constitution Ave., N.W.
Washington, D.C. 20224
HAND DELIVERED: Courier’s Desk, CC:PA:LPD:PR (REG-115457-08)
RE:
Proposed and Temporary Regulations (REG-115457-08) Regarding Simplification of
Procedures for Automatic Extensions of Time to File Certain Returns – Form 1041 for
Fiduciary Returns Should Remain at Current 10/15 Extended Filing Deadline
Dear Messrs. Shulman and Korb:
The American Institute of Certified Public Accountants (AICPA) is submitting comments on
proposed and temporary regulations relating to simplification of procedures for automatic extensions
of time to file certain returns. The proposed and temporary regulations will reduce the extended
filing period for most partnerships, as well as estates and trusts.
As we indicated in our letter dated January 24, 20081, the AICPA generally supports limiting the
extension of the due date for partnership returns to five months. However, our prior letter and
comments did not consider the issue of the proper extended due date for fiduciary returns because
we were primarily focusing on the filing problems created for individuals who are partners in
partnerships. We believe that the extension period for fiduciary returns (i.e., Form 1041 for trusts
and estates) should remain at six months, rather than being reduced to five months as set forth in the
temporary regulations applicable to all returns which are due after January 1, 2009 (Temp. Reg. Sec.
1.6081-6T(a)(1)).
As further discussed in our letter, we believe trusts should continue with a 10/15 extended due date
because, based on the extensive experience of our members:
1. Trusts and estates generally do not extend the due date unless there are situations beyond
their control.
2. Trusts and estates, like individuals, are partners in partnerships or shareholders in subchapter
S corporations.
3. There are new filing burdens for certain types of trusts and estates if they have the same
extended due date as subchapter S corporations.
4. Often it is the same preparer for the trust or estate and the beneficiaries receiving the Form
1041 Schedules K-1.
5. Trusts and estates generally have only a few beneficiaries, and only if there is a distribution
is a Schedule K-1 needed by a beneficiary; otherwise the trust is taxed as a separate taxpayer.
1
See http://tax.aicpa.org/Resources/Partnerships/Regulation+and+Administration/ AICPA+Calls+for+K1+Due+Date+of+September+15.htm.
Messrs. Shulman and Korb
September 24, 2008
Page 2 of 5
6. Amended returns for trusts and estates and beneficiaries may increase if the extended due
date is 9/15.
Trusts and Estates Generally Do Not Extend Unless Situations Beyond Their Control
Based on our members’ experience as return preparers for thousands of trusts and estates, fiduciaries
for most trusts and estates generally do not seek an extension of time to file Form 1041 unless there
is a reason, usually beyond their control, that makes filing by normal due date impractical. Because
of their fiduciary duties, as a matter of policy and practice, fiduciaries (i.e., trustees and executors)
generally make the reporting of tax information a high priority. Many financial institutions and
other corporate entities serve as fiduciaries and, as a result, have internal deadlines for reporting
information that is prior to the original filing deadlines. As a matter of internal policy, most
fiduciaries that do extend the due date for filing Form 1041 do so for reasons that are beyond their
control (e.g., litigation, difficulties of administration, waiting for Schedules K-1 from their
investments).
Trusts and Estates, Like Individuals, are Partners in Partnerships or Shareholders in
Subchapter S Corporations
It has been our members’ experience that if a Form 1041 is extended, it is often because just like
individuals, estates and trusts are partners in partnerships (including hedge funds, private equity
funds, and funds of funds) or are shareholders in subchapter S corporations. These partners or
shareholders, irrespective of whether they are individuals, trusts, or estates, cannot complete their
own tax returns until they receive the Schedules K-1 from the various partnerships or subchapter S
corporations in which they have invested, and, as the proposed regulations recognized for
individuals, these parties need a month to prepare their returns.
In many instances, our members report that they were waiting for Schedules K-1 for both their
individual clients and their trust and estate clients from the exact same partnerships. They often had
to wait for partnership Schedules K-1 to be completed in order to be able to prepare both the Form
1041s for the entity and the Form 1040 for the individual beneficary. Conversely, in order to
prepare the individual tax returns, it was rare that delays were caused because the beneficiaries were
waiting for Schedules K-1 from trusts or estates when no partnerships or other extenuating
circumstances were involved.
There are New Filing Burdens for Certain Types of Trusts and Estates if They Have the Same
Extended Due Date as Subchapter S Corporations
In addition, the proposed and temporary regulations will create an additional conflict that did not
exist before for trusts (such as grantor trusts, qualified subchapter S trusts, and electing small
business trusts) and estates that are owners of stock in subchapter S corporations. The extended due
date for returns of subchapter S corporations is September 15. In the past, trusts and estates that
were shareholders in a subchapter S corporation had at least 30 days after receiving their subchapter
S corporation Schedules K-1 before the extended due date of their own returns. Under the proposed
change, the extended due date for trust and estate returns becomes September 15 as well. As a
Messrs. Shulman and Korb
September 24, 2008
Page 3 of 5
result, the prior filing challenges for trusts and estates to obtain timely tax information from
partnerships will remain, and new challenges for trusts and estates to obtain timely tax information
from subchapter S corporations will arise. These new challenges are caused by moving the extended
due date for trusts and estates to the same extended due date for subchapter S corporations
(September 15).
Often it is the Same Preparer for the Trust or Estate and the Beneficiaries Receiving the Form
1041 Schedules K-1
In the past, the problem of obtaining tax information has been particularly acute when the
partnerships’ Schedules K-1 are received from unrelated third parties close to the filing deadline.
Based on our members’ experience, frequently, trusts and estates and their corresponding
beneficiaries have the same tax return preparer. It would, therefore, be fairly easy for that tax return
preparer to complete the fiduciary return and, if necessary, its Schedules K-1 and the individual
beneficiary’s return within the 30-day period after receiving the Schedules K-1 from the
partnerships. If no distributions were made to the individual beneficiary, the individual’s return
could be prepared at any time without waiting for the Schedules K-1 from the partnerships, and only
the Form 1041 would have to be completed within 30 days after receiving the partnerships’
Schedules K-1.
Trusts and Estates Generally Have Only a Few Beneficiaries, and Only if there is a
Distribution is a Schedule K-1 Needed by a Beneficiary
The tax information on a Form 1041 generally affects the returns of only a small number of
beneficiaries and then only if the beneficiaries have received actual distributions during the tax year
from a trust or estate. In contrast, a partnership or subchapter S return affects the returns of all
partners or shareholders, irrespective of whether distributions are made to them. Partnerships in
particular can have hundreds or thousands of partners.
Trusts and estates, unlike most subchapter S corporations and unlike all partnerships, are entities that
pay income tax. They are taxed on all their income, except for certain amounts distributed and taxed
to beneficiaries. The traditional structure for a trust to distribute all its income to an income
beneficiary and otherwise hold its assets for the benefit of a remainderman is disappearing. More
and more trusts are established as discretionary trusts with income and principal payable to
beneficiaries either in the pure discretion of the trustee or in the trustee’s discretion based on an
ascertainable standard (e.g., health, education, support, or maintenance of the beneficiaries). It has
been our experience that many of these trusts make no annual distributions to their beneficiaries, so
the trusts are taxed on all of their income and are the “final” taxpayer, just like individuals. There is
no tax consequence to the beneficiaries in such a year. Even for traditional trusts, income earned by
a trust from a partnership or subchapter S corporation in excess of the cash received from those
investments is taxable to the trust unless distributions are made to beneficiaries from principal, and
capital gains earned by a trust are almost always taxable to the trust and not to a beneficiary,
relieving the beneficiary of having to deal with any Schedule K-1 information from the trust.
Messrs. Shulman and Korb
September 24, 2008
Page 4 of 5
Amended Returns for Trusts and Estates and Beneficiaries May Increase
Lastly, we note that the proposed extended due date of September 15 (e.g., a maximum five month
extension for a calendar year) for Forms 1041, as set forth in the temporary regulations, requires that
Form 1041 and its Schedules K-1 be completed at potentially the same time the fiduciary receives
the Schedules K-1 from the partnerships and subchapter S corporations. Such an undertaking will
lead to incomplete initial returns and the necessity to file amended returns. When changes are made
on an amended return for a trust or estate, those changes will affect the returns of the individual
beneficiaries, who received distributions from the trust or estate, and will require them to file
amended returns as well. It is in the best interest of taxpayers, as well as the IRS, that the initial
returns filed for trusts, estates, and their beneficiaries are as accurate as possible. Meeting such a
goal is possible only if the extension period for Form 1041 remains at six months.
We urge the retention of the six-month extension period for returns filed by trusts and estates. We
believe that providing trusts and estates with an additional filing month beyond that of subchapter S
corporations and partnerships is necessary in order to facilitate accurate tax reporting and to provide
sufficient time for fiduciaries to discharge their fiduciary obligations. If trusts and estates can
receive Schedules K-1 from partnerships and subchapter S corporations by September 15, then their
returns can be completed and, if necessary, their Schedules K-1 can be issued to beneficiaries soon
thereafter and in time for the individual beneficiaries to file their returns.
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The AICPA is the national professional organization of certified public accountants comprised of
approximately 350,000 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.
We thank you for the opportunity to present our comments. Please feel free to contact me at (212)
773-2858 or jeffrey.hoops@ey.com; Justin P. Ransome, Chair of the AICPA Trust, Estate, and Gift
Tax Technical Resource Panel, at (202) 521-1520, or justin.ransome@gt.com; or Eileen R. Sherr,
AICPA Technical Manager, at (202) 434-9256, or esherr@aicpa.org, to discuss the above comments
or if you require any additional information.
Sincerely,
Jeffrey R. Hoops
Chair, AICPA Tax Executive Committee
cc:
The Honorable Eric Solomon, Assistant Secretary for Tax Policy, Treasury Department
Ms. Catherine Hughes, Attorney Advisor, Treasury Department
Messrs. Shulman and Korb
September 24, 2008
Page 5 of 5
Ms. Deborah A. Butler, Associate Chief Counsel for Procedure and Administration
Mr. William P. O’Shea, Associate Chief Counsel for Passthroughs and Special Industries
Mr. Matthew P. Howard, Attorney, IRS Office of the Associate Chief Counsel for Procedure
and Administration