AICPA Urges IRS to Retain Simplified Method for Charitable Remainder Trusts Calculating NIIT

April 24, 2014

The American Institute of CPAs (AICPA) urged the U.S. Department of the Treasury and Internal Revenue Service to adopt the Institute’s recommended changes to proposed regulations (REG-130843-13) pertaining to application of the net investment income tax (NIIT) to charitable remainder trusts in order to make compliance less difficult. 

In its March 31, 2014 comment letter, the AICPA recommended a number of changes to Internal Revenue Code (Code) section 1411 regulations, including retention of the elective simplified method for calculating the net investment income (NII) of a charitable remainder trust and attributing the calculated NII to the beneficiary’s annuity or unitrust distribution.

Section 1411 imposes a tax on unearned income on investments of certain individuals, estates, and trusts, whose income is above the statutory threshold amounts, as stipulated by the Health Care and Education Reconciliation Act of 2010.  Section 1411(a)(2) of the Code provides that in the case of an estate or trust, in addition to any other tax imposed by the subtitle, an additional tax is imposed, equal to 3.8 percent of the lesser of:

  • The undistributed NII for such taxable year, or

  • The excess (if any) of the adjusted gross income (as defined in section 67(e)) for such taxable year, over the dollar amount at which the highest tax bracket in section 1(e) begins for such taxable year.

The AICPA’s March 31 comment letter addresses provisions in proposed regulations affecting charitable remainder trusts (REG-130843-13) that were issued by the Treasury Department last December.

The AICPA is pleased that the Treasury Department’s December 2013 final regulations adopted the suggestion the AICPA made in its May 8, 2013 comments that NII of a CRT is treated in accordance with section 664(b) and section 1.664-1(d)(1)(ii) (NII rules track with the ordering rules under the CRT category and class system) and NII of a CRT is not treated as distributed first to the annuity or unitrust recipient unless so required under the current statutory and regulatory provisions.

For more information, read the April 1, 2014 Journal of Accountancy article.