The Application of New Section 68 to Trusts and Estates: Analyzing JCT Footnote 102 and Unresolved Ambiguities

IRC §68 as amended by the One Big Beautiful Bill Act, July 4, 2025

The One Big Beautiful Bill Act (OBBBA) fundamentally reshaped Section 68 by replacing the suspended Pease limitation with a new cap on the tax benefit of itemized deductions. Effective for tax years beginning after 2025, the new Section 68 limits the marginal tax-reducing value of itemized deductions by reducing them by 2/37ths of the lesser of (i) total itemized deductions or (ii) the excess of taxable income (computed without itemized deductions) over the threshold for the 37 percent tax bracket.

Crucially, the OBBBA repealed the prior statutory exclusion for trusts and estates under former Section 68(e). Consequently, the new Section 68 limitation now applies to fiduciary taxpayers. Because the statutory language lacks explicit coordination with Subchapter J, this inclusion has created a storm of technical ambiguities, double taxation risks, and conflicts with long-standing fiduciary income tax principles.

The Joint Committee on Taxation's Footnote 102

The Joint Committee on Taxation (JCT) Blue Book sought to clarify the mechanics of Section 68's application to trusts and estates in its Footnote 102. The JCT's explanation relies on a strict, mechanical reading of the Internal Revenue Code:

1. Section 641(b) as the Gateway: The JCT states that Section 68 applies to estates and trusts by virtue of Section 641(b), which dictates that the taxable income of an estate or trust is generally computed in the same manner as an individual.
2. The Definition of Itemized Deductions: Section 63(d) defines "itemized deductions" as all allowable deductions other than those used to arrive at adjusted gross income (AGI) under Section 62 and those specifically listed in Section 63(b).
3. Classification of Fiduciary Deductions: Because unique fiduciary deductions—such as the personal exemption equivalent under Section 642(b) and the distribution deductions under Sections 651 and 661—are not excluded by Section 62 or 63(b), the JCT classifies them as itemized deductions subject to the new 2/37ths limitation.
4. The Limitation of Section 67(e): The JCT acknowledges that Treasury Regulation section 1.67-4(a)(1)(ii) explicitly states that these fiduciary deductions "are not itemized deductions under section 63(d)". However, the JCT argues this regulation only interprets Section 67(e), which statutorily limits its own application with the phrase "For purposes of this section". Because Section 67(e) is legally constrained to Section 67 (miscellaneous itemized deductions), the JCT concludes it does not shield these deductions from being classified as itemized deductions for the purposes of Section 68.

Criticisms of the JCT’s Logic

Tax commentators, including Justin T. Miller in an article published in Tax Notes Today Federal on June 8, 2026, have sharply criticized the JCT’s interpretation for ignoring the broader structural framework of Subchapter J.

• Omission of Qualifying Statutory Language: Miller points out that while the JCT relies heavily on Section 641(b) to apply individual rules to trusts, Footnote 102 notably omits the crucial qualifying language of that exact statute: "except as otherwise provided in this part".
• Failure to Address Section 642(c): The JCT explanation completely ignores Section 642(c), failing to address how the limitation interacts with the unique charitable deductions available to trusts and estates.
• Inconsistent Definitions of AGI: Critics highlight that the Code and regulations define AGI for trusts and estates differently across various provisions (e.g., Sections 165(h)(4)(C), 1411(a)(2)(B)(i), and 641(c)(2)(E)(ii)). Relying rigidly on Section 63(d) without coordinating with Subchapter J creates irreconcilable technical conflicts.

Other Areas of Unclarity for Trusts and Estates

Beyond the classification of distribution deductions, several other areas remain severely unclear:

1. Disproportionate Impact on Preferential-Rate Income The 2/37ths reduction was designed to cap the tax benefit of deductions at 35 percent for taxpayers in the 37 percent bracket. However, trusts and estates hit the 37 percent bracket at a highly compressed threshold of just over $16,000. Section 68 does not currently distinguish between ordinary income and income taxed at preferential rates under Section 1(h), such as long-term capital gains and qualified dividends. If a trust offsets capital gains (taxed at a maximum of 20 percent) with itemized deductions, Section 68 would apply the 2/37ths reduction, inequitably dropping the effective tax benefit of those deductions to approximately 18.92 percent.

2. Erosion of the Conduit Principle and Double Taxation Subchapter J treats trusts and estates as "quasi-conduits," using distribution deductions under Sections 651 and 661 to allocate taxable income to beneficiaries. If Section 68 limits these distribution deductions, it artificially inflates the entity's taxable income. The trust or estate would pay tax on the limited portion of the distribution, while the beneficiary would still include the full distribution in their gross income under Sections 652 or 662. This effectively creates double taxation on the exact same income, breaking the core mechanics of Subchapter J.

3. Conflicts with Charitable and IRD Deductions Section 642(c) allows trusts and estates to take charitable deductions "without limitation". Applying Section 68 to a permanent charitable set-aside deduction under Section 642(c)(2) forces tax-exempt charities to indirectly bear the burden of an income tax. Furthermore, because the tax caused by the limitation reduces the amount available for charity, it creates an impossibly complex "algebraic loop" where the tax recalculates the limitation continuously. Limiting the Section 691(c) deduction also defeats its foundational purpose of mitigating double taxation on Income in Respect of a Decedent (IRD).

4. DNI Calculation Circularity The New York State Bar Association (NYSBA) noted that applying Section 68 creates severe circularity issues when calculating Distributable Net Income (DNI). To calculate taxable income, a trust must know its distribution deduction; to compute the distribution deduction, it must know DNI; but DNI requires knowing taxable income, which is impacted by the Section 68 limitation on itemized deductions.

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Recommendations Submitted by Tax Organizations

Professional organizations have heavily advocated for technical corrections and administrative guidance to resolve these flaws.

The American Institute of Certified Public Accountants (AICPA)

• Preferential-Rate Income: The AICPA recommends that Treasury and the IRS "issue guidance clarifying that the section 68 limitation applies only to non-preferential rate income exceeding the threshold at which the 37% tax rate bracket begins."
• Fiduciary Deductions and Section 67(e): The AICPA recommends the government "provide that the LID does not apply to trusts and estates with respect to deductions under sections 642(b), 651, and 661, and administration expenses." They further advise that "Treasury and the IRS should also provide that under section 68, for purposes of determining the AGI of an estate or trust, the AGI of an estate or trust is AGI as defined in section 67(e)."
• Charitable and IRD Deductions: The AICPA urges the government to "Similar to prior section 68(e), provide that the LID does not apply to trusts and estates with respect to deductions under sections 642(c) and 691(c)." They alternatively suggest "clarifying that deductions under sections 642(c) and 691(c) are above-the-line deductions rather than itemized deductions." If the government does apply the rule to 642(c), they ask to "clarify that Hartwick College prevents this reduction from reducing the section 642(c) deduction."

The American College of Trust and Estate Counsel (ACTEC)

• Preferential-Rate Income: ACTEC suggests Congress "consider a technical amendment to section 68(a)(2) that would read as follows: ‘(2) so much of the taxable income of the taxpayer for the taxable year (determined without regard to this section and increased by such amount of itemized deductions) reduced by the amount of the taxpayer’s income subject to tax under section 1(h)’".
• Fiduciary Deductions: ACTEC recommends Congress "consider a technical amendment of section 68 to clarify that it only applies to deductions that would be computed in the same manner as in the case of an individual, and not to deductions that only apply to estates and trusts as otherwise provided in Subchapter J of the Code. In addition to the deductions to which section 67(e) refers, we think the deduction allowed by section 642(c) should also be expressly excepted from the application of section 68...".
• Section 67(e) Expansion: ACTEC suggests Congress "consider a technical amendment of section 67(e) to provide that it applies for purposes of section 68 as well as for purposes of section 67."
• Charitable Deductions: Regarding the conflict in statutory text, ACTEC advises Treasury/IRS to "consider issuing guidance under section 68 to resolve the ambiguity in the Code by either providing that the 'without limitation' language in section 642(c) takes precedence over section 68 or that section 68 takes precedence over the 'without limitation' language in section 642(c)." If the limitation applies, they recommend guidance "explicitly permitting the amount of the section 642(c)(2) deduction to be calculated without reduction for any income tax caused by the section 68 disallowance."

The New York State Bar Association (NYSBA)

• Distribution Deductions: The NYSBA advises that "The Treasury Department and Service should determine whether they have the authority to treat the Section 651 and 661 distribution deductions as non-itemized deductions for purposes of Section 68." If not, they "could seek a technical correction from Congress to provide that the Section 651 and 661 deductions are not treated as itemized deductions for purposes of Section 68."
• Charitable Deductions: They recommend the government "determine whether they have the authority to treat the charitable deductions available to estates as non-itemized deductions for purposes of Section 68, to the extent that the application of Section 68 would otherwise cause charitable beneficiaries to bear the burden of a tax on income that, if received directly by the charitable beneficiaries, would be exempt from tax."
• Warning Against Broad Section 67(e) Application: In stark contrast to the AICPA and ACTEC, the NYSBA warns against a blanket application of Section 67(e), stating: "The Treasury Department and Service should not incorporate the Section 67(e)(1) definition of adjusted gross income into Section 68." The NYSBA warns that pretending Section 67(e) does not exist for the rest of the calculation could inadvertently recharacterize administration expenses as fully nondeductible miscellaneous itemized deductions.
• DNI Calculation: To solve the circular math problem, the NYSBA recommends that "The Treasury Department and the Service should clarify that in computing the Section 68 limitation, a hypothetical computation of distributable net income, determined without regard to Section 68, is required."

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List of Sources Used in Preparing the Article:

• 26 U.S. Code § 63 - Taxable income defined
• 26 U.S. Code § 641 - Imposition of tax
• 26 U.S. Code § 67 - 2-percent floor on miscellaneous itemized deductions
• Joint Committee on Taxation Blue Book, “11. Limitation on Tax Benefit of Itemized Deductions (sec. 70111 of the Act and sec. 68 of the Code)”, Footnote 102,
• Justin Miller, "The Fate of a Trust or Estate Under New Section 68," Tax Notes Today Federal, June 8, 2026
• AICPA Tax Executive Committee, "AICPA comments requesting AICPA comments on IRS guidance for limitation on itemized deductions and Trump accounts"
• November 10, 2025 Letter, “Comments of The American College of Trust and Estate Counsel”
• New York State Bar Association Tax Section Report No. 1517, December 1, 2025

Prepared with assistance from NotebookLM.

Analyzing Procedural Timeliness in Tax Litigation: The Karps’ Automatic Extension Ruling

Selwyn Karp and Barbara Adams-Karp v. The United States, Case No. 1:23-cv-00926-MRS, filed May 21, 2026

The U.S. Court of Federal Claims issued a significant opinion in Selwyn Karp and Barbara Adams-Karp v. The United States, Case No. 1:23-cv-00926-MRS, filed May 21, 2026. This ruling provides crucial guidance on the interplay between statutory requirements for tax refund claims (26 U.S.C. § 7422(a)), the validity of automatic filing extensions under Treasury regulations, and whether a technical error in estimating liability can invalidate a taxpayer’s claim when adequate funds are already available to the government.

Here is a detailed breakdown of the facts, applicable law, analysis, and holdings for tax professionals.

I. Facts of the Case (The Dispute)

Selwyn Karp and Barbara Adams-Karp (the Plaintiffs) sought a refund for a substantial overpayment made on their 2016 federal tax return. The core dispute centered on whether their request for an automatic six-month extension to file their 2016 taxes was valid, which the Government argued would render their eventual filing untimely and thus invalidate their claim.

Key factual points included:

• The Karps repeatedly overpaid their taxes in prior years (including 2014, 2015, and 2016).
• To obtain an automatic extension, the couple used Form 4868 and reported a total estimated tax liability of $0, citing that previous overpayments were sufficient to cover their expected tax burden.
• The Government argued that the estimate was flawed because the Karps failed to account for all sources of income, thus making the extension request—and subsequently the refund claim—void.
• Critically, the Court noted that the IRS had initially acted in a way that supported the Karps: "While the case was pending, the IRS agreed that the Karps had filed their 2016 taxes by the October 2020 deadline... The IRS mailed the Karps a refund check for $154,720.45 and credited a portion of the 2016 overpayment to the taxes the Karps owed for 2022."

II. Applicable Law (The Legal Framework)

The opinion required reviewing several layers of tax law:

A. Right to Refund Action

Before litigation can occur, a taxpayer must follow statutory procedures under 26 U.S.C. § 7422(a), which mandates that "No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected... until a claim for refund or credit has been duly filed with the Secretary" of the Treasury.

B. Extension and Estimation

The ability to receive an automatic extension is governed by 26 C.F.R. § 1.6081-4. The IRS advises that Form 4868 requires a specific estimate: "Line four requires an ‘[e]stimate of total tax liability for’ the tax year in question," and its instructions warn that if the estimate is not reasonable, "the extension will be null and void."

C. Summary Judgment Standard

The Court utilized the standard set forth by the Rules of the Court of Federal Claims: A motion for summary judgment must show that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law. If "the evidence is such that a reasonable jury could return a verdict for the nonmoving party," the court must deny summary judgment.

III. Court’s Application of Law (The Analysis)

The Judge, Molly R. Silfen, analyzed the dispute by addressing three main points: the standard for a reasonable estimate, the effect of prior overpayments on current estimates, and the availability of alternative extension methods.

1. The Standard for Estimate

While acknowledging that Form 4868 requires an estimate, the Court noted that the standard is not rigid. Citing precedent, the court reiterated the principle established in Crocker v. Commissioner, 92 T.C. 899, 907 (1989), stating that a taxpayer must make a "bona fide and reasonable estimate of his tax liability based on the information available to him at the time he makes his request for extension."

2. The Error vs. Intent

The Government argued that the Karps' zero estimate was materially wrong, as their gross tax liability was actually $131,201. However, the Court found this argument insufficient:

"While the Karps made a technical error in estimating net rather than gross tax liability, they correctly estimated that they would owe zero, and the technical error was not unreasonable enough to make the automatic extension void."

3. The Critical Role of Overpayments (Deemed Payments)

The most decisive factor in the ruling was the Karps' history of overpaying taxes. For years prior to 2016, the Karps consistently paid large amounts that were carried forward to cover subsequent year’s tax liabilities.

The Court held that this carryover payment provided crucial context for the estimate:

"Once the Karps filed their 2015 return, the carryover payment would be available for the 2016 tax year and deemed paid on April 15, 2017... Thus, the Karps’ estimate that they would owe zero for 2016, once they filed their tax return, was correct."

The Court further countered the Government's reliance on FleetBoston Financial Corp. v. United States, 483 F.3d 1345 (Fed. Cir. 2007), by noting that unlike FleetBoston, the Karps were not attempting to offset a deficiency in a different year, but were simply accounting for their expected carryover payments toward their current tax liability.

4. The Alternative Extension Methods

Crucially, the Court dismantled the premise of the Government's argument—that the Form 4868 estimate is necessary for an extension. The Judge pointed out that "The IRS website provides three ways a taxpayer can request a six-month extension... Two options are electronic... [and] At least one of those methods—paying online—requires no estimate at all as long as the taxpayer’s liability is covered by payments and credits."

The Court concluded:

"It would be unreasonable for the Karps to be penalized only because they chose an older method of payment that still includes a line requesting their estimate of their total tax liability. The law disfavors setting that sort of trap for the unwary taxpayer."

IV. Ultimate Holdings (The Judgment)

Based on these findings, the Court reached two definitive holdings:

1. The automatic six-month extension was valid: "The court agrees with the Karps that they should have received the six-month extension to file their 2016 taxes."
2. The refund claim is timely and payable: Consequently, the Karps are "entitled to a refund of their tax overpayment for the 2016 tax year."

In summary judgment terms: "The court grants the Karps’ cross-motion for summary judgment... The court denies the government’s motion for summary judgment."

V. Takeaways for Tax Professionals

• Due Diligence on Extension Methods: When advising clients, always clarify which extension mechanism is being used (Form 4868 vs. online payment). If a client's tax liability is already covered by credits or overpayments, the online method may be preferable as it removes the requirement for an explicit tax estimate.
• The Deemed Payment Principle: The ruling underscores the practical application of deemed payments and carryover credits within tax planning. Demonstrating that substantial prior payments were successfully carried forward to cover a current liability is powerful evidence supporting the reasonableness of a client’s tax estimates.
• Reasonableness Standard: While taxpayers must make a "bona fide and reasonable estimate" (per Crocker v. Commissioner, 92 T.C. at 907), this standard is contextual. If alternative, non-estimating methods exist that the IRS itself promotes, courts may view an overreliance on the older, form-based method as procedurally disadvantageous to the taxpayer rather than substantively flawed for the government.

Prepared with assistance from Gemma 4 E4B on a MacBook Air AI - LM Studio.