IRS Releases Draft Form 8960 on Net Investment Income Tax; Final Regulations, Public Comments Yet to Be Released

The IRS has released draft Form 8960, Net Investment Income Tax–Individuals, Estates, and Trusts. The draft form fits on a single page. It contains only 21 lines (33 entries if lines 4a-b, 5a-c, 9a-c, 18a-b and 19a-b are each counted separately), divided into three parts: Part I – Investment Income; Part II – Investment Expenses Allocable to Investment Income and Modifications; and Part III – Tax Computation (within which separate computations are required for Individuals and Estates and Trusts).

Draft Form 8960 Instructions have not yet been released. The IRS stated that the draft Form 8960 should not be interpreted as reflecting any changes that may be made by anticipated final Code Sec. 1411 regulations.

Although the IRS had published a Notice and Request for Comments on Form 8960 in the July 29, 2013, Federal Register (TAXDAY, 2013/07/29, I.2), the IRS did not made the draft form itself available until August 8, 2013. At the time the notice was published, an IRS spokesperson told CCH that the draft form was undergoing some “final adjustments” and would be released shortly.


The 3.8-percent tax on net investment income under new Code Sec. 1411 has been effective generally for tax years beginning after December 31, 2012. Taxpayers and practitioners have been concerned about the complexities involved in determining liability for the net investment income tax (NII tax), particularly since the tax is already effective. Proposed regulations that were published on December 5, 2012 (TAXDAY, 2012/12/03, I.3) have been considered inadequate by many commentators (TAXDAY, 2013/04/03, I.5). Final regulations have not yet been issued, although they have been promised to be issued in 2013 (TAXDAY, 2013/05/14, M.1).


In a “caution page” preceding the draft form, the IRS warned that “no inference should be drawn from any particular line item regarding the treatment of such item in the final regulations.” It also noted that the draft form does not reflect consideration of comments submitted on the proposed regulations. Nevertheless, some practitioners have been examining draft Form 8960 for any possible hint of how the IRS will resolve certain issues that have remained unclear under the proposed regulations.

Consistent with previous plans. IRS personnel had previously expressed their intention to make the NII tax form a relatively simple, single-page form on which, to the extent possible, various components of net investment income will have already been computed at the back end on other forms and would be merely transferred onto the NII tax form. David Kirk, attorney-adviser, IRS Office of Associate Chief Counsel (Passthroughs and Special Industries), and a principal drafts-person on the Code Sec. 1411 regulations project, had earlier reported that the NII tax touches over 50 existing IRS forms and instructions that were being revised (TAXDAY, 2013/05/14, M.1).

As an example of “back-door” computations done before an amount reaches the NII tax form, Kirk speculated at the time that NII adjustments for rental income might be made on Form 1040 Schedule E and then carried over as a single number onto the NII tax form. That intention appears to be reflected in draft Form 8960, line 4a: “Rental real estate, royalties, partnerships, S corporations, trusts, etc. (Form 1040. Line 17; or Form 1041, line 5)” since Form 1040, line 17 carries the same title and instructs “Attach Schedule E” and Form 1041, line 5, instructs the same.

“See Instructions.” In addition to the back-door work in determining what is net investment income done on other tax forms before reaching the NII tax Form 8960, draft Form 8960 also contains 15 lines on which it instructs “(see instructions)” Some of the figures to be entered on these lines may only require simple reference to a chart-like table in future instructions (for example, line 14 – “Threshold based on filing status (see instructions)” ). The calculations for others, such as Line 4b – “Adjustment for net income or loss derived in the ordinary course of a non-section 1411 trade or business (see instructions)” ; Line 5b – “Net gain or loss from disposition of property that is not subject to net investment income tax (see instructions)” ; and Line 9c – “Miscellaneous investment expenses (see instructions)” look particularly challenging given the issues that have surfaced surrounding them since proposed regulations had been issued. At least some of these lines may include work-sheet computations that would be performed pursuant to the instructions.

Other insights. One theory about the content of draft Form 8960 is that it should be discounted as merely a place-holder, since scheduling of IRS forms and publications may call for finalizing new 2013 forms in early Fall 2013, which in turn may require the submission of a draft at this time. Nevertheless, assuming that the IRS Chief Counsel’s Office and IRS Forms and Publications have been working together, the following interpretation of the proposed regulations and the NII tax in general might be inferred from the following lines within draft Form 8960:

Line 3—”Annuities from nonqualilfied plans (see instructions) .” The fact that instructions are required may indicate a recognition that partner retirement payments that contain noncompete conditions may qualify;

Line 4a—”Rental real estate, …etc.” By omission, the inclusion of rental real estate only might indicate that income from personal property leases are not NII (although it might still be covered by Line 4b—”Activities for net income or loss…(see instructions)” ;

Line 5a—”Net gain or loss from disposition of property.” The inclusion of net losses may allow a net loss to offset other categories of investment income (but contrary to the Preamble to the proposed regulations).

By George Jones, CCH News Staff


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