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March
2008
Supreme Court Upholds Sec.
67(e) Limit on Deduction of Trust’s Investment
Advisory Fees as Miscellaneous Deduction
On January 16, 2008, the Supreme Court ruled that investment
advisory costs are subject to the two-percent limit
for miscellaneous itemized deductions as defined in
Code Sec. 67(e). Upholding the IRS’s position
against Rudkin, the ruling clears a disputed issue that
has appeared in several court cases as trust managers
identify different interpretations of the miscellaneous
deduction allowance.
The Supreme Court ruled that the previously set limit
of two-percent included these fees after rejecting both
the Second Circuit court’s reasoning and the trustee’s
argument, stating, “The statute…does not
establish a causation test.” Specifically, the
court decided the language of Code Sec. 67(e), asking
if the costs would have been incurred ,created a distinction
between costs unique to the conditions of holding a
trust separate from costs that would be incurred by
an individual. The ruling allows for a full deduction
of costs unique to a trust and upholds the two-percent
limit to costs that would be incurred by an individual
as well.
While simplifying the interpretation of Code Sec. 67(e),
this ruling creates additional difficulty for tax planners
and regulators alike. Tax planners must incorporate
this ruling when making intermediate tax planning decisions.
The IRS is expected to propose new regulations to clarify
or redefine this ruling. Recently, interim guidance
on the Rudkin ruling provides that bundled fiduciary
fees will be fully deductible for any tax year beginning
before January 1, 2008 (IRS Notice 2008-32). Future
tax plans must be adjusted to comply with forthcoming
regulation.
For individuals and organizations whose interests include
a trust, it is important to stay current on applicable
tax regulations, as expertise and careful planning can
potentially reduce tax liability by large amounts. For
more information on important tax issues, contact your
local CB&H office and ask to speak to a tax professional
who specializes in these types of issues.
FOR MORE INFORMATION, PLEASE CONTACT:
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