US Supreme Court Rules On Trust Tax Deductions

by Glen Shapiro, LawAndTax-News.com, New York

18 January 2008

The United States Supreme Court has upheld a previous decision limiting the amount which trusts can deduct for tax purposes, a decision that it likely to be felt across the trust industry.

In an unanimous verdict, the court ruled that trusts may not ordinarily deduct the full cost of investment advice on their income tax returns, and that these expenses are deductible only when they exceed 2% of adjusted gross income, the same limits faced by individual filers.

The case was brought by Michael Knight, trustee of the Rudkin Trust, who claimed a full deduction for the trust's investment management fees, which totalled USD22,241, based on an earlier decision by the Sixth Circuit Court of Appeals. The Internal Revenue Service however, disallowed the deduction, arguing that the trust could only deduct the expenses to the extent that they exceeded the 2% floor mandated by Section 67 of the Tax Code. The disputed amount of tax was USD4,448.

Knight subsequently lost the case in the US Tax Court, and an appeal to the Second Circuit was dismissed before the dispute was taken to the Supreme Court.

While the case is not anticipated to have a great effect on the US trust industry in terms of lost business, the verdict is expected to reach far and wide in terms of how trustees and their accountants approach the issue of tax.

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