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US Trust Industry Awaits Supreme Court Tax Verdict

by Leroy Baker, Tax-News.com, New York

04 July 2007


The United States Supreme Court has agreed to hear a case involving the deductibility of fees incurred by trust managers, with the verdict promising to have widespread ramifications for the US trust industry.

The case of Knight v. Commissioner of Internal Revenue, comes to the Supreme Court on appeal from the Second Circuit US Court of Appeals in New York. The outcome of the case rests on whether the court decides that trustees may deduct fees paid to outside advisors in the course of managing assets in the trust, and if so, how much.

Trustees may deduct fees, known as trustees' commissions, for managing trusts, but the lower courts have been unable to agree whether fees paid to investment advisors such as banks are deductible. The issue is complicated by the fact that the law seems to be being applied differently across the states, with some allowing the trustee to fully deduct the outside advisory fee, and others arguing that the expenses don't qualify as above-the-line deductions, and are subject to the standard 2% miscellaneous deductions limitation, as stipulated in the Internal Revenue Code.

The case was brought by Michael Knight, trustee of the Rudkin Trust, who claimed a full deduction for the trust's investment management fees based on an earlier decision by the Sixth Circuit Court of Appeals. However, he subsequently lost the case in the US Tax Court, and an appeal to the Second Circuit was dismissed.

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.

"The issue is relevant to every single trust and estate that files an income tax return," Jeffrey N. Pennell, a law professor at Emory University in Atlanta, was quoted as observing by Dow Jones. "The dollar amount may not be great in any given trust, but the applicability of the issue - it's everywhere," he added.

An estimated $1 trillion in assets are held in trusts and estates in the US, according to Dow Jones.

Oral arguments in the case are scheduled for December.

A comprehensive report in our Intelligence Report series examining tax-sheltering arrangements for investors, including Venture Capital, Forest Finance, Film Finance, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report5.asp

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