The U.S. Supreme Court today handed down a unanimous decision limiting the ability of trusts to deduct investment expenses.
The decision in the case, Knight, Trustee of William L. Rudkin Testamentary Trust vs. Commissioner of Internal Revenue, concerns Internal Revenue Code Section 67(e).
Under normal circumstances, the section lets individual taxpayers deduct investment advisory fees only if the advisory fees exceed 2% of adjusted gross income, Chief Justice John Roberts writes in the opinion for the court.
The same 2% floor applies to trusts, except that trusts can deduct the full cost of expenses “which would not have been incurred if the property were not held in such trust or estate,” according to the text of Section 67(e).
Michael Knight, the trustee for the William L. Rudkin Testamentary Trust, which was established in Connecticut in 1967, tried in 2000 to deduct $22,241 in investment advisory firm fees from the trust’s income of $624,816.
Knight says he hired the investment advisory firm because of a Connecticut law imposing a fiduciary duty on him to act as a “prudent investor” and seek outside advice.
The U.S. Tax Court held that Section 67(e) “allows full deductibility of trustee costs only for expenses that are not commonly incurred outside the trust setting,” Roberts writes.