Supreme Court to hear case on deduction of fees for investment advice

The U.S. Supreme Court has agreed to hear a case where the deductibility of investment advice fees incurred by a trust is in question. In the case, Knight v. Commissioner of Internal Revenue, the Second Circuit held that the expenses don't qualify as above-the-line deductions and are subject to the 2 percent miscellaneous deductions limitation.

Internal Revenue Code section 67(a) states that, "In the case of an individual, miscellaneous itemized deductions for any taxable year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income."

Trusts receive essentially the same treatment as individuals for this calculation, however the Code section states, "For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as in the case of an individual, except that -
(1) the deductions for costs which are paid or incurred in connection with the administration of the estate or trust and which would not have been incurred if the property were not held in such trust or estate, and
(2) the deductions allowable under sections 642(b), 651, and 661, shall be treated as allowable in arriving at adjusted gross income."

The Court will determine if the fees "would not have been incurred if the property were not held in such trust," in which case the fees would not be subject to the 2 percent limitation. The U.S. Court of Appeals for the Second Circuit and the Tax Court have held that full deductibility of expenses only applies to expenses that are incurred in a trust setting, and that investment advice fees are not protected under this umbrella and are thus subject to the 2 percent limitation.

You may like these other stories...

With tax season in the past, it's time to think about the tax implications of decisions your clients may be making about their homes in 2014. The rules are complicated and because of the huge amounts involved, the...
IRS revokes group’s tax exemption over anti-Clinton statementsGregory Korte of the USA Today reported on Monday that the IRS has revoked the tax-exempt status of a conservative-aligned charity, the Patrick Henry Center...
Clawback policies vary by company, industry: PwCAccording to a report issued to clients by PwC on April 17, companies have instituted a wide range of so-called clawback policies – with no two exactly alike – in...

Upcoming CPE Webinars

Apr 24
In this session Excel expert David Ringstrom, CPA introduces you to a powerful but underutilized macro feature in Excel.
Apr 25
This material focuses on the principles of accounting for non-profit organizations' revenues. It will include discussions of revenue recognition for cash and non-cash contributions as well as other revenues commonly received by non-profit organizations.
Apr 30
During the second session of a four-part series on Individual Leadership, the focus will be on time management- a critical success factor for effective leadership. Each person has 24 hours of time to spend each day; the key is making wise investments and knowing what investments yield the greatest return.
May 1
This material focuses on the principles of accounting for non-profit organizations’ expenses. It will include discussions of functional expense categories, accounting for functional expenses and allocations of joint costs.