U.S. Supreme Court to rule on trust investment advisory fees deductibility case.

On Nov. 27, 2007, the U.S. Supreme Court heard oral arguments in a trust fees deductibility case, Michael J. Knight, Trustee of the William L. Rudkin Testamentary Trusts, Petitioner, v. Commissioner of Internal Revenue (06-1286). The case, which should be decided by this summer, will impact many trusts and estates, their beneficiaries, and the accountants, trustees and executors who serve as fiduciaries for these entities. There are nearly four million estates and trusts that outsource $10.2 billion a year for legal, accounting, tax reporting and asset management and that pay trustees another $4 billion for their services.

The Supreme Court should resolve the 15-year-old debate and resulting three-way split in the circuits over whether Internal Revenue Code section 67(e) allows estates and trusts to fully deduct investment advisory fees or deduct them only to the extent they exceed 2% of the entity's adjusted gross income.

The Second Circuit created a three-way split last year when it held that IRC section 67(e) allows trustees a full deduction only for fees that "individuals are incapable of incurring." As it stands now, the Second, Fourth and Federal Circuits deny a full deduction for investment management fees of estates and trusts under two different interpretations---the "cannot incur" and the "commonly incur"...