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Can trusts deduct adviser fees?


TAX CASES

Many trust fiduciaries incur investment adviser fees while administering the trust. To reduce taxable income, the trustee wants to deduct these costs against trust income--but the courts are split on the issue. The Tax Court recently was asked to reconsider the question.

Henry Rudkin established a testamentary trust with the proceeds of the sale of his business, Pepperidge Farm, to Campbell Soup Co. The trustee hired Warfield Associates Inc. to provide investment advice, and then deducted payments to Warfield of $22,241 on the trust's 2000 income tax return. The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws.  rejected the deduction on the grounds the expenditure was a miscellaneous itemized deduction subject to the 2% floor.

Result. For the ILLS. A trust calculates income the same way an individual does. It can deduct IRC (Internet Relay Chat) Computer conferencing on the Internet. There are hundreds of IRC channels on numerous subjects that are hosted on IRC servers around the world. After joining a channel, your messages are broadcast to everyone listening to that channel.  section 62 expenses from its gross income to arrive at adjusted gross income and is then permitted the section 63 itemized deductions from adjusted gross income.

Section 67 limits miscellaneous itemized deductions to expenditures in excess of 2% of adjusted gross income. Section 67(e) exempts from this 2% floor "costs that 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" All parties in Rudkin agreed the challenged expenditure was incurred in the administration of the trust. The question was whether it was incurred because the trust owned the assets.

The trustee argued that he had met the requirement because his fiduciary responsibility obligated ob·li·gate  
tr.v. ob·li·gat·ed, ob·li·gat·ing, ob·li·gates
1. To bind, compel, or constrain by a social, legal, or moral tie. See Synonyms at force.

2. To cause to be grateful or indebted; oblige.
 him to hire an investment adviser where individuals are not obligated to do so. The IRS said that, as many individuals do hire investment advisers, the expenditures for investment advice were not incurred because of the trust's existence.

The Tax Court previously had considered this argument in O'Neill v. Commissioner, 98 TC 227 (1992), and ruled for the IRS. The Sixth Circuit Court of Appeals reversed the decision, reasoning that fiduciaries can incur penalties for negligence if they failed to hire an adviser but individuals are not similarly penalized pe·nal·ize  
tr.v. pe·nal·ized, pe·nal·iz·ing, pe·nal·iz·es
1. To subject to a penalty, especially for infringement of a law or official regulation. See Synonyms at punish.

2.
. Thus, the expenditure was incurred because the trust existed.

Subsequently, the Federal and Fourth Circuits ruled for the IRS. In their opinion, the expenditures did not meet the requirement because individuals commonly incur them. In addition a ruling in favor of the trust would allow a fiduciary to argue he or she incurred all expenditures as a result of his or her fiduciary responsibility and, thus, the ruling would nullify nul·li·fy  
tr.v. nul·li·fied, nul·li·fy·ing, nul·li·fies
1. To make null; invalidate.

2. To counteract the force or effectiveness of.
 the second requirement.

After reviewing the argument on both sides, the Tax Court sided with the Federal and Fourth Circuits and held the expenditures were subject to the 2% floor.

Courts continue to disagree on this issue, which must be settled through legislation or additional litigation An action brought in court to enforce a particular right. The act or process of bringing a lawsuit in and of itself; a judicial contest; any dispute.

When a person begins a civil lawsuit, the person enters into a process called litigation.
. At this point taxpayers should tailor their position to the appeals court that would hear their case.

* William Rudkin Testamentary Trust v. Commissioner, 124 TC no. 19.

Prepared by Edward J. Schnee, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , PhD, Hugh Culverhouse Professor of Accounting and director, MTA (1) (Message Transfer Agent or Mail Transfer Agent) The store and forward part of a messaging system. See messaging system.

(2) See M Technology Association.

1. (messaging) MTA - Message Transfer Agent.
 program, Culverhouse School of Accountancy, University of Alabama The University of Alabama (also known as Alabama, UA or colloquially as 'Bama) is a public coeducational university located in Tuscaloosa, Alabama, USA. Founded in 1831, UA is the flagship campus of the University of Alabama System. , Tuscaloosa.
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Article Details
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Author:Schnee, Edward J.
Publication:Journal of Accountancy
Date:Jan 1, 2006
Words:512
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