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Investment fees paid by trust not subject to 2% floor.

An irrevocable trust paid an investment adviser $15,000 in fees in 1987. (Because of the trust's size, the trustees were not willing to serve without the advice of an investment adviser.) The trust deducted the fees in full on its 1987 form 1041.

Under IRC section 67(a), certain miscellaneous itemized deductions of individual taxpayers, including fees paid for investment advice, are allowed only to the extent they exceed, in the aggregate, 2% of the taxpayer's adjusted gross income (AGI). Section 67(e) says an estate or trust's AGI is computed as that of an individual, "except ... costs ... 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 ... shall be ... allowable ..." (emphasis added).

The IRS claimed the 2%-of-AGI floor applied to the investment advice fees. The trust argued the floor did not apply. Had the funds not been held by a trust, it claimed, the fees would not have been incurred. Thus, the fees met the statutory exception to the 2% floor in section 67(e).

The Tax Court ruled in the IRS's favor. (See JofA, May92, page 26.)

Result: For the taxpayer. The investment adviser fees fell within the section 67(e) exception. The fees were incurred because the property was held in trust; the trustees were compelled to pay an investment expert in order to carry out their fiduciary duties. Thus, the investment advice fees were not subject to the 2% limit.

* Wm. J. O'Neill, Jr., Irrevocable Trust (6th Cir., 1992), reversing 98 TC no. 17.
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Title Annotation:O'Neill, Jr., Irrevocable Trust
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Aug 1, 1993
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