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Investment fees paid by trust 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 unwilling to serve without an investment adviser's advice.

The trust deducted the fees fully on its 1987 income tax return. However, the IRS claimed the 2%-of-adjusted-gross-income (AGI) floor [IRC section 67(a)] applied to the investment-advice fees.

Under 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 aggregate, 2% of the taxpayer's AGI. Section 67(e) says an estate or trust's AGI is computed the same as an individual's, "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 trust argued the 2% floor did not apply to the fees. Had the funds not been held in 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).

Result: For the IRS. Section 67(e) is interpreted to mean only fees unique to trust or estate administration are exempt from the 2% floor. These include trustee fees and trust accounting fees mandated by law or specified in the trust instrument. Thus, the voluntary investment advice fees were subject to the limitations.

* Wm. J. O'Neill, Jr., Irrevocable Trust, 98 (TC No. 17).
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Publication:Journal of Accountancy
Date:May 1, 1992
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