Trust Investment Fees Revisited

By Schnee, Edward J. | Journal of Accountancy, October 2003 | Go to article overview

Trust Investment Fees Revisited


Schnee, Edward J., Journal of Accountancy


There currently is a split in the courts of appeal concerning the deductibility by trusts of expenses they pay for investment advice. The Fourth Circuit Court of Appeals has now joined the debate.

In 1944 John Stewart Bryan's will established a trust for his children and grandchildren. In 1996 and 1997 the trust had assets of approximately $25 million. In those years it paid--and deducted--$107,000 and $120,000, respectively, for investment advice. The IRS rejected the deductions on the grounds they were miscellaneous itemized deductions subject to the 2% floor. The trust paid the tax and sued for a refund. The district court ruled in favor of the IRS in part on the grounds the trustees could have avoided personal liability by using the states' "legal list" of investments and thereby avoided the expense of hiring advisers. The taxpayer appealed.

Result. For the IRS. As a general rule, trusts are entitled to the same deductions as individuals. As a consequence, miscellaneous itemized deductions are subject to the 2% floor described in IRC section 67. Subsection (e) contains an exception to the 2% floor for expenses incurred in administering a trust the taxpayer would not have had to pay if the property was not in a trust.

The first question the Fourth Circuit addressed was the extent to which it should rely on the legislative history of section 67(e). The general rule of interpretation is that a court should refer to the legislative history only if a provision is ambiguous. The appeals court found the code section clear and unambiguous and therefore did not rely on any of the legislative history the parties cited in their appeal.

According to the Fourth Circuit, the exception to the 2% floor for trusts has two requirements. …

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