October 24, 2007
Loebl on The Section 67 Question: Are Fees For Investment Advice Fully or Partially Deductible By Trusts?
James F. Loebl (Valparaiso) has posted The Section 67 Question: Are Fees For Investment Advice Fully or Partially Deductible By Trusts?, 56 Drake L. Rev. ___ (2008), on SSRN. Here is the abstract:
One of the more controversial questions in tax law in recent memory is whether a trust may fully deduct the fees it pays for investment advice or whether it must treat the fees as miscellaneous itemized deductions that are allowed only to the extent that the total of such deductions exceeds 2% of the trust's adjusted gross income. While the Sixth Circuit held in the trust's favor that such fees are fully deductible under § 67(e)(1) of the Internal Revenue Code, the Federal, Fourth and Second Circuits subsequently agreed with the Government that such costs were miscellaneous itemized deductions subject to the 2% floor under § 67(a). As result, the United States Supreme Court has granted the petition for certiorari in the Second Circuit case and will resolve the issue during the Court's 2007-08 Term.
This Article takes the position that fees for investment advice do not satisfy the two requirements under § 67(e)(1) for full deductibility under a “plain meaning” interpretation of the statute. However, the Article concludes that § 67(e)(1) should be amended so that costs incurred by trustees in fulfilling their fiduciary duties would be fully deductible. After providing the statutory background for the current dispute, this Article examines the opinions issued in the trial court and at the appellate level for each of the four cases that have reached the United States Court of Appeals. This Article then evaluates the decisions of the lower courts in light of the textualist approach to statutory interpretation advocated by several Justices of the Supreme Court and employed by the Court in Gitlitz v. Commissioner, and concludes that the Court will affirm the Second Circuit's decision. Finally, the Article discusses the policy considerations supporting the amendment of § 67(e)(1).
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