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Sunday, June 27, 2010

Knight and the 2% Floor

Nathan R. O’Tool (J.D. 2011, William Mitchell) has published Comment, Knight and the Two Percent Floor: Still in Search of a Workable Standard to Evaluate the Tax Deductability of Fiduciary Expenses, 36 Wm. Mitchell L. Rev. 1333 (2010). Here is the Conclusion:

The estate planning and wealth management community had high expectations when the Supreme Court granted certiorari in the Knight case. These expectations were rooted in the fact that for more than twenty years, since the adoption of section 67, trustees were unsure as to how the 2% floor applied to certain fiduciary fees and expenses. The Supreme Court took on the case to resolve a longrunning conflict among federal appeals courts. There was hope that the Supreme Court would settle this conflict and establish a brightline rule by which both the IRS and trustees would be able to determine with certainty which fiduciary expenses would be fully deductible and which expenses would be subject to the 2% floor.

The opinion, while logical and well written, did little to clarify the confusion which surrounds section 67(e). Instead, the Supreme Court seemed content in setting the boundaries within which the IRS and Treasury would be allowed to make their own clarification— specifically, what constitutes “common” or “customarily.” This clarification, however, has yet to be made. In issuing the final regulations, the IRS and Treasury should avoid setting forth a rule that would require a case-by-case analysis of each and every fiduciary fee or expense. Instead, they should issue a bright-line rule that is cost-effective and reasonable to administer for both fiduciaries and for the IRS.

Given the language of section 67(e), establishing this bright-line rule is easier said than done. Depending on the success that the IRS and Treasury have with setting forth this rule, the next logical step is for Congress to address the poorly written statute. This process, however, may take longer than the two decades it took courts to address this issue. But until Congress inserts itself into this process, trustees will wait patiently in tax law limbo for the finalized regulations—hoping some reasonable guidance will be provided.
 

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