On March 23, 2007, the Rudkin Testamentary Trust petitioned the Supreme Court to resolve the split in the circuits over whether Sec. 67(e) allows estates and trusts to fully deduct investment management fees. (The American Bankers Association will also file an amicus brief.) The Second Circuit created a three-way split when it held that Sec. 67(e) allows trustees a full deduction only for miscellaneous itemized deductions that “individuals are incapable of incurring.” (For details, see Cantrell, “Did the Second Circuit Err in Rudkin Testamentary Trust?” TTA, April 2007, p. 206.)
The Second Circuit’s opinion has created even more confusion than before for the nearly four million estates and trusts that outsource $9.8 billion a year for legal, accounting, tax reporting and asset management services, and pay trustees another $3.9 billion for asset management. Read literally, the Second Circuit’s opinion allows none of these costs to be fully deductible. Yet, that court allows a full deduction for fees paid to trustees.
Although the aggregate amounts in question are enormous, few single trusts will have sufficient tax at stake to appeal. The Rudkin Trust received a grant from Georgetown University Law Center to fund its appeal.Author Note; Carol A. Cantrell, Shareholder, Briggs & Veselka Co., Bellaire, TX, and member, AICPA Tax Division’s Trust, Estate & Gift Tax Technical Resource Panel’s Trust Accounting Income Task Force