The Supreme Court has handed down a unanimous decision in a case involving the deductibility of investment advisory fees by trusts, ruling that the expenses are deductible only to the extent that they exceed 2 percent of the adjusted gross income.
The case, Knight vs. Commissioner of Internal Revenue, involved the family of the founder of Pepperidge Farm, Henry Rudkin. The trust that handled his estate tried to deduct the entire $22,241 it spent on investment advice in 2000, but the Internal Revenue Service said it could only deduct the expenses to the extent that they exceeded the 2 percent floor mandated by Section 67 of the Tax Code. The discrepancy amounted to a tax deficiency of $4,448.
After the Tax Court and the Second U.S. Circuit Court of Appeals ruled against the trust, the case went to the Supreme Court. Chief Justice John Roberts wrote the decision saying the deductions are still subject to the 2 percent floor.
The Supreme Court also heard arguments in another tax case, MeadWestvaco Corp. vs. Illinois Department of Revenue. That case involves a tax imposed by Illinois on the $1 billion gain by MeadWestVaco when it sold information provider LexisNexis in 1994, a company it acquired in 1968 for $6 million. The court will decide on whether the tax ruling conflicts with court decisions in several earlier cases involving AlliedSignal, F.W. Woolworth and Asarco.
