Supreme Court Limits Deductions on Trusts

The Supreme Court upheld the limits on income tax deductions for a trustsor estate. The Court ruled against the Knight family (they created Pepperidge Farm).

The Court said trusts ordinarily may not deduct the full cost of investment advice on their income tax returns. These expenses are only deductible when they exceed 2 percent of adjusted gross income of the entity. These are the same as with individuals.

The case dealt with a small dispute and involved the Trusts income tax return.

The trust reported that it spent $22,241 on investment advice and deducted all of it on its tax return. The Internal Revenue Service said the expenses could be deducted only to the extent they exceeded the 2 percent floor. The discrepancy was $4,448.

The trust sued in U.S. Tax Court, which ruled for the government and the case was affirmed by the 2nd U.S. Circuit Court of Appeals before being heard by the Supreme Court
The case is Knight v. Commissioner of Internal Revenue, 06-1286.

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