Sep 1, 2007 12:00 PM

, By John M. Janiga professor, Loyola University Chicago, and of counsel, Spagnolo & Hoeksema, LLC, Ho

By John M. Janiga professor, Loyola University Chicago, and of counsel, Spagnolo & Hoeksema, LLC, Ho

On June 25, 2007, the Supreme Court agreed to hear Knight v. Commissioner¹ to decide whether trusts and estates can fully deduct the fees they pay for the investment management and advisory services they receive.²

For the last 10 years, a debate has raged over what level of deductibility Internal Revenue Code Section 67(e)(1) permits for trust investment advisory fees (IAFs). Some courts, notably the U.S. Court of Appeals for the Sixth Circuit, have found that IAFs are fully deductible before arriving at a trust's taxable income. Others, including the Second, Federal and Fourth Circuits, maintain that IAFs are just miscellaneous itemized deductions (MIDs) that are deductible only to the extent that they exceed 2 percent of a trust's adjusted gross income (AGI), often referred to as the “2 percent-of-AGI floor.”³