SC tax decision closes cracks in 2% floor

Today the U.S. Supreme Court ruled that most investment advisory fees are subject to the “2-percent floor” for itemized income tax deductions even when the fees are incurred in connection with the administration of a trust in Knight v. Commissioner. The PDF file of opinion available here on the Court’s website.

Although the Court took up the case to settle a split in the Circuits on the issue, which seemed to stem from inconsistencies in the Internal Revenue Code itself. One section allows miscellaneous itemized deductions “only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income,” while another allows for the deduction of full administrative costs in certain situations.

The 2nd Circuit had held that investment management fees were not exempt from the 2 percent floor even where a trustee had a fiduciary duty to incur them, a position echoed by recent decisions from the 4th and Federal Circuits. The 6th Circuit, however, has held to the contrary.

In an opinion authored by Chief Justice John G. Roberts, Jr., the Supreme Court agreed with the 2nd Circuit, but under a different rationale. The Court held that the 2 percent floor applies for trustees, with the exception of costs that would be “uncommon, unusual or unlikely” for an individual to incur.

Roberts acknowledged that the rule night not be so easy to apply. “We appreciate that the inquiry into what is common may not be as easy in other cases, particularly given the absence of regulatory guidance,” Roberts wrote. “But once you depart in the name of ease of administration from the language chosen by Congress, there is more than one way to skin the cat.”

The Court also held today that New York’s system of electing state trial court judges by convention does not violate the First Amendment in New York State Bd. of Elections v. Lopez Torres. The PDF file version of that decision is here.


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