Extension of Interim Guidance on Deductibility of Investment Advisory Fees by Trusts

December 11, 2008

On December 11, 2008, the Internal Revenue Service released Notice 2008-116 extending its no-unbundling-of-unitary fees pronouncement to 2008 fiduciary income tax returns.

Earlier in the year, the Internal Revenue Service released Notice 2008-32, reacting to the Supreme Court’s unanimous holding in Michael J. Knight, Trustee v. Commissioner, 552 U.S. ___ (No. 06-1286, Jan. 16, 2008), that trust investment advisory fees are subject to the “2% floor” of section 67(a) of the Internal Revenue Code. That Notice confirmed that fiduciaries preparing 2007 income tax returns would not be required to “unbundle” a unitary fiduciary fee to separately state the components of the fee that are subject to the 2% floor. See “Internal Revenue Service Confirms That ‘Unbundling’ of 2007 Unitary Fiduciary Fees Is Not Needed” and our Trusts and the 2% Floor analysis on section 67(e) and the Knight decision in light of Notice 2008-32.

Notice 2008-116 modifies Notice 2008-32 and further relieves trustees of the need to unbundle their fees for 2008 returns. Trusts may deduct the full amount of the bundled fiduciary fees for 2008 without regard to the 2% floor, but payments by trustees to third parties for expenses subject to the 2% floor are readily identifiable and must be treated separately from the otherwise bundled fiduciary fees.

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