Supreme Court gives IRS win in trust case

The U.S. Supreme Court ruled today that deductions for trusts and estates are subject to the same 2 percent of adjusted gross income limits that individual
taxpayers face.

The case, Knight v. IRS, revolved around a relatively tiny tax amount: $4,448.

Yeah, I do think almost $4,500 is a tidy sum. But I use the word relative because that amount was in connection with a tax return filed by a trust established for the heirs of the Pepperidge Farm company.

When you’re talking about Pepperidge Farm (yes, I said "fahhrm" in my head as I typed that), you’re not just talking yummy Milano cookie crumbs.

The trust was set up with money from the sale of Pepperidge Farm to
Campbell Soup and in 2000, the year of the disputed return, it had $2.9 million in assets and $625,000
in income.

It reported expenditures of $22,241 on investment advice and
deducted the full amount on its tax return.

Uh-uh, said the IRS. Expenses can be deducted only to the extent they exceeded the 2
percent floor. The difference was the disputed $4,448.

The Supreme Court, in a unanimous decision, said Uncle Sam is right. That’s why you’re seeing a lot of mopey trust managers and beneficiaries today.

At least in this case, we regular taxpayers can take solace in the fact that while the IRS won, it was folks much, much wealthier than us who came out on the losing end of the tax battle.

This Forbes’ story has some good background on the suit, as does this bulletin from Cornell University Law School. This AP story has a bit more on the Court’s decision.