Key Developments in Select Federal and State Tax Issues

By William C. Hussey, II

On January 16, 2008, the U.S. Supreme Court, affirming the 2nd Circuit Court of Appeals, resolved a split among the federal Circuit Courts by holding that investment advisory fees paid by a trust are deductible only to the extent that they exceed 2% of the trust's adjusted gross income ("AGI"). These investment advisory expenses do not qualify for the exception in Code Section 67(e)(1) under which certain costs paid or incurred in connection with the administration of a trust that wouldn't have been incurred if the property weren't held in the trust may be deducted in arriving at AGI. The ruling does not impact the deductibility of fees paid to banks and other trust companies solely for fiduciary services. However, it will likely result in a higher income tax burden for trusts, and the beneficiaries of those trusts, that incur investment advisory and similar expenses.

On December 15, 2007, the Pennsylvania Department of Revenue issued amendments to its Realty Transfer Tax Regulations. The new Regulations will directly impact the transfer taxes that many Pennsylvania taxpayers will incur in common real estate transactions, including without limitation, Section 1031 Like Kind Exchanges, sale-leaseback transactions and assignments of real estate sales contracts. Close attention to the structuring of these real estate transactions will be required in order to avoid the uncertainties introduced by the Regulations that, in many instances, are a tax trap for the unadvised.

If you would like to discuss how any of these changes may affect your business or tax planning, or have any other tax or estate planning questions, please contact Bill Hussey (215-864-6257), Stephen Zivitz (215-864-6240) or Scott Borsack (215-864-7048).

Bill Hussey focuses on taxation and estate planning issues. He can contacted at 215-864-6257 or husseyw@whiteandwilliams.com.

IRS Circular 230 Notice: To ensure compliance with certain regulations promulgated by the U.S. Internal Revenue Service, we inform you that any federal tax advice contained in this communication is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (1) avoiding tax-related penalties under the U.S. Internal Revenue Code, or (2) promoting, marketing or recommending to another party any tax-related matters addressed herein, unless expressly stated otherwise.