Source: https://law.justia.com/cases/federal/appellate-courts/F3/328/132/500174/
Timestamp: 2020-08-13 01:59:38
Document Index: 44872366

Matched Legal Cases: ['§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 212', '§ 1', '§ 1', '§ 212', '§ 67', '§ 67', '§ 1', '§ 1', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 67', '§ 636', '§ 636']

J.h. Scott; Shelah K. Scott; Anne K. Mcguire; Trust Under the Will of John Stewart Bryan, by and Through Its Co-trustees, C. Cotesworth Pinckney, Lucius H. Bracey, Jr. and Richard T. Taylor; Timothy W. Childs, Deceased, Hope S. Childs, Executrix, Hope S. Childs, Individually, Plaintiffs-appellants, v. United States of America, Defendant-appellee, 328 F.3d 132 (4th Cir. 2003) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Fourth Circuit › 2003 › J.h. Scott; Shelah K. Scott; Anne K. Mcguire; Trust Under the Will of John Stewart Bryan, by and Thr...
J.h. Scott; Shelah K. Scott; Anne K. Mcguire; Trust Under the Will of John Stewart Bryan, by and Through Its Co-trustees, C. Cotesworth Pinckney, Lucius H. Bracey, Jr. and Richard T. Taylor; Timothy W. Childs, Deceased, Hope S. Childs, Executrix, Hope S. Childs, Individually, Plaintiffs-appellants, v. United States of America, Defendant-appellee, 328 F.3d 132 (4th Cir. 2003)
U.S. Court of Appeals for the Fourth Circuit - 328 F.3d 132 (4th Cir. 2003) Argued: February 25, 2003
Four federal taxpayers — a trust and three of its beneficiaries — appeal a district court's decision that they were not entitled to tax deductions for fees paid to investment advisors. Scott v. United States, 186 F. Supp. 2d 664 (E.D. Va. 2002), Memorandum Opinion (the "Opinion"). In particular, the taxpayers maintain that a trust's investment-advice fees should be fully deductible under § 67(e) of the Internal Revenue Code because such fees are incurred as a result of the fact that the income-producing property is held in trust. For the reasons explained below, we agree with the Government that such investment-advice fees are not fully deductible, and we affirm, albeit on alternate grounds, the district court's award of summary judgment.
To resolve this issue, it is necessary to understand certain essential legal principles governing federal taxation of trusts and estates. First and foremost, an individual taxpayer is entitled to deduct fees for investment advice only to the extent that the sum of those fees, plus the taxpayer's other miscellaneous itemized deductions, exceeds 2% of the taxpayer's adjusted gross income. I.R.C. § 67(a).1 Under § 67(e) of the Internal Revenue Code (the "I.R.C."),2 estates and trusts are subject to this same 2% floor, except to the extent that trust-related administrative costs "would not have been incurred if the property were not held in such trust or estate." Id. § 67(e) (1).3 If the fees qualify for the exception created by § 67(e), they are fully deductible in calculating adjusted gross income.
Our sister circuits have split over the proper resolution of the legal issue presented here, that is, whether a trust's investment-advice fees are fully deductible under § 67(e). In O'Neill v. Commissioner of Internal Revenue, 994 F.2d 302 (6th Cir. 1993), the Sixth Circuit held that such fees are fully deductible because trustees incur them in performing their fiduciary duties, duties which do not affect ordinary individual taxpayers. Conversely (and more recently), the Federal Circuit, in Mellon Bank, N.A. v. United States, 265 F.3d 1275 (Fed. Cir. 2001), held that such investment-advice fees are subject to the 2% floor regardless of a trustee's fiduciary duties, because such fees are commonly incurred by individuals. Id. at 1281. According to the Federal Circuit, investment-advice fees do not qualify for the exception established by § 67(e).4
We review de novo a district court's award of summary judgment. See Estate of Armstrong v. United States, 277 F.3d 490, 495 (4th Cir. 2002). Summary judgment is appropriate only when, viewing the facts in the light most favorable to the non-moving party, there is no genuine issue of material fact. See Fed. R. Civ. P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S. Ct. 2505, 91 L. Ed. 2d 202 (1986). In this case, we are primarily faced with issues of statutory interpretation, which are legal issues that we review de novo. Lane v. United States, 286 F.3d 723, 730 (4th Cir. 2002). We are, of course, entitled to affirm on any ground appearing in the record, including theories not relied upon or rejected by the district court. Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992).
In this case, the investment-advice fees fall within I.R.C. § 212, which allows a deduction for ordinary and necessary expenses paid or incurred in producing income and in managing property held for the production of income. See Treas. Reg. § 1.212-1(g), (i) (codified at 26 C.F.R. § 1.212-1(g), (i)). Because the expenses deductible under § 212 are not listed in § 67(b), such expenses are generally subject to the 2% floor established by § 67(a). See Temp. Treas. Reg. § 1.67-1T(a) (1) (ii) (codified at 26 C.F.R. § 1.67-1T(a) (1) (ii)) (explaining that miscellaneous itemized deductions include investment-advisory fees).
I.R.C. § 67(e). Thus, § 67(e) establishes the general rule that the adjusted gross income of an estate or trust must be "computed in the same manner as in the case of an individual." Id. An exception to that rule is provided in § 67(e) (1), which allows deductions (above the line and without regard to the 2% floor) for costs that (1) "are paid or incurred in connection with the administration of the ... trust"; and (2) "would not have been incurred if the property were not held in such trust." Id. § 67(e) (1).
It is undisputed that the investment-advice fees in this case were "paid or incurred in connection with the administration of the ... trust." Id. Thus, the issue presented here, and on which our two sister circuits have disagreed, is whether a trust's investment-advice fees fit within the second requirement of § 67(e) (1), such that they should be fully deductible without regard to the 2% floor established by § 67(a). Accordingly, we are called upon to interpret the meaning of, and relationship between, provisions of § 67(a) and § 67(e).
When interpreting a statute, the goal is always to ascertain and implement the intent of Congress. Brown & Williamson Tobacco Corp. v. FDA, 153 F.3d 155, 161-62 (4th Cir. 1998), aff'd, 529 U.S. 120, 120 S. Ct. 1291, 146 L. Ed. 2d 121 (2000); Stiltner v. Beretta U.S.A. Corp., 74 F.3d 1473, 1482 (4th Cir. 1996) (en banc). The first step of this process is to determine whether the statutory language has a plain and unambiguous meaning. If the statute is unambiguous and if the statutory scheme is coherent and consistent, our inquiry ends there. Barnhart v. Sigmon Coal Co., Inc., 534 U.S. 438, 450, 122 S. Ct. 941, 151 L. Ed. 2d 908 (2002); see also Rosmer v. Pfizer Inc., 263 F.3d 110, 118 (4th Cir. 2001), cert. dismissed, 536 U.S. 979, 123 S. Ct. 14, 153 L. Ed. 2d 878 (2002) (holding that circuit splits and differences in statutory interpretation do not establish ambiguity).
When examining statutory language, we generally give words their ordinary, contemporary, and common meaning. Williams v. Taylor, 529 U.S. 420, 431, 120 S. Ct. 1479, 146 L. Ed. 2d 435 (2000); United States v. Maxwell, 285 F.3d 336, 340-41 (4th Cir. 2002); United States v. Lehman, 225 F.3d 426, 428-29 (4th Cir. 2000). The Supreme Court has explained that " [t]he plainness or ambiguity of statutory language is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Robinson v. Shell Oil Co., 519 U.S. 337, 341, 117 S. Ct. 843, 136 L. Ed. 2d 808 (1997); Maxwell, 285 F.3d at 340-41; Brown & Williamson Tobacco Corp., 153 F.3d at 161-63. Where possible, we must give effect to every provision and word in a statute and avoid any interpretation that may render statutory terms meaningless or superfluous. Freytag v. Comm'r Internal Revenue, 501 U.S. 868, 877, 111 S. Ct. 2631, 115 L. Ed. 2d 764 (1991).
Section 67(e) (1) then establishes an exception to the general rule, allowing certain costs to be deducted in full in computing the adjustable gross income of a trust. It is this exception that the taxpayers attempt to invoke here. Two requirements must be satisfied in order for costs to qualify for the § 67(e) (1) exception. First, the costs incurred by the trust must have been "paid or incurred in connection with the administration of the ... trust." Id. There is no dispute that the investment-advice fees at issue satisfy this requirement.
Second, and importantly for this case, the costs must have been expenses "which would not have been incurred if the property were not held in such trust." Id. The verb "would" in the context of § 67(e) (1) expresses concepts such as custom, habit, natural disposition, or probability. Webster's Third New International Dictionary 481 (1976); American Heritage Dictionary of the English Language 20-42, 2059 (3d ed.1992). Thus, "the second requirement treats as fully deductible only those trust-related administrative expenses that are unique to the administration of a trust and not customarily incurred outside of trusts." Mellon Bank, 265 F.3d at 1280-81; see also Mellon Bank, N.A. v. United States, 47 Fed. Cl. 186, 188-89 (Fed. Cl. 2000). Put simply, trust-related administrative expenses are subject to the 2% floor if they constitute expenses commonly incurred by individual taxpayers.
As the Government points out, we would, by holding that a trust's investment-advice fees were fully deductible, render meaningless the second requirement of § 67(e) (1). All trust-related administrative expenses could be attributed to a trustee's fiduciary duties, and the broad reading of § 67(e) (1) urged by the taxpayers would treat as fully deductible any costs associated with a trust. But the second clause of § 67(e) (1) specifically limits the applicability of § 67(e) to certain types of trust-related administrative expenses. To give effect to this limitation, we must hold that the investment-advice fees incurred by the Trust do not qualify for the exception created by § 67(e). Rather, they are subject to the 2% floor established by § 67(a).
In reaching our decision today, we find ourselves in agreement with the Federal Circuit's reasoning in Mellon Bank, and we thus render a decision at odds with the Sixth Circuit's holding in O'Neill. In O'Neill, the Sixth Circuit reasoned that " [w]here a trustee lacks experience in investment matters, professional assistance may be warranted." 994 F.2d at 304. According to the court, without investment advice, "the co-trustees would have put at risk the assets of the Trust. Thus, the investment advisory fees were necessary to the continued growth of the Trust and were caused by the fiduciary duties of the co-trustees." Id. In our judgment, this analysis contains a fatal flaw. Of course, trustees often (and perhaps must) seek outside investment advice. But the second requirement of § 67(e) (1) does not ask whether costs are commonly incurred in the administration of trusts. Instead, it asks whether costs are commonly incurred outside the administration of trusts. As the Federal Circuit decided in Mellon Bank, investment-advice fees are commonly incurred outside the administration of trusts, and they are therefore subject to the 2% floor established by § 67(a).9
In sum, four other courts have previously considered the issue presented here — the Court of Federal Claims (as a trial court) and the Federal Circuit in Mellon Bank, and the Tax Court (the trial court) and the Sixth Circuit in O'Neill. Of these four courts, three have concluded that a trust's investment advice fees are subject to the 2% floor. See Mellon Bank, N.A. v. United States, 265 F.3d 1275 (Fed. Cir. 2001); Mellon Bank, N.A. v. United States, 47 Fed. Cl. 186 (Fed. Cl. 2000); O'Neill v. Comm'r of Internal Revenue, 98 T.C. 227, 1992 WL 37354 (T.C.1992). Only the Sixth Circuit in O'Neill has held that a trust's investment-advice fees are fully deductible under § 67(e). See O'Neill v. Comm'r of Internal Revenue, 994 F.2d 302, 304 (6th Cir. 1993).
By consent of the parties, the consolidated case was referred to a United States magistrate judge for all purposes. 28 U.S.C. § 636(c). The magistrate judge's Opinion disposed of the parties' cross-motions for summary judgment. In issuing the Opinion, the magistrate judge was acting for the court, and we therefore refer to the Opinion as that of the district court Id. § 636(c) (1) ("Upon the consent of the parties, a full-time United States magistrate judge ... may conduct any or all proceedings in a jury or nonjury civil matter and order the entry of judgment in the case, when specially designated to exercise such jurisdiction by the district court or courts he serves.").