Legal Document

128 S. Ct. 782 (2008) Michael J. KNIGHT, Trustee of William L. Rudkin Testamentary Trust, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE. No. 06-1286. Supreme Court United States. Argued November 27, 2007. Decided January 16, 2008. *784 Peter Rubin, Washington, DC, for petitioner. Eric D. Miller, respondent. Carol A. Cantrell, Bellaire, TX, Martin, The Martin Law Firm, LLP, Woodlands, Jonathan Massey, Bethesda, MD, Counsel Record, Cornelia T.L. Pillard, Georgetown University Center, Walter Dellinger, Robert Rizzi, O'Melveny & Myers Donald Korb, Chief Counsel, Internal Revenue Service, D.C., Paul Clement, Solicitor General, Richard T. Morrison, Acting Assistant Attorney Thomas G. Hungar, Deputy Gilbert Rothenberg, to the Anthony Sheehan, Attorney, Department Justice, *785 Justice ROBERTS delivered opinion Court. Under Code, individuals may subtract from their taxable income certain itemized deductions, but only extent deductions exceed 2% adjusted gross income. A trust also claim those subject floor, except that costs incurred in administration trust, which would not have been if property were held by a be deducted without regard floor. In case individuals, investment advisory fees are floor; question presented is whether such floor when trust. We hold they and therefore affirm judgment below, albeit different reasons than given Appeals. I Code imposes tax on "taxable income" both trusts. 26 U.S.C. § 1(a). instructs calculation begins with determination "gross income," capaciously defined as "all whatever source derived." 61(a). "Adjusted then calculated subtracting "above-the-line" trade business expenses losses sale or exchange property. 62(a). Finally, "itemized deductions"also known "below-the-line" deductionsdefined all allowable other identified 62(a) deduction personal exemptions allowed under 151 (2000 ed. Supp. V). 63(d) ed.). Before passage Tax Reform Act 1986, 100 Stat. 2085, below-the-line deductible full. This system resulted significant complexity potential abuse, requiring "extensive [taxpayer] recordkeeping what commonly small expenditures," well "significant administrative enforcement problems Service." H.R.Rep. 99-426, p. 109 (1985). response, Congress enacted "2% floor" adding 67 Code. Section 67(a) provides "the miscellaneous any year shall aggregate exceeds 2 percent income." term "miscellaneous deductions" include ones specified 67(b). Investment pursuant 212. Because 212 listed 67(b) one categories full, CFR 1.67-1T(a)(1)(ii) (2007). 67(e) makes generally applicable estates trusts,[1] exception relevant here. this exception, an estate computed same manner individual, ... paid connection *786 treated allowable" 67(e)(1). Petitioner Knight trustee established State Connecticut 1967. 2000, hired Warfield Associates, Inc., provide advice respect investing Trust's assets. At beginning year, Trust approximately $2.9 million marketable securities, it $22,241 year. On its fiduciary return reported total $624,816, full Warfield. After conducting audit, respondent Commissioner found these deduct fees, claimed exceeded discrepancy deficiency $4,448. filed petition States seeking review assessed deficiency. It argued Trustee's duty act "prudent investor" Uniform Prudent Investor Act, Conn. Gen. §§ 45a-541a 45a-541l (2007),[2] required obtain services, pay fees. accordingly unique trusts fully rejected argument, holding 67(e)(1) allows deductibility outside setting. Commissioner, 124 T.C. 304, 309-311, 2005 WL 1503675 (2005). appealed Appeals Second Circuit. concluded that, determining "directs inquiry toward counterfactual condition assets individually instead trust," requires "an objective particular cost peculiar incapable incurring." 467 F.3d 149, 155, 156 (2006). court because "costs type could rather was Id., at 155-156. Courts divided presented. Sixth Circuit has deductible. O'Neill 994 F.2d 302, 304 (1993). contrast, Fourth Federal Circuits *787 "commonly" "customarily" See Scott States, 328 132, 140 (C.A.4 2003); Mellon Bank, N.A. 265 1275, 1281 (C.A.Fed.2001). below came conclusion, noted announced more exacting test, allowing "full individual owner." F.3d, (emphasis added). granted certiorari resolve conflict, 551 U.S. ___, 127 3005, 168 Ed. 2d 725 (2007), now affirm. II "We start, always, language statute." Williams Taylor, 529 420, 431, 120 1479, 146 435 (2000). sets forth general rule: "[T]he [a] individual." That is, can ordinarily applies individuals' deductions. two conditions met. First, must "paid trust." Second, "which Ibid. applying statute, asked issue individual.[3] approach flies face statutory language. provision asks "would held" ibid., not, it, "could incurred" case, 156. fact do something reason he possible reason. If had intended Appeals' reading, easily replaced "would" statute "could," presumably have. did adopt readily available apparent alternative strongly supports rejecting reading.[4] *788 Moreover, reading correct, clear why included first clause contextthat truststhen there no place further think expense exclusively nevertheless with" administration. argues "establishes straightforward causation test." Brief 22. proper inquiry, contends, "whether caused estate." argument goes, meet test trustee's obligation "to compliance Trustees' duties." reject well. view, operates distinguish virtue duties not. But (or nearly all) trust's incur them; otherwise, place. Bogert Bogert, Trusts Trustees 801, 134 (2d rev. 1981) ("[T]he payment reasonably necessary facilitate trust"). As example trust-related offers "expenses routine maintenance real property" 23. appear own obligated light maintain 1 Restatement (Second) 176, 381 (1957) ("The beneficiary use reasonable care skill preserve property"). Indeed, formulation circular: "Trust 19. "trust fees" aptly described trust; Even clearly analogous category exempt most merely derive duty. Adding modifier "trust" otherwise surely cannot enough escape What more, position 67(e)(1)providing "incurred trust"would necessary. statute's second, limiting condition work; *789 we see difference saying, hand, "caused by" and, other, "in administration" Thus, accepting render part entirely superfluous, loath do." Cooper Industries, Inc. Aviall Services, 543 157, 166, 125 577, 160 548 (2004). undermined our inclination, "[i]n construing provisions statement policy qualified [to] read narrowly order primary operation provision." Clark, 489 726, 739, 1455, 103 753 (1989). said, rule purposes 67(a): "For section, 67(e)(1)'s swallow rule; (if "Given ..., should eviscerate legislative through expansive somewhat ambiguous exception." More point, terms does "establis[h] test," 22, invites hypothetical into treatment ask "Far examining nature perspective duties, looks absence Respondent 9. brings us adopted Circuits: Costs individuals. Scott, ("Put simply, constitute taxpayers"); (§ "treats customarily trusts"). General accepts view statute. 20-21. agree approach. turns prediction about happen changedspecifically, context making prediction, uncertainty answer, word best "express[ing] concepts custom, habit, natural disposition, probability." supra, 139. Webster's Third New International Dictionary 2637-2638 (1993); American Heritage 2042, 2059 (3d ed.1996). objects text "does `customarily' trusts," Reply 15, direct import context. changed; exercise necessarily *790 entails prediction; predictions based occur. asking excepts uncommon unusual, unlikely) incur. III Having decided 67(e)(1), come application case: unusual hire adviser. Certainly Trustee, who burden establishing entitlement deduction, demonstrated is. INDOPCO, 503 79, 84, 112 1039, 117 226 (1992) (noting "`familiar rule' `an matter grace showing right taxpayer'" (quoting Interstate Transit Lines 319 590, 593, 63 1279, 87 1607 (1943))); Rule 142(a)(1) (stating "burden proof upon petitioner," exceptions here). essential point engaged adviser his Connecticut's Gen.Stat. 45a-541a(a) eponymously trustees follow investor rule." n. 2, supra. To satisfy standard, "invest manage prudent would, considering purposes, terms, distribution requirements circumstances 45a-541b(a) standard plainly refer trustee; very helpful explain would. Rather, objectives handling affairs doi.e., investor. (Third) (Prudent Rule) Reporter's Notes 227, 58 (1990) origins dictum Harvard College Amory, 9 Pick. (26 Mass.) 446, 461 (1830), stating `observe how men prudence, discretion, intelligence affairs, speculation, permanent disposition funds, probable income, safety capital invested'"). also, e.g., re Musser's Estate, 341 Pa. 1, 9-10, 17 A.2d 411, 415 (1941) "general rule" "a prudence diligence average discretion employ affairs"). And doubt solicited advice, just did. accepted this, quite difficult say incurred"that incurredif *791 affairs. appreciate common easy cases, particularly regulatory guidance. once you depart name ease chosen Congress, way skin cat: raises administrability concerns support 6, so Government explaining prefers successfully advanced before Circuits. Congress's decision phrase pertinent situation inevitably some uncertainty, excuse judicial amendment elsewhere poses similar questions "ordinary," 162(a), 212; Deputy, Administratrix Du Pont, 308 488, 495, 60 363, 84 416 (1940) "[o]rdinary connotation normal, usual, customary")and event requires. concedes, "if advisor impose special, additional charge accounts." 25. There nothing record, however, suggest charged anything extra, differently objectives, obligations. App. 24-27. conceivable, moreover, objective, require specialized balancing interests various parties, comparison investors improper. incremental expert beyond normally ordinary taxpayer Here, asserted requisite competing distinctive. Accordingly, conclude affirmed. ordered. NOTES [1] trusts, throughout, analysis equally estates. [2] Forty-four District Columbia versions Act. 7B U.L.A. 1-2 (2006) (listing Act). Five remaining six standard. Del.Code Ann., Tit. 12, 3302 (1995 2006 Supp.); Ga.Code Ann. 53-12-287 (1997); La. 9:2127 (West 2005); Md. Est. 15-114 (Lexis 2001); S.D. Codified Laws 55-5-6 Kentucky, State, circumstances. Ky.Rev.Stat. 286.3-277 2007 Cum.Supp.); 386.454(1), 386.502 (Supp.2007). [3] embraces Court, arguing represents establishes administrable rule. 17-20, after decision, court's proposed regulation. Limitations Estates Trusts, 72 Fed.Reg. 41243, 41245 (2007) (notice rulemaking) (a exempted trust" added)). advance Appellee 05-5151-AG (CA2), pp. 3-4, 22-24. fact, notice rulemaking appears time ever taken position, made brief. Bank 01-5015 (CA Fed.), 27 ("[I]f habitually two-percent floor"); 02-1464(CA4), (same). [4] pressing approach, team won game quarterback's outstanding play quarterback." simply posits truth propositionthat play states equivalent. posit proposition. question:

Classification Label: 11