Court Opinion

ID: 2967768
Source: CourtListenerOpinion
Date Created: 2015-09-22 03:22:01.048142+00
Date Added: 2024-06-11T15:28:14.684739
License: Public Domain

PUBLISHED

UNITED STATES COURT OF APPEALS
                 FOR THE FOURTH CIRCUIT

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.                No. 02-1464
CHILDS, Individually,
                Plaintiffs-Appellants,
                  v.
UNITED STATES OF AMERICA,
               Defendant-Appellee.
                                         
           Appeal from the United States District Court
         for the Eastern District of Virginia, at Richmond.
                 David G. Lowe, Magistrate Judge.
                          (CA-01-177-3)
                       Argued: February 25, 2003
                         Decided: May 1, 2003
     Before LUTTIG, TRAXLER, and KING, Circuit Judges.

Affirmed by published opinion. Judge King wrote the opinion, in
which Judge Luttig and Judge Traxler joined.

                              COUNSEL
ARGUED: Ronald David Aucutt, MCGUIREWOODS, L.L.P.,
McLean, Virginia, for Appellants. Gilbert Steven Rothenberg, Tax
2                       SCOTT v. UNITED STATES
Division, UNITED STATES DEPARTMENT OF JUSTICE, Wash-
ington, D.C., for Appellee. ON BRIEF: Craig D. Bell, MCGUIRE-
WOODS, L.L.P., Richmond, Virginia, for Appellants. Eileen J.
O’Connor, Assistant Attorney General, Paul J. McNulty, United
States Attorney, Anthony T. Sheehan, Tax Division, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C., for
Appellee.

                              OPINION

KING, Circuit Judge:

   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,
CA No. 3:01CV177, Memorandum Opinion (E.D. Va. Feb. 28, 2002)
(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.

                                   I.

                                   A.

   This appeal involves the Trust Under the Will of John Stewart
Bryan (the "Bryan Trust" or the "Trust") and three of its income bene-
ficiaries. In 2001, these four taxpayers (collectively, the "taxpayers")
filed four separate lawsuits in the Eastern District of Virginia, seeking
refunds for taxes paid in the 1996 and 1997 tax years. The suits were
consolidated because they all raise the same issue: whether a trust is
entitled to deduct, in full, fees paid for investment advice.

   To resolve this issue, it is necessary to understand certain essential
legal principles governing federal taxation of trusts and estates. First
                          SCOTT v. UNITED STATES                            3
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 per-
forming their fiduciary duties, duties which do not affect ordinary
individual taxpayers. Conversely (and more recently), the Federal Cir-
cuit, in Mellon Bank, N.A. v. United States, 265 F.3d 1275 (Fed. Cir.
  1
    Section 67(a) of the Internal Revenue Code provides: "In the case of
an individual, the miscellaneous itemized deductions for any taxable year
shall be allowed only to the extent that the aggregate of such deductions
exceeds 2 percent of adjusted gross income." I.R.C. § 67(a) (codified at
26 U.S.C. § 67(a)).
  2
    The Internal Revenue Code is codified in Title 26 of the United States
Code, and I.R.C. § 67 is codified at 26 U.S.C. § 67. For ease of refer-
ence, we cite to the I.R.C. rather than to the United States Code.
  3
    Section 67(e) of the I.R.C. provides, in relevant part:
      Determination of adjusted gross income in case of estates and
      trusts. — For purposes of this section, the adjusted gross income
      of an estate or trust shall be computed in the same manner as in
      the case of an individual, except that —
            (1) the deductions for costs which are paid or incurred in
          connection with the administration of the estate or trust and
          which would not have been incurred if the property were not
          held in such trust or estate . . .
      shall be treated as allowable in arriving at adjusted gross income.
I.R.C. § 67(e).
4                        SCOTT v. UNITED STATES
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 Fed-
eral Circuit, investment-advice fees do not qualify for the exception
established by § 67(e).4

                                    B.

   Between 1932 and 1942, John Stewart Bryan became a grandfather
to four girls (all sisters). These granddaughters include taxpayers
Shelah K. Scott, Hope S. Childs, and Anne K. McGuire.5 On October
16, 1944, pursuant to Bryan’s will, the Bryan Trust was established
under Virginia law. The Trust directed the payment of all of its cur-
rent income in quarterly installments to a series of lifetime beneficia-
ries, ending with Bryan’s granddaughters. When a granddaughter
dies, her share of the Trust’s income passes to her husband and chil-
dren as directed in her will or, if there is no provision in her will, to
her descendants per stirpes. Upon the death of the last granddaughter,
each granddaughter’s share of the Trust’s principal is to be distributed
to her husband and children as directed in her will or, if there is no
provision in her will, to her descendants per stirpes.

   The Bryan Trust authorized its trustees to make a broad variety of
investments "whether or not any investment shall produce income,"
"without regard to any statute or other law concerning the investment
    4
     In sum, four other courts have previously considered the issue pre-
sented here — the Court of Federal Claims (as a trial court) and the Fed-
eral 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 (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).
   5
     The fourth granddaughter, Constance K. Tucker, lived in Ohio during
1996 and 1997. No adjustments were made to her 1996 and 1997 tax
returns, and she is not a party to this litigation.
                        SCOTT v. UNITED STATES                         5
of trust funds," and "without incurring liability for losses as a result
of such investments." It also directed the trustees to keep "in mind
possible changes in monetary or other standards which might affect
the purchasing power" of Trust assets. The Trust authorized its trust-
ees to employ investment advisors and to pay those advisors reason-
able charges and fees for their services.

   In 1971, the trustees of the Bryan Trust retained Brundage, Story
and Rose, LLC ("BS&R"), an investment-counseling firm in New
York City, which provides its clients with a full spectrum of invest-
ment advice and monitoring services. BS&R’s clients include not
only institutions such as trusts, endowments, foundations, and pension
plans, but also wealthy individuals and families. BS&R provides an
identical range of services to both institutional and individual clients.

   During 1996 and 1997, the tax years at issue in this case, the Bryan
Trust had assets worth approximately $25 million. The income bene-
ficiaries were Scott, Childs, McGuire, and their sister who lived in
Ohio. The trustees were three lawyers — C. Cotesworth Pinckney (a
partner at Troutman Sanders LLP, which was known as Mays & Val-
entine, LLP during the tax years at issue), Lucius H. Bracey, Jr. (a
partner at McGuireWoods LLP), and Richard T. Taylor (a former
partner at Cadwalader, Wickersham & Taft LLP). The taxpayers
allege that the trustees lacked expertise in the investment of large
sums of money and that they would not have served without outside
investment advice.

   In 1996 and 1997, respectively, the Bryan Trust paid BS&R
$107,055 and $119,943 in fees for investment advice. The Trust also
paid custodian fees, trustees’ fees, and fees for the preparation of
income tax returns and accountings.

                                   C.

   On their 1996 and 1997 income tax returns, the taxpayers reported
the investment-advice fees paid to BS&R as "other deductions," not
subject to the 2% floor for miscellaneous itemized deductions. After
an audit, the IRS determined that the investment-advice fees were, in
fact, miscellaneous itemized deductions subject to the 2% floor.
I.R.C. § 67(a). Consequently, the IRS concluded that the taxpayers
6                        SCOTT v. UNITED STATES
owed additional income taxes for the 1996 and 1997 tax years. In
early 2000, the taxpayers paid the additional taxes and interest. They
then filed refund claims with the IRS, contending that the investment-
advice fees that the Bryan Trust had paid to BS&R were not subject
to the 2% floor applicable to miscellaneous itemized deductions. The
IRS denied the refund claims.

   Thereafter, the taxpayers filed their four refund suits in the Eastern
District of Virginia. After the suits were consolidated, the Govern-
ment filed a motion for summary judgment in which it maintained,
consistent with the Federal Circuit’s decision in Mellon Bank, that the
Trust’s investment-advice fees were subject to the 2% floor. The tax-
payers filed a cross motion for summary judgment contending, in
accordance with the Sixth Circuit’s decision in O’Neill, that the fees
qualified for § 67(e)’s exception from the 2% floor. At oral argument
on the motions, the court raised a new issue — that is, the immunity
afforded under Virginia law to trustees who invest trust assets in a
statutory list of approved investments. See Va. Code Ann. § 26-45.1
(Michie 1992) (the "Virginia legal list").6 The court sought additional
briefing on the potential impact of that immunity on the deductibility
of investment-advice fees.

   After further briefing and argument on the Virginia law issue, the
court granted the Government’s motion for summary judgment. Opin-
ion at 10.7 The court explained that, under Virginia law, trustees could
    6
     The current version of the Virginia legal list, effective January 1,
2000, is codified at Va. Code Ann. §§ 26-45.3 to 26-45.14 (Michie
2001). The relevant law for this case, however, is the pre-2000 version
of the statute.
   7
     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 act-
ing for the court, and we therefore refer to the Opinion as that of the dis-
trict 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 dis-
trict court or courts he serves.").
                        SCOTT v. UNITED STATES                        7
fully satisfy their fiduciary duties by limiting themselves to certain
investments specifically authorized by the Virginia legal list. Opinion
at 5-11; see also Va. Code Ann. § 26-45.1 (Michie 1992). The court
acknowledged that investments authorized by the Virginia legal list
might not be the best investments from a financial perspective and
that trustees "would probably be better served" by seeking investment
advice. Opinion at 10. The court concluded, however, that the trustees
were under no obligation to do so. Id. Accordingly, the court con-
cluded that when a Virginia trustee seeks investment advice "he is
doing nothing different than what an individual investor might do" in
that a trustee’s "need" and an individual’s "need" for investment
advice both spring from the same desire — to increase profitability.
Id.

   Pursuant to this reasoning, the court decided that the Trust’s
investment-advice fees were subject to the 2% floor of § 67(a), and
it awarded summary judgment to the Government. Opinion at 10-11.
The taxpayers have filed a timely notice of appeal, and we possess
jurisdiction pursuant to 28 U.S.C. § 1291.

                                  II.

   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 (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).

                                  III.

   The taxpayers maintain that the district court erred in holding that
the Trust’s investment-advice fees were subject to the 2% floor of
§ 67(a). They claim that the fees should instead be fully deductible
8                        SCOTT v. UNITED STATES
under the exception to § 67(a) created by § 67(e), in that the fees
"would not have been incurred if the property were not held in trust."
I.R.C. § 67(e). The Government, by contrast, contends that invest-
ment advice is commonly sought by wealthy individuals, that a trust’s
investment-advice fees are thus not incurred because the property is
held in trust, and that, as a result, the § 67(e) exception does not apply
to such fees.

                                    A.

   Section 1 of the I.R.C. imposes a tax on all "taxable income" of
individuals and trusts. Id. § 1. The computation of taxable income
begins with a determination of "gross income," which is defined as
"all income from whatever source derived." Id. § 61(a). Taxpayers
can then subtract from gross income certain "above-the-line" deduc-
tions (i.e., trade and business expenses, losses from the sale or
exchange of property, and deductions attributable to rents and royal-
ties) to arrive at "adjusted gross income." Id. § 62(a). "Taxable
income" is then calculated by subtracting from adjusted gross income
the "itemized" (or "below-the-line") deductions, consisting of all
deductions other than (1) above-the-line deductions and (2) the
deductions for personal exemptions under I.R.C. § 151. Id. § 63.

   In the case of individuals, the majority of itemized deductions are
"miscellaneous itemized deductions," which are deductible "only to
the extent that the aggregate of such deductions exceeds 2 percent of
adjusted gross income." Id. § 67(a). The only itemized deductions
exempted from the 2% floor are enumerated in I.R.C. § 67(b). In
other words, all itemized deductions are subject to the 2% floor unless
specifically removed from that category by § 67(b).8

   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
    8
    The deductions excepted from the 2% floor include the deductions
for: interest (I.R.C. § 163); state and local income and property taxes
(I.R.C. § 164); casualty and theft losses (I.R.C. § 165); charitable contri-
butions (I.R.C. § 170); and medical expenses (I.R.C. § 213). I.R.C.
§ 67(b).
                        SCOTT v. UNITED STATES                         9
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).

   Section 67(e), however, modifies (in part) the general 2% floor cre-
ated by § 67(a) in the context of trusts and estates. Section 67(e) pro-
vides in relevant part:

    [T]he adjusted gross income of an estate or trust shall be
    computed in the same manner as in the case of an individ-
    ual, except that —

            (1) the deductions for costs which are paid or
         incurred in connection with the administration of
         the estate or trust and which would not have been
         incurred if the property were not held in such trust
         or estate . . .

    shall be treated as allowable in arriving at adjusted gross
    income.

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).
10                      SCOTT v. UNITED STATES
Accordingly, we are called upon to interpret the meaning of, and rela-
tionship between, provisions of § 67(a) and § 67(e).

                                  B.

   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 (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 (2002); see also Rosmer v. Pfizer Inc., 263
F.3d 110, 118 (4th Cir. 2001), cert. dismissed, 123 S. Ct. 14 (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 (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 refer-
ence 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 (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 meaning-
less or superfluous. Freytag v. Comm’r Internal Revenue, 501 U.S.
868, 877 (1991).

                                  C.

   Applying these canons of statutory construction to § 67(e), we con-
clude that its text is clear and unambiguous. Thus, we need not refer-
ence any of the legislative history brought to our attention by the
parties. The text of § 67(e) establishes that the adjusted gross income
of a trust is generally computed in the same manner as the adjusted
                        SCOTT v. UNITED STATES                        11
gross income of an individual. I.R.C. § 67(e) ("For purposes of this
section, the adjusted gross income of an estate or trust shall be com-
puted in the same manner as in the case of an individual."). Under that
general rule, the deductions claimed by a trust are typically treated as
miscellaneous itemized deductions subject to the 2% floor of § 67(a).

   Section 67(e)(1) then establishes an exception to the general rule,
allowing certain costs to be deducted in full in computing the adjust-
able 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 disposi-
tion, 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.

   Because investment-advice fees are commonly incurred outside the
context of trust administration, they are subject to the 2% floor cre-
ated by § 67(a). Other costs ordinarily incurred by trusts, such as fees
paid to trustees, expenses associated with judicial accountings, and
the costs of preparing and filing fiduciary income tax returns, are not
ordinarily incurred by individual taxpayers, and they would be fully
deductible under the exception created by § 67(e). Such trust-related
administrative expenses are solely attributable to a trustee’s fiduciary
duties, and as such are fully deductible under § 67(e). Investment-
12                       SCOTT v. UNITED STATES
advice fees, by contrast, are often incurred by individual taxpayers in
the management of income-producing property not held in trust.

   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).

                                    D.

   In reaching our decision today, we find ourselves in agreement
with the Federal Circuit’s reasoning in Mellon Bank, and we thus ren-
der 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 expe-
rience in investment matters, professional assistance may be war-
ranted." 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 administra-
tion of trusts. As the Federal Circuit decided in Mellon Bank,
investment-advice fees are commonly incurred outside the adminis-
tration of trusts, and they are therefore subject to the 2% floor estab-
lished by § 67(a).9
  9
   In concluding that the Trust’s investment-advice fees do not qualify
for the exception of § 67(e), we resolve the appeal on this alternative
basis and do not reach the issue decided by the district court on how the
Virginia legal list affects the application of § 67(e). See Opinion at 5-10.
                     SCOTT v. UNITED STATES                   13
                              IV.

  For the foregoing reasons, we affirm (on alternate grounds) the
decision of the district court.

                                                     AFFIRMED