328 F.3d 132 (4th Cir. 2003), 02-1464, Scott v. United States
|Citation:||328 F.3d 132|
|Party Name:||J.H. SCOTT; SHELAH K. S; ANNE K. MCGUIRE; TRUST UNDER THE WILL OF J. H. S 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-Appelle|
|Case Date:||May 01, 2003|
|Court:||United States Courts of Appeals, Court of Appeals for the Fourth Circuit|
Argued: February 25, 2003
Appeal from the United States District Court for the Eastern District of Virginia, at Richmond. CA-01-177-3, David G. Lowe, Magistrate Judge.
Ronald David Aucutt, MCGUIREWOODS, L.L.P., McLean, Virginia, for Appellants. Gilbert Steven Rothenberg, Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
Craig D. Bell, MCGUIRE-WOODS, L.L.P., Richmond, Virginia, for Appellants. Eileen J. OConnor, Assistant Attorney General, Paul J. McNulty, United States Attorney, Anthony Page 134
T. Sheehan, Tax Division, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee. Before LUTTIG, TRAXLER, and KING, Circuit Judges.
Affirmed by published opinion. Judge King wrote the opinion, in which Judge Luttig and Judge Traxler joined.
KING, Circuit Judge:
Four federal taxpayers a trust and three of its beneficiaries appeal a district courts 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 trusts 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 courts award of summary judgment.
This appeal involves the Trust Under the Will of John Stewart Bryan (the "Bryan Trust" or the "Trust") and three of its income beneficiaries. 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 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 taxpayers other miscellaneous itemized deductions, exceeds 2% of the taxpayers 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 Page 135
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 trusts investment-advice fees are fully deductible under § 67(e). In ONeill 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 trustees 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
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 Bryans will, the Bryan Trust was established under Virginia law. The Trust directed the payment of all of its current income in quarterly installments to a series of lifetime beneficia ries, ending with Bryans granddaughters. When a granddaughter dies, her share of the Trusts income passes to her husband and children 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 granddaughters share of the Trusts 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 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 trustees to employ investment advisors and to pay those advisors reasonable 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 investment advice and monitoring services. BS&Rs clients include not only institutions such as trusts, endowments, foundations, and pension Page 136
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 beneficiaries 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 & Valentine, 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...
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