Scott v. U.S.
| Citation | 328 F.3d 132 |
| Decision Date | 01 May 2003 |
| Docket Number | No. 02-1464,02-1464 |
| Parties | 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. |
| Court | United States Courts of Appeals. United States Court of Appeals (4th Circuit) |
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.
ON BRIEF:
Craig D. Bell, McGuireWoods, 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.
Before LUTTIG, TRAXLER, and KING, Circuit Judges.
Affirmed by published opinion. Judge KING wrote the opinion, in which Judge LUTTIG and Judge TRAXLER joined.
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.
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 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
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 current income in quarterly installments to a series of lifetime beneficiaries, ending with Bryan's granddaughters. When a granddaughter dies, her share of the Trust's 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 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 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 & 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 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 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.
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 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 Government 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 taxpayers 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. Opinion at 10.7 The court explained that, under Virginia law, trustees could 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 concluded 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.
We review de novo a district court's award of...
To continue reading
Request your trial
-
Mays & Associates, Inc. v. Euler, No. CIV. RDB 05-437.
...the Inconbazaar case, the goal of statutory interpretation is always to ascertain and implement the intent of Congress. Scott v. U.S., 328 F.3d 132, 138 (4th Cir.2003). "The first step of this process is to determine whether the statutory language has a plain and unambiguous meaning. If the......
-
United States v. Blair
...and word in a statute and avoid any interpretation that may render statutory terms meaningless or superfluous.” Scott v. United States, 328 F.3d 132, 139 (4th Cir.2003).5 Clearly, no one has a constitutional right to use drug money or other criminally derived proceeds to retain a defense at......
-
United States v. Chappell
...as requiring the same thing would render it superfluous, in violation of the rules of statutory construction. See Scott v. United States, 328 F.3d 132, 139 (4th Cir.2003) (stating that courts must “give effect to every provision and word in a statute and avoid any interpretation that may re......
-
Mahdi v. Stirling
...Thus, we affirm the district court's denial of Mahdi's Jury Sentencing Claim on this independent ground. See Scott v. United States , 328 F.3d 132, 137 (4th Cir. 2003) (reiterating that the Court is "entitled to affirm on any ground appearing in the record"). Even if we were to reach the me......
-
Wealth Management Update (August 2014)
...v. Comm'r, 994 F. 2d 302 (6th Cir. 1993); Mellon Bank v. United States, 265 F. 3d 1275 (Fed. Cir. 2001); J.H. Scott v. United States, 328 F. 3d 132 (4th Cir. 2003). This disagreement was resolved in 2008 with the U.S. Supreme Court's decision in Knight v. Comm'r, 552 U.S. 181 In Knight, whi......
-
Ron Aucutts 'Top Ten' Estate Planning And Estate Tax Developments Of 2014
...advice costs of trusts to the 2 percent floor.Mellon Bank v. United States, 265 F.3d 1275 (Fed. Cir. 2001); Scott v. United States, 328 F.3d 132 (4th Cir. 2003); William L. Rudkin Testamentary Trust v. Commissioner, 467 F.3d 149 (2d Cir. 2006), aff'd sub nom Michael J. Knight, Trustee v. Co......
-
President Bush Issues Amendment to Executive Order Regarding National Security Reviews of Foreign Acquisitions of Control of U.S. Businesses
...by the Federal and Fourth Circuits in Mellon Bank, N.A., v. United States, 265 F.3d 1275 (Fed. Cir. 2001), and Scott v. United States, 328 F.3d 132 (4th Cir. 2003), which held that only expenses that are either not commonly or customarily incurred by individuals or unique to the administrat......
-
The ongoing sec. 67(e) controversy and the new preparer penalties.
...the AMT for the trust. The Historical Controversy Several federal courts have ruled on the Sec. 67(e) exclusivity requirement. (See Scott, 328 F3d 132 (4th Cir. 2003), aff'g 186 FSupp2d 664 (E.D. Va. 2002); Mellon Bank, N.A., 265 F3d 1275 (Fed. Cir. 2001), aff'g 47 Fed. C1. 186 (2000); O'Ne......
-
Supreme Court holds investment advisory fees are subject to 2% floor.
...to the 2% floor (Rudkin Testamentary Trust, 467 F3d 149 (2d Cir. 2006), aff'd sub nom. Knight, S. Ct. Dkt. 06-1286 (U.S. 1/16/08); Scott, 328 F3d 132 (4th Cir. 2003); Mellon Bank, N.A., 265 F3d 1275 (Fed. Cir. In October 2006, in Rudkin, the Second Circuit held that "would not" means "could......
-
Significant recent developments in estate planning.
...Cir. 1993), rev'g 98 T.C. 227 (1992). (5) Rudkin Testamentary Trust, 467 F.3d 153 (2d Cir 2006), aff'g 124 T.C. 304 (2005). (6) Scott, 328 F.3d 132 (4th Cir. 2003), aff'g 186 F. Supp. 2d 664 (E.D. Va. (7) Mellon Bank, N.A., 265 F.3d 1275 (Fed. Cir. 2001), aff'g 47 Fed. Cl. 186 (2000). (8) R......
-
Prop. regs. clarify treatment of trust administrative expenses.
...investment advisory fees are subject to the 2% floor (Rudkin Testamentary Trust, 467 F3d 149 (2d Cir. 2006), cert. granted 6/25/07; Scott, 328 F3d 132 (4th Cir. 2003); Mellon Bank, N.A., 265 F3d 1275 (Fed. Cir. While the Supreme Court has granted certiorari in Rudkin and should settle the s......