Mellon Bank v. U.S.

• Citation: 265 F.3d 1275
• Decision Date: 07 September 2001
• Docket Number: No. 01-5015,01-5015
• Parties: (Fed. Cir. 2001) MELLON BANK, N.A., TRUSTEE 361330 C.B.M. 1961 TRUST FOR CHILDREN, TAX YEAR 1989, MELLON BANK, N.A., TRUSTEE 360874 CONSTANCE B. MELLON 1961 TRUST, TAX YEAR 1989, MELLON BANK, N.A., TRUSTEE 360874 CONSTANCE B. MELLON 1961 TRUST, TAX YEAR 1990, REAL ESTATE TRUST, MELLON BANK, N.A., TRUSTEE 361330 CONSTANCE B. MELLON 1961 TRUST FOR CHILDREN, TAX YEAR 1990, MELLON BANK, N.A., TRUSTEE 361331 SEWARD PROSSER MELLON 1961 TRUST FOR CHILDREN, MELLON BANK, N.A., TRUSTEE 360875 SEWARD PROSSER MELLON 1961 TRUST, MELLON BANK, N.A., TRUSTEE 360872 RICHARD P. MELLON 1961 TRUST, MELLON BANK, N.A., TRUSTEE 361328 RICHARD P. MELLON 1961 TRUST FOR CHILDREN, MELLON BANK, N.A., TRUSTEE 360873 CASSANDRA M. MILBURY 1961 TRUST, MELLON BANK, N.A., TRUSTEE 361329 CASSANDRA M. MILBURY 1961 TRUST FOR CHILDREN, MELLON BANK, N.A., TRUSTEE 360138 CONSTANCE B. MELLON 1941 TRUST, MELLON BANK, N.A., TRUSTEE 361448 CONSTANCE B. MELLON 1965 TRUST, MELLON BANK, N.A., TRUSTEE 361330 C.B.M. 1961 TRUST FOR CHILDREN, MELLON BANK, N.A., TRUSTEE 360158 SEWARD PROSSER MELLON 1942 TRUST, MELLON BANK, N.A., TRUSTEE 360118 RICHARD P. MELLON 1940 TRUST, and MELLON BANK, N.A., TRUSTEE 360874 CONSTANCE B. MELLON 1961 TRUST, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

Page 1275

265 F.3d 1275 (Fed. Cir. 2001)

MELLON BANK, N.A., TRUSTEE 361330 C.B.M. 1961 TRUST FOR CHILDREN, TAX YEAR 1989, MELLON BANK, N.A., TRUSTEE 360874 CONSTANCE B. MELLON 1961 TRUST, TAX YEAR 1989, MELLON BANK, N.A., TRUSTEE 360874 CONSTANCE B. MELLON 1961 TRUST, TAX YEAR 1990, REAL ESTATE TRUST, MELLON BANK, N.A., TRUSTEE 361330 CONSTANCE B. MELLON 1961 TRUST FOR CHILDREN, TAX YEAR 1990, MELLON BANK, N.A., TRUSTEE 361331 SEWARD PROSSER MELLON 1961 TRUST FOR CHILDREN, MELLON BANK, N.A., TRUSTEE 360875 SEWARD PROSSER MELLON 1961 TRUST, MELLON BANK, N.A., TRUSTEE 360872 RICHARD P. MELLON 1961 TRUST, MELLON BANK, N.A., TRUSTEE 361328

RICHARD P. MELLON 1961 TRUST FOR CHILDREN, MELLON BANK, N.A., TRUSTEE 360873 CASSANDRA M. MILBURY 1961 TRUST, MELLON BANK, N.A., TRUSTEE 361329 CASSANDRA M. MILBURY 1961 TRUST FOR CHILDREN, MELLON BANK, N.A., TRUSTEE 360138 CONSTANCE B. MELLON 1941 TRUST, MELLON BANK, N.A., TRUSTEE 361448 CONSTANCE B. MELLON 1965 TRUST, MELLON BANK, N.A., TRUSTEE 361330 C.B.M. 1961 TRUST FOR CHILDREN, MELLON BANK, N.A., TRUSTEE 360158 SEWARD PROSSER MELLON 1942 TRUST, MELLON BANK, N.A., TRUSTEE 360118 RICHARD P. MELLON 1940 TRUST, and MELLON BANK, N.A., TRUSTEE 360874 CONSTANCE B. MELLON 1961 TRUST, Plaintiffs-Appellants, v. UNITED STATES, Defendant-Appellee.

No. 01-5015

United States Court of Appeals for the Federal Circuit

September 7, 2001

Appealed from: United States Court of Federal Claims Judge Roger B. Andewelt

Joseph W. Klein, Reed Smith LLP, of Pittsburgh, Pennsylvania, argued for plaintiffs-appellants. With him on the brief were Mark Bookman, Carolyn D. Duronio, and Leo N. Hitt.

Gilbert S. Rothenberg, Attorney, Tax Division, Appellate Section, Department of Justice, of Washington, DC, argued for defendant-appellee. With him on the brief was Anthony T. Sheehan, Attorney. Of counsel was Steven W. Parks, Attorney.

Mark R. Baran, American Bankers Association, of Washington, DC, for amicus curiae American Bankers Association.

Before MAYER, Chief Judge, LOURIE and RADER, Circuit Judges.

MAYER, Chief Judge.

Mellon Bank, N.A. and Real Estate Trust (collectively, "Mellon Bank") appeal the September 18, 2000, judgment of the Court of Federal Claims granting summary judgment to the United States. Mellon Bank, N.A. v. United States, No. 97-CV-151^* (September 18, 2000) ("Mellon II"). Because the Court of Federal Claims properly construed I.R.C. 67(e)(1), we affirm.

Background

Mellon Bank seeks a consolidated tax refund of income taxes paid in years 1989 through 1992 by thirteen irrevocable trusts created for the benefit of members of the Richard K. Mellon family. Mellon Bank sought reimbursement for expenditures paid by the trustees for the outside services they employed for the administration and management of the trusts. The services included investment strategy advice, accounting, tax preparation, and financial management.

I.R.C. 67(a) allows individuals to deduct "miscellaneous itemized deductions" only to the extent that the aggregate of the deductions exceeds two percent of the taxpayer's adjusted gross income. This is referred to as the "two percent floor." Section 67(e) requires the adjusted gross income for a trust to be computed in the same manner as in the case of an individual. Therefore, the two percent floor rule generally applies to deductions for trust income. However, section 67(e)(1) allows deductions below the two percent floor if the claimed expenditures are "paid or incurred in connection with the administration of the estate or trust and . . . would not have been incurred if the property were not held in such trust or estate."

In October of 1990, Mellon Bank filed a Form 1041 Fiduciary Income Tax Return (Form 1041) for tax year 1989. Form 1041 provides for the deduction of "Fiduciary fees"; "Other deductions NOT subject to the 2% floor"; and "Allowable miscellaneous itemized deductions subject to the 2% floor." Mellon Bank claimed a deduction for income distribution and administrative costs that would not have been incurred had the property not been held in a trust. Relying on the then recent O'Neill v. Commissioner, 994 F.2d 302 (6th Cir. 1993), in October 1993, Mellon Bank filed an amended Form 1041, seeking a refund. The Internal Revenue Service (IRS) denied the refund claim, and the bank filed suit in the Court of Federal Claims. The parties cross-moved for summary judgment.

On July 17, 2000, the Court of Federal Claims denied both motions for summary judgment. Mellon Bank, N.A. v. United States, 47 Fed. Cl. 186 (2000) ("Mellon I"). The court denied Mellon Bank's motion because it rejected its interpretation of section 67(e)(1). Id. at 196. The court denied the government's motion because there were material issues of fact as to whether the additional expenditures deducted by the bank on the October 1993 Form 1041 would not have been incurred if the property were not held in a trust. Id. On September 14, 2000, the parties filed a stipulation eliminating any subsequent fact finding. The stipulation reads, in relevant part, as follows:

1. In the taxable years 1989 through 1992, inclusive, some or all of the Plaintiff Trusts incurred costs for the services of Richard K. Mellon and Sons and of certain investment specialists . . . . These stipulations will refer to all of these costs as "the costs at issue."

2. It is the position of the Plaintiff Trusts that the construction of I.R.C. 67(e), set forth in the July 17, 2000 opinion of the Court of Federal Claims, is erroneous. To isolate and preserve the issue of the proper construction of 67(e) for appeal, the Plaintiff Trusts stipulate that they will not present evidence before the trial or appellate court in this proceeding as to whether any of the costs at issue "would not have been incurred if the property were not held in such trust or estate," as the Court of Federal Claims has construed that statutory phrase in its Opinion of July 17, 2000.

Accordingly, the trial court entered judgment on the merits in favor of the United States. Mellon Bank appeals the court's construction of the statute.

Discussion

We have jurisdiction to hear this appeal from a final judgment of the Court of Federal Claims under 28 U.S.C. 1295(a)(3). "Summary judgment is appropriate when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Cenex, Inc. v. United States, 156 F.3d 1377, 1378 (Fed. Cir. 1998) (quoting Barseback Kraft AB v. United States, 121 F.3d 1475, 1479 (Fed. Cir. 1997). Accordingly, our review is de novo. Gump v. United States, 86 F.3d 1126, 1127 (Fed. Cir. 1996).

The question is whether the Court of Federal Claims in Mellon I properly interpreted the second requirement of I.R.C. 67(e)(1) to mean that a trustee's costs are subject to the two percent floor established by I.R.C. 67(a) unless the costs occur only in the context of trust administration and are not routinely incurred by individual investors. Section 67 provides:

(a) General rule.-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.

* * *

(e) 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, and

* * *

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

It is undisputed that trustee fees are fully deductible. Mellon maintains that trustee fees are merely a label for fiduciary services performed by the trustee. It thus argues that there are really no unique "trustee" services--all are requirements of state fiduciary law. Services delegated by the trustee remain subject to fiduciary standards and are fiduciary services under governing law. Therefore, payments for outside fiduciary services are in fact, trustee fees, and should be fully deductible under section 67(e)(1).

Mellon relies on the Sixth Circuit's ruling in O'Neill for the proposition that the taxpayer may satisfy section 67(e)(1) by proving that the expenses incurred were necessary to fulfill his fiduciary obligations under state law. O'Neill determined that the trustees lacked the knowledge and experience to manage a $4.5 million trust and hired outside investors. 994 F.2d at 303. The trustees deducted these management fees under section 67(e). Id. The Tax Court denied the deduction, reasoning that such fees were not "unique to the administration" of a trust and "[i]ndividual investors routinely incur costs for investment advice as an integral part of their investment activities." O'Neill v. Comm'r, 98 T.C. 227, 230 (1992). However, the Sixth Circuit reversed, finding that individual investors are "not required to consult advisors and suffer no penalties or potential liability if they act negligently for themselves." 994 F.2d at 304. The court concluded that "fiduciaries uniquely occupy a position of trust for others and have an obligation to the beneficiaries to exercise proper skill and care with the assets of the trust." Id. Therefore, the fees were eligible for the section 67(e) exception and not subject to the two percent floor requirement of section 67(a). Id.

We agree with the Sixth Circuit's conclusion that different legal obligations apply to assets held in a trust. The prudence standard for trustee investing traces back to Harvard College v. Amory, 26 Mass. 446 (Mass. 1830). The Massachusetts Supreme Judicial Court stated that trustees should "observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation,...