Судебные дела / Зарубежная практика / WILLIAM L. RUDKIN TESTAMENTARY TRUST, u/w/o Henry A. Rudkin, Michael J. Knight, Trustee, Petition╜er-Appellant, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee., United States Court of Appeals, Second Circuit., 467 F.3d 149, Docket No. 05-5151-AG., Decided: Oct. 18, 2006., Argued: May 10, 2006
WILLIAM L. RUDKIN TESTAMENTARY TRUST, u/w/o Henry A. Rudkin, Michael J. Knight, Trustee, Petition╜er-Appellant, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee., United States Court of Appeals, Second Circuit., 467 F.3d 149, Docket No. 05-5151-AG., Decided: Oct. 18, 2006., Argued: May 10, 2006
WILLIAM L. RUDKIN TESTAMENTARY TRUST, u/w/o Henry A. Rudkin, Michael J. Knight, Trustee, Petition╜er-Appellant, v. COMMISSIONER of INTERNAL REVENUE, Respondent-Appellee.
United States Court of Appeals, Second Circuit.
467 F.3d 149
Docket No. 05-5151-AG.
Decided: Oct. 18, 2006.
Argued: May 10, 2006.
Decided: Oct. 18, 2006.
Carol. A. Cantrell, Briggs & Veselka Co., Bellaire, TX, for Petitioner-Appellant.
Gilbert S. Rothenberg, Attorney, Tax Division, United States Dept. of Justice (Eileen J. O'Connor, Assistant Attorney General; Anthony T. Sheehan, Attorney, Tax Division, United States Dept. of Jus╜tice, on the brief), Washington, D.C., for Respondent-Appellee.
Gregory F. Taylor, Lisa Bleier, Ameri╜can Bankers Association, Washington, D.C., for Amici Curiae, American Bankers Association and New York, Bankers Asso╜ciation.
Before: SOTOMAYOR and HALL, Circuit Judges.*
* ═ Judge Wilfred Feinberg, originally a member of the panel, recused himself subsequent to oral argument. Because the remaining members of the Panel are in agreement, we decide this case in accordance with ╖ 0.14(b) of the rules of this Court.
SOTOMAYOR, Circuit Judge.
The question presented on this appeal is whether investment-advice fees incurred by a trust are fully deductible in calculat╜ing adjusted gross income for purposes of the Internal Revenue Code ("IRC") under 26 U.S.C. ╖ 67(e)(1) (2000), or whether these fees are deductible only to the extent that they exceed two percent of the trust's adjusted gross income under ╖ 67(a). Pe╜titioner-appellant Michael J. Knight, trus╜tee of the William L. Rudkin Testamenta╜ry Trust ("the Trust"), appeals from a decision of the United States Tax Court (Robert A. Wherry, Jr., J.). We affirm the decision of the tax court and hold that a trust's investment-advice fees are subject to the two-percent floor of ╖ 67(a) and therefore not fully deductible in arriving at adjusted gross income.
The parties in this case stipulated to the following facts. Henry A. Rudkin estab╜lished the William L. Rudkin Testamenta╜ry Trust in Connecticut on April 14, 1967, for the benefit of his son William, William's wife and William's descendants and their spouses. The Trust was originally funded with proceeds from the sale of Pepperidge Farm, a food products company, to Camp╜bell Soup Company. In 2000, Michael J. Knight, the trustee, engaged Warfield As╜sociates, Inc. ("Warfield") to provide in╜vestment-management advice to the Trust. In its 2000 tax return, the Trust reported total income of $624,816 and claimed a deduction in the amount of $22,241 for investment-management fees paid to War╜field. The Trust claimed this deduction on line 15a of its tax return for "deductions not subject to the 2% floor"; the Trust claimed no deduction on line 15b for "[a]l╜lowable miscellaneous itemized deductions subject to the 2% floor."
On December 5, 2003, the Internal Rev╜enue Service (the "IRS") sent the Trust a notice of deficiency for the year 2000. In the notice, the IRS indicated that it reject╜ed the Trust's itemized deduction for in╜vestment-advice fees in the amount of $22,241, and permitted such a deduction only in the amount of $9,780 (that portion of the fees which exceeded two percent of adjusted gross income of $623,050); as a result, the Trust owed $4,448 in taxes. The parties subsequently became aware that the notice contained an error in its calculation of the Trust's adjusted gross income and stipulated that the correct amount was $613,263. The parties there╜fore agreed that the corresponding deduc╜tion for investment-advice fees would be $9,976, but, for reasons not relevant here, agreed further that the resulting deficien╜cy calculated in the December 5 notice would remain unchanged.
The Trust thereafter filed a petition dis╜puting the assessed deficiency. It argued that the trustee's fiduciary duty-specifi╜cally, the investment duties defined under the Connecticut Uniform Prudent Investor Act, Conn. Gen.Stat. ╖╖ 45a-541-45a-5411 (2005)-required investment advisory ser╜vices for the proper administration of the Trust's sizable stock portfolio and that the investment-advice fees were therefore fully deductible under ╖ 67(e)(1). Following a trial in the United States Tax Court in Hartford, Connecticut, the tax court held that the "investment advisory fees paid by the trust are not fully deductible under the exception provided in section 67(e)(1) and are deductible only to the extent that they exceed 2 percent of the trust's adjusted gross income pursuant to section 67(a)." Rudkin Testamentary Trust v. Comm'r, 124 T.C. 304, 311, 2005 WL 1503675 (2005). This timely appeal followed.
This appeal, which we have jurisdiction to consider under 26 U.S.C. ╖ 7482(a)(1) (2000), presents a question of statutory interpretation. In interpreting a statute, "[w]e start, as always, with the language of the statute." Williams v. Taylor , 529 U.S. 420, 431, 120 S.Ct. 1479, 146 L.Ed.2d 435 (2000). "We give the words of a statute their ordinary, contemporary, common meaning, absent an indication Congress intended them to bear some different im╜port." Id. (internal quotation marks omit╜ted). "Our inquiry must cease if the statu╜tory language is unambiguous and the statutory scheme is coherent and consis╜tent." Robinson v. Shell Oil Co ., 519 U.S. 337, 340, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997) (internal quotation marks omitted). "The plainness or ambiguity of statutory language is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole." Id. at 341, 117 S.Ct. 843. "[A]lthough a court appropriately may refer to a stat╜ute's legislative history to resolve statutory ambiguity, there is no need to do so" if the statutory language is clear. Toibb v. Rad╜loff , 501 U.S. 157, 162, 111 S.Ct. 2197, 115 L.Ed.2d 145 (1991).
In considering the question of stat╜utory interpretation presented on this ap╜peal, we review the legal conclusions of the tax court de novo. Reimels v. Comm'r, 436 F.3d 344, 346 (2d Cir.2006); 26 U.S.C. ╖ 7482(a)(1) (providing that the courts of appeals "shall have exclusive jurisdiction to review the decisions of the Tax Court . . . in the same manner and to the same extent as decisions of the district courts in civil actions tried without a jury"). "In particular, ▒[w]e owe no deference to the Tax Court's statutory interpretations, its relationship to us being that of a district court to a court of appeals, not that of an administrative agency to a court of ap╜peals.' " Callaway v. Comm'r , 231 F.3d 106, 115 (2d Cir.2000) (quoting Exacto Spring Corp. v. Comm'r , 196 F.3d 833, 838 (7th Cir.1999) (Posner, C.J.)).
I. Statutory Framework
Under the IRC, "the adjusted gross in╜come of an estate or trust shall be comput╜ed in the same manner as in the case of an individual," subject to one exception rele╜vant to this appeal. 26 U.S.C. ╖ 67(e). The exception provides that "the deduc╜tions 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 fully deductible from gross income in cal╜culating adjusted gross income. Id. ╖ 67(e)(1). In order to understand this provision's operation, it is necessary first to comprehend the manner in which ad╜justed gross income is calculated for indi╜viduals.
Section 1 of the IRC imposes a tax on all "taxable income" of individuals and trusts. 26 U.S.C. ╖ 1. In calculating tax╜able income, a taxpayer must first deter╜mine the amount of "gross income," which is defined as "all income from whatever source derived." Id. ╖ 61(a). The taxpay╜er then arrives at "adjusted gross income" by subtracting from gross income certain "above-the-line" deductions, such as trade and business expenses and losses from the sale of property. Id. ╖ 62(a). Finally, "taxable income" is calculated by subtract╜ing from adjusted gross income any "item╜ized" (or "below-the-line") deductions. Id. ╖ 63. In the case of an individual, "below-the-line" deductions include, inter alia , "all the ordinary and necessary expenses paid or incurred during the taxable year . . . for the management, conservation, or mainte╜nance of property held for the production of income." Id. ╖ 212.
Again in the case of an individual, "the miscellaneous itemized deductions [i.e., "below-the-line" deductions] for any tax╜able year shall be allowed only to the extent that the aggregate of such deductions exceeds 2 percent of adjusted gross income." Id . ╖ 67(a). Stated differently, the rule creates a "two-percent floor" for an individual's itemized deductions of the sort at issue here. Section 67(b) exempts from the two-percent floor certain specifi╜cally enumerated itemized deductions. Id . ╖ 67(b). Investment-advice fees are gen╜erally treated as itemized deductions un╜der ╖ 212. 26 C.F.R. ╖ 1.212-1(g) (speci╜fying the circumstances in which "[f]ees for services of investment counsel . . . are deductible under section 212"). They are not listed in ╖ 67(b), so are therefore not exempt from the two-percent floor estab╜lished by ╖ 67(a). Temp. Treas. Reg. ╖ 1.67-1T(a)(1)(ii) (1988) (stating that "in╜vestment advisory fees" are subject to the two-percent floor of ╖ 67(a)).
As noted, under ╖ 67(e), trusts are gen╜erally subject to the same rules for calcu╜lating adjusted gross income that apply to individuals, with one exception that is rele╜vant to this appeal. A trust's costs are fully deductible, rather than subject to the two-percent floor, if they satisfy both of the following two requirements: (1) they are "paid or incurred in connection with the administration of the . . . trust"; and (2) they "would not have been incurred if the property were not held in such trust." 26 U.S.C. ╖ 67(e)(1). There is no dispute here that the investment-advice fees at issue meet the requirement of the first clause, that is, that the fees Knight paid to Warfield were incurred in connection with the administration of the Trust. Instead, the issue presented here, on which some of our sister circuits have disagreed, is whether the investment-advice fees also satisfy the requirement of the second clause of ╖ 67(e)(1) and therefore are fully deductible without regard to the two-per╜cent floor of ╖ 67(a).
II. The Circuit Split
The Sixth Circuit was the first federal court of appeals to consider the question presented here. It held that "the invest╜ment advisor fees paid by the Trust were costs incurred because the property was held in trust, thereby making them eligible for the ╖ 67(e) exception and not subject to the base of two percent of adjusted gross income." O'Neill v. Comm'r, 994 F.2d 302, 304 (6th Cir.1993). The Sixth Circuit reasoned that because a trustee has a fiduciary duty to manage trust assets as a "prudent investor," investment-adviso╜ry fees are "necessary to" the trust's ad╜ministration and "caused by" the fiduciary duty of the trustee. Id. The court rea╜soned further that although individual in╜vestors often incur costs for investment advice, "they are not required to consult advisors and suffer no penalties or poten╜tial liability if they act negligently for themselves." Id. In short, O'Neill estab╜lished the rule that a trust's costs attribut╜able to the trustee's fiduciary duty, and not required outside the administration of trusts, fall within the ╖ 67(e)(1) exception and are therefore fully deductible. 1
1. ═ The American Bankers Association and the New York Bankers Association, appearing in this case as amici curiae , advocate the posi╜tion adopted by the Sixth Circuit. They con╜tend that investment-advice fees incurred by a trustee are fully deductible under the statute "because the prudent execution of the duties imposed upon a trustee rendered it necessary to obtain investment advisory services."
The Federal Circuit rejected this rea╜soning in Mellon Bank, N.A. v. United States, 265 F.3d 1275 (Fed.Cir.2001). In Mellon Bank, the court held that the sec╜ond clause of ╖ 67(e)(1) "serves as a filter" with respect to the first clause and "treats as fully deductible only those trust-related administrative expenses that are unique to the administration of a trust and not cus╜tomarily incurred outside of trusts." Id. at 1280-81. Because "[i]nvestment advice and management fees are commonly in╜curred outside of trusts," the court rea╜soned, "these costs are not exempt under section 67(e)(1) and are required to meet the two percent floor of section 67(a)." Id . at 1281. The Federal Circuit also found its construction to be consistent with the statute's legislative history. Id. It con╜cluded by noting that the trust's reading of the statute, which would find all costs aris╜ing out of the trustee's fiduciary duties to fall within the second clause of ╖ 67(e)(1), rendered that clause superfluous "because any costs associated with a trust will al╜ways be deductible." Id.
The Fourth Circuit subsequently joined the Federal Circuit in holding that invest╜ment-advice fees incurred by a trust are subject to the two-percent floor of ╖ 67(a). Scott v. United States, 328 F.3d 132, 140 (4th Cir.2003). Noting that the "text is clear and unambiguous," the Fourth Cir╜cuit stated that "trust-related administra╜tive expenses are subject to the 2% floor if they constitute expenses commonly in╜curred by individual taxpayers." Id. at 139-40. Applying this rule, the court con╜cluded that because investment-advice fees are commonly incurred outside the context of trust administration, they are subject to the two-percent floor. Id. The court not╜ed, however, that "[o]ther 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 tax╜payers, and they would be fully deductible under the exception created by ╖ 67(e)." Id. These costs, the court explained, are "solely attributable to a trustee's fiduciary duties, and as such are fully deductible under ╖ 67(e)." Id . Stating a rationale similar to the Federal Circuit's in Mellon Bank, the court said that to find a trust's investment-advice fees to be fully deductible would lead to the conclusion that "[a]ll trust-related administrative expenses could be attributed to a trustee's fiduciary duties," rendering the second clause of ╖ 67(e)(1) meaningless. Id .
The Trust contends that the Sixth Cir╜cuit construed ╖ 67(e)(1) correctly and that the Federal and Fourth Circuits interpret╜ed the provision inconsistently with both its plain language and legislative history. The Trust's principal textual argument is that the second clause of ╖ 67(e)(1) creates a "but for" causation test, excluding from full deduction only those costs which would have been incurred even in the absence of the trust's ownership of the property, i.e., without the trustee. The Trust also relies on the drafting history of ╖ 67(e)(1) to make the somewhat different argument that by enacting that particular section, Congress intended only to prevent trusts from fully deducting those administrative expenses incurred by pass-through entities in which they had invested. For the rea╜sons that follow, we reject both arguments.
A. Statutory Language
The Trust reads ╖ 67(e)(1) to re╜flect Congress's intent to allow a full de╜duction for the administrative costs of a trust that are attributable to the fiduciary duty of the trustee. The Trust argues that the statute sets forth a "but for" causal test: if the cost would not have been incurred without the trustee, then it is attributable to the trustee's performance of its fiduciary duty and is thus fully de╜ductible under ╖ 67(e)(1). According to the Trust, therefore, the second prong of ╖ 67(e)(1) requires no consideration of whether a generic individual owner of the same assets may have incurred the cost at issue. Rather, the Trust contends that the causation test "plainly" entails "a simple exercise of removing the trustee from the property and seeing which costs remain and which ones disappear without him." The Trust points to specific statutory lan╜guage in advancing this view. It reads the statute's use of the language "such trust" to refer to the specific trust under consid╜eration, its trustee and that trustee's duties, rather than to the generic trust of ╖ 67(e)'s introductory language, that is, a trust of the type to which ╖ 67(e) is appli╜cable. 2 Under the Trust's construction, the statute requires consideration of whether a particular cost would have been incurred if the trustee had never existed. It would ignore, however, how an individu╜al property owner managing the same as╜sets would have acted. For the following reasons, we find the Trust's interpretation unreasonable.
2. ═ The Trust thus contends that the word "such" in the statute, emphasized below, re╜fers to "the" estate or trust mentioned in the first clause of ╖ 67(e)(1), also emphasized be╜low, which it understands to refer not to the generic estate or trust mentioned in the intro╜ductory text of ╖ 67(e)(1), but to the particu╜lar trust at issue.
For purposes of this section, the adjusted gross income of an estate or trust shall be computed in the same manner as is the case of an individual, except that -(1) the deductions for costs which are paid or in╜curred in connection with the administra╜tion of the estate or trust and which would not have been incurred if the property were not held in such trust or estate . . . .
U.S.C. ╖ 67(e)(1) (emphasis added).
As an initial matter, had Congress in╜tended to create a causation test of the type the Trust advances, which disregards what an individual asset owner may have done if the assets were not held in trust, it could have done so in language clearly expressing that intent. Such a "but for" causation test, however, is not apparent from the text's "ordinary, common mean╜ing." See Luyando v. Grinker, 8 F.3d 948, 950 (2d Cir.1993) (noting we interpret a statute according to the "ordinary, com╜mon meaning" of the statute's "plain lan╜guage"). On the contrary, the phrase "if the property were not held in such trust" more logically directs the inquiry away from the trust and back toward the hypo╜thetical ownership of the property by an individual. That is, the introductory lan╜guage of ╖ 67(e) takes as its point of refer╜ence the rules that apply to individual taxpayers, and by using the phrase, "if the property were not held in such trust," Congress has aimed the inquiry at the costs that a hypothetical individual proper╜ty owner could incur with respect to that property. We therefore agree with the Fourth Circuit's statement in Scott that the second prong of ╖ 67(e)(1) does not ask whether the costs at issue are com╜monly incurred in the administration of trusts or are incurred as a result of a particular trustee's fiduciary duty. It fo╜cuses the inquiry, instead, on the hypothet╜ical situation where the assets are in the hands of an individual. See 328 F.3d at 140.
Although the statutory language directs the inquiry toward the counterfactual con╜dition of assets held individually instead of in trust, the statute does not require a subjective and hypothetical inquiry into whether a particular, individual asset own╜er would have incurred the particular cost at issue. Nothing in the statute indicates that Congress intended the test for the exception to the two-percent floor to give rise to factual disputes about whether an individual asset owner (or owners) is in╜sufficiently financially savvy or the assets sufficiently large such that be or she un╜questionably would have sought invest╜ment advice. Instead, the plain meaning of ╖ 67(e)(1)'s second clause excludes from full deduction those costs of a type that could be incurred if the property were held individually rather than in trust. In other words, for the trust to avoid the two-percent floor and have advantage of the full deduction, the plain language of the statute requires certainty that a par╜ticular cost "would not have been in╜curred" if the property were not held in trust.
For that reason, the statute demands not a subjective and hypothetical inquiry, but rather an objective determination of whether the particular cost is one that is peculiar to trusts and one that individuals are incapable of incurring. In other words, the statute sets an objective limit on the availability of a full deduction and, as the source of that limit, looks to those costs that individual property holders are capable of incurring and permitted to de╜duct from adjusted gross income. For example, the fact that investment-advice fees are subject to the two-percent floor under regulations applicable to individual taxpayers proves the fees to be a cost that individual taxpayers are capable of incur╜ring. Investment-advice fees and other costs that individual taxpayers are capable of incurring are, therefore, not fully de╜ductible pursuant to ╖ 67(e)(1) when in╜curred by a trust. By contrast, costs that individuals are incapable of incurring, like "fees paid to trustees, expenses associated with judicial accountings, and the costs of preparing and filing fiduciary income tax returns," Scott, 328 F.3d at 140, are fully deductible.
We thus join the Federal and Fourth Circuits in holding that ╖ 67(e)(1) does not exempt from ╖ 67(a)'s two-percent floor investment-advice fees incurred by trusts. We disagree, however, with their state╜ment that costs "not customarily incurred outside of trusts" are the ones not subject to the floor, Mellon Bank, 265 F.3d at 1281 (emphasis added); Scott, 328 F.3d at 139-40 (citing Mellon Bank and stating that ╖ 67(e)(1) subjects "expenses commonly incurred by individual taxpayers" to the two-percent floor (emphasis added)), be╜cause, as explained above, we believe ╖ 67(e)(1) is more restrictive than that. While the Federal and Fourth Circuits' approach properly focuses the inquiry on the hypothetical situation of costs incurred by individuals as opposed to trusts, that inquiry into whether a given cost is "cus╜tomarily" or "commonly" incurred by indi╜viduals is unnecessary and less consistent with the statutory language. We believe the plain text of ╖ 67(e) requires that we determine with certainty that costs could not have been incurred if the property were held by an individual. We therefore hold that the plain meaning of the statute permits a trust to take a full deduction only for those costs that could not have been incurred by an individual property owner.
In so doing, we reject the Trust's argu╜ment that, in construing ╖ 67(e)(1) to refer to costs incurred by a generic trust rather than the particular trust under consider╜ation, we must ignore the word "such" in the second clause of ╖ 67(e)(1). The stat╜ute's introductory language references a generic "estate or trust" by stating that, "[f]or the 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," subject to the exception under consideration on this ap╜peal. 26 U.S.C. ╖ 67(e) (emphasis added). The first clause of ╖ 67(e)(1) next uses the different phrase "the estate or trust" in setting forth the condition that, to qualify for a full deduction, a cost must be "paid or incurred in connection with the adminis╜tration of the estate or trust." Id . ╖ 67(e)(1) (emphasis added). The second clause of ╖ 67(e)(1) refers to " such estate or trust" in establishing that an adminis╜trative cost is fully deductible only if it "would not have been incurred if the property were not held in such trust or estate." Id . (emphasis added). For the following reason, we agree with the Commissioner that, as used here, "such trust" is best understood as referring to the generic trust of ╖ 67(e)'s introductory language and not to any actual, particular trust that incurred a cost subject to scrutiny. In the first clause of ╖ 67(e)(1), the language "the estate or trust" plainly refers not to a particular trust under consideration, but to the generic estate or trust mentioned in the provision's introductory language. The phrase "such trust or estate" of ╖ 67(e)(1)'s second clause also refers, therefore, to the generic estate or trust mentioned in both the introductory lan╜guage of ╖ 67(e) and in the first clause of ╖ 67(e)(1). Moreover, as explained, noth╜ing in the statute indicates that Congress intended to make applicability of the de╜duction dependent on what costs are pecu╜liarly incurred by a specific trust.
Even if the statute's meaning were not plain and the Trust's alternative inter╜pretation were not unreasonable, canons of statutory interpretation favor the Commis╜sioner's interpretation of the statute. See Natural Res. Def. Council, Inc. v. Muszynski , 268 F.3d 91, 98 (2d Cir.2001) ("If the plain meaning of a statute is suscepti╜ble to two or more reasonable meanings, i.e., if it is ambiguous, then a court may resort to the canons of statutory construc╜tion."). Specifically, our conclusion ac╜cords with the canon of statutory interpre╜tation requiring that when the statute is ambiguous, we resolve interpretive disputes as to the availability of a tax deduc╜tion in favor of the government. "It is a common principle of taxation that where doubt exists, courts should resolve deduc╜tions in favor of the government: ▒Wheth╜er and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision there╜for can any particular deduction be al╜lowed.' " Holmes v. United States , 85 F.3d 956, 961 n. 3 (2d Cir.1996) (quoting New Colonial Ice Co. v. Helvering , 292 U.S. 435, 440, 54 S.Ct. 788, 78 L.Ed. 1348 (1934)).
B. Legislative History
The Trust also invokes the statute's legislative history to support a construc╜tion that is somewhat different from, and not obviously consistent with, its textual argument. 3 It contends that the drafting history indicates that Congress added the second clause of ╖ 67(e)(1) in order to restrict a trust's use of pass-through enti╜ties to avoid the two-percent floor of ╖ 67(a) and not to limit the deductibility of any other administrative costs of a trust. Because we find the statute's text "clear and unambiguous," we need not address the Trust's legislative history arguments. See Scott, 328 F.3d at 139. Even if it were not, however, we disagree that this history supports the Trust's proposed interpreta╜tion of the statute discussed above or pro╜vides any reason to depart from our read╜ing of the statute's meaning. 4
3. ═ While the Trust's textual argument is essen╜tially that fiduciary administrative costs are exempt from the two-percent floor, its argu╜ment based on the drafting history, as ex╜plained below, is that the second clause of ╖ 67(e)(1) makes only the indirect administra╜tive costs of a pass-through entity in which a trust has invested subject to the two-percent floor. If the second clause were so limited, one might think that the statute exempts from the two-percent floor more than simply fidu╜ciary administrative costs. On this view, the statute would appear to exempt from the two-percent floor all costs incurred in connection with the administration of a trust except a trust's share of the administrative costs of a pass-through entity owned, at least in part, by the trust.
4. ═ We note that the legislative history upon which the Federal Circuit relied in Mellon Bank, 265 F.3d at 1281, chiefly H.R.Rep. No. 99-426 (1985) and S.Rep. No. 99-313 (1986), predates the introduction of ╖ 67(e)(1)'s sec╜ond clause, and this history relates to a bill that treated all costs incurred in the adminis╜tration of a trust or an estate as fully deduct╜ible. Thus, unlike the Federal Circuit, we do not view this history as persuasive evidence of the meaning of ╖ 67(e)(1).
Pass-through entities, such as partner╜ships, S corporations, common trust funds, and nonpublic mutual funds, generally do not pay income taxes at the entity level, but instead pass their tax liabilities on to ultimate taxpayers-generally individuals. See Temp. Treas. Reg. 1.67-2T (1988). In the Tax Reform Act of 1986, Congress sought to eliminate the ability of wealthy taxpayers to avoid the two-percent floor of ╖ 67(a) by funneling income through pass╜through entities. See Issues Relating to Passthrough Entities: Hearings Before the Subcomm. on Select Revenue Meas╜ures of the H. Comm. on Ways and Means on H.R. 1658, H.R. 2571, H.R. 3397, H.R. 4448 , 99th Cong. 1 (1986) (stating the Sub╜committee's intent to scrutinize the role of pass-through entities in "facilitating and encouraging tax avoidance techniques"). If there were no restrictions on such enti╜ties, an individual could deduct the full cost of investment advice, for example, by plac╜ing his or her investments in a pass╜through entity, deducting the cost of the advice at the entity level and reporting only the net investment income on his or her individual tax return. Congress ad╜dressed this problem by enacting ╖ 67(c), which provides, inter alia, that regulations shall be issued "which prohibit the indirect deduction through pass-thru entities of amounts which are not allowable as a deduction if paid or incurred directly by an individual." 26 U.S.C. ╖ 67(c)(1). Con╜gress also provided, however, that this rule, except as provided in regulations, shall not apply to trusts. Id. ╖ 67( c)(3)(B).
At the time Congress added ╖ 67(c), the bill provided that all costs incurred in con╜nection with the administration of a trust were exempted from the two-percent floor of ╖ 67(a) and thus permitted trusts to deduct fully all of their administrative costs. Section 67(e)(1)'s second clause was not included in the versions of the bill that emerged initially from the House and Sen╜ate, but was added only in the joint confer╜ence draft. 5 Accordingly, under the draft language of ╖ 67(e) at the time Congress added ╖ 67(c), a trust, unlike an individual, could fully deduct the cost of investment advice and other administrative expenses incurred by pass-through entities in which the trust had invested. To correct this problem, the Trust argues, Congress add╜ed the second clause of ╖ 67(e)(1): trusts and estates could fully deduct only those administrative costs that "would not have been incurred if the property were not held in such trust or estate." According to the Trust, this language was intended to create a limited exception within an excep╜tion. Although trust income is to be calculated in the same way as individual income, administrative costs incurred by a trust are not subject to the two-percent floor of ╖ 67(a), except for those administrative costs incurred by a pass-through entity in which the trust has invested (which are subject to the floor). 6
5. ═ The House bill included the following lan╜guage:
(c) DETERMINATION OF ADJUSTED GROSS INCOME IN CASE OF ESTATES AND TRUSTS.-For purposes of this sec╜tion, 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 the deductions for costs which are paid or incurred in connection with the administration of the estate or trust shall be treated as allowable in arriving at adjusted gross income.
H.R. 3838, 99th Cong. ╖ 67(c) (1985). The Senate Committee on Finance did not amend this provision, but expressed the view that "the bill attempts to reduce the benefits aris╜ing from the use of trusts . . . by revising the rate schedule applicable to trusts." S.Rep. No. 99-313, 99th Cong. 868 (1986). The sec╜ond clause of ╖ 67(e)(1) appeared for the first time in the final version of the bill that emerged in the Joint Conference Agreement. See H.R.Rep. No. 99-841, vol. II, at 34 (1986) (Conf.Rep.), reprinted at 1986 U.S.C.C.A.N. 4075, 4122.
6. ═ The Trust relies most heavily in making this argument on the House Conference Report, which provides some indication that the sec╜ond clause of ╖ 67(e)(1) was drafted to ad╜dress indirect deductions through pass╜through entities. The Trust relies on the fol╜lowing passage from the Report:
Pursuant to Treasury regulations, the [two-percent] floor is to apply with respect to indirect deductions through pass-through entities (including mutual funds) other than estates, nongrantor trusts, cooperatives, and REITs. The floor also applies with respect to indirect deductions through grantor trusts, partnerships, and S corpora╜tions by virtue of present-law grantor trust and pass-through rules. In the case of an estate or trust, the conference agreement pro╜vides that the adjusted gross income is to be computed in the same manner as in the case of an individual, except that the deductions for costs that are paid or incurred in connec╜tion with the administration of the estate or trust and that would not have been incurred if the property were not held in such trust or estate are treated as allowable in arriving at adjusted gross income and hence are not subject to the floor. The regulations to be prescribed by the Treasury relating to appli╜cation of the floor with respect to indirect deductions through certain pass-through entities are to include such reporting re╜quirements as may be necessary to effectu╜ate this provision.
H.R.Rep. No. 99-841, at 34, reprinted at 1986 U.S.C.C.A.N. 4075, 4122 (emphasis added).
If Congress's only purpose had been to restrict the ability of trusts as ultimate taxpayers to deduct fully their share of the administrative costs of pass-through enti╜ties in which they had invested, however, it could have drafted the second clause of ╖ 67(e)(1) more narrowly. It could have, for example, permitted full deductibility for those administrative costs "which are not pass-through costs restricted under section 67(c)." Instead, Congress chose the broader language of ╖ 67(e)(1). Thus, notwithstanding the narrow purpose the Trust attributes to Congress in enacting the second clause of ╖ 67(e)(1), the broad statutory language is the best indication that Congress intended to treat those ad╜ministrative costs that would be subject to the two-percent floor when incurred by an individual as similarly subject to that floor when incurred by a trust. Nothing in the legislative history suggests a clearly ex╜pressed congressional intent contrary to the plain meaning of the statute itself. 7 See Toibb , 501 U.S. at 162 , 111 S.Ct. 2197.
7. ═ The Trust also argues that its reading of the statute in light of the legislative history elimi╜nates the superfluity problem that the Federal and Fourth Circuits, as well as the Commis╜sioner in this case, identified. The Federal and Fourth Circuits both concluded that to interpret ╖ 67(e)(1)'s second clause similarly to the "but for" causation test the Trust ad╜vances here renders that clause superfluous because "[a]ll trust-related administrative ex╜penses could be attributed to a trustee's fidu╜ciary duties." Scott, 328 F.3d at 140; Mellon Bank , 265 F.3d at 1281 ("Under Mellon's construction, the second prerequisite of sec╜tion 67(e)(1) would be rendered superfluous because any costs associated with a trust will always be deductible."). We do not adopt the Federal and Fourth Circuits' view. The Trust contends that the second clause is necessary to filter out a specific subset of the adminis╜trative costs described in the first clause-those incurred by pass-through entities in which a trust has invested. Assuming arguendo that such costs are "incurred in con╜nection with the administration" of a trust for purposes of the statute (and satisfy the first clause), they are not caused by the trustee's fiduciary duty (and so fall outside the Trust's reading of the second clause). We find it difficult to conceive that a trustee's fiduciary duty could require that trust assets be invest╜ed in a particular vehicle.
Because ╖ 67(e)(1) unambiguously ex╜empts from the two-percent floor of ╖ 67(a) only those costs incurred by a trust that could not have been incurred if the property were held by an individual, we conclude that the Trust's investment-advice fees are deductible only to the ex╜tent that they exceed two percent of the Trust's adjusted gross income. This con╜clusion follows from the fact that individual property owners obviously can incur in╜vestment-advice fees and from the regula╜tion explicitly including investment-advice fees among an individual's miscellaneous itemized deductions subject to ╖ 67(a)'s two-percent floor. See Temp. Treas. Reg. ╖ 1.67-1T(a)(1)(ii). Accordingly, the investment-advice fees the Trust paid to Warfield do not meet the requirements of ╖ 67(e)(1) and therefore are not fully de╜ductible. For the foregoing reasons, we AFFIRM the judgment of the tax court.
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