The American Bankers Association announced on August 24, 2007, that the ABA and eleven state bankers associations filed a friend-of-the-court brief with the U.S. Supreme Court in the pending appeal of William L. Rudkin Testamentary Trust v. Commissioner (PDF, 19 pages), 467 F.3d 149, 98 AFTR2d 2006-7368 (2d Cir. 10/18/06).
The filing of the Amicus Brief was made on August 23, 2007, according to the United States Supreme Court's Docket for the case, found here.
The associations' brief argues for a reversal of a lower-court ruling strictly limiting the deductibility of investment-advice fees incurred by trustees.
For background about the Rudkin dispute, see: PA EE&F Law Blog posting "Rudkin" Regulations Proposed During Appeal (08/02/07).
The "ABA Amicus Brief to the Supreme Court in the Rudkin Case" (PDF, 19 pages) was made available online by the ABA on its "Center for Securities, Trust & Investments" web page. It was also made available here on the website of the American College of Trust & Estate Counsel.
The American Bankers Association was joined in the filing by bankers associations from the following states: California, Florida, Illinois, Kansas, Massachusetts, Missouri, New York, North Dakota, Ohio, Pennsylvania, and Texas. The Pennsylvania Bankers Association was listed as an amicus; and a Pennsylvania statute -- 20 Pa. Cons. Sta. Ann. §§ 7201 – 7214 (West, Westlaw through 2006-189) -- was cited in the brief on page 8. [Note: This last statement is a correction from the original posting. See: Update on 09/04/07, below.]
The interest of the ABA in the case was stated as follows:
The ABA is the largest national trade association of the banking industry in the country. It represents banks and holding companies of all sizes in each of the fifty states and the District of Columbia, including community, regional, and money center banks. The ABA also represents savings associations, trust companies, and savings banks. ABA members hold approximately 95% of the U.S. banking industry’s domestic assets. ABA frequently appears in litigation, either as a party or amicus curiae, in order to protect and promote the interests of the banking industry and its members.This is the "Summary" of the argument in the brief:
The amici have a direct interest in the outcome of this litigation. Many of ABA’s and the State Association Amici’s members serve as trustees and executors, or act as agents for individuals who serve as executors or trustees. The issue presently before the Court concerns the proper construction and interpretation of Section 67(e) of the Internal Revenue Code (the “Tax Code”), 26 U.S.C. § 67(e). This statute addresses the taxation of trusts and estates, specifically the deductibility of investment advisory fees. The outcome of this case will have a direct effect upon the manner in which the amici’s members engage in (and are taxed on) their trust business.
The ABA and the State Association Amici respectfully submit that the decision below was incorrectly decided because the court failed to recognize that, unlike individual investors, trustees have an affirmative legal duty to prudently invest trust assets.The full argument and citations are set forth in the brief.
While individual investors often seek professional investment advice, they do so out of good sense and not legal obligation. Trustees, on the other hand, manage assets and act on behalf of others which, in turn, bind them to certain legal duties and responsibilities, including a duty to prudently manage the trust that is in their care.
This legal duty of prudence is embodied and codified in the Uniform Prudent Investor Act (“UPIA”). Since the completion of the UPIA in 1995, versions of this uniform statute have been adopted by 44 states and the District of Columbia as the standard for trust investment law.
It is the existence of this duty that differentiates the individual investor from the trustee; because trustees generally have an affirmative duty to handle the investment of trust assets in a prudent fashion, and the fulfillment of that duty may require the retention of expert investment help. * * *
In a footnote, the brief mentioned the position and activities of the IRS, which issued proposed regulations for comment on these matters during the pendency of the Rudkin appeal to the United States Supreme Court:
It is worth noting that the Commissioner opposed review of this case partly on the grounds that the IRS was intending to issue a notice of proposed rulemaking regarding the deductibility of investment advisor fees.This is the summary and the conclusion of the amicus brief regarding the Rudkin case:
The IRS took the position that once the regulations were issued, the matter would be resolved because the court would be required to defer to the agency’s interpretation of section 67(e) under Chevron U.S.A. Inc. v. NRDC, 467 U.S. 837 (1984).
The IRS has subsequently issued a notice of proposed rulemaking that seeks comment on proposed regulations that address the issue before the court. See Section 67 Limitations on Estates or Trusts, 72 Fed. Reg. 41243 (July 27, 2007).
The amici respectfully submit that, apart from the rather curious timing, the IRS’s proposed regulations are irrelevant to the court’s consideration of this case. The notice of proposed rulemaking was issued by the IRS well after the operative facts of this case occurred, and no final regulations have been issued. Further, the Court need not defer to the IRS’s interpretation of the law contained in its final regulation – whenever it is issued and in whatever form it eventually takes – if that interpretation is contrary to the express language of the statute or the regulations are arbitrary and capricious.
In sum, the Court should conclude that the Second Circuit decided the case below incorrectly. The existence of a legal duty of prudence differentiates the individual investor from the trustee, and the fulfillment of that duty of prudence may require a trustee to retain expert investment help. The advice received by the trustee (and for which the fees are incurred) is in most cases peculiar to the particular trust in light of the trust’s purpose and other factors outlined by the UPIA. The Court should ultimately conclude that investment management fees are fully deductible by trusts under Section 67(e) of the Tax Code because they “would not have been incurred if the property had not been held in trust.”Update: 09/04/07:CONCLUSION
Based upon the foregoing, the ABA and State Association Amici urge the Court to grant the petition for certiorari to resolve the conflict between the circuits and to provide a uniform interpretation of the Tax Code.
In my original posting, I had mentioned that the Pennsylvania Bankers Association was not among the amicus parties. This was clearly incorrect, as indicated by the list of participants.
This error was pointed out to me today by Louise A. Rynd, Esq., who serves as General Counsel for the Pennsylvania Bankers Association, in Harrisburg: "I read your posting to state that PBA had not joined and that no PA statute was cited. We did in fact join and the first statute cited is PA law."
I changed the text of the posting above to be accurate. I thank Louise for telling me; and I apologize for the error. I am glad that the PA Bankers Association is participating.
Various organizations submitted comments to the proposed regulations, and the IRS held a hearing on Wednesday, November 14, 2007. See: PA EE&F Law Blog posting, IRS Gets Comments on "Rudkin" Regs Proposed (11/19/07).
On January 16, 2008, the United States Supreme Court issued its decision in Knight, Trustee of William L. Rudkin Testamentary Trust v. Commissioner of Internal Revenue Service. (No. 06–1286; PDF, 16 pages). In short, the IRS won. But the drama may not be over, either.
See: PA EE&F Law Blog posting "IRS Wins Rudkin Case in U.S. Supreme Court" (01/17/08).