Argument recap: Knight v. CIR

At oral argument on Tuesday, members of the Court suggested that Section 67(e) permits a trust to deduct fees for investment advice that is related to trust status, but does not allow the trust to deduct fees for advice that is indistinguishable from advice sought by individuals.

Peter Rubin argued on behalf of petitioner that Section 67(e) imposes a categorical rule that permits a trust to deduct all investment advice sought by a trustee. Chief Justice Roberts was the first to express skepticism of petitioner’s position, which rests on the premise that trust investment fees are incurred because of the trustee’s fiduciary duty and are thus always distinctive. He asked why advice that is otherwise unrelated to trust status and is usually sought by individual investors should be excluded from the 2% floor. Justice Scalia added that petitioner’s argument about fiduciary duty would apply, apparently implausibly, to preservation of all trust property, including fixing the roofs of any buildings owned by the trust. And in Justice Stevens’s view, the “most normal reading of the language” at issue would require one to distinguish between advice that is related to trust status and advice that is normally incurred by individuals; Justice Breyer agreed that “special expenses” of a trust are those that are not incurred by a reasonable person who was not holding those assets in trust. Justice Ginsberg also commented that some investment advice – but not all fees – might be related to trust status, and pushed Rubin towards a concession that he refused to make. Instead, Rubin kept presenting his fiduciary duty argument, even as it seemed to find little traction with members of the Court—it is only coincidence, Rubin argued, if the investment advice for a trust is identical to advice given to an individual about how to maximize returns. Instead, he argued, what matters is the “decisional process [of the trustee] leading to obtaining the advice.” Justice Kennedy thought that the last point, if true, would just invite avoidance.

On behalf of the Commissioner, Eric Miller argued that that the word “would” in Section 67(e) means “could,” meeting some resistance from Justices Scalia and Ginsberg. Miller quickly took Chief Justice Roberts’ suggestion, however, that “now might be a good time to fall back” on the position that “would not have been incurred” means customarily or ordinarily would not have been incurred by individuals. Members of the Court then worked on where to draw the line. Justice Kennedy asked whether the appropriate test is if the trust is attempting to achieve an objective that a non-trust business would also want to achieve. Looking for a bright-line rule, Justice Scalia stated that it might be plausible to distinguish advice sought by a trustee as to how to fulfill his responsibilities under the trust. Miller responded that the substance of the interaction with the investment advisor would be the same, but Justice Scalia remained skeptical that investment advisors or the courts could distinguish the parts of advice that were related to trust status from those that were general. Justices Alito and Souter didn’t understand how the government could say that investment advice in general is subject to the 2% floor but the cost of preparing and filing a fiduciary tax return is not—either it always matters who is filing the return or seeking the advice, or it doesn’t, they seemed to suggest. Chief Justice Roberts asked directly how the “customarily or ordinarily” test would work and why it isn’t just a vague line. Justice Scalia added that wherever the line is drawn, trusts would contort themselves to fall beneath it.

All of these concerns about administrability provoked Miller to turn again to the categorical approach that is preferred by the government, but also to suggest the Service regulations like the one currently proposed could lend clarity.