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Rudkin

Sotomayor Supreme Court Hearing: Where’s the Tax?

July 14, 2009 · 1 comment

While watching the Sotomayor Confirmation Hearings (and I hope that you are, even if for a bit), you’ll hear lots of questions. What you likely won’t hear are any significant questions about tax. But don’t panic: it’s not surprising.

For one, Sotomayor has not written extensively about tax law. The one case that she is perhaps best known for is Knight v Commissioner, which was known as the Rudkin case when Sotomayor wrote on the matter. The case went all of the way to the Supreme Court eventually, with Chief Justice Roberts agreeing with Sotomayor’s decision but criticizing the way that she got there. If you’re interested in reading more about Sotomayor’s judicial decision, you can check out this Analysis of Selected Opinions, put together by the Congressional Research Service (it will download as a pdf).

But more significantly, the Supreme Court just doesn’t hear many tax cases. For the term beginning October 2007, for example, the Supreme Court agreed to hear five tax cases:

  • Kentucky Department of Revenue v. Davis, No. 06-666 (state bond issue)
  • Knight v. Commissioner, No. 06-1286 (trust administration fees)
  • CSX Transportation Inc. v. Georgia State Board of Equalization, No. 06-1287 (railroad property valuation)
  • MeadWestvaco Corp. v. Illinois, No. 06-1413 (state gain issue)
  • Boulware v. United States, No. 06-1509 (diversion of corporate funds to a shareholder of a corporation)

During that same term, the US Supreme Court issued 73 opinions. Not great odds, despite the fact that 2007 appeared to be a banner year for tax cases on the SCOTUS, relatively speaking.

This doesn’t mean that tax cases may not hit the SCOTUS, they just may not be formally heard or disposed of. Approximately 10,000 petitions are filed with the SCOTUS in the course of a term. A term lasts for a year, beginning on the first Monday in October and ends on the first Monday in October of the next year.

Written petitions for review are referred to as “writ of certiorari.” The SCOTUS can either grant a writ of certiorari (sometimes called “granting cert”) or choose to deny it (sometimes called “denying cert”).

Each week, Justices evaluate more than 130 petitions to determine which cases are to be heard. Four of nine justices must agree to take a case – no majority rule is required. They grant plenary review, meaning that there will be full oral arguments by attorneys, for about 100 cases per term. An additional 50 or 60 cases are reviewed without oral arguments.

So there’s lots of room to hear tax cases. The Justices have just not been amenable to hearing many. That perhaps says a bit about how settled tax law is in our country. Or it could have a lot to do with the quality (or lack thereof) of cases being submitted. Remember, just making it to the SCOTUS to ask to be heard doesn’t mean that your case has merit or matters to anyone but you. Just ask Richard Hatch.

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Sotomayor, Roberts Agree on Taxes (Sort Of)

May 27, 2009 · 1 comment

A couple of years ago, I was speaking about fiduciary taxes at a CLE when I was passed a note. It said, “Trust investment advisory fees subject to the 2% floor. Knight vs. Commissioner.” Whoa. This, you see, was a fairly significant development in the world of fiduciary income tax. It later went on to be only one of a handful of tax-related cases heard at the US Supreme Court last year.

Here are the facts in the case: Trustee (Michael J. Knight, and no, not of Knightrider fame which is I’m sure what popped into your head) hired an investment advisor to manage a trust portfolio worth about $3 million. In 2000, the advisor charged the trust about $20,000 in fees, which the trust deducted in full on its tax return.

On audit, the IRS said that the fees were not completely deductible. Instead, the IRS said that the fees were considered a “miscellaneous itemized deduction” and subject to the 2% floor. You might remember seeing that line on your personal income tax on Schedule A. If so, you know that miscellaneous itemized deductions are deductible only to the extent they exceed 2% of your AGI (adjusted gross income). The law says that “investment advisory fees” are subject to the 2% floor unless, in the case of a trust, the expenses “would not have been incurred if the property were not held in such trust.” The trustee in Knight argued that the fees were directly attributable to the fact that the money was in the trust and therefore met the exception (which would have made the fees fully deductible).

The trustee lost at the lower level and appealed on behalf of the trust – and lost again. And who wrote the opinion for the Second Circuit? Supreme Court Justice nominee Sonia Sotomayor.

There was a split among the lower courts with respect to the decision, with one court ruling in favor of the trustee. The case was further appealed to the US Supreme Court, which agreed to hear the case. The Supreme Court upheld Sotomayor’s decision in 2008 but Chief Justice Roberts wrote (downloadable as a pdf) that her decision “flies in the face of the statutory language.”

Same bottom line, different way of getting there. Expect to hear more about this case as Sotomayor goes to confirmation hearings – the “Knight case” is often referred to as the “Rudkin case” because the decedent in the matter was named Rudkin. Don’t be confused, same case.

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