President Bush Issues Amendment to Executive Order Regarding National Security Reviews of Foreign Acquisitions of Control of U.S. Businesses

Developments of Note

U.S. Supreme Court Upholds 2% Floor for Deduction of Investment Advisory Fees by Trusts

President Bush Issues Amendment to Executive Order Regarding National Security Reviews of Foreign Acquisitions of Control of U.S. Businesses

Hedge Fund Working Group Issues Best Practice Standards

OTS Expands Permissible Activities of Savings and Loan Holding Companies

SEC Staff Provides No-Action Relief to Allow Wholly-Owned Subsidiary of Registered Broker-Dealer to Succeed to Parent's Registration by Amendment to Parent's Form BD

OTS Approves Large Federal Savings Association's Establishment of and Investment in Foreign Service Corporations

Other Items of Note

Goodwin Procter to Host Webinar: "The Rise of ERISA Litigation Involving Collective Trusts and Other Retirement Products" - 2/7/2008 at Noon (Eastern Standard Time)

Federal Appeals Court Rules California Disclosure Requirements for Convenience Checks Preempted

Developments of Note

U.S. Supreme Court Upholds 2% Floor for Deduction of Investment Advisory Fees by Trusts

The U.S. Supreme Court (the "Court" or the "Supreme Court") held that expenses incurred by trusts for investment advisory services are generally subject to the 2% floor for miscellaneous itemized deductions under Section 67(e) of the Internal Revenue Code (the "Code"). The ruling, in a case that has been closely watched by professional fiduciaries and investment advisers, is an important victory for the IRS. However, the Court did not adopt the approach to determining whether particular expenses are subject to the 2% floor put forward by the IRS in controversial proposed regulations issued in July 2007. The fiduciary and investment adviser community expects that the IRS will issue new proposed regulations incorporating the Court's approach. A number of experts have also predicted that, although the Court's ruling appears to resolve the issue, the result of the ruling may in fact be increased litigation, as fiduciaries attempt to apply the Court's analysis on a case-by-case basis.

Section 67(e) of the Code extends the 2% floor on miscellaneous deductions applicable to individuals to estates and non-grantor trusts, but makes an exception for the deduction of administration expenses "which would not have been incurred if the property were not held" in an estate or trust. Whether or not this exception applies to investment advisory fees incurred by a trust or estate has been disputed in a number of cases, and the U.S. Courts of Appeals were divided on the issue. The U.S. Court of Appeals for the Sixth Circuit, in O'Neill v. Commissioner, 994 F.2d 302 (6th Cir. 1993), held that the exception does apply, allowing trustees to fully deduct investment advisory fees in computing a trust's adjusted gross income. Both the Fourth and the Federal Circuits, however, have held that such fees are subject to the 2% floor because individuals commonly incur similar expenses in relation to property held outside a trust.

The Supreme Court's ruling, which resolved the split among the circuit courts, resulted from Rudkin Testamentary Trust v. Commissioner, 467 F.3d 149 (2d Cir. 2006) ("Rudkin"), a case decided by the U.S. Court of Appeals for the Second Circuit. The trustee in Rudkin argued that his fiduciary duty under the state-law prudent investor standard required him to consult an investment adviser and that the adviser's fees were therefore caused by the fact that the property was held in a trust. The Second Circuit disagreed, interpreting Section 67(e) as allowing a full deduction only for trust expenses that could not (rather than would not, as Section 67(e) itself reads) have been incurred by individuals.

The trustee in Rudkin petitioned the Supreme Court to review the Second Circuit's decision and resolve the circuit split. In a unanimous opinion delivered by Chief Justice John Roberts, the Court rejected both the trustee's argument, noting that the prudent investor standard refers to a prudent individual investor, as well as the Second Circuit's approach, which it found inconsistent with the language of Section 67(e). Instead, the Court adopted the approach taken by the Federal and Fourth Circuits in Mellon Bank, N.A., v. United States, 265 F.3d 1275 (Fed. Cir. 2001), and Scott v. United States, 328 F.3d 132 (4th Cir. 2003), which held that only expenses that are either not commonly or customarily incurred by individuals or unique to the administration of trusts are fully deductible and not subject...