Tax Lawyer's Blog

Judge Sonia Sotomayor’s Supreme Court confirmation hearing begins today before the U.S. Senate Judiciary Committee.

Although she has been on the Second Circuit bench for 12 years, she has written the majority opinion in only one significant tax case. The case is Knight (Rudkin) v. Commissioner of Internal Revenue  and it was appealed to the Supreme Court.

Chief Justice Roberts writing for the Court affirmed the 2nd Circuit’s ruling, but harshly criticized Judge Sotomayor’s reasoning.

Issue

Are a trust’s investment advisory expenses subject to the 2% floor of IRC § 67?

IRC § 67(a) allows taxpayers to deduct miscellaneous expenses to the extent they exceed 2% of their adjusted gross incomes.

IRC § 67(e) allows a deduction in full 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.”

Holding

The Supreme Court affirmed the 2nd Circuit’s conclusion stating that the investment advisory expenses in question would have been incurred if the property were not held in trust and, therefore, are subject to the 2% floor.

Analysis

Here is an excerpt from Judge Sotomayor’s opinion:  

[T]he 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 particular cost “would not have been incurred” if the property were not held in trust. (Emphasis added)

And here is Chief Justice Roberts scolding her for replacing the word “would” in § 67 with the word “could”: 

In applying the statute, the Court of Appeals below asked whether the cost at issue could have been incurred by an individual.

This approach flies in the face of the statutory language. The provision at issue asks whether the costs “would not have been incurred if the property were not held” in trust, ibid., not, as the Court of Appeals would have it, whether the costs “could not have been incurred” in such a case, 467 F. 3d, at 156. The fact that an individual could not do something is one reason he would not, but not the only possible reason.

If Congress had intended the Court of Appeals’ reading, it easily could have replaced “would” in the statute with “could,” and presumably would have. The fact that it did not adopt this readily available and apparent alternative strongly supports rejecting the Court of Appeals’ reading. (Emphases added)

Possible Concerns

The pertinent part of Section 67(e) contains 32 unambiguous words.

So why did it give Judge Sotomayor such a problem?

And, more importantly, why did she choose to solve that problem by amending the statute to read “could” instead of “would?”

I can think of just four possibilities:

1. She didn’t know there is a difference between the words “would” and “could.”
2. She intentionally chose to reword the statute to justify a conclusion that she believed would not have been justifiable were it not for such rewording.
3. She didn’t read the statute carefully.
4. She believed that Congress in enacting the statute must have meant to say “could” instead of “would.”

Number 1 is absurd on its face and we’ll discard it from the outset.

Number 2 is unlikely because I can’t imagine Judge Sotomayor (or any Judge for that matter) having a pre-formulated opinion on an issue as obtuse as the limitations on the deductibility of investment advisory expenses.

Also, as Justice Robert’s opinion makes plain, she could have arrived at the same conclusion without substituting the word “could” for “would.”

Number 3 is the least egregious of the three, but nevertheless quite troubling. Everyone makes mistakes and this might very well be the only time Judge Sotomayor has done so, but if other cases reveal the same analytical negligence demonstrated here, it will raise serious questions about her ability to become a competent Supreme Court Justice.

The Big Concern

Finally we come to Number 4: Judge Sotomayor changed the statute to read what she thought it should have read.

They have a name for this brand of judging. It’s called legislating from the bench (PDF) and it causes strict constructionists (like Chief Justice Roberts) to pop blood vessels.

One of the first principles of good adjudication is the plain meaning rule:

If the meaning of a legislative text is plain, the court may not interpret it but must simply apply it as written. The court may to resort to the rules and techniques of interpretation only if the text is ambiguous.

In her opinion Judge Sotomayor dutifully invokes the plain meaning rule and then proceeds to violate it.

If I were on the Senate Judiciary Committee, here are three questions I would ask the Judge:

1. Did she knowingly and intentionally change the wording of 67(e)?
2. Does she believe in the plain meaning rule?
3. Does she believe an unelected, life-tenured Judge should substitute her own judgment for that of democratically elected legislators in determining, not what a statute does say, but what  it should say?

The answers to these questions are not as obvious as you might think for there is no shortage of legal scholars and Judges who abhor the plain meaning rule.

I don’t get it.

What good is the right to vote if unelected Judges are permitted to re-draft plainly worded statutes based on their personal beliefs about what the law should or should not be?

This is dangerous ground, indeed.

Other Blog Posts:

Sotomayor, Roberts Agree on Taxes (Sort of) -Kelley Phillips-Erb

Judge Sotomayor’s Tax Opinions - Paul Caron

Coverage of Sotomayor Confirmation Hearings:

C-SPAN Live Stream (Monday at 10am (ET))

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