Legal Authority of the Department of the Treasury to Issue Regulations Indexing Capital Gains for Inflation ( 1992 )

Legal Authority of the Department of the Treasury to
Issue Regulations Indexing Capital Gains for Inflation
The Department of the Treasury does not have legal authority to index capital gains for inflation
by means of regulation.
September 1, 1992
M e m o r a n d u m O p in io n f o r t h e G e n e r a l C o u n s e l
Departm ent o f th e T r ea su ry
You have asked for our opinion whether the Department of the Treasury
(“Treasury”) has legal authority to amend its regulations to index capital
gains for inflation. In connection with that request, you have provided us
with your legal opinion concluding that Treasury does not have such author­
ity. O p in io n o f the G eneral C ounsel (A ug. 28, 1992) (“T reasury
M emorandum”) In reaching that conclusion, you consider in detail, and spe­
cifically reject, arguments presented by the National Chamber Foundation in
the form of a legal memorandum prepared by its private counsel, which
concludes that Treasury has such legal authority. See Memorandum for Dr.
Lawrence A. Hunter, Executive Vice President, National Chamber Founda­
tion, by Charles J. Cooper, et al. (Aug. 17, 1992) (“NCF Memorandum”).
We have carefully reviewed the arguments set forth in the Treasury Memo­
randum and the NCF Memorandum. As a result of that review, and of our
own research and analysis, we are compelled to agree with Treasury’s legal
conclusion that Treasury does not have legal authority to index capital gains
for inflation by means of regulation.1
I.
Section 1001(a) of the Internal Revenue Code (“Code”) provides that
“[t]he gain from the sale or other disposition of property shall be the excess
1 Were w e to disagree with your conclusion, and were Treasury to adopt a regulation o f the sort pro­
posed by the N CF M emorandum, we expect that the regulation would be challenged in court. Accord­
ingly, w e have consulted with the Department of Justice’s Tax Division, the litigating division that
w ould be responsible for defending any such indexing regulation. That division concurs fully in the
conclusions set forth herein.
136
of the amount realized therefrom over the adjusted basis provided in section
1011.” The general rule of section 1011(a) is that a property’s adjusted
basis is its “basis (determined under section 1012 . . .), adjusted as provided
in section 1016.” Section 1012 defines the basis o f property as generally
“the cost of such property.” Although the term “cost” is not further defined
in the Code, since the inception of the federal income tax system following
ratification of the Sixteenth Amendment in 1913, Treasury has consistently
interpreted the statutory term “cost” to mean price paid. Compare, e.g., T.D.
2090, 16 Treas. Dec. Int. Rev. 259, 273 (1914) (“The cost of property ac­
quired . . . will be the actual price paid for it . . . .”), with 26 C.F.R. §
1.1012-l(a) (1992) (“The cost [of property] is the amount paid for such
property in cash or other property”). The current regulation dates from
1957. See T.D. 6265, 1957-2, 12 C.B. 463, 470.
The sole issue presented by your request is whether Treasury may, by
amending its regulations, reinterpret the statutory term “cost” to mean the
price paid as adjusted for inflation. The NCF Memorandum argues that
Treasury may do so. In making that argument, the Memorandum relies
heavily on analysis of the Supreme Court’s decision in Chevron U.S.A., Inc.
v. National Resources Defense Council, Inc., 467 U.S. 837 (1984).2 Chevron
announced a two-step rule for courts to follow when reviewing an agency’s
construction of a statute that it administers. The court must always first
examine “whether Congress has directly spoken to the precise question at
issue. If the intent of Congress is clear, that is the end of the matter; for the
court, as well as the agency, must give effect to the unambiguously ex­
pressed intent o f Congress.” Id. at 842-43. If, however, “the statute is silent
or ambiguous with respect to the specific issue, the question for the court is
whether the agency’s answer is based on a permissible construction o f the
statute.” Id. at 843. As the Court noted in Chevron, “ ‘[t]he power o f an
administrative agency to administer a congressionally created . . . program
necessarily requires the formulation of policy and the making of rules to fill
any gap left, implicitly or explicitly, by Congress.’” Id. (quoting Morton v.
Ruiz, 415 U.S. 199, 231 (1974)). But any such “gap” must be created by
Congress: “assertions of ambiguity do not transform a clear statute into an
ambiguous provision.” United States v. James, 478 U.S. 597, 605 (1986).3
2 See NCF M emorandum at 1 (“We must stress at the outset that our analysis o f this question depends
heavily on the standard of judicial review that would apply to such a regulation [under Chevron]."); id.
at 12 (“The fram ew ork for analyzing the issue under study is provided by the Supreme Court’s land­
mark Chevron decision.’’); id. at 21 (“In the terms of the Chevron doctrine, the question is w hether
Congress has . . . delegated authority to the Treasury to interpret the statute.” ); id. at 23 ("Accordingly,
the basic question under Chevron is whether the term ‘cost’ is amenable to a construction that takes
account o f inflation.”).
’ Two members of the Supreme Court have suggested that an agency construction should prevail if the
statute is merely “arguably ambiguous." See K M art Corp. v. Cartier, Inc., 486 U.S. 281, 293 n.4
(1988) (opinion of Kennedy, J., joined by White, J.). The N CF Memorandum's characterization o f the
“arguably am biguous” standard as the view of “the Court” in that case, id. at 22 n i l , however, is
plainly mistaken. Only two Justices embraced that view, and they expressly took issue with the refusal
o f four other members o f the Court to recognize the alleged ambiguity. See K. M art Corp., 486 U.S. at
293 n.4.
137
The NCF Memorandum’s central argument rests on the proposition that
“cost” is an ambiguous term. In essence, the Memorandum argues that
Congress, in using that word, left a “gap” in the statutory scheme to be
filled by Treasury in the exercise of its rulemaking power under the Code.
Specifically, the NCF Memorandum asserts that the “meaning of ‘cost’ is
sufficiently ambiguous to permit the exercise of administrative discretion”
to interpret cost in a manner that takes account of inflation, id. at 23, and
consequently that in light of Chevron, “a regulation indexing capital gains
for inflation should and would be upheld judicially as a valid exercise of the
Treasury’s interpretative discretion under the [Code],” id. at l.4
Chevron is a profound expression of principles that flow from the doc­
trine o f separation o f powers. The decision recognizes the appropriate roles
o f each o f the three branches of government. Congress writes laws; the
executive branch interprets and enforces them. Congress may, however,
leave greater or lesser scope for Executive action. Thus, Congress often
leaves to the executive branch the task of filling in the gaps in the statutory
scheme through interpretation, and courts must then defer to the Executive’s
reasonable interpretations. As the Chevron Court explained:
4 Although we agree with the conclusion o f the NCF Memorandum that Chevron provides the frame­
w ork for analyzing this issue, we note that there remains som e confusion in the case law on this point.
In C ottage Savings A ss'n v. Commissioner, 499 U.S. 554 (1991), the Supreme Court considered a
challenge to a Treasury regulation interpreting a provision o f the Code. The Court noted that Congress
had given Treasury the broad power “to prom ulgate ‘all needful rules and regulations for the enforcement
o f [the Internal Revenue C ode].’” Id. at 560 (quoting I.R.C. § 7805(a)). Based on that grant of authority,
the Court held that it “must defer to [Treasury’s] regulatory interpretations of the Code so long as they are
reasonable.” Id. at 560-61 (citing Mm'ona/ M uffler Dealers A ss'nv. United States, 440 U.S. 472,476-77
(1979)). T he C ourt made no reference to Chevron or its progeny.
W hatever the significance o f the Court’s failure in Cottage Savings to cite Chevron, we have found no
case that has expressly rejected application o f Chevron to regulations interpreting the Internal Revenue
C ode. Som e low er court cases apply the National M uffler standard without considering Chevron, see,
e.g., D avis v. United States, 972 F.2d 869 (1992), while others cite both cases without resolving any
supposed inconsistency between them, see, e.g., American Medical A ss'n v. United States, 887 F.2d
760, 770 (7th Cir. 1989). Two courts of appeals, however, expressly applied Chevron to interpretative
regulations under the Internal Revenue Code. See RJR Nabisco, Inc. v. United States, 955 F.2d 1457,
1464 (1 1th Cir. 1992); Peoples Federal Sav. & Loan Ass'n v. Commissioner, 948 F.2d 289, 299 (6th Cir.
1991). A third court of appeals noted the two different standards but declined to choose between them,
because on the facts o f the case, either standard would have compelled the same result. Pacific First
Fed. Sav. B ank v. Commissioner, 961 F.2d 800, 803 (9th Cir.) (noting, however, that much o f the
reasoning in P eoples F ederal was persuasive), cert, denied, 506 U.S. 873 (1992). Cf. Georgia Fed.
B ankv. Com m issioner, 98 T.C. 105,107-08,118 (1992) (rejecting Sixth Circuit’s conclusions in Peoples
Federal, but applying Chevron principles).
Even if we assum e that application o f the National M uffler test rather than the Chevron test can
produce different results in some cases, as applied here National Muffler would not alter our conclu­
sion. The N ational M uffler standard requires that a regulation “harmoniz[e] with the plain language of
the statute, its origin, and its purpose.” 440 U.S. at 477. T his permits not a plenary review by the court,
but rather a determ ination whether the regulation is a “reasonable” interpretation of the statute. Id. at
476. Because the interpretation advanced in the NCF M emorandum is contrary to the plain language of
the statute, it would fail the National M uffler test as well as the Chevron test.
In addition, we note that the Treasury Memorandum cites several decisions in which the courts of
appeals have continued to apply — in the wake of Chevron — the traditional distinction between “leg­
islative" and “ interpretive” regulations in determining how much deference is due Treasury’s interpre­
tation o f the Code. Treasury Memorandum at 41-42. Under this regime, “legislative” regulations
generally are accorded greater deference than are "interpretive” regulations. We need not address the
issue o f Chevron's impact upon this traditional distinction here, because in either case the plain meaning of
the statute will control. We note, however, that the Supreme Court has not conclusively resolved this issue.
138
While agencies are not directly accountable to the people, the
Chief Executive is, and it is entirely appropriate for this po­
litical branch of the Government to make such policy choices
— resolving the competing interests which Congress itself
either inadvertently did not resolve, or intentionally left to be
resolved by the agency charged with the administration o f the
statute in light of everyday realities.
467 U.S. at 865-66.
Chevron is thus a powerful analytical tool for the smooth administration
of complex statutes and for the defense of agency actions under such stat­
utes. It is not, however, unlimited. Chevron also teaches that when Congress
writes legislation in specific terms, if it does not leave policy choices to be
resolved by an administrative agency, then Congress’s decision binds both
the executive branch and the judiciary. To repeat: “If the intent o f Congress
is clear, that is the end of the matter.” Id. at 842. In particular, Chevron
does not furnish blanket authority for the regulatory rewriting of statutes
whenever a dictionary gives more than a single definition for a statutory
term or whenever some arguably relevant discipline assigns a specialized,
technical meaning to such a term. Such a reading of Chevron would evis­
cerate the well-established rule of construction that statutes must be accorded
their plain and commonly understood meaning.5 Indeed, it would lead to a
legal regime in which many statutory terms with widely understood mean­
ings would be deemed “ambiguous.” In this regard, we fully concur in your
conclusion that “ [i]f the plain meaning doctrine could be applied only to
words that have only one conceivable meaning, it would have precious little
utility as a principle to resolve conflicting interpretations of statutes.” Trea­
sury Memorandum at 7-8.6
’ This rule of construction, like Chevron itself, sounds in the separation o f powers under the C onstitu­
tion and thus is an im portant limitation on judicial power. See In re Sinclair, 870 F.2d 1340, 1344 (7th
Cir. 1989) (Easterbrook, J.).
‘ Accordingly, courts have generally been reluctant to treat the meaning o f a single word or a short
phrase as other than a "pure question o f statutory construction" on which courts will not defer to agen­
cies. INS v. Cardoza-Fonseca, 480 U.S. 421, 446 (1987). Courts have rejected agency interpretations
o f such words or term s in favor of the courts' own reading of the statutory language. See, e.g., Conecuh-
Monroe Com m unity A ction A gency v. Bowen, 852 F.2d 581, 588-89 (D.C. Cir. 1988) (m eaning o f
“term inate” ); Telecommunications Research & Action Ctr. v. FCC, 836 F.2d 1349, 1357-58 (D.C. Cir.
1988) (meaning of “system of random selection”); Santa Fe Pac. R.R. v. Secretary o f Interior. 830 F.2d
1168, 1174-80 & n.91 (D.C. Cir. 1987) (meaning of “lieu selection . . . right” ).
Surprisingly, the N C F Memorandum nowhere discusses the plain meaning rule, despite its obvious
importance to the legal analysis. The omission is significant, because the methodology adopted by the
NCF M em orandum would undermine the rule. O f course, the availability o f two clearly inconsistent
and equally plausible alternative dictionary definitions can in some circumstances “indicated that the
statute is open to interpretation," National R.R. Passenger Corp. v. Boston <£ Me. Corp., 503 U.S. 407,
418 (1992), particularly if the overall statutory context of the provision at issue provides evidence that
the agency’s proffered interpretation is a reasonable one, id. Clearly, however, the m ere existence of
Continued
139
Chevron teaches that the inquiry into the meaning of a statutory term —
including whether that meaning is ambiguous — is to be conducted by “em­
ploying traditional tools of statutory construction.” 467 U.S. at 843 n.9. See
also IN S v. Cardoza-Fonseca, 480 U.S. at 449 (using “ordinary canons of
statutory construction” to ascertain the meaning of statutory terms). These
tools and canons include examination of “the plain language of the Act, its
symmetry with [other relevant legal materials], and its legislative history.”
Id. Additionally, “ [i]n ascertaining the plain meaning o f the statute, the
court m ust look to . . . the language and design of the statute as a whole.” K
M art Corp., 486 U.S. at 291.
In reaching its ultimate conclusion that Treasury lacks the legal authority
to index capital gains for inflation, your opinion considers and rejects the
NCF M em orandum ’s arguments that the term “cost” is ambiguous. It con­
cludes that “ [t]he statute itself has a plain meaning which is clear and
unambiguous: cost means the ‘actual price paid’ or ‘purchase price.’ ” Trea­
sury M emorandum at 1. See also, e.g., id. at 4-8. As set forth below, we
also conclude that “cost” is not ambiguous in the context of determining
gain or loss from the disposition of property.
II.
A.
We must begin with what the Supreme Court has called a “fundamental
canon o f statutory construction” that “unless otherwise defined, words will
be interpreted as taking their ordinary, contemporary, common meaning.”
Perrin v. United States, 444 U.S. 37, 42 (1979). The fundamental canon, of
course, applies with full force to the tax laws. See, e.g., Crane v. Commis­
sioner, 331 U.S. 1, 6 (1947) (“ [T]he words of statutes — including revenue
acts — should be interpreted where possible in their ordinary, everyday
senses.”); Old Colony Trust Co. v. Commissioner, 301 U.S. 379, 383 (1937)
(“The words of the statute are plain and should be accorded their usual
significance in the absence o f some dominant reason to the contrary.”);
‘ (....continued)
alternative dictionary definitions will not establish “ambiguity.” Were that so, the dictionary would be­
com e an irresistible engine for destroying the plain meaning rule. In practice, o f course, the courts rely
on dictionary definitions to establish, rather than obscure, plain meaning. E.g., United States v. Rodgers,
4 66 U.S. 4 7 5 ,4 7 9 -8 0 (1 9 8 4 ) (rejecting “alternative definition” of term “jurisdiction” provided by dictio­
nary in favor o f “ [t]he m ost natural, nontechnical reading” provided by same source). See also M allard v.
United Slates D istrict Court, 490 U S. 296 (1989), discussed infra. As we shall demonstrate, there is no
am biguity in the term “cost” in its statutory context.
The courts recognize that an “ambiguity” can properly be found only if there is a genuinely reason­
ab le and relevant alternative reading of a term , not a merely possible or arguable alternative reading.
Only this past Term, for instance, the Suprem e Court found the meaning of the statutory phrase “person
entitled to com pensation” to be "plain,” Estate o f Cowart v. Nicklos Drilling Co., 505 U.S. 469, 478
(1992), despite the dissenting Justices’ argum ent that it could bear two distinct interpretations, id. at
500-02 (Blackm un, J., dissenting). See also United States v. James, 478 U.S. 597 (1986) (holding that
the provision o f the Flood Control Act creating immunity for “damage” was not ambiguous even though
that term m ight arguably refer only to dam age to property rather than, as ordinarily understood, to
dam age to both persons and property).
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Helvering v. San Joaquin Fruit & Inv. Co., 297 U.S. 496, 499 (1936) (“Lan­
guage used in tax statutes should be read in the ordinary and natural sense.”).7
Therefore, in order to determine whether “cost” is an ambiguous statutory
term, we must first attempt to ascertain the “ordinary, contemporary, com­
mon meaning” of that term.
“Cost” first appears in the federal tax laws in the capital gains context in
the Revenue Act of 1918.8 The Supreme Court has explained that statutory
terms are best understood by reference to meanings common at the time of
their adoption. Shaare Tefila Congregation v. Cobb, 481 U.S. 615, 617
(1987).9 Dictionaries that are roughly contemporaneous with the enactment
o f that Act define “cost” as the price paid for a thing or service. See, e.g.,
Webster’s New International Dictionary o f the English Language 509 (1917)
(“The amount or equivalent paid, or given, or charged, or engaged to be paid
or given for anything bought or taken in barter or service rendered . . . .”)
(emphasis added); 1 Bouvier Law Dictionary 689 (8th ed. 1914) (“The cost
of an article purchased for exportation is the price paid, with all incidental
charges paid at the place of exportation. Cost price is that actually paid for
goods.”) (citations omitted); 2 A New English Dictionary on Historical Prin­
ciples 1034 (James A.H. Murray ed., New York, MacMillan & Co. 1893)
(“That which must be given or surrendered in order to acquire, produce,
accomplish, or maintain something; the price paid fo r a thing.”) (emphasis
added). More recent dictionaries give the same definition. See, e.g., Am eri­
can Heritage Dictionary 301 (1976) (“An amount paid or required in payment
for a purchase.”); Black’s Law Dictionary 345 (6th ed. 1990) (“Expense;
7 In United States v. Leslie Salt Co., 350 U.S. 383 (1956), the Supreme Court unanimously rejected
Treasury’s “more recent ad hoc contention” as to how the statutory term “debenture” should be con­
strued, in favor o f Treasury’s “prior longstanding and consistent administrative interpretation.” Id. at
396. Treasury’s traditional interpretation, the Court held, was more “in accord with the generally
understood meaning of the term ‘debentures.’ ‘The words of the statute [a stamp tax statute] are to be_
taken in the sense in which they will be understood by that public in which they are to take effect.'" Id.
at 397 (citations omitted; emphases added; brackets in original).
8The Revenue Act o f 1918 was actually enacted into law early in 1919. It provided in part: “T hat for
the purpose o f ascertaining the gain derived or loss sustained from the sale or other disposition o f
p ro p erty ,. . . the basis shall be . . . the cost thereof.” Act of Feb. 24, 1919, ch. 18, § 202(a)(2), 40 Stat.
1057, 1060.
Subsequent revenue acts, see infra note 16, adopted the formulation in effect today; in general, the
basis of property is “the cost of such property.” In 1939, Congress began the practice of codifying the
tax laws. The definition o f property’s basis as generally “the cost of such property” appears unchanged
in all three codifications. See Internal Revenue Code of 1939, ch. 2, § 113(a), 53 Stat. 1, 40; Internal
Revenue Code of 1954, ch. 736, § 1012, 68A Stat. 1, 296 (codified at I.R.C. § 1012); Internal Revenue
Code o f 1986, Pub. L. No. 99-514, § 2, 100 Stat. 2085, 2095 (reenacting in relevant part the Internal
Revenue Code of 1954).
*See also M olzo f v. United States, 502 U.S. 301, 307 (1992) (relying upon “ [l]egal dictionaries in
existence when the [Federal Tort Claims Act] was drafted and enacted” to ascertain the m eaning o f a
term used in that statute). Thus, although the meaning of the term “cost" has not changed in the 74
years since the enactm ent o f the Revenue Act of 1918, we refer to authority contemporaneous with the
first appearance o f “cost” in this context.
Indeed, the definition of “cost” has remained essentially unchanged since the publication o f the first
m odem English dictionary in 1755. In that year, Dr. Johnson defined “cost” principally as “ [t]he price
o f any thing.” 1 Sam uel Johnson, A D ictionary o f the English Language (1755) (G eorg Olm s
Verlagsbuchhandlung ed. 1968).
141
price. The sum or equivalent expended, paid or charged for something.”).
Indeed, the only dictionary cited in the NCF Memorandum also gives as the
primary meaning o f cost “the price paid to acquire, produce, accomplish, or
maintain anything.” NCF Memorandum at 24 (quoting Random House Dic­
tionary o f the English Language 457 (2d ed. 1987)).
The NCF Memorandum’s analysis of this dictionary meaning is reveal­
ing. The M emorandum first quotes the full definition: “ 1) the price paid to
acquire, produce, accomplish, or maintain anything . . . , 2) an outlay or
expenditure of money, time, labor, trouble, etc.: What will the cost be to
me?, 3) a sacrifice, loss or penalty: to work at the cost of one’s health.”
NFC M emorandum at 24. It then ignores the primary definition of cost —
“price paid” — in favor of the third, obviously figurative, definition of cost
as “loss” or “sacrifice.” 10 Id. To this, the Memorandum adds “expenditure”
generally, rather than “expenditure of money,” which is the relevant concept
when one is discussing the acquisition of property. The NCF Memorandum
thus takes a perfectly clear definition of cost as applied to financial matters
— price paid, or outlay or expenditure of money — and, without any discus­
sion or further mention of that clear definition, seeks to obfuscate it."
The NCF Memorandum attempts to mix the figurative and literal mean­
ings o f “cost” by asserting that “ [a]ny such ‘loss,’ ‘sacrifice,’ or ‘expenditure’
needs to be ascribed a monetary value in order to determine the [taxable]
gain realized” on the sale of an asset. Id. The Memorandum further asserts
that the monetary value of a loss, sacrifice, or expenditure could be mea­
sured at other than the time it is incurred — at either the time of purchase
or the time of sale. The Memorandum concludes: “We can discern nothing
in the standard definition of ‘cost’ . . . suggesting that the historical ‘pur­
chase price’ measurement of monetary value must be used in preference to a
m easurem ent that coincides with the sale of the asset.” Id. Finally, the
M emorandum asserts that when cost to the taxpayer is measured at the time
o f sale, it is legally appropriate to state cost in inflation-adjusted dollars to
reflect the real impact of the purchase and sale on the taxpayer’s buying
power. Id. at 25.
We disagree with this line o f reasoning on several levels. First, as re­
flected in each of the dictionary definitions of “cost” set forth above, the
10 M oreover, after describing the third alternative dictionary definition of “cost” as “a standard defini­
tion," the N C F M em orandum suggests later on the same page that it is “the" standard definition, imply­
ing that the third definition is the only m eaning o f the term. NCF M emorandum at 24 (emphases
added). T hus, the prim ary dictionary definition o f “cost” is spirited away.
" T h e analysis set forth in the NCF Memorandum stands in marked contrast to the analysis employed
by the Suprem e Court in sim ilar circumstances. In M allard v. United States District Court, the Court
w as called on to interpret the word “request.” The Court first looked to “closest synonym s” in “every­
day speech,” namely, “ask,” “petition,” and “entreat.” 490 U.S. at 301 (citing Webster's New Interna­
tio n a l D ictionary 1929 (3d ed. 1981) and Black's Law D ictionary 1172 (5th ed. 1979)). Although the
C ourt acknow ledged that the dictionary gave other entries — “require” and “demand” — it found “little
reason to think that Congress did not intend ‘request’ to bear its most common meaning when it used the
w ord in [the statute]." Id. (emphasis added). Indeed, despite the potential alternate meanings of request,
the C ourt chose to give it “its ordinary and natural signification.” Id.; accord Perrin, 444 U.S. at 42.
142
first and most common meaning of the term is the price paid. “Price paid”
obviously does suggest an “historical ‘purchase price’ measurement of mon­
etary value.” The primacy of this meaning is easily illustrated. If one were
asked “How much did your car cost?” a response simply that “the car cost
$10,000” would be considered truthful only if that amount were at least a
close approximation of the actual price paid at the time of purchase. In
contrast, a response based on some specialized meaning of the term “cost”
(such as cost expressed in inflation-adjusted dollars or net of trade-in value)
would be perceived as not responsive to the question. Indeed, such a re­
sponse would be viewed as truthful only if the respondent were careful to
point out that he was using the term in other than its normal and plain
meaning. Clearly, then, a specialized use of “cost” is appropriate only with
the addition of some qualifying words signaling that the speaker is using the
term in a manner not contemplated by normal usage.12
Second, even assuming that it is appropriate to look to an alternative,
figurative definition to establish the ambiguity of a statutory term, the NCF
Memorandum’s argument on this point cuts sharply against its conclusion.
When monetary values are ascribed to terms such as “sacrifice” and “loss,”
such values are normally measured when made or expended. For example,
statements such as “I lost $5,000 on the stock market” and “I sacrificed
$10,000 to help my neighbor” require the listener to assume that the speaker
is talking about historical dollar “loss” or “sacrifice,” unless the speaker
makes clear that those terms are being used in some way other than their
ordinary meaning.13
Finally, even if the definitions of the term “cost” could be read to create
some ambiguity with respect to that term, the NCF Memorandum fails to
demonstrate the existence of any relevant ambiguity. That a particular term
has two plausible definitions does not support an agency determination that
rests on a third implausible definition. As shown above, none of the dictio­
nary definitions of “cost” refers to “purchase price adjusted for inflation.” 14
l! An additional analytical flaw in the NCF M emorandum’s treatment o f the definition of the term
“cost” is its focus on the “cost to the taxpayer” rather than on the statutory phrase "cost o f such prop­
erty” in section 1012 of the Code. The former phrase may be read to include a broader range o f costs
incurred by the ow ner in the course of ownership. For example, a statement of the “cost to X of owning
a car” might include, in addition to the purchase price, costs associated with maintenance o f the car,
insurance, taxes, etc. The statute however, refers to "cost o f . . . property." This phrase refers more
naturally to the original price paid for the property: “What did the car cost?”
1J O ther relevant statutory terms also provide support for our rejection o f the NCF M em orandum ’s
conclusion that “cost” as used in section 1012 may be read to refer to something other than “historical
cost.” In ordinary usage, the term “gain” would be thought to describe an increase m easured from one
point in time to another. Moreover, the term “basis” suggests that gain is measured from some fixed
baseline, rather than from a floating indicator of relative value.
14 A possible alternative argument not advanced in the NCF Memorandum would be that, although the
unambiguous meaning of “cost” is the original price paid, that definition is itself ambiguous in that it is
not specified whether the price is to be stated in nominal or inflation-adjusted dollars. This argum ent
suffers from several o f the same defects noted above with respect to the Memorandum’s attem pt to
discover ambiguity in the word “cost.” The common meaning of the term “price” requires that it be
stated in nominal dollars unless it is clear that the word is being used in some specialized sense. For
example, in everyday speech the question “What was the price of your home when you bought it?” calls
for an answer expressed in nominal dollars.
143
In addition to its argument based on the Random House Dictionary, the
NCF Memorandum argues that “standard economic analysis” should be taken
into account in determining the meaning of the term “cost.” Id. at 25. To
this end, the Memorandum looks to uses of “cost” in economics treatises to
establish the term ’s ambiguity. Id. For purposes of construing section 1012
o f the Code, however, the meaning to be given “cost” must be the “common
and ordinary” meaning of that word — not its purported meaning in the
jargon of economists. For example, the Tax Court has rejected arguments
that taxpayers should not be taxed on their nominal capital gain, but on their
“economic gain,” quoting Learned Hand’s statement that ‘“ [the] meaning [of
income] is to be gathered from the implicit assumptions of its use in com­
mon speech.’ Thus, the meaning of income is not to be construed as an
economist might, but as a layperson might.” Hellermann v. Commissioner,
77 T.C. 1361, 1366 (1981) (quoting United States v. Oregon-Wash. R.R. &
Nav. Co., 251 F. 211, 212 (2d Cir. 1918)). In other words, “[t]he income tax
laws do not profess to embody perfect economic theory.” Weiss v. Wiener,
279 U.S. 333, 335 (1929). We must therefore reject the NCF Memorandum’s
attem pt to ascertain the meaning of cost under “standard economic analy­
sis,” as well as its repeated invocations of “economic reality” or “principles”
of sophisticated economic analysis more generally, see, e.g., id. at 2, 8, 23-27,
68, 87, 88 n.47, in favor of the common and ordinary meaning of that term.15
E.
The drafters of the Revenue Act of 1918 had available, in addition to the
com m on and ordinary dictionary meanings of cost, Treasury’s contempora­
neous regulatory definition of cost. This definition, embodied in published
Treasury Decisions, was “actual price paid.” See T.D. 2005, 16 Treas. Dec.
Int. Rev. I l l , 112 (1914), restated, T.D. 2090, 16 Treas. Dec. Int. Rev. 259,
272-73 (1914). This definition, adopted by Congress in the 1918 Act, certainly
also evidences the "ordinary, contemporary, common meaning” of cost.16
15The N C F M em orandum ’s contention that income from the sale of a capital asset can be determined
for purpose o f the Code only by taking inflation into account is similar to the legion of “tax protestor”
claim s that has so often been rejected by the courts. For example, in Stelly v. Commissioner, 804 F.2d
868, 869 (5th Cir. 1986), cert, denied, 48 0 U.S. 907 (1987), the taxpayers asserted that they were
entitled to a 13 percent downward adjustment in their interest income on the ground that their interest
incom e had been devalued by inflation T he Fifth Circuit ruled that there was “no basis in law or fact"
for the inflation adjustm ent and concluded that Treasury “properly characterized the [taxpayers’] argu­
m ent as frivolous." Id. at 870.
“ The assertion in the NCF Memorandum that “there is nothing in the legislative history of the 1918
A ct indicating that these Treasury Decisions were being adopted,” id. at 36, is incorrect. As discussed
m ore fully below, the available legislative history from 1918 concerning this issue indicates that Con­
gress did adopt T reasury’s interpretation w hen it wrote “cost” into the Revenue Act of 1918. During the
floor debate concerning a proposal to amend the 1918 legislation so as to virtually elim inate the effect
o f inflation on capital gains, it was explained that the capital gains provision of the Act was “ merely
enacting into law the rules and regulations now in force under the present statute.” 56 Cong. Rec.
10,349 (1918) (statem ent of Rep. Gamer) (em phasis added). See also Treasury M emorandum at 8-13.
T reasu ry ’s in terpretation o f “cost" has not substantially changed since 1914. See 26 C.F.R. §
Continued
144
That “cost” in the Code has this plain meaning has been recognized in
several court cases. For example, the Tax Court has stated that “there is no
statutory provision which allows for an upward adjustment to basis to reflect
inflation or loss of the purchasing power of the dollar.” Ruben v. Commis­
sioner, 53 T.C.M. 992, 994-95 (1987). The court also observed that
“ [s]ections 1011 and 1012 of the Internal Revenue Code provide the general
rule that a taxpayer’s basis in property shall be its cost. While it is true that
such [government] reports do provide evidence of inflation, basis in prop­
erty is not affected by inflation.” Id. at 994 n.2.17
Similarly, in Crossland v. Commissioner, 35 T.C.M. 262 (1976),
the taxpayers claimed an “inflation loss deduction” of ten percent of their
gross income. The court acknowledged that “[i]nflation is a fact” and that it
“affects every taxpayer to some extent,” but it nonetheless disallowed the
deduction: “Our tax structure is not set up to take into account the effects of
inflation. Tax liability depends on income figures computed in terms of
nominal dollars, without regard for inflation.” Id. at 262. In a passage that
is especially relevant, the court noted: “The problem of inflation has caused
several writers to explore the practicality of indexing; i.e., changing the tax
structure to adjust for price level changes in computing taxable income.
Although the suggestion might have merit, Congress has not seen fit to
consider it . . . .” Id. at 263 (footnote omitted).18
“ (....continued)
I.]0 1 2 -l(a ) (‘T h e cost [of property] is the amount paid for such property in cash or other property.”).
This definition was adopted in T.D. 6265, § 1.1012-1 (a), 1957-2, 12 C.B. 463, 470, and has not been
amended. Congress has repeatedly amended and reenacted the tax laws and has never disturbed T reasury’s
consistent interpretation o f cost. See Revenue Act of 1921, ch. 136, § 202(a), 42 Stat. 227, 229; Rev­
enue Act of 1924, ch. 234, § 204(a), 43 Stat. 253, 258; Revenue Act of 1926, ch. 27, § 204(a), 44 Stat.
9, 14; Revenue Act o f 1928, ch. 852, § 113(a), 45 Stat. 791, 818; Revenue Act of 1932, ch. 209, §
113(a), 47 Stat. 169, 198; Revenue Act of 1934, ch. 277, § 113(a) 48 Stat. 680, 706; Revenue Act o f
1936, ch. 690, § 113(a), 49 Stat. 1648, 1682; Revenue Act of 1938, ch. 289, § 113(a), 52 Stat. 4 4 7 ,4 9 0 ;
Internal Revenue Code of 1939, ch. 2, § 113(a), 53 Stat. 1, 40; Internal Revenue Code o f 1954, ch. 736,
§ 1012, 68A Stat. 1, 296 (codified at I.R.C. § 1012); Internal Revenue Code of 1986, Pub. L. No. 99-
514, § 2, 100 Stat. 2085, 2095 (reenacting in relevant part the Internal Revenue Code o f 1954).
A court would likely deem significant Congress's repeated reenactment o f the tax laws without dis­
turbing Treasury’s interpretation of “cost.” Cottage Savings, 499 U.S. at 560-62. Accord United States
V. Correll, 389 U.S. 299, 305-06 (1967); Helvering v. Winmill. 305 U.S. 79, 83 (1938). A court would
also likely attach significance to Congress's repeated consideration of and refusal to enact proposals
explicitly to index capital gains for inflation. See, e.g.. Bob Jones Univ. v. United States, 461 U.S. 574,
600-01 & n.25 (1983) (finding in Congress’s failure to enact any one of thirteen bills introduced to
overturn the Treasury’s interpretation o f section 501(c)(3) o f the Code additional support for the con­
clusion that Congress acquiesced in that interpretation). For a recounting of these refusals, see infra
note 27.
"T h is key case is discussed by the NCF Memorandum only in a footnote, at the end o f a string cite, and
the Tax C ourt's quoted conclusion is mischaracterized as the court’s “refus[al], in the absence o f clear
statutory provisions to the contrary, to accept the taxpayer's construction of the [Internal Revenue Code]
over the Treasury’s contrary construction.” NCF Memorandum at 70n.39. As noted in the text, however,
the Ruben court’s conclusion rested expressly on its observation that there is no applicable “statutory
provision” perm itting an upward adjustment to basis to reflect inflation. The Ruben court viewed the
taxpayers’ argum ent to the contrary as so “frivolous" that it upheld the assessment of penalties against the
taxpayers in the form o f additional tax. 53 T.C.M. at 996.
11 The same footnote in the NCF Memorandum that mischaracterizes Ruben m ischaracterizes Crossland
in the same way. The footnote also cites two other Tax Court cases. Neither of these cases turns upon
C o n tin u ed
145
Other courts have also interpreted the term “cost” as meaning nominal
purchase price. In Vandenberge v. Commissioner, 147 F.2d 167, 168 (5th
Cir.), cert, denied, 325 U.S. 875 (1945), the court stated: “Section 113(a) of
the Revenue Act o f 1938 provides that the unadjusted basis of property shall
be the cost of such property. The solution to the question raised is as simple
and clear as the language of the pivotal statute. The cost of the property was
the price paid to acquire it.” See also Hawke v. Commissioner, 35 B.T.A.
784, 789 (1937) (“We must assume that Congress used the term ‘cost’ in its
commonly understood meaning as the amount of money which a man pays
out in the acquisition of property.”), rev’d on other grounds, 109 F.2d 946
(9th Cir.), cert, denied, 311 U.S. 657 (1940).
C.
Another of the traditional tools of statutory construction is an examina­
tion of “the language and design of the statute as a whole.” K Mart Corp.,
486 U.S. at 291. The NCF Memorandum appears to recognize this rule of
construction, but asserts flatly that there is nothing “in any other language of
the [Code] suggesting that the historical ‘purchase price’ measurement of
monetary value must be used in preference to a measurement that coincides
with the sale of the asset.” Id. at 24. That assertion is mistaken. Many
provisions of the Code that grant itemized deductions to individuals and
corporations are intelligible only if “cost” under section 1012 is measured at
the time an asset is purchased or at other times beside the time of sale.
To cite an important example, the deduction for depreciation is calculated
based on “the adjusted basis provided in section 1011, for the purpose of
determining the gain on the sale or other disposition of such property.” I.R.C.
§ 167(c). Under section 1011, of course, the adjusted basis of an asset is
determ ined by section 1012, which uses the term “cost.” Accordingly, the
cost o f an asset must be known in every year in which the taxpayer would
take a depreciation deduction. If Treasury reinterpreted cost to require that
cost be measured at the time o f the asset’s sale, as the NCF Memorandum
suggests it could, the taxpayer (and Treasury) would have no basis on which
to calculate the proper deduction. See Treasury Memorandum at 52-53.19
"(....co n tin u ed )
“T reasury’s . . . construction” o f the Code, as the M emorandum asserts. Gajewski v. Commissioner, 67
T.C. 181 (1976), a ff'd , 578 F.2d 1383 (8th Cif. 1978), held that the “ the statutory gold content of the
dollar is irrelevant for purposes of computing petitioner’s taxable income under the Code.” Id. at 195
(footnote om itted; em phasis added) 5/6/a v. Commissioner, 68 T.C. 422 (1977), a ff'd , 611 F.2d 1260
(9th Cir. 1980), held that the taxpayer w as “ not entitled to any adjustm ent in the gross incom e he
received because o f any decline in value o f the dollar with respect to gold or silver." Id. at 431. Nothing
in Sibla suggests that the holding was based on Treasury's interpretation of the Code, rather than on the
c o u rt’s ow n interpretation.
19M any other deductions and credits are also defined in terms of “adjusted basis” and would suffer
from the sam e problem . See I.R.C. §§ 42(d) (low income housing), 165(b) (losses), 166(b) (bad debts),
169(f)(1) (pollution control facilities), 171(b)(2) (bond premiums), and 612 (depletion). If cost for
som e purposes must be determined at the tim e of acquisition, or at least at the time the deduction or
credit is taken each year, while cost for purposes of calculating capital gains is to be determined at the
tim e that an asset is sold (as proposed by the NCF M emorandum), the Internal Revenue Code would
contradict itself. Such a forced contradiction would certainly undercut the reasonableness of any Trea­
sury regulation indexing capital gains for inflation.
146
Other structural characteristics of the Code strongly support the conclu­
sion that cost unambiguously means historical price paid, in nominal dollars
not adjusted for inflation. As indicated above, “adjusted basis” is important
in interpreting many provisions of the Code. The term appears in more than
a hundred sections. By reference to section 1012, section 1011 provides that
adjusted basis is generally the cost of property, “adjusted as provided in
section 1016.” I.R.C. § 1011(a). Section 1016 is entitled “Adjustments to
basis,” and it contains twenty-five separate items of adjustment.20 This list
of congressionally determined adjustments to cost does not include an infla­
tion adjustment. Yet one would rationally expect that if Congress intended
to provide such an adjustment in the Code, the adjustment would appear in
section 1016 or in some other section of Part II of Subchapter O, entitled
“Basis Rules of General Application.” It is, at best, unlikely that Congress
would so carefully and precisely lay out the many mandatory and allowable
adjustments to cost and at the same time load (or authorize Treasury to load)
a very significant adjustment — for inflation — into the word “cost” itself.
Moreover, under the doctrine of expressio unius est exclusio alterius (“the
expression of one thing is the exclusion of another”), omissions in such
instances are to be deemed to reflect the intent of the legislature. Thus, in
TVA v. Hill, 437 U.S. 153 (1978), the Court ruled that TVA’s Tellico Dam
project was subject to Endangered Species Act requirements, reasoning that,
while Congress had included several “hardship” exemptions in the Act, none
was provided for federal agencies. The Court concluded that “under the
maxim expressio unius est exclusio alterius, we must presume that these
were the only ‘hardship cases’ Congress intended to exempt.” Id. at 188.
See also, e.g., United States v. Monsanto, 491 U.S. 600, 611 (1989) (inclu­
sion o f forfeiture exemption in another chapter of the same legislation
“indicates . . . that Congress understood what it was doing in omitting such
an exemption” from the chapter at issue); Letter for George U. Cameal,
General Counsel, Federal Aviation Administration, from William H. Rehnquist,
Assistant Attorney General, Office of Legal Counsel, at 2 (Oct. 6, 1971); 2A
Norman J. Singer, Sutherland on Statutory Construction § 47.23, at 216-17
(5th ed. 1992). Because Congress has specified other adjustments to basis
but has not included an adjustment for inflation in the computation of capi­
tal gains, it follows that Congress did not intend to permit indexing in the
capital gains context.
The force of this argument is even greater because Congress has, else­
where in the Code, carefully and precisely set forth a number of adjustments
for inflation. Section 1(f), entitled “Adjustments in tax tables so that infla­
tion will not result in tax increases,” requires Treasury every calendar year
to “increas[e] the minimum and maximum dollar amounts for each rate
bracket . . . by the cost-of-living adjustment for such calendar year,” which
“ Twenty-three of these are found in subsection (a)(l)-(9), (ll)-(24), and one each in subsections (c)
and (d).
147
adjustment is defined by reference to the Labor Department’s published Con­
sum er Price Index for all-urban consumers. I.R.C. § 1(f)(2)(A), (3)-(5). At
least eight other dollar amounts specified in the Code are indexed for infla­
tion by reference to section 1(0(3). Id. §§ 32(i) (earned income credit),
41(e)(5)(C) (research activity credit), 42(h)(6)(G) (low income housing credit),
63(c)(4) (standard deduction), 68(b)(2) (overall limitation on itemized de­
ductions), 135(b)(2)(B) (income from U.S. savings bonds used to pay higher
education tuition and fees), 151(d)(4) (personal exemptions), and 513(h)(2)(C)
(distributions o f low cost articles by tax-exempt organizations). Section
1012, o f course, contains no comparable provision. Again, we would expect
that if Congress intended that asset costs be indexed for the calculation of
capital gains, it would have done so explicitly and in the same manner as
these many other indexing provisions.21
B.
In an attempt to find some basis in the statute to support its proposed
interpretation, the NCF Memorandum relies on the writings of certain tax
theorists for the proposition that a general purpose o f the tax code is to treat
similarly situated taxpayers alike (the principle of “horizontal equity”). Id.
at 8, 26. From this general purpose, the Memorandum argues that the term
“cost” should be read to mean inflation-adjusted cost in order to avoid the
inequity inherent in taxing real and inflationary gains at the same rate.
Although the principle of horizontal equity may be embodied as a general
purpose of the Code, that general purpose cannot be taken to provide a
statutory basis for indexing of capital gains. The Supreme Court has noted
the dangers of attempting to argue from a general statutory purpose to a
context-specific interpretation o f a particular statutory provision:
21 We note that the N CF Memorandum nowhere discusses the significance of section 1(0 of the Code
and the provisions that refer to it, even though it is clearly of legal significance that Congress has
provided for inflation-related indexation in some instances, but not in the case o f capital gains. The
N C F M em orandum attempts to explain away congressional failure to index asset costs in the same
m anner as tax brackets and other concepts in part because “the adverse effect o f inflation was am elio­
rated by the general capital gains tax preference” (a lower effective tax rate on capital gains), which
“obviated the need and impetus, from 1921 until 1986, to establish a more accurate counter for infla­
tion, such as indexation.” Id. at S3.
The argum ent, in fact, cuts against the N C F M em orandum 's conclusions. Accepting the argument on
its face, it is obvious that to the extent C ongress established a preference for capital gains in order to
reduce taxation o f gains that resulted m erely from inflation. Congress assumed that its tax laws other­
w ise treated cost as nominal purchase price with no adjustment for inflation. Moreover, as your opinion
points out, Congress has consistently recognized that inflation introduces distortions into the calcula­
tion o f capita] gains. Treasury Memorandum at 13-15. It appears, then, that Congress has consistently
m ade a deliberate policy choice not to index asset basis for inflation. As for the decision to repeal the
capital gains preference in 1986, it was not taken in ignorance of the special character o f investment in
capital assets, but with a conscious belief that the reduction in individual income tax rates would elim i­
nate any need to accord preferential treatm ent to capital gains. Id. at IS. In any event, long-term
capital gains now enjoy a slightly preferential rate. See Omnibus Budget Reconciliation Act o f 1990,
Pub. L. No. 101-508, § 11101(c), 104 Stat. 1388, 1388-404 to 1388-405 (amending I.R.C. § l(j)).
148
[N]o legislation pursues its purposes at all costs. Deciding
what competing values will or will not be sacrificed to the
achievement of a particular objective is the very essence of
legislative choice — and it frustrates rather than effectuates
legislative intent simplistically to assume that whatever fur­
thers the statute’s primary objective must be the law.
Rodriguez v. United States, 480 U.S. 522, 525-26 (1987). See also Board o f
Governors v. Dimension Financial Corp., 474 U.S. 361, 373-74 (1986) (re­
jecting agency’s use of the “plain purpose” of legislation to support regulatory
definitions not supported by the plain language of the statute).
Even more generally, the NCF Memorandum suggests that the Court has
deferred to agency interpretations of other terms that are “no more ambigu­
ous than the terms at issue here.” Id. at 22 n.l 1. This approach to statutory
interpretation suffers from a glaring flaw: as the Supreme Court has recog­
nized in determining whether deference is owed, the court “must look to the
particular statutory language at issue, as well as the language and design of
the statute as a whole.” K Mart Corp., 486 U.S. at 291. Accordingly, even
an identical term may be ambiguous in one context and not in another. For
example, in Helvering v. Reynolds, 313 U.S. 428 (1941) — relied upon in
the NCF Memorandum for the proposition that “acquisition” was found to
be ambiguous, see id. at 22 n.l 1 — the Court found the term ambiguous
only in the context presented. The Court noted that although the same term
might be “unambiguous . . . as respects other transactions,” 313 U.S. at 433
(citing Helvering v. San Joaquin Fruit & Inv. Co., 297 U.S. 496 (1936)), it
was in fact ambiguous in the context of remainder interests passing by be­
quest, devise, or inheritance, id. In San Joaquin, on the other hand, the
Court, addressing real property acquired by lease with an option to buy,
relied on the “plain import” of the word “acquired,” because “acquired” was
not a term of art and “[l]anguage used in tax statutes should be read in the
ordinary and natural sense.” 297 U.S. at 499.
Moreover, the cases relied upon by the NCF Memorandum for this sug­
gestion themselves rely on factors that, when applied to the present case,
undercut the Memorandum’s ultimate conclusions. The Memorandum’s re­
liance in Cottage Savings, for example, appears to ignore the fact that the
Court, addressing the reasonableness of the agency’s interpretation, discussed
at length the fact that the long-standing agency interpretation had been left
undisturbed by Congress for many years, and stated that “Treasury regula­
tions and interpretations long continued without substantial change, applying
to unamended or substantially reenacted statutes, are deemed to have re­
ceived congressional approval and have the effect of law.” Cottage Savings,
499 U.S. at 561. Here, as the NCF Memorandum recognizes, “Treasury’s
consistent and long-standing interpretation of cost” has been “original cost.”
149
Id. at 77. See also INS v. Cardoza-Fonseca, 480 U.S. at 446 n.30 (“An
agency interpretation of a relevant provision which conflicts with the agency’s
earlier interpretation is ‘entitled to considerably less deference’ than a consis­
tently held agency view.”) (quoting Watt v. Alaska, 451 U.S. 259, 273 (1981)).22
Finally, the NCF Memorandum cites two cases as support for the propo­
sition that “ ‘cost’ or similar terms in other statutes have been construed to
permit, or even require, taking account of inflationary effects." Id. at 27
(emphasis added). That proposition is, o f course, largely irrelevant to under­
standing the intent o f Congress in enacting the Internal Revenue Code. See,
e.g., Prussner v. United States, 896 F.2d 218, 228 (7th Cir. 1990) (en banc)
(pointing out that “ [different statutes passed by different Congresses often
do use the same words to mean different things”). In any event, at least one
o f the two cited cases simply offers no support for the Memorandum’s propo­
sition. Amusement & Music Operators Ass'n v. Copyright Royalty Tribunal,
676 F.2d 1144 (7th Cir.), cert, denied, 459 U.S. 907 (1982), concerned a
statute that required the Copyright Royalty Tribunal to determine “reason­
able copyright royalty rates.” 17 U.S.C. § 801(b)(1). The court noted that
the Tribunal had rejected an “individualized cost-based approach” and in­
stead relied on factors “not related to cost.” 676 F.2d at 1148.23
Accordingly, we agree with your conclusion that the Internal Revenue
Code’s plain language and structure demonstrate that “cost” cannot be inter­
preted to allow an adjustment for inflation.
III.
Under the Supreme Court’s jurisprudence, the plain meaning of the word
“cost” ends the inquiry:
The task o f resolving the dispute over the meaning of [the
statute] begins where all such inquiries must begin: with the
language of the statute itself. In this case it is also where the
inquiry should end, for where, as here, the statute’s language
is plain, “the sole function of the courts is to enforce it ac­
cording to its terms.” The language before us expresses
C ongress’ intent . . . with sufficient precision so that reference
to legislative history . . . is hardly necessary.
22The C ourt's recent decision in Rust V’. Sullivan, 500 U.S. 173 (1991), which noted that an agency
interpretation is entitled to som e deference even if it represents a break with prior interpretations, id. at
186-88, did not alter this rule. Subsequent to Rust, the Court again stated the general rule that “the case
for judicial deference is less compelling with respect to agency positions that are inconsistent with
previously held view s.” P auley v. BethEnergy Mines, Inc., 501 U.S. 680, 698 (1991).
23 Indeed, the statute specifically authorized the Tribunal “to make determinations concerning the ad­
ju stm e n t of reasonable copyright royalty rates.” 17 U.S.C. § 801(b)(1) (emphasis added). Pursuant to
that authority the Tribunal allowed an inflation adjustment in 1987. In Chevron terms, the adjustm ent
w as “affirm atively supported by the language of the Act.” 676 F.2d at 1155. By contrast, in the case of
section 1012 o f the Internal Revenue C ode, Congress has provided only the definition of “basis" in
term s o f “co st,” while om itting any general grant of authority to make inflation-linked adjustm ents to
co st basis.
150
United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989) (citations
omitted). Once it is determined as a textual matter that cost means “actual price
paid” in nominal dollars, resort to the legislative history is unnecessary.
As noted above, however, Chevron requires that the search for the m ean­
ing of a statutory provision be conducted by “employing traditional tools of
statutory construction.” 467 U.S. at 843 n.9. These tools include the legis­
lative history of the provision. See also Cardoza-Fonseca, 480 U.S. at 449.
Thus, even if we were to conclude that the plain language and the structure
of the Code did not provide a clear meaning for the term “cost” in section
1012, we would be compelled to search the legislative record of the Revenue
Act of 1918 to determine if that record could provide such meaning.24 Based
on our review of that record, we agree with your conclusion that “the con­
temporaneous legislative history of the [Act] indicates that Congress intended
the word ‘cost’ to mean the price paid in nominal dollars not adjusted for
inflation.” Treasury Memorandum at 8 (capitalization omitted).
As we have noted above, Treasury’s pre-1918 regulatory definition of
cost was “actual price paid.” T.D. 2005, 16 Treas. Dec. Int. Rev. I l l , 112
(1914), restated, T.D. 2090, 16 Treas. Dec. Int. Rev. 259, 272-73 (1914).
Contrary to the assertion in the NCF Memorandum that “there is nothing in
the legislative history of the 1918 Act indicating that these Treasury D eci­
sions were being adopted,” id. at 36, the legislative history concerning this
issue clearly indicates that Congress adopted Treasury’s interpretation when
it wrote “cost” into the Revenue Act of 1918. Indeed, it was explained
during floor debate concerning an amendment proposed by Representative
Hardy, intended in part to eliminate the effects of inflation on capital gains,
that the capital gains provision of the Act was “merely enacting into law the
rules and regulations now in force under the present statute.” 56 Cong. Rec.
10,349 (1918) (statement of Rep. Gamer) (emphasis added).
The NCF Memorandum, after extensively quoting from the debate sur­
rounding Representative Hardy’s proposed amendment to the capital gains
provision of the Act, concedes that the legislative history “demonstrates that
at least certain members of Congress were aware of the effects o f inflation
on capital gains. It also can be argued to reflect an understanding o f Con­
gress that a property’s basis referred to the acquisition cost o f the property.”
Id. at 44 (emphasis added).
" T h e NCF M emorandum suggests that the proper scope and significance o f legislative history is un­
clear under Chevron. Id. at 31 n .l 5. To the contrary, we believe its relevance is quite clear. A court
undertakes a Chevron inquiry employing traditional tools of statutory construction, of which legislative
history is generally one See, e.g.. Chevron, 467 U.S. at 851-53, 862-64 (analyzing the legislative
history of the Clean Air Act); NLRB v. United Food & Commercial Workers Union, Local 23, 484 U.S.
112, 124-25 (1987) (analyzing the history of the Labor Management Relations Act). See also W agner
Seed Co. v. Bush, 946 F.2d 918, 920 (D.C. Cir. 1991) ( Chevron requires deference “when the statute,
viewed in light o f its legislative history and the traditional tools of statutory construction, is am bigu­
ous.” ), cert, denied, 503 U.S. 970 (1992).
151
Indeed, Congress must have been extremely well aware of the problems of
inflation when it adopted the Act. In 1918, the year prior to the first statu­
tory use of “cost” to define basis in the capital gains context, consumer
prices for all urban consumers increased by 18.0%. Economic Indicators
Handbook 224 (Damey ed. 1992).25 In the previous year, inflation was
nearly as high, at 17.4%, a dramatic rise from the 1% inflation rates in 1914
and 1915. Id.
In view o f this World War I-related inflation, it is not surprising that a
proposal intended to eliminate most of the effects of inflation on capital
gains was debated at the time. In moving to strike the basis provision out of
the Revenue Act entirely, Representative Hardy argued that the tax on gains
would be unfair because “a piece of property bought in 1913, if its exchange
value today is to be equal to its exchange value when it was bought, must
bring in dollars and cents something like two times what it cost.” 56 Cong.
Rec. at 10,349.26 See also id. (“ [If a] man today makes a sale of a tract of
land which he bought in 1913 at the prices then prevailing, and if he sold it
today at 100% apparent profit and reinvested the money he could not obtain
any more property now than he could have obtained in 1913 with the money
then paid for the same land.”).
While noting that “the reasoning of [Representative Hardy] would apply
to every conceivable source o f income,” not simply capital gains, id. at
10,350 (statement of Rep. Kitchin), opponents of the proposed amendment
emphasized that the section dealing with capital gains did not change cur­
rent law. See id. (“This provision makes absolutely no change in existing
law ”) (statement of Rep. Kitchin). The opponents also explained how
current law operated. Representative Fordney thus stated that if a taxpayer
purchased property ten years ago and then sold it, the appropriate measure
of the gain would be “ [t]he difference between the price paid fo r it 10 years
ago and the price you sell it for today.” Id. at 10,351 (emphasis added).
Representative Kitchin, the Chairman of the House Ways and Means Com­
mittee, further explained that “ [i]f you bought a ship in 1916 for $100,000
and sell it in 1918 at $200,000, or if you bought Bethlehem stock or United
States Steel Corporation stock in 1915, your income is the difference be­
tween the purchase and selling price, and that is the only rule under which
you can administer the law.” Id. at 10,350-51. The hypotheticals posed by
Representatives Fordney and Kitchin are particularly revealing since the gains
described would, to a large degree, have been attributable to the dramatic
wartime inflation described above. No one at the time disputed these char­
acterizations of current law, and the statements were consistent with the
earlier Treasury Decisions quoted above. Ultimately, Representative Hardy
withdrew his proposal to strike the basis provision and proposed an amendment
15 The 1918 Act was adopted in 1919. S ee supra note 8.
:s Representative Hardy was half right. Consumer prices had increased slightly more than 50% from
1913 to 1918, from an index o f 9.9 to an index of 15.1. Economic Indicators Handbook at 224.
152
that would measure capital gain only from the beginning of the year in which
the capital asset was sold. Id. at 10,351, 10,354. Congress was apparently
not persuaded to remedy the effects of inflation on income derived from
capital gains in this way, and the proposal was rejected. Id.
The NCF Memorandum attempts to deny the force of its own reading of
the legislative history by asserting that the 1918 Act’s legislative history
“simply does not speak directly and clearly to the ‘precise question at is­
sue.’” Id. at 46-47 (quoting Chevron, 467 U.S. at 843 n.9). For the reasons
set forth above and in the Treasury Memorandum, we disagree. In any
event, as the NCF Memorandum recognizes, the legislative history is consis­
tent with the ordinary meaning of the term “cost” as meaning historical
price paid, id. at 44, and clearly demonstrates that Congress legislated with
full knowledge of the effect of current law and of the impact of inflation on
capital gains.
For these reasons, we concur in your conclusion that the legislative record
evidences a clear congressional intent that “cost” be given its common and
ordinary meaning, that is, price paid in nominal dollars not adjusted for
inflation. Treasury Memorandum at 8-13.
IV.
The NCF Memorandum argues that Treasury’s adoption of a capital gains
indexing regulation is not foreclosed by Congress’s repeated reenactments
of the Internal Revenue Code with knowledge of Treasury’s interpretation of
“cost” to mean the actual price paid (the “reenactment” doctrine), or by
Congress’s rejection of statutory indexing proposals (the “acquiescence” doc­
trine). See NCF Memorandum at 75-87. We have discussed these doctrines
only briefly, see supra note 16, because they have application only if Trea­
sury has discretion under the statute to reinterpret “cost” — that is, only if
“cost” is ambiguous. In Parts II and III, we have demonstrated that it is not.
In places, however, the NCF Memorandum appears to make an affirma­
tive argument in support of regulatory indexing of capital gains based on
recent votes of either the Senate or the House on legislative proposals to
index capital gains:
[W ]hile C ongress has not actually enacted a capital gains
indexing proposal, the legislative history o f C ongress’ con­
sid eratio n o f such proposals reveals, if anything, that
C ongress fa vo rs the concept o f indexing capital gains.
Indeed, . . . indexation measures have passed in recent ses­
sions of both the Senate and the House . . . .
Congress’ deliberations on the issue to date suggest that a ma­
jority of both Houses would welcome a Treasury reinterpretation
of “cost” to take account of inflation.
153
NCF Memorandum at 84. See also id. at 3 (“[T]he legislative history of
C ongress’ consideration of such proposals reveals, if anything, that Congress
fa vo rs the concept of indexing capital gains.”). This reasoning is substan­
tially flawed for several reasons.
First, as the Treasury Memorandum points out, although Congress has
repeatedly considered proposals explicitly to index capital gains for infla­
tion, it has never enacted them. Id. at 15-18.27 It is a strange twist of logic
to conclude that because Congress has rejected a proposal many times, Con­
gress therefore favors that proposal. Second, even assuming that a majority
o f both Houses would in fact be willing to enact such legislation, it by no
means follows that they would welcome an administrative agency’s decision
to bring about a similar outcome by regulatory action alone.
M ore fundamentally, the attitude of a majority of the members of the
current Congress is completely irrelevant to the question whether an agency’s
interpretation of existing law is or is not correct. Like the courts, the execu­
tive branch must interpret the law as it finds it, not base its interpretations
on conjecture as to how Congress might act. Thus, although agencies must
follow the “will of Congress” in interpreting statutes, “[t]he ‘will of Con­
gress’ we look to is not a will evolving from Session to Session, but a will
expressed and fixed in a particular enactment.” West Virginia Univ. Hosps.,
Inc. v. Casey, 499 U.S. 83, 101 n.7 (1991). Furthermore, it is an elementary
principle o f constitutional law that the policy preferences of individual mem­
bers of Congress, even if they happen to comprise majorities of both Houses,
are legally meaningless until they crystallize into “bicameral passage fol­
lowed by presentment to the President.” INS v. Chadha, 462 U.S. 919, 954-55
(1983). See also NCF Memorandum at 80 n.43.
The history of capital gains taxation also shows that Congress was aware
o f the effects o f inflation but chose to deal with them in a manner other than
indexation. The Revenue Act of 1918 did not distinguish between capital
and ordinary income for purposes of tax rates. In 1921, however, Congress
enacted the first preference for capital gains income. Compare Revenue Act
o f 1921, ch. 136, § 206(b), 42 Stat. 227, 233 (taxing capital gains at a
m aximum o f 12.5%) with id., § 211(a)(1), 42 Stat. at 233-35 (taxing ordi­
nary income at rates as high as 65%). Your opinion concludes that “[o]ne of
the policy reasons most often cited for this preferential treatment was the
21 On at least four occasions since 1978, indexation legislation has been approved by either the Senate
or the H ouse, only to be rejected in conference. See Revenue Act of 1978, H.R. 13511, 95th Cong., 2d
Sess. § 404 (1978) (approved by House), rejected by H.R. Conf. Rep. No. 1800, 95th Cong., 2d Sess.
258 (1978); Tax Equity and Fiscal Responsibility Act of 1982, H.R. 4961, 97th Cong., 2d Sess. § 310A
(1982) (approved by Senate), rejected by H.R. Conf. Rep. No. 760, 97th Cong., 2d Sess. 478 (1982);
O m nibus Budget Reconciliation Act of 1989, H.R. 3299, 101st Cong., 1st Sess. § 11961 (1989) (ap­
proved by House), rejected by H.R. Conf. Rep. No. 386, 101st Cong., 1st Sess. 664 (1989); Tax Fairness
and Econom ic G rowth Act o f 1992, H.R. 4210, 102d Cong., 2d Sess. § 2101 (1992) (approved by
H ouse), rejected by H R. Conf. Rep. No. 461, 102d Cong., 2d Sess. 356, 364 (1992).
154
desire to mitigate the impact of inflation on the taxation of capital gains.”
Treasury Memorandum at 13. See also id. n. l 6 (citing committee hearings
on the 1921 Act); NCF Memorandum at 48-49 & n.25 (same).
It is apparent that the draftsmen of the 1921 Act did not intend that
“cost” reflect an adjustment for inflation. In reenacting the tax laws, they
chose to mitigate the effects of inflation on capital assets by granting prefer­
ential treatment to capital gains — not by indexing cost. This choice reflects
their understanding that without some special treatment, capital gains would
be peculiarly subject to the effects of inflation under the tax laws. Congress’s
decision to provide preferential treatment for capital gains assumed that the
Treasury’s regulatory interpretation of “cost” as “actual price paid” was valid
and would remain in effect.28
As recently as 1978, Congress was again faced with a choice in dealing
with the impact of inflation on the values of capital assets. In the course of
enacting the Revenue Act of 1978, the House adopted a provision expressly
indexing the basis of such assets. The Senate, on the other hand, rejected
this approach, choosing instead to increase the capital gains exclusion from
50% to 60%. The Finance Committee’s explanation for this choice is in­
structive:
[A]n increased capital gains deduction will tend to offset the
effect of inflation by reducing the amount of gain which is
subject to tax. Thus, by increasing the deduction, taxable
gain should be reconciled more closely with real, rather than
merely inflationary gain. However, since the deduction is con­
stant, unlike the automatic adjustments generally provided for
in various indexation proposals, it should not tend to exacer­
bate inflationary increases.
S. Rep. No. 1263, 95th Cong., 2d Sess. 192 (1978). The bill as finally
enacted into law adopted the Senate’s version. Pub. L. No. 95-600, § 402(a),
92 Stat. 2763, 2867 (1978).
Whenever Congress has been faced with a choice of different methods for
dealing with the impact of inflation on capital gains, it has chosen some
means other than indexation. Indeed, it has specifically rejected indexation
in favor of the capital gains preference. This fact reflects both the under­
standing that indexation was not allowed under the Code in the first place
and the intent o f Congress to keep it that way. We believe that Congress’s
“ The capital gains preference continued to be a major feature of the tax laws until 1986. Since the
enactm ent of the 19S4 Code, this preference was accomplished in part by allowing individual taxpayers
to exclude from gross income a substantial percentage of their capital gain income. See, e.g., 26 U.S.C.
§ 1202 (1982) (allowing individuals to dfduct 60% of their net capital gain from gross income). Sec­
tion 1202 was repealed in 1986. Pub. L. No. 99-514, § 301(a), 100 Stat. 2085, 2216 (1986).
155
continued affirmation of an inflation-mitigating mechanism other than index­
ation — specifically, preferential treatment — together with Treasury’s
consistent interpretation of “co st” as not allowing indexation, makes this a
particularly com pelling case for concluding that Congress has ratified
Treasury’s interpretation of the Code.29
V.
The NCF Memorandum advances two other arguments, both of which are
unavailing. First, the Memorandum attempts to show that “the Treasury has
historically taken a flexible view toward its own interpretation of basis and
cost.” Id. at 29. Yet the supposed instances of this “flexible” view are
mischaracterized.
The NCF Memorandum claims that because the 1918 Treasury regula­
tions addressing the capital gains treatment of property acquired by gift
equated “cost” with fair market value of the property at the time of the gift,
cost “was completely divorced from concepts of historical or original cost.”
Id. at 38. This is mistaken; cost was clearly tied to the fair market value at
the time the asset was acquired by gift or bequest. Rather than altering the
time at which cost is calculated, as the Memorandum argues, the regulations
merely substituted an appropriate measure of value where the taxpayer in
question had not paid anything for the asset. See Hartley v. Commissioner,
295 U.S. 216, 219 (1935) (“T he use of the word cost does not preclude the
computation and assessment o f the taxable gains on the basis of the value of
property [at the time of acquisition] rather than its cost, where there is no
purchase by the taxpayer, and thus no cost at the controlling date.”).30 Simi­
larly, although Congress subsequently rejected fair market value at the time
o f the gift in favor o f the donor’s original cosf, see Revenue Act of 1921, ch.
136, § 202(a)(2), 42 Stat. 227, 229, Congress never deviated from tying the
basis to original cost — the only question was whose original cost was
appropriate.
The NCF Memorandum also cites the treatment of depreciation and deple­
tion in the 1918 regulations as an example o f Treasury’s flexibility in defining
cost. Id. at 40. Those regulations, however, reflected flexibility not in
defining “cost” but in determining what “property” the taxpayer owned. When
those regulations were challenged in United States v. Ludey, 274 U.S. 295
” There is evidence that when Congress eliminated the capita! gains preference in 1986, its decision not
to replace the preference w ith indexation was deliberate. As the NCF M emorandum points out, both the
T reasury’s public tax proposals in 1984 and the President’s proposals to the Congress in 1985 recom­
m ended som e form o f indexation Id. at 57-58. Moreover, the problem o f inflation and the need to index
capital gains in the absence o f preferential treatment were the subject o f congressional hearings. See,
e.g.. Tax R eform A ct o f 1986, Part IV: H earings Before the Senate Comm, on Finance, 99th Cong., 2d
Sess. 61 (1986).
“ In any event, to reason from the treatm ent of gifts in 1918 that the indexation o f capital gains is
appropriate, the N CF Memorandum w ould have to demonstrate the legal propriety o f indexing the
value o f a gift from the date its cost is determined. T here i$, no suggestion that such an adjustm ent
w ould have been perm issible.
156
(1927), the Supreme Court observed that the depreciation allowance was
based on the theory that “by using up the [property], a gradual sale is made
of it,” and. thus “[t]he depreciation charged is the measure of the cost o f the
part which has been sold.” Id. at 301. See also id. at 302 (depletion charge
“represents the reduction in the mineral contents of the reserves from which
the product is taken”). The Court never deviated from its treatment o f cost
as a bearing on the price paid: “[t]he amount of the depreciation must be
deducted from the original cost of the whole [property] in order to deter­
mine the cost of that disposed of in the final sale of properties.” Id. at 301
(emphasis added). See also Treasury Memorandum at 30 n.30. The NCF
Memorandum concedes as much: “the regulations provided that the origi­
nal cost of property had to be adjusted downward for any depreciation or
depletion taken on the property by the taxpayer prior to its sale.” Id. at 40
(emphasis added). Nothing in the regulations suggested that the starting
point for this calculation was not original cost in nominal dollars.
Second, the NCF Memorandum reads Ludey as upholding “the Treasury’s
discretion to fill in gaps left by Congress in the [Code’s] capital gains provi­
sions, specifically in the concept of ‘cost.’” NCF Memorandum at 66. That
reading is flawed in several respects. First, the Ludey Court did not rely on
the Commissioner’s regulatory interpretation; it instead held that “the rev­
enue acts should be construed as requiring deductions for both depreciation
and depletion when determining the original cost of oil properties sold.”
274 U.S. at 300 (emphasis added). By its own terms, therefore, Ludey is hot
a decision that upholds agency discretion, but a decision in which the Court
construed the statute for itself. See also id. at 303-04 (rejecting the
Commissioner’s method for determining the appropriate deduction).
The Treasury regulations in question in Ludey did not fill in “gaps” in the
statutory term “cost;” rather, they reconciled two potentially contradictory
statutory provisions. Treasury’s interpretation of “cost” as requiring adjust­
ments for depreciation was necessary to harmonize the statutory provision
taxing capital gains with the statutory provision granting annual deductions
for depreciation — that is, to prevent taxpayers from receiving tax benefits
twice. See id. at 301 (“Any other construction would permit a double deduc­
tion for the loss of the same capital assets.”). The Court avoided this double
deduction based on indications in the statute that no such deduction was
intended.31 For example, the Court noted that Congress intended the allow­
ance for depreciation to reflect a “gradual sale” of the property. Thus, the
“depreciation charged is the measure of the cost o f the part which has been
sold.” Id. at 301 (emphasis added). Similarly, the Court determined that
because depletion allowances were limited by statute to the amount of the
31 C f United States v. Skelly Oil Co., 394 U.S. 678, 695 (1969) (Stewart, J., dissenting) (“In prior
decisions [including Ludey) disallowing what truly were 'double deductions,' the Court has relied on
evident statutory indications, not just its own view of the equities, that Congress intended to preclude
the second deduction/’)-
157
capital invested, the deduction was meant “to be regarded as a return of
capital, not as a special bonus for enterprise and willingness to assume
risks.” Id. at 303.
In the case of indexing for purposes of determining capital gain, there is
no conflict in statutory provisions that indexing would resolve. Indeed, as
explained above, any interpretation that measures cost at the time of sale
rather than purchase would create a positive conflict with provisions allow­
ing deductions for depreciation and other items.
VI.
For all the reasons set forth above, we conclude, as did the Treasury
Department, that the term “cost” as used in section 1012 is not ambiguous.32
TIMOTHY E. FLANIGAN
Assistant Attorney General
Office o f Legal Counsel
32 Because we conclude that in using the term "cost,” Congress has left no “gap” for Treasury to fill, no
further inquiry is appropriate. We need not address under step two of Chevron whether a proposed
Treasury regulation indexing capital gains for inflation would be a “reasonable” interpretation of sec­
tion 1012 o f the Code. 467 U.S. at 844.
158