Dupont v. Com. IRS ( 1994 )

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
12-2-1994
Dupont v. Com. IRS
Precedential or Non-Precedential:
Docket 94-7242
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________________
Nos. 94-7242, 94-7243 & 94-7244
___________________
E.I. DU PONT DE NEMOURS & COMPANY,
and Affiliated Corporations,
Appellant in No. 94-7242
REMINGTON ARMS COMPANY, INC.,
Appellant in No. 94-7243
E.I. DU PONT DE NEMOURS & COMPANY,
Successor to New England Nuclear Corporation,
Appellant in No. 94-7244
v.
COMMISSIONER OF INTERNAL REVENUE SERVICE
__________________________________________________
On Appeal from the United States Tax Court
Washington, D.C.
(Tax Court Nos. 91-19950, 91-19952 & 91-19953)
________________________
Argued September 29, 1994
Before: SCIRICA, NYGAARD and McKEE, Circuit Judges
(Filed December 2, 1994)
JOHN L. SNYDER, ESQUIRE (Argued)
MICHAEL R. SCHLESSINGER, ESQUIRE
BRADFORD L. FERGUSON, ESQUIRE
MARILYN D. FRANSON, ESQUIRE
Hopkins & Sutter
Three First National Plaza
Suite 4200
Chicago, Illinois 60602
Attorneys for Appellants
THOMAS J. CLARK, ESQUIRE (Argued)
GARY R. ALLEN, ESQUIRE
GILBERT S. ROTHENBERG, ESQUIRE
United States Department of Justice
Tax Division
P.O. Box 502
Washington, D.C. 20044
Attorneys for Appellee
__________________
OPINION OF THE COURT
__________________
SCIRICA, Circuit Judge.
In this appeal, we must determine the validity of
Treas. Reg. § 1.58-9 (1992). Specifically, the issue is whether
the Department of the Treasury may implement a "suspended-tax"
approach instead of a "suspended-preference" method in
calculating minimum tax under the "tax benefit rule" of former
I.R.C. § 58(h), 26 U.S.C. The first approach computes and
suspends tax liability until a benefit results while the latter
suspends items of tax preference. Because we find the suspended-
tax approach to be a reasonable construction of § 58(h), in
accord with its language and purpose, we will uphold the
regulation.
I.
E.I. du Pont de Nemours & Company, Conoco, Inc.,
Remington Arms Company, and New England Nuclear Corp.1 filed
1
. New England Nuclear Corp. (NEN) merged into DuPont
after the 1981 taxable year, the year of the alleged deficiency
against NEN.
federal income tax returns for 1979, 1980, and 1981,2 claiming
reductions in tax liability through the use of income tax credits
carried back from the 1982 tax year. Subsequently, the Internal
Revenue Service issued notices of deficiency to taxpayers for
$25,633,133. Taxpayers responded by filing petitions in the Tax
Court, contending the regulation on which the deficiencies were
based exceeded the scope of the authorizing statute, I.R.C. §
58(h).3 The Tax Court sustained the regulation, E.I. Du Pont De
Nemours & Co. v. Commissioner, 102 T.C. 1 (T.C. 1994), and
taxpayers appealed.4 We will affirm.
A.
In 1969, Congress enacted I.R.C. § 56(a) out of concern
over the use of tax deductions and exemptions that enabled some
high-income taxpayers to pay little or no income tax.5 Section
2
. In 1982, DuPont filed a consolidated federal income tax
return on behalf of itself and its affiliates, including Conoco,
Remington, and E.I. du Pont de Nemours & Company, as successor to
NEN. Conoco, Remington, and NEN were not affiliates of DuPont
for the taxable years covered by the 1979-81 returns, however,
and each entity therefore filed its own return. Furthermore,
while DuPont and Conoco filed tax returns on behalf of their
affiliated corporations, we will refer to the tax returns as
having been filed by DuPont and Conoco.
3
. The law relevant to this appeal changed significantly
in 1986. See infra note 38. Unless otherwise noted, citations
to former I.R.C. §§ 56 and 58(h) will be to the 1982 version of
the Internal Revenue Code, 26 U.S.C.
4
. DuPont, for itself and as successor to NEN, and
Remington filed this appeal. Conoco, which has its principal
place of business in Texas, has an appeal pending before the
Court of Appeals for the Fifth Circuit. Conoco, Inc. v.
Commissioner, No. 94-40382.
5
. See H.R. Rep. No. 413, 91st Cong., 1st. Sess., pt. 1,
at 2 (1969), reprinted in 1969 U.S.C.C.A.N. 1645, 1646 ("Under
56(a) imposed a minimum tax, apart from the regular income tax,
on certain deductions and exemptions designated as "items of tax
preference."6 During the years relevant to this case, the
statute levied a minimum tax of 15% of the amount by which the
(..continued)
your committee's bill, virtually no individual with significant
amounts of income will be able to escape payment of all
tax. . . . The second line of defense is to group remaining tax
preference items and impose a minimum tax or a limit on tax
preferences."); S. Rep. No. 552, 91st Cong., 1st Sess. 112
(1969), reprinted in 1969 U.S.C.C.A.N. 2027, 2143 ("the committee
believes that an overall minimum tax on tax preferences is also
needed to reduce the advantages derived from these preferences
and to make sure that those receiving such preferences also pay a
share of the tax burden"). See also First Chicago Corp. v.
Commissioner, 842 F.2d 180, 181 (7th Cir. 1988) ("The purpose of
minimum tax (original or alternative) is to make sure that the
aggregating of tax-preference items does not result in the
taxpayer's paying a shockingly low percentage of his income as
tax."); Occidental Petroleum Corp. v. United States, 685 F.2d
1346, 1350 (Cl. Ct. 1982) (Occidental I) ("The legislative
history, to us, reflects a Congressional concern for the way the
tax code is perceived by the general public. . . . In order to
prevent the system from seeming inequitable, individuals and
corporations with large incomes should not be able to avoid
entirely the payment of domestic taxes.").
6
. Items of tax preference, defined in I.R.C. § 57 (1982),
represented:
income of a person which either is not
subject to current taxation by reason of
temporary exclusion (such as stock options)
or by reason of an acceleration of deductions
(such as accelerated depreciation) or is
sheltered from full taxation by reason of
certain deductions (such as percentage
depletion) or by reason of a special rate of
tax (such as the rate of tax on corporate
capital gains).
T.D. 7564, 1978-2 C.B. 19, 23. Tax preferences continue to be
defined in the current Internal Revenue Code, albeit in modified
form. I.R.C. § 57 (1988 & Supp. 1994).
taxpayer's preferences exceeded its regular tax deduction7 or
$10,000, whichever was greater.
In some situations, however, tax preferences did not
result in a current tax benefit for the taxpayer. For example, a
taxpayer's tax liability could be completely offset by income tax
credits, which were not designated as preferences. Yet, even in
those cases in which tax preferences did not result in an actual
benefit, such as when a taxpayer had enough tax credits to reduce
its tax liability to zero, the minimum tax still was imposed.
See Occidental Petroleum Corp. v. United States, 685 F.2d 1346
(Cl. Ct. 1982) (Occidental I).
To remedy this perceived unfairness, Congress enacted a
new provision, I.R.C. § 58(h), in the Tax Reform Act of 1976,
Pub. L. No. 94-455, § 301(d)(3), 90 Stat. 1520, 1553 (1976).8
I.R.C. § 58(h) provided:
7
. The "regular tax deduction" equaled income tax
liability, including investment tax credit recapture, reduced by
certain tax credits. I.R.C. § 56(c).
8
. The Joint Committee on Taxation explained the reason
for § 58(h):
There are certain cases in which a
person derives no tax benefit from an item of
tax preference because, for example, the item
is disallowed as a deduction under other
provisions of the Code or because the
taxpayer has sufficient deductions relating
to nonpreference items to eliminate his
taxable income. . . . To deal with this
problem specifically, the Act instructs the
Secretary of the Treasury to prescribe
regulations under which items of tax
preference (of both individuals and
corporations) are to be properly adjusted
when the taxpayer does not derive any tax
Regulations to include tax benefit rule
The Secretary shall prescribe
regulations under which items of tax
preference shall be properly adjusted where
the tax treatment giving rise to such items
will not result in the reduction of the
taxpayer's tax under this subtitle for any
taxable years.
Despite the express statutory directive, the Department of the
Treasury failed to propose implementing regulations for thirteen
years.9 In the meantime, Congress repealed § 58(h) in 1986 and
adopted an alternative minimum tax,10 although it later noted
(..continued)
benefit from the preference. For this
purpose, a tax benefit includes tax deferral,
even if only for one year.
H.R. Rep. No. 10612, 94th Cong., 2d Sess., at 106-07 (1976)
(footnote omitted), reprinted in 1976-3 C.B. 118-19. See also
First Chicago Corp., 842 F.2d at 181 ("[S]ection 56(a) would
impose minimum tax on tax-preference items even though the items
never conferred a tax benefit on the taxpayer. . . . The sparse
legislative history as well as the text of section 58(h)
indicates that this section was added in order to prevent these
anomalous consequences."); Occidental Petroleum Corp. v.
Commissioner, 82 T.C. 819, 824 (T.C. 1984) (Occidental II)
("Plainly, in enacting section 58(h), Congress was concerned
about not imposing the minimum tax on tax preferences where such
tax preferences did not result in a tax benefit.").
9
. Courts have noted the interpretative difficulties
caused by the Treasury's delay in issuing regulations under §
58(h). See First Chicago Corp., 842 F.2d at 182 ("These and
other questions might have been answered if the Treasury
Department had ever gotten around to promulgating regulations
under section 58(h), as ordered to do by Congress, but it never
did, blaming its default on a staggering workload . . . .");
Occidental II, 82 T.C. 829 ("[T]he failure to promulgate the
required regulations can hardly render the new provisions of
section 58(h) inoperative. We must therefore do the best we can
with these new provisions.").
10
. The Tax Reform Act of 1986 replaced the remnants of the
add-on minimum tax with an alternative minimum tax for taxable
years after 1986. Tax Reform Act of 1986, Pub. L. No. 99-514, §
that § 58(h) would continue to apply to tax years preceding the
1986 statutory change.11
B.
In 1989, the Treasury Department issued a temporary
regulation to implement § 58(h).12 Three years later, the
department promulgated a final version of the regulation, 26
C.F.R. § 1.58-9, applicable only to preferences arising in
taxable years from 1977 to 1986, when the statute was in effect.
Id. § 1.58-9(b). Under the regulation, as specified by § 58(h),
a taxpayer is not liable for the minimum tax on its preferences
when they result in no current tax benefit, such as when the
taxpayer has sufficient credits to offset tax liability for the
year without deducting any available preferences.
Operation of the statute and regulation, however,
results in an unavoidable secondary effect. When tax credits
exceed regular tax liability for a year, the taxpayer is deemed
to have received no current tax benefit and no minimum tax is
imposed. Yet, the taxpayer still calculates regular tax
liability by deducting its preferences. Because the resulting
regular tax liability is lower than it otherwise would be without
(..continued)
701, 100 Stat. 2085, 2320-45 (1986) (codified as amended at
I.R.C. §§ 55-59 (1988)).
11
. The Omnibus Budget Reconciliation Act of 1989, Pub. L.
No. 101-239, title VII, § 7811(d)(1)(B), 103 Stat. 2106, 2408
(1989), provided that: "The repeal of section 58(h) of the
Internal Revenue Code of 1954 by the Tax Reform Act of 1986 shall
be effective only with respect to items of tax preference arising
in taxable years beginning after December 31, 1986."
12
. Temp. Treas. Reg. § 1.58-9T (1989).
the inclusion of the preferences, fewer credits are necessary to
offset the taxpayer's tax liability for the year. Because tax
credits may be carried over from year to year, the need for fewer
tax credits to offset tax liability in one year "frees up"
additional credits for use in other years.
If the taxpayer does not use those "freed-up" tax
credits to reduce regular tax liability in any year, then it
never benefits from the preferences; thus, no minimum tax may be
imposed. See Occidental Petroleum Corp. v. Commissioner, 82 T.C.
819 (T.C. 1984) (Occidental II). If the taxpayer later uses
those freed-up credits, however, then it has benefitted from the
preferences and must pay the minimum tax. Treas. Reg. § 1.58-9.
All parties agree with this conclusion. The dispute centers on
the method by which the minimum tax is calculated.
C.
For the 1982 tax year, DuPont filed a consolidated
federal income tax return for itself and its affiliates --
including Conoco, Remington, and NEN -- showing taxable income of
$629,112,639. DuPont claimed tax preferences of $177,082,305,
which reduced its tax liability to $256,844,566. Without the use
of preferences to compute taxable income, DuPont's tax liability
would have been $338,302,426.13 Because DuPont had $469,997,179
in credits -- more than enough to offset the potential tax
liability of $338,302,426 -- it was not subject to minimum tax
for the year, pursuant to I.R.C. § 58(h). See First Chicago
Corp. v. Commissioner, 842 F.2d 180 (7th Cir. 1988).
Nevertheless, because DuPont claimed the preferences in
1982 to reduce its taxable income and subsequent tax liability,14
it saved $81,457,86015 in credits for use in other years. DuPont
carried back those freed-up credits and applied them to its own
return for the 1979 tax year and to individual returns filed by
13
. The $338,302,426 in potential tax liability is
calculated by multiplying the $177,082,305 in preferences by the
marginal tax rate of 46 percent from I.R.C. § 11(b)(5) (1982).
The result, $81,457,860, is then added to the $256,844,566 in
regular tax liability computed after deducting the preferences
from taxable income.
14
. After being offset by its tax credits, DuPont's zero
tax liability actually increased to $5,626,409 because of the
recapture of investment tax credits, which could not be offset by
credits.
15
. See supra note 13.
Conoco, Remington, and NEN, which were not affiliated at the time
with DuPont.16
Under Treas. Reg. § 1.58-9, the minimum tax constitutes
15% of the difference between the taxpayer's tax preferences and
its regular tax deduction for the year in which the preferences
arose, here 1982. The regulation requires that credits freed up
by the preferences in one year must be reduced by the amount of
the minimum tax before being carried over to other tax years.
In this case, § 1.58-9 mandated that the freed-up DuPont credits
of $81,457,860 be reduced by $25,633,133, which was 15% of the
difference between the 1982 preferences of $177,082,305 and the
1982 regular tax deduction of $6,194,754.17
Because DuPont had not reduced the credits pursuant to
the regulation, the Commissioner assessed the following
deficiencies:
Taxpayer Taxable Year Ended Deficiency
DuPont December 31, 1979 $13,010,040
Conoco December 31, 1980 12,436,199
Remington January 31, 1980 78,698
NEN February 28, 1981 108,196
Total $25,633,133
16
. See supra note 2. DuPont used the tax credits for the
1979 tax year, Conoco and Remington used the credits for the 1980
tax year, and NEN used them for the 1981 tax year.
17
. The regular tax deduction in 1982 was $568,345 more
than the investment tax credit recapture amount of $5,626,409.
See supra note 14. The difference resulted from I.R.C. § 56(c),
which, in defining the regular tax deduction, excluded from
offsetting tax credits the Tax Reduction Act Stock Ownership Plan
(TRASOP) employee plan percentage, under I.R.C. § 46(a)(2)(E)
(1982).
In contrast to the system mandated by the regulation,
which the Tax Court characterized as the "suspended-tax method,"
taxpayers advocate a "suspended-preference approach." Du Pont,
102 T.C. 6. In essence, taxpayers' method would suspend the
preferences -- not the minimum tax -- and treat them as if they
had arisen during the carry-over year, i.e., the year the freed-
up credits are used. Those suspended preferences would be
aggregated with other preferences arising in the carry-over year.
The minimum tax then would equal 15% of the difference between
the aggregated preferences and the regular tax deduction for the
carry-over year. Under taxpayer's method, DuPont, Remington, and
NEN would have no minimum tax liability, and the deficiency
against Conoco would be reduced to $10,551,95618 -- instead of
the $25,633,133 total deficiency assessed under Treas. Reg. §
1.58-9.
Accordingly, taxpayers filed petitions in the Tax Court
claiming the deficiencies were based on an invalid regulation.
The Commissioner of Internal Revenue disagreed, and all parties
submitted a fully stipulated record to the Tax Court, which
upheld Treas. Reg. § 1.58-9 as a reasonable interpretation of the
statute. Du Pont, 102 T.C. 20-21. Taxpayers then appealed.19
The Tax Court had jurisdiction of the case under I.R.C.
§§ 6214(a) and 7442 (1988). We have jurisdiction under I.R.C. §
18
. For detailed calculations of the minimum tax under
taxpayers' proposed system, see Du Pont, 102 T.C. 7-8.
19
. See supra note 4.
7482 (1988), and our review is plenary. Pleasant Summit Land
Corp. v. Commissioner, 863 F.2d 263, 268 (3d Cir. 1988), cert.
denied, 493 U.S. 901 (1989).
II.
As an initial matter, we consider the judicial
deference to which the regulation is entitled. Under Chevron
U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837, 844 (1984), "legislative regulations are given controlling
weight unless they are arbitrary, capricious, or manifestly
contrary to the statute." Taxpayers, however, contend that §
1.58-9 is not a "legislative" regulation entitled to deference
under Chevron.
Because the Treasury proposed the regulation thirteen
years after the statute's enactment and three years after its
repeal, taxpayers argue that § 1.58-9 is not a "legislative"
regulation issued under I.R.C. § 58(h), but merely an
"interpretative" one20 under the department's general rule-making
authority. See I.R.C. § 7805(a) (1988) ("the Secretary shall
prescribe all needful rules and regulations for the enforcement
20
. In this context, "legislative regulations" are those
issued pursuant to a specific grant of congressional authority
"'to define a statutory term or prescribe a method of executing a
statutory provision,'" while "interpretative regulations" are
issued under the general grant of authority of I.R.C. § 7805(a).
See Armstrong World Indus., Inc. v. Commissioner, 974 F.2d 422,
430-31 (3d Cir. 1992) (quoting Rowan Cos. v. United States, 452
U.S. 247, 253 (1981)). See also McKnight v. Commissioner, 7 F.3d
447, 450-51 (5th Cir. 1993); Gehl Co. v. Commissioner, 795 F.2d
1324, 1328 (7th Cir. 1986).
of this title").21 We cannot agree. I.R.C. § 58(h) provided
that the "Secretary shall prescribe regulations . . .," which
appears to be precisely the type of "express delegation of
authority to the agency" that Chevron contemplates. 467 U.S. at
843-44. Although there may be situations in which substantial
and prejudicial delay in exercising rule-making authority might
alter the degree of deference accorded a regulation, we see no
express prejudice here nor do we discern any other factors that
would change the nature of our review. In addition, even after
the repeal of § 58(h), Congress expressly stated that the statute
would remain effective for preferences arising in taxable years
before 1987.22 Therefore, the congressional directive for the
Treasury to "prescribe regulations" under § 58(h) remained in
force as to those taxable years.
Furthermore, in the tax area, we are still required to
treat regulations issued under a general grant of authority with
broad deference, although to a somewhat lesser degree than when
Congress has made a specific delegation of authority in a
specific statute.23 As the Supreme Court has explained:
21
. The preamble to Treas. Reg. § 1.58-9 states it was
issued under the specific statute, I.R.C. § 58(h), and the
general grant of authority of § 7805. See T.D. 8416, 1992-1 C.B.
7, 7, 9.
22
. See supra note 11.
23
. See Polychrome Int'l Corp. v. Krigger, 5 F.3d 1522,
1544 n.53 (3d Cir. 1993) (noting, in discussing the Virgin
Islands tax code, that courts "owe less deference to an
interpretative regulation . . . than to one promulgated under a
specific grant of authority"); Armstrong World Indus., 974 F.2d
at 430 ("legislative regulations not promulgated under the
general authority to 'prescribe all needful rules and
"Because Congress has delegated to the Commissioner the power to
promulgate 'all needful rules and regulations for the enforcement
of [the Internal Revenue Code],' 26 U.S.C. §7805(a), we must
defer to his regulatory interpretations of the Code so long as
they are reasonable." Cottage Sav. Ass'n v. Commissioner, 499
U.S. 554, 560-61 (1991) (quoting National Muffler Dealers Ass'n
v. United States, 440 U.S. 472, 476-77 (1979)).24
III.
A.
(..continued)
regulations,' 26 U.S.C. § 7805(a), but instead emanating from a
specific grant of Congressional authority 'to define a statutory
term or prescribe a method of executing a statutory provision,'
are owed an even greater deference") (quoting Rowan Cos., 452
U.S. at 253). See also United States v. Vogel Fertilizer Co.,
455 U.S. 16, 24 (1982); McKnight, 7 F.3d at 450-51; Gehl Co., 795
F.2d at 1328.
Although this court and others have noted that
interpretative regulations issued under the Internal Revenue Code
are entitled to less deference than legislative regulations, it
is not clear whether this rule applies outside the Internal
Revenue Code. So far we have declined to decide whether Chevron
U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S.
837 (1984), which advises judicial deference to agency
regulations, overruled General Electric Co. v. Gilbert, 429 U.S.
125, 141-42 (1976), which held that an agency's interpretative
decisions required less judicial deference. See Sekula v.
Federal Deposit Ins. Corp., No. 93-3596, 1994 WL 620836, at *8
n.13 (3d Cir. Nov. 9, 1994); Reich v. Local 30, Int'l Bhd. of
Teamsters, 6 F.3d 978, 987 n.14 (3d Cir. 1993); International Raw
Materials, Ltd. v. Stauffer Chem. Co., 978 F.2d 1318, 1325 n.9
(3d Cir. 1992), cert. denied, 113 S. Ct. 1588 (1993).
24
. See also Commissioner v. Portland Cement Co. of Utah,
450 U.S. 156, 169 (1981) (citations omitted) ("Treasury
Regulations 'must be sustained unless unreasonable and plainly
inconsistent with the revenue statutes'"); Armstrong World
Indus., 974 F.2d at 430 (citations omitted) ("we defer to
treasury regulations that 'implement the congressional mandate in
some reasonable manner'").
I.R.C. § 58(h) directs the Treasury to enact
regulations "under which items of tax preference shall be
properly adjusted where the tax treatment giving rise to such
items will not result in the reduction of the taxpayer's tax
under this subtitle for any taxable years." On appeal,
taxpayers' principal contention is that the regulation adjusts
tax credits, not items of tax preference.
Although § 58(h) requires that taxpayers be exempt from
the minimum tax for any year in which their preferences do not
result in a tax benefit, the regulation nevertheless computes the
minimum tax that otherwise would be due on those preferences for
the year. The regulation then reduces the taxpayers' tax credits
by the amount of the minimum tax. It is only when taxpayers
attempt to benefit from their preferences -- by using the freed-
up credits -- that they become subject to the tax.
Taxpayers complain that the operation of § 1.58-9
results in adjustments to their tax credits, contrary to the
language of the statute. Instead, taxpayers claim the tax should
be assessed by carrying the preference items from the "non-
benefit" year over to the "benefit" year and combining them with
the preferences that arose during the latter year. The minimum
tax then would equal 15% of the total number of preferences from
both years subtracted by the benefit year's regular tax
deduction. Taxpayers contend this method would adjust actual
"items of tax preference," as the statute required.
Although taxpayers' proposal appears to be reasonable,
it is not the only permissible construction of the statute, nor
is it necessarily the most reasonable one.25 We believe Treas.
Reg. § 1.58-9 adjusts "items of tax preference" simply by
ignoring them -- for minimum tax purposes -- during the year when
no tax benefit is realized. As we have noted, the purpose of the
statute was to ensure that no minimum tax be assessed on
preferences when they did not result in a tax benefit;26 Treas.
Reg. § 1.58-9 accomplishes this result.
B.
Taxpayers contend Congress intended a "suspended-
preference approach" be promulgated to implement I.R.C. § 58(h)
and claim the legislative history of the 1976 Tax Reform Act,
which adopted § 58(h), supports their construction of the
statute. But none of the congressional committee reports on §
58(h) indicates the method by which the preferences were to be
adjusted.27 Nevertheless, taxpayers point to one committee
report discussing other provisions of the Code that specify a
type of suspension and reactivation of preferences somewhat
25
. The Commissioner claims the taxpayers' approach would
violate fundamental principles of the Internal Revenue Code by
permitting deductions to be shifted from one tax year to another.
Taxpayers respond that they would adjust preferences only for
minimum tax purposes, not under the regular tax, and thus the
integrity of the Code would remain intact. Because we find the
Treasury regulation to be a reasonable construction of the
statute, we need not resolve this issue.
26
. See supra note 8.
27
. See, e.g., S. Rep. No. 938, 94th Cong., 2d Sess., pt.
I, at 113-14 (1976), reprinted in 1976 U.S.C.C.A.N. 3439, 3548-
49; H.R. Rep. No. 658, 94th Cong., 2d Sess. 130-32 (1975),
reprinted in 1976 U.S.C.C.A.N. 2897, 3025-27.
similar to the system they advocate.28 That committee report,
however, does not explicitly support taxpayers' method of tax
computation. Furthermore, as the Commissioner contends, the
cited Code provisions are not analogous because they suspend tax
deductions for other purposes,29 not just for minimum tax
purposes, as does § 58(h).30
28
. The Joint Committee on Taxation Staff General
Explanation of the Tax Reform Act of 1976 stated:
There are certain cases in which a person
derives no tax benefit from an item of tax
preference because, for example, the item is
disallowed as a deduction under other
provisions of the Code or because the
taxpayer has sufficient deductions relating
to nonpreference items to eliminate his
taxable income.1
_______________
1For example, preference items giving rise
to losses which are suspended under at risk
provisions (sec. 465 or sec. 704(d) of the
Code) are not to be considered to give rise
to a tax benefit until the year in which the
suspended deduction is allowed. Similarly,
investment interest which is disallowed
(under sec. 163(d)) is to be treated as an
itemized deduction for purposes of that
preference only in the year in which it is
allowed (under sec. 163(d)).
H.R. Rep. No. 10612, 94th Cong., 2d Sess., at 106-07 (1976)
(footnote omitted), reprinted in 1976-3 C.B. 118-19.
29
. See I.R.C. §§ 465, 704(d), 163(d) (1976).
30
. Taxpayers also contend the regulation is contrary to
legislative intent because it was issued after Congress failed to
include in a 1989 statute a proposal to permit the Treasury to
adjust items other than tax preferences, presumably including tax
credits. In excluding this language from the final bill,
however, the Conference Report noted the omission was not
intended to affect the pending temporary Treasury regulation,
which was later largely adopted as Treas. Reg. § 1.58-9:
Taxpayers also assert that Treas. Reg. § 1.58-9
distorts congressional will by interfering with the operation of
other provisions of the Internal Revenue Code. First, taxpayers
claim the regulation disregards the import of the regular tax
deduction in calculating and reducing minimum tax liability under
I.R.C. § 56(a), (c). Because Treas. Reg. § 1.58-9 "transforms a
suspended minimum tax in the year the nonbeneficial preferences
arise into regular tax liability in the benefit year," Du Pont,
102 T.C. 15-16, the preferences from the non-benefit year are
not being weighed against the regular tax deduction in the year
they result in a benefit. Yet, under the regulation, the
preferences from the non-benefit year continue to be weighed
against the regular tax deduction in the non-benefit year in
calculating the amount of the suspended tax. Furthermore, while
the regular tax deduction appears to be an integral part of the
minimum tax computation system of § 56, we can discern no
(..continued)
The conferees do not intend any change
in the scope of the authority provided in
section 58(h) of prior law. Thus, only those
regulations which would have been valid under
section 58(h) of prior law are valid under
the conference agreement. No inference is
intended as to whether the regulations issued
by the Treasury Department are valid under
section 58(h) or prior law.
H.R. Conf. Rep. No. 386, 101st Cong., 1st Sess. 664-65 (1989),
reprinted in 1989 U.S.C.C.A.N. 3018, 3267-68. Thus, Congress's
failure to approve the language cited above should not affect our
determination as to the validity of the regulation.
authority or evidence the regular tax deduction was meant to play
a crucial role in the tax benefit rule of § 58(h).
Second, because Treas. Reg. § 1.58-9 operates to reduce
tax credits available for use in other years, taxpayers contend
the regulation improperly interferes with Code provisions
governing tax credits and the regular income tax. Although the
regulation does affect tax credits, it does so only in limited
circumstances to certain taxpayers, as the Tax Court noted.
Du Pont, 102 T.C. 19. There is no authority suggesting the
minimal effects of the regulation will disrupt the entire system
of tax credits crafted by Congress or that Congress intended to
forbid all regulations that affect tax credits in any manner.31
Taxpayers urge us to look to other provisions of the
Internal Revenue Code for guidance in considering the validity of
Treas. Reg. § 1.58-9. Accordingly, we have examined I.R.C. §
56(b), which until 1987 provided for deferral of minimum tax
liability in situations involving net operating losses affected
by preferences. Under § 56(b), if preferences served to increase
a net operating loss in one year, the minimum tax otherwise due
on the preferences under § 56(a) was suspended until the year the
preferences provided a tax benefit. The amount of the minimum
31
. Taxpayers also complain that the regulation affects the
balance between the regular tax and minimum tax provisions
created by 1982 and 1984 congressional amendments to the Internal
Revenue Code that scaled back certain preferences by specified
percentages. See Tax Equity and Fiscal Responsibility Act of
1982, Pub. L. No. 97-248, 1982 U.S.C.C.A.N. (96 Stat. 324);
Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 68(a), 98
Stat. 494, 588 (1984). We do not believe § 1.58-9 will interfere
with the operation of these statutory changes.
tax imposed on the preferences in this situation was calculated
with reference to the minimum tax rate and the regular tax
deduction for the year in which the preferences originated --
similar to the manner in which § 1.58-9 operates. Du Pont, 102
T.C. 17-18. We agree with the Tax Court that § 56(b)
generally supports the rationale of Treas. Reg. § 1.58-9. Id. at
18.
Therefore, we find nothing in the legislative history
or inferentially from other sections of the Internal Revenue Code
that would indicate the Treasury deviated from the language or
purpose of the statute. What is clear is the language of § 58(h)
that directs the Secretary to "prescribe regulations under which
items of tax preference shall be properly adjusted." Congress
made a specific delegation of authority to the Secretary to
promulgate regulations, and we may not substitute an alternative
construction of the statute unless the regulation contravenes the
language or purpose of the statute,32 which this regulation does
not do.
32
. See supra section II.
C.
Since 1976, when I.R.C. § 58(h) was enacted, other
courts have considered its meaning and scope.33 Although no
prior cases directly confronted the validity of Treas. Reg. §
1.58-9, taxpayers contend their position here is bolstered by the
reasoning of First Chicago Corp. v. Commissioner, 842 F.2d 180
(7th Cir. 1988). In First Chicago, the taxpayer had credits
exceeding its tax liability for the 1980 and 1981 tax years. The
Internal Revenue Service, however, decreed First Chicago should
pay the minimum tax for those years on the preferences it used to
reduce its tax liability, because those preferences freed up tax
credits that might have been used to reduce First Chicago's
33
. For example, in Occidental Petroleum Corp. v. United
States, 685 F.2d 1346 (Cl. Ct. 1982) (Occidental I), the Court of
Claims considered the propriety of the minimum tax for the years
before Congress enacted the tax benefit rule of § 58(h). The
court held the minimum tax was imposed regardless of whether the
preferences actually resulted in a tax benefit. The court also
determined that the provisions of § 58(h) should not be applied
retroactively to cover the years 1970-71. In Occidental
Petroleum Corp. v. Commissioner, 82 T.C. 819 (T.C. 1984)
(Occidental II), the taxpayer's tax credits exceeded its tax
liability for 1977, although it used its tax preferences to
reduce the number of credits needed to offset that tax liability
-- just as DuPont did in 1982. In Occidental II, however, the
taxpayer never used the tax credits freed up by the preferences;
instead, the credits expired unused. Nevertheless, the
Commissioner attempted to impose the minimum tax on the taxpayer
because, as in the present case, the taxpayer's use of the
preferences did provide a benefit in the form of increased
available credits for use in other years -- even if those credits
later expired unused. The court rejected the Commissioner's
argument and held that the provisions of § 58(h) meant "no
minimum tax is to be imposed where the tax preference does not
result in a decrease of tax not only for the year under
consideration (here 1977) but also for any other year." Id. at
828.
future tax liability. The Court of Appeals for the Seventh
Circuit disagreed, affirming the Tax Court's holding that "there
is no minimum tax on tax-preference items until the items confer
an actual benefit on the taxpayer." Id. at 180.34
In the course of its discussion, the Seventh Circuit
noted:
It is true that, as a result of Congress's
extreme restlessness in the area of tax law,
by the time the benefit is obtained the
structure of taxation may have changed and
the taxpayer may escape part or even all of
the tax. But this instability is built into
tax law. If a taxpayer is able to defer
income to a year when tax rates are lower, he
obtains a tax savings analogous to what First
Chicago may someday obtain if its tax-
preference items yield a tax benefit which
gives rise to a minimum-tax liability that it
can offset with foreign or investment tax
credits, thanks to the new alternative
minimum tax. But the deferral may backfire,
if the structure of taxation changes against
the taxpayer.
Id. at 183. This language suggests the court may have assumed
that if the 1980-81 preferences generated a tax benefit after the
1986 statutory changes, then they would be treated as preferences
in that later year and be subject to the new alternative minimum
tax, a view of § 58(h) advocated by taxpayers here.
But such assumptions, even if indicative of the court's
view, cannot be persuasive here. At the time of the decision in
First Chicago, § 1.58-9 had not been promulgated. In fact, the
34
. Although the Seventh Circuit rejected the Treasury's
position, the preamble to § 1.58-9 notes the regulation is
"[c]onsistent" with the holding of First Chicago Corp. See T.D.
8416, 1992-1 C.B. 7, 8.
court decried the absence of a regulation as contributing to the
difficulties in interpreting § 58(h).35 Once the Treasury
Department adopted the regulation pursuant to § 58(h), the
landscape changed. Instead of choosing among alternative methods
of interpreting the statute, we must inquire whether the Treasury
regulation reasonably implements the statute.36 As we have
noted, we believe it does.
D.
Besides challenging the substance of Treas. Reg. §
1.58-9, taxpayers assert the regulation was enacted in "bad
faith" and thus not entitled to judicial deference. In support,
taxpayers cite National Muffler Dealers Ass'n v. United States,
440 U.S. 472 (1979). In National Muffler, the Supreme Court
stated, in assessing the validity of regulations, courts should
consider factors such as whether the regulation was issued
contemporaneously with the statute, the manner in which it
evolved, "the length of time the regulation has been in effect,
the reliance placed on it, the consistency of the Commissioner's
interpretation, and the degree of scrutiny Congress has devoted
to the regulation during subsequent re-enactments of the
statute." Id. at 477. Taxpayers argue the National Muffler
factors demonstrate the regulation should be set aside. Although
35
. First Chicago Corp., 842 F.2d at 182 ("These and other
questions might have been answered if the Treasury Department had
ever gotten around to promulgating regulations under section
58(h), as ordered to do by Congress, but it never did . . . .").
36
. See supra section II.
application of the National Muffler factors may not explicitly
validate § 1.58-9, we do not find that sufficient to warrant
striking down the regulation.37 In fact, we already have
determined the regulation implements the statute in a "reasonable
manner," which is all National Muffler ultimately requires and
which is what its factors were intended to ascertain. Id. at
476-77 (noting that courts should defer to regulations that
"implement the congressional mandate in some reasonable manner"
and listing factors to "determin[e] whether a particular
regulation carries out the congressional mandate in a proper
manner").
Taxpayers also assert the regulation is not entitled to
deference because the Treasury Department promulgated it in an
37
. Indeed, in National Muffler, the Treasury waited six
years after the statute was enacted to issue any regulation and
then substantially changed its own regulation ten years after
that. 440 U.S. at 478-82. Nevertheless, the Supreme Court
deferred to the regulation. Id. at 488-89.
We are not persuaded that the National Muffler factors
favor taxpayers' position here. Although the regulation was not
issued contemporaneously with the statute nor been long in place,
taxpayers have not shown they detrimentally relied on any prior
understanding of the statute. The Commissioner's interpretation
of the statute apparently has changed primarily because of
judicial decisions such as Occidental II, 82 T.C. 819 (T.C.
1984), and First Chicago Corp., 842 F.2d at 180. See T.D. 8416,
1992-1 C.B. 7, 8 (noting that Treas. Reg. § 1.58-9 is
"[c]onsistent" with the holding of First Chicago). Furthermore,
although Congress may not have re-enacted the statute, it
expressly noted the statute would continue to apply to the years
preceding the repeal of § 58(h). See supra note 11. Finally,
National Muffler involved an interpretative regulation issued
under the general grant of authority of I.R.C. § 7805(a), rather
than a regulation issued pursuant to a specific statutory
mandate. In view of this, the National Muffler analysis is
somewhat less helpful.
attempt to circumvent the 1986 change in the revenue statutes
that permitted up to 90% of the minimum tax to be offset by
foreign tax credits.38 In addition, taxpayers claim the Treasury
adopted § 1.58-9 merely to enhance its litigating stance in cases
like this.
As to the claim the regulation was enacted merely to
bolster the Treasury's litigating position, one court has ruled
that "the Commissioner may not take advantage of his power to
promulgate retroactive regulations during the course of a
litigation for the purpose of providing himself with a defense
based on the presumption of validity accorded to such
regulations." Chock Full O' Nuts Corp. v. United States, 453
F.2d 300, 303 (2d Cir. 1971). Yet, as the Court of Appeals for
the Fifth Circuit noted, "[n]o case has held that the Secretary
abused his discretion to promulgate retroactive regulations
merely because the regulation at issue affected a legal matter
pending before a court at the time the regulation was adopted."
Anderson, Clayton & Co. v. United States, 562 F.2d 972, 980 (5th
Cir. 1977), cert. denied, 436 U.S. 944 (1978). In the present
case, there is no claim that any specific case was pending at the
time the regulation was proposed. Furthermore, taxpayers cite to
38
. The Tax Reform Act of 1986 replaced the add-on minimum
tax for corporations with an alternative minimum tax for taxable
years after 1986. Tax Reform Act of 1986, Pub. L. No. 99-514, §
701, 100 Stat. 2085, 2320-45 (1986) (codified as amended at
I.R.C. §§ 55-59 (1988)). Under the old system, foreign tax
credits could not be used to offset the minimum tax. Under the
new alternative minimum tax, foreign tax credits are permitted to
offset up to 90% of the tax. See First Chicago Corp., 842 F.2d
at 182; I.R.C. § 55, 59(a)(2) (1988 & Supp. 1994).
nothing in the record to support any of their suspicions
regarding the Treasury Department's motives in promulgating the
regulation, and the case was submitted to the Tax Court fully
stipulated. DuPont, 102 T.C. 2.
IV.
In evaluating Treas. Reg. § 1.58-9, we are mindful of
the Supreme Court's admonition: "The choice among reasonable
interpretations [of the Internal Revenue Code] is for the
Commissioner, not the courts." Skinner v. Mid-America Pipeline,
490 U.S. 212, 222 (1989) (quoting National Muffler Dealers Ass'n
v. United States, 440 U.S. 472, 488 (1979)). After considering
the regulation in light of the language of I.R.C. § 58(h), and
the purpose behind it, we are satisfied § 1.58-9 constitutes a
reasonable interpretation of the statute. Accordingly, we will
affirm the judgment of the Tax Court.