Justia Federal District Court Opinions

New England Nuclear Corp. (NEN) merged into DuPont after the 1981 taxable year, the year of the alleged deficiency against NEN

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

The law relevant to this appeal changed significantly in 1986. See infra note 38. Unless otherwise noted, citations to former I.R.C. Secs. 56 and 58(h) will be to the 1982 version of the Internal Revenue Code, 26 U.S.C

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, 42 F.3d 972 (5th Cir.1995)

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 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.")

Items of tax preference, defined in I.R.C. Sec. 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. Sec. 57 (1988 & Supp.1994).

The "regular tax deduction" equaled income tax liability, including investment tax credit recapture, reduced by certain tax credits. I.R.C. Sec. 56(c)

The Joint Committee on Taxation explained the reason for Sec. 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 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, 1984 WL 15576 (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.").

Courts have noted the interpretative difficulties caused by the Treasury's delay in issuing regulations under Sec. 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. at 829, 1984 WL 15576 ("[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.")

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, Sec. 701, 100 Stat. 2085, 2320-45 (1986) (codified as amended at I.R.C. Secs. 55-59 (1988))

The Omnibus Budget Reconciliation Act of 1989, Pub.L. No. 101-239, title VII, Sec. 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."

Temp.Treas.Reg. Sec. 1.58-9T (1989)

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. Sec. 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

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

See supra note 13

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

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. Sec. 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. Sec. 46(a)(2)(E) (1982)

For detailed calculations of the minimum tax under taxpayers' proposed system, see du Pont, 102 T.C. at 7-8

See supra note 4

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. Sec. 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, 101 S.Ct. 2288, 2292, 68 L.Ed.2d 814 (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)

The preamble to Treas.Reg. Sec. 1.58-9 states it was issued under the specific statute, I.R.C. Sec. 58(h), and the general grant of authority of Sec. 7805. See T.D. 8416, 1992-1 C.B. 7, 7, 9

See supra note 11

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 regulations,' 26 U.S.C. Sec. 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, 101 S.Ct. at 2292). See also United States v. Vogel Fertilizer Co., 455 U.S. 16, 24, 102 S.Ct. 821, 827, 70 L.Ed.2d 792 (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, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984), which advises judicial deference to agency regulations, overruled General Electric Co. v. Gilbert, 429 U.S. 125, 141-42, 97 S.Ct. 401, 410-11, 50 L.Ed.2d 343 (1976), which held that an agency's interpretative decisions required less judicial deference. See Sekula v. Federal Deposit Ins. Corp., 39 F.3d 448, 453 n. 13 (3d Cir.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, --- U.S. ----, 113 S.Ct. 1588, 123 L.Ed.2d 154 (1993).

See also Commissioner v. Portland Cement Co. of Utah, 450 U.S. 156, 169, 101 S.Ct. 1037, 1045, 67 L.Ed.2d 140 (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' ")

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

See supra note 8

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

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

See I.R.C. Secs. 465, 704(d), 163(d) (1976)

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. Sec. 1.58-9:

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.

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, Sec. 68(a), 98 Stat. 494, 588 (1984). We do not believe Sec. 1.58-9 will interfere with the operation of these statutory changes

See supra section II

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 Sec. 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 Sec. 58(h) should not be applied retroactively to cover the years 1970-71. In Occidental Petroleum Corp. v. Commissioner, 82 T.C. 819, 1984 WL 15576 (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 Sec. 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

Although the Seventh Circuit rejected the Treasury's position, the preamble to Sec. 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

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....")

See supra section II

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, 99 S.Ct. at 1307-09. Nevertheless, the Supreme Court deferred to the regulation. Id. at 488-89, 99 S.Ct. at 1312-13

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, 1984 WL 15576 (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. Sec. 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 Sec. 58(h). See supra note 11. Finally, National Muffler involved an interpretative regulation issued under the general grant of authority of I.R.C. Sec. 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.

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, Sec. 701, 100 Stat. 2085, 2320-45 (1986) (codified as amended at I.R.C. Secs. 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. Sec. 55, 59(a)(2) (1988 & Supp.1994)