Miller v. Comr. of IRS , 99 F.3d 1042 ( 1996 )

PUBLISH
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
_______________
No. 95-3040
______________
D. C. Docket No. 7263-93
BRADLEY C. MILLER and
DIANNE M. MILLER,
Petitioners-Appellants,
versus
COMMISSIONER OF INTERNAL REVENUE,
Respondents-Appellees.
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Appeal from the Decision of the United States Tax Court
(Florida Case)
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( 1996)
Before BARKETT, Circuit Judge, DYER and HILL, Senior Circuit
Judges.
HILL, Senior Circuit Judge:
This appeal from the Tax Court involves the issue of whether the
taxpayers' election statement under Internal Revenue Code Section
172 (b) (3) (C)1 unequivocally communicated their intent to
1
In general, an NOL is carried back to each of three preceding
years to offset taxable income (beginning with the earliest year first).
Then, to the extent that it has not been absorbed, the NOL is carried
relinquish the carryback period for both a net operating loss (NOL)
and an alternative minimum tax net operating loss (AMT NOL).
Finding that it did not, we reverse the decision of the Tax Court.
I.
Bradley C. and Dianne M. Miller filed their 1984 federal income
tax return. They reported a tax liability of zero, and an alternative
minimum tax (AMT) liability of $46,000. The Millers paid this sum
to the Commissioner of Internal Revenue (Commissioner) in a timely
manner. The next year the Millers sustained an NOL of $332,000
and an AMT NOL of $156,000. An opportunity for personal income
tax planning was presented as, naturally, the Millers wanted to offset
both types of 1985 losses against income to the greatest lawful
advantage under the tax code.
Robert B. Krusoe was the Miller's certified public accountant. In
preparing their 1985 return, Krusoe determined that, if the Millers
carried back their 1985 AMT NOL to 1984, they would be entitled to
a refund of $41,000. He found no such benefit in carrying back their
"regular" NOLs. Krusoe concluded that it would be financially
beneficial to the Millers if they elected to relinquish the carryback
period for "regular" NOLs and carry them over only into future years.
Krusoe then researched whether this could be done legally under
forward to each of the next fifteen years. I.R.C. § 172 (b)(1), (2). A
taxpayer may irrevocably elect to relinquish his three-year carryback
period. I.R.C. § 172 (b)(3)(C). In that case he may use the NOL only
by carrying it forward to offset income in subsequent years. Id.
2
the tax code.2 At the time, there was a dearth of information on the
treatment of AMT NOLs for carryback purposes. Relying on an
article in a respected tax periodical,3 substantiated by the written
opinion of a former IRS employee and colleague, and his own
research, Krusoe filed an election on the Millers' behalf to waive the
NOL carryback period and, in so doing, attempted to "split" their
election:
In accordance with the Internal Revenue Code
Section 172, the Taxpayers hereby elect to
forego the net operating loss carry back period and will
carryforward the net operating loss. (Emphasis
added.)
Krusoe testified that it was his intent to waive only the regular
NOL carryback period and not the AMT NOL carryback period. He
claims that was why he chose the singular word "loss" and not its
plural, "losses." Krusoe prepared the election statement by tracking
Krusoe testified that, if his research had shown that the
2
carryback periods could not be split, he fully intended to carry both
losses back to assure the refund rightfully due the Millers.
3
The article stated:
It is unclear whether both a regular NOL and
AMT NOL from the same year must be given
the same carryover treatment. For example, it
may be possible to carryback a regular NOL
and elect to carry forward an AMT NOL even
though both NOLs originated in the same year.
Independent treatment would seem appropriate
in that for 1983, separate treatment was required
due to the fact that an AMT NOL could not be
carried back to a pre-1983 year, but no such
limitation applied to a regular tax NOL.
Gary R. Stout & Earl J. Weiss, "Analysis of the Alternative Minimum
Tax Net Operating Loss: The Second NOL", 61 J. Tax., 418, 422
(December 1984).
3
the exact statutory language of NOLs in the tax code. By so doing,
he intended the term "net operating loss" to mean regular NOLs. He
thought it unnecessary to refer to AMT NOLs at all.4
Thereafter Krusoe filed an amended 1984 return for the Millers
and carried back their AMT NOL. He did not carryback their NOL.5
The return stated:
The amended return is filed to carryback an
alternative minimum taxable net operating loss
in accordance with Internal Revenue Code §
55(d). AMT NOL computations are on page 5
and first carried back to 1983, on page 6, then to
1984 also on page 6.
Subsequently, the Millers received a refund of $41,000 from the
Commissioner.
II.
Hindsight and writing skills were not in Krusoe's favor. In 1986,
a House Conference Report was issued, making it clear that "an
election under section 172 (b) (3) (C) to relinquish the carryback
period applies both for regular tax and for minimum tax purposes."
2 H.R. Rep. No. 99-841, 99th Cong., 2d Sess. II-262, 283 (1986).
One year later, the Commissioner issued a revenue ruling stating that
the election was indivisible and could not be split. Rev. Rul. 87-44,
4
Expert witnesses testified at trial that, in the early 1980's, the
term 'net operating loss' was commonly understood by members of
the tax accounting industry to mean regular NOLs, not AMT NOLs.
5
Krusoe's cover letter to the Millers, with their completed 1985
return, stated that, for 1985, they had sustained a "regular net
operating loss of [$332,000] which [had] been elected to be carried
forward . . . [and] an alternative minimum tax net operating loss of
[$156,000], which . . . [the Millers, with the assistance of Krusoe,
would] carryback after [the] return [was] filed."
4
1987-1 C.B. 3. In addition, in 1991, the Tax Court ruled that NOLs
and AMT NOLs could not be split and carried in different directions.
Plumb v. Commissioner, 97 T.C. 632, 636 (1991).
Subsequently, in 1993, the Commissioner issued a notice of
deficiency to the Millers, disallowing the carryback of the AMT
NOL, and, seeking the return of the refunded AMT. The Millers filed
a petition in the Tax Court contesting the Commissioner's
determination. They argued that, after Plumb, 97 T.C. 632, if they
were not permitted to split their carryback periods, then their election
was invalid as ambiguous on its face, and they should be allowed to
carryback both their AMT NOL and their regular NOL.
The Tax Court rejected this contention stating:
. . . objectively and on its face, when considered
in the context of the election, [the election] does
not create ambiguity or show that [the
taxpayers] attempted to carry forward only
NOL's computed by the regular method. The
operative language in [the taxpayers'] election
included the phrase "to forego the net operating
loss carry back period." Under the statute, that
necessarily would include NOLs and AMT
NOLs.
The Tax Court found that the Millers' election statement
unequivocally and unambiguously communicated an intent to waive
the carryback period for both their NOL and their AMT NOL. It
held, as a matter of law, that the Millers had made an effective
election under Code Section 172 (b)(3)(C) and were bound by that
election. We review the Tax Court's holding de novo. Powers v. Commissioner,
43 F.3d 172, 175 (5th Cir. 1995); Branum v. Commissioner, 17 F.3d 805, 808
(5th Cir. 1994).
III.
5
While this issue is one of first impression in this circuit, the Fifth
Circuit has considered it twice recently. Powers v. Commissioner, 43 F.3d
172 (5th Cir. 1995); Branum v. Commissioner, 17 F.3d 805 (5th Cir. 1994).
In both Branum and Powers, the taxpayers attempted a split election that
was later found to be unavailable to them. The Fifth Circuit
determined that a taxpayer's election to waive the carryback period
under Code Section 172 (b) (3) (C) must be unequivocal and
unambiguous to be effective. Powers, 43 F.3d at 176; Branum, 17 F.3d at
811; see also Young v. Commissioner, 783 F.2d 1201, 1206 (5th Cir. 1986).
In Branum, the taxpayer attempted to file a "split" election notice,
sending NOLs and AMT NOLs in different directions for offset
purposes. Unlike the Millers, however, the Branum taxpayer used the
plural word, "losses," and the phrase, "all losses," in his election
statement. 17 F.3d at 806. When it was later determined that a split
election was impermissible, the Branum taxpayer sought to repudiate his
election, as he, like the Millers, benefited from waiving the carryback
only as to his NOLs and not his AMT NOLs. The Fifth Circuit found
that he had waived the carryback periods for both. Id. The Branum
taxpayer's use of the plural in his election statement "unequivocally
communicated his intent" to waive both types of losses, id. at 808, and
left no room for even a "shadow of ambiguity."6 Id. at 809 n.11. This
was fatal to his claim. Id. at 809.
In Powers, the taxpayer, in his attempt to file a "split" election
In this case, the Tax Court found that the Millers should not be
6
permitted to repudiate their own language by showing, what it termed
"a mere shadow of ambiguity."
6
notice, used the right subsection of the tax code but the wrong section
number. The Fifth Circuit held the taxpayer's error caused his
election to be ambiguous on its face and fatal to the validity of his
election. Powers, 43 F.3d at 177. The court found that an invalid
election is no election at all and that the Powers taxpayer had not
relinquished the right to carryback his NOLs.7 Id. at 179.
Under a de novo review, the same result is in order here. As the
taxpayers in Branum and Powers, the Millers attempted a split election
under Code Section 172 (b) (3) (C) that was later determined to be
unavailable to them. Plumb, 97 T.C. 641. Unlike the Branum election
notice, however, the Miller's notice did not refer to "losses" but to
"loss.8" Using the Fifth Circuit precedent of Branum and Powers as
guidance, we find the Miller's election to be ambiguous and equivocal
on its face, and hence, invalid. Branum, 17 F.3d at 805; Powers, 43 F.3d
at 175. For purposes of Code Section 172 (b) (3) (C), their invalid
election is no election at all. Id. Therefore, the Millers have not
relinquished their right to carryback both their regular NOLs and
their AMT NOLs. Id.
IV.
7
Here the Tax Court distinguished Powers on the basis that the
Millers had used language that had correctly cited the proper code
section.
8
The Tax Court here found itself "compelled to hold that the
[singular] term "net operating loss" objectively and on its face, when
considered in the context of the election, does not create ambiguity
or show that [the Millers] attempted to carry forward only NOL's
computed by the regular method."
7
The decision of the Tax Court is REVERSED.
REVERSED.
8