Charles C. Allen, III and Barbara N. Allen v. Commissioner

118 T.C. No. 1UNITED STATES TAX COURT
CHARLES C. ALLEN, III AND BARBARA N. ALLEN,
ET AL.,1 Petitioners v. COMMISSIONER OF
INTERNAL REVENUE, Respondent
Docket Nos. 1287-00, 1288-00, Filed January 4, 2002.
1289-00, 1290-00,
1291-00, 1292-00,
1293-00, 1618-00.
Ps are the shareholders of F, a subch. S
corporation. During its 1994 and 1995 taxable years,
F incurred wages that qualified for the targeted jobs
credit (TJC) under secs. 38 and 51, I.R.C. F claimed
TJCs of $456,264 and $259,434 for the respective years
and reported to Ps their proportionate shares of the
credits. F reduced its deduction of wages by the
1
Cases of the following petitioners are consolidated
herewith: John R. Allen and Estate of Sally F. Allen, docket No.
1288-00; John R. Allen, Jr., and Susan S. Allen, docket No.
1289-00; John R. and Judith M. Allen, docket No. 1290-00; Charles
C. Allen, Jr., docket No. 1291-00; Warren L. Allen, docket No.
1292-00; Warren L. Allen, Jr., docket No. 1293-00; and Amantha S.
Allen, docket No. 1618-00.
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amount of the TJCs, pursuant to sec. 280C(a), I.R.C.,
and reported to Ps their proportionate shares of its
resulting net income (F’s resulting net income). Ps
computed their regular tax liability by including F’s
resulting net income in their taxable income. Ps were
not subject to the alternative minimum tax but had to
compute their alternative minimum taxable income (AMTI)
in order to ascertain for purposes of sec. 38(c)(1)(A),
I.R.C., the tentative minimum tax ceiling on the amount
of the TJCs that could be applied against their regular
tax liability. Ps computed their AMTI by deducting
their proportionate shares of F’s full wage expense
(i.e., the wage expense unreduced by the TJC). R
determined that Ps’ AMTI had to be computed using F’s
resulting net income and that the tentative minimum tax
ceiling limited Ps’ application of the TJC against
their regular income tax liabilities.
Held: Because sec. 280C(a), I.R.C., requires that
a wage deduction be reduced by the amount of the TJC,
and pt. VI, subch. A, ch. 1, subtit. A (secs. 55
through 59, I.R.C.) does not allow for an adjustment of
that reduction for purposes of the alternative minimum
tax regime, the portion of F’s wages equal to the TJC
is not deductible in calculating Ps’ AMTI.
Robert H. Kapp and John S. Stanton, for petitioners.
David R. Ferguson, for respondent.
OPINION
LARO, Judge: This case was submitted to the Court without
trial. See Rule 122.2 Petitioners petitioned the Court to
redetermine respondent’s determination of the following
deficiencies in their Federal income taxes for 1994 and 1995:
2
Rule references are to the Tax Court Rules of Practice and
Procedure. Unless otherwise indicated, section references are to
the Internal Revenue Code in effect for the subject years.
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Petitioners 1994 1995
Charles C. Allen III and Barbara N. Allen $21,321 $12,107
Charles C. Allen, Jr. 21,324 12,015
John R. Allen and Estate of Sally F. Allen 21,395 -
John R. and Judith M. Allen - 12,108
John R. Allen, Jr., and Susan S. Allen 21,394 12,107
Warren L. Allen 6,388 1,970
Warren L. Allen, Jr. 36,197 20,582
Amantha S. Allen 36,197 20,582
Following concessions in docket Nos. 1291-00 and 1292-00, we
must decide whether the wage-expense limitation of section
280C(a) enters into the calculation of alternative minimum
taxable income (AMTI). As relevant herein, section 280C(a)
limits a taxpayer’s wage expense to the amount of the expense
that exceeds the amount of a targeted jobs credit (TJC)
determined under section 51(a). We hold that section 280C(a)
enters into the calculation of a taxpayer’s AMTI.
Background
All facts were stipulated and are so found. The stipulated
facts and the exhibits submitted therewith are incorporated
herein by this reference. During the subject years, each
petitioner,3 with the exception of Warren L. Allen and Charles C.
Allen, Jr., filed a joint Federal income tax return with his
wife. Charles C. Allen III was the husband of Barbara N. Allen.
John R. Allen was the husband of Sally F. Allen during 1994, and
3
We hereinafter refer to Charles C. Allen III, Charles C.
Allen, Jr., John R. Allen, John R. Allen, Jr., Warren L. Allen,
and Warren L. Allen, Jr., as the sole petitioners.
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he was the husband of Judith M. Allen during 1995. John R.
Allen, Jr., was the husband of Susan S. Allen. Warren L. Allen,
Jr., was the husband of Amantha S. Allen. Each petitioner and
his wife (with the exception of Sally F. Allen) resided in
Delaware when the petitions were filed. Sally F. Allen was
deceased at that time, and the executor of her estate was (and
is) John R. Allen, Jr.
Allen Family Foods, Inc. (Foods), is an S corporation that
was incorporated under Delaware law. Its business is the
slaughtering, converting, and processing of chickens into
ready-to-cook whole chickens and chicken parts for sale primarily
to retailers. It computes its income and expenses using an
accrual method of accounting and on the basis of a fiscal year
ending on the Saturday nearest April 30. It filed a Form 1120S,
U.S. Income Tax Return for an S Corporation, for its fiscal years
ended in 1994 and 1995 (its 1994 and 1995 taxable years,
respectively).
Petitioners are descendants of Charles C. Allen, the founder
of the family poultry business, and they owned all of Foods’
outstanding stock during its 1994 and 1995 taxable years. The
number of the shares that they each owned and the percentage of
their respective ownership interests were as follows:
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Shareholder No. of Shares Percent
Charles C. Allen, Jr. 50 16.67
Charles C. Allen III 50 16.67
Warren L. Allen 15 5.00
Warren L. Allen, Jr. 85 28.33
John R. Allen 50 16.67
John R. Allen, Jr. 50 16.67
Total 300 100.00 (rounded)
During its 1994 and 1995 taxable years, Foods incurred wages
which qualified for the TJC. Foods claimed TJCs of $456,264 and
$259,434 on its 1994 and 1995 Federal income tax returns,
respectively, and reported to each petitioner on his Schedules
K-1, Shareholder’s Share of Income, Credits, Deductions, etc.,
his proportionate shares of those credits. The Schedules K-1
reported the proportionate shares as follows:
Shareholder 1994 1995
Charles C. Allen, Jr. $76,044 $43,239
Charles C. Allen, III 76,044 43,239
Warren L. Allen 22,813 12,972
Warren L. Allen, Jr. 129,275 73,506
John R. Allen 76,044 43,239
John R. Allen, Jr. 76,044 43,239
Total 456,264 259,434
For Federal income tax purposes, Foods reduced its deduction
of wages by the amount of the TJC as required by section 280C(a)
and reported to each petitioner on his Schedules K-1 his
proportionate share of the resulting net income (Foods’ resulting
net income). Each petitioner computed his regular income tax
liability for 1994 and 1995 by including in his taxable income
his proportionate share of Foods’ resulting net income.
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Petitioners were not subject to alternative minimum tax but
were required to compute their AMTI in order to ascertain for
purposes of section 38(c)(1)(A) the tentative minimum tax (TMT)
ceiling on the amount of a TJC that may be applied against
regular tax liability. For purposes of computing his AMTI for
1994 and 1995, each petitioner claimed deductions for his
proportionate share of Foods’ full wage expense (i.e., the wage
expense unreduced by the TJC). Each petitioner calculated this
full wage expense by reference to a negative adjustment equal to
the TJC shown on his Schedules K-1. Each petitioner reported the
same adjustment on his 1994 and 1995 Forms 6251, Alternative
Minimum Tax--Individuals, which were attached to his Federal
income tax returns for the respective years.
Each petitioner claimed on his personal income tax returns
his proportionate share of the TJC and applied the TJC without
limitation by his TMT. The deficiencies at hand are the result
of the Commissioner’s recalculating petitioners’ AMTI for
purposes of ascertaining the TMT ceiling. In those
recalculations, the Commissioner did not allow each petitioner to
deduct as wages the portion of the claimed wages that was equal
to his proportionate share of Foods’ TJCs. Respondent determined
as a result of these recalculations that each petitioner’s
application of the TJCs for regular tax purposes was less than
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claimed on his return by virtue of the TMT limitation of section
38(c)(1)(A).
Discussion
The Internal Revenue Code imposes upon taxpayers an
alternative minimum tax (AMT) in addition to all other taxes
imposed by subtitle A. See sec. 55(a). The AMT is imposed upon
a taxpayer’s AMTI, which is an income base broader than the usual
base of taxable income applicable to Federal income taxes in
general. See H. Conf. Rept. 99-841 (Vol. II), at II-249
(individual AMT), II-263 (corporate AMT) (1986), 1986-3 C.B.
(Vol. 4) 250, 264. Congress established AMTI as a broad base of
income in order to tax taxpayers more closely on their economic
income, intending for all taxpayers to pay their fair share of
the overall Federal income tax burden. See S. Rept. 99-313, at
518-519 (1986), 1986-3 C.B. (Vol. 3) 518-519; H. Rept. 99-426,
at 305-306 (1985), 1986-3 C.B. (Vol. 2) 305-306. Congress
required that corporations be taxed at a single AMT rate and that
individuals be taxed under a progressive AMT regime with two
rates. The highest AMT rate applicable to a taxpayer is lower
than the taxpayer’s maximum rate of taxation under the regular
tax regime, and a taxpayer must pay AMT when the taxpayer’s AMT
liability is greater than the taxpayer’s regular tax liability.
The instant case focuses on the tax base upon which AMTI is
calculated. Specifically, we pass for the first time on the
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question of whether the calculation of AMTI includes the
wage-expense limitation of section 280C(a). Respondent asserts
it does. Respondent focuses primarily on section 280C(a) and
argues that a literal reading of that section always precludes a
taxpayer from deducting wages to the extent of a TJC. Respondent
acknowledges that a taxpayer cannot apply a TJC to reduce the
taxpayer’s AMT liability but argues that the wage-expense
limitation still applies in the calculation of AMTI because no
provision of the Code specifically provides otherwise.
Petitioners assert that the wage-expense limitation of section
280C(a) does not enter into the calculation of AMTI. Petitioners
point to the fact that the TJC is not an allowable credit for
purposes of calculating AMT and conclude from this fact that
section 280C(a) does not apply in the calculation of AMTI.
Petitioners assert that the AMT regime is a tax system that
operates “parallel” to the regular tax regime and that the
application of each provision of the Code to the AMT regime must
be measured solely within the parameters of that regime.4
4
We understand the parties’ use of the word “parallel” in
the context of the AMT and regular tax regimes to mean that the
regimes run independently of each other without ever meeting.
See Merriam-Webster’s Collegiate Dictionary 842 (10th ed. 1999).
In other words, according to the parties, a taxpayer must first
apply the provisions of the Code to compute regular tax and then
“start from scratch” to apply those provisions to compute AMT.
In this regard, the parties state, the de novo calculation of
AMTI is made without regard to any calculation made for regular
tax purposes.
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Petitioners assert that the wage-expense limitation is not
applicable to the AMTI calculation under a plain reading of
section 280C(a) because a TJC is never determined in the AMT
regime. Respondent acknowledges that the primary reading of the
provisions underlying the AMT regime requires that a taxpayer
calculate AMTI by adjusting taxable income in the manner set
forth in section 55(b) but invites the Court to adopt the
alternative reading advanced by petitioners under which the AMT
and regular tax regimes are considered parallel systems in that
the computation of AMT starts from scratch without regard to any
calculation made for regular tax purposes. Respondent argues
that the fact that a TJC is determined for the regular tax regime
is enough to subject petitioners to the wage-expense limitation
in the calculation of AMTI under the AMT regime given the absence
of any statutory provision that provides to the contrary.
We agree with respondent that the wage-expense limitation of
section 280C(a) enters into the calculation of AMTI but do so for
reasons different than he espouses. Our analysis begins with the
relevant statutory text. We interpret that text with reference
to the legislative history primarily to learn the purpose of the
statute and to resolve any ambiguity in the words contained in
the text. Landgraf v. USI Film Prods., 511 U.S. 244 (1994);
Commissioner v. Soliman, 506 U.S. 168, 174 (1993); Consumer Prod.
Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980);
- 10 -
United States v. Am. Trucking Associations, Inc., 310 U.S. 534,
543-544 (1940); Venture Funding, Ltd. v. Commissioner, 110 T.C.
236, 241-242 (1998), affd. without published opinion 198 F.3d 248(6th Cir. 1999); Trans City Life Ins. Co. v. Commissioner,
106 T.C. 274, 299 (1996). We apply the plain meaning of the
words prescribed in the text unless we find that a word’s plain
meaning is “inescapably ambiguous”. Venture Funding, Ltd. v.
Commissioner, supra at 241-242; see Garcia v. United States,
469 U.S. 70, 76 n.3 (1984); see also Ex parte Collett, 337 U.S.
55 (1949). Where legislative “will has been expressed in
reasonably plain terms, that language must ordinarily be regarded
as conclusive.” Negonsott v. Samuels, 507 U.S. 99, 104 (1993).
We look first to the text on the TJC. Section 38 allows
each petitioner to credit against his tax the amount of a general
business credit. In relevant part, section 38 provides:
SEC. 38. GENERAL BUSINESS CREDIT.
(a) Allowance of Credit.-–There shall be allowed
as a credit against the tax imposed by this chapter for
the taxable year an amount equal to the sum of–-
(1) the business credit carryforwards
carried to such taxable year,
(2) the amount of the current year
business credit, plus
(3) the business credit carrybacks
carried to such taxable year.
(b) Current Year Business Credit.–-For purposes of
this subpart, the amount of the current year business
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credit is the sum of the following credits determined
for the taxable year:
* * * * * * *
(2) the targeted jobs credit determined
under section 51(a);
* * * * * * *
(c) Limitation Based on Amount of Tax.--
(1) In general.--The credit allowed
under subsection (a) for any taxable year
shall not exceed the excess (if any) of the
taxpayer’s net income tax over the greater
of--
(A) the tentative minimum tax
for the taxable year, or
(B) 25 percent of so much of
the taxpayer’s net regular tax
liability as exceeds $25,000.
For purposes of the preceding sentence, the
term “net income tax” means the sum of the
regular tax liability and the tax imposed by
section 55, reduced by the credits allowable
under subparts A and B of this part, and the
term “net regular tax liability” means the
regular tax liability reduced by the sum of
the credits allowable under subparts A and B
of this part.
For purposes of section 38(b)(2), the TJC generally entitles
a taxpayer such as Foods (and, by virtue of the passthrough
nature of Foods, each petitioner) to a credit equal to a
percentage of the salaries or wages (collectively, wages) which
it incurs in employing individuals described in one or more of
the targeted groups enumerated in section 51(d)(1). If the
taxpayer cannot use the full amount of a TJC on account of the
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limitation set forth in section 38(c), the taxpayer may carry the
unused portion either back or forward in accordance with section
39. In the case of an individual taxpayer, the taxpayer may
deduct any portion of a TJC that has not been used as of the time
that: (1) The carryforward period of section 39(a) expires or
(2) the taxpayer dies. See sec. 196.
The right to apply a TJC, however, does not come without
limitation. As relevant herein, section 280C(a) provides that
“No deduction shall be allowed for that portion of the wages or
salaries paid or incurred for the taxable year which is equal to
the sum of the credits determined for the taxable year under
sections 45A(a), 51(a) and 1396(a).” Thus, under section
280C(a), a taxpayer may not deduct the portion of wages incurred
for the taxable year equal to the TJC determined for that year.
A taxpayer, however, may forgo the disallowed deduction by
electing not to determine a TJC for that year. Sec. 51(j).
Petitioners concede that they are subject to section 280C(a)
for purposes of their regular tax liability. They assert,
however, that section 280C(a) is inapplicable in the calculation
of AMTI. We disagree. We read nothing in section 38, 51, or
280C that would lead us to conclude that section 280C(a) does not
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apply in the case of AMTI. Nor do we read any of the provisions
underlying AMT that would lead us to that result.5
The heart of AMT is section 55. That section provides:
SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED.
(a) General Rule.--There is hereby imposed (in
addition to any other tax imposed by this subtitle) a
tax equal to the excess (if any) of--
(1) the tentative minimum tax for the
taxable year, over
(2) the regular tax for the taxable
year.
(b) Tentative minimum tax.--For purposes of this
part–-
(1) Amount of Tentative Tax.
(A) Noncorporate taxpayers.
(i) In general.--In the
case of a taxpayer other than a
corporation, the tentative minimum
tax for the taxable year is the sum
of--
(I) 26 percent of so
much of the taxable excess as does
not exceed $175,000, plus
5
Although respondent concedes that no petitioner is liable
for AMT, we must address the AMT provisions in order to compute
each petitioner’s TMT. See sec. 38(c) (in the computation of a
taxpayer’s regular tax liability, the application of the TJC may
be limited by the taxpayer’s TMT). The calculation of a
taxpayer’s TMT is generally a three-step process in which: (1)
The taxpayer’s AMTI is reduced by an exemption amount, (2) the
reduced amount is multiplied by the AMT rate, and (3) the
resulting tax figure is reduced by the alternative minimum
foreign tax credit. Sec. 55(b)(1), (d).
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(II) 28 percent of
so much of the taxable excess as
exceeds $175,000.
The amount determined under the
preceding sentence shall be reduced
by the alternative minimum tax
foreign tax credit for the taxable
year.
(ii) Taxable excess.--For
purposes of this subsection, the
term “taxable excess” means so much
of the alternative minimum taxable
income for the taxable year as
exceeds the exemption amount.
(iii) Married individual
filing separate return.--In the
case of a married individual filing
a separate return, clause (i) shall
be applied by substituting
“$87,500” for “$175,000” each place
it appears. For purposes of the
preceding sentence, marital status
shall be determined under section
7703.
(B) Corporations.--In the case
of a corporation, the tentative
minimum tax for the taxable year
is--
(i) 20 percent of so much
of the alternative minimum taxable
income for the taxable year as
exceeds the exemption amount,
reduced by
(ii) the alternative
minimum tax foreign tax credit for
the taxable year.
(2) Alternative minimum taxable
income.--The term “alternative minimum
taxable income” means the taxable income of
the taxpayer for the taxable year--
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(A) determined with the
adjustments provided in section 56
and section 58, and
(B) increased by the amount of
the items of tax preference
described in section 57.
If a taxpayer is subject to the regular tax,
such taxpayer shall be subject to the tax
imposed by this section (and, if the regular
tax is determined by reference to an amount
other than taxable income, such amount shall
be treated as the taxable income of such
taxpayer for purposes of the preceding
sentence).
From this text, we understand explicitly that the base of
AMTI is “taxable income”, and that this base may be affected by
the items described in sections 56, 57, and 58. Sec. 55(b)(2).
See generally section 59, which, although not specifically
mentioned in section 55, provides definitions and special rules
that apply in the setting of AMT. As to the meaning of the term
“taxable income”, Congress has provided unambiguously and with
sweeping breadth that “for purposes of this subtitle, the term
‘taxable income’ means gross income [see sec. 61(a) for the
applicable meaning of the term “gross income”6] minus the
deductions allowed by this chapter (other than the standard
6
Whereas sec. 61(a) provides that the meaning of the term
“gross income” as set forth therein does not apply “where
otherwise provided in this subtitle”, we are unaware of any
provision in the subtitle that would make the sec. 61(a)
definition inapplicable to sec. 63(a).
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deduction).”7 Sec. 63(a) (emphasis added). We conclude on the
basis of our plain reading of the unambiguous text of sections 55
and 63(a) that a computation of AMTI requires that a taxpayer
first compute its taxable income and then alter that amount (by
way of an adjustment or an increase) to reflect the items
described in the remainder of pt. VI, subch. A, ch. 1, subtit. A
(part VI).8 In fact, notwithstanding respondent’s invitation to
the Court to conclude that AMTI is calculated de novo, and
without regard to any calculation made for regular tax purposes,
our conclusion is on all fours with the manner in which
respondent requires taxpayers to report their calculations of
AMTI for Federal income tax purposes. See, e.g., Form 4626,
7
Congress provided the sole exception to this rule in sec.
63(b). See sec. 63(a). Section 63(b) provides:
(b) Individuals Who Do Not Itemize Their
Deductions.--In the case of an individual who does not
elect to itemize his deductions for the taxable year,
for purposes of this subtitle, the term “taxable
income” means adjusted gross income, minus--
(1) the standard deduction, and
(2) the deduction for personal
exemptions provided in section 151.
8
Part VI includes five sections, numbered and titled as
follows:
SEC. 55. Alternative Minimum Tax Imposed;
SEC. 56. Adjustments in Computing Alternative Minimum
Taxable Income;
SEC. 57. Items of Tax Preference;
SEC. 58. Denial of Certain Losses; and
SEC. 59. Other Definitions and Special Rules.
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Alternative Minimum Tax–-Corporations; Form 6251 (individuals).
Because section 280C is a wage-expense limitation that enters
into the computation of taxable income for purposes of section
63(a), and section 280C(a) is not referenced in part VI, we
conclude naturally that the limitation is reflected in the
calculation of AMTI.
Petitioners assert in their brief that the legislative
history underlying AMT “makes clear” that the AMT regime is a
“separate and independent tax system that operates in parallel
with the RT [regular tax] system and requires separate
calculations of a taxpayer’s” taxable income for regular tax
purposes and AMTI. Petitioners conclude that, notwithstanding
the fact that section 280C(a) is not referenced in part VI,
section 280C(a) is inapplicable in the AMT regime because the TJC
is also inapplicable there. Respondent does not disagree with
the parallel tax regime rationale advanced by petitioners.
Respondent invites the Court to hold that the systems are
“parallel” in the sense that a taxpayer who has calculated
taxable income must start from scratch in a separate computation
of AMTI. Both respondent and petitioners rely extensively upon
the Staff of Joint Comm. on Taxation, General Explanation of the
Tax Reform Act of 1986 (J. Comm. Print 1987) (General Explanation
of the 1986 Act), in arguing that the legislative history under
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the current AMT regime supports the treatment of that regime as a
system that is parallel to the regular tax regime.
Were we to adopt the parties’ contention that the regular
tax and AMT regimes are parallel systems, we would be inclined to
agree with petitioners that the section 280C(a) wage-expense
limitation does not enter into the calculation of AMTI. Because
a TJC is not determined in the calculation of AMT, the amount of
disallowed wages under section 280C(a) would appear to be zero
for purposes of the AMT regime. Moreover, even if a credit were
determined for that purpose, although it could not be applied, we
know of no reason (nor has respondent suggested one) that would
prevent petitioners, given the de novo calculation of AMTI that
flows from the parallel systems, from electing under section
51(j) to forgo that credit in the AMT regime in order to claim as
a deduction Foods’ full wage expense. We decline to adopt the
parties’ parallel system contention, however, because, as
discussed herein, the plain and unambiguous text of the statutes
(and the related legislative history) disproves that contention.
As to petitioners, they concede that a plain reading of the
relevant statutory provisions fails to distinguish between
taxable income for regular tax purposes and taxable income for
AMT purpose. Petitioners ask the Court to draw such a
distinction pointing solely to two sentences from the General
Explanation of the 1986 Act, one sentence in the preamble to
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section 1.55-1, Income Tax Regs., and the fact that the
Commissioner recognized this distinction in a technical advice
memorandum (Tech. Adv. Mem. 9722005 (Feb. 5, 1997)) issued as to
the facts of this case. The referenced sentences of the General
Explanation of the 1986 Act provide:
Structure of minimum tax as an alternative
system.–-For most purposes, the tax base for the new
alternative minimum tax is determined as though the
alternative minimum tax were a separate and independent
income tax system. Thus, for example, where a Code
provision refers to a “loss” of the taxpayer from an
activity, for purposes of the alternative minimum tax
the existence of a loss is determined with regard to
the items that are includable and deductible for
minimum tax, not regular tax, purposes. [General
Explanation of the 1986 Act, supra at 438.]
The referenced sentence in the preamble to section 1.55-1, Income
Tax Regs., provides (with a citation to the General Explanation
of the 1986 Act, supra at 438 n.9): “Congress generally intended
that the AMT be treated as a tax system separate from but
parallel to the regular tax system”. T.D. 8569, 59, 1994-2 C.B.
13. The technical advice memorandum reasons that the regular tax
regime operates parallel to the AMT regime. Tech. Adv. Mem.
9722005 (Feb. 5, 1997).
Respondent, in turn, acknowledges that the primary reading
of the AMT provisions requires that AMTI be calculated by
modifying taxable income by the items described in part VI. In a
manner that is openly inconsistent with respondent’s plain
reading of section 280C(a), however, respondent invites the Court
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not to apply the plain meaning of section 55 and to adopt the de
novo computation of AMTI advanced by petitioners. Respondent
asserts that the Commissioner has “generally” set forth in his
rulings the rationale that the AMT regime is “separate from but
parallel to” the regular tax regime. Respondent observes that
the phrase “separate from but parallel to” does not appear in the
explanation section of any of the committee reports underlying
the Tax Reform Act of 1986 (1986 Act), Pub. L. 99-514, 100 Stat.
2085, but that it does appear twice in the “present law” sections
of the conference report. The conferees used the phrase to
explain the pre-1986 treatment of the carryover of AMT net
operating losses (NOLs) and AMT foreign tax credits (FTCs). The
conferees stated that the present law applicable to individuals
applied the AMT provisions on NOLs and FTCs in the following
manner:
Present Law
NOLs are allowed against alternative minimum
taxable income. For years after 1982, minimum tax NOLs
are reduced by the items of tax preference. Minimum
tax NOLs are carried over under a system separate from
but parallel to that applying for regular tax purposes.
[H. Conf. Rept. 99-841 (Vol. II), at II-262 (1986),
1986-3 C.B. (Vol. 4) 250, 262.]
Present Law
Foreign tax credits are allowed against the
minimum tax, under limits similar to those applying
under the regular tax. Credits that cannot be used in
the current taxable year because of these limits are
carried over under a system separate from but parallel
to that applying for regular tax purposes. [H. Conf.
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Rept. 99-841, supra at 261, 1986-3 C.B. (Vol. 4) at
261.9]
9
But for these citations, respondent’s argument on brief
includes no citation to the legislative history underlying the
Tax Reform Act of 1986 (1986 Act), Pub. L. 99-514, 100 Stat.
2085, enactment of the current AMT regime. Our research has
revealed two other times in which the term “separate from but
parallel to” appears in that legislative history. The conferees
stated that the House bill provided the following rules on the
application of the AMT FTCs and the AMT NOLs to corporate
taxpayers:
Under the House bill, foreign tax credits are
allowed against the minimum tax, under limits similar
to those applying under the regular tax. Credits that
cannot be used in the current taxable year because of
these limits are carried over under a system separate
from but parallel to that applying for regular tax
purposes.
* * * * * * *
Under the House bill, the net operating loss
deduction is allowed against alternative minimum
taxable income. For any taxable year beginning after
1985, the minimum tax is reduced by the items of tax
preference arising in that year. Minimum tax NOLs are
carried over under a system separate from but parallel
to that applying for regular tax purposes. [H. Conf.
Rept. 99-841 (Vol. II), supra at II-281, II-282 (1986),
1986-3 C.B. (Vol. 4) at 281, 282.]
In addition to these two uses of the word “parallel” and the
other two uses referenced by the parties, our research has
uncovered only one other time that the word “parallel” appears in
the legislative history underlying the 1986 Act’s enactment of
the current AMT regime. The conferees stated in its discussion
of corporate AMT NOLs:
It is clarified that, in light of the parallel
nature of the regular tax and minimum tax systems, any
limitations applying for regular tax purposes to the
use by a consolidated group of NOLs or current year
losses (e.g., section 1503) apply for minimum tax
purposes as well. [H. Conf. Rept. 99-841, supra at II-
(continued...)
- 22 -
Respondent also quotes the following language from the
General Explanation of the 1986 Act:
STRUCTURE OF MINIMUM TAX AS AN ALTERNATIVE
SYSTEM.--For most purposes, the tax base for the new
alternative minimum tax is determined as though the
alternative minimum tax were a separate and independent
income tax system. Thus, for example, where a Code
provision refers to a ‘loss’ of the taxpayer from an
activity, for purposes of the alternative minimum tax
the existence of a loss is determined with regard to
the items that are includable and deductible for
[alternative] minimum tax, not regular tax, purposes.
In certain instances, the operation of the
alternative minimum tax as a separate and independent
tax system is set forth expressly in the Code. With
respect to the passive loss provision, for example,
section 58 provides expressly that, in applying the
limitation for minimum tax purposes, all minimum tax
adjustments to income and expense are made and regular
tax deductions that are items of tax preference are
disregarded.
In other instances, however, where no such express
statement is made, Congress did not intend to imply
that similar adjustments were not necessary. Thus, for
example, for [alternative] minimum tax purposes it was
intended that section 1211 (limiting capital losses) be
computed using [alternative] minimum tax basis, that
section 263A (requiring the capitalization of certain
depreciation deductions to inventory) apply with regard
to [alternative] minimum tax depreciation deductions,
and that section 265 (relating to expenses of earning
tax-exempt income) apply with regard only to items
excludable from alternative minimum taxable income.
[General Explanation of the 1986 Act, supra at 438; fn.
refs. omitted and alterations made by respondent.]
We do not believe that the “legislative history” referenced
by the parties displaces our plain and unambiguous reading of the
9
(...continued)
282, 1986-3 C.B. (Vol. 4) at 282.]
- 23 -
relevant statutory provisions. To be sure, the parties, but for
citations to the conferees’ understanding of the law that
preceded the 1986 Act, have not even cited the Court one iota of
persuasive legislative history in support of their contentions.
The General Explanation of the 1986 Act, the source of the
“legislative history” upon which the parties primarily rely to
support their assertions of legislative intent, is not part of
the statute’s legislative history. See Estate of Hutchinson v.
Commissioner, 765 F.2d 665, 669-670 (7th Cir. 1985), affg.
T.C. Memo. 1984-55; Condor Intl., Inc. v. Commissioner, 98 T.C.
203, 227 (1992). See generally Mertens, Law of Federal Income
Taxation, sec. 3.20, at 31 (1994):
The purpose of the Blue Book [the Staff of Joint
Committee’s general explanation of a tax statute] is to
provide, in one volume, a compilation of the
legislative history of a piece of tax legislation.
While the document is most helpful as a handy reference
volume it also gives some guidance. Where the Blue
Book’s explanation differs from that in a conference
report it may serve to alert the reader that a
technical correction is needed to reconcile the views.
[Emphasis added.]
Such is especially true as to the General Explanation of the 1986
Act, which was written by the Joint Committee of Taxation for the
100th Congress (Joint Committee), or, in other words, the
Congress that next followed the Congress that passed the 1986
Act.10 Although the Staff of Joint Committee’s explanation of a
10
The Joint Committee consisted of 10 Congressmen, 5 from
(continued...)
- 24 -
tax statute may be entitled to respect as a document that is
prepared in connection with the legislative process by
individuals who are intimately involved in that process, we shall
not hesitate to disregard the expressions set forth therein
where, as here, those expressions are barren of corroboration in
the legislative history. Zinniel v. Commissioner, 89 T.C. 357,
367 (1987), affd. 883 F.2d 1350 (7th Cir. 1989); see also
Estate of Wallace v. Commissioner, 965 F.2d 1038, 1050-1051 n.15
(11th Cir. 1992), affg. 95 T.C. 525 (1990).
Even if we were to follow the lead of the parties and rely
on the General Explanation of the 1986 Act for an expression of
legislative intent as to the current AMT regime, we would still
not reach their proffered conclusion that Congress intended that
the regular tax and AMT regimes operate as parallel systems. In
fact, the primary provision of the General Explanation of the
1986 Act that the parties quote in support of their contention
that the systems are “parallel” does not even use that word.
Moreover, that provision actually contradicts the parties’
10
(...continued)
the Senate and 5 from the House of Representatives. Staff of
Joint Comm. on Taxation, General Explanation of the Tax Reform
Act of 1986 (J. Comm. Print 1987) (General Explanation of the
1986 Act) II. The General Explanation of the 1986 Act was
prepared by the Staff of Joint Committee, in consultation with
the staffs of the House Ways and Means Committee and the Senate
Finance Committee. Letter from David H. Brockway, Chief of
Staff, to the Hon. Dan Rostenkowski, Chairman, and the Hon. Lloyd
Bentsen, Vice-Chairman. Id. at XVII.
- 25 -
position by stating “For most purposes, the tax base * * * is
determined as though the alternative minimum tax were a separate
and independent income tax system.” General Explanation of the
1986 Act, supra at 438 (emphasis added). To our minds, the
phrase “For most purposes” means that even the Joint Committee
recognized that the regular tax and AMT systems were not parallel
systems for all purposes. The same is true as to the use of the
term “as though”, rather than a term such as “by virtue of the
fact that”. As to the Joint Committee’s use of the term
“separate and independent”, we find no statement in the General
Explanation of the 1986 Act to the effect that the two regimes
are separate and independent for all purposes. And even if we
did, the mere fact that two systems are “separate and
independent” does not make them “parallel”.
The General Explanation of the 1986 Act uses the word
“parallel” only twice in its discussion of AMT. First, as to the
treatment of AMT NOLs, the General Explanation of the 1986 Act
states:
In light of the parallel nature of the regular tax
and minimum tax systems, any limitations applying for
regular tax purposes to the use by a consolidated group
of NOLs or current year losses (e.g., section 1503)
apply for minimum tax purposes as well. Moreover, an
election under section 172(b)(3)(C) to relinquish the
carryback period applies for both regular tax and
minimum purposes. [General Explanation of the 1986
Act, supra at 470.]
- 26 -
Second, in its discussion of “other rules”, the General
Explanation of the 1986 Act states:
Under the Act, the application of the tax benefit
rule to the minimum tax is within the discretion of the
Secretary of the Treasury. Relief from either the
regular or the minimum tax, when the source of the
taxpayer’s tax liability changes, between taxable
years, from one system to the other, is not appropriate
solely by reason of the fact that a taxpayer has
received no benefit under one of the systems with
respect to a particular item. Congress both intended
that the regular and minimum taxes constitute separate
and parallel tax systems, and anticipated that the
source of some taxpayers’ liability would change from
year to year. Relief from the possible adverse impact
of switching from one system to the other (e.g., the
denial of deductions with respect to which there are
timing differences as between the two systems) was
intended to be provided by means of the minimum tax
credit, along with the use of adjustments that give
rise, in effect, to “negative preferences” with respect
to items such as depreciation. Thus, application of
the tax benefit rule in this context is not necessary,
although the Treasury may, at its discretion, identify
particular circumstances where such exercise is
appropriate. [Id. at 472.]
Given the clarity of the statute in the direct reference to
and the definition of the term “taxable income”, we consider none
of the uses of the word “parallel” by Congress or the Joint
Committee to be a clear directive from Congress that it intended
that the computation of AMTI would, as the parties suggest,
“start from scratch”. Moreover, in the case of AMT NOLs, the
rules for those NOLs did and still do run parallel.11 Thus, the
mere fact that the prior and current systems of AMT NOLs are
11
The same is true as to AMT FTCs.
- 27 -
parallel to their treatment for regular tax purposes does not, in
our minds, mean that the entire AMT regime runs parallel to the
regular tax regime.12
Although the legislative history to a statute is secondary
when the Court can apply the plain meaning of unambiguous
statutory text, we recognize that unequivocal evidence of a clear
legislative intent may sometimes override a plain meaning
interpretation and lead to a different result. Consumer Prod.
Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980);
see also Halpern v. Commissioner, 96 T.C. 895, 899 (1991);
Hirasuna v. Commissioner, 89 T.C. 1216, 1224 (1987); Huntsberry
v. Commissioner, 83 T.C. 742, 747-748 (1984). Here, the
legislative history of the statutes provides scant and
unpersuasive support for a holding contrary to that which we
reach herein.
As to section 280C(a), its genesis lies in the Tax Reduction
and Simplification Act of 1977 (1977 Act), Pub. L. 95-30,
91 Stat. 126, which also is the statute that spawned the new jobs
credit of former sections 44B, 51, 52, and 53. Given the
presence at that time of high marginal tax rates and the
12
Nor are we persuaded by the preamble or technical advice
memorandum upon which petitioners rely. In addition to the
obvious fact that these documents also are not items of
legislative history, these documents are afforded little weight
in this Court. Textron Inc. v. Commissioner, 115 T.C. 104, 110
(2000) (technical advice memorandum); Dobin v. Commissioner,
73 T.C. 1121, 1129 n.9 (1980) (preamble to proposed regulations).
- 28 -
percentage of wages that could qualify for the new jobs credit,
Congress believed that some employers might want to pay an
employee not needed for work simply to avail itself of the
credit. Such a case could occur, for example, where the combined
tax benefit from both the full deduction and credit exceeded the
cost of the wages; e.g., where an employer subject to a 70-
percent marginal tax rate received a 50-percent new jobs credit
for qualifying wages. Congress enacted section 280C to thwart
this possibility. S. Rept. 95-66, at 68-69 (1977), 1977-1 C.B.
469, 488-489. One year later, Congress amended the provisions
relating to the new jobs credit to replace it with the TJC. The
legislative history accompanying this amendment does not
elaborate as to the reason for a wage-expense limitation in the
case of the TJC but states simply that such a reduction is
required. H. Conf. Rept. 95-1800, at 231–232 (1978), 1978-3 C.B.
(Vol. 1) 565-566; S. Rept. 95-1263, at 127 (1978), 1978-3 C.B.
(Vol. 1) 315, 425.
As to the provisions on AMT, those provisions find their
roots in the Tax Reform Act of 1969 (the 1969 Act), Pub. L.
91-172, 83 Stat. 487, where Congress set forth rules for a
minimum tax (MT) which was imposed in addition to the taxpayer’s
regular tax. The Code has included MT provisions for both
corporate and individual taxpayers ever since. The current
minimum tax; i.e., the AMT, has generally evolved into its
- 29 -
current form through three pieces of legislation; namely, the
Revenue Act of 1978 (1978 Act), Pub. L. 95-600, 92 Stat. 2763;
the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Pub. L. 97-248, 96 Stat. 324; and the 1986 Act.
Through the 1969 Act, Congress enacted the MT provisions to
prevent corporate and individual taxpayers from aggregating
deductions to the point where they would pay either no tax or a
“shockingly low” tax. First Chicago Corp. v. Commissioner,
842 F.2d 180, 181 (7th Cir. 1988), affg. 88 T.C. 663 (1987).
Congress aimed through the MT provisions to allocate the tax
burden among taxpayers more equitably by taxing preference items
(preferences) consisting of certain deductions and an exclusion
from gross income. See S. Rept. 91-552, at 112 (1969), 1969-3
C.B. 423, 495. The preferential deductions generally included
deductions which involved no economic cost to the taxpayer (e.g.,
the long-term capital gains deduction) or exceeded current
economic cost. The MT equaled the product of a single tax rate
multiplied by the amount of the taxpayer’s preferences which
exceeded a prescribed deduction.
This scheme remained in effect, with only minor changes, as
the only minimum tax formulation in the Code until 1978. See
1978 Act sec. 421(a), 92 Stat. 2871. Through the 1978 Act,
Congress supplemented the MT with an AMT for noncorporate
- 30 -
taxpayers.13 In contrast to the MT, the AMT was imposed on a tax
base similar to taxable income. The most notable differences
between the bases were that, in computing AMTI, a long-term
capital gain deduction was not allowed and itemized deductions
could be effectively disallowed. As to both taxable bases, the
NOL deduction and the basis of property were the same.
Through TEFRA, Congress repealed the MT for noncorporate
taxpayers and replaced it with a revised form of AMT. For the
computation of AMTI, Congress generally: (1) Incorporated the
old MT preferences by causing those amounts to increase AMTI
relative to taxable income and (2) created new preferences which
were either not deductible or not excludable from gross income.
Congress also disallowed certain itemized deductions allowable in
computing taxable income and provided for a separate alternative
tax NOL deduction.
The TEFRA AMT provision remained in effect from 1982 until
its amendment by the 1986 Act, which expanded the AMT for
individuals. S. Rept. 99-313, at 515, 521 (1986), 1986-3 C.B.
(Vol. 3) 515, 521. Through that act, Congress repealed the MT
13
Although the Revenue Act of 1978, Pub. L. 95-600,
92 Stat. 2763, purported to repeal the add-on minimum tax for
individuals and replace it with a new AMT formulation beginning
in 1979, other sources indicate that the two provisions
co-existed in the Code until the add-on minimum tax was finally
repealed by the Tax Equity and Fiscal Responsibility Act of 1982,
Pub. L. 97-248, sec. 201(a), 96 Stat. 411, and supplanted by an
amended alternative minimum tax. See, e.g., Day v. Commissioner,
108 T.C. 11, 14 (1997), and the cases cited therein.
- 31 -
for corporate taxpayers and subjected them to AMT. Congress also
altered the computation of AMTI by providing for differences
regarding when items of income or deductions are taken into
account in computing taxable income and AMTI. The post-1986 AMT
rules, sections 55-59, were enacted to achieve one overriding
objective: to establish a floor for tax liability, so that a
taxpayer pays some tax regardless of the tax breaks otherwise
available to him under the regular tax system. S. Rept. 99-313,
supra at 518, 1986-3 C.B. (Vol. 3) at 518. The AMT rules
accomplish this goal by eliminating favorable treatment to
certain items that are treated favorably for purposes of the
regular tax (tax preference items). Secs. 55(b)(2)(B), 57(a).
The legislative history under the 1986 Act states explicitly
that the computation of a corporation’s AMTI begins with taxable
income and that any adjustments required by the AMT regime are
made from there. The report of the House Ways and Means
Committee, for example, explains clearly and unambiguously that
the starting point for computing a corporation’s AMTI is “taxable
income”. The report states:
Explanation of Provisions
1. Overview
The bill repeals the present law add-on minimum
tax for corporations beginning in 1986, creates a new
alternative minimum tax on corporations, and expands
the alternative minimum tax on individuals.
- 32 -
Corporations.--Generally, the tax base for the
alternative minimum tax on corporations is the
taxpayer’s regular taxable income, increased by the
taxpayer’s tax preferences for the year and adjusted by
computing certain deductions in a special manner which
negates the acceleration of such deductions under the
regular tax. The resulting amount, called alternative
minimum taxable income, then is reduced by a $40,000
exemption and is subject to tax at a 25-percent rate.
The amount so determined may then be offset by the
minimum tax foreign tax credit to determine a
“tentative minimum tax.” These rules are designed to
ensure that, in each taxable year, the taxpayer must
pay tax equaling at least 25 percent of an amount more
nearly approximating its economic income (above the
exemption amount).
The net minimum tax, or amount of minimum tax due,
is the amount by which the tax computed under this
system (the tentative minimum tax) exceeds the
taxpayer’s regular tax. Although the minimum tax is,
in effect, a true alternative tax, in the sense that it
is paid only when it exceeds the regular tax,
technically the taxpayer’s regular tax continues to be
imposed, and the net minimum tax is added on.
Individuals.-–The structure for the alternative
minimum tax on individuals generally is the same as
under present law, except that certain deferral
preferences (such as incentive depreciation) give rise
to adjustments to the minimum tax base over a period of
years, in order properly to compute total income each
year in light of the fact that, in later years, the
regular tax deduction typically is smaller than the
deduction would be if calculated on a straight line
basis over a longer period. The alternative minimum
tax on individuals differs from that applying to
corporations in several respects. For example, there
are some differences between the preferences applying
to individuals and those applying to corporations, and
certain itemized deductions that individuals can claim
for regular tax purposes are not allowable under the
minimum tax. [H. Rept. 99-426, at 308 (1986), 1986-3
C.B. (Vol. 2) 308; emphasis added.]
- 33 -
The Senate Finance Committee repeated these statements almost
verbatim in its report.14 S. Rept. 99-313, supra at 521, 1986-3
C.B. (Vol. 3) 521. Although these reports do not explicitly
provide that the computation of an individual’s AMTI also begins
with taxable income, we decline to conclude that the calculation
of AMTI is different for an individual given no clear provision
to that effect in either the statute or the legislative history.
Whereas the House and Senate committee reports both state that
the two regimes are considered “separate” systems, this simply
means, as respondent acknowledges, that two taxes are involved.
The mere fact that the two systems may also be “independent” does
not necessarily mean that they are unrelated in all regards, or,
in other words, parallel.
Petitioners also rely on the fact that section 1.55-1(b),
Income Tax Regs., does not prohibit them from deducting all of
the wages for AMT purposes. Petitioners recognize in this regard
that Congress authorized the Treasury Department to issue
regulations on the AMT regime, that the Commissioner issued two
14
The General Explanation of the 1986 Act also includes
these statements and clarifies that the word “generally” as used
in the discussion on corporations means that regular taxable
income is not used only where the taxpayer’s tax base is other
than taxable income; e.g., unrelated business taxable income,
real estate investment trust taxable income, or life insurance
company taxable income. General Explanation of the 1986 Act,
supra at 436-437. The General Explanation of the 1986 Act states
that a technical correction may be necessary to effectuate the
exception to the general rule. Id. at 436 n.5.
- 34 -
rulings, Tech. Adv. Mem. 93-20-003 (May 21, 1993) and Priv. Let.
Rul. 93-21-063 (May 28, 1993), before exercising this authority,
that these rulings concluded that, for AMT purposes, the relevant
taxpayers must make a separate computation of adjusted gross
income in order to ascertain the charitable contribution
limitation under section 170(b)(1), and that the Commissioner
effectively overruled those rulings through the issuance of
section 1.55-1(b), Income Tax Regs.
We read nothing in section 1.55-1, Income Tax Regs., that is
inconsistent with our opinion herein. That section provides:
SEC. 1.55-1. Alternative minimum taxable income.--(a)
General rule for computing alternative minimum taxable
income. Except as otherwise provided by statute,
regulations, or other published guidance issued by the
Commissioner, all Internal Revenue Code provisions that
apply in determining the regular taxable income of a
taxpayer also apply in determining the alternative
minimum taxable income of the taxpayer.
(b) Items based on adjusted gross income or
modified adjusted gross income. In determining the
alternative minimum taxable income of a taxpayer other
than a corporation, all references to the taxpayer’s
adjusted gross income or modified adjusted gross income
in determining the amount of items of income,
exclusion, or deduction must be treated as references
to the taxpayer’s adjusted gross income or modified
adjusted gross income as determined for regular tax
purposes.
(c) Effective date. These regulations are
effective for taxable years beginning after December
31, 1993.
Petitioners’ final argument is that the Court will frustrate
congressional intent by not allowing them to deduct Foods’ full
- 35 -
wage expense. Petitioners contend that disallowing part of the
deduction may place taxpayers in a worse position by electing the
TJC than by not making the election. We disagree that our
holding herein frustrates congressional intent. The primary way
to foster congressional intent is to apply, as we do here, the
plain meaning of the statute as written. In this regard, the
Supreme Court has stated: “courts must presume that a
legislature says in a statute what it means and means in a
statute what it says there.” Conn. Natl. Bank v. Germain,
503 U.S. 249, 253-254 (1992) (citations and quotation marks
omitted).
We sustain respondent’s determination on this issue. In so
doing, we have considered all arguments made by the parties and
have rejected those arguments not discussed herein as without
merit. Accordingly,
Decisions will be entered for
respondent in docket Nos. 1287-00,
1288-00, 1289-00, 1290-00, 1293-00, and
1618-00, and decisions will be entered
under Rule 155 in docket Nos. 1291-00
and 1292-00.