United Therapeutics Corporation

United States Tax Court
160 T.C. No. 12UNITED THERAPEUTICS CORPORATION,
Petitioner
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent
—————
Docket No. 10210-21. Filed May 17, 2023.
—————
P is a biotechnology company. For each of the tax
years 2011 through 2014, P claimed both the research
credit under I.R.C. § 41 and the orphan drug credit under
I.R.C. § 45C. Some of P’s expenses during those years
qualified as both qualified clinical testing expenses under
I.R.C. § 45C and qualified research expenses under I.R.C.
§ 41. For those expenses, P elected to claim the orphan
drug credit under I.R.C. § 45C.
In determining the research credit for 2014,
P elected to use the alternative simplified credit calculation
under I.R.C. § 41(c)(5) and the reduced credit under I.R.C.
§ 280C(c)(3). When calculating the credit under I.R.C.
§ 41(c)(5), P excluded qualified clinical testing expenses
from both its 2014 qualified research expenses and its
average qualified research expenses for the three preceding
tax years (2011 through 2013).
R audited P’s return and ultimately issued a Notice
of Deficiency determining that P overstated its research
credit for 2014 by improperly excluding from its
computations the expenses P treated as qualified clinical
testing expenses for 2011 through 2013.
Served 05/17/23
2
P timely petitioned our Court for redetermination.
The case is before us for decision under Rule 122.
R maintains that I.R.C. § 45C(c)(2) requires the result
reflected in the Notice of Deficiency. P contends that,
because of changes in I.R.C. § 41 since its original
enactment, I.R.C. § 45C(c)(2) is a dead letter and has no
application here.
Held: The text and structure of I.R.C. §§ 41 and
45C(c)(2) as they existed for 2014 require the result
reflected in the Notice of Deficiency.
—————
Thomas H. Dupree, Jr., Lucas C. Townsend, Saul Mezei, and John F.
Craig III, for petitioner.
Brandon S. Cline, Anna L. Boning, and Naseem Jehan Khan, for
respondent.
OPINION
TORO, Judge: In this deficiency case involving the tax year 2014,
we consider a question of first impression: Must expenses that are used
to determine the orphan drug credit under section 45C1 also be taken
into account in determining certain elements of the research credit
under section 41, with the result that a taxpayer claiming both credits
receives a reduced research credit? The Commissioner of Internal
Revenue maintains that section 45C(c)(2) requires this result. United
Therapeutics Corporation (United Therapeutics) contends that
section 45C(c)(2) is a dead letter (often referred to as deadwood) and has
no application here.
Resolution of the case turns on a question of statutory
interpretation. Sections 41 and 45C provide credits (originally enacted
as temporary credits) that Congress extended and amended many times
1 Unless otherwise indicated, all statutory references are to the Internal
Revenue Code, Title 26 U.S.C. (I.R.C. or Code), in effect at all relevant times, all
regulation references are to the Code of Federal Regulations, Title 26 (Treas. Reg.), in
effect at all relevant times, and all Rule references are to the Tax Court Rules of
Practice and Procedure. We round all monetary amounts to the nearest dollar.
3
over a number of years. The specific question before us is whether we
should give effect to section 45C(c)(2) based on the ordinary meaning of
its terms or whether we should ignore the provision altogether as a no-
longer-effective rule that Congress neglected multiple times to remove
from the Code. In interpreting clear statutory text, we normally do not
assume that Congress made a mistake in drafting, and we certainly do
not assume that it made the same mistake repeatedly. We see no reason
to depart from that practice here. We therefore apply section 45C(c)(2)
in accordance with its ordinary meaning and, as explained in more detail
below, find in favor of the Commissioner.
Background
The parties submitted this case fully stipulated under Rule 122.
The facts below are based on the pleadings and the parties’ Stipulation
of Facts (including the Exhibits attached thereto). The parties’
Stipulation of Facts with accompanying Exhibits is incorporated herein
by this reference.
United Therapeutics, a biotechnology company, is a Delaware
public benefit corporation. When it timely filed the Petition in this case,
United Therapeutics maintained principal places of business in Silver
Spring, Maryland, and Durham, North Carolina.
United Therapeutics focuses primarily on the development and
commercialization of unique products to address the unmet medical
needs of patients with chronic and life-threatening conditions. During
the 2014 tax year and the preceding three tax years (2011 through
2013), the company conducted research and development on potential
treatments for pulmonary arterial hypertension (which ultimately leads
to heart failure and death) and neuroblastoma (a rare form of brain
cancer that predominantly affects children and infants), among other
diseases.
For each of the tax years 2011 through 2014, United Therapeutics
computed and claimed both the research credit under section 41 and the
orphan drug credit under section 45C. Some of the company’s expenses
during those years qualified both as qualified clinical testing expenses
under section 45C and as qualified research expenses under section 41.
With respect to those expenses, United Therapeutics elected to claim the
orphan drug credit under section 45C.
In claiming its research credit for the 2014 tax year, United
Therapeutics elected to use the alternative simplified credit calculation
4
under section 41(c)(5) and the reduced credit under section 280C(c)(3). 2
When calculating the credit under section 41(c)(5), the company
excluded the expenses it had treated as qualified clinical testing
expenses for purposes of section 45C from both its 2014 qualified
research expenses and its average qualified research expenses for the
three preceding tax years (2011 through 2013). In total for 2014, United
Therapeutics claimed that it incurred $42,062,405 of qualified research
expenses within the meaning of section 41. And it claimed that its
average qualified research expenses for the three preceding tax years
(2011 through 2013) were $22,605,492. Accordingly, it claimed an
adjusted research credit of $2,799,129 for 2014. 3
The Commissioner audited United Therapeutics and ultimately
issued a Notice of Deficiency. The Commissioner determined that
United Therapeutics overstated its research credit by improperly
excluding from its computations expenses it treated as qualified clinical
testing expenses for tax years 2011 through 2013.
The parties have stipulated that if (as United Therapeutics
contends) the company properly excluded its qualified clinical testing
expenses from the calculation of its average qualified research expenses
for the three years immediately preceding its tax year 2014 under
section 41(c)(5), then its average qualified research expenses for those
years (2011 through 2013) would be $22,605,492. Using that amount,
United Therapeutics’ research credit under section 41 for tax year 2014
would be $2,799,129.
The parties have also stipulated that if (as the Commissioner
contends) United Therapeutics must include its qualified clinical testing
expenses for 2011 through 2013 in the calculation of its average
qualified research expenses for those years, then its average qualified
research expenses would be $49,257,244. Using that amount, United
2 Section 280C(c), which is not at issue, generally provides that a taxpayer’s
deductions (or the amounts it would otherwise charge to its capital account) for
qualified research expenses must be reduced according to the amount of the taxpayer’s
research credit. I.R.C. § 280C(c)(1) and (2). Alternatively, a taxpayer may avoid these
requirements by electing to reduce the amount of its research credit pursuant to
section 280C(c)(3). Section 280C(b) provides similar rules with respect to qualified
clinical testing expenses.
3 The amounts listed in the text differ from the amounts United Therapeutics
reported on its 2014 return because of adjustments agreed on by the parties.
5
Therapeutics’ research credit under section 41 for tax year 2014 would
be $1,586,474.
Discussion
Section 38 permits taxpayers to claim a variety of business credits
against federal income tax. Among those credits are the section 41
research credit and the section 45C orphan drug credit. United
Therapeutics claimed both credits for the 2014 tax year, raising the
question of how the two credits relate to each other. We begin with a
brief discussion of the history of the two credits and how they interact.
I. The Research Credit
Congress introduced the “credit for increasing research activities”
as part of the Economic Recovery Tax Act of 1981 (ERTA), Pub. L. No.
97-34, § 221(a), 95 Stat. 172, 241. “The credit was intended to ‘stimulate
a higher rate of capital formation and to increase productivity’” by
incentivizing taxpayers to undertake new research. See Hewlett-
Packard Co. & Consol. Subs. v. Commissioner, 139 T.C. 255, 258–59
(2012) (first quoting S. Rep. No. 97-144, at 76–77 (1981), as reprinted in
1981-2 C.B. 412, 438–39; and then quoting H.R. Rep. No. 97-201, at 111
(1981), as reprinted in 1981-2 C.B. 352, 358), aff’d, 875 F.3d 494 (9th
Cir. 2017). In general, the credit was equal to a percentage of the
amount by which a taxpayer’s “qualified research expenses” for the
credit year exceeded its average qualified research expenses for the
three preceding tax years. ERTA § 221(a). Consistent with its name,
therefore, the credit rewarded taxpayers who increased their research
expenditures year over year. The credit was temporary and initially
applied only to amounts paid or incurred after June 30, 1981, and before
January 1, 1986. Id. § 221(d), 95 Stat. at 247.
In the years following its enactment, Congress extended the
credit multiple times and, in at least one instance, allowed it to expire
for a year before reinstating it prospectively. 4 When we say that
Congress “extended the credit,” we mean that Congress made the benefit
applicable to expenses incurred in a period not originally covered by the
statute. See In re Grand Jury Subpoenas Duces Tecum, 78 F.3d 1307,
1311–12 (8th Cir. 1996) (holding that the Independent Counsel
Reauthorization Act of 1987 was validly reenacted when “Congress
4 The Commissioner provided a helpful table summarizing the relevant
amendments, their enactment dates, and the effective dates covered by the relevant
provisions, which we reproduce in the Appendix. See also Suppl. Br. for Resp’t 6.
6
passed [a public law] amend[ing] the sunset provision . . . of the 1987
Act by substituting the year 1994 for the year 1987”). Without these
extensions, taxpayers would not have been entitled to any research
credit in years following 1986 for incurring the types of expenses the
credit is intended to incentivize. Congress finally made the research
credit permanent (that is, it removed the provision that limited its
application to specific time periods) in 2015. 5
Congress also modified the research credit a number of times
after its initial enactment, including by moving the credit to different
Code sections, changing the primary method of calculating the credit,
and adding new methods for calculating the credit, each on more than
one occasion. 6
The version of the research credit in effect for 2014, the tax year
before us, was in section 41 (where it remains today). It was extended
and amended earlier that year. It describes five methods for calculating
the research credit, some that operate as alternatives to each other and
some that work in tandem. 7 Each method is different from the others
in various respects, but, consistent with the credit’s original design,
nearly all the methods include a mechanism to reward taxpayers who
5For a discussion of the budgetary impact of legislation with permanent and
temporary effects and the legislative process followed in adopting such legislation, see
George K. Yin, Temporary-Effect Legislation, Political Accountability, and Fiscal
Restraint, 84 N.Y.U. L. Rev. 174 (2009). See also id. at 199–202 (discussing the initial
adoption and subsequent extensions of the research credit). For a broader discussion
of temporary legislation, see Jacob E. Gersen, Temporary Legislation, 74 U. Chi. L.
Rev. 247 (2007).
6 Significant amendments included, among others, those made by the Deficit
Reduction Act of 1984 (DEFRA), Pub. L. No. 98-369, §§ 471, 474(i), 98 Stat. 494, 825–
26, 831–32, the Tax Reform Act of 1986 (TRA 1986), Pub. L. No. 99-514, § 231, 100
Stat. 2085, 2173–80, the Omnibus Budget Reconciliation Act of 1989 (OBRA 1989),
Pub. L. No. 101-239, § 7110, 103 Stat. 2106, 2322–26, the Small Business Job
Protection Act of 1996 (SBJPA), Pub. L. No. 104-188, § 1204, 110 Stat. 1755, 1773–75,
and the Tax Relief and Health Care Act of 2006 (TRHCA), Pub. L. No. 109-432, §§ 104,
123(a), 120 Stat. 2922, 2934–36, 2944.
7 The five methods are (1) the incremental research credit under
section 41(a)(1); (2) the basic research credit under section 41(a)(2); (3) the credit
related to energy research under section 41(a)(3); (4) the alternative incremental credit
under section 41(c)(4); and (5) the alternative simplified credit under section 41(c)(5).
The alternative incremental credit expired for taxable years beginning after
December 31, 2008, but remains in the statute. I.R.C. § 41(h)(2).
7
increase their research activity in the current year relative to some
earlier baseline defined by the statute.
The alternative simplified method—the method United
Therapeutics used in 2014—is a good example. Like the original method
for calculating the credit adopted in 1981, the alternative simplified
method generally requires a taxpayer to compare its current year
qualified research expenses to those it incurred during the three
preceding years. See I.R.C. § 41(c)(5). In particular, section 41(c)(5)(A)
provides that, subject to an exception not relevant here, a taxpayer’s
credit under section 41(a)(1) equals 14% of the amount by which the
taxpayer’s current year qualified research expenses exceed 50% of its
average qualified research expenses for the three previous years. 8 So, a
taxpayer that increases its qualified research expenses in the current
year relative to the three-year period (i.e., the baseline) generally gets a
larger credit. And the calculation of a taxpayer’s baseline expenses—
i.e., the issue before us—can significantly affect the final credit amount.
II. The Orphan Drug Credit
In 1983, approximately two years after first establishing the
research credit, Congress enacted the orphan drug credit as part of the
Orphan Drug Act, Pub. L. No. 97-414, 96 Stat. 2049 (1983) (codified in
relevant part as amended at 21 U.S.C. §§ 360aa–360ee and I.R.C.
§ 44H). “The Orphan Drug Act incentivizes pharmaceutical companies
to develop ‘orphan drugs’—drugs for rare diseases that affect such a
small portion of the population that there otherwise would be no
financial incentive to research and develop treatments.” Catalyst
Pharms., Inc. v. Becerra, 14 F.4th 1299, 1302 (11th Cir. 2021); see also
Eagle Pharms., Inc. v. Azar, 952 F.3d 323, 325 (D.C. Cir. 2020). The
orphan drug credit was one of the Orphan Drug Act’s financial
incentives. The credit could be elected on an annual basis and rewarded
taxpayers who, during a taxable year, incurred qualified clinical testing
expenses in researching and developing drugs to treat rare diseases.
I.R.C. § 44H(a), (b), (d)(5) (1983).
8 Expressed in the form of an equation, the formula for calculating the
alternative simplified credit is as follows:
Current year credit = 14% × (X – (50% × ((Y1 + Y2 + Y3) / 3))).
In the formula, X represents qualified research expenses for the credit year, and Y1,
Y2, and Y3 represent qualified research expenses for the three years preceding the
credit year.
8
Like the research credit, the orphan drug credit originally was
temporary, with an expiration date of December 31, 1987. I.R.C.
§ 44H(e) (1983). Congress extended and modified the credit frequently
over the years. 9 In at least one instance, Congress allowed the credit to
expire before reinstating it prospectively, and it ultimately made the
credit permanent in 1997. See infra Appendix; see also supra note 4.
The 2014 version of the credit was in section 45C (where it
remains today). It generally permits taxpayers who incur qualified
clinical testing expenses 10 and elect to apply section 45C to claim a credit
equal to 50% of such expenses for the year, regardless of their
expenditures in prior years. I.R.C. § 45C(a), (d)(4). This relatively
straightforward computation makes the orphan drug credit a simpler
(and more generous) benefit than the research credit, but with a
potentially smaller pool of eligible expenses.
III. Interaction Between the Research Credit and the Orphan Drug
Credit
As one might expect given the overlapping goals of the research
credit and the orphan drug credit, expenses that qualify for one credit
may also qualify for the other. Congress recognized this potential for
overlap and addressed it in section 45C(c), which provides as follows: 11
Sec. 45C(c). Coordination with credit for increasing
research expenditures.—
(1) In general.—Except as provided in
paragraph (2), any qualified clinical testing
expenses for a taxable year to which an election
under this section applies shall not be taken into
account for purposes of determining the credit
allowable under section 41 for such taxable year.
9 Significant amendments have included, among others, those made by the
DEFRA §§ 471, 474(g), 98 Stat. at 826, 831–32, the TRA 1986 §§ 232, 701(c)(2),
1275(c)(4), 1879(b), 100 Stat. at 2180, 2340, 2599, 2905–06, the SBJPA § 1205, 110
Stat. at 1775–76, and the Taxpayer Relief Act of 1997, Pub. L. No. 105-34, § 604, 111
Stat. 788, 863.
10 Qualified clinical testing expenses are defined with reference to qualified
research expenses under section 41, subject to certain modifications. I.R.C.
§ 45C(b)(1).
11 Essentially the same text appeared in the original orphan drug credit at
section 44H(c) (1983).
9
(2) Expenses included in determining base
period research expenses.—Any qualified clinical
testing expenses for any taxable year which are
qualified research expenses (within the meaning of
section 41(b)) shall be taken into account in
determining base period research expenses for
purposes of applying section 41 to subsequent
taxable years.
As in effect for 2014, neither section 45C(c)(2) nor any other Code
provision defines the phrase “base period research expenses.”
The parties’ dispute turns on the meaning of this coordination
rule. A simple example illustrates the stakes.
Assume that each year for four years (2011 through 2014) a
taxpayer incurs $50 of expenses that qualify both as qualified research
expenses and qualified clinical testing expenses. In each of the same
years, the taxpayer also incurs $100 of additional expenses that qualify
only as qualified research expenses. The second column of Table 1 below
shows the result in the fourth year if, for all four years, the taxpayer
claims only the research credit and uses the alternative simplified
method to calculate the credit. The third column of Table 1 shows the
result if the taxpayer claims only the orphan drug credit. 12
12 For simplicity’s sake, our discussion here does not take into account
section 280C, which operates to further limit a taxpayer’s credits in certain
circumstances. Additionally, because the research credit is not elective, we recognize
that a taxpayer may never be in position to claim the orphan drug credit alone. We
therefore include this calculation for comparison purposes only.
10
Table 1: Research Credit Only or Orphan Drug Credit Only
Research Credit Orphan Drug Credit
Only Only
Year 1 Qualified Research Expenses $150 NA 13
Year 2 Qualified Research Expenses 150 NA13
Year 3 Qualified Research Expenses 150 NA13
Years 1-3 Average Qualified
150 NA13
Research Expenses
Year 4 Qualified Research Expenses 150 NA 14
Year 4 Qualified Clinical Testing
NA 15 $50
Expenses
Year 4 Research Credit (a) 10.5 16 -0-
Year 4 Orphan Drug Credit (b) -0- 25 17
Year 4 Total Credits (c) = (a) + (b) 10.5 25
In this example, claiming the more generous orphan drug credit
results in a larger credit than claiming the research credit despite the
smaller pool of eligible expenses.
The issue before us is how the research credit is computed when
the taxpayer claims both the research credit and the orphan drug credit
for each of the relevant years. Table 2 below shows the calculation of
13 Because the computation of the orphan drug credit turns only on qualified
clinical testing expenses incurred in the year the taxpayer elects to claim the credit,
qualified research expenses incurred in other years are irrelevant to the computation
of the credit.
14 Qualified research expenses that are also qualified clinical testing expenses
are reflected in the “Year 4 Qualified Clinical Testing Expenses” line.
15 Because for purposes of this example the taxpayer elects not to claim the
orphan drug credit, qualified clinical testing expenses that are also qualified research
expenses are taken into account in the “Year 4 Qualified Research Expenses” line.
16 Applying the formula described in note 8, the credit computation is as
follows: 14% × (150 – (50% × 150)) = 10.5.
17 As discussed above, the orphan drug credit for the year is equal to 50% of
qualified clinical testing expenses incurred in the year: 50 × 50% = 25.
11
the research credit (again using the alternative simplified method) and
the orphan drug credit during the fourth year in that scenario. The
second column reflects United Therapeutics’ interpretation of
section 45C(c)(2)—i.e., that qualified clinical testing expenses are not
included in calculating qualified research expenses for the three
preceding years. The third column reflects the Commissioner’s
interpretation of the provision—i.e., that qualified clinical testing
expenses are included in calculating qualified research expenses for the
three preceding years because of section 45C(c)(2).
12
Table 2: Research Credit and Orphan Drug Credit
United Therapeutics’ Commissioner’s
Position Position
Year 1 Qualified Research Expenses $100 18 $150 19
Year 2 Qualified Research Expenses 10018 15019
Year 3 Qualified Research Expenses 10018 15019
Years 1-3 Average Qualified Research 100 150
Expenses
Year 4 Qualified Research Expenses 100 100
Year 4 Qualified Clinical Testing 50 50
Expenses
Year 4 Research Credit (a) 7 20 3.5 21
Year 4 Orphan Drug Credit (b) 22 25 25
Year 4 Total Credits (c) = (a) + (b) 32 28.5
In this example, including the taxpayer’s qualified clinical testing
expenses in its historical qualified research expenses (as the
Commissioner maintains) reduces the research credit for 2014. But the
taxpayer is still much better off claiming both credits than claiming the
research credit alone (as shown in Table 1, claiming the research credit
alone would result in a benefit of only $10.50, while claiming both credits
would result in a benefit of $28.50 even under the Commissioner’s
position). In the case before us, the difference between research credit
computed under the Commissioner’s interpretation and the research
18 Expenses that are both qualified research expenses and qualified clinical
testing expenses ($50 each year) are ignored in computing the three-year average.
19 Expenses that are both qualified research expenses and qualified clinical
testing expenses ($50 each year) are taken into account in computing the three-year
average.
20 Applying the formula described in note 8, the credit computation is as
follows: 14% × (100 – (50% × 100)) = 7.
21 Applying the formula described in note 8, the credit computation is as
follows: 14% × (100 – (50% × 150)) = 3.5.
22 See supra note 17.
13
credit computed under United Therapeutics’ interpretation for 2014 is
$1,212,655.
IV. Application to United Therapeutics
Every year from 2011 through 2014, United Therapeutics, like
the taxpayer in our example, incurred expenses that qualified as both
qualified clinical testing expenses under section 45C(b) and qualified
research expenses under section 41(b). And each year from 2011 to
2014, United Therapeutics elected to claim the orphan drug credit for
all these expenses. In 2014, United Therapeutics excluded all qualified
clinical testing expenses from its section 41 credit computations
(including the calculation of the three-year average for 2011 through
2013). United Therapeutics argues that this approach is required by
section 45C(c)(1) and that section 45C(c)(2) is inapplicable.
The Commissioner agrees that section 45C(c) provides the
operative rule for coordinating the research credit and the orphan drug
credit. He further agrees that section 45C(c)(1) requires qualified
clinical testing expenses incurred in 2014 to be excluded when
computing qualified research expenses for the credit year (i.e., 2014).
But, unlike United Therapeutics, the Commissioner contends that
section 45C(c)(2) requires qualified clinical testing expenses that are
also qualified research expenses to be included in determining qualified
research expenses for the three-year reference period described in
section 41(c)(5)(A) (here, 2011 through 2013). For the reasons below, we
agree with the Commissioner.
A. The Text and Structure of the Relevant Provisions Decide
the Dispute Before Us.
Section 45C(c) provides that qualified clinical testing expenses
must be excluded from all section 41 calculations, except that, under
section 45C(c)(2), qualified clinical testing expenses that are also
qualified research expenses must be included “in determining base
period research expenses for purposes of applying section 41 to
subsequent taxable years.” The parties agree that the qualified clinical
testing expenses at issue are qualified research expenses. So the only
question before us is whether “base period research expenses” are
relevant to United Therapeutics’ research credit computation for 2014.
As we show below, they are.
We begin with first principles. As the Supreme Court has
explained, “[i]n statutory interpretation disputes, a court’s proper
14
starting point lies in a careful examination of the ordinary meaning and
structure of the law itself.” Food Mktg. Inst. v. Argus Leader Media, 139
S. Ct. 2356, 2364 (2019) (citing Schindler Elevator Corp. v. United States
ex rel. Kirk, 563 U.S. 401, 407 (2011)). And, when the statute does not
define a term, “we ask what that term’s ‘ordinary, contemporary,
common meaning’ was when Congress enacted” the relevant provision.
Id. at 2362 (quoting Perrin v. United States, 444 U.S. 37, 42 (1979)).
“The people who come before us are entitled, as well, to have
independent judges exhaust ‘all the textual and structural clues’ bearing
on that meaning.” Niz-Chavez v. Garland, 141 S. Ct. 1474, 1480 (2021)
(quoting Wis. Cent. Ltd. v. United States, 138 S. Ct. 2067, 2074 (2018)).
“When exhausting those clues enables [the Court] to resolve the
interpretive question put to us,” id., “the sole function of the courts—at
least where the disposition required by the text is not absurd—is to
enforce it according to its terms,” Lamie v. U.S. Tr., 540 U.S. 526, 534
(2004) (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank,
N.A., 530 U.S. 1, 6 (2000)).
The term “base period research expenses” is not defined in the
2014 version of section 45C or section 41. Accordingly, we look to the
term’s ordinary meaning. And because there is no dispute that the
expenses at issue in this case qualify as research expenses for purposes
of section 41, we focus on the term “base period.”
The term “base period” has been defined consistently over time.
Cf. BP P.L.C. v. Mayor of Balt., 141 S. Ct. 1532, 1537 (2021) (“Whether
we look to the time of § 1447(d)’s adoption or amendment, a judicial
‘order’ meant then what it means today . . . .”). In general, it means “a
period of time used as a standard of comparison in measuring changes
. . . at other periods of time.” Base Period, Webster’s Encyclopedic
Unabridged Dictionary of the English Language (1989); see also Base
Period, Merriam-Webster, https://www.merriam-webster.com/
dictionary/base%20period (last visited May 9, 2023) (“[A] period of
business or economic activity used as a basis or reference point . . . .”). 23
This meaning is consistent with how Congress has used the term “base
23 Combining the individual definitions of “base” and “period” produces the
same meaning. See, e.g., Base, The American Heritage Dictionary (5th ed. 2011) (“15.
A line used as a reference for measurement or computations.”); Period, The American
Heritage Dictionary (5th ed. 2011) (“1. An interval of time characterized by the
occurrence of a certain condition, event, or phenomenon . . . .”); Base, Random House
Webster’s College Dictionary (2001) (“7. a starting point or point of departure.”); Period,
Random House Webster’s College Dictionary (2001) (“2. a specific division or portion of
time.”).
15
period” in other contexts, including in a specific definition provided for
limited purposes in section 41(e). 24 Thus, we interpret the term “base
period research expenses” to mean research expenses that are incurred
during the base period—i.e., the period of time section 41 employs as a
standard of comparison (or as a baseline or reference point).
This interpretation is compatible with the structure of
sections 45C and 41 and produces a nonabsurd result. It means that,
for purposes of computing the research credit under section 41, the
taxpayer that makes the election under section 45C must exclude
qualified clinical testing expenses incurred in the year for which the
election is made when calculating qualified research expenses for that
year. See I.R.C. § 45C(c)(1). But the taxpayer must include qualified
clinical testing expenses incurred during a reference period (i.e., a base
period) prescribed by section 41 in its calculation of qualified research
expenses for that reference period so long as those qualified clinical
testing expenses also meet the definition of qualified research expenses.
See I.R.C. § 45C(c)(2).
Take section 41(c)(5), which sets out the method for calculating
the alternative simplified credit, as an example. As discussed above,
that provision requires a taxpayer to compare its qualified research
expenses during the current year to the expenses it incurred during “the
3 taxable years preceding the taxable year for which the credit is being
determined.” I.R.C. § 41(c)(5)(A). The three-year period described in the
provision is a period of time that is being “used as a standard of
comparison in measuring changes.” In other words, the three-year
period is a “base period” within the ordinary meaning of that phrase.
And so, for a taxpayer that made the section 45C election for each of the
three years included in the base period, section 45C(c)(2), interpreted
according to its ordinary meaning, requires that the taxpayer’s qualified
clinical testing expenses (that are also qualified research expenses) be
24 Section 41(e) describes a longstanding method of calculating the research
credit that is not at issue in this case: the basic research credit under section 41(a)(2).
The basic research credit generally is calculated by using the amount by which a
taxpayer’s payments for basic research during the year exceed its “qualified
organization base period amount.” I.R.C. § 41(e)(1)(A). And the calculation of the
qualified organization base period amount depends in part on certain categories of
expenses incurred during the “base period,” I.R.C. § 41(e)(3)–(5), which is defined (for
purposes of subsection (e)) to mean “the 3-taxable-year period ending with the taxable
year immediately preceding the 1st taxable year of the taxpayer beginning after
December 31, 1983,” I.R.C. § 41(e)(7)(B). Consistent with the definition we describe
above, therefore, the three-year “base period” set out in section 41(e)(7)(B) is a period
of time that the statute employs as a standard for comparison.
16
included when calculating qualified research expenses during that
period. 25
This result follows from the text of the relevant provisions, and
there is nothing unreasonable or illogical about it. Working together,
the two statutory provisions (section 41(c)(5) and section 45C(c)(2))
require taxpayers who have elected the generous orphan drug credit for
prior years to account for that prior-year benefit in calculating their
research credit for the current year. One can conceive of many reasons
why Congress might have taken such an approach, 26 which is identical
to the approach both parties agree it adopted in the original orphan drug
credit.
This analysis resolves the issue before us. See Lamie, 540 U.S.
at 536 (stating that the Supreme Court will follow the plain meaning of
a statute so long as it produces a result that is not absurd). But before
concluding, we address certain arguments United Therapeutics raises.
B. United Therapeutics’ Contrary Arguments Are Not
Persuasive.
United Therapeutics resists the straightforward reading of
sections 41(c)(5) and 45C(c)(2) set out above based on two principal
arguments. First, it maintains that the phrase “base period research
expenses” should be read as a defined term. And, second, it argues that
a consistency rule in section 41(c)(6)(A) trumps the coordination rule in
section 45C(c)(2). Despite United Therapeutics’ skillful presentation,
neither argument carries the day.
1. “Base Period Research Expenses” Is Not a Defined
Term.
We turn first to the claim that the phrase “base period research
expenses” should be read as a defined term. As we have already said,
25 Expressed in terms of the formula in note 8, our interpretation of
section 45C(c)(2) requires qualified clinical testing expenses incurred in the credit year
to be excluded from X. But qualified clinical testing expenses incurred in the three
years preceding the credit year that also are qualified research expenses must be
included in Y1, Y2, and Y3, and must be taken into account in the three-year average
against which X is compared if the taxpayer claimed the orphan drug credit in years
1, 2, and 3.
26 Concerns about the cost of the research credit would be one example. See
infra note 43.
17
sections 41 and 45C as in effect for 2014 do not define that phrase. Nor
does any other provision of the Code in effect for 2014. Why then does
United Therapeutics contend it is a defined term?
United Therapeutics’ claim rests on a prior version of the research
credit provision. Specifically, when Congress first adopted the research
credit in 1981, its computation required the calculation of “base period
research expenses.” 27 That term was defined in then section 44F(c)(1). 28
When Congress first adopted the orphan drug credit in 1983, it used the
same phrase—“base period research expenses”—in section 44H(c)(2).
This, United Therapeutics argues, demonstrates that the phrase “base
period research expenses” as now used in section 45C(c)(2) must have
the defined meaning provided by old section 44F(c)(1). The argument
fails for several reasons.
a. Predecessor Statutes May Not Be Used to
Manufacture Ambiguity.
To begin, we are not interpreting either the research credit or the
orphan drug credit provisions as each existed in 1981 and 1983,
respectively. Those provisions would not entitle United Therapeutics to
the research credit in 2014 because on their face they applied only to
expenses incurred long before 2014 and offered no credits whatever for
2014. See ERTA § 221(d)(1) (“The amendments made by this section
shall apply to amounts paid or incurred after June 30, 1981, and before
January 1, 1986.”); I.R.C. § 44H(e) (1983) (“Termination.—This section
shall not apply to any amount paid or incurred after December 31,
1987.”). Instead, the provisions at issue here are section 41 and
section 45C(c)(2) as they read in 2014. And by then Congress had
removed from the Code the definition of the term “base period research
expenses.” OBRA 1989 § 7110(b), 103 Stat. at 2323–25.
As the Supreme Court has explained, “[t]he starting point in
discerning congressional intent is the existing statutory text, . . . and
not the predecessor statutes.” Lamie, 540 U.S. at 534 (emphasis added).
27 The original research credit was calculated using the amount by which a
taxpayer’s qualified research expenses for the tax year exceeded its “base period
research expenses.” I.R.C. § 44F(a) (1981).
28 Section 44F(c)(1) (1981) provided in part as follows: “For purposes of this
section . . . [t]he term ‘base period research expenses’ means the average of the
qualified research expenses for each year in the base period.” And the base period was
“the 3 taxable years immediately preceding the taxable year for which the
determination is being made.” Id. para. (2)(A).
18
We interpret undefined terms in the existing text in accordance with
their ordinary meaning at the time Congress adopted them. Niz-
Chavez, 141 S. Ct. at 1480. And when that meaning is clear and
produces a nonabsurd result, our analysis is finished. See Lamie, 540
U.S. at 534.
Here, the adopting time is either the last time (before 2014)
Congress made relevant substantive changes to the orphan drug credit
or the time Congress extended the research credit to apply to expenses
incurred in 2014. As to the first option, one possible choice is 1996, the
year when Congress reinstated the orphan drug credit, moved it, and
made it subject to the limitations applicable to general business credits.
See infra pp. 24–25. A second possible choice is 1997, when Congress
made the credit permanent (that is, applicable to qualified clinical
testing expenses incurred in subsequent years, including 2014). As to
the second option, the relevant time is 2014, the year when Congress
made the research credit applicable to qualified research expenses
incurred in 2014. But regardless of which option is chosen, by the
relevant time, the definition of the term “base period research expenses”
provided in old section 44F(c)(1) (and later in old section 30(c)(1) and
section 41(c)(1), see the research credit history discussed in note 33
below) had been missing from the Code for seven years at the very
least. 29 Accordingly, United Therapeutics’ argument that the existing
text of section 45C(c)(2) somehow still incorporates the old definition is
incorrect. 30
29 We point to these alternate timeframes because the coordination rule of
section 45C(c)(2) could be viewed either as a limiting condition on the orphan drug
credit (i.e., a taxpayer electing to claim the more generous benefits of the orphan drug
credit must in effect accept a haircut to its otherwise available research credit) or as
an inherent condition of the research credit (i.e., the research credit is calculated a
certain way when a taxpayer meets a specific condition, namely, that it elected to claim
the orphan drug credit during a year included in the base period). We need not decide
here which of these alternatives is the proper one as the outcome in this case is the
same under either.
30 United Therapeutics also invokes Treasury Regulation § 1.41-3A in support
of its position. Specifically, it argues both (1) that the regulation confirms “base period
research expenses” is a concept applicable only to years before 1990 and (2) that the
2001 redesignation of the regulation reflects agreement by the Department of the
Treasury (Treasury) and the Internal Revenue Service (IRS) that the concept no longer
applies. But, as United Therapeutics concedes, the regulation says on its face that it
does not apply for taxable years after 1989. See Treas. Reg. § 1.41-1(b); T.D. 8930,
2001-1 C.B. 433, 443, 66 Fed. Reg 280, 289 (Jan. 3, 2001). If predecessor statutes do
19
The analysis above faithfully follows the Supreme Court’s
analysis in Lamie, 540 U.S. 526, where the Court considered a question
arising under the Bankruptcy Code. In Lamie, a bankruptcy attorney
had sought compensation under section 330(a)(1) of the Bankruptcy
Code, 11 U.S.C., which governs court awards of professional fees. His
application was denied, and a challenge followed. The attorney’s
argument turned on the text of 11 U.S.C. § 330(a) before and after an
amendment made by the Bankruptcy Reform Act of 1994 (1994 Act), 108
Stat. 4106. 31
The Supreme Court described the attorney’s argument as follows:
[The debtor’s attorney] argues that the existing
statutory text is ambiguous . . . . He makes the case for
not cast doubt on the meaning of an existing statute’s text, see Lamie, 540 U.S. at 534,
then we fail to see how a predecessor regulation could do so. Moreover, for years after
1990, Treasury and the IRS simply have not spoken regarding the meaning of “base
period research expenses.” The 2001 redesignation of the regulation was simply an
acknowledgment that the research credit had been amended. Silence by Treasury and
the IRS is no concession as to the nature of the amended statute. In other words,
administrative confirmation that a regulation interpreting a predecessor statute
applies to the period the predecessor statute was in effect does not constrain future
interpretations of another statute.
31 Before the 1994 Act, 11 U.S.C. § 330(a) read as follows (emphasis added to
highlight text later deleted):
(a) After notice to any parties in interest and to the United
States trustee and a hearing, and subject to sections 326, 328, and 329
of this title, the court may award to a trustee, to an examiner, to a
professional person employed under section 327 or 1103 of this title, or
to the debtor’s attorney—
(1) reasonable compensation for actual, necessary services
rendered by such trustee, examiner, professional person, or attorney
. . . and by any paraprofessional persons employed by such trustee,
professional person, or attorney . . . ; and
(2) reimbursement for actual, necessary expenses.
Pursuant to the 1994 Act, § 224(b), 108 Stat. at 4130, 11 U.S.C. § 330(a)(1) was
amended to read as follows:
(a)(1) After notice to the parties in interest and the United
States Trustee and a hearing, and subject to sections 326, 328, and 329,
the court may award to a trustee, an examiner, a professional person
employed under section 327 or 1103—
(A) reasonable compensation for actual, necessary services
rendered by the trustee, examiner, professional person, or attorney and
by any paraprofessional person employed by any such person; and
(B) reimbursement for actual, necessary expenses.
20
ambiguity, for the most part, by comparing the present
statute with its predecessor. Thus, he says the statute is
ambiguous because subsection (A)’s “attorney” is “facially
irreconcilable” with the section’s first part since
“[e]ither Congress inadvertently omitted the
‘debtor’s attorney’ from the ‘payees’ list, on which
the court of appeals relied, or it inadvertently
retained the reference to the attorney in the latter,
‘payees’ list.” Brief for Petitioner 17.
Similarly, with respect to the missing conjunction “or” he
says,
“[t]here is no apparent reason, other than a drafting
error, that Congress would have rewritten the
statute to produce a grammatically incorrect
provision.” Ibid.This is the analysis followed by the Courts of
Appeals that hold the statute is ambiguous. . . . One
determines ambiguity, under this contention, by relying on
the grammatical soundness of the prior statute. That
contention is wrong.
Lamie, 540 U.S. at 533–34.
The Court went on to observe:
The starting point in discerning congressional intent
is the existing statutory text, see Hughes Aircraft Co. v.
Jacobson, 525 U.S. 432, 438 (1999), and not the predecessor
statutes. It is well established that “when the statute’s
language is plain, the sole function of the courts—at least
where the disposition required by the text is not absurd—
is to enforce it according to its terms.” Hartford
Underwriters Ins. Co. v. Union Planters Bank, N. A., 530
U.S. 1, 6 (2000) (internal quotation marks omitted)
(quoting United States v. Ron Pair Enterprises, Inc., 489
U.S. 235, 241 (1989), in turn quoting Caminetti v. United
States, 242 U.S. 470, 485 (1917)). So we begin with the
present statute.
21
Id. at 534. And turning to that “present statute,” the Court noted: “The
statute is awkward, and even ungrammatical; but that does not make it
ambiguous on the point at issue.” Id.The “present” statutory provisions before us (those in effect for
2014) are not in the least bit “awkward” or “ungrammatical.” In these
circumstances, there is even less reason than in Lamie to consult
predecessor versions of the statute.
In short, United Therapeutics invites us to reject the ordinary
(not to mention straightforward and nonabsurd) meaning of an existing
statute in favor of a predecessor definition that Congress removed from
the Code in 1989. Seeing nothing in the existing statute’s text that
authorizes such a rejection, we decline.
b. Even the Predecessor Statutes Do Not Require
United Therapeutics’ Preferred Result.
As a further point, we are not persuaded that United
Therapeutics’ argument works even on its own terms. That is, even if
we were to conduct the relevant statutory analysis as of 1983, the time
the orphan drug credit and the coordination rule at issue here were first
adopted, we would not be sure that Congress used the phrase “base
period research expenses” as a defined term. At that time,
section 44H(c)(2) (the predecessor of section 45C(c)(2)) read as follows:
Expenses included in determining base period research
expenses.—Any qualified clinical testing expenses for any
taxable year which are qualified research expenses (within
the meaning of section 44F(b)) shall be taken into account
in determining base period research expenses for purposes
of applying section 44F to subsequent taxable years.
Note that, when addressing “qualified research expenses,” Congress was
careful to indicate that it meant such expenses “within the meaning of
section 44F(b).” But when it addressed “base period research expenses,”
Congress did not direct the reader to the specific definition in
section 44F(c)(1). Courts presume that when Congress includes certain
language in one provision but omits it in another, the inclusion and
exclusion are intentional. See Loughrin v. United States, 573 U.S. 351,
358 (2014) (“We have often noted that when ‘Congress includes
particular language in one section of a statute but omits it in another’—
let alone in the very next provision—this Court ‘presume[s]’ that
Congress intended a difference in meaning.” (quoting Russello v. United
22
States, 464 U.S. 16, 23 (1983))); see also Henson v. Santander Consumer
USA Inc., 137 S. Ct. 1718, 1723 (2017) (same). All the more so when the
relevant language is missing in the very same sentence. 32 See Loughrin,
573 U.S. at 358. Thus, textual clues from 1983 support the view that
the phrase “base period research expenses” should be given its ordinary
meaning, rather than a special, defined, meaning.
c. Other Principles Refute United Therapeutics’
Position. 33
To complicate matters further for United Therapeutics’ position,
repeals by implication are disfavored. See Posadas v. Nat’l City Bank of
N.Y., 296 U.S. 497, 503 (1936) (“Where there are two acts upon the same
subject, effect should be given to both if possible.”); see also id.(discussing the standard for implied repeals); Lockhart v. United States,
546 U.S. 142, 149 (2005) (Scalia, J., concurring) (same). When, in 1989,
Congress amended the research credit to delete the definition of “base
period research expenses,” it left the same phrase in section 28(c)(2) (the
predecessor of section 45C(c)(2)) untouched. United Therapeutics
maintains that this congressional action rendered section 28(c)(2)
inapplicable. But it is not clear to us why section 28(c)(2) should be
interpreted as having been left with no work to do (that is, as having
been effectively repealed by the changes in the research credit) since
1989 when, as we discuss above, it is not difficult at all to apply the text
32Note also that the definition provided in section 44F(c)(1) explicitly states
that the definition is provided “[f]or purposes of this section.” Given that limiting
phrase, one would expect Congress to tell us if it wished to give an undefined term in
another section the same meaning.
33 Summarizing a few changes Congress made to the research and orphan drug
credits between 1983 and 1989 helps provide context for the discussion that follows.
In 1984, Congress reorganized the credits by “group[ing them] together in [a] more
logical order.” DEFRA § 471. The orphan drug credit (previously found in section 44H)
was moved to new section 28, and the research credit (previously found in section 44F)
was moved to new section 30. Id. § 471(c), 98 Stat. at 826. Then, in 1986, the research
credit was moved yet again, this time to section 41 (where it remains today). TRA 1986
§ 231(d)(2), 100 Stat. at 2178. One reason for the change was to treat the research
credit in the same manner as other business credits. Id. § 231(d)(1), 100 Stat. at 2178.
With these changes, the definition of the term “base period research expenses” came
to be found in section 41(c)(1). Then, in 1989, Congress amended section 41(c)(1) in its
entirety, which resulted in the definition of the term “base period research expenses”
(previously included in section 41(c)(1)) being removed from the Code altogether. But
Congress left the phrase “base period research expenses” in section 28(c)(2) (the
predecessor of section 45C(c)(2)) untouched.
23
of that section and its successors to the amended text of section 41. 34
United Therapeutics says that there is a difference between a provision’s
having been made inapplicable and implied repeal. On the facts of this
case, we are unable to see what that distinction would be. 35
Even if we were to overlook the law’s aversion to implied repeals,
United Therapeutics’ position runs afoul of another “‘cardinal principle’
of interpretation.” See Loughrin, 573 U.S. at 358 (quoting Williams v.
Taylor, 529 U.S. 362, 404 (2000)). In reading the Code as it applied for
2014, we “must give effect, if possible, to [its] every clause and word.” 36
Id. (quoting Williams, 529 U.S. at 404); Advoc. Health Care Network v.
Stapleton, 581 U.S. 468, 478 (2017) (same); see also Sutherland v.
Commissioner, 155 T.C. 95, 104 (2020). Our interpretation of
section 45C(c)(2) follows this principle. United Therapeutics, on the
other hand, reads section 45C(c)(2) as a dead letter. The Code’s text and
structure do not support, let alone require, such a reading.
34 That Congress not only left section 28(c)(2) intact in 1989, but also
renumbered it later when it moved the orphan drug credit to section 45C, see infra
pp. 24–25, further undercuts the view that the provision was impliedly repealed.
35 United Therapeutics also faults the Commissioner for not pointing to “[any]
evidence, let alone clear evidence, indicating that Congress intended to amend the
limited exception set forth in section 45C(c)(2) to apply to the new and different
section 41 research credit when Congress overhauled section 41 in 1989.” Pet’r’s
Answering Br. 13. But there was no need for Congress to amend section 28(c)(2) (the
predecessor of section 45C(c)(2)) or section 45C(c)(2) itself to apply to changes in the
research credit. The existing text, which (as we have explained) did not use a defined
term, is sufficiently broad to cover new methods of determining the research credit.
This fully explains why Congress both left the provision in the statute in 1989 and did
not change it thereafter, including in 2006 when it adopted the alternative simplified
method that United Therapeutics used in 2014. See also infra pp. 27–29.
36 As the Supreme Court has maintained for nearly 150 years,
we are not at liberty . . . to deny effect to a part of a statute. No rule of
statutory construction has been more definitely stated or more often
repeated than the cardinal rule that “significance and effect shall, if
possible, be accorded to every word. As early as in Bacon’s Abridgment,
sect. 2, it was said that ‘a statute ought, upon the whole, to be so
construed that, if it can be prevented, no clause, sentence, or word shall
be superfluous, void, or insignificant.’”
Petition of Pub. Nat’l Bank of N.Y., 278 U.S. 101, 104 (1928) (quoting Washington
Market Co. v. Hoffman, 101 U.S. 112, 115 (1879)).
24
A more in-depth look at the history of the relevant provisions
further refutes United Therapeutics’ position. 37 We have already
discussed changes Congress made to both credits from 1983 to 1989. See
supra note 33. Between the 1989 amendments to the research credit
that United Therapeutics highlights and the end of 2014, Congress
amended the research credit at least 16 times 38 and the orphan drug
credit at least 14 times. 39 Many of the amendments to both credits were
minor, but others were significant.
As an example, Congress, which had previously renewed the
research credit and the orphan drug credit every few years, allowed
them both to expire effective July 1, 1995, for the research credit and
December 31, 1994, for the orphan drug credit. It revived the credits in
1996, but not retroactively. Thus, there was a period from 1995 to 1996
when neither credit was available. See I.R.C. § 41(h)(1)(A) (1996)
(providing that section 41 “shall not apply to any amount paid or
incurred . . . after June 30, 1995, and before July 1, 1996”); I.R.C.
§ 45C(e)(1) (1996) (providing the same for “any amount paid or incurred
. . . after December 31, 1994, and before July 1, 1996”). And while
Congress made the orphan drug credit permanent in 1997, it continued
to extend the research credit every few years, sometimes retroactively,
until ultimately making the credit permanent in 2015. See Consolidated
Appropriations Act, 2016, Pub. L. No. 114-113, div. Q, § 121(a), 129 Stat.
2242, 3049 (2015).
Moreover, when Congress revived the credits in 1996 following
their lapse, it simultaneously made changes to both. For example,
Congress modified the orphan drug credit by moving it from section 28
to section 45C, thereby subjecting it to the rules and limitations that
apply to general business credits, see I.R.C. § 38, changing the
termination and carryback provisions to reflect the credit’s lapse, and
making other conforming amendments, see SBJPA § 1205. With respect
to the research credit, Congress modified the definition of the term “base
37 The “history [we] have in mind here . . . [is] the record of enacted changes
Congress made to the relevant statutory text over time, the sort of textual evidence
everyone agrees can sometimes shed light on meaning.” BNSF Ry. Co. v. Loos, 139
S. Ct. 893, 906 (2019) (Gorsuch, J., dissenting) (citing United States v. Wong Kim Ark,
169 U.S. 649, 653–54 (1898)).
For a discussion of the amendments, see Kendall B. Fox et al., Research and
38
Development Expenditures, 556-3rd Tax Mgmt. (BNA) at X.B (Sept. 30, 2019).
39 Nearly all the amendments were made by the same statutes that amended
the research credit. See supra note 38.
25
amount” as it applies to startup companies, provided for the election of
the alternative incremental credit, and increased the credit available for
certain contract research expenses, among others. See id. § 1204, 110
Stat. at 1773–75. And Congress continued to tinker with the research
credit over the years, including, as United Therapeutics points out,
adding the alternative simplified credit as an option for calculating the
credit in 2006. See TRHCA § 104(c), 120 Stat. at 2935.
All of this goes to show that, between 1989 and 2014, Congress
had a number of opportunities to delete or modify the reference to base
period research expenses in section 45C(c)(2) if it was in fact deadwood.
These opportunities included, among many others, 2014 (the
amendments that made the research credit available for 2014 and made
a conforming change to section 45C), 2006 (the amendments that added
the alternative simplified method to the research credit and updated a
provision of the orphan drug credit), and 1996 (the amendments that
resurrected both credits and made other changes). See infra Appendix.
But with every amendment, Congress left section 45C(c)(2) intact.
Congress’s choice in this regard, a choice that it made over and
over in the years leading up to 2014, suggests that it was happy with
the text of section 45C(c)(2), including the reference to base period
research expenses. New York ex rel. N.Y. State Off. of Child. & Fam.
Servs. v. U.S. Dep’t of Health & Hum. Servs.’ Admin. for Child. & Fams.,
556 F.3d 90, 99 (2d Cir. 2009) (even “edit[s that] may appear small” are
“sufficient” to “demonstrate[] that [one statutory provision] did not
escape Congress’s notice at the time it amended [another statutory]
provision” and a contrary inference would be “unreasonable”).
This statutory history also explains in part why United
Therapeutics’ reliance on Wisconsin Central, 138 S. Ct. 2067, is
misplaced. That decision undercuts, rather than supports, United
Therapeutics’ position here. In Wisconsin Central, the Supreme Court
was called upon to interpret a term contained in a statute that, in
relevant part, had been left unchanged since its adoption in 1937. In
giving the relevant term the meaning it had in 1937, the Court observed:
Written laws are meant to be understood and lived by. If a
fog of uncertainty surrounded them, if their meaning could
shift with the latest judicial whim, the point of reducing
them to writing would be lost. That is why it’s a
“fundamental canon of statutory construction” that words
generally should be “interpreted as taking their ordinary,
26
contemporary, common meaning . . . at the time Congress
enacted the statute.” Perrin, 444 U.S., at 42. Congress
alone has the institutional competence, democratic
legitimacy, and (most importantly) constitutional
authority to revise statutes in light of new social problems
and preferences. Until it exercises that power, the people
may rely on the original meaning of the written law.
Wis. Cent. Ltd., 138 S. Ct. at 2074.
What the Supreme Court observed should happen through the
legislative process is exactly what Congress has done with respect to the
research and orphan drug credits. That constitutionally authorized
body has repeatedly “exercise[d] [its] power” “to revise” the terms under
which the research and orphan drug credits are made available “in light
of new social problems and preferences.” Id. And, as we have already
explained, the statute that made the credit available for the year at
issue also left in place the coordination provision that United
Therapeutics urges us to read as a nullity. So, following United
Therapeutics’ lead would require that we ignore “the ordinary,
contemporary, common meaning” of the duly enacted statute that gave
United Therapeutics the very benefit it seeks. That we will not do. “[A]
judge’s job [is] only to apply, not revise or update, the terms of statutes.”
Id. (citing Wis. Cent. Ltd. v. United States, 856 F.3d 490, 493 (7th Cir.
2017) (Manion, J., dissenting), rev’d and remanded, 138 S. Ct. 2067); see
also New Prime Inc. v. Oliveira, 139 S. Ct. 532, 539 (2019) (interpreting
the undefined term “contract of employment” as used in the Federal
Arbitration Act based on that term’s meaning at the time of the Act’s
adoption in 1925 when (unlike here) the relevant provisions had been
left unchanged by Congress).
United Therapeutics’ reliance on Wisconsin Central is misplaced
for another, perhaps more fundamental, reason. That case, the cases on
which it relied, and the cases that followed it all concerned the proper
interpretation of an undefined term. They all answered the question
“what should a court do when the statute does not define the meaning
of a relevant term at the time of its enactment?” They neither
confronted nor answered the question “what should a court do when
Congress removes from the statute a definition that might have been
viewed as supplying the meaning of what a party claims to be a ‘defined’
term that remains in the statute?”
27
Our case implicates the latter question. In United Therapeutics’
telling, the phrase “base period research expenses” was a defined term
when it was first adopted and retains that defined meaning even after
Congress eliminated the relevant definition from the statute. United
Therapeutics cites no authority for this proposition.
Nor does its position make sense in light of the concerns that
animate Wisconsin Central and like cases. As the Supreme Court
observed in New Prime Inc., 139 S. Ct. at 539:
[I]f judges could freely invest old statutory terms with new
meanings, we would risk amending legislation outside the
“single, finely wrought and exhaustively considered,
procedure” the Constitution commands. INS v. Chadha,
462 U.S. 919, 951 (1983). We would risk, too, upsetting
reliance interests in the settled meaning of a statute. Cf.
2B N. Singer & J. Singer, Sutherland on Statutes and
Statutory Construction § 56A:3 (rev. 7th ed. 2012).
The circumstances before us do not involve the Court’s giving an
undefined statutory term a meaning different from the ordinary
meaning it would have had at the time of its adoption, thus interfering
with the “single, finely wrought and exhaustively considered, procedure”
for amending a statute. They involve instead a party inviting the Court
to treat an undefined term as if it were defined, ignoring a congressional
enactment that eliminated the potentially relevant definition from the
Code, contrary to the considerations set out in New Prime Inc., and
further ignoring repeated amendments to the statute. In short, neither
Wisconsin Central nor any other authority United Therapeutics cites
supports what United Therapeutics asks us to do.
Also weighing against United Therapeutics’ position is the 111th
Congress’s enactment, in 2010, of a new credit that relied on the same
language as that used in section 45C(c)(2). Specifically, as part of the
Patient Protection and Affordable Care Act, Pub. L. No. 111-148,
§ 9023(a), 124 Stat. 119, 877 (2010), the 111th Congress enacted a new
“qualifying therapeutic discovery project credit” under section 48D. And
it included in the new credit, in a paragraph entitled “Denial of a double
benefit,” the following coordination rule, with language nearly identical
to that in section 45C(c):
(i) In general.—Except as provided in clause (ii), any
expenses taken into account under this section for a
28
taxable year shall not be taken into account for purposes of
determining the credit allowable under section 41 or 45C
for such taxable year.
(ii) Expenses included in determining base period
research expenses.—Any expenses for any taxable year
which are qualified research expenses (within the meaning
of section 41(b)) shall be taken into account in determining
base period research expenses for purposes of applying
section 41 to subsequent taxable years.
I.R.C. § 48D(e)(2)(C) (2010). If section 45C(c)(2) has been a dead letter
since 1989 because of its reference to “base period research expenses,”
one would not expect Congress to have used the same language for a
new credit in 2010. And that same Congress, which was far closer in
time to 2014 than the 1989 Congress whose actions United Therapeutics
invokes, later amended section 45C itself without modifying the
coordination rule in subsection (c)(2). See Tax Relief, Unemployment
Insurance Reauthorization, and Job Creation Act of 2010, Pub. L. No.
111-312, § 731(b), 124 Stat. 3296, 3317; cf. New Prime Inc., 139 S. Ct.
at 540 (“More confirmation yet comes from a neighboring term in the
statutory text.”).
Of course, we do not consider the actions of the 111th Congress as
deciding the meaning of statutory provisions adopted by prior or future
Congresses. See United States v. Price, 361 U.S. 304, 313 (1960) (“[T]he
views of a subsequent Congress form a hazardous basis for inferring the
intent of an earlier one.”). We mention them only to highlight that the
atextual reading of section 41 and section 45C that United Therapeutics
presses here (that the phrase “base period research expenses” refers to
a concept that has been inapplicable from 1989 on) does not appear to
have been shared by the 111th Congress or the Senate Finance
Committee. 40
United Therapeutics insisted at the oral argument we held on
January 25, 2023, that the coordination rule of old section 28(c)(2) and
its successor section 45C(c)(2) remained in the Code because of an
“oversight.” Tr. 28:5. In its view, Congress’s “failure to delete it was not
a deliberate choice that [Congress] wanted this section to continue to
40 See S. Rep. No. 111-89, at 363 n.149 (2009) (describing the provision that
later became section 48D and noting that “[a]ny expenses for the taxable year that are
qualified research expenses under section 41(b) are taken into account in determining
base period research expenses for purposes of computing the research credit under
section 41 for subsequent taxable years” (emphasis added)).
29
have life and applicability. It was simply a failure to make a
corresponding change to section 45C when it overhauled section 41.”
Tr. 28:14–18. This, United Therapeutics says, “[h]appens fairly often.”
Tr. 28:12. But we do not interpret statutory enactments by assuming
that Congress made mistakes and failed to express in the statutory text
what it wished to accomplish. To the contrary, “[w]e ‘must presume that
[the] legislature says in a statute what it means and means in a statute
what it says there.’” Dodd v. United States, 545 U.S. 353, 357 (2005)
(quoting Conn. Nat’l Bank v. Germain, 503 U.S. 249, 253–54 (1992)); see
also Russello, 464 U.S. at 23 (“We would not presume to ascribe this
difference to a simple mistake in draftsmanship.”); United States ex rel.
Totten v. Bombardier Corp., 380 F.3d 488, 496 (D.C. Cir. 2004)
(Roberts, J.) (“In the final analysis, we can remain agnostic on the
question whether Congress intentionally left the presentment
requirement in [the relevant statute] or simply forgot to take it out. The
suggestion that Congress may have ‘dropped a stitch,’ [United States ex
rel. Yesudian v. Howard Univ., 153 F.3d 731, 738 (D.C. Cir. 1998),] is
not enough to permit us to ignore the statutory text.”).
In short, United Therapeutics’ contentions concerning the
statutory provisions as they existed before 1989 and the changes made
in 1989, while understandable in light of the outcome it wishes to
achieve, do not provide valid reasons for ignoring the straightforward
and ordinary meaning of the statutory text that applies for 2014.
2. The Consistency Rule of Section 41(c)(6)(A) Does Not
Require a Different Outcome.
United Therapeutics next argues that the consistency rule of
section 41(c)(6)(A) mandated its approach. Congress added the
consistency rule to section 41 in 1989, when it replaced the definition of
“base period research expenses” with a new “base amount” concept.
Because the consistency rule pertains to the calculation of the base
amount, some background regarding that concept is useful in
understanding the rule.
Since the 1989 amendments to the research credit and through
2014, section 41 has provided that one component of the credit is an
amount equal to 20% of the taxpayer’s qualified research expenses for
the year over the “base amount.” I.R.C. § 41(a)(1). The base amount is
the product of the taxpayer’s “fixed base percentage” and its average
gross receipts for the four years preceding the credit year. I.R.C.
§ 41(c)(1). In general, the fixed base percentage is “the percentage which
30
the aggregate qualified research expenses of the taxpayer for taxable
years beginning after December 31, 1983, and before January 1, 1989,
is of the aggregate gross receipts of the taxpayer for [those] years.”
I.R.C. § 41(c)(3)(A).
The consistency rule applies to the calculation of a taxpayer’s
fixed base percentage. It provides that “the qualified research expenses
taken into account in computing such percentage shall be determined
on a basis consistent with the determination of qualified research
expenses for the credit year.” I.R.C. § 41(c)(6)(A).
The consistency rule (as it appears in the statute) refers only to
the fixed base percentage and does not, on its face, apply when
calculating the alternative simplified credit. But, after Congress
enacted the alternative simplified credit in 2006, Treasury and the IRS
promulgated a regulation that extended the consistency rule. The
regulation provides as follows:
Treas. Reg. § 1.41-9 Alternative simplified credit.
....
(c) Special rules. . . .
....
(2) Section 41(c)(6) applicability. [Qualified
research expenses] for the three taxable years
preceding the credit year must be determined on a
basis consistent with the definition of [qualified
research expenses] for the credit year, without
regard to the law in effect for the three taxable years
preceding the credit year. This consistency
requirement applies even if the period for filing a
claim for credit or refund has expired for any of the
three taxable years preceding the credit year.
United Therapeutics argues that this rule requires consistency in
calculating the two components of the alternative simplified credit—i.e.,
that it does not permit qualified clinical testing expenses to be excluded
in qualified research expenses for the credit year but included for the
three preceding years. Again, we disagree.
First, to the extent United Therapeutics relies on the statutory
consistency rule, that provision does the company no good. As United
Therapeutics appears to recognize, the consistency rule in
section 41(c)(6)(A) applies only when calculating a taxpayer’s fixed base
31
percentage, a concept that had no relevance in calculating the company’s
alternative simplified credit.
Second, we disagree with United Therapeutics’ interpretation of
the regulation, which says simply that taxpayers must apply the same
definition of qualified research expenses to the credit year and the three
preceding years even if there has been a change in law. In other words,
if the definition of qualified research expenses, which is provided in
section 41(b), changes during the relevant years, the regulation requires
taxpayers to apply the credit year definition in identifying its qualified
research expenses for all four years. Nothing in the regulation purports
to override the coordination rule of section 45C(c), which does not
address the definition of qualified research expenses other than by
referring back to section 41(b). Rather, section 45C(c) provides a special
rule for how a certain category of qualified research expenses—those
that are also qualified clinical testing expenses—must be treated after
they are identified.
Third, to the extent United Therapeutics intends to use the
statutory consistency rule as a textual clue supporting its reading of
section 45C(c)(2), that effort also comes up short. We see no conflict
between the statutory consistency rule and section 45C(c)(2). Instead,
we read the statutory consistency rule the same way Treasury and the
IRS do in their regulations, and the same way the U.S. Court of Appeals
for the Fifth Circuit read it in Trinity Industries, Inc. v. United States,
757 F.3d 400 (5th Cir. 2014). That is, the rule simply requires that the
definition of qualified research expenses, which Congress has changed
over the years, be applied consistently across the credit year and the
years in the reference period. See Treas. Reg. § 1.41-3(d)(1) (requiring
qualified research expenses “[to] be determined on a basis consistent
with the definition of qualified research expenses . . . for the credit year,
without regard to the law in effect for the taxable years taken into
account in computing the fixed-base percentage or the base amount”);
see also Trinity Indus., Inc., 757 F.3d at 411–12 (“In sum, the consistency
rule calls for consistent application of the [qualified research expense]
definition across the base period years and the claim year . . . .”). 41 This
straightforward reading of the statute gives effect to both
section 41(c)(5) and section 45C(c)(2), unlike United Therapeutics’
preferred reading. See Epic Sys. Corp. v. Lewis, 138 S. Ct. 1612, 1624
(2018) (“When confronted with two Acts of Congress allegedly touching
41 United Therapeutics cites Trinity Industries in support of its position, but
that case interprets the consistency rule the same way we do here.
32
on the same topic, this Court is not at ‘liberty to pick and choose among
congressional enactments’ and must instead strive ‘to give effect to
both.’” (citing Morton v. Mancari, 417 U.S. 535, 551 (1974))).
Moreover, even assuming for the sake of argument that the
consistency rule of section 41(c)(6) conflicts with the coordination rule of
section 45C(c)(2) in certain circumstances, 42 section 45C(c)(2) would
prevail under “the specific governs the general” rule of statutory
interpretation. See RadLAX Gateway Hotel, LLC v. Amalgamated
Bank, 566 U.S. 639, 645 (2012) (“[I]t is a commonplace of statutory
construction that the specific governs the general.” (quoting Morales v.
Trans World Airlines, Inc., 504 U.S. 374, 384 (1992))); see also Antonin
Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal
Texts 183–88 (2012). Section 41(c)(6) is a general rule that applies to all
taxpayers computing the incremental research credit, whereas
section 45C(c)(2) applies only to taxpayers who elect to claim the orphan
drug credit in addition to the research credit. Accordingly,
section 45C(c)(2), which may marginally reduce the overall benefit of
both credits for taxpayers who claim the orphan drug credit, is the more
specific rule in this context and would control in the event of a conflict.
3. Policy Considerations Cannot Change the Clear
Directive of the Relevant Provisions.
United Therapeutics also appears to offer a policy argument in
support of its position. Its opening brief observes that, in adopting the
orphan drug credit,
Congress aimed to encourage the development of
desperately needed treatments. See H.R. Rep. No. 101-247,
at 1199 (noting that the House Committee on the Budget
“modified the method of calculating a taxpayer’s base
amount in order to enhance the credit’s incentive effect”).
That objective would be frustrated by reducing the
section 41 research credit based on a company’s
incremental investment in clinical testing of orphan drugs.
42 To reiterate a point we made above, the statutory consistency rule applies
only to taxpayers claiming the incremental credit, which relies on the base amount
computation. So, even under United Therapeutics’ interpretation, it would not create
a conflict in this case since United Therapeutics claimed the alternative simplified
credit, not the incremental credit. See supra note 7.
33
Pet’r’s Opening Br. 12–13.
But, “[a]s [the Supreme] Court has explained, ‘even the most
formidable’ policy arguments cannot ‘overcome’ a clear statutory
directive.” BP P.L.C., 141 S. Ct. at 1542 (quoting Kloeckner v. Solis, 568
U.S. 41, 56 n.4 (2012)). Moreover,
[t]hat a law might temper its pursuit of one goal [for
example, the encouragement of desperately needed
treatments] by accommodating others [for example,
minimizing the budget impact of an incentive provision like
the research credit 43] can come as no surprise. Often
legislation becomes possible only because of such
compromises. Often lawmakers tread in areas fraught
with competing social demands where everyone agrees
trade-offs are required.
Id. at 1539. In the final analysis, we agree that, as United Therapeutics
notes in its Answering Brief at 17, “‘[t]he judicial function is confined to
applying what Congress has enacted after ascertaining what it is that
Congress has enacted.’ Local 1976, United Bhd. of Carpenters & Joiners
v. NLRB, 357 U.S. 93, 100 (1958). Congress’s policy aims are best served
by applying the statute according to its terms . . . .” That is precisely
what we do here.
V. Conclusion
For the reasons stated above, the case must be resolved in favor
of the Commissioner.
To reflect the foregoing,
Decision will be entered for respondent.
43 Concern over the cost of the research credit is a common theme in the
materials that accompany the legislation governing the research credit. See, e.g., H.R.
Rep. No. 101-247, at 1199–1200 (1989), as reprinted in 1989 U.S.C.C.A.N. 1906, 2669–
70 (explaining that changes were made “at the lowest possible revenue cost”); see also
Yin, supra note 5, at 199–202.
34
APPENDIX
Research Credit 44
Date of Effective Dates
Legislation
Enactment
Begin End
Economic Recovery Tax Act of 1981, August 13, December
July 1, 1981
Pub. L. 97-34 1981 31, 1985
Tax Reform Act of 1986, Pub. L. 99- October 22, January 1, December
514 1986 1986 31, 1988
Technical and Miscellaneous Revenue November 10, January 1, December
Act of 1988, Pub. L. 100-647 1988 1989 31, 1989
Omnibus Budget Reconciliation Act of December 19, January 1, December
1989, Pub. L. 101-239 1989 1990 31, 1990
Omnibus Budget Reconciliation Act of November 5, January 1, December
1990, Pub. L. 101-508 1990 1991[ 45] 31, 1991
Tax Extension Act of 1991, Pub. L. December 11, January 1, June 30,
102-227 1991 1992 1992
Omnibus Budget Reconciliation Act of August 10, June 30,
July 1, 1992
1993, Pub. L. 103-66 1993 1995
Small Business Job Protection Act of August 20, May 31,
July 1, 1996
1996, Pub. L. 104-188 1996 1997
Taxpayer Relief Act of 1997, Pub. L. June 1, June 30,
August 5, 1997
105-34 1997 1998
Omnibus Consolidated and
Emergency Supplemental October 21, June 30,
July 1, 1998
Appropriations Act, [1999,] Pub. L. 1998 1999
105-277
Ticket to Work and Work Incentives
December 17, June 30,
Improvement Act of 1999, Pub. L. 106- July 1, 1999
1999 2004
170
44 The tables are reproduced from Respondent’s Supplemental Brief pp. 6–7.
45 The effective date of the relevant provisions was January 1, 1990. Omnibus
Budget Reconciliation Act of 1990, Pub. L. No. 101-508, § 11402(c), 104 Stat. 1388,
1388–473.
35
Working Families Tax Relief Act of October 4, December
July 1, 2004
2004, Pub. L. 108-311 2004 31, 2005
Tax Relief and Health Care Act of December 20, January 1, December
2006, Pub. L. 109-432 2006 2006 31, 2007
Emergency Economic Stabilization October 3, January 1, December
Act of 2008, Pub. L. 110-343 2008 2008 31, 2009
Tax Relief, Unemployment Insurance
December 17, January 1, December
Reauthorization, and Job Creation Act
2010 2010 31, 2011
of 2010, Pub. L. 111-312American Taxpayer Relief Act of 2012, January 2, January 1, December
Pub. L. 112-240 2013 2012 31, 2013
Tax Increase Prevention Act of 2014, December 19, January 1, December
Pub. L. 113-295 2014 2014 31, 2014
Protecting Americans from Tax Hikes December 18, January 1, *Made
Act of 2015, Pub. L. 114-113 2015 2015 Permanent
36
Orphan Drug Credit
Date of Effective Dates
Legislation
Enactment Begin End
January 4, January 1, December
Orphan Drug Act, Pub. L. 97-414
1983 1983 31, 1987
October 22, December
Tax Reform Act of 1986, Pub. L. 99-514 N/A[46]
1986 31, 1990
Omnibus Budget Reconciliation Act of November 5, January 1, December
1990, Pub. L. 101-508 1990 1990[ 47] 31, 1991
Tax Extension Act of 1991, Pub. L. December 11, January 1, June 30,
102-227 1991 1992 1992
Omnibus Budget Reconciliation Act of August 10, July 1, December
1993, Pub. L. 103-66 1993 1992 31, 1994
Small Business Job Protection Act of August 20, July 1, May 31,
1996, Pub. L. 104-188 1996 1996 1997
Taxpayer Relief Act of 1997, Pub. L. August 5, June 1, * Made
105-34 1997 1997 Permanent
46 The effective date of the relevant provisions was January 1, 1983. TRA 1986
§ 1879(b)(3), 100 Stat. at 2906.
47 The relevant section does not appear to include an effective date provision.
Omnibus Budget Reconciliation Act of 1990, § 11411, 104 Stat. at 1388–479.