dissenting. I respectfully disagree with those who support the majority’s opinion because they have chosen to invalidate a regulation which is a literal, accurate, and reasonable interpretation of unambiguous statutory provisions. This matter arose in circumstances under which respondent issued new regulations contrary to his original regulations and position. The superseded regulations had permitted the result being sought by petitioner. Although the majority has not shown that the new regulations are incompatible with the statutory structure, it has invalidated the regulation because of its perception of congressional intent. I cannot support the majority’s holding because: (1) The regulations are unambiguous and in complete accord with an unambiguous statutory framework; (2) the effect of the majority’s invalidation of the regulations will not carry out the congressionally intended result described in the majority opinion; (3) it permits a congressionally unintended benefit to a specific class of taxpayers, which is not available to any other class of taxpayers; and (4) the majority has failed to consider the Supreme Court’s analysis and approach in an analogous and similarly situated case.
Background
The salient factors in this case are as follows:
(1) Petitioner is a savings bank which computes its reserve for losses under section 593. “This section * * * permits a taxpayer broad discretion to determine the amount of the addition to [its] reserve, not to exceed the limits set forth in section 593(b).” The Home Group, Inc. v. Commissioner, 91 T.C. 265, 266 (1988), affd. on other grounds 875 F.2d 377 (2d Cir. 1989).
(2) Petitioner, during the taxable years 1971 through 1977, could have chosen any of several statutorily permitted methods of computing its loss reserve. Some of the methods provide for computation of the reserve based upon actual experience. Another permits the use of an artificial statutorily permitted percentage of taxable income without regard to a taxpayer’s actual loss experience. Petitioner, for its 1971 through 1977 taxable years, used the artificial percentage of taxable income method without regard to its actual loss experience to produce the largest permissible reduction of taxable income — a result envisioned by Congress to permit the flow of additional capital and provide for potential losses.
(3) As much as 10 years later, in 1981 and 1982, petitioner experienced net operating losses which generated a net operating loss deduction (NOLD), which petitioner sought to carry back to the taxable years 1971 through 1977. The NOLD reduces taxable income and may produce a tax refund from the years to which it is carried back. To the extent that the NOLD is not absorbed in the year to which it is carried back, it is carried forward to the next later year with taxable income, and so on. Petitioner wishes to have the benefit of being able to carry the NOLD further forward by applying it against an amount of taxable income in the carryback year which had been reduced by the maximum amount of reserve addition based upon a “taxable income” unreduced by the NOLD. In other words, petitioner wishes us to ignore the fact that taxable income had been reduced in the carryback year by an addition to the loss reserve based upon a percentage of taxable income. Respondent argues that taxable income must first be reduced by the NOLD before the reserve addition may be determined. It should be noted that respondent does not advocate that petitioner receive no allowance for its loss reserve, but that it is not now feasible to compute it based upon the now-reduced amount of taxable income under the computation called for in the questioned regulation. It should also be noted that section 593 provides for alternative methods to compute an addition to the loss reserve without the percentage of taxable income limitation.
The appropriate question posed by these facts is whether petitioner is entitled to the double benefit of carrying back the NOLD and also retaining the artificial and purely mathematical addition to its loss reserve based upon the “pre-NOLD” or unreduced amount of taxable income.1 The answer to this question is to be found in the definition of the term “taxable income.” “Taxable income” is conceptually the bedrock of our income tax system. We must be careful not to weaken this structure by an inconsistent use of the basic principles which have been carefully formulated over the past 75 years. The majority has not shown or stated that the regulations2 it invalidates do not comport with statutes (which are unambiguous on their face). The majority opinion is based upon a view that Congress intended a result opposite to that promulgated in respondent’s regulation, even though the statutory provisions clearly and unambiguously comport with respondent’s regulation. The majority also emphasizes respondent’s 20-year practice of permitting the double benefit prior to promulgation of the regulation in question.3
Congressional Intent
The majority has expended substantial verbiage attempting to persuade us that Congress intended certain savings institutions to enjoy liberal loss reserves, which may result in the freeing of capital. To that extent, there is no disagreement. The disagreement concerns the majority’s reasoning that these intentions are a basis for holding that certain savings institutions should have a more favorable definition or concept of “taxable income” applied to them in instances where they are carrying back a NOLD. No legislative history has been advanced by the majority for such a proposition and the statutes involved, as the majority must admit, do not provide for such a result. The essence of the legislative history advanced by the majority tells us that Congress intended that certain savings institutions, which were once tax-exempt, should be subject to taxation; and that said institutions were originally intended to have broad discretion to enjoy liberal deductions attributable to their loss reserves.
The majority also refers us to the legislative history for the undisputed proposition that the 10-year net operating loss carryback was intended as a substitute for permitting larger loss reserves. This proposition is more properly cited in support of this dissenting view that Congress did not intend to permit both the largest possible reserve and 7 additional years within which to carry back subsequent losses, as petitioner is seeking and the majority has approved in this case. The position advanced by petitioner and approved by the majority is inconsistent with congressional intent concerning the relationship between the 10-year carryback and the more generous percentage of taxable income loss reserve allowance. Therein lies the incongruity and shortcoming of the majority’s logic.
If these institutions Eire to be subject to tax, the definition of “taxable income” utilized for them should be no different than the definition used for other taxpayers, unless specificEilly and congressionally mandated otherwise. Here, in the face of unambiguous statutory provisions, the majority would redefine “taxable income” based upon its own rationalized view of inexplicit congressional intent. It is inappropriate to find an otherwise lucid statute(s) to be ambiguous based upon legislative history (assuming such legislative history existed here).4 Furthermore, it seems inappropriate to look to legislative history underlying prior statutory provisions when Congress has reenacted the provisions in question at a time when the questioned regulations had been published for nearly 8 years — a point for which the majority has already provided ample case support.
Congressional intent to expand or increase reserves or the amount of capital available for loans was fully served in this case. Throughout the period that ended with the net operating loss, petitioner received the benefit of computing its loss reserve allowance based upon a percentage of taxable income unreduced by the NOLD now in issue. By means of the beneficial computation in each of the years 1971 through 1977, petitioner ostensibly reported less taxable income and had more cash to loan while amassing a larger reserve for losses. The current recomputation of a portion of the addition to the reserve does not change the availability of that cash which was likely received by borrowers long before petitioner experienced a net operating loss in the 1980’s. The only direct effect of the current recomputation is to determine the amount of the net operating loss deduction to be absorbed and, hence, the amount of any refund due the taxpayer. The recomputation, as it relates to the allowance for losses and the loss reserve, has no effect on the congressionally intended result.
Moreover, the congressional intent underlying the net operating loss deduction is also fully served by the ability of petitioner to seek refunds or reductions of tax liability from “carryback years” which would be currently available for the congressionally intended purpose of making capital available to the taxpayer who suffered the net operating loss. Here, however, petitioner, in addition to the favorable reserve benefits already received and those still available, asks us to use differing definitions of “taxable income” to provide to it benefits beyond those congressionally mandated. The concept of net operating losses is not unique to petitioner, as is the loss reserve addition permitted by Congress, and we cannot permit special treatment in an area involving a universal concept (like net operating losses or taxable income) without a clear and specific congressional mandate. As pointed out by the majority, the extra benefit relative to operating losses that Congress conferred upon these savings institutions was to permit a 10-year, rather them a 3-year, carryback. No additional benefit is described or should be inferred, including the one sought by petitioner in this case.
The Double Benefit Aspect
The circumstances of this case have a direct and correlative relationship to the situation we considered in The Home Group, Inc. v. Commissioner, 91 T.C. 265 (1988), affd. on other grounds 875 F.2d 377 (2d Cir. 1989). That case also involved the computation of the addition to the loss reserve provided for in section 593. In that case, we permitted a taxpayer to make a choice concerning the amount of loss reserve to utilize because taxable income had increased due to a deficiency resulting from another matter decided adversely to that taxpayer, and hence the possibility for a larger reserve. Here we are confronted with a mirror image situation — the taxable income is reduced by a NOLD and the reserve addition (which is an element necessary to arrive at taxable income) should also be automatically reduced in accord with the statutory and regulatory formula for its computation.
Failure to reduce the loss reserve addition would result in the anomaly of no taxable income in a particular year and a large increase to the reserve for losses based upon a now-fictional amount of taxable income. Because the addition to the reserve results in a deduction used to arrive at taxable income, distortion and incongruity must result. Where a taxpayer’s taxable income increases due to events occurring subsequent to the taxable year in question, that taxpayer’s addition to the loss reserve could increase. The Home Group, Inc. v. Commissioner, supra. Where a taxpayer’s taxable income is to be decreased due to events occurring subsequent to the taxable year in question, pursuant to the majority’s holding, that taxpayer’s addition to the loss reserve would not be reduced.
Moreover, the majority has failed to emphasize (having relegated it to footnote 3 of the majority opinion) that, under respondent’s computation, petitioner will be entitled to a deduction for a reserve allowance based upon one of the other formulae provided in section 593. It is significant to note that petitioner will be entitled to claim the largest deduction permissible under the methods which are not dependent upon gauging the maximum limit upon a percentage of taxable income. This will not place petitioner at a disadvantage in relation to other taxpayers carrying back net operating losses. Indeed, even after calculating the absorption of the loss by the method prescribed in the regulations, petitioner will remain in an advantaged position because it will not lose the ability to offset some amount of the NOLD by means of its statutorily computed addition to its loss reserve. Taxpayers who might lose the ability to claim a contribution deduction because of the interplay of a net operating loss in a particular year are not offered alternative methods of claiming that deduction. Although petitioner may lose the ability to claim the maximum benefit of the more generous percentage of taxable income method of computing its loss allowance, it would remain squarely within the intended congressional framework.
The adjustment to taxable income and resulting reduction to the reserve addition based upon taxable income is practically no different from the mechanical changes that affect “below the line” medical deductions and charitable and other percentage limitations based upon changes to adjusted gross or taxable income. See for example Lustman v. Commissioner, T.C. Memo. 1960-116, affd. 322 F.2d 253 (3d Cir. 1963). Likewise, on occasion, a change in basis may generate a concomitant change in depreciation. Commissioner v. Superior Yarn Mills, 228 F.2d 736 (4th Cir. 1955).
Supreme Court Precedent
In United States v. Foster Lumber Co., 429 U.S. 32 (1976), the Supreme Court considered a strikingly similar interaction between two relief or benefit provisions of the Internal Revenue Code. In that case, the focus, as it is here, centered upon the definition of “taxable income” for purposes of carrying back and applying a NOLD to a prior year. In Foster Lumber, the taxpayer had used an alternative computation of tax liability which was intended to insure that capital gains were not taxed above a certain rate, which rate may be more favorable than the rates on other types of income.
The alternative computation is made separately from the computation of other income, and, for computational purposes only, the amount of taxable income reflected in part of the computation does not include income from capital gains. In Foster Lumber, the alternative computation produced a lower tax than the regular computation. But the interplay of the NOLD from a subsequent year caused the absorption of all taxable income without permitting the benefit of the capital gains tax rate. The question decided by the. Supreme Court was whether capital gain income had to be used as part of taxable income to be absorbed by the NOLD before it was carried to other taxable years.5 The taxpayer argued that it would lose the benefit of the alternative tax computation if the capital gain portion of taxable income was used to absorb a portion of the NOLD. The Government argued that capital gain income was part of taxable income and must be used in the absorption process. The Supreme Court held for the Government.
In so holding, the Supreme Court, in part, rested its decision upon the concept that taxable income includes capital gains and the NOLD must be applied against or absorbed by all taxable income, irrespective of its characterization as ordinary or capital. The Court was cognizant that the use of the alternative tax computation produced a lower tax liability and that capital gains were not, in the computational sense, a part of taxable income when using the alternative capital gains method of computing the tax liability. Accordingly, the Supreme Court in Foster Lumber was forced, as we are in this case, to consider two competing benefits conferred by Congress. Its holding resulted in the taxpayer not receiving the full benefit of the alternative capital gains computation.6
In this case we are also confronted with a situation where there is interplay between two benefit provisions. As in Foster Lumber, carryback loss deductions are involved. Here, however, we consider a provision permitting certain savings institutions to liberally compute their loss reserves. Like the beneficial capital gains rates in Foster Lumber, petitioner had the benefit of a liberal section 593 artificial computation of the addition to its loss reserve based upon a percentage of taxable income. Similarly, the introduction of the net operating loss deduction reduces taxable income, which under the statutes and regulations would reduce the amount of the addition to the loss reserve if computed by the percentage of taxable income method. And finally, and again similar to Foster Lumber, the question concerns the concept or definition of “taxable income.” Unlike Foster Lumber, the petitioner here will receive a congressionally intended deduction which will have the effect of increasing the amount of the NOLD carried to subsequent years. The difference is that the amount carried forward will be somewhat less than the amount petitioner seeks.
As in Foster Lumber, the majority here should have protected the concept of “taxable income” and the internal harmony of the tax code. As in Foster Lumber, the majority should have strived to treat all taxpayers utilizing net operating losses equally, unless there is a contrary and express congressional mandate to treat them otherwise. To have done so would not cause petitioner any overall hardship. If the majority had not invalidated the regulation, petitioner would have been treated, at very least, equal to other taxpayers who incurred net operating loss deductions. Instead, the majority’s invalidation of the section 593 regulations here will permit petitioner a refund which is larger than the amount to which it is entitled. Moreover, the excess refund will not, in all circumstances, be recouped in some future taxable year. This is not simply a matter of timing.
I respectfully submit that petitioner should not be permitted to utilize an addition to its loss reserve based upon a concept of taxable income not specifically mandated in the statutes and/or unavailable to all taxpayers equally.
PARKER, JACOBS, PARR, and RUWE, JJ., agree with this dissent.This is a double benefit because it would permit the benefits of the NOLD and the unreduced loss reserve at the same time. These benefits may both exist only if inconsistent concepts of taxable income are used. Moreover, as explained infra, the NOLD and addition to the loss reserve represent concepts which Congress intended to be inversely proportional, so that if one is larger, the other, by design, must be smaller. Here petitioner seeks for them both to be utilized without considering the other.
The record is silent on whether petitioner’s particular accounting method with regard to reporting of actual losses or recoveries could result in the potential for double deductions. For purposes of this discussion it is assumed that the question of potential double deductions is not involved and should not be considered.
Rhe regulations require the reduction of taxable income by NOLD’s and the recomputation of the addition to the reserve based upon the reduced amount of taxable income. In a recent opinion we held that taxpayers were permitted broad discretion to choose among the various methods for computing their reserve under sec. 593. The Home Group, Inc. v. Commissioner, 91 T.C. 265 (1988), affd. on other grounds 875 F.2d 377 (2d Cir. 1989). In that Court-reviewed opinion we permitted a taxpayer to select the method it wished for a 1969 taxable year during a 1988 controversy over the computation of a deficiency under Rule 155 of our Rules of Practice and Procedure.
Respondent’s inconsistent positions, whether expressed in revenue rulings or contained in superseded regulations, should be afforded little or no weight. To give credence to respondent’s longstanding positions as a basis for holding a regulation valid or invalid, if equally applied in other settings, may place us in a position of treating respondent’s longstanding positions as correct by means of prescriptive preemption. If the regulations in question comport with the statute and congressional intent, should they be invalidated because of respondent’s longstanding position or interpretation to the contrary?
The majority has proceeded a step beyond using the legislative history to assist in understanding a statutory provision. Indeed, without a supporting statutory provision or an ambiguity in the one the regulation tracks, the majority has devised a self-serving version of congressional intent. Commentators have cautioned us to be leery of congressional commentary even where it directly addresses the statutory matter. See Justice Scalia’s comments in his concurring opinion in Blanchard v. Bergeron, 489 U.S. 87, 97 (1989).
This is, in essence, the same question which we address in this case. The only difference is one case involved an addition to taxable income (capital gains) and the other involves a reduction from taxable income (reserve allowance deduction). Otherwise, in principle and practice, the matters should be treated homogeneously.
See Justice Blackmun’s dissent for further explanation of the benefits involved and the failure of the taxpayer to receive part of the benefits congressionally intended. United States v. Foster Lumber Co., 429 U.S. 32, 49-52 (1976).