United States Court of Appeals,
Fifth Circuit.
No. 93-4251.
Mansell W. BRANUM, Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
April 5, 1994.
Appeal from a Decision of the United States Tax Court.
Before WISDOM, BARKSDALE, and EMILIO M. GARZA, Circuit Judges.
WISDOM, Circuit Judge:
[C]hange our present tax system into a model of fairness,
simplicity, efficiency and compassion....
—President Ronald Reagan1
Appellant Mansel Branum believes that the decision in this
case is a reflection of our failure to meet that challenge. Where
he seeks an understanding and flexible Tax Code, ours offers him no
solace. As we shall explain, his position deserves some sympathy.
The applicable tax law, however, is unbending. Specifically,
Branum seeks relief from the Tax Court's holding that he made an
effective election under section 172(b)(3)(C) of the Internal
Revenue Code for his 1985 tax year when evidence indicated that his
intention was otherwise. That holding is legally unassailable and,
as such, must be affirmed.
I.
The petitioner/appellant, Mansell W. Branum, timely filed his
1
The President's Tax Proposals to the Congress for Fairness,
Growth and Simplicity, at I (May 29, 1985).
1
1985 federal income tax return. For that year, he reported a net
operating loss ("regular NOL") under section 172 and an alternative
minimum tax net operating loss ("alternative minimum tax NOL")
under section 55 of the Internal Revenue Code.2 Specifically, he
reported a regular NOL of $5,003,451 and an alternative minimum tax
NOL of $4,943,544.
Branum attached the following statement to his 1985 return:
Taxpayer, in accordance with I.R.C. section 172(b)(3)(C)
hereby elect [sic ] to carry foreward [sic ] all losses
sustained in the calendar year 1985 and forego [sic ] carry
back of such losses to prior years.
Branum asserts that he intended this statement to relinquish the
carryback period for his regular NOL, but not for his alternative
minimum tax NOL. In tax jargon, this is referred to as an
attempted "split election".
In support of that construction, he points to his Form 1045
Application for a Tentative Refund, mailed separately on the same
day, in which he requested a refund based on the carryback of his
1985 alternative minimum tax NOL to 1982. An income averaging
statement attached to that form contained this handwritten
directive in the margin:
Regular NOL not carried back per 172(b)(3)(C) election with
1985 return; AMT [alternative minimum tax] carried back only.
Branum cites this statement as evidence that the first
statement—the one he attached to his main return—reflected his
intent to make a split election.
2
References to the Tax Code are to the Internal Revenue Code
of 1954 (26 U.S.C.) as amended up to 1985 (the tax year in
question), unless otherwise indicated.
2
The Commissioner granted Branum's request for a "tentative"
refund of $972,708, based upon the carryback of Branum's 1985
alternative minimum tax NOL to 1982. Later, after conducting an
audit of Branum's return, the Commissioner reversed that decision;
he disallowed the carryback of Branum's alternative minimum tax
NOL. The Commissioner reasoned that Branum's initial statement on
his 1985 return constituted an effective election and, thus,
relinquished the carryback period with respect to both his regular
NOL and his alternative minimum tax NOL. Branum, in turn,
petitioned the Tax Court to redetermine the deficiency.3
The Tax Court sustained the Commissioner's determination. The
court explained that section 172 permits a taxpayer to elect to
carryback both his regular NOL and his alternative minimum tax NOL;
a split election by which he elects to carryback one or the other
is not permissible. Although Branum contends that his failed
attempt to make such a split election renders the entire election
ineffective, the Tax Court found otherwise. The court concluded
that Branum's statement attached to his return constituted an
unambiguous election. Hence, Branum was bound by that statement.
The dispute which forms the basis of this appeal is simple:
Branum contends that, if his attempted split election is not
permissible, he made no election at all. The Commissioner ruled
and the Tax Court held, however, that Branum's statement did not
3
Although several other matters were initially in dispute,
this case involves only the question at hand. All other issues
have been resolved. More, this case was submitted on a
stipulation of facts and exhibits.
3
reflect the attempt to make a split election but, rather,
constituted an unambiguous effective election for both his regular
and his alternative minimum tax NOL's. In so doing, the court
refused to consider other evidence demonstrating his
less-than-unequivocal intent to make that election. Branum urges
that we reverse the Tax court on the grounds that the Commissioner
failed to consider the evidence of his true intent. For the
reasons we shall explain directly, we decline to do so.
II.
We review Tax Court decisions in the same manner in which we
review civil actions decided by the district courts.4 We examine
findings of fact for clear error, while we examine conclusions of
law de novo.5 The Tax Court's holding that Branum made an
effective election is a conclusion of law and, as such, subject to
de novo review.
This case takes us through the intricate labyrinth that is
our Tax Code. In particular, we direct our focus to an
individual's ability to offset his income by his losses. A
taxpayer who seeks to recognize an operating loss must first apply
the loss (carry it back) to the three immediately preceding tax
years and carry any remaining loss forward to the succeeding
fifteen tax years. A taxpayer may, however, elect to relinquish
the carryback period for his operating losses under section 172 of
the Code. In that instance, the taxpayer may carry forward the
4
Grigg v. Commissioner, 979 F.2d 383, 384 (5th Cir.1992).
5
Id.
4
entire loss to offset the income of subsequent tax years without
first carrying it back to the preceding three years. Section
172(b)(3)(C) is the vehicle for making such an election; it
provides, in pertinent part:
Any taxpayer entitled to a carryback period under paragraph
(1) may elect to relinquish the entire carryback period with
respect to a net operating loss for any taxable year ending
after December 31, 1975.
This provision further mandates that the election be made in a
manner prescribed by the Secretary and by the due date of the
return. Moreover, once made, the election is irrevocable.
A taxpayer who does not effectively communicate his
unequivocal intent to relinquish the carryback period for both his
regular NOL and his alternative minimum tax NOL has not made an
effective election. This rule was the subject of some confusion at
the time that Branum filed his 1985 return. The House Conference
Report to the Tax Reform Act of 1986 addressed this uncertainty the
following year:
It is clarified that an election under Section 172(b)(3)(C) to
relinquish the carryback period applies both for regular tax
and for minimum tax purposes.6
In response to this clarification, the Commissioner published a
revenue ruling which similarly explained that an election under
section 172(b)(3)(C) applies to both regular and alternative
minimum tax NOL's. When faced with the issue in 1991, the Tax
Court similarly followed suit and ruled that a taxpayer may not
6
House Conference Report No. 99-841, 99th Cong., 2d Sess.
II-262 (1986), U.S.Code Cong. & Admin.News, pp. 4075, 4350, 1986-
3 C.B. (Vol. 4), 262.
5
relinquish the carryback period for one NOL but not the other.7 As
a result, the rule is clear: a taxpayer who fails to make an
effective election is required to carryback both his regular and
his alternative minimum tax NOL.
As a starting point, Branum argues that he did all that he
believed was necessary to demonstrate his intent to relinquish the
carryback period with respect to his regular NOL only. He points
out that the clarifications of section 172(b)(3)(C) were
promulgated after he filed his 1985 return. Hence, he seeks an
excuse from the strictures of section 172 because he filed his
return within the murky legal context that those explanations
rectified.
We dismiss this "confusion in the law" argument outright. The
complexities of our tax code notwithstanding, a taxpayer cloaked in
ignorance will find no safe haven from liability imposed by law.
For "[w]hile the statutory and financial complexities that our
unfair tax code often involves are irritating, they are certainly
not impossible."8 Consequently, the Tax Court has held that
oversight, poor judgment, and ignorance of the law all fail to
mitigate the binding effect of an otherwise proper election.9 As
we previously have stated: "Were simple misreading of the Tax Code
7
See Plumb v. Commissioner, 97 T.C. 632, 638, 1991 WL 260735
(1991).
8
Vogt v. Abish, 663 F.Supp. 321, 327 (S.D.N.Y.1987),
judgment remanded, 842 F.2d 1288, cert. denied, 488 U.S. 891, 109
S.Ct. 225, 102 L.Ed.2d 215 (1988).
9
See Estate of Stamos v. Commissioner, 55 T.C. 468, 474,
1970 WL 2371 (1970).
6
a valid defense to tax liability, ... we have no doubt that
incompetency in providing accounting services would carry a
premium."10
Branum's central contention is that he did not make an
effective election under section 172(b)(3)(C) because he did not
communicate his "unequivocal" wish to relinquish the carryback for
both his regular NOL and his alternative minimum tax NOL.11 This
argument has two components: First, that his initial statement on
his return was not an unambiguous, unequivocal election and,
second, that the court should have considered his subsequent
statement filed with his Form 1045 as further evidence of that
ambiguity. We take them in turn.
Branum argues that the statement attached to his main return
reflects his intention to waive the carryback period for his
regular NOL only. Again, Branum stated:
Taxpayer, in accordance with I.R.C. section 172(b)(3)(C)
hereby elect [sic ] to carry foreward [sic ] all losses
sustained in the calendar year 1985 and forego [sic ] carry
back of such losses to prior years.
The Tax Court disagreed with that construction. Instead, the court
held that the statement constituted an unambiguous, effective
election under section 172. The court reasoned that the phrases
10
Young v. Commissioner, 783 F.2d 1201, 1204 (5th Cir.1986).
11
Branum's real burden is to cast a shadow of ambiguity over
his intent so that, at the very least, it falls short of
"unequivocal".
7
"all losses" and "such losses", plainly encompass both NOL's.12
Accordingly, the court perceived no evidence of the petitioner's
attempt to make a split election.
We agree. The statement, on its face, uses broad language
that contradicts Branum's assertion that he intended to make a
split election. Branum nonetheless points to the Plumb case,
ostensibly for the proposition that a taxpayer in similar
circumstances should be held to have made no election at all.13
In Plumb, the taxpayer attached the following statement to his
return: "Taxpayers elect to forego [sic ] the carryback provision
for the regular NOL in accordance with section 172(b)(3)(C) ..."
(emphasis in original). The Plumb court specifically relied on the
taxpayer's unambiguous reference to his "regular" NOL. From that,
it was apparent that the taxpayer did not understand that he could
relinquish both or none. Based upon the taxpayer's statement,
clearly intending to make an impermissible split election, the
Plumb court held that the taxpayer had not made an effective
election.14
12
The appellant's argument suffers from a fatal circularity.
Branum contends that this statement is, by itself, ambiguous. He
seeks to use, however, the subsequent statement on his Form 1045
as evidence of that ambiguity. The inference logically follows
that, without that subsequent statement, the directive attached
to the main return is clear.
13
In the central holding of that case, the Tax Court held
that a taxpayer could not relinquish the carryback period for his
regular NOL but not his alternative minimum tax NOL. If you
waive one, you waive both.
14
Although the Plumb court did bolster its reasoning with
reference to other information contained within the taxpayer's
Form 1045, that information supported the opinion, not the
8
The statement in the present matter leads to the opposite
conclusion. In this case, Branum stated that he elected to "carry
foreward [sic ] all losses sustained in the calendar year 1985 and
forego [sic ] carry back of such losses to prior years" (emphasis
added). These terms leave no trail of ambiguity; unlike the
statement at issue in the Plumb case, the terms "all losses" and
"such losses" indicate that Branum intended to relinquish the
carryback for both NOL's. The Tax Court got it right when it held
that this statement was "sweeping and unambiguous" and,
accordingly, reflected an effective election.
Branum next argues that even if the statement attached to his
main return is not ambiguous, his statement in the margin of the
schedule filed with his Form 1045 reveals his true intention to
make an impermissible split election. The court disregarded this
subsequent statement because it ceased to be relevant in the light
of Branum's unambiguous initial statement attached to his main
return. Branum charges that the court's failure to consider that
subsequent statement as evidence of his true intent constitutes
legal error. While we are sympathetic with his position, the law
is not.
In 1977, the Secretary promulgated temporary regulations
implementing section 172(b)(3)(C). These rules provide, in part,
that a statement describing the election, the period for which it
applies, and the taxpayer's entitlement for making it must be
ultimate decision. It is crystal clear from the Tax Court's
reasoning that the use of the word "regular" was dispositive as
to the taxpayer's intent.
9
attached to the taxpayer's main tax return.15 The Tax Court
concluded in the present matter that the original statement
attached to the return met these criteria and constituted an
unambiguous statement of election.16
Branum nonetheless urges that the court erred when it failed
to consider, as evidence of his intent, the statement attached to
his Form 1045: "Regular NOL not carried back per 172(b)(3)(C)
election with 1985 return; AMT NOL carried back only." He relies
on three cases for the proposition that the Commissioner and the
Tax Court were bound to consider evidence outside of his main
return on the question of his intent: Young v. Commissioner17,
Turney v. Commissioner18, and Carlstedt Assoc., Inc. v.
Commissioner19. None of these cases, however, stands for that
submission.
15
Sec. 7.0(d), Temporary Income Tax Regs., 42 Fed.Reg. 1470
(Jan. 7, 1977). The regulations dictate that:
the elections described * * * shall be made by a
statement attached to the return (or amended return)
for the taxable year.
16
It is true that "substantial compliance with regulatory
requirements may suffice when such requirements are procedural
and when the essential statutory purposes have been fulfilled."
American Air Filter v. Commissioner, 81 T.C. 709, 719, 1983 WL
14887 (1983). Here, the Tax Court held that Branum had literally
complied (i.e., his unambiguous statement of election on the main
return), thus obviating the need to look for other indicia of
substantial compliance.
17
783 F.2d 1201 (5th Cir.1986), aff'g, 83 T.C. 831, 1984 WL
15635 (1984).
18
56 T.C.Memo. (P-H) 390 (¶ 87,074), 1987 WL 40167 (1987).
19
58 T.C.Memo. (P-H) 112 (¶ 89,027), 1989 WL 871 (1989).
10
First, Branum asserts that Young stands for the proposition
that "the Commissioner must consider documents filed with the
Commissioner outside of a return for purposes of determining
whether the taxpayer made an effective election".20 That case
stands for no such rule in its holding or dicta. On the contrary,
the Court in Young held that the Commissioner could not be charged
with knowledge of information beyond that which was contained on
the return.21
The Turney decision is a mildly more helpful case to the
appellant. Branum contends that the Turney court based its holding
that a taxpayer had made a similar election (though under a
different provision) upon statements made outside of the taxpayer's
return. It is true that the court indicated that the evidence
demonstrating an irrevocable intent may come from sources outside
the return itself.22 That proposition does not further Branum's
position. The Turney court never held that the Commissioner must
look to evidence outside of the return, only that evidence of that
intent may properly come from such sources. The court stated:
What is required is evidence of an affirmative intent on the
taxpayer's part to make the required election and be bound
thereby.23
In this light, it is plain that Turney doesn't get Branum where he
20
Brief for Appellant at 12.
21
Young, 783 F.2d at 1206.
22
Turney, 56 T.C.Memo. (P-H) at 394-95, 1987 WL 40167 at 6-
7.
23
Id. at 395, 1987 WL 40167 at 6.
11
needs to be. The Turney court had no other basis, short of
examining evidence outside of the return, for ascertaining the
taxpayer's intent. In the matter at hand, that problem doesn't
exist. As we have spelled out, all the "evidence of an affirmative
intent" was contained on Branum's initial statement. Nothing bound
the court to look further.
Last, in the Carlstedt case, the Tax Court held that a
taxpayer who inadvertently attached an unambiguous statement of
election to the return would nonetheless be bound by that
statement. Branum submits that the court directed the Commissioner
to examine documents filed outside of the return, even though the
statement attached to the return was unambiguous. If Carlstedt
really said that, it would be impressive support for Branum's
position. It does not, however. Rather, the Court in Carlstedt
stated unequivocally that any information beyond the unambiguous
statement attached to the return is "irrelevant to the
determination of whether a valid and binding election was made
under section 172(b)(3)(C)".24 The court then quoted with approval
Judge Higginbotham's emphatic statement from our decision in Young:
[N]ineteen bishops swearing as to the taxpayers' subjective
intent would not carry this argument, because it contends for
an irrelevant fact.25
If nineteen bishops can't do it, a handwritten notation in the
margin of a tax schedule filed with a subsequent form mailed under
separate cover cannot do it either.
24
Carlstedt, 58 T.C.Memo. (P-H) at 129, 1989 WL 871 at 21.
25
Id. (quoting Young, 783 F.2d at 1206).
12
In sum, Branum's reliance on these three cases does him more
harm than good. They do not, under any plausible reading, stand
for the proposition that the Commissioner must look beyond an
unambiguous election attached to the taxpayer's return. While the
Commissioner is free to consider other evidence, nothing requires
that he do so.
Branum's subjective intent ultimately is irrelevant. We are
concerned only with the objective manifestation of his intent—here,
the unambiguous statement on his return. We hold that this
statement is sufficiently indicative of the petitioner's
unequivocal intent to make an election. The Tax Court did not err
when it refused to consider Branum's subsequent statement.
As a final word, we acknowledge that we are sympathetic with
Branum's position. The evidence taken as a whole reveals his
genuine intention to make an impermissible split election, just as
he contends. The Commissioner, at least by the audit, knew of
Branum's true intent (or at least his inconsistent statements).26
Although the statement in the margin of the schedule to Form 1045
was by no means an election—it merely attempted to characterize the
election Branum made on his regular return—the Commissioner should
have known what Branum really meant.
26
At oral argument, the parties engaged in a lively debate
over whether the Internal Revenue Manual requires the Form 1045
to be stapled to the taxpayer's return when a case file is
established. Although we will not pass on the binding nature of
those rules, it seems certain that the Commissioner knew of
Branum's true intent, at least by the audit. It is a stipulated
fact that the Commissioner reviewed Branum's 1985 return and his
Form 1045 on the same day.
13
Accordingly, while the Tax Court's decision is legally
unassailable, we recognize that it imposes an election on Branum
that he did not wish to make. The law's requirement that the
election be "unequivocal" is evidence that a taxpayer who did not
clearly seek this election should not be forced to suffer it.27 We
are without recourse, under the strictures of the statute, however,
to satisfy Branum beyond these token acknowledgements.28
The history of our jurisprudence reflects a particular
inflexibility in the application of the tax laws. The collection
of revenue does not allow for such case-by-case adjudication. We
note this because Branum is not the first, nor will he be the last,
taxpayer whose story, however appealing, did not move the I.R.S.
Twenty years ago, our colleague Judge Goldberg wrote for this Court
in United States v. Second National Bank of North Miami29. That
case presented a similar problem and the Court, with equal
reticence, similarly concluded that nothing in the law prevented
the I.R.S. from pursuing its cold course.30 As our resolution in
the present matter mirrors his, we appropriate Judge Goldberg's
final statement for our concluding thought:
27
See, e.g., Valdes Commissioner, 60 T.C. 910, 914, 1973 WL
2669 (1973) (no election must reflect the taxpayer's unequivocal
agreement).
28
But See Plato, The Republic Bk. I., 343d (B. Jowett
trans., Modern Library ed. 1982) ("When there is an income tax,
the just man will pay more and the unjust less on the same amount
of income.").
29
502 F.2d 535 (5th Cir.1974).
30
Id. at 549.
14
Our federal tax code may appear to operate with a rigidity
that makes its collectors bereft of human pity, conscience, or
compassion; its operation is also an illustration that ours
is a government of laws, not men.31
AFFIRMED.
31
Id.
15