United States Court of Appeals,
Fifth Circuit.
No. 94-40382.
CONOCO, INC. and Affiliated Corporations, Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Jan. 27, 1995.
Appeal from a decision of the United States Tax Court.
Before WHITE, Associate Justice (Ret.),1 BARKSDALE and PARKER,
Circuit Judges.
PER CURIAM:
At issue is whether the suspended tax method of Treasury
Regulation § 1.58-9 for the minimum tax in effect for corporate
taxpayers from 1969 to 1986 is a permissible interpretation of 26
U.S.C. (I.R.C.) § 58(h) (adjustment of tax preference items that do
not cause a tax benefit for the taxable year in which they arose).
We AFFIRM.
I.
For 1969 to 1986 (for corporate taxpayers; only to 1982 for
noncorporate), I.R.C. § 56(a)2 imposed a "minimum tax" on tax
preference items.3 This tax was added on to the regular income
tax. The rationale for the minimum tax was that many taxpayers
1
Associate Justice of the United States Supreme Court
(Ret.), sitting by designation.
2
The relevant law was changed significantly by the Tax
Reform Act of 1986. All references are to the 1982 version of
the Internal Revenue Code.
3
See I.R.C. § 57 (listing items of tax preference).
1
were able to offset all, or almost all, tax liability through the
use of certain tax preference items, such as long term capital
gains and accelerated depreciation. See First Chicago Corp. v.
Commissioner, 842 F.2d 180, 181 (7th Cir.1988) (noting purpose of
minimum tax). For corporate taxpayers, the minimum tax equaled 15
percent of the amount by which preference items exceeded the
greater of $10,000 or its regular tax liability (as adjusted for
certain credits). I.R.C. § 56(a), (c).
Despite having to pay the minimum tax, however, a taxpayer
could realize no benefit from the preference items for that tax
year. This would occur, for instance, if the taxpayer had tax
credits which reduced regular tax liability to zero.4 Responding
to this, Congress enacted I.R.C. § 58(h) in 1976; it provided:
Regulations to Include Tax Benefit Rule. The Secretary shall
prescribe regulations under which items of tax preference
shall be properly adjusted where the tax treatment giving rise
to such items will not result in the reduction of the
taxpayer's tax under this subtitle for any taxable years.
A clear purpose of § 58(h) was to preclude imposition of the
minimum tax for a tax year when preference items did not provide a
tax benefit (nonbenefit year). See First Chicago Corp., 842 F.2d
at 180; Occidental Petroleum Corp. v. Commissioner, 82 T.C. 819,
1984 WL 15576 (1984). Concomitantly, there arose the necessity for
a method for a tax adjustment when preference items gave rise to a
benefit in a tax year other than the nonbenefit year in which the
preference items arose. The benefit could occur as follows: tax
4
See H.R.Rep. No. 10612, 94th Cong., 2d Sess. 106-07 (1976)
(explaining situations wherein no benefit is realized from
preference items).
2
credits offset tax liability; the preference items deduction does
so as well; the amount of tax credits necessary to offset
liability are thereby reduced; and these "freed-up" credits can be
used to offset tax in other years (benefit year). Therefore, if
the freed-up credits are so utilized, a tax benefit results for the
benefit year from the preference items from the nonbenefit year.
The Secretary delayed 13 years in promulgating regulations
under § 58(h); Temporary Treasury Regulation § 1.58-9T was issued
in 1989 (it became final three years later).5 Under the
Regulation, no minimum tax was imposed for a nonbenefit year
(preference items did not provide current tax benefit). On the
other hand, when preference items from a nonbenefit year gave rise
to a benefit in another year (such as when "freed up" tax credits
were used to offset taxes in another year (benefit year)), the
Regulation established, in effect, a "suspended tax": prescribed
minimum tax is calculated for the nonbenefit year and "suspended"
until the benefit year, with the amount of freed-up tax credits to
be used in the benefit year being reduced in an amount equal to the
amount of the suspended tax.6
5
Section 58(h) was repealed by the Tax Reform Act of 1986.
Both § 58(h) and Regulation § 1.58-9 are applicable only to tax
years 1977 through 1986.
6
For calculating the suspended tax to be offset against the
freed-up credits, the Regulation provided in pertinent part:
(c) Adjustment of carryover credits—(1) In
general. A taxpayer's freed-up credits must be reduced
by the additional minimum tax that would have been
imposed if a current tax benefit had been derived from
preference items that did not actually produce a
current tax benefit. The amount of this reduction
3
E.I. du Pont de Nemours & Co. filed a consolidated tax return
for 1982 for itself and its affiliates, Conoco, Inc., New England
Nuclear Corporation (NEN), and Remington Arms Company, Inc. (the
DuPont Group). The DuPont Group's 1982 return listed a tax
liability of $256,844,566, representing a $338,302,426 potential
tax liability reduced by a $81,457,860 preference items deduction.7
This liability was offset fully by tax credits available to the
DuPont Group for that tax year.8 Indeed, the tax credits were so
plentiful that, even absent the preference items deduction, the
credits would have still offset the entire tax liability.
shall be calculated in the following manner—
(i) Determine the amount of freed-up credits;
(ii) Determine the amount of tax preference items
(if any) from which a current tax benefit was derived
for the taxable year ("beneficial preferences"), and
the amount of preferences from which no current tax
benefit was derived for the taxable year
("non-beneficial preferences"); and
(iii) Determine the portion of the total minimum
tax on all tax preference items for the taxable year
that is attributable to the non-beneficial preferences.
The freed-up credits are then reduced by an amount
equal to such portion of the minimum tax.
Treas.Reg. § 1.58-9(c)(1) (1992).
7
The DuPont Group's preference items for 1982 totalled
$177,082,305, which allowed a $81,457,860 preference items
deduction (preference items multiplied by the 46 percent marginal
tax rate (I.R.C. § 11(b)(5))).
8
The DuPont Group's tax liability for 1982 was only
$5,626,409 for recapture of investment tax credits, the liability
for which cannot be offset by available tax credits. Its regular
tax deduction for minimum tax computation for 1982 was $6,194,754
(sum of the foregoing recapture and net TRASOP credits of
$568,345).
4
Therefore, the DuPont Group realized no tax benefit from its
preference items for 1982, and, as a result, no minimum tax was
imposed for that year.
The DuPont Group did benefit, however, from the preference
items from 1982. By reducing its tax liability for 1982 with the
preference items, it required fewer tax credits to offset its 1982
income. These freed-up credits were carried back to offset tax for
prior years. (For those years, the DuPont Group members did not
have a consolidated return.) Conoco carried back its portion of
the tax credits to offset tax from taxable year 1980. Therefore,
although Conoco realized no tax benefit from the 1982 preference
items for 1982, it did realize a benefit from them for 1980.
Accordingly, in 1991, pursuant to Regulation § 1.58-9 (the
Regulation), the Commissioner claimed a tax deficiency of
$12,436,199 against Conoco for 1980. Deficiencies were also
claimed against the other members of the DuPont Group.
Each member of the DuPont Group appealed the deficiency to the
Tax Court, which consolidated the four cases and upheld the
Regulation. E.I. Du Pont De Nemours & Co. v. Commissioner, 102
T.C. 1, 1994 WL 9930 (1994). Conoco appealed to this court; the
remainder of the DuPont Group, to the Third Circuit, which upheld
the Regulation. E.I. Du Pont De Nemours & Co. v. Commissioner, 41
F.3d 130 (3d Cir.1994).
II.
Conoco does not dispute that it has tax liability resulting
from the benefit that it received for 1980 from the 1982 preference
5
items. At issue is only whether the Regulation established a
permissible method for computing that liability. "[L]egislative
regulations are given controlling weight unless they are arbitrary,
capricious, or manifestly contrary to the statute."9 Chevron,
U.S.A., Inc. v. Natural Resources Defense Counsel, Inc., 467 U.S.
837, 844, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984).
Conoco claims, on three bases, that the Regulation is an
impermissible interpretation of I.R.C. § 58(h). As noted, the
Third Circuit affirmed the decision of the Tax Court at issue here.
The same claims as are presented here by Conoco were presented to,
and rejected by, the Third Circuit in holding that the Regulation
is a reasonable interpretation of § 58(h).10 Its opinion is
extremely thorough and well-reasoned; accordingly, no benefit will
be derived from engaging here in the painstaking analysis employed
there. See, e.g., Wendland v. Commissioner, 739 F.2d 580, 582
(11th Cir.1984) (adopting analysis of Ninth Circuit in identical
appeal from same Tax Court decision).
First, and primarily, Conoco contends that the Regulation is
inconsistent with both the plain language and the intent of §
58(h). Conoco asserts that the Regulation, by calculating and
suspending a tax for the nonbenefit year, does not "adjust
9
Conoco contends that the Regulation is "interpretative"
rather than "legislative", thus, entitled to less deference. We
disagree. See Du Pont, 41 F.3d at 134-35.
10
Understandably, counsel were the same in the Third Circuit
as in the appeal to our court. Moreover, the four cases,
including for Conoco, were presented to the Tax Court on fully
stipulated facts.
6
preferences" as directed by § 58(h).11 As the Third Circuit noted,
however, this criticism, which is not explicitly supported by the
legislative history, does not demonstrate that the Regulation is an
unreasonable interpretation of the statute. Du Pont, 41 F.3d at
135-36.
Second, Conoco claims that the Regulation ignores the language
and intent of § 58(h), and therefore disrupts the balance between
the regular tax and the minimum tax by essentially computing a tax
in the nonbenefit year and imposing that tax as a "regular tax" in
the benefit year. In support, Conoco notes various Internal
Revenue Code provisions with which the Regulation supposedly
interferes. The Third Circuit found only minimal interference with
other portions of the Code, and also noted that such interference
is not authoritatively prohibited. Id. at 137-38.
Finally, Conoco contends that the Regulation is not entitled
to the deference usually afforded to Treasury Regulations because,
among other things, the Regulation was allegedly promulgated in bad
faith. Once again, we agree with the Third Circuit that the
Regulation is entitled to the usual deference. Id. at 138-40.
III.
In sum, for the reasons set forth in the opinion by the Third
11
Conoco offers an alternative method for calculating the
tax. Rather than calculating a tax for the nonbenefit year and
offsetting it against the potential freed-up credits, Conoco's
method bases its calculation on the benefit year, using the sum
of preference items for the benefit and nonbenefit years. As the
Third Circuit stated: "Although taxpayers' proposal appears to
be reasonable, it is not the only permissible construction of the
statute, nor is it necessarily the most reasonable one." Du
Pont, 41 F.3d at 136.
7
Circuit, Treasury Regulation § 1.58-9 is a reasonable construction
of § 58(h). Accordingly, the decision of the tax court is
AFFIRMED.
8