Branum v. Commissioner

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