Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-98-01462/USCOURTS-caDC-98-01462-0/pdf.json

Parties Involved:
Commissioner of Internal Revenue Service
Appellee
Koramba Farmers & Graziers No. 2
Appellant
Dean Phillips
Appellant

Document Text:

<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued May 6, 1999 Decided June 4, 1999

No. 98-1454

Koramba Farmers & Graziers No. 1;

Dean Phillips, Tax Matters Partner,

Appellants

v.

Commissioner of Internal Revenue Service,

Appellee

No. 98-1460

Koramba Farmers & Graziers No. 1;

Dean Phillips, Tax Matters Partner,

Appellants

v.

Commissioner of Internal Revenue Service,

Appellee

---------

USCA Case #98-1462 Document #440018 Filed: 06/04/1999 Page 1 of 7
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

No. 98-1461

Koramba Farmers & Graziers No. 2;

Dean Phillips, Tax Matters Partner,

Appellants

v.

Commissioner of Internal Revenue Service,

Appellee

No. 98-1462

Koramba Farmers & Graziers No. 2;

Dean Phillips, Tax Matters Partner,

Appellants

v.

Commissioner of Internal Revenue Service,

Appellee

Appeals from the United States Tax Court

(No. IRS-3679-96)

(No. IRS-3680-96)

(No. IRS-3681-96)

(No. IRS-3682-96)

John R. Wilson argued the cause for the appellants. Peter

J. Perla was on brief for the appellants.

Paula K. Speck, Attorney, United States Department of

Justice, argued the cause for the appellee. Loretta C. Argrett, Assistant Attorney General, and Richard Farber, Attorney, United States Department of Justice, were on brief for

USCA Case #98-1462 Document #440018 Filed: 06/04/1999 Page 2 of 7
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

the appellee. Teresa T. Milton, Attorney, United States

Department of Justice, entered an appearance.

Before: Silberman, Williams and Henderson, Circuit

Judges.

Opinion for the court filed by Circuit Judge Henderson.

Karen LeCraft Henderson, Circuit Judge: The appellants,

Australian partnerships subject to U.S. income reporting and

their tax partner, seek review of a Tax Court opinion holding

that they were not entitled to deduct expenditures for water

and soil conservation expenditures made for property located

in Australia. See Koramba Farmers & Graziers No. 1 v.

Commissioner, 110 T.C. 445 (1998). The Tax Court concluded that section 175(c)(3)(A)(ii) of the Internal Revenue Code,

26 U.S.C. s 175(c)(3)(A)(ii) (IRC s 175), does not allow the

deduction of such expenditures on foreign land because the

expenditures must be consistent with the soil conservation

plan of a state agency with jurisdiction over the taxpayer's

land. On appeal the appellants argue that IRC

s 175(c)(3)(A)(ii) requires that expenditures simply be consistent with any state soil conservation plan regardless whether

the taxpayer's property is located within the jurisdiction of

the agency with whose plan its water and soil conservation

expenditures are consistent. We disagree and hold that IRC

s 175(c)(3)(A)(ii) requires that the plan apply to " 'the area in

which the land is located.' " Koramba, 110 T.C. at 452

(quoting IRC s 175(c)(3)(A)(i)). Accordingly, we affirm.

I.

Koramba Farmers & Graziers No.1 (Koramba No.1) and

Koramba Farmers & Graziers No.2 (Koramba No.2) (collectively Koramba) are general partnerships organized under

Australian law with their principal place of business in New

South Wales, Australia. Dean Phillips, a Koramba partner, is

a U.S. citizen. In 1985 Philips & Heetco, Inc. (Heetco), a

United States corporation, acquired from William and Penelope Owen a fifty per cent interest in their New South Wales,

USCA Case #98-1462 Document #440018 Filed: 06/04/1999 Page 3 of 7
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Australia farmland. Phillips, Heetco and the Owens then

formed Koramba No. 1 to develop the farmland. In 1986

Koramba No. 1 began construction of an irrigation project in

order to grow cotton on the farm. In 1987 and 1988 the

partners purchased two additional parcels, formed Koramba

No. 2 and expanded their cotton farming. In constructing

the irrigation system, Koramba provided for soil and water

conservation. As required by Part VII of the New South

Wales Water Act, see Water (Amendment) Act, 1983, No. 142,

s 167 (N.S.W. Inc. Act) (Joint Appendix (JA) at 34), Koramba

sought and received general approval from the New South

Wales Department of Water Resources for its expenditures.

It elected to deduct from its federal income taxes its conservation expenditures for the tax years 1986-89 pursuant to

IRC s 175. The Internal Revenue Service (IRS) accepted

Koramba No. 1's 1986 deduction but disallowed all of Koramba's post-1986 deductions.1 The IRS concluded that the Tax

Reform Act of 1986, Pub. L. 99-514, sec. 401(a), 100 Stat.

2221, in including IRC s 175(c)(3), disallowed any deduction

for "conservation expenditures incurred with respect to land

outside the United States." Koramba, 110 T.C. at 448.

Koramba then petitioned the Tax Court for review, claiming that under IRC s 175(c)(3) (A)(ii) "conservation expenditures need only be consistent with the plan of some State

agency," regardless whether the plan covered the taxpayer's

land, "to be deductible."2 110 T.C. at 452 (emphasis original).

The Tax Court disagreed, holding that "the statute requires

that the improved land must lie within the state whose agency

is comparable to" the Department of Agriculture's Soil and

Conservation Service (SCS). Id. Koramba appealed.

__________

1 The IRS denied Koramba No. 1 a $806,633 deduction for 1987

and a $519,004 deduction for 1988. Koramba No. 2 was denied a

$1,011,360 deduction for 1988 and a $2,683,415 deduction for 1989.

Koramba No. 1 had no 1989 deductions.

2 Before the Tax Court Koramba also argued that the term

"state" included a foreign state. Koramba does not appeal the Tax

Court's rejection of this argument.

USCA Case #98-1462 Document #440018 Filed: 06/04/1999 Page 4 of 7
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

II.

Before December 31, 1986, the Internal Revenue Code

allowed a farmer to deduct soil and water conservation expenditures not exceeding twenty-five per cent of the farmer's

gross farm income. See IRC s 175 (1982) (amended 1986).

In 1986, responding to a concern that section 175 and similar

provisions "may be affecting prudent farming decisions adversely.... [and] that such provisions may have contributed

to an increase in acreage under production, which in turn may

have encouraged the present-day overproduction of agricultural commodities," S. Rep. No. 99-313, at 265 (1986), the

Congress amended IRC s 175 to limit the deductibility of

conservation expenditures. It did so by adding section

175(c)(3)(A) which provides:

Expenditures must be consistent with soil conservation

plan.--Notwithstanding any other provision of this section, subsection (a) shall not apply to any expenditures

unless such expenditures are consistent with--

(i) the plan (if any) approved by the Soil Conservation

Service of the Department of Agriculture for the area

in which the land is located, or

(ii) if there is no plan described in clause (i), any soil

conservation plan of a comparable state agency.

The appellants argue that the language of (ii) is unambiguous, that is, a farmer qualifies for the deduction under (ii) if

his conservation expenditures are consistent with the soil

conservation plan of "any" state regardless whether the expenditures are made for property located in that state.3 We

__________

3 The appellants also argue that the express geographic limitation

in clause (i) manifests that the absence of the limitation in clause (ii)

is intentional. As discussed infra, however, we believe the phrase

"comparable state agency" encompasses a geographic limitation.

Accordingly, we find several of the appellants' other arguments

unpersuasive. We reject their reliance on other IRC provisions

that contain specific geographic limitations, e.g., IRC s 616(d) (limiting deductibility of mining expenditures made"outside the United

States") as well as an unenacted soil conservation tax credit for soil

conservation expenditures made "within the United States," see

disagree. To be deductible the conservation plan must be

consistent with that of a state agency "comparable" to the

SCS.

First, the most natural way to read "comparable state

agency" is that the state agency, like the SCS, must have

jurisdiction over "the area in which the [taxpayer's] land is

located." Second, it is highly unlikely "that Congress intended to approve the deductions of conservation expenditures in

Nevada, for example, which are consistent with a conservation plan of an agency of some other state" but inconsistent

with the conservation plan of Nevada's agency. Koramba,

110 T.C. at 452. The appellants argue that this result will not

occur because the underlying assumption ignores "the scientific underpinnings of soil and water conservation plans," Reply

USCA Case #98-1462 Document #440018 Filed: 06/04/1999 Page 5 of 7
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

Br. at 3, and erroneously assumes that "state plans vary

widely and, hence, that conservation expenditures consistent

with the plan of one state will not be consistent with the plans

of others," Appellants' Br. at 25.

While the record is inadequate for us to determine whether

all state plans are essentially the same, we would note that

small differences in state plans may reflect important policy

differences--e.g., arid states are likely to have greater conservation concerns. Moreover, if, as the appellants contend,

state plans are essentially identical and based on best management practices, the Congress's reference to a "comparable

state agency" would appear to be superfluous--it could simply have allowed deductions conforming with "best management practices." Cf. Swanson Mining Corp. v. FERC, 790

__________

H.R. H4170, 88th Cong. s 892(h)(3) (1984) (as amended by the

Senate), reprinted in Cong. Rec. H4547. Similarly, their citation to

cases holding that a geographic limitation in one provision demonstrates that the absence of a limitation in a second provision is

deliberate, see, e.g., Water Quality Ass'n Employees' Benefit Corp.

v. United States, 795 F.2d 1303 (7th Cir. 1986) (invalidating IRSimposed geographic limitation on membership in "voluntary employees' beneficiary associations" where other tax-exempt organizations had statutory geographic membership limitations provided by

statute), is unavailing because of our conclusion that clause (ii)'s

geographic limitation is necessarily implied.

USCA Case #98-1462 Document #440018 Filed: 06/04/1999 Page 6 of 7
<<The pagination in this PDF may not match the actual pagination in the printed slip opinion>>

F.2d 96, 102 (D.C. Cir. 1986) (provisions are read to give each

part meaning).

Examining the legislative history, we find no indication that

the Congress intended the deduction to apply outside the

United States. To the contrary, it supports the nondeductibility of foreign expenditures. The joint conference report

states that "the conferees wish to clarify that while prior

approval of the taxpayer's particular project by the [SCS] or

comparable state agency is not necessary to qualify the

expenditure under the provision, there must be an overall

plan for the taxpayer's area that has been approved by such

an agency." H.R. Rep. No. 99-841, at 110 (1986) (emphasis

added). As "[t]he phrase 'such an agency' unmistakably

refers to the SCS or a State agency comparable to the SCS

whose plan is in effect for the taxpayer's area,"4 110 T.C. at

453, to the extent the legislative history is relevant, it supports the view that those involved in drafting the report were

aware that the congressional limitation had geographic implications.

Because the natural interpretation, and the one supported

by what legislative history exists, of the term "comparable

state agency" means that the state agency, like the SCS,

must have jurisdiction over the taxpayer's land and because

the alternative reading could, as noted earlier, lead to an

absurd result, we conclude that IRC s 175(c)(3)(A) does not

allow the deduction of soil conservation expenditures made

for property located outside the United States. Accordingly

the opinion of the Tax Court is

Affirmed.

__________

4 Koramba argues that imposition of a geographic nexus requirement interferes with the congressional purposes of creating tax

neutrality and promoting "prudent farming practices." See S. Rep.

No. 99-313, at 265. As the IRS notes, however, the Congress also

wanted to reduce overproduction. Id.

USCA Case #98-1462 Document #440018 Filed: 06/04/1999 Page 7 of 7