1994 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

12-2-1994

Dupont v. Com. IRS

Precedential or Non-Precedential:

Docket 94-7242

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_1994

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova

University School of Law Digital Repository. It has been accepted for inclusion in 1994 Decisions by an authorized administrator of Villanova

University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.

Recommended Citation

"Dupont v. Com. IRS" (1994). 1994 Decisions. Paper 206.

http://digitalcommons.law.villanova.edu/thirdcircuit_1994/206
 UNITED STATES COURT OF APPEALS 

 FOR THE THIRD CIRCUIT 

 ___________________ 

 Nos. 94-7242, 94-7243 & 94-7244 

 ___________________ 

 E.I. DU PONT DE NEMOURS & COMPANY, 

 and Affiliated Corporations, 

 Appellant in No. 94-7242 

 REMINGTON ARMS COMPANY, INC., 

 Appellant in No. 94-7243 

 E.I. DU PONT DE NEMOURS & COMPANY, 

 Successor to New England Nuclear Corporation, 

 Appellant in No. 94-7244 

v. 

 COMMISSIONER OF INTERNAL REVENUE SERVICE 

 __________________________________________________ 

 On Appeal from the United States Tax Court 

 Washington, D.C. 

 (Tax Court Nos. 91-19950, 91-19952 & 91-19953) 

 ________________________ 

 Argued September 29, 1994 

 Before: SCIRICA, NYGAARD and McKEE, Circuit Judges

 (Filed December 2, 1994) 

 JOHN L. SNYDER, ESQUIRE (Argued) 

 MICHAEL R. SCHLESSINGER, ESQUIRE 

 BRADFORD L. FERGUSON, ESQUIRE 

 MARILYN D. FRANSON, ESQUIRE 

 Hopkins & Sutter 

 Three First National Plaza 

 Suite 4200 

 Chicago, Illinois 60602 

 Attorneys for Appellants 

 THOMAS J. CLARK, ESQUIRE (Argued) 

 GARY R. ALLEN, ESQUIRE 

 GILBERT S. ROTHENBERG, ESQUIRE 

 United States Department of Justice 

 Tax Division 

 P.O. Box 502 

 Washington, D.C. 20044 

 Attorneys for Appellee 

 __________________ 

 OPINION OF THE COURT 

 __________________ 

SCIRICA, Circuit Judge. 

 In this appeal, we must determine the validity of 

Treas. Reg. § 1.58-9 (1992). Specifically, the issue is whether 

the Department of the Treasury may implement a "suspended-tax" 

approach instead of a "suspended-preference" method in 

calculating minimum tax under the "tax benefit rule" of former 

I.R.C. § 58(h), 26 U.S.C. The first approach computes and 

suspends tax liability until a benefit results while the latter 

suspends items of tax preference. Because we find the suspendedtax approach to be a reasonable construction of § 58(h), in 

accord with its language and purpose, we will uphold the 

regulation. 

I. 

 E.I. du Pont de Nemours & Company, Conoco, Inc., 

Remington Arms Company, and New England Nuclear Corp.1 filed 

 

1. New England Nuclear Corp. (NEN) merged into DuPont 

after the 1981 taxable year, the year of the alleged deficiency 

against NEN. 
federal income tax returns for 1979, 1980, and 1981,2 claiming 

reductions in tax liability through the use of income tax credits 

carried back from the 1982 tax year. Subsequently, the Internal 

Revenue Service issued notices of deficiency to taxpayers for 

$25,633,133. Taxpayers responded by filing petitions in the Tax 

Court, contending the regulation on which the deficiencies were 

based exceeded the scope of the authorizing statute, I.R.C. § 

58(h).3 The Tax Court sustained the regulation, E.I. Du Pont De 

Nemours & Co. v. Commissioner, 102 T.C. 1 (T.C. 1994), and 

taxpayers appealed.4 We will affirm. 

A. 

 In 1969, Congress enacted I.R.C. § 56(a) out of concern 

over the use of tax deductions and exemptions that enabled some 

high-income taxpayers to pay little or no income tax.5 Section 

 

2. In 1982, DuPont filed a consolidated federal income tax 

return on behalf of itself and its affiliates, including Conoco, 

Remington, and E.I. du Pont de Nemours & Company, as successor to 

NEN. Conoco, Remington, and NEN were not affiliates of DuPont 

for the taxable years covered by the 1979-81 returns, however, 

and each entity therefore filed its own return. Furthermore, 

while DuPont and Conoco filed tax returns on behalf of their 

affiliated corporations, we will refer to the tax returns as 

having been filed by DuPont and Conoco. 

3. The law relevant to this appeal changed significantly 

in 1986. See infra note 38. Unless otherwise noted, citations 

to former I.R.C. §§ 56 and 58(h) will be to the 1982 version of 

the Internal Revenue Code, 26 U.S.C. 

4. DuPont, for itself and as successor to NEN, and 

Remington filed this appeal. Conoco, which has its principal 

place of business in Texas, has an appeal pending before the 

Court of Appeals for the Fifth Circuit. Conoco, Inc. v. 

Commissioner, No. 94-40382. 

5. See H.R. Rep. No. 413, 91st Cong., 1st. Sess., pt. 1, 

at 2 (1969), reprinted in 1969 U.S.C.C.A.N. 1645, 1646 ("Under 
56(a) imposed a minimum tax, apart from the regular income tax, 

on certain deductions and exemptions designated as "items of tax 

preference."6 During the years relevant to this case, the 

statute levied a minimum tax of 15% of the amount by which the 

(..continued) 

your committee's bill, virtually no individual with significant 

amounts of income will be able to escape payment of all 

tax. . . . The second line of defense is to group remaining tax 

preference items and impose a minimum tax or a limit on tax 

preferences."); S. Rep. No. 552, 91st Cong., 1st Sess. 112 

(1969), reprinted in 1969 U.S.C.C.A.N. 2027, 2143 ("the committee 

believes that an overall minimum tax on tax preferences is also 

needed to reduce the advantages derived from these preferences 

and to make sure that those receiving such preferences also pay a 

share of the tax burden"). See also First Chicago Corp. v. 

Commissioner, 842 F.2d 180, 181 (7th Cir. 1988) ("The purpose of 

minimum tax (original or alternative) is to make sure that the 

aggregating of tax-preference items does not result in the 

taxpayer's paying a shockingly low percentage of his income as 

tax."); Occidental Petroleum Corp. v. United States, 685 F.2d 

1346, 1350 (Cl. Ct. 1982) (Occidental I) ("The legislative 

history, to us, reflects a Congressional concern for the way the 

tax code is perceived by the general public. . . . In order to 

prevent the system from seeming inequitable, individuals and 

corporations with large incomes should not be able to avoid 

entirely the payment of domestic taxes."). 

6. Items of tax preference, defined in I.R.C. § 57 (1982), 

represented: 

 income of a person which either is not 

subject to current taxation by reason of 

temporary exclusion (such as stock options) 

or by reason of an acceleration of deductions 

(such as accelerated depreciation) or is 

sheltered from full taxation by reason of 

certain deductions (such as percentage 

depletion) or by reason of a special rate of 

tax (such as the rate of tax on corporate 

capital gains). 

T.D. 7564, 1978-2 C.B. 19, 23. Tax preferences continue to be 

defined in the current Internal Revenue Code, albeit in modified 

form. I.R.C. § 57 (1988 & Supp. 1994). 
taxpayer's preferences exceeded its regular tax deduction7 or 

$10,000, whichever was greater. 

 In some situations, however, tax preferences did not 

result in a current tax benefit for the taxpayer. For example, a 

taxpayer's tax liability could be completely offset by income tax 

credits, which were not designated as preferences. Yet, even in 

those cases in which tax preferences did not result in an actual 

benefit, such as when a taxpayer had enough tax credits to reduce 

its tax liability to zero, the minimum tax still was imposed. 

See Occidental Petroleum Corp. v. United States, 685 F.2d 1346 

(Cl. Ct. 1982) (Occidental I). 

 To remedy this perceived unfairness, Congress enacted a 

new provision, I.R.C. § 58(h), in the Tax Reform Act of 1976, 

Pub. L. No. 94-455, § 301(d)(3), 90 Stat. 1520, 1553 (1976).8 

I.R.C. § 58(h) provided: 

 

7. The "regular tax deduction" equaled income tax 

liability, including investment tax credit recapture, reduced by 

certain tax credits. I.R.C. § 56(c). 

8. The Joint Committee on Taxation explained the reason 

for § 58(h): 

 There are certain cases in which a 

person derives no tax benefit from an item of 

tax preference because, for example, the item 

is disallowed as a deduction under other 

provisions of the Code or because the 

taxpayer has sufficient deductions relating 

to nonpreference items to eliminate his 

taxable income. . . . To deal with this 

problem specifically, the Act instructs the 

Secretary of the Treasury to prescribe 

regulations under which items of tax 

preference (of both individuals and 

corporations) are to be properly adjusted 

when the taxpayer does not derive any tax 
 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. 

Despite the express statutory directive, the Department of the 

Treasury failed to propose implementing regulations for thirteen 

years.9 In the meantime, Congress repealed § 58(h) in 1986 and 

adopted an alternative minimum tax,10 although it later noted 

(..continued) 

benefit from the preference. For this 

purpose, a tax benefit includes tax deferral, 

even if only for one year. 

 

H.R. Rep. No. 10612, 94th Cong., 2d Sess., at 106-07 (1976) 

(footnote omitted), reprinted in 1976-3 C.B. 118-19. See also

First Chicago Corp., 842 F.2d at 181 ("[S]ection 56(a) would 

impose minimum tax on tax-preference items even though the items 

never conferred a tax benefit on the taxpayer. . . . The sparse 

legislative history as well as the text of section 58(h) 

indicates that this section was added in order to prevent these 

anomalous consequences."); Occidental Petroleum Corp. v. 

Commissioner, 82 T.C. 819, 824 (T.C. 1984) (Occidental II) 

("Plainly, in enacting section 58(h), Congress was concerned 

about not imposing the minimum tax on tax preferences where such 

tax preferences did not result in a tax benefit."). 

9. Courts have noted the interpretative difficulties 

caused by the Treasury's delay in issuing regulations under § 

58(h). See First Chicago Corp., 842 F.2d at 182 ("These and 

other questions might have been answered if the Treasury 

Department had ever gotten around to promulgating regulations 

under section 58(h), as ordered to do by Congress, but it never 

did, blaming its default on a staggering workload . . . ."); 

Occidental II, 82 T.C. at 829 ("[T]he failure to promulgate the 

required regulations can hardly render the new provisions of 

section 58(h) inoperative. We must therefore do the best we can 

with these new provisions."). 

10. The Tax Reform Act of 1986 replaced the remnants of the 

add-on minimum tax with an alternative minimum tax for taxable 

years after 1986. Tax Reform Act of 1986, Pub. L. No. 99-514, § 
that § 58(h) would continue to apply to tax years preceding the 

1986 statutory change.11 

B. 

 In 1989, the Treasury Department issued a temporary 

regulation to implement § 58(h).12 Three years later, the 

department promulgated a final version of the regulation, 26 

C.F.R. § 1.58-9, applicable only to preferences arising in 

taxable years from 1977 to 1986, when the statute was in effect. 

Id. § 1.58-9(b). Under the regulation, as specified by § 58(h), 

a taxpayer is not liable for the minimum tax on its preferences 

when they result in no current tax benefit, such as when the 

taxpayer has sufficient credits to offset tax liability for the 

year without deducting any available preferences. 

 Operation of the statute and regulation, however, 

results in an unavoidable secondary effect. When tax credits 

exceed regular tax liability for a year, the taxpayer is deemed 

to have received no current tax benefit and no minimum tax is 

imposed. Yet, the taxpayer still calculates regular tax 

liability by deducting its preferences. Because the resulting 

regular tax liability is lower than it otherwise would be without 

(..continued) 

701, 100 Stat. 2085, 2320-45 (1986) (codified as amended at 

I.R.C. §§ 55-59 (1988)). 

11. The Omnibus Budget Reconciliation Act of 1989, Pub. L. 

No. 101-239, title VII, § 7811(d)(1)(B), 103 Stat. 2106, 2408 

(1989), provided that: "The repeal of section 58(h) of the 

Internal Revenue Code of 1954 by the Tax Reform Act of 1986 shall 

be effective only with respect to items of tax preference arising 

in taxable years beginning after December 31, 1986." 

12. Temp. Treas. Reg. § 1.58-9T (1989). 
the inclusion of the preferences, fewer credits are necessary to 

offset the taxpayer's tax liability for the year. Because tax 

credits may be carried over from year to year, the need for fewer 

tax credits to offset tax liability in one year "frees up" 

additional credits for use in other years. 

 If the taxpayer does not use those "freed-up" tax 

credits to reduce regular tax liability in any year, then it 

never benefits from the preferences; thus, no minimum tax may be 

imposed. See Occidental Petroleum Corp. v. Commissioner, 82 T.C. 

819 (T.C. 1984) (Occidental II). If the taxpayer later uses 

those freed-up credits, however, then it has benefitted from the 

preferences and must pay the minimum tax. Treas. Reg. § 1.58-9. 

All parties agree with this conclusion. The dispute centers on 

the method by which the minimum tax is calculated. 
C. 

 For the 1982 tax year, DuPont filed a consolidated 

federal income tax return for itself and its affiliates -- 

including Conoco, Remington, and NEN -- showing taxable income of 

$629,112,639. DuPont claimed tax preferences of $177,082,305, 

which reduced its tax liability to $256,844,566. Without the use 

of preferences to compute taxable income, DuPont's tax liability 

would have been $338,302,426.13 Because DuPont had $469,997,179 

in credits -- more than enough to offset the potential tax 

liability of $338,302,426 -- it was not subject to minimum tax 

for the year, pursuant to I.R.C. § 58(h). See First Chicago 

Corp. v. Commissioner, 842 F.2d 180 (7th Cir. 1988). 

 Nevertheless, because DuPont claimed the preferences in 

1982 to reduce its taxable income and subsequent tax liability,14

it saved $81,457,86015 in credits for use in other years. DuPont 

carried back those freed-up credits and applied them to its own 

return for the 1979 tax year and to individual returns filed by 

 

13. The $338,302,426 in potential tax liability is 

calculated by multiplying the $177,082,305 in preferences by the 

marginal tax rate of 46 percent from I.R.C. § 11(b)(5) (1982). 

The result, $81,457,860, is then added to the $256,844,566 in 

regular tax liability computed after deducting the preferences 

from taxable income. 

14. After being offset by its tax credits, DuPont's zero 

tax liability actually increased to $5,626,409 because of the 

recapture of investment tax credits, which could not be offset by 

credits. 

15. See supra note 13. 
Conoco, Remington, and NEN, which were not affiliated at the time 

with DuPont.16

 Under Treas. Reg. § 1.58-9, the minimum tax constitutes 

15% of the difference between the taxpayer's tax preferences and 

its regular tax deduction for the year in which the preferences 

arose, here 1982. The regulation requires that credits freed up 

by the preferences in one year must be reduced by the amount of 

the minimum tax before being carried over to other tax years. 

In this case, § 1.58-9 mandated that the freed-up DuPont credits 

of $81,457,860 be reduced by $25,633,133, which was 15% of the 

difference between the 1982 preferences of $177,082,305 and the 

1982 regular tax deduction of $6,194,754.17

 Because DuPont had not reduced the credits pursuant to 

the regulation, the Commissioner assessed the following 

deficiencies: 

 Taxpayer Taxable Year Ended Deficiency

 DuPont December 31, 1979 $13,010,040 

 Conoco December 31, 1980 12,436,199 

 Remington January 31, 1980 78,698 

 NEN February 28, 1981 108,196

 Total $25,633,133 

 

16. See supra note 2. DuPont used the tax credits for the 

1979 tax year, Conoco and Remington used the credits for the 1980 

tax year, and NEN used them for the 1981 tax year. 

17. The regular tax deduction in 1982 was $568,345 more 

than the investment tax credit recapture amount of $5,626,409. 

See supra note 14. The difference resulted from I.R.C. § 56(c), 

which, in defining the regular tax deduction, excluded from 

offsetting tax credits the Tax Reduction Act Stock Ownership Plan 

(TRASOP) employee plan percentage, under I.R.C. § 46(a)(2)(E) 

(1982). 
 In contrast to the system mandated by the regulation, 

which the Tax Court characterized as the "suspended-tax method," 

taxpayers advocate a "suspended-preference approach." Du Pont, 

102 T.C. at 6. In essence, taxpayers' method would suspend the 

preferences -- not the minimum tax -- and treat them as if they 

had arisen during the carry-over year, i.e., the year the freedup credits are used. Those suspended preferences would be 

aggregated with other preferences arising in the carry-over year. 

The minimum tax then would equal 15% of the difference between 

the aggregated preferences and the regular tax deduction for the 

carry-over year. Under taxpayer's method, DuPont, Remington, and 

NEN would have no minimum tax liability, and the deficiency 

against Conoco would be reduced to $10,551,95618 -- instead of 

the $25,633,133 total deficiency assessed under Treas. Reg. § 

1.58-9. 

 Accordingly, taxpayers filed petitions in the Tax Court 

claiming the deficiencies were based on an invalid regulation. 

The Commissioner of Internal Revenue disagreed, and all parties 

submitted a fully stipulated record to the Tax Court, which 

upheld Treas. Reg. § 1.58-9 as a reasonable interpretation of the 

statute. Du Pont, 102 T.C. at 20-21. Taxpayers then appealed.19

 The Tax Court had jurisdiction of the case under I.R.C. 

§§ 6214(a) and 7442 (1988). We have jurisdiction under I.R.C. § 

 

18. For detailed calculations of the minimum tax under 

taxpayers' proposed system, see Du Pont, 102 T.C. at 7-8. 

19. See supra note 4. 
7482 (1988), and our review is plenary. Pleasant Summit Land 

Corp. v. Commissioner, 863 F.2d 263, 268 (3d Cir. 1988), cert. 

denied, 493 U.S. 901 (1989). 

II. 

 As an initial matter, we consider the judicial 

deference to which the regulation is entitled. Under Chevron 

U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 

837, 844 (1984), "legislative regulations are given controlling 

weight unless they are arbitrary, capricious, or manifestly 

contrary to the statute." Taxpayers, however, contend that § 

1.58-9 is not a "legislative" regulation entitled to deference 

under Chevron. 

 Because the Treasury proposed the regulation thirteen 

years after the statute's enactment and three years after its 

repeal, taxpayers argue that § 1.58-9 is not a "legislative" 

regulation issued under I.R.C. § 58(h), but merely an 

"interpretative" one20 under the department's general rule-making 

authority. See I.R.C. § 7805(a) (1988) ("the Secretary shall 

prescribe all needful rules and regulations for the enforcement 

 

20. In this context, "legislative regulations" are those 

issued pursuant to a specific grant of congressional authority 

"'to define a statutory term or prescribe a method of executing a 

statutory provision,'" while "interpretative regulations" are 

issued under the general grant of authority of I.R.C. § 7805(a). 

See Armstrong World Indus., Inc. v. Commissioner, 974 F.2d 422, 

430-31 (3d Cir. 1992) (quoting Rowan Cos. v. United States, 452 

U.S. 247, 253 (1981)). See also McKnight v. Commissioner, 7 F.3d 

447, 450-51 (5th Cir. 1993); Gehl Co. v. Commissioner, 795 F.2d 

1324, 1328 (7th Cir. 1986). 
of this title").21 We cannot agree. I.R.C. § 58(h) provided 

that the "Secretary shall prescribe regulations . . .," which 

appears to be precisely the type of "express delegation of 

authority to the agency" that Chevron contemplates. 467 U.S. at 

843-44. Although there may be situations in which substantial 

and prejudicial delay in exercising rule-making authority might 

alter the degree of deference accorded a regulation, we see no 

express prejudice here nor do we discern any other factors that 

would change the nature of our review. In addition, even after 

the repeal of § 58(h), Congress expressly stated that the statute 

would remain effective for preferences arising in taxable years 

before 1987.22 Therefore, the congressional directive for the 

Treasury to "prescribe regulations" under § 58(h) remained in 

force as to those taxable years. 

 Furthermore, in the tax area, we are still required to 

treat regulations issued under a general grant of authority with 

broad deference, although to a somewhat lesser degree than when 

Congress has made a specific delegation of authority in a 

specific statute.23 As the Supreme Court has explained: 

 

21. The preamble to Treas. Reg. § 1.58-9 states it was 

issued under the specific statute, I.R.C. § 58(h), and the 

general grant of authority of § 7805. See T.D. 8416, 1992-1 C.B. 

7, 7, 9. 

22. See supra note 11. 

23. See Polychrome Int'l Corp. v. Krigger, 5 F.3d 1522, 

1544 n.53 (3d Cir. 1993) (noting, in discussing the Virgin 

Islands tax code, that courts "owe less deference to an 

interpretative regulation . . . than to one promulgated under a 

specific grant of authority"); Armstrong World Indus., 974 F.2d 

at 430 ("legislative regulations not promulgated under the 

general authority to 'prescribe all needful rules and 
"Because Congress has delegated to the Commissioner the power to 

promulgate 'all needful rules and regulations for the enforcement 

of [the Internal Revenue Code],' 26 U.S.C. §7805(a), we must 

defer to his regulatory interpretations of the Code so long as 

they are reasonable." Cottage Sav. Ass'n v. Commissioner, 499 

U.S. 554, 560-61 (1991) (quoting National Muffler Dealers Ass'n 

v. United States, 440 U.S. 472, 476-77 (1979)).24

III. 

A. 

(..continued) 

regulations,' 26 U.S.C. § 7805(a), but instead emanating from a 

specific grant of Congressional authority 'to define a statutory 

term or prescribe a method of executing a statutory provision,' 

are owed an even greater deference") (quoting Rowan Cos., 452 

U.S. at 253). See also United States v. Vogel Fertilizer Co., 

455 U.S. 16, 24 (1982); McKnight, 7 F.3d at 450-51; Gehl Co., 795 

F.2d at 1328. 

 Although this court and others have noted that 

interpretative regulations issued under the Internal Revenue Code 

are entitled to less deference than legislative regulations, it 

is not clear whether this rule applies outside the Internal 

Revenue Code. So far we have declined to decide whether Chevron 

U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 

837 (1984), which advises judicial deference to agency 

regulations, overruled General Electric Co. v. Gilbert, 429 U.S. 

125, 141-42 (1976), which held that an agency's interpretative 

decisions required less judicial deference. See Sekula v. 

Federal Deposit Ins. Corp., No. 93-3596, 1994 WL 620836, at *8 

n.13 (3d Cir. Nov. 9, 1994); Reich v. Local 30, Int'l Bhd. of 

Teamsters, 6 F.3d 978, 987 n.14 (3d Cir. 1993); International Raw 

Materials, Ltd. v. Stauffer Chem. Co., 978 F.2d 1318, 1325 n.9 

(3d Cir. 1992), cert. denied, 113 S.Ct. 1588 (1993). 

24. See also Commissioner v. Portland Cement Co. of Utah, 

450 U.S. 156, 169 (1981) (citations omitted) ("Treasury 

Regulations 'must be sustained unless unreasonable and plainly 

inconsistent with the revenue statutes'"); Armstrong World 

Indus., 974 F.2d at 430 (citations omitted) ("we defer to 

treasury regulations that 'implement the congressional mandate in 

some reasonable manner'"). 
 I.R.C. § 58(h) directs the Treasury to enact 

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." On appeal, 

taxpayers' principal contention is that the regulation adjusts 

tax credits, not items of tax preference. 

 Although § 58(h) requires that taxpayers be exempt from 

the minimum tax for any year in which their preferences do not 

result in a tax benefit, the regulation nevertheless computes the 

minimum tax that otherwise would be due on those preferences for 

the year. The regulation then reduces the taxpayers' tax credits 

by the amount of the minimum tax. It is only when taxpayers 

attempt to benefit from their preferences -- by using the freedup credits -- that they become subject to the tax. 

 Taxpayers complain that the operation of § 1.58-9 

results in adjustments to their tax credits, contrary to the 

language of the statute. Instead, taxpayers claim the tax should 

be assessed by carrying the preference items from the "nonbenefit" year over to the "benefit" year and combining them with 

the preferences that arose during the latter year. The minimum 

tax then would equal 15% of the total number of preferences from 

both years subtracted by the benefit year's regular tax 

deduction. Taxpayers contend this method would adjust actual 

"items of tax preference," as the statute required. 

 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.25 We believe Treas. 

Reg. § 1.58-9 adjusts "items of tax preference" simply by 

ignoring them -- for minimum tax purposes -- during the year when 

no tax benefit is realized. As we have noted, the purpose of the 

statute was to ensure that no minimum tax be assessed on 

preferences when they did not result in a tax benefit;26 Treas. 

Reg. § 1.58-9 accomplishes this result. 

B. 

 Taxpayers contend Congress intended a "suspendedpreference approach" be promulgated to implement I.R.C. § 58(h) 

and claim the legislative history of the 1976 Tax Reform Act, 

which adopted § 58(h), supports their construction of the 

statute. But none of the congressional committee reports on § 

58(h) indicates the method by which the preferences were to be 

adjusted.27 Nevertheless, taxpayers point to one committee 

report discussing other provisions of the Code that specify a 

type of suspension and reactivation of preferences somewhat 

 

25. The Commissioner claims the taxpayers' approach would 

violate fundamental principles of the Internal Revenue Code by 

permitting deductions to be shifted from one tax year to another. 

Taxpayers respond that they would adjust preferences only for 

minimum tax purposes, not under the regular tax, and thus the 

integrity of the Code would remain intact. Because we find the 

Treasury regulation to be a reasonable construction of the 

statute, we need not resolve this issue. 

26. See supra note 8. 

27. See, e.g., S. Rep. No. 938, 94th Cong., 2d Sess., pt. 

I, at 113-14 (1976), reprinted in 1976 U.S.C.C.A.N. 3439, 3548-

49; H.R. Rep. No. 658, 94th Cong., 2d Sess. 130-32 (1975), 

reprinted in 1976 U.S.C.C.A.N. 2897, 3025-27. 
similar to the system they advocate.28 That committee report, 

however, does not explicitly support taxpayers' method of tax 

computation. Furthermore, as the Commissioner contends, the 

cited Code provisions are not analogous because they suspend tax 

deductions for other purposes,29 not just for minimum tax 

purposes, as does § 58(h).30 

 

28. The Joint Committee on Taxation Staff General 

Explanation of the Tax Reform Act of 1976 stated: 

 There are certain cases in which a person 

derives no tax benefit from an item of tax 

preference because, for example, the item is 

disallowed as a deduction under other 

provisions of the Code or because the 

taxpayer has sufficient deductions relating 

to nonpreference items to eliminate his 

taxable income.1 

 _______________ 

 1For example, preference items giving rise 

to losses which are suspended under at risk 

provisions (sec. 465 or sec. 704(d) of the 

Code) are not to be considered to give rise 

to a tax benefit until the year in which the 

suspended deduction is allowed. Similarly, 

investment interest which is disallowed 

(under sec. 163(d)) is to be treated as an 

itemized deduction for purposes of that 

preference only in the year in which it is 

allowed (under sec. 163(d)). 

H.R. Rep. No. 10612, 94th Cong., 2d Sess., at 106-07 (1976) 

(footnote omitted), reprinted in 1976-3 C.B. 118-19. 

29. See I.R.C. §§ 465, 704(d), 163(d) (1976). 

30. Taxpayers also contend the regulation is contrary to 

legislative intent because it was issued after Congress failed to 

include in a 1989 statute a proposal to permit the Treasury to 

adjust items other than tax preferences, presumably including tax 

credits. In excluding this language from the final bill, 

however, the Conference Report noted the omission was not 

intended to affect the pending temporary Treasury regulation, 

which was later largely adopted as Treas. Reg. § 1.58-9: 
 Taxpayers also assert that Treas. Reg. § 1.58-9 

distorts congressional will by interfering with the operation of 

other provisions of the Internal Revenue Code. First, taxpayers 

claim the regulation disregards the import of the regular tax 

deduction in calculating and reducing minimum tax liability under 

I.R.C. § 56(a), (c). Because Treas. Reg. § 1.58-9 "transforms a 

suspended minimum tax in the year the nonbeneficial preferences 

arise into regular tax liability in the benefit year," Du Pont, 

102 T.C. at 15-16, the preferences from the non-benefit year are 

not being weighed against the regular tax deduction in the year 

they result in a benefit. Yet, under the regulation, the 

preferences from the non-benefit year continue to be weighed 

against the regular tax deduction in the non-benefit year in 

calculating the amount of the suspended tax. Furthermore, while 

the regular tax deduction appears to be an integral part of the 

minimum tax computation system of § 56, we can discern no 

(..continued) 

 The conferees do not intend any change 

in the scope of the authority provided in 

section 58(h) of prior law. Thus, only those 

regulations which would have been valid under 

section 58(h) of prior law are valid under 

the conference agreement. No inference is 

intended as to whether the regulations issued 

by the Treasury Department are valid under 

section 58(h) or prior law. 

H.R. Conf. Rep. No. 386, 101st Cong., 1st Sess. 664-65 (1989), 

reprinted in 1989 U.S.C.C.A.N. 3018, 3267-68. Thus, Congress's 

failure to approve the language cited above should not affect our 

determination as to the validity of the regulation. 
authority or evidence the regular tax deduction was meant to play 

a crucial role in the tax benefit rule of § 58(h). 

 Second, because Treas. Reg. § 1.58-9 operates to reduce 

tax credits available for use in other years, taxpayers contend 

the regulation improperly interferes with Code provisions 

governing tax credits and the regular income tax. Although the 

regulation does affect tax credits, it does so only in limited 

circumstances to certain taxpayers, as the Tax Court noted. 

Du Pont, 102 T.C. at 19. There is no authority suggesting the 

minimal effects of the regulation will disrupt the entire system 

of tax credits crafted by Congress or that Congress intended to 

forbid all regulations that affect tax credits in any manner.31

 Taxpayers urge us to look to other provisions of the 

Internal Revenue Code for guidance in considering the validity of 

Treas. Reg. § 1.58-9. Accordingly, we have examined I.R.C. § 

56(b), which until 1987 provided for deferral of minimum tax 

liability in situations involving net operating losses affected 

by preferences. Under § 56(b), if preferences served to increase 

a net operating loss in one year, the minimum tax otherwise due 

on the preferences under § 56(a) was suspended until the year the 

preferences provided a tax benefit. The amount of the minimum 

 

31. Taxpayers also complain that the regulation affects the 

balance between the regular tax and minimum tax provisions 

created by 1982 and 1984 congressional amendments to the Internal 

Revenue Code that scaled back certain preferences by specified 

percentages. See Tax Equity and Fiscal Responsibility Act of 

1982, Pub. L. No. 97-248, 1982 U.S.C.C.A.N. (96 Stat. 324); 

Deficit Reduction Act of 1984, Pub. L. No. 98-369, § 68(a), 98 

Stat. 494, 588 (1984). We do not believe § 1.58-9 will interfere 

with the operation of these statutory changes. 
tax imposed on the preferences in this situation was calculated 

with reference to the minimum tax rate and the regular tax 

deduction for the year in which the preferences originated -- 

similar to the manner in which § 1.58-9 operates. Du Pont, 102 

T.C. at 17-18. We agree with the Tax Court that § 56(b) 

generally supports the rationale of Treas. Reg. § 1.58-9. Id. at 

18. 

 Therefore, we find nothing in the legislative history 

or inferentially from other sections of the Internal Revenue Code 

that would indicate the Treasury deviated from the language or 

purpose of the statute. What is clear is the language of § 58(h) 

that directs the Secretary to "prescribe regulations under which 

items of tax preference shall be properly adjusted." Congress 

made a specific delegation of authority to the Secretary to 

promulgate regulations, and we may not substitute an alternative 

construction of the statute unless the regulation contravenes the 

language or purpose of the statute,32 which this regulation does 

not do. 

 

32. See supra section II. 
C. 

 Since 1976, when I.R.C. § 58(h) was enacted, other 

courts have considered its meaning and scope.33 Although no 

prior cases directly confronted the validity of Treas. Reg. § 

1.58-9, taxpayers contend their position here is bolstered by the 

reasoning of First Chicago Corp. v. Commissioner, 842 F.2d 180 

(7th Cir. 1988). In First Chicago, the taxpayer had credits 

exceeding its tax liability for the 1980 and 1981 tax years. The 

Internal Revenue Service, however, decreed First Chicago should 

pay the minimum tax for those years on the preferences it used to 

reduce its tax liability, because those preferences freed up tax 

credits that might have been used to reduce First Chicago's 

 

33. For example, in Occidental Petroleum Corp. v. United 

States, 685 F.2d 1346 (Cl. Ct. 1982) (Occidental I), the Court of 

Claims considered the propriety of the minimum tax for the years 

before Congress enacted the tax benefit rule of § 58(h). The 

court held the minimum tax was imposed regardless of whether the 

preferences actually resulted in a tax benefit. The court also 

determined that the provisions of § 58(h) should not be applied 

retroactively to cover the years 1970-71. In Occidental 

Petroleum Corp. v. Commissioner, 82 T.C. 819 (T.C. 1984) 

(Occidental II), the taxpayer's tax credits exceeded its tax 

liability for 1977, although it used its tax preferences to 

reduce the number of credits needed to offset that tax liability 

-- just as DuPont did in 1982. In Occidental II, however, the 

taxpayer never used the tax credits freed up by the preferences; 

instead, the credits expired unused. Nevertheless, the 

Commissioner attempted to impose the minimum tax on the taxpayer 

because, as in the present case, the taxpayer's use of the 

preferences did provide a benefit in the form of increased 

available credits for use in other years -- even if those credits 

later expired unused. The court rejected the Commissioner's 

argument and held that the provisions of § 58(h) meant "no 

minimum tax is to be imposed where the tax preference does not 

result in a decrease of tax not only for the year under 

consideration (here 1977) but also for any other year." Id. at 

828. 
future tax liability. The Court of Appeals for the Seventh 

Circuit disagreed, affirming the Tax Court's holding that "there 

is no minimum tax on tax-preference items until the items confer 

an actual benefit on the taxpayer." Id. at 180.34

 In the course of its discussion, the Seventh Circuit 

noted: 

 It is true that, as a result of Congress's 

extreme restlessness in the area of tax law, 

by the time the benefit is obtained the 

structure of taxation may have changed and 

the taxpayer may escape part or even all of 

the tax. But this instability is built into 

tax law. If a taxpayer is able to defer 

income to a year when tax rates are lower, he 

obtains a tax savings analogous to what First 

Chicago may someday obtain if its taxpreference items yield a tax benefit which 

gives rise to a minimum-tax liability that it 

can offset with foreign or investment tax 

credits, thanks to the new alternative 

minimum tax. But the deferral may backfire, 

if the structure of taxation changes against 

the taxpayer. 

Id. at 183. This language suggests the court may have assumed 

that if the 1980-81 preferences generated a tax benefit after the 

1986 statutory changes, then they would be treated as preferences 

in that later year and be subject to the new alternative minimum 

tax, a view of § 58(h) advocated by taxpayers here. 

 But such assumptions, even if indicative of the court's 

view, cannot be persuasive here. At the time of the decision in 

First Chicago, § 1.58-9 had not been promulgated. In fact, the 

 

34. Although the Seventh Circuit rejected the Treasury's 

position, the preamble to § 1.58-9 notes the regulation is 

"[c]onsistent" with the holding of First Chicago Corp. See T.D. 

8416, 1992-1 C.B. 7, 8. 
court decried the absence of a regulation as contributing to the 

difficulties in interpreting § 58(h).35 Once the Treasury 

Department adopted the regulation pursuant to § 58(h), the 

landscape changed. Instead of choosing among alternative methods 

of interpreting the statute, we must inquire whether the Treasury 

regulation reasonably implements the statute.36 As we have 

noted, we believe it does. 

D. 

 Besides challenging the substance of Treas. Reg. § 

1.58-9, taxpayers assert the regulation was enacted in "bad 

faith" and thus not entitled to judicial deference. In support, 

taxpayers cite National Muffler Dealers Ass'n v. United States, 

440 U.S. 472 (1979). In National Muffler, the Supreme Court 

stated, in assessing the validity of regulations, courts should 

consider factors such as whether the regulation was issued 

contemporaneously with the statute, the manner in which it 

evolved, "the length of time the regulation has been in effect, 

the reliance placed on it, the consistency of the Commissioner's 

interpretation, and the degree of scrutiny Congress has devoted 

to the regulation during subsequent re-enactments of the 

statute." Id. at 477. Taxpayers argue the National Muffler

factors demonstrate the regulation should be set aside. Although 

 

35. First Chicago Corp., 842 F.2d at 182 ("These and other 

questions might have been answered if the Treasury Department had 

ever gotten around to promulgating regulations under section 

58(h), as ordered to do by Congress, but it never did . . . ."). 

36. See supra section II. 
application of the National Muffler factors may not explicitly 

validate § 1.58-9, we do not find that sufficient to warrant 

striking down the regulation.37 In fact, we already have 

determined the regulation implements the statute in a "reasonable 

manner," which is all National Muffler ultimately requires and 

which is what its factors were intended to ascertain. Id. at 

476-77 (noting that courts should defer to regulations that 

"implement the congressional mandate in some reasonable manner" 

and listing factors to "determin[e] whether a particular 

regulation carries out the congressional mandate in a proper 

manner"). 

 Taxpayers also assert the regulation is not entitled to 

deference because the Treasury Department promulgated it in an 

 

37. Indeed, in National Muffler, the Treasury waited six 

years after the statute was enacted to issue any regulation and 

then substantially changed its own regulation ten years after 

that. 440 U.S. at 478-82. Nevertheless, the Supreme Court 

deferred to the regulation. Id. at 488-89. 

 We are not persuaded that the National Muffler factors 

favor taxpayers' position here. Although the regulation was not 

issued contemporaneously with the statute nor been long in place, 

taxpayers have not shown they detrimentally relied on any prior 

understanding of the statute. The Commissioner's interpretation 

of the statute apparently has changed primarily because of 

judicial decisions such as Occidental II, 82 T.C. 819 (T.C. 

1984), and First Chicago Corp., 842 F.2d at 180. See T.D. 8416, 

1992-1 C.B. 7, 8 (noting that Treas. Reg. § 1.58-9 is 

"[c]onsistent" with the holding of First Chicago). Furthermore, 

although Congress may not have re-enacted the statute, it 

expressly noted the statute would continue to apply to the years 

preceding the repeal of § 58(h). See supra note 11. Finally, 

National Muffler involved an interpretative regulation issued 

under the general grant of authority of I.R.C. § 7805(a), rather 

than a regulation issued pursuant to a specific statutory 

mandate. In view of this, the National Muffler analysis is 

somewhat less helpful. 
attempt to circumvent the 1986 change in the revenue statutes 

that permitted up to 90% of the minimum tax to be offset by 

foreign tax credits.38 In addition, taxpayers claim the Treasury 

adopted § 1.58-9 merely to enhance its litigating stance in cases 

like this. 

 As to the claim the regulation was enacted merely to 

bolster the Treasury's litigating position, one court has ruled 

that "the Commissioner may not take advantage of his power to 

promulgate retroactive regulations during the course of a 

litigation for the purpose of providing himself with a defense 

based on the presumption of validity accorded to such 

regulations." Chock Full O' Nuts Corp. v. United States, 453 

F.2d 300, 303 (2d Cir. 1971). Yet, as the Court of Appeals for 

the Fifth Circuit noted, "[n]o case has held that the Secretary 

abused his discretion to promulgate retroactive regulations 

merely because the regulation at issue affected a legal matter 

pending before a court at the time the regulation was adopted." 

Anderson, Clayton & Co. v. United States, 562 F.2d 972, 980 (5th 

Cir. 1977), cert. denied, 436 U.S. 944 (1978). In the present 

case, there is no claim that any specific case was pending at the 

time the regulation was proposed. Furthermore, taxpayers cite to 

 

38. The Tax Reform Act of 1986 replaced the add-on minimum 

tax for corporations with an alternative minimum tax for taxable 

years after 1986. Tax Reform Act of 1986, Pub. L. No. 99-514, § 

701, 100 Stat. 2085, 2320-45 (1986) (codified as amended at 

I.R.C. §§ 55-59 (1988)). Under the old system, foreign tax 

credits could not be used to offset the minimum tax. Under the 

new alternative minimum tax, foreign tax credits are permitted to 

offset up to 90% of the tax. See First Chicago Corp., 842 F.2d 

at 182; I.R.C. § 55, 59(a)(2) (1988 & Supp. 1994). 
nothing in the record to support any of their suspicions 

regarding the Treasury Department's motives in promulgating the 

regulation, and the case was submitted to the Tax Court fully 

stipulated. DuPont, 102 T.C. at 2. 

IV. 

 In evaluating Treas. Reg. § 1.58-9, we are mindful of 

the Supreme Court's admonition: "The choice among reasonable 

interpretations [of the Internal Revenue Code] is for the 

Commissioner, not the courts." Skinner v. Mid-America Pipeline, 

490 U.S. 212, 222 (1989) (quoting National Muffler Dealers Ass'n 

v. United States, 440 U.S. 472, 488 (1979)). After considering 

the regulation in light of the language of I.R.C. § 58(h), and 

the purpose behind it, we are satisfied § 1.58-9 constitutes a 

reasonable interpretation of the statute. Accordingly, we will 

affirm the judgment of the Tax Court.