TAX COURT OPINION

Case: Charles C. Allen, III & Barbara N. Allen
Docket Number: 1287-00
Judge: Laro
Opinion Type: reported
Filed: 01/04/2002
Pages: 18

118 T.C. No. 1 UNITED STATES TAX COURT STAT, 1 FILES CHARLES C. ALLEN, III AND BARBARA N. ALLEN, ET AL.¹, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 1287-00, 1288-00, 1289-00, 1290-00, 1291-00, 1292-00, 1293-00, 1618-00. Filed January 4, 2002. . Ps are the shareholders of F, a subch. S corporation. During its 1994 and 1995 taxable years, F incurred wages that qualified for the targeted jobs credit F claimed TJCs of $456,264 and $259,434 for the respective years and reported to Ps their proportionate shares of the credits. F reduced its deduction of wages by the (TJC) under secs. 38 and 51, I.R.C. ¹ Cases of the following petitioners are consolidated John R. Allen and Estate of Sally F. Allen, docket No. herewith: 1288-00; John R. Allen, Jr., and Susan S. Allen, docket No. 1289-00; John R. and Judith M. Allen, docket No. 1290-00; Charles C. Allen, Jr., docket No. 1291-00; Warren L. Allen, docket No. 1292-00; Warren L. Allen, Jr., docket No. 1293-00; and Amantha S. Allen, docket No. 1618-00. þERVED ÈN - 4 2002 Petitioners Charles C. Allen III and Barbara N. Allen Charles C. Allen, Jr. John R. Allen and Estate of Sally F. Allen John R. and Judith M. Allen John R. Allen, Jr., and Susan S. Allen Warren L. Allen Warren L. Allen, Jr. Amantha S. Allen 1994 1995 $21,321 21,324 21,395 - 21,394 6,388 36,197 36,197 $12,107 12,015 - 12,108 12,107 1,970 20,582 20,582 Following concessions in docket numbers 1291-00 and 1292-00, we must decide whether the wage-expense-limitation of section 280C(a) enters into the calculation of alternative minimum taxable income (AMTI). As relevant herein, section 280C(a) limits a taxpayer's wage expense to the amount of the expense that exceeds the amount of a targeted jobs credit (TJC) determined under section 51(a). We hold that section 280C(a) enters into the calculation of a taxpayer's AMTI. . Background All facts were stipulated and are so found. The stipulated facts and the exhibits submitted therewith are incorporated herein by this reference. During the subject years, each petitioner,3 with the exception of Warren L. Allen and Charles C. Allen, Jr., filed a joint Federal income tax return with his wife. Charles C. Allen III was the husband of Barbara N. Allen. John R. Allen was the husband of Sally F. Allen during 1994, and 3 We hereinafter refer to Charles C. Allen III, Charles C. Allen, Jr., John R. Allen, John R. Allen, Jr., Warren L. Allen, and Warren L. Allen, Jr., as the sole petitioners. - 5 - Shareholder No. of Shares Percent Charles C. Allen, Jr. Charles C. Allen III Warren L. Allen Warren L. Allen, Jr. John R. Allen John R. Allen, Jr. Total 50 50 15 85 50 _50 300 16.67 16.67 5.00 28.33 16.67 16.67 100.00 (rounded) During its 1994 and 1995 taxable years, Foods incurred wages which qualified for the TJC. Foods claimed TJCs of $456,264 and $259,434 on its 1994 and 1995 Federal income tax returns, respectively, and reported to each petitioner on his Schedules K-1, Shareholder's Share of Income, Credits, Deductions, etc., his proportionate shares of those credits. The Schedules K-1 reported the proportionate shares as follows: Shareholder 1994 1995 Charles C. Allen, Jr. Charles C. Allen, III Warren L. Allen Warren L. Allen, Jr. John R. Allen John R. Allen, Jr. Total $76,044 76,044 22,813 129,275 76,044 76,044 456,264 $43,239 43,239 12,972 73,506 43,239 43,239 259,434 For Federal income tax purposes, Foods reduced its deduction of wages by the amount of the TJC as required by section 280C(a) and reported to each petitioner on his Schedules K-1 his proportionate share of the resulting net income (Foods' resulting net income). Each petitioner computed his regular income tax liability for 1994 and 1995 by including in his taxable income his proportionate share of Foods' resulting net income. claimed on his return by virtue of the TMT limitation of section - 7 - 38(c)(1) (A). . Discussion The Internal Revenue Code imposes upon taxpayers an alternative minimum tax (AMT) in addition to all other taxes imposed by subtitle A. See sec. 55(a). The AMT is imposed upon a taxpayer's AMTI, which is an income base broader than the usual • base of taxable income applicable to Federal income taxes in general. See H. Conf. Rept. 99-841 (Vol. II), at II-249 (individual AMT), II-263 (corporate AMT) (1986), 1986-3 C.B. (Vol. 4) 250, 264. Congress established AMTI as a broad base of income in order to tax taxpayers more closely on their economic income, intending for all taxpayers to pay their fair share of the overall Federal income tax burden. See S. Rept. 99-313, at 518-519 (1986), 1986-3 C.B. (Vol. 3) 518-519; H. Rept. 99-426, at 305-306 (1985), 1986-3 C.B. (Vol. 2) 305-306. Congress required that corporations be taxed at a single AMT rate and that individuals be taxed under a progressive AMT regime with two rates. The highest AMT rate applicable to a taxpayer is lower than the taxpayer's maximum rate of taxation under the regular tax regime, and a taxpayer must pay AMT when the taxpayer's AMT liability is greater than the taxpayer's regular tax liability. The instant case focuses on the tax base upon which AMTI is calculated. Specifically, we pass for the first time on the Petitioners assert that the wage-expense-limitation is not applicable to the AMTI calculation under a plain reading of section 280C(a) because a TJC is never determined in the AMT regime. Respondent acknowledges that the primary reading of the provisions underlying the AMT regime requires that a taxpayer calculate AMTI by adjusting taxable income in the manner set forth in section 55(b) but invites the Court to adopt the alternative reading advanced by petitioners under which the AMT and regular tax regimes are considered parallel systems in that the computation of AMT starts from scratch without regard to any calculation made for regular tax purposes. Respondent argues that the fact that a TJC is determined for the regular tax regime is enough to subject petitioners to the wage-expense-limitation in the calculation of AMTI under the AMT regime given the absence of any statutory provision that provides to the contrary. We agree with respondent that the wage-expense-limitation of section 280C(a) enters into the calculation of AMTI but do so for reasons different than he espouses. Our analysis begins with the relevant statutory text. We interpret that text with reference to the legislative history primarily to learn the purpose of the statute and to resolve any ambiguity in the words contained in the text. Landgraf v. USI Film Prods., 511 U.S. 244 (1994); Commissioner v. Soliman, 506 U.S. 168, 174 (1993); Consumer Prod. Safetý Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980); credit is the sum of the following credits determined for the taxable year: . - 11 - - * * * * * * * (2) the targeted jobs credit determined under section 51(a); * * * * * * * (c) Limitation Based on Amount of Tax.-- (1) In general.--The credit allowed under subsection (a) shall not exceed the excess (if any) of the taxpayer's net of-- income tax over the greater for any taxable year (A) the tentative minimum tax for the taxable year, or (B) 25 percent of so much of the taxpayer's net regular tax liability as exceeds $25,000. the income tax" means the sum of the For purposes of the preceding sen·tence, term "net regular tax liability and the tax imposed by section 55, reduced by the credits allowable under subparts A and B of this part, and the term "net regular tax liability" means the regular tax liability reduced by the sum of the credits allowable under subparts A and B of this part. * * * * * * * For purposes of section 38(b)(2), the TJC generally entitles a taxpayer such as Foods (and, by virtue of the passthrough nature of Foods, each petitioner) to a credit equal to a percentage of the salaries or wages (collectively, wages) which it incurs in employing individuals described in one or more of the targeted groups enumerated in section 51(d)(1). If the taxpayer cannot - 13 - apply in the case of AMTI. Nor do we read any of the provisions underlying AMT that would lead us to that result.5 The heart of AMT is section 55. That section provides: SEC. 55. ALTERNATIVE MINIMUM TAX IMPOSED. (a) General Rule.--There is hereby imposed (in addition to any other tax imposed by this subtitle) a tax equal to the excess (if any) of-- • (1) the tentative minimum tax for the taxable year, over (2) the regular tax for the taxable year. (b) Tentative minimum tax.--For purposes of this part-- . (1) Amount of Tentative Tax. (A) Noncorporate taxpayers. (i) In general.--In the case of a taxpayer other than a corporation, tax for the taxable year is the sum of-- the tentative minimum (I) 26 percent of so much of not exceed $175,000, plus the taxable excess as does 3 Although respondent concedes that no petitioner is liable for AMT, we must address the AMT provisions in order to compute each petitioner's TMT. (in the computation of a taxpayer's regular tax liability, the application of the TJC may be limited by the taxpayer's TMT). taxpayer's TMT is generally a three-step process in which: The taxpayer's AMTI (2) reduced amount the resulting tax figure is reduced by the alternative minimum foreign tax credit. is multiplied by the AMT rate, and (3) is reduced by an exemption amount, The calculation of a Sec. 55(b)(1), (1) the See sec. 38(c) (d). - 15 - (A) determined with the adjustments provided in section 56 and section 58, and (B) increased by the amount of the items of tax preference described in section 57. to the regular tax, If a taxpayer is subject such taxpayer shall be subject imposed by this section (and, if the regular tax is determined by reference to an amount other than taxable income, such amount shall be treated as the taxable income of such taxpayer for purposes of the preceding sentence) . to the tax From this text, we understand explicitly that the base of AMTI is "taxable income", and that this base may be affected by the items described in sections 56, 57, and 58. Sec. 55(b)(2). See generally sec. 59, which, although not specifically mentioned in section 55, provides definitions and special rules that apply in the setting of AMT. As to the meaning of the term "taxable income", Congress has provided unambiguously and with sweeping breadth that "for purposes of this subtitle, the term 'taxable income' means gross income [see sec. 61(a) for the applicable meaning of the term "gross income"6] minus the deductions allowed by this chapter (other than the standard deduction)."7 Sec. 6 Whereas sec. 61(a) provides that the meaning of the term "gross income" as set forth therein doe's not apply "where otherwise provided in this subtitle", we are unaware of any provision in the subtitle that would make the sec. 61(a) definition inapplicable to sec. 63(a). 7 Congress provided the sole exception to this rule in sec. (continued...) - 17 - Corporations; Form 6251 (individuals). Because section 280C is a wage-expense-limitation that enters into the computation of taxable income for purposes of section 63(a), and section 280C(a) is not referenced in part VI, we conclude naturally that the limitation is reflected in the calculation of AMTI. Petitioners assert in their brief that the legislative history underlying AMT "makes clear" that the AMT regime is a "separate and independent tax system that operates in parallel with the RT [regular tax) system and requires separate calculations of a taxpayer's" taxable income for regular tax purposes and AMTI. Petitioners conclude that, notwithstanding the fact that section 280C(a) is not referenced in part VI, section 28ÒC(a) is inapplicable in the AMT regime because the TJC is also inapplicable there. Respondent does not disagree with the parallel tax regime rationale advanced by petitioners. Respondent invites the Court to hold that the systems are "parallel" in the sense that a taxpayer who has calculated taxable income must start from scratch in a separate computation of AMTI. Both respondent and petitioners rely extensively upon the Staff of Joint Comm. on Taxation, General Explanation of the Tax Reform Act of 1986 (J. Comm. Print 1987) (General Explanation of the 1986 Act), in arguing that the legislative history under the current AMT regime supports the treatment of that regime as a system that is parallel to the regular tax regime. - 19 - memorandum (Tech. Adv. Mem. 9722005 (Feb. 5, 1997)) issued as to the facts of this case. The referenced sentences of the General Explanation of the 1986 Act provide: Structure of minimum tax as an alternative the tax base for the new system.--For most purposes, alternative minimum tax is determined as though the alternative minimum tax were a separate and independent income tax system. provision refers to a "loss" of the taxpayer from an activity, the existence of a loss is determined with regard to the items that are includable and deductible for minimum tax, not regular tax, purposes. Explanation of the 1986 Act, supra at 438.] for purposes of the alternative minimum tax Thus, for example, where a Code [General The referenced sentence in the preamble to section 1.55-1, Income Tax Regs., provides (with a citation to the General Explanation of the 1986 Act, supra at 438 n.9): "Congress generally intended that the AMT be treated as a tax system separate from but parallel to the regular tax system". T.D. 8569, 59, 1994-2 C.B. 13. The technical advice memorandum reasons that the regular tax regime operates in parallel to the AMT regime. Tech. Adv. Mem. 9722005 (Feb. 5, 1997). Respondent, in turn, acknowledges that the primary reading of the AMT provisions requires that AMTI be calculated by modifying taxable income by the items described in part VI. In a manner that is openly inconsistent with respondent's plain reading of section 280C(a), however, respondent invites the Court not to apply the plain meaning of section 55 and to adopt the de novo computation of AMTI advanced by petitioners. Respondent - 21 - Rept. 99-841, supra at 261, 1986-3 C.B. 261.9] (Vol. 4) at 9 But for these citations, respondent's argument on brief includes no citation to the legislative history underlying the Tax Reform Act of 1986 (1986 Act), Pub. L. 99-514, 100 Stat. 2085, enactment of the current AMT regime. Our research has revealed two other times in which the term "separate from but parallel to" appears in that stated that the House bill provided the following rules on the application of the AMT FTCs and the AMT NOLs to corporate taxpayers: legislative history. The conferees Under the House bill, foreign tax credits are the minimum tax, under limits similar allowed against to those applying under the regular tax. Credits that cannot be used in the current taxable year because of these limits are carried over under a system separate from but parallel to that applying for regular tax purposes. * * * * * * * Under the House bill, the net operating loss deduction is allowed against alternative minimum taxable income. For any taxable year beginning after 1985, the minimum tax is reduced by the items of tax preference arising in that year. Minimum tax NOLs are carried over under a system separate from but parallel to that applying for regular tax purposes. Rept. 99-841 (Vol. II), supra at 1986-3 C.B. (Vol. 4) at 281, 282.] [H. Conf. II-281, II-282 (1986), In addition to these two uses of the word "parallel" and the other two uses referenced by the parties, our research has uncovered only one other time that the word "parallel" appears in the legislative history underlying the 1986 Act's enactment of the current AMT regime. of corporate AMT NOLs: The conferees stated in its discussion It is clarified that, in light of the parallel nature of the regular tax and minimum tax systems, any limitations applying for regular tax purposes to the use by a consolidated group of NOLs or current year losses (e.g., section 1503) apply for minimum tax purposes as well. [H. Conf. Rept. 99-841, supra at II- (continued...) - 23 - relevant statutory provisions. To be sure, the parties, but for citations to the conferees' understanding of the law that preceded the 1986 Act, have not even cited the Court one iota of persuasive legislative history in support of their contentions. The General Explanation of the 1986 Act, the source of the "legislative history" upon which the parties primarily rely to support their assertions of legislative intent, is not part of the statute's legislative history. See Estate of Hutchinson v. Commissioner, 765 F.2d 665, 669-670 (7th Cir. 1985), affg. T.C. Memo. 1984-55; Condor Intl., Inc. v. Commissioner, 98 T.C. 203, 227 (1992). See generally Mertens, Law of Federal Income Taxation, sec. 3.20, at 31 (1994): in one volume, a compilation of the The purpose of the Blue Book [the Staff of Joint Committee's general explanation of a tax statute] provide, legislative history of a piece of tax legislation. While the document volume it also gives some guidance. Where the Blue Book's explanation differs from that report it may serve to alert the reader that a technical correction is needed to reconcile the views. [Emphasis added.] is most helpful as a handy reference is to in a conference Such is especially true as to the General Explanation of the 1986 Act, which was written by the Joint Committee of Taxation for the 100th Congress (Joint Committee), or, in other words, the Congress that next followed the Congress that passed the 1986 Act." Although the Staff of Joint Committee's explanation of a " The Joint Committee consisted of 10 Congressman, 5 from (continued...) - 25 - position by stating "For most purposes, the tax base * * * is determined as though the alternative minimum tax were a separate and independent income tax system." General Explanation of the 1986 Act, supra at 438 (emphasis added). To our minds, the phrase "For most purposes" means that even the Joint Committee recognized that the regular tax and AMT systems were not parallel systems for all purposes. The same is true as to the use of the • term "as though", rather than a term such as "by virtue of the fact that". As to the Joint Committee's use of the term "separate and independent", we find no statement in the General Explanation of the 1986 Act to the effect that the two regimes are separate and independent for all purposes. And even if we did, the mere fact that two systems are "separate and independent" does not make them "parallel". The General Explanation of the 1986 Act uses the word "parallel" only twice in its discussion of AMT. First, as to the treatment of AMT NOLs, the General Explanation of the 1986 Act states: In light of the parallel nature of the regular tax and minimum tax systems, any limitations applying for regular tax purposes to the use by a consolidated group of NOLs or current year losses (e.g., section 1503) apply for minimum tax purposes as well. Moreover, an election under section 172(b)(3)(C) to relinquish the carryback period applies for both regular tax and min1mum purposes. Act, supra at 470.] [General Explanation of the 1986 - 27 - parallel to their treatment for regular tax purposes does not, in our minds, mean that the entire AMT regime runs parallel to the regular tax regime.¹² Although the legislative history to a statute is secondary when the Court can apply the plain meaning of unambiguous statutory text, we recognize that unequivocal evidence of a clear legislative intent may sometimes override a plain meaning interpretation and lead to a different result. Consumer Prod. Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980); see also Halpern v. Commissioner, 96 T.C. 895, 899 (1991); Hirasuna v. Commissioner, 89 T.C. 1216, 1224 (1987); Huntsberry v. Commissioner, 83 T.C. 742, 747-748 (1984). Here, the legislative history of the statutes provides scant and unpersuasive support for a holding contrary to that which we reach herein. As to section 280C(a), its genesis lies in the Tax Reduction and Simplification Act of 1977 (1977 Act), Pub. L. 95-30, 91 Stat. 126, which also is the statute that spawned the new jobs credit of former sections 44B, 51, 52, and 53. Given the presence at that time of high marginal tax rates and the ¹²Nor are we persuaded by the preamble or technical advice memorandum upon which petitioners rely. obvious fact that these documents also are not legislative history, in this Court. (2000) 73 T.C. 1121, 1129 n.9 (1980) these documents are afforded little weight Textron Inc. v. Commissioner, 115 T.C. 104, 110 In addition to the items of (technical advice memorandum); Dobin v. Commissioner, (preamble to proposed regulations). - 29 - current form through three pieces of legislation; namely, the Revenue Act of 1978 (1978 Act), Pub. L. 95-600, 92 Stat. 2763; the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. 97-248, 96 Stat. 324; and the 1986 Act. Through the 1969 Act, Congress enacted the MT provisions to prevent corporate and individual taxpayers from aggregating deductions to the point where they would pay either no tax or a "shockingly low" tax. First Chicago Corp. v. Commissioner, 842 F.2d 180, 181 (7th Cir. 1988), affg. 88 T.C. 663 (1987). Congress aimed through the MT provisions to allocate the tax burden among taxpayers more equitably by taxing preference items (preferences) consisting of certain deductions and an exclusion from gross income. See S. Rept. 91-552, at 112 (1969), 1969-3 C.B. 423, 495. The preferential deductions generally included deductions which involved no economic cost to the taxpayer (e.g., the long-term capital gains deduction) or exceeded current economic cost. The MT equaled the product of a single tax rate multiplied by the amount of the taxpayer's preferences which exceeded a prescribed deduction. This scheme remained in effect, with only minor changes, as the only minimum tax formulation in the Code until 1978. See 1978 Act sec. 421(a), 92 Stat. 2871. Through the 1978 Act, Congress supplemented the MT with an AMT for noncorporate - 31 - for corporate taxpayers and subjected them to AMT. Congress also altered the computation of AMTI by providing for differences regarding when items of income or deductions are taken into account in computing taxable income and AMTI. The post-1986 AMT rules, sections 55-59, were enacted to achieve one overriding objective: to establish a floor for tax liability, so that a taxpayer pays some tax regardless of the tax breaks otherwise available to him under the regular tax system. S. Rept. 99-313, supra at 518, 1986-3 C.B. (Vol. 3) at 518. The AMT rules accomplish this goal by eliminating favorable treatment to certain items that are treated favorably for purposes of the regular tax (tax preference items). Secs. 55(b)(2) (B), 57(a). The legislative history under the 1986 Act states explicitly that the computation of a corporation's AMTI begins with taxable income and that any adjustments required by the AMT regime are made from there. The report of the House Ways and Means Committee, for example, explains clearly and unambiguously that the.starting point for computing a corporation's AMTI is "taxable income". The report states: Explanation of Provisions 1. Overview The bill repeals the present law add-on minimum tax for corporations beginning in 1986, creates a new alternative minimum tax on corporations, and expands the alternative minimum tax on individuals. - 33 - The Senate Finance Committee repeated these statements almost verbatim in its report.¹4 S. Rept. 99-313, supra at 521, 1986-3 C.B. (Vol. 3) 521. Although these reports do not explicitly provide that the computation of an individual's AMTI also begins with taxable income, we decline to conclude that the calculation of AMTI is different for an individual given no clear provision to that effect in either the statute or the legislative history. Whereas the House and Senate committee reports both state that the two regimes are considered "separate" systems, this simply means, as respondent acknowledges, that two taxes are involved. The mere fact that the two systems may also be "independent" does not necessarily mean that they are unrelated in all regards, or, in other words, parallel. Petitioners also rely on the fact that section 1.55-1(b), Income Tax Regs., does not prohibit them from deducting all of the wages for AMT purposes. Petitioners recognize in this regard that Congress authorized the Treasury Department to issue regulations on the AMT regime, that the Commissioner issued two ¹4 The General Explanation of the 1986 Act also includes these statements and clarifies that the word "generally" as used in the discussion on corporations means that regular taxable income is not used only where the taxpayer's tax base is other than taxable income; e.g., unrelated business taxable income, real estate investment trust taxable income, or life insurance company taxable income. General Explanation of supra at 436-437. that a technical correction may be necessary to effectuate the exception to the general rule. The General Explanation of the 1986 Act states the 1986 Act, Id. at 436 n.5. - 35 - Petitioners' final argument is that the Court will frustrate congressional intent by not allowing them to deduct Foods' full wage expense. Petitioners contend that disallowing part of the deduction may place taxpayers in a worse position by electing the TJC than by not making the election. We disagree that our holding herein frustrates congressional intent. The primary way to foster congressional intent is to apply, as we do here, the . • plain meaning of the statute as written. In this regard, the Supreme Court has stated: "courts must presume that a legislature says in a statute what it means and means in a statute what it says there." Conn. Natl. Bank v. Germain, 503 U.S. 249, 253-254 (1992) (citations and quotation marks omitted). We sustain respondent's determination on this issue. In so doing, we have considered all arguments made by the parties and have rejected those arguments not discussed herein as without merit. Accordingly, Decisions will be entered for respondent in docket nos. 1287-00, 1288-00, 1289-00, 1290-00, 1293-00, and 1618-00, and decisions will be entered under Rule 155 in docket nos. 1291-00 and 1292-00.