Opinion ID: 769324
Heading Depth: 1
Heading Rank: 4

Heading: The 1374 Issue and the Government's Failure of Proof.

Text: 15 To recapitulate, the PSR calculated the actual tax loss caused by the conspiracy offense by determining how much corporate-level tax CMI would have paid under 1374 of the 1954 Code if CMI, rather than Tucker individually, had sold the Plantation assets. The issue is whether that loss should have been calculated using 1374 as amended by TRA and TAMRA. 16 A major purpose of TRA was to impose a corporate-level capital gains tax on subchapter C corporations that sell appreciated assets and liquidate. 4 To close a potential loophole in the new regime, TRA amended 1374 to impose an equivalent corporate-level tax on a subchapter C corporation that files a subchapter S election before selling appreciated assets and liquidating. Presumably because Congress was focused on this specific problem, 1374 as amended by TRA did not apply to corporations that had always been S corporations. See Pub. L. No. 99-514, 632(a), 100 Stat. at 2276, codified at 1374(c)(1). But that created another potential loophole -- the use of an existing S corporation to acquire appreciated assets from a C corporation in a tax free transaction and then sell them. This would avoid the new corporate-level tax, because amended 1374 did not apply to existing S corporations. To close this loophole, TAMRA further amended 1374 by adding 1374(d)(8). Subsection (d)(8) clarifies that amended 1374 applies whenever an S corporation disposes of assets the basis of which is determined (in whole or in part) by reference to the basis of such asset[s] . . . in the hands of a C corporation. Pub. L. No. 100-647, 1006(f), 102 Stat. at 3405. Congress made the TAMRA amendments retroactive; they take effect as if included in the provision of the Reform Act to which [they] relate. Id. 1019(a), 102 Stat. at 3593. 17 So far, Tucker's argument for application of amended 1374 looks strong. The merger of PCS into CMI followed by CMI's hypothetical sale of those assets looks like a subsection (d)(8) transaction, and the sale took place in January 1988, a full year after TRA became generally effective. But Tucker's argument founders on the specific effective-date provision governing the TRA amendments to 1374. Those amendments apply to taxable years beginning after December 31, 1986, but only in cases where the 1st taxable year for which the corporation is an S corporation is pursuant to an election made after December 31, 1986. Pub. L. No. 99-514, 633(b), 100 Stat. at 2277 (emphasis added). Although TAMRA further amended 1374 to include tax free acquisitions of appreciated assets by existing subchapter S corporations, Congress again explicitly limited the effective date to cases where the return for the taxable year is filed pursuant to an S election made after December 31, 1986. Pub. L. No. 100-647, 1006(g), 102 Stat. at 3407. The government argues that CMI elected S corporation status in 1985 and therefore the TRA and TAMRA amendments do not apply by the plain language of their effective date provisions. The district court agreed, commenting at the sentencing hearing: It seems to me the only way you could interpret it the way [Tucker] interpret[s] it is to take a big black marker and strike out the phrase that begins '. . . but only . . .' 18 Tucker responds to this construction of the statutes with evidence that the IRS has consistently interpreted the reach of the TRA and TAMRA amendments in a contrary fashion. The IRS's enforcement policy was first broadcast in Announcement 86-128, 1986-51 I.R.B. 22, published on December 22, 1986, just days before TRA became effective. The purpose of this publication was to inform[] taxpayers of the manner in which regulations will clarify the application of [the 1374 amendments] in five areas. The third area encompassed situations like the PCS merger into CMI. After correctly summarizing the TRA effective date provision in an introductory paragraph, the operative paragraph nonetheless announced that amended 1374 would apply to certain transactions by pre-TRA S corporations: 19 To prevent the use of the corporate reorganization provisions of the Code to circumvent the built-in gain tax, the regulations will provide that transferred basis property acquired by an S corporation from a C corporation or a former C corporation, such as transferred basis property acquired in a tax-free merger of a C corporation into an S corporation, generally is subject to the built-in gain tax notwithstanding that the transferee corporation always has been an S corporation . . . . For purposes of section 1374 of the Code, as amended by the Act, the acquisition of such transferred basis property will be treated as a conversion to S corporation status as to that property. 20 (Emphasis added.) Following Announcement 86-128, the IRS issued a number of private letter rulings that consistently applied the TRA amendments to pre-1987 S corporations that acquired assets with built-in gain from C corporations. See Priv. Ltr. Rul. 92-06-011 (Nov. 4, 1991); Priv. Ltr. Rul. 90-02-051 (Oct. 18, 1989); Priv. Ltr. Rul. 87-43-046 (July 28, 1987). Finally, in 1994, the IRS promulgated its long-promised regulations. 5 The regulations do not govern this case because they apply only to taxable years ending after December 27, 1994. See Treas. Reg. 1.1374-10. But the regulations unmistakably adopt the policy announced in Announcement 86-128 that the TRA and TAMRA amendments apply to certain transactions by pre-1987 S corporations. See Treas. Reg. 1.1374-8, example 1(i) (applying 1374(d)(8) to an S corporation that elected S corporation status on January 1, 1986). 21 So that is the dilemma -- the IRS has consistently applied the TRA and TAMRA amendments in a manner contrary to the plain meaning of the statute, as construed by the district court. Of course, courts invalidate an agency's interpretation that is contrary to the plain language of a governing statute. But the tax laws are complex, and Congress works closely with the Treasury Department on tax matters. Therefore, Treasury Regulations construing the Internal Revenue Code are given great judicial deference, particularly long-standing interpretations that Congress has chosen not to modify. See National Muffler Dealers Ass'n, Inc. v. United States, 440 U.S. 472, 476-77 (1979); Norwest Corp. v. Commissioner, 69 F.3d 1404, 1408-09 (8th Cir. 1995), cert. denied, 517 U.S. 1203 (1996). Judges are understandably reluctant to conclude that they can discern the plain meaning of a tax statute when the agency charged with enforcing that statute considers it ambiguous. For example, in what was perhaps the last time this court held a Treasury Regulation invalid -- Western Nat'l Mut. Ins. Co. v. Commissioner, 65 F.3d 90 (8th Cir. 1995), construing another provision of TRA --a unanimous Supreme Court later upheld the regulation in Atlantic Mut. Ins. Co. v. Commissioner, 523 U.S. 382 (1998). 22 At this point in the analysis -- with the opposing arguments as to which 1374 should apply rather nicely balanced -- we conclude the government's failure to present affirmative evidence at sentencing is fatal to its position. The ultimate question is actual tax loss to the government. There is no loss to the IRS when a taxpayer takes a position the IRS chooses not to challenge. If CMI had sold the Plantation assets in January 1988 -- as the PSR assumed for purposes of calculating the loss -- its 1988 tax return would presumably have reported corporate-level taxable gain calculated under the more favorable TRA and TAMRA amendments to 1374. What is missing in this record is testimony by a responsible IRS official that the agency would have asserted a deficiency based upon the applicability of old 1374, despite the contrary enforcement policy articulated in Announcement 86-128. Absent credible evidence that the agency in fact would have taken this position, actual loss cannot be calculated on this basis, even if the sentencing court concludes that the position, if asserted, would have been upheld. Here, there is good reason to infer that IRS would not have aggressively employed old 1374 to capture more corporate-level tax in this case, because that inconsistent position might jeopardize the greater tax revenues it expected to gain from broadly applying the TRA and TAMRA amendments to 1374. Thus, on this record, actual loss as determined in the PSR cannot be upheld. 23