Court Opinion

ID: 4474922
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:12.792752+00
Date Added: 2024-06-11T14:53:51.706878
License: Public Domain

Swift, J, concurring: Regardless of whether petitioner’s redemption dividends should be disallowed under section 162(k)(l), respondent argues in the alternative that the redemption dividends should be disallowed pursuant to his determination under section 404(k)(5)(A). Thereunder, Congress provided that “The Secretary may disallow the deduction under * * * [section 404(k)(l)] for any dividend if the Secretary determines that such dividend constitutes, in substance, an evasion of taxation.” In the light of case authority that redemption dividends should not be disallowed under section 162(k)(l),1 I believe this Court should address respondent’s alternative argument under section 404(k)(5)(A). It is most unusual in a particular Code section to have an express and specific delegation to the Secretary of authority to disallow on the grounds of tax evasion the very deduction provided in the section. On its face and given its placement in section 404(k), section 404(k)(5)(A) appears to give the Secretary authority to do just that. In section 7805(a) Congress has delegated to the Secretary general authority to promulgate interpretative rules and regulations, and in a number of Code sections Congress has delegated to the Secretary additional authority to promulgate regulations under the specific sections. The jurisprudence relating to the deference to be given such regulations is well known. See, e.g., Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984); Swallows Holding, Ltd. v. Commissioner, 515 F.3d 162 (3d Cir. 2008), vacating 126 T.C. 96 (2006). The delegation Congress made to the Secretary in section 404(k)(5)(A), however, is particularly specific and broad and is not limited to the promulgation of regulations. In section 404(k)(5)(A) Congress appears to have delegated to the Secretary authority to place a “tax evasion” label on a particular transaction or type of transaction by regulation, by ruling, or by other public or private notice. No particular requirement or limitation is set forth in section 404(k)(5)(A) as to how the Secretary is to make the “tax evasion” determination, as to how specific and detailed the Secretary’s public explanation thereof need be, or as to how the Secretary is to make the “tax evasion” announcement. For a number of years now and on a number of occasions, under authority of section 404(k)(5)(A) a “tax evasion” label has been placed by the Commissioner and/or by the Government on redemption dividends, and claimed deductions under section 404(k)(l) relating thereto have been disallowed: First, in the litigation of Boise Cascade Corp. v. United States, 329 F.3d 751 (9th Cir. 2003); second, by issuance of Rev. Rul. 2001-6, 2001-1 C.B. 491; third, in the litigation of Conopco, Inc. v. United States, 100 AFTR 2d 5296, 2007-2 USTC par. 50,582 (D.N.J. 2007); fourth, in the litigation of General Mills, Inc. v. United States, 101 AFTR 2d 550, 2008-1 USTC par. 50, 141 (D. Minn. 2008); fifth, in the instant litigation; and sixth, in final regulations promulgated in 2006 under sections 162(k) and 404(k), see secs. 1.162(k)-l(a), 1.404(k)-3, Income Tax Regs. Under section 404(k)(5)(A) in 2001 the Commissioner issued Rev. Rul. 2001-6, supra.2 Certainly, the Office of Chief Counsel advised the Commissioner and was the primary drafter of Rev. Rul. 2001-6, supra. The revenue ruling, however, clearly was issued by the Commissioner as are all revenue rulings to whom the Secretary has delegated such authority as reflected in Treas. Dept. Order 150-10 (April 22, 1982). See sec. 7803(a). Letter rulings and technical advice memoranda are issued by the Commissioner’s Office of Chief Counsel. That office, however, only drafts and proposes revenue rulings and revenue procedures. See IRS Deleg. Order 190 (Rev. 4, Oct. 8, 1996), Internal Revenue Manual (irm), pt. 1.2.53.5, (Oct. 8, 1996); Gen. Counsel Order 4 (Jan. 19, 2001), IRM pt. 30.2, Exhibit 30.2.2-6 (Aug. 11, 2004); see also sec. 7803(b)(2)(B). Rev. Rui. 2001-6, supra, was approved and issued by the Assistant to the Commissioner, acting on the Commissioner’s behalf, and was published in the Internal Revenue Bulletin, 2001-6 I.R.B. 491, the authoritative publication of the Commissioner for announcement of official rulings pertaining to internal revenue matters. See sec. 601.601(d)(1), Statement of Procedural Rules (“The Internal Revenue Bulletin is the authoritative instrument of the Commissioner for the announcement of official rulings, decisions, opinions, and procedures, and for the publication of Treasury decisions, Executive orders, tax conventions, legislation, court decisions, and other items pertaining to internal revenue matters.”); see also id. sec. 601.601(d)(2)(ii)(a), (vii)(a) and Cb). Also in 2001 Congress addressed section 404(k)(5)(A) and by amendment clarified the Secretary’s authority thereunder by adding the word “avoidance”. Economic Growth and Tax Relief Reconciliation Act of 2001, Pub. L. 107-16, sec. 662(b), 115 Stat. 142. I would note that the Commissioner’s disallowance of deductions under section 404(k)(l), based on the discretion given to him in section 404(k)(5)(A), need not involve an analysis and findings of “badges of fraud” typically associated with prosecutions under section 7201 of affirmative attempts by taxpayers to engage in willful tax evasion and with determinations of willful civil tax fraud penalties under section 6663. See, e.g., Spies v. United States, 317 U.S. 492, 499 (1943). Indeed, in this case petitioner filed its corporate Federal income tax returns for 1994 and 1995 without claiming deductions for redemption dividends. At this time no underpayments of tax are associated with the claimed section 404(k)(l) deductions. Not until December 9, 2003 (2 years after Rev. Rui. 2001-6, supra, was issued), did petitioner file (via its second amendment to petition herein) claims for refund for 1994 and 1995, asking respondent and this Court to consider the deductibility of petitioner’s redemption dividends and if allowed to refund overpayments of taxes paid. There are no “badges of fraud” to be found here, and respondent does not contend otherwise. Rather, respondent simply contends that allowance of petitioner’s claimed redemption dividend deductions would be improper and would give rise to underpayments of Federal income taxes which the Commissioner, exercising his discretion under section 404(k)(5)(A), has described as tax evasion. The tax “evasion” or “avoidance” label placed by the Commissioner on redemption dividends under the authority of section 404(k)(5)(A) is somewhat analogous to the tax “evasion” or “avoidance” label that the Commissioner occasionally places on transactions under the authority given to him in other Code sections. For example, in section 269 the Commissioner is given substantial discretionary authority to label a transaction as engaged in for the principal purpose of tax evasion or avoidance and to disallow related deductions. The tax “evasion” or “avoidance” which the Commissioner typically identifies under section 269 refers to the underlying nature and purpose of the transaction, not to what we typically consider “badges of fraud”, such as a taxpayer’s double set of books, destruction of evidence, or omitted income. The tax evasion or avoidance typically involved under section 269 may be described simply as involving a transaction in which a taxpayer is attempting to secure a tax benefit which it “would not otherwise enjoy” and which the Commissioner, in his discretion, has identified as having a principal tax evasion purpose. See Southland Corp. v. Campbell, 358 F.2d 333, 336 (5th Cir. 1966).3  Here respondent has labeled redemption dividends as transactions that inherently provide to a corporate esop sponsor tax deductions to which it is not entitled. In Rev. Rui. 2001-6, supra, it is explained that the allowance of deductions for redemption dividends would give corporate ESOP sponsors deductions for payments that do not represent true economic costs and that redemption dividends vitiate important rights and protections for recipients of ESOP distributions. In spite of the brevity of the explanation provided in Rev. Rui. 2001-6, supra, I believe that in the light of section 404(k)(5)(A) the tax evasion label that has been placed on redemption dividends by the Commissioner is entitled to substantial deference. See Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984). While notice- and-comment rulemaking generally assures Chevron deference for regulations, the absence of such formality in the issuance of rulings does not preclude such deference where Congress intended to grant the agency the power to make rules with the “force of law” and “the agency interpretation claiming deference was promulgated in the exercise of that authority.” United States v. Mead Corp., 533 U.S. 218, 226-227 (2001); see Barnhart v. Walton, 535 U.S. 212, 221-222 (2002). Lastly, as stated, in 2006 the Secretary promulgated final regulations reflecting the position set forth in Rev. Rul. 2001-6, supra. See sec. 1.162(k)-l, Income Tax Regs.; sec. 1.404(k)-3, Q&A-l, Income Tax Regs. (“Payments to reacquire stock held by an ESOP * * * used to make benefit distributions to participants” are not allowed under section 404(k)(2) and (5)). Although the regulations apply only prospectively and only to amounts paid or incurred after August 30, 2006, secs. 1.162(k)-l(c), 1.404(k)-3, Q&A-2, Income Tax Regs., the regulations are relevant as they are consistent with Rev. Rul. 2001-6, supra, see Smiley v. Citibank (S.D.), N.A., 517 U.S. 735, 744 n.3 (1996) (“Where * * * a court is addressing transactions that occurred at a time when there was no clear agency guidance, it would be absurd to ignore the agency’s current authoritative pronouncement of what the statute means.”). For the reasons stated, I would address respondent’s alternative argument and conclude that respondent’s determination — that the claimed deductions for redemption dividends, if allowed, would constitute impermissible tax evasion— should be sustained.   Although one court has upheld the Commissioner’s disallowance under sec. 162(k)(l) of deductions for redemption dividends, see Conopco, Inc. v. United States, 100 AFTR 2d 5296, 2007— 2 USTC par. 50,582 (D.N.J.2007) (unpublished opinion, see 8th Cir. R. 32.1A), three courts have rejected sec. 162(k)(l) as a basis for disallowing deductions for redemption dividends, see, e.g., Boise Cascade Corp. v. United States, 329 F.3d 751 (9th Cir.2003), affg. 82 AFTR 2d 7249 (D. Idaho 1998); General Mills, Inc. v. United States, 101 AFTR 2d 550, 2008-1 USTC par. 50,141 (D. Minn. 2008). General Mills and Conopeo are pending appeal to the U.S. Courts of Appeals for the Third and the Eighth Circuits, respectively.    Sec. 7701(a)(ll)(B) defines “Secretary” as “the Secretary of the Treasury or his delegate.5    1 emphasize that the sec. 404(k)(5)(A) authority to disallow a claimed sec. 404(k)(l) deduction because it would constitute a tax evasion transaction is even more specific than the authority set forth in sec. 269.