Court Opinion

ID: 4486303
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:20.349201+00
Date Added: 2024-06-11T15:03:49.166423
License: Public Domain

Gerber, J., dissenting: The majority opinion in this case and the opinion in Todd v. Commissioner, 89 T.C. 912 (1987), affd. 862 F.2d 540 (5th Cir. 1988),1 reach incorrect and anomalous results. The majority’s conclusion is based upon a questionable and strained reading of the term “attributable to” and a similar misreading of the Joint Committee Explanation. These interpretations, while perhaps supportable in the abstract, ignore congressional focus upon gross overvaluation as one of the core problems of so-called “abusive tax shelters.” Sections 6659 and 6621(c) were enacted to deter the very activity that the majority has circumvented and refused to address in its opinion. The genesis of this controversy is our opinion in Todd v. Commissioner, supra. In an earlier Memorandum Opinion, Noonan v. Commissioner, T.C. Memo. 1986-449, we had made specific findings that the taxpayer’s refrigerated containers had not been placed in service, resulting in the disallowance of all deductions and credits with respect to the container activity. In Todd, we concluded that the underpayment resulting from that disallowance could not be “attributable to” a valuation overstatement within the meaning of section 6659, notwithstanding the fact that the taxpayers had claimed values on their income tax returns for the containers exceeding 400 percent of fair market value. This Court and the Court of Appeals for the Fifth Circuit found support for their reasoning in the following sentence in the Joint Committee on Taxation’s General Explanation of the Economic Recovery Tax Act of 1981 (Blue Book). “The portion of a tax underpayment that is attributable to a valuation overstatement will be determined after taking into account any other proper adjustments to tax liability.” From that sentence, both this Court and the Court of Appeals for the Fifth Circuit incorrectly reasoned that if another ground besides valuation overstatement supports a deficiency, the deficiency cannot be attributable to a valuation overstatement. “Attributable” means capable of being attributed. Irom v. Commissioner, 866 F.2d 545 (2d Cir. 1989). In the ordinary meaning of that term, it is logical to conclude that an underpayment (the correct amount of tax less the amount shown on a timely return) may be attributable to more than one ground. The Court of Appeals for the Second Circuit is in agreement with this concept and in conflict with the Court of Appeals for the Fifth Circuit. “Thus, even though the Tax Court found a deficiency on the first ground, it should also have considered whether a deficiency was capable of being attributed to the second ground, which would have entailed additional interest.” (Emphasis supplied.) Irom v. Commissioner, supra at 547. Although the Court of Appeals in Irom v. Commissioner, supra at 547, attempted to distinguish Todd, the Second Circuit’s holding is based upon the opposite interpretation of the term “attributable.” The Second Circuit held: “We do not think Congress intended to preclude additional interest for deficiencies that are capable of being attributed to tax-motivated transactions simply because the Commissioner seeks summary judgment for the deficiency on other grounds.” Irom v. Commissioner, supra at 547. As a practical matter, the majority’s rationale in this case would force respondent to pursue the tax-motivated transaction and/or overvaluation approach as the sole ground(s) for the tax deficiency, although multiple grounds may exist, in order to successfully employ section 6621(c) or 6659. Where, as here, the language of a statute is not expressly defined, legislative purpose can be found in the ordinary meaning of the words used. Richards v. United States, 369 U.S. 1, 9 (1962). The word “attributable” is defined as “capable of being attributed.” Webster’s Third New International Dictionary (1976). Congress enacted section 6659, along with a number of other penalty provisions (including sections 6621, 6661, and 6673) to deal with the Tax Court’s backlog arising from the enormous number of tax shelter cases under audit, 500,000 of which involved property valuation questions of more than routine significance. In discussing these additions to tax, Congress believed it had “given the Tax Court sufficient tools to manage its docket * * * . The Court should * * * assert, without hesitancy in appropriate instances, the penalties that the Congress has provided.” H. Rept. 98-861 (Conf.), 985 (1984), 1984-3 C.B. (Vol. 2) 1, 239. The majority’s interpretation frustrates the policy that Congress sought to implement. Initially, it should be noted that the so-called “Blue Book” commentary, heavily relied upon by the majority, is not considered part of the official legislative history underlying statutory enactment. Moreover, the majority’s and the Fifth Circuit’s reading of the Joint Committee (Blue Book post-enactment) Explanation is not the most plausible. The Blue Book contains the following sentence: “The portion of a tax underpayment that is attributable to a valuation overstatement will be determined after taking into account any other proper adjustments to tax liability.” This sentence does not contemplate and was not intended to include situations where the deficiency related to a single transaction that could be sustained on multiple grounds. Rather, the sentence was intended to define or explain “attributable to” where there are several different portions of a deficiency, some admittedly attributable to a valuation overstatement and others not. The majority’s reading of the Blue Book creates an unwarranted hierarchy where valuation overstatements are subordinated to every other ground for redetermining a deficiency. If anything, considering the crux of the abusive shelter problem, we should give priority to grounds that support a valuation overstatement. Valuation is one of the major devices used in abusive tax shelters. It is the value inherent in an asset that will imbue a transaction with economic substance. Value is the measure of the income producing potential of the asset, crucial to profit objective. In measuring profit objective, and economic substance, we look at the value of the underlying asset. Rose v. Commissioner, 88 T.C. 386 (1987), affd. 868 F.2d 851 (6th Cir. 1989), and cases cited therein.2 The difference between abusive and nonabusive shelters is that the value of the assets are so grossly inflated as to remove any possibility of economic profit. “The fundamental issue in these cases generally will be whether the property has been ‘acquired’ at an artificially high price, having little relation to its fair market value.” Estate of Franklin v. Commissioner, 544 F.2d 1045, 1046 n. 1 (9th Cir. 1976), affg. 64 T.C. 752 (1975). Other inquiries in these cases, whether the asset will appreciate, whether the taxpayer obtained independent appraisals, the expertise of the taxpayer or his advisors, all relate to the taxpayer’s realistic ability or honest attempts to measure value and, subsequently, earn a profit. Query whether petitioners would be before this Court had the value of the asset even approached the amount claimed? The majority’s position is ostensibly designed to obviate thorny and difficult valuation questions. Judicial economy should apply to situations where alternative grounds are available to support the same determination. Where, however, an alternative part of a deficiency determination can only be sustained if a further ground is considered, we must consider that ground because it is not an alternative. Even if the majority’s approach were correct, it would not, in numerous circumstances, obviate the need to address the valuation issue. For example, one factor in determining whether a sale has occurred for tax purposes is the relationship of the purchase price to fair market value. Grodt and McKay Realty, Inc. v. Commissioner, 77 T.C. 1221 (1981) (whether the taxpayer acquired an equity in the property). Additionally, in both Noonan v. Commissioner, supra (predecessor to Todd), and in this case, the valuation problem was addressed, notwithstanding the Court’s avowed hesitancy to do so. It should be noted that the Court of Appeals for the Fifth Circuit implied in affirming Todd that deductions or credits disallowed for lack of profit objective would not create underpayments attributable to valuation overstatements. Todd v. Commissioner, 862 F.2d 540, 545 (5th Cir. 1988). The majority is correct in their holding that, at the least, if valuation is an integral part of or is inseparable from the ground found for disallowance, that the additions to tax (sections 6621(c) and 6659) should apply. Irom v. Commissioner, 866 F.2d 545 (2d Cir. 1989). The logical path worn by the majority’s reasoning will lead us to decide future cases on a basis other than valuation overstatement, where valuation is not the only focus or issue. We are not entitled to avoid ruling on an addition to tax simply because it involves further inquiry. The pervasive nature of the valuation inquiry militates against such an approach, since it could resolve many more issues at once — profit objective, economic substance, whether a note constitutes genuine indebtedness, and section 48(d) investment tax credit pass-through, etc. As previously indicated, given that value is one of the major focuses of the abusive tax shelter, resolution of that issue makes more sense than deciding a case on the basis of a side or collateral issue(s). The rationale advanced by the majority will result in anomalous litigation tactics and results that are inconsistent with congressional intent. Taxpayers under the Todd rationale have the incentive to concede based on any amorphous ground other than a valuation overstatement or tax-motivated transaction. Similarly, in the charitable contribution context, we are encouraging concessions based on lack of donative intent. The majority’s findings in this case reflect an egregious tax-motivated transaction. However, we are precluded from applying the additional interest section under the majority’s reasoning, at the very least a violation of the spirit of the law. This is clearly an appropriate instance for application of section 6621(c), in a situation intended by Congress. The majority’s narrow definition of “attributable” thus leads to absurd results. This decision will result in taxpayers, who had claimed large credits and deductions based upon overvalued assets, arguing that their assets were not placed in service to avoid the congressionally intended additions to tax. Hence, a taxpayer with an asset placed in service will be more harshly treated than a taxpayer who claimed the same tax “benefits” where no asset existed or it was not placed in service. The majority’s attempt at a pragmatic solution will encourage taxpayers with no hope of prevailing to petition and concede the underlying deficiency based on a nontax-motivated issue, thus avoiding the additions. Moreover, the practical effect of the majority’s opinion will be to shift focus from section 6659 to section 6661. For the number of cases already in the system, this will only generate mountains of paperwork as respondent rushes to amend his answer to alternatively plead section 6661. This may also have the effect of shifting the burden of proof to respondent in the most egregious valuation cases, because section 6661 may not have been included in the notice of deficiency (and afforded the presumption of correctness). As in this case, in lieu of a valuation, we will have to determine whether this is a statutory tax shelter. Sec. 6661(b)(2)(C). This entails determining whether the arrangement was one in which the principal purpose is to avoid or evade Federal income tax. The majority, in this case, determines that the transaction was a tax shelter lacking economic substance and profit objective, presumably by looking at the value, or the lack thereof, of the leased asset. “In view of his training as a loan officer, however, petitioner must have known that a non-negotiable note, payable only from gross receipts for 14 years, at 10-percent interest, did not reflect fair market value.” Majority opinion at 847. Cf. Goldstein v. Commissioner, 89 T.C. 535 (1987). Therefore, valuation was considered by the majority even though they seem to seek avoidance of such consideration. Where respondent determines an addition under section 6659, or section 6621(c), we are obliged to consider it, even if we are able to dispose of the underlying deficiency on an “easier” ground. Petitioners are responsible for an accurate report of their tax to the Government, including the value of the master tapes. Perhaps they should have considered this before attempting to obtain $18,500 in tax benefits for an $11,000 investment. Therefore, I do not believe that the application of the sections 6621(c) and 6659 additions in this case would be either “draconian” or in any manner inequitable.  Because an appeal from this case would normally proceed to the Court of Appeals for the Fifth Circuit, this dissent questions only the rationale underlying the result. See Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940 (1971).   I agree with the majority concerning the continued viability of the Rose analysis as a sublimation of the voluminous case law concerning economic substance and profit objective.