Court Opinion

ID: 4486473
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:34:27.608863+00
Date Added: 2024-06-11T15:03:49.941125
License: Public Domain

GERBER, J., dissenting: I respectfully dissent because: (1) The majority failed to consider or decide the issue argued by the parties, to wit: whether the section 461(e) regulations governed the outcome of this controversy and/or whether those regulations are valid; (2) the consolidated regulations and case law generally do not support the majority’s holding that section 1.1502-76 of the Income Tax Regulations takes precedence over or preempts section 461(e); (3) the regulation relied upon is not intended to establish a method of accounting or to change an existing method of accounting; (4) the relief granted by the majority is equitable and is rendered without specific comparative analysis explaining why this particular regulation section should be preferred over a statute or why it should be considered a method of accounting rather than a mere device for allocation; and (5) finally, the majority’s opinion would cause anomalous results. The remainder of this dissent explains, in greater detail, the above-listed concerns regarding the majority’s holding in this case. The majority opinion relies upon section 1.1502-76, Income Tax Regs., which is essentially procedural in nature, to permit possible avoidance of a statutory tax accounting requirement. Section 1.1502-76(b)(2), (3), and (4) of the Income Tax Regulations is part of a large body of legislative regulations (consolidated return regulations— hereinafter consolidated regulations) promulgated under the congressional mandate of section 1502 to regulate the “privilege to file consolidated returns.” The section 1.1502-76 regulations contain broad, procedurally oriented guides for allocating income and deductions where an affiliated member must report part of its income and expenses on a separate return. In connection with other operative Code provisions, the consolidated regulations may function in one of three ways: (1) The regulations may apply exclusively by expressly excluding the operation of part or all of a specific Code section;1 (2) the application of the regulations may be subject to the operation of other Code sections;2 or (3) the regulations may coexist with a Code or regulation provision which is not specifically enumerated in the consolidated regulations. In the context of this case, we deal with the third variety. Courts have long held that the power granted to promulgate legislative regulations is insufficient to permit the regulator to invalidate a basic concept of tax law or statute. See Kanawha Gas & Utilities Co. v. Commissioner, 214 F.2d 685, 691-692 n. 7 (5th Cir. 1954), revg. 19 T.C. 1017 (1953). The power to promulgate consolidated regulations pursuant to section 1502 is the power to conform the applicable income tax law of the Code to the special, myriad problems resulting from the filing of consolidated income tax returns. American Standard, Inc. v. United States, 220 Ct. Cl. 411, 602 F.2d 256 (1979). In this vein, section 1.1502-80 of the consolidated regulations provides that “The Code, or other law, shall be applicable to the group to the extent the [consolidated] regulations do not exclude its application.”3  In determining consolidated taxable income, reference is made to the general provisions of the Code. For example, section 1.1502-12, Income Tax Regs., expressly defers to appropriate statutory sections in connection with the computation of taxable income. It requires that the. separate taxable income of a member be computed in accordance with the provisions of the Code covering the determination of taxable income of separate corporations, subject to certain modifications, one of which pertains to methods of accounting pursuant to section 1.1502-17, Income Tax Regs. Section 1.1502-17(a), Income Tax Regs., provides that “The method of accounting to be used by each member of the group shall be determined in accordance with the provisions of section 446 as if such member filed a separate return.” Sections 446 and 461 are both contained in subtitle A, chapter IE, part II of the Code, which is entitled “Methods Of Accounting.” Section 446 states the general rule for methods of accounting. Section 461 provides the rules for claiming deductions under a method of accounting permitted by section 446. The cross-reference to section 446 in consolidated regulation 1.1507-17(a) indicates that the general method of accounting rules are applicable to the affiliated group and are not excluded from application by the consolidated regulations. In the “de-consolidation” situation (where the consolidated return of a group properly includes the income of a corporation for only a portion of such corporation’s taxable year) section 1.1502-76(b), Income Tax Regs., requires that taxable income of the member for the taxable year must be allocated between consolidated and separate returns and the taxable income to be reported in each such return shall be determined on the basis of income shown on the de-consolidated member’s permanent records (including work papers). Secs. 1.1502-76(b)(2) and 1.1502-76(b)(4)(i), Income Tax Regs. The parties do not disagree that these regulations would entitle petitioner to a deduction for the accrued and paid interest. Were we to view section 1.1502-76, Income Tax Regs., as the exclusive substantive accounting provision, this would no doubt be the correct result. However, in light of the application of section 446 et seq. pursuant to sections 1.1502-80, 1.1502-11, 1.1502-12, and 1.1502-17, Income Tax Regs., it is relatively clear that the consolidated regulations, and more particularly section 1.1502-76, Income Tax Regs., are not intended to govern methods of accounting or to provide for special methods of accounting for affiliated groups who chose to file a consolidated return. Regulation section 1.1502-76’s purpose is to assist in allocating income and losses between separate and consolidated returns. The problem caused by the majority’s choice of preferring the consolidated regulations over the section 461(e) provisions is that it may permit the bunching of deductions which may be prohibited by section 461(e) or the regulations thereunder. The majority does not address the question of whether section 461(e) or the underlying regulations are applicable in the circumstances of this case. It should be noted that neither respondent nor petitioner argued for or against the rationale utilized by the majority to reach its result. On brief, the parties’ sole focus was the applicability of section 461(e). Assuming arguendo that the majority had found that section 461(e) was not applicable to the facts of this case, then it may not have been necessary to dissent because the same result would have been reached upon a proper basis. This dissent does not necessarily question the result reached by the majority, but is directed toward the means utilized to reach the result. We also note that both the majority’s opinion and the opinion in Erwin Properties, Inc. v. Commissioner, 43 T.C. 888 (1965) (a case upon which the majority places great reliance), are terse and without specific comparative analysis for the significant finding that a consolidated regulation should preempt a specific statutory provision. We also note that Erwin Properties is the only support offered for the majority’s holding in this case. The majority also failed to address the “invalidation concept” contained in numerous cases, of which Kanawha Gas & Utilities Co. v. Commissioner, 214 F.2d 685 (5th Cir. 1954), revg. 19 T.C. 1017 (1953), and Corner Broadway-Maiden Lane, Inc. v. Commissioner, 76 F.2d 106 (2d Cir. 1935), represent a mere sampling. Although petitioner’s 8-day lapse is one that may “cry out for equity,” we are not empowered to provide relief in the manner utilized by the majority. Finally, the majority’s holding would cause anomalous results. Essentially, only consolidated affiliates which report consolidated income and deductions for the entire taxable year may be subject to the anti-bunching provisions of section 461(e). Any time one of the consolidated affiliates, for any reason, reports income and deductions on a separate return, under the majority’s rationale, section 1.1502-76(b), Income Tax Regs., would come into play and possibly permit bunching in spite of the congressionally mandated prohibition in section 461(e) or possibly other deviations from established or prescribed tax accounting methods. Accordingly, I respectfully dissent from the majority’s opinion. COHEN, J., agrees with this dissenting opinion.  Several of the sec. 1502 regulations contain express exceptions making the regulations exclusive and causing them to preempt statutory or regulatory provisions which may have provided for a different result than the consolidated regulations. See, for example, sec. 1.1502-3(f)(2)(1), Income Tax Regs, (transfer of sec. 38 property between affiliated group members during a consolidated return year is not treated as a disposition or cessation within the meaning of sec. 47(a)); sec. 1.1502-7(b)(2), Income Tax Regs, (consolidated tax liability shall be determined under sec. 1.1502-2, Income Tax Regs., without regard to the tax surcharge imposed by sec. 51, the minimum tax imposed by sec. 56, any increase in tax under sec. 47(a), relating to early dispositions of investment credit property, or under sec. 614(c)(4)(C), relating to an election to aggregate certain mineral interests); sec. 1.1502-13(c)(ii)(a), Income Tax Regs, (selling member may not report gain on the installment sales method under sec. 453 to the extent the gain is otherwise deferred by the selling member under the deferred intercompany transaction rules). Additionally, the consolidated regulations are legislative in character and have the force and effect of law. Union Electric Co. of Missouri v. United States, 158 Ct. Cl. 479, 486, 305 F.2d 850, 854 (1962). To the extent they are not proven to be beyond the scope of authority delegated, inconsistent with the statute or unreasonable, the regulations are valid and a taxpayer’s consent to file a consolidated return may therefore preempt or modify the operation of other Code provisions. Commissioner v. General Machinery Corp., 95 F.2d 759 (6th Cir. 1938); Corner Broadway-Maiden Lane, Inc. v. Commissioner, 76 F.2d 106 (2d Cir. 1935); Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501 (1948); Bingler v. Johnson, 394 U.S. 741 (1969). See Valley Paperback Manufacturers, Inc. v. Commissioner, T.C. Memo. 1975-311 (sec. 1.1502-76(d) regulations found to be valid).   See, for example, note 3 concerning sec. 1.1502-80, Income Tax Regs., where four different Code sections are expressly enumerated in the regulation.   Sec. 1.1502-80, Income Tax Regs., goes on to provide the example that, “in a transaction to which section 381(a) applies, the acquiring corporation will succeed to the tax attributes described in section 381(c).” Secs. 269, 304, and 482 are also specifically enumerated in the regulation as applicable to consolidated groups.