Court Opinion

ID: 4482164
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:20.985581+00
Date Added: 2024-06-11T15:03:38.265828
License: Public Domain

Simpson, J., dissenting: In invalidating section 1.951-3 of the Income Tax Regulations, this Court has again declined to exercise judicial restraint in the review of regulations and has chosen to assert the supremacy of its view as to the purpose of the legislation, and that view, which rests on a narrow reading of the statute, disregards the purposes of Congress in enacting the provisions for the taxation of controlled foreign corporations and will in fact frustrate such objectives. What our role should be in reviewing regulations was described by the Supreme Court in United States v. Correll, 389 U.S. 299, 306-307 (1967), when it said: we do not sit as a committee of revision to perfect tlie administration of the tax laws. Congress has delegated to the Commissioner, not to the courts, the task of prescribing “all needful rules and regulations for the enforcement” of the Internal Revenue Code. 26 U.S.C. § 7805(a). In this area of limitless factual variations, “it is the province of Congress and the Commissioner, not the courts, to make the appropriate adjustments.” Commissioner v. Stidger, 386 U.S. 287, 296. The role of the judiciary in cases of this sort begins and ends with assuring that the Commissioner’s regulations fall within his authority to implement the congressional mandate in some reasonable manner. * * * See Bingler v. Johnson, 394 U.S. 741, 749-751 (1969). The Supreme Court, in strong and unequivocal terms, has repeatedly declared that the Treasury regulations should not be struck down lightly (see, e.g., Bingler v. Johnson, supra at 749-750; Commissioner v. South Texas Co., 333 U.S. 496, 501 (1948); Colgate Co. v. United States, 320 U.S. 422, 426 (1943); Fawcus Machine Co. v. United States, 282 U.S. 375, 378 (1931); Brewster v. Gage, 280 U.S. 327, 336 (1930)), and— it is fundamental, of course, that as “contemporaneous constructions by those charged with administration of” the Code, the Regulations “must be sustained unless unreasonable and plainly inconsistent with the revenue statutes,” and “should not be overruled except for weighty reasons.” Commissioner v. South Texas Lumber Co., 333 U.S. 496, 501. * * * [Bingler v. Johnson, 394 U.S. at 749-750.] See Griswold, “A Summary of the Regulations Problem,” 54 Harv. L. Rev. 404 (1941). In this case, our task is to interpret section 951 and the other provisions of subpart F which result from a legislative proposal made by President Kennedy in April of 1961. The President was concerned that a number of businesses were moving abroad for tax reasons, and he wished to remove the tax advantages of doing business abroad. Hearings on the President’s 1961 Tax Recommendations before the House Committee on Ways and Means, 87th Cong., 1st Sess., vol. 1, p. 8 (1961). He proposed to accomplish that objective by taxing, as earned, the income of foreign corporations controlled by U.S. citizens. Id. at p. 9. Congress was convinced of the need to act and adopted the President’s ultimate objective, although it decided that such objective could be accomplished by less sweeping provisions. H. Rept. No. 1447, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 405, 461-462; S. Rept. No. 1881, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 707, 784-785. It believed that by taxing only certain types of income earned by controlled foreign corporations, the “tax haven” advantages of doing business abroad could be eliminated. H. Rept. No. 1447, supra, 1962-3 C.B. 461-462; S. Rept. No. 1881, supra, 1962-3 C.B. 784-785. While Congress was considering the President’s proposals, the Secretary of the Treasury and members of his staff met and conferred repeatedly with Congress concerning the taxation of controlled foreign corporations (see, e.g., Hearings, supra, vol. 1, pp. 28-34,313-322; vol. 4, pp. 3535-3544; Hearings on H.R. 10650 before the Senate Committee on Finance, 87th Cong., 2d Sess., Part 1, pp. 98-99; Part 10, pp. 4288-4289 (1962)), and after the enactment of the controlled foreign corporations provisions on October 16, 1962, the Treasury commenced the task of preparing its implementing regulations. Those regulations were published in proposed form on July 10, 1964, and the public was given an opportunity to comment in writing and to present oral comments at a hearing. The regulations were finally adopted on January 28, 1965 (T.D. 6795). The statutory provisions of subpart F are extremely complex, and to determine what was meant by section 951 (d) and whether the regulations, section 1.951-3, properly carry out its purpose, it is necessary to understand bow sucb provisions work in conjunction with the provisions relating to foreign personal holding companies. Secs. 551-558. Under these circumstances, we have regulations that were issued contemporaneously with the enactment of the statute, regulations that were prepared by those who were in a position to be familiar with the objectives of the legislation, regulations interpreting extraordinarily complex provisions of the statute, and regulations developed by those officials who spent several years working with the problems of the taxation of controlled foreign corporations. In my judgment, such regulations should be given a great deal of weight by us. See, e.g., Bingler v. Johnson, supra; Commissioner v. South Texas Co., supra. A careful review of the legislative history of subpart F convinces me that the Treasury had substantial reason for the regulations. While the House was considering the matter, it was apparent that there might be an overlap between the provisions relating to the foreign personal holding companies and the new provisions dealing with the taxation of controlled foreign corporations. To avoid taxing the same income twice, the House provided that income taxable under subpart F should not be taxable under section 551 relating to foreign personal holding companies. H.R. 10650, 87th Cong., 2d Sess., sec. 13 (b)(1) (1962). In the Senate, the House provision was replaced by what is now section 951(d). However, in the report of the Senate Finance Committee, there is a discussion of the significant changes which the committee proposed to make in the House bill, and that discussion contains no reference to any change of purpose with regard to the coordination of the subpart F provisions and those relating to foreign personal holding companies. S. Rept. No. 1881, supra, 1962-3 C.B. 785-786. Moreover, in the general explanation of the provisions in the Finance Committee report, there is also no reference to the problem of coordinating the two sets of provisions. S. Rept. No. 1881, supra, 1962-3 C.B. 786-800. In the Statement of the Managers on the Part of the House accompanying the Conference Committee report, there is an extensive discussion of the changes made by the Senate, but here too there is no reference to any change in the provisions relating to the coordination of the controlled foreign corporation provisions with those relating to foreign personal holding companies. Conf. Rept. No. 2508, 87th Cong., 2d Sess. (1962), 1962-3 C.B. 1129, 1157-1164. It is true that the technical explanation in the Finance Committee report does point out that the Senate used different words than those used by the House, but that statement does not indicate that a different result was intended by the use of different words. S. Rept. No. 1881, supra, 1962-3 C.B. 944. In tbe opinion of the majority, there is reference to the fact that section 951(c) is similar to section 951(d) and that in connection with section 951(c), the Finance Committee report pointed out that if a foreign investment company elected not to be taxed under subpart F, none of its income would be taxable under those provisions. S. Kept. No. 1881, supra, 1962-3 C.B. 944. The majority infers that the committee contemplated the same result when it used similar language in section 951(d), but in connection with the explanation of section 951(d), the committee did not point out that this provision would have the same result. S. Kept. No. 1881, supra, 1962-3 C.B. 944. If the committee had contemplated that both provisions would have similar results, it seems as though it would have made a similar observation with respect to both provisions. Under the House provision, it is clear that if a controlled foreign corporation made an investment in U.S. property or liquidated an investment in a less developed country, the investment or the proceeds of the liquidation would be taxable, even though the corporation was also a foreign personal holding company for that year. See H.R. 10650, supra at sec. 13(b)(1). There is nothing in the legislative history to indicate that, by the use of words different from those used in the House, the Senate intended a different result. Yet, by its holding, the majority exempts a shareholder of a controlled foreign corporation from taxation on his pro rata share of previously excluded subpart F income withdrawn from investment in less developed countries and his pro rata share of the corporation’s increase in earnings invested in U.S. property, if the controlled foreign corporation happens also to be a foreign personal holding company during the same year. Such result is clearly significantly different from that of the House bill, and it is in conflict with the obvious intent of the Senate to tax both previously excluded income which is withdrawn from investments in less developed countries and income which is invested in U.S. property. S. Rept. No. 1881, supra, 1962-3 C.B. 785, 787, 791-794. The frustration of such congressional purpose effectuated by the majority opinion is amply illustrated by two examples in the Income Tax Regulations. See sec. 1.951-3, examples (4) and (5). Example (4) deals with a controlled foreign corporation that makes an investment in a less developed country during a year in which it is not a foreign personal holding company and thereby defers taxation on the income so invested. In a later year, when the corporation is both a foreign personal holding company and a controlled foreign corporation, it liquidates the investment in the less developed country. It is clear that under subpart F, Congress intended to provide an incentive for investments in less developed countries by deferring taxation on income tbat otherwise would be currently taxable, but it is equally clear that Congress intended to tax such income if it was removed from the less developed country. H. Rept. No. 1447, supra, 1962-3 C.B. 461-462; S. Rept. No. 1881, supra, 1962-3 C.B. 785, 791. The regulations achieve that objective (see sec. 1.955-l(b) (2)(ii), Income Tax Begs.), but the majority holding will result in such income not being taxable when withdrawn from the less developed country. Example (5) of the regulations deals with a situation similar to that in this case. A corporation realized foreign-source income in years when it was a controlled foreign corporation but not a foreign personal holding company. In a year when it is both a foreign personal holding company and a controlled foreign corporation, it invests such previously untaxed income in U.S. property. The purpose of sections 951 and 956 is to tax the indirect repatriation of foreign-source income by taxing such income when it is invested in U.S. property (H. Rept. No. 1447, supra, 1962-3 C.B. 462; S. Rept. No. 1881, supra, 1962-3 C.B. 786), and that objective is carried out by the regulations. See secs. 1.951-3 and 1.956-1 (b)(2)(h), Income Tax Eegs. However, the majority holds that such income is not taxable. Considering the undoubted intention of Congress to tax funds withdrawn from investment in less developed countries, if they have been previously excluded, and to tax funds invested in U.S. property, it seems clear that section 951(d) is to be applied on a year-by-year basis to the earnings of a corporation for each taxable year during which the corporation is a controlled foreign corporation. If the earnings for a year are taxed under the foreign personal holding company provisions, then such earnings were not intended to be subject to the provisions of subpart E. However, earnings not so taxed were not intended to be exempted from the operations of subpart P merely because the corporation happens to be both a foreign personal holding company and a controlled foreign corporation. In my opinion, this Court has abrogated its responsibility by its holding in this case. It is well established that in interpreting legislation, the Court should consider not only the words of the statute, but also the effect of the proposed interpretation of those words. See, e.g., Corn Products Co. v. Commissioner, 350 U.S. 46 (1955); Helvering v. Gregory, 69 F. 2d 809 (C.A. 2, 1934), affd. 293 U.S. 465 (1935); Estate of Robert Rodger Glen, 45 T.C. 323 (1966). In Corn Products Co. v. Commissioner, supra, the Supreme Court held that the income which the corporation realized from trading in commodity futures should, be treated as ordinary income, and not as long-term capital gains. The Court said at 350 U.S. 51-52: Admittedly, petitioner’s corn futures do not come within the literal language of the exclusions set out in * * * [present section 1221], They were not stock in trade, actual inventory, property held for sale to customers or depreciable property used in a trade or business. But the capital-asset provision * * * must not be so broadly applied as to defeat rather than further the purpose of Congress. * * * Thus, if the proposed interpretation of a statute clearly fails to carry out the clear purpose of the legislation, then it should be rejected. See Helvering v. Clifford, 309 U.S. 331 (1940). Yet, in this case, the Court has acted in total disregard of the effect of its interpretation of section 951. To say that, “If its holding fails to accomplish the purpose of Congress, let Congress change the law,” represents a failure to recognize what I consider to be our proper role. Such an attitude will impose upon Congress the necessity of enacting corrective legislation in order to avoid the frustration of its purpose. When that purpose can be gleaned as certainly as it can in this case, I believe that it is our responsibility to carry it out and not to force Congress to plug every hole that we create in the statute. I perceive that we have a higher responsibility than to interpret the statute on the basis of a narrow, literal reading of the words and to turn our bach on the consequences of such an interpretation. Raum and DawsoN, JJ., agree with this dissent.