Court Opinion

ID: 9476557
Source: CourtListenerOpinion
Date Created: 2023-08-05 05:58:42.57254+00
Date Added: 2024-06-11T17:45:22.839796
License: Public Domain

MERRITT, Circuit Judge.
This tax case raises an intricate issue of statutory interpretation concerning the deduction of charitable contributions to veterans organizations prior to amendments to the tax law in 1984 and 1986. The issue requires an interpretation of three semantically complex, interlocking sections of the Internal Revenue Code of 1954 that cross-reference and incorporate each other, sections 170, 509 and 501. The relevant language of these sections is set forth in the appendix.
In 1979 the donor taxpayer gave a $435,-000 building to Southgate Veterans of Foreign Wars Post No. 9283 in Southgate, Michigan. The specific question presented by this appeal is whether this nonprofit veterans organization was entitled to be classified as a section 170(b)(1)(A) charity (churches, schools, hospitals, welfare and certain other organizations are specified in the statute) so as to permit a more generous deduction from adjusted gross income — generally 50%, however, in the case of this capital asset it is 30% — and future loss carry forwards of unused portions of the gift, as the taxpayer argues. Or should the donor receive a deduction limited to only 20% of adjusted gross income without any carry forward as provided under section 170(b)(1)(B), as the Tax Court held? Weingarden v. Comm’r, 86 T.C. 669 (1986).
The parties agree that the veterans organization does not fall into the first seven subparagraphs of the subsection of section 170(b)(1)(A) which lists schools, hospitals and other specific organizations. They also agree that the interpretation issue turns on whether the donee organization comes with subparagraph viii. Subparagraph viii makes a cross-reference; it gives the more generous treatment to “any organization described in section 509(a)(2) or (3).” The interpretation problem presented to us arises because it is unclear exactly what this phrase “any organization described in section 509(a)(2) or (3)” means.
The cross-referenced section, section 509, was designed as a section of subchapter F on exemptions. It defines “private foundations” — as distinguished from publicly supported charities — that are subject to certain additional taxes. Section 509 was not specifically designed to define charitable deductions, although the cross-reference in subparagraph viii of section 170 uses sub-paragraphs (a)(2) and (3) for that purpose. The prefatory language of section 509(a) begins with another cross-reference. It *1029says that a “private foundation” is one of the many types of organizations described in section 501(c)(3), i.e., organizations operating “exclusively for religious, charitable, scientific” and other similar purposes which are not engaged in lobbying and political activities. Subparagraphs (1), (2), (3) and (4) of section 509(a) then exclude certain charitable organizations from the definition of “private foundations,” thereby granting to them better tax treatment than private foundations. Subparagraph (2)— the specific subparagraph at issue in this case — excludes from the definition of private foundations publicly supported foundations that receive more than one-third of their support from gifts, membership fees and receipts from charitable services.
The question in our case therefore is whether subparagraph viii of section 170(b)(1)(A) — “any organization described in section 509(a)(2) or (3)” — should be read to include the general proviso appearing in the preface to that section which apparently requires these organizations to also qualify under section 501(c)(3). The government argues that an organization must both be qualified under section 501(c)(3) and meet one of the criteria listed in subsections (2) or (3) of section 509. The taxpayer argues that the specific reference to subsections (2) and (3) indicates that an organization need not meet the additional section 501(c)(3) requirement mandated by the prior general section of the statute. If the donee has to meet section 501(c)(3), it is unclear whether the veterans organization in question can meet the “no lobbying” limitation. But if the donee only has to meet the definition contained in subpara-graph (2) alone, all parties agree that the deduction should be allowed because the veterans organization in question meets that standard.
Despite the Tax Court’s ruling that the cross-reference in subparagraph viii includes the prefatory language of section 509(a), and thereby incorporates section 501(c)(3), we conclude that the taxpayer’s argument to the contrary is more persuasive. The government’s interpretation would make subparagraph viii of section 170(b)(1)(A) cover all of the cases already covered by clause vi. Clause vi, by cross-referencing section 170(c)(2), incorporates the same limitation as section 501(c)(3), and also uses part of the same public contributions test as subparagraph (2) of section 509(a). Therefore, under the government’s proposed construction, there would be no cases covered by subparagraph vi that are not covered by the broader language of subparagraph viii. We do not understand what sense it would make to construe sub-paragraph viii to duplicate and overlap sub-paragraph vi.
Although we believe that the taxpayer’s argument on the technical interpretation of the statute is more persuasive than the Commissioner’s, it is obvious that at best the statutory scheme is ambiguous. The Tax Court called the problem of interpretation here “as difficult as capturing a drop of mercury under your thumb.” 86 T.C. at 675. This difficulty arises because “the resolution of this issue ... necessitates (whichever way it is decided) a difficult analysis of a vague statutory provision” and “the legislative history provides no clue.” 86 T.C. at 681.
The general canon of construction is that statutes imposing a tax are interpreted liberally (in favor of the taxpayer). See Porter v. Comm’r, 288 U.S. 436, 442, 53 S.Ct. 451, 453, 77 L.Ed. 880 (1933); 1 R. Mertens, Law of Federal Income Taxation § 3.05 (1986). But provisions granting a deduction or exemption are matters of legislative “grace” and are construed strictly (in favor of the government). See 1 R. Mertens, supra, at § 3.07. A special rule applies to charitable deductions, however, because these provisions are an expression of “public policy” rather than legislative grace. See Helvering v. Bliss, 293 U.S. 144, 150-51, 55 S.Ct. 17, 20, 79 L.Ed. 246 (1934); Hartwick College v. United States, 801 F.2d 608, 615 (2d Cir.1986). Provisions regarding charitable deductions should therefore be liberally construed in favor of the taxpayer. See Hartwick College, 801 F.2d at 615. Given this rule of interpretation, we construe the hopeless ambiguity created by this statutory scheme in favor of the taxpayer.
*1030In light of the redundant, ambiguous, and opaque nature of the statutory language, the absence of legislative history or other indicia of legislative purpose, and the limited effect of our ruling,1 we conclude that the cross-reference in subpara-graph viii should be read as a cross-reference to subparagraph (2) of section 509(a) without the prefatory cross-reference in subsection (a) to section 501(c)(3).
Finally, we agree with the Tax Court that footnote 8 in the Supreme Court's opinion in Regan v. Taxation with Representation of Washington, 461 U.S. 540, 546 n. 8, 103 S.Ct. 1997, 2001 n. 8, 76 L.Ed.2d 129 (1983), is not controlling. The Supreme Court suggests in that footnote that veterans organizations are subject to the twenty percent limitation of section 170(b)(1)(B) and that these contributions do not carry forward. The Tax Court was correct in its description of that footnote: “The issue concerning whether the 20 or the 50 percent limitation applied to veterans’ organizations, however, was not before the Supreme Court in that case, and no explanation or analysis of the relevant statutory provisions were provided.” 86 T.C. at 674.
Accordingly, we reverse the decision of the Tax Court.

. The tax statute was amended by section 301 of the Deficit Reduction Act of 1984 to increase the permissible deduction for an individual’s contribution to a non-qualifying charity from 20 to 30 percent and to permit the carry forward of these deductions. See Deficit Reduction Act of 1984, Sec. 301(a), Pub.L. No. 98-369, 98 Stat. 494, 777 (1984).