Court Opinion

ID: 6944494
Source: CourtListenerOpinion
Date Created: 2022-07-24 01:17:55.600967+00
Date Added: 2024-06-11T16:07:50.478824
License: Public Domain

KENNEDY, Circuit Judge,
dissenting.
I respectfully disagree with the conclusion of the majority because I believe that the regulation at issue, 26 C.F.R. § 1.458-l(g), contradicts the clear dictates of 26 U.S.C. § 458.
Regulations may not conflict with or amend unambiguous provisions of the tax code. See Koshland v. Helvering, 298 U.S. 441, 447, 56 S.Ct. 767, 770, 80 L.Ed. 1268 (1936). Accordingly, “[t]he Courts and the Commissioner do not have the power to repeal or amend the enactments of the legislature even though they may disagree with the result; rather it is their function to give the natural and plain meaning effect to statutes as passed by Congress.” National Life & Accident Ins. Co. v. United States, 524 F.2d 559, 560 (6th Cir.1975); accord United States v. Vogel Fertilizer Co., 455 U.S. 16, 24, 102 S.Ct. 821, 827, 70 L.Ed.2d 792 (1982) (invalidating tax regulation which purported to “interpret” definition which Congress already had defined with “considerable specificity”); United States v. Calamaro, 354 U.S. 351, 359, 77 S.Ct. 1138, 1143-44, 1 L.Ed.2d 1394 (1957) (invalidating tax regulation as “an attempted addition to the statute of something which is not there”). Although defendant has the authority under 26 U.S.C. § 446(b) to determine whether an accounting method “clearly reflects income,” defendant may not invoke § 446(b) to reject a method of accounting specifically authorized by Congress merely because it fails to embody the Commissioner’s particular view of clearly reflected income. See Southern Cal. Sav. & Loan Ass’n v. Commissioner of Internal Revenue, 95 T.C. 35, 41, 1990 WL 91243 (1990); Williams v. Commissioner of Internal Revenue, 94 T.C. 464, 470, 1990 WL 29267 (1990), aff'd on other grounds, 1 F.3d 502 (7th Cir.1993).
The majority reasons in part that § 1.458-1(g) is valid because “it is hardly clear” that language in the heading of § 458(b)(6) precludes its adjustment procedure. Although the majority discusses §§ 458(a) and 458(b)(6), it fails to discuss § 458(b)(5)(A). That provision, which controls the “amount covered by the legal obligation” to which § 458(b)(6)(A) refers, provides:
(5) Qualified sale.— A sale of a magazine, paperback, or record is a qualified sale if—
(A) at the time of sale, the taxpayer has a legal obligation to adjust the sales price of such magazine, paperback, or record if it is not resold_
26 U.S.C. § 458(b)(5)(A) (emphasis added).
Collectively, sections 458(a), 458(b)(5)(A) and 458(b)(6) indicate that Congress has created an'explicit accounting procedure which § 1.458-1(g) improperly attempts to amend. First, § 458(a) provides for an exclusion from gross income of “income attributable to [a] qualified sale.” See 26 U.S.C. § 458(a). Section 458(b)(6) then defines the “amount excluded” by explaining that it shall be the lesser of either a sum previously agreed to by the taxpayer or the “amount covered by the legal obligation described” in § 458(b)(5)(A). See id. at § 458(b)(6) (emphasis added). Finally, § 458(b)(5)(A) defines, a “qualified sale” as a sale for which the taxpayer has a “legal obligation to adjust the sales price of such magazine, paperback, or record if it is not resold.” Id. at § 458(b)(5)(A) (emphasis added). Although interpretation of § 458 requires more than a single step, the statute inevitably provides that a taxpayer may exclude from its gross income an amount precisely equal to the sum of the sales prices of returned items.
The section controlling the suspense ác-eount which a taxpayer must establish when adopting § 458’s accounting methods, 26 U.S.C. § 458(e), confirms that a taxpayer may exclude from gross income an amount exactly equal to the gross receipts attributable to its qualified sales. A taxpayer must base the opening balance of its suspense account upon “the largest dollar amount of returned merchandise” which the taxpayer would have taken into account under § 458 for , any of the three preceding years if it then *328had been employing the statute’s method of accounting. See 26 U.S.C. § 458(e)(2) (emphasis added). Sections 458(e)(3) and 458(e)(4) then provide that a taxpayer annually must adjust both its suspense account and its gross income by an amount equal to the difference between the opening balance of the account, a figure calculated according to the dollar amount of qualified sales of the prior year, and the “amount excluded from gross income” under § 458(a) for the current year. In order for these calculations to make sense, § 458(e) must contemplate that the amount excluded under § 458(a) mirrors every other figure in § 458(e) by representing the gross receipts, not gross profits, attributable to qualified sales. Language at the end of § .458(e) provides a final confirmation by discussing a comparison between the opening balance of the suspense account and “the dollar amount of returned merchandise which would have been taken into account under subsection (a).” Id. at 458(e).1
Defendant repeatedly insists that Congress must have meant that a taxpayer not receive a tax deduction for costs relating to returned merchandise for which the taxpayer will receive credit because an opposite interpretation would violate the general accounting principle of matching revenue with related expenses. Although defendant correctly characterizes general accounting principles, the regulation at issue injects a substantive addition to § 458 which simply does not exist in the statute as written.
The Tax Court below relied exclusively upon the recent decision in Hachette USA, Inc. v. Commissioner of Internal Revenue, 105 T.C. 234, 1995 WL 563984 (1995), aff'd, 87 F.3d 43 (2d Cir.1996) (per curiam), which ultimately concluded that the legislative history behind § 458 reveals that § 1.458-l(g) does not conflict with the statute. Resort to legislative history, however, is both unnecessary and improper because the statute is sufficiently clear. See, e.g., Tennessee Valley Auth. v. Hill, 437 U.S. 153, 184 n. 29, 98 S.Ct. 2279, 2296-97 n. 29, 57 L.Ed.2d 117 (1978); United States v. Winters, 33 F.3d 720, 721 (6th Cir.1994), cert. denied, — U.S. -, 115 S.Ct. 1148, 130 L.Ed.2d 1107 (1995). Regardless, the legislative history of § 458 fails to support defendant. Although defendant quotes extensively from the legislative record, the passages quoted only refer vaguely to broad concepts regarding “equity,” “fairness,” and the “accurate reflection of income,” principles upon which both parties of course purport to rely. As the Haehette court noted, “one is struck by the complete absence [in the legislative history] of any explicit reference to the cost side of the relevant gross income computation.” Haehette, 105 T.C. at 244. Further, the Haehette court stated that “[w]e can only conclude that Congress simply was not concerned with the inventory and cost accounting issues that the returned merchandise problem involved.” Id. at 245. Although the Haehette court viewed this utter silence as an invitation to address a perceived oversight, the absence of legislative history contrary to the plain meaning of the statute confirms that Congress meant what it said. See Wright v. Finance Serv. of Norwalk, Inc., 22 F.3d 647, 650-51 (6th Cir.1994).
The practical effect of striking down § 1.458-l(g) would be to allow distributors to delay for one year paying taxes on the credit which they receive from publishers to pay for the costs of returned merchandise. The regulation promulgated by defendant indeed may represent an objective improvement upon § 458. A regulation, however, may not alter the stated will of Congress, no matter how misguided in its use of language Congress may have been. See, e.g., Calamaro, *329354 U.S. at 357, 77 S.Ct. at 1142; National Life, 524 F.2d at 560.
I therefore respectfully dissent.

. In a document filed after oral argument, the Commissioner concedes that "we now wish to clarify that we do not disagree with the taxpayer's general contention that the language of Section 458(e) contemplates suspense account computations on a gross receipts basis — i.e., the largest dollar amount of returned merchandise and the amount of gross receipts excluded from gross income for the taxable year computed under Section 458(a).” The Commissioner nevertheless maintains that “§ 1.458 — 1(g)(1) still requires the costs associated with the sales revenues that are excluded from the gross income computation under Section 458(a) to fall from that computation.” Although the Commissioner is correct that § 1.458 — 1(g)(1) requires additional adjustments to gross income, the pertinent issue is whether § 458 allows for such adjustments. It does not.