Court Opinion

ID: 4474247
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:10:51.073664+00
Date Added: 2024-06-11T15:04:22.066570
License: Public Domain

Foley, J., dissenting: I disagree with the majority’s analysis and holding. A. The Statute’s Plain Language Dictates Congress, through its grant of legislative regulatory authority, mandated that “the determination as to whether income is * * * [sourced, or effectively connected to a taxpayer’s trade or business, in American Samoa] shall be made under regulations prescribed by the Secretary.” Sec. 931(d)(2). Pursuant to the plain and unambiguous language of section 931(d)(2), there can be no such determination until regulations are issued. Where the statute’s language is plain, the language is where the interpretive task should end, and the sole function of the courts is to enforce such language according to its terms. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989); United States v. Merriam, 263 U.S. 179, 187-188 (1923) (stating that tax statutes are not to be extended by implication beyond the clear import of the language used). Section 931 cannot be reasonably interpreted because definition of the statute’s most integral terms is relegated to regulations that do not exist. Congress explicitly vested the Secretary with the authority to prescribe legislative regulations delineating the scope of the income exclusion pursuant to section 931(d)(2). See Coca-Cola Co. v. Commissioner, 106 T.C. 1, 19 (1996); Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 843-844 (1984) (holding that where Congress has explicitly left a gap for the agency to fill, there is an express delegation of authority to the agency to elucidate a specific provision of the statute by regulation, and such regulations are legislative). Indeed, the determination whether income is “derived from sources within [American Samoa]” or “effectively connected with the conduct of a trade or business * * * within [American Samoa]” is the crux of the statute. Sec. 931(a). Such determination can be accomplished in a variety of ways, and this Court cannot divine what rules the Secretary would promulgate. Moreover, our role is to interpret, not make, the law. The statute states that the determination of whether income is effectively connected “shall be made under regulations prescribed by the Secretary.” Sec. 931(d)(2). The majority imply that such language is ambiguous, and that the Court, and presumably taxpayers, may look to any regulation if the Code does not specify the section under which the regulations must be drafted. Majority op. p. 324. The above-referenced language is commonly used in statutes. Respondent and tax practitioners will certainly find creative uses for this sophistic line of analysis. The majority’s analysis eventually shifts to section 864. Application of that statute does not work, however, because section 864 was intended to determine whether income of a nonresident alien is effectively connected to the United States. Sec. 864(c)(1). In fact, a literal application of section 864 to section 931 would result in no U.S. citizen’s qualifying under the effectively connected prong. Nevertheless, the “principles” of an inapplicable section (i.e., section 864) are being relied on, and the mandate of the applicable section (i.e., section 931(d)(2)) is ignored in a desperate attempt to make the statute work. See majority op. p. 332. The bottom line is that, other than section 931, there are no statutes or regulations addressing whether an individual’s income is “effectively connected with the conduct of a trade or business by such individual within * * * [American Samoa]”. Sec. 931(a)(2). Rather than adhere to the statute, the majority rely on effectively connected “concepts” and “principles”. See majority op. pp. 332-333. The statute, legislative history, and Implementing Agreement do not authorize the application of section 864’s “principles”. In numerous other grants of regulatory authority Congress explicitly provided that the “principles” of a particular section should be applicable, but with respect to section 931 Congress failed to provide such direction. See secs. 41(f)(1)(B), 52(b), 120(d)(6)(B), 127(c)(4)(B), 129(e)(5)(B), 267(a)(3), 367(e)(1), 383(b), 404(g)(3)(C), 414(c), 416(i)(l)(B)(iii)(II), 597(b), 1092(b)(1), 2663(2), et al. In order to give effect to section 931(d)(2), the Court must follow, not ignore, its mandate. B. Exceptions to the Plain Language Doctrine Are Not Applicable There are two exceptions to the plain language doctrine. We need not adhere to a literal application of a statute if such language produces an outcome that is “demonstrably at odds” with clearly expressed congressional intent to the contrary, United States v. Ron Pair Enters., Inc., 489 U.S. at 241 (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982)); Peaden v. Commissioner, 113 T.C. 116, 122 (1999), or results in an outcome so absurd “as to shock the general moral or common sense”, Crooks v. Harrelson, 282 U.S. 55, 60 (1930); Tele-Communications, Inc. v. Commissioner, 95 T.C. 495 (1990). A conclusion that section 931 is inapplicable without regulations neither conflicts with clearly expressed congressional intent nor results in an absurd outcome. To the contrary, the legislative history and the implementing agreement both support the plain language of the statute, which provides that section 931 is inapplicable in the absence of regulations. 1. Legislative History The legislative history indicates that Congress gave only the Secretary the authority to prescribe the applicable rules. Congress was equally concerned about American Samoa’s authority to implement its own tax system and the minimization of potential abuse. The Senate Committee on Finance stated: Therefore, to promote fiscal autonomy of the possessions, it is important to permit each possession to develop a tax system that is suited to its own revenue needs and administrative resources. It is also important to coordinate the possessions’ tax systems with the U.S. tax system to provide certainty and minimize the potential for abuse. [S. Rept. 99-313, at 478 (1986), 1986-3 C.B. (Vol. 3) 1, 478.] To accomplish these goals, Congress gave extraordinary power to the Secretary to negotiate an implementing agreement between the United States and American Samoa, and to prescribe regulations for purposes of defining the boundaries of American Samoa’s tax authority. Id. at 479-481, 1986-3 C.B. (Vol. 3) at 479-481. Congress intended that the Secretary define “effectively connected income” in a manner that would prevent tax avoidance. Id. at 481, 1986-3 C.B. (Vol. 3) at 481; H. Conf. Rept. 99-841 (Vol. II), at 11-680 (1986), 1986-3 C.B. (Vol. 4) 1, 680. The legislative history identifies situations where taxpayers with assets having built-in gain move to a U.S. possession, sell their assets, and avoid tax on the gain. S. Rept. 99-313, supra at 481, 1986-3 C.B. (Vol. 3) at 481. These tax avoidance techniques are an illustrative, rather than exhaustive, delineation of machinations Congress wanted the Secretary to foreclose. The Secretary was given this responsibility because he, rather than Congress or this Court, has experience with the specific problem and the expertise to solve it. 2. Implementing Agreement Congress gave the Secretary the responsibility to negotiate the implementing agreement, without which section 931 is inoperative. Tax Reform Act of 1986 (tra 1986), Pub. L. 99-514, sec. 1271, 100 Stat. 2085, 2591; S. Rept. 99-313, supra at 479, 1986-3 C.B. (Vol. 3) at 479. Moreover, the implementing agreement indicates that the Secretary has the responsibility of defining the scope of American Samoa’s tax authority and explicitly states that “the United States may use its regulatory authority over sourcing rules under section 931(d)(2) and 7654(e) of the Code to determine that certain income is U.S.-source income.” Tax Implementation Agreement Between the United States of American and American Samoa, 1988-1 C.B. 408, 410. (Emphasis added.) Pursuant to section 1271 of TRA 1986, and the resulting implementing agreement, the Secretary is granted extraordinary authority. For example, American Samoa is allowed to replace the “mirror” system of taxation with its own tax scheme, but the Secretary has the authority to return the possession to the “mirror” system if the possession enacts discriminatory tax laws or the possession’s tax receipts fall (revenue requirement). TRA 1986 sec. 1271, 100 Stat. 2592. Thus, after discovering a violation of these requirements and informing Congress of its findings, the possession will return to the “mirror” system unless Congress passes a law providing otherwise. Id. The aforementioned revenue requirement is a good example of the coordination between the implementing agreement and the regulations. Obviously, whether tax receipts rise or fall within American Samoa is directly related to the Secretary’s definition of “income derived from sources within [American Samoa]” and “income effectively connected with the conduct of a trade or business by such individual within [American Samoa].” The definitions of these terms can be adjusted to ensure that certain income does not escape from both the U.S. and American Samoan tax systems. Thus, the implementing agreement and the regulation were intended to, and in fact do, work in tandem to outline the scope of American Samoa’s tax authority. C. Section 931(d)(2) Presents a Case of First Impression On numerous occasions, this Court has considered whether the promulgation of regulations pursuant to a statutory grant of authority was a condition precedent to the execution of a statute. See Schwalbach v. Commissioner, 111 T.C. 215 (1998); Intl. Multifoods Corp. v. Commissioner, 108 T.C. 579 (1997); Estate of Neumann v. Commissioner, 106 T.C. 216 (1996); H Enters. Intl., Inc. v. Commissioner, 105 T.C. 71 (1995); Estate of Hoover v. Commissioner, 102 T.C. 777 (1994); Alexander v. Commissioner, 95 T.C. 467 (1990); Estate of Maddox v. Commissioner, 93 T.C. 228 (1989); First Chicago Corp. v. Commissioner, 88 T.C. 663 (1987); Occidental Petroleum Corp. v. Commissioner, 82 T.C. 819 (1984). In those cases, however, the grant of regulatory authority was not similar to section 931(d)(2)’s mandate, and the statute’s ambit was not as dependent on the promulgation of regulations. In addition, the Court was not asked to interpret the statute’s most integral term without sufficient guidance regarding Congress’s intent. In Alexander v. Commissioner, supra at 473, we held that a statute was not applicable because the Secretary had failed to promulgate regulations. We concluded: Section 465(c)(3)(D) unambiguously provides that section 465(b)(3) “shall apply only to the extent provided in regulations prescribed by the Secretary,” to an activity described in section 465(c)(3)(A). Regulations have not been prescribed by the Secretary. Accordingly, we hold that section 465(b)(3) does not apply to the activities of the limited partnerships. Id. We chose not to exercise our independent judgment because Congress gave the Secretary, and only the Secretary, the authority to prescribe the applicable rules. In Schwalbach, Intl. Multifoods, Estate of Neumann,1 and H Enters., the statutes at issue provided that “The Secretary shall prescribe such regulations as may be necessary or appropriate”. See secs. 469(1), 865(j)(l), 2663, 7701(f). Thus, these cases are distinguishable from petitioner’s because of the permissive nature of the grants of regulatory authority. The majority rely on Estate of Maddox, First Chicago, and Occidental, for the proposition that the Secretary’s failure to promulgate regulations as directed by Congress cannot prevent the application of a statute which confers a benefit on taxpayers. The majority’s reliance on these cases is misplaced for two reasons. First, section 931 provides an exclusion for income sourced in, or effectively connected to, American Samoa, but such income is subject to taxation in American Samoa. See TRA 1986 sec. 1271(a), 100 Stat. 2593. Any tax reduction that may result from the interplay between the two tax systems was not intended by Congress. Thus, an exclusion from U.S. taxes pursuant to section 931 confers no benefit of the type contemplated in Estate of Maddox (i.e., reduction in estate tax due to application of section 2032A), and First Chicago and Occidental (i.e., relief from alternative minimum tax liability). Accordingly, these cases are distinguished. Second, the grants of authority in Estate of Maddox, First Chicago, and Occidental allowed the Secretary to promulgate legislative regulations that enlarged the scope of section 2032A and the tax benefit rule. The Secretary was not required to define terms integral to the operation of the entire statute. Thus, even in the absence of regulations, the Court in those cases could arrive at a reasonable conclusion regarding whether the taxpayer met the terms of the statute. See Estate of Maddox v. Commissioner, supra at 233 (concluding that the language of section 2032A(g) “backhandedly tells us that Congress did not want the estate of a stockholder in a family corporation to be deprived of the benefits of section 2032A”); First Chicago Corp. v. Commissioner, supra at 672 (reasoning that section 58(h) “was obviously intended to give the tax benefit rule unlimited scope”); see also Occidental Petroleum Corp. v. Commissioner, supra at 827. Congress, in section 931, did not, however, provide a basis upon which this Court can determine whether petitioner’s income qualifies for exclusion. D. Conclusion Congress enacted a statutory scheme delegating broad authority to the Secretary. Whether we agree with such delegation, or are comfortable with its consequences, is irrelevant. We must follow the statutory mandate and not do the job reserved for either the legislative or executive branch.   In Estate of Neumann v. Commissioner, 106 T.C. 216, 219 (1996), the Court set forth the “whether versus how” test. The Court stated that we are called upon to resolve the following question: Are the regulations a necessary condition to determining “whether” the GST tax applies * * * or do they constitute only a means of arriving at “how” that tax, otherwise imposed by the statute, should be determined * * *. Id. Without regulations to determine the scope of the exclusion, we are unable to discern “whether” or “how” sec. 931 relates to petitioner. Thus, the “whether” versus “how” test is not useful. The regulatory grant of authority in sec. 931(d)(2), unlike the grant of authority in previous cases holding that the "how” prong of the test was applicable, explicitly provides that “whether income is described in paragraph (1) or (2) of subsection (a) shall be made under regulations prescribed by the Secretary.” (Emphasis added.) In addition, the grant of authority at issue in Estate of Neumann v. Commissioner, supra at 218, directed the Secretary to draft regulations “consistent with the principles of chapters 11 and 12”, thus giving the Court a foundation for its conclusion. See sec. 2663(2).