Court Opinion

ID: 4484038
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:28.218566+00
Date Added: 2024-06-11T11:33:35.838784
License: Public Domain

Tannenwald, J., dissenting: I agree with Judge Simpson that we should construe the statutory provisions in question in a manner that carries out congressional intent, but I think there is a better method than that outlined in his dissent for dealing with the disposition of the issue of the second-level tax. The difficulty arises, as the majority points out, from the fact that the literal language of the statute provides for the imposition of a second-level tax if the act of self-dealing is not corrected, but the period during which the correction must be made does not end until our decision as to such tax becomes final, and the amount of such tax is determined with reference to the highest fair market value of the property involved during the correction period. Sec. 4941(b) and (e)(2) and (3). Judge Simpson would deal with this problem by entering a decision imposing the second-level tax, unless correction is made before the decision becomes final, in an amount based on the highest fair market value of the property preceding the date of decision. He would leave open the possibility that respondent could claim an increase in the amount of the second-level tax if the fair market value of the property involved increases after the entry of decision herein as to that tax but before that decision becomes final. The problem of dealing with such an increase becomes acute if the fair market value of the property increases by over 100 percent during such period. Under these circumstances, it would be more advantageous for the self-dealer to accept and pay the second-level tax than to correct the act of self-dealing. Considering the inflation that currently prevails in our economy and the period of time that might elapse if the parties appeal to the Court of Appeals and perhaps also to the Supreme Court for certiorari, a possibility is presented that the intent of Congress that the foundation be given the benefit of any bargain it could have made (S. Rept. 91-552 (1969), 1969-3 C.B. 423,442,445), will not be fulfilled. Under Judge Simpson’s approach, the responsibility for taking necessary action to carry out the intent of Congress in order to avoid this eventuality would be on respondent rather than on this Court. Obviously, in the situation described above, where the amount involved increases by over 100 percent, it is the foundation that has a real interest in seeing that correction is made. However, the foundation is not a party to the case and would seem to have no procedure available to it for seeking an increase in the penalty. To minimize these problems and at the same time to adhere as closely as possible to the literal language of the statute, I would sever the issue of liability as to the second-level tax and enter a decision as to the first-level tax only, thereby delaying the determination of the amount of the second-level tax until the decision as to the first-level tax becomes final. Although the question of whether such a decision would be a final decision for purposes of appeal is not for this Court to decide, I believe it appropriate to note my view of the question. In my opinion, the question can and should be resolved in favor of appealability. Section 7482(a) grants to the United States Courts of Appeals exclusive jurisdiction to review “decisions” of the Tax Court. Insofar as this case is concerned, a decision of this Court means either a dismissal of the case or a determination of a deficiency. Sec. 7459; Commissioner v. Smith Paper, 222 F.2d 126 (1st Cir. 1955). Thus, where an issue as to a rule of law is severed but does not result in determination of a deficiency, the Court’s ruling on that issue is not appealable. Michael v. Commissioner, 56 F.2d 825 (2d Cir. 1932). On the other hand, the First Circuit has indicated that a decision as to 1 year in a case raising issues in more than 1 year might be appealable. Commissioner v. Smith Paper, supra. Cf. Wilson v. Commissioner, 42 B.T.A. 1254 (1940). The controversy involving two taxes in the instant case1 is sufficiently similar to the suggestion dealing with severability for purposes of appellate jurisdiction, in cases involving a deficiency notice covering more than 1 year, to justify severance of the issue herein as to the second-level tax, particularly when doing so offers the potential for better implementation of legislative intention. In Gillespie v. United States Steel Corp., 379 U.S. 148 (1964), petitioner, as administratrix of the estate of her son, brought an action in a Federal court against the shipowner-employer of the son for damages on account of his death. She claimed a right to recover for the benefit of herself and the decedent’s brother and sisters under the Jones Act, an Ohio wrongful death statute, and general maritime law. The District Court ruled that the Jones Act was the exclusive remedy, struck all parts of the complaint referring to the Ohio statute and general maritime law, and denied any right of recovery to the brother and sisters on the ground that they were not beneficiaries entitled to recovery under the Jones Act. The Court of Appeals determined that the District Court ruling was appealable. In discussing this issue, the Supreme Court stated that for a decision to be “final” does not “necessarily mean [that it is] the last order possible to be made in a case. Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 545” and that “the requirement of finality is to be given a ‘practical rather than a technical construction.’ ” See 379 U.S. at 152.2  A decision as to the first-level tax will unquestionably be a final decision as to that tax. Applying the practical approach of the Supreme Court, that decision should be appealable. While Judge Simpson would also provide an expanded period of time during which a determination of fair market value upon which the second-level tax would be based might be made, my approach would enable the Court to retain the power to take whatever action might prove necessary to protect the foundation’s interest, without relying on a party to take the initiative. In this connection, I recognize that, under either approach, it will not be possible to produce an ultimate decision which conforms precisely to the statutory scheme.3  Simpson, J., dissenting: By its decision in this case, this Court has unnecessarily invalidated nine provisions of the statutes enacted by the Congress in 1969,1974, and 1978. Due respect for the acts of Congress compels me to dissent from such a conclusion. It is a cardinal principle of statutory construction that, whenever possible, the courts should interpret a statute so as to avoid invalidating it. Such proposition often arises in cases in which a statute is under constitutional attack. Chief Justice Hughes expressed the proposition when he said: The cardinal principle of statutory construction is to save and not to destroy. We have repeatedly held that as between two possible interpretations of a statute, by one of which it would be unconstitutional and by the other valid, our plain duty is to adopt that which will save the act. Even to avoid a serious doubt the rule is the same. * * * [N.L.R.B. v. Jones & Laughlin Steel Corp., 301 U.S. 1, 30 (1937).] The same doctrine was again articulated by the Supreme Court when it stated: to construe statutes so as to avoid results glaringly absurd, has long been a judicial function. Where, as here, the language is susceptible of a construction which preserves the usefulness of the section, the judicial duty rests upon this Court to give expression to the intendment of the law. [Armstrong Co. v. Nu-Enamel Corp., 305 U.S. 315, 333 (1938); fn. ref. omitted.] Again, in Markham v. Cabell, 326 U.S. 404, 409 (1945), the Supreme Court declared: The process of interpretation also misses its high function if a strict reading of a law results in the emasculation or deletion of a provision which a less literal reading would preserve. Here, we do not have a constitutional issue; yet, the majority of the Court has chosen to adopt an interpretation of the statute which nullifies and invalidates it. Such action is contrary to the repeated judicial mandates to preserve a statute wherever possible. In this case, there is absolutely no doubt as to the purpose of the Congress. In 1969, it enacted a system of rules regulating private foundations and certain persons dealing with them. To make such rules effective, it provided sanctions: Under section 4941, if a “disqualified person” engages in an act contrary to such rules (that is, an act of self-dealing), a 5-percent penalty is imposed on such person. However, Congress was interested in doing more than merely punishing him for his act of self-dealing; it wanted to disgorge the benefit of such act and to make the foundation whole. S. Rept. 91-552 (1969), 1969-3 C.B. 423,445; H. Rept. 91-413 (Part 1) (1969), 1969-3 C.B. 200, 216. To accomplish that result, it provided that if the effect of the act of self-dealing was not corrected, the person is subject to the second-level penalty of 200 percent. Obviously, no rational person would knowingly pay the second-level penalty; he would make correction of the act of self-dealing. S. Rept. 91-552 (1969), 1969-3 C.B. at 445; H. Rept. 91-413 (Part 1) (1969), 1969-3 C.B. at 213. To carry out the plan, it was provided that if the Commissioner determines that there has been an act of self-dealing, he should send to the disqualified person a notice of deficiency for the penalties. Secs. 6211(a) and 6212(a). By filing a petition with this Court, such person would then have an opportunity to seek judicial review of whether his conduct did in fact constitute an act of self-dealing. Sec. 6213(a). Within the time for filing such petition, such person can decide whether he wishes to seek such judicial review or whether he is willing to pay the first-level penalty and correct the act of self-dealing. If he seeks judicial review by filing a petition with this Court, he is not then required to correct the act of self-dealing at that time; he can wait until the completion of judicial review of the underlying question of whether there has been an act of self-dealing. Sec. 4941(e)(4). If this Court decides that issue in his favor, he is relieved of paying any penalty. If this Court decides that the person has engaged in an act of self-dealing, the person then has a period in which he can decide whether to seek judicial review of the decision of this Court. Sec. 7483. If he decides to accept the decision of this Court, such decision does not become final until the expiration of the period for appeal (sec. 7481(a)(1)), and he has the same period in which to avoid the second-level penalty by correcting the act of self-dealing. If he does appeal the decision of this Court, he can postpone any attempt at correcting such act; he can await the decision of the appellate court. Sec. 4941(e)(4). If the appellate court also decides the issue against him, the decision of this Court does not become final for some time (sec. 7481(a)(2)), and he has such time in which to make correction of the act of self-dealing and avoid the second-level penalty. No doubt, the statute could have been drafted so as to accomplish these legislative objectives more clearly. However, as the Third Circuit stated in Berger v. Commissioner, 404 F.2d 668, 673 (1968), affg. 48 T.C. 848 (1967), cert. denied 395 U.S. 905 (1969): “The statute * * * must be given a sensible reading which makes its provisions workable, a purpose which the draftsmen must be presumed to have intended. With this purpose in mind the meaning of the statute is readily ascertainable.” I see no insurmountable problems arising from the language of the statutes. The majority concludes that since the second-level penalty is not unconditionally due at the time that the Commissioner issues his notice of deficiency, such penalty has not yet been imposed within the meaning of section 6211 and, therefore, cannot be the subject of a notice of deficiency. There is nothing to indicate that the word “imposed” was intended to mean that the penalty had become unconditionally due and owing. To the contrary, the legislative history makes it abundantly clear that such meaning was not intended. The word “imposed” appears to refer merely to the act of enacting such tax. In other words, Congress could have used the words “provided,” or “established,” by section 4941(b), and the effect would be the same. The majority also believes that since it will be impossible to know whether the petitioner will be required to pay the second-level penalty at the time we enter a decision, we cannot enter a final decision in the case. Again, such a result is not compelled by the law. If, after reviewing the evidence, we conclude that the petitioner has engaged in an act of self-dealing, our decision can provide that there is due the amount of the first-level penalty. The decision can also provide that there is due the amount of the second-level penalty unless the petitioner corrects the act of self-dealing before the decision becomes final. For purposes of such decision, the amount of such penalty can be based on the value of the involved property preceding the date of decision. There are other situations in which a deficiency determined by us may be modified by subsequent events. For example, if we decide that there is a deficiency in the personal holding company tax imposed by section 541, such deficiency may be reduced or eliminated by the subsequent payment of deficiency dividends in accordance with section 547. Similarly, if we decide there is a deficiency in the tax of a real estate investment trust, such deficiency may be modified by the subsequent payments of deficiency dividends in accordance with section 860. A deficiency in the estate tax may also be reduced by subsequent credits of State death taxes. Sec. 2011(c)(1). Under Rule 156, Tax Court Rules of Practice and Procedure, there may be a further trial in an estate tax case to determine the amount of the expenses of an estate, and the deduction for such expenses may reduce the deficiency previously decided by this Court. It is true that in the personal holding company provisions, in the real estate investment trust provisions, and in the estate tax provisions, the procedures for subsequent modification of a deficiency are carefully spelled out. Yet, the statutory provisions and the legislative history are equally clear in indicating that a deficiency in the tax under section 4941 may be modified by subsequent events. Furthermore, the majority does not rest its conclusion on the failure to make clear the legislative purpose. The majority seems to believe that there is an inherent requirement that a decision be unconditional. These examples serve to demonstrate that there is no such requirement; nor is there such a requirement for a decision to be considered by an appellate court. See Fulman v. United States, 434 U.S. 528 (1978); Callan v. Commissioner, 476 F.2d 509 (9th Cir. 1973), affg. per curiam 54 T.C. 1514 (1970). Finally, the technique used by the Congress to induce self-dealers to restore the benefits to the foundation has also been used in many other situations. In 1969, such technique was used to induce the distribution of certain undistributed income by a private foundation (sec. 4942); the disposition of certain excess business holdings (sec. 4943); the removal of certain investments that jeopardize the charitable purposes of the foundation (sec. 4944); and the correction of certain taxable expenditures by a foundation (sec. 4945). When the Employee Retirement Income Security Act of 1974 (Pub. L. 93-406), 88 Stat. 829, was enacted, Congress again made use of the same technique to bring about compliance with the minimum funding standards and adherence to the investment restrictions applicable to employee plans. Secs. 4971 and 4975. In 1978, Congress turned again to such technique to bring about the correction of acts of self-dealing in connection with black lung trusts and to encourage repayment of taxable expenditures by such trusts. Secs. 4951 and 4952. Hence, when the Court nullifies the sanctions designed to encourage correction of the acts of self-dealing under section 4941, it also nullifies the sanctions used by the Congress in connection with all these other provisions. Our decision thus has widespread consequences, and those consequences we should seek to avoid. In this case, all that we have to decide at this time is whether the notice of deficiency is valid and what type of decision to enter in the case. It seems to me that we can answer them in a manner that carries out the undoubted legislative objectives. At this time, we need not decide precisely what is to happen when the petitioner undertakes to correct the act of self-dealing, what action the Commissioner should take in the event the petitioner fails to attempt to correct his act, or what action may be taken by the Commissioner if he wishes to claim an increase in the penalty because of increases in the value of the property involved subsequent to the entry of the initial decision and before the time it becomes final. I am altogether confident that when those questions are faced by this or other courts, reasonable answers consistent with the legislative purpose can be worked out. See Rodgers P. Johnson Trust v. Commissioner, 71 T.C. 941, 952 (1979), where the Court adopted a similar approach with respect to the consequences of a trust filing an agreement under section 302(c). In my judgment, it is altogether clear that we should not strike down a statute merely because we do not know precisely how it will be interpreted and applied in situations not now before us. Yet, the majority has raised doubts, and based on those doubts, concluded that the statute is unworkable. If the charge be made that we take liberties with the statute, it may be so. Anyone should try to make it work. And we have sought the true meaning of Congress, believing it intended to make it work. [Tenzer v. Commissioner, 285 F.2d 956, 958 (9th Cir. 1960), revg. an unreported order of this Court.] Sterrett, Wilbur, and Chabot, JJ., agree with this dissenting opinion. Chabot, /., dissenting: I join in Judge Simpson’s dissent. I join in so much of Judge Tannenwald’s dissent as suggests an alternative way to preserve much of the statute. In addition, it should be noted that the majority have raised a further problem by effectively invalidating the scheme of section 4941. Section 4941 was enacted by section 101(b) of the Tax Reform Act of 1969 (83 Stat. 498). Section 101(j)(7) of that act (83 Stat. 527) removed private foundations from the application of the rules against self-dealing embodied in section 503 of the Code. Section 503 provided a different set of sanctions, including loss of exempt status for the organization participating in the self-dealing. The question then arises as to whether (because of the effective invalidation of the scheme of section 4941) section 503 again applies to private foundations. It appears that this question does not need to be decided in this case; however, the existence of this problem should be recognized in weighing the alternative methods of dealing with section 4941 in this case. See Lingenfelder v. Commissioner, 38 T.C. 44, 46 (1962). Simpson, Sterrett, and Wilbur, JJ., agree with this dissenting opinion.   That the two taxes may be related does not preclude a holding that a decision as to the first-level tax is a final decision for purposes of determining appealability. Cf. Hudson Distributors v. Eli Lilly, 377 U.S. 386, 389 n. 4 (1964).    The Supreme Court was also not disturbed by the absence of a certification by the District Court under 28 U.S.C. 1292(b) as then in effect. See Gillespie v. United States Steel Corp., 379 U.S. 148, 154. See also rule 54(b), Federal Rules of Civil Procedure, which, in any event, is not applicable to this Court.    I use the word “precisely” because I recognize that the problem of circuity inherent in the literal language of the statute precludes its full implementation.