Court Opinion

ID: 4474964
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:11:14.604983+00
Date Added: 2024-06-11T14:53:53.039893
License: Public Domain

Cohen, J., concurring: As the author of the Opinion for the Court in Med. Practice Solutions, LLC v. Commissioner, 132 T.C. 125 (2009), I write to explain why my agreement with the majority opinion here is consistent with the conclusion in that case, which followed McNamee v. Dept. of the Treasury, 488 F.3d 100 (2d Cir. 2007). Briefly, I agree with the majority that McNamee and Med. Practice Solutions, LLC are classification cases that appropriately applied the check-the-box regulations of section 301.7701 — 3(b)(l)(ii), Proced. & Admin. Regs., in deciding whether the single owner/member of an LLC or the LLC was liable for employment taxes on the wages of the employees of the business in question. In contrast, this case involves the issue of the valuation for transfer tax purposes of certain interests in a single-owner LLC that that owner transferred. See majority op. p. 32. (McNamee and Med. Practice Solutions, LLC, along with Littriello v. United States, 484 F.3d 372 (6th Cir. 2007), and others cited in Med. Practice Solutions, LLC, will be referred to as the employment tax cases). The check-the-box regulations might be applied to determine for gift tax purposes whether the owner of a single-member LLC or the LLC is the transferor of the assets used in the business or the activities for which the LLC was formed. In that event, the determination would parallel the determination in the employment tax cases as to who is liable for the Federal tax in dispute and would consider whether the LLC should be “disregarded” under those regulations. The only transfer at issue here, however, is the transfer by the owner of the LLC of certain interests that she held in that llc. Transfer tax disputes, including this one, more frequently involve differences over the fair market value of property, and fair market value is determined by applying the “willing buyer, willing seller” standard to the property transferred. See majority op. pp. 28-30. Where the property transferred is an interest in a single-member LLC that is validly created and recognized under State law, the willing buyer cannot be expected to disregard that LLC. See, e.g., Knight v. Commissioner, 115 T.C. 506, 514 (2000) (“We do not disregard * * * [a] partnership because we have no reason to conclude from this record that a hypothetical buyer or seller would disregard it.”). Of course, Congress has the ability to, and on occasion has opted to, modify the willing buyer, willing seller standard. See, e.g., secs. 2032A, 2701, 2702, 2703, 2704; Holman v. Commissioner, 130 T.C. 170, 191 (2008) (applying section 2703 to disregard restrictions in a partnership agreement). In Kerr v. Commissioner, 113 T.C. 449, 470-474 (1999), affd. 292 F.3d 490 (5th Cir. 2002), we explained that the special valuation rules were a targeted substitute for the complexity, breadth, and vagueness of prior section 2036(c). We reaffirmed the willing buyer, willing seller standard, Kerr v. Commissioner, supra at 469, and concluded that the special provision in section 2704(b) did not apply to disregard the partnership restrictions in issue, id. at 473; see also Estate of Strangi v. Commissioner, 115 T.C. 478, 487-489 (2000), affd. on this issue, revd. and remanded on other grounds 293 F.3d 279 (5th Cir. 2002). The majority opinion, majority op. pp. 31-32, discusses the adoption of the check-the-box regulations as a targeted substitute for the complexity of the Kintner regulations in classifying hybrid entities and thereby determining the tax consequences to those entities and their owners of the business or the activities for which those entities were formed. A targeted solution to a particular problem should not be distorted to achieve a comprehensive overhaul of a well-established body of law. If the regulations expressly provided that single-owner LLCs would be disregarded in determining the identity of the property transferred and the value of that transferred property, we could debate the validity of the regulations and the degree of deference to be given to various expressions of an agency’s position. Here we are dealing only with respondent’s litigating position. The majority does not question the validity of the check-the-box regulations. The majority holds only that those regulations do not control the valuation issue in this case. See majority op. p. 35. The argument that the majority opinion disregards the plain meaning of the phrase “for federal tax purposes” in section 301.7701-3(a), Proced. & Admin. Regs., is unpersuasive. The plain meaning of the text of a regulation is the starting point for determining the meaning of that regulation. See Walker Stone Co. v. Secy. of Labor, 156 F.3d 1076, 1080 (10th Cir. 1998) (“When the meaning of a regulatory provision is clear on its face, the regulation must be enforced in accordance with its plain meaning.”). We see here, however, (1) ambiguity in the specific phrase “federal tax purposes” and (2) ambiguity in the term “disregarded”, both of which make plain meaning elusive. First, the regulation does not provide that an entity will be disregarded “for all Federal tax purposes”. Instead, the regulation implements a statute that, by its terms, applies except where “manifestly incompatible with the intent” of the Internal Revenue Code. Sec. 7701(a). The language of the regulation requires a determination of which “federal tax purposes” are implicated and whether a given purpose might be manifestly incompatible with the Internal Revenue Code. Second, the regulation states that an entity will be “disregarded as an entity separate from its owner”. Sec. 301.7701-3(a) and (b)(l)(ii), Proced. & Admin. Regs, (emphasis added). That sentence might mean that a disregarded entity is exempt from tax, that its transactions are disregarded and therefore not reported for tax purposes, or that transfers of interests in the entity are disregarded for Federal gift tax purposes and not taxed. While none of those meanings is likely, the ambiguity is inherent. Of course, the regulation must be interpreted in the light of the other principles of the Internal Revenue Code. Those other principles include the valuation principles discussed in the majority opinion. Respondent’s proposed application of the regulation is manifestly incompatible with those principles. The majority’s approach is consistent with the principle that a regulation will be interpreted to avoid conflict with a statute. See LaVallee Northside Civic Association v. V.I. Coastal Zone Mgmt. Commn., 866 F.2d 616, 623 (3d Cir. 1989); see also Smith v. Brown, 35 F.3d 1516, 1526 (Fed. Cir. 1994); Phillips Petroleum Co. v. Commissioner, 97 T.C. 30, 35 (1991), affd. without published opinion 70 F.3d 1282 (10th Cir. 1995). It is also consistent with the express limitation of section 7701(a) on the scope of regulations that define terms. See majority op. p. 36. The majority’s interpretation of the scope of the check-the-box regulations harmonizes the classification purpose of those regulations with the statutory rules and case precedents that firmly establish the meaning of fair market value in transfer tax cases and the willing buyer, willing seller standard as the hallmark of that meaning. Some final words about deference. As the majority opinion indicates, majority op. p. 30, section 7701(a) precludes the application of the definitions of the terms in that section where they are “manifestly incompatible with the intent” of the Internal Revenue Code. This case does not involve the question in Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), of deference to the Commissioner’s interpretation of a statute that the Commissioner is charged with administering. Nothing in the check-the-box regulations or in the cases cited by respondent persuades us that those regulations require us to disregard a single-owner LLC where, as is the case here, to do so would be “manifestly incompatible” with the intent of other provisions of the Internal Revenue Code. Judge Halpern in his dissenting opinion does not address the majority’s conclusion that respondent’s interpretation of the regulation is manifestly incompatible with other provisions of the Code. He asserts that “respondent’s position [in this case] * * * is consistent with the Commissioner’s administrative position for at least 10 years”. Dissenting op. p. 44. He cites Rev. Rul. 99-5, 1999-1 C.B. 434, which describes the Federal income tax consequences of a transfer under sections 721-723, 1001(a), and 1223. The ruling and the sections cited do not deal with transfer taxes generally or gift tax specifically. Moreover, the Internal Revenue Service has reversed itself with respect to application of the check-the-box regulations in employment tax situations and has adopted new rules as of January 1, 2009. See McNamee v. Dept. of the Treasury, 488 F.3d at 109; Littriello v. United States, 484 F.3d 372 (6th Cir. 2007); Med. Practice Solutions, LLC v. Commissioner, 132 T.C. at 129. We have never accorded deference to the Commissioner’s litigating position, as contrasted to (1) contemporaneous expressions of intent when the regulations were adopted and (2) consistent administrative interpretations before the litigation. See Gen. Dynamics Corp. & Subs. v. Commissioner, 108 T.C. 107, 120-121 (1997). Respondent does not argue here that respondent’s interpretation of the regulation is entitled to deference. Neither the cases—Oteze Fowlkes v. Adamec, 432 F.3d 90, 97 (2d Cir. 2005), United States v. Miller, 303 F.2d 703, 707 (9th Cir. 1962), and Lantz v. Commissioner, 132 T.C. 131, 144 n.10 (2009) — nor the so-called hornbook law on which Judge Halpern relies in his dissenting opinion requires us to give deference to respondent’s litigating position that the check-the-box regulations apply in this case. We have no reason to believe that respondent’s litigating position here is an interpretation of those regulations that reflects “the * * * fair and considered judgment [of the Secretary of the Treasury] on the matter in question.” Auer v. Robbins, 519 U.S. 452, 462 (1997) (where the Supreme Court of the United States ordered the Secretary of Labor to file an ami-cus brief in a case between private litigants involving the interpretation of a regulation that the Secretary had promulgated, the Supreme Court accepted the Secretary’s interpretation since in the circumstances of the case “There is simply no reason to suspect that the interpretation does not reflect the agency’s fair and considered judgment on the matter in question.”). Moreover, Judge Halpern’s reliance on a footnote in Lantz v. Commissioner, supra, is misplaced. We there concluded that a taxpayer’s pursuit of a particular type of relief would be fruitless in the face of the Commissioner’s position, the validity of which had not been challenged. Neither case cited in that footnote adopts the litigating position of the party as distinct from preexistent and consistent administrative interpretations. See Bowles v. Seminole Rock & Sand Co., 325 U.S. 410, 414 (1945); Phillips Petroleum Co. v. Commissioner, 101 T.C. 78, 97 (1993), affd. without published opinion 70 F.3d 1282 (10th Cir. 1995). Wells, Foley, Vasquez, Thornton, Marvel, Goeke, Wherry, and GUSTAFSON, JJ., agree with this concurring opinion.