Schuler Industries, Inc. v. U.S.

• Decision Date: 24 March 1997
• Docket Number: No. 96-5096,96-5096
• Citation: 109 F.3d 753
• Parties: -1430, 97-1 USTC P 50,301 SCHULER INDUSTRIES, INC., Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.
• Court: U.S. Court of Appeals — Federal Circuit

Page 753

109 F.3d 753

79 A.F.T.R.2d 97-1430, 97-1 USTC P 50,301

SCHULER INDUSTRIES, INC., Plaintiff-Appellant, v. The UNITED STATES, Defendant-Appellee.

No. 96-5096.

United States Court of Appeals Federal Circuit.

March 24, 1997.

F. Gerald Burnett, Cabaniss, Johnston, Gardner, Dumas & O'Neal, Birmingham, AL, argued, for plaintiff-appellant.

Frank P. Cihlar, Attorney, Tax Division, Department of Justice, Washington, D.C., argued, for defendant-appellee. With him on the brief were Loretta C. Argrett, Assistant Attorney General and Kenneth L. Greene, Attorney.

Before LOURIE, CLEVENGER, and SCHALL, Circuit Judges.

CLEVENGER, Circuit Judge.

In this federal tax case, Schuler Industries, Inc. (Taxpayer) appeals from the judgment of the Court of Federal Claims upholding Treas. Reg. § 1.56(g)-1(d)(3)(iii)(E), which the Internal Revenue Service (IRS) applied to deny the Taxpayer's tax refund claim. We affirm.

I

Until 1989, the Taxpayer was wholly owned by its founder, Bill Schuler. On November 21, 1989, Bill Schuler sold all of his shares in the Taxpayer to the trustee of the Schuler Employee Stock Ownership Plan (ESOP) for $50 million. The transaction was financed by a bank loan to the ESOP. With a favorable determination letter, the IRS blessed the transaction as tax exempt under Internal Revenue Code (I.R.C.) §§ 401(a) and 501.

The dispute in this case stems from payments made by the Taxpayer to the ESOP at the end of the Taxpayer's 1992 taxable year. ¹ The Taxpayer then made a total payment to the ESOP of $5,505,790, divided as follows: $1,646,165 in interest-based contributions to pay interest due on the bank loan, $987,196 in payroll-based contributions, and $2,872,429 in applicable dividends to pay principal due on the bank loan. The Taxpayer did not deduct the payment of applicable dividends when determining adjusted current earnings as part of its calculation of Alternative Minimum Tax. In 1995, however, the Taxpayer filed a claim for refund, asserting that it was entitled to deduct the amount paid in applicable dividends (i.e., $2,872,429) from adjusted current earnings.

The IRS disallowed the claim based on Treas. Reg. § 1.56(g)-1(d)(3)(iii)(E). Under that regulation, although dividends paid to an ESOP are deductible from gross income for computing regular income tax liability, they are not deductible in computing adjusted current earnings for liability under the Alternative Minimum Tax.

The Taxpayer brought this action before the Court of Federal Claims for a $319,260 refund. Both parties moved for summary judgment. The court denied the Taxpayer's motion and granted the government's, ruling that the pertinent treasury regulation is a valid regulation that is consistent with the underlying statutes and congressional intent. Because the regulation on its face refuted the Taxpayer's claim, the court entered judgment in favor of the government. The Taxpayer appeals. We have jurisdiction to entertain the appeal pursuant to 28 U.S.C. § 1295(a)(3) (1994).

II

We first determine whether Treas. Reg. § 1.56(g)-1(d)(3)(iii) is legislative or interpretive in character, because that determination affects our standard of review. Interpretive regulations are upheld if they implement the congressional mandate in a reasonable manner. National Muffler Dealers Ass'n, Inc. v. United States, 440 U.S. 472, 476, 99 S.Ct. 1304, 1307, 59 L.Ed.2d 519 (1979). We apply a more deferential review to legislative regulations, according them "controlling weight unless they are arbitrary, capricious, or manifestly contrary to the statute." Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837, 844, 104 S.Ct. 2778, 2782, 81 L.Ed.2d 694 (1984). While an interpretive regulation is issued under the general authority vested in the Secretary of the Treasury by I.R.C. § 7805, a legislative regulation is issued under a specific grant of congressional rulemaking authority and has "legislative effect." See Batterton v. Francis, 432 U.S. 416, 425, 97 S.Ct. 2399, 2405, 53 L.Ed.2d 448 (1977). To ascertain the source of authority for a particular regulation, we examine the statutory language and the regulation itself. See Dresser Indus., Inc. v. Commissioner, 911 F.2d 1128, 1139 (5th Cir.1990).

In adopting the statute relevant to this case, Congress directed the Secretary to "prescribe initial regulations providing guidance as to which items of income are included in adjusted current earnings under section 56(g)(4)(B)(i) of the Internal Revenue Code of 1986 and which items of deduction are disallowed under section 56(g)(4)(C) of such Code." See Omnibus Budget Reconciliation Act of 1989, P.L. No. 101-239, § 7611(g)(3), 103 Stat. 2106, 2373. Thereafter, the Secretary adopted the subject Treasury regulation, which states that dividends paid to an ESOP that are otherwise deductible under section 404(k), are not deductible for computing earnings and profits, and thus not deductible in computing adjusted current earnings, under the Alternative Minimum Tax. See 26 C.F.R. § 1.56(g)-1(d)(3)(iii)(E) (1996).

The Taxpayer argues that this regulation should be viewed as interpretive only. We reject that contention. Congress specifically directed the Secretary to "prescribe initial regulations," and, thus, through section 7611(g)(3), Congress expressly delegated specific authority to the Secretary to promulgate the regulation at issue. We reject the Taxpayer's argument that the word "guidance" in the statute means that the otherwise mandated regulation must be understood as...