Branum v. C.I.R., 93-4251

• Decision Date: 05 April 1994
• Docket Number: No. 93-4251,93-4251
• Citation: 17 F.3d 805
• Parties: -1675, 94-1 USTC P 50,163 Mansell W. BRANUM, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 805

17 F.3d 805

73 A.F.T.R.2d 94-1675, 94-1 USTC P 50,163

Mansell W. BRANUM, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 93-4251.

United States Court of Appeals, Fifth Circuit.

April 5, 1994.

William P. Bowers, David Allen Miller, Jenken & Gilchrist, Dallas, TX, for petitioner-appellant.

Abraham N.M. Shashy, Jr., Chief Counsel, IRS, Charles Bricken, Gary R. Allen, Chief, Appellate Section, Tax Div., Dept. of Justice, Richard Farber, Washington, DC, for respondent-appellee.

Appeal from a Decision of the United States Tax Court.

Before WISDOM, BARKSDALE, and EMILIO M. GARZA, Circuit Judges.

WISDOM, Circuit Judge:

Appellant Mansel Branum believes that the decision in this case reflects our failure to administer a fair, simple and efficient tax system. Where he seeks an understanding and flexible Tax Code, ours offers him no solace. As we shall explain, his position deserves some sympathy. The applicable tax law, however, is unbending. Specifically, Branum seeks relief from the Tax Court's holding that he made an effective election under section 172(b)(3)(C) of the Internal Revenue Code for his 1985 tax year when evidence indicated that his intention was otherwise. That holding is legally unassailable and, as such, must be affirmed.

I.

The petitioner/appellant, Mansell W. Branum, timely filed his 1985 federal income tax return. For that year, he reported a net operating loss ("regular NOL") under section 172 and an alternative minimum tax net operating loss ("alternative minimum tax NOL") under section 55 of the Internal Revenue Code. ¹ Specifically, he reported a regular NOL of $5,003,451 and an alternative minimum tax NOL of $4,943,544.

Branum attached the following statement to his 1985 return:

Taxpayer, in accordance with I.R.C. section 172(b)(3)(C) hereby elect [sic ] to carry foreward [sic ] all losses sustained in the calendar year 1985 and forego [sic ] carry back of such losses to prior years.

Branum asserts that he intended this statement to relinquish the carryback period for his regular NOL, but not for his alternative minimum tax NOL. In tax jargon, this is referred to as an attempted "split election".

In support of that construction, he points to his Form 1045 Application for a Tentative Refund, mailed separately on the same day, in which he requested a refund based on the carryback of his 1985 alternative minimum tax NOL to 1982. An income averaging statement attached to that form contained this handwritten directive in the margin:

Regular NOL not carried back per 172(b)(3)(C) election with 1985 return; AMT [alternative minimum tax] carried back only.

Branum cites this statement as evidence that the first statement--the one he attached to his main return--reflected his intent to make a split election.

The Commissioner granted Branum's request for a "tentative" refund of $972,708, based upon the carryback of Branum's 1985 alternative minimum tax NOL to 1982. Later, after conducting an audit of Branum's return, the Commissioner reversed that decision; he disallowed the carryback of Branum's alternative minimum tax NOL. The Commissioner reasoned that Branum's initial statement on his 1985 return constituted an effective election and, thus, relinquished the carryback period with respect to both his regular NOL and his alternative minimum tax NOL. Branum, in turn, petitioned the Tax Court to redetermine the deficiency. ²

The Tax Court sustained the Commissioner's determination. The court explained that section 172 permits a taxpayer to elect to carryback both his regular NOL and his alternative minimum tax NOL; a split election by which he elects to carryback one or the other is not permissible. Although Branum contends that his failed attempt to make such a split election renders the entire election ineffective, the Tax Court found otherwise. The court concluded that Branum's statement attached to his return constituted an unambiguous election. Hence, Branum was bound by that statement.

The dispute which forms the basis of this appeal is simple: Branum contends that, if his attempted split election is not permissible, he made no election at all. The Commissioner ruled and the Tax Court held, however, that Branum's statement did not reflect the attempt to make a split election but, rather, constituted an unambiguous effective election for both his regular and his alternative minimum tax NOL's. In so doing, the court refused to consider other evidence demonstrating his less-than-unequivocal intent to make that election. Branum urges that we reverse the Tax court on the grounds that the Commissioner failed to consider the evidence of his true intent. For the reasons we shall explain directly, we decline to do so.

II.

We review Tax Court decisions in the same manner in which we review civil actions decided by the district courts. ³ We examine findings of fact for clear error, while we examine conclusions of law de novo. ⁴ The Tax Court's holding that Branum made an effective election is a conclusion of law and, as such, subject to de novo review.

This case takes us through the intricate labyrinth that is our Tax Code. In particular, we direct our focus to an individual's ability to offset his income by his losses. A taxpayer who seeks to recognize an operating loss must first apply the loss (carry it back) to the three immediately preceding tax years and carry any remaining loss forward to the succeeding fifteen tax years. A taxpayer may, however, elect to relinquish the carryback period for his operating losses under section 172 of the Code. In that instance, the taxpayer may carry forward the entire loss to offset the income of subsequent tax years without first carrying it back to the preceding three years. Section 172(b)(3)(C) is the vehicle for making such an election; it provides, in pertinent part:

Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year ending after December 31, 1975.

This provision further mandates that the election be made in a manner prescribed by the Secretary and by the due date of the return. Moreover, once made, the election is irrevocable.

A taxpayer who does not effectively communicate his unequivocal intent to relinquish the carryback period for both his regular NOL and his alternative minimum tax NOL has not made an effective election. This rule was the subject of some confusion at the time that Branum filed his 1985 return. The House Conference Report to the Tax Reform Act of 1986 addressed this uncertainty the following year:

It is clarified that an election under Section 172(b)(3)(C) to relinquish the carryback period applies both for regular tax and for minimum tax purposes. ⁵

In response to this clarification, the Commissioner published a revenue ruling which similarly explained that an election under section 172(b)(3)(C) applies to both regular and alternative minimum tax NOL's. When faced with the issue in 1991, the Tax Court followed suit and ruled that a taxpayer may not relinquish the carryback period for one NOL but not the other. ⁶ As a result, the rule is clear: a taxpayer who fails to make an effective election is required to carryback both his regular and his alternative minimum tax NOL.

As a starting point, Branum argues that he did all that he believed was necessary to demonstrate his intent to relinquish the carryback period with respect to his regular NOL only. He points out that the clarifications of section 172(b)(3)(C) were promulgated after he filed his 1985 return. Hence, he seeks an excuse from the strictures of section 172 because he filed his return within the murky legal context that those explanations rectified.

We dismiss this "confusion in the law" argument outright. The complexities of our tax code notwithstanding, a taxpayer cloaked in ignorance will find no safe haven from liability imposed by law. For "[w]hile the statutory and financial complexities that our unfair tax code often involves are irritating, they are certainly not impossible." ⁷ Consequently, the Tax Court has held that oversight, poor judgment, and ignorance of the law all fail to mitigate the binding effect of an otherwise proper election. ⁸ As we previously have stated: "Were simple misreading of the Tax Code a valid defense to tax liability, ... we have no doubt that incompetency in providing accounting services would carry a premium." ⁹

Branum's central contention is that he did not make an effective election under section 172(b)(3)(C) because he did not communicate his "unequivocal" wish to relinquish the carryback for both his regular NOL and his alternative minimum tax NOL. ¹⁰ This argument has two components: First, that his initial statement on his return was not an unambiguous, unequivocal election and, second, that the court should have considered his subsequent statement filed with his Form 1045 as further evidence of that ambiguity. We take them in turn.

Branum argues that the statement attached to his main return reflects his intention to waive the carryback period for his regular NOL only. Again, Branum stated:

Taxpayer, in accordance with I.R.C. section 172(b)(3)(C) hereby elect [sic ] to carry foreward [sic ] all losses sustained in the calendar year 1985 and forego [sic ] carry back of such losses to prior years.

The Tax Court disagreed with that construction. Instead, the court held that the statement constituted an unambiguous, effective election under section 172. The court reasoned that the phrases "all losses" and "such losses" plainly encompass both NOL's. ¹¹ Accordingly, the court perceived no evidence of the petitioner's attempt to make a split election.

We agree. The statement, on its face, uses broad language that contradicts Branum's assertion that he intended to make a split election. Branum nonetheless points to the Plumb case, ostensibly for the...