Deluxe Corp. v. U.S.

• Decision Date: 12 September 1989
• Docket Number: 88-1629,Nos. 88-1628,s. 88-1628
• Citation: 885 F.2d 848
• Parties: -5327, 89-2 USTC P 9545 DELUXE CORPORATION, Plaintiff-Appellant, v. The UNITED STATES, Defendant/Cross-Appellant.
• Court: U.S. Court of Appeals — Federal Circuit

Page 848

885 F.2d 848

64 A.F.T.R.2d 89-5327, 89-2 USTC P 9545

DELUXE CORPORATION, Plaintiff-Appellant, v. The UNITED STATES, Defendant/Cross-Appellant.

Nos. 88-1628, 88-1629.

United States Court of Appeals Federal Circuit.

Sept. 12, 1989.

Phillip H. Martin, Dorsey & Whitney, of Minneapolis, Minn., argued for plaintiff-appellant. With him on the brief was Thomas D. Vander Molen.

Kenneth W. Rosenberg, Dept. of Justice, of Washington, D.C., argued for defendant/cross-appellant. With him on the brief were William S. Rose, Jr., Asst. Atty. Gen., Gary R. Allen and David I. Pincus.

Before MARKEY, Chief Judge, NEWMAN and MICHEL, Circuit Judges.

PAULINE NEWMAN, Circuit Judge.

Deluxe Corporation ("the Corporation") appeals the judgment of the United States Claims Court, Deluxe Check Printers, Inc. v. United States, 14 Cl.Ct. 782 (1988) and supplemental opinion at 15 Cl.Ct. 175 (1988), granting the United States' motion for summary judgment with respect to the Corporation's liability for certain internal revenue excise taxes under the provisions of 26 U.S.C. Sec. 4941. ¹ The United States cross-appeals the grant of partial summary judgment in favor of the Corporation with respect to the refund of interest. The material facts are not in dispute; we review the judgment for correctness in law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); Beta Systems, Inc. v. United States, 838 F.2d 1179, 1184 (Fed.Cir.1988).

We reverse the judgment as to liability and affirm as to the interest payment.

Background

At issue are certain tax consequences of transactions between the Corporation and Deluxe Check Printers Foundation ("the Foundation"), a private non-profit foundation in the category of 26 U.S.C. Sec. 501(c)(3). In accordance with a Treasury Share Acquisition Program ("the Program") established by the Corporation in 1966, the Corporation was authorized to purchase outstanding shares of its common stock in transactions, based on current market prices, on the over-the-counter market and in negotiated purchases off the market. The resolution governing the Program provided, inter alia, that no purchases were to be made from officers or directors of the Corporation. There were purchased, from 1966 through 1979, 1,721,133 shares in 39,406 separate transactions, none with any officer or director.

The Foundation had received over 75,000 shares of the Corporation's stock in 1974 through distribution of a testamentary charitable remainder trust. For purposes of diversification and yield, the Foundation submitted and the Corporation redeemed a total of 75,000 shares in six unsolicited transactions in 1976 and 1977. In each transaction the Corporation paid the mean between the over-the-counter bid and asked prices as of the close of the previous day's business. In 1976 these transactions with the Foundation represented three of a total of 4,394 separate transactions, and 45,000 of a total of 207,676 shares redeemed; in 1977, the Corporation redeemed 350,599 shares in 5,460 transactions, the three transactions with the Foundation involving 30,000 shares.

Code Sec. 4941 imposes, as the first tier of a three-tier penalty system designed to deter self-dealing, excise taxes on acts of self-dealing between a disqualified person and a private foundation. It is uncontroverted that the Corporation, which was a substantial contributor as defined in Code Sec. 507(d)(2)(A), was a disqualified person under Code Sec. 4946(a)(1)(A). The Corporation filed excise tax returns pursuant to Code Secs. 4941(a)(1) and (e)(1) and paid the taxes, as required by Treas. Reg. Secs. 53.6011-1(b) and 53.6071-1, for calendar years 1976, 1977, and 1978; and duly filed claims for refund. The excise tax on self-dealing accrues annually on each act of self-dealing until a notice of deficiency is mailed or until correction of the self-dealing is completed. Code Sec. 4941(a)(1) and 4941(e)(1). Thus, the return for calendar year 1977 included excise taxes for the 1977 transactions and the 1976 transactions; similarly, the 1978 return included excise taxes for the 1977 and 1976 transactions. In 1981 the Internal Revenue Service assessed a $3,831.37 interest payment against the Corporation due to the one-year delay in payment of the excise taxes owed for calendar year 1976.

In 1982 the IRS disallowed the claims for refund. The Corporation filed a timely complaint in the Claims Court.

The Claims Court held that the redemptions were acts of self-dealing and were not corrected. The court also held that since this excise tax was a penalty, the interest assessment was improper.

Each side appeals the portion of the judgment adverse to it.

Discussion

The Corporation states that these transactions are a statutory exception to acts of self-dealing. Pertinent Code sections are Sec. 4941(d)(1)(A):

For purposes of this section, the term "self-dealing" means any direct or indirect ... sale or exchange ... of property between a private foundation and a disqualified person....

with the exception established in Code Sec. 4941(d)(2)(F):

any transaction between a private foundation and a corporation which is a disqualified person (as defined in section 4946(a)), pursuant to any liquidation, merger, redemption, recapitalization, or other corporate adjustment, organization, or reorganization, shall not be an act of self-dealing if all of the securities of the same class as that held by the foundation are subject to the same terms and such terms provide for receipt by the foundation of no less than fair market value.

The issue of liability turns on whether the requirements of Code Sec. 4941(d)(2)(F) were met, when the Corporation's officers and directors were expressly excluded from participation in the Program.

A

The Claims Court stated that the statutory exceptions to self-dealing must be strictly construed, for the overall statutory purpose is "an objective general prohibition against self-dealing". 14 Cl.Ct. at 789. Thus the Claims Court held that the Program's prohibition against purchases from officers and directors means that all shares were not "subject to the same terms", in the words of the statute.

The Corporation argues that the statute requires that the shares that are actually redeemed must all be subject to the same terms, and that the Program's exclusion of participation by officers and directors does not change its compliance with the statutory purpose that all who redeem shall receive fair market value and any other terms of redemption, applied identically. The government responds that the statute requires that all outstanding stock of the redeemed class, without exception, must be entitled to redemption on the same terms, and that the Corporation's exclusion of its officers and directors from access to this Program bars the Corporation from qualifying for the exception set in Code Sec. 4941(d)(2)(F).

In this matter of statutory interpretation, where the text itself does not clearly exclude alternate interpretations, we look first to the legislative history for illumination of the intent of Congress. See, e.g., Shriners Hospitals v. United States, 862 F.2d 1561, 1563 (Fed.Cir.1988) (consulting legislative history).

The prohibitions against self-dealing were enacted in 1969, for the purposes of protecting private foundations against improper acts by those who control the foundation, and curtailing possible abuse of the foundation's tax-exempt status. H.R.Rep. No. 413, 91st Cong., 1st. Sess. 20-21, reprinted in 1969 U.S.Code Cong. & Admin.News 1645, 1665; S.Rep. No. 552, 91st Cong., 1st Sess. 28-29, reprinted in 1969 U.S.Code Cong. & Admin.News 2027, 2055. Nevertheless, as the Treasury explained when it endorsed the bill, see Hearings Before the Committee on Ways and Means, 91st Cong., 1st Sess. on the Subject of Tax Reform, pt. 14 at 5059 (1969), a self-dealing exception "would be made to permit essential donor-foundation transactions." Id. at 5322. Congress expressly rejected an absolute prohibition against transactions between a private foundation and a disqualified person. However, the standard of the prior law, which had authorized arm's-length transactions with a disqualified person, was superseded by the present text of Sec. 4941(d)(2)(F).

Congress declined to elaborate, in the statutory text, on the meaning of "subject to the same terms", although such was requested in testimony during hearings. See Tax Reform Act of 1969: Hearings on H.R. 13270 Before the Senate Committee on Finance, 91st Cong., 1st Sess. 5759, 5764, 5976 (1969). The absence of detail from a statutory text, or Congressional reluctance to legislate for all possible future situations, does not mean that Congress thereby intended to adopt a policy intolerant of adaptive interpretation. It is still the original intent of Congress, as gleaned from the official history and accompanying explanation, to which we look in the first instance. From this background, it is clear that the purpose of the requirement that all shares be "subject to the same terms", Sec. 4941(d)(2)(F), is to assure that a foundation's status is not abused, whether the transaction is "liquidation, merger, redemption, recapitalization, or other corporate adjustment, organization or reorganization", so that a foundation does not receive less advantageous terms than any other shareholder when dealing with a disqualified person. See S.Rep. No. 552, supra, at 28-29, 31, reprinted at 2055-58.

The Corporation states that its prohibition of participation in the Program by officers and directors was both to avoid any appearance of impropriety and to avoid any opportunity for impropriety on the part of those conducting the Program, and has no impact on the Corporation's treatment on the same terms of all shares tendered for redemption. The Corporation argues that this prohibition simply recognizes the statutory restraints on officers and directors in dealing in their corporation's...