Gainer v. C.I.R.

• Decision Date: 04 January 1990
• Docket Number: No. 88-7502,88-7502
• Citation: 893 F.2d 225
• Parties: -485, 58 USLW 2414, 90-1 USTC P 50,024 John B. GAINER, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 225

893 F.2d 225

65 A.F.T.R.2d 90-485, 58 USLW 2414, 90-1

USTC P 50,024

John B. GAINER, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 88-7502.

United States Court of Appeals Ninth Circuit.

Argued and Submitted Nov. 3, 1989.

Decided Jan. 4, 1990.

Gary R. Allen, Dept. of Justice, Tax Div., Washington, D.C., for respondent-appellant.

Kevin C. Kellow, Pachter & Schaffer, Los Angeles, Cal., for petitioner-appellee.

Before HUG, CANBY and BOOCHEVER, Circuit Judges.

BOOCHEVER, Circuit Judge:

The Commissioner of Internal Revenue (Commissioner) appeals from the Tax Court's decision sustaining the income tax deficiency against John B. Gainer (Gainer) but declining to impose an addition to tax pursuant to section 6659 of the Internal Revenue Code. 26 U.S.C. Sec. 6659(a). ¹ We affirm.

BACKGROUND

The facts are not in dispute. Sometime in late 1981, Gainer purchased a ten percent limited partnership interest in a FoodSource refrigerated controlled atmosphere shipping container from FoodSource Sales Corporation. The total price of the container was $260,000. Gainer paid $26,000 for his interest in the container, $4,500 by check and the balance by executing a promissory note.

The container was designed to preserve perishable agricultural products during shipment. The fair market value of the container was stipulated to be between $52,000 and $60,000, a fraction of the purported selling price. The valuation was based upon an earlier decision of the Tax Court in a related case, Noonan v. Commissioner, 52 T.C.M. (CCH) 534 (1986), aff'd, Todd v. Commissioner, 862 F.2d 540 (5th Cir.1988). ²

For the 1981 tax year, Gainer claimed a depreciation deduction and investment tax credit based upon his $26,000 purchase price. Gainer's 1981 deductions and credits were disallowed, however, because the container was not placed in service in 1981. In addition, Gainer's basis in the container was limited to his $4,500 cash investment because of the overvaluation of his interest, and because the promissory note was non-recourse so that he was not at risk. All issues were settled prior to the Tax Court proceeding, save one: whether Gainer was liable for an addition to tax attributable to a valuation overstatement under section 6659.

The Tax Court refused to allow the section 6659 addition to tax. It reasoned that Gainer's deductions and credits were disallowed because the container had not been placed in service for the 1981 tax year. Therefore, Gainer was not entitled to any deduction or credit for that year, regardless of any overstatement of value. Because the underpayments were not "attributable to" any overstatement of value, the Tax Court refused to impose the section 6659 penalty. The Commissioner now asks us to reverse the Tax Court's decision.

DISCUSSION

The interpretation of a statute is a question of law which we review de novo. See, e.g., Batchelor v. Oak Hill Medical Group, 870 F.2d 1446, 1447 (9th Cir.1989).

The statute at issue here, section 6659, provides in part:

(a) Addition to the tax

If--

(1) an individual, or

(2) a closely held corporation or a personal service corporation, has an underpayment of the tax imposed by chapter 1 for the taxable year which is attributable to a valuation overstatement, then there shall be added to the tax an amount equal to the applicable percentage of the underpayment so attributable.

26 U.S.C. Sec. 6659(a).

The controversy focuses upon the phrase "is attributable to." The Commissioner makes several arguments in support of his contention that the section 6659 penalty should apply. He argues that the intent of Congress, as demonstrated by the plain meaning of "attributable" and the legislative history of section 6659, suggests a broad reading of the phrase and not one of sole causation. The Commissioner contends that a narrow interpretation of section 6659 would produce anomalous and inequitable results for taxpayers and force the Commissioner to choose between section 6659 and other possible penalties. The identical arguments in the same factual context were presented and addressed in Todd v. Commissioner, 862 F.2d 540, 542-45 (5th Cir.1988). We agree with the reasoning employed by the Fifth Circuit in Todd.

We may initially look to the plain meaning of the language of a statute in order to ascertain Congress' intent. See Richards v. United States, 369 U.S. 1, 9-10, 82 S.Ct. 585, 590-91, 7 L.Ed.2d 492 (1962). As indicative of Congress' intent, the Commissioner points to a dictionary definition of the word "attributable" as "capable of being attributed," Webster's Third New International Dictionary 141 (1976), and argues that there is no requirement that over-valuation be the sole cause of any underpayment. The Commissioner cites no other authority to support this proposition. ³ This tautological definition, however, provides us with no further explanation of "attributable," but instead casts another ambiguity into our search. See Todd, 862 F.2d at 542. Our inquiry would then turn on "capable" as well as "attributable." Id. We note that "attribute" and "attributable" are subject to as many varying definitions as there are dictionaries. See, e.g., The Random House College Dictionary 88 (1st ed. rev. 1980); Webster's New Dictionary of Synonyms 76 (1978); Webster's Third New International Dictionary 141-142 (1976); The American Heritage Dictionary of the English Language 85-86 (1970). For example, "attribute" is defined, inter alia, by The Random House College Dictionary as "to regard as resulting from; consider as caused by." Because of these ambiguities, we look to the legislative history. Todd, 862 F.2d at 542.

Congress' intent in enacting section 6659 and adding the overvaluation penalty was to discourage taxpayers from significantly overvaluing property on their tax returns in order to reduce their tax liability. See Todd, 862 F.2d at 542 (citing H.R.Rep. No. 201, 97th Cong., 1st Sess. 243 (1981) reprinted in 1981-2 C.B. 352, 398). The formal legislative history, however, does not discuss how to determine whether a tax underpayment is "attributable to" an overvaluation of property.

The General Explanation of the Economic Recovery Tax Act of 1981, prepared by the staff of the Joint Committee on Taxation, does contain such a formula.

The portion of a tax underpayment that is attributable to a valuation overstatement will be determined after taking into account any other proper adjustments to tax liability. Thus, the underpayment resulting from a valuation overstatement will be determined by comparing the taxpayer's (1) actual tax liability (i.e., the tax liability that results from a proper valuation and which takes into account any other proper adjustments) with (2) actual tax liability as reduced by taking into account the valuation overstatement. The difference between these two amounts will be the underpayment that is attributable to the valuation overstatement.

Staff of the Joint Committee on Taxation, General Explanation of the Economic Recovery

Tax Act of 1981, 333 (Comm.Print 1981) (emphasis added) [hereinafter General Explanation ].

If we follow this formula and make an adjustment here, Gainer's overvaluation becomes irrelevant to the determination of any tax due. The parties stipulated that the container had not been placed in service in 1981 and the Tax Court therefore found no deductions or credits could have been taken in that year. Even if Gainer had correctly valued the container, the underpayment of tax would be the same because the container was not placed in service. Thus, Gainer's actual tax liability, after adjusting for failure to place the container in service, was no different from his liability after adjusting for any overvaluation. See Todd, 862 F.2d at 543. This formula has been adopted by the Tax Court and the Fifth Circuit. See Gainer v. Commissioner, 56 T.C.M. (CCH) 39, 40-41 (1988); Todd v. Commissioner, 89 T.C. 912 (1987), aff'd, 862 F.2d 540 (5th Cir.1988).

Moreover, the formal legislative history surrounding the recent enactment of section 6659A also supports such an interpretation and the application of the formula. Section 6659A provides for an addition to tax where a tax underpayment "is attributable to an overstatement of pension liabilities." 26 U.S.C. Sec. 6659A (1986). The report of the House Ways and Means Committee provides that "[t]he portion of a tax underpayment that is attributable to a valuation overstatement is to be determined after taking into account any other proper adjustments to tax liability." H.R.Rep. No. 426, 99th Cong., 1st Sess. 763 (1985); see also Staff of the Joint Committee on Taxation, General Explanation of the Economic Recovery Tax Act of 1986, at 770 (Comm.Print 1987). This language is nearly identical to the language contained in the 1981 staff report. Because Congress modeled section 6659A after section 6659, it is not unreasonable to conclude that the same formula should apply to both.

The Commissioner argues that such a result would mean that where there are multiple grounds, including overvaluation, for a tax underpayment, no section 6659 penalty could ever be obtained. That is true only when there is some other ground for disallowing the entire portion of a deduction that otherwise might be disallowed for overvaluation. In other instances when multiple grounds exist, some portion of any underpayment may well be attributable to the overvaluation and some portion to the other grounds. See General Explanation at 333 n. 2. ⁴ Cf. Irom v. Commissioner, 866 F.2d 545, 547-48 (2nd Cir.1989) (where multiple grounds exist, section 6621 "attributable to" penalty applies when grounds are inseparable). The Commissioner's related argument that he would be forced to plead only a single penalty when faced with several alternatives is defective for the same reasons.

The Commissioner also argues that Irom should control here. Irom interprets section 6621(c), which...