Georgia Fed. Bank, F.S.B. & Subsidiaries v. Comm'r of Internal Revenue, Docket No. 26870-90.

• Decision Date: 04 February 1992
• Docket Number: Docket No. 26870-90.
• Citation: 60 USLW 2558,98 T.C. 105,98 T.C. No. 9
• Parties: GEORGIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

60 USLW 2558

98 T.C. 105

98 T.C. No. 9

GEORGIA FEDERAL BANK, F.S.B. AND SUBSIDIARIES, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 26870-90.

United States Tax Court

Filed February 4, 1992.

From 1970 through 1982, P deducted additions to its bad debt reserve. The amounts deducted were calculated with reference to P's taxable income for each year. From 1980 through 1984, P sustained net operating losses (NOL's). Held, subdivisions (vi) and (vii) of sec. 1.593-6A(b)(5), Income Tax Regs. are invalid to the extent they require that taxable income reflect any NOL carrybacks before the addition to bad debt reserve is calculated for certain financial institutions. Pacific First Federal Savings v. Commissioner, 94 T.C. 101 (1990), on appeal (9th Cir., Feb. 8, 1991), followed. Peoples Federal Savings & Loan Association of Sidney v. Commissioner, 948 F.2d 289 (6th Cir. 1991), revg. T.C. Memo. 1990-129, not followed. Robert M. Fink and Roger S. Reigner, Jr., for petitioner.

Bonnie L. Cameron, for respondent.

OPINION

WELLS, JUDGE:

The instant case is before us on petitioner's motion for summary judgment. Respondent determined a deficiency of $114,193 in petitioner's Federal income tax for its taxable year ended April 11, 1986. At the time the petition in the instant case was filed, petitioner's principal place of business was located in Atlanta, Georgia. From 1970 through 1982, petitioner computed its deduction for the addition to its bad debt reserves using the percentage of taxable income method set forth in section 593(b)(2)(A). ¹ From 1980 through 1984, petitioner sustained net operating losses (NOL's) within the meaning of section 172(c), which NOL's may be carried back under section 172(b)(1)(F) to each of the 10 taxable years preceding the loss years.

The parties agree that the sole issue presented is the validity of subdivisions (vi) and (vii) of section 1.593-6A(b)(5), Income Tax Regs., under which respondent seeks to calculate petitioner's tax liability for its taxable year ending April 11, 1986. The challenged provisions generally provide that taxable income is to be reduced by any NOL carrybacks before the deduction for addition to bad debt reserve is calculated. Sec. 1.593-6A(b)(5)(vii), Income Tax Regs. Such regulations were adopted May 17, 1978 (the 1978 regulations). T.D. 7549, 1978-1 C.B. 185. Taking NOL carrybacks into account in such manner reduces the base of taxable income on which the bad debt reserve addition is calculated, and so reduces the deduction below the amount originally calculated in the taxable year to which the NOL carryback is applied.

The 1978 regulations changed the method by which a mutual institution's bad debt reserve addition is calculated in a year to which an NOL carryback is applied. The first regulations interpreting section 593 provided that taxable income is to be computed “without regard to any section providing for a deduction the amount of which is dependent upon the amount of taxable income”. Sec. 1.593-1(b)(1), Income Tax Regs., T.D. 6188, 1956-2 C.B. 310, 321 (the 1956 regulations). The 1956 regulations were cited in Rev. Rul. 58-10, 1958-1 C.B. 246, which provided that, for purposes of calculating the bad debt reserve addition, taxable income was not to be reduced by NOL carrybacks. The 1958 revenue ruling was incorporated in changes to the regulations adopted in 1964. Sec. 1.593-6(b)(2)(iv), Income Tax Regs., T.D. 6728, 1964-1 C.B. 195, 202 (the 1964 regulations). Thus, the 1978 regulations challenged by petitioner reversed an ordering rule that had been in effect for approximately 20 years.

The issue of which of the two opposing interpretations should be sustained was decided by this Court in Pacific First Federal Savings v. Commissioner, 94 T.C. 101 (1990), on appeal (9th Cir. Feb. 8, 1991). We held, based on our review of the structure of section 593(b) and its legislative history, that the 1978 regulations were invalid because they did not harmonize with Congressional intent. Recently, the Sixth Circuit disagreed with our conclusion and upheld the 1978 regulations. Peoples Federal Savings & Loan Association of Sidney v. Commissioner, 948 F.2d 289 (6th Cir. 1991), revg. T.C. Memo. 1990-129. In our Memorandum Opinion in Peoples Federal, we granted summary judgment on the basis of our Opinion in Pacific First Federal. The Sixth Circuit reversed. After due consideration and with due respect to the Sixth Circuit, we conclude that our holding in Pacific First Federal was correct, and we therefore will follow it in cases not appealable to the Sixth Circuit. See Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971).

In Peoples Federal, the Sixth Circuit held that we failed to give proper deference to the 1978 regulations under the principles set forth in Chevron, U.S.A. v. Natural Res. Def. Council, 467 U.S. 837 (1984). We therefore will begin our analysis in the instant case by discussing those principles. In Chevron, the Supreme Court reviewed the standards courts must employ in deciding the reasonableness of an agency's interpretation of statutory law. First the court must decide whether Congress had an intention on the question in issue. Chevron, U.S.A. v. Natural Res. Def. Council, 467 U.S. at 842-843. Such a question is a matter of statutory construction, on which the judiciary is the final authority. Chevron, U.S.A. v. Natural Res. Def. Council, 467 U.S. at 843 n.9.

If a court, using the traditional tools of statutory construction, such as the plain language, structure, and legislative history of the law, ascertains that Congress has addressed the precise question at issue, that is the end of the matter. Chevron, U.S.A. v. Natural Res. Def. Council, 467 U.S. at 842-843. Thus, “If Congress has spoken to the issue with which we are concerned, there is no need for deference” to an agency's construction of the law. U.S. Mosaic Tile Co. v. N.L.R.B, 935 F.2d 1249, 1255 (11th Cir. 1991).

If, on the other hand, the court concludes that the statute is silent or ambiguous with respect to the specific issue, the question for the Court is “whether the agency's answer is based on a permissible construction of the statute.” Chevron, U.S.A. v. Natural Res. Def. Council, 467 U.S. at 843. The principle of deference embodied in such standard of review, however, “only sets ‘the framework for judicial analysis; it does not displace it.”’ United States v. Vogel Fertilizer Co., 455 U.S. 16, 24 (1982) (quoting United States v. Cartwright, 411 U.S. 546, 550 (1973)). “[T]he essential function of judicial review, in this context, is to ensure that the agency engaged in ‘reasoned decisionmaking’.” United States v. Garner, 767 F.2d 104, 116 (5th Cir. 1985). The Courts

ha[ve] firmly rejected the suggestion that a regulation is to be sustained simply because it is not “technically inconsistent” with the statutory language, when that regulation is fundamentally at odds with the manifest congressional design. [United States v. Vogel Fertilizer, 455 U.S. at 26.]

A reviewing court should consider the agency's reaction to objections raised by the public and how the agency rebutted vital relevant comments during the regulatory process. Lloyd Noland Hospital & Clinic v. Heckler, 762 F.2d 1561, 1566-1567 (11th Cir. 1985), citing Western Coal Traffic League v. United States, 677 F.2d 915, 927 (D.C. Cir. 1982). To guard against arbitrary action, a court must engage in a “‘thorough, probing, in-depth review’ of the agency's asserted basis for [its] decision, ensuring that ‘the agency [has] * * * examine[d] the relevant data and [has] articulate[d] a satisfactory explanation for its action’ * * *.” Midtec Paper Corp. v. United States, 857 F.2d 1487, 1498 (D.C. Cir. 1988) (quoting Motor Vehicle Manufacturers Association v. State Farm Mutual Ins. Co., 463 U.S. 29, 43 (1983), and Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 415 (1971)).

Many factors have been applied to aid in the decision as to whether the agency's interpretation is a reasonable construction of the statute. A regulation which is a substantially contemporaneous construction of the statute is entitled to special weight, as its drafters are presumed to have a greater awareness of congressional intent, and such construction is therefore more likely to reflect such intent. Rowan Cos. v. United States, 452 U.S. 247, 253 (1981); National Muffler Dealers Association v. United States, 440 U.S. 472, 477 (1979). Where a contemporaneous construction remains consistent over a long period of time, it is entitled to special deference. EEOC v. Associated Dry Goods Corp. 449 U.S. 590, 600 n.17 (1981).

If a regulation dates from a period after the enactment of the statute which it interprets, or repudiates an earlier interpretation, the manner in which it evolved merits inquiry. National Muffler Dealers Association v. United States, 440 U.S. at 477; State of Washington v. Commissioner, 77 T.C. 656, 671 n.12 (1981), affd. 692 F.2d 128 (D.C. Cir. 1982). Additional considerations include the length of time it has been in effect, the consistency of the agency's interpretation, and the degree of scrutiny which Congress has devoted to the regulation during subsequent reenactments of the statute. NLRB v. Food & Commercial Workers, 484 U.S. 112, 124 n.20 (1987); National Muffler Dealers Association v. United States, 440 U.S. 472, 477 (1979).

An agency has the flexibility to modify its regulations in the light of experience and to respond to changed circumstances. Chevron, U.S.A. v. Natural Res. Def. Council, 467 U.S. at 863- 864. If an agency reverses a prior statutory interpretation, however, its most recent expression may be accorded less deference than a consistently maintained position. INS v. Cardoza-Fonseca, 480 U.S. 421, 446 n.30 (1987); Watt v. Alaska, 451 U.S. 259, 273 (1981); Seldovia Native Association, Inc. v. Lujan, 904 F.2d 1335, 1345 (9th Cir. 1990). “Sharp changes...