E.I. Du Pont De Nemours & Co. v. Comm'r of Internal Revenue, s. 19950–91 to 19953–91.

• Decision Date: 18 January 1994
• Docket Number: Nos. 19950–91 to 19953–91.,s. 19950–91 to 19953–91.
• Parties: E.I. DU PONT DE NEMOURS & COMPANY, and Affiliated Corporations, et al., 1 Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

102 T.C. 1
102 T.C. No. 1

E.I. DU PONT DE NEMOURS & COMPANY, and Affiliated Corporations, et al., 1 Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 19950–91 to 19953–91.

United States Tax Court.

Jan. 18, 1994.

[102 T.C. 2]

John L. Snyder, Bradford L. Ferguson, Michael R. Schlessinger, and Marilyn D. Franson, Chicago, IL, for petitioners.

John A. Guarnieri, Philadelphia, PA, for respondent.

OPINION HAMBLEN, Chief Judge:

Respondent determined the following deficiencies in the Federal income taxes of E.I. du Pont de Nemours & Co. (Du Pont) and affiliated corporations; Conoco, Inc. (Conoco), and affiliated corporations; Remington Arms Co., Inc. (Remington); and New England Nuclear Corp. (NEN):

+----------------------------------------------+
                ¦Taxpayer(s) ¦Taxable Year Ended¦Deficiency ¦
                +---------------+------------------+-----------¦
                ¦Du Pont, et al.¦Dec. 31, 1979 ¦$13,010,040¦
                +---------------+------------------+-----------¦
                ¦Conoco, et al. ¦Dec. 31, 1980 ¦12,436,199 ¦
                +---------------+------------------+-----------¦
                ¦Remington ¦Jan. 31, 1980 ¦78,698 ¦
                +---------------+------------------+-----------¦
                ¦NEN ¦Feb. 28, 1981 ¦108,196 ¦
                +---------------+------------------+-----------¦
                ¦ ¦Total ¦$25,633,133¦
                +----------------------------------------------+
                

Unless otherwise indicated, section references are to the Internal Revenue Code in effect during the years in issue and 1982, and Rule references are to the Tax Court Rules of Practice and Procedure.

When these consolidated cases were submitted to the Court, an issue involving depletion as a tax preference item under section 57(a)(8) was unresolved. The parties agreed, however, to abide by the decision in a case then pending before the Supreme Court. In its eventual resolution of that case, the Court held in favor of the Government. United States v. Hill, 506 U.S. 546, 113 S.Ct. 941 (1993). Accordingly, the sole issue for our decision is the validity of section 1.58–9, Income Tax Regs., as invoked by respondent in determining the above deficiencies. This regulation, corresponding to section 58(h), involves the application of the tax benefit rule to the minimum tax imposed by section 56.

Background

These cases were submitted fully stipulated under Rule 122. The stipulation and attached exhibits are incorporated by this reference. When the petitions were filed, the principal place of business of Du Pont and Remington was in Wilmington,

[102 T.C. 3]

Delaware, and the principal place of business of Conoco was in Houston, Texas.²

For calendar year 1982, Du Pont filed a consolidated Federal income tax return as the common parent of an affiliated group (the Du Pont group), which by then included NEN and all of petitioners. The “tentative” income tax liability of the Du Pont group, before tax credits and recapture of credits, was $256,844,566. Various types of credits available to the Du Pont group, including foreign, investment, jobs, and research credits, totaled $469,997,179. After a full offset of the tentative tax liability, excess credits of $213,152,613, mostly investment tax credits, remained.³ Allocated portions of the excess credits were carried back to the taxable years in issue, a period during which the four taxpayers—Du Pont and affiliated corporations, Conoco and affiliated corporations, Remington, and NEN—did not join in consolidated returns with one another.

Until 1987, section 56 imposed on corporations a so-called minimum tax, based on tax preference items, as an add-on to the regular income tax imposed by section 11. See sec. 12(8). Tax preference items, listed in section 57, represented—

income of a person which either is not subject to current taxation by reason of temporary exclusion (such as stock options) or by reason of an acceleration of deductions (such as accelerated depreciation) or is sheltered from full taxation by reason of certain deductions (such as percentage depletion) or by reason of a special rate of tax (such as the rate of tax on corporate capital gains). * * * [Sec. 1.56–1(a), Income Tax Regs., T.D. 7564, 1978–2 C.B. 19, 23.]

The minimum tax during the period in issue was equal to 15 percent of the excess of tax preference items over the greater of $10,000 or the “regular tax deduction”. Sec. 56(a). The regular tax deduction was equal to income tax liability, including investment tax credit recapture, as reduced by certain credits. Sec. 56(c).

Tax preference items totaled $177,082,305 for the Du Pont group in 1982. Without regard to the minimum tax, had

[102 T.C. 4]

these items not been taken into account in the computation of taxable income, the regular tax liability before credits and recapture would have been $81,457,860 higher; i.e., the marginal tax rate of 46 percent from section 11(b)(5) multiplied by $177,082,305. Although the Du Pont group had sufficient credits to offset in full even this higher tentative tax liability, a consequence would have been $81,457,860 less in credits available for carryback or carryover. Hence, use of the preference items for regular tax purposes in 1982, which use did not reduce 1982 tax liability, nonetheless reduced taxable income and thereby “freed up” $81,457,860 of credits for carryback to the years in issue. Over $65 million of this freed-up amount represented regular investment tax credits, with the remainder about equally divided between energy credits and so-called TRASOP (Tax Reduction Act Stock Ownership Plan) credits.

The statutory provision most directly in issue is section 58(h), which originated in the Tax Reform Act of 1976, Pub.L. 94–455, sec. 301(d)(3), 90 Stat. 1553:

SEC. 58(h). Regulations to Include Tax Benefit Rule.—The Secretary shall prescribe regulations under which items of tax preference shall be properly adjusted where the tax treatment giving rise to such items will not result in the reduction of the taxpayer's tax under this subtitle [A—Income Taxes] for any taxable years.

This Court had occasion to consider section 58(h) prior to the issuance of temporary regulations in 1989, T.D. 8249, 1989–1 C.B. 15, and substantially identical final regulations in 1992. T.D. 8416, 1992–1 C.B. 7.

In Occidental Petroleum Corp. v. Commissioner, 82 T.C. 819 (1984), the taxpayer had no regular tax liability for 1977 because of available foreign tax credits, which were not preference items. These credits were sufficient to offset in full the tentative tax liability that would have resulted if income had not been reduced by preference items, meaning that there was no tax benefit attributable to the preferences in 1977. In addition, although the credits not needed to offset actual tentative tax liability for 1977 were available for carryback or carryover to other years, they expired unused. The 1977 preferences thus did not result in a tax benefit for any applicable year, and we held that section 58(h) precluded the imposition of the minimum tax for 1977. Id. at 829.

[102 T.C. 5]

In First Chicago Corp. v. Commissioner, 88 T.C. 663 (1987), affd. 842 F.2d 180 (7th Cir.1988), the taxpayer had no regular tax liability for 1980 or 1981, again because of foreign tax credits. As in Occidental Petroleum, the credits were sufficient in amount to offset in full the tentative tax liability that would have resulted if income had not been reduced by preference items, meaning that there was no current tax benefit from the preferences. Unlike the circumstances in Occidental Petroleum, however, the excess credits freed up by the preferences had not yet expired unused. The Commissioner argued that the minimum tax should be imposed for 1980 and 1981 because of the potential for tax reduction in subsequent years. We disagreed, concluding that, under section 58(h), the minimum tax consequences should await the years when the taxpayer derived tax benefits resulting from the preferences. Id. at 667–668.

The situation confronting us in the instant cases differs from Occidental Petroleum and First Chicago in two major respects. First, the excess credits freed up by the 1982 preferences of the Du Pont group have been applied, and thus have actually generated tax benefits, in other years. Second, we now have a regulation, section 1.58–9, Income Tax Regs., promulgated under section 58(h), which by its terms applies to the years under consideration. See sec. 1.58–9(b), Income Tax Regs. (regulation effective for taxable years beginning after 1976 and before 1987). The parties agree on how the regulation applies to the facts before us, and, assuming that the regulation is valid, petitioners do not dispute respondent's deficiency determinations. Petitioners claim, however, that the regulation is not valid, and they offer an alternative means of implementing section 58(h) that results in a greatly reduced total deficiency.

The regulation begins with a proposition uncontested by petitioners: a taxpayer is not subject to minimum tax in the current year for preferences that, because of available credits, do not have the effect of reducing current regular tax liability. Sec. 1.58–9(a), Income Tax Regs. Accord First Chicago Corp. v. Commissioner, supra. Consistent with this principle, and as agreed by the parties, the Du Pont group has no minimum tax liability for 1982 because its preferences of $177,082,305 did not provide a tax benefit in that year. See sec. 1.58–9(c)(3)(ii), Income Tax Regs. The parties also agree

[102 T.C. 6]

that the credits freed up by these nonbeneficial preferences equaled $81,457,860.⁴ See sec. 1.58–9(c)(2), Income Tax Regs.

The regulation further provides, and petitioners here disagree, that any credits freed up by nonbeneficial preferences must be reduced before carryback or carryover to other taxable years. Sec. 1.58–9(a), Income Tax Regs. The amount of the credit reduction is the minimum tax that would have applied if the taxpayer had derived a current tax benefit from the preferences. Sec. 1.58–9(c)(1), (5), Income Tax Regs. This credit-reduction amount is allocated among the...