Sundstrand Corp. v. C.I.R.

Decision Date08 April 1994
Docket NumberNo. 93-2250,93-2250
Citation17 F.3d 965
Parties-1198, 94-1 USTC P 50,092 SUNDSTRAND CORPORATION, et al., Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
CourtU.S. Court of Appeals — Seventh Circuit

Francis D. Morrissey, James M. O'Brien, Baker & McKenzie, Chicago, IL, John C. Klotsche (argued), Robert H. Albaral, Owen P. Martikan, Neil D. Traubenberg, Baker & McKenzie, Dallas, TX, for petitioners-appellants.

Gary R. Allen, Bruce R. Ellisen, Frank P. Cihlar (argued), Dept. of Justice, Tax Div., Appellate Section, Washington, DC, for respondent-appellee.

Before POSNER, Chief Judge, ROVNER, Circuit Judge, and MIHM, District Judge. *

POSNER, Chief Judge.

Ordinarily when a taxpayer repays money that he had previously received as income and included in his gross income in the year of receipt, he can deduct the payment from his current income in figuring his current income tax liability but he cannot go back and recompute his tax liability for the year in which he received the money that he is now repaying. Money received under a claim of entitlement to it as income is income for purposes of the federal income tax even if the claim is defeasible and eventually defeated. E.g., North American Oil Consolidated v. Burnet, 286 U.S. 417, 424, 52 S.Ct. 613, 615, 76 L.Ed. 1197 (1932); United States v. Lewis, 340 U.S. 590, 71 S.Ct. 522, 95 L.Ed. 560 (1951); Continental Illinois Corp. v. Commissioner, 998 F.2d 513, 521 (7th Cir.1993). But there are exceptions, one created by section 1481 of the Internal Revenue Code, which though repealed in 1990 applies to taxable years before the repeal. We are asked to decide whether a defense contractor that agreed to repay hundreds of millions of dollars to the government pursuant to the Truth in Negotiations Act, 10 U.S.C. Sec. 2306a, and OMB's Cost Accounting Standards, 48 C.F.R. pt. 9904, can use section 1481 to restate its income for the years (1979 through 1982) in which it received income under contracts negotiated and performed in violation of CAS and TINA. Such a restatement would be more profitable to Sundstrand than deducting the repayments from its current income. The corporate income tax was higher in the contract period than it is today, and a deduction is worth more the higher the tax rate.

Section 1481(a)(1) provides, with respect to any contract (or subcontract, but we can ignore that detail) with a federal agency, that "excessive profits" eliminated as the result of a "renegotiation" shall be used to reduce the contract price that was used in figuring the contractor's taxable income in the year that the contractor received the excessive profits. A "renegotiation" includes "any transaction which is a renegotiation within the meaning of the Renegotiation Act ..., any modification of one or more contracts with the United States or any agency thereof, and any agreement with the United States or any agency thereof in respect of one or more such contracts." 26 U.S.C. Sec. 1481(a)(1)(A). "Excessive profits" include "any amount which constitutes excessive profits within the meaning assigned to such term by the Renegotiation Act ..., any part of the contract price of a contract with the United States or any agency thereof, ... and any profits derived from one or more such contracts." 26 U.S.C. Sec. 1481(a)(1)(B). The Tax Court, concluding that the adjustments required by CAS and TINA were not the elimination of "excessive profits" by a "renegotiation," refused to recompute Sundstrand's tax liability. 98 T.C. 518, 1992 WL 88529 (1992).

Sundstrand directs our attention to the words (in the definition of "excessive profits") "any part of the contract price of a contract with the United States or any agency thereof," and asks us to read no further. The words, it argues, are clear, so we must not inquire into the history or purpose of the statute. CAS and TINA are the vehicles by which the Defense Department has required Sundstrand to repay a number of items, including expenses for liquor, dog kennels, and servants for executives' spouses, that it had included in the price terms of its contracts. The statute says that excessive profits include any part of any contract price. Therefore the adjustment of the contract price under CAS and TINA eliminated excessive profits. Q.E.D.

But there is no principle of interpretation that if the meaning of a word, phrase, or sentence plucked out of the heart of a statute seems clear if you do not read or think beyond it you must accept this as the meaning of the statute. On the contrary, taking a word, a phrase, or a sentence out of context is as great a sin in statutory interpretation as it is in ordinary argument. United States National Bank v. Independent Insurance Agents of America, Inc., --- U.S. ----, ----, 113 S.Ct. 2173, 2182, 124 L.Ed.2d 402 (1993); Deal v. United States, --- U.S. ----, ----, 113 S.Ct. 1993, 1996, 124 L.Ed.2d 44 (1993). "Slicing a statute into phrases while ignoring their contexts--the surrounding words, the setting of the enactment, the function a phrase serves in the statutory structure--is a formula for disaster." Herrmann v. Cencom Cable Associates, Inc., 978 F.2d 978, 982 (7th Cir.1992); see also Moskowitz v. Trustees of Purdue University, 5 F.3d 279, 283 (7th Cir.1993); Calderon v. Witvoet, 999 F.2d 1101, 1104 (7th Cir.1993). But there is context and there is context. Rowland v. California Men's Colony, --- U.S. ----, ----, 113 S.Ct. 716, 720, 121 L.Ed.2d 656 (1993). Surrounding sentences are context for interpreting a sentence, but so is the history behind the sentence--where the sentence came from, what problem it was written to solve, who drafted it, who opposed its inclusion in the statute.

The history of a statute can, it is true, be misused. The term "legislative history" picks up some peculiarly unreliable "historical" guides to meaning--the statement of a single legislator, on a day when the chamber may have been empty; a statement not made on the floor at all, but inserted in the record of the proceedings later; a passage in a committee report that may have been inserted by a lobbyist or a committee staff member and not scrutinized carefully by other members of the committee; a passage inserted by an opponent of the bill, designed to impart a particular "spin" to it--or by a proponent, designed as an invitation to a sympathetic court to "restore" a provision that had been deleted in a compromise with opponents. The concern that a number of judges have expressed with regard to the use of legislative history, e.g., Schwegmann Bros. v. Calvert Distillers Corp., 341 U.S. 384, 395-97, 71 S.Ct. 745, 751-52, 95 L.Ed. 1035 (1951) (Jackson, J., concurring); United States v. Public Utilities Comm'n, 345 U.S. 295, 319-20, 73 S.Ct. 706, 719-20, 97 L.Ed. 1020 (1953) (Jackson, J., concurring); Green v. Bock Laundry Machine Co., 490 U.S. 504, 527-28, 109 S.Ct. 1981, 1994-95, 104 L.Ed.2d 557 (1989) (Scalia, J., concurring), though possibly overstated, Stephen Breyer, "On the Uses of Legislative History in Interpreting Statutes," 65 So.Cal.L.Rev. 845, 861-69 (1992), dictates caution in its use. But it does not touch the use of "history" in a broader sense to illuminate a statute that may be ambiguous not because any individual sentence or clause in it is ambiguous but because some of its sentences or clauses don't fit together clearly or don't mesh with rather obvious realities of the subject matter of the statute. J.C. Penney Co. v. Commissioner, 312 F.2d 65 (2d Cir.1962) (Friendly, J.); Fishgold v. Sullivan Drydock & Repair Corp., 154 F.2d 785, 788-89 (2d Cir.) (L. Hand, J.), aff'd, 328 U.S. 275, 66 S.Ct. 1105, 90 L.Ed. 1230 (1946).

As is true here, Sundstrand concedes, of subsection (B) of section 1481(a)(1). Read literally, it makes the settlement of a suit under CAS and TINA a "renegotiation," but not a judgment in the same suit, because "renegotiation" is defined (so far as pertinent here) as an agreement and a judgment is not an agreement. Yet Sundstrand admits that its claim would be unaffected had it fought the...

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