Todd v. C.I.R.

• Decision Date: 16 December 1988
• Docket Number: No. 88-4118,88-4118
• Citation: 862 F.2d 540
• Parties: -523, 89-1 USTC P 9116 Richard J. TODD and Denese W. Todd, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 540

862 F.2d 540

63 A.F.T.R.2d 89-523, 89-1 USTC P 9116

Richard J. TODD and Denese W. Todd, Petitioners-Appellees, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 88-4118.

United States Court of Appeals Fifth Circuit.

Dec. 16, 1988.

Nancy Morgan, Gary R. Allen, William S. Rose, Jr., Jonathan S. Cohen, Asst. Attys. Gen., Tax Div., Dept. of Justice, Washington, D.C., for respondent-appellant.

Charles Baume, William Marc Weintraub, Los Angeles, Cal., for petitioners-appellees.

Appeal from the Decision of the United States Tax Court.

Before THORNBERRY, RUBIN and HIGGINBOTHAM, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Taxpayers Richard and Denese Todd appealed deficiencies and penalties assessed by the Commissioner of Internal Revenue. The Tax Court denied the taxpayers' claimed depreciation deductions and investment tax credits. In a later opinion, the Tax Court refused to impose the Commissioner's requested penalties under Internal Revenue Code Sec. 6659 for tax underpayments attributable to valuation overstatements. The Commissioner appeals that determination. We affirm.

I

Beginning in 1980, FoodSource, Inc. sold investors interests in refrigerated food containers. The containers were designed to preserve perishable agricultural products during shipment to foreign and domestic markets. Each investor paid a fraction of the alleged purchase price of part or all of a refrigerated unit, signing a promissory note for the balance. FoodSource managed the containers, renting them to food transporters and regularly reporting profits supposedly earned by each investor.

Appellees Richard and Denese Todd purchased two FoodSource containers on December 8, 1981, and a third on October 14, 1982. The Todds paid $52,000 to FoodSource for each unit, signing notes to raise the "purchase price" of each container to $260,000. Using the $260,000 figure as the basis of each unit, the Todds claimed investment tax credits and depreciation deductions for the 1981 and 1982 tax years, carrying unused portions of the investment tax credits back to 1979 and 1980. However, due to a payment dispute with FoodSource, the manufacturer retained control of all three containers purchased by the Todds until 1983.

The Internal Revenue Service assessed deficiencies and penalties against many investors in the FoodSource program, including the Todds. The Todds participated with various other "test case petitioners" in litigation before the Tax Court, challenging the IRS actions. In Noonan v. Commissioner of Internal Revenue, ¹ the Tax Court determined that the Todds were not entitled to their claimed deductions and credits for 1979-82, since none of their containers had been placed in service until 1983. Other investors, such as the Hillendahls and the Hendricks, did have containers placed in service during the years for which they claimed tax benefits. Finding the obligations represented by the promissory notes illusory, the Tax Court limited the maximum adjusted basis taxpayers could claim in each FoodSource container to the lesser of its $60,000 fair market value or the actual cash payments made by the investor. Consequently, investors like the Hendricks and Hillendahls, though purchasing their containers with an actual profit motive, still received substantially smaller deductions and tax credits due to their reduced basis in their assets. These investors were also found liable under IRC Sec. 6659 for a 30% addition to tax on portions of their tax deficiencies "attributable to [ ] valuation overstatement[s]."

Upon remand for calculation of deficiencies, the Commissioner assessed a Sec. 6659 penalty against the Todds. The Todds appealed once again to the Tax Court. In Todd v. Commissioner of Internal Revenue, ² the Tax Court refused to allow the Sec. 6659 addition to tax. It reasoned that the Todds' deductions and credits were disallowed on the Commissioner's alternative ground that the food storage units had not been placed in service during the tax years in issue. Consequently, the Tax Court decided, the taxpayers' underpayments of tax could not be "attributable to" the valuation overstatements contained in their tax returns. The court refused to read Sec. 6659 as imposing a penalty anytime a tax underpayment had been accompanied by a valuation overstatement. The Commissioner now asks us to reverse the Tax Court's decision.

II

The statute we must construe, IRC Sec. 6659(a), provides:

(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.

The penalty only applies if the tax underpayment attributable to the overstated valuation equals at least $1000 and the claimed property value or adjusted basis is at least 150 percent of the actual value or basis. ³ The parties agree that, under the Tax Court ruling in Noonan, the Todds overstated the value of their FoodSource containers by 500%. If Sec. 6659 applies, the Todds will be liable for an addition to tax of 30% of underpayments attributable to the valuation overstatements. ⁴

The parties divide only over the meaning of the words "attributable to" in the statute. The Commissioner asks us to hold the Todds liable under Sec. 6659, basing his arguments on the statute's language, its legislative history, its underlying policy, and the Commissioner's perception of inequity in the Tax Court's result. First, the government argues that "attributable" ordinarily means "capable of being attributed." Thus, it contends that Sec. 6659 applies anytime a taxpayer's underpayment is "capable of being attributed" to a valuation overstatement, regardless of the actual ground relied on to uphold the deficiency. Unfortunately, the Commissioner's formulation merely substitutes one ambiguity for another. Whether a given underpayment is "capable of being attributed" to a valuation overstatement depends on the meaning of "capable." In one sense, that urged by the government, there can be several problems with a particular deduction and the resulting tax deficiency is, then, capable of being attributed to any of them. In this case, however, the Commissioner asserted and the Tax Court found that the Todds' FoodSource units had not been placed in service until after the 1982 tax year. Given those circumstances, no deductions or credits could legally be taken with respect to these food containers on the Todds' 1981 and 1982 tax returns. Thus, the value claimed for the containers became irrelevant to the Todds' tax liability, since it played no part in calculating the tax they actually owed. One can certainly argue the position that a tax underpayment is not "capable of being attributed" to an irrelevant figure on the income tax return. While a client might be "capable" of kicking the bottom of her lethargic lawyer in an abstract sense, one might still say she was "incapable" of doing so at a time when the two were a thousand miles apart. Thus, we find the language of the statute ambiguous, and look instead to the legislative history. ⁵

Congress initially enacted Sec. 6659 as part of the Economic Recovery Tax Act of 1981. The House Ways and Means Committee recognized the large number of property valuation disputes clogging the tax collection system, and added the overvaluation penalty to discourage those taxpayers who would inflate the value of property on their tax returns in hopes of "dividing the difference" with the IRS. ⁶ Unfortunately, none of the formal legislative history provides a method for calculating whether a given tax underpayment is attributable to a valuation overstatement.

Such a formula is found, however, in the General Explanation of the Economic Recovery Tax Act of 1981, or "blue book," prepared by the staff of the Joint Committee on Taxation. Though not technically legislative history, the Supreme Court relied on a similar blue book in construing part of the Tax Reform Act of 1969, calling the document a "compelling contemporary indication" of the intended effect of the statute. ⁷ The committee staff explained Sec. 6659's operation as follows:

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. ²

Applying this formula, the Tax Court determined that no portion of the Todds' tax underpayment was attributable to their valuation overstatements. The Todds' actual tax liability, after adjusting for the failure to place the food containers in service before 1983, did not differ from their actual tax liability adjusted for the valuation overstatements. In other words, where the deductions and credits for these refrigeration units were inappropriate altogether, the Todds' valuation of the property supposedly generating the tax benefits had no impact whatsoever on the amount of tax actually owed. Since the legislative history of Sec. 6659 provides no alternative method of applying the statute, we are persuaded that the formula contained in the committee staff's explanation evidences congressional intent with respect to calculating underpayments subject to the penalty.

Our conclusion that Congress intended this formula to be applied in determining liability for the Sec. 6659...