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SEQUA CORPORATION & AFFILIATES v. U.S.

September 20, 2004.

SEQUA CORPORATION & AFFILIATES, Plaintiffs,
v.
UNITED STATES OF AMERICA and the INTERNAL REVENUE SERVICE, Defendants.



The opinion of the court was delivered by: GERARD E. LYNCH, District Judge

OPINION AND ORDER

Plaintiffs Sequa Corporation and its affiliates (collectively "Sequa") bring this action seeking a tax refund from the Internal Revenue Service, which Sequa claims it is owed under a proper interpretation of the Internal Revenue Code sections governing the corporate Alternative Minimum Tax. The Government argues for a different interpretation of those Code sections, and asserts that this interpretation supports the IRS's denial of Sequa's claimed refund. The parties have stipulated to all relevant facts, and agree that the dispute is a pure issue of law that is ripe for summary judgment. Sequa has so moved, and, for the reasons that follow, its motion will be denied. BACKGROUND*fn1

The corporate Alternative Minimum Tax ("AMT") was created by Congress in the Tax Reform Act of 1986, which became effective as of January 1, 1987.*fn2 Pub.L. No. 99-514, 100 Stat. 2085, 2320-45 (1986). The corporate AMT is codified in sections 55 through 59 of the Internal Revenue Code, and, like the AMT for individual taxpayers, is intended to ensure that corporate taxpayers who are eligible for many income tax exclusions, adjustments, credits, and deductions nonetheless pay at least a minimum amount of tax each year. The AMT is sometimes described as "parallel" to the regular tax system in that it has its own set of rules for calculating income and deductions and its own tax rates, which are different in certain respects from the rules and rates that make up the regular tax system. A taxpayer typically must calculate taxable income and tax due under both the regular tax system and the AMT, and then, in effect, pay the greater of the two calculated tax liabilities.

  If a taxpayer's allowable deductions and exclusions exceed its gross income in a given tax year, the resulting difference is deemed a Net Operating Loss ("NOL"). Both the AMT and the regular tax system have rules for calculating NOLs, and both systems allow taxpayers to carry NOLs back or forward to offset net income in other tax years. During the years at issue here, both systems required NOLs to be carried back three years and then forward up to fifteen years; certain "specified liability" losses could be carried back ten years. Sequa is a corporation that is the common parent of an affiliated group of corporations that file consolidated tax returns on a calendar year basis. During an audit of Sequa's 1986 through 1995 tax years, the Internal Revenue Service ("IRS") determined that (i) in 1987, Sequa had an Alternative Minimum Tax Net Operating Loss ("AMT NOL") of <$1,787,197>; (ii) in 1994, Sequa had a "specified liability" AMT NOL of <$14,186,681>; and (iii) in 1995, Sequa had a "specified liability" AMT NOL of <$19,497,373>

  In the course of the audit, the IRS carried each of these AMT NOLs back to 1986, and offset the full amount of each against Sequa's regular taxable income for 1986.*fn3 Sequa, in contrast, argued that AMT NOLs could not be deducted in 1986, because Sequa had no AMT income in that year (as the corporate AMT did not yet exist). Sequa requested that each of these AMT NOLs be carried to 1988 and offset against Sequa's 1988 AMT income, producing a refund of $6,006,723 for that year and liberating an AMT tax credit that could be carried forward to Sequa's 1989 AMT income, producing a further refund of $1,087,527. The IRS denied these requests during the audit. Sequa then filed a formal Form 1120 request for the two refunds, which was also denied. Finally, Sequa filed this action, seeking the requested refunds for 1988 and 1989. The sole dispute between the parties is whether the Internal Revenue Code provides for AMT NOLs to be offset against regular taxable income in pre-1987 years, as the Government claims, or whether AMT NOLs may be offset only against AMT income, which by definition cannot exist before the 1987 tax year, as Sequa claims. DISCUSSION

  1. Legal Standard and Burden of Proof

  Summary judgment must be granted where "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law." Fed.R. Civ. P. 56(c). The parties agree that there are no material factual disputes and that the matter is ripe for summary judgment. The parties disagree, however, on where the burden of proof lies. The Government maintains that a taxpayer seeking a refund has the burden of proving its entitlement to the refund. (D. Mem. 4.) Sequa, on the other hand, contends that a taxpayer bears the burden of proof solely on factual issues, and that, where the dispute is solely legal, neither party bears the burden of proof. (P. Rep. 2.) Sequa is correct in that the concept of "burden of proof" has no relevance where a dispute is solely on a question of law. It is well-established that the findings of the Commissioner in tax matters are presumed correct, and the taxpayer challenging those findings typically bears the burden of proof. See, e.g., United States v. Janis, 428 U.S. 433, 440 (1976). However, where, as here, the taxpayer and the Commissioner have stipulated to the relevant facts, no burden of proof is applicable, as statutory interpretation is purely a legal question for the Court. See, e.g., Kraft, Inc. v. United States, 30 Fed. Cl. 739, 757 (Fed.Cl. 1994) ("How fair market value is defined is a legal question [on which there is no burden of proof]; what constitutes fair market value in a particular case is a factual matter and the burden of proof is on the taxpayer.").

  II. Statutory Interpretation

  This dispute centers on the interplay between two sections of the Internal Revenue Code: section 172(b)(2), "Amount of carrybacks and carryovers," and section 56(d), "Alternative tax net operating loss deduction defined."*fn4 Section 172(b)(2) reads, in relevant part,
(2) . . . the entire amount of the net operating loss for any . . . loss year shall be carried to the earliest of the taxable years to which . . . such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss may be carried.
As passed by Congress in 1986 and in effect throughout the tax years relevant here, section 56(d) reads, in relevant part,
 
(1) . . . the term "alternative tax net operating loss deduction" means the net operating loss deduction allowable for the taxable year under section 172, except that —
(A) the amount of such deduction shall not exceed 90 percent of alternative minimum taxable income determined without regard to such deduction, and
(B) in determining the amount of such deduction —
(i) the net operating loss (within the meaning of section 172(c)) for any loss year shall be adjusted as provided in paragraph (2), and
(ii) in the case of taxable years beginning after December 31, 1986, section 172(b)(2) shall be applied by substituting "90 percent of alternative minimum taxable income determined without regard to the alternative tax net operating loss deduction" for "taxable income" each place it appears.
Section 56(d)(1)(B)(ii) was amended in 1996 as a collateral part of the "Small Business Job Protection Act of 1996," replacing the original language with the following: "appropriate adjustments in the application of section 172(b)(2) shall be made to take into account the limitation of subparagraph (A)." Pub.L. No. 104-188, § 1702(e)(1)(A)(1996). The only legislative history on this amendment describes this change, among others, as merely "technical, clerical, and conforming amendments" to various prior revenue bills. See H.R. Conf. Rep. No. 104-737, at 348 (August 1, 1996). Unfortunately, in a case that turns in large part on divining the meaning of statutory language and the intent of Congress, both parties ignore the original language of section 56(d)(1)(B)(ii) and instead describe and analyze the statute as if the present amended version of that section had always existed. Although neither the original nor the amended version of section 56(d)(1)(B)(ii) unambiguously resolves the dispute here, the original language does provide clues to the correct interpretation of 56(d)(1) as a whole, and negates a number of Sequa's statutory interpretation arguments that are based, in part, on the amended language.*fn5

  Sequa argues that the "plain language" of these statutory sections requires that AMT NOLs be offset only against 90% of AMT income (and never against regular taxable income), and, since by definition Sequa had no AMT income in any year prior to 1987, Sequa's 1987, 1994 and 1995 AMT NOLs cannot be absorbed by its 1986 income and are thus fully available for use in post-1987 years. Sequa bases this view on its reading of the language of section 56(d)(1)(A)(i) and on three additional assertions: (i) that the AMT system is wholly "separate" from the regular tax system and calculations from each system can never cross over into each other (P. Mem. 6-7, 16); (ii) that the existence of other explicit "transitional" rules for other AMT calculations indicates that Congress did not intend any differential treatment of NOLs during the transition years, under the rule of inclusio unius est exclusio alterius (P. Mem. 14-16); and, (iii) that the position on this issue contained in the General Explanation of the Tax Reform Act of 1986 (the "Blue Book") is incorrect and can be disregarded because the Blue Book is not authoritative (P. Mem. 17-25).

  The first two of these additional arguments can be summarily rejected. Although Sequa cites a handful of documents that refer to the AMT as "separate" or "parallel" to the regular tax system, courts have emphatically rejected this description as determinative of whether certain features of the Internal Revenue Code are applicable to AMT calculations (including in one case cited repeatedly by Sequa for other propositions). See, e.g., Ventas v. United States, 2004 WL 1878240, at * 5-6 (Fed. Cir. Aug. 24, 2004); Allen v. Commissioner, 118 T.C. 1, 10-16 (U.S.T.C. 2002). The Court agrees with those courts that, given the various conflicting provisions of the Internal Revenue Code and the legislative history of the AMT, the characterization of the AMT as wholly "separate" or "parallel" is unhelpful in resolving specific disputes — the terms are mere semantics and have no value as interpretative tools. Indeed, Sequa's own brief belies the "separateness" it claims, because, in making its inclusio unius argument (point (iii) above), Sequa relies on a Code provision that allows an allegedly forbidden "crossover" between the AMT and the regular tax system. (P. Mem. 14-15.)

  Sequa's inclusio unius argument — that Congress' inclusion of other transition rules precludes reading the disputed provisions in the Internal Revenue Service's favor here — is also flawed. As noted above, the original statutory language of section 56(d)(1)(B)(ii), ignored by plaintiffs, did include at least a partial transition rule for AMT NOL carrybacks. Thus, whatever limited value such statutory construction rules may have, see, e.g., Black's Law Dictionary 602 (7th ed. 1999) ("several Latin maxims masquerade as rules of interpretation while doing nothing more than describing results reached by other means"), it offers no help to Sequa here.

&nbsp; Sequa's third point, though partially correct, likewise does not bolster the asserted correctness of its interpretation. It is true that the Blue Book is simply an interpretive manual created after the legislation is passed, is not legislative history, and cannot be taken as an authoritative guide to congressional intent. See, e.g., Hutchinson v. Commissioner, 765 F.2d 665, 669 (7th Cir. 1985). But, of course, this fact does not advance Sequa's interpretation of the statute. It merely reduces the force of one consideration favoring the Government's position. As discussed further below, the Blue Book is persuasive authority, as an interpretation of the statute by a body of experts intimately familiar with the ...


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