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Tools of Statutory Construction

GUARDIAN INDUSTRIES CORP. v.

COMMISSIONER143 T.C. 1 (2014)

FACTS AND ISSUE

• Guardian (US) paid a fine of € 20 million to the Commission of the European Union for an antitrust violation.

• Did this payment give rise to a deductible business expense?

IRC § 162TRADE OR BUSINESS EXPENSES

(a) IN GENERAL.–There shall be allowed as a deduction all the ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business * * *.

* * *

(f) FINES PENALTIES.–No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.

Treas. Reg. § 1.162-21Fines and penalties

(a) In general.–No deduction shall be allowed under section 162(a) for any fine or similar penalty paid to–

(1) The government of the United States, a State, a territory or possession of the United States, the District of Columbia, or the Commonwealth of Puerto Rico;

(2) The government of a foreign country; or

(3) A political subdivision of, or corporation or other entity serving as an agency or instrumentality of, any of the above.

QUESTION TO BE DECIDED:

• Is the EU Commission a “corporation or other entity serving as an agency or instrumentality of” * * * “[t]he government of a foreign country”?

1. “Government of a Foreign Country”

• Does the term “government” include “governments”?

IRC § 7701 DEFINITIONS

* * *

(p) CROSS-REFERENCES.--

(1) OTHER DEFINITIONS.–For other definitions, see the following sections of the United States Code:

(1) Singular as including plural, section 1.

* * *

1 U.S.C. 1 (2006)

Unless the context indicates otherwise–words importing the singular include and apply to several persons, parties, or things.

2.“Agency or instrumentality”

• Do this phrase have a plain meaning?

• Taxpayer said “yes” and proposed the following:– According to Guardian, “[t]he common sense

reading of the term ‘agency or instrumentality’ in the context of the applicable regulatory language, and as informed by applicable dictionary definitions, demonstrates that such term encompasses only entities that act as divisions or subsidiary branches of a government.

Tax Court rejected the taxpayer’s proposed “plain meaning”

• Terms “agency” and “instrumentality” are ambiguous.

• Dictionary definitions not helpful.

• “Anti-surplusage canon”

Taxpayer invoked “noscitur a sociis”

• Latin phrase meaning “it is known by its associates.”

• E.g., Jarecki v. Searle & Co., 367 U.S. 303 (1961), construing sec. 456(a)(2)(B) of the 1939 Code: “income resulting from exploration, discovery, or prospecting.”

Tax Court ultimately adopted a functional definition

• An entity should be regarded as an “agency or instrumentality” for purposes of section 162(f) if it has been delegated the right to exercise part of the sovereign power of a government or governments; if it performs an important governmental function; and if it has the authority to act with the sanction of government behind it.

Essence of taxpayer’s argument:

• “Agency or instrumentality” must be below a government.

• In other words, it must be controlled by the government of which it is an agency, such that it cannot act independently of that government.

Analogous Statutes

• Foreign Sovereign Immunities Act (FSIA), 28 U.S.C. 1603(b)

• European Community v. RJR Nabisco, 2014 WL 1613878 (CA2 2014)

United States v. Woods

134 S.Ct. 557 (2013)

Issues Decided by The Court

1. Whether the district court possessed jurisdiction in a partnership-level proceeding to determine the applicability of the IRC section 6662(b)(3) accuracy-related penalty for partner-level valuation misstatements that relate to a partnership’s lack of economic substance.

2. Whether the IRC section 6662(b)(3) accuracy-related penalty applied in this circumstance.

Issue 1 –Construction of IRC § 6226

“(f) Scope of Judicial Review

A court with which a petition is filed in accordance with this section shall have jurisdiction to determine … the applicability of any penalty ... which relates to an adjustment to a partnership item.”

Referencing TEFRA’s Structure to Resolve the Indeterminacy of “Relates To”

• The Court weighs the competing statutory accounts of the parties.

• Because it finds the key statutory phrase “indeterminate,” it resolves the indeterminacy by resort to the larger statutory framework of TEFRA.

Referencing TEFRA’s Structure to Resolve the Indeterminacy of “Relates To”

• The Court rejects the taxpayer’s construction of the statute as inconsistent with:

the overall structure of TEFRA; and

various provisions of TEFRA.

Issue 2 – Construction of IRC § 6662

IRC § 6662(a), (b)(3):

An accuracy-related penalty applies to the portion of an underpayment “attributable to …any substantial valuation misstatement.”

IRC § 6662(e)(1)(A) (2000 ed.):

Substantial valuation misstatements exist where “the value of any property (or the adjusted basis of any property) … is 200 percent or more of the amount determined to be the correct amount.”

Plain Language of IRC § 6662 Applies

• The Court reasons, in the case of partnerships lacking economic substance, that “no partner could legitimately claim an outside basis greater than zero.”

Plain Language of IRC § 6662 Applies

• If a partner, therefore, uses an outside basis greater than zero to claim losses on a return, and if doing so causes the partner to underpay taxes, the underpayment plainly is:

• “attributable to” the partner’s having claimed an

• “adjusted basis” in the partnership that exceeded

• “the correct amount of such … adjusted basis”

Various Tools of Statutory Construction Demonstrated

• Plain meaning rule

• Rule against statutory superfluity

• Construction of terms in light of larger statutory structure, i.e., Title 26 or Title 26 sub-parts

• Construction of terms in light of the evident purpose of the Congress

• Acknowledgment of potential relevance of post-enactment materials like the Joint Committee on Taxation’s Blue Book, but only to the extent persuasive.

King v. Burwell

IRC §36B

(a) In general

In the case of an applicable taxpayer, there shall be allowed as a credit … an amount equal to the premium assistance credit amount of the taxpayer for the taxable year.

IRC §36B

(c)(1) Applicable taxpayer

(A) In general

The term “applicable taxpayer” means, with respect to any taxable year, a taxpayer whose household income for the taxable year [is between 100 and 400 percent of the poverty line].

IRC §36B

(b) Premium assistance credit amount

For purposes of this section—

. . .

The term “premium assistance credit amount” means … the monthly premiums for such month for 1 or more qualified health plans offered in the individual market within a State which cover the taxpayer, the taxpayer’s spouse, or any dependent … and which were enrolled in through an Exchange established by the State under [section] 1311 of the Patient Protection and Affordable Care Act, or …

ACA §1311(b)42 U.S.C. §18031

(b) American Health Benefit Exchanges.

(1) In general. Each State shall, not later than January 1, 2014, establish an American Health Benefit Exchange (referred to in this title as an "Exchange") for the State ….

ACA §1321(c)42 U.S.C. §18041(c)

(c) Failure to establish Exchange or implement requirements

(1) In general

If—

[a State doesn’t set up an exchange]

the Secretary shall … establish and operate such Exchange within the State ….

45 C.F.R. §155.20The following definitions apply to this part:…Exchange … includes an Exchange …, regardless of whether the Exchange is established and operated by a State … or by HHS.…Federally-facilitated Exchange means an Exchange established and operated within a State by the Secretary under section 1321(c)(1) of the Affordable Care Act.

Note: This definition is incorporated by cross-reference into the regulations under IRC §36B. See Treas. Reg. §1.36B-1(k).