Albertson's developed a deferred compensation plan for its employees. Although the facts are a little complicated, the essence was that Albertson's promised to pay employees in the future as part of their compensation. It also promised to pay interest on the amount deferred. It then wanted to deduct the interest on its tax return.
At first, the IRS agreed with the scheme. Then it changed its mind and charged Albertson's with a tax deficiency. The lower tax court was badly divided over the whole thing, but decided against the deduction. The Ninth Circuit Court of Appeals, after first deciding in favor of Albertson's, changed its mind and reversed itself.
The reason for the change is remarkable. It agreed that Albertson's had a strong argument under the plain meaning of the statute. But that wasn't enough. Here is a key quote:
"Albertson's argument as to the plain language of the statute is a strong one. We certainly agree that the additional payments resemble "interest" and that, under a literal reading of the statutory language, the deduction of interest is not affected . . . .
In the end we are forced . . . to reject Albertson's approach. We may not adopt a plain language interpretation of a statutory provision that directly undercuts the clear purpose of the statute. . . . (T)he 'court must look beyond the express language of a statute where a literal interpretation 'would thwart the purpose of the overall statutory scheme or lead to an absurd or futile result.'" (citation omitted).
Albertson's Inc. v. Commissioner, 42 F.3d 537, 545 (1994)(Emphasis added).
The argument was fairly technical. In a nutshell, Albertson's plan was a non-qualified (but perfectly legal) deferred compensation plan. The IRS argued that Congress had developed a scheme for "qualified" plans. It further argued that even though Alberston's was not violating any law, and in fact was operating squarely within the statutory scheme, Albertson's should still lose because this would tend to negate Congress's goal of promoting qualified plans. In other words, Albertson's loses because Congress was not clear enough.
The moral of the story is not only do you have to know the law as passed by Congress, you have to know what Congress really meant when it passed the law. Should be easy enough as long as you are clairvoyant.
Of course, the idea of a standard, as in something to measure by, is obscured by that process.
"Divers weights and divers measures, both of them are alike abomination to the LORD." Proverbs 20:10.