Tuesday, October 24, 2006

More Tax Stuff

One of the jobs of the IRS, and the courts, is to "protect the fisc." What that means, generally, is that the IRS Commissioner can interpret the rules and "restructure" transactions in such a way so as to prevent tax avoidance. Federal Bulk Carriers, Inc. v. Commissioner, 558 F.2d 128, 130 (2nd Cir 1977). This also has been stretched to mean that even if a statute allows you to do something, you may not necessarily really be allowed to do it. The case of Albertson's v. Commissioner jumps out as an example of "there are many ways to do it wrong."

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.


Mrs. B said...

I see Commissioner Hammurabi's point. Way up there, at the top of the stele....

There is a grievous evil which I have seen under the sun, namely riches kept by the owner thereof to his hurt....And this also is a grievous evil, that in all points as he came, so shall he go: and what profit hath he that he laboreth for the wind? All his days also he eateth in darkness, and he is sore vexed, and hath sickness and wrath. Ecclesiastes 5:13,16-17.

Also: Give unto Caesar what you should have known Caesar meant was Caesar's.

Ruben said...

Oh, but Vic, it isn't hard. Congress wants us to pay money. Any time a statute seems to allow us not to, I think we can be sure that the clear intention was that we would, in fact, pay that.

Victorbravo said...

Right, Ruben. I lost my bearings. The presumption is "pay it all". After that, we have to hope for an affirmative expression of Congress's "grace".

Ruben said...

Well, we have the love of the executive and the grace of the legislature --any bids for the communion of the judiciary?

Mike Pitzler said...

How about i wash your windows for some figs?

Victorbravo said...

Mike, that would be a great deal, for us. You can have all the figs you can find on the tree. I probably should tell you that there were only two, and they both shrivelled up and fell off.

Mike Pitzler said...

mmm. Maybe i can invest in fig futures, and grapes do better when they shrivel up. i'm getting more wrinkles myself.