IRC §468 allows electing taxpayers who, among other things, operate landfills to claim a current deduction for costs that will be incurred once the landfill is closed to clean up the site. But the IRS argued in the case of Gregory v. Commissioner, 149 TC No. 2 that this election was restricted to taxpayers who used the overall accrual method of accounting for tax purposes.
IRC §448’s language allows a deduction to a taxpayer who elects the application of the provision. The taxpayers argued that nowhere in the statute did Congress restrict the taxpayers who could make this election to those using the overall accrual basis of accounting and that, based on the plain language of the statute, they should be allowed to take a deduction for such future clean-up costs regardless of the fact they reported their income and deductions generally on the cash basis of accounting.
The parties agreed about much—there was no dispute about the amount of the deduction if the taxpayers were qualified to elect under §468, no question that they were properly on the cash basis of accounting, and no question that they filed the required election. As well, the taxpayers agreed that if the statute truly was limited to those on accrual basis of accounting that they would be denied the deduction.
The Tax Court therefore was stuck with deciding what the term “taxpayer” in IRC §468(a) referred to. The Court notes that if the words of the statute are clear an unambiguous, then no additional sources need to be consulted, with court noting “[w]e assume the statute was written as Congress intended.”
The Tax Court notes that while §468 itself does not have a definition of taxpayer, the IRC itself has definitions that apply in the absence of being overridden by the specific section that is found at IRC §7701. IRC §7701(a)(14) provides that “[t]he term taxpayer means any person subject to an internal revenue tax.” In this case the electing entity was an S corporation, which itself is not subject to income tax. But, as the opinion notes, S corporations are subject to Social Security and unemployment taxes, which are also internal revenue taxes.
Now the Court went searching to see if this definition was somehow overridden by IRC §468. The Court found there was no such contrary rule found anywhere within IRC §448. And, the Court found, nothing in the section was “manifestly incompatible” with applying the standard IRC §7701 definition of taxpayer to §448. The opinion notes that in numerous cases Congress had expressly applied the limitation of “on the accrual basis” to the term taxpayer in provisions that it wished to limit to taxpayers using the accrual basis of accounting.
The Court notes that having found that the statute was unambiguous the issue is decided, but it did comment on a series of arguments the IRS attempted to bring forward to argue and rejected each of them. Those arguments included:
- The argument that §468 was not included in the list of expenses a cash basis taxpayer can deduct even if not paid found in Reg. §1.461-1(a)(1)—but the Court points out that the list is prefaced by “such as” making clear that the list does not represent an exhaustive list of such deductions.
- That the statute uses the term “incurred” which implies accrual, while Congress uses the term “paid” when discussing cash basis accounting. But the Court points out that while §448 at points uses the term “incurred” it also at points uses the cash basis term “paid” so this doesn’t prove anything.
- The Court rejected the IRS argument that §468 “must be ambiguous” if the Court needs to go to §7701 to find the definition of taxpayer. As the Court notes, §7701 adds clarity, not ambiguity, to the IRC.
- Finally, the Court dismissed the Blue Book, noting that such books are compiled after Congress enacts the law and thus did not inform the decisions of the members of Congress who voted for the law.
The key take-away from this case is a reminder that unambiguous law text renders other sources irrelevant. And, as the Court points out, only in very limited circumstances will be the Court even consider looking at legislative history—and when a Court does feel it must go there it does “so with caution.”