Corporation Insists It Qualifies for ITC Under World Headquarters Exception

NDC provides electronic information services for various markets. In 1973 NDC agreed to be the original lessor of a building, once the first floor of the newly constructed building could be occupied. The lease was to run 240 months or until 1993, but in 1991 it was extended to April 30, 2003, with an additional renewal term of 10 years at NDC's option. The building was NDC's corporate headquarters. From 1987 through 1990 NDC made various improvements to the building. NDC filed timely corporate income tax returns but didn't claim investment credits for the building. In August 1994 NDC filed claims for refunds, asserting that it was entitled to investment tax credits for the leasehold improvements, furnishings, and equipment placed in service in the building. In 1996 the IRS appeals office denied the request for refunds for 1987-1989, and in 1997 the IRS denied the refund request for 1990. In 1997 NDC commenced this consolidated suit for refund. The parties filed cross- motions for summary judgment.

The Court of Federal Claims determined that the Tax Reform Act of 1986 eliminated the investment tax credit for most property placed in service after 1985 with exceptions, including an exception for property placed in service in complexes classified as "world headquarters." The court noted that there was no dispute that NDC met two of the three requirements for the exception -- that NDC was the "original lessee" of the building and that its building qualified as a world headquarters. However, the court found that NDC failed to meet the third requirement, that the lessee was obligated to lease the building under an agreement to lease entered into before September 26, 1985. Noting the common-law distinction between leases and agreements to lease, the court concluded that Congress was aware of the difference between the two and intended to provide an exception for agreements to lease and not intervening leases.(For a summary, see Tax Notes, Aug. 6, 2001, p. 769; for the full text, see Doc 2001-20110 (15 original pages) [PDF] or 2001 TNT 145-13 .)

NDC argues that the Court of Federal Claims incorrectly attributed universal understanding to the words "agreement to lease" and that Congress could not have intended to impute such precise meaning to such a historically imprecise term. NDC further contends that the context of the statute confirms that the term "agreement to lease" must have been intended to refer to a firm lease agreement as opposed to an executory contract to enter a lease. NDC insists that imputing to Congress an intent to distinguish between taxpayers obligated under an executory contract to enter a lease and a firm lease is illogical. Finally, NDC argues that even if Congress did intend such a precise meaning to the words "agreement to lease" the Court of Federal Claims erroneously granted the government's motion for summary judgment.

[1] Pursuant to Fed. Cir. R. 47.5, counsel for Plaintiff- Appellant, National Data Corporation and Subsidiaries ("National Data"), states that:

1. He is unaware of any other appeal in or from the same proceeding before the United States Court of Federal Claims ("Claims Court") that previously was before this Court or any other appellate court under the same or similar title; and

2. He is unaware of any pending cases in this or any other court that will directly affect or be directly affected by this Court's decision in the pending appeal.

STATEMENT OF JURISDICTION

[2] National Data appeals an erroneous judgment of the Claims Court entered on July 23, 2001, denying National Data's motion for summary judgment and granting the United States' motion for summary judgment in a tax refund case. On August 21, 2001, National Data filed a timely Notice of Appeal to this Court.

[3] Pursuant to 28 U.S.C.A. section 1491(a)(1), the Claims Court had jurisdiction to entertain the tax refund claims that are the subject of National Data's appeal. Pursuant to 28 U.S.C.A. section 1295(a)(3), this Court has exclusive jurisdiction of an appeal from the final decision of the Claims Court, such as the judgment in this case.

STATEMENT OF THE ISSUE

[4] Whether the Claims Court erred, as a matter of law, in holding that National Data did not qualify for the claimed investment tax credits under the "world headquarters exception" of section 204(a)(7) of the Tax Reform Act of 1986 (Pub. L. No. 99-514, 100 Stat. 2085) (the "Tax Reform Act" or "Act") by virtue of National Data's failure to satisfy the lease requirement under section 204(a)(7)(B) of the Act.

STATEMENT OF THE CASE

I. NATURE OF THE CASE

[5] This is an appeal of a decision of the Claims Court, National Data Corp. & Subsidiaries v. United States, 50 Fed. Cl. 24 (Ct. C1. 2001), in which the court denied National Data's motion for summary judgment and granted the United States' motion for summary judgment on the basis that National Data was not entitled to the claimed investment tax credits under section 204(a)(7) of the Tax Reform Act with respect to certain leasehold improvements, equipment, and furnishings placed in service during the taxable years ended May 31, 1987 through 1990, at National Data's world headquarters, One NDC Plaza in Atlanta, Georgia.

II. COURSE OF PROCEEDINGS BELOW

[6] National Data filed two complaints in the Claims Court, one on January 14, 1997, for its taxable years 1987-1989 (i.e., 97- CV-23) and one on August 25, 1997, for its taxable year 1990 (i.e., 97-CV-580). See JA 18, 24. Upon National Data's motion, the cases were consolidated on September 10, 1997. See JA 19.

[7] After filing a Stipulation of Facts, the parties filed cross-motions for summary judgment on September 1, 1999, regarding National Data's entitlement to the investment tax credit under section 204(a)(7) of the Tax Reform Act. See JA 21. These cross- motions involved two issues: (i) whether National Data satisfied the technical requirements of section 204(a)(7) of the Tax Reform Act (the "world headquarters exception") and (ii) if so, which of the property placed in service during the taxable years 1987-1990 qualified for the investment tax credit (the "class life issue"). With respect to the first issue, the parties stipulated that National Data was the original and only lessee of One NDC Plaza within the meaning of section 204(a)(7)(A) of the Tax Reform Act and that One NDC Plaza was National Data's world headquarters within the meaning of section 204(a)(7)(C) of the Tax Reform Act. See JA 61. Therefore, the focus of the world headquarters issue was whether National Data satisfied the lease requirement of section 204(a)(7)(B) of the Tax Reform Act. This issue as well as the class life issue were addressed at the oral arguments held by the Claims Court in this case on April 18, 2001. See JA 22. Both issues were issues of first impression for the Claims Court. ¹

III. DISPOSITION

[8] On July 23, 2001, the Claims Court issued its opinion denying National Data's motion and granting the United States' motion on the grounds that National Data did not satisfy the requirements of section 204(a)(7) of the Tax Reform Act, specifically the lease requirement of section 204(a)(7)(B) of such act. See JA 3, 16. As a result of this ruling, the Claims Court did not address the class life issue. See JA 3. This timely appeal followed and, as with the Claims Court, this is an issue of first impression for this Court.

STATEMENT OF THE FACTS

[9] During the taxable years 1987 through 1990, National Data was engaged in the business of providing the electronic interchange of information for the financial, retail, healthcare, and communications markets through specialized data processing applications. JA 62. National Data had corporate offices and employees across the United States and throughout the world, including at various times during 1987 through 1990 Africa, Canada, England, Europe, Italy, Japan, Middle East, Spain, Sweden, and West Germany. JA 61, 63, 64. The hub of these worldwide operations was located at One NDC Plaza, Corporate Square, Atlanta, Georgia 30329 ("One NDC Plaza"). JA 61.

[10] With respect to its corporate headquarters, National Data entered into an agreement on April 21, 1973, which provided that National Data "does hereby lease, demise, and rent from Lessor, the entire four-story office building to be constructed by Lessor" for a 20-year term (the "Lease Agreement"). JA 25. The date on which this 20-year term began to run (i.e., the "commencement date") was not expressly provided in the agreement, but it was triggered in part by the date on which National Data could occupy the first floor of One NDC Plaza. JA 28. The parties agreed to execute an amendment to the Lease Agreement for the purpose of expressly setting forth the commencement date of the 20-year term. JA 29. On April 21, 1973 (i.e., the same date as the agreement), the parties entered into a "First Amendment to Lease Agreement" establishing April 27, 1973, as the commencement date of the 20-year lease for One NDC Plaza. JA 56.

[11] National Data was the original and only lessee to occupy space at One NDC Plaza within the meaning of section 204(a)(7)(A) of the Tax Reform Act. JA 61. This building, along with a second building that was built by National Data as its operations expanded, serves as National Data's corporate headquarters. It functions as the command center for all of National Data's domestic and international business operations, and it serves as National Data's world headquarters as that term is used in section 204(a)(7)(C) of the Act. JA 61.

SUMMARY OF ARGUMENT

[12] The decision of the Claims Court is based upon an incomplete and erroneous analysis of decades of common law. In its analysis, the Claims Court determined that the words "agreement to lease," as they are used in section 204(a)(7)(B) of the Tax Reform Act, comprise a legal term of art that clearly indicates a Congressional intent to confer transitional relief from the repeal of the investment tax credit only to those taxpayers obligated under an executory contract to enter a lease in the future. This conclusion was premised on the finding that the words "agreement to lease" have a well-established meaning and usage in the common law, which Congress therefore is presumed to incorporate. The problem, however, is that the common law does not indicate such a clear meaning and usage of these words. In fact, decades of common law indicate that the words "agreement to lease" have been used very inconsistently by the courts, referring to both executory contracts to enter a lease and to firm lease agreements. Read in context of the entire statute, which expressly refers to taxpayers who are "lessees," it becomes clear that Congress intended to benefit those taxpayers who were obligated under firm lease agreements. Additionally, interpreting the statute to refer to an executory contract to enter a lease would be inconsistent with the language that makes the exception applicable only to a lessee who "is obligated" under the agreement because qualifying taxpayers would become ineligible once they signed a firm lease agreement.

[13] The Claims Court's interpretation is inconsistent with decisions in the Ninth and Seventh Circuit Courts of Appeal, in addition to the Eastern District of Wisconsin. See Airborne Freight Corp. v. United States, 153 F.3d 967 (9th Cir. 1998); United States v. Kjellstrom, 100 F.3d 482 (7th Cir. 1996); Kimberly-Clark Tissue Co. v. United States, 38 F. Supp. 2d 1028 (E.D. Wis. 1999). The fact that other courts have uniformly rejected the very analysis adopted by the Claims Court in this case should come as no surprise -- distinguishing between taxpayers obligated under executory contracts to enter a lease and those with firm leases makes no sense. The Claims Court's interpretation of the world headquarters exception would result in a denial of transitional relief to those taxpayers with the strongest reliance interest -- those bound under firm leases.

[14] Even if the statute is held to specifically require an executory contract to enter a lease, the Claims Court's grant of summary judgment for the United States was erroneous. In the proceedings below, the United States argued that National Data had in fact entered into an "agreement to lease" prior to September 26, 1985. While the Claims Court's factual determination as to the nature of National Data's agreement is not clear, it appears that the court accepted the United States' factual assertion that National Data was obligated under an "agreement to lease." Even though this is all that section 204(a)(7)(B) of the Tax Reform Act requires, the Claims Court wrote into the statute a requirement that the taxpayer also not be in possession of the subject property on the cut-off date. This Court should reject the Claims Court's attempt to reverse-engineer the world headquarters exception so as to limit its application to a class of a single taxpayer, putatively Merrill Lynch, especially in light of the fact that it is entirely possible that the ruling is so narrow that even that taxpayer would not qualify for the transitional relief.

[15] The Claims Court's ambiguous factual determinations are of no consequence if the term "agreement to lease" is properly interpreted to refer to actual lease agreements because neither party contests National Data's obligation under a lease agreement prior to September 26, 1985. The common law, the plain language context of the statute, and its legislative history all support such an interpretation, and National Data is entitled to transitional relief under the world headquarters exception.

ARGUMENT

I. STANDARD OF REVIEW

[16] This Court reviews a grant of summary judgment made by the Claims Court WITHOUT DEFERENCE. American Mut. Life Ins. Co. v. United States, No. 00-5078, 2001 U.S. App. LEXIS 21378. at *11 (Fed. Cir. Oct. 3, 2001). See also Demko v. United States, 216 F.3d 1049, 1052 (Fed. Cir. 2000) (Claims Court grant of summary judgment is reviewed "completely and independently"); Brighton Village Assocs. v. United States, 52 F.3d 1056. 1059 (Fed. Cir. 1995) (Claims Court decision is reviewed de novo); Applegate v. United States, 25 F.3d 1579, 1581 (Fed. Cir. 1994) (same). The interpretation of a statute is a matter of law that the Court reviews de novo. American Mut. Life, 2001 U.S. App. LEXIS 21378, at *11; Demko, 216 F.3d at 1052; Doyon v. United States, 214 F.3d 1309, 1314 (Fed. Cir. 2000). Similarly, this Court reviews the Claims Court's compliance with summary judgment standards de novo. Godley v. United States, 5 F.3d 1473, 1475 (Fed. Cir. 1993).

[17] The Claims Court's findings of fact are reviewed for clear error. Exxon Corp. v. United States, 931 F.2d 874, 878-879 (Fed. Cir. 1991); Rocovich v. United States, 933 F.2d 991, 993 (Fed. Cir. 1991); Hamlet v. United States, 873 F.2d 1414, 1416 (Fed. Cir. 1989). A finding of fact is "clearly erroneous" when, "although there is some evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed." Milmark Servs., Inc. v. United States, 731 F.2d 855, 857 (Fed. Cir. 1984) (quoting United States v. United States Gypsum Co., 333 U.S. 365, 395 (1948)).

II. THE COURT OF FEDERAL CLAIMS INCORRECTLY ATTRIBUTES UNIVERSAL UNDERSTANDING TO THE WORDS "AGREEMENT TO LEASE."

[18] Section 204(a)(7) of the Tax Reform Act, commonly referred to as the "world headquarters exception," provides transitional relief from the repeal of the investment tax credit for certain leasehold improvements. This transitional exception provides:

The amendments made by section 201 shall not apply to any

A. CONGRESS COULD NOT HAVE INTENDED TO IMPUTE SUCH PRECISE

[20] The Claims Court cites a litany of cases in support of its assertion that there is a "usual judicial formula" that differentiates between an "agreement to lease" and a "lease" or "lease agreement." JA 8. ² Any degree of study of the Claims Court's cited authority quickly establishes two principles that are incapable of dispute. First, there is indeed a legal distinction between an agreement whereby a conveyance of a leasehold interest in real estate is currently effected, and an agreement whereby the parties merely agree to formally contract at a later date for the effective conveyance of such an interest in real property. National Data has never contested this legal principle. Second, it is clear that there is absolutely no universal term of art used to refer to the latter situation where an agreement is reached that a lease will be executed in the future, but no present demise of an interest in real estate is intended. This is made plain by the very authorities cited by the Claims Court. See Dan Cohen Realty Co. v. National Svgs. & Trust Co., 125 F.2d 288 (6th Cir. 1942) (referring to an executory contract to agree in the future as an "executory contract to lease," an "agreement to enter into a lease," and an "informal executory agreement to lease," in addition to an "agreement to lease"); Sands v. United States, 198 F. Supp. 880 (W.D. Wash. 1960) (using the terms "agreement to give a lease," "agreement to later execute a lease," "agreement to execute a lease in the future," and "proposal to lease" in addition to "agreement to lease"), aff'd sub nom. First Federal Sav. & Loan Ass'n of Bremerton v. United States, 295 F.2d 481 (9th Cir. 1961) (referring to an "agreement to execute a lease" and "proposed lease" in addition to "agreement to lease"); Feeley v. Michigan Ave. Nat'l Bank, 490 N.E.2d 15 (Ill. App. Ct. 1986) (referring to a "contract for the execution of a future lease," and an "agreement for a lease" in addition to "agreement to lease"); Byrd Cos. v. Birmingham Trust Nat'l Bank, 482 So.2d 247 (Ala. 1985) (using the terms "contract to execute a lease at a later date," and "executory agreement to lease" in addition to "agreement to lease"); Target Stores, Inc. v. Twin Plaza Co., 153 N.W.2d 832 (Minn. 1967) (referring to a "contract to make a lease," an "executory agreement to lease," and a "contract for a lease" (citations omitted) in addition to an "agreement to lease"); Motels of Md., Inc. v. Baltimore County, 223 A.2d 609 (Md. 1966) (using the terms "personal contract to execute a lease at a future time," "agreement to make a lease at a future date," "contract to make a lease of realty," "personal contract to thereafter make a lease," "agreement for a future lease," and "contract to lease" to refer to an executory agreement, but NOT the term "agreement to lease"); Ryan v. Stanger Inv. Co., 620 S.W.2d 505 (Tenn. Ct. App. 1981) (referring to an "agreement to make a lease" and an "agreement to give a lease" in addition to an "agreement to lease").

[21] A more careful reading of the authority cited by the Claims Court proves another point. The courts have typically preferred to use terms that are more descriptive and intuitive than "agreement to lease" unless the context clearly indicates that the reference is to an executory contract to enter a lease. See, e.g., Dan Cohen Realty Co., 125 F.2d 288 (using descriptive terms such as "agreement to enter into a lease" except where "agreement to lease" is used in a sentence expressly contrasting an "executed lease"); First Fed. Sav. & Loan Ass'n of Bremerton, 295 F.2d 481 (only using "agreement to lease" after expressly referring to the agreement as an "agreement to execute a lease"); Feeley, 490 N.E.2d 15 (only using "agreement to lease" when context unambiguously indicates that an executory contract, and not a firm lease, is being discussed); Byrd Cos., 482 So.2d 247 (same); Target Stores, 153 N.W.2d 832 (same).

[22] The Claims Court cites to Ryan v. Stanger Inv. Co., 620 S.W.2d 505, 508 (Tenn. Ct. App. 1981), for the proposition that an "'agreement to lease is not a lease, just as a contract to sell is not a saal.'" Court fails to explain is that the court in Ryan, as is typical of most cases dealing with the issue of whether an agreement is a firm lease or merely an executory contract to enter a lease, was simply using the term "agreement to lease" as one expression of an executory contract where no present demise of a leasehold interest in real estate occurs. See Ryan, 620 S.W.2d 505. Surprisingly, the Claims Court does not explain the context in which this statement was made, and erroneously lets it stand as a bold pronouncement by the court in Ryan that the words "agreement to lease" make up such a technical term of art that they should never be mistaken for a "lease." See JA 8. The court's holding in Ryan is not that the words "agreement to lease" may never refer to a "lease" but rather, that an executory contract to enter a lease is not a present lease. Ryan, 620 S.W.2d 505. Indeed, the court in Ryan also refers to such an executory contract as an "agreement to make a lease" and an "agreement to give a lease." Id. at 509-510. Thus, the import of the Ryan case and nearly all of the other cases cited by the Claims Court is not that the words "agreement to lease" comprise an established and precise legal term of art, but that there is a legal distinction between an agreement that effects a contemporaneous transfer of a leasehold interest, and one that merely anticipates such an agreement. ³

[23] The Claims Court's cited authority clearly establishes that the words "agreement to lease" are merely one expression that some courts have used to refer to an executory contract that anticipates a future conveyance of a leasehold interest. A complete review of the historical common law also reveals a litany of cases where the words "agreement to lease" are used to refer to an agreement whereby a contemporaneous conveyance of a leasehold interest is effectuated, i.e., those agreements most commonly referred to as "lease agreements" or "leases." See, e.g., Prescott v. Smits, 505 A.2d 1211, 1212 (Vt. 1985) (using "agreement to lease" interchangeably with "lease agreement" and "lease"); Brown v. Magness Co., 617 F. Supp. 571, 572 (S.D. Tex. 1985) (same); Coe v. Thermasol, Ltd., 615 F.Supp. 316, 317 (W.D. N.C. 1985), aff'd 785 F.2d 511 (4th Cir. 1986)(using "agreement to lease" synonymously with "lease"); In re Condominium Admin. Servs., Inc., 55 B.R. 792 (Bankr. M.D. Fla. 1985) (same); Serwitz v. General Elec. Credit Corp., 331 S.E.2d 95, 96 (Ga. Ct. App. 1985) (using "agreement to lease" interchangeably with "lease agreement" in context of a lease of personal property); Prudential Ins. Co. v. United States, 7 Cl. Ct. 710, 717 (Cl. Ct. 1985), aff'd as modified, 801 F.2d 1295 (Fed. Cir. 1986) (using "agreement to lease" as a synonym for "lease"); Pearson v. Zoning Hearing Bd., 765 A.2d 1187, 1188 (Pa. Commw. Ct. 2001) (using "agreement to lease" as a synonym for "lease agreement"); Park Jefferson Apartments v. Storage Rentals, 738 N.E.2d 685, 686 (Ind. Ct. App. 2000) (using "agreement to lease" interchangeably with "lease"); In re Wechsler, 121 F. Supp. 2d 404, 438 (D. Del. 2000) (using the term "agreement to lease" to describe an agreement conveying a leasehold interest to moor a boat at a private slip); Stilwell v. Seibel, 10 P.3d 319, 320 (Or. Ct. App. 2000) (using "agreement to lease" interchangeably with "lease agreement" and "lease"); DeZerega v. Meggs, 99 Cal.Rptr.2d 366, 368 (Cal. Ct. App. 2000) (using "agreement to lease" interchangeably with "lease").

[24] In fact, the Federal Circuit Court of Appeals has used the words "agreement to lease" to refer to a fully executed lease. See, e.g., S.S. Silberblatt Inc. v. United States, 888 F.2d 829, 830 (Fed. Cir. 1989); Wells Fargo Bank v. United States, 88 F.3d 1012, 1023 (Fed. Cir. 1996) (referring to the "lease" at issue in Neely v. United States, 285 F.2d 438 (Ct. Cl. 1961), as an "agreement to lease"). State legislatures also have used the term "agreement to lease" in referring to contracts effectively conveying leasehold interests. See, e.g., N.D. Cent. Code section 47-16-08 (1999) (statute requiring lessor to secure quiet possession of lessee and using "agreement to lease" and "lease" interchangeably). Additionally, in both Airborne, 153 F.3d 967, and Kimberly-Clark, 38 F. Supp. 2d 1028, the courts expressly held that the words "agreement to lease" as used in section 204(a)(7) of the Act were synonymous with the concept of a "lease." ⁴

[25] A comparison of these authorities and the authority relied upon by the Claims Court confirms that there historically has been no precise meaning to the term "agreement to lease," as it has been used to refer to both an executory contract to enter a lease and an effective leasehold conveyance. The multi-purpose use of this term undoubtedly results from the amorphous and overlapping meanings of each of the individual words. A "lease" is of course an agreement between a lessor and a lessee. Thus, the term "agreement to lease," while redundant, is susceptible to two different meanings. ⁵ The term has, at times, been read as an "agreement to (later enter into a) lease." It is possible that prior to the evolution of modern landlord and tenant law, the words "agreement to lease" standing alone may have had more descriptive significance because a "lease" was considered to be primarily a conveyance as opposed to a contract. Milton R. Friedman, Friedman on Leases section 1.1 (4th ed. 1997). Thus, the words "agreement to lease" may have more clearly indicated that a contract, and not a conveyance, was all that the parties to a transaction were achieving. However, over time, landlord and tenant law has gradually adopted many of the characteristics of contract law. Friedman on Leases section 1.1. This has led to a deterioration of the idea of a lease as purely a conveyance and not a contract. In fact, as early as 1939, experts in the field of real property law noticed the courts' usage of the phrase "contract of lease" to describe an effective leasehold conveyance. Herbert T. Tiffany, Tiffany on Real Property section 74 (3d ed. 1939). The commentator discussed the inherent ambiguity in the term "lease," which could be used to refer both to a conveyance or the written instrument used to effect the conveyance. Id. As a result of this confusion, courts frequently began to use the term "contract of lease" instead of "lease." Id. Whatever the explanation, it is clear that the words "agreement to lease" and similar variants are often used as a means of describing an instrument effectively conveying an interest in real property and can be intended as a synonym of the term "lease."

[26] A complete review of the common law makes clear that the words "agreement to lease" have no precise meaning or import in and of themselves, and the context in which they are used must be consulted in determining whether an executory contract to enter a lease or a current demise of a leasehold interest is being described. Because the common law indicates that the words "agreement to lease" historically have been applied to two very different situations, it is unreasonable to conclude that Congress intended for the words to convey such a precise and limiting meaning as the Claims Court supposes. In fact, read in context of the entirety of section 204(a)(7) of the Act, and the legislative history of the Act, it becomes clear that Congress intended to refer to the type of agreement more descriptive known as a "lease" or "lease agreement."

B. THE CONTEXT OF THE STATUTE CONFIRMS THAT THE TERM "AGREEMENT

[28] Additionally, the language in section 204(a)(7)(B) of the Act setting forth the requirement that a lessee "is obligated" under the agreement supports the idea that Congress intended to refer to actual lease agreements. If the words "agreement to lease" refer to an executory contract to enter a lease, when read in conjunction with the "is obligated" language of the statute, only those taxpayers who NEVER signed actual lease agreements during the transitional period of 1986 through 1991 would continue to be eligible for the world headquarters exception throughout this period. On the other hand, if the words "agreement to lease" are interpreted to refer to a lease agreement, this language makes perfect sense, as taxpayers entering into such agreements prior to September 26, 1985, will likely continue to be obligated during the course of the transitional period.

[29] The legislative history of the Act indicates that Congress has used the words "agreement to lease" as imprecisely as the courts. Nevertheless, this history indicates that Congress intended section 204(a)(7) of the Act to apply to taxpayers obligated under what is commonly referred to as a "lease agreement." The Conference Committee Report accompanying the Act evinces a Congressional intent to use the words "agreement to lease" interchangeably with "lease agreement," i.e., an agreement that effectuates a conveyance of an interest in real property. H.R. Conf. Rep. No. 99-841, at II-59 to II-60, reprinted in 1986 U.S.C.C.A.N. 4075, 4147-48. In describing the applicability of section 204(a)(3) of the Act, which also provides transitional relief for certain taxpayers obligated under an "agreement to lease," the report states that the exception would apply to "LEASE AGREEMENTS under which a grantor trust is obligated to provide property under a finance lease . . . ." Id. at 4148 (emphasis added). While the term "agreement to lease" may be sufficiently ambiguous as to be read to refer to both an executory contract to enter a lease and a firm lease, the term "lease agreement" is not. Clearly, the term "lease agreement" refers only to an effective conveyance of a leasehold interest in property, and is merely an alternative title for what is most commonly called a "lease."

[30] The Claims Court dismisses this interchangeable use of the terms "agreement to lease" and "lease agreement" without any meaningful analysis, and merely concludes in a cursory fashion that Congress was really referring to an executory contract to enter a lease when it used the term "lease agreement." JA 13-14. The only support for the Claims Court's dismissal of this passage of the Conference Committee Report is the fact that section 204(a)(3) of the Act applies to the situation where a party is entering an agreement in relation to a building that is yet to be constructed. JA 13-14. The Claims Court erroneously implies that an executory contract to enter into a lease is necessarily the form of agreement when the subject property is yet to be constructed. See JA 14. This assertion is patently incorrect, because as the Claims Court's own cited authority clearly shows, leases can be and usually are executed to convey a possessory interest at a later date. Friedman on Leases section 34.1, at 1737-38; Byrd Cos., 482 So.2d 247; Motels of Md., 223 A.2d 609. It is equally clear that two parties may effect a present lease even though the leasehold conveyed relates to a building which is yet to be built. Friedman on Leases section 34.1, at 1738; Jonas v. Walgreen Az. Drug Co. (In re Wonderfair Stores, Inc.), 511 F.2d 1206 (9th Cir. 1975); Kmart Corp. v. First Hartford Realty Corp., 810 F. Supp. 1316 (D. Conn. 1993); Arthur Treacher's Fish & Chips, Inc. v. Chillum Terrace Ltd. P'ship, 327 A.2d 282 (Md. 1974). The Conference Report, therefore, should be viewed as further evidence that Congress drew no distinction between an "agreement to lease" and a "lease agreement" in the Act.

III. IMPUTING TO CONGRESS AN INTENT TO DISTINGUISH BETWEEN TAXPAYERS

[32] The additional requirements that the Claims Court attempts to add to section 204(a)(7) of the Act have already been rejected by the Ninth Circuit Court of Appeals. See Airborne, 153 F.3d 967. In Airborne, the United States similarly argued that the world headquarters exception was limited to taxpayers who were obligated to lease their headquarters building on September 26, 1985, but had not yet entered a firm lease on that date. Id. at 970. The Ninth Circuit recognized the distinction between an effective lease and an executory contract to enter a lease. Id. But, the Ninth Circuit held that the statute does not provide for disparate treatment of taxpayers obligated under these two types of contractual obligations. While the Ninth Circuit did refer to an executory contract to enter a lease as an "agreement to lease," it refused to interpret the statute to provide relief only to taxpayers obligated under this type of agreement. Although the Ninth Circuit did not provide a detailed explanation for this decision, it did note that it could find "no reason why the execution of a lease creates a relevantly different condition from that which existed under an agreement to lease." Id. Thus, the Ninth Circuit's logic appears to be that because there is no rational basis for Congress to differentiate between taxpayers with an executed lease and those with only a contract to enter a lease in the future and because the words "agreement to lease" do not conclusively refer to one or the other, Congress did not intend to limit the exception to taxpayers obligated under executory contracts to enter a lease. Indeed, the notion that taxpayer reliance interests provide the justification for these types of transitional rules compels an application of the statute to those taxpayers who are firmly obligated under an executed lease.

[33] The Ninth Circuit properly interpreted section 204(a)(7) of the Act in accordance with the plain language of the statute. The Airborne decision was in accord with the reasoning employed by the Seventh Circuit in Kjellstrom, 100 F.3d 482, and would subsequently be followed by the district court in Kimberly-Clark, 38 F. Supp. 2d 1028. To accept the United States' argument, as the Claims Court did in this case, would be to add restrictions to the statute that were not imposed by Congress in an attempt to reverse-engineer the statute to confine its application to "virtually a class of one." See Airborne, 153 F.3d at 970.

[34] In Kimberly-Clark, the district court similarly rejected the argument that the words "agreement to lease" comprise a legal term of art that limits the application of the world headquarters exception to those taxpayers who are obligated under an executory contract to enter a lease. 38 F. Supp. 2d 1028. The district court refused to add to the statute the additional requirements urged by the United States and held that the taxpayer, who was obligated under a lease originally executed in 1959 and met the other requirements of section 204(a)(7) of the Act, was eligible for the world headquarters exception according to the plain language of the statute. Id. The district court in Kimberly-Clark was aware of the common historical use of the words "agreement to lease," and held that while these words could refer to an executory contract to enter a lease, they could also refer to a firm lease agreement. Id. at 1037. Therefore, the district court reasoned, if Congress had intended to except only those taxpayers in an executory contract situation, the statute would have referred to an "agreement to enter into a lease agreement" or "an agreement to enter into an agreement to lease." Id.

[35] Similarly, the Seventh Circuit decision in Kjellstrom is disapproving of the Claims Court's attempt to reverse-engineer section 204(a)(7) of the Act so as to apply to a single taxpayer. 100 F.3d 482. Indeed, the Claims Court's approach to interpreting the world headquarters exception is remarkably similar to that employed by the district court in Kjellstrom. See United States v. Kjellstrom, 916 F. Supp. 902 (W.D. Wis.), aff'd 100 F.3d 482 (7th Cir. 1996). This approach to statutory interpretation inexplicably begins with an analysis of the putative situation of a single identified taxpayer. It then works backwards to read the statute to apply only to the alleged facts of that individual taxpayer. Not surprisingly, the Claims Court cites to the Kjellstrom district court decision as support for its conclusions. JA 14. The Claims Court falls to point out, however, that this method of analysis employed by the district court was expressly rejected by the Seventh Circuit upon appeal. See United States v. Kjellstrom, 100 F.3d 482, 485 (7th Cir. 1996). The Seventh Circuit held that the world headquarters exception should be interpreted according to the plain language of the statute, and not based upon the perception that the provision was intended to apply solely to Merrill Lynch. Id. at 485. Because the taxpayer's building in Kjellstrom did not constitute a "world headquarters" and because it had no "affiliates," the Seventh Circuit affirmed the district court's decision that the world headquarters exception was inapplicable because the taxpayer failed to satisfy the plain language of the statute, and not because it failed to be in the suspected situation of Merrill Lynch. Id. at 485. The taxpayer in Kjellstrom was obligated under a lease executed in 1974, and under the plain-language analysis employed by the Seventh Circuit, the Kjellstrom opinion made no attempt to distinguish this agreement from an executory contract to enter a lease in the future. Id. at 483.

B. THE COURT OF FEDERAL CLAIMS' INTERPRETATION PRODUCES ABSURD

[37] The absurdity of the Claims Court's interpretation of the world headquarters exception is clearly illustrated by the following example. Assume two taxpayers, identical in every respect, both decide to lease office space in the same building. Taxpayer A signs a "lease" on September 25, 1985, agreeing to lease space for ten years commencing on January 1, 1986. Taxpayer B, on the other hand, signs a contract on September 25, 1985, agreeing to sign an actual lease ten days later which will also provide for a ten-year lease commencing on January 1, 1986. The Claims Court's position is that Congress intended for Taxpayer B to receive the transitional relief while Taxpayer A does not. Further assume that a Taxpayer C signs a technically defective "lease" on September 25, 1985. If the agreement had been technically sufficient to constitute a firm "lease," then the Claims Court would hold that Taxpayer C does not receive transitional relief. However, because the lease is defective, Taxpayer C could argue that the agreement was in fact an agreement to execute a lease in the future, and thus become eligible for the world headquarters exception under the Claims Court's analysis. Thus, Taxpayer A who conducted his affairs in the most efficient manner, and who clearly has the strongest reliance interest in the investment tax credit, receives no transitional relief. There is nothing in the statute or the legislative history that even remotely suggests that Congress intended such absurd results.

[38] The Claims Court did not attempt to explain the absurd results that would obtain upon application of its holding to this situation. The Claims Court appears to believe that because the putative beneficiary of the exception, Merrill Lynch, was allegedly not in possession of its building because it had not yet been built on September 26, 1985, and because this would provide a "typical" factual setting for the use of an executory contract to enter a lease in the future, Congress must have intended for the statute to apply only to taxpayers not yet in possession but obligated under such executory contracts to enter a lease. ⁶ See JA 14. This analysis is flawed for many reasons. First, as discussed above, it is clear that the words "agreement to lease" are not a precise term of art, and in fact have been commonly used to denote a lease. The Claims Court should not be allowed to ignore the plain usage of this term in decades of common law based merely upon the presumption that Merrill Lynch, the putative beneficiary, had such an executory contract to enter a lease. Second, even if this court were to approve of this method of statutory interpretation, there is absolutely no evidence of record anywhere in this case that reveals the factual circumstances of the Merrill Lynch lease situation. The simple truth is that the Claims Court tried to limit the exception of section 204(a)(7) of the Act to a single taxpayer, without even knowing if that taxpayer would qualify under the interpretation.

IV. EVEN IF CONGRESS DID INTEND SUCH A PRECISE MEANING TO THE WORDS

[National Data's] agreement in this case was an AGREEMENT TO

[40] Upon close examination of the Claims Court's opinion, it appears that the court did base its decision upon this proposed fact, i.e., that National Data was obligated under an agreement to lease prior to September 26, 1985. Upon mutual agreement of this proposed fact, the Claims Court should have granted National Data's motion for summary judgment based upon the plain language of the statute. However, notwithstanding the fact that section 204(a)(7)(B) of the Act merely requires a taxpayer to have "entered into" an agreement "before September 26, 1985," the Claims Court apparently looked to the words "are to serve" in section 204(a)(7)(C) of the Act in finding an unstated requirement that the taxpayer not be in possession of the property on the cut-off date of September 26, 1985. ⁸ JA 10. Section 204(a)(7)(C) of the Act imposes a requirement that "such buildings are to serve as world headquarters of the lessee and its affiliates." The Claims Court uses this language as a shoe-horn to squeeze out some support for the conclusion that Congress only intended the exception to apply to taxpayers who were not in possession of the subject property on September 26, 1985 -- presumably the factual circumstances of Merrill Lynch. This strained interpretation of the statute does not withstand scrutiny.

[41] The words "are to serve" simply do not convey the bright- line possession requirement that the Claims Court would suppose. The Claims Court holds that this language "suggests that the statute was intended to cover only a company that had obligated itself to lease a building in the future, but had not yet occupied the structure." JA 10. This argument once again evinces the Claims Court's attempt to back into an interpretation of the statute based upon the supposed factual circumstances surrounding Merrill Lynch. Surely the words "are to serve" could be read to refer to a building that is already occupied by the taxpayer, but will become its world headquarters at a point in time in the future, or merely to require that the taxpayer have an intention to continue to use the building as its world headquarters for an indefinite period of time into the future. Notwithstanding this ambiguity, the Claims Court focuses on these words in an unabashed attempt to restrict the benefits of the exception to a class of virtually one taxpayer. This interpretation is not supported by the plain language of the statute, and National Data should qualify for transitional relief of the world headquarters exception regardless of the interpretation of the words "agreement to lease."

[42] The incongruity between National Data's interpretation of the statute and that of the Claims Court can be attributed to the two different starting points of the statutory analysis. National Data looks to the plain language of the statute which on its face applies to a limited set of taxpayers who were contractually obligated as original lessees of office space for use as a world headquarters facility. The Claims Court's analysis, on the other hand, begins with a pre-conceived notion that Congress intended to benefit a single taxpayer and then works backwards in an attempt to reverse-engineer the statute to read in such an exclusionary fashion. This is an unacceptable form of statutory interpretation. ⁹ The Claims Court is right in stating that transitional rules such as the world headquarters exception are intended to apply to a narrow set of taxpayers. Commonwealth Energy Sys., 235 F.3d at 16; Apache Bend Apartments, Ltd. v. United States, 987 F.2d 1174, 1175 (5th Cir. 1993). But, the Claims Court attempts to narrow section 204(a)(7)(B) of the Act to a class of a single taxpayer. Clearly, Congress knew very well how to draft an exception to the repeal of the investment tax credit that would apply only to a single taxpayer. See, e.g., Tax Reform Act of 1986, section 204(a)(31) /10/; see also Tax Reform Act of 1986 sections 204(a)(9) and 204(a)(20). Those exceptions that were not clearly drafted to apply to such a limited class, such as the world headquarters exception, should not be interpreted by the courts to do so. The Claims Court appears to think that additional requirements must be added to the statute in order to achieve the Congressional intent that the transitional exceptions apply to a narrow group of taxpayers. But, as the court in Kimberly-Clark has already noted, the plain language of section 204(a)(7) of the Act already narrows the class of qualifying taxpayers to those who purchased qualified property or made leasehold improvements to their world headquarters facility, of which they were the original lessee, between 1986 and 1991. See Kimberly-Clark, 38 F. Supp. 2d at 1037. This Court should reject the Claims Court's backward approach to statutory interpretation, and hold that National Data qualifies for transitional relief under the plain language of section 204(a)(7) of the Act. CONCLUSION

[43] For the foregoing reasons, National Data respectfully requests this Court to reverse the of the United States Court of Federal Claims denying National Data's motion for summary judgment and granting the United States' motion for summary judgment.

Respectfully submitted,

[Editor's Note: The attachment has been omitted. However, this document in its entirety can be obtained through our Tax Analysts' Access Service as Doc 2001-27327 (66 original pages) [PDF].] FOOTNOTES

¹ Other decisions addressing some aspect of the world headquarters exception include: Airborne Freight Corp. v. United States, 153 F.3d 967 (9th Cir. 1998), aff'g 96-2 U.S. Tax Cas. (CCH) paragraph 50,552 (W.D. Wash 1996); United States v. Kjellstrom, 100 F.3d 482 (7th Cir. 1996), aff'g 916 F. Supp. 902 (W.D. Wis.); Kimberly-Clark Tissue Co. v. United States, 38 F. Supp. 2d 1028 (E.D. Wis. 1999); Payless Cashways Inc. v. Commissioner, 114 T.C. 72 (2000); Chicago Mercantile Exch. v. Commissioner, 79 T.C.M. (CCH) 1581 (2001).

² Footnote 8 of the Claims Court's opinion contains the citation of common law authority for this precise interpretation of the words "agreement to lease."

³ The only case cited by the Claims Court that appears to use the words "agreement to lease" as a precise term of art, i.e., the term is used consistently, is Zook v. Zook, 11 Pa. D. & C. 203 (1928). The presence of one case dating from 1928 is hardly a level of authority sufficient to support the Claims Court's assertion that in "common usage . . . a layperson would not employ the phrase 'agreement to lease' . . . to refer simply to a 'lease' . . .." JA 7.

⁴ National Data is therefore puzzled by the Claims Court's statement that "it is telling that [National Data] has not cited a single case at common law in which a court has construed any of the relevant phrases . . . [including] "agreement to lease" . . . to be synonymous with the term 'lease.'" JA 8. Of course, National Data did cite to Airborne and Kimberly-Clark as authority for this proposition in the context of the very statutory provision at issue in this case. JA 146, 205.

⁵ The Claims Court points out that the term "lease" includes an understanding of an agreement and, therefore, interpreting the words "agreement to lease" as including a lease would be redundant and illogical. JA 7. However, the logic behind the common usage of the term was not the question before the Claims Court, and it is clear that the term has been used to refer to a lease in the same fashion that the similarly redundant term "lease agreement" has been used.

⁶ In the proceedings below, the United States argued that possession was in fact the determining characteristic that distinguished a lease from an executory contract to enter a lease. See JA 122. This argument is clearly without support in the law. See Friedman on Leases section 34.1 (stating that "the term of no lease of consequence begins on the day it is signed and virtually all leases begin in the future. An instrument may be a present lease though it gives no right to possession until some time in the future.") The Claims Court appears to advance a modified theory sua sponte, which holds that the words "agreement to lease" are a precise term of art to distinguished from a "lease," but without an emphasis on possession as the defining characteristic. See JA 4-8.

⁷ The United States made this assertion in furtherance of its misguided theory that possession was the characteristic which determined the distinction between an executory contract to enter a lease and a lease. Thus, the United States argued that National Data was obligated under an agreement to lease until it took possession of the property on April 27, 1973. JA 122. The United States also requested a proposed finding of fact that National Data entered an "agreement to lease" on April 21, 973. JA 103. National Data accepted this proposed fact for purposes of the court's ruling. JA 186-187.

⁸ While the opinion is not clear, it is also possible that the Claims Court accepted the proposed fact and held that National Data still did not qualify because it was not obligated under the "agreement to lease" on September 26, 1985. See JA 6-7. This decision also would be erroneous because, as discussed, earlier, if the "is obligated" language of the statute is interpreted in this fashion, the requirement must be. read to extend beyond the September 26, 1985 cut-off date -- an interpretation which would disqualify any taxpayer who eventually signed a firm lease agreement. Such an interpretation would ensure that the world headquarters exception would not apply to any taxpayer for the duration of the transitional period, even Merrill Lynch.

⁹ Indeed, a similar mode of analysis also was undertaken by the district court in Kjellstrom, only to be rejected by the Seventh Circuit. 916 F. Supp. 902 (W.D. Wis.), aff'd 100 F.3d 482 (7th Cir. 1996) (rejecting the lower court's holding that exception applied only to Merrill Lynch, but affirming because taxpayer did not satisfy the plain-language requirements of statute

¹⁰ Section 204(a)(31) of the Act provides:

The amendments made by section 201 shall not apply to railroad