Host Marriott Argues Interest on Tax Qualifies as 'Specified Liability Loss'

In 1991, Host Marriott and the IRS entered into a settlement agreement that required the company to pay $46 million in interest that had accrued on tax deficiencies for the taxable years 1977-1979. Host Marriott deducted the interest on its 1991 return under section 163(a). On its 1991 return Host Marriott reported a net operating loss in excess of $139 million. The company claimed that a portion of the NOL, representing the federal income tax deficiency interest deduction it claimed on its 1991 return, constituted a "specified liability loss" under section 172(b)(1)(C) that could be carried back to 1984.

Host Marriott filed a complaint seeking refunds of alleged overpayments for 1984 and 1985. A district court granted Host Marriott's motion for summary judgment and determined that the "plain language" of section 172(f)(1)(B)(i) established that Host Marriott had derived a specified liability loss from its 1991 interest deduction. (For a summary of that opinion, see Tax Notes, Aug. 28, 2000, p. 1113; for the full text, see Doc 2000-21962 (13 original pages) or 2000 TNT 165-4 .) The court subsequently ordered that the government pay $37.9 million plus interest from September 15, 2000, to the date of payment plus costs to Host Marriott Corp. (For a summary of that opinion, see Tax Notes, Oct. 16, 2000, p. 376; for the full text, see Doc 2000-25683 (1 original page) or 2000 TNT 195- 9 .)

Host Marriott argues that the federal income tax deficiency interest portion of its 1991 net operating loss qualifies as a specified liability loss under section 172(f)(1)(B). Host Marriott insists that the deficiency interest satisfies the requirements explicitly set forth in section 172(f)(1)(B) and that no reason exists to look beyond the plain terms of the statute. Host Marriott notes that even if it were appropriate to look beyond the statute's plain language, no basis exists for grafting an economic performance requirement onto the statute. Host Marriott also maintains that the doctrine of Ejusdem Generis does not exclude federal deficiency interest from section 172(f)(1)(B). Finally, Host Marriott emphasizes that its entire 1991 tax deficiency interest accrual is a specified liability loss because the act giving rise to that liability was the understatement of tax liability on the 1977-1979 tax returns.

STATEMENT OF THE ISSUES

[1] The issue in this appeal is whether the district court correctly held that Appellee Host Marriott Corporation's ("Taxpayer's") 1991 deduction for interest on federal income tax deficiencies that were more than three years old qualified for the special 10-year carryback available for specified liability losses ("SLLs") under sections 172(b)(1)(C) and 172(f)(1)(B) of the Internal Revenue Code ("Code"). ¹ The resolution of this issue requires this Court to determine:

(1) Whether the district court correctly refused to impose nonstatutory limitations on the plain language of section 172(f)(1)(B).

(2) Whether the district court correctly held that, for purposes of the 3-year rule of section 172(f)(1)(B), the relevant "act" giving rise to all of Taxpayer's 1991 deficiency interest liability under section 6601(a) was Taxpayer's underpayment of taxes on its 1977-79 tax returns, rather than the daily compounding of interest under section 6622.

STATEMENT OF THE CASE

[2] This is a case for the refund of federal income tax. The United States appeals the decision of the United States District Court for the District of Maryland (Chasanow, J.), which concurrently granted Taxpayer's motion for summary judgment and denied the United States' cross motion for summary judgment on a fully stipulated factual record in Taxpayer's refund suit. App. 31-42. The district court held that Taxpayer's 1991 deductions for federal income tax deficiency interest and workers' compensation claims qualified for 10-year carryback treatment as SLLs under the plain language of section 172(f)(1)(B). The court subsequently entered judgment in favor of Taxpayer in the stipulated amount of $37,995,199.32 plus statutory interest, representing a refund of tax overpayments for the 1984 and 1985 tax years resulting from the carryback of the 1991 SLLs. App. 41-42.

STATEMENT OF FACTS

[3] The facts in this case are stipulated and undisputed. App. 19-23. Taxpayer and its predecessor in interest were continuously on the accrual method of accounting. App. 20 at paragraph 6. In 1991, because its total deductions exceeded its gross income for that year, Taxpayer incurred a net operating loss ("NOL") of $139,117,808. App. 20 at paragraph 7. In addition to $7,235,275 paid in 1991 to satisfy workers' compensation claims, the NOL included $45,762,977 in interest on federal income tax deficiencies for the tax years 1977, 1978, and 1979, which Taxpayer settled with the Internal Revenue Service ("IRS") in 1991. App. 20-21 at paragraphs 9-10. The liability for federal deficiency interest was imposed under section 6601 (a) of the Code. App. 26 at paragraph 13.

[4] Taxpayer claimed that its 1991 deductions for both workers' compensation and federal deficiency interest qualified as SLLs eligible for extended 10-year carryback treatment under Code section 172, which defines as one category of SLL

[A]NY AMOUNT . . . ALLOWABLE AS A DEDUCTION UNDER THIS CHAPTER

[5] In granting Taxpayer's motion for summary judgment, the district court held that Taxpayer's 1991 deduction for federal tax deficiency interest was an SLL under the plain language of section 172(f)(1)(B) as a liability that "ar[ose] under a 3 Federal . . . law," specifically Code section 6601(a). App. 35. ³ In denying the United States' cross motion, the district court rejected as "dicta" the Tax Court's statement in Sealy v. Commissioner, 107 T.C. 177 (1996), aff'd on other grounds, 171 F.3d 655 (9th Cir. 1999), that a single sentence of the legislative history of section 172(f)(1)(B) "suggests" a congressional intent to limit that section to only those federal and state law liabilities delayed by the economic performance requirements of section 461(h). App. 39-40. The district court stated that "diversion" into the legislative history was "unnecessary and inappropriate" given the plain language of the statute. App. 39. The district court added that, in any event, "the scant legislative history does not suggest a 'clearly expressed legislative intent contrary to the plain language"' of the statute. App. 40 n.4 (quoting Toibb v. Radloff, 501 U.S. 157, 162 (1991)).

[6] The district court also rejected the United States' attempt to apply the maxim of EJUSDEM GENERIS to construe section 172(f)(1)(B) as applying only to federal and state law liabilities characterized by a nonstatutory "inherent delay" requirement. The court held that "the construction of this statute does not signal application of [the ejusdem generis] doctrine" and noted furthermore that there was "no basis for imposing an additional requirement of 'inherent delay' on top of those restrictions already specified by Congress." App. 37-38. The court also noted that, in any event, both workers' compensation claims and federal income tax deficiency interest penalties would meet the United States' proposed inherent delay requirement, "given the common delay in both resolution of workers' compensation claims and the IRS audit process." App. 38 n.2.

[7] In determining the amount of Taxpayer's SLL, the district court found that for purposes of section 172(f)(1)(B) the "acts" giving rise to Taxpayer's 1991 deficiency interest deductions were the acts of underpaying tax on the filing of the tax returns for the 1977, 1978, and 1979 tax years under section 6601(a). App. 36 & n.2. The court specifically rejected the United States' argument that the last three years of interest accruals did not satisfy the statute because, according to the United States, continuing nonpayment of tax constituted a series of daily "failures to act" as interest accrued daily under section 6622 of the Code. Id.

SUMMARY OF ARGUMENT

[8] I. The United States concedes, as it must, that Taxpayer's 1991 liability for federal income tax deficiency interest falls within the plain language of section 172(f)(1)(B)'s definition of an SLL: Taxpayer used an accrual method of accounting; the liability arose under Code section 6601(a), a federal law; and the section 6601(a) liability related to underpayments on tax returns filed more than three years before the 1991 NOL year. Because the United States cannot contest Taxpayer's satisfaction of these requirements, it is forced to urge this Court to adopt nonstatutory limitations on section 172(f)(1)(B) that the district court correctly found to be inconsistent with well-established rules of statutory construction and unpersuasive on their merits.

[9] As recently reaffirmed by this Court in Sigmon Coal Co. v. Apfel, 226 F.3d 291 (4th Cir. 2000), and the Supreme Court in Gitlitz v. Commissioner, 121 S. Ct. 701 (2001), Judicial interpretation of a statute begins and ends with the statutory language when such language is plain and unambiguous. The United States cannot identify any ambiguity in the language of section 172(f)(1)(B). In an attempt to overcome this fatal circumstance, the United States relies on Brown & Williamson Tobacco Corp. v. Food & Drug Administration, 153 F.3d 155 (4th Cir. 1998), aff'd, 120 S. Ct. 1291 (2000), for the proposition that the interpretation of section 172(f)(1)(B) must take into account the "context" of the statutory scheme, including its legislative history. This argument ignores that in Brown & Williamson this Court reiterated the plain language standard for unambiguous statutes where the statutory scheme is coherent, and it examined the broader context in that case only because the agency's reliance on definitional terms conflicted with its historical practice, the remaining provisions of the act in question, and other extensive tobacco legislation. No such circumstances are present here.

[10] To the contrary, the statutory context of the section 172 NOL carryback rules is completely consistent with the plain language of section 172(f)(1)(B). The purpose of section 172 is to relieve the distortions in net income that result from basing our federal income tax system on annual accounting periods. It provides generally that NOLs may be carried back or carried forward a certain number of years to offset income in profitable years. Section 172(f) simply provides special extended carryback rules for specified types of deductions that originated before the 3-year carryback period generally applicable to NOLs.

[11] Nor can the United States offer any persuasive evidence that Congress intended the statute to mean something other than what it says. The United States invites this Court to impose a nonstatutory requirement that would limit the 10 year carryback for federal and state law liabilities to those deductions deferred by the economic performance rules of sections 461(h)(1) and (2). The United States' position, however, relies on inferences based on the enactment of the federal and state law carryback provision in conjunction with the addition of the economic performance requirement to the Code, a forced interpretation of a lone sentence in the legislative history, and the Tax Court's dicta in Sealy, 107 T.C. at 185. The better interpretation of the context in which section 172(f)(1)(B) was enacted is that the 3-year delay rule of the statute was meant to accommodate delays caused by failures to satisfy any element of the rules for accrual of deductions, including either of the dual requirements of the "all events test" (a fixed liability and an ascertainable amount) or the economic performance rules. The correctness of this interpretation is further confirmed by the disparate treatment of similarly situated taxpayers that would occur under the United States' proposed economic performance restriction.

[12] Similarly unpersuasive is the United States' attempt to superimpose on the statute a different, nontextual requirement of "inherent delay," based on the doctrine of ejusdem generis. At the threshold, it is clear that section 172(f)(1) simply does not fit the doctrinal mold, because it sets forth three separate and distinct circumstances for SLL eligibility, rather than a single definition that includes some specific terms and a general catch-all that is subject to interpretation. In any event, assuming for argument's sake that the doctrine of ejusdem generis imposed an "inherent delay" requirement, the district court correctly determined that federal deficiency interest deductions would satisfy this requirement, because there are such delays attributable to the IRS audit and dispute resolution process in the context of a complex Code. App. 38 n.2.

[13]] II. The United States bases its alternative computational argument on the proposition that, under section 6622 of the Code, interest accrues daily and therefore every day the taxpayer fails to pay the tax is a separate "failure to act" under section 172(f)(1)(B). Under this interpretation, the statute's 3-year requirement would disallow any interest accruing during the three years preceding the 1991 deduction. This argument ignores (i) the parties' stipulation (App. 21 at paragraph 13) that the Taxpayer's interest liability arises under section 6601(a); (ii) the language of section 6601(a), which establishes the liability for interest when the original tax returns are filed with tax understatements; and (iii) the language of section 6622, which refers to other provisions of the Code for the imposition of the interest liability that is then merely computed under its rules. As the district court correctly held, it is the act of filing the tax returns that established the liability for interest under section 6601(a), the amount of which was computed under section 6622. App. 36 & n.2.

ARGUMENT

(1) In general -- The term "specified liability loss" means

[15] Accordingly, putting aside for now the post-1987 deficiency interest, Taxpayer meets all of the statutory requirements under the stipulated facts:

1. Taxpayer and its predecessors were continuously on the

[17] Even after it reversed its position, the IRS has acknowledged that its new interpretation is inconsistent with the plain language of the statute. See FSA 199936002 (May 20, 1999) ("The [SLL] exception is more limited than that which would be extant under a supposed 'plain meaning' reading of the section's elements. The correct narrower reading is based upon our interpretation of the scant legislative history . . . .").

[18] Moreover, even if there were doubt about the meaning of the statute, such doubt should be resolved in favor of the taxpayer. The IRS has recognized that section 172(f) is a "relief provision." See, e.g., FSA 199936002 (May 20, 1999) (interpreting the context within which "this relief provision [section 172(f)] was enacted by Congress"). As such, "it should be liberally construed in the taxpayer's favor." See Kimbrell's Home Furnishings, Inc. v. Commissioner, 159 F.2d 608, 610 (4th Cir. 1947); see also Burnet v. Marston, 57 F.2d 611, 612 (D.C. Cir. 1932) (citing Bonwit Teller and Co. v. United States, 283 U.S. 258, 263 (1931)); FSA 200035002 (May 2, 2000) ("Section 1033 is intended to be a relief provision and, therefore, is entitled to liberal and realistic construction.").

[19] The United States cites INDOPCO Inc. v. Commissioner, 503 U.S. 79, 84 (1992), and paraphrases the Supreme Court's statement that deductions are "allowed only as there is a clear provision therefor." See Brief of United States at 20. But this rule does not assist the United States because the plain language of the statute here makes "clear provision" for treatment of the deficiency interest as an SLL, and the United States does not identify any ambiguity in the statutory language.

[20] This Court's recent decision in Dominion Resources, Inc. v. United States, 219 F.3d 359 (4th Cir. 2000), is instructive regarding the scope of the INDOPCO rule. Without referring to INDOPCO, this Court relied upon the plain language of section 1341, which provides relief from annual accounting, to allow a utility a favorable computation of a deduction for a refund to ratepayers. Id. at 362-71. By contrast, in denying the utility a deduction for environmental cleanup expenses preparatory to real estate development, this Court relied upon the INDOPCO rule that deductions should be strictly construed. Id. at 371-72.

[21] Accordingly, the plain language of section 172(f)(1)(B) entitles Taxpayer to 10-year carryback treatment.

B. NO REASON EXISTS TO LOOK BEYOND THE PLAIN TERMS OF THE

If a literal reading of a statute produces an outcome that is

[23] The Supreme Court likewise recently applied these same rules of construction in rejecting the government's invitation to narrow the unambiguous language of sections 108 (discharge of indebtedness income) and 1366 (subchapter S pass-through rules) of the Code. Notwithstanding assertions of a "double windfall" inuring to the taxpayers' benefit -- circumstances not present here -- the Court refused to inject judicial limitations into the plain language of the statute. Gitlitz, 121 S. Ct. at 709-10.

[24] The United States asserts that the district court's statutory analysis of section 172(f)(1)(B) was "mechanical" and excessively "literal" (Brief of United States at 23) and ignored the "context" of the statute as required by the rules of construction set forth in Brown & Williamson Tobacco Corp. v. Food & Drug Administration, 153 F.3d 155, 162 (4th Cir. 1998), aff'd, 129 S. Ct. 1291 (2000), and Robinson v. Shell Oil Co., 519 U.S. 337 (1997). But those cases are fully consistent with the district court's decision to adhere to the plain language of the statute.

[25] The United States simply ignores that in Brown & Williamson this Court repeated the primary rule that "the first step of statutory construction is determining the plain meaning of the statutory text" and that "the inquiry ends with the statutory language when the language is unambiguous and 'the statutory scheme is coherent and consistent.'" Brown & Williamson, 153 F.3d at 162 (quoting Robinson v. Shell Oil Co., 519 U.S. at 340).

[26] The United States also ignores the dramatic differences between the interpretive issues here and those in Brown & Williamson and Robinson. In Brown & Williamson, this Court labeled the FDA's reliance on the definitions of "drug" and "device" in the Food, Drug, and Cosmetic Act as "mechanical" because the FDA focused blindly on those definitions to the exclusion of other provisions of the Act and other explicit legislation regulating tobacco products, as well as eighty years of agency practice. 153 F.3d at 159-60, 163-64. Similarly, in Robinson, the Supreme Court interpreted the term "employee" as used in section 704(a) of Title VII (barring retaliation against an employee for availing himself of Title VII) to include former employees because the term was "necessarily ambiguous" when viewed in light of the different usage of the term in different sections of the statute. 519 U.S. at 343-44, 346.

[27] In both of these cases the textual context of the statute was essential to the correct interpretation of the provision at issue. Here, in contrast, there is nothing about the statutory context that is inconsistent with the plain language of section 172(f)(1)(B). It is unambiguous on its face, and the inclusion of federal deficiency interest deductions attributable to tax liabilities that arose more than three years prior to 1991 fits harmoniously within the context of the carryover relief provided by section 172.

[28] Section 172 provides remedies for mismatches between gross income and deductible expenses caused by the annual accounting concepts that are the foundation of the federal income tax system. Each year's tax liability is separately determined, based upon the income and deductions properly attributable to that year under the taxpayer's method of accounting. See I.R.C. sections 441, 446. If NOLs were not permitted to be carried to profitable years, expenses in excess of income in NOL years would be lost for lack of gross income to "absorb" them. The carryback and carryover rules of section 172, subject to certain limitations, mitigate this problem by generally allowing the NOLs of one taxable year to be applied against gross income of other years. I.R.C. section 172(a) & (c). In 1991, NOLs generally were limited to 3-year carrybacks and 15-year carryforwards. I.R.C. section 172(b)(1)(A). ⁶ Like other special provisions in section 172, sections 172(b)(1)(C) and 172(f) merely provide extended carryback rules for specified deductions referred to as SLLs. See, e.g., I.R.C. section 172(b)(1)(D) (providing extended 10-year carryback treatment for bad debt losses of commercial banks).

[29] In 1991, section 172(f)(1) classified three types of liabilities as SLLs: (1) product liability and related expense deductions; (2) deductions based upon liability under federal or state law, where the act (or failure to act) giving rise to the liability occurs at least three years prior to the deduction; and (3) deductions based upon liability for tort arising from a series of actions (or failures to act) over an extended period, a substantial portion of which occurred at least three years prior to the deduction. ⁷

[30] The plain language of section 172(f)(1)(B) furthers section 172's general goal of reducing annual accounting distortions and the more specialized goal of extending carryback relief for SLLs attributable to losses based on liabilities that predate the normal 3-year carryback period. If it wanted, Congress could have chosen to restrict qualifying federal or state law liabilities on the basis of the TYPE of liability or the REASON FOR the delay, but instead Congress determined that the only limitation would be based on the AMOUNT of delay between the deduction and the underlying act giving rise to the liability.

[31] Moreover, a plain reading of the statute advances the goal of the SLL provisions without opening the gates to a large loss of revenues because the circumstances under which taxpayers qualify for the provision are not open-ended. Only a limited number of corporations can rely on the SLL provisions because the statute requires all of the following circumstances to be met: (1) a federal income tax deficiency interest liability is discharged in a year; (2) by an accrual basis taxpayer; (3) which also has an NOL for the year that exceeds the interest deduction because its business is losing money; (4) the tax deficiency is attributable to returns for tax years that are more than three years old; and (5) the interest was paid before 1998, when Congress narrowed the definition of eligible SLLs. Taxpayers are not likely to intentionally delay the resolution of their tax liabilities in hopes that they will have a future loss year in which to discharge them.

C. EVEN IF IT WERE APPROPRIATE TO LOOK BEYOND THE STATUTE'S

[33] As the district court correctly concluded, even if one were to embark on this "inappropriate" examination of legislative history, the legislative history does not contain "clearly expressed intent contrary to the plain language" of the statute that could justify departing from that language. App. 39, 40 n.4.

1. THE "CONTEXT" IN WHICH SECTION 172(f)(l) ORIGINALLY WAS

[35] The United States is correct that Congress intended the economic performance rules in DEFRA to defer deductions beyond the point at which they otherwise would have been deductible under the historical "all events test." See Brief of United States at 14-15. That test, previously embodied in Treas. Reg. section 1.461-1(a)(2) (1984), permitted the deduction of an expense after both (1) the fact of liability was established, and (2) the amount of the liability was reasonably ascertainable. Any contest of a liability postponed the deduction, because the fact of liability could not be established until resolution of the contest. See Treas. Reg. sections 1.461- 1(a)(3)(ii) (1984), 1.461-2(b)(2) (1992). Uncertainty as to amount also prevented accrual. See Treas. Reg. section 1.461-1(a)(2) (1984). If these two requirements were met, a deduction was allowed notwithstanding that payment or performance might not occur until a future date. Congress was concerned that allowing the current accrual of deductions for amounts to be paid in the future could overstate the deduction by failing to take into account the time value of money. Therefore, Congress modified the rule to postpone deductions that otherwise satisfied the all events test until the taxpayer actually performed the services or made the payments giving rise to the deduction. See H.R. Rep. No. 98-432 ("DEFRA House Report") at 1254 (1984).

[36] DEFRA codified the all events test in section 461(h)(4) of the Code at the same time that it added the concept of economic performance in sections 461(h)(1) and (2). After DEFRA, deductions for accrual basis taxpayers could be postponed for three reasons under section 461(h): failure to reasonably ascertain the amount of the liability, failure to fix the fact of the liability, or failure to perform the service or pay the liability.

[37] There is no reason to believe that Congress, when it adopted the 3-year delay requirement in section 172(f)(1)(B) without further stated qualification, intended only one of these three possible causes of delay to qualify. Any one of the three causes of delay ought to be sufficient, provided the act causing the liability originates beyond the normal 3-year carryback allowed for NOLs at the time under section 172. The United States' assertion (Brief of United States at 25) that the accrual requirement of section 172(f)(1) supports an economic performance limitation on the statute ignores that application of the all events test, equally applicable to accrual basis taxpayers, provides two other potential causes of delay. The best evidence of congressional intent is in the particular words Congress uses (or chooses to omit) in crafting a statute. See Sigmon, 226 F.3d at 305. ⁸

[38] The United States' use of location and labeling within DEFRA section 91 cannot support a nontextual statutory modification, given the Code's instruction that "[n]o inference, implication, or presumption of legislative construction shall be drawn or made by reason of the location or grouping of any particular section or provision or portion of this title . . . ." I.R.C. section 7806(b). ⁹ Nor is the result changed by the general observations of Mr. Pearlman, a non-elected Treasury official, when describing the broad outline of a legislative proposal prior to any congressional action. Cf. Circuit City Stores, Inc. v. Adams, No. 99-1379, 532 U.S.___, slip op. at 12 (Mar. 21, 2001) ("Legislative history is problematic even when the attempt is to draw inferences from the intent of duly appointed committees of Congress. It becomes far more so when we consult sources still more steps removed from the full Congress . . . ."); Sigmon at 306 (citing Garcia v. United States, 469 U.S. 70, 76- 77 (1984) (preferring legislative history that reflects the collective understanding of a committee to the views of an individual legislator)). Although the United States may have preferred Congress to have enacted the statute with a textual restriction based on economic performance, Congress drafted a broader statute that is consistent with the context of section 172 and the historical background relied on by the United States.

2. THE SENTENCE IN THE DEFRA CONFERENCE REPORT DOES NOT

[40] With the exception of this sentence, the House Report, the Senate Report, the Conference Report, and the subsequent Joint Committee "Blue Book" all describe the addition of the 10-year loss carryback rule for federal and state law liabilities merely by reciting the explicit elements of the statute. ¹⁰ The United States acknowledged in its brief below that this legislative history was "somewhat sparse and itself not entirely clear," App. 40 n.4, and the IRS has characterized the legislative history as "scant." See FSA 199936002 (May 20, 1999).

[41] Moreover, it is incorrect to conclude that the Conference Report reference to "certain liabilities deferred under these provisions" refers only to the provisions adding the economic performance requirements in sections 461(h)(1) and (2). It is equally or even more plausible that it refers to the "certain liabilities" listed in the statute when they are delayed under any of the accrual provisions of DEFRA section 91. As noted above, the historical all events test codified in section 461(h)(4) by DEFRA section 91(d) can defer deductions for two reasons: (1) the liability may not yet have become fixed, as in a case where it is contested, or (2) the amount of the liability may not be ascertainable with reasonable certainty. The economic performance rules codified in sections 461(h)(1) and (2) add a third potential cause of delay. Thus, the phrase "deferred under these provisions" should be read to mean deferred by the provisions of the all events test or the economic performance rules, all of which were included in the "provisions" of section 91 of DEFRA. If Congress had the intention imputed to it by the United States, section 172(f)(1)(B) would have been conditioned on the all events test being satisfied more than three years before the deduction that resulted from satisfying the economic performance requirement. Similarly, it is perfectly logical to interpret the phrase "certain liabilities" to refer to those specific liabilities identified in section 172(f)(1)(B) -- that is, federal and state law liabilities and certain tort liabilities meeting the appropriate 3- year limitations specified in the statute.

[42] Thus, the Conference Report sentence is fully consistent with the plain meaning of section 172(f)(1)(B), which is that federal and state law liabilities of an accrual basis taxpayer are SLLs if deduction of the liability has been delayed by three years, regardless of whether the delay is due to (1) the inability to reasonably ascertain the amount of the liability; (2) the absence of a fixed liability, due to contest or otherwise; or (3) a delay between the date the liability is fixed and the amount ascertained and the date it is satisfied by payment or performance of services. Rather than select between or among the various available reasons for delay, Congress adopted statutory language that ignored the reason for the delay and relied instead upon an unrestricted 3-year delay for eligibility for the special 10-year rule.

[43] Taxpayer's interpretation is the most reasonable interpretation of this language, given that it leaves the plain meaning of the statute intact. See NLRB v. Plasterers' Local Union No. 79, 404 U.S. 116, 129 n.24 (1971) (citing United States v. Dickerson, 310 U.S. 554, 562 (1940), and noting that ambiguous legislative materials should not be permitted to control the plain meaning of words). A single sentence, particularly one that is at best ambiguous, cannot be the basis for rewriting an unambiguous statute. The Supreme Court has made this point forcefully:

We are not aware of any case . . . in which we have given

3. THE UNITED STATES' RESTRICTED READING WOULD LEAD TO

[45] Assuming all three taxpayers otherwise meet the statutory criteria for SLL treatment, the United States' theory would produce conflicting and irrational results, notwithstanding that the liabilities of the three taxpayers arose from the same violations and payment was delayed in all three cases. Under the United States' theory, Taxpayer 1 would have a qualified SLL because its deduction was delayed more than three years (from 1986 to 1991) by the economic performance rules of section 461(h). By contrast, Taxpayer 2's deduction would not qualify as an SLL because it was delayed by a contest rather than economic performance. The all events test would not be satisfied until 1991. But Taxpayer 3's deduction might qualify because a portion of the delay, between the December 1991 settlement and the deduction at the time of payment in 1992, would be attributable to the economic performance rules.

[46] The foregoing are relatively simple examples. The potential complexities of the United States' interpretation are much more significant. What if the liability of any one of these three taxpayers could not be ascertained with reasonable certainty for any period before a contest began or a deferred payment was agreed? What if an agreed payment was made on the installment basis over more than three years? It is inconceivable that Congress intended, without saying so, such disparate treatment for similarly situated taxpayers. Instead of involving itself in these complex distinctions, Congress adopted a simple, flat rule -- there must be at least three years between the event giving rise to the liability and the deduction that contributes to an NOL for the year. The nature of the delay and the reasons therefor are irrelevant under the statute.

[47] Accordingly, this Court should decline the United States' invitation to redraft section 172(f)(1)(B). The plain language of that provision accomplishes the relief objectives of section 172 in a reasonable manner, and the text is unambiguous. The role of the courts is to "interpret the statutes as written, not as [they] may wish for them to be written." Sigmon, 226 F.3d at 308.

D. THE DOCTRINE OF EJUSDEM GENERIS DOES NOT EXCLUDE FEDERAL

[49] First, the district court correctly recognized that the doctrine of ejusdem generis is not applicable to statutes structured like section 172(f), where there are distinct, independent, and specific statutory limitations: "In the usual instance, the doctrine of ejusdem generis applies where a 'catch-all' term precedes, or more often follows, an enumeration of specific terms in order to expand the list without identifying every situation covered by the statute." App. 36 (citing Brogan v. United States, 522 U.S. 398, 403 n.2 (1998)); see also Circuit City, slip. op. at 6 (finding the doctrine applicable because the words "'any other class of workers engaged in . . . commerce' constitute a residual phrase, following, in the same sentence, explicit reference to 'seamen' and 'railroad employees'").

[50] Thus, courts have applied the doctrine to the general phrase "separate apparatus intended for the recreation of children" where it was followed by the specific examples of "sliding boards, swingsets, and teeterboards," United States v. Parker, 30 F.3d 542, 552 (4th Cir. 1994); to the phrase "wages, salary, and other income," Woods v. Simpson, 46 F.3d 21, 23-24 (6th Cir. 1995); to the phrase "life, sick, accident, or other benefits," Canton Police Benevolent Ass'n v. United States, 844 F.2d 1231, 1236 (6th Cir. 1988); and to the phrase "any plate, stone, or other thing," United States v. Dixon, 446 F. Supp. 236, 239 (D. Md. 1970).

[51] By contrast, the statutory definition of SLLs lists, in independent subsections, three equally specific categories of liability: (1) product liabilities and attendant expenses, (2) federal and state law liabilities meeting the 3-year rule, and (3) tort liabilities meeting a 3-year rule. Each is a specific, independent, and unambiguous category that in no way is defined by the existence of the other two categories. Indeed, as discussed supra at 18 n.7, the three provisions were enacted separately in 1978 and 1984 and were only combined and labeled as SLLs in 1990. In any event, different rules govern the availability of SLL treatment for each category.

[52] As the district court observed, category (2) above does not function as a generalized catch-all, as it might have if Congress had drafted the SLL definition as encompassing "product liabilities, tort liabilities meeting the 3-year rule, and other liabilities arising out of federal or state law." App. 37-38. Furthermore, each of these categories is facially unambiguous. Even assuming that Congress was focusing on liabilities characterized by inherent delay, this Court should not limit statutory language that casts a broader net. As the Supreme Court recognized in Brogan v. United States, "it is not, and cannot be, our practice to restrict the unqualified language of a statute to the particular evil that Congress was trying to remedy -- even assuming that it is possible to identify that evil from something other than the text of the statute itself." 522 U.S. 398, 403 (1998); see also United States v. Gilliland, 312 U.S. 86, 93 (1941) (rejecting defendant's ejusdem generis argument and recognizing that the reach of a statute often exceeds the precise evil to be eliminated).

[53] Second, even if there were some basis for reading an inherent delay requirement into the statute, the United States fails to rebut the district court's determination that federal deficiency interest liabilities satisfy an inherent delay test. App. 38 n.3. There is ample evidence that corporate taxpayers, particularly those that are part of the Coordinated Examination Program (CEP) like the Taxpayer, generally experience significant delays between their return filings and the commencement of audits, as well as significant delays during completion of the audit, before any disagreement is identified, let alone resolved. A 1994 General Accounting Office report that studied the corporate federal tax audit process found that "[t]he audit team generally examines two or three annual tax returns in a single audit cycle; [and] each audit cycle takes an average of 2 to 3 years to complete. Although the time lag varies, teams generally begin auditing CEP returns 5 to 6 years after they are filed." Tax Administration: Compliance Measures And Audits Of large Corporations Need Improvement, GAO/GGD-94-70, at 18 (Sept. 1, 1994) ("GAO Report"). Thus, for large corporate taxpayers there is an average delay of seven to nine years between the filing of a return and the completion of an audit, which is the first point at which a dispute may be identified.

[54] The amount of delay in this case is illustrative of the general situation. Taxpayer filed its returns for the 1977, 1978, and 1979 fiscal years in September 1978, September 1979, and September 1980, respectively. App. 21 at paragraph 11; App. 26 at paragraph 11. The audit of those returns did not commence until August 1981, and it was not until June 1985 that the IRS concluded the audit and proposed tax deficiency adjustments on a wide range of issues for those years. App. 21 at paragraph 12; App. 26 at paragraph 12. Thus, five to seven years elapsed between the original return filings and the IRS's identification of the issues it intended to dispute with the Taxpayer. The compromise resolution of that dispute lasted another six years. App. 21 at paragraph 12; App. 26 at paragraph 12.

[55] Although the United States would like to view the period of a taxpayer's contest as a self-induced, non-inherent delay, it is clear that the complexity of the Internal Revenue Code and the difficulty of its interpretation lead to bona fide disputes that cannot reasonably be characterized as self-induced. The GAO Report estimates that "CEP taxpayers protest 80 to 90 percent" of the taxes recommended on audit. See GAO Report at 19. This is because "[b]oth the IRS and taxpayers consider the corporate tax code complex and ambiguous, causing legitimate differences in opinion over how the law should be interpreted." Id. at 64; see also Farley P. Katz, The Infernal Revenue Code, 50 Tax Law. 617 (1997) (compiling a broad range of quotations relating to the complexity of specific Code provisions and the Code generally). Thus, "it is reasonable to assume that CEP [audit] teams are likely to recommend additional taxes and that CEP corporations are likely to challenge them." GAO Report at 37.

[56] Moreover, the administrative delays inherent in the federal income tax audit process are no different from the administrative delays inherent in the processing of product liability, tort, or workers' compensation claims. See App. 38 n.3. Deficiency interest liabilities, like product liability, tort claims, and workers' compensation claims, are often delayed by contests based upon bona fide disagreements between the parties.

II. TAXPAYER'S ENTIRE 1991 TAX DEFICIENCY INTEREST ACCRUAL IS A

[58] The United States now argues that section 6601(a) must be "taken together" with section 6622, which provides the method for computing interest. It asserts that daily compounding of interest under section 6622 creates each day a distinct "failure to act" within the meaning of section 172(f)(1)(B), making interest accrued during 1988-1991 ineligible for SLL treatment.

[59] The United States' position, however, is refuted by the parties' stipulations that Taxpayer's deficiency interest liability "was imposed under section 6601 of the Internal Revenue Code," App. 21 at paragraph 13, and the district court's finding that Taxpayer's section 6601(a) failure to pay tax occurred on the filing of its 1977, 1978, and 1979 tax returns in 1978, 1979, and 1980, respectively. App. 36 & n.2. ¹¹ The parties' stipulation does not mention section 6622.

[60] The United States' argument also ignores the plain language of the Code sections that it asserts must be taken together by confusing the ACT that gives rise to the liability (failure to pay tax on the original return) with the MANNER in which that liability is computed (daily compounding from the original return until paid). The origin of the liability is plainly in section 6601(a), which states that if tax is not paid, interest "shall be paid." In contrast, section 6622 specifically applies its computational methodology only to liabilities that are imposed elsewhere in the tax title: "In COMPUTING THE AMOUNT of any interest REQUIRED TO BE PAID UNDER THIS TITLE [including interest imposed under 6601(a)] . . . such interest . . . shall be compounded daily" (emphasis added). Section 6622, by its terms, does not impose any independent liability.

[61] Under these circumstances, no support exists for the United States' argument that, because interest can be terminated by payment of the underlying tax liability, continuing nonpayment of the tax constitutes a daily failure to act. In this case, nonpayment only continued until all disputes regarding the amount of tax for the years in issue were resolved in 1991. Just because damages can be mitigated, it does not follow that the failure to do so constitutes an independent act giving rise to the underlying liability. In the case of environmental remediation, for example, the amount of the ultimate liability may increase with each passing day following the federal or state law imposition of the liability (for example, in the case of contamination that becomes more costly to remediate over time). Similarly, a defendant appealing a product liability or federal law liability judgment will pay interest on that judgment pending the outcome of the appeal. However, the entire amount of the judgment plus interest will qualify for SLL treatment if the taxpayer has an NOL in the year of payment; failure to pay the judgment pending appeal alters only the amount of damages arising out of the injury at issue. The "act" in both cases is the event triggering the liability, notwithstanding that the amount of that liability may be contingent on the taxpayer's subsequent actions.

[62] It is also clear that section 172(f)(1)(B) by its terms avoids the entanglements involved in the proration exercise now urged by the United States. All of the liabilities in section 172(f)(1)(B) have the potential to increase in size between the time of the original act and the final discharge of the liability. The whole purpose of the provision is to give relief for old liabilities that accumulate over time but are consolidated into a single year for accrual purposes. Product liabilities, workers' compensation liabilities, and tort liabilities all increase with the passage of time due to additional expenses and in some cases due to interest on adjudicated judgments that are appealed before being finalized. There is not a shred of evidence that Congress intended to give SLL status only to the expenses, costs, and damages incurred more than three years prior to satisfaction of the liability and to disqualify the costs and expenses accumulated during the final three years prior to satisfaction. Deficiency interest should not be treated any differently.

[63] It is noteworthy that in the case of continuing torts, where SLL treatment applies even if a substantial portion of the acts giving rise to the liability occurs at least three years before their satisfaction and a portion occurs within the 3-year period, there is no restriction on SLL treatment of the entire final liability. Like the increase for additional expenses or disability in the amount of a workers' compensation liability between the time of injury and the final payment, there is no basis for proration in the case of deficiency interest.

[64] Finally, the United States incorrectly analogizes the district court's finding that underpayment of taxes gave rise to Taxpayer's deficiency interest to the "chain of causes" argument that the Ninth Circuit rejected in Sealy. The two cases are completely different. In Sealy, the Ninth Circuit determined that the acts giving rise to the taxpayer's liabilities to its lawyers and accountants were the acts of contracting for their services. It rejected the taxpayer's causation argument that the act giving rise to the liabilities was the original organization of the company, which then subjected it to federal and state regulatory statutes, which in turn required it to hire advisors in order to comply. The relevant acts, the court explained, were not simply the first events in a "chain of causes" that eventually led to the liability to the lawyers and accountants, but rather the acts of engaging the lawyers and accountants. Sealy, 171 F.3d at 657.

[65] Here, Taxpayer does not rely on a "chain of causes" to meet the 3-year requirement. Rather, Taxpayer relies upon the understatement of tax on its original returns as the act -- an act specifically referred to by section 6601(a), which directly imposes the liability. Once Taxpayer failed to pay the tax with its returns, it was subject to liability for the underpayment and deficiency interest when the tax dispute was finally resolved. The situation is not comparable to the situation in Sealy. In this context, section 6622 is merely computational.

CONCLUSION

[66] The Judgment of the district court should be affirmed.

REQUEST FOR ORAL ARGUMENT

[67] Counsel for Taxpayer respectfully request oral argument on the issues in the present appeal.

Respectfully submitted,

[68] I hereby certify that, on this 26th day of March, 2001, the foregoing brief was served on counsel for the United States by first class mail, postage prepaid, to:

Edward Perelmuter

² Section 172 allows NOLs to be carried back and then carried forward as deductions for use in profitable tax years. In 1991, the general rule under section 172(b)(1)(A) was limited to a 3-year carryback and a 15-year carryforward. Sections 172(b)(1)(C) and 172(f) extended the carryback to 10 years for SLLs.

³ The court also held that Taxpayer's liability for workers' compensation payments qualified under section 172(f)(1)(B) as arising out of various state laws. App. 35. The United States has not challenged this holding on appeal.

⁴ See Tech. Adv. Mem. 9840003 (May 29, 1998); FSA 199924071 (Mar. 4, 1999); PLR 199922046 (Mar. 5, 1999); PLR 199927012 (Apr. 6, 1999); FSA 199936002 (May 20, 1999); Tech. Adv. Mem. 199941006 (June 17, 1999); FSA 199941011 (July 1, 1999); Tech. Adv. Mem. 199944004 (July 15, 1999); FSA 199945014 (August 9, 1999); Tech. Adv. Mem. 200043018 (July 14, 2000).

⁵ Although not precedential authority, IRS technical advice memoranda and private letter rulings "do reveal the interpretation put upon the statute by the agency charged with the responsibility of administering the revenue laws." Hanover Bank v. Commissioner, 369 U.S. 672, 686 (1962); see also Rowan Cos., Inc. v. United States, 452 U.S. 247, 261 n. 17 (1981) (private letter rulings are "evidence" of IRS practice).

⁶ The lengths of the general carryback and carryforward terms recently were amended to limit the carryback period to 20 years. Pub. L. No. 105-34, section 1082(a)(1) & (2), 111 Stat. 788 (1997).

⁷ Extended carrybacks for product liability amounts and related expenses originated in 1978 as sections 172(b)(1)(H) and 172(i). Pub. L. No. 95-600, section 371(a) & (b), 92 Stat. 2763, 2859 (1978). The federal and state law liabilities and continuing tort provisions were added in 1984 by section 91(d) of the Deficit Reduction Act ("DEFRA"). Pub. L. No. 98-369, 98 Stat. 494 (1984). A 1990 technical corrections bill combined all of these provisions under section 172(f) and relabeled them collectively as specified liability losses. Pub. L. No. 101-508, section 11811, 104 Stat. 1388- 400, 1388-532 (1990). The 1998 amendments deleted torts from the statute and limited federal and state law liabilities to five specific types of liabilities. Compare I.R.C. section 172(f) (1991) with I.R.C. section 172(f) (2000), set forth in the Addendum.

⁸ Indeed, even assuming a contextual ambiguity in the plain language, "courts may choose only between reasonable interpretations of a text." Whitman v. American Trucking Ass'ns, Inc., 69 U.S.L.W. 4136 (U.S. Feb. 27, 2001) (Nos. 99-1257, 99-1426); see also Shannon v. United States, 512 U.S. 573, 583 (1994). No reasonable reading of the plain text would limit the section 172(f)(1)(B) carryback to deductions deferred under section 461(h)(1).

⁹ In any event, the 1990 consolidation of the provisions relabeled the provisions collectively as "specified liability losses."

¹⁰ See DEFRA House Report at 1256; S. Rep. No. 98-169 ("DEFRA Senate Report"), vol. 1, at 269 (1984); DEFRA Conference Report at 872-73; Staff of the Jt. Comm. on Taxation, 98th Congress, General Explanation of the Revenue Provisions of the Deficit Reduction Act of 1984 (Jt. Comm. Print) ("DEFRA Blue Book").

¹¹ It is of no moment that the fact and amount of liability may not have been fixed until 1991. The acts giving rise to the liability are the original underpayments. Thus, the IRS has noted that "if a taxpayer contests a liability, resolution of the contest against the taxpayer does not constitute the final act or failure to act giving rise to the taxpayer's liability." Tech. Adv. Mem. 200043018 at n.9. Such resolution "does not create any liability that did not already exist, . . . it merely confirms its existence." Id.