Telecom USA Inc v. United States

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued April 6, 1999 Decided October 15, 1999

No. 98-5361

Telecom*USA, Inc., and subsidiaries,

Appellants

v.

United States of America,

Appellee

Consolidated with

98-5362

Appeals from the United States District Court

for the District of Columbia

(No. 96cv00258)

(No. 96cv00259)

Albert H. Turkus argued the cause for appellants. With

him on the briefs were Pamela F. Olson and Julia M.

Kazaks.

Joan I. Oppenheimer, Attorney, U.S. Department of Jus-

tice, argued the cause for appellee. With her on the brief

were Loretta C. Argrett, Assistant Attorney General, Wilma

A. Lewis, U.S. Attorney, and David I. Pincus, Attorney, U.S.

Department of Justice.

Before: Wald, Randolph, and Garland, Circuit Judges.

Opinion for the Court filed by Circuit Judge Garland.

Garland, Circuit Judge: Telecom*USA, Inc. and its sub-

sidiaries, and MCI Communications Corporation and its sub-

sidiaries, (collectively, "Telecom"), appeal the district court's

ruling that Telecom is not entitled to the income tax refund it

seeks. The case concerns transition rules enacted by Con-

gress in 1986 to cushion the impact of the repeal of the

investment tax credit (ITC). Telecom's principal contention

is that its basis in depreciable property should be reduced by

the amount of ITC it received in the year to which it carried

its ITC forward. Following the lead of the Federal Circuit

and the Court of Federal Claims, the district court rejected

this argument and held that Telecom must instead reduce its

basis by the larger amount of ITC first available to it in the

year in which it placed the property in service. We agree

with the district court and the other courts that have consid-

ered this issue, and affirm.

I

To put Telecom's claims in context, we begin with a brief

history of the depreciation deduction and the ITC. The

Internal Revenue Code has long provided for depreciation

deductions through which a property owner can deduct the

cost of its property over the property's useful life. See 26

U.S.C. s 167(a); 26 U.S.C. s 23(l ) (1934); United States v.

Ludey, 274 U.S. 295, 297-300 (1927). Under the straight line

method of depreciation, for example, an asset with an initial

cost of $1,000,000, a salvage value of $50,000, and a useful life

of 10 years would generate annual deductions of $95,000. See

26 U.S.C. s 167(b)(1) (1988); 26 C.F.R. s 1.167(b)-1. Vari-

ous other methods of depreciation also have been permitted.

See, e.g., 26 U.S.C. s 167(b)(2) (1988) (double declining bal-

ance method); id. s 167(b)(3) (sum of the years-digits meth-

od); see 26 C.F.R. ss 1.167(b)-2, 1.167(b)-3.

In the Economic Recovery Tax Act of 1981 (ERTA), Con-

gress adopted a new set of depreciation rules called the

Accelerated Cost Recovery System (ACRS). See Pub. L. No.

97-34, sec. 201(a), s 168, 95 Stat. 172, 203 (codified as amend-

ed at 26 U.S.C. s 168). Intended to stimulate economic

expansion, ACRS permits recovery of capital costs for most

tangible depreciable property by using accelerated methods

over predetermined periods that are generally shorter than

the useful life of the asset. See 26 U.S.C. s 168(e)(1); S. Rep.

No. 97-144, at 48 (1981). ACRS also eliminates the salvage

value limitation, hence allowing the entire cost of the property

to be depreciated. See ERTA, sec. 201, s 168(f)(9), 95 Stat.

at 216.

Although not as old as the depreciation deduction, the

investment tax credit dates back to the Kennedy Administra-

tion and was also designed to stimulate the economy by

encouraging investment. See Revenue Act of 1962, Pub. L.

No. 87-834, s 2, 76 Stat. 960, 962-73; H.R. Conf. Rep. No.

87-2508, at 14 (1962). The most recent incarnation of the

ITC, prior to amendment and repeal in 1986, gave taxpayers

a one-time credit of 10% of the cost of the property. See 26

U.S.C. s 46 (1982). The credit was a dollar-for-dollar offset

against a taxpayer's tax liability, see id. s 39(a), but could not

be used if the taxpayer had insufficient tax liability for the

year, see id. s 46(a)(3). The unused credits could, however,

be carried back and carried forward a specified number of

years to reduce the taxpayer's liabilities in those years. See

id. s 46(b).

The combined use of ITCs and depreciation deductions

gave taxpayers generous benefits. For an asset costing

$1,000,000, the taxpayer could both claim an ITC of $100,000

(10% of the cost) and deduct $1,000,000 worth of depreciation

(the full cost of the asset). In 1982, Congress concluded that

this combination was distorting the allocation of capital re-

sources and determined to reduce the level of benefits. See

S. Rep. No. 97-494, at 122 (1982). A new provision, enacted

as part of the Tax Equity and Fiscal Responsibility Act of

1982 (TEFRA), provided that an asset's "basis"--the value of

the property used to determine the total available deprecia-

tion deductions--would be reduced by 50% of the amount of

the ITC. See Pub. L. No. 97-248, s 205(a), 96 Stat. 324, 427

(codified at 26 U.S.C. s 48(q)(1) (1982)). Hence, although an

asset originally costing $1,000,000 would continue to yield an

ITC of $100,000, it would generate a total of only $950,000

worth of depreciation ($1,000,000 minus 50% of the $100,000

credit).

In 1986, Congress concluded that the ITC was still distort-

ing investment activity by channeling too much investment

into tax-favored sectors. See S. Rep. No. 99-313, at 96 (1986).

Thus, in the Tax Reform Act of 1986, Congress repealed the

ITC for property purchased in 1986 and thereafter. See Pub.

L. No. 99-514, s 211, 100 Stat. 2085, 2166-70 (codified as

amended at 26 U.S.C. s 49(a) (1988)).1 It made an exception,

however, for "transition property"--property purchased prior

to 1986 but placed in service in 1986 or later. For such

property, the ITC was phased out over a number of years.

For calendar year taxpayers, transition property placed in

service in 1986 received the full 10% credit; property placed

in service in 1987 received a reduced credit of 8.25% of cost;

and property placed in service in 1988 or later received a

credit of only 6.5%. See 26 U.S.C. s 46; id. s 49(b), (c)(1),

(c)(3)(A), (c)(5)(A) (1988).2 The phased reduction is known

colloquially as the ITC "haircut."

The 1986 amendments included two other changes of signif-

icance for this case. First, the haircut was also applied to

credits carried forward from the year in which they were first

available to the taxpayer. Credits carried forward for use in

1987 were reduced to 8.25%; those carried forward to 1988

__________

1 The Tax Reform Act repealed the "regular" investment tax

credit at issue here. See id. s 211, 100 Stat. at 2166; 26 U.S.C.

s 49(a) (1988). Other investment credits survive. See 26 U.S.C.

s 46.

2 Telecom is a calendar year taxpayer. MCI Communications

Corp. is a fiscal year taxpayer as to which slightly different

percentages apply. See id. s 49(c)(3).

and subsequent years were reduced to 6.5%. See id.

s 49(c)(2), (c)(3)(B), (c)(5)(A). Second, the amount of the

basis adjustment for purposes of determining depreciation

was changed from 50% to 100% of the amount of the ITC.

See id. s 49(d)(1).

The following year, the Internal Revenue Service (IRS, or

"the Service") issued a revenue ruling to guide taxpayers with

respect to the operation of the 1986 amendments. See Rev.

Rul. 87-113, 1987-2 C.B. 33. Example 1 of that ruling

considered the case of a $1,000,000 machine purchased in 1985

and placed in service in 1986, the final 10% year. The ruling

stated that under those circumstances, the taxpayer was

entitled to an ITC of $100,000 (10% of the $1,000,000 cost)

and had to reduce the machine's depreciable basis by 100% of

that amount, (i.e., to $900,000).

But what if the taxpayer were unable to use the credit in

1986, and could not use it until 1988? Did the basis for

depreciation deductions have to be reduced by the 10% credit

available in 1986, the year the property was placed in service,

or by the 6.5% credit available in 1988, the year to which the

taxpayer carried the credit forward? Example 3 of Revenue

Ruling 87-113 addressed that issue, and concluded that the

basis had to be reduced by the amount of the credit available

in the year the property was placed in service. In the

example, the credit available to the company when the prop-

erty was placed in service in 1986 was $100,000. Accordingly,

following the 100% basis reduction rule, the basis had to be

reduced to $900,000. This, the IRS concluded, was the case

even though the amount of the credit the company received

was only $65,000 when it was eventually used in 1988. The

company, the IRS said, was "not allowed to increase its basis

in the property to reflect the reduction in the investment

credit carryforward." Id. at 35.

II

As Telecom acknowledges, its case presents the same situa-

tion as that addressed in Example 3 of Revenue Ruling

87-113, and the IRS has treated it in precisely the same way.

See Telecom Br. at 18 n.12. Telecom owned transition prop-

erties placed in service in calendar years 1986 and 1987. The

ITC percentages available for those properties in those years

were 10% and 8.25%, respectively. When calculating its

depreciation deductions in the years the properties were

placed in service, Telecom reduced its bases by amounts that

reflected those percentages. Telecom was unable to use its

ITCs immediately, however, because it had insufficient tax

liabilities in those years; it therefore carried the credits

forward to 1989 and thereafter. Under the ITC haircut, the

percentage received by Telecom in those years was only

6.5%.3

Telecom filed claims for refunds with the IRS, seeking the

additional depreciation deductions it could have taken had it

calculated its properties' bases using the ITCs it actually

received. The IRS denied the claims, and Telecom filed

refund actions in the district court. Telecom advanced one

principal theory and two alternatives in support of its posi-

tion. Its principal contention was that several interconnected

provisions of the Internal Revenue Code permitted it to

amend its earlier returns by adjusting its properties' bases

upward to reflect the amounts of ITC it actually used. Alter-

natively, Telecom argued that 26 U.S.C. s 168, as construed

in a proposed treasury regulation, entitled it to adjust its

bases in the carryforward years to reflect the effective

change in the cost of its properties brought about by the

haircut applied when its ITCs were carried forward. As a

second alternative, Telecom contended that 26 U.S.C. s 196,

__________

3 The "Telecom" reference in this paragraph is only to

Telecom*USA, Inc. and its subsidiaries. As noted supra note 2,

MCI Communications Corporation is a fiscal year taxpayer. It

owns transition properties placed in service in fiscal years 1986,

1987, and 1988. The ITC percentages available for those properties

were 10%, 10%, and 7.375%, respectively. Like Telecom, MCI

carried its ITCs forward to 1989 and subsequent years. As the

principles involved are the same, we confine our textual discussion

to the calendar year situation faced by Telecom.

which provides deductions for portions of tax credits that a

taxpayer has not been allowed to use, entitled it to deductions

for the difference between the amounts of ITC allowable in

the initial and carryforward years.

The district court rejected Telecom's arguments on cross-

motions for summary judgment. See MCI Communications

Corp. v. United States, 26 F. Supp. 2d 6 (D.D.C. 1998).

Relying both on Revenue Ruling 87-113 and on the opinion of

the U.S. Court of Appeals for the Federal Circuit in B.F.

Goodrich Co. v. United States, 94 F.3d 1545 (Fed. Cir. 1996),

which denied a taxpayer's virtually identical claim, the court

rejected Telecom's argument that it should be permitted to

adjust its original basis. The court also rebuffed Telecom's

alternative efforts to utilize sections 168 and 196, holding

those sections inapplicable to the circumstances at issue here.

III

On appeal, Telecom presses all of the arguments it raised

below. There are no factual disputes, and we review the

district court's grant of summary judgment de novo. See Tao

v. Freeh, 27 F.3d 635, 638 (D.C. Cir. 1994). To decide this

case, we must analyze the interplay of three quite technical

statutory provisions. Fortunately, we are not left wholly to

our own devices, but rather are assisted by two important

interpretive guides. Equally fortunate, the two point in the

same direction.

The first guide instructs that a taxpayer who seeks a

deduction bears the burden of demonstrating a clear entitle-

ment. See New Colonial Ice Co. v. Helvering, 292 U.S. 435,

440 (1934) ("[O]nly as there is clear provision therefor can any

particular deduction be allowed."); Lenkin v. District of

Columbia, 461 F.2d 1215, 1225 (D.C. Cir. 1972) (applying New

Colonial Ice rule to depreciation deductions); cf. United

States v. Centennial Sav. Bank FSB, 499 U.S. 573, 583-84

(1991) (citing "rule that tax-exemption and -deferral provi-

sions are to be construed narrowly"); United States v. Wells

Fargo Bank, 485 U.S. 351, 354-55 (1988) ("[E]xemptions from

taxation are not to be implied; they must be unambiguously

proved."). At oral argument, Telecom agreed that it bears

this burden, but insisted that its entitlement to deductions is

clear.

The second interpretive guide requires us to accord at least

some deference to the IRS' revenue ruling. Although a

revenue ruling does not have the force and effect of Treasury

Department Regulations, see 26 C.F.R. s 601.601(d)(2)(v)(d),

it does constitute "an official interpretation by the Service,"

id. s 601.601(d)(2)(i)(a). Accordingly, the Supreme Court

and virtually all of the Circuits have indicated that revenue

rulings are entitled to some degree of deference.4

In Davis v. United States, 495 U.S. 472, 484 (1990), the

Court indicated that revenue rulings are entitled to "consider-

able weight where they involve the contemporaneous con-

struction of a statute and where they have been in long use"5

--two conditions that are roughly satisfied here.6 Davis did

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4 See generally Estate of McLendon v. Commissioner, 135 F.3d

1017, 1023 (5th Cir. 1998) (noting that "virtually every circuit

recognizes some form of deference," and that only the Tax Court

takes the "position that revenue rulings are nothing more than the

legal contentions of a frequent litigant") (citing Pasqualini v.

Commissioner, 103 T.C. 1, 8 (1994)); John F. Coverdale, Court

Review of Tax Regulations and Revenue Rulings in the Chevron

Era, 64 Geo. Wash. L. Rev. 35, 81-84 (1995).

5 Subsequently, in United States v. Thompson/Center Arms Co.,

the Court spoke neutrally to the question of whether deference was

due, stating that "even if they were entitled to deference," the

revenue rulings proffered in that case did not apply to the questions

there at issue. 504 U.S. 505, 518 n.9 (1992). In Commissioner v.

Schleier, the Court noted that revenue rulings "may not be used to

overturn the plain language of a statute," 515 U.S. 323, 336 n.8

(1995), a point consistent with all of the varieties of deference cited

infra notes 8, 9, & 10.

6 Revenue Ruling 87-113 was issued the year following the 1986

amendments, and has constituted the Service's consistent position

for the 12 years since it was issued.

not, however, address how this standard compared to the

relatively high level of deference applicable to agency inter-

pretations of ambiguous statutes under Chevron U.S.A. Inc.

v. Natural Resources Defense Council, Inc., 467 U.S. 837

(1984).7 The Courts of Appeals have accorded revenue rul-

ings varying degrees of deference, ranging from the level

utilized in Chevron,8 to "some weight,"9 to variations in be-

tween.10

This court has not had the occasion to decide the precise

degree of deference due to revenue rulings, although we have

__________

7 Chevron held that if a "statute is silent or ambiguous with

respect to the specific issue, the question for the court is whether

the agency's answer is based on a permissible construction of the

statute." Id. at 843.

8 See Johnson City Med. Ctr. v. United States, 999 F.2d 973, 975-

76 (6th Cir. 1993) (adopting Chevron-like deference).

9 See, e.g., First Chicago NBD Corp. v. Commissioner, 135 F.3d

457, 458-59 (7th Cir. 1998) (holding that revenue rulings deserve

"some weight" and are "entitled to respectful consideration," but

"not to the deference that the Chevron doctrine requires in its

domain") (citations omitted); Farmar v. United States, 689 F.2d

1017, 1024 n.12 (Ct. Cl. 1982) (stating that revenue rulings "are

entitled to some consideration and carry some weight," and noting

"Commissioner's authority to choose between reasonable interpreta-

tions").

10 See, e.g., Gillespie v. United States, 23 F.3d 36, 39 (2d Cir.

1994) ("Revenue rulings issued by the IRS are entitled to great

deference, and have been said to have the force of legal precedent

unless unreasonable or inconsistent with the provisions of the

Internal Revenue Code.") (internal quotation marks and citations

omitted); Gillis v. Hoechst Celanese Corp., 4 F.3d 1137, 1145 (3d

Cir. 1993) ("We give weight to IRS revenue rulings and do not

disregard them unless they conflict with the statute they purport to

interpret or its legislative history, or if they are otherwise unrea-

sonable.") (internal quotation marks and citations omitted); Foil v

Commissioner, 920 F.2d 1196, 1201 (5th Cir. 1990) (noting that

revenue rulings are entitled to "respectful consideration," but will

be disregarded if in conflict with the statute or its legislative

history, or if otherwise unreasonable); United States v. Howard,

referred to such rulings as "the second most important

agency pronouncements that interpret the Code" and have

looked to them when neither the statute nor Treasury regula-

tions provided clear guidance. Stichting Pensioenfonds Voor

de Gezondheid v. United States, 129 F.3d 195, 198 (D.C. Cir.

1997). We need not announce a precise calibration here,

either. Telecom does not dispute that some deference would

be due Revenue Ruling 87-113 if it were consistent with the

statute's language and legislative history, although it argues

that even then the degree of deference should be minimal.11

But utilizing even a minimal level of deference--or imposing

only a minimal burden of clarity under the first interpretive

guide discussed above--is sufficient to decide this case. As

we discuss below, the IRS' construction of the statute is more

than consistent with the statutory language and legislative

history, and Telecom has been unable to point to anything

that, with any measure of clarity, entitles it to the deductions

it seeks.

IV

In this Part, we consider Telecom's first claim: that under

the 1986 amendments, the basis of transition property should

be reduced by the actual amount of ITC ultimately used by

the taxpayer, rather than by the amount available in the year

in which the asset is placed in service.

__________

855 F.2d 832, 836 (8th Cir. 1988) (giving "weight" and according

"respectful consideration").

11 At oral argument, counsel for Telecom agreed that the Davis

standard governs, but argued for a minimal level of deference

because Revenue Ruling 87-113 does not contain an express expla-

nation for its construction of the relevant statutory sections. The

ruling does, however, discuss the same statutory language upon

which the IRS relies in this case, and sets forth the Service's

interpretation of that language. It notes that "section 48(q)(1)

requires the taxpayer to reduce the basis" by the "credit deter-

mined," and subsequently states that the "basis must be reduced in

the year the property is placed in service." Rev. Rul. 87-113,

1987-2 C.B. 33, 34-35. Compare discussion infra Part IV.A.

Counsel conceded that this degree of explanation would ordinarily

be entitled to some weight, were it not for the assertedly contrary

legislative history discussed infra Part IV.B.

A

The government's contrary argument is grounded in the

language of several statutory sections. It begins with section

48(q)(1), the provision requiring that basis be reduced by the

ITC. See 26 U.S.C. s 48(q)(1) (1988).12 That section, as

modified by section 49(d)(1)(A), provides that "if a credit is

determined under section 46(a) ... the basis of such property

shall be reduced by [100 percent] of the amount of the credit

so determined." Id. s 48(q)(1); see id. s 49(d)(1)(A).13

Hence, to establish the amount by which the basis must be

reduced, we must look to "the amount of the credit so

determined" under section 46(a). That section, in turn, pro-

vides that "the amount of the investment credit determined

__________

12 In this subpart, citations to 26 U.S.C. ss 46, 48, and 49 are to

the versions of those sections in effect during 1986-90. In 1990, the

transitional rules at issue here were removed from the Code. See

Revenue Reconciliation Act of 1990, Pub. L. No. 101-508,

s 11813(a), 104 Stat. 1388-400, 1388-536.

13 Section 48(q)(1) states:

For purposes of this subtitle, if a credit is determined under

section 46(a) with respect to section 38 property, the basis of

such property shall be reduced by 50 percent of the amount

of the credit so determined.

Section 49(d)(1) states in part:

In the case of periods after December 31, 1985, with respect

to so much of the credit determined under section 46(a) with

respect to transition property as is attributable to the regu-

lar investment credit (as defined in subsection (c)(5)(B))--

(A) paragraphs (1), (2), and (7) of section 48(q) and section

48(d)(5) shall be applied by substituting "100 percent" for

"50 percent" each place it appears....

Congress made technical amendments to s 49 in 1988 and incorpo-

rated the effective date of the original s 49 of the Tax Reform Act

of 1986. See Technical and Miscellaneous Revenue Act of 1988

(TAMRA), Pub. L. No. 100-647, ss 1002(e), 1019, 102 Stat. 3342,

3367 & 3593. The version of s 49 quoted above incorporates those

amendments.

under this section for any taxable year shall be an amount

equal to" the sum of certain percentages of "the qualified

investment" as "determined under subsection[ ] (c)." Id.

s 46(a).14 And subsection (c), in turn, defines "qualified

investment" by reference to property "placed in service"

during the taxable year. See id. s 46(c)(1).15 Putting these

provisions together, the IRS concludes that basis must be

reduced by the amount of the credit "determined," and that

this refers to the credit for which the property qualified

during the taxable year in which the property was placed in

service.

The interpretation the IRS advances here is the one re-

flected in Revenue Ruling 87-113 and adopted by the court

below, see MCI, 26 F. Supp. 2d at 10, by the Court of Federal

Claims, see B.F. Goodrich v. United States, 32 Fed. Cl. 571,

572 (Fed. Cl. 1995), and by the Federal Circuit, see B.F.

Goodrich, 94 F.3d at 1549. In the words of the Federal

Circuit, "[s]ince the investment tax credit is determined when

the property is placed in service, and the statute mandates a

reduction in the basis when the credit is determined, we hold

that the basis of transition property must be reduced when

the taxpayer placed the property in service." Id. We find

this interpretation to be a more than reasonable construction

of the words of the statutory provisions.16

__________

14 Section 46(a) states in part:

For purposes of section 38, the amount of the investment

credit determined under this section for any taxable year

shall be an amount equal to the sum of the following percent-

ages of the qualified investment (as determined under sub-

sections (c) and (d))....

15 Section 46(c)(1) states in part:

For purposes of this subpart, the term "qualified investment"

means, with respect to any taxable year ...--

(A) the applicable percentage of the basis of each new

section 38 property (as defined in section 48(b)) placed in

service during such taxable year....

16 As Telecom notes, B.F. Goodrich arose in a different procedur-

al posture from the instant case. Here, the taxpayer initially

Telecom, of course, disagrees. In its briefs, it contends

that the language of sections 46, 48 and 49 makes "clear" that

the haircut on ITC carryforwards must be taken into account

in calculating adjustments to depreciable basis. See Telecom

Br. at 15. At oral argument, however, Telecom conceded that

the statutory language is "confusing and technical." More

important, Telecom was unable to cite any clear language in

support of its position. Rather than rely on specific lan-

guage, Telecom's fundamental contention is that the three

sections must be read as an "integrated whole," and that if

one does so, the validity of its position becomes manifest. Id.

Telecom's argument is that section 49,17 which imposes the

__________

reduced its basis by the full amount of the ITC allowed in the year

the property was placed in service, and subsequently sought to

increase the basis through a refund claim. In B.F. Goodrich, by

contrast, instead of initially reducing its basis by the full amount of

the ITC, the taxpayer reduced it only enough to reflect the 6.5%

credit it "reasonabl[y] expect[ed]" to receive in the carryforward

year. This procedural difference, however, did not drive the Feder-

al Circuit's opinion. Although the court did hold that the statute

"leaves no room for consideration of Goodrich's 'reasonable expecta-

tions,' " 94 F.3d at 1549, it reached that conclusion because, like the

IRS, it read the statute as providing that an "investment tax credit

is determined when the property is placed in service." Id.

17 Section 49(c) states in part:

(1) .... Any portion of the current year business credit

under section 38(b) for any taxable year beginning after June

30, 1987, which is attributable to the regular investment

credit shall be reduced by 35 percent.

2) .... Any portion of the business credit carryforward

under section 38(a)(1) attributable to the regular investment

credit which has not expired as of the close of the taxable

year preceding the 1st taxable year of the taxpayer begin-

ning after June 30, 1987, shall be reduced by 35 percent.

(3) .... In the case of any taxable year beginning before

and ending after July 1, 1987--

(A) any portion of the current year business credit under

section 38(b) for such taxable year, or

haircut on the ITC, must be understood to alter the basis

adjustment provisions of section 48(q)(1) so that they reflect

not only the haircut on current-year credits, but the haircut

on credits carried forward as well.18

If this were Congress' intent, it would not be an unreason-

able one. But as already noted, there is nothing in the

language of any of the three statutory provisions that com-

mands this interpretation. Rather, the clearest language in

the statute indicates that the key question is when the credit

is "determined," for that is the time at which the basis must

be reduced. See 26 U.S.C. s 48(q)(1) (1988). And while it

would not be unreasonable to conclude that a credit is not

"determined" until it is used, the government's contention

that a credit is determined when it first becomes available,

i.e., when the asset is placed in service, is also reasonable.

Indeed, the government's construction is the more reasonable

of the two in light of section 46(c)'s definition of qualified

investment by reference to property "placed in service" dur-

ing the taxable year.19

__________

(B) any portion of the business credit carryforward under

section 38(a)(1) to such year,

which is attributable to the regular investment credit shall be

reduced by the applicable percentage.

18 Telecom further contends that there is no ground for the IRS'

conclusion that s 49 should apply to ss 46 and 48 in four other

circumstances, while refusing to apply it as requested by Telecom.

See Telecom Reply Br. at 5-6. But unlike the application Telecom

seeks, in each of the other circumstances the application is clear

from the text of the statute. See 26 U.S.C. s 49(a) (1988) (repealing

the ITC); id. s 49(c)(1) ("reduc[ing] by 35 percent" the "current

year investment credit" for tax years beginning after June 30,

1987); id. s 49(d)(1) (providing "full basis adjustment" by "substi-

tuting '100 percent' for '50 percent' each place it appears" in

s 48(q)); id. ss 49, 48(q) (adjusting basis to reflect current year

business credit "determined under section 46(a)" as reduced by the

percentages prescribed in s 49(c)).

19 Even Telecom concedes that a credit is at least "initially"

determined at that time, since depreciation begins when the asset is

B

Telecom attempts to buttress its argument by directing our

attention to the legislative history of the Tax Reform Act of

1986, which it insists "unambiguously" supports its position.

See Telecom Br. at 20. According to Telecom, the Confer-

ence Report on the Act clearly demonstrates that Congress

intended basis adjustments to reflect the haircut applied to

carryforward credits.20 That Report states, in pertinent part:

Full basis adjustment

A taxpayer is required to reduce the basis of property

that qualifies for transition relief ("transition property")

by the full amount of investment credits earned with

respect to the transition property (after application of the

phased-in 35-percent reduction, described below)....

Reduction of ITC carryforwards and credits

claimed under transitional rules

....

Under the conference agreement, the investment tax

credit allowable for carryovers is reduced by 35 percent.

The reduction in investment tax credit carryovers is

phased in with the corporate rate reduction. The 35-

percent reduction is fully effective for taxable years

beginning on or after July 1, 1987.... The investment

tax credit earned on transition property is reduced in the

same manner as carryovers.

__________

placed in service, see 26 U.S.C. s 168(d)(1), (d)(4), and since the

assets's basis must be calculated in order to take a depreciation

deduction.

20 Telecom also relies on language contained in an explanation of

the Tax Reform Act prepared by the Staff of the Joint Committee

on Taxation. See Staff of Joint Comm. on Taxation, 99th Cong., 2d

Sess., General Explanation of the Tax Reform Act of 1986, at 123

(Comm. Print 1987). We need not consider what, if any, weight

should be given to this post-enactment publication, see Estate of

Wallace v. Commissioner, 965 F.2d 1038, 1050 n.15 (11th Cir. 1992);

McDonald v. Commissioner, 764 F.2d 322, 336 n.25 (5th Cir. 1985),

because the language cited by Telecom does not add anything

material to the text of the Conference Report.

. . . .

As described above, a full basis adjustment is required

with respect to the reduced amount of the investment tax

credit. Thus, for transition property that is eligible for a

6.5 percent investment tax credit, the basis reduction

would be with respect to the 6.5 percent credit, not the

unreduced 10 percent credit.

H.R. Conf. Rep. No. 99-841, at II-63 to -64 (1986) (underlin-

ing added).

Telecom argues that the first sentence quoted above indi-

cates that a property's basis should be reduced to reflect the

ITC haircut actually received in the carryforward year, since

it states that a taxpayer must reduce the basis by the amount

of the ITC "after application of the phased-in 35-percent

reduction." Id. Although this is not an unreasonable read-

ing, the sentence is not unambiguous. It does not state

whether it refers to the phased-in reduction that applies to a

credit used in the same year in which the property is placed

in service (a current-year credit), or whether it refers to the

phased-in reduction that applies to a carryforward. The

government, the district court, and the Federal Circuit all

read the sentence as referring to current-year rather than

carryforward credits--largely because the sentence is not in

the subsequent section entitled "Reduction of ITC carryfor-

wards and credits," but rather in the preceding section whose

title does not mention carryforwards. See B.F. Goodrich, 94

F.3d at 1549; MCI, 26 F. Supp. 2d at 11. Although Telecom

rightly points to a number of indications that the sections are

interrelated (for example, cross-references to material "de-

scribed below" in the first section and to material "described

above" in the second), these do not resolve the question with

clarity because the referenced material does not itself indicate

to which year it refers.

Telecom also points to the last paragraph of the quoted

excerpt, which is contained in a section that does refer to both

current-year credits and carryforwards. That sentence

states that "for transition property that is eligible for a 6.5

percent investment tax credit, the basis reduction would be

with respect to the 6.5 percent credit, not the unreduced 10

percent credit." H.R. Conf. Rep. No. 99-841, at II-64 (em-

phasis added). But this sentence contains an ambiguity of its

own: the meaning of the word "eligible." The government's

view, and that of the other courts to have considered the

question, is that a taxpayer is eligible for the full amount of

the credit available to it in the year in which it places an asset

in service. That the taxpayer may not be able to use the

credit for which its property is eligible because of the pecu-

liarities of the taxpayer's individual situation does not render

the property itself ineligible. See MCI, 26 F. Supp. 2d at 10;

B.F. Goodrich, 32 Fed. Cl. at 573 ("When property is placed

in service, it is eligible for the credit irrespective of whether

the credit later may be carried forward and reduced."). We

conclude that the government's interpretation of the legisla-

tive history is at least as reasonable as that of Telecom.21

C

The final component of Telecom's argument is an appeal to

two "principles of tax policy" which, it argues, require us to

interpret the statute as Telecom does. But even if that kind

of appeal could overcome the conclusions drawn above re-

garding the statutory language and legislative history, we

would still find the tax policy principles at issue here too

ambiguous and indeterminate to guide our construction.

__________

21 The government also argues that Telecom's interpretation is

foreclosed by Congress' failure to adopt a technical amendment,

proposed by industry representatives during the development of the

Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub.

L. No. 100-647, 102 Stat. 3342, that would have permitted precisely

the upward adjustment in basis Telecom seeks in this case. This

post-1986 legislative history, however, "is a hazardous basis for

inferring the intent of an earlier Congress." Pension Benefit Guar.

Corp. v. LTV Corp., 496 U.S. 633, 650 (1990) (internal quotation

marks and citations omitted). On the other hand, the statements

submitted in the course of that failed effort do indicate that

industry representatives believed the basis adjustment provisions

were ambiguous and could be read as the IRS reads them here.

See Staff of H.R. Comm. on Ways and Means, Written Comments on

H.R. 2636, The Technical Corrections Act of 1987, Vol. 1, 100th

Cong., 2d Sess., 418-27 & 429-32 (Comm. Print 1988).

Telecom's first contention is that depreciation deductions

are governed by a principle of "full cost recovery"--i.e.,

allowing taxpayers to use depreciation to deduct the full

amount of their investments--and that only its interpretation

of the interaction between depreciation deductions and the

ITC ensures such recovery. Telecom argues that "[i]n eco-

nomic terms, the investment tax credit can be viewed as the

government's co-investment in a taxpayer's property." Tele-

com Br. at 9. Thus, to determine the taxpayer's "share" of

the investment, the ITC must be deducted from the proper-

ty's initial cost. To ensure full cost recovery, the taxpayer

must then be permitted to deduct the balance as depreciation.

Translating this analysis to our simplified example, Tele-

com's contention is that, because it received a $65,000 credit

on a $1,000,000 investment when it used its ITC in 1989

(when the ITC percentage was 6.5%), its share of the invest-

ment in the property was $935,000. Accordingly, $935,000

should be the basis used to calculate its depreciation deduc-

tions. Under the IRS' view, however, Telecom was required

to subtract $100,000 from the asset's $1,000,000 cost to arrive

at its basis, because the property was placed into service in

1986 (when the ITC percentage was 10%). According to

Telecom, limiting its deductions to the resulting basis,

$900,000, renders it unable to recover its full costs.

The government's first response is that depreciation deduc-

tions and the tax basis upon which they are computed must

be determined by application of the provisions of the Internal

Revenue Code, and not by appeal to notions of "full cost

recovery"--a concept unmentioned in the Code. Whatever

the merit of this dispute regarding the policy underlying the

depreciation deduction,22 however, the question at issue here

involves the interrelationship between the depreciation deduc-

tion and the ITC. While Telecom contends that the ITC

__________

22 In Lenkin v. District of Columbia, we said that in interpreting

a statutory section that "leaves for the courts the definition of basis

for 'reasonable' depreciation allowances, their polestar is a basis

that will enable the taxpayer to recover his investment in the asset."

461 F.2d at 1229 (interpreting D.C. Code s 47-1583e (Supp. IV

should be viewed as "economically" equivalent to a govern-

ment investment in the taxpayer's property, over the years

Congress has offered a number of far more general rationales

for the different combinations of depreciation deductions and

ITCs it has enacted.23 Indeed, even Telecom concedes that a

principle of full cost recovery cannot explain why in most

years prior to the enactment of TEFRA (1982) basis did not

have to be reduced by ITC at all, or why between TEFRA

and the Tax Reform Act of 1986 basis had to be reduced by

only 50% of ITC. Fine-tuning the principle assertedly at

issue here, Telecom argues that although these provisions

permitted more than full cost recovery, Congress has never

permitted less. This fine-tuning, however, weakens the over-

all coherence of the principle Telecom urges us to follow.

The government further argues that notwithstanding the

basis adjustment Telecom was required to make, the company

__________

1971)). Sections 46, 48 and 49, however, do not leave the measure

of basis "for the courts" to determine. Moreover, even Telecom

concedes that a policy of full cost recovery cannot explain ERTA's

1981 elimination of the requirement that basis be reduced by

salvage value, which plainly permits the recovery of more than the

asset's full cost. See 26 U.S.C. s 168(f)(9) (1982). Telecom has a

similar problem explaining ERTA's adoption of ACRS itself, which

permits accelerated depreciation schedules over predetermined pe-

riods generally shorter than the useful life of an asset, and hence

permits taxpayers to take full depreciation deductions before an

asset's true useful life has ended. See Simon v. Commissioner, 68

F.3d 41, 44-45 (2d Cir. 1995); Liddle v. Commissioner, 65 F.3d 329,

334 (3d Cir. 1995); S. Rep. No. 97-144, at 48.

23 See, e.g., S. Rep. No. 99-313, at 96 (concluding that repeal of

ITC would permit "[a] large reduction in the top corporate tax rate"

and thereby "encourag[e] the efficient allocation of all resources");

S. Rep. No. 97-494, at 123 (concluding that under TEFRA, the

combination of ACRS deductions and the ITC would "provide

investment incentives comparable to those in a system without an

income tax"); cf. Simon, 68 F.3d at 44-45 (noting that ERTA

"altered the depreciation scheme" for "reasons other than sound

accounting practice," particularly "as a stimulus for economic

growth").

has already recovered more than the full cost of its invest-

ments. As the government notes, a tax credit is a dollar-for-

dollar reduction in a taxpayer's tax liability. A deduction, on

the other hand, is a dollar-for-dollar reduction in the taxable

income used to compute tax liability, and thus only reduces

taxes by an amount equal to the deduction multiplied by the

taxpayer's marginal rate. Hence, for a taxpayer like Telecom

which was in the 34% marginal bracket, a tax credit of $10 is

roughly equivalent to a tax deduction of $30. Applying this

analysis to Telecom's actual tax situation, the government

calculates that the combination of Telecom's depreciation

deductions and the deduction-value of its ITCs substantially

exceeded its total investment in the transition properties.

See Gov't Br. at 40 (citing First Stipulation of Facts at 7 (J.A.

65)). Although Telecom rightly notes that (at least initially)

Congress intended the ITC to have an incentive effect in

addition to the benefit of depreciation deductions, the govern-

ment's argument does take some of the air out of Telecom's

claim not to have recovered its economic costs. Moreover, we

must be cognizant of the fact that we are dealing with

transition rules here, and that regardless of Congress' initial

rationale for the combination of the ITC and depreciation

deduction, we have little indication of what Congress' inten-

tions were for the transition--other than there be a phase-out

period that would inevitably involve some compromise be-

tween the goal of more efficient resource allocation, see

S. Rep. No. 99-313, at 96, and a concern for fair treatment of

investors' reasonable expectations.

Telecom contends that its interpretation of the statute is

compelled by a second principle of tax policy as well--i.e.,

that similarly situated taxpayers must be treated in the same

way. Taxpayers who place property in service in the same

year should be treated the same, Telecom argues. This

assertedly can only be accomplished if a taxpayer who cannot

use a credit in that year is permitted to recover as much of

his investment cost as one who can.

We are not persuaded by Telecom's argument. Taxpayers

who place property in service in the same year are treated

the same under Revenue Ruling 87-113. All such taxpayers

have available to them the same ITC and the same basis

reduction, if they can use the credit in that year. The

differential impact of which Telecom complains is not due to

the revenue ruling, but rather to Telecom's individual tax

situation--that is, to the fact that it had insufficient tax

liability in the current year to make the ITC useful. Indeed,

many of the Internal Revenue Code's provisions, although

neutral on their face, have a differential impact depending

upon taxpayers' individual circumstances, yet we generally do

not regard that as a sign of inequitable disparate treatment.24

In any event, the indeterminacy of the application of this

principle to the question before us makes it an insufficient

ground for rejecting the IRS' reasonable interpretation of the

statutory language. See B.F. Goodrich, 94 F.3d at 1550

("Nor are we convinced by Goodrich's hypotheticals that the

alleged inconsistencies between so-called 'similarly situated

taxpayers' warrant a construction which departs from the

language enacted by Congress.").

In sum, we conclude that neither of Telecom's appeals to

tax policy generates a principle sufficiently clear either to

meet its burden of showing an entitlement to the deduction it

seeks, or to overcome even a minimal level of deference to

Revenue Ruling 87-113.25

V

As alternatives to its argument under sections 46, 48, and

49, Telecom offers two other grounds for its refund claims.

__________

24 Even the ITC, in its pre-1986 incarnation, had such a differen-

tial effect. Although a company that had to carry its credit forward

several years would ultimately receive nominally the same ITC as a

company that could use it immediately, it would enjoy significantly

less present value.

25 In light of our resolution of this issue, we need not consider the

weight of the government's reference to its own "principle of tax

policy"--namely, the principle that tax accounting generally pro-

ceeds on a year-by-year basis, and that tax determinations general-

ly are based on events occurring in the taxable year. See Gov't Br.

at 45 (citing 26 U.S.C. s 441).

First, it contends that even if those sections do not entitle it

to reach back to the years it put its property into service,

"section 168 and its accompanying regulations" entitle it to

increase its basis beginning in 1989--the year it actually used

the ITC. Telecom, however, does not point to any specific

language in section 168, which sets out the details of the

Accelerated Cost Recovery System, to support this proposi-

tion. Indeed, its briefs do not quote the language of section

168 at all.

Nor does Telecom point to any "accompanying regula-

tions," at least not to any that have been enacted. Instead, it

rests its claim upon the language of a proposed Treasury

regulation, Prop. Treas. Reg. s 1.168-2(d)(3), 49 Fed. Reg.

5940, 5945-46 (1984). That regulation, proposed in 1984,

cannot serve as the basis of any entitlement because it was

never adopted. But even if it could, it would have no

application here. The proposed regulation provides for the

redetermination of an asset's depreciable basis when the cost

of the asset changes in a subsequent year, "e.g., due to

contingent purchase price or discharge of indebtedness." Id.

It offers as an example the case of a buyer who pays

additional consideration for an asset after the year of its

initial purchase because the purchase price was partially

contingent on gross profits from the operation of the asset.

Notwithstanding Telecom's claim that the haircut on ITC

carryforwards represents the same "economic reality," there

is no indication that the proposed regulation was intended to

cover such a statutorily required reduction. That is hardly

surprising, of course, since the Treasury Department pro-

posed the regulation two years before Congress enacted the

haircut.

As a second alternative, Telecom contends that it is entitled

to a deduction pursuant to section 196(a), which permits

taxpayers to take a deduction for certain unused business

credits. That section provides:

If any portion of the qualified business credits deter-

mined for any taxable year has not, after the application

of section 38(c), been allowed to the taxpayer as a credit

under section 38 for any taxable year, an amount equal to

the credit not so allowed shall be allowed to the taxpayer

as a deduction for the first taxable year following the last

taxable year for which such credit could, under section

39, have been allowed as a credit.

26 U.S.C. s 196(a). Section 38(c), referenced in section 196,

bars a taxpayer from taking the ITC in excess of its income

tax liability in a given year, and is the reason Telecom could

not use the credit in 1986 or 1987. Telecom contends that

section 38(c), "in conjunction with the application of the ITC

haircut to the ITC carryforwards," barred it "from taking the

full ITC to which it was originally entitled." Telecom Br. at

33. According to Telecom, "[s]ection 196(a) provides a reme-

dy for this incomplete cost recovery: it allows taxpayers to

take deductions in the amounts of the ITC reduced by the

haircut, thereby fully recovering their investment costs." Id.

Without deciding whether section 196(a) can ever provide a

deduction to make up for the amount of the ITC haircut,26 we

agree with the Federal Circuit that the deduction contemplat-

ed by section 196(a) simply does not apply until, in the words

of the section, "the first taxable year following the last

taxable year for which such credit could, under section 39,

have been allowed as a credit." Since section 39 provides

that Telecom's credits may be carried forward for fifteen

__________

26 The district court held that "[s]ection 196(a) authorizes deduc-

tions for carryforward credits that have expired" because the

taxpayer had insufficient tax liabilities against which to offset them

during the allowable carryforward period, "not for credits that are

disallowed by reason of s 49(c)" and its statutory haircut. MCI, 26

F. Supp. 2d at 13; see S. Rep. No. 97-494, at 123 ("A deduction will

be allowed equal to the amount of the basis adjustment in the event

a credit for which a basis adjustment has been made expires at the

end of the 15-year carryover period."); Rev. Rul. 87-113 (conclud-

ing that "section 196 only applies to credits disallowed by reason of

section 38(c), pertaining to tax limitation, and not to credits disal-

lowed by reason of section 49(c)(1), (2) or (3)"); see also 26 U.S.C.

s 49(c)(4) (1988) ("The amount of the reduction of the regular

investment credit under paragraphs (1) and (2) shall not be allowed

as a credit for any taxable year.").

years,27 the section 196 deduction is not available until the

expiration of that fifteen-year period. See B.F. Goodrich, 94

F.3d at 1550-51; see also S. Rep. No. 97-494, at 123.

In support of the claim that it is nonetheless entitled to

take the deduction in 1989, Telecom argues that the "unique

nature" of the ITC haircut for carryforwards, which once

applied reduces the ITC forever, should make the year before

the haircut the "last taxable year" for which the full credit

could have been allowed. Telecom Br. at 33-34. Whatever

the reasonableness of this argument as a matter of tax policy,

it cannot overcome section 39's express reference to the

fifteen-year carryforward period. Accordingly, we reject

Telecom's final effort to secure a deduction.

VI

We uphold the interpretation of the Tax Reform Act re-

flected in Revenue Ruling 87-113, and reject the two alterna-

tive grounds Telecom offers in support of its refund claims.

The decision of the district court, granting summary judg-

ment for the United States, is therefore affirmed.

__________

27 See 26 U.S.C. s 39(a)(1) (1988). Under the current Code, the

carryforward period is 20 years. See id. s 39(a)(1) (Supp. III 1997).