# Allen v. Comm'r

> United States Tax Court · January 4, 2002 · 118 T.C. 1

URL: https://www.frixlaw.com/law-library/cases/4474181

## Case

- **Full name:** CHARLES C. ALLEN, III AND BARBARA N. ALLEN v. COMMISSIONER OF INTERNAL REVENUE
- **Court:** United States Tax Court
- **Decided:** January 4, 2002
- **Citations:** 118 T.C. 1; 118 T.C. No. 1; 2002 U.S. Tax Ct. LEXIS 1
- **Precedential status:** Published
- **Opinion:** Opinion of the court by Laro
- **Judges:** Laro
- **Cited by:** 68 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/4474181

## How later opinions describe it (automated extraction)

- holding that the wage-expense limitation of section 280C(a) applies to the calculation of AMTI where nothing in the sections relating to the wage-expense limitation or in the AMT provisions indicates otherwise

## Opinion text

OPINION
Laro, Judge: This case was submitted to the Court without trial. See Rule 122. 2 Petitioners petitioned the Court to redetermine respondent’s determination of the following deficiencies in their Federal income taxes for 1994 and 1995:
Petitioner 1994 1995
Charles C. Allen III and Barbara N. Allen $21,321 $12,107
Charles C. Allen, Jr. 21,324 12,015
John R. Allen and Estate of Sally F. Allen 21,395
John R. and Judith M. Allen 12,108
John R. Allen, Jr., and Susan S. Allen 21,394 12,107
Warren L. Allen 6,388 1,970
Warren L. Allen, Jr. 36,197 20,582
Amantha S. Allen 36,197 20,582
Following concessions in docket Nos. 1291-00 and 1292-00, we must decide whether the wage-expense limitation of section 280C(a) enters into the calculation of alternative minimum taxable income (AMTI). As relevant herein, section 280C(a) limits a taxpayer’s wage expense to the amount of the expense that exceeds the amount of a targeted jobs credit (TJC) determined under section 51(a). We hold that section 280C(a) enters into the calculation of a taxpayer’s AMTI.
Background
All facts were stipulated and are so found. The stipulated facts and the exhibits submitted therewith are incorporated herein by this reference. During the subject years, each petitioner, 3 with the exception of Warren L. Allen and Charles C. Allen, Jr., filed a joint Federal income tax return with his wife. Charles C. Allen hi was the husband of Barbara N. Allen. John R. Allen was the husband of Sally F. Allen during 1994, and he was the husband of Judith M. Allen during 1995. John R. Allen, Jr., was the husband of Susan S. Allen. Warren L. Allen, Jr., was the husband of Amantha S. Allen. Each petitioner and his wife (with the exception of Sally F. Allen) resided in Delaware when the petitions were filed. Sally F. Allen was deceased at that time, and the executor of her estate was (and is) John R. Allen, Jr.
Allen Family Foods, Inc. (Foods), is an S corporation that was incorporated under Delaware law. Its business is the slaughtering, converting, and processing of chickens into ready-to-cook whole chickens and chicken parts for sale primarily to retailers. It computes its income and expenses using an accrual method of accounting and on the basis of a fiscal year ending on the Saturday nearest April 30. It filed a Form 1120S, U.S. Income Tax Return for an S Corporation, for its fiscal years ended in 1994 and 1995 (its 1994 and 1995 taxable years, respectively).
Petitioners are descendants of Charles C. Allen, the founder of the family poultry business, and they owned all of Foods’ outstanding stock during its 1994 and 1995 taxable years. The number of the shares that they each owned and the percentage of their respective ownership interests were as follows:
Shareholder No. of shares Percent
16.67 Charles C. Allen, Jr. LO
16.67 Charles C. Allen III ID
5.00 Warren L. Allen H
28.33 Warren L. Allen, Jr. 00
16.67 John R. Allen *0
Shareholder No. of shares Percent
John R. Allen, Jr. 50 16.67
Total 300 100.00 (rounded)
During its 1994 and 1995 taxable years, Foods incurred wages which qualified for the TJC. Foods claimed TJCs of $456,264 and $259,434 on its 1994 and 1995 Federal income tax returns, respectively, and reported to each petitioner on his Schedules K-l, Shareholder’s Share of Income, Credits, Deductions, etc., his proportionate shares of those credits. The Schedules K-l reported the proportionate shares as follows:
Shareholder 1994 1995
Charles C. Allen, Jr. $76,044 $43,239
Charles C. Allen III 76,044 43,239
Warren L. Allen 22,813 12,972
Warren L. Allen, Jr. 129,275 73,506
John R. Allen 76,044 43,239
John R. Allen, Jr. 76,044 43,239
Total 456,264 259,434
For Federal income tax purposes, Foods reduced its deduction of wages by the amount of the TJC as required by section 280C(a) and reported to each petitioner on his Schedules K-l his proportionate share of the resulting net income (Foods’ resulting net income). Each petitioner computed his regular income tax liability for 1994 and 1995 by including in his taxable income his proportionate share of Foods’ resulting net income.
Petitioners were not subject to alternative minimum tax but were required to compute their AMTI in order to ascertain for purposes of section 38(c)(1)(A) the tentative minimum tax (tmt) ceiling on the amount of a TJC that may be applied against regular tax liability. For purposes of computing his AMTI for 1994 and 1995, each petitioner claimed deductions for his proportionate share of Foods’ full wage expense (i.e., the wage expense unreduced by the TJC). Each petitioner calculated this full wage expense by reference to a negative adjustment equal to the TJC shown on his Schedules K-l. Each petitioner reported the same adjustment on his 1994 and 1995 Forms 6251, Alternative Minimum Tax — Individuals, which were attached to his Federal income tax returns for the respective years.
Each petitioner claimed on his personal income tax returns his proportionate share of the tjc and applied the TJC without limitation by his TMT. The deficiencies at hand are the result of respondent’s recalculating petitioners’ AMTI for purposes of ascertaining the TMT ceiling. In those recalculations, respondent did not allow each petitioner to deduct as wages the portion of the claimed wages that was equal to his proportionate share of Foods’ TJCs. Respondent determined as a result of these recalculations that each petitioner’s application of the TJCs for regular tax purposes was less than claimed on his return by virtue of the TMT limitation of section 38(c)(1)(A).
Discussion
The Internal Revenue Code imposes upon taxpayers an alternative minimum tax (AMT) in addition to all other taxes imposed by subtitle A. See sec. 55(a). The AMT is imposed upon a taxpayer’s AMTI, which is an income base broader than the usual base of taxable income applicable to Federal income taxes in general. See H. Conf. Rept. 99-841 (Vol. II), at 11-249 (individual AMT), 11-263 (corporate AMT) (1986), 1986-3 C.B. (Vol. 4) 1, 250, 264. Congress established AMTI as a broad base of income in order to tax taxpayers more closely on their economic income, intending for all taxpayers to pay their fair shares of the overall Federal income tax burden. See S. Rept. 99-313, at 518-519 (1986), 1986-3 C.B. (Vol. 3) 1, 518-519; H. Rept. 99-426, at 305-306 (1985), 1986-3 C.B. (Vol. 2) 1, 305-306. Congress required that corporations be taxed at a single AMT rate and that individuals be taxed under a progressive amt regime with two rates. The higher amt rate applicable to a taxpayer is lower than the taxpayer’s maximum rate of taxation under the regular tax regime, and a taxpayer must pay AMT when the taxpayer’s AMT liability is greater than the taxpayer’s regular tax liability.
The instant case focuses on the tax base upon which AMTI is calculated. Specifically, we pass for the first time on the question of whether the calculation of AMTI includes the wage-expense limitation of section 280C(a). Respondent asserts it does. Respondent focuses primarily on section 280C(a) and argues that a literal reading of that section always precludes a taxpayer from deducting wages to the extent of a TJC. Respondent acknowledges that a taxpayer cannot apply a TJC to reduce the taxpayer’s AMT liability but argues that the wage-expense limitation still applies in the calculation of AMTI because no provision of the Code specifically provides otherwise. Petitioners assert that the wage-expense limitation of section 280C(a) does not enter into the calculation of AMTI. Petitioners point to the fact that the TJC is not an allowable credit for purposes of calculating AMT and conclude from this fact that section 280C(a) does not apply in the calculation of AMTI. Petitioners assert that the AMT regime is a tax system that operates “parallel” to the regular tax regime and that the application of each provision of the Code to the AMT regime must be measured solely within the parameters of that regime. 4 Petitioners assert that the wage-expense limitation is not applicable to the AMTI calculation under a plain reading of section 280C(a) because a TJC is never determined in the AMT regime. Respondent acknowledges that the primary reading of the provisions underlying the AMT regime requires that a taxpayer calculate AMTI by adjusting taxable income in the manner set forth in section 55(b) but invites the Court to adopt the alternative reading advanced by petitioners under which the AMT and regular tax regimes are considered parallel systems in that the computation of AMT starts from scratch without regard to any calculation made for regular tax purposes. Respondent argues that the fact that a TJC is determined for the regular tax regime is enough to subject petitioners to the wage-expense limitation in the calculation of AMTI under the AMT regime given the absence of any statutory provision that provides to the contrary.
We agree with respondent that the wage-expense limitation of section 280C(a) enters into the calculation of AMTI but do so for reasons different than he espouses. Our analysis begins with the relevant statutory text. We interpret that text with reference to the legislative history primarily to learn the purpose of the statute and to resolve any ambiguity in the words contained in the text. Landgraf v. USI Film Prods., 511 U.S. 244 (1994); Commissioner v. Soliman, 506 U.S. 168, 174 (1993); Consumer Prod. Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980); United States v. Am. Trucking Associations, Inc., 310 U.S. 534, 543-544 (1940); Venture Funding, Ltd. v. Commissioner, 110 T.C. 236, 241-242 (1998), aff'd. without published opinion 198 F.3d 248 (6th Cir. 1999); Trans City Life Ins. Co. v. Commissioner, 106 T.C. 274, 299 (1996). We apply the plain meaning of the words prescribed in the text unless we find that a word’s plain meaning is “inescapably ambiguous”. Venture Funding, Ltd. v. Commissioner, supra at 241-242; see Garcia v. United States, 469 U.S. 70 , 76 n.3 (1984); see also Ex parte Collett, 337 U.S. 55 (1949). Where legislative “will has been expressed in reasonably plain terms, that language must ordinarily be regarded as conclusive.” Negonsott v. Samuels, 507 U.S. 99, 104 (1993).
We look first to the text on the tjc. Section 38 allows each petitioner to credit against his tax the amount of a general business credit. In relevant part, section 38 provides:
SEC. 38. GENERAL BUSINESS CREDIT.
(a) Allowance op Credit. — There shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the sum of—
(1) the business credit carryforwards carried to such taxable year,
(2) the amount of the current year business credit, plus
(3) the business credit carryback carried to such taxable year.
(b) Current Year Business Credit. — For purposes of this subpart, the amount of the current year business credit is the sum of the following credits determined for the taxable year:
(2) the targeted jobs credit determined under section 51(a);
H: # ifc ij:
(c) Limitation Based on Amount of Tax.—
(1) In general. — The credit allowed under subsection (a) for any taxable year shall not exceed the excess (if any) of the taxpayer’s net income tax over the greater of—
(A) the tentative minimum tax for the taxable year, or
(B) 25 percent of so much of the taxpayer’s net regular tax liability as exceeds $25,000.
For purposes of the preceding sentence, the term “net income tax” means the sum of the regular tax liability and the tax imposed by section 55, reduced by the credits allowable under subparts A and B of this part, and the term “net regular tax liability” means the regular tax liability reduced by the sum of the credits allowable under subparts A and B of this part.
For purposes of section 38(b)(2), the TJC generally entitles a taxpayer such as Foods (and, by virtue of the passthrough nature of Foods, each petitioner) to a credit equal to a percentage of the salaries or wages (collectively, wages) which it incurs in employing individuals described in one or more of the targeted groups enumerated in section 51(d)(1). If the taxpayer cannot use the full amount of a TJC on account of the limitation set forth in section 38(c), the taxpayer may carry the unused portion either back or forward in accordance with section 39. In the case of an individual taxpayer, the taxpayer may deduct any portion of a TJC that has not been used as of the time that: (1) The carryforward period of section 39(a) expires or (2) the taxpayer dies. See sec. 196.
The right to apply a TJC, however, does not come without limitation. As relevant herein, section 280C(a) provides that “No deduction shall be allowed for that portion of the wages or salaries paid or incurred for the taxable year which is equal to the sum of the credits determined for the taxable year under sections 45A(a), 51(a) and 1396(a).” Thus, under section 280C(a), a taxpayer may not deduct the portion of wages incurred for the taxable year equal to the TJC determined for that year. A taxpayer, however, may forgo the disallowed deduction by electing not to determine a TJC for that year. Sec. 51¡c * i¡¡ rH sf¡ * ¡H
Under the House bill, the net operating loss deduction is allowed against alternative minimum taxable income. For any taxable year beginning after 1985, the minimum tax is reduced by the items of tax preference arising in that year. Minimum tax NOLs are carried over under a system separate from but parallel to that applying for regular tax purposes. [H. Conf. Rept. 99-841 (Vol. II), at 11-281,11-282 (1986), 1986-3 C.B. (Vol. 4) 1, 281, 282.]
In addition to these two uses of the word “parallel” and the other two uses referenced by the parties, our research has uncovered only one other time that the word “parallel” appears in the legislative history underlying the 1986 Act’s enactment of the current AMT regime. The conferees stated in their discussion of corporate AMT NOLs:
It is clarified that, in light of the parallel nature of the regular tax and minimum tax systems, any limitations applying for regular tax purposes to the use by a consolidated group of NOLs or current year losses (e.g., section 1503) apply for minimum tax purposes as well.
[Id. at 11-282, 1986-3 C.B. (Vol. 4) at 282.]
The Joint Committee consisted of 10 Congressmen, 5 from the Senate and 5 from the House of Representatives. Staff of Joint Comm, on Taxation, General Explanation of the Tax Reform Act of 1986, at II (J. Comm. Print 1987) (General Explanation of the 1986 Act). The General Explanation of the 1986 Act was prepared by the Staff of the Joint Committee, in consultation with the staffs of the House Ways and Means Committee and the Senate Finance Committee. Letter from David H. Brockway, Chief of Staff, to the Hon. Dan Rostenkowski, Chairman, and the Hon. Lloyd Bentsen, Vice Chairman. Id. at XVII.
The same is true as to AMT FTCs.
Nor are we persuaded by the preamble or technical advice memorandum upon which petitioners rely. In addition to the obvious fact that these documents also are not items of legislative history, these documents are afforded little weight in this Court. Textron Inc. v. Commissioner, 115 T.C. 104, 110 (2000) (technical advice memorandum); Dobin v. Commissioner, 73 T.C. 1121 , 1129 n.9 (1980) (preamble to proposed regulations).
Although the Revenue Act of 1978, Pub. L. 95-600, 92 Stat. 2763, purported to repeal the add-on minimum tax for individuals and replace it with a new AMT formulation beginning in 1979, other sources indicate that the two provisions coexisted in the Code until the add-on minimum tax was finally repealed by the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, sec. 201 (a), 96 Stat. 411 , and supplanted by an amended alternative minimum tax. See, e.g., Day v. Commissioner, 108 T.C. 11, 14 (1997) (and the cases cited therein).
The General Explanation of the 1986 Act also includes these statements and clarifies that the word “generally” as used in the discussion on corporations means that regular taxable income is not used only where the taxpayer’s tax base is other than taxable income; e.g., unrelated business taxable income, real estate investment trust taxable income, or life insurance company taxable income. General Explanation of the 1986 Act, supra at 436-437. The General Explanation of the 1986 Act states that a technical correction may be necessary to effectuate the exception to the general rule. Id. at 436 n.5.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/4474181. Public record. Not legal advice.