Focht v. Commissioner

Wilbur, J., concurring: The majority begins by retracing the path we followed to error, confessing along the way that an extremely literal interpretation has once again produced harsh results not in conformity with the overall purposes of the statute. 1

Indeed, one would search in vain for a plainer illustration of the sterile futility of assigning an immutable meaning to a word without regard to the circumstances attending its use. 2 Hopefully we have reached the last chapter of a series of painful episodes providing fresh evidence that the reward of extreme literalism is extreme error.

The standard argument offered for literalism is that Congress must be assumed to have meant what it said, and if it didn’t, it should amend the law, not the Courts. This tired old platitude simply begs the question. We may assume Congress meant what it said: the issue is what did it say? If that were so plain, it is passing strange that this Court has produced several extended opinions on both sides of this subject, as have the Courts of Appeals, and the academics and brethren at the bar have found it a fruitful subject for lengthy exegesis in the law journals. 3 In the final analysis, when someone in this context tells us we must assume Congress meant what it said, they are simply opting for one of several possible interpretations of a term without accepting the responsibility for supporting their interpretation with reasoned views.

When it is added that if the law is to be changed it must be changed by Congress, the case is gently rested on the hallowed and unassailable ground of separation of powers. But the second half of the platitude is predicated on the question-begging first half, and even apart from this defect, can no more withstand analysis than the first half. The problem usually arises when (as the majority opinion tells us) an "extremely literal” or "mechanical application” of the statute produces a "harsh” result not in "conformity with the overall purposes of the statute.” It is, of course, most unlikely that Congress intended any such result. And it is inconceivable that Congress focused on the matter and decided in favor of the harsh result without leaving any trace of evidence in the legislative record that the specific problem was ever considered.

There are many points in the legislative process, both in the House and Senate, where the views of the public and the interested executive agencies can be considered, and the issue, if considered, would surely have provoked a spark of controversy in light of the fire it ignited in the courts and law journals. What we really have is still another instance of the circumstances described by John Chipman Gray:

The fact is that the difficulties of so-called interpretation arise when the Legislature has had no meaning at all; when the question which is raised on the statute never occurred to it; when what the judges have to do is, not to determine what the Legislature did mean on a point which was present to its mind, but to guess what it would have intended on a point not present to its mind, if the point had been present. If there are any lawyers among those who honor me with their attention, let them consider any dozen cases of the interpretation of statutes, as they have occurred consecutively in their reading or practice, and they will, I venture to say, find that in almost all of them it is probable, and that in most of them it is perfectly evident, that the makers of the statutes had no real intention, one way or another, on the point in question; that if they had, they would have made their meaning clear; and that when the judges are professing to declare what the Legislature meant, they are in truth, themselves legislating to fill up casus omissi. [Gray, The Nature and Sources of the Law 173 (Macmillan 1921). Emphasis added. See Cardozo, The Nature of the Judicial Process 14, 15 (Yale University Press 1921).]

Even while sustaining respondent in Thatcher v. Commissioner, 61 T.C. 28 (1973), affd. in part and revd. in part 533 F.2d 1114 (9th Cir. 1976), we apparently recognized that Congress had never specifically focused on the point in question. We stated:

The resolution of the problem illustrated by this case will require Congress and the Administration to reconsider the mechanical test adopted in 1954 and to decide what rule should be applied to a transfer of liabilities; it will then be necessary for them to take appropriate legislative or administrative action. [ 61 T.C. at 37 . Emphasis added.]

We went on to fill in the casus omissi by adopting the worst of the possible interpretations. Having unfortunately done so, we should not remain frozen in error. Since we created the problem before us with our earlier decisions, the Court in this opinion properly takes corrective action rather than leaving the problem to Congress. 4

Nothing will be served by a dialectical search for a perfectly symmetrical theory of section 357. For in any event, it is now agreed that the one theory entirely without merit is the one originally adopted by this Court, repudiated by the Second and Ninth Circuits, and now abandoned by us. An interpretation that nearly scores a bull’s eye is distinctly preferable to one that fails to even approach the target.

Thucydides asserted that history is philosophy learned from examples, and Santayana added much later that those who cannot remember the past are condemned to repeat it. The example before us will undoubtedly be repeated unless we remember the philosophy of statutory interpretation taught by this unfortunate episode: where a literal interpretation or a mechanical application of the statute produces a harsh, unjust, and absurd result, literalism must give way. As the Supreme Court long ago stated:

It is a familiar rule, that a thing may be within the letter of the statute and yet not within the statute, because not within its spirit, nor within the intention of its makers. This has been often asserted, and the reports are full of cases illustrating its application. This is not the substitution of the will of the judge for that of the legislator, for frequently words of general meaning are used in a statute, words broad enough to include an act in question, and yet a consideration of the whole legislation, or of the circumstances surrounding its enactment, or of the absurd results which follow from giving such broad meaning to the words, makes it unreasonable to believe that the legislator intended to include the particular act. [Holy Trinity Church v. United States, 143 U.S. 457, 459 (1892).]

In the typical small business the "owner” labors long hours, usually assisted by a few employees, but with minimal capital. The income is for the most part the difference between net receipts and disbursements — often no more than a fair return on the "owner’s” labor. The "owner” may at some point, possibly as a result of his accountant’s or lawyer’s suggestion that he limit his exposure to liability, spend a few hundred dollars to incorporate. The labor goes on as usual — same place, same customers, same help, same long hours, same modest income, and same small or nonexistent net worth. When no one has perceived the slightest break in continuity, it must be an enormous shock for the man to be told he has a fifty or sixty thousand dollar capital gain consisting (in large part) of his accounts payable. To be sure, significant tax consequences attend incorporation of a business, but it is virtually certain Congress never intended this to be one of them. (As we said in another context in Thatcher v. Commissioner, 61 T.C. 28, 35 (1973) affd. in part and revd. in part 533 F.2d 1114 (9th Cir. 1976), "its irrationality constitutes a persuasive reason for not reaching such a result.”) It is like telling the taxpayer that his place of business was struck by lightning and burned to the ground, only a little worse, for lightning and fire, unlike "extremely literal” interpretations of the Internal Revenue Code, are catastrophes that can be insured against.

For a very close second, see the history recounted and the contrasting views expressed in Sylvan v. Commissioner, 65 T.C. 548 (1975), and Holt v. Commissioner, 67 T.C. 829 (1977).

See n. 12 of the majority opinion.

Respondent often wrings his hands in anguish when he feels compelled to urge the "plain meaning” of a statute to produce a harsh result. As I said in an earlier but in some respects similar context:

"the Internal Revenue Service is a part of the Treasury, whose representatives spend considerable time each year before Congress advancing Treasury proposals in the tax area. Hopefully, since respondent recognizes the harsh results that often stem from tedious interpretations of the present statute, careful attention will be given to resolving any remaining problems in a legislative context * * *. [Holt v. Commissioner, 67 T.C. 829 , 842 n. 12 (1977) (Wilbur, J., concurring).]”

We may be sure that if respondent were on the losing end of a harsh result due to an extremely literal and mechanical application of the statute, the Treasury would prescribe a prompt legislative correction for the ensuing distress, assuming a lesser remedy (i.e., regulation, ruling) completely within its control was inadequate. Raich v. Commissioner, 46 T.C. 604 (1966), was decided over a decade ago, and Thatcher, 4 years ago. Despite the suggestion of a legislative or administrative solution in Thatcher (see text above), none of these tools have been employed, and instead the Service is still vigorously litigating to sustain this very harsh result.