Bulletin No. 1996–34

Bulletin No. 1996–34

August 19, 1996

HIGHLIGHTS

OF THIS ISSUE

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be relied

upon as authoritative interpretations.

SPECIAL ANNOUNCEMENT

Announcement 96–75, page 29.

A public hearing will be held on September 4, 1996, on

issues related to a study of ‘‘global interest netting’’

being conducted by the Internal Revenue Service and

Treasury.

INCOME TAX

Rev. Rul. 96–39, page 4.

LIFO; price indexes; department stores. The June

1996 Bureau of Labor Statistics price indexes are

accepted for use by department stores employing the

retail inventory and last-in, first-out inventory methods

for valuing inventories for tax years ended on, or with

reference to, June 30, 1996.

Ct.D. 2058, page 13.

Refund claims; Tax Court; return not filed. The Tax

Court lacks jurisdiction to award a refund of taxes paid

more than two years before the date the taxpayer was

mailed a notice of deficiency, if, on the date that the

notice was mailed, the taxpayer had not yet filed a

return. In these circumstances, the applicable look-back

period under section 6512 of the Code is two years.

Commissioner of Internal Revenue v. Robert F. Lundy.

Ct.D. 2059, page 10.

Validity of liens; bankruptcy. A bankruptcy court may

not equitably subordinate claims on a categorical basis

in derogation of Congress’ priorities scheme. United

States v. Thomas R. Noland.

FI–32–95, page 21.

Proposed regulations under section 475 of the Code

Finding Lists begin on page 32.

make mark-to-market accounting inapplicable to most

equity interests in related entities. A public hearing will

be held on October 15, 1996.

CO–9–96, page 20.

Proposed regulations under section 1059 of the Code

relate to certain distributions made by corporations to

certain corporate shareholders. A public hearing will be

held on October 2, 1996.

PS–39–93, page 27.

Proposed regulations under section 280B of the Code

relate to deductions available upon demolition of a

building. A public hearing will be held on October 9,

1996.

Announcement 96–76, page 29.

Rev. Proc. 96–36, 1996–27 I.R.B. 11, which provides

specifications for filing Forms 1098, 1099, 5498, and

W–2G, is corrected.

Pub. L. 104–117, page 19.

An Act to provide that members of the Armed Forces

performing services for the peacekeeping efforts in

Bosnia and Herzegovina, Croatia, and Macedonia shall

be entitled to tax benefits in the same manner as if

such services were performed in a combat zone, and for

other purposes, is reproduced.

EXCISE TAX

Ct.D. 2060, page 5.

Foreign insurance taxes. The Export Clause prohibits

assessment of nondiscriminatory federal taxes on goods

in export transit. United States v. International Business Machines Corp.

Mission of the Service

The purpose of the Internal Revenue Service is to

collect the proper amount of tax revenue at the least

cost; serve the public by continually improving the

quality of our products and services; and perform in a

manner warranting the highest degree of public

confidence in our integrity, efficiency and fairness.

Statement of Principles

of Internal Revenue

Tax Administration

The Service also has the responsibility of applying

and administering the law in a reasonable,

practical manner. Issues should only be raised by

examining of ficers when they have merit, never

arbitrarily or for trading purposes. At the same

time, the examining officer should never hesitate

to raise a meritorious issue. It is also important

that care be exercised not to raise an issue or to

ask a court to adopt a position inconsistent with

an established Service position.

The function of the Internal Revenue Service is to

administer the Internal Revenue Code. Tax policy

for raising revenue is determined by Congress.

With this in mind, it is the duty of the Service to

carry out that policy by correctly applying the laws

enacted by Congress; to determine the reasonable

meaning of various Code provisions in light of the

Congressional purpose in enacting them; and to

perform this work in a fair and impartial manner,

with neither a government nor a taxpayer point of view.

Administration should be both reasonable and

vigorous. It should be conducted with as little

delay as possible and with great cour tesy and

considerateness. It should never try to overreach,

and should be reasonable within the bounds of law

and sound administration. It should, however, be

vigorous in requiring compliance with law and it

should be relentless in its attack on unreal tax

devices and fraud.

At the heart of administration is interpretation of the

Code. It is the responsibility of each person in the

Service, charged with the duty of interpreting the

law, to try to find the true meaning of the statutory

provision and not to adopt a strained construction in

the belief that he or she is ‘‘protecting the revenue.’’

The revenue is properly protected only when we ascertain and apply the true meaning of the statute.

2

Introduction

The Internal Revenue Bulletin is the authoritative instrument of the Commissioner of Internal Revenue for

announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation,

court decisions, and other items of general interest. It is

published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin

contents of a permanent nature are consolidated semiannually into Cumulative Bulletins, which are sold on a

single-copy basis.

court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are

cautioned against reaching the same conclusions in

other cases unless the facts and circumstances are

substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on

provisions of the Internal Revenue Code of 1986.

It is the policy of the Service to publish in the Bulletin all

substantive rulings necessary to promote a uniform

application of the tax laws, including all rulings that

supersede, revoke, modify, or amend any of those

previously published in the Bulletin. All published rulings

apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management

are not published; however, statements of internal

practices and procedures that affect the rights and

duties of taxpayers are published.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows:

Subpart A, Tax Conventions, and Subpart B, Legislation

and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to

these subjects are contained in the other Parts and

Subparts. Also included in this part are Bank Secrecy

Act Administrative Rulings. Bank Secrecy Act Administrative Rulings are issued by the Department of the

Treasury’s Office of the Assistant Secretary (Enforcement).

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts

stated in the revenue ruling. In those based on positions

taken in rulings to taxpayers or technical advice to

Service field offices, identifying details and information

of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory

requirements.

Part IV.—Items of General Interest.

With the exception of the Notice of Proposed Rulemaking and the disbarment and suspension list included in

this part, none of these announcements are consolidated in the Cumulative Bulletins.

Rulings and procedures reported in the Bulletin do not

have the force and effect of Treasury Department

Regulations, but they may be used as precedents.

Unpublished rulings will not be relied on, used, or cited

as precedents by Service personnel in the disposition of

other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations,

The first Bulletin for each month includes an index for

the matters published during the preceding month.

These monthly indexes are cumulated on a quarterly and

semiannual basis, and are published in the first Bulletin

of the succeeding quarterly and semi-annual period,

respectively.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

For sale by the Superintendent of Documents U.S. Government Printing Office, Washington, D.C. 20402.

3

Part I. Rulings and Decisions Under the Internal Revenue Code of 1986

Section 472.—Last-in, First-out

Inventories

26 CFR 1.472–1: Last-in, first-out inventories.

LIFO; price indexes; department

stores. The June 1996 Bureau of Labor

Statistics price indexes are accepted for

use by department stores employing the

retail inventory and last-in, first-out inventory methods for valuing inventories

for tax years ended on, or with reference

to, June 30, 1996.

Rev. Rul. 96–39

The following Department Store Inventory Price Indexes for June 1996

were issued by the Bureau of Labor

Statistics on July 16, 1996. The indexes

are accepted by the Internal Revenue

Service, under § 1.472–1(k) of the Income Tax Regulations and Rev. Proc.

86–46, 1986–2 C.B. 739, for appropriate

application to inventories of department

stores employing the retail inventory and

last-in, first-out inventory methods for

tax years ended on, or with reference to,

June 30, 1996.

The Department Store Inventory Price

Indexes are prepared on a national basis

and include (a) 23 major groups of departments, (b) three special combinations

of the major groups—soft goods, durable

goods, and miscellaneous goods, and (c) a

store total, which covers all departments,

including some not listed separately, except for the following: candy, foods, liquor, tobacco, and contract departments.

BUREAU OF LABOR STATISTICS, DEPARTMENT STORE

INVENTORY PRICE INDEXES BY DEPARTMENT GROUPS

(January 1941 = 100, unless otherwise noted)

June

1995

June

1996

Percent Change from

June 1995 to

June 19961

Piece Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Domestics and Draperies . . . . . . . . . . . . . . . . . . . . . . . .

Women’s and Children’s Shoes . . . . . . . . . . . . . . . . . . .

Men’s Shoes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Infants’ Wear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Women’s Underwear . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Women’s Hosiery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Women’s and Girls’ Accessories . . . . . . . . . . . . . . . . . .

Women’s Outerwear and Girls’ Wear. . . . . . . . . . . . . . .

Men’s Clothing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Men’s Furnishings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Boys’ Clothing and Furnishings . . . . . . . . . . . . . . . . . . .

Jewelry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Toilet Articles and Drugs . . . . . . . . . . . . . . . . . . . . . . . .

Furniture and Bedding . . . . . . . . . . . . . . . . . . . . . . . . . .

Floor Coverings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Housewares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Major Appliances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Radio and Television. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Recreation and Education2 . . . . . . . . . . . . . . . . . . . . . . .

Home Improvements2 . . . . . . . . . . . . . . . . . . . . . . . . . . .

Auto Accessories2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

522.9

646.7

624.2

919.3

587.9

515.1

283.3

549.5

416.3

597.5

562.4

477.8

1004.9

758.7

859.9

663.1

577.0

771.8

247.2

82.1

114.0

122.6

106.8

551.1

641.0

649.3

895.4

627.1

535.4

288.0

545.5

401.1

612.2

584.5

485.7

1011.5

774.1

877.8

673.6

576.4

808.7

245.5

79.3

112.8

127.4

107.5

5.4

20.9

4.0

22.6

6.7

3.9

1.7

20.7

23.7

2.5

3.9

1.7

0.7

2.0

2.1

1.6

20.1

4.8

20.7

23.4

21.1

3.9

0.7

Groups 1–15: Soft Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

587.8

592.4

0.8

Groups 16–20: Durable Goods . . . . . . . . . . . . . . . . . . . . . . . . . .

462.8

469.7

1.5

113.9

113.7

20.2

545.8

550.3

0.8

Groups

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

15.

16.

17.

18.

19.

20.

21.

22.

23.

2

Groups 21–23: Misc. Goods . . . . . . . . . . . . . . . . . . . . . . . . . . .

3

Store Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1

Absence of a minus sign before percentage change in this column signifies price increase.

Indexes on a January 1986=100 base.

3

The store total index covers all departments, including some not listed separately, except for the following: candy, foods,

liquor, tobacco, and contract departments.

2

DRAFTING INFORMATION

The principal author of this revenue

ruling is Stan Michaels of the Office of

Assistant Chief Counsel (Income Tax

and Accounting). For further information

regarding this revenue ruling, contact

4

Mr. Michaels on (202) 622–4970 (not a

toll-free call).

Section 4371.—Imposition of Tax

Ct.D. 2060

SUPREME COURT OF THE UNITED

STATES

No. 95–591

UNITED STATES, PETITIONER v.

INTERNATIONAL BUSINESS

MACHINES CORPORATION

[517 U.S.—]

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF

APPEALS FOR THE FEDERAL

CIRCUIT

June 10, 1996

Syllabus

Pursuant to § 4371 of the Internal Revenue

Code, respondent International Business Machines

Corporation (IBM) paid a tax on insurance premiums remitted to foreign insurers to cover shipments of goods to its foreign subsidiaries. When

its refund claims were denied, IBM filed suit in

the Court of Federal Claims, contending that

§ 4371’s application to policies insuring export

shipments violated the Export Clause, which states

that ‘‘[n]o Tax or Duty shall be laid on Articles

exported from any State.’’ The court agreed,

rejecting the Government’s argument that Thames

& Mersey Marine Ins. Co. v. United States, 237

U. S. 19—in which this Court held that a federal

stamp tax on policies insuring marine risks could

not, under the Export Clause, be constitutionally

applied to policies covering export shipments—

had been superseded by subsequent decisions

interpreting the Import-Export Clause, which states

in relevant part, ‘‘No State shall . . . lay any

Imposts or Duties on Imports or Exports.’’ The

Court of Appeals affirmed.

Held: The Export Clause prohibits assessment

of nondiscriminatory federal taxes on goods in

export transit.

(a) While this Court has strictly enforced the

Export Clause’s prohibition against federal taxation of goods in export transit and certain closely

related services and activities, see, e.g., Thames &

Mersey, supra, it has not exempted pre-export

goods and services from ordinary tax burdens or

exempted from federal taxation various services

and activities only tangentially related to the

export process, see, e.g., Cornell v. Coyne, 192

U.S. 418. Conceding that the tax assessed here

violates the Export Clause under Thames &

Mersey, the Government asks that the case be

overruled because its underlying theory has been

rejected in the context of the Commerce and

Import-Export Clauses and those Clauses have

historically been interpreted in harmony with the

Export Clause.

(b) When this Court expressly disavowed its

early view that the dormant Commerce Clause

required a strict ban on state taxation of interstate

commerce, Complete Auto Transit, Inc. v. Brady,

430 U.S. 274, 288–289, it resolved a long struggle

over the meaning of the nontextual negative

command of that Clause. The Export Clause, on

the other hand, expressly prohibits Congress from

laying any tax or duty on exports. These textual

disparities strongly suggest that shifts in the

Court’s view of the dormant Commerce Clause’s

scope cannot govern Export Clause interpretation.

Cf. Richfield Oil Corp. v. State Bd. of Equalization, 329 U. S. 69, 75–76.

(c) While one may question Thames & Mersey’s

finding that a tax on policies insuring exports is

functionally the same as a tax on exportation

itself, the Government apparently has chosen not

to do so here. Under the principles that animate

the policy of stare decisis, the Court declines to

overrule Thames & Mersey’s long-standing precedent, which has caused no uncertainty in commercial export transactions, on a theory not argued by

the parties.

(d) This Court’s recent Import-Export Clause

cases do not require that Thames & Mersey be

overruled. Meaningful textual differences that

should not be overlooked exist between the Export

Clause and the Import-Export Clause. In finding

the assessments in Michelin Tire Corp. v. Wages,

423 U.S. 276, and Department of Revenue of

Wash. v. Association of Wash. Stevedoring Cos.,

435 U. S. 734, valid, the Court recognized that the

Import-Export Clause’s absolute ban on ‘‘Imposts

or Duties’’ is not a ban on every tax. Because

impost and duty are thus narrower terms than tax,

a particular state assessment might be beyond the

Import-Export Clause’s reach, while an identical

federal assessment might be subject to the Export

Clause. The word ‘‘Tax’’ has a common, and

usually expansive, meaning that should not be

ignored. The Clauses were also intended to serve

different goals. The Government’s policy argument—that the Framers intended the Export

Clause to narrowly alleviate the fear of northern

repression through taxation of southern exports by

prohibiting only discriminatory taxes—cannot be

squared with the Clause’s broad language. The

better reading is that the Framers sought to

alleviate their concerns by completely denying to

Congress the power to tax exports at all. See

Fairbank v. United States, 181 U. S. 283.

(e) Even assuming that Michelin and Washington Stevedoring govern the Export Clause inquiry

here, those holdings do not interpret the ImportExport Clause to permit assessment of nondiscriminatory taxes on imports and exports in transit.

59 F. 3d 1234, affirmed.

THOMAS, J., delivered the opinion of the Court,

in which REHNQUIST, C. J., and O’CONNOR,

S CALIA , S OUTER , and B REYER , JJ., joined.

KENNEDY, J., filed a dissenting opinion, in which

GINSBURG, J., joined. STEVENS, J., took no part in

the consideration or decision of the case.

JUSTICE THOMAS delivered the opin-

ion of the Court.

We resolve in this case whether the

Export Clause of the Constitution permits the imposition of a generally applicable, nondiscriminatory federal tax on

goods in export transit. We hold that it

does not.

Business Machines Corporation (IBM)

ships products that it manufactures in

the United States to numerous foreign

subsidiaries and insures those shipments

against loss. When the foreign subsidiary makes the shipping arrangements,

the subsidiary often places the insurance

with a foreign carrier. When it does,

both IBM and the subsidiary are listed

as beneficiaries in the policy.

IBM filed federal excise tax returns

for the years 1975 through 1984, but

reported no liability under § 4371. The

IRS audited IBM and determined that

the premiums paid to foreign insurers

were taxable under § 4371 and that

IBM—as a named beneficiary of the

insurance policies—was liable for the

tax. The IRS assessed a tax against IBM

for each of those years.

IBM paid the assessments and filed

refund claims, which the IRS denied.

IBM then commenced suit in the Court

of Federal Claims, contending that application of § 4371 to policies insuring

its export shipments violated the Export

Clause. The focus of the suit was this

Court’s decision in Thames & Mersey

Marine Ins. Co. v. United States, 237

U.S. 19 (1915), in which we held that a

federal stamp tax on policies insuring

marine risks could not, under the Export

Clause, be constitutionally applied to

policies covering export shipments. The

United States argued that the analysis of

Thames & Mersey is no longer valid,

having been superseded by subsequent

decisions interpreting the Import-Export

Clause—specifically, Michelin Tire

Corp. v. Wages, 423 U. S. 276 (1976),

and Department of Revenue of Wash. v.

Association of Wash. Stevedoring Cos.,

435 U. S. 734 (1978). The Court of

Federal Claims noted that this Court has

never overruled Thames & Mersey and

ruled that application of § 4371 to policies insuring goods in export transit

violates the Export Clause. 31 Fed. Cl.

500 (1994). The Court of Appeals for

the Federal Circuit affirmed. 59 F. 3d

1234 (1995). We agreed to hear this

case to decide whether we should overrule Thames & Mersey. 516 U.S. __

(1995).

I

II

Section 4371 of the Internal Revenue

Code imposes a tax on insurance premiums paid to foreign insurers that are not

subject to the federal income tax.1 26 U.

S. C. § 4371 (1982 ed.). International

The Export Clause states simply and

directly: ‘‘No Tax or Duty shall be laid

on Articles exported from any State.’’

U.S. Const., Art. I, § 9, cl. 5. We have

had few occasions to interpret the lan-

1

The tax does not apply if a policy issued by a

foreign insurer is ‘‘signed or countersigned by an

officer or agent of the insurer in a State, or in the

District of Columbia, within which such insurer is

authorized to do business.’’ 26 U. S. C. § 4373(1)

(1982 ed.).

5

guage of the Export Clause, but our

cases have broadly exempted from federal taxation not only export goods, but

also services and activities closely related to the export process. At the same

time, we have attempted to limit the

term ‘‘Articles exported’’ to permit federal taxation of pre-export goods and

services.

Our early cases upheld federal assessments on the manufacture of particular

products ultimately intended for export

by finding that pre-export products are

not ‘‘Articles exported.’’ See Pace v.

Burgess, 92 U. S. 372 (1876); Turpin v.

Burgess, 117 U. S. 504 (1886); Cornell

v. Coyne, 192 U. S. 418 (1904). Pace

and Turpin both involved a federal excise tax on tobacco products. In Pace,

though tobacco intended for export was

exempted from the tax, the exemption

itself was subject to a per-package

stamp charge of 25 cents. When a tobacco manufacturer challenged the

stamp charge, we upheld the charge on

the basis that the stamps were designed

to prevent fraud in the export exemption

from the excise tax and did not, therefore, represent a tax on exports. 92 U.S.,

at 375. When Congress later repealed

the 25-cent charge for the exemption

stamp in a statute that referred to the

stamp as an ‘‘export tax,’’ another

manufacturer sued to recover the money

it had paid for the exemption stamps.

See Turpin, supra. Without disturbing

the prior ruling in Pace that the stamp

charge was not a tax on exports, 117

U.S., at 505, we explained that the

prohibition of the Export Clause ‘‘has

reference to the imposition of duties on

goods by reason or because of their

exportation or intended exportation, or

whilst they are being exported,’’ id., at

507. We said that the plaintiffs would

have had no Export Clause claim even

if there had been no exemption from the

excise because the goods were not in

the course of exportation and might

never be exported. Ibid. Turpin broadly

suggested that the Export Clause prohibits both taxes levied on goods in the

course of exportation and taxes directed

specifically at exports.

In Cornell, the Court addressed

whether the Export Clause prohibited

application of a federal excise tax on

filled cheese manufactured under contract for export. Looking to the analysis

set out in Turpin, we rejected the contention that the Export Clause bars application of a nondiscriminatory tax imposed before the product entered the

course of exportation. ‘‘The true con-

struction of the constitutional provision

is that no burden by way of tax or duty

can be cast upon the exportation of

articles, and does not mean that articles

exported are relieved from the prior

ordinary burdens of taxation which rest

upon all property similarly situated.’’

Cornell, supra, at 427. Pace, Turpin,

and Cornell made clear that nondiscriminatory pre-exportation assessments

do not violate the Export Clause, even if

the goods are eventually exported.

At the same time we were defining a

domain within which nondiscriminatory

taxes could permissibly be imposed on

goods intended for export, we were also

making clear that the Export Clause

strictly prohibits any tax or duty, discriminatory or not, that falls on exports

during the course of exportation. See

Fairbank v. United States, 181 U. S.

283 (1901); United States v. Hvoslef,

237 U. S. 1 (1915); Thames & Mersey

Marine Ins. Co. v. United States, supra.

In Fairbank, for example, we addressed

a federal stamp tax on bills of lading for

export shipments imposed by the War

Revenue Act of 1898. The Court found

that the tax was facially discriminatory,

Fairbank, supra, at 290, and, though not

directly imposed on the goods being

exported, the tax was nevertheless ‘‘in

effect a duty on the article transported,’’

181 U. S., at 294. Consequently, the tax

fell directly into the category of forbidden taxes on exports defined in Turpin.

In striking down the tax, we said:

‘‘The requirement of the Constitution is that exports should be

free from any governmental burden. The language is ‘no tax or

duty.’ Whether such provision is

or is not wise is a question of

policy with which the courts have

nothing to do. We know historically that it was one of the compromises which entered into and

made possible the adoption of the

Constitution. It is a restriction on

the power of Congress . . . .’’ 181

U. S., at 290.

Hvoslef and Thames & Mersey differed from Fairbank in that the taxes

imposed in those cases—on ship charters and marine insurance, respectively—did not facially discriminate

against exports. The Court nonetheless

prohibited the application of those generally applicable, nondiscriminatory

taxes to the transactions at issue because

each tax was, in effect, a tax on exports.

The type of charter contract at issue in

Hvoslef was ‘‘in contemplation of law a

mere contract of affreightment,’’ 237

6

U.S., at 16, and we found that the tax,

as applied to charters for exportation,

‘‘was in substance a tax on the exportation; and a tax on the exportation is a

tax on the exports,’’ id., at 17. Likewise,

in Thames & Mersey, we found that

‘‘proper insurance during the voyage is

one of the necessities of exportation’’

and that ‘‘the taxation of policies insuring cargoes during their transit to foreign ports is as much a burden on

exporting as if it were laid on the

charter parties, the bills of lading, or the

goods themselves.’’ 237 U. S., at 27.

Shortly after Hvoslef and Thames &

Mersey, the Court rejected an attempt to

shield from taxation the net income of a

company engaged in the export business. William E. Peck & Co. v. Lowe,

247 U. S. 165 (1918). In accordance

with the analysis set out in Turpin, we

found both that the tax was nondiscriminatory and that ‘‘[i]t is not laid on

articles in course of exportation or on

anything which inherently or by the

usages of commerce is embraced in

exportation or any of its processes.’’ 247

U. S., at 174.

Only a few years later the Court

struck down the application of a tax on

the export sale of certain baseball equipment. See A. G. Spalding & Bros. v.

Edwards, 262 U. S. 66 (1923). Although

the tax was clearly nondiscriminatory,

we explained that the goods being taxed

had entered the course of exportation

when they were delivered to the export

carrier. Id., at 70. Because the taxable

event, the transfer of title, occurred at

the same moment the goods entered the

course of exportation, we held that the

tax could not constitutionally be applied

to the export sale. Id., at 69–70.

The Court has strictly enforced the

Export Clause’s prohibition against federal taxation of goods in export transit,

and we have extended that protection to

certain services and activities closely

related to the export process. We have

not, however, exempted pre-export

goods and services from ordinary tax

burdens; nor have we exempted from

federal taxation various services and

activities only tangentially related to the

export process.

III

The Government concedes, as it did

below, that this case is largely indistinguishable from Thames & Mersey and

that, if Thames & Mersey is still good

law, the tax assessed against IBM under

§ 4371 violates the Export Clause. See

Tr. of Oral Arg. 5; 59 F. 3d, at 1237.

The parties apparently agree that there is

no legally significant distinction between the insurance policies at issue in

this case and those at issue in Thames &

Mersey, and, accordingly, the Government asks that we overrule Thames &

Mersey.

The Government asserts that the Export Clause permits the imposition of

generally applicable, nondiscriminatory

taxes, even on goods in export transit.

The Government urges that we have

historically interpreted the Commerce,

Import-Export, and Export Clauses in

harmony and that we have rejected the

theory underlying Thames & Mersey in

the context of the Commerce and

Import-Export Clauses. Accordingly, the

Government contends that our Export

Clause jurisprudence, symbolized by

Thames & Mersey, has become an

anachronism in need of modernization.

The Government asks us to reinterpret

the Export Clause to permit the imposition of generally applicable, nondiscriminatory taxes as we have under the

Commerce Clause and, it argues, under

the Import-Export Clause.

A

The Government contends that our

dormant Commerce Clause jurisprudence has shifted dramatically and that

our traditional understanding of the Export Clause, which is based partly on an

outmoded view of the Commerce

Clause, can no longer be justified. It is

true that some of our early Export

Clause cases relied on an interpretation

of the Commerce Clause that we have

since rejected. In Fairbank, 181 U. S.,

at 298–300, for example, we analogized

to Robbins v. Shelby County Taxing

Dist., 120 U. S. 489, 497 (1887), in

which we held that ‘‘[i]nterstate commerce cannot be taxed at all [by the

States], even though the same amount of

tax should be laid on domestic commerce, or that which is carried on solely

within the state.’’ Referring to the categorical ban on taxation of interstate

commerce declared in Robbins, we likened the scope of the Commerce

Clause’s ban on state taxation of interstate commerce to the Export Clause’s

ban on federal taxation of exports.

Fairbank, supra, at 300; see also

Hvoslef, 237 U. S., at 15 (‘‘The court

[in Fairbank] found an analogy in the

construction which had been given to

the commerce clause in protecting interstate commerce from state legislation

imposing direct burdens’’). After

Thames & Mersey, the Commerce

Clause construction espoused in Robbins

fell out of favor, see Western Live Stock

v. Bureau of Revenue, 303 U. S. 250,

254 (1938) (‘‘It was not the purpose of

the commerce clause to relieve those

engaged in interstate commerce from

their just share of state tax burden even

though it increases the cost of doing the

business’’), and we expressly disavowed

that view in Complete Auto Transit, Inc.

v. Brady, 430 U. S. 274, 288—289

(1977).

Our rejection in Complete Auto of

much of our early dormant Commerce

Clause jurisprudence did not, however,

signal a similar rejection of our Export

Clause cases. Our decades-long struggle

over the meaning of the nontextual

negative command of the dormant Commerce Clause does not lead to the

conclusion that our interpretation of the

textual command of the Export Clause

is equally fluid. At one time, the Court

may have thought that the dormant

Commerce Clause required a strict ban

on state taxation of interstate commerce,

but the text did not require that view.2

The text of the Export Clause, on the

other hand, expressly prohibits Congress

from laying any tax or duty on exports.

These textual disparities strongly suggest that shifts in the Court’s view of

the scope of the dormant Commerce

Clause should not, and indeed cannot,

govern our interpretation of the Export

Clause. Cf. Richfield Oil Corp. v. State

Bd. of Equalization, 329 U. S. 69,

75–76 (1946) (distinguishing accommodations made under the Commerce

Clause from the express textual prohibition of the Import-Export Clause).

B

The Government’s primary assertion

is that modifications in our ImportExport Clause jurisprudence require parallel modifications in the Export Clause

context. More specifically, the Government argues that our decisions in

Michelin Tire Corp. v. Wages, 423 U. S.

276 (1976), and Department of Revenue

of Wash. v. Association of Wash. Steve2

The Commerce Clause is an express grant of

power to Congress to ‘‘regulate Commerce . . .

among the several States.’’ U. S. Const., Art. I,

§ 8, cl. 3. It does not expressly prohibit the States

from doing anything, though we have long recognized negative implications of the Clause that

prevent certain state taxation even when Congress

has failed to legislate. See Fulton Corp. v.

Faulkner, 516 U. S. __, __ (1996) (slip op., at

4–5); Quill Corp. v. North Dakota, 504 U. S. 298,

309 (1992).

7

doring Cos., 435 U. S. 734 (1978),

establish that States may impose generally applicable, nondiscriminatory taxes

even if those taxes fall on imports or

exports. The Export Clause, the Government contends, is no more restrictive.

The Import-Export Clause, which is

textually similar to the Export Clause,

says in relevant part, ‘‘No State shall

. . . lay any Imposts or Duties on Imports or Exports.’’ U. S. Const., Art. I,

§ 10, cl. 2. Though minor textual differences exist and the Clauses are directed

at different sovereigns, historically both

have been treated as broad bans on

taxation of exports, and in several cases

the Court has interpreted the provisions

of the two Clauses in tandem. For

instance, in the Court’s first decision

interpreting the Import-Export Clause,

Chief Justice Marshall said:

‘‘The States are forbidden to lay a

duty on exports, and the United

States are forbidden to lay a tax or

duty on articles exported from any

State. There is some diversity in

language, but none is perceivable

in the act which is prohibited.’’

Brown v. Maryland, 12 Wheat.

419, 445 (1827).

See also Kosydar v. National Cash

Register Co., 417 U. S. 62, 67, n. 5

(1974); Hvoslef, supra, at 13–14;

Cornell, 192 U. S., at 427–428; Turpin,

117 U. S., at 506–507. The Government

argues that our longstanding parallel

interpretations of the two Clauses require judgment in its favor. We disagree.

In Michelin, we addressed whether a

State could impose a nondiscriminatory

ad valorem property tax on imported

goods that were no longer in import

transit. Michelin, which imported tires

from Canada and France and stored

them in a warehouse, argued that Georgia could not constitutionally assess ad

valorem property taxes against its imported tires. We explained that ‘‘[t]he

Framers of the Constitution . . . sought

to alleviate three main concerns’’: (i)

ensuring that the Federal Government

speaks with one voice when regulating

foreign commerce; (ii) preserving import

revenues as a major source of federal

revenue; and (iii) preventing disharmony

likely to be caused if seaboard States

taxed goods coming through their ports.

Michelin, supra, at 285–286. The Court

found that nondiscriminatory ad valorem

taxes violate none of these policies. A

century earlier, however, the Court had

ruled that, under the ‘‘original package

doctrine,’’ a State could not impose such

a tax until the goods had lost their

character as imports and had been incorporated into the mass of property in the

State. Low v. Austin, 13 Wall. 29, 34

(1872). The Michelin Court overruled

Low and held that the nondiscriminatory

property tax levied on Michelin’s inventory of imported tires did not violate the

Import-Export Clause because it was not

an impost or duty on imports. 423 U. S.,

at 301. See also Limbach v. Hooven &

Allison Co., 466 U. S. 353 (1984)

(reaffirming that Michelin expressly

overruled the original package doctrine

altogether and not merely Low on its

facts).

Two years later, in Washington Stevedoring, we upheld against an ImportExport Clause challenge a nondiscriminatory state tax assessed against the

compensation received by stevedoring

companies for services performed within

the State. The Court found that Washington’s stevedoring tax did not violate

the policies underlying the ImportExport Clause. Unlike the property tax

at issue in Michelin, the activity taxed

by Washington occurred while imports

and exports were in transit. That fact

was not dispositive, however, because

the tax did not fall on the goods themselves:

‘‘The levy reaches only the business of loading and unloading

ships or, in other words, the business of transporting cargo within

the State of Washington. Despite

the existence of the first distinction, the presence of the second

leads to the conclusion that the

Washington tax is not a prohibited

‘Impost or Duty’ when it violates

none of the policies [that animate

the Import-Export Clause].’’ Washington Stevedoring, supra, at 755.

Relying on Canton R. Co. v. Rogan, 340

U. S. 511 (1951), which upheld a tax on

the gross receipts of a railroad that

operated a marine terminal and transported imports and exports, we ruled in

Washington Stevedoring that taxation of

transportation services, whether by railroad on the docks or by stevedores

loading and unloading ships, did not

relate to the value of the goods and

could not be considered imposts or

duties on the goods themselves. 435

U.S., at 757.

1

A tax on policies insuring exports is

not, precisely speaking, the same as a

tax on exports, but Thames & Mersey

held that they were functionally the

same under the Export Clause. We noted

in Washington Stevedoring that one may

question the finding in Thames &

Mersey that the tax was essentially a tax

upon the exportation itself. 435 U. S., at

756, n. 21. We expressed concern that

‘‘[t]he basis for distinguishing Thames

& Mersey is less clear’’ than for

Fairbank or Richfield Oil, because the

marine insurance policies in Thames &

Mersey arguably ‘‘had a value apart

from the value of the goods.’’ 435 U. S.,

at 756, n. 21. Nevertheless, the Government apparently has chosen not to challenge that aspect of Thames & Mersey

in this case. Tr. of Oral Arg. 5, 8–9, 40.

When questioned on that implicit concession at oral argument, the Government admitted that it ‘‘chose not to’’

argue that § 4371 does not impose a tax

on the goods themselves. Id., at 9. It

would be inappropriate for us to reexamine in this case, without the benefit

of the parties’ briefing, whether the

policies on which § 4371 is assessed

are so closely connected to the goods

that the tax is, in essence, a tax on

exports.3 See, e.g., id., at 27–28 (‘‘[T]he

record doesn’t reveal the sort of statistical information Justice Breyer was suggesting might be relevant’’ to determine

‘‘whether this is sufficiently indirect that

it’s not a tax on exports, . . . because the

Government has conceded throughout

that they are not disputing that this tax,

if discriminatory, is in violation of the

Constitution’’).

Stare decisis is a ‘‘principle of

policy,’’ Helvering v. Hallock, 309 U. S.

106, 119 (1940), and not ‘‘an inexorable

command,’’ Payne v. Tennessee, 501 U.

S. 808, 828 (1991). Applying that

policy, we frequently have declined to

overrule cases in appropriate circumstances because stare decisis ‘‘promotes the evenhanded, predictable, and

consistent development of legal principles, fosters reliance on judicial decisions, and contributes to the actual and

perceived integrity of the judicial process.’’ Id., at 827. ‘‘[E]ven in constitutional cases, the doctrine carries such

persuasive force that we have always

required a departure from precedent to

be supported by some ‘special justification.’’’ Id., at 842 (SOUTER, J., concurring) (quoting Arizona v. Rumsey, 467

U. S. 203, 212 (1984)).

Though from time to time we have

overruled governing decisions that are

‘‘unworkable or are badly reasoned,’’

Payne, supra, at 827; see Smith v.

Allwright, 321 U. S. 649, 665 (1944),

we have rarely done so on grounds not

advanced by the parties. Thames &

Mersey has been controlling precedent

for over 80 years, and the Government

does not, indeed could not, argue that

the rule established there is ‘‘unworkable.’’ Despite the dissent’s speculative

protestations to the contrary, post, at

9–11, there is simply no evidence that

Thames & Mersey has caused or will

cause uncertainty in commercial export

transactions. The principles that animate

our policy of stare decisis caution

against overruling a long-standing precedent on a theory not argued by the

parties, and we decline to do so in this

case.4

2

3

The Court has never held that the Export Clause

prohibits only direct taxation of goods in export

transit. In Brown v. Maryland, 12 Wheat. 419

(1827), Chief Justice Marshall expressed in dicta

his skepticism that a federal occupational tax on

exporters could pass scrutiny under the Export

Clause. Id., at 445 (‘‘[W]ould government be

permitted to shield itself from the just censure to

which this attempt to evade the prohibitions of the

constitution would expose it, by saying that this

was a tax on the person, not on the article, and

that the legislature had a right to tax occupations?’’). In Fairbank, Hvoslef, and Thames &

Mersey, we struck down taxes that were not

assessed directly on goods in export transit, but

which the Court found to be so closely related as

to be effectively a tax on the goods themselves.

We have never repudiated that principle, but

neither have we ever carefully defined how we

decide whether a particular federal tax is sufficiently related to the goods or their value to

violate the Export Clause. To the extent the issue

was raised in the petition for certiorari, the

Government failed to address the issue in its brief

on the merits and therefore has abandoned it. See

Posters ‘N’ Things, Ltd. v. United States, 511 U.

S. ___, ___ (1994) (slip op., at 15); Russell v.

United States, 369 U. S. 749, 754, n. 7 (1962).

8

What the Government does argue is

that our Import-Export Clause cases require us to overrule Thames & Mersey5.

We have good reason to hesitate before

adopting the analysis of our recent

Import-Export Clause cases into our

Export Clause jurisprudence. Though we

have frequently interpreted the Clauses

together, see supra, at 9–10, our more

4

The dissent suggests that ‘‘the Court assumes the

statute to be invalid rather than deciding it to be

so.’’ Post, at 2. We make no such assumptions.

Rather, we begin with a longstanding decision

that, by all accounts, controls this case. Even the

Government agrees that Congress enacted a law

whose application in this case directly contravenes

our holding in Thames & Mersey. We sit not to

condemn § 4371, but rather to determine whether

it is to be saved by overruling binding precedent.

5

The dissent suggests that we make a ‘‘serious

mistake’’ in deciding whether a nondiscriminatory

tax on goods violates the Export Clause, post, at

19. We do not agree that it is a mistake to address

the arguments actually advanced by the parties.

recent Import-Export Clause cases, on

which the Government relies, caution

that meaningful textual differences exist

and should not be overlooked. The Export Clause prohibits Congress from

laying any ‘‘Tax or Duty’’ on exports,

while the Import-Export Clause prevents

the States from laying any ‘‘Imposts or

Duties’’ on imports or exports. In both

Michelin and Washington Stevedoring,

we left open the possibility that a particular state assessment might not properly be called an impost or duty, and

thus would be beyond the reach of the

Import-Export Clause, while an identical

federal assessment might properly be

called a tax and would be subject to the

Export Clause. Though we found in

Michelin that a nondiscriminatory state

property tax does not transgress the

policy dictates of the Import-Export

Clause, we also recognized that the

Import-Export Clause is ‘‘not written in

terms of a broad prohibition of every

‘tax,’ ’’ and that impost and duty are

narrower terms than tax. 423 U. S., at

290–293. In Washington Stevedoring, we

likewise rejected the assertion that the

Import-Export Clause absolutely prohibits all taxation of imports and exports.

435 U. S., at 759. We said that ‘‘the

term ‘Impost or Duty’ is not selfdefining and does not necessarily encompass all taxes’’ and that the respondents’ argument to the contrary ignored

‘‘the central holding of Michelin that the

absolute ban is only of ‘Imposts or

Duties’ and not of all taxes.’’ Ibid.

The distinction between imposts or

duties and taxes is especially pertinent

in light of the peculiar definitional

analysis we chose in Michelin. Finding

substantial ambiguity in the phrase ‘‘Imposts or Duties,’’ we ‘‘decline[d] to

presume it was intended to embrace

taxation that does not create the evils

the Clause was specifically intended to

eliminate.’’ Michelin, supra, at 293–294.

We entirely bypassed the etymological

inquiry into the proper meaning of the

terms ‘‘impost’’ and ‘‘duty,’’ and instead

created a regime in which those terms

are conclusions to be drawn from an

examination into whether a particular

assessment ‘‘was the type of exaction

that was regarded as objectionable by

the Framers of the Constitution.’’ 423 U.

S., at 286. We are not prepared to say

that the word ‘‘Tax’’ is ‘‘sufficiently

ambiguous,’’ id., at 293, that we may

ignore its common, and usually expan-

sive,6 meaning in favor of an Export

Clause decisional rule in which a tax is

not a ‘‘Tax’’ unless it discriminates

against exports. Consequently, Michelin

and Washington Stevedoring, which held

that the assessments in question were

not ‘‘Imposts or Duties’’ at all, do not

logically validate the assessment at issue

in this case, which, by all accounts,

remains a ‘‘Tax.’’

It is not intuitively obvious that

Michelin’s three-pronged analysis of the

Framers’ concerns is really just another

way of stating a nondiscrimination principle. But even if it were, the Government cannot reasonably rely on Michelin

to govern the Export Clause because

Michelin drew its analysis around the

phrase ‘‘Imposts or Duties’’ and expressly excluded the broader term

‘‘Tax’’ that appears in the Export

Clause. Michelin marked a more permissive approach to state taxation under the

Import-Export Clause only by distinguishing the presumptively stricter language of the Export Clause. We agree

with the Government that Michelin informs our decision in this case, but not

in a way that supports the Government’s

position. It is simply no longer true that

the Court perceives no substantive difference between the two Clauses.

We are similarly hesitant to adopt the

Import-Export Clause’s policy-based

analysis without some indication that the

Export Clause was intended to alleviate

the same ‘‘evils’’ to which the ImportExport Clause was directed. Unlike the

Import-Export Clause, which was intended to protect federal supremacy in

international commerce, to preserve federal revenue from import duties and

imposts, and to prevent coastal States

with ports from taking unfair advantage

of inland States, see Michelin, supra, at

285–286, the Export Clause serves none

of those goals. Indeed, textually, the

Export Clause does quite the opposite. It

specifically prohibits Congress from

regulating international commerce

through export taxes, disallows any attempt to raise federal revenue from

exports, and has no direct effect on the

way the States treat imports and exports.

As a purely historical matter, the

Export Clause was originally proposed

6

Though Michelin discusses ‘‘taxes’’ in terms of

‘‘every exaction,’’ 423 U. S., at 290, it also

suggests that at the time of the Founding ‘‘probably only capitation, land, and general property

exactions were known by the term ‘tax’ rather

than the term ‘duty,’ ’’ id., at 291. In any event,

the Michelin Court understood that the terms used

in the Export Clause were broader than those used

in the Import-Export Clause.

9

by delegates to the Federal Convention

from the Southern States, who feared

that the Northern States would control

Congress and would use taxes and duties on exports to raise a disproportionate share of federal revenues from the

South. See 2 M. Farrand, The Records

of the Federal Convention of 1787, pp.

95, 305–308, 359–363 (rev. ed. 1966).

The Government argues that this ‘‘narrow historical purpose’’ justifies a narrow interpretation of the text and that

application of § 4371 to policies insuring exports does not conflict with the

policies embodied in the Clause. Brief

for United States 32–34. While the

original impetus may have had a narrow

focus, the remedial provision that ultimately became the Export Clause does

not, and there is substantial evidence

from the Debates that proponents of the

Clause fully intended the breadth of

scope that is evident in the language.

See, e. g., 2 Farrand, Records of the

Federal Convention, at 220 (Mr. King:

‘‘In two great points the hands of the

Legislature were absolutely tied. The

importation of slaves could not be prohibited—exports could not be taxed’’);

id., at 305 (‘‘Mr. Mason urged the

necessity of connecting with the power

of levying taxes . . . that no tax should

be laid on exports’’); id., at 360 (Mr.

Elseworth [sic]: ‘‘There are solid reasons agst. Congs taxing exports’’); ibid.

(‘‘Mr. Butler was strenuously opposed to

a power over exports’’); id., at 361 (Mr.

Sherman: ‘‘It is best to prohibit the

National legislature in all cases’’); id., at

362 (‘‘Mr. Gerry was strenuously opposed to the power over exports’’).

The Government argued for a different narrow interpretation of the Export

Clause in Fairbank. See 181 U. S., at

292–293. Arguing that the Debates expressed a primary interest in diffusing

sectional conflicts, the Government

urged the Fairbank Court to interpret

the Export Clause to permit taxation of

‘‘the act of exportation or the document

evidencing the receipt of goods for

export, for these exist with substantial

uniformity throughout the country.’’ Id.,

at 292. We rejected that argument:

‘‘If mere discrimination between

the States was all that was contemplated, it would seem to follow

that an ad valorem tax upon all

exports would not be obnoxious to

this constitutional prohibition. But

surely under this limitation Congress can impose an export tax

neither on one article of export,

nor on all articles of export.’’ Ibid.

As in Fairbank, we think the text of the

constitutional provision provides a better

decisional guide than that offered by the

Government. The Government’s policy

argument—that the Framers intended the

Export Clause to narrowly alleviate the

fear of northern repression through taxation of southern exports by prohibiting

only discriminatory taxes—cannot be

squared with the broad language of the

Clause. The better reading, that adopted

by our earlier cases, is that the Framers

sought to alleviate their concerns by

completely denying to Congress the

power to tax exports at all.

3

Even assuming that Michelin and

Washington Stevedoring govern our Export Clause inquiry in this case, the

Government’s argument falls short of its

goal. Our holdings in Michelin and

Washington Stevedoring do not reach the

facts of this case and, more importantly,

do not interpret the Import-Export

Clause to permit assessment of nondiscriminatory taxes on imports and exports in transit. Michelin involved a tax

on goods, but the goods were no longer

in transit. The tax in Washington Stevedoring burdened imports and exports

while they were still in transit, but it did

not fall directly on the goods themselves. This case, as it comes to us, is a

hybrid in which the tax both burdens

exports during transit and—as the Government concedes and our earlier cases

held—is essentially a tax on the goods

themselves. The Government argues that

Michelin and Washington Stevedoring by

analogy permit Congress to impose generally applicable, nondiscriminatory

taxes that fall directly on exports in

transit. Brief for United States 32

(Michelin and Washington Stevedoring

‘‘demonstrate that, when a generally

applicable, nondiscriminatory tax is at

issue, the mere fact that the tax applies

also to goods that are in the export or

import process does not provide a constitutional immunity from taxation’’). If

this contention is to succeed, the Government at the very least must show that

our Import-Export Clause jurisprudence

now permits a State to impose a nondiscriminatory tax directly on goods in

import or export transit. We think the

Government has failed to make that

showing.

The Court has never upheld a state

tax assessed directly on goods in import

or export transit. In Michelin, we suggested that the Import-Export Clause

would invalidate application of a non-

discriminatory property tax to goods still

in import or export transit. 423 U. S., at

290 (compliance with the Import-Export

Clause may be secured ‘‘by prohibiting

the assessment of even nondiscriminatory property taxes on [import or export]

goods which are merely in transit

through the State when the tax is assessed’’). See also Virginia Indonesia

Co. v. Harris County Appraisal Dist.,

910 S. W. 2d 905, 915 (Tex. 1995)

(invalidating application of a nondiscriminatory ad valorem property tax to

goods in export transit).

We also declined to endorse the Government’s theory in Washington Stevedoring. After reciting that the Court in

Canton R. Co. had distinguished Thames

& Mersey, Fairbank, and Richfield Oil,

we pointed out that in those cases ‘‘the

State [or Federal Government] had taxed

either the goods or activity so connected

with the goods that the levy amounted

to a tax on the goods themselves.’’

Washington Stevedoring, 435 U. S., at

756, n. 21. We expressly declined to

‘‘reach the question of the applicability

of the Michelin approach when a State

directly taxes imports or exports in

transit,’’ id., at 757, n. 23, because,

although the goods in that case were in

transit, the tax fell on ‘‘a service distinct

from the goods and their value,’’ id., at

757. Thus, contrary to the Government’s

contention, this Court’s Import-Export

Clause cases have not upheld the validity of generally applicable, nondiscriminatory taxes that fall on imports or

exports in transit. We think those cases

leave us free to follow the express

textual command of the Export Clause

to prohibit the application of any tax

‘‘laid on Articles exported from any

State.’’

*

*

*

*

*

We conclude that the Export Clause

does not permit assessment of nondiscriminatory federal taxes on goods in

export transit. Reexamination of the

question whether a particular assessment

on an activity or service is so closely

connected to the goods as to amount to

a tax on the goods themselves must

await another day. We decline to overrule Thames & Mersey. The judgment of

the Court of Appeals for the Federal

Circuit is affirmed.

It is so ordered.

10

Section 6323.—Validity and Priority

Against Certain Persons

Ct.D. 2059

SUPREME COURT OF THE

UNITED STATES

No. 95–323

UNITED STATES, PETITIONER v.

THOMAS R. NOLAND, TRUSTEE

FOR DEBTOR FIRST TRUCK

LINES, INC.

517 U.S.—

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF

APPEALS FOR THE SIXTH CIRCUIT

May 13, 1996

Syllabus

The Internal Revenue Service filed claims in the

Bankruptcy Court for taxes, interest, and penalties

that accrued after debtor First Truck Lines, Inc.,

sought relief under Chapter 11 of the Bankruptcy

Code but before the case was converted to a

Chapter 7 bankruptcy. The court found that all of

the IRS’s claims were entitled to first priority as

administrative expenses under 11 U. S. C.

§§ 503(b)(1)(C) and 507(a)(1), but held that the

penalty claim was subject to ‘‘equitable subordination’’ under § 510(c), which the court interpreted

as giving it authority not only to deal with

inequitable Government conduct, but also to adjust

a statutory priority of a category of claims. The

court’s decision to subordinate the penalty claim to

the claims of the general unsecured creditors was

affirmed by the District Court and the Sixth

Circuit, which concluded that postpetition,

nonpecuniary loss tax penalty claims are susceptible to subordination by their very nature.

Held: A bankruptcy court may not equitably

subordinate claims on a categorical basis in derogation of Congress’s priorities scheme. The language of § 510(c), principles of statutory construction, and legislative history clearly indicate

Congress’s intent in its 1978 revision of the Code

to use the existing judge-made doctrine of equitable subordination as the starting point for deciding when subordination is appropriate. By adopting ‘‘principles of equitable subordination,’’

§ 510(c) allows a bankruptcy court to reorder a

tax penalty when justified by particular facts. It is

also clear that Congress meant to give courts some

leeway to develop the doctrine. However, a reading of the statute that would give courts leeway

broad enough to allow subordination at odds with

the congressional ordering of priorities by category

is improbable in the extreme. The statute would

then empower a court to modify the priority

provision’s operation at the same level at which

Congress operated when it made its characteristically general judgment to establish the hierarchy

of claims in the first place, thus delegating

legislative revision, not authorizing equitable exception. Nonetheless, just such a legislative type

of decision underlies the reordering of priorities

here. The Sixth Circuit’s decision runs directly

counter to Congress’s policy judgment that a

postpetition tax penalty should receive the priority

of an administrative expense. Since the Sixth

Circuit’s rationale was inappropriately categorical

in nature, this Court need not decide whether a

bankruptcy court must always find creditor misconduct before a claim may be equitably subordinated.

48 F. 3d 210, reversed and remanded.

SOUTER, J., delivered the opinion for a unanimous Court.

JUSTICE SOUTER delivered the opinion

of the Court.

The issue in this case is the scope of

a bankruptcy court’s power of equitable

subordination under 11 U.S.C. § 510(c).

Here, in the absence of any finding of

inequitable conduct on the part of the

Government, the Bankruptcy Court subordinated the Government’s claim for a

postpetition, noncompensatory tax penalty, which would normally receive first

priority in bankruptcy as an ‘‘administrative expense,’’ §§ 503(b)(1)(C),

507(a)(1). We hold that the bankruptcy

court may not equitably subordinate

claims on a categorical basis in derogation of Congress’s scheme of priorities.

In April 1986, First Truck Lines, Inc.,

voluntarily filed for relief under Chapter

11 of the Bankruptcy Code, and in the

subsequent operation of its business as a

debtor-in-possession incurred, but failed

to discharge, tax liabilities to the Internal Revenue Service. First Truck moved

to convert the case to a Chapter 7

liquidation in June 1988, and in August

1988 the Bankruptcy Court granted that

motion and appointed respondent Thomas R. Noland as trustee. The liquidation of the estate’s assets raised insufficient funds to pay all of the creditors.

After the conversion, the IRS filed

claims for taxes, interest, and penalties

that accrued after the Chapter 11 filing

but before the Chapter 7 conversion, and

although the parties agreed that the

claims for taxes and interest were entitled to priority as administrative expenses, §§ 503(b), 507(a)(1), and

726(a)(1),1 they disagreed about the priority to be given tax penalties. The

Bankruptcy Court determined that the

penalties (like the taxes and interest)

were administrative expenses under

§ 503(b) but held them to be subject to

1

Section 507(a)(1) provides, in relevant part: ‘‘(a)

The following expenses and claims have priority

in the following order: (1) First, administrative

expenses allowed under section 503(b) of this title

. . . .’’ Under § 503(b)(1), administrative expenses

include ‘‘any tax . . . incurred by the estate’’ (with

certain exceptions not relevant here), as well as

‘‘any fine [or] penalty . . . relating to [such] a tax

. . . .’’ Section 726(a)(1) adopts the order of

payment specified in § 507 for Chapter 7 proceedings.

equitable subordination under § 510(c).2

In so doing, the Court read that section

to provide authority not only to deal

with inequitable conduct on the Government’s part, but also to adjust a statutory

priority of a category of claims. The

Bankruptcy Court accordingly weighed

the relative equities that seemed to flow

from what it described as ‘‘the Code’s

preference for compensating actual loss

claims,’’ and subordinated the tax penalty claim to those of the general unsecured creditors. In re First Truck Lines,

Inc., 141 B. R. 621, 629 (SD Ohio

1992). The District Court affirmed. Internal Revenue Service v. Noland, 190

B. R. 827 (SD Ohio 1993).

After reviewing the legislative history

of the 1978 revision to the Bankruptcy

Code and several recent appeals cases

on equitable subordination of tax penalties, the Sixth Circuit affirmed, as well.

In re First Truck Lines, Inc., 48 F. 3d

210 (1995). The Sixth Circuit stated that

it did

‘‘not see the fairness or the justice

in permitting the Commissioner’s

claim for tax penalties, which are

not being assessed because of pecuniary losses to the Internal Revenue Service, to enjoy an equal or

higher priority with claims based

on the extension of value to the

debtor, whether secured or not.

Further, assessing tax penalties

against the estate of a debtor no

longer in existence serves no punitive purpose. Because of the nature of postpetition, nonpecuniary

loss tax penalty claims in a Chapter 7 case, we believe such claims

are susceptible to subordination.

To hold otherwise would be to

allow creditors who have supported the business during its attempt to reorganize to be penalized once that effort has failed and

there is not enough to go around.’’

Id., at 218.

See also Burden v. United States, 917 F.

2d 115, 120 (CA3 1990); Schultz Broadway Inn v. United States, 912 F. 2d 230,

234 (CA8 1990); In re Virtual Network

Services Corp., 902 F. 2d 1246, 1250

(CA7 1990). We granted certiorari to

determine the appropriate scope of the

power under the Bankruptcy Code to

subordinate a tax penalty, 516 U. S. ___

(1995), and we now reverse.

2

Section 510(c) provides that ‘‘the court may . . .

under principles of equitable subordination, subordinate for purposes of distribution all or part of an

allowed claim . . . .’’

11

The judge-made doctrine of equitable

subordination predates Congress’s revision of the Code in 1978. Relying in

part on our earlier cases, see, e.g.,

Comstock v. Group of Institutional Investors, 335 U. S. 211 (1948); Pepper v.

Litton, 308 U. S. 295 (1939); Taylor v.

Standard Gas & Elec. Co., 306 U. S.

307 (1939), the Fifth Circuit, in its

influential opinion in In re Mobile Steel

Co., 563 F. 2d 692, 700 (CA5 1977),

observed that the application of the

doctrine was generally triggered by a

showing that the creditor had engaged in

‘‘some type of inequitable conduct.’’

Mobile Steel discussed two further conditions relating to the application of the

doctrine: that the misconduct have ‘‘resulted in injury to the creditors of the

bankrupt or conferred an unfair advantage on the claimant,’’ and that the

subordination ‘‘not be inconsistent with

the provisions of the Bankruptcy Act.’’

Ibid. This last requirement has been read

as a ‘‘reminder to the bankruptcy court

that although it is a court of equity, it is

not free to adjust the legally valid claim

of an innocent party who asserts the

claim in good faith merely because the

court perceives that the result is inequitable.’’ DeNatale & Abram, The Doctrine of Equitable Subordination as Applied to Nonmanagement Creditors, 40

Bus. Law. 417, 428 (1985). The district

courts and courts of appeals have generally followed the Mobile Steel formulation, In re Baker & Getty Financial

Services, Inc., 974 F. 2d 712, 717 (CA6

1992).

Although Congress included no explicit criteria for equitable subordination

when it enacted § 510(c)(1), the reference in § 510(c) to ‘‘principles of equitable subordination,’’ clearly indicates

congressional intent at least to start with

existing doctrine. This conclusion is

confirmed both by principles of statutory construction, see Midlantic Nat.

Bank v. New Jersey Dept. of Environmental Protection, 474 U. S. 494, 501

(1986) (‘‘The normal rule of statutory

construction is that if Congress intends

for legislation to change the interpretation of a judicially created concept, it

makes that intent specific. The Court

has followed this rule with particular

care in construing the scope of bankruptcy codifications’’) (citation omitted),

and by statements in the legislative

history that Congress ‘‘intended that the

term ‘principles of equitable subordination’ follow existing case law and leave

to the courts development of this principle,’’ 124 Cong. Rec. 32398 (1978)

(Rep. Edwards); see also id., at 33998

(Sen. DeConcini). In keeping with pre1978 doctrine, many Courts of Appeals

have continued to require inequitable

conduct before allowing the equitable

subordination of most claims, see, e.g.,

In re Fabricators, Inc., 926 F. 2d 1458,

1464 (CA5 1991); In re Bellanca Aircraft Corp., 850 F. 2d 1275, 1282–1283

(CA8 1988), although several have done

away with the requirement when the

claim in question was a tax penalty. See,

e.g., Burden, supra, at 120; Schultz,

supra, at 234; In re Virtual Network,

supra, at 1250.

Section 510(c) may of course be

applied to subordinate a tax penalty,

since the Code’s requirement that a

Chapter 7 trustee must distribute assets

‘‘in the order specified in . . . section

507,’’ (which gives a first priority to

administrative expense tax penalties) is

subject to the qualification, ‘‘[e]xcept as

provided in section 510 of this title

. . . .’’ 11 U.S.C. § 726(a). Thus, ‘‘principles of equitable subordination’’ may

allow a bankruptcy court to reorder a

tax penalty in a given case. It is almost

as clear that Congress meant to give

courts some leeway to develop the doctrine, 124 Cong. Rec. 33998 (1978),

rather than to freeze the pre-1978 law in

place. The question is whether that

leeway is broad enough to allow subordination at odds with the congressional

ordering of priorities by category.

The answer turns on Congress’s probable intent to preserve the distinction

between the relative levels of generality

at which trial courts and legislatures

respectively function in the normal

course. Hence, the adoption in § 510(c)

of ‘‘principles of equitable subordination’’ permits a court to make exceptions

to a general rule when justified by

particular facts, cf. Hecht Co. v. Bowles,

321 U. S. 321, 329 (1944) (‘‘The essence of equity jurisdiction has been the

power of the Chancellor to do equity

and to mould each decree to the necessities of the particular case’’). But if the

provision also authorized a court to

conclude on a general, categorical level

that tax penalties should not be treated

as administrative expenses to be paid

first, it would empower a court to

modify the operation of the priority

statute at the same level at which Congress operated when it made its characteristically general judgment to establish

the hierarchy of claims in the first place.

That is, the distinction between characteristic legislative and trial court functions would simply be swept away, and

the statute would delegate legislative

revision, not authorize equitable exception. We find such a reading improbable

in the extreme. ‘‘Decisions about the

treatment of categories of claims in

bankruptcy proceedings . . . are not dictated or illuminated by principles of

equity and do not fall within the judicial

power of equitable subordination . . . .’’

Burden, 917 F. 2d, at 122 (Alito, J.,

concurring in part and dissenting in

part).

Just such a legislative type of decision, however, underlies the Bankruptcy

Court’s reordering of priorities in question here, as approved by the District

Court and the Court of Appeals. Despite

language in its opinion about requiring a

balancing of the equities in individual

cases, the Court of Appeals actually

concluded that ‘‘postpetition, nonpecuniary loss tax penalty claims’’ are ‘‘susceptible to subordination’’ by their very

‘‘nature.’’ 48 F. 3d, at 218. And although the court said that not every tax

penalty would be equitably subordinated, ibid., that would be the inevitable

result of consistent applications of the

rule employed here, which depends not

on individual equities but on the supposedly general unfairness of satisfying

‘‘postpetition, nonpecuniary loss tax

penalty claims’’ before the claims of a

general creditor.

The Court of Appeals’s decision thus

runs directly counter to Congress’s

policy judgment that a postpetition tax

penalty should receive the priority of an

administrative expense, 11 U.S.C.

§§ 503(b)(1)(C), 507(a)(1), and 726(a)(1). This is true regardless of Noland’s

argument that the Bankruptcy Court

made a distinction between compensatory and noncompensatory tax penalties,

for this was itself a categorical distinction at a legislative level of generality.

Indeed, Congress recognized and employed that distinction elsewhere in the

priority provisions: Congress specifically

assigned 8th priority to certain compensatory tax penalties, see § 507(a)(8)(G),

and 12th priority to prepetition, noncompensatory penalties, see § 726(a)(1), and

(4).3

3

Noland argues that ‘‘although the penalties at

issue arose postpetition,’’ this claim should be

viewed as a prepetition penalty because a ‘‘reorganized debtor is in many respects similar to a

prepetition debtor . . . [and] the conversion of

[this] case to chapter 7 was tantamount to the

filing of a new petition.’’ Brief for Respondent 16,

n. 7. But we agree with the Sixth Circuit, see In re

First Truck Lines, Inc., 48 F. 3d 210, 214 (1995),

that the penalties at issue here are postpetition

administrative expenses pursuant to 11 U. S. C.

12

The Sixth Circuit, to be sure, invoked

a more modest authority than legislative

revision when it relied on statements by

the congressional leaders of the 1978

Code revisions, see 48 F. 3d, at 215,

217–218, and it is true that Representative Edwards and Senator DeConcini

stated that ‘‘under existing law, a claim

is generally subordinated only if [the]

holder of such claim is guilty of inequitable conduct, or the claim itself is of a

status susceptible to subordination, such

as a penalty or a claim for damages

arising from the purchase or sale of a

security of the debtor.’’ 124 Cong. Rec.

32398 (1978) (Rep. Edwards); see also

id., at 33998 (Sen. DeConcini). But their

remarks were not statements of existing

law and the Sixth Circuit’s reliance on

the unexplained reference to subordinated penalties ran counter to this

Court’s previous endorsement of priority

treatment for postpetition tax penalties.

See Nicholas v. United States, 384 U. S.

678, 692–695 (1966). More fundamentally, statements in legislative history

cannot be read to convert statutory leeway for judicial development of a rule

on particularized exceptions into delegated authority to revise statutory categorization, untethered to any obligation

to preserve the coherence of substantive

congressional judgments.

Given our conclusion that the Sixth

Circuit’s rationale was inappropriately

categorical in nature, we need not decide today whether a bankruptcy court

must always find creditor misconduct

before a claim may be equitably subordinated. We do hold that (in the absence

of a need to reconcile conflicting congressional choices) the circumstances

that prompt a court to order equitable

subordination must not occur at the

level of policy choice at which Congress

itself operated in drafting the Bankruptcy Code. Cf. In re Ahlswede, 516 F.

2d 784, 787 (CA9) (‘‘[T]he [equity]

chancellor never did, and does not now,

exercise unrestricted power to contradict

statutory or common law when he feels

§§ 348(d), 503(b)(1). Although § 348(d) provides

that a ‘‘claim against the estate or the debtor that

arises after the order for relief but before conversion in a case that is converted under section 1112,

1208, or 1307 of this title, other than a claim

specified in section 503(b) of this title, shall be

treated for all purposes as if such claim had arisen

immediately before the date of the filing of the

petition,’’ the claim for priority here is ‘‘specified

in section 503(b)’’ and Congress has already

determined that it is not to be treated like

prepetition penalties. Noland may or may not have

a valid policy argument, but it is up to Congress,

not this Court, to revise the determination if it so

chooses.

a fairer result may be obtained by

application of a different rule’’), cert.

denied sub nom. Stebbins v. Crocker

Citizens Nat. Bank, 423 U.S. 913

(1975); In re Columbia Ribbon Co., 117

F. 2d 999, 1002 (CA3 1941) (court

cannot ‘‘set up a subclassification of

claims . . . and fix an order of priority

for the sub-classes according to its

theory of equity’’).

In this instance, Congress could have,

but did not, deny noncompensatory,

postpetition tax penalties the first priority given to other administrative expenses, and bankruptcy courts may not

take it upon themselves to make that

categorical determination under the

guise of equitable subordination. The

judgment of the Court of Appeals is

reversed, and the case is remanded for

further proceedings consistent with this

opinion.

It is so ordered.

Section 6512.—Limitations in Case

of Petition to Tax Court

Ct.D. 2058

SUPREME COURT OF THE

UNITED STATES

No. 94–1785

COMMISSIONER OF INTERNAL

REVENUE, PETITIONER v. ROBERT

F. LUNDY

516 U.S.—

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF

APPEALS FOR THE FOURTH

CIRCUIT

January 17, 1996

Syllabus

Respondent Lundy and his wife withheld from

their 1987 wages substantially more in federal

income taxes than they actually owed for that

year, but they did not file their 1987 tax return

when it was due, nor did they file a return or

claim a refund of the overpaid taxes in the

succeeding 2½ years. On September 26, 1990, the

Commissioner of Internal Revenue mailed Lundy

a notice of deficiency for 1987. Some three

months later, the Lundys filed their joint 1987 tax

return, which claimed a refund of their overpaid

taxes, and Lundy filed a timely petition in the Tax

Court seeking a redetermination of the claimed

deficiency and a refund. The Tax Court held that

where, as here, a taxpayer has not filed a tax

return by the time a notice of deficiency is mailed,

and the notice is mailed more than two years after

the date on which the taxes are paid, a 2-year

‘‘look-back’’ period applies under 26 U. S. C.

§ 6512(b)(3)(B), and the court lacks jurisdiction

to award a refund. The Fourth Circuit reversed,

finding that the applicable look-back period in

these circumstances is three years and that the Tax

Court had jurisdiction to award a refund.

Held: The Tax Court lacks jurisdiction to award

a refund of taxes paid more than two years prior

to the date on which the Commissioner mailed the

taxpayer a notice of deficiency, if, on the date that

the notice was mailed, the taxpayer had not yet

filed a return. In these circumstances, the applicable look-back period under § 6512(b)(3)(B) is

two years.

(a) Section 6512(b)(3)(B) forbids the Tax Court

to award a refund unless it first determines that

the taxes were paid ‘‘within the [look-back] period

which would be applicable under section

6511(b)(2) . . . if on the date of the mailing of the

notice of deficiency a claim [for refund] had been

filed.’’ Section § 6511(b)(2)(A) in turn instructs

the court to apply a 3-year look-back period if a

refund claim is filed, as required by § 6511(a),

‘‘within 3 years from the time the return was

filed,’’ while § 6511(b)(2)(B) specifies a 2-year

look-back period if the refund claim is not filed

within that 3-year period. The Tax Court properly

applied the 2-year look-back period to Lundy’s

case because, as of September 26, 1990 (the date

the notice of deficiency was mailed), Lundy had

not filed a tax return, and, consequently, a claim

filed on that date would not be filed within the

3-year period described in § 6511(a). Lundy’s

taxes were withheld from his wages, so they are

deemed paid on the date his 1987 tax return was

due (April 15, 1988), which is more than two

years prior to the date the notice of deficiency was

mailed. Lundy is therefore seeking a refund of

taxes paid outside the applicable look-back period,

and the Tax Court lacks jurisdiction to award a

refund.

(b) Lundy suggests two alternative interpretations of § 6512(b)(3)(B), neither of which is

persuasive. Lundy first adopts the Fourth Circuit’s

view, which is that the applicable look-back period

is determined by reference to the date that the

taxpayer actually filed a claim for refund, and

argues that he is entitled to a 3-year look-back

period because his late-filed 1987 tax return

contained a refund claim that was filed within

three years from the filing of the return itself. This

interpretation is contrary to the requirements of the

statute and leads to a result that Congress could

not have intended, as it in some circumstances

subjects a timely filer of a return to a shorter

limitations period in Tax Court than a delinquent

filer. Lundy’s second argument, that the ‘‘claim’’

contemplated by § 6512(b)(3)(B) can only be a

claim filed on a tax return, such that a uniform

3-year look-back period applies under that section,

is similarly contrary to the language of the statute.

(c) This Court is bound by § 6512(b)(3)(B)’s

language as it is written, and even if the Court

were persuaded by Lundy’s policy-based arguments for applying a 3-year look-back period, the

Court is not free to rewrite the statute simply

because its effects might be susceptible of improvement.

45 F. 3d 856, reversed.

O’CONNOR, J., delivered the opinion of the

Court, in which REHNQUIST, C. J., and SCALIA,

KENNEDY, SOUTER, GINSBURG, and BREYER, JJ.,

joined. STEVENS, J., filed a dissenting opinion.

THOMAS, J., filed a dissenting opinion, in which

STEVENS, J., joined.

J USTICE O’C ONNOR delivered the

opinion of the Court.

In this case, we consider the ‘‘lookback’’ period for obtaining a refund of

overpaid taxes in the United States Tax

13

Court under 26 U.S.C. § 6512(b)(3)(B),

and decide whether the Tax Court can

award a refund of taxes paid more than

two years prior to the date on which the

Commissioner of Internal Revenue

mailed the taxpayer a notice of deficiency, when, on the date the notice of

deficiency was mailed, the taxpayer had

not yet filed a return. We hold that in

these circumstances the 2-year lookback period set forth in § 6512(b)(3)(B)

applies, and the Tax Court lacks jurisdiction to award a refund.

I

During 1987, respondent Robert F.

Lundy and his wife had $10,131 in

federal income taxes withheld from their

wages. This amount was substantially

more than the $6,594 the Lundys actually owed in taxes for that year, but the

Lundys did not file their 1987 tax return

when it was due, nor did they file a

return or claim a refund of the overpaid

taxes in the succeeding two and a half

years. On September 26, 1990, the

Commissioner of Internal Revenue

mailed Lundy a notice of deficiency,

informing him that he owed $7,672 in

additional taxes and interest for 1987

and that he was liable for substantial

penalties for delinquent filing and negligent underpayment of taxes, see 26 U.

S. C. §§ 6651(a)(1) and 6653(1).

Lundy and his wife mailed their joint

tax return for 1987 to the Internal

Revenue Service (IRS) on December 22,

1990. This return indicated that the

Lundys had overpaid their income taxes

for 1987 by $3,537 and claimed a

refund in that amount. Two days after

the return was mailed, Lundy filed a

timely petition in the Tax Court seeking

a redetermination of the claimed deficiency and a refund of the couple’s

overpaid taxes. The Commissioner filed

an answer generally denying the allegations in Lundy’s petition. Thereafter, the

parties negotiated towards a settlement

of the claimed deficiency and refund

claim. On March 17, 1992, the Commissioner filed an amended answer acknowledging that Lundy had filed a tax

return and that Lundy claimed to have

overpaid his 1987 taxes by $3,537.

The Commissioner contended in this

amended pleading that the Tax Court

lacked jurisdiction to award Lundy a

refund. The Commissioner argued that if

a taxpayer does not file a tax return

before the IRS mails the taxpayer a

notice of deficiency, the Tax Court can

only award the taxpayer a refund of

taxes paid within two years prior to the

date the notice of deficiency was

mailed. See 26 U.S.C. § 6512(b)(3)(B).

Under the Commissioner’s interpretation

of § 6512(b)(3)(B), the Tax Court

lacked jurisdiction to award Lundy a

refund because Lundy’s withheld taxes

were deemed paid on the date that his

1987 tax return was due (April 15,

1988), see § 6513(b)(1), which is more

than two years before the date the notice

was mailed (September 26, 1990).

The Tax Court agreed with the position taken by the Commissioner and

denied Lundy’s refund claim. Citing an

unbroken line of Tax Court cases adopting a similar interpretation of § 6512(b)(3)(B), e.g. Allen v. Commissioner,

99 T. C. 475, 479–480 (1992); Galuska

v. Commissioner, 98 T. C. 661, 665

(1992); Berry v. Commissioner, 97 T. C.

339, 344–345 (1991); White v. Commissioner, 72 T. C. 1126, 1131–1133 (1979)

(renumbered statute); Hosking v. Commissioner, 62 T. C. 635, 642–643 (1974)

(renumbered statute), the Tax Court held

that if a taxpayer has not filed a tax

return by the time the notice of deficiency is mailed, and the notice is

mailed more than two years after the

date on which the taxes are paid, the

look-back period under § 6512(b)(3)(B)

is two years and the Tax Court lacks

jurisdiction to award a refund. 65 TCM

3011, 3014–3015, RIA TC memo ¶93,

278 (1993).

The Court of Appeals for the Fourth

Circuit reversed, finding that the applicable look-back period in these circumstances is three years and that the

Tax Court had jurisdiction to award

Lundy a refund. 45 F. 3d 856, 861

(1995). Every other Court of Appeals to

have addressed the question has affirmed the Tax Court’s interpretation of

§ 6512(b)(3)(B), see Davison v. Commissioner, 9 F. 3d 1538 (CA2 1993)

(unpublished disposition); Allen v. Commissioner, 23 F. 3d 406 (CA6 1994)

(unpublished disposition); Galuska v.

Commissioner, 5 F. 3d 195, 196 (CA7

1993); Richards v. Commissioner, 37 F.

3d 587, 589 (CA10 1994); see also

Rossman v. Commissioner, 46 F. 3d

1144 (CA9 1995) (unpublished disposition) (affirming on other grounds). We

granted certiorari to resolve the conflict,

(1995), and now reverse.

515 U. S.

II

A taxpayer seeking a refund of overpaid taxes ordinarily must file a timely

claim for a refund with the Internal

Revenue Service (IRS) under 26 U. S.

C. § 6511.1 That section contains two

separate provisions for determining the

timeliness of a refund claim. It first

establishes a filing deadline: The taxpayer must file a claim for a refund

‘‘within 3 years from the time the return

was filed or 2 years from the time the

tax was paid, whichever of such periods

expires the later, or if no return was

filed by the taxpayer, within 2 years

from the time the tax was paid.’’

§ 6511(b)(1) (incorporating by reference

§ 6511(a)). It also defines two ‘‘lookback’’ periods: If the claim is filed

‘‘within 3 years from the time the return

was filed,’’ ibid., then the taxpayer is

entitled to a refund of ‘‘the portion of

the tax paid within the 3 years immediately preceding the filing of the claim.’’

§ 6511(b)(2)(A) (incorporating by refer1

In relevant part, 26 U. S. C. § 6511 provides:

‘‘(a) Period of limitation on filing claim

Claim for credit or refund of an overpayment of

any tax imposed by this title in respect of which

tax the taxpayer is required to file a return shall be

filed by the taxpayer within 3 years from the time

the return was filed or 2 years from the time the

tax was paid, whichever of such periods expires

the later, or if no return was filed by the taxpayer,

within 2 years from the time the tax was paid.

Claim for credit or refund of an overpayment of

any tax imposed by this title which is required to

be paid by means of a stamp shall be filed by the

taxpayer within 3 years from the time the tax was

paid.

‘‘(b) Limitation on allowance of credits and

refunds

‘‘(1) Filing of claim within prescribed period

No credit or refund shall be allowed or made

after the expiration of the period of limitation

prescribed in subsection (a) for the filing of a

claim for credit or refund, unless a claim for credit

or refund is filed by the taxpayer within such

period.

‘‘(2) Limit on amount of credit or refund

‘‘(A) Limit where claim filed within 3-year

period

If the claim was filed by the taxpayer during the

3-year period prescribed in subsection (a), the

amount of the credit or refund shall not exceed the

portion of the tax paid within the period, immediately preceding the filing of the claim, equal to 3

years plus the period of any extension of time for

filing the return. If the tax was required to be paid

by means of a stamp, the amount of the credit or

refund shall not exceed the portion of the tax paid

within the 3 years immediately preceding the

filing of the claim.

‘‘(B) Limit where claim not filed within 3-year

period

If the claim was not filed within such 3-year

period, the amount of the credit or refund shall not

exceed the portion of the tax paid during the 2

years immediately preceding the filing of the

claim.

‘‘(C) Limit if no claim filed

If no claim was filed, the credit or refund shall

not exceed the amount which would be allowable

under subparagraph (A) or (B), as the case may

be, if claim was filed on the date the credit or

refund is allowed.’’

14

ence § 6511(a)). If the claim is not filed

within that 3-year period, then the taxpayer is entitled to a refund of only that

‘‘portion of the tax paid during the 2

years immediately preceding the filing

of the claim.’’ § 6511(b)(2)(B) (incorporating by reference § 6511(a)).

Unlike the provisions governing refund suits in United States District

Court or the United States Court of

Federal Claims, which make timely filing of a refund claim a jurisdictional

prerequisite to bringing suit, see 26

U.S.C. § 7422(a); Martin v. United

States, 833 F. 2d 655, 658–659 (CA7

1987), the restrictions governing the Tax

Court’s authority to award a refund of

overpaid taxes incorporate only the

look-back period and not the filing

deadline from § 6511. See 26 U.S.C.

§ 6512(b)(3).2 Consequently, a taxpayer

who seeks a refund in the Tax Court,

like respondent, does not need to actually file a claim for refund with the IRS;

the taxpayer need only show that the tax

to be refunded was paid during the

applicable look-back period.

2

In relevant part, 26 U. S. C. § 6512(b) provides:

‘‘(1) Jurisdiction to determine

Except as provided by paragraph (3) and by

section 7463, if the Tax Court finds that there is

no deficiency and further finds that the taxpayer

has made an overpayment of income tax for the

same taxable year . . . in respect of which the

Secretary determined the deficiency, or finds that

there is a deficiency but that the taxpayer has

made an overpayment of such tax, the Tax Court

shall have jurisdiction to determine the amount of

such overpayment, and such amount shall, when

the decision of the Tax Court has become final, be

credited or refunded to the taxpayer.

.

.

.

.

.

‘‘(3) Limit on amount of credit or refund

No such credit or refund shall be allowed or

made of any portion of the tax unless the Tax

Court determines as part of its decision that such

portion was paid—

‘‘(A) after the mailing of the notice of deficiency,

‘‘(B) within the period which would be applicable under section 6511(b)(2), (c), or (d), if on

the date of the mailing of the notice of deficiency

a claim had been filed (whether or not filed)

stating the grounds upon which the Tax Court

finds that there is an overpayment, or

‘‘(C) within the period which would be applicable under section 6511(b)(2), (c), or (d), in

respect of any claim for refund filed within the

applicable period specified in section 6511 and

before the date of the mailing of the notice of

deficiency’’

‘‘(i) which had not been disallowed before that

date,

‘‘(ii) which had been disallowed before that

date and in respect of which a timely suit for

refund could have been commenced as of that

date, or

‘‘(iii) in respect of which a suit for refund had

been commenced before that date and within the

period specified in section 6532.’’

In this case, the applicable look-back

period is set forth in § 6512(b)(3)(B),

which provides that the Tax Court cannot award a refund of any overpaid

taxes unless it first determines that the

taxes were paid:

‘‘within the period which would

be applicable under section

6511(b)(2) . . . if on the date of

the mailing of the notice of deficiency a claim had been filed

(whether or not filed) stating the

grounds upon which the Tax Court

finds that there is an overpayment.’’

The analysis dictated by § 6512(b)(3)(B) is not elegant, but it is straightforward. Though some courts have adverted to the filing of a ‘‘deemed

claim,’’ see Galuska, 5 F. 3d, at 196;

Richards, 37 F. 3d, at 589, all that

matters for the proper application of

§ 6512(b)(3)(B) is that the ‘‘claim’’

contemplated in that section be treated

as the only mechanism for determining

whether a taxpayer can recover a refund.

Section 6512(b)(3)(B) defines the lookback period that applies in Tax Court by

incorporating the look-back provisions

from § 6511(b)(2), and directs the Tax

Court to determine the applicable period

by inquiring into the timeliness of a

hypothetical claim for refund filed ‘‘on

the date of the mailing of the notice of

deficiency.’’

To this end, § 6512(b)(3)(B) directs

the Tax Court’s attention to § 6511(b)(2), which in turn instructs the court to

apply either a 3-year or a 2-year lookback period. See §§ 6511(b)(2)(A) and

(B) (incorporating by reference

§ 6511(a)); see supra, at 5. To decide

which of these look-back periods to

apply, the Tax Court must consult the

filing provisions of § 6511(a) and ask

whether the claim described by

§ 6512(b)(3)(B)—a claim filed ‘‘on the

date of the mailing of the notice of

deficiency’’—would be filed ‘‘within 3

years from the time the return was

filed.’’ See § 6511(b)(2)(A) (incorporating by reference § 6511(a)). If a claim

filed on the date of the mailing of the

notice of deficiency would be filed

within that 3-year period, then the lookback period is also three years and the

Tax Court has jurisdiction to award a

refund of any taxes paid within three

years prior to the date of the mailing of

the notice of deficiency. §§ 6511(b)(2)(A) and 6512(b)(3)(B). If the claim

would not be filed within that 3-year

period, then the period for awarding a

refund is only two years. §§ 6511(b)(2)(B) and 6512(b)(3)(B).

In this case, we must determine which

of these two look-back periods to apply

when the taxpayer fails to file a tax

return when it is due, and the Commissioner mails the taxpayer a notice of

deficiency before the taxpayer gets

around to filing a late return. The Fourth

Circuit held that a taxpayer in this

situation is entitled to a 3-year lookback period if the taxpayer actually files

a timely claim at some point in the

litigation, see infra, at 10–11, and respondent offers additional reasons for

applying a 3-year look-back period, see

infra, at 13–17. We think the proper

application of § 6512(b)(3)(B) instead

requires that a 2-year look-back period

be applied.

We reach this conclusion by following the instructions set out in § 6512(b)(3)(B). The operative question is

whether a claim filed ‘‘on the date of

the mailing of the notice of deficiency’’

would be filed ‘‘within 3 years from the

time the return was filed.’’ See supra,

at 7; § 6512(b)(3)(B) (incorporating

§§ 6511(b)(2) and 6511(a)). In the case

of a taxpayer who does not file a return before the notice of deficiency

is mailed, the claim described in

§ 6512(b)(3)(B) could not be filed

‘‘within 3 years from the time the return

was filed.’’ No return having been filed,

there is no date from which to measure

the 3-year filing period described in

§ 6511(a). Consequently, the claim contemplated in § 6512(b)(3)(B) would not

be filed within the 3-year window described in § 6511(a), and the 3-year

look-back period set out in § 6511(b)(2)(A) would not apply. The applicable look-back period is instead the

default 2-year period described in

§ 6511(b)(2)(B), which is measured

from the date of the mailing of the

notice of deficiency, see § 6512(b)(3)(B). The taxpayer is entitled to a refund

of any taxes paid within two years prior

to the date of the mailing of the notice

of deficiency.

Special rules might apply in some

cases, see e.g., § 6511(c) (extension of

time by agreement); § 6511(d) (special

limitations periods for designated items),

but in the case where the taxpayer has

filed a timely tax return and the IRS is

claiming a deficiency in taxes from that

return, the interplay of §§ 6512(b)(3)(B)

and 6511(b)(2) generally ensures that

the taxpayer can obtain a refund of any

taxes against which the IRS is asserting

a deficiency. In most cases, the notice of

15

deficiency must be mailed within three

years from the date the tax return is

filed. See 26 U. S. C. §§ 6501(a) and

6503(a)(1); Badaracco v. Commissioner,

464 U. S. 386, 389, 392 (1984). Therefore, if the taxpayer has already filed a

return (albeit perhaps a faulty one), any

claim filed ‘‘on the date of the mailing

of the notice of deficiency’’ would necessarily be filed within three years from

the date the return is filed. In these

circumstances, the applicable look-back

period under § 6512(b)(3)(B) would be

the 3-year period defined in § 6511(b)(2)(A), and the Tax Court would have

jurisdiction to award a refund.

Therefore, in the case of a taxpayer

who files a timely tax return, § 6512(b)(3)(B) usually operates to toll the

filing period that might otherwise deprive the taxpayer of the opportunity to

seek a refund. If a taxpayer contesting

the accuracy of a previously filed tax

return in Tax Court discovers for the

first time during the course of litigation

that he is entitled to a refund, the

taxpayer can obtain a refund from the

Tax Court without first filing a timely

claim for refund with the IRS. It does

not matter, as it would in district court,

see § 7422 (incorporating §§ 6511),

that the taxpayer has discovered the

entitlement to a refund well after the

period for filing a timely refund claim

with the IRS has passed, because

§ 6512(b)(3)(B) applies ‘‘whether or not

[a claim is] filed,’’ and the look-back

period is measured from the date of the

mailing of the notice of deficiency. Ibid.

Nor does it matter, as it might in a

refund suit, see 26 CFR § 301.6402–

2(b)(1) (1995), whether the taxpayer has

previously apprised the IRS of the precise basis for the refund claim, because

26 U. S. C. § 6512(b)(3)(B) posits the

filing of a hypothetical claim ‘‘stating

the grounds upon which the Tax Court

finds that there is an overpayment,’’

§ 6512(b)(3)(B).

Section 6512(b)(3)(B) treats delinquent filers of income tax returns less

charitably. Whereas timely filers are

virtually assured the opportunity to seek

a refund in the event they are drawn

into Tax Court litigation, a delinquent

filer’s entitlement to a refund in Tax

Court depends on the date of the mailing of the notice of deficiency. Section

6512(b)(3)(B) tolls the limitations period, in that it directs the Tax Court to

measure the look-back period from the

date on which the notice of deficiency is

mailed and not the date on which the

taxpayer actually files a claim for re-

fund. But in the case of delinquent

filers, § 6512(b)(3)(B) establishes only

a 2-year look-back period, so the delinquent filer is not assured the opportunity

to seek a refund in Tax Court: If the

notice of deficiency is mailed more than

two years after the taxes were paid, the

Tax Court lacks jurisdiction to award

the taxpayer a refund.

The Tax Court properly applied this

2-year look-back period to Lundy’s case.

As of September 26, 1990 (the date the

notice was mailed), Lundy had not filed

a tax return. Consequently, a claim filed

on that date would not be filed within

the 3-year period described in § 6511(a), and the 2-year period from § 6511(b)(2)(B) applies. Lundy’s taxes were

withheld from his wages, so they are

deemed paid on the date his 1987 tax

return was due (April 15, 1988), see 26

U. S. C. § 6513(b)(1), which is more

than two years prior to the date the

notice of deficiency was mailed (September 26, 1990). Lundy is therefore

seeking a refund of taxes paid outside

the applicable look-back period, and the

Tax Court lacks jurisdiction to award

such a refund.

III

In deciding Lundy’s case, the Fourth

Circuit adopted a different approach to

interpreting § 6512(b)(3)(B) and applied

a 3-year look-back period. Respondent

supports the Fourth Circuit’s rationale,

but also offers an argument for applying

a uniform 3-year look-back period under

§ 6512(b)(3)(B). We find neither position persuasive. p1The Fourth Circuit

held that:

‘‘[T]he Tax Court, when applying

the limitation provision of § 6511(b)(2) in light of § 6512(b)(3)(B), should substitute the date of

the mailing of the notice of deficiency for the date on which the

taxpayer filed the claim for refund, but only for the purpose of

determining the benchmark date

for measuring the limitation period

and not for the purpose of determining whether the two-year or

three-year limitation period applies.’’ 45 F. 3d, at 861.

In other words, the Fourth Circuit held

that the look-back period is measured

from the date of the mailing of the

notice of deficiency (i.e., the taxpayer is

entitled to a refund of any taxes paid

within either two or three years prior to

that date), but that that date is irrelevant

in calculating the length of the lookback period itself. The look-back period,

the Fourth Circuit held, must be defined

in terms of the date that the taxpayer

actually filed a claim for refund. Ibid.

(‘‘[T]he three-year limitation period applies because Lundy filed his claim for

refund . . . within three years of filing

his tax return’’). Thus, under the Fourth

Circuit’s view, Lundy was entitled to a

3-year look-back period because

Lundy’s late-filed 1987 tax return contained a claim for refund, and that claim

was filed within three years from the

filing of the return. Ibid. (taxpayer entitled to same look-back period that

would apply in district court).

Contrary to the Fourth Circuit’s interpretation, the fact that Lundy actually filed

a claim for a refund after the date on

which the Commissioner mailed the notice of deficiency has no bearing in

determining whether the Tax Court has

jurisdiction to award Lundy a refund.

See supra, at 6. Once a taxpayer files a

petition with the Tax Court, the Tax

Court has exclusive jurisdiction to determine the existence of a deficiency or to

award a refund, see 26 U. S. C.

§ 6512(a), and the Tax Court’s jurisdiction to award a refund is limited to

those circumstances delineated in

§ 6512(b)(3). Section 6512(b)(3)(C) is

the only provision that measures the

look-back period based on a refund

claim that is actually filed by the taxpayer, and that provision is inapplicable

here because it only applies to refund

claims filed ‘‘before the date of the

mailing of the notice of deficiency.’’

§ 6512(b)(3)(C). Under § 6512(b)(3)(B), which is the provision that does

apply, the Tax Court is instructed to

consider only the timeliness of a claim

filed ‘‘on the date of the mailing of the

notice of deficiency,’’ not the timeliness

of any claim that the taxpayer might

actually file.

The Fourth Circuit’s rule also leads to a

result that Congress could not have

intended, in that it subjects the timely,

not the delinquent, filer to a shorter

limitations period in Tax Court. Under

the Fourth Circuit’s rule, the availability

of a refund turns entirely on whether the

taxpayer has in fact filed a claim for

refund with the IRS, because it is the

date of actual filing that determines the

applicable look-back period under

§ 6511(b)(2) (and, by incorporation,

§ 6512(b)(3)(B)). See 45 F. 3d, at 861;

see supra, at 11. This rule might ‘‘eliminate[] the inequities resulting’’ from adhering to the 2-year look-back period,

45 F. 3d, at 863, but it creates an even

greater inequity in the case of a tax-

16

payer who dutifully files a tax return

when it is due, but does not initially

claim a refund. We think our interpretation of the statute achieves an appropriate and reasonable result in this case:

The taxpayer who files a timely income

tax return could obtain a refund in the

Tax Court under § 6512(b)(3)(B), without regard to whether the taxpayer has

actually filed a timely claim for refund.

See supra, at 8–9.

If it is the actual filing of a refund claim

that determines the length of the lookback period, as the Fourth Circuit held,

the filer of a timely income tax return

might be out of luck. If the taxpayer

does not file a claim for refund with his

tax return, and the notice of deficiency

arrives shortly before the 3-year period

for filing a timely claim expires, see 26

U. S. C. §§ 6511(a) and (b)(1), the

taxpayer might not discover his entitlement to a refund until well after the

commencement of litigation in the Tax

Court. But having filed a timely return,

the taxpayer would be precluded by the

passage of time from filing an actual

claim for refund ‘‘within 3 years from

the time the return was filed,’’ as

§ 6511(b)(2)(A) requires. § 6511(b)(2)(A) (incorporating by reference

§ 6511(a)). The taxpayer would therefore be entitled only to a refund of taxes

paid within two years prior to the

mailing of the notice of deficiency. See

§ 6511(b)(2)(B); 45 F. 3d, at 861–862

(taxpayer entitled to same look-back

period as would apply in district court,

and look-back period is determined

based on date of actual filing). It is

unlikely that Congress intended for a

taxpayer in Tax Court to be worse off

for having filed a timely return, but that

result would be compelled under the

Fourth Circuit’s approach.

Lundy offers an alternative reading of

the statute that avoids this unreasonable

result, but Lundy’s approach is similarly

defective. The main thrust of Lundy’s

argument is that the ‘‘claim’’ contemplated in § 6512(b)(3)(B) could be filed

‘‘within 3 years from the time the return

was filed,’’ such that the applicable

look-back period under § 6512(b)(3)(B)

would be three years, if the claim were

itself filed on a tax return. Lundy in fact

argues that Congress must have intended

the claim described in § 6512(b)(3)(B)

to be a claim filed on a return, because

there is no other way to file a claim for

refund with the IRS. Brief for Respondent 28, 30 (citing 26 CFR § 301.6402–

3(a)(1) (1995). Lundy therefore argues

that § 6512(b)(3)(B) incorporates a uni-

form 3-year look-back period for Tax

Court cases: If the taxpayer files a

timely return, the notice of deficiency

(and the ‘‘claim’’ under § 6512(b)(3)(B)) will necessarily be filed within

three years of the return and the lookback period is three years; if the taxpayer does not file a return, then the

claim contemplated in § 6512(b)(3)(B)

is deemed to be a claim filed with, and

thus within three years of, a return and

the look-back period is again three

years. Like the Fourth Circuit’s approach, Lundy’s reading of the statute

has the convenient effect of ensuring

that taxpayers in Lundy’s position can

almost always obtain a refund if they

file in Tax Court, but we are bound by

the terms Congress chose to use when it

drafted the statute, and we do not think

that the term ‘‘claim’’ as it is used in

§ 6512(b)(3)(B) is susceptible of the

interpretation Lundy has given it. The

Internal Revenue Code does not define

the term ‘‘claim for refund’’ as it is used

in § 6512(b)(3)(B), cf. 26 U.S.C.

§ 6696(e)(2) (‘‘For purposes of section

6694 and 6695 . . . [t]he term ‘claim for

refund’ means a claim for refund of, or

credit against, any tax imposed by subtitle A’’), but it is apparent from the

language of § 6512(b)(3)(B) and the

statute as a whole that a claim for

refund can be filed separately from a

return. Section 6512(b)(3)(B) provides

that the Tax Court has jurisdiction to

award a refund to the extent the taxpayer would be entitled to a refund ‘‘if

on the date of the mailing of the notice

of deficiency a claim had been filed.’’

(Emphasis added.) It does not state, as

Lundy would have it, that a taxpayer is

entitled to a refund if on that date ‘‘a

claim and a return had been filed.’’

Perhaps the most compelling evidence

that Congress did not intend the term

‘‘claim’’ in § 6512 to mean a ‘‘claim

filed on a return’’ is the parallel use of

the term ‘‘claim’’ in § 6511(a). Section

6511(a) indicates that a claim for refund

is timely if it is ‘‘filed by the taxpayer

within 3 years from the time the return

was filed,’’ and it plainly contemplates

that a claim can be filed even ‘‘if no

return was filed.’’ 26 U.S.C. § 6511(a).

If a claim could only be filed with a

return, as Lundy contends, these provisions of the statute would be senseless,

cf. 26 U. S. C. § 6696 (separately

defining ‘‘claim for refund’’ and ‘‘return’’), and we have been given no

reason to believe that Congress meant

the term ‘‘claim’’ to mean one thing in

§ 6511 but to mean something else

altogether in the very next section of the

statute. The interrelationship and close

proximity of these provisions of the

statute ‘‘presents a classic case for application of the ‘normal rule of statutory

construction that identical words used in

different parts of the same act are

intended to have the same meaning.’ ’’

Sullivan v. Stroop, 496 U. S. 478, 484

(1990) (quoting Sorenson v. Secretary of

Treasury, 475 U. S. 851, 860 (1986)

(internal quotation marks omitted).

The regulation Lundy cites in support of

his interpretation, 26 CFR § 301.6402–

3(a)(1) (1995), is consistent with our

interpretation of the statute. That regulation states only that a claim must ‘‘[i]n

general’’ be filed on a return, ibid.,

inviting the obvious conclusion that

there are some circumstances in which a

claim and a return can be filed separately. We have previously recognized

that even a claim that does not comply

with federal regulations might suffice to

toll the limitations periods under the Tax

Code, see, e.g., United States v. Kales,

314 U. S. 186, 194 (1941) (‘‘notice

fairly advising the Commissioner of the

nature of the taxpayer’s claim’’ tolls the

limitations period, even if ‘‘it does not

comply with formal requirements of the

statute and regulations’’), and we must

assume that if Congress had intended to

require that the ‘‘claim’’ described in

§ 6512(b)(3)(B) be a ‘‘claim filed on a

return,’’ it would have said so explicitly.

IV

Lundy offers two policy-based arguments for applying a 3-year look-back

period under § 6512(b)(3)(B). He argues that the application of a 2-year

period is contrary to Congress’ broad

intent in drafting § 6512(b)(3)(B),

which was to preserve, not defeat, a

taxpayer’s claim to a refund in Tax

Court, and he claims that our interpretation creates an incongruity between the

limitations period that applies in Tax

Court litigation and the period that

would apply in a refund suit filed in

district court or the Court of Federal

Claims. Even if we were inclined to

depart from the plain language of the

statute, we would find neither of these

arguments persuasive.

Lundy correctly argues that Congress

intended § 6512(b)(3)(B) to permit taxpayers to seek a refund in Tax Court in

circumstances in which they might otherwise be barred from filing an administrative claim for refund with the IRS.

This is in fact the way § 6512(b)(3)(B)

operates in a large number of cases. See

17

supra, at 8–9. But that does not mean

that Congress intended that § 6512(b)(3)(B) would always preserve taxpayers’

ability to seek a refund. Indeed, it is

apparent from the face of the statute that

Congress also intended § 6512(b)(3)(B)

to act sometimes as a bar to recovery.

To this end, the section incorporates

both the 2-year and the 3-year look-back

periods from § 6511(b)(2), and we must

assume (contrary to Lundy’s reading,

which provides a uniform 3-year period,

see supra, at 13–14) that Congress intended for both those look-back periods

to have some effect. Cf. Badaracco, 464

U. S., at 405 (Stevens, J., dissenting)

(‘‘Whatever the correct standard for

construing a statute of limitations . . .

surely the presumption ought to be that

some limitations period is applicable’’).

(Emphasis deleted.)

Lundy also suggests that our interpretation of the statute creates a disparity

between the limitations period that applies in Tax Court and the periods that

apply in refund suits filed in district

court or the Court of Federal Claims. In

this regard, Lundy argues that the claim

for refund he filed with his tax return on

December 28 would have been timely

for purposes of district court litigation

because it was filed ‘‘within three years

from the time the return was filed,’’

§ 6511(b)(1) (incorporating by reference

§ 6511(a)); see also Rev. Rul. 76–511,

1976–2 Cum. Bull. 428, and within the

3-year look-back period that would apply under § 6511(b)(2)(A). Petitioner

disagrees that there is any disparity,

arguing that Lundy’s interpretation of

the statute is wrong and that Lundy’s

claim for refund would not have been

considered timely in district court. See

Brief for Petitioner 12, 29–30 and n. 11

(citing Miller v. United States, 38 F. 3d

473, 475 (1994)).

We assume without deciding that

Lundy is correct, and that a different

limitations period would apply in district

court, but nonetheless find in this disparity no excuse to change the limitations scheme that Congress has crafted.

The rules governing litigation in Tax

Court differ in many ways from the

rules governing litigation in the district

court and the Court of Federal Claims.

Some of these differences might make

the Tax Court a more favorable forum,

while others may not. Compare 26 U. S.

C. § 6213(a) (taxpayer can seek relief

in Tax Court without first paying an

assessment of taxes) with Flora v.

United States, 362 U.S. 145, 177 (1960)

(28 U.S.C. § 1346(a)(1) requires full

payment of the tax assessment before

taxpayer can file a refund suit in district court); and compare 26 U.S.C.

§ 6512(b)(3)(B) (Tax Court must assume that the taxpayer has filed a claim

‘‘stating the grounds upon which the

Tax Court’’ intends to award a refund)

with 26 CFR § 301.6402–2(b)(1) (1995)

(claim for refund in district court must

state grounds for refund with specificity). To the extent our interpretation of

§ 6512(b)(3)(B) reveals a further distinction between the rules that apply in

these fora, it is a distinction compelled

by the statutory language, and it is a

distinction Congress could rationally

make. As our discussion of § 6512(b)(3)(B) demonstrates, see supra, at

8–9, all a taxpayer need do to preserve

the ability to seek a refund in the Tax

Court is comply with the law and file a

timely return.

We are bound by the language of the

statute as it is written, and even if the

rule Lundy advocates might ‘‘accor[d]

with good policy,’’ we are not at liberty

‘‘to rewrite [the] statute because [we]

might deem its effects susceptible of

18

improvement.’’ Badaracco, 464 U. S., at

398. Applying § 6512(b)(3)(B) as Congress drafted it, we find that the applicable look-back period in this case is

two years, measured from the date of

the mailing of the notice of deficiency.

Accordingly, we find that the Tax Court

lacked jurisdiction to award Lundy a

refund of his overwithheld taxes. The

judgment is reversed.

It is so ordered.

Part II. Treaties and Tax Legislation

Subpart B.—Legislation and

Related Committee Reports

Public Law 104–117

104th Congress, H.R. 2778

March 20, 1996

An Act to provide that members of the

Armed Forces performing services for

the peacekeeping efforts in Bosnia and

Herzegovina, Croatia, and Macedonia

shall be entitled to tax benefits in the

same manner as if such services were

performed in a combat zone, and for

other purposes.

Be it enacted by the Senate and House

of Representatives of the United States of

America in Congress assembled,

SECTION 1. TREATMENT OF

CERTAIN INDIVIDUALS

PERFORMING SERVICES IN

CERTAIN HAZARDOUS DUTY AREAS.

(a) GENERAL RULE.—For purposes of

the following provisions of the Internal

Revenue Code of 1986, a qualified

hazardous duty area shall be treated in

the same manner as if it were a combat

zone (as determined under section 112

of such Code):

(1) Section 2(a)(3) (relating to special rule where deceased spouse was

in missing status).

(2) Section 112 (relating to the

exclusion of certain combat pay of

members of the Armed Forces).

(3) Section 692 (relating to income

taxes of members of Armed Forces on

death).

(4) Section 2201 (relating to members of the Armed Forces dying in

combat zone or by reason of combatzone-incurred wounds, etc.).

(5) Section 3401(a)(1) (defining

wages relating to combat pay for

members of the Armed Forces).

(6) Section 4253(d) (relating to the

taxation of phone service originating

from a combat zone from members of

the Armed Forces).

(7) Section 6013(f)(1) (relating to

joint return where individual is in

missing status).

(8) Section 7508 (relating to time

for performing certain acts postponed

by reason of service in combat zone).

(b) QUALIFIED HAZARDOUS DUTY

AREA.—For purposes of this section, the

term ‘‘qualified hazardous duty area’’

means Bosnia and Herzegovina, Croatia,

or Macedonia, if as of the date of the

enactment of this section any member of

the Armed Forces of the United States is

entitled to special pay under section 310

of title 37, United States Code (relating

to special pay; duty subject to hostile

fire or imminent danger) for services

performed in such country. Such term

includes any such country only during

the period such entitlement is in effect.

Solely for purposes of applying section

7508 of the Internal Revenue Code of

1986, in the case of an individual who

is performing services as part of Operation Joint Endeavor outside the United

States while deployed away from such

individual’s permanent duty station, the

term ‘‘qualified hazardous duty area’’

includes, during the period for which

such entitlement is in effect, any area in

which such services are performed.

(c) E XCLUSION OF C OMBAT P AY

F ROM W ITHHOLDING L IMITED TO

AMOUNT EXCLUDABLE FROM GROSS

I NCOME .—Paragraph (1) of section

3401(a) of the Internal Revenue Code of

1986 (defining wages) is amended by

inserting before the semicolon the following: ‘‘to the extent remuneration for

such service is excludable from gross

income under such section’’.

(d) INCREASE IN COMBAT PAY EXCLUSION FOR OFFICERS TO HIGHEST

AMOUNT APPLICABLE TO ENLISTED PERSONNEL.—

19

(1) IN GENERAL.—Subsection (b)

of section 112 of such Code (relating

to commissioned officers) is amended

by striking ‘‘$500’’ and inserting ‘‘the

maximum enlisted amount’’.

(2) MAXIMUM ENLISTED AMOUNT.—

Subsection (c) of section 112 of such

Code (relating to definitions) is

amended by adding at the end the

following new paragraph:

‘‘(5) The term ‘maximum enlisted

amount’ means, for any month, the

sum of—

‘‘(A) the highest rate of basic

pay payable for such month to any

enlisted member of the Armed

Forces of the United States at the

highest pay grade applicable to enlisted members, and

‘‘(B) in the case of an officer

entitled to special pay under section

310 of title 37, United States Code,

for such month, the amount of such

special pay payable to such officer

for such month.’’.

(e) EFFECTIVE DATE.—

(1) IN GENERAL.—Except as provided in paragraph (2), the provisions

of and amendments made by this

section shall take effect on November

21, 1995.

(2) W ITHHOLDING .—Subsection

(a)(5) and the amendment made by

subsection (c) shall apply to remuneration paid after the date of the

enactment of this Act.

SEC. 2. EXTENSION OF INTERNAL

REVENUE SERVICE USER FEES.

Subsection (c) of section 10511 of the

Revenue Act of 1987 is amended by

striking ‘‘October 1, 2000’’ and by inserting ‘‘October 1, 2003’’.

Approved March 20, 1996.

Part IV. Items of General Interest

Notice of Proposed Rulemaking

and Notice of Public Hearing

SUPPLEMENTARY

INFORMATION:

Section 1059 Extraordinary

Dividends

Background

CO–9–96

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains

proposed regulations relating to certain

distributions made by corporations to

certain corporate shareholders. The proposed regulations are necessary to

clarify that certain distributions in redemption of stock are treated as extraordinary dividends notwithstanding provisions that otherwise might exempt the

distributions from extraordinary dividend treatment. Corporations that receive a distribution in redemption of

stock may be affected if the redemption

is either part of a partial liquidation of

the redeeming corporation or is not pro

rata as to all shareholders. This document also provides notice of a public

hearing on these proposed regulations.

DATES: Written comments and outlines

of topics to be discussed at the public

hearing scheduled for Wednesday, October 2, 1996, must be received by September 16, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (CO–9–96), room

5228, Internal Revenue Service, POB

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (CO–9–96), Courier’s Desk, Internal Revenue Service,

1111 Constitution Avenue NW., Washington, DC. The public hearing will be

held in room 3313, Internal Revenue

Building, 1111 Constitution Avenue

NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the hearing, Mike

Slaughter, Regulations Unit, Assistant

Chief Counsel (Corporate), at (202)

622–7190 (not a toll-free number). Concerning the proposed regulations, Richard K. Passales at (202) 622–7530 (not

a toll-free number).

1996–34

I.R.B.

This document contains proposed

amendments to the Income Tax Regulations (26 CFR part 1) relating to the

extraordinary dividend provisions under

section 1059 of the Internal Revenue

Code. Section 1059 was added by the

Deficit Reduction Act of 1984, Public

Law 98–369. One of the purposes of

section 1059 is to prevent a corporate

shareholder from creating an artificial

loss on stock. See General Explanation

of the Revenue Provisions of the Deficit

Reduction Act of 1984.

Section 1059(a) generally requires a

corporation that receives an extraordinary dividend on stock it has not held

for at least two years before the dividend announcement date to reduce its

basis (but not below zero) immediately

before any sale or disposition of the

stock by the nontaxed portion of the

dividend (generally, the amount of the

dividends received deduction). If the

nontaxed portion of the dividend exceeds basis, the excess generally is

treated as additional gain recognized

when the stock is sold. Section 1059(c)

generally defines an extraordinary dividend as a dividend that equals or exceeds the threshold percentage of the

taxpayer’s adjusted basis in such stock.

Sections 1059(d)(6), (e)(1), and (e)(2)

were enacted as part of the Tax Reform

Act of 1986. Each of those sections

affects the definition of extraordinary

dividends contained in section 1059(c).

Section 1059(d)(6) generally excludes

an extraordinary dividend from section

1059(a) treatment if the distributee is an

original shareholder of the distributing

corporation and the earnings and profits

from which the dividend is paid are

attributable solely to the original shareholder. Section 1059(e)(2) generally excludes a dividend from extraordinary

dividend treatment if it is a ‘‘qualifying

dividend.’’ A dividend generally is a

qualifying dividend if the distributee and

distributing corporations are affiliated at

the time of the distribution and the

distribution is out of affiliated year

earnings and profits. Both sections

1059(d)(6) and (e)(2) contemplate that

the distribution that otherwise would be

an extraordinary dividend subject to section 1059(a) is derived from earnings

and profits accumulated while the

20

distributee corporation is a shareholder

of the distributing corporation. Generally, a corporate shareholder’s ability to

create an artificial loss is reduced if all

of the distributing corporation’s earnings

and profits are accumulated while the

distributee corporation is a shareholder

of the distributing corporation.

Section 1059(e)(1) expands the scope

of the extraordinary dividend definition

in section 1059(c) by disregarding the

holding period and threshold rules for

certain distributions. Generally, section

1059(e)(1) provides that a non pro rata

redemption or a partial liquidation that

is treated as a dividend under section

301 is an extraordinary dividend to

which section 1059(a) applies without

regard to the threshold percentage or the

period the taxpayer held such stock. See

General Explanation of the Tax Reform

Act of 1986, Joint Committee on Taxation, 100th Cong., 1st Sess. (May 4,

1987).

These regulations address the question

of whether section 1059(d)(6) or (e)(2)

applies to a distribution otherwise

treated as an extraordinary dividend under section 1059(e)(1). The IRS and

Treasury Department believe that applying those provisions to section

1059(e)(1) is inconsistent with the purpose of section 1059 and may create

inappropriate consequences, such as basis shifting that eliminates gain or creates an artificial loss.

Accordingly, these regulations clarify

that neither section 1059(d)(6) nor section 1059(e)(2) applies to a distribution

treated as an extraordinary dividend under section 1059(e)(1). In finalizing

these regulations, the IRS and Treasury

Department will consider comments that

illustrate distributions described in section 1059(e)(1) to which the application

of section 1059(d)(6) or (e)(2) is appropriate or to which section 1059(e)(1)

otherwise should not apply.

These regulations also address the

question of whether an exchange treated

as a dividend under section 356(a)(2) is

subject to section 1059(e)(1). These

regulations clarify that for purposes of

section 1059(e)(1), an exchange under

section 356(a)(1) is treated as a redemption and, to the extent any amount is

treated as a dividend under section

356(a)(2), it is treated as a dividend

under section 301.

Explanation of Provisions

Proposed § 1.1059(e)–1(a) provides

that neither section 1059(d)(6) nor section 1059(e)(2) will prevent any distribution treated as an extraordinary dividend under section 1059(e)(1) from

being treated as an extraordinary dividend. For example, if a redemption of

stock is not pro rata as to all shareholders, any amount treated as a dividend

under section 301 is treated as an extraordinary dividend regardless of

whether the dividend is a qualifying

dividend.

Proposed § 1.1059(e)–1(b) provides

that for purposes of section 1059(e)(1),

an exchange under section 356(a)(1) is

treated as a redemption and, to the

extent any amount is treated as a dividend under section 356(a)(2), it is

treated as a dividend under section 301.

Proposed Effective Date

These regulations are proposed to

apply to distributions announced on or

after June 17, 1996.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a significant regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It also has been

determined that section 553(b) of the

Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility

Act (5 U.S.C. chapter 6) do not apply to

these regulations, and, therefore, a

Regulatory Flexibility Analysis is not

required. Pursuant to section 7805(f) of

the Internal Revenue Code, this notice

of proposed rulemaking will be submitted to the Chief Counsel for Advocacy

of the Small Business Administration for

comment on its impact on small business.

beyond the Internal Revenue Building

lobby more that 15 minutes before the

hearing starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments by September 16,

1996, and submit an outline of the

topics to be discussed and the time to be

devoted to each topic (signed original

and eight (8) copies) by September 16,

1996.

A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal author of these regulations is Richard K. Passales, Office of

Assistant Chief Counsel (Corporate),

IRS. However, other personnel from the

IRS and Treasury Department participated in their development.

*

*

*

*

*

Proposed Amendments to the

Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1 is amended by adding an entry in

numerical order to read as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.1059(e)–1 also issued under

26 U.S.C. 1059(e)(1) and (e)(2). * * *

Par. 2. Section 1.1059(e)–1 is added

to read as follows:

Comments and Public Hearing

§ 1.1059(e)–1 Non pro rata redemptions.

Before these proposed regulations are

adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8)

copies) that are submitted timely to the

IRS. All comments will be available for

public inspection and copying.

A public hearing has been scheduled

at 10 a.m. on Wednesday, October 2,

1996, room 3313, Internal Revenue Service, 1111 Constitution Avenue NW.,

Washington, DC. Because of access restrictions, visitors will not be admitted

(a) In general. Section 1059(d)(6)

(exception where stock held during entire existence of corporation) and section

1059(e)(2) (qualifying dividends) do not

apply to a distribution treated as an

extraordinary dividend under section

1059(e)(1). For example, if a redemption of stock is not pro rata as to all

shareholders, any amount treated as a

dividend under section 301 is treated as

an extraordinary dividend regardless of

whether the dividend is a qualifying

dividend.

21

(b) Reorganizations. For purposes of

section 1059(e)(1), an exchange under

section 356(a)(1) is treated as a redemption and, to the extent any amount is

treated as a dividend under section

356(a)(2), it is treated as a dividend

under section 301.

(c) Effective date. This section applies to distributions announced (within

the meaning of section 1059(d)(5)) on

or after June 17, 1996.

Margaret Milner Richardson,

Commissioner of Internal Revenue.

(Filed by the Office of the Federal Register on

June 17, 1996, 8:45 a.m., and published in the

issue of the Federal Register for June 18 1996, 61

F.R. 30845)

Notice of Proposed Rulemaking

and Notice of Public Hearing

Mark-to-Market for Dealers in

Securities; Equity Interests in

Related Parties and the

Dealer-Customer Relationship

FI–32–95

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

SUMMARY: This document contains

proposed regulations that make mark-tomarket accounting inapplicable to most

equity interests in related entities. The

regulations also relate to the definition

of a dealer in securities for certain

federal income tax purposes. To qualify

as a dealer in securities, a taxpayer must

engage in transactions with customers.

The proposed regulations concern the

existence of dealer-customer relationships. The Revenue Reconciliation Act

of 1993 amended the applicable tax law.

These regulations provide guidance for

taxpayers that engage in securities transactions. This document also provides

notice of a public hearing on these

proposed regulations.

DATES: Written comments and outlines

of oral comments to be presented at a

public hearing scheduled for October 15,

1996, at 10 a.m., must be received by

September 18, 1996.

ADDRESSES: Send submissions to:

CC:DOM:CORP:R (FI–32–95), room

5228, Internal Revenue Service, POB

1996–34

I.R.B.

7604, Ben Franklin Station, Washington,

DC 20044. In the alternative, submissions may be hand delivered between

the hours of 8 a.m. and 5 p.m. to:

CC:DOM:CORP:R (FI–32–95), Courier’s Desk, Internal Revenue Service,

1111 Constitution Avenue NW., Washington, DC 20224. The public hearing

will be held in the Commissioner’s

Conference Room, room 3313, Internal

Revenue Building, 1111 Constitution

Avenue NW., Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Jo

Lynn L. Ricks, (202) 622–3920, or

Robert B. Williams, (202) 622–3960;

concerning submissions and the hearing,

Michael Slaughter, (202) 622–7190 (not

toll-free numbers).

SUPPLEMENTARY

INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking has been submitted to the

Office of Management and Budget for

review in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C.

3507).

Comments on the collection of information should be sent to the Office of

Management and Budget, Attn: Desk

Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503,

with copies to the Internal Revenue

Service, Attn: IRS Reports Clearance

Officer, T:FP, Washington, DC 20224.

Comments on the collection of information should be received by August 19,

1996.

An agency may not conduct or sponsor, and a person is not required to

respond to, a collection of information

unless the collection of information displays a valid control number.

The collection of information is described in the Explanation of Provisions

section of the Preamble (rather than

being included in the text of the proposed regulations). The Preamble requests comments on whether the final

regulations should permit taxpayers to

elect to disregard certain inter-company

transactions in determining status as a

dealer in securities. The preamble also

indicates that, if the election is allowed

to be made, it is expected that taxpayers

would make it by attaching a statement

to a tax return. If the final regulations

1996–34

I.R.B.

allow taxpayers to make this election in

this manner, the information will be

required by the IRS to determine

whether the election has been made, and

will be used for that purpose. The likely

respondents will be businesses that file

consolidated tax returns. If taxpayers are

allowed to make the election, responses

to this collection of information will be

required to obtain the benefit of having

status as a dealer in securities determined without regard to certain intercompany transactions.

Books or records relating to a collection of information must be retained as

long as their contents may become material in the administration of any internal revenue law. Generally, tax returns

and tax return information are confidential, as required by 26 U.S.C. 6103.

Estimated total annual reporting burden:

6,000 hours.

The estimated annual burden per respondent varies from .25 hour to 1 hour,

depending on individual circumstances,

with an estimated average of .5 hours.

Estimated number of respondents:

12,000.

Estimated annual frequency of responses: once in the existence of each

respondent.

Background

This document contains proposed

regulations under section 475 of the

Internal Revenue Code, which requires

mark-to-market accounting for certain

dealers in securities. Section 475 was

added by section 13223 of the Revenue

Reconciliation Act of 1993, Pubic Law

103–66, 107 Stat. 481, and is effective

for all taxable years ending on or after

December 31, 1993.

Temporary and proposed regulations

published on December 29, 1993, [58

FR 68798] provide that stock in a

50-percent-controlled subsidiary (and interests in 50-percent-controlled partnerships and trusts) are deemed properly

identified as held for investment and

thus are excluded from mark-to-market

accounting. The IRS is reproposing this

rule with two changes. First, the IRS

has concluded that the rationale for the

rule applies equally to equity interests in

most related persons and not just to

persons controlled by the taxpayer. Second, after considering various comments

received, the IRS determined that this

rule prohibiting marking a security to

market should not apply if two require-

22

ments are met: (1) the security is actively traded on a national securities

exchange or through an interdealer quotation system; and (2) the taxpayer who

marks owns less than 5 percent of all

shares or interests of the same class.

Comments are requested as to whether it

is appropriate to allow any equity interests in related parties to be marked to

market, and, if so, whether the proposed

limitations are the most appropriate

ones. The provisions in this document

concerning these issues are referred to

below in this preamble as the reproposed regulations.

When commenting on the temporary

and proposed regulations, taxpayers

asked the IRS to provide guidance on

whether certain transactions are entered

into with customers for purposes of

section 475. Whether transactions are

entered into with customers can affect

both whether a taxpayer is a dealer in

securities subject to mark-to-market accounting (see section 475(c)(1)) and

whether a dealer may exempt a security

from mark-to-market treatment (see

section 475(b)(1)(A) and (B) and

§ 1.475(b)–1T(a)).

In response to these comments, on

January 4, 1995, the IRS published

proposed regulations [(FI–42–94) (60

FR 397)] stating that whether a taxpayer

is transacting business with customers is

determined based on all of the facts and

circumstances (see proposed § 1.475(c)–

1(c), reproposed as § 1.475(c)–1(a)).

These proposed regulations also provide

that the term dealer in securities includes a taxpayer that, in the ordinary

course of its trade or business, regularly

holds itself out as being willing and able

to enter into either side of a transaction

enumerated in section 475(c)(1)(B) (see

proposed § 1.475(c)–1(c)(2), reproposed

as § 1.475(c)–1(a)(2)).

On March 4, 1996, the IRS published

Notice 96–12 (1996–10 I.R.B. 29), stating that the IRS intended to publish

additional proposed regulations concerning when transactions with related parties may be transactions with customers

for purposes of section 475. Notice

96–12 also described the substance of

rules that the proposed regulations were

expected to contain. The rules were

expected to be proposed to be effective

for taxable years beginning on or after

February 20, 1996. The proposed regulations in this document generally reflect

the substance that was described in

Notice 96–12.

Explanation of Provisions

Prohibition against marking equity

interests in related persons

The reproposed regulations identify

certain assets that are inherently investments and, thus, may not be marked to

market under section 475. The new rules

retain the provision in the temporary

regulations that prevents marking certain

insurance products to market, but they

differ from the temporary regulations in

the provisions that prevent the marking

of certain equity interests. Under the

temporary regulations, the prohibition

against marking applies only if the

dealer in securities controls the issuer of

an equity interest (whether it is stock in

a corporation or an interest in a widely

held or publicly traded partnership or

trust). The reproposed regulations expand the scope of this treatment so that

mark-to-market accounting cannot be

used for equity interests in many related

issuers. (For these purposes, the reproposed regulations incorporate by reference the relevant relations described in

sections 267(b) and 707(b)(1).) The reproposed regulations also narrow the

scope of this prohibition against marking so that mark-to-market accounting

can be used for certain actively-traded

securities, regardless of the dealer’s relation to the issuer of the security, if the

dealer owns less than five percent of the

securities. The IRS is particularly interested in receiving comments on the

scope of the reproposed rules’ exception

to the general prohibition on marking to

market equity interests in a related person.

These reproposed regulations also

contain rules to cover situations where a

security begins, or ceases, to be subject

to this deemed-identification rule. First,

if a security is being marked to market

and then, as a result of a change in

facts, the regulations prohibit the security from continuing to be marked to

market, the regulations require that the

security be marked as of the close of

business on the last day before the day

when the prohibition on marking first

applies.

Second, the reproposed regulations

also cover situations in which the regulations have prohibited a security from

being marked to market and then the

prohibition on marking ceases to apply.

In these cases, the deadline for the

taxpayer to identify the security under

section 475(b)(2) as exempt from markto-market treatment is generally ex-

tended until the date the prohibition on

marking ceases to apply. (If the taxpayer

had identified the security by the original deadline, the extension, of course, is

irrelevant.) If the identification is not

made on or before the deadline (as so

extended), new changes in value are

taken into account under the mark-tomarket method, but recognition of appreciation and depreciation that occurred

while the security was not being marked

is suspended. This is the approach

adopted by section 475(b)(3) for securities that lose their exemption from

mark-to-market treatment. The reproposed rule is to apply both when the

prohibition on marking ceases because

of a change in facts and when the

prohibition on marking ceases because

the rule covering certain actively-traded

securities becomes effective.

In sum, under the reproposed regulations, the following assets held by a

dealer in securities are deemed to be

properly identified as held for investment: (1) stock in a corporation (or a

partnership or beneficial ownership interest in a widely held or publicly traded

partnership or trust) to which the taxpayer is related (other than certain

actively-traded stock or interests); and

(2) an annuity, endowment, or life insurance contract. The provision concerning

the second category of assets continues

to be proposed to apply to all taxable

years ending on or after December 31,

1993. The rules concerning the first

category of assets, however, are proposed to prohibit only those marks to

market that would have occurred on or

after June 19, 1996. If the prohibition

against marking begins to apply to a

security solely because of this effective

date rule, then (unlike the situation

when the onset of the prohibition is

caused by a change in facts) the security

is not marked to market immediately

before the prohibition begins.

In general, the provision allowing

certain actively-traded securities to be

marked to market even when the issuer

of the security is related is proposed to

be effective for marks to market on or

after June 19, 1996. Thus, this effective

date is the same as the effective date in

the reproposed regulations for the general prohibition on marking to market

securities issued by a related person.

Until the reproposed regulations are finalized, however, all equity interests

issued by controlled entities continue to

be subject to the temporary regulations’

prohibition against being marked to

market, even if the dealer owns less

23

than 5 percent of interests of that class

and even if the interests are actively

traded.

Some commenters suggested there

should be no per se rule treating certain

securities as held for investment, but

instead there should be a rebuttable

presumption to this effect for these

items. Other commenters proposed to

add, or delete, a variety of items to or

from those deemed to be per se held for

investment. The reproposed regulations

do not adopt these suggestions.

Consolidated Returns

Under both the temporary and the

reproposed regulations, there are situations in which the mark-to-market

method may apply to a consolidated

group member’s stock held by another

member of the group. This may result in

the recognition of duplicate gain or loss.

For instance, if a common parent marks

to market stock in a subsidiary to reflect

increases in the value of the subsidiary

stock owned by the parent resulting

from appreciation in the value of the

subsidiary’s assets, the parent will recognize gain on that stock under the

mark-to-market method. The subsidiary’s subsequent sale of the assets will

replicate that gain at the subsidiary

level. The gains will generate duplicate

stock basis increases under section 475

and § 1.1502–32(b), creating the potential for an offsetting loss when the stock

is subsequently marked down to fair

market value under section 475. Section

1.1502–20, however, may disallow any

such offsetting loss. Comments are invited regarding how to address the

anomalies these rules may produce.

The dealer-customer relationship

These proposed regulations clarify

that a taxpayer’s transactions with members of its consolidated group or other

related persons may be transactions with

customers for purposes of section 475.

Thus, a taxpayer may be a dealer in

securities for purposes of section 475

even if its only customer transactions

are transactions with members of its

consolidated group. In enacting section

475, Congress adopted a taxpayer-bytaxpayer approach to determining dealer

status, rather than the single-entity approach embodied in § 1.1502–13.

An example in the proposed regulations clarifies that, for purposes of section 475, transactions do not fail to be

transactions with customers solely because the parties enter into them with

1996–34

I.R.B.

other than arms-length pricing terms.

Under section 482 and the regulations

thereunder, however, the district director

may make allocations between or among

the members of the group if he or she

determines that a member has not reported its true taxable income.

These proposed regulations generally

reflect the substance of the rules set

forth in Notice 96–12 (1996–10 I.R.B.

29). In response to taxpayer comments,

however, certain language in Notice

96–12 has been clarified. Because of

these changes, although the rules described in Notice 96–12 were expected

to be proposed to be effective for taxable years beginning on or after February 20, 1996, these proposed regulations

are to be effective for taxable years

beginning on or after June 20, 1996. If

there are any situations in which the

proposed rules lead to a different result

from that which would be reached under

the rules described in the notice, a

taxpayer may reasonably and consistently apply the rules described in the

notice for any taxable year beginning on

or after February 20, 1996, and before

June 20, 1996.

Under these regulations, a taxpayer

may be a dealer in securities based

solely on transactions with other members of its consolidated group. The IRS

requests comments on whether certain

consolidated groups should be allowed

to disregard inter-member transactions

in determining a member’s status as a

dealer in securities. For instance, a

group might be allowed to disregard

inter-member transactions if the group,

considered as a single corporation,

would not be a dealer in securities for

purposes of section 475. It is likely that

the election, if permitted by the final

regulations, would be made by attaching

an appropriate statement to the taxpayer’s return. (See the Paperwork Reduction Act section of this preamble, which

requests comments on the burden that

might be imposed by this requirement.)

The IRS hereby requests comments on

the desirability and potential terms and

conditions of any such election. Comments could also address whether such

an election should apply in determining

whether a taxpayer had made more than

negligible sales for purposes of reproposed § 1.475(c)–1(c). Further, the IRS

requests comments on whether the election should be available only to groups

that have not made a separate-entity

election under § 1.1221–2(d)(2).

1996–34

I.R.B.

Miscellaneous

Some of the 1993 and 1995 proposed

regulations are reordered.

Special Analyses

It has been determined that this notice

of proposed rulemaking is not a significant regulatory action as defined in EO

12866. Therefore, a regulatory assessment is not required. It also has been

determined that section 553(b) of the

Administrative Procedure Act (5 U.S.C.

chapter 5) and the Regulatory Flexibility

Act (5 U.S.C. chapter 6) do not apply to

these regulations, and, therefore, a

Regulatory Flexibility Analysis is not

required. Pursuant to section 7805(f) of

the Internal Revenue Code, this notice

of proposed rulemaking will be submitted to the Chief Counsel for Advocacy

of the Small Business Administration for

comment on its impact on small business.

Comments and Public Hearing

Before these proposed regulations are

adopted as final regulations, consideration will be given to any written comments (a signed original and eight (8)

copies) that are submitted timely to the

IRS. All comments will be available for

public inspection and copying.

A public hearing has been scheduled

for October 15, 1996, at 10 a.m. in the

Commissioner’s Conference Room,

room 3313, Internal Revenue Building,

1111 Constitution Avenue NW., Washington, DC 20224. Because of access

restrictions, visitors will not be admitted

beyond the Internal Revenue Building

lobby more than 15 minutes before the

hearing starts.

The rules of 26 CFR 601.601(a)(3)

apply to the hearing.

Persons that wish to present oral

comments at the hearing must submit

written comments and submit an outline

of the topics to be discussed and the

time to be devoted to each topic (signed

original and eight (8) copies) by September 18, 1996.

A period of 10 minutes will be allotted to each person for making comments.

An agenda showing the scheduling of

the speakers will be prepared after the

deadline for receiving outlines has

passed. Copies of the agenda will be

available free of charge at the hearing.

Drafting Information

The principal authors of these regulations are Jo Lynn L. Ricks and Robert

24

B. Williams, Office of Assistant Chief

Counsel (Financial Institutions & Products). However, other personnel from

the IRS and Treasury Department participated in their development.

*

*

*

*

*

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for

part 1, as proposed on January 4, 1995,

at 60 FR 401, is further amended by

revising the entries for ‘‘Section

1.475(b)–1’’, ‘‘Section 1.475(b)–2’’, and

‘‘Section 1.475(b)–4’’ to read as follows:

Authority: 26 U.S.C. 7805. * * *

Section 1.475(b)–1 also issued under

26 U.S.C. 475(a) and 26 U.S.C. 475(e).

Section 1.475(b)–2 also issued under

26 U.S.C. 475(b)(2) and 26 U.S.C.

475(e). * * *

Section 1.475(b)–4 also issued under

26 U.S.C. 475(b)(2), 26 U.S.C. 475(e),

and 26 U.S.C. 6001. * * *

Par. 2. Section 1.475–0, as proposed

on January 4, 1995 (60 FR 401), is

amended by:

1. Revising the heading and entries

for § § 1.475(b)–1, 1.475(b)–2, and

1.475(b)–4.

2. Revising the entries under

§§ 1.475(c)–1 and 1.475(c)–2.

3. Removing the entries under

§ 1.475(e)–1.

The revisions read as follows:

§ 1.475–0 Table of contents.

*

*

*

*

*

§ 1.475(b)–1 Scope of exemptions from

mark-to-market requirement.

(a) Securities held for investment or not

held for sale.

(b) Securities deemed identified as held

for investment.

(1) In general.

(2) Relationships

(i) General rule

(ii) Attribution

(iii) Trusts treated as partnerships

(3) Securities traded on certain established financial markets.

(4) Changes in status.

(i) Onset of prohibition against

marking.

(ii) Termination of prohibition

against marking.

(iii) Examples

(c) Securities deemed not held for investment.

(1) General rule for dealers in notional principal contracts and derivatives.

(2) Exception for securities not acquired in dealer capacity.

(d) Special rules.

(1) Stock, partnership, and beneficial

ownership interests in certain controlled

corporations, partnerships, and trusts.

(i) In general.

(ii) Control defined.

(iii) Applicability.

(2) [Reserved]

§ 1.475(b)–2 Exemptions—Identification requirements.

(a) Identification of the basis for exemption.

(b) Time for identifying a security with

a substituted basis.

(c) Securities involved in integrated

transactions under § 1.1275–6.

(1) Definitions.

(2) Synthetic debt held by a taxpayer

as a result of legging in.

(3) Securities held after legging out.

*

*

*

*

*

§ 1.475(b)–4 Exemptions—Transitional

issues.

(a) Transitional identification.

(1) Certain securities previously identified under section 1236.

(2) Consistency requirement for other

securities.

(b) Corrections on or before January 31,

1994.

(1) Purpose.

(2) To conform to § 1.475(b)–1(a).

(i) Added identifications.

(ii) Limitations.

(3) To conform to § 1.475(b)–1(c).

(c) Effect of corrections.

§ 1.475(c)–1 Definitions—Dealer in securities.

(a) Dealer-customer relationship.

(1) [Reserved].

(2) Transactions described in section

475(c)(1)(B).

(i) In general.

(ii) Examples.

(3) Related parties.

(i) In general.

(ii) Example.

(b) Sellers of nonfinancial goods and

services.

(c) Taxpayers that purchase securities

but do not sell more than a negligible

portion of the securities.

(1) Exemption from dealer status.

(2) Negligible portion.

(3) Special rules.

(d) Issuance of life insurance products.

§ 1.475(c)–2 Definitions—Security.

(a) In general.

(b) Synthetic debt held by a taxpayer as

a result of an integrated transaction

under § 1.1275–6.

(c) Negative value REMIC residuals.

(d) Special rules.

*

*

*

*

*

§ 1.475(e)–1 Effective dates.

Par. 3. Section 1.475(b)–1 as proposed on December 29, 1993 (58 FR

68798), is amended by revising paragraph (b) and adding paragraph (d) to

read as follows:

§ 1.475(b)–1 Scope of exemptions from

mark-to-market requirement.

*

*

*

*

*

(b) Securities deemed identified as

held for investment—(1) In general. The

following items held by a dealer in

securities are per se held for investment

within the meaning of section 475(b)(1)(A) and are deemed to be properly

identified as such for purposes of section 475(b)(2)—

(i) Except as provided in paragraph

(b)(3) of this section, stock in a corporation, or a partnership or beneficial ownership interest in a widely held or

publicly traded partnership or trust, to

which the taxpayer has a relationship

specified in paragraph (b)(2) of this

section; or

(ii) A contract that is treated for

federal income tax purposes as an annuity, endowment, or life insurance contract (see sections 817 and 7702).

(2) Relationships—(i) General rule.

The relationships specified in this paragraph (b)(2) are—

(A) those described in section

267(b)(2), (3), (10), (11), or (12); or

(B) those described in section

707(b)(1)(A) or (B).

(ii) Attribution. The relationships

described in paragraph (b)(2)(i) of this

section are determined taking into account sections 267(c) and 707(b)(3), as

appropriate.

(iii) Trusts treated as partnerships. For purposes of this paragraph

(b)(2), the phrase partnership or trust is

substituted for the word partnership in

sections 707(b)(1) and 707(b)(3), and a

reference to beneficial ownership interest is added to each reference to capital

interest or profits interest in those sections.

25

(3) Securities traded on certain

established financial markets. Paragraph

(b)(1)(i) of this section does not apply

to a security if—

(i) The security is actively traded

within the meaning of § 1.1092(d)–1(a)

taking into account only established financial

markets

identified

in

§ 1.1092(d)–1(b)(1)(i) or (ii) (describing

national securities exchanges and

interdealer quotation systems), and

(ii) The taxpayer owns less than 5

percent of all of the shares or interests

in the same class.

(4) Changes in status—(i) Onset of

prohibition against marking—(A) Once

a security begins to be described in

paragraph (b)(1) of this section and for

so long as it continues to be so described, section 475(a) does not apply to

the security in the hands of the taxpayer.

(B) If a security has not been

timely identified under section 475(b)(2)

and, after the last day on which such an

identification would have been timely,

the security begins to be described in

paragraph (b)(1) of this section, then the

dealer must recognize gain or loss on

the security as if it were sold for its fair

market value as of the close of business

of the last day before the security begins

to be described in paragraph (b)(1) of

this section, and gain or loss is taken

into account at that time.

(ii) Termination of prohibition

against marking. If a taxpayer did not

timely identify a security under section

475(b)(2) and paragraph (b)(1) of this

section applies to the security on the last

day on which such an identification

would have been timely but it thereafter

ceases to apply—

(A) An identification of the security under section 475(b)(2) is timely

if made on or before the close of the

day paragraph (b)(1) of this section

ceases to apply; and

(B) Unless the taxpayer timely

identifies the security under section

475(b)(2) (taking into account the additional time for identification that is

provided by paragraph (b)(4)(ii)(A) of

this section), section 475(a) applies to

changes in value of the security after the

cessation in the same manner as under

section 475(b)(3).

(iii) Examples. These examples illustrate this paragraph (b)(4):

Example 1. Onset of prohibition against marking—(A) Facts. Corporation H owns 75 percent of

the stock of corporation D, a dealer in securities

within the meaning of section 475(c)(1). On

December 1, 1995, D acquired less than half of

the stock in corporation X. D did not identify the

stock for purposes of section 475(b)(2). On July

1996–34

I.R.B.

17, 1996, H acquired from other persons 70

percent of the stock of X. As a result, D and X

became related within the meaning of paragraph

(b)(2)(i) of this section. The stock of X is not

described in paragraph (b)(3) of this section

(concerning securities traded on certain established

financial markets).

(B) Holding. Under paragraph (b)(4)(i) of this

section, D recognizes gain or loss on its X stock

as if the stock were sold for its fair market value

at the close of business on July 16, 1996, and the

gain or loss is taken into account at that time. As

with any application of section 475(a), proper

adjustment is made in the amount of any gain or

loss subsequently realized. After July 16, 1996,

section 475(a) does not apply to D’s X stock while

D and X continue to be related to each other.

Example 2. Termination of prohibition against

marking; retained securities identified as held for

investment—(A) Facts. On July 1, 1996, corporation H owned 60 percent of the stock of corporation Y and all of the stock of corporation D, a

dealer in securities within the meaning of section

475(c)(1). Thus, D and Y are related within the

meaning of paragraph (b)(2)(i) of this section.

Also on July 1, 1996, D acquired, as an investment, 10 percent of the stock of Y. The stock of Y

is not described in paragraph (b)(3) of this section

(concerning securities traded on certain established

financial markets). When D acquired its shares of

Y stock, it did not identify them for purposes of

section 475(b)(2). On December 27, 1996, D

identified its shares of Y stock as held for

investment under section 475(b)(2). On December

30, 1996, H sold all of its shares of stock in Y to

an unrelated party. As a result, D and Y cease to

be related within the meaning of paragraph

(b)(2)(i) of this section.

(B) Holding. Under paragraph (b)(4)(ii)(A) of

this section, identification of the Y shares is timely

if done on or before the close of December 30,

1996. Because D timely identified its Y shares

under section 475(b)(2), it continues to refrain

from marking to market its Y stock after December 30, 1996.

Example 3. Termination of prohibition against

marking; retained securities not identified as held

for investment—(A) Facts. The facts are the same

as in Example 2 above, except that D did not

identify its stock in Y for purposes of section

475(b)(2) on or before December 30, 1996. Thus,

D did not timely identify these securities under

section 475(b)(2) (taking into account the additional time for identification provided in paragraph

(b)(4)(ii)(A) of this section).

(B) Holding. Under paragraph (b)(4)(ii)(B) of

this section, section 475(a) applies to changes in

value of D’s Y stock after December 30, 1996, in

the same manner as under section 475(b)(3). Thus,

any appreciation or depreciation that occurred

while the securities were prohibited from being

marked to market is suspended. Further, section

475(a) applies only to those changes occurring

after December 30, 1996.

*

*

*

*

*

(d) Special rules—(1) Stock, partnership, and beneficial ownership interests

in certain controlled corporations, partnerships, and trusts—(i) In general. The

following items held by a dealer in

securities are per se held for investment

within the meaning of section

475(b)(1)(A) and are deemed to be

properly identified as such for purposes

of section 475(b)(2)—

1996–34

I.R.B.

(A) Stock in a corporation that the

taxpayer controls (within the meaning of

paragraph (d)(1)(ii) of this section); or

(B) A partnership or beneficial ownership interest in a widely held or

publicly traded partnership or trust that

the taxpayer controls (within the meaning of paragraph (d)(1)(ii) of this section).

(ii) Control defined. Control means

the ownership, directly or indirectly

through persons described in section

267(b) (taking into account section

267(c)), of—

(A) 50 percent or more of the total

combined voting power of all classes of

stock entitled to vote; or

(B) 50 percent or more of the

capital interest, the profits interest, or

the beneficial ownership interest in the

widely held or publicly traded partnership or trust.

(iii) Applicability. The rules of this

paragraph (d)(1) apply only before the

date 30 days after final regulations on

this subject are published in the Federal

Register.

(2) [Reserved].

Par. 4. Section 1.475(b)–2, as proposed on December 29, 1993 (58 FR

68798), is redesignated as § 1.475(b)–4.

Par. 5. Section 1.475(b)–4, as proposed on January 4, 1995 (60 FR 404),

is redesignated as § 1.475(b)–2.

Par. 6. Section 1.475(c)–1, as proposed on December 29, 1993 (58 FR

68798), and amended on January 4,

1995 (60 FR 405), is amended as follows:

1. Paragraph (c) is removed.

2. Paragraphs (a) and (b) are redesignated as paragraphs (b)and (c), respectively.

3. New paragraph (a) is added to read

as follows:

§ 1.475(c)–1 Definitions—Dealer in securities.

(a) Dealer-customer relationship.

Whether a taxpayer is transacting business with customers is determined on

the basis of all of the facts and circumstances.

(1) [Reserved].

(2) Transactions described in section

475(c)(1)(B)—(i) In general. For purposes of section 475(c)(1)(B), the term

dealer in securities includes, but is not

limited to, a taxpayer that, in the ordinary course of the taxpayer’s trade or

business, regularly holds itself out as

being willing and able to enter into

26

either side of a transaction enumerated

in section 475(c)(1)(B).

(ii) Examples. T

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