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FILES

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118 T.C. No. 1

UNITED STATES TAX COURT

CHARLES C. ALLEN, III AND BARBARA N. ALLEN,

ET AL.¹, Petitioners v. COMMISSIONER OF

INTERNAL REVENUE, Respondent

Docket Nos. 1287-00, 1288-00,

1289-00,J?qn-nn,

1291-00, 1292-00,

1293-00, 1618-00.

Filed January 4, 2002.

Ps are the shareholders of F, a subch. S

corporation.

During its 1994 and 1995 taxable years,

F incurred wages that qualified for the targeted jobs

credit (TJC) under secs. 38 and 51, I.R.C.

F claimed

TJCs of $456,264 and $259,434 for the respective years

and reported to Ps their proportionate shares of the

credits.

F reduced its deduction of wages by the

¹ Cases of the following petitioners are consolidated

herewith: John R. Allen and Estate of Sally F. Allen, docket No.

1288-00; John R. Allen, Jr., and Susan S. Allen, docket No.

1289-00; John R. and Judith M. Allen, docket No. 1290-00; Charles

C. Allen, Jr., docket No. 1291-00; Warren L. Allen, docket No.

1292-00; Warren L. Allen, Jr., docket No. 1293-00; and Amantha S.

Allen, docket No. 1618-00.

SERVED .JAN-4 2N2

- 3 Petitioners

.

Charles C. Allen III and Barbara N. Allen

Charles C. Allen, Jr.

John R. Allen and Estate of Sally F. Allen

John R. and Judith M. Allen

John R. Allen, Jr., and Susan S. Allen

Warren L. Allen

Warren L. Allen, Jr.

Amantha S. Allen

1994

1995

$21,321

21,324

21,395

21,394

6,388

36,197

36,197

$12,107

12,015

12,108

12,107

1,970

20,582

20,582

Following concessions in docket numbers 1291-00 and 1292-00,

we must decide whether the wage-expense-limitation of section

280C(a) enters into the calculation of alternative minimum

taxable income (AMTI).

As relevant herein, section 280C(a)

limits a taxpayer's wage expense to the amount of the expense

that exceeds the amount of a targeted jobs credit (TJC)

determined under section 51(a).

We hold that section 280C(a)

enters into the calculation of a taxpayer's AMTI.

Background

All facts were stipulated and are so found.

The stipulated

facts and the exhibits submitted therewith are incorporated

herein by this reference.

During the subject years, each

petitioner,3 with the exception of Warren L. Allen and Charles C.

Allen, Jr., filed a joint Federal income tax return with his

wife.

Charles C. Allen III was the husband of Barbara N. Allen.

John R. Allen was the husband of Sally F. Allen during 1994, and

3 We hereinafter refer to Charles C. Allen III, Charles C.

Allen, Jr., John R. Allen, John R. Allen, Jr., Warren L. Allen,

and Warren L. Allen, Jr., as the sole petitioners.

Shareholder

Charles C. Allen, Jr.

Charles C.. Allen III

Warren L. Allen

Warren L. Allen, Jr.

John R. Allen

John R. Allen, Jr.

Total

No. of Shares

50

50

15

85

. 50

_50

300

Percent

16.67

16.67

5.00

28.33

16.67

16.67

100.00 (rounded)

During its 1994 and 1995 taxable years, Foods incurred wages

which qualified for the TJC.

Foods claimed TJCs of $456,264 and

$259,434 on its 1994 and 1995 Federal income tax returns,

respectively, and reported to each petitioner on his Schedules

K-1, Shareholder's Share of Income, Credits, Deductions, etc.,

his proportionate shares of those credits.

The Schedules K-1

reported the proportionate shares as follows:

Shareholder

1994

1995

Charles C. Allen, Jr.

Charles C. Allen, III

Warren L. Allen

Warren L. Allen, Jr.

John R. Allen

John R. Allen,r Jr.

Total

$76,044

76,044

22,813

129,275

76,044

76,044

456,264

$43,239

43,239

12,972

73,506

43,239

43,239

259,434

For Federal income tax purposes, Foods reduced its deduction

of wages by the amount of the TJC as required by section 280C(a)

and reported to each petitioner on his Schedules K-1 his

proportionate share df the resulting net income (Foods' resulting

net income):

Each petitioner computed his regular income tax

liability for 1994 and 1995 by including in his taxable income

his proportionate share of Foods' resulting net income.

- 7 claimed on his return by virtue of the TMT limitation of section

38(c)(1) (A).

Discussion

The Internal Revenue Code imposes upon taxpayers an

alternative minimum tax (AMT) in addition to all other taxes

imposed by subtitle A.

See sec. 55(a).

The AMT is imposed upon

a taxpayer's AMTI, which is an income base broader than the usual

base of taxable income applicable to Federal income taxes in

general.

See H. Conf. Rept. 99-841 (Vol. II), at II-249

(individual AMT), II-263 (corporate AMT)

(Vol. 4) 250, 264.

(1986), 1986-3 C.B.

Congress established AMTI as a broad base of

income in order to tax taxpayers more closely on their economic

income, intending for all taxpayers to pay their fair share of

the overall Federal income tax burden.

518-519 (1986), 1986-3 C.B.

See S. Rept. 99-313, at

(Vol. 3) 518-519; H. Rept. 99-426,

at 305-306 (1985), 1986-3 C.B.

(Vol. 2) 305-306.

Congress

required that corporations be taxed at a single AMT rate and that

individuals be taxed under a progressive AMT regime with two

rates.

The highest AMT rate applicable to a taxpayer is lower

than the taxpayer's maximum rate of taxation under the regular

tax regime, and a taxpayer must pay AMT when the taxpayer's AMT

liability is greater than the taxpayer's regular tax liability.

The instant case focuses on the tax base upon which AMTI is

calculated.

Specifically, we pass for the first time on the

- 9 Petitioners assert that the wage-expense-limitation is not

- applicable to the AMTI calculation under a plain reading of

section 280C(a) because a TJC is never determined in the AMT

regime.

Respondent acknowledges that the primary reading of the

provisions underlying the AMT regime requires that a taxpayer

calculate AMTI by adjusting taxable income in the manner set

forth in section 55(b) but invites the Court to adopt the

alternative reading advanced by petitioners under which the AMT

and regular tax regimes are considered parallel systems in that

the computation of AMT starts from scratch without regard to any

calculation made for regular tax purposes.

Respondent argues

that the fact that a TJC is determined for the regular tax regime

is enough to subject petitioners to the wage-expense-limitation

in the calculation of AMTI under the AMT regime given the absence

of any statutory provision that provides to the contrary.

We agree with respondent that the wage-expense-limitation of

section 280C(a) enters into the calculation of AMTI but do so for

reasons different than he espouses.

relevant statutory text.

Our analysis begins with the

We interpret that text with reference

to the legislative history primarily to learn the purpose of the

statute and to resolve any ambiguity in the words contained in

the text.

Landgraf v. USI Film Prods.,

511 U.S. 244 (1994);

Commissioner v. Soliman, 506 U.S. 168, 174 (1993); Consumer Prod.

Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980);

- 11 credit is the sum of the following credits determined

for the taxable year:

. *

*

*

*

*

*

*

(2) the targeted jobs credit determined

under section 51(a);

*

(c)

*

*

*

*

*

*

Limitation Based on Amount of Tax.--

(1) In general.--The credit allowed

under subs'ection (a) for any taxable year

shall not exceed the excess (if any) of the

taxpayer's net income tax over the greater

of--

(A) the tentative minimum tax

for the taxable year, or

(B) 25 percent of so much of

the taxpayer's net regular tax

liability as exceeds $25,000.

For purposes of the preceding sentence, the

term "net income tax" means the sum of the

regular tax liability and the tax imposed by

section 55, reduced by the credits allowable

under subparts A and B of this part, and the

term "net regular tax liability" means the

regular tax liability reduced by the sum of

the credits allowable under subparts A and B

of this part.

For purposes of section 38(b)(2), the TJC generally entitles a

taxpayer such as Foods (and, by virtue of the passthrough nature

of Foods, each petitioner) to a credit equal to a percentage of

the salaries or wages (collectively, wages) which it incurs in

employing individuals described in one or more of the targeted

groups enumerated in section 51(d)(1).

If the taxpayer cannot

- 13 apply in the case of AMTI.

Nor do we read any of the provisions

. underlying AMT that would lead us to that result.5

The heart of AMT is section 55.

SEC. 55.

That section provides:

ALTERNATIVE MINIMUM TAX IMPOSED.

(a) General Rule.--There is hereby imposed (in

addition to any other tax imposed by this subtitle) a

tax equal to the excess (if any) of-(1) the tentative minimum tax for the

taxable year, over

(2) the regular tax for the taxable

year.

(b) Tentative minimum tax.--For purposes of this

part-(1) Amount of Tentative Tax.

(A)

Noncorporate taxpayers.

(i) In general.--In the

case of a taxpayer other than a

corporation, the tentative minimum

tax for the taxable year is the sum

of--

(I) 26 percent of so

much of the taxable excess as does

not exceed $175,000, plus

s Although respondent concedes that no petitioner is liable

for AMT, we must address the AMT provisions in order to compute

each petitioner's TMT. See sec. 38(c) (in the computation of a

taxpayer's regular tax liability, the application of the TJC may

be limited by the taxpayer's TMT). The calculation of a

taxpayer's TMT is generally a three-step process in which:

(1)

The taxpayer's AMTI is reduced by an exemption amount, (2) the

reduced amount is multiplied by the AMT rate, and (3) the

resulting tax figure is reduced by the alternative minimum

foreign tax credit. Sec. 55(b)(1), (d).

- 15 (A) determined with the

adjustments provided in section 56

and section 58, and

(B) increased by the amount of

the items of tax preference

described in section 57.

If a taxpayer is subject to the regular tax,

such taxpayer shall be subject to the tax

imposed by this section (and, if the regular

tax is determined by reference to an amount

other than taxable income, such amount shall

be treated as the taxable income of such

taxpayer for purposes of the preceding

sentence).

From this text, we understand explicitly that the base of

AMTI is "taxable income", and that this base may be affected by

the items described in sections 56, 57, and 58.

Sec. 55(b)(2).

See generally. sec. 59, which, although not specifically mentioned

in section 55, provides definitions and special rules that apply

in the setting of AMT.

As to the meaning of the term "tagable

income", Congress has provided unambiguously and with sweeping

breadth that "for purposes of this subtitle, the term 'taxable

income' means gross income [see sec. 61(a) for the applicable

meaning of the term "gross income"s] minus the deductions allowed

by this chapter (other than the standard deduction)."7

Sec.

6 Whereas sec. 61(a) provides that the meaning of the term

"gross income" as set forth therein does not apply "where

otherwise provided in this subtitle", we are unaware of any

provision in the subtitle that would make the sec. 61(a)

definition inapplicable to sec. 63(a).

7 Congress provided the sole exception to this rule in sec.

(continued...)

- 17 Corporations; Form 6251 (individuals) .

Because section 280C is a

wage-expense-limitation that enters into the computation of

taxable income for purposes of section 63(a), and section 280C(a)

is not referenced in part VI, we conclude naturally that the

limitation is reflected in the calculation of AMTI.

Petitioners assert in their brief that the legislative

history underlying AMT "makes clear" that the AMT regime is a

"separate and independent tax system that operates in parallel

with the RT [regular tax] system and requires separate

calculations of a taxpayer' s" taxable income for regular tax

purposes and AMTI.

Petitioners conclude that, notwithstanding

the fact that section 280C(a) is not referenced in part VI,

section 280C (a) is inapplicable in the AMT regime because the TJC

is also inapplicable there.

Respondent does not disagree with

the parallel tax regime rationale advanced by petitioners.

Respondent invites the Court to hold that the systems are

"parallel" in the sense that a taxpayer who has calculated

taxable income must start from scratch in a separate computation

of AMTI.

Both respondent and petitioners rely extensively upon

the Staff of Joint Comm. on Taxation, General Explanation of the

Tax Reform Act of 1986 (J. Comm. Print 1987)

(General Explanation

of the 1986 Act), in arguing that the legislative history under

the current AMT regime supports the treatment of that regime as a

system that is parallel to the regular tax regime.

- 19 memorandum (Tech. Adv. Mem. 9722005 (Feb. 5, 1997)) issued as to

the facts of this case.

The referenced sentences of the General

Explanation of the 1986 Act provide:

Structure of minimum tax as an alternative

system.--For most purposes, the tax base for the new

alternative minimum tax is determined as though the

alternative minimum tax were a separate and independent

income tax system. Thus, for example, where a Code

provision refers to a "loss" of the taxpayer from an

activity, for purposes of the alternative minimum tax

the existence of a loss is determined with regard to

the items that are includable and deductible for

minimum tax, not regular tax, purposes.

[General

Explanation of the 1986 Act, supra at 438.]

The referenced sentence in the preamble to section 1.55-1, Income

Tax Regs., provides (with a citation to the General Explanation

of the 1986 Act, supra at 438 n.9):

"Congress generally intended

that the AMT be treated as a tax system separate from but

parallel to the regular tax system".

13.

T.D. 8569, 59, 1994-2 C.B.

The technical advice memorandum reasons that the regular tax

regime operates in parallel to the AMT regime.

Tech. Adv. Mem.

9722005 (Feb. 5, 1997).

Respondent, in turn, acknowledges that the primary reading

of the AMT provisions requires that AMTI be calculated by

modifying taxable income by the items described in part VI.

In a

manner that is openly inconsistent with respondent's plain

reading of section 280C(a), however, respondent invites the Court

not to apply the plain meaning of section 55 and to adopt the de

novo computation of AMTI advanced by petitioners.

Respondent

- 21 Rept. 99-841, supra at 261, 1986-3 C.B.

261.9]

(Vol. 4) at

9 But for these citations, respondent's argument on brief

includes no citation to the legislative history underlying the

Tax Reform Act of 1986 (1986 Act), Pub. L. 99-514, 100 Stat.

2085, enactment of the current AMT regime. Our research has

revealed two other times in which the term "separate from but

parallel to" appears in that legislative history. The conferees

stated that the House bill provided the following rules on the

application of the AMT FTCs and the AMT NOLs to corporate

taxpayers:

Under the House bill, foreign tax credits are

allowed against the minimum tax, under limits similar

to those applying under the regular tax. Credits that

cannot be used in the current taxable year because of

these limits are carried over under a system separate

from but parallel to that applying for regular tax

purposes.

Under the House bill, the net operating loss

deduction is allowed against alternative minimum

taxable income. For any taxable year beginning after

1985, the minimum tax is reduced by the items of tax

preference arising in that year. Minimum tax NOLs are

carried over under a system separate from but parallel

to that applying for regular tax purposes.

[H. Conf.

Rept. 99-841 (Vol. II), supra at II-281, II-282 (1986),

1986-3 C.B. (Vol. 4) at 281, 282.]

In addition to these two uses of the word "parallel" and the

other two uses referenced by the parties, our research has

uncovered only one other time that the word "parallel" appears in

the legislative history underlying the 1986 Act's enactment of

the current AMT regime. The conferees stated in its discussion

of corporate AMT NOLs:

It is clarified that, in light of the parallel

nature of the regular tax and minimum tax systems, any

limitations applying for regular tax purposes to the

use by a consolidated group of NOLs or current year

losses (e.g., section 1503) apply for minimum tax

purposes as well.

[H. Conf. Rept. 99-841, supra at II(continued...)

- 23 relevant statutory provisions.

To be sure, the parties, but for

. citations to the conferees' understanding of the law that

preceded the 1986 Act, have not even cited the Court one iota of

persuasive legislative history in support of their contentions.

The General Explanation of the 1986 Act, the source of the

"legislative history" upon which the parties primarily rely to

support their assertions of legislative intent, is not part of

the statute's legislative history.

See Estate of Hutchinson v.

Commissioner, 765 F.2d 665, 669-670 (7th Cir. 1985), affg.

T.C. Memo. 1984-55; Condor Intl., Inc. v. Commissioner, 98 T.C.

203, 227 (1992).

See generally Mertens, Law of Federal Income

Taxation, sec. 3.20, at 31 (1994):

The purpose of the Blue Book [the Staff of Joint

Committee's general explanation of a tax statute) is to

provide, in one volume, a compilation of the

legislative history of a piece of tax legislation.

While the document is most helpful as a handy reference

volume it also gives some guidance. Where the Blue

Book's explanation differs from that in a conference

report it may serve to alert the reader that a

technical correction is needed to reconcile the views.

[Emphasis added.]

Such is especially true as to the General Explanation of the 1986

Act, which was written by the Joint Committee of Taxation for the

100th Congress (Joint Committee), or, in other words, the

Congress that next followed the Congress that passed the 1986

Act.¹°

Although the Staff of Joint Committee's explanation of a

¹° The Joint Committee consisted of 10 Congressman, 5 from

(continued...)

- 25 position by stating "For most purposes, the tax base * * * is

- determined as though :he alternative minimum tax were a separate

and independent income tax system."

General Explanation of the

1986 Act, supra at 433 (emphasis added).

To our minds, the

phrase "For most purposes" means that even the Joint Committee

recognized that the regular tax and AMT systems were not parallel

systems for all purposes.

The same is true as to the use of the

term "as though", rather than a term such as "by virtue of the

fact that".

As to the Joint Committee's use of the term

"separate and independent", we find no statement in the General

Explanation of the 1986 Act to the effect that the two regimes

are separate and independent for all purposes.

And even if we

did, the mere fact that two systems are "separate and

independent" does not make them "parallel".

The General Explanation of the 1986 Act uses the word

"parallel" only twice in its discussion of AMT.

First, as to the

treatment of AMT NOLs, the General Explanation of the 1986 Act

states:

In light of the parallel nature of the regular tax

and minimum tax systems, any limitations applying for

regular tax purposes to the use by a consolidated group

of NOLs or current year losses (e.g., section 1503)

apply for minimum tax purposes as well. Moreover, an

election under section 172(b)(3)(C) to relinquish the

carryback period applies for both regular tax and

minimum purposes.

[General Explanation of the 1986

Act, supra at 4T0.]

- 27 parallel to their treatment for regular tax purposes does not, in

. our minds, mean that the entire AMT regime runs parallel to the

regular tax regime.¹²

Although the legislative history to a statute is secondary

when the Court can apply the plain meaning of unambiguous

statutory text, we recognize that unequivocal evidence of a clear

legislative intent may sometimes override a plain meaning

interpretation and lead to a different result.

Consumer Prod.

Safety Commn. v. GTE Sylvania, Inc., 447 U.S. 102, 108 (1980);

see also Halpern v. Commissioner, 96 T.C. 895, 899 (1991);

Hirasuna v. Commissioner, 89 T.C. 1216, 1224

(1987); Huntsberry

v. Commissioner, 83 T.C. 742, 747-748 (1984).

Here, the

legislative history of the statutes provides scant and

unpersuasive support for a holding contrary to that which we

reach herein.

As to section 280C(a), its genesis lies in the Tax Reduction

and Simplification Act of 1977 (1977 Act), Pub. L. 95-30,

91 Stat. 126, which also is the statute that spawned the new jobs

credit of former sections 44B, 51, 52, and 53.

Given the

presence at that time of high marginal tax rates and the

12 Nor are we persuaded by the preamble or technical advice

memorandum upon which petitioners rely. In addition to the

obvious fact that these documents also are not items of

legislative history, these documents are afforded little weight

in this Court.

Textron Inc. v. Commissioner, 115 T.C. 104, 110

(2000) (technical advice memorandum); Dobin v. Commissioner,

73 T.C. 1121, 1129 n.9 (1980) (preamble to proposed regulations).

- 29 current form through three pieces of legislation; namely, the

Revenue Act of 1978 (1978 Act), Pub. L. 95-600, 92 Stat. 2763;

the Tax Equity and Fiscal Responsibility Act.of 1982 (TEFRA),

Pub. L. 97-248, 96 Stat. 324; and the 1986 Act.

Through the 1969 Act, Congress enacted the MT provisions to

prevent corporate and individual taxpayers from aggregating

deductions to the point where they would pay either no tax or a

"shockingly low" tax.

First Chicago Corp. v. Commissioner,

842 F.2d 180, 181 (7th Cir. 1988), affg. 88 T.C. 663 (1987).

Congress aimed through the MT provisions to allocate the tax

burden among taxpayers more equitably by taxing preference items

(preferences) consisting of certain deductions and an exclusion

from gross income.

C.B. 423, 495.

See S. Rept. 91-552, at 112 (1969), 1969-3

The preferential deductions generally included

deductions which involved no economic cost to the taxpayer (e.g.,

the long-term capital gains deduction) or exceeded current

economic cost.

The MT equaled the product of a single tax rate

multiplied by the amount of the taxpayer's preferences which

exceeded a prescribed deduction.

This scheme remained in effect, with only minor changes, as

the only minimum tax formulation in the Code until 1978.

1978 Act sec. 421(a), 92 Stat. 2871.

See

Through the 1978 Act,

Congress supplemented the MT with an AMT for noncorporate

- 31 for corporate taxpayers and subjected them to AMT.

Congress also

altered the computation of AMTI by providing for differences

regarding when items of income or deductions are taken into

account in computing taxable income and AMTI.

The post-1986 AMT

rules, sections 55-59, were enacted to achieve one overriding

objective: to establish a floor for tax liability, so that a

taxpayer pays some tax regardless of the tax breaks otherwise

available to him under the regular tax system.

supra at 518, 1986-3 C.B.

(Vol. 3) at 518.

S. Rept. 99-313,

The AMT rules

accomplish this goal by eliminating favorable treatment to

certain items that are treated favorably for purposes of the

regular tax (tax preference items).

Secs. 55(b)(2)(B), 57(a).

The legislative history under the 1986 Act states explicitly

that the computation of a corporation's AMTI begins with taxable

income and that any adjustments required by the AMT regime are

made from there.

The report of the House Ways and Means

Committee, for example, explains clearly and unambiguously that

the starting point for computing a corporation's AMTI is "taxable

income".

The report states:

Explanation of Provisions

1.

Overview

The bill repeals the present law add-on minimum

tax for corporations beginning in 1986, creates a new

alternative minimum tax on corporations, and expands

the alternative minimum tax on individuals.

- 33 The Senate Finance Committee repeated these statements almost

. verbatim in its repor:.¹4

C.B.

(Vol. 3) 521.

S. Rept. 99-313, supra at 521, 1986-3

Although these reports do not explicitly

provide that the computation of an individual's AMTI also begins

with taxable income, we decline to conclude that the calculation

of AMTI is different for an individual given no clear provision

to that effect in either the statute or the legislative history.

Whereas the House and Senate committee reports both state that

the two regimes are considered "separate" systems, this simply

means, as respondent acknowledges, that two taxes are involved.

The mere fact that the two systems may also be "independent" does

not necessarily mean that they are unrelated in all regards, or,

in other words, parallel.

Petitioners also rely on the fact that section 1.55-1(b),

Income Tax Regs., does not prohibit them from deducting all of

the wages for AMT purposes.

Petitioners recognize in this regard

that Congress authorized the Treasury Department to issue

regulations on the AMT regime, that the Commissioner issued two

14 The General Explanation of the 1986 Act also includes

these statements and clarifies that the word "generally" as used

in the discussion on corporations means that regular taxable

income is not used only where the taxpayer's tax base is other

than taxable income; e.g., unrelated business taxable income,

real estate investment trust taxable income, or life insurance

company taxable incone. General Explanation of the 1986 Act,

supra at 436-437. The General Explanation of the 1986 Act states

that a technical correction may be necessary to effectuate the

exception to the general rule.

Id. at 436 n.5.

- 35 -

Petitioners' final argument is that the Court will frustrate

congressional intent by not allowing them to deduct Foods' full

wage expense.

Petitioners contend that disallowing part of the

deduction may place taxpayers in a worse position by electing the

TJC than by not making the election.

We disagree that our

holding herein frustrates congressional intent.

The primary way

to foster congressional intent is to apply, as we do here, the

plain meaning of the statute as written.

Supreme Court has stated:

In this regard, the

"courts must presume that a

legislature says in a statute what it means and means in a

statute what it says there."

Conn. Natl. Bank v. Germain,

503 U.S. 249, 253-254 (1992)

(citations and quotation marks

omitted).

We sustain respondent's determination on this issue.

In so

doing, we have considered all arguments made by the parties and

have rejected those arguments not discussed herein as without

merit.

Accordingly,

Decisions will be entered for

respondent in docket nos. 1287-00,

1288-00, 1289-00, 1290-00, 1293-0Ó, and

1618-00, and decisions will be entered

under Rule 155 in docket nos. 1291-00

and 1292-00.