Petition for Writ of Certiorari — Albertson's, Inc. v. Commissioner

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ita Sup. me Court, U.S. ’

{ f ii ED

No. 417 96 MAY 1 - 1995'

Ce ee ee ee

‘

IN THE

Supreme Court of the United States

OCTOBER TERM, 1994

ALBERTSON'S, INC.,

Petitioner,

Vv.

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

Petition for Writ of Certiorari to th

United States Court of Appeals

for the Ninth Circuit

PETITION FOR WRIT OF CERTIORARI

KEITH A. JONES

Counsel of Record

BECK, REDDEN & SECREST

1331 Lamar, Suite 1570

Houston, TX 77010

(713) 659-8140

ROBERT S. ERICKSON

CRAIG G. TAYLOR

HAWLEY TROXELL ENNIS

& HAWLEY

877 Main Street, Suite 1000

Boise, IL’ 83701

WILSON - Eres Printinc Co., Inc. - 789-0096 - WASHINGTON, D.C. 20001

(SG

QUESTIONS PRESENTED

1. Whether section 404 of the Internal Revenue Code

bars the current deduction of interest accrued under a

nonqualified deferred compensation plan.

2. Whether central heating, ventilating, and air-

conditioning systems installed in supermarkets to meet

the temperature and humidity requirements set by manu-

facturers of refrigerated food cases constitute “tangible

personal property” within the meaning of section 48 of

the Code.

(i)

THE PARTIES BELOW; CORPORATE AFFILIATES

Petitioner Albertson’s, Inc., and respondent Commis-

sioner of Internal Revenue are the only parties.

Petitioner has no corporate parent and no nonwholly-

owned subsidiaries.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED i

THE PARTIES BELOW; CORPORATE AFFILI-

ATES ...... i?

TABLE OF AUTHORITIES

OPINIONS BELOW

JURISDICTION

STATUTES AND REGULATIONS INVOLVED..........

STATEMENT Or THE CASE

1. Background . ; ima

a. Interest on deferred compensation -..............

b. HVAC systems

2. The Tax Court’s decisions

a. Interest deduction

b. Investment tax credit

38. The Ninth Circuit’s initial decision

a. Interest deduction

b. Investment tax credit .

4. The Ninth Circuit’s decision on rehearing ..........

REASONS FOR GRANTING CERTIORARI ............ i

I. Section 404 does not bar the current deduction

compensation plan 15

II. Supermarket HVAC systems constitute “tangi-

eas

section 48 i

CONCLUSION

owovonrniaw Ww WS NY NW FH

(iii)

TABLE OF AUTHORITIES

CASES: Page

Aames v. Commissioner, 94 T.C. 189 (1990) ........ 8,9

American Tobacco Co. v. Patterson, 456 U.S. 68

CEOS i ee 17

Commissioner v. Keystone Consol. indus., Inc., 118

. Gh, SD Ca is ieee 18

Commiss‘oner v. Lester, 366 U.S. 299 (1961)... 18

Deputy v. du Pont, 308 U.S. 488 CERO. 5a 15

Hanover Bank v. Commissioner, 369 U.S. 672

(Tee 5c ; 10

Idaho Power Co. v. Commissioner, 418 U.S. 1

CPE ivesccenkscn incl ; 19

Indopeo, Inc. v. Commissioner, 112 S. Ct. 1089

CEE ks icine ee 21

Old Colony R.R. Co. v. Commissioner, 284 U.S. 552

(SGD citings eG & 15

Piggly Wiggly Southern, Ine. v. Commissioner, 803

F.2d 1572 (1ith Cir. 1966) passim

Publix Supermarkets, Inc. v. United States, 26 Cl.

Ch. 30S COORD sess 14

Sorenson v. Secretary of Treasury, 475 U.S. 851

GUE siicceencaite i a cee vi 18

Starker v. United States, 602 F.2d 1341 (9th Cir.

SORELLE ME RT ee - 9

STATUTES:

i | EPC n ras or 2, 6, 23

ae USA eee 2, 6, 18, 23

26 U.S.C. § Oe Corea) passim

26 U.S.C. § 168 (1994) _.. 14, 15

26 U.S.C. § 401 (1982) _........ 3

26 U.S.C. § 404 (1982) 0. passim

SU... 2, 19, 20

26 U.S.C. § 6213 (1994) 7A 7

28 U.S.C. § 1254(1) (1994) . , : 2

RULES AND REGULATIONS:

IRS Notice 94-38, 1994-1 C.B. 350 ud 20

Rev. Proc. 92-20, 1992-1 C.B. 685 .......... 20

Temp. Treas. Reg. §1.404(a)-1T, Q&A 1, as

amended by T.D. 8485, 1992-2 C.B. 324... 19

TABLE OF AUTHORITIES—Continued

Page

Treas. Reg. § 1.48-1 passim

Treas. Reg. § 1.162-7 (a) 17

Treas. Reg. § 1.168-3 (c) , 14, 15

Treas. Reg. § 1.404 (a)-1(b) 17

Treas. Reg. § 1.897-1(b) (3) (iv) -.........-............ 15

Treas. Reg. § 1.1245-3(c) (2) ................ aes 14

LEGISLATIVE MATERIALS:

S. Rep. No. 313, 99th Cong., 2d Sess. 1, 1013

(1986) .... aay 19

MISCELLANEOUS

E. Abahoonie, “Ninth Circuit’s Albertson’s Flip-

Flop Outrages Practitioner,” Tax Notes, Feb. 6,

1995, p. 898 23

J. Cummings, “Statutory Interpretation and

Albertson’s,” Tax Notes, Jan. 23, 1995, p. 559.... 12, 16,

17, 18

R. Dema & K. Frazier, “The Real Cost of Nonquali-

fied Deferred Compensation Plans,” J. Account-

one 25: Te Ae so. 16

Tom Herman, U.S. Appeals Court Overturns Its

Ruling in High-Stakes Tax Case, Wall St. J., Dec.

6, 1994, at B12 12, 13

Note, “Employer Deductions Under Nonqualified

Deferred Compensation Agreements: Albert-

son’s, Inc. v. Commissioner, 48 Tax Lawyer 493

(1995) 16

L. Shapiro and W. Pomierski, “ ‘Interest’ on De-

ferred Compensation Arrangements May Be De-

ductible, for Now,” J. Taxation 212 (April

1994) . 16,17

S. Willis, “Leave Albertson’s Alone,” Tax Notes

em: Sa a BOE ic Sn 21, 22

E. Zelinsky, “Albertson’s: Why Courts Shouldn’t

Override Clear Statutory Language,” Tax Notes,

March 13, 1995, p. 1691 17, 20

Tax Report, Wall St. J., Jan. 19, 1994, at Al SRK eal 13

Tax Report, Wall St. J., Feb. 9, 1994, at Al -............. 13

TABLE OF AUTHORITIES—Continued

, Page

Taz Report, Wall St. J., April6,1994,atAl_.. ssid

Taz Report, Wall St. J., April 27,1994,atAl....—ss‘'18

Tax Report, Wall St. J., June 29,1994,atAl... isd

44 Fed. Reg. 31927 (1979) 24

Supreme Court of the United States

OcTOBER TERM, 1994

No. 94- ——

ALBERTSON’S, INC.,

a Petitioner,

COMMISSIONER OF INTERNAL REVENUE,

Respondent.

Petition for Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

PETITION FOR WRIT OF CERTIORARI

Alhertson’s, Inc., hereby petitions for a writ of cer-

tiorari to review the judgment of the United States Court

of Appeals for the Ninth Circuit.

OPINIONS BELOW

The opinion of the court of appeals on rehearing (App.

A) is reported at 42 F.3d 537. The initial opinion of

the court of appeals (App. B) is reported at 38 F.3d

1046. The opinion of the Tax Court with respect to the

deduction for interest (App. C) is reported at 95 T.C.

415. The opinion of the Tax Court with respect to the

investment tax credit (App. D) is reported at 56 T.C.M.

928. The opinion of the Tax Court with respect to work

incentive tax credits (App. E) is reported at 59 T.C.M.

186.

JURISDICTION

The judgments of the court of appeals were entered on

December 30, 1993, and December 5, 1994. Timely

petitions for rehearing were denied on February 2, 1995

(App. F). This Court’s jurisdiction is invoked under 28

U.S.C. § 1254(1).

STATUTES AND REGULATIONS INVOLVED

The pertinent provisions of sections 38, 48, 163, and

404 of the Internal Revenue Code of 1954, 26 U.S.C.

§§ 38, 48, 163, and 404 (1982), of section 404 of the

Internal Revenue Code of 1986, 26 U.S.C. § 404 (1994),

and of Treas. Reg. § 1.48-1(e)(2), 26 CFR. § 1.48-

1(e)(2) (1982), are set forth at App. G.

STATEMENT OF THE CASE

Petitioner Albertson’s, Inc., operates several hundred

retail food and drug stores throughout the western, mid-

western, and southern regions of the United States. This

federal income tax case relates to petitioner’s taxable

year ending February 3, 1983. Two separate and distinct

questions are presented.

The first question is whether interest accrued in con-

nection with a nonqualified deferred compensation plan

may be currently deducted under section 163 of the In-

ternal Revenue Code, 26 U.S.C. § 163 (1982) (unless

otherwise noted, references herein to the Internal Revenue

Code are to the 1954 Code as in effect during the taxable

year at issue). In seeking rehearing below, respondent

Commissioner of Internal Revenue candidly advised the

Ninth Circuit that this question “is one of exceptional

importance to the administration of the federal income

tax laws.” App. H at 101a.

The second question is whether supermarket heating,

ventilating, and air-conditioning ( “HVAC”) systems con-

stitute “tangible personal property” within the meaning

of section-48 of the Code. In deciding this question

adversely to petitioner, the Ninth Circuit explicitly declined

to follow the contrary holding of the Eleventh Circuit in

Piggly Wiggly Southern, Inc. v. Commissioner, 803 F. 2d

1572 (11th Cir. 1986). App. B at 40a n.25.

1. Background. The facts bearing upon the questions

presented are as follows.

a. Interest on deferred compensation. Prior to the

taxable year at issue in this case, petitioner established

a voluntary deferred compensation plan for certain of its

senior executives and directors. App. C at 42a. Under

this plan, an eligible participant could elect to enter into

a deferred compensation agreement and thereby defer

receipt of a fixed amount or percentage of his salary or

fees until retirement, termination of employment, or at-

tainment of a specified age. Id.

Petitioner’s deferred compensation plan was not funded.

The deferred compensation agreements simply “repre-

sented the unsecured contractual obligations of petitioner

to pay a specified sum . . . at or after a specified time.”

App. C at 42a. The amount of compensation thus ‘e-

ferred remained available to petitioner for use in its busi-

ness as additional working capital or for other purposes.

To reflect this fact, and in recognition of the time value

of money, the agreements provided that upon payment

of the deferred compensation petitioner also would pay

“a further sum of money equal to the amount of interest

accrued which shall be calculated by applying a rate of

interest to the total accumulated amount of deferred

compensation including accrued interest compounded

monthly. The rate to be used will be the weighted aver-

age of [petitioner’s] long term borrowing rate for that

current fiscal year.” Id. at 44a. (One of the agreements

provided for a different rate of interest, measured by

rates on large certificates of deposit. Id.)

This deferred compensation plan was not a “qualified

plan” for purposes of section 401(a) of the Code.

“Strict requirements must be met to achieve qualified

status. The most significant of these requirements relate

to the funding of benefits, minimum coverage, prohibi-

tions against discrimination, limitations on the benefits

which may accrue to participants, and prohibitions against

self-dealing. . . . An employer that contributes to a

qualified plan must pay the contributions to a trustee

under a trust arrangement or to an insurance company

that issues an annuity contract with respect to the plan.”

App. C at 53a-54a.

An employer may take a current deduction for de-

ferred compensation funded under a qualified plan even

though the covered employees may not be required to

include the compensation in gross income until they re-

ceive payment many years later. See App. C at 53a-54a.

Pursuant to section 404(a)(5) of the Code, however,

deferred compensation accrued under a nonqualified plan

“shall not be deductible under section 162 (relating to

trade or business expenses) or section 212 (relating to

expenses for the production of income); but if they satisfy

the conditions of either of such sections, they shall be

deductible . . . in the taxable year in which an amount

attributable to the contribution is includible in the gross

income of employees participating in the plan.”

Although section 163(a) of the Code grants a deduc-

tion for all interest paid or accrued during the taxable

year, prior to 1982 petitioner had refrained from taking

a current deduction for interest accrued under its de-

ferred compensation plan, in effect treating that interest

in the same manner as the deferred compensation itself.

In 1982 petitioner requested permission from the Internal

Revenue Service (“IRS”) to deduct such accrued interest

currently under section 163. App. C at 45a. The IRS

granted the request. Id. “Relying on the permission

granted,” petitioner then deducted that interest for the

taxable year here in issue. Jd. “In 1987, the IRS

changed its mind, however, and sought a deficiency.”

App. B at 28a. In defending this reversal of position,

respondent has contended that the interest accrued under

petitioner’s deferred compensation: plan constituted “com-

pensation” within the meaning of section 404 or, in the

alternative, that section 404 by implication denies a cur-

rent deduction not only for compensation but also for

interest otherwise deductible under section 163.

b. HVAC systems. During the taxable year in issue

petitioner purchased and installed HVAC systems in 33

new or remodeled food stores. App. D at 7la. “Each

of the HVAC systems at issue consisted of a central aif

handler, compressor, condenser, cooling coils and heat

reclaim coils, all of which were connected to a system

of duct-work and diffusers. Petitioner's HVAC systems

operated 24 hours a day, including hours its stores were

Closed to customers and employees.” 7d.

“[L]ike most food retailers,” petitioner was required to

install HVAC systems because of its use of open-front

refrigerated food cases. App. D at 74a. Such food cases

are designed “to operate properly in stores where tempera-

ture and relative humidity were strictly maintained ac-

cording to certain specifications. All of the manufac-

turers’ specifications for the cases used by petitioner rec-

ommended an ambient store environment at or below

75 degrees Fahrenheit and at or below 55 percent relative

humidity.” Jd. at 72a. Permitting temperature and

humidity to rise above these levels reduces shelf-life and

can result in spoilage. Id. at 74a. “[T]he failure to use

a HVAC system can easily result in lost product, sales

and profits.” Id.

Customers frequently find the required ambient condi-

tions uncomfortable, but those conditions are dictated by

the need to meet the temperature and humidity require-

ments of refrigerated food cases and thereby protect food

against spoilage:

[DJuring the summer months, the outdoor tempera-

tures at the locations of petitioner’s stores at issue

would often reach or be in excess of 90 degrees Fahr-

enheit. The variance in petitioner’s store temperature

and the outdoor temperature created discomfort to

many customers who complained to petitioner’s em-

ployees that the stores were uncomfortably cold.

Nevertheless, petitioner could not raise its store tem-

perature to accommodate its customers without risk-

ing spoilage of its refrigerated food products dis-

played in open-front cases.

App. D at 74a.

Petitioner sought investment tax credits for its newly

installed HVAC systems pursuant to section 38 of the

Code. Respondent contested petitioner’s entitlement to

those credits. Their disagreement centered on “whether

petitioner's HVAC systems . . . are tangible personal

property within the meaning of section 48(a)(1)(A)

and the regulations promulgated under that section.”

App. D at 76a. Under those regulations, “petitioner’s

HVAC systems are tangible personal property qualifying

for the investment tax credit if they are not ‘structural

components.’” Id. at 77a.

The meaning of the regulatory term “structural com-

ponents” is discussed as follows in Treas. Reg. § 1.48-

1(e)(2) (1982), a legislative regulation that “has the

full force and effect of law,” App. D at 78a:

The term ‘structural components’ includes such

parts of a building as walls, partitions, floors, and

ceilings, as well as any permanent coverings therefor

such as panelling; windows and doors; all components

(whether in, on, or adjacent to the building) of a

central air conditioning or heating system, including

motors, compressors, pipes and ducts .. . . However,

the term ‘structural components’ does not include

machinery the sole justification for the installation of

which is the fact that such machinery is required to

meet temperature or humidity requirements which

are essential for the operation of other machinery or

the processing of materials or foodstuffs. Machinery

may meet the ‘sole justification’ test provided by the

preceding sentence even though it incidentally pro-

vides for the comfort of employees, or serves, to an

insubstantial degree, areas where such temperature

or humidity requirements are not essential. For ex-

ample, an air conditioning and humidification system

installed in a textile plant in order to maintain the

temperature or humidity within a narrow optimum

range which is critical in processing particular types

of yarn or cloth is not included within the term ‘struc-

tural components.’

Id. at 77a-78a (emphasis added by the court). The dis-

pute between petitioner and respondent turned on whether

petitioner’s HVAC systems met the “sole justification”

test propounded by this regulation.

2. The Tax Court's decisions. Following respondent’s

determination of a deficiency, petitioner filed a petition

for review in the United States Tax Court pursuant to

section 6213 of the 1986 Code. In separate opinions,

the court held that petitioner was not entitled to deduct

the interest accrued under its deferred compensation

plan, App. C, but that petitioner was entitled to an

investment tax credit for its HVAC systems, App. D.

(In a third opinion, the court decided a question not

presented here, involving work incentive tax credits. See

App. E.)

a. Interest deduction. As the Ninth Circuit later ob-

served, the Tax Court was “sharply divided” with respect

to the deduction for interest accrued under the deferred

compensation plan. App. B at 28a. The case was con-

sidered by the full court. Nine judges joined in a major-

ity opinion holding that “[t]he ‘interest’ factor in petition-

er’s DCAs {deferred compensation agreements] is not

interest within the meaning of section 163. Rather, it is

part of the deferred compensation. It is therefore de-

ductible only [when the employee receives payment].”

App. C at 59a.

The majority took the position that “interest is a pay-

ment for the use of money that the lender had a legal

right to possess, prior to relinquishing possession rights

to the debtor.” App. C at 48a. Noting that a deferred

compensation agreement is executed before the partici-

pant has a legal right to receive the compensation, the

majority reasoned that “Petitioner could not have ‘bor-

rowed’ something from the DCA Participants that the

DCA Participants never had the right to possess ...

[and therefore] Petitioner cannot properly characterize its

accruals as ‘interest.’” Id. at 50a.

This reasoning was rejected by four concurring judges

and five dissenters. The concurring judges (one of whom

also joined in the majority opinion) explained:

[We] do not think that the case turns on whether the

‘interest’ component of the deferred compensation

represents payments made by petitioner for the use

of money ‘borrowed’ from its employees and director.

A central focus of the time value of money legisla-

tion of the last ten years was to identify hidden in-

terest. Congress clearly understood that transactions

involving deferred payments for services contained

an interest element. Thus, given our current under-

standing of the interest element inherent in deferred

payment transactions, the majority’s analysis seems

anachronistic.

App. C at 61a (footnote omitted). These judges rea-

soned, however, that section 404, which bars the em-

ployer from taking a current deduction for compensation

until the employee includes that compensation in income,

by implication also bars the employer from taking a cur-

rent deduction for interest: “If the employer were allowed

an interest deduction, then the present discounted value

of the tax burden on the employer would not be equivalent

(i.e., would be less than) an immediate tax on the em-

ployee (assuming, of course, equal tax rates). We need

not allow that result.” Id. at 63a (footnote omitted ) .

The dissenting judges pointed out that “ ‘interest is. . .

paid because of delay in the receipt of funds’. . . [and]

it is obvious the additional amounts accrued under the

DCA’s were accrued because of delay in the receipt of

funds.” App. C at 65a, quoting Aames v. Commissioner,

94 T.C. 189, 193 (1990). The dissent continued:

Having found the amounts in question are interest,

the statute is clear: the deduction is not limited by

sections 404(a)(5) and 404(d) .... In his con-

curing opinion, Judge Halpern argues that allowing

an employer to deduct interest in advance of inclu-

sion by employees frustrates the matching principle,

but it is the prerogative of Congress, not this Court,

to change the statutory result... .

Id. at 66a.

b. Investment tax credit. The Tax Court held that

petitioner’s installation of HVAC systems in its food

stores met the regulatory “sole justification” test and thus

qualified for the investment tax credit: “if [petitioner]

did not maintain case manufacturers’ specifications for

store environment, whatever those specifications may be,

the quality of its food products displayed in its open-

front cases would suffer, resulting in lost product, sales,

and profits. It was for this reason that it was crucial to

the operation of each of petitioner’s retail food stores

that each had a HVAC system.” App. D at 81a. Under

the regulation, it made no difference that the HVAC sys-

tems also afforded an “incidental benefit to customers and

employees.” Id.

3. The Ninth Circuit's initial decision. The Ninth Cir-

cuit initially reversed the Tax Court on both issues.

a. Interest deduction. The Ninth Circuit determined

that the Tax Court majority had erred in its analysis of

what constitutes “interest” under section 163: “a legal

right to possession of the assets on which the additional

amounts are earned is not necessary in order for those

earnings to qualify as interest... . The controlling prin-

ciple [is] not possession, but rather ‘compensation for

the use or forbearance of money.’” App. B at 30a-31a,

quoting Starker v. United States, 602 F.2d 1341, 1356

(9th Cir. 1979). Under that test, the court of appeals

held, the accrued amounts were interest. In so holding,

the court rejected respondent’s argument that those

mens ’ merc erceuern seer eratnauset Te aie canes Se ee

Mat a TUES | ELS ERS Sty RA re PRO GS py OME ACM Ne TnL eT OY EN Pee MEY eT ba bul cea Sans

amounts represented not interest but additional deferred

compensation, explaining that “[t]he predetermined rate

for calculating the additional amounts did not depend in

any way upon the amount or type of services performed

by the participants.” Id. at 31a.

The court next determined, “[bJased on a plain-

language reading of the statute,” that section 404 does

not bar the current deduction of interest accrued under

a nonqualified deferred compensation plan. App. B at

33a. The court reasoned that section 404 on its face

bars deductions only under sections 162 and 212; Con-

gress could have extended the statute to reach interest

deductions under section 163 as well, but it did not do

so. “Because we must not ‘add to or alter the words

employed to effect a purpose which does not appear on

the face of the statute,’ Hanover Bank v. Commissioner,

369 U.S. 672, 687 (1962), we hold that .. . the timing

restrictions of section 404 were inapplicable to interest

deductions.” Jd. at 35a. This conclusion, the court be-

lieved, was confirmed by the legislative history, which

“mentions only ‘compensation.’ . . . [T]here is no indica-

tion in the legislative history of section 404 that Congress

intended it to apply to interest.” Id.

b. Investment tax credit. The Ninth Circuit rejected

the Tax Court’s determination that petitioner’s installation

of HVAC systems in its food Stores met the regulatory

“sole justification” test because, according to the court

of appeals, those systems serve “two additional significant

purposes: ventilation and customer comfort.” App. B

at 38a. The court believed that the regulation’s reference

to comfort as an acceptable incidental benefit “applies

only to employees.” Id. at 39a (emphasis in original).

Accordingly, the court expressly declined to follow

Piggly Wiggly Southern, Inc. vy. Commissioner, 803 F.2d

1572 (11th Cir. 1986), “in which the Eleventh Circuit

held that costs for a similar HVAC System qualified for

an investment tax credit.” Id. at 40a n.25.

4. The Ninth Circuit’s decision on rehearing. Re-

spondent filed a petition for rehearing and suggestion for

rehearing en banc asking the Ninth Circuit to reconsider

its holding with respect to the current deductibility of

interest under nonqualified deferred compensation plans.

Respondent described this issue as “one of exceptional

importance to the administration of the federal income

tax laws” and stated that “if the panel’s decision were

to be applied nationwide, the reduction in federal tax

receipts could total $7 billion from Fiscal Year 1994

through Fiscal Year 1999.” App. H at 10la. The origi-

nal panel thereupon granted rehearing and proceeded to

“change[] our minds about the result we reached in our

original opinion.” App. A at 5a.

The court acknowledged that interest accrued under a

nonqualified deferred compensation plan is currently de-

ductible “under a literal reading of the statutory lan-

guage.” App. A at 16a. The court reasoned, however,

that the purpose of section 404 is “to ensure matching

of income inclusion and deduction between employee and

employer under nonqualified plans,” id. at 1la, and “to

encourage employers to create qualified plans for their

employees.” Id. at 13a. Concerned that a failure to ex-

tend the perceived “matching principle” to interest could

weaken the incentive to establish qualified plans, the court

refused to adhere to the “plain language interpretation”

of its initial decision. 7d. at 17a. Instead, the court rea-

soned that “despite the literal wording of the statute,

Congress could not have intended to exclude interest pay-

ments, a substantial part of the deferred compensation

package, from the rule prohibiting deductions until such

time as the employee receives his benefits.” Jd. at 18a.

REASONS FOR GRANTING CERTIORARI

This unusual case presents two federal income tax

issues that should be decided dispositively by this Court.

The first issue, involving the current deductibility under

section 163 of interest accrued under nonqualified de-

ferred compensation plans, unquestionably is one of great

significance under the Internal Revenue Code. Respond-

ent concedes that this is so. In a petition for rehearing

en banc authorized by the Solicitor General, respondent

represented to the Ninth Circuit that this issue “is one

of exceptional importance to the administration of the

federal income tax laws” and that “[b]y any measure,

this is a case of major fiscal importance.” App. H at

101a, 102a. Respondent estimated the short-term revenue

implications at seven billion doliars nationwide, and at

two billion dollars in the Ninth Circuit alone. /d.

The ruling in this case is likely to “affect[] just about

every nonqualified deferred compensation plan in the

country.” Tom Herman, U.S. Appeals Court Overturns

its Ruling in High-Stakes Tax Case, Wall St. J., Dec. 6,

1994, at B12. There are thousands of such plans; their

use is widespread throughout the corporate world. As

respondent advised the Ninth Circuit, “more than 60%

of the Fortune 500 utilize nonqualified deferred compen-

sation plans . . . [and] [t]he use of such plans is not

limited to major corporations.” App. H at 10la. Hun-

dreds if not thousands of corporate taxpayers, including

many of the nation’s largest companies, will be directly

affected by the outcome of this case.

The publicity and attention given to the issue by both

professional journals and the business press attest to its

importance. Professional commentary on the decisions

below has become something of a cottage industry. See

J. Cummings, “Statutory Interpretation and Albertson's,”

Tax Notes, Jan. 23, 1995, p. 559 at 560 n.3 (citing 12

law review articles published within a period of less than

eight months). Appealing to a more general readership,

the Wall Street Journal has discussed the case on no

fewer than six occasions. See Wal’ St. J. at B12 (Dec. 6,

1994); Tax Report, Wall St. J., june 29, 1994, at Al

(“the case will have a very broad impact”); Tax Report,

Wall St. J. April 27, 1994, at Al; Tax Report, Wall St.

J., April 6, 1994, at Al (“an enormously important

case”); Tax Report, Wall St. J. Feb. 9, 1994, at Al;

Tax Report, Wall St. J., Jan. 19, 1994, at Al.

When it reversed itself, the Ninth Circuit explicitiy

recognized that the issue merits review by this Court:

“The question is not an easy one .... We have struggled

with it unsuccessfully at least once, and it may, indeed,

ultimately turn out that the United States Supreme Court

will tell us that it is this [second] opinion which is in

error.” App. A at 5a. This Court should accept the

Ninth Circuit’s invitation to review the case and proceed

to fulfill that court’s prophecy that its erroneous decision

on rehearing will be overturned.

The second issue, involving the proper characterization

under section 48 of HVAC systems used in retail food

Stores, also is important. There is a direct and acknowl-

edged conflict between the Ninth and Eleventh Circuits

on this issue. See App. B at 40a n.25. |

This second issue affects virtually every owner of a

modern food store, including not only operators of major

supermarket chains like petitioner but also smaller estab-

lishments operating just one or a small number of stores.

Although there inevitably is a factual element in deter-

mining whether an item constitutes “tangible personal

property” within the meaning of section 48, the essential

facts relating to HVAC systems are invariant for all

modern food stores: (1) proper operation of open-front

refrigerated food cases depends upon the maintenance of

strict controls on ambient temperature and humidity, and

thus upon the installation and use of an HVAC system;

(2) HVAC systems also may incidentally provide for

the comfort of customers and employees. See App. D

at 75a-76a. In this context. the case of one supermarket

chain is not factually distinguishable from that of an-

other. Id. at 79a. The Ninth Circuit evinced its under-

standing that the underlying issue is one of law rather

than fact when it expressly “decline[d] to follow the

Eleventh Circuit’s holding” in Piggly Wiggly Southern,

Inc. v. Commissioner, 803 F.2d 1572 (11th Cir. 1986).

and chose instead to follow the contrary holding in Publix

Supermarkets, Inc. v. United States, 26 Cl. Ct. 161

(1992). App. B at 40a n.25.

This conflict among the circuits should be resolved.

Such a conflict is of particular concern in the super-

market industry, where nationwide chains operating on

low margins compete with one another in many circuits.

This case dramatizes that concern. Petitioner operates

scores Of food stores within the geographical area of the

Eleventh Circuit, in direct competition with Piggly

Wiggly. Yet because of the disagreement between the

Ninth and Eleventh Circuits, petitioner suffers a distinct

tax disadvantage. A circuit conflict that imposes differ-

ent cost structures on direct competitors in the same local

market should not be allowed to persist.

Although the investment tax credit was repealed by the

Tax Reform Act of 1986, the underlying issue on which

the Ninth and Eleventh Circuits disagree—the applica-

tion of the “sole justification” test under Treas. Reg.

§ 1.48-1(e)(2) to supermarket HVAC systems—is one

of continuing significance. The issue remains extremely

important in the context of the deduction for deprecia-

tion. In defining “section 1245 property,” Treas. Reg.

§ 1.1245-3(c)(2) expressly incorporates the definition of

“structural components,” including the “sole justification”

test, contained in Treas. Reg. § 1.48-1(e)(2). The term

“section 1245 property” is then used to determine whether

property is real or personal for purposes of accelerated

depreciation under section 168 of the 1986 Code. See

Treas. Reg. § 1.168-3(c). Considerable tax liability and

revenue must turn on that distinction: whereas non-

residential real property is subject to straight line depre-

ciation over a lengthy 39-year recovery period, tangible

personal property can qualify for 200 percent declining

balance depreciation over a much shorter five-year recov-

ery period. See section 168(b) and (c) of the 1986

Code.

In addition, the regulatory definition of “structural

components” and the “sole justification” test continue to

apply in at least three other situations under the 1986

Code. See Treas. Reg. § 1.168-3(c)(4) (depreciation

recapture); Treas. Reg. § 1.897-1(b) (3) (iv) (disposition

of certain foreign-owned property); section 47 of the

Code (rehabilitation tax credit). The question whether

supermarket HVAC systems meet the “sole justification”

test, therefore, retains substantial vitality under current

law. This Court should grant certiorari to resolve the

circuit conflict on this issue created by the decision below.

Review of this case is further warranted because, as the

following discussion demonstrates, both questions pre-

sented were incorrectly decided by the court of appeals.

I. Section 404 does not bar the current deduction of

interest accrued under a nonqualified deferred compensa-

tion plan. Section 163(a) of the Code allows a deduc-

tion for “all interest paid or accrued within the taxable

year on indebtedness.” It has long been understood that

“interest,” within the meaning of this provision, retains

its “usual, ordinary and everyday meaning,” Old Colony

R.R. Co. v. Commissioner, 284 US. 552, 561 (1931),

and refers to an obligation to pay “for the use or forbear-

ance of money.” Deputy v. du Pont, 308 USS. 488, 498

(1940). That definition fits this case like a glove. Under

the terms of its deferred compensation agreements, peti-

tioner became indebted to the participants for the

amounts of their deferred compensation, and it under-

took to accrue and ultimately to pay interest on that

indebtedness at rates fairly representing the time value

of money. App. B at 30. Petitioner’s contractual obliga-

tion to pay interest on the funds thus borrowed from the

participants plainly “qualified as interest under the Code.”

Id. See also Note, “Employer Deductions Under Non-

qualified Deferred Compensation Agreements: Albert-

son’s, Inc. v. Commissioner,” 48 Tax Lawyer 493, 500-02

(1995); L. Shapiro & W. Pomierski, “ ‘Interest’ on De-

ferred Compensation Arrangements May Be Deductible,

for Now,” J. Taxation 212, 213 (April 1994).

Even on rehearing, the Ninth Circuit did not disturb

its prior determination that petitioner had accrued “inter-

est . . . on indebtedness” within the meaning of section

163(a). The court conceded, moreover, that “under a

literal reading of the statutory language, the deduction

of interest is not affected by section 404.” App. A at

16a. The court nonetheless held that section 404 must

be construed as forbidding a current deduction for inter-

est accrued under a nonqualified deferred compensation

plan because, it believed, permitting a deduction would

“undermine[] Congress’ attempts to encourage employers

to adopt qualified plans.” Jd. This “argument proves too

much because it would support any limit on tax benefits

related to nonqualified plans.” J. Cummings, supra, Tax

Notes at 572.

As written, section 404 favors qualified plans over

nonqualified plans by allowing employers to take a cur-

rent deduction for deferred compensation in connection

with the former but not the latter. This alone is sufficient

to provide a meaningful tax incentive for the adoption of

qualified rather than nonqualified plans. See R. Dema &

K. Frazier, “The Real Cost of Nonqualified Deferred

Compensation Plans,” J. Accountancy 86 (March 1995).

The Ninth Circuit was gilding the lily when it went fur-

ther and also barred employers with nonqualified plans

from taking a current deduction for interest under sec-

tion 163. The creation and limitation of tax incentives

is, of course, a matter solely for Congress. Congressional

enactment of a single, narrowly circumscribed tax incen-

tive or disincentive plainly does not warrant the judicial

creation of still further. incentives or disincentives that

Congress itself. did not see fit to legislate.

The decision below stands as a triumph of judicial

policymaking over straightforward statutory construction.

The Ninth Circuit “is in full rout before the intimidating

force of ‘tax logic,’ i.e., what the code should say, whether

it says so or not.” J. Cummings, supra, Tax Notes at

559. That approach to statutory construction is seriously

misguided and ultimately quite mischievous. “Going be-

hind the plain language of a statute in search of a pos-

sibly contrary congressional intent is a ‘step to be taken

cautiously’ even under the best of circumstances.” Ameri-

can Tobacco Co. v. Patterson, 456 U.S. 63, 74-75

(1982). In this case, “there is simply no evidence that

Congress intended to extend [section 404] to a deduction

for interest.” L. Shapiro & W. Pomierski, supra, J. Taxa-

tion at 214. Furthermore, “the legislative purpose per-

ceived by the appeals court is nothing more than the

court’s own preference among competing policy consid-

erations .. . .” E. Zelinsky, “Albertson’s: Why Courts

Shouldn’t Override Clear Statutory Language,” Tax

Notes, March 13, 1995, p. 1691 at 1697.

Although the Ninth Circuit erred in both its path of

reasoning and its final result, the court nonetheless was

correct in acknowledging that the “plain language” of

section 404 permits a current deduction for interest.

App. A at 16a. Section 404 by its terms postpones the

deduction only of “compensation.” “The plain meaning

of compensation here is payment for services.” J. Cum-

mings, supra, Tax Notes at 562. The underlying regula-

tion confirms that section 404 is concerned solely with

“compensation for personal services actually rendered.”

Treas. Reg. §-1.404(a)-i(b) (emphasis added). That

also is the meaning of the same term elsewhere in the

Code. See, e.g., Treas. Reg. § 1.162-7(a) (defining com-

pensation as “payments purely for services”). “It is a

‘normal rule of statutory construction . . . that identical

words used in different parts of the same act are intended

to have the same meaning.’” Commissioner v. Keystone

Consol. Indus., Inc., 113 S.Ct. 2006, 2011 (1993), quot-

ing Sorenson v. Secretary of Treasury, 475 U.S. 851, 860

(1986). See also, e.g., Commissioner v. Lester, 366 U.S.

299, 304 (1961).

Nothing in either the text of section 404 or its legisla-

tive history suggests that Congress was using “compensa-

tion” to refer to interest on indebtedness as well as com-

pensation for services. Such use would have been harshly

discordant with congressional treatment of interest and

compensation elsewhere in the Code:

the code normally deals with interest and compensa-

tion explicitly and separately. Section 61 separately

identifies interest, compensation, and other income

items; sections 162, 163, and 267 do the same for

deduction purposes... .

Presumably, Congress meant compensation and

not interest in section 404(a), because it knew that

the code deals separately with compensation and

interest.

J. Cummings, supra, Tax Notes at 564. When Congress

has wished to refer both to compensation and interest in

connection with deferred compensation arrangements, it

has known how to do so. See section 457(a) of the

1986 Code (referring to “any amount of compensation

deferred under the plan, and any amount attributable to

the amounts so deferred”) (emphasis added). Congress

did not do so in section 404.

The text of section 404(a) as in effect during the

taxable year at issue made explicit that only the deduc-

tion for compensation, and not that for interest, was

subject to postponement: “if compensation is paid or

accrued on account of any employee under a [nonquali-

fied] plan deferring the receipt of such compensation,

such . . . compensation shall not be [currently] deductible

under section 162 (relating to trade or business expenses )

or section 212 (relating to expenses for the production

of income).” There was no reference to, and no bar

against, the current deduction of interest under section

163.

The explicit statutory reference to sections 162 and

212 was removed in 1986, and section 404(a) now pro-

vides that deferred compensation may not be currently

deducted “under this chapter.” The limited purpose of

this amendment, which the Senate Report described as

a mere “clarification,” was “to prevent taxpayers from

asserting that deferred compensation is attributable to

capitalizable compensation expenses and, thereby, accel-

erate the timing of the deduction for such deferred com-

pensation.” S.Rep. No. 313, 99th Cong., 2d Sess. 1,

1013 (1986). In other words, Congress was just making

clear that section 404 governs the deduction of deferred

compensation that might otherwise be subject to capital-

ization and depreciation under section 167. See Idaho

Power Co. v. Commissioner, 418 U.S. 1 (1974).

The 1986 amendment did not widen the focus of sec-

tion 404(a); the statute remains narrowly addressed to

the deductibility of “compensation.” The amendment

thus does not detract from the importance of the ques-

tion presented or bear upon the correct analysis of that

question under the statute. See App. B at 36a. Current

Treasury regulations, issued in 1986 and amended as

recently as 1992, confirm that section 404 analytically

is no different now than in 1982 and that the statute

remains today, as in 1982, concerned solely with the

timing of the deduction for compensation normally de-

ductible under section 162 or 212: “Section 404(a) and

(d) require that . . . [deferred] compensation be paid

or incurred for purposes of section 162 or 212 and satisfy

the requirements for deductibility under either of those

sections.” Temp. Treas. Reg. § 1.404(a)-1T, Q&A-1, as

amended by T.D. 8435, 1992-2 C.B. 324. In short, sec-

tion 404 is not now, and was not in 1982, addressed to

or concerned with the current deductibility of interest

under section 163.

In view of this background, it is not surprising that

from 1977 until the time of the Tax Court’s decision in

this case one of the most widely distributed tax com-

mentaries, the Standard Federal Tax Reporter published

by Commerce Clearing House, advised that interest ac-

crued under nonqualified deferred compensation plans is

currently deductible under section 163. See, e.g., [1977]

3 Stand. Fed. Tax Rep. (CCH) 4 2656A.25. As amici

curiae Connecticut Mutual Life Insurance Company et al.

demonstrated in their briefs below, this advice has been

widely followed. The decision below on rehearing dis-

appointed many taxpayers’ settled expectations. Respond-

ent’s representation to the Ninth Circuit concerning the

immediate revenue consequences of its initial decision,

see App. H at 10la, appears to provide a fair measure

of the extent of that disappointment. Taxpayers with

nonqualified plans who had not previously claimed a cur-

rent deduction for accrued interest could not begin to do

so in the wake of the Ninth Circuit’s initial decision with-

out first securing respondent’s permission to change their

method of accounting—permission that respondent had

discretion to deny and announced would be denied. See

IRS Notice 94-38, 1994-1 C.B. 350; Rev. Proc. 92-20,

1992-1 C.B. 685, 703. The revenue estimates respond-

ent furnished to the court thus presumably were based

largely if not entirely on those taxpayers who, like peti-

tioner, already were claiming the deduction.

The Ninth Circuit’s result cannot be rationalized on policy

grounds. In the first place, of course, “[i]f highly specific

terminology in the tax code is to be overturned, that task

belongs to Congress, not to the courts.” Zelinsky, supra,

Tax Notes at 1692. But beyond that, the court’s choice

of policy was highly dubious. The court was concerned

to prevent petitioner from taking a deduction before its

plan participants recognized income. But it is common-

place under the Code for one taxpayer to claim a deduc-

tion in one year and for another taxpayer to recognize

the income relating to that deduction in a subsequent

year. As one commentator has observed, “Every time an

accrual-method taxpayer accrues an unpaid deduction at-

tributable to an amount owed a cash-method taxpayer,

an inconsistency arises. Every time. And, so what.” S.

Willis, “Leave Albertson’s Alone,” Tax Notes, June 13,

1994, p. 1481 at 1488. This “inconsistency” is megely

a natural consequence of the right taxpayers have under

the Code to choose between cash-basis and accrual-basis

accounting. It is not a problem that cries out for judi-

cial correction (nor is it, indeed, properly amenable to

judicial solution ).

The Ninth Circuit nonetheless became persuaded that

section 404 should be applied to deal with this situation

more broadly than its literal language would suggest, i.e.,

as embodying a broad “matching principle” that requires all

of an employer’s deductions relating to nonqualified plans

to be matched with an employee’s recognition of income.

See App. A at 1la-12a. The court thus lost sight of the

Code’s more general underlying matching principle: for

any given taxpayer, “the Code endeavors to match ex-

penses with the revenues of the taxable period to which

they are properly attributable, thereby resulting in a

more accurate calculation of [that taxpayer’s] net in-

come for tax purposes.” Indopco, Inc. v. Commissioner,

112 S.Ct. 1039, 1043 (1992). Section 404 constitutes

a specific exception to this more general principle and as

such should be narrowly construed, in accordance with its

plain language, as applying only to compensation and

not to interest. The Code’s general matching principle

directly supports the current deduction of interest ac-

crued on borrowed funds that are used currently as work-

ing capital or otherwise to produce revenues in a tax-

payer’s business. It directly supports, in other words.

petitioner’s current deduction of interest under section

163.

SES AWs re

By forcing petitioner to defer its interest deduction,

the Ninth Circuit in fact “appl{ied] a solution . . . that

Congress rejected.” S. Willis, supra, Tax Notes at 1486.

In section 467(g) of the 1986 Code, Congress delegated

to the Secretary of Treasury authority (which the Secre-

tary has not exercised) to promulgate regulations requir-

ing, in connection with certain substantial deferred com-

pensation arrangements, that even cash basis employees

must recognize interest income in the year of accrual.

Congress evidently understood that, absent such regula-

tions, the Code itself does not require, explicitly or im-

plicitly, that an employer’s interest deduction be matched

with the employee’s recognition of income. Congress con-

cluded, moreover, that in those circumstances where the

Secretary determines that such matching is appropriate,

it should be achieved by accelerating the employee’s rec-

ognition of income, not by postponing the employer’s

deduction. The policy judgment reflected in section

467(g) thus is diametrically opposite the approach taken

by the court below.

The policy the Ninth Circuit favored—requiring an

accrual basis taxpayer to defer a deduction for accrued

interest until it becomes includible in the gross income

of a cash basis recipient—actually is reflected in section

267 of the Code. The reach of that provision, however,

is narrowly and deliberately restricted to transactions be-

tween specifically identified parties, such as a corporation

and a majority shareholder, or the fiduciary and bene-

ficiary of a trust. Congress could have extended this rule

to transactions between a corporation and its employees

and thereby covered this case as well. But Congress did

not do so. The Ninth Circuit should have been content

to follow Congress’ lead. The court obviously erred in

departing from the actual text of the Code to devise and

enforce its own idiosyncratic and nonstatutory tax policy.

The undeniable importance of the question presented

under section 404, the Ninth Circuit’s improper result-

oriented reasoning process in addressing this question,

and the court’s manifestly incorrect result, all lead inelucta-

bly to the conclusion that “Albertson’s is the rare cor-

porate income tax case worthy of review by the Supreme

Court even before a conflict is established among the cir-

cuits.” E. Abahoonie, “Ninth Circuit’s Albertson’s Flip-

Flop Outrages Practitioner,” Tax Notes, Feb. 6, 1995,

p. 898.

II. Supermarket HVAC systems constitute “tangible

personal property” within the meaning of section 48. The

investment tax credit provided by section 38 of the Code

extended to investments in so-called “section 38 prop-

erty,” which section 48(a)(1)(a) defined as including

“tangible personal property.” The latter term is defined

by Treas. Reg. § 1.48-1(c) to exclude “structural com-

ponents of . . . buildings.” In turn, Treas. Reg. § 1.48-

1(e)(2) provides that “the term ‘structural components’

does not include machinery the sole justification for the

installation of which is the fact that such machinery is

required to meet the temperature and humidity require-

ments which are essential to the operation of other ma-

chinery.” Thus HVAC systems qualified for the invest-

ment tax credit if, within the meaning of Treas. Reg.

§ 1.48-1(e)(2), the “sole justification” for their installa-

tion was to meet the temperature and humidity require-

ments of open-front refrigerated food cases.

Respondent concedes that “petitioner’s retail food

stores require HVAC systems to keep ambient store tem-

perature within case manufacturers’ specifications and

prevent spoilage.” App. D at 79a. This now is a stand-

ard characteristic of food stores generally: “Unlike other

commercial buildings, supermarkets do not base air con-

ditioning on comfort considerations. Rather, air condi-

tioning works together with the refrigerators in keeping

perishable foods at proper temperature.” Tr. 220-21

(“Tr.” refers to the trial transcript). The Department of

Energy recognized this industry-wide phenomenon when

it proposed regulations exempting food stores from heat-

ing and cooling standards applicable to other business

establishments, noting that “temperature and humidity

levels other than those mandated in the regulations are

required . . . for the proper refrigeration of perishable

items on open shelf units.” 44 Fed. Reg. 31927, 31928

(1979). See also App. D at 75a.

The Ninth Circuit nevertheless held that meeting the

requirements of refrigerated food cases cannot be con-

sidered the “sole justification” for installing HVAC sys-

tems in food stores, because such systems also provide

“ventilation and customer comfort.” App. B at 38a.

Although the court couched its reasoning in terms of

“clear error,” id. at 39a, its holding was not grounded in

either the particular facts of this case or any evidence

pertaining to the industry generally. Both petitioner and

respondent presented evidence that suitable ventilation is

an integral part of any system designed to maintain the

temperature and humidity conditions necessary for the

proper operation of in-store food refrigeration equipment.

See Tr. 435; Cmr. Exs. EA and EF (“Cmr. Ex.” refers

to respondent’s trial exhibits). That is, indeed, little more

than common sense. As to customer comfort, moreover,

there is abundant evidence that, in fact, customers fre-

quently criticize both petitioner’s supermarkets and those

of its competitors for being uncomfortably cold. See, e.g.,

App. D at 74a; Piggly Wiggly, 803 F.2d at 1576 n.16.

At bottom, the Ninth Circuit’s decision turned on its

erroneous construction of the regulatory term “sole justi-

fication” to mean “exclusive justification.” Although

Treas. Reg. § 1.48-1(e)(2) does not comprehensively

define “sole justification,” it does make clear that the

phrase is not to be construed literally as disallowing a

secondary or incidental purpose for the installation of

HVAC systems:

Machinery may meet the “sole justification” test . . .

even though it incidentally provides for the comfort

of employees, or serves, to an insubstantial degree,

areas where such temperature or humidity require-

ments are not essential. For example, an air condi-

tioning and humidification system installed in a tex-

tile plant in order to maintain the temperature or

humidity within a narrow optimum range which is

critical when processing particular types of yarn or

cloth is not included within the term “structural com-

ponents.”

Consequently, “sole justification” cannot be equated with

“exclusive justification.” Piggly Wiggly, 803 F.2d at 1575

(emphasis in original). Instead, the regulation calls for

a “balancing of the ‘sole justification’ versus ‘incidental

benefits.’ ” Jd.

The Ninth Circuit explained its refusal to undertake such

a balancing on the ground that the regulatory “comfort

exception applies only to employees.” App. B at 39a

(emphasis in original). That reading of the regulation

defies common sense. In referring to the comfort of em-

ployees, the regulation merely furnishes a specific illustra-

’ tion of the application of a more general rule, i.e., HVAC

systems that are essential to the operation of other ma-

chinery do not become “structural components” merely

because they afford the incidental benefit of a more

comfortable environment. A distinction between the

comfort of employees and that of customers in this con-

text has no rational bearing on whether an HVAC system

should be considered a “structural component,” and the

regulation in fact does not draw any such distinction.

Rationally construed, Treas. Reg. § 1.48-1(e)(2) is

not concerned with the identity of those who may be in-

cidentally benefitted by the installation of an HVAC sys-

tem, whether they are customers, suppliers, employees, or

other business invitees. As the Eleventh Circuit correctly

understood, the “sole justification” test is satisfied when-

ever HVAC systems are installed “to meet equipment

specifications [even though] customer and worker com-

fort was an incidental benefit.” Piggly Wiggly, 803 F.2d

at 1575 (emphasis added). In short, even if supermarket

customers are made more comfortable as a result of the

installation of new HVAC systems—and there is evidence

that they frequently are not, see, e.g., App. D at 74a—

such systems nonetheless satisfy the regulatory “sole jus-

tification” test.

The conflict between the Ninth and Eleventh Circuits

leaves the law unsettled on an issue of considerable con-

tinuing practical significance and will encourage further

litigation. This Court can nip that growth of litigation

in the bud by resolving the conflict now. Indeed, the

Court has the opportunity to, and should, “kill two birds

with one stone” by accepting and deciding both of the

important questions of federal income tax law presented

in this case.