Petition for Writ of Certiorari — NDCHealth Corp. v. United States

ie : Supreme Qourt, U.S.

(1) FILED

02 328 ave 28 2008

No. 02- cconns

IN THE

Supreme Court of the United States

NDCHEALTH CORPORATION and SUBSIDIARIES,

Petitioners,

V.

UNITED STAFES,

Respondent.

On PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

WILuiAM L. GoLDMAN ~ Puiu C. Coox*

McDermott, WILL & EMERY TimmoTHY J. PEADEN

600 13th Street, N.W. TimoTny L. FALLAwW

Washington, DC 20005-3096 ALSTON & Birp LLP

(202) 756-8000 1201 West Peachtree Street

Atlanta, GA 30309

(404) 881-7000

* Counsel of Record

Counsel for Petitioners —

setematenias

ne

175852 g

COUNSEL PRESS

(800) 274-3321 + (800) 359-6859

port

eae ren

OR EEE EE PERE YO IN eT te RTE CE RN eRe

ner tte se

i

QUESTION PRESENTED

Whether, in denying Petitioner relief under the world

headquarters exception to the 1986 repeal of the investment

tax credit, the Federal Circuit erroneously relied on legislative

history in adding a further requirement not contained in the

statute, thereby creating an. acknowledged, direct conflict

with the Ninth Circuit.

ici tui |

tl

RULES 14.1 AND 29.6 STATEMENTS

tat Pe alia ea:

RULE 14.1 STATEMENT

The parties to this proceeding are NDCHealth

Corporation and Subsidiaries. Prior to October 25, 2001,

Petitioner NDCHealth Corporation was known as National

Data Corporation, and was so named in the complaint and

proceedings below.

RULE 29.6 STATEMENT

NDCHealth Corporation has no parent company and no

publicly held company owns 10 percent or more of the stock

of NDCHealth Corporation. The Subsidiaries are wholly-

owned by NDCHealth Corporation.

iil

TABLE OF CONTENTS

Page

Question Presented ........---eeeeee eer eeeeee 1

Rules 14.1 and 29.6 Statements .......----++--- il

Table of baw ed, eee ee ee eee lil

Table of Cited Authorities ..........-2 esse eeees Vv

Table of Appendices .......---+seee eee reeeees Vill

Opinions Below .......----+eeeeeee rete 1

Statement of Jurisdiction ........-.++e++eeeeee 1

Statutory Provisions Involved .........--++++:: 1

Statement of the Case ........-- eee e eee ee eeeee 1

A. Statutory Background ........--.+-++++ l

B. Factual Background ..........---++--+-- 4

C. Proceedings Below ........---+-+s++0e: 5

Reasons for Granting the Petition ..........---. 7

A. There Is a Direct Conflict in the Circuits as

to Whether the World Headquarters

Exception Is Applicable to Taxpayers Who

Leased and Occupied the Building Before

September 26, 1985. .......---+-eeeeee: 8

iv

Contents

B. The Use of Congressional Legislative History

to Flout the Plain Language of a Statute Is in

Direct Conflict with Supreme Court

ORO es Pee ee ire ee eT

C. The Question Presented Is a Recurring Issue

of Great Practical Importance. ...........

a Ne ae a

Page

13

19

23

Vv

TABLE OF CITED AUTHORITIES

Page

CASES:

Airborne Freight Corp. v. United States, 153 F.3d

967 (9th Cir. 1998) ......-- eee cere eters passim

Airborne Freight Corp. v. United States, No. C95-

301R, 1996 U.S. Dist. Lexis 12902 (W.D. Wash.

PDIG) occ n vee cscvesnvevecvecesersunsnss 9

Beecham v. United States, 511 U.S. 368 (1994) ... 14

Blanchard v. Bergeron, 489 U.S. 87 (1989) ....-- 22

Caminetti v. United States, 242 U.S. 470 (1917) .. 13

Chicago Mercantile Exch. v. Commissioner,

79 T.C.M. (CCH) 1581 (2001) ...----- eee eee 8

Griffin v. Oceans Contractors, Inc., 458 U.S. 564

(1962) onc ccccccrncpcvevcivcereccccososess 13

Iselin v. United States, 270 U.S. 245 (1926) ...... 19

~ Kimberly-Clark Tissue Co. v. United States, 38

F. Supp. 2d 1028 (E.D. Wis. 1999) ....----+--. 8,14

Landreth Timber Co. v. Landreth, 471 U.S. 681

HOD vg veep n ssn ecne ueare cenyen ts eone es: 13

Payless Cashways Inc. v. Commissioner, 114 T.C.

T2 (2000) 2... cc vccccccccsccccsconrcescers 8

vi

Cited Authorities

Page

United States v. Kjellstrom, 100 F.3d 482 (7th Cir.

1996), aff’g, 916 F. Supp. 902 (W.D. Wis. 1996)

Leones bie te G6 iis ee ew ae see 8, 18

United States v. Kjellstrom, 916 F. Supp. 902 (W.D.

Wis. 1996), aff'd, 100 F.3d 482 (7th Cir. 1996)

PE SE ee ee ee ery. 17, 18, 19

United States v. Ron Pair Enters., Inc., 489 U.S. 235

COE 5 9:0 4-on 0s 00eeee bee see dap eee 13

West Virginia Univ. Hosps., Inc. v. Casey, 499 U.S.

8 Ct Re ere Eero in rat mayor Ol WING 14, 19

STATUTES:

I.R.C. § 38 (1985), amended by Tax Reform Act of

1986, Pub. L. No. 99-514, 100 Stat. 2085 ...... l

I.R.C. § 46 (1985), amended by Tax Reform Act of

1986, Pub. L. No. 99-514, 100 Stat. 2085 ..... l

LaL. BA CA a hives’ Cais 4a dane aneaea 2

Job Creation and Worker Assistance Act of 2002

§ 301(a), 26 U.S.C. § 1400L(c) .............. 19, 20

Section 203(b) of the Tax Reform Act of 1986,

Pub. L. No. 99-514, 100 Stat. 2085 ........... 2

a ee. os

ALL SIF BRL ad CLADE BA BE

Vil

Cited Authorities

Page

ection 204 of the Tax Reform Act of 1986,

Pub. L. No. 99-514, 100 Stat. 2085 .......... passim

section 211(a) of the Tax Reform Act of 1986,

Pub. L. No. 99-514, 100 Stat. 2085 ........... 2

TE UBC. © RRSGE) oc cvccecdvveesccccsconses l

28 U.S.C. § 1491(aX1) ..... ce ercccescveeces 5

MISCELLANEOUS:

131 Cong. Rec. 35,285 (1985) .........-0e- eee 16

132 Cong. Rec. 13,090 (1986) ...........--05 16-17

132 Cong. Rec. 14,113 (1986) ...........-0---s 17

132 Cong. Rec. 26,638-40 (1986) .........005. 17

vili

TABLE OF APPENDICES

Page

Appendix A — Per Curiam Opinion Of The United

States Court Of Appeals For The Federal Circuit

ORs GE BU NE Wh A Wee cuadockeeccsens la

Appendix B — Opinion Of The United States Court

Of Federal Claims Dated And Filed July 23,

PEE tev Vsenobangebag ba nneesed Oeen ca eoe - 3a

PETITION FOR A WRIT OF CERTIORARI

NDC Health Corporation and Subsidiaries (“Petitioner”)

respectfully petition for a writ of certiorari to review the

judgment of the United States Court of Appeals for the

Federal Circuit in this case.

OPINIONS BELOW

The opinion of the United States Court of Appeals for the

Federal Circuit (App., infra, 1a-2a) is reported at 291 F.3d 1381.

The opinion of the United States Court of Federal Claims

(App., infra, 3a-29a) is reported at 50 Fed. Cl. 24 (2001).

STATEMENT OF JURISDICTION

The judgment of the court of appeals was entered on

May 30, 2002. App., infra, 1a. The jurisdiction of this Court

is invoked under 28 U.S.C. § 1254(1).

STATUTORY PROVISIONS INVOLVED

The relevant portions of § 204 of the Tax Reform Act of

1986, Pub. L. No. 99-514, 100 Stat. 2085 (1986), are set forth

in the Appendix to this petition at 30a.

STATEMENT OF THE CASE

A. Statutory Background

For most of the period from 1962 to 1985, a taxpayer

who acquired qualified tangible personal property for use in

its trade or business was allowed a credit against its federal

income tax liability. LR.C. §§ 38, 46.! Commonly referred

1. Unless otherwise noted, “I.R.C.” references are to the Internal

Revenue Code of 1954, as amended.

2

to as the “investment tax credit,” or “ITC,” the amount of

the credit was a fixed percentage of the cost of the qualified

property.

The Tax Reform Act of 1986 (the “Tax Reform Act” or “Act’”’)

added a new section 49 to the Internal Revenue Code that

generally repealed the investment tax credit for property placed

in service after December 31, 1985. Pub. L. No. 99-514,

§ 211(a), 100 Stat. 2085, 2166 (1986). Section 49, however,

extended the placed-in-service dates for property that

qualified as “transition property,” as defined in section 49(e).?

“Transition property” was “any property placed in service

after December 31, 1985, and to which the amendments made

by section 201 of the Tax Reform Act of 1986 do not apply.”

Tax Reform Act § 211(a), 100 Stat. at 2167.

Section 204(a)(7) of the Act created a category of

“transition property” and is commonly referred to as the

“world headquarters” transitional rule. This section provides

as follows:

2. For “transition property,” the Act provided several different

placed-in-service dates, ranging from July 1, 1986, to January 1, 1991,

depending upon the “class life” of the property. Tax Reform Act

§ 203(b), 100 Stat. at 2144.

3. The exceptions to section 201 of the Act are found in sections

203 and 204 of the Act, and are commonly referred to as the

“transitional rules.” Section 203 of Act contains “general transitional

rules,” providing later placed-in-service dates for property acquired

pursuant to a binding contract entered into by December 31, 1985,

as well as certain “self-constructed property” and property considered

part of an “equipped building.” Tax Reform Act § 203(b), 100 Stat. at

2143-44. Section 204 of the Act contains numerous “additional

transitional rules,” including the one at issue in this case. Tax Reform

Act § 204(a), 100 Stat. at 2146-63.

:

I

3

CERTAIN LEASEHOLD IMPROVEMENTS —

The amendments made by § 201 shall not apply

to any reasonable leasehold improvements,

equipment and furnishings placed in service by a

lessee or its affiliates if —

(A) the lessee or an affiliate is the

original lessee of each building in which

such property is to be used,

(B) such lessee is obligated to lease the

building under an agreement to lease

entered into before September 26, 1985,

and such property is provided for such

building, and

(C) such buildings are to serve as world

headquarters of the lessee and its

affiliates.

For purposes of this paragraph, a

corporation is an affiliate of another

corporation if both corporations are

members of a controlled group of

corporations within the meaning of

§ 1563(a) of the Internal Revenue Code

of 1954 without regard to § 1563(b)(2)

of such Code. Such lessee shall include

a securities firm that meets the

requirements of subparagraph (A),

except the lessee is obligated to lease

the building under a lease entered into

on June 18, 1986.

Tax Reform Act § 204(a)(7), 100 Stat. at 2155.

B. Factual Background

During the taxable years 1987 through 1990, Petitioner

was engaged in the business of providing the electronic

interchange of information for the financial, retail, healthcare,

and communications markets through specialized data processing

applications. JA62.* Petitioner had corporate offices and

employees across the United States and throughout the world,

including, at various times during 1987 through 1990, Africa,

Canada, England, Europe, Italy, Japan, the Middle East,

Spain, Sweden, and West Germany. The headquarters of these

worldwide operations was located at One NDC Plaza,

Corporate Square, Atlanta, Georgia 30329 (“One NDC

Plaza”). JA61.

With respect to One NDC Plaza, Petitioner agreed

on April 21, 1973, to lease “the entire four-story office

building to be constructed by Lessor” for a 20-year term.

JA 25. The date on which this 20-year term began to run

(i.e., the “commencement date”) was not expressly provided

in the agreement, but it was triggered in part by the date on

which Petitioner could occupy the first floor of One NDC Plaza.

On April 21, 1973 (i.e., the same date as the agreement),

the parties entered into a “First Amendment to Lease Agreement”

establishing April 27, 1973, as the commencement date of

the 20-year lease for One NDC Plaza. JA 56.

Petitioner was the original and only lessee to occupy

space at One NDC Plaza. This building, along with a second

building that was built by Petitioner as its operations

expanded, functions as the command center for all of

Petitioner’s domestic and international business operations,

and it serves as Petitioner’s world headquarters. JA61.

4. Citations to the record below follow the abbreviation used

in the court of appeals for the Joint Appendix (“JA”).

5

During the taxable years 1987 through 1990, Petitioner

placed in service at One NDC Plaza various leasehold

improvements, equipment, and furniture and fixtures with a

cost of approximately $35 million. Petitioner filed refund

claims for the investment tax credit on this property in 1994,

and when these refund claims were denied by the Internal

Revenue Service, Petitioner filed actions for refund in the

United States Court of Federal Claims.°

C. Proceedings Below

After filing a Stipulation of Facts, the parties filed cross-

motions for summary judgment regarding Petitioner’s

entitlement to the investment tax credit under the world

headquarters transitional rule of section 204(a)(7) of the Tax

Reform Act.® The parties stipulated that Petitioner was the

original and only lessee of One NDC Plaza within the

meaning of section 204(a)(7)(A) of the Act and that One NDC

Plaza was Petitioner’s world headquarters within the meaning

of section 204(a)(7)(C) of the Act. JA61. Therefore, the only

issue under section 204(a)(7) was whether Petitioner satisfied

5. The Court of Federal Claims had jurisdiction over these

matters pursuant to 28 U.S.C. § 1491(a)(1). Petitioner filed two

separate actions, one for tax years 1987 through 1989 and another

for tax year 1990, which were then consolidated for decision. JA18,

19, and 24.

6. These cross-motions involved two issues: (i) whether

Petitioner satisfied the technical requirements of section 204(a)(7)

of the Act and (ii) if so, which of the property placed in service

during the taxable years 1987-1990 qualified for the investment tax

credit (the “class life issue”). Because of the lower court’s ruling on

the first issue, the class life issue was not reached and it is not an

issue in this petition.

6

thepre-September 26, 1985, lease obligation requirement of

section 204(a)(7)(B).

During these proceedings, the United States contended,

and Petitioner agreed, that the initial agreement executed by

Petitioner on April 21, 1973, was an “agreement to lease”

within the meaning of section 204(a)(7)(B). JA103, 122, 186-

187. Nonetheless, despite Petitioner’s acknowledged

obligation “to lease the building under an agreement to lease

entered into before September 26, 1985,” the United States

argued that Petitioner was not entitled to transitional relief

because of an additional requirement not contained in section

204(a)(7)(B) — namely, that a taxpayer must not have

actually leased and occupied the building before September

26, 1985. Petitioner argued that its lease agreement which

commenced onApril 27, 1973, satisfied the “agreement to lease”

requirement.’ Alternatively, Petitioner argued that, in any

event, the original “agreement to lease” executed on April

21, 1973, satisfied the statutory requirement of “an obligation

to lease the building under an agreement to lease entered

into before September 26, 1985.” Tax Reform Act

§ 204(a)(7)(B),100 Stat. at 2155.

On July 23, 2001, the Court of Federal Claims issued its

opinion denying Petitioner’s motion for summary judgment

and granting the United States’ motion on the grounds that

Petitioner did not satisfy the requirements of section

204(a)(7)(B) of the Tax Reform Act. App., infra, 3a-29a.

7. The term “lease agreement” will be used to refer to an.

agreement whereby one contracting party conveys a leasehold interest

in real property to the other contracting party in exchange for a

consideration; this type of agreement is also commonly referred to

as a “lease,” and is contrasted with a purely executory agreement to

enter into a lease agreement at a later date.

7

Drawing a distinction between an actual lease agreement and

an executory contract to enter into a lease in the future, the

court ruled that the lease agreement commencing on April

27, 1973, did not satisfy the statutory requirement of an

“agreement to lease.” Relying in large part on the limited

legislative history of this transitional rule, the court viewed

the provision as having “‘at most, two intended beneficiaries

— the firms Merrill Lynch and Drexel Burnham Lambert.”

App., infra, 20a. The Court of Federal Claims ignored

Petitioner’s alternative argument that the statutory

requirement was satisfied by the “agreement to lease” entered

into on April 21, 1973. See App., infra, 3a-29a.

Petitioner appealed the Court of Federal Claims’ decision

to the United States Court of Appeals for the Federal Circuit,

which affirmed the lower court’s decision in a per curiam

opinion issued on May 30, 2002. App., infra, 1a-2a.

REASONS FOR GRANTING THE PETITION

The Federal Circuit’s decision in this case creates a direct

and acknowledged conflict with the Ninth Circuit. Unlike

the Ninth Circuit, the Federal Circuit erroneously interpreted

section 204(a)(7)(B) of the Tax Reform Act of 1986, the

world headquarters transitional rule, as containing a

requirement that taxpayers not actually lease and occupy their

world headquarters building before September 26, 1985,

despite the lack of such a requirement in the statute. In so

doing, the court inappropriately relied upon legislative history

to supercede the plain language of the Act. The Federal

Circuit’s mode of statutory analysis ignored the clear

precedent of this Court holding that reliance on legislative

history in these circumstances is inappropriate. Statutes

providing transitional relief for taxpayers, a common and

8

recurring part of tax legislation, should be construed by

reference to the plain language enacted by Congress, not

through a search for the supposed circumstances of a single

taxpayer named by individual legislators and in publications

by congressional committees, as was done by the lower court

in this case.

A. There Is a Direct Conflict in the Circuits as to

Whether the World Headquarters Exception Is

Applicable to Taxpayers Who Leased and Occupied

the Building Before September 26, 1985.

There is a direct and acknowledged conflict between the

Ninth and Federal Circuits regarding the issue in this case.

Finding the “Ninth Circuit’s reasoning faulty on several

counts,” the lower court expressly “reject[ed] both the

rationale and conclusion” of the Ninth Circuit in Airborne

Freight Corp. v. United States, 153 F.3d 967 (9th Cir. 1998).®

App., infra, 27a, 29a.

1. In Airborne, the Ninth Circuit held that the transitional

relief of the world headquarters exception was available to a

taxpayer who leased and occupied its world headquarters

building before September 26, 1985, in factual circumstances

indistinguishable from this case. On September 29, 1983,

Airborne agreed to lease approximately three fourths of a

building that was to be constructed in the near future.

8. Other decisions addressing some aspect of the world

headquarters exception include: United States v. Kjellstrom, 100 F.3d

482 (7th Cir. 1996), aff’g, 916 F. Supp. 902 (W.D. Wis. 1996);

Kimberly-Clark Tissue Co. v. United States, 38 F. Supp. 2d 1028

(E.D. Wis. 1999); Payless Cashways, Inc. v. Commissioner, 114 T.C. 72

(2000); Chicago Mercantile Exch. v. Commissioner, 79 T.C.M.

(CCH) 1581 (2001).

9

Airborne then occupied the building in 1984, which was

before September 26, 1985, the critical date contained in

section 204(a)(7)(B). By the time Airborne occupied the

building in 1984, it had exercised an option to lease the entire

building, and the building was used as its world headquarters.

Airborne Freight Corp. v. United States, No. C95-301R, 1996

U.S. Dist. Lexis 12902 (W.D. Wash. 1996).’

The United States argued in Airborne that two conditions

of the world headquarters transitional rule contained in

section 204(a)(7) were not satisfied: (i) Airborne leased and

occupied the building before September 26, 1985 (the same

issue presented here); and (ii) Airborne did not initially lease

the entire building (an issue not involved here). In the view

of the United States, “the exception should apply to taxpayers

who were obligated to lease the building before September

26, 1985, but had not leased the building by that date.

It also argues that, to qualify, the taxpayer must have agreed

to lease the entire building.” 153 F.3d at 970.

The Ninth Circuit rejected the government’s attempts to

add requirements that were not contained in the text of

section 204(a)(7), stating that “[t]he difficulty with the

government’s argument is that none of the words italicized

in the previous paragraph were written into § 204(a)(7).” Jd.

The court held, contrary to the United States’ objections,

that “[t]here is no disqualification of those who executed

leases before September 26, 1985, and the government offers

no reason why the execution of a lease creates a relevantly

different condition from that which existed under an

agreement to lease.” Jd.

9. The opinion of the district court in Airborne is cited for

certain details regarding the factual situation of the taxpayer at issue.

10

The Ninth Circuit rejected the United States’ attempt to

rewrite the statute based upon its view of the legislative

history. In Airborne, the government argued:

that the exception must be construed very

narrowly, in light of the circumstances of its

passage. Congress enacted § 204(a)(7) to allow

the firm of Merrill Lynch to claim investment tax

credits for property placed in service in its new

world headquarters because Merrill Lynch had

agreed to lease the new building in reliance on

the old law. . .. Consequently, the requirements

of § 204(a)(7) reflect Merrill Lynch’s particular

circumstances. The government argues that it is

inappropriate to extend the exception beyond

those circumstances.

153 F.3d at 970.

Because these requirements urged by the United States

were not contained in text of the legislation, however,

the Ninth Circuit refused to impose them on the taxpayer

regardless of “the circumstances of [the Act’s] passage,”

nd held that Airborne was entitled to the transitional relief

of the world headquarters exception because the “plain words”

of the statute were satisfied. Jd. In short, the Ninth Circuit

“decline[d] therefore to write the government’s additional

proposed restrictions into the statute in order to confine the

exception virtually to a class of one.” Jd.

2. In direct contrast to the Ninth Circuit in Airborne,

the Federal Circuit denied transitional relief to Petitioner

because it leased and occupied its world headquarters before

September 26, 1985. In this case, as in Airborne, Petitioner

11

leased and occupied its world headquarters before September

26, 1985. Petitioner argued in this case, as did the taxpayer

in Airborne, that its actual lease and occupancy of its

headquarters building satisfied the statutory obligation in

section 204(a)(7)(B) of the Act “to lease the building under

an agreement to lease entered into before September 26,

1985.” The United States argued, as it did in Airborne, that

the phrase “agreement to lease” referred exclusively to an

executory contract to enter into a lease at a later date. In a

lengthy opinion dealing almost exclusively with the issue of

whether the words “agreement to lease” included a lease

agreement or only an executory contract to enter a lease in

the future, the lower court explicitly rejected Petitioner’s (and

the Ninth Circuit’s) position and granted the United States’

motion for summary judgment. App., infra, la-2a; 3a-29a.

In addition, Petitioner had entered into a separate

agreement prior to its actuai lease and occupancy of the

building, and the United States and Petitioner agree that this

initial agreement was an “agreement to lease.” JA 103, 122,

186-187. Therefore, there was no dispute before the Court

of Federal Claims or the Federal Circuit that Petitioner had

an obligation “to lease the building under an agreement

to lease entered into before September 26, 1985... .”

Tax Reform Act § 204(a)(7)(B), 100 Stat. at 2155.

Accordingly, based on this agreement and Petitioner’s

satisfaction of the plain language of section 204(a)(7)(B),

summary judgment should have been granted by the Court

of Federal Claims for Petitioner. Instead, both of the lower

courts simply ignored Petitioner’s alternative argument that

it satisfied the plain language of the statute.

The lower courts relied upon the legislative history of

the world headquarters exception as support for the recurring

12

theme that the transitional rule was intended to apply to a

very narrow Class of taxpayers who did not lease and occupy

the building before September 26, 1985. See App., infra,

19a-25a. The court used specific comments by individual

legislators and items published by congressional committees

to conclude that the statute had “at most, two intended

beneficiaries-the firms Merrill Lynch and Drexel Burnham

Lambert.” App., infra, 20a. Indeed, the court interpreted these

sources to conclusively establish that Merrill Lynch was the

sole intended beneficiary of the world headquarters exception

contained in sections 204(a)(7)(A)-(C).'° App., infra, 21a at

n.13. Because the Court of Federal Claims chose not to

address the indisputable fact of Petitioner’s obligation under

an “agreement to lease” entered into before September 26,

1985, and instead relied upon legislative history for the

proposition that a single named taxpayer was the sole

intended beneficiary of the world headquarters exception,

the court effectively added an extra-statutory requirement to

the text of section 204(a)(7)(B) — that a taxpayer who executed

an “agreement to lease” may not also enter into a firm lease

agreement and take possession of the property prior to

September 26, 1985.

Both the resort to and interpretation of the legislative

history by the Court of Federal Claims and ultimately the

Federal Circuit were erroneous. They should have enforced

the plain language of the statute without reference to the

legislative history as did the Ninth Circuit in Airborne.

Moreover, as discussed in Part B below, the substance of the

legislative history in this case in no way establishes the

additional requirement prohibiting lease and occupancy

before September 26, 1985.

10. The Court of Federal Claims also determined that the last

sentence of section 204(a)(7), what the court referred to as the “flush

language,” was intended to apply to Drexel Burnham Lambert.

a senen meena

13

B. The Use of Congressional Legislative History to Flout

the Plain Language of a Statute Is in Direct Conflict

with Supreme Court Precedent.

The resort by the lower courts to the legislative history

of the Tax Reform Act for purposes of adding a requirement

not contained in the actual text of section 204(a)(7) is contrary

to a long line of Supreme Court precedent establishing the

proper use of legislative history in statutory construction.

When interpreting a statute, this Court-has stated that

“all such inquiries must begin . . . with the language of the

statute itself.” United States v. Ron Pair Enters., Inc.,

489 U.S. 235, 241 (1989) (citing Landreth Timber Co. v.

Landreth, 471 U.S. 681, 685 (1985)). Where, as in this

case, the language of the statute is plain, this is also where a

court’s inquiry should end, as “the sole function of the courts

is to enforce [the statute] according to its terms.” Jd.

(citing Caminetti v. United States, 242 U.S. 470, 485 (1917)).

The only exception to the rule that the plain language of the

legislation is conclusive is the “rare” situation where literal

application of the statute “will produce a result demonstrably

at odds with the intentions of its drafters.” Jd. at 242

(citing Griffin v. Oceans Contractors, Inc., 458 U.S. 564,

571 (1982)).

The issue before the Federal Circuit in this case was

whether Petitioner satisfied the statutory requirement set forth

~ in section 204(a)(7)(B) of the Act. Since, as the parties agree,

Petitioner entered into an agreement to lease the building on

April 21, 1973 (which is “before September 26, 1985”),

the lower courts should have ended their inquiry at this point

having found that Petitioner satisfied the plain language

requirements of the statute — a decision which would have

been consistent with both the Ninth Circuit’s decision in

Airborne and this Court’s precedent regarding the

14

interpretation of plain statutory language. Instead, prompted

by the belief that Petitioner simply was not within the narrow

class of taxpayers Congress intended to benefit, the courts

agreed to undertake what this Court has referred to as the

“hopeless” task of “ascertaining what the legislators who

passed the law would have decided had they reconvened to

consider [this particular case].” Beecham v. United States,

511 U.S. 368 (1994). The lower courts overlooked the

principle that “[t}he best evidence of [Congressional] purpose

is the statutory text adopted by both Houses of Congress and

submitted to the President.” West Virginia Univ. Hosps., Inc.

v. Casey, 499 U.S. 83, 98 (1991).

The resort to legislative history was erroneous because

application of the world headquarters exception according

to its plain terms does not yield an absurd result. If section

204(a)(7) is applied according to its plain language, as one

court has noted, the transitional benefit will be afforded only

to the narrow class of taxpayers who purchased qualified

property or made leasehold improvements to their world

headquarters facility, of which they were the original lessee,

between the years 1986 and 1991. See Kimberly-Clark Tissue

Co. v. United States, 38 F. Supp. 2d 1028, 1037 (E.D. Wis.

1999).

It is clear that the 99th Congress knew very well how to

draft a transitional rule that would apply to a single taxpayer

— when that was the intent, it simply named the intended

beneficiary. See Tax Reform Act §§ 204(a)(32) and (33), 100

Stat. at 2161-63; 204(c)(4)(A)-(P), 100 Stat. at 2164-65."

11. Section 204(a)(32) of the Act provides:

The amendment made by § 201 shall not apply to — (K)

A $600,000,000, 250 megawatt plant placed in service

(Cont'd)

15

In the text of the world headquarters exception, however,

Congress went to great lengths to spell out in detail the

conditions that were necessary to qualify for the transitional

(Cont'd)

| by the Sierra Pacific Power Company, (L) 128 units of

rental housing the Point Gloria Limited Partnership . . .

(O) the Santa Rosa Hotel, in New Orleans, Louisiana

.. .(S) two cogeneration facilities, placed in service by

the Reading Anthracite Company, costing approximately

$110,000,000 each. ...

Tax Reform Act §§ 204(a)(32)(K)-(L), (O), (S), 100 Stat. at 2162.

Section 204(a)(33) of the Act provides:

The amendments made by § 201 shall not apply to —

(A) $400,000 of equipment placed in service by Super

Kay Market . . . (I) 40,000 vending machines, for a cost

approximating $3,400,000 placed into service by Folz

Vending Co....

Tax Reform Act §§ 204(a)(33)(A), (I, 100 Stat. at 2163.

Section 204(c)(4) of the Act provides: _

The amendments made by § 201 shall not apply to a

limited amount of the following property or a limited

amount of property set forth in submission before

September 16, 1986, by the following taxpayers —

(A) Arena project, Michigan, (B) Campbell Soup

Company . . . (C) Overton, Florida, (D) Legett and Platt

.. . (F) Standard Telephone Company, (G) Presidential

Air, (H) Ann Arbor Railroad . . . (M) Hardage Company,

(N) Mesa Airlines. . . .

Tax Reform Act §§ 204(c)(4)(A)-(D), (F), (G), (H), (M), (N),

100 Stat. at 2164-65.

16

relief to be granted. When compared with the examples where

Congress made clear its intent to enact a transitional rule

that applied to a single taxpayer, the “absurd” result would

be to interpret the much more broad world headquarters

exception to apply in the same ultra-narrow fashion. :

Furthermore, the legislative history in this case does not

lend even the slightest amount of support to the determination

that a taxpayer who leases and occupies its building before

September 26, 1985, is not eligible for transitional relief.

The Court of Federal Claims’ analysis of the legislative

history related to section 204(a)(7)(B) begins by stating that

“(while the legislative history does not specifically define

the phrase in question, it does strongly suggest that Congress

intended the transitional rules to have a narrow application.”

App., infra, 20a. The opinion should have ended at this point

because the ensuing analysis of the legislative history has

absolutely no relevance to the specific language contained

in section 204(a)(7)(B); rather, the analysis merely supports

the general proposition that the world headquarters exception

was intended to be of limited application.

The legislative history on which the lower courts rely

consists primarily of two statements by individual legislators

and two items published by congressional committees in the

Congressional Record. See App., infra, 19a-22a. First, the

Court of Federal Claims refers to a speech given by a

representative on the House floor in which Merrill Lynch is

specifically referred to as an intended beneficiary of the

provision. App., infra, 20a (citing 131 Cong. Rec. 35,285

(1985) (comments of Rep. Newt Gingrich)). Second, the court

cites to a report of the Senate Finance Committee where again

Merrill Lynch is specifically mentioned as an intended

beneficiary. App., infra, 20a-21a (citing 132 Cong. Rec. 13,090

17

(1986)). Next, the court highlights yet another statement by

an individual legislator in which Merrill Lynch is identified

as an intended beneficiary. App., infra, 21a (citing 132 Cong.

Rec. 14,113 (1986) (comments of Sen. Howard Metzenbaum)).

Finally, the court looked to an entry made by the Senate in

the Congressional Record at Senator Metzenbaum’s behest

identifying intended beneficiaries of the bill and listing

Merrill Lynch as a beneficiary of sections 204(a)(7)(A)-(C)

of the Act. App., infra, 21a (citing 132 Cong. Rec. 26,638-

40 (1986)).

There is no analysis, however, as to hw these sources

serve to support the addition of a statutory requirement in

section 204(a)(7)(B) that a taxpayer not lease and occupy its

building before September 26, 1985. At most, the Court of

Federal Claims can only conclude that this history establishes

that Congress intended the world headquarters exception to

be of limited application. App., infra, 22a. In reading the

court’s analysis of the legislative history, one is left with the

distinct impression that the court ultimately decided that

Petitioner did not qualify for the world headquarters

exception simply because it was not Merrill Lynch."

In fact, the analysis below bears a striking resemblance

to the district court decision in United States v. Kjellstrom

— the first of the litigated cases regarding the application

of the world headquarters exception. 916 F. Supp. 902

(W.D. Wis. 1996). In Kjellstrom, the district court relied on

the same legislative history as support for its conclusion that

12. The court, to be sure, eschewed any such rationale, stating

that it did not consider the fact that Petitioner was not Merrill Lynch

to be “dispositive,” and noted that it was theoretically possible that

Congress intended to pass a law benefiting one or two taxpayers and

incidentally benefited others in the process. App., infra, 22a.

18

the taxpayer could not qualify for transitional relief under

the world headquarters exception essentially because it was

not Merrill Lynch. Jd. The district court reasoned that

“{a]lthough it is plausible that § 204(a)(7) was meant to

benefit other companies besides Merrill Lynch, Congress

could not have intended to benefit every company who leased

newly constructed world headquarters buildings, unless that

company was similarly situated to Merrill Lynch... .”

916 F. Supp. at 907. On appeal to the Seventh Circuit, the

United States determined that this mode of statutory analysis

employed by the district court was so untenable that it refused

to pursue it, at least expressly. See United States v. Kjellstrom,

100 F.3d 482, 485 n.2 (7th Cir. 1996) (stating that the

Government does not attempt to restrict relief under the world

headquarters exception to Merrill Lynch). Indeed, the Seventh

Circuit flatly rejected the district court’s statutory analysis,

refusing to hold that the world headquarters exception was

limited to Merrill Lynch. Jd. at 485. Instead, the Seventh Circuit

held that the taxpayer did not qualify because it simply did not

meet the plain-language requirements of the statute." Jd.

Notwithstanding the United States’ repeated assertions

in this case that it does not seek to restrict application of the

world headquarters exception to Merrill Lynch alone, it has

continued to make the de facto argument through its

assertions of the need for a “narrow” construction of the

statute. The United States succeeded in convincing the lower

courts that the “policy” underlying section 204(a)(7), and

the transitional rules of the Tax Reform Act in general, should

prevail over the plain language of the statute. Thus, the lower

courts used the legislative history to create an extra-statutory

13. The taxpayer in Kjellstrom did not meet the requirement of

section 204(a)(7)(C) that the building be used as a “world

headquarters.” Kjellstrom, 100 F.3d at 484-485.

19

requirement that would give effect to this “policy.” In this

regard the litigation regarding the world headquarters

exception has come full circle to the disavowed and

discredited district court decision in Kjell/strom — Petitioner

is denied transitional relief not because it fails to meet the

requirements of the statute, but because it supposedly is not

within the ultra-narrow scope of intended beneficiaries

referred to by name in the legislative history.

This Court should grant certiorari to protect the integrity

of its decisions and to confirm that this approach to statutory

construction is not acceptable. See Iselin v. United States,

270 U.S. 245, 251 (1926) (“To supply omissions [to plain

and unambiguous statutory language] transcends the judicial

function.”); West Virginia Univ. Hosps., Inc. v. Casey,

499 U.S. 83 (1991). oe

C. The Question Presented Is a Recurring Issue of Great

Practical Importance.

Clarification by this Court of the proper use of congressional

legislative history in the judicial construction of tailored

transitional rules is of great practical importance to the

interpretation of federal tax statutes as well as other statutes

in general. Rules providing special tax benefits to a targeted

group of taxpayers are a recurring necessity of federal tax

“law. For example, the recently enacted Job Creation and

Worker Assistance Act of 2002 provides a beneficial

five-year recovery period for the depreciation of “qualified

New York Liberty Zone leasehold improvement property.”

§ 301(a), 26 U.S.C. § 1400L(c) (2002).'* The proper method

14. This legislation added a new section 1400L(c) to the Internal et

Revenue Code that provides a tax benefit to taxpayers installing

leasehold improvements in buildings located in a specific area of

New York City. Section 1400L(c)(2) provides: (Cont'd)

20

of determining eligibility for relief under this transitional

rule is to apply the literal language of the statute to the

situations of individual taxpayers, rather than scouring the

legislative history of the Act for the names of specific

intended beneficiaries or for the creation of a legislative

“policy” such as a limitation of the transitional benefit to

taxpayers who actually had property destroyed in the terrorist

attacks of September 11, 2001.

Due to the frequency with which federal tax policy is

amended, and the need of taxpayers to be able to plan their

business activities in order to operate in a tax-efficient manner

under an existing policy, transitional rules will continue to

be an integral part of a federal income tax regime that strives

to achieve fairness and equity. Additionally, Congress will

(Cont’d)

QUALIFIED NEW YORK LIBERTY ZONE

LEASEHOLD IMPROVEMENT PROPERTY — For

purposes of this section, the term “qualified New York

Liberty Zone leasehold improvement property” means

qualified leasehold improvement property (as defined

in section 168(k)(3)) if —

(A) such building is located in the New York

Liberty Zone,

(B) such improvement is placed in service

after September 10, 2001, and before January

1, 2007, and

(C) no written binding contract for such

improvement was in effect before September

11, 2001.

Job Creation and Worker Assistance Act § 301(a), 26 U.S.C.

§ 1400L(c)(2).

21

continue to draft tailored transitional rules as part of the tax

code in order to protect specific groups of taxpayers who are

most in need of relief from a sudden change in federal tax policy.

The issue presented in this case gives the Court an

opportunity to clarify the proper role of legislative history in

such circumstances, and to confirm that, even in situations

where Congress intends a statute to be of narrow application,

random statemenis by legislators and obscure references in

congressional publications are not acceptable substitutes for

the plain text of the legislation.

The method of statutory construction employed by the

lower courts in this case effectively begins with the legislative

history of the Tax Reform Act and then works backward in

an attempt to reverse-engineer section 204(a)(7)(B) of the

Act in order to give effect to the perceived “policy” of ultra-

narrow application. When presented with the undisputed fact

that Petitioner entered into an “agreement to lease” before

September 26, 1985, as required by section 204(a)(7)(B), resort

by the lower courts to the legislative history was unwarranted

even if the narrow application of the statute were intended.

In effect, this method of statutory construction virtually

ensures that any individual referred to by name in a source

of legislative history is guaranteed the benefit of the statute,

regardless of literal compliance with the statutory

requirements; on the other hand, those individuals not

specifically named in the legislative history are effectively

precluded from qualifying for the benefit, even if they were

to comply with the language of the statute.

The potential danger with this method of statutory

interpretation is readily apparent. Legislators and their staffs

would have a tangible incentive to slip in references to their

22

would-be beneficiaries and thereby guarantee their

qualification — while at the same time inadvertently

excluding other individuals who would have qualified under

the plain conditions of the statute. See Blanchard v. Bergeron,

489 U.S. 87, 98 (1989) (Scalia, J., concurring)

As anyone familiar with modern-day drafting of

congressional committee reports is well aware,

the references [to particular cases] were inserted,

at best by a committee staff member on his or her

Own initiative and at worst by a committee staff

member at the suggestion of a lawyer-lobbyist;

and the purpose of those references was not

primarily to inform the members of Congress what

the bill meant . . . but rather to influence judicial

construction.

In this case, the Court should issue a strong pronouncement

that legislative history will not be allowed to stand in the

place of the actual words enacted by Congress and signed

into law by the President.

23

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

WILLIAM L. GOLDMAN Puitie C. CooK*

McDermott, WILL & EMERY TimoTtuy J. PEADEN

600 13th Street, N.W. TimoTHy L. FALLAW

Washington, DC 20005-3096 §ALsTon & Birp LLP |

(202) 756-8000 1201 West Peachtree Street

Atlanta, GA 30309

(404) 881-7000

* Counsel of Record

Counsel for Petitioner

APPENDIX

la

APPENDIX A — PER CURIAM OPINION OF THE

UNITED STATES COURT OF APPEALS FOR THE

FEDERAL CIRCUIT DECIDED MAY 30, 2002

UNITED STATES COURT OF APPEALS

FOR THE FEDERAL CIRCUIT

01-5139

NATIONAL DATA CORPORATION & SUBSIDIARIES,

Plaintiff-Appellant,

v.

UNITED STATES,

Defendant-Appellee.

DECIDED: May 30, 2002.

Before GAJARSA, LINN, and DYK, Circuit Judges.

PER CURIAM.

National Data Corporation and Subsidiaries (“NDC”)

appeals a decision of the United States Court of Federal

Claims. The Court of Federal Claims summary judgment

decision denied NDC’s tax refund claim. Nat’) Data Corp.

& Subsidiaries v. United States, 50 Fed. Cl. 24, 25 (2001).

NDC argued that certain amounts it expended for leasehold

improvements qualified for the “world headquarters

exception” to the repeal of the investment tax credit.

2a

Appendix A

The exception is codified in § 204(a)(7) of the Tax Reform

Act of 1986. The Court of Federal Claims holding depends

predominantly on its interpretation of the phrase “agreement

to lease” in subparagraph (B) of § 204(a)(7). This court finds

the Court of Federal Claims interpretation of such phrase to

be correct. Therefore, we adopt as this court’s opinion the

Court of Federal Claims interpretation of this particular

phrase and similarly adopt the Court of Federal Claims

application of such interpretation to the facts of this case.

As a result, we affirm.

AFFIRMED.

COSTS

No costs.

3a

APPENDIX B — OPINION OF THE UNITED STATES

COURT OF FEDERAL CLAIMS DATED AND FILED

JULY 23, 2001

UNITED STATES COURT OF FEDERAL CLAIMS

Nos. 97-23T, 97-580T

(Filed: July 23, 2001)

NATIONAL DATA CORPORATION & SUBSIDIARIES,

Plaintiff,

v.

THE UNITED STATES,

Defendant.

Summary Judgment; Income Tax Refund Suit; Investment

Tax Credit; Transition Rules under Tax Reform Act of

1986; “World Headquarters” Exception;

“Agreement to Lease” vs. “Lease.”

OPINION

ALLEGRA, Judge.

For most of the peried from 1962 through 1985, a

taxpayer who acquired qualifying machinery and equipment

for use in its trade or business was allowed an “investment

tax credit” as a dollar-for-dollar offset against its income tax

liability, in an amount equal to a specified percentage of its

4a

Appendix B

investment. The Tax Reform Act of 1986 (the Reform Act),

Pub. L. No. 99-514, 100 Stat. 2085, generally eliminated this

credit for property placed in service after December 31, 1985.

But, as tax acts are wont to do, the Reform Act contained

transitional rules, among them an exception to the repeal for

certain property placed in service in complexes classified as

“world headquarters.” At issue in this case is whether plaintiff

was covered by this exception and thereby entitled to

investment tax credits for certain property it placed in service

after the effective date of the general repeal. This highly

technical issue is before the court on cross-motions for

summary judgment. After careful consideration of the briefs

filed, the oral argument, and for the reasons discussed below,

the court determines that plaintiff is not entitled to the

claimed credits, and, thereforé, GRANTS defendant’s motion

for summary judgment and DENIES plaintiff’s cross-motion

for summary judgment.!

I. FACTS

Neither party disputes the facts at issue here, which are

as follows:

Plaintiff, National Data Corporation and Subsidiaries

(NDC or plaintiff), is a Georgia corporation that provides

electronic information services for financial, retail, health

care and communications markets. On April 21, 1973,

plaintiff entered into an agreement to be the original lessee

1. Because the court concludes that plaintiff is allowed no credit,

it does not reach issues raised by the parties’ briefs regarding the

application of Section 203 of the Reform Act and the amount of credit

potentially owed plaintiff.

5a

Appendix B

of a building located at One NDC Plaza in Atlanta, once the

first floor of that newly-constructed building could be

occupied. The commencement date for the lease was not

specified in the initial agreement, but was settled upon

in a First Amendment to the Lease Agreement, which set

April 27, 1973 as the lease initiation date. Under the

provisions of the original agreement, as first amended, the

term of the lease was 240 months, or until April 27, 1993.

On September 24, 1991, however, the lease was extended to

April 30, 2003, with an additional renewal term of 10 years

at the option of NDC. The One NDC Plaza serves as NDC’s

corporate headquarters and the hub for all of its worldwide

operations. From 1987 to 1990 (the four taxable years at issue

here), plaintiff had other corporate offices located throughout

the United States, as well as offices and computer centers

throughout Western Europe, Japan, and Canada.

NDC’s taxable year ran from June 1 to May 31. In its

taxable year 1987, plaintiff placed approximately $6.5 million

in leasehold improvements, equipment, furniture, and fixtures

in service at the One NDC Plaza. In taxable year 1988,

plaintiff placed an additional $17 million in improvements

in service at the building, followed by an additional $5.5

million in improvements in taxable year 1989, and an

additional $5.8 million in improvements in taxable year 1990.

For each of the taxable years in question, plaintiff timely

filed corporate income tax returns, but did not claim thereon

investment credits for the aforementioned property.

On August 8, 1994, however, plaintiff filed claims for

refunds, asserting that it was entitled to investment tax credits

for leasehold improvements, furnishings, and equipment

placed in service at One NDC Plaza, during the four taxable

years at issue. Plaintiff claimed approximately $2.1 million

6a

Appendix B

in tax credits, for a total refund claim of approximately $1.7

million. On September 5, 1996, the Appeals Office of the

Internal Revenue Service denied plaintiff’s refund claims for

taxable years 1987-89, and, on August 12, 1997, it denied

plaintiff’s refund claim for taxable year 1990.

On January 14, 1997 and August 25, 1997, plaintiff

commenced the instant consolidated suit, seeking a refund

of $1,687,192, corresponding to the amounts it previously

claimed on account of the investment tax credit. As noted

above, this matter is before the court on the parties’ cross-

motions for summary judgment. The case was transferred to

the undersigned judge on February 8, 2001. Oral argument

was heard in this case on April 18, 2001.

II. DISCUSSION

Summary judgment is appropriate when there is no

genuine dispute as to any material fact and the moving party

is entitled to judgment as a matter of law. RCFC 56;

Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986).

As noted, the facts material to the motions are essentially

undisputed. Based on those facts, the court concludes, as a

matter of law, that defendant is entitled to summary judgment.

Before the enactment of the Tax Reform Act of 1986

(the Reform Act), Pub. L. No. 99-514, 100 Stat. 2085, section

38 of the Internal Revenue Code of 1954? governed a

2. Section 2 of the Reform Act redesignated the “Internal

Revenue Code of 1954” “as heretofore, hereby or hereafter amended”

the “Internal Revenue Code of 1986.” § 2, 100 Stat. at 2095. However,

references to the operative Internal Revenue Code provisions at issue

here will be to Internal Revenue Code of 1954 (26 U.S.C.), unless

otherwise indicated.

7a

Appendix B

taxpayer’s eligibility for the investment tax credit, while

section 46 of the Code controlled the amount of such credit

allowable. With permutations not here relevant, the latter

section provided that “the amount of the investment credit

determined under this section for any taxable year shall be

an amount equal to . . . the regular percentage” of a taxpayer’s

“qualified investment.” I.R.C. § 46(a)(1). Paragraph (c)(1)

of section 46 defined the term “qualified investment” as the

aggregate of a defined portion of “the basis of each new

section 38 property (as defined in section 48(b)) placed in

service by the taxpayer during such taxable year,” plus a

defined portion of “the cost of each used section 38 property

(as defined in section 48(c)(1)) placed in service by the

taxpayer during such taxabie year.” Id. at § 46(c)(1). Under

these provisions, then, the amount of the credit allowed for

a particular taxable year generally was determined by

multiplying the regular percentage by the “qualified

investment,” i.e., the defined portion of the basis or cost

associated with certain qualifying property that was placed

in service during that taxable year. See B.F. Goodrich v.

United States, 94 F.3d 1545, 1548-49 (Fed. Cir. 1996).

Section 211(a) of the Reform Act eliminated this

investment tax credit by making the “regular percentage”

specified in section 46(a)(1) of the Code inapplicable to

“any property placed in service after December 31, 1985.”

§ 211, 100 Stat. at 2167-68. See also Telecom USA, Inc. v.

United States, 192 F.3d 1068, 1070 (D.C. Cir. 1999),

cert. denied, 529 U.S. 1123 (2000); S. Rep. No. 99-313,

at 96 (1986). However, Congress “softened the blow slightly

by providing transitional rules to ameliorate the loss of’ the

investment tax credit, United States v. Commonwealth Energy

8a

Appendix B

Sys., 235 F.3d 11, 15 (1st Cir. 2000), among them, a limited

exception to the repeal for certain types of “transition

property,” including property falling within a “world

headquarters” exception. See Pub. L. No. 99-514, § 204(a)(7),

100 Stat. 2155. The latter exception provided, in pertinent

part:

Certain leasehold improvements. — The [repeal

of the investment tax credit] shall not apply to

any reasonable leasehold improvements,

equipment and furnishings placed in service by a

lessee... if —

(A) the lessee ... is the original lessee of each

building in which such property is to be used,

(B) such lessee is obligated to lease the building

under an agreement to lease entered into before

September 26, 1985, and such property is provided

for such building, and

(C) such buildings are to serve as world

headquarters of the lessee... .

Such lessee shall include a securities firm that

meets the requirements of subparagraph (A),

except the lessee is obligated to lease the building ©

under a lease entered into on June 18, 1986.

Id. See Kimberly-Clark Tissue Co. v. United States,

38 F. Supp. 2d 1028, 1031 (E.D. Wis. 1999). As noted by the

Tax Court, “(t]he requirements of the world headquarters rule

are cumulative,” and a taxpayer “must prove that it meets all

the requirements of subparagraphs (A), (B), and (C) in order

to qualify for an investment tax credit under this transitional

9a

Appendix B

rule.” Payless Cashways, Inc., v. Commissioner, 114 T.C.

72, 77 (2000). Pursuant to section 203(b) of the Reform Act,

property subject to this exception was eligible for the credit

provided it was placed in service by January 1, 1991. § 203,

100 Stat. at 2144.

Plaintiff argues, and defendant concedes (at least for

purposes of the cross-motions), that plaintiff met two prongs

of section 204(a)(7)’s requirements — that is, it was the

“original lessee” of the One NDC Plaza for purposes of

subparagraph (A), and its building qualified as a “world

headquarters” for purposes of subparagraph (C). However,

the parties disagree as to whether NDC qualified under

subparagraph (B), which requires that the “lessee is obligated

to lease the building under an agreement to lease entered

into before September 26, 1985.” § 204, 100 Stat. at 2155.

Defendant asserts that this language does not apply to a

taxpayer, such as NDC, who, prior to September 26, 1985,

had already signed a lease and occupied its world

headquarters. It is to that issue that the court now turns.

In construing the “world headquarters” exception, the

court must first look to whether the statutory language is

plain and unambiguous. See United States v. Ron Pair Enters.,

Inc., 489 U.S. 235, 241 (1989); Chevron U.S.A. v. Natural

Res. Def. Council, 467 U.S. 837, 842-43 (1984).

In performing this task, it is guided by certain principles of

interpretation.’ The first, a “fundamental canon of statutory

3. See N.L.R.B. v. United Food & Commercial Workers Union,

Local 23, 484 U.S. 112, 123 (1987) (“On a pure question of statutory

construction, our first job is to try to determine congressional intent,

using ‘traditional tools of statutory construction.’ ”).

10a

Appendix B

construction,” is that, “unless otherwise defined, words will

be interpreted as taking their ordinary, contemporary,

common meaning.” Perrin v. United States, 444 U.S. 37,

42 (1979). The second, in many ways a corollary of the first,

is that a statute should be construed so that each part is given

effect and no part is rendered inoperative or superfluous.‘

See Reiter v. Sonotone Corp., 442 U.S. 330, 339 (1979).

The third is that “where Congress uses terms that have

accumulated settled meaning under . . . the common law, a

court must infer, unless the statute otherwise dictates, that

Congress means to incorporate the established meaning of

these terms.” Field v. Mans, 516 U.S. 59, 69 (1995) (internal

citations omitted).° Lastly, yet another rule of interpretation

applicable here is that “provisions granting special tax

exemptions are to be strictly construed.” Helvering v.

Northwest Steel Rolling Mills, 311 U.S. 46, 49 (1940).°

4. This rule has specifically been applied in construing the

investment tax credit transition rules under the Tax Reform Act.

See Commonwealth Energy Sys., 235 F.3d at 15; Bell Atlantic Corp.

v. United States, 224 F.3d 220, 224 (3d Cir. 2000).

5. See also United States v. Shabani, 513 U.S. 10, 13 (1994)

(stating that it is a settled principal of statutory construction that

“absent contrary indications, Congress intends to adopt the common

law definition of statutory terms”); 2B Norman J. Singer, Sutherland

Statutory Construction § 50.04 (6th ed. 2000) [hereinafter Sutherland

Statutory Construction] (emphasizing “utility of examining a federal

statute with reference to the common law of the various states as it

existed at the time the statute was enacted”).

6. See also Commissioner v. Jacobson, 336 U.S. 28, 49 (1949)

(exemptions “are specifically stated and should be construed with

restraint” in light of the purpose of taxing income comprehensively);

Espenshade v. United States, 354 F.2d 332, 336 (Ct. Cl. 1965).

lla

Appendix B

This oft-quoted tax maxim has been applied in interpreting

tax transition rules, see United States v. Hemme, 476 U.S.

558, 566-67 (1986), and, specifically, in construing those of

the Reform Act, including those involving the phase-out of

the investment tax credit, see Commonwealth Energy Sys.,

235 F.3d at 15-16; Apache Bend Apartments, Ltd. v. United

States, 987 F.2d 1174, 1175 (Sth Cir. 1993); United States v.

Kjellstrom, 916 F. Supp. 902, 905 (W.D. Wis. 1996), aff'd,

on other grounds, 100 F.3d 482 (7th Cir. 1996).

Applying these familiar canons to the lariguage of section

204(a)(7), the court first trains its eye on that portion of

subparagraph (B) which states “[s]uch lessee is obligated to

lease the building under an agreement to lease entered into

before September 26, 1985.” § 204, 100 Stat. at 2155. Relying

on the present tense of the “is obligated” language, defendant

first contends that this provision requires that a taxpayer be

obligated under an “agreement to lease” as of September 26,

1985. It then predicates that an “agreement to lease” is a

separate and distinct concept from that ofa “lease,” and refers

only to an executory contract to enter into a building lease in

the future. It asserts that while plaintiff originally entered

into such an “agreement to lease,” it was not obligated to

lease the building under that agreement as of the effective

date of the transition provision, but, instead, was operating

under a supervening lease. As such, according to defendant,

plaintiff is not covered by the transitional ruie. For its part,

plaintiff insists that defendant is reading requirements into

the statute that simply are not there, and, in particular,

contends that the term “agreement to lease” is legally

synonymous with the term “lease.” Thus, it maintains that it

12a

Appendix B

fully met the requirements of section 204(a)(7)(B), when, in

1973, i.e., prior to September 26, 1985, it was the original

lessor and occupant of the NDC Plaza.

For many reasons, section 204(a)(7)(B) will not bear

plaintiff’s interpretation. The key phrase in that statute,

“agreement to lease,” is neither defined in Webster's

Dictionary nor Blacks Law Dictionary. Nonetheless, both

familiar lexicons define the term “lease” as constituting an

“agreement” or a “contract” — Webster s defines that phrase

as “a contract by which one conveys lands, tenements, or

hereditaments for lie, for terms of year, or at will,” Webster's

Third New International Dictionary 1286 (1993), while

Black's similarly describes it as “any agreement which gives

rise to relationship of landlord and tenant,” Black's Law

Dictionary 889 (6th ed. 1990). These definitions suggest that

in common usage, a layperson would not employ the phrase

“agreement to lease” or “contract to lease” to refer simply to

a “lease,” as the word “agreement” or “contract” is implied

and subsumed within the latter concept. This observation,

though a splinter of logic in the first instance, takes on sturdier

proportions when buttressed by the common law

understanding of the phrase “agreement to lease,” or its

equivalent, “contract to lease,” which, although subject to

some local variation, is a familiar denizen of landlord and

tenant law.

As noted in a leading treatise in this area, “[a] lease is

said to convey a present estate in distinction to a contract to

lease, which is to provide for the creation in the future.”

3 Milton R. Friedman, Friedman on Leases § 34.1

(4th ed. 1997) [hereinafter Friedman on Leases]. Burnishing

this explanation, another treatise indicates:

13a

Appendix B

it is important to distinguish leases from

nonpossessory interests because important

consequences depend on the distinction. For the

same reason, a lease must also be distinguished

from a contract to make a lease. The distinction

is that a lease is a transaction that is already

partially executed, while a contract to lease creates

obligations that are purely executory....

A contract to lease is an agreement that

contemplates the future execution of a formal

lease giving the prospective tenant the right to

possession; the contract to lease is purely

executory, and does not itself transfer a right to

possession to the prospective tenant.

2 Richard R. Powell, Powell on Real Property § 16.02[4]

(Michael Allan Wolf ed., 2001) [hereinafter Powell].

See also 51C C.J.S. Landlord & Tenant § 185a (1968) (“There

is a distinction between a present lease and an executory

contract to enter into a lease in that the latter vests no estate

in the proposed lessee, while the former conveys an estate.”’).

The principal raison d’etre of this distinction lies in the fact

that a lease, unlike an agreement to lease, gives a right to

possession, which, in turn, defines the relief available upon

its breach — for a breach of a lease, the landlord’s remedy is

for accrued or accruing rent; while, for breach of an

“agreement to lease,” a landlord may expect only ordinary

contract damages (with a corresponding duty to mitigate).

Friedman on Leases, §§ 34.1, 34.5.’ Cases distinguishing

7. See also Roger A. Cunningham, William B. Stoebuck & Dale

A. Whitman, The Law of Property 263 (2d ed. 1993) (measure of

(Cont'd)

l4a

Appendix B

between leases and agreements or contracts to lease are

legion, with one court perhaps best summing up the usual

judicial formula stating, albeit simply, that “[a]n agreement

to lease is not a lease, just as a contract to sell is not a sale.”

Ryan v. Stanger Inv. Co., 620 S.W.2d 505, 508 (Tenn. Ct.

App. 1981).°

(Cont'd)

damages is the “major consequence” of the distinction); J.A.

Connelly, Annotation, Measure of Damages for Lessor's Breach of

Contract to Lease or to Put Lessee Into Possession, 88 A.L.R.2d

1024 (1963). Other state law consequences that spring from the

distinction between a lease and an agreement to lease involve the

proper application of statutes of fraud and recordation statutes, some

of which distinguish between contracts and leases. Powell, § 16.02[4].

See generally Emory Washburn, American Law of Real Property 453

(1876) (noting the importance of the distinction between “agreements

to lease and agreements which operate as leases” for parol evidence

purposes); Restatement (Second) of Property § 2.5 (1977) (contract

section governs contract to lease).

8. See, e.g., Dan Cohen Realty Co. v. National Sav. & Trust

Co., 125 F.2d 288, 289 (6th Cir. 1942) (“There is a sharp and generally

recognized distinction between the rights and liabilities created by

an executed lease on the one hand and an executory contract to lease

on the other.”); Sands v. United States, 198 F.Supp. 880, 883

(W.D.Wash.1960), aff’d sub nom. First Federal Sav. & Loan Ass'n

of Bremerton v. United States, 295 F.2d 481 (9th Cir.1961) (drawing

distinction between “agreement to lease” and “lease”); Feeley v.

Michigan Ave. Nat’l Bank, 141 Ill.App.3d 187, 95 Ill.Dec. 542, 490

N.E.2d 15, 18 (Ill. App. 1986) (“An agreement to lease is a contract

to formally execute a contract in the future for exclusive possession

of lands or tenements for a determinate period. . . . A lease is generally

defined as a contract for exclusive possession of lands, tenements or

hereditaments for life, for a term of years, or at will, or for any interest

(Cont'd)

15a

Appendix B

Under the statutory canons outlined above, this court

must presume that Congress was aware of this common

law distinction in enacting the Reform Act. But, .n fact,

there is evidence that Congress actually appreciated this

distinction — evidence that is found, interestingly enough,

in the text of two prior acts that phased out the investment

tax credit for a time. In 1966, for example, Congress

suspended the credit for “suspension period property,”

but excluded from that category property acquired “pursuant

(Cont’d)

less than that of the lessor, usually for a specified rent of

compensation.”); Byrd Cos., Inc. v. Birmingham Trust Nat'l Bank,

482 So.2d 247, 253 (Ala. 1985) (drawing distinction between “lease”

and “agreement to lease” in applying recording statute); Jarget Stores,

Inc. v. Twin Plaza Co., 153 N.W. 2d 832, 840 (1967) (drawing the

same distinction and indicating that “[t]he fact that a document covers

a building yet to be constructed implies that the transaction is at

most an agreement to lease rather than a lease”), Motels of Maryland,

Inc. v. Baltimore County, 223 A.2d 609, 612 (Md.1966)

(distinguishing between a “contract to lease” and “lease”); Zook v.

Zook, 11 Pa. D. & C. 203 (1928) (citing cases from the 1800s and

noting that a lack of “present words of demise” distinguishes a lease

from “merely an agreement to lease”). Plaintiff notes that a few

treatises and cases use the phrase “agreement for lease,” rather than

“agreement to lease,” suggesting thereby that the phrase “agreement

to lease” is not a well-accepted term of art. See, e.g., John N. Taylor,

The American Law of Landlord and Tenant 81 (1879) (referring to

an “agreement for a lease”). In the court’s view, however, the

numerous treatises and cases cited above demonstrate to the contrary.

Moreover, it is telling that plaintiff has not cited a single case at

common law in which a court has construed any of the relevant

phrases — “agreement to lease,” “contract to lease” and “agreement

for lease” — to be synonymous with the term “lease.”

16a

Appendix B

to a binding lease or contract to a binding lease or contract

in effect on October 9, 1966.” Tax Reform Act of 1966,

26 U.S.C. § 48(h)(8) (1966) (emphasis added). Similarly, in

1969, when it terminated the credit (only to reenact it

three years later), Congress continued the credit for

“pre-termination property,” defined as property acquired

“pursuant to a binding lease or contract to lease in effect

on April 18, 1969.” Tax Reform Act of 1969, 26 U.S.C.

§ 49(b)(6) (1969) (emphasis added). The language and

structure of these provisions belie any notion that Congress

believed either that the phrases “leases” and “contract to

lease” were synonymous or that the latter phrase somehow

incorporated the former. Rather, when, in 1966 and 1969,

Congress wanted to include both concepts in a transitional

provision, it did so quite explicitly and alternatively.

To conclude, as plaintiff does, that the phrase “contract to

lease” covers a “lease” is blithely to assume that Congress’

use of the latter term in these earlier provisions was

gratuitous. Such a conclusion, however, would violate the

canon, highlighted above, that “a legislature is presumed to

have used no superfluous words. Platt v. Union Pacific R.R.

Co., 99 U.S. 48, 52 (1878).° Indeed, because in phasing out

9. Such a conclusion also would be inconsistent with the

legislative history of the 1969 act, which again evidenced an

understanding of the distinction between a “contract to lease” and a

“lease.” Thus, for example, in explaining the types of “pre-termination

property” that would not be subject to the credit repeal, the

accompanying Senate Report indicated that “neither the lessor nor

the lessee may receive any investment credit with respect to property”

where “property is leased after April 18, 1969 (other than pursuant

to a binding contract to lease entered into before April 19, 1969).”

S. Rep. No. 91-552, at 246 (1969), reprinted in 1969 U.S.C.C.A.N.

(Cont'd)

17a

Appendix B

the credit in 1966 and 1969, Congress apparently understood

the meaning and common law tradition of the words it

selected, it is reasonable to conclude that it had that same

basic understanding in mind when, in 1986, it passed the

Reform Act."

To be sure, “[c]anons of constructions need not be

conclusive,” the Supreme Court recently stated, “and are

often countered ... by some maxim pointing in a different

direction.” Circuit City Stores, Inc. v. Adams, 121 S. Ct. 1302,

1309 (2001). Yet, here, not only do all the canons harken to

the same conclusion, but there is further indication in section

(Cont'd)

2282. In recognizing that leases entered into after the effective date

could qualify for the credit if the lease derived from an agreement to

lease entered into before that date, the quoted language indicates

that Congress not only understood the common law distinction

between a “lease” and a “contract to lease,” but also knew that the

former type of agreement could spring from the latter.

10. Both tax-writing committees, in 1986, certainly were aware

that Congress had phased out the credit on two prior occasions.

Hearing testimony before those committees, leading up to the passage

of the 1986 Code, indeed, highlighted this fact. See Tax Reform

Proposals — VII: Hearing before Comm. on Finance, United States

Senate, 99th Cong. 120 (1985) (statement of Robert Mercer,

Chairman and Chief Executive Officer, Goodyear Tire & Rubber Co.)

(discussing the earlier phaseouts); Comprehensive Tax Reform, Part

VI: Hearings before House Comm. on Ways and Means, 99th Cong.

5390, 5407-08 (1985) (statement of David I. Margolis, Chairman of

the Board, Colt Industries, Inc.) (same). See also Congressional

Budget Office, Congress of the United States, Revising the Corporate

Income Tax 19-21 (1985) (report to Congress discussing the history

of the investment credit, including the two phaseouts).

18a

Appendix B

204(a)(7) itself that Congress understood the distinction

between a lease and an agreement to lease. Thus, while, as

discussed above, in subparagraph (B), the “world

headquarters” exception applied to “an agreement to lease

entered into before September 26, 1985,” the statute also

indicated, in the last sentence of paragraph (7), that the same

exception would apply where “the lessee is obligated to lease

under a lease entered into on June 18, 1986.” § 204, 100

Stat. at 2155 (emphasis added). If, as plaintiff claims, a

“lease” is an “agreement to lease” then why, in a single

statutory paragraph, did Congress employ both phrases? Were

plaintiff correct, Congress presumably would have used one

phrase or the other in both places, paralleling the language

in section 204(a)(7)(B) with that in the last sentence of

paragraph (7). But it did not, choosing instead to employ

different language and bringing into play yet another rule of

statutory construction, to wit, that when different words are

used in the same provision they are presumed to have a

different meaning. See Russello v. United States, 464 U.S.

16, 23 (1983)." In this court’s view, this canon of construction

is fully applicable here, revealing the last sentence of section

204(a)(7) to be further evidence that Congress did not intend ©

the phrase “agreement to lease” to include a “lease.”

11. See also Hecht Co. v. Bowles, 321 U.S. 321, 326-27 (1944);

Lindsey v. Tacoma-Pierce County Health Dep t, 195 F.3d 1065, 1074

(9th Cir.1999); United States v. Maria, 186 F.3d 65, 71 (2d Cir.1999).

See generally 2A Sutherland Statutory Construction § 46.06 (“[W]hen

the legislature uses certain language in one part of the statute and

different language in another, the court assumes different meanings

were intended.”).

12. Notably, as originally introduced, section 204(a)(7) used

the term “lease” and only later was amended to substitute the phrase

(Cont'd)

19a

Appendix B

Still, without a specific statutory definition of the phrase

“agreement to lease,” there arguably is enough ambiguity in

the clause “is obligated to lease under an agreement to lease”

to warrant reference to the statute’s legislative history.

See Robinson v. Shell Oil Co., 519 U.S. 337, 340 (1997).

(Cont'd)

“agreement to lease.” Compare H.R. 3838, 99th Cong., 1st Sess.

(1985) ( “such lessee is obligated to lease the building under a lease

entered into before September 26, 1985 ...”) (emphasis added);

H.R. 3838, 99th Cong., 2d Sess. (1986) (same) with the Reform Act

(“such lessee is obligated to lease the building under an agreement

to lease entered into before September 26, 1985 ...”) (emphasis

added). Such an amendment, of course, would have been unnecessary

had Congress viewed the terms “agreement to lease” and “lease” as

interchangeable. Indeed, other language in section 204(a)(7)(C)

suggests that the statute was intended to cover only a company that

had obligated itself to lease a building in the future, but had not yet

occupied the structure. Thus, for example, the statute provides that

the buildings to be leased “are to serve” as a world headquarters.

This language is in a form of the future tense and ordinarily would

not be understood to encompass property already serving as a

headquarters — were the latter intended, Congress would have simply

used the word “serves.” See Charles Darling, Guide to Grammar

and Writing, at http://ccc.commnet.edu/grammar/tenses/simple

future.htm (last modified 2001) (“The construction form of to be +

infinitive is used to convey a sense of planning for the future,

command, or contingency.”); Anthony Hughes, The Online English

Grammar, at http://www.edufind.com/english/grammar/tenses2 1 .cfm

(last modified 2001) (“This form refers to an obligation to do

something at a time later than now.”). Indeed, at least two courts

have observed that the “are to serve” language is “prospective,”

suggesting that it refers to a building that, as of the effective

date of the transitional rule, was not yet being used as a world

headquarters. See Kjellstrom, 916 F. Supp. at 907; Payless Cashways,

114 T.C. at 79.

20a

Appendix B

While that legislative history does not specifically define the

phrase in question, it does strongly suggest that Congress

intended the transitional rules to have a narrow application.

Consistent with that history, the courts have generally

observed that the transition rules of the Relief Act were

enacted to provide relief “to a very, very few specified favored

taxpayers,” Apache Bend, 987 F.2d at 1175. See also

Commonwealth Energy Sys., 235 F.3d at 16; Airborne Freight

Corp. v. United States, 153 F.3d 967, 970 (9th Cir. 1998),

cert. denied, 526 U.S. 1112 (1999). As discussed below,

section 204(a)(7) proves no exception to this observation,

as various aspects of its legislative history indicate that it

had, at most, two intended beneficiaries — the firms Merrill

Lynch and Drexel Burnham Lambert.

House Resolution 3838, which contained the original

draft of what ultimately became section-204(A)(7), was

passed by the House of Representatives on December 16,

1985. On December 9, 1985, prior to passage, Representative

Newt Gingrich from Georgia spoke on the floor of the House,

railing against the “giveaways” created by the transitional

rules and specifically citing Merrill Lynch as the intended

beneficiary of the transitional rule applicable to the world

headquarters exception. See 131 Cong. Rec. 35,285 (1985).

Subsequent to its passage by the House, H.R. 3838 was

referred to the Senate Finance Committee on May 29, 1986.

- On June 10, 1986, the Committee published in the

Congressional Record the identities of the intended

beneficiaries of the various transitional rules relating to the

repeal of the investment tax credit, indicating therein, again,

that Merrill Lynch was the sole intended beneficiary of the

world headquarters transitional rule. See 132 Cong. Rec.

2la

Appendix B

13,090 (1986). On June 17, 1986, the proposed investment

credit transitional rules were assailed again, this time by

Senator Howard Metzenbaum from Ohio, who, in

successfully moving an amendment to limit the transition

rules, again identified Merrill Lynch as the beneficiary of

the provision in question. See 132 Cong. Rec. 14,113 (1986).

Finally, on September 27, 1986, after the Senate had passed

its version of the Reform Act, and the Conference Committee

had issued its report modifying the bill, the Senate, at Senator

Metzenbaum’s behest, entered into the Congressional Record

the intended beneficiaries of the transitional rules cross-

referenced to the page of the Conference Report on which

the particular rule was listed. Two entries in this listing reflect

that Merrill Lynch was the intended beneficiary of section

204(a)(7)(A)-(C), and Drexel Burnham Lambert the

beneficiary of the flush language in section 204(a)(7) added

by the Conference Committee. 132 Cong. Rec. 26,638-40

(1986).'°

13. To reach this conclusion requires a bit of deductive logic.

As recounted in Kjellstrom, 916 F. Supp. at 905-06, the Congressional

Record, in a list entitled “ACRS/ ITC: RULES IN HOUSE BILL

AND HOUSE AND SENATE BILLS,” indicates that Merrill Lynch,

Sonat Offshore Drilling, Kern River Pipeline and Tri-Cities Sewage

were the beneficiaries of the rules listed on page I-75 of the

conference report. 132 Cong. Rec. 26,638-39(1986). Four transitional

rules were quoted on page I-75 — the world headquarters transition

rule, and rules pertaining to submersible drilling units, natural gas

pipelines and waste or sewage treatment plants. Accordingly, it may

readily be deduced that the world headquarters rule applied only to

Merrill Lynch, while the other rules focused on the other three

companies — a submersible drilling company, a gas pipeline company

and a sewage treatment company. A second list in the Congressional

Record, entitled “NEW HOUSE AND SENATE oT ware)

ont’

22a

Appendix B

Now, of course, plaintiff is neither Merrill Lynch nor

Drexel Burnham Lambert, and, despite the legislative

history recited above, the court does not deem that fact

dispositive. Clearly, Congress could have passed a provision

intended to benefit one or two taxpayers and incidentally

benefitted others. But, the legislative history outlined

above does indicate that Congress intended the world

headquarters exception to be limited.'* By contrast, plaintiff’s

interpretation of that rule has an exceedingly broad berth.

For example, under its reading of the statute, the credit would

(Cont’d)

RULES-FINAL LIST” and subtitled “ACRS/ITC,” lists the “Drexel

Burnham Office Building” as an additional beneficiary of the

Conference Committee version of the bill. 132 Cong. Rec. 26,640

(1986). That version of the bill added the last sentence of section

204(a)(7), see footnote 12, supra, leading the court to conclude that

the flush language in that section was intended to benefit Drexel

Burnham Lambert.

14. To be sure, the Supreme Court has “eschewed reliance on

the passing comments of one Member ... and casual statements from

the floor debates.” Garcia v. United States, 469 U.S. 70, 76 (1984)

(citations omitted). Here, however, we are faced not with a single,

idle statement, but rather a pattern of statements — and one that is

consistent not only with the Conference Committee Report’s emphasis

on the narrow scope of the transition rules, but also the statute’s

language itself. Accordingly, in this court’s view, these statements

of individual members are an accurate gauge of Congressional intent.

See Grove City College v. Bell, 465 U.S. 555, 566-67 (1984);

Kjellstrom, 916 F. Supp. at 906. See also 2A Sutherland Statutory

Construction, § 48.13 (“The statements of individual legislators . . .

can be given effect if they are consistent with statutory language and

other legislative history which justifies reliance upon them as

evidence of legislative intent.”).

23a

Appendix B

be extended to a taxpayer that had leased its corporate

headquarters in 1969, during the period in which the Congress

had suspended the investment tax credit; or in 1959, prior to

the credit’s initial passage; or even 1899, prior to the passage

of the modern income tax.'* In fact, plaintiff’s interpretation

would reach any taxpayer that was the original lessor of

property, no matter how “old and cold” their lease, provided

that lease was entered into some time between the beginning

of time and September 25, 1986. Moreover, under plaintiff’s

view, Congress extended the credit to all these lessors of

world headquarters, many of whom would have entered into

their original leases prior to the investment tax credit even

existing, while providing no transitional relief to other

taxpayers who clearly had relied on the existence of the credit

in making investment decisions and thus had much more

compelling cases for relief — those who, for example, before

the effective date of the repeal, carefully factored in the

impact of the credit in choosing to purchase (rather than lease)

a headquarters or to purchase or lease some other type of

building. As such, plaintiff’s interpretation of the transition

rule would ascribe to Congress the logic-chopping intent of

rewarding the unwitting, while shortchanging the witting.

While, as Mr. Justice McReynolds once stated, “[l]ogic

and taxation are not always the best of friends,” Sonneborn

Bros. v. Cureton, 262 U.S. 506, 522 (1923), this court is loathe

to attribute to Congress such an anomalous, yet sweeping,

15. At oral argument, the court posed to plaintiff’s counsel a

series of hypotheticals, asking whether, under plaintiff’s theory, the

exception would apply to leases executed in the years indicated in

the text (i.e., 1969, 1959 and 1899). In each instance, plaintiff’s

counsel unabashedly answered that it would.

24a

Appendix B

approach, without the flimsiest of textual support, and

especially in the face of a contrary conference report, which

clearly indicates that the “special transitional rules” are “of

limited application.” H.R. Conf. Rep. No. 99-841, at I-62

(1986), reprinted in 1986 U.S.C.C.A.N. 4075, 4150.'°

16. Striving for evidence to support its claim that Congress used

the terms “lease” and “agreement to lease” interchangeably, plaintiff

latches onto a portion of the legislative history of section 204(a)(3)

of the Reform Act, which provision, like section 204(a)(7), discussed

above, provided investment credit transitional relief to a taxpayer

subject to “an agreement to lease.” § 204, 100 Stat. at 2149. Plaintiff

finds it significant that the Conference Committee report describing

the “agreement to lease” language in section 204(a)(3) refers to it as

involving “lease agreements.” While this observation is true, see H.R.

Conf. Rep. No. 99-841, at II-59 to II-60 (1986), reprinted in 1986

U.S.C.C.A.N. 4075, 4147-48, it offers only empty solace to plaintiff,

as can be seen when the quoted language is read in context:

The bill provides transitional relief for certain situations

where written binding contracts require the construction

or acquisition of property, but the contract is not between

the person who will own the property and the person

who will construct or supply the property. This rule

applies to written service or supply contracts and

agreements to lease entered into before March 2, 1986

(January 1, 1986, in the case of the investment tax credit).

An example of a case to which this rule would apply

would be lease agreements under which a grantor trust

is obligated to provide property under a finance lease

(to the extent continued under the bill).

Id. This passage makes apparent not only that the report’s reference

to “lease agreements” is to an “agreement to lease,” but also that

Congress used the term “agreement to lease” in section 204(a)(3) in

a factual setting typical for that term — that is, where an individual

(Cont’d)

25a

Appendix B

This is not, as plaintiff claims, a matter of “undertaking to

put words into the statute that, whatever the reasons may

have been, Congress did not put there,” /nternational Trading

Co. v. Commissioner, 484 F.2d 707, 711 (7th Cir. 1973), but

rather of effectuating the words and intent of what the

Congress actually enacted. And on both these important

counts, NDC’s arguments fall short. Cf United States v.

Brown, 333 U.S. 18, 27 (1948) (“[nJo rule of construction

necessitates our acceptance of an interpretation resulting in

patently absurd consequerices’’).

To be sure, this conclusion — that the transition rule

applies only to parties obligated to lease under an “agreement

to lease,” but not a “lease” — has received a mix reception

in the courts, with one prior decision supporting this court’s

view, see United States v. Kjellstrom, 916 F. Supp. 902 (W.D.

Wis. 1996), aff'd on other grounds, 100 F.3d 482 (7th Cir.

1996), and two others, including one by the Ninth Circuit,

rejecting that conclusion, see Airborne Freight Corp. v.

United States, 153 F.3d 967 (9th Cir. 1998); Kimberly-Clark

Tissue Co. v. United States, 38 F. Supp. 2d 1028 (E.D. Wis.

1999). In the Ninth Circuit case, the defendant apparently

argued, as it did here, that:

the exception should apply to taxpayers who were

obligated to lease the building before September

(Cont’d)

agrees to lease in the future a building that has yet been constructed

or acquired. Accordingly, far from supporting plaintiff’s position,

this snippet from the legislative history of the Reform Act actually

constitutes further evidence that there is a real and meaningful

distinction between a “lease” and an “agreement to lease.”

26a

Appendix B

26, 1985, but had not leased the building by that

date. It also argued that, to qualify, the taxpayer

must have agreed to lease the entire building. If

these narrow constructions are not adopted,

according to the government, the purpose of the

exception will be frustrated: taxpayers who agreed

to lease and leased buildings decades before the

repeal of the investment credit will be entitled to

avail themselves of the transitional exception.

Airborne Freight, 153 F.3d at 970 (emphasis in original).

The Ninth Circuit, however, made short shrift of this

argument, stating:

The difficulty with the government’s argument is

that none of the words italicized in the previous

paragraph were written into § 204(a)(7). There is

no disqualification of those who executed leases

before September 26, 1985, and the government

offers no reason why the execution of a lease

creates a relevantly different condition from that

which existed under an agreement to lease. ...

We decline therefore to write the government’s

additional proposed restrictions into the statute

in order to confine the exception virtually to a

Class of one.

Id. Notwithstanding these comments, the court found that

the statute incorporated a “reasonable expectation” test,

indicating that “[w]e have no quarrel with the government’s

argument that, in light of its purpose, the exception should

be available only to those whose expectations at the time

27a

Appendix B

they undertook their obligations would otherwise be defeated

by the repeal of the investment credit.” Jd. The Ninth Circuit

found that while Airborne “qualifies . . . under such a guiding

principle,” “other companies that leased their world

headquarters decades ago” would not, concluding, on that

basis, that its decision was “not likely to open the floodgates.”

Id. at 970-71.

With all due respect, this court finds Ninth Circuit’s

reasoning faulty on several counts."’ First, the court of appeals

failed to recognize that adopting defendant’s position does

not require the statute to be augmented, but merely enforced,

by its terms. The case law outlined above reveals that there

is a fundamental difference between an “agreement to lease”

and a “lease” — a distinction apparently understood by the

Congress, but lost on the Ninth Circuit. Second, the Ninth

Circuit’s interpretation of the statute comports neither with

the ordinary rules of construction nor the relevant legislative

history. On this count, it is beyond peradventure that,

generally, the maxim that tax exceptions are construed

narrowly and, specifically, the legislative history of

this provision, both point toward the conclusion that Congress

intended this exception to apply to a select few.

See Commonwealth Energy Sys., 235 F.3d at 16. The Ninth

Circuit clearly betrayed that intent in eschewing a reasonable,

narrow construction of the statute in favor of an apocryphal,

yet broader version thereof. Finally, perhaps bothered by the

last point, the Ninth Circuit ultimately hinged its ruling on a

legal fiction — that section 204(a)(7) directly imposes a

17. The district court decision in Kimberly-Clark Tissue Co.,

supra, essentially adopted the same reasoning as the Ninth Circuit

and, in this court’s view, suffers from the same flaws.

28a

Appendix B

separate and distinct “reasonable expectation” requirement

— so that only taxpayers who met the statute’s express terms

and entered into transactions based upon the reasonable

expectation of receiving an investment tax credit should be

eligible. In this regard, it appears the Ninth Circuit is guilty

of the very sin that it wrongly accused the defendant of

committing — a bit of statutory joie de revision — minting

an eligibility requirement that has no antecedent in the

statute’s language.'* Adopting this “reasonable expectation”

principle, purportedly as a limitation on its ruling, actually

freed the appellate court to brush aside the obvious clash

between its sweeping interpretation and what Congress

intended.'* Thus, after careful analysis, this court respectfully

18. To be sure, in drafting the transition rules, Congress did

focus on taxpayers who had made economic decisions relying upon

the existence of the investment tax credit. But, it effectuated that

intent not directly, by imposing a separate reliance requirement in

the statute, but indirectly, by drafting eligibility requirements that

logically could be met only by taxpayers who had reasonably relied

upon the existence of the credit. In contrast, having construed that

statutory language broadly in a way that clearly defeated Congress’

intent, the Ninth Circuit then proceeded to reintroduce the reliance

concept as a separate and distinct nonstatutory gloss on its otherwise

broad interpretation.

19. On this point (and others), the court agrees with the district

court in Kjellstrom, which stated:

Nothing in the legislative history indicates that Congress

intended to provide an exemption for a// taxpayers who

had leased world headquarters buildings prior to 1985

and as early as 1974. To read the statute this broadly

would undermine Congress’s intent as it is evidenced in

the legislative history to the Tax Reform Act.

916 F.Supp. at 907.

29a

Appendix B

concludes that the Ninth Circuit’s opinion proves both too

little and too much. For this and the other reasons stated,

this court, therefore, respectfully rejects both the rationale

and conclusion reached in Airborne Freight and Kimberly-

Clark Tissue.

In sum, the text of the Reform Act, as illuminated by the

statute’s legislative history, the various statutory canons of

construction, and common law, forecloses the construction

of section 204(a)(7) urged by NDC. As such, this court

concludes that, with respect to the taxable years in question,

NDC did not meet section 204(a)(7)(B)’s requirement that a

taxpayer “is obligated to lease the building under an

agreement to lease entered into before September 26, 1985.”

§ 204, 100 Stat. at 2155. Therefore, it is not entitled to the

transition rule exception from the general repeal of the

investment tax credit.

III. Conclusion

For the foregoing reasons, the court concludes that

plaintiff is not entitled to the claimed investment tax credits.

Accordingly, the defendant’s motion for summary judgment

is GRANTED, and the plaintiff’s cross-motion for summary

judgment is DENIED. The Clerk shall dismiss the complaints

in Case Nos. 97-23 T and 97-580 T.

s/ Francis M. Allegra

Francis M. Allegra

Judge

30a

APPENDIX C — TAX REFORM ACT OF 1986

Tax Reform Act of 1986, Pub. L. No. 99-514, § 204(a)(7),

100 Stat. 2085, 2155 (1986).

CERTAIN LEASEHOLD IMPROVEMENTS — The

amendments made by section 201 shall not apply to any

reasonable leasehold improvements, equipment and

furnishings placed in service by a lessee or its affiliates if —

(A) the lessee or an affiliate is the original lessee of each

building in which such property is te be used,

(B) such lessee is obligated to lease the building

under an agreement to lease entered into before

September 26, 1985, and such property is provided

for such building, and

(C) such buildings are to serve as world headquarters

of the lessee and its affiliates.

For purposes of this paragraph, a corporation is an affiliate

of another corporation if both corporations are members of

a controlled group of corporations within the meaning of

section 1563(a) of the Internal Revenue Code of 1954 without

regard to section 1563(b)(2) of such Code. Such lessee shall

include a securities firm that meets the requirements of

subparagraph (A), except the lessee is obligated to lease the

building under a lease entered into on June 18, 1986.

i aeeeeeieiinemeeeiiiinaiiadiiiaiiiéillib