Opposition Brief — Aeroquip-Vickers, Inc. v. Commissioner

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No. 03-1449

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Jn the Supreme Court of the Giuted States

AEROQUIP-VICKERS, INC. AND SUBSIDIARIES, FKA

TRINOVA CORPORATION AND SUBSIDIARIES,

PETITIONERS

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

THEODORE B. OLSON

Solicitor General

Counsel of Record

EILEEN J. O'CONNOR

Assistant Attorney General

RICHARD FARBER

FRANK P. CIHLAR

Attorneys

Department of Justice

Washington, D.C. 20520-0001

(202) 514-2217

JUN 1 8 2004

Nt ee

i

eS A

QUESTION PRESENTED

Whether the court of appeals correctly applied de

novo review to determine whether the Tax Court erred

in refusing to give deference to an Internal Revenue

Service (IRS) Revenue Ruling interpreting an IRS

regulation.

Bt ee OT) ee i - IS — — —_—— LLL LDL LLL LEAL LALLA AAALAC a _ —— a

TABLE OF CONTENTS

Page

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TABLE OF AUTHORITIES

Cases:

ABKCO Indus., Inc. v. Commissioner, 482 F.2d

Sa, cs ssansuiuinbiitesnnelnnncenmnennenie 8

AMERCO, Inc. v. Commissioner, 979 F.2d 162

SE EI CLE TC s

Adarand Constructors, Inc. v. Mineta, 534 U.S.

i ceslninebounb nae 6

Adickes v. S.H. Kress & Co., 398 U.S. 144 (1970) ............ 6

Best Life Assurance Co. v. Commissioner,

Be ee NN te IED sncencitnnsecsitenssssesevnssosrecocsccsconssese 8

Christensen v. Harris County, 529 U.S. 576

ia i cae ninasnnanton 4

Commissioner v. Duberstein, 363 U.S. 278 (1960) .......... 7

Custom Chrome, Inc. v. Commissioner, 217 F.3d

I sss canes hiinancaneicenine 8

Estate of Caporella v. Commissioner, 817 F.2d 706

I a calibelintienignaniet 8

Exacto Spring Co. v. Commissioner, 196 F.3d 833

I a a. ssaahesisbiistennipsebanabineneons 8

Geisinger Health Plan v. Commissioner, 985 F.2d

I i sass cnsisiennsmnbnnnnabtcnstie 8

Graham v. Commissioner, 822 F.2d 844 (9th Cir.

os nsbiedaisbaeibibaanebenes 8

Hackl v. Commissioner, 225 F.3d 664 (7th Cir.

a a ataiapnaliainiaiacith &

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IV

Cases—Continued: Page

Horton v. Commissioner, 33 F.3d 625 (6th Cir.

RENE ee SD ee Lee ee Te ee ee %

InverWorld, Ltd. v. Commissioner, 979 F.2d 868

Cig Hein RO :ciskishiacsiesis chided catantiaehsacabcgea titanic x

Madison Recycling Assocs. v. Commissioner,

ee ee ar ED siniccacnarscrnsesidesctereatiostntiarmrnorssie &

Magneson v. Commissioner, 753 F.2d 1490

GE Ns SION scctinssnieeteccatchsdurcdliaaissdanansiiaastanacidiieansiinilldsnscatsnianinanite 8

Salomon, Inc. v. United States, 976 F.2d 837 (2d

ae 3-4, 6

Skidmore v. Swift & Co., 323 U.S. 134 (1944) eens 4

Smith v. Commissioner, 926 F.2d 1470 (6th Cir.

ED iii inden ccna inert celica Iai 8

United States v. Cleveland Indians Baseball Co.,

Re Sis SUED ciicicraciaciicroiesnrseatcniicectaniamabsinneneieiinaaepans 4

United States v. Lovasco, 431 U.S. 783 (1977) .......ccccecseee 6

United States v. Mead Corp., 533 U.S. 218 (2001) ........... 4

Vukasovich, Inc. v. Commissioner, 790 F.2d 1409

rs UID saicensecicdcapeneicticaticii icant aa a aaa 8

Yarbro v. Commissioner, 737 F.2d 479 (5th Cir.

RI ERE SATE AO EMR ENE mE REPEAL OER ROT OT 8

Walt Disney, Inc. v. Commissioner, 4 F.3d 735

(9th Cir. 1998) ......0-. Pade DMA CON Lee A te ROO 3,6

Wisniewski v. United States, 353 U.S. 901 (1957) ........... 9

Zobrest v. Catalina Foothills Sch. Dist., 509 U.S. 1

| RNR Ske ee NES Re RE OE Se es NRA OREN DAI 6

Statutes and regulation:

Internal Revenue Code (26 U.S.C.):

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Miscellaneous: Page

Rev. Rul. 82-20, 1982 C.B. 6

SOOPER EEE E HEHEHE TEE EHEEE EEE EEE EE ES

In the Supreme Court of the Anited States

No. 03-1449

AEROQUIP-VICKERS, INC. AND SUBSIDIARIES, FKA

TRINOVA CORPORATION AND SUBSIDIARIES,

PETITIONERS

Vv.

COMMISSIONER OF INTERNAL REVENUE

ON PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

BRIEF FOR THE RESPONDENT IN OPPOSITION

OPINIONS BELOW

The opinion of the court of appeals (Pet. App. la-40a)

is reported at 347 F.3d 178. The opinion of the Tax

Court (Pet. App. 42a-67a) is reported at 108 T.C. 68.

JURISDICTION

The judgment of the court of appeals was entered on

October 20, 2003. A petition for rehearing was denied

on January 21, 2004 (Pet. App. 41a). The petition for a

writ of certiorari was filed on April 19, 2004. The juris-

diction of this Court is invoked under 28 U.S.C. 1254(1).

(1)

- eee | ee - yy

STATEMENT

1. Under former Section 38 of the Internal Revenue

Code, 26 U.S.C. 38 (1982), a taxpayer who acquired

certain property for use in its trade or business (Section

38 property) was allowed an investment tax credit

(ITC) calculated by reference to the property’s useful

life. To ensure accurate estimation of a property’s

useful life, former Section 47(a)(1) required that the

taxpayer “recapture” or repay the ITC if the taxpayer

disposed of Section 38 property before the end of its

estimated useful life. Section 1.1502-8(f)(3) of the

Treasury Regulations, promulgated by the Internal

Revenue Service (IRS), creates an exception to this

rule for transfer of Section 38 property between mem-

bers of a consolidated group. 26 C.F.R. 1.1502-3(f)(3).

Thus, Example 5 of 26 C.F.R. 1.1502-3(f)(3) indicates

that no recapture is required if Section 38 property is

transferred to a consolidated subsidiary, and the sub-

sidiary’s shares are subsequently sold to a third party

in a different tax year. In Revenue Ruling 82-20, how-

ever, the Commissioner of Internal Revenue deter-

mined that ITC recapture is required if there is no

intention at the time the transfer occurs to keep the

Section 38 property within the consolidated group. See

Rev. Rul. 82-20, 1982-1 C.B. 6.

2. In 1986, petitioner Aeroquip-Vickers, Inc. (for-

merly known as Trinova Corporation) transferred Sec-

tion 38 property to a wholly-owned subsidiary with

which it filed a consolidated tax return. Pet. App. la-

2a. Immediately thereafter, petitioner distributed the

stock of the subsidiary to one of its shareholders, thus

causing the subsidiary and the Section 38 property to

leave the consolidated group. Jd. at 2a, 3a-4a.

Although the Section 38 property was not at the end of

3

its useful life, petitioner did not report any recaptured

ITC on its tax returns. /d. at 2a. Rather, relying on

Example 5 of 26 C.F.R. 1.1502-3(f)(3), petitioner

claimed that the transfer of Section 38 property oc-

curred within a consolidated group and was not subject

to the recapture rule. The Commissioner disagreed and

asserted a deficiency against petitioner for its failure to

include recaptured ITC in its 1986 consolidated tax

return. Pet. App. 2a.

3. Petitioner sought a redetermination of the defi-

ciency in the United States Tax Court, which concluded

that petitioner was not required to recapture any ITC.

Pet. App. 42a-67a. The Tax Court reasoned that under

Example 5 of 26 C.F.R. 1.1502-3(f)(3) “the mere trans-

fer of section 38 assets within a consolidated group does

not trigger recapture,” and the subsequent “transfer of

stock” of the consolidated subsidiary to a third party

also “would not trigger the recapture of such credit.”

Pet. App. 47a, 48a.

The Tax Court rejected the Commissioner’s argument

that recapture was required under Revenue Ruling 82-

20. Pet. App. 48a. In its view, the Revenue Ruling had

no force because it was in “conflict” with “Example (5)

of the regulations.” Jd. at 52a. The Tax Court

acknowledged (id. at 53a) that its interpretation of

Revenue Ruling 82-20 was inconsistent with decisions

of the Second and Ninth Circuits, both of which

interpret Revenue Ruling 82-20 as applying when

Section 38 property is transferred to a subsidiary with

the intent to make a subsequent transfer of the sub-

sidiary to a third party, whereas 26 C.F.R. 1.1502-

3(f)(3) applies when the transactions are sufficiently

separated in time as to demonstrate the absence of such

intent. See Walt Disney, Inc. v. Commissioner, 4 F.3d

735 (9th Cir. 1993); Salomon, Inc. v. United States,

Tee ee rete ee mnre = ae-

4

976 F.2d 837 (2d Cir. 1992). The Tax Court “disagree[d]

with both the result and reasoning of the Courts of

Appeals” and asserted that “the fact that the transfer

of the assets and the transfer of the stock occurred in

the same, rather than different, taxable years does not

provide a meaningful basis for distinguishing Rev. Rul.

82-20 * * * from Example (5) of the regulations.” Pet.

App. 52a.

In addition, the Tax Court concluded that recapture

was not required under the “step transaction” doctrine.

Under this doctrine, multiple transactions are treated

as a single event for tax purposes if the taxpayer

devises th transactions as part of a single plan. Pet.

App. 58a-54a. The court reasoned that the step trans-

action doctrine did not apply because each of peti-

tioner’s transactions had a legitimate business purpose.

Ibid.

4, The court of appeals reversed. Pet. App. la-40a.

The court initially observed that Revenue Ruling 82-20

was not automatically entitled to deference in light of

this Court’s decisions in Christensen v. Harris County,

529 U.S. 576, 587 (2000), and United States v. Mead

Corp., 588 U.S. 218, 226-227 (2001), which held that

agency interpretations that “lack the force of law” are

entitled to deference “only to the extent that those

interpretations have the ‘power to persuade.” Pet.

App. 12a, 14a (quoting Skidmore v. Swift & Co., 323

U.S. 134, 140 (1944)). The court of appeals nonetheless

concluded that “the underlying rationale of Revenue

Ruling 82-20 is valid, ‘reflects the agency’s longstanding

interpretation of its own regulations,’ and thus de-

serves ‘substantial judicial deference.’” Jd. at 15a

(quoting United States v. Cleveland Indians Baseball

Co., 582 U.S. 200, 220 (2001)). The court of appeals

dismissed the contention that Revenue Ruling 82-20

5

was inconsistent with Example 5 of 26 C.F.R. 1.1502-

3(f)(3), holding that the regulation “involves a situation

where the asset transfer occurs in one year and the

spin-off takes place in the following year, while Reve-

nue Ruling 82-20 applies to situations where (as in the

instant case) the asset transfer is ‘immediately’ fol-

lowed by the spin-off.” Pet. App. 14a-15a. Finally, the

court concluded that the Commissioner properly ap-

plied the step transaction doctrine. The court reasoned

that “although the individual steps of the transaction

had a legitimate business reason, the transaction must

be treated as a single unit and judged by its end result,”

in this case an attempt to avoid liability for ITC

recapture. /d. at 17a-18a.

Judge Clay dissented. He concluded that the major-

ity had erroneously deferred to the Commissioner (Pet.

App. 19a-24a), and that Revenue Ruling 82-20 was

“inconsistent with § 1.1502-3(f)(2)(i) because the trea-

sury regulation focuses on making the transferee re-

sponsible for the Section 38 property, whereas the

Revenue Ruling looks to the ‘intent’ of the parties i in

the consolidated group.” Jd. at 32a.

ARGUMENT

Petitioner argues only that the court of appeals erred

in failing to defer to the Tax Court and asks this Court

to decide whether “the Tax Court is due some level of

respect beyond that of a district court” by virtue of its

“special expertise * * * in interpreting the tax laws of

the United States.” Pet. 10, 11. Petitioner, however,

failed to advance that argument in the court of appeals.

In addition, the court of appeals correctly applied the de

novo standard of review, and its decision does not

conflict with any decision of this Court or any other

6

court of appeals. Further review is therefore not war-

ranted.

1. Petitioner failed to argue in the court of appeals

that Tax Court decisions should be accorded some

special deference. To the contrary, petitioner and the

government agreed that courts of appeals should

review Tax Court decisions on questions of law de novo.

See Pet. C.A. Br. 16 (“The Tax Court’s findings of fact

are thus reviewed for clear error and its application of

law is reviewed de novo.”); Gov’t C.A. Br. 26 (“The Tax

Court’s holding presents a question of law that this

court reviews de novo.”). Petitioner’s rehearing peti-

tion similarly failed to raise any question about the

applicable standard of review. Accordingly, whether a

Tax Court decision is entitled to some special deference

is not a question preserved for this Court’s review. See

Adarand Constructors, Inc. v. Mineta, 534 U.S. 103,

109 (2001); Zobrest v. Catalina Foothills Schoo! Mst.,

509 U.S. 1, 8 (1993); United States v. Lovasco, 431 U.S.

783, 788 n.7 (1977); Adickes v. S.H. Kress & Co., 398

U.S. 144, 147 n.2 (1970).

2. In addition, there is no conflict among the courts

of appeals that would warrant this Court’s review.

With respect to the primary legal issue decided below,

the courts of appeals uniformly hold that Revenue Rul-

ing 82-20 is a reasonable interpretation of the relevant

statute and regulations that applies when the initial

transfer within the consolidated group is made with the

intention of subsequently transferring the property

outside the consolidated group. See Pet. App. 14a-15a;

Salomon Inc. v. United States, 976 F.2d 887, 841 (2d

Cir. 1992) (holding that Revenue Ruling 82-20 is not

“unreasonable, nor inconsistent with prevailing law”);

Walt Disney v. Commissioner, 4 F.3d 735, 741 (9th Cir.

1993) (holding that “Revenue Ruling 82-20 and Exam-

7

ple 5 of the Consolidated Return Regulations are not

inconsistent because they address different situations”).

The secondary issue petitioner identifies—the stan-

dard of review that courts of appeals should apply when

reviewing a Tax Court decision (Pet. 8-13)—was cor-

rectly decided by the court of appeals and does not

implicate a meaningful conflict among the circuits.

a. The applicable standard of review is clearly

defined in Section 7482(a)(1) of the Internal Revenue

Code (26 U.S.C.):

The United States Courts of Appeals * * * shall

have exclusive jurisdiction to review the decisions of

the Tax Court * * * inthe same manner and to the

same extent as decisions of the district courts in

civil actions tried without a jury.

Petitioner thus errs in asserting that “the Tax Court is

due some level of respect beyond that of a district

court.” Pet. 10. Section 7482(a)(1) plainly bars such

heightened “respect” by mandating that courts of

appeals review Tax Court decisions “in the same man-

ner” and “to the same extent” as district court deci-

sions. 26 U.S.C. 7482(a)(1) (emphasis supplied). In-

deed, this Court long ago noted that the very “purpose”

of Section 7482 was “to remove from the law the

favored position (in comparison with District Court and

Court of Claims rulings in tax matters) [previously]

enjoyed by the Tax Court.” Commissioner v. Duber-

stein, 363 U.S. 278, 291 n.13 (1960).

b. Contrary to petitioners’ claim (Pet. 10-11), the

Second, Third, Fifth, Sixth, Seventh, Eleventh, and

D.C. Circuits consistently review Tax Court decisions

de novo, although they employ varying verbal formula-

8

tions in doing so.” While the Ninth Circuit has ob-

served that Tax Court opinions may be “entitled to

respect because of its special expertise in the field,”

Magneson v. Commissioner, 753 F.2d 1490, 1493 (9th

Cir. 1985), more recent decisions from that Circuit

confirm that it conducts a de novo review. See Graham

v. Commissioner, 822 F.2d 844, 848 (9th Cir. 1987).

That court, indeed, has observed that “(t]he frequent

recitations of special deference are apparently muta-

tions that this court has ignored when we disagree with

the Tax Court. * * * To the extent that expressions of

deference in reviewing questions of law are harmless

honorifics among fellow judges, they waste ink. To the

extent that they sow confusion, they are best ignored.”

Vukasovich, Inc. v. Commissioner, 790 F.2d 1409, 1413

(9th Cir. 1986). See Best Life Assurance Co. v.

Commissioner, 281 F.3d 828, 830 (9th Cir. 2002) (“[Wle

give no special deference to the Tax Court’s deci-

sions.”); Custom Chrome, Inc. v. Commissioner, 217

F.3d 1117, 1121 (9th Cir. 2000) (same); AMERCO, Inc.

v. Commissioner, 979 F.2d 162, 164 (9th Cir. 1992)

(same). In any event, to-the extent the Ninth Circuit’s

precedent may not be entirely uniform on this subject, a

* Madison Recycling Assocs. v. Commissioner, 295 F.3d 280,

285 (2d Cir. 2002) (no deference); Geisinger Health Plan v. Com-

missioner, 985 F.2d 1210, 1212 (3d Cir. 1993) (review plenary);

ABKCO Indus., Inc. vy. Commissioner, 482 F.2d 150, 155 (8d Cir.

1973) (same); Yarbro v. Commissioner, 737 F.2d 479, 483 (5th Cir.

1984) (independent analysis); Horton v. Commissioner, 33 F.3d

625, 627 (6th Cir. 1994) (de novo review); Smith v. Commissioner,

926 F.2d 1470, 1474 (6th Cir. 1991) (same); Hackl v. Commissioner,

335 F.3d 664, 666 (7th Cir. 2003) (no special deference); Exacto

Spring Corp. v. Commissioner, 196 F.3d 833, 838 (7th Cir. 1999)

(same); Estate of Caporella v. Commissioner, 817 F.2d 706, 708

(11th Cir. 1987) (de novo review); InverWorld, Ltd. v. Commis-

stoner, 979 F.2d 868, 875-876 (D.C. Cir. 1992) (de novo review).

9

conflict among decisions of the same court of appeals is

a matter properly resoived by that court. Wisniewski

v. United States, 353 U.S. 901, 902 (1957) (“It is pri-

marily the task of a Court of Appeals to reconcile its

internal difficulties.”).

3. Review is also unwarranted in this case because

resolution of the question presented would not affect

the judgment below. The court of appeals’ decision is

supported by an alternative ground that the petition

does not appear to challenge, namely the court’s deter-

mination that the “step transaction doctrine” is appli-

cable in this case. Pet. App. 15a-18a. Thus, the result

would be the same even under petitioner’s newly as-

serted view of the law.

CONCLUSION

The petition for a writ of certiorari should be denied.

Respectfully submitted.

THEODORE B. OLSON

Solicitor General

EILEEN J. O'CONNOR

Assistant Attorney General

RICHARD FARBER

FRANK P. CIHLAR

Attorneys «

JUNE 2004