The Eighth Circuit Improperly Defers to a Statutory Interpretation Put Forth by the Internal Revenue Service in Thom v. United States

• Publication year: 2001

36 Creighton L. Rev. 93. THE EIGHTH CIRCUIT IMPROPERLY DEFERS TO A STATUTORY INTERPRETATION PUT FORTH BY THE INTERNAL REVENUE SERVICE IN THOM V. UNITED STATES

Creighton Law Review

Vol. 36

"When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean - neither more nor less."

"The question is," said Alice, "whether you can make words mean so many different things."

"The question is," said Humpty Dumpty, "which is to be master - that's all."(fn1)

INTRODUCTION

In 1934, Judge Learned Hand expressed an important principle in regard to the United States income tax when he stated:

A transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade, taxation. Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes.(fn2)

As Judge Hand made clear, United States taxpayers owe no duty to pay even one penny more than they actually owe.(fn3) In contrast, the Internal Revenue Service ("IRS"), with the assistance of a judiciary that often gives great deference to IRS regulatory interpretations, works to zealously guard the government's "rightful" share of taxpayers' incomes.(fn4) These two competing motives often give rise to litigation concerning the amount of income that taxpayers must share with the government.(fn5)

In Thom v. United States,(fn6) the United States Court of Appeals for the Eighth Circuit reviewed the IRS's interpretation of 26 U.S.C. § 453(l)(2)(A)(fn7) in the United States Tax Code; specifically, the court reviewed the phrase "used or produced in the trade or business of farming" as it relates to sales of property qualifying for the installment method of accounting ("installment method").(fn8) In Thom, the taxpayers' subchapter 'S' corporation, T-L Irrigation ("T-L"), used the installment method to report its sales of center pivot irrigation systems made directly to farmers where the farmers had paid for the systems over a period of time lasting two years or more.(fn9) T-L had elected to use the installment method based on its belief that under the plain meaning of § 453(l)(2)(A), center pivot irrigation systems clearly qualified as equipment used in the business of farming.(fn10) The IRS denied use of the installment method to T-L regarding its direct sales of the irrigation systems to farmers, resulting in an increased income tax burden to the shareholders of T-L.(fn11) The Eighth Circuit in Thom determined that the plain language of § 453(l)(2)(A) did not support TL's interpretation of the statute.(fn12) Rather, the court stated that the word "used" as it appeared in the statute must be read in the past tense.(fn13) Thus, where T-L did not show that the equipment sold had previously been used in farming, its direct sales to farmers did not qualify for the § 453(l)(2)(A) exception allowing for use of the installment method.(fn14)

This Note will discuss the Eighth Circuit's holding in Thom, which stated that an exception allowing a taxpayer to elect the installment method for sales of personal property did not apply to dealers' direct sales of farm equipment to farmers for use in farming.(fn15) Then, this Note will review federal statutory law as well as case law discussing the manner in which federal courts should interpret those statutes.(fn16) Next, this Note will analyze the Eighth Circuit's holding in Thom by first exploring the Eighth Circuit's correct decision to begin statutory analysis by looking to the plain language of the statute.(fn17) Then, this Note will explore the Eighth Circuit's erroneous decision to adopt the IRS's interpretation of the statute, which determined the statutory language in § 453(l)(2)(A) did not allow T-L to elect use of the installment treatment.(fn18) Next, this Note will demonstrate that even if the Eighth Circuit in Thom had found the language of the statute to be ambiguous, it should have looked to the statutory history of the installment method for guidance in interpreting § 453 before deferring to the IRS's interpretation.(fn19) Then, this Note will argue that the Eighth Circuit incorrectly cited administrative burdens as a basis for its decision denying T-L the use of the installment method.(fn20) Finally, this Note will argue that the Eighth Circuit's decision failed to assist farmers in contravention of a public policy that favors farmers.(fn21) Thus, this Note will argue that the Eighth Circuit's decision denying use of the installment method to T-L could not survive proper statutory construction.(fn22)

FACTS AND HOLDING

In Thom v. United States,(fn23) the United States Court of Appeals for the Eighth Circuit determined that a direct seller of center pivot irrigation systems to farmers could not use the installment method of accounting ("installment method") to report income under an exception that made the installment method available to sellers of farm equipment.(fn24) T-L Irrigation ("T-L"), a Nebraska subchapter S Corporation, manufactured, sold and leased farm equipment, including center pivot irrigation systems.(fn25) The Thom family, comprised of four pairs of husbands and wives, owned all of T-L's stock.(fn26) In 1994 and 1995, T-L leased and sold center pivot irrigation systems directly to farmers, as well as through a network of dealers.(fn27) To facilitate sales, T-L also provided financing assistance to farmers who bypassed the dealers and bought the irrigation systems directly from T-L.(fn28)

For the taxable years ending on December 31 in 1994 and 1995, TL used the installment method to report financed sales of center pivot irrigation systems sold directly to farmers.(fn29) The installment method delayed reporting of the income until T-L actually received the payments for the sale.(fn30) T-L reported ordinary taxable income of $5,517,638 for 1994, and $5,565,679 for 1995, on its corporate income tax returns.(fn31)

After auditing T-L's 1994 and 1995 corporate income tax returns, the Commissioner of the Internal Revenue Service ("Commissioner") disallowed T-L's use of the installment method in reporting gains on direct sales of center pivot irrigation systems to farmers.(fn32) The Commissioner's disallowance of the installment treatment increased T-L's taxable income for 1994 and 1995 by $482,296 and $409,280, respectively.(fn33) The increase represented the accrued gain deferred by T-L for the 1994 and 1995 tax years from farm equipment sales.(fn34) T-L's increased taxable income passed through to the Thoms' individual federal income tax returns.(fn35) Thus, the Commissioner's disallowance of T-L's use of the installment method as a business increased the taxable income of T-L's individual stockholders.(fn36)

On February 5, 1999, the Internal Revenue Service ("IRS") issued deficiency notices to the Thoms for the additional personal income taxes due after the income adjustment.(fn37) On or about June 4, 1997, the Thoms paid the tax deficiencies determined by the IRS for 1994 and 1995.(fn38) The four couples then filed requests for refunds of additional taxes paid pursuant to the audit on August 17, 1999.(fn39)

On January 26, 2000, the Commissioner denied the Thoms' refund claims.(fn40) On May 11, 2000, all four couples commenced timely suits in the United States District Court for the District of Nebraska to obtain refunds of the additional 1994 and 1995 federal income taxes paid and statutory interest that had accrued.(fn41) The Thoms relied on the farm property exception language in 26 U.S.C. § 453(l)(2)(A), in which the definition of "dealer disposition" as it related to qualification for use of the installment method did not include "the disposition of any property used or produced in the trade or business of farming."(fn42) The Thoms further claimed the words "used or produced in the trade or business of farming" indicated that a merchant who sold equipment "used in the business of farming," such as a center pivot irrigation system, could report a sale pursuant to the statute.(fn43) Thus, the Thoms claimed that T-L's sales of center pivot irrigation systems qualified for the installment method under the farm property exception because the payments occurred in at least two different taxable years.(fn44)

The IRS, however, argued that the plain meaning of the statute required T-L be engaged in "the trade or business of farming" to qualify for the § 453(l)(2)(A) exception allowing use of the installment method.(fn45) The Thoms, as taxpayers, had previously admitted T-L was not currently nor had it ever been actively engaged in farming.(fn46) Therefore, the government argued T-L did not qualify for the § 453(l)(2)(A) exception.(fn47)

Judge Richard G. Kopf, writing for the court, granted the United States' motion for summary judgment, dismissing the Thoms' case with prejudice.(fn48) In doing so, the court adopted the IRS's interpretation of the exception under § 453(l)(2)(A) from Private Letter Ruling 9616012 ("PLR 9616012").(fn49) The district court noted that PLR 9616012 stated that the installment method was only available to farmers, not to dealers selling personal property to farmers.(fn50) Accord-ing to the court, the Thoms were dealers in personal property and were therefore not...