December 23, 2024
Volume XIV, Number 358
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Tax Court Reinforces Plain Meaning Approach in Interpreting Tax Statutes
Friday, September 1, 2017

The Internal Revenue Service (IRS) and taxpayers frequently spar over the meaning and interpretation of tax statutes (and regulations). In some situations, one side will argue that the statutory text is clear while the other argues that it is not and that other evidence of Congress’ intent must be examined. Courts are often tasked with determining which side’s interpretation is correct, which is not always an easy task. This can be particularly difficult where the plain language of the statute dictates a result that may seem unfair or at odds with a court’s views as the proper result.

The Tax Court’s (Tax Court) recent opinion in Borenstein v. Commissioner, 149 TC No. 10 (August 30, 2017), discussed the standards to be applied in interpreting a statute and reinforces that the plain meaning of the language used by Congress should be followed absent an interpretation that would produce an absurd result.

In Borenstein, the taxpayer made tax payments for 2012 totaling $112,000, which were deemed made on April 15, 2013. However, she failed to file a timely return for that year and the IRS issued a notice of deficiency. Before filing a petition with the Tax Court, the taxpayer submitted return reporting a tax lability of $79,559. The parties agreed that this liability amount was correct and that the taxpayer had an overpayment of $32,441 due to the prior payments. However, the IRS argued that the taxpayer was not entitled to a credit or refund of the overpayment because, under the plain language of Internal Revenue Code Sections 6511(a) and (b)(2)(B), the tax payments were made outside the applicable “lookback” period keyed to the date the notice of deficiency was mailed.

Despite the undisputed fact that the taxpayer made payments well in excess of her tax liability for 2012, the Tax Court held that it lacked jurisdiction to award a refund or credit of the excess amount. The court began by stating that the starting point in all cases is the language of the statute itself, and when the words are unambiguous “judicial inquiry is complete.” Courts must presume that Congress “says in a statute what it means and means in a statute what it says.” Based on the plain language of the statute, the court concluded that the IRS’s position was correct. In light of the clear language, the court was not required to review the legislative history; however, for completeness it did look at the history and found it “insufficient to countermand the plain meaning the plain meaning of the words Congress enacted.”

The taxpayer argued that, even if the statute was clear, the result was absurd. Thus, the statute could be construed in a manner to avoid the absurdity. The “anti-absurdity” canon of construction dates back to the late 1800s, but is rarely relied upon by the courts. The standard for invoking the canon is extremely high: the result must be “so gross as to shock the general moral or common sense.” The court agreed that the plain language of the statute produced an “odd result in certain factual circumstances,” but this was not enough to render the operation of the statute as absurd.

The court concluded its opinions with strong words reinforcing application of the plain meaning rule. It stated that “court should not attempt to fill statutory gaps in order to fashion judicial remedies.” Finally, the court ended its opinion as follows: “Our unwillingness to soften the import of Congress’ chosen words even if we believe the words to lead to a harsh outcome is longstanding. It results from deference to the supremacy of the Legislature.”

Practice Point: As noted above, taxpayers often rely on the plain language of the Internal Revenue Code in planning and defending the tax treatment of transactions. The Tax Court’s opinion reinforces this approach. However, the opinion did not deal with challenges based on judicial doctrines such as substance over form or economic substance, which the IRS sometimes uses to successfully overcome the plain language of a statute.

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