High Court opines on how to read tax statutes
TAX ALERT |
The recently enacted Tax Cuts and Jobs Act (TCJA) includes a number of statutory provisions that may seem to have a clear meaning, but also seem to produce unexpected or unusual results. On June 21, 2018, the Supreme Court decided a tax case interpreting a tax statute presenting similar challenges that dated from 1937. Although the statute at issue was originally enacted more than 80 years ago, the Court’s fresh analysis of the statutory language and related authorities may provide useful guidance for statutes enacted much more recently, such as the TCJA. Hopefully, it will not take as long for the provisions of the TCJA to be fully understood.
In Wisconsin Central Ltd. v. U.S., 585 U. S. (2018), the Supreme Court addressed a disputed provision of the Railroad Retirement Tax Act of 1937 (RRTA). Although that law operates to provide a retirement system for railroad employees that is largely a parallel to the social security system, the Court sustained the taxpayer’s argument that the term ‘money remuneration’ in the tax provisions of the railroad retirement system did not have the same meaning as the term ‘all remuneration’ in the tax provisions of the social security system—generally known as the FICA tax rules. Specifically, the issue was whether certain stock options granted to railroad workers were included in ‘money remuneration’ and therefore subject to tax, since they did not appear to be ‘money’ in the conventional sense of that term. The Court sustained the taxpayer’s argument that the options were non-taxable, despite Treasury regulations arguably to the contrary that were issued shortly after the RRTA’s enactment. The government also asked the Court to defer to a 2017 tax regulation that, on its face, seemed intended to treat ‘compensation’ under the RRTA as having the same meaning as ‘wages’ in FICA. The Court in both cases concluded that the regulations were technically not clearly applicable to the narrow facts of the case, thus avoiding any decision as to whether they were invalid. Key to this holding was the decision that the RRTA statute itself was unambiguous.
As to that issue, the Court first looked to the language of the statute to understand its ordinary meaning, stating “[a]s usual, our job is to interpret the words consistent with their ‘ordinary meaning . . . at the time Congress enacted the statute.’” The Court focused on what the ordinary meaning of ‘money’ was at the time the statute was enacted based on the at-the-time dictionary definition, how money was defined in other areas of the tax code and other regulations (including for employment taxes), and how we generally view the purpose of money, as a medium of exchange. In the analysis, the Court also emphasized the structure of the sentences in the statute and how the term ‘money’ modified the term ‘remuneration’ (in the phrase ‘money remuneration’) to conclude that not all types of remuneration were subject to tax under the RRTA. The Court stated that because the language of the statute deliberately made the choice to use a narrower term – money remuneration rather than all remuneration–that choice must be respected, not disregarded.
In rejecting the government’s arguments that ‘money remuneration’ could theoretically have a more expansive meaning the Court asked rhetorically, “[i]f Congress really thought everything is money, why did it take such pains to differentiate between money and stock in the Internal Revenue Code of 1939? Why did it so carefully distinguish ‘money remuneration’ in the Act and ‘all remuneration’ in FICA?” The thrust of the Court’s analysis here was that looking to the plain meaning of the statue is often the best evidence of the meaning and intent of the law, and arguments that seek to posit a broader or narrower reading must fail if the language is unambiguous. Moreover, in light of clear statutory language, courts will often resist finding other meanings even if justified by policy considerations, or the possibility that there was simply poor drafting in implementing Congressional intent. As the Court stated “it is not our function to ‘rewrite a constitutionally valid statutory text under the banner of speculation about what Congress might have’ intended.”
Another notable issue was whether the interpretation of the statute should be affected by the argument that a given interpretation, seemingly consistent with the plain language, made other provisions in related aspects of the law seem redundant. This is a very common argument in statutory interpretation cases. Here, the Court found that there were potential redundancies of language no matter how it read the provisions, perhaps implying a more realistic understanding that the Congress was not a monolithic, perfect, and omniscient entity when it comes to drafting statutes. Wisconsin Central Ltd. v. U.S., 585 U. S. ___ (2018) (“Besides, even if the railroads’ interpretation of the statute threatens to leave one of many exemptions [to the RRTA] with little to do, that’s hardly a reason to abandon it, for the government’s and dissent’s alternative promises a graver surplusage problem of its own. As it did in 1939, the Internal Revenue Code today repeatedly distinguishes between ‘stock’ and ‘money.’ See, e.g., §306(c)(2) (referring to a situation where ‘money had been distributed in lieu of . . . stock’)”).
In language that one could easily foresee being quoted in cases arising under the TCJA – a law that has been criticized as suffering from an expedited drafting process – the Court explained its underlying general philosophy of statutory interpretation as follows (emphasis supplied):
Written laws are meant to be understood and lived by. If a fog of uncertainty surrounded them, if their meaning could shift with the latest judicial whim, the point of reducing them to writing would be lost. That is why it’s a “fundamental canon of statutory construction” that words generally should be “interpreted as taking their ordinary, contemporary, common meaning . . . at the time Congress enacted the statute.” [Perrin v. United States, 444 U. S. 37, 42 (1979)]. Congress alone has the institutional competence, democratic legitimacy, and (most importantly) constitutional authority to revise statutes in light of new social problems and preferences. Until it exercises that power, the people may rely on the original meaning of the written law.
With the TCJA of 2017—as with the 1937 RRTA—the Treasury may provide guidance in regulations that could be challenged using arguments similar to those that prevailed in this case. In other cases, no regulations will be issued and some taxpayers and the IRS will find themselves in disputes over what the ‘plain language’ of a provision means.
Examples of such controversies may include the meaning of the term ‘corporation’ and the apparent exclusion of ‘trade or business’ property from the carried interest provisions, the meaning of such terms as ‘services’ and ‘health’ or ‘law’ or ‘consulting’ in the new 20 percent deduction for certain pass-through businesses, and the references to situations where the skills or reputation of a firm’s employees are its ‘principal asset.’ Other ambiguities may exist in the new rules governing depreciation and many aspects of the new international tax system.