Title Bell Atlantic Corporation v. United States
Date 2000
By Alito
Subject Misc
Contents
Page 1
98 of 238 DOCUMENTS
BELL ATLANTIC CORPORATION, Appellant v. UNITED STATES OF AMERICA
No. 99-1234
UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
224 F.3d 220; 2000 U.S. App. LEXIS 20905; 2000-2 U.S. Tax Cas. (CCH) P50,669; 86
A.F.T.R.2d (RIA) 5633
January 13, 2000, Argued
August 17, 2000, Filed
PRIOR HISTORY: **1 ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA. (Dist. Court No. 96-cv--08657). District Court Judge: Louis Charles Bechtle.
DISPOSITION: Affirmed.
CASE SUMMARY:
PROCEDURAL POSTURE: Appellant telephone com- pany sought review of a decision by the United States District Court for the Eastern District of Pennsylvania which ruled plaintiff was not entitled to $77 million in- come tax refund under the transitional rule for capital investment tax credits contained in the Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085 (1986).
OVERVIEW: Appellant telephone company argued it was entitled to investment tax credits (ITC) under a tran- sitional rule in the Tax Reform Act of 1986, Pub. L. No.
99-514, 100 Stat. 2085 (1986) (Act), because it had to meet quality standards under its various utility franchises, tariffs, and contracts to provide service. The property was identifiable through company estimate files. The govern- ment argued the franchises and tariffs were not contracts within the meaning of the Act or if they were contracts, no property was readily identifiable with and necessary to carry out the alleged contracts. The court focused on whether any property was readily identifiable with and necessary to carry out the contracts. The Act provided this two-prong test. The court found that appellant's argument would make any property, which was necessary also read- ily identifiable, which would render the two-prong test superfluous. The court affirmed the decision finding that property could not be readily identifiable with a contract solely by means of internally generated documents.
OUTCOME: Decision affirmed. The court determined
that while appellant's property was necessary it was not readily identifiable with a contract and therefore appel- lant was not eligible to receive the investment tax credit. The property had to be readily identifiable by some other means than an internally generated document.
LexisNexis(R) Headnotes
Tax Law > Federal Income Tax Computation > Deductions for Depreciation, Amortization & Depletion
> Investment Tax Credit (IRC secs. 38, 39, 46, 48)
HN1 Prior to the enactment of the Tax Reform Act of
1986, Pub. L. No. 99-514, 100 Stat. (1986), the Internal Revenue Code provided that qualifying taxpayers were entitled to an income tax credit for qualified investments in certain tangible property. See 26 U.S.C.S. § 38 (1985). Tax Law > Federal Income Tax Computation > Deductions for Depreciation, Amortization & Depletion
> Investment Tax Credit (IRC secs. 38, 39, 46, 48)
HN2 One of the transitional rules of the Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat. 2085 (1986), is the supply or service contract rule, which allows an investment tax credit for otherwise-qualified property if that property is readily identifiable with and necessary to carry out a written supply or service contract, which was binding on December 31, 1985. Section 204(a)(3) of the Tax Reform Act of 1986, Pub. L. No. 99-514, 100 Stat.
2085 (1986).
Tax Law > Federal Income Tax Computation > Deductions for Depreciation, Amortization & Depletion
> Investment Tax Credit (IRC secs. 38, 39, 46, 48)
HN3 Under the supply or service contract rule, a tax- payer could still claim an investment tax credit if it had agreed to perform some service that required it to purchase otherwise-qualified property and if that service contract was binding as of the end of 1985.
Tax Law > Federal Income Tax Computation > Deductions for Depreciation, Amortization & Depletion
224 F.3d 220, *; 2000 U.S. App. LEXIS 20905, **1;
2000-2 U.S. Tax Cas. (CCH) P50,669; 86 A.F.T.R.2d (RIA) 5633
Page 2
> Investment Tax Credit (IRC secs. 38, 39, 46, 48)
HN4 The Tax Reform Act of 1986, Pub. L. No. 99-
514, 100 Stat. 2085 (1986), imposes two conditions that must be met before property is eligible for investment tax credits. The property must be both necessary to carry out the service contract and readily identifiable with it.
Tax Law > Federal Income Tax Computation > Deductions for Depreciation, Amortization & Depletion
> Investment Tax Credit (IRC secs. 38, 39, 46, 48)
HN5 Within the context of supply or service contracts, the investment tax credit transitional rule is applicable only where the specifications and amount of the property are readily ascertainable from the terms of the contract, or from related documents. H.R. Conf. Rep. No. 99-841, at 4148 (1986), reprinted in 1986 U.S.C.C.A.N. 4075. Governments > Legislation > Interpretation
HN6 A statute should be construed, if possible, so that each part is given effect and no part is rendered inoperative or superfluous.
COUNSEL: Thomas E. Zemaitis, Gordon R. Downing, Pepper Hamilton LLP, Philadelphia, Pennsylvania. Thomas P. Marinis, Jr., John D. Taurman, Thomas S. Leatherbury (argued), Sarah A. Duckers, Debra J. Duncan, H. Mallory Caldwell, Vinson & Elkins L.L.P., Houston, Texas, Attorneys for Appellant.
Loretta C. Argrett, Assistant Attorney General, Bruce R. Ellisen, Thomas J. Sawyer (argued), Attorneys Tax Division, Department of Justice, Washington, D.C. Michael R. Stiles, United States Attorney Of Counsel, Attorneys for Appellee.
JUDGES: Before: ALITO, BARRY, and ALDISERT, Circuit Judges.
OPINIONBY: ALITO
OPINION: *220
OPINION OF THE COURT
ALITO, Circuit Judge:
This appeal concerns a transition rule for capital in- vestment tax credits ("ITC") contained in a provision of the Tax Reform Act of 1986, Pub. L. No. 99-514, 100
Stat. 2085 (1986). Bell Atlantic Corporation seeks a $77 million income tax refund under *221 this rule, and it appeals the District Court's decision that it was not entitled to such a refund. We affirm.
I.
HN1 Prior **2 to the enactment of the Tax Reform
Act, the Internal Revenue Code provided that qualify- ing taxpayers were entitled to an income tax credit for qualified investments in certain tangible property. See
26 U.S.C. § 38 (1985). The Tax Reform Act changed this regime. The Act reduced corporate income tax rates, but it also eliminated many deductions, exclusions, and credits. Among the credits that were eliminated were in- vestment tax credits on property brought into service af- ter December 31, 1985. The Act included transitional rules that ameliorated this change to some extent. See Tax Reform Act §§ 203-04.
HN2 One of these transitional rules is the "supply or service contract" rule, which allows an investment tax credit for otherwise-qualified property if that property is
"readily identifiable with and necessary to carry out a written supply or service contract, . . . which was binding on December 31, 1985 ." Tax Reform Act § 204(a)(3).
HN3 Under this rule, a taxpayer could still claim an ITC if it had agreed to perform some service that required it to purchase otherwise-qualified property and if that service contract was binding as of the end of 1985. Thus, for ex- ample, **3 if Bell Atlantic had agreed to wire a new residential development for telephone services, pursuant to a written contract signed at the end of 1985, and if Bell Atlantic then had to purchase telephone poles as part of the contracted service, that purchase might qualify for an ITC under the service contract transitional rule.
II. A.
Bell Atlantic claims that it is entitled to ITC for hun- dreds of millions of dollars of property put into service after 1985, because it purchased the property "in order to satisfy its written obligations to provide telecommu- nications services." See Appellant Br. at 3. In support of its claim, Bell Atlantic asserts that its utility franchises, tariffs, contracts with other local telephone companies, and contracts with long distance carriers are "written . .
. service contracts" within the meaning of the Act. Bell Atlantic claims that its franchises and tariffs are contracts because the state offered "the right to provide telephone service" and "in exchange . . . Bell Atlantic . . . agreed to undertake specified service obligations." Id. at 27-28. Bell Atlantic then asserts that much of the property pur- chased in the course of its telephone service business
**4 is "readily identifiable with and necessary to carry out" these franchises, tariffs, and contracts and, therefore, is eligible for ITC under the service contract transitional rule.
Bell Atlantic's utility franchises govern Bell Atlantic's relationships with the various authorities that regulate it. Franchises usually encompass rate regulation, utility ser-
224 F.3d 220, *221; 2000 U.S. App. LEXIS 20905, **4;
2000-2 U.S. Tax Cas. (CCH) P50,669; 86 A.F.T.R.2d (RIA) 5633
Page 3
vice obligations, and the standards that must be met be- fore a new industry entrant can begin providing telephone service. Tariffs are maintained by Bell Atlantic with the various state public utility commissions. The tariffs gov- ern Bell Atlantic's relationships with its customers and detail the parties' mutual obligations under the applicable franchises. By their own terms, tariffs often become the contract between the utility and the customer once service begins. See, e.g., App. at 1443 (Maryland tariff). Finally, in order to provide uninterrupted service to its customers, Bell Atlantic contracts with other telephone companies that provide local service in its service areas and with the telephone companies that provide long distance service to Bell Atlantic customers.
Bell Atlantic's tariffs, franchises, and contracts with other **5 telephone companies *222 all incorporate service quality standards. n1 Bell Atlantic claims ITC for property purchased to meet the service quality stan- dards that were incorporated in Bell Atlantic's franchises, tariffs, and other contracts because the service quality standards in the contracts "dictate what property is 'read- ily identifiable with and necessary to carry out' the con- tracts." Appellant Br. at 13. This property included new telephone lines, telephone poles, and many other capital investments. Because "a telephone network is constantly both wearing out and growing," id. at 16, it is beyond doubt that in order to provide telephone service at the level required by the applicable service quality standards, Bell Atlantic had to purchase a great deal of property.
n1 By way of example, the State of New Jersey requires that 75 of regular service installations must be completed within five working days and that 95 of local calls must be completed without encoun- tering a busy circuit. See N.J. Admin. Code tit. 14
§ 10-1.10(b) (2000). Some of Bell Atlantic's con- tracts with other telephone companies require that Bell Atlantic "maintain and operate its system so as to provide adequate facilities for the provision of services." App. at 961.
**6
When Bell Atlantic found that it was in danger of fail- ing to meet a service quality standard, it "engaged in an extensive and detailed planning process . . . to identify .
. . the property necessary to correct that situation." Id. at
19. All of the estimates, budgets, projections, forecasts, and other documents generated by Bell Atlantic's inter- nal planning processes went into "estimate files." Bell Atlantic asserts that the estimate files disclose what prop- erty was "readily identifiable with and necessary to carry out" its contracts and that the estimate files are the link that makes this property eligible for ITC, because these files
"contain all of the information necessary to tie a project to a contractual obligation and to explain why the property was necessary to satisfy that obligation." Id. at 21. Bell Atlantic thus claims ITC for all the property referred to in the estimate files in the record.
B.
The government asserts that Bell Atlantic's franchises and tariffs are not contracts. It relies on National R.R. Passenger Corp. v. Atchison, Topeka and Santa Fe Ry. Co., 470 U.S. 451, 84 L. Ed. 2d 432, 105 S. Ct. 1441
(1985), in which the Supreme Court re-affirmed **7 the principle that "absent some clear indication that the legis- lature intends to bind itself contractually, the presumption is that a law is not intended to create private contractual or vested rights but merely declares a policy to be pursued until the legislature shall ordain otherwise." 470 U.S. at
465-66 (quotation marks omitted). As Bell Atlantic has not shown that the legislatures in Bell Atlantic's service area have given a clear indication that they intended to be contractually bound, the government maintains that Bell Atlantic's franchises and tariffs are not contracts. In addition, the government notes that while Bell Atlantic's tariffs often state that they represent the contract between Bell Atlantic and its customers, no written contract passes between the two parties. The tariffs are also modified on a regular basis by the state utility commissioners without the consent of Bell Atlantic or its customers. For this rea- son, the government contends that Bell Atlantic's tariffs are more like regulations than contracts.
As a narrower ground for affirmance, the government asserts that Bell Atlantic's franchises and tariffs are not
"written service contracts" for the **8 purposes of the Tax Reform Act. The government contends that because the Tax Reform Act eliminated investment tax credits, a taxpayer may get different treatment only if it is clearly entitled to it, as "provisions granting special tax exemp- tions are to be strictly construed." Helvering v. Northwest Steel Rolling Mills, Inc., 311 U.S. 46, 49, 85 L. Ed. 29,
61 S. Ct. 109 (1940). Thus, if there is any doubt whether
Bell Atlantic's *223 franchises and tariffs qualify as
"written service contracts" under the special tax exemp- tion available to those who put property in service in order to carry out eligible "written service contracts," that doubt must be resolved against the taxpayer.
To the extent that Bell Atlantic relies on the favorable treatment of the cable television industry under the service contract transitional rule, the government argues that the favorable treatment of the cable television industry and of other taxpayers under the rule undermines Bell Atlantic's case because it illustrates the only manner in which favor- able tax treatment, such as special exemptions and transi- tional relief, may be gained. In the Conference Report on
224 F.3d 220, *223; 2000 U.S. App. LEXIS 20905, **8;
2000-2 U.S. Tax Cas. (CCH) P50,669; 86 A.F.T.R.2d (RIA) 5633
Page 4
the Tax Reform Act, H.R. Conf. Rep. **9 No. 99-841
(1986), reprinted in 1986 U.S.C.C.A.N. 4075 (hereinafter Conf. Rep.), the Committee stated: "The conferees wish to clarify that this rule the service contract transitional rule applies to cable television franchise agreements." Conf. Rep. at 4148. Some other taxpayers also managed to secure specific exemptions for themselves in the Act itself. See, e.g., Tax Reform Act § 204(a)(6) (granting certain exemptions to "any interstate natural gas pipeline" that had certain construction applications on file with the Federal Energy Regulatory Commission and that had one of its terminal points near Bakersfield, California). Thus, the government asserts that the absence of any such refer- ence to Bell Atlantic or to the telephone service industry suggests that Bell Atlantic is not eligible for a special exemption to the repeal of the investment tax credit.
The government also relies on the Conference Report to illuminate the meaning of the term "written service contract." The Conference Report gives more specific guidance as to what qualifies as a "written supply or ser- vice contract." According to the report, the transitional rule "applies only to contracts in which the construction,
**10 reconstruction, erection, or acquisition of prop- erty is itself the subject matter of the contract." Conf. Rep. at 4143. This is true whether an exemption is claimed under the general transitional rule for purchases or un- der the service contract transitional rule. See id. at 4148. While the franchises, tariffs, and other agreements con- template service quality standards, they do not concern
"the construction, reconstruction, erection, or acquisition of property." The government therefore contends that Bell Atlantic's franchises, tariffs, and other agreements are not contracts under the Tax Reform Act.
Even if Bell Atlantic's franchises, tariffs, and other contracts are "written service contracts" within the mean- ing of the term in the Tax Reform Act, the government asserts that no property was "readily identifiable with and necessary to carry out" the alleged contracts. Again, the government relies on the Conference Report: "The tran- sitional rule is applicable only where the specifications and amount of the property are readily ascertainable from the terms of the contract, or from related documents." Conf. Rep. at 4148. Bell Atlantic asserts that the property is "readily ascertainable" **11 from the estimate files. The government argues that the estimate files are not "re- lated" to the "contracts" because they were only "internal budgeting documents," that were not prepared contempo- raneously with the "contracts" and were not provided to the other contracting party. Appellee Br. at 58. Thus, the government's position is that Bell Atlantic is not entitled to investment tax credit.
III.
We do not find it necessary to decide whether Bell Atlantic's tariffs, franchises, and contracts with other tele- phone companies are "written service contracts" within the meaning of the Act. Instead, we focus on the question whether any property was "readily identifiable with and necessary to carry out" these "contracts." Bell Atlantic's franchises, tariffs, and other contracts contain service quality standards that regulate telephone service, im- pose *224 conditions on service and set service goals. Whenever Bell Atlantic was required to put new prop- erty into service to meet a service quality standard, Bell Atlantic constructed an estimate file to document the pur- chase itself and the need for the new property under the pertinent service quality standard. Bell Atlantic asserts that these estimate **12 files allow us to determine what property is "readily identifiable with and necessary to carry out" the contracts. We disagree.
HN4 The Tax Reform Act imposes two conditions that must be met before property is eligible for ITC. The property must be both "necessary to carry out" the ser- vice contract and "readily identifiable with" it. It cannot be determined from the terms of any of the tariffs, fran- chises, or other contracts that the property for which Bell Atlantic claims ITC is "readily identifiable with" the tar- iffs, franchises, or contracts. This is because these alleged
"contracts" speak only of service quality standards, never mentioning property of any sort. The property, therefore, must be "readily identifiable with" the contracts by some other means. Bell Atlantic asserts that the estimate files bridge the gap. However, the tariffs, franchises, and con- tracts do not direct the preparation of estimate files; nor do they direct what they should contain.
Bell Atlantic asserts that the estimate files show what property was "readily identifiable with" the contracts be- cause Bell Atlantic had to undertake the purchases de- tailed in the estimate files in order to meet the service quality **13 standards in the contracts. The District Court held that this link is "too attenuated," Dist. Ct. Op. at 23, and we agree. In addition, we note that it was undis- puted that the estimate files did not have a binding effect on anyone. As the District Court observed, the estimate files were prepared for internal forecasting, planning and budgeting. They were not prepared contemporaneously with the contracts, and they were not provided to any party to the alleged contracts. Id. at 21-22. The question then becomes whether Bell Atlantic's estimate files in and of themselves make the property "readily identifiable with and necessary to carry out" the tariffs, franchises, and contracts.
We believe that Bell Atlantic's argument is inconsis- tent with Congress's choice of the term "readily identi- fiable." 26 U.S.C. § 204(a)(3). Obviously Congress did
224 F.3d 220, *224; 2000 U.S. App. LEXIS 20905, **13;
2000-2 U.S. Tax Cas. (CCH) P50,669; 86 A.F.T.R.2d (RIA) 5633
Page 5
not want to extend ITC to all property that was identifi- able and necessary to carry out a service contract. Instead, Congress demanded that the property be "readily" iden- tifiable with the contract. "Readily" means "promptly,"
"quickly," or "easily." The Random House Dictionary of the English Language 1195 (Jess Stein ed., 1967). **14 Although it is not possible as a general matter to draw a bright line between property that is "readily identifiable" with a service contract and property that is merely identi- fiable with a service contract, we agree with the govern- ment and the District Court that Bell Atlantic's estimate files cannot meet the "readily identifiable" standard.
The Conference Report regarding the supply or ser- vice contract transition rule buttresses this conclusion.
HN5 The Report states that the "transitional rule is ap- plicable only where the specifications and amount of the property are readily ascertainable from the terms of the contract, or from related documents." Conf. Rep. at 4148
(emphasis added). Here, the relationship between the tar- iffs, franchises, and contracts, on the one hand, and the estimate files, on the other, is, as the District Court aptly put it, "attenuated," at best.
In addition, we believe that Bell Atlantic's argument is difficult to square with the rule that HN6 a statute should be construed, if possible, so that each part is given effect and no part is rendered inoperative or superfluous. See United States v. Higgins, 128 F.3d 138, 142 (3d Cir.
1997). The statute at **15 issue here imposes two dis- tinct requirements for ITC: the property must *225 be both "necessary to carry out" the contracts and also
"readily identifiable with" the contracts. If we can, we are bound to avoid an interpretation of this statute that renders one of the two statutory requirements superfluous.
The estimate files were prepared by Bell Atlantic, and we assume that they detail what property was needed to meet the service quality standards in the contracts, but this only demonstrates why the property was "necessary to carry out" the contracts. Bell Atlantic has described the estimate file process as "engaging in an extensive and detailed planning process . . . to identify . . . the property necessary to correct that situation." Appellant Br. at 19. This merely tells us that the property was necessary to meet the applicable service quality standard. If determin- ing what property was necessary to carry out the contract also necessarily had the effect under the statute of making that property identifiable with the contract, the "readily identifiable with" language of the statute would have no operative effect.
We note that the very use of a two-prong test in the statute presumes that **16 there will be property that fails to qualify for ITC under the transitional rule because it meets only one of the two requirements in the statute.
Some property will be "necessary to carry out" the con- tract but not "readily identifiable with" it--and vice versa. Under Bell Atlantic's proposed construction of the statu- tory test, it is doubtful that any property that was "neces- sary to carry out" the contract would ever fail the "readily identifiable with" prong. When property is necessary to carry out a contract, a taxpayer could almost always gener- ate some sort of document detailing this relationship. The taxpayer could then point to this document to demonstrate that the property was "readily identifiable with" the con- tract. As this result would render superfluous the language in the statute that the property for which a taxpayer claims ITC must be "readily identifiable with" a written service contract binding as of December 31, 1995, we hold that property cannot be shown to be "readily identifiable with" a written service contract by means of internally gener- ated documents, such as the estimate files in this case, that were not prepared contemporaneously with the contract, that had **17 no binding effect on anyone, and that were not provided to the other contracting party. Because Bell Atlantic has not met its burden of showing that the property for which it claims ITC was readily identifiable with the contracts in question, the District Court did not err in denying Bell Atlantic's claim for investment tax credit.
This result is supported by the decisions of other courts that have examined the statute. In United States v. Commonwealth Energy Sys., 49 F. Supp. 2d 57 (D. Mass. 1999), the court found in favor of the taxpayer's claim for a refund under Tax Reform Act § 204(a)(3). Commonwealth Energy claimed ITC for power gener- ating equipment purchased pursuant to a contract un- der which it had agreed to supply power. The contract specifically covered the building of a new steam plant to provide 560 megawatts. See Commonwealth Energy,
49 F. Supp. 2d at 59. Because the amount of power was specified in the contract itself, the District Court held that "the specifications . . . of the property were read- ily ascertainable from the terms of the contract." Conf. Rep. at 4148. Commonwealth Energy was granted ITC for a replacement generator rotor, **18 replacement burner panels, and various other items, which were "inti- mately connected to the generation of power at the plant." Commonwealth Energy, 49 F. Supp. 2d at 60-61. Bell Atlantic's situation is not analogous to this case because in Commonwealth Energy the power supply contract itself provided a measure by the which the power plant prop- erty could be identified, namely, the wattage requirement, whereas the service quality standards in Bell Atlantic's contracts cannot identify any property without resort to the estimate files. *226
In United States v. Zeigler Coal Holding Co., 934 F. Supp. 292 (S.D. Ill. 1996), the District Court held that it
224 F.3d 220, *226; 2000 U.S. App. LEXIS 20905, **18;
2000-2 U.S. Tax Cas. (CCH) P50,669; 86 A.F.T.R.2d (RIA) 5633
Page 6
would not allow ITC unless the property had been "specif- ically described" in the contract or related documents and that to hold otherwise would mean "that the transition rule exception would swallow the rule eliminating the ITC." Id. at 295. In Southern Multi-Media Communications, Inc. v. Commissioner, 113 T.C. 412 (T.C. 1999), a ca- ble television company claimed ITC for property used to make extensive improvements to some of its systems and to extend its lines in some of its service areas. See
**19 id. at *1-2. Even though the company's franchise required that the system be "maintained in accordance with the highest accepted standards of the industry," id. at *2, the Court held that the improvements and line ex- tensions were not "necessary to carry out" the franchise because the company was not "specifically required" to undertake the improvements, id. at *2-3.
Our holding today that ITC property must be "read- ily identifiable with" a contract by some means other than an internally generated document is perfectly con- sonant with a requirement that the ITC property must be "specifically required" or "specifically described." As
we hold that no property was "readily identifiable" with Bell Atlantic's franchises, tariffs, and other contracts with telephone companies, we reject Bell Atlantic's claim for investment tax credit.
IV.
For the reasons explained above, the judgment of the
District Court is affirmed. JUDGMENT
This cause came to be heard on the record from the United States District Court for the Eastern District of Pennsylvania and was argued by counsel on January 13,
2000.
After careful review and consideration of all con- tentions raised by the appellant, it is hereby **20 ORDERED and ADJUDGED that the judgment of the District Court entered on February 2, 1999, be and is hereby affirmed, all in accordance with the opinion of this Court.
Costs taxed against appellant.
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