TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, April 28, 2009

Kysar: Transition Rules and Statutory Interpretation in G-I Holdings

Kysar Last week, I blogged important new developments in In re G-I Holdings, 369 B.R. 832 (D.N.J. 2007), in my post, Can Congressional Staff Testify on Meaning of Tax Law?Rebecca M. Kysar (Brooklyn), author of the important article on the subject, Listening to Congress: Earmark Rules and Statutory Interpretation, 94 Cornell L. Rev. 519 (2009), share her views on these developments:

A metaphor may be timeworn yet timeless. As blogged by Paul here, a recent court proceeding, involving the bankruptcy of G-I Holdings, confronts troublesome issues of statutory interpretation that arise from similarities of the tax legislative process to the making of sausage.

Specifically, the court was asked to interpret a provision Congress drafted to provide relief from a tax increase to certain taxpayers. These types of provisions are known generally as transition rules. Unsurprisingly, most taxpayers who obtain such relief employ lobbyists to advocate their position to members of Congress and their staffers. Thus, the transition rules are often targeted to benefit special interests.

Although common, individualized treatment due to lobbying efforts is nonetheless regarded by the public as unseemly. Hence, these deals carry heavy political and economic costs to the lawmakers who support them and to their beneficiaries as well. To reduce such costs, lawmakers not only enact transition rules “off-code” but hide them in obscure terms so that they are less visible to the wider constituency, as well as to competing interest groups. As a result, the tax laws are littered with elliptical provisions benefitting those lucky few who possess idiosyncratic characteristics, such as a specific sewage treatment facility operating under a service agreement approved on December 4, 1985 by a parish council. See Pub. L. No. 99-514, § 204(a)(10), (1986).

Lacking clearly worded beneficiaries, these transition rules are also often ensconced behind textual ambiguities and mis-drafting, rendering them susceptible to non-enforcement by courts that interpret these provisions against the special interests. When litigation arises over these provisions, beneficiaries often point to the details of their lobbying efforts to shed light on the meaning of the provision. The extent to which courts are institutionally equipped to and should consider these “gory” details in interpreting the sausage factory’s product, however, has perplexed judges, lawyers, and scholars alike.

In the instant matter, the court previously had held that a partnership agreement entered into by G-I Holdings did not qualify for targeted transition relief from a statutory amendment (the amendment is an exception to the nonrecognition rule of § 731 and would require gain recognition upon certain partnership distributions). This was due to the fact, the court explained, that the taxpayer’s partnership agreement did not provide for partnership distributions of “(i) a fixed value of marketable securities that are specified in the contract, or (ii) other property,” as is required by the transition rule. The court interpreted these distribution options as mutually exclusive and held that transition relief was not available to the taxpayer because the agreement entitled the partnership to vary the value of securities it distributed. In reaching that conclusion, the court ruled that it could not consider an affidavit from a lobbyist employed by G-I Holdings to secure such relief. G-I Holdings has now petitioned the court to reconsider its prior ruling in light of additional affidavits from congressional staffers, lobbyists, and others that could bear witness to the corporation’s lobbying activities.

At first glance, whether the court should rely on evidence of these activities in interpreting a Code section seems to implicate the classic debate between textualists and intentionalists. Textualists object to the use of extra-statutory devices in interpreting statutes. Such thinkers claim that consulting legislating history is inconsistent with democratic theory since it has not been voted upon and, furthermore, encourages congressional members or lobbyists to plant legislative history that does not represent majority will. In contrast, intentionalists contend that courts must discern legislative intent in interpreting ambiguous statutes. Intentionalists advocate for the use of tools external to the statutory text as a legitimate means of so doing.

The court, however, need not (and almost certainly will not) choose between these two theories of statutory interpretation. First, the court may simply uphold its prior ruling that the clause was unambiguous and, thus, evidence regarding the circumstances of its enactment should be ignored. Second, the court could strike the affidavits at issue since they constitute post-enactment statements and hence do not reliably inform contemporaneous congressional intent. Unlike other legislative history that may be implicitly approved by a floor vote, post-enactment statements carry no consequences and hence are cheap talk. Although this issue is not entirely resolved, the Supreme Court, in Western Air Lines v. Board of Equalization, 480 U.S. 123, 130 n.* (1987), refused to consider an affidavit from a lobbyist, relying in part on its “post hoc” nature. Additionally, in Consumer Product Safety Comm’n v. GTE Sylvania, 447 U.S. 102, 117-18 (1980), the Court expressed a reluctance to use subsequent legislative statements in statutory interpretation, identifying such a practice as “hazardous”. Accord Sullivan v. Finkelstein, 496 U.S. 617, 631-32 (1990) (Scalia, J., concurring) “[a]rguments based on subsequent legislative history, like arguments based on antecedent futurity, should not be taken seriously, not even in a footnote”). Finally, if the court generally adheres to the theory that deals between lawmakers and interest groups must be upheld by the judiciary, in the instant case, the hidden nature of the purported deal undermines this argument since the deal is invisible to non-participating lawmakers and their constituents. Even pure intentionalists regard legislative history as existing upon a spectrum of reliability and choose to rely upon those types that involve the enactment process. In this manner, there is a distinction between committee reports, which are collective statements known to the rest of Congress of a committee’s views on the law’s meaning, and affidavits from lobbyists and individual staffers, which perhaps reflect only empty promises whispered in the backroom. See Western Air Lines, 480 U.S. at 130 n.*.

Going forward, developments in the legislative process may ameliorate the difficulties in interpreting a special interest provision. Current “earmark rules” provide that lawmakers must expose hidden special interest deals by disclosing all beneficiaries of narrowly tailored tax and spending provisions. I have argued in an article, which discussed the G-I Holdings case, that courts should assume these earmark rules have functioned correctly: if no special interest beneficiary has been disclosed, judges should assume, I argue, that none was intended. This proposal is aimed at strengthening congressional adherence to the earmark rules, which is badly needed since the rules are self-enforcing. By refusing to uphold the undisclosed bargains of lawmakers and their special interest constituents, the proposal achieves this result through the imposition of costs upon these parties. Although this proposal would not apply in G-I Holdings since the earmark rules were enacted subsequent to the transition rule at issue, it may be the best way to navigate between competing theories of statutory interpretation in future cases involving narrowly tailored transition rules. It may even clean up the sausage factory.

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