Paul L. Caron

Monday, April 27, 2020

Lesson From The Tax Court: Using Legislative History To Clarify Ambiguous Text

TTax Court (2017)ax statutes are difficult to read.  Usually that is because they make precise use of complex terms of art.  But sometimes the text is hard to follow because of poor drafting.  Last week’s case of Dale W. Laue and Alicia Laue v. Commissioner, T.C. Sum. Op. 2020-14 (April 20, 2020) (Judge Panuthos) shows us the classic approach to resolving textual ambiguities: look to legislative history.  There Judge Panuthos examines a drafting ambiguity in §72(t), the statute governing qualified retirement plans and penalties for early withdrawals.  He relies on an explanation given in a committee report to resolve the ambiguity against the taxpayer.  Details below the fold.

Law: Early Withdrawal Penalties
The main purpose of retirement plans is to provide income to taxpayers once they reach an age where they retire from the labor force and stop receiving compensation for labor.  Congress enacted the tax provisions at issue in this case as part of the Tax Reform Act of 1986, 100 Stat. 2085.  At that time, most folks probably expected to retire at around age 60, according to this 2018 Gallup Poll (showing expected retirement aged had changed from age 60 in 1995 to age 66 in 2018).  That would explain the requirement in subsections (q), (t) and (v) that taxpayers must wait until age 59½ before they can start receiving, without penalty, payments from the various flavors of retirement annuities, plans and endowment contracts.  Early withdrawals are subject to a 10% “penalty” (subsection q) or a 10% “addition to tax” (subsections t and v).  As I am a rank novice in retirement taxation, I welcome enlightenment on the reasons for the difference in nomenclature.

The problem with penalizing early withdrawals is that a non-trivial number of taxpayers retire much earlier that age 59½ due to unhappy or unforeseen circumstances.  According this US News article, despite the expectation of retiring at age 66, the actual average age at retirement in the US has varied between 60 and 62 depending on your source and depending whether you are looking at the mean or median age.

Congress has recognized there may be legitimate reasons for taxpayers to break into their retirement piggy bank early and has created numerous exceptions to the 10% penalty.  Today’s lesson involves a distribution from a qualified retirement plan subject to the rules in §72(t).  So that’s the section at issue.

Section 72(t) is awkwardly structured.  Section 72(t)(1) starts off creating a general rule that all retirement plan withdrawals are subject to an additional tax of 10% of the amount of the withdrawal that is includable in gross income.  Section 72(t)(2) then lists 8 subparagraphs of exceptions.  The first one, subparagraph A, is very broad and itself contains 8 discrete exceptions, starting with the age 59½ exception in clause (i).  Section 72(t)(2)(A)(v) adds a further exception for withdrawals “made to an employee after separation from service after attainment of age 55.”

To a novice like myself, that language is ambiguous because the adjectival clause “after attainment of age 55” might modify either the noun “employee” or the noun “separation.”  If the former, the provision would apply to that class of taxpayers who had (1) left their employer’s service and (2) then reached age 55.  If the latter, then the provision would apply to that class of taxpayers who left their employer’s service after reaching age 55. 

Mr. Laue was an engineer who worked on bombers for a company that was later acquired by Boeing.  For reasons not disclosed in the opinion he ceased working for that company in 1987.  He continued working on bombers for another company until 1999, then stopped and, again for reasons not disclosed in the opinion, became “generally unemployed” in 2002 at age 46.  In 2015, the Boeing pension folks contacted Mr. Laue and said that for a limited time they would permit him to take a lump sum distribution from his pension plan.  He agreed and so they paid him about $25,000.  Mr. Laue turned 59 in 2015, but he had not turned 59½ as of the date of the distribution.

Mr. and Ms. Laue properly reported the distribution as income but did not report or pay the penalty.  The IRS did that for them in an NOD.  They petitioned the Tax Court for review, very sensibly opting for the small case procedure.

Lesson: The Value of Committee Reports
Mr. Laue pointed out the textual ambiguity to Judge Panuthos and rightly suggested that if you look at the §72(t)(2)(A)(v) exception as treating the early age requirement separate from the separation from service requirement, then he would meet the exception since he had been separated from service from Boeing and did receive the distribution after age 55.

Judge Panuthos did not really think the statute was ambiguous, citing a couple of T.C. Memo opinions.  But what sealed it for him was the legislative history of the exception.  Here, the legislative history took the form of the explanatory section of the Conference Committee Report to the Tax Reform Act of 1986.  On pages 456 of Volume II the Report addresses this age 55 exception.  It says: “In all cases, the exception applies only if the participant has attained age 55 on or before separation from service.”  It then gives an example of what does not qualify and the facts of the example are the same as the facts of Mr. Laue’s situation: “Thus, for example, the exception does not apply to a participant who separates from service at age 52, and, pursuant to the early retirement provisions of the plan, begins receiving benefits at or after age 55.”  Well, that clarifies that!

Comment:  What Is This “Legislative History” Of Which You Speak?
I tell my students that learning tax law is more than learning rules.  It’s also about learning how to read statutes.  And when reading statutes, the old adage “text without context is pretext” serves us well.  While the adage is often attributed to Jesse Jackson, it appears to have originated in the field of biblical scholarship.

The key to approaching legal text is to realize there are multiple kinds of “contexts” that affect interpretation.  I discuss this more thoroughly in Bryan Camp, “New Thinking About Jurisdictional Time Periods in the Tax Code,” 73 The Tax Lawyer 1 (2019).  Judge Panuthos used two types in his opinion: judicial context (a/k/a precedent) and legislative context (a/k/a legislative history).  It’s the latter that I want to comment on here.

The idea of legislative context is to find meaning in the purpose of the statute at issue.  That is tricky because Congress, as an entity, has no purpose.  It is the individual members of Congress who have their own purposes, motivations, agendas.  Academics have engaged in a robust and never-ending debate over how, if at all, those individual intentions translate into corporate intention.

While academics have the luxury of unlimited discussion about that intriguing larger question, judges have to actually make decisions and lawyers have to actually advise clients.  So they need working tools.

I think the two most helpful tools for understanding legislative context are (1) the drafting history of the statute; and (2) the reports of the legislative committees charged with drafting the language.  The actual drafting history can sometimes tell you what language may have been proposed but then rejected during the drafting process.  If the resulting text is ambiguous, you can sometimes eliminate one potential meaning if that meaning was in the rejected language.  For example, in Allen v. Commissioner, 128 T.C. 37 (2007), the Tax Court interpreted an ambiguity in §6501(c)(1) to hold that the fraudulent intent of a tax return preparer was sufficient to trigger the fraud exception to the three year limitation period for assessment, even when the taxpayer himself did not intend to commit fraud.  That decision blithely ignored the actual drafting history of §6501(c) as I explained in my usual great gory detail in “Tax Return Preparer Fraud and the Assessment Limitation Period,” 116 Tax Notes 687 (August 20, 2007).  The Federal Circuit, in contrast, used that drafting history to come to the opposite interpretation of the same ambiguity.  See BASR Partnership v. U.S., 795 F.3d 1338 (Fed. Cir. 2015).

In today’s case, Judge Panuthos uses the committee report tool.  He relies on a report from the Conference Committee, the committed charged with reconciling potentially differing proposals.  The reason such report is helpful in understanding the purpose of a statute lies in the concept of delegation.  Congress delegates the task of explaining statutory meaning to a committee and thus the work product of the committee represents the “voice” of Congress more than any other source, similar to how Revenue Rulings and Revenue Procedures represent the "voice" of the IRS.  Here, the committee report directly addresses the ambiguity and explains the purpose of the statute was to remove the penalty for taxpayers whose early retirement was nonetheless done after age 55. 

It is a good lesson on how to use legislative history to resolve a statutory ambiguity.

Coda: Sometimes a statutory error is so plain that one does not need any tool except common sense.  For example, go look at §72(o).  Paragraph (1) says that certain contributions from employees to qualified employer plans or government plans are to be treated as amounts contributed by the employer and excluded from the employee’s income.  The subsection then later cross-references to §72(p)(3)(A) for the definition of qualified employer plan. and cross-references §72(p)(3)(B) for the definition of government plan.  But one looks in vain for the promised definitions in the cross-referenced sections.  Instead, one finds the promised definitions in §72(p)(4), not §72(p)(3).  It appears that the erroneous cross-reference originated in the Tax Reform Act of 1986, and has never been corrected.  But I seriously doubt anyone would contend that the terms qualified employer plans and government plans have a meaning different from that given in the relevant, yet not cross-referenced, provisions. 

Bryan T. Camp is the George H. Mahon Professor Of Law in Exile somewhere in the vicinity of the Texas Tech University School of Law.

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