The opinion of the court was delivered by: HARRIS
Before the Court are the parties' cross-motions for summary judgment, corresponding oppositions, plaintiffs' reply, and plaintiffs' notice of recent authority. After careful consideration of the entire record, the Court denies plaintiffs' motion for summary judgment and grants defendant's motion for summary judgment. Although "findings of fact and conclusions of law are unnecessary on decisions of motions under Rule . . . 56," the Court nevertheless sets forth its analysis. See Fed. R. Civ. P. 52(a).
Prior to 1986, when the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085 (1986), was passed, the tax code encouraged taxpayers to invest in certain property or assets by offering two interrelated programs -- the investment tax credit ("ITC"), and the accelerated cost recovery system ("ACRS").
The ITC provided taxpayers with a 10% tax credit for investing in qualified assets, and the related ACRS program allowed taxpayers to deduct a portion of an asset's value during each year of the asset's life.
Under the ACRS program, however, the asset was still considered to be worth its full cost, even after the taxpayer had received a tax credit that reduced the "real" cost of the asset. Thus, taxpayers were getting a double benefit because they received a tax credit, and they also were allowed to deduct depreciation of the full cost of the asset. For example, if a taxpayer's cost for an asset were $ 1,000, the taxpayer (a) would receive an investment tax credit of $ 100 (10% of the $ 1,000 cost of the asset), and (b) could deduct, through depreciation deductions, $ 1,000 (the full cost of the asset) over the life of the asset. See I.R.C. §§ 46(a)(1) and 46(b)(1).
In 1982, Congress passed the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. No. 97-248, 96 Stat. 324 (1982) ("TEFRA"), which provided for an adjustment to the property's "basis," the value of the property used in determining depreciation deductions.
Even after TEFRA was passed, however, a substantial amount of double benefit was still available.
This led many taxpayers to direct investments into categories of assets that qualified for the special treatment of the ITC and ACRS programs, which was considered to have had a detrimental effect on the economy. See, e.g., S. Rpt. 99-313, 99th Cong. 2d Sess., at 96 (1986). Tax-favored sectors attracted a disproportionate share of investment, to the detriment of tax-disadvantaged sectors.
Congress responded by passing the Tax Reform Act of 1986, Pub. L. 99-514, 100 Stat. 2085 (1986), which repealed the tax credit for new purchases and lowered overall corporate tax rates. Because some taxpayers already had committed to substantial asset acquisitions based on the expected benefits of the ITC program, Congress set up a complex series of transition rules to phase out the ITC over time. Under those rules, taxpayers wishing to receive the full value of ITC credits were required to place the qualifying assets into service and take the credits in a timely manner. Qualifying assets, i.e., those purchased prior to 1986, that were placed into service before 1987, were allowed the full 10% credit, while those put into service during 1987 earned a reduced credit of 8.25%. Those put into service during 1988 or later received a 6.5% credit. This phasedown, known colloquially as the "ITC haircut," thus encouraged taxpayers to put qualified assets into service sooner rather than later. See I.R.C. § 49.
Under these transitional rules, Congress also eliminated the double benefit by requiring basis reductions to equal 100% of the credits earned. This meant that a qualifying asset costing $ 1,000, put into service in 1986, would earn a $ 100 credit, and its basis would be reduced by the entire $ 100, to $ 900.
Tax credits, such as those at issue in the ITC program, can generally be used only to reduce income taxes owed; they cannot be used to reduce taxes to less than zero so as to generate a tax refund. Absent a rule specifically allowing the credits to be carried forward to future years (or carried back to previous years), the tax credit would be lost. The rules of the ITC program contained both carryback and carryforward rules, and until 1986 they were simple: credits could be carried back up to three years or forward up to fifteen years. I.R.C. § 39(a). Taxpayers unable to carry credits back commonly saved their credits until they generated sufficient profits against which to offset them, because other than reductions in value due to inflation, the credits retained their full value. One of the 1986 changes, however, was the application of the ITC haircut to these types of unused tax credits. A 10% ITC credit earned in 1986, but not used that same year, shrank to 8.25% in 1987, and to 6.5% in 1988.
Because the corporate tax rates were being lowered, taxpayers who were losing the value of their ITC credits were simultaneously benefitting from gradually lowering tax rates. However, the transition rules set up a system that reduced the basis of assets in the year when the ITC was earned, instead of when the ITC was actually used. For example, a taxpayer who put a $ 1,000 asset into service in 1986 earned a 10% ITC credit of $ 100, but had to reduce the taxable basis of the asset (for ACRS purposes) by that same amount, to $ 900. Two years later, when the taxpayer was able to use the credit, it had been reduced by the ITC haircut from $ 100 down to $ 65, even though the asset's basis had already been reduced by the full $ 100 and could not be readjusted to take into account that the taxpayer had actually utilized only $ 65 of credit. Such a taxpayer therefore had a basis of $ 935 for the asset ($ 1,000 paid in 1986, minus the $ 65 allowed as a credit in 1988), but had to depreciate the asset as if it had paid $ 900 ($ 1,000 paid in 1986, minus the $ 100 ITC earned in 1986), thus losing $ 35 of basis that would otherwise have been used for deduction calculations.
Plaintiffs MCI and TELECOM*USA filed claims with the IRS in 1994 seeking refunds to recover such lost bases.
The IRS denied their claims entirely, and, after plaintiffs had exhausted their administrative remedies, they filed this action.
Plaintiffs assert three grounds for recovering the lost basis of their investment properties. Plaintiffs first assert that they should be allowed to amend their returns for the years in which qualifying assets were placed into service by upwardly adjusting their assets' bases to reflect the amount of ITC actually utilized. (Count I). Plaintiffs alternatively assert that they should be allowed to count the lost basis as additional investment, warranting redetermination of the basis (Count II), or deduct the amount of the credit that was taken away due to the ITC haircut (Count III).
Plaintiffs contend that Congress did not intend for them to lose basis in their assets. They contend that a proper reading of the code leads to the interpretation they seek. They ask the Court to disagree with IRS Revenue Ruling 87-113, 1987-2 C.B. 33, and the reasoning of the Federal Circuit in B.F. Goodrich Co. v United States, 94 F.3d 1545 (Fed. Cir. 1996). Defendant responds that the tax code does not allow for recovery of plaintiffs' lost basis. Defendant also requests that the Court exclude from its consideration a declaration of Kenneth L. Wertz, plaintiffs' expert witness.
Summary judgment may be granted only if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986). Taxpayers carry the burden of establishing that Congress clearly authorized the benefits or deductions they seek. New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440, 78 L. Ed. 1348, 54 S. Ct. 788 (1934); Interstate Transit Lines v. Commissioner of Internal Revenue, 319 U.S. 590, 593, 63 S. Ct. 1279, 87 L. Ed. 1607 (1943). Exemptions from taxation are to be construed "narrowly," Bingler v. Johnson, 394 U.S. 741, 751-52, 22 L. Ed. 2d 695, 89 S. Ct. 1439 (1969), and are "not to be implied," but "unambiguously proved." United States v. Wells Fargo Bank, 485 U.S. 351, 354, 99 L. Ed. 2d 368, 108 S. Ct. 1179 (1988).
I. Admissibility of the Wertz Declaration
Before turning to each of plaintiffs' claims, the Court first addresses defendant's allegation that the Wertz declaration is "irrelevant and inadmissible." Def's Mem. in Opp'n to Pls.' Mot. for Summ. J. at 4. Defendant claims that this declaration falls outside the scope of expert testimony permitted by Federal Rule of Evidence 702 and therefore must be excluded.
Rule 702 provides that "if scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an ...