Appeal from the United States District Court for the Eastern District of Virginia, at Richmond. Richard L. Williams, Senior District Judge. (CA-95-1004)
Before NIEMEYER, MICHAEL, and MOTZ, Circuit Judges.
Reversed by published opinion. Judge Motz wrote the opinion, in which Judge Niemeyer and Judge Michael joined.
This case involves the now repealed "book income" provisions of the alternative minimum tax applicable to corporate taxpayers. Proper calculation of a corporation's "book income" is a somewhat esoteric endeavor, but was critically important to corporations that had high "book incomes" and low taxable incomes, as the millions of dollars in tax refunds at issue in this case demonstrate.
As part of the Tax Reform Act of 1986, Congress enacted the "alternative minimum tax." See 26 U.S.C.A.Section(s) 55-59 (West 1988) (amended 1988, 1989, 1990, 1992, 1993 and 1996). The alternative minimum tax replaced the corporate minimum tax, which had been passed in 1969 in response to the public perception that through deductions and tax-planning many corporations were paying no taxes at all. See Sandra G. Soneff Redmond, Comment, The Book Income Adjustment in the 1986 Tax Reform Act Corporate Minimum Tax: Has Congress Added Needless Complexity in the Name of Fairness, 40 Sw. L.J. 1219, 1221-22 (1987).
Congress concluded that the corporate minimum tax did not adequately address this problem and so enacted the alternative minimum tax as a more effective means of collecting taxes from taxpayers with significant financial profits who were escaping tax liability through tax preferences, deductions, or incentives. See S. Rep. No. 99-313, at 518-19 (1986); Staff of the Joint Comm. on Taxation, Explanation of the Tax Reform Act of 1986 434 (1987); Ahron H. Haspel & Mark Wertlieb, New Law Makes Sweeping Changes to Corporate Minimum Tax, 66 J. Tax'n 22, 22-23 (1987).
The concept behind this alternative minimum tax as applicable to corporate taxpayers was relatively simple. Corporations calculated both their "regular tax for the taxable year," and a second, alternative tax amount based upon a broader based definition of income, and increased by their financial, or book income. 26 U.S.C.A. Section(s) 55-56 (West 1988). In addition to its "regular tax" burden, a corporation would pay the amount the second, financial-based tax exceeded its "regular tax." By creating a second, alternative income measure that did not include many tax preferences and took into account the profits shown in a corporation's financial records, Congress hoped to remedy the situation in which "major companies have paid no taxes in years when they have reported substantial earnings." S. Rep. No. 99-313, at 519.
The actual mechanics of this alternative minimum tax were, of course, significantly more complex than the general concept. First, a corporation would assess its "tentative minimum tax" for the year. 26 U.S.C.A. Section(s) 55(a)(1) (1988). The "tentative minimum tax" was figured on the basis of the corporation's "alternative minimum taxable income," a much broader based calculation of income than the calculation used for "regular" tax purposes. In addition to the broader base for income calculation, the alternative minimum tax structure included the book income provisions to guarantee that a corporation with significant profits would not go untaxed. If a corporation's "adjusted net book income" -- the "net income or loss" of the corporation "set forth" in the corporation's "applicable financial statement" -- exceeded the corporation's "alternative minimum taxable income," the amount of the minimum taxable income would be increased by fifty percent of the "adjusted net book income." 26 U.S.C.A. Section(s) 56(f)(1), (2) (West 1988) (repealed 1990). In short, if a corporate taxpayer showed profits that outstripped its "alternative minimum taxable income," 50% of the profits above the originally calculated income were added to the "alternative minimum taxable income." This provision ensured that when a corporation showed a significant "financial" profit, that amount would be reflected in the "alternative minimum taxable income," and a corporation would be taxed on a portion of its financial profit even if it had little or no "regular tax" burden.
Once the "alternative minimum taxable income" was determined, a corporation figured its "alternative minimum tax" by subtracting two items -- (1) "the exemption amount," which was $40,000 for corporations, and (2) a foreign tax credit, see 26 U.S.C.A. Section(s) 55(b)(1); twenty percent of the remaining amount was the "tentative minimum tax." 26 U.S.C.A. Section(s) 55(b)(1), (d)(2) (West 1988). The corporation then subtracted its "regular tax" liability for the year from its "tentative minimum tax." The amount by which the "tentative minimum tax" exceeded the corporation's "regular tax" liability was the amount of the "alternative minimum tax," i.e., the amount of extra tax that the corporation would have to pay. Thus, the alternative minimum tax utilized two methods to ensure that corporations with significant profits but low "regular taxes" would pay taxes: it used a broader based "alternative minimum taxable income" and it added to that income a portion of the corporation's "book income," or the profits shown on the company's financial statements.
At issue in this case are the adjustments available to corporate taxpayers in figuring their "book income" for the purposes of the alternative minimum tax in effect for tax years 1987 through 1989. See 26 U.S.C.A. Section(s) 56(f) (repealed 1990). *fn1 Congress granted the Secretary of Treasury "authority to adjust" the definition of book income ...