City of Tucson, Arizona v. Commissioner of Internal Revenue

is obtained in the administrative relief Conclusion ceedings. Ticor Title Insurance Co. v. Because appellant we hold that is enti- Commission, Trade Federal tled to an hearing administrative under 5 (D.C.Cir.1987) Edwards, (opinion U.S.C. we reverse contrary de- § J.). cision of the District Court. ap- Because pellant must process exhaust the remaining by appellant claims raised seeking review, before judicial further we case, including in this his constitutional vacate the remainder of the District claims, may argu also be to the decision, Court’s expressing any without they judicial ment that are immune from opinion disposition on the appel- ultimate review either 7532 or 50 U.S.C. remaining statutory lant’s and constitution- — Doe, U.S.-, Webster S.Ct. Cf. Finally, al claims. we remand this action cert, (1987), granting appropriate District Court for an (D.C. Casey, 796 F.2d 1508 to Doe v. Cir. directing order the Secretary of Defense to 1986) (question presented: whether deci pursuant act to 5 U.S.C. 7532. sion of CIA Director under 50 U.S.C. part, Reversed in part, vacated in 403(c) discharge employee CIA for na remanded. security judicially tional reasons is reviewa APA); Department Navy ble under the — U.S.-, Egan, (1987),

L.Ed.2d 868 granting cert. to 802 (Fed.Cir.1986) (question present

F.2d 1563 TUCSON, Systems ed: whether Merit CITY OF Protection ARIZONA, Appellant, Board, reviewing in course of removal of employee required for failure to maintain clearance, security may review substance COMMISSIONER OF INTERNAL underlying decision to revoke the clear REVENUE, Appellee. ance). Were we to consider these claims at No. 82-2187. time, this we would have to confront the thorny issue of whether statutes that ex United States Appeals, Court of plicitly judicial curtail review certain ad District of Columbia Circuit. ministrative pre decisions were intended to Argued March judicial clude review constitutional Decided June claims; intent, and should find such pricklier question the even of whether this As Amended on Rehearing Denial of preclusion judicial review was itself con 24,1987. Sept. Bowen, stitutional. See Bartlett v. (D.C.Cir.1987),

F.2d 695 vacated and re

hearing (June 8, en granted, 1987). banc

These are certainly not issues that courts

should decide when the exhaustion of ad

ministrative remedies obviate the need

for their resolution. case,

In proceeded the District Court appellant’s

to decide claims without even

considering judicial whether or not a deter-

mination of proper. these claims was Con-

sequently, we vacate the decision of the concerning appellant’s

District Court

maining claims.

Michigan, vice, pro hac by special of leave Court, Archer, Jr., with whom Glenn L. Gen., Atty. Asst. and Paup Michael L. Farber, Justice, Attys., Dept. Richard of D.C., Washington, brief, appel were on for Wachtel, Counsel, lee. L. Michael Internal Service, D.C., Washington, Revenue also appearance appellee. entered an for Nelson, brief, David H. was on for City Phoenix, Arizona, curiae, urging amicus reversal.

Sidney G. Leech and Herman B. Rosen- thal, Baltimore, Md., brief, were on for Lawyers, Nat. Ass’n of Bond amicus curi- ae, urging reversal. ROBINSON, Judge,

Before Circuit MacKINNON, and WRIGHT and Judges. Senior Circuit Opinion by for the Court filed Judge Circuit ROBINSON. Dissenting opinion by filed Senior Judge Circuit WRIGHT. ROBINSON, III,

SPOTTSWOODW. Cir- Judge: cuit City Tucson, Arizona, challenges a of the of the Trea- sury ground on the incompatibility with statutory proscription purports it implement. regulation1 provides that by funds established state and local governments payment principal interest on their bonds are imposed by restriction of the Internal Revenue Code.2 Each se- curity in an issue covered that section is “arbitrage bond,” classified as an the inter- enjoy any tax-exempt est on does not which municipal obligation. status as a The Unit- James, Jr., Phoenix, Ariz., upheld regulation.3 Charles E. ed States Tax Court appellant. find neither We text Miller,

Jay Atty., Justice, Dept. of the nor the scheme sustains the De- Supreme 103(c). Bar of the partment’s interpretation Court of the State of of Section 1.103-13(g) for a Tax discussion effect infra municipal Reform Act of 1986 on bonds issued 2. Tax Reform Act of Pub.L. No. August after 601(a), (1969) (codified 83 Stat. 656 as amend 103(c) (1982 Supp. ed at 26 U.S.C. & III T.C. 767 convenience, 1985)). For we refer to such obli gations, by politi whether issued a state or thereof, municipal unit cal as bonds. See Responsively prevalence Tax Court’s deci- of this therefore reverse the enacted, questioned practice, Congress and set sion aside 1969, provision Tax Reform Act deny- tion. tax exclusion of interest on I expect- bond issues the of which 103(a)(1) Internal Revenue ably produce profits.8 would Co- general exclusion of confers a inter- Code dified as Section of the Internal gross from municipal on income est bonds Code, Revenue provision expressly de- purposes of taxation.4 federal This non-exempt “arbitrage fines a separate bond” as concession has created a financial any obligation which is issued part as govern- in which and local market state an issue major portion all or a signifi- can ments borrow at interest rates proceeds of which are cantly reasonably expect- below those featured taxable obli- ed to be gations.5 directly While interest used or indirectly— differential (A) to securities ... or undoubtedly integral congressional is to a obli- gations may governmental reasonably to ... which be capacity effort enhance to expected public works,6 time finance it has also at the of issuance afforded issue, municipal opportuni- to issuers of such produce yield bonds to over the ty pursue purely monetary goals to at term of the issue which is materially animating legislative expense policy. of the higher ... than on obli- The exclusion has enabled and local gations of such or (B) governments to to market their bonds at funds which low were used proceeds directly indirectly rates interest and use the or to acquire to obligations purchase providing taxable securities securities or com- described in higher (A).9 paratively yields. provid- subparagraph Instead of designed While public improvements, funds for to cover all munici- transactions in which pal simply issues thus could be used issues could serve to gamer conduits,10 profits some extent as disparity to from in in- investment Sec- tion Serving perva- terest rates. does curtail the fashion as most entrepreneurial governmental by effecting sive and serious vehicles abuses a “me- issuers, chanical municipal securities test”11 for identification of functioned as munici- bonds, pal arbitrage derogation actually functioning securities legis- of the as arbi- trage intent.7 bonds.12 lative 4. 4, 756, 1916, 6, pra U.S.App.D.C. Revenue Act 39 Stat. 758 223 at 692 (codified (1916) as amended 26 U.S.C. F.2d at 133-137. 103(a)(1) (1982)). 103(c)(2)(A)-(B) (1982). 9. 26 U.S.C. § See Peaslee, 103(c): The Limits Mu- id., 103(c)(4)(A)-(B); Washington v. nicipal Arbitrage Sinking Bond the Invested After Commissioner, 6, U.S.App.D.C. 223 Fund, 421, 34 Tax L.Rev. 423 136, 692 F.2d at congressional 6. For objective statements of the 6, Washington underlying present exclusion and its statu 133, U.S.App.D.C. 223 forerunner, 692 F.2d at tory see, e.g., Helvering v. Stock Bank, 84, 87, holms Enskilda 50, 51, Washington 214 Bonds issued after v. 5, August are sub 223 406 n. ject provisions of the Tax Reform Act of (1982) F.2d (citing 692 130 n. 5 J. Chom 99-514, 100 Pub.L. No. (codified Stat. 2085 mie, (1973)); Federal Income Taxation 36 scattered sections of Titles Corp. American Viscose 56 (West 46 and 49 U.S.C.A. Supp.1987)), (3d Cir.), denied, F.2d cert. which was appeal enacted while this pend was L.Ed. Drew v. ing. legislation, This 103?(b)(2) in Ü.S.C.A.§ States, (5th Cir.1977); United (West Supp.1987), tax-exempt denies status to (8th Fox v. United Cir.1968). "[a]ny arbitrage meaning bond within the of sec 148.” provides; Section 148 then Note, 7. See Exempt The Tax Status Local (a) Arbitrage purposes bond defined.—For Government tions, Arbitrage Bonds Used in Transac- of section “arbitrage term bond” Geo.Wash.L.Rev. any means bond issued as any of an issue 103(c) (1982 1985). 8. 26 U.S.C. Supp. & III portion of which are reason- legislative history Pertinent of this ably (at expected the time of issuance of the examined in bond) su- directly to indirectly— used or point The focal of the case at bar is a interest on municipal bonds are to be “proceeds deemed Trea- issue.” Accord- ingly, investment of sury purportedly pursuant higher- to its authori- such funds in yielding pending securities regulations the occasion ty “prescribe such as to discharge principal and interest on the necessary carry purposes out bonds issued would transform them into That un- [Section ].”14 nonexempt arbitrage bonds. implement statutory provi- dertakes to classifying sion state or validity The of this is the sole producing local issues “all or a question appeal. on The of Tucson major portion reasonably of” which “are issued four series of obligation expected directly or indirectly be used bonds, proposed fifth, to issue a replace ... which were used di- finance various works in obedience rectly acquire” instruments special to the mandate of a bond refer- offering materially higher yield.15 endum.17 of each issue have regulation specifies that amounts held in expended been and solely would be sinking pay principal public improvements,18 to be used to or principal and and (1) investments, Cir.1984); acquire higher yielding to Bergland, West v. (8th 611 F.2d 710 Cir.1979). or Moreover, City yet (2) while the has not issued the to funds which were used di- precipitating litigation, this rectly higher the yielding functional or to identity 148(a)(2) of old § and new § investments. subsection, compels controversy the purposes conclusion that the For of this be- bond alive, and, parties together tween the shall be remains treated as an bond if the intentionally tiny portion congressional with the issuer uses absence of of the validation of proceeds Reg. 1.103-13(g), Treas. § of the issue of which such bond is a lead us to conclude that (1) paragraph today in a manner described in the result we reach would also follow were (2). exclusively or the issue to be considered under the Thus, govern to mu §old continues emphasize new tax law. scope the narrow August

nicipal than bonds issued not later holding. provisions our Other of the Tax Reform 148(a) applies to issued § while new those taxability Act of 1986 well affect the language 148(a) issue, see, City proposes thereafter. The ly of new close bonds the e.g., § 103(c)(2), however, 148(f) (West mirrors Supp.1987) that of old U.S.C.A. (required § § and re- case, provision States), they the critical bate bearing this old to United have no 103(c)(2)(B), functionally ruling § is Reg. 1.103-13(g) identical to new on our that Treas. § can- 148(a)(2). 9; See text at note H.R.Conf. by not be by sustained either §old or new § Cong., (1986). Ren 2d 99th Sess. 148(a). 99-84. II-86 predeces its like Act of Rerorm Tax 13. The Treas.Reg. 1.103-13(g) sor, provisions relating specifically contains no 26 U.S.C. § 103(c)(6) (1982). funds, sinking any application or of the arbi trage upon, section thereto. The The section relied 26 U.S.C. House Conference 15. 103(c)(2)(B) (1982), Report accompanying fully legislation, quoted the 1986 more 99-841, Sess., R.Conf.Rep. Cong., H. expressly No. 99th 2d text at note 9. The XIII, (1986), tit. provision at 11-744 mentioned that current identified this as the basis Treasury 78-349, Department regulations challenged regulation. "define bond for the Rev.Rul. proceeds original proceeds, to include invest C.B. 1978-2 proceeds, ment amounts accumulated in sink The relevant subsections of the regulation fund, ing ceeds, replaced by pro other amounts provide: proceeds refunding and transformed of a (g) sinking (1) Invested In funds — issue," approve disap id. but did not either or sinking Amounts held in a fund for an issue prove any aspect sinking regulation, fund (and receipts sinking from investment of the here, le., specific or address the issue whether fund) proceeds are treated a-: of the issue. deposits sinking in a fund of revenues collected (2) Sinking "sinking The term fund" fund "replace” from ad valorem taxes the fund, redemption includes a debt service an earlier bond issue that were devoted to fund, fund, fund, any reserve improvements. say passing We cannot fund, similar to the extent that the issuer report sinking reference in the funds amounts reasonably expects pay to use the fund to congressional Treas.Reg. ratification- of principal or interest on the issue. Cl979). 103-13(g) Evangelical I. See St. Martin 1.103-13(g)(1)-(2) Dakota, Lutheran Church v. South Commissioner, supra note City 2142, 2150-2151, L.Ed.2d 78 T.C. at 768-769. Donovan, AFL-CIO been U.S.Add.D.C have The bond at 770. 18. Id. 209, 217 FDIC, (8th sewers, improvements State Bank v. provide citizen street used first, third, interest on the and fifth impermissible series as an extension of the arbi- paid from sinking would a common trage-bond 103(c),23 of Section required law, fund.19 As City and from the Tax uphold- Court’s decision annually tax, property levies an ad valorem sinking regulation the City payments from which annually made took appeal.24 into the fund.20 The candidly acknowledges, an intent to invest placed

the tax II higher-yielding securities until needed The governing standard our review issues,21 for debt service on its own and regulation under attack is well es problem. therein lies regulation treasury tablished. A com here, implicated while in inapplicable terms significant judicial mands deference as a series, to the already-issued first and third construction of a authority statute 103(c)’s would to Section administration,25 entrusted with its espe striction all from future issues when, cially here, utilizing fund.22 statute so con For this rea- son, City petitioned strued itself express the Tax contains grant Court for a judgment declaring rulemaking power.26 invalid must facilities, libraries, lighting, police 124, 129 (1944). and and fire It also is an recreational facilities. drawing upon scheme agency, not judicial, expertise in E.g., revenue matters. Id. at 769 & n. 3. Correll, 299, 306-307, United States v. not, however, Id. at 768. The fund would payment exclusive source of monies for issue; any legally debt service on the available (1982); 26. See 26 U.S.C. § United revenues could be so used. Id. Co., Vogel 16, 24, 102 States v. 455 U.S. Fertilizer 821, Id.; 827, 792, (1982); City S.Ct. 70 Letter from L.Ed.2d Tucson to 800 Commis- Aier (June 29, States, 1979), 19, sioner of chants Natl Bank Internal Revenue v. United 583 F.2d (1st (R.Doc.) 9, Cir.1978); 2-B, Record 22 Document exhibit at Goldman v. 382, 1-2. (6th Cir.), denied, 497 F.2d 383 cert. 419 1021, 496, (1974); U.S. 95 S.Ct. 42 L.Ed.2d 295 City 3, supra Tucson v. note States, Title Ins. & Trust Co. v. United 654 F.2d 78 T.C. at 773 n. 10. 604, (9th Cir.1981); 606 United Telecommunica tions, 1383, Inc. v. 1387 Declaratory Judgment, 23. Petition (10th Cir.1978), denied, 917, cert. 442 U.S. 99 (T.C.) Tucson v. No. 3889-80B 2839, (1979). S.Ct. 61 L.Ed.2d 284 Courts fre (filed 19, 1980), Mar. petition R. Doc. 2. The quently justified judicial have deference in this pursuant was filed to 26 U.S.C. § 7478 part by area at least in reference to the contem poraneity see, challenged interpretation, Appeal, City 24. Notice of Tucson v. Commis- e.g., States, 247, Rowan Cos. v. United 452 U.S. sioner, 26, (T.C.) (filed 1982), No. July 3889-80B 253, 2288, 2292, 814, 101 S.Ct. 68 L.Ed.2d 821 Appendix Appellant II to Brief for at iii. (1981); States, 25, Fulman v. United States, 528, 533, 533, 845, Fulman v. United 8; 434 U.S. 98 U.S. 434 98 S.Ct. at 55 L.Ed.2d at 841, 845, 1, (1978); Bingler S.Ct. Co., 55 L.Ed.2d 8 v. 1439, Commisioner v. South Tex. Lumber Johnson, 25, 501, 698, 394 U.S. 89 S.Ct. 333 U.S. at 68 S.Ct. at 92 L.Ed. 695, (1969); 836; 22 Club, L.Ed.2d Country White v. Winchester Co., 25, 41, 430, Commissioner v. South Tex. Lumber 333 315 U.S. at 62 S.Ct. at 86 L.Ed. 496, 501, 695, 698, 831, 626, U.S. 68 position reflecting S.Ct. 92 L.Ed. a the well-entrenched (1948); Club, 836 Country judicial White v. Winchester policy respecting administrative con 32, 41, 425, 430, 619, statutes, 315 U.S. 62 S.Ct. e.g., 86 L.Ed. structions of EEOC v. Associated deference,” 590, This 17, "rule of Dry Corp., Fulman v. Goods 449 U.S. 600 n. 533, supra, United 434 U.S. at 98 S.Ct. at S.Ct. 823 n. 66 L.Ed.2d 770 n. 17 (1981); Gilbert, 55 L.Ed.2d at is a manifestation of the General Elec. Co. v. 429 U.S. commanding respect doctrine for in- S.Ct. 50 L.Ed.2d terpretative agency rulings (1976); Tollman, cogent 1, 16, indicia of Udall v. 380 U.S. 85 S.Ct. FCC, E.g., intent. CBS v. 453 U.S. 13 L.Ed.2d That the S.Ct. contemporane is not a FCC, Broadcasting 103(c)(2)(B) Red interpretation Lion Co. v. ous of § the De —as concedes, expressly itself see Brief for L.Ed.2d Appellee Skidmore v. & at 26—thus dilutes the deference to be Swift Co., 134,140, 161,164, accorded it. “implement[s] edly implements. if the con

be sustained it Under gressional in some reasonable 103(c)(2)(B), mandate municipal a bond issue forfeits manner;”27 if only it be nullified “un its tax if exclusion the issuer uses all or a plainly inconsistent” reasonable and with major portion therefrom to that mandate.28 “replace” funds used earlier however, higher-yielding Prototypically, securities.32 emphasize, prin- that these ciples, providing impetus judicial replacement while occurs when the issuer regulations, disputed validation of do not places in an investment fund monies that give Treasury Department carte otherwise would be dedicated to a discrete interpreting the tax laws. blanche As use, and then channels the it, Supreme put has Court of its bond issue into the void created judicial ment sets “the framework for 103(c)(2)(B) the diversion. Section endeav- it,”29 analysis; displace it does ors to thinly eliminate this veiled method of when we “can measure the Commissioner’s circumventing prohibition arbitrage. on interpretation against specific provision assailed, The here Code, interpretation we owe less shapes the statutory command and extends deference” than it would otherwise com- beyond it far these contours. It theorizes routinely subjected mand.30 have Courts of a regulations scrutiny administrative to close used, actually “replace” whatever manner review, annulling on those that are incom- monies, derived, from whatever source de- patible underlying with the statute or oth- posited in a fund that will used unreasonable, including erwise those at- pay principal on interest the bonds.33 tempting “enlarge scope of the stat- question whether this formulation is ute.” prescriptions, Mindful of these faithful to the concept embod- presented. turn to the issue ied in Section is the crux of this case.

Ill A. Courts attribute to nontechnical statu- incorporates reading tory their expansive ordinary sig- words “known and the statutory replacement theory suppos- it longstanding guide nification.” This 25, Correll, States, 575, (6th 27. United States v. 389 Bates v. United 581 F.2d 579 307, 450, Cir.1978); U.S. Caterpillar 88 S.Ct. at 19 L.Ed.2d at 543. Tractor Co. v. United States, 1040, 1045, 589 218 Ct.Cl. 517 Co., (1978). 28. Commissioner v. South Tex. Lumber su- 25, 501, 698, pra note 333 U.S. at 68 S.Ct. at 92 Moreover, taxing strictly statutes should L.Ed. at 836. any construed and doubt resolved in favor of taxpayer. Davenport Ralph v. N. Peters & 546, 550, Cartwright, 29. United States v. 411 U.S. Co., (4th Cir.1967); 386 F.2d 199 Bookwalter v. 1713, 1716, 528, 93 S.Ct. 36 L.Ed.2d 533 (8th Ind., Cir.1965); Mayer, 345 F.2d 476 Luben States, (9th Inc. v. United 707 F.2d 1037 Cir. States, 26, 30. Rowan Cos. v. United 1983); States, Renick's Estate v. United 687 F.2d 253, 2292, 452 U.S. at 101 S.Ct. at 68 L.Ed.2d 371, (1982); Co., 231 Ct.Cl. 457 Mobil Petroleum Blaz, (D.C. 1975). F.Supp. Inc. v. 416 Guam 98 103(c)(2)(B) (1982). Co., 187, 32. 26 U.S.C. Busey v. Deshler Hotel 190 (6th Cir.1942); see also United States v. Calama- ro, 351, 357, 359, 1138, 1142, regulation reproduced 354 U.S. 33. The text of the is in 77 S.Ct. 1143, 1394, 1399, (1957); supra. 1 note 16 L.Ed.2d 1399-1400 107, Helvering Corp., v. Credit Alliance 316 U.S. 113, 989, 992, 1307, 62 Colony S.Ct. 86 L.Ed. 1312 34. Old R.R. v. 284 U.S. (1942); 441, 552, 560, 211, 213, 484, Helvering, Koshland v. 298 U.S. 52 S.Ct. 76 L.Ed. 489 447, 767, 770, 1268, McCartee, (1932) (6 (quoting Levy 56 S.Ct. 80 L.Ed. 1273 31 U.S. (1936); 245, 251, 102, Pet.) 110, 334, (1832)); Iselin v. United 270 U.S. 8 L.Ed. 337 see also 248, 250, 566, (1926); 185, 46 Hochfelder, S.Ct. 70 L.Ed. & Ernst n. 569-570 Ernst 425 U.S. 199 Lynch Co., 315, 321, 19, 1375, 19, 668, v. Tilden Produce 265 U.S. 96 S.Ct. 1384 n. 47 L.Ed.2d 680 488, 490, 575, (1924); (1976); Alcala, 44 S.Ct. 68 L.Ed. 1036 n. 19 580-581, Burns v. 420 U.S. 1180, 1184, 223 95 S.Ct. 43 L.Ed.2d 409, 412, 133, 136; (1975); Chicago 692 F.2d at 475 Banks v. Grain Trimmers

1289 statutory special assumes construction formula in Section respect with to revenue laws in stature funds which were used direct- —“to 103(c) particular,36 general35 and Section in ly securities” offer- dispositive we find it here.37 As ordi- ing materially higher yields.40 Congress comprehended, “replace” narily used and is language already limited its to funds expressions “to take the equated with such higher-interest obligations vested in that of,” place “to serve as a substitute for or subsequently recouped through a bond of,” supplant.”38 The successor and “to issue. regulation simply cannot be reconciled with these common under- The disassociation of the statute from standings “replace.” totally ignor- By becomes all the more evident origin sinking fund revenues when we again look once to the facts of through subsequent taxation and the uses noted, this case. As we have the monies put, to which the bond are to be comprising City’s sinking fund are de- Treasury Department has severed all rived, required by law, from ad connection between the and the property valorem taxes levied for the sole precondition operation of the statute— purpose defraying debt service on out- place used to take the standing bond issues.41 In its effort of, for, succeed, sup- to substitute justify application rule or, statute, plant, language in the “replace” deposited circumstances, monies into the the statute these the De- fund.39 argues that City’s “replace” bond issues tax revenues “replace”

This construction of is bol- past raised, stered use of the yet tense to be might and which never be Ass’n, 459, 465, 1140, 1144, proposed by 390 U.S. 88 S.Ct. 20 ward construction” (1968); ment). Holly L.Ed.2d Addison v. Hill Prods., Inc., 607, 617-618, Fruit 322 U.S. 64 S.Ct. 1215, 1221, argued, (1944); has not nor L.Ed. could United agree, Bank, 245, 258, "replace” that the word v. First States Natl 234 U.S. 846, 849, specialized a technical term (1914); endowed with a S.Ct. 58 L.Ed. meaning. Lawrence, Neither (16 How.) text nor the Maillard v. 261, 57 U.S. legislative history suggests Congress en- 14 L.Ed. anything dowed this term with other than its ordinary signification. per- and usual We thus Malat v. Riddell, 383 U.S. departure ceive no occasion for from traditional 1030, 1032,16 (1966) (per S.Ct. L.Ed.2d standards of construction in this case. curiam); Hanover Bank v. U.S. Webster’s Third New International Dictio- (1962); Korell, Commisioner v. nary 1925 94 L.Ed. Crane v. perception replacement pervading 39. The S.Ct. has eased actual bond Co., Helvering v. William Flaccus Oak Leather “proceeds” completely regulatory pic out of the 247, 249, 878, 880, 313 U.S. 61 S.Ct. 85 L.Ed. ture, notwithstanding "proceeds” that these (1941); Helvering Joaquin v. San 103(c)(2)’s one of two central elements in § Co., 496, 499, Fruit & Inv. 297 U.S. 56 S.Ct. regulation exposes formulation. The itself the (1936); Lang 80 L.Ed. v. Commis- upon statutory distortion inflicted the scheme sioner, 534, 535, U.S. 53 S.Ct. declaring unqualifiedly by that monies held in a Lederer, Ganay L.Ed. De fund are to be “treated as L.Ed. Treas.Reg. 1.103-13(g)(1) the issue.” United States v. Nat- Buffalo does, particular Ignoring, as it the circumstanc Co., ural Gas Fuel involved, regulation the further es reflects the restructuring fundamental statutory replacement formula. 407, 408, 409, 413, 40. 26 U.S.C. 103(c)(2)(B) (1982) at (emphasis 131, 132, 133, (according language added), quoted in in relevant in text 103(c) accepted meaning," its "common and note 9. reading" "commonly its "most natural and its the “awk- accepted meaning,” rejecting while See text at note 19. replacement This un- the bond issues.42 that a occurs each raised time munic- but only to confirm our ipal simply by bonds position realistic serves virtue of the predicated regulation obligation repayment.45 that the and mechanics of conclusion unrecogniza- replacement upon a notion of Unless contractually debt service is con- funds, in statute. availability ble the fined to of earmarked general the issuer’s revenues consti- will by analysis that the dis- Persuaded this tute the payments source from which language the puted regulation stretches principal and interest will be made. The breaking beyond the statutory theory by Depart- advanced the as an point, we cannot sustain it authorized regula- ment to rationalize the role that the view, In our the implementation thereof.43 assigns tion funds contains at sought Treasury Department sculpt has ap- least the rudiments of a tentacular statutory straight-forward barring proach respect at least to in which —with aimed at transactions exclusively by issues not to be retired previously ceeds funds invested designated funds set aside and for that regulatory higher-yielding securities into a purpose proscription encompassing financial ar- —investments derogation 103(c)(2)(B). as a of Section rangements for retirement of the bond is- approach think the wide swath such an by after-acquired temporarily sue so threatens to cut into investment doing, invested. In so has incongruity alternatives underscores the forged, anot reasonable between the mandate, im- but rather an Indeed, restriction. since we enlargement permissible by an unnatural have held that Section does not en- statutory language. construction of the compass all transactions which a munici- pal bond issue serves an investment B. conduit,46 reasonably the section cannot holding by Our is fortified consideration impose construed to such a widescale em- far-reaching consequences potential- bargo practices on the financial of state ly attending Department’s approach governments. and local 103(c)(2)(B). Although regula- applies only Seeking its terms parry logic, to bond issues regulation applies, be serviced “amounts held in a sink- ment insists that fund,”44 statutory interpretation merely not to revenues available to retire debt, upon which it rests is only not so confined. but to funds the issuer “reason- thought in the ably expects pay principal Imbedded is the to use ... Brief for oust, modifies, Appellee "indirectly” only 28-32. The Tax does property subsequent statutory “replace." Court seems to have assumed that tax- word It thus levied, collected, bypasses es would have been and used cannot sanction a rath- City’s replacement concept to finance works had the er than effectuates the tegral never issued. Tucson v. to the section. supra note 78 T.C. at 783. We find no basis us, 1.103-13(g)(1) (1979). for this inference. On the record before taxes, way knowing there is no whether these issues, they As the Tax Court stated in its decision even were assessed absent the bond up- for, prove immediately would be used or would holding regulation, of, adequate financing public to the task works. every borrowing may generally t be said occurs; namely, that a of funds Tacitly conceding "re- term the substitution of borrowed funds for mon- place” tion, weight bear the full cannot reasonably eys anticipated to be earned or Department congression- the contends that repay in the future to the collected debt. "indirectly’ al insertion of the adverb into supra note of coverage sufficiently broadens its § to n. 21. T.C. at 784 support imple- the as an authorized Washington supra (B). note subparagraph mentation of See Brief for 31; Appellee at 135. Appellee’s Response to Brief for Lawyers National Association of Bond as Ami- Appellee disagree. cus Curiae at 1-2. Brief for at 33. The word 47. See agree, pay interest on the issue.”48 We do not funds to principal and interest on mu- nicipal bonds, more, that this limitation inheres in the without renders the theory animating regulation. the The De- statutory applicable limitation thereto. For proposi- instance, endorsed the Department, itself has the treasury plainly regulation, are not opines tion that funds which bond that a reserve fund not proceeds may, designed at least in some circum- for service on municipal debt stances, 103(c)’s subject to governed issue nevertheless is to expected if reasonably striction even not to Section if pledged the fund is as be used for debt service.49 The Although Department collateral.53 the has willingness apply push ment has indicated its declined to reasoning beyond the hypothesized,54 the restriction to funds thus used “indirect- facts unsurprising out- ly” though actually growth to retire bond Department’s thinking could debt,50 wielding as well as to transactions deemed well statutory prohibi- be a against general “an artifice or in circumvention of simply device” be- 103(c),51 rebutting any thus further cause their availability pay principal of interest, reasonable-expecta- when, idea of adherence to a especially commonly as note, too, occurs,55 they “pledged” tion standard. We that occasion- are as collateral for ally Surely Department’s has articulated an al- the issue. idea of holding “arbitrage” any pecuniary ternative standard in that funds benefit — subject exploitation whatsoever from of limitation when the inter- est bearing enough differential56—is broad invested securities a “nexus or to sanc- tion that doctrinal sufficiently relationship” direct extension. Under a with sort, scheme of this mere use available bond issue.52 purchase monies to higher-yielding securi- disproving Instead the claim that its ties, discharge rather than to principal or replacement concept augurs widescale interest indebtedness on the bond policies trusion into the financial of state might easily be characterized as an enlist- governments, Department’s and local differential, ment of the and hence as arbi- disparate practices have accentuated our trage. on that concerns score. It is but a small step positions already Accordingly, from the broad ad- Department’s pro availability contrary vanced to stance that notwithstanding, testations to the 78-348, Treas.Reg. 1.103-13(g)(2) supra Rev.Rul. note 1978-2 C.B. (nexus required exists 49. See Treas.Reg. 1.103-14(e)(7)(B)(ii), Exam- higher-yielding pledged where collateral); securities are as ple 1 82-101, supra Rev.Rul. note (requiring C.B. 1982-1 "a reasonable as- 50. See Rev.Rul. 78-302, 1978-2 C.B. surance that the collateral will be available if (implementing statutory provi- Situation 2 service”). pay needed to debt pertaining proceeds expectably sion to bond "indirectly acquire higher-yielding be used 55. See Peaslee, at 439. securities). 56. See Brief for Appellee at 30. The Tax Court 51. 1.103-13(j) Neither proposition, City endorsed this Tucson v. supra note 78 T.C. at but 103(c)(2)’s pro indirect-use nor its accept we cannot such a cavernous definition of concerning belying nouncement transactions "arbitrage." By exemption enactment of the tax appeal. “artifice or device” is at issue on this bonds, Congress contemplated do, however, They light shed on the marketing of that successful such securities to theory underlying regulation. gener- works often finance would relieve pre- al revenues of that burden. The activities See Rev.Rul. 78-348, 95, 96; 1978-2 C.B. see adoption cipitating 103(c) pursuit by of § 82-101, also Rev.Rul. — C.B. governments “arbitrage” profits, and local See note 49 supra. 410-411, U.S.App.D.C.at 692 F.2d at 134-135— See, involved, e.g., Rev.Rul. not freedom revenues for ("reserve exploitation general purposes, 1978-2 C.B. Situation 1 fund" the interest through constitutes differential investment of restric- "pledged issue); security generate tion because additional ceeds revenues. persuaded coverage we are the- both the section’s and the ory challenged regulation spawning authority beyond ment’s administrative portends sphere operation contemplated for Section by Congress. boundaries Ac- 103(c) surpassing cordingly, we reverse the order of the Tax provide expectably proceedings debt service on Court and remand the case for issues, potentially opinion. and extends not inconsistent with this an issuer’s revenues vestment of So ordered. pending maturity outstanding obli- gations. That neither the terms nor the WRIGHT, J. SKELLY Senior Circuit legislative antecedents of Section Judge, dissenting: purpose gener- congressional veal a to hold hostage to its restric- al Implementation congressional ban our tion buttresses conclusion that the De- “arbitrage on bonds” embodied in Section replace- entertains a notion of 103(a)(1)of the Internal Revenue Code is a significantly underly- ment at odds with the complicated matter, and delicate as the ing statutory precept. length Judge and detail Robinson’s scholarly opinion demonstrate. For two Finally, Department’s we note that the reasons, closely related I join cannot that interpretational technique only inflates opinion. 103(c)beyond configu- its intended ration, but also casts an administrative role First, substantially agree I with the rea- Department disproportionate for the to the soning of the Tax in this Court matter. congressional design. Early drafts of that delegation section envisioned a wholesale (1982). The T.C. 767 Commissioner’s con- Department power to the to define “arbi- financing clusion that of mu- bond,” trage Congress plainly abjured nicipal effectively allows bond by substituting that route a “mechanical” ceeds funds used to conjunction grant test in with a narrower acquire higher yield securities indirectly rulemaking power Department.57 to the eminently seems to me an posi- reasonable By idiosyncratic construction of Section tion. 103(c), has under- Second, consistently the courts have rec- expand authority its taken to a manner ognized that the Internal Revenue Service largely that would reinstate the defunct given breathing should be a fair amount of legislative approach. accepting In the nat- space in its of the Internal ordinary meaning ural and Revenue Code’s convoluted nooks and cran- language as the most reliable indication of See, e.g., nies. Fulman v. United effect, its intended our decision also re- regulatory equanimity in stores this area. L.Ed.2d 1 complex No more and arcane a statute exists than the IRC. IV When, here, reasonable, IRS has taken a regard Treasury With all due for the broad, meaning albeit view of the of one of Department’s pivotal role as administrator provisions, the Code’s we should defer to laws, of the revenue and as well its consid- that view. taxation, expertise in the field of erable Accordingly, I respectfully dissent. challenged regulation hold that the exceeds delegated power to im- 103(c)(2)(B). plement

tion attributes word “re-

place” and unreasonably an unnatural interpretation, thereby enlarges

broad flatly underlying legislative history "Congress implicitly stated 57. The recount- which we rejected any Commissioner,, grant authority of unlimited ed in bonds____” Treasury U.S.App.D.C.at to define Id.

Case Details

Case Name: City of Tucson, Arizona v. Commissioner of Internal Revenue

Court Name: Court of Appeals for the D.C. Circuit

Date Published: Sep 24, 1987

Citation: 820 F.2d 1283

Docket Number: 82-2187

Court Abbreviation: D.C. Cir.