Section of Taxation Publications
  VOL. 57
NO. 3
Contents | TTL Home

 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.
Deference to Revenue Rulings Seemingly Inconsistent with Treasury Regulations: Aeroquip-Vickers, Inc. v. Commissioner
Juhong Cha


Former section 38 provided an investment tax credit (ITC) to taxpayers who invested in certain productive assets known as “section 38 assets.” The ITC’s purpose is to encourage modernization and expansion of the productive facilities in the United States by reducing the net cost of acquiring new equipment and thereby increasing the profitability of productive investment. Generally, to benefit from the full ITC, a section 38 asset had to be retained and used by the taxpayer in its business for a minimum period of time. Section 47(a)(1) provides that a premature disposition of a section 38 asset causes a recapture of ITCs taken prior to the disposition of the section 38 assets. Congress stated that the purpose of ITC recapture is “to guard against a quick turnover of assets by those seeking multiple credits,” when the taxpayer disposed of a section 38 asset before the end of its useful life. An exception to the general ITC recapture rule exists in Regulation section 1.1502-3(f) for transfers of section 38 assets within a consolidated group of corporations filing a consolidated tax return. However, in Revenue Ruling 1982-20, the Service carved out an exception to the exception. Revenue Ruling 1982-20 provides that although Regulation section 1.1502-3(f) creates an exception to section 47(a) (1) recapture, that exception is premised on the assumption that there is an intent that section 38 assets remain within the consolidated group after its transfer. These different exceptions to ITC recapture engendered continuing disagreements among taxpayers, courts, and the Service. The U.S. Tax Court has found on a number of occasions that where a corporate taxpayer transferred its assets to a subsidiary within the consolidated group, and the subsidiary was then sold out of the consolidated group, ITC recapture should not be required under Revenue Ruling 1982-20 because there is no “intent” test ingrained in Regulation section 1.1502-3(f), and that a transfer of a section 38 asset within a consolidated group does not trigger ITC recapture. These Tax Court decisions have been uniformly reversed on appeal. Rejecting the Tax Court’s application of Regulation section 1.1502-3(f), the Second and Ninth Circuit Courts of Appeal upheld the Service’s application of Revenue Ruling 1982-20. In the latest case, Aeroquip-Vickers, Inc. v. Commissioner, the Court of Appeals for the Sixth Circuit joined its brethren. The court in Aeroquip held that Revenue Ruling 1982-20 was a correct expression of the law, and it rejected the Tax Court’s application of Regulation section 1.1502-3(f) because the recapture was mandated on the planned transfer of section 38 assets outside the consolidated group. The Aeroquip court’s holding conflicts with Regulation section 1.1502-3(f).Because the taxpayer in Aeroquip adhered strictly to Regulation section 1.1502-3(f), the Aeroquip court erred in holding that transfers of section 38 assets within a consolidated group followed by the transferee’s exit from the consolidated group triggers the ITC recapture under Revenue Ruling 1982-20.

Part I of this Note presents the factual backgrounds. Part II summarizes the relevant statutory provisions at issue in Aeroquip and the arguments set forth by the parties. Part III summarizes the decisions of the Tax Court and the Sixth Circuit. Part IV analyzes the Sixth Circuit’s decision in light of the Code, Regulation section 1.1502-3(f), Revenue Ruling 1982-20, and the Supreme Court’s decisions regarding the proper level of deference to be accorded to Revenue Rulings. Part V concludes that the Sixth Circuit erred by according deference to and following Revenue Ruling 1982-20.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


If you are an ABA member, you can receive The Tax Lawyer and the Section NewsQuarterly, both quarterly publications, when you join the Section of Taxation. Anyone can subscribe to The Tax Lawyer by contacting the ABA Service Center.