IRS must consider a vessel-replacement extension application

Plain-English summary

Section 1359 permits a qualifying vessel operator to avoid recognizing gain when it replaces a disposed vessel within the statutory replacement period. The statute also allows the IRS to designate a later replacement date upon the taxpayer's application, but Treasury had not issued regulations prescribing the application's time and manner. The IRS advised that it must still consider such an application. The missing regulations concern how the statute applies, not whether the statutory extension procedure exists.

Ruling snapshot

• Question: Must the IRS consider a qualifying vessel operator's application for a later replacement date when no regulations prescribe the application's time and manner?
• Outcome: Advice given
• Key authorities: IRC § 1359(b); American Jobs Creation Act of 2004 § 295

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       memorandum
       Number: 201537021
       Release Date: 9/11/2015
       CC:PA:01:JBlack
       POSTF-114942-15

UILC: 9412.07-00

date: August 03, 2015

 to:   R. Scott Shieldes
       Associate Area Counsel
       (Large Business & International)

from: Elizabeth Girafalco Chirich
Branch Chief (Procedure & Administration, Branch 1)

subject: Section 1359 Application

       This Chief Counsel Advice responds to your request for assistance. This advice may
       not be used or cited as precedent.

       ISSUES

       I.R.C. § 1359(b)(2) states that a qualifying vessel-operator’s application for non-
       recognition of gain must be made at such time and manner “as the Secretary may by
       regulations prescribe.” The Secretary has not prescribed regulations. Must the Service
       nonetheless consider a qualifying vessel operator’s application?

       CONCLUSIONS

       The Service must consider a qualifying vessel operator’s application because the
       regulations contemplated under section 1359(b)(2) specify how, not whether, the statute
       shall apply.

       BACKGROUND

       Section 1359 was enacted by section 295 of the American Jobs Creation Act of 2004,
       Pub. L. No. 108-357, 118 Stat. 1418 (2004). The legislative history accompanying the
       American Jobs Creation Act states as follows with regard to section 1359:

             Generally, if an [sic] qualifying vessel operator sells or disposes of a
             qualifying vessel in an otherwise taxable transaction, at the election of the

POSTF-114942-15 2

      operator no gain is recognized if a replacement qualifying vessel is
      acquired during a limited replacement period except to the extent that the
      amount realized upon such sale or disposition exceeds the cost of the
      replacement qualifying vessels [sic]. Generally, in the case of the
      replacement of a qualifying vessel that results in the nonrecognition of any
      part of the gain under the rule above, the basis of the replacement vessel
      is the cost of such replacement property decreased in the amount of gain
      not recognized.

H.R. Conf. Rep. No. 108-755, at __ (2004), reprinted in 2004 U.S.C.C.A.N. 1341, 1427.

The legislative history further states that the purpose of section 295 of the American
Jobs Creation Act of 2004 is to provide American shippers the opportunity to be
competitive with their otherwise tax-advantaged foreign competitors. H.R. Rep.
No. 108-548(I), at 177 (2004).

Section 1359(a)1 provides that a qualifying vessel operator may elect not to recognize
certain gain on an otherwise taxable disposition of a qualifying vessel if the qualifying
vessel operator acquires a replacement qualifying vessel “during the period specified in
subsection (b).” That time period begins one year before the qualifying vessel is
disposed of and ends “(1) 3 years after the close of the first taxable year in which the
gain is realized, or (2) subject to such terms and conditions as may be specified by the
Secretary, on such later date as the Secretary may designate on application by the
taxpayer.” I.R.C. § 1359(b).

Subsection (b) also states that the “application shall be made at such time and in such
manner as the Secretary may by regulations prescribe.” Id. To date, the Secretary has
issued no regulations, nor any other form of guidance, prescribing the time and manner
in which a taxpayer shall make the election, and has specified no terms and conditions
for an application made under section 1359(b)(2). You have asked whether, when a
taxpayer acquires a replacement qualifying vessel after the period specified in section
1359(b)(1) has expired,2 the Service must consider the taxpayer’s application made
under section 1359(b)(2).

LAW AND ANALYSIS

1
The text of section 1359(a) is as follows:
In general.—If any qualifying vessel operator sells or disposes of any qualifying vessel in
an otherwise taxable transaction, at the election of such operator, no gain shall be
recognized if any replacement qualifying vessel is acquired during the period specified in
subsection (b), except to the extent that the amount realized upon such sale or
disposition exceeds the cost of the replacement qualifying vessel.
2
In practice, when taxpayers acquire replacement qualifying vessels within the period specified in
section 1359(b)(1), they simply file tax returns on which they do not recognize the gain on the vessels
disposed of.
POSTF-114942-15 3

    “A tax statute is self-executing if the regulations referred to in the statute deal

only with how, not whether, the tax is to be applied.” Sundance Helicopters, Inc. v.
United States, 104 Fed. Cl. 1, 11 (2012) (citing Occidental Petroleum Corp. v.
Commissioner, 82 T.C. 819, 829 (1984)); see also Int’l Multifoods Corp. v.
Commissioner, 108 T.C. 579, 587 (1997); Estate of Neumann v. Commissioner,
106 T.C. 216, 219 (1996). “The absence of regulations is not an acceptable basis for
refusing to apply the substantive provisions of a section of the Internal Revenue Code.”
Int’l Multifoods Corp, 108 T.C. at 587 (citing Estate of Neumann, 106 T.C. at 221; H
Enters. Int’l, Inc. v. Commissioner, 105 T.C. 71, 82 (1995); First Chicago Corp. v.
Commissioner, 88 T.C. 663, 669 (1987), aff’d, 842 F.2d 180 (7th Cir.1988); Occidental
Petroleum Corp., 82 T.C. at 829).

    To determine whether a statute is self-executing, “the Tax Court has looked for

explicit language supporting such a conclusion, has considered legislative history, and
has considered whether the statute can be applied without further explication in a
regulation.” Temsco Helicopters, Inc. v. United States, 409 F. App’x 64, 67 (9th Cir.
2010) (citing Francisco v. Commissioner, 119 T.C. 317, 322–23 (2002), aff'd on other
grounds, 370 F.3d 1228, 1230 n.1 (D.C. Cir. 2004)). Although not always explicitly
analyzing these factors, courts have found statutes to be self-executing where the
statutes provided as follows:

      “‘The Secretary shall prescribe such regulations as may be necessary or
       appropriate to carry out the purposes of this chapter, including . . .
       regulations . . . providing for the application of this chapter in the case of
       transferors who are [non-resident aliens].’” See Estate of Neumann, 106 T.C.
       at 217–18, 221 (quoting section 2663; applying the statute in the case of a
       non-resident alien and holding that the regulations contemplated reflected “a
       ‘how’ characterization”).

      “‘The Secretary shall prescribe such regulations as may be necessary or
       appropriate to prevent the avoidance of those provisions of this title [dealing
       with certain tax elements] . . . through the use of related persons . . . .’” See
       H Enters., 105 T.C. at 79, 81–82 (quoting section 7701(f); applying the
       provisions to related corporations because nothing in the language of the
       statute or the legislative history foreclosed application to related persons in
       absence of regulations).

      “[I]f the Transportation Tax is not collected from the purchaser, ‘under
       regulations prescribed by the Secretary,’ the carrier shall pay the tax to the
       government.” See Temsco Helicopters, 409 F. App’x at 67 (quoting
       section 4263(c); determining that the language of the statute set a
       straightforward requirement that was not contradicted by the legislative
       history, and that there was already a procedure for computing the tax and
       paying it to the government).

POSTF-114942-15 4

      “‘The Secretary shall prescribe regulations under which items of tax
       preference shall be properly adjusted where the tax treatment giving rise to
       such items will not result in the reduction of the taxpayer's tax under this
       subtitle for any taxable years.’” See Occidental Petroleum Corp., 82 T.C.
       at 819, 829 (quoting section 58(h); holding that “the failure to promulgate the
       required regulations can hardly render the new provisions of section 58(h)
       inoperative”).

A tax statute is not self-executing if the language of the statute provides that it “shall
apply only to the extent provided in regulations prescribed by the Secretary.” See
Alexander v. Commissioner, 95 T.C. 467, 473 (1990) (discussing the application of
section 465(b)(3) to activities described in 465(c)(3)(A)). In Alexander, the court noted
that the legislative history, which stated that section 465(b)(3) “shall apply only to the
extent provided in regulations prescribed by the Treasury,” supported its interpretation.
See id. at 473 n.7.

Here, unlike the statute in Alexander, section 1359(a) does not specify that it will apply
“only to the extent provided in regulations.” Cf. id. at 473. The contemplated
regulations are therefore more accurately characterized as indicating “how,” rather than
“whether,” the section applies. See Estate of Neumann, 106 T.C. at 221. Moreover, the
legislative history does not indicate that regulations are intended to be a prerequisite to
application of section 1359(a). See H.R. Conf. Rep. No. 108-755, at __, reprinted in
2004 U.S.C.C.A.N. 1341, 1427; see also H Enters., 105 T.C. at 82–84 (supporting
application of a statute where legislative history indicated Congress did not intend
otherwise). Additionally, the language of section 1359(a) sets a straightforward
requirement: a taxpayer may elect not to recognize gain on a qualifying vessel replaced
during the period specified in section 1359(b). See Temsco Helicopters, 409 F. App’x
at 67 (applying statute absent regulations where statute set straightforward
requirement).

Section 1359(b)(1) also sets a straightforward requirement: the period during which the
replacement qualifying vessel must be acquired shall end “3 years after the close of the
first taxable year in which the gain is realized.” Or, under section 1359(b)(2), subject to
terms and conditions as the Secretary may specify, “on such later date as the Secretary
may designate on application by the taxpayer.”

The legislative history does not differentiate between paragraphs (b)(1) and (b)(2): it
states only that “no gain is recognized if a replacement qualifying vessel is acquired
during a limited replacement period.” The language of paragraph (b)(1) creates a
minimum period, and the language of paragraph (b)(2) creates an extended period, “as
the Secretary may designate.” Neither the legislative history nor the language of
section 1359 provides that paragraph (b)(2) will apply “only to the extent provided in
regulations.” Cf. Alexander, 95 T.C. at 473.
POSTF-114942-15 5

By not allowing a taxpayer to apply for an extended time under section 1359(b)(2)
because the Service has not prescribed the time and manner for the application, the
Service would thwart the clear congressional intent—to allow taxpayers to make an
election. See Occidental Petroleum Corp., 82 T.C. at 829 (“[T]he failure to promulgate
the required regulations can hardly render the new provisions . . . inoperative.”). Thus,
the Service should consider a qualifying vessel-operator’s application under
section 1359(b)(2) even though the Service has not prescribed the time and manner for
the application.

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (202) 317-6845 if you have any further questions.