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Part I. Rulings and Decisions Under the Internal Revenue Code of 1986
Internal Revenue Bulletin 1998-36 · 2026-10-03 edition · updated 2026-10-04 · United States
Section 42.—Low-Income Housing Credit
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 280G.—Golden Parachute Payments
Federal short-term, mid-term, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 382.—Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change
The adjusted federal long-term rate is set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 412.—Minimum Funding Standards
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 467.—Certain Payments for the Use of Property or Services
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 468.—Special Rules for Mining and Solid Waste Reclamation and Closing Costs
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 482.—Allocation of Income and Deductions Among Taxpayers
Federal short-term, mid-term, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 483.—Interest on Certain Deferred Payments
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 642.—Special Rules for Credits and Deductions
Federal short-term, mid-term, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 807.—Rules for Certain Reserves
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 846.—Discounted Unpaid Losses Defined
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 936.—Puerto Rico and Possession Tax Credit
26 CFR 1.936–11T: New lines of business prohibited (temporary).
T.D. 8778
DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Part 1
Termination of Puerto Rico and Possession Tax Credit; New Lines of Business Prohibited
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Temporary regulations.
SUMMARY: This document contains temporary regulations that provide guidance regarding the addition of a substantial new line of business by a possessions corporation that is an existing credit claimant. These temporary regulations
reflect changes made by the Small Business Job Protection Act of 1996. The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice of proposed rulemaking on this subject in REG–115446–97, page 23.
DATES: These regulations are effective September 18, 1998.
Applicability: These regulations apply to taxable years of a possessions corporation beginning after August 19, 1998.
FOR FURTHER INFORMATION CONTACT: Patricia A. Bray or Elizabeth Beck, (202) 622-3880, or Jacob Feldman, (202) 622-3830 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 1601(a) of the Small Business Job Protection Act of 1996, Public Law 104–188, 110 Stat. 1755 (1996), amended the Internal Revenue Code by adding section 936(j). Section 936(j) generally repeals the Puerto Rico and possession tax credit for taxable years beginning after December 31, 1995. However, the section provides grandfather rules under which a corporation that is an existing credit claimant would be eligible to claim credits for a transition period. The Puerto Rico and possession tax credit will phase out for these existing credit claimants ending with the last taxable year beginning before January 1, 2006.
For taxable years beginning after December 31, 1995 and before January 1, 2006, the Puerto Rico and possession tax credit applies only to a corporation that qualifies as an existing credit claimant (as defined in section 936(j)(9)(A)). The determination of whether a corporation is an existing credit claimant is made separately for each possession. A possessions corporation that adds a substantial new line of business (other than in a qualifying acquisition of all the assets of a trade or business of an existing credit claimant) after October 13, 1995, ceases to be an existing credit claimant as of the beginning of the taxable year during which such new line of business is added. Therefore, a possessions corporation that
September 8, 1998 4 1998–36 I.R.B.
ceases to be an existing credit claimant either because it has added a substantial new line of business, or because a new line of business becomes substantial, during a taxable year may not claim the Puerto Rico and possessions tax credit for that taxable year or any subsequent taxable year.
Explanation of Provisions
This document provides temporary regulations that interpret section 936(j)(9)(B). In particular, temporary regulation §1.936–11T adopts principles similar to those in §1.7704–2(c) and (d) (transition rules for existing publicly traded partnerships) for determining whether a corporation has added a substantial new line of business.
Paragraph (a) of §1.936–11T states the general rule that, if a possessions corporation that is an existing credit claimant, as defined in section 936(j)(9)(A), adds a substantial new line of business during a taxable year, it will cease to be an existing credit claimant as of the close of the taxable year ending before the date of such addition. The paragraph also generally describes the subjects discussed in the other paragraphs in §1.936–11T.
Paragraph (b) addresses the meaning of the term new line of business. The temporary regulation generally follows the approach of §1.7704–2(d)(1), providing the general rule derived from §1.7704– 2(d)(2) that explains when a business activity is a pre-existing business, and from §1.7704–2(d)(3) that defines when that activity is closely related to a pre-existing business. Paragraph (b)(1) provides that a new line of business is any activity of the possessions corporation that is not closely related to a pre-existing business of the possessions corporation.
Paragraph (b)(2) explains that, except as provided in paragraph (b)(2)(ii), all the facts and circumstances (including factors A through H in paragraph (b)(2)(i)) must be considered to determine whether a new activity is closely related to a pre-existing business of the possessions corporation. Paragraph (b)(2)(i) applies the same eight factors considered in §1.7704–2(d)(3), except that the temporary regulation provides that in applying factor H, the possessions corporation may use either the new North American Industry Classification System Code (NAICS code) or the
Standard Industrial Classification Code (SIC code).
Factor (H) is whether the United States Bureau of the Census assigns the activity the same six-digit NAICS code (or fourdigit SIC code) as the pre-existing business. In the case of a pre-existing business or activity that is listed under a NAICS code of 99999, Unclassified establishments, or under a miscellaneous category (most NAICS codes ending in a “9” are miscellaneous categories), the similarity in NAICS codes is ignored as a factor in determining whether the activity is closely related to the pre-existing business. The dissimilarity of the NAICS codes is considered in determining whether the activity is closely related to the pre-existing business. For purposes of this section, NAICS codes must be set forth in the North American Industry Classification System Manual, United States, that is in effect for the taxable year during which a new line of business is added.
Similarly, in the case of a pre-existing business or activity that is listed under a SIC code of 9999, Nonclassifiable Establishments, or under a miscellaneous category (most SIC codes ending in a “9” are miscellaneous categories), the similarity in SIC codes is ignored as a factor in determining whether the activity is closely related to the pre-existing business. The dissimilarity of the SIC codes is considered as a factor in determining whether the activity is closely related to the preexisting business. The SIC codes are set forth in the Executive Office of the President, Office of Management and Budget, Standard Industrial Classification Manual, that is in effect for the taxable year during which a new line of business is added.
Paragraph (b)(2)(ii) provides safe harbors for determining whether an activity is closely related to a pre-existing business in three cases. First, an activity will be closely related to a pre-existing business if the activity is within the same sixdigit NAICS code or four-digit SIC code as the pre-existing business. Second, an activity will be closely related to a pre-existing business if the activity is within the same five-digit NAICS code or three-digit SIC code as the pre-existing business and the facts related to the new activity satisfy at least three of the factors in paragraphs (b)(2)(i)(A) through (G) of this section.
Third, an activity will be closely related to a pre- existing business if the pre-existing business is making a component product or end-product form, as defined in §1.936–5(a)(1), Q & A1, and the new activity is making an integrated product (or end-product form with fewer excluded components), that is not within the same six-digit NAICS code (or four-digit SIC code) as the pre-existing business solely because the component product and the integrated product (or the two end-product forms) have different end-uses.
Paragraph (b)(3) provides that a business activity of a possessions corporation is considered to be a pre-existing business if the possessions corporation was actively engaged in the activity within the possession on or before October 13, 1995, and the possessions corporation elected the benefits of the Puerto Rico and possession tax credit pursuant to an election which was in effect for the taxable year that included October 13, 1995.
Paragraph (b)(3)(ii) explains how the acquisition of all of the assets or the stock of an existing credit claimant can affect the determination of whether an activity is a pre-existing business. It is intended that an activity that is a pre-existing business of an existing credit claimant and that continues to be carried on in the possession by any affiliated or non-affiliated existing credit claimant should continue to be characterized as a pre-existing activity since all the assets and activity remain in the possession and no new activity is introduced there. A non-affiliated acquiring corporation will not be bound by any section 936(h) election made by the predecessor existing credit claimant with respect to that business activity.
Where all of the assets related to a preexisting activity of an existing credit claimant are acquired by a corporation that is not an existing credit claimant, but that continues the activity in the possession, the regulation provides that if the acquiring corporation makes an election under section 936(e) for the taxable year of the acquisition, the acquired activity will be treated as a pre-existing activity of the acquiring corporation, and the acquiring corporation will be treated as an existing credit claimant. The acquiring corporation will be deemed to satisfy the rules of section 936(a)(2) for the year of acquisition.
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nesses for taxable years beginning before January 1, 1996.
Special Analyses
It has been determined that this temporary regulation is not a significant regulatory action as defined in Executive Order 12866. Therefore, a regulatory assessment is not required. It also has been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations, and because the regulation does not impose a collection of information on small entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Moreover, the rules contained in this Treasury decision provide taxpayers with immediate guidance necessary to comply with section 936(j)(9)(B), which was effective for taxable years beginning after December 31, 1995. In the absence of temporary regulations, the only guidance regarding what is a new line of business is a reference in the legislative history to the principles of §1.7704–2(d) of the regulations. The only guidance regarding what is substantial is a reference to §1.7704– 2(c) in the Joint Committee Explanation (Blue Book) of Public Law 104–188. Although a possessions corporation might be able to construct a tax return position based on this information, the effect of misinterpretation is severe—disqualification as an existing credit claimant, without benefits for either the substantial new line of business or the pre-existing business. Taxpayers must have unambiguous guidance on which they can immediately rely in structuring their possession corporation business activities. For these reasons this temporary regulation is needed to ensure the efficient administration of the tax laws. Pursuant to section 7805(f) of the Internal Revenue Code, this temporary regulation will be submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on its effect on small business.
Drafting Information
The principal author of these regulations is Patricia A. Bray of the Office of the Associate Chief Counsel (International), within the office of Chief Counsel, IRS. However, other personnel from the IRS and the Department of the Trea
In the case of an acquisition of all the assets of a non-affiliated existing credit claimant, the acquiring corporation will not be bound by its predecessor’s elections under sections 936(a)(4) and (h) regarding that business activity.
A mere change in the ownership of a possessions corporation will not affect its status as an existing credit claimant for purposes of determining whether an activity is closely related to a pre-existing business.
Paragraph (b)(4) provides that the test for a new line of business is only applied at the time the new activity is added (as opposed to the test of whether a new line of business is substantial, which is applied annually under paragraph (c) of this section).
Paragraph (c)(1) provides the general rule for determining when a new line of business becomes substantial. The paragraph explains that, for purposes of section 936 and section 30A, a new line of business of a possessions corporation is treated as substantial in the first taxable year in which it satisfies either of the following two tests: (1) the possessions corporation derives more than 15 percent of its gross income for the taxable year from that line of business (the gross income test); or (2) the possessions corporation directly uses in that line of business more than 15 percent of its total assets (the assets test). This position generally reflects the rules of §1.7704–2(c)(1).
For purposes of the gross income test, paragraph (c)(2) provides that the denominator is the amount that is the gross income of the possessions corporation for the current taxable year, while the numerator is the gross income of the new line of business for the current taxable year. The gross income test must be applied at the end of each taxable year. The income is not to be annualized when a new activity begins late in the taxable year. Testing should occur on a company-by-company basis, if a consolidated group election was made pursuant to section 936(i)(5). In the case of a new line of business acquired through the purchase of all of the assets of an existing credit claimant, the gross income test for the acquiring corporation for the year of the acquisition includes only the income from the date of acquisition through the end of the taxable year that includes the date of acquisition.
Paragraph (c)(3) provides rules for applying the annual assets test. For purposes of the assets test, paragraph (c)(3) provides that the denominator is the adjusted tax bases of the total assets of the possessions corporation for the current taxable year, while the numerator is the adjusted tax bases of the total assets utilized in the new line of business for the current taxable year. Total assets include intangibles, cash and receivables. In order to provide for administrative convenience for both the taxpayer and the IRS and for greater certainty in the result, the test uses the adjusted tax bases of the applicable assets since these amounts are already reflected in the books and records of the possessions corporation.
Paragraph (c)(3)(ii) permits an exception to the assets test. A new line of business of a possessions corporation will not be treated as substantial as a result of the assets test if an event that is not reasonably anticipated causes the adjusted tax bases of the assets used in the new line of business to exceed 15 percent of the adjusted tax basis of the possessions corporation’s total assets. An event that is not reasonably anticipated would include the destruction of plant and equipment of the pre-existing business due to a hurricane or other natural disaster or other similar circumstances beyond the control of the possessions corporation. The expiration of a patent is not such an event and thus will not trigger this exception.
Paragraph (d) contains five examples that illustrate the rules of this temporary regulation.
Paragraph (e) provides that a possessions corporation that adds a significant new line of business during a taxable year may not claim the Puerto Rico and possession tax credit on its return for the taxable year in which the substantial new line of business is added or a new line of business becomes substantial.
Paragraph (f) provides that the temporary regulation will apply to taxable years of the possessions corporation beginning after August 19, 1998. However, taxpayers may elect to apply all of the provisions of the regulation for any open taxable years beginning after December 31, 1995. Once an election is made, the regulation will apply for all subsequent taxable years. The temporary regulations will not apply to the activities of pre-existing busi
September 8, 1998 6 1998–36 I.R.B.
sury participated in the development of these regulations.
- - - -
Adoption of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1—INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * * Section 1.936–11T also issued under 26 U.S.C. 936(j). ***
Par. 2. Section 1.936–11T is added to read as follows:
§1.936–11T New lines of business prohibited (temporary).
(a) In general. A possessions corporation that is an existing credit claimant, as defined in section 936(j)(9)(A), and that adds a substantial new line of business during a taxable year, or that has a new line of business that becomes substantial during the taxable year, will cease to be an existing credit claimant as of the close of the taxable year ending before either such taxable year. The term new line of business is defined in paragraph (b) of this section. The term substantial is defined in paragraph (c) of this section. Paragraph (d) of this section provides examples illustrating paragraphs (a) through (c) of this section. Paragraph (e) of this section instructs a possessions corporation not to claim the Puerto Rico and possession tax credit on its return if it has added a substantial new line of business during the taxable year. Paragraph (f) of this section is the effective date provision.
(b) New line of business —(1) In gen- eral. A new line of business is any business activity of the possessions corporation that is not closely related to a pre-existing business of the possessions corporation. The term closely related is defined in paragraph (b)(2) of this section. The term pre-existing business is defined in paragraph (b)(3) of this section.
(2) Closely related. All the facts and circumstances must be considered, including paragraphs(b)(2)(i)(A) through (H) of this section, to determine whether a
new activity is closely related to a pre-existing business of the possessions corporation, and thus is not a new line of business.
(i) Factors. The following factors will help to establish that a new activity is closely related to a pre-existing business activity of the possessions corporation—
(A) The activity provides products or services very similar to the products or services provided by the pre-existing business;
(B) The activity markets products and services to the same class of customers as that of the pre-existing business;
(C) The activity is of a type that is normally conducted in the same business location as the pre-existing business;
(D) The activity requires the use of similar operating assets as those used in the pre-existing business;
(E) The activity’s economic success depends on the success of the pre-existing business;
(F) The activity is of a type that would normally be treated as a unit with the preexisting business in the business’ accounting records;
(G) If the activity and the pre-existing business are regulated or licensed, they are regulated or licensed by the same or similar governmental authority; and
(H) The United States Bureau of the Census assigns the activity the same sixdigit North American Industry Classification System (NAICS) code or four-digit Industry Number Standard Identification code (SIC code) as the pre-existing business. In the case of a pre-existing business or activity that is listed under a NAICS code of 99999, Unclassified Establishments, or under a miscellaneous category (most NAICS codes that end in a “9” are miscellaneous categories), the similarity in NAICS codes is ignored as a factor in determining whether the activity is closely related to the pre-existing business. The dissimilarity of the NAICS code is considered in determining whether the activity is closely related to the pre-existing business. For purposes of this section, NAICS codes must be set forth in the North American Industry Classification System (United States) Manual that is in effect for the taxable year during which a new line of business is added. The official NAICS-United States Manual is available in both printed
and electronic versions from the National Technical Information Service (NTIS) at 1-800-553-6847 or at the NTIS NAICS web site at http://www.ntis.gov/naics. In the case of a pre-existing business or activity that is listed under a SIC code of 9999, Nonclassifiable Establishments, or under a miscellaneous category (most SIC codes ending in “9” are miscellaneous categories), the similarity in SIC codes is ignored as a factor in determining whether the activity is closely related to the pre-existing business. The dissimilarity of the SIC codes is considered in determining whether the activity is closely related to the pre-existing business. The SIC codes are set forth in the Executive Office of the President, Office of Management and Budget, Standard Industrial Classification Manual, that is in effect for the taxable year during which a new line of business is added. A printed version of the official SIC Manual is available from the National Technical Information Service (NTIS) at 1-800-553-6847.
(ii) Safe harbors. An activity is closely related to a pre-existing business and thus is not a new line of business in the following three cases—
(A) If the activity is within the same six-digit NAICS code (or four-digit SIC code);
(B) If both the pre-existing business activity and the new activity are within the same five-digit NAICS code (or threedigit SIC code) and the facts relating to the new activity satisfy at least three of the factors listed in paragraph (b)(2)(i)(A) through (G) of this section; or
(C) If the pre-existing business is making a component product or end-product form, as defined in §1.936–5(a)(1),Q & A1, and the new business activity is making an integrated product, or an end-product form with fewer excluded components, that is not within the same six-digit NAICS code (or four-digit SIC code) as the pre-existing business solely because the component product and the integrated product (or two end-product forms) have different end-uses.
(3) Pre-existing business —(i) In gen- eral. Except as provided in paragraph (b)(3)(ii) and (4) of this section, a business activity is a pre-existing business of the existing credit claimant if—
(A) The existing credit claimant was actively engaged in the activity within the
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possession on or before October 13, 1995; and
(B) The existing credit claimant has elected the benefits of the Puerto Rico and possession tax credit pursuant to an election which is in effect for the taxable year that includes October 13, 1995.
(ii) Acquisition of all of the assets or stock of an existing credit claimant. (A) If all the assets of a pre-existing business of an existing credit claimant are acquired by an affiliated or non-affiliated existing credit claimant which carries on the business activity of the predecessor existing credit claimant, the acquired business activity will be treated as a pre-existing business of the acquiring corporation. A non-affiliated acquiring corporation will not be bound by any section 936(h) election made by the predecessor existing credit claimant with respect to that business activity.
(B) Where all of the assets of a pre-existing business of an existing credit claimant are acquired by a corporation that is not an existing credit claimant, if the acquiring corporation makes a section 936(e) election for the taxable year in which the assets are acquired—
( 1 ) The acquiring corporation will be treated as an existing credit claimant for the year of acquisition;
( 2 ) The activity will be considered a pre-existing business of the acquiring corporation;
( 3 ) The acquiring corporation will be deemed to satisfy the rules of section 936(a)(2) for the year of acquisition; and ( 4 ) After making an election under section 936(e), a non-affiliated acquiring corporation will not be bound by elections under sections 936(a)(4) and (h) made by the predecessor existing credit claimant.
(C) A mere change in the stock ownership of a possessions corporation will not affect its status as an existing credit claimant for purposes of this section.
(4) Timing rule. The tests for a new line of business in this paragraph (whether the new activity is closely related to a pre-existing business) are applied only at the end of the taxable year during which the new activity is added.
(c) Substantial —(1) In general. For purposes of section 936 and section 30A, a new line of business is considered to be substantial as of the earlier of—
(i) The taxable year in which the possessions corporation derives more that 15
percent of its gross income from that new line of business (gross income test); or
(ii) The taxable year in which the possessions corporation directly uses in that new line of business more that 15 percent of its assets (assets test).
(2) Gross income test. The denominator in the gross income test is the amount that is the gross income of the possessions corporation for the current taxable year, while the numerator is the amount that is the gross income of the new line of business for the current taxable year. The gross income test is applied at the end of each taxable year. For purposes of this test, if a new line of business is added late in the taxable year, the income is not to be annualized in that year. In the case of a new line of business acquired through the purchase of assets, the gross income of such new line of business for the taxable year of the acquiring corporation that includes the date of acquisition is determined from the date of acquisition through the end of the taxable year. In the case of a consolidated group election made pursuant to section 936(i)(5), the test applies on a company by company basis and not on a consolidated basis.
(3) Assets test —(i) Computation. The denominator is the adjusted tax basis of the total assets of the possessions corporation for the current taxable year. The numerator is the adjusted tax basis of the total assets utilized in the new line of business for the current taxable year. The assets test is computed annually using all assets including cash and receivables.
(ii) Exception. A new line of business of a possessions corporation will not be treated as substantial as a result of meeting the assets test if an event that is not reasonably anticipated causes assets used in the new line of business of the possessions corporation to exceed 15 percent of the adjusted tax basis of the possession corporation’s total assets. For example, an event that is not reasonably anticipated would include the destruction of plant and equipment of the pre-existing business due to a hurricane or other natural disaster, or other similar circumstances beyond the control of the possessions corporation. The expiration of a patent is not such an event and will not trigger this exception.
(d) Examples. The following examples illustrate the rules described in paragraphs (a), (b), and (c) of this section. In the following examples, X Corp. is an existing
credit claimant unless otherwise indicated:
Example 1. X Corp. is a pharmaceutical corporation which manufactured bulk chemicals (a component product). In March 1997, X Corp. began to also manufacture pills (e.g., finished dosages or an integrated product). The new activity provides products very similar to the products provided by the pre-existing business. The new activity is of a type that is normally conducted in the same business location as the pre-existing business. The activity’s economic success depends on the success of the preexisting business. The manufacture of bulk chemicals is in NAICS code 325411, Medicinal and Botanical Manufacturing, while the manufacture of the pills is in NAICS code 325412, Pharmaceutical Preparation Manufacturing. Although the products have a different end-use, may be marketed to a different class of customers, and may not use similar operating assets, they are within the same five-digit NAICS code and the activity also satisfies paragraphs (b)(2)(i)(A), (C), and (E) of this section. The manufacture of the pills by X Corp. will be considered closely related to the manufacture of the bulk chemicals. Therefore, X Corp. did not add a new line of business because it falls within the safe harbor rule of paragraph (b)(2)(ii)(B) of this section.
Example 2. X Corp. currently manufactures printed circuit boards in a possession. As a result of a technological breakthrough, X Corp. could produce the printed circuit boards more efficiently if it modified its existing production methods. Because demand was high, X Corp. expanded its facilities to support the production of its current products when it modified its production methods. After these modifications to the facilities and production methods, the products produced through the new technology were in the same six-digit NAICS code as products produced previously by X Corp. See paragraph (b)(2)(ii)(A) of this section. Therefore, X Corp. will not be considered to have added a new line of business for purposes of paragraph (b) of this section.
Example 3. X Corp. has manufactured Device A in Puerto Rico for a number of years and began to manufacture Device B in Puerto Rico in 1997. Device A and Device B are both used to conduct electrical current to the heart and are both sold to cardiologists. There is no significant change in the type of activity conducted in Puerto Rico after the transfer of the manufacturing of Device B to Puerto Rico. Similar manufacturing equipment, manufacturing processes and skills are used in the manufacture of both devices. Both are regulated and licensed by the Food and Drug Administration. The economic success of Device B is dependent upon the success of Device A only to the extent that the liability and manufacturing prowess with respect to one reflects favorably on the other. Depending upon the heart abnormality, the cardiologist may choose to use Device A, Device B or both on a patient. Both devices are within the same business sector of the taxpayer’s business. The manufacture of Device A is in the sixdigit NAICS code 339112, Surgical and Medical Instrument Manufacturing. The manufacture of Device B is in the six-digit NAICS code 334510, Electromedical and electro- therapeutic Apparatus Manufacturing. (The manufacture of Device A is in the four-digit SIC code 3845, Electromedical and Electrotheraputic Apparatus. The manufacture of Device B is in the four-digit SIC code 3841, Surgi
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(Filed by the Office of the Federal Register on August 18, 1998, 8:45 a.m., and published in the issue of the Federal Register for August 19, 1998, 63 F.R. 44387)
Section 1274.—Determination of Issue Price in the Case of Certain Debt Instruments Issued for Property
(Also sections 42, 280G, 382, 412, 467, 468, 482, 483, 642, 807, 846, 1288, 7520, 7872.)
Federal rates; adjusted federal rates; adjusted federal long-term rate, and the long-term exempt rate. For purposes of sections 1274, 1288, 382, and other sections of the Code, tables set forth the rates for September 1998.
Rev. Rul. 98–43
This revenue ruling provides various prescribed rates for federal income tax purposes for September 1998 (the current month.) Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b). Table 3 sets forth the adjusted federal long-term rate and the long-term tax-exempt rate described in section 382(f). Table 4 contains the appropriate percentages for determining the low-income housing credit described in section 42(b)(2) for buildings placed in service during the current month. Finally, Table 5 contains the federal rate for determining the present value of an annuity, an interest for life or for a term of years, or a remainder or a reversionary interest for purposes of section 7520.
cal and Medical Instruments and Apparatus.) The safe harbor of paragraph (b)(2)(ii)(B) of this section applies because the two activities are within the same three-digit SIC code and Corp. X satisfies paragraphs (b)(2)(i)(A), (B), (C), (D), (F), and (G) of this section.
Example 4 . X Corp. has been manufacturing house slippers in Puerto Rico since 1990. Y Corp. is a U.S. corporation that is not affiliated with X Corp. and is not an existing credit claimant. Y Corp. has been manufacturing snack food in the United States. In 1997, X Corp. purchased the assets of Y Corp. and began to manufacture snack food in Puerto Rico. House slipper manufacturing is in the six-digit NAICS code 316212 (Four-digit SIC code 3142, House Slippers). The manufacture of snack foods falls under the six-digit NAICS code 311919, Other Snack Food Manufacturing (four-digit SIC code 2052, Cookies and Crackers (pretzels)). Because these activities are not within the same five or six digit NAICS code (or the same three or four-digit SIC code), and because snack food is not an integrated product that contains house slippers, the safe harbor of paragraph (b)(2)(ii) of this section cannot apply. Considering all the facts and circumstances, including the eight factors of paragraph (b)(2)(i) of this section, the snack food manufacturing activity is not closely related to the manufacture of house slippers, and is a new line of business, within the meaning of paragraph (b) of this section.
Example 5. X Corp. is an existing credit claimant that has elected the profit-split method for computing taxable income. P Corp. was not an existing credit claimant and manufactured a product in a different five-digit NAICS code than the product manufactured by X Corp. In 1997, X Corp. acquired the stock of P Corp. and liquidated P Corp. in a tax-free liquidation under section 332, but continued the business activity of P Corp. as a new business segment. Assume that this new business segment is a new line of business within the meaning of paragraph (c) of this section. In 1997, X Corp. has gross income from the active conduct of a trade or business in a possession computed under section 936(a)(2) of $500 million and the adjusted tax basis of its assets is $200 million. The new business segment had gross income of $60 million, or 12 percent of the X Corp. gross income, and the adjusted basis of the new segment’s assets was $20 million, or 10 percent of the X Corp. total assets. In 1997, X Corp. does not derive more than 15 percent of its gross income, or directly use more that 15 percent of its total assets, from the new business segment. Thus, the new line of business acquired from P Corp. is not a substantial new line of business within the meaning
of paragraph (c) of this section, and the new activity will not cause X Corp. to lose its status as an existing credit claimant during 1997. In 1998, however, the gross income of X Corp. grew to $750 million while the gross income of the new line of business grew to $150 million, or 20% of the X Corp. 1998 gross income. Thus, in 1998, the new line of business is substantial within the meaning of paragraph (c) of this section, and X Corp. loses its status as an existing credit claimant as of December 31, 1997.
(e) Loss of status as existing credit claimant. An existing credit claimant that adds a substantial new line of business in a taxable year, or that has a new line of business that becomes substantial in a taxable year, loses its status as an existing credit claimant as of the close of the taxable year ending before either such taxable year. In such case, the possession corporation must not claim the Puerto Rico and possession tax credit on its return for the taxable year in which the substantial new line of business is added or a new line of business becomes substantial.
(f) Effective date —(1) General rule. This section applies to taxable years of a possessions corporation beginning after August 19, 1998.
(2) Election for retroactive application. Taxpayers may elect to apply retroactively all the provisions of this section for any open taxable year beginning after December 31, 1995. Such election will be effective for the year of the election and all subsequent taxable years. This section will not apply to activities of pre-existing businesses for taxable years beginning before January 1, 1996.
Michael P. Dolan, Deputy Commissioner of
Internal Revenue.
Donald C. Lubick, Assistant Secretary of
the Treasury.
1998–36 I.R.B. 9 September 8, 1998
REV. RUL. 98–43 TABLE 1
Applicable Federal Rates (AFR) for September 1998
Period for Compounding
Annual Semiannual Quarterly Monthly
Short-Term
AFR 5.42% 5.35% 5.31% 5.29% 110% AFR 5.98% 5.89% 5.85% 5.82% 120% AFR 6.52% 6.42% 6.37% 6.34% 130% AFR 7.08% 6.96% 6.90% 6.86%
Mid-Term
AFR 5.54% 5.47% 5.43% 5.41% 110% AFR 6.11% 6.02% 5.98% 5.95% 120% AFR 6.67% 6.56% 6.51% 6.47% 130% AFR 7.24% 7.11% 7.05% 7.01% 150% AFR 8.38% 8.21% 8.13% 8.07% 175% AFR 9.80% 9.57% 9.46% 9.38%
Long-Term
AFR 5.74% 5.66% 5.62% 5.59% 110% AFR 6.33% 6.23% 6.18% 6.15% 120% AFR 6.91% 6.79% 6.73% 6.70% 130% AFR 7.50% 7.36% 7.29% 7.25%
REV. RUL. 98–43 TABLE 2
Adjusted AFR for September 1998
Period for Compounding
Annual Semiannual Quarterly Monthly Short-term adjusted AFR 3.66% 3.63% 3.61% 3.60% Mid-term adjusted AFR 4.24% 4.20% 4.18% 4.16% Long-term adjusted AFR 5.02% 4.96% 4.93% 4.91%
REV. RUL. 98–43 TABLE 3
Rates Under Section 382 for September 1998
Adjusted federal long-term rate for the current month 5.02% Long-term tax-exempt rate for ownership changes during the current month (the highest of the adjusted federal long-term rates for the current month and the prior two months.) 5.02%
REV. RUL. 98–43 TABLE 4
Appropriate Percentages Under Section 42(b)(2) for September 1998
Appropriate percentage for the 70% present value low-income housing credit 8.32%
Appropriate percentage for the 30% present value low-income housing credit 3.57%
September 8, 1998 10 1998–36 I.R.B.
REV. RUL. 98–43 TABLE 5
Rate Under Section 7520 for September 1998
Applicable federal rate for determining the present value of an annuity, an interest for life or a term of years, or a remainder or reversionary interest 6.6%
Clearance Officer, OP:FS:FP, Washington, DC 20224. Any such comments should be submitted not later than October 19, 1998. Comments are specifically requested concerning:
Whether the collection of information is necessary for the proper performance of the functions of the IRS, including whether the information will have practical utility.
The accuracy of the estimated burden associated with the collection of information (see below);
How to enhance the quality, utility, and clarity of the information collected;
How to minimize the burden of complying with the collection of information, including the application of automated collection techniques or other forms of information technology; and
Estimates of capital or start-up costs and costs of operation, maintenance, and purchase of services to provide information.
Estimates of the reporting burden in these final regulations will be reflected in the burden of Form 843 (Claim for Refund and Request for Abatement) and Form 706 (Estate Tax Return) or 706NA (Estate Tax Return for Nonresident Noncitizens).
Books or records relating to this collection of information must be retained as long as their contents may become material in the administration of any internal revenue law. Generally, tax returns and tax return information are confidential, as required by 26 U.S.C. 6103.
Background
On March 1, 1994, the IRS published final estate and gift tax regulations (26 CFR part 20 and part 25) under sections 2044, 2056, 2207A, 2519, 2523, and 6019 of the Internal Revenue Code (Code) in the Federal Register (59 F.R. 9642). At
Section 1288.—Treatment of Original Issue Discount on Tax- Exempt Obligations
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 2044.—Certain Property for Which Marital Deduction Was Previously Allowed
26 CFR 1.2044–1: Certain property for which marital deduction was previously allowed.
T.D. 8779
DEPARTMENT OF THE TREASURY Internal Revenue Service 26 CFR Parts 20 and 602
Estate and Gift Tax Marital Deduction
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
SUMMARY: This document contains final regulations amending the estate tax marital deduction regulations. The amendments are made to conform the estate tax regulations to recent court decisions in Estate of Clayton v. Commis- sioner, 976 F.2d 1486 (5th Cir. 1992), rev’g 97 T.C. 327 (1991); Estate of Robertson v. Commissioner, 15 F.3d 779 (8th Cir. 1994), rev’g 98 T.C. 678 (1992); Estate of Spencer v. Commissioner, 43 F.3d 226 (6th Cir. 1995), rev’g T.C. Memo. 1992–579; and Estate of Clack v. Commissioner, 106 T.C. 131 (1996). The amendments affect estates of decedents electing the marital deduction for qualified terminable interest property (QTIP)
and the estates of the surviving spouses of such decedents.
DATES: These regulations are effective August 19, 1998.
FOR FURTHER INFORMATION CONTACT: Susan B. Hurwitz, (202) 6223090 (not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information in these final regulations has been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget (OMB) under 44 U.S.C. 3507 and assigned control number 1545–1612.
An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection of information displays a valid control number assigned by OMB.
The collection of information in this regulation is in §20.2056(b)–7(d)(3)(ii). This information is required to provide a method for estates of decedents whose estate tax returns were due on or before February 18, 1997, to obtain an extension of time to make the qualified terminable interest property election under section 2056(b)(7)(B)(v). This information will be used to inform the IRS of the affected estates that are electing to obtain the relief granted in the regulation. The collection of information is mandatory for those estates that seek relief. The likely respondents are individuals representing estates.
Comments concerning the collection of information should be directed to OMB, Attention: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, DC 20503, with copies to the Internal Revenue Service, Attention: IRS Reports
1998–36 I.R.B. 11 September 8, 1998
that time, §20.2056(b)–7(d)(3) provided that an income interest (or life estate) that is contingent upon the executor’s election under section 2056(b)(7)(B)(v) (the QTIP election) is not a qualifying income interest for life.
On February 18, 1997, temporary regulations (T.D. 8714) amending the existing final estate tax regulations relating to the marital deduction for qualified terminable interest property (QTIP) were published in the Federal Register (62 F.R. 7156). A notice of proposed rulemaking (REG– 209830–96) cross-referencing the temporary regulations was published in the Fed- eral Register (62 F.R. 7188) for the same day.
The temporary regulations provide that an income interest for life (or life estate) that is contingent upon the executor’s QTIP election, will not, because of the contingency, fail to be a qualifying income interest for life.
Written comments responding to the notice of proposed rulemaking were received. A public hearing was held on June 3, 1997. After consideration of all the comments, the proposed regulations under sections 2044 and 2056 are adopted as revised by this Treasury decision, and the corresponding temporary regulations are removed.
Explanation of Revisions and Summary of Comments
Under section 2056(b)(7)(B)(ii), the surviving spouse has a qualifying income interest for life in property which passes from the decedent if (1) the surviving spouse is entitled to all of the income from the property, payable at least annually (or has a usufruct interest for life in the property), and (2) no person has a power to appoint any part of the property to any person other than the surviving spouse.
Commentators suggested that the regulation, based on the case law, should specifically provide that as a result of the executor’s election over a portion of the property, in cases where the unelected portion of the property passes to a beneficiary other than the surviving spouse, the executor will not be considered to have a power to appoint any part of the property to any person other than the surviving spouse.
The final regulation is clarified to provide that an interest in property is eligible for treatment as qualified terminable in
terest property if the income interest is contingent upon the executor’s election and if that portion of the property for which no election is made will pass to or for the benefit of beneficiaries other than the surviving spouse. Two examples provided in the temporary regulations have been revised in the final regulations to conform to this clarification.
Comments were also received regarding the effective date of the temporary regulations. It was suggested that relief should be made available for estates of decedents that did not make the QTIP election on their estate tax returns because the surviving spouse’s income interest in the property was contingent upon the election or because the nonelected portion of the property was to pass to a beneficiary other than the surviving spouse. Accordingly, the final regulations provide that estates of decedents whose estate tax returns were due on or before February 18, 1997, are granted an extension of time to make the QTIP election if: (1) the period of limitations on filing a claim for credit or refund under section 6511(a) has not expired; and (2) the estate submits a statement providing that, pursuant to section 2044, the surviving spouse’s gross estate will include the value, at the date of the surviving spouse’s death, of the property for which the QTIP election is being made. The statement must be signed, under penalties of perjury, by the surviving spouse, the surviving spouse’s legal representative (if the surviving spouse is legally incompetent), or the surviving spouse’s executor (if the surviving spouse is deceased).
Special Analyses
It has been determined that this Treasury decision is not a significant regulatory action as defined in EO 12866. Therefore, a regulatory assessment is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to these regulations and, because these regulations do not impose on small entities a collection of information requirement, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not apply. Therefore, a Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Code, the notice of proposed rulemaking preceding these reg
ulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.
Drafting Information
The principal author of these regulations is Susan B. Hurwitz, Office of Assistant Chief Counsel (Passthroughs and Special Industries). However, other personnel from the IRS and the Treasury Department participated in their development.
- - - -
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 20 and 602 are amended as follows:
PART 20—ESTATE TAX; ESTATES OF DECEDENTS DYING AFTER AUGUST 16, 1954
Paragraph 1. The authority citation for part 20 continues to read in part as follows:
Authority: 26 U.S.C. 7805 * * * Par. 2. In §20.2044-1, paragraph (e) Ex- ample 8 is added to read as follows:
§20.2044–1 Certain property for which marital deduction was previously allowed.
(e) * * *
Example 8. Inclusion of trust property when sur- viving spouse dies before first decedent’s estate tax return is filed. D dies on July 1, 1997. Under the terms of D’s will, a trust is established for the benefit of D’s spouse, S. The will provides that S is entitled to receive the income from that portion of the trust that the executor elects to treat as qualified terminable interest property. The remaining portion of the trust passes as of D’s date of death to a trust for the benefit of C, D’s child. The trust terms otherwise provide S with a qualifying income interest for life under section 2056(b)(7)(B)(ii). S dies on February 10, 1998. On April 1, 1998, D’s executor files D’s estate tax return on which an election is made to treat a portion of the trust as qualified terminable interest property under section 2056(b)(7). S’s estate tax return is filed on November 10, 1998. The value on the date of S’s death of the portion of the trust for which D’s executor made a QTIP election is includible in S’s gross estate under section 2044.
§20.2044–1T [Removed]
Par. 3. Section 20.2044–1T is removed.
September 8, 1998 12 1998–36 I.R.B.
Par. 4. In §20.2056(b)–(7), paragraphs (d)(3) and (h) Example 6 are revised to read as follows:
§20.2056(b)–(7) Election with respect to life estate for surviving spouse.
(d) * * * (3) Contingent income interests. (i) An income interest for a term of years, or a life estate subject to termination upon the occurrence of a specified event (e.g., remarriage), is not a qualifying income interest for life. However, a qualifying income interest for life that is contingent upon the executor’s election under section 2056(b)(7)(B)(v) will not fail to be a qualifying income interest for life because of such contingency or because the portion of the property for which the election is not made passes to or for the benefit of persons other than the surviving spouse. This paragraph (d)(3)(i) applies with respect to estates of decedents whose estate tax returns are due after February 18, 1997. This paragraph (d)(3)(i) also applies to estates of decedents whose estate tax returns were due on or before February 18, 1997, that meet the requirements of paragraph (d)(3)(ii) of this section.
(ii) Estates of decedents whose estate tax returns were due on or before February 18, 1997, that did not make the election under section 2056(b)(7)(B)(v) because the surviving spouse’s income interest in the property was contingent upon the election or because the nonelected portion of the property was to pass to a beneficiary other than the surviving spouse are granted an extension of time to make the QTIP election if the following requirements are satisfied:
(A) The period of limitations on filing a claim for credit or refund under section 6511(a) has not expired. (B) A claim for credit or refund is filed on Form 843 with a revised Recapitulation and Schedule M, Form 706 (or 706NA) that signifies the QTIP election. Reference to this section should be made on the Form 843.
(C) The following statement is included with the Form 843: “The undersigned certifies that the property with respect to which the QTIP election is being made will be included in the gross estate of the surviving spouse as provided in
section 2044 of the Internal Revenue Code, in determining the federal estate tax liability on the spouse’s death.” The statement must be signed, under penalties of perjury, by the surviving spouse, the surviving spouse’s legal representative (if the surviving spouse is legally incompetent), or the surviving spouse’s executor (if the surviving spouse is deceased).
(h) * * *
Example 6. Spouse’s qualifying income interest for life contingent on executor’s election. D’s will established a trust providing that S is entitled to receive the income, payable at least annually, from that portion of the trust that the executor elects to treat as qualified terminable interest property. The portion of the trust which the executor does not elect to treat as qualified terminable interest property passes as of D’s date of death to a trust for the benefit of C, D’s child. Under these facts, the executor is not considered to have a power to appoint any part of the trust property to any person other than S during S’s life.
§20.2056(b)–7T [Removed]
Par. 5. Section 20.2056(b)–7T is removed.
Par. 6. Section 20.2056(b)–10 is revised to read as follows:
§20.2056(b)–10 Effective dates.
Except as specifically provided in §§20.2056(b)–5(c)(3)(ii) and (iii), 20.2056(b)–7(d)(3), 20.2056(b)–7(e)(5), and 20.2056(b)–8(b), the provisions of §§20.2056(b)–5(c), 20.2056(b)–7, 20.2056(b)–8, and 20.2056(b)–9 are applicable with respect to estates of decedents dying after March 1, 1994. With respect to decedents dying on or before such date, the executor of the decedent’s estate may rely on any reasonable interpretation of the statutory provisions.
§20.2056(b)–10T [Removed]
Par. 7. Section 20.2056(b)–10T is removed.
PART 602—OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT
Par. 8. In §602.101, paragraph (c), the entry in the table for 20.2056(b)–7 is revised to read as follows:
APRIL 19,1998
Syllabus
After a third party perfected a $400,000 judgment lien under Pennsylvania law on Francis Romani’s Cambria County real property, the Internal Revenue Service filed notices of tax liens on the property, totaling some $490,000. When Mr. Romani died, his entire estate consisted of real estate worth only $53,001. Because
§602.101 OMB Control numbers.
(c) * * *
CFR part or section Current OMB where identified control No. and described
20.2056(b)–7 . . . . . . . . . . . . 1545–0015 1545–1612
Michael P. Dolan, Deputy Commissioner of
Internal Revenue.
Approved July 27, 1998.
Donald C. Lubick, Assistant Secretary of
the Treasury.
(Filed by the Office of the Federal Register on August 18, 1998, 8:45 a.m., and published in the issue of the Federal Register for 63 F.R. 44391)
Section 6323.—Validity and Priority Against Certain Persons
Ct.D. 2063
SUPREME COURT OF THE UNITED STATES
No. 96–1613
UNITED STATES v. ESTATE OF
FRANCIS J. ROMANI ET AL.
523 U.S. (1998)
CERTIORARI TO THE SUPREME
COURT OF PENNSYLVANIA,
WESTERN DISTRICT
1998–36 I.R.B. 13 September 8, 1998
the property was encumbered by both the judgment lien and the federal tax liens, the estate’s administrator sought the county court’s permission to transfer the property to the ‘judgment creditor in hen of execution. The court authorized the conveyance, overruling the Federal Government’s objection that the transfer violated the federal priority statute, 31 U. S. C. §3713(a), which provides that a Government claim “shall be paid first” when a decedent’s estate cannot pay all of its debts. The Superior Court of Pennsylvania affirmed, as did the Pennsylvania Supreme Court. The latter court determined that there was a “plain inconsistence” between §3713 and the Federal Tax Lien Act of 1966, which provides that a federal tax hen “shall not be valid” against judgment lien creditors until a prescribed notice has been given, 26 U. S. C. §6323(a). The court concluded that the 1966 Act effectively limited §3713’s operation as to tax debts, relying on United States v. Kimbell Foods, Inc., 440 U. S. 715, 738, which noted that the 1966 Act modified the Government’s preferred position in the tax area and recognized the priority of many state claims over federal tax liens.
Held: Section 3713(a) does not require that a federal tax claim be given preference over a judgment creditor’s perfected hen on real property. Pp. 4– 17.
(a) There is no dispute about the meaning of either the Pennsylvania hen statute or the Tax Lien Act. It is undisputed that, under the state law, the judgment creditor acquired a valid lien on Romani’s real property before his death and before the Government served notice of its tax hens. That lien was therefore perfected in the sense that there is nothing more to be done to have a choate hen. E.g., United States v. City of New Britain, 347 U. S. 81, 84. And a review of the Tax Lien Act’s history reveals that each time Congress has revisited the federal tax lien, it has ameliorated pre-existing harsh consequences for the delinquent taxpayer’s other secured creditors. Here, all agree that by §6323(a)’s terms, the Government’s liens are not valid as against the earlier recorded judgment lien. Pp. 4–7.
(b) Because this Court has never definitively resolved the basic question whether the federal priority statute gives the United States a preference only over other unsecured creditors, or whether it also applies to the antecedent perfected liens of secured creditors, see, e.g., United States v. Vermont, 377 U. S. 351, 358, n. 8, it does not seem appropriate to view the issue here as whether the Tax Lien Act has implicitly amended or repealed §3713(a). Instead, the proper inquiry is how best to harmonize the two statutes’ impact on the Government’s power to collect delinquent taxes. Pp. 7–12.
(c) Nothing in the federal priority statute’s text or its long history justifies the conclusion that it authorizes the equivalent of a secret lien as a substitute for the expressly authorized tax lien that the Tax Lien Act declares “shall not be valid” in a case of this kind. On several occasions, this Court has concluded that a specific policy embodied in a later federal statute should control interpretation of the older federal priority statute, despite that law’s literal, unconditional text and the fact that it had not been expressly amended by the later Act. See, e.g., Cook County Nat. Bank v. United States, 107 U. S. 445, 448451. United States v. Emory, 314 U. S. 423, 429–433, and United States v. Key, 397 U. S. 322, 324–333, distinguished. So too here, there are sound reasons for treating the Tax Lien Act as the governing statute. That Act is the later statute, the more specific statute, and its provisions are comprehensive, reflecting an obvious attempt to accommodate the strong policy objections to the enforcement of secret liens. It represents Congress’ detailed judgment as to when the Government’s claims for unpaid taxes should yield to many different sorts of interests (including, e.g., judgment liens, mechanic’s liens, and attorneys’ liens) in many different types of property (including, e.g., real property, securities, and motor vehicles). See §6323. Indeed, given this Court’s unambiguous determination that the
federal interest in the collection of taxes is paramount to its interest in enforcing other claims, see Kimbell Foods Inc., 440 U. S., at 733735, it would be anomalous to conclude that Congress intended the priority statute to impose greater burdens on the citizen than those specifically crafted for tax collection purposes. Pp. 12–17. Pa. , 688 A. 2d 703, affirmed. STEVENS, J., delivered the opinion of the Court, in which REHNQUIST, C. J., and O’CONNER, KENNEDY, SOUTHER, THOMAS, GINSBURG, and BREYER, J.J., joined. SCALIA J., filed an opinion concurring in part and concurring in the judgment.
SUPREME COURT OF THE
UNITED STATES
No. 96–1613
UNITED STATES, PETITIONER v. ESTATE OF FRANCIS J. ROMANI
ET AL.
ON WRIT OF CERTIORARI TO THE
SUPREME COURT OF PENNSYLVANIA, WESTERN
DISTRICT
[April, 29, 1998]
JUSTICE STEVENS delivered the opinion of the Court.
The federal priority statute, 31 U. S. C. §3713(a), provides that a claim of the United States Government “shall be paid first” when a decedent’s estate cannot pay all of its debts. 1 The question presented is whether that statute requires that a federal
1“§3713. Priority of Government claims “(a)(1) A claim of the United States Government shall be paid first when—
“(A) a person indebted to the Government is insolvent and—
“(i) the debtor without enough property to pay all debts makes a voluntary assignment of property;
“(ii) property of the debtor, if absent, is attached; or
“(iii) an act of bankruptcy is committed; or “(B) the estate of a deceased debtor, in the custody of the executor or administrator, is not enough to pay all debts of the debtor.
“(2) This subsection does not apply to a case under title ll.” 31 U.S. C. §3713.
The present statute is the direct descendent of §3466 of the Revised Statutes, which had been codified in 31 U. S. C. § 191.
September 8, 1998 14 1998–36 I.R.B.
States v. Emory, 314 U.S. 423, 433 (1941)). We granted certiorari, 521 U. S. (1997), to resolve the conflict and to consider whether Thelusson, Key, or any of our other cases construing the priority statute requires a different result.
II
There is no dispute about the meaning of two of the three statutes that control the disposition of this case. It is therefore appropriate to comment on the Pennsylvania lien statute and the Federal Tax Lien Act before considering the applicability of the priority statute to property encumbered by an antecedent judgment creditor’s lien.
The Pennsylvania statute expressly provides that a judgment shall create a lien against real property when it is recorded in the county where the property is located. 42 Pa. Cons. Stat. §4303(a) (1995). After the judgment has been recorded, the judgment creditor has the same right to notice of a tax sale as a mortgagee. 4 The recording in one county does not, of course, create a lien on property located elsewhere. In this case, however, it is undisputed that the judgment creditor acquired a valid lien on the real property in Cambria County before the judgment debtor’s death and before the Government served notice of its tax liens. Romani Industries’ lien was “perfected in the sense that there is nothing more to be done to have a choate lien—when the identity of the lienor, the property subject to the lien, and the amount of the hen are established.” United States v. City of New Britain, 347 U. S. 81, 84 (1954); see also Illinois ex rel. Gordon v. Campbell, 329 U.S. 362, 375 (1946).
4The Pennsylvania Supreme Court has elaborated:
“We must now decide whether judgment creditors are also entitled to personal or general notice by the [County Tax Claim] Bureau as a matter of due process of law.
“Judgment liens are a product of centuries of statutes which authorize a judgment creditor to seize and sell the land of debtors at a judicial sale to satisfy their debts out of the proceeds of the sale. The judgment represents a binding judicial determination of the rights and duties between the parties, and establishes their debtor-creditor relationship for all the world to notice when the judgment is recorded in a Prothonotary’s Office. When entered of record, the judgment also operates as a lien upon all real property of the debtor in that county.” In re Upset Sale, Tax Claiin Bureau of Berks County, 505 Pa. 327, 334, 479 A. 2d 940,943(1984).
tax claim be given preference over a judgment creditor’s perfected lien on real property even though such a preference is not authorized by the Federal Tax Lien Act of 1966, 26 U. S. C. §6321 et seq.
I
On January 25, 1985, the Court of Common Pleas of Cambria County, Pennsylvania, entered a judgment for $400,000 in favor of Romani Industries, Inc., and against Francis J. Romani. The judgment was recorded in the clerk’s office and therefore, as a matter of Pennsylvania law, it became a lien on all of the defendant’s real property in Cambria County. Thereafter, the Internal Revenue Service filed a series of notices of tax liens on Mr. Romani’s property. The claims for unpaid taxes, interest and penalties described in those notices amounted to approximately $490,000.
When Mr. Romani died on January 13, 1992, his entire estate consisted of real estate worth only $53,001. Because the property was encumbered by both the judgment lien and the federal tax liens, the estate’s administrator sought permission from the Court of Common Pleas to transfer the property to the judgment creditor, Romani Industries, in lieu of execution. The Federal Government acknowledged that its tax liens were not valid as against the earlier judgment hen; but, giving new meaning to Franklin’s aphorism that “in this world nothing can be said to be certain, except death and taxes,” 2 it opposed the transfer on the ground that the priority statute (§3713) gave it the right to “be paid first.”
The Court of Common Pleas overruled the Government’s objection and authorized the conveyance. The Superior Court of Pennsylvania affirmed, and the Supreme Court of the State also affirmed. 547 Pa. 41, 688 A. 2d 703 (1997). That court first determined that there was a “plain inconsistency” between §3713, which appears to give the United States “absolute priority” over all competing
2Letter of November 13, 1789 to Jean Baptiste Le Roy, in 10 The Writings of Benjamin Franklin 69 (A. Smyth ed. 1907). As is often the case, the original meaning of the aphorism is clarified somewhat by its context: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” Ibid.
claims, and the Tax Lien Act of 1966, which provides that the federal tax lien “shall not be valid” against judgment hen creditors until a prescribed notice has been given. Id., at 45, 688 A. 2d, at 705. 3
Then, relying on the reasoning in United States v. Kimbell Foods, Inc., 440 U. S. 715 (1979), which had noted that the Tax Lien Act of 1966 modified the Federal Government’s preferred position in the tax area and recognized the priority of many state claims over federal tax liens, id., at 738, the court concluded that the 1966 Act had the effect of limiting the operation of §3713 as to tax debts.
The decision of the Pennsylvania Supreme Court conflicts with two federal court of appeals decisions, Kentucky ex rel. Luckett v. United States, 383 F. 2d 13 (CA6 1967), and Nesbitt v. United States, 622 F. 2d 433 (CA9 1980). Moreover, in its petition for certiorari, the Government submitted that the decision is inconsistent with our holding in Thelusson v. Smith, 2 Wheat. 396 (1817), and with the admonition that “‘[o]nly the plainest inconsistency would warrant our finding an implied exception to the operation of so clear a command as that of [31 U. S. C. §3713],”’ United States v. Key, 397 U.S. 322, 324-325 (1970) (quoting United
3The Federal Tax Lien Act of 1966, 26 U. S. C. §6321 et seq., provides in pertinent part:
“§6321. Lien for taxes “If any person liable to pay any tax neglects or refuuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.”
Ҥ6323. Validity and priority against certain persons
“(a) Purchasers, holders of security interests, mechanic’s henors, and judgment lien creditors
“The lien imposed by section 6321 shall not be valid as against any purchaser, holder of a security interest, mechanic’s henor, or judgment lien creditor until notice thereof which meets the requirements of subsection (f) has been filed by the Secretary.”
Section 6323(f)(1)(A)(i) provides that the required notice ‘shall be filed ... [i]n the case of real property, in one office within the State (or the county, or other governmental subdivision), as designated by the laws of such State, in which the property subject to the hen is situated.” If the State has not designated such an office, notice is to be filed with the clerk of the federal district court “for the judicial district in which situated.” §6323(f)(1)(B). the property subject to the lien is situated.” §6232(f)(1)(B).
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The Federal Government’s right to a hen on a delinquent taxpayer’s property has been a part of our law at least since 1865. 5 Originally the lien applied, without exception, to all property of the taxpayer immediately upon the neglect or failure to pay the tax upon demand. 6 An unrecorded tax lien against a delinquent taxpayer’s property was valid even against a bona fide purchaser who had no notice of the lien. United States v. Snyder, 149 U. S. 210, 213– 215 (1893). In 1913, Congress amended the statute to provide that the federal tax hen “shall not be valid as against any mortgagee, purchaser, or judgment creditor” until notice has been filed with the clerk of the federal district court or with the appropriate local authorities in the district or county in which the property subject to the hen is located. Act of Mar. 4, 1913, 37 Stat. 1016. In 1939, Congress broadened the protection against unfiled tax hens to include pledgees and the holders of certain securities. Act of June 29, 1939, §401, 53 Stat. 882–883. The Federal Tax Lien Act of 1966 again broadened that protection to encompass a variety of additional secured transactions, and also included detailed provisions protecting certain secured interests even when a notice of the federal hen previously has been filed. 80 Stat. 1125-1132, as amended, 26 U. S. C. §6323.
5The post-Civil War Reconstruction Congress imposed a tax of three cents per pound on “the producer, owner, or holder” of cotton and a hen on the cotton until the tax was paid. Act of July 13, 1866, §1, 14 Stat. 98. The same statute also imposed a general lien on all of a delinquent taxpayer’s property, see §9, 14 Stat. 107, which was nearly identical to a provision in the revenue act of Mar. 3, 1865, 13 Stat. 470–471, quoted in n. 6, infra.
6The 1865 revenue act contained the following sentence: ‘And if any person, bank, association, company, or corporation, liable to pay any duty, shall neglect or refuse to pay the same after demand, the amount shall be a hen in favor of the United States from the time it was due until paid, with the interests, penalties, and costs that may accrue m addition thereto, upon all property and rights to property; and the collector, after demand, may levy or by warrant may authorize a deputy collector to levy upon all property and rights to property belonging to such person, bank, association, company, or corporation, or on which the said hen exists, for the payment of the sum due as aforesaid, with interest and penalty for non-payment, and also of such further sum as shall be sufficient for the fees, costs, and expenses of such levy.” 13 Stat. 470–471. This provision, as amended, became §3186 of the Revised Statutes.
In sum, each time Congress revisited the federal tax lien, it ameliorated its original harsh impact on other secured creditors of the delinquent taxpayer. 7 In this case, it is agreed that by the terms of §6323(a), the Federal Government’s liens are not valid as against the hen created by the earlier recording of Romani Industries' judgment.
III
The text of the priority statute on which the Government places its entire reliance is virtually unchanged since its enactment in 1797. 8 As we pointed out in United States v. Moore, 423 U. S. 77 (1975), not only were there earlier versions of the statute, 9 but “its roots reach back even further into the English common law,” id.,
7For a more thorough description of the early history and of Congress’ reactions to this Court’s tax lien decisions, see Kennedy, The Relative Priority of the Federal Government: The Pernicious Career of the Inchoate and General Lien, 63 Yale L. J. 905, 919–922 (1954) (hereinafter Kennedy) 8The Act of Mar. 3, 1797, §5, 1 Stat. 515, provided:
“And be it further enacted, That where any revenue officer, or other person hereafter becoming indebted to the United States, by bond or otherwise, shall become insolvent, or where the estate of any deceased debtor, in the hands of executors or administrators, shall be insufficient to pay all the debts due from the deceased, the debt due to the United States shall be first satisfied; and the priority hereby established shall be deemed to extend, as well to cases in which a debtor, not having sufficient property to pay all his debts, shall make a voluntary assignment thereof, or in which the estate and effects of an absconding, concealed, or absent debtor, shall be attached by process of law, as to cases in which an act of legal bankruptcy shall be committed.” Compare §3466 of the Revised Statutes, and the present statutequoted in n. 1, supra .
It has long been settled that the federal priority covers the Government’s claims for unpaid taxes. Price v. United States, 269 U. S. 492, 499–502 (1926); Massachusetts v. United States, 333 U. S. 611, 625626, and n. 24 (1948). 9“The earliest priority statute was enacted in the Act of July 31, 1789, 1 Stat. 29, which dealt with bonds posted by importers in lieu of payment of duties for release of imported goods. It provided that the ‘debt due to the United States’ for such duties shall be discharged first ‘in all cases of insolvency, or where any estate in the hands of executors or administrators, shall be insufficient to pay all the debts due from the deceased . . . .’ §21, 1 Stat. 42. A 1792 enactment broadened the Act’s coverage by providing that the language ‘cases of insolvency’ should be taken to include cases in which a debtor makes a voluntary assignment for the benefit of creditors, and the other situations that §3466, 31 U.S.C. §191, now covers. l Stat.263.” United States v.Moore, 423 U.S., at 81.
at 80. The sovereign prerogative that was exercised by the English Crown and by many of the States as “an inherent incident of sovereignty,” ibid., applied only to unsecured claims. As Justice Brandeis noted in Marshall v. New York, 254 U. S. 380, 384 (1920), the common law priority “[did] not obtain over a specific lien created by the debtor before the sovereign undertakes to enforce its right.” Moreover, the statute itself does not create a lien in favor of the United States. 10 Given this background, respondent argues that the statute should be read as giving the United States a preference over other unsecured creditors but not over secured creditors. 11
There are dicta in our earlier cases that support this contention as well as dicta that tend to refute it. Perhaps the strongest support is found in Justice Story’s statement:
“What then is the nature of the priority, thus limited and established in favour of the United States? Is it a right, which supersedes and overrules the assignment of the debtor, as to any property which the United States may afterwards elect to take in execution, so as to prevent such property from passing by virtue of such assignment to the assignees? Or, is it a mere right of prior payment, out of the general funds of the debtor, in the hands of the assignees? We are of opinion that it clearly falls, within the latter description. The language employed is that which naturally would be employed to express such an intent; and it must be strained from its ordinary import, to speak any other.” Conard v. Atlantic Ins. Co. of N.Y, 1 Pet. 386, 439 (1828). Justice Story’s opinion that the language employed in the statute “must be
10“In construing the statutes on this subject, it has been stated by the court, on great deliberation, that the priority to which the United States are entitled, does not partake of the character of a lien on the property of public debtors. This distinction is always to be recollected.” United States v. Hooe, 3 Cranch 73, 90 (1805).
11Although this argument was not presented to the state courts, respondent may defend the judgment on a ground not previously raised. Heckler v. Cainpbell, 461 U. S. 458, 468–469, n. 12 (1983). We will rarely consider such an argument, however. Ibid. ; see also Matsushita Elec. Industrial Co. v. Ep- stien, 516 U. S. 367, 379, n. 5 (1996).
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strained” to give it any other meaning is entitled to special respect because he was more familiar with 18th-century usage than judges who view the statute from a 20th-century perspective. We cannot, however, ignore the Court’s earlier judgment in Thelusson v. Smith, 2 Wheat. 396, 426 (1817), or the more recent dicta in United States v. Key, 397 U. S. 322, 324–325 (1970). In Thelusson, the Court held that the priority statute gave the United States a preference over the claim of a judgment creditor who had a general hen on the debtor’s real property. The Court’s brief opinion 12 is subject to the interpretation that the statutory priority always accords the Government a preference over judgment creditors. For two reasons, we do not accept that reading of the opinion.
First, as a factual matter, in 1817 when the case was decided, there was no procedure for recording a judgment and thereby creating a choate lien on a specific parcel of real estate. See generally 2 L. Dembitz, A Treatise on Land Titles in the United States §127, pp. 948–952 (1895). Notwithstanding the judgment, a bona fide purchaser could have acquired the debtor’s property free from any claims of the judgment creditor. See Semple v. Burd, 7 Serg. & Rawle 286, 291 (Pa. 1821) (“The prevailing object of the Leg
islature, has uniformly been, to support the security of a judgment creditor, by confirming his lien, except when it interferes with the circulation of property by embarrassing a fair purchaser”). That is not the case with respect to Romani Industries’ choate hen on the property in Cambria County.
Second, and of greater importance, in his opinion for the Court in the Conard case, which was joined by Justice Washington, the author of Thelusson, 13 Justice Story explained why that holding was fully consistent with his interpretation of the text of the priority statute:
12The relevant portion of the opinion reads, in full, as follows: “These [statutory] expressions are as general as any which could have been used, and exclude all debts due to individuals, whatever may be their dignity.... The law makes no exception in favour of prior judgment creditors; and no reason has been, or we think can be, shown to warrant this court in making one....
“The United States are to be first satisfied; but then it must be out of the debtor’s estate. If, therefore, before the right of preference has accrued to the United States, the debtor has made a bona fide conveyance of his estate to a third person, or has mortgaged the same to secure a debt; or if his property has been seized under a fi. fa., the property is devested out of the debtor, and cannot be made liable to the United States. A judgment gives to the judgment creditor a lien on the debtor’s lands, and a preference over all subsequent judgment creditors. But the act of congress defeats this preference in favour of the United States, in the cases specified in the 65th section of the act of 1799.” Thelusson v. Smith, 2 Wheat. 396, 425–426 (1817). In the later Conard case, Justice Story apologized for Thelusson: “The reasons for that opinion are not, owing to accidental circumstances, as fully given as they are usually given in this Court.” Conard v. At- lantic Ins. Co. of N. Y., 1 Pet. 386, 442 (1828).
13Justice Washington’s opinion for this Court in Thelusson affirmed, and was essentially the same as, his own opinion delivered in the Circuit Court as a Circuit Justice. 2 Wheat., at 426, n. h.
14Relying on this and several other cases, in 1857 the Attorney General of the United States issued an opinion concluding that Thelusson “has been distinctly overruled” and that the priority of the United States under this statute “will not reach back over any hen, whether it be general or specific.” 9 Op. Att. Gen. 28, 29. See also Kennedy 908–911 (advancing this same interpretation of the early priority act decisions).
“The real ground of the decision, was, that the judgment creditor had never perfected his title, by any execution and levy on the Sedgely estate; that he had acquired no title to the proceeds as his property, and that if the proceeds were to be deemed general funds of the debtor, the priority of the United States to payment had attached against all other creditors; and that a mere potential lien on land, did not carry a legal title to the proceeds of a sale, made under an adverse execution. This is the manner in which this case has been understood, by the Judges who concurred in the decision; and it is obvious, that it established no such proposition, as that a specific and perfected hen, can be displaced by the mere priority of the United States; since that priority is not of itself equivalent to a lien.” Conard, I Pet., at 444. 14
The Government also relies upon dicta from our opinion in United States v. Key, 397 U. S., at 324–325, which quoted from our earlier opinion in United States v. Emory, 314 U.S., at 433: “Only the plainest inconsistency would warrant our finding an implied exception to the opera
tion of so clear a command as that of
[§3713].” Because both Key and Emory were cases in which the competing claims were unsecured, the statutory command was perfectly clear even under Justice Story’s construction of the statute. The statements made in that context, of course, shed no light on the clarity of the command when the United States relies on the statute as a basis for claiming a preference over a secured creditor. Indeed, the Key opinion itself made this specific point: “This case does not raise the question, never decided by this Court, whether §3466 grants the Government priority over the prior specific liens of secured creditors. See United States v. Gilbert Associates, Inc., 345 U. S. 361, 365-366 (1953).” 397 U. S., at 332, n. 11. The Key opinion is only one of many in which the Court has noted that despite the age of the statute, and despite the fact that it has been the subject of a great deal of litigation, the question whether it has any application to antecedent perfected liens has never been answered definitively. See United States v. Vermont, 377 U.S. 351, 358, n. 8 (1964) (citing cases). In his dissent in the Gilbert Associates case, Justice Frankfurter referred to the Court’s reluctance to decide the issue “not only today but for almost a century and a half.” 345 U. S., at 367. The Government’s priority as against specific, perfected security interests is, if possible, even less settled with regard to real property. The Court has sometimes concluded that a competing creditor who has not “divested” the debtor of “either title or possession” has only a “general, unperfected lien” that is defeated by the Government’s priority. Eg., id., at 366. Assuming the validity of this “title or possession” test for deciding whether a lien on personal property is sufficiently choate for purposes of the priority statute (a question of federal law, see Illinois ex rel. Gordon v. Campbell, 329 U. S., at 371), we are not aware of any decisions since Thelusson applying that theory to claims for real property, or of any reason to require a lienor or mortgagee to acquire possession in order to perfect an interest in real estate.
Given the fact that this basic question of interpretation remains unresolved, it does not seem appropriate to view the issue in this case as whether the Tax Lien
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Act of 1966 has implicitly amended or repealed the priority statute. Instead, we think the proper inquiry is how best to harmonize the impact of the two statutes on the Government’s power to collect delinquent taxes.
IV
In his dissent from a particularly harsh application of the priority statute, Justice Jackson emphasized the importance of considering other relevant federal policies. Joined by three other Justices, he wrote:
“This decision announces an unnecessarily ruthless interpretation of a statute that at its best is an arbitrary one. The statute by which the Federal Government gives its own claims against an insolvent priority over claims in favor of a state government must be applied by courts, not because federal claims are more meritorious or equitable, but only because that Government has more power. But the priority statute is an assertion of federal supremacy as against any contrary state policy. It is not a limitation on the Federal Government itself, not an assertion that the priority policy shall prevail over all other federal policies. Its generalities should not lightly be construed to frustrate a specific policy embodied in a later federal statute.” Massachusetts v. United States, 333 U. S. 611, 635 (1948) (Jackson, J., dissenting). On several prior occasions the Court had followed this approach and concluded that a specific policy embodied in a later federal statute should control our construction of the priority statute, even though it had not been expressly amended. Thus, in Cook County Nat. Bank v. United States, 107 U. S. 445, 448–451 (1883), the Court concluded that the priority statute did not apply to federal claims against national banks because the National Bank Act comprehensively regulated banks’ obligations and the distribution of insolvent banks’ assets. And in United States v. Guaranty Trust Co. of N.Y, 280 U. S. 478, 485 (1930), we determined that the Transportation Act of 1920 had effectively superseded the priority statute with respect to federal claims against the railroads arising under that Act.
The bankruptcy law provides an additional context in which another federal statute was given effect despite the priority statute’s literal, unconditional text. The early federal bankruptcy statutes had accorded to “‘all debts due to the United States, and all taxes and assessments under the laws thereof “ a preference that was “coextensive” with that established by the priority statute. Guarantee Title & Trust Co. v. Title Guaranty & Surety Co., 224 U.S. 152, 158 (1972) (quoting the Bankruptcy Act of 1867, Rev. Stat. §5101). As such, the priority act and the bankruptcy laws “were to be regarded as in pari materia, and both were unqualified; . . . as neither contained any qualification, none could be interpolated.” Ibid. The Bankruptcy Act of 1898, however, subordinated the priority of the Federal Government’s claims (except for taxes due) to certain other kinds of debts. This Court resolved the tension between the new bankruptcy provisions and the priority statute by applying the former and thus treating the Government like any other general creditor. Id., at 158–160; Davis v. Pringle, 268 U. S. 315, 317–319 (1925). 15
There are sound reasons for treating the Tax Lien Act of 1966 as the governing statute when the Government is claiming a preference in the insolvent estate of a delinquent taxpayer. As was the case with the National Bank Act, the Transportation Act of 1920, and the Bankruptcy Act of 1898, the Tax Lien Act is the later statute, the more specific statute, and its provisions are comprehensive, reflecting an obvious attempt to accommodate the strong policy objections to the enforcement of secret hens. It represents Congress’ detailed judgment as to when the Government’s claims for unpaid taxes should yield to many different sorts of in
15Congress amended the priority statute in 1978 to make it expressly inapplicable to Title 11 bankruptcy cases. Pub. L. 95–598, §322(b), 92 Stat. 2679, codified in 31 U. S. C. §3713(a)(2). The differences between the bankruptcy laws and the priority statute have been the subject of criticism: “as a result of the continuing discrepancies between the bankruptcy and insolvency rules, some creditors have had a distinct incentive to throw into bankruptcy a debtor whose case might have been handled, with less expense and less burden on the federal courts, in another form of proceeding.” Plumb, The Federal Priority in Insolvency: Proposals for Reform, 70 Mich. L. Rev. 3, 8–9 (1971) (hereinafter Plumb).
terests (including, for instance, judgment liens, mechanic’s liens, and attorneys’ hens) in many different types of property (including, for example, real property, securities, and motor vehicles). See 26 U.S.C. §6323. Indeed, given our unambiguous determination that the federal interest in the collection of taxes is paramount to its interest in enforcing other claims, see United States v. Kimbell Foods, Inc., 440 U. S., at 733–735, it would be anomalous to conclude that Congress intended the priority statute to impose greater burdens on the citizen than those specifically crafted for tax collection purposes.
Even before the 1966 amendments to the Tax Lien Act, this Court assumed that the more recent and specific provisions of that Act would apply were they to conflict with the older priority statute. In the Gilbert Associates case, which concerned the relative priority of the Federal Government and a New Hampshire town to funds of an insolvent taxpayer, the Court first considered whether the town could qualify as a “judgment creditor” entitled to preference under the Tax Lien Act. 345 U.S., at 363–364. Only after deciding that question in the negative did the Court conclude that the United States obtained preference by operation of the priority statute. Id., at 365–366. The Government would now portray Gilbert Associates as a deviation from two other relatively recent opinions in which the Court held that the priority statute was not trumped by provisions of other statutes: United States v. Emory, 314 U. S., at 429–433 (the National Housing Act), and United States v. Key, 397 U. S., at 324–333 (Chapter X of the Bankruptcy Act). In each of those cases, however, there was no “plain inconsistency” between the commands of the priority statute and the other federal act, nor was there reason to believe that application of the priority statute would frustrate Congress’ intent. Id., at 329. The same cannot be said in the present suit.
The Government emphasizes that when Congress amended the Tax Lien Act in 1966, it declined to enact the American Bar Association’s proposal to modify the federal priority statute, and Congress again failed to enact a similar proposal in 1970. Both proposals would have expressly provided that the Government’s
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priority in insolvency does not displace valid liens and security interests, and therefore would have harmonized the priority statute with the Tax Lien Act. See Hearings on H. R. 11256 and 11290 before the House Committee on Ways and Means, 89th Cong., 2d Sess., 197 (1966) (hereinafter Hearings); S. 2197, 92d Cong., lst Sess. (1971). But both proposals also would have significantly changed the priority statute in many other respects to follow the priority scheme created by the bankruptcy laws. See Hearings, at 85, 198; Plumb 10, n. 53, 33–37. The earlier proposal may have failed because its wide-ranging subject matter was beyond the House Ways and Means Committee’s jurisdiction. Plumb 8. The failure of the 1970 proposal in the Senate Judiciary Committee—explained by no reports or hearings—might merely reflect disagreement with the broad changes to the priority statute, or an assumption that the proposal was not needed because, as Justice Story had believed, the priority statute does not apply to prior perfected security interests, or any number of other views. Thus, the Committees’ failures to report the proposals to the entire Congress do not necessarily indicate that any legislator thought that the priority statute should supersede the Tax Lien Act in the adjudication of federal tax claims. They provide no support for the hypothesis that both Houses of Congress silently endorsed that position.
The actual measures taken by Congress provide a superior insight regarding its intent. As we have noted, the 1966 amendments to the Tax Lien Act bespeak a strong condemnation of secret liens, which unfairly defeat the expectations of innocent creditors and frustrate “the needs of our citizens for certainty and convenience in the legal rules governing their commercial dealings.” 112 Cong. Rec. 22227 (1966) (remarks of Rep. Byrnes); cf. United States v. Speers, 382 U.S. 266, 275 (1965) (referring to the “general policy against secret liens”). These policy concerns shed light on how Congress would want the conflicting statutory provisions to be harmonized:
“Liens may be a dry-as-dust part of the law, but they are not without significance in an industrial and commercial community where construction and credit are thought to have
importance. One does not readily impute to Congress the intention that many common commercial liens should be congenitally unstable.” E. Brown, The Supreme Court, 1957 Term—Foreword: Process of Law, 72 Harv. L. Rev. 77, 87 (1958) (footnote omitted). In sum, nothing in the text or the long history of interpreting the federal priority statute justifies the conclusion that it authorizes the equivalent of a secret hen as a substitute for the expressly authorized tax lien that Congress has said “shall not be valid” in a case of this kind.
The judgment of the Pennsylvania Supreme Court is affirmed.
It is so ordered.
JUSTICE SCALIA concurring in part and concurring in the judgment.
I join the opinion of the Court except that portion which takes seriously, and thus encourages in the future, an argument that should be laughed out of court. The Government contended that 31 U. S. C. §3713(a) must have priority over the Federal Tax Lien Act of 1966, because in 1966 and again in 1970 Congress “failed to enact” a proposal put forward by the American Bar Association that would have subordinated §3713(a) to the Tax lien Act, citing hearings before the House Committee on Ways and Means, and a bill proposed in, but not passed by, the Senate. See Brief for United States 25–27, and n. 10 (citing American Bar Association, Final Report of the Committee on Federal Liens 7, 122–124 (1959), contained in Hearings on H. R. 11256 and 11290 before the House Committee on Ways and Means, 89th Cong., 2d Sess., 85, 199 (1966); S. 2197, 92d Cong., lst Sess. (1971)). The Court responds that these rejected proposals “provide no support for the hypothesis that both Houses of Congress silently endorsed” the supremacy of §3713, ante, at 16, because those proposals contained other provisions as well, and might have been rejected because of those other provisions, or because Congress thought the existing law already made §3713 supreme. This implies that, if the proposals had not contained those additional features, or if Members of Congress (or some part of them) had somehow made clear in the
course of rejecting them that they wanted the existing supremacy of the Tax Lien Act to subsist, the rejection would “provide support” for the Government’s case.
That is not so, for several reasons. First and most obviously, Congress can notexpress its will by a failure to legislate. The act of refusing to enact a law (if that can be called an act) has utterly no legal effect, and thus has utterly no place in a serious discussion of the law. The Constitution sets forth the only manner in which the Members of Congress have the power to impose their will upon the country: by a bill that passes both Houses and is either signed by the President or repassed by a supermajority after his veto. Art. 1, §7. Everything else the Members of Congress do is either prelude or internal organization. Congress can no more express its will by not legislating than an individual Member can express his will by not voting.
Second, even if Congress could express its will by not legislating, the will of a later Congress that a law enacted by an earlier Congress should bear a particular meaning is of no effect whatever. The Constitution puts Congress in the business of writing new laws, not interpreting old ones. “[L]ater-enacted lows . . . do not declare the meaning of earlier law.” Almendarez-Torres v. United States, 523 U. S. (1998) (slip op., at 12); id., at (SCALIA, J., dissenting) (“This later amendment can of course not cause [the statute] to have meant, at the time of petitioner’s conviction, something different from what it then said”) (slip op., at 23). If the enacted intent of a later Congress cannot change the meaning of an earlier statute, then it should go without saying that the later unenacted intent cannot possibly do so. It should go without saying, and it should go without arguing as well.
I have in the past been critical of the Court’s using the so-called legislative history of an enactment (hearings, committee reports, and floor debates) to determine its meaning. See, e.g., Conroy v. Aniskoff, 507 U. S. 511, 518–529 (1993) (SCAUA, J., concurring in judgment); United States v. Thompson/Center Arms Co., 504 U. S. 505, 521 (1992) (SCALIA, J., concurring in judgment); Blanchard v. Bergeron, 489 U. S. 87, 98–100 (1989) (SCALIA, J., concurring in part and concurring in judgment). Today, however,
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the Court’s fascination with the files of Congress (we must consult them, because they are there) is carried to a new silly extreme. Today’s opinion ever-so-carefully analyzes, not legislative history, but the history of legislation-that never-was. If we take this sort of material seriously, we require conscientious counsel to investigate (at clients’ expense) not only the hearings, committee reports, and floor debates pertaining to the history of the law
at issue (which is bad enough), but to find, and then investigate the hearings, committee reports, and floor debates pertaining to, later bills on the same subject that were never enacted. This is beyond all reason, and we should say so.
Section 7520.—Valuation Tables
The adjusted applicable federal short-term, mid
term, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
Section 7872.—Treatment of Loans with Below-Market Interest Rates
The adjusted applicable federal short-term, midterm, and long-term rates are set forth for the month of September 1998. See Rev. Rul. 98–43, page 9.
September 8, 1998 20 1998–36 I.R.B.
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