Petitioner Albertson's, Inc. ("Albertson's")1 appeals two decisions of the United States Tax Court. In the first decision, the Tax Court held that Albertson's was not entitled to claim work incentive tax credits ("WIN credits") retroactively for its past hiring of certain welfare recipients. See Albertson's, Inc. v. Commissioner, 59 T.C.M. (CCH) 186, 1990 WL 29271 (1990). In the second decision, the Tax Court held that Albertson's was not entitled to claim current deductions for interest-like obligations that had accrued under deferred compensation agreements ("DCAs") made with certain of its top executives and directors. See Albertson's, Inc. v. Commissioner, 95 T.C. 415, 1990 WL 149185 (1990).

Respondent Commissioner of Internal Revenue ("Commissioner") cross-appeals a third decision of the United States Tax Court. In the third decision, the Tax Court held that Albertson's was entitled to claim investment tax credits for its heating, ventilating, and air-conditioning ("HVAC") systems. See Albertson's, Inc. v. Commissioner, 56 T.C.M. (CCH) 928, 1988 WL 137121 (1988).

We affirm the Tax Court with respect to its judgment on the first issue (WIN credits). We reverse the Tax Court with respect to its judgment on the second issue (DCAs). We also reverse the Tax Court with respect to its judgment on the third issue (HVAC credits). We discuss each issue separately below.

1. Background. In 1971, Congress established work incentive ("WIN") tax credits to provide employers with an incentive to hire employees who might otherwise receive public assistance. Participating employers were required to submit certifications from state agencies showing that their employees were either receiving welfare assistance or participating in a work-incentive program at the time they were hired.2 In return, the employer would receive a tax credit equal to a portion of the employee's first- and second-year wages.

Prior to January 29, 1982, Albertson's had hired numerous employees who qualified for the WIN credits. Some of these employees remained unidentified, however, and Albertson's was unable to claim any credits for them. In 1985, during an IRS audit of its 1983 return, Albertson's hired a consulting firm to help identify those employees. Albertson's discovered that 121 of its existing employees ("WIN employees") were qualified for the WIN credit program at the time of their hiring. It therefore requested and obtained state-agency certification for those employees during the summer of 1985.

The IRS initially allowed Albertson's to certify its WIN employees retroactively. That is, Albertson's was permitted to submit certifications that it had requested and obtained after its WIN employees had already started work. The IRS later changed its mind, however, and assessed Albertson's for a tax deficiency of $141,795. Albertson's refused to pay and appealed to the Tax Court. The Tax Court held for the Commissioner, reasoning that Congress had abolished the retroactive certification of WIN employees in 1981. We affirm the judgment of the Tax Court.

2. Analysis. Albertson's argues that the Tax Court erred in refusing to allow it to submit certifications that it had requested and obtained after its WIN employees had already started work. We disagree. In 1981, Congress expressly abolished the retroactive certification of WIN credits through the Economic Recovery Tax Act of 1981, Pub.L. 97-34, 95 Stat. 172 ("ERTA").3 The statute provides that an employee cannot qualify for WIN-type credits after September 26, 1981, unless his employer requests or obtains state-agency certification "on or before the date on which such individual begins work." See I.R.C. Sec. 51(d)(16) (emphasis added). Congress imposed this contemporaneous certification requirement because it felt that retroactive certification failed properly to motivate employers to hire WIN-qualified workers and resulted in substantial revenue losses. See Staff of the Joint Committee on Taxation, General Explanation of the Economic Recovery Tax Act of 1981, at 171 (Joint Committee Print 1981) [hereinafter Joint Committee Explanation].4

Albertson's argues that another part of ERTA, Sec. 261(g)(1)(B), creates an exception to the contemporaneous certification rule for all employees who were hired as of January 1, 1982.5 It bases its argument on a provision that directs all current WIN employees to be treated "as if such employees had been members of a targeted group for taxable years beginning before January 1, 1982." Id. Albertson's argues that because its WIN employees were hired during taxable years beginning before January 1, 1982, the company should be allowed to certify them retroactively for any taxable year beginning after December 31, 1981.

We reject Albertson's reading of section 261(g)(1)(B). That section was enacted simply to ensure that employees who had been hired under the old WIN program would not be treated any differently under the new targeted jobs program. As we explained above, Congress merged the WIN credit with the targeted jobs credit through ERTA, but did not change the basic qualifications for obtaining WIN-type credits. See discussion supra note 4. Accordingly, Congress wanted to ensure that the former WIN employees were not read out of the statute simply because they were now targeted employees. Section 261(g)(1)(B) does not address in any way the issue of retroactive certification. That determination is left to section 261(g)(2), which clearly abolishes retroactive certification for all claims made after September 26, 1981.6

Albertson's argument is also refuted by the express language of the act, which unambiguously states that the contemporaneous certification requirement "shall apply to all individuals whether such individuals began work for their employer before, on, or after the date of enactment." Id. Sec. 261(g)(2)(A) (emphasis added). In light of this language, Congress could not have possibly intended a broad-based exception to the contemporaneous certification rule for all employees who had been hired as of January 1, 1982.7

In sum, because Albertson's did not claim the WIN credits until after September 26, 1981 (in fact, not until 1985), and because it did not request or obtain state-agency certification until after the start dates of the 121 employees in question, it cannot rely upon retroactive certification for its WIN employees. Accordingly, it is not entitled to the WIN credits.8

1. Background. Deferred compensation agreements ("DCAs") are agreements in which certain employees and independent contractors ("DCA participants") agree to wait a specified period of time ("deferral period") before receiving bonuses, salaries, or director's fees for services already rendered ("deferred compensation"). During the deferral period, the employer uses the deferred compensation as an inexpensive source of working capital. At the end of the deferral period, the employer pays the participating individuals the deferred compensation and an additional amount ("additional amount") for the time value of the deferred compensation.

Prior to 1982, Albertson's entered into DCAs with eight of its top executives and one outside director. The parties agreed that they would be paid deferred compensation plus an additional amount as calculated by a predetermined formula.9 The DCA participants would be eligible to receive the total sum (the deferred compensation plus the additional amount) upon their retirement or termination of employment with Albertson's. The DCA participants also had the option of deferring payment of the total sum for up to fifteen years thereafter. During that extra period, the additional amounts would continue to accrue on an annual basis.

In 1982, Albertson's requested permission from the IRS to deduct currently the additional amounts (but not the deferred compensation), instead of waiting until the end of the deferral period.10 In 1983, the IRS granted Albertson's request. Accordingly, Albertson's claimed deductions of $667,142 for the additional amounts that had already accrued, even though it had not yet paid the DCA participants anything. In 1987, the IRS changed its mind, however, and sought a deficiency for those amounts. Albertson's filed a petition with the Tax Court, claiming that the additional amounts constituted "interest" and thus could be deducted as they accrued.

In a sharply divided opinion, the Tax Court rejected Albertson's position. The court found that the additional amounts were not interest, but rather compensation. Under section 404 of the Internal Revenue Code, compensation was not deductible until the end of the deferral period. Accordingly, the court prohibited Albertson's from deducting its expenses relating to the additional amounts until the end of the deferral period. See Albertson's, 95 T.C. 430.11 We reluctantly reverse the judgment of the Tax Court.

2. Discussion. This issue raises two related questions. First, we must decide whether the tax court erred in finding that the additional amounts were not "interest" within the meaning of the Code. Second, if so, we must decide whether section 404's restrictions against making deductions prior to the end of the deferral period (the "timing restrictions") applied to interest expenses. We answer the first question in the positive and the second in the negative.

a. Albertson's Additional Payments. Albertson's argues that the Tax Court erred in holding that the additional amounts were not "interest" within the definition of I.R.C. Sec. 163. We agree. Section 163(a) allowed a deduction for "all interest paid or accrued within the taxable year on indebtedness." Although neither section 163 nor the regulations relating to it specifically defined "interest," the Supreme Court has held that interest is the measure of the value of the use of money over time. See Dickman v. Commissioner, 465 U.S. 330, 337, 104 S. Ct. 1086, 1091, 79 L. Ed. 2d 343 (1984). The additional amounts specified in the DCAs were a direct reflection of what Albertson's would have paid on the open market in order to borrow such amounts. See 2 B. Bittker & L. Lokken, Federal Taxation of Income, Estate and Gifts, p 60.2.1 (2d ed.1990) (describing the interest component of DCAs, which "reflect[s] the time value of money"). Accordingly, they were a fair measure of the time value of the monies loaned to Albertson's by the DCA participants, and they qualified as interest under the Code.12

The Commissioner argues that the additional amounts were not interest because Albertson's never properly "borrowed" the deferred compensation from the DCA participants. According to the Commissioner, Albertson's could not have borrowed the deferred compensation because the DCA participants never had a "legal right to possess" such compensation until the end of the deferral period.13 We disagree. As the Tax Court concurrence points out, this approach is "anachronistic." Albertson's, 95 T.C. 431 (Halpern, J., concurring).14 Circuit precedent clearly holds that a legal right to possession of the assets on which the additional amounts are earned is not necessary in order for those earnings to qualify as interest. For example, in Starker v. United States, 602 F.2d 1341 (9th Cir.1979), we recognized interest that accrued in exchange for the ability to make deferred payments over a five-year period. We recognized interest in Starker even though the interest payee had no legal right to possess the deferred payments in full until the end of the five-year period. The controlling principle was not possession, but rather "compensation for the use or forbearance of money." Id. at 1356. We find this case indistinguishable from Starker. Accordingly, the Commissioner's argument fails.

The Commissioner further argues that the additional amounts were not interest, but rather additional deferred compensation. We disagree. The predetermined rate for calculating the additional amounts did not depend in any way upon the amount or type of services performed by the participants. The rate was simply a function of the time that had elapsed since the signing of the DCAs. Under the DCA, participating employees performed the same services and received the same salary as their non-participating colleagues. The only difference between the two groups was the delay in payment and the additional amount received at the end of the deferral period. Accordingly, the additional amounts were not additional compensation, and the Commissioner's argument fails.

Upon a participant's termination of employment with Albertson's, he could still elect to defer payment of the additional amount for up to fifteen years, even though he was no longer providing services to the corporation. Again, the participants were not required to perform any services in return for compensation. The additional amount was calculated at the same rate at which the interest had accrued prior to the employee's termination. Accordingly, the additional amounts were not compensation, and the Commissioner's argument fails.15

The Commissioner finally argues that the additional amounts were not interest because they were not payments for true "indebtedness" by Albertson's. See I.R.C. Sec. 163(a) (allowing interest only on payments for "indebtedness"). We disagree. The Tax Court has held that indebtedness is an "unconditional legally enforceable obligation for the payment of money." Horn v. Commissioner, 90 T.C. 908, 923, 1988 WL 44098 (1988). In this case, the DCAs were bona fide, nonforfeitable contracts, and Albertson's was unconditionally and legally obligated to pay the DCA participants for deferring their compensation upon the rendering of their services.16 Accordingly, the additional amounts were payment for indebtedness, and the Commissioner's argument fails.

b. Section 404 and Interest Expenses. Having held that the additional amounts are interest within the meaning of section 163, we now turn to the question whether the timing restrictions of section 404 applied to interest expenses--in other words, did section 404 prohibit Albertson's from deducting such expenses prior to the time the participants were required to recognize the additional amounts as income? Based on a plain-language reading of the statute in effect during the taxable year at issue, we conclude that the answer is no--the timing restrictions did not apply to interest expenses. Albertson's was therefore free to deduct such expenses as they accrued. Accordingly, we reverse the judgment of the Tax Court.

Prior to 1942, corporations were allowed to deduct DCA-related expenses as they accrued each year, even though employees did not recognize any income until a subsequent taxable year. In 1942, Congress abolished this preferential treatment for certain deductions relating to "unqualified" DCAs such as the ones at issue in this case.17 In so doing, Congress forced employers to wait until the end of the deferral period before they could deduct expenses relating to their unqualified DCAs. See I.R.C. Secs. 404(a)(5) & 404(d) (1983).18 This is because section 404 of the Code prohibited an employer from deducting certain expenses until they were includible in the income of the DCA participants, which was usually not until the end of the deferral period.19 See id.

In the taxable year at issue, the Code and regulations specified two categories of deductions to which the timing restrictions of section 404 applied. First, section 404 applied to section 162 deductions, see I.R.C. Sec. 162, which included "all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." See I.R.C. Sec. 404(a)(5) (1983). Second, section 404 applied to section 212 deductions, see I.R.C. Sec. 212, which included "all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income." See id.; see generally Treas.Reg. Sec. 1.404(a)-1(b) (1983).20

The interest accrued under the DCAs in this case did not fall within either of the above categories. Interest deductions, which included "all interest paid or accrued within the taxable year on indebtedness," were covered by section 163 of the Code. See I.R.C. Sec. 163. They were not subject to either section 162 or section 212. Compare I.R.C. Sec. 163 (pertaining to interest) with I.R.C. Secs. 162 & 212 (not pertaining to interest). Because we must not "add to or alter the words employed to effect a purpose which does not appear on the face of the statute," Hanover Bank v. Commissioner, 369 U.S. 672, 687, 82 S. Ct. 1080, 1089, 8 L. Ed. 2d 187 (1962), we hold that, in the taxable year at issue, the timing restrictions of section 404 were inapplicable to interest deductions.

The legislative history of section 404 lends support to our conclusion. There is absolutely no indication that Congress intended section 404 to apply to interest deductions. Section 404 was codified in its present form in 1954. At that time, Congress was fully aware of the differences between the predecessors to sections 162 (trade or business expenses), 163 (interest), and 212 (production of income expenses) of the Code. See, e.g., H.R.Rep. No. 1337, 83d Cong., 2d Sess., reprinted in 1954 U.S.C.C.A.N. 4017, 4181 (discussing the relationship between the predecessors to sections 162, 163, and 212). If Congress had intended section 404 to govern the timing of interest deductions, it could have made specific reference to the predecessor of section 163 as well. See, e.g., I.R.C. Sec. 267 (1983) (explicitly referring to section 163 as well as sections 162 and 212). To the contrary, the legislative history of section 404 mentions only "compensation." See, e.g., S.Rep. No. 1631, 77th Cong., 2d Sess. (1942), reprinted in 1942-2 Com.Bull. at 504, 607-09. Accordingly, there is no indication in the legislative history of section 404 that Congress intended it to apply to interest.

The Commissioner argues that a 1986 "clarifying" amendment to section 404, which eliminated the references to sections 162 and 212 in order to make clear the broad scope of the statute, evidenced Congressional intent, ab initio, to include interest under that section. We reject this argument. According to the legislative history of the 1986 amendment, it is true that Congress intended to clarify section 404 to include all forms of compensation for services rendered. However, there is insufficient indication that Congress intended to include anything other than compensation. See, e.g., S.Rep. No. 313, 99th Cong., 2d Sess. 1, 1013 (1986) (referring repeatedly to compensation).21 As we have noted, for DCA purposes, "compensation" and "interest" are two very different concepts. Accordingly, we reject the Commissioner's argument that the 1986 amendment evidenced an intent by Congress to include interest expenses under the timing restrictions of section 404.

Finally, the Commissioner argues that, notwithstanding the plain language of the statute, Congress must have intended to include interest expenses within the scope of section 404 because Congress enacted timing restrictions with respect to compensation expenses. We do not agree that simply because Congress determined to treat compensation in a particular manner it necessarily intended to treat interest in that same manner. Congress' decisions with respect to tax policy do not always fit a neat and logical pattern. Sometimes they are even influenced by less-than-objective forces. Still, we sympathize with the Commissioner's "policy" arguments regarding Congress' intent. It is quite possible that, had Congress considered this problem in 1942 and 1986, it would have modified the wording of section 404 to cover deductions for interest as well as for compensation. Permitting the deduction of interest may simply have resulted from a glitch in the Code. Even if that is the case, however, Code changes are for Congress to make--not the courts.

In sum, we hold that the timing restrictions of section 404 do not apply to expenses relating to interest that is paid pursuant to a DCA. Accordingly, Albertson's may properly deduct such expenses as they accrue, and we reverse the Tax Court on this issue.

1. Background. Prior to 1986, the Internal Revenue Code allowed a tax credit for a taxpayer's investment in certain types of property ("Section 38 Property"). See I.R.C. Sec. 46 (1983).22 In general, such property did not include "structural components" of buildings, such as central air conditioning or heating systems. See Treas.Reg. Sec. 1.48-1(e)(2). A limited exception for such systems existed, however, if the "sole justification" for them was meeting the temperature and humidity requirements essential for the operation of other machinery. See id.23 The owners of systems that qualified under the exception were able to claim investment tax credits for such property.

In 1985, Albertson's claimed investment tax credits for various heating, ventilating, and air conditioning ("HVAC") systems that it had installed in 33 of its supermarkets. Albertson's argued that it was entitled to the investment tax credits because the "sole justification" for such property was meeting the temperature and humidity requirements for Albertson's refrigerated cases and computerized checkout equipment. The Tax Court agreed and ruled in Albertson's favor. We reverse.

2. Analysis. The Commissioner argues that the Tax Court clearly erred in holding that the "sole justification" for Albertson's installation of its HVAC systems was the meeting of the temperature and humidity requirements for its other machinery. We agree. The Tax Court erred by failing to recognize that the HVAC systems were intended for and are used by Albertson's for two additional significant purposes: ventilation and customer comfort.

First, Albertson's HVAC systems play an important role in ventilating its supermarkets. The Tax Court completely failed to recognize this point. Albertson's HVAC systems provide a continuous supply of fresh air to its supermarkets. The systems also remove airborne bacteria, smoke, dirt, and stale odors. Because customer concerns about cleanliness are a top priority for supermarkets, Albertson's HVAC systems are crucial for attracting and retaining customers in a highly competitive market. Even Albertson's acknowledges that it is "certainly only good business practice" to ventilate its supermarkets. In light of these facts, we conclude that Albertson's HVAC systems play an important role in ventilating its supermarkets.

Second, HVAC systems clearly provide a comfortable shopping environment for Albertson's customers. The systems are set to 72?F all year round, which is well within the optimum comfort range for individuals of 68?F to 78?F. Given the broad geographical range of stores throughout Albertson's chain of supermarkets (Florida to Idaho), we find it impossible to say that air conditioning during the summer and heating during the winter does not result in a more comfortable shopping environment for the taxpayer's customers. This conclusion is supported by the fact that, during the 1950s, Albertson's had already installed HVAC systems in most of its supermarkets, well before it was aware of any interrelationship between HVAC systems and the proper functioning of its other equipment.

Given these facts, we conclude that it was clear error for the Tax Court to find that meeting the temperature and humidity requirements for other machinery was the "sole justification" for Albertson's installation of its HVAC systems.

Albertson's argues that customer comfort is a permissible exception to the "sole justification" test. That is, the HVAC systems are not disqualified even though they result in customer comfort. Specifically, Albertson's argues that the regulatory exception for employee comfort, see Treas.Reg. Sec. 1.48-1(e)(2), is equally applicable to customer comfort. We decline to adopt Albertson's expansive reading of the regulation. First, the plain language of the regulations indicates that the comfort exception applies only to employees; the regulations make no reference to any other groups of individuals. Second, the example immediately following the regulation shows that the IRS intended the employee comfort exception to be a narrow one. See id. (giving the example of a factory--where there are no customers--instead of a retail store). Accordingly, we decline to import the concept of "customer" into the word "employee."24

In sum, because Albertson's HVAC systems clearly provide for ventilation and customer comfort, we reject its argument that the "sole justification" for such systems is maintaining the temperature and humidity requirements for its other machinery. Although such maintenance might very well be a primary reason for installing the HVAC systems, it is not the only significant one. Accordingly, the HVAC systems do not fall within the "sole justification" exception for central air conditioning or heating systems, see Treas.Reg. Sec. 1.48-1(e)(2), and Albertson's is not eligible to claim tax credits for such property.25

The judgment of the Tax Court is AFFIRMED in part and REVERSED in part.