“Cost” first appears in the federal tax laws in the capital gains context in the Revenue Act of 1918. The Supreme Court has explained that statutory terms are best understood by reference to meanings common at the time of their adoption. Dictionaries that are roughly contemporaneous with the enactment of that Act define “cost” as the price paid for a thing or service.

Webster’s New International Dictionary of the English Language 509 (1917): “The amount or equivalent paid, or given, or charged, or engaged to be paid or given for anything bought or taken in barter or service rendered…”

Bouvier Law Dictionary 689 (8th ed. 1914): “The cost of an article purchased for exportation is the price paid, with all incidental charges paid at the place of exportation. Cost price is that actually paid for goods.”

A New English Dictionary on Historical Principles 1034 (James A.H. Murray ed., New York, MacMillan & Co. 1893): “That which must be given or surrendered in order to acquire, produce, accomplish, or maintain something; the price paid for a thing.”)

More recent dictionaries give the same definition.

American Heritage Dictionary 301 (1976): “An amount paid or required in payment for a purchase.”

Black’s Law Dictionary 345 (6th ed. 1990): (“Expense; price. The sum or equivalent expended, paid or charged for something.”)

Indeed, the only dictionary cited in the NCF Memorandum (Random House Dictionary of the English Language 457 (2d ed. 1987) also gives as the primary meaning of cost “the price paid to acquire, produce, accomplish, or maintain anything.”

The NCF Memorandum’s analysis of this dictionary meaning is revealing. The Memorandum first quotes the full definition:

1) the price paid to acquire, produce, accomplish, or maintain anything…,

2) an outlay or expenditure of money, time, labor, trouble, etc.: What will the cost be to me?

3) a sacrifice, loss or penalty: to work at the cost of one’s health.”

It then ignores the primary definition of cost—“price paid”—in favor of the third, obviously figurative, definition of cost as “loss” or “sacrifice.” To this, the Memorandum adds “expenditure” generally, rather than “expenditure of money,” which is the relevant concept when one is discussing the acquisition of property. The NCF Memorandum thus takes a perfectly clear definition of cost as applied to financial matters—price paid, or outlay or expenditure of money—and, without any discussion or further mention of that clear definition, seeks to obfuscate it.

The NCF Memorandum attempts to mix the figurative and literal meanings of “cost” by asserting that “[a]ny such ‘loss,’ ‘sacrifice,’ or ‘expenditure’ needs to be ascribed a monetary value in order to determine the [taxable] gain realized” on the sale of an asset. The Memorandum further asserts that the monetary value of a loss, sacrifice, or expenditure could be measured at other than the time it is incurred—at either the time of purchase or the time of sale. The Memorandum concludes: “We can discern nothing in the standard definition of ‘cost’… suggesting that the historical ‘purchase price’ measurement of monetary value must be used in preference to a measurement that coincides with the sale of the asset.” Finally, the Memorandum asserts that when cost to the taxpayer is measured at the time of sale, it is legally appropriate to state cost in inflation-adjusted dollars to reflect the real impact of the purchase and sale on the taxpayer’s buying power.

We disagree with this line of reasoning on several levels. First, as reflected in each of the dictionary definitions of “cost” set forth above, the first and most common meaning of the term is the price paid. “Price paid” obviously does suggest an “historical ‘purchase price’ measurement of monetary value.” The primacy of this meaning is easily illustrated. If one were asked “How much did your car cost?” a response simply that “the car cost $10,000” would be considered truthful only if that amount were at least a close approximation of the actual price paid at the time of purchase. In contrast, a response based on some specialized meaning of the term “cost” (such as cost expressed in inflation-adjusted dollars or net of trade-in value) would be perceived as not responsive to the question. Indeed, such a response would be viewed as truthful only if the respondent were careful to point out that he was using the term in other than its normal and plain meaning. Clearly, then, a specialized use of “cost” is appropriate only with the addition of some qualifying words signaling that the speaker is using the term in a manner not contemplated by normal usage.

Second, even assuming that it is appropriate to look to an alternative, figurative definition to establish the ambiguity of a statutory term, the NCF Memorandum’s argument on this point cuts sharply against its conclusion. When monetary values are ascribed to terms such as “sacrifice” and “loss,” such values are normally measured when made or expended. For example, statements such as “I lost $5,000 on the stock market” and “I sacrificed $10,000 to help my neighbor” require the listener to assume that the speaker is talking about historical dollar “loss” or “sacrifice,” unless the speaker makes clear that those terms are being used in some way other than their ordinary meaning.

Finally, even if the definitions of the term “cost” could be read to create some ambiguity with respect to that term, the NCF Memorandum fails to demonstrate the existence of any relevant ambiguity. That a particular term has two plausible definitions does not support an agency determination that rests on a third implausible definition. As shown above, none of the dictionary definitions of “cost” refers to “purchase price adjusted for inflation.”